Massive oil hedging losses fell 12th largest American private company, files for bankruptcy

24 July 2008

Hedging with oil prices nowadays has become synonymous with playing with fire. And the latest victim of such a conflagration is a company which had once been amongst the largest in the world. On Tuesday, the privately-owned SemGroup, an oil marketing company based in Tulsa, Oklahoma, filed for Chapter 11 bankruptcy protection brought under by the increasing cost of trading oil in a time of record prices.

The company, ranked the 12th largest private entity by Forbes last year, was forced to curtail its futures trading operations two weeks ago because of a lack of funds and because physical oil dealers were unwilling to work with the company, participants in both markets say.

It racked up the massive $3.2 billion losses as oil prices ran up record gains, undercutting short crude futures positions SemGroup bought to hedge against its 500,000 barrel-per-day trading business.

To meet obligations, SemGroup plans to sell off oil and natural gas gathering, transportation, and storage assets worth an estimated $6.14 billion that were purchased in a whirlwind of acquisitions since it was founded in 2000.

"We have determined that the best way to maximise value for our creditors is to undertake a sales process that will transition our valuable businesses to well-established companies," Terry Ronan, SemGroup's acting chief executive, said in a statement.

Shares in SemGroup's publicly-traded subsidiary, SemGroup Energy Partners, which operates pipelines and terminals that mainly transport its parent company's oil, have plunged 50 per cent since 16 July.