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EX-10.5.1 - EXHIBIT 10.5.1 - SRC Energy Inc.exhibit106-1stamendmenttoe.htm
EX-99.1 - EXHIBIT 99.1 - SRC Energy Inc.exhibit991-rsreport2016.htm
EX-32.1 - EXHIBIT 32.1 - SRC Energy Inc.exhibit321-soxcert.htm
EX-31.2 - EXHIBIT 31.2 - SRC Energy Inc.exhibit312-cfocert.htm
EX-31.1 - EXHIBIT 31.1 - SRC Energy Inc.exhibit311-ceocert.htm
EX-23.3 - EXHIBIT 23.3 - SRC Energy Inc.exhibit233-rsconsent.htm
EX-23.2 - EXHIBIT 23.2 - SRC Energy Inc.exhibit232-ekshconsent.htm
EX-23.1 - EXHIBIT 23.1 - SRC Energy Inc.exhibit231-dtconsent.htm


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

FORM 10-K


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

For the fiscal year ended December 31, 2016

OR

 
o
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:  001-35245

SYNERGY RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)

COLORADO
20-2835920
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

1625 Broadway, Suite 300, Denver, CO
80202
(Address of principal executive offices) 
(Zip Code)
 
Registrant's telephone number, including area code: (720) 616-4300

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Name of each exchange on which registered
Common Stock
 
NYSE MKT

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

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 o   No ý

Indicate by check mark whether the registrant (1) has filed all reports 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 ý   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý   No o






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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer  o
 
 
Non-accelerated filer  o   (Do not check if a smaller reporting company)    
Smaller reporting company  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):  Yes o No ý

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the registrant’s common stock on June 30, 2016, was approximately $1.3 billion.  Shares of the registrant’s common stock held by each officer and director and each person known to the registrant to own 10% or more of the outstanding voting power of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not a determination for other purposes.

As of January 31, 2017, the Registrant had 200,674,003 issued and outstanding shares of common stock.

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 to be filed pursuant to Regulation 14A for our 2017 Annual Meeting of Stockholders.






SYNERGY RESOURCES CORPORATION

Index

 
 
 
Page
PART I
 
 
Item 1.
Business
 
Item 1A.
Risk Factors
 
Item 1B.
Unresolved Staff Comments
 
Item 2.
Properties
 
Item 3.
Legal Proceeding
 
Item 4.
Mine Safety Disclosures
 
 
 
 
 
PART II
 
 
 
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
 
Item 6.
Selected Financial Data
 
Item 7.
Management's Discussion and Analysis of Financial Condition and Result of Operations
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risks
 
Item 8.
Financial Statements and Supplementary Data
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
Item 9A.
Controls and Procedures
 
Item 9B.
Other Information
 
 
 
 
 
PART III
 
 
Item 10.
Directors, Executive Officers, and Corporate Governance
 
Item 11.
Executive Compensation
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Item 13.
Certain Relationships and Related Transactions and Director Independence
 
Item 14.
Principal Accounting Fees and Services
 
 
 
 
 
PART IV
 
 
 
Item 15.
Exhibits, Financial Statement Schedules
 
 
 
 
 
SIGNATURES
 
 
 
 
GLOSSARY OF UNITS OF MEASUREMENT AND INDUSTRY TERMS
 






PART I

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.

Cautionary Statement Concerning Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of management and information currently available to management. The use of words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “should,” “likely,” or similar expressions indicate forward-looking statements. Forward-looking statements included in this report include statements relating to future capital expenditures and projects, the adequacy and nature of future sources of financing, possible future impairment charges, midstream capacity issues, future differentials, and future production relative to volume commitments.

The identification in this report of factors that may affect our future performance and the accuracy of forward-looking statements is meant to be illustrative and by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.

Important factors that could cause our actual results to differ materially from those expressed or implied by forward-looking statements include, but are not limited to:
declines in oil and natural gas prices;
operating hazards that adversely affect our ability to conduct business;
uncertainties in the estimates of proved reserves;
the effect of seasonal weather conditions and wildlife and plant species restrictions on our operations;
our ability to fund, develop, produce, and acquire additional oil and natural gas reserves that are economically recoverable;
our ability to obtain adequate financing;
the effect of local and regional factors on oil and natural gas prices;
incurrence of ceiling test write-downs;
our inability to control operations on properties that we do not operate;
the availability and capacity of gathering systems, pipelines, and other midstream infrastructure for our production;
the strength and financial resources of our competitors;
our ability to successfully identify, execute, and effectively integrate acquisitions;
the effect of federal, state, and local laws and regulations;
the effects of, including costs to comply with, environmental legislation or regulatory initiatives, including those related to hydraulic fracturing;
our ability to market our production;
the effects of local moratoria or bans on our business;
the effect of environmental liabilities;
the effect of the adoption and implementation of statutory and regulatory requirements for derivative transactions;
changes in U.S. tax laws;
our ability to satisfy our contractual obligations and commitments;
the amount of our indebtedness and our ability to maintain compliance with debt covenants;
the effectiveness of our disclosure controls and our internal controls over financial reporting;
the geographic concentration of our principal properties;
our ability to protect critical data and technology systems;
the availability of water for use in our operations; and
the risks and uncertainties described and referenced in "Risk Factors."

Note Regarding Change in Fiscal Year

In February 2016, the Company changed its fiscal year-end to December 31 from August 31. Certain information in this report is presented as of and for the fiscal years ended August 31, 2015, 2014, 2013 and 2012.

1



ITEM 1.
BUSINESS

Overview

Synergy Resources Corporation ("we," "us," "Synergy," or the "Company") is a growth-oriented independent oil and gas company engaged in the acquisition, development, and production of oil and natural gas in the Denver-Julesburg Basin (“D-J Basin”), which we believe to be one of the premier, liquids-rich oil and natural gas resource plays in the United States. The D-J Basin generally extends from the Denver metropolitan area throughout northeast Colorado into Wyoming, Nebraska, and Kansas. It contains hydrocarbon-bearing deposits in several formations, including the Niobrara, Codell, Greenhorn, Shannon, Sussex, J-Sand, and D-Sand. The area has produced oil and natural gas for over fifty years and benefits from established infrastructure including midstream and refining capacity, long reserve life, and multiple service providers.

Our drilling and completion activities are focused in the Wattenberg Field, predominantly in Weld County, Colorado, an area that covers the western flank of the D-J Basin. Currently, we are focused on the horizontal development of the Codell and Niobrara formations, which are characterized by relatively high liquids content.

In order to maintain operational focus while preserving developmental flexibility, we strive to attain operational control of a majority of the wells in which we have a working interest. We currently operate approximately 73% of our proved producing reserves, and anticipate operating substantially all of our future net drilling locations. Our current development plan anticipates that all of our future activities will be concentrated in the Wattenberg Field.

During the twelve months ended December 31, 2016, we continued to execute our plans for growth through development of our existing oil and gas properties and strategic acquisitions of leasehold and producing properties. As of December 31, 2016, we are the operator of 324 gross (288 net) producing wells, of which 110 gross (106 net) are Codell or Niobrara horizontal wells. The Company has also participated as a non-operator in 307 gross (65 net) producing wells. In addition, there were 49 gross (44 net) operated wells in various stages of drilling or completion as of December 31, 2016, which excludes 9 gross (9 net) wells for which we have only set surface casings.

For the twelve months ended December 31, 2016 and 2015, our average net daily production was 11,670 BOED and 9,548 BOED, respectively. By comparison, during the years ended August 31, 2015, 2014 and 2013, our average production rate was 8,750 BOED, 4,290 BOED, and 2,117 BOED, respectively. By the end of December 31, 2016, over 96% of our daily operated production was from horizontal wells.

Strategy

Our primary objective is to enhance shareholder value by increasing our net asset value, net reserves, and cash flow through development, exploitation, exploration, and acquisitions of oil and gas properties. We intend to follow a balanced risk strategy by allocating capital expenditures to lower risk development and exploitation activities. Key elements of our business strategy include the following:

Concentrate on our existing core area in the D-J Basin, where we have significant operating experience.  All of our current wells and our proved undeveloped acreage is located either in or adjacent to the Wattenberg Field.  Focusing our operations in this area leverages our management, technical, and operational experience in the basin.
 
Develop and exploit existing oil and gas properties.  Our principal growth strategy has been to develop and exploit our properties to add reserves.  In the Wattenberg Field, we target three benches of the Niobrara formation as well as the Codell formation for horizontal drilling and production. We believe horizontal drilling is the most efficient way to recover the potential hydrocarbons and consider the Wattenberg Field to be relatively low-risk because information gained from the large number of existing wells can be applied to potential future wells.  There is enough similarity between wells in the Wattenberg Field that the exploitation process is generally repeatable.

Improve hydrocarbon recovery through increased well density.  We utilize what we believe to be industry best practices in our effort to determine the optimal recovery area for each well. Early horizontal well development in the Wattenberg Field generally assumed optimal recoveries would be obtained utilizing between 12 and 16 wells per 640-acre section. As horizontal well development has matured, well density assumptions have generally increased beyond 16 wells per section depending on the specific area of the field being drilled.
 
Complete selective acquisitions.  We seek to acquire developed and undeveloped oil and gas properties, primarily in the Wattenberg Field.  We generally seek acquisitions that will provide us with opportunities for reserve additions and

2



increased cash flow through production enhancement and additional development and exploratory prospect generation.
 
Retain control over the operation of a substantial portion of our production. As operator of a majority of our wells and undeveloped acreage, we control the timing and selection of new wells to be drilled.  This allows us to modify our capital spending as our financial resources and underlying lease terms allow and market conditions permit.

Maintain financial flexibility while focusing on operational cost control.  We strive to be a cost-efficient operator and to maintain a relatively low utilization of debt, which enhances our financial flexibility. Our high degree of operational control, as well as our focus on operating efficiencies and short return on investment cycle times, is central to our operating strategy.

Use the latest technology to maximize returns.  Our development objective for individual well optimization is to drill and complete wells with lateral lengths of 7,000' to 10,000' as opposed to the 4,000' laterals that were initially drilled in the Wattenberg Field. Utilizing petrophysical and seismic data, a 3-D model is developed for each leasehold section to assist in determining optimal wellbore placement, well spacing, and stimulation design. This process is augmented with formation-specific drilling and completion execution designs and coupled with localized production results to provide a continuous improvement philosophy in optimizing the value per acre of our leasehold throughout our development program.
      
Competitive Strengths
 
We believe that we are positioned to successfully execute our business strategy because of the following competitive strengths:

Core acreage position in the Wattenberg Field. Wells in our core properties in the Wattenberg Field generally exhibit high liquids content, and those properties are generally prospective for Niobrara A, B, and C bench and Codell development. We believe that these factors will lead to attractive EURs per acres of leasehold, per unit capital and operating costs, and rates of return. Increased well density within the Codell and Niobrara formations, as well as our acquisition efforts and organic leasing efforts within the core Wattenberg Field, have added to our multi-year drilling inventory.

Financial flexibility. Our capital structure, along with our high degree of operational control, continues to provide us with significant financial flexibility. We have historically utilized very little debt in our capital structure. Our low debt level has enabled us to make capital decisions with limited restrictions imposed by debt covenants, lender oversight, and/or mandatory repayment schedules. Additionally, as the operator of substantially all of our anticipated future drilling locations per our December 31, 2016 reserve report, we control the timing and selection of drilling locations as well as completion schedules. This allows us to modify our capital spending program depending on financial resources, leasehold requirements, and market conditions.

Management experience.  Members of our key management team possess an average of over thirty years of experience in oil and gas exploration and production in multiple resource plays including the Wattenberg Field.
 
Balanced oil and natural gas reserves and production.  At December 31, 2016, approximately 73% of total gross revenues were oil and condensate, and 27% were natural gas. We believe that this balanced commodity mix will provide diversification of sources of cash flow.

Cost-efficient and safe operator. We have continued to demonstrate our ability to drill wells in a cost-efficient and safe way and to successfully integrate acquired assets without incurring significant increases in overhead.

High success rate. We have concentrated our drilling in areas that we perceive as relatively low risk and, as a result, have had a very high success rate in our drilling program throughout the Wattenberg Field.

Properties

As of December 31, 2016, our estimated net proved oil and natural gas reserves, as prepared by our independent reserve engineering firm Ryder Scott Company, L.P. ("Ryder Scott"), were 38.0 MMBbls of oil and condensate and 331.9 Bcf of natural gas. As of December 31, 2016, we had approximately 397,200 gross and 332,400 net acres under lease. We further delineate our acreage into specific areas, including the areas that we refer to as the Wattenberg Field (approximately 78,500 gross and 68,900 net acres) and the North East Extension Area (approximately 55,300 gross and 27,600 net acres). In addition, we hold approximately

3



183,600 gross (180,400 net) acres in southwest Nebraska, a conventional oil-prone prospect, and approximately 77,900 gross (54,200 net) acres in other areas of Colorado.

We currently operate over 73% of our proved producing reserves, and over 98% of our drilling and completion expenditures during the twelve months ended December 31, 2016 were focused on the Wattenberg Field. Substantially all of our drilling and completion expenditures for the 2017 calendar year are anticipated to be focused on the Wattenberg Field. A high degree of operational and capital control gives us both operational focus and development flexibility to maximize returns on our leasehold position.

Significant Business Developments

Acquisitions

In May 2016, the Company entered into an agreement ("GC Agreement") to purchase a total of approximately 72,000 gross (33,100 net) acres located in an area known as the Greeley-Crescent development area in Weld County Colorado, primarily in and around the city of Greeley, for $505 million ("GC Acquisition"). Estimated net daily production from the acquired properties was approximately 2,400 BOE at the time we entered into the agreement. On June 14, 2016, the Company closed on the portion of the assets comprised of the undeveloped lands and non-operated production. The effective date of this part of the transaction was April 1, 2016, and the purchase price was $486.4 million, comprised of $485.1 million in cash and the assumption of certain liabilities. The second closing will cover the operated producing properties and is expected to be completed in 2017. The Company has placed $18.2 million in escrow to be released upon the second closing. For the second closing, the effective date will be April 1, 2016 for the horizontal wells to be acquired and the first day of the calendar month in which the closing for such properties occurs for the vertical wells. The second closing is subject to certain closing conditions including the receipt of regulatory approval. Accordingly, the second closing of the transaction may not close in the expected time frame or at all.

During 2016, the Company completed various other acquisitions of undeveloped oil and natural gas leasehold interests in the D-J Basin for a total of $20.7 million in cash and the assumption of certain liabilities or receivables. These acquisitions were completed in an effort to increase our working interests and to extend the lateral lengths of our wells. See Note 3 to the consolidated financial statements included in this report for further discussion.

Divestitures

In April 2016, the Company agreed to divest approximately 3,700 net undeveloped acres primarily in Adams County, Colorado and 107 vertical wells primarily in Weld County, Colorado for total consideration of approximately $24.7 million in cash and the assumption by the buyers of $0.5 million in liabilities. The divested assets had associated production of approximately 200 BOED at the time of sale. The vertical well transaction closed in April 2016 and the undeveloped acreage transaction closed in June 2016.

In January 2017, we executed a purchase and sale agreement with a private party resulting in the divestiture of acreage outside of the Company's core development area. The transaction resulted in the Company divesting approximately 10,000 net undeveloped acres and approximately 700 BOED of associated production for $71 million. The transaction is expected to close in the first quarter of 2017.

Equity offerings

In January 2016, the Company closed on the sale of 16,100,000 shares of common stock pursuant to an underwriting agreement with Credit Suisse Securities (USA) LLC, acting severally on behalf of itself and the other underwriters.  The price to the Company was $5.545 per share, and net proceeds to the Company, after deduction of underwriting discounts and expenses payable by the Company, were $89.2 million. Proceeds were used to repay amounts borrowed under the revolving credit facility and for general corporate purposes, which included continuing to develop our acreage position in the Wattenberg Field and funding a portion of our 2016 capital expenditure program.

In April 2016, the Company closed on the sale of an additional 22,425,000 shares of common stock pursuant to an underwriting agreement with substantially the same underwriting group.  The price to the Company was $7.3535 per share, and net proceeds to the Company, after deduction of underwriting discounts and expenses payable by the Company, were $164.8 million.  The proceeds of this offering were used for general corporate purposes, including to fund the GC Acquisition.

In May and June 2016, the Company closed on the sale of an additional 51,750,000 shares of common stock pursuant to an underwriting agreement with substantially the same underwriting group.  The price to the Company was $5.597 per share, and

4



net proceeds to the Company, after deduction of underwriting discounts and expenses payable by the Company, were $289.4 million. The proceeds of this offering were used for general corporate purposes, including to fund the GC Acquisition.

Revolving Credit Facility

We continue to maintain a borrowing arrangement with our bank syndicate to provide us with liquidity, which could be used to develop oil and gas properties, acquire new oil and gas properties, and for working capital and other general corporate purposes. As of December 31, 2016, this revolving credit facility (sometimes referred to as the "Revolver") provides for maximum borrowings of $500 million, subject to adjustments based upon a borrowing base calculation, which is redetermined semi-annually using updated reserve reports. The Revolver is collateralized by certain of our assets, including substantially all of our producing wells and developed oil and gas leases, and bears a variable interest rate on borrowings with the effective rate varying with utilization. The Revolver expires on December 15, 2019. See further discussion in Note 6 to our consolidated financial statements

In October 2016, the Revolver was amended in connection with the semi-annual redetermination of the borrowing base. The borrowing base was increased from $145 million to $160 million. Due to outstanding letters of credit, approximately $159.5 million of the borrowing base was available to use for future borrowings as of December 31, 2016.

The Revolver contains covenants that, among other things, restrict the payment of dividends and limit our overall commodity derivative position to a maximum position that varies over 5 years as a percentage of estimated proved reserves as projected in the semi-annual reserve report.

The Revolver also requires the Company to maintain compliance with certain financial and liquidity ratio covenants. Under the requirements, the Company, on a quarterly basis, must not (a) at any time permit its ratio of total funded debt as of such time to EBITDAX, as defined in the agreement, to be greater than or equal to 4.0 to 1.0; or (b) as of the last day of any fiscal quarter permit its current ratio, as defined in the agreement, to be less than 1.0 to 1.0. As of December 31, 2016, the most recent compliance date, the Company was in compliance with these covenants and expects to remain in compliance throughout the next 12-month period.

Senior Notes

In June 2016, the Company issued $80 million aggregate principal amount of 9% Senior Notes ("Senior Notes") in a private placement to qualified institutional buyers. The maturity for the payment of principal is June 13, 2021. Interest on the Senior Notes accrues at 9% and began accruing on June 14, 2016. Interest is payable on June 15 and December 15 of each year, beginning on December 15, 2016. The Senior Notes were issued pursuant to an indenture dated as of June 14, 2016 (the "Indenture") and are guaranteed on a senior unsecured basis by the Company’s existing and future subsidiaries that incur or guarantee certain indebtedness, including indebtedness under the Revolver. The net proceeds from the sale of the Senior Notes were $75.2 million after deductions of $4.8 million for expenses and underwriting discounts and commissions. The net proceeds were used to fund the GC Acquisition. The Indenture contains covenants that restrict the Company’s ability and the ability of certain of its subsidiaries to, among other restrictions and limitations: (i) incur additional indebtedness; (ii) incur liens; (iii) pay dividends; (iv) consolidate, merge, or transfer all or substantially all of its or their assets; (v) engage in transactions with affiliates; or (vi) engage in certain restricted business activities.  These covenants are subject to a number of exceptions and qualifications.


