http://www.zerohedge.com/news/2016-03-12/court-decision-could-accelerate-oil-and-gas-bankruptcies
Sabine held three separate contracts with pipeline firms in Texas, for the transport and sale of oil and gas that the company produced. These contracts came with clauses like “deliver or pay” features — where Sabine was obligated to send minimum volumes of production through the pipeline, or pay financial penalties to the pipeline operators.
Such contracts could have been a stumbling block in bankruptcy — requiring the company to deliver production or cash at a time when its operations have slowed or stopped. And so Sabine had challenged in bankruptcy court to have the agreements nixed.
And the judge in the case agreed. Ruling that the midstream contracts are not “running with the land” — in essence, saying that the contracts are not inextricably tied to the land assets that underlie Sabine.
The decision opens the door for Sabine to sever the contracts as it restructures in bankruptcy. A strategy that other E&Ps immediately jumped on — with bankrupt producer Magnum Hunter Resources yesterday striking a deal to cancel four midstream contracts as it restructures.
With the case giving producers a greater financial incentive to declare bankruptcy, we could see such filings increase. Obviously posing a risk for equity holders — and also for midstream companies, which could see a rising amount of contract business disappear in the bankruptcy courts.
Watch for more cases of canceled contracts emerging. And possible write-downs and loss of income at midstream firms as a result.
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