PSTRQ PostRock Energy Corporation (CE)

ITEM 1A. RISK FACTORS  

Risks Related to Our Business

Energy prices are very volatile, and if commodity prices are depressed or   decline, our revenues, profitability and cash flows will be adversely   affected.

The prices we receive for our oil and gas production heavily influence our revenue, profitability, access to capital and future rate of growth. Oil and gas are commodities; therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. Although we have recently focused our development efforts on crude oil, approximately 92.6% of our production in 2013 was natural gas. The prices that we receive for our production, and the levels of our production, depend on a variety of factors that are beyond our control, such as:

• the levels and location of oil and gas supply and demand and expectations regarding supply and demand, including the potential long-term impact of an abundance of natural gas from shale on the global natural gas supply;

• price and level of foreign imports of oil and gas;

• level of consumer product demand;

• weather conditions;

• overall domestic and global economic conditions;

• political and economic conditions in oil and gas producing countries, including embargoes and continued hostilities in the Middle East and other sustained military campaigns, acts of terrorism or sabotage;

• actions of the Organization of Petroleum Exporting Countries and other state-controlled oil companies relating to oil price and production controls;

• the impact of the U.S. dollar exchange rates on oil and gas prices;

• technological advances affecting energy consumption;

• governmental regulations and taxation;

• the impact of energy conservation efforts;

• the costs, proximity and capacity of gas pipelines and other transportation facilities; and

• the price and availability of alternative fuels.

Our revenue, profitability and cash flow depend upon the prices and demand for oil and gas, and a drop in prices will significantly affect our financial results and impede our growth. In particular, declines in commodity prices will:

• reduce the amount of cash flow available for capital expenditures, including the drilling of wells and the construction of inf rastructure to transport the hydrocarbons produced;

• negatively impact the value of our reserves because declines in oil and gas prices would reduce the amount of oil and gas we can produce economically;

• reduce the drilling and production activity of our third-party customers and increase the rate at which our customers shut in wells; and

• limit our ability to borrow money or raise additional capital.

We may be required to write-down the carrying value of our assets.

Lower oil and gas prices may not only decrease our revenues, profitability and cash flows, but also reduce the amount of oil and gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated reserves. Substantial decreases in oil and gas prices have rendered and may continue to render a significant number of our planned exploration and development projects uneconomic. If this occurs, or if our estimates of development costs increase, production data factors change or drilling results deteriorate, accounting rules may require us to write-down, as a non-cash charge to earnings, the carrying valu e of our oil or gas properties.

We are exposed to credit risk in the ordinary course of our business activities.

We are exposed to risks of loss in the event of nonperformance by our customers, vendors and other counterparties. Some of our customers, vendors and counterparties may be highly leveraged and subject to their own operating and regulatory risks. Despite our credit review and analysis, we may experience financial losses in our dealings with these and other parties with which we enter into transactions as a normal part of our business activities. Any nonpayment or nonperformance by our customers, vendors or counterparties could have a material adverse impact on our consolidated financial position, results of operations or cash flows.

We are unable to pass through all of our costs and expenses for gathering and   compression to royalty owners under our gas leases, which reduces our net   income and cash flows.

We incur costs and expenses for gathering, dehydration, treating and compression of the gas that we produce. The terms of some of our existing gas leases and other development rights currently do not, and the terms of some of the gas leases and other development rights that we may acquire in the future may not, allow us to charge the full amount of these costs and expenses to the royalty owners under the leases or other agreements. During 2011, we reached settlements of several royalty owner lawsuits in Oklahoma and Kansas. These lawsuits were related, in part, to the amounts previously deducted by us to cover the costs and expenses for gathering and compression. As a result of these settlements, we are charging post-production costs to royalty and overriding royalty interest owners pursuant to an agreed upon formula. To the extent that we are unable to charge and recover the full amount of these costs and expenses from our royalty owners, our net income and cash flows will be reduced.

Unless we replace the reserves that we produce, our existing reserves and   production will decline, which would adversely affect our revenues,   profitability and cash flows.

Producing oil and gas reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics and other factors. Our future oil and gas reserves, production and cash flow depend on our success in developing and exploiting our reserves efficiently and finding or acquiring additional recoverable reserves economically. We may not be able to develop, find or acquire additional reserves to replace our current and future production at acceptable costs or production from our existing wells could decline at a faster rate than we have estimated, which would adversely affect our business, financial condition and results of operations. Factors that may hinder our ability to acquire additional reserves include competition, access to capital, prevailing gas prices and attractiveness of properties for sale.

Our estimated reserves are based on assumptions that may prove to be   inaccurate. Any material inaccuracies in these reserve estimates or underlying   assumptions will materially affect the quantities and present value of our   reserves.

It is not possible to measure underground accumulations of oil and gas in an exact way. Reserve estimation is a subjective process that involves estimating volumes to be recovered from underground accumulations of oil and gas that cannot be directly measured and assumptions concerning future oil and gas prices, production levels and operating and development costs. In estimating our level of oil and gas reserves, we and our independent reserve engineers make certain assumptions that may prove to be incorrect, including assumptions relating to:

• a constant level of future oil and gas prices;

• geological conditions and expected reservoir characteristics based on geological, geophysical and engineering assessments ;  

• production levels;

• capital expenditures;

• operating and development costs;

• the effects of governmental regulations and taxation; and

• availability of funds.

