COVID-19 FAQ: Natural Resources

A. COVID-19 is having a significant impact on the U.S. economy and is exacerbating existing headwinds for oil and gas companies. Prior to the pandemic, companies were already contending with low oil prices, mounting debt obligations, and investors that were growing less willing to provide companies with new capital and instead wanting them to focus on cashflow. COVID-19’s impact to oil demand has caused oil prices to plummet, compounding the impact of these existing forces.

Investors’ priorities have shifted further in the wake of COVID-19 too. Reports from several groups and donor advised funds suggest that in the immediate term, investors are also stepping up oversight of the organizations they support, ensuring appropriate workforce protection, financial sustainability and assessing opportunities to shift priorities to areas of greater need or higher impact.
 

A. Due to a combination of travel restrictions, stay-at-home orders and rising unemployment, almost all businesses will experience declining revenues due to the widespread impacts of COVID-19. For oil and gas companies, widespread business closures and stay-home orders have caused oil demand to fall, which in turn has caused oil prices to plummet. Demand for oil, and consequently, oil prices, will remain low as long as COVID-19 containment measures remain in place, and will likely take time to recover when the crisis starts to abate.

Between the impact of low oil prices to companies’ bottom lines, the ongoing costs of continuing operations and additional costs incurred as a result of responding to the pandemic, many oil and gas companies will experience a liquidity crunch because of reduced cash flows. Businesses should examine their current cash flow and make a realistic projection of that over the next three to six months to understand their expected capital requirements.

Planning for a range of possible scenarios can also help identify the options available to a business, which can help strategize for various circumstances as the ongoing situation develops. Beyond just reviewing profits and losses, it is crucial to focus on the balance sheet and determine the current cash conversion cycle, especially as suppliers and customers experience disruption themselves. Although some back-office functions may not usually be top of mind, decision-makers need a clear picture of accounts receivable and the timeline for conversion to understand cash flow now and in the near future
 

A. Oil companies hit hardest by COVID-19’s impact to oil prices may consider seeking bankruptcy protection. There are three types of bankruptcy filings available to businesses, depending on their financial condition and level of debt.

Chapter 11 bankruptcy involves a reorganization of a business’ assets and debts and is the most complex type of bankruptcy case. Companies filing for Chapter 11 generally continue to operate through bankruptcy proceedings, working to restructure their affairs and plotting a path back to financial stability.

Chapter 13 bankruptcy is available to sole proprietorships, in which the debtor reorganizes their finances under the supervision and approval of courts. It is primarily filed by individuals and generally results in creation of a payment plan for the debtor’s creditors.

Chapter 7 bankruptcy involves liquidation of all a business’s assets to pay off debts and generally means the business will not continue operating following the bankruptcy, so is usually a last resort.

Before going down the path of bankruptcy, oil & gas companies may also want to consider alternatives such as out-of-court debt restructuring.

Chapter 11 bankruptcies were on the rise for oil companies in 2019, and we’re likely to see additional cases filed in the coming months as COVID-19’s impact reverberates
 

A. While there are many tax savings opportunities included in the CARES Act, eligibility for some provisions is dependent on size and other factors, and many benefits are mutually exclusive or have other tax implications. Given the level of complexity in applying these provisions, it is critical organizations consult with tax professionals in order to maximize their savings.

The CARES Act includes a number of programs for employers that keep employees on payroll instead of laying them off. Keeping the employee population in tact provides the additional benefits of not having to locate, screen and train new employees upon re-opening which will accelerate the ability to re-start operations.

The most publicized of these programs is the Payroll Protection Program (PPP) that provides loans to certain employers through the Small Business Association. In addition to providing a very favorable two-year loan at 1% interest, there is an opportunity for the loan to be forgiven if the employer maintains its employee headcount and wage payments at pre-COVID-19 levels.

However, eligibility for the PPP and its forgiveness requirements are dependent on many variables. These conditions need to be reviewed thoroughly to determine if an employer qualifies.

Additionally, the Employee Retention Credit (a 50% credit on qualifying wages paid to employees on March 13 through December 31, 2020) is available for employers who do not take advantage of the PPP and either:

• Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
• Experience a significant decline in gross receipts during the calendar quarter.

All employers are eligible to defer their social security tax liability due March 27 through the earlier of PPP loan forgiveness, if applicable, or December 31, 2020.

Organizations should also check with their applicable state taxing authorities for relief and updates on how states are coordinating with the CARES Act’s provisions.

In addition to checking options for government stimulus, organizations should examine all liabilities to see how to mitigate any potential financial issues. Oil and gas companies can engage with lenders to confirm existing lines of credit, negotiate terms of existing loans or seek additional funds for relief in the near term.

