Bankrupt Sabine Oil & Gas Corp. can reject contracts with two companies that gather, treat and transport oil and natural gas, a federal judge has ruled, driving down shares of other so-called midstream businesses.
As Bloomberg reports, U.S. Bankruptcy Judge Shelley Chapman in Manhattan said Tuesday that Sabine should be able to reject contracts with HPIP Gonzales Holdings LLC and Nordheim Eagle Ford Gathering LLC, an affiliate of Cheniere Energy. At the same time, she said she didn’t want to decide an underlying legal dispute “in a binding way.”
“It would have been preferable” to hear Sabine’s request to reject the contracts at the same time the court held a full trial on a more complex issue: whether the contracts gave the midstream companies the right to provide services on a specific tract of land, Chapman said.
Pipeline operators including Williams Cos. and Energy Transfer Equity LP slid on speculation that Chapman’s ruling may set a precedent for distressed energy explorers looking to break transportation commitments.
“It was a ruling against the existing rate structure,” said Michael Kay, an analyst for Bloomberg Intelligence. “In all likelihood, it means that they’ll either renegotiate the rates or those contracts won’t be resigned.”
“It sets a precedent for the group,” Kay added. “But there’s more risk for certain players than others.”
Sliding oil prices have weighed on midstream stocks over the past year on speculation that drillers filing for bankruptcy may break their contracts and eat away at their profits. In a Feb. 18 call with investors, Williams had to defend itself against speculation that its finances were tied too closely to energy explorer Chesapeake Energy Corp.
Houston-based Sabine, which filed for bankruptcy in July, told the court in September that it wanted to reject contracts it sees as “unnecessarily burdensome.” Scrapping the two contracts at issue Tuesday could save as much as $115 million for the bankruptcy estate, the company has said in court papers.
The midstream companies objected, saying that while bankruptcy usually allows companies to sever contracts with business partners, the deals in question were unique in that they gave the companies rights to the land.
