##### 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, 2009
 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 
Preferred Stock Purchase Rights
    
    New York Stock Exchange
New York Stock Exchange
  o þ
 o þ
 þ o
 o o
 o
  o Large accelerated filer
    
    þ Accelerated filer
    
    o Non-accelerated filer
    
    o Smaller reporting company
 o þ




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##### 



TABLE OF CONTENTS
 Page No.PART IItems
1 and 2 Business and Properties
    
    
    3Item 1A. Risk Factors
    
    
    15Item 1B. Unresolved Staff Comments
    
    
    26Item 3. Legal Proceedings
    
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    
    26PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    27Item 6. Selected Financial Data
    
    
    29Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    29Item 7A. Quantitative and Qualitative Disclosure About Market Risk
    
    
    39Item 8. Financial Statements and Supplementary Data
    
    
    40Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    40Item 9A. Controls and Procedures
    
    
    40Item 9B. Other Information
    
    
    43PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    43Item 11. Executive Compensation
    
    
    43Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
    
    
    43Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    43Item 14. Principal Accountant Fees and Services
    
    
    43PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    43Index to Financial Statements
    
    
    F-1Exhibit 21.1Exhibit 23.1Exhibit 23.2Exhibit 23.3Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2Exhibit 99.1Exhibit 99.2
   1




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




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




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Business Strategy
 Maintain Our Financial Flexibility.
 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.
 2009 Financial and Operational Summary
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Oil and Gas Reserves
  New SEC
    
    
    Previous SECMethodology
    
    
    MethodologyOil price (per Bbl) pre differentials
    
    $
    61.18
    
    
    $
    79.36Oil price (per Bbl) with differentials
    
    $
    60.57
    
    
    $
    78.75Gas price (per Mcfe) pre differentials
    
    $
    3.87
    
    
    $
    5.79Gas price (per Mcfe) with differentials
    
    $
    2.97
    
    
    $
    5.01Total Proved Reserves (Bcfe)
    
    
    178.9
    
    
    
    202.2Standardized Measure (M$)
    
    $
    174,288
    
    
    $
    344,466
     5




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Natural Gas andOil (MBbls)
    
    
    NGL (Mmcfe)
    
    
    Total MmcfeProved Developed
    
    
    1,775
    
    
    
    100,430
    
    
    
    111,080Proved Undeveloped
    
    
    156
    
    
    
    66,931
    
    
    
    67,867Total Proved
    
    
    1,931
    
    
    
    167,361
    
    
    
    178,947
    ProvedProved Developed
    
    
    Undeveloped
    
    
    Total Proved(M$)
    
    
    (M$)
    
    
    (M$)Estimated pre-tax future net cash flows (1)
    
    $
    233,201
    
    
    $
    39,070
    
    
    $
    272,271Discounted pre-tax future net cash flows (PV-10) (1)
    
    $
    179,520
    
    
    $
    (2,525
    )
    
    $
    176,995Total standardized measure of discounted future net cash flows
    
    
    
    
    
    
    
    
    
    $
    174,288
 
 (1)
    
    Estimated pre-tax future net cash flows and discounted pre-tax future net cash flows (PV-10)
are non-GAAP measures because they exclude income tax effects. Management believes these non-GAAP
Measures are useful to investors as they are based on prices, costs and discount factors which are
consistent from company to company, while the standardized measure of discounted future net cash
flows is dependent on the unique tax situation of each individual company. As a result, the
Company believes that investors can use these non-GAAP measures as a basis for comparison of the
relative size and value of the Companys reserves to other companies. The Company also understands
that securities analysts and rating agencies use these non-GAAP measures in similar ways. The
following table reconciles undiscounted and discounted future net cash flows to standardized
measure of discounted cash flows as of December 31, 2009: Total Proved (M$)Estimated pre-tax future net cash flows
    
    $
    272,27110% annual discount
    
    
    (95,276
    )Discounted pre-tax future net cash flows
    
    
    176,995Future income taxes discounted at 10%
    
    
    (2,707
    )Standardized measure of discounted future net cash flows
    
    $
    174,288
   6




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Core Areas
 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;
  7




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
    
    state and federal regulation of oil and natural gas production; and
    
    federal regulation of gas sold or transported in interstate commerce.
    Production, Pricing and Production Cost Data
  Year Ended December 31,2009
    
    
    2008
    
    
    2007Production:Oil (Bbls)
    
    
    600,124
    
    
    
    680,571
    
    
    
    1,079,672Gas (Mcfe)
    
    
    30,598,092
    
    
    
    29,708,204
    
    
    
    24,965,789Total Production (Mcfe)
    
    
    34,198,836
    
    
    
    33,791,630
    
    
    
    31,443,821Average sales prices (1):Oil (per Bbl)
    
    $
    59.31
    
    
    $
    100.61
    
    
    $
    71.25Gas (per Mcfe)
    
    
    3.37
    
    
    
    8.36
    
    
    
    6.78Per Mcfe
    
    
    4.06
    
    
    
    9.38
    
    
    
    7.83Average Production Cost per Mcfe (2)
    
    $
    1.13
    
    
    $
    1.32
    
    
    $
    1.02
 (1)
    
    Does not include the effect of hedges(2)
    
    Production costs do not include production taxes
  8




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Oil and Gas Drilling Activity
  2009
    
    
    2008
    
    
    2007Gross
    
    
    Net
    
    
    Gross
    
    
    Net
    
    
    Gross
    
    
    NetExploration:Productive
    
    
    64
    
    
    
    5.84
    
    
    
    103
    
    
    
    27.64
    
    
    
    54
    
    
    
    26.12Non-productive
    
    
    2
    
    
    
    0.48
    
    
    
    6
    
    
    
    1.63
    
    
    
    9
    
    
    
    2.86Total
    
    
    66
    
    
    
    6.32
    
    
    
    109
    
    
    
    29.27
    
    
    
    63
    
    
    
    28.98Development:Productive
    
    
    16
    
    
    
    1.70
    
    
    
    41
    
    
    
    10.77
    
    
    
    22
    
    
    
    7.89Non-productive
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    0.15Total
    
    
    16
    
    
    
    1.70
    
    
    
    41
    
    
    
    10.77
    
    
    
    24
    
    
    
    8.04
  Leasehold Acreage
  Leasehold AcreageDeveloped
    
    
    UndevelopedGross
    
    
    Net
    
    
    Gross
    
    
    NetAlabama
    
    
    135
    
    
    
    46
    
    
    
    3,432
    
    
    
    2,200Arkansas
    
    
    17,785
    
    
    
    5,035
    
    
    
    37,416
    
    
    
    11,802Louisiana
    
    
    7,304
    
    
    
    2,301
    
    
    
    8,955
    
    
    
    3,350Mississippi
    
    
    1,628
    
    
    
    1,178
    
    
    
    
    
    
    
    Oklahoma
    
    
    73,387
    
    
    
    36,427
    
    
    
    27,775
    
    
    
    25,826Texas
    
    
    45,366
    
    
    
    24,660
    
    
    
    21,515
    
    
    
    18,430Federal Waters
    
    
    66,731
    
    
    
    28,308
    
    
    
    16,416
    
    
    
    11,704Total
    
    
    212,336
    
    
    
    97,955
    
    
    
    115,509
    
    
    
    73,312
  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;
  9




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
    
    back-ins and reversionary interests existing under purchase agreements and leasehold
assignments;
    
    liens that arise in the normal course of operations, such as those for unpaid taxes,
statutory liens securing obligations to unpaid suppliers and contractors and contractual
liens under operating agreements; pooling, unitization and communitization agreements,
declarations and orders; and
    
    easements, restrictions, rights-of-way and other matters that commonly affect property.
  Federal Regulations
 Sales and Transportation of Natural Gas
     Sales and Transportation of Crude Oil.
  10




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Federal Leases.
    Federal, State or American Indian Leases.
   11




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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.
   12




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Solid and Hazardous Waste.
  Superfund.
 Oil Pollution Act.
  Clean Water Act.
 Air Emissions.
  13




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Coastal Coordination.
   OSHA.
  Corporate Offices
   14




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Employees
  Available Information
  
 ITEM 1A.
    
