DR illing DOwn
On ThE COT TOn VallE y
2016 annUal REPORT
www.PETROQUEST.COM
abOUT ThE C OVER
The Cotton Valley sands extend from East Texas to Florida,
do not reach the surface, originate from many high energy
depocenters, and include stacked barrier-island, strandplain,
and fluvial-deltaic sandstones. The East Texas Cotton Valley
sandstone group is typically greater than 1000 ft thick, and has
a range in porosity generally around +/- 10%, and permeability
ranging from 0.05mD to 1-3mD. Cotton Valley sands source
their hydrocarbon content through migration from the
underlying bossier/haynesville Shales. These sands often
require moderate hydraulic fracturing to produce appreciable
quantities of gas and condensate.
by contrast, most shale plays were typically deposited as mud in low-energy, quiet water
depositional environments. Deposition of organic-rich matter occurred concurrently with
the fine-grained sediment deposition, setting up shale plays as self-sourcing systems where
gas is created and stored within. Subsequent burial and compression of these sediments
produce a rock that has limited horizontal permeability and extremely limited vertical
permeability, with permeabilities ranging from 0.01mD to 0.00001mD. Porosity ranges fall
between 2% at the low end, and 14% at the high end. Due to the extremely low permeabilities
in shale plays, significant hydraulic fracturing is necessary to produce hydrocarbons.
abOUT PETROQ UEST
Founded in 1985, PetroQuest Energy is a U.S.-focused exploration and development company
of crude oil and natural gas in louisiana and Texas. Commodity prices change but our strategy
is strong and flexible enough to withstand a down cycle and persevere. Our industry is a
business of long-term resourcefulness balanced with near-term inventiveness. Since our
founding, we’ve focused on building an energy company with the diversity to preserve returns
through any cycle. we believe PetroQuest will persevere through the current commodity
environment, add incrementally to its reserve and production base, improve well performance,
and be well prepared for the future.
CORE aSSETS
2016 RESERVES
E aST TE x aS
gUlF
COa ST
28%
E aST
TE x aS
72%
gUlF COaST
115 bCFE
lET TER TO ShaREhOlDERS
2016: A PIVOTAL YEAR OF PREPARATION FOR A RETURN TO GROWTH
Ours is a cyclical business,
PetroQuest chose to make the critical decisions necessary to
and if anyone needed
adapt our company to the new realities of the oil and gas market,
a reminder, the global
preserve value and live to grow another day. That day is upon us.
oil and gas industry
downturn of the past two
years proved the point.
From our beginnings as a
private prospect generation
company in 1986,
to our formation as a
Charles T. Goodson
Chairman, President & CEO
public company in 1998, and more recently to the posture we
assumed in 2016, PetroQuest’s history parallels the cycles
of the energy business over the past 31 years. That we have
endured many cycles and market volatility in our history is
primarily a tribute to the ingenuity and commitment of our
employees. Largely due to the efforts of our team, I have the
I believe the strategic decision to aggressively extend our
debt maturities rather than capitulate distinguishes PetroQuest
in the market. Investors can have confidence that we are
good stewards of capital and will act to preserve value for
both equity and debt holders. In 2016, we worked diligently
to preserve the interests of all stakeholders by paying off
our bank debt and negotiating with supportive bondholders
to refinance our notes. Since the beginning of 2015, we
have refinanced or repaid all of our year-end 2014 debt
of $425 million, all achieved during a prolonged period
of dysfunctional capital markets. As a result, we have the
financial resources needed to fund our 2017 drilling program.
privilege to report that PetroQuest has emerged from this latest
Strategy is, of course, only part of our story, in that we have
down cycle with an attractive asset portfolio, a strengthened
identified the operational steps necessary to successfully
balance sheet and a culture of creating value at all points of the
execute our program over the next several years. Toward
energy business cycle.
