NEW YORK (Reuters) - The dramatic collapse of energy trader SemGroup LP shocked the privately held firm’s backers who until last week had little idea of the extent of the oil trading losses that sank it, sources said this week.
As late as June a banker at Bank of America (BAC.N), one of SemGroup’s main lenders, described the fast-growing company as one of his best clients, two sources said this week.
The Tulsa, Oklahoma-based company filed for bankruptcy on Tuesday after suffering $3.2 billion in losses on energy futures and derivatives trades that SemGroup says were designed to protect its physical oil trading business.
SemGroup creditors said this week 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.
Some creditors suggested on Wednesday the possibility that fraudulent trades may have caused the collapse.
“Last week was the first that we heard of this level of losses and at the same time heard the need for more money,” said Keith Wafford, a lawyer for 11 SemGroup lenders in a U.S. bankruptcy court hearing on Wednesday.
Due to the larger than expected hedging losses, SemGroup creditors will likely recover only half of the more than $7 billion they are owed, Moody’s Investors Service said on Thursday.
Shareholders including private equity giants Ritchie Capital Management, Riverstone Holdings and the Carlyle Group are expected to be wiped out.
Founded in 2000, SemGroup grew rapidly through dozens of acquisitions, becoming the 12th-largest privately held company in the United States last year, according to Forbes.com.
SemGroup told investors its operating cash flow could reach $600 million this year before the cost of hedging its physical oil trading business which bought or sold more than 500,000 barrels of oil a day, two sources said.
But on a 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, sources said.
The next day, Bank of America, the administrative agent for three secured loan facilities totaling $2.55 billion, issued a default notice to SemGroup, bankruptcy court documents show.
“These guys were supposed to be the straight arrows. They had smart, veteran traders and everyone is shocked by what has happened,” said one source close to the bank lending group.
The Bank of America default notice triggered a cascade of bad news for SemGroup. The company suspended its co-founder and chief executive Thomas Kivitso and was forced to recognize $2.4 billion in losses on NYMEX crude oil futures when it transferred its trading position to Barclays Plc (BARC.L).
Included in the losses was $290 million owed to SemGroup by Kivitso’s personal trading company.
By July 17, counterparties to SemGroup’s over-the-counter energy derivatives trades began terminating trades, resulting in a further $850 million loss for SemGroup.
“People had no idea about these over-the-counter trades and absolutely no idea that Kivitso was running his own NYMEX book within the company as well,” said a source close to the lenders.
That same day, shares of SemGroup Energy Partners LP SGLP.O, SemGroup’s publicly traded subsidiary, plunged by 52 percent despite the fact that SemGroup’s mounting financial problems, which were by then well-known among lenders and trading counterparties, had not yet been made public.
SemGroup Energy Partners, which is not part of the bankruptcy filing, disclosed its parent’s problems in a press release issued hours after the market closed on July 17. The U.S. Securities and Exchange Commission has opened an inquiry into SemGroup Energy Partners’ disclosure practices.
Reporting by Robert Campbell, editing by Matthew Lewis