    RISK FACTORS
 Risks Related to Our Business, Industry and Strategy
 Oil and natural gas prices are volatile, and natural gas prices have been significantly depressed
since the middle of 2008. An extended decline in the prices of oil and natural gas would likely
have a material adverse effect on our financial condition, liquidity, ability to meet our financial
obligations and results of operations.
   
    
    relatively minor changes in the supply of or the demand for oil and natural
gas;
    
    the condition of the United States and worldwide economies;
    
    market uncertainty;
    
    the level of consumer product demand;
    
    weather conditions in the United States, such as hurricanes;
    
    the actions of the Organization of Petroleum Exporting Countries;
    
    domestic and foreign governmental regulation and taxes, including price
controls adopted by the Federal Energy Regulatory Commission;
    
    political conditions or hostilities in oil and natural gas producing
regions, including the Middle East and South America;
    
    the price and level of foreign imports of oil and natural gas; and
    
    the price and availability of alternate fuel sources.
   15




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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 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.
    16




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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.
   The recent financial crisis and continuing uncertain economic conditions may have material adverse
impacts on our business and financial condition that we currently cannot predict.
   
    
    the demand for oil and natural gas may decline due to continuing uncertain
economic conditions which could negatively impact the revenues, margins and
profitability of our oil and natural gas business;
 
    
    our ability to access the capital markets may be restricted at a time when
we would like, or need, to raise capital for our business including for exploration
and/or development of our reserves;
 
    
    the tightening of credit or lack of credit availability to our customers
could adversely affect our ability to collect our trade receivables; or
 
    
    counterparties may not fulfill their delivery or purchase obligations.
 Lower oil and natural gas prices may cause us to record ceiling test write-downs, which could
negatively impact our results of operations.
   17




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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.
  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;
  18




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
    
    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.
  Approximately half of our production is exposed to the additional risk of severe weather, including
hurricanes and tropical storms, as well as flooding, coastal erosion and sea level rise.
   19




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Losses and liabilities from uninsured or underinsured drilling and operating activities could have
a material adverse effect on our financial condition and 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;
 
    
    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.
  20




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Our estimates of proved reserves have been prepared under revised SEC rules which went into effect
for fiscal years ending on or after December 31, 2009, which may make comparisons to prior periods
difficult and could limit our ability to book additional proved undeveloped reserves in the future.
   Our actual production, revenues and expenditures related to our reserves are likely to differ from
our estimates of proved reserves. We may experience production that is less than estimated and
drilling costs that are greater than estimated in our reserve report. These differences may be
material.
  
    
    historical production from the area compared with production from other
similar producing wells;
 
    
    the assumed effects of regulations by governmental agencies;
 
    
    assumptions concerning future oil and natural gas prices; and
 
    
    assumptions concerning future operating costs, severance and excise taxes,
development costs and work-over and remedial costs.
  
    
    the quantities of oil and natural gas that are ultimately recovered;
 
    
    the production and operating costs incurred;
 
    
    the amount and timing of future development expenditures; and
 
    
    future oil and natural gas sales prices.
  21




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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.
     22




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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.
  Federal and state legislation and regulatory initiatives relating to hydraulic fracturing could
result in increased costs and additional operating restrictions or delays.
   23




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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.
    We cannot control the activities on properties we do not operate and we are unable to ensure the
proper operation and profitability of these non-operated properties.
  
    
    timing and amount of capital expenditures;
 
    
    expertise and diligence in adequately performing operations and complying
with applicable agreements;
 
    
    financial resources;
 
    
    inclusion of other participants in drilling wells; and
 
    
    use of technology.
   24




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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.
   25




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Provisions in certificate of incorporation, bylaws and shareholder rights plan could delay or
prevent a change in control of our company, even if that change would be beneficial to our
stockholders.
  
    
    the charter authorization of blank check preferred stock;
    
    provisions that directors may be removed only for cause, and then only on
approval of holders of a majority of the outstanding voting stock;
 
    
    a restriction on the ability of stockholders to call a special meeting and
take actions by written consent; and
 
    
    provisions regulating the ability of our stockholders to nominate directors
for election or to bring matters for action at annual meetings of our stockholders.
  We do not intend to pay dividends on our common stock and our ability to pay dividends on our
common stock is restricted.
  
 ITEM 1B.
    
    UNRESOLVED STAFF COMMENTS
  
 ITEM 3.
    
    LEGAL PROCEEDINGS
  
 ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   26




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PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITES
  
  27




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Market Price of and Dividends on Common Stock
  High
    
    
    Low20081st Quarter
    
    $
    18.07
    
    
    $
    10.772nd Quarter
    
    
    28.16
    
    
    
    17.173rd Quarter
    
    
    29.18
    
    
    
    13.154th Quarter
    
    
    15.09
    
    
    
    4.4520091st Quarter
    
    $
    8.65
    
    
    $
    0.612nd Quarter
    
    
    5.90
    
    
    
    2.143rd Quarter
    
    
    6.52
    
    
    
    2.644th Quarter
    
    
    8.08
    
    
    
    5.14
    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, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    November 1 - November 30, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 1 - December 31, 2009
    
    
    6,324
    
    
    $
    5.39
    
    
    
    
    
    
    
    
 
 (1)
    
    All shares repurchased were surrendered by employees to pay tax withholding upon the vesting of restricted stock awards.  28




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ITEM 6.
    
    SELECTED FINANCIAL DATA
  Year Ended December 31,2009 (1)
    
    
    2008 (2)
    
    
    2007
    
    
    2006
    
    
    2005(in thousands except per share data)Revenues
    
    $
    218,875
    
    
    $
    313,958
    
    
    $
    262,334
    
    
    $
    199,520
    
    
    $
    120,552Net income (loss) available to common stockholders
    
    
    (95,330
    )
    
    
    (102,100
    )
    
    
    39,245
    
    
    
    23,986
    
    
    
    21,417Net income (loss) available to common stockholders per share:Basic
    
    
    (1.72
    )
    
    
    (2.08
    )
    
    
    0.79
    
    
    
    0.49
    
    
    
    0.46Diluted
    
    
    (1.72
    )
    
    
    (2.08
    )
    
    
    0.78
    
    
    
    0.49
    
    
    
    0.44Oil and gas properties, net
    
    
    321,875
    
    
    
    512,861
    
    
    
    554,850
    
    
    
    431,814
    
    
    
    365,183Total assets
    
    
    410,459
    
    
    
    670,249
    
    
    
    644,347
    
    
    
    518,290
    
    
    
    431,470Long-term debt
    
    
    178,267
    
    
    
    278,998
    
    
    
    148,755
    
    
    
    195,537
    
    
    
    158,340Stockholders equity
    
    
    162,105
    
    
    
    237,487
    
    
    
    302,317
    
    
    
    189,711
    
    
    
    144,537
 (1)
    
    The year ended December 31, 2009 includes a ceiling test write-down of $156.1 million.(2)
    
    The year ended December 31, 2008 includes a ceiling test write-down of $266.2 million. 
 ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Overview
     29




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##### Table of Contents



Critical Accounting Policies and Estimates
 Reserve Estimates
   Full Cost Method of Accounting
   30




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##### Table of Contents



Future Abandonment Costs
  Derivative Instruments
   31




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##### Table of Contents



New Accounting Standards
        32




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##### Table of Contents



Results of Operations
  Year Ended December 31,2009
    
    
    2008
    
    
    2007Production:Oil (Bbls)
    
