Document:

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                                                                    EXHIBIT 10.6

                                    GUARANTY

      THIS GUARANTY is made as of December 21, 2000, by PetroQuest Energy,
Inc., a Delaware corporation ("Guarantor"), in favor of EnCap Energy Capital
Fund III, L.P. ("Lender").

                                    RECITALS:

      1. PetroQuest Energy, Inc., a Louisiana corporation (the "Corporation"),
and PetroQuest Energy One, L.L.C., a Louisiana limited liability company (the
"LLC"; the Corporation and the LLC are collectively referred to herein as
"Borrower"), have executed in favor of Lender that certain promissory note of
even date herewith payable to the order of Lender in the principal amount of
$10,000,000 (such promissory note, as from time to time amended, and all
promissory notes given in substitution, renewal or extension therefor or
thereof, in whole or in part, being herein collectively called the "Note").

      2. The Note was executed pursuant to a Credit Agreement of even date
herewith (herein, as from time to time amended, supplemented or restated, called
the "Credit Agreement") by and between Borrower, Guarantor, and Lender, pursuant
to which Lender has agreed to advance funds to Borrower under the Note.

      3. It is a condition precedent to Lender's obligations to advance funds
pursuant to the Credit Agreement that Guarantor shall execute and deliver to
Lender a satisfactory guaranty of Borrower's obligations under the Note and the
Credit Agreement.

      4. Guarantor owns directly, or indirectly through one or more
subsidiaries, one hundred percent (100 %) of the outstanding shares of common
stock of the Corporation and one hundred percent (100%) of the outstanding
membership interests of the LLC.

      5. Borrower, Guarantor, and the other direct and indirect subsidiaries of
Guarantor are mutually dependent on each other in the conduct of their
respective businesses under a holding company structure, with the credit needed
from time to time by each often being provided by another or by means of
financing obtained by one such affiliate with the support of the others for
their mutual benefit and the ability of each to obtain such financing being
dependent on the successful operations of the others.

      6. The board of directors of Guarantor has determined that Guarantor's
execution, delivery and performance of this Guaranty may reasonably be expected
to benefit Guarantor, directly or indirectly, and are in the best interests of
Guarantor.

      NOW, THEREFORE, in consideration of the premises, of the benefits which
will inure to Guarantor from Lender's' advances of funds to Borrower under the
Credit Agreement, and of Ten Dollars and other good and valuable consideration,
the receipt and sufficiency of all of which are hereby acknowledged, and in
order to induce Lender to advance funds under the Credit Agreement, Guarantor
hereby agrees with Lender as follows:
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                                   AGREEMENTS:

      Section 1. Definitions. Reference is hereby made to the Credit Agreement
for all purposes. All terms used in this Guaranty which are defined in the
Credit Agreement and not otherwise defined herein shall have the same meanings
when used herein. All references herein to any Obligation Document, Loan
Document, or other document or instrument refer to the same as from time to time
amended, supplemented or restated. As used herein the following terms shall have
the following meanings:

      "Lender" means EnCap Energy Capital Fund III, L.P., and its successors
and assigns.

      "Obligations" means collectively all of the indebtedness, obligations, and
undertakings which are guaranteed by Guarantor and described in subsections (a)
and (b) of Section 2.

      "Obligation Documents" means this Guaranty, the Note, the Credit
Agreement, the Loan Documents, all other documents and instruments under, by
reason of which, or pursuant to which any or all of the Obligations are
evidenced, governed, secured, or otherwise dealt with, and all other documents,
instruments, agreements, certificates, legal opinions and other writings
heretofore or hereafter delivered in connection herewith or therewith.

      "Obligors" means Borrower, Guarantor and any other endorsers, guarantors
or obligors, primary or secondary, of any or all of the Obligations.

      "Security" means any rights, properties, or interests of Lender, under the
Obligation Documents or otherwise, which provide recourse or other benefits to
Lender in connection with the Obligations or the non-payment or non-performance
thereof, including collateral (whether real or personal, tangible or intangible)
in which Lender has rights under or pursuant to any Obligation Documents,
guaranties of the payment or performance of any Obligation, bonds, surety
agreements, keep-well agreements, letters of credit, rights of subrogation,
rights of offset, and rights pursuant to which other claims are subordinated to
the Obligations.

      Section 2.  Guaranty.

      (a) Guarantor hereby irrevocably, absolutely, and unconditionally
guarantees to Lender the prompt, complete, and full payment when due, and no
matter how the same shall become due, of:

            (i)  the Note, including all principal, all interest thereon and
      all other sums payable thereunder; and

            (ii) All other sums payable under the other Obligation Documents,
      whether for principal, interest, fees or otherwise; and

            (iii) Any and all other indebtedness or liabilities which Borrower
      may at any time owe to Lender, whether incurred heretofore or hereafter or
      concurrently herewith,

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      voluntarily or involuntarily, whether owed alone or with others, whether
      fixed, contingent, absolute, inchoate, liquidated or unliquidated, whether
      such indebtedness or liability arises by notes, discounts, overdrafts,
      open account indebtedness or in any other manner whatsoever, and including
      interest, attorneys' fees and collection costs as may be provided by law
      or in any instrument or agreement evidencing any such indebtedness or
      liability.

Without limiting the generality of the foregoing, Guarantor's liability
hereunder shall extend to and include all post-petition interest, expenses, and
other duties and liabilities of Borrower described above in this subsection (a),
or below in the following subsection (b), which would be owed by Borrower but
for the fact that they are unenforceable or not allowable due to the existence
of a bankruptcy, reorganization, or similar proceeding involving Borrower.

      (b) Guarantor hereby irrevocably, absolutely, and unconditionally
guarantees to Lender the prompt, complete and full performance, when due, and no
matter how the same shall become due, of all obligations and undertakings of
Borrower to Lender under, by reason of, or pursuant to any of the Obligation
Documents.

      (c) If Borrower shall for any reason fail to pay any Obligation, as and
when such Obligation shall become due and payable, whether at its stated
maturity, as a result of the exercise of any power to accelerate, or otherwise,
Guarantor will, upon demand by Lender, pay such Obligation in full to Lender. If
Borrower shall for any reason fail to perform promptly any Obligation, Guarantor
will, upon demand by Lender, cause such Obligation to be performed or, if
specified by Lender, provide sufficient funds, in such amount and manner as
Lender shall in good faith determine, for the prompt, full and faithful
performance of such Obligation by Lender or such other Person as Lender shall
designate.

      (d) If either Borrower or Guarantor fails to pay or perform any Obligation
as described in the immediately preceding subsections (a), (b), or (c) Guarantor
will incur the additional obligation to pay to Lender, and Guarantor will
forthwith upon demand by Lender pay to Lender, the amount of any and all
expenses, including fees and disbursements of Lender's counsel and of any
experts or agents retained by Lender, which Lender may incur as a result of such
failure.

      (e) As between Guarantor and Lender, this Guaranty shall be considered a
primary and liquidated liability of Guarantor. Guarantor's obligations and
liability under this Guaranty shall be on a "solidary" or "joint and several"
basis along with Borrower to the same degree and extent as if Guarantor had been
and/or will be a co-borrower, co-principal obligor and/or co-maker of the
Obligations with Borrower. In the event that there is more than one Guarantor
under this Guarantor, or in the event that there are other guarantors, endorsers
or sureties of all or any portion of the Obligations, Guarantor's obligations
and liability hereunder shall further be on a "solidary" or "joint and several"
basis along with such other guarantors, endorsers and/or sureties.

