In the past two years, M&A activity in the upstream oil and gas space has seen an unparalleled wave of consolidation, much of which has focused on the Permian Basin and has occurred at a breakneck pace. We have also seen the start of the customary portfolio rationalization that is pursued by newly consolidated companies which are looking to divest their portfolios of non-core assets to enhance their financial health.
These transactions, both in the consolidation phase and the portfolio rationalization phase, can take the form of entity level deals (M&A) or asset level transactions (A&D). A common issue that we have helped clients address as part of these transactions is the necessity of interpreting and, in many cases, amending midstream agreements which do not fully or properly address what happens in the context of a merger or a divestment of dedicated assets.
In these transactions, the acquiring party will inherit midstream agreements that are either held by the target company that is being acquired or which run with the lands included in the properties being purchased. In many cases (especially with older/legacy agreements) the agreements in play will not fully address, or are completely silent with respect to, how such M&A or A&D activity impacts the parties rights under key provisions of such agreement.
While most parties strive to identify these issues and, if possible, address them ahead of transacting, many times these issues have to be “cleaned up” after closing either because they are not detected, not fully understood, or not capable of being addressed prior to closing of the transaction.
A Sample of Specific Issues
A dedication is a crucial component of many midstream agreements, as it requires the producer to commit all production from a given area, set of leases or set of wells exclusively to its midstream counterparty for provision of services under the agreement. Most dedications encompass the production from the dedicated interests that is owned by the producer and its affiliates. As such, in the context of an M&A transaction where you have two previously separate/unaffiliated entities being merged together, if both entities have dedicated their interests in the same geographic areas, sets of leases or sets of wells to different midstream counterparties, closing of the merger will result in a set of affiliated entities with overlapping dedications to different gatherers. This is further complicated by the fact that in most large-scale M&A or entity acquisition transactions, an upper tier/holding company entity with many subsidiaries under it is the target entity that is being acquired. This results in a large number of newly affiliated entities surviving the transaction.
Overlapping dedications can create incredibly complicated issues as most dedications cover both the existing dedicated interests as of the time the contract was signed as well as any future interests acquired by the producer and its affiliates in the applicable area, set of leases or set of wells. While many agreements provide exceptions for future acquisitions that are dedicated under other agreements at the time they are acquired, and some agreements specifically limit what remains dedicated after a “transfer” of interests subject to the dedication, there are numerous situations where interests held (or later acquired) by the combined set of entities are legally dedicated to multiple gatherers under multiple agreements.
At the heart of the arrangement under many midstream agreements are features such as minimum volume commitments with associated deficiency fee obligations, entitlements to firm capacity, buildout obligations for additional receipt points and similar commercial- or operational-focused mechanics.
While these provisions provide the foundation that supports the operational and commercial assumptions the parties made when negotiating the original agreement, they are often drafted in a way that applies to the entirety of the contract and do not address how these attributes should be split up in the event of a partial transfer of the agreement or the dedicated interests subject thereto. Absent provisions directly addressing how these attributes may be split in a partial transfer, it is usually unclear who gets to decide how these attributes are split and what basis they can be split. This can create issues for both the upstream and midstream parties to these agreements.
Without appropriate transfer restrictions, the midstream counterparty risks having to live with the allocation of these attributes as agreed upon by the transferor and transferee. Depending on whether the contract has sufficient adequate assurance of performance provisions, this could create issues with credit support for these obligations as well as other mismatches between the rights held by one of the parties to the transfer after closing and the operational plans and capabilities that party has for its properties that support those rights.
From the upstream counterparty’s perspective, the lack of clarity on how it can split these attributes with its transferee and, importantly, whether it remains responsible for obligations that it attempts to assign to its transferee, can frustrate its ability to close on transactions or result in post-closing risk that must be addressed in its deal documents.
Coming Back to the Table
In any transaction that will involve midstream agreements being transferred or inherited, it is often necessary for the upstream party and midstream party to come back to the table to address any contract uncertainty around the key contractual attributes. Depending on the situation, this can expose the party seeking to adjust the agreement to giving up value to satisfy the demands of its contractual counterparty.
While that is often part of the equation, in our experience, the commercial benefits that result from the transactions in question result in the parties working together to rectify these issues in a way that is beneficial for both parties. Obviously, the best practice is to address these issues up front rather than after the transaction closes.
As the wave of consolidation in the upstream space balances out and portfolio rationalization follows, both upstream and midstream parties alike should be attuned to the issues presented by M&A and A&D transactions.
Now is the perfect time for these parties to examine their midstream agreements and, if needed, seek adjustments that are needed to protect their respective interests in the context of these transactions. This diligence step, even taken post- M&A activity, can save both parties from future disputes, unexpected costs, and unnecessary headaches.
Article was originally published in the July 2025 issue of Oil and Gas Investor Magazine.
