##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: September 30, 2007
 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.
  DELAWARE
    
    72-1440714(State of Incorporation)
    
    (I.R.S. Employer Identification No.)400 E. Kaliste Saloom Rd., Suite 6000Lafayette, Louisiana
    
    70508(Address of principal executive offices)
    
    (Zip code)
 
   þ o
  o þ o
  o þ




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##### 



Page No.Part I. Financial InformationItem 1.
    
    Financial StatementsConsolidated Balance Sheets as of September 30, 2007 and December 31, 2006
    
    
    1Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2007 and 2006
    
    
    2Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006
    
    
    3Notes to Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4.
    
    Controls and Procedures
    
    
    21Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    22Item 1A.
    
    Risk Factors
    
    
    22Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3.
    
    Defaults upon Senior Securities
    
    
    24Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    24Item 5.
    
    Other Information
    
    
    24Item 6.
    
    Exhibits
    
    
    24Certification of CEO Pursuant to Rule 13a-14(a)/15d-14(a)Certification of CFO Pursuant to Rule 13a-14(a)/15d-14(a)Certification of CEO Pursuant to 18 U.S.C Section 1350Certification of CFO Pursuant to 18 U.S.C Section 1350




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##### Table of Contents



September 30,
    
    
    December 31,2007
    
    
    2006(unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,714
    
    
    $
    4,795Revenue receivable
    
    
    24,181
    
    
    
    21,767Joint interest billing receivable
    
    
    19,707
    
    
    
    20,072Hedging asset
    
    
    2,509
    
    
    
    10,527Prepaid drilling costs
    
    
    2,088
    
    
    
    4,886Other current assets
    
    
    4,639
    
    
    
    2,143Total current assets
    
    
    60,838
    
    
    
    64,190Property and equipment:Oil and gas properties:Oil and gas properties, full cost method
    
    
    850,807
    
    
    
    695,116Unevaluated oil and gas properties
    
    
    72,313
    
    
    
    51,567Accumulated depreciation, depletion and amortization
    
    
    (401,977
    )
    
    
    (314,869
    )Oil and gas properties, net
    
    
    521,143
    
    
    
    431,814Gas gathering assets
    
    
    21,509
    
    
    
    19,072Accumulated depreciation and amortization of gas gathering assets
    
    
    (5,852
    )
    
    
    (3,562
    )Total property and equipment
    
    
    536,800
    
    
    
    447,324Other assets, net of accumulated depreciation and amortization
of $10,843 and $11,719, respectively
    
    
    6,277
    
    
    
    6,776Total assets
    
    $
    603,915
    
    
    $
    518,290LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable to vendors
    
    $
    50,476
    
    
    $
    34,790Advances from co-owners
    
    
    18,056
    
    
    
    13,391Oil and gas revenue payable
    
    
    6,935
    
    
    
    6,935Accrued interest
    
    
    5,836
    
    
    
    2,453Asset retirement obligation
    
    
    7,778
    
    
    
    9,028Other accrued liabilities
    
    
    7,194
    
    
    
    5,484Total current liabilities
    
    
    96,275
    
    
    
    72,081Bank debt
    
    
    
    
    
    
    47,00010 3/8% senior notes
    
    
    148,698
    
    
    
    148,537Asset retirement obligation
    
    
    12,671
    
    
    
    11,211Deferred income taxes
    
    
    63,865
    
    
    
    49,646Other liabilities
    
    
    362
    
    
    
    104Commitments and contingenciesStockholders equity:Preferred stock, $.001 par value; authorized 5,000
shares; issued and outstanding 1,300 and 0, respectively
    
    
    1
    
    
    
    Common stock, $.001 par value; authorized 75,000
shares; issued and outstanding 48,350 and 47,788, respectively
    
    
    48
    
    
    
    48Paid-in capital
    
    
    193,690
    
    
    
    124,552Accumulated other comprehensive income
    
    
    1,418
    
    
    
    6,632Retained earnings
    
    
    86,887
    
    
    
    58,479Total stockholders equity
    
    
    282,044
    
    
    
    189,711Total liabilities and stockholders equity
    
    $
    603,915
    
    
    $
    518,290
  1




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Oil and gas sales
    
    $
    63,988
    
    
    $
    53,310
    
    
    $
    190,702
    
    
    $
    150,194Gas gathering revenue and other income
    
    
    1,512
    
    
    
    1,776
    
    
    
    5,566
    
    
    
    4,74665,500
    
    
    
    55,086
    
    
    
    196,268
    
    
    
