Sabine Oil & Gas wins approval to reject gas and condensate contracts

By Caroline Salls

Pittsburgh, March 8 – Sabine Oil & Gas Corp. obtained court approval to reject contracts with Nordheim Eagle Ford Gathering, LLC and HPIP Gonzales Holdings, LLC, according to a memorandum opinion filed Tuesday with the U.S. Bankruptcy Court for the Southern District of New York.

Sabine became a party to the gas gather and condensate gathering contracts with Nordheim and production gathering, treating and processing and water and acid gas handling agreements with HPIP as a result of the combination of Sabine and Forest Oil Corp.

Sabine requested court approval to reject the contracts under a Bankruptcy Code provision that allows debtors to evaluate executory contracts and unexpired leases and “decide which ones would be beneficial to adhere to and which ones it would be beneficial to reject,” the filing said. The court said this “permits the company to use valuable estate property and renounce title to and abandon burdensome property.”

Specifically, Sabine said it is not financially viable for it to deliver the minimum amounts of gas and condensate set in the agreements, and, absent rejection, the company would be required to make contractual deficiency payments, “which would impose a considerable and unnecessary drain on the estates’ resources.”

Sabine said it plans to enter into new gathering agreements with other gatherers on more favorable terms.

Nordheim and HPIP opposed the rejection motion. Nordheim argued that Sabine’s covenants to dedicate the Nordheim products and to pay a “transportation fee” are covenants that run with the land and therefore would survive rejection, meaning Sabine would still be bound by those covenants. Nordheim also argued that, while the court can authorize the company’s rejection of the agreements, it cannot in doing so make a determination as to the legal status under Texas property law of the covenants.

Like Nordheim, HPIP argues that Sabine’s dedication of some of its leases and the HPIP products are covenants that run with the land and are not subject to rejection.

In Tuesday’s ruling judge Shelley C. Chapman said “the decision to reject the Nordheim agreements and HPIP agreements is a reasonable exercise of the debtors’ business judgment.”

However, Chapman declined “to make any final determination as to whether the covenants at issue run with the land or as to any substantive legal issue other than granting authority to reject the contracts under section 365(a).”

The court also did not grant Sabine’s request to limit the nature of the claims that Nordheim or HPIP may file against its estates, nor did it grant Nordheim’s request for relief from the automatic stay to take action against Sabine and its property.

Formerly Forest Oil Corp., Sabine is an oil and gas company based in Houston that filed for bankruptcy on July 15, 2015. The Chapter 11 case number is 15-11835.

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