Within weeks, two low-profile legal disputes may determine whether an unprecedented wave of bankruptcies expected to hit U.S. oil and gas producers this year will imperil the $500 billion pipeline sector as well.
In the two court fights, U.S. energy producers are trying to use Chapter 11 bankruptcy protection to shed long-term contracts with the pipeline operators that gather and process shale gas before it is delivered to consumer markets.
The attempts to shed the contracts by Sabine Oil & Gas (SOGCQ.PK) and Quicksilver Resources (KWKAQ.PK) are viewed by executives and lawyers as a litmus test for deals worth billions of dollars annually for the so-called midstream sector.
Pipeline operators have argued the contracts are secure, but restructuring experts say that if the two producers manage to tear up or renegotiate their deals, others will follow. That could add a new element of risk for already hard-hit investors in midstream companies, which have plowed up to $30 billion a year into infrastructure to serve the U.S. fracking boom.
“It’s a hellacious problem,” said Hugh Ray, a bankruptcy lawyer with McKool Smith in Houston. “It will end with even more bankruptcies.”
A judge on New York’s influential bankruptcy court said on Feb. 2 she was inclined to allow Houston-based Sabine to end its pipeline contract, which guaranteed it would ship a minimum volume of gas through a system built by a Cheniere Energy (LNG.A) subsidiary until 2024. Sabine’s lawyers argued they could save $35 million by ending the Cheniere contract, and then save millions more by building an entirely new system.
Fort Worth, Texas-based Quicksilver’s request to shed a contract with another midstream operator, Crestwood Equity Partners (CEQP.N), is set for Feb. 26.
The concerns have grown more evident in recent days, raised in law firms’ client memos and investment bank research notes.