10-K 1 cog-12312016x10k.htm 10-K Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
Commission file number 1-10447
CABOT OIL & GAS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
04-3072771
(I.R.S. Employer
Identification Number)
Three Memorial City Plaza, 840 Gessner Road, Suite 1400, Houston, Texas 77024
(Address of principal executive offices including ZIP code)

(281) 589-4600
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $.10 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes 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 required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months 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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 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. (Check one):
Large accelerated filer
ý
Accelerated filer
o
 
Non-accelerated filer
(Do not check if a
smaller reporting company)
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
The aggregate market value of Common Stock, par value $.10 per share ("Common Stock"), held by non-affiliates as of the last business day of registrant's most recently completed second fiscal quarter (based upon the closing sales price on the New York Stock Exchange on June 30, 2016) was approximately $11.8 billion.
As of February 17, 2017, there were 475,138,587 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held May 3, 2017 are incorporated by reference into Part III of this report.
 



TABLE OF CONTENTS
 
 
PAGE
 
 
 
 
 
 
 
 
 

2


FORWARD-LOOKING INFORMATION
The statements regarding future financial and operating performance and results, strategic pursuits and goals, market prices, future hedging activities, and other statements that are not historical facts contained in this report are forward-looking statements. The words "expect," "project," "estimate," "believe," "anticipate," "intend," "budget," "plan," "forecast," "predict," "may," "should," "could," "will" and similar expressions are also intended to identify forward-looking statements. Such statements involve risks and uncertainties, including, but not limited to, market factors, market prices (including geographic basis differentials) of natural gas and crude oil, results of future drilling and marketing activity, future production and costs, legislative and regulatory initiatives, electronic, cyber or physical security breaches and other factors detailed herein and in our other Securities and Exchange Commission filings. See "Risk Factors" in Item 1A for additional information about these risks and uncertainties. Many of these risks are difficult to predict and beyond our controls. Although we believe the expectations and forecasts reflected in our forward-looking statements are reasonable, we can give no assurance that they will prove to have been correct. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated.
GLOSSARY OF CERTAIN OIL AND GAS TERMS
The following are abbreviations and definitions of certain terms commonly used in the oil and gas industry and included within this Annual Report on Form 10-K:
Abbreviations
Bbl.    One stock tank barrel, or 42 U.S. gallons liquid volume, used in reference to oil or other liquid hydrocarbons.
Bcf.    One billion cubic feet of natural gas.
Bcfe.    One billion cubic feet of natural gas equivalent.
Btu.    One British thermal unit.
Dth.    One million British thermal units.
Mbbls.    One thousand barrels of oil or other liquid hydrocarbons.
Mcf.    One thousand cubic feet of natural gas.
Mcfe.    One thousand cubic feet of natural gas equivalent.
Mmbbls.    One million barrels of oil or other liquid hydrocarbons.
Mmbtu.    One million British thermal units.
Mmcf.    One million cubic feet of natural gas.
Mmcfe.    One million cubic feet of natural gas equivalent.
NGL.    Natural gas liquids.
NYMEX.    New York Mercantile Exchange.
Definitions
Condensate.    A mixture of hydrocarbons that exists in the gaseous phase at original reservoir temperature and pressure, but that, when produced, is in the liquid phase at surface pressure and temperature.
Conventional play.    A term used in the oil and gas industry to refer to an area believed to be capable of producing crude oil and natural gas occurring in discrete accumulations in structural and stratigraphic traps utilizing conventional recovery methods.
Developed reserves.    Developed reserves are reserves that can be expected to be recovered: (i) Through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well; and (ii) Through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.

3


Development costs.    Costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing the oil and gas. More specifically, development costs, including depreciation and applicable operating costs of support equipment and facilities and other costs of development activities, are costs incurred to: (i) gain access to and prepare well locations for drilling, including surveying well locations for the purpose of determining specific development drilling sites, clearing ground, draining, road building, and relocating public roads, gas lines, and power lines, to the extent necessary in developing the proved reserves, (ii) drill and equip development wells, development-type stratigraphic test wells, and service wells, including the costs of platforms and of well equipment such as casing, tubing, pumping equipment, and the wellhead assembly, (iii) acquire, construct, and install production facilities such as lease flow lines, separators, treaters, heaters, manifolds, measuring devices, and production storage tanks, natural gas cycling and processing plants, and central utility and waste disposal systems, and (iv) provide improved recovery systems.
Development well.    A well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive.
Differential.    An adjustment to the price of oil or gas from an established spot market price to reflect differences in the quality and/or location of oil or gas.
Dry hole.    Exploratory or development well that does not produce oil or gas in commercial quantities.
Exploitation activities.    The process of the recovery of fluids from reservoirs and drilling and development of oil and gas reserves.
Exploration costs.    Costs incurred in identifying areas that may warrant examination and in examining specific areas that are considered to have prospects of containing oil and gas reserves, including costs of drilling exploratory wells and exploratory-type stratigraphic test wells. Exploration costs may be incurred both before acquiring the related property (sometimes referred to in part as prospecting costs) and after acquiring the property. Principal types of exploration costs, which include depreciation and applicable operating costs of support equipment and facilities and other costs of exploration activities, are: (i) costs of topographical, geographical and geophysical studies, rights of access to properties to conduct those studies, and salaries and other expenses of geologists, geophysical crews, and others conducting those studies. Collectively, these are sometimes referred to as geological and geophysical or "G&G" costs, (ii) costs of carrying and retaining undeveloped properties, such as delay rentals, ad valorem taxes on properties, legal costs for title defense, and the maintenance of land and lease records, (iii) dry hole contributions and bottom hole contributions, (iv) costs of drilling and equipping exploratory wells, and (v) costs of drilling exploratory-type stratigraphic test wells.
Exploratory well.    A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir. Generally, an exploratory well is any well that is not a development well, an extension well, or a service well.
Extension well.    An extension well is a well drilled to extend the limits of a known reservoir.
Field.    An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition. There may be two or more reservoirs in a field that are separated vertically by intervening impervious, strata, or laterally by local geological barriers, or by both. Reservoirs that are associated by being in overlapping or adjacent fields may be treated as a single or common operational field. The geological terms structural feature and stratigraphic condition are intended to identify localized geological features as opposed to the broader terms of basins, trends, provinces, plays, areas-of-interest, etc.
Gross acres.    The total acres in which a working interest is owned.
Gross wells. The total wells in which a working interest is owned.
Net acres. The number of acres an owner has out of a particular number of gross acres. An owner who has a 30% working interest in 100 acres owns 30 net acres.
Net wells. The percentage ownership interest in a well than an owner has based on the working interest. An owner who has a 30% working interest in a well owns a 0.30 net well.
Oil.    Crude oil and condensate.
Operator.    The individual or company responsible for the exploration, development and/or production of an oil or gas well or lease.

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Play.    A geographic area with potential oil and gas reserves.
Possible reserves.    Possible reserves are those additional reserves that are less certain to be recovered than probable reserves.
Probable reserves.    Probable reserves are those additional reserves that are less certain to be recovered than proved reserves but which, together with proved reserves, are as likely not to be recovered.
Production costs.    Costs incurred to operate and maintain wells and related equipment and facilities, including depreciation and applicable operating costs of support equipment and facilities, which become part of the cost of oil and gas produced.
Proved properties.    Properties with proved reserves.
Proved reserves.    Proved reserves are those quantities, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions and operating methods prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.
Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average price during the twelve-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.
Reasonable certainty.    If deterministic methods are used, reasonable certainty means a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate. A high degree of confidence exists if the quantity is much more likely to be achieved than not, and, as changes due to increased availability of geoscience (geological, geophysical, and geochemical), engineering, and economic data are made to estimated ultimate recovery (EUR) with time, reasonably certain EUR is much more likely to increase or remain constant than to decrease.
Reliable technology.    A grouping of one or more technologies (including computational methods) that has been field tested and has been demonstrated to provide reasonable certain results with consistency and repeatability in the formation being evaluated or in an analogous formation.
Reserves.    Reserves are estimated remaining quantities of oil and gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and gas or related substances to market, and all permits and financing required to implement the project.
Reservoir.    A porous and permeable underground formation containing a natural accumulation of producible oil and/or gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.
Resources.    Resources are quantities of oil and gas estimated to exist in naturally occurring accumulations. A portion of the resources may be estimated to be recoverable, and another portion may be considered to be unrecoverable. Resources include both discovered and undiscovered accumulations.
Royalty interest.    An interest in an oil and gas lease that gives the owner of the interest the right to receive a portion of the production from the leased acreage (or of the proceeds of the sale thereof), but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the leased acreage. Royalties may be either landowners' royalties, which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner.
Shale.    Fine-grained sedimentary rock composed mostly of consolidated clay or mud.
Standardized measure.    The present value, discounted at 10% per year, of estimated future net revenues from the production of proved reserves, computed by applying sales prices used in estimating proved oil and gas reserves to the year-end quantities of those reserves in effect as of the dates of such estimates and held constant throughout the productive life of the reserves (except for consideration of future price changes to the extent provided by contractual arrangements in existence at

5


year-end), and deducting the estimated future costs to be incurred in developing, producing and abandoning the proved reserves (computed based on year-end costs and assuming continuation of existing economic conditions). Future income taxes are calculated by applying the appropriate year-end statutory federal and state income tax rate with consideration of future tax rates already legislated, to pre-tax future net cash flows, net of the tax basis of the properties involved and utilization of available tax carryforwards related to proved oil and gas reserves.
Unconventional play.    A term used in the oil and gas industry to refer to a play in which the targeted reservoirs generally fall into one of three categories: (1) tight sands, (2) coal beds or (3) shales. The reservoirs tend to cover large areas and lack the readily apparent traps, seals and discrete hydrocarbon-water boundaries that typically define conventional reservoirs. These reservoirs generally require fracture stimulation treatments or other special recovery processes in order to achieve economic flow rates.
Undeveloped reserves.    Undeveloped reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required. Reserves on undrilled acreage are limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence exists that establishes reasonable certainty of economic producibility at greater distances. Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time. Under no circumstances shall estimates for undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir, or by other evidence using reliable technology establishing reasonable certainty.
Unproved properties.    Properties with no proved reserves.
Working interest.    An interest in an oil and gas lease that gives the owner of the interest the right to drill for and produce oil and gas on the leased acreage and requires the owner to pay a share of the costs of drilling and production operations.

6


PART I
ITEMS 1 and 2. BUSINESS AND PROPERTIES
Cabot Oil & Gas Corporation is an independent oil and gas company engaged in the development, exploitation and exploration of oil and gas properties. Our assets are concentrated in areas with known hydrocarbon resources, which are conducive to multi-well, repeatable drilling programs. We operate in one segment, natural gas and oil development, exploitation, exploration and production, in the continental United States. We have offices located in Houston, Texas and Pittsburgh, Pennsylvania.
STRATEGY
Our objective is to enhance shareholder value over the long-term through consistent growth in production and reserves, even in the current commodity price environment. We believe this is attainable by employing disciplined management of our balance sheet and our operations and remaining focused on our core asset base, which offers a strategic advantage. Key components of our business strategy include:
Disciplined Capital Spending Focused on Organic Projects.    We allocate our capital program to economic projects expected to generate the highest returns, maximize our production levels and add to our reserve growth. Our capital program is developed with the expectation of being fully funded through operating cash flows, with any shortfalls funded primarily by cash on hand and/or borrowings under our revolving credit facility. While we consider various growth opportunities, including strategic acquisitions, our primary focus is organic growth through drilling our core areas of operation where we believe we can exploit our extensive inventory of low-cost, repeatable drilling opportunities. The price we expect to receive for our production is a critical factor in the capital investments we make in order to achieve the greatest economic benefit from the development our properties.
Low Cost Structure.    Our operations are focused on select unconventional plays with significant resource potential that allow us to add and produce reserves at a low cost. We have developed sizable, contiguous acreage positions in our core operating areas and believe the concentration of our assets allows us to further reduce costs through economies of scale. We continue to optimize drilling and completion efficiencies using multi-well pad drilling, increasing frac stages and drilling longer lateral wells in our core operating areas, resulting in additional cost savings. Furthermore, since we operate in a limited number of geographic areas, we believe we can leverage our technical expertise in these areas to achieve further cost reductions through operational efficiencies. We also operate a majority of our properties, which allows us to more effectively manage all elements of our cost structure.
Conservative Financial Position and Financial Flexibility.    We believe the prudent management of our balance sheet and the active management of commodity price risk allows us the financial flexibility to provide continued production and reserve growth over time, even in periods of depressed commodity prices. We utilize derivative contracts to manage commodity price risk and to provide a level of cash flow predictability. In the event we experience a lower than anticipated commodity price environment, we believe that we have the flexibility to supplement the funding of our capital program with cash on hand, borrowings under our revolving credit facility, select asset sales, access to capital markets or, depending on the specific circumstances, reductions to our overall level of activity.
Pursue Strategic Marketing and Transportation Agreements to Maximize Cash Flows and Diversify Risk.    We continue to pursue opportunities to maximize our cash flows and diversify our market and customer risk by securing strategic long-term firm transportation and sales contracts in close proximity to our core area of operations.
2017 OUTLOOK
Our 2017 drilling program includes approximately $650.0 million in capital expenditures and approximately $70.0 million in expected contributions to our equity method investments. We expect to fund these expenditures with existing cash, operating cash flow and, if required, borrowings under our revolving credit facility. See Note 4 of the Notes to the Consolidated Financial Statements for further details regarding our equity method investments in Constitution Pipeline Company, LLC (Constitution) and Meade Pipeline Co LLC (Meade).
In 2017, we plan to drill 95 gross wells (90.0 net) and complete 95 gross wells (90.0 net), of which 51 gross wells (45.0 net) were drilled but uncompleted in prior years. We allocate our planned program for capital expenditures among our various operating areas based on market conditions, return expectations, availability of services and human resources. We will continue to assess the natural gas and crude oil price environment along with our liquidity position and may increase or decrease our capital expenditures accordingly.

7


As a result of higher expected natural gas and crude oil prices, we increased our budgeted capital expenditures compared to 2016. We plan to operate an average of approximately 3.0 rigs in 2017, an increase from an average of approximately 1.4 rigs in 2016. During 2016, we strategically curtailed production levels in the Marcellus Shale due to lower price realizations in the region; however, we expect to increase Marcellus Shale production during 2017.
DESCRIPTION OF PROPERTIES
Our exploration, development and production operations are primarily concentrated in two unconventional plays—the Marcellus Shale in northeast Pennsylvania and the Eagle Ford Shale in south Texas. We also have operations in various other conventional and unconventional plays throughout the continental United States.
Marcellus Shale
Our Marcellus Shale properties represent our largest operating and growth area in terms of reserves, production and capital investment. Our properties are principally located in Susquehanna County, Pennsylvania, where we currently hold approximately 179,000 net acres in the dry gas window of the play. Our 2016 net production in the Marcellus Shale was 581.9 Bcfe, representing approximately 93% of our total equivalent production for the year. As of December 31, 2016, we had a total of 553.0 net wells in the Marcellus Shale, of which approximately 99% are operated by us.
During 2016, we invested $266.1 million in the Marcellus Shale and drilled or participated in drilling 29.0 net wells, completed 63.0 net wells and turned in line 52.0 net wells. As of December 31, 2016, we had 26.2 net wells that were either in the completion stage or waiting on completion or connection to a pipeline. We exited 2016 with two drilling rigs operating in the play and plan to exit 2017 with two rigs operating.
Eagle Ford Shale
Our properties in the Eagle Ford Shale are principally located in Atascosa, Frio and La Salle Counties, Texas, where we hold approximately 84,000 net acres in the oil window of the play. In 2016, our net crude oil/condensate/NGL and natural gas production from the Eagle Ford Shale was 3,819 Mbbl and 2.5 Bcf, respectively, or 25.5 Bcfe, representing approximately 4% of our total equivalent production. As of December 31, 2016, we had a total of 229.3 net wells in the Eagle Ford, of which approximately 90% are operated by us.
During 2016, we invested $91.8 million in the Eagle Ford Shale and drilled or participated in drilling 9.0 net wells, completed 13.0 net wells and turned in line 13.0 net wells. As of December 31, 2016, we had 19.0 net wells that were waiting on completion. We exited 2016 with one drilling rig operating in the play and plan to exit 2017 with one rig operating.
Other Properties
In addition to our core unconventional resource plays, we also operate or participate in other conventional and unconventional plays throughout the continental United States, including the Devonian Shale, Big Lime, Weir and Berea formations in West Virginia; the Haynesville, Bossier, and James Lime formations in east Texas; and the Utica Shale in Pennsylvania.
Ancillary to our exploration, development and production operations, we operate a number of gas gathering and transmission pipeline systems, made up of approximately 3,100 miles of pipeline with interconnects to three interstate transmission systems, four local distribution companies and numerous end users. The majority of our pipeline infrastructure is located in West Virginia and is regulated by the Federal Energy Regulatory Commission (FERC) for interstate transportation service and the West Virginia Public Service Commission (WVPSC) for intrastate transportation service. As such, the transportation rates and terms of service of our pipeline subsidiary, Cranberry Pipeline Corporation, are subject to the rules and regulations of the FERC and the WVPSC. Our natural gas gathering and transmission pipeline systems in West Virginia enable us to connect new wells quickly and transport natural gas from the wellhead directly to interstate pipelines, local distribution companies and industrial end users. Control of our gathering and transmission pipeline systems also enables us to purchase, transport and sell natural gas produced by third parties. In addition, we can engage in development drilling without relying upon third parties to transport our natural gas and incur only the incremental costs of pipeline and compressor additions to our system.
We also have two natural gas storage fields located in West Virginia with a combined working capacity of approximately 4 Bcf. We use these storage fields to take advantage of the seasonal variations in the demand for natural gas typically associated with winter natural gas sales, while maintaining production at a nearly constant rate throughout the year. The pipeline systems and storage fields are fully integrated with our operations in West Virginia.

