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PetroQuest Energy, Inc. (NYSE:PQ)

Q1 2008 Earnings Call Transcript

May 6, 2008 9:30 am ET

Executives

Matt Quantz – Manager of Corporate Communications

Charles Goodson – Chairman, CEO and President

Todd Zehnder – EVP, CFO and Treasurer

Analysts

Joe Allman – JPMorgan

David Kistler – Simmons & Co.

Steve Berman – Pritchard Capital

Ron Mills – Johnson Rice

Subash Chandra – Jefferies & Co.

Ronnie Esman [ph] – JPMorgan

Rehan Rashid – FBR Capital Markets

Michael Bodino – Coker & Palmer

Andrew Coleman – UBS

Vincent Lin [ph] – Clarion Capital

Richard Tullis – Capital One Southcoast

Operator

Good morning. My name is Julianne and I will be your conference operator today. At this time, I would like to welcome everyone to the PetroQuest Energy first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator instructions) Thank you. Mr. Quantz, you may begin your conference.

Matt Quantz

Thank you, Julianne. Good morning, everyone. We would like to welcome you to our first quarter conference call and webcast. Participating with me today on the call are Charles Goodson, Chairman, CEO, and President; Todd Zehnder, CFO, and Bond Clement, Chief Accounting Officer.

As you have come to expect, we would like to make our Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. Statements made today regarding PetroQuest's business which are not historical facts are forward-looking statements that involve risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in forward-looking statements, see risk factors in the company's Annual Report on Form 10-K for the year ended December 31, 2007.

With that, Charles will get us started with an overview of the quarter.

Charles Goodson

Good morning. During the first quarter we produced 7.9 Bcfe or 87 million cubic feet of gas equivalent per day, which is up 2% from the fourth quarter of 2007. Approximately 38% of the production came from our long-life basins, which is up from 33% realized in the fourth quarter of 2007, and the highest percentage of long-life production we have obtained as a company. Even with the two of our largest fields experiencing mechanical downtime during the quarter, we stayed with our previously issued production guidance which speaks volumes about our efforts to de-concentrate our production.

Own gas revenues were $74. 8 million with product price realizations averaging $94.08 per barrel of oil and $8.41 per million cubic feet of gas. Net income available to common shareholders was $14.1 million, and net income per share was $0.28, which was a new company record.

Now let's move to operations. Our drilling program in the Woodford continued in the first quarter with completion of three operated Woodford horizontal wells. As previously announced, our 13th horizontal well came on line at approximately 6.3 million cubic feet per day and has averaged daily production rate of approximately 4.6 million cubic feet per day for seven weeks. The well has a 4,600-foot lateral and cost approximately $4.5 million to drill and complete. As of today the well continues to flow approximately 4.3 million cubic feet per day.

Our 12th and 14th horizontal wells each with lateral links of approximately 2,700 feet were recently completed and had initial production rates of approximately 4.6 million and 6.3 million cubic feet per day, respectively. As we sit here today, we are producing approximately 27 million cubic feet per day of Woodford gas on a gross basis and have another four to six wells that should reach total depth in the second quarter.

During the first quarter we acquired approximately 4,000 net acreage in the Woodford Trend and our current net acreage position now stands at over 31,000 net acres. We will continue to look for attractive opportunities to increase our acreage position in this trend.

Drilling continues in the Fayetteville where we currently have six non-operated rigs working and approximately 18,000 net acres. Since the commencement of our Fayetteville program in late 2007 we participated in the drilling completion of 55 gross wells for approximately five net wells. Our current net production is approximately 3.3 million cubic feet per day, which is up 10% compared to the first quarter's exit rate.

Moving onto East Texas, we are very encouraged by the performance of our most recent Palmer prospect well, which is the third well in this area. The well logged approximately 50 feet of net pay and is flowing at approximately 2.5 million cubic feet equivalent per day. The second Palmer well which came online eight weeks ago continues to flow at approximately 2.3 million cubic feet per day. Both these wells are flowing from the lower Cotton Valley lime section. In addition, we are currently drilling our second horizontal well in the Weekley prospect and should reach total depth in approximately two weeks. You may recall that our discovery well for the Weekley prospect, the Gillette [ph], had an initial production rate in excess of 1,300-barrels per day. Based on production during the first quarter, the well paid out and is currently flowing between 200 and 300 barrels per day.

Moving onto the Gulf Coast, our Pelican Point prospect was recently brought on line and is expected to produce approximately 20 million cubic feet equivalent per day. We have an approximate 22% net revenue interest in this well. We continue to have activity in the Gulf Coast where we are currently drilling two development wells and our high impact exploration program will resume within the next month.

At this time, I'd like to turn it over to Todd to go over the first quarter financial results.