Having founded the company and led the men and women who
have helped navigate the Company through multiple cycles,
I can write with confidence about our past, present and future
ability to successfully manage through the uncertainties inherent
to the oil and natural gas markets. It is my sincere belief that our
people, strategy and asset quality inspired the confidence in our
Company that shareholders and bondholders needed to help us
achieve some critical milestones in 2016 together.
As I write this letter, there have been over 114 upstream oil
and gas companies who have declared Chapter 11 bankruptcy
between 2014 and 2016, wiping out billions of dollars in value
for equity and debt investors. Although we appreciate that many
competitors perceived no other alternative and they were tempted
that end, we completed
the divestment program
necessary for us to high-
grade our core assets and
positioned PetroQuest for
the next commodity cycle
upswing. With a renewed
focus on our core assets,
we believe we can
achieve the consistent
growth in production
required to continue
deleveraging our
balance sheet.
we believe we can achieve the consistent growth in production
required to continue deleveraging our balance sheet.
Today, our asset portfolio is focused on our best performing
assets, and we expect planned development drilling in the Cotton
Valley and recompletion work at Thunder Bayou will drive our
growth in 2017.
to “clear the decks” during difficult market conditions, we chose
The Cotton Valley has been a priority for PetroQuest for several
to lead and to find a new path forward that preserves value.
years because assets in this region of East Texas possess several
1
2016 Annual Report positive attributes in the current price environment. First, wells in this area have enviable reservoir rock quality that exhibit production
profiles arguably more like conventional oil wells than the high-decline resource plays that have been the industry’s focus in recent years.
For comparison, our Cotton Valley acreage consists of high permeability sandstone as compared to lower permeability, unconventional
shales. Sandstone reservoirs like the Cotton Valley exhibit the repeatability and cost of an unconventional shale, but the rock quality is
more akin to a conventional Gulf Coast sandstone.
The proof is in the numbers. Our operations team increased
average initial production rates for Cotton Valley wells by 105%
since 2011, while decreasing our cost to drill per lateral foot
by 45% over the same period. Our team is generating higher
well productivity using less capital through careful analysis and
tailoring well completion designs.
Our operations team increased
average initial production rates for
Cotton Valley wells by 105% since
2011, while decreasing our cost to
drill per lateral foot by 45% over
the same period.
What makes the Cotton Valley trend even more responsive to analysis and experimentation is the fact that there is a great deal of well
control from decades of vertical production history, along with ample cores and mud logs. All of this data is useful in high-grading
opportunities and de-risking our Cotton Valley drilling program.
In addition, we believe there are significant opportunities to tap a large, existing resource already in place. Vertical well development
in this area identified multiple target benches throughout a 1,400-foot thick sand column, but they were inefficiently drained using
the prevailing vertical well technology of the time. This is an ideal geologic setting to apply the modern development techniques
of horizontal development drilling and new completion techniques.
COTTOn VallEy bEnChES
“C&D” Sands
Vaughn Sand
Davis Sand
Taylor/ Sexton
E 4 S a n d s
E S a n d s
R o s e b e r r y / E b e r r y S a n d
2
PetroQuest Energy, Inc. Furthermore, Cotton Valley economics are resilient. At a $2.50 per
Mcf price deck held flat, 91% of well cost payout can be achieved
in the first year based on current drilling costs. Quite simply, our
Cotton Valley asset is a stable, consistent, shallow decline area
offering myriad visible growth opportunities.
Our Company’s 2017 drilling program was designed to assess
certain operational concepts not previously evaluated, including
drilling longer laterals, testing tighter spacing, obtaining micro-
seismic data and implementing pad drilling. We believe the
information obtained through these operational concept tests
will help fine tune our future well design and location selection
process. It’s worth highlighting that we have only drilled and
completed 22 horizontal wells on this 50,000-acre position.
Based on the rate of improvement that we saw between our
PQ#1 and the most recent group of wells gives us confidence
that armed with this new data we will be able to continue to
achieve improvements to extract these resources in place.