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ACQUISITIONS
In December 2014, we completed the acquisition of certain proved and unproved oil and gas properties located in the Eagle Ford Shale in south Texas for $30.5 million. Total cash consideration paid was $29.9 million, which reflects the impact of customary purchase price adjustments and acquisition costs.
In October 2014, we purchased certain proved and unproved oil and gas properties located in the Eagle Ford Shale in south Texas for $210.0 million. Total cash consideration paid at closing was $185.2 million, which reflects the impact of customary purchase price adjustments and acquisition costs. In April 2015, we completed the acquisition of the remaining oil and gas properties for which the seller was unable to obtain consents at closing for $16.0 million.
DIVESTITURES
In February 2016, we sold certain proved and unproved oil and gas properties in east Texas to a third party for $56.4 million and recognized a $0.5 million gain on sale of assets.
In October 2014, we sold certain proved and unproved oil and gas properties in east Texas to a third party for $44.3 million and recognized a $19.9 million gain on sale of assets.
In December 2013, we sold certain proved and unproved oil and gas properties located in the Oklahoma and Texas panhandles to Chaparral Energy, L.L.C. for $160.0 million and recognized a $19.4 million gain on sale of assets. We also sold certain proved and unproved oil and gas properties located in Oklahoma, Texas and Kansas to a third party for $123.4 million and recognized a $17.5 million loss on sale of assets.
In 2013, we sold various other proved and unproved oil and gas properties for $44.3 million and recognized an aggregate net gain of $19.5 million.
In 2012, we sold certain unproved oil and gas properties and other assets for $169.3 million and recognized an aggregate net gain of $50.6 million.
MARKETING
Substantially all of our natural gas is sold at market sensitive prices under both long-term and short-term sales contracts and is subject to seasonal price swings. The principal markets for our natural gas are in the northeastern United States where we sell natural gas to industrial customers, local distribution companies, gas marketers and power generation facilities.
We also incur transportation and gathering expenses to move our natural gas production from the wellhead to our principal markets in the United States. The majority of our natural gas production is transported on third-party gathering systems and interstate pipelines where we have long-term contractual capacity arrangements or use purchaser-owned capacity under both long-term and short-term sales contracts.
To date, we have not experienced significant difficulty in transporting or marketing our natural gas production as it becomes available; however, there is no assurance that we will always be able to transport and market all of our production.
Our crude oil is sold at market sensitive prices under long-term sales contracts. The principal markets for our oil are in the south Texas refining region where we can market to refineries and oil pipeline customers.
Delivery Commitments
We have entered into various firm sales contracts to deliver and sell natural gas. We believe we will have sufficient production quantities to meet substantially all of our commitments, but may be required to purchase natural gas from third parties to satisfy shortfalls should they occur.
A summary of our firm sales commitments as of December 31, 2016 are set forth in the table below:
 
 
Natural Gas (Bcfe)
2017
 
116.9

2018
 
294.0

2019
 
614.8

2020
 
614.8

2021
 
575.0


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We utilize a part of our firm transportation capacity to deliver natural gas under the majority of these firm sales contracts and have entered into numerous agreements for transportation of our production. Some of these contracts have volumetric requirements which could require monetary shortfall penalties if our production is inadequate to meet the terms. However, we do not believe we have a financial commitment due based on our current proved reserves and production levels from which we can fulfill these obligations.
RISK MANAGEMENT
From time to time, we use derivative financial instruments to manage price risk associated with our natural gas and crude oil production. While there are many different types of derivatives available, we generally utilize collar, swap and basis swap agreements designed to manage price risk more effectively. The collar arrangements are a combination of put and call options used to establish floor and ceiling prices for a fixed volume of natural gas or crude oil production during a certain time period. They provide for payments to counterparties if the index price exceeds the ceiling and payments from the counterparties if the index price falls below the floor. The swap agreements call for payments to, or receipts from, counterparties based on whether the index price for the period is greater or less than the fixed price established for the particular period under the swap agreement.
During 2016, natural gas swaps covered 52.0 Bcf, or 9%, of natural gas production at a weighted-average price of $2.51 per Mcf. Crude oil collars with floor prices of $38.00 per Bbl and ceiling prices ranging from $47.10 to $47.50 per Bbl covered 1.4 Mmbbl, or 34%, of crude oil production at a weighted-average price of $45.61 per Bbl.
As of December 31, 2016, we had the following outstanding commodity derivatives:
 
 
 
 
 
 
 
Collars
 
 
 
 
 
 
 
 
 
 
 
Floor
 
Ceiling
 
Swaps
 
Basis Swaps
Type of Contract
 
Volume
 
Contract Period
 
Range
 
Weighted-
Average
 
Range
 
Weighted-
Average
 
Weighted-
Average
 
Weighted- Average
Natural gas
 
35.5

Bcf
 
Jan. 2017 - Dec. 2017
 

 

 

 

 
$
3.12

 
 
Natural gas
 
16.2

Bcf
 
Feb. 2017 - Dec. 2017
 
 
 
 
 
 
 
 
 
$
3.46

 
 
Natural gas
 
35.5

Bcf
 
Jan. 2017 - Dec. 2017
 
$

 
$
3.09

 
$3.42-$3.45
 
$
3.43

 

 

Natural gas
 
21.3

Bcf
 
Jan. 2018 - Dec. 2019
 

 

 

 

 

 
$
0.42

Crude oil
 
1.8

Mmbbl
 
Jan. 2017 - Dec. 2017
 
$

 
$
50.00

 
$56.25-$56.50
 
$
56.39

 

 
 
In the table above, natural gas prices are stated per Mcf and crude oil prices are stated per barrel.
While we have hedged a portion of our expected natural gas and crude oil production for 2017 and beyond, any unhedged production is directly exposed to the volatility in natural gas and crude oil market prices, whether favorable or unfavorable. We will continue to evaluate the benefit of using derivatives in the future. Please read "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures about Market Risk" for further discussion related to our use of derivatives.

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RESERVES
The following table presents our estimated proved reserves for the periods indicated:
 
December 31,
 
2016
 
2015
 
2014
Natural Gas (Bcf)
 
 
 

 
 

Proved developed reserves
5,500

 
4,676

 
4,339

Proved undeveloped reserves(1)
2,781

 
3,180

 
2,743

 
8,281

 
7,856

 
7,082

Crude Oil & NGLs (Mbbl)(2)
 
 
 

 
 

Proved developed reserves
20,442

 
25,586

 
27,221

Proved undeveloped reserves(1)
28,730

 
30,144

 
25,915

 
49,172

 
55,730

 
53,136

 
 
 
 
 
 
Natural gas equivalent (Bcfe)(3)
8,576

 
8,190

 
7,401

Reserve life index (in years)(4)
13.7

 
13.6

 
13.9

_______________________________________________________________________________
(1)
Proved undeveloped reserves for 2016, 2015 and 2014 include reserves drilled but uncompleted of 488.7 Bcfe, 937.4 Bcfe and 501.1 Bcfe, respectively.
(2)
NGL reserves were less than 1.0% of our total proved equivalent reserves for 2016, 2015 and 2014, and 13.6%, 16.1% and 13.5% of our proved crude oil and NGL reserves for 2016, 2015 and 2014, respectively.
(3)
Natural gas equivalents are determined using a ratio of 6 Mcf of natural gas to 1 Bbl of crude oil, condensate or NGLs.
(4)
Reserve life index is equal to year-end proved reserves divided by annual production for the years ended December 31, 2016, 2015 and 2014, respectively.
Our proved reserves totaled approximately 8,576 Bcfe at December 31, 2016, of which 97% were natural gas. This reserve level was up by 5% from 8,190 Bcfe at December 31, 2015. In 2016, we added 683.9 Bcfe of proved reserves through extensions, discoveries and other additions, primarily due to the positive results from our drilling and completion program in the Dimock field in northeast Pennsylvania. We also had a net upward revision of 370.1 Bcfe, which was primarily due to an upward performance revision of 658.7 Bcfe associated with positive drilling results in our Dimock field in northeast Pennsylvania, partially offset by a downward revisions of 246.0 Bcfe associated with proved undeveloped (PUD) reserves reclassifications as a result of the five year limitation and 42.6 Bcfe associated with lower commodity prices. In 2016, we produced 627.1 Bcfe.
Our reserves are sensitive to natural gas and crude oil prices and their effect on the economic productive life of producing properties. Our reserves are based on the 12-month average natural gas, crude oil and NGL index prices, calculated as the unweighted arithmetic average for the first day of the month price for each month during the year. Increases in commodity prices may result in a longer economic productive life of a property or result in more economically viable proved undeveloped reserves to be recognized. Decreases in prices may result in negative impacts of this nature.
For additional information regarding estimates of proved reserves, the audit of such estimates by Miller and Lents, Ltd. (Miller and Lents) and other information about our reserves, including the risks inherent in our estimates of proved reserves, see the Supplemental Oil and Gas Information to the Consolidated Financial Statements included in Item 8 and “Risk Factors-Our proved reserves are estimates. Any material inaccuracies in our reserve estimates or underlying assumptions could cause the quantities and net present value of our reserves to be overstated or understated” in Item 1A.
Technologies Used In Reserves Estimates
We utilize various traditional methods to estimate our natural gas, crude oil and NGL reserves, including decline curve extrapolations, material balance calculations, volumetric calculations and analogies, and in some cases a combination of these methods. In addition, at times we may use seismic interpretations to confirm continuity of a formation in combination with traditional technologies; however, seismic interpretations are not used in the volumetric computation.

11


Internal Control
Our Vice President, Engineering and Technology is the technical person responsible for our internal reserves estimation process and provides oversight of our corporate reservoir engineering department, which consists of three engineers, and the annual audit of our year-end reserves by Miller and Lents. He has a Bachelor of Science degree in Chemical Engineering, specializing in petroleum engineering, and over 34 years of industry experience with positions of increasing responsibility in operations, engineering and evaluations. He has worked in the area of reserves and reservoir engineering for 25 years and is a member of the Society of Petroleum Engineers.
Our reserves estimation process is coordinated by our corporate reservoir engineering department. Reserve information, including models and other technical data, are stored on secured databases on our network. Certain non-technical inputs used in the reserves estimation process, including commodity prices, production and development costs and ownership percentages, are obtained by other departments and are subject to testing as part of our annual internal control process. We also engage Miller and Lents, independent petroleum engineers, to perform an independent audit of our estimated proved reserves. Upon completion of the process, the estimated reserves are presented to senior management.
Miller and Lents made independent estimates for 100% of our proved reserves estimates and concluded, in their judgment, we have an effective system for gathering data and documenting information required to estimate our proved reserves and project our future revenues. Further, Miller and Lents has concluded (1) the reserves estimation methods employed by us were appropriate, and our classification of such reserves was appropriate to the relevant SEC reserve definitions, (2) our reserves estimation processes were comprehensive and of sufficient depth, (3) the data upon which we relied were adequate and of sufficient quality, and (4) the results of our estimates and projections are, in the aggregate, reasonable. A copy of the audit letter by Miller and Lents dated January 23, 2017, has been filed as an exhibit to this Form 10-K.
Qualifications of Third Party Engineers
The technical person primarily responsible for the audit of our reserves estimates at Miller and Lents meets the requirements regarding qualifications, independence, objectivity, and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Miller and Lents is an independent firm of petroleum engineers, geologists, geophysicists, and petro physicists; they do not own an interest in our properties and are not retained on a contingent fee basis.
Proved Undeveloped Reserves
At December 31, 2016 we had 2,953.3 Bcfe of PUD reserves associated with future development costs of $1.5 billion, which represents a decrease of 407.9 Bcfe compared to December 31, 2015. Approximately 94% of our PUD reserves are located in Susquehanna County, Pennsylvania. We expect to complete approximately 99% of our PUD reserves associated with drilled but uncompleted wells by the end of 2017. Future development plans are reflective of the expected increase in commodity prices and have been established based on cash on hand, expected available cash flows from operations and availability under our revolving credit facility. As of December 31, 2016, all PUD reserves are expected to be drilled and completed within five years of initial disclosure of these reserves.
The following table is a reconciliation of the change in our PUD reserves (Bcfe):
 
Year Ended 
 December 31, 2016
Balance at beginning of period
3,361.2

Transfers to proved developed
(1,215.5
)
Additions
583.7

Revision of prior estimates
223.9

Balance at end of period
2,953.3

Changes in PUD reserves that occurred during the year were due to:
transfer of 1,215.5 Bcfe from PUD to proved developed reserves based on total capital expenditures of $211.1 million during 2016;
new PUD reserve additions of 583.7 Bcfe primarily in the Dimock field in northeast Pennsylvania; and

12


positive PUD reserve revisions of 223.9 Bcfe resulting from positive performance revisions of 515.9 Bcfe associated with the drilling of longer lateral wells and completing more frac stages in our Dimock field in northeast Pennsylvania, partially offset by downward revisions of 246.0 Bcfe associated with PUD reclassifications as a result of the five year limitation and negative price revisions of 46.0 Bcfe.
PRODUCTION, SALES PRICE AND PRODUCTION COSTS
The following table presents historical information about our production volumes for natural gas and oil (including NGLs), average natural gas and crude oil sales prices, and average production costs per equivalent, including our Dimock field located in northeast Pennsylvania, which represents more than 15% of our total proved reserves:
 
Year Ended December 31,
 
2016
 
2015
 
2014
Production Volumes
 

 
 

 
 

Natural gas (Bcf)
 

 
 

 
 

Dimock field
581.9

 
540.8

 
479.8

Total
600.4

 
566.0

 
508.0

Oil (Mbbl)(1)
 

 
 

 
 

Total
4,454

 
6,096

 
3,961

Equivalents (Bcfe)
 

 
 

 
 

Dimock field
581.9

 
540.8

 
479.8

Total
627.1

 
602.5

 
531.8

Natural Gas Average Sales Price ($/Mcf)
 

 
 

 
 

Dimock field
$
1.69

 
$
1.78

 
$
3.37

Total (excluding realized impact of derivative settlements)
$
1.70

 
$
1.81

 
$
3.41

Total (including realized impact of derivative settlements)
$
1.70

 
$
2.15

 
$
3.28

Oil Average Sales Price ($/Bbl)
 

 
 

 
 

Total (excluding realized impact of derivative settlements)
$
37.65

 
$
45.72

 
$
87.65

Total (including realized impact of derivative settlements)
$
37.30

 
$
45.72

 
$
88.50

Average Production Costs ($/Mcfe)
 

 
 

 
 

Dimock field
$
0.03

 
$
0.04

 
$
0.07

Total
$
0.11

 
$
0.18

 
$
0.22

_______________________________________________________________________________
(1)
Includes NGLs which represent less than 1.0% of our equivalent production for all years presented and 9.9%, 11.0%, and 9.4% of our oil production for the years ended December 31, 2016, 2015 and 2014, respectively.
ACREAGE
Our interest in both developed and undeveloped properties is primarily in the form of leasehold interests held under customary mineral leases. These leases provide us the right to develop oil and/or natural gas on the properties. Their primary terms range in length from approximately three to 10 years. These properties are held for longer periods if production is established.
The following table summarizes our gross and net developed and undeveloped leasehold and mineral fee acreage at December 31, 2016:
 
Developed
 
Undeveloped
 
Total
 
Gross
 
Net
 
Gross
 
Net
 
Gross
 
Net
Leasehold acreage
973,863
 
861,370
 
420,018
 
328,943
 
1,393,881
 
1,190,313
Mineral fee acreage
151,440
 
130,387
 
61,844
 
52,276
 
213,284
 
182,663
Total
1,125,303
 
991,757
 
481,862
 
381,219
 
1,607,165
 
1,372,976

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Total Net Undeveloped Acreage Expiration
In the event that production is not established or we take no action to extend or renew the terms of our leases, our net undeveloped acreage that will expire over the next three years as of December 31, 2016 is 78,174, 34,926 and 34,306 for the years ending December 31, 2017, 2018 and 2019, respectively.
We expect to retain substantially all of our expiring acreage either through drilling activities, renewal of the expiring leases or through the exercise of extension options. As of December 31, 2016, approximately 29% of our expiring acreage disclosed above is located in our core areas of operation where we currently expect to continue development activities and/or extend the lease terms.
WELL SUMMARY
The following table presents our ownership in productive natural gas and crude oil wells at December 31, 2016. This summary includes natural gas and crude oil wells in which we have a working interest:
 
Gross
 
Net
Natural gas
3,920

 
3,623.9

Crude oil
292

 
240.2

Total(1)
4,212

 
3,864.1

_______________________________________________________________________________
(1)
Total percentage of gross operated wells is 93.5%.
DRILLING ACTIVITY
We drilled and completed wells or participated in the drilling and completion of wells as indicated in the table below. The information below should not be considered indicative of future performance, nor should a correlation be assumed between the number of productive wells drilled, quantities of reserves found or economic value.
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
Gross
 
Net
 
Gross
 
Net
 
Gross
 
Net
Development Wells
 
 
 
 
 
 
 
 
 
 
 
Productive
76

 
76.0

 
106

 
97.85

 
173

 
150.2

Dry

 

 

 

 

 

Exploratory Wells
 
 
 
 
 
 
 
 
 
 
 
Productive

 

 
1

 
1.0

 

 

Dry

 

 

 

 
1

 
1.0

Total
76

 
76.0

 
107

 
98.9

 
174

 
151.2

 
 
 
 
 
 
 
 
 
 
 
 
Acquired Wells

 

 
1

 
1.0

 
26

 
23.7

During the year ended December 31, 2016, we completed 62 gross wells (62.0 net) that were drilled in prior years.
The following table sets forth information about wells for which drilling was in progress or which were drilled but uncompleted at December 31, 2016, which are not included in the above table:
 
 
Drilling In Progress
 
Drilled But Uncompleted
 
 
Gross
 
Net
 
Gross
 
Net
Development wells
 
4

 
4.0

 
51

 
45.2

Exploratory wells
 
1

 
1.0

 

 

Total
 
5

 
5.0

 
51

 
45.2



14


OTHER BUSINESS MATTERS
Title to Properties
We believe that we have satisfactory title to all of our producing properties in accordance with generally accepted industry standards. Individual properties may be subject to burdens such as royalty, overriding royalty, carried, net profits, working and other outstanding interests customary in the industry. In addition, interests may be subject to obligations or duties under applicable laws or burdens such as production payments, ordinary course liens incidental to operating agreements and for current taxes or development obligations under oil and gas leases. As is customary in the industry in the case of undeveloped properties, preliminary investigations of record title are made at the time of lease acquisition. Complete investigations are made prior to the consummation of an acquisition of producing properties and before commencement of drilling operations on undeveloped properties.
Competition
The oil and gas industry is highly competitive and we experience strong competition in our primary producing areas. We primarily compete with integrated, independent and other energy companies for the sale and transportation of our oil and natural gas production to marketing companies and end users. Furthermore, the oil and gas industry competes with other energy industries that supply fuel and power to industrial, commercial and residential consumers. Many of these competitors have greater financial, technical and personnel resources. The effect of these competitive factors cannot be predicted.
Price, contract terms, availability of rigs and related equipment and quality of service, including pipeline connection times and distribution efficiencies affect competition. We believe that our extensive acreage position and our access to gathering and pipeline infrastructure in Pennsylvania, along with our expected activity level and the related services and equipment that we have secured for the upcoming years, enhance our competitive position over other producers who do not have similar systems or services in place.
Major Customers
During the years ended December 31, 2016, 2015 and 2014, two customers accounted for approximately 19% and 10%, two customers accounted for approximately 16% and 14% and two customers accounted for approximately 14% and 10%, respectively, of our total sales. We do not believe that the loss of any of these customers would have a material adverse effect on us because alternative customers are readily available.
Seasonality
Demand for natural gas has historically been seasonal, with peak demand and typically higher prices occurring during the colder winter months.
Regulation of Oil and Natural Gas Exploration and Production
Exploration and production operations are subject to various types of regulation at the federal, state and local levels. This regulation includes requiring permits to drill wells, maintaining bonding requirements to drill or operate wells, and regulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties on which wells are drilled, and the plugging and abandoning of wells. Our operations are also subject to various conservation laws and regulations. These include the regulation of the size of drilling and spacing units or proration units, the density of wells that may be drilled in a given field and the unitization or pooling of oil and natural gas properties. Some states allow the forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibiting the venting or flaring of natural gas and imposing certain requirements regarding the ratability of production. The effect of these regulations is to limit the amounts of oil and natural gas we can produce from our wells, and to limit the number of wells or the locations where we can drill. Because these statutes, rules and regulations undergo constant review and often are amended, expanded and reinterpreted, we are unable to predict the future cost or impact of regulatory compliance. The regulatory burden on the oil and gas industry increases its cost of doing business and, consequently, affects its profitability. We do not believe, however, we are affected differently by these regulations than others in the industry.
Natural Gas Marketing, Gathering and Transportation
Federal legislation and regulatory controls have historically affected the price of the natural gas we produce and the manner in which our production is transported and marketed. Under the Natural Gas Act of 1938 (NGA), the Natural Gas Policy Act of 1978 (NGPA), and the regulations promulgated under those statutes, the FERC regulates the interstate sale for resale of natural gas and the transportation of natural gas in interstate commerce, although facilities used in the production or