Todd Zehnder

Thank you, Charlie. During the quarter, our LOE per Mcfe was $1.29, which above our guidance for the quarter. The higher LOE was primarily the result of major maintenance expense incurred as a result of work at our Ship Shoal 72 and Carthage fields. As you can see from our second quarter and full year guidance, we fully expect our cost to come back down.

D&A on oil and gas properties came in below guidance at $3.68, which is also an $0.08 decline from our fourth quarter of 2007 rate. This decline is a result of our positive drilling results and reserve bookings during the quarter. As we continue to allocate more of our CapEx to our longer-lived and lower risk resource plays, we expect to continue to lower our F&D costs, which will translate into a lower DD&A rate.

During the quarter, we spent approximately $84 million in capital expenditures. The breakout of this capital is approximately $50 million of direct CapEx, $29 million of property and lease acquisition costs, and $5 million of capitalized overhead and interest. 79% of our total CapEx in the first quarter was spent in our long-life basin.

As mentioned earlier, our revenues and cash flows are at record highs. As a result of these cash flows and the current forecast of production and commodity prices, we are increasing our drilling capital guidance for 2008 to $230 million to $260 million. As a result of our bank group's regularly scheduled re-determination, our borrowing base was increased to $95 million of which we had $45 million outstanding as of March 31st. The borrowings are primarily the result of acquisition costs during the first quarter in East Texas and Oklahoma, and the reduction of our working capital deficit during the quarter after consideration of FAS 133 and FAS 143. We continue to plan for our drilling CapEx to stay within internally generated cash flows. We had approximately $12.1 million of cash as of March 31st.

From a production standpoint, our current plans call for producing between 91 million and 97 million cubic feet equivalent per day net to the company for the second quarter of 2008. We are reconfirming our previously announced full year production guidance of 94 million to 100 million cubic feet per day. We are extremely pleased with the continued growth in our long-lived production percentage.

We have approximately 11.4 Bcfe of our remaining 2008 production hedged at an average floor of $7.99, and an average ceiling of $9.12. We currently have approximately 3.7 Bcfe of our 2009 production hedged at a floor price of $9 and a ceiling of $12.03. We will continue to look for opportunistic times to add to our hedging portfolio.

With that, I will turn it back over to Charlie.

Charles Goodson

During the first quarter we maintained our active drilling program with great success, especially in our long-life basins where we continue to exceed our initial expectations. We are continuing to execute our strategy of converting cash flow from our high cash margin Gulf Coast properties to the long-life basins and are well positioned to do achieve our company goals of 75% long-life reserves by the end of the year. We are once again forecasting record growth in production and cash flow for the year and are on track to grow reserves by 30% with the drill bit in 2008.

With that, at this time I will turn the call back to Matt and the moderator to begin our Q&A.

Matt Quantz

Operator, we are ready to take some questions now.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Your first question is from the line of Joe Allman with JPMorgan.

Joe Allman – JPMorgan

Hi. Good morning, guys.

Charles Goodson

Good morning, Joe.

Joe Allman – JPMorgan

Hey, Charlie, in terms of – I think you said on that one horizontal well in the Woodford, I think you said the length of the lateral was – I think you said 4,600 feet, is that right?

Charles Goodson

Yes.

Joe Allman – JPMorgan

Okay. And then could you give us the length of the laterals on the other two, and then also what are your opportunities to improve efficiencies in the Woodford?

Charles Goodson

Well the last two that I mentioned that were flowing at the rates of 4.6 million and 6.3 million, which is our ore one and two, those laterals lengths are 2,700 feet, and our laterals, Joe, are dependent on geology and faulting. If we can drill unencumbered we'll drill it out to 4,000 to 5,000 feet. As a matter of fact, our last lateral that we just finished in the last day or so was 4,100 feet, so you are going to see them all over as – but as we gain more and more 3D over the area, we are going to lay out more and more long laterals.

As far as efficiencies, you are going to see our cost from the southwestern part of the trend to the northeastern part of the trend, we are certainly are going to have higher cost on the southwestern side than the north eastern side, it's a little shallower and easier drilling, but we are seeing as we have gone from one rig to three rigs, our efficiencies are getting better and better. We are still sticking with the 4.2 million to 4.7 million per completed well, and we certainly are trying to drive cost down with those efficiencies.

Joe Allman – JPMorgan

Okay. That's helpful. And are you thinking about doing things like dual completions or anything like that?

Charles Goodson

We are looking at everything that's been tried and not only to Woodford, but in all these trends, and we think we are getting access to that data. Anything that we feel like can improve our efficiencies and our EURs in these wells we are going to – we'll eventually do.

Joe Allman – JPMorgan

Okay. That’s helpful. And then just in general, what are you seeing in – what are the most recent trends in terms of drilling and completion costs in your different areas?