Additionally, assessing the status of vendors and suppliers can identify possibilities for temporary relief, as they may be willing to amend the usual payment terms or offer an extension, especially if there is an established relationship. It’s also important to carefully review insurance coverage to see if this applies to current losses due to business interruption, and then establish milestones for claim recovery. Organizations should maintain contemporaneous documentation and carefully track any losses and added expenses related to the pandemic as well.
 

A. Defaulting on a covenant allows the contractor, such as a lender, to demand early repayment of the outstanding balance or deny the company access to further funding or services. Oil and gas companies need to be intimately familiar with the terms of their contracts and clear about how the lender interprets the various clauses and covenants. From there, businesses need to assess which covenants they are likely to breach, if any, over the coming weeks and months.

To avoid this scenario, oil and gas companies can try to negotiate restructuring of their debt or for a debt service holiday justified by the impact of COVID-19. General best practice is to contact your lender as soon as possible, and negotiate a restructured payment plan or covenant relief option.
 

A. In the short term, oil and gas companies should consider leveraging any tax strategies that can help lower their total tax liability and increase cash flow. This includes provisions in the various stimulus bills, like payroll tax credits and delays, AMT credits, Net Operation Loss Carryovers/carrybacks, and tax-deductible charitable contributions.

Outside of the existing stimulus bills and other response measures, oil producers should also consider measures to reduce their total tax liability that were already available prior to the start of the pandemic, such as state and federal Research and Development (R&D) tax credits. Companies that operate internationally should be sure to also assess the tax relief options in the places they operate.

While there are many tax savings opportunities available, eligibility for some provisions is dependent on company size and other factors, and many benefits are mutually exclusive or have other tax implications that could affect a company’s total tax liability. Given the level of complexity in tax planning during this time, it is critical that you consult with tax professionals in order to maximize your savings and understand the long-term impacts of your tax strategies.
 

A. Oil and gas companies of all sizes are likely able to leverage some aspect of the economic stimulus packages passed by the federal government.

However, when considering available options, you’ll need to factor in that many benefits are mutually exclusive or come with reporting and compliance obligations. For small businesses, two disaster loan programs—The Paycheck Protection Program (PPP) and the Emergency Economic Injury Disaster Loans (EIDL) program—are available to them via the Small Business Administration (SBA). For those facing financial strain as a result of COVID-19, these forgivable loans can help offset a variety of costs. The PPP provides small businesses with funds to pay up to 8 weeks of payroll costs including benefits. EIDL loans can be used to cover any necessary financial obligations. Oil companies can apply for loans under both SBA programs as long as they don’t cover the same expenses.

To qualify for a loan under either program, your company must employ 500 workers or fewer (both full-time and part-time), or you must meet the industry size standard set forth by the SBA. The SBA’s size standard for crude petroleum extraction companies, for example, is 1,250 employees or fewer.

Additionally, the Employee Retention Credit (a 50% credit on qualifying wages paid to employees on March 13 through December 31, 2020) is available for employers who do not take advantage of the PPP and either:

• Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
• Experience a significant decline in gross receipts during the calendar

All employers are eligible to defer its social security tax liability due March 27 through the earlier of PPP loan forgiveness or December 31, 2020.

Midsized and larger oil companies may also be eligible for low-interest loans under the $500 billion economic stabilization plan included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Unlike the SBA programs, these loans must be paid back and come with public disclosure requirements.

The CARES Act also includes a number of tax savings opportunities, AMT credits, Net Operation Loss Carryovers/carrybacks, and tax-deductible charitable contributions.

Most recently, the Fed unveiled a new $600 billion Main Street Lending program available to small and midsized businesses with up to 15,000 employees or up to $5 billion in 2019 annual revenues. Principal and interest payments on these four-year loans can be deferred for the first year.

And, on April 23, Congress finalized an additional stimulus package that allocates $484 billion in funding, $320 billion of which is available for small business loan programs.

For more information on how oil and gas companies can take advantage of the SBA’s Paycheck Protection Program, read our Insight.
 

A. The SEC has provided conditional relief for registrants that are impacted by COVID-19 and are unable to file on a timely basis. On March 25, 2020, the SEC issued a new order extending the due date by 45 days to file certain SEC disclosure reports, such as Forms 10-K or 10-Q. The exemptions granted relate to reporting and proxy delivery requirements for registrants and the new order modified exemptions to now cover filings due between March 1, 2020 and July 1, 2020. Registrants must disclose why they were unable to file on a timely basis.

For more on how to take advantage of the extension, read our report on the accounting and reporting impacts of COVID-19.