Petroquest Energy (PQ) 8-K Results of Operations and Financial Condition

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 8-K

Current Report
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED):
October 28, 2005

PETROQUEST ENERGY, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	72-1440714
(State of Incorporation)	(I.R.S. Employer Identification No.)
400 E. Kaliste Saloom Rd., Suite 6000
Lafayette, Louisiana	70508
(Address of Principal Executive Offices)	(Zip Code)

Commission File Number: 0-019020

Registrant’s telephone number, including area code: (337) 232-7028

     Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

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TABLE OF CONTENTS

Item 2.02 RESULTS OF OPERATIONS AND FINANCIAL CONDITION

On October 28, 2005, PetroQuest Energy, Inc. (the “Company”) announced net income for the quarter ended September 30, 2005 of $5,045,000 or $0.10 per share, compared to third quarter 2004 net income of $3,940,000 or $0.08 per share. Net cash flow provided by operating activities before working capital changes for the third quarter of 2005 was $19,115,000, as compared to $16,330,000 for the comparable 2004 period. Net cash flow provided by operating activities for the quarters ended September 30, 2005 and 2004 totaled $30,187,000 and $25,935,000, respectively. For the first nine months of 2005, the Company reported net income of $13,097,000 or $0.27 per share. The Company reported net income of $11,349,000 or $0.25 per share for the first nine months of 2004. For the first nine months of 2005, net cash flow provided by operating activities before working capital changes was $55,474,000. Net cash flow provided by operating activities before working capital changes for the first nine months of 2004 was $46,163,000. For the nine months ended September 30, 2005 and 2004, net cash flow provided by operating activities totaled $63,377,000 and $49,472,000, respectively. A reconciliation of net cash flow provided by operating activities to net cash flow provided by operating activities before working capital changes is attached in this release.

Oil and gas sales during the third quarter of 2005 increased 37% to $30,859,000 as compared to $22,516,000 in the third quarter of 2004. For the first nine months of 2005, sales increased 33% to $82,508,000 from $62,084,000 in the first nine months of 2004. On an Mcfe basis, production for the quarter and nine months ended September 30, 2005 increased 2% and 10% over the respective 2004 periods. Stated on an Mcfe basis, unit prices received during the third quarter and first nine months of 2005 were 34% and 20% higher, respectively, than the prices received during the comparable 2004 periods.

Lease operating expenses for the third quarter of 2005 increased 57% to $1.70 per Mcfe from $1.08 per Mcfe in the third quarter of 2004. For the first nine months of 2005, lease operating expenses increased 46% to $1.31 per Mcfe from $0.90 per Mcfe in the comparable period of 2004. The increase in lease operating expenses during the current year was the result of the increase in the number of producing wells, a general increase in field service costs and the major hurricanes during the current year. Depreciation, depletion and amortization on oil and gas properties for the third quarter of 2005 increased 3% to $2.59 per Mcfe from $2.52 per Mcfe in the third quarter of 2004. For the first nine months of 2005, depreciation, depletion and amortization on oil and gas properties increased 2% to $2.53 per Mcfe from $2.48 per Mcfe for the comparable period of 2004.

Drilling Update

During the quarter, PetroQuest operated the drilling and completion of three more wells in its Southeast Carthage Field which brings the 2005 total to nine wells drilled and completed in this field. Additionally, PetroQuest operated the drilling and completion of 14 coal bed methane wells in the Arkoma Basin, and participated in 10 additional successful non-operated coal bed methane wells. During the first nine months of 2005, PetroQuest has participated in 43 wells in the Arkoma Basin. Since entering East Texas and the Arkoma Basin, PetroQuest has achieved a 100% success rate in both areas.

As previously announced, the Company is completing its Pebble Beach Prospect in the Gulf of Mexico. The well is expected to begin producing during late December at a gross rate of approximately 15,000 Mcfe per day. PetroQuest owns an approximate 27% NRI in the well. Hurricanes Katrina and Rita have delayed the initial production of this prospect.

Drilling continues in the Company’s 10 to 15 well 2005 program in Southeast Carthage Field with two rigs currently running, and the 60 well 2005 program in the Arkoma Basin. The Company plans to keep two operated rigs in the Arkoma Basin during the fourth quarter and plans to participate in multiple outside operated wells. The Company is currently drilling its Pelican Point Prospect (25% working interest), its Chicory Prospect (38% working interest) and its Cayenne Prospect (50% working interest) in

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South Louisiana. The Company is drilling its Poppy Hills Prospect (25% working interest) in the Gulf of Mexico.

The Company expects to resume drilling on its Oakbourne Prospect (20% working interest) during the fourth quarter of 2005.