Our Thunder Bayou/La Cantera assets are cornerstone assets,
generating free cash flow for reinvestment into the Cotton
Valley. At the end of 2016, Thunder Bayou was producing
10 MMCfe per day; this well has performed better than our
pre-drill projections throughout its production life. As with
any well, however, Thunder Bayou’s production rates had
declined through 2016, so we decided to recomplete this
well in the Upper Cris R-2 pay zone, which is a 150-foot
thick sand section. After completing the upper pay zone in
mid-February the well is producing approximately 39,000
Mcf/d of gas 1,500 Bbls/d of oil and 2,200 Bbls/d of NGLs.
Our internally generated and operated Thunder Bayou well is a
world class onshore discovery, which has the highest sustained
deliverability in the Gulf Coast and we believe in onshore United
Thunder Bayou production at 39,000 Mcf/d of gas, 1,500
Bbbls/d of oil and 2,200 Bbls/d of NGLs after recompletion
in February 2017.
hedged 2.7 Bcf for the first quarter of 2018. Our hedge program
was designed to increase throughout this year to cover our
expected growth in underlying gas production while protecting
our anticipated cash flows.
On behalf of our Board of Directors and employees, I would
once again like to express PetroQuest Energy’s appreciation to
our creditors for their flexibility and patience while we worked to
address the company’s debt maturities last year. I believe their
constructive approach demonstrates a fundamental confidence in
our strategy, our operations, and most importantly, confidence in
the ability of our team to execute our growth plan. I am confident
that the best days for PetroQuest still lie ahead.
States. This project along with our 8-10 well Cotton Valley
program sets the stage for significant deleveraging through
Sincerely,
organic production growth in 2017.
As I’m writing this letter, we have approximately 11.0 Bcf of gas
hedged for 2017 consisting of 20 million per day in the first
quarter, 30 million per day in the second and third quarters and
40 million per day in the fourth quarter. Additionally, we have
Charles T. Goodson
Chairman, President and Chief Executive Officer
March 16, 2017
3
2016 Annual Report abOUT ThE COTTOn
VallEy SanD Play
Our Cotton Valley acreage consists of high permeability
sandstone as compared to lower permeability,
unconventional shales. Sandstone reservoirs like the
Cotton Valley exhibit the repeatability and cost of an
unconventional shale, but the rock quality is more akin
to a conventional gulf Coast sandstone.
COTTOn VallEy iP RaTES
14.2
13.7
5 %
0
p ~ 1
11.9
s U
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t
a
e I P R
9.1
7.4
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6.3
2011
2012
2013
2014
2015
2016
Gas
Liquids
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F
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r
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4
2
4
PetroQuest Energy, inc.
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number: 001-32681
PETROQUEST ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware
State of incorporation:
72-1440714
I.R.S. Employer Identification No.
400 E. Kaliste Saloom Road, Suite 6000
Lafayette, Louisiana 70508
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (337) 232-7028
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $.001 per share
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No
The aggregate market value of the voting common equity held by non-affiliates of the registrant as of June 30, 2016, based on the $3.33 per share closing
price for the registrant's Common Stock, par value $.001 per share, as quoted on the New York Stock Exchange, was approximately $52,314,000 (for purposes
of this disclosure, the registrant assumed its directors and executive officers were affiliates).
As of March 2, 2017, the registrant had outstanding 21,223,090 shares of Common Stock, par value $.001 per share.
Document incorporated by reference: portions of the definitive Proxy Statement of PetroQuest Energy, Inc. to be filed pursuant to Regulation 14A under
the Securities Exchange Act of 1934 with respect to the Annual Meeting of Stockholders to be held on May16, 2017, which are incorporated by reference into
Part III of this Form 10-K.
Table of Contents
Table of Contents
Page No.
Items 1 and 2 Business and Properties
PART I
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
PART II
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits, Financial Statement Schedules
PART IV
Item 16. 10-K Summary
Index to Financial Statements
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20
34
34
34
35
37
37
47
48
48
48
50
50
50
50
50
50
51
56
61
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this "Form 10-K") contains “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of
1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included in and incorporated by
reference into this Form 10-K are forward looking statements. These forward-looking statements are subject to certain risks, trends
and uncertainties that could cause actual results to differ materially from those projected.