If these assumptions prove to be incorrect, our estimates of reserves, the economically recoverable quantities of oil and gas attributable to any particular group of properties, the classifications of reserves based on risk of recovery and our estimates of the future net cash flows from our reserves could change significant ly. Additionally, there has been increased debate and disagreement over the classification of reserves, with particular focus on proved undeveloped reserves. Changing interpretations of the classification standards or disagreements with our interpretations could cause us to write-down reserves.

Our standardized measure is calculated using unhedged oil and gas prices and is determined in accordance with the rules and regulations of the SEC. The present value of future net cash flows from our estimated proved reserves is not necessarily the same as the market value of our estimated proved reserves. The estimated discounted future net cash flows from our estimated proved reserves is based on twelve month average prices and expected costs in effect on the day of estimate. The timing and amount of actual future prices and costs, which affect the present value of the reserves, may be higher or lower than the timing and amounts at the time of the estimate. In addition, the 10% discount factor we use when calculating discounted future net cash flows in compliance with the Financial Accounting Standards Board ( “ FASB ” ) Accounting Standards Codification   ( “ ASC ” ) Topic 932, Extractive Activities — Oil and Gas , may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and gas industry in general.

Drilling for and producing oil and gas is a costly and high-risk activity with   many uncertainties that could adversely affect our financial condition or   results of operations.

Our drilling activities are subject to many risks, including the risk that we will not discover commercially productive reservoirs. The cost of drilling, completing and operating a well is often uncertain, and cost factors, as well as the market price of oil and gas, can adversely affect the economics of a well. Furthermore, our drilling and producing operations may be curtailed, delayed or canceled as a result of other factors, including:

• high costs, shortages or delivery delays of drilling rigs, equipment, labor or other services;

• adverse weather conditions;

• difficulty disposing of water produced as part of our production process;

• equipment failures or accidents;

• title problems;

• pipe or cement failures or casing collapses;

• compliance with environmental and other governmental requirements;

• environmental hazards, such as gas leaks, oil spills, pipeline ruptures and discharges of toxic gases;

• lost or damaged oilfield drilling and service tools;

• loss of drilling fluid circulation;

• unexpected operational events and drilling conditions;

• increased risk of wellbore instabil ity due to horizontal drilling;

• pressure or irregularities in formations;

• unusual or unexpected geological formations;

• natural disasters, such as fires and floods;

• blowouts, surface craterings and explosions; and

• uncontrollable flows of oil, gas or well fluids.

A productive well may become uneconomic in the event water or other harmful substances are encountered, which impair or prevent the production of oil or gas from the well. In addition, production from any well may be unmarketable if it is contaminated with water or other harmful substances. We may drill wells that are unproductive or, although productive, do not produce oil or gas in economic quantities. Unsuccessful drilling activities could result in higher costs without any corresponding revenues. Furthermore, a successful completion of a well does not ensure a profitable return on the investment.

Our commodity price risk management activities may prevent us from benefiting   fully from price increases and may expose us to other risks.

To the extent that we engage in risk management activities to protect ourselves from commodity price fluctuations, we may be prevented from realizing the full benefits of price increases above the levels of the derivative instruments used to manage price risk. In addition, our hedging arrangements may expose us to the risk of financial loss in certain circumstances, including instances in which:

• our production falls short of the hedged volumes;

• a sudden unexpected event materially impacts oil and natural gas prices;

• the counterparties to our hedging or other price risk management contracts fail to perform under those arrangements; and

• there is a widening of price-basis differentials between delivery points for our production and the delivery point assumed in the hedge arrangement.

The Dodd-Frank Act and implementing regulations could have an adverse effect on our ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with our business.

In 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).  Among other things, the Dodd-Frank Act requires the CFTC and the SEC to enact regulations affecting derivative contracts, including the derivative contracts we use to hedge our exposure to price volatility through the over-the-counter market.

The CFTC and SEC have adopted several regulations implementing the Dodd-Frank Act and are considering several additional proposed regulations.  For example, the CFTC has issued final rules requiring centralized clearing of certain categories of swaps and is considering expanding this requirement to additional swap categories, including commodity swaps.  We could be required either to clear our swap transactions or claim an exemption from clearing for swaps used for hedging purposes.  In addition, the CFTC has proposed regulations implementing position limits for certain futures and option contracts in the major energy markets and for swaps that are their economic equivalents (with exemptions for certain bona fide hedging transactions). The impact of such regulations upon our business is not yet clear. Certain of our hedging and trading activities and those of our counterparties may be subject to the position limits, which may reduce our ability to enter into hedging transactions. 

While it is not possible at this time to predict when the CFTC will finalize certain other related rules and regulations, the Dodd-Frank Act and related regulations may require us to comply with margin requirements and with certain clearing and trade-execution requirements in connection with our derivative activities, although whether these requirements will apply to our business is uncertain at this time. If the regulations ultimately adopted require that we post margin for our hedging activities or require our counterparties to hold margin or maintain capital levels, the cost of which could be passed through to us, or impose other requirements that are more burdensome than current regulations, our hedging would become more expensive and we may decide to alter our hedging strategy.