The following table sets forth certain information with respect to the oil and gas operations of the Company for the three- and nine-month periods ended September 30, 2005 and 2004:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
Production:
Oil (Bbls)		138,013		218,906		536,568		643,437
Gas (Mcf)		3,046,211		2,481,218		8,547,834		6,803,269
Total Production (Mcfe)		3,874,289		3,794,654		11,767,242		10,663,891
Sales:
Total oil sales	$	6,711,423	$	8,013,842	$	24,331,122	$	22,324,568
Total gas sales	$	24,147,980	$	14,502,074	$	58,176,498	$	39,759,829
Total oil and gas sales	$	30,859,403	$	22,515,916	$	82,507,620	$	62,084,397
Average sales prices:
(Including hedges)
Oil (per Bbl)	$	48.63	$	36.61	$	45.35	$	34.70
Gas (per Mcf)	$	7.93	$	5.84	$	6.81	$	5.84
Per Mcfe	$	7.97	$	5.93	$	7.01	$	5.82

The above sales and average sales prices include reductions related to gas hedges of $1,563,000 and $119,000 and oil hedges of $1,688,000 and $1,295,000 for the three months ended September 30, 2005 and 2004, respectively. The above sales and average sales prices include reductions related to gas hedges of $2,641,000 and $486,000 and oil hedges of $4,029,000 and $2,468,000 for the nine months ended September 30, 2005 and 2004, respectively.

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The following initiates guidance for the fourth quarter of 2005:

	Guidance for
Description	4th Quarter 2005
Production volumes (MMcfe/d)	40 - 45
Percent gas	73%
Expenses:
Lease operating expenses (per Mcfe)	$1.60 - $1.70
Production taxes (per Mcfe)	$0.45 - $0.55
Depreciation, depletion and amortization (per Mcfe)	$2.60 - $2.70
General and administrative (in millions)	$2.0 - $2.5
Interest expense (in millions)	$3.4 - $3.6
Effective tax rate (all deferred)	35%

The following updates guidance for the year ended December 31, 2005:

	Guidance for
Description	Full year 2005
Production volumes (MMcfe/d)	40 - 45
Percent gas	73%
Expenses:
Lease operating expenses (per Mcfe)	$1.40 - $1.50
Production taxes (per Mcfe)	$0.25 - $0.35
Depreciation, depletion and amortization (per Mcfe)	$2.60 - $2.70
General and administrative (in millions)	$7.0 - $7.5
Interest expense (in millions)	$12 - $13(1)
Effective tax rate (all deferred)	35%

(1) Includes a $2.4 million pre-tax charge related to the write-off of deferred financing costs in conjunction with the notes offering consummated during the second quarter.

Conference call

Company management will be hosting a conference call with investors that will be broadcast live over the Internet on October 28, 2005 at 9:30 a.m. Eastern time. To access this call, log on to the Company’s website atwww.petroquest.com.

About the Company

PetroQuest Energy, Inc. is an independent energy company engaged in the exploration, development, acquisition and production of oil and natural gas reserves in the Gulf Coast Basin, Texas and Oklahoma. PetroQuest trades on the Nasdaq National Market under the ticker symbol “PQUE.”

Forward-Looking Statements

This press release contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are subject to certain risks, trends and uncertainties that could cause

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actual results to differ materially from those projected. Among those risks, trends and uncertainties are our estimate of the sufficiency of our existing capital sources, our ability to raise additional capital to fund cash requirements for future operations, the uncertainties involved in estimating quantities of proved oil and natural gas reserves, in prospect development and property acquisitions and in projecting future rates of production, the timing of development expenditures and drilling of wells, and the operating hazards attendant to the oil and gas business. In particular, careful consideration should be given to cautionary statements made in the various reports PetroQuest has filed with the Securities and Exchange Commission. PetroQuest undertakes no duty to update or revise these forward-looking statements.

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PETROQUEST ENERGY, INC.
Consolidated Statements of Income
(unaudited)
(Amounts in Thousands, Except Per Share Data)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
Revenues:
Oil and gas sales	$	30,859	$	22,516	$	82,508	$	62,084
Interest and other income		522		56		895		187
		31,381		22,572		83,403		62,271
Expenses:
Lease operating expenses		6,601		4,087		15,448		9,593
Production taxes		1,081		300		2,217		1,164
Depreciation, depletion and amortization		10,485		9,701		30,539		26,774
General and administrative		1,571		1,589		5,079		4,716
Accretion of asset retirement obligation		424		210		829		611
Interest expense		3,456		622		9,141		1,968
Derivative expense		—		2		—		2
		23,618		16,511		63,253		44,828
Income from operations		7,763		6,061		20,150		17,443
Income tax expense		2,718		2,121		7,053		6,094
Net income	$	5,045	$	3,940	$	13,097	$	11,349
Earnings per common share:
Basic	$	0.11	$	0.09	$	0.28	$	0.25
Diluted	$	0.10	$	0.08	$	0.27	$	0.25
Weighted average number of common shares:
Basic		47,213		44,631		46,514		44,593
Diluted		48,576		46,905		48,086		46,243