    
    600,124
    
    
    
    680,571
    
    
    
    1,079,672Gas (Mcfe)
    
    
    30,598,092
    
    
    
    29,708,204
    
    
    
    24,965,789Total Production (Mcfe)
    
    
    34,198,836
    
    
    
    33,791,630
    
    
    
    31,443,821Sales:Total oil sales
    
    $
    41,150,657
    
    
    $
    66,349,344
    
    
    $
    76,138,234Total gas sales
    
    
    177,493,256
    
    
    
    242,273,860
    
    
    
    180,084,794Total oil and gas sales
    
    $
    218,643,913
    
    
    $
    308,623,204
    
    
    $
    256,223,028Average sales prices:Oil (per Bbl)
    
    $
    68.57
    
    
    $
    97.49
    
    
    $
    70.52Gas (per Mcfe)
    
    
    5.80
    
    
    
    8.16
    
    
    
    7.21Per Mcfe
    
    
    6.39
    
    
    
    9.13
    
    
    
    8.15
  Comparison of Results of Operations for the Years Ended December 31, 2009 and 2008
  Production
   Prices
 Revenue
  33




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##### Table of Contents



Expenses
   Years Ended December 31,2009
    
    
    2008Stock options:Incentive Stock Options
    
    $
    835
    
    
    $
    1,316Non-Qualified Stock Options
    
    
    2,024
    
    
    
    2,729Restricted stock
    
    
    3,469
    
    
    
    5,537Share-based compensation
    
    $
    6,328
    
    
    $
    9,582
       34




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##### Table of Contents



Comparison of Results of Operations for the Years Ended December 31, 2008 and 2007
  Production
  Prices
 Revenue
  Expenses
   35




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##### Table of Contents



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
      Liquidity and Capital Resources
     36




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Source of Capital: Operations
  Source of Capital: Debt
       37




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##### Table of Contents



Source of Capital: Issuance of Securities
   Source of Capital: Divestitures
  Use of Capital: Exploration and Development
    38




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##### Table of Contents



Contractual Obligations
  AfterTotal
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    201410 3/8% senior notes (1)
    
    $
    186,962
    
    
    $
    15,563
    
    
    $
    15,563
    
    
    $
    155,836
    
    
    $
    
    
    
    $
    
    
    
    $
    Bank debt (1)
    
    
    30,927
    
    
    
    870
    
    
    
    943
    
    
    
    29,114
    
    
    
    
    
    
    
    
    
    
    
    Operating leases (2)
    
    
    2,793
    
    
    
    1,087
    
    
    
    894
    
    
    
    749
    
    
    
    63
    
    
    
    
    
    
    
    Capital projects (3)
    
    
    23,916
    
    
    
    4,517
    
    
    
    1,703
    
    
    
    1,267
    
    
    
    1,486
    
    
    
    682
    
    
    
    14,261Total
    
    $
    244,598
    
    
    $
    22,037
    
    
    $
    19,103
    
    
    $
    186,966
    
    
    $
    1,549
    
    
    $
    682
    
    
    $
    14,261
 (1)
    
    Includes principal and estimated interest.(2)
    
    Consists primarily of leases for office space and office equipment.(3)
    
    Consists of estimated future obligations to abandon our oil and gas properties. 
 ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
       Instrument
    
    
    
    
    
    
    WeightedProduction Period
    
    Type
    
    
    Daily Volumes
    
    
    Average PriceNatural Gas:2010
    
    Costless Collar
    
    30,000 Mmbtu
    
    $
    5.83  6.54
   39




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##### Table of Contents



ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
  
 ITEM 9A.
    
    CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  i.
    
    that the Companys disclosure controls and procedures are designed to ensure (a) that
information required to be disclosed by the Company in the reports it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SECs rules and forms, and (b) that such information is
accumulated and communicated to the Companys management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure; and
 ii.
    
    that the Companys disclosure controls and procedures are effective.
  Changes in Internal Control Over Financial Reporting
   40




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##### Table of Contents



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

Charles T. GoodsonChairman and
Chief Executive Officer/s/ J. Bond Clement

J. Bond ClementExecutive Vice President-
Chief Financial Officer
  41




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
       /s/ Ernst & Young LLP
 
  42




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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
    Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2009 and 2008Consolidated Statements of Operations for the three years ended December 31, 2009Consolidated Statements of Cash Flows for the three years ended December 31, 2009Consolidated Statements of Stockholders Equity for the three years ended December 31, 2009Consolidated Statements of Comprehensive Income for the three years ended December 31, 2009Notes to Consolidated Financial Statements
    2.1
    
    
    Plan and Agreement of Merger by and among Optima Petroleum
Corporation, Optima Energy (U.S.) Corporation, its wholly-owned subsidiary, and
Goodson Exploration Company, NAB Financial L.L.C., Dexco Energy, Inc., American
Explorer, L.L.C. (incorporated herein by reference to Appendix G of the Proxy
Statement on Schedule 14A filed July 22, 1998).3.1
    
    
    Certificate of Incorporation of PetroQuest Energy, Inc. (incorporated
herein by reference to Exhibit 4.1 to Form 8-K filed September 16, 1998).3.2
    
    
    Certificate of Amendment to Certificate of Incorporation dated May
14, 2008 (incorporated herein by reference to Exhibit 3.1 to Form 8-K filed June
23, 2009).3.3
    
    
    Bylaws of PetroQuest Energy, Inc., as amended of December 20, 2007
(incorporated herein by reference to Exhibit 3.1 to Form 8-K filed December 21,
2007).3.4
    
    
    Certificate of Domestication of Optima Petroleum Corporation
(incorporated herein by reference to Exhibit 4.4 to Form 8-K filed September 16,
1998).
  43




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##### Table of Contents



3.5
    
    
    Certificate of Designations, Preferences, Limitations and Relative
Rights of The Series a Junior Participating Preferred Stock of PetroQuest Energy,
Inc. (incorporated herein by reference to Exhibit A of the Rights Agreement
attached as Exhibit 1 to Form 8-A filed November 9, 2001).3.6
    
    
    Certificate of Designations establishing the 6.875% Series B
cumulative convertible perpetual preferred stock, dated September 24, 2007
(incorporated herein by reference to Exhibit 3.1 to Form 8-K filed on September
24, 2007).4.1
    
    
    Rights Agreement dated as of November 7, 2001 between PetroQuest
Energy, Inc. and American Stock Transfer & Trust Company, as Rights Agent,
including exhibits thereto (incorporated herein by reference to Exhibit 1 to Form
8-A filed November 9, 2001).4.2
    
    
    Form of Rights Certificate (incorporated herein by reference to
Exhibit C of the Rights Agreement attached as Exhibit 1 to Form 8-A filed November
9, 2001).4.3
    
    
    Indenture, dated May 11, 2005, among PetroQuest Energy, Inc.,
PetroQuest Energy, LLC, the Subsidiary Guarantors identified therein, and the Bank
of New York Trust Company, N.A. (incorporated herein by reference to Exhibit 4.1
to Form 8-K filed May 11, 2005).10.1
    
    
    PetroQuest Energy, Inc. 1998 Incentive Plan, as amended and restated
effective May 14, 2008 (the Incentive Plan) (incorporated herein by reference to
Appendix A of the Proxy Statement on Schedule 14A filed April 9, 2008).10.2
    
    
    Form of Incentive Stock Option Agreement for executive officers
(including Charles T. Goodson, W. Todd Zehnder, Arthur M. Mixon, III, Daniel G.
Fournerat, Stephen H. Green, Mark K. Stover, Dalton F. Smith III and J. Bond Clement)
under the Incentive Plan (incorporated herein by reference to Exhibit 10.2 to Form
10-K filed February 27, 2009).10.3
    