15


gathering of natural gas in interstate commerce are generally exempted from FERC jurisdiction. Effective beginning in January 1993, the Natural Gas Wellhead Decontrol Act deregulated natural gas prices for all “first sales” of natural gas, which definition covers all sales of our own production. In addition, as part of the broad industry restructuring initiatives described below, the FERC granted to all producers such as us a “blanket certificate of public convenience and necessity” authorizing the sale of natural gas for resale without further FERC approvals. As a result of this policy, all of our produced natural gas is sold at market prices, subject to the terms of any private contracts that may be in effect. In addition, under the provisions of the Energy Policy Act of 2005 (2005 Act), the NGA was amended to prohibit any forms of market manipulation in connection with the purchase or sale of natural gas. Pursuant to the 2005 Act, the FERC established regulations intended to increase natural gas pricing transparency by, among other things, requiring market participants to report their gas sales transactions annually to the FERC. The 2005 Act also significantly increased the penalties for violations of the NGA and the FERC’s regulations up to $1,000,000 per day per violation. This maximum penalty authority established by statute will continue to be adjusted periodically for inflation. In 2010, the FERC issued Penalty Guidelines for the determination of civil penalties and procedure under its enforcement program.
Some of our pipelines are subject to regulation by the FERC. We own an intrastate natural gas pipeline through our wholly‑owned subsidiary, Cranberry Pipeline Corporation, that provides interstate transportation and storage services pursuant to Section 311 of the NGPA, as well as intrastate transportation and storage services that are regulated by the West Virginia Public Service Commission. For qualified intrastate pipelines, FERC allows interstate transportation service “on behalf of” interstate pipelines or local distribution companies served by interstate pipelines without subjecting the intrastate pipeline to the more comprehensive NGA jurisdiction of the FERC. We provide Section 311 service in accordance with a publicly available Statement of Operating Conditions filed with FERC under rates that are subject to approval by the FERC. On December 18, 2012, we filed with the FERC a petition for rate approval of our existing interstate transportation rates and a proposed decrease of our storage rates. By Letter Order issued May 15, 2013, the FERC approved the rate petition.
In 2012 we executed a precedent agreement with Constitution, at the time a wholly owned subsidiary of Williams Partners L.P., for 500,000 Dth per day of pipeline capacity and acquired a 25% equity interest in a pipeline to be constructed in the states of New York and Pennsylvania. On June 12, 2013, the project sponsors filed an application with FERC requesting a certificate of public convenience and necessity to construct and operate the 124‑mile pipeline project that, once completed, will provide 650,000 Dth per day of pipeline capacity. On December 2, 2014, the FERC issued a certificate of public convenience and necessity, authorizing the construction and operation of the pipeline project. While FERC has issued the certificate, the project scope or timeline for construction and eventual in-service date has been impacted by the public regulatory permitting process. Currently, the in-service date for Constitution is expected in the second half of 2018. When placed into service, the project pipeline will be an interstate pipeline subject to full regulation by FERC under the NGA.
Additionally, in 2014 we executed a precedent agreement with Transcontinental Gas Pipe Line Company, LLC (Transco) for 850,000 Dth per day of pipeline capacity and acquired a 20% equity interest in Meade, which was formed to construct a pipeline with Transco from Susquehanna County, Pennsylvania to an interconnect with Transco's mainline in Lancaster County, Pennsylvania. The proposed pipeline will be an interstate pipeline subject to full regulation by the FERC under the NGA. Transco filed an application for a certificate of public convenience and necessity with the FERC on March 31, 2015. On February 3, 2017, the FERC issued a certificate of public convenience and necessity, authorizing the construction and operation of the pipeline project.
Our production and gathering facilities are not subject to jurisdiction of the FERC; however, our natural gas sales prices nevertheless continue to be affected by intrastate and interstate gas transportation regulation because the cost of transporting the natural gas once sold to the consuming market is a factor in the prices we receive. Beginning with Order No. 436 in 1985 and continuing through Order No. 636 in 1992 and Order No. 637 in 2000, the FERC has adopted a series of rulemakings that have significantly altered the transportation and marketing of natural gas. These changes were intended by the FERC to foster competition by, among other things, requiring interstate pipeline companies to separate their wholesale gas marketing business from their gas transportation business, and by increasing the transparency of pricing for pipeline services. The FERC has also established regulations governing the relationship of pipelines with their marketing affiliates, which essentially require that designated employees function independently of each other, and that certain information not be shared. The FERC has also implemented standards relating to the use of electronic data exchange by the pipelines to make transportation information available on a timely basis and to enable transactions to occur on a purely electronic basis.
In light of these statutory and regulatory changes, most pipelines have divested their natural gas sales functions to marketing affiliates, which operate separately from the transporter and in direct competition with all other merchants. Most pipelines have also implemented the large‑scale divestiture of their natural gas gathering facilities to affiliated or non‑affiliated companies. Interstate pipelines are required to provide unbundled, open and nondiscriminatory transportation and transportation‑related services to producers, gas marketing companies, local distribution companies, industrial end users and other customers seeking such services. As a result of FERC requiring natural gas pipeline companies to separate marketing and

16


transportation services, sellers and buyers of natural gas have gained direct access to pipeline transportation services, and are better able to conduct business with a larger number of counterparties. We believe these changes generally have improved our access to markets while, at the same time, substantially increasing competition in the natural gas marketplace. We cannot predict what new or different regulations the FERC and other regulatory agencies may adopt, or what effect subsequent regulations may have on our activities. Similarly, we cannot predict what proposals, if any, that affect the oil and natural gas industry might actually be enacted by Congress or the various state legislatures and what effect, if any, such proposals might have on us. Further, we cannot predict whether the recent trend toward federal deregulation of the natural gas industry will continue or what effect future policies will have on our sale of gas.
Federal Regulation of Swap Transactions
We use derivative financial instruments such as collar, swap and basis swap agreements to attempt to more effectively manage price risk due to the impact of changes in commodity prices on our operating results and cash flows. Following enactment of the Dodd‑Frank Wall Street Reform and Consumer Protection Act (Dodd‑Frank Act) in July 2010, the Commodity Futures Trading Commission (CFTC) has promulgated regulations to implement statutory requirements for swap transactions, including certain options. The CFTC regulations are intended to implement a regulated market in which most swaps are executed on registered exchanges or swap execution facilities and cleared through central counterparties. In addition, all swap market participants are subject to new reporting and recordkeeping requirements related to their swap transactions. We believe that our use of swaps to hedge against commodity exposure qualifies us as an end‑user, exempting us from the requirement to centrally clear our swaps. Nevertheless, changes to the swap market as a result of Dodd‑Frank implementation could significantly increase the cost of entering into new swaps or maintaining existing swaps, materially alter the terms of new or existing swap transactions and/or reduce the availability of new or existing swaps. If we reduce our use of swaps as a result of the Dodd‑Frank Act and regulations, our results of operations may become more volatile and our cash flows may be less predictable.
Federal Regulation of Petroleum
Our sales of crude oil and NGLs are not regulated and are made at market prices. However, the price received from the sale of these products is affected by the cost of transporting the products to market. Much of that transportation is through interstate common carrier pipelines, which are regulated by the FERC under the Interstate Commerce Act (ICA). FERC requires that pipelines regulated under the ICA file tariffs setting forth the rates and terms and conditions of service and that such service not be unduly discriminatory or preferential.
Effective January 1, 1995, the FERC implemented regulations generally grandfathering all previously approved interstate transportation rates and establishing an indexing system for those rates by which adjustments are made annually based on the rate of inflation, subject to certain conditions and limitations. These regulations may increase or decrease the cost of transporting crude oil and NGLs by interstate pipeline, although the annual adjustments may result in decreased rates in a given year. Every five years, the FERC must examine the relationship between the annual change in the applicable index and the actual cost changes experienced in the oil pipeline industry. In December 2015, to implement this required five‑year re‑determination, the FERC established an upward adjustment in the index to track oil pipeline cost changes and determined that the Producer Price Index for Finished Goods plus 1.23% should be the oil pricing index for the five‑year period beginning July 1, 2016. The result of indexing is a “ceiling rate” for each rate, which is the maximum at which the pipeline may set its interstate transportation rates. A pipeline may also file cost‑of‑service based rates if rate indexing will be insufficient to allow the pipeline to recover its costs. Rates are subject to challenge by protest when they are filed or changed. For indexed rates, complaints alleging that the rates are unjust and unreasonable may only be pursued if the complainant can show that a substantial change has occurred since the enactment of Energy Policy Act of 1992 in either the economic circumstances of the pipeline or in the nature of the services provided, that were a basis for the rate. There is no such limitation on complaints alleging that the pipeline’s rates or terms and conditions of service are unduly discriminatory or preferential. We are unable to predict with certainty the effect upon us of these periodic reviews by the FERC of the pipeline index.
Pipeline Safety Regulation
Certain of our pipeline systems and storage fields in West Virginia are regulated for safety compliance by the U.S. Department of Transportation (DOT) and the West Virginia Public Service Commission. In 2002, Congress enacted the Pipeline Safety Improvement Act of 2002 (2002 Act), which contains a number of provisions intended to increase pipeline operating safety. The DOT’s final regulations implementing the act became effective February 2004. Among other provisions, the regulations require that pipeline operators implement a pipeline integrity management program that must at a minimum include an inspection of gas transmission and non‑rural gathering pipeline facilities in certain locations within ten years, and at least every seven years thereafter. On March 15, 2006, the DOT revised these regulations to define more clearly the categories of gathering facilities subject to DOT regulation, establish new safety rules for certain gathering lines in rural areas, revise the

17


current regulations applicable to safety and inspection of gathering lines in non‑rural areas, and adopt new compliance deadlines. The initial baseline assessments under our integrity management program for our pipeline system in West Virginia were completed in January 2013. Pipeline integrity was confirmed at each of the targeted assessment sites. A new seven‑year reassessment cycle began during 2013.
In December 2006, Congress enacted the Pipeline Inspection, Protection, Enforcement and Safety Act of 2006 (PIPES Act), which reauthorized the programs adopted under the 2002 Act, proposed enhancements for state programs to reduce excavation damage to pipelines, established increased federal enforcement of one‑call excavation programs, and established a new program for review of pipeline security plans and critical facility inspections. Pursuant to the PIPES Act, the DOT issued regulations on May 5, 2011 that would, with limited exceptions, subject all low‑stress hazardous liquids pipelines, regardless of location or size, to the DOT’s pipeline safety regulations.
In December 2011, Congress passed the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011. The act increased the maximum civil penalties for pipeline safety administrative enforcement actions; required the DOT to issue regulations requiring the use of automatic or remote‑controlled shutoff valves on new and rebuilt pipelines and to study and report on the expansion of integrity management requirements, the sufficiency of existing gathering line regulations to ensure safety, and the use of leak detection systems by hazardous liquid pipelines; required pipeline operators to verify their records on maximum allowable operating pressure; and imposed new emergency response and incident notification requirements. The act reflects many of the areas of possible regulatory change described in an Advance Notice of Proposed Rulemaking issued by the DOT on August 18, 2011, including revisions to DOT's civil penalty authority and the requirement that pipelines verify maximum allowable operating pressure.
On December 3, 2009, the DOT adopted a regulation requiring gas and hazardous liquid pipelines that use supervisory control and data acquisition (SCADA) systems and have at least one controller and control room to develop written control room management procedures by August 1, 2011 and implement the procedures by February 1, 2013. The DOT expedited the program implementation deadline to October 1, 2011 for most of the requirements, except for certain provisions regarding adequate information and alarm management, which had a program implementation deadline of August 1, 2012. We developed and implemented the required control room management procedures in accordance with the deadlines. Effective January 1, 2011, natural gas and hazardous liquid pipelines also became subject to updated reporting requirements with DOT.
The cost of compliance with DOT’s integrity management rules depends on integrity testing and the repairs found to be necessary by such testing. Changes to the amount of pipe subject to integrity management, whether by expansion of the definition of the type of areas subject to integrity management procedures or of the applicability of such procedures outside of those defined areas can have a significant impact on costs we may incur to ensure compliance. On April 8, 2016, the DOT’s Pipeline and Hazardous Materials Safety Administration (PHMSA) published a Notice of Proposed Rulemaking that would amend existing integrity management requirements, expand assessment and repair requirements to pipelines in areas with medium population densities, and extend regulatory requirements to onshore gas gathering lines that are currently exempt. PHMSA issued, but has yet to publish, a similar rule for hazardous liquids pipelines on January 13, 2017. That rule extends regulatory reporting requirements to all liquid gathering lines, requires additional event-driven and periodic inspections, requires use of leak detection systems on all hazardous liquid pipelines, modifies repair criteria, and requires certain pipelines to eventually accommodate inline inspection tools. It is unclear when or if this rule will go into effect as, on January 20, 2017, the Trump Administration requested that all regulations that had been sent to the Office of the Federal Register, but not yet published, be immediately withdrawn for further review.
In the future other laws and regulations may be enacted or adopted or existing laws may be reinterpreted in a manner that could impact our compliance costs. In addition, we may be subject to DOT’s enforcement actions and penalties for failure to comply with pipeline regulations.
Environmental and Safety Regulations
General. Our operations are subject to extensive federal, state and local laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. Permits are required for the operation of our various facilities. These permits can be revoked, modified or renewed by issuing authorities. Governmental authorities enforce compliance with their regulations through fines, injunctions or both. Government regulations can increase the cost of planning, designing, installing and operating, and can affect the timing of installing and operating, oil and natural gas facilities. Although we believe that compliance with environmental regulations will not have a material adverse effect on us, risks of substantial costs and liabilities related to environmental compliance issues are part of oil and natural gas production operations. No assurance can be given that significant costs and liabilities will not be incurred. Also, it is possible that other developments, such as stricter environmental laws and regulations, and claims for damages to property or persons resulting from oil and natural gas production could result in substantial costs and liabilities to us.

18


U.S. laws and regulations applicable to our operations include those controlling the discharge of materials into the environment, requiring removal and cleanup of materials that may harm the environment or otherwise relating to the protection of the environment.
Solid and Hazardous Waste. We currently own or lease, and have in the past owned or leased, numerous properties that were used for the production of oil and natural gas for many years. Although operating and disposal practices that were standard in the industry at the time may have been utilized, it is possible that hydrocarbons or other wastes may have been disposed of or released on or under the properties currently owned or leased by us. State and federal laws applicable to oil and gas wastes and properties have become stricter over time. Under these increasingly stringent requirements, we could be required to remove or remediate previously disposed wastes (including wastes disposed or released by prior owners and operators) or clean up property contamination (including groundwater contamination by prior owners or operators) or to perform plugging operations to prevent future contamination.
We generate some hazardous wastes that are already subject to the Federal Resource Conservation and Recovery Act (RCRA) and comparable state statutes. The Environmental Protection Agency (EPA) has limited the disposal options for certain hazardous wastes. It is possible that certain wastes currently exempt from treatment as hazardous wastes may in the future be designated as hazardous wastes under RCRA or other applicable statutes. For example, in December 2016, the EPA and environmental groups entered into a consent decree to address the EPA’s alleged failure to timely assess its RCRA Subtitle D criteria regulations exempting certain exploration and production related oil and gas wastes from regulation as hazardous wastes under RCRA. The consent decree requires the EPA to propose a rulemaking by March 2019 for revision of certain Subtitle D criteria regulations pertaining to oil and gas wastes or to sign a determination that revision of the regulations is not necessary. We could, therefore, be subject to more rigorous and costly disposal requirements in the future than we encounter today.
Superfund. The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), also known as the “Superfund” law, and comparable state laws and regulations impose liability, without regard to fault or the legality of the original conduct, on certain persons with respect to the release of hazardous substances into the environment. These persons include the current and past owners and operators of a site where the release occurred and any party that treated or disposed of or arranged for the treatment or disposal of hazardous substances found at a site. Under CERCLA, such persons may be subject to joint and several strict liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies. CERCLA also authorizes the EPA, and in some cases, private parties, to undertake actions to clean up such hazardous substances, or to recover the costs of such actions from the responsible parties. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. In the course of business, we have used materials and generated wastes and will continue to use materials and generate wastes that may fall within CERCLA’s definition of hazardous substances. We may also be an owner or operator of sites on which hazardous substances have been released. As a result, we may be responsible under CERCLA for all or part of the costs to clean up sites where such substances have been released.
Oil Pollution Act. The Federal Oil Pollution Act of 1990 (OPA) and resulting regulations impose a variety of obligations on responsible parties related to the prevention of oil spills and liability for damages resulting from such spills in waters of the United States. The term “waters of the United States” has been broadly defined to include inland water bodies, including wetlands and intermittent streams. The OPA assigns joint and several strict liability to each responsible party for oil removal costs and a variety of public and private damages. The OPA also imposes ongoing requirements on operators, including the preparation of oil spill response plans and proof of financial responsibility to cover environmental cleanup and restoration costs that could be incurred in connection with an oil spill. We believe that we substantially comply with the Oil Pollution Act and related federal regulations.
Endangered Species Act. The Endangered Species Act (ESA) restricts activities that may affect endangered or threatened species or their habitats. While some of our operations may be located in areas that are designated as habitats for endangered or threatened species, we believe that we are in substantial compliance with the ESA, nor are we aware of any proposed listings that will affect our operations. However, the designation of previously unidentified endangered or threatened species could cause us to incur additional costs or become subject to operating restrictions or bans in the affected states.
Clean Water Act. The Federal Water Pollution Control Act (Clean Water Act) and resulting regulations, which are primarily implemented through a system of permits, also govern the discharge of certain contaminants into waters of the United States. Sanctions for failure to comply strictly with the Clean Water Act are generally resolved by payment of fines and correction of any identified deficiencies. However, regulatory agencies could require us to cease construction or operation of certain facilities or to cease hauling wastewaters to facilities owned by others that are the source of water discharges. We believe that we substantially comply with the Clean Water Act and related federal and state regulations.

