Occidental Petroleum Corp. v. Sanchez Energy Corp. (In re Sanchez Energy Corp.)
| Decision Date | 06 May 2021 |
| Docket Number | Case No: 19-34508,Adversary No. 20-3198 |
| Parties | IN RE: SANCHEZ ENERGY CORPORATION, et al, Debtors. Occidental Petroleum Corp., et al, Plaintiffs, v. Sanchez Energy Corporation, et al, Defendants. |
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Southern District of Texas |
John P. Melko, Sharon M. Beausoleil, FOLEY & LARDNER LLP, Houston, TX, Jamie A. Levitt (admitted Pro hac vice), Michael D. Birnbaum (admitted Pro hac vice), James E. Hough (admitted Pro hac vice), Dennis L. Jenkins (admitted Pro hac vice), Brett H. Miller (admitted Pro hac vice), MORRISON & FOERSTER LLP, New York, NY, Counsel to the Reorganized Debtors/Defendants.
Marvin Isgur, United States Bankruptcy Judge As oil and gas prices collapsed during the early months of the global COVID-19 pandemic, Sanchez Energy Corporation ("Sanchez") faced a possible conversion of its chapter 11 bankruptcy case to one under chapter 7. To forestall liquidation, Sanchez and its creditors agreed to confirm a chapter 11 plan first and litigate Sanchez's ability to reject executory contracts later. The executory contracts at issue in this opinion concern Sanchez's 2017 purchase of oil and gas assets in Texas' Comanche Field. Occidental Petroleum Corp. ("Occidental"), whose predecessor sold the Comanche Assets, objects to the proposed rejection of its midstream gathering agreements and an associated development agreement. For the reasons that follow, the reorganized debtor, Mesquite Energy, Inc. ("Mesquite"), may reject these executory contracts. However, consistent with the Supreme Court's holding in Mission Product Holdings, Inc. v. Tempnology, LLC , ––– U.S. ––––, 139 S. Ct. 1652, 203 L.Ed.2d 876 (2019), Occidental retains its real property interests that were granted in the gathering agreements.
Mesquite seeks authority to reject contracts executed in conjunction with SN Maverick's ("Maverick") purchase of oil and gas assets in the west Texas Eagle Ford Shale. In 2017, Maverick, along with Gavilan Resources, LLC and SN EF UnSub, LP ("UnSub") purchased assets in the Comanche Field (the "Comanche Assets") from Anadarko E&P Onshore LLC and Kerr-McGee Oil and Gas Onshore LP (collectively, "Anadarko").1 The three purchasers paid $2 billion to acquire separate working interests in about 318,000 acres of the Comanche Assets from Anadarko. To effectuate the transaction, the purchasers, as well as Anadarko, entered into a web of contracts setting forth the parties' rights and obligations with respect to the Comanche Assets.
Prior to the sale, Anadarko's subsidiary built an extensive midstream oil and gas gathering system to transport production from the Comanche Assets downstream. Springfield Pipeline, LLC ("Springfield") spent over $1.3 billion to build the oil and gas gathering systems (the "Springfield Gathering System") servicing the Comanche Assets. Springfield was wholly owned by Anadarko. As part of the Comanche Transaction, Anadarko retained ownership of Springfield and the Springfield Gathering System. The purchasers entered into an Oil Gathering Agreement ("Springfield OGA") and a Gas Gathering Agreement ("Springfield GGA") (collectively, the "Springfield Agreements") which dedicated their hydrocarbon production to the Springfield Gathering System. Additionally, Maverick entered a Development Agreement promising to drill annual quotas of new wells or else pay set fees to Anadarko. Mesquite seeks rejection of the Springfield Agreements and the Development Agreement.
The Eagle Ford is a shale play in south Texas. As early as 2008, Anadarko began to acquire oil and gas assets in the Eagle Ford shale, including assets in the Comanche Field. (ECF No. 50 at 17). At about the same time, Anadarko acquired Springfield and contracted with Springfield to build the Springfield Gathering System. (ECF No. 50 at 18). The Springfield Gathering System now consists of over 750 miles of pipeline connecting wells in the Comanche Field to centralized processing plants. (ECF No. 50 at 18). Springfield spent over $1.3 billion to construct and maintain the Springfield Gathering System. (ECF No. 50 at 18).
Prior to the sale of the Comanche Assets, in 2011, Anadarko entered into certain oil and gas gathering agreements with Springfield ("Original Springfield Agreements"). (ECF No. 50 at 19). "The Original Springfield Agreements contain dedications and long-term commitments in consideration of the substantial capital invested in the Springfield Gathering System." (ECF No. 50 at 19).
