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How Do Upstream Bankruptcies Affect Midstream Companies?

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Not all contracts are equal

Bluestone Natural Resources II’s agreement with Crestwood Equity Partners (CEQP) indicates that the impact of upstream companies’ bankruptcies on midstream companies may vary from case to case. In these cases, even if the court allows the producer to end such contracts, how much negotiating power does the producer actually have? This is a critical question.

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Williams Companies’ contract with Chesapeake Energy

Alan Armstrong, president and CEO of Williams Companies (WMB), explained the implications of a possible Chesapeake Energy (CHK) bankruptcy filing during the company’s 4Q15 earnings call. According to the company, its “gathering lines are physically connected to Chesapeake’s wellheads and pads.” In most cases, there are no other gathering lines nearby, making it difficult for Chesapeake Energy to opt for alternative lines.

“We certainly are following current bankruptcy cases like Sabine where the general question is at issue, but people should understand that the ultimate outcome in individual cases will turn on specific facts and circumstances,” said Armstrong. The shares of Energy Transfer Equity (ETE), Williams Partners (WPZ), and WMB fell on rumors of CHK’s bankruptcy a few days ago. WMB forms 0.94% of the Vanguard Energy ETF (VDE).

The extent of the possible damage to midstream companies providing storage and transport services may also depend on the alternatives available to producers.

It should be noted that if an upstream producer does file for bankruptcy, the creditors taking over will likely continue operations. The creditors will still require pipelines to transport oil or gas to the markets. Thus, a midstream provider may be on strong footing if the producer does not have other options nearby.

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