Todd Zehnder

Joe, in Arkoma we have seen a – I would call it a pretty flat pricing over the last several months, and from what we are seeing we have not seen a drastic reduction in pressure pumping costs. We have been hearing that people have been seeing some pretty significant declines, but I am not sure if we are using service companies that just haven't needed to soften their prices. We clearly have not seen an increase. From East Texas and the Gulf Coast, rig rates have stayed relatively flat. We are seeing service costs come under a little bit of pressure, more from a labor and tubulars and chemical and things of that sort, but I wouldn't characterize this last quarter or what we are seeing in the second quarter as a drastic change.

Joe Allman – JPMorgan

That's helpful, guys. Thank you.

Operator

Your next question is from the line of David Kistler with Simmons and Company.

David Kistler – Simmons & Co.

Good morning, guys.

Charles Goodson

Good morning, David.

David Kistler – Simmons & Co.

Hey, kind of piggybacking a little bit on Joe's question there, can you talk a little bit about your 3D data and how that unfolds over the next three, six, 12 months as you do that across your now 31,000 acres?

Todd Zehnder

Okay. The easiest way to characterize it is breaking our acreage up into three different regional subsets, and what we would call the central of those which is our Lake (inaudible) area which the majority of our activity has been in, we have the 3D in hand and we are using it. More to the west or to the southwest, which is more scattered acreage, and we don't have as high of a working interest, we are expecting the 3D to be within the next couple of months, we should be analyzing it here for the summer. And so we'll be drilling off of that. And then as we move a little bit further east where we do have a lot of high working intersections where we are going to be moving a rig there here within the next week or so, we should have 3D data there by either late '08 or early '09, just depending on how everything shakes out. So I think it’s pretty fair to say that within the next nine to 12 months we should have virtually 100% of our acreage under 3D.

David Kistler – Simmons & Co.

Okay. And then hitting just the people comment that you made as far as you are starting to feel like there might be constraints on that aspect or at least it’s getting more expensive, does that impact your capital spending plan going forward? Obviously you've taken your CapEx up, but that's directed project specific, but I am just thinking about in this higher commodity price market right now, looks like cash flows will be very strong going forward. Do you anticipate putting that more towards people, resources, et cetera?

Todd Zehnder

Well, let me just clarify. When I said labor, that's third party service companies.

David Kistler – Simmons & Co.

Okay.

Todd Zehnder

We haven't run into a wall of being able to find good people to come work for PetroQuest.

David Kistler – Simmons & Co.

Okay.

Todd Zehnder

I don't think that you are going to see any direct correlation in our increase in CapEx and going after people right now. I think what we are seeing is we are putting more money to work in leasing and we are putting more money to work in drilling in both the Woodford and the Fayetteville Shale. That's the primary increase of our CapEx budget increase.

David Kistler – Simmons & Co.

Okay. And then just for clarification, when you gave kind of the updated production guidance for '08, does that incorporate potential downtime associated with hurricane season later in the year?

Charles Goodson

Yes. We do risk – David, we do risk in our model in the production guidance side some contingency for hurricane shut-ins.

David Kistler – Simmons & Co.

Hey, can you give me a ballpark on that?

Charles Goodson

I think we typically risk our production somewhere on the Gulf of Mexico side 5% to 10% for July, August, and September.

David Kistler – Simmons & Co.

Okay. Great. Well, I appreciate it very much, guys. Thanks for the clarification. Good work.

Charles Goodson

Thanks.

Operator

Your next question is from the line of Steve Berman with Pritchard Capital.

Steve Berman – Pritchard Capital

Good morning, guys. Charlie, I missed one number you threw out on how many Woodford wells will reach TD in this quarter, how many new ones?

Charles Goodson

Four to six.

Steve Berman – Pritchard Capital

Alright. And taking it out to the full year, how many operated wells at this point do you think you can drill?

Todd Zehnder

Well, we are still sticking with the three rig estimate right now, Steve, and so we are still comfortable with that 25 rig plus or minus, I mean 25 wells plus or minus number we have been talking about.

Steve Berman – Pritchard Capital

And with these last three really nice wells, any thoughts on EURs for these bigger wells and these are clearly at a higher level. I mean you've been moving up nicely, but this is kind of taking it to a whole new level, so any thoughts on EURs now?

Charles Goodson

I think we want to watch and produce, and once we feel comfortable that – and I mean, clearly they are exceeding our initial estimates, and so once we have – we and our third party engineering firm has comfort to raise that level, we will.

Steve Berman – Pritchard Capital

And moving away from the Woodford, any further thoughts on your prospectivity in the Hainesville in East Texas, now that you've had a little bit of time to look at it?

Charles Goodson

You know, we have always said we are a quick follower, not a leader, and in a new trend, and we certainly are watching it like everyone else. We have representation in it; we have acreage, whether it's the Bossier or the Hainesville, depending on Texas or Louisiana. We have interest in both, and we are excited to see another shale trend, and we think we'll be involved in.

