PDC Energy (PDCE) Risk Analysis

Our future success depends to a large extent on the services of our key employees. The loss of one or more of these individuals could have a material adverse effect on our business. Furthermore, competition for experienced technical and other professional personnel remains strong. If we cannot retain our current personnel or attract additional experienced personnel, our ability to compete could be adversely affected. Also, the loss of experienced personnel could lead to a loss of technical expertise. Further, our operations require laborers, including contractors, skilled in multiple disciplines, such as heavy equipment operators, mechanics and engineers, among others. A shortage in skilled labor can increase the risk of safety issues, decrease our overall productivity and business results and increase the labor, health care and benefits costs we incur to attract and retain high quality employees with the right skill sets to meet our needs. For example, in 2022 we experienced an increase in contractor injuries at our worksites, many attributable to the labor conditions in the oilfield, including a greater number of short-service contractor employees.

We use commodity derivatives for a portion of the production from our own wells to achieve more predictable cash flows, to reduce exposure to adverse fluctuations in commodity prices, and to allow our natural gas marketing company to offer pricing options to natural gas sellers and purchasers. These arrangements expose us to the risk of financial loss in some circumstances, including when purchases or sales are different than expected or the counterparty to the commodity derivative contract defaults on its contractual obligations. In addition, many of our commodity derivative contracts are based on WTI or another crude oil or natural gas index price. The risk that the differential between the index price and the price we receive for the relevant production may change unexpectedly makes it more difficult to hedge effectively and increases the risk of a hedging-related loss. Also, commodity derivative arrangements may limit the benefit we would otherwise receive from increases in the prices for the relevant commodity. At December 31, 2022, we had hedged a total of 25.3 MMBbls crude oil for 2023 to 2025 and 214.8 BBtu of natural gas for 2023 to 2025. These hedges may be inadequate to protect us from continuing and prolonged declines in crude oil and natural gas prices. Since we do not designate our commodity derivatives as cash flow hedges, we do not currently qualify for use of hedge accounting; therefore, changes in the fair value of commodity derivatives are recorded in our income statements and our net income is subject to greater volatility than it would be if our commodity derivative instruments qualified for hedge accounting. For instance, if commodity prices rise significantly, this could result in significant non-cash charges during the relevant period, which could have a material negative effect on our net income.

Our exploration, development, production and marketing operations are regulated extensively at the federal, state and local levels. Laws and regulations have increased the costs of planning, designing, drilling, installing, operating and abandoning crude oil and natural gas wells and associated facilities. Under these laws and regulations, we could also be liable for personal injuries, property damage and natural resource or other damages, and could be required to change, suspend or terminate operations. A summary of certain laws and regulations that apply to us and some potential changes to those laws and regulations is set forth in Items 1 and 2 - Business and Properties - Governmental Regulation. Any of the currently applicable laws and regulations could be amended, including in ways that we do not anticipate, and those changes could adversely affect our operations. From time to time, we have been subject to sanctions and lawsuits relating to alleged noncompliance with regulatory requirements. For example, in October 2017, in order to settle a lawsuit brought against us by the U.S. Department of Justice, on behalf of the EPA and the State of Colorado, we entered into a consent decree ("CD") pursuant to which we paid a fine and agreed to implement certain operational changes. In addition, as a result of the acquisition of SRC Energy, Inc. ("SRC"), and Great Western Petroleum, LLC ("GW"), we became subject to SRC's 2018 Compliance Order on Consent ("SRC COC") and GW's 2018 Compliance Order on Consent ("GW COC"), each of which involved issues similar to those addressed in the CD. As of December 31, 2022, each of these matters have been resolved. The CD was terminated on December 15, 2022; the SRC COC was terminated on February 28, 2022; and the GW COC was terminated on November 7, 2022. We may, however, be subject to similar lawsuits and orders in the future. The regulatory environment in which we operate also changes frequently, often through the imposition of new or more stringent environmental and other requirements, some of which may apply retroactively. We cannot predict the nature, timing, cost or effect of such additional requirements, but they may have a variety of adverse effects on us. The types of regulatory changes that could impact our operations vary widely and include, but are not limited to, the following: - As discussed in Items 1 and 2, Business and Properties - Governmental Regulation, there is continued ambiguity around COGCC permitting rules as implementation continues. In 2023, we anticipate continued rulemakings and guidance from the COGCC Commissioners and staff. We expect to participate in the stakeholder process to create rules and guidance around high-priority habitat, workers safety and cumulative impacts. We cannot predict the ultimate impact of these requirements on our inventory and operations. - Federal and various state, local and regional governmental authorities have implemented, or considered implementing, regulations that seek to limit or discourage the emission of carbon, methane and other GHGs. Additional laws or regulations intended to restrict the emission of GHGs could require us to incur additional operating costs and could adversely affect demand for the oil, natural gas and NGLs that we sell. These new laws or rules could, among other things, require us to install new emission controls on our equipment and facilities, acquire allowances to authorize our GHG emissions, pay taxes related to our emissions and administer and manage a GHG emissions program. In addition, like other energy companies, we could be named as a defendant in GHG-related lawsuits. - The development of new environmental initiatives or regulations related to the acquisition, withdrawal, storage and use of surface water or groundwater or treatment and discharge of water waste, may limit our ability to use techniques such as hydraulic fracturing, increase our development and operating costs and cause delays, interruptions or termination of our operations, any of which could have an adverse effect on our operations and financial condition. - Corporate governance, public disclosure and compliance practices continue to evolve based upon continuing legislative action, SEC rulemaking and policy positions taken by large institutional stockholders and proxy advisors. As a result, the number of rules, regulations and standards applicable to us may become more burdensome to comply with, could increase scrutiny of our practices and policies by these or other groups and increase our legal and financial compliance costs and the amount of time management must devote to governance and compliance activities. For example, the SEC has recently proposed rules requiring that issuers provide significantly increased disclosures concerning cybersecurity matters, insider trading policies and procedures and the impact of climate changes on their business.