      Section 3.  Unconditional Guaranty.

      (a) No action which Lender may take or omit to take in connection with any
of the Obligation Documents, any of the Obligations (or any other indebtedness
owing by Borrower to

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Lender), or any Security, and no course of dealing of Lender with any Obligor or
any other Person, shall release or diminish Guarantor's obligations,
liabilities, agreements or duties hereunder, affect this Guaranty in any way, or
afford Guarantor any recourse against Lender, regardless of whether any such
action or inaction may increase any risks to or liabilities of Lender or any
Obligor or increase any risk to or diminish any safeguard of any Security.
Without limiting the foregoing, Guarantor hereby expressly agrees that Lender
may, from time to time, without notice to or the consent of Guarantor, do any or
all of the following:

            (i) Amend, change or modify, in whole or in part, any one or more of
      the Obligation Documents and give or refuse to give any waivers or other
      indulgences with respect thereto.

            (ii) Neglect, delay, fail, or refuse to take or prosecute any action
      for the collection or enforcement of any of the Obligations, to foreclose
      or take or prosecute any action in connection with any Security or
      Obligation Document, to bring suit against any Obligor or any other
      Person, or to take any other action concerning the Obligations or the
      Obligation Documents.

            (iii) Accelerate, change, rearrange, extend, or renew the time,
      rate, terms, or manner for payment or performance of any one or more of
      the Obligations (whether for principal, interest, fees, expenses,
      indemnifications, affirmative or negative covenants, or otherwise).

            (iv) Compromise or settle any unpaid or unperformed Obligation or
      any other obligation or amount due or owing, or claimed to be due or
      owing, under any one or more of the Obligation Documents.

            (v) Take, exchange, amend, eliminate, surrender, release, or
      subordinate any or all Security for any or all of the Obligations, accept
      additional or substituted Security therefor, and perfect or fail to
      perfect Lender's rights in any or all Security.

            (vi)  Discharge, release, substitute or add Obligors.

            (vii) Apply all monies received from Obligors or others, or from any
      Security for any of the Obligations, as Lender may determine to be in
      their best interest, without in any way being required to marshall
      Security or assets or to apply all or any part of such monies upon any
      particular Obligations.

      (b) No action or inaction of any Obligor or any other Person, and no
change of law or circumstances, shall release or diminish Guarantor's
obligations, liabilities, agreements, or duties hereunder, affect this Guaranty
in any way, or afford Guarantor any recourse against Lender. Without limiting
the foregoing, the obligations, liabilities, agreements, and duties of Guarantor
under this Guaranty shall not be released, diminished, impaired, reduced, or
affected by the occurrence of any or all of the following from time to time,
even if occurring without notice to or without the consent of Guarantor:

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            (i) Any voluntary or involuntary liquidation, dissolution, sale of
      all or substantially all assets, marshalling of assets or liabilities,
      receivership, conservatorship, assignment for the benefit of creditors,
      insolvency, bankruptcy, reorganization, arrangement, or composition of any
      Obligor or any other proceedings involving any Obligor or any of the
      assets of any Obligor under laws for the protection of debtors, or any
      discharge, impairment, modification, release, or limitation of the
      liability of, or stay of actions or lien enforcement proceedings against,
      any Obligor, any properties of any Obligor, or the estate in bankruptcy of
      any Obligor in the course of or resulting from any such proceedings.

            (ii) The failure by Lender to file or enforce a claim in any
      proceeding described in the immediately preceding subsection (i) or to
      take any other action in any proceeding to which any Obligor is a party.

            (iii) The release by operation of law of any Obligor from any of the
      Obligations or any other obligations to Lender.

            (iv) The invalidity, deficiency, illegality, or unenforceability of
      any of the Obligations or the Obligation Documents, in whole or in part,
      any bar by any statute of limitations or other law of recovery on any of
      the Obligations, or any defense or excuse for failure to perform on
      account of force majeure, act of God, casualty, impossibility,
      impracticability, or other defense or excuse whatsoever.

            (v) The failure of any Obligor or any other Person to sign any
      guaranty or other instrument or agreement within the contemplation of any
      Obligor or Lender.

            (vi) The fact that Guarantor may have incurred directly part of the
      Obligations or is otherwise primarily liable therefor.

            (vii) Without limiting any of the foregoing, any fact or event
      (whether or not similar to any of the foregoing) which in the absence of
      this provision would or might constitute or afford a legal or equitable
      discharge or release of or defense to a guarantor or surety other than the
      actual payment and performance by Guarantor under this Guaranty.

      (c) Lender may invoke the benefits of this Guaranty before pursuing any
remedies against any Obligor or any other Person and before proceeding against
any Security now or hereafter existing for the payment or performance of any of
the Obligations. Lender may maintain an action against Guarantor on this
Guaranty without joining any other Obligor therein and without bringing a
separate action against any other Obligor.

      (d) If any payment to Lender by any Obligor is held to constitute a
preference or a voidable transfer under applicable state or federal laws, or if
for any other reason Lender is required to refund such payment to the payor
thereof or to pay the amount thereof to any other Person, such payment to Lender
shall not constitute a release of Guarantor from any liability hereunder, and
Guarantor agrees to pay such amount to Lender on demand and agrees and
acknowledges that this Guaranty shall continue to be effective or shall be
reinstated, as the case

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may be, to the extent of any such payment or payments. Any transfer by
subrogation which is made as contemplated in Section 6 prior to any such payment
or payments shall (regardless of the terms of such transfer) be automatically
voided upon the making of any such payment or payments, and all rights so
transferred shall thereupon revert to and be vested in Lender.

      (e) This is a continuing guaranty and shall apply to and cover all
Obligations and renewals and extensions thereof and substitutions therefor from
time to time.

      Section 4. Waiver. Guarantor hereby waives, with respect to the
Obligations, this Guaranty, and the other Obligation Documents:

      (a) notice of the incurrence of any Obligation by Borrower, and notice of
any kind concerning the assets, liabilities, financial condition,
creditworthiness, businesses, prospects, or other affairs of Borrower (it being
understood and agreed that: (i) Guarantor shall take full responsibility for
informing itself of such matters, (ii) Lender shall not have any responsibility
of any kind to inform Guarantor of such matters, and (iii) Lender are hereby
authorized to assume that Guarantor, by virtue of its relationships with
Borrower which are independent of this Guaranty, has full and complete knowledge
of such matters whenever Lender extends credit to Borrower or take any other
action which may change or increase Guarantor's liabilities or losses
hereunder).

      (b) notice that Lender, any Obligor, or any other Person has taken or
omitted to take any action under any Obligation Document or any other agreement
or instrument relating thereto or relating to any Obligation.

      (c) notice of acceptance of this Guaranty.

      (d) default, demand, presentment for payment, and notice of default,
demand, dishonor, nonpayment, or nonperformance.

      (e) notice of intention to accelerate, notice of acceleration, notice of
any Default or Event of Default, protest, notice of protest, notice of any
exercise of remedies (as described in the following Section 5 or otherwise), and
all other notices of any kind whatsoever.