Steve Berman – Pritchard Capital

But right now you have no definitive plans to drill your own wells – your own Hainesville wells at this stage?

Charles Goodson

I wouldn't say anything that we want to come out and specifically say we are going to move a rig in at a targeted date, but we certainly are – we are looking at – with our acreage position we are looking at it, and with the results of the wells that are drilling, we are moving a lot – we are moving in that direction, put it that way.

Steve Berman – Pritchard Capital

Okay. Thanks a lot. Very nice quarter.

Charles Goodson

Thank you.

Todd Zehnder

Thanks.

Operator

Your next question is from the line of Ron Mills with Johnson Rice.

Charles Goodson

Good morning, Ron.

Ron Mills – Johnson Rice

Good morning, Charlie. Just to clarify on the Woodford, you are sticking with the three-rig program, so it sounds like you'll be moving one of those rigs to the eastern portion later in the year. Is that right, Todd?

Todd Zehnder

That is correct. It's going over there within the next week.

Charles Goodson

We feel like – we want to see the results of that well before we really talk about increasing our rig activity, but certainly with anticipated positive results there we feel like that rig activity will continue to increase.

Ron Mills – Johnson Rice

Okay. And then moving to the Fayetteville, I know you don't operate – there are no – the primary operator talked about increased efficiencies on their drilling program up there and you've all seen good results. It looks like you all now plan on drilling an incremental 20 wells or so relative to your last update. Am I reading that correct, and is that where a big portion of the CapEx increase is going?

Todd Zehnder

You are definitely reading it correct, Ron, in that we are going from 60 to 80 and now we are probably thinking 80 to 100. However, a significant component of that is some lower working interest wells that we had come through in the first five months of the year, and so I wouldn't say that you should increase the capital that we are dedicating to the Fayetteville by 20%. We are still working on those numbers, but it will see a nominal increase just due to increased activity, but it won't be linear with the number of wells increase.

Ron Mills – Johnson Rice

Okay. And then if you look at the new budget, the $230 million to $260 million versus I think it’s $200 million to $220 million earlier with somewhat cash flow dependent, where are you seeing the biggest increases in that capital budget?

Todd Zehnder

It’s really spread out through all of our basins. Every one of them is getting a little bit more money for one reason or another. It's either additional success which is driving the Gulf Coast getting more capital. In East Texas, we've accelerated drilling in this Palmer prospect due to our good result, Pelican Point being successful, and other projects, but I think the largest increase will come from the success we've had from a leasing standpoint in the Woodford and just more drilling in the Fayetteville.

Ron Mills – Johnson Rice

Okay. In East Texas when the Palmer prospect has obviously been a pretty good area for you all, how much running room do you all have at Palmer, and can you just remind from a Buda oil play, how – I can't remember, I think you said you had five or 10 potential locations in that play?

Charles Goodson

We have – Palmer has drilled three, and we probably have another at least 12 locations to drill there, and Buda we have drilled one. We are getting near TD on the second and have room to drill another 13 or so there. So all in all about close to 25 to 30 wells in those two project areas at this point in time.

Ron Mills – Johnson Rice

Okay. And have you all in prior calls talked about what you expect you all's exit rate percentage to be from an onshore or long-life basin standpoint given you expect to average 45% for the year and you started out at 38%?

Charles Goodson

We are thinking that if everything goes as planned what we're seeing we could be about 50%. Obviously that's dependent on Gulf Coast success with the high swing – I mean the high flow rates that can swing the production around a little bit, but just like you hit on. I mean we are averaging 45%, 46%, and we had the first quarter at 38%. It’s obviously going to be higher towards the end of the year.

Ron Mills – Johnson Rice

Okay. Let me jump off and I'll get back in queue. Thanks.

Charles Goodson

All right.

Operator

Your next question is from the line of Subash Chandra with Jefferies.

Charles Goodson

Good morning, Subash.

Subash Chandra – Jefferies & Co.

Hey. Good morning. Could you talk about that 12th and 14th well, where they were relative to the 13th well, which I think was a pretty good size step-out?

Charles Goodson

Correct. Those two wells were back to the west on the western side of our acreage. So we now are bracketed – two-thirds of our acreage is bracketed by wells that have flowed six million a day, so next step is to step out to the east and hopefully have that type of results there.

Subash Chandra – Jefferies & Co.

Okay. And so at this point I suspect that of your acreage you probably don't have any of it drilled with more than one well per section?

Todd Zehnder

We have had – we have a couple of sections where we have two wells in there, just from starting to develop a down spacing pattern, if you will, and we are not going to do it significantly with any one section, but over the next year or so we want to put several wells in a section, and at the same time be cognizant of holding our acreage and proving up more acreage.

