Accordingly, the surface easements granted pursuant to the gathering agreements³ directly affect the lessee's underlying mineral interest. In Alta Mesa, Judge Isgur explained that, "[t]he Sabine court found that a surface easement does not touch and concern the mineral estate because the surface and mineral estates consist of separate bundles of sticks." Id. at *28–29.⁴ However, "in the context of an oil and gas lease, the surface easement is integral to the lessee's ability to realize the value of its mineral reserves. Without the surface easement, the lessee cannot capture reserve hydrocarbons." Id. at *28–29. Moreover, the surface easements "directly burden Alta Mesa's interest" because it restricts the Debtors' "use of the surface land for drilling or exploration." Id. at *29. Thus, there is a logical connection between both the burden and benefit of the covenants and Alta Mesa's real property. Id.

In addition to the surface easements, Judge Isgur also found that three (3) other covenants touched and concerned the Debtors' oil and gas leases: 

• First, the agreements dedicated all of Alta Mesa's produced hydrocarbons for delivery to Kingfisher. Id. at *26. 
• Second, the agreements included sections titled "Covenants Running With Land" which required recordation and required transferees to affirm the agreements. Id.
• Finally, "the agreements set out the fixed gathering fees." Id. 

(2) The Parties were in "privity of estate."

The second element required to form a real property covenant in Oklahoma is privity of estate. Citing to Oklahoma law, "[t]wo types of privity of estate are recognized at common law: vertical and horizontal." Id. at *31. "Vertical privity relates to the relationship between the present owner of the land and the original parties to the covenant." Id. Vertical privity was irrelevant in this case because Alta Mesa and Kingfisher had not transferred their interest. Id.

Conversely, "[h]orizontal privity existed only if the covenanter and covenantee created the covenant in connection with a conveyance of an estate from one to the other." Id. at *31–32 (emphasis added). Here, Judge Isgur found that horizontal privity existed: 

Although less than a fee simple estate, the easements conveyed to Kingfisher a possessory interest in the leasehold estate. The surface easement is integrally tied to the purpose of an oil and gas lease. The conveyance of the easements to Kingfisher is enough to show horizontal privity with respect to the gathering agreements. . . . [T]he covenants were created alongside the conveyance of a property interest in Alta Mesa's leasehold estates.

Id. at *33 (internal citations omitted). As such, the second element was also satisfied. 

(3) The Parties intended for the agreements to bind successors.

Judge Isgur found that, "[b]ased upon the language of the gathering agreements, original and as amended, the parties expressed the intent to bind successors":

Each of the agreements states that it is "a covenant running with the land." On their own, those recitations do not create real property covenants; however, the provisions memorialize the parties' intent to bind successors to real covenants. Additionally, those provisions require that the dedications be recorded. Recording puts subsequent purchasers on notice of real property covenants. . . . Finally, the gathering agreements also contain language requiring the parties to obtain affirmation that a transferee will uphold the party's obligations under the agreements.

Id. at *34–35 (internal citations omitted). In sum, Judge Isgur concluded that, "[t]hese provisions show a clear intent to bind successors to the covenants of the gathering agreements." Id.

Practical Considerations 

Alta Mesa sheds light on the importance of drafting and structuring a midstream gathering agreement that will withstand rejection under section 365(a) of the Bankruptcy Code – particularly since, under its analysis, the surface easement aspects of an oil and gas lease, on which the gatherer relies, is an integral component of the covenant "running with the land" and establishes the "privity of estate" requirement. Moreover, midstream gathering agreements should also clearly stipulate the parties' intent to create a real property covenant. In Alta Mesa, each agreement expressly stated that it is "a covenant running with the land," and required that the dedications be recorded. 

Perhaps of even greater importance to the midstream company, Alta Mesa appears to recognize the fundamental economic proposition that the midstream company’s agreement "connects" to the leasehold estate's hydrocarbons (and their removal) to create the embedded economic value of those hydrocarbons. The Sabine court seems to ignore the capital outlay required by the midstream company to get the hydrocarbons to a market. In the Sabine court's mind, the insolvent producer gets to keep the value of the hydrocarbons (as connected to a market) without the burdens that created the connection. In the Sabine scenario, once the producer has rejected the contract – meaning, rejected the rate under the contract that is tied to the capital outlay – it may turn right around and sign the same contract at a lower rate, and it is reconnected to the intrinsic value of market-attached hydrocarbons. In this context, the midstreamer eats the capital outlay which the old rate serviced. 

Alta Mesa gives renewed hope to midstream service providers that gathering agreements, if properly crafted, may not be rejected. Sabine of course, remains alive and well, and taken together, the two cases represent opposite outcomes on essentially the same set of industry circumstances.

1. Even though the Sabine Court focused its inquiry on the mineral estate ("the gathering agreements do not grant [the midstream companies] a real property interest in the Debtors' mineral estate"), in both cases, the Debtors owned oil and gas leases, not "fee" interests in the mineral estate. See In re Sabine, 547 B.R. 66, 76 (Bankr. S.D.N.Y. 2016).
2. For example, "[o]wnership of a fee mineral estate includes the power to lease, the right to receive bonuses, the right to receive delay rentals, and the right to receive royalties." Alta Mesa, 2019 Bankr. LEXIS 3859, at *24–25. Alternatively, an oil and gas lessee has "the right to search for and reduce hydrocarbons to possession, surface easements for exploration and production, and other rights and privileges necessary for profitable production." Id.
3. More specifically, "Alta Mesa's leases grant it easements to develop hydrocarbons. The gathering agreements carve out a portion of Alta Mesa’s lease easements and grant those portions to Kingfisher. This reduces Alta Mesa's real property interest under the leases." Id. at *28.
4. The Sabine court held that, under Texas law, a separate agreement that conveyed a pipeline easement was insufficient to establish privity of estate or burden the mineral estate. See In re Sabine Oil & Gas Corporation, 734 Fed.Appx. 64, 68 (2nd Cir. 2018) (affirming In re Sabine, 567 B.R. 869, 877 (S.D.N.Y. 2017) ("[T]he Agreements [at issue] benefit only appellants, not their land. Through the Agreements, appellants are entitled to receive fees for processing delivered gas and condensate, regardless of where that process takes place, and thus the Agreements themselves do not render more valuable the land on which appellants have located their processing facilities.")).