Linn Energyfiled for bankruptcy on May 11. It reported $9.3 billion in debt at the end of 2015.

See the other energy companies who have fallen victim to the oil crash in 2016.

As oil prices surged toward $100 a barrel in 2010, Key Energy Services doubled down on horizontal drilling and began building heavy-duty service rigs. Four years later, the company had spent more than $1 billion on equipment and other capital investments as it rode the shale boom, piling up debt along the way.

Then the market turned. Crude prices plunged, drillers fled oil fields, and Key's cash flow evaporated. But the debt didn't.

Today, Key Energy is on the verge of bankruptcy, struggling under the weight of net debt - total debt minus available cash - that nearly tripled over the past decade to $760 million. Like many other energy firms, Key finds it nearly impossible to pay down loans it banked in days of plenty, now that prices have dipped below $50 a barrel.

"The market caught Key off guard," said Trey Whichard, Key's former chief financial officer, "and it caught a lot of companies off guard." Source: SEC data compiled by Bloomberg

Key Energy is an example of how oil and gas firms, supported by banks and other lenders, turned a boom into a bubble and why, now that it has burst, the energy industry faces a slow and painful recovery. Even if companies can avoid bankruptcy, the costs servicing heavy debt loads will tie up money that might otherwise be used to buy new equipment, launch new products, and hire new workers.

A Houston Chronicle analysis of 130 publicly traded energy companies found that their combined net debt, a vital indicator of the health of a company, jumped sevenfold in a decade, ballooning from $60 billion in 2005 to $440 billion last year.

"Something is going to have to give," said Ed Hirs, an energy fellow in the University of Houston's economics department and managing director for a small oil and gas exploration company on the Gulf Coast. "This is not a sustainable trend."

The last borrowing explosion is weighing on energy companies big and small. In 2009, Exxon Mobil bought the Fort Worth shale gas producer XTO for $41 billion, a deal that helped drive Exxon's net debt to $35 billion from a cash surplus a decade earlier. With revenues slipping, Exxon in February stopped buying back shares to preserve cash.

Load of debt

In April, the nation's biggest oil company lost its AAA credit rating, a distinction then shared by just three U.S. companies. Exxon declined to comment.

Houston-based C&J Energy Services, an oilfield services company, also made a major acquisition when it seemed oil prices would only keep rising. It borrowed heavily in 2014 - just before oil prices peaked - to finance its $2.9 billion purchase of the well production and completion business of Nabors Industries, also of Houston.

By 2015, C&J reported $1.1 billion in net debt and just $100 million in cash flow, forcing the company to slash spending, pull rigs out of operation and lay off more than 4,000 workers. C&J, which lost $900 million in 2015, filed for Chapter 11 bankruptcy Wednesday.

A few months ago, Key Energy started secret talks about a structured bankruptcy, according to regulatory filings. Key declined to comment, but Whichard, who retired as CFO in 2013, said Key Energy was far from unique in its bullish outlook, rapid expansion and miscalculations.

"A lot of companies were in the midst of capital spending programs that they could not undo," said Whichard. "All of a sudden a drop in the market just penalized them."

More than 150 North American energy companies have filed for bankruptcy since the start of 2015, according to Haynes and Boone, a Dallas law firm that tracks the industry. And the final tally is likely to be far worse.

While there is no one indicator of impending bankruptcy, financial experts generally agree that companies are at risk if their net debt reaches six times their operating cash flow.

The Chronicle's analysis found 25 of the 130 companies exceeded that threshold in 2015; attorneys and analysts predict that many, barring a dramatic rise in oil prices and production, won't be able to survive.

Lydia Protopapas, a partner at in the Houston law firm Winston & Strawn, said she expected bankruptcy filings to keep piling up this year. Companies can't survive at current oil prices "with those debt loads," she said.

Crude settled at $44.19 a barrel in New York on Friday.

Explore net debt and cash flow for oilfield companies

Net debt, a key indicator of a company’s financial health, has boomed since 2005, rising to $440 million in 2015, according to data pulled for 130 publicly traded oilfield companies. Cash flows from company operations — which would allow businesses to pay their notes — also rose over the past decade, but then crashed in 2015 as oil prices tanked. Choose an oilfield company from the pulldown menu below to explore debt versus cash flow.

In the mid-2000s, as oil prices began a record-breaking climb, horizontal drilling and hydraulic fracturing unleashed a revolution of oil and gas production.