      Section 5. Exercise of Remedies. Lender shall have the right to enforce,
from time to time, in any order and at Lender's sole discretion, any rights,
powers and remedies which Lender may have under the Obligation Documents or
otherwise, including judicial foreclosure, the exercise of rights of power of
sale, the taking of a deed or assignment in lieu of foreclosure, the appointment
of a receiver to collect rents, issues and profits, the exercise of remedies
against personal property, or the enforcement of any assignment of leases,
rentals, oil or gas production, or other properties or rights, whether real or
personal, tangible or intangible; and Guarantor shall be liable to Lender
hereunder for any deficiency resulting from the exercise by Lender of any such
right or remedy even though any rights which Guarantor may have against Borrower
or others may be destroyed or diminished by exercise of any such right or
remedy. No failure on the part of Lender to exercise, and no delay in
exercising, any right hereunder or under any other Obligation Document shall
operate as a waiver thereof; nor shall any single or partial exercise of

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any right preclude any other or further exercise thereof or the exercise of any
other right. The rights, powers and remedies of Lender provided herein and in
the other Obligation Documents are cumulative and are in addition to, and not
exclusive of, any other rights, powers or remedies provided by law or in equity.
The rights of Lender hereunder are not conditional or contingent on any attempt
by Lender to exercise any of its rights under any other Obligation Document
against any Obligor or any other Person.

      Section 6. Limited Subrogation.

      (a) Until all of the Obligations have been paid and performed in full
Guarantor shall have no right to exercise any right of subrogation,
reimbursement, indemnity, exoneration, contribution or any other claim which it
may now or hereafter have against or to any Obligor or any Security in
connection with this Guaranty, and Guarantor hereby waives any rights to enforce
any remedy which Guarantor may have against Borrower and any right to
participate in any Security until such time. If any amount shall be paid to
Guarantor on account of any such subrogation or other rights, any such other
remedy, or any Security at any time when all of the Obligations and all other
expenses guaranteed pursuant hereto shall not have been paid in full, such
amount shall be held in trust for the benefit of Lender, shall be segregated
from the other funds of Guarantor and shall forthwith be paid over to Lender to
be held by Lender as collateral for, or then or at any time thereafter applied
in whole or in part by Lender against, all or any portion of the Obligations,
whether matured or unmatured, in such order as Lender shall elect.

      (b) If Guarantor shall make payment to Lender of all or any portion of the
Obligations and if all of the Obligations shall be finally paid in full, Lender
will, at Guarantor's request and expense, execute and deliver to Guarantor
(without recourse, representation or warranty) appropriate documents necessary
to evidence the transfer by subrogation to Guarantor of an interest in the
Obligations resulting from such payment by Guarantor; provided that such
transfer shall be subject to Section 3(d) above and that without the consent of
Lender (which Lender may withhold in its discretion) Guarantor shall not have
the right to be subrogated to any claim or right against any Obligor which has
become owned by Lender, whose ownership has otherwise changed in the course of
enforcement of the Obligation Documents, or which Lender otherwise has released
or wishes to release from its Obligations.

      Section 7. Successors and Assigns. Guarantor's rights or obligations
hereunder may not be assigned or delegated, but this Guaranty and such
obligations shall pass to and be fully binding upon the successors of Guarantor,
as well as Guarantor. This Guaranty shall apply to and inure to the benefit of
Lender and its successors or assigns. Without limiting the generality of the
immediately preceding sentence, Lender may assign, grant a participation in, or
otherwise transfer any Obligation held by it or any portion thereof, and Lender
may assign or otherwise transfer its rights or any portion thereof under any
Obligation Document, to any other Person, and such other Person shall thereupon
become entitled to all of the benefits in respect thereof granted to Lender
hereunder unless otherwise expressly provided by Lender in connection with such
assignment or transfer.

      Section 8. Subordination. Guarantor hereby subordinates and makes inferior
to the Obligations any and all indebtedness now or at any time hereafter owed by
Borrower to

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Guarantor. Guarantor agrees that after the occurrence of any Default or Event of
Default it will neither permit Borrower to repay such indebtedness or any part
thereof nor accept payment from Borrower of such indebtedness or any part
thereof without the prior written consent of Lender. If Guarantor receives any
such payment without the prior written consent of Lender, the amount so paid
shall be held in trust for the benefit of Lender, shall be segregated from the
other funds of Guarantor, and shall forthwith be paid over to Lender to be held
by Lender as collateral for, or then or at any time thereafter applied in whole
or in part by Lender against, all or any portions of the Obligations, whether
matured or unmatured, in such order as Lender shall elect.

      Section 9. Representations and Warranties. Without limitation of anything
contained in the Credit Agreement, Guarantor hereby represents and warrants to
Lender as follows:

      (a) The Recitals at the beginning of this Guaranty are true and correct in
all respects.

      (b) Guarantor is a corporation duly organized, validly existing and in
good standing under the laws of the state of its incorporation as set forth in
the Recitals to this Guaranty; and Guarantor has all requisite power and
authority to execute, deliver and perform this Guaranty.

      (c) The execution, delivery and performance by Guarantor of this Guaranty
have been duly authorized by all necessary corporate action and do not and will
not contravene its certificate or articles of incorporation or bylaws.

      (d) The execution, delivery and performance by Guarantor of this Guaranty
do not and will not contravene any law or governmental regulation or any
contractual restriction binding on or affecting Guarantor or any of its
Affiliates or properties, and do not and will not result in or require the
creation of any lien, security interest or other charge or encumbrance upon or
with respect to any of its properties.

      (e) No authorization or approval or other action by, and no notice to or
filing with, any governmental authority or other regulatory body or third party
is required for the due execution, delivery and performance by Guarantor of this
Guaranty.

      (f) This Guaranty is a legal, valid and binding obligation of Guarantor,
enforceable against Guarantor in accordance with its terms except as limited by
bankruptcy, insolvency or similar laws of general application relating to the
enforcement of creditors' rights.

      (g) There is no action, suit or proceeding pending or, to the knowledge of
Guarantor, threatened against or otherwise affecting Guarantor before any court,
arbitrator or governmental department, commission, board, bureau, agency or
instrumentality which may materially and adversely affect Guarantor's financial
condition or its ability to perform its obligations hereunder.

      (h) The direct or indirect value of the consideration received and to be
received by Guarantor in connection herewith is reasonably worth at least as
much as the liability and obligations of Guarantor hereunder, and the incurrence
of such liability and obligations in return for such consideration may
reasonably be expected to benefit Guarantor, directly or indirectly.

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      (i) Guarantor is not "insolvent" on the date hereof (that is, the sum of
Guarantor's absolute and contingent liabilities, including the Obligations, does
not exceed the fair market value of Guarantor's assets). Guarantor's capital is
adequate for the businesses in which Guarantor is engaged and intends to be
engaged. Guarantor has not incurred (whether hereby or otherwise), nor does
Guarantor intend to incur or believe that it will incur, debts which will be
beyond its ability to pay as such debts mature.

      (j) All balance sheets, earning statements, financial data and other
information concerning Guarantor which have been furnished to Lender to induce
it to accept this Guaranty (or otherwise furnished to Lender in connection with
the transactions contemplated hereby or associated herewith) fairly represent
the financial condition of Guarantor as of the dates and the results of
Guarantor's operations for the periods for which the same are furnished. None of
such balance sheets, earnings and cash flow statements, financial data and other
information contains any untrue statement of a material fact or omits to state
any material fact which is necessary to make any statements contained therein
not misleading.

