Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K


T ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

or

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to _________

Commission File Number 001-37419
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12741674&doc=25
PDC ENERGY, INC.
(Exact name of registrant as specified in its charter)

Delaware
95-2636730
(State of incorporation)
(I.R.S. Employer Identification No.)
1775 Sherman Street, Suite 3000
Denver, Colorado 80203
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: (303) 860-5800

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes T No £

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes £ No T

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes T No £

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes T No £

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. T

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer  £
Smaller reporting company  o
                  
                   Emerging growth company  o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes £ No T

The aggregate market value of our common stock held by non-affiliates on June 30, 2018 was $4.0 billion (based on the closing price of $60.45 per share as of the last business day of the fiscal quarter ending June 30, 2018).

As of February 15, 2019, there were 66,148,128 shares of our common stock outstanding.


DOCUMENTS INCORPORATED BY REFERENCE

We hereby incorporate by reference into this document the information required by Part III of this Form, which will appear in our definitive proxy statement filed pursuant to Regulation 14A for our 2019 Annual Meeting of Stockholders.










PDC ENERGY, INC.
2018 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

 
PART I
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART III
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART IV
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART I

REFERENCES TO THE REGISTRANT

Unless the context otherwise requires, references in this report to "PDC," the "Company," "we," "us," "our" or "ours" refer to the registrant, PDC Energy, Inc., our wholly-owned subsidiaries consolidated for the purposes of its financial statements, including our proportionate share of the financial position, results of operations, cash flows and operating activities of our affiliated partnerships. PDC Energy, Inc. is a Delaware corporation, having reincorporated from Nevada in 2015.

GLOSSARY OF UNITS OF MEASUREMENTS AND INDUSTRY TERMS
 
Units of measurements and industry terms are defined in the Glossary of Units of Measurements and Industry Terms, included at the end of this report.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 ("Securities Act") and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act") regarding our business, financial condition, results of operations and prospects. All statements other than statements of historical fact included in and incorporated by reference into this report are "forward-looking statements." Words such as expect, anticipate, intend, plan, believe, seek, estimate, schedule and similar expressions or variations of such words are intended to identify forward-looking statements herein. Forward-looking statements include, among other things, statements regarding future: production, costs and cash flows; drilling locations, zones and growth opportunities; commodity prices and differentials; capital expenditures and projects, including the number of rigs employed, and that cash flows from operations will exceed expected capital investments in crude oil and natural gas properties for 2019 and 2020; management of lease expiration issues; financial ratios and compliance with covenants in our revolving credit facility and other debt instruments; impacts of certain accounting and tax changes; anticipated sale of our Delaware Basin midstream assets and the timing of those sales; midstream capacity and related curtailments; fractionation capacity; impacts of Colorado political matters; ability to meet our volume commitments to midstream providers; ongoing compliance with our consent decree; reclassification of the Denver Metro/North Front Range NAA ozone classification to serious; and timing and adequacy of infrastructure projects of our midstream providers.

The above statements are not the exclusive means of identifying forward-looking statements herein. Although forward-looking statements contained in this report reflect our good faith judgment, such statements can only be based on facts and factors currently known to us. Forward-looking statements are always subject to risks and uncertainties, and become subject to greater levels of risk and uncertainty as they address matters further into the future. Throughout this report or accompanying materials, we may use the term “projection” or similar terms or expressions, or indicate that we have “modeled” certain future scenarios. We typically use these terms to indicate our current thoughts on possible outcomes relating to our business or the industry in periods beyond the current fiscal year. Because such statements relate to events or conditions further in the future, they are subject to increased levels of uncertainty.

Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to:

changes in global production volumes and demand, including economic conditions that might impact demand and prices for products we produce;
volatility of commodity prices for crude oil, natural gas and natural gas liquids ("NGLs") and the risk of extended periods of depressed prices;
volatility and widening of differentials;
reductions in the borrowing base under our revolving credit facility;
impact of governmental policies and/or regulations, including changes in environmental and other laws, the interpretation and enforcement related to those laws and regulations, liabilities arising thereunder and the costs to comply with those laws and regulations;
declines in the value of our crude oil, natural gas and NGLs properties resulting in impairments;
changes in estimates of proved reserves;
inaccuracy of estimated reserves and production rates;
potential for production decline rates from our wells being greater than expected;
timing and extent of our success in discovering, acquiring, developing and producing reserves;

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availability of sufficient pipeline, gathering and other transportation facilities and related infrastructure to process and transport our production and the impact of these facilities and regional capacity on the prices we receive for our production;
timing and receipt of necessary regulatory permits;
risks incidental to the drilling and operation of crude oil and natural gas wells;
difficulties in integrating our operations as a result of any significant acquisitions and acreage exchanges;
availability of supplies, materials, contractors and services that may delay the drilling or completion of our wells;
potential losses of acreage due to lease expirations or otherwise;
increases or changes in costs and expenses;
future cash flows, liquidity and financial condition;
possibility that one or more sales of our Delaware Basin midstream assets will not close as expected;
competition within the oil and gas industry;
availability and cost of capital;
our success in marketing crude oil, natural gas and NGLs;
effect of crude oil, natural gas and NGLs derivatives activities;
impact of environmental events, governmental and other third-party responses to such events and our ability to insure adequately against such events;
cost of pending or future litigation;
effect that acquisitions we may pursue have on our capital requirements;
our ability to retain or attract senior management and key technical employees; and
success of strategic plans, expectations and objectives for our future operations.
 
Further, we urge you to carefully review and consider the cautionary statements and disclosures, specifically those under Item 1A, Risk Factors, made in this report and our other filings with the U.S. Securities and Exchange Commission ("SEC") for further information on risks and uncertainties that could affect our business, financial condition, results of operations and cash flows. We caution you not to place undue reliance on forward-looking statements, which speak only as of the date of this report. We undertake no obligation to update any forward-looking statements in order to reflect any event or circumstance occurring after the date of this report or currently unknown facts or conditions or the occurrence of unanticipated events. All forward-looking statements are qualified in their entirety by this cautionary statement.


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ITEMS 1. AND 2. BUSINESS AND PROPERTIES

The Company

We are a domestic independent exploration and production company that acquires, explores and develops properties for the production of crude oil, natural gas and NGLs, with operations in the Wattenberg Field in Colorado and the Delaware Basin in Texas. Our operations in the Wattenberg Field are focused in the horizontal Niobrara and Codell plays and our Delaware Basin operations are primarily focused in the Wolfcamp zones. We previously operated properties in the Utica Shale in Southeastern Ohio; however, we divested these properties (the "Utica Shale Divestiture") during the first quarter of 2018.

The following map presents the general locations of our development and production activities as of December 31, 2018:

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The following table presents selected information regarding our results of operations for the periods presented:
 
 
Year Ended/As of
 
 
December 31,
 
Percent Change
 
 
2018
 
2017
 
2018-2017
 
 
(production and reserves in MMBoe, dollars in millions)
 
 
Wells:
 
 
 
 
 
 
Gross productive wells
 
2,876

 
2,785

 
3.3
 %
Net productive wells
 
2,284

 
2,285

 
 %
Horizontal percentage
 
39.0
%
 
32.0
%
 
21.9
 %
Operated percentage
 
84.3
%
 
87.0
%
 
(3.1
)%
Gross operated wells turned-in-line
 
165

 
146

 
13.0
 %
Net operated wells turned-in-line
 
151

 
128

 
18.0
 %
 
 
 
 
 
 
 
Production:
 
 
 
 
 
 
Wattenberg Field
 
30.7

 
26.8

 
14.3
 %
Delaware Basin
 
9.4

 
4.2

 
123.7
 %
Utica Shale (1)
 
0.1

 
0.8

 
(82.1
)%
Total
 
40.2

 
31.8

 
26.2
 %
 
 
 
 
 
 
 
Reserves:
 
 
 
 
 
 
Proved reserves
 
544.9

 
452.9

 
20.3
 %
Proved developed reserves percentage
 
32.9
%
 
31.6
%
 
4.1
 %
 
 
 
 
 
 
 
Liquidity
 
$
1,268.9

 
$
880.7

 
44.1
 %
Leverage ratio
 
1.4

 
1.9

 
(26.3
)%
(1) In March 2018, we completed the disposition of our Utica Shale properties.

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Our Strengths

Significant project inventory in premier crude oil, natural gas and NGL plays.  We have a considerable operational presence in two premier U.S. onshore basins, the Wattenberg Field in Weld County, Colorado, and the Delaware Basin in Reeves and Culberson Counties, Texas. We have identified an inventory of horizontal drilling locations in each basin which we believe will allow us to continue to grow our proved reserves and production at attractive rates of return. Such expected returns can vary well by well and are based upon many factors, including, but not limited to commodity prices, drilling rig pace and well development and operating costs. Our 2019 drilling and completion operations are expected to continue to focus on the areas in which we expect to deliver our strongest economic results, which include the Kersey area of the Wattenberg Field and in the oilier eastern and north central areas of the Delaware Basin.
 
Strong financial position. We expect to maintain a disciplined financial strategy, consisting of strong liquidity, low leverage ratios and an active commodity derivative program to help mitigate a portion of the risk associated with commodity price fluctuations. As of December 31, 2018, we had a total liquidity position of $1.3 billion, comprised of $1.4 million of cash and cash equivalents and $1.3 billion available for borrowing under our revolving credit facility, a leverage ratio, as defined in our revolving line of credit facility agreement, of 1.4, and commodity derivative positions covering 11.0 MMBbls and 8.6 MMBbls of crude oil production for 2019 and 2020, respectively. As of the same date, we had hedged approximately 26.4 Bcf of natural gas for 2019.

Balanced and diversified portfolio across two premier U.S. onshore basins. Having drilling opportunities in both the Wattenberg Field and the Delaware Basin allows us to allocate capital between the two areas to diversify our risk. We believe this will improve our overall financial results and drive our future production and reserve growth. Additionally, we believe the geographical diversity of our portfolio aids in the mitigation of risks associated with a single dominant producing area, as each basin has its own operating and competitive dynamic in terms of commodity price markets, service costs, takeaway capacity and regulatory and political considerations.

Significant operational control in our core areas. We have, and expect to continue to have, a substantial degree of operational control over our properties. As a result of successfully executing our strategy of acquiring and consolidating largely concentrated acreage positions with high working interests, we operate and manage approximately 84 percent of all wells in which we have an interest across all of our operating basins. Our control allows us to manage our drilling, production, operating and administrative costs and to leverage our technical expertise in our core operating areas. Our leaseholds that are held by production further enhance our operational control by providing us flexibility in selecting drilling locations based upon various operational criteria.
 
Efficiency through technology and consolidation. Technological innovation has led to continued improvement in our Wattenberg Field and Delaware Basin drilling times. These improvements in drilling efficiency have resulted from a combination of highly technical drilling services and equipment and continuity within our operations team. After several years of drilling horizontal wells, our drilling operations in the Wattenberg Field have shown strong results. We are in the process of applying our extensive experience in drilling highly-successful wells in the Wattenberg Field to our growing Delaware Basin operations.

The technology associated with our completions process is also improving as wellbore placement and stage spacing continue to advance. In addition, completion equipment, perforation clusters, fluid and sand type and concentration decisions continue to result in increased estimated ultimate recoveries of crude oil and natural gas reserves. As with our drilling operations, we are currently working toward using the expertise we have developed in the Wattenberg Field to increase the efficiency of our Delaware Basin completions activities.

Also key to our efficiency, we occasionally enter into acquisitions and exchanges that provide acreage consolidation, particularly in the Wattenberg Field, where we continue to drill longer length lateral wells. Longer length lateral wells are more cost effective and reduce the impact on the surface through fewer wells and reduced truck traffic, both of which also provide enhanced efficiencies and are beneficial to the communities in which we operate. 

Strong environmental, health and safety compliance programs and community outreach. We have focused on establishing effective environmental, health and safety programs that are intended to promote safe working practices for our employees and contractors and to help earn the trust and respect of land owners, regulatory agencies and public officials. This is an important part of our strategy in effectively operating in today’s intensive regulatory and public debate climate. We are also dedicated to being an active and contributing member of the communities in which we

4



operate. We share our success with these communities in various ways, including charitable giving and community event sponsorships.

Strong management team and operational capabilities. We have strong and stable management, led by our executive management team. Each member of the team has between 10 and 30 years of experience in the energy and natural resource industry. This experience collectively spans land, reservoir analysis, operations, accounting, strategy and general operations, and has helped us continue our growth through periods of commodity price pressure and cost inflation and other challenging environments.

Long-Term Business Strategy

Our long-term business strategy focuses on being a responsible and respected provider of energy while generating stockholder value through the exploration and development of crude oil and natural gas properties. We leverage technology and innovation to increase operational efficiencies while prioritizing health, safety and the environment and are focused on the growth of our cash flows, production and reserves, primarily through organic exploration and development of our existing leasehold. We focus on horizontal development drilling programs in resource plays that offer repeatable results and the potential for attractive returns on investment in a range of commodity price environments. Our creation and maintenance of a high-value inventory of drilling locations supports our planned organic growth over the next several years.

In addition to development drilling, we routinely review acquisition and acreage swap opportunities in our core areas of operations and pursue those that meet our strategic plan and that we believe will increase stockholder value. We believe we can extract additional value from such transactions through the addition of more extended reach lateral wells, related production optimization opportunities and increases in our working interests in our development drilling locations afforded by more concentrated acreage positions. Once we have established a significant presence in an area, the use of bolt-on acquisitions and acreage exchanges provides synergies that result in additional economies of scale.

We also maintain a limited and disciplined exploration program with the goal of replenishing our portfolio with new potential drilling locations capable of positioning us for significant production and reserve growth in future years. When doing so, we attempt to accumulate significant leasehold positions before competitive forces drive up the cost of entry and to invest in leasehold positions that are near existing or emerging midstream infrastructure. Our recent exploration activity has been in the Delaware Basin as there are multiple zones that have not seen development sufficient to record proved reserves, such as the Bone Spring and Wolfcamp C zones.

We pursue various midstream, marketing and cost reduction initiatives designed to increase our operating margins, while maintaining a disciplined financial strategy focused on providing a strong financial foundation for the execution of our business strategy.

Operating Areas

Wattenberg Field. In the Wattenberg Field, we have identified a gross operated inventory of approximately 920 horizontal drilling locations with an average lateral length of approximately 8,300 feet. In addition to these drilling locations, we entered 2019 with approximately 135 gross operated drilled uncompleted wells ("DUCs"). Our inventory of Wattenberg Field locations declined in 2018 as a result of our 2018 drilling program and two significant acreage exchanges. Although these acreage exchanges reduced our inventory of gross drilling locations, they increased both our working interest ownership in, and the average lateral length of, the remaining locations. Our average working interest in our Wattenberg Field properties that we operate is approximately 79 percent. Our Wattenberg Field horizontal drilling locations have been substantially de-risked through multiple years of successful development from the field. Substantially all of our Wattenberg Field acreage is held by production. Wells in the Wattenberg Field typically have productive horizons at depths of approximately 6,500 to 7,500 feet below the surface.

Delaware Basin. In the Delaware Basin, we have identified a gross operated inventory of approximately 365 horizontal drilling locations, primarily targeting the Wolfcamp A and Wolfcamp B zones within our oilier eastern and north central areas. The average lateral length of these locations is approximately 7,900 feet. Some of these locations are within untested target zones that may be subject to a higher degree of uncertainty or may depend upon additional delineation and testing. In addition to these drilling locations, we entered 2019 with approximately 20 gross operated DUCs. Wells in the Delaware Basin typically have productive horizons at depths of approximately 8,000 to 11,500 feet below the surface.

Our average working interest in our Delaware Basin properties that we operate is approximately 83 percent. Our leasehold in the Delaware Basin requires a more active drilling program than the Wattenberg Field in terms of managing lease

5



expirations. In some cases, continuous operations will be required to maintain the underlying leasehold in the Delaware Basin. However, with our high percentage of operated leasehold in the area, we expect to have adequate control over the location and pace of our development to manage lease expirations and meet our drilling obligations in the central and eastern parts of our acreage position.

We are in the process of actively marketing our Delaware Basin crude oil gathering, natural gas gathering and produced water gathering and disposal assets for sale and currently expect to execute agreements for the sales of these assets in the first half of 2019.
    
2019 Strategic Focus
 
Our planned 2019 capital investments in crude oil and natural gas properties, which we expect to be between $810 million and $870 million, are focused on continued execution of our development plans in the Wattenberg Field and Delaware Basin. In allocating our planned expenditures, we consider, among other things, expected rates of return, the political environment and our remaining inventory in order to best meet our short- and long-term corporate goals.