5



Drilling and Completion Operations

During the periods presented below, we drilled or participated in the drilling of a number of wells that reached productive status in each respective period.  During the twelve months ended December 31, 2016, we completed 24 wells in two separate spacing units.  Due to proved well density thresholds, 6 of the wells are classified as exploratory and 18 of the wells are classified as development. 
 
Twelve Months Ended December 31, 2016
 
Four Months Ended December 31, 2015
 
Year Ended August 31,
 
 
 
2015
 
2014
 
Gross
 
Net
 
Gross
 
Net
 
Gross
 
Net
 
Gross
 
Net
Development Wells:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Productive:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Oil
18
*
 
17

 
4

 
4

 
8

 
1

 
47

 
22

Gas

 

 

 

 
1

 

 
2

 
1

Nonproductive

 

 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exploratory Wells:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Productive:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Oil
6

 
5

 
9

 
9

 
67

 
40

 
11

 
10

Gas

 

 

 

 

 

 

 

Nonproductive

 

 
1

 

 

 

 
1

 

* Excludes 3 gross (0.42 net) productive wells which we participated in on a non-operated basis.

All of the oil wells in the table above are located in, or adjacent to, the Wattenberg Field of the D-J Basin. The three natural gas wells in the table above are located in Yuma County, Colorado. As of December 31, 2016, we were the operator of 49 gross (44 net) wells in progress, which excludes 9 gross (9 net) wells for which we have only set surface casings, that were not included in the above well counts.

Production Data
          
The following table shows our net production of oil and natural gas, average sales prices, and average production costs for the periods presented:
 
Twelve months ended December 31,
 
Years Ended August 31,
 
2016
 
2015
 
2015
 
2014
Production:
 
 
 
 
 
 
 
Oil (MBbls)
2,257

 
2,073

 
1,970

 
941

Natural Gas (MMcf)
12,086

 
8,472

 
7,344

 
3,747

MBOE
4,271

 
3,485

 
3,194

 
1,566

BOED
11,670

 
9,548

 
8,750

 
4,290

 
 
 
 
 
 
 
 
Average sales price:
 
 
 
 
 
 
 
Oil ($/Bbl)
$
34.43

 
$
40.08

 
$
50.75

 
$
89.98

Natural Gas ($/Mcf)
$
2.44

 
$
2.71

 
$
3.39

 
$
5.21

BOE
$
25.09

 
$
30.43

 
$
39.09

 
$
66.56

 
 
 
 
 
 
 
 
Average lease operating expenses ("LOE") per BOE
$
4.67

 
$
4.61

 
$
4.70

 
$
5.10



6



Major Customers

Historically, we sold our oil production to local refineries and, to a lesser degree, third-party marketers. During 2014, we secured contracts with additional oil purchasers who transport oil via pipelines. Under the contracts, we have delivery commitments covering a portion of our anticipated future production over the next four to five years. Our natural gas is sold under contracts with two midstream gas gathering and processing companies. We believe that both gas processing and oil takeaway capacity are sufficient to meet our anticipated production growth. See further discussion in Note 16 to our consolidated financial statements.

Oil and Gas Properties, Wells, Operations, and Acreage

We believe that the title to our oil and gas properties is good and defensible in accordance with standards generally accepted in the oil and gas industry, subject to such exceptions which, in our opinion, are not so material as to detract substantially from the use or value of such properties. Our properties are typically subject, in one degree or another, to one or more of the following:
royalties and other burdens and obligations, expressed or implied, under oil and gas leases;
overriding royalties and other burdens created by us or our predecessors in title;
a variety of contractual obligations (including, in some cases, development obligations) arising under operating agreements, farm-out agreements, production sales contracts, and other agreements that may affect the properties or title thereto;
back-ins and reversionary interests existing as a result of pooling under state orders;
liens that arise in the normal course of operations, such as those for unpaid taxes, statutory liens securing obligations to unpaid suppliers and contractors, and contractual liens under operating agreements;
pooling, unitization and communitization agreements, declarations, and orders; and
easements, restrictions, rights-of-way, and other matters that commonly affect property.

To the extent that such burdens and obligations affect our rights to production revenues, they have been taken into account in calculating our net revenue interests and in estimating the size and value of our reserves. We believe that the burdens and obligations affecting our properties are customary in the industry for properties of the kind that we own.

The following table shows, as of December 31, 2016, by state, our producing wells, developed acreage, and undeveloped acreage:
 
 
Productive Wells
 
Developed Acreage
 
Undeveloped Acreage 1
State
 
Gross
 
Net
 
Gross
 
Net
 
Gross
 
Net
Colorado
 
631

 
353

 
26,500

 
22,000

 
185,200

 
128,700

Nebraska
 

 

 

 

 
183,600

 
180,400

Wyoming
 

 

 

 

 
1,100

 
500

Kansas
 

 

 

 

 
800

 
800

Total
 
631

 
353

 
26,500

 
22,000

 
370,700

 
310,400


        1    Undeveloped acreage includes leasehold interests on which wells have not been drilled or completed to the point that would permit the production of commercial quantities of oil and natural gas regardless of whether the leasehold interest is classified as containing proved undeveloped reserves.

    The following table shows, as of December 31, 2016, the status of our gross acreage:
State
 
Held by Production
 
Not Held by Production
Colorado
 
62,100

 
149,600

Nebraska
 

 
183,600

Wyoming
 

 
1,100

Kansas
 

 
800

Total
 
62,100

 
335,100


Leases that are held by production generally remain in force so long as oil or natural gas is produced from the well on

7



the particular lease.  Leased acres which are not held by production may require annual rental payments to maintain the lease until the expiration of the lease or the time oil or natural gas is produced from one or more wells drilled on the leased acreage.  At the time oil or natural gas is produced from wells drilled on the leased acreage, the lease is generally considered to be held by production.
 
The following table shows the calendar years during which our leases not currently held by production will expire unless a productive oil or natural gas well is drilled on the lease or the lease is renewed.
Leased Acres
(Gross)
 
Expiration
of Lease
50,500
 
2017
66,700
 
2018
24,700
 
2019
45,300
 
2020
147,900
 
After 2020

The overriding royalty interests that we own are not material to our business.

Oil and Natural Gas Reserves
 
Our estimated proved reserve quantities increased by 41% from December 31, 2015 to December 31, 2016.  At December 31, 2016, we had estimated proved reserves of 38.0 million barrels of oil and 331.9 billion cubic feet of gas. The estimated standardized measure of future net cash flow from our reserves at December 31, 2016 was $434.3 million and the
estimated PV-10 value of our reserves at that date was $476.3 million. PV-10 is a non-GAAP measure that reflects the present value, discounted at 10%, of estimated future net revenues from our proved reserves. We present a reconciliation of PV-10 value to the standardized measure of discounted future net cash flows in Item 7 under "Non-GAAP Financial Measures." The PV-10 value as of December 31, 2016 increased compared to December 31, 2015 by $38.2 million. The increase in estimated proved reserve quantities and PV-10 value is primarily due to better drilling efficiencies leading to an increase in the number of wells drilled per year and the GC Acquisition, which created spacing units with higher interests and the opportunity to drill longer laterals.

Ryder Scott prepared the estimates of our proved reserves, future production, and income attributable to our leasehold interests as of December 31, 2016.  Ryder Scott is an independent petroleum engineering firm that has been providing petroleum consulting services worldwide for over seventy years.  The estimates of proved reserves, future production, and income attributable to certain leasehold and royalty interests are based on technical analyses conducted by teams of geoscientists and engineers employed at Ryder Scott.  The office of Ryder Scott that prepared our reserves estimates is registered in the State of Texas (License #F-1580).  Ryder Scott prepared our reserve estimate based upon a review of property interests being appraised, historical production, lease operating expenses, price differentials, authorizations for expenditure, and geological and geophysical data.
 
The report of Ryder Scott dated January 20, 2017, which contains further discussions of the reserve estimates and evaluations prepared by Ryder Scott, as well as the qualifications of Ryder Scott’s technical personnel responsible for overseeing such estimates and evaluations, is attached as Exhibit 99.1 to this Annual Report on Form 10-K.

Our reserves technical team, which consists of our Reservoir Engineering Manager, VP of Exploration, COO - Operations, and COO - Development, oversaw the preparation of the reserve estimates by Ryder Scott to ensure accuracy and completeness of the data prior to and after submission.  Our technical team has an average of over thirty years of experience in oil and gas exploration and development.
 
Our proved reserves include only those amounts which we reasonably expect to recover in the future from known oil and natural gas reservoirs under existing economic and operating conditions, at current prices and costs, under existing regulatory practices, and with existing technology.  Accordingly, any changes in prices, operating and development costs, regulations, technology, or other factors could significantly increase or decrease estimates of proved reserves.
 
Estimates of volumes of proved reserves at year end are presented in barrels for oil and Mcf for natural gas at the official temperature and pressure bases of the areas in which the natural gas reserves are located.
 
The proved reserves attributable to producing wells and/or reservoirs were estimated by performance methods.  These performance methods include decline curve analysis, which incorporate extrapolations of historical production and pressure data

8



available through December 31, 2016 in those cases where this data was considered to be definitive.  The data used in this analysis was obtained from public sources and was considered sufficient for calculating producing reserves. The undeveloped reserves were estimated by the analogy method.  The analogy method uses pertinent well data obtained from public sources that was available through December 31, 2016.
 
Below are estimates of our net proved reserves at December 31, 2016, all of which are located in Colorado:
 
Oil
(MBbls)
 
Gas
(MMcf)
 
MBOE
Proved:
 
 
 
 
 
Developed
7,435

 
62,570

 
17,863

Undeveloped
30,597

 
269,351

 
75,489

Total
38,032

 
331,921

 
93,352


The following tabulations present the PV-10 value of our estimated reserves as of December 31, 2016, December 31, 2015, August 31, 2015, and August 31, 2014 (in thousands):
 
Proved - December 31, 2016
 
Developed
 
 
 
Total
 
Producing
 
Non-producing
 
Undeveloped
 
Proved
Future cash inflow
$
414,230

 
$

 
$
1,766,443

 
$
2,180,673

Future production costs
(177,138
)
 

 
(466,955
)
 
(644,093
)
Future development costs
(29,634
)
 

 
(554,903
)
 
(584,537
)
Future pre-tax net cash flows
$
207,458

 
$

 
$
744,585

 
$
952,043

PV-10 (Non-U.S. GAAP)
$
154,261

 
$

 
$
322,087

 
$
476,348

 
Proved - December 31, 2015
 
Developed
 
 
 
Total
 
Producing
 
Non-producing
 
Undeveloped
 
Proved
Future cash inflow
$
494,858

 
$

 
$
1,215,752

 
$
1,710,610

Future production costs
(172,210
)
 

 
(289,887
)
 
(462,097
)
Future development costs
(32,700
)
 

 
(307,749
)
 
(340,449
)
Future pre-tax net cash flows
$
289,948

 
$

 
$
618,116

 
$
908,064

PV-10 (Non-U.S. GAAP)
$
198,056

 
$

 
$
240,086

 
$
438,142

 
Proved - August 31, 2015
 
Developed
 
 
 
Total
 
Producing
 
Non-producing
 
Undeveloped
 
Proved
Future cash inflow
$
554,366

 
$

 
$
1,492,249

 
$
2,046,615

Future production costs
(211,911
)
 

 
(441,098
)
 
(653,009
)
Future development costs
(30,985
)
 

 
(479,735
)
 
(510,720
)
Future pre-tax net cash flows
$
311,470

 
$

 
$
571,416

 
$
882,886

PV-10 (Non-U.S. GAAP)
$
225,834

 
$

 
$
212,447

 
$
438,281



9



 
Proved - August 31, 2014
 
Developed
 
 
 
Total
 
Producing
 
Non-producing
 
Undeveloped
 
Proved
Future cash inflow
$
511,252

 
$
234,452

 
$
1,094,283

 
$
1,839,987

Future production costs
(127,900
)
 
(48,990
)
 
(218,129
)
 
(395,019
)
Future development costs
(13,245
)
 
(29,403
)
 
(369,869
)
 
(412,517
)
Future pre-tax net cash flows
$
370,107

 
$
156,059

 
$
506,285

 
$
1,032,451

PV-10 (Non-U.S. GAAP)
250,749

 
76,593

 
206,356

 
$
533,698


The prices for the oil and natural gas reserves as of December 31, 2016 are based on the twelve-month arithmetic average for the first of month prices from January 1, 2016 through December 31, 2016. The following table presents the prices used to prepare the reserve estimates, based upon the unweighted arithmetic average of the first day of the month price for each month within the twelve-month period prior to the end of the respective reporting period presented as adjusted for our differentials:
 
Oil (Bbl)
 
Natural Gas (Mcf)
December 31, 2016 (Average)
$
36.07

 
$
2.44

December 31, 2015 (Average)
$
41.33

 
$
2.60

August 31, 2015 (Average)
$
53.27

 
$
3.28

August 31, 2014 (Average)
$
89.48

 
$
5.03

    
During the twelve months ended December 31, 2016, the combined effect of our drilling, acquisition, and participation activities partially offset by declining commodity prices generated an increase in projected future cash inflow from proved reserves of $470.1 million and an increase in future pre-tax net cash flow of $44.0 million from December 31, 2015 to December 31, 2016.  During the same period, our PV-10 from proved reserves increased by $38.2 million.  During the twelve months ended December 31, 2016, we incurred capital expenditures of approximately $283.3 million related to the acquisition and development of proved reserves.

Our drilling, acquisition, and participation activities during the four months ended December 31, 2015 and changes in commodity prices resulted in a decrease in projected future cash inflow from proved reserves of $336.0 million from August 31, 2015. Future pre-tax net cash flow decreased $25.2 million from August 31, 2015 to December 31, 2015. During that same period, our PV-10 from proved reserves decreased by $0.1 million.  During the four months ended December 31, 2015, we incurred capital expenditures of approximately $92.5 million related to the acquisition and development of proved reserves.

Our drilling, acquisition, and participation activities, partially offset by declining commodity prices, during the year ended August 31, 2015 generated an increase in projected future cash inflow from proved reserves of $206.6 million compared to August 31, 2014. However, future pre-tax net cash flow decreased $149.6 million from August 31, 2014 to August 31, 2015 as per-unit costs did not decline commensurate with per-unit future cash inflow.  During that same period, our PV-10 from proved reserves decreased by $95.4 million.  During the year ended August 31, 2015, we incurred capital expenditures of approximately $203.2 million related to the acquisition and development of proved reserves.

Our drilling, acquisition, and participation activities during the year ended August 31, 2014 and changes in commodity prices resulted in increases in projected future cash inflow from proved reserves of $1.1 billion and future pre-tax net cash flow of $538.1 million from August 31, 2013.  During that same period, our PV-10 from proved reserves increased by $297.6 million.  During the year ended August 31, 2014, we incurred capital expenditures of approximately $185.1 million related to the acquisition and development of proved reserves.

In general, the volume of production from our oil and gas properties declines as reserves are depleted.  Unless we acquire additional properties containing proved reserves, conduct successful exploration and development activities, or both, our proved reserves will decline as reserves are produced.  Accordingly, volumes generated from our future activities are highly dependent upon our success in acquiring or finding additional reserves, and the costs incurred in doing so.

10



Proved Undeveloped Reserves
Net Reserves
(MBOE)
Beginning September 1, 2013
4,859

Converted to proved developed
(587
)
Extensions
13,436

Acquisitions
1,522

Revisions
(19
)
Ending August 31, 2014
19,211

Converted to proved developed
(414
)
Extensions
17,633

Acquisitions
3,780

Divestitures
(1,278
)
Revisions
2,689

Ending August 31, 2015
41,621

Converted to proved developed
(1,869
)
Extensions
17,161

Acquisitions
11,960

Divestitures
(4,360
)
Revisions
(16,224
)
Ending December 31, 2015
48,289

Converted to proved developed
(806
)
Extensions
3,110

Acquisitions
50,530

Divestitures
(6,479
)
Revisions
(19,155
)
Ending December 31, 2016
75,489


At December 31, 2016, our proved undeveloped reserves were 75,489 MBOE. During 2016, the GC Acquisition, along with other minor acquisitions, led to an increase of 50,530 MBOE in proved undeveloped reserves.  These acquisitions allowed for creating spacing units with higher working interests, opportunities to drill longer laterals, and increased focus on our development program in the core Wattenberg area. This increase was partially offset by a decrease of 12,144 MBOE as a result of the removal of certain legacy PUD locations as they are now expected to be developed beyond the three-year drilling plan.  In addition to the 806 MBOE of prior year proved undeveloped reserves converted to proved developed reserves, we developed 3,217 MBOE of acquired proved undeveloped reserves during the year, and we drilled 5.4 net exploratory wells. Further, due to a better commodity market environment, our increase in expected drilling activity positively affected our proved undeveloped reserves.  While our 2015 reserves estimate assumed no rig initially then an increase to two rigs during the first year, our 2016 reserves estimate now assumes two rigs working continually throughout the three-year plan period. In addition to the undeveloped locations added as a result of recent drilling and acquisitions, we limited our undeveloped locations related to horizontal wells to be drilled within this three-year horizon due to the current uncertainty in the oil and gas environment.

During the year end December 31, 2016, we converted 806 MBOE, or 2%, of our proved undeveloped reserves as of December 31, 2015 into proved developed reserves, requiring $9.4 million of drilling and completion capital expenditures. Due to the timing of our drilling operations and the use of multi-well pads, we ended the year with 3 fully drilled pads, comprised of 30 gross (27.8 net) wells, that were awaiting completion, of which 18 gross (16.4 net) were classified as proved undeveloped locations, representing 19% of proved undeveloped reserves as of December 31, 2015 and 12% of proved undeveloped reserves as of December 31, 2016.  All 30 of these wells are being completed in the first half of 2017.  All proved undeveloped reserves as of December 31, 2016 are expected to be converted to proved producing within three years, and within five years of their initial booking. Based on our current drilling plans for the next three years, we expect to allocate more funds to developmental drilling in areas of established production where ongoing and planned infrastructure buildout continues. None of our proved undeveloped reserves as of December 31, 2016 have been in this category for more than five years.

At December 31, 2015, our proved undeveloped reserves were 48,289 MBOE. We drilled 9 net exploratory wells and 4

11



net development wells during the four months ended December 31, 2015. This generated proved developed reserves from those exploratory wells as well as new proved undeveloped reserves due to direct offset locations. As a result, we recognized an increase in proved undeveloped reserves from extensions of 17,161 MBOE. The 4 net development wells converted 1,869 MBOE during the four months ended December 31, 2015, or 4%, of our proved undeveloped reserves as of August 31, 2015 into proved developed reserves, requiring $17.7 million of drilling and completion capital expenditures.

At August 31, 2015, our proved undeveloped reserves were 41,621 MBOE. We drilled 40 net exploratory wells and one net development well during the year ended August 31, 2015. This generated proved developed reserves from those exploratory wells, as well as new proved undeveloped reserves due to direct offset locations. In addition, our reserve estimates reflect the positive impact of additional offset operator activities within the Wattenberg Field. As a result, we recognized an increase in proved undeveloped reserves from extensions of 17,633 MBOE. The one net development well converted 414 MBOE during the year ended August 31, 2015, or 2%, of our proved undeveloped reserves as of August 31, 2014 into proved developed reserves, requiring $5.0 million of drilling and completion capital expenditures.