      Section 10. No Oral Change. No amendment of any provision of this Guaranty
shall be effective unless it is in writing and signed by Guarantor and Lender,
and no waiver of any provision of this Guaranty, and no consent to any departure
by Guarantor therefrom, shall be effective unless it is in writing and signed by
Lender, and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.

      Section 11. Invalidity of Particular Provisions. If any term or provision
of this Guaranty shall be determined to be illegal or unenforceable all other
terms and provisions hereof shall nevertheless remain effective and shall be
enforced to the fullest extent permitted by applicable law.

      Section 12. Headings and References. The headings used herein are for
purposes of convenience only and shall not be used in construing the provisions
hereof. The words "this Guaranty," "this instrument," "herein," "hereof,"
"hereby" and words of similar import refer to this Guaranty as a whole and not
to any particular subdivision unless expressly so limited. The phrases "this
section" and "this subsection" and similar phrases refer only to the
subdivisions hereof in which such phrases occur. The word "or" is not exclusive,
and the word "including" (in its various forms) means "including without
limitation". Pronouns in masculine, feminine and neuter genders shall be
construed to include any other gender, and words in the singular form shall be
construed to include the plural and vice versa, unless the context otherwise
requires.

      Section 13. Term. This Guaranty shall be irrevocable until all of the
Obligations have been completely and finally paid and performed, Lender has no
obligation to make any loans or other advances to Borrower, and all obligations
and undertakings of Borrower under, by reason of, or pursuant to the Obligation
Documents have been completely performed, and this Guaranty is thereafter
subject to reinstatement as provided in Section 3(d). All extensions of credit
and financial accommodations heretofore or hereafter made by Lender to Borrower
shall be conclusively presumed to have been made in acceptance hereof and in
reliance hereon.

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      Section 14. Notices. Any notice or communication required or permitted
hereunder shall be given as provided in the Credit Agreement.

      Section 15. Limitation on Interest. Lender and Guarantor intend to
contract in strict compliance with applicable usury law from time to time in
effect, and the provisions of the Credit Agreement limiting the interest for
which Guarantor is obligated are expressly incorporated herein by reference.

      Section 16. Loan Document. This Guaranty is a Loan Document, as defined in
the Credit Agreement, and is subject to the provisions of the Credit Agreement
governing Loan Documents.

      Section 17. Counterparts; Fax. This Guaranty may be executed in any number
of counterparts, each of which when so executed shall be deemed to constitute
one and the same Guaranty. This Agreement may be validly executed and delivered
by facsimile or other electronic transmission.

      SECTION 18. GOVERNING LAW. THIS GUARANTY IS TO BE PERFORMED IN THE STATE
OF LOUISIANA AND SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE
WITH THE LAWS OF SUCH STATE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

      SECTION 19. FINAL AGREEMENT. THIS WRITTEN AGREEMENT AND THE OTHER LOAN
DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES HERETO AND MAY NOT
BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES HERETO.

           [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

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      IN WITNESS WHEREOF, Guarantor has executed and delivered this Guaranty as
of the date first written above.

                              PETROQUEST ENERGY, INC., a Delaware corporation

                              By: /s/ Charles T. Goodson
                                  -------------------------------------
                                  Charles T. Goodson
                                  Chairman of the Board and Chief
                                  Executive Officer<PAGE>   1
                                                                    EXHIBIT 10.7

                             SUBORDINATION AGREEMENT

         This Subordination Agreement (this "Agreement") is entered into
effective as of December 21, 2000, by and among Hibernia National Bank, on
behalf of itself and each additional lender from time to time party to the
Hibernia Credit Agreement (as such term is defined below) (herein called
"Hibernia"), EnCap Energy Capital Fund III, L.P. on behalf of itself and its
affiliates (herein called "EnCap"), and PetroQuest Energy, Inc., a Louisiana
corporation, PetroQuest Energy One, L.L.C., a Louisiana limited liability
company, and PetroQuest Energy, Inc., a Delaware corporation (herein
collectively called "Debtors").

                                    RECITALS:

         1. Debtors and Hibernia are entering into a Credit Agreement of even
date herewith (herein, as from time to time amended, supplemented, or restated
in compliance herewith, called the "Hibernia Credit Agreement"). The promissory
note(s) given pursuant to the Hibernia Credit Agreement, together with all
promissory notes given in renewal and extension thereof, as each is from time to
time amended or supplemented in compliance herewith, are herein called the
"Hibernia Notes". True and correct copies of the Hibernia Credit Agreement and
the Hibernia Notes are being delivered to EnCap concurrently herewith.

         2. Debtors are also entering into a Credit Agreement of even date
herewith (herein, as from time to time amended, supplemented, or restated in
compliance herewith, called the "EnCap Credit Agreement") with EnCap. The
promissory note(s) given pursuant to the EnCap Credit Agreement, together with
all promissory notes given in renewal and extension thereof, as each is from
time to time amended or supplemented in compliance herewith, are herein called
the "EnCap Notes". True and correct copies of the EnCap Credit Agreement and the
EnCap Notes are being delivered to Hibernia concurrently herewith.

         3. The Hibernia Indebtedness and the EnCap Indebtedness (as each such
term is defined below) will be secured by certain liens and security interests
granted by Debtors.

         4. The execution and delivery of this Agreement is a condition
precedent to the extensions of credit under the Hibernia Credit Agreement and
the EnCap Credit Agreement.

         NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and in order to induce Hibernia to enter into the Hibernia Credit
Agreement with Debtors, and to induce EnCap to enter into the EnCap Credit
Agreement with Debtors, the parties hereto hereby agree as follows:

         Section 1.        Definitions.

         (a) Specific Definitions. As used herein, the terms "Agreement,"
"Hibernia," "EnCap," "Debtors," "Hibernia Credit Agreement", "Hibernia Notes",
"EnCap Credit

<PAGE>   2

Agreement," and "EnCap Notes" have the meanings indicated above, and the
following additional terms have the following meanings:

         "Collateral" means any and all property of any nature whatsoever which
now constitutes or hereafter will constitute collateral or other security for
payment of any of the Indebtedness.

         "EnCap Default" means any "Event of Default" as defined in the EnCap
Credit Agreement.

         "EnCap Documents" means (a) the EnCap Credit Agreement, (b) the EnCap
Notes and any other notes or instruments evidencing EnCap Indebtedness, (c) all
mortgages, security agreements, pledge agreements or financing statements
evidencing, creating or perfecting any Lien to secure the EnCap Indebtedness in
any way, (d) all guaranties of the EnCap Indebtedness, (e) all other documents,
instruments or agreements relating to the EnCap Indebtedness now or hereafter
executed or delivered by or among any Debtor or any Subsidiary of any Debtor, to
EnCap, and (f) all renewals, extensions, amendments, modifications or
restatements of the foregoing.

         "EnCap Indebtedness" means any and all indebtedness (whether for
principal, interest, fees, indemnifications, expenses, or otherwise) owing by
any Debtor to EnCap under or relating to the EnCap Credit Agreement, any
promissory note issued by any Debtor in connection therewith (including the
EnCap Notes), any EnCap Document, or any Permitted Junior Securities.

