##### 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, 2008
 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 o
 o
  þ Large accelerated filer
    
    o Accelerated filer
    
    o Non-accelerated filer
    
    o Smaller reporting company
 o þ




---



##### 



TABLE OF CONTENTS
 Page No.PART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    11Item 1B. Unresolved Staff Comments
    
    
    20Item 2. Properties
    
    
    21Item 3. Legal Proceedings
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    24Item 6. Selected Financial Data
    
    
    26Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 7A. Quantitative and Qualitative Disclosure About Market Risk
    
    
    35Item 8. Financial Statements and Supplementary Data
    
    
    36Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    36Item 9A. Controls and Procedures
    
    
    36Item 9B. Other Information
    
    
    39PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    39Item 11. Executive Compensation
    
    
    39Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    39Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    39Item 14. Principal Accountant Fees and Services
    
    
    39PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    39Index to Financial Statements
    
    
    F-1Exhibit 10.2Exhibit 10.3Exhibit 10.4Exhibit 10.19Exhibit 10.20Exhibit 10.21Exhibit 21.1Exhibit 23.1Exhibit 23.2Exhibit 23.3Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   1




---



##### Table of Contents




    
    our ability to find oil and natural gas reserves that are economically
recoverable;
 
    
    the volatility of oil and natural gas prices and the significant price decline
since June 30, 2008;
 
    
    the decline in the values of our properties that have resulted from ceiling test
write-downs and may in the future result in additional ceiling test write-downs;
 
    
    the deteriorating economic conditions in the United States and globally;
 
    
    our ability to replace reserves and sustain production;
 
    
    our estimate of the sufficiency of our existing capital sources;
 
    
    our ability to raise additional capital to fund cash requirements for future
operations;
 
    
    the uncertainties involved in estimating quantities of proved oil and natural gas
reserves, in prospect development and property acquisitions or dispositions and in
projecting future rates of production;
 
    
    the timing of development expenditures and drilling of wells and;
 
    
    hurricanes and other natural disasters, and the operating hazards attendant to
the oil and gas business.
       2




---



##### Table of Contents



PART I
 
 ITEM 1. BUSINESS
 Overview
    Business Strategy
 Maintain Our Financial Flexibility.
 Concentrate in Core Operating Areas and Build Scale.
  3




---



##### Table of Contents



Pursue Balanced Growth and Portfolio Mix.
 Manage Our Risk Exposure.
 Target Underexploited Properties with Substantial Opportunity for Upside.
 2008 Financial and Operational Summary
     4




---



##### Table of Contents



Oklahoma
  Arkansas
  Texas
  Gulf Coast Basin
  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.
    5




---



##### Table of Contents



Federal Regulations
 Sales and Transportation of Natural Gas
     Sales and Transportation of Crude Oil.
  6




---



##### Table of Contents



Federal Leases.
    Federal, State or American Indian Leases.
   7




---



##### Table of Contents



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.
   Legislative Proposals
  Environmental Regulations
 General.
  Solid and Hazardous Waste.
  8




---



##### Table of Contents



Superfund.
 Oil Pollution Act.
  Clean Water Act.
 Air Emissions.
 Coastal Coordination.
  9




---



##### Table of Contents



OSHA.
  Corporate Offices
  Employees
  Available Information
   10




---



##### Table of Contents



ITEM 1A. RISK FACTORS
 Risks Related to Our Business, Industry and Strategy
 Oil and natural gas prices are volatile, and have declined substantially since June 30, 2008. An
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;
 
    
    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, 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.
   The current financial crisis and deteriorating economic conditions may have material adverse
impacts on our business and financial condition that we currently cannot predict.
   11




---



##### Table of Contents




    
    the demand for oil and natural gas may decline due to the deteriorating economic
conditions which could negatively impact the revenues, margins and profitability of our
oil and natural gas business;
 
    
    we may be unable to obtain adequate funding under our bank credit facility due to
reductions in our borrowing base as a result of a redetermination due to lower oil and
gas prices or lending counterparties being unwilling or unable to meet their funding
obligations;
 
    
    the tightening of credit or lack of credit availability to our customers could
adversely affect our ability to collect our trade receivables;
 
    
    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; or
 
    
    our commodity hedging arrangements could become ineffective if our counterparties
are unable to perform their obligations or seek bankruptcy protection.
 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 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.
    12




---



##### Table of Contents



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 obtain adequate financing to execute our long-term operating strategy when
the need arises.
  
    
    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.
  We may not be able to fund our planned capital expenditures.
   13




---



##### Table of Contents



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 a certain level of borrowings under our credit facility and 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.
   Our future success depends upon our ability to find, develop, produce and acquire additional oil
and natural gas reserves that are economically recoverable.
   14




---



##### Table of Contents



Approximately half of our production 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.
   Lower oil and natural gas prices may cause us to record ceiling test write-downs.
  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;
  15




---



##### Table of Contents




    
    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.
   16




---



##### Table of Contents



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.
   17




---



##### Table of Contents



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.
  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.
   18




---



##### Table of Contents



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.
   19




---



##### 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
   20




---



##### Table of Contents



ITEM 2. PROPERTIES
  Oil and Gas Reserves
  Proved
    
    
    Proved
    
    
    TotalDeveloped
    
    
    Undeveloped
    
    
    ProvedOil (MBbls)
    
    
    2,030
    
    
    
    171
    
    
    
    2,201Natural Gas and NGL (MMcfe)
    
    
    124,020
    
    
    
    48,166
    
    
    
    172,186Estimated pre-tax future net cash flows
    
    $
    407,917,074
    
    
    $
    58,531,564
    
    
    $
    466,448,638Discounted pre-tax future net cash flows
    
    $
    315,757,469
    
    
    $
    11,435,677
    
    
    $
    327,193,146
    21




---



##### Table of Contents



Production, Pricing and Production Cost Data
  Year Ended December 31,2008
    
    
    2007
    
    
    2006Production:Oil (Bbls)
    
    
    680,571
    
    
    
    1,079,672
    
    
    
    694,724Gas (Mcfe)
    
    
    29,708,204
    
    
    
    24,965,789
    
    
    
    21,528,323Total Production (Mcfe)
    
    
    33,791,630
    
    
    
    31,443,821
    
    
    
