The oil and gas industry is in the midst of a transition, with prices falling as supply outpaces current demand. With global economic weakness and growing competition from alternative energy sources, the expectation is for continued headwinds. Low prices have caused numerous producers to default on their indebtedness and many to seek financial restructuring, including filing for bankruptcy protection.

Executive Summary New York bankruptcy judge allows Sabine Oil & Gas to reject gathering agreements over the objections of midstream companies, finding that the covenants do not run with the land.

In a decision entered yesterday afternoon, Judge Shelley Chapman of the United States Bankruptcy Court for the Southern District of New York authorized Sabine Oil & Gas Corporation to reject certain midstream contracts under Section 365(a) of the Bankruptcy Code and, critically, made a non-binding holding that Sabine’s obligations under these contracts were not “covenants running with the land” under Texas law.

The US Bankruptcy Court for the Southern District of New York has issued a ruling in a chapter 11 case that could have a significant  impact on future restructurings in the oil and gas industry.

On March 8, 2016,  in the case of Sabine Oil and Gas Corp., Judge Shelley Chapman ruled that Sabine could reject certain pipeline and gas gathering agreements with two midstream gathering pipeline companies.

Can Gathering Agreements Be Rejected as Executory Contracts?

Bankruptcy Judge Shelley Chapman held that Sabine Oil & Gas Corp. has satisfied the standards for rejection of several gathering and handling agreements between Sabine and its midstream counter-parties, Nordheim Eagle Ford Gathering, LLC and HPIP Gonzales Holdings, LLC.

In a March 8, 2016 ruling from the bench, the U.S. Bankruptcy Court for the Southern District of New York issued a significant decision regarding the ability of a debtor in bankruptcy to reject gas gathering agreements and similar intrastate contracts. Judge Shelley Chapman, overseeing the bankruptcy case of In re Sabine Oil & Gas Corp., determined that those agreements could be rejected in bankruptcy, notwithstanding contractual provisions that purport to issue conveyances that run with the land.

Updates

Last week, we discussed the complexities of metals exploration chapter 11 bankruptcy cases and addressed several of the notable issues that arise in those cases. The discussion of significant issues continues below.

With the steep collapse of oil and gas prices in the last eighteen months, dozens of exploration and production companies have declared bankruptcy and many more companies are expected to file for bankruptcy protection unless prices rebound dramatically. As the prospect of further bankruptcies looms, it is important for parties to understand how to adequately protect their security interests and the nature of competing liens that could prevent them from fully realizing on the value of the collateral securing their counterparty’s obligations.