The sunrise of SemGroup Corp.'s slow, hard journey out of bankruptcy didn't really dawn on CEO Norm Szydlowski until he looked into the face of Curdel Moreland.
Her husband, crude oil terminals manager Cecil Moreland, was voted by co-workers to join company executives when they rang the opening bell at the New York Stock Exchange in December 2010. Two years before that, nobody knew if Cecil Moreland or anyone else would have a job at what was then SemGroup LP or if SemGroup would even exist.
"Seeing her watching him, that was such vindication," Szydlowski recalled earlier this month. "I was looking at her face, and she was looking at Cecil. I was just so proud."
Exactly four years ago Sunday, SemGroup LP's facade as a fast-rising, big-time industry player crashed into a sea of debt and, eventually, scandal. No one has ever been charged with any wrongdoing in the company's speedy downfall, but co-founder and CEO Tom Kivisto quickly lost his job and reputation when his oil futures trading strategy cost at least $2.4 billion in margin calls, depleted cash flow and prompted bankers to cut off their credit lines.
Survival or selloff
Only two months earlier, SemGroup was a star in the Tulsa corporate firmament: sponsor of ballets, social services and a women's professional golf tournament. Forbes had ranked the midstream energy firm as one of the nation's largest private businesses with revenues approaching $15 billion annually doing transport and storage services in crude oil, natural gas, residual fuels and asphalt.
The collapse happened quietly over months as oil prices zoomed upward in the summer of 2008, but the public learned the truth when public spinoff SemGroup Energy Partners LP's stock fell 50 percent in one day.
The parent SemGroup filed for Chapter 11 bankruptcy in hopes of reorganization but admitted it might have to sell off its vast array of assets to satisfy creditors. Apparently, insiders say, it was every bit that bad and more.
"It was a moment-to-moment, day-to-day fight to hold it together," said Tim O'Sullivan, who was president of the SemGas subsidiary at that time and now is SemGroup's vice president of corporate planning and strategic initiatives.
"It was a very grim, destructive set of circumstances," he added. "Looking back on the bankruptcy process, I can't tell you that I'd do it again."
Kivisto was fired, and fellow co-founders Gregory Wallace and Kevin Foxx eventually left the company. SemGroup was forced to lay off hundreds of workers and endured 17 months of very public scrutiny during the Chapter 11 process.
Questions piled up deeper than the formidable list of creditors and investigators. Would SemGroup be liquidated? Would it stay in Tulsa? Wouldn't that name be forever tainted?
The answers, Szydlowki now believes, are obviously no, yes and no. The company held on to most of its properties, is still headquartered out of the Warren Two building at 61st and Yale and is still named SemGroup.
But the effort was grueling for both Szydlowski and the people who stayed to work for him. He left Colonial Pipeline to guide the reorganized SemGroup in December 2009.
"People were tired, worn out," he said. "Even as a newcomer like me, you could feel it."
Turnarounds and spinoffs
The negative headlines slammed SemGroup for most of the 17 months in bankruptcy, including former FBI Director Louis Freeh's highly critical April 2009 examiner's report. On the inside, however, creditors apparently believed that losses could be turned to gains by converting their stakes into equity and taking SemGroup public.
The firm downsized the futures trading apparatus, sold off its SemMaterials asphalt research wing and many residual fuels storage terminals. SemGroup turned an important corner when it closed on a new $600 million credit facility that reduced potential interest expenses by 50 percent in June 2011.
"That was huge for us," Szydlowski pointed out.
SemGroup also finished its WhiteCliffs crude oil pipeline, a Colorado-to-Cushing project originally imperiled by credit default and the bankruptcy. In the past year, the SemStream propane division was sold for a stake in Tulsa-based NGL Energy Partners and a new Glass Mountain Pipeline joint venture announced with partners Chesapeake Energy Corp. and Gavillon LLC.