    25,696,667Average sales prices (1):Oil (per Bbl)
    
    $
    97.49
    
    
    $
    70.52
    
    
    $
    60.91Gas (per Mcfe)
    
    
    8.16
    
    
    
    7.21
    
    
    
    7.04Per Mcfe
    
    
    9.13
    
    
    
    8.15
    
    
    
    7.54Average Production Cost per Mcfe (2)
    
    $
    1.69
    
    
    $
    1.27
    
    
    $
    1.61
 
 (1)
    
    Includes the effects of hedges.(2)
    
    Production costs include lease operating costs and production taxes. Oil and Gas Drilling Activity
  2008
    
    
    2007
    
    
    2006Gross
    
    
    Net
    
    
    Gross
    
    
    Net
    
    
    Gross
    
    
    NetExploration:Productive
    
    
    103
    
    
    
    27.64
    
    
    
    54
    
    
    
    26.12
    
    
    
    37
    
    
    
    15.82Non-productive
    
    
    6
    
    
    
    1.63
    
    
    
    9
    
    
    
    2.86
    
    
    
    4
    
    
    
    0.95Total
    
    
    109
    
    
    
    29.27
    
    
    
    63
    
    
    
    28.98
    
    
    
    41
    
    
    
    16.77Development:Productive
    
    
    41
    
    
    
    10.77
    
    
    
    22
    
    
    
    7.89
    
    
    
    66
    
    
    
    26.40Non-productive
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    0.15
    
    
    
    6
    
    
    
    2.89Total
    
    
    41
    
    
    
    10.77
    
    
    
    24
    
    
    
    8.04
    
    
    
    72
    
    
    
    29.29
   22




---



##### Table of Contents



Leasehold Acreage
  Leasehold AcreageDeveloped
    
    
    UndevelopedGross
    
    
    Net
    
    
    Gross
    
    
    NetMississippi
    
    
    721
    
    
    
    458
    
    
    
    88
    
    
    
    56Alabama
    
    
    90
    
    
    
    30
    
    
    
    2,924
    
    
    
    1,898Arkansas
    
    
    7,973
    
    
    
    2,636
    
    
    
    44,016
    
    
    
    15,451Louisiana
    
    
    9,430
    
    
    
    3,524
    
    
    
    13,074
    
    
    
    3,920Oklahoma
    
    
    107,537
    
    
    
    41,077
    
    
    
    32,342
    
    
    
    30,030Texas
    
    
    19,821
    
    
    
    10,046
    
    
    
    43,494
    
    
    
    30,460Federal Waters
    
    
    46,304
    
    
    
    34,187
    
    
    
    51,534
    
    
    
    30,603Total
    
    
    191,876
    
    
    
    91,958
    
    
    
    187,472
    
    
    
    112,418
  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
   23




---



##### Table of Contents



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 SECURITES
  
  24




---



##### Table of Contents



Market Price of and Dividends on Common Stock
  NYSE Stock MarketHigh
    
    
    Low20071st Quarter
    
    $
    13.57
    
    
    $
    10.082nd Quarter
    
    
    15.99
    
    
    
    11.393rd Quarter
    
    
    15.13
    
    
    
    10.024th Quarter
    
    
    14.99
    
    
    
    10.6920081st Quarter
    
    $
    18.07
    
    
    $
    10.772nd Quarter
    
    
    28.16
    
    
    
    17.173rd Quarter
    
    
    29.18
    
    
    
    13.154th Quarter
    
    
    15.09
    
    
    
    4.45
    Total Number ofShares Purchased
    
    
    Maximum Number (oras Part of
    
    
    Approximate DollarPublicly
    
    
    Value) of Shares that MayTotal Number of Shares
    
    
    Average Price
    
    
    Announced Plan
    
    
    be Purchased Under thePurchased (1)
    
    
    Paid Per Share
    
    
    or Program
    
    
    Plans or ProgramsOctober 1 - October 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    November 1 - November 30, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 1 - December 31, 2008
    
    
    7,779
    
    
    $
    4.68
    
    
    
    
    
    
    
    
 
 (1)
    
    All shares repurchased were surrendered by employees to pay tax withholding upon the vesting of
restricted stock awards.  25




---



##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA
  Year Ended December 31,2008 (1)
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(in thousands except per share data)Revenues
    
    $
    313,958
    
    
    $
    262,334
    
    
    $
    199,520
    
    
    $
    120,552
    
    
    $
    84,595Net income (loss) available to common stockholders
    
    
    (102,100
    )
    
    
    39,245
    
    
    
    23,986
    
    
    
    21,417
    
    
    
    16,348Net income
(loss) available to common stockholders per share:Basic
    
    
    (2.08
    )
    
    
    0.82
    
    
    
    0.50
    
    
    
    0.46
    
    
    
    0.37Diluted
    
    
    (2.08
    )
    
    
    0.79
    
    
    
    0.49
    
    
    
    0.44
    
    
    
    0.35Oil and gas properties, net
    
    
    512,861
    
    
    
    554,850
    
    
    
    431,814
    
    
    
    365,183
    
    
    
    211,683Total assets
    
    
    670,249
    
    
    
    644,347
    
    
    
    518,290
    
    
    
    431,470
    
    
    
    231,617Long-term debt
    
    
    278,998
    
    
    
    148,755
    
    
    
    195,537
    
    
    
    158,340
    
    
    
    38,500Stockholders equity
    
    
    237,487
    
    
    
    302,317
    
    
    
    189,711
    
    
    
    144,537
    
    
    
    121,277
 (1)
    
    The year ended December 31, 2008 includes a ceiling test write-down of $266.2 million, $167.1
million net of tax benefit, or $3.41 share. 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Overview
     26




---



##### Table of Contents



Critical Accounting Policies and Estimates
 Full Cost Method of Accounting
         27




---



##### Table of Contents



Future Abandonment Costs
  Reserve Estimates
  Derivative Instruments
     28




---



##### Table of Contents



New Accounting Standards
     Results of Operations
  Year Ended December 31,2008
    
    
    2007
    
    
    2006Production:Oil (Bbls)
    
    
    680,571
    
    
    
    1,079,672
    
    
    
    694,724Gas (Mcfe)
    
    
    29,708,204
    
    
    
    24,965,789
    
    
    
