SNL Energy Quotes Chuck Gibbs and Doug Glass from Mid-Year Energy Briefing
Chuck Gibbs and Doug Glass, partners in Akin Gump’s financial restructuring and oil and gas practices, respectively, were quoted in the SNL Financial article “Producers still using Chapter 11 to pressure midstream contracts.” The article reports on Akin Gump’s recent mid-year energy briefing, which included a look at the use of the bankruptcy protection process by oil and gas exploration and production companies to try to terminate or restructure contracts with midstream providers.
Gibbs and Glass said the overall situation for producers is difficult, with a growing number seeking Chapter 11 bankruptcy protection. “I think through June 30 there have been almost as many Chapter 11s filed as there were in all of 2015, and the vast majority are in some way related to the oil and gas business,” said Gibbs. As producers look to cut costs, he said one issue that no one had anticipated has become a big one: E&P companies looking to terminate their contracts with their midstream counterparts.
Gibbs said many producers want their oil and gas transportation contracts placed in the category of “burdensome executory contracts or leases,” which can then be rejected and eliminated. He cited an example involving Sabine Oil & Gas, which, shortly after filing for bankruptcy, attempted to reject two contracts with midstream providers. In both cases, the midstream companies unsuccessfully attempted to claim the contracts were running with the land. “The debtor’s business judgment will likely be upheld by the court,” he said. In the event a producer does attempt to get out of a contract, Gibbs added, it is an all-or-nothing proposition with no way to keep portions of the contract the debtor thinks are favorable. “It’s a binary choice; you assume it in all its glory or reject it,” he noted.
Glass said midstream companies are fighting back with a concept known as “covenants running with the land as applied to acreage or production dedications,” which asserts that a contract is tied to the land and involves real property in the hands of the midstream company.. Under this concept, he said, a contract would survive a challenge and would not be considered executory.
“The fundamental reason for these types of dedication provisions … is to make sure that the successor to the producer or the gatherer is subject to the contract,” Glass explained. “The question is whether that also provides a further purpose, to take it out of the realm of executory contracts.”