         "EnCap Liens" means all Liens securing the EnCap Indebtedness.

         "Enforcement Action" means, with respect to any Indebtedness: (a) any
acceleration of any or all of such Indebtedness, (b) any enforcement or
foreclosure of Liens granted by any Debtor or any Subsidiary of any Debtor to
secure any or all of such Indebtedness, or (c) any other efforts to collect any
or all of such Indebtedness from any Debtor or any Subsidiary of any Debtor or
from any Debtor's or any such Subsidiary's assets or properties (including
proceeds of production), excluding receipt of payments on such Indebtedness in
the ordinary course of business but including the commencement or the joining
with any other creditor of any Debtor or any Subsidiary in the commencement of
any Insolvency Proceeding against any Debtor or any Subsidiary of any Debtor;
provided, that, none of the following shall constitute an Enforcement Action:
(i) acceleration of any of the EnCap Indebtedness following acceleration of any
of the Hibernia Indebtedness, (ii) acceleration of any of the Hibernia
Indebtedness following acceleration of any of the EnCap Indebtedness, (iii) any
of the actions described in the foregoing clauses (a), (b) or (c) that are taken
during the existence of any Insolvency Proceeding that is subject to the
jurisdiction of a court of competent authority, and (iv) demands or actions to
enforce this Agreement.

         "Hibernia Documents" means (a) the Hibernia Credit Agreement, (b) the
Hibernia Notes and any other notes or instruments evidencing Hibernia
Indebtedness, (c) all mortgages, security agreements, pledge agreements or
financing statements evidencing, creating or perfecting any Lien to secure the
Hibernia Indebtedness in any way, (d) all guaranties of the Hibernia

                                       2
<PAGE>   3

Indebtedness, (e) all other documents, instruments or agreements relating to the
Hibernia Indebtedness now or hereafter executed or delivered by or among any
Debtor or any Subsidiary of any Debtor to Hibernia, and (f) all renewals,
extensions, amendments, modifications or restatements of the foregoing.

         "Hibernia Event of Default" means any Hibernia Non-Payment Default or
any Hibernia Payment Default.

         "Hibernia Indebtedness" means any and all indebtedness and other
obligations (whether for principal, interest, fees, indemnifications, expenses,
or otherwise) owing by any Debtor to Hibernia under the Hibernia Credit
Agreement or the "Loan Documents" as defined therein.

         "Hibernia Non-Payment Default" means any "Event of Default" as defined
in the Hibernia Credit Agreement, other than a Hibernia Payment Default.

         "Hibernia Payment Default" means a default in the payment of any
principal or interest owing in respect of any Hibernia Indebtedness, whether
such default relates to the failure of any Debtor to pay when due (i) any
regularly scheduled payment under the Hibernia Indebtedness, (ii) any payment of
the Hibernia Indebtedness which may be from time to time required under the
terms of the Hibernia Credit Agreement (including those which might result from
a redetermination of the Borrowing Base Amount as therein defined); and/or (iii)
all Hibernia Indebtedness upon the acceleration of the maturity of same pursuant
to the terms of the Hibernia Credit Agreement.

         "Indebtedness" means any of the EnCap Indebtedness or the Hibernia
Indebtedness.

         "Insolvency Payor" means, in connection with any Insolvency Proceeding,
any Debtor or any trustee in bankruptcy, receiver, assignee for the benefit of
creditors, liquidating trustee or agent of or for any Debtor or its unsecured
creditors.

         "Insolvency Proceeding" means any (a) insolvency, bankruptcy,
receivership, custodianship, liquidation, reorganization, readjustment,
composition or other similar proceeding relating to any Debtor or any of any
Debtor's properties, whether under any bankruptcy, reorganization or insolvency
law or laws, federal or state, or any law, federal or state, relating to relief
of debtors, readjustment of indebtedness, reorganization, composition or
extension, (b) proceeding for any liquidation, liquidating distribution,
dissolution or other "winding up" of any Debtor, voluntary or involuntary,
whether or not involving insolvency or bankruptcy proceedings, (c) assignment
for the benefit of creditors of any Debtor, or (d) other marshaling of the
assets of any Debtor; provided that any merger, consolidation or liquidation of
any Debtor which is permitted under both the Hibernia Credit Agreement and the
EnCap Credit Agreement shall not constitute an "Insolvency Proceeding".

         "Lien" means any lien, mortgage, security interest, pledge, deposit,
judgment lien, attachment garnishment, or other charge or encumbrance for
security purposes or to enforce a judgment, whether arising by law or agreement
or otherwise.

                                       3
<PAGE>   4

         "Permitted Junior Securities" means (a) stock or other equity interests
in any Debtor or any parent company of any Debtor, and (b) debt instruments or
securities (including renewals and extensions of EnCap Notes) issued by any
Debtor or any parent company of any Debtor in exchange for or in renewal and
extension of EnCap Notes that (i) have a maturity date longer than that of the
EnCap Indebtedness being exchanged or renewed and extended, and (ii) are
subordinate and junior in right of payment to the payment of the Hibernia
Indebtedness at least to the extent provided in this Agreement.

         "Person" means an individual, corporation, limited liability company,
partnership, association, joint stock company, trust or trustee thereof, estate
or executor thereof, unincorporated organization or joint venture, court or
governmental unit or any agency or subdivision thereof, or any other legally
recognizable entity.

         "Proceeds" has the meaning assigned to it under the UCC, shall also
include "products" (as defined in the UCC), and, in any event, shall include,
but not be limited to (a) any and all proceeds of any insurance, indemnity,
warranty, letter of credit or guaranty or collateral security payable to any
grantor from time to time with respect to any of the Collateral, (b) any and all
payments (in any form whatsoever) made or due and payable to the owner of the
Collateral from time to time in connection with any requisition, confiscation,
condemnation, seizure or forfeiture of all or any part of the Collateral by any
government body, authority, bureau or agency (or any Person acting under color
of governmental authority) and (c) any and all other amounts from time to time
paid or payable under or in connection with any of the Collateral.

         "Subsidiary" means, for any Person, any corporation, limited liability
company, partnership, or other entity of which securities or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other Persons performing similar functions (including that of a
general partner) are at the time directly or indirectly owned, collectively, by
such Person and any Subsidiaries of such Person. The term Subsidiary shall
include Subsidiaries of Subsidiaries (and so on).

         "UCC" means the Uniform Commercial Code, as amended and as in effect
from time to time in the State of Louisiana.

         (b) References and Headings. Unless the context otherwise requires or
unless otherwise provided herein, references in this Agreement to a particular
agreement, instrument or document (including references to promissory notes,
loan agreements, guaranties and security documents) also refer to and include
all renewals, extensions, amendments, modifications, supplements or restatements
of any such agreement, instrument or document which are made in writing by the
parties thereto; provided, that, nothing contained in this Section 1(b) shall be
construed to authorize any party hereto to execute or enter into any such
renewal, extension, amendment modification, supplement or restatement. The
headings used herein are for purposes of convenience only and shall not be used
in construing the provisions hereof. The words "this Agreement," "this
instrument," "herein," "hereof," "hereby" and words of similar import refer to
this Agreement as a whole and not to any particular subdivision unless expressly
so limited. The word "or" is not exclusive, and the word "including" (in its
various forms) means "including without limitation". Pronouns in masculine,
feminine and neuter genders shall be construed to

                                       4
<PAGE>   5

include any other gender, and words in the singular form shall be construed to
include the plural and vice versa, unless the context otherwise requires.

