Steve Schlotterbeck took the CEO title at EQT Corp. and its two publicly traded midstream companies on March 1, in addition to being president of the Pittsburgh-based gas producer since December 2015. (Retired, former CEO David L. Porges remains on the board for one year.)

Schlotterbeck heads a company that produced 190 billion cubic feet equivalent (Bcfe) in the first quarter, primarily from the Marcellus Shale. But it’s been on a growth path for some time. In February, the company paid $652.5 million for two West Virginia acreage packages. In June, he announced the blockbuster deal: EQT will pay $8.2 billion in cash, stock and assumed debt to acquire Rice Energy Inc. The transaction will consolidate two of the biggest gas producers in the Appalachian Basin by year-end.

This deal catapults 125-year-old EQT atop the ranks—it will be the largest gas producer in the U.S., making an estimated 3.6 Bcf/d, outrunning BP Plc, ExxonMobil Corp. and EQT’s many independent peers, such as Chesapeake Energy Corp. Pro forma production of 1.3 trillion cubic feet equivalent (Tcfe) in 2017 will rise to 1.6 Tcfe in 2018, but with 20% fewer Marcellus wells needed to reach that total.

Oil and Gas Investor met with Schlotterbeck at EQT’s Pittsburgh headquarters the day after the big deal was unveiled, while hosting Hart Energy’s annual DUG East conference. He explained why the deal makes sense, adding that EQT now has “a cool million acres.” Although that number wasn’t necessarily the goal, he admitted it does sound good to say: it’s a nice round number.

Investor Who approached who first, or did an investment banker bring you the idea? Can you give us some color on how this came down?

Schlotterbeck No details yet, but the proxy will have all that information. What I can tell you is that, for the past couple of years, we’ve been working on a consolidation strategy and, as part of that, you look at all the opportunities, big and small. Rice from Day One was always there; it stood out when we were looking at the bigger opportunities that were more of a corporate nature, not just acreage. It stood out because of the synergies. It was always an attractive option, but we had no idea if it was “executable” or not. In big transactions like these, you need both parties to be on board.

Investor So you looked at other companies too?

Schlotterbeck In just over a year now, we’ve done six different acquisitions, so we’ve been pretty active. These were primarily acreage deals, although the Trans Energy (Inc.) deal was a corporate one too. (This deal closed in January.) So, yes, we’ve been very active, but this transaction was a different order of magnitude. To achieve the objective of delivering synergies, Rice kind of puts it all together for us.

Investor One analyst wrote that you are an empire-builder.

Schlotterbeck Yes, I saw that too. (Laughs.) But this was never about scale for scale’s sake. I think there’s the rationale that being the lowest-cost producer will win out. You cannot control commodity prices or service costs, so you have to focus on having the lowest possible cost structure. It’s really around being efficient. The biggest levers we have are longer laterals and more wells per pad, getting our LOE (lease operating expense) as low as possible and getting our logistics in the field concentrated to have the ability to lower costs.

It’s also about making our G&A (general and administrative) costs lower. The operations of both companies were so similar—we have the same business model and our acreage overlays—the whole thing overlays well. It’s an opportunity to get a better cost structure and that’s an advantage in a commodity business.

Investor Low gas prices are pressuring everyone. Was that also a motivating factor?

Schlotterbeck In a commodity business, the biggest differentiator you can have is your cost structure. We cannot move the revenue lever much, other than which gas markets we access. If you’re going to differentiate yourself, it’s going to be around costs. The commodity itself is always going to be volatile, up and down. We think that, with low costs, the one extra advantage is you know almost, by definition, you’re going to survive the downturns.

Plus, if you are the first dispatcher of gas to the market, you’ll have an advantage. If you are fourth or fifth or 20th down the list and gas prices go down, you can have liquidity problems.

Now you’ve got all the associated gas, primarily right now in the Permian, which is driven by factors beyond the gas price—that gas is going to come on regardless of the Nymex price. That gas is going to get dispatched first. But we want EQT to be second in line. You’re going to need to be at least No. 2, which will be EQT. So we’re trying to position ourselves for that.

The oil price will move around and that’s independent of anything we can do.

Investor You never thought about diversifying into an oil play instead? To get a balance between oil and gas?

Schlotterbeck We thought extensively about that. We’ve looked at consolidation vs. diversification. We debated both of those for some time, but, ultimately, what we concluded was that the benefits of consolidation far outweigh the benefits of diversifying because of all the synergies we could get.

And they mitigate the concentration risks we’re taking on, which are not insignificant.

To diversify and have it be meaningful, we’d probably have to make a deal the size of what we just did—$6 billion to $8 billion—but that means making a huge one-time bet on a different basin, a different commodity than we’re used to, and in an area where we would have no competitive advantage. And it would have meant bidding against other companies that do have a competitive advantage in that basin.

We’ve been in the Appalachian Basin for 125 years, so we have a high level of certainty around the geology, the landowners, the reservoirs, the human capital—vs. being the new guy on the block. That’s why we chose the consolidation path.

Investor Were you, in part, also motivated by the activist investor who in January suggested that EQT should merge with Antero Resources Corp. or Rice?

Schlotterbeck Not at all, other than to say we had already embarked on this strategy, and he was just saying what we already believed. I think maybe some of the ways he thought it would happen were different than what happened, but, for the most part, we were pretty well aligned.

We saw low gas prices as an opportunity because of the strength of our balance sheet—we held up pretty well through the downturn, and we thought we could acquire some assets at pretty favorable prices. We started with Statoil (ASA), who decided to exit the basin. That was the first deal we did. The next few deals were done as the recovery was starting, but, again, at favorable prices—and we were able to do it at a time when others, perhaps, had the same strategy, but not the same balance sheet.