    21,528,323Total Production (Mcfe)
    
    
    33,791,630
    
    
    
    31,443,821
    
    
    
    25,696,667Sales:Total oil sales
    
    $
    66,349,344
    
    
    $
    76,138,234
    
    
    $
    42,317,332Total gas sales
    
    
    242,273,860
    
    
    
    180,084,794
    
    
    
    151,544,026Total oil and gas sales
    
    $
    308,623,204
    
    
    $
    256,223,028
    
    
    $
    193,861,358Average sales prices:Oil (per Bbl)
    
    $
    97.49
    
    
    $
    70.52
    
    
    $
    60.91Gas (per Mcfe)
    
    
    8.16
    
    
    
    7.21
    
    
    
    7.04Per Mcfe
    
    
    9.13
    
    
    
    8.15
    
    
    
    7.54
  Comparison of Results of Operations for the Years Ended December 31, 2008 and 2007
  Production
  29




---



##### Table of Contents



Prices
 Revenue
  Expenses
    Years Ended December 31,2008
    
    
    2007Stock options:Incentive Stock Options
    
    $
    1,316
    
    
    $
    1,250Non-Qualified Stock Options
    
    
    2,729
    
    
    
    1,869Restricted stock
    
    
    5,537
    
    
    
    6,699Share-based compensation
    
    $
    9,582
    
    
    $
    9,818
   30




---



##### Table of Contents



Comparison of Results of Operations for the Years Ended December 31, 2007 and 2006
  Production
  Prices
 Revenue
  Expenses
   31




---



##### Table of Contents



Years Ended December 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
     Liquidity and Capital Resources
     32




---



##### Table of Contents



Source of Capital: Operations
  Source of Capital: Debt
        33




---



##### Table of Contents



Source of Capital: Issuance of Securities
   Source of Capital: Divestitures
  Use of Capital: Exploration and Development
    34




---



##### Table of Contents



Contractual Obligations
  AfterTotal
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    201310 3/8% senior notes (1)
    
    $
    202,525
    
    
    $
    15,563
    
    
    $
    15,563
    
    
    $
    15,563
    
    
    $
    155,836
    
    
    $
    
    
    
    $
    Bank debt (1)
    
    
    145,246
    
    
    
    4,550
    
    
    
    4,875
    
    
    
    5,200
    
    
    
    130,621
    
    
    
    
    
    
    
    Purchase obligations (2)
    
    
    4,900
    
    
    
    4,900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating leases (3)
    
    
    3,815
    
    
    
    1,070
    
    
    
    1,039
    
    
    
    893
    
    
    
    750
    
    
    
    63
    
    
    
    Capital projects (4)
    
    
    25,633
    
    
    
    8,590
    
    
    
    557
    
    
    
    1,103
    
    
    
    1,659
    
    
    
    594
    
    
    
    13,130Total
    
    $
    382,119
    
    
    $
    34,673
    
    
    $
    22,034
    
    
    $
    22,759
    
    
    $
    288,866
    
    
    $
    657
    
    
    $
    13,130
 
 (1)
    
    Includes principal and estimated interest.(2)
    
    Consists of commitment for the rental of a drilling rig.(3)
    
    Consists primarily of leases for office space and leases for office equipment.(4)
    
    Consists of estimated future obligations to abandon our oil and gas properties. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
       35




---



##### Table of Contents



Instrument
    
    
    
    
    
    WeightedProduction Period
    
    Type
    
    Daily Volumes
    
    
    Average PriceNatural Gas:January  June 2009
    
    Swap
    
    20,000 Mmbtu
    
    $
    5.622009
    
    Swap
    
    10,000 Mmbtu
    
    $
    7.462009
    
    Costless Collar
    
    30,000 Mmbtu
    
    $
    8.75 - 11.38Crude Oil:2009
    
    Costless Collar
    
    400 Bbls
    
    $
    100.00 - 168.50
   Instrument
    
    
    
    
    
    WeightedProduction Period
    
    Type
    
    Daily Volumes
    
    
    Average PriceNatural Gas:July  December 2009
    
    Swap
    
    10,000 Mmbtu
    
    $
    5.342010
    
    Costless Collar
    
    10,000 Mmbtu
    
    $
    6.00 - $7.15
  
 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; andii.
    
    that the Companys disclosure controls and procedures are effective.
  36




---



##### Table of Contents



Changes in Internal Control Over Financial Reporting
  Managements Report on Internal Control Over Financial Reporting
      /s/ Charles T. GoodsonCharles T. GoodsonChairman andChief Executive Officer/s/ W. Todd ZehnderW. Todd ZehnderExecutive Vice President-Chief Financial Officer
  37




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
        
  38




---



##### Table of Contents



ITEM 9B. OTHER INFORMATION
  
 PART III
 
 ITEMS 10, 11, 12, 13 & 14
  
 PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
             2.1
    
    

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
    
    
    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).3.3
    
    
    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).
  39




---



##### Table of Contents



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
    
    
    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).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.*10.3
    
    

Form
of Nonstatutory Stock Option Agreement under the Incentive Plan.*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.10.5
    
    
    PetroQuest Energy, Inc. Annual Cash Bonus Plan (incorporated herein by
reference to Exhibit 10.1 to Form 8-K filed August 18,
2006).10.6
    
    
    Amendment to the PetroQuest Energy, Inc. Annual Cash Bonus Plan
(incorporated herein by reference to Exhibit 10.7 to
Form 8-K filed January 6, 2009).10.7
    
    
    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).10.8
    
    
    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).10.9
    
    
    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 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).
  40




---



##### Table of Contents



10.10
    
    

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).10.11
    
    
    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).10.12
    
    
    Amendment No. 5 to Second Amended and Restated Credit Agreement,
dated effective as of April 1, 2008, among PetroQuest Energy, L.L.C., PetroQuest
Energy, Inc., Pittrans, Inc., TDC Energy LLC, JPMorgan 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 April 25,
2008).10.13
    
    
    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).10.14
    
    
    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).10.15
    
    
    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).10.16
    
    
    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).10.17
    
    
    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).10.18
    
    
    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).*10.19
    
    
    Amended Executive Employment Agreement dated effective as of December 31,
2008, between Mark
K. Stover and PetroQuest Energy, Inc.*10.20
    