         Section 2. General. Notwithstanding any provision of the EnCap
Documents, the EnCap Indebtedness shall be subordinate and junior in right of
payment to all Hibernia Indebtedness, to the extent and in the manner provided
for in this Agreement, and EnCap, by acceptance thereof, whether upon original
issuance, transfer, assignment or exchange, agrees to be bound by the provisions
of this Agreement.

         Section 3. Insolvency Proceedings. In the event of any Insolvency
Proceeding all Hibernia Indebtedness shall first be finally and irrevocably paid
in full in cash before any payment or distribution of any character, whether in
cash, securities or other property (except Permitted Junior Securities) shall be
made by any Insolvency Payor, or received or accepted by EnCap from any
Insolvency Payor, for or on account of any EnCap Indebtedness. In the event of
any Insolvency Proceeding, any payment or distribution by any Insolvency Payor
in such Insolvency Proceeding of any kind or character, whether in cash,
securities or other property (other than Permitted Junior Securities), which
would otherwise (but for this Agreement) be payable or deliverable to EnCap in
respect of any EnCap Indebtedness shall be paid or delivered by such Insolvency
Payor directly to Hibernia for application in payment of the Hibernia
Indebtedness to the extent necessary to pay in full all Hibernia Indebtedness
then remaining unpaid, after giving effect to any concurrent payment or
distribution to the holders of the Hibernia Indebtedness. EnCap hereby grants to
Hibernia the right to file proofs of claim on account of the EnCap Indebtedness
in any Insolvency Proceedings in the event that EnCap fails to do so within 15
days of the bar date pertaining thereto; provided, however, that Hibernia shall
not be permitted to vote such claim, and all voting rights with respect thereto
are retained by EnCap. In the event of any Insolvency Proceeding of any Debtor
and any hearing or motion therein under Section 363 of the United States
Bankruptcy Code with respect to the use of Collateral constituting cash Proceeds
from the sale of oil and gas production of any Debtor in the ordinary course of
business, EnCap will not oppose any payment of such cash Collateral to Hibernia
to the extent such cash Collateral is to be applied to payment of Hibernia
Indebtedness.

         Section 4. Subordination Upon Hibernia Payment Default. If any Hibernia
Payment Default ever exists (whether at a date fixed for payment or by
declaration, acceleration or otherwise), then the rights of EnCap to receive any
payment from any Debtor with respect to the EnCap Indebtedness (other than in
the form of Permitted Junior Securities) shall be suspended from and after the
date that Hibernia gives EnCap written notice of such Hibernia Payment Default
until such Hibernia Payment Default has been cured or waived or until the
Hibernia Indebtedness is satisfied in full.

         Section 5. Subordination Upon Hibernia Non-Payment Default. If any
Hibernia Non-Payment Default occurs, then Hibernia may, at its option, give
notice thereof to EnCap, in which event the rights of EnCap to receive any
payment from any Debtor with respect to the EnCap Indebtedness (other than in
the form of Permitted Junior Securities) shall be suspended for a thirty day
period from and after the date that Hibernia gives EnCap written notice of such
Hibernia Non-Payment Default; provided that Hibernia may give only one such
notice during any consecutive twelve-month period.

                                       5
<PAGE>   6

         Section 6. Lien Priorities and Application of Proceeds.

         (a) Any and every perfected Lien in the Collateral in favor of Hibernia
or any other lender from time to time party to the Hibernia Credit Agreement
held as security for payment of the Hibernia Indebtedness has and shall have
priority, as among the parties hereto, over any Lien that EnCap now has or may
hereafter acquire in the Collateral, notwithstanding any statement or provision
contained in the EnCap Documents or otherwise to the contrary and irrespective
of the time or order of filing or recording of financing statements, security
agreements, pledge agreements, deeds of trust, mortgages or other notices of
Liens or assignments granted pursuant thereto, and irrespective of anything
contained in any filing or agreement to which any part hereto or its respective
successors and assigns may now or hereafter be a party, and irrespective of the
ordinary rules for determining priorities under the UCC or under any other law
governing the relative priorities of secured creditors.

         (b) At any time during which all or any part of the Hibernia
Indebtedness remains outstanding, and whether or not the same is then due and
payable, the Proceeds of any Enforcement Action by Hibernia or EnCap upon all or
any part of the Collateral shall be applied in the following order of
priorities, irrespective of the application of any rule or law or the defect or
impairment of any Hibernia Document, EnCap Document, Lien or assignment
thereunder or the failure to perfect any Lien or assignment securing the
Hibernia Indebtedness:

         first,   to the payment in full of all Hibernia Indebtedness, in such
                  order as Hibernia shall determine in its sole discretion;

         second,  to the payment in full of all EnCap Indebtedness, in such
                  order as EnCap shall determine in its sole discretion; and

         third,   to be released to Debtors with the consent of EnCap and
                  Hibernia, or as a court of competent jurisdiction may direct.

         (c) Each of EnCap and Hibernia shall be entitled to rely upon any order
or decree made by any court of competent jurisdiction in which proceedings are
pending, or a certificate of the liquidating trustee or other Person making any
distribution to EnCap or Hibernia, as the case may be, for the purpose of
ascertaining the Persons entitled to participate in such distribution, the
amount thereof or payable thereon, the amount or amounts paid or distributed
thereon and all other facts pertinent thereto or to this Agreement.

         Section 7. No Changes to Payment Terms.

         (a) Until the termination of the Hibernia Credit Agreement, Debtors and
EnCap will not (without the written consent of Hibernia) amend or supplement the
EnCap Documents in any way that requires any Debtor to make principal payments
on the EnCap Indebtedness prior to November 17, 2001 or that increases the
interest rate payable on the EnCap Indebtedness.

         (b) Until the termination of the EnCap Credit Agreement, Debtors and
Hibernia will not (without the written consent of EnCap) amend or supplement the
Hibernia Credit Agreement

                                       6
<PAGE>   7

in any way that requires any Debtor to make additional principal payments (not
already provided for) on the Hibernia Indebtedness prior to one day after the
date set forth in the preceding subsection (a) or that increases the interest
rate payable on the Hibernia Indebtedness, except that the Hibernia Credit
Agreement may be amended to add additional lenders and to provide additional
credit to Debtors thereunder (which shall be considered additional Hibernia
Indebtedness hereunder) so long as (i) the maturity dates of principal payments
due to such additional lenders are no earlier than the maturity dates of the
principal payments and mandatory prepayments presently required and which may
from time to time be required due to Borrowing Base redeterminations made by
Hibernia under the Hibernia Credit Agreement, and (ii) such additional lenders
expressly acknowledge in writing and agree that any such indebtedness extended
by them under the Hibernia Credit Agreement shall be considered Hibernia
Indebtedness for purposes of this Agreement.

         Section 8. Optional Prepayments; Turnover of Payments Wrongly Received.

         (a) Debtors may make optional prepayments (i) on the Hibernia
Indebtedness as permitted under the Hibernia Credit Agreement if at the time of
such prepayment no EnCap Default shall have occurred or be continuing or be
caused solely by the making of such prepayment and (ii) on the EnCap
Indebtedness as permitted under the EnCap Credit Agreement if at the time of
such prepayment no Hibernia Event of Default shall have occurred or be
continuing or be caused solely by the making of such prepayment.