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Among those risks, trends and uncertainties are:
the volatility of oil and natural gas prices and significantly depressed oil prices since the end of 2014;
our indebtedness and the significant amount of cash required to service our indebtedness;
our ability to obtain adequate financing when the need arises to execute our long-term strategy and to fund our planned
capital expenditures;
limits on our growth and our ability to finance our operations, fund our capital needs and respond to changing conditions
imposed by the Multidraw Term Loan Agreement (as defined below) and restrictive debt covenants;
the effects of a financial downturn or negative credit market conditions on our liquidity, business and financial condition;
losses or limits on potential gains resulting from hedging production;
our ability to post additional collateral to satisfy our offshore decommissioning obligations;
our ability to find, develop, produce and acquire additional oil and natural gas reserves that are economically recoverable;
approximately 54% of our production being exposed to the additional risk of severe weather, including hurricanes and
tropical storms, as well as flooding, coastal erosion and sea level rise;
Securities and Exchange Commission (sometimes referred to herein as the "SEC") rules that could limit our ability to
book proved undeveloped reserves in the future;
the likelihood that our actual production, revenues and expenditures related to our reserves will differ from our estimates
of proved reserves;
our ability to identify, execute or efficiently integrate future acquisitions;
the loss of key management or technical personnel;
losses and liabilities from uninsured or underinsured drilling and operating activities;
ceiling test write-downs resulting, and that could result in the future, from lower oil and natural gas prices;
our ability to market our oil and natural gas production;
changes in laws and governmental regulations, increases in insurance costs or decreases in insurance availability, and
delays in our offshore exploration and drilling activities that may result from the April 22, 2010 sinking of the Deepwater
Horizon and subsequent oil spill in the Gulf of Mexico;
regulatory initiatives relating to oil and natural gas development, hydraulic fracturing, and derivatives;
proposed changes to U.S. tax laws;
competition from larger oil and natural gas companies;
the operating hazards attendant to the oil and gas business;
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governmental regulation relating to environmental compliance costs and environmental liabilities;
the operation and profitability of non-operated properties;
potential conflicts of interest resulting from ownership of working interests and overriding royalty interests in certain of
our properties by our officers and directors;
the loss of our information and computer systems;
the impact of terrorist activities on global economies;
putative class action lawsuits that may result in substantial expenditures and divert management's attention;
the volatility of our stock price; and
our ability to meet the continued listing standards of the New York Stock Exchange with respect to our common stock
or to cure any deficiency with respect thereto.
Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure
you that such expectations reflected in these forward looking statements will prove to have been correct.
When used in this Form 10-K, the words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and
similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these
identifying words. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially
from those expressed or implied by these forward-looking statements for a number of important reasons, including those discussed
under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and elsewhere
in this Form 10-K.
You should read these statements carefully because they discuss our expectations about our future performance, contain
projections of our future operating results or our future financial condition, or state other “forward-looking” information. You
should be aware that the occurrence of any of the events described under “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” “Risk Factors” and elsewhere in this Form 10-K could substantially harm our business,
results of operations and financial condition and that upon the occurrence of any of these events, the trading price of our common
stock could decline, and you could lose all or part of your investment.
We cannot guarantee any future results, levels of activity, performance or achievements. Except as required by law, we
undertake no obligation to update any of the forward-looking statements in this Form 10-K after the date of this Form 10-K.
As used in this Form 10-K, the words “we,” “our,” “us,” “PetroQuest” and the “Company” refer to PetroQuest Energy,
Inc., its predecessors and subsidiaries, except as otherwise specified. We have provided definitions for some of the oil and natural
gas industry terms used in this Form 10-K in “Glossary of Certain Oil and Natural Gas Terms” beginning on page 57.