    
    Form of Nonstatutory Stock Option Agreement under the Incentive Plan
(incorporated herein by reference to Exhibit 10.3 to Form 10-K filed February 27,
2009).10.4
    
    
    Form of Restricted Stock Agreement for executive officers (including
Charles T. Goodson, W. Todd Zehnder, Arthur M. Mixon, III, Daniel G. Fournerat,
Stephen H. Green, Mark K. Stover, Dalton F. Smith III and J. Bond Clement) under the
Incentive Plan (incorporated herein by reference to Exhibit 10.4 to Form 10-K filed
February 27, 2009).10.5
    
    
    PetroQuest Energy, Inc. Annual 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
    
    
    Credit Agreement dated as of October 2, 2008, among PetroQuest Energy,
L.L.C., PetroQuest Energy, Inc., JPMorgan Chase Bank, N.A., Calyon New York Branch,
Bank of America, N.A., Wells Fargo Bank, N.A., and Whitney National Bank
(incorporated herein by reference to Exhibit 10.1 to Form 8-K filed October 6,
2008).10.8
    
    
    First Amendment to Credit Agreement dated as of March 24, 2009, among
PetroQuest Energy, Inc., PetroQuest Energy, L.L.C., TDC Energy LLC, JPMorgan
Chase Bank, N.A., Calyon New York Branch, Bank of America, N.A., Wells Fargo Bank,
N.A. and Whitney National Bank (incorporated herein by reference to Exhibit 10.1 to
Form 8-K filed March 24, 2009).10.9
    
    
    Second Amendment to Credit Agreement dated as of September 30, 2009,
among PetroQuest Energy, Inc., PetroQuest Energy, L.L.C., TDC Energy LLC, JPMorgan
Chase Bank, N.A., Calyon New York Branch, Bank of America, N.A., Wells Fargo Bank,
N.A. and Whitney National Bank (incorporated herein by reference to Exhibit 10.1 to
Form 8-K filed October 1, 2009).
  44




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##### Table of Contents



10.10
    
    
    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).10.11
    
    
    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).10.12
    
    
    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).10.13
    
    
    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).10.14
    
    
    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).10.15
    
    
    Amended Executive Employment Agreement dated effective as of December 31,
2008, between Mark
K. Stover and PetroQuest Energy, Inc. (incorporated herein by reference to
Exhibit 10.19 to Form 10-K filed February 27, 2009).10.16
    
    
    Amended Executive Employment Agreement dated effective as of
December 31, 2008, between Dalton F. Smith III and PetroQuest Energy, Inc.
(incorporated herein by reference to Exhibit 10.20 to Form 10-K filed February 27,
2009).10.17
    
    
    Amended Executive Employment Agreement dated effective as of
December 31, 2008, between J. Bond Clement and PetroQuest Energy, Inc. (incorporated
herein by reference to Exhibit 10.20 to Form 10-K filed February 27, 2009).10.18
    
    
    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).10.19
    
    
    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.
  45




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##### Table of Contents



*31.2
    
    
    Certification of Chief Financial Officer pursuant to Rule 13-a-14(a)/Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as
amended.*32.1
    
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Executive
Officer.*32.2
    
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Financial
Officer.*99.1
    
    
    Reserve report letter as of December 31, 2009, as prepared by Ryder
Scott Company, L.P.*99.2
    
    
    Reserve report letter as of December 31, 2009, as prepared by
Netherland, Sewell and Associates, Inc.
 
 *
    
    Filed herewith.
    
    Management contract or compensatory plan or arrangement(b)
    
    Exhibits. See Item 15 (a) (3) above.(c)
    
    Financial Statement Schedules. None  46




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##### Table of Contents



GLOSSARY OF CERTAIN OIL AND NATURAL GAS TERMS
  Bbl
 Bcf
 Bcfe
 Block
 Btu or British Thermal Unit
 Completion
 Condensate
 Deterministic estimate
 Developed acreage
 Development well
 Dry hole
 Exploratory well
 Extension well
 Farm-in or farm-out
 Field
 Gross acres or gross wells
 Lead
  47




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##### Table of Contents



MBbls
 Mcf
 Mcfe
 MMBls
 MMBtu
 MMcf
 MMcfe
 Net acres or net wells
 Possible reserves
 Probabilistic estimate
 Probable reserves
 Productive well
 Prospect
 Proved area
 Proved oil and gas reserves
 Proved properties
 Reasonable certainty
 Reliable technology
 Reserves
  48




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##### Table of Contents



Reservoir
 Resources
 Service well
 Stratigraphic test well
 Undeveloped oil and gas reserves
 Undeveloped acreage
 Unproved properties
 Working interest
  49




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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/ J. Bond Clement

J. BOND CLEMENT
    
    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
  50




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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, 2009 and 2008
    
    
    F-3Consolidated Statements of Operations of PetroQuest Energy, Inc.
for the years ended December 31, 2009, 2008 and 2007
    
    
    F-4Consolidated Statements of Cash Flows of PetroQuest Energy, Inc.
for the years ended December 31, 2009, 2008 and 2007
    
    
    F-5Consolidated Statements of Stockholders Equity of PetroQuest Energy, Inc.
for the years ended December 31, 2009, 2008 and 2007
    
    
    F-6Consolidated Statements of Comprehensive Income of PetroQuest Energy, Inc.
for the years ended December 31, 2009, 2008 and 2007
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
  F-1




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Report of Independent Registered Public Accounting Firm
 
      /s/ Ernst & Young LLP
 
  F-2




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PETROQUEST ENERGY, INC.
 
  Amounts in Thousands)
 December 31,2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    20,772
    
    
    $
    23,964Revenue receivable
    
    
    16,457
    
    
    
    20,074Joint interest billing receivable
    
    
    11,792
    
    
    
    24,259Hedging asset
    
    
    2,796
    
    
    
    40,571Prepaid drilling costs
    
    
    2,383
    
    
    
    11,523Drilling pipe inventory
    
    
    19,297
    
    
    
    25,898Other current assets
    
    
    1,619
    
    
    
    1,530Total current assets
    
    
    75,116
    
    
    
    147,819Property and equipment:Oil and gas properties:Oil and gas properties, full cost method
    
    
    1,296,177
    
    
    
    1,225,304Unevaluated oil and gas properties
    
    
    108,079
    
    
    
    119,847Accumulated depreciation, depletion and amortization
    
    
    (1,082,381
    )
    
    
    (832,290
    )Oil and gas properties, net
    
    
    321,875
    
    
    
    512,861Gas gathering assets
    
    
    4,848
    
    
    
    4,644Accumulated depreciation and amortization of gas gathering assets
    
    
    (1,198
    )
    
    
    (900
    )Total property and equipment
    
    
    325,525
    
    
    
    516,605Other assets, net of accumulated depreciation and amortization
of $8,342 and $6,237, respectively
    
    
    9,818
    
    
    
    5,825Total assets
    
    $
    410,459
    
    
    $
    670,249LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable to vendors
    
    $
    27,113
    
    
    $
    70,643Advances from co-owners
    
    
    3,662
    
    
    
    5,349Oil and gas revenue payable
    
    
    7,886
    
    
    
    15,305Accrued interest and preferred stock dividend
    
    
    3,133
    
    
    
    3,696Asset retirement obligation
    
    
    4,517
    
    
    
    8,590Other accrued liabilities
    
    
    4,106
    
    
    
    4,094Total current liabilities
    
    
    50,417
    
    
    
    107,677Bank debt
    
    
    29,000
    
    
    
    130,00010 3/8% Senior Notes
    
    
    149,267
    
    
    
    148,998Asset retirement obligation
    
    
    19,399
    
    
    
    17,043Deferred income taxes
    
    
    
    
    
    
    28,845Other liabilities
    
    
    271
    
    
    
    199Commitments and contingenciesStockholders equity:Preferred stock, $.001 par value; authorized 5,000
shares; issued and outstanding 1,495 shares
    
    
    1
    
    
    
    1Common stock, $.001 par value; authorized 150,000
shares; issued and outstanding 61,177 and 49,319
shares, respectively
    
    
    61
    
    
    
    49Paid-in capital
    
    
    259,981
    
    
    
    216,253Accumulated other comprehensive income
    
    
    1,768
    
    
    
    25,560Accumulated deficit
    
    
    (99,706
    )
    
    
    (4,376
    )Total stockholders equity
    
    
    162,105
    
    
    
    237,487Total liabilities and stockholders equity
    
    $
    410,459
    
    
    $
    670,249
   F-3




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PETROQUEST ENERGY, INC.
 