         (b) If any Debtor or any Subsidiary of any Debtor shall make any
payment of EnCap Indebtedness or any payment in respect of any purchase,
repurchase, redemption or defeasance or distribution (whether in cash, property
or any other manner) to EnCap which is prohibited hereby or EnCap shall collect
any such payment or distribution which is prohibited hereby (including any such
amount resulting from the taking of any Enforcement Action, whether or not
permitted hereunder), then such payment shall be received and held in trust for
and paid over and delivered by EnCap to Hibernia as agent for itself and any
other lenders party to the Hibernia Credit Agreement upon demand by Hibernia.

         Section 9. Payments to EnCap Otherwise Permitted. Except as expressly
provided herein, nothing shall prevent any Debtor from paying, or EnCap from
receiving, any payments when due on the EnCap Indebtedness or limit the rights
of EnCap to take Enforcement Actions.

         Section 10.  Notice and Right to Cure; Subrogation.

         (a) From and after the date hereof until and but not including
September 18, 2001, Hibernia will give notice to EnCap of any Hibernia Event of
Default at least thirty days prior to taking any Enforcement Action with respect
thereto, and Hibernia agrees not to take any Enforcement Action until the end of
such thirty day period without the consent of EnCap. From and after September
18, 2001, Hibernia will give notice to EnCap of any Hibernia Event of Default at
least fifteen days prior to taking any Enforcement Action with respect thereto,
and Hibernia agrees not to take any Enforcement Action until the end of such
fifteen day period without the consent of EnCap. Although EnCap has no
obligation to cure any Hibernia Event of Default, each Debtor hereby irrevocably
authorizes EnCap to make any such cure, if EnCap so

                                       7
<PAGE>   8

elects, and Hibernia hereby agrees that it will allow EnCap to make any such
cure on behalf of such Debtor (whether during or after such thirty or fifteen
day period, as applicable).

         (b) From and after the date hereof until and but not including
September 18, 2001, EnCap shall give notice to Hibernia at least thirty days
prior to any Enforcement Action with respect to the EnCap Indebtedness, and
EnCap agrees not to take any Enforcement Action until the end of such thirty day
period without the consent of Hibernia, provided that all amounts received by
EnCap from Enforcement Actions thereafter must be paid over to Hibernia as agent
for itself and the other lenders then party to the Hibernia Credit Agreement
until all Hibernia Indebtedness has been paid in full. From and after September
18, 2001, EnCap shall give notice to Hibernia at least fifteen days prior to any
Enforcement Action with respect to the EnCap Indebtedness, and EnCap agrees not
to take any Enforcement Action until the end of such fifteen day period without
the consent of Hibernia, provided that all amounts received by EnCap from
Enforcement Actions thereafter must be paid over to Hibernia as agent for itself
and the other lenders then party to the Hibernia Credit Agreement until all
Hibernia Indebtedness has been paid in full. Although Hibernia has no obligation
to cure any event of default under the EnCap Documents, each Debtor hereby
irrevocably authorizes Hibernia to make any such cure, if Hibernia so elects,
and EnCap hereby agrees that it will allow Hibernia to make any such cure on
behalf of such Debtor (whether during or after such thirty or fifteen day
period, as applicable).

         (c) To the extent that EnCap has made any payments hereunder to
Hibernia, after the payment in full in cash of all Hibernia Indebtedness EnCap
shall be subrogated to the rights of Hibernia to receive payments and
distributions of cash, property and securities applicable to the Hibernia
Indebtedness and the Collateral until all amounts owing on the EnCap
Indebtedness shall be paid in full in cash. For purposes of such subrogation, no
payments or distributions to the holders of the Hibernia Indebtedness by or on
behalf of any Debtor or any Subsidiary of any Debtor or by or on behalf of EnCap
by virtue of this Agreement which otherwise would have been made to EnCap shall,
as between any Debtor or any Subsidiary of any Debtor, their respective
creditors other than Hibernia and EnCap, be deemed to be a payment or
distribution by any Debtor or any Subsidiary to or on account of the Hibernia
Indebtedness.

         (d) Hibernia will at any time following the occurrence and during the
continuance of a Hibernia Payment Default, upon request by EnCap, assign to
EnCap all of the Hibernia Indebtedness, all of Hibernia's rights under the
Hibernia Credit Agreement, and all appurtenant liens, rights, documents and
instruments upon payment of a cash purchase price equal to 100% of the Hibernia
Indebtedness so assigned and assumption or termination of any remaining duties
under the Hibernia Credit Agreement. Any such assignment will be without
recourse, representation or warranty, except that Hibernia will warrant that it
owns and holds, free of any encumbrance or subordination created by Hibernia,
the Hibernia Indebtedness and the liens, rights, documents and instruments which
it is transferring.

         Section 11. Provisions Solely to Define Relative Rights. The provisions
of this Agreement are solely for the purposes of defining the relative rights of
Hibernia, on the one hand and EnCap, on the other hand. Nothing herein shall
impair or prevent Hibernia from exercising all rights and remedies otherwise
permitted by applicable law upon default under the Hibernia Credit Agreement
subject, however, to the provisions of this Agreement. Nothing herein shall

                                       8
<PAGE>   9

impair, as between any Debtor and EnCap, the obligation of any Debtor, which is
unconditional and absolute, to pay to EnCap the principal of and interest on and
fees with respect to the EnCap Indebtedness as and when the same shall become
due in accordance with their terms, nor shall anything herein prevent EnCap from
exercising all rights and remedies otherwise permitted by applicable law upon
default under the EnCap Documents, subject, however, to the provisions of this
Agreement and the rights of Hibernia to the extent provided herein. EnCap shall
not at any time be charged with knowledge of the existence of any facts which
would prohibit the making of any payment to EnCap or the taking of any other
action under this Agreement unless and until EnCap shall have received written
notice from Hibernia and, prior to the receipt of any such notice, EnCap shall
be entitled to assume conclusively that no such facts exist, except that EnCap
hereby understands and agrees that any Enforcement Action by EnCap shall
constitute a Hibernia Non-Payment Default (with all the consequences thereof
under this Agreement) of which EnCap shall be deemed to have received notice
without the requirement of any further notice thereof by Hibernia to EnCap.

         Section 12.  Specific Performance.

         (a) At any time that any of EnCap or any Debtor fails to comply with
any provision of this Agreement that is applicable to such party, Hibernia may
demand specific performance of this Agreement.

         (b) At any time that any of Hibernia or any Debtor fails to comply with
any provision of this Agreement that is applicable to such party, EnCap may
demand specific performance of this Agreement.

         (c) Each party hereto hereby waives any defense based on the adequacy
of a remedy at law which might be asserted as a bar to the remedy of specific
performance of this Agreement in any action brought therefor by either EnCap or
Hibernia.

