(Adds tax details)
July 3 (Reuters) - Activist investor Jana Partners LLC disclosed a 5.8 percent stake in natural gas producer EQT Corp on Monday and urged the company to abandon its $6.7 billion buyout of rival Rice Energy Inc.
The move, which threatens to scuttle EQT's plans to become the largest U.S. natural gas producer, is hedge fund Jana's latest foray into the energy sector. Jana pushed Oil States International Inc to spin off Civeo Corp in 2014.
Jana began buying shares in April, before the Rice deal was announced last month - a deal that caught Jana by surprise, according to a source familiar with the matter. Since amassing its stake, Jana has become EQT's fourth-largest shareholder.
Jana said in regulatory filings that instead of buying Rice, the company should separate all of its pipeline operations into a publicly traded company and change its board structure.
Jana believes EQT would thrive if it focused solely on exploration and production, and believes the Rice deal's delay and tax structure pose problems, according to the source.
The hedge fund has lined up two potential nominees for EQT's board and could nominate them and others, the source added.
EQT acknowledged on Monday that its parts could be worth more if the company were broken apart and said its managers would study options and create a plan by the end of next year.
"EQT seeks to maintain an open dialog with investors and respects their opinions and perspectives," EQT spokeswoman Natalie Cox said in a statement.
EQT's shares gained 1.2 percent to close Monday at $59.75, while shares of Rice Energy fell 3.6 percent to close at $25.66.
Rice must pay EQT a breakup fee of $255 million if the deal collapses.
The Rice deal, EQT's biggest, comes as U.S. natural gas prices have been suppressed by abundant supply, forcing companies to seek ways to control production costs.
EQT said it has identified $2.5 billion in cost savings as well as benefits from moving some of Rice's midstream assets into its own pipeline business, EQT Midstream Partners. Not all of EQT's pipeline operations are controlled by EQT Midstream Partners.
EQT would face a higher tax burden if it bought Rice and moves Rice's pipeline assets into EQT Midstream Partners rather than if it just hived off all of its pipeline assets and focused on production. Such a step would likely be much quicker than buying Rice.
Jana returned 1.2 percent in June and is now up 5.8 percent for the first six months of 2017.
Based on EQT's Friday closing price, Jana's stake is worth about $590 million.
Rice did not respond to requests for comment.
The Wall Street Journal reported Jana's plans earlier on Monday. (Reporting by Yashaswini Swamynathan in Bengaluru, Michael Flaherty in New York and Ernest Scheyder in Houston; Writing by Ernest Scheyder; Editing by Jeffrey Benkoe and Dan Grebler)