    
    Amended Executive Employment Agreement dated effective as of
December 31, 2008, between Dalton F. Smith III and PetroQuest
Energy, Inc.*10.21
    
    
    Amended Executive Employment Agreement dated effective as of
December 31, 2008, between J. Bond Clement and PetroQuest
Energy, Inc.10.22
    
    
    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).
  41




---



##### Table of Contents



10.23
    
    

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).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.*23.3
    
    
    Consent of Netherland, Sewell
and Associates, Inc.*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  42




---



##### 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
  43




---



##### 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
  44




---



##### 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 andCHARLES T. GOODSON
    
    
    
    Director (Principal Executive Officer)By:
    
    /s/ W. Todd Zehnder
    
    
    
    Executive Vice President, Chief
Financial Officer, TreasurerW. TODD ZEHNDER
    
    
    
    (Principal Financial Officer)By:
    
    /s/ J. Bond Clement
    
    
    
    Senior Vice President and Chief Accounting OfficerJ. BOND CLEMENT
    
    
    
    (Principal
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:
    
    
    
    
    
    DirectorE. WAYNE NORDBERGBy:
    
    /s/ William W. Rucks, IV
    
    
    
    DirectorWILLIAM W. RUCKS, IV
  45




---



##### 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, 2008 and 2007
    
    
    F-3Consolidated Statements of Operations of PetroQuest Energy, Inc. for the years ended December 31, 2008, 2007 and 2006
    
    
    F-4Consolidated Statements of Cash Flows of PetroQuest Energy, Inc. for the years ended December 31, 2008, 2007 and 2006
    
    
    F-5Consolidated Statements of Stockholders Equity of PetroQuest Energy, Inc. for the years ended December 31, 2008, 2007 and 2006
    
    
    F-6Consolidated Statements of Comprehensive Income of PetroQuest Energy, Inc. for the years ended December 31, 2008, 2007 and 2006
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
  F-1




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
      
  F-2




---



##### Table of Contents



PETROQUEST ENERGY, INC.
 
  Amounts in Thousands)
 December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    23,964
    
    
    $
    16,909Revenue receivable
    
    
    20,074
    
    
    
    22,820Joint interest billing receivable
    
    
    24,259
    
    
    
    22,936Hedging asset
    
    
    40,571
    
    
    
    Prepaid drilling costs
    
    
    11,523
    
    
    
    1,448Drilling pipe inventory
    
    
    25,898
    
    
    
    Other current assets
    
    
    1,530
    
    
    
    3,984Total current assets
    
    
    147,819
    
    
    
    68,097Property and equipment:Oil and gas properties:Oil and gas properties, full cost method
    
    
    1,225,304
    
    
    
    907,083Unevaluated oil and gas properties
    
    
    119,847
    
    
    
    80,297Accumulated depreciation, depletion and amortization
    
    
    (832,290
    )
    
    
    (432,530
    )Oil and gas properties, net
    
    
    512,861
    
    
    
    554,850Gas gathering assets
    
    
    4,644
    
    
    
    22,040Accumulated depreciation and amortization of gas
gathering assets
    
    
    (900
    )
    
    
    (6,640
    )Total property and equipment
    
    
    516,605
    
    
    
    570,250Other assets, net of accumulated depreciation and amortization
of $6,237 and $11,238, respectively
    
    
    5,825
    
    
    
    6,000Total assets
    
    $
    670,249
    
    
    $
    644,347LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable to vendors
    
    $
    70,643
    
    
    $
    78,273Advances from co-owners
    
    
    5,349
    
    
    
    12,870Oil and gas revenue payable
    
    
    15,305
    
    
    
    5,771Accrued interest and preferred stock dividend
    
    
    3,696
    
    
    
    3,320Asset retirement obligation
    
    
    8,590
    
    
    
    5,280Other accrued liabilities
    
    
    4,094
    
    
    
    6,326Total current liabilities
    
    
    107,677
    
    
    
    111,840Bank debt
    
    
    130,000
    
    
    
    10 3/8% Senior Notes
    
    
    148,998
    
    
    
    148,755Asset retirement obligation
    
    
    17,043
    
    
    
    12,171Deferred income taxes
    
    
    28,845
    
    
    
    69,160Other liabilities
    
    
    199
    
    
    
    104Commitments 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 49,319 and 48,414
shares, respectively
    
    
    49
    
    
    
    48Paid-in capital
    
    
    216,253
    
    
    
    204,979Accumulated other comprehensive income (loss)
    
    
    25,560
    
    
    
    (435
    )Retained earnings (deficit)
    
    
    (4,376
    )
    
    
    97,724Total stockholders equity
    
    
    237,487
    
    
    
    302,317Total liabilities and stockholders equity
    
    $
    670,249
    
    
    $
    644,347
   F-3




---



##### Table of Contents



PETROQUEST ENERGY, INC.
 
  Amounts in Thousands, Except Per Share Data
 Year Ended December 31,2008
    
    
    2007
    
    
    2006Revenues:Oil and gas sales
    
    $
    308,623
    
    
    $
    256,223
    
    
    $
    193,861Gas gathering revenue
    
    
    5,335
    
    
    
    6,111
    
    
    
    5,659313,958
    
    
    
    262,334
    
    
    
    199,520Expenses:Lease operating expenses
    
    
    44,665
    
    
    
    31,965
    
    
    
    34,735Production taxes
    
    
    12,292
    
    
    
    7,859
    
    
    
    6,576Depreciation, depletion and amortization
    
    
    134,340
    
    
    
    119,969
    
    
    
    85,858Ceiling test writedown
    
    
    266,156
    
    
    
    
    
    
    
    Gas gathering costs
    
    
    2,309
    
    
    
    4,120
    
    
    
    3,637General and administrative
    
    
    23,249
    
    
    
    21,162
    
    
    
    15,122Accretion of asset retirement obligation
    
    
    1,317
    
    
    
    923
    
    
    
    1,513Interest expense
    
    
    9,327
    
    
    
    13,393
    
    
    
    14,513493,655
    
    
    
    199,391
    
    
    
    161,954Gain on sale of gas gathering assets
    
    
    26,812
    
    
    
    
    
    
    
    Other income
    
    
    344
    
    
    
    1,340
    
    
    