    154,940Expenses:Lease operating expenses
    
    
    8,929
    
    
    
    8,960
    
    
    
    24,185
    
    
    
    24,738Production taxes
    
    
    1,593
    
    
    
    1,772
    
    
    
    5,777
    
    
    
    4,554Depreciation, depletion and amortization
    
    
    31,846
    
    
    
    23,923
    
    
    
    89,510
    
    
    
    62,994Gas gathering costs
    
    
    894
    
    
    
    998
    
    
    
    3,188
    
    
    
    2,642General and administrative
    
    
    5,550
    
    
    
    4,561
    
    
    
    16,054
    
    
    
    10,060Accretion of asset retirement obligation
    
    
    238
    
    
    
    387
    
    
    
    679
    
    
    
    1,140Interest expense
    
    
    3,542
    
    
    
    3,756
    
    
    
    11,112
    
    
    
    10,75552,592
    
    
    
    44,357
    
    
    
    150,505
    
    
    
    116,883Income from operations
    
    
    12,908
    
    
    
    10,729
    
    
    
    45,763
    
    
    
    38,057Income tax expense
    
    
    4,870
    
    
    
    4,185
    
    
    
    17,281
    
    
    
    14,382Net income
    
    
    8,038
    
    
    
    6,544
    
    
    
    28,482
    
    
    
    23,675Preferred stock dividends
    
    
    74
    
    
    
    
    
    
    
    74
    
    
    
    Net income available to common stockholders
    
    $
    7,964
    
    
    $
    6,544
    
    
    $
    28,408
    
    
    $
    23,675Earnings per common share:Basic
    
    $
    0.16
    
    
    $
    0.14
    
    
    $
    0.59
    
    
    $
    0.50Diluted
    
    $
    0.16
    
    
    $
    0.13
    
    
    $
    0.57
    
    
    $
    0.49Weighted average number of common shares:Basic
    
    
    48,284
    
    
    
    47,643
    
    
    
    48,018
    
    
    
    47,454Diluted
    
    
    49,778
    
    
    
    48,999
    
    
    
    49,602
    
    
    
    48,747
  2




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Nine Months EndedSeptember 30,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    28,482
    
    
    $
    23,675Adjustments to reconcile net income to net cash provided by
operating activities:Deferred tax expense
    
    
    17,281
    
    
    
    14,382Depreciation, depletion and amortization
    
    
    89,510
    
    
    
    62,994Accretion of asset retirement obligation
    
    
    679
    
    
    
    1,140Amortization of debt issuance costs
    
    
    722
    
    
    
    705Amortization of bond discount
    
    
    161
    
    
    
    145Share based compensation expense
    
    
    7,656
    
    
    
    3,169Changes in working capital accounts:Accounts receivable
    
    
    (2,414
    )
    
    
    (407
    )Joint interest billing receivable
    
    
    365
    
    
    
    2,593Accounts payable and accrued liabilities
    
    
    20,588
    
    
    
    9,243Advances from co-owners
    
    
    4,665
    
    
    
    (724
    )Other assets
    
    
    (207
    )
    
    
    (5,069
    )Net cash provided by operating activities
    
    
    167,488
    
    
    
    111,846Cash flows from investing activities:Investment in oil and gas properties
    
    
    (176,791
    )
    
    
    (136,709
    )Sale of oil and gas properties and other
    
    
    248
    
    
    
    4,859Investment in gas gathering assets
    
    
    (2,437
    )
    
    
    (5,861
    )Net cash used in investing activities
    
    
    (178,980
    )
    
    
    (137,711
    )Cash flows from financing activities:Net (payments for) proceeds from share based compensation
    
    
    (63
    )
    
    
    1,380Deferred financing costs
    
    
    (73
    )
    
    
    (106
    )Proceeds from preferred stock offering
    
    
    65,000
    
    
    
    Costs of preferred stock offering
    
    
    (3,453
    )
    
    
    Repayment of bank borrowings
    
    
    (70,000
    )
    
    
    (6,000
    )Proceeds from bank borrowings
    
    
    23,000
    
    
    
    30,000Net cash provided by financing activities
    
    
    14,411
    
    
    
    25,274Net increase (decrease) in cash and cash equivalents
    
    
    2,919
    
    
    
    (591
    )Cash and cash equivalents, beginning of period
    
    
    4,795
    
    
    
    6,703Cash and cash equivalents, end of period
    
    $
    7,714
    
    
    $
    6,112Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    11,283
    
    
    $
    9,124Income taxes
    
    $
    
    
    
