Industry-Specific Considerations for Energy Companies Contemplating PPP Loans

With an additional $310 billion in funding for the Paycheck Protection Program (PPP) signed into law, energy companies should consider applying for PPP loans in order to maintain daily operations during the COVID-19 crisis. Generally speaking, companies may receive a maximum loan amount of the lesser of two-and-a-half times their average monthly payroll costs, or $10 million. PPP loans are especially attractive to struggling businesses because such loans may be forgiven up to the entire principal borrowed, including interest.

The CARES Act does not include any specific regulations or prohibitions regarding energy companies applying for PPP loans, nor does it include any specific guidance regarding loan forgiveness for companies in distressed sectors. There are, however, elements of the CARES Act regarding loan forgiveness that energy companies should assess prior to applying.

Assuming the borrower allocates PPP funds properly—at least 75 percent to payroll costs—the amount of loan forgiveness is then determined by the borrower’s retention of employees and maintaining compensation levels during the eight-week period beginning on the date of the PPP loan disbursement. Although this may deter some energy companies considering large cost-saving measures, there are nuances to the PPP that will affect the calculation of loan forgiveness. 

First, it is important to note that independent contractors are not included in the employee count or the payroll cost calculation; accordingly, a reduction in contractors such as pumpers, landmen, or outside geologists will not affect the borrower’s eligibility for loan forgiveness.

Second, the borrower may select the time period considered for the comparison of the company’s average number of full-time equivalent employees per month prior to the COVID-19 crisis from either: (1) the period beginning on 2/15/2019 and ending on 6/30/2019, or (2) the period beginning on 1/1/2020 and ending on 2/29/2020. This option is especially beneficial for companies who already reduced their workforce in 2019 due to market conditions, and are operating with their core employees in 2020 through the COVID-19 crisis. 

Finally, reductions in employees from February 15, 2020, through April 26, 2020, do not affect the amount of loan forgiveness so long as the borrower reinstates the full-time equivalent employee headcount no later than June 30, 2020, nor do reductions in employees following the eight-week period after receipt of the PPP loan proceeds. Considering the six-month deferral of payments and 1 percent interest rate, energy companies should consider participating in the PPP, but they should weigh the risk of not being able to re-instate the full-time equivalent employee headcount—thus requiring re-payment of the loan if market conditions continue to deteriorate.

Dykema will continue to monitor additional guidance released regarding PPP loans and update this article with any energy-specific regulations or prohibitions.

If we can be of assistance in helping your company navigate any of these issues, please contact Israel R. Silvas at 214.698.7812 (ISilvas@Dykema.com), Brandon Durrett at 210.554.5276 (BDurrett@Dykema.com), Amelia Marquis at 405.863.0265 (AMarquis@dykema.com), Prescott W. Smith at 214.991.8250 (PWSmith@dykema.com) or your Dykema relationship attorney.

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