Subash Chandra – Jefferies & Co.

So how many more wells do you think you might need to then fully bracket your 31,000 net acres?

Charles Goodson

Well we basically we are almost immediately getting ready to bracket another 25% of it and to the east, and that will get us up probably in the 85% range somewhere, and then if this trend continue to move to the east, then you'll – as you continue to expand your acreage position which we are doing, you'll keep opening it up. But right now we've, like I said, probably two-thirds of our acreage position is bracketed by wells that have flowed in excess of six million cubic feet of gas a day.

Subash Chandra – Jefferies & Co.

Yes. That's terrific. I guess acreage there is pretty tough to come by, and there is a package for sale, and depending on what Antero does probably there is more activity. Any thoughts at all to really get bold and to buy any of this stuff out there?

Charles Goodson

Well we are looking at everything that's available. As you've seen, we've been able to increase our acreage position. 4,000 acres is not an insignificant amount of acreage, and cost of that has ranged anywhere from $700 to $3,000 per acre. We were actually seeing acreage coming to us because we have been a very active operator on the eastern side of this trend.

Subash Chandra – Jefferies & Co.

Okay. Great. And one last one. What is your Hartshorne volumes?

Todd Zehnder

Right now Hartshorne probably makes up about 7 million to 7.5 million a day.

Subash Chandra – Jefferies & Co.

Okay. Is there still a program there, or –

Todd Zehnder

Yes. It’s been more of a non-operated program. We've done some things – we participate in pretty much anything that people are going to do, and we've done some trades with people where we'll farm out some acreage, and we've got some acreage that we are going to continue to drill on our own. It’s just a matter of allocating capital and what we want to do as a company, and so there is definitely a program out there, it's clearly dwarfed by the size of Woodford, but its inventory that we have and there is operators that are making good money especially in the price environment by drilling them.

Subash Chandra – Jefferies & Co.

That makes a lot of sense. Thanks a lot, guys.

Todd Zehnder

Sure. Thanks.

Operator

Your next question is from the line of Ronnie Esman [ph] with JPMorgan.

Charles Goodson

Good morning.

Ronnie Esman – JPMorgan

Good morning. Actually you guys answered my questions earlier. So, thank you.

Charles Goodson

Okay.

Operator

Your next question is from the line of Rehan Rashid with FBR Capital Markets.

Charles Goodson

Good morning, Rehan.

Rehan Rashid – FBR Capital Markets

Good morning. On your Woodford, what has to happen to take up the rig count to four or five? And then I have got one more follow-up.

Charles Goodson

As we continue to expand to the east that will certainly allow us to expand beyond the three rigs. We are looking at it primarily on an efficiency standpoint. We certainly have the capability to expand, but we are being very careful to make sure that we bring a new rig in that it has at least a year plus of drilling activity lined up, which will make it the most efficient where you are not picking them up and losing them. So as we step into our hose [ph] area, which could easily expand this activity up to five rigs, I think we certainly, by our next conference call, will be very comfortable to talk about what our rig activity is going to be throughout the rest of the year.

Todd Zehnder

The other piece to that is we are currently, as mentioned earlier, when I was talking to Dave Kistler, we have already begun the works of shooting the 3D there, and one thing we've seen is 3D does help. You don't necessarily need it, but when you are going to move multi-rigs out there, it sure helps, and it helps from an extended lateral standpoint and picking faults and so forth.

Rehan Rashid – FBR Capital Markets

Got it. Got it. Okay. From a geological standpoint similar length horizontal laterals from other operators aren't yielding as high of an IP rates, the 2700 specifically. Any thoughts as to what is driving kind of better performance here?

Charles Goodson

Rehan, we are more focused on what we are doing, and again the reason we don't want to jump out and grab a bunch of rigs and lose those efficiencies I really can't – I don't think I am prepared to talk about what everybody else is doing. It's just we are very happy with the results that we have posted with our drilling activity.

Rehan Rashid – FBR Capital Markets

Okay. Okay. And in Pelican Point, I am happy with the way the rates came in and just kind of where would we go from here, we'll be able to I guess from a reserve standpoint, and any initial thoughts what the upside could be?

Charles Goodson

One, we brought it on. We are seeing what appears to be a higher condensate yield in the first well. We are not really ready to talk about what that yield is going to be yet, but we are tweaking our facilities to handle a higher condensate yield right now. The well will be on line fully flowing here. We have already brought it cleaned it up, now we are tweaking the facilities and will bring it back on line and we anticipate that rate of – the equivalent of 12 million cubic feet of gas a day. What I have said all along is, is that when you look at what is, quote, proven by this well bore under SEC rules and regulations, you are probably talking about a gross 20 Bcf project. When you look at the spill point of this reservoir, that could raise it up to the 75 to 100 Bcf range capable of being produced from this well, so it is – it will really take time to determine what the – that ultimate EUR is because this is not one you are going to step out and drill an expendable $20 million to $25 million well to see where your water levels are. So much like our main pass where we continue to see positive revisions and other projects, this is one that we feel like we are going to see, and we hopefully anticipate seeing positive revisions on a quarterly or at least on a yearly basis.