    $
    
  3




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Note 1 Basis of Presentation
    Note 2 Convertible Preferred Stock
  PreferredStock OfferingGross proceeds
    
    $
    65,000,000Underwriting discount
    
    
    (3,250,000
    )Other costs of the offering
    
    
    (203,000
    )Net proceeds (1)
    
    $
    61,547,000Shares issued (1)
    
    
    1,300,000Issue price per share
    
    $
    50.00
 
 (1)
    
    In October 2007, the underwriters exercised their over-allotment option and we issued an
additional 195,000 shares of Series B Preferred Stock resulting in net proceeds to us of $9.3
million.  Dividends
  4




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Liquidation preference
 Ranking
 
    
    senior to all of the shares of the Companys common stock and to all
of the Companys other capital stock issued in the future unless the
terms of such capital stock expressly provide that it ranks senior to,
or on a parity with, shares of the Series B Preferred Stock;
    
    on a parity with all of the Companys other capital stock issued in
the future the terms of which expressly provide that it will rank on a
parity with the shares of the Series B Preferred Stock; and
    
    junior to all of the Companys existing and future debt obligations
and to all shares of the Companys capital stock issued in the future
the terms of which expressly provide that such shares will rank senior
to the shares of the Series B Preferred Stock.
 Mandatory conversion
 Limited optional redemption
 Conversion rights
  Purchase or exchange upon fundamental change provided,
 5




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##### Table of Contents



however,
 Conversion in connection with a fundamental change
  1.
    
    any person becomes the beneficial owner directly or indirectly, of
more than 50% of the voting power of the Companys common equity;2.
    
    individuals who on September 25, 2007, constituted the board of
directors (together with any new directors whose election by such board of
directors or whose nomination for election by the stockholders of the Company was
approved by a vote of a majority of the directors of the Company then still in
office who were either directors on September 25, 2007, or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the board of directors then in office;3.
    
    the merger or consolidation of the Company with or into another person
or the merger of another person with or into the Company, or the sale of all or
substantially all the assets of the Company to another person other than a
transaction following which holders of securities that represented 100% of the
voting power of the Companys common equity immediately prior to such transaction
(or other securities into which such securities are converted as part of such
merger or consolidation transaction) own directly or indirectly at least a majority
of the voting power of the voting equity of the surviving person in such merger or
consolidation transaction or transferee in such sale of assets transaction
immediately after such transaction;4.
    
    the adoption of a plan relating to the liquidation or dissolution of
the Company; or5.
    
    the Companys common stock is neither listed on a national securities
exchange nor listed nor approved for quotation on an over-the-counter market in the
United States.
  Voting rights
 6




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##### Table of Contents




    
    amend the Companys certificate of incorporation and bylaws, by merger
or otherwise, if the amendment would alter or change the powers,
preferences, privileges or rights of the holders of shares of the
Series B Preferred Stock so as to adversely affect them;
    
    issue, authorize or increase the authorized amount of, or issue or
authorize any obligation or security convertible into or evidencing a
right to purchase, any senior stock; or
    
    reclassify any of the Companys authorized stock into any senior stock
of any class, or any obligation or security convertible into or
evidencing a right to purchase any senior stock.
 
 Note 3 Earnings Per Share
   7




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Income
    
    
    Shares
    
    
    PerFor the Three Months Ended September 30, 2007
    
    (Numerator)
    
    
    (Denominator)
    
    
    Share AmountBASIC EPSNet income available to common stockholders
    
    $
    7,964
    
    
    
    48,284
    
    
    $
    0.16Effect of dilutive securities:Stock options
    
    
    
    
    
    
    966Restricted stock
    
    
    
    
    
    
    528Series B preferred stock
    
    
    
    
    
    
    DILUTED EPS
    
    $
    7,964
    
    
    
    49,778
    
    
    $
    0.16
 Income
    
    
    Shares
    
    
    PerFor the Three Months Ended September 30, 2006
    
    (Numerator)
    
    
    (Denominator)
    
    
    Share AmountBASIC EPSNet income available to common stockholders
    
    $
    6,544
    
    
    
    47,643
    
    
    $
    0.14Effect of dilutive securities:Stock options
    
    
    
    
    
    
    1,199Restricted stock
    
    
    
    
    
    
    157DILUTED EPS
    
    $
    6,544
    
    
    
    48,999
    
    
    $
    0.13
 Income
    
    
    Shares
    
    
    PerFor the Nine Months Ended September 30, 2007
    
    (Numerator)
    
