Continuing low oil and natural gas commodity prices have led to bargain prices at the pump, but also high tension in many boardrooms. This strain on the industry has resulted in many exploration and production, or “E&P,” companies seeking relief from high debt and reduced revenue in bankruptcy. In recent cases, those E&P companies have sought to reject their midstream gathering agreements, which they deem onerous and unprofitable. E&P companies Sabine Oil and Gas Corp. and Magnum Hunter Resources Corp. have been getting quite a bit of attention for their attempts to do just that, presenting potential road maps for how other such companies may choose to proceed during their reorganizations.
The ability to reject an executory contract or unexpired lease is a powerful reorganizational tool given to a bankrupt company by the Bankruptcy Code. With limited exception, under 11 U.S.C. § 365, debtors can reject such executory contracts over the objection of their counterparty. One such limited exception – that contracts creating covenants, which run with the title to real property, cannot be rejected under § 365 – has taken center stage in recent attempts by E&P debtors to reject midstream gathering agreements.
For the unacquainted, a midstream gathering agreement is a contract that governs the midstream company’s service of delivering oil or natural gas from the wellhead to market. Whether it does so using a pipeline, truck or crude oil transported by rail, these contracts can be extremely costly, largely because they are so vital to the business model of a continuing E&P venture. Continue Reading