A judge has allowed a US oil and gas company to abandon pipeline contracts while in bankruptcy, in a first-of-its-kind decision that has rattled investors in energy infrastructure.
Sabine Oil & Gas,
a shale energy producer under Chapter 11 bankruptcy protection, sought
permission to break contracts with two pipeline companies so it could
pursue better deals and save as much as $115m.
On
Tuesday a judge ruled in its favour. “The court defers to the business
judgment of the debtors to reject the agreements,” Judge Shelley Chapman
said at a hearing in US bankruptcy court in Manhattan.
The decision has important implications for the midstream energy sector, which
gathers, processes, transports and stores oil and gas. Income-hungry
investors had flocked to midstream companies on the belief that their
generous payouts were backed by long-term, immutable contracts with
customers.
As they suffer low gas and oil prices, bankrupt producers are
challenging these contracts in court. Some midstream companies have
warned of “counterparty risk” in reference to their less creditworthy
customers.
After the ruling, investors dumped shares and units of pipeline companies and partnerships, with Kinder Morgan down 5.3 per cent, Plains All American off 5.9 per cent and Williams Companies dropping 9.4 per cent.
However, it would be hard to draw broad precedents from any single case, lawyers and analysts said. “While this is an important decision, it’s one of those decisions that is state specific, fact specific and play specific,” said David Karp, partner at Schulte Roth & Zabel, a law firm, who is not involved with the case. “There are many other agreements out there that this decision will not cover.”
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Haynes and Boone, a law firm, said 48 North American oil and gas producers filed for bankruptcy in 2015 and more will follow this year.
In a case in Delaware bankruptcy court, producer Quicksilver Resources
has sought to reject gas-gathering contracts with Crestwood Midstream
Partners. Two trade groups have intervened, warning that a ruling in
Quicksilver’s favour could disrupt the midstream industry.
Sabine filed for bankruptcy protection
last July with $2.9bn in debt. In September it filed a motion to reject
gathering contracts with the two companies, calling them “unnecessarily
burdensome” as it seeks to reorganise.
Two of the contracts committed Sabine to deliver Texas gas and condensate to a unit of New York-listed Cheniere Energy
or pay a penalty. The contracts, signed months before the oil market
crash in January 2014, were supposed to last a decade. Cheniere had no
immediate comment.
Sabine now seeks to use a different gatherer that will not demand
minimum volumes, according to a court filing. The pipeline companies
have objected, arguing that the contracts “run with the land” that
Sabine has been drilling and cannot be torn up in bankruptcy. Judge Chapman disagreed, but issued a non-binding ruling on that question for procedural reasons.
Robert Burns, a lawyer at Bracewell who represents the Cheniere subsidiary, acknowledged efforts were under way to resolve the dispute through commercial avenues. “A redoubling of those efforts is in order,” he told the judge.
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