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Bankruptcy Judge Sides With Sabine Again Over Contracts

A bankruptcy court judge in Manhattan rejected motions by two midstream companies to stay an order allowing Sabine Oil & Gas Corp. to terminate certain natural gas and condensate gathering agreements, and for summary judgment in the case.

On Wednesday in U.S. Bankruptcy Court for the Southern District of New York [No. 15-11835], Judge Shelley Chapman rejected a motion by Nordheim Eagle Ford Gathering LLC and HPIP Gonzales Holdings LLC to stay a court ruling last May that allows Sabine to cancel agreements it signed with the midstream companies in 2013 and 2014. Chapman also rejected a summary judgment stay motion.

Faced with crushing debt and the collapse in oil and gas prices, Houston-based Sabine voluntarily filed for Chapter 11 bankruptcy in July 2015 (see Shale DailyJuly 15, 2015).

Last March, Chapman ruled that Sabine could terminate agreements with Nordheim, a subsidiary of Cheniere Energy Inc., and HPIP, but was unable to determine whether the covenants at issue run with the land under Texas law and ordered further proceedings on the matter (see Daily GPIMarch 9March 8).

The court ultimately sided with Sabine in May, agreeing that the contracts do not run with the land. Nordheim and HPIP subsequently filed an appeal to U.S. Court of Appeals for the Second Circuit, and a hearing was held on June 2.

Sabine signed agreements with Nordheim covering all of its natural gas interests in a geographic area of DeWitt County, TX, in 2014 (see Shale DailyJuly 15, 2015). Meanwhile, Forest Oil Corp., which Sabine acquired in December 2014, signed separate gathering, treating and processing agreements with HPIP in 2013 (see Shale DailyJan. 14, 2015May 6, 2014). Sabine wants to terminate all of the agreements as it continues to navigate through Chapter 11.

Midstream companies are fearful that, should Sabine and other producers be allowed to terminate their contracts, a host of other E&P companies struggling in the low commodity price environment could attempt the same strategy (see Daily GPI, Feb. 23).

Executives and analysts are divided over whether the Sabine case could spell trouble for the midstream sector. While some agree the ruling could be troublesome, others don't believe the ruling sets a precedent. Nevertheless, the latter group is advising midstream companies to fortify their contracts with producers.

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