April 26, 2005
via facsimile and U.S. mail
Mr. Michael O. Aldridge
Senior Vice President and Chief Financial Officer
Petroquest Energy, Inc.
400 E. Kaliste Saloom Road, Suite 6000
Lafayette, LA 70508
Re: Petroquest Energy, Inc.
10-K for the fiscal year ended December 31, 2004
File No. 000-19020
Dear Mr. Aldridge:
We have reviewed the above filing and have the following
accounting and engineering comments. Our review has been limited
to
the areas identified below. Please provide us a response to the
comments below and include appropriate disclosure in future
filings.
If you disagree, we will consider your explanation as to why our
comments are inapplicable or a revision is unnecessary. Please be
as
detailed as necessary in your explanation. In some of our
comments,
we may ask you to provide us with supplemental information so we
may
better understand your disclosure. After reviewing this
information,
we may or may not raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
10-K for the fiscal year ended December 31, 2004
Management`s Discussion and Analysis of Financial Condition and
Results of Operations, page 18
Results of Operations, page 21
1. We note your discussion provides limited insight into the
underlying reasons for variances and guidance on whether or not
the
results of operations are indicative of expected results. The
objective should be to provide information about the quality and
potential variability of future earnings and cash flow, so readers
can ascertain the likelihood that past performance is indicative
of
future performance. For example, in your discussion of production
volumes, you state that production volumes on a Mcfe basis
increased
47% from 2003 to 2004. There does not appear to be sufficient
discussion in the document as to whether the reader should expect
similar increases in future periods. In future filings, revise
your
results of operations discussion where appropriate. Please refer
to
FRC Section 501.12 for further guidance.
Please include within your response, example disclosure you
anticipate including in future filings to address the items above.
Controls and Procedures, page 26
Evaluation of Disclosure Controls and Procedures, page 26
2. We note in your disclosure that "the Chief Executive Officer
and
Chief Financial Officer concluded that our disclosure controls and
procedures are effective, in all material respects, with respect
to
the recording, processing, summarizing and reporting, within the
time
periods specified in the Securities and Exchange Commission`s
rules
and forms, of information required to be disclosed by us in the
reports that we file or submit under the Exchange Act." In future
filings, revise to clarify, if true, that your officers concluded
that your disclosure controls and procedures are also effective to
ensure that information required to be disclosed in the reports
that
you file or submit under the Exchange Act is accumulated and
communicated to your management, including your chief executive
officer and chief financial officer, to allow timely decisions
regarding required disclosure. See Exchange Act Rule 13a-15(e)
for
further guidance.
3. We note your statement that the chief executive officer and
chief
financial officer have concluded that the company`s disclosure
controls and procedures are effective "in all material respects."
The addition of the language "in all material respects" appears to
qualify the conclusions reached by the chief executive officer and
chief financial officer regarding the company`s disclosure
controls
and procedures, and is therefore not appropriate. In future
filings,
please revise your disclosure to state, in clear and unqualified
language, the conclusions reached by your chief executive officer
and
your chief financial officer on the effectiveness of your
disclosure
controls and procedures. Please also supplementally confirm, if
true, that the chief executive officer and chief financial officer
have concluded that the company`s disclosure controls and
procedures
are effective.
4. We note your disclosure that "There have been no significant
changes in internal control over financial reporting..." Please
note
that Item 308 of Regulation S-K requires any change in internal
control over financial reporting be disclosed. In future filings
please revise your statement as necessary.
Financial Statements, page F-1
Note 1 - Organization and Summary of Significant Accounting
Policies, page F-7
Derivative Instruments, page F-9
5. We note your disclosure states that you recognized derivatives
expense in the respective years as a result of "the settlement of
ineffective derivative contracts that expired in 2004." This
seems
inconsistent with your discussion in MD&A where you state the
derivatives expense recorded in 2003 "was the result of a gas
derivative instrument and an interest rate swap that did not
qualify
for hedge accounting treatment." It is unclear from the
disclosure
if the expenses are the result of ongoing hedges ineffectiveness,
or
they are the result of hedges that no longer qualified for cash
flow
hedge accounting. Please clarify for us and in future filings why
the amounts were incurred.