Rehan Rashid – FBR Capital Markets

Got it. Can you improve the productive capacity or it’s kind of limited at 20?

Charles Goodson

No. We certainly can. We feel like initially that was – what we were targeting, but certainly there is a capacity out there to expand beyond that.

Rehan Rashid – FBR Capital Markets

Okay. Thank you.

Charles Goodson

Sure.

Operator

Your next question is from the line of Michael Bodino with Coker and Palmer.

Charles Goodson

Good morning, Michael.

Michael Bodino – Coker & Palmer

Good morning, Charlie. Hey, just a couple of follow-up questions. In the Fayetteville shale I know you are looking at participating in 80 to 100 wells, how many have you participated in to-date? And looks like you are ahead of schedule there.

Charles Goodson

Yes. Today, Michael, we participate in 55 or so. But about 14 or 15 of those were in 2007. So, on a 2008 basis we are at about 40 in the first quarter.

Michael Bodino – Coker & Palmer

Okay. Is that likely to increase or are you just waiting to get AFE now?

Charles Goodson

We put out the guidance of 80 to 100 wells. Probably going to be closer to 100 by the time all is said and done on a gross basis, but like Todd mentioned earlier, when you look on a net basis, it is not that significant of an increase from a CapEx standpoint to PetroQuest.

Michael Bodino – Coker & Palmer

What is your average NRI in this program?

Todd Zehnder

7.5% or somewhere between 7% and 7.5% average NRI.

Michael Bodino – Coker & Palmer

Okay. Okay. Moving on, you've had pretty good operational success in the Woodford Shale. You kind of made it down the learning curve now. Are you all looking at other shale plays where you can get a meaningful acreage position and operate?

Charles Goodson

Sure. The answer is yes.

Michael Bodino – Coker & Palmer

I guess based on that answer I won't ask where.

Charles Goodson

It’s Lower 48.

Michael Bodino – Coker & Palmer

That's good. There's a lot of shales in Canada people are talking about.

Charles Goodson

No. We certainly are. And we feel like what we've done in the Woodford certainly makes us internally a lot more comfortable. We know what we need to do, and we feel like also we don't need to do as far as getting into these other shale trends, and there are certainly other ones that are very close by our acreage position, and others that we feel like that there is an entry point – a number of entry points, whether it is acquisition of a small company or acreage position, but the farther and farther you get away from Lafayette, Louisiana, where we are, the more dependent you are on capable personnel to do that. And so just as important as the acreage position is, it is the personnel that go along with it, and so it’s hat in hand and so we are looking at it and looking at opportunities in a number of shale plays that are – that seem to be active and successful, and we feel like we will continue to expand our position in those.

Michael Bodino – Coker & Palmer

I know part of the budget was spent on acreage in the first quarter. Would any of that be targeting some of these other areas?

Charles Goodson

No.

Michael Bodino – Coker & Palmer

No. Because I know you mentioned East Texas and Arkansas – Oklahoma. Last – well, two more questions. Budget, looks like about a third of your budget was spent in the first quarter. How do I think about the spending of the remaining budget on the back three quarters? Or maybe a better question is what commodity price is your budget on? Is there some possible upside to that later on this year?

Todd Zehnder

I think so, Michael. I mean, the one thing I do want to point out is we guide just pure direct CapEx, right? And so that's why this quarter you – and probably talking too fast when I went through it. We spent $50 million on direct CapEx. We never guide for property acquisitions or leasehold acquisitions because we are just not sure when the next one will come out. So, we are very specific when we close those to update (inaudible). So, I am not sure if we necessarily spent a third of it. We spent $50 million out of a $230 million to $260 million direct CapEx budget. Now, addressing commodity prices, we don't need the strip to stay where it is currently in order to be able to generate the cash flow to fund $230 million to $260 million, but if you had a significant pullback in commodity prices, or some problem with our production, we would adjust our capital accordingly.

Michael Bodino – Coker & Palmer

Okay. And my last question and I'll let somebody else get in here, I think that in one of your slide presentations you had one of your prospects in the Gulf Coast to spud by now. I think it was Sugarloaf. Have you started drilling yet at that-?

Charles Goodson

We've actually – and when we – we are going to go ahead and post our new presentation today with the updated numbers. And we've actually deferred Sugarloaf to later in the year. It’s an offshore project that we just got to – we have to clean up some MMS work from a neighboring platform, and so we have to defer that. The next project that is going to spud here in the next 15 days or so is what we call Sand Hills.

