##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the fiscal year ended December 31, 2010
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number: 001-32681
 PETROQUEST ENERGY, INC.
  State of incorporation: Delaware
    
    I.R.S. Employer Identification No. 72-1440714
 
   Title of each class
    
    Name of each exchange on which registeredCommon Stock, par value $.001 per share
    
    New York Stock ExchangePreferred Stock Purchase Rights
    
    New York Stock Exchange
  o Yes þ No
 o Yes þ No
 þ Yes o No
 o Yes o No
 o
  o Large accelerated filer
    
    þ Accelerated filer
    
    o Non-accelerated filer
    
    o Smaller reporting company
 o Yes þ No




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##### 



TABLE OF CONTENTS
 Page No.PART IItems 1 and 2 Business and Properties
    
    
    3Item 1A. Risk Factors
    
    
    17Item 1B. Unresolved Staff Comments
    
    
    28Item 3. Legal Proceedings
    
    
    28Item 4. (Removed and Reserved)
    
    
    28PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    29Item 6. Selected Financial Data
    
    
    31Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    31Item 7A. Quantitative and Qualitative Disclosure About Market Risk
    
    
    40Item 8. Financial Statements and Supplementary Data
    
    
    41Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    41Item 9A. Controls and Procedures
    
    
    41Item 9B. Other Information
    
    
    44PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    44Item 11. Executive Compensation
    
    
    44Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    44Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    44Item 14. Principal Accounting Fees and Services
    
    
    44PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    44Index to Financial Statements
    
    
    F-1Exhibit 21.1Exhibit 23.1Exhibit 23.2Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2Exhibit 99.1
   1




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##### Table of Contents




    
    the volatility of oil and natural gas prices and depressed natural gas prices since the
middle of 2008;
 
    
    our indebtedness and the significant amount of cash required to service our
indebtedness;
 
    
    the recent financial crisis and continuing uncertain economic conditions in the United
States and globally;
 
    
    ceiling test write-downs resulting, and that could result in the future, from lower oil
and natural gas prices;
 
    
    our ability to obtain adequate financing when the need arises to execute our long-term
strategy and to fund our planned capital expenditures;
 
    
    limits on our growth and our ability to finance our operations, fund our capital needs
and respond to changing conditions imposed by restrictive debt covenants;
 
    
    our ability to find, develop, produce and acquire additional oil and natural gas
reserves that are economically recoverable;
 
    
    approximately half of our production being exposed to the additional risk of severe
weather, including hurricanes and tropical storms, as well as flooding, coastal erosion and
sea level rise;
 
    
    losses and liabilities from uninsured or underinsured drilling and operating activities;
 
    
    our ability to market our oil and natural gas production;
 
    
    changes in laws and governmental regulations, increases in insurance costs or decreases
in insurance availability, and delays in our offshore exploration and drilling activities
that may result from the April 22, 2010 sinking of the Deepwater Horizon and subsequent oil
spill in the Gulf of Mexico;
 
    
    competition from larger oil and natural gas companies;
 
    
    the effect of new SEC rules on our estimates of proved reserves;
 
    
    the likelihood that our actual production, revenues and expenditures related to our
reserves will differ from our estimates of proved reserves;
 
    
    our ability to identify, execute or efficiently integrate future acquisitions;
 
    
    losses or limits on potential gains resulting from hedging production;
 
    
    the loss of key management or technical personnel;
 
    
    the operating hazards attendant to the oil and gas business;
 
    
    governmental regulation relating to hydraulic fracturing and environmental compliance
costs and environmental liabilities;
 
    
    the operation and profitability of non-operated properties; and
 
    
    potential conflicts of interest resulting from ownership of working interests and
overriding royalty interests in certain of our properties by our officers and directors.
  2




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PART I
 
 ITEMS 1 AND 2. BUSINESS AND PROPERTIES
 Overview
     3




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Business Strategy
 Maintain Our Financial Flexibility.
 Pursue Balanced Growth and Portfolio Mix.
 Target Underexploited Properties with Substantial Opportunity for Upside.
 Concentrate in Core Operating Areas and Build Scale.
 Manage Our Risk Exposure.
  4




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2010 Financial and Operational Summary
   Oil and Gas Reserves
     Natural GasOil (MBbls)
    
    
    NGL (Mmcfe)
    
    
    (Mmcf)
    
    
    Total Mmcfe*Proved Developed
    
    
    1,474
    
    
    
    6,078
    
    
    
    110,599
    
    
    
    125,521Proved Undeveloped
    
    
    149
    
    
    
    2,295
    
    
    
    63,967
    
    
    
    67,156Total Proved
    
    
    1,623
    
    
    
    8,373
    
    
    
    174,566
    
    
    
    192,677
 *
    
    Oil conversion to Mcfe at one Bbl of crude oil, condensate or natural gas liquids to six Mcf of
natural gas  5




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MmcfePUD Balance at December 31, 2009
    
    
    67,867PUDs converted to proved developed
    
    
    (2,423
    )PUDs added from revisions or
extensions and discoveries
    
    
    25,814PUDs sold
    
    
    (28,761
    )PUDs removed for 5 year rule
    
    
    (6,444
    )PUDs added due to pricing
    
    
    11,103PUD Balance at December 31, 2010
    
    
    67,156
   ProvedProved Developed
    
    
    Undeveloped
    
    
    Total Proved(M$)
    
    
    (M$)
    
    
    (M$)Estimated pre-tax future net cash flows (1)
    
    $
    360,040
    
    
    $
    82,465
    
    
    $
    442,505Discounted pre-tax future net cash flows (PV-10) (1)
    
    $
    239,332
    
    
    $
    16,319
    
    
    $
    255,651Total standardized measure of discounted future net cash flows
    
    
    
    
    
    
    
    
    
    $
    236,375
 
 (1)
    
    Estimated pre-tax future net cash flows and discounted pre-tax future net cash flows (PV-10)
are non-GAAP measures because they exclude income tax effects. Management believes these non-GAAP
measures are useful to investors as they are based on prices, costs and discount factors which are
consistent from company to company, while the standardized measure of discounted future net cash
flows is dependent on the unique tax situation of each individual company. As a result, the
Company believes that investors can use these non-GAAP measures as a basis for comparison of the
relative size and value of the Companys reserves to other companies. The Company also understands
that securities analysts and rating agencies use these non-GAAP measures in similar ways. The
following table reconciles undiscounted and discounted future net cash flows to standardized
measure of discounted cash flows as of December 31, 2010: Total Proved(M$)Estimated pre-tax future net cash flows
    
    $
    442,50510% annual discount
    
    
    (186,854
    )Discounted pre-tax future net cash flows
    
    
    255,651Future income taxes discounted at 10%
    
    
    (19,276
    )Standardized measure of discounted future net cash flows
    
    $
    236,375
  6




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Core Areas
  2010
    
    
    2009Reserves
    
    
    Production
    
    
    Reserves
    
    
    ProductionOklahoma
    
    
    117.0
    
    
    
    10.6
    
    
    
    98.5
    
    
    
    10.6Texas
    
    
    26.1
    
    
    
    3.5
    
    
    
    29.8
    
    
    
    4.3Gulf Coast Basin
    
    
    25.6
    
    
    
    14.4
    
    
    
    40.9
    
    
    
    16.3Arkansas
    
    
    23.6
    
    
    
    2.5
    
    
    
    9.8
    
    
    
    3.0Wyoming
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    192.7
    
    
    
    31.0
    
    
    
    179.0
    
    
    
    34.2
 Oklahoma
  Texas
  Gulf Coast Basin
  Arkansas
  Wyoming
   7




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Markets and Customers
  
    
    the extent of domestic production and imports of oil and natural gas;
 
    
    the proximity of the natural gas production to pipelines;
 
    
    the availability of capacity in such pipelines;
 
    
    the demand for oil and natural gas by utilities and other end users;
 
    
    the availability of alternative fuel sources;
 
    
    the effects of inclement weather;
 
    
    state and federal regulation of oil and natural gas production; and
 
    
    federal regulation of gas sold or transported in interstate commerce.
     8




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Production, Pricing and Production Cost Data
  Year Ended December 31,2010
    
    
    2009
    
    
    2008Production:Oil (Bbls):Oklahoma
    
    
    71
    
    
    
    502
    
    
    
    330Other
    
    
    663,231
    
    
    
    599,622
    
    
    
    680,241Total Oil (Bbls)
    
    
    663,302
    
    
    
    600,124
    
    
    
    680,571Gas (Mcf):Oklahoma
    
    
    10,577,414
    
    
    
    10,579,524
    
    
    
    9,174,993Other
    
    
    13,924,126
    
    
    
    17,485,746
    
    
    
    17,856,808Total Gas (Mcf)
    
    
    24,501,540
    
    
    
    28,065,270
    
    
    
    27,031,801NGL (Mcfe):Oklahoma
    
    
    683
    
    
    
    450
    
    
    
    342Other
    
    
    2,469,188
    
    
    
    2,532,372
    
    
    
    2,676,061Total NGL (Mcfe)
    
    
    2,469,871
    
    
    
    2,532,822
    
    
    
    2,676,403Total Production (Mcfe):Oklahoma
    
    
    10,578,523
    
    
    
    10,582,986
    
    
    
    9,177,315Other
    
    
    20,372,700
    
    
    
    23,615,850
    
    
    
    24,614,315Total Production (Mcfe)
    
    
    30,951,223
    
    
    
    34,198,836
    
    
    
    33,791,630Average sales prices (1):Oil (per Bbl):Oklahoma
    
    $
    69.62
    
    
    $
    52.13
    
    
    $
    85.33Other
    
    $
    79.48
    
    
    $
    59.31
    
    
    $
    100.62Total Oil (per Bbl)
    
    $
    79.47
    
    
    $
    59.31
    
    
    $
    100.61Gas (per Mcf)Oklahoma
    
    $
    2.80
    
    
    $
    2.27
    
    
    $
    6.33Other
    
    $
    4.31
    
    
    $
    3.74
    
    
    $
    9.20Total Gas (per Mcf)
    
    $
    3.66
    
    
    $
    3.19
    
    
    $
    8.22NGL (per Mcfe)Oklahoma
    
    $
    3.79
    
    
    $
    4.10
    
    
    $
    9.67Other
    
    $
    7.78
    
    
    $
    5.38
    
    
    $
    9.76Total NGL (per Mcfe)
    
    $
    7.78
    
    
    $
    5.38
    
    
    $
    9.76Total Per Mcfe:Oklahoma
    
    $
    2.80
    
    
    $
    2.27
    
    
    $
    6.33Other
    
    $
    6.47
    
    
    $
    4.86
    
    
    $
    10.51Total Per Mcfe
    
    $
    5.22
    
    
    $
    4.06
    
    
    $
    9.38Average Production Cost per Mcfe (2):Oklahoma
    
    $
    0.71
    
    
    $
    0.53
    
    
    $
    0.74Other
    
    $
    1.55
    
    
    $
    1.39
    
    
    $
    1.54Total Average Production Cost per Mcfe
    
    $
    1.26
    
    
    $
    1.13
    
    
    $
    1.32
 
 (1)
    