The price of a barrel of U.S. crude was surging then, from $42 in 2005 to well over $100 in 2011, a price that held steady until the second half of 2014.

While oil became expensive, money got cheap. Central banks around the world slashed interest rates in the wake of the 2008 financial crisis, and, by 2010, oil companies were borrowing hundreds of millions of dollars to get a piece of the action.

In 2009, the Frisco exploration and production company Comstock Resources dumped about $350 million into the development of its Cotton Valley shale fields in East Texas, among others, according to Securities & Exchange Commission filings. The next year, it spent $540 million. In 2011, Comstock spent $1 billion and ended the year with $1.2 billion in long-term loans.

'Pain' will continue

Hirs, the University of Houston economist, estimated that companies like Comstock needed oil prices of at least $80 a barrel to service the debt they took on. Oil prices peaked at about $107 a barrel in summer of 2014; by the end of 2015, they'd fallen to $37 a barrel.

Comstock's operating cash flow plunged from $401 million in 2014 to $30 million last year. Its net debt ballooned to $1.1 billion, and its share price plunged from a peak of $29 in 2014 to less than $1. The company cut 14 positions, 10 percent of its workforce.

Comstock did not return a phone call seeking comment.

Anadarko, the independent oil producer, increased its debt by five times from 2005, to $15 billion last year, according to SEC filings, while its cash flow dropped to negative $2 billion - meaning the company paid more to run its operations than it took in. In response, Anadarko cut its U.S. rig count by 80 percent and its workforce by 1,000 jobs. It also slashed capital spending by half and its shareholder dividend by 81 percent.

Anadarko spokesman John Christiansen noted, however, that the company sold more than enough assets that year to cover the dip in cash flow.

The effects of the crash spilled from producer to the service and equipment companies that support them. Houston-based Gulfmark Offshore, an ocean platform service provider, started building 12 new ships in 2011 bound for the Gulf of Mexico and North Sea. By 2015, Gulfmark had $1.2 billion in ships, $500 million in debt, and just $22 million in the bank.

Gulfmark did not respond to requests for comment.

Since the start of 2015, Texas oil companies, equipment suppliers and services providers have cut an estimated 100,000 jobs, one-third of the state's energy workforce.

Those jobs aren't coming back right away, even if crude prices jump back to $80 a barrel, said Berkeley Research Group Managing Director Ron Vollmar. Companies will want to see a sustained rebound, he said.

"People are in survival mode right now," Vollmar said. "The pain is going to continue."

Like hurricane debris

During the shale boom, oil production grew nearly 60 percent, from 5.5 million barrels a day in 2010 to 8.7 million barrels a day in 2014. Companies needed land, trucks and tools to harvest the crude.

Key Energy was one of the country's largest onshore well completion and service companies. It did everything from preparing wells for pumping to transporting and disposing of wastewater from fracking operations.

In 2011, Key's chief executive, Dick Alario, noted the "strong shift" to fracking and horizontal wells, and promised "to fund significant investments" in the equipment needed to perform those jobs. It was the company's future.

In SEC filings, the company said it would proceed cautiously. It planned about $240 million in capital expenditures in 2011 and assured shareholders it would fund them largely with savings and operating cash flows. Key instead spent almost $360 million on capital equipment that year, plus another $190 million in cash to acquire the fracking service company Edge Oilfield Services. Key borrowed $300 million that year.

The next few years were similar. Key took out loans, spent tens of millions of dollars on capital equipment and hauled in hundreds of millions of dollars in cash. But it never paid down its debt.

By the end of 2015, long-term debt stood at nearly $1 billion. Key reported more than $1 billion in operational losses.

Last summer, its stock - at $9 two years ago - slipped below $1. It closed Friday at 18 cents. By February, Key had cut 4,000 jobs, about half its workforce. In May, some of Key's lenders believed the company had failed to meet certain loan agreements. In June, Key revealed that lenders had already proposed bankruptcy restructuring plans, which included taking the company private, according to regulatory filings.

The lenders recommended filing for Chapter 11 protection on Aug. 15. Company executives didn't immediately approve the plan but agreed to negotiate.

"What you're seeing in 2016 is the debris left after a hurricane," said Christopher Ross, an oil-and-gas finance professor at the University of Houston. "You can argue they should have seen it coming. Nothing goes on forever in this business."
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