Resilience of Pipeline Pacts Thrown Into Question by Court

  • Court allows driller to scrap oil and gas shipping contracts
  • Shares of Williams Cos., Energy Transfer slid after decision

A U.S. bankruptcy court ruling has thrown into question how heavily oil and natural gas pipeline operators can rely on their contracts with energy explorers to shield them from the worst industry downturn in decades.

Judge Shelley Chapman ruled Tuesday that driller Sabine Oil & Gas Corp., which filed for bankruptcy in July, can reject contracts with two pipeline operators, HPIP Gonzales Holdings LLC and Cheniere Energy Inc.’s Nordheim Eagle Ford Gathering LLC affiliate. Analysts including energy consultancy WTRG Economics say the ruling threatens to set a precedent for other distressed energy explorers looking to break transportation commitments.

The decision comes as operators have already seen their market values sink on concern that sliding oil and gas prices will force energy producers into bankruptcies and cut their revenues. The Alerian MLP Index, made up of nearly 50 pipeline partnerships once favored by investors for their high payouts and dependable, long-term shipping contracts, has plunged 40 percent in the past year.

Tuesday’s ruling “will impact Williams and others,” James Williams, WTRG Economics’s president, said by e-mail from London, Arkansas. “Normally, these take-or-pay contracts survive the bankruptcy hearings.”

Williams Cos. was up 0.6 percent on Wednesday to $17.36 at 10:11 a.m. in New York after plunging as much as 10 percent on the news a day earlier. Energy Transfer Equity LP fell 0.8 percent to $7.27 after dropping as much as 13 percent on Tuesday. Spokesmen for the two companies didn’t provide comment on the judge’s decision.

‘Unnecessarily Burdensome’

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., one of its customers. The company said its contracts were “not the type of contracts that would be rejected” should one of its clients file for bankruptcy.

Houston-based Sabine had told the court in September that it wanted to reject contracts it sees as “unnecessarily burdensome.” Scrapping the two contracts at issue Tuesday may save as much as $115 million for the bankruptcy estate, the company said in court papers.

“It sets a precedent for the group,” 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 re-signed.”

Land Rights

HPIP Gonzales and Nordheim Eagle Ford Gathering 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.

HPIP said the agreements included covenants “attaching to and running with the lands” that are binding on Sabine and any successor -- meaning HPIP should have the right to perform the same services on a specific plot of land for whomever is extracting gas. 

After reading her decision from the bench, Chapman told the lawyers gathered in her Manhattan courtroom: “It might be time to talk about a commercial resolution of some of these issues, but that’s for you and your clients to decide.”

The case is In re Sabine Oil & Gas Corp., 15-11835, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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