Midstream Energy Industry Braces for Key Bankruptcy Court Ruling

 

U.S. Bankruptcy Judge Shelley Chapman in Manhattan will read her ruling at 2:30 pm ET on a request by Houston-based Sabine Oil & Gas Corp to reject a contract with an affiliate of Cheniere Energy Inc to gather and process natural gas in Texas.

 

Chapman's ruling will be the first major test for using Chapter 11 to shed the contracts, which were seen as a way to protect the midstream industry from the volatility of energy prices.

 

Underpinned by the stability offered by the capacity contracts, many midstream companies organized as high-yielding master limited partnerships favored by income-seeking investors.

 

Since commodity prices began to plummet in 2014, many producers have cut their drilling, and now the commitments to use pipeline capacity no longer make economic sense.

 

Sabine has argued it could immediately save $35 million by ending its contract, while Cheniere has argued the contract is written to be essentially bankruptcy-proof.

 

Chapman told a hearing in early February she was inclined to rule in Sabine's favor.

 

Sabine has said if it gets its way, it plans to build a pipeline system in southern Texas to replace Cheniere's. The producer's lawyers have also acknowledged a ruling in Sabine's favor may provide leverage to renegotiate with Cheniere.

 

Other producers have followed in Sabine's footsteps.

 

Quicksilver Resources Inc has filed papers to reject agreements with a unit of Crestwood Equity Partners and Magnum Hunter Resources Corp is seeking to end multiple pipeline deals, including one with an affiliate that is majority owned by Morgan Stanley.

 

A ruling on Quicksilver's request is expected later this month. Magnum Hunter's requests will be argued in court in the coming weeks.