As a result of this disciplined approach, we expect that cash flows from operations in 2019 will exceed our capital investments in crude oil and natural gas properties, which exclude investments in corporate capital, by approximately $65.0 million. This expectation is based on our current production forecast for 2019 and our average 2019 price assumptions of $55.00 for New York Mercantile Exchange ("NYMEX") crude oil and $3.00 for NYMEX natural gas. Assuming a NYMEX crude oil price of $50.00, we expect cash flows from operations to exceed our capital investments in crude oil and natural gas properties by approximately $25.0 million. We anticipate that capital investments will exceed cash flows from operations during the first half of 2019 and expect cash flows from operations to exceed capital investment during the remainder of the year. Our leverage ratio, as defined in our revolving credit facility agreement, is expected to decrease from 1.4 as of the end of 2018 to approximately 1.3 by the end of 2019 based on our anticipated production and $50.00 to $55.00 NYMEX crude oil prices.

Assuming a NYMEX crude oil price of $45.00, we expect cash flows from operations to approximate our capital investments in crude oil and natural gas properties. A significant decline in NYMEX crude oil prices below approximately $45.00 per barrel would negatively impact our results of operations, financial condition and future development plans. We may revise our 2019 capital investment program during the year as a result of, among other things, changes in commodity prices or our internal long-term outlook for commodity prices, the cost of services for drilling and well completion activities, requirements to hold acreage, drilling results, changes in our borrowing capacity, a significant change in cash flows, regulatory issues, requirements to maintain continuous activity on leaseholds or acquisition and/or divestiture opportunities.

In 2019, we also expect to spend approximately $20 million for corporate capital, the majority of which is related to the implementation of an enterprise resource planning (“ERP”) system to replace our existing operating and financial systems. This long-planned investment is being made to enhance maintenance of our financial records, improve operational functionality and provide timely information to our management team related to the operation of the business.

Recent Strategic Developments

We closed an acquisition of properties from Bayswater Exploration and Production LLC (the "Bayswater Asset Acquisition") in January 2018, acquiring approximately 7,400 net acres, 24 operated horizontal wells that were either DUCs or in-process wells at the time of closing and approximately 220 gross drilling locations.

During 2018, we completed two acreage exchanges that consolidated our position in the core area of the Wattenberg Field, resulting in us acquiring approximately 14,800 net acres in exchange for 15,500 net acres.
    
Business Segments

We are engaged in two operating segments: our oil and gas exploration and production segment and our gas marketing segment. All of our material operations are attributable to our exploration and production business; therefore, our operations are presented as a single segment for all periods presented. Our most significant customer is DCP Midstream, LP ("DCP"). Sales to this party constituted more than 10 percent of our 2018 revenues. Given the liquidity in the market for the sale of hydrocarbons, however, we believe that the loss of any purchaser or the aggregate loss of several customers could be managed by selling to alternative purchasers.



6



Properties

Productive Wells

The following table presents our productive wells:
    
 
 
Productive Wells
 
 
As of December 31, 2018
 
 
Crude Oil
 
Natural Gas
 
Total
Operating Region/Area
 
 Gross
 
 Net
 
Gross
 
 Net 
 
 Gross
 
 Net
Wattenberg Field
 
1,044

 
706.0

 
1,746

 
1,506.7

 
2,790

 
2,212.7

Delaware Basin
 
43

 
29.8

 
43

 
41.2

 
86

 
71.0

Total productive wells
 
1,087

 
735.8

 
1,789

 
1,547.9

 
2,876

 
2,283.7

    
Proved Reserves

The following table presents our proved reserve estimates as of December 31, 2018, based on reserve reports prepared by our independent petroleum engineering consulting firms, Ryder Scott Company, L.P. ("Ryder Scott") and Netherland, Sewell & Associates, Inc. ("NSAI") and related information:
 
Proved Reserves at December 31, 2018
 
 
 
 
 
 
 
Proved Reserves (MMBoe)
 
% of Total Proved Reserves
 
% Proved Developed
 
% Liquids
 
Proved Reserves to Production Ratio (in years)(1)
 
2018 Production (MBoe)
 
 
 
 
 
 
 
 
 
 
 
 
Wattenberg Field
425.4

 
78
%
 
33
%
 
57
%
 
13.9

 
30,652

Delaware Basin
119.5

 
22
%
 
34
%
 
68
%
 
12.8

 
9,359

Utica Shale (2)

 
%
 
%
 
%
 

 
149

Total
544.9

 
100
%
 
33
%
 
59
%
 
13.6

 
40,160

_________
(1) Based on 2018 production.
(2) In March 2018, we completed the disposition of our Utica Shale properties.
          
Our proved reserves are sensitive to future crude oil, natural gas and NGLs sales prices and the related effect on the economic productive life of producing properties. Increases in commodity prices may result in a longer economic productive life of a property or result in recognition of more economically viable proved undeveloped ("PUD") reserves, while decreases in commodity prices may result in negative impacts of this nature. All of our proved reserves are located in the U.S.

Controls Over Reserve Report Preparation. Our proved reserve estimates are prepared using the definitions for proved reserves set forth in SEC Regulation S-X, Rule 4-10(a) and other applicable SEC rules. Inputs and major assumptions related to our proved reserves are reviewed annually by an internal team composed of reservoir engineers, geologists, land and management for adherence to SEC guidelines through a detailed review of land and accounting records, available geological and reservoir data and production performance data. The internal team compiles the reviewed data and forwards the applicable data to Ryder Scott or NSAI. Our proved reserves in the Wattenberg Field as of December 31, 2018 were estimated by Ryder Scott and our proved reserves in the Delaware Basin as of that date were estimated by NSAI.

When preparing our reserve estimates, neither Ryder Scott nor NSAI independently verifies the accuracy and completeness of information and data furnished by us with respect to ownership interests, production volumes, well test data, historical costs of operations and development, product prices or any agreements relating to current and future operations of properties or sales of production. Ryder Scott and NSAI prepare estimates of our reserves in conjunction with an ongoing review by our engineers. A final comparison of data is performed to ensure that the reserve estimates are complete, determined pursuant to acceptable industry methods, and with a level of detail we deem appropriate. The final estimated reserve reports are prepared by Ryder Scott and NSAI and reviewed by our engineering staff and management prior to issuance by those firms.

Letters which identify the professional qualifications of the individuals at Ryder Scott and NSAI who are responsible for overseeing the preparation of our reserve estimates as of December 31, 2018 have been filed as Exhibits 99.1 and 99.2 to this report.

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Internally, the professional qualifications of our lead engineer primarily responsible for overseeing the preparation of our reserve estimates, as defined in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information as promulgated by the Society of Petroleum Engineers, qualifies this individual as a Reserve Estimator. This person holds a Masters of Petroleum Engineering from the Colorado School of Mines and a Bachelors of Geology from the University of Colorado and has over 18 years of oil and gas experience.

In determining our proved reserves estimates, we used a combination of performance methods, including decline curve analysis and other computational methods, offset analogies and seismic data and interpretation. All of our proved undeveloped reserves conform to the SEC five-year rule requirement as all proved undeveloped locations are scheduled, according to an adopted development plan, to be drilled within five years of the location’s initial booking date.

Commodity Pricing. Per SEC rules, the pricing used to prepare the proved reserves is based on the unweighted arithmetic average of the first of the month prices for the preceding 12 months. The NYMEX prices used in preparing the reserves are then adjusted based on energy content, location and basis differentials and other marketing deductions to arrive at the net realized price.

The indicated index prices for our reserves, by commodity, are presented below.
 
 
Average Benchmark Prices (1)
As of December 31,
 
Crude Oil
(per Bbl) (2)
 
Natural Gas
(per Mcf) (2)
 
NGLs
(per Bbl) (3)
 
 
 
 
 
 
 
2018
 
$
65.56

 
$
3.10

 
$
65.56

2017
 
51.34

 
2.98

 
51.34

2016
 
42.75

 
2.48

 
42.75


The netted back price used to estimate our reserves, by commodity, are presented below.
 
 
Price Used to Estimate Reserves (4)
As of December 31,
 
Crude Oil
(per Bbl)
 
Natural Gas
(per Mcf)
 
NGLs
(per Bbl)
 
 
 
 
 
 
 
2018
 
$
61.14

 
$
2.15

 
$
23.04

2017
 
48.68

 
2.31

 
20.21

2016
 
38.67

 
1.85

 
11.97

___________
(1)
Per SEC rules, the pricing used to prepare the proved reserves is based on the unweighted arithmetic average of the first of the month prices for the preceding 12 months.
(2) Our benchmark prices for crude oil and natural gas are West Texas Intermediate ("WTI") and Henry Hub, respectively.
(3)
For NGLs, we use the NYMEX crude oil price as a reference for presentation purposes.
(4)
These prices are based on the index prices and are net of basin differentials, transportation fees, contractual adjustments and Btu adjustments we experienced for the respective commodity.

Commodities and Standardized Measure. Reserve estimates involve judgments and reserves cannot be measured exactly. The estimates must be reviewed periodically and adjusted to reflect additional information gained from reservoir performance, new geologic and geophysical data and economic changes. Neither the estimated future net cash flows nor the standardized measure of discounted future net cash flows ("standardized measure") is intended to represent the current market value of our proved reserves. For additional information regarding both of these measures, as well as other information regarding our proved reserves, see the Supplemental Information Unaudited - Crude Oil and Natural Gas Information provided with our consolidated financial statements included elsewhere in this report.


8



The following tables provide information regarding our estimated proved reserves:
 
As of December 31,
 
2018
 
2017
 
2016
Proved reserves
 
 
 
 
 
Crude oil and condensate (MMBbls)
190

 
155

 
118

Natural gas (Bcf)
1,336

 
1,154

 
834

NGLs (MMBbls)
132

 
106

 
84

Total proved reserves (MMBoe)
545

 
453

 
341

Proved developed reserves (MMBoe)
180

 
143

 
98

Estimated undiscounted future net cash flows (in millions) (1)
$
7,735

 
$
5,453

 
$
2,681

 
 
 
 
 
 
Standardized measure (in millions)
$
4,448

 
$
2,880

 
$
1,421

 
 
 
 
 
 
PV-10 (in millions) (2)
$
5,321

 
$
3,212

 
$
1,675

___________
(1)
Amount represents aggregate undiscounted future net cash flows, before income taxes, estimated by Ryder Scott and NSAI, of approximately $9.1 billion, $6.2 billion and $3.3 billion as of December 31, 2018, 2017 and 2016, respectively, less an internally-estimated undiscounted future income tax expense of approximately $1.4 billion, $0.7 billion and $0.6 billion, respectively.
(2)
PV-10 is a non-U.S. GAAP financial measure. It is not intended to represent the current market value of our estimated reserves. PV-10 should not be considered in isolation or as a substitute for the standardized measure reported in accordance with U.S. GAAP, but rather should be considered in addition to the standardized measure. See Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Reconciliation of Non-U.S. GAAP Financial Measures, for a definition of PV-10 and a reconciliation of our PV-10 value to the standardized measure.

The additions to our proved reserves at December 31, 2018 as compared to December 31, 2017 were primarily a result of extending the average lateral length of newly-drilled and expected future wells, combined with an increase in our working interest ownership in wells in areas with established reserves largely resulting from recently-completed acreage exchanges and the addition of proved undeveloped locations in the Delaware Basin.
 
The following table presents our estimated proved developed and undeveloped reserves by category and area:
 
 
As of December 31, 2018
Operating Region/Area
 
Crude Oil and Condensate (MMBbls)
 
Natural Gas
(Bcf)
 
NGLs
(MMBbls)
 
Crude Oil
Equivalent
(MMBoe)
 
Percent
Proved developed
 
 
 
 
 
 
 
 
 
 
Wattenberg Field
 
46.3

 
357.4

 
33.2

 
139.0

 
26
%
Delaware Basin
 
15.6

 
85.7

 
10.7

 
40.5

 
7
%
Total proved developed
 
61.9

 
443.1

 
43.9

 
179.5

 
33
%
Proved undeveloped
 
 
 
 
 
 
 
 
 
 
Wattenberg Field
 
90.5

 
749.2

 
71.0

 
286.4

 
52
%
Delaware Basin
 
38.0

 
143.4

 
17.1

 
79.0

 
15
%
Total proved undeveloped
 
128.5

 
892.6

 
88.1

 
365.4

 
67
%
Total proved reserves
 
 
 
 
 
 
 
 
 
 
Wattenberg Field
 
136.8

 
1,106.6

 
104.2

 
425.4

 
78
%
Delaware Basin
 
53.6

 
229.1

 
27.8

 
119.5

 
22
%
Total proved reserves
 
190.4

 
1,335.7

 
132.0

 
544.9

 
100
%
    

9



Proved Reserves Sensitivity Analysis. We have performed an analysis of our proved reserve estimates as of December 31, 2018 to present sensitivity associated with a lower crude oil price as the value of crude oil influences the value of our proved reserves and PV-10 most significantly. Replacing the 2018 NYMEX price for crude oil used in estimating our reported proved reserves with $50.00 as shown on the table below, and leaving all other parameters unchanged, results in changes to our estimated proved reserves as shown.
 
Pricing Scenario - NYMEX
 
Crude Oil (per Bbl)
 
Natural Gas (per MMBtu)
 
Proved Reserves (MMBoe)
 
% Change from December 31, 2018 Estimated Reserves
PV-10 (in Millions)
PV-10 % Change from December 31, 2018 Estimated Reserves
2018 SEC Reserve Report (1)
$
65.56

 
$
3.10

 
544.9

 

$
5,321.3


Alternate Price Scenario
$
50.00

 
$
3.10

 
529.3

 
(3
)%
$
3,659.0

(31
)%
__________
(1)
These prices are the SEC NYMEX prices applied to the calculation of the PV-10 value. Such prices have been applied consistently in the alternate pricing scenario to include the impact of adjusting for deductions for any basin differentials, transportation fees, contractual adjustments and Btu adjustments we experienced for the relevant commodity.

Developed and Undeveloped Acreage

The following table presents our developed and undeveloped lease acreage:
 
 
As of December 31, 2018
 
 
Developed
 
Undeveloped
 
Total
Operating Region/Area
 
Gross
 
Net
 
Gross
 
Net
 
Gross
 
Net
Wattenberg Field (1)
 
115,600

 
109,300

 
16,000

 
14,700

 
131,600

 
124,000

Delaware Basin (2)
 
36,100

 
32,300

 
22,300

 
19,100

 
58,400

 
51,400

 Total acreage
 
151,700

 
141,600

 
38,300

 
33,800

 
190,000

 
175,400

 
 
 
 
 
 
 
 
 
 
 
 
 
_______________
(1)
Of the amounts shown, 91,500 gross (86,100 net) developed lease acres and 11,100 gross (10,200 net) undeveloped lease acres are associated with our approximately 920 operated horizontal Wattenberg Field drilling locations targeting the Niobrara or Codell plays. The remaining acres are associated with other zones within the field that we do not currently estimate to be economic to develop; therefore, we have not currently identified any potential drilling locations on these acres.
(2)
See below regarding Culberson County acreage expirations.

Substantially all of our undeveloped acreage in the Wattenberg Field is related to leaseholds that are held by production. Our Wattenberg Field leaseholds at risk to expire in 2019 and 2020 are not material.

In the Delaware Basin, there are drilling obligations or continuous drilling clauses associated with the majority of our acreage. We believe that our current Delaware Basin drilling plan should provide sufficient development to meet these obligations in our core areas over the next few years. In the event that we do not meet the obligations for certain leases, we plan to make any necessary bonus extension payments or changes to drilling schedules, or seek to renew or re-lease in order to retain the leases. However, the payments necessary to extend or retain certain leases may be significant and we may not be successful in such efforts or we may elect not to pursue them.

During 2017 and 2018, we recorded impairment charges totaling $285.9 million and $458.4 million, respectively, as we identified current and anticipated leasehold expirations within the Western Culberson County area of the Delaware Basin and made the determination that we would no longer pursue plans to develop these properties. The impaired non-focus leaseholds typically have a higher gas to oil ratio and a greater degree of geologic complexity than our other Delaware Basin properties. In 2019, we expect that we will allow approximately 18,300 gross (17,900 net) acres of our leaseholds in the Delaware Basin to expire. Of these leaseholds, we expect that approximately 9,500 gross and net acres and 8,600 gross (8,000 net) acres will expire in the first and third quarters, respectively, of 2019. Taking all expected 2019 expirations into account, we anticipate ending 2019 with approximately 40,100 gross (33,500 net) acres in the Delaware Basin. In 2020, we expect that we will allow approximately 3,400 gross (1,800 net) acres of our leaseholds in the Delaware Basin to expire. We are currently exploring strategic alternatives with respect to the acres expected to expire in 2019 and 2020 and believe that we may be able to monetize a portion of this acreage. See Item 1A. Risk Factors - Our undeveloped acreage must be drilled before lease expiration to hold the acreage by production. In highly competitive markets for acreage, failure to drill sufficient wells to hold

10



acreage could result in a substantial lease renewal cost or, if renewal is not feasible, loss of our lease and prospective drilling opportunities.