The Dodd-Frank Act and implementing regulations may significantly increase the cost of derivative contracts (including through requirements to post collateral which could adversely affect our available liquidity), materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks we encounter, restrict our flexibility in conducting trading and hedging activity and increase our exposure to less creditworthy counterparties.  If we reduce our use of derivative contracts as a result of the new requirements, our results of operations may become more volatile and cash flows less predictable, which could adversely affect our ability to plan for and fund capital expenditures. Finally, the Dodd-Frank Act was intended, in part, to reduce the volatility of oil and natural-gas prices, which some legislators attributed to speculative trading in derivatives and commodity instruments related to oil and natural gas.  Our revenues could therefore be adversely affected if a consequence of the legislation and regulations is to lower

commodity prices. Any of these consequences could have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Because of our lack of asset and geographic diversification, adverse   developments in our operating areas would adversely affect our results of   operations.

A substantial portion of our assets are located in the Cherokee Basin. As a result, our business is disproportionately exposed to adverse developments affecting this region. Potential adverse developments could result from, among other things, changes in governmental regulation, capacity constraints with respect to the pipelines connected to our wells, curtailment of production, natural disasters or adverse weather conditions in or affecting these regions. Due to our lack of diversification in asset type and location, an adverse development in our business or this operating area would have a significantly greater impact on our financial condition and results of operations than if we maintained more diverse assets and operating areas.

Our business involves many hazards and operational risks, some of which may   not be fully covered by insurance. If a significant accident or event occurs   that is not fully insured, our operations and financial results could be   adversely affected.

There are a variety of risks inherent in our operations that may generate liabilities, including contingent liabilities, and financial losses to us, such as:

• damage to wells, pipelines, related equipment and surrounding properties caused by hurricanes, tornadoes, floods, fires and other natural disasters and acts of terrorism;

• inadvertent damage from construction, farm and utility equipment;

• leaks of gas or oil spills as a result of the malfunction of equipment or facilities;

• fires and explosions; and

• other hazards that could also result in personal injury and loss of life, pollution and suspension of operations.

Any of these or other similar occurrences could result in the disruption of our operations, substantial repair costs, personal injury or loss of human life, significant damage to property, environmental pollution, impairment of our operations and substantial revenue losses.

We are not fully insured against all risks, including drilling and completion risks that are generally not recoverable from third parties or insurance. We do not have property insurance on any of our underground pipeline systems or wellheads that would cover damage to the pipelines. Pollution and environmental risks generally are not fully insurable. Additionally, we may elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the perceived risks presented. Losses could, therefore, occur for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. Moreover, insurance may not be available in the future at commercially reasonable costs and on commercially reasonable terms. Premiums and deductibles for certain insurance policies have increased substantially in recent years. Due to these cost increases, we may not be able to obtain the levels or types of insurance we would otherwise have obtained, and the insurance coverage we do obtain may contain large deductibles or fail to cover certain hazards or cover all potential losses. Losses and liabilities from uninsured and underinsured events and delay in the payment of insurance proceeds could have a material adverse effect on our business, financial condition and results of operations.

We remain highly leveraged.  

At December 31, 201 3 , we had $ 101.6 million of contractual commitments outstanding, consisting of debt service requirements and non-cancelable operating lease and purchase obligation commitments. Of such amount, $ 92.0 million was outstanding under our $200 million secured borrowing base revolving credit facility with a current borrowing base of $ 115 million.

Our ability to borrow funds will depend upon a number of factors, including the condition of the financial markets. Under certain circumstances, the use of leverage may create a greater risk of loss to stockholders than if we did not borrow. The risk of loss in such circumstances is increased because we would be obligated to meet fixed payment obligations on specified dates regardless of our cash flow. If we do not make our debt service payments when due, our lenders may foreclose on assets securing such debt.

Our future level of debt could have important consequences, including the following:

• our ability to obtain additional debt or equity financing, if necessary, for drilling, expansion, working capital and other business needs may be impaired or such financing may not be available on favorable terms;

• a substantial decrease in our revenues as a result of lower oil and gas prices, decreased production or other factors could make it difficult for us to pay our liabilities. Any failure by us to meet these obligations could result in litigation, non-performance by contract counterparties or bankruptcy;

• our funds available for operations and future business opportunities will be reduced by that portion of our cash flow required to make principal or interest payments on our debt;

• we may be more vulnerable to competitive pressures or a downturn in our business or the economy generally; and

• our flexibility in responding to changing business and economic conditions may be limited.

Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service our indebtedness, we will be forced to take actions such as reducing or delaying business activities, acquisitions, investments and/or capital expenditures, selling assets, restructuring or refinancing our indebtedness or seeking additional equity capital. We may not be able to affect any of these remedies on satisfactory terms or at all.

Our credit agreement has substantial restrictions and financial covenants   that restrict our business and financing activities.

