A Texas bankruptcy court judge ruled that pure-play STACK operator 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
"While Alta Mesa retained the right to determine whether and when to capture its mineral reserves, it surrendered the right to determine what happens to the reserves once it drills," Judge Marvin Isgur of the U.S. Bankruptcy Court for the Southern District of Texas, Houston Division, wrote in a Dec. 20 opinion.
Kingfisher, which is also a subsidiary of Alta Mesa Resources, signed the agreements in 2015. They were amended in 2016 to save the parent company money as commodity prices slumped, but still encompassed all of Alta Mesa Resources' Oklahoma hydrocarbons.
"At the heart of this dispute is Alta Mesa's belief that its owners, sitting on both sides of the negotiation table, agreed to pay Kingfisher exorbitant gathering fees," Isgur said. "According to Alta Mesa, its value as a going concern will increase if it is able to renegotiate its gathering arrangements, either with Kingfisher or a third party."
Alta Mesa Resources in September filed for Chapter 11 bankruptcy after laying off about one-third of its 200 employees and writing down the value of its assets by $3.1 billion. The company said in May that it had received delisting warnings from the Nasdaq stock exchange due to delayed financial reports, and it was delisted in September.
Fitch Ratings wrote in a November report that potential upstream bankruptcies could jeopardize North American gathering and processing companies' cash flows and credit in 2020, and Chesapeake Energy Corp.'s default concerns have weighed on midstream provider Crestwood Equity Partners LP's stock price. Still, Williams Cos. Inc. President and CEO Alan Armstrong said in December that he has never seen one of Williams' gathering contracts get rejected by a customer going through bankruptcy.
"There is no other feasible way to move the commodity to the market and get paid than to own the gathering system, and so if you think about the opportunity to reject a contract you would have to believe that the avoided cost of building a brand-new system ... is better than that current pricing," he said.