Sabine Oil & Gas May Reject Pipeline Contracts -- Update
March 08 2016 - 4:49PM
Dow Jones News
By Tom Corrigan
A federal bankruptcy judge dealt a blow to pipeline operators
and other midstream oil companies Tuesday, ruling that Sabine Oil
& Gas Corp. can scrap pipeline deals it made before oil and gas
prices plummeted.
Judge Shelley Chapman of the U.S. Bankruptcy Court in Manhattan
agreed to let Sabine out of the pipeline deals in a closely watched
decision that energy and restructuring experts warn could roil the
so-called midstream sector.
"The court defers to the business judgment of the debtors to
reject the agreements," she said.
But Judge Chapman added that her ruling isn't binding, potential
setting the stage for another legal battle over the pipeline
operators' argument that the agreements can't be broken because
they're inextricably tied to the land on which Sabine operates.
"Unfortunately, there appears to be no clear ruling from the
Texas Supreme Court that answers all the questions at hand," she
said, noting that Sabine's agreements with the pipeline operators
are governed by Texas law.
However, Judge Chapman added that "the court preliminarily finds
that none of the covenants run with the land,"
Houston-based Sabine sought to exit a contract with an affiliate
of Cheniere Energy Inc. because of the likelihood that it wouldn't
meet the deal's requirement to deliver a certain amount of natural
gas in southern Texas. Sabine also sought to reject another deal it
made with a midstream company that halted construction of its
pipeline in 2014.
Sabine, which sought chapter 11 protection last summer to
restructure some $3 billion in debt, said it could save as much as
$115 million by exiting the deals and wants to be free to negotiate
more favorable contracts.
Before Tuesday's ruling, restructuring and energy experts warned
that a loss for Sabine's pipeline operators could inspire other
bankrupt oil and gas producers to seek similar relief, spreading
the distress that has plagued them to the so-called midstream
companies that process and transport oil and natural gas.
In fact, similar requests are currently pending in the chapter
11 cases of companies like Quicksilver Resources Inc. and Magnum
Hunter Resources Inc. A Delaware judge is expected to rule on
Quicksilver's request by the end of the month.
"This is a big deal in the industry," John Demmy, a lawyer for
two midstream trade groups, said at Friday's hearing in the
Quicksilver case. "Depending on the ruling, it could have ripple
effects outside the industry."
While Judge Chapman's ruling may be helpful to Delaware
bankruptcy judges with similar disputes before them, they aren't
bound by it.
"The courts do not have to follow each other and each contract
needs to be reviewed independently," said Schulte Roth & Zabel
partner David Karp, who isn't involved in the Sabine pipeline
dispute.
In allowing Sabine to reject its pipeline agreements, Judge
Chapman found that bankruptcy law typically prioritizes a company's
right to keep contracts it finds beneficial and tear up contracts
that are burdensome. Though she said she couldn't definitively
decide some of the legal issues underlying the dispute, she made
clear that she favored allowing Sabine to settle the dispute
outside of court and proceed with negotiating new pipeline
deals.
"We should get to the end game here," she said. "I don't think
this should linger."
--Jacqueline Palank contributed to this article.
Write to Tom Corrigan at tom.corrigan@wsj.com
(END) Dow Jones Newswires
March 08, 2016 16:34 ET (21:34 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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