Amidst the sometimes dramatic fluctuations in commodity prices that buffet the oil and gas industry, investors generally relied on one segment of the market to be safe and stable: so-called “midstream” companies that own the pipelines that transport oil and gas. The rationale was that the oil and gas had to travel, and the fare had to be paid, regardless of the commodity price—not to mention that “take or pay” contracts were the norm in the industry.
Investors’ perception of the safety of investments in midstream companies—i.e., the owners of the pipelines—was shaken by a March 2016 decision out of the Southern District of New York Bankruptcy Court permitting a bankrupt oil exploration company to reject its midstream service contracts. In re Sabine Oil & Gas, (No. 15-11835 SCC) (Bankr. S.D.N.Y. March 8, 2016, ECF No. 872) (Sabine). Sabine set the stage for several heated battles over a debtor’s ability to reject midstream contracts, and, in the process, introduced concern regarding midstream companies’ cash flows. These conflicts arise at the intersection of the core bankruptcy tool of contract rejection, centuries-old state property law, and how the financing that supported the recent expansion of domestic oil and gas production was structured.
