Monday, July 28, 2008

SemGroup, Another Carlyle Affiliate, Declares Bankruptcy

The private equity firm that wants to save America's failing banks had another internal failure. Months after the collapse of Carlyle Capital Corporation, another Carlyle affiliate declared bankruptcy. SemGroup filed for Chapter 11 on July 22nd. Oddly, SemGroup's press release mentioned no causes for the current action.

Company statements cite corporate cousins not impacted by the filing. They include other profitable divisions in the U.S. as well as international entities. Their byzantine organizational structure makes it difficult to understand the relationships between SemGroup affiliated corporations, but ownership of the parent is clear. Carlyle Group and Riverstone Holdings has a 29.3% stake in SemGroup, while hedge fund Ritchie Capital Management owns a 25.2% stake. SemGroup's management owns 30.5%. Other investors control the remaining 15%.

Seeking Alpha spoke to the events driving bankruptcy.

According to SemGroup's bankruptcy-court filings, the company found itself without enough cash to cover margin calls and on July 16 handed its trading account with the New York Mercantile Exchange to Barclays PLC, a move that forced SemGroup to recognize losses exceeding $2.4 billion. A Barclays spokesman declined to comment. Another $850 million of unrealized losses were incurred through over the counter trading, documents show.

Reuters reported the loss to be larger.

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.

In February SemGroup offered shares to limited partners at $23.90 per unit. The prospectus remarked on the company's stable, predictable revenue streams (page 74). Not one time was the word "hedging" or "speculating" used in the over 200 page document.

A July 24th SEC filing gives a bit more information on the situation. It mentions two investor class action lawsuits filed against the company. The 8-K states:

Plaintiffs’ specific allegations include that, despite an obligation to do so, the Defendants failed to disclose between February 20, 2008 and May 8, 2008 that Parent was engaged in high-risk crude oil hedging transactions that could affect its ability to continue as a going concern or that Parent was suffering from liquidity problems.

On July 23, 2008, the Partnership and the General Partner each received Grand Jury subpoenas from the United States Attorney’s Office in Oklahoma City, Oklahoma, requiring, among other things, that the Partnership and the General Partner produce financial and other records related to the Partnership’s July 17, 2008 press release.

One creditor was taken aback by the failure. "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.

While The Carlyle Group was the second largest investor in SemGroup, it seems their reputation has taken another hit. What strings will they pull to keep their good name? Stay tuned!

Update 8-25-11:  SemGroup's energy trading was at the same level as Merrill Lynch