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Clean Air Act. Our operations are subject to the Federal Clean Air Act and comparable local and state laws and regulations to control emissions from sources of air pollution. Federal and state laws require new and modified sources of air pollutants to obtain permits prior to commencing construction. Major sources of air pollutants are subject to more stringent, federally imposed requirements including additional permits. Federal and state laws designed to control toxic air pollutants and greenhouse gases might require installation of additional controls. Payment of fines and correction of any identified deficiencies generally resolve penalties for failure to comply strictly with air regulations or permits. Regulatory agencies could also require us to cease construction or operation of certain facilities or to install additional controls on certain facilities that are air emission sources. We believe that we substantially comply with the emission standards under local, state, and federal laws and regulations.
Some of our producing wells and associated facilities are subject to restrictive air emission limitations and permitting requirements. In 2012, the EPA published final New Source Performance Standards (NSPS) and National Emission Standards for Hazardous Air Pollutants (NESHAP) that amended the existing NSPS and NESHAP standards for oil and gas facilities and created new NSPS standards for oil and natural gas production, transmission and distribution facilities. In June 2016, the EPA published a final rule that updates and expands the NSPS by setting additional emissions limits for volatile organic compounds and regulating methane emissions for new and modified sources in the oil and gas industry. In addition, the EPA has announced that it intends to impose methane emission standards for existing sources and has issued information collection requests for oil and natural gas facilities. The EPA also published a final rule in June 2016 concerning aggregation of sources that affects source determinations for air permitting in the oil and gas industry. If we are unable to comply with air pollution regulations or to obtain permits for emissions associated with our operations, we could be required to forego construction, modification or certain operations. These regulations may also increase compliance costs for some facilities we own or operate, and result in administrative, civil and/or criminal penalties for non-compliance. Obtaining permits may delay the development of our oil and natural gas projects, including the construction and operation of facilities.
Safe Drinking Water Act. The Safe Drinking Water Act (SDWA) and comparable local and state provisions restrict the disposal, treatment or release of water produced or used during oil and gas development. Subsurface emplacement of fluids (including disposal wells or enhanced oil recovery) is governed by federal or state regulatory authorities that, in some cases, includes the state oil and gas regulatory authority or the state’s environmental authority. These regulations may increase the costs of compliance for some facilities.
Hydraulic Fracturing. Many of our exploration and production operations depend on the use of hydraulic fracturing to enhance production from oil and natural gas wells. This technology involves the injection of fluids, usually consisting mostly of water but typically including small amounts of several chemical additives, as well as sand into a well under high pressure in order to create fractures in the formation that allow oil or natural gas to flow more freely to the wellbore. Most of our wells would not be economical without the use of hydraulic fracturing to stimulate production from the well. Due to concerns raised relating to potential impacts of hydraulic fracturing on groundwater quality, legislative and regulatory efforts at the federal, state and local levels have been initiated to render permitting and compliance requirements more stringent for hydraulic fracturing or prohibit the activity altogether. Increased regulation and attention given to the hydraulic fracturing process could lead to greater opposition to oil and natural gas production activities using hydraulic fracturing techniques which could have an adverse effect on oil and natural gas production activities, including operational delays or increased operating costs in the production of oil and natural gas from the developing shale plays, or could make it more difficult to perform hydraulic fracturing. The adoption of 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 natural gas wells and increased compliance costs, which could increase costs of our operations and cause considerable delays in acquiring regulatory approvals to drill and complete wells. For additional information about hydraulic fracturing and related environmental matters, please read “Risk Factors-Federal and state legislation and regulatory initiatives related to oil and gas development, including hydraulic fracturing, could result in increased costs and operating restrictions or delays” in Item 1A.
Greenhouse Gas. In response to studies suggesting that emissions of carbon dioxide and certain other gases may be contributing to global climate change, the United States Congress has considered, but not enacted, legislation to reduce emissions of greenhouse gases from sources within the United States between 2012 and 2050. In addition, many states have already taken legal measures to reduce emissions of greenhouse gases, primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. The EPA has also begun to regulate carbon dioxide and other greenhouse gas emissions under existing provisions of the Clean Air Act. This includes proposed regulation of methane emissions from the oil and gas sector. If we are unable to recover or pass through a significant portion of our costs related to complying with current and future regulations relating to climate change and GHGs, it could materially affect our operations and financial condition. To the extent financial markets view climate change and GHG emissions as a financial risk, this could negatively impact our cost of, and access to, capital. Future legislation or regulations adopted to address climate change could also make our products more or less desirable than competing sources of energy.

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Please read “Risk Factors-Climate change and climate change legislation and regulatory initiatives could result in increased operating costs and decreased demand for the oil and natural gas that we produce” in Item 1A.
OSHA and Other Laws and Regulations. We are subject to the requirements of the federal Occupational Safety and Health Act (OSHA), and comparable state laws. The OSHA hazard communication standard, the EPA community right‑ to‑know regulations under the Title III of CERCLA and similar state laws require that we organize and/or disclose information about hazardous materials used or produced in our operations. Also, pursuant to OSHA, the Occupational Safety and Health Administration has established a variety of standards related to workplace exposure to hazardous substances and employee health and safety.
Employees
As of December 31, 2016, we had 421 employees. In addition, we had 155 employees that are employed by our wholly-owned subsidiary, GasSearch Drilling Services Corporation. We recognize that our success is significantly influenced by the relationship we maintain with our employees. Overall, we believe that our relations with our employees are satisfactory. Our employees are not represented by a collective bargaining agreement.
Website Access to Company Reports
We make available free of charge through our website, www.cabotog.com, our annual reports on Form 10‑K, quarterly reports on Form 10‑Q, current reports on Form 8‑K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). Information on our website is not a part of this report. In addition, the SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information filed by us. The public may read and copy materials that we file with the SEC at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, DC 20549. Information regarding the operation of the Public Reference Room can be obtained by calling the SEC at 1‑800‑SEC‑0330.
Corporate Governance Matters
Our Corporate Governance Guidelines, Corporate Bylaws, Audit Committee Charter, Compensation Committee Charter, Corporate Governance and Nominations Committee Charter, Code of Business Conduct and Safety and Environmental Affairs Committee Charter are available on our website at www.cabotog.com, under the “Governance” section of “About Cabot.” Requests can also be made in writing to Investor Relations at our corporate headquarters at Three Memorial City Plaza, 840 Gessner Road, Suite 1400, Houston, Texas 77024.

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ITEM 1A.    RISK FACTORS
Natural gas and oil prices fluctuate widely, and low prices for an extended period would likely have a material adverse impact on our business.
Our revenues, operating results, financial condition and ability to borrow funds or obtain additional capital depend substantially on prices we receive for the natural gas and oil that we sell. Lower commodity prices may reduce the amount of natural gas and oil that we can produce economically. Historically, natural gas and oil prices have been volatile, with prices fluctuating widely, and they are likely to continue to be volatile. Because our reserves are predominantly natural gas (approximately 97% of equivalent proved reserves), changes in natural gas prices have a more significant impact on our financial results than oil prices. Natural gas prices, based on the twelve-month average of the first of the month Henry Hub index price, were $2.48 per Mmbtu in 2016 compared to $2.59 per Mmbtu in 2015. Oil prices, based on the NYMEX monthly average price, were $42.75 per barrel in 2016 compared to $50.28 per barrel in 2015, and have yet to recover to levels experienced in 2014 despite recent price improvements. Low prices throughout 2015 and 2016 have had, and any substantial or extended decline in future natural gas or crude oil prices would have, a material adverse effect our future business, financial condition, results of operations, cash flows, liquidity or ability to finance planned capital expenditures and commitments. Furthermore, substantial, extended decreases in natural gas and crude oil prices may cause us to delay or postpone a significant portion of our exploration, development and exploitation projects or may render such projects uneconomic, which may result in significant downward adjustments to our estimated proved reserves and could negatively impact our ability to borrow and cost of capital and our ability to access capital markets, increase our costs under our revolving credit facility, and limit our ability to execute aspects of our business plans. See "Risk Factors-Future natural gas and oil price declines may result in additional write-downs of the carrying amount of our oil and gas properties, which could materially and adversely affect our results of operations."
Prices for natural gas and oil are subject to wide fluctuations in response to relatively minor changes in the supply of and demand for natural gas and oil, market uncertainty and a variety of additional factors that are beyond our control. These factors include but are not limited to the following:
the levels and location of natural gas and oil supply and demand and expectations regarding supply and demand, including the potential long-term impact of an abundance of natural gas from shale (such as that produced from our Marcellus Shale properties) on the global natural gas supply;
the level of consumer demand for natural gas and oil;
weather conditions;
political conditions or hostilities in natural gas and oil producing regions, including the Middle East, Africa and South America;
the ability and willingness of the members of the Organization of Petroleum Exporting Countries and other exporting nations to agree to and maintain oil price and production controls;
the price level and quantities of foreign imports;
actions of governmental authorities;
the availability, proximity and capacity of gathering, transportation, processing and/or refining facilities in regional or localized areas that may affect the realized price for natural gas and oil;
inventory storage levels;
the nature and extent of domestic and foreign governmental regulations and taxation, including environmental and climate change regulation;
the price, availability and acceptance of alternative fuels;
technological advances affecting energy consumption;
speculation by investors in oil and natural gas;
variations between product prices at sales points and applicable index prices; and
overall economic conditions, including the value of the U.S. dollar relative to other major currencies.

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These factors and the volatile nature of the energy markets make it impossible to predict the future prices of natural gas and oil. If natural gas and oil prices remain low or continue to decline significantly for a sustained period of time, the lower prices may cause us to reduce our planned drilling program or adversely affect our ability to make planned expenditures, raise additional capital or meet our financial obligations.
Drilling natural gas and oil wells is a high-risk activity.
Our growth is materially dependent upon the success of our drilling program. Drilling for natural gas and oil involves numerous risks, including the risk that no commercially productive natural gas or oil reservoirs will be encountered. The cost of drilling, completing and operating wells is substantial and uncertain, and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors beyond our control, including:
decreases in natural gas and oil prices;
unexpected drilling conditions, pressure or irregularities in formations;
equipment failures or accidents;
adverse weather conditions;
surface access restrictions;
loss of title or other title related issues;
lack of available gathering or processing facilities or delays in the construction thereof;
compliance with, or changes in, governmental requirements and regulation, including with respect to wastewater disposal, discharge of greenhouse gases and fracturing; and
costs of shortages or delays in the availability of drilling rigs or crews and the delivery of equipment and materials.
Our future drilling activities may not be successful and, if unsuccessful, such failure will have an adverse effect on our future results of operations and financial condition. Our overall drilling success rate or our drilling success rate within a particular geographic area may decline. We may be unable to lease or drill identified or budgeted prospects within our expected time frame, or at all. We may be unable to lease or drill a particular prospect because, in some cases, we identify a prospect or drilling location before seeking an option or lease rights in the prospect or location. Similarly, our drilling schedule may vary from our capital budget. The final determination with respect to the drilling of any scheduled or budgeted wells will be dependent on a number of factors, including:
the results of exploration efforts and the acquisition, review and analysis of seismic data;
the availability of sufficient capital resources to us and the other participants for the drilling of the prospects;
the approval of the prospects by other participants after additional data has been compiled;
economic and industry conditions at the time of drilling, including prevailing and anticipated prices for natural gas and oil and the availability of drilling rigs and crews;
our financial resources and results; and
the availability of leases and permits on reasonable terms for the prospects and any delays in obtaining such permits.
These projects may not be successfully developed and the wells, if drilled, may not encounter reservoirs of commercially productive natural gas or oil.

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Our proved reserves are estimates. Any material inaccuracies in our reserve estimates or underlying assumptions could cause the quantities and net present value of our reserves to be overstated or understated.
Reserve engineering is a subjective process of estimating underground accumulations of natural gas and oil that cannot be measured in an exact manner. The process of estimating quantities of proved reserves is complex and inherently imprecise, and the reserve data included in this document are only estimates. The process relies on interpretations of available geologic, geophysical, engineering and production data. The extent, quality and reliability of this technical data can vary. The process also requires certain economic assumptions, some of which are mandated by the SEC, such as natural gas and oil prices. Additional assumptions include drilling and operating expenses, capital expenditures, taxes and availability of funds. Furthermore, different reserve engineers may make different estimates of reserves and cash flows based on the same data.
Results of drilling, testing and production subsequent to the date of an estimate may justify revising the original estimate. Accordingly, initial reserve estimates often vary from the quantities of natural gas and oil that are ultimately recovered, and such variances may be material. Any significant variance could reduce the estimated quantities and present value of our reserves.
You should not assume that the present value of future net cash flows from our proved reserves is the current market value of our estimated natural gas and oil reserves. In accordance with SEC requirements, we base the estimated discounted future net cash flows from our proved reserves on the 12-month average index price for the respective commodity, calculated as the unweighted arithmetic average for the first day of the month price for each month and costs in effect on the date of the estimate, holding the prices and costs constant throughout the life of the properties. The present value of future cash flows are based on $1.74 per Mcf of natural gas, $10.69 per Bbl of NGLs and $37.54 per Bbl of oil as of December 31, 2016. Actual future prices and costs may differ materially from those used in the net present value estimate, and future net present value estimates using then current prices and costs may be significantly less than the current estimate. In addition, the 10% discount factor we use when calculating discounted future net cash flows for reporting requirements in compliance with the applicable accounting standards 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.
Future natural gas and oil price declines may result in additional write-downs of the carrying amount of our oil and gas properties, which could materially and adversely affect our results of operations.
The value of our oil and gas properties depends on prices of natural gas and oil. Declines in these prices as well as increases in development costs, changes in well performance, delays in asset development or deterioration of drilling results may result in our having to make material downward adjustments to our estimated proved reserves, and could result in an impairment charge and a corresponding write-down of the carrying amount of our oil and natural gas properties. For example, in December 2015, we recorded an impairment of approximately $114.9 million associated with oil and gas properties in certain non-core fields in south Texas, east Texas and Louisiana. The impairment of these fields was due to a significant decline in commodity prices in late 2015. Because our reserves are predominately natural gas (approximately 97% of equivalent proved reserves), changes in natural gas prices have a more significant impact on our financial results than oil prices.
We evaluate our oil and gas properties for impairment on a field-by-field basis whenever events or changes in circumstances indicate a property's carrying amount may not be recoverable. We compare expected undiscounted future cash flows to the net book value of the asset. If the future undiscounted expected cash flows, based on our estimate of future natural gas and oil prices, operating costs and anticipated production from proved reserves and risk-adjusted probable and possible reserves, are lower than the net book value of the asset, the capitalized cost is reduced to fair value. Commodity pricing is estimated by using a combination of assumptions management uses in its budgeting and forecasting process as well as historical and current prices adjusted for geographical location and quality differentials, as well as other factors that management believes will impact realizable prices. In the event that commodity prices decline, there could be a significant revision in the future.
Our future performance depends on our ability to find or acquire additional natural gas and oil reserves that are economically recoverable.
In general, the production rate of natural gas and oil properties declines as reserves are depleted, with the rate of decline depending on reservoir characteristics. Unless we successfully replace the reserves that we produce, our reserves will decline, eventually resulting in a decrease in natural gas and oil production and lower revenues and cash flow from operations. Our future natural gas and oil production is, therefore, highly dependent on our level of success in finding or acquiring additional reserves. We may not be able to replace reserves through our exploration, development and exploitation activities or by acquiring properties at acceptable costs. Low natural gas and oil prices may further limit the kinds of reserves that we can develop and produce economically.

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Our reserve report estimates that production from our proved developed reserves as of December 31, 2016 will decrease at a rate of 7%, 27%, 19% and 15% during 2017, 2018, 2019 and 2020, respectively. Future development of proved undeveloped and other reserves currently not classified as proved developed producing will impact these rates of decline. Because of higher initial decline rates from newly developed reserves, we consider this pattern fairly typical.
Exploration, development and exploitation activities involve numerous risks that may result in, among other things, dry holes, the failure to produce natural gas and oil in commercial quantities and the inability to fully produce discovered reserves.
We have substantial capital requirements, and we may not be able to obtain needed financing on satisfactory terms, if at all.
We rely upon access to both our revolving credit facility and longer-term capital markets as sources of liquidity for any capital requirements not satisfied by cash flow from operations or other sources. Future challenges in the global financial system, including the capital markets, may adversely affect our business and our financial condition. Our ability to access the capital markets may be restricted at a time when we desire, or need, to raise capital, which could have an impact on our flexibility to react to changing economic and business conditions. Adverse economic and market conditions could adversely affect the collectability of our trade receivables and cause our commodity hedging counterparties to be unable to perform their obligations or to seek bankruptcy protection. Future challenges in the economy could also lead to reduced demand for natural gas which could have a negative impact on our revenues.
Risks associated with our debt and the provisions of our debt agreements could adversely affect our business, financial position and results of operations.
As of December 31, 2016, we had approximately $1.5 billion of debt outstanding and we may incur additional indebtedness in the future. Increases in our level of indebtedness may:
require us to use a substantial portion of our cash flow to make debt service payments, which will reduce the funds that would otherwise be available for operations and future business opportunities;
limit our operating flexibility due to financial and other restrictive covenants, including restrictions on incurring additional debt, making certain investments, and paying dividends;
place us at a competitive disadvantage compared to our competitors with lower debt service obligations;
depending on the levels of our outstanding debt, limit our ability to obtain additional financing for working capital, capital expenditures, general corporate and other purposes; and
increase our vulnerability to downturns in our business or the economy, including declines in prices for natural gas and oil.
In addition, the interest rates that we pay on our senior unsecured notes and the margins we pay under our revolving credit facility depend on our leverage ratio and our asset coverage ratio. Accordingly, increases in the amount of our indebtedness without corresponding increases in our earnings or the present value of our reserves, or decreases in our earnings or the present value of our natural gas and oil reserves without a corresponding decrease in our indebtedness, will result in an increase in our interest expense.
Our debt agreements also require compliance with covenants to maintain specified financial ratios. If the price that we receive for our natural gas and oil production deteriorates from current levels or continues for an extended period, it could lead to reduced revenues, cash flow and earnings, which in turn could lead to a default under the ratios described above. Because the calculations of the financial ratios are made as of certain dates, the financial ratios can fluctuate significantly from period to period. A prolonged period of decreased natural gas and oil prices could further increase the risk of our inability to comply with covenants to maintain specified financial ratios. In order to provide a margin of comfort with regard to these financial covenants, we may seek to reduce our capital expenditures, sell non-strategic assets or opportunistically modify or increase our derivative instruments to the extent permitted under our debt agreements. In addition, we may seek to refinance or restructure all or a portion of our indebtedness. We cannot assure you that we will be able to successfully execute any of these strategies, and such strategies may be unavailable on favorable terms or at all. For more information about our debt agreements, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Capital Resources and Liquidity.”
The borrowing base under our revolving credit facility may be reduced, which could limit us in the future.
The borrowing base under our revolving credit facility is currently $3.2 billion, and lender commitments under our revolving credit facility are $1.8 billion. The borrowing base is redetermined annually under the terms of the revolving credit facility on April 1. In addition, either we or the banks may request an interim redetermination twice a year or in conjunction with certain