    1,024Income (loss) from operations
    
    
    (152,541
    )
    
    
    64,283
    
    
    
    38,590Income tax expense (benefit)
    
    
    (55,581
    )
    
    
    23,664
    
    
    
    14,604Net income (loss)
    
    
    (96,960
    )
    
    
    40,619
    
    
    
    23,986Preferred stock dividend
    
    
    5,140
    
    
    
    1,374
    
    
    
    Net income (loss) available to common
stockholders
    
    $
    (102,100
    )
    
    $
    39,245
    
    
    $
    23,986Earnings per common share:BasicNet income (loss) per share
    
    $
    (2.08
    )
    
    $
    0.82
    
    
    $
    0.50DilutedNet income (loss) per share
    
    $
    (2.08
    )
    
    $
    0.79
    
    
    $
    0.49Weighted average number of common shares:Basic
    
    
    48,971
    
    
    
    48,108
    
    
    
    47,537Diluted
    
    
    48,971
    
    
    
    49,679
    
    
    
    48,936
   F-4




---



##### Table of Contents



PETROQUEST ENERGY, INC.
 
  Amounts in Thousands
 Year Ended December 31,2008
    
    
    2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    (96,960
    )
    
    $
    40,619
    
    
    $
    23,986Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Deferred tax expense (benefit)
    
    
    (55,581
    )
    
    
    23,664
    
    
    
    14,604Gain on sale of gas gathering assets
    
    
    (26,812
    )
    
    
    
    
    
    
    Depreciation, depletion and amortization
    
    
    134,340
    
    
    
    119,969
    
    
    
    85,858Ceiling test writedown
    
    
    266,156
    
    
    
    
    
    
    
    Share-based compensation expense
    
    
    9,582
    
    
    
    9,818
    
    
    
    5,651Accretion of asset retirement obligation
    
    
    1,317
    
    
    
    923
    
    
    
    1,513Amortization expense and other
    
    
    1,492
    
    
    
    1,187
    
    
    
    1,140Payments to settle asset retirement obligations
    
    
    (19,377
    )
    
    
    (6,058
    )
    
    
    (252
    )Changes in working capital accounts:Revenue receivable
    
    
    2,746
    
    
    
    (1,053
    )
    
    
    725Joint interest billing receivable
    
    
    (1,323
    )
    
    
    (2,864
    )
    
    
    (2,505
    )Prepaid drilling costs
    
    
    (10,075
    )
    
    
    3,438
    
    
    
    (3,630
    )Drilling pipe inventory
    
    
    (25,898
    )
    
    
    
    
    
    
    Accounts payable and accrued liabilities
    
    
    (4,567
    )
    
    
    37,050
    
    
    
    (13,552
    )Advances from co-owners
    
    
    (7,521
    )
    
    
    (521
    )
    
    
    7,517Other
    
    
    1,542
    
    
    
    (2,443
    )
    
    
    (1,685
    )Net cash provided by operating activities
    
    
    169,061
    
    
    
    223,729
    
    
    
    119,370Cash flows from investing activities:Investment in oil and gas properties
    
    
    (325,936
    )
    
    
    (233,436
    )
    
    
    (175,277
    )Investment in gas gathering assets
    
    
    (6,204
    )
    
    
    (2,968
    )
    
    
    (6,363
    )Proceeds from sale of gathering assets, net of expenses
    
    
    43,170
    
    
    
    
    
    
    
    Proceeds from sale of oil and gas properties and other
    
    
    2,256
    
    
    
    1,277
    
    
    
    22,023Net cash used in investing activities
    
    
    (286,714
    )
    
    
    (235,127
    )
    
    
    (159,617
    )Cash flows from financing activities:Net proceeds from (payments for) share based
compensation
    
    
    1,597
    
    
    
    (99
    )
    
    
    1,461Proceeds from preferred stock offering
    
    
    
    
    
    
    74,750
    
    
    
    Costs of preferred stock offering
    
    
    
    
    
    
    (4,041
    )
    
    
    Payment of preferred stock dividend
    
    
    (5,439
    )
    
    
    
    
    
    
    Proceeds from bank borrowings
    
    
    258,000
    
    
    
    23,000
    
    
    
    48,000Repayment of bank borrowings
    
    
    (128,000
    )
    
    
    (70,000
    )
    
    
    (11,000
    )Deferred financing costs
    
    
    (1,450
    )
    
    
    (98
    )
    
    
    (122
    )Net cash provided by financing activities
    
    
    124,708
    
    
    
    23,512
    
    
    
    38,339Net increase (decrease) in cash and cash equivalents
    
    
    7,055
    
    
    
    12,114
    
    
    
    (1,908
    )Cash and cash equivalents at beginning of period
    
    
    16,909
    
    
    
    4,795
    
    
    
    6,703Cash and cash equivalents at end of period
    
    $
    23,964
    
    
    $
    16,909
    
    
    $
    4,795Supplemental disclosure of cash flow informationCash paid during the period for:Interest
    
    $
    17,851
    
    
    $
    19,238
    
    
    $
    17,572Income taxes
    
    $
    
    
    
    $
    
    
    
    $
    
   F-5




---



##### 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, 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
    
    
    $
    302,317Options 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
    )
    
    $
    237,487
   F-6




---



##### Table of Contents



PETROQUEST ENERGY, INC.
 
  Amounts in Thousands
 Year Ended December 31,2008
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    (96,960
    )
    
    $
    40,619
    
    
    $
    23,986Change in fair value of derivative instruments,
accounted for as hedges, net of tax benefit
(expense)
of ($15,267), $4,150 and ($7,903), respectively
    
    
    25,995
    
    
    
    (7,067
    )
    
    
    14,076Comprehensive income (loss)
    
    $
    (70,965
    )
    
    $
    33,552
    
    
    $
    38,062
   F-7




---



##### 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




---



##### Table of Contents



Years Ended December 31,2008
    
    
    2007
    
    
    2006Gas gathering revenue
    
    $
    4,876
    
    
    $
    5,581
    
    
    $
    4,835Expenses:Gas gathering costs
    
    
    (2,247
    )
    
    
    (4,120
    )
    
    
    (3,637
    )Depreciation expense
    
    
    (1,974
    )
    
    
    (2,773
    )
    