Drilling Activity. The following tables set forth a summary of our developmental and exploratory well drilling activity for the periods presented. Productive wells consist of wells that were turned-in-line and commenced production during the period, regardless of when drilling was initiated. In-process wells represent wells that are in the process of being drilled or have been drilled and are waiting to be fractured and/or for gas pipeline connection as of the date shown. We utilize pad drilling operations where multiple wells are developed from the same well pad in both the Wattenberg Field and Delaware Basin. Because we operate multiple drilling rigs in each operating area, we expect to have in-process wells at any given time. Wells may be in-process for up to a year.
 
 
Gross Development Well Drilling Activity
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Operating Region/Area
 
Productive
 
In-Process
 
Non-Productive
 
Productive
 
In-Process
 
Non-Productive (1)
 
Productive
 
In-Process
 
Non-Productive (1)
Wattenberg Field, operated wells
 
139

 
133

 

 
130

 
87

 

 
140

 
64

 
2

Wattenberg Field, non-operated wells
 
20

 
5

 

 
12

 
14

 
1

 
24

 
12

 

Delaware Basin, operated wells
 
26

 
22

 
1

 
9

 
10

 

 
1

 
5

 

Delaware Basin, non-operated wells
 
11

 

 

 
2

 
8

 

 

 

 

Utica Shale (2)
 

 

 

 

 

 

 
5

 

 

Total gross development wells
 
196

 
160


1

 
153

 
119

 
1

 
170

 
81

 
2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
__________
(1) Represents mechanical failures that resulted in the plugging and abandonment of the respective well(s).
(2) In March 2018, we completed the disposition of our Utica Shale properties.
 
 
Net Development Well Drilling Activity
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Operating Region/Area
 
Productive
 
In-Process
 
Non-Productive
 
Productive
 
In-Process
 
Non-Productive (1)
 
Productive
 
In-Process
 
Non-Productive (1)
Wattenberg Field, operated wells
 
126.8

 
122.4

 

 
112.8

 
80.1

 

 
109.7

 
52.7

 
1.7

Wattenberg Field, non-operated wells
 
2.5

 
0.9

 

 
1.6

 
2.6

 
0.1

 
5.0

 
2.8

 

Delaware Basin, operated wells
 
24.5

 
16.3

 
1.0

 
10.1

 
9.4

 

 
1.0

 
4.8

 

Delaware Basin, non-operated wells
 
1.2

 

 

 
0.4

 
1.0

 

 

 

 

Utica Shale (2)
 

 

 

 

 

 

 
4.5

 

 

Total net development wells
 
155.0

 
139.6

 
1.0

 
124.9

 
93.1

 
0.1

 
120.2

 
60.3

 
1.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
_________
(1) Represents mechanical failures that resulted in the plugging and abandonment of the respective well(s).
(2) In March 2018, we completed the disposition of our Utica Shale properties.

11




 
 
Gross Exploratory Well Drilling Activity
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Operating Region/Area
 
Productive
 
In-Process
 
Non-Productive
 
Productive
 
In-Process
 
Non-Productive
 
Productive
 
In-Process
 
Non-Productive
Wattenberg Field, operated wells
 

 

 

 

 

 

 

 

 

Wattenberg Field, non-operated wells
 

 

 

 

 

 

 

 

 

Delaware Basin
 
3

 
2

 

 
5

 
3

 
2

 

 

 

Total gross development wells
 
3

 
2

 

 
5

 
3

 
2

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Net Exploratory Well Drilling Activity
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Operating Region/Area
 
Productive
 
In-Process
 
Non-Productive
 
Productive
 
In-Process
 
Non-Productive
 
Productive
 
In-Process
 
Non-Productive
Wattenberg Field, operated wells
 

 

 

 

 

 

 

 

 

Wattenberg Field, non-operated wells
 

 

 

 

 

 

 

 

 

Delaware Basin
 
2.8

 
2.0

 

 
3.1

 
2.8

 
2.0

 

 

 

Total gross development wells
 
2.8

 
2.0

 

 
3.1

 
2.8

 
2.0

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

    Title to Properties

We believe that we hold good and defensible leasehold title to substantially all of our crude oil and natural gas properties, in accordance with standards generally accepted in the industry. A preliminary title examination is typically conducted at the time the undeveloped properties are acquired. Prior to the commencement of drilling operations, a title examination is conducted and remedial curative work is performed, as necessary, with respect to discovered defects which we deem to be significant, in order to procure division order title opinions. Title examinations have been performed with respect to substantially all of our producing properties.

The properties we own are subject to royalty, overriding royalty and other outstanding interests. The properties may also be subject to additional burdens, liens or encumbrances customary in the industry, including items such as operating agreements, current taxes, development obligations under crude oil and natural gas leases, farm-out agreements and other restrictions. We do not believe that any of these burdens will materially interfere with our use of the properties.

Substantially all of our crude oil and natural gas properties, excluding our share of properties held by the limited partnerships that we sponsor, have been mortgaged or pledged as security for our revolving credit facility.

Facilities

We lease 109,000 square feet of office space in Denver, Colorado, which serves as our corporate office, through February 2023. We own a 32,000 square foot administrative office building located in Bridgeport, West Virginia.

We also lease field operating facilities in or near Evans, Colorado, and Midland, Texas.

Governmental Regulation

The U.S. crude oil and natural gas industry is extensively regulated at the federal, state and local levels. The following is a summary of certain laws, rules and regulations currently in force that apply to us. The regulatory environment in which we operate changes frequently and we cannot predict the timing or nature of such changes or their effects on us.

Regulation of Crude Oil and Natural Gas Exploration and Production. Our exploration and production activities are subject to a variety of rules and regulations concerning drilling permits, location, spacing and density of wells, water discharge

12



and disposal, prevention of waste, bonding requirements, surface use and restoration and well plugging and abandonment. The primary state-level regulatory authority regarding these matters is the Colorado Oil and Gas Conservation Commission (the “COGCC”) in Colorado and the Texas Railroad Commission in Texas. For example, prior to preparing a surface location and commencing drilling operations on a well, we must procure permits and/or approvals for the various stages of the drilling process from the relevant state and local agencies. Similarly, our operations must comply with rules governing the size of drilling and spacing units or proration units and the unitization or pooling of lands and leases. Some states, such as Colorado, allow the forced pooling or integration of tracts to facilitate exploration while other states, such as Texas, rely primarily or exclusively on voluntary pooling of lands and leases.

In states such as Texas, where pooling is primarily or exclusively voluntary, it may be more difficult to form units and therefore to drill and develop our leases in circumstances where we do not own all of the leases in the proposed unit. State laws may also prohibit the venting or flaring of natural gas, which may impact rates of production of crude oil and natural gas from our wells. Leases covering state or federal lands often include additional laws, regulations and conditions which can limit the location, timing and number of wells we can drill and impose other requirements on our operations, all of which can increase our costs.

Regulation of Transportation of Commodities. We move natural gas through pipelines owned by other entities and sell natural gas to other entities that also utilize common carrier pipeline facilities. Natural gas pipeline interstate transmission and storage activities are subject to regulation by the Federal Energy Regulatory Commission ("FERC") under the Natural Gas Act of 1938 ("NGA") and under the Natural Gas Policy Act of 1978 ("NGPA"). Rates and charges for the transportation of natural gas in interstate commerce, and the extension, enlargement or abandonment of jurisdictional facilities, among other things, are subject to regulation. Natural gas pipeline companies hold certificates of public convenience and necessity issued by FERC authorizing ownership and operation of certain pipelines, facilities and properties.

In addition to regulation of natural gas pipeline interstate transmission and storage activities, under the Energy Policy Act of 2005 (the “EPAct 2005”), it is unlawful for “any entity” to use any deceptive or manipulative device or contrivance in connection with the purchase or sale of gas or the purchase or sale of transportation services subject to regulation by FERC. The EPAct 2005 provides FERC with substantial enforcement authority to prohibit such manipulation of natural gas markets and enforce its rules and orders, including the ability to assess substantial civil penalties.
In December 2007, FERC issued Order 704 (as amended by subsequent orders on rehearing, “Order 704”), which requires that any market participant, including natural gas producers, gatherers and marketers, that engaged in wholesale sales or purchases of natural gas that equaled or exceeded 2.2 MMBtus of physical natural gas in the previous calendar year to report to FERC the aggregate volumes of natural gas produced or sold at wholesale in such calendar year. Order 704 applies only to those transactions that utilize, contribute to or may contribute to the formation of price indices. It is the responsibility of the market participant to determine which individual transactions are to be reported under the guidance of Order 704. Additional information that must be reported includes whether the price in the relevant transaction was reported to any index publisher, and if so, whether such reporting complied with FERC’s policy statement on price reporting. To the extent that we engage in wholesale sales or purchases of natural gas that equal or exceed 2.2 MMBtus of physical natural gas in the a calendar year pursuant to transactions utilizing, contributing or having the potential to contribute to the formation of price indices, we may be subject to the reporting requirements of Order 704.

Gathering is exempt from regulation under the NGA, thus allowing gatherers to charge negotiated rates. Gathering lines are, however, subject to state regulation, which includes various safety, environmental and, in some circumstances, nondiscriminatory take requirements and rate regulation on a complaint basis. We own certain pipeline facilities in the Delaware Basin that we believe are exempt from regulation under the NGA as “gathering facilities,” but which may in some cases be subject to state regulation.

Although FERC has set forth a general test to determine whether facilities are exempt from regulation under the NGA as “gathering” facilities, FERC’s determinations as to the classification of facilities are performed on a case-by-case basis. With respect to facilities owned by third parties and on which we move natural gas, to the extent that FERC subsequently issues an order reclassifying facilities previously thought to be subject to FERC jurisdiction as non-jurisdictional gathering facilities, and depending on the scope of that decision, our costs of moving natural gas to the point of sale may be increased. Further, to the extent that FERC issues an order reclassifying facilities that we own that were previously thought to be non-jurisdictional gathering facilities as subject to FERC jurisdiction, we could be subject to additional regulatory requirements under the NGA and the NGPA.

Transportation and safety of natural gas is also subject to regulation by the U.S. Department of Transportation, through the Pipeline and Hazardous Materials Safety Administration (“PHMSA”), under the Natural Gas Pipeline Safety Act of 1968, as

13



amended, which imposes safety requirements in the design, construction, operation and maintenance of interstate natural gas transmission facilities, the Pipeline Inspection, Protection, Enforcement and Safety Act of 2006 (the “PIPES Act 2006”), and the Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011 (the “PIPES Act 2011”). We own certain pipeline facilities in the Delaware Basin that are subject to such regulation by PHMSA.

In addition to natural gas, we move crude oil, condensate and natural gas liquids (collectively, “liquids”) through pipelines owned by other entities and sell such liquids to other entities that also utilize pipeline facilities that may be subject to regulation by FERC. FERC regulates the rates and terms and conditions of service for the interstate transportation of liquids under the Interstate Commerce Act, as it existed on October 1, 1977 (the “ICA”), and the rules and regulations promulgated thereunder. This includes movements of liquids through any pipelines, including those located solely within one state, that are providing part of the continuous movement of such liquids in interstate commerce for a shipper. The ICA requires that pipelines providing jurisdictional movements maintain a tariff on file with FERC, setting forth established rates and the rules and regulations governing transportation service, which must be “just and reasonable.” The ICA also requires that services be provided in a manner that is not unduly discriminatory or unduly preferential; in some cases, this may result in the proration of capacity among shippers in an equitable manner.

The intrastate transportation of crude oil and NGLs is subject to regulation by state regulatory commissions, which in some cases require the provision of intrastate transportation on a nondiscriminatory basis and the prorationing of capacity on such pipelines under policies set forth in published tariffs. These state-level regulations may also impose certain limitations on the rates that the pipeline owner may charge for transportation.

Transportation and safety of liquids by pipeline is subject to regulation by PHMSA pursuant to the Hazardous Liquids Pipeline Safety Act of 1979, as well as the PIPES Act 2006 and the PIPES Act 2011, which govern the design, installation, testing, construction, operation, replacement and management of liquids pipeline facilities. Liquids that are transported by rail may also be subject to additional regulation by PHMSA.

The availability, terms and cost of transportation affect the amounts we receive for our commodities. Historically, producers were able to flow supplies into interstate pipelines on an interruptible basis; however, recently we have seen the increased need to acquire firm transportation on pipelines in order to avoid curtailments or shut-in gas, which could adversely affect cash flows from the affected area.

Environmental Matters

Our operations are subject to numerous laws and regulations relating to environmental protection. These laws and regulations change frequently, and the effect of these changes is often to impose additional costs or other restrictions on our operations. We cannot predict the occurrence, timing, nature or effect of these changes.

Hazardous Substances and Wastes

We generate wastes that may be subject to the Federal Resource Conservation and Recovery Act (“RCRA”) and comparable state statutes. The U.S. Environmental Protection Agency (“EPA”) and various state agencies have adopted requirements that limit the approved disposal methods for certain hazardous and non-hazardous wastes. Furthermore, certain wastes generated by our operations that are currently exempt from treatment as “hazardous wastes” may in the future be designated as hazardous wastes, and therefore may subject us to more rigorous and costly operating and disposal requirements. In December 2016, the U.S. District Court for the District of Columbia approved a consent decree between the EPA and a coalition of environmental groups. The consent decree requires the EPA to review and determine whether it will revise the RCRA regulations for exploration and production waste to treat such waste as hazardous waste. The EPA must complete its review and make its decision regarding revision by March 2019. If the EPA chooses to revise the applicable RCRA regulations, it must sign a notice taking final action related to the new regulation by July 2021.

We currently own or lease numerous properties that have been used for the exploration and production of crude oil and natural gas for many years. If hydrocarbons or other wastes have been disposed of or released on or under the properties that we own or lease or on or under locations where such wastes have been taken for disposal by us or prior owners or operators of such properties, we could be subject to liability under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), RCRA and analogous state laws, as well as state laws governing the management of crude oil and natural gas wastes. CERCLA and similar state laws impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered to have contributed to the release of a “hazardous substance” into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed of, transported or arranged for the disposal of the hazardous substances found at the site. Individuals who are or

14



were responsible for release of hazardous substances under CERCLA may be subject to full liability for the costs of cleaning up the hazardous substances that have been released into the environment or remediation to prevent future contamination and for damages to natural resources. Under state laws, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.
Hydraulic Fracturing

Hydraulic fracturing is commonly used to stimulate production of crude oil and/or natural gas from dense subsurface rock formations. We consistently utilize hydraulic fracturing in our crude oil and natural gas development programs. The process involves the injection of water, sand and additives under pressure into a targeted subsurface formation. The water and pressure create fractures in the rock formations which are held open by the grains of sand, enabling the crude oil or natural gas to more easily flow to the wellbore. The process is generally subject to regulation by state oil and gas commissions, but is also the subject of various other regulatory initiatives at the federal, state and local levels.

Federal Regulation

Beginning in 2012, the EPA implemented Clean Air Act (“CAA”) standards (New Source Performance Standards and National Emission Standards for Hazardous Air Pollutants) applicable to hydraulically fractured natural gas wells and certain storage vessels. The standards require, among other things, use of reduced emission completions, or “green” completions, to reduce volatile organic compound emissions during well completions as well as new controls applicable to a wide variety of storage tanks and other equipment, including compressors, controllers and dehydrators.

In February 2014, the EPA issued permitting guidance under the Safe Drinking Water Act ("SDWA") for the underground injection of liquids from hydraulically fractured and other wells where diesel is used. Depending upon how it is implemented, this guidance may create duplicative requirements in certain areas, further slow the permitting process in certain areas, increase the costs of operations and result in expanded regulation of hydraulic fracturing activities by the EPA, and may therefore adversely affect even companies, such as us, that do not use diesel fuel in hydraulic fracturing activities.

In May 2014, the EPA issued an advance notice of proposed rulemaking under the Toxic Substances Control Act pursuant to which it will collect extensive information on the chemicals used in hydraulic fracturing fluid, as well as other health-related data, from chemical manufacturers and processors.

The U.S. Department of the Interior, through the Bureau of Land Management (the “BLM”), finalized a rule in 2015 requiring the disclosure of chemicals used, mandating well integrity measures and imposing other requirements relating to hydraulic fracturing on federal lands. The BLM rescinded the rule in December 2017; however, the BLM’s rescission of the rule has been challenged in the United States District Court for the Northern District of California.

