Heavy debt loads could slow energy’s recovery – Houston Chronicle

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.”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.”

Source: Heavy debt loads could slow energy’s recovery – Houston Chronicle

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