    
    (2,209
    )Income (loss) from operations
    
    $
    655
    
    
    $
    (1,312
    )
    
    $
    (1,011
    )
 Other Assets
  Cash and Cash Equivalents
  Drilling Pipe Inventory
  Income Taxes
  Revenue Recognition
   F-9




---



##### Table of Contents



Certain Concentrations
   Year Ended December 31,2008
    
    
    2007
    
    
    2006DCP Midstream
    
    
    10
    %
    
    
    12
    %
    
    
    (a
    )Cokinos
    
    
    (a
    )
    
    
    (a
    )
    
    
    11
    %Louis Dreyfus Corporation
    
    
    11
    %
    
    
    16
    %
    
    
    12
    %Texon LP
    
    
    23
    %
    
    
    32
    %
    
    
    22
    %Crosstex
    
    
    11
    %
    
    
    (a
    )
    
    
    14
    %Laclede Energy
    
    
    11
    %
    
    
    (a
    )
    
    
    (a
    )
 (a)
    
    Less than 10 percent Fair Value of Financial Instruments
  Derivative Instruments
   New Accounting Standards
    F-10




---



##### Table of Contents



Note
2  Convertible Preferred Stock
   Dividends
 Mandatory conversion
 Conversion rights
  Note 3  Earnings Per Share
    F-11




---



##### Table of Contents



Income (loss)
    
    
    Shares
    
    
    PerFor the Year Ended December 31, 2008
    
    (Numerator)
    
    
    (Denominator)
    
    
    Share AmountBASIC EPSNet 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
    )
 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
    
    
    
    
    
    
    515DILUTED 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
  Note 4  Share Based Compensation
    F-12




---



##### 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.
   Years Ended December 31,2008
    
    
    2007
    
    
    2006Stock options:Incentive Stock Options
    
    $
    1,316
    
    
    $
    1,250
    
    
    $
    526Non-Qualified Stock Options
    
    
    2,729
    
    
    
    1,869
    
    
    
    1,344Restricted stock
    
    
    5,537
    
    
    
    6,699
    
    
    
    3,781Share based compensation
    
    $
    9,582
    
    
    $
    9,818
    
    
    $
    5,651
   Stock Options
    F-13




---



##### Table of Contents



Years Ended December 31,2008
    
    
    2007
    
    
    2006Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    54.9% - 69.8
    %
    
    
    55.7% - 58.5
    %
    
    
    59.0% - 62.8
    %Risk-free rate
    
    
    1.7% - 3.6
    %
    
    
    4.0% - 5.1
    %
    
    
    4.4% - 5.1
    %Expected term
    
    6 years
    
    
    6 years
    
    
    6 yearsForfeiture rate
    
    
    5.0
    %
    
    
    5.0
    %
    
    
    8.4
    %Stock options granted (1)
    
    
    563,900
    
    
    
    440,676
    
    
    
    679,189Wgtd. avg. grant date
fair value per share
    
    $
    9.45
    
    
    $
    7.29
    
    
    $
    6.69Fair value of grants (1)
    
    $
    5,330,000
    
    
    $
    3,212,000
    
    
    $
    4,543,000
 
 (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
    
    
    2,580,700
    
    
    $
    6.65Granted
    
    
    563,900
    
    
    
    17.08Expired/cancelled/forfeited
    
    
    (73,795
    )
    
    
    11.90Exercised
    
    
    (520,341
    )
    
    
    3.65Outstanding at end of year
    
    
    2,550,464
    
    
    
    9.42
    
    
    6.9 years
    
    $
    3,551Options exercisable at end of year
    
    
    1,541,267
    
    
    $
    5.95
    
    
    5.7 years
    
    $
    3,539Options expected to vest
    
    
    958,737
    
    
    
    14.71
    
    
    8.5 years
    
    $
    12
   Range of
    
    Options
    
    
    Wgtd. Avg.
    
    
    Wgtd. Avg.
    
    
    Options
    
    
    Wgtd. Avg.Exercise
    
    Outstanding
    
    
    Remaining
    
    
    Exercise
    
    
    Exercisable
    
    
    ExercisePrice
    
    12/31/08
    
    
    Contractual Life
    
    
    Price
    
    
    12/31/08
    
    
    Price$1.53 - $3.20
    
    
    663,667
    
    
    4.3 years
    
    $
    2.83
    
    
    
    663,667
    
    
    $
    2.83$3.21 - $10.00
    
    
    393,898
    
    
    5.9 years
    
    $
    4.45
    
    
    
    378,565
    
    
    $
    4.36$10.01 - $15.00
    
    
    968,824
    
    
    7.8 years
    
    $
    11.56
    
    
    
    499,035
    
    
    $
    11.31$15.01 - $22.40
    
    
    524,075
    
    
    9.2 years
    
    $
    17.54
    
    
    
    
    
    
    
    2,550,464
    
    
    6.9 years
    
    $
    9.42
    
    
    
    1,541,267
    
    
    $
    5.95
 Restricted Stock
   F-14




---



##### Table of Contents



Wgtd. Avg.Number of
    
    

Fair Value perShares
    
    
    ShareOutstanding at beginning of year
    
    
    1,285,454
    
    
    $
    11.18Granted
    
    
    326,853
    
    
    
    16.53Expired/cancelled/forfeited
    
    
    (102,119
    )
    
    
    11.42Lapse of restrictions
    
    
    (408,580
    )
    
    
    11.15Outstanding at December 31, 2008
(1)
    
    
    1,101,608
    
    
    $
    12.76
 
 (1)
    
    At December 31, 2008, the weighted average remaining life of restricted stock outstanding was 3.1 years and the
intrinsic value of restricted stock outstanding, using the closing stock price on December 31, 2008, was $7.4 million. Note 5  Asset Retirement Obligations
  Asset retirement obligation at January 1, 2008
    
    $
    17,451Liabilities incurred during 2008
    
    
    9,464Liabilities settled during 2008
    
    
    (20,876
    )Accretion expense
    
    
    1,317Revisions in estimates
    
    
    18,277Asset retirement obligation at December 31, 2008
    
    
    25,633Less: current portion of asset retirement obligation
    
    
    (8,590
    )Long-term asset retirement obligation
    
    $
    17,043
 Note 6  Derivatives
    F-15




---



##### Table of Contents



Instrument
    
    
    
