By Jonathan Randles

Extraction Oil & Gas Inc., loaded with $1.7 billion in long-term debt, has become the latest oil-and-gas drilling company to file for bankruptcy after handing out retention bonuses to top management and putting creditors in position to take over the business.

The Denver-based company said its liquidity had rapidly deteriorated over the past six months as the energy sector has struggled with both decreased output due to the coronavirus pandemic and a price war between Saudi Arabia and Russia that sent U.S. crude prices plunging. Extraction has about $35 million on hand, according to papers filed Monday in the U.S. Bankruptcy Court in Wilmington, Del.

The company has lined up $125 million in chapter 11 financing, including $50 million in new money and roll-up of $75 million in existing loans under a restructuring agreement with bondholders. A roll-up is a transaction commonly used to fund a bankruptcy that vaults existing loans ahead of other debt in line for repayment under a chapter 11 plan.

Both the proposed bankruptcy financing, which is backed by top lender Wells Fargo Bank NA, as well as the proposed debt-for-equity swap must be approved by a bankruptcy judge and could be challenged by more junior creditors.

The bankruptcy filing comes after Extraction on Friday disclosed it would pay $6.7 million under retention agreements with 16 executives and senior managers. The company said it "determined that its historic compensation structure and performance metrics are ineffective in motivating and incentivizing the company's workforce in the current environment." The company said it reduced co-founder and Chief Executive Matthew Owens's variable compensation for 2020 by 20%.

In recent weeks, a number of companies, including Hertz Global Holdings Inc., J.C. Penney Co. and Whiting Petroleum Corp., have paid out retention bonuses to top brass just before filing for chapter 11. By paying bonuses before seeking bankruptcy protection, the companies avoid the need for court approval.

In court papers, Mr. Owens said the company has been in negotiations with investors holding about $1.4 billion, or about 83%, of its long-term debt.

The oil-and-gas sector is facing unprecedented financial pressure and the related market volatility has made it especially difficult for energy companies to complete debt restructurings without turning to bankruptcy, Mr. Owens said.

"Near and long-term liquidity projections were completely upended by the sudden crash of oil prices in March followed by a continuing downward spiral through April and May," he said in a sworn declaration.

The bankruptcy filing follows a recent surge in the value of Extraction's shares. Signs of a bounce in commodity prices and aggressive federal action to stabilize markets have spurred investors to buy stocks including Extraction's, which was trading at 21 cents a share in March but rose as high as $1.48 a share last week.

Investors registered enthusiasm despite warnings from the Denver company that it was struggling, and bankruptcy could be in the offing.

Equity investors rank at the bottom of the payment priority order in chapter 11, and shareholders are usually wiped out in corporate bankruptcies. Extraction stock traded at 53 cents a share Monday afternoon. More than $1 billion of Extraction's bonds are trading at less than 12 cents on the dollar, according to FactSet, indicating creditors don't think the debt can be repaid with money left over for equity.

Extraction has filed a number of customary first day motions to continue paying taxes, employee wages and other ordinary business expenses as it begins operating under court supervision in chapter 11. The company has about 180 employees, court papers said.

Founded in November 2012, Extraction has grown to become one of the largest oil-and-gas producers in Colorado, the company said in court papers. It launched an initial public offering in 2016.

Judge Christopher Sontchi has been assigned to the bankruptcy case, number 20-11548.

Kirkland & Ellis LLP is serving as Extraction's legal counsel. The company is also being advised by Moelis & Co., Petrie Partners LLC and Alvarez & Marsal.

--Peg Brickley and Becky Yerak contributed to this article.

Write to Jonathan Randles at Jonathan.Randles@wsj.com