Paycheck Protection Program money has flowed to private equity-backed companies in the oil and gas industry amid the pandemic, according to data from the Small Business Administration.
Several companies owned by Energy Spectrum Capital were approved for PPP loans, including Azure Midstream Energy, Bluewing Midstream, Caliche Development Partners, Santa Fe Midstream, and Taproot Energy Partners, data released last week by the SBA show. Taproot reportedly borrowed in the range of $150,000 to $350,000, while the others were approved for loans ranging from $350,000 to $1 million, according to the data.
Thomas Whitener, Energy Spectrum president and founding partner, did not return phone calls seeking comment on the PPP loans. James Spann, the Dallas-based firm’s chief compliance officer and founding partner, did not respond to phone calls and an email seeking comment.
The U.S. government created the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act to help small businesses survive the pandemic and save jobs. Many private equity-owned companies may be excluded from the program due to restrictions surrounding size: They are deemed too big based on the number of employees under the affiliation rule, which considers staff across all companies in a private equity firm’s portfolio.
Energy Spectrum, which focuses on North American midstream companies in the lower end of the middle market, is now investing capital from a $969 million fund that closed in April, according to its website. The fund, named ESP VIII, invested in Denver-based Taproot in May 2018. Azure, Bluewing, Caliche, and Santa Fe — all based in Texas — are older investments in Energy Spectrum’s active portfolio that were made by the private equity firm since 2012, the website shows.
At least one other oil and gas company with private equity ties borrowed millions of dollars under the Paycheck Protection Program. EnerVest Operating, backed by Houston-based private equity firm EnerVest Ltd., was approved in April for a PPP loan in the range of $5 million to $10 million, SBA data show.
EnerVest Operating chief executive officer Alex Zazzi and EnerVest Ltd. CEO John Walker did not return phone calls seeking comment. EnerVest’s media relations department did not respond to an email and phone call seeking comment on the PPP loans.
EnerVest Ltd., which last raised $2.4 billion in equity commitments from investors, buys oil and gas assets and acreage, according to its website. EnerVest Operating runs those properties.
The firm says on its website that its operating company has tens of thousands of wells across the U.S. and is among the largest operators or producers in “most major North American plays, including the Austin Chalk, the Barnett Shale, the Eagle Ford and the Utica.”
In late April, the SBA clarified that private equity firms are not eligible for PPP loans under its rules as they are mainly engaged in investing. Companies they own must have no more than 500 employees to apply, a threshold many private equity-backed businesses would cross due to the affiliation rule.
PPP loans have favorable borrowing terms, including an interest rate of one percent and the possibility they may be forgiven when certain criteria such as job retention are met, according to the SBA. EverVest would retain 500 jobs under the program, the recently released data from the federal agency show.
Energy Spectrum portfolio companies Azure, Bluewing, Caliche, Santa Fe, and Taproot also would retain jobs under the Paycheck Protection Program, with the number ranging from 10 to 27 per firm, according to the data from the SBA. Santa Fe’s PPP loan was approved in May, the data show, while the other four companies were approved for PPP money in April.
Under the government’s Paycheck Protection Program, eligible borrowers must “in good faith” certify the PPP loan was needed after considering current business activity and “their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business,” according to guidance provided by the SBA as recently as June 25 in response to frequently asked questions.
Azure president I.J. “Chip” Berthelot, Bluewing president Todd Reid, Caliche CEO Dave Marchese, Santa Fe managing partners Cliff Rupnow and Paul Dolan, and Taproot CEO Kevin Sullivan did not respond to requests for comment on the PPP loans obtained under Energy Spectrum’s ownership.
Private equity firms excluded from the Paycheck Protection Program have eyed the Federal Reserve’s emergency Main Street Lending Program as a possible source of financing for their portfolio companies during the pandemic. The Main Street loans are available to small-to-midsized companies with as much as $5 billion in revenue or as many as 15,000 employees.
Earlier this year, Jeremy Swan, national director of CohnReznick’s financial sponsors and financial services industry practice, told Institutional Investor that many of his private equity clients had expressed in the Main Street loans — cautiously. He said they were “treating it almost as a last resort.”
While the Main Street program is open to highly-levered companies, restrictions on debt levels would prevent some private equity-controlled companies from applying. Unlike PPP loans, which in some cases may be forgiven, the Main Street loans must be paid back under terms provided by the Fed.
The Main Street program was slower to get up and running, with the Fed announcing last month that it was seeking feedback to expand it to nonprofit organizations. Meanwhile, the Paycheck Protection Program has been extended, with the SBA now accepting applications through August 8, according to the SBA’s website.