In June 2016, the EPA finalized pretreatment standards for indirect discharges of wastewater from the oil and gas extraction industry. The regulation prohibits sending wastewater pollutants from onshore unconventional oil and gas extraction facilities to publicly-owned treatment works.

In December 2016, the EPA released a report titled “Hydraulic Fracturing for Oil and Gas: Impacts from the Hydraulic Fracturing Water Cycle on Drinking Water Resources.” The report concluded that activities involved in hydraulic fracturing can have impacts on drinking water under certain circumstances. These and similar studies, depending on their degree of development and nature of results obtained, could spur initiatives to further regulate hydraulic fracturing under the SDWA or other regulatory mechanisms.

In November 2018, the EPA and the non-profit organization known as the State Review of Oil and Natural Gas Environmental Regulations (“STRONGER”) entered into a Memorandum of Understanding pursuant to which the EPA has affirmed its commitment to meaningful participation in STRONGER’s efforts to develop guidelines for state oil and natural gas environmental regulatory programs, conduct reviews of such programs and publish reports of those reviews.
  

15



State Regulation

The states in which we currently operate have adopted or are considering adopting laws and regulations that impose or could impose, among other requirements, stringent permitting or air emission control, chemical disclosure, wastewater disposal, baseline sampling, seismic monitoring, well monitoring and materials handling requirements on hydraulic fracturing and/or well construction and well location requirements and more stringent notification or consultation processes that relate to hydraulic fracturing. Similarly, some states, including Texas, have implemented rules requiring the submission of detailed information related to seismicity in connection with injection well permit applications for the disposal of wastewater.

Colorado and Texas require that chemicals used in the hydraulic fracturing of a well be reported in a publicly searchable registry website developed and maintained by the Ground Water Protection Council and Interstate Oil and Gas Compact Commission.

Concerns about hydraulic fracturing have contributed to support for ballot initiatives in Colorado that would dramatically limit the areas of the state in which drilling would be permitted to occur. See Item 1A. Risk Factors-Risks Relating to Our Business and the Industry-Changes in laws and regulations applicable to us could increase our costs, impose additional operating restrictions or have other adverse effects on us.

Local Regulation

Various local and municipal bodies in each of the states in which we operate have sought to impose prohibitions, moratoria and other restrictions on hydraulic fracturing activities. In Colorado, the Colorado Supreme Court ruled in 2016 that the cities of Fort Collins and Longmont did not have the authority to prohibit or impose five-year moratoria on hydraulic fracturing. Ballot initiatives and legislation have previously been proposed but not enacted in Colorado that would vest local governmental authorities with greater control over oil and gas development. If similar proposals are enacted in the future, they could conceivably undo the Colorado Supreme Court’s 2016 rulings and enable local authorities to implement hydraulic fracturing bans or other restrictions. We primarily operate in the rural areas of the core Wattenberg Field in Weld County. In Texas, legislation enacted in 2015 generally prohibits political subdivisions from banning, limiting or otherwise regulating oil and gas operations. See Item 1A. Risk Factors-Risks Relating to Our Business and the Industry-Changes in laws and regulations applicable to us could increase our costs, impose additional operating restrictions or have other adverse effects on us.

Private Lawsuits

Lawsuits have been filed against other operators in several states, including Colorado, alleging contamination of drinking water as a result of hydraulic fracturing activities.

Greenhouse Gases

In December 2009, the EPA published its findings that emissions of carbon dioxide, methane and other greenhouse gases (“GHGs”) present an endangerment to public health and the environment because such emissions are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes. These findings provide the basis for the EPA to adopt and implement regulations that would restrict emissions of GHGs under existing provisions of the CAA. In June 2010, the EPA began regulating GHG emissions from stationary sources.
In the past, Congress has considered proposed legislation to reduce emissions of GHGs. To date, Congress has not adopted any such significant legislation, but could do so in the future. In addition, many states and regions have taken legal measures to reduce emissions of GHGs, primarily through the planned development of GHG emission inventories and/or regional GHG cap and trade programs. In February 2014 and November 2017, Colorado adopted rules regulating methane emissions from the oil and gas sector.
The Obama administration reached an agreement during the December 2015 United Nations climate change conference in Paris pursuant to which the U.S. initially pledged to make a 26 to 28 percent reduction in its GHG emissions by 2025 against a 2005 baseline and committed to periodically update this pledge every five years starting in 2020 (the "Paris Agreement"). In June 2017, President Trump announced that the U.S. would initiate the formal process to withdraw from the Paris Agreement.

Regulation of methane and other GHG emissions associated with oil and natural gas production could impose significant requirements and costs on our operations.

16



    
Air Quality

Our operations are subject to the CAA and comparable state and local requirements. The CAA contains provisions that may result in the gradual imposition of certain pollution control requirements with respect to air emissions from our operations. The EPA and state governments continue to develop regulations to implement these requirements. We may be required to incur certain capital investments in the next several years for air pollution control equipment in connection with maintaining or obtaining operating permits and approvals addressing other air emission-related issues. See the footnote titled Commitments and Contingencies - Litigation and Legal Items to our consolidated financial statements included elsewhere in this report for further information regarding the Clean Air Act Section 114 Information Request that we received from the EPA.

In June 2016, the EPA implemented new requirements focused on achieving additional methane and volatile organic compound reductions from the oil and natural gas industry. The rules imposed, among other things, new requirements for leak detection and repair, control requirements for oil well completions, replacement of certain pneumatic pumps and controllers and additional control requirements for gathering, boosting and compressor stations. In September 2018, the EPA proposed revisions to the 2016 rules. The proposed amendments address certain technical issues raised in administrative petitions and include proposed changes to, among other things, the frequency of monitoring for fugitive emissions at well sites and compressor stations. Also in 2016, the EPA issued guidelines for reducing volatile organic compound emissions from existing oil and natural gas equipment and processes in ozone non-attainment areas, including the Denver Metro North Front Range Ozone 8-Hour Non-Attainment (“Denver Metro/North Front Range NAA”) area discussed below.

In November 2016, the BLM finalized rules to further regulate venting, flaring and leaks during oil and natural gas production activities on onshore federal and Indian leases. The rules require additional controls and impose new emissions and other standards on certain operations on applicable leases, including committed state or private tracts in a federally approved unit or communitized agreement that drains federal minerals. In September 2018, the BLM published a final rule that revises the 2016 rules. The new rule, among other things, rescinds the 2016 rule requirements related to waste-minimization plans, gas-capture percentages, well drilling, well completion and related operations, pneumatic controllers, pneumatic diaphragm pumps, storage vessels and leak detection and repair. The new rule also revised provisions related to venting and flaring. Environmental groups and the States of California and New Mexico have filed challenges to the 2018 rule in the United States District Court for the Northern District of California.

In 2016, the EPA increased the state of Colorado’s non-attainment ozone classification for the Denver Metro/North Front Range NAA area from “marginal” to “moderate” under the 2008 national ambient air quality standards (“NAAQS”). This increase in non-attainment status triggered significant additional obligations for the state under the CAA and resulted in Colorado adopting new and more stringent air quality control requirements in November 2017 that are applicable to our operations. Ozone measurements in the Denver Metro/North Front Range NAA exceeded the NAAQS during 2018, subjecting it to a further reclassification to “serious.” While the Colorado Department of Public Health and Environment (“CDPHE”) may request an exception or other relief from the reclassification, it appears very likely that the Denver Metro/North Front Range NAA will be reclassified as “serious” by early 2020. A “serious” classification will trigger significant additional obligations for the state under the CAA and could result in new and more stringent air quality control requirements, which may in turn result in significant costs and delays in obtaining necessary permits applicable to our operations.

State-level rules applicable to our operations include regulations imposed by the CDPHE's Air Quality Control Commission, including stringent requirements relating to monitoring, recordkeeping and reporting matters.

Water Quality
 
The federal Clean Water Act (“CWA”) and analogous state laws impose strict controls concerning the discharge of pollutants and fill material, including spills and leaks of crude oil and other substances. The CWA also requires approval and/or permits prior to construction, where construction will disturb wetlands or other waters of the U.S. In June 2015, the EPA and the Army Corps of Engineers (the “Corps”) issued a new rule known as the Clean Water Rule clarifying the scope of the EPA’s and the Corps’ jurisdiction under the Clean Water Act with respect to certain types of waterbodies and classifying these waterbodies as regulated. In February 2018, the EPA issued a rule that delays the applicability of the new definition of the waters of the U.S. until 2020. In August 2018, the U.S. District Court for South Carolina found that the EPA and the Corps failed to comply with the Administrative Procedure Act and struck the 2018 rule that attempted to delay the applicability date of the 2015 Clean Water Rule. Other district courts, however, have issued rulings temporarily enjoining the applicability of the 2015 Clean Water Rule itself. Taken together, the 2015 Clean Water Rule is currently in effect in 23 states, and temporarily stayed in the remaining states, including Colorado and Texas. In those remaining states, the 1986 rule and guidance remain in effect. In December 2018, the EPA and the Corps issued a proposed new rule that would differently revise the definition of

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“waters of the United States” and essentially replace both the 1986 rule and the 2015 Clean Water Rule. According to the agencies, the proposed new rule is “intended to increase CWA program predictability and consistency by increasing clarity as to the scope of ‘waters of the United States’ federally regulated under the Act.” If finalized, this new definition of “waters of the United States” will likely be challenged and sought to be enjoined in federal court.

In January 2017, the Corps issued revised and renewed streamlined general nationwide permits that are available to satisfy permitting requirements for certain work in streams, wetlands and other waters of the U.S. under Section 404 of the CWA and the Rivers and Harbors Act. The new nationwide permits took effect in March 2017, or when certified by each state, whichever was later. The oil and gas industry broadly utilizes nationwide permits 12, 14 and 39 for the construction, maintenance and repairs of pipelines, roads and drill pads, respectively, and related structures in waters of the U.S. that impact less than a half-acre of waters of the U.S. and meet the other criteria of each nationwide permit.
 
The CWA also regulates storm water run-off from crude oil and natural gas facilities and requires storm water discharge permits for certain activities. Spill Prevention, Control and Countermeasure (“SPCC”) requirements of the CWA require appropriate secondary containment load out controls, piping controls, berms and other measures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon spill, rupture or leak.

Endangered Species

The Endangered Species Act restricts activities that may affect endangered or threatened species or their habitats. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act and bald and golden eagles under the Bald and Golden Eagle Protection Act. Some of our operations may be located in areas that are or may be designated as habitats for endangered or threatened species or that may attract migratory birds, bald eagles or golden eagles.

Safety and Spill Prevention

In October 2015, the U.S. Department of Transportation Pipeline and Hazardous Materials Safety Administration proposed to expand its regulations in a number of ways, including increased regulation of gathering lines, even in rural areas, and proposed additional standards to revise safety regulations applicable to onshore gas transmission and gathering pipelines in 2016.

Crude oil production is subject to many of the same operating hazards and environmental concerns as natural gas production, but is also subject to the risk of crude oil spills. In addition to SPCC requirements, the Oil Pollution Act of 1990 (“OPA”) subjects owners of facilities to strict joint and several liability for all containment and cleanup costs and certain other damages arising from crude oil spills. Noncompliance with OPA may result in varying civil and criminal penalties and liabilities. Historically, we have not experienced any significant crude oil discharge or crude oil spill problems.
In May 2015, the U.S. Department of Transportation issued a final rule regarding the safe transportation of flammable liquids by rail. The final rule imposes certain requirements on “offerors” of crude oil, including sampling, testing and certification requirements.
In February 2018, the COGCC comprehensively amended its regulations for oil, gas, and water flowlines to expand requirements addressing flowline registration and safety, integrity management, leak detection, and other matters. The COGCC has also adopted or amended numerous other rules in recent years, including rules relating to safety, flood protection and spill reporting.

We are also subject to rules regarding worker safety and similar matters promulgated by the U.S. Occupational Safety and Health Administration (“OSHA”) and other governmental authorities. OSHA has established workplace safety standards that provide guidelines for maintaining a safe workplace in light of potential hazards, such as employee exposure to hazardous substances. To this end, OSHA adopted a new rule governing employee exposure to silica, including during hydraulic fracturing activities, in March 2016.
 
Employees

As of December 31, 2018, we had approximately 600 full-time employees. Our employees are not covered by collective bargaining agreements. We consider relations with our employees to be good.


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WHERE YOU CAN FIND ADDITIONAL INFORMATION

We file annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC filings are available free of charge from our website at www.pdce.com as soon as reasonably practicable after such material is filed with, or furnished to, the SEC. We also make available free of charge any of our SEC filings by mail. For a mailed copy of a report, please contact PDC Energy, Inc., Investor Relations, 1775 Sherman Street, Suite 3000, Denver, CO 80203, or call (303) 860-5800.

We recommend that you view our website for additional information, as we routinely post information that we believe is important for investors. Our website can be used to access such information as our recent news releases, committee charters, code of business conduct and ethics, stockholder communication policy, director nomination procedures and our whistle blower hotline. While we recommend that you view our website, the information available on our website is not part of this report and is not incorporated by reference.


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ITEM 1A. RISK FACTORS

You should carefully consider the following risk factors in addition to the other information included in this report. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock or other securities.

Risks Relating to Our Business and the Industry

Crude oil, natural gas and NGL prices fluctuate and declines in these prices, or an extended period of low prices, can significantly affect the value of our assets and our financial results and may impede our growth.

Our revenue, profitability, cash flows and liquidity depend in large part upon the prices we receive for our crude oil, natural gas and NGLs. Changes in prices affect many aspects of our business, including:
our revenue, profitability and cash flows;
our liquidity;
the quantity and present value of our reserves;
the borrowing base under our revolving credit facility and access to other sources of capital; and
the nature and scale of our operations.

The markets for crude oil, natural gas and NGLs are often volatile, and prices may fluctuate in response to, among other things:
relatively minor changes in regional, national or global supply and demand;
regional, national or global economic conditions, and perceived trends in those conditions;
geopolitical factors, such as events that may reduce or increase production from particular oil-producing regions and/or from members of the Organization of Petroleum Exporting Countries ("OPEC"); and
regulatory changes.

The price of oil has been volatile since mid-2014, with a high over $100 per barrel in June 2014 to lows below $30 per barrel in 2016, in each case based on WTI prices, due to a combination of factors including increased U.S. supply and global economic concerns. In 2018, oil prices ranged from highs of over $70 per barrel to lows of less than $50 per barrel. Prices for natural gas and NGLs have also experienced substantial volatility. If we reduce our capital expenditures due to low prices, natural declines in production from our wells will likely result in reduced production and therefore reduced cash flow from operations, which would in turn further limit our ability to make the capital expenditures necessary to replace our reserves and production.
In addition to factors affecting the price of crude oil, natural gas and NGLs generally, the prices we receive for our production are affected by factors specific to us and to the local markets where the production occurs. The prices that we receive for our production are generally lower than the relevant benchmark prices that are used for calculating commodity derivative positions. These differences, or differentials, are difficult to predict and may widen or narrow in the future based on market forces. Differentials can be influenced by, among other things, local or regional supply and demand factors and the terms of our sales contracts. Over the longer term, differentials will be significantly affected by factors such as investment decisions made by providers of midstream facilities and services, refineries and other industry participants and the overall regulatory and economic climate. For example, increases in U.S. domestic oil production generally, or in production from particular basins, may result in widening differentials. We may be materially and adversely impacted by widening differentials on our production and decreasing commodity prices.

The marketability of our production is dependent upon transportation and processing facilities, the capacity and operation of which we do not control. Market conditions or operational impediments affecting midstream facilities and services could hinder our access to crude oil, natural gas and NGL markets, increase our costs or delay production. Our efforts to address midstream issues may not be successful.
Our ability to market our production depends in substantial part on the availability, proximity and capacity of gathering systems, pipelines and processing facilities owned and operated by third parties. If adequate midstream facilities and services are not available to us on a timely basis and at acceptable costs, our production and results of operations will be adversely affected. For example, in recent periods, due to ongoing drilling activities by us and third parties and seasonal changes in temperatures, our principal third-party provider in the Wattenberg Field for midstream facilities and services has experienced significantly increased gathering system pressures. The resulting capacity constraints have restricted our production in the area and reduced our revenue. Similarly, rapid production growth in the Permian Basin has strained the

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available midstream infrastructure there with adverse effects on our operations. The use of alternative forms of transportation for oil production, such as trucks or rail, involves risks, including the risk that increased regulation could lead to increased costs or shortages of trucks or rail-cars. In addition to causing production curtailments, capacity constraints can also reduce the price we receive for the crude oil, natural gas and NGLs we produce.
We rely on third parties to continue to construct additional midstream facilities and related infrastructure to accommodate our growth, and the ability and willingness of those parties to do so is subject to a variety of risks. For example:

Decreases in commodity prices in recent years have resulted in reduced investment in midstream facilities by some third parties;
Various interest groups have protested the construction of new pipelines, and particularly pipelines near water bodies, in various places throughout the country, and protests have at times physically interrupted pipeline construction activities;
Some upstream energy companies have sought to reject volume commitment agreements with midstream providers in bankruptcy proceedings, and the risk that such efforts will succeed, or that upstream energy company counterparties will otherwise be unable or unwilling to satisfy their volume commitments, may have the effect of reducing investment in midstream infrastructure; and
The possibility that new or amended regulations, including regulations that increase mandatory setbacks or enhance local control of oil and gas development, could result in severely curtailed drilling activities in Colorado may discourage investment in midstream facilities.