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acquisitions or sales of oil and gas properties. Our borrowing base may decrease as a result of lower natural gas or oil prices, operating difficulties, declines in reserves, lending requirements or regulations, the issuance of new indebtedness or for any other reason. In the event of a decrease in our borrowing base due to declines in commodity prices or otherwise, our ability to borrow under our revolving credit facility may be limited and we could be required to repay any indebtedness in excess of the redetermined borrowing base. In addition, we may be unable to access the equity or debt capital markets, including the market for senior unsecured notes, to meet our obligations, including any such debt repayment obligations.
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 made in the development of our 2017 plan, 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 from those contemplated by our 2017 plan, and our failure to recognize or respond to those changes may limit our ability to achieve our objectives.
Negative public perception regarding us and/or our industry could have an adverse effect on our operations.
Negative public perception regarding us and/or our industry resulting from, among other things, concerns raised by advocacy groups about hydraulic fracturing, oil spills, greenhouse gas or methane emissions and explosions of natural gas transmission lines, may lead to increased regulatory scrutiny, which may, in turn, lead to new state and federal safety and environmental laws, regulations, guidelines and enforcement interpretations. These actions may cause operational delays or restrictions, increased operating costs, additional regulatory burdens and increased risk of litigation. Moreover, governmental authorities exercise considerable discretion in the timing and scope of permit issuance and the public may engage in the permitting process, including through intervention in the courts. Negative public perception could cause the permits we need to conduct our operations to be withheld, delayed, or burdened by requirements that restrict our ability to profitably conduct our business.
Our ability to sell our natural gas and oil production and/or the prices we receive for our production could be materially harmed if we fail to obtain adequate services such as transportation and processing.
The sale of our natural gas and oil production depends on a number of factors beyond our control, including the availability and capacity of transportation and processing facilities. We deliver our natural gas and oil production primarily through gathering systems and pipelines that we do not own. The lack of available capacity on these systems and facilities could reduce the price offered for our production or result in the shut-in of producing wells or the delay or discontinuance of development plans for properties. Third-party systems and facilities may be unavailable due to market conditions or mechanical or other reasons. In addition, at current commodity prices, construction of new pipelines and building of such infrastructure may be slower to build out. To the extent these services are unavailable, we would be unable to realize revenue from wells served by such facilities until suitable arrangements are made to market our production. Our failure to obtain these services on acceptable terms could materially harm our business.
For example, the Marcellus Shale wells we have drilled to date have generally reported very high initial production rates. The amount of natural gas being produced in the area from these new wells, as well as natural gas produced from other existing wells, may exceed the capacity of the various gathering and intrastate or interstate transportation pipelines currently available. In such event, this could result in wells being shut in or awaiting a pipeline connection or capacity and/or natural gas being sold at much lower prices than those quoted on NYMEX or than we currently project, which would adversely affect our results of operations and cash flows.
We are subject to complex laws and regulations, including environmental and safety regulations, which can adversely affect the cost, manner or feasibility of doing business.
Our operations are subject to extensive federal, state and local laws and regulations, including drilling, permitting and safety laws and regulations and those relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. These laws and regulations can adversely affect the cost, manner or feasibility of doing business. Many laws and regulations require permits for the operation of various facilities, and these permits are subject to revocation, modification and renewal. Governmental authorities have the power to enforce compliance with their regulations,

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and violations could subject us to fines, injunctions or both. These laws and regulations have increased the costs of planning, designing, drilling, installing and operating natural gas and oil facilities, and new laws and regulations or revisions or reinterpretations of existing laws and regulations could further increase these costs. In addition, we may be liable for environmental damages caused by previous owners of property we purchase or lease. Risks of substantial costs and liabilities related to environmental compliance issues are inherent in natural gas and oil operations. For example, we could be required to install expensive pollution control measures or limit or cease activities on lands located within wilderness, wetlands or other environmentally or politically sensitive areas. Failure to comply with these laws also may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties as well as the imposition of corrective action orders. It is possible that other developments, such as stricter environmental laws and regulations, and claims for damages to property or persons resulting from natural gas and oil production, would result in substantial costs and liabilities.
Acquired properties may not be worth what we pay due to uncertainties in evaluating recoverable reserves and other expected benefits, as well as potential liabilities.
Successful property acquisitions require an assessment of a number of factors beyond our control. These factors include estimates of recoverable reserves, exploration potential, future natural gas and oil prices, operating costs, production taxes and potential environmental and other liabilities. These assessments are complex and inherently imprecise. Our review of the properties we acquire may not reveal all existing or potential problems. In addition, our review may not allow us to fully assess the potential deficiencies of the properties. We do not inspect every well, and even when we inspect a well we may not discover structural, subsurface, or environmental problems that may exist or arise.
There may be threatened or contemplated claims against the assets or businesses we acquire related to environmental, title, regulatory, tax, contract, litigation or other matters of which we are unaware, which could materially and adversely affect our production, revenues and results of operations. We often assume certain liabilities, and we may not be entitled to contractual indemnification for pre-closing liabilities, including environmental liabilities, and our contractual indemnification may not be effective. At times, we acquire interests in properties on an "as is" basis with limited representations and warranties and limited remedies for breaches of such representations and warranties. In addition, significant acquisitions can change the nature of our operations and business if the acquired properties have substantially different operating and geological characteristics or are in different geographic locations than our existing properties.
The integration of the properties we acquire could be difficult, and may divert management's attention away from our existing operations.
The integration of the properties we acquire could be difficult, and may divert management's attention and financial resources away from our existing operations. These difficulties include:
the challenge of integrating the acquired properties while carrying on the ongoing operations of our business;
the inability to retain key employees of the acquired business;
potential lack of operating experience in a geographic market of the acquired properties; and
the possibility of faulty assumptions underlying our expectations.
The process of integrating our operations could cause an interruption of, or loss of momentum in, the activities of our business. Members of our management may be required to devote considerable amounts of time to this integration process, which will decrease the time they will have to manage our existing business. If management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could suffer.
We face a variety of hazards and risks that could cause substantial financial losses.
Our business involves a variety of operating risks, including:
well site blowouts, cratering and explosions;
equipment failures;
pipe or cement failures and casing collapses, which can release natural gas, oil, drilling fluids or hydraulic fracturing fluids;
uncontrolled flows of natural gas, oil or well fluids;

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pipeline ruptures;
fires;
formations with abnormal pressures;
handling and disposal of materials, including drilling fluids and hydraulic fracturing fluids;
release of toxic gas;
buildup of naturally occurring radioactive materials;
pollution and other environmental risks, including conditions caused by previous owners or lessors of our properties; and
natural disasters.
Any of these events could result in injury or loss of human life, loss of hydrocarbons, significant damage to or destruction of property, environmental pollution, regulatory investigations and penalties, suspension or impairment of our operations and substantial losses to us.
Our operation of natural gas gathering and pipeline systems also involves various risks, including the risk of explosions and environmental hazards caused by pipeline leaks and ruptures. The location of pipelines near populated areas, including residential areas, commercial business centers and industrial sites, could increase these risks. As of December 31, 2016, we owned or operated approximately 3,100 miles of natural gas gathering and pipeline systems. As part of our normal maintenance program, we have identified certain segments of our pipelines that we believe periodically require repair, replacement or additional maintenance.
We may not be insured against all of the operating risks to which we are exposed.
We maintain insurance against some, but not all, operating risks and losses. We do not carry business interruption insurance. In addition, pollution and environmental risks generally are not fully insurable. The occurrence of an event not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows.
We have limited control over the activities on properties we do not operate.
Other companies operate some of the properties in which we have an interest. As of December 31, 2016, non-operated wells represented approximately 6.5% of our total owned gross wells, or approximately 1.9% of our owned net wells. We have limited ability to influence or control the operation or future development of these non-operated properties, including compliance with environmental, safety and other regulations, or the amount of capital expenditures that we are required to fund with respect to them. The failure of an operator of our wells to adequately perform operations, an operator's breach of the applicable agreements or an operator's failure to act in ways that are in our best interest could reduce our production and revenues. Our dependence on the operator and other working interest owners for these projects and our limited ability to influence or control the operation and future development of these properties could materially adversely affect the realization of our targeted returns on capital in drilling or acquisition activities and lead to unexpected future costs.
Competition in our industry is intense, and many of our competitors have substantially greater financial and technological resources than we do, which could adversely affect our competitive position.
Competition in the natural gas and oil industry is intense. Major and independent natural gas and oil companies actively bid for desirable natural gas and oil properties, as well as for the capital, equipment and labor required to operate and develop these properties. Our competitive position is affected by price, contract terms and quality of service, including pipeline connection times, distribution efficiencies and reliable delivery record. Many of our competitors have financial and technological resources and exploration and development budgets that are substantially greater than ours. These companies may be able to pay more for exploratory projects and productive natural gas and oil properties and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. In addition, these companies may be able to expend greater resources on the existing and changing technologies that we believe will be increasingly important to attaining success in the industry. These companies may also have a greater ability to continue drilling activities during periods of low natural gas and oil prices and to absorb the burden of current and future governmental regulations and taxation.

28


We may have hedging arrangements that expose us to risk of financial loss and limit the benefit to us of increases in prices for natural gas and oil.
From time to time, when we believe that market conditions are favorable, we use financial derivative instruments to manage price risk associated with our natural gas and crude oil production. While there are many different types of derivatives available, we generally utilize collar, swap and basis swap agreements to manage price risk more effectively.
The collar arrangements are put and call options used to establish floor and ceiling prices for a fixed volume of production during a certain time period. They provide for payments to counterparties if the index price exceeds the ceiling and payments from the counterparties if the index price falls below the floor. The swap agreements call for payments to, or receipts from, counterparties based on whether the index price for the period is greater or less than the fixed price established for that period when the swap is put in place. These arrangements limit the benefit to us of increases in prices. In addition, these arrangements expose us to risks of financial loss in a variety of circumstances, including when:
there is an adverse change in the expected differential between the underlying price in the derivative instrument and actual prices received for our production;
production is less than expected; or
a counterparty is unable to satisfy its obligations.
The CFTC has promulgated regulations to implement statutory requirements for swap transactions. These regulations are intended to implement a regulated market in which most swaps are executed on registered exchanges or swap execution facilities and cleared through central counterparties. While we believe that our use of swap transactions exempt us from certain regulatory requirements, the changes to the swap market due to increased regulation could significantly increase the cost of entering into new swaps or maintaining existing swaps, materially alter the terms of new or existing swap transactions and/or reduce the availability of new or existing swaps. If we reduce our use of swaps as a result of the Dodd-Frank Act and regulations, our results of operations may become more volatile and our cash flows may be less predictable.
We will continue to evaluate the benefit of utilizing derivatives in the future. Please read "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 and "Quantitative and Qualitative Disclosures about Market Risk" in Item 7A for further discussion concerning our use of derivatives.
The loss of key personnel could adversely affect our ability to operate.
Our operations are dependent upon a relatively small group of key management and technical personnel, and one or more of these individuals could leave our employment. The unexpected loss of the services of one or more of these individuals could have a detrimental effect on us. In addition, our drilling success and the success of other activities integral to our operations will depend, in part, on our ability to attract and retain experienced geologists, engineers and other professionals. Competition for experienced geologists, engineers and some other professionals is extremely intense. If we cannot retain our technical personnel or attract additional experienced technical personnel, our ability to compete could be harmed.
Federal and state legislation and regulatory initiatives related to oil and gas development, including hydraulic fracturing, could result in increased costs and operating restrictions or delays.
Most of our exploration and production operations depend on the use of hydraulic fracturing to enhance production from oil and gas wells. This technology involves the injection of fluids—usually consisting mostly of water but typically including small amounts of several chemical additives—as well as sand or other proppants into a well under high pressure in order to create fractures in the rock that allow oil or gas to flow more freely to the wellbore. Most of our wells would not be economical without the use of hydraulic fracturing to stimulate production from the well. Hydraulic fracturing operations have historically been overseen by state regulators as part of their oil and gas regulatory programs; however, the EPA has asserted federal regulatory authority over certain hydraulic fracturing activities involving diesel under the Safe Drinking Water Act and has released permitting guidance for hydraulic fracturing activities that use diesel in fracturing fluids in those states where EPA is the permitting authority, including Pennsylvania. As a result, we may be subject to additional permitting requirements for hydraulic fracturing operations as well as various restrictions on those operations. These permitting requirements and restrictions could result in delays in operations at well sites as well as increased costs to make wells productive. In addition, from time to time, legislation has been introduced, but not enacted, in Congress that would provide for federal regulation of hydraulic fracturing under the Safe Drinking Water Act and require the public disclosure of certain information regarding the chemical makeup of hydraulic fracturing fluids. If enacted, this legislation could establish an additional level of regulation and permitting at the federal, state or local levels, and could make it easier for third parties opposed to the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely

29


affect the environment, including groundwater, soil or surface water. Moreover, in May 2014, the EPA announced an Advanced Notice of Proposed Rulemaking under the Toxic Substances Control Act relating to data collection, including the chemical substances and mixtures used in hydraulic fracturing. Further, in March 2015, the Department of the Interior's Bureau of Land Management (BLM) issued a final rule to regulate hydraulic fracturing on public and Indian land; however, in June 2016, a Wyoming federal judge struck down this final rule, finding that the BLM lacked authority to promulgate the rule. This decision is currently being appealed by the federal government. We voluntarily disclose on a well-by-well basis the chemicals we use in the hydraulic fracturing process at www.fracfocus.org.
In addition, state and federal regulatory agencies recently have focused on a possible connection between the operation of injection wells used for oil and gas waste disposal and seismic activity. Similar concerns have been raised that hydraulic fracturing may also contribute to seismic activity. When caused by human activity, such events are called induced seismicity. In March 2016, the United States Geological Survey identified six states with the most significant hazards from induced seismicity, including Oklahoma, Kansas, Texas, Colorado, New Mexico, and Arkansas. In light of these concerns, some state regulatory agencies have modified their regulations or issued orders to address induced seismicity. Certain environmental and other groups have also suggested that additional federal, state and local laws and regulations may be needed to more closely regulate the hydraulic fracturing process. We cannot predict whether additional federal, state or local laws or regulations applicable to hydraulic fracturing will be enacted in the future and, if so, what actions any such laws or regulations would require or prohibit. Increased regulation and attention given to induced seismicity could lead to greater opposition to, and litigation concerning, oil and gas activities utilizing hydraulic fracturing or injection wells for waste disposal, which could have an adverse effect on oil and natural gas production activities, including operational delays or increased operating costs in the production of oil and natural gas from developing shale plays, or could make it more difficult to perform hydraulic fracturing.
On August 16, 2012, the EPA published final rules that establish new air emission control requirements for natural gas and NGL production, processing and transportation activities, including NSPS to address emissions of sulfur dioxide and volatile organic compounds, and NESHAPS to address hazardous air pollutants frequently associated with gas production and processing activities. In June 2016, the EPA published a final rule that updates and expands the NSPS by setting additional emissions limits for volatile organic compounds and regulating methane emissions for new and modified sources in the oil and gas industry. In addition, the EPA has announced that it intends to impose methane emission standards for existing sources and has issued information collection requests for oil and natural gas facilities. The EPA also published a final rule in June 2016 concerning aggregation of sources that affects source determinations for air permitting in the oil and gas industry.
Compliance with these requirements, especially the new methane regulation, may require modifications to certain of our operations, including the installation of new equipment to control emissions at the well site that could result in significant costs, including increased capital expenditures and operating costs, and could adversely impact our business. Similarly, aggregating our oil and gas facilities for permitting could result in more complex, costly, and time consuming air permitting. Particularly in regard to obtaining pre-construction permits, the final aggregation rule could add costs and cause delays in our operations.
In addition to these federal legislative and regulatory proposals, some states in which we operate, such as Pennsylvania, West Virginia and Texas, and certain local governments have adopted, and others are considering adopting, regulations that could restrict hydraulic fracturing in certain circumstances, including requirements regarding chemical disclosure, casing and cementing of wells, withdrawal of water for use in high-volume hydraulic fracturing of horizontal wells, baseline testing of nearby water wells, and restrictions on the type of additives that may be used in hydraulic fracturing operations. For example, the City of Denton, Texas adopted a moratorium on hydraulic fracturing in November 2014, though it was later lifted in 2015, and New York issued a statewide ban on hydraulic fracturing in June 2015. In addition, Pennsylvania's Act 13 of 2012 became law on February 14, 2012 and amended the state's Oil and Gas Act to, among other things, increase civil penalties and strengthen the Pennsylvania Department of Environmental Protection's (PaDEP) authority over the issuance of drilling permits. Although the Pennsylvania Supreme Court struck down portions of Act 13 that made statewide rules on oil and gas preempt local zoning rules, this could lead to additional local restrictions on oil and gas activity in the state. The Pennsylvania Supreme Court heard additional challenges to Act 13 and struck several more provisions in September 2016, including the provision requiring notification of spills and leaks only to public water suppliers.
We use a significant amount of water in our hydraulic fracturing operations. Our inability to locate sufficient amounts of water, or dispose of or recycle water used in our operations, could adversely impact our operations. Moreover, new environmental initiatives and regulations could include restrictions on our ability to conduct certain operations such as hydraulic fracturing or disposal of waste, including, but not limited to, produced water, drilling fluids and other wastes associated with the exploration, development or production of natural gas. Compliance with environmental regulations and permit requirements governing the withdrawal, storage and use of surface water or groundwater necessary for hydraulic fracturing of wells may increase our operating costs and cause delays, interruptions or termination of our operations, the extent of which cannot be predicted, all of which could have an adverse effect on our operations and financial condition. For example, in April 2011, PaDEP called on all Marcellus Shale natural gas drilling operators to voluntarily cease by May 19, 2011

30


delivering wastewater to those centralized treatment facilities that were grandfathered from the application of PaDEP's Total Dissolved Solids regulations. In June 2016, the EPA published final pretreatment standards for disposal of wastewater produced from shale gas operations to publicly owned treatment works (POTWs). The regulations were developed under the EPA's Effluent Guidelines Program under the authority of the Clean Water Act. In response to these actions, operators including us have begun to rely more on recycling of flowback and produced water from well sites as a preferred alternative to disposal.
A number of federal agencies are analyzing, or have been requested to review, a variety of environmental issues associated with hydraulic fracturing practices. For example, the EPA conducted a study of the potential environmental effects of hydraulic fracturing on drinking water and groundwater. The EPA released its final report in December 2016. It concluded that hydraulic fracturing activities can impact drinking water resources under some circumstances, including large volume spills and inadequate mechanical integrity of wells. This study and other studies that may be undertaken by EPA or other federal agencies 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.
Climate change and climate change legislation and regulatory initiatives could result in increased operating costs and decreased demand for the oil and natural gas that we produce.
Climate change, the costs that may be associated with its effects, and the regulation of greenhouse gas (GHG) emissions have the potential to affect our business in many ways, including increasing the costs to provide our products and services, reducing the demand for and consumption of our products and services (due to change in both costs and weather patterns), and the economic health of the regions in which we operate, all of which can create financial risks. In addition, legislative and regulatory responses related to GHG emissions and climate change may increase our operating costs. The United States Congress has previously considered legislation related to GHG emissions. There have also been international efforts seeking legally binding reductions in GHG emissions. The United States was actively involved in the negotiations at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change in Paris, which led to the creation of the Paris Agreement. The Paris Agreement requires countries to review and "represent a progression" in their nationally determined contributions, which set emissions reduction goals, every five years. The United States signed the Paris Agreement in April 2016. Increased public awareness and concern may result in more state, regional and/or federal requirements to reduce or mitigate GHG emissions.
In September 2009, the EPA finalized a mandatory GHG reporting rule that requires large sources of GHG emissions to monitor, maintain records on, and annually report their GHG emissions beginning January 1, 2010. The rule applies to large facilities emitting 25,000 metric tons or more of carbon dioxide-equivalent (CO2e) emissions per year and to most upstream suppliers of fossil fuels, as well as manufacturers of vehicles and engines. Subsequently, in November 2010, the EPA issued GHG monitoring and reporting regulations that went into effect on December 30, 2010, specifically for oil and natural gas facilities, including onshore and offshore oil and natural gas production facilities that emit 25,000 metric tons or more of CO2e per year. The rule required reporting of GHG emissions by regulated facilities to the EPA by March 2012 for emissions during 2011 and annually thereafter. We are required to report our GHG emissions to the EPA each year in March under this rule and have submitted our annual reports in compliance with the deadline. The EPA also issued a final rule that makes certain stationary sources and newer modification projects subject to permitting requirements for GHG emissions, beginning in 2011, under the CAA. However, in June 2014, the U.S. Supreme Court, in UARG v. EPA, limited the application of the GHG permitting requirements under the Prevention of Significant Deterioration and Title V permitting programs to sources that would otherwise need permits based on the emission of conventional pollutants. In October 2015, the EPA finalized rules that added new sources to the scope of the GHG monitoring and reporting requirements. These new sources include gathering and boosting facilities as well as completions and workovers from hydraulically fractured oil wells. The revisions also include the addition of well identification reporting requirements for certain facilities. Also, in November 2016, the EPA published a final rule adding monitoring methods for detecting leaks from oil and gas equipment and emission factors for leaking equipment to be used to calculate and report GHG emissions resulting from equipment leaks.