The operating and financial restrictions and co venants in our credit agreement restrict our ability to finance future operations or capital needs and to engage, expand or pursue our business activities. Our ability to comply with these restrictions and covenants in the future is uncertain and will be affected by our results of operations and financial conditions and events or circumstances beyond our control. If market or other economic conditions do not improve, our ability to comply with these covenants may be impaired. If we violate any of the restrictions, covenants, ratios or tests in our credit agreement , our indebtedness may become immediately due and payable, the interes t rates on our credit agreement may increase and the lenders ’ commitment, if any, to make further loans to us may terminate. We might not have, or be able to obtain, sufficient funds to make these accelerated payments in which event we may be forced to file for bankruptcy.

For a desc ription of our credit facility , please read Part II, Item 7. “ Management ’ s Discussion and Analysis of Financial Condition and Results of   Operations — Liquidity and Capital Resources — Credit Agreement ” and Note 10 in Part II, Item 8.

An increase in market interest rates will cause our debt service obligations   to increase.

Borrow ings under our credit agreement bear interest at floating rates. The rates are subject to adjustment based on fluctuations in market interest rates. An increase in the interest rates associated with our floating-rate debt would increase our debt service costs and affect our results of operations and cash flow. In addition, an increase in our interest expense could adversely affect our future ability to obtain financing or materially increase the cost of any additional financing.

We may not be able to obtain funding at all, or to obtain funding on   acceptable terms, because of the deterioration of the credit and capital   markets. This may hinder or prevent us from meeting our future capital needs.

In recent years, global financial markets and economic conditions experienced disruptions and volatility, which caused deterioration in the credit and capital markets. A recurrence of similar conditions in the future could make it difficult for us to obtain funding for our ongoing capital needs.

In volatile financial markets, the cost of raising money in the debt and equity capital markets can fluctuate widely and the availability of funds from those markets may diminish significantly. Our ability to access certain capital markets such as the market for high yield debt may be limited due to our size. The difficult financial environment may also limit the number of prospects for potential joint venture, asset monetization, or other capital raising transactions that we may pursue in the future or reduce the values we are able to realize in those transactions. As a result of these factors, we cannot be certain that funding will be available if needed and to the extent required, on acceptable terms. If we cannot meet our capital needs, we may be unable to implement our development plan, enhance our existing business, complete acquisitions or otherwise take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our production, revenues and results of operations.

Strategic determinations, including the allocation of capital and other   resources to strategic opportunities, are challenging, and our failure to   appropriately allocate capital and resources among our strategic opportunities   may adversely affect our financial condition and reduce our growth rate.

Our future growth prospects are dependent upon our ability to identify optimal strategies for our business. In developing our business plan, we considered allocating capital and other resources to various aspects of our businesses including well-development (primarily drilling), reserve acquisitions, exploratory activity, corporate items and other alternatives. We also considered our likely sources of capital. Notwithstanding the determinations mad e in the development of our 2014 budget, business opportunities not previously identified periodically come to our attention, including possible acquisitions and dispositions. If we fail to identify optimal business strategies, or fail to optimize our capital investment and capital raising opportunities and the use of our other resources in furtherance of our business strategies, our financial condition and growth rate may be adversely affected. Moreover economic or other circumstances may change fro m those contemplated by our 2014 budget, and our failure to recognize or respond to those changes may limit our ability to achieve our objectives.

Our ability to produce oil and gas could be impaired if we are unable to   acquire adequate supplies of water.

The recent drought, which began in 2011 and covered 80% of the contiguous United States with at least abnormally dry conditions, may impair our ability to obtain the water required for our drilling operations as government officials ration water supplies crucial to energy exploration. In the hardest-hit areas, water- management districts have warned residents and businesses to curtail usage from rivers, lakes and aquifers. The shortage is forcing exploration and production companies to buy water from farmers, irrigation districts and municipalities and is increasing the cost of the water.   Our inability to locate sufficient amounts of water at reasonable prices could adversely impact our operations, particularly with respect to our Central Oklahoma oil producing properties.

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

If an examination of the title history of a property reveals that an oil or gas lease or other developed rights has been purchased in error from a person who is not the owner of the mineral interest desired, our interest would substantially decline in value. In such an instance, the amount paid for such lease or leases or other developed rights would be lost. It is management ’ s practice, in acquiring leases, or undivided interests in leases or other developed rights, not to incur the expense of retaining lawyers to examine the title to the mineral interest to be acquired. Rather, we will rely upon the judgment of lease brokers or landmen who perform the fieldwork in examining records in the appropriate governmental office before attempting to acquire a lease or other developed rights in a specific mineral interest.

Prior to drilling a well, however, it is the normal practice in the industry for the person or company acting as the operator of the well to obtain a preliminary title review of the spacing unit within which the proposed well is to be drilled to ensure there are no obvious deficiencies in title to the well. Frequently, as a result of such examinations, certain curative work must be done to correct deficiencies in the marketability of the title, and such curative work entails expense. The work might include obtaining affidavits of heirship or causing an estate to be administered. Our failure to obtain these rights may adversely impact our ability in the future to increase production and reserves.

A change in the jurisdictional characterization of some of our gathering assets   by federal, state or local regulatory agencies or a change in policy by those   agencies may result in increased regulation of our gathering assets, which may   indirectly cause our revenues to decline and operating expenses to increase.