As of December 31, 2022, we have fully released our tax valuation allowance and we anticipate incurring federal and state income taxes in 2023. In addition, 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 gas properties; elimination of the ability to fully deduct intangible drilling costs in the year incurred; and an increase in the geological and geophysical amortization period for independent producers. Additional proposed general tax law changes include raising tax rates on both domestic and foreign income and imposing a new alternative minimum tax on book income. Further, many states are currently in deficits, and have been enacting laws eliminating or limiting certain deductions, carryforwards and credits in order to increase tax revenue. Should the U.S. or any relevant state pass tax legislation limiting any currently allowed tax incentives or deductions, our taxes would increase, potentially significantly, which would have a negative impact on our net income and cash flows. This could also reduce our drilling activities. Since future changes to federal and state tax legislation and regulations are unknown, we cannot predict the ultimate impact such changes may have on our business.

Publicly traded companies, both in the oil and natural gas industry and otherwise, are facing increased scrutiny from stakeholders regarding climate changes and ESG matters. Attention to these issues has come from stakeholders including the SEC, local governments and institutional investors, and these stakeholders have and may in the future seek certain outcomes or results on issues they perceive to be material. For example, the SEC has recently proposed rules to enhance and standardize climate-related disclosures for investors. This increased scrutiny could result in reduced access to capital, shareholder proposals and other adverse effects. Companies that fail to adapt or comply with evolving stakeholder expectations, or are perceived as failing to respond appropriately, could suffer from reputational damage and the business, financial condition, and/or stock price of such a company could be materially and adversely impacted. Many scientists have shown that increasing concentrations of carbon dioxide, methane and other GHGs in the Earth's atmosphere are changing global climate patterns. The following is a summary of potential climate-related risks that could adversely affect us: Transition Risks. Transition risks are related to the transition to a lower-carbon economy and include the risk of reduced demand and lower prices for our production. Policy and Legal Risks. Policy risks include those arising from the regulatory actions intended to discourage activities that contribute to the adverse effects of climate change or to promote adaptation to climate change. President Biden's administration has made addressing climate change a high priority, and this could lead to a more challenging regulatory environment. Examples of policy actions from federal, state or local governments that could increase the costs of our operations, reduce our future development or production or reduce demand for our oil and gas include the implementation of carbon-pricing mechanisms, regulations designed to shift energy use toward lower emission sources, regulations regarding energy and water use efficiency, regulations disallowing development or production activity on high ozone level days, and regulations intended to promote sustainable land use. Policy actions also may include restrictions or bans on oil and gas activities, which could lead to write-downs or impairments of our assets. Legal risks include potential lawsuits based on alleged failures to mitigate impacts of climate change, failures to adapt to climate change and disclosure matters. For example, we may be subject to climate-related litigation such as "greenwashing" suits with respect to our operations, disclosures, or products. Although we are not a party to any such climate-related or "greenwashing" litigation currently, unfavorable rulings against us in any such case brought against us in the future could significantly impact our operations and could have an adverse impact on our financial condition. Technology Risks. Technological improvements or innovations that support the transition to a lower-carbon, more energy efficient economic system may have a significant impact on us. The development and use of emerging technologies in renewable energy, battery storage, and energy efficiency may reduce demand for oil and gas, resulting in lower prices and revenues, and higher costs. In addition, many automobile manufacturers have announced plans to shift production from internal combustion engine vehicles to electric powered vehicles, and some states and foreign countries have announced bans on sales of internal combustion engine vehicles beginning as early as 2025, which could reduce demand for oil. Market Risks. Markets could be affected by climate change through shifts in supply and demand for certain commodities, especially carbon-intensive commodities such as oil and gas and other products dependent on oil and gas. Lower demand for our oil and gas production could result in lower prices and lower revenues. Market risk also may take the form of limited access to capital as investors shift investments to less carbon-intensive industries and alternative energy industries. In addition, certain investment advisers, banks, and sovereign wealth, pension, and endowment funds have in recent years been promoting divestment of investments in fossil fuel companies and pressuring lenders to limit funding to companies engaged in the extraction, production, and sale of oil and gas. We have substantial capital requirements, and we may not be able to obtain needed financing on satisfactory terms, or at all. Reputational Risk. Climate change is a potential source of reputational risk, which is tied to changing customer or community perceptions of an organization's contribution to, or detraction from, the transition to a lower-carbon economy. Physical Risks. Potential physical risks resulting from climate change may be event driven (including increased severity of extreme weather events, such as hurricanes, droughts, or floods) or may be driven by longer-term shifts in climate patterns that may cause sea levels to rise or chronic heat waves. Potential physical risks may cause direct damage to assets and indirect impacts, such as supply chain disruption, and also could include changes in water availability, sourcing, and quality, which could impact drilling and completion operations. These physical risks could cause increased costs, production disruptions, and lower revenues and could substantially increase the cost or limit the availability of insurance.

