Huge oil trading loss sinks energy trader SemGroup

NEW YORK (Reuters) - SemGroup LP declared bankruptcy on Tuesday after $3.2 billion in oil trading losses torpedoed the formerly 12th-largest private U.S. company.

Oil rigs are seen in Midland, Texas May 9, 2008. REUTERS/Jessica Rinaldi

The Tulsa-based company racked up the massive losses as oil prices ran up record gains, undercutting short crude futures positions SemGroup bought to hedge against its 500,000 barrel-per-day trading business.

To meet obligations, SemGroup plans to sell off oil and natural gas gathering, transportation, and storage assets worth an estimated $6.14 billion that were purchased in a whirlwind of acquisitions since it was founded in 2000.

“We have determined that the best way to maximize value for our creditors is to undertake a sales process that will transition our valuable businesses to well-established companies,” Terry Ronan, SemGroup’s acting chief executive, said in a statement.

SemGroup took a $2.4 billion loss on July 16 after it transferred its New York Mercantile Exchange oil futures trading account to Barclays Plc, converting what they called “loss contingencies” into an actual loss.

Included in the NYMEX loss was $290 million owed to SemGroup by a trading company owned by co-founder and former chief executive Thomas Kivisto, who was placed on administrative leave on July 17.

Securities legislation limits publicly traded company executives from extensive dealings with their firms, but experts said privately held companies have more flexibility.

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“They can’t do anything illegal. But there is no particular disclosure to anyone apart from any contractual agreements that they may have with investors,” said Kenneth Froewiss, a professor of finance at New York University.

SemGroup had engaged in regular hedging transactions with BOK Financial Corp, where Kivisto had been a board member since 2006 before resigning on July 16. As of the end of 2007, SemGroup had hedged 21 million barrels of crude oil with BOK, which had a fair value of negative $130 million.

As of the end of March, this position was worth negative $88 million, said BOK spokesman Jesse Boudiette, who declined to comment on BOK’s current exposure to SemGroup saying the bank would not speak publicly about individual clients.

Since going public just over a year ago, SemGroup Energy’s stock has lost 72 percent of its value, most of that in the past five trading days. The stock closed at $22.69 on July 16, the day before Semgroup Energy disclosed SemGroup LP was having liquidity issues, and ended Tuesday at $8.28.


SemGroup, ranked the No. 12 private U.S. company by in a 2007 article, also took $850 million in losses on July 17 when its over-the-counter hedging program was marked to market. It listed liabilities of $7.53 billion in its bankruptcy filing, including $3.1 billion of total debt $2 billion of secured debt and $594 million in unsecured notes.

SemGroup’s financial difficulties were disclosed by its publicly traded affiliate SemGroup Energy Partners LP last week, when it warned that a liquidity crisis at its parent could lead to bankruptcy.

SemGroup Energy Partners management said it was confident the partnership could survive despite SemGroup’s bankruptcy and would seek new business from third parties. The company’s board has also authorized management to consider a sale or merger.

SemGroup Energy Partners also warned it was not ready to say if it would make a cash distribution to unitholders in the second quarter, though its management believes parent SemGroup will continue to use its fee-based assets to maintain operations while in bankruptcy.

Additional reporting by Michael Erman and Matthew Robinson; writing by Matthew Robinson and Robert Campbell; Editing by Gary Hill