PetroQuest Aims to Close JV and Spud Cotton Valley Well in Q4; Recomplete Thunder Bayou in Q4 and Be Producing from the Upper Cris R-2 Formation in Q1 2017

PetroQuest Energy, Inc. (ticker: PQ) announced a loss available to common stockholders for the quarter ended September 30, 2016 of $23,306,000, or $1.31 per share, compared to third quarter 2015 loss available to common stockholders of $51,910,000, or $3.19 per share. For the first nine months of 2016, the Company reported a loss available to common stockholders of $86,586,000, or $4.97 per share, compared to a loss available to common stockholders of $235,233,000, or $14.50 per share, for the 2015 period. The losses during the quarter and nine months ended September 30, 2016 and September 30, 2015 included non-cash ceiling test write-downs totaling $8,665,000 and$40,304,000, respectively, and $40,212,000 and $214,618,000, respectively.

Discretionary cash flow for the third quarter of 2016 was $207,000, as compared to $4,990,000 for the comparable 2015 period.  For the first nine months of 2016, discretionary cash flow was $(2,994,000), as compared to $22,853,000 for the first  nine months of 2015. See the attached schedule for a reconciliation of net cash flow provided by operating activities to discretionary cash flow.

Production for the third quarter of 2016 was 5.2 Bcfe, compared to 7.4 Bcfe for the comparable period of 2015. For the first nine months of 2016, production was 18.9 Bcfe, compared to 27.5 Bcfe for the comparable period of 2015. The reduction in production volumes during the 2016 periods is primarily attributable to the sale of the Company’s Arkoma assets in 2015, as well as the continued lack of capital expenditures.

Stated on an Mcfe basis, unit prices including the effects of hedges for the third quarter of 2016 were $3.27  per Mcfe, as compared to $3.62 per Mcfe in the third quarter of 2015. For the first nine months of 2016, unit prices including the effects of hedges, were $2.66 per Mcfe, as compared to $3.38 per Mcfe for the first nine months of 2015.

Oil and gas sales during the third quarter of 2016 were $17,094,000, as compared to $26,872,000 in the third quarter of 2015. For the first nine months of 2016, oil and gas sales were $50,238,000 as compared to oil and gas sales of $92,873,000 for the first nine months of 2015.

Lease operating expenses (“LOE”) for the third quarter of 2016 decreased to $6,857,000, as compared to $10,070,000 in the third quarter of 2015.  Lease operating expenses decreased during the three months ended September 30, 2016 primarily as a result of the Company’s 2015 Arkoma divestiture. LOE per Mcfe was $1.31 for the third quarter of 2016, as compared to $1.35 in the third quarter of 2015. For the first nine months of 2016, lease operating expenses were $1.16 per Mcfe compared to $1.17 per Mcfe in the first nine months of 2015.

Depreciation, depletion and amortization (“DD&A”) on oil and gas properties for the third quarter of 2016 was $1.12 per Mcfe, as compared to $1.79 per Mcfe in the third quarter of 2015. For the first nine months of 2016, DD&A on oil and gas properties was$1.21 per Mcfe compared to $1.88 per Mcfe for the comparable period of 2015. The decrease in the per unit DD&A rate during the 2016 periods is primarily the result of recent ceiling test write-downs.

Interest expense for the third quarter of 2016 decreased to $7,737,000, as compared to $8,526,000 in the third quarter of 2015. Interest expense for the third quarter of 2016 included the non-cash write-off of approximately $1 million of deferred financing costs. During the three month period ended September 30, 2016, capitalized interest totaled $167,000, as compared to $724,000during the 2015 period. For the first nine months of 2016, interest expense was $22,497,000, compared to $24,996,000 for the comparable period of 2015. During the nine month period ended September 30, 2016, capitalized interest totaled $722,000, as compared to $4,100,000 during the 2015 period. The decrease in interest expense during the 2016 periods is primarily attributable a lower debt balance after the completion of the Company’s debt exchange in February 2016 as well as the repayment of the Company’s bank debt in June 2015.

