In an ominous development for midstream companies, a federal bankruptcy court judge ruled in favor of Sabine Oil & Gas Corp. on Tuesday, allowing the distressed producer to terminate natural gas and condensate gathering agreements in the wake of low commodity prices.

Meanwhile, Magnum Hunter Resources Corp., which filed for Chapter 11 bankruptcy protection last December (see Shale Daily, Dec. 15, 2015), fired back at a Gulf Coast pipeline company after it objected to Magnum moving to reject similar contracts.

Tuesday’s ruling by Judge Shelley Chapman in U.S. Bankruptcy Court for the Southern District of New York [No. 15-11835] will allow Houston-based Sabine to reject agreements it signed in 2014 with Nordheim Eagle Ford Gathering LLC, a subsidiary of Cheniere Energy Inc. The agreements cover all of Sabine’s natural gas interests in a geographic area of DeWitt County, TX (see Shale Daily, July 15, 2015).

Court records show Sabine also wanted to cancel separate gathering, treating and processing agreements signed in 2013 between Forest Oil Corp., which Sabine acquired in December 2014, and HPIP Gonzales Holdings LLC (see Shale Daily, Jan. 14, 2015; May 6, 2014).

Nordheim and HPIP had argued that the agreements cannot be rejected because they are covenants that run with the land under Texas law. Chapman disagreed.

“The court preliminarily finds that none of the covenants runs with the land either as a real covenant or as an equitable servitude,” Chapman said in her 21-page ruling. “Moreover, the agreements do not grant Nordheim or HPIP a real property interest in the debtors’ mineral estate…Therefore, under Texas law, the debtors have not transferred any portion of their real property interests to Nordheim or HPIP through the agreements.”

Midstream companies are fearful that, should Sabine, Magnum 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 say that could spell trouble for the midstream sector as well.

David Karp, an attorney with firm Schulte Roth & Zabel LLP, told NGI that Chapman’s ruling was the first of many important decisions yet to come affecting midstream companies and producers.

“This ruling covers the two specific midstream agreements of HPIP and Nordheim in Sabine,” Karp said Tuesday. “It covers agreements where there is a dedication of acreage, and the dedicated interest is production or personal property once it has met the surface. It is not going to impact certain agreements that include dedications of a mineral estate.”

Last Thursday, in U.S. Bankruptcy Court for the Delaware District [No. 15-12533], Texas Gas Transmission LLC filed an objection to Magnum’s motion to reject contracts between Texas Gas and Triad Hunter, Magnum’s Appalachian production subsidiary (see Shale Daily, Dec. 17, 2015). Among the issues are an agreement where Triad Hunter would support Texas Gas’s Northern Supply Access Project (see Daily GPI, June 24, 2014), and a $65 million credit support agreement. Both agreements were reached in 2014.

“The debtors’ request to reject the agreements is governed by the ‘business judgment’ standard,” Texas Gas said in its objection. “While debtors are normally granted wide latitude in exercising their business judgment, they must nonetheless do so rationally…

“The debtors’ proposed rejection of the precedent agreement leaves the Rockies Express Pipeline [Rex] — the more [expensive] pipeline — as the debtors’ only outlet. If the debtors are pursuing some strategy to improve their negotiating leverage with Rex by rejecting their only alternative to Rex, the Debtors should explain their rationale, as it is not readily apparent.”

On Monday, Magnum told Judge Kevin Gross that there were two reasons why he should overrule Texas Gas’s objection.

“First, the objection is premised on the faulty assumption that the debtors have only two options: transport natural gas to the Gulf Coast via Texas Gas’s pipeline or transport natural gas to the Gulf Coast via an alternative pipeline,” Magnum said. “The objection ignores a third alternative that is both reasonable and significantly cheaper and that the debtors have determined is the best approach forward: Do not transport natural gas to the Gulf Coast.

“Second, Texas Gas’s own publicly-filed statements aver that it has not suffered — and will not suffer — damages other than damages for loss of profits, the right to which it has waived under the contracts, as a result of the proposed rejection.”

Midstream companies are also watching a third bankruptcy case. Quicksilver Resources Inc. has asked Delaware Bankruptcy Court Judge Laurie Silverstein to allow it to terminate its gathering and processing contracts with Crestwood Midstream Partners LP [No. 15-10585]. The contracts expire in 2020 (see Shale Daily, March 18, 2015).

According to court documents, Quicksilver argued cancellation of the contracts is necessary for the court-approved sale of some of its assets — to BlueStone Natural Resources II LLC, for $245 million (see Shale Daily, Jan. 25). Silverstein said she will issue a ruling soon (see Daily GPI, March 7).