Michael Bodino – Coker & Palmer

Okay. Thank you very much, guys. Great quarter.

Charles Goodson

Thanks.

Operator

Your next question is from the line of Andrew Coleman with UBS.

Charles Goodson

Good morning, Andrew.

Andrew Coleman – UBS

Hey, I had a question on the acreage breakdown in the Woodford, central, southwestern and east. Can you give like approximate size or net working interest in those areas?

Todd Zehnder

Probably about 7,000 to 8,000 would be in the west where we have a smaller working interest spread out amongst a significant amount of sections. Probably about 11,000 would be in the central, or 11,000 to 12,000 would be in the central where we carry anywhere from 50% to 90%, I say on average maybe a 65% working interest just roughly. And then the balance would be on the, what we would call the east, and it has a pretty significant or a pretty high working interest up in the probably 60% to 90% world.

Andrew Coleman – UBS

Okay. All right. That's pretty good. And then at the gross level are you guys constrained on pipeline capacity for any of this stuff?

Todd Zehnder

Not currently, no.

Andrew Coleman – UBS

Okay, so–

Todd Zehnder

Go ahead.

Andrew Coleman – UBS

No, I just asked – just thinking about how to put that number [ph], that's pretty good thing there. And looking at Pelican Point, what kind of drive mechanism is that? Is that a water drive?

Charles Goodson

We think ultimately, yes, it is a water drive.

Andrew Coleman – UBS

Okay.

Charles Goodson

We won't know until we really see some production history.

Todd Zehnder

We have no water level identified on the log.

Andrew Coleman – UBS

Okay.

Charles Goodson

We – it appears that you are open to a large, large area which would tend to make it more water drive than gas expansion. So – but once we see three months of production history, we'll know a lot more about that than we do currently.

Andrew Coleman – UBS

Okay. And what's the closure on the structure? Is it a three-way, four-way, or –

Charles Goodson

It is a three-way closure against the fault, and along with I guess you call it a stratigraphic trap on the western side. So eastern side appears to be totally open to a down dip area. So you've got three sides are faults and stratigraphic in the fourth side is open with a large area.

Andrew Coleman – UBS

All right. And looking at where your well kind of intersected into the pay zone, do you think you might have much up dip?

Charles Goodson

I mean we didn't – certainly didn't try to drill up against the fault, but I wouldn't consider there is a whole lot of up dip that you wouldn't be able to drain with this well.

Andrew Coleman – UBS

Okay. And then is there anything that might be within that little fault block there a structure that you need to put additional wells in, or do you think you have enough high porosity permeability to kind of drain it all through that single well?

Charles Goodson

Well we have 147 feet of solid pay with no water level in it that’s all appears to be connected, and we anticipate at this point in time that this well could drain that entire area. Over time you are going to – production histories will tell you if you are draining that area, but when you look over to the west at Etouffee there are certainly wells that have had those type of EURs on the top of their structure.

Andrew Coleman – UBS

Okay. And now do you see – is this a pretty standard kind of view there on seismic when you guys are looking at this? Are there places you can export this sort of learning to have more success?

Charles Goodson

Well we've been active in home embankment [ph] since the late '80s, and so we certainly – with our Turtle Bayou, this is an eastern offset to that and a number of other fields we've been active in. Certainly we have and others have continued to take the home embankment to deeper and deeper horizons. And we are not forecasting anything at this point in time as far as expanding the fields. Our Whistling Straits prospect is going to start here in the next six – three to six months. It is a north offset to Etouffee. It is Turtle Bayou field in our vernacular, and it is a 75 to 100 Bcf fault wedge on the north side of that structure which is analogous to what we've just done. So, again, it’s all interdependent on Mother Nature, but we feel like with 3D and our understanding of the deposition in the area that we reduced the risk of these projects substantially, and we feel like it is a growth area for this company.

Andrew Coleman – UBS

Okay. Great. And then last question, I may have missed this in an earlier release, but are you still looking at La Cantera to go back to that later in the year.

Charles Goodson

Absolutely. If we hadn’t – the first well – because it drilled through some drill through some depleted zones, was a mechanical failure long before it ever even saw anywhere close to our first objective. The partners are sound, and have agreed to move the location about 2,000 feet and drill a second well sometime anywhere from later this year to early next year. We still feel the prospect is just as strong as it ever was, and certainly anticipate starting another well there to test that project.

Andrew Coleman – UBS

Okay. And what do you guys think you can raise your well count from in the Woodford, I guess on a – thinking about 2009, do you think you could potentially add two or three more rigs and kind of keep growing it there and double it potentially? Or do you think it is more of a steady state program kind of in that model it out?