We believe that the facilities comprising our gathering systems meet the traditional tests used by FERC to distinguish gathering facilities, which are not subject to FERC ’ s jurisdiction under the NGA, from FERC-jurisdictional transmission facilities. The classification and regulation of some of our gathering facilities may be subject to change based on future determinations by FERC, the courts or Congress. If FERC were to determine that the facilities perform primarily a transmission function, these facilities may become subject to regulation as interstate natural gas pipeline facilities and we may be subject to fines. We believe the expenses associated with compliance with FERC regulations, including seeking certificate authority for construction, service and abandonment, establishing rates and tariffs, and meeting FERC ’ s detailed regulatory accounting and reporting requirements, if such compliance were to become necessary, would substantially increase our operating costs and would adversely affect our profitability.

FERC regulation affects our gathering systems and the markets for our natural gas. FERC ’ s policies and practices concerning, for example, its policies on open access transportation, ratemaking, capacity release and market center promotion, could indirectly affect our gathering systems.

Although natural gas gathering facilities are exempt from FERC jurisdiction under the NGA, such facilities are subject to regulation by the state in which such facilities are located. State regulation of gathering facilities generally includes various safety,

environmental and, in some circumstances, open access requirements and rate regulation. Our gathering operations are limited to the States of Kansas, Oklahoma and West Virginia. We are licensed as an operator of a natural gas gathering system with the KCC and are required to file periodic information reports with the KCC. We are not required to be licensed as an operator or to file reports in Oklahoma or West Virginia.

Our gathering operations may be or become subject to safety and operational regulations relating to the design, installation, testing, construction, operation, replacement and management of gathering facilities. In the future, legislative and regulatory changes could require us to incur additional capital expenditures and increased costs.

We may incur significant costs and liabilities in the future resulting from a   failure to comply with new or existing environmental and operational safety   regulations or an accidental release of hazardous substances into the   environment.

We may incur significant costs and liabilities as a result of environmental, health and safety requirements applicable to our oil and gas exploration, development, production, gathering and transportation activities. These costs and liabilities could arise under a wide range of federal, state and local environmental, health and safety laws and regulations, including regulations and enforcement policies, which have tended to become increasingly strict over time.

Our operations are subject to stringent and complex environmental laws and regulations. Failure to comply with these or future laws and regulations or may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary penalties, the imposition of remedial requirements, and the issuance of orders limiting or enjoining future operations or imposing additional compliance requirements or operational limitations. Certain environmental laws impose strict, joint and several liability for costs required to clean up and restore sites where hazardous substances or hydrocarbons have been disposed or otherwise released. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment.

There is inherent risk of environmental costs and liabilities in our business due to our handling of oil and natural gas, air emissions related to our operations, and historical industry operations and waste disposal practices. For example, an accidental release from one of our pipelines could subject us to substantial liabilities arising from environmental cleanup and restoration costs, claims made by neighboring landowners and other third parties for personal injury and property damage and fines or penalties for related violations of environmental laws or regulations. We may not be able to recover these costs from insurance. Moreover, the possibility exists that stricter laws, regulations or enforcement policies could significantly increase our compliance costs and the cost of any remediation that may become necessary.

We may face unanticipated water and other waste disposal costs.  

We may be subject to regulation that restricts our ability to discharge water produced as part of our gas production operations. Productive zones frequently contain water that must be removed in order for the gas to produce, and our ability to remove and dispose of sufficient quantities of water from the various zones will determine whether we can produce gas in commercial quantities. The produced water must be transported from the lease and injected into disposal wells. The availability of disposal wells with sufficient capacity to receive all of the water produced from our wells may affect our ability to produce our wells. Also, the cost to transport and dispose of that water, including the cost of complying with regulations concerning water disposal, may reduce our profitability.

In the event (1) water produced from our projects fails to meet the quality requirements of applicable regulatory agencies, (2) our wells produce water in excess of the applicable volumetric permit limits, (3) the disposal wells fail to meet the requirements of all applicable regulatory agencies, or (4) we are unable to secure access to disposal wells with sufficient capacity to accept all of the produced water, we may have to shut in wells, reduce drilling activities, or upgrade facilities for water handling or treatment. The costs to dispose of this produced water may increase if any of the following occur:

• we cannot obtain future permits from applicable regulatory agencies;

• water of lesser quality or requiring additional treatment is produced;

• our wells produce excess water;

• new laws and regulations require water to be managed or disposed in a different manner; or

• costs to transport the produced water to the disposal wells increase.

The Resource Conservation and Recovery Act ( “ RCRA ” ) and comparable state statutes, regulate the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous solid wastes. EPA has delegated the authority to administer RCRA, in whole or in part to individual states, which also can impose their own, more stringent requirements. Our operations generate some ordinary industrial wastes, such as paint wastes, waste solvents, and waste oils, which may be regulated as hazardous wastes. The transportation of natural gas in pipelines may also generate some hazardous wastes subject to RCRA or comparable state laws. Drilling fluids, produced waters, and most other wastes associated with the exploration, development, production and transportation of oil and gas are currently excluded from regulation as hazardous wastes under RCRA but may be regulated by EPA or state agencies as non-hazardous solid wastes. Moreover, it is possible that this exclusion could change and cause some or all of such wastes now to be classified as hazardous wastes, which could increase our waste management costs and could have a material adverse effect on our results of operations and financial position.