6. We were unable to locate the amount of hedge ineffectiveness
you
incurred for the periods presented, or a discussion of where such
amounts are recorded in the financial statements. Please note
that
SFAS 133 45 b (1) requires such information to be disclosed for
every reporting period which a complete set of financial
statements
is presented. Please include this information in future filings,
or
explain to us where such information is located in the document.
7. The estimated amount of unrealized gains or losses expected to
be
reclassified into earnings within the next 12 months does not
appear
to be disclosed in the document. Please include this information
in
future filings, or explain to us where such information is located
in
the document. See SFAS 133 45 b (2) for further guidance.
8. Please explain to us what consideration you have given to
disclosing in the footnotes and MD&A within Critical Accounting
Policies, the specific methodology you use to test hedge
effectiveness for your cash flow hedges as well as how often those
tests are performed. We consider such information to be important
in
providing transparency and relevance to financial statement
readers.
See additional discussion regarding this matter in the most recent
Current Accounting and Disclosure Issues in the Division of
Corporation Finance included on our website at:
http://www.sec.gov/divisions/ corpfin/acctdis030405.htm.
Petroleum Engineering Comments
10-K for the fiscal year ended December 31, 2004
Business, page 1
2004 Operational Overview, page 2
9. You state that 68% of your reserves are proved developed
reserves.
To the extent that a material amount of these reserves are non-
producing it should be disclosed in future filings.
Gulf Coast Basin, page 2
10. For the Ship Shoal 72 Field you state that this field
contributed
40% of your total production. In future filings please expand
your
disclosure to include all of the requirements of Item 102 of
Regulation S-K such as reserves, development and the nature of
your
interest for this field and other fields that are significant to
your
operations.
Oil and Gas Reserve Information - Unaudited, page F-17
11. You state that there are numerous uncertainties in estimating
quantities of proved reserves. The definition of proved reserves
in
Rule 4-10(a) of Regulation S-X requires that you be reasonably
certain of producing the reserves you state to be proved. In
future
filings, indicate that proved reserves constitute quantities that
you
are reasonably certain of recovering in future years. If you are
not
reasonably certain that you will be able to produce the reserves
that
you have disclosed as proved, please revise your document to only
include those reserves which meet the definition of proved
reserves.
12. In 2004 you increased your reserves by a total of 37% by
discoveries and extensions and purchase of proved properties.
However, we could find little disclosure about these reserve
increases. Supplementally, please provide us with the
justification
for these material increases in reserves. In future filings
expand
your disclosure to include information about significant additions
of
reserves.
Closing Comments
As appropriate, please respond to these comments within 10
business days or tell us when you will provide us with a response.
Please furnish a cover letter with your responses to our comments
and
provide any requested supplemental information. Detailed cover
letters greatly facilitate our review. Please understand that we
may
have additional comments after reviewing your responses to our
comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to the company`s disclosure, they
are responsible for the accuracy and adequacy of the disclosures
they
have made. In connection with responding to our comments, please
provide, in writing, a statement from the company acknowledging
that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filings;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filings or
in
response to our comments on your filings.
Direct questions regarding accounting issues and related
disclosures to Mark A. Wojciechowski, at (202) 942-1928 or, in his
absence, to Jenifer Gallagher, at (202) 942-1923, and engineering
issues and related disclosures to James Murphy, Petroleum
Engineer,
at (202) 942-2939. Direct questions relating to all other
disclosure
issues to the undersigned at (202) 942-1870. Direct all
correspondence to the following ZIP code: 20549-0405.
Sincerely,
H. Roger Schwall
Assistant Director
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Mr. Michael O. Aldridge
Petroquest Energy, Inc.
April 26, 2005
Page 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-0405
DIVISION OF
CORPORATION FINANCE