    
    (Denominator)
    
    
    Share AmountBASIC EPSNet income available to common stockholders
    
    $
    28,408
    
    
    
    48,018
    
    
    $
    0.59Effect of dilutive securities:Stock options
    
    
    
    
    
    
    1,090Restricted stock
    
    
    
    
    
    
    494Series B preferred stock
    
    
    
    
    
    
    DILUTED EPS
    
    $
    28,408
    
    
    
    49,602
    
    
    $
    0.57
 Income
    
    
    Shares
    
    
    PerFor the Nine Months Ended September 30, 2006
    
    (Numerator)
    
    
    (Denominator)
    
    
    Share AmountBASIC EPSNet income available to common stockholders
    
    $
    23,675
    
    
    
    47,454
    
    
    $
    0.50Effect of dilutive securities:Stock options
    
    
    
    
    
    
    1,293Restricted stock
    
    
    
    
    
    
    DILUTED EPS
    
    $
    23,675
    
    
    
    48,747
    
    
    $
    0.49
   8




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Note 4 Long-Term Debt
       Note 5 Asset Retirement Obligation
   9




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Asset retirement obligation at January 1, 2007
    
    $
    20,239Liabilities incurred during 2007
    
    
    554Liabilities settled during 2007
    
    
    (1,233
    )Accretion expense
    
    
    679Revisions in estimates
    
    
    210Asset retirement obligation at September 30, 2007
    
    
    20,449Less: current portion of asset retirement obligation
    
    
    (7,778
    )Long-term asset retirement obligation
    
    $
    12,671
 Note 6 Share Based Compensation
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Stock options:Incentive Stock Options
    
    $
    255
    
    
    $
    520
    
    
    $
    943
    
    
    $
    813Non-Qualified Stock Options
    
    
    484
    
    
    
    122
    
    
    
    1,396
    
    
    
    229Restricted stock
    
    
    1,431
    
    
    
    1,480
    
    
    
    5,317
    
    
    
    2,127Share based compensation
    
    $
    2,170
    
    
    $
    2,122
    
    
    $
    7,656
    
    
    $
    3,169
   Number of
    
    
    Wgtd. Avg.Options
    
    
    Exercise PriceOutstanding at beginning of year
    
    
    2,520,811
    
    
    $
    5.18Granted
    
    
    415,676
    
    
    
    12.43Expired/cancelled/forfeited
    
    
    (30,000
    )
    
    
    10.59Exercised
    
    
    (327,662
    )
    
    
    2.81Outstanding at end of period
    
    
    2,578,825
    
    
    $
    6.59
 10




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##### Table of Contents



Wgtd. Avg.Number of
    
    
    Fair Value perShares
    
    
    ShareOutstanding at beginning of year
    
    
    1,409,895
    
    
    $
    11.04Granted
    
    
    238,420
    
    
    
    11.75Expired/cancelled/forfeited
    
    
    (3,095
    )
    
    
    11.78Lapse of restrictions
    
    
    (310,954
    )
    
    
    10.84Outstanding at end of period
    
    
    1,334,266
    
    
    $
    11.21
 Note 7 Other Comprehensive Income and Derivative Instruments
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income available to common stockholders
    
    $
    7,964
    
    
    $
    6,544
    
    
    $
    28,408
    
    
    $
    23,675Change in fair value of derivative instruments,
accounted for as hedges, net of taxes
    
    
    (1,293
    )
    
    
    5,017
    
    
    
    (5,214
    )
    
    
    14,355Comprehensive income
    
    $
    6,671
    
    
    $
    11,561
    
    
    $
    23,194
    
    
    $
    38,030
    11




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##### Table of Contents



Instrument
    
    
    
    
    
    WeightedProduction Period
    
    Type
    
    Daily Volumes
    
    Average PriceNatural Gas:Fourth Quarter 2007
    
    Costless Collar
    
    27,500 Mmbtu
    
    $
    7.87-9.522008
    
    Costless Collar
    
    10,000 Mmbtu
    
    $
    7.50-8.97Crude Oil:Fourth Quarter 2007
    
    Costless Collar
    
    700 Bbls
    
    $
    68.57-75.952008
    
    Costless Collar
    
    400 Bbls
    
    $
    70.00-75.55
  Note 8 New Accounting Standards
   12




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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
    Recent Events
 Fayetteville Shale Acreage
  Preferred Stock Offering
  13




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Critical Accounting Policies
 Full Cost Method of Accounting
       Future Abandonment Costs
  Reserve Estimates
  14