  Amounts in Thousands, Except Per Share Data
 Year Ended December 31,2009
    
    
    2008
    
    
    2007Revenues:Oil and gas sales
    
    $
    218,644
    
    
    $
    308,623
    
    
    $
    256,223Gas gathering revenue
    
    
    231
    
    
    
    5,335
    
    
    
    6,111218,875
    
    
    
    313,958
    
    
    
    262,334Expenses:Lease operating expenses
    
    
    38,541
    
    
    
    44,665
    
    
    
    31,965Production taxes
    
    
    4,656
    
    
    
    12,292
    
    
    
    7,859Depreciation, depletion and amortization
    
    
    84,772
    
    
    
    134,340
    
    
    
    119,969Ceiling test writedown
    
    
    156,134
    
    
    
    266,156
    
    
    
    Gas gathering costs
    
    
    191
    
    
    
    2,309
    
    
    
    4,120General and administrative
    
    
    18,869
    
    
    
    23,249
    
    
    
    21,162Accretion of asset retirement obligation
    
    
    2,452
    
    
    
    1,317
    
    
    
    923Interest expense
    
    
    12,615
    
    
    
    9,327
    
    
    
    13,393318,230
    
    
    
    493,655
    
    
    
    199,391Gain on sale of assets
    
    
    485
    
    
    
    26,812
    
    
    
    Other income (expense)
    
    
    (5,955
    )
    
    
    344
    
    
    
    1,340Income (loss) from operations
    
    
    (104,825
    )
    
    
    (152,541
    )
    
    
    64,283Income tax expense (benefit)
    
    
    (14,635
    )
    
    
    (55,581
    )
    
    
    23,664Net income (loss)
    
    
    (90,190
    )
    
    
    (96,960
    )
    
    
    40,619Preferred stock dividend
    
    
    5,140
    
    
    
    5,140
    
    
    
    1,374Net income (loss) available to common stockholders
    
    $
    (95,330
    )
    
    $
    (102,100
    )
    
    $
    39,245Earnings per common share:BasicNet income (loss) per share
    
    $
    (1.72
    )
    
    $
    (2.08
    )
    
    $
    0.79DilutedNet income (loss) per share
    
    $
    (1.72
    )
    
    $
    (2.08
    )
    
    $
    0.78Weighted average number of common shares:Basic
    
    
    55,363
    
    
    
    48,971
    
    
    
    48,108Diluted
    
    
    55,363
    
    
    
    48,971
    
    
    
    49,164
   F-4




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##### Table of Contents



PETROQUEST ENERGY, INC.
 
  Amounts in Thousands
 Year Ended December 31,2009
    
    
    2008
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    (90,190
    )
    
    $
    (96,960
    )
    
    $
    40,619Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Deferred tax expense (benefit)
    
    
    (14,635
    )
    
    
    (55,581
    )
    
    
    23,664Depreciation, depletion and amortization
    
    
    84,772
    
    
    
    134,340
    
    
    
    119,969Ceiling test writedown
    
    
    156,134
    
    
    
    266,156
    
    
    
    Gain on sale of assets
    
    
    (485
    )
    
    
    (26,812
    )
    
    
    Accretion of asset retirement obligation
    
    
    2,452
    
    
    
    1,317
    
    
    
    923Pipe inventory impairment
    
    
    913
    
    
    
    
    
    
    
    Share-based compensation expense
    
    
    6,328
    
    
    
    9,582
    
    
    
    9,818Amortization costs and other
    
    
    1,512
    
    
    
    1,492
    
    
    
    1,187Payments to settle asset retirement obligations
    
    
    (1,803
    )
    
    
    (19,377
    )
    
    
    (6,058
    )Changes in working capital accounts:Revenue receivable
    
    
    3,617
    
    
    
    2,746
    
    
    
    (1,053
    )Joint interest billing receivable
    
    
    11,937
    
    
    
    (1,323
    )
    
    
    (2,864
    )Prepaid drilling and pipe costs
    
    
    14,828
    
    
    
    (35,973
    )
    
    
    3,438Accounts payable and accrued liabilities
    
    
    (51,375
    )
    
    
    (4,567
    )
    
    
    37,050Advances from co-owners
    
    
    (1,687
    )
    
    
    (7,521
    )
    
    
    (521
    )Other
    
    
    (496
    )
    
    
    1,542
    
    
    
    (2,443
    )Net cash provided by operating activities
    
    
    121,822
    
    
    
    169,061
    
    
    
    223,729Cash flows from investing activities:Investment in oil and gas properties
    
    
    (63,420
    )
    
    
    (325,936
    )
    
    
    (233,436
    )Investment in gas gathering assets
    
    
    (204
    )
    
    
    (6,204
    )
    
    
    (2,968
    )Proceeds from sale of gathering assets, net of expenses
    
    
    
    
    
    
    43,170
    
    
    
    Proceeds from sale of oil and gas properties and other
    
    
    7,451
    
    
    
    2,256
    
    
    
    1,277Net cash used in investing activities
    
    
    (56,173
    )
    
    
    (286,714
    )
    
    
    (235,127
    )Cash flows from financing activities:Net proceeds from (payments for) share based compensation
    
    
    (366
    )
    
    
    1,597
    
    
    
    (99
    )Deferred financing costs
    
    
    (114
    )
    
    
    (1,450
    )
    
    
    (98
    )Proceeds from common stock offering
    
    
    38,036
    
    
    
    
    
    
    
    Costs of common stock offering
    
    
    (258
    )
    
    
    
    
    
    
    Payment of preferred stock dividend
    
    
    (5,139
    )
    
    
    (5,439
    )
    
    
    Repayment of bank borrowings
    
    
    (101,000
    )
    
    
    (128,000
    )
    
    
    (70,000
    )Proceeds from bank borrowings
    
    
    
    
    
    
    258,000
    
    
    
    23,000Proceeds from preferred stock offering
    
    
    
    
    
    
    
    
    
    
    74,750Costs of preferred stock offering
    
    
    
    
    
    
    
    
    
    
    (4,041
    )Net cash provided by (used in) financing activities
    
    
    (68,841
    )
    
    
    124,708
    
    
    
    23,512Net increase (decrease) in cash and cash equivalents
    
    
    (3,192
    )
    
    
    7,055
    
    
    
    12,114Cash and cash equivalents at beginning of period
    
    
    23,964
    
    
    
    16,909
    
    
    
    4,795Cash and cash equivalents at end of period
    
    $
    20,772
    
    
    $
    23,964
    
    
    $
    16,909Supplemental disclosure of cash flow informationCash paid during the period for:Interest
    
    $
    20,335
    
    
    $
    17,851
    
    
    $
    19,238Income taxes
    
    $
    227
    
    
    $
    
    
    
