Reluctant activist sees heart of shale being ripe for deals

By Tim Loh on 1/9/2017

CHARLOTTE, North Carolina (Bloomberg) -- After years of calling for it privately, Barnes Hauptfuhrer decided that early 2017 was finally time to go public with his desire to see a makeover of America’s hottest natural gas play. 

On Tuesday, the 62-year-old sent a 10-page open letter to the board of EQT Corp., urging the gas explorer to merge with either Range Resources Corp. or Antero Resources Corp. That prompted Range to put out a statement saying it hadn’t been contacted by EQT about a potential deal and that it had no plans to hold talks.

It was a "difficult decision" to go public for the founder of Charlotte-based Chapter IV Investors LLC, who prides himself on having spent the past decade working quietly and amicably alongside corporate leaders. “It creates a bit of awkwardness," he acknowledged in a phone interview Friday. “Sometimes in life you have to encourage management to think outside of the box about something big."

In this case, that "something big" would usher in a new era for the Marcellus and Utica shale regions, where the last decade’s gas boom has helped reshape America’s energy markets. The region is “fragmented” with too many companies and should follow the example of North America’s midstream sector, which saw several multi-billion-dollar deals last year, he said.

The timing’s right for consolidation on the production side, Hauptfuhrer said, as energy prices recover from last year’s lows and it becomes clearer who the strongest companies are. Hauptfuhrer wants EQT—the region’s best player, in his opinion, because of its low debt levels and high market capitalization—to lead the way by either pairing off with Range or Antero. He’s calling for an all-equity transaction that would result in a company with a $25-billion enterprise value that could produce twice as much gas as any of its Marcellus and Utica rivals.

New Leadership

Such a large-scale merger would be rare in the E&P sector, where companies have historically been more likely to buy up acreage or smaller assets, said Vincent Piazza, a senior analyst at Bloomberg Intelligence. “The basic premise for corporate consolidation in the E&P space may not really hold," Piazza said. "Usually smaller and bolt-on transactions tend to work."

Hauptfuhrer’s decision to go public owed, in part, to the fact that EQT will change its leadership this spring. Starting March 31, Steven Schlotterbeck will take over as CEO of the company.

“That unique moment allows them to objectively look at the pros and cons of a potential merger of equals," Hauptfuhrer said. “What we want to see is the company emerge as the 800-pound gorilla.”

Private Equity

Hauptfuhrer started Chapter IV in 2006, with plans to invest up to half of his assets in private equity and the rest in publicly traded companies. After the 2008 crisis, he decided to focus solely on the latter. He likes investing for the long term in about 10 companies. He’s owned shares of EQT and Range since 2010 and Antero since 2014.

Chapter IV isn’t a huge player. The fund has about $250 million under management and had a less than 1% ownership stake in all three of those gas companies as of Dec. 31, he said. Beyond that, it has stakes in Cabot Oil & Gas Corp. and Pioneer Natural Resources Co.—as well as companies in the paper and packaging and construction sectors.

Hauptfuhrer expects U.S. gas output to grow by 3% annually for the next decade or two. Gas prices will stay mostly between $2.50 and $3.50 per million British thermal units for the next few years, which he acknowledges is cheap. “We are focused on owning the lowest-cost producers,” he said. "If you’re the low-cost producer, you can still make money.”

Fourth Phase

Chapter IV’s name reflects the fact that Hauptfuhrer’s in the fourth phase of his career, he said. He started at Kidder, Peabody during the 1980s, where he specialized in mergers and acquisitions. Then he founded and ran the private-equity group First Union Capital Partners. From there, he became co-head of First Union’s—later, Wachovia’s—corporate and investment bank. He left that post in 2004.

Generally, he likes establishing relationships with management teams and working with them privately. He’s talked with the EQT, Range and Antero management teams for years about consolidation, he said. While he knew going public with his pitch could risk those relationships, he said the response he’s heard thus far from other investors and analysts has been mostly good.

“We haven’t had one person, not one, who hasn’t said: ‘This makes a lot of sense,’" Hauptfuhrer said. “We think we’re going down the right path.”

Neither EQT nor Antero immediately responded to emailed requests for comment Friday. Range referred to its earlier statement.

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