Part I
Item 1 and 2. Business and Properties Items
Overview
PetroQuest Energy, Inc. is an independent oil and gas company incorporated in the State of Delaware with primary
operations in Texas, Louisiana and the shallow waters of the Gulf of Mexico. We seek to grow our production, proved reserves,
cash flow and earnings at low finding and development costs through a balanced mix of exploration, development and acquisition
activities. From the commencement of our operations through 2002, we were focused exclusively in the Gulf Coast Basin with
onshore properties principally in southern Louisiana and offshore properties in the shallow waters of the Gulf of Mexico shelf.
During 2003, we began the implementation of our strategic goal of diversifying our reserves and production into longer life and
lower risk onshore properties with our acquisition of the Carthage Field in East Texas. As part of the strategic shift to diversify
our asset portfolio and lower our geographic and geologic risk profile, we refocused our opportunity selection processes to reduce
our average working interest in higher risk projects, shift capital to higher probability of success onshore wells and mitigate the
risks associated with individual wells by expanding our drilling program across multiple basins. From 2005 through 2015, we
4
Table of Contents
were actively acquiring acreage and drilling wells primarily in the Woodford Shale play in Oklahoma. We divested all of our
acreage and producing wells in Oklahoma in three transactions that closed in June 2015, April 2016 and October 2016 (the
"Oklahoma Divestitures"). See Note 2 - Acquisitions and Divestitures.
Our liquidity position has been negatively impacted by the prolonged decline in commodity prices that began in late
2014. In response, we executed the following actions during 2015 and 2016 aimed at preserving liquidity, reducing overall debt
levels and extending debt maturities:
• Completed the Oklahoma Divestitures for $292.6 million;
• Reduced our 2016 capital expenditures by 75% as compared to 2015 capital expenditures of approximately $65
million;
• Completed two debt exchanges reducing debt maturing in 2017 from $350 million to $22.7 million;
• Reduced total debt 32% from $425 million at December 31, 2014 to $290.3 million at December 31, 2016;
• Entered into a new $50 million Multidraw Term Loan Agreement maturing in 2020;
•
•
Suspended the quarterly dividend on our outstanding Series B Preferred Stock saving $5.1 million annually; and
Secured a new drilling joint venture in East Texas.
In addition to extending the maturity on approximately $113.0 million of debt due in 2017 to 2021, our September 2016
debt exchange permits us to reduce our cash interest expense on $243.5 million of debt from 10% cash to 1% cash and 9% payment-
in-kind for the first three semi-annual interest payments, which is expected to provide us with more than $30 million of cash
interest savings during 2017 and 2018. To enhance our liquidity and provide capital to refinance the remaining 10% Senior Notes
due 2017 (the "2017 Notes"), in October 2016, we entered into a new $50 million Multidraw Term Loan Agreement (the "Multidraw
Term Loan Agreement") maturing in 2020, that replaced our prior bank credit facility which had no borrowing base on the date
of termination. We currently have a more favorable outlook on oil and gas prices for 2017 than prices experienced in 2016. We
have recently recompleted our Thunder Bayou well in South Louisiana into a larger sand package and commenced the East Texas
joint venture drilling program where we expect to drill eight to ten gross wells during 2017. As a result, we expect to begin growing
production during 2017 as compared to 2016.
Business Strategy
Preserve Our Liquidity and Strengthen Our Balance Sheet. Our 2017 capital expenditures, which include capitalized
interest and overhead but exclude acquisitions, are expected to range between $40 million and $48 million, a 176% increase at
the midpoint of that range from our spending in 2016, and are expected to be funded through cash flow from operations and cash
on hand. Because we operate approximately 75% of our total estimated proved reserves and manage the drilling and completion
activities on an additional 16% of such reserves, we expect to be able to control the timing of a substantial portion of our capital
investments. We also may continue to opportunistically dispose of certain assets or enter into joint venture arrangements to provide
additional liquidity and plan to maintain our commodity hedging program, as in prior years. As a result of the debt exchanges
mentioned above and the suspension of the quarterly dividend payments on our outstanding Series B Preferred Stock, we expect
to see cash savings on interest and dividends of approximately $25 million during 2017.