The first year out of bankruptcy was bumpy, as the company sustained a $132 million net loss in 2010. Last year, however, SemGroup reported a $2.4 million profit, and the spinoff of storage and terminal assets into Rose Rock Midstream LP gained $23.2 million in net income for the year.
Holding their breath
The comeback road has had its detours, including last year's hostile takeover attempt by Plains All-American Pipeline LP. The bid fell short but temporarily distressed some employees who'd worked so hard through Chapter 11 and beyond.
"Just as we're starting to take a deep breath, here comes Plains," O'Sullivan recalled. "Our board had to look at us and say 'Do we want to bet on them or auction off the company?' "
The board bet on SemGroup's leadership, and investors seem to be on board so far, too. The company stock is hanging around $32, up $9 in what has been a volatile 12 months for energy firms.
Investment manager Fred Russell is cautiously impressed by SemGroup's apparent comeback. He has studied the company since before its bankruptcy and strongly criticized former CEO Kivisto's highly leveraged "short" trading strategy, which wagered that oil prices would fall during summer 2008's historic rise.
"They must have very capable people running it because it's certainly a major task to take a company like that out of bankruptcy and make it profitable," said Russell, principal of Fredric E. Russell Investment Management Co. "I think they deserve a lot of praise."
The caveat to that praise, he added, is hoping SemGroup stays away from the futures trading and derivative traps that snared the original company four years ago. Russell believes that the midstream terminal and storage business is a steady business, but the intricacy and volatility of commodity trading spooks him.
"They have to be careful that they don't get excited about prospects the way Tom Kivisto did," he warned. "Hedging is fine, but speculation, as they found out, is extremely dangerous.
"Beware, but congratulations on turning the firm around."
Back to the future
O'Sullivan said he and many others inside SemGroup's walls didn't grasp the severity of Kivisto's trading positions up into the summer of 2008. He doesn't believe history will repeat itself but added that SemGroup must never forget those lessons.
"I'm not sure the story's ever been told, and I wouldn't be able to tell you precisely what happened," he said. "There certainly wasn't enough institutional control."
Both O'Sullivan and Szydlowski agreed that SemGroup Corp. is a very different company now, publicly traded with internal controls and the focus on core terminal and pipeline sectors. The trading wing is not a profit center anymore.
The actual gold mine, so to speak, lies deep beneath the earth not so far away from Tulsa headquarters and Cushing tanks. U.S. oil fields are experiencing a revolution due to hydraulic fracturing and horizontal drilling.
The Mississippi lime formation of northern Oklahoma and southern Kansas is all the rage with both domestic and international energy players, and the Bakken Shale of North Dakota is now the nation's biggest production field. Oil is flowing at levels not seen in many years, and producers need infrastructure partners to move that crude down the line to refineries.
"It's a fortunate confluence" of events that should keep SemGroup running strong for years, Szydlowski pointed out. The short-term plan calls for SemGroup to build and develop assets, such as the Glass Mountain Pipeline, then sell them to the Rose Rock Midstream master limited partnership, in which the parent company holds a controlling interest and cash flow distribution rights.
Investment firm Tudor Pickering Holt & Co. touted SemGroup as "the fastest-growing midstream general partner of 2014" in a recent report. The cash flow benefits from the Rose Rock assets should drive SemGroup to generate a net cash balance of $600 million in two years, Tudor analysts predicted.
"SEMG's high growth years all lie ahead," the report reads.
Of course, financial rating firms painted pretty pictures of SemGroup LP in the years prior to the bankruptcy. Today's company leaders know they need to keep looking ahead but be mindful of the past.
"You can't say never, but this is the way a company should be run," O'Sullivan said.
By the numbers
SemGroup Corp. and Rose Rock Midstream LP
Founded: 2000
Went public: 2009
Tulsa employees: 95
Companywide: 716
Energy segments: Crude oil, natural gas, natural gas liquids, refined products and asphalt storage and transportation.
Market cap now: $1.37 billion
Rod Walton 918-581-8457
rod.walton@tulsaworld.com
Original Print Headline: Rising from the ashes
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