More oil and gas drillers with limited liability companies registered in Delaware may opt to file for Chapter 11 bankruptcy there after a court recently allowed two producers to reject contracts with midstream providers, a restructuring attorney said.
Midstream gathering and processing agreements are often written as real property interests, which are tied to the property and cannot be rejected in bankruptcy. The U.S. Bankruptcy Court for the District of Delaware, however, views some of those agreements as executory contracts that can be thrown out.
Judge Christopher Sontchi at the U.S. Bankruptcy Court for the District of Delaware ruled in October that none of Extraction Oil & Gas Inc.'s agreements with a number of gathering, processing and transportation firms satisfied the requirements for a real property interest "running with the land" per Colorado state law, as opposed to obligating the debtor or another party to fulfill its terms at a later date. On Nov. 13, Sontchi's colleague Karen Owens found Southland Royalty Co. LLC's gas gathering agreement with Williams Cos. Inc. subsidiary Wamsutter LLC did not meet Wyoming state law's criteria for a real property covenant.
Those decisions contrast with how the U.S. Bankruptcy Court for the Southern District of Texas has interpreted similar contracts, particularly a December 2019 ruling that Alta Mesa Resources Inc. and subsidiary Alta Mesa Holdings LP cannot use Chapter 11 proceedings to reject oil and gas gathering contracts with Kingfisher Midstream LLC.
"Now I think it's very clear that you have a venue in Delaware that's going to be viewing these types of arrangements as executory contracts that can be rejected," Haynes and Boone LLP's Eli Columbus said in an interview. "The question is, are we going to start seeing some venue shopping from [exploration and production] companies who would like to get out of burdensome midstream agreements."
Judge Owens' opinion in favor of Southland Royalty also noted the "developing split between bankruptcy courts regarding the enforceability of gas gathering agreements in whole or in part as real property covenants."
CreditSights analyst Charles Johnston said in an interview that the Delaware court decisions "create more uncertainty in the space" for pipeline companies, while Haynes and Boone's Columbus added that he thinks midstream firms "view in certain jurisdictions ... their contracts are at risk."
Still, the Southern District of Texas' judge David Jones recently ruled that Chesapeake Energy Corp. can throw out a gas purchase agreement with Energy Transfer LP's interstate ETC Texas Pipeline Ltd. because it is not a real property interest "running with the land" and was written as an executory contract.
NGL Energy Partners LP unit Grand Mesa Pipeline LLC, meanwhile, announced Nov. 2 that it plans to appeal the court's determination that Extraction can reject two gas transportation contracts due in part to questions about exclusive jurisdiction. According to NGL Energy Partners, only the Federal Energy Regulatory Commission can modify or discontinue those rates and tariffs per the Interstate Commerce Act.
"NGL owes it to its stakeholders to continue to defend the value of the [transportation service agreements] and will be considering all available legal remedies, including but not limited to asserting Grand Mesa's approximately $650 million unsecured claim, which, under Extraction's proposed plan of reorganization, will ultimately convert to equity in the emerged Extraction," CEO H. Michael Krimbill said.
The debate among FERC and bankruptcy courts regarding interstate pipeline contracts will also play out during Gulfport Energy Corp.'s Chapter 11 proceedings. After Gulfport issued its going concern warning, the agency declared it would have concurrent jurisdiction with the bankruptcy court over transportation agreements with Rockies Express Pipeline LLC, Rover Pipeline LLC and several TC Energy Corp. units in the event of a bankruptcy filing. Since filing for Chapter 11 on Nov. 13, Gulfport has asked the U.S. Bankruptcy Court for the Southern District of Texas to reject those contracts and block FERC actions that might "usurp" the court's role.
For Columbus, the real surprise during this upstream bankruptcy cycle is how many midstream contract disputes have been settled by court decisions.
"What's been interesting to me is that they have all gone to litigation all the way to a ruling by the bankruptcy court rather than the parties reaching some type of consensual commercial resolution," he said.
Williams, however, announced Nov. 23 that it struck a deal with Chesapeake to avoid a bankruptcy court dispute. The shale driller will pay all receivables associated with midstream expenses under the existing contracts and will not reject Williams' gathering agreements in the Eagle Ford, Marcellus or Mid-Continent shale regions, while Williams agreed to slash its gathering fees in the Haynesville area in exchange for ownership of part of Chesapeake's South Mansfield producing assets. Chesapeake also agreed to enter into a long-term gas supply commitment for a minimum 100,000 Dth/d to 150,000 Dth/d for the Transco Regional Energy Access gas pipeline, which is under development.