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PetroQuest Ready to Partner Up, Drill in Gassy Cotton Valley by Year's End

PetroQuest Energy Inc. is making progress toward forming a joint venture (JV) in the Cotton Valley formation in East Texas, and it plans to recomplete a well targeting the Thunder Bay prospect in South Louisiana next month, the company said.

The Lafayette, LA-based exploration and production company also said a debt exchange completed during the third quarter would allow it to repay or extend the maturity on 93% of its unsecured notes due in 2017, while a new $50 million multi-draw term loan facility would provide funding for capital expenditures (capex).

PetroQuest holds an estimated 52,000 gross (28,000 net) acres in East Texas prospective to the Cotton Valley, which includes acreage where it holds either a 50% (45,600 gross acres) or a 100% (6,400 gross acres) working interest (WI). PetroQuest sold a portion of its 100% WI position to an undisclosed buyer and potential JV partner, for $7 million in 1Q2016. In a statement Tuesday, the company said it expects to reacquire that acreage for $5 million prior to closing the JV.

Initial Pad Drilling Soon to Begin

During an earnings call Tuesday to discuss 3Q2016, CEO Charles Goodson said the company expects to close the Cotton Valley JV and spud an initial well program before the end of the year. PetroQuest recently signed a six-month contract for an upgraded rig to allow it to perform pad drilling for the first time.

"As you can probably tell from our actions, we're planning to have a continuous rig running in the area for the foreseeable future," Goodson said. "We're very excited to get back to development mode at our Carthage field, which we believe is one of the top assets in North America."

Goodson said several unique characteristics set the Cotton Valley apart from other natural gas plays, including the presence of permeable tight sands and seven separate, productive benches -- the C&D, Vaughn, Davis, E4, E, Eberry/Roseberry and Sexton/Taylor sands.

"On our acreage, there are numerous cores, hundreds of vertical wells and 26 horizontal wells with years of production history," Goodson said. "We've not only derisked this area, but we have provided valuable information about the geology and engineering needed to proficiently develop these tight sands...

"If you look out five miles to the east, south and west, there are hundreds of light vintage horizontal wells drilled by others successfully testing all seven benches...With readily available frac water, supportive landowners and state governmental agencies as well as access to premium Gulf Coast priced markets, it should be evident that we and others believe this is a tremendous asset with significant upside potential."

During the question-and-answer portion of the earnings call, Goodson declined to provide additional details over how a potential JV would be structured, including whether there would be a drilling carry, what working interests would be established and if the company would receive any cash up front.

Operations chief Art Mixon said PetroQuest would continue to look for other ways to drive down drilling costs, including using enhanced completions.

"We are going to continue to look at prop densities, efficiencies and all of the things we think go into making a good completion -- including lateral length and the number of stages," Mixon said. "We think we've done very well to date, but we're not happy with existing conditions. We'll continue to try and improve that as we go along in the [drilling] program."

Longer Laterals Planned

CFO Bond Clement added that in the short term, PetroQuest would "have the ability to drill some longer laterals than we've ever drilled out here, particularly with some of the acreage that we put together in the northern section of our 100% acreage, but we can see lateral lengths approaching 7,000 feet. We're excited to [see] longer laterals in the Cotton Valley just to see what kind of [estimated ultimate recovery] per lateral foot we can generate."

According to PetroQuest's earnings presentation, all of the acreage is held by production. Based upon 1,500-foot spacing, the acreage includes 601 gross drilling locations, 182 of which are in the Davis Sand. The Vaughn Sand (114 drilling locations), E Sand (95) and C&D sands (90) rounded out the top four.

PetroQuest said a well targeting the Thunder Bayou prospect was currently flowing at 18 MMcfe/d, following initial completion in the lower section of the Cris R2 formation, which includes 48 net feet of pay. It expects the daily production rate for the well to continue to decline into 4Q2016 and plans to shut in the well in December to recomplete the upper section of Cris R2, which measures 154 net feet of pay. The well would be placed back online in January. The company announced its Thunder Bay discovery almost two years ago (see Shale Daily, Dec. 10, 2014).

Production fell 29.7% year/year in 3Q2016 to 5.23 Bcfe (56.8 MMcfe/d) from 7.43 Bcfe (80.8 MMcfe/d). Despite the decline, attributed in part to selling Arkoma Basin assets in 2015 and less capex, PetroQuest exceeded its production guidance for the third consecutive quarter.

"While we're forecasting 4Q2016 production will be down compared to our 3Q2016 production volumes, this should mark an inflection point in our production profile," Goodson said. "We're expecting sequential production growth throughout 2017 based upon our Cotton Valley drilling program and the recompletion of Thunder Bayou."

Last September, PetroQuest closed on a private exchange offer to eligible holders of its outstanding 10% senior notes due in 2017, and its outstanding 10% second lien senior secured notes due in 2021. The exchange provided a 9% payment-in-kind feature that the company expects will provide $33 million of cash interest savings over the next 18 months. PetroQuest then secured a multi-advance term loan agreement with certain lenders to borrow up to $50 million over a three-year period. Wells Fargo Bank NA will serve as administrative agent. The new loan is secured by the same collateral used for a previous senior secured bank credit facility with JPMorgan Chase Bank NA.

"Our 2017 debt maturity extension took some time to resolve," Goodson said. "We and our bondholders are able to come up to a mutual agreement that should ultimately benefit all parties. With the debt maturity issues behind us, we can now turn our full focus on executing in East Texas where we believe we'll be able to unlock substantial value to all our stakeholders."

PetroQuest recorded a loss of $23.3 million (minus $1.31/share) for 3Q2016, compared with a loss of $51.9 million (minus $3.19) in 3Q2015. Discretionary cash flow was $207,000 in the third quarter of 2016, compared with $4.99 million to the third quarter of 2015.

Stay up to date on 3Q16 earnings and projections for the remainder of the year with NGI'sEarnings Call and Coverage sheet.

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