Our industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce crude oil, natural gas and NGLs, but also carry on refining operations and market petroleum and other products on a regional, national or worldwide basis. These companies may be able to pay more for productive properties and exploratory prospects, evaluate, bid for and purchase a greater number of properties and prospects than we can. Our ability to acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. In addition, larger companies may have a greater ability to continue exploration activities during periods of low commodity prices. Larger competitors may also be able to absorb the burden of present and future federal, state, local and other laws and regulations more easily than we can, which could adversely affect our competitive position. Additionally, larger competitors may have greater financial, technical and personnel resources that may provide technological advantages and may in the future allow them to implement new technologies before we can. These factors could adversely affect our operations and our profitability.

We are exposed to certain risks associated with our customers, contractual counterparties and lenders. These risks include credit risks associated with (i) customers who purchase our oil, NGLs and natural gas production, (ii) the collection of receivables from our joint interest partners for their proportionate share of expenditures made on projects we operate, and (iii) counterparties to our derivative financial contracts. We are also subject to performance risks associated with the non-delivery, or delayed delivery, of contracted products or services, including the transportation and processing of our oil, NGLs and natural gas production and liquidity risk in the event one or more lenders under our existing credit facility are unable to perform their funding obligations. In the event a customer, contractual counterparty or lender fails to satisfy their obligations, our business, financial condition and results of operations could be materially and adversely affected.

We face various security threats, including attempts by third parties to gain unauthorized access to, or control of, competitive information or to render data or systems corrupted or unusable; threats to the safety of our employees; threats to the security of our infrastructure or third-party facilities and infrastructure, such as processing plants and pipelines; and threats from terrorist acts. There can be no assurance that the procedures and controls we use to monitor these threats and mitigate our exposure to them will be sufficient to prevent them from materializing. Our industry has become increasingly dependent on digital technologies to conduct day-to-day operations, including certain exploration, development and production activities. We depend on digital technology, including information systems and related infrastructure, as well as cloud applications and services, to store, transmit, process and record sensitive information (including but not limited to trade secrets, employee information and financial and operating data), communicate with our employees and business partners, and for many other activities related to our business. In addition, computer systems control the oil and gas production and processing equipment that are necessary to deliver our production to market. Critical infrastructure targets, such as energy-related assets and transportation assets, may be at greater risk of future cyber-attacks than other targets. A disruption or failure of these systems, or of the networks and infrastructure on which they rely, may cause damage to critical production, distribution and/or storage assets, delay or prevent delivery to markets, or make it difficult to accurately account for production and settle transactions. The various procedures, facilities, infrastructure and controls we utilize to monitor these threats and mitigate our exposure to such threats are costly and labor intensive. Moreover, there can be no assurance that such measures will be sufficient to prevent security breaches from occurring. The continuing and evolving threat of cybersecurity attacks has resulted in increased regulatory focus on prevention, which could potentially elevate costs, and failure to comply with these regulations could result in penalties and potential legal liability. As dependence on digital technologies has increased in our industry cyber incidents, including deliberate attacks and unintentional events, have also increased. Our systems and infrastructure are, and those of our business partners, including vendors, service providers, operating partners, purchasers of our production and financial institutions may be, subject to damage or interruption from a number of potential sources including natural disasters, software viruses or other malware, power failures, cyber-attacks and other events. We and our business partners also face various other cyber-security threats from criminal hackers, state-sponsored intrusion, industrial espionage and employee malfeasance, including threats to gain access to sensitive information or to render data or systems unusable. Our technologies, systems and networks, and those of our business partners, may become the target of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary and other information, theft of property or other disruption of our business operations and planned business transactions. In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period. To our knowledge, we have not suffered material losses related to cyber-attacks to date; however, there can be no assurance that we will not suffer material losses in the future either as a result of an interruption to or a breach of our systems or those of our third-party vendors and service providers. If we were successfully attacked, we could incur substantial remediation and other costs or suffer other negative consequences, such as a loss of competitive information, critical infrastructure, personnel or capabilities essential to our operations. Insurance may not provide adequate protection from these risks. Events of this nature could have a material adverse effect on our reputation, financial condition, results of operations or cash flows. Moreover, as the sophistication of cyber-attacks continues to evolve, we may be required to expend significant additional resources to further enhance our digital security or to remediate vulnerabilities.