Recent and future environmental laws and regulations may significantly limit,   and increase the cost of, our exploration, production and gathering operations.

Recent and future environmental laws and regulations, including additional federal and state restrictions on greenhouse gas emissions ( “ GHG ” ) in response to climate change concerns, may increase our capital and operating costs and also reduce the demand for the oil and natural gas we produce. The oil and gas industry is a direct source of certain GHG emissions, such as carbon dioxide and methane, and future restrictions on such emissions could impact our future operations. The EPA issued the Final Mandatory Reporting of Green house Gases Rule, which required certain sources and other facilities that emit 25,000 metric tons or more of carbon dioxide equivalent per year to begin collecting GHG emissions data under a new reporting system as of January 1, 2010. In November 2010, the EPA issued final regulations requiring the annual reporting of GHG emissions from qualifying facilities in the upstream oil and natural gas sector, including onshore production (Subpart W). Although the Mandatory Reporting Rule does not control GHG emission levels from any facilities, it has caused us to incur monitoring and reporting costs for emissions subject to the rule. In addition, relatively large sources of GHG emission are subject to permitting requirements, which could be expanded in the future to include smaller sources.

Federal or state legislative or regulatory initiatives that regulate or restrict emissions of GHGs in areas in which we conduct business , as well as private legal actions brought under common law theories for alleged climate change impacts, could adversely affect the demand for our products and could increase the costs of our operations, including costs to operate and maintain our facilities, obtain and comply with permits, install new emission controls on our facilities, acquire allowances to authorize our GHG emissions, pay any taxes related to our GHG emissions and/or administer and manage a GHG program. Reductions in our revenues or increases in our expense s as a result of climate legislative and regulatory initiatives or litigation could have a material adverse effect on our business.

Federal and state laws require new and modified sources of air pollutants to obtain permits prior to commencing construction. We may incur expenditures in the future for air pollution control equipment in connection with ob taining or maintaining permits and approvals for air emissions.

The Endangered Species Act (“ ESA ”) , restricts activities that may affect endangered or threatened species or their habitats. The designation of previously unidentified endangered or threatened species could cause us to incur additional costs or become subject to operating restrictions or bans or limit future development activity in the affected areas.

Federal legislation and state legislative and regulatory initiatives relating   to oil and gas operations, including hydraulic fracturing , could result in increased costs and additional   operating restrictions or delays.

Hydraulic fracturing is an essential and common practice in the oil and gas industry used to stimulate production of natural gas and/or oil from dense subsurface rock formations. We routinely employ hydraulic fracturing in our drilling activity. Hydraulic fracturing involves using water, sand, and certain chemicals to fracture the hydrocarbon-bearing rock formation to allow flow of hydrocarbons into the wellbore. The process is typically regulated by state oil and natural gas commissions; however, the EPA has asserted federal regulatory authority over certain hydraulic fracturing activities involving diesel under the Safe Drinking Water Act “SDWA”. On February 11, 2014, the EPA released guidance and an interpretative memorandum clarifying that SDWA permit requirements apply to hydraulic fracturing activities using diesel fuels and indicating EPA’s intent to make decisions on such permitting on a case-by-case basis . In addition, Congress has considered legislation to provide for federal regulation of hydraulic fracturing and to require disclosure of the chemicals used in the hydraulic-fracturing process. Moreover, on November 23, 2011, the EPA announced that it was granting in part a petition to initiate a rulemaking under the Toxic Substances Control Act, relating to chemical substances and mixtures used in oil and gas exploration and production. Further, on May 24, 2013 the U.S. Department of the Interior published a proposed rule in the Federal Register that includes disclosure requirements and other mandates for hydraulic fracturing on federal lands.

State legislatures and agencies are also enacting legislation and promulgating rules to regulate hydraulic fracturing and require disclosure of hydraulic fracturing chemicals. In the event state, local, or municipal legal restrictions are adopted in areas where we are currently conducting or in the future plan to conduct operations, we may incur additional costs to comply with such requirements that may be significant in nature, experience delays or curtailment in the pursuit of exploration, development, or production activities, and perhaps even be precluded from the drilling of wells.

There are certain governmental reviews either underway or being proposed that focus on environmental aspects of hydraulic-fracturing practices. These on-going or proposed studies, depending on their degree of pursuit and any meaningful results obtained, could spur initiatives to further regulate hydraulic fracturing under the Safe Drinking Water Act, the Toxic Substances Control Act, or other statutory and/or regulatory mechanisms. President Obama created the Interagency Working Group on Unconventional Natural Gas and Oil by Executive Order on April 13, 2012, which is charged with coordinating and aligning federal agency research and scientific studies on unconventional natural gas and oil resources.