At August 31, 2014, our proved undeveloped reserves were 19,211 MBOE. During the year ended August 31, 2014, 587 MBOE or 12% of our proved undeveloped reserves as of August 31, 2013 were converted into proved developed reserves, requiring $14.9 million of drilling and completion capital expenditures. Executing our capital program during the year ended August 31, 2014 resulted in the addition of 13,436 MBOE in proved undeveloped reserves.

Delivery Commitments

See "Volume Commitments" in Note 16 to our consolidated financial statements included elsewhere in this report.

Competition and Marketing

We are faced with strong competition from many other companies and individuals engaged in the oil and gas business, many of which are very large, well-established energy companies with substantial capabilities and established earnings records.  We may be at a competitive disadvantage in acquiring oil and gas prospects since we must compete with these individuals and companies, many of which have greater financial resources and larger technical staffs.  It is nearly impossible to estimate the number of competitors; however, it is known that there are a large number of companies and individuals in the oil and gas business.

Exploration for and production of oil and natural gas are affected by the availability of pipe, casing and other tubular goods, and certain other oil field equipment including drilling rigs and tools.  We depend upon independent contractors to furnish rigs, pressure pumping equipment, and tools to drill and complete our wells.  Higher prices for oil and natural gas may result in competition among operators for drilling and completion equipment, tubular goods, and drilling and completion crews, which may affect our ability expeditiously to drill, complete, recomplete, and work over wells.

The market for oil and natural gas is dependent upon a number of factors beyond our control, which at times cannot be accurately predicted.  These factors include the proximity of wells to, and the capacity of, oil and natural gas pipelines, the extent of competitive domestic production and imports of oil and gas, the availability of other sources of energy, fluctuations in seasonal supply and demand, and governmental regulation.  In addition, there is always the possibility that new legislation may be enacted that would impose price controls or additional excise taxes upon oil, natural gas, or both.  Oversupplies of oil and natural gas can be expected to occur from time to time and may result in the producing wells being shut-in.  Imports of oil and natural gas may adversely affect the market for domestic oil and natural gas.

The market price for oil is significantly affected by policies adopted by the member nations of the Organization of the Petroleum Exporting Countries or OPEC.  Members of OPEC establish production quotas among themselves for petroleum products from time to time with the intent of influencing the global supply of oil and consequently price levels.  We are unable to predict the effect, if any, that OPEC, its members, or other countries will have on the amount of, or the prices received for, oil and natural gas.

Natural gas prices are now largely influenced by competition.  Competitors in this market include producers, natural gas pipelines and their affiliated marketing companies, independent marketers, and providers of alternate energy supplies, such as coal.  Changes in government regulations relating to the production, transportation, and marketing of natural gas have also resulted in significant changes in the historical marketing patterns of the industry.


12



General

Our offices are located at 1625 Broadway Suite 300, Denver, CO 80202.  Our office telephone number is (720) 616-4300, and our fax number is (720) 616-4301. Subsequent to February 24, 2017, our offices will be located at 1675 Broadway Suite 2600, Denver, CO 80202.

We intend to propose that our shareholders approve a change in our legal name to “SRC Energy Inc.” at the 2017 annual meeting.  Pending the shareholder vote on the proposal, we intend to use the new name and logo on a “doing business as” basis beginning on or about March 6, 2017.  In addition, commencing on that date, we expect that our common stock will trade under the symbol “SRCI,” and our domain name will become SRCenergy.com.

Our Greeley offices includes field offices and an equipment yard.

As of December 31, 2016, we had 96 full-time employees.

Available Information
    
We make available on our website, www.syrginfo.com, under “Investor Relations, SEC Filings,” free of charge, our annual and transition reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after we electronically file or furnish them to the U.S. Securities and Exchange Commission (“SEC”). You may also read or copy any document we file at the SEC's public reference room in Washington, D.C., located at 100 F Street, N.E., Room 1580, Washington D.C. 20549, or may obtain copies of such documents at the SEC's website at www.sec.gov. Please call the SEC at (800) SEC-0330 for further information on the public reference room.

13



Government Regulation

Our operations are subject to various federal, state, and local laws and regulations that change from time to time. Many of these regulations are intended to prevent pollution and protect environmental quality, including regulations related to permit requirements for the drilling of wells, bonding requirements to drill or operate wells, the location of wells, the method of drilling, completing and casing wells, the surface use and restoration of properties upon which wells are drilled, the sourcing and disposal of water used in the drilling and completion process, groundwater testing, air emissions, noise, lighting and traffic abatement, and the plugging and abandonment of wells. Other regulations are intended to prevent the waste of oil and natural gas and to protect the rights among owners in a common reservoir. These include regulation of the size of drilling and spacing units or proration units, the number or density of wells that may be drilled in an area, the unitization or pooling of oil and natural gas wells, and regulations that generally prohibit the venting or flaring of natural gas and that impose requirements regarding the ratability or fair apportionment of production from fields and individual wells. In addition, our operations are subject to regulations governing the pipeline gathering and transportation of oil and natural gas as well as various federal, state, and local tax laws and regulations.

Failure to comply with applicable laws and regulations can result in substantial penalties. Our competitors in the oil and gas industry are generally subject to regulatory requirements and restrictions similar to those that affect our operations. The regulatory burden on the industry increases the cost of doing business and affects profitability. Although we believe that we are in substantial compliance with all applicable laws and regulations, such laws and regulations are frequently amended or reinterpreted. Therefore, we are unable to predict the future costs or impact of compliance.

Regulation of production

Federal, state, and local agencies have promulgated extensive rules and regulations applicable to our oil and gas exploration, production, and related operations.  Most states require drilling permits, drilling and operating bonds, the filing of various reports, and the satisfaction of other requirements relating to the exploration and production of oil and natural gas.  Many states also have statutes or regulations addressing conservation matters including provisions governing the size of drilling and spacing units or proration units, the density of wells, and the unitization or pooling of oil and gas properties. 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. In addition, 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 like Colorado allow the forced pooling or integration of tracts to facilitate exploration while other states rely primarily or exclusively on the voluntary pooling of lands and leases. In areas with voluntary pooling, it may be more difficult to develop a project if the operator owns less than 100% of the leasehold, or one or more of our leases does not provide the necessary pooling authority. Further, the statutes and regulations of some states limit the rate at which oil and natural gas is produced from properties, prohibit the venting or flaring of natural gas, and impose requirements regarding the ratability of production. This may limit the amount of oil and natural gas that we can produce from our wells and may limit the number of wells or locations at which we can drill.  The federal and state regulatory burden on the oil and gas industry increases our cost of doing business and affects our profitability.  Because these rules and regulations are amended or reinterpreted frequently, we are unable to predict the future cost or impact of complying with these laws.

The Colorado Oil and Gas Conservation Commission (“COGCC”) is the primary regulator of exploration and production of oil and gas resources in the principal area in which we operate.  The COGCC regulates oil and gas operators through rules, policies, written guidance, orders, permits, and inspections. Among other things, the COGCC enforces specifications regarding drilling, development, production, abandonment, enhanced recovery, safety, aesthetics, noise, waste, flowlines, and wildlife.  In recent years, the COGCC has amended its existing regulatory requirements and adopted new requirements with increased frequency. For example, in August 2013, the COGCC implemented new setback rules for oil and natural gas wells and production facilities near occupied buildings. The COGCC increased its setback distance to a uniform 500 feet statewide setback from occupied buildings and imposed new notice, meeting, and mitigation requirements for nearby homes and communities. In January 2013, the COGCC approved new rules that require operators to sample groundwater for hydrocarbons and other indicator compounds both before and after drilling. In December 2013, the COGCC issued new and more restrictive rules regarding spill reporting and remediation. In December 2014, the COGCC issued amendments clarifying and modifying a number of existing rules, including those governing drilling, plugging, mechanical integrity testing, blow out prevention, and waste management. In January 2015, the COGCC amended its enforcement and penalty rules to increase the maximum penalty for regulatory violations. In March 2015, the COGCC adopted new requirements for operations within floodplains. In January 2016, the COGCC approved new rules that require local government consultation and certain best management practices for large-scale oil and natural gas facilities in certain urban mitigation areas. The new rules also require operator registration and/or notifications to local governments with respect to future oil and natural gas drilling and production facility locations.


14



Regulation of sales and transportation of natural gas

Historically, the transportation and sales for resale of natural gas in interstate commerce have been regulated pursuant to the Natural Gas Act of 1938 (“NGA”), the Natural Gas Policy Act of 1978, and the Federal Energy Regulatory Commission (“FERC”) regulations. Effective January 1, 1993, the Natural Gas Wellhead Decontrol Act deregulated the price for all “first sales” of natural gas. Thus, all of our sales of natural gas may be made at market prices, subject to applicable contract provisions. Sales of natural gas are affected by the availability, terms, and cost of pipeline transportation. Since 1985, the FERC has implemented regulations intended to make natural gas transportation more accessible to gas buyers and sellers on an open-access, non-discriminatory basis. We cannot predict what further action the FERC will take on these matters. Some of the FERC's more recent proposals may, however, adversely affect the availability and reliability of interruptible transportation service on interstate pipelines. We do not believe that we will be affected by any action taken materially differently than other natural gas producers, gatherers, and marketers with which we compete.

Our natural gas sales are generally made at the prevailing market price at the time of sale. Therefore, even though we sell significant volumes to major purchasers, we believe that other purchasers would be willing to buy our natural gas at comparable market prices.

In August 2005, the Energy Policy Act of 2005 (the “2005 EPA”) was signed into law. The 2005 EPA directs the FERC, Bureau of Ocean Energy Management (“BOEM”), and other federal agencies to issue regulations that will further the goals set out in the 2005 EPA. The 2005 EPA amends the NGA to make it unlawful for “any entity,” including otherwise non-jurisdictional producers such as us, to use any deceptive or manipulative device or contrivance in connection with the purchase or sale of natural gas or the purchase or sale of transportation services subject to regulation by the FERC, in contravention of rules prescribed by the FERC. FERC rules implementing this provision make it unlawful in connection with the purchase or sale of natural gas subject to the jurisdiction of the FERC, or the purchase or sale of transportation services subject to the jurisdiction of the FERC, for any entity, directly or indirectly, to use or employ any device, scheme, or artifice to defraud; to make any untrue statement of material fact or omit to make any such statement necessary to make the statements made not misleading; or to engage in any act or practice that operates as a fraud or deceit upon any person. The anti-manipulation rule does not apply to activities that relate only to intrastate or other non-jurisdictional sales or gathering, but does apply to activities of otherwise non-jurisdictional entities to the extent the activities are conducted “in connection with” natural gas sales, purchases, or transportation subject to FERC jurisdiction. It, therefore, reflects a significant expansion of the FERC's enforcement authority. To date, we do not believe that we have been, nor do we anticipate that we will be, affected any differently than other producers of natural gas.

In 2007, the FERC issued a final rule on annual natural gas transaction reporting requirements, as amended by subsequent orders on rehearing (“Order 704”). Under Order 704, wholesale buyers and sellers of more than 2.2 million MMBtu of physical natural gas in the previous calendar year, including interstate and intrastate natural gas pipelines, natural gas gatherers, natural gas processors, and natural gas marketers, are now required to report, on May 1 of each year, aggregate volumes of natural gas purchased or sold at wholesale in the prior calendar year to the extent such transactions utilize, contribute to, or may contribute to the formation of price indices. It is the responsibility of the reporting entity to determine which individual transactions should be reported based on the guidance of Order 704. The monitoring and reporting required by these rules have increased our administrative costs. To date, we do not believe that we have been, nor do we anticipate that we will be, affected any differently than other producers of natural gas.

Regulation of sales and transportation of oil

Our sales of oil are affected by the availability, terms, and cost of transportation. Interstate transportation of oil by pipeline is regulated by the FERC pursuant to the Interstate Commerce Act (“ICA”), the Energy Policy Act of 1992, and the rules and regulations promulgated under those laws. The ICA and its implementing regulations require that tariff rates for interstate service on oil pipelines, including interstate pipelines that transport oil and refined products (collectively referred to as “petroleum pipelines”) be just and reasonable and non-discriminatory and that such rates and terms and conditions of service be filed with the FERC.

Intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state. Insofar as effective, interstate and intrastate rates are equally applicable to all comparable shippers, we do not believe that the regulation of oil transportation rates will affect our operations in any way that is materially different than those of our competitors who are similarly situated.

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 oil, including sampling, testing, and certification

15



requirements. 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.

Regulation of derivatives and reporting of government payments

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was passed by Congress and signed into law in July 2010. The Dodd-Frank Act is designed to provide, among other things, a comprehensive framework for the regulation of the over-the-counter derivatives market with the intent to provide greater transparency and reduction of risk between counterparties. The Dodd-Frank Act subjects certain derivative market participants to a variety of capital, margin, and other requirements and requires many derivative transactions to be cleared on exchanges. The Dodd-Frank Act provides for a potential exemption from certain of these requirements for commercial end-users.

Environmental Regulations

As with the oil and natural gas industry in general, our properties are subject to extensive and changing federal, state, and local laws and regulations designed to protect and preserve natural resources and the environment.  Long-term and recent trends in environmental legislation and regulation are generally toward stricter standards, and this trend is likely to continue.  These laws and regulations often require a permit or other authorization before construction or drilling commences and for certain other activities; limit or prohibit access, seismic acquisition, construction, drilling, and other activities on certain lands lying within wilderness and other protected areas; mandate requirements and standards for operations; impose substantial liabilities and remedial obligations for pollution; and require the reclamation of certain lands.

The permits required for many of our operations are subject to revocation, modification, and renewal by issuing authorities.  Governmental authorities have the power to enforce compliance with their regulations, and violations are subject to fines, injunctions, or both.  In March 2015, the COGCC implemented regulatory and statutory amendments that significantly increase the potential penalties for violating the Colorado Oil and Gas Conservation Act or its implementing regulations, orders, or permits. These amendments increase the maximum penalty per violation per day from $1,000 to $15,000; eliminate the $10,000 maximum penalty for violations without significant consequences; require the COGCC to assess a penalty for each day of violation; and authorize the COGCC to prohibit the issuance of new permits and suspend certificates of clearance for egregious violations. Following the adoption of this new penalty scheme, Colorado operators have experienced increased penalties for violations within COGCC’s jurisdiction. In the opinion of our management, we are in substantial compliance with current applicable environmental laws and regulations, and we have no material commitments for capital expenditures to comply with existing environmental requirements.  Nevertheless, changes in existing environmental laws and regulations or in their interpretation could have a significant impact on us as well as the oil and gas industry in general.

The Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) and comparable state statutes impose strict and joint and several liability on owners and operators of certain sites and on persons who disposed of or arranged for the disposal of “hazardous substances” found at such sites.  Persons responsible for the release or threatened release of hazardous substances under CERCLA may be subject to liability for the costs of cleaning up those substances and for damages to natural resources. It is not uncommon for the 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.   Although CERCLA currently excludes petroleum from its definition of “hazardous substance,” state laws affecting our operations impose clean-up liability relating to petroleum and petroleum-related products.  The Resource Conservation and Recovery Act (“RCRA”) and comparable state statutes govern the disposal of “solid waste” and “hazardous waste” and authorize the imposition of substantial fines and penalties for noncompliance.  Although RCRA classifies certain oil field wastes as non-hazardous "solid wastes,” such exploration and production wastes could be reclassified as hazardous wastes, thereby making such wastes subject to more stringent handling and disposal requirements. In May 2016, certain environmental groups filed suit against the Environmental Protection Agency (“EPA") in federal court for failing to timely assess its RCRA Subtitle D criteria regulations for oil and gas wastes, asserting that the agency has not reviewed its RCRA Subtitle D regulations since July 1988. A proposed consent decree filed in December 2016 between EPA and the environmental groups commits EPA to decide whether to revise its RCRA Subtitle D criteria regulations and state plan guidelines for the oil and natural gas sector by March 2019.

Certain of our operations are subject to the federal Clean Air Act (“CAA”) and similar state and local requirements. The CAA may require certain pollution control requirements with respect to air emissions from our operations. The EPA and states continue to develop regulations to implement these requirements. We may be required to incur certain capital expenditures 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. Greenhouse gas recordkeeping and reporting requirements under the CAA took effect in 2011 and impose increased administrative and control costs. Federal New Source Performance Standards regarding oil and gas operations (“NSPS OOOO”) took effect in 2012, with more subsequent amendments, all of which have likewise added

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administrative and operational costs. In June 2016, EPA finalized new regulations under the CAA to reduce methane emissions from new and modified sources in the oil and natural gas sector. These new regulations impose, among other things, new requirements for leak detection and repair, control requirements at oil well completions, and additional control requirements for gathering, boosting, and compressor stations. Concurrent with the proposed methane rules, the EPA also finalized a new rule regarding source determinations and permitting requirements for the onshore oil and gas industry under the CAA. Colorado adopted new regulations to meet the requirements of NSPS OOOO and promulgated significant new rules in February 2014 relating specifically to oil and natural gas operations that are more stringent than NSPS OOOO and directly regulate methane emissions from affected facilities.

In October 2015, the EPA lowered the national ambient air quality standard (“NAAQS”) for ozone under the CAA from 75 parts per billion to 70 parts per billion. Any resulting expansion of the ozone nonattainment areas in Colorado could cause oil and natural gas operations in such areas to become subject to more stringent emissions controls, emission offset requirements, and increased permitting delays and costs. In addition, the ozone nonattainment status for the Denver Metro North Front Range Ozone 8-Hour Non-Attainment area was bumped up by the EPA from “marginal” to “moderate” as a result of the area failing to attain the 2008 ozone NAAQS by the applicable attainment date of July 20, 2015. In 2016, the state of Colorado undertook a rulemaking to address the new “moderate” status, culminating in, among others, the incorporation of two existing state-only requirements for oil and natural gas operations into the federally-enforceable State Implementation Plan ("SIP"). During the fall of 2016, EPA also issued final Control Techniques Guidelines ("CTGs") 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 area. In 2017, as part of the federal CTG process for oil and natural gas, Colorado will begin a stakeholder and rulemaking effort to compare the CTGs to existing Colorado requirements to ensure they meet applicable federal requirements. This process could result in new or more stringent air quality control requirements applicable to our operations. On March 10, 2016, EPA announced its intention to initiate a formal process under CAA § 111(d) to require companies operating existing oil and gas sources to provide information to assist EPA in developing comprehensive regulations to reduce methane emissions. Related to this effort, EPA sent out Information Collection Requests ("ICRs") in late 2016 to operators to gather information on existing sources of methane emissions, technologies to reduce those emissions, and the costs of those technologies in the production, gathering, processing, and transmission and storage segments of the oil and natural gas sector.

The federal Clean Water Act (“CWA”) and analogous state laws impose requirements regarding the discharge of pollutants into waters of the U.S. and the state, including spills and leaks of hydrocarbons and produced water. The CWA also requires approval for the construction of facilities in wetlands and other waters of the U.S., and it imposes requirements on storm water run-off. In June 2016, the EPA finalized new CWA pretreatment standards that would prevent onshore unconventional oil and natural gas wells from discharging wastewater pollutants to public treatment facilities. In June 2015, the EPA and the U.S. Army Corps of Engineers adopted a new regulatory definition of “waters of the U.S.,” which governs which waters and wetlands are subject to the CWA. This final rule has been stayed pending the resolution of ongoing litigation. Depending upon if and how the new definition is implemented, it could significantly expand the jurisdictional reach of the CWA in many states, including Colorado.

The Endangered Species Act restricts activities that may affect endangered or threatened species or their habitats. Some of our operations may be located in areas that are or may be designated as habitats for threatened or endangered species. In such areas, we may be prohibited from conducting operations at certain locations or during certain periods, and we may be required to develop plans for avoiding potential adverse effects. In addition, certain species are subject to varying degrees of protection under state laws.

Federal laws including the CWA require certain owners or operators of facilities that store or otherwise handle oil and produced water to prepare and implement spill prevention, control, countermeasure and response plans addressing the possible discharge of oil into surface waters. The Oil Pollution Act of 1990 (“OPA”) subjects owners and operators of facilities to strict and joint and several liability for all containment and cleanup costs and certain other damages arising from oil spills, including the government’s response costs. Spills subject to the OPA may result in varying civil and criminal penalties and liabilities.

In 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 emissions of such gases are, according to the EPA, contributing to warming of the Earth's atmosphere and other climatic conditions. Based on these findings, the EPA adopted regulations under the CAA that, among other things, established Prevention of Significant Deterioration (“PSD”), construction and Title V operating permit reviews for GHG emissions from certain large stationary sources that are already major sources of emissions of regulated pollutants. In a subsequent ruling, the U.S. Supreme Court upheld a portion of EPA’s GHG stationary source program, but invalidated a portion of it. The Court held that stationary sources already subject to the PSD or Title V program for non-GHG criteria pollutants remained subject to GHG best available control technology ("BACT") requirements, but ruled that sources subject to the PSD or Title V program only for GHGs could not be forced to comply with GHG BACT requirements. Upon remand, the D.C. Circuit issued an amended judgment, which, among other things, vacated the PSD and Title V regulations

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under review in that case to the extent they require a stationary source to obtain a PSD or Title V permit solely because the source emits or has the potential to emit GHGs above the applicable major source thresholds. In October 2016, EPA issued a proposed rule to revise its PSD and Title V regulations applicable to GHGs in accordance with these court rulings, including proposing a de minimis level of GHG emissions below which BACT is not required. Depending on what EPA does in a final rule, it is possible that any regulatory or permitting obligation that limits emissions of GHGs could extend to smaller stationary sources and require us to incur costs to reduce and monitor emissions of GHGs associated with our operations and also adversely affect demand for the oil and natural gas that we produce.

In addition, the EPA has adopted rules requiring the monitoring and annual reporting of GHG emissions from specified GHG emission sources in the United States, including certain onshore oil and natural gas production sources, which include certain of our operations. While Congress has not enacted significant legislation relating to GHG emissions, it may do so in the future and, moreover, several state and regional initiatives have been enacted aimed at monitoring and/or reducing GHG emissions through cap and trade programs.

The adoption of new laws, regulations, or other requirements limiting or imposing other obligations on GHG emissions from our equipment and operations, and the implementation of requirements that have already been adopted, could require us to incur costs to reduce emissions of GHGs associated with our operations. In addition, substantial limitations on GHG emissions in other sectors, such as the power sector under EPA’s August 2015 Clean Power Plan, could adversely affect demand for the oil and natural gas that we produce. In February 2016, the U.S. Supreme Court stayed the Clean Power Plan pending judicial review. Further GHG regulation may result from the December 2015 agreement reached at the United Nations climate change conference in Paris. Pursuant to the agreement, the United States made an initial pledge to a 26-28% reduction in its GHG emission by 2025 against a 2005 baseline and committed to periodically update its pledge in five yearly intervals starting in 2020. GHG emissions in the earth’s atmosphere have also been shown to produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods, and other climatic events, any of which could have an adverse effect on our operations.

Hydraulic Fracturing

We operate primarily in the Wattenberg Field of the D-J Basin where the rock formations are typically tight, and it is a common practice to use hydraulic fracturing to allow for or increase hydrocarbon production.  Hydraulic fracturing involves the process of injecting substances such as water, sand, and additives (some proprietary) under pressure into a targeted subsurface formation to create fractures, thus creating a passageway for the release of oil and gas.  Hydraulic fracturing is a technique that we commonly employ and expect to employ extensively in future wells that we drill and complete.

We outsource all hydraulic fracturing services to service providers with significant experience, and which we deem to be competent and responsible.  Our service providers supply all personnel, equipment, and materials needed to perform each stimulation, including the chemical mixtures that are injected into our wells.  We require our service companies to carry insurance covering various losses and liabilities that could arise in connection with their activities; however, insurance may not be available or adequate to cover losses and liabilities incurred, or may be prohibitively expensive relative to the perceived risk.  In addition to the drilling permit that we are required to obtain and the notice of intent that we provide the appropriate regulatory authorities, our service providers are responsible for obtaining any regulatory permits necessary for them to perform their services in the relevant geographic location.  We have not had any incidents, citations, or lawsuits relating to any environmental issues resulting from hydraulic fracturing, and we are not presently aware of any such matters.

In recent years, environmental opposition to hydraulic fracturing has increased, and various governmental and regulatory authorities have adopted or are considering new requirements for this process. To the extent that these requirements increase our costs or restrict our development activities, our business and prospects may be adversely affected.

The EPA has asserted that the Safe Drinking Water Act (“SDWA”) applies to hydraulic fracturing involving diesel fuel, and in February 2014, it issued final guidance on this subject. The guidance defines the term “diesel fuel,” describes the permitting requirements that apply under SDWA for the underground injection of diesel fuel in hydraulic fracturing, and makes recommendations for permit writers. Although the guidance applies only in those states, excluding Colorado, where the EPA directly implements the Underground Injection Control Class II program, it could encourage state regulatory authorities to adopt permitting and other requirements for hydraulic fracturing. In addition, from time to time, Congress has considered legislation that would provide for broader federal regulation of hydraulic fracturing under the SDWA. If such legislation were enacted, hydraulic fracturing operations could be required to meet additional federal permitting and financial assurance requirements, adhere to certain construction specifications, fulfill monitoring, reporting, and recordkeeping obligations, and provide for additional public disclosure of the chemicals used in the fracturing process.


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The EPA has also conducted a nationwide study into the effects of hydraulic fracturing on drinking water. In June 2015, the EPA released a draft study report for peer review and comment. The draft report did not find evidence of widespread systemic impacts to drinking water, but did find a relatively small number of site-specific impacts. The EPA noted that these results could indicate that such effects are rare or that other limiting factors exist. In December 2016, EPA released the final report on impacts from hydraulic fracturing activities on drinking water, concluding that hydraulic fracturing activities can impact drinking water resources under some circumstances and identifying some factors that could influence these impacts.

Federal agencies have also adopted or are considering additional regulation of hydraulic fracturing. On March 26, 2016, the U.S. Occupational Safety and Health Administration (“OSHA”) issued a final rule, with effective dates of 2018 and 2021 for the hydraulic fracturing industry, which imposes stricter standards for worker exposure to silica, including worker exposure to sand in hydraulic fracturing. In May 2014, the EPA issued an advance notice of proposed rulemaking under the Toxic Substances Control Act (“TSCA”) to obtain data on chemical substances and mixtures used in hydraulic fracturing. In March 2015, the Bureau of Land Management (“BLM”) issued a new rule regulating hydraulic fracturing activities involving federal and tribal lands and minerals, including requirements for chemical disclosure, wellbore integrity and handling of flowback and produced water. Due to pending litigation, however, the effective date of the rule has been postponed.

In November 2016, 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 became effective in January 2017, but are subject to ongoing litigation.

In Colorado, the primary regulator is the COGCC, which has adopted regulations regarding chemical disclosure, pressure monitoring, prior agency notice, emission reduction practices, and offset well setbacks with respect to hydraulic fracturing operations and may in the future adopt additional requirements for this purpose. As part of these requirements, operators must report all chemicals used in hydraulically fracturing a well to a publicly searchable registry website developed and maintained by the Ground Water Protection Council and the Interstate Oil and Gas Compact Commission.

Apart from these ongoing federal and state initiatives, local governments are adopting new requirements and restrictions on hydraulic fracturing and other oil and gas operations. Some local governments in Colorado, for instance, have amended their land use regulations to impose new requirements on oil and gas development, while other local governments have entered memoranda of agreement with oil and gas producers to accomplish the same objective. Beyond that, during the past few years, a total of five Colorado cities have passed voter initiatives temporarily or permanently prohibiting hydraulic fracturing. Since that time, however, local district courts have struck down the ordinances for certain of those Colorado cities, and such decisions were upheld by the Colorado Supreme Court in May 2016. Nevertheless, there is a continued risk that cities will adopt local ordinances that seek to regulate the time, place, and manner of hydraulic fracturing activities and oil and gas operations within their respective jurisdictions.

During 2014, opponents of hydraulic fracturing also sought statewide ballot initiatives that would have restricted oil and gas development in Colorado by, among other things, significantly increasing the setback between oil and natural gas wells and occupied buildings. These initiatives were withdrawn from the November 2014 ballot in return for the creation of a task force to craft recommendations for minimizing land use conflicts over the location of oil and natural gas facilities.

During 2016, opponents of hydraulic fracturing again advanced various options for ballot initiatives restricting oil and gas development in Colorado. Proponents of two such initiatives attempted to qualify the initiatives to appear on the ballot for the November 2016 election. One would have amended the Colorado constitution to impose a minimum distance of 2,500 feet between wells and any occupied structures or "areas of special concern". If implemented, this proposal would have made the vast majority of the surface area of the state ineligible for drilling, including substantially all of our planned future drilling locations. The second proposal would have amended the state constitution to give local governmental authorities the ability to regulate, or to ban, oil and gas exploration, development, and production activities within their boundaries notwithstanding state rules and approvals to the contrary. If implemented, this proposal could have resulted in us becoming subject to onerous, and possibly inconsistent, regulations that vary from jurisdiction to jurisdiction, or to outright bans on our activities in various jurisdictions. In August 2016, the Colorado Secretary of State issued a press release and statements of insufficiency of signatures, stating that the proponents of the proposals had failed to collect enough valid signatures to have the proposals included on the ballot. However, similar proposals may be made in the future. Because a substantial portion of our operations and reserves are located in Colorado, the risks we face with respect to such future proposals are greater than those of our competitors with more geographically diverse operations. Although we cannot predict the outcome of future ballot initiatives, statutes, or regulatory developments, such developments could materially impact our results of operations, production, and reserves.


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ITEM 1A.
RISK FACTORS

Investors should be aware that any purchase of our securities involves risks, including those described below, which could adversely affect the value of our common stock. We do not make, nor have we authorized any other person to make, any representation about the future market value of our common stock. In addition to the other information contained in this report, the following factors should be considered carefully in evaluating an investment in our securities.

Risks Relating to Our Business and the Industry

An extended or further decline in oil and natural gas prices may adversely affect our business, financial condition, or results of operations and our ability to meet our financial commitments.

The prices we receive for our oil and natural gas significantly affect many aspects of our business, including our revenue, profitability, access to capital, quantity and present value of proved reserves, and future rate of growth. Oil and natural gas are commodities, and their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. Historically, the markets for oil and natural gas have been volatile. In the recent past, benchmark oil prices have fallen from highs of over $100 per Bbl to lows below $30 per Bbl, and natural gas prices have experienced declines of comparable magnitude. Oil and natural gas prices will likely continue to be volatile in the future and will depend on numerous factors beyond our control. These factors include the following:

worldwide and regional economic conditions impacting the global supply and demand for oil and natural gas;
the actions, or inaction, of OPEC;
the price and quantity of imports of foreign oil and natural gas;
political conditions or hostilities in oil-producing and natural gas-producing regions and related sanctions, including current conflicts in the Middle East and conditions in Africa, South America, and Russia;
the level of global oil and domestic natural gas exploration and production;
the level of global oil and domestic natural gas inventories;
prevailing prices on local oil and natural gas price indexes in the areas in which we operate;
localized supply and demand fundamentals and gathering, processing, and transportation availability;
weather conditions and natural disasters;
domestic and foreign governmental regulations;
exports from the United States of liquefied natural gas or oil;
speculation as to the future price of oil and natural gas and the speculative trading of oil and natural gas futures contracts;
price and availability of competitors’ supplies of oil and natural gas;
technological advances affecting energy consumption; and
the price and availability of alternative fuels.
    
Lower oil and natural gas prices will reduce our cash flows and our borrowing ability. Our business has historically relied on the availability of additional capital, including proceeds from the sale of equity, debt, and convertible securities, to execute our business strategy. Further, our future growth strategy requires substantial additional capital, the availability of which will depend in significant part on current and expected commodity prices. If we are unable to raise capital on acceptable terms in the future, we may be unable to pursue our future acquisition, drilling, and development plans. While our current revolving credit facility provides for commitments of up to $500 million, actual borrowings may not exceed our borrowing base in effect at any time, which is subject to re-determination on a semi-annual basis. Our borrowing base is based in substantial part on the value of our oil and natural gas reserves which are, in turn, impacted by prevailing oil and natural gas prices. Accordingly, declining oil and natural gas prices have a direct impact on the amount that we can borrow under our revolving credit facility, which could affect our cash flows and ability to execute on our business plans. The next semi-annual redetermination of the borrowing base, which is currently $160 million, is scheduled to occur in May 2017. We may experience decreases in our borrowing base depending on future oil and natural gas prices. If our borrowing base declines significantly, we would have to either raise additional capital or adjust our drilling plan. In addition, if the lenders reduce the borrowing base below the then-outstanding balance, we will be required to repay the difference between the outstanding balance and the reduced borrowing base, and we may not have or be able to obtain the funds necessary to do so.
    
Furthermore, lower prices have reduced and may further reduce the amount of oil and natural gas that we can produce economically and may cause the value of our estimated proved reserves at future reporting dates to decline. Our estimated proved reserves as of December 31, 2015, and related PV-10 and standardized measure values, were calculated under SEC rules using twelve-month trailing average benchmark prices, adjusted by lease or field for quality, transportation fees, and regional price differentials, of $41.33 per barrel of oil (WTI) and $2.60 per MMBtu of natural gas (Henry Hub). The twelve-month trailing average benchmark prices, adjusted by lease or field for quality, transportation fees, and regional price differentials, used in

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calculating proved reserves, PV-10 and standardized measure as of December 31, 2016 were $36.07 per barrel of oil (WTI) and $2.44 per MMBtu (Henry Hub). These lower prices adversely affected the estimated quantity and value of our proved reserves.

Furthermore, sustained periods of reduced oil and natural gas prices and the resultant effect such prices have on our drilling economics and our ability to raise capital would likely require us to re-evaluate and postpone or eliminate our development drilling, which would likely result in the reduction of some of our proved undeveloped reserves and PV-10 and standardized measure values, and would make it more difficult for us to achieve expected levels of production.

To attempt to reduce our price risk, we periodically enter into hedging transactions with respect to a portion of our expected future production. We cannot assure you that such transactions will reduce the risk or minimize the effect of any decline in oil or natural gas prices. If oil and natural gas prices decline, we will not be able to hedge future production at the same pricing level as our current hedges, and our results of operations and financial condition would be negatively impacted. In addition, hedging arrangements can expose us to risk of financial loss in some circumstances, including when production is less than expected, a counterparty to a hedging contract fails to perform under the contract, or there is a change in the expected differential between the underlying price in the hedging contract and the actual prices received.

Accordingly, any substantial or extended decline in the prices that we receive for our production would have a material adverse effect on our financial condition, liquidity, ability to meet our financial obligations, and our results of operations.

Operating hazards may adversely affect our ability to conduct business.

Our operations are subject to risks inherent in the oil and gas industry, such as:

unexpected drilling conditions including loss of well control, loss of drilling fluid circulation, cratering, and explosions;
uncontrollable flows of oil, natural gas, or well fluids;
equipment failures, fires, or accidents;
pollution, releases of hazardous materials, and other environmental risks; and
shortages in experienced labor or shortages or delays in the delivery of equipment or the performance of services.

These risks could result in substantial losses to us from injury and loss of life, damage to and destruction of property and equipment, pollution and other environmental damage, and suspension of operations. We do not maintain insurance for all of these risks, nor in amounts that cover all of the losses to which we may be subject, and the insurance that we have may not continue to be available on acceptable terms. Moreover, some risks that we face are not insurable. For example, a leak or other pollution event may occur without our knowledge, making it impossible for us to notify the insurer within the time period required by the policy. Also, we could in some circumstances have liability for actions taken by third parties over which we have no or limited control, including operators of properties in which we have an interest. The occurrence of an uninsured or underinsured loss could result in significant costs that could have a material adverse effect on our financial condition and liquidity. In addition, maintenance activities undertaken to reduce operational risks can be costly and can require exploration, exploitation, and development operations to be curtailed while those activities are being completed.

Our actual production, revenues, and expenditures related to our reserves are likely to differ from our estimates of proved reserves. We may experience production that is less than estimated, and drilling costs that are greater than estimated, in our reserve report. These differences may be material.

Although the estimates of our oil and natural gas reserves and future net cash flows attributable to those reserves were prepared by Ryder Scott, our independent petroleum and geological engineers, we are ultimately responsible for the disclosure of those estimates. Reserve engineering is a complex and subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. Estimates of economically recoverable oil and natural gas reserves and of future net cash flows necessarily depend upon a number of variable factors and assumptions, including:

historical production from the area compared with production from similar producing wells;
the assumed effects of regulations by governmental agencies;
assumptions concerning future oil and natural gas prices; and
assumptions concerning future operating costs, severance and excise taxes, development costs, and workover and remedial costs.


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Because all reserve estimates are based on assumptions that may prove to be incorrect and are to some degree subjective, each of the following items may differ from those assumed in estimating proved reserves:

the quantities of oil and natural gas that are ultimately recovered;
the production and operating costs incurred;
the amount and timing of future development expenditures; and
future cash flows from the development of reserves.

Historically, there has been a difference between our actual production and the production estimated in a prior year’s reserve report. We cannot assure you that these differences will not be material in the future.

Approximately 81% of our estimated proved reserves at December 31, 2016 are undeveloped. Recovery of undeveloped reserves requires significant capital expenditures and successful drilling operations. Our estimates of proved undeveloped reserves reflect our plans to make significant capital expenditures to convert those reserves into proved developed reserves, including approximately $554.9 million in estimated capital expenditures during the five years ending December 31, 2021. 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 proved undeveloped reserves, 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, proved undeveloped reserves 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 to probable or possible any proved undeveloped reserves that are not developed or expected to be developed within this five-year time frame.

You should not assume that the standardized measure of discounted cash flows is the current market value of our estimated oil and natural gas reserves. In accordance with SEC requirements, the standardized measure of discounted cash flows from proved reserves at December 31, 2016 is based on twelve-month average prices and costs as of the date of the estimate. These prices and costs will change and may be materially higher or lower than the prices and costs as of the date of the estimate. Any changes in consumption by oil and natural gas purchasers or in governmental regulations or taxation may also affect actual future net cash flows. The timing of both the production and the expenses from the development and production of oil and gas properties will affect the timing of actual future net cash flows from proved reserves and their present value. In addition, the 10% discount factor we use when calculating standardized measure of discounted cash flows for reporting requirements in compliance with accounting requirements is not necessarily the most appropriate discount factor. The effective interest rate at various times and the risks associated with our operations or the oil and gas industry in general will affect the accuracy of our estimates of our oil and natural gas reserves. Each of the foregoing considerations also impacts the PV-10 values of our reserves.

Seasonal weather conditions, wildlife and plant species conservation restrictions, and other constraints could adversely affect our ability to conduct operations.

Our operations could be adversely affected by weather conditions and wildlife and plant species conservation restrictions. In Colorado, certain activities cannot be conducted as effectively during the winter months. Winter and severe weather conditions limit and may temporarily halt operations. These constraints and resulting shortages or high costs could delay or temporarily halt our operations and materially increase our operational and capital costs, which could have a material adverse effect on our business, financial condition, and results of operations.

Similarly, some of our properties are located in relatively populous areas in the Wattenberg Field, and our operations in those areas may be subject to additional expenses and limitations. For example, we may incur additional expenses in those areas to mitigate visual impacts, noise, and odor issues relating to our operations, and we may find it more difficult to obtain drilling permits and other governmental approvals. In addition, the risk of litigation related to our operations may be higher in those areas. Any of these factors could have a material impact on our operations in the Wattenberg Field and could have a material adverse effect on our business, financial condition, and results of operations.

Furthermore, a critical habitat designation for certain wildlife under the U.S. Endangered Species Act or similar state laws could result in material restrictions to public or private land use and could delay or prohibit land access or development. The listing of certain species as threatened or endangered could have a material adverse effect on our operations in areas where such listed species are found.


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Our future success depends upon our ability to find, develop, produce, and acquire additional oil and natural gas reserves that are economically recoverable. Drilling activities may be unsuccessful or may be less successful than anticipated.

In order to maintain or increase our reserves, we must locate and develop or acquire new oil and natural gas reserves to replace those being depleted by production. We must do this even during periods of low oil and natural gas prices when it is difficult to raise the capital necessary to finance our exploration, development, and acquisition activities. Without successful exploration, development, or acquisition activities, our reserves and revenues will decline rapidly. We may not be able to find and develop or acquire additional reserves at an acceptable cost or have access to necessary financing for these activities, either of which would have a material adverse effect on our financial condition.

Our management has identified and scheduled drilling locations as an estimation of our future multi-year drilling activities on our existing acreage. These identified drilling locations represent a significant part of our strategy. Our ability to drill and develop these locations depends on a number of uncertainties, including the availability of capital, seasonal conditions, regulatory approvals, oil and natural gas prices, costs, drilling results, and the accuracy of our assumptions and estimates regarding potential well communication issues and other matters affecting the spacing of our wells. Because of these uncertainties, we do not know if the numerous potential drilling locations that we have identified will ever be drilled or if we will be able to produce oil and natural gas from these or any other potential drilling locations. Many factors may cause us to curtail, delay, or cancel scheduled drilling projects, including factors relating to our receipt of drilling permits and other governmental approvals, shortages or delays in obtaining necessary equipment or services, equipment failures or accidents, adverse weather, environmental hazards, and title problems. As such, our actual drilling activities may differ materially from those presently identified, which could adversely affect our business and reserves.

Drilling for oil and natural gas may involve unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient quantities to cover drilling, operating, and other costs. In addition, even a commercial well may have production that is less, or costs that are greater, than we projected. The cost of drilling, completing, and operating a well is often uncertain, and many factors can adversely affect the economics of a well or property. There can be no assurance that proved or unproved property acquired by us or undeveloped acreage leased by us will be profitably developed, that new wells drilled by us in prospects that we pursue will be productive, or that we will recover all or any portion of our investment in such proved or unproved property or wells.

Acquisitions we pursue may not achieve their intended results and may result in us assuming unanticipated liabilities. These risks are heightened in the case of the GC Acquisition due to its size relative to our prior acreage position.

Pursuing acquisitions is an important part of our growth strategy. However, achieving the anticipated benefits of any acquisition is subject to a number of risks and uncertainties. For example, we may discover title defects or adverse environmental or other conditions related to the acquired properties of which we are unaware at the time that we enter into the relevant purchase and sale agreement. Environmental, title, and other problems could reduce the value of the acquired properties to us, and depending on the circumstances, we could have limited or no recourse to the sellers with respect to those problems. We may assume all or substantially all of the liabilities associated with the acquired properties and may be entitled to indemnification in connection with those liabilities in only limited circumstances and in limited amounts. We cannot assure that such potential remedies will be adequate for any liabilities that we incur, and such liabilities could be significant. Even though we perform due diligence reviews (including a review of title and other records) of the major properties that we seek to acquire that we believe are consistent with industry practices, these reviews are inherently incomplete. It is generally not feasible for us to perform an in-depth review of every individual property and all records involved in each acquisition. Moreover, even an in-depth review of records and properties may not necessarily reveal existing or potential liabilities or other problems or permit us to become familiar enough with the properties to assess fully their deficiencies and potential. The discovery of any material liabilities associated with our acquisitions could materially and adversely affect our business, financial condition, and results of operations. In addition, completing the integration process for any acquisition may be more expensive than anticipated, and we cannot assure you that we will be able to effect the integration of any acquired operations smoothly or efficiently or that the anticipated benefits of the transaction will be achieved. Further, acquisitions may require additional debt or equity financing, resulting in additional leverage or dilution of ownership.

The success of any acquisition will depend on, among other things, the accuracy of our assessment of the number and quality of the drilling locations associated with the properties to be acquired, future oil and natural gas prices, reserves and production, and future operating costs and various other factors. These assessments are necessarily inexact. Our assessment of certain of these factors will typically be based in part on information provided to us by the seller, including historical production data. Our independent reserve engineers typically will not provide a report regarding the estimates of reserves with respect to the properties to be acquired. The assumptions on which our internal estimates are based may prove to be incorrect in a number of material ways, resulting in our not realizing the expected benefits of the acquisition. As a result, we may not recover the purchase

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price for the acquisition from the sale of production from the acquired properties or recognize an acceptable return from such sales.

We are subject to all of the foregoing risks with respect to the GC Acquisition, and these risks are heightened with respect to that acquisition due to the significant amount of acreage acquired relative to our prior acreage position. In addition, if the second closing of the GC Acquisition is delayed for a substantial period, we will not be able to control operations on the properties subject to that closing during that period, which would increase the risk that some leases will expire before production is established. This could materially detract from the value of the properties acquired pursuant to either closing. The second closing is subject to certain closing conditions, including our receipt of a release of a consent decree burdening certain of the properties to be acquired, and these conditions may not be satisfied in the time frame we expect or at all.

We may not be able to obtain adequate financing when the need arises to execute our long-term operating strategy.

Our ability to execute our long-term operating strategy is highly dependent on our having access to capital when the need arises. We historically have addressed our liquidity needs through credit facilities, issuances of equity, debt, and convertible securities, sales of assets, joint ventures, and cash provided by operating activities. We will examine the following alternative sources of capital in light of economic conditions in existence at the relevant time:

borrowings from banks or other lenders;
the sale of non-core assets;
the issuance of debt securities;
the sale of common stock, preferred stock, or other equity securities;
joint venture financing; and
production payments.

The availability of these sources of capital when the need arises will depend upon a number of factors, some of which are beyond our control. These factors include general economic and financial market conditions, oil and natural gas prices, our credit ratings, interest rates, market perceptions of us or the oil and gas industry, our market value, and our operating performance. We may be unable to execute our long-term operating strategy if we cannot obtain capital from these sources when the need arises, which would adversely affect our production, cash flows, and capital expenditure plans.

Oil and natural gas prices may be affected by local and regional factors.

The prices to be received for our production will be determined to a significant extent by factors affecting the local and regional supply of and demand for oil and natural gas, including the adequacy of the pipeline and processing infrastructure in the region to process and transport our production and that of other producers. Those factors result in basis differentials between the published indices generally used to establish the price received for regional natural gas production and the actual (frequently lower) price that we receive for our production. Our average differential for the twelve months ended December 31, 2016 was $(8.77) per barrel for oil and $(0.08) per Mcf for natural gas. These differentials are difficult to predict and may widen or narrow in the future based on market forces. The unpredictability of future differentials makes it more difficult for us to effectively hedge our production. Our hedging arrangements are generally based on benchmark prices and therefore do not protect us from adverse changes in the differential applicable to our production.

Lower oil and natural gas prices and other adverse market conditions may cause us to record ceiling test write-downs or other impairments, which could negatively impact our results of operations.

We use the full cost method of accounting to account for our oil and natural gas operations. Accordingly, we capitalize the cost to acquire, explore for, and develop oil and gas properties. Under full cost accounting rules, the net capitalized costs of oil and gas properties may not exceed a “full cost ceiling” which is based upon the present value of estimated future net cash flows from proved reserves, including the effect of hedges in place, discounted at 10%, plus the lower of cost or fair market value of unproved properties. If, at the end of any fiscal period, we determine that the net capitalized costs of oil and gas properties exceed the full cost ceiling, we must charge the amount of the excess to earnings in the period then ended. This is called a “ceiling test write-down.” This charge does not impact cash flow from operating activities, but does reduce our net income and stockholders’ equity. Once incurred, a write-down of oil and gas properties is not reversible at a later date.

We review the net capitalized costs of our properties quarterly, using a single price based on the beginning-of-the-month average of oil and natural gas prices for the preceding 12 months. We also assess investments in unproved properties periodically to determine whether impairment has occurred. The risk that we will be required to further write down the carrying value of our oil and gas properties increases when oil and natural gas prices are low or volatile. In addition, write-downs may occur if we

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experience substantial downward adjustments to our estimated proved reserves or our unproved property values or if estimated future development costs increase.

The ceiling test calculation as of December 31, 2016 used average realized prices of $36.07 per barrel and $2.44 per Mcf. The oil prices used at December 31, 2016 were approximately 13% lower than the December 31, 2015 price of $41.33 per barrel, and the gas prices were approximately 6% lower than the December 31, 2015 price of $2.60 Mcf. We compare our net capitalized costs for oil and gas properties to the ceiling amount at various points during the year. At March 31, 2016, June 30, 2016, and September 30, 2016, our net capitalized costs for oil and gas properties exceeded the ceiling amount by $45.6 million, $144.1 million, and $25.5 million, respectively, resulting in a total ceiling test write-down of $215.2 million for the year ended December 31, 2016. We may experience further ceiling test write-downs in the future. Any future ceiling test cushion, and the risk we may incur further write-downs or impairments, will be subject to fluctuation as a result of acquisition or divestiture activity. In addition, declining commodity prices or other adverse market conditions, such as declines in the market price of our common stock, could result in goodwill impairments or reductions in proved reserve estimates that would adversely affect our results of operation or financial condition.

We cannot control the activities on properties that we do not operate, and we are unable to ensure the proper operation and profitability of these non-operated properties.

We do not operate all of the properties in which we have an interest. As a result, we have limited ability to exercise influence over, and control the risks associated with, the operation of these properties. The success and timing of drilling and development activities on our partially owned properties operated by others, therefore, will depend upon a number of factors outside of our control, including the operator’s:

timing and amount of capital expenditures;
expertise and diligence in adequately performing operations and complying with applicable agreements;
financial resources;
inclusion of other participants in drilling wells; and
use of technology.

As a result of any of the above or an operator’s failure to act in ways that are in our best interest, our allocated production revenues and results of operations could be adversely affected. In addition, our lack of control over non-operated properties makes it more difficult for us to forecast future capital expenditures and production.

We are dependent on third party pipeline, trucking, and rail systems to transport our production and gathering and processing systems to prepare our production. These systems have limited capacity and, at times, have experienced service disruptions. Curtailments, disruptions, or lack of availability in these systems interfere with our ability to market the oil and natural gas we produce and could materially and adversely affect our cash flow and results of operations.

Market conditions or the unavailability of satisfactory oil and gas transportation and processing arrangements may hinder our access to oil and natural gas markets or delay our production. The marketability of our oil and natural gas production depends in part on the availability, proximity, and capacity of gathering, processing, pipeline, trucking, and rail systems. The amount of oil and natural gas that can be produced and sold is subject to limitation in certain circumstances, such as pipeline interruptions due to scheduled and unscheduled maintenance, accidents, excessive pressure, physical damage to the gathering or transportation system, lack of contracted capacity on such systems, inclement weather, labor or regulatory issues, or other interruptions. A portion of our production may be interrupted, or shut in, from time to time as a result of these factors. Curtailments and disruptions in these systems may last from a few days to several months or longer. These risks are greater for us than for some of our competitors because our operations are focused on areas where there has been a substantial amount of development activity in recent years and resulting increases in production, and this has increased the likelihood that there will be periods of time in which there is insufficient midstream capacity to accommodate the increased production. For example, the gas gathering systems serving the Wattenberg Field have in recent years experienced high line pressures, and at times, this has reduced capacity and caused gas production to either be shut in or flared. In addition, we might voluntarily curtail production in response to market conditions. Any significant curtailment in gathering, processing or pipeline system capacity, significant delay in the construction of necessary facilities, or lack of availability of transport would interfere with our ability to market the oil and natural gas that we produce and could materially and adversely affect our cash flow and results of operations and the expected results of our drilling program.


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We may be unable to satisfy our contractual obligations, including obligations to deliver oil and natural gas from our own production or other sources.

We have entered into agreements that require us to deliver minimum amounts of oil to three counterparties that transport oil via pipelines. Pursuant to these agreements, we must deliver specific amounts, either from our own production or from oil we acquire, over the next five years. Since October 2015, we have been obligated to deliver a combined volume of 6,157 Bbls of oil per day to two of these counterparties. We have also committed to deliver 5,000 Bbls of oil per day to the third counterparty for five years beginning in the latter half of 2016. If we are unable to fulfill all of our contractual obligations from our own production or from oil and natural gas that we acquire from third parties, we may be required to pay penalties or damages pursuant to these agreements. We incurred such charges in the amount of $0.6 million during the year ended December 31, 2016.

Furthermore, in collaboration with several other producers and DCP Midstream, we have agreed to participate in the expansion of natural gas gathering and processing capacity in the D-J Basin. As a result of this agreement, we have committed to deliver 46.4 MMcf of natural gas per day for a period of 7 years from the plant in-service date, which is currently expected to be in late 2018. We may be required to pay penalties or damages pursuant to this agreement if we are unable to fulfill all of our contractual obligation from our own production and if the collective volumes delivered to the plant by other producers in the D-J Basin are not in excess of the total commitment.

Any future penalties or damages of the types described above could adversely impact our cash flows, profit margins, net income, and reserve values.

We face strong competition from larger oil and natural gas companies that may negatively affect our ability to carry on operations.

We operate in the highly competitive areas of oil and gas exploration, development, and production. Factors that affect our ability to compete successfully in the marketplace include:

the availability of funds for, and information relating to, properties;
the standards established by us for the minimum projected return on investment; and
the transportation of natural gas and oil.

Our competitors include major integrated oil companies, substantial independent energy companies, affiliates of major interstate and intrastate pipelines, and national and local gas gatherers, many of which possess greater financial and other resources than we do. If we are unable to successfully compete against our competitors, our business, prospects, financial condition, and results of operations may be adversely affected.

We may be unable to successfully identify, execute, or effectively integrate future acquisitions, which may negatively affect our results of operations.

Acquisitions of oil and gas businesses and properties have been an important element of our business, and we will continue to pursue acquisitions in the future. Although we regularly engage in discussions with, and submit proposals to, acquisition candidates, suitable acquisitions may not be available in the future on reasonable terms. If we do identify an appropriate acquisition candidate, we may be unable to successfully negotiate the terms of an acquisition, finance the acquisition, or if the acquisition occurs, effectively integrate the acquired business or properties into our existing business. Negotiations of potential acquisitions and the integration of acquired assets may require a disproportionate amount of management’s attention and our resources. Moreover, our debt agreements contain covenants that may limit our ability to finance an acquisition. Even if we complete additional acquisitions, any new assets may not generate revenues comparable to our existing business, the anticipated cost efficiencies or synergies may not be realized, and the acquired assets may not be integrated successfully or operated profitably. Our inability to successfully identify, execute, or effectively integrate future acquisitions may negatively affect our results of operations.
    
We may incur substantial costs to comply with the various federal, state, and local laws and regulations that affect our oil and natural gas operations.

We are affected significantly by a substantial number of governmental regulations that increase costs related to the drilling, completion, production, and abandonment of wells, the transportation and processing of oil and natural gas, the management and disposal of waste, and other aspects of our operations. It is possible that the number and extent of these regulations, and the costs to comply with them, will increase significantly in the future. In Colorado, for example, significant governmental regulations have been adopted in recent years to address well siting, well construction, hydraulic fracturing, water quality, public safety, air

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emissions, aesthetics, waste management, spill reporting, land reclamation, wildlife protection, and data collection. These government regulatory requirements may result in substantial costs that are not possible to pass through to our customers and could impact the profitability of our operations.

Our operations are subject to stringent federal, state, and local laws and regulations relating to the release or disposal of materials into the environment or otherwise relating to health and safety, land use, environmental protection, or the oil and gas industry generally. Legislation affecting the industry is under constant review for amendment or expansion, frequently increasing our regulatory burden. Compliance with such laws and regulations often increases our cost of doing business and, in turn, decreases our profitability. Failure to comply with these laws and regulations may result in the assessment of administrative, civil, and criminal penalties, the incurrence of investigatory or remedial obligations, or the issuance of cease and desist orders.

The environmental laws and regulations to which we are subject may, among other things:

require us to apply for and receive a permit before drilling commences or certain associated facilities are developed;
restrict the types, quantities, and concentrations of substances that can be released into the environment in connection with drilling, hydraulic fracturing, and production activities;
limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other "waters of the United States," threatened and endangered species habitat, and other protected areas;
require remedial measures to mitigate pollution from former operations, such as plugging abandoned wells; and
impose substantial liabilities for pollution resulting from our operations.

Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly waste handling, storage, transport, disposal, or cleanup requirements could require us to make significant expenditures to maintain compliance, and may otherwise have a material adverse effect on our earnings, results of operations, competitive position, or financial condition. Changes to the requirements for drilling, completing, operating, and abandoning wells and related facilities could have similar adverse effects on us.

New environmental legislation or regulatory initiatives, including those related to hydraulic fracturing, could result in increased costs and additional operating restrictions or delays.

We are subject to extensive federal, state, and local laws and regulations concerning health, safety, and environmental protection. Government authorities frequently add to those requirements, and both oil and gas development generally and hydraulic fracturing specifically are receiving increased regulatory attention. Our operations utilize hydraulic fracturing, an important and commonly used process in the completion of oil and natural gas wells in low-permeability formations. Hydraulic fracturing involves the injection of water, proppant, and chemicals under pressure into rock formations to stimulate hydrocarbon production.

In 2012, the EPA issued final rules that establish new air emission controls for natural gas processing operations as well as for oil and natural gas production. Among other things, the rules cover the completion and operation of hydraulically fractured natural gas wells and associated equipment. After several parties challenged the new air regulations in court, the EPA reconsidered certain requirements and amended the rules in 2013 and 2014. In June 2016, the EPA finalized new regulations that set methane and volatile organic compounds emission standards for new and modified oil and natural gas production and natural gas processing and transmission facilities as part of an effort to reduce methane emissions from the oil and natural gas sector by up to 45 percent from 2012 levels by 2025. In addition, on March 10, 2016, EPA announced that it will begin a formal process under CAA § 111(d) to require companies operating existing oil and gas sources to provide information to assist EPA in developing comprehensive regulations to reduce methane emissions. In late 2016, EPA sent ICRs to operators to gather information on existing sources of methane emissions, technologies to reduce those emissions, and the costs of those technologies in the production, gathering, processing, and transmission and storage segments of the oil and natural gas sector. In addition, in October 2015, the EPA lowered the NAAQS for ozone under the CAA from 75 parts per billion to 70 parts per billion. Any resulting expansion of the ozone nonattainment areas in Colorado could cause our oil and natural gas operations in such areas to become subject to more stringent emissions controls, emission offset requirements and increased permitting delays and costs. In addition, the ozone nonattainment status for the Denver Metro North Front Range Ozone 8-Hour Non-Attainment area was bumped up by the EPA from “marginal” to “moderate” as a result of the area failing to attain the 2008 ozone NAAQS by the applicable attainment date of July 20, 2015. In 2016, the state of Colorado undertook a rulemaking to address the new “moderate” status, culminating in, among other things, the incorporation of two existing state-only requirements for oil and natural gas operations into the federally-enforceable SIP. During the fall of 2016, EPA also issued final CTGs 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 area. In 2017, as part of the federal CTG process for oil and natural gas, Colorado will begin a stakeholder and rulemaking effort to compare the CTGs to existing Colorado requirements to ensure they meet applicable federal requirements. This process could result in new or more stringent air quality control requirements applicable to our operations.

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 Several governmental reviews are underway assessing the impact of hydraulic fracturing on the environment and human health and safety, including potential adverse effects on drinking water supplies as well as migration of methane and other hydrocarbons. As a result, the federal government is studying the environmental risks associated with hydraulic fracturing and evaluating whether to adopt additional regulatory requirements. For example, the EPA has conducted a multi-year study of the potential impacts of hydraulic fracturing on drinking water resources, and the draft results were released for public and peer review in June 2015. In December 2016, EPA released the final report on impacts from hydraulic fracturing activities on drinking water, concluding that hydraulic fracturing activities can impact drinking water resources under some circumstances and identifying some factors that could influence these impacts. In addition, in February 2014, the EPA issued final guidance for underground injection permits that regulate hydraulic fracturing using diesel fuel, where the EPA has permitting authority under the SDWA. This guidance eventually could encourage other regulatory authorities to adopt permitting and other restrictions on the use of hydraulic fracturing. In May 2014, the EPA issued an advance notice of proposed rulemaking under the TSCA to obtain data on chemical substances and mixtures used in hydraulic fracturing. In October 2015, EPA also granted, in part, a petition filed by several national environmental advocacy groups to add the oil and gas extraction industry to the list of industries required to report releases of certain "toxic chemicals" under the Toxics Release Inventory ("TRI") program. EPA determined that natural gas processing facilities may be appropriate for addition to the scope of TRI and will conduct a rulemaking process to propose such action. In January 2017, EPA issued a proposed rule to include natural gas processing facilities within the TRI program. In June 2016, the EPA finalized CWA pretreatment standards on wastewater discharges associated with hydraulic fracturing activities. Aside from the EPA, the BLM has issued new rules, which are currently stayed pending further litigation, for hydraulic fracturing activities involving federal and tribal lands and minerals that, in general, would cover disclosure of fracturing fluid components, wellbore integrity, and handling of flowback and produced water. In March 2016, OSHA issued a final rule, with effective dates of 2018 and 2021 for the hydraulic fracturing industry, which imposes stricter standards for worker exposure to silica, including worker exposure to sand in hydraulic fracturing. In addition, OSHA and the National Institute of Occupational Safety and Health have issued hazard alerts to the hydraulic fracturing industry regarding risks to workers from silica exposure and other hazards, which include recommendations to reduce those risks and proposals for additional study of the industry. In December 2015, the U.S. Department of Labor and the U.S. Department of Justice released a Memorandum of Understanding ("MOU"), announcing an interagency effort to increase enforcement of worker endangerment violations under environmental statutes (such as the Clean Water Act, the Clean Air Act, and the RCRA) and Title 18 criminal statutes that carry harsher penalties than the Occupational Safety and Health Act of 1970. Consistent with this MOU, where appropriate, the Department of Justice will seek felony charges (such as false statements, conspiracy, and obstruction of justice) when prosecuting worker endangerment violations.

In the United States Congress, bills have been introduced from time to time that would amend the SDWA to eliminate an existing exemption for certain hydraulic fracturing activities from the definition of "underground injection," thereby requiring oil and gas companies to obtain SDWA permits for fracturing not involving diesel fuels, and to require disclosure of the chemicals used in the process. If adopted, such legislation could establish an additional level of regulation and permitting at the federal level, although some form of chemical disclosure is already required by most oil and gas producing states. At this time, it is not clear what action, if any, the United States Congress will take to address hydraulic fracturing.

Apart from these ongoing federal initiatives, state governments where we operate have moved to impose stricter requirements on hydraulic fracturing and other aspects of oil and natural gas production. Colorado, for example, comprehensively updated its oil and gas regulations in 2008 and adopted significant additional amendments in 2011, 2013, 2014, and 2015. Among other things, the updated and amended regulations require operators to reduce methane emissions associated with hydraulic fracturing, compile and report additional information regarding wellbore integrity, satisfy more stringent reclamation and remediation standards, avoid certain wildlife habitat, publicly disclose the chemical ingredients used in hydraulic fracturing, increase the minimum distance between occupied structures and oil and natural gas wells, undertake additional mitigation for nearby residents, implement additional groundwater testing, and take additional actions to prevent blowouts and avoid subsurface well communication. Colorado has also adopted new regulations for air emissions from oil and natural gas operations as well as new legislation and implementing regulations increasing the monetary penalties for regulatory violations and lowering the threshold for reporting spills. Additionally, local governments are adopting new requirements on hydraulic fracturing and other oil and natural gas operations, including local county and city governments in Colorado.

In January 2016, the COGCC approved new rules that require local government consultation and certain best management practices for large-scale oil and natural gas facilities in certain urban mitigation areas. The new rules also require operator registration and/or notifications to local governments with respect to future oil and natural gas drilling and production facility locations.

           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.


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The trend toward stricter standards and greater enforcement in environmental legislation and regulation is likely to continue. For example, concern has recently arisen in several states over increasing numbers of earthquakes that may be associated with underground injection wells used for the disposal of oil and gas wastewater. Such concerns could eventually limit the use of such wells in some areas and increase the cost of disposal in others. Similarly, concerns have recently been expressed over the flaring of natural gas associated with oil production in some areas. These concerns and regulations could limit or increase the cost of oil production in some areas. Other environmental issues and concerns may arise from time to time in the future and lead to new and additional legislative and regulatory initiatives.

The adoption of future federal, state, or local laws or implementing regulations or orders imposing new environmental obligations on, or otherwise limiting, our operations could make it more difficult and more expensive to complete oil and natural gas wells, increase our costs of compliance and doing business, delay or prevent the development of resources (especially from shale formations that are not commercial without the use of hydraulic fracturing), or alter the demand for and consumption of our products. Any such outcome could have a material and adverse impact on our cash flows and results of operations.

Any local moratoria or bans on our activities could have a negative impact on our business, financial condition, and results of operations.

Some local governments are adopting new requirements and restrictions on hydraulic fracturing and other oil and natural gas operations. Some local governments in Colorado, for instance, have amended their land use regulations to impose new requirements on oil and gas development, while other local governments have entered memoranda of agreement with oil and gas producers to accomplish the same objective. Beyond that, during the past few years, a total of five Colorado cities have passed voter initiatives temporarily or permanently prohibiting hydraulic fracturing. Since that time, local district courts have struck down the ordinances for certain of those Colorado cities, and such decisions were upheld by the Colorado Supreme Court in May 2016. Nevertheless, there is a continued risk that cities will adopt local ordinances that seek to regulate the time, place, and manner of hydraulic fracturing activities and oil and natural gas operations within their respective jurisdictions.

In addition, in 2014 and 2016, opponents of hydraulic fracturing sought statewide ballot initiatives that would have restricted oil and gas development in Colorado. The 2014 initiatives were withdrawn in return for the creation of a task force to craft recommendations for minimizing land use conflicts over the location of oil and natural gas facilities, and none of the 2016 initiatives were successful. We cannot predict the nature or outcome of future ballot initiatives, which could materially impact our results of operations, production, and reserves. If we are required to cease operating in any of the areas in which we now operate as the result of bans or moratoria on drilling or related oilfield services activities, it could have a material effect on our business, financial condition, and results of operations.

Climate change laws and regulations restricting emissions of greenhouse gases could result in increased operating costs and reduced demand for the oil and natural gas that we produce. Potential physical effects of climate change could disrupt our production and cause us to incur significant costs in preparing for or responding to those effects.

In 2009, the EPA published its findings that emissions of carbon dioxide, methane, and other GHGs present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the Earth's atmosphere and other climatic conditions. Based on these findings, the EPA adopted regulations under the CAA that, among other things, established PSD, construction and Title V operating permit reviews for GHG emissions from certain large stationary sources that are already major sources of emissions of regulated pollutants. In a subsequent ruling, the U.S. Supreme Court upheld a portion of EPA’s GHG stationary source program, but invalidated a portion of it. The Court held that stationary sources already subject to the PSD or Title V program for non-GHG criteria pollutants remained subject to GHG BACT requirements, but ruled that sources subject to the PSD or Title V program only for GHGs could not be forced to comply with GHG BACT requirements. Upon remand, the D.C. Circuit issued an amended judgment, which, among other things, vacated the PSD and Title V regulations under review in that case to the extent they require a stationary source to obtain a PSD or Title V permit solely because the source emits or has the potential to emit GHGs above the applicable major source thresholds. In October 2016, EPA issued a proposed rule to revise its PSD and Title V regulations applicable to GHGs in accordance with these court rulings, including proposing a de minimis level of GHG emissions below which BACT is not required. Depending on what EPA does in a final rule, it is possible that any regulatory or permitting obligation that limits emissions of GHGs could extend to smaller stationary sources and require us to incur costs to reduce and monitor emissions of GHGs associated with our operations and also adversely affect demand for the oil and natural gas that we produce.

In addition, the EPA has adopted rules requiring the monitoring and annual reporting of GHG emissions from specified GHG emission sources in the United States, including certain onshore oil and natural gas production sources, which include certain of our operations. While Congress has not enacted significant legislation relating to GHG emissions, it may do so in the future,

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and moreover, several state and regional initiatives have been enacted aimed at monitoring and/or reducing GHG emissions through cap and trade programs.

The adoption of new laws, regulations, or other requirements limiting or imposing other obligations on GHG emissions from our equipment and operations, and the implementation of requirements that have already been adopted, could require us to incur costs to reduce emissions of GHGs associated with our operations, including those regulating methane emissions from the oil and gas industry. See the risk factor above entitled "New environmental legislation or regulatory initiatives, including those related to hydraulic fracturing, could result in increased costs and additional operating restrictions or delays" for further information regarding methane emissions regulations. In addition, substantial limitations on GHG emissions in other sectors, such as the power sector under EPA's August 2015 Clean Power Plan, could adversely affect demand for the oil and natural gas that we produce. In February 2016, the U.S. Supreme Court stayed the Clean Power Plan pending judicial review. Further, GHG regulation may result from the December 2015 agreement reached at the United Nations climate change conference in Paris. Pursuant to the agreement, the United States made an initial pledge to a 26-28% reduction in its GHG emissions by 2025 against a 2005 baseline and committed to periodically update its pledge in five yearly intervals starting in 2020. GHG emissions in the earth's atmosphere have also been shown to produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods, and other climatic events, any of which could have an adverse effect on our operations.

Environmental liabilities relating to activities of other parties could have a material adverse effect on our financial condition and operations.

Our operations could result in liability for personal injuries, property damage, oil spills, discharge of hazardous materials, remediation and clean-up costs, and other environmental damages, including as a result of the activities of previous owners of our properties. We could incur substantial liabilities to third parties or governmental entities, which could have a material adverse effect on our financial condition and results of operations. For example, over the years, we have owned or leased numerous properties for oil and natural gas activities upon which petroleum hydrocarbons or other materials may have been released by us or by predecessor property owners or lessees who were not under our control. Under applicable environmental laws and regulations, including CERCLA, RCRA, and state laws, we could be held liable for the removal or remediation of previously released materials or property contamination at such locations, or at third-party locations to which we have sent waste, regardless of whether we were responsible for the release or whether the operations at the time of the release were standard industry practice.

Similarly, the OPA imposes a variety of regulations on “responsible parties” related to the prevention of oil spills. The implementation of new, or the modification of existing, environmental laws or regulations, including regulations promulgated pursuant to the OPA, could have a material adverse impact on us.

The adoption and implementation of new statutory and regulatory requirements for derivative transactions could have an adverse impact on our ability to hedge risks associated with our business and increase the working capital required to conduct these activities.

The Dodd-Frank Act authorizes federal oversight and regulation of the over-the-counter derivatives market and entities that participate in that market. Regulations under the Dodd-Frank Act may, among other things, require us to comply with margin requirements in connection with our derivative activities. If we are required to post cash collateral in connection with some or all of our derivative positions, this would make it difficult or impossible to pursue our current hedging strategy. The regulations may also require the counterparties to our derivative instruments to spin off some of their derivatives activities to separate entities, which may not be as creditworthy as the current counterparties. The regulations may also reduce the number of potential counterparties in the market, which could make hedging more expensive.

If we reduce our use of derivatives as a result of the Dodd-Frank Act and its implementing regulations, our results of operations may be more volatile, and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures. Any of these consequences could have a material adverse effect on our financial position, results of operations, and cash flows. In addition, derivative instruments create a risk of financial loss in some circumstances, including when production is less than the volume covered by the instruments.

Proposed changes to U.S. tax laws, if adopted, could have an adverse effect on our business, financial condition, results of operations, and cash flows.

From time to time, legislative proposals are made that would, if enacted, result in significant changes to U.S. tax laws. These proposed changes have included, among others, eliminating the immediate deduction for intangible drilling and development costs, eliminating the deduction from income for domestic production activities relating to oil and gas exploration and development, repealing the percentage depletion allowance for oil and gas properties and extending the amortization period for certain geological

30



and geophysical expenditures. Such proposed changes in the U.S. tax laws, if adopted, or other similar changes that reduce or eliminate deductions currently available with respect to oil and gas exploration and development, could adversely affect our business, financial condition, results of operations, and cash flows.

Our indebtedness adversely affects our cash flow and may adversely affect our ability to operate our business. Our ability to remain in compliance with debt covenants and make payments on our debt is subject to numerous risks.

As of December 31, 2016, the aggregate amount of our outstanding indebtedness was $80 million. Our indebtedness could have important consequences for investors, including the following:

the covenants contained in our debt agreements limit our ability to borrow money in the future for acquisitions, capital expenditures, or to meet our operating expenses or other general corporate obligations and may limit our flexibility in operating our business;
the amount of our interest expense may increase because amounts borrowed under our credit facility bear interest at variable rates, payable either quarterly or at the end of a specified interest period; if interest rates increase, this could result in higher interest expense; and
our debt level could limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.

Our ability to meet our expenses and debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory, and other factors. We will not be able to control many of these factors, such as economic conditions and governmental regulation. We cannot be certain that our cash flow from operations will be sufficient to allow us to pay the principal and interest on our debt and meet our other obligations. If we do not have enough cash to service our debt, we may be required to refinance all or part of our existing debt, sell assets, borrow more money, or raise equity. We may not be able to refinance our debt, sell assets, borrow more money, or raise equity on terms acceptable to us, if at all.

Any failure to meet our debt obligations could harm our business, financial condition, and results of operations.

Our ability to make payments on and/or to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate sufficient cash flow from operations in the future. To a significant extent, this is subject to general economic, financial, competitive, legislative and regulatory conditions, and other factors that are beyond our control, including the prices that we receive for our oil and natural gas production.

We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our credit facility in an amount sufficient to enable us to pay principal and interest on our indebtedness or to fund our other liquidity needs. For example, decreases in oil and natural gas prices in the recent past have adversely affected our ability to generate cash flow from operations and future decreases would have similar effects. If our cash flow and existing capital resources are insufficient to fund our debt obligations, we may be forced to reduce our planned capital expenditures, sell assets, seek additional equity or debt capital, or restructure our debt, and any of these actions, if completed, could adversely affect our business and/or our shareholders. We cannot assure you that any of these remedies could, if necessary, be effected on commercially reasonable terms, in a timely manner or at all. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness could harm our ability to incur additional indebtedness on acceptable terms. Our cash flow and capital resources may be insufficient for payment of interest on and principal of our debt in the future, and any such alternative measures may be unsuccessful or may not permit us to meet scheduled debt service obligations, which could cause us to default on our obligations and could impair our liquidity.

Restrictive debt covenants could limit our growth and our ability to finance our operations, fund our capital needs, respond to changing conditions, and engage in other business activities that may be in our best interests.

Our credit facility and the indenture governing our Senior Notes contain, and future debt agreements may contain, covenants that restrict or limit our ability to:

pay dividends or distributions on our capital stock or issue preferred stock;
repurchase, redeem, or retire our capital stock or subordinated debt;
make certain loans and investments;
sell assets;
enter into certain transactions with affiliates;
create or assume certain liens on our assets;
enter into sale and leaseback transactions;

31



merge or enter into other business combination transactions; or
engage in certain other corporate activities.

Our credit facility also requires us to satisfy certain financial tests on an ongoing basis. Our ability to comply with these requirements may be affected by events beyond our control, and we cannot assure you that we will satisfy them in the future. In addition, these requirements could limit our ability to obtain future financings, make needed capital expenditures, withstand a future downturn in our business or the economy in general, or otherwise conduct necessary corporate activities. We may also be prevented from taking advantage of business opportunities that arise because of the restrictive covenants under our debt agreements. Future debt agreements may have similar, or more restrictive, provisions.

A breach of any of the covenants in our debt agreements could result in a default under the agreement. A default, if not cured or waived, could result in all indebtedness outstanding under the agreement and other debt agreements becoming immediately due and payable. If that should occur, we may not be able to pay all such debt or borrow sufficient funds to refinance it. Even if new financing were then available, it may not be on terms that are acceptable to us. If we were unable to repay those amounts, the lenders could accelerate the maturity of the debt or proceed against any collateral granted to them to secure such defaulted debt.

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 100% of the working interest in the oil and gas leases on which we conduct operations, and other parties own the remaining portion of the working interest. 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 unpaid costs and liabilities arising from the actions of other working interest owners. In addition, declines in commodity prices may increase the likelihood that some of these working interest owners, particularly those that are smaller and less established, will not be 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, a partner may declare bankruptcy. In the event any of our project partners do not pay their share of such costs, we would likely have to pay those costs, and we may be unsuccessful in any efforts to recover them from our partners. This could materially adversely affect our financial position.