    Does not include the effect of hedges.(2)
    
    Production costs do not include production taxes.  9




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Oil and Gas Drilling Activity
  2010
    
    
    2009
    
    
    2008Gross
    
    
    Net
    
    
    Gross
    
    
    Net
    
    
    Gross
    
    
    NetExploration:Productive
    
    
    82
    
    
    
    9.55
    
    
    
    64
    
    
    
    5.84
    
    
    
    103
    
    
    
    27.64Non-productive
    
    
    3
    
    
    
    0.76
    
    
    
    2
    
    
    
    0.48
    
    
    
    6
    
    
    
    1.63Total
    
    
    85
    
    
    
    10.31
    
    
    
    66
    
    
    
    6.32
    
    
    
    109
    
    
    
    29.27Development:Productive
    
    
    17
    
    
    
    1.50
    
    
    
    16
    
    
    
    1.70
    
    
    
    41
    
    
    
    10.77Non-productive
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    17
    
    
    
    1.50
    
    
    
    16
    
    
    
    1.70
    
    
    
    41
    
    
    
    10.77
   Leasehold Acreage
  Leasehold AcreageDeveloped
    
    
    UndevelopedGross
    
    
    Net
    
    
    Gross
    
    
    NetAlabama
    
    
    
    
    
    
    
    
    
    
    2,647
    
    
    
    1,249Arkansas
    
    
    23,670
    
    
    
    6,775
    
    
    
    31,479
    
    
    
    9,358Louisiana
    
    
    8,589
    
    
    
    2,944
    
    
    
    8,848
    
    
    
    3,010Mississippi
    
    
    1,628
    
    
    
    1,178
    
    
    
    
    
    
    
    Oklahoma
    
    
    77,242
    
    
    
    33,439
    
    
    
    39,143
    
    
    
    29,294Texas
    
    
    42,422
    
    
    
    21,981
    
    
    
    16,020
    
    
    
    10,156Wyoming
    
    
    640
    
    
    
    160
    
    
    
    14,682
    
    
    
    3,671Federal Waters
    
    
    41,614
    
    
    
    16,393
    
    
    
    23,560
    
    
    
    14,039Total
    
    
    195,805
    
    
    
    82,870
    
    
    
    136,379
    
    
    
    70,777
   10




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Title to Properties
  
    
    royalties and other burdens and obligations, express or implied, under oil and gas
leases;
 
    
    overriding royalties and other burdens created by us or our predecessors in title;
 
    
    a variety of contractual obligations (including, in some cases, development obligations)
arising under operating agreements, farmout agreements, production sales contracts and
other agreements that may affect the properties or their titles;
 
    
    back-ins and reversionary interests existing under purchase agreements and leasehold
assignments;
 
    
    liens that arise in the normal course of operations, such as those for unpaid taxes,
statutory liens securing obligations to unpaid suppliers and contractors and contractual
liens under operating agreements; pooling, unitization and communitization agreements,
declarations and orders; and
 
    
    easements, restrictions, rights-of-way and other matters that commonly affect property.
  Federal Regulations
 Sales and Transportation of Natural Gas
     11




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Sales and Transportation of Crude Oil.
  Federal Leases.
   12




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Federal, State or American Indian Leases.
  State Regulations
  
    
    requirements for obtaining drilling permits;
 
    
    the method of developing new fields;
 
    
    the spacing and operation of wells;
 
    
    the prevention of waste of oil and gas resources; and
 
    
    the plugging and abandonment of wells.
    13




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Legislative Proposals
  Environmental Regulations
 General.
  Solid and Hazardous Waste.
   Superfund.
  14




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##### Table of Contents



Oil Pollution Act.
   Discharges.
  Air Emissions.
  15




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##### Table of Contents



Coastal Coordination.
   OSHA.
  Corporate Offices
   16




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Employees
  Available Information
  
 ITEM 1A.
    
    RISK FACTORS
 Risks Related to Our Business, Industry and Strategy
 Oil and natural gas prices are volatile, and natural gas prices have been significantly depressed
since the middle of 2008. An extended decline in the prices of oil and natural gas would likely
have a material adverse effect on our financial condition, liquidity, ability to meet our financial
obligations and results of operations.
   
    
    relatively minor changes in the supply of or the demand for oil and natural
gas;
 
    
    the condition of the United States and worldwide economies;
 
    
    market uncertainty;
 
    
    the level of consumer product demand;
 
    
    weather conditions in the United States, such as hurricanes;
 
    
    the actions of the Organization of Petroleum Exporting Countries;
 
    
    domestic and foreign governmental regulation and taxes, including price
controls adopted by the Federal Energy Regulatory Commission;
 
    
    political conditions or hostilities in oil and natural gas producing
regions, including the Middle East and South America;
 
    
    the price and level of foreign imports of oil and natural gas; and
 
    
    the price and availability of alternate fuel sources.
  17




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We have a substantial amount of indebtedness, which may adversely affect our cash flow and our
ability to operate our business, remain in compliance with debt covenants and make payments on our
debt.
  
    
    it may be more difficult for us to satisfy our obligations with respect to
our outstanding indebtedness, including 10% senior notes due 2017, which we refer to as
our 10% notes, and any failure to comply with the obligations of any of our debt
agreements, including financial and other restrictive covenants, could result in an
event of default under the agreements governing such indebtedness;
 
    
    the covenants contained in our debt agreements limit our ability to borrow
money in the future for acquisitions, capital expenditures or to meet our operating
expenses or other general corporate obligations and may limit our flexibility in
operating our business;
 
    
    we will need to use a substantial portion of our cash flows to pay interest
on our debt, approximately $15 million per year for interest on our 10% notes alone,
and to pay quarterly dividends, if declared by our Board of Directors, on our Series B
Preferred Stock of approximately $5.1 million per year, which will reduce the amount of
money we have for operations, capital expenditures, expansion, acquisitions or general
corporate or other business activities;
 
    
    the amount of our interest expense may increase because certain of our
borrowings in the future may be at variable rates of interest, which, if interest rates
increase, could result in higher interest expense;
 
    
    we may have a higher level of debt than some of our competitors, which may
put us at a competitive disadvantage;
 
    
    we may be more vulnerable to economic downturns and adverse developments in
our industry or the economy in general, especially extended or further declines in oil
and natural gas prices; and
 
    
    our debt level could limit our flexibility in planning for, or reacting to,
changes in our business and the industry in which we operate.
  To service our indebtedness, we will require a significant amount of cash. Our ability to generate
cash depends on many factors beyond our control, and any failure to meet our debt obligations could
harm our business, financial condition and results of operations.
   18




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The recent financial crisis and continuing uncertain economic conditions may have material adverse
impacts on our business and financial condition that we currently cannot predict.
   
    
    the demand for oil and natural gas may decline due to continuing uncertain
economic conditions which could negatively impact the revenues, margins and
profitability of our oil and natural gas business;
 
    
    our ability to access the capital markets may be restricted at a time when
we would like, or need, to raise capital for our business including for exploration
and/or development of our reserves;
 
    
    the tightening of credit or lack of credit availability to our customers
could adversely affect our ability to collect our trade receivables; or
 
    
    counterparties may not fulfill their delivery or purchase obligations.
 Lower oil and natural gas prices may cause us to record ceiling test write-downs, which could
negatively impact our results of operations.
   19




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We may not be able to obtain adequate financing when the need arises to execute our long-term
operating strategy.
  
    
    borrowings from banks or other lenders;
 
    
    the issuance of debt securities;
 
    
    the sale of common stock, preferred stock or other equity securities;
 
    
    joint venture financing; and
 
    
    production payments.
  Restrictive debt covenants could limit our growth and our ability to finance our operations, fund
our capital needs, respond to changing conditions and engage in other business activities that may
be in our best interests.
  
    
    pay dividends or distributions on our capital stock or issue preferred
stock;
 
    
    repurchase, redeem or retire our capital stock or subordinated debt;
 
    
    make certain loans and investments;
 
    
    place restrictions on the ability of subsidiaries to make distributions;
 
    
    sell assets, including the capital stock of subsidiaries;
 
    
    enter into certain transactions with affiliates;
 
    
    create or assume certain liens on our assets;
 
    
    enter into sale and leaseback transactions;
 
    
    merge or to enter into other business combination transactions;
 
    
    enter into transactions that would result in a change of control of us; or
 
    
    engage in other corporate activities.
  20




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Our future success depends upon our ability to find, develop, produce and acquire additional oil
and natural gas reserves that are economically recoverable.
  Approximately half of our production is exposed to the additional risk of severe weather, including
hurricanes and tropical storms, as well as flooding, coastal erosion and sea level rise.
   Losses and liabilities from uninsured or underinsured drilling and operating activities could have
a material adverse effect on our financial condition and operations.
    21




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Factors beyond our control affect our ability to market oil and natural gas.
  
    
    the level of domestic production and imports of oil and natural gas;
 
    
    the proximity of natural gas production to natural gas pipelines;
 
    
    the availability of pipeline capacity;
 
    
    the demand for oil and natural gas by utilities and other end users;
 
    
    the availability of alternate fuel sources;
 
    
    the effect of inclement weather, such as hurricanes;
 
    
    state and federal regulation of oil and natural gas marketing; and
 
    
    federal regulation of natural gas sold or transported in interstate
commerce.
  Changes in the regulation of offshore oil and gas exploration in the U.S. Gulf of Mexico as a
result of the recent explosion and sinking of the Deepwater Horizon drilling rig in the Gulf of
Mexico and the resulting oil spill could adversely affect our business.
  Federal and state legislation and regulatory initiatives relating to hydraulic fracturing could
result in increased costs and additional operating restrictions or delays.
   22




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We face strong competition from larger oil and natural gas companies that may negatively affect our
ability to carry on operations.
  
    
    the availability of funds and information relating to a property;
 
    
    the standards established by us for the minimum projected return on
investment; and
 
    
    the transportation of natural gas.
  Our estimates of proved reserves have been prepared under revised SEC rules which went into effect
for fiscal years ending on or after December 31, 2009, which may make comparisons to prior periods
difficult and could limit our ability to book additional proved undeveloped reserves in the future.
    23




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Our actual production, revenues and expenditures related to our reserves are likely to differ from
our estimates of proved reserves. We may experience production that is less than estimated and
drilling costs that are greater than estimated in our reserve report. These differences may be
material.
  
    
    historical production from the area compared with production from other
similar producing wells;
 
    
    the assumed effects of regulations by governmental agencies;
 
    
    assumptions concerning future oil and natural gas prices; and
 
    
    assumptions concerning future operating costs, severance and excise taxes,
development costs and work-over and remedial costs.
  
    
    the quantities of oil and natural gas that are ultimately recovered;
 
    
    the production and operating costs incurred;
 
    
    the amount and timing of future development expenditures; and
 
    
    future oil and natural gas sales prices.
     24




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We may be unable to successfully identify, execute or effectively integrate future
acquisitions, which may negatively affect our results of operations.
    Hedging production may limit potential gains from increases in commodity prices or result in
losses.
  The loss of key management or technical personnel could adversely affect our ability to operate.
  Operating hazards may adversely affect our ability to conduct business.
  
    
    unexpected drilling conditions including blowouts, cratering and
explosions;
  25




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##### Table of Contents




    
    uncontrollable flows of oil, natural gas or well fluids;
 
    
    equipment failures, fires or accidents;
 
    
    pollution and other environmental risks; and
 
    
    shortages in experienced labor or shortages or delays in the delivery of
equipment.
  Environmental compliance costs and environmental liabilities could have a material adverse effect
on our financial condition and operations.
  
    
    require the acquisition of permits before drilling commences;
 
    
    restrict the types, quantities and concentration of various substances that
can be released into the environment from drilling and production activities;
 
    
    limit or prohibit drilling activities on certain lands lying within
wilderness, wetlands and other protected areas;
 
    
    require remedial measures to mitigate pollution from former operations,
such as plugging abandoned wells; and
 
    
    impose substantial liabilities for pollution resulting from our operations.
    We cannot control the activities on properties we do not operate and we are unable to ensure the
proper operation and profitability of these non-operated properties.
  
    
    timing and amount of capital expenditures;
  26




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##### Table of Contents




    
    expertise and diligence in adequately performing operations and complying
with applicable agreements;
 
    
    financial resources;
 
    
    inclusion of other participants in drilling wells; and
 
    
    use of technology.
  Ownership of working interests and overriding royalty interests in certain of our properties by
certain of our officers and directors potentially creates conflicts of interest.
  Risks Relating to Our Outstanding Common Stock
 Our stock price could be volatile, which could cause you to lose part or all of your investment.
   Issuance of shares in connection with financing transactions or under stock incentive plans will
dilute current stockholders.
  The number of shares of our common stock eligible for future sale could adversely affect the market
price of our stock.
   27




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##### Table of Contents



Provisions in certificate of incorporation, bylaws and shareholder rights plan could delay or
prevent a change in control of our company, even if that change would be beneficial to our
stockholders.
  
    
    the charter authorization of blank check preferred stock;
 
    
    provisions that directors may be removed only for cause, and then only on
approval of holders of a majority of the outstanding voting stock;
 
    
    a restriction on the ability of stockholders to call a special meeting and
take actions by written consent; and
 
    
    provisions regulating the ability of our stockholders to nominate directors
for election or to bring matters for action at annual meetings of our stockholders.
  We do not intend to pay dividends on our common stock and our ability to pay dividends on our
common stock is restricted.
  
 ITEM 1B.
    
    UNRESOLVED STAFF COMMENTS
  
 ITEM 3.
    
    LEGAL PROCEEDINGS
  
 ITEM 4.
    
    (REMOVED AND RESERVED)
  28




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##### Table of Contents



PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITES
  
  29




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##### Table of Contents



Market Price of and Dividends on Common Stock
  High
    
    
    Low20091st Quarter
    
    $
    8.65
    
    
    $
    0.612nd Quarter
    
    
    5.90
    
    
    
    2.143rd Quarter
    
    
    6.52
    
    
    
    2.644th Quarter
    
    
    8.08
    
    
    
    5.1420101st Quarter
    
    $
    7.20
    
    
    $
    4.702nd Quarter
    
    
    8.84
    
    
    
    5.013rd Quarter
    
    
    7.29
    
    
    
    5.154th Quarter
    
    
    7.92
    
    
    
    5.35
    Total Number ofShares
    
    
    Maximum Number (orPurchased as
    
    
    Approximate DollarPart of Publicly
    
    
    Value) of Shares that MayTotal Number of
    
    
    Average Price
    
    
    Announced Plan
    
    
    be Purchased Under theShares Purchased (1)
    
    
    Paid Per Share
    
    
    or Program
    
    
    Plans or ProgramsOctober 1  October 31, 2010
    
    
    23,401
    
    
    $
    6.19
    
    
    
    
    
    
    
    November 1  November 30, 2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 1  December 31, 2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    All shares repurchased were surrendered by employees to pay tax withholding upon the
vesting of restricted stock awards.  30




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##### Table of Contents



ITEM 6.
    
    SELECTED FINANCIAL DATA
  Year Ended December 31,2010
    
    
    2009 (1)
    
    
    2008 (2)
    
    
    2007
    
    
    2006(in thousands except per share data)Revenues
    
    $
    179,294
    
    
    $
    218,875
    
    
    $
    313,958
    
    
    $
    262,334
    
    
    $
    199,520Net income (loss) available to common stockholders
    
    
    41,987
    
    
    
    (95,330
    )
    
    
    (102,100
    )
    
    
    39,245
    
    
    
    23,986Net income (loss) available to common stockholders per share:Basic
    
    
    0.67
    
    
    
    (1.72
    )
    
    
    (2.08
    )
    
    
    0.79
    
    
    
    0.49Diluted
    
    
    0.66
    
    
    
    (1.72
    )
    
    
    (2.08
    )
    
    
    0.78
    
    
    
    0.49Oil and gas properties, net
    
    
    312,940
    
    
    
    321,875
    
    
    
    512,861
    
    
    
    554,850
    
    
    
    431,814Total assets
    
    
    439,517
    
    
    
    410,459
    
    
    
    670,249
    
    
    
    644,347
    
    
    
    518,290Long-term debt
    
    
    150,000
    
    
    
    178,267
    
    
    
    278,998
    
    
    
    148,755
    
    
    
    195,537Stockholders equity
    
    
    208,162
    
    
    
    162,105
    
    
    
    237,487
    
    
    
    302,317
    
    
    
    189,711
 (1)
    
    The year ended December 31, 2009 includes a ceiling test write-down of $156.1 million.(2)
    
    The year ended December 31, 2008 includes a ceiling test write-down of $266.2 million. 
 ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Overview
     31




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##### Table of Contents



Critical Accounting Policies and Estimates
 Reserve Estimates
   Full Cost Method of Accounting
    32




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##### Table of Contents



Future Abandonment Costs
  Derivative Instruments
     33




---



##### Table of Contents



Results of Operations
  Year Ended December 31,2010
    
    
    2009
    
    
    2008Production:Oil (Bbls)
    
    
    663,302
    
    
    
    600,124
    
    
    
    680,571Gas (Mcf)
    
    
    24,501,540
    
    
    
    28,065,270
    
    
    
    27,031,801Ngl (Mcfe)
    
    
    2,469,871
    
    
    
    2,532,822
    
    
    
    2,676,403Total Production (Mcfe)
    
    
    30,951,223
    
    
    
    34,198,836
    
    
    
    33,791,630Sales:Total oil sales
    
    $
    52,715,434
    
    
    $
    41,150,657
    
    
    $
    66,349,344Total gas sales
    
    
    107,117,320
    
    
    
    163,867,613
    
    
    
    216,143,358Total ngl sales
    
    
    19,205,726
    
    
    
    13,625,642
    
    
    
    26,130,502Total oil and gas sales
    
    $
    179,038,480
    
    
    $
    218,643,912
    
    
    $
    308,623,204Average sales prices:Oil (per Bbl)
    
    $
    79.47
    
    
    $
    68.57
    
    
    $
    97.49Gas (per Mcf)
    
    
    4.37
    
    
    
    5.84
    
    
    
    8.00Ngl (per Mcfe)
    
    
    7.78
    
    
    
    5.38
    
    
    
    9.76Per Mcfe
    
    
    5.78
    
    
    
    6.39
    
    
    
    9.13
  Comparison of Results of Operations for the Years Ended December 31, 2010 and 2009
  Production
   Prices
  34




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##### Table of Contents



Revenue
 Expenses
  Years EndedDecember 31,2010
    
    
    2009Stock options:Incentive Stock Options
    
    $
    793
    
    
    $
    835Non-Qualified Stock Options
    
    
    2,081
    
    
    
    2,024Restricted stock
    
    
    4,263
    
    
    
    3,469Share-based compensation
    
    $
    7,137
    
    
    $
    6,328
     3 8
   35




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##### Table of Contents



Comparison of Results of Operations for the Years Ended December 31, 2009 and 2008
  Production
    Prices
 Revenue
 Expenses
   36




---



##### Table of Contents



Years EndedDecember 31,2009
    
    
    2008Stock options:Incentive Stock Options
    
    $
    835
    
    
    $
    1,316Non-Qualified Stock Options
    
    
    2,024
    
    
    
    2,729Restricted stock
    
    
    3,469
    
    
    
    5,537Share based compensation
    
    $
    6,328
    
    
    $
    9,582
         37




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##### Table of Contents



Liquidity and Capital Resources
   Source of Capital: Operations
  Source of Capital: Debt
 3 8 3 8
  3 8
   38




---



##### Table of Contents



Source of Capital: Issuance of Securities
   Source of Capital: Joint Ventures
   Source of Capital: Divestitures
   39




---



##### Table of Contents



Use of Capital: Exploration and Development
   Use of Capital: Acquisitions
  Contractual Obligations
  AfterTotal
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    2015
    
    
    201510% senior notes (1)
    
    $
    250,000
    
    
    $
    15,000
    
    
    $
    15,000
    
    
    $
    15,000
    
    
    $
    15,000
    
    
    $
    15,000
    
    
    $
    175,000Operating leases (2)
    
    
    3,367
    
    
    
    1,167
    
    
    
    1,060
    
    
    
    376
    
    
    
    227
    
    
    
    216
    
    
    
    321Capital projects (3)
    
    
    24,592
    
    
    
    1,517
    
    
    
    1,942
    
    
    
    776
    
    
    
    1,508
    
    
    
    74
    
    
    
    18,775Purchase
commitments (4)
    
    
    11,619
    
    
    
    11,619
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    289,578
    
    
    $
    29,303
    
    
    $
    18,002
    
    
    $
    16,152
    
    
    $
    16,735
    
    
    $
    15,290
    
    
    $
    194,096
 (1)
    
    Includes principal and estimated interest.(2)
    
    Consists primarily of leases for office space and office equipment.(3)
    
    Consists of estimated future obligations to abandon our oil and gas properties.(4)
    
    Consists of certain drilling rig contracts. 
 ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
     40




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##### Table of Contents



Instrument
    
    
    
    
    
    WeightedProduction Period
    
    Type
    
    Daily Volumes
    
    
    Average PriceNatural Gas:2011
    
    Costless Collar
    
    10,000 Mmbtu
    
    
    $4.00  4.87Crude Oil:2011
    
    Costless Collar
    
    250 Bbl
    
    
    $80.00  90.10
   Instrument
    
    
    
    
    
    WeightedProduction Period
    
    Type
    
    Daily Volumes
    
    
    Average PriceNatural Gas:February  December 2011
    
    Costless Collar
    
    5,000 Mmbtu
    
    
    $4.50  4.96
 
 ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
  
 ITEM 9A.
    
    CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  i.
    
    that the Companys disclosure controls and procedures are designed to ensure (a) that
information required to be disclosed by the Company in the reports it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SECs rules and forms, and (b) that such information is
accumulated and communicated to the Companys management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure; and
 ii.
    
    that the Companys disclosure controls and procedures are effective.
  41




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##### Table of Contents



Changes in Internal Control Over Financial Reporting
 
 Managements Report on Internal Control Over Financial Reporting
      /s/ Charles T. Goodson

Charles T. GoodsonChairman andChief Executive Officer/s/ J. Bond Clement

J. Bond ClementExecutive Vice President-Chief Financial Officer
  42




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
       /s/ Ernst & Young LLP
 
  43




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##### Table of Contents



ITEM 9B.
    
    OTHER INFORMATION
  
 PART III
 
 
 
 
 
 ITEMS 10, 11, 12, 13 & 14
  
 PART IV
 
 ITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES
   Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2010 and 2009Consolidated Statements of Operations for the three years ended December 31, 2010Consolidated Statements of Cash Flows for the three years ended December 31, 2010Consolidated Statements of Stockholders Equity for the three years ended December 31, 2010Consolidated Statements of Comprehensive Income for the three years ended December 31, 2010Notes to Consolidated Financial Statements
 2.
    
    FINANCIAL STATEMENT SCHEDULES:
  3.
    
    EXHIBITS:
 2.1
    
    
    Plan and Agreement of Merger by and among Optima Petroleum
Corporation, Optima Energy (U.S.) Corporation, its wholly-owned subsidiary, and
Goodson Exploration Company, NAB Financial L.L.C., Dexco Energy, Inc., American
Explorer, L.L.C. (incorporated herein by reference to Appendix G of the Proxy
Statement on Schedule 14A filed July 22, 1998).3.1
    
    
    Certificate of Incorporation of PetroQuest Energy, Inc. (incorporated
herein by reference to Exhibit 4.1 to Form 8-K filed September 16, 1998).3.2
    
    
    Certificate of Amendment to Certificate of Incorporation dated May
14, 2008 (incorporated herein by reference to Exhibit 3.1 to Form 8-K filed June
23, 2009).3.3
    
    
    Bylaws of PetroQuest Energy, Inc., as amended of December 20, 2007
(incorporated herein by reference to Exhibit 3.1 to Form 8-K filed December 21,
2007).3.4
    
    
    Certificate of Domestication of Optima Petroleum Corporation
(incorporated herein by reference to Exhibit 4.4 to Form 8-K filed September 16,
1998).
  44




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##### Table of Contents



3.5
    
    
    Certificate of Designations, Preferences, Limitations and Relative
Rights of The Series a Junior Participating Preferred Stock of PetroQuest Energy,
Inc. (incorporated herein by reference to Exhibit A of the Rights Agreement
attached as Exhibit 1 to Form 8-A filed November 9, 2001).3.6
    
    
    Certificate of Designations establishing the 6.875% Series B
cumulative convertible perpetual preferred stock, dated September 24, 2007
(incorporated herein by reference to Exhibit 3.1 to Form 8-K filed on September
24, 2007).4.1
    
    
    Rights Agreement dated as of November 7, 2001 between PetroQuest
Energy, Inc. and American Stock Transfer & Trust Company, as Rights Agent,
including exhibits thereto (incorporated herein by reference to Exhibit 1 to Form
8-A filed November 9, 2001).4.2
    
    
    Form of Rights Certificate (incorporated herein by reference to
Exhibit C of the Rights Agreement attached as Exhibit 1 to Form 8-A filed November
9, 2001).4.3
    
    
    Indenture, dated May 11, 2005, among PetroQuest Energy, Inc.,
PetroQuest Energy, LLC, the Subsidiary Guarantors identified therein, and the Bank
of New York Trust Company, N.A. (incorporated herein by reference to Exhibit 4.1
to Form 8-K filed May 11, 2005).4.4
    
    
    First Supplemental Indenture, dated August 19, 2010, among PetroQuest
Energy, Inc., the Subsidiary Guarantors identified therein, and The Bank of New
York Mellon Trust Company, N.A. (incorporated herein by reference to Exhibit 4.1
to Form 8-K filed on August 19, 2010).4.5
    
    
    Indenture, dated August 19, 2010, between PetroQuest Energy, Inc. and
The Bank of New York Mellon Trust Company, N.A. (incorporated herein by reference
to Exhibit 4.2 to Form 8-K filed on August 19, 2010).4.6
    
    
    First Supplemental Indenture, dated August 19, 2010, among PetroQuest
Energy, Inc., the Subsidiary Guarantors identified therein, and The Bank of New
York Mellon Trust Company, N.A. (incorporated herein by reference to Exhibit 4.3
to Form 8-K filed on August 19, 2010). 10.1
    
    
    PetroQuest Energy, Inc. 1998 Incentive Plan, as amended and restated
effective May 14, 2008 (the Incentive Plan) (incorporated herein by reference to
Appendix A of the Proxy Statement on Schedule 14A filed April 9, 2008). 10.2
    
    
    Form of Incentive Stock Option Agreement for executive officers
(including Charles T. Goodson, W. Todd Zehnder, Arthur M. Mixon, III, Daniel G.
Fournerat, Stephen H. Green, Mark K. Stover, Dalton F. Smith III and J. Bond Clement)
under the Incentive Plan (incorporated herein by reference to Exhibit 10.2 to Form
10-K filed February 27, 2009). 10.3
    
    
    Form of Nonstatutory Stock Option Agreement under the Incentive Plan
(incorporated herein by reference to Exhibit 10.3 to Form 10-K filed February 27,
2009). 10.4
    
    
    Form of Restricted Stock Agreement for executive officers (including
Charles T. Goodson, W. Todd Zehnder, Arthur M. Mixon, III, Daniel G. Fournerat,
Stephen H. Green, Mark K. Stover, Dalton F. Smith III and J. Bond Clement) under the
Incentive Plan (incorporated herein by reference to Exhibit 10.4 to Form 10-K filed
February 27, 2009).10.5
    
    
    PetroQuest Energy, Inc. Annual Incentive Plan (incorporated herein by
reference to Exhibit 10.1 to Form 8-K filed on May 13, 2010).10.6
    
    
    PetroQuest Energy, Inc. Annual Incentive Plan, as amended and
restated (incorporated herein by reference to Exhibit 10.1 to Form 8-K filed on
June 8, 2010).
  45




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##### Table of Contents



10.7
    
    
    Credit Agreement dated as of October 2, 2008, among PetroQuest Energy,
L.L.C., PetroQuest Energy, Inc., JPMorgan Chase Bank, N.A., Calyon New York Branch,
Bank of America, N.A., Wells Fargo Bank, N.A., and Whitney National Bank
(incorporated herein by reference to Exhibit 10.1 to Form 8-K filed October 6,
2008).10.8
    
    
    First Amendment to Credit Agreement dated as of March 24, 2009, among
PetroQuest Energy, Inc., PetroQuest Energy, L.L.C., TDC Energy LLC, JPMorgan
Chase Bank, N.A., Calyon New York Branch, Bank of America, N.A., Wells Fargo Bank,
N.A. and Whitney National Bank (incorporated herein by reference to Exhibit 10.1 to
Form 8-K filed March 24, 2009).10.9
    
    
    Second Amendment to Credit Agreement dated as of September 30, 2009,
among PetroQuest Energy, Inc., PetroQuest Energy, L.L.C., TDC Energy LLC, JPMorgan
Chase Bank, N.A., Calyon New York Branch, Bank of America, N.A., Wells Fargo Bank,
N.A. and Whitney National Bank (incorporated herein by reference to Exhibit 10.1 to
Form 8-K filed October 1, 2009).10.10
    
    
    Third Amendment to Credit Agreement dated as of August 5, 2010, among
PetroQuest Energy, Inc., PetroQuest Energy, L.L.C., TDC Energy LLC, JPMorgan Chase
Bank, N.A., Credit Agricole Corporate and Investment Bank, Bank of America, N.A.,
Wells Fargo Bank, N.A. and Whitney National Bank (incorporated herein by reference
to Exhibit 10.1 to Form 8-K filed on August 6, 2010). 10.11
    
    
    Amended Executive Employment Agreement dated effective as of
December 31, 2008, between Charles T. Goodson and PetroQuest Energy, Inc.
(incorporated herein by reference to Exhibit 10.1 to Form 8-K filed January 6,
2009). 10.12
    
    
    Amended Executive Employment Agreement dated effective as of
December 31, 2008, between W. Todd Zehnder and PetroQuest Energy, Inc.
(incorporated herein by reference to Exhibit 10.2 to Form 8-K filed January 6,
2009). 10.13
    
    
    Amended Executive Employment Agreement dated effective as of
December 31, 2008, between Arthur M. Mixon, III and PetroQuest Energy, Inc.
(incorporated herein by reference to Exhibit 10.3 to Form 8-K filed January 6,
2009). 10.14
    
    
    Amended Executive Employment Agreement dated effective as of
December 31, 2008, between Daniel G. Fournerat and PetroQuest Energy, Inc.
(incorporated herein by reference to Exhibit 10.4 to Form 8-K filed January 6,
2009). 10.15
    
    
    Amended Executive Employment Agreement dated effective as of
December 31, 2008, between Stephen H. Green and PetroQuest Energy, Inc.
(incorporated herein by reference to Exhibit 10.5 to Form 8-K filed January 6,
2009). 10.16
    
    
    Amended Executive Employment Agreement dated effective as of December 31,
2008, between Mark
K. Stover and PetroQuest Energy, Inc. (incorporated herein by reference to
Exhibit 10.19 to Form 10-K filed February 27, 2009). 10.17
    
    
    Amended Executive Employment Agreement dated effective as of
December 31, 2008, between Dalton F. Smith III and PetroQuest Energy, Inc.
(incorporated herein by reference to Exhibit 10.20 to Form 10-K filed February 27,
2009). 10.18
    
    
    Amended Executive Employment Agreement dated effective as of
December 31, 2008, between J. Bond Clement and PetroQuest Energy, Inc. (incorporated
herein by reference to Exhibit 10.20 to Form 10-K filed February 27, 2009). 10.19
    
    
    Form of Amended Termination Agreement between the Company and each
of its executive officers, including Charles T. Goodson, W. Todd Zehnder, Arthur M.
Mixon, III, Daniel G. Fournerat, Stephen H. Green, Mark K. Stover, Dalton F. Smith
III and J. Bond Clement (incorporated herein by reference to Exhibit 10.6 to Form
8-K filed January 6, 2009).
  46




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##### Table of Contents



 10.20
    
    
    Form of Indemnification Agreement between PetroQuest Energy, Inc.
and each of its directors and executive officers, including Charles T. Goodson, W.
Todd Zehnder, Arthur M. Mixon, III, Daniel G. Fournerat, Stephen H. Green, Mark K.
Stover, Dalton F. Smith III, J. Bond Clement, William W. Rucks, IV, E. Wayne
Nordberg, Michael L. Finch, W.J. Gordon, III and Charles F. Mitchell, II
(incorporated herein by reference to Exhibit 10.21 to Form 10-K filed March 13,
2002).10.21
    
    
    Form of Surrender and Cancellation Agreement for Directors and
Executive Officers (incorporated herein by reference to Exhibit 10.1 to Form 8-K
filed on September 16, 2010).10.22
    
    
    Joint Development Agreement dated May 17, 2010, among PetroQuest
Energy, L.L.C., a Louisiana limited liability company, WSGP Gas Producing, LLC, a
Delaware limited liability company, and NextEra Energy Gas Producing, LLC, a
Delaware limited liability company (incorporated herein by reference to Exhibit
10.2 to Form 10-Q filed on August 5, 2010).14.1
    
    
    Code of Business Conduct and Ethics (incorporated herein by reference
to Exhibit 14.1 to Form 10-K filed March 8, 2006).*21.1
    
    
    Subsidiaries of the Company.*23.1
    
    
    Consent of Independent Registered Public Accounting Firm.*23.2
    
    
    Consent of Ryder Scott Company, L.P.*31.1
    
    
    Certification of Chief Executive Officer pursuant to Rule 13-a-14(a)
/ Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as
amended.*31.2
    
    
    Certification of Chief Financial Officer pursuant to Rule 13-a-14(a)
/ Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as
amended.*32.1
    
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Executive
Officer.*32.2
    
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Financial
Officer.*99.1
    
    
    Reserve report letter as of December 31, 2010, as prepared by Ryder
Scott Company, L.P.
 
 *
    
    Filed herewith.
    
    Management contract or compensatory plan or arrangement(b)
    
    Exhibits. See Item 15 (a) (3) above.(c)
    
    Financial Statement Schedules. None  47




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##### Table of Contents



GLOSSARY OF CERTAIN OIL AND NATURAL GAS TERMS
  Bbl
 Bcf
 Bcfe
 Block
 Btu or British Thermal Unit
 Completion
 Condensate
 Deterministic estimate
 Developed acreage
 Development well
 Dry hole
 Exploratory well
 Extension well
 Farm-in or farm-out
 Field
 Gross acres or gross wells
 Lead
  48




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##### Table of Contents



MBbls
 Mcf
 Mcfe
 MMBls
 MMBtu
 MMcf
 MMcfe
 Ngl.
 Net acres or net wells
 Possible reserves
 Probabilistic estimate
 Probable reserves
 Productive well
 Prospect
 Proved area
 Proved oil and gas reserves
 Proved properties
 Reasonable certainty
 Reliable technology
  49




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##### Table of Contents



Reserves
 Reservoir
 Resources
 Service well
 Stratigraphic test well
 Undeveloped oil and gas reserves
 Undeveloped acreage
 Unproved properties
 Working interest
  50




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##### Table of Contents



PETROQUEST ENERGY, INC.By:
    /s/ Charles T. GoodsonCHARLES T. GOODSONChairman of the Board, President and Chief
Executive Officer  By:
    
    /s/ Charles T. Goodson
    
    
    
    Chairman of the Board, President, Chief Executive Officer and DirectorCHARLES T. GOODSON
    
    
    
    (Principal Executive Officer)By:
    
    /s/ J. Bond Clement
    
    
    
    Executive Vice President, Chief Financial Officer, TreasurerJ. BOND CLEMENT
    
    
    
    (Principal Financial and Accounting Officer)By:
    
    /s/ W.J. Gordon, III
    
    
    
    DirectorW.J. GORDON, IIIBy:
    
    /s/ Michael L. Finch
    
    
    
    DirectorMICHAEL L. FINCHBy:
    
    /s/ Charles F. Mitchell, II, M.D.
    
    
    
    DirectorCHARLES F. MITCHELL, II, M.D.By:
    
    /s/ E. Wayne Nordberg
    
    
    
    DirectorE. WAYNE NORDBERGBy:
    
    /s/ William W. Rucks, IV
    
    
    
    DirectorWILLIAM W. RUCKS, IV
  51




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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets of PetroQuest Energy, Inc. as of
December 31, 2010 and 2009
    
    
    F-3Consolidated Statements of Operations of PetroQuest Energy, Inc.
for the years ended December 31, 2010, 2009 and 2008
    
    
    F-4Consolidated Statements of Cash Flows of PetroQuest Energy, Inc.
for the years ended December 31, 2010, 2009 and 2008
    
    
    F-5Consolidated Statements of Stockholders Equity of PetroQuest Energy, Inc.
for the years ended December 31, 2010, 2009 and 2008
    
    
    F-6Consolidated Statements of Comprehensive Income of PetroQuest Energy, Inc.
for the years ended December 31, 2010, 2009 and 2008
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
  F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
       
  F-2




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##### Table of Contents



PETROQUEST ENERGY, INC.
 
 Amounts in Thousands)
 December 31,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    63,237
    
    
    $
    20,772Revenue receivable
    
    
    13,386
    
    
    
    16,457Joint interest billing receivable
    
    
    12,193
    
    
    
    11,792Other receivable
    
    
    13,795
    
    
    
    Hedge asset
    
    
    
    
    
    
    2,796Prepaid drilling costs
    
    
    789
    
    
    
    2,383Drilling pipe inventory
    
    
    11,711
    
    
    
    19,297Other current assets
    
    
    1,827
    
    
    
    1,619Total current assets
    
    
    116,938
    
    
    
    75,116Property and equipment:Oil and gas properties:Oil and gas properties, full cost method
    
    
    1,433,642
    
    
    
    1,296,177Unevaluated oil and gas properties
    
    
    54,851
    
    
    
    108,079Accumulated depreciation, depletion and amortization
    
    
    (1,175,553
    )
    
    
    (1,082,381
    )Oil and gas properties, net
    
    
    312,940
    
    
    
    321,875Gas gathering assets
    
    
    4,177
    
    
    
    4,848Accumulated depreciation and amortization of gas gathering assets
    
    
    (1,496
    )
    
    
    (1,198
    )Total property and equipment
    
    
    315,621
    
    
    
    325,525Other assets, net of accumulated depreciation and amortization
of $6,435 and $8,342, respectively
    
    
    6,958
    
    
    
    9,818Total assets
    
    $
    439,517
    
    
    $
    410,459LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable to vendors
    
    $
    26,097
    
    
    $
    27,113Advances from co-owners
    
    
    7,963
    
    
    
    3,662Oil and gas revenue payable
    
    
    7,220
    
    
    
    7,886Accrued interest and preferred stock dividend
    
    
    6,575
    
    
    
    3,133Hedge liability
    
    
    1,089
    
    
    
    Asset retirement obligation
    
    
    1,517
    
    
    
    4,517Other accrued liabilities
    
    
    7,380
    
    
    
    4,106Total current liabilities
    
    
    57,841
    
    
    
    50,417Bank debt
    
    
    
    
    
    
    29,00010 3/8% Senior Notes
    
    
    
    
    
    
    149,26710% Senior Notes
    
    
    150,000
    
    
    
    Asset retirement obligation
    
    
    23,075
    
    
    
    19,399Other liabilities
    
    
    439
    
    
    
    271Commitments and contingenciesStockholders equity:Preferred stock, $.001 par value; authorized 5,000
shares; issued and outstanding 1,495 shares
    
    
    1
    
    
    
    1Common stock, $.001 par value; authorized 150,000
shares; issued and outstanding 61,565 and 61,177
shares, respectively
    
    
    62
    
    
    
    61Paid-in capital
    
    
    266,907
    
    
    
    259,981Accumulated other comprehensive income (loss)
    
    
    (1,089
    )
    
    
    1,768Accumulated deficit
    
    
    (57,719
    )
    
    
    (99,706
    )Total stockholders equity
    
    
    208,162
    
    
    
    162,105Total liabilities and stockholders equity
    
    $
    439,517
    
    
    $
    410,459
   F-3




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##### Table of Contents



PETROQUEST ENERGY, INC.
 
 Amounts in Thousands, Except Per Share Data
 Year Ended December 31,2010
    
    
    2009
    
    
    2008Revenues:Oil and gas sales
    
    $
    179,038
    
    
    $
    218,644
    
    
    $
    308,623Gas gathering revenue
    
    
    256
    
    
    
    231
    
    
    
    5,335179,294
    
    
    
    218,875
    
    
    
    313,958Expenses:Lease operating expenses
    
    
    39,012
    
    
    
    38,541
    
    
    
    44,665Production taxes
    
    
    4,917
    
    
    
    4,656
    
    
    
    12,292Depreciation, depletion and amortization
    
    
    59,326
    
    
    
    84,772
    
    
    
    134,340Ceiling test writedown
    
    
    
    
    
    
    156,134
    
    
    
    266,156Gas gathering costs
    
    
    31
    
    
    
    191
    
    
    
    2,309General and administrative
    
    
    21,341
    
    
    
    18,869
    
    
    
    23,249Accretion of asset retirement obligation
    
    
    1,306
    
    
    
    2,452
    
    
    
    1,317Interest expense
    
    
    9,952
    
    
    
    12,615
    
    
    
    9,327135,885
    
    
    
    318,230
    
    
    
    493,655Gain on legal settlement
    
    
    12,400
    
    
    
    
    
    
    
    Loss on early extinguishment of debt
    
    
    (5,973
    )
    
    
    
    
    
    
    Gain on sale of assets
    
    
    
    
    
    
    485
    
    
    
    26,812Other income (expense)
    
    
    (1,080
    )
    
    
    (5,955
    )
    
    
    344Income (loss) from operations
    
    
    48,756
    
    
    
    (104,825
    )
    
    
    (152,541
    )Income tax expense (benefit)
    
    
    1,630
    
    
    
    (14,635
    )
    
    
    (55,581
    )Net income (loss)
    
    
    47,126
    
    
    
    (90,190
    )
    
    
    (96,960
    )Preferred stock dividend
    
    
    5,139
    
    
    
    5,140
    
    
    
    5,140Net income (loss) available to common stockholders
    
    $
    41,987
    
    
    $
    (95,330
    )
    
    $
    (102,100
    )Earnings per common share:BasicNet income (loss) per share
    
    $
    0.67
    
    
    $
    (1.72
    )
    
    $
    (2.08
    )DilutedNet income (loss) per share
    
    $
    0.66
    
    
    $
    (1.72
    )
    
    $
    (2.08
    )Weighted average number of common shares:Basic
    
    
    61,415
    
    
    
    55,363
    
    
    
    48,971Diluted
    
    
    61,789
    
    
    
    55,363
    
    
    
    48,971
   F-4




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##### Table of Contents



PETROQUEST ENERGY, INC.
 
 Amounts in Thousands
 Year Ended December 31,2010
    
    
    2009
    
    
    2008Cash flows from operating activities:Net income (loss)
    
    $
    47,126
    
    
    $
    (90,190
    )
    
    $
    (96,960
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Deferred tax expense (benefit)
    
    
    1,630
    
    
    
    (14,635
    )
    
    
    (55,581
    )Depreciation, depletion and amortization
    
    
    59,326
    
    
    
    84,772
    
    
    
    134,340Ceiling test writedown
    
    
    
    
    
    
    156,134
    
    
    
    266,156Non-cash gain on legal settlement
    
    
    (4,164
    )
    
    
    
    
    
    
    Loss on early extinguishment of debt
    
    
    5,973
    
    
    
    
    
    
    
    Gain on sale of assets
    
    
    
    
    
    
    (485
    )
    
    
    (26,812
    )Accretion of asset retirement obligation
    
    
    1,306
    
    
    
    2,452
    
    
    
    1,317Pipe inventory impairment
    
    
    
    
    
    
    913
    
    
    
    Share-based compensation expense
    
    
    7,137
    
    
    
    6,328
    
    
    
    9,582Amortization costs and other
    
    
    1,334
    
    
    
    1,512
    
    
    
    1,492Payments to settle asset retirement obligations
    
    
    (6,274
    )
    
    
    (1,803
    )
    
    
    (19,377
    )Changes in working capital accounts:Revenue receivable
    
    
    3,071
    
    
    
    3,617
    
    
    
    2,746Joint interest billing receivable
    
    
    (401
    )
    
    
    11,937
    
    
    
    (1,323
    )Prepaid drilling and pipe costs
    
    
    9,180
    
    
    
    14,828
    
    
    
    (35,973
    )Accounts payable and accrued liabilities
    
    
    3,368
    
    
    
    (51,375
    )
    
    
    (4,567
    )Advances from co-owners
    
    
    4,301
    
    
    
    (1,687
    )
    
    
    (7,521
    )Other
    
    
    (1,269
    )
    
    
    (496
    )
    
    
    1,542Net cash provided by operating activities
    
    
    131,644
    
    
    
    121,822
    
    
    
    169,061Cash flows from investing activities:Investment in oil and gas properties
    
    
    (103,926
    )
    
    
    (63,420
    )
    
    
    (325,936
    )Investment in gas gathering assets
    
    
    
    
    
    
    (204
    )
    
    
    (6,204
    )Proceeds from sale of gathering assets, net of expenses
    
    
    
    
    
    
    
    
    
    
    43,170Proceeds from sale of unevaluated properties
    
    
    22,473
    
    
    
    
    
    
    
    Proceeds from sale of oil and gas properties and other
    
    
    35,000
    
    
    
    7,451
    
    
    
    2,256Net cash used in investing activities
    
    
    (46,453
    )
    
    
    (56,173
    )
    
    
    (286,714
    )Cash flows from financing activities:Net proceeds from (payments for) share based compensation
    
    
    (210
    )
    
    
    (366
    )
    
    
    1,597Deferred financing costs
    
    
    (12
    )
    
    
    (114
    )
    
    
    (1,450
    )Proceeds from common stock offering
    
    
    
    
    
    
    38,036
    
    
    
    Costs of common stock offering
    
    
    
    
    
    
    (258
    )
    
    
    Payment of preferred stock dividend
    
    
    (5,137
    )
    
    
    (5,139
    )
    
    
    (5,439
    )Repayment of bank borrowings
    
    
    (29,000
    )
    
    
    (101,000
    )
    
    
    (128,000
    )Proceeds from bank borrowings
    
    
    
    
    
    
    
    
    
    
    258,000Redemption of 10 3/8% Senior Notes
    
    
    (150,000
    )
    
    
    
    
    
    
    Costs to redeem 10 3/8% Senior Notes
    
    
    (4,187
    )
    
    
    
    
    
    
    Proceeds from issuance of 10% Senior Notes
    
    
    150,000
    
    
    
    
    
    
    
    Costs to issue 10% Senior Notes
    
    
    (4,180
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (42,726
    )
    
    
    (68,841
    )
    
    
    124,708Net increase (decrease) in cash and cash equivalents
    
    
    42,465
    
    
    
    (3,192
    )
    
    
    7,055Cash and cash equivalents at beginning of period
    
    
    20,772
    
    
    
    23,964
    
    
    
    16,909Cash and cash equivalents at end of period
    
    $
    63,237
    
    
    $
    20,772
    
    
    $
    23,964Supplemental disclosure of cash flow informationCash paid during the period for:Interest
    
    $
    11,195
    
    
    $
    20,335
    
    
    $
    17,851Income taxes
    
    $
    192
    
    
    $
    227
    
    
    $
    
   F-5




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##### Table of Contents



PETROQUEST ENERGY, INC
 
 Amounts in Thousands
 Other
    
    
    Retained
    
    
    TotalCommon
    
    
    Preferred
    
    
    Paid-In
    
    
    Comprehensive
    
    
    Earnings
    
    
    StockholdersStock
    
    
    Stock
    
    
    Capital
    
    
    Income (Loss)
    
    
    (Deficit)
    
    
    EquityDecember 31, 2007
    
    $
    48
    
    
    $
    1
    
    
    $
    204,979
    
    
    $
    (435
    )
    
    $
    97,724
    
    
    $
    302,317Options exercised
    
    
    1
    
    
    
    
    
    
    
    1,896
    
    
    
    
    
    
    
    
    
    
    
    1,897Retirement of shares upon vesting of restricted stock
    
    
    
    
    
    
    
    
    
    
    (300
    )
    
    
    
    
    
    
    
    
    
    
    (300
    )Share-based compensation expense
    
    
    
    
    
    
    
    
    
    
    9,582
    
    
    
    
    
    
    
    
    
    
    
    9,582Non-cash compensation
    
    
    
    
    
    
    
    
    
    
    96
    
    
    
    
    
    
    
    
    
    
    
    96Derivative fair value adjustment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,995
    
    
    
    
    
    
    
    25,995Preferred stock dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,140
    )
    
    
    (5,140
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (96,960
    )
    
    
    (96,960
    )December 31, 2008
    
    $
    49
    
    
    $
    1
    
    
    $
    216,253
    
    
    $
    25,560
    
    
    $
    (4,376
    )
    
    $
    237,487Options exercised
    
    
    
    
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    65Retirement of shares upon vesting of restricted stock
    
    
    
    
    
    
    
    
    
    
    (431
    )
    
    
    
    
    
    
    
    
    
    
    (431
    )Issuance of common stock
    
    
    12
    
    
    
    
    
    
    
    37,766
    
    
    
    
    
    
    
    
    
    
    
    37,778Share-based compensation expense
    
    
    
    
    
    
    
    
    
    
    6,328
    
    
    
    
    
    
    
    
    
    
    
    6,328Derivative fair value adjustment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,792
    )
    
    
    
    
    
    
    (23,792
    )Preferred stock dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,140
    )
    
    
    (5,140
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (90,190
    )
    
    
    (90,190
    )December 31, 2009
    
    $
    61
    
    
    $
    1
    
    
    $
    259,981
    
    
    $
    1,768
    
    
    $
    (99,706
    )
    
    $
    162,105Options exercised
    
    
    1
    
    
    
    
    
    
    
    296
    
    
    
    
    
    
    
    
    
    
    
    297Retirement of shares upon vesting of restricted stock
    
    
    
    
    
    
    
    
    
    
    (507
    )
    
    
    
    
    
    
    
    
    
    
    (507
    )Share-based compensation expense
    
    
    
    
    
    
    
    
    
    
    7,137
    
    
    
    
    
    
    
    
    
    
    
    7,137Derivative fair value adjustment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,857
    )
    
    
    
    
    
    
    (2,857
    )Preferred stock dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,139
    )
    
    
    (5,139
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,126
    
    
    
    47,126December 31, 2010
    
    $
    62
    
    
    $
    1
    
    
    $
    266,907
    
    
    $
    (1,089
    )
    
    $
    (57,719
    )
    
    $
    208,162
   F-6




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##### Table of Contents



PETROQUEST ENERGY, INC.
 
 Amounts in Thousands
 Year Ended December 31,2010
    
    
    2009
    
    
    2008Net income (loss)
    
    $
    47,126
    
    
    $
    (90,190
    )
    
    $
    (96,960
    )Change in fair value of derivative instruments,
accounted for as hedges, net of tax benefit
(expense)
of $1,028, $13,983 and ($15,267), respectively
    
    
    (2,857
    )
    
    
    (23,792
    )
    
    
    25,995Comprehensive income (loss)
    
    $
    44,269
    
    
    $
    (113,982
    )
    
    $
    (70,965
    )
   F-7




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##### Table of Contents



PETROQUEST ENERGY, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Organization and Summary of Significant Accounting Policies
  Principles of Consolidation
  Use of Estimates
  Reserve Estimates and Oil and Gas Properties
      F-8




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##### Table of Contents



Gas Gathering Assets
 
 Other Assets
 
 Cash and Cash Equivalents
  Accounts Receivable and Other Accrued Liabilities
  Drilling Pipe Inventory
  Income Taxes
  Revenue Recognition
   F-9




---



##### Table of Contents



Certain Concentrations
   Year Ended December 31,2010
    
    
    2009
    
    
    2008Shell Trading Co.
    
    
    19
    %
    
    
    17
    %
    
    
    (a
    )Texon LP
    
    
    17
    %
    
    
    17
    %
    
    
    23
    %Laclede Energy
    
    
    17
    %
    
    
    12
    %
    
    
    11
    %Gary Williams
    
    
    10
    %
    
    
    (a
    )
    
    
    (a
    )Atmos Energy
    
    
    (a
    )
    
    
    13
    %
    
    
    (a
    )Louis Dreyfus Corporation
    
    
    (a
    )
    
    
    (a
    )
    
    
    11
    %Crosstex
    
    
    (a
    )
    
    
    (a
    )
    
    
    11
    %DCP Midstream
    
    
    (a
    )
    
    
    (a
    )
    
    
    10
    %
 (a)
    
    Less than 10 percent Fair Value of Financial Instruments
  Derivative Instruments
    F-10




---



##### Table of Contents



Note 2  Convertible Preferred Stock
   Dividends
 Mandatory conversion
 Conversion rights
  Note 3  Common Stock Offering
  Note 4  Woodford Joint Development Agreement
   F-11




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##### Table of Contents



Note 5  Earnings Per Share
   Income
    
    
    Shares
    
    
    PerFor the Year Ended December 31, 2010
    
    (Numerator)
    
    
    (Denominator)
    
    
    Share AmountNet income available to common stockholders
    
    $
    41,987
    
    
    
    61,415Attributable to participating securities
    
    
    (1,029
    )
    
    
    BASIC EPS
    
    $
    40,958
    
    
    
    61,415
    
    
    $
    0.67Net income available to common stockholders
    
    $
    41,987
    
    
    
    61,415Effect of dilutive securities:Stock options
    
    
    
    
    
    
    374Attributable to participating securities
    
    
    (1,023
    )
    
    
    DILUTED EPS
    
    $
    40,964
    
    
    
    61,789
    
    
    $
    0.66
 Loss
    
    
    Shares
    
    
    PerFor the Year Ended December 31, 2009
    
    (Numerator)
    
    
    (Denominator)
    
    
    Share AmountNet loss available to common stockholders
    
    $
    (95,330
    )
    
    
    55,363
    
    
    $
    (1.72
    )Effect of dilutive securities:Stock options
    
    
    
    
    
    
    Restricted stock
    
    
    
    
    
    
    Series B preferred stock
    
    
    
    
    
    
    DILUTED EPS
    
    $
    (95,330
    )
    
    
    55,363
    
    
    $
    (1.72
    )
 Loss
    
    
    Shares
    
    
    PerFor the Year Ended December 31, 2008
    
    (Numerator)
    
    
    (Denominator)
    
    
    Share AmountNet loss available to common stockholders
    
    $
    (102,100
    )
    
    
    48,971
    
    
    $
    (2.08
    )Effect of dilutive securities:Stock options
    
    
    
    
    
    
    Restricted stock
    
    
    
    
    
    
    Series B preferred stock
    
    
    
    
    
    
    DILUTED EPS
    
    $
    (102,100
    )
    
    
    48,971
    
    
    $
    (2.08
    )
   F-12




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##### Table of Contents



Note 6  Share Based Compensation
  Years EndedDecember 31,2010
    
    
    2009
    
    
    2008Stock options:Incentive Stock Options
    
    $
    793
    
    
    $
    835
    
    
    $
    1,316Non-Qualified Stock Options
    
    
    2,081
    
    
    
    2,024
    
    
    
    2,729Restricted stock
    
    
    4,263
    
    
    
    3,469
    
    
    
    5,537Share-based compensation
    
    $
    7,137
    
    
    $
    6,328
    
    
    $
    9,582
   Stock Options
    Years Ended December 31,2010
    
    
    2009
    
    
    2008Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    78.2%  80.3
    %
    
    
    75.5%  78.4
    %
    
    
    54.9%  69.8
    %Risk-free rate
    
    
    1.5%  3.0
    %
    
    
    2.3%  2.5
    %
    
    
    1.7%  3.6
    %Expected term
    
    6 years
    
    
    6 years
    
    
    6 yearsForfeiture rate
    
    
    5.0
    %
    
    
    5.0
    %
    
    
    5.0
    %Stock options granted (1)
    
    
    69,500
    
    
    
    638,486
    
    
    
    563,900Wgtd. avg. grant date fair value per share
    
    $
    4.21
    
    
    $
    4.77
    
    
    $
    9.45Fair value of grants (1)
    
    $
    293,000
    
    
    $
    3,045,000
    
    
    $
    5,330,000
 
 (1)
    
    Prior to applying estimated forfeiture rate  F-13




---



##### Table of Contents



AggregateNumber of
    
    
    Wgtd. Avg.
    
    
    Wgtd. Avg.
    
    
    IntrinsicOptions
    
    
    Exercise Price
    
    
    Remaining Life
    
    
    Value (000s)Outstanding at beginning of year
    
    
    3,126,758
    
    
    $
    8.91Granted
    
    
    69,500
    
    
    
    6.08Expired/cancelled/forfeited (1)
    
    
    (1,440,707
    )
    
    
    13.67Exercised
    
    
    (130,000
    )
    
    
    2.51Outstanding at end of year
    
    
    1,625,551
    
    
    
    5.09
    
    
    5.7 years
    
    
    $
    3,914Options exercisable at end of year
    
    
    1,121,400
    
    
    $
    4.29
    
    
    4.3 years
    
    
    $
    3,601Options expected to vest
    
    
    478,943
    
    
    
    6.87
    
    
    8.6 years
    
    
    $
    297
 (1)
    
    During 2010, 1,438,782 stock options having a weighted average exercise price of $13.69
were voluntarily cancelled by certain employees and directors.   Range of
    
    Options
    
    
    Wgtd. Avg.
    
    Wgtd. Avg.
    
    
    Options
    
    
    Wgtd. Avg.Exercise
    
    Outstanding
    
    
    Remaining
    
    Exercise
    
    
    Exercisable
    
    
    ExercisePrice
    
    12/31/10
    
    
    Contractual Life
    
    Price
    
    
    12/31/10
    
    
    Price$1.53  $3.17
    
    
    523,167
    
    
    2.9 years
    
    $
    2.93
    
    
    
    523,167
    
    
    $
    2.93$3.17  $4.88
    
    
    260,065
    
    
    4.0 years
    
    $
    3.57
    
    
    
    233,400
    
    
    $
    3.42$4.88  $6.72
    
    
    218,833
    
    
    5.7 years
    
    $
    5.91
    
    
    
    145,333
    
    
    $
    5.84$6.72  $13.44
    
    
    623,486
    
    
    8.7 years
    
    $
    7.25
    
    
    
    219,500
    
    
    $
    7.441,625,551
    
    
    5.7 years
    
    $
    5.09
    
    
    
    1,121,400
    
    
    $
    4.29
 Restricted Stock
   F-14




---



##### Table of Contents



Wgtd. Avg.Number of
    
    
    Fair ValueShares
    
    
    per ShareOutstanding at beginning of year
    
    
    1,446,267
    
    
    $
    7.58Granted
    
    
    590,207
    
    
    
    5.44Expired/cancelled/forfeited
    
    
    (44,850
    )
    
    
    7.17Lapse of restrictions
    
    
    (352,815
    )
    
    
    7.42Outstanding at December 31, 2010 (1)
    
    
    1,638,809
    
    
    $
    6.86
 
 (1)
    
    At December 31, 2010, the weighted average remaining life of restricted stock outstanding was 3
years and the intrinsic value of restricted stock outstanding, using the closing stock price on
December 31, 2010, was $12.3 million. Note 7  Asset Retirement Obligations
   Years Ended December 31,2010
    
    
    2009Asset retirement obligation, beginning of period
    
    $
    23,916
    
    
    $
    25,633Liabilities incurred
    
    
    275
    
    
    
    58Liabilities settled
    
    
    (7,362
    )
    
    
    (1,803
    )Accretion expense
    
    
    1,306
    
    
    
    2,452Revisions in estimates
    
    
    6,457
    
    
    
    (2,424
    )Asset retirement obligation, end of period
    
    
    24,592
    
    
    
    23,916Less: current portion of asset retirement
obligation
    
    
    (1,517
    )
    
    
    (4,517
    )Long-term asset retirement obligation
    
    $
    23,075
    
    
    $
    19,399
  Note 8  Derivatives
  Instrument
    
    
    
    
    
    WeightedProduction Period
    
    Type
    
    Daily Volumes
    
    
    Average PriceNatural Gas:2011
    
    Costless Collar
    
    10,000 Mmbtu
    
    
    $
    4.00  4.87Crude Oil:2011
    
    Costless Collar
    
    250 Bbl
    
    
    $
    80.00  90.10
  F-15




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##### Table of Contents



Instrument
    
    
    
    
    
    WeightedProduction Period
    
    Type
    
    Daily Volumes
    
    
    Average PriceNatural Gas:February  December
2011
    
    Costless Collar
    
    5,000 Mmbtu
    
    
    $
    4.50  4.96
  Effect of Derivative Instruments on the Consolidated Balance Sheet at December 31, 2010 and 2009:
 Commodity DerivativesBalance SheetPeriod
    
    Location
    
    Fair ValueDecember 31, 2010
    
    Hedging liability
    
    $
    (1,089
    )December 31, 2009
    
    Hedging asset
    
    $
    2,796
 Effect of Derivative Instruments on the Consolidated Statement of Operations for the twelve months
ended December 31, 2010, 2009 and 2008:
 Commodity DerivativesAmount of Gain (Loss)
    
    
    Location of
    
    Amount of Gain (Loss)Recognized in Other
    
    
    Gain (Loss) Reclassified
    
    Reclassified intoPeriod
    
    Comprehensive Income (Loss)
    
    
    into Income
    
    IncomeDecember 31, 2010
    
    $
    (2,857
    )
    
    Oil and gas sales
    
    $
    17,538December 31, 2009
    
    $
    (23,792
    )
    
    Oil and gas sales
    
    $
    79,892December 31, 2008
    
    $
    25,995
    
    
    Oil and gas sales
    
    $
    (8,284
    )
  
    
    Level 1: valuations consist of unadjusted quoted prices in active markets for identical
assets and liabilities and has the highest priority;
    
    Level 2: valuations rely on quoted prices in markets that are not active or observable
inputs over the full term of the asset or liability;
    
    Level 3: valuations are based on prices or third party or internal valuation models
that require inputs that are significant to the fair value measurement and are less
observable and thus have the lowest priority.
  F-16




---



##### Table of Contents



Fair Value Measurements UsingQuoted Prices
    
    
    Significant Other
    
    
    Significantin Active
    
    
    Observable
    
    
    UnobservableInstrument
    
    Markets (Level 1)
    
    
    Inputs (Level 2)
    
    
    Inputs (Level 3)Commodity Derivatives  2010
    
    
    
    
    
    $
    (1,089
    )
    
    
    Commodity Derivatives  2009
    
    
    
    
    
    $
    2,796
    
    
    
    
 Note 9  Long-Term Debt
 3 8 3 8 3 8
  3 8
    F-17




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##### Table of Contents



Note 10  Related Party Transactions
     Note 11  Ceiling Test
   F-18




---



##### Table of Contents



Note 12  Investment in Oil and Gas Properties
  amounts in thousands
 For the Year-Ended December 31,2010
    
    
    2009
    
    
    2008Acquisition costs:Proved
    
    $
    10,421
    
    
    $
    427
    
    
    $
    3,014Unproved
    
    
    11,310
    
    
    
    1,592
    
    
    
    58,826Divestitures  unproved (1)
    
    
    (36,139
    )
    
    
    
    
    
    
    Exploration costs:Proved
    
    
    34,310
    
    
    
    16,495
    
    
    
    149,811Unproved
    
    
    10,384
    
    
    
    3,249
    
    
    
    6,048Development costs
    
    
    34,286
    
    
    
    19,333
    
    
    
    118,891Capitalized general and administrative and interest costs
    
    
    19,665
    
    
    
    18,009
    
    
    
    21,181Total costs incurred
    
    $
    84,237
    
    
    $
    59,105
    
    
    $
    357,771
 For the Year-Ended December 31,2010
    
    
    2009
    
    
    2008Accumulated depreciation, depletion
and amortization (DD&A)Balance, beginning of year
    
    $
    (1,082,381
    )
    
    $
    (832,290
    )
    
    $
    (432,530
    )Provision for DD&A
    
    
    (58,172
    )
    
    
    (83,613
    )
    
    
    (131,348
    )Ceiling test writedown
    
    
    
    
    
    
    (156,134
    )
    
    
    (266,156
    )Sale of proved properties and other (1)
    
    
    (35,000
    )
    
    
    (10,344
    )
    
    
    (2,256
    )Balance, end of year
    
    $
    (1,175,553
    )
    
    $
    (1,082,381
    )
    
    $
    (832,290
    )DD&A per Mcfe
    
    $
    1.88
    
    
    $
    2.44
    
    
    $
    3.89
 (1)
    
    During 2010, the Company recorded $71 million in consideration from its Woodford joint
development agreement
(See Note 4).  Note 13  Income Taxes
   F-19




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##### Table of Contents



December 31,2010
    
    
    2009Net operating loss carryforwards
    
    $
    4,737
    
    
    $
    6,697Percentage depletion carryforward
    
    
    3,596
    
    
    
    3,344Alternative minimum tax credit
    
    
    776
    
    
    
    201Contributions carryforward and other
    
    
    90
    
    
    
    65Temporary differences:Oil and gas properties  full cost
    
    
    (10,141
    )
    
    
    8,803Hedges
    
    
    405
    
    
    
    (1,040
    )Share-based compensation
    
    
    3,732
    
    
    
    5,209Valuation allowance
    
    
    (3,195
    )
    
    
    (23,279
    )Deferred tax liability
    
    $
    
    
    
    $
    
   For the Year-Ended December 31,2010
    
    
    2009
    
    
    2008Amount computed using the statutory rate
    
    $
    17,065
    
    
    $
    (36,689
    )
    
    $
    (53,389
    )Increase (reduction) in taxes resulting from:State & local taxes
    
    
    1,073
    
    
    
    (2,306
    )
    
    
    (3,357
    )Percentage depletion carryforward
    
    
    (252
    )
    
    
    (725
    )
    
    
    310Allowance for alternative minimum tax
    
    
    575
    
    
    
    
    
    
    
    Non-deductible stock option expense (1)
    
    
    295
    
    
    
    311
    
    
    
    490Share-based compensation (2)
    
    
    3,041
    
    
    
    1,334
    
    
    
    Other
    
    
    321
    
    
    
    161
    
    
    
    365Change in valuation allowance
    
    
    (20,488
    )
    
    
    23,279
    
    
    
    Income tax expense (benefit)
    
    $
    1,630
    
    
    $
    (14,635
    )
    
    $
    (55,581
    )
 (1)
    
    Relates to compensation expense recognized on the vesting of Incentive Stock Options(2)
    
    Relates to the write-off of deferred tax assets associated with share based compensation that
will not be
recognized for tax purposes. Note 14  Commitments and Contingencies
  F-20




---



##### Table of Contents



Lease Commitments
   2011
    
    $
    1,1672012
    
    
    1,0602013
    
    
    3762014
    
    
    2272015
    
    
    216Thereafter
    
    
    321$
    3,367
  Note 15  Oil and Gas Reserve Information  Unaudited
      F-21




---



##### Table of Contents



Oil
    
    
    NGL
    
    
    Natural Gas
    
    
    Totalin
    
    
    in
    
    
    in
    
    
    ReservesMBbls
    
    
    MMcfe
    
    
    MMcf
    
    
    in MMcfeProved reserves as of December 31, 2007
    
    
    2,342
    
    
    
    13,314
    
    
    
    129,154
    
    
    
    156,520Revisions of previous estimates
    
    
    (21
    )
    
    
    1,453
    
    
    
    (12,579
    )
    
    
    (11,252
    )Extensions, discoveries and other additions
    
    
    499
    
    
    
    1,314
    
    
    
    68,486
    
    
    
    72,794Purchase of producing properties
    
    
    62
    
    
    
    
    
    
    
    1,047
    
    
    
    1,419Sale of reserves in place
    
    
    
    
    
    
    
    
    
    
    (295
    )
    
    
    (295
    )Production
    
    
    (681
    )
    
    
    (2,676
    )
    
    
    (27,032
    )
    
    
    (33,794
    )Proved reserves as of December 31, 2008
    
    
    2,201
    
    
    
    13,405
    
    
    
    158,781
    
    
    
    185,392Revisions of previous estimates
    
    
    321
    
    
    
    (664
    )
    
    
    (9,953
    )
    
    
    (8,691
    )Extensions, discoveries and other additions
    
    
    9
    
    
    
    300
    
    
    
    39,003
    
    
    
    39,357Sale of reserves in place
    
    
    
    
    
    
    
    
    
    
    (2,913
    )
    
    
    (2,913
    )Production
    
    
    (600
    )
    
    
    (2,533
    )
    
    
    (28,065
    )
    
    
    (34,198
    )Proved reserves as of December 31, 2009
    
    
    1,931
    
    
    
    10,508
    
    
    
    156,853
    
    
    
    178,947Revisions of previous estimates
    
    
    187
    
    
    
    187
    
    
    
    20,958
    
    
    
    22,267Extensions, discoveries and other additions
    
    
    168
    
    
    
    150
    
    
    
    47,681
    
    
    
    48,839Purchase of producing properties
    
    
    
    
    
    
    
    
    
    
    2,336
    
    
    
    2,336Sale of reserves in place
    
    
    
    
    
    
    
    
    
    
    (28,761
    )
    
    
    (28,761
    )Production
    
    
    (663
    )
    
    
    (2,472
    )
    
    
    (24,501
    )
    
    
    (30,951
    )Proved reserves as of December 31, 2010
    
    
    1,623
    
    
    
    8,373
    
    
    
    174,566
    
    
    
    192,677Proved developed reservesAs of December 31, 2008
    
    
    2,030
    
    
    
    9,326
    
    
    
    114,691
    
    
    
    136,197As of December 31, 2009
    
    
    1,775
    
    
    
    7,134
    
    
    
    93,294
    
    
    
    111,078As of December 31, 2010
    
    
    1,474
    
    
    
    6,078
    
    
    
    110,599
    
    
    
    125,521
  F-22




---



##### Table of Contents



Standardized Measure
 December 31,2010
    
    
    2009
    
    
    2008Future cash flows
    
    $
    810,131
    
    
    $
    614,293
    
    
    $
    889,732Future production costs
    
    
    (223,175
    )
    
    
    (193,427
    )
    
    
    (275,117
    )Future development costs
    
    
    (144,451
    )
    
    
    (148,595
    )
    
    
    (148,167
    )Future income taxes
    
    
    (41,156
    )
    
    
    (3,166
    )
    
    
    (14,479
    )Future net cash flows
    
    
    401,349
    
    
    
    269,105
    
    
    
    451,96910% annual discount
    
    
    (164,974
    )
    
    
    (94,817
    )
    
    
    (137,182
    )Standardized measure of discounted future net cash flows
    
    $
    236,375
    
    
    $
    174,288
    
    
    $
    314,787
 Changes in Standardized Measure
 Year Ended December 31,2010
    
    
    2009
    
    
    2008Standarized measure at beginning of year
    
    $
    174,288
    
    
    $
    314,787
    
    
    $
    447,258Sales and transfers of oil and gas produced,
net of production costs
    
    
    (117,572
    )
    
    
    (95,555
    )
    
    
    (259,950
    )Changes in price, net of future production costs
    
    
    93,702
    
    
    
    (100,150
    )
    
    
    (172,214
    )Extensions and discoveries, net of future
production and development costs
    
    
    42,028
    
    
    
    2,790
    
    
    
    147,089Changes in estimated future development costs,
net of development costs incurred during this period
    
    
    5,803
    
    
    
    38,407
    
    
    
    36,567Revisions of quantity estimates
    
    
    46,373
    
    
    
    (15,045
    )
    
    
    (25,037
    )Accretion of discount
    
    
    17,700
    
    
    
    32,719
    
    
    
    54,065Net change in income taxes
    
    
    (16,568
    )
    
    
    9,698
    
    
    
    80,988Purchase of reserves in place
    
    
    1,478
    
    
    
    
    
    
    
    1,944Sale of reserves in place
    
    
    (798
    )
    
    
    (2,138
    )
    
    
    (1,378
    )Changes in production rates (timing) and other
    
    
    (10,059
    )
    
    
    (11,225
    )
    
    
    5,455Standardized measure at end of year
    
    $
    236,375
    
    
    $
    174,288
    
    
    $
    314,787
   F-23




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##### Table of Contents



Note 16  Summarized Quarterly Financial Information  Unaudited
  Quarter EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 312010:Revenues
    
    $
    47,614
    
    
    $
    41,918
    
    
    $
    46,285
    
    
    $
    43,477Income from operations
    
    
    27,106
    
    
    
    9,046
    
    
    
    6,525
    
    
    
    6,079Net income available to common stockholders
    
    
    29,717
    
    
    
    5,248
    
    
    
    4,939
    
    
    
    2,083Earnings per share:Basic
    
    $
    0.47
    
    
    $
    0.08
    
    
    $
    0.08
    
    
    $
    0.03Diluted
    
    $
    0.46
    
    
    $
    0.08
    
    
    $
    0.08
    
    
    $
    0.032009:Revenues
    
    $
    59,449
    
    
    $
    55,261
    
    
    $
    50,254
    
    
    $
    53,911Income (loss) from operations (1)
    
    
    (100,476
    )
    
    
    17,184
    
    
    
    13,616
    
    
    
    (35,149
    )Net income (loss) available to common
stockholders (1)
    
    
    (66,957
    )
    
    
    7,746
    
    
    
    4,453
    
    
    
    (40,572
    )Earnings (loss) per share:Basic
    
    $
    (1.36
    )
    
    $
    0.15
    
    
    $
    0.07
    
    
    $
    (0.66
    )Diluted
    
    $
    (1.36
    )
    
    $
    0.15
    
    
    $
    0.07
    
    
    $
    (0.66
    )
 (1)
    
    Loss from operations and net loss available to common stockholders reported during the three
months ended March 31 and December 31, 2009 include non-cash ceiling test write-downs of $103.5
million and $52.6 million, respectively.  F-24