Further, on April 17, 2012, the EPA issued final rules that subject oil and gas operations (production, processing, transmission, storage and distribution) to regulation under the New Source Performance Standards ( “ NSPS ” ) and National Emission Standards for Hazardous Air Pollutants ( “ NESHAPS ” ) programs. The rules establish specific new requirements for emissions from compressors, controllers, dehydrators, storage tanks, gas processing plants and certain other equipment and include NSPS standards for completions of hydraulically fractured natural gas wells. Until January 1, 2015, these standards require owners/operators to reduce Volatile Organic Compound emissions from natural gas not sent to the gathering line during well completion either by flaring using a completion combustion device or by capturing the gas using green completions with a completion combustion device. Beginning January 1, 2015, operators must capture the gas and make it available for use or sale, which can be done through the use of green completions. Since promulgating final rules, the EPA has reconsidered aspects of them and litigation challenging the rules is ongoing. We are currently evaluating the effect these rules could have on our business and believe that these rules could result in increased operating costs.

Increased regulation and attention given to the hydraulic-fracturing process could lead to greater opposition, including litigation, to oil and gas production activities using hydraulic-fracturing techniques. Additional legislation or regulation could also lead to operational delays or increased operating costs in the production of oil and natural gas, including from the developing shale plays, or could make it more difficult to perform hydraulic fracturing. The adoption of any federal, state or local laws or the implementation of regulations regarding hydraulic fracturing could potentially cause a decrease in the completion of new oil and gas wells, increased compliance costs and time, which could adversely affect our financial position, results of operations and cash flows.

Certain U.S. federal income tax preferences currently available with respect to oil and natural gas production may be eliminated as a result of future legislation.

The Obama administration's most recent budget proposal and other recently proposed legislation have included the elimination of certain key U.S. federal income tax incentives currently available to oil and gas exploration and production. If enacted into law, these proposals would eliminate certain tax preferences applicable to taxpayers engaged in the exploration or production of natural resources. Proposed changes to such tax incentives include, but are not limited to (1) the repeal of the percentage depletion allowance for oil and gas properties, (2) the elimination of current deductions for intangible drilling and development costs, (3) the elimination of the deduction for U.S. production activities and (4) the increase in the amortization period from two years to seven years for geophysical costs paid or incurred in connection with the exploration for or development of, oil and gas within the United States. It is unclear whether any such changes will be enacted or how soon any such changes would become effective. The passage of any legislation as a result of these proposals or any other similar changes in U.S. federal income tax laws could negatively affect our consolidated financial position, results of operations or cash flows.

Our ability to grow and to increase our profitability may depend in part on   our ability to make acquisitions. Acquisitions are subject to a number of   risks.

Our ability to grow and increase our profitability may depend in part on our ability to make acquisitions that result in an increase in our net income per share and cash flows. We may be unable to make such acquisitions because we are: (1) unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts with them, (2) unable to obtain financing for these acquisitions on economically acceptable terms or (3) outbid by competitors. If we are unable to acquire properties containing proved reserves, our total level of proved reserves will decline as a result of our production, which will adversely affect our results of operations. Even if we do make acquisitions that we believe will increase our net income per share and cash flows, these acquisitions may perform below our expectations and nevertheless result in a decrease in net income and/or cash flows.

Our acquisitions may involve number risks, including:

• operating a larger combined organization and adding operations;

• difficulties in assimilating and operating the assets and operations of the acquired business, particularly if the assets acquired are in a new geographical area;

• risk that oil and natural gas reserves acquired may not be of the anticipated magnitude or may not be developed as anticipated;

• loss of significant key employees from the acquired business; 

• diversion of management’s attention from other business concerns;

• failure to realize expected profitability or growth;

• failure to realize expected synergies and cost savings;

• coordinating geographically disparate organizations, systems and facilities; and

• coordinating or consolidating corporate and administrative functions.

If third-party pipelines and other facilities interconnected to our gas   pipelines become unavailable to transport or produce gas, our revenues and cash   flows could be adversely affected.

We depend upon third-party pipelines and other facilities that provide delivery options to and from our pipelines and facilities for the benefit of our customers. Since we do not own or operate any of these pipelines or other facilities, their continuing operation is not within our control. If any of these third-party pipelines and other facilities become unavailable to transport or produce gas, our revenues and cash flows could be adversely affected.

We do not own all of the land on which our pipelines are located or on which   we may seek to locate pipelines in the future, which could disrupt our   operations and growth.

We do not own the land on which our pipelines have been constructed, but we do have right-of-way and easement agreements from landowners and governmental agencies, some of which require annual payments to maintain the agreements and most of which have a perpetual term. New pipeline infrastructure construction may subject us to more onerous terms or to increased costs if the design of a pipeline requires redirecting. Such costs could have a material adverse effect on our business, results of operations and financial condition.

In addition, the construction of additions to the pipelines may require us to obtain new rights-of-way prior to constructing new pipelines. We may be unable to obtain such rights-of-way to expand pipelines or capitalize on other attractive expansion opportunities. Additionally, it may become more expensive to obtain new rights-of-way. If the cost of obtaining new rights-of-way increases, our business and results of operations could be adversely affected.

Risks Related to the Ownership of Our Common Stock

The price of our common stock has been and may continue to experience   volatility.

