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Chesapeake asks to cancel pipeline contracts, sets drilling cuts

Jennifer Hiller
To match Special Report CHESAPEAKE-MCCLENDON/LOANS

By Jennifer Hiller

HOUSTON (Reuters) - Chesapeake Energy Corp on Monday sought bankruptcy court approval to cancel $311 million in pipeline contracts, setting up a battle with U.S. regulators and operators including Energy Transfer LP, according to court filings.

Chesapeake on Sunday became the largest U.S. oil and gas producer to seek bankruptcy protection in at least five years, falling to heavy debt and the impact of the coronavirus outbreak on energy markets.

The company separately said in a filing it plans to operate six to eight drilling rigs for the next two years, about half the 14 rigs active on average in the first quarter, as it battles a historic downturn in oil prices.

The shale pioneer wants to walk away from contracts with units of Energy Transfer, Boardwalk Pipelines, and a Crestwood Equity Partners and Consolidated Edison gas joint venture. The contracts involve about $293 million with Energy Transfer's Tiger Pipeline and $18 million with Boardwalk's Gulf South Pipeline.

Neither Energy Transfer, Boardwalk nor Chesapeake responded to a request for comment.

U.S. pipeline regulator, the Federal Energy Regulatory Commission, last week barred Chesapeake from altering its agreement with Energy Transfer and is set to weigh similar requests from Gulf South and from Stagecoach Pipeline & Storage Co, owned by Crestwood Equity Partners and Consolidated Edison.

Crestwood said it is positioned to maintain operations for Chesapeake, including its Stagecoach unit. However, Chesapeake must show any rejection benefits the public good for FERC to approve it, a Crestwood spokesman said.

Cancelling the contracts are key to winning creditors' consent of its debt restructuring, Chesapeake told U.S. Bankruptcy court Judge David Jones in a filing.

The battle could represent a turning point in energy bankruptcies, said Matthew Lewis, director at pipeline research firm East Daley Capital, with FERC seeking equal footing with interstate pipeline contracts.

If FERC is "less liberal with contract rejection, it could force more renegotiations of contracts," instead of outright cancellations, Lewis said.


(Reporting by Jennifer Hiller in Houston and Taru Jain; Editing by Maju Samuel and Marguerita Choy)