Like other producers, we from time to time enter into volume commitments with midstream providers in order to induce them to provide increased capacity. If our production falls below the level required under these agreements, we could be subject to substantial penalties. We are currently not producing sufficient volumes to satisfy a volume commitment in the Delaware Basin; although at current commodity prices we have been able to profitably satisfy our obligations under the agreement with volumes purchased from third parties, this may not continue to be the case.
 
We have pursued a variety of strategies to alleviate some of the risks associated with the midstream services and facilities upon which we rely, including entering into facility expansion agreements with our primary midstream provider in the Wattenberg Field in 2017 and 2018. There can be no assurance that the strategies we pursue will be successful or adequate to meet our needs. For example, while we expect the midstream provider to commence operation of a new facility in the second quarter of 2019, it is not obligated to do so and it may delay or cancel the project entirely. In addition, the benefits to us of that facility may be less than we expect.

Changes in laws and regulations applicable to us could increase our costs, impose additional operating restrictions or have other adverse effects on us.

The regulatory environment in which we operate changes frequently, often through the imposition of new or more stringent environmental and other requirements. We cannot predict the nature, timing or effect of such additional requirements, but they may have a variety of adverse effects on us. The types of regulatory changes that could impact our operations vary widely and include, but are not limited to, the following:

From time to time ballot initiatives have been proposed in Colorado that would adversely affect our operations. For example, Proposition 112, which was included on the ballot for the November 2018 election in Colorado but was defeated at the polls, would have amended the Colorado Oil and Gas Conservation Act to, among other things, require all new oil and gas development not on federal land to be located at least 2,500 feet away from any occupied structure or broadly defined “vulnerable area”. If enacted, Proposition 112 would have effectively prohibited the vast majority of our planned future drilling activities in Colorado and would therefore have made it impossible to pursue our current development plans. Despite the defeat of Proposition 112, it is likely that similar proposals to increase setbacks, or other proposals to enhance local control of oil and gas development or otherwise restrict our ability to operate or increase our costs, will be made in future years, either by ballot initiative or by legislation. Similar proposals may also be made in other states.
Substantially all of our drilling activities involve the use of hydraulic fracturing, and proposals are made from time to time at the federal, state and local levels to further regulate, or to ban, hydraulic fracturing practices. Additional laws or regulations regarding hydraulic fracturing could, among other things, increase our costs, reduce our inventory of economically viable drilling locations and reduce our reserves.
Federal and various state, local and regional governmental authorities have implemented, or considered implementing, regulations that seek to limit or discourage the emission of carbon, methane and other greenhouse gases ("GHGs"). For example, the EPA has made findings and issued regulations that require us to establish and

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report an inventory of greenhouse gas emissions, and the state of Colorado has adopted rules regulating methane emissions from oil and gas operations. In addition, the Obama administration reached an agreement during the December 2015 United Nations climate change conference in Paris pursuant to which the U.S. initially pledged to make a 26 percent to 28 percent reduction in its GHG emissions by 2025 against a 2005 baseline (although President Trump subsequently announced that the U.S. is withdrawing from the Paris Agreement). Additional laws or regulations intended to restrict the emission of GHGs could require us to incur additional operating costs and could adversely affect demand for the oil, natural gas and NGLs that we sell. These new laws or rules could, among other things, require us to install new emission controls on our equipment and facilities, acquire allowances to authorize our GHG emissions, pay taxes related to our emissions and administer and manage a GHG emissions program. In addition, like other energy companies, we could be named as a defendant in GHG-related lawsuits.
Proposals are made from time to time to amend U.S. federal and state tax laws in ways that would be adverse to us, including by eliminating certain key U.S. federal income tax preferences currently available with respect to crude oil and natural gas exploration and production. The changes could include (i) the repeal of the percentage depletion deduction for crude oil and natural gas properties, (ii) the elimination of current deductions for intangible drilling and development costs, (iii) the elimination of the deduction for certain U.S. production activities and (iv) an extension of the amortization period for certain geological and geophysical expenditures. Also, state severance taxes may increase in the states in which we operate. This could adversely affect our existing operations in the relevant state and the economic viability of future drilling.
The development of new environmental initiatives or regulations related to the acquisition, withdrawal, storage and use of surface water or groundwater or treatment and discharge of water waste, may limit our ability to use techniques such as hydraulic fracturing, increase our development and operating costs and cause delays, interruptions or termination of our operations, any of which could have an adverse effect on our operations and financial condition.

See Items 1 and 2, Business and Properties - Governmental Regulation for a summary of certain laws and regulations that currently apply to us. Any of such laws and regulations could be amended, and new laws or regulations could be implemented, in a way that adversely affects our operations.

Our undeveloped acreage must be drilled before lease expiration to hold the acreage by production. In highly competitive markets for acreage, failure to drill sufficient wells to hold acreage could result in substantial lease renewal costs or, if renewal is not feasible, loss of our lease and prospective drilling opportunities.
Unless production is established within the spacing units covering our undeveloped acreage, our leases for such acreage will expire. The cost to renew such leases may increase significantly and we may not be able to renew such leases on commercially reasonable terms or at all. In 2019, we expect that we will allow 35 percent of our net leaseholds in the Delaware Basin to expire based on our current drilling plan, and we incurred an impairment charge in the fourth quarter of 2018 relating to these anticipated expirations. Unexpected lease expirations could also occur if our actual drilling activities differ materially from our current expectations, and this could result in further impairment charges. The risk of lease expiration is greater at times and in areas where the pace of our exploration and development activity slows. Our ability to drill and develop the locations necessary to maintain our leases depends on a number of uncertainties, including oil and natural gas prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, drilling results, gathering system and pipeline transportation constraints, access to and availability of water sourcing and distribution systems, regulatory approvals and other factors.

A substantial part of our crude oil, natural gas and NGLs production is located in the Wattenberg Field, making us vulnerable to risks associated with operating primarily in a single geographic area. In addition, we have a large amount of proved reserves attributable to a small number of producing formations.
Although we have significant leasehold positions in the Delaware Basin in Texas, our current production is primarily located in the Wattenberg Field in Colorado. Because our production is not as diversified geographically as many of our competitors, the success of our operations and our profitability may be disproportionately exposed to the effect of any regional events, including:
fluctuations in prices of crude oil, natural gas and NGLs produced from the wells in the area;
natural disasters such as the flooding that occurred in northern Colorado in September 2013;
restrictive governmental regulations; and
curtailment of production or interruption in the availability of gathering, processing or transportation infrastructure and services and any resulting delays or interruptions of production from existing or planned new wells.

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For example, bottlenecks in processing and transportation that have occurred in some recent periods in the Wattenberg Field have negatively affected our results of operations, and these adverse effects may be disproportionately severe to us compared to our more geographically diverse competitors. Similarly, the concentration of our producing assets within a small number of producing formations exposes us to risks, such as changes in field-wide rules that could adversely affect development activities or production relating to those formations. Such an event could have a material adverse effect on our results of operations and financial condition. In addition, in areas where exploration and production activities are increasing, as has been the case in recent years in the Wattenberg Field and the Delaware Basin, the demand for, and cost of, drilling rigs, equipment, supplies, chemicals, personnel and oilfield services often increase as well. Shortages or the high cost of drilling rigs, equipment, supplies, chemicals, personnel or oilfield services could delay or adversely affect our development and exploration operations or cause us to incur significant expenditures that are not provided for in our capital forecast, which could have a material adverse effect on our business, financial condition or results of operations.

Certain of our properties are subject to land use restrictions, which could limit the manner in which we conduct our business.
Certain of our properties are subject to land use restrictions, including city ordinances, which could limit the manner in which we conduct our business.  Such restrictions could affect, among other things, our access to and the permissible uses of our facilities as well as the manner in which we produce oil and natural gas, and may restrict or prohibit drilling in general.  The costs we incur to comply with such restrictions may be significant, and we may experience delays or curtailment in the pursuit of development activities and may be precluded from drilling wells in some areas.

We may incur losses as a result of title defects in the properties in which we invest or acquire.
It is our practice in acquiring oil and gas leases or interests not to incur the expense of retaining lawyers to examine the title to the mineral interest at the time of acquisition. Rather, we rely upon the judgment of oil and gas lease brokers or landmen who perform record title examinations before we acquire oil and gas leases and related interests. The existence of a material title deficiency can render a lease worthless and can adversely affect our results of operations and financial condition. While we typically obtain title opinions prior to commencing drilling operations on a lease or in a unit, the failure of title may not be discovered until after a well is drilled, in which case we may lose the lease and the right to produce all or a portion of the minerals under the property.

We are subject to complex federal, state, local and other laws and regulations that adversely affect the cost and manner of doing business.

Our exploration, development, production and marketing operations are regulated extensively at the federal, state and local levels. Environmental and other governmental laws and regulations have increased the costs of planning, designing, drilling, installing, operating and abandoning crude oil and natural gas wells and associated facilities. Under these laws and regulations, we could also be liable for personal injuries, property damage and natural resource or other damages, and could be required to change, suspend or terminate operations. Similar to our competitors, we incur substantial operating and capital costs to comply with such laws and regulations. These costs may put us at a competitive disadvantage compared to larger companies in the industry which can more easily capture economies of scale with respect to compliance. A summary of certain laws and regulations that apply to us is set forth in Items 1 and 2 - Business and Properties - Governmental Regulation.
In June 2017, the U.S. Department of Justice, on behalf of the EPA and the State of Colorado, filed a complaint against us, claiming that we failed to operate and maintain certain condensate collection equipment at 65 facilities so as to minimize leakage of volatile organic compounds in compliance with applicable law. In October 2017, we entered into a consent decree to resolve the lawsuit. Pursuant to the consent decree, we agreed to implement a variety of operational enhancements and mitigation and similar projects, including vapor control system modifications and verification, increased inspection and monitoring and installation of tank pressure monitors. If we materially fail to comply with the requirements of the consent decree with respect to those matters, we could be subject to additional liability. See the footnote titled Commitments and Contingencies - Litigation and Legal Items to our consolidated financial statements included elsewhere in this report for further information regarding this litigation.
A major risk inherent in our drilling plans is the possibility that we will be unable to obtain needed drilling permits from relevant governmental authorities in a timely manner. Our ability to obtain the permits needed to pursue our development plans may be impacted by a variety of factors, including opposition by landowners or interest groups. Delays in obtaining regulatory approvals or drilling permits, the failure to obtain a drilling permit for a well or the receipt of a permit with unreasonable or unexpected conditions or costs could have a material adverse effect on our ability to explore or develop our properties.

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Our ability to produce crude oil, natural gas and NGLs economically and in commercial quantities could be impaired if we are unable to acquire adequate supplies of water for our drilling and completion operations or are unable to dispose of or recycle the water we use at a reasonable cost, in a timely manner and within applicable environmental rules.

Drilling and development activities such as hydraulic fracturing require the use of water and result in the production of wastewater. Our operations could be adversely impacted if we are unable to locate sufficient amounts of water or dispose of or recycle water used in our exploration and production operations. The quantity of water required in certain completion operations, such as hydraulic fracturing, and changing regulations governing usage may lead to water constraints, supply concerns and regulatory issues, particularly in relatively arid climates such as eastern Colorado and western Texas. For example, increased drilling activity in the Delaware Basin in recent years has led to heightened concerns about water supply issues in the area and this may lead to regulatory actions, including rules providing local governments greater authority over water use, that adversely impact our operations.

Our operations depend on being able to reuse or dispose of wastewater in a timely and economic fashion. Wastewater from oil and gas operations is often disposed of through underground injection. Wells in the Delaware Basin typically produce relatively large amounts of water that require disposal and an increased number of earthquakes have been detected in the Delaware Basin in recent years. Some studies have linked earthquakes, or induced seismicity, in certain areas to underground injection, which is leading to increased public and regulatory scrutiny of injection safety. 
Reduced commodity prices could result in significant impairment charges and significant downward revisions of proved reserves.
Commodity prices are volatile. Significant and rapid declines in prices have occurred in the past and may occur in the future. Low commodity prices could result in, among other things, significant impairment charges. The cash flow model we use to assess properties for impairment includes numerous assumptions, such as management’s estimates of future oil and gas production and commodity prices, the outlook for forward commodity prices and operating and development costs. All inputs to the cash flow model must be evaluated at each date the estimate of future cash flows for each producing basin is calculated. However, a significant decrease in long-term forward prices alone could result in a significant impairment for our properties that are sensitive to declines in prices. We have incurred impairment charges in a number of recent periods, including charges of $458.4 million and $285.9 million in 2018 and 2017, respectively, to write down assets and $75.1 million to impair goodwill associated with our acquisition in the Delaware Basin in 2017. Similar charges could occur in the future.

Our estimated reserves are based on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions may materially affect the quantities and present value of our reserves.
Calculating reserves for crude oil, natural gas and NGLs requires subjective estimates of remaining volumes of underground accumulations of hydrocarbons. Assumptions are also made concerning commodity prices, production levels and operating and development costs over the economic life of the properties. As a result, estimated quantities of proved reserves and projections of future production rates and the timing of development expenditures may be inaccurate. Independent petroleum engineers prepare our estimates of crude oil, natural gas and NGLs reserves using pricing, production, cost, tax and other information that we provide. The reserve estimates are based on assumptions regarding commodity prices, production levels and operating and development costs that may prove to be incorrect. Any significant variance from these assumptions to actual results could greatly affect:

the economically recoverable quantities of crude oil, natural gas and NGLs attributable to any particular group of properties;
future depreciation, depletion and amortization (“DD&A”) rates and amounts;
impairments in the value of our assets;
the classifications of reserves based on risk of recovery;
estimates of future net cash flows;
timing of our capital expenditures; and
the amount of funds available for us to borrow under our revolving credit facility.

Some of our reserve estimates must be made with limited production histories, which renders these estimates less reliable than those based on longer production histories. Further, reserve estimates are based on the volumes of crude oil, natural gas and NGLs that are anticipated to be economically recoverable from a given date forward based on economic conditions that exist at that date. The actual quantities of crude oil, natural gas and NGLs recovered will be different than the reserve estimates since they will not be produced under the same economic conditions as are used for the reserve calculations.

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In addition, quantities of probable and possible reserves by definition are inherently more risky than proved reserves, in part because they have greater uncertainty associated with the recoverable quantities of hydrocarbons.
At December 31, 2018, approximately 67 percent of our estimated proved reserves were undeveloped. These reserve estimates reflect our plans to make significant capital expenditures to convert our PUDs into proved developed reserves, including approximately $4.4 billion during the five years ending December 31, 2023, as estimated in the calculation of the standardized measure of oil and gas activity. The estimated development costs may not be accurate, development may not occur as scheduled and results may not be as estimated. If we choose not to develop PUDs, or if we are not otherwise able to successfully develop them, we will be required to remove the associated volumes from our reported proved reserves. In addition, under the SEC’s reserve reporting rules, PUDs generally may be booked only if they relate to wells scheduled to be drilled within five years of the date of initial booking, and we may therefore be required to downgrade any PUDs that are not developed within this five-year time frame.
The present value of the estimated future net cash flows from our proved reserves is not necessarily the same as the current market value of those reserves. Pursuant to SEC rules, the estimated discounted future net cash flows from our proved reserves, and the estimated quantity of those reserves, are based on the prior year’s first day of the month 12-month average crude oil and natural gas index prices. However, factors such as actual prices we receive for crude oil and natural gas and hedging instruments, the amount and timing of actual production, the amount and timing of future development costs, the supply of and demand for crude oil, natural gas and NGLs and changes in governmental regulations or taxation, also affect our actual future net cash flows from our properties. The timing of both our production and incurrence of expenses in connection with the development and production of crude oil and natural gas properties will affect the timing of actual future net cash flows from proved reserves, and thus their actual present value. In addition, the 10 percent discount factor we use when calculating discounted future net cash flows (the rate required by the SEC) may not be the most appropriate discount factor based on interest rates currently in effect and risks associated with our properties or the industry in general.
Unless reserves are replaced as they are produced, our reserves and production will decline, which would adversely affect our future business, financial condition and results of operations. We may not be able to develop our identified drilling locations as planned.
Producing crude oil, natural gas and NGL reservoirs are generally characterized by declining production rates that vary depending upon reservoir characteristics and other factors. The rate of decline may change over time and may exceed our estimates. Our future reserves and production and, therefore, our cash flows and income, are highly dependent on our ability to efficiently develop and exploit our current reserves and to economically find or acquire additional recoverable reserves. We may not be able to develop, discover, or acquire additional reserves to replace our current and future production at acceptable costs. Our failure to do so would adversely affect our future operations, financial condition and results of operations.
We have identified a number of well locations as an estimation of our future multi-year drilling activities on our existing acreage. These well locations represent a significant part of our growth strategy. Our ability to drill and develop these locations depends on a number of uncertainties, including:

crude oil, natural gas and NGL prices;
the availability and cost of capital;
drilling and production costs;
availability of drilling services and equipment;
drilling results;
lease expirations or limitations as to depth;
midstream constraints;
access to and availability of water sourcing and distribution systems;
regulatory approvals; and
other factors.