The price of our common stock has been and may continue to be volatile. In addition to the risk factors described above, some of the factors that could affect the price of our common stock are quarterly increases or decreases in revenue or earnings, changes in revenue or earnings estimates by the investment community, sales of our common stock by significant stockholders, short-selling of our common stock by investors, issuance of a significant number of shares for equity-based compensation or to raise additional capital to fund our operations, changes in market valuations of similar companies and speculation in the press or investment community about our financial condition or results of operations, as well as any doubt about our ability to continue as a going concern. General market conditions and U.S. or international economic factors and political events unrelated to the performance of us may also affect our stock price. For these reasons, investors should not rely on recent trends in the price of our common stock to predict the future price of our common stock or our financial results.

Our charter and bylaws contain provisions that may make it more difficult for   a third party to acquire control of us, even if a change in control would   result in the purchase of our stockholders ’ common stock at a premium to the   market price or would otherwise be beneficial to our stockholders.

There are provisions in our restated certificate of incorporation and bylaws that may make it more difficult for a third party to acquire control of us, even if a change in control would result in the purchase of our stockholders ’ common stock at a premium to the market price or would otherwise be beneficial to our stockholders. For example, our restated certificate of incorporation authorizes our board of directors to issue preferred stock without stockholder approval. If our board of directors elects to issue preferred stock, it could be more difficult for a third party to acquire us. In addition, provisions of our restated certificate of incorporation and bylaws, including limitations on stockholder actions by written consent and on stockholder proposals and director nominations at meetings of stockholders, could make it more difficult for a third party to acquire control of us. Delaware corporation law may also discourage takeover attempts that have not been approved by our board of directors.

White Deer Energy L.P. and its affiliates ( “ White Deer ” ) beneficially own   approximately 60 % , as of March 3, 2014, of our common stock after giving effect to the exercise of   their outstanding warrants, giving White Deer control in corporate transactions   and other matters, including a sale of our Company, as well as potentially   diluting the profits of the Company.

At March 3, 2014 , including 10,958,601 common shares owned and 20,161,351 warrants, White Deer beneficially owns 31,119,952 shares, or approximately 60 %, of our common stock. By exercising their warrants, White Deer can benefit from their respective percentage of all of our profits and growth. In addition, we have agreed to issue White Deer additional warrants on each quarterly dividend payment date of the Series A Preferred Stock prior to December 31, 2014, on which dividends are not paid in cash but instead accrue. The voting power of the Series B Preferred Stock issued with certain of the warrants is limited to 45% of the votes applicable to all outstanding voting stock. In addition, White Deer may vote any shares of common stock held by it without regard to that limit.

As a result of its ownership, White Deer is our controlling stockholder and is able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other stockholders, the outcome of certain corporate transactions or other matters submitted to our stockholders for approval, including, for example, potential mergers or acquisitions, asset sales and other significant corporate transactions. The interests of White Deer may not coincide with the interests of other holders of our common stock.

Subject to certain restrictions, White Deer may make investments in companies that compete with us. In addition, our interests may conflict with those of White Deer with respect to, among other things, business opportunities that may be presented to White Deer and to our directors associated with White Deer.

Substantial sales of our common stock by White Deer could cause our stock   price to decline.

We are unable to predict whether significant amounts of our common stock will be sold by White Deer. Any sales of substantial amounts of our common stock in the public market by White Deer, or the perception that these sales might occur, could lower the market price of our common stock.

Forward-Looking Statements

Various statements in this report, including those that express a belief, expectation, or intention, as well as those that are not statements of historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include those regarding projections and estimates concerning the timing and success of specific projects; financial position; business strategy; budgets; amount, nature and timing of capital expenditures; drilling of wells and construction of pipeline infrastructure; acquisition and development of oil and gas properties and related pipeline infrastructure; timing and amount of future production of oil and gas; operating costs and other expenses; estimated future net revenues from oil and gas reserves and the present value thereof; cash flow and anticipated liquidity; funding of our capital expenditures; ability to meet our debt service obligations; and other plans and objectives for future operations.

When we use the words “ believe, ”   “ intend, ”   “ expect, ”   “ may, ”   “ will, ”   “ should, ”   “ anticipate, ”   “ could, ”   “ estimate, ”   “ plan, ”   “ predict, ”   “ project, ” or their negatives, or other similar expressions, the statements which include those words are usually forward-looking statements. When we describe strategy that involves risks or uncertainties, we are making forward-looking statements. The factors impacting these risks and uncertainties include, but are not limited to:

• current weak economic conditions;

• volatility of oil and gas prices;

• increases in the cost of drilling, completion and gas gathering or other costs of developing and producing our reserves;

• our debt covenants;

• access to capital, including debt and equity markets;

• results of our hedging activities;

• drilling, operational and environmental risks; and

• regulatory changes and litigation risks.

You should consider carefully the statements in Part I, Item 1A. “ Risk Factors ” and other sections of this Annual Report on Form 10-K, which describe factors that could cause our actual results to differ from those set forth in the forward-looking statements.

We have based these forward-looking statements on our current expectations and assumptions about future events. The forward-looking statements in this report speak only as of the date of this report; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the SEC, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected.