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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, 2007
 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.
   
   Title of each class
    
    Name of each exchange on which registeredCommon Stock, par value $.001 per share 
Preferred Stock Purchase Rights
    
    New York Stock Exchange
New York Stock Exchange
   o þ
  o þ
  þ o
 o
  o þ o o
   o þ




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TABLE OF CONTENTS
 Page No.PART IItem 1. Business
    
    
    2Item 1A. Risk Factors
    
    
    10Item 1B. Unresolved Staff Comments
    
    
    20Item 2. Properties
    
    
    20Item 3. Legal Proceedings
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    23Item 6. Selected Financial Data
    
    
    25Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 7A. Quantitative and Qualitative Disclosure About Market Risk
    
    
    33Item 8. Financial Statements and Supplementary Data
    
    
    34Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
    
    
    34Item 9A. Controls and Procedures
    
    
    34Item 9B. Other Information
    
    
    37PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    37Item 11. Executive Compensation
    
    
    37Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
    
    
    37Item 13. Certain Relationships and Related Transactions, and Director Independence.
    
    
    37Item 14. Principal Accountant Fees and Services
    
    
    37PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    37Index to Financial Statements.
    
    
    F-1Subsidiaries of the CompanyConsent of Independent Registered Public Accounting FirmConsent of Ryder Scott Company, L.P.Certification of CEO Pursuant to Rule 13a-14(a) / Rule 15d-14(a)Certification of CFO Pursuant to Rule 13a-14(a) / Rule 15d-14(a)Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  1




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PART I
 
 ITEM 1. BUSINESS
 Overview
   2




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Business Strategy
 Concentrate in Core Operating Areas and Build Scale.
 Pursue Balanced Growth and Portfolio Mix.
 Manage Our Risk Exposure.
 Target Underexploited Properties with Substantial Opportunity for Upside.
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Maintain Our Financial Flexibility.
 2007 Financial and Operational Summary
   Oklahoma
  Arkansas
  Texas
   4




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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.
   Federal Regulations
 Sales and Transportation of Natural Gas
  5




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Sales and Transportation of Crude Oil.
  Federal Leases.
  6




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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.
   7




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Legislative Proposals
  Environmental Regulations
 General.
  Solid and Hazardous Waste.
  Superfund.
 Oil Pollution Act.
 8




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Clean Water Act.
 Air Emissions.
 Coastal Coordination.
   OSHA.
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Corporate Offices
  Employees
  Available Information
  
 ITEM 1A. RISK FACTORS
 Risks Related to Our Business, Industry and Strategy
 Our future success depends upon our ability to find, develop, produce and acquire additional oil
and natural gas reserves that are economically recoverable.
  Oil and natural gas prices are volatile, and a substantial and extended decline in the prices of
oil and natural gas would likely have a material adverse effect on our financial condition.
   
    
    relatively minor changes in the supply of or the demand for oil and natural gas;
    
    market uncertainty;
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
    
    the level of consumer product demand;
    
    weather conditions in the United States, such as hurricanes;
    
    the condition of the United States and worldwide economies;
    
    the actions of the Organization of Petroleum Exporting Countries;
    
    domestic and foreign governmental regulation, including price controls adopted by
the Federal Energy Regulatory Commission;
    
    political instability in the Middle East and elsewhere;
    
    the price of foreign imports of oil and natural gas; and
    
    the price and availability of alternate fuel sources.
   A substantial portion of our operations is exposed to the additional risk of tropical weather
disturbances.
   Losses and liabilities from uninsured or underinsured drilling and operating activities could have
a material adverse effect on our financial condition and operations.
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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 10
3/8% senior notes due 2012, which we refer to as our 10 3/8% 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 indenture
governing our 10 3/8% notes and the agreements governing such other 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;
    
    we will need to use a substantial portion of our cash flows to pay principal and
interest on our debt, approximately $15.6 million per year for interest on our 10 3/8%
notes alone, and to pay quarterly dividends, if declared by our Board of Directors, on
our Series B Preferred Stock, 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 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.
   We may incur substantially more debt, which may intensify the risks described above, including our
ability to service our indebtedness.
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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.
   We may not be able to fund our planned capital expenditures.
  Shortage of rigs, equipment, supplies or personnel may restrict our operations.
  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;
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
    
    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.
  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.
  You should not place undue reliance on reserve information because reserve information represents
estimates.
   
    
    the available data;
    
    assumptions regarding future oil and natural gas prices;
    
    estimated expenditures for future development and exploitation activities; and
    
    engineering and geological interpretation and judgment.
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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.
  
    
    dispose of assets;
    
    incur or guarantee additional indebtedness and issue certain types of preferred
stock;
    
    pay dividends on our capital stock;
    
    create liens on our assets;
    
    enter into sale and leaseback transactions;
    
    enter into specified investments or acquisitions;
    
    repurchase, redeem or retire our capital stock or subordinated debt;
    
    merge or consolidate, or transfer all or substantially all of our assets and the
assets of our subsidiaries;
    
    engage in specified transactions with subsidiaries and affiliates; or
    
    other corporate activities.
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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.
    We may not be able to obtain adequate financing to execute our 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.
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Lower oil and natural gas prices may cause us to record ceiling test write-downs.
  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;
    
    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.
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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.
    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.
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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.
  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.
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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 2. PROPERTIES
  Oil and Gas Reserves
  Proved
    
    Proved
    
    TotalDeveloped
    
    Undeveloped
    
    ProvedOil (MBbls)
    
    
    2,070
    
    
    
    272
    
    
    
    2,342Natural Gas and NGL (MMcfe)
    
    
    95,639
    
    
    
    46,829
    
    
    
    142,468Estimated pre-tax future net cash flows
    
    $
    620,685,527
    
    
    $
    158,709,153
    
    
    $
    779,394,680Discounted pre-tax future net cash flows
    
    $
    471,555,642
    
    
    $
    69,095,841
    
    
    $
    540,651,483
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Production, Pricing and Production Cost Data
  Year Ended December 31,2007
    
    2006
    
    2005Production:Oil (Bbls)
    
    
    1,079,672
    
    
    
    694,724
    
    
    
    665,400Gas (Mcfe)
    
    
    24,965,789
    
    
    
    21,528,323
    
    
    
    12,058,377Total Production (Mcfe)
    
    
    31,443,821
    
    
    
    25,696,667
    
    
    
    16,050,777Average sales prices (1):Oil (per Bbl)
    
    $
    70.52
    
    
    $
    60.91
    
    
    $
    45.76Gas (per Mcfe)
    
    
    7.21
    
    
    
    7.04
    
    
    
    7.47Per Mcfe
    
    
    8.15
    
    
    
    7.54
    
    
    
    7.51Average Production Cost per Mcfe (2)
    
    $
    1.27
    
    
    $
    1.61
    
    
    $
    1.54
 
 (1)
    
    Includes the effects of hedges.(2)
    
    Production costs include lease operating costs and production taxes. Oil and Gas Drilling Activity
  2007
    
    2006
    
    2005Gross
    
    Net
    
    Gross
    
    Net
    
    Gross
    
    NetExploration:Productive
    
    
    54
    
    
    
    26.12
    
    
    
    37
    
    
    
    15.82
    
    
    
    32
    
    
    
    14.82Non-productive
    
    
    9
    
    
    
    2.86
    
    
    
    4
    
    
    
    0.95
    
    
    
    3
    
    
    
    1.53Total
    
    
    63
    
    
    
    28.98
    
    
    
    41
    
    
    
    16.77
    
    
    
    35
    
    
    
    16.35Development:Productive
    
    
    22
    
    
    
    7.89
    
    
    
    66
    
    
    
    26.40
    
    
    
    46
    
    
    
    30.90Non-productive
    
    
    2
    
    
    
    0.15
    
    
    
    6
    
    
    
    2.89
    
    
    
    5
    
    
    
    4.29Total
    
    
    24
    
    
    
    8.04
    
    
    
    72
    
    
    
    29.29
    
    
    
    51
    
    
    
    35.19
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Leasehold Acreage
  Leasehold AcreageDeveloped
    
    UndevelopedGross
    
    Net
    
    Gross
    
    NetMississippi
    
    
    721
    
    
    
    458
    
    
    
    
    
    
    
    Alabama
    
    
    709
    
    
    
    468
    
    
    
    6,832
    
    
    
    4,511Arkansas
    
    
    280
    
    
    
    91
    
    
    
    51,236
    
    
    
    17,250Louisiana
    
    
    6,178
    
    
    
    2,120
    
    
    
    15,709
    
    
    
    4,356Oklahoma
    
    
    71,603
    
    
    
    26,686
    
    
    
    14,262
    
    
    
    13,475Texas
    
    
    46,762
    
    
    
    25,392
    
    
    
    35,045
    
    
    
    31,176Federal Waters
    
    
    35,694
    
    
    
    15,321
    
    
    
    60,278
    
    
    
    35,651Total
    
    
    161,947
    
    
    
    70,536
    
    
    
    183,362
    
    
    
    106,419
  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.
  
 ITEM 3. LEGAL PROCEEDINGS
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
  
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Market Price of and Dividends on Common Stock
  NYSE Stock MarketHigh
    
    Low20061st Quarter
    
    $
    12.11
    
    
    $
    8.252nd Quarter
    
    
    13.00
    
    
    
    9.353rd Quarter
    
    
    12.58
    
    
    
    9.554th Quarter
    
    
    14.40
    
    
    
    9.8720071st Quarter
    
    $
    13.57
    
    
    $
    10.082nd Quarter
    
    
    15.99
    
    
    
    11.393rd Quarter
    
    
    15.13
    
    
    
    10.024th Quarter
    
    
    14.99
    
    
    
    10.69
    Total Number of
    
    Maximum Number (orShares Purchased as
    
    Approximate DollarPart of Publicly
    
    Value) of Shares that MayTotal Number of
    
    Average Price
    
    Announced Plan or
    
    be Purchased Under theShares Purchased (1)
    
    Paid Per Share
    
    Program
    
    Plans or ProgramsOctober 1 - October 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    November 1 - November 30, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 1 - December 31, 2007
    
    
    11,458
    
    
    $
    14.47
    
    
    
    
    
    
    
    
 
 (1)
    
    All shares repurchased were surrendered by employees to pay tax withholding upon the vesting of
restricted stock awards. 24




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ITEM 6. SELECTED FINANCIAL DATA
  Year Ended December 31,2007
    
    2006 (a)
    
    2005
    
    2004
    
    2003 (b)(in thousands except per share data)Revenues
    
    $
    263,674
    
    
    $
    200,544
    
    
    $
    124,594
    
    
    $
    84,868
    
    
    $
    48,688Net income available to common stockholders
    
    
    39,245
    
    
    
    23,986
    
    
    
    21,417
    
    
    
    16,348
    
    
    
    3,640Net income available to common stockholders per share:Basic
    
    
    0.82
    
    
    
    0.50
    
    
    
    0.46
    
    
    
    0.37
    
    
    
    0.08Diluted
    
    
    0.79
    
    
    
    0.49
    
    
    
    0.44
    
    
    
    0.35
    
    
    
    0.08Oil and gas properties, net
    
    
    554,850
    
    
    
    431,814
    
    
    
    365,183
    
    
    
    211,683
    
    
    
    160,229Total assets
    
    
    644,347
    
    
    
    518,290
    
    
    
    431,470
    
    
    
    231,617
    
    
    
    176,384Long-term debt
    
    
    148,755
    
    
    
    195,537
    
    
    
    158,340
    
    
    
    38,500
    
    
    
    22,200Stockholders equity
    
    
    302,317
    
    
    
    189,711
    
    
    
    144,537
    
    
    
    121,277
    
    
    
    107,727
 
 (a)
    
    During 2006, the Company adopted SFAS No. 123(R). Amounts recognized during 2006 relative to
SFAS 123(R) reduced net income by $3.7 million, or $0.08 per share.(b)
    
    During 2003, the Company adopted SFAS No. 143. The cumulative effect of adoption resulted in a
gain of $849,000, or $0.02 per share. 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Overview
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Critical Accounting Policies and Estimates
 Full Cost Method of Accounting
       Future Abandonment Costs
  26




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Reserve Estimates
  Derivative Instruments
    New Accounting Standards
  27




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Results of Operations
  Year Ended December 31,2007
    
    
    2006
    
    
    2005Production:Oil (Bbls)
    
    
    1,079,672
    
    
    
    694,724
    
    
    
    665,400Gas (Mcfe)
    
    
    24,965,789
    
    
    
    21,528,323
    
    
    
    12,058,377Total Production (Mcfe)
    
    
    31,443,821
    
    
    
    25,696,667
    
    
    
    16,050,777Sales:Total oil sales
    
    $
    76,138,234
    
    
    $
    42,317,332
    
    
    $
    30,446,897Total gas sales
    
    
    180,084,794
    
    
    
    151,544,026
    
    
    
    90,105,054Total oil and gas sales
    
    $
    256,223,028
    
    
    $
    193,861,358
    
    
    $
    120,551,951Average sales prices:Oil (per Bbl)
    
    $
    70.52
    
    
    $
    60.91
    
    
    $
    45.76Gas (per Mcfe)
    
    
    7.21
    
    
    
    7.04
    
    
    
    7.47Per Mcfe
    
    
    8.15
    
    
    
    7.54
    
    
    
    7.51
  Comparison of Results of Operations for the Years Ended December 31, 2007 and 2006
  Production
    28




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Prices
  Revenue
   Expenses
    Years EndedDecember 31,2007
    
    
    2006Stock options:Incentive Stock Options
    
    $
    1,250
    
    
    $
    526Non-Qualified Stock Options
    
    
    1,869
    
    
    
    1,344Restricted stock
    
    
    6,699
    
    
    
    3,781Share based compensation
    
    $
    9,818
    
    
    $
    5,651
    29




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Comparison of Results of Operations for the Years Ended December 31, 2006 and 2005
  Production
    Prices
  Revenue
   Expenses
   30




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Liquidity and Capital Resources
   Source of Capital: Operations
  Source of Capital: Debt
  31




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Source of Capital: Issuance of Securities
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Source of Capital: Divestitures
  Use of Capital: Exploration and Development
  Contractual Obligations
  AfterTotal
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    201210 3/8% senior notes (1)
    
    $
    218,088
    
    
    $
    15,563
    
    
    $
    15,563
    
    
    $
    15,563
    
    
    $
    15,563
    
    
    $
    155,836
    
    
    $
    Purchase obligations (2)
    
    
    20,525
    
    
    
    11,625
    
    
    
    8,900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating leases (3)
    
    
    2,131
    
    
    
    951
    
    
    
    909
    
    
    
    189
    
    
    
    71
    
    
    
    11
    
    
    
    Capital projects (4)
    
    
    17,451
    
    
    
    5,280
    
    
    
    581
    
    
    
    785
    
    
    
    111
    
    
    
    1,429
    
    
    
    9,265Total
    
    $
    258,195
    
    
    $
    33,419
    
    
    $
    25,953
    
    
    $
    16,537
    
    
    $
    15,745
    
    
    $
    157,276
    
    
    $
    9,265
 
 (1)
    
    Includes principal and interest.(2)
    
    Consists of commitments for the rental of drilling rigs and seismic data acquisition
obligations.(3)
    
    Consists primarily of leases for office space and leases for equipment rentals.(4)
    
    Consists of estimated future obligations to abandon our leased properties. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    33




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##### Table of Contents



Instrument
    
    
    
    
    
    WeightedProduction Period
    
    Type
    
    Daily Volumes
    
    Average PriceNatural Gas:2008
    
    Costless Collar
    
    20,000 Mmbtu
    
    $
    7.75-8.78Crude Oil:2008
    
    Costless Collar
    
    400 Bbls
    
    $
    70.00-75.55
   Instrument
    
    
    
    
    
    WeightedProduction Period
    
    Type
    
    Daily Volumes
    
    Average PriceNatural Gas:February-December 2008
    
    Costless Collar
    
    7,500 Mmbtu
    
    $
    7.50-8.98March-June 2008
    
    Costless Collar
    
    10,000 Mmbtu
    
    $
    8.25-8.75April-December 2008
    
    Costless Collar
    
    7,500 Mmbtu
    
    $
    9.00-10.35Crude Oil:February-June 2008
    
    Costless Collar
    
    400 Bbls
    
    $
    85.00-115.00
  
 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,
 34




---



##### Table of Contents



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

Charles T. GoodsonChairman and
Chief Executive Officer
 /s/ Michael O. Aldridge

Michael O. AldridgeExecutive Vice President-
Chief Financial Officer
 35




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
        
 36




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##### Table of Contents



ITEM 9B. OTHER INFORMATION
  
 PART III
 
 ITEMS 10, 11, 12, 13 & 14
  
 PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
   
 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).2.2
    
    
    Agreement and Plan of Merger dated April 12, 2005, among PetroQuest
Energy, Inc., TDC Acquisition Sub LLC and TDC Energy LLC (incorporated herein by
reference to Exhibit 2.1 to Form 8-K filed April 13, 2005).2.3
    
    
    Purchase and Sale Agreement, dated as of April 13, 2005 between Staab
Holdings, L.L.C. and PetroQuest Energy, LLC (incorporated herein by reference to
Exhibit 2.1 to Form 8-K filed April 22, 2005).2.4
    
    
    Purchase and Sale Agreement, dated as of April 7, 2005, among MAKO
Resources, LLC, Golden Gas Service Company and PetroQuest Energy, LLC
(incorporated herein by reference to Exhibit 2.2 to Form 8-K filed April 22,
2005).
 37




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##### Table of Contents



2.5
    
    
    Purchase and Sale Agreement, dated as of April 7, 2005, between
Golden Gas Service Company and PetroQuest Energy, LLC (incorporated herein by
reference to Exhibit 2.3 to Form 8-K filed April 22, 2005).2.6
    
    
    Purchase and Sale Agreement, dated as of April 7, 2005, between
Golden Gas Service Company and PetroQuest Energy, LLC (incorporated herein by
reference to Exhibit 2.4 to Form 8-K filed April 22, 2005).3.1
    
    
    Certificate of Incorporation of the Company (incorporated herein by
reference to Exhibit 4.1 to Form 8-K filed September 16, 1998).3.2
    
    
    Bylaws of the Company, as amended of December 20, 2007 (incorporated
herein by reference to Exhibit 3.1 to Form 8-K filed December 21, 2007).3.3
    
    
    Certificate of Domestication of Optima Petroleum Corporation
(incorporated herein by reference to Exhibit 4.4 to Form 8-K filed September 16,
1998).3.4
    
    
    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).3.5
    
    
    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
    
    
    Warrant to Purchase Common Shares of PetroQuest Energy, Inc.
(incorporated herein by reference to Exhibit 4.1 to Form 8-K filed December 29,
2003).4.2
    
    
    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).4.3
    
    
    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).4.4
    
    
    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).4.5
    
    
    Registration Rights Agreement dated April 12, 2005, between
PetroQuest Energy, Inc. and Macquarie Bank Limited (incorporated herein by
reference to Exhibit 4.1 to Form 8-K filed April 13, 2005).10.1
    
    
    PetroQuest Energy, Inc. 1998 Incentive Plan, as amended and restated
effective March 16, 2006 (the Incentive Plan) (incorporated herein by reference to
Exhibit 10.1 to Form 8-K filed May 19, 2006).10.2
    
    
    Form of Incentive Stock Option Agreement for executive officers
(including Charles T. Goodson, Arthur M. Mixon, III, Michael O. Aldridge, Daniel G.
Fournerat and Stephen H. Green) under the Incentive Plan (incorporated herein by
reference to Exhibit 10.2 to Form 8-K filed May 19, 2006).10.3
    
    
    Form of Restricted Stock Agreement for executive officers (including
Charles T. Goodson, Arthur M. Mixon, III, Michael O. Aldridge, Daniel G. Fournerat
and Stephen H. Green) under the Incentive Plan (incorporated herein by reference to
Exhibit 10.2 to Form 8-K filed May 19, 2006).10.4
    
    
    PetroQuest Energy, Inc. Annual Cash Bonus Plan (incorporated herein
by reference to Exhibit 10.1 to Form 8-K filed August 18, 2006).
 38




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##### Table of Contents



10.5
    
    
    Amended and Restated Credit Agreement, dated as of May 14, 2003, by and
between PetroQuest Energy, LLC, PetroQuest Energy, Inc., Bank One, NA, Banc One
Capital Markets, Inc., and certain other Lenders (incorporated herein by reference
to Exhibit 10.1 to Form 10-Q filed August 13, 2003).10.6
    
    
    Guaranty dated May 14, 2003, between PetroQuest Energy, Inc. and Bank
One, NA, as Agent for the Lenders (incorporated herein by reference to Exhibit
10.2 to Form 10-Q filed August 13, 2003).10.7
    
    
    First Amendment to Amended and Restated Credit Agreement dated as of
November 6, 2003, by and among PetroQuest Energy, L.L.C., PetroQuest Energy, Inc.;
Bank One, N.A., and Union Bank of California, N.A. (incorporated herein by
reference to Exhibit 10.4 to Form 10-Q filed November 13, 2003).10.8
    
    
    Second Amendment to Amended and Restated Credit Agreement dated as of
December 23, 2003, by and among PetroQuest Energy, L.L.C., PetroQuest Energy,
Inc., and Bank One, N.A. (incorporated herein by reference to Exhibit 10.2 to Form
8-K filed December 29, 2003).10.9
    
    
    Third Amendment to Amended and Restated Credit Agreement dated as of
July 27, 2004, by and among PetroQuest Energy, L.L.C., PetroQuest Energy, Inc.,
and Bank One, N.A. (incorporated herein by reference to Exhibit 10.1 to Form 10-Q
filed July 30, 2004).10.10
    
    
    Fourth Amendment to Amended and Restated Credit Agreement dated as
of October 14, 2004 by and between PetroQuest Energy, LLC, PetroQuest Energy, Inc.
and Bank One, N.A. (incorporated herein by reference to Exhibit 10.1 on Form 8-K
filed October 19, 2004).10.11
    
    
    Fifth Amendment to Amended and Restated Credit Agreement entered
into as of November 3, 2004 by and between PetroQuest Energy, LLC, PetroQuest
Energy, Inc., Pittrans Inc. (a wholly owned subsidiary of PetroQuest Energy, LLC)
and Bank One, N.A. (incorporated herein by reference to Exhibit 10.1 on Form 8-K
filed November 15, 2004).10.12
    
    
    Sixth Amendment to Amended and Restated Credit Agreement dated April
12, 2005, by and among PetroQuest Energy, LLC, PetroQuest Energy, Inc., Pittrans
Inc., TDC Acquisition Sub LLC, and JP Morgan Chase Bank, N.A. (incorporated herein
by reference to Exhibit 10.1 to Form 8-K filed April 13, 2005).10.13
    
    
    Seventh Amendment to Amended and Restated Credit Agreement dated May
9, 2005, by and among PetroQuest Energy, LLC, PetroQuest Energy, Inc., Pittrans
Inc., TDC Energy LLC, and JP Morgan Chase Bank, N.A. (incorporated herein by
reference to Exhibit 10.1 to Form 8-K filed May 11, 2005).10.14
    
    
    Eighth Amendment to Amended and Restated Credit Agreement dated June
17, 2005, by and among PetroQuest Energy, LLC, PetroQuest Energy, Inc., Pittrans
Inc., TDC Energy LLC, and JP Morgan Chase Bank, N.A., Guaranty Bank, FSB and
Calyon New York Branch (incorporated herein by reference to Exhibit 10.1 to Form
8-K filed June 17, 2005).10.15
    
    
    Second Amended and Restated Credit Agreement dated as of November
18, 2005, among PetroQuest Energy, LLC, PetroQuest Energy, Inc., JP Morgan Chase
Bank, N.A. as lender, agent and issuer of letters of credit, Macquarie Bank
Limited as lender, and Calyon New York Branch as lender and syndication agent
(incorporated herein by reference to Exhibit 10.1 to Form 8-K filed November 23,
2005).10.16
    
    
    Amendment No. 1 to Second Amended and Restated Credit Agreement
dated as of December 22, 2005, among PetroQuest Energy, LLC, PetroQuest Energy,
Inc., Pittrans, Inc., TDC Energy LLC, JP Morgan Chase Bank, N.A. as lender, agent
and issuer of letters of credit, Macquarie Bank Limited as lender, and Calyon New
York Branch as lender and syndication agent (incorporated herein by reference to
Exhibit 10.1 to Form 8-K filed December 22, 2005).10.17
    
    
    Amendment No. 2 to Second Amended and Restated Credit Agreement
dated as of November 16, 2006 among PetroQuest Energy, LLC, PetroQuest Energy,
Inc., Pittrans, Inc., TDC Energy LLC, JP Morgan Chase Bank, N.A. as lender, agent
and issuer of letters of credit, Macquarie Bank Limited as
 39




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##### Table of Contents



lender, and Calyon New York Branch as lender and syndication agent (incorporated
herein by reference to Exhibit 10.1 to Form 8-K filed November 21, 2006).10.18
    
    
    Amendment No. 3 to Second Amended and Restated Credit Agreement
dated as of September 17, 2007 among PetroQuest Energy, LLC, PetroQuest Energy,
Inc., Pittrans, Inc., TDC Energy LLC, JP Morgan Chase Bank, N.A. as lender, agent
and issuer of letters of credit, Macquarie Bank Limited as lender, and Calyon New
York Branch as lender and syndication agent (incorporated herein by reference to
Exhibit 10.1 to Form 8-K filed September 18, 2007).10.19
    
    
    Amendment No. 4 to Second Amended and Restated Credit Agreement
dated as of September 19, 2007 among PetroQuest Energy, LLC, PetroQuest Energy,
Inc., Pittrans, Inc., TDC Energy LLC, JP Morgan Chase Bank, N.A. as lender, agent
and issuer of letters of credit, Macquarie Bank Limited as lender, and Calyon New
York Branch as lender and syndication agent (incorporated herein by reference to
Exhibit 10.1 to Form 8-K filed September 24, 2007).10.20
    
    
    Senior Second Lien Secured Credit Agreement dated November 6, 2003,
between PetroQuest Energy, L.L.C., PetroQuest Energy, Inc., each of the Lenders
from time to time party thereto; and Macquarie Americas Corp., as administrative
agent for the Lenders (incorporated herein by reference to Exhibit 10.1 to Form
10-Q filed November 13, 2003).10.21
    
    
    Unconditional Guaranty Agreement dated November 6, 2003, by
PetroQuest Energy, Inc. to Macquarie Americas Corp., as administrative agent for
the benefit of the Lenders under the Credit Agreement (incorporated herein by
reference to Exhibit 10.2 to Form 10-Q filed November 13, 2003).10.22
    
    
    First Amendment to Second Lien Secured Credit Agreement dated
December 23, 2003, among PetroQuest Energy, L.L.C., PetroQuest Energy, Inc., each
of the Lenders from time to time party thereto, and Macquarie Americas Corp., as
administrative agent for the Lenders (incorporated herein by reference to Exhibit
10.1 to Form 8-K filed December 29, 2003).10.23
    
    
    Second Amendment to Second Lien Secured Credit Agreement dated July
27, 2004, among PetroQuest Energy, L.L.C., PetroQuest Energy, Inc., each of the
Lenders from time to time party thereto, and Macquarie Americas Corp., as
administrative agent for the Lenders (incorporated herein by reference to Exhibit
10.2 to Form 10-Q filed July 30, 2004).10.24
    
    
    Third Amendment to Second Lien Secured Credit Agreement dated as of
October 14, 2004 by and between PetroQuest Energy, LLC, PetroQuest Energy, Inc.
and Macquarie Bank Limited (incorporated herein by reference to Exhibit 10.2 on
Form 8-K filed October 19, 2004).10.25
    
    
    Fourth Amendment to Second Lien Secured Credit Agreement dated as of
December 29, 2004 by and between PetroQuest Energy, LLC and Macquarie Bank Limited
(incorporated herein by reference to Exhibit 10.1 on Form 8-K filed December 30,
2004).10.26
    
    
    Fifth Amendment to Second Lien Secured Credit Agreement dated April
12, 2005, among PetroQuest Energy, LLC, TDC Energy LLC f/k/a TDC Acquisition Sub
LLC, PetroQuest Energy, Inc. and Macquarie Bank Limited (incorporated herein by
reference to Exhibit 10.2 to Form 8-K filed April 13, 2005).10.27
    
    
    Employment Agreement dated September 1, 1998, between PetroQuest
Energy, Inc. and Charles T. Goodson (incorporated herein by reference to Exhibit
10.2 to Form 8-K dated September 16, 1998).10.28
    
    
    First Amendment to Employment agreement dated September 1, 1998
between PetroQuest Energy, Inc. and Charles T. Goodson dated July 30, 1999
(incorporated herein by reference to Exhibit 10.1 to For 8-K dated August 9, 1999).10.29
    
    
    Severance Agreement and Release, effective April 8, 2005, between
PetroQuest Energy, Inc. and Ralph J. Daigle (incorporated herein by reference to
Exhibit 10.1 to Form 8-K filed April 22, 2005).
 40




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##### Table of Contents



10.30
    
    
    Employment Agreement dated May 8, 2000 between PetroQuest Energy,
Inc. and Michael O. Aldridge (incorporated herein by reference to Exhibit 10.1 to
the Form 10-Q filed August 14, 2000).10.31
    
    
    Employment Agreement dated December 15, 2000 between PetroQuest
Energy, Inc. and Arthur M. Mixon, III. (incorporated herein by reference to Exhibit
10.12 to Form 10-K filed March 30, 2001).10.32
    
    
    Employment Agreement dated April 20, 2001 between PetroQuest Energy,
Inc. and Daniel G. Fournerat (incorporated herein by reference to Exhibit 10.1 to
Form 10-Q filed May 15, 2001).10.33
    
    
    Employment Agreement dated April 20, 2001 between PetroQuest
Energy, Inc. and Dalton F. Smith III (incorporated herein by reference to Exhibit
10.21 to Form 10-K filed March 13, 2002).10.34
    
    
    Employment Agreement dated July 28, 2003, between PetroQuest
Energy, Inc. and Stephen H. Green (incorporated herein by reference to Exhibit 10.3
to Form 10-Q filed November 13, 2003).10.35
    
    
    Form of Termination Agreement Between PetroQuest Energy, Inc. and
each of its executive officers, including Charles T. Goodson, Michael O. Aldridge,
Arthur M. Mixon, III, Daniel G. Fournerat, Dalton F. Smith III and Stephen H. Green
(incorporated herein by reference to Exhibit 10.20 to Form 10-K filed March 13,
2002).10.36
    
    
    Form of Amendment to Termination Agreement entered into between
the Company and each of its executive officers (including Charles T. Goodson,
Michael O. Aldridge, Arthur M. Mixon, III, Daniel G. Fournerat and Stephen H.
Green), effective as of May 16, 2006 (incorporated herein by reference to Exhibit
10.4 to Form 8-K filed May 19, 2006).10.37
    
    
    Form of Indemnification Agreement between PetroQuest Energy, Inc.
and each of its directors and executive officers, including Charles T. Goodson,
Daniel G. Fournerat, E. Wayne Nordberg, William W. Rucks, IV, Michael O. Aldridge,
Arthur M. Mixon, III, Dalton F. Smith III, Michael L. Finch, W.J. Gordon, III,
Stephen H. Green and Charles F. Mitchell, II (incorporated herein by reference to
Exhibit 10.21 to Form 10-K filed March 13, 2002).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.
 
 *
    
    Filed herewith.
    
    Management contract or compensatory plan or arrangement(b)
    
    Exhibits. See Item 15 (a) (3) above.(c)
    
    Financial Statement Schedules. None 41




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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
 Developed acreage
 Developmental well
 Dry hole
 Exploratory well
 Farm-in or farm-out
 Field
 Gross acres or gross wells
 Lead
 MBbls
 Mcf
 Mcfe
 MMBls
 42




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##### Table of Contents



MMBtu
 MMcf
 MMcfe
 Net acres or net wells
 Productive well
 Prospect
 Proved developed non-producing reserves
 Proved developed producing reserves (PDP)
 Proved developed reserves
 Proved reserves
 Proved undeveloped reserves
 Reservoir
 Undeveloped acreage
 Working interest
 43




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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

CHARLES T. GOODSON
    
    Chairman of the Board, President,
Chief Executive Officer and Director
(Principal Executive Officer)By:
    
    /s/ Michael O. Aldridge

MICHAEL O. ALDRIDGE
    
    Executive Vice President, Chief
Financial Officer, Treasurer
(Principal Financial and Accounting Officer)By:
    
    /s/ W.J. Gordon, III

W.J. GORDON, III
    
    DirectorBy:
    
    /s/ Michael L. Finch

MICHAEL L. FINCH
    
    DirectorBy:
    
    /s/ Charles F. Mitchell, II, M.D.

CHARLES F. MITCHELL, II, M.D.
    
    DirectorBy:
    
    /s/ E. Wayne Nordberg

E. WAYNE NORDBERG
    
    DirectorBy:
    
    /s/ William W. Rucks, IV

WILLIAM W. RUCKS, IV
    
    Director
 44




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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, 2007 and 2006
    
    F-3Consolidated Statements of Income of PetroQuest Energy, Inc.
for the years ended December 31, 2007, 2006 and 2005
    
    F-4Consolidated Statements of Cash Flows of PetroQuest Energy, Inc.
for the years ended December 31, 2007, 2006 and 2005
    
    F-5Consolidated Statements of Stockholders Equity of PetroQuest Energy, Inc.
for the years ended December 31, 2007, 2006 and 2005
    
    F-6Consolidated Statements of Comprehensive Income of PetroQuest Energy, Inc.
for the years ended December 31, 2007, 2006 and 2005
    
    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 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    16,909
    
    
    $
    4,795Revenue receivable
    
    
    22,820
    
    
    
    21,767Joint interest billing receivable
    
    
    22,936
    
    
    
    20,072Hedging asset
    
    
    
    
    
    
    10,527Prepaid drilling costs
    
    
    1,448
    
    
    
    4,886Other current assets
    
    
    3,984
    
    
    
    2,143Total current assets
    
    
    68,097
    
    
    
    64,190Property and equipment:Oil and gas properties:Oil and gas properties, full cost method
    
    
    907,083
    
    
    
    695,116Unevaluated oil and gas properties
    
    
    80,297
    
    
    
    51,567Accumulated depreciation, depletion and amortization
    
    
    (432,530
    )
    
    
    (314,869
    )Oil and gas properties, net
    
    
    554,850
    
    
    
    431,814Gas gathering assets
    
    
    22,040
    
    
    
    19,072Accumulated depreciation and amortization of gas gathering assets
    
    
    (6,640
    )
    
    
    (3,562
    )Total property and equipment
    
    
    570,250
    
    
    
    447,324Other assets, net of accumulated depreciation and amortization
of $11,238 and $11,719, respectively
    
    
    6,000
    
    
    
    6,776Total assets
    
    $
    644,347
    
    
    $
    518,290LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable to vendors
    
    $
    78,273
    
    
    $
    34,790Advances from co-owners
    
    
    12,870
    
    
    
    13,391Oil and gas revenue payable
    
    
    5,771
    
    
    
    6,935Accrued interest and preferred stock dividend
    
    
    3,320
    
    
    
    2,453Asset retirement obligation
    
    
    5,280
    
    
    
    9,028Other accrued liabilities
    
    
    6,326
    
    
    
    5,484Total current liabilities
    
    
    111,840
    
    
    
    72,081Bank debt
    
    
    
    
    
    
    47,00010 3/8% Senior Notes
    
    
    148,755
    
    
    
    148,537Asset retirement obligation
    
    
    12,171
    
    
    
    11,211Deferred income taxes
    
    
    69,160
    
    
    
    49,646Other liabilities
    
    
    104
    
    
    
    104Commitments and contingenciesStockholders equity:Preferred stock, $.001 par value; authorized 5,000
shares; issued and outstanding 1,495 and 0, respectively
    
    
    1
    
    
    
    Common stock, $.001 par value; authorized 75,000
shares; issued and outstanding 48,414 and 47,788
shares, respectively
    
    
    48
    
    
    
    48Paid-in capital
    
    
    204,979
    
    
    
    124,552Accumulated other comprehensive income (loss)
    
    
    (435
    )
    
    
    6,632Retained earnings
    
    
    97,724
    
    
    
    58,479Total stockholders equity
    
    
    302,317
    
    
    
    189,711Total liabilities and stockholders equity
    
    $
    644,347
    
    
    $
    518,290
  F-3




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##### Table of Contents



PETROQUEST ENERGY, INC.
 
  Amounts in Thousands, Except Per Share Data
 Year Ended December 31,2007
    
    
    2006
    
    
    2005Revenues:Oil and gas sales
    
    $
    256,223
    
    
    $
    193,861
    
    
    $
    120,552Gas gathering revenue and other income
    
    
    7,451
    
    
    
    6,683
    
    
    
    4,042263,674
    
    
    
    200,544
    
    
    
    124,594Expenses:Lease operating expenses
    
    
    31,965
    
    
    
    34,735
    
    
    
    20,972Production taxes
    
    
    7,859
    
    
    
    6,576
    
    
    
    3,764Depreciation, depletion and amortization
    
    
    119,969
    
    
    
    85,858
    
    
    
    43,747Gas gathering costs
    
    
    4,120
    
    
    
    3,637
    
    
    
    1,246General and administrative
    
    
    21,162
    
    
    
    15,122
    
    
    
    7,347Accretion of asset retirement obligation
    
    
    923
    
    
    
    1,513
    
    
    
    1,253Interest expense
    
    
    13,393
    
    
    
    14,513
    
    
    
    12,371199,391
    
    
    
    161,954
    
    
    
    90,700Income from operations
    
    
    64,283
    
    
    
    38,590
    
    
    
    33,894Income tax expense
    
    
    23,664
    
    
    
    14,604
    
    
    
    12,477Net income
    
    
    40,619
    
    
    
    23,986
    
    
    
    21,417Preferred stock dividend
    
    
    1,374
    
    
    
    
    
    
    
    Net income available to common stockholders
    
    $
    39,245
    
    
    $
    23,986
    
    
    $
    21,417Earnings per common share:BasicNet income per share
    
    $
    0.82
    
    
    $
    0.50
    
    
    $
    0.46DilutedNet income per share
    
    $
    0.79
    
    
    $
    0.49
    
    
    $
    0.44Weighted average number of common shares:Basic
    
    
    48,108
    
    
    
    47,537
    
    
    
    46,714Diluted
    
    
    49,679
    
    
    
    48,936
    
    
    
    48,242
  F-4




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##### Table of Contents



PETROQUEST ENERGY, INC.
 
  Amounts in Thousands
 Year Ended December 31,2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    40,619
    
    
    $
    23,986
    
    
    $
    21,417Adjustments to reconcile net income to net cash
provided by operating activities:Deferred tax expense
    
    
    23,664
    
    
    
    14,604
    
    
    
    12,477Amortization of debt issuance costs
    
    
    969
    
    
    
    943
    
    
    
    1,390Compensation expense
    
    
    
    
    
    
    
    
    
    
    213Depreciation, depletion and amortization
    
    
    119,969
    
    
    
    85,858
    
    
    
    43,747Write-off of debt issuance costs
    
    
    
    
    
    
    
    
    
    
    2,575Amortization of bond discount
    
    
    218
    
    
    
    197
    
    
    
    111Share-based compensation expense
    
    
    9,818
    
    
    
    5,651
    
    
    
    Accretion of asset retirement obligation
    
    
    923
    
    
    
    1,513
    
    
    
    1,253Payments to settle asset retirement obligations
    
    
    (6,058
    )
    
    
    (252
    )
    
    
    Changes in working capital accounts:Revenue receivable
    
    
    (1,053
    )
    
    
    725
    
    
    
    (13,100
    )Joint interest billing receivable
    
    
    (2,864
    )
    
    
    (2,505
    )
    
    
    (13,912
    )Accounts payable and accrued liabilities
    
    
    37,050
    
    
    
    (13,552
    )
    
    
    14,255Other assets
    
    
    (602
    )
    
    
    (1,743
    )
    
    
    (448
    )Advances from co-owners
    
    
    (521
    )
    
    
    7,517
    
    
    
    3,609Other
    
    
    1,597
    
    
    
    (3,572
    )
    
    
    (397
    )Net cash provided by operating activities
    
    
    223,729
    
    
    
    119,370
    
    
    
    73,190Cash flows from investing activities:Investment in oil and gas properties
    
    
    (233,436
    )
    
    
    (175,277
    )
    
    
    (171,980
    )Sale of oil and gas properties
    
    
    1,277
    
    
    
    22,023
    
    
    
    Investment in gas gathering assets
    
    
    (2,968
    )
    
    
    (6,363
    )
    
    
    (10,861
    )Net cash used in investing activities
    
    
    (235,127
    )
    
    
    (159,617
    )
    
    
    (182,841
    )Cash flows from financing activities:Net (payments for) proceeds from share based compensation
    
    
    (99
    )
    
    
    1,461
    
    
    
    972Proceeds from preferred stock offering
    
    
    74,750
    
    
    
    
    
    
    
    Costs of preferred stock offering
    
    
    (4,041
    )
    
    
    
    
    
    
    Proceeds from bank borrowings
    
    
    23,000
    
    
    
    48,000
    
    
    
    44,500Repayment of bank borrowings
    
    
    (70,000
    )
    
    
    (11,000
    )
    
    
    (73,000
    )Proceeds from issuance of 10 3/8% Senior Notes
    
    
    
    
    
    
    
    
    
    
    148,229Deferred financing costs
    
    
    (98
    )
    
    
    (122
    )
    
    
    (5,876
    )Net cash provided by financing activities
    
    
    23,512
    
    
    
    38,339
    
    
    
    114,825Net increase (decrease) in cash and cash equivalents
    
    
    12,114
    
    
    
    (1,908
    )
    
    
    5,174Cash and cash equivalents at beginning of period
    
    
    4,795
    
    
    
    6,703
    
    
    
    1,529Cash and cash equivalents at end of period
    
    $
    16,909
    
    
    $
    4,795
    
    
    $
    6,703Supplemental disclosure of cash flow informationCash paid during the period for:Interest
    
    $
    19,238
    
    
    $
    17,572
    
    
    $
    9,628Income taxes
    
    $
    
    
    
    $
    
    
    
    $
    75
  F-5




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##### Table of Contents



PETROQUEST ENERGY, INC
  Amounts in Thousands
 Other
    
    
    
    
    
    
    TotalCommon
    
    
    Preferred
    
    
    Paid-In
    
    
    Comprehensive
    
    
    Retained
    
    
    StockholdersStock
    
    
    Stock
    
    
    Capital
    
    
    Income (Loss)
    
    
    Earnings
    
    
    EquityDecember 31, 2004
    
    $
    45
    
    
    $
    
    
    
    $
    112,387
    
    
    $
    (4,231
    )
    
    $
    13,076
    
    
    $
    121,277Options and warrants exercised
    
    
    2
    
    
    
    
    
    
    
    1,003
    
    
    
    
    
    
    
    
    
    
    
    1,005Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    4,051
    
    
    
    
    
    
    
    
    
    
    
    4,051Derivative fair value adjustment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,213
    )
    
    
    
    
    
    
    (3,213
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,417
    
    
    
    21,417December 31, 2005
    
    $
    47
    
    
    $
    
    
    
    $
    117,441
    
    
    $
    (7,444
    )
    
    $
    34,493
    
    
    $
    144,537Options and warrants exercised
    
    
    1
    
    
    
    
    
    
    
    1,460
    
    
    
    
    
    
    
    
    
    
    
    1,461Share-based compensation expense
    
    
    
    
    
    
    
    
    
    
    5,651
    
    
    
    
    
    
    
    
    
    
    
    5,651Derivative fair value adjustment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,076
    
    
    
    
    
    
    
    14,076Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,986
    
    
    
    23,986December 31, 2006
    
    $
    48
    
    
    $
    
    
    
    $
    124,552
    
    
    $
    6,632
    
    
    $
    58,479
    
    
    $
    189,711Options exercised
    
    
    
    
    
    
    
    
    
    
    1,051
    
    
    
    
    
    
    
    
    
    
    
    1,051Retirement
of shares upon vesting of restricted stock
    
    
    
    
    
    
    
    
    
    
    (1,150
    )
    
    
    
    
    
    
    
    
    
    
    (1,150
    )Issuance of preferred stock
    
    
    
    
    
    
    1
    
    
    
    70,708
    
    
    
    
    
    
    
    
    
    
    
    70,709Share-based compensation expense
    
    
    
    
    
    
    
    
    
    
    9,818
    
    
    
    
    
    
    
    
    
    
    
    9,818Derivative fair value adjustment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,067
    )
    
    
    
    
    
    
    (7,067
    )Preferred stock dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,374
    )
    
    
    (1,374
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,619
    
    
    
    40,619December 31, 2007
    
    $
    48
    
    
    $
    1
    
    
    $
    204,979
    
    
    $
    (435
    )
    
    $
    97,724
    
    
    $
    302,317
  F-6




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##### Table of Contents



PETROQUEST ENERGY, INC.
  Amounts in Thousands
 Year Ended December 31,2007
    
    
    2006
    
    
    2005Net income
    
    $
    40,619
    
    
    $
    23,986
    
    
    $
    21,417Change in fair value of derivative instruments,
accounted for as hedges, net of tax benefit (expense)
of $4,150, ($7,903) and $1,730, respectively
    
    
    (7,067
    )
    
    
    14,076
    
    
    
    (3,213
    )Comprehensive income
    
    $
    33,552
    
    
    $
    38,062
    
    
    $
    18,204
  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
  Oil and Gas Properties
    Gas Gathering Assets
  F-8




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##### Table of Contents



Other Assets
  Cash and Cash Equivalents
  Income Taxes
  Revenue Recognition
  Certain Concentrations
  Year Ended December 31,2007
    
    2006
    
    2005DCP Midstream
    
    
    12
    %
    
    
    (a
    )
    
    
    (a
    )Cokinos
    
    
    (a
    )
    
    
    11
    %
    
    
    12
    %Louis Dreyfus Corporation
    
    
    16
    %
    
    
    12
    %
    
    
    20
    %Texon LP
    
    
    32
    %
    
    
    22
    %
    
    
    16
    %Crosstex
    
    
    (a
    )
    
    
    14
    %
    
    
    (a
    )(a) Less than 10 percent
 Fair Value of Financial Instruments
  F-9




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##### Table of Contents



Derivative Instruments
      Instrument
    
    
    
    
    
    WeightedProduction Period
    
    Type
    
    Daily Volumes
    
    Average PriceNatural Gas:2008
    
    Costless Collar
    
    20,000 Mmbtu
    
    $
    7.75-8.78Crude Oil:2008
    
    Costless Collar
    
    400 Bbls
    
    $
    70.00-75.55
   Instrument
    
    
    
    
    
    WeightedProduction Period
    
    Type
    
    Daily Volumes
    
    Average PriceNatural Gas:February-December 2008
    
    Costless Collar
    
    7,500 Mmbtu
    
    $
    7.50-8.98March-June 2008
    
    Costless Collar
    
    10,000 Mmbtu
    
    $
    8.25-8.75April-December 2008
    
    Costless Collar
    
    7,500 Mmbtu
    
    $
    9.00-10.35Crude Oil:February-June 2008
    
    Costless Collar
    
    400 Bbls
    
    $
    85.00-115.00
 New Accounting Standards
  F-10




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##### Table of Contents



Note 2 Convertible Preferred Stock
  PreferredStock OfferingGross proceeds
    
    $
    74,750,000Underwriting discount
    
    
    (3,737,500
    )Other costs
of the offering
    
    
    (303,480
    )Net proceeds
    
    $
    70,709,020Shares issued
    
    
    1,495,000Issue price per share
    
    $
    50.00
  Dividends
  Liquidation preference
 Ranking
 
    
    senior to all of the shares of the Companys common stock and to all
of the Companys other capital stock issued in the future unless the
terms of such capital stock expressly provide that it ranks senior to,
or on a parity with, shares of the
 F-11




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##### Table of Contents




    
    on a parity with all of the Companys other capital stock issued in
the future the terms of which expressly provide that it will rank on a
parity with the shares of the Series B Preferred Stock; and
    
    junior to all of the Companys existing and future debt obligations
and to all shares of the Companys capital stock issued in the future
the terms of which expressly provide that such shares will rank senior
to the shares of the Series B Preferred Stock.
 Mandatory conversion
 Limited optional redemption
 Conversion rights
  Purchase or exchange upon fundamental change provided, however,
 Conversion in connection with a fundamental change
  1.
    
    any person becomes the beneficial owner directly or indirectly, of
more than 50% of the voting power of the Companys common equity;
 F-12




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##### Table of Contents



2.
    
    individuals who on September 25, 2007, constituted the board of directors
(together with any new directors whose election by such board of directors or whose
nomination for election by the stockholders of the Company was approved by a vote of
a majority of the directors of the Company then still in office who were either
directors on September 25, 2007, or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the board
of directors then in office;3.
    
    the merger or consolidation of the Company with or into another person or
the merger of another person with or into the Company, or the sale of all or
substantially all the assets of the Company to another person other than a
transaction following which holders of securities that represented 100% of the
voting power of the Companys common equity immediately prior to such transaction
(or other securities into which such securities are converted as part of such merger
or consolidation transaction) own directly or indirectly at least a majority of the
voting power of the voting equity of the surviving person in such merger or
consolidation transaction or transferee in such sale of assets transaction
immediately after such transaction;4.
    
    the adoption of a plan relating to the liquidation or dissolution of the
Company; or5.
    
    the Companys common stock is neither listed on a national securities
exchange nor listed nor approved for quotation on an over-the-counter market in the
United States.
  Voting rights
  
    
    amend the Companys certificate of incorporation and bylaws, by merger
or otherwise, if the amendment would alter or change the powers,
preferences, privileges or rights of the holders of shares of the
Series B Preferred Stock so as to adversely affect them;
    
    issue, authorize or increase the authorized amount of, or issue or
authorize any obligation or security convertible into or evidencing a
right to purchase, any senior stock; or
    
    reclassify any of the Companys authorized stock into any senior stock
of any class, or any obligation or security convertible into or
evidencing a right to purchase any senior stock.
 
 Note 3  Earnings Per Share
   F-13




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##### Table of Contents



Income
    
    
    Shares
    
    
    PerFor the Year Ended December 31, 2007
    
    (Numerator)
    
    
    (Denominator)
    
    
    Share AmountBASIC EPSNet income available to common stockholders
    
    $
    39,245
    
    
    
    48,108
    
    
    $
    0.82Effect of dilutive securities:Stock options
    
    
    
    
    
    
    1,056Restricted stock
    
    
    
    
    
    
    515Series B preferred stock
    
    
    
    
    
    
    DILUTED EPS
    
    $
    39,245
    
    
    
    49,679
    
    
    $
    0.79
 Income
    
    
    Shares
    
    
    PerFor the Year Ended December 31, 2006
    
    (Numerator)
    
    
    (Denominator)
    
    
    Share AmountBASIC EPSNet income available to common stockholders
    
    $
    23,986
    
    
    
    47,537
    
    
    $
    0.50Effect of dilutive securities:Stock options
    
    
    
    
    
    
    1,278Restricted stock
    
    
    
    
    
    
    121DILUTED EPS
    
    $
    23,986
    
    
    
    48,936
    
    
    $
    0.49
 Income
    
    
    Shares
    
    
    PerFor the Year Ended December 31, 2005
    
    (Numerator)
    
    
    (Denominator)
    
    
    Share AmountBASIC EPSNet income available to common stockholders
    
    $
    21,417
    
    
    
    46,714
    
    
    $
    0.46Effect of dilutive securities:Stock options
    
    
    
    
    
    
    1,327Warrants
    
    
    
    
    
    
    201DILUTED EPS
    
    $
    21,417
    
    
    
    48,242
    
    
    $
    0.44
   Note 4  Share Based Compensation
  F-14




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##### Table of Contents




    
    incentive stock options as defined in Section 422 of the Code;
    
    nonstatutory stock options;
    
    stock appreciation rights;
    
    shares of restricted stock;
    
    performance units and performance shares;
    
    other stock-based awards; and
    
    supplemental payments dedicated to the payment of income taxes.
   Years EndedDecember 31,2007
    
    
    2006Stock options:Incentive Stock Options
    
    $
    1,250
    
    
    $
    526Non-Qualified Stock Options
    
    
    1,869
    
    
    
    1,344Restricted stock
    
    
    6,699
    
    
    
    3,781Share based compensation
    
    $
    9,818
    
    
    $
    5,651
   Stock Options
  F-15




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##### Table of Contents



Years Ended December 31,2007
    
    2006
    
    2005Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    55.7% - 58.5
    %
    
    
    59.0% - 62.8
    %
    
    
    60.9% - 64.5
    %Risk-free rate
    
    
    4.0% - 5.1
    %
    
    
    4.4% - 5.1
    %
    
    
    3.8% - 4.6
    %Expected term
    
    6 years
    
    6 years
    
    5 yearsForfeiture rate
    
    
    5.0
    %
    
    
    8.4
    %
    
    
    0
    %Stock options granted (1)
    
    
    440,676
    
    
    
    679,189
    
    
    
    155,000Wgtd. avg. grant date fair value per share
    
    $
    7.29
    
    
    $
    6.69
    
    
    $
    3.59Fair value of grants (1)
    
    $
    3,212,000
    
    
    $
    4,543,000
    
    
    $
    556,350
 
 (1)
    
    Prior to applying estimated
forfeiture rate  AggregateNumber of
    
    Wgtd. Avg.
    
    Wgtd. Avg.
    
    Intrinsic ValueOptions
    
    Exercise Price
    
    Remaining Life
    

(000s)Outstanding at beginning of year
    
    
    2,520,811
    
    
    $
    5.18Granted
    
    
    440,676
    
    
    
    12.43Expired/cancelled/forfeited
    
    
    (30,000
    )
    
    
    10.59Exercised
    
    
    (350,786
    )
    
    
    3.00Outstanding at end of year
    
    
    2,580,701
    
    
    
    6.65
    
    
    6.7 years
    
    $
    19,738Options exercisable at end of year
    
    
    1,658,798
    
    
    $
    4.01
    
    
    5.5 years
    
    $
    17,061Options expected to vest
    
    
    875,807
    
    
    
    11.40
    
    
    8.8 years
    
    $
    2,542
   Range of
    
    Options
    
    Wgtd. Avg
    
    Wgtd. Avg.
    
    Options
    
    Wgtd. Avg.Exercise
    
    Outstanding
    
    Remaining
    
    Exercise
    
    Exercisable
    
    ExercisePrice
    
    12/31/07
    
    Contractual Life
    
    Price
    
    12/31/07
    
    Price$0.85 - $3.00
    
    
    403,967
    
    
    2.9 years
    
    $
    1.61
    
    
    
    403,967
    
    
    $
    1.61$3.01 - $6.00
    
    
    1,028,999
    
    
    5.9 years
    
    $
    3.44
    
    
    
    1,002,330
    
    
    $
    3.39$6.01 - $10.75
    
    
    573,900
    
    
    8.2 years
    
    $
    10.37
    
    
    
    208,114
    
    
    $
    10.08$10.76 - $14.48
    
    
    573,835
    
    
    9.1 years
    
    $
    12.24
    
    
    
    44,387
    
    
    $
    11.602,580,701
    
    
    6.7 years
    
    $
    6.65
    
    
    
    1,658,798
    
    
    $
    4.01
 F-16




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##### Table of Contents



Restricted Stock
   Wgtd. Avg.Number of
    
    Fair Value perShares
    
    ShareOutstanding at beginning of year
    
    
    1,409,895
    
    
    $
    11.04Granted
    
    
    243,420
    
    
    
    11.78Expired/cancelled/forfeited
    
    
    (5,456
    )
    
    
    11.48Lapse of restrictions
    
    
    (362,405
    )
    
    
    10.98Outstanding at December 31, 2007 (1)
    
    
    1,285,454
    
    
    $
    11.18
 
 (1)
    
    At December 31, 2007, the weighted average remaining life of restricted
stock outstanding was 3.6 years.  Year EndedDecember 31, 2005Net income
    
    $
    21,417Stock-based compensation:Add: expense included in reported results, net of tax
    
    
    22Deduct: fair value based method, net of tax
    
    
    (688
    )Pro forma net income
    
    $
    20,751Earnings per common shareBasic  as reported
    
    $
    0.46Basic  pro forma
    
    $
    0.44Diluted  as reported
    
    $
    0.44Diluted  pro forma
    
    $
    0.43
 Note 5  Asset Retirement Obligations
  F-17




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##### Table of Contents



Asset retirement obligation at January 1, 2007
    
    $
    20,239Liabilities incurred during 2007
    
    
    585Liabilities settled during 2007
    
    
    (6,058
    )Accretion expense
    
    
    923Revisions in estimates
    
    
    1,762Asset retirement obligation at December 31, 2007
    
    
    17,451Less: current portion of asset retirement obligation
    
    
    (5,280
    )Long-term asset retirement obligation
    
    $
    12,171
 Note 6  Debt
       Note 7  Related Party Transactions
  F-18




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##### Table of Contents



F-19




---



##### Table of Contents



Note 8  Investment in Oil and Gas Properties
  amounts in thousands
 For the Year-Ended December 31,2007
    
    
    2006
    
    
    2005Acquisition costs:Proved
    
    $
    1,253
    
    
    $
    7,515
    
    
    $
    58,121Unproved
    
    
    32,833
    
    
    
    12,744
    
    
    
    24,152Exploration costs:Proved
    
    
    104,669
    
    
    
    70,526
    
    
    
    39,311Unproved
    
    
    15,908
    
    
    
    7,457
    
    
    
    15,098Development costs
    
    
    71,973
    
    
    
    61,643
    
    
    
    51,420Capitalized general and administrative and interest costs
    
    
    14,061
    
    
    
    10,841
    
    
    
    7,719Total costs incurred
    
    $
    240,697
    
    
    $
    170,726
    
    
    $
    195,821
 For the Year-Ended December 31,2007
    
    
    2006
    
    
    2005Accumulated depreciation, depletion
and amortization (DD&A)Balance, beginning of year
    
    $
    (314,869
    )
    
    $
    (210,774
    )
    
    $
    (168,453
    )Provision for DD&A
    
    
    (116,384
    )
    
    
    (82,928
    )
    
    
    (42,513
    )Sale of proved properties and other
    
    
    (1,277
    )
    
    
    (21,167
    )
    
    
    192Balance, end of year
    
    $
    (432,530
    )
    
    $
    (314,869
    )
    
    $
    (210,774
    )DD&A per Mcfe
    
    $
    3.70
    
    
    $
    3.23
    
    
    $
    2.65
  Note 9  Income Taxes
  F-20




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December 31,2007
    
    
    2006Net operating loss carryforwards
    
    $
    31,542
    
    
    $
    28,331Percentage depletion carryforward
    
    
    2,928
    
    
    
    2,068Alternative minimum tax credit
    
    
    105
    
    
    
    105Contributions carryforward and other
    
    
    109
    
    
    
    Temporary differences:Oil and gas properties  full cost
    
    
    (104,252
    )
    
    
    (76,408
    )Hedges
    
    
    255
    
    
    
    (3,895
    )Compensation expense
    
    
    153
    
    
    
    153Deferred tax liability
    
    $
    (69,160
    )
    
    $
    (49,646
    )
   For the Year-Ended December 31,2007
    
    
    2006
    
    
    2005Amount computed using the statutory rate
    
    $
    22,499
    
    
    $
    13,507
    
    
    $
    11,863Increase (reduction) in taxes resulting from:State & local taxes
    
    
    1,414
    
    
    
    849
    
    
    
    746Percentage depletion carryforward
    
    
    (860
    )
    
    
    (74
    )
    
    
    (155
    )Non-deductible stock option expense (1)
    
    
    462
    
    
    
    195
    
    
    
    Other
    
    
    149
    
    
    
    127
    
    
    
    23Income tax expense
    
    $
    23,664
    
    
    $
    14,604
    
    
    $
    12,477
 
 (1)
    
    Relates to compensation expense recognized on the vesting of Incentive Stock Options in connection with the
adoption of SFAS 123(R) on January 1, 2006. Note 10  Commitments and Contingencies
  F-21




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##### Table of Contents



Lease Commitments
   2008
    
    $
    9512009
    
    
    9092010
    
    
    1892011
    
    
    712012
    
    
    11Thereafter
    
    
    $
    2,131
  Note 11  Oil and Gas Reserve Information  Unaudited
    F-22




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##### Table of Contents



Oil
    
    Natural Gasin
    
    and NGL inMBbls
    
    MMcfeProved reserves as of December 31, 2004
    
    
    3,714
    
    
    
    79,069Revisions of previous estimates
    
    
    (29
    )
    
    
    (8,315
    )Extensions, discoveries and other additions
    
    
    362
    
    
    
    29,966Purchase of producing properties
    
    
    294
    
    
    
    21,211Sale of producing properties
    
    
    (34
    )
    
    
    (758
    )Production
    
    
    (665
    )
    
    
    (12,058
    )Proved reserves as of December 31, 2005
    
    
    3,642
    
    
    
    109,115Revisions of previous estimates
    
    
    (197
    )
    
    
    2,744Extensions, discoveries and other additions
    
    
    773
    
    
    
    34,498Purchase of producing properties
    
    
    
    
    
    
    Sale of producing properties
    
    
    (792
    )
    
    
    (6,676
    )Production
    
    
    (695
    )
    
    
    (21,528
    )Proved reserves as of December 31, 2006
    
    
    2,731
    
    
    
    118,153Revisions of previous estimates
    
    
    109
    
    
    
    14,047Extensions, discoveries and other additions
    
    
    366
    
    
    
    37,590Purchase of producing properties
    
    
    234
    
    
    
    173Sale of producing properties
    
    
    (18
    )
    
    
    (2,529
    )Production
    
    
    (1,080
    )
    
    
    (24,966
    )Proved reserves as of December 31, 2007
    
    
    2,342
    
    
    
    142,468Proved
developed reservesAs of December 31, 2005
    
    
    2,891
    
    
    
    73,250As of December 31, 2006
    
    
    2,528
    
    
    
    81,487As of December 31, 2007
    
    
    2,070
    
    
    
    95,639
 F-23




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##### Table of Contents



Standardized Measure
 December 31,2007
    
    
    2006
    
    
    2005Future cash flows
    
    $
    1,155,236
    
    
    $
    786,829
    
    
    $
    1,157,283Future production costs
    
    
    (240,849
    )
    
    
    (168,037
    )
    
    
    (195,648
    )Future development costs
    
    
    (134,993
    )
    
    
    (102,778
    )
    
    
    (99,946
    )Future income taxes
    
    
    (143,683
    )
    
    
    (70,615
    )
    
    
    (213,222
    )Future net cash flows
    
    
    635,711
    
    
    
    445,399
    
    
    
    648,46710% annual discount
    
    
    (188,453
    )
    
    
    (112,566
    )
    
    
    (165,055
    )Standardized measure of discounted future net cash flows
    
    $
    447,258
    
    
    $
    332,833
    
    
    $
    483,412
 Changes in Standardized Measure
 Year Ended December 31,2007
    
    
    2006
    
    
    2005Standarized measure at beginning of year
    
    $
    332,833
    
    
    $
    483,412
    
    
    $
    257,754Sales and transfers of oil and gas produced,
net of production costs
    
    
    (206,477
    )
    
    
    (152,550
    )
    
    
    (95,816
    )Changes in price, net of future production costs
    
    
    153,961
    
    
    
    (221,118
    )
    
    
    164,071Extensions and discoveries, net of future
production and development costs
    
    
    95,850
    
    
    
    124,138
    
    
    
    168,802Changes in estimated future development costs,
net of development costs incurred during this period
    
    
    12,014
    
    
    
    18,016
    
    
    
    6,398Revisions of quantity estimates
    
    
    66,025
    
    
    
    5,199
    
    
    
    (47,025
    )Accretion of discount
    
    
    38,431
    
    
    
    63,973
    
    
    
    32,627Net change in income taxes
    
    
    (41,913
    )
    
    
    104,841
    
    
    
    (87,808
    )Purchase of reserves in place
    
    
    14,108
    
    
    
    
    
    
    
    94,834Sale of reserves in place
    
    
    (9,293
    )
    
    
    (70,765
    )
    
    
    (1,352
    )Changes in production rates (timing) and other
    
    
    (8,281
    )
    
    
    (22,313
    )
    
    
    (9,073
    )Standardized measure at end of year
    
    $
    447,258
    
    
    $
    332,833
    
    
    $
    483,412
  F-24




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##### Table of Contents



Note 12  Summarized Quarterly Financial Information  Unaudited
  Quarter EndedMarch-31
    
    
    June-30
    
    
    September-30
    
    
    December-312007:Revenues
    
    $
    64,008
    
    
    $
    66,760
    
    
    $
    65,500
    
    
    $
    67,406Expenses
    
    
    53,194
    
    
    
    57,130
    
    
    
    57,462
    
    
    
    55,269Net income
    
    $
    10,814
    
    
    $
    9,630
    
    
    $
    8,038
    
    
    $
    12,137Earnings per share:Basic
    
    $
    0.23
    
    
    $
    0.20
    
    
    $
    0.16
    
    
    $
    0.23Diluted
    
    $
    0.22
    
    
    $
    0.19
    
    
    $
    0.16
    
    
    $
    0.222006:Revenues
    
    $
    48,358
    
    
    $
    51,496
    
    
    $
    55,086
    
    
    $
    45,604Expenses
    
    
    39,209
    
    
    
    43,514
    
    
    
    48,542
    
    
    
    45,293Net income
    
    $
    9,149
    
    
    $
    7,982
    
    
    $
    6,544
    
    
    $
    311Earnings per share:Basic
    
    $
    0.19
    
    
    $
    0.17
    
    
    $
    0.14
    
    
    $
    0.01Diluted
    
    $
    0.19
    
    
    $
    0.16
    
    
    $
    0.13
    
    
    $
    0.01
 F-25