Chronicle of SemGroup’s implosive "Boom!" – Courtesy of Greg Newton, at NakedShorts.
Things that go BOOM! in the night
Until now a little-known, though large, closely held partnership in Tulsa, Okla., SemGroup transports, stores and distributes crude oil and refined products. It filed for bankruptcy protection last week after losing more than $2.4 billion on energy contracts…Exactly what drove the company to that fate remains unclear, but clues have started to emerge amid court hearings and other ripples from the implosion. (WSJ –Wrong-Way Oil Bets Slam an Energy Firm , source list below)
After the jump:
- News follows price
- Another body in the Ritchie cemetery?
- Was the hedger speculating?
- Public shareholders, meet The Shaft
News follows price
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.
(WSJ)
Nymex WTI crude oil futures topped out on Jul. 14 at $147.90 (intraday) and Jul. 15 at $145.78 (closing). The intraday ($122.50) and closing ($123.26) lows since then were both hit Friday, Jul. 25, representing declines of 17.2 and 15.5 per cent respectively. Mere coincidence, of course, that the market should put the last few lashings of lipstick on the alleged oil bubble just hours before a big short blows up.
Another body in the Ritchie cemetery?
According to regulatory filings, a fund owned by 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 most of the remaining shares. Spokesmen for Ritchie and Carlyle/Riverstone declined to comment. (WSJ)
Ritchie has been a slow motion tank farm fire (formerly train-wreck) for about three years now, in a process featuring an endless stream of excuses for not returning investors’ funds, punctuated by restructuring plans of dubious efficacy, some abandoned along the way, a bankruptcy filing by two funds that lost an alleged $700 million in life settlement assets after partner Coventry First LLC was sued by New York State, a $40 million settlement for its involvement in the mutual fund market timing morass…well you get the general idea.
In late 2007, Ritchie investors filed an involuntary bankruptcy petition seeking liberation of their funds, only to be hit by a Ritchie countersuit alleging that the action was “disparagement” prohibited by the offering documents’ ban on public criticism of the fund and its management. (The bankruptcy shot was tossed; Ritchie then withdrew the countersuit).
Among founder Thane Ritchie’s most consistently excellent excuses for limiting redemptions was that he needed time to realize the full value of private equity holdings. Mission, at least in this case, accomplished.
Was the hedger speculating?
SemGroup’s futures market losses have, naturally, given rise to speculation that the hedger was, in fact, speculating.
SemGroup had large “short” positions on crude-oil contracts, which were essentially bets that oil prices would fall. As part of its business, SemGroup uses these contracts — which commit the company to sell oil at fixed prices at future dates — to hedge its inventory and future oil purchases. But given the whopping size of SemGroup’s losses, some analysts and creditors suspect the firm may also have been making speculative trades not directly tied to its core business…
…Andrew Oram, an analyst at Moody’s Investors Service, said SemGroup’s bankruptcy-filing documents “brought to light additional large hedging liabilities and other unusual items that had not been reflected” in the company’s previous disclosures. (WSJ)
This one will run and run, but it does raise yet another question concerning the validity of the closely-followed Commodity Futures Trading Commission’s Commitments of Traders reports, which both sides of the Evil Speculators! debate have, like drunks and lampposts, leaned on to support their arguments. SemGroup’s positions were classified as “commercials” (i.e., used to hedge physical market risks); as the autopsy proceeds it will be interesting to see what proportion of its trading should have been filed in the “Great Big Get Rich Poor Quick” bucket.
Public shareholders, meet The Shaft
When SemGroup filed for bankruptcy, two of its hedge-fund creditors, Alerian Capital Management and Manchester Securities, took control of the general partnership of SemGroup Energy [SGLP]. Shares of SemGroup Energy have fallen 67% since the start of last week. As of 4 p.m. Nasdaq composite trading Thursday, they were at $7.72, off 28 cents. [They closed Friday at $7.55.] (WSJ)
But further evidence, was needed, of the advantages of ETFs (or, in this case, an ETN) compared with the joys of stock-picking.
If, of course, you really must. And while SGLP was not in BSR — the Bear-Linx Alerian Master [Energy] Limited Partnership exchange-traded note (b. Jul. 20 2007) — its trading symbol was carefully chosen as an abbreviation for Bear Stearns Rubbish.
Wrong-Way Oil Bets Slam an Energy Firm
WSJ, By Serena Ng, Peg Brickley and Carolyn Cui
July 25, 2008; Page C1
When Hedge Funds Bar the Door
By Susan Pulliam
The Wall Street Journal Jul. 2 2008
[This article provides reasonably comprehensive background on the Ritchie inferno but the second para needs be treated with caution. Yes, “A.R. Thane Ritchie has barred investors from leaving his fund,” the original redemption limits date back to 2005 (as noted later in the article). As well, Ritchie has several funds, and the limits have probably impacted each of them differently.]
Related Ancient History
Ritchie Fund Rewrites Rules
by Emma Trincal
TheStreet.com Dec. 14 2005
Ritchie Announces Mutual Fund Trading Settlement
Business Wire (via Reuters) Feb. 5 2008
Greg Newton is a veteran financial journalist who from 1988-2004 was President of The Metal Bulletin Holdings Corp of New York. His blog NakedShorts takes a witty and insightful angle on market developments, with a special focus on hedge funds and commodities.
Note: Please keep ignoring the 48-hour delay box. All articles in this section are free and immediately available, click on title/links for authors’ websites and click here for the backup site, with comments and blogroll. – Ilene
