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“The thing that we basically have done the best this year is de-risk a huge portfolio of assets in East Texas. East Texas now could be our largest area of growth. …”  – Charlie Goodson, Chairman, President and CEO of PetroQuest Energy at EnerCom’s The Oil & Gas Conference®19

PetroQuest Energy, Inc. (ticker: PQ) is an independent E&P headquartered in Lafayette, Louisiana, with operations in Oklahoma’s Woodford shale and Mississippi Lime, East Texas, South Louisiana and the Gulf of Mexico.

The company reported total reserves of 301.8 Bcfe at the close of 2013. Its Q2’14 average daily production rate was 118 Mmcfe/day. Total production for the quarter was 10.7 Bcfe, with oil and NGL volumes at about 28%.  For Q2’14, 85% of the company’s production came from Louisiana and Oklahoma—100.4 Mmcfe/day. Its East Texas Cotton Valley operations generated the balance—15.4 Mmcfe/day. While PetroQuest has been generating most of the company’s production and cash flow from its Mid Continent and Gulf of Mexico operations, it’s committed to developing its East Texas assets, and for good reason.

The Cotton Valley formation is a layer of shale, sandstone and clay above the Haynesville shale. The EIA estimates the Cotton Valley play’s technically recoverable resources to be 152.7 Tcf of dry gas. In its September investor presentation, PetroQuest details its piece of the Cotton Valley as well as its progression, including nearly doubling its 2014 IP rates compared to its 2011 wells. PetroQuest’s Cotton Valley horizontal completions are realizing eight times EUR uplift compared to vertical wells.

As a result, the company is ramping up the pace of horizontal drilling in East Texas and, based on results from the first group of wells, the company is encouraged to see strong returns from East Texas.  In his presentation at the EnerCom conference in mid-August, Charlie Goodson laid out his company’s strategy for East Texas.

“Let’s talk about East Texas and Cotton Valley. We bought this property in 2003. Drilled about 50 wells that were dual completed. We made money out of them, but they were only drilling about 5% of the resources in place. We shut that down in 2006-2007, did an entire field study, tore every log apart, looked at every zone. We looked at all the sandstones and the siltstones around there and felt it was a perfect application for horizontal drilling.

“We drilled about 8 wells or 9 wells in the Southern plank … and what we saw with those wells is they were averaging about 6.3 Bcfe which was about an eight-time uplift going from a vertical to horizontal. Obviously the fracking in the horizontal was working out very well.

“Our number 9 well, which is kind of the template of what we’ve done this year—that well is now up to about 9.8 Bcfe in an EUR.

“So moving from 2011, when we started our horizontal project, averaging IP rates of about 6.3 million a day, moving to 2012, 7.4 million, 2013, one well which kind of set up the template for the wells we were going to drill in 2014, 9.1million. This year, the five wells that we’ve announced so far average IP rate is 12.2 million a day,” Goodson said.

In PetroQuest’s second quarter results and operations update, released August 4, 2014, it reported that it had completed its PQ#13 (a 4,697 foot lateral), PQ#14 (4,622 foot lateral) and PQ#15 (3,107 foot lateral) horizontal Cotton Valley wells, and that it had commenced completion of its PQ#11 well (4,402 foot lateral).

“What does the number 9 well tell us compared to what we’ve just drilled? The initial booking of that well was 6.4 Bcf. Six months later, Ryder Scott increased that to 7.9 Bcf, now we’re up to 9.8 Bcf for that well. … The number 10, number 11, number 12, number 13, number 14 and number 15, all have had higher IP rates than that,” Goodson said.

“In full disclosure, number 15 was supposed to be kind of a highway well. It was only about 2,700 foot lateral. We thought it would probably come on about 5 million a day, but we found out in a sandstone, a tight sandstone and siltstone, these fracture very efficiently. And so that 2,700 foot lateral which unlocks a number of locations that because of lease restrictions, we couldn’t drill a full lateral. This well is doing just as well as a 5, 000 foot lateral. So very, very impressive. Something that really surprises us and gives us a lot of hope that we’re going to continue seeing higher and higher IP rates on this project.

“The number 9 well basically, gross well cost was about $6.8 million. EUR currently is 9.8 Bcf. Initial IP rate of about 9.1 million a day, 70% gas, 30% liquids, as I said, it’s a very rich barrel. IRR at $4, that well is about 70%, payback about 1.2 years. On these last wells we’ve drilled, this is the number 9 well and these are basically the number 10 and 12 wells showing a higher IP rate, higher initial rates coming on.

“So what are we looking at for our 2014-2015 program? We feel like in 2015, the 18 wells to 20 wells that we’re going to drill will probably come in around $6 million per well. We’ll be running two rigs out there … drilling 18 wells to 20 wells. And so at $3.75, we’re looking at a 70% IRR; moving to $4, 85% IRR. And so obviously, they’re very, very economical wells.

“What does this transition do for our company for next year’s production, realizing we’re at an all-time high production rate right now at 118 million a day? Next year, those … 20 wells, will have an average interest larger than … say 50%, bringing those wells on at say, less than these rates that we just talked about, 10 million a day. That’s basically 100 million cubic feet of gas a day, that’s to PetroQuest.

The company has an approximate 10-year horizontal drilling inventory in the Cotton Valley using its accelerated 2015 drilling pace. “This project alone is going to have a huge impact on our company,” Goodson said.

PetroQuest will have additional room on the balance sheet for its upcoming operations. The company announced on September 30 a $20 million increase on both its borrowing base and commitment level following a re-determination by its bank group. The company will have $220 million and $170 million, respectively, moving forward. An additional $9.7 million in capital was secured with the sale of non-core Eagle Ford assets producing 195 BOEPD.

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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.