E&P Bankruptcies Move in ‘Very Hairy’ Direction

Many distressed E&Ps and their midstream partners could be flying blind into a litigation collision course as the number of expected bankruptcies and reorganizations ramps up in the third and fourth quarters.

That’s because recent upstream/midstream disputes have in many cases centered around whether an E&P in Chapter 11 bankruptcy can reject midstream agreements they are unable to meet. In 2016, a court ruled that Sabine Oil and Gas Corp. could reject its agreements because they did not include covenants that “run with the land” as defined by Texas bankruptcy law.

Until that decision, those types of agreements were understood to fall under the province of “covenants that run with the land.” So, when it was handed down, the decision was viewed by many to be a game-changer. Turns out, subsequent rulings over contracts like these—particularly cases involving Badlands Energy Inc. and Alta Mesa Resources Inc.—have shown that the game continues to change.

“I think there are some people that had the belief that, since ‘Sabine,’ ‘Badlands’ and ‘Alta Mesa’ came out, that issue is settled,” Liz Freeman, partner with Jackson Walker LLP, told Hart Energy. “That’s not it at all. What we have are guidelines.”