         Section 13. No Waiver or Requirement to Marshall. No right of Hibernia
to enforce the subordination of the EnCap Liens and the EnCap Indebtedness as
herein provided shall at any time or in any way be prejudiced or impaired by any
act or failure to act on the part of any Debtor or by any act or failure to act
by Hibernia, or by any noncompliance by any Debtor with the terms of this
Agreement, regardless of any knowledge thereof which Hibernia may have or be
otherwise charged with. No right of EnCap to receive notice or cure Hibernia
Events of Default, as provided in Section 9(a), or to otherwise exercise its
rights as herein provided shall at any time or in any way be prejudiced or
impaired by any act or failure to act on the part of any Debtor or by any act or
failure to act by EnCap, or by any noncompliance by any Debtor with the terms of
this Agreement, regardless of any knowledge thereof which EnCap may have or be
otherwise charged with. Neither Hibernia nor EnCap shall have any obligation to
preserve rights in the Collateral or to marshal any of the Collateral for the
benefit of any Person. No failure to exercise, and no delay in exercising on the
part of any party hereto, any right, power or privilege under this Agreement
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right, power or privilege under this Agreement preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
rights and remedies provided in this Agreement are cumulative and shall not be
exclusive of any rights or remedies provided by law.

                                       9
<PAGE>   10

         Section 14. Reinstatement of Agreement. Notwithstanding any prior
revocation, termination, surrender, or discharge of this Agreement in whole or
in part, the effectiveness of this Agreement shall automatically continue or be
reinstated in the event that any payment received or credit given by Hibernia in
respect of the Hibernia Indebtedness is returned, disgorged or rescinded under
any applicable state or federal law, including, without limitation, the laws
pertaining to bankruptcy or insolvency, in which case this Agreement shall be
enforceable against EnCap as if the returned, disgorged, or rescinded payment or
credit has not been received or given by Hibernia, and whether or not Hibernia
relied upon this payment or credit or changed its position as a consequence of
it. In the event of continuation or reinstatement of this Agreement, EnCap
agrees upon demand by Hibernia to execute and deliver to Hibernia those
documents which Hibernia reasonably determines to be appropriate to further
evidence (in the public records or otherwise) such continuation or
reinstatement, although the failure of EnCap to do so shall not affect in any
way such continuation or reinstatement.

         Section 15. Representations, and Warranties. Each of the parties hereto
hereby represents and warrants that (a) it has full power, authority and legal
right to make and perform this Agreement, and (b) this Agreement is its legal,
valid and binding obligation, enforceable against it in accordance with its
terms, subject to bankruptcy, insolvency and similar laws relating to the
enforcement of creditors' rights and to general principles of equity.

         Section 16. Changes Must Be In Writing. No amendment of any provision
of this Agreement shall be effective unless it is in writing and signed by
Hibernia and by EnCap, and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given. Neither
the failure nor any delay on the part of Hibernia or EnCap to exercise any
right, remedy, power or privilege hereunder shall operate as a waiver thereof or
give rise to an estoppel, nor be construed as an agreement to modify the terms
of this Agreement nor shall any single or partial exercise of any right, remedy,
power or privilege with respect to any occurrence be construed as a waiver of
such light, remedy, power or privilege with respect to any other occurrence.

         Section 17. Governing Law. This Agreement shall be deemed a contract
and instrument made under the laws of the State of Louisiana and shall be
construed and enforced in accordance with and governed by the laws of such state
and the laws of the United States of America, without regard to principles of
conflicts of law.

         Section 18. Invalidity of Particular Provisions. If any term or
provision of this Agreement shall be determined to be illegal or unenforceable,
all other terms and provisions hereof shall nevertheless remain effective and
shall be enforced to the fullest extent permitted by applicable law.

         Section 19. Notices. All notices, requests, consents, demands and other
communications to any Debtor, EnCap, or Hibernia which are required or permitted
under this Agreement shall be in writing and shall be deemed sufficiently given
or furnished if delivered by personal delivery, by telecopy, by delivery service
with proof of delivery, or by registered or certified United States mail,
postage prepaid, at the addresses set forth on Annex I hereto (unless changed by
similar notice in writing given by the particular Person whose address is to be

                                       10
<PAGE>   11

changed). Any such notice or communication shall be deemed to have been given
and received (a) in the case of personal delivery or delivery service, as of the
date of first attempted delivery at the address and in the mariner provided
herein, (b) in the case of telecopy, upon receipt, or (c) in the case of
registered or certified United States mail, three days after deposit in the
mail.

         Section 20. Successors and Assigns. This Agreement shall pass to and be
fully binding upon and inure to the benefit of the successors and assigns of
each party hereto. Neither Hibernia nor EnCap will transfer or assign any of its
Indebtedness to any Person (except in accordance with Section 7(b) hereof)
unless the transferee acknowledges this Agreement in writing. If EnCap transfers
or assigns any of its Indebtedness (other than participations to an Affiliate of
EnCap), the transferor or EnCap will give prompt notice of such assignment or
transfer to Hibernia, and if Hibernia transfers or assigns any of its
Indebtedness, Hibernia will give prompt notice of such assignment or transfer to
EnCap.

         Section 21.  Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

         Section 22. FINAL AGREEMENT. THIS AGREEMENT REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.

         THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

                  [remainder of page intentionally left blank]

                                       11
<PAGE>   12

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duty executed by their proper and duly authorized officers as of the day and
year first above written.

HIBERNIA:                         HIBERNIA NATIONAL BANK

                                  By: /s/ David Reid
                                    --------------------------------------------
                                    David Reid
                                    Title:

DEBTOR:                           PETROQUEST ENERGY, INC.,
                                  a Delaware corporation

                                  By: /s/ Charles T. Goodson
                                    --------------------------------------------
                                    Charles T. Goodson
                                    Chairman of the Board and Chief Executive
                                    Officer

                                  PETROQUEST ENERGY, INC.,
                                  a Louisiana corporation

                                  By: /s/ Charles T. Goodson
                                    --------------------------------------------
                                    Charles T. Goodson
                                    Chairman of the Board and Chief Executive
                                    Officer

                                  PETROQUEST ENERGY ONE, L.L.C.,
                                  a Louisiana limited liability company

                                  By:  PETROQUEST ENERGY, INC., a Louisiana
                                       corporation, its sole member

                                       By: /s/ Charles T. Goodson
                                         ---------------------------------------
                                         Charles T. Goodson
                                         Chairman of the Board and Chief
                                         Executive Officer

<PAGE>   13

ENCAP:                            ENCAP ENERGY FUND CAPITAL FUND III, L.P.

                                  By:  ENCAP INVESTMENTS L.L.C., General
                                       Partner

                                       By: /s/ D. Martin Phillips
                                           ------------------------------------
                                           D. Martin Phillips, Managing Director

<PAGE>   14

                                     ANNEX I

                              ADDRESSES FOR NOTICE

ENCAP ENERGY FUND CAPITAL FUND, III, L.P.
1100 Louisiana, Suite 3150
Houston, Texas  77002
Attention:        Sean Smith

Telephone:        713-696-6100
Fax:              713-659-6130

HIBERNIA NATIONAL BANK
313 Carondelet Street
New Orleans, LA  70130
Attention:        David Reid

Telephone:        (337) 268-4582
Fax:              (337) 268-4566

PETROQUEST ENERGY, INC., a Delaware corporation
PETROQUEST ENERGY, INC., a Louisiana corporation
PETROQUEST ENERGY ONE, L.L.C., a Louisiana limited liability company

400 E. Kaliste Saloom Road, Ste. 3000
Lafayette, LA 70508
Attention:        Chairman of the Board and Chief Executive Officer

Telephone:        (337) 266-1158
Fax:              (337) 232-0044

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