Because of these factors, we do not know if the numerous potential well locations we have identified will ever be drilled or if we will be able to produce crude oil, natural gas or NGLs from these or any other potential well locations. In addition, the number of drilling locations available to us will depend in part on the spacing of wells in our operating areas. An increase in well density in an area could result in additional locations in that area, but a reduced production performance from the area on a per-well basis. Further, certain of the horizontal wells we intend to drill in the future may require pooling of our lease interests with the interests of third parties. Some states, including Colorado, allow the involuntary pooling of tracts in a relatively broad number of circumstances in order to facilitate exploration. Other states, notably Texas, restrict involuntary pooling to a much narrower set of circumstances and consequently these states rely primarily on voluntary pooling of lands and

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leases. In states such as Texas where pooling is accomplished primarily on a voluntary basis, it may be more difficult to form units and, therefore, more difficult to fully develop a project if we own less than all the leasehold in the proposed units or one or more of our leases in the proposed units does not provide the necessary pooling authority. If third parties in the proposed units are unwilling to pool their interests with ours, we may be unable to require such pooling on a timely basis or at all, which would limit the total horizontal wells we can drill. Further, the number of available locations will depend in part on the expected lateral lengths of the horizontal wells we drill. Because the intended lateral length of a horizontal well is subject to change for a variety of reasons, our estimated drilling locations will change over time. For this or numerous other reasons, our actual drilling activities may materially differ from those presently identified.
Our inventory of drilling projects includes locations in addition to those that we currently classify as proved, probable and possible. The development of and results from these additional projects are more uncertain than those relating to probable and possible locations, and significantly more uncertain than those relating to proved locations. We have generally accelerated the pace of our development activities in the Wattenberg Field over the past several years, and this has reduced our related inventory of drilling locations. In addition, our Wattenberg Field inventory was further reduced by recent acreage exchange transactions in which we received, among other things, increased working interests in certain locations in exchange for our right to develop other locations. We anticipate that our remaining locations in the field will not, on average, be as productive as economic as many those we have drilled in recent years, due to lower anticipated overall production or higher gas-to-oil ratios. In the Delaware Basin, our inventory is subject to, among other things, lease expiration issues and our continued analysis of geologic issues in certain areas.

The wells we drill may not yield crude oil, natural gas or NGLs in commercially viable quantities and productive wells may be less successful than we expect.
A prospect is a property on which our geologists have identified what they believe, based on available information, to be indications of hydrocarbon-bearing rocks. However, given the limitations of available data and technology, our geologists cannot know conclusively prior to drilling and testing whether crude oil, natural gas or NGLs will be present in sufficient quantities to repay drilling or completion costs and generate a profit. Furthermore, even when properly used and interpreted, 2-D and 3-D seismic data and visualization techniques do not enable our geologists to be certain as to the quantity of the hydrocarbons in those structures. In addition, the use of 3-D seismic and other advanced technologies requires greater pre-drilling expenditures than traditional drilling strategies, and we could incur greater drilling and testing expenses as a result of such expenditures, which may result in a reduction in our returns or losses. As a result, our drilling activities may not be successful or economical, and our overall drilling success rate or our drilling success rate for activities in a particular area could decline. If a well is determined to be dry or uneconomic, which can occur even though it contains some crude oil, natural gas or NGLs, it is classified as a dry hole and must be plugged and abandoned in accordance with applicable regulations. This generally results in the loss of the entire cost of drilling and completion to that point, the cost of plugging and lease costs associated with the prospect. Even wells that are completed and placed into production may not produce sufficient crude oil, natural gas and NGLs to be profitable, or they may be less productive and/or profitable than we expected. For example, the data we use to model anticipated results from wells in a particular area may prove to be not representative of actual results from typical wells in the area, and this could result in production that falls short of estimates reflected in our internal business plans and/or guidance, "type curve" or other disclosures we make to the public. This risk is higher for us in certain areas in the Delaware Basin that have relatively complex geological characteristics and correspondingly greater variability in well results. If we drill a dry hole or unprofitable well on a current or future prospect, or if drilling or completion costs increase, the profitability of our operations will decline and the value of our properties will likely be reduced. Exploratory drilling is typically subject to substantially greater risk than development drilling. In addition, initial results from a well are not necessarily indicative of its performance over a longer period.


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Drilling for and producing crude oil, natural gas and NGLs are high risk activities with many uncertainties that could adversely affect our business, financial condition and results of operations.

Drilling activities are subject to many risks, including the risk that we will not discover commercially productive reservoirs. Drilling can be unprofitable, not only due to dry holes, but also due to curtailments, delays or cancellations as a result of other factors, including:

unusual or unexpected geological formations;
pressures;
fires;
floods;
loss of well control;
loss of drilling fluid circulation;
title problems;
facility or equipment malfunctions;
unexpected operational events;
shortages or delays in the delivery of equipment and services;
unanticipated environmental liabilities;
compliance with environmental and other governmental requirements; and
adverse weather conditions.

Any of these risks can cause substantial losses, including personal injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution, environmental contamination or loss of wells and regulatory penalties. For example, a loss of containment of hydrocarbons during drilling activities could potentially subject us to civil and/or criminal liability and the possibility of substantial costs, including for environmental remediation. We maintain insurance against various losses and liabilities arising from our operations; however, insurance against certain operational risks may not be available or may be prohibitively expensive relative to the perceived risks presented. For example, we may not have coverage with respect to a pollution event if we are unaware of the event while it is occurring and are therefore unable to report the occurrence of the event to our insurance company within the time frame required under our insurance policy. Thus, losses could occur for uninsurable or uninsured risks or for amounts in excess of existing insurance coverage. The occurrence of an event that is not fully covered by insurance and/or governmental or third party responses to an event could have a material adverse effect on our business activities, financial condition and results of operations. We are currently involved in various remedial and investigatory activities at some of our wells and related sites.
In addition, certain technical risks relating to the drilling of horizontal wells - including those relating to our ability to fracture stimulate the planned number of stages and to successfully run casing the length of the well bore - have increased in recent years because we have increased the average lateral length of the horizontal wells we drill. Longer-lateral wells are also typically more expensive and require more time for preparation. In addition, we have transitioned to the use of multi-well pads instead of single-well sites. The use of multi-well pad drilling increases some operational risks because problems affecting the pad or a single well could adversely affect production from all of the wells on the pad. Pad drilling can also make our overall production, and therefore our revenue and cash flows, more volatile, because production from multiple wells on a pad will typically commence simultaneously. While we believe that we will be better served by using multi-well pads with longer lateral wells, the risk component involved in such drilling will be increased in some respects, with the result that we might find it more difficult to achieve economic success in our drilling program.

The inability of one or more of our customers or other counterparties to meet their obligations may adversely affect our financial results.

Substantially all of our accounts receivable result from our crude oil, natural gas and NGLs sales or joint interest billings to a small number of third parties in the energy industry. This concentration of customers and joint interest owners may affect our overall credit risk in that these entities may be similarly affected by changes in economic and other conditions. In addition, our commodity derivatives expose us to credit risk in the event of nonperformance by counterparties. Nonperformance by our customers or derivative counterparties may adversely affect our financial condition and profitability. We face similar risks with respect to our other counterparties, including the lenders under our revolving credit facility and the providers of our insurance coverage.

Seasonal weather conditions and lease stipulations can adversely affect our operations.

Seasonal weather conditions and lease stipulations designed to prohibit or limit operations during crop-growing seasons and to protect wildlife affect operations in some areas. In certain areas drilling and other activities may be restricted or

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prohibited by lease stipulations, or prevented by weather conditions, for significant periods of time. This limits our operations in those areas and can intensify competition during the active months for drilling rigs, equipment, supplies, chemicals, personnel, and oilfield services, which may lead to additional or increased costs or periodic shortages. These constraints, and the resulting high costs or shortages, could delay our operations and materially increase operating and capital costs and therefore adversely affect our profitability. Similarly, extreme temperatures during some recent periods adversely impacted the operation of certain midstream facilities, and therefore our production. Similar events could occur in the future and could negatively impact our results of operations and cash flows.

We have limited control over activities on properties in which we own an interest but we do not operate, which could reduce our production and revenues.
We operate approximately 84 percent of the wells in which we own an interest. If we do not operate a property, we do not have control over normal operating procedures, expenditures or future development of the property. The success and timing of drilling and development activities on properties operated by others therefore depends upon a number of factors outside of our control, including the operator’s timing and amount of capital expenditures, expertise (including safety and environmental compliance) and financial resources, inclusion of other participants in drilling wells and use of technology. The failure of an operator to conduct drilling activities properly, or its breach of the applicable agreements, could reduce production and revenues and adversely affect our profitability. These risks may be heightened during periods of depressed commodity prices as operators may propose activities that we believe to be economically unattractive, leading us to incur non-consent penalties. Our lack of control over non-operated properties also makes it more difficult for us to forecast capital expenditures, production and related matters.

We participate in oil and gas leases with third parties who may not be able to fulfill their commitments to our projects.
We frequently own less than all of the working interest in the oil and gas leases on which we conduct operations. Financial risks are inherent in any operation where the cost of drilling, equipping, completing and operating wells is shared by more than one person. We could be held liable for joint activity obligations of other working interest owners, such as nonpayment of costs and liabilities, arising from the actions of the other owners. In addition, declines in oil, natural gas and NGL prices may increase the likelihood that some of these working interest owners, particularly those that are smaller and less established, are not able to fulfill their joint activity obligations. A partner may be unable or unwilling to pay its share of project costs, and, in some cases, may declare bankruptcy. In the event any of our project partners does not pay its share of such costs, we would likely have to pay those costs, and we may be unsuccessful in any efforts to recover the costs from the partner. This could materially adversely affect our financial position.
We may not be able to keep pace with technological developments in our industry.
Our industry is characterized by rapid and significant technological advancements. As our competitors use or develop new technologies, we may be placed at a competitive disadvantage, and competitive pressures may force us to implement those or other new technologies at substantial cost. In addition, our competitors may have greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the future allow them to implement new technologies before we can. We may not be able to respond to these competitive pressures and implement new technologies on a timely basis or at an acceptable cost. If one or more of the technologies we use now or in the future were to become obsolete or if we were unable to use the most advanced technology, our business, financial condition and results of operations could be materially adversely affected.
Competition in our industry is intense, which may adversely affect our ability to succeed.
Our industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce crude oil, natural gas and NGLs, but also carry on refining operations and market petroleum and other products on a regional, national or worldwide basis. These companies may be able to pay more for productive properties and exploratory prospects or define, evaluate, bid for and purchase a greater number of properties and prospects than we can. Our ability to acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. In addition, larger companies may have a greater ability to continue exploration activities during periods of low commodity prices. Larger competitors may also be able to absorb the burden of present and future federal, state, local and other laws and regulations more easily than we can, which could adversely affect our competitive position. These factors could adversely affect our operations and our profitability.

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Our success depends on key members of our management and our ability to attract and retain experienced technical and other professional personnel.
Our future success depends to a large extent on the services of our key employees. The loss of one or more of these individuals could have a material adverse effect on our business. Furthermore, competition for experienced technical and other professional personnel remains strong. If we cannot retain our current personnel or attract additional experienced personnel, our ability to compete could be adversely affected. Also, the loss of experienced personnel could lead to a loss of technical expertise.
A failure to complete successful acquisitions would limit our growth.
Because our crude oil and natural gas properties are depleting assets, our future reserves, production volumes and cash flows depend on our success in developing and exploiting our current reserves efficiently and finding or acquiring additional recoverable reserves economically. In addition, we continue to strive to achieve greater efficiencies in our drilling program, and our ability to do so is dependent in part on our ability to complete asset exchanges and other acquisitions that allow us to increase our working interests in particular properties. When attractive opportunities arise, acquiring additional crude oil and natural gas properties, or businesses that own or operate such properties, is a significant component of our strategy. We may not be able to identify attractive acquisition opportunities. If we do identify an appropriate acquisition candidate, we may be unable to negotiate mutually acceptable terms with the seller, finance the acquisition or obtain the necessary regulatory approvals. It may be difficult to agree on the economic terms of a transaction, as a potential seller may be unwilling to accept a price that we believe to be appropriately reflective of prevailing economic conditions. If we are unable to complete suitable acquisitions, it will be more difficult to replace our reserves, and an inability to replace our reserves would have a material adverse effect on our financial condition and results of operations.
Acquisitions of properties are subject to the uncertainties of evaluating recoverable reserves and potential liabilities, including environmental uncertainties.
Acquisitions of producing and undeveloped properties have been an important part of our growth over time. We expect acquisitions will also contribute to our future growth. Successful acquisitions require an assessment of a number of factors, many of which are beyond our control. These factors include recoverable reserves, development potential, future commodity prices, operating costs, title issues and potential environmental and other liabilities. Such assessments are inexact and their accuracy is inherently uncertain. In connection with our assessments, we generally perform engineering, environmental, geological and geophysical reviews of the acquired properties that we believe are generally consistent with customary industry practices. However, such reviews are not likely to permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities. We do not inspect every well prior to an acquisition and our ability to evaluate undeveloped acreage is inherently imprecise. Even when we inspect a well, we may not always discover structural, subsurface and environmental problems that may exist or arise. In some cases, our review prior to signing a definitive purchase agreement may be even more limited. In addition, we often acquire acreage without any warranty of title except as to claims made by, through or under the transferor.
When we acquire properties, we will generally have potential exposure to liabilities and costs for environmental and other problems existing on the acquired properties, and these liabilities may exceed our estimates. We may not be entitled to contractual indemnification associated with acquired properties. We often acquire interests in properties on an “as is” basis with no or limited remedies for breaches of representations and warranties. Therefore, we could incur significant unknown liabilities, including environmental liabilities or losses due to title defects, in connection with acquisitions for which we have limited or no contractual remedies or insurance coverage. In addition, the acquisition of undeveloped acreage is subject to many inherent risks and we may not be able to realize efficiently, or at all, the assumed or expected economic benefits of acreage that we acquire.
Additionally, significant acquisitions can change the nature of our operations depending upon the character of the acquired properties, which may have substantially different operating and geological characteristics or may be in different geographic locations than our existing properties. These factors can increase the risks associated with an acquisition. Acquisitions also present risks associated with the additional indebtedness that may be required to finance the purchase price and any related increase in interest expense or other related charges.
Some of our acquisitions are structured as asset trades or exchanges. These transactions may give rise to any or all of the foregoing risks. In addition, transactions of this type create a risk that we will undervalue the properties we transfer to the counterparty in the trade or exchange or overvalue the properties we receive. Such an undervaluation or overvaluation would result in the transaction being less favorable to us than we expected.

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Complications with the design or implementation of our new enterprise resource planning system could adversely impact our business and operations.

We rely extensively on information systems and technology to manage our business and summarize operating results. We are in the process of implementing a new ERP system. This ERP system will replace our existing operating and financial systems. The ERP system is designed to enhance the maintenance of our financial records, improve operational functionality and provide timely information to our management team related to the operation of the business. The ERP system implementation process has required, and will continue to require, the investment of significant personnel and financial resources. We may not be able to successfully implement the ERP system without experiencing delays, increased costs and other difficulties. If we are unable to successfully design and implement the new ERP system as planned, our financial position, results of operations and cash flows could be negatively impacted. Additionally, if we do not effectively implement the ERP system as planned or the ERP system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected or our ability to assess those controls adequately could be delayed.

We operate in a litigious environment. The cost of defending any suits brought against us, and any judgments or settlements resulting from such suits, could have an adverse effect on our results of operations and financial condition.

