PetroQuest Energy (ticker: PQ), a micro-cap E&P headquartered in Lafayette, Louisiana, projects volumes to reach record highs of 125 to 131 MMcfe/d (76% gas) in Q2’15, the company said in its Q1’15 earnings release. Charlie Goodson, Chief Executive Officer and President of PetroQuest, said, “This record production profile coupled with a minimal capex program in the back half of 2015 should provide free cash flow generation later this year and allow us to achieve our 2015 goals of growing production while maintaining our liquidity position.”
Goodson mentioned in February 2015 that Q2’15 would see the majority of production uplift for the year, bolstered by oncoming production from the Cotton Valley program and the Thunder Bayou. Approximately 42% of its 2015 guidance was expended in Q1’15 as the company executed on its development programs.
PQ reported a net loss of $122.4 million ($1.89 per share) in the latest quarter, recording a non-cash ceiling test write down of $108.9 million as a result of the lower commodity environment. Production for Q1’15 averaged 115.3 MMcfe/d, meaning the midpoint of Q2’15 guidance will represent a sequential increase of 11%. On a year over year basis, Q1’15 production climbed by 6%. Year-end reserves for 2014 were 397 Bcfe (77% gas).
Many analyst notes said the lower-than-expected was a major factor in the quarterly loss, but oncoming projects provide upside. A note from Capital One Securities said, “The most important factor in the PQ story remains Thunder Bayou’s impact on the production profile, and management’s upbeat guidance is encouraging in this regard.”
Source: PQ April 2015 Presentation
Counting Down to Thunder Bayou
The Thunder Bayou well, located in Vermilion Parish, is expected to be placed online within the month. Regional storms slightly delayed construction on the game-changing well, but PQ expects production to begin at 38 MMcfe/d (37% net revenue interest) – higher than previously guided volumes of 25 to 30 MMcfe/d.
Three other wells have been placed online in the La Cantera project, located two miles to the south of Thunder Bayou. The La Cantera has produced more than 70 Bcfe from the Cris R2 sand since its completion in March 2012 and has generated more than $60 million in field level cash flows net to PQ. Initial production from its first well returned a gross daily rate of 36 MMcfe/d. Two subsequent wells were placed online with IP rates of 52 and 35 MMcfe/d. PetroQuest held net revenue interest of 15% in the projects. PetroQuest holds a 37% net interest in Thunder Bayou.
Cotton Valley Wells Exceeding Expectations
PQ’s Cotton Valley program just completed its ninth well and third of the year. The latest well, PQ #18, will begin flowback this week. The PQ #16 and PQ #17 wells generated combined returns of 30.9 MMcfe/d for 24-hours and 29.7 MMcfe/d for 30-day production rates, exceeding the average of the previous six wells by 36% and 29%, respectively. The PQ #18 is the last scheduled Cotton Valley well in 2015, but management may re-initiate the program once prices recover.
Two wells in its Fleetwood joint venture were deemed non-commercial and cost PQ $1.6 million, but tests in the Cockfield formation are also being considered for H2’15. “This potential repeatable horizontal oil play was the primary driver for our Fleetwood acquisition, as we already had a strong appreciation for tight sand reservoir development,” said Todd Zhender, Chief Operating Officer of PetroQuest, in a conference call. “On average, vertical wells in the area assume EURs of approximately 80 MBOE, and we would expect to achieve three to five times uplift horizontally.”
Source: PQ April 2015 Presentation
Fewer Drilling Days Coupled with Lower Completion Costs
In the West Relay field of the Woodford Shale, production was recently established on nine wells and an additional eight wells are expected to be completed in Q2’15. Three of the wells returned average volumes of 4.1 MMcfe/d (15% net revenue interest) with dry gas accounting for 48% of the mix. Eight dry gas wells (14% net revenue interest) will also come online in its Hoss Field within the quarter.
PQ plans on running two rigs in the region for the remainder of the year, and continuing efficiencies have cut drilling days to 10 from 16. Well completion costs have subsequently decreased to $3.5 million from $5.0 million.
Near-Term Forecast
The company plans on hedging 50% of production in 2016 to lock in returns, and its borrowing base was revised upwards to $220 million from $190 million in March. PQ’s commitments remain unchanged at $170 million. At the time of the redetermination, Thunder Bayou was classified as a nonproducing asset, meaning the borrowing base will likely increase once fall redeterminations take place. PQ management expects the value of Thunder Bayou, along with its core assets in West Relay and Cotton Valley, to be realized by its lenders in the fall.
“Each of these areas will be utilized and will add value when appropriate,” said Goodson in the call. “We believe the value of our three core assets far outweigh our current market valuation.
With PQ’s Q1 in the books, in the next few weeks all eyes will be on Thunder Bayou.
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