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PETROQUEST ENERGY, INC.
Consolidated Balance Sheets
(unaudited)
(Amounts in Thousands)

	September 30,			December 31,
	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	39,844		$	1,529
Oil and gas revenue receivable		12,521			9,392
Joint interest billing receivable		10,221			3,655
Other current assets		6,990			1,017
Total current assets		69,576			15,593
Oil and gas properties:
Oil and gas properties, full cost method		477,661			363,756
Unevaluated oil and gas properties		39,608			16,380
Accumulated depreciation, depletion and amortization		(198,072	)		(168,453	)
Oil and gas properties, net		319,197			211,683
Other assets, net of accumulated depreciation and amortization of $10,615 and $5,967, respectively		15,204			4,341
Total assets	$	403,977		$	231,617
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable to vendors	$	27,776		$	24,176
Advances from co-owners		8,993			2,265
Hedging liability		30,329			4,536
Oil and gas revenue payable		11,839			2,930
Accrued interest on 10 3/8% Senior Notes		6,016			—
Other accrued liabilities		8,918			6,115
Total current liabilities		93,871			40,022
Bank debt		—			38,500
10 3/8% Senior Notes		148,294			—
Asset retirement obligation		18,338			15,238
Deferred income taxes		13,792			14,606
Long-term hedging liability		4,724			1,974
Other accrued liabilities		227			—
Commitments and contingencies		—			—
Stockholders’ equity:
Common stock, $.001 par value; authorized 75,000 shares; issued and outstanding 47,291 and 44,685 shares, respectively		47			45
Paid-in capital		117,352			112,387
Accumulated other comprehensive loss		(18,841	)		(4,231	)
Retained earnings		26,173			13,076
Total stockholders’ equity		124,731			121,277
Total liabilities and stockholders’ equity	$	403,977		$	231,617

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PETROQUEST ENERGY, INC.
Consolidated Statements of Cash Flows
(unaudited)
(Amounts in Thousands)

	Nine Months Ended
	September 30,
	2005			2004
Cash flows from operating activities:
Net income	$	13,097		$	11,349
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred tax expense		7,053			6,094
Depreciation, depletion and amortization		30,539			26,774
Accretion of asset retirement obligation		829			611
Amortization of debt issuance costs		1,239			1,232
Compensation expense		213			272
Write-off of debt issuance costs		2,439			—
Amortization of bond discount		65			—
Derivative mark to market		—			(169	)
Changes in working capital accounts:
Accounts receivable		(3,129	)		(1,057	)
Joint interest billing receivable		(6,566	)		(1,296	)
Other assets		(6,290	)		(115	)
Accounts payable and accrued liabilities		17,160			7,171
Advances from co-owners		6,728			(1,394	)
Net cash provided by operating activities		63,377			49,472
Cash flows from investing activities:
Investment in gas gathering assets		(9,650	)		—
Investment in oil and gas properties		(124,532	)		(42,360	)
Net cash used in investing activities		(134,182	)		(42,360	)
Cash flows from financing activities:
Proceeds from exercise of options		883			170
Proceeds from bank borrowings		34,500			13,000
Repayment of bank borrowings		(73,000	)		(19,500	)
Proceeds from issuance of 10 3/8% senior notes		148,229			—
Deferred financing costs		(5,543	)		(358	)
Issuance of common stock, net of expenses		4,051			—
Net cash provided by (used in) financing activities		109,120			(6,688	)
Net increase in cash and cash equivalents		38,315			424
Cash and cash equivalents, beginning of period		1,529			779
Cash and cash equivalents, end of period	$	39,844		$	1,203
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	1,593		$	1,250
Income taxes	$	—		$	—

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Non-GAAP Disclosure Reconciliation
(Amounts In Thousands)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
Net cash flow provided by operating activities	$	30,187		$	25,935		$	63,377		$	49,472
Changes in working capital accounts		(11,072	)		(9,605	)		(7,903	)		(3,309	)
Net cash flow provided by operating activities before working capital changes	$	19,115		$	16,330		$	55,474		$	46,163

Note:  Management believes that net cash flow provided by operating activities before working capital changes is relevant and useful information, which is commonly used by analysts, investors and other interested parties in the oil and gas industry as a financial indicator of an oil and gas company’s ability to generate cash used to internally fund exploration and development activities and to service debt. Net cash flow provided by operating activities before working capital changes is not a measure of financial performance prepared in accordance with generally accepted accounting principles (“GAAP”) and should not be considered in isolation or as an alternative to net cash flow provided by operating activities. In addition, since net cash flow provided by operating activities before working capital changes is not a term defined by GAAP, it might not be comparable to similarly titled measures used by other companies.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PETROQUEST ENERGY, INC.
Date: October 28, 2005	By:	/s/ Daniel G. Fournerat
		Daniel G. Fournerat
		Senior Vice President, General Counsel and Secretary

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