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Ruling Expected In Sabine’s Case To End Contract With Cheniere Affiliate

The $500 billion midstream sector is bracing on March 8 for a ruling from a U.S. bankruptcy judge that could determine if energy producers can use Chapter 11 to shed contracts with pipeline operators for transporting oil and natural gas.

U.S. Bankruptcy Judge Shelley Chapman in Manhattan will read her ruling at 2:30 pm ET on a request by Houston-based Sabine Oil & Gas Corp. to reject a contract with an affiliate of Cheniere Energy Inc. to gather and process natural gas in Texas.

Chapman’s ruling will be the first major test for using Chapter 11 to shed the contracts, which were seen as a way to protect the midstream industry from the volatility of energy prices.

Underpinned by the stability offered by the capacity contracts, many midstream companies organized as high-yielding MLPs favored by income-seeking investors.

Since commodity prices began to plummet in 2014, many producers have cut their drilling, and now the commitments to use pipeline capacity no longer make economic sense.

Sabine has argued it could immediately save $35 million by ending its contract, while Cheniere has argued the contract is written to be essentially bankruptcy-proof.

Chapman told a hearing in early February she was inclined to rule in Sabine’s favor.

Sabine has said that if it gets its way, it plans to build a pipeline system in southern Texas to replace Cheniere’s. The producer’s lawyers have also acknowledged that a ruling in Sabine’s favor could provide leverage to renegotiate with Cheniere.

Other producers have followed in Sabine’s footsteps.

Quicksilver Resources Inc. has filed papers to reject agreements with a unit of Crestwood Equity Partners, and Magnum Hunter Resources Corp. (OTC: MHRCQ) is seeking to end multiple pipeline deals, including one with an affiliate that is majority owned by Morgan Stanley.

A ruling on Quicksilver’s request is expected later this month. Magnum Hunter’s requests will be argued in court in the coming weeks.

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