Like many oil and gas companies, we are from time to time involved in various legal and other proceedings, such as title, royalty or contractual disputes, employment litigation, regulatory compliance matters and personal injury or property damage matters, in the ordinary course of our business. For example, in recent years, we have been subject to lawsuits regarding royalty practices and payments and matters relating to certain of our affiliated partnerships. As discussed in the footnote titled Commitments and Contingencies to our consolidated financial statements included elsewhere in this report, we are the subject of a recently filed lawsuit relating to our two remaining affiliated partnerships and are currently involved in a fiduciary duty lawsuit regarding our environmental compliance programs. The outcome of legal proceedings is inherently uncertain. Regardless of the outcome, such proceedings could have an adverse impact on us because of legal costs, diversion of management attention and other factors. In addition, the resolution of such a proceeding could result in penalties or sanctions, settlement costs and/or judgments, consent decrees or orders requiring a change in our business practices, any of which could materially and adversely affect our business, operating results and financial condition. Accruals for such liability, penalties, sanctions or costs may be insufficient. Judgments and estimates to determine accruals or the anticipated range of potential losses related to legal and other proceedings could change from one period to the next, and such changes could be material. Information regarding our legal proceedings can found in the footnote titled Commitments and Contingencies - Litigation and Legal Items to our consolidated financial statements included elsewhere in this report.
Our business could be negatively impacted by security threats, including cybersecurity threats and other disruptions.

We face various security threats, including attempts by third parties to gain unauthorized access to competitive information or to render data or systems unusable; threats to the safety of our employees; threats to the security of our infrastructure or third party facilities and infrastructure, such as processing plants and pipelines; and threats from terrorist acts. There can be no assurance that the procedures and controls we use to monitor these threats and mitigate our exposure to them will be sufficient to prevent them from materializing.

Our industry has become increasingly dependent on digital technologies to conduct day-to-day operations, including certain exploration, development and production activities. We depend on digital technology, including information systems and related infrastructure, as well as cloud applications and services, to store, transmit, process and record sensitive information (including but not limited to trade secrets, employee information and financial and operating data), communicate with our employees and business partners, and for many other activities related to our business. In addition, computer systems control the oil and gas production and processing equipment that are necessary to deliver our production to market. A disruption or failure of these systems, or of the networks and infrastructure on which they rely, may cause damage to critical production, distribution and/or storage assets, delay or prevent delivery to markets, or make it difficult to accurately account for production and settle transactions.
 
As dependence on digital technologies has increased in our industry, cyber incidents, including deliberate attacks and unintentional events, have also increased. Our systems and infrastructure are subject to damage or interruption from a number of potential sources including natural disasters, software viruses or other malware, power failures, cyber-attacks and other events. We also face various other cyber-security threats from criminal hackers, state-sponsored intrusion, industrial espionage and employee malfeasance, including threats to gain access to sensitive information or to render data or systems unusable.


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Our business partners, including vendors, service providers, operating partners, purchasers of our production and financial institutions, are also dependent on digital technology. A vulnerability in the cybersecurity of one or more of our vendors could facilitate an attack on our systems.

Our technologies, systems and networks, and those of our business partners, may become the target of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary and other information, theft of property or other disruption of our business operations. In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period. Although we have not suffered material losses related to cyber-attacks to date, if we were successfully attacked, we could incur substantial remediation and other costs or suffer other negative consequences, such as a loss of competitive information, critical infrastructure, personnel or capabilities essential to our operations. Events of this nature could have a material adverse effect on our reputation, financial condition, results of operations or cash flows. Moreover, as the sophistication of cyber-attacks continues to evolve, we may be required to expend significant additional resources to further enhance our digital security or to remediate vulnerabilities.
The physical effects of climate change could disrupt our production and cause us to incur significant costs in preparing for or responding to those effects.

Many scientists believe that increasing concentrations of carbon dioxide, methane and other GHGs in the Earth's atmosphere are changing global climate patterns. One consequence of climate change could be increased severity of extreme weather, such as increased hurricanes and floods. Flooding that occurred in Colorado in 2013 is an example of an extreme weather event that negatively impacted our operations. If such events were to continue to occur, or become more frequent, our operations could be adversely affected in various ways, including through damage to our facilities or from increased costs for insurance.

Another possible consequence of climate change is increased volatility in seasonal temperatures. The market for natural gas is generally improved by periods of colder weather and impaired by periods of warmer weather, so any changes in climate could affect the market for the fuels that we produce. Despite the use of the term “global warming” as a shorthand for climate change, some studies indicate that climate change could cause some areas to experience temperatures substantially colder than their historical averages. As a result, it is difficult to predict how the market for our production could be affected by increased temperature volatility, although if there is an overall trend of warmer temperatures, it would be expected to have an adverse effect on our business.

Risks Relating to Financial Matters

Our development and exploration operations require substantial capital, and we may be unable to obtain needed capital or financing on satisfactory terms, which could lead to a loss of properties and a decline in our production and reserves, and ultimately our profitability.
Our industry is capital intensive. We expect to continue to make substantial capital expenditures for the exploration, development, production and acquisition of crude oil, natural gas and NGL reserves. To date, we have financed capital expenditures primarily with bank borrowings under our revolving credit facility, cash generated by operations and proceeds from capital markets transactions and the sale of properties. We intend to finance our future capital expenditures utilizing similar financing sources. Our cash flows from operations and access to capital are subject to a number of variables, including:

our proved reserves;
the amount of crude oil, natural gas and NGLs we are able to produce from existing wells;
the prices at which crude oil, natural gas and NGLs are sold;
the costs to produce crude oil, natural gas and NGLs; and
our ability to acquire, locate and produce new reserves.

If our revenues or the borrowing base under our revolving credit facility decrease as a result of lower commodity prices, operating difficulties or for any other reason, our need for capital from other sources could increase, and there can be no assurance that such other sources of capital would be available at that time on reasonable terms or at all. If we raise funds by issuing additional equity securities, this would have a dilutive effect on existing shareholders. If we raise funds through the incurrence of debt, the risks we face with respect to our indebtedness would increase and we would incur additional interest expense. Our inability to obtain sufficient financing on acceptable terms would adversely affect our financial condition and profitability.

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We have a substantial amount of debt and the cost of servicing, and risks related to refinancing, that debt could adversely affect our business. Those risks could increase if we incur more debt.
We have a substantial amount of indebtedness outstanding. As a result, a significant portion of our cash flows will be required to pay interest and principal on our indebtedness, and we may not generate sufficient cash flows from operations, or have future borrowing capacity available, to enable us to repay our indebtedness or to fund other liquidity needs.
Servicing our indebtedness and satisfying our other obligations will require a significant amount of cash. Our cash flow from operating activities and other sources may not be sufficient to fund our liquidity needs. Our ability to pay interest and principal on our indebtedness and to satisfy our other obligations will depend on our future operating performance, our financial condition and the availability of refinancing indebtedness, which will be affected by prevailing economic conditions and financial, business and other factors, many of which are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations, or that sufficient future borrowings will be available to us under our revolving credit facility or otherwise, to fund our liquidity needs.
A substantial decrease in our operating cash flow or an increase in our expenses could make it difficult for us to meet debt service requirements and could require us to modify our operations, including by curtailing our exploration and drilling programs, selling assets, reducing our capital expenditures, refinancing all or a portion of our existing debt or obtaining additional financing. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, the terms of our debt agreements could restrict us from implementing some of these alternatives.
In the absence of adequate cash from operations and other available capital resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate these dispositions for fair market value, in a timely manner or at all. Furthermore, any proceeds that we could realize from any dispositions may not be adequate to meet our debt service obligations then due.
Covenants in our debt agreements currently impose, and future financing agreements may impose, significant operating and financial restrictions.
Our current debt agreements contain restrictions, and future financing agreements may contain additional restrictions, on our activities, including covenants that restrict our and our restricted subsidiaries’ ability to:

incur additional debt;
pay dividends on, redeem or repurchase stock;
create liens;
make specified types of investments;
apply net proceeds from certain asset sales;
engage in transactions with our affiliates;
engage in sale and leaseback transactions;
merge or consolidate;
restrict dividends or other payments from restricted subsidiaries;
sell equity interests of restricted subsidiaries; and
sell, assign, transfer, lease, convey or dispose of assets.

Our revolving credit facility is secured by substantially all of our oil and gas properties as well as a pledge of all ownership interests in our operating subsidiaries. The restrictions contained in our debt agreements may prevent us from taking actions that we believe would be in the best interest of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. We may also incur future debt obligations that subject us to additional restrictive covenants.
Our revolving credit facility has substantial restrictions and financial covenants and our ability to comply with those restrictions and covenants is uncertain. Our lenders can unilaterally reduce our borrowing availability based on anticipated commodity prices.

We expect to depend on our revolving credit facility for part of our future capital needs. The terms of the credit agreement require us to comply with certain financial covenants. Our ability to comply with these covenants in the future is

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uncertain and will be affected by the levels of cash flows from operations and events or circumstances beyond our control. Our failure to comply with any of the restrictions and covenants under the revolving credit facility or other debt agreements could result in a default under those agreements, which could cause all of our existing indebtedness to become immediately due and payable.

The revolving credit facility limits the amounts we can borrow to a borrowing base amount, determined by the lenders in their sole discretion based upon projected revenues from the properties securing their loan. Decreases in the price of crude oil, natural gas or NGLs can be expected to have an adverse effect on the borrowing base. The lenders can unilaterally adjust the borrowing base and the borrowings permitted to be outstanding under the revolving credit facility. Outstanding borrowings in excess of the borrowing base must be repaid immediately unless we pledge other crude oil and natural gas properties as additional collateral. We do not currently have any substantial unpledged properties, and we may not have the financial resources in the future to make any mandatory principal prepayments required under the revolving credit facility. Our inability to borrow additional funds under our revolving credit facility could adversely affect our operations and our financial results.
If we are unable to comply with the restrictions and covenants in our debt agreements, the resulting default could lead to an acceleration of payment of funds that we have borrowed and we may not have or be able to obtain the funds necessary to repay those amounts.

Any default under the agreements governing our indebtedness, including a default under our revolving credit facility that is not waived by the required lenders, and the remedies sought by the holders of any such indebtedness, could make us unable to pay principal and interest on our indebtedness and satisfy our other obligations. If we are unable to generate sufficient cash flows and are otherwise unable to obtain the funds necessary to meet required payments of principal and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such a default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under our revolving credit facility could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. In addition, the default could result in a cross-default under other debt agreements. If our operating performance declines, we may in the future need to seek waivers from the required lenders under our revolving credit facility to avoid being in default and we may not be able to obtain such a waiver. If this occurs and no waiver is obtained, we would be in default under our revolving credit facility, the lenders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation. We cannot assure you that we will be granted waivers or amendments to our debt agreements if for any reason we are unable to comply with these agreements, or that we will be able to refinance our debt on terms acceptable to us, or at all.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under our revolving credit facility bear interest at variable rates and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase although the amount borrowed remained the same, and our net income and cash available for servicing our indebtedness and for other purposes would decrease.
Notwithstanding our current indebtedness levels and restrictive covenants, we may still be able to incur substantial additional debt, which could exacerbate the risks described above.
We may be able to incur additional debt in the future. Although our debt agreements contain restrictions on our ability to incur indebtedness, those restrictions are subject to a number of exceptions. In particular, we may borrow under the revolving credit facility. We may also consider investments in joint ventures or acquisitions that may increase our indebtedness. Adding new debt to current debt levels could intensify the related risks that we and our subsidiaries now face.
Under the “successful efforts” accounting method that we use, unsuccessful exploratory wells must be expensed in the period in which they are determined to be non-productive, which reduces our net income in such periods.
We conduct exploratory drilling in order to identify additional opportunities for future development. Under the “successful efforts” method of accounting that we use, the cost of unsuccessful exploratory wells must be charged to expense in the period in which the wells are determined to be unsuccessful. In addition, lease costs for acreage condemned by the unsuccessful well must also be expensed. In contrast, unsuccessful development wells are capitalized as a part of the investment in the field where they are located. The costs of unsuccessful exploratory wells could result in a significant reduction in our profitability in periods in which the costs are required to be expensed.

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Our commodity derivative activities could result in financial losses or reduced income from failure to perform by our counterparties, could limit our potential gains from increases in prices and could result in volatility in our net income.
We use commodity derivatives for a portion of the production from our own wells and for natural gas purchases and sales by our marketing subsidiary to achieve more predictable cash flows, to reduce exposure to adverse fluctuations in commodity prices, and to allow our natural gas marketing company to offer pricing options to natural gas sellers and purchasers. These arrangements expose us to the risk of financial loss in some circumstances, including when purchases or sales are different than expected or the counterparty to the commodity derivative contract defaults on its contractual obligations. In addition, many of our commodity derivative contracts are based on WTI or another crude oil or natural gas index price. The risk that the differential between the index price and the price we receive for the relevant production may change unexpectedly makes it more difficult to hedge effectively and increases the risk of a hedging-related loss. Also, commodity derivative arrangements may limit the benefit we would otherwise receive from increases in the prices for the relevant commodity.
At December 31, 2018, we had hedged a total of 19.6 MMBbls of crude oil and 26.4 Bcf of natural gas through 2020. These hedges may be inadequate to protect us from continuing and prolonged declines in crude oil and natural gas prices.
Since we do not designate our commodity derivatives as cash flow hedges, we do not currently qualify for use of hedge accounting; therefore, changes in the fair value of commodity derivatives are recorded in our income statements and our net income is subject to greater volatility than it would be if our commodity derivative instruments qualified for hedge accounting. For instance, if commodity prices rise significantly, this could result in significant non-cash charges during the relevant period, which could have a material negative effect on our net income.

Our insurance coverage may not be sufficient to cover some liabilities or losses that we may incur.
The occurrence of a significant accident or other event that is not fully covered by insurance, not properly or timely noticed to our carrier, or that is in excess of our insurance coverage, could have a material adverse effect on our operations and financial condition. Insurance does not protect us against all operational risks. We do not carry business interruption insurance at levels that would provide enough funds for us to continue operating without access to other funds. In addition, pollution and environmental risks are generally not fully insurable.
The price of our common stock has been and may continue to be highly volatile, which may make it difficult for shareholders to sell our common stock when desired or at attractive prices.
The market price of our common stock is highly volatile and we expect it to continue to be volatile for the foreseeable future. Adverse events could trigger declines in the price of our common stock, including, among others:

changes in production volumes, worldwide demand and prices for crude oil and natural gas;
inability to hedge future production at the same pricing level as our current or prior hedges;
changes in securities analysts’ estimates of our financial performance;
fluctuations in stock market prices and volumes, particularly among securities of energy companies;
changes in market valuations and valuation multiples of similar companies;
changes in interest rates;
announcements regarding adverse timing or lack of success in discovering, acquiring, developing and producing crude oil and natural gas resources;
announcements by us or our competitors of significant contracts, new acquisitions, discoveries, commercial relationships, joint ventures or capital commitments;
decreases in the amount of capital available to us, including as a result of borrowing base reductions and/or lenders ceasing to participate in our revolving credit facility syndicate;
operating results that fall below market expectations or variations in our quarterly operating results;
loss of a major customer;
loss of a relationship with a partner;
the occurrence and severity of environmental events and governmental and other third-party responses to the events; or
additions or departures of key personnel.

External events, such as news concerning economic conditions, counterparties to our natural gas or crude oil derivatives arrangements, changes in government regulations impacting the crude oil and natural gas exploration and production industry or the movement of capital into or out of our industry, are also likely to affect the price of our common stock, regardless of our operating performance. For example, there have been recent efforts by some investment advisers, sovereign wealth funds, public pension funds, universities and other investment groups to divest themselves from investments

34



in companies involved in fossil fuel extraction, and these efforts could reduce the trading prices of our securities. Similarly, our stock price could be adversely affected by changes in the way that analysts and investors assess the geological and economic characteristics of the basins in which we operate. Furthermore, general market conditions, including the level of, and fluctuations in, the trading prices of stocks generally could affect the price of our common stock. The stock markets regularly experience price and volume volatility that affects many companies’ stock prices without regard to the operating performance of those companies. Volatility of this type may affect the trading price of our common stock. Similar factors could also affect the trading prices of our senior notes.
Our certificate of incorporation, bylaws and Delaware law contain provisions that may have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt, which may adversely affect the market price of our common stock.
Our certificate of incorporation and bylaws, and certain provisions of Delaware law, may have anti-takeover effects.
For example, our certificate of incorporation authorizes our board of directors to issue preferred stock without shareholder approval. If our board of directors elects to issue preferred stock, it could be more difficult for a third party to acquire us, including in circumstances where the acquisition is supported by the holders of a majority of our stock. In addition, other provisions of our certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire control of us against the wishes of our board of directors, including:

the organization of our board of directors as a classified board, which provides that approximately one-third of our directors are subject to election each year;
bylaw provisions that require advance notice of some types of shareholder proposals; and
Delaware law provisions which prohibit us from engaging in any business combination with any "interested stockholder," meaning generally that a stockholder who beneficially owns more than 15% of our stock cannot acquire us for a period of three years from the date this person became an interested stockholder, unless various conditions are met.