Federal and state regulatory agencies can impose administrative, civil and/or criminal penalties for non-compliance with air permits or other requirements of the CAA and associated state laws and regulations. In addition, the passage of any federal or state climate change laws or regulations in the future could result in increased costs to (i) operate and maintain our facilities, (ii) install new emission controls on our facilities and (iii) administer and manage any GHG emissions program. If we are unable to recover or pass through a significant level of our costs related to complying with climate change regulatory requirements imposed on us, it could have a material adverse effect on our results of operations and financial condition. To the extent financial markets view climate change and GHG emissions as a financial risk, this could negatively impact our cost of and access to capital. Legislation or regulations that may be adopted to address climate change could also affect the markets for our products by making our products more or less desirable than competing sources of energy.    


31


Moreover, some experts believe climate change poses potential physical risks, including an increase in sea level and changes in weather conditions, such as an increase in changes in precipitation and extreme weather events. In addition, warmer winters as a result of global warming could also decrease demand for natural gas. To the extent that such unfavorable weather conditions are exacerbated by global climate change or otherwise, our operations may be adversely affected to a greater degree than we have previously experienced, including increased delays and costs. However, the uncertain nature of changes in extreme weather events (such as increased frequency, duration, and severity) and the long period of time over which any changes would take place make any estimations of future financial risk to our operations caused by these potential physical risks of climate change unreliable.
Terrorist activities and the potential for military and other actions could adversely affect our business.
The threat of terrorism and the impact of military and other action have caused instability in world financial markets and could lead to increased volatility in prices for natural gas and oil, all of which could adversely affect the markets for our operations. Acts of terrorism, including cybersecurity threats to gain unauthorized access to sensitive information or to render data or systems unusable, could be directed against companies operating in the United States. The U.S. government has issued public warnings that indicate energy assets might be specific targets of terrorist organizations. These developments have subjected our operations to increased risk and, depending on their ultimate magnitude, could have a material adverse effect on our business.
Cyber-attacks targeting our systems or the oil and gas industry systems and infrastructure could adversely affect our business.
Our business and the oil and gas industry in general have become increasingly dependent on digital data, computer networks and connected infrastructure. We depend on this technology to record and store financial data, estimate quantities of natural gas and crude oil reserves, analyze and share operating data and communicate internally and externally. Computers control nearly all of the oil and gas distribution systems in the United States, which are necessary to transport our products to market.
A cyber-attack may involve a hacker, a virus, malware, phishing or other actions for the purposes of misappropriating assets or sensitive information, corrupting data or causing operational disruption. Unauthorized access to our proprietary information could lead to data corruption or communication or operational disruptions. A cyber-attack directed at oil and gas distribution systems could damage those assets or the environment, delay or prevent delivery of production to markets and make it difficult or impossible to accurately account for transported products.
We can provide no assurance that we will not suffer such attacks in the future. As cyber-attackers become more sophisticated, we may be required to expend significant additional resources to continue to protect our business or remediate the damage from cyber-attacks.
Certain federal income tax law changes have been proposed that, if passed, would have an adverse effect on our financial position, results of operations, and cash flows.
Substantive changes to existing federal income tax laws have been proposed that, if adopted, would repeal many tax incentives and deductions that are currently used by U.S. oil and gas companies and would impose new taxes. The proposals include: repeal of the percentage depletion allowance for oil and natural gas properties; elimination of the ability to fully deduct intangible drilling costs in the year incurred; repeal of the manufacturing tax deduction for oil and gas companies; and increase in the geological and geophysical amortization period for independent producers. Should some or all of these proposals become law, our taxes will increase, potentially significantly, which would have a negative impact on our net income and cash flows. This could also reduce our drilling activities in the U.S. Since none of these proposals have yet to become law, we do not know the ultimate impact these proposed changes may have on our business.
Provisions of Delaware law and our bylaws and charter could discourage change in control transactions and prevent stockholders from receiving a premium on their investment.
Our charter authorizes our Board of Directors to set the terms of preferred stock. In addition, Delaware law contains provisions that impose restrictions on business combinations with interested parties. Our bylaws prohibit the calling of a special meeting by our stockholders and place procedural requirements and limitations on stockholder proposals at meetings of stockholders. Because of these provisions of our charter, bylaws and Delaware law, persons considering unsolicited tender offers or other unilateral takeover proposals may be more likely to negotiate with our Board of Directors rather than pursue non-negotiated takeover attempts. As a result, these provisions may make it more difficult for our stockholders to benefit from transactions that are opposed by an incumbent Board of Directors.

32


The personal liability of our directors for monetary damages for breach of their fiduciary duty of care is limited by the Delaware General Corporation Law and by our charter.
The Delaware General Corporation Law allows corporations to limit available relief for the breach of directors' duty of care to equitable remedies such as injunction or rescission. Our charter limits the liability of our directors to the fullest extent permitted by Delaware law. Specifically, our directors will not be personally liable for monetary damages for any breach of their fiduciary duty as a director, except for liability:
for any breach of their duty of loyalty to the company or our stockholders;
for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;
under provisions relating to unlawful payments of dividends or unlawful stock repurchases or redemptions; and
for any transaction from which the director derived an improper personal benefit.
This limitation may have the effect of reducing the likelihood of derivative litigation against directors, and may discourage or deter stockholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefited our stockholders.
ITEM 1B.    UNRESOLVED STAFF COMMENTS
None.
ITEM 3.    LEGAL PROCEEDINGS
Legal Matters
The information set forth under the heading "Legal Matters" in Note 9 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K is incorporated by reference in response to this item.
Environmental Matters
On November 12, 2015, we received a proposed Consent Order and Agreement from the Pennsylvania Department of Environmental Protection (PaDEP) relating to gas migration allegations in an area surrounding several wells owned and operated by us in Susquehanna County, Pennsylvania. The allegations relating to these wells were initially raised by residents in the area in August 2011. We received a Notice of Violation from the PaDEP in September 2011 for failure to prevent the migration of gas into fresh groundwater sources in the area surrounding these wells. Since then, we have been engaged with the PaDEP in investigating the incident and have performed appropriate remediation efforts, including the provision of alternative sources of drinking water to affected residents. We believe the source of methane has been remediated and we entered into a Consent Order and Agreement with the PaDEP on December 30, 2016. We agreed to pay a civil monetary penalty in the amount of approximately $0.3 million and to continue to provide alternative sources of drinking water to affected residents until the affected water supplies are permanently restored. Further, the related gas well is being permanently plugged. Following the plugging of the gas well, additional monitoring will be required to ensure the source of methane has been remediated. Cabot continues to work with the PaDEP to bring this matter to a close.
From time to time we receive notices of violation from governmental and regulatory authorities in areas in which we operate relating to alleged violations of environmental statutes or the rules and regulations promulgated thereunder. While we cannot predict with certainty whether these notices of violation will result in fines and/or penalties, if fines and/or penalties are imposed, they may result in monetary sanctions, individually or in the aggregate, in excess of $100,000.


33


ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table shows certain information as of February 22, 2017 about our executive officers, as such term is defined in Rule 3b-7 of the Securities Exchange Act of 1934, and certain of our other officers.
Name
 
Age
 
Position
 
Officer
Since
Dan O. Dinges
 
63

 
Chairman, President and Chief Executive Officer
 
2001
Scott C. Schroeder
 
54

 
Executive Vice President and Chief Financial Officer
 
1997
Jeffrey W. Hutton
 
61

 
Senior Vice President, Marketing
 
1995
Todd L. Liebl
 
59

 
Senior Vice President, Land and Business Development
 
2012
Steven W. Lindeman
 
56

 
Senior Vice President, South Region and Engineering
 
2011
Phillip L. Stalnaker
 
57

 
Senior Vice President, North Region
 
2009
G. Kevin Cunningham
 
63

 
Vice President and General Counsel
 
2010
Matthew P. Kerin
 
36

 
Vice President and Treasurer
 
2014
Todd M. Roemer
 
46

 
Vice President and Controller
 
2010
Deidre L. Shearer
 
49

 
Vice President and Corporate Secretary
 
2012
All officers are elected annually by our Board of Directors. All of the executive officers have been employed by Cabot Oil & Gas Corporation for at least the last five years, except for Mr. Matthew P. Kerin.
Mr. Kerin joined the Company in March 2012 and was appointed Treasurer in September 2014 and was promoted to Vice President in February 2017. Mr. Kerin most recently served as Manager - Finance and Investor Relations. Prior to joining the Company, Mr. Kerin served as an Associate in the Oil and Gas Investment Banking group at J.P. Morgan Securities.  He is a graduate of Texas A&M University with a Bachelor in Business Administration degree in Accounting and a Master of Science degree in Finance. He is also a graduate from the Jones Graduate School of Business at Rice University with a Master in Business Administration degree with a concentration in Finance and Energy.


34


PART II
ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed and principally traded on the New York Stock Exchange under the ticker symbol "COG." The following table presents the high and low closing sales prices per share of our common stock during certain periods, as reported in the consolidated transaction reporting system. Cash dividends paid per share of the common stock are also shown.
 
High
 
Low
 
Dividends
2016
 

 
 

 
 

First Quarter
$
22.88

 
$
15.42

 
$
0.02

Second Quarter
$
25.94

 
$
22.23

 
$
0.02

Third Quarter
$
26.47

 
$
23.52

 
$
0.02

Fourth Quarter
$
25.69

 
$
20.03

 
$
0.02

2015
 

 
 

 
 

First Quarter
$
30.01

 
$
26.44

 
$
0.02

Second Quarter
$
35.34

 
$
29.95

 
$
0.02

Third Quarter
$
30.98

 
$
21.28

 
$
0.02

Fourth Quarter
$
23.70

 
$
15.03

 
$
0.02

As of February 1, 2017, there were 383 registered holders of our common stock.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2016 regarding the number of shares of common stock that may be issued under our 2014 and 2004 incentive plans. Effective May 1, 2014, no additional awards are to be granted under the 2004 Incentive Plan.
 
(a)
 
(b)
 
(c)
 
Plan Category
Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights
 
 Weighted-average exercise
price of outstanding options,
warrants and rights
 
Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a))
 
Equity compensation plans approved by security holders
3,190,351

(1) 
$
13.04

(2) 
15,995,342

(3) 
Equity compensation plans not approved by security holders
n/a

 
n/a

 
n/a

 
Total
3,190,351

 
$
13.04

 
15,995,342

 
_______________________________________________________________________________
(1)
Includes 483,286 SARs to be settled in common stock, which are fully vested; 993,530 employee performance shares, the performance periods of which end on December 31, 2016, 2017 and 2018; 885,213 TSR performance shares, the performance periods of which end on December 31, 2016, 2017 and 2018; 479,784 hybrid performance shares, which vest, if at all, in 2017, 2018, and 2019; and 348,538 restricted stock units awarded to the non-employee directors, the restrictions on which lapse upon a non-employee director's departure from the Board of Directors.
(2)
Price is only with respect to the 483,286 SARs outstanding because all other outstanding awards are issued without an exercise price.
(3)
Includes 43,175 shares of restricted stock, the restrictions on which lapse on various dates in 2017, 2018 and 2019; and 15,952,167 shares that are available for future grants under the 2014 Incentive Plan.



35


ISSUER PURCHASES OF EQUITY SECURITIES
Our Board of Directors has authorized a share repurchase program under which we may purchase shares of common stock in the open market or in negotiated transactions. There is no expiration date associated with the authorization. During 2016, we did not repurchase any shares of common stock. All purchases executed to date have been through open market transactions. The maximum number of remaining shares that may be purchased under the plan as of December 31, 2016 was 10,107,320.
PERFORMANCE GRAPH
The following graph compares our common stock performance ("COG") with the performance of the Standard & Poor's 500 Stock Index and the Dow Jones U.S. Exploration & Production Index for the period December 2011 through December 2016. The graph assumes that the value of the investment in our common stock and in each index was $100 on December 31, 2011 and that all dividends were reinvested.
cog-1231201_chartx36587a02.jpg
 
December 31,
Calculated Values
2011
 
2012
 
2013
 
2014
 
2015
 
2016
COG
$
100.00

 
$
131.34

 
$
205.05

 
$
157.00

 
$
94.08

 
$
124.69

S&P 500
$
100.00

 
$
116.00

 
$
153.58

 
$
174.60

 
$
177.01

 
$
198.18

Dow Jones U.S. Exploration & Production
$
100.00

 
$
105.82

 
$
139.52

 
$
124.48

 
$
94.94

 
$
118.19

The performance graph above is furnished and not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and will not be incorporated by reference into any registration statement filed under the Securities Act of 1933 unless specifically identified therein as being incorporated therein by reference. The performance graph is not soliciting material subject to Regulation 14A.

36


ITEM 6.    SELECTED FINANCIAL DATA
The following table summarizes our selected consolidated financial data for the periods indicated. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7, and the Consolidated Financial Statements and related Notes in Item 8.
 
Year Ended December 31,
(In thousands, except per share amounts)
2016
 
2015
 
2014
 
2013
 
2012
Statement of Operations Data
 

 
 

 
 

 
 

 
 

Operating revenues
$
1,155,677

 
$
1,357,150

 
$
2,173,011

 
$
1,746,278

 
$
1,204,546

Impairment of oil and gas properties and other assets (1)
435,619

 
114,875

 
771,037

 

 

Gain (loss) on sale of assets(2)
(1,857
)
 
3,866

 
17,120

 
21,351

 
50,635

Income (loss) from operations
(566,554
)
 
(90,362
)
 
106,186

 
551,582

 
306,186

Net income (loss)
(417,124
)
 
(113,891
)
 
104,468

 
279,773

 
131,730

Basic earnings (loss) per share
$
(0.91
)
 
$
(0.28
)
 
$
0.25

 
$
0.67

 
$
0.31

Diluted earnings (loss) per share
$
(0.91
)
 
$
(0.28
)
 
$
0.25

 
$
0.66

 
$
0.31

Dividends per common share
$
0.08

 
$
0.08

 
$
0.08

 
$
0.06

 
$
0.04

 
December 31,
(In thousands)
2016
 
2015
 
2014
 
2013
 
2012
Balance Sheet Data
 

 
 

 
 

 
 

 
 

Properties and equipment, net
$
4,250,125

 
$
4,976,879

 
$
4,925,711

 
$
4,546,227

 
$
4,310,977

Total assets (3)
5,122,569

 
5,253,038

 
5,429,705

 
4,978,038

 
4,612,780

Current portion of long-term debt

 
20,000

 

 

 
75,000

Long-term debt (3)
1,520,530

 
1,996,139

 
1,743,989

 
1,143,958

 
1,008,467

Stockholders' equity
2,567,667

 
2,009,188

 
2,142,733

 
2,204,602

 
2,131,447

____________________________________________ ___________________________________
(1)
For discussion of impairment of oil and gas properties and other assets, refer to Note 3 of the Notes to the Consolidated Financial Statements.
(2)
Gain on sale of assets in 2014 includes a $19.9 million gain from the sale of certain proved and unproved oil and gas properties located in east Texas. Gain on sale of assets in 2013 includes a $19.4 million gain from the sale of certain proved and unproved oil and gas properties located in the Oklahoma and Texas panhandles, and a $17.5 million loss from the sale of certain proved and unproved oil and gas properties located in Oklahoma, Texas and Kansas and an aggregate net gain of $19.5 million from the sale of various other oil and gas properties during the year. Gain on sale of assets in 2012 includes a $67.0 million gain from the sale of certain Pearsall Shale undeveloped leaseholds in south Texas and an $18.2 million loss from the sale of certain proved oil and gas properties located in south Texas.
(3)
Effective January 1, 2016, the Company adopted Accounting Standards Update No. 2015-03 as a change in accounting principle. The Consolidated Balance Sheet as of December 31, 2015, 2014, 2013 and 2012 has been retrospectively adjusted to reflect the adoption of this guidance, resulting in a decrease of $8.9 million, $8.0 million, $3.0 million and $3.5 million, respectively, in both total assets and long-term debt related to the debt issuance costs on the Company's senior notes.

37


ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist you in understanding our results of operations and our present financial condition. Our Consolidated Financial Statements and the accompanying Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K contain additional information that should be referred to when reviewing this material.
OVERVIEW
Financial and Operating Overview
Financial and operating results for the year ended December 31, 2016 compared to the year ended December 31, 2015 are as follows:
Equivalent production increased 24.6 Bcfe, or 4%, from 602.5 Bcfe, or 1,650.8 Mmcfe per day, in 2015 to 627.1 Bcfe, or 1,713.4 Mmcfe per day, in 2016.
Natural gas production increased 34.4 Bcf, or 6%, from 566.0 Bcf in 2015 to 600.4 Bcf in 2016, as a result of drilling and completion activities in Pennsylvania, partially offset by the divestiture of certain oil and gas properties in east Texas in early 2016.
Crude oil/condensate/NGL production decreased 1.6 Mmbbls, or 27%, from 6.1 Mmbbls in 2015 to 4.5 Mmbbls in 2016, as a result of a decrease in drilling activities in south Texas.
Average realized natural gas price for 2016 was $1.70 per Mcf, 21% lower than the $2.15 per Mcf price realized in 2015.
Average realized crude oil price for 2016 was $37.30 per Bbl, 18% lower than the $45.72 per Bbl price realized in 2015.
Drilled 40 gross wells (38.0 net) with a success rate of 100.0% in 2016 compared to 138 gross wells (130.5 net) with a success rate of 100.0% in 2015.
Completed 76 gross wells (76.0 net) in 2016 compared to 107 gross wells (98.9 net) in 2015.
Total capital expenditures were $372.5 million in 2016 compared to $773.5 million in 2015.
Average rig count during 2016 was approximately 1.1 rigs in the Marcellus Shale and approximately 0.3 rigs in the Eagle Ford Shale, compared to an average rig count in the Marcellus Shale of approximately 3.5 rigs and approximately 1.9 rigs in the Eagle Ford Shale during 2015.
In February 2016, we completed a public offering of our common stock and received net proceeds of $995.6 million, after deducting underwriting discounts and commissions.
In February 2016, we received proceeds of $50.1 million primarily related to the divestiture of certain proved and unproved oil and gas properties in east Texas.
In May 2016, we repurchased $64.0 million principal amount of our 6.51% weighted-average senior notes for approximately $68.3 million.
In December 2016, we recognized an impairment loss of $435.6 million associated with our oil and gas properties and related pipeline assets in West Virginia and Virginia.
Market Conditions and Commodity Prices
Our financial results depend on many factors, particularly the price of natural gas and crude oil and our ability to market our production on economically attractive terms. Commodity prices are affected by many factors outside of our control, including changes in market supply and demand, which are impacted by pipeline capacity constraints, inventory storage levels, basis differentials, weather conditions and other factors. In addition, our realized prices are further impacted by our hedging activities. As a result, we cannot accurately predict future commodity prices and, therefore, we cannot determine with any degree of certainty what effect increases or decreases in these prices will have on our capital program, production volumes or revenues. Location differentials have increased in certain regions, such as in the Appalachian region, resulting in further declines in natural gas prices. We expect natural gas and crude oil prices to remain volatile. In addition to production volumes and commodity prices, finding and developing sufficient amounts of natural gas and crude oil reserves at economical costs are critical to our long-term success. For information about the impact of realized commodity prices on our natural gas and crude