Todd Zehnder

No. I mean we are going to – I think you should clearly expect us to continue to increase our rig count with additional acreage pickups, additional successes, and additional 3D that comes in. For us to be at five rigs next year is by no means being too aggressive. And depending on drilling efficiencies, we think each rig can probably drill somewhere between eight and 10 wells per year, and so I don't think that there is any plans just to go slow. It’s clearly been the plan that we've had in place for several years is to convert cash flow from the Gulf Coast, and increase our presence in the long-life areas. It’s been a plan that we've been successful at. We are not deviating from it. I don't think you should think about it as just building it up to sell it either. I mean it is a core asset for PetroQuest. It is our most significant asset, and it is clearly the largest growth engine for the company.

Charles Goodson

I think the best way to summarize that is we have increased our acreage position three times as fast as we have drilled it out. So we wouldn't be doing that, and we already have a pretty long development life to this area. So you have got to draw the conclusion that certainly with our expansion to the east you are definitely going to need more rigs to drill this thing up and develop it in a reasonable period of time.

Andrew Coleman – UBS

Okay. Great. And just one last question about just modeling semantics here. You guys mentioned production taxes on a $1 per Mcf basis. Do you think it is better to look at it as a percent of revenue? I mean is there a big change across the severance tax rates and in the Woodford Shale versus East Texas versus the Gulf Coast?

Todd Zehnder

Andrew, the MMS just – excuse me, the state of Louisiana just came out and announced they're going to be raising severance tax in Louisiana by a couple of cents beginning July 1st. So that goes into play in our guidance. But as you know, I mean, Oklahoma, Texas, and in the future, Arkansas are primarily value based. So to model it off as some percentage of your realized price would probably be the most effective way to do that.

Andrew Coleman – UBS

Okay. Great. Thanks a lot for the time today, guys.

Charles Goodson

All right. Thank you.

Operator

Your next question is from the line of Ron Mills with Johnson Rice.

Ron Mills – Johnson Rice

I tried to jump out of queue. They've all been asked. Thanks.

Charles Goodson

All right. Thank you.

Operator

Your next question is from the line of Vincent Lin [ph] with Clarion Capital.

Charles Goodson

Good morning. Hello?

Vincent Lin – Clarion Capital

– representation in the Hainesville. Can you kind of give us some metrics on what's your exposure there?

Charles Goodson

We are really not kind of – we are not releasing what our net acreage – position is at this point in time because really you don't really know what the trend totally encompasses, and so we have a lot of acreage in north Louisiana and East Texas, and so as this – as we all get more of a handle on, is it a Hainesville play only? Is it a Bossier Hainesville? I think we'll know more about that. We can release acreage positions. And I think probably by the next conference call we can certainly start giving some color on that, but we certainly have an acreage position that is – exposes us to the Hainesville, and we are pleased to be involved.

Vincent Lin – Clarion Capital

Okay. Appreciate it.

Charles Goodson

Thanks.

Operator

(Operator instructions) Your next question is from the line of Richard Tullis with Capital One South.

Richard Tullis – Capital One Southcoast

Hey, guys, congratulations on a good quarter. It looks like most of my have been answered. I was just going to touch on the future of the Gulf Coast drilling program. I know Todd said he is going to put the new slide out there a little bit later today. I was just looking at some future high impact wells, but I think you touched on La Cantera and Whistling Straits, so I'll just wait on the slide.

Charles Goodson

Yes. And once – we touched on the fact that Sugarloaf has been deferred. You will see a new project that has been slid in there that I think we're calling The Bluffs, and so as we have always said, projects that we put out there, they slide sometimes. It’s not a – we don't know exactly when things are going to be drilled, but we've got a deep inventory of Gulf Coast projects, and we will drill them accordingly. So take a look at that slide and you guys can call us if you have any questions on it.

Richard Tullis – Capital One Southcoast

Thank you.

Operator

Your next question is from the line of Steve Berman with Pritchard Capital.

Steve Berman – Pritchard Capital

Hey, guys, where do you stand on the strategic alternatives process with the gas gathering business?

Todd Zehnder

We are down to just a few parties left in the process, and we will most likely be able to tell you guys where we've decided to go with that by the next earnings release.

Steve Berman – Pritchard Capital

Okay. Thank you.

Todd Zehnder

Sure. And in the meantime on that, these assets are still generating good cash flow, so it’s not anything that we have to do as we have mentioned before, and they are very profitable in this gas price environment and the growth of the Oklahoma assets.

Operator

There are no further questions at this time. Are there any closing remarks?

Todd Zehnder

We once again want to thank everybody for their participation, and look forward to a very solid second quarter. We'll be in touch with you guys.

Charles Goodson

Thank you very much.

Operator

Thank you for participating in today's PetroQuest Energy first quarter conference call. You may now disconnect.

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Source: PetroQuest Energy, Inc. Q1 2008 Earnings Call Transcript
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