    $
    
   F-5




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##### Table of Contents



PETROQUEST ENERGY, INC
 
  Amounts in Thousands
 Other
    
    
    Retained
    
    
    TotalCommon
    
    
    Preferred
    
    
    Paid-In
    
    
    Comprehensive
    
    
    Earnings
    
    
    StockholdersStock
    
    
    Stock
    
    
    Capital
    
    
    Income (Loss)
    
    
    (Deficit)
    
    
    EquityDecember 31, 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
    )
    
    $
    237,487Options exercised
    
    
    
    
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    65Retirement of shares upon vesting of restricted stock
    
    
    
    
    
    
    
    
    
    
    (431
    )
    
    
    
    
    
    
    
    
    
    
    (431
    )Issuance of common stock
    
    
    12
    
    
    
    
    
    
    
    37,766
    
    
    
    
    
    
    
    
    
    
    
    37,778Share-based compensation expense
    
    
    
    
    
    
    
    
    
    
    6,328
    
    
    
    
    
    
    
    
    
    
    
    6,328Derivative fair value adjustment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,792
    )
    
    
    
    
    
    
    (23,792
    )Preferred stock dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,140
    )
    
    
    (5,140
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (90,190
    )
    
    
    (90,190
    )December 31, 2009
    
    $
    61
    
    
    $
    1
    
    
    $
    259,981
    
    
    $
    1,768
    
    
    $
    (99,706
    )
    
    $
    162,105
   F-6




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##### Table of Contents



PETROQUEST ENERGY, INC.
 
  Amounts in Thousands
 Year Ended December 31,2009
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    (90,190
    )
    
    $
    (96,960
    )
    
    $
    40,619Change in fair value of derivative instruments,
accounted for as hedges, net of tax benefit
(expense)
of $13,983, ($15,267) and $4,150, respectively
    
    
    (23,792
    )
    
    
    25,995
    
    
    
    (7,067
    )Comprehensive income (loss)
    
    $
    (113,982
    )
    
    $
    (70,965
    )
    
    $
    33,552
   F-7




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##### Table of Contents



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




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##### Table of Contents



Gas Gathering Assets
   Years Ended December 31,2008
    
    
    2007Gas gathering revenue
    
    $
    4,876
    
    
    $
    5,581Expenses:Gas gathering costs
    
    
    (2,247
    )
    
    
    (4,120
    )Depreciation expense
    
    
    (1,974
    )
    
    
    (2,773
    )Income (loss) from operations
    
    $
    655
    
    
    $
    (1,312
    )
 Other Assets
  Cash and Cash Equivalents
  Accounts Receivable and Other Accrued Liabilities
  Drilling Pipe Inventory
   F-9




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##### Table of Contents



Income Taxes
  Revenue Recognition
  Certain Concentrations
   Year Ended December 31,2009
    
    
    2008
    
    
    2007Texon LP
    
    
    17
    %
    
    
    23
    %
    
    
    32
    %Shell Trading Co.
    
    
    17
    %
    
    
    (a
    )
    
    
    (a
    )Atmos Energy
    
    
    13
    %
    
    
    (a
    )
    
    
    (a
    )Laclede Energy
    
    
    12
    %
    
    
    11
    %
    
    
    (a
    )Louis Dreyfus Corporation
    
    
    (a
    )
    
    
    11
    %
    
    
    16
    %Crosstex
    
    
    (a
    )
    
    
    11
    %
    
    
    (a
    )DCP Midstream
    
    
    (a
    )
    
    
    10
    %
    
    
    12
    %(a) Less than 10 percent
 Fair Value of Financial Instruments
  Derivative Instruments
   F-10




---



##### Table of Contents



New Accounting Standards
       Note 2  Convertible Preferred Stock
   Dividends
  F-11




---



##### Table of Contents



Mandatory conversion
 Conversion rights
  Note 3  Common Stock Offering
  Note 4  Earnings Per Share
   F-12




---



##### Table of Contents



Loss
    
    
    Shares
    
    
    PerFor the Year Ended December 31, 2009
    
    (Numerator)
    
    
    (Denominator)
    
    
    Share AmountNet loss available to common stockholders
    
    $
    (95,330
    )
    
    
    55,363
    
    
    $
    (1.72
    )Effect of dilutive securities:Stock options
    
    
    
    
    
    
    Restricted stock
    
    
    
    
    
    
    Series B preferred stock
    
    
    
    
    
    
    DILUTED EPS
    
    $
    (95,330
    )
    
    
    55,363
    
    
    $
    (1.72
    )
 Loss
    
    
    Shares
    
    
    PerFor the Year Ended December 31, 2008
    
    (Numerator)
    
    
    (Denominator)
    
    
    Share AmountNet loss available to common stockholders
    
    $
    (102,100
    )
    
    
    48,971
    
    
    $
    (2.08
    )Effect of dilutive securities:Stock options
    
    
    
    
    
    
    Restricted stock
    
    
    
    
    
    
    Series B preferred stock
    
    
    
    
    
    
    DILUTED EPS
    
    $
    (102,100
    )
    
    
    48,971
    
    
    $
    (2.08
    )
 Income
    
    
    Shares
    
    
    PerFor the Year Ended December 31, 2007
    
    (Numerator)
    
    
    (Denominator)
    
    
    Share AmountBASIC EPSNet income available to common stockholders
    
    $
    39,245
    
    
    
    48,108Attributable to participating securities
    
    
    (1,069
    )
    
    
    BASIC EPS
    
    $
    38,176
    
    
    
    48,108
    
    
    $
    0.79Effect of dilutive securities:Stock options
    
    
    
    
    
    
    1,056Restricted stock
    
    
    22
    
    
    
    Series B preferred stock
    
    
    
    
    
    
    DILUTED EPS
    
    $
    38,198
    
    
    
    49,164
    
    
    $
    0.78
   F-13




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##### Table of Contents



Note 5  Share Based Compensation
  Years Ended December 31,2009
    
    
    2008
    
    
    2007Stock options:Incentive Stock Options
    
    $
    835
    
    
    $
    1,316
    
    
    $
    1,250Non-Qualified Stock Options
    
    
    2,024
    
    
    
    2,729
    
    
    
    1,869Restricted stock
    
    
    3,469
    
    
    
    5,537
    
    
    
    6,699Share based compensation
    
    $
    6,328
    
    
    $
    9,582
    
    
    $
    9,818
   Stock Options
    Years Ended December 31,2009
    
    
    2008
    
    
    2007Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    75.5% - 78.4
    %
    
    
    54.9% - 69.8
    %
    
    
    55.7% - 58.5
    %Risk-free rate
    
    
    2.3% - 2.5
    %
    
    
    1.7% - 3.6
    %
    
    
    4.0% - 5.1
    %Expected term
    
    6 years
    
    
    6 years
    
    
    6 yearsForfeiture rate
    
    
    5.0
    %
    
    
    5.0
    %
    
    
    5.0
    %Stock options granted (1)
    
    
    638,486
    
    
    
    563,900
    
    
    
    440,676Wgtd. avg. grant date fair value per share
    
    $
    4.77
    
    
    $
    9.45
    
    
    $
    7.29Fair value of grants (1)
    
    $
    3,045,000
    
    
    $
    5,330,000
    
    
    $
    3,212,000
 
 (1)
    
    Prior to applying estimated forfeiture rate  F-14




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##### Table of Contents



AggregateNumber of
    
    
    Wgtd. Avg.
    
    
    Wgtd. Avg.
    