Our disclosure controls and procedures may not prevent or detect potential acts of fraud.

Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms.

Our management, including our Chief Executive Officer and Chief Financial Officer, believes that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within our company have been prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by an unauthorized override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.

Failure to maintain an effective system of internal control over financial reporting may have an adverse effect on our stock price.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, and the rules and regulations promulgated by the SEC to implement Section 404, we are required to furnish a report by our management in this report regarding the effectiveness of our internal control over financial reporting. The report includes, among other things, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. If we are unable to assert that our internal control over financial reporting is effective now or in any future period, or if our auditors are unable to express an opinion on the effectiveness of our internal controls, investors

32



could lose confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.

Substantially all of our producing properties are located in the D-J Basin in Colorado, making us vulnerable to risks associated with operating in one major geographic area.

Our operations have been focused on the D-J Basin in Colorado, which means our current producing properties and new drilling opportunities are geographically concentrated in that area. Because our operations are 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 oil and natural gas produced from the wells in the region, natural disasters, restrictive governmental regulations, transportation capacity constraints, weather, curtailment of production, or interruption of transportation and processing services, and any resulting delays or interruptions of production from existing or planned new wells. 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. 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. In addition, in areas where exploration and production activities are increasing, as has been the case in recent years in the Wattenberg Field, the demand for, and cost of, drilling rigs, equipment, supplies, personnel, and oilfield services increase. Shortages or the high cost of drilling rigs, equipment, supplies, 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.

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

Substantially all of our accounts receivable result from oil and natural gas sales or joint interest billings to third parties in the energy industry. We sell production to a small number of customers, as is customary in the industry. For the twelve months ended December 31, 2016, we had four major customers, which represented 20%, 20%, 16%, and 13% of our revenue during the period. This concentration of customers and joint interest owners may impact our overall credit risk in that these entities may be similarly affected by changes in economic and other conditions. In addition, our oil and natural gas hedging arrangements expose us to credit risk in the event of nonperformance by counterparties.

Failure to adequately protect critical data and technology systems could materially affect our operations.

Information technology solution failures, network disruptions, and breaches of data security could cause delays or cancellation of transactions, impede processing of transactions and reporting financial results, or cause inadvertent disclosure of non-public information or other problems, any of which could result in disruptions to our operations, liability to third parties, or damage to our reputation. A system failure or data security breach may have a material adverse effect on our financial condition, results of operations, or cash flows.

Our operations are substantially dependent on the availability of water. Restrictions on our ability to obtain or dispose of water at a reasonable cost and in compliance with applicable regulations may have a material adverse effect on our financial condition, results of operations, and cash flows.

Water is an essential component of shale oil and natural gas production during both the drilling and hydraulic fracturing processes. Historically, we have been able to purchase water from local land owners for use in our operations. When drought conditions occur, governmental authorities may restrict the use of water subject to their jurisdiction for hydraulic fracturing to protect local water supplies. Colorado has a relatively arid climate and experiences drought conditions from time to time. If we are unable to obtain water to use in our operations from local sources or dispose of or recycle water used in operations, or if the price of water or water disposal increases significantly, we may be unable to produce oil and natural gas economically, which could have a material adverse effect on our financial condition, results of operations, and cash flows. The quantity of water required for hydraulic fracturing, and changing regulations governing usage, may lead to water constraints and supply concerns, particularly in some parts of the country. As a result, future availability of water from some sources used in the past may become limited.


33



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

Unless production is established within the spacing units covering the undeveloped acres on which some of our drilling locations are identified, 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. As such, our actual drilling activities may differ materially from our current expectations, which could materially and adversely affect our business. The risk of lease expiration typically increases at times when commodity prices are depressed, as the pace of our exploration and development activity tends to slow during such periods. The GC Acquisition increased these risks for us as a large portion of the acreage we acquired in the transaction is undeveloped.

We may incur losses as a result of title defects in the properties in which we invest.

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 the fieldwork in examining records in the appropriate governmental office before attempting to acquire a lease in a specific mineral interest. 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.

Part of our strategy involves drilling using the latest available horizontal drilling and completion techniques, which involve risks and uncertainties in their application.

Our operations involve utilizing the latest drilling and completion techniques as developed by us and our service providers. As of December 31, 2016, we operated 110 gross horizontal producing wells, with an additional 49 horizontal wells waiting on completion, and therefore are subject to increased risks associated with horizontal drilling as compared to companies that have greater experience in horizontal drilling activities. Risks that we face while drilling include, but are not limited to, failing to land our wellbore in the desired drilling zone, not staying in the desired drilling zone while drilling horizontally through the formation, not running our casing the entire length of the wellbore, and not being able to run tools and other equipment consistently through the horizontal wellbore. Risks that we face while completing our wells include, but are not limited to, not being able to fracture stimulate the planned number of stages, not being able to run tools the entire length of the wellbore during completion operations, and not successfully cleaning out the wellbore after completion of the final fracture stimulation stage. Also, we generally use 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. Ultimately, the success of these drilling and completion techniques can only be evaluated over time as more wells are drilled and production profiles are established over a sufficiently long time period. If our drilling results are less successful than anticipated or we are unable to execute our drilling program because of capital constraints, lease expirations, access to gathering systems, and/or unfavorable commodity prices, the return on our investment in these areas may not be as attractive as we anticipate. Further, as a result of any of these developments, we could incur material write-downs of our oil and gas properties, and the value of our undeveloped acreage could decline.

Risks Relating to our Common Stock

We do not intend to pay dividends on our common stock, and our ability to pay dividends on our common stock is restricted.

Since inception, we have not paid any cash dividends on our common stock. Cash dividends are restricted under the terms of our debt agreements, and we presently intend to continue the policy of using retained earnings for expansion of our business. Any future dividends also may be restricted by future agreements.


34



The price of our stock price 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, including, among others:

changes in production volumes, worldwide demand and prices for oil and natural gas;
changes in market prices of oil and natural gas;
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 of similar companies;
changes in interest rates;
announcements regarding adverse timing or lack of success in discovering, acquiring, developing, and producing 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;
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 identification of and severity of environmental events and governmental and other third-party responses to the events; or
additions or departures of key personnel,

could trigger significant declines in the price of our common stock. External events, such as news concerning economic conditions, counterparties to our natural gas or oil derivatives arrangements, changes in government regulations impacting the oil and gas exploration and production industries, actual and expected production levels from OPEC members and other oil-producing countries and the movement of capital into or out of our industry, also are likely to affect the price of our common stock, regardless of our operating performance. 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. Recently, the stock markets have experienced price and volume volatility that has affected many companies' stock prices. Stock prices for many companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. These fluctuations may affect the market price of our common stock.

Additional financings may subject our existing stockholders to significant dilution.

To the extent that we raise additional funds or complete acquisitions by issuing equity securities, our stockholders may experience significant dilution. In addition, debt financing, if available, may involve restrictive covenants. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. Our access to the financial markets and the pricing and terms that we receive in those markets could be adversely impacted by various factors, including changes in general market conditions and commodity price changes.

Equity compensation plans may cause a future dilution of our common stock.

To the extent options to purchase common stock under our equity incentive plans are exercised, or shares of restricted stock or other equity awards are issued based on satisfaction of vesting requirements, holders of our common stock will experience dilution.

As of December 31, 2016, there were 9,519,584 shares reserved for issuance under our equity compensation plans, of which 890,336 restricted shares have been granted and are subject to vesting in the future based on the satisfaction of certain criteria established pursuant to the respective awards, 478,510 performance-based restricted shares have been granted and are subject to future issuance based on the Company's total shareholder return relative to a selected peer group of companies over the performance period, and 6,001,500 of which are issuable upon the exercise of outstanding options to purchase common stock. Our outstanding options have a weighted average exercise price of $9.27 per share as of December 31, 2016.


35



Non-U.S. holders of our common stock, in certain situations, could be subject to U.S. federal income tax upon sale, exchange, or disposition of our common stock.

        It is likely that we are, and will remain for the foreseeable future, a U.S. real property holding corporation for U.S. federal income tax purposes because our assets consist primarily of "United States real property interests" as defined in the applicable Treasury regulations. As a result, under the Foreign Investment in Real Property Tax Act ("FIRPTA"), certain non-U.S. investors may be subject to U.S. federal income tax on gain from the disposition of shares of our common stock, in which case they would also be required to file U.S. tax returns with respect to such gain, and may be subject to a withholding tax. In general, whether these FIRPTA provisions apply depends on the amount of our common stock that such non-U.S. investors hold and whether, at the time they dispose of their shares, our common stock is regularly traded on an established securities market within the meaning of the applicable Treasury regulations. So long as our common stock continues to be regularly traded on an established securities market, only a non-U.S. investor who has owned, actually or constructively, more than 5% of our common stock at any time during the shorter of (i) the five-year period ending on the date of disposition and (ii) the non-U.S. investor's holding period for its shares may be subject to U.S. federal income tax on the disposition of our common stock under FIRPTA.

ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

See Item 1 of this report.

ITEM 3.
LEGAL PROCEEDINGS

On June 1, 2015, the Company filed a complaint in the District Court of Weld County, Colorado, against Briller, Inc., R.W.L. Enterprises, and Robert W. Loveless (together, the "Defendants") arising from a dispute concerning the validity of certain leases covering oil and gas properties in Weld County, Colorado.  In June 2015, the Defendants removed the case to the Federal District Court of Colorado and filed an answer and counterclaims including claims for trespass. The Company and Defendants entered into a settlement agreement on December 6, 2016, resolving all claims and counterclaims related to the litigation. The terms of the settlement agreement do not have a material effect on the Company.

In July 2016, we were informed by the Colorado Department of Public Health and Environment's Air Quality Control Commission's Air Pollution Control Division ("CDPHE") that it expects to expand its inspection of the Company's facilities in connection with a Compliance Advisory previously issued by the CDPHE and subsequent inspections conducted by the CDPHE. The Compliance Advisory alleged issues at five Company facilities regarding leakages of volatile organic compounds from storage tanks, all of which were promptly addressed. A subsequent February 2017 tolling agreement between the Company and CDPHE addressed alleged similar storage tank leakage issues at other Company facilities in Colorado. We are working with the CDPHE to respond to any continuing concerns. We cannot predict the outcome of this matter, but we expect that any potential resolution of these claims would be on a field-wide basis.

ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.

36



PART II

ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on the NYSE MKT under the symbol “SYRG”.

Shown below is the range of high and low sales prices for our common stock as reported by the NYSE MKT for the past two years. 
Period Ended
 
High
 
Low
Three Months Ended November 30, 2014
 
$13.75
 
$8.05
Three Months Ended February 28, 2015
 
$13.50
 
$8.14
Three Months Ended May 31, 2015
 
$12.98
 
$10.40
Three Months Ended August 31, 2015
 
$12.82
 
$9.04
Four Months Ended December 31, 2015
 
$12.12
 
$8.31
Period Ended
 
High
 
Low
Three Months Ended March 31, 2016
 
$9.09
 
$5.41
Three Months Ended June 30, 2016
 
$8.41
 
$5.60
Three Months Ended September 30, 2016
 
$7.20
 
$5.88
Three Months Ended December 31, 2016
 
$9.85
 
$6.37


As of January 31, 2017, the closing price of our common stock on the NYSE MKT was $8.61.

As of January 31, 2017, we had 200,674,003 outstanding shares of common stock and 96 shareholders of record.

Since inception, we have not paid any cash dividends on common stock.  Cash dividends are restricted under the terms of our debt agreements, and we presently intend to continue the policy of using retained earnings for expansion of our business.

Issuer Purchases of Equity Securities
Period
 
Total Number of Shares (or Units) Purchased
 
Average Price Paid per Share (or Unit)
 
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs)
October 1, 2016 - October 31, 2016 (1)
 
2,160

 
$
7.38

 

 

November 1, 2016 - November 30, 2016 (1)
 
4,135

 
$
8.47

 

 

December 1, 2016 - December 31, 2016 (1)
 
22,643

 
$
9.13

 

 


(1) Pursuant to statutory minimum withholding requirements, certain of our employees and executives exercised their right to "withhold to cover" as a tax payment method for the vesting and exercise of certain shares. These elections were outside of a publicly announced repurchase plan.


37



Comparison of Cumulative Return

The performance graph below compares the cumulative total return of our common stock over the five-year period ended December 31, 2016, with the cumulative total returns for the same period for the Standard and Poor's ("S&P") 500 Index and the companies with a Standard Industrial Code ("SIC") of 1311. The SIC Code 1311 consists of a weighted average composite of publicly traded oil and gas companies. The cumulative total shareholder return assumes that $100 was invested, including reinvestment of dividends, if any, in our common stock on August 31, 2011 and in the S&P 500 Index and all companies with the SIC Code 1311 on the same date. The results shown in the graph below are not necessarily indicative of future performance.
syrg5yr2016.jpg
 
 
 As of August 31,
 
As of December 31,
 
 
2011
 
2012
 
2013
 
2014
 
2015
 
2015
 
2016
Synergy Resources Corporation
 
100.00

 
90.03

 
300.96

 
432.80

 
345.34

 
273.95

 
286.50

S&P 500
 
100.00

 
118.00

 
140.07

 
175.43

 
176.27

 
184.02

 
206.02

SIC Code 1311
 
100.00

 
96.71

 
103.16

 
130.75

 
85.86

 
71.73

 
84.33



38



ITEM 6.
SELECTED FINANCIAL DATA

The selected financial data presented in this item has been derived from our audited consolidated financial statements that are either included in this report or in reports previously filed with the SEC.  The information in this item should be read in conjunction with the consolidated financial statements and accompanying notes and other financial data included in this report.

 
Year Ended December 31, 2016
 
Four Months Ended December 31, 2015
 
Year Ended August 31,
 
 
 
2015
 
2014
 
2013
 
2012
Results of Operations
(in thousands):
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
107,149

 
$
34,138

 
$
124,843

 
$
104,219

 
$
46,223

 
$
24,969

Net income (loss)
(219,189
)
 
(122,932
)
 
18,042

 
28,853

 
9,581

 
12,124

 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per common share:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
(1.26
)
 
$
(1.14
)
 
$
0.19

 
$
0.38

 
$
0.17

 
$
0.26

Diluted
$
(1.26
)
 
$
(1.14
)
 
$
0.19

 
$
0.37

 
$
0.16

 
$
0.25

 
 
 
 
 
 
 
 
 
 
 
 
Certain Balance Sheet Information (in thousands):
 
 
 
 
 
 
 
 
 
 
 
Total Assets
$
1,024,113

 
$
672,616

 
$
746,449

 
$
448,542

 
$
291,236

 
$
120,731

Working (Deficit) Capital
(38,056
)
 
24,992

 
93,129

 
(35,338
)
 
50,608

 
10,875

Total Liabilities
183,374

 
166,106

 
174,052

 
167,052

 
88,016

 
19,619

Equity
840,739

 
506,510

 
572,397

 
281,490

 
203,220

 
101,112

 
 
 
 
 
 
 
 
 
 
 
 
Certain Operating Statistics:
 
 
 
 
 
 
 
 
 
 
 
Production:
 
 
 
 
 
 
 
 
 
 
 
Oil (MBbls)
2,257

 
742

 
1,970

 
941

 
421

 
236

Natural Gas (MMcf)
12,086

 
3,468

 
7,344

 
3,747

 
2,108

 
1,109

MBOE
4,271

 
1,320

 
3,194

 
1,566

 
773

 
421

BOED
11,670

 
10,822

 
8,750

 
4,290

 
2,117

 
1,149

Average sales price per BOE
$
25.09

 
$
25.86

 
$
39.09

 
$
66.56

 
$
59.83

 
$
59.38

LOE per BOE
$
4.67

 
$
4.41

 
$
4.70

 
$
5.10

 
$
4.42

 
$
2.89

DD&A1 per BOE
$
10.93

 
$
14.22

 
$
20.62

 
$
21.05

 
$
17.26

 
$
14.29

1 Depletion, Depreciation, & Accretion

On February 25, 2016, we changed our fiscal year from the period beginning on September 1 and ending on August 31 to the period beginning on January 1 and ending on December 31. As a result, the selected financial data above includes financial information for the transition period from September 1, 2015 through December 31, 2015. This financial information may not be directly comparable to the prior periods as it covers a shorter time frame.

See Note 19 to the consolidated financial statements included as part of this report for our quarterly financial data. See Note 1 and Note 3 to the consolidated financial statements included as part of this report for information concerning significant accounting policies and acquisitions, respectively.


39



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

Introduction

On February 25, 2016, the Company's board of directors approved a change in fiscal year end from August 31 to December 31. Unless otherwise noted, all references to "years" in this report refer to the twelve-month period which ends on December 31 or August 31 of each year. The following discussion and analysis was prepared to supplement information contained in the accompanying consolidated financial statements and is intended to explain certain items regarding the Company's financial condition as of December 31, 2016, and its results of operations for the years ended December 31, 2016, December 31, 2015 (unaudited), August 31, 2015, and August 31, 2014.  It should be read in conjunction with the “Selected Financial Data” and the accompanying audited consolidated financial statements and related notes thereto contained in this Annual Report on Form 10-K. The unaudited results of operations for the year ended December 31, 2015 was derived from data previously reported in the Company's Transition Report on Form 10-K as filed with the SEC on April 22, 2016.

This section and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties.  See the “Cautionary Statement Concerning Forward-Looking Statements” at the beginning of this Annual Report on Form 10-K.  Forward-looking statements are not guarantees of future performance, and our actual results may differ significantly from the results discussed in the forward-looking statements.  Factors that might cause such differences include, but are not limited to, those discussed in “Risk Factors”.  We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Overview

Synergy Resources Corporation is a growth-oriented independent oil and gas company engaged in the acquisition, development, and production of oil and natural gas in the D-J Basin, which we believe to be one of the premier, liquids-rich oil and natural gas resource plays in the United States. It contains hydrocarbon-bearing deposits in several formations, including the Niobrara, Codell, Greenhorn, Shannon, Sussex, J-Sand, and D-Sand. The area has produced oil and natural gas for over fifty years and benefits from established infrastructure including midstream and refining capacity, long reserve life, and multiple service providers.

Our oil and natural gas activities are focused in the Wattenberg Field, predominantly in Weld County, Colorado, an area that covers the western flank of the D-J Basin. Currently, we are focused on the horizontal development of the Codell and Niobrara formations, which are characterized by relatively high liquids content.

In order to maintain operational focus while preserving developmental flexibility, we strive to attain operational control of a majority of the wells in which we have a working interest. We currently operate approximately 73% of our proved producing reserves, and anticipate operating substantially all of our future net drilling locations. Additionally, our current development plan anticipates that all of our future activities will be concentrated in the Wattenberg Field.

Market Conditions

Market prices for our products significantly impact our revenues, net income, and cash flow.  The market prices for oil and natural gas are inherently volatile.  To provide historical perspective, the following table presents the average annual NYMEX prices for oil and natural gas for each of the last five years.

 
Years Ended December 31,
 
Years Ended August 31,
 
2016
 
2015
 
2015
 
2014
 
2013
 
2012
Average NYMEX prices
 
 
(unaudited)
 
 
 
 
 
 
 
 
Oil (per Bbl)
$
43.20

 
$
48.73

 
$
60.65

 
$
100.39

 
$
94.58

 
$
94.88

Natural gas (per Mcf)
$
2.52

 
$
2.58

 
$
3.12

 
$
4.38

 
$
3.55

 
$
2.82



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For the periods presented in this report, the following table presents the relevant NYMEX price as well as the differential between NYMEX and the wellhead prices realized by us.
 
Years Ended December 31,
 
Years Ended August 31,
 
2016
 
2015
 
2015
 
2014
Oil (NYMEX WTI)
 
 
(unaudited)
 
 
 
 
Average NYMEX Price
$
43.20

 
$
48.73

 
$
60.65

 
$
100.39

Realized Price
$
34.43

 
$
40.08

 
$
50.75

 
$
89.98

Differential
$
(8.77
)
 
$
(8.65
)
 
$
(9.90
)
 
$
(10.41
)
 
 
 
 
 
 
 
 
Natural Gas (NYMEX Henry Hub)
 
 
 
 
 
 
 
Average NYMEX Price
$
2.52

 
$
2.58

 
$
3.12

 
$
4.38

Realized Price
$
2.44

 
$
2.71

 
$
3.39

 
$
5.21

Differential
$
(0.08
)
 
$
0.13

 
$
0.27

 
$
0.83


Market conditions in the Wattenberg Field require us to sell oil at prices less than the prices posted by the NYMEX. The negative differential between the prices actually received by us at the wellhead and the published indices reflects deductions imposed upon us by the purchasers for location and quality adjustments. With regard to the sale of natural gas and liquids, we have historically been able to sell production at prices greater than the prices posted for dry gas, primarily because prices that we receive include payment for a percentage of the value attributable to the natural gas liquids produced with the gas. With the decline in value of NGLs during 2016, we were not able to sell production at prices greater than the prices posted for dry gas.

There has been a significant decline in the price of oil since the summer of 2014; however, oil prices increased in late 2016 from their lows in early 2016.  As reflected in published data, the price for WTI oil settled at $37.13 per Bbl on Thursday, December 31, 2015.  Comparably, the price of oil settled at $53.75 per Bbl on Friday, December 30, 2016, an increase of 45% from December 31, 2015. Our revenues, results of operations, profitability and future growth, and the carrying value of our oil and gas properties depend primarily on the prices that we receive for our oil and natural gas production.

A decline in oil and natural gas prices will adversely affect our financial condition and results of operations.  Furthermore, low oil and natural gas prices can result in an impairment of the value of our properties and the calculation of the “ceiling test” required under the accounting principles for companies following the “full cost” method of accounting.  Our ceiling tests resulted in a total impairment charge of $215.2 million for the year ended December 31, 2016, and additional impairments may occur in the future.

Core Operations        

The following table provides details about our ownership interests with respect to vertical and horizontal producing wells as of December 31, 2016:
Vertical Wells
Operated Wells
 
Non-Operated Wells
 
Totals
Gross
 
Net
 
Gross
 
Net
 
Gross
 
Net
214

 
182

 
158

 
43

 
372

 
225

Horizontal Wells
Operated Wells
 
Non-Operated Wells
 
Totals
Gross
 
Net
 
Gross
 
Net
 
Gross
 
Net
110

 
106

 
149

 
22

 
259

 
128


In addition to the producing wells summarized in the preceding table, as of December 31, 2016, we were the operator of 49 gross (44 net) wells in progress, which excludes 9 gross (9 net) wells for which we have only set surface casings.


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Properties

As of December 31, 2016, our estimated net proved oil and natural gas reserves, as prepared by Ryder Scott, were 38.0 MMBbls of oil and condensate and 331.9 Bcf of natural gas. As of December 31, 2016, we had approximately 397,200 gross and 332,400 net acres under lease. We further delineate our acreage into specific areas, including the areas that we refer to as the Wattenberg Field (approximately 78,500 gross and 68,900 net acres) and the North East Extension Area (approximately 55,300 gross and 27,600 net acres). In addition, we hold approximately 183,600 gross (180,400 net) acres in southwest Nebraska, a conventional oil-prone prospect, and approximately 77,900 gross (54,200 net) acres in other areas of Colorado.

Production

For the year ended December 31, 2016, our average net daily production increased to 11,670 BOED as compared to 9,548 BOED for the year ended December 31, 2015. By comparison, our production increased from 4,290 BOED for the year ended August 31, 2014 to 8,750 BOED for the year ended August 31, 2015.

Significant Business Developments

Acquisitions

In May 2016, the Company entered into an agreement to effect the GC Acquisition, a purchase totaling approximately 72,000 gross (33,100 net) acres located in an area known as the Greeley-Crescent development area in Weld County Colorado, primarily in and around the city of Greeley, for $505 million. Estimated net daily production from the acquired properties was approximately 2,400 BOE at the time of entering into the agreement.

In June 2016, the Company closed on the portion of the assets comprised of the undeveloped lands and non-operated production. The effective date of this part of the transaction was April 1, 2016, and the purchase price was $486.4 million, comprised of $485.1 million in cash and the assumption of certain liabilities. The second closing will cover the operated producing properties and is expected to be completed in 2017. The Company has placed $18.2 million in escrow to be released upon the second closing. For the second closing, the effective date will be April 1, 2016 for the horizontal wells to be acquired and the first day of the calendar month in which the closing for such properties occurs for the vertical wells. The second closing is subject to certain closing conditions, including the receipt of regulatory approval. Accordingly, the second closing of the transaction may not close in the expected time frame or at all.

During 2016, the Company completed various other acquisitions of undeveloped oil and natural gas leasehold interests in the D-J Basin for a total of $20.7 million in cash and the assumption of certain liabilities or receivables. These acquisitions were completed in an effort to increase our working interests and to extend the lateral lengths of our wells. See Note 3 to the consolidated financial statements included in this report for further discussion.

Divestitures

In April 2016, the Company agreed to divest approximately 3,700 net undeveloped acres primarily in Adams County, Colorado and 107 vertical wells primarily in Weld County, Colorado for total consideration of approximately $24.7 million in cash and the assumption by the buyers of $0.5 million in liabilities. The divested assets had associated production of approximately 200 BOED. The vertical well transaction closed in April 2016, and the undeveloped acreage transaction closed in June 2016.

In January 2017, we executed a purchase and sale agreement with a private party resulting in the divestiture of acreage outside of the Company's core development area. The transaction resulted in the Company divesting approximately 10,000 net undeveloped acres and approximately 700 BOED of associated production for $71 million. The transaction is expected to close in the first quarter of 2017.

Equity Offerings

In January 2016, the Company closed on the sale of 16,100,000 shares of common stock pursuant to an underwriting agreement with Credit Suisse Securities (USA) LLC, acting severally on behalf of itself and the other underwriters.  The price to the Company was $5.545 per share and net proceeds to the Company, after deduction of underwriting discounts and expenses payable by the Company, were $89.2 million. Proceeds were used to repay amounts borrowed under the Revolver and for general corporate purposes, which included continuing to develop our acreage position in the Wattenberg Field in Colorado and funding a portion of our 2016 capital expenditure program.


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In April 2016, the Company closed on the sale of an additional 22,425,000 shares of common stock pursuant to an underwriting agreement with substantially the same underwriting group.  The price to the Company was $7.3535 per share and net proceeds to the Company, after deduction of underwriting discounts and expenses payable by the Company, were $164.8 million.  The proceeds of this offering were used for general corporate purposes, including to fund the GC Acquisition.

In May and June 2016, the Company closed on the sale of an additional 51,750,000 shares of common stock pursuant to an underwriting agreement with substantially the same underwriting group.  The price to the Company was $5.597 per share and net proceeds to the Company, after deduction of underwriting discounts and expenses payable by the Company, were $289.4 million. The proceeds of this offering were used for general corporate purposes, including to fund the GC Acquisition.

Revolving Credit Facility

We continue to maintain a borrowing arrangement with our bank syndicate to provide us with liquidity, which could be used to develop oil and gas properties, acquire new oil and gas properties, and for working capital and other general corporate purposes. As of December 31, 2016, this revolving credit facility provides for maximum borrowings of $500 million, subject to adjustments based upon a borrowing base calculation, which is re-determined semi-annually using updated reserve reports. The Revolver is collateralized by certain of our assets, including substantially all of our producing wells and developed oil and gas leases, and bears a variable interest rate on borrowings with the effective rate varying with utilization. The Revolver expires on December 15, 2019. See further discussion in Note 6 to our consolidated financial statements.

In October 2016, the Revolver was amended in connection with the semi-annual redetermination of the borrowing base. The borrowing base was increased from $145 million to $160 million. Due to outstanding letters of credit, approximately $159.5 million of the borrowing base was available to use for future borrowings as of December 31, 2016.

The Revolver contains covenants that, among other things, restrict the payment of dividends and limits our overall commodity derivative position to a maximum position that varies over 5 years as a percentage of estimated proved reserves as projected in the semi-annual reserve report.

The Revolver also requires the Company to maintain compliance with certain financial and liquidity ratio covenants. Under the requirements, the Company, on a quarterly basis, must not (a) at any time permit its ratio of total funded debt as of such time to EBITDAX, as defined in the agreement, to be greater than or equal to 4.0 to 1.0; or (b) as of the last day of any fiscal quarter permit its current ratio, as defined in the agreement, to be less than 1.0 to 1.0. As of December 31, 2016, the most recent compliance date, the Company was in compliance with these covenants and expects to remain in compliance throughout the next 12-month period.

Senior Notes

In June 2016, the Company issued $80 million aggregate principal amount of 9% Senior Notes in a private placement to qualified institutional buyers. The maturity for the payment of principal is June 13, 2021. Interest on the Senior Notes accrues at 9% and began accruing on June 14, 2016. Interest is payable on June 15 and December 15 of each year, beginning on December 15, 2016. The Senior Notes were issued pursuant to an indenture dated as of June 14, 2016 and are guaranteed on a senior unsecured basis by the Company’s existing and future subsidiaries that incur or guarantee certain indebtedness, including indebtedness under the Revolver. The net proceeds from the sale of the Senior Notes were $75.2 million after deductions of $4.8 million for expenses and underwriting discounts and commissions. The net proceeds were used to fund the GC Acquisition. The Indenture contains covenants that restrict the Company’s ability and the ability of certain of its subsidiaries to, among other restrictions and limitations: (i) incur additional indebtedness; (ii) incur liens; (iii) pay dividends; (iv) consolidate, merge, or transfer all or substantially all of its or their assets; (v) engage in transactions with affiliates; or (vi) engage in certain restricted business activities.  These covenants are subject to a number of exceptions and qualifications.

Impairment of Full Cost Pool

Every quarter, we perform a ceiling test as prescribed by SEC regulations for entities following the full cost method of accounting. This test determines a limit on the book value of oil and gas properties using a formula to estimate future net cash flows from oil and natural gas reserves. This formula is dependent on several factors and assumes future oil and natural gas prices to be equal to an unweighted arithmetic average of oil and natural gas prices derived from each of the 12 months prior to the reporting period. During the twelve months ended December 31, 2016, these calculations indicated that the ceiling amount had declined, largely as a result of the decline in oil and natural gas prices, such that the ceiling was less than the net book value of oil and gas properties. As a result of ceiling tests throughout the year, we recorded non-cash ceiling test impairments totaling $215.2 million for the twelve months ended December 31, 2016. As of our December 31, 2016 ceiling test, we determined that

43



a ceiling test impairment was not necessary. The December 31, 2016 ceiling test used average realized prices of $36.07 per barrel and $2.44 per Mcf as compared to the September 30, 2016 prices of $31.95 per barrel and $2.21 per Mcf, an increase of approximately 13% and 10%, respectively. A full cost ceiling impairment is recognized as a charge to earnings and may not be reversed in future periods, even if oil and natural gas prices subsequently increase. Declining commodity prices, other adverse market conditions, and acquisitions or divestitures could result in further ceiling test write-downs in the future.

Drilling and Completion Operations

Our drilling and completion schedule drives our production forecast and our expected future cash flows. As commodity prices have fallen over the past two years, we have been able to reduce per-well drilling and completion costs. We believe that at current drilling and completion cost levels and with currently prevailing commodity prices, we can achieve reasonable well-level rates of return when drilling mid-length or long laterals. Should commodity prices weaken our operational flexibility will allow us to adjust our drilling and completion schedule, if prudent. If management believes that the well-level internal rate of return will be at or below our weighted-average cost of capital, we may choose to delay completions and/or forego drilling altogether. Conversely, if commodity prices move higher, we may choose to accelerate drilling and completions activities.

During the twelve months ended December 31, 2016, we drilled 56 operated horizontal wells, completing 24 of them. As of December 31, 2016, we are the operator of 49 gross (44 net) horizontal wells in progress, which excludes 9 gross (9 net) horizontal wells for which we have only set surface casings. For 2017, we expect to drill 102 gross operated horizontal wells of mostly mid-length and long laterals targeting the Codell and Niobrara zones.

In addition, we participated in drilling and completion activities on 3 gross (0.42 net) non-operated horizontal wells during the year. As of December 31, 2016, we are participating in 26 gross (2 net) non-operated horizontal wells in progress.

Other Operations

We continue to be opportunistic with respect to acquisition efforts to increase our working interests and drilling location inventory. Further, in an effort to extend the length of laterals and/or increase working interests in our wells, we continue to enter into land and working interest swaps.

Trends and Outlook

Oil traded at $37.13 per Bbl on December 31, 2015, but has since increased approximately 45% as of December 30, 2016 to $53.75. Natural gas traded at $2.34 per Mcf on December 31, 2015, but increased approximately 59% as of December 30, 2016 to $3.72. Although oil prices have risen in the last six months, oil prices continue to remain significantly lower than their 2014 levels, which were near $100/bbl. Lower oil prices (i) will reduce our cash flow which, in turn, could reduce the funds available for exploring and replacing oil and natural gas reserves, (ii) could potentially reduce our current Revolver borrowing base capacity and increase the difficulty of obtaining equity and debt financing and worsen the terms on which such financing may be obtained, (iii) could reduce the number of oil and gas prospects which have reasonable economic returns, (iv) may cause us to allow leases to expire based upon the value of potential oil and natural gas reserves in relation to the costs of exploration, (v) may result in marginally productive oil and natural gas wells being abandoned as non-commercial, and (vi) may cause ceiling test impairments.

Other factors that will most significantly affect our results of operations include (i) activities on properties that we operate, (ii) the marketability of our production, (iii) our ability to satisfy our financial and transportation obligations, (iv) completion of acquisitions of additional properties and reserves, and (v) competition from larger companies. Our revenues will also be significantly impacted by our ability to maintain or increase oil or natural gas production through exploration and development activities.

We utilize what we believe to be industry best practices in our effort to achieve optimal hydrocarbon recoveries.  Currently, our practice is to drill 16 to 24 horizontal wells per 640-acre section depending upon specific geologic attributes and existing vertical wellbore development.  Some operators are testing higher density programs, but it is too early to determine if the recoveries justify the additional capital cost.

The decline in commodity prices since late 2014 has led to a corresponding decline in service costs, which directly relate to our drilling and completion costs. We have been able to reduce drilling and completion costs due to a combination of optimizing well designs, lower contract rates for drilling rigs, fewer average days to drill, and lower completion costs. This focus on cost reduction has supported well-level economics in spite of the severe drop in the prices of oil and natural gas. We continue to strive to reduce drilling and completion costs going forward, but as commodity prices improve and industry activity increases, we may experience higher service costs causing well-level rates of return to be lower.

44




From time to time, our production has been adversely impacted by high natural gas gathering line pressures. Where it is cost effective, we install wellhead compression to enhance our ability to inject natural gas into the gathering system and, in some instances, install larger gathering lines to help mitigate the impacts. Additionally, midstream companies that operate the gas gathering pipelines in the area continue to make significant capital investments to increase their capacities. While these actions have helped reduce overall line pressures in the field, some of our producing locations have been curtailed on occasion due to line pressures exceeding system limits.

To address natural gas production in the D-J Basin, DCP Midstream has announced plans for multiple projects including new processing plants, low pressure gathering systems, additional compression and plant bypass infrastructure. Most notably, in collaboration with DCP Midstream, we and several other producers have agreed to participate in the expansion of natural gas gathering and processing capacity in the D-J Basin.  The initial plan includes a new 200 MMcf per day processing plant as well as the expansion of a related gathering system, both expected to be completed by late 2018. Additionally, through the same framework, all of the parties are working to form a cooperative development plan to add another 200 MMcf/d plant by mid-2019.

We have extended the use of oil gathering lines to certain production locations. These gathering systems are owned and operated by independent third parties, and we commit specific wells to these systems. We believe that oil gathering lines have several benefits including, a) reduced need to use trucks to gather our oil, thereby reducing truck traffic in and around our production locations, b) potentially lower gathering costs as pipeline gathering tends to be more efficient, c) reduced on-site oil storage capacity, resulting in lower production location facility costs, and d) generally less noise and dust.

Oil transportation and takeaway capacity has increased with the expansion of certain interstate pipelines servicing the Wattenberg Field. This has reversed the prior imbalance of oil production exceeding the combination of local refinery demand and the capacity of pipelines to move the oil to other markets. Depending on transportation commitments, local refinery demand, and our production volumes, we may be able to reduce the negative differential that we have historically realized on our oil production. Further details regarding posted prices and average realized prices are discussed in "-Market Conditions."

As of December 31, 2016, we have identified over 1,000 gross mid- to long-lateral (~7,500’ to ~9,500’) drilling locations across our acreage position. For 2017, we expect to drill 102 gross operated horizontal wells of mostly mid-length and long laterals targeting the Codell and Niobrara zones. We anticipate this drilling and completion schedule will cost between $260 million and $300 million and will lead to a significant increase in production and associated proved developed producing reserves while allowing us to retain significant operational and financial flexibility to reduce or accelerate activity in response to changing economic conditions. Initial estimates place full-year 2017 production between 17,500 BOED and 20,000 BOED.

Other than the foregoing, we do not know of any trends, events, or uncertainties that will have had or are reasonably expected to have a material impact on our sales, revenues, expenses, liquidity, or capital resources.

Results of Operations

Material changes of certain items in our consolidated statements of operations included in our consolidated financial statements for the periods presented are discussed below. All references to the year ended December 31, 2015 are unaudited.

For the year ended December 31, 2016 compared to the year ended December 31, 2015

For the year ended December 31, 2016, we reported net loss of $219.2 million compared to net loss of $131.7 million during the year ended December 31, 2015. Net loss per basic and diluted share was $(1.26) for the year ended December 31, 2016 compared to net loss per share per basic and diluted share of $(1.27) for the year ended December 31, 2015. Revenues increased slightly during the year ended December 31, 2016 compared to the year ended December 31, 2015. As of December 31, 2016, we had 631 gross producing wells, compared to 609 gross producing wells as of December 31, 2015. The impact of changing prices on our commodity derivative positions also drove significant differences in our results of operations between the two periods.


45



Oil and Natural Gas Production and Revenues - For the year ended December 31, 2016, we recorded total oil and natural gas revenues of $107.1 million compared to $106.1 million for the year ended December 31, 2015. The following table summarizes key production and revenue statistics:
 
Years Ended December 31,
 
 
 
2016
 
2015
 
Change
Production:
 
 
 
 
 
Oil (MBbls)
2,257

 
2,073