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SemGroup Implosion Brings More Questions than Answers

SemGroup LP's bankruptcy filing last Tuesday produced a fair amount of head scratching from its creditors, subsidiaries and even federal officials after the company reportedly racked up $3.2 billion in trading losses in crude deals on the New York Mercantile Exchange and over-the-counter energy derivative markets.

The privately owned midstream services giant is coming under fire from creditors as well as from stockholders of its publicly traded subsidiary SemGroup Energy Partners LP (SGLP).

According to Reuters, a group of SemGroup creditors last Wednesday said unauthorized energy trading may have caused the $3.2 billion loss. In a U.S. bankruptcy court in Wilmington, DE, 11 lenders that participated in a $141 million secured term loan said they objected to SemGroup's request for permission to access cash collateral to maintain normal business operations, warning in a brief filed with the court that any fraudulent trades made by SemGroup could affect their ability to recoup their losses, according to the news service.

At least one of the 11 creditors, TEPPCO Partners LP subsidiary TEPPCO Crude Oil LLC, said it does not expect to see any fallout. "Through an existing netting agreement for crude oil sold to and purchased from a subsidiary of SemGroup, TEPPCO's credit exposure has historically been minimal," the company said. "While a review of the bankruptcy filings is still ongoing, based on historical arrangements TEPPCO does not expect any future material impact as a result of the SemGroup bankruptcy nor does it expect any future material credit exposure to SemGroup." TEPPCO, which owns and operates a network of assets that facilitate the movement, marketing, gathering and storage of various commodities and energy-related products, said SemGroup has represented less than 3% of the partnership's current crude oil gathering volumes.

Separately, Roy Jacobs & Associates (RJ&A) said last Tuesday it has filed an action in the U.S. District Court for the Southern District of New York on behalf of purchasers of the common units of SGLP from Feb. 20 through July 17 for violation of federal securities laws. The defendants include SGLP and certain officers and directors.

The complaint alleges that SGLP's parent company was "in financial difficulty" or "at high risk for such financial difficulty" as a result of its "investment in risky crude oil hedge transactions," but hid this from investors in SGLP. Rather than own up to the situation then, SGLP effected a secondary offering where it sold six million units at $23.90/share for proceeds of $137 million, the law firm said. In addition, the company also borrowed substantial funds and purchased the parent's asphalt business for $387 million in an alleged attempt to financially prop up the parent company.

RJ&A added that the bankruptcy filing was "completely unexpected" and "shocked the market," resulting in a decline in SGLP's common units, which has wiped out "almost $300 million" in unitholder value.

SGLP's common units, which began the month trading around $25/share, were hovering around $7.40/share in Friday afternoon trade.

Last Thursday, it was also revealed that the Securities and Exchange Commission and the U.S. Attorney's Office in Oklahoma City are investigating the company's collapse. According to an 8-K statement filed by SGLP on Thursday, the SEC is looking to see whether SGLP offered any disclosure about its parent company's liquidity problems. The U.S. Attorney's Office wants more information related to the company's cashflow and debt crisis.

The buzz about the impact on the energy industry has been significant. "SemGroup going under was a hot topic today [Tuesday]," said a Midcontinent producer. "It will hurt the credit of a lot more people that are its creditors, including several well known producers. If we do business with somebody that is exposed [to SemGroup], then we are exposed."

SemGroup was doing damage control last Tuesday. "Our core business in energy distribution and storage remains strong, and we are taking aggressive steps to address our financial challenge," said SemGroup CEO Terry Ronan. "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 that can carry forward the mission we undertook. We believe there will be significant interest in our assets because of our talented and experienced employees, unique industry position, expansive customer base and premiere service capabilities."

Tulsa-based SemGroup provides diversified services for end-users and consumers of crude oil, natural gas, natural gas liquids, refined products and asphalt. Services include purchasing, selling, processing, transporting, terminaling and storage in the United States, Canada, Mexico, Wales, Switzerland and Vietnam. The company said its affiliates in Mexico, the United Kingdom and Asia were not included in the filing.

The company is in negotiations with lenders to secure sufficient debtor-in-possession (DIP) financing and anticipates obtaining a DIP facility within a week. In the interim, SemGroup is working with its existing bank lenders to use cash collateral, which, upon court approval, will enable SemGroup to utilize existing cash and cash generated through normal business operations to fund trade and employee obligations after the Chapter 11 filing. The company said it expects to continue negotiations with its banks regarding the terms on which the banks' interest will be adequately protected during the proceedings.

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