38


oil and condensate revenues, refer to "Results of Operations" below. See "Risk Factors—Natural gas and oil prices fluctuate widely, and low prices for an extended period would likely have a material adverse impact on our business" and "Risk Factors—Our future performance depends on our ability to find or acquire additional natural gas and oil reserves that are economically recoverable" in Item 1A.
We account for our derivative instruments on a mark-to-market basis with changes in fair value recognized in operating revenues in the Consolidated Statement of Operations. As a result of these mark-to-market adjustments associated with our derivative instruments, we will experience volatility in our earnings due to commodity price volatility. Refer to “Impact of Derivative Instruments on Operating Revenues” below and Note 6 to the Consolidated Financial Statements for more information.
Commodity prices have remained volatile and have improved during the fourth quarter of 2016 compared to the fourth quarter of 2015 but have yet to recover to levels experienced in 2014. In the event that commodity prices significantly decline, management would test the recoverability of the carrying value of its oil and gas properties and, if necessary, record an impairment charge.
We believe we are well-positioned to manage the challenges presented in the current commodity pricing environment, and we can endure the current cyclical downturn in the oil and gas industry and the continued volatility in current and future commodity prices by:
Continuing to exercise discipline in our capital program by fully funding our capital expenditures with operating cash flows.
Continuing to optimize our drilling, completion and operational efficiencies, resulting in lower operating costs per unit of production.
Continuing to manage our balance sheet, which included the issuance of common stock in February 2016. Our common stock issuance allowed us to pay down the outstanding balance under our revolving credit facility and certain of our senior notes, leaving us with sufficient availability under our revolving credit facility and existing cash balances to meet our capital requirements and maintain compliance with our debt covenants.
Continuing to manage price risk by strategically hedging our natural gas and crude oil production.
FINANCIAL CONDITION
Capital Resources and Liquidity
Our primary sources of cash in 2016 were from funds generated from the sale of common stock, the sale of natural gas and oil production and proceeds from the sale of assets. These cash flows were primarily used to fund our capital expenditures (including contributions to our equity method investments), repayment of indebtedness under our revolving credit facility and to repurchase certain of our senior notes, interest payments on debt and payment of dividends. See below for additional discussion and analysis of cash flow.
In February 2016, we sold an aggregate of 50.6 million shares of common stock at a price of $19.675 per share and received $995.6 million in net proceeds, after deducting underwriting discounts and commissions. These net proceeds were used for general corporate purposes, including repaying indebtedness under our revolving credit facility, repurchasing certain of our senior notes.
The borrowing base under the terms of our revolving credit facility is redetermined annually in April. In addition, either we or the banks may request an interim redetermination twice a year or in connection with certain acquisitions or divestitures of oil and gas properties. Effective April 19, 2016, our borrowing base was reduced from $3.4 billion to $3.2 billion. The maximum credit amount under the revolving credit facility remained unchanged at $1.8 billion; however, the available commitments were reduced to $1.6 billion at the time of redetermination.
In May 2016, we repurchased $64.0 million principal amount of our 6.51% weighted-average senior notes for approximately $68.3 million. A $4.7 million extinguishment loss was recognized in the second quarter of 2016 associated with the premium paid and the write-off of a portion of the related deferred financing costs due to early repayment. As a result of the repurchase of these senior notes, the available commitments under the revolving credit facility increased to $1.7 billion and remained at that level as of December 31, 2016.

39


A decline in commodity prices could result in the future reduction of our borrowing base and related commitments under the revolving credit facility. Unless commodity prices decline significantly from current levels, we do not believe that any such reductions would have a significant impact on our ability to service our debt and fund our drilling program and related operations.
We strive to manage our debt at a level below the available credit line in order to maintain borrowing capacity. Our revolving credit facility includes a covenant limiting our total debt. We believe that, with the existing cash on hand, internally generated cash flow and availability under our revolving credit facility, we have the capacity to finance our spending plans.
As of December 31, 2016, we had no borrowings outstanding and unused commitments of $1.7 billion under our revolving credit facility. At December 31, 2015, we had $413.0 million of borrowings outstanding under our revolving credit facility.
At December 31, 2016, we were in compliance with all restrictive financial covenants for both the revolving credit facility and senior notes. See Note 5 of the Notes to the Consolidated Financial Statements for further details regarding our debt.
Cash Flows
Our cash flows from operating activities, investing activities and financing activities are as follows:
 
Year Ended December 31,
(In thousands)
2016

2015

2014
Cash flows provided by operating activities
$
392,377


$
740,737


$
1,236,435

Cash flows used in investing activities
(353,218
)

(993,334
)

(1,664,840
)
Cash flows provided by financing activities
458,869


232,157


425,959

Net increase (decrease) in cash and cash equivalents
$
498,028


$
(20,440
)

$
(2,446
)
Operating Activities. Operating cash flow fluctuations are substantially driven by commodity prices and changes in our production volumes and operating expenses. Prices for natural gas and crude oil have historically been volatile, primarily as a result of supply and demand for natural gas and crude oil, pipeline infrastructure constraints and seasonal influences. In addition, fluctuations in cash flow may result in an increase or decrease in our capital expenditures. See "Results of Operations" for a review of the impact of prices and volumes on revenues.
Our working capital is substantially influenced by the variables discussed above and fluctuates based on the timing and amount of borrowings and repayments under our revolving credit facility, the timing of cash collections and payments on our trade accounts receivable and payable, respectively, sales of our securities and changes in the fair value of our commodity derivative activity. From time to time, our working capital will reflect a deficit, while at other times it will reflect a surplus. This fluctuation is not unusual. At December 31, 2016 and 2015, we had a working capital surplus of $458.1 million and a deficit of $90.8 million, respectively. We believe we have adequate liquidity and availability under our revolving credit facility available to meet our working capital requirements over the next twelve months.
Net cash provided by operating activities in 2016 decreased by $348.4 million when compared to 2015. This decrease was primarily due to unfavorable changes in working capital and other assets and liabilities and lower operating revenues, partially offset by lower operating expenses (excluding non-cash expenses). The decrease in operating revenues was primarily due to a decrease in realized natural gas and crude oil prices, partially offset by an increase in equivalent production. Average realized natural gas and crude oil prices decreased by 21% and 18%, respectively, for 2016 compared to 2015. Equivalent production increased by 4% for 2016 over 2015 as a result of higher natural gas production in the Marcellus Shale, partially offset by lower oil production in the Eagle Ford Shale.
Net cash provided by operating activities in 2015 decreased by $495.7 million when compared to 2014. This decrease was primarily due to lower operating revenues and higher operating expenses (excluding non-cash expenses), partially offset by favorable changes in working capital and other assets and liabilities. The decrease in operating revenues was primarily due to a decrease in realized natural gas and crude oil prices, partially offset by an increase in equivalent production. Average realized natural gas and crude oil prices decreased by 34% and 48%, respectively, for 2015 compared to 2014. Equivalent production volumes increased by 13% for 2015 over 2014 as a result of higher natural gas production in the Marcellus Shale and higher oil production in the Eagle Ford Shale.

40


See "Results of Operations" for additional information relative to commodity price, production and operating expense fluctuations. We are unable to predict future commodity prices and, as a result, cannot provide any assurance about future levels of net cash provided by operating activities.
Investing Activities. Cash flows used in investing activities decreased by $640.1 million from 2015 to 2016 due to a decrease of $580.4 million in capital expenditures, $16.3 million lower acquisition costs and $42.8 million higher proceeds from the sale of assets.
Cash flows used in investing activities decreased by $671.5 million from 2014 to 2015 due to a decrease of $524.0 million in capital expenditures, $198.4 million lower acquisition costs and a $9.0 million decrease in capital contributions associated with our equity method investments. These decreases were partially offset by a $31.8 million decrease in proceeds from the sale of assets and $28.1 million of changes in restricted cash balances.
Financing Activities. Cash flows provided by financing activities increased by $226.7 million from 2015 to 2016 due to $995.3 million of net proceeds related to the issuance of common stock and lower capitalized debt issuance costs of $4.6 million related to the amendment of our revolving credit facility and senior notes in December 2015. These increases were partially offset by $770.0 million of higher net repayments of debt due to the repayment of the outstanding balance on our revolving credit facility and certain of our senior notes with the proceeds from the issuance of common stock and $3.1 million of higher dividend payments.
Cash flows provided by financing activities decreased by $193.8 million from 2014 to 2015 due to $332.0 million of lower net borrowings and an increase in cash paid for capitalized debt issuance costs of $2.2 million related to the amendment of our credit facility in April 2015. These decreases were partially offset by lower treasury stock repurchases of $138.9 million as no shares were repurchased in 2015 and a decrease of $1.4 million in tax benefits associated with our stock-based compensation.
Capitalization
Information about our capitalization is as follows:
 
December 31,
(Dollars in thousands)
2016
 
2015
Debt(1)
$
1,520,530

 
$
2,016,139

Stockholders' equity
2,567,667

 
2,009,188

Total capitalization
$
4,088,197

 
$
4,025,327

Debt to total capitalization
37
%
 
50
%
Cash and cash equivalents
$
498,542

 
$
514

_______________________________________________________________________________
(1)
Includes $20.0 million of current portion of long-term debt and $413.0 million of borrowings outstanding under our revolving credit facility at December 31, 2015. There were no borrowings outstanding under our revolving credit facility as of December 31, 2016.
During 2016 and 2015, we paid dividends of $36.2 million ($0.08 per share) and $33.1 million ($0.08 per share) on our common stock, respectively.
Capital and Exploration Expenditures
On an annual basis, we generally fund most of our capital expenditures, excluding any significant property acquisitions, with cash generated from operations and, if required, borrowings under our revolving credit facility. We budget these expenditures based on our projected cash flows for the year.

41


The following table presents major components of our capital and exploration expenditures:
 
Year Ended December 31,
(In thousands)
2016
 
2015
 
2014
Capital expenditures
 

 
 

 
 

Drilling and facilities
$
359,479

 
$
729,994

 
$
1,454,288

Leasehold acquisitions
2,703

 
20,097

 
73,962

Property acquisitions

 
16,312

 
214,737

Pipeline and gathering
1,909

 
2,373

 
1,287

Other
8,386

 
4,739

 
14,791

 
372,477

 
773,515

 
1,759,065

Exploration expenditures(1)
27,662

 
27,460

 
28,746

Total
$
400,139

 
$
800,975

 
$
1,787,811

_______________________________________________________________________________
(1) Exploration expenditures include $10.1 million, $3.3 million and $7.8 million of exploratory dry hole expenditures in 2016, 2015 and 2014, respectively.
In 2016, we drilled 40 gross wells (38.0 net) and completed 76 gross wells (76.0 net), of which 62 gross wells (62.0 net) were drilled but uncompleted in prior years. In 2017, we plan to drill 95 gross wells (90.0 net) and complete 95 gross wells (90.0 net), of which 51 gross wells (45.0 net) were drilled but uncompleted in prior years. Our 2017 drilling program includes approximately $650.0 million in total capital expenditures. We will continue to assess the natural gas and crude oil price environment along with our liquidity position and may increase or decrease our capital expenditures accordingly.
Contractual Obligations
We have various contractual obligations in the normal course of our operations. A summary of our contractual obligations as of December 31, 2016 are set forth in the following table:
 


Payments Due by Year
(In thousands)
Total

2017

2018 to 2019

2020 to 2021

2022 & Beyond
Debt
$
1,528,000


$


$
304,000


$
275,000


$
949,000

Interest on debt(1)
402,296


73,511


117,643


89,593


121,549

Transportation and gathering agreements(2)
1,844,173


148,061


323,653


300,632


1,071,827

Drilling rig commitments(2)
4,188


4,188







Hydraulic fracturing services commitments (2)
3,960


3,960







Operating leases(2)
37,209


7,244


13,090


10,672


6,203

Equity investment contribution commitments(3)
266,363


70,000


196,363





Total contractual obligations
$
4,086,189


$
306,964


$
954,749


$
675,897


$
2,148,579

_______________________________________________________________________________
(1)
Interest payments have been calculated utilizing the rates associated with our senior notes outstanding at December 31, 2016, assuming that our senior notes will remain outstanding through their respective maturity dates.
(2)
For further information on our obligations under transportation and gathering agreements, drilling rig commitments, hydraulic fracturing services commitments and operating leases, see Note 9 of the Notes to the Consolidated Financial Statements.
(3)
For further information on our equity investment contribution commitments, see Note 4 of the Notes to the Consolidated Financial Statements.

42


Amounts related to our asset retirement obligation are not included in the above table given the uncertainty regarding the actual timing of such expenditures. The total amount of our asset retirement obligation at December 31, 2016 was $133.7 million. See Note 8 of the Notes to the Consolidated Financial Statements for further details.
We have no off-balance sheet debt or other similar unrecorded obligations.
Potential Impact of Our Critical Accounting Policies
Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements. The preparation of the Consolidated Financial Statements, which is in accordance with accounting principles generally accepted in the United States, requires management to make certain estimates and judgments that affect the amounts reported in our financial statements and the related disclosures of assets and liabilities. The following accounting policies are our most critical policies requiring more significant judgments and estimates. We evaluate our estimates and assumptions on a regular basis. Actual results could differ from those estimates.
Successful Efforts Method of Accounting
We follow the successful efforts method of accounting for our oil and gas producing activities. Acquisition costs for proved and unproved properties are capitalized when incurred. Judgment is required to determine the proper classification of wells designated as developmental or exploratory, which will ultimately determine the proper accounting treatment of costs incurred. Exploration costs, including geological and geophysical costs, the costs of carrying and retaining unproved properties and exploratory dry hole costs are expensed. Development costs, including costs to drill and equip development wells and successful exploratory drilling costs to locate proved reserves are capitalized.
Oil and Gas Reserves
The process of estimating quantities of proved reserves is inherently imprecise, and the reserve data included in this document are only estimates. The process relies on interpretations and judgment of available geological, geophysical, engineering and production data. The extent, quality and reliability of this technical data can vary. The process also requires certain economic assumptions, some of which are mandated by the SEC, such as natural gas and crude oil prices. Additional assumptions include drilling and operating expenses, capital expenditures, taxes and availability of funds. Any significant variance in the interpretations or assumptions could materially affect the estimated quantity and value of our reserves and can change substantially over time. Periodic revisions to the estimated reserves and future cash flows may be necessary as a result of reservoir performance, drilling activity, commodity prices, fluctuations in operating expenses, technological advances, new geological or geophysical data or other economic factors. Accordingly, reserve estimates are generally different from the quantities ultimately recovered. We cannot predict the amounts or timing of such future revisions.
Our reserves have been prepared by our petroleum engineering staff and audited by Miller and Lents, independent petroleum engineers, who in their opinion determined the estimates presented to be reasonable in the aggregate. For more information regarding reserve estimation, including historical reserve revisions, refer to the Supplemental Oil and Gas Information to the Consolidated Financial Statements included in Item 8.
Our rate of recording depreciation, depletion and amortization (DD&A) expense is dependent upon our estimate of proved and proved developed reserves, which are utilized in our unit-of-production calculation. If the estimates of proved reserves were to be reduced, the rate at which we record DD&A expense would increase, reducing net income. Such a reduction in reserves may result from lower market prices, which may make it uneconomic to drill and produce higher cost fields. A 5% positive or negative revision to proved reserves would result in a decrease of $0.04 per Mcfe and an increase of $0.04 per Mcfe, respectively, on our DD&A rate. Revisions in significant fields may individually affect our DD&A rate. It is estimated that a positive or negative reserve revision of 10% in one of our most productive fields would result in a decrease of $0.05 per Mcfe and an increase of $0.06 per Mcfe, respectively, on our total DD&A rate. These estimated impacts are based on current data, and actual events could require different adjustments to our DD&A rate.
In addition, a decline in proved reserve estimates may impact the outcome of our impairment test under applicable accounting standards. Due to the inherent imprecision of the reserve estimation process, risks associated with the operations of proved producing properties and market sensitive commodity prices utilized in our impairment analysis, management cannot determine if an impairment is reasonably likely to occur in the future.
Carrying Value of Oil and Gas Properties
We evaluate our proved oil and gas properties for impairment on a field-by-field basis whenever events or changes in circumstances indicate an asset's carrying amount may not be recoverable. We compare expected undiscounted future cash flows to the net book value of the asset. If the future undiscounted expected cash flows, based on our estimate of future natural

43


gas and crude oil prices, operating costs and anticipated production from proved reserves and risk-adjusted probable and possible reserves, are lower than the net book value of the asset, the capitalized cost is reduced to fair value. Commodity pricing is estimated by using a combination of assumptions management uses in its budgeting and forecasting process, historical and current prices adjusted for geographical location and quality differentials, as well as other factors that management believes will impact realizable prices. In the event that commodity prices significantly decline, management would test the recoverability of the carrying value of its oil and gas properties and, if necessary, record an impairment charge. Fair value is calculated by discounting the future cash flows. The discount factor used is based on rates utilized by market participants that are commensurate with the risks inherent in the development and production of the underlying natural gas and oil.
Unproved oil and gas properties are assessed periodically for impairment on an aggregate basis through periodic updates to our undeveloped acreage amortization based on past drilling and exploration experience, our expectation of converting leases to held by production and average property lives. Average property lives are determined on a geographical basis and based on the estimated life of unproved property leasehold rights. Historically, the average property life in each of the geographical areas has not significantly changed and generally range from three to five years. The commodity price environment may impact the capital available for exploration projects as well as development drilling. We have considered these impacts when determining the amortization rate of our undeveloped acreage, especially in exploratory areas. If the average unproved property life decreases or increases by one year, the amortization would increase by approximately $8.9 million or decrease by approximately $7.5 million, respectively, per year.
As these properties are developed and reserves are proved, the remaining capitalized costs are subject to depreciation and depletion. If the development of these properties is deemed unsuccessful, the capitalized costs related to the unsuccessful activity is expensed in the year the determination is made. The rate at which the unproved properties are written off depends on the timing and success of our future exploration and development program.
Asset Retirement Obligations
The majority of our asset retirement obligations (ARO) relates to the plugging and abandonment of oil and gas wells and to a lesser extent meter stations, pipelines, processing plants and compressors. We record the fair value of a liability for an asset retirement obligation in the period in which it is incurred, with the associated asset retirement cost capitalized as part of the carrying amount of the related long-lived asset. The recognition of an asset retirement obligation requires management to make assumptions that include estimated plugging and abandonment costs, timing of settlements, inflation rates and discount rate. In periods subsequent to initial measurement, the asset retirement cost is depreciated using the units-of-production method, while increases in the discounted ARO liability resulting from the passage of time (accretion expense) are reflected as depreciation, depletion and amortization expense.
Accounting for Derivative Instruments and Hedging Activities
Under applicable accounting standards, the fair value of each derivative instrument is recorded as either an asset or liability on the balance sheet. At the end of each quarterly period, these instruments are marked-to-market. The change in fair value of derivatives not designated as hedges and the ineffective portion of the change in the fair value of derivatives designated as cash flow hedges and are recorded as a component of operating revenues in gain (loss) on derivative instruments in the Consolidated Statement of Operations. The change in the fair value of derivatives designated as cash flow hedges that are effective are recorded in accumulated other comprehensive income (loss) in stockholders’ equity in the Consolidated Balance Sheet.
Our derivative contracts are measured based on quotes from our counterparties. Such quotes have been derived using an income approach that considers various inputs including current market and contractual prices for the underlying instruments, quoted forward prices for natural gas and crude oil, basis differentials, volatility factors and interest rates, such as a LIBOR curve for a similar length of time as the derivative contract term, as applicable. These estimates are verified using relevant NYMEX futures contracts or are compared to multiple quotes obtained from counterparties for reasonableness. The determination of fair value also incorporates a credit adjustment for non-performance risk. We measure the non-performance risk of our counterparties by reviewing credit default swap spreads for the various financial institutions in which we have derivative transactions, while our non-performance risk is evaluated using a market credit spread provided by one of our banks.
Our financial condition, results of operations and liquidity can be significantly impacted by changes in the market value of our derivative instruments due to volatility of natural gas and crude oil prices, both NYMEX and basis differentials.

