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Sabine Warns of Possible Litigation Over Forest Oil Merger

A New York bankruptcy judge on Thursday authorized Sabine Oil & Gas Corp.'s use of cash collateral to keep the business running as a court restructuring gets underway, but the company warned that potential liability stemming from the oil producer's tie up with Forest Oil Corp. could lead to future battles down the road.

U.S. Bankruptcy Judge Shelley Chapman approved a slate of first day motions that will enable Sabine to maintain its operations in the short-term as it embarks on a Chapter 11 reorganization. Speaking at a hearing in Manhattan, attorneys for Sabine said the goal is to get the company out of bankruptcy as soon as possible.

Sabine attorney Jonathan Henes of Kirkland & Ellis LLP suggested at the hearing that the timing of the bankruptcy is unusual: the company retained restructuring attorneys shortly after the company merged with Forest Oil in December. Henes told the court that Sabine's board of directors supports the creation of an independent panel to investigate potential legal claims — including possible breaches of fiduciary duty and fraudulent transfers — stemming from the tie-up.

The upshot, Henes said, is that Sabine needs to get out in front of any potential legal claims it may be facing because the company can't afford to engage in litigation that would extend the bankruptcy proceedings. Henes said Sabine is over-leveraged and the intent of the Chapter 11 is to reduce the company's debt.

“We need to get this company out as quickly as we can,” Henes said.

Sabine, whose upstream operations are primarily in Texas and Louisiana and is backed by private equity firm First Reserve Corp., said the combination of cratering oil prices, still-low natural gas prices and substantial debt obligations forced the company to take the restructuring route. The company filed for Chapter 11 Monday listing  assets of approximately $2.5 billion and debts of $2.9 billion.

The Forest Oil and Sabine Oil & Gas merger was especially unusual in that the companies shifted the technical acquirer under the terms of their agreement after the deal had been announced, making Forest the acquirer in the bargain instead of the other way around and revealing the adoption of a shareholder rights plan.

The restructuring came just a couple of months after a Forest Oil investor launched a proposed class action suit seeking to block the acquisition, claiming the deal shortchanged shareholders.

The merger agreement tweaks, which made it easier for the deal to win approval, raised eyebrows at the time and was seen by some as response to fears of bond short sellers. At the time of the merger, Forest Oil had a market capitalization of $273 million and an outstanding debt of $800 million.

Attorneys indicated at Tuesday's hearing that Sabine's bankruptcy will be contentious. Michael S. Stamer, an attorney representing a group of noteholders from Akin Gump Strauss Hauer & Feld LLP, called the merger “disastrous.”

Stamer said at the hearing that the financing Sabine had requested would “tip the scales” in the secured noteholders favor. Judge Chapman approved Sabine's request for cash collateral only after Stamer obtained a number of clarifications on specific language used in the order.

Sabine is one of several U.S. oil and gas producers that have filed for bankruptcy in 2015, joining BPZ Resource Inc., Cal Dive International Inc., WBH Energy LP and others.

Sabine is represented by Jonathan S. Henes, James H.M. Sprayregen, Paul M. Basta, Christopher Marcus, Gabor Balassa, Ryan B. Bennett, A. Katrine Jakola and Whitney L. Becker of Kirkland & Ellis LLP. Lazard is acting as financial adviser.

The case is Sabine Oil & Gas Corp., case number 1:15-bk-11835, in the U.S. Bankruptcy Court for the Southern District of New York.