By Alison Sider and Tom Corrigan
A judge ruled that a bankrupt oil-and-gas producer could shed
expensive contracts it made with pipeline companies when energy was
booming, rejecting pipeline firms' claim that even bankruptcies
couldn't break the lucrative agreements apart.
Sabine Oil & Gas Corp., which filed for bankruptcy
protection in July, had asked a New York bankruptcy court to let it
out of pipeline agreements with Nordheim Eagle Ford Gathering LLC,
an affiliate of Cheniere Energy Inc.
Under such deals, oil-and-gas producers agree to ship certain
volumes of oil or gas every year at set fees, and have to make
deficiency payments if they miss their targets.
Sabine argued it was no longer shipping enough fuel to meet its
minimum commitments under the deals and would have to pay Nordheim
$35 million over the life of the contract to make up the
difference, making the pacts so expensive it would be better off
striking a new agreement with another company.
Sabine also asked to get out of similar agreements with a second
pipeline operator--an affiliate of High Point Infrastructure
Partners LLC--arguing that it would save as much as $80 million and
avoid sinking money into unprofitable wells the company would be
required to drill under the agreement.
Judge Shelley Chapman of the U.S. Bankruptcy Court in Manhattan
agreed to let Sabine out of the deals over the objections of the
pipeline companies, but said that Texas law wasn't clear enough to
allow her to make a binding decision, potentially setting the stage
for another legal battle over the pipeline operators' argument that
the agreements can't be broken because they are inextricably tied
to the land on which Sabine operates.
Sabine and Cheniere didn't respond to requests for comment.
The ruling may be helpful to Delaware bankruptcy judges with
similar disputes before them, but they aren't bound by it.
Pipelines and producers will also likely resolve many disputes
without going to court.
Companies like Plains All American Pipeline LP have said
producers are already asking for breaks on fees and volume
commitments, and some experts said the ruling could set a new tone
for those discussions.
The closely watched case is likely to upend the once symbiotic
relationship between companies that pump fuel and those that spent
billions to lay thousands of miles of pipelines to move it.
Oil and gas producers, which have been battered by persistently
low oil and natural gas prices, have been hoping for a signal they
might be able to escape pipeline transport fees and minimum
shipping volumes they agreed to when times were good. Since output
has fallen, some producers are stuck paying for space on pipelines
that they aren't using.
Ed Longanecker, president of the Texas Independent Producers and
Royalty Owners Association, said he expects more challenges to
contracts between producers and pipeline companies. "One could see
this ruling as something favorable for producers, but it's
something that's going to play out further in the courts," he
said.
If more judges side with producers, it could pose a serious
threat to dozens of pipeline companies that count on a steady
stream of fees and pay out most of their cash flow to investors.
The Alerian MLP index, which includes major pipeline companies,
fell 6.1% Tuesday.
"There is a concern in the community about whether this is going
to shake up the reliable income everybody was kind of depending
on," said Mary Lyman, president of the Master Limited Partnership
Association, a trade group that represents many pipeline
operators.
Lawyers and analysts cautioned that Tuesday's decision won't
necessarily affect companies with contracts structured differently,
or in states with different laws.
Alan Armstrong, the chief executive of pipeline company Williams
Cos., sought to assure investors and analysts last month that
contracts would survive customer bankruptcies.
"We believe gathering contracts such as ours are not the type of
contract that would be rejected," he said.
Williams shares sold off sharply last month when rumors swirled
that Chesapeake Energy Corp., a major shipper, might go bankrupt,
potentially threatening its pipeline revenue and its credit rating.
The panic spread to Energy Transfer Equity LP, which is buying
Williams in a $33 billion deal.
Williams has said Chesapeake is still paying its bills and that
it remains open to renegotiating contract terms with its customer.
Chesapeake issued a statement last month saying it had no plans to
pursue a bankruptcy.
Pipeline companies have argued that many of their agreements
with producers are ironclad because many are set up more like
real-estate interests in the oil and gas fields, not just a promise
of payment, creating a link to the land that sticks even if the
acreage is sold to a new owner.
But as more struggling producers slide into bankruptcy, experts
say contentious disputes will continue to emerge.
After Quicksilver Resources filed for bankruptcy last year, its
oil-and-gas fields were sold. The winner, BlueStone Natural
Resources II LLC, agreed to pay $245 million in cash, with one
condition: the rejection of contracts with pipeline company
Crestwood Equity Partners LP.
Crestwood Chief Executive Robert Phillips has said the company
believes its agreements are bankruptcy-proof. Crestwood bought
Quicksilver's north Texas natural-gas pipeline system in 2010. Last
week, Crestwood's lawyers said the company wouldn't have paid more
than $700 million in 2010 if it had not expected the contracts
would stick with the land.
But BlueStone said in a court filing that it didn't want to be
saddled with obligations to Crestwood, arguing that the fees are
"significantly above the market rate" in Texas' Barnett shale
region.
"BlueStone has other options instead of paying Crestwood an
exorbitant gathering fee," the company wrote in a court filing.
If a judge doesn't agree, BlueStone will walk away, and
Quicksilver's creditors will have to turn to a significantly lower
second-place offer: $93 million in cash from BSG LLC.
--Jacqueline Palank contributed to this article.
Write to Alison Sider at alison.sider@wsj.com and Tom Corrigan
at tom.corrigan@wsj.com
(END) Dow Jones Newswires
March 08, 2016 19:51 ET (00:51 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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