    
    Intrinsic ValueOptions
    
    
    Exercise Price
    
    
    Remaining Life
    
    
    (000s)Outstanding at beginning of year
    
    
    2,550,464
    
    
    $
    9.42Granted
    
    
    638,486
    
    
    
    6.94Expired/cancelled/forfeited
    
    
    (11,460
    )
    
    
    15.86Exercised
    
    
    (25,000
    )
    
    
    2.60Outstanding at end of year
    
    
    3,152,490
    
    
    
    8.95
    
    
    6.6 years
    
    $
    2,879Options exercisable at end of year
    
    
    2,026,323
    
    
    $
    7.90
    
    
    5.3 years
    
    $
    2,825Options expected to vest
    
    
    1,069,859
    
    
    
    10.83
    
    
    9.0 years
    
    $
    51
   Range of
    
    Options
    
    
    Wgtd. Avg.
    
    
    Wgtd. Avg.
    
    
    Options
    
    
    Wgtd. Avg.Exercise
    
    Outstanding
    
    
    Remaining
    
    
    Exercise
    
    
    Exercisable
    
    
    ExercisePrice
    
    12/31/09
    
    
    Contractual Life
    
    
    Price
    
    
    12/31/09
    
    
    Price$1.53 - $3.20
    
    
    638,667
    
    
    3.4 years
    
    $
    2.84
    
    
    
    638,667
    
    
    $
    2.84$3.21 - $10.00
    
    
    1,032,384
    
    
    7.9 years
    
    $
    5.99
    
    
    
    385,898
    
    
    $
    4.42$10.01 - $15.00
    
    
    968,824
    
    
    6.7 years
    
    $
    11.56
    
    
    
    827,057
    
    
    $
    11.40$15.01 - $22.40
    
    
    512,615
    
    
    8.1 years
    
    $
    17.57
    
    
    
    174,701
    
    
    $
    17.543,152,490
    
    
    6.6 years
    
    $
    8.95
    
    
    
    2,026,323
    
    
    $
    7.90
 Restricted Stock
   Wgtd. Avg.Number of
    
    
    Fair Value perShares
    
    
    ShareOutstanding at beginning of year
    
    
    1,101,608
    
    
    $
    12.76Granted
    
    
    854,427
    
    
    
    3.44Expired/cancelled/forfeited
    
    
    (70,695
    )
    
    
    9.81Lapse of restrictions
    
    
    (439,073
    )
    
    
    12.13Outstanding at December 31, 2009 (1)
    
    
    1,446,267
    
    
    $
    7.58
 
 (1)
    
    At December 31, 2009, the weighted average remaining life of restricted stock outstanding
was 3.5 years and the intrinsic value of restricted stock outstanding, using the closing stock
price on December 31, 2009, was $8.9 million.  F-15




---



##### Table of Contents



Note 6  Asset Retirement Obligations
   Years Ended December 31,2009
    
    
2008Asset
retirement obligation, beginning of period
    
    $
    25,633
    
    
    $
    17,451Liabilities incurred
    
    
    58
    
    
    
    9,464Liabilities settled
    
    
    (1,803
    )
    
    
    (20,876
    )Accretion expense
    
    
    2,452
    
    
    
    1,317Revisions in estimates
    
    
    (2,424
    )
    
    
    18,277Asset
retirement obligation, end of period
    
    
    23,916
    
    
    
    25,633Less: current portion of asset retirement obligation
    
    
    (4,517
    )
    
    
    (8,590
    )Long-term asset retirement obligation
    
    $
    19,399
    
    
    $
    17,043
  Note 7  Derivatives
    Instrument
    
    
    
    
    
    
    WeightedProduction Period
    
    Type
    
    
    Daily Volumes
    
    
    Average PriceNatural Gas:2010
    
    Costless Collar
    
    30,000 Mmbtu
    
    $
    5.83 - 6.54
   F-16




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##### Table of Contents



Effect of Derivative Instruments on the Consolidated Balance Sheet at December 31, 2009:
 Asset DerivativesBalance SheetInstrument
    
    Location
    
    
    Fair ValueCommodity Derivatives
    
    Hedging asset
    
    $
    2,796
 Effect of Derivative Instruments on the Consolidated Balance Sheet at December 31, 2008:
 Asset DerivativesBalance SheetInstrument
    
    Location
    
    
    Fair ValueCommodity Derivatives
    
    Hedging asset
    
    $
    40,571
 Effect of Derivative Instruments on the Consolidated Statement of Operations for the twelve months
ended December 31, 2009:
 Amount of Loss
    
    
    Location of
    
    
    Amount of GainRecognized in Other
    
    
    Gain Reclassified
    
    
    Reclassified intoInstrument
    
    Comprehensive Loss
    
    
    into Income
    
    
    IncomeCommodity Derivatives
    
    $
    (23,792
    )
    
    Oil and gas sales
    
    $
    79,892
 Effect of Derivative Instruments on the Consolidated Statement of Operations for the twelve months
ended December 31, 2008:
 Amount of Gain
    
    
    Location of
    
    
    Amount of LossRecognized in Other
    
    
    Loss Reclassified
    
    
    Reclassified intoInstrument
    
    Comprehensive Income
    
    
    into Income
    
    
    IncomeCommodity Derivatives
    
    $
    25,995
    
    
    Oil and gas sales
    
    $
    (8,284
    )
 Effect of Derivative Instruments on the Consolidated Statement of Operations for the twelve months
ended December 31, 2007:
 Amount of Loss
    
    
    Location of
    
    
    Amount of GainRecognized in Other
    
    
    Gain Reclassified
    
    
    Reclassified intoInstrument
    
    Comprehensive Loss
    
    
    into Income
    
    
    IncomeCommodity Derivatives
    
    $
    (7,067
    )
    
    Oil and gas sales
    
    $
    9,922
  
    
    Level 1: valuations consist of unadjusted quoted prices in active markets for identical
assets and liabilities and has the highest priority;
 
    
    Level 2: valuations rely on quoted prices in markets that are not active or observable
inputs over the full term of the asset or liability;
 
    
    Level 3: valuations are based on prices or third party or internal valuation models
that require inputs that are significant to the fair value measurement and are less
observable and thus have the lowest priority.
  F-17




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##### Table of Contents



Fair Value Measurements UsingQuoted Prices
    
    
    Significant Other
    
    
    Significantin Active
    
    
    Observable
    
    
    UnobservableInstrument
    
    Markets (Level 1)
    
    
    Inputs (Level 2)
    
    
    Inputs (Level 3)Commodity
Derivatives - 2009
    
    
    
    
    
    $
    2,796
    
    
    
    Commodity
Derivatives - 2008
    
    
    
    
    
    $
    40,571
    
    
    
    
 Note 8  Long-Term Debt
       F-18




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##### Table of Contents



Note 9  Related Party Transactions
     Note 10  Ceiling Test
   F-19




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##### Table of Contents



Note 11  Investment in Oil and Gas Properties
  amounts in thousands
 For the Year-Ended December 31,2009
    
    
    2008
    
    
    2007Acquisition costs:Proved
    
    $
    427
    
    
    $
    3,014
    
    
    $
    1,253Unproved
    
    
    1,592
    
    
    
    58,826
    
    
    
    32,833Exploration costs:Proved
    
    
    16,495
    
    
    
    149,811
    
    
    
    104,669Unproved
    
    
    3,249
    
    
    
    6,048
    
    
    
    15,908Development costs
    
    
    19,333
    
    
    
    118,891
    
    
    
    71,973Capitalized general and administrative and interest costs
    
    
    18,009
    
    
    
    21,181
    
    
    
    14,061Total costs incurred
    
    $
    59,105
    
    
    $
    357,771
    
    
    $
    240,697
 For the Year-Ended December 31,2009
    
    
    2008
    
    
    2007Accumulated depreciation, depletion
and amortization (DD&A)Balance, beginning of year
    
    $
    (832,290
    )
    
    $
    (432,530
    )
    
    $
    (314,869
    )Provision for DD&A
    
    
    (83,613
    )
    
    
    (131,348
    )
    
    
    (116,384
    )Ceiling test writedown
    
    
    (156,134
    )
    
