NEW YORK—The Haynes and Boone LLP law firm’s spring survey, released April 4, showed a slight uptick in optimism, though participants who responded after the mid-March oil price dip were less hopeful than those replying while oil was still above $50 a barrel.

The fifth semi-annual bank-lending redetermination survey was the first since a New York appellate court upheld on March 10 the controversial ruling by a bankruptcy court that midstream contracts were simple service contracts and as such subject to modification or rejection in bankruptcy. The midstream company argued, and many in the industry upstream and mid have agreed, that midstream contracts for volumes and prices are real property rights that run with the land.

“The original ‘Sabine’ ruling was a real shock to the industry,” said Ian Peck, a partner with Haynes and Boone. “The day after stocks of midstream companies fell something like 10% because operators [and their shareholders] thought their contacts were immune from bankruptcy courts.”

Source: Haynes and Boone LLP With the decision upheld, Peck suggested that producers and their service providers must continue to collaborate to reach agreements that give both parties comfort.

“In almost every situation there is only one midstream company for a field,” he noted. “If a contract is rejected it’s not like the producer can just go to a competing carrier or processor.”

Peck noted, however, that the ruling is only binding in the Southern District of New York, and that attorneys and even some judges in Texas have been uncharacteristically outspoken in criticizing the decision.

“It remains to be seen if there is another appeal in ‘Sabine,’ or if there are cases brought in other jurisdictions that are traditionally more receptive to the idea of contracts running with the land,” Peck said.

Charlie Beckham, another partner, added some clarity as to why “Sabine” became the bellwether.

“There were some very expensive tariffs,” he said. “One, I recall, was $1 million a month, and the producer was not even using the capacity. So that was easily identifiable as a contract where some money could be saved for a company that was hemorrhaging cash. Also, it was not a pre-packaged bankruptcy. It lingered longer than most of its peers.”

Haynes and Boone’s survey of oil and gas borrowers and lenders demonstrated a modestly improved outlook for the oil and gas market. Respondents expected that 76% of producers will see their borrowing bases increase slightly or remain unchanged compared to their fall 2016 bases. That is improved from the fall 2016 survey, when respondents expected only 59% of producers to see their borrowing bases increase or remain unchanged.

Almost all of the respondents, 89%, predict that E&P companies’ capital expenditure budgets will increase in 2017 compared to last year, with near two-thirds of those surveyed expecting substantial budget increases of 20% or greater.

Among those respondents predicting that borrowers will see an increase in their bases, most expect the increase to be about 10% above fall 2016 bases. Only 3% of respondents see bankruptcy or restructuring as the most likely path that lenders or borrowers will take if faced with borrowing-base deficiencies, as compared to the fall 2016 survey when 13% of respondents viewed bankruptcy or restructuring as the most likely path.

“The responses reflect a cautious optimism among producers and bankers for the road ahead, but I think everyone is still mindful of the capital destruction plainly visible in the rearview mirror,” said energy practice co-chair Buddy Clark.

The firm polled a broad cross-section of the industry, including executives at oil and gas producers, oilfield services companies, banks and private-equity firms, to glean their views about the financial state of the market. Of the 163 respondents, 45% described themselves as oil and gas lenders, including private equity firms, 29% are oil and gas producers (borrowers) and about 19% are professional service providers.

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