LNG Cheniere Energy Inc

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)

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