The Enron-esque Fall of SemGroup

"Large oil company goes bankrupt. CEO being investigated by Securities and Exchange Commission. Laid-off employees scramble to find new jobs." Think you've heard it all before? You have. And you haven't. The old journalistic saw, "if it bleeds, it leads" is occasionally trumped by another cliché, "been there, done that." With entire neighborhoods in foreclosure, banks in bankruptcy, and bailed-out insurance companies sending their execs on lavish "retreats," the news of an oil company going bust is so 2001. Unless you live in an oil-producing Plains state, or unless your job or your stock portfolio is connected to the company or one of its subsidiaries, you may not have heard much about the sudden decline of SemGroup Energy Partners, L.P.

What is SemGroup?

SemGroup should have remained among the definitive American rise-to-the-top stories. SemGroup was founded in 2000 by Tom Kivisto, a University of Kansas basketball star. Instead of allowing his career to flounder as he was bypassed for promotion numerous times, Kivisto started his own company. Seven years later, Forbes Magazine listed SemGroup as one of America's 25 largest private companies¹. Not only did his Tulsa-based energy company quickly rise to the top, Kivisto became an active member of Tulsa's philanthropic and cultural scene. The Kivisto family also made numerous contributions to educational initiatives and political campaigns-Republican and Democrat.

According to Tulsa World, SemGroup was a great place to work². It seemed to model its work environment on other highly-desirable employers such as Google with its offerings of free healthy snacks, beverages, and catered meals for employees; an onsite gym complete with indoor running track and state-of-the-art exercise machines; and original art to enhance the plush décor.

But SemGroup's status as a shining light in the dark world of dreary workplaces turned out to be a sudden flash rather than an enduring beacon. As Tulsa World notes, "Former CEO Tom Kivisto helmed a meteoric rise and fall"². As anyone with a minimal understanding of astronomy and a persnickety sense of word usage should note, meteors technically do not rise; they fall. In fact, they tend to burn up and crash leaving behind nothing but useless holes in the ground.

What went wrong

The downfall of the Oklahoma energy powerhouse came swiftly. A mere two months after Paula Creamer won the SemGroup LPGA Championship, it became clear that the fun and games had come to an end. SemGroup's heavy debt burden, partly caused by multiple acquisitions and hedging on oil futures, prompted Moody's to express concerns. Few, however, could have anticipated the rate at which its stock plummeted on July 17, 2008, shares losing half their value in one day. The company filed for bankruptcy shortly thereafter and lawsuits have been filed by shareholders and Bank of America.

Why it matters

So, what does the failure of one Oklahoma oil company mean to you? In addition to lost jobs and another poorly-performing stock sucking the life out of many a fund, the demise of SemGroup means less domestically-produced energy. The Associated Press reports, "The bankruptcy of an Oklahoma-based oil marketer [SemGroup] has the Kansas oil industry looking at reducing production as it faces losing tens of millions of dollars in revenue" ³. While it will take years to set up the infrastructure to drill offshore or in Alaska's remote ANWR region (while the politicians continue to debate whether it should be done at all), the oil beneath Kansas farmland could be in your car's tank within weeks-if someone would drill for it and pump it out. For now, many idle wells are sitting atop useless holes in the ground.

Lessons learned

The SemGroup fiasco is further proof of how safeguards such as the Sarbanes-Oxley Act of 2002 (a.k.a., "SOX" or "Sarbox") that were supposed to protect our economy from another Enron type failure have been ineffective at best. It is also an indication that our current energy policies are not as driven by consumer demand as much as we would like to think.

And what have the executives at SemGroup learned? Probably that running a company into the ground (again, think of the meteor analogy) should not in any way reduce your own quality of life. After Kivisto stepped down and another took his place, he reportedly is still getting paid for doing nothing and being as useless as the holes drilled in prairie sod to gain access to Kansas and Okie crude⁴. But he's not the only one living large on whatever fragments remain in SemGroup's debris field. In a press release dated October 3, 2008, SemGroup's current CEO, Kevin Foxx, commenting on the appointment of two new members of their board of directors, states that he hopes the new board members will "utilize[e] their combined business experience to grow our business" (5). According to information provided to the SEC, one of the new board members (Duke Ligon) will receive the following compensation:

(i) $75,000 per year as an annual retainer fee;

(ii) $5,000 per year for serving on each of the Compensation Committee and the Conflicts Committee and $10,000 per year as the chairman of the audit committee;

(iii) $1,500 for each meeting of the Board that Mr. Ligon attends;

(iv) reimbursement for out-of-pocket expenses associated with attending meetings of the Board or committees; and

(v) director and officer liability insurance coverage.⁶

Not a bad gig from a company that can't pay its creditors.

So, the next time you fill up your car and curse and lament the still-high cost of fuel, take solace in the knowledge that in spite of the Enron-inspired Sarbanes-Oxley act of 2002, it's still business as usual for many oil executives. What you decide to compare them to is up to you.

To dig deeper on the subject, be sure to visit the provided links.

Sources

1. "By The Numbers: America's 25 Largest Private Companies," photo slideshow, Forbes, November 8, 2007, http://www.forbes.com/business/2007/11/06/biz_privates07_top25_slide.html

2. Ginnie Graham, et. al., "SemGroup Shock Wave," Tulsa World, August 3, 2008.

3. Associated Press, "Oil producers slowed by bankrupt marketer," August 14, 2008, http://www.nexis.com

4. Rod Walton, "Ex-SemGroup CEO still on payroll," Tulsa World, October 19, 2008, http://www.tulsaworld.com/news/article.aspx?articleID=20081019_49_A1_SemGro658893

5. "Duke R. Ligon and Dave Miller Appointed to Board of SGLP's General Partner," press release, October 3, 2008, http://sec.gov/Archives/edgar/data/1392091/000139209108000028/exh99-1.htm

6. Securities and Exchange Commission, Form 8-K filing, http://sec.gov/Archives/edgar/data/1392091/000139209108000028/form8k.htm