Late yesterday afternoon, a bankruptcy court in Delaware has approved SemGroup LP’s Chapter 11 filing. One of the company’s subsidiaries, SemGroup Energy Partners LP (NASDAQ:SGLP), is publicly traded and not included in the bankruptcy filing. The court has permitted SemGroup to liquidate its assets (estimated at about $211 million) and to withhold about $50 million to pay suppliers.

A group of lenders challenged SemGroup’s plan to use some of the cash to stay in business. The lenders argue that the protections being granted "are not commensurate with the substantial amount of cash being made available to debtors."

The fate of SemGroup Energy Partners (SGLP) is still unclear, althoughthat company has expressed a desire to remain in business. How thatmight happen is also vague, because as much as 90% of SGLP’s revenue isderived from its parent. SGLP’s common unit price hovered around$25/unit until last Friday, when it fell to $11/unit following adowngrade of its debt to junk status. The stock closed at $8/unityesterday. The company’s long-term debt is approximately $300 million.

Other investors are also feeling the pinch. Tortoise Capital Adisors,LLC, which is the investment adviser for Tortoise Energy InfrastructureCorp. (NYSE:TYG), Tortoise Energy Capital Corp (NYSE:TYY), and TortoiseNorth American Energy Corp (NYSE:TYN), issued a press release lateyesterday. In the release, Tortoise noted that the value of SemGroup’s8.75% Senior Notes had decreased in value from 96.5% of par to 11.5% ofpar. Other creditors have not disclosed their exposure yet.

SemGroup’s problems stemmed from its short position in NYMEX crude oilfutures. The demands for cash to cover its positions overtook itsability to raise the money. SGLP, which owns pipelines and terminals,could not by itself generate the necessary liquidity.

It’s hard to believe, though, that SemGroup’s problems drove down thecost of crude. The company’s trading business amounted to just 500,000b/d, out of more than 85 million b/d worldwide. Besides, it was bettingthat crude prices would fall. SemGroup got its market timing wrong, andit’s now paying the price.

Paul Ausick
July 24, 2008

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