    
    
    
    WeightedProduction Period
    
    Type
    
    
    Daily Volumes
    
    
    Average PriceNatural Gas:January  June 2009
    
    Swap
    
    20,000 Mmbtu
    
    $
    5.622009
    
    Swap
    
    10,000 Mmbtu
    
    $
    7.462009
    
    Costless Collar
    
    30,000 Mmbtu
    
    $
    8.75 - 11.38Crude Oil:2009
    
    Costless Collar
    
    400 Bbls
    
    
    $
    100.00 - 168.50
   
    
    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.
   Fair Value Measurements UsingQuoted Prices
    
    
    Significant Other
    
    
    Significantin Active
    
    
    Observable
    
    
    UnobservableInstrument
    
    Markets (Level 1)
    
    
    Inputs (Level 2)
    
    
    Inputs (Level 3)Commodity Derivatives
    
    
    
    
    
    $
    40,571
    
    
    
    
  F-16




---



##### Table of Contents



Year EndedDecember 31, 2008Balance at beginning of period
    
    $
    (691
    )Total gains or losses (realized or unrealized):Included in earnings
    
    
    (8,284
    )Included in other comprehensive income
    
    
    41,262Purchases, issuances and settlements
    
    
    8,284Transfers in and out of Level 3 (1)
    
    
    (40,571
    )Balance at end of period
    
    $
    
 
 (1)
    
    During 2008, the Company began deriving the fair value of its derivative instruments using an
independent third-partys valuation model that utilizes market-corroborated inputs that are
observable over the term of the derivative contract. Note 7  Debt
       F-17




---



##### Table of Contents



Note 8  Related Party Transactions
      F-18




---



##### Table of Contents



Note 9  Ceiling Test
   Note 10  Investment in Oil and Gas Properties
  amounts in thousands
 For the Year-Ended December 31,2008
    
    
    2007
    
    
    2006Acquisition costs:Proved
    
    $
    3,014
    
    
    $
    1,253
    
    
    $
    7,515Unproved
    
    
    58,826
    
    
    
    32,833
    
    
    
    12,744Exploration costs:Proved
    
    
    149,811
    
    
    
    104,669
    
    
    
    70,526Unproved
    
    
    6,048
    
    
    
    15,908
    
    
    
    7,457Development costs
    
    
    118,891
    
    
    
    71,973
    
    
    
    61,643Capitalized general and
administrative and interest costs
    
    
    21,181
    
    
    
    14,061
    
    
    
    10,841Total costs incurred
    
    $
    357,771
    
    
    $
    240,697
    
    
    $
    170,726
 For the Year-Ended December 31,2008
    
    
    2007
    
    
    2006Accumulated depreciation, depletion
and amortization (DD&A)Balance, beginning of year
    
    $
    (432,530
    )
    
    $
    (314,869
    )
    
    $
    (210,774
    )Provision for DD&A
    
    
    (131,348
    )
    
    
    (116,384
    )
    
    
    (82,928
    )Ceiling test writedown
    
    
    (266,156
    )
    
    
    
    
    
    
    Sale of proved properties and other
    
    
    (2,256
    )
    
    
    (1,277
    )
    
    
    (21,167
    )Balance, end of year
    
    $
    (832,290
    )
    
    $
    (432,530
    )
    
    $
    (314,869
    )DD&A per Mcfe
    
    $
    3.89
    
    
    $
    3.70
    
    
    $
    3.23
   F-19




---



##### Table of Contents



Note 11  Income Taxes
  December 31,2008
    
    
    2007Net operating loss carryforwards
    
    $
    13,301
    
    
    $
    31,542Percentage depletion carryforward
    
    
    2,619
    
    
    
    2,928Alternative minimum tax credit
    
    
    144
    
    
    
    105Contributions carryforward and other
    
    
    156
    
    
    
    109Temporary differences:Oil and gas properties  full cost
    
    
    (30,207
    )
    
    
    (104,252
    )Hedges
    
    
    (15,011
    )
    
    
    255Compensation expense
    
    
    153
    
    
    
    153Deferred tax liability
    
    $
    (28,845
    )
    
    $
    (69,160
    )
    For the Year-Ended December 31,2008
    
    
    2007
    
    
    2006Amount computed using the statutory rate
    
    $
    (53,389
    )
    
    $
    22,499
    
    
    $
    13,507Increase (reduction) in taxes resulting
from:State & local taxes
    
    
    (3,357
    )
    
    
    1,414
    
    
    
    849Percentage depletion carryforward
    
    
    310
    
    
    
    (860
    )
    
    
    (74
    )Non-deductible stock option expense (1)
    
    
    490
    
    
    
    462
    
    
    
    195Other
    
    
    365
    
    
    
    149
    
    
    
    127Income tax expense (benefit)
    
    $
    (55,581
    )
    
    $
    23,664
    
    
    $
    14,604
 
 (1)
    
    Relates to compensation
expense recognized on the vesting of Incentive Stock Options.  F-20




---



##### Table of Contents



Note 12  Commitments and Contingencies
  Lease Commitments
   2009
    
    $
    1,0702010
    
    
    1,0392011
    
    
    8932012
    
    
    7502013
    
    
    63Thereafter
    
    
    $
    3,815
  Note 13  Oil and Gas Reserve Information  Unaudited
     F-21




---



##### Table of Contents



Oil
    
    
    Natural Gasin
    
    
    and NGL inMBbls
    
    
    MMcfeProved 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
    
    
    
    142,468Revisions of previous estimates
    
    
    (21
    )
    
    
    (11,126
    )Extensions, discoveries and other additions
    
    
    499
    
    
    
    69,800Purchase of producing properties
    
    
    62
    
    
    
    1,047Sale of producing properties
    
    
    
    
    
    
    (295
    )Production
    
    
    (681
    )
    
    
    (29,708
    )Proved reserves as of December 31, 2008
    
    
    2,201
    
    
    
    172,186Proved developed reservesAs of December 31, 2006
    
    
    2,528
    
    
    
    81,487As of December 31, 2007
    
    
    2,070
    
    
    
    95,639As of December 31, 2008
    
    
    2,030
    
    
    