In 2017, Sanchez, through its affiliate SN EF Maverick, LLC ("Maverick"), along with UnSub and Gavilan purchased the majority of Anadarko's working interests in the Comanche Field. (ECF No. 50 at 20). The parties entered into a Purchase and Sale Agreement ("PSA") on January 12, 2017. (ECF No. 50 at 20). The purchasers "acquired the majority of Anadarko's working interest in the Comanche Leases and related assets, granting the right to explore for and produce hydrocarbons, primarily targeting the Eagle Ford shale, on approximately 320,000 gross acres located in Dimmit, La Salle, Maverick, Webb, and Zavala Counties." (Case No. 20-3198; ECF No. 50 at 20). The sale closed on March 1, 2017.
While the purchasers sought to buy all of Anadarko's assets, a number of Anadarko's lease counterparties refused to consent to the sale. (ECF No. 50 at 22). "The parties solved for this in the PSA by having Anadarko retain certain Comanche Leases ... and entering into a joint operating agreement ["JOA"] appointing SN Maverick as operator." (ECF No. 50 at 23). Thus, Anadarko continued to hold title to those leases, but did so for the benefit of the purchasers. (ECF No. 50 at 23). Under the Retained Agreements, Anadarko was required to deliver minimum volume commitments to midstream gatherers or else pay significant fees. (ECF No. 1 at 3).
Anadarko did not sell Springfield or the Springfield Gathering System as part of the Comanche Transaction. Instead, on June 1, 2017, Sanchez and Anadarko entered into the "Springfield Gathering Assumption Agreement," which assigned the Original Springfield Agreements to Sanchez. (ECF No. 50 at 23). On the same date, Springfield and Sanchez entered into the Springfield OGA and the Springfield GGA. (ECF No. 50 at 23). The Springfield Agreements include dedications of oil and gas which provide that:
[Sanchez] dedicates, covenants and commits to the System and performance of this Agreement (a) the Leases (including all unproduced Gas that is attributable to the Leases), (b) all Wells other than the Excluded Wells and (c) the Dedicated Production. [Sanchez] acknowledges and agrees that the dedication, covenants and commitments set forth ... under this Agreement are continuations of the dedication, covenants and commitments made by [Anadarko] in the [Original Springfield Agreements] (the "Prior Dedication"), to the extent (and only to the extent) that [Anadarko] assigned Original [Springfield] Agreement[s] to [Sanchez], and that the Prior Dedication has not been terminated or interrupted in any way by the entry into this agreement.
(ECF No. 50 at 24-25). The Springfield Agreements express an intent to form covenants running with the land:
Each Party agrees that the dedication, covenants and commitments set forth in this Section 2 or in any other section under this Agreement are equitable servitudes and covenants running with the land with respect to (a) the Leases (including all unproduced Gas [or Oil] that is attributable to the Leases), (b) all Wells other than the Excluded Wells and (c) the Dedicated Production, and shall be binding on [Sanchez], [Sanchez's] Affiliates, and the successors and permitted assigns of [Sanchez] and [Sanchez's] Affiliates.
(ECF No. 50 at 25). The aforementioned "dedications, covenants and commitments" include "[Sanchez] and its Affiliates' right, title, and interest in and to (a) the Leases (including all unproduced Gas that is attributable to the Leases), (b) all Wells other than the Excluded Wells and (c) the Dedicated Production." (ECF No. 50 at 25). In addition to the dedication, the Springfield Agreements conveyed a floating easement and right-of-way to Springfield in order to lay pipeline, maintain pipeline, and install other necessary equipment. (ECF No. 50 at 20).
Antonio R. Sanchez III ("Mr. Sanchez") signed the Springfield Agreements on behalf of Sanchez after Anadarko expressed concerns about Maverick's credit rating. (ECF No. 50 at 24). As previously explained, Maverick was a wholly owned subsidiary of Sanchez. At the time of the Comanche Transaction, Mr. Sanchez served as CEO of both Sanchez and Maverick. Mr. Sanchez signed numerous Comanche Agreements on behalf of Sanchez, Maverick, or both. (ECF No. 50 at 22).
On March 1, 2017, Maverick, UnSub, Gavilan, and Anadarko entered into the Development Agreement. (ECF No. 50 at 26). The Development Agreement requires Maverick, UnSub, and Gavilan to either complete and equip sixty wells per year over a five-year period or pay Anadarko a $200,000.00 fee for each promised but uncompleted well. (ECF No. 50 at 26). Section 2.1 of the Development Agreement states that the purchasers "commit to Complete and Equip sixty (60) gross wells per Twelve Month Period on the lands covered by or unitized with the Leases." (ECF No. 58-3 at 6). Sanchez guaranteed Maverick's obligations under the Development Agreement. (ECF No. 50 at 26).
Like the Springfield Agreements, the Development Agreement expresses the parties' intent that it form covenants running with the land, stating:
Covenants Running with Lands. The obligations of the Drilling Parties under this Agreement are partial consideration for Anadarko's conveyance of the Assets to the Drilling Parties under the Assignments, and such obligations touch and concern the Leases and lands and obligations related thereto, being things in existence, and...
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