Saturday, July 26, 2008

The Demise of SemGroup and SemGroup Energy Partners (SGLP)

On July 16 2008, SemGroup Energy Partners (SGLP) was trading for around $22 a share. SGLP provides terminalling, storage, gathering, and transportation services for companies engaged in the production, distribution, and marketing of crude oil. In addition, it owns and operates two pipeline systems with approximately 1,150 miles of pipelines that gather crude oil for its parent company SemGroup LP and other third-party customers. SGLP seems on the surface very much like other storage and pipeline companies such as Kinder Morgan Energy Partners (KMP), Williams Pipeline Partners (WMZ), and Magellan Midstream Partners (MMP). So what happend to SGLP and why is it now trading for less than $8 a share?

SGLP went public on July 18, 2007 at a price of $22 a share. With strong demand of their IPO, the stock ended the day at $29.32 for a gain of 33% on its first day of trading. SGPL was created by the SemGroup LP which owns 37% of SGLP. SemGroup is a privately held company that was started in April 2000 and led until recently by co-founder Tom Kivisto. The company grew rapidly through dozens of acquisitions, becoming the 12th-largest privately held company in the United States last year, according to Forbes.com.

One huge problem for SGLP, SemGroup accounts for about 80% of sales to SGLP.

On a Tuesday July 15 conference call with lenders, SemGroup revealed its massive bets that oil prices would fall had gone spectacularly wrong and that it was out of cash. The next day, Bank of America, the administrative agent for three secured loan facilities totaling $2.55 billion, issued a default notice to SemGroup. I also heard CEO and co-founder, Tom Kivisto was walked out his office by security on Thursday July 17th.

With the parent company on the brink of bankruptcy, SGLP stock plummets with few prospects for continuing operations. Since SemGroup provides the vast majority of income, SGLP has to come up with a plan to find new customers or to start selling off assets.

On Tuesday July 22nd, SemGroup filed Chapter 11 bankruptcy in Delaware and indicates they are planning to lay off 276 employees and offer them $1.1 million in total severance benefits. The Tulsa energy firm also indicated that it owed $2.4 billion to creditors. The list of top creditors include BP Oil Supply Co., that is owed $159 million by SemGroup. Sunoco Partners Marketing and Terminals LP and Pimco are second and third on the debt list, at $88.9 million and $86 million, respectively. SemGroup has not yet listed its top bank creditors.

Two hedge funds with a considerable stake in SemGroup Energy Partners LP gained control of the company. Manchester Securities in New York and Alerian Capital Management of Dallas took voting power over publicly traded company. They are keeping its daily management but are replacing several longstanding board members. The hedge funds took voting control upon a default in their credit agreement with SemGroup.

Bank of Oklahoma Financial is apparently exposed to $147 million in losses through loans or financing for hedging efforts by SemGroup, according to a report it filed with the SEC on Thursday.

The dramatic energy trading collapse of SemGroup also shocked the private firm's backers who until last week had little idea of the size of the oil trading losses. Since SemGroup is a privately held company, creditors said they had little idea of the extent of the firm's losses and were surprised by the much larger than expected size of the hedging program. SemGroup reportedly lost vast amounts of cash over the past two years as it tried to guess the direction of oil futures markets.

Some creditors suggested on Wednesday the possibility that fraudulent trades may have caused the collapse and several lawsuits have been brought against the company as well. SemGroup is also the center of investigations by the Securities and Exchange Commission and the U.S. Attorney's Office in Oklahoma City. The SEC's staff notified managers of SemGroup Energy Partners about the inquiry earlier this week. Federal trade regulators want to examine SemGroup Energy Partners' documents and information related to the parent company's cash-flow problems and hedging mistakes that culminated with its sudden collapse and Tuesday's filing for Chapter 11 bankruptcy protection.

We will have to wait and see how this story ends but I would not be a shareholder of SGLP at this time. Who knows if there will be any assets left to justify the current price of $7.55 a share. My guess is SGLP will have to file bankruptcy and the assets will be sold off to the highest bidder but I think it will go for much less than Friday's close $7.55.

Disclosure: The Div Guy does not own shares of SGLP

This article was written by The Div Guy. You may email questions or comments to me at thedivguy@gmail.com.

3 comments:

  1. Comments have been enabled and are now available for all posts, including those previously archived.

    Best Wishes,
    D4L

    ReplyDelete
  2. Maybe this silences the naysayers on the speculative trading in oil issue. I think this could be the beginning evidence of the speculative trading that is impacting oil prices.

    ReplyDelete
  3. I think people getting out of oil market trading has caused the oil prices to come down over the past week. With the threat of legislation and regulation, I think is driving speculators out of the market.

    SemGroups's demise also shows how fast you can get in trouble with some wrong bets in the commodities markets. It reminds me of Nick Leeson, the trader who drove Bearings Bank out of business with his trades as well as the collapes of Enron.

    This is also why most energy firms got out commodity trading business after Enron.

    ReplyDelete

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