Hard times for fossil energy producers, a third of whom face insolvency this year, could lead to knock-on bankruptcies among “midstream” operators, as well.
Two U.S. oil and gas producers are seeking bankruptcy protection to break or reopen long-term carriage contracts they had signed with pipeline operators, Reuters reports. The move now threatens the solvency of the pipeline companies, which booked those contracts as “secure” on their own balance sheets.
Last week, auditing and consulting firm Deloitte forecast that one out of three fossil energy producers may not survive 2016. Court efforts by Sabine Oil & Gas and Quicksilver Resources to break their contracts are seen as “a litmus test for deals worth billions of dollars annually for the so-called midstream sector,” Hals writes.
If the two companies are allowed to walk away from their contracts, a flood of similar deal-breaking may follow—forcing a sharp recalculation of the financial risk for pipeline companies that have been leveraging the cash flow promises implied by those contracts to invest up to US$30 billion per year in recent years into delivery infrastructure.
“It’s a hellacious problem,” Hugh Ray, a Houston oil-industry bankruptcy lawyer, told Hals. “It will end with even more bankruptcies.”