Investor You are taking on a lot of debt. Any plans for an equity offering?

Schlotterbeck No. The only equity is the equity we’ll issue to the Rice shareholders. We will refinance the Rice debt. We’ve run our financing plan by all three credit-rating agencies, and they have indicated we will retain our investment-grade rating throughout the process and beyond.

We’ll be issuing 0.37 share of EQT for every Rice share. In fact, the reason there is $5.30 cash in the deal was our desire to use as much cash as we could and not EQT stock, but also to satisfy Rice’s desires to have EQT stock. That’s why we put cash in. We certainly don’t want to issue new stock—we’re trying to do as little equity issuance as possible.

Investor In the big picture, you said you want to focus on returns, not growth for growth’s sake. This concept is being mentioned by more analysts who want E&Ps to be cash-flow neutral.

Schlotterbeck I think it’s an imperative for our industry to adopt that mindset; time will tell how pervasive that will become.

The ability to oversupply gas markets is tremendous, and it’s scary the amount of gas the industry can bring on quickly. With set demand growth, the market can really get out of balance quickly. At the end of the day, this is a great market for speculators, but a bad one for companies and their investors who really want to invest their money for the long term to help build something sustainable.

I hope this next phase of the shale revolution is about generating excess cash flow and returning it to shareholders, and doing it in a routine and predictable way. We intend to be cash-flow neutral in 2019 and start returning cash after that. I hope Wall Street will reward that. At this point, if everyone tries to grow by 30% to 40%-plus again, it won’t be long before we’re in another disaster of a bust and that’s not healthy.

I’m not suggesting we go down to single-digit growth, just not the 30% to 40% of the past. I do believe, with some time, a slower growth rate will become a more accepted business model. If you have fewer, bigger players, it will accelerate the adoption of that business model.

I realize that, for start-ups, their business model is still going to be built around high growth—there will always be some of that. But if it becomes a feeding frenzy, more consolidation will slow that down and bring some sanity to the industry.

Investor It sounds like you’re talking about what the majors do—the way they spend money and plan their business model more conservatively.

Schlotterbeck It is somewhat like that. The majors are much more vertically integrated, more diversified, but, in terms of matching growth with returning cash to shareholders, we are talking about similar business models.

Investor What challenges do you see for the integration of EQT and Rice?

Schlotterbeck We probably have about five months before closing at year-end, so that will be a big, big task. However, because of the similar nature of the companies and the direct overlap of our operating areas, we're hoping to make the transition as seamless as possible. That said, integrating the IT and accounting systems is always a major effort that will take some time on our part.

Investor To what degree is EQT using big data?

Schlotterbeck We are huge believers in data and metrics, and we currently have a big effort around that —around field operations, rig scheduling, water handling and so on. We recently hired a Ph.D. from Carnegie Mellon to come onboard and he’s building some very complex models to help us. It’s been fascinating.

The first thing he did was look at how we scheduled our rigs and frack crews in Greene County (Pa.). He looked at the way we move rigs in and out, the way we do water sourcing and water disposal, and other similar logistical elements. Historically, we’d move in a rig to the pad, drill the wells, move it off and then bring in the frack crews and frack them all. Every time you move a rig, it’s a half-million dollars. He did a look back and designed an optimal plan, and, frankly, it was shocking. He had that rig moving all over the place—many more times than we would have moved it. When I looked at his plan, I said that cannot be possible. But he walked me through it. It’s so expensive to get water to that rig, you’d be better off moving that rig among different areas. Other things he looked at were around making the most of our gathering capacity when producing gas.

This was one very clear, very real use of big data and advanced analytics. I think we are just scratching the surface and it’s a big opportunity for our industry across the board.

Investor The midstream aspect of your merger is a big deal. You’re picking up a big amount of capacity to get gas to the Gulf Coast.

Schlotterbeck Yes, we are tripling our capacity to the Gulf. We also think the Southeast is one of the biggest gas markets; our Mountain Valley Pipeline is 2 Bcf/d to the Southeast. So a significant amount of our gas will go to those two premium markets. Mountain Valley is targeted to go into service at the end of 2018; the project just received its EIS (environmental impact statement) from FERC (Federal Energy Regulatory Commission).

Investor Do you have any direct contracts to sell your gas to LNG facilities?

Schlotterbeck We do have two contracts to sell to Cheniere Energy (Inc.), and we have contracts with other end users. We have a contract to deliver ethane to the Shell (Oil Co.) cracker being built here in southwest Pennsylvania. In fact, I’m going to visit Shell’s construction site in the next week.

Investor What are your next steps ahead?

Schlotterbeck We now have a cool million acres in the Marcellus—not all in the core, but that’s a nice round number. It was never a real target, but it’s a nice number to say. We weren’t in Ohio at all recently, but now we will be. It’s nice rock. It has good returns and is fairly well consolidated, so we can drill long laterals.

Investor The story of Alpha Natural Resources Inc. in 2016 was interesting—with Vantage Energy Appalachia II LP outbidding Rice for Alpha and, then, Rice buying Vantage. Did EQT participate in that?

Schlotterbeck We certainly had talks with Vantage but couldn’t make the numbers work at the time. Prior to that, we had also looked at Alpha; it was us, Vantage and Rice and a couple of others who looked at that. I remember at one point, I congratulated Danny Rice (Daniel J. Rice IV, CEO) on getting Alpha, but, then, Vantage came back in the auction room after I was certain they were done and they outbid Rice. So I learned: Never prematurely congratulate someone on doing a deal.

Now, with this acquisition, we’re getting Alpha, Vantage and Rice, which we think are the key pieces for Greene and Washington counties in Pennsylvania. We just kind of took the long way to get there.