SemGroup Files for Bankruptcy

[Old Titan]

SemGroup, a high-profile Tulsa-based energy company that has donated and/or pledged millions of dollars to a variety of local athletic causes in recent years, has filed for bankruptcy:

Tulsa World: SemGroup Companies File for Bankruptcy

Their fall was as sudden as it was unexpected for casual onlookers:  just a couple of weeks ago, they were prominently mentioned as a donor for a new minor league baseball park in downtown Tulsa, possibly even as the stadium name sponsor.  They have made several athletic-related donations the past couple of years, amounting to millions of dollars, including ones to the University of Tulsa's Chapman Stadium renovations, the new BOK Center downtown, and on a much smaller scale, to ORU Athletics.  Perhaps most prominently, they were the name sponsor of the LPGA tour event at Cedar Ridge this past spring, with big plans to increase the tournament to a 4-day event next year, with larger payouts.

With almost all of the key members of the board of directors being replaced in the past couple of days by out-of-state creditor's representatives, it seems apparent that, even if the company emerges from bankruptcy, the Tulsa area has lost one of it's biggest sports benefactors in the blink of an eye.

[OKC Eagle]

You have to try pretty hard to run an oil and gas company into the ground in this market.

[Bogus Smith]

Very interesting read on the goings-on of SemGroup.  Something I didn't realize about Tom Kivisto is that he was on the team that knocked ORU out of the Final Four in 1974!!  It just goes to show you that if he had let us win in 1974, this wouldn't have happened to him! 

Seriously, though, this is an interesting article about the collapse.  I wouldn't want to be in Tom's shoes right now.

Inside The Semgroup Bust

Christopher Helman 07.28.08, 5:00 PM ET

HOUSTON - Six days after Tulsa, Okla.-based Semgroup's Chapter 11 bankruptcy filing, details of its wrong-way oil trades remain in short supply. Neither the company nor its creditors are talking.

Saturday, in his first public statement since the bankruptcy, former Chief Executive Thomas Kivisto said he wanted to reassure Semgroup's 2,000 employees; but he gave them no reasons to feel hopeful. With the Securities & Exchange Commission investigating, a class-action suit in the works and a grand jury demanding trading records, the truth will soon emerge. And it won't be pretty.

What is known for sure, gleaned largely from an affidavit written by Interim Chief Executive Terence Ronan is that Semgroup buckled under margin calls against losses of $2.4 billion in the company's trading accounts on the New York Mercantile Exchange (NYMEX). Incredibly, $290 million of those losses are owed the company by Kivisto for losses from personal trades using capital fronted him by Semgroup.

One Tulsa businessman, well connected to Semgroup executives, says he "was not shocked" at Semgroup's failure, having first heard of the company's oil-trading troubles six months ago, when oil had scarcely breached $100 a barrel. Even then the company's traders were stubborn, having convinced themselves that the soaring oil price was irrational and was sure to reverse itself. Since then, he says, Kivisto had unsuccessfully sought additional financing from the Bank of Oklahoma (which had already lent more than $130 million to back- trading efforts), Kaiser-Francis Oil, Goldman Sachs (nyse: GS - news - people ), and even the Kuwait Investment Authority.

Kivisto had better luck with hedge funds Alerian Capital, Elliott Group and Carlyle/Blackstone, which put up some $150 million just weeks ago. They are now calling the shots and holding the bag. At its bankruptcy, Semgroup had $6.1 billion in assets against $7.5 billion in liabilities, including $2.5 billion in secured debt and $600 million in unsecured notes.

It's a violation of securities laws for Kivisto to hide huge undisclosed trading losses while soliciting additional financing for the company. If that's what he did, "He would be as guilty as any of the Enron guys," says Dallas corporate bankruptcy attorney Richard Levy.

How big must Semgroup's positions have been to rack up $2.5 billion in losses? In the simplest (and purely hypothetical) terms, to lose that much since January, Semgroup would need to have shorted 50 million barrels of crude oil at $100, then lost roughly $50 on each barrel. This is enormous, says Andrew Lipow, a Houston oil trading consultant, noting that such a position would be equal to one-sixth of the entire U.S. crude inventory of 300 million barrels.