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Derivative Instruments
    New Accounting Standards
   15




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##### Table of Contents



Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Production:Oil (Bbls)
    
    
    243,048
    
    
    
    206,576
    
    
    
    889,521
    
    
    
    548,999Gas (Mcf)
    
    
    6,621,226
    
    
    
    5,738,895
    
    
    
    18,257,387
    
    
    
    16,023,905Total Production (Mcfe)
    
    
    8,079,514
    
    
    
    6,978,351
    
    
    
    23,594,513
    
    
    
    19,317,899Sales:Total oil sales
    
    $
    18,793,535
    
    
    $
    13,721,525
    
    
    $
    59,892,329
    
    
    $
    34,741,192Total gas sales
    
    
    45,194,457
    
    
    
    39,587,994
    
    
    
    130,809,880
    
    
    
    115,452,309Total oil and gas sales
    
    
    63,987,992
    
    
    
    53,309,519
    
    
    
    190,702,209
    
    
    
    150,193,501Average sales prices:Oil (per Bbl)
    
    $
    77.32
    
    
    $
    66.42
    
    
    $
    67.33
    
    
    $
    63.28Gas (per Mcf)
    
    
    6.83
    
    
    
    6.90
    
    
    
    7.16
    
    
    
    7.21Per Mcfe
    
    
    7.92
    
    
    
    7.64
    
    
    
    8.08
    
    
    
    7.77
   Production
  Prices
 16




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Revenue.
 Expenses.
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Stock options:Incentive Stock Options
    
    $
    255,000
    
    
    $
    520,000
    
    
    $
    943,000
    
    
    $
    813,000Non-Qualified Stock Options
    
    
    484,000
    
    
    
    122,000
    
    
    
    1,396,000
    
    
    
    229,000Restricted stock
    
    
    1,431,000
    
    
    
    1,480,000
    
    
    
    5,317,000
    
    
    
    2,127,000Share based compensation
    
    $
    2,170,000
    
    
    $
    2,122,000
    
    
    $
    7,656,000
    
    
    $
    3,169,000
     17




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Liquidity and Capital Resources
   Source of Capital: Operations
  Source of Capital: Debt
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Source of Capital: Issuance of Securities
   Source of Capital: Divestitures
  Use of Capital: Exploration and Development
   Use of Capital: Acquisitions
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Disclosure Regarding Forward Looking Statements
   
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Instrument
    
    
    
    
    
    WeightedProduction Period
    
    Type
    
    Daily Volumes
    
    Average PriceNatural Gas:Fourth Quarter 2007
    
    Costless Collar
    
    27,500 Mmbtu
    
    $
    7.87-9.522008
    
    Costless Collar
    
    10,000 Mmbtu
    
    $
    7.50-8.97Crude Oil:Fourth Quarter 2007
    
    Costless Collar
    
    700 Bbls
    
    $
    68.57-75.952008
    
    Costless Collar
    
    400 Bbls
    
    $
    70.00-75.55
   Instrument
    
    
    
    
    
    WeightedProduction Period
    
    Type
    
    Daily Volumes
    
    Average PriceNatural Gas:2008
    
    Costless Collar
    
    10,000 Mmbtu
    
    $
    8.00-8.60
  
  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.
 Changes in Internal Controls
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Part II
 
   
  Our future success depends upon our ability to find, develop, produce and acquire additional oil
and natural gas reserves that are economically recoverable.
  A substantial portion of our operations is exposed to the additional risk of tropical weather
disturbances.
   A material reduction or loss in production from our Ship Shoal 72 field could materially affect our
operations.
  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
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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, which will reduce the amount of money we have for operations, capital
expenditures, expansion, acquisitions or general corporate or other business
activities;
    
    we have a higher level of debt than some of our competitors, which may put us at a
competitive disadvantage;
    
    we may be more vulnerable to economic downturns and adverse developments in our
industry or the economy in general, especially declines in oil and natural gas prices;
and
    
    our debt level could limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate.
   We may incur substantially more debt, which may intensify the risks described above, including our
ability to service our indebtedness.
  We do not intend to pay dividends on our common stock and our ability to pay dividends on our
common stock is restricted.
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PETROQUEST ENERGY, INC.Date: November 6, 2007
    
    /s/ Michael O. Aldridge

         Michael O. AldridgeExecutive Vice President, ChiefFinancial Officer and Treasurer(Authorized Officer and PrincipalFinancial and Accounting Officer)
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Index to Exhibits