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Sabine Gets Final OK To Nix Midstream Contracts In Ch. 11

A New York bankruptcy judge ruled on Tuesday that Sabine Oil & Gas Corp. can extricate itself from two natural gas and condensate gathering contracts in its restructuring, solidifying an earlier ruling that sent shock waves through the midstream oil and gas industry.

U.S. Bankruptcy Judge Shelley C. Chapman granted Sabine summary judgment, allowing the driller to shed three midstream contracts with Nordheim Eagle Ford Gathering LLC and HPIP Gonzales Holdings LLC. The judge reiterated her prior nonbinding decision that the contracts are not “covenants running with land” under state law because they don’t concern Sabine’s land or its use, just the hydrocarbons being pulled out of the ground.

She also rejected a new argument by Nordheim and HPIP that the contracts “touch and concern” the mineral resources in the ground, meaning they concern real property. Neither the contracts nor Texas law on when minerals are considered real property support those arguments, the judge said.

“By the plain terms of the Nordheim agreements and the HPIP agreements, the mineral dedications concern only minerals extracted from the ground, which indisputably constitute personal property, not real property, under Texas law,” the judge said.

Sabine, which submitted its Chapter 11 plan in January, had filed a motion aiming to reject the three gathering contracts, claiming it would save the company more than $100 million. But Nordheim and HPIP opposed the motion, saying the contracts run with the land and can’t be canceled by bankruptcy.

After the judge tentatively granted Sabine's motion in March, the energy producer brought two adversary proceedings against the gathering companies over the same issue.

The ruling handed down Tuesday in those two adversary proceedings tracked the judge's tentative ruling on how the midstream agreements should be classified under Texas law and added commentary on issues that came up in the summary judgment motion.

In addition to dispatching the gathering companies' argument that the contracts dealt with real property, the judge rejected their contention that Texas law does not require shared interest in the property, known as horizontal privity of estate, in order for the contracts to be attached to the land in the way they had claimed.

Judge Chapman said Texas law is murky as to whether or not horizontal privity of estate is required, but that it is clear that the gathering companies' contracts did not give them such interest in Sabine's mineral holdings.

The judge's holdings mean more midstream companies could be vulnerable in the increasing restructurings by oil and gas producers trying to weather a prolonged downturn in energy prices.

In Delaware bankruptcy court last month, Crestwood Midstream Partners LP and several affiliates escaped a bid by Quicksilver Resources Inc. to reject its midstream contracts. Instead, the companies reworked those agreements ahead of Quicksilver's $245 million sale of oil and gas assets to Oklahoma-based BlueStone Natural Resources.

Counsel for the parties did not immediately reply to requests for comment on Wednesday.

Sabine is represented by Jonathan S. Henes, James H.M. Sprayregen, Paul M. Basta, Christopher Marcus, Gabor Balassa, Ryan Blaine Bennett, A. Katrine Jakola and Devon M. Largio of Kirkland & Ellis LLP.

The creditors committee is represented by Keith Wofford, D. Ross Martin and Mark R. Somerstein of Ropes & Gray LLP.

Nordheim is represented by William A. Wood III, Jason G. Cohen and Robert G. Burns of Bracewell LLP.

HPIP is represented by Keith A. Simon, Paul A. Serritella and Annemarie V. Reilly of Latham & Watkins LLP.

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.