    
    (266,156
    )
    
    
    Sale of proved properties and other
    
    
    (10,344
    )
    
    
    (2,256
    )
    
    
    (1,277
    )Balance, end of year
    
    $
    (1,082,381
    )
    
    $
    (832,290
    )
    
    $
    (432,530
    )DD&A per Mcfe
    
    $
    2.44
    
    
    $
    3.89
    
    
    $
    3.70
   F-20




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##### Table of Contents



Note 12  Income Taxes
   December 31,2009
    
    
    2008Net operating loss carryforwards
    
    $
    8,031
    
    
    $
    13,301Percentage depletion carryforward
    
    
    3,344
    
    
    
    2,619Alternative minimum tax credit
    
    
    201
    
    
    
    144Contributions carryforward and other
    
    
    65
    
    
    
    156Temporary differences:Oil and gas properties  full cost
    
    
    13,859
    
    
    
    (30,207
    )Hedges
    
    
    (1,040
    )
    
    
    (15,011
    )Compensation expense
    
    
    153
    
    
    
    153Valuation allowance
    
    
    (24,613
    )
    
    
    Deferred tax liability
    
    $
    
    
    
    $
    (28,845
    )
   For the Year-Ended December 31,2009
    
    
    2008
    
    
    2007Amount computed using the statutory rate
    
    $
    (36,689
    )
    
    $
    (53,389
    )
    
    $
    22,499Increase (reduction) in taxes resulting from:State & local taxes
    
    
    (2,306
    )
    
    
    (3,357
    )
    
    
    1,414Percentage depletion carryforward
    
    
    (725
    )
    
    
    310
    
    
    
    (860
    )Non-deductible stock option expense (1)
    
    
    311
    
    
    
    490
    
    
    
    462Other
    
    
    161
    
    
    
    365
    
    
    
    149Change in valuation allowance
    
    
    24,613
    
    
    
    
    
    
    
    Income tax expense (benefit)
    
    $
    (14,635
    )
    
    $
    (55,581
    )
    
    $
    23,664
 (1)
    
    Relates to compensation expense recognized on the vesting of Incentive Stock Options Note 13  Commitments and Contingencies
    F-21




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##### Table of Contents



Lease Commitments
   2010
    
    $
    1,0872011
    
    
    8942012
    
    
    7492013
    
    
    632014
    
    
    Thereafter
    
    
    $
    2,793
  Note 14  Subsequent Events
   Note 15  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, 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
    
    
    
    172,186Revisions of previous estimates
    
    
    321
    
    
    
    (10,617
    )Extensions, discoveries and other additions
    
    
    9
    
    
    
    39,303Purchase of producing properties
    
    
    
    
    
    
    Sale of producing properties
    
    
    
    
    
    
    (2,913
    )Production
    
    
    (600
    )
    
    
    (30,598
    )Proved reserves as of December 31, 2009
    
    
    1,931
    
    
    
    167,361Proved developed reservesAs of December 31, 2007
    
    
    2,070
    
    
    
    95,639As of December 31, 2008
    
    
    2,030
    
    
    
    124,020As of December 31, 2009
    
    
    1,775
    
    
    
    100,430
  F-23




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##### Table of Contents



Standardized Measure
 December 31,2009
    
    
    2008
    
    
    2007Future cash flows
    
    $
    614,293
    
    
    $
    889,732
    
    
    $
    1,155,236Future production costs
    
    
    (193,427
    )
    
    
    (275,117
    )
    
    
    (240,849
    )Future development costs
    
    
    (148,595
    )
    
    
    (148,167
    )
    
    
    (134,993
    )Future income taxes
    
    
    (3,166
    )
    
    
    (14,479
    )
    
    
    (143,683
    )Future net cash flows
    
    
    269,105
    
    
    
    451,969
    
    
    
    635,71110% annual discount
    
    
    (94,817
    )
    
    
    (137,182
    )
    
    
    (188,453
    )Standardized measure of discounted future net cash flows
    
    $
    174,288
    
    
    $
    314,787
    
    
    $
    447,258
 Changes in Standardized Measure
 Year Ended December 31,2009
    
    
    2008
    
    
    2007Standarized measure at beginning of year
    
    $
    314,787
    
    
    $
    447,258
    
    
    $
    332,833Sales and transfers of oil and gas produced,
net of production costs
    
    
    (95,555
    )
    
    
    (259,950
    )
    
    
    (206,477
    )Changes in price, net of future production costs
    
    
    (100,150
    )
    
    
    (172,214
    )
    
    
    153,961Extensions and discoveries, net of future
production and development costs
    
    
    2,790
    
    
    
    147,089
    
    
    
    95,850Changes in estimated future development costs,
net of development costs incurred during this period
    
    
    38,407
    
    
    
    36,567
    
    
    
    12,014Revisions of quantity estimates
    
    
    (15,045
    )
    
    
    (25,037
    )
    
    
    66,025Accretion of discount
    
    
    32,719
    
    
    
    54,065
    
    
    
    38,431Net change in income taxes
    
    
    9,698
    
    
    
    80,988
    
    
    
    (41,913
    )Purchase of reserves in place
    
    
    
    
    
    
    1,944
    
    
    
    14,108Sale of reserves in place
    
    
    (2,138
    )
    
    
    (1,378
    )
    
    
    (9,293
    )Changes in production rates (timing) and other
    
    
    (11,225
    )
    
    
    5,455
    
    
    
    (8,281
    )Standardized measure at end of year
    
    $
    174,288
    
    
    $
    314,787
    
    
    $
    447,258
   F-24




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##### Table of Contents



Note 16  Summarized Quarterly Financial Information  Unaudited
  Quarter EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 312009:Revenues
    
    $
    59,449
    
    
    $
    55,261
    
    
    $
    50,254
    
    
    $
    53,911Income (loss) from operations (1)
    
    
    (100,476
    )
    
    
    17,184
    
    
    
    13,616
    
    
    
    (35,149
    )Net income (loss) available to common stockholders (1)
    
    
    (66,957
    )
    
    
    7,746
    
    
    
    4,453
    
    
    
    (40,572
    )Earnings (loss) per share:Basic (3)
    
    $
    (1.36
    )
    
    $
    0.15
    
    
    $
    0.07
    
    
    $
    (0.66
    )Diluted (3)
    
    $
    (1.36
    )
    
    $
    0.15
    
    
    $
    0.07
    
    
    $
    (0.66
    )2008:Revenues
    
    $
    76,550
    
    
    $
    92,868
    
    
    $
    78,275
    
    
    $
    66,265Income (loss) from operations (2)
    
    
    24,719
    
    
    
    36,793
    
    
    
    28,847
    
    
    
    (242,900
    )Net income (loss) available to common stockholders (2)
    
    
    14,161
    
    
    
    21,775
    
    
    
    16,758
    
    
    
    (154,794
    )Earnings (loss) per share:Basic (3)
    
    $
    0.28
    
    
    $
    0.43
    
    
    $
    0.33
    
    
    $
    (3.14
    )Diluted (3)
    
    $
    0.25
    
    
    $
    0.41
    
    
    $
    0.32
    
    
    $
    (3.14
    )
 (1)
    
    Loss from operations and net loss available to common stockholders reported during the three
months ended March 31 and December 31, 2009 include non-cash ceiling test write-downs of $103.5
million and $52.6 million, respectively (see Note 10).(2)
    
    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 $26.8 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.(3)
    
    Effective January 1, 2009, the Company adopted the provisions of ASC Topic 260-10-45 (FSP
No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions
are Participating Securities). As a result of adoption, the Companys earnings per share for
2009 have been calculated in accordance with ASC Topic 260-10-45 and the Company retrospectively
adjusted the calculation of earnings per share for 2008.  F-25