44


Income Taxes
We make certain estimates and judgments in determining our income tax expense for financial reporting purposes. These estimates and judgments include the calculation of certain deferred tax assets and liabilities that arise from differences in the timing and recognition of revenue and expenses for tax and financial reporting purposes and estimating reserves for potential adverse outcomes regarding tax positions that we have taken. We account for the uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return. The tax benefit from an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination by taxing authorities based on technical merits of the position. The amount of the tax benefit recognized is the largest amount of the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The effective tax rate and the tax basis of assets and liabilities reflect management's estimates of the ultimate outcome of various tax uncertainties.
We believe all of our deferred tax assets, net of any valuation allowances, will ultimately be realized, taking into consideration our forecasted future taxable income, which includes consideration of future operating conditions specifically related to commodity prices. If our estimates and judgments change regarding our ability to realize our deferred tax assets, our tax provision could increase in the period it is determined that it is more likely than not it will not be realized.
Our effective tax rate is subject to variability as a result of factors other than changes in federal and state tax rates and/or changes in tax laws which could affect us. Our effective tax rate is affected by changes in the allocation of property, payroll and revenues among states in which we operate. A small change in our estimated future tax rate could have a material effect on current period earnings.
Contingency Reserves
A provision for contingencies is charged to expense when the loss is probable and the cost is estimable. The establishment of a reserve is based on an estimation process that includes the advice of legal counsel and subjective judgment of management. In certain cases, management's judgment is based on the advice and opinions of legal counsel and other advisors, the interpretation of laws and regulations, which can be interpreted differently by regulators and courts of laws, our experience and the experiences of other companies dealing with similar matters, and our decision on how we intend to respond to a particular matter. Actual losses can differ from estimates for various reasons, including those noted above. We monitor known and potential legal, environmental and other contingencies and make our best estimate based on the information we have. Future changes in facts and circumstances not currently foreseeable could result in the actual liability exceeding the estimated ranges of loss and amounts accrued.
Stock-Based Compensation
We account for stock-based compensation under the fair value method of accounting in accordance with applicable accounting standards. Under the fair value method, compensation cost is measured at the grant date for equity-classified awards and remeasured each reporting period for liability-classified awards based on the fair value of an award and is recognized over the service period, which is generally the vesting period. To calculate fair value, we use either a Monte Carlo or Black-Scholes valuation model, as determined by the specific provisions of the award. The use of these models requires significant judgment with respect to expected life, volatility and other factors. Stock-based compensation cost for all types of awards is included in general and administrative expense in the Consolidated Statement of Operations. See Note 13 of the Notes to the Consolidated Financial Statements for a full discussion of our stock-based compensation.
Recently Adopted Accounting Pronouncements
Refer to Note 1 of the Notes to the Consolidated Financial Statements, "Summary of Significant Accounting Policies," for a discussion of recently adopted accounting pronouncements.
Recently Issued Accounting Pronouncements
Refer to Note 1 of the Notes to the Consolidated Financial Statements, "Summary of Significant Accounting Policies," for a discussion of new accounting pronouncements that affect us.
OTHER ISSUES AND CONTINGENCIES
Regulations. Our operations are subject to various types of regulation by federal, state and local authorities. See "Regulation of Oil and Natural Gas Exploration and Production," "Natural Gas Marketing, Gathering and Transportation," "Federal Regulation of Swap Transactions," "Federal Regulation of Petroleum," "Pipeline Safety Regulation," and "Environmental and Safety Regulations" in the "Other Business Matters" section of Item 1 for a discussion of these regulations.

45


Restrictive Covenants. Our ability to incur debt and to make certain types of investments is subject to certain restrictive covenants in our various debt instruments. Among other requirements, our senior note agreements and our revolving credit agreement specify a minimum annual coverage ratio of consolidated cash flow to interest expense for the trailing four quarters of 2.8 to 1.0, a minimum asset coverage ratio of the present value of proved reserves before income taxes plus adjusted cash to indebtedness and other liabilities of 1.25 to 1.0, which increases back to a ratio of 1.75 to 1.0 beginning on January 1, 2018, and a leverage ratio of debt to consolidated EBITDAX of 4.75 to 1.0. through and including December 31, 2016. Under the terms of the respective agreements, the leverage ratio will be adjusted to 4.25 to 1.0 through and including December 31, 2017 and 3.5 to 1.0 beginning on March 31, 2018 or until we maintain a leverage ratio below 3.0 to 1.0 for two consecutive fiscal quarters on or after December 31, 2017 or we receive an investment grade rating by Standard & Poor's Ratings Services (S&P) or Moody's Investor Service, Inc. (Moody's), at which time we will no longer be subject to this covenant. Our revolving credit agreement also requires us to maintain a minimum current ratio of 1.0 to 1.0. At December 31, 2016, we were in compliance with all restrictive financial covenants in both our senior note agreements and our revolving credit agreement.
Operating Risks and Insurance Coverage. Our business involves a variety of operating risks. See "Risk Factors—We face a variety of hazards and risks that could cause substantial financial losses" in Item 1A. In accordance with customary industry practice, we maintain insurance against some, but not all, of these risks and losses. The occurrence of any of these events not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. The costs of these insurance policies are somewhat dependent on our historical claims experience, the areas in which we operate and market conditions.
Commodity Pricing and Risk Management Activities. Our revenues, operating results, financial condition and ability to borrow funds or obtain additional capital depend substantially on prevailing prices for natural gas and crude oil. Further declines in natural gas and crude oil prices may have a material adverse effect on our financial condition, liquidity, ability to obtain financing and operating results. Lower natural gas and crude oil prices also may reduce the amount of natural gas and crude oil that we can produce economically. Historically, natural gas and crude oil prices have been volatile, with prices fluctuating widely, and they are likely to continue to be volatile. Depressed prices in the future would have a negative impact on our future financial results. In particular, substantially lower prices would significantly reduce revenue and could potentially trigger an impairment of our oil and gas properties or a violation of certain financial debt covenants. Because our reserves are predominantly natural gas (approximately 97% of equivalent proved reserves), changes in natural gas prices may have a more significant impact on our financial results than oil prices.
The majority of our production is sold at market responsive prices. Generally, if the related commodity index declines, the price that we receive for our production will also decline. Furthermore, we have experienced widening basis differentials in certain regions, such as in the Appalachian region, resulting in further declines in natural gas prices. Therefore, the amount of revenue that we realize is determined by certain factors that are beyond our control. However, management may mitigate this price risk on a portion of our anticipated production with the use of commodity derivatives. Most recently, we have used commodity derivatives such as collar, swap and basis swap arrangements to reduce the impact of sustained lower pricing on our revenue. Under both arrangements, there is also a risk that the movement of index prices may result in our inability to realize the full benefit of an improvement in market conditions.
RESULTS OF OPERATIONS
2016 and 2015 Compared
We reported a net loss for 2016 of $417.1 million, or $0.91 per share, compared to net loss for 2015 of $113.9 million, or $0.28 per share. The increase in net loss was primarily due to lower operating revenues and higher operating expenses, partially offset by a higher income tax benefit.

46


Revenue, Price and Volume Variances
Our revenues vary from year to year as a result of changes in commodity prices and production volumes. Below is a discussion of revenue, price and volume variances.
 
Year Ended December 31,
 
Variance
Revenue Variances (In thousands)
2016
 
2015
 
Amount
 
Percent
Natural gas
$
1,022,590

 
$
1,025,044

 
$
(2,454
)
 
 %
Crude oil and condensate
151,106

 
248,211

 
(97,105
)
 
(39
)%
Gain (loss) on derivative instruments
(38,950
)
 
56,686

 
(95,636
)
 
(169
)%
Brokered natural gas
13,569

 
16,383

 
(2,814
)
 
(17
)%
Other
7,362

 
10,826

 
(3,464
)
 
(32
)%
 
$
1,155,677

 
$
1,357,150

 
$
(201,473
)
 
(15
)%
 
Year Ended December 31,
 
Variance
Increase
(Decrease)
(In thousands)
 
2016
 
2015
 
Amount
 
Percent
Price Variances
 

 
 

 
 

 
 

 
 

Natural gas
$
1.70

 
$
1.81

 
$
(0.11
)
 
(6
)%
 
$
(64,718
)
Crude oil and condensate
$
37.65

 
$
45.72

 
$
(8.07
)
 
(18
)%
 
(32,365
)
Total
 

 
 

 
 

 
 

 
$
(97,083
)
Volume Variances
 

 
 

 
 

 
 

 
 

Natural gas (Bcf)
600.4

 
566.0

 
34.4

 
6
 %
 
$
62,264

Crude oil and condensate (Mbbl)
4,013

 
5,429

 
(1,416
)
 
(26
)%
 
(64,740
)
Total
 

 
 

 
 

 
 

 
$
(2,476
)

Natural Gas Revenues
The decrease in natural gas revenues of $2.5 million was due to lower natural gas prices, partially offset by higher production. The increase in production was a result of our drilling and completion activities in Pennsylvania, partially offset by the divestiture of certain oil and gas properties in east Texas in early 2016.
Crude Oil and Condensate Revenues
The decrease in crude oil and condensate revenues of $97.1 million was due to lower production and crude oil prices. The decrease in production was a result of a decrease in drilling and completion activities in south Texas.
Impact of Derivative Instruments on Operating Revenues
 
Year Ended December 31,
(In thousands)
2016
 
2015
Cash received (paid) on settlement of derivative instruments
 

 
 

Gain (loss) on derivative instruments
$
(1,682
)
 
$
194,289

Non-cash gain (loss) on derivative instruments
 

 
 

Gain (loss) on derivative instruments
(37,268
)
 
(137,603
)
 
$
(38,950
)
 
$
56,686



47


Brokered Natural Gas
 
Year Ended December 31,
 
Variance
 
Price and
Volume
Variances (In thousands)
 
 
2016
 
 
2015
 
Amount
 
Percent
 
Brokered Natural Gas Sales
 
 

 
 
 

 
 

 
 

 
 

Sales price ($/Mcf)
$
2.55

 
$
2.83

 
$
(0.28
)
 
(10
)%
 
$
(1,490
)
Volume brokered (Mmcf)
x
5,321

 
x
5,784

 
(463
)
 
(8
)%
 
(1,324
)
Brokered natural gas (In thousands)
$
13,569

 
$
16,383

 
 

 
 

 
$
(2,814
)
Brokered Natural Gas Purchases
 
 

 
 
 

 
 

 
 

 
 

Purchase price ($/Mcf)
$
2.03

 
$
2.18

 
$
(0.15
)
 
(7
)%
 
$
798

Volume brokered (Mmcf)
x
5,321

 
x
5,784

 
(463
)
 
(8
)%
 
1,009

Brokered natural gas (In thousands)
$
10,785

 
$
12,592

 
 

 
 

 
$
1,807

 
 
 
 
 
 
 
 
 
 
 
 
Brokered natural gas margin (In thousands)
$
2,784

 
$
3,791

 
 

 
 

 
$
(1,007
)
The $1.0 million decrease in brokered natural gas margin is a result of a decrease in sales price that outpaced the decrease in purchase price and lower brokered volumes.
Operating and Other Expenses
 
Year Ended December 31,
 
Variance
(In thousands)
2016
 
2015
 
Amount
 
Percent
Operating and Other Expenses
 

 
 

 
 

 
 

Direct operations
$
100,696

 
$
140,814

 
$
(40,118
)
 
(28
)%
Transportation and gathering
436,542

 
427,588

 
8,954

 
2
 %
Brokered natural gas
10,785

 
12,592

 
(1,807
)
 
(14
)%
Taxes other than income
29,223

 
42,809

 
(13,586
)
 
(32
)%
Exploration
27,662

 
27,460

 
202

 
1
 %
Depreciation, depletion and amortization
590,128

 
622,211

 
(32,083
)
 
(5
)%
Impairment of oil and gas properties and other assets
435,619

 
114,875

 
320,744

 
279
 %
General and administrative
87,242

 
69,444

 
17,798

 
26
 %
 
$
1,717,897

 
$
1,457,793

 
$
260,104

 
18
 %
 
 
 
 
 
 
 
 
Earnings (loss) on equity method investments
$
(2,477
)
 
$
6,415

 
$
(8,892
)
 
(139
)%
Gain (loss) on sale of assets
(1,857
)
 
3,866

 
(5,723
)
 
(148
)%
Loss on debt extinguishment
4,709

 

 
4,709

 
100
 %
Interest expense
88,336

 
96,911

 
(8,575
)
 
(9
)%
Income tax benefit
(242,475
)
 
(73,382
)
 
169,093

 
230
 %
Total costs and expenses from operations increased by $260.1 million from 2015 to 2016. The primary reasons for this fluctuation are as follows:
Direct operations decreased $40.1 million largely due to improved operational efficiencies, cost reductions from service providers and suppliers in 2016 compared to 2015 and divestiture of certain oil and gas properties in east Texas in February 2016.
Transportation and gathering increased $9.0 million due to higher throughput as a result of higher Marcellus Shale production and the commencement of various transportation and gathering agreements in the Marcellus Shale throughout 2015.

48


Brokered natural gas decreased $1.8 million from 2015 to 2016. See the preceding table titled "Brokered Natural Gas" for further analysis.
Taxes other than income decreased $13.6 million due to $7.2 million lower production taxes resulting from lower crude oil prices and production in south Texas and the receipt of a production tax refund of $1.9 million in February 2016. Additionally, drilling impact fees decreased $1.5 million as a result of drilling fewer wells in Pennsylvania during 2016 compared to 2015 and ad valorem taxes decreased $3.8 million as a result of lower property values primarily in south Texas. The remaining changes were not individually significant.
Exploration increased $0.2 million as a result of a $6.7 million increase in exploratory dry hole expense, partially offset by lower charges related to the release of certain drilling rig contracts in south Texas and $2.7 million lower geophysical and geological costs and other exploration expenses. During 2016, we recorded rig termination charges of $1.7 million, compared to $5.1 million during 2015.
Depreciation, depletion and amortization decreased $32.1 million, of which $41.2 million was due to a lower DD&A rate of $0.87 per Mcfe for 2016 compared to $0.93 per Mcfe for 2015, partially offset by a $23.0 million increase due to higher equivalent production volumes. The lower DD&A rate was primarily due to lower cost reserve additions and the impairment charge recorded in the fourth quarter of 2015 associated with higher DD&A rate fields. In addition, amortization of unproved properties decreased $16.4 million in 2016 as a result of lower lease acquisition costs and lower amortization rates.
Impairment of oil and gas properties and other assets was $435.6 million in 2016 due to the impairment of oil and gas properties and related pipeline assets in West Virginia and Virginia. In 2015, we recognized an impairment of oil and gas properties of $114.9 million related to certain non-core fields in south Texas, east Texas and Louisiana. The impairment of these fields was due to a significant decline in commodity prices in late 2015.
General and administrative increased $17.8 million due to higher stock-based compensation expense of $12.3 million primarily the result of an increase in the Company's stock price during 2016 compared to 2015 and $2.7 million higher professional services. The remaining changes were not individually significant.
Earnings (Loss) on Equity Method Investments
The decrease in equity method earnings (loss) is the result of our proportionate share of net earnings from our equity method investments in 2016 compared to 2015.
Gain (Loss) on Sale of Assets
During 2016, we recognized a net aggregate loss of $1.9 million primarily due to the sale of certain of our oil and gas properties in east and south Texas. During 2015, we recognized a net aggregate gain of $3.9 million primarily due to the sale of certain unproved oil and gas properties in east Texas.

Loss on Debt Extinguishment
A $4.7 million extinguishment loss was recognized in the second quarter of 2016 related to the premium paid for the repurchase of a portion of our 6.51% weighted-average senior notes in May 2016 and the write-off of a portion of the associated deferred financing costs due to early repayment.
Interest Expense
Interest expense decreased $8.6 million due to a $5.5 million decrease resulting from the repayment of the outstanding borrowings under our revolving credit facility in March 2016, which remained undrawn through December 31, 2016. Interest expense also decreased $3.4 million resulting from the repurchase of a portion of our 6.51% weighted-average senior notes in May 2016 and the repayment of our 7.33% weighted-average senior notes at maturity. These decreases were offset by a $0.6 million increase in commitment fees as a result of an increase in the unused portion of the commitments under our revolving credit facility.

Income Tax Benefit
Income tax benefit increased $169.1 million due to a higher pretax loss, partially offset by a lower effective tax rate. The effective tax rates for 2016 and 2015 were 36.8% and 39.2%, respectively. The decrease in the effective tax rate is primarily due to the impact of non-recurring discrete items recorded during 2016 compared to 2015.

49


We expect our 2017 effective income tax rate to be approximately 37.0%; however, this rate may fluctuate based on a number of factors, including but not limited to changes in enacted federal and/or state tax rates that occur during the year, as well as changes in the composition and location of our asset base, our employees and our customers.
2015 and 2014 Compared
We reported a net loss for 2015 of $113.9 million, or $0.28 per share, compared to net income for 2014 of $104.5 million, or $0.25 per share. The decrease in net income was primarily due to lower operating revenues, higher operating and interest expenses and a decrease in gain on sale of assets. These decreases were partially offset by lower impairments on oil and gas properties.
Revenue, Price and Volume Variances
Our revenues vary from year to year as a result of changes in commodity prices and production volumes. Below is a discussion of revenue, price and volume variances.
 
Year Ended December 31,
 
Variance
Revenue Variances (In thousands)
2015
 
2014
 
Amount
 
Percent
Natural gas
$
1,025,044

 
$
1,590,625

 
$
(565,581
)
 
(36
)%
Crude oil and condensate
248,211

 
313,889

 
(65,678
)
 
(21
)%
Gain (loss) on derivative instruments
56,686

 
219,319

 
(162,633
)
 
(74
)%
Brokered natural gas
16,383

 
34,416

 
(18,033
)
 
(52
)%
Other
10,826

 
14,762

 
(3,936
)
 
(27
)%
 
$
1,357,150

 
$
2,173,011

 
$
(815,861
)
 
(38
)%
 
Year Ended December 31,
 
Variance
 
Increase
(Decrease)
(In thousands)
 
2015
 
2014
 
Amount
 
Percent
 
Price Variances
 

 
 

 
 

 
 

 
 

Natural gas(1)
$
1.81

 
$
3.13

 
$
(1.32
)
 
(42
)%
 
$
(747,121
)
Crude oil and condensate(2)
$
45.72

 
$
87.48

 
$
(41.76
)
 
(48
)%
 
(226,729
)
Total
 

 
 

 
 

 
 

 
$
(973,850
)