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Bankrupt E&P companies looking to end pipeline agreements

The downturn in oil prices took a serious toll on the U.S. E&P market last year, with 42 companies filing for bankruptcy in 2015. Those companies’ total debt amounted to $17.85 billion, and many of them are seeking to restructure under Chapter 11. As part of that restructuring, many oil and gas companies are hoping to exit deals made with midstream companies. While E&Ps seek to lighten their financial burdens, it’s a move midstream industry groups say would undermine the sector’s financial stability.

Bankrupt E&P companies like Quicksilver Resources and Sabine Oil & Gas are hoping to make the case in court to reject previously negotiated midstream contracts with Crestwood Equity Partners (ticker: CEQP, CrestwoodLP.com) and Cheniere Energy (ticker: LNG, Cheniere.com), respectively.

Midstream companies tie their prices to carrying capacity on their pipelines, a strategy that gives them a certain level of insulation from oil prices, and has also allowed many of them to form MLPs which can pay out high dividends to investors based on a steady flow of cash. These contracts are nearly unbreakable, remaining in place even if the production is sold to a new company. With many of these transportation contracts negotiated while oil prices were significantly higher, bankrupt companies are no longer able to pay the previously negotiated price.

The Gas Processors Association and the Texas Pipeline Association, which together represent some 140 midstream companies, filed in Delaware bankruptcy court warning that allowing these contracts would open the door for other bankrupt companies to follow suit, reports The Wall Street Journal. If companies were able to exit their contracts, it could destabilize the midstream sector, which has pumped up to $30 billion annually into building pipelines to serve the shale boom, reports Reuters.

Companies looking to become more attractive targets for acquisitions

Quicksilver is hoping to cancel its midstream contracts to close a $245 million sale to BlueStone Natural Resources II LLC. BlueStone has said that it would not be interested in the deal if Quicksilver’s commitments with Crestwood remained in place. The company plans to ask Texas regulators to set a new rate for using Crestwood’s pipelines, said Tim Trump, a lawyer for the company.

The debt burdens and other obligations of companies in the E&P sector has made most companies unattractive targets for acquisition, said ExxonMobil (ticker: XOM, ExxonMobil.com) CEO Rex Tillerson.

Crestwood has said that the pipeline agreement cannot be broken under bankruptcy law, and that if BlueStone walks away, Quicksilver has a backup buyer, albeit with a lower bid, waiting in the wings.

Sabine Oil & Gas, which also went bankrupt last year, is hoping to cancel its pipeline deals with Cheniere so that it will have more flexibility to negotiate more favorable deals and save up to $115 million. Cheniere Energy has opposed the request, which was filed in a New York bankruptcy court.

The Delaware court is set to hear arguments in the Quicksilver case this Friday, while the New York court plans to hear the case for Sabine Oil & Gas next week.


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