"Betting turned into a habit they couldn't get out of. The only way to keep going was to make bigger bets," says attorney Levy.

It's a colossal fall from grace for one of Tulsa's favorite sons. A former basketball star at the University of Kansas, Kivisto took the Jayhawks to the NCAA Final Four in 1974. In the early 1990s he left his position as head of oil trading at Koch Industries to head his own trading outfit called Eaglwing. In 2000, looking to add physical assets to his trading operations, Kivisto approached Tulsa billionaire George Kaiser seeking financing. Kaiser, owner of Kaiser-Francis oil company and chairman of the Bank of Oklahoma, arranged for the bank to lend $90 million. Eight years and 47 acquisitions later Semgroup became one of the nation's biggest privately held companies, with revenues of $13.2 billion.

Semgroup handles more than 500,000 barrels of crude oil a day in the U.S., operates two pipeline systems and has 6.7 million barrels of oil storage capacity. Most of that storage is at Cushing, Okla., the delivery hub for benchmark West Texas Intermediate crude.

Last year an initial public offering for subsidiary Semgroup Energy Partners L.P. raised $275 million.

It could have been an early sign that Semgroup was overstretched when last year Semgroup's corporate division siphoned off $54 million from a $120 million loan that General Electric Capital (nyse: GEA - news - people ) had made to the SemCrude subsidiary to build a line from Colorado to Cushing, Okla. GECC last week sued Semgroup for misusing its money.

The disastrous oil trading may have started routinely enough. Pipeline operators commonly hedge the value of the crude oil flowing through their pipelines. Their business is in moving the oil, not in playing commodity prices. So if they pay an oil producer $10 million for 100,000 barrels of $100 oil at the wellhead, they will often immediately hedge those barrels to make sure that by the time they get them through their pipeline to market they'll get their $10 million back (plus a couple bucks a barrel to cover overhead and profit).

This hedge would most likely be done by shorting 10 front-month futures contracts on NYMEX (of 10,000 barrels each)--thus balancing out the long position with a short one. But say the price goes up to $120 while the contract is open--NYMEX requires that you have enough cash in your account to cover the loss, in this case $200,000 on your $10 million of oil. When oil prices are pretty steady month to month, hedging losses will balance out gains. But with prices going up every month, these losses mount.

In the first quarter of this year, Semgroup in its bankruptcy filings says it had to post $1.96 billion in collateral to cover its trading positions--double its posting the year before.

But regular hedging apparently wasn't enough to satisfy Kivisto's ambitions for growing Semgroup. "The margins for what you pay for crude and what you sell it for aren't that big," says Michael Terry, president of the Oklahoma Independent Petroleum Association. "This was a company that wanted to grow fast, so they hedged big."

Pipeline industry experts are surprised that Semgroup dared to take short positions so far beyond anything the company could cover with physical barrels. "You can be sure Richard Kinder isn't doing anything like this at Kinder Morgan," says one.

When is hedging no longer hedging, but speculation? "When you have a large open short position and not enough physical barrels to cover your short when the contracts expire," says Paul MacAvoy, professor emeritus at the Yale School of Management.

Even companies that do have ample physical barrels have learned the downside of being too quick to lock in seemingly record prices for their oil. In the last quarter Newfield Exploration (nyse: NFX - news - people ) reported losses from hedging of $380 million; Noble Energy lost $237 million, and Encana lost more than $1 billion. Shareholders must be wondering when their oil companies became hedge funds.

Oil trading consultant Lipow suspects that to lose so much money Semgroup must have ventured beyond mere futures contracts into options. "One way to lose a lot of money is to sell calls thinking the market was going down, but instead the market goes up," he says. "Then, after you lose on that one, you think the market will go up some more, so you sell puts, but instead the market goes down. You lose on the way up and on the way down.”

Oil peaked on July 12 at $147. Four days later Semgroup first announced that it had liquidity problems and sold its NYMEX trading account to Barclay's. Since then crude has dropped $23 a barrel. At last Semgroup's stubborn bets have started to pay off--for someone else.