General and administrative expenses during the quarter and nine months ended September 30, 2016 totaled $8,827,000 and $21,297,000, respectively, as compared to $4,686,000 and $16,544,000 during the comparable 2015 periods. Capitalized general and administrative expenses during the quarter and nine months ended September 30, 2016 totaled $1,268,000, and $4,347,000, respectively, as compared to expenses of $1,926,000  and $6,522,000 during the comparable 2015 periods. General and administrative expenses for the three and the nine month 2016 periods included approximately $5,300,000 and $10,100,000 in expenses, respectively, related to the Company’s two debt exchanges in 2016.

The above sales and average sales prices include increases (decreases) to revenues related to the settlement of gas hedges of ($144,000) and $3,603,000, oil hedges of zero and $299,000 and Ngl hedges of zero and $191,000 for the three months ended September 30, 2016 and 2015, respectively.  The above sales and average sales prices include increases to revenues related to the settlement of gas hedges of $2,043,000  and $10,108,000, oil hedges of zero and $38,000, and Ngl hedges of zero and $348,000 for the nine months ended September 30, 2016 and 2015, respectively.

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, 2016 and 2015:

The above sales and average sales prices include increases (decreases) to revenues related to the settlement of gas hedges of($144,000) and $3,603,000, oil hedges of zero and $299,000 and Ngl hedges of zero and $191,000 for the three months ended September 30, 2016 and 2015, respectively.  The above sales and average sales prices include increases to revenues related to the settlement of gas hedges of $2,043,000  and $10,108,000, oil hedges of zero and $38,000, and Ngl hedges of zero and $348,000 for the nine months ended September 30, 2016 and 2015, respectively.

Guidance for Q4 2016

The following provides guidance for the fourth quarter of 2016:

East Texas Joint Venture

The Company continues to make progress toward a joint venture in the Cotton Valley and expects to close the joint venture and spud the first well thereunder before the end of 2016. During the first quarter of 2016, the Company sold a portion of its 100% owned 6,400 gross acre Cotton Valley position to a potential joint venture partner for $7 million.  The Company expects to re-acquire this acreage for $5 million prior to closing the joint venture.

Thunder Bayou Update

In the Gulf Coast, the Company’s Thunder Bayou well is currently flowing from the initial completion in the lower section of the Cris R-2 formation (48 net feet of pay) at approximately 18 MMcfe/d (NRI-37%).  The daily production rate of the well continues to decline as expected. As a result, the Company’s production guidance for the fourth quarter of 2016 assumes the well will be shut-in for the month of December due to the Company’s planned recompletion into the upper section of the Cris R-2 formation (154 net feet of pay).  Thunder Bayou is forecasted to be back online in January 2017.

Liquidity Update

The Company recently enhanced its liquidity position through a new $50 million multidraw term loan and the issuance of debt in the Company’s September 2016 debt exchange that includes a payment-in-kind feature that is expected to provide approximately$33 million of cash interest savings over the next 18 months.  During the third quarter of 2016, the Company’s cash balance declined from approximately $69 million at June 30, 2016 to approximately $34 million at September 30, 2016.  The primary uses of cash during the third quarter of 2016 were $21 million for accrued interest and fees related to the debt exchange, $4 million in capital expenditures and payments to reduce accounts payable to vendors.  In October 2016, the Company borrowed $10 millionunder its multidraw term loan for additional working capital needs including payments to reduce accounts payable to vendors.

Hedging Update

The Company recently initiated the following hedging transaction:

Management’s Comment

“The debt exchange completed in September 2016 has resulted in a significant opportunity for our team, on behalf of all of our stakeholders, to capitalize on the value of our attractive properties in East Texas and Gulf Coast as commodity prices continue to improve,” said Charles T. Goodson, Chairman, Chief Executive Officer and President. “The planned recompletion of our Thunder Bayou well should be a near-term catalyst of increased cash flow in the first quarter of 2017 and beyond.  We expect to finalize ourEast Texas joint venture in the coming weeks, on terms attractive to both the investors and the Company, and expect to spud our first well before year-end.  We look forward to 2017 as a year of renewed and significant growth in production, with all capital expenditures expected to be funded by cash flow.”