    124,020
  F-22




---



##### Table of Contents



December 31,Standardized Measure
    
    2008
    
    
    2007
    
    
    2006Future cash flows
    
    $
    889,732
    
    
    $
    1,155,236
    
    
    $
    786,829Future production costs
    
    
    (275,117
    )
    
    
    (240,849
    )
    
    
    (168,037
    )Future development costs
    
    
    (148,167
    )
    
    
    (134,993
    )
    
    
    (102,778
    )Future income taxes
    
    
    (14,479
    )
    
    
    (143,683
    )
    
    
    (70,615
    )Future net cash flows
    
    
    451,969
    
    
    
    635,711
    
    
    
    445,39910% annual discount
    
    
    (137,182
    )
    
    
    (188,453
    )
    
    
    (112,566
    )Standardized measure of
discounted future net cash flows
    
    $
    314,787
    
    
    $
    447,258
    
    
    $
    332,833
 Year Ended December 31,Changes in Standardized Measure
    
    2008
    
    
    2007
    
    
    2006Standarized measure at beginning of year
    
    $
    447,258
    
    
    $
    332,833
    
    
    $
    483,412Sales and transfers of oil and gas produced,
net of production costs
    
    
    (259,950
    )
    
    
    (206,477
    )
    
    
    (152,550
    )Changes in price, net of future production costs
    
    
    (172,214
    )
    
    
    153,961
    
    
    
    (221,118
    )Extensions and discoveries, net of future
production and development costs
    
    
    147,089
    
    
    
    95,850
    
    
    
    124,138Changes in estimated future development costs,
net of development costs incurred during this
period
    
    
    36,567
    
    
    
    12,014
    
    
    
    18,016Revisions of quantity estimates
    
    
    (25,037
    )
    
    
    66,025
    
    
    
    5,199Accretion of discount
    
    
    54,065
    
    
    
    38,431
    
    
    
    63,973Net change in income taxes
    
    
    80,988
    
    
    
    (41,913
    )
    
    
    104,841Purchase of reserves in place
    
    
    1,944
    
    
    
    14,108
    
    
    
    Sale of reserves in place
    
    
    (1,378
    )
    
    
    (9,293
    )
    
    
    (70,765
    )Changes in production rates (timing) and other
    
    
    5,455
    
    
    
    (8,281
    )
    
    
    (22,313
    )Standardized measure at end of year
    
    $
    314,787
    
    
    $
    447,258
    
    
    $
    332,833
   F-23




---



##### Table of Contents



Note 14  Summarized Quarterly Financial Information  Unaudited
  Quarter EndedMarch-31
    
    
    June-30
    
    
    September-30
    
    
    December-312008:Revenues
    
    $
    76,550
    
    
    $
    92,868
    
    
    $
    78,276
    
    
    $
    66,264Income (loss) from operations (1)
    
    
    24,719
    
    
    
    36,793
    
    
    
    28,847
    
    
    
    (242,900
    )Net income (loss) available to common
stockholders (1)
    
    
    14,161
    
    
    
    21,775
    
    
    
    16,758
    
    
    
    (154,794
    )Earnings (loss) per share:Basic
    
    $
    0.29
    
    
    $
    0.45
    
    
    $
    0.34
    
    
    $
    (3.14
    )Diluted
    
    $
    0.28
    
    
    $
    0.41
    
    
    $
    0.32
    
    
    $
    (3.14
    )2007:Revenues
    
    $
    63,527
    
    
    $
    66,556
    
    
    $
    65,169
    
    
    $
    67,082Income from operations
    
    
    17,351
    
    
    
    15,504
    
    
    
    12,908
    
    
    
    18,520Net income available to common stockholders
    
    
    10,814
    
    
    
    9,630
    
    
    
    7,964
    
    
    
    10,837Earnings per share:Basic
    
    $
    0.23
    
    
    $
    0.20
    
    
    $
    0.16
    
    
    $
    0.22Diluted
    
    $
    0.22
    
    
    $
    0.19
    
    
    $
    0.16
    
    
    $
    0.22
 (1)
    
    Income from operations and net income available to common stockholders reported during
the three months ended September 30, 2008 include a gain on the sale of gas gathering
systems totaling $26.7 million (see Note 1). Loss from operations and net loss available
to common stockholders reported during the three months ended December 31, 2008 include a
non-cash ceiling test write-down of $246.8 million (see Note 9).  F-24




---



##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description2.1
    
    

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
    
    
    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).3.3
    
    
    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
    
    
    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).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.*10.3
    
    
    Form of Nonstatutory Stock Option Agreement under the Incentive Plan.*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.10.5
    
    
    PetroQuest Energy, Inc. Annual Cash Bonus Plan (incorporated herein by
reference to Exhibit 10.1 to Form 8-K filed August 18, 2006).10.6
    
    
    Amendment to the PetroQuest Energy, Inc. Annual Cash Bonus Plan
(incorporated herein by reference to Exhibit 10.7 to Form 8-K filed January 6, 2009).




---



##### Table of Contents



Exhibit No.
    
    Description10.7
    
    
    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).10.8
    
    
    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).10.9
    
    
    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 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).10.10
    
    
    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).10.11
    
    
    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).10.12
    
    
    Amendment No. 5 to Second Amended and Restated Credit Agreement,
dated effective as of April 1, 2008, among PetroQuest Energy, L.L.C., PetroQuest
Energy, Inc., Pittrans, Inc., TDC Energy LLC, JPMorgan 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 April 25, 2008).10.13
    
    
    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).10.14
    
    
    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).10.15
    
    
    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).10.16
    
    
    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).10.17
    
    
    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).10.18
    
    
    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).




---



##### Table of Contents



Exhibit No.
    
    Description*10.19
    
    
    Amended Executive Employment Agreement dated effective as of December 31,
2008, between Mark K. Stover and PetroQuest Energy, Inc.*10.20
    
    
    Amended Executive Employment Agreement dated effective as of
December 31, 2008, between Dalton F. Smith III and PetroQuest Energy, Inc.*10.21
    
    
    Amended Executive Employment Agreement dated effective as of
December 31, 2008, between J. Bond Clement and PetroQuest Energy, Inc.10.22
    
    
    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).10.23
    
    
    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).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.*23.3
    
    
    Consent of Netherland, Sewell and Associates, Inc.*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