In addition, shareholder activism in our industry has been increasing. If we are unable to work productively with activist or other shareholders, any resulting disagreements or disputes could require substantial management time and attention and could adversely affect our results of operations.

Derivatives legislation and regulation could adversely affect our ability to hedge crude oil and natural gas prices and increase our costs and adversely affect our profitability.

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted into law. The Dodd-Frank Act regulates derivative transactions, including our commodity hedging swaps, and could have a number of adverse effects on us, including the following:

The Dodd-Frank Act may limit our ability to enter into hedging transactions, thus exposing us to additional risks related to commodity price volatility; commodity price decreases would then have an increased adverse effect on our profitability and revenues. Reduced hedging may also impair our ability to have certainty with respect to a portion of our cash flows, which could lead to decreases in capital spending and, therefore, decreases in future production and reserves.
If, as a result of the Dodd-Frank Act or its implementing regulations, we are required to post cash collateral in connection with our derivative positions, this would likely make it impracticable to implement our current hedging strategy.
Our derivatives counterparties are subject to significant requirements imposed as a result of the Dodd-Frank Act. We expect that these requirements will increase the cost to hedge because there will be fewer counterparties in the market and increased counterparty costs will be passed on to us.

The above factors could also affect the pricing of derivatives and make it more difficult for us to enter into hedging transactions on favorable terms.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.


35



ITEM 3. LEGAL PROCEEDINGS

Information regarding our legal proceedings can found in the footnote titled Commitments and Contingencies - Litigation and Legal Items to our consolidated financial statements included elsewhere in this report.

ITEM 4. MINE SAFETY DISCLOSURES
    
Not applicable.
PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDERS MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
Our common stock, par value $0.01 per share, is traded on the NASDAQ Global Select Market under the symbol PDCE.

As of February 15, 2019, we had approximately 476 stockholders of record. Since inception, no cash dividends have been declared on our common stock. Cash dividends are restricted under the terms of our revolving credit facility, as well as the indentures governing our 6.125% senior notes due September 15, 2024 (the "2024 Senior Notes") and our 5.75% senior notes due May 15, 2026 (the "2026 Senior Notes"), and we presently intend to continue a policy of using retained earnings for the expansion of our business.

The following table presents information about our purchases of our common stock during the three months ended December 31, 2018:
Period
 
Total Number of Shares Purchased (1)
 
Average Price Paid per Share
 
 
 
 
 
October 1 - 31, 2018
 
5,160

 
$
47.20

November 1 - 30, 2018
 

 

December 1 - 31, 2018
 
7,022

 
29.00

Total fourth quarter 2018 purchases
 
12,182

 
36.71

__________
(1)
Purchases primarily represent shares purchased from employees for the payment of their tax liabilities related to the vesting of securities issued pursuant to our stock-based compensation plans.


36



STOCKHOLDER PERFORMANCE GRAPH

The performance graph below compares the cumulative total return of our common stock over the five-year period ended December 31, 2018 with the cumulative total returns for the same period for the Standard and Poor's ("S&P") 500 Index and the Standard Industrial Code ("SIC") Index. The SIC Index is a weighted composite of 233 crude petroleum and natural gas companies. The cumulative total stockholder return assumes that $100 was invested, including reinvestment of dividends, if any, in our common stock on December 31, 2013, and in the S&P 500 Index and the SIC Index on the same date. The results shown in the graph below are not necessarily indicative of future performance.

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12741674&doc=28

37




ITEM 6. SELECTED FINANCIAL DATA


 
Year Ended/As of December 31,

 
2018
 
2017
 
2016 (1)
 
2015
 
2014 (2)

 
(in millions, except per share data and as noted)
Statement of Operations (From Continuing Operations):
 
 
 
 
 
 
 
 
 
 
Crude oil, natural gas and NGLs sales
 
$
1,390.0

 
$
913.1

 
$
497.4

 
$
378.7

 
$
471.4

Commodity price risk management gain (loss), net
 
145.2

 
(3.9
)
 
(125.7
)
 
203.2

 
310.3

Total revenues
 
1,548.7

 
921.6

 
382.9

 
595.3

 
856.2

Income (loss) from continuing operations
 
2.0

 
(127.5
)
 
(245.9
)
 
(68.3
)
 
107.3


 
 
 
 
 
 
 
 
 
 
Earnings per share from continuing operations:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.03

 
$
(1.94
)
 
$
(5.01
)
 
$
(1.74
)
 
$
3.00

Diluted
 
0.03

 
(1.94
)
 
(5.01
)
 
(1.74
)
 
2.93


 
 
 
 
 
 
 
 
 
 
Statement of Cash Flows:
 
 
 
 
 
 
 
 
 
 
Net cash flows from:
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
889.3

 
$
597.8

 
$
486.3

 
$
411.1

 
$
236.7

Investing activities
 
(1,087.9
)
 
(717.0
)
 
(1,509.1
)
 
(604.3
)
 
(474.1
)
Financing activities
 
18.1

 
65.0

 
1,266.1

 
178.0

 
60.3

Capital expenditures from development of crude oil and natural gas properties (3)
 
(946.4
)
 
(737.2
)
 
(436.9
)
 
(599.5
)
 
(623.8
)
Acquisition of crude oil and natural gas properties
 
(180.0
)
 
(15.6
)
 
(1,073.7
)
 

 


 
 
 
 
 
 
 
 
 
 
Balance Sheet:
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
4,544.1

 
$
4,420.4

 
$
4,485.8

 
$
2,370.5

 
$
2,331.1

Working capital (deficit)
 
(166.6
)
 
(16.4
)
 
129.2

 
30.7

 
89.5

Total debt, net of unamortized discount and debt issuance costs
 
1,194.9

 
1,151.9

 
1,044.0

 
642.4

 
655.5

Total equity
 
2,526.7

 
2,507.6

 
2,622.8

 
1,287.2

 
1,137.4


 
 
 
 
 
 
 
 
 
 
Average Pricing and Production Expenses From Continuing Operations (per Boe and as a percent of sales for production taxes):
 
 
 
 
 
 
 
 
 
 
Sales price (excluding net settlements on derivatives)
 
$
34.61

 
$
28.69

 
$
22.43

 
$
24.64

 
$
50.72

Lease operating expenses
 
3.26

 
2.82

 
2.70

 
3.71

 
4.56

Transportation, gathering and processing
 
0.93

 
1.04

 
0.83

 
0.66

 
0.49

Production taxes
 
2.25

 
1.91

 
1.42

 
1.20

 
2.76

Production taxes (as a percent of sales)
 
6.5
%
 
6.6
%
 
6.3
%
 
4.9
%
 
5.4
%
 
 
 
 
 
 
 
 
 
 
 
Production (MBoe):
 
 
 
 
 
 
 
 
 
 
Production from continuing operations
 
40,160

 
31,830

 
22,176

 
15,369

 
9,294

Production from discontinued operations
 

 

 

 

 
1,093

Total production
 
40,160

 
31,830

 
22,176

 
15,369

 
10,387

 
 
 
 
 
 
 
 
 
 
 
Total proved reserves (MMBoe)
 
544.9

 
452.9

 
341.4

 
272.8

 
250.1

______________
(1)
In 2016, we closed an acquisition in the Delaware Basin for aggregate consideration of approximately $1.76 billion. 
(2)
In 2014, we completed the sale of our ownership interest in PDC Mountaineer, LLC ("PDCM"). Our proportionate share of PDCM's Marcellus Shale results of operations have been separately reported as discontinued operations. 
(3)
Includes impact of change in accounts payable related to capital expenditures.



38




ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this report. Further, we encourage you to revisit the Special Note Regarding Forward-Looking Statements in Part I of this report.

SUMMARY

2018 Financial Overview of Operations and Liquidity

Production volumes increased 26 percent to 40.2 MMBoe in 2018 compared to 2017. The increase in production volumes was primarily attributable to the continued success of our horizontal Niobrara and Codell drilling program in the Wattenberg Field and growing production from our horizontal Wolfcamp drilling program in our Delaware Basin properties. Crude oil production increased 32 percent in 2018 and comprised approximately 42 percent of our total production. Natural gas production increased 23 percent and NGLs production increased 22 percent in 2018 compared to 2017. On a combined basis, total liquids production of crude oil and NGLs comprised 63 percent of production in 2018. For the month ended December 31, 2018, we maintained an average production rate of approximately 129,000 Boe per day, up from approximately 97,000 Boe per day for the month ended December 31, 2017.

Crude oil, natural gas and NGLs sales increased to $1.4 billion in 2018 compared to $913.1 million in 2017, due to a 26 percent increase in production, combined with a 21 percent increase in weighted average realized commodity prices. Crude oil, natural gas and NGLs sales increased 84 percent in 2017 as compared to 2016 due to a 44 percent increase in production, combined with a 28 percent increase in average realized commodity prices.

We had negative net settlements from our commodity derivative contracts of $115.5 million for 2018 as compared to positive net settlements of $13.3 million and $208.1 million for 2017 and 2016, respectively. See Results of Operations - Commodity Price Risk Management, Net for further details of our settlements of derivatives and changes in the fair value of unsettled derivatives.

The combined revenue from crude oil, natural gas and NGLs sales and net settlements received on our commodity derivative instruments increased 38 percent to $1.3 billion in 2018 from $926.4 million in 2017. Such combined revenue of $926.4 million in 2017 represented an increase of 31 percent from $705.5 million in 2016.

During 2018, we recorded unproved and proved property impairment charges of $458.4 million, primarily resulting from identified current and anticipated near-term leasehold expirations within our non-focus areas of the Delaware Basin and our determination that we would no longer pursue plans to develop these properties. For more information regarding these charges see Results of Operations - Impairments of Properties.

In 2018, we generated a net income of $2.0 million or $0.03 per diluted share. Our net income was most negatively impacted by the aforementioned impairment charges.

During the same period, our adjusted EBITDAX, a non-U.S. GAAP financial measure, was $868.3 million, up 27 percent relative to 2017. See Reconciliation of Non-U.S. GAAP Financial Measures, below, for a more detailed discussion of adjusted EBITDAX and a reconciliation of adjusted EBITDAX to net income and cash from operating activities. The increase in our 2018 adjusted EBITDAX as compared to 2017 was primarily the result of the increase in crude oil, natural gas and NGLs sales of $476.9 million. This increase was partially offset by a decrease in derivative commodity settlements of $128.9 million, an increase in operating costs of $125.3 million and the reversal of a provision for uncollectible notes receivable of $40.2 million in 2017. In 2017 and 2016, our net loss per diluted share was $1.94 and $5.01, respectively, and our adjusted EBITDAX was $682.1 million and $459.8 million, respectively.

Our net cash flows from operating activities in 2018, 2017 and 2016 were $889.3 million, $597.8 million and $486.3 million, respectively, and our adjusted cash flows from operations, a non-U.S. GAAP financial measure, were $808.4 million, $582.1 million and $466.8 million, respectively.




39



Liquidity

Available liquidity as of December 31, 2018 was $1.3 billion, which was comprised of $1.4 million of cash and cash equivalents and $1.3 billion available for borrowing under our revolving credit facility at our current commitment level. We increased the commitment level on our revolving credit facility to $1.3 billion in October 2018.

We maintain a significant capital investment program to execute our development plans, which requires capital expenditures to be made in periods prior to initial production from newly-developed wells. Further, we use our available liquidity for other working capital requirements, acquisitions, support for letters of credit and for general corporate purposes. From time to time, these activities may result in a working capital deficit; however, we do not believe that our working capital deficit as of December 31, 2018 is an indication of a lack of liquidity. We intend to continue to manage our liquidity position by a variety of means, including through the generation of cash flows from operations, investment in projects with attractive rates of return, protection of cash flows on a portion of our anticipated sales through the use of an active commodity derivative hedging program, utilization of our borrowing capacity under our revolving credit facility and, if warranted, capital markets transactions from time to time.

Acquisitions

We closed the Bayswater Asset Acquisition in January 2018, acquiring approximately 7,400 net acres, 24 operated horizontal wells that were either DUCs or in-process wells at the time of closing and approximately 220 gross drilling locations. See the footnote titled Business Combination to our consolidated financial statements included elsewhere in this report for further details.

Acreage Exchanges

During 2018, we completed two acreage exchanges that consolidated our position in the core area of the Wattenberg Field, resulting in us acquiring approximately 14,800 net acres in exchange for 15,500 net acres.


40




2018 Drilling Overview

During the year ended December 31, 2018, we continued to execute our strategic plan to grow production while preserving our financial strength and liquidity. During 2018, we ran three drilling rigs in each of the Wattenberg Field and Delaware Basin.

The following tables summarizes our drilling and completion activity for the year ended December 31, 2018:

 
 
Wells Operated by PDC
 
 
Wattenberg Field
 
Delaware Basin
 
Total
 
 
 Gross
 
 Net
 
Gross
 
Net
 
Gross
 
Net
In-process as of December 31, 2017
 
87

 
80.1

 
13

 
12.2

 
100

 
92.3

Wells spud
 
161

 
150.9

 
31

 
29.7

 
192

 
180.6

 Acquired in-process (1)
 
24

 
18.2

 

 

 
24

 
18.2

Wells turned-in-line
 
(139
)
 
(126.8
)
 
(26
)
 
(24.5
)
 
(165
)
 
(151.3
)
In-process as of December 31, 2018
 
133

 
122.4

 
18

 
17.4

 
151

 
139.8


 
 
Wells Operated by Others
 
 
Wattenberg Field
 
Delaware Basin
 
Total
 
 
 Gross
 
 Net
 
Gross
 
Net
 
Gross
 
Net
In-process as of December 31, 2017
 
14

 
2.6

 
8

 
1.0

 
22

 
3.6

Wells spud
 
25

 
3.4

 
9

 
1.1

 
34

 
4.5

 Acquired DUCs (operated at December 31, 2018) (1)
 
(3
)
 
(1.5
)
 

 

 
(3
)
 
(1.5
)
Wells turned-in-line
 
(31
)
 
(2.5
)
 
(11
)
 
(1.2
)
 
(42
)
 
(3.7
)
In-process as of December 31, 2018
 
5

 
2.0

 
6

 
0.9

 
11

 
2.9

_______________
(1)
Represents DUCs and completed wells that had not been turned-in-line that we acquired with the Bayswater Asset Acquisition in January 2018.

Our in-process wells represent wells that are in the process of being drilled and/or have been drilled and are waiting to be fractured and/or for gas pipeline connection. Our DUCs are generally completed and turned-in-line within a year of drilling.
2019 Operational and Financial Outlook

We anticipate that our production for 2019 will range between 46 MMBoe to 50 MMBoe, or approximately 126,000 Boe to 137,000 Boe per day for the year. We expect that approximately 41 to 45 percent of our 2019 production will be comprised of crude oil and approximately 21 to 23 percent will be NGLs, for total liquids of approximately 62 to 68 percent. Our planned 2019 capital investments in crude oil and natural gas properties, which we expect to be between $810 million and $870 million, are focused on continued execution of our development plans in the Wattenberg Field and Delaware Basin.

In 2019, we also expect to spend approximately $20 million for corporate capital, the majority of which is related to the implementation of an ERP system to replace our existing operating and financial systems. This long-planned investment is being made to enhance maintenance of our financial records, improve operational functionality and provide timely information to our management team related to the operation of the business.

We believe that we maintain a degree of operational flexibility to control the pace of our capital spending. As we execute our capital investment program, we continually monitor, among other things, expected rates of return, the political environment and our remaining inventory in order to best meet our short- and long-term corporate strategy. Should commodity pricing or the operating environment deteriorate, we may determine that an adjustment to our development plan is appropriate.

Wattenberg Field. We are drilling in the horizontal Niobrara and Codell plays in the rural areas of the core Wattenberg Field, which is further delineated between the Kersey, Prairie and Plains development areas. Our 2019 capital investment program for the Wattenberg Field is approximately 60 percent of our total capital investments in crude oil and natural gas properties, of which approximately 90 percent is expected to be invested in operated drilling and completion activity. We plan to drill standard-reach lateral (“SRL”), mid-reach lateral (“MRL”) and extended-reach lateral (“XRL”) wells in 2019, the

41



majority of which will be in the Kersey area of the field. In 2019, we anticipate spudding approximately 135 to 150 operated wells and turning-in-line approximately 110 to 125 operated wells. We expect to drill at a three-rig pace in 2019 with an average development cost per well of between $3 million and $5 million, depending upon the lateral length of the well. The remainder of the Wattenberg Field capital investment program is expected to be used for non-operated drilling, land, capital workovers and facilities projects.