Pursue Balanced Growth and Portfolio Mix. We plan to pursue a risk-balanced approach to the growth and stability of
our reserves, production, cash flows and earnings. Our goal is to weight our capital allocation to lower risk development activities
to balance the capital allocated to higher risk and higher impact exploration activities. We plan to allocate our capital investments
in a manner that continues to geographically and operationally diversify our asset base. Through our portfolio diversification
efforts, at December 31, 2016, approximately 72% of our estimated proved reserves were located in longer life and lower risk
basins in East Texas and 28% were located in the shorter life, but higher flow rate reservoirs in the Gulf Coast Basin. In terms of
production diversification, during 2016, 46% of our production was derived from longer life basins. Our 2016 production was
comprised of 71% natural gas, 13% oil and 16% natural gas liquids.
Focus Capital Toward More Predictable Onshore Assets. We plan to focus the majority of our capital spending developing
our lower-risk Cotton Valley acreage in East Texas. Since beginning horizontal drilling in the Carthage Field in 2011, we have a
100% drilling success rate on 20 gross wells drilled. Approximately 77% of our 2017 capital expenditures are allocated to operations
in East Texas where we believe the less complex geology, combined with the large inventory of offsetting vertical and horizontal
well data, offers greater predictability in increasing production and proved reserves. Additionally, our East Texas acreage position
5
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provides a significant inventory of future drilling locations, which we expect to develop over a long-term drilling campaign. We
plan to apply the latest drilling and completion techniques to consistently improve the economic development of this resource
potential.
Concentrate in Core Operating Areas and Build Scale. We plan to continue focusing on our operations in East Texas and
the Gulf Coast Basin. Operating in concentrated areas helps to better control our overhead by enabling us to manage a greater
amount of acreage with fewer employees and minimize incremental costs of increased drilling and production. We have substantial
geological and reservoir data, operating experience and partner relationships in these regions. We believe that these factors,
combined with the existing infrastructure and favorable geologic conditions with multiple known oil and gas producing reservoirs
in these regions, will provide us with attractive investment opportunities.
Manage Our Risk Exposure. We plan to continue several strategies designed to mitigate our operating risks. We have
adjusted the working interest we are willing to hold based on the risk level and cost exposure of each project. For example, we
typically reduce our working interests in higher risk exploration projects while retaining greater working interests in lower risk
development projects. Our partners often agree to pay a disproportionate share of drilling costs relative to their interests, allowing
us to allocate our capital spending to maximize our return and reduce the inherent risk in exploration and development activities.
We also strive to retain operating control of the majority of our properties to control costs and timing of expenditures and we
expect to continue to actively hedge a portion of our future planned production to mitigate the impact of commodity price fluctuations
and achieve more predictable cash flows. We may also enter into joint venture arrangements designed to develop our properties
while limiting our capital requirements and preserving our liquidity.
2016 Financial and Operational Summary
During 2016, we invested $15.9 million in exploratory, development and acquisition activities. We drilled 5 gross
development wells realizing an overall success rate of 100%. These activities were financed through cash on hand and our cash
flow from operations. During 2016, our production decreased 31% to 23.5 Bcfe as a result of the Oklahoma Divestitures and
normal production declines at our East Texas and Gulf Coast fields. Our estimated proved reserves at December 31, 2016 decreased
35% from 2015 as discussed in greater detail below.
Oil and Gas Reserves
Our estimated proved reserves at December 31, 2016 decreased 35% from 2015 totaling 1.4 MMBbls of oil, 26.6 Bcfe
of natural gas liquids (Ngls) and 81 Bcf of natural gas. At December 31, 2016, our standardized measure of our discounted cash
flows, which includes the estimated impact of future income taxes, totaled $67.3 million. We had a pre-tax present value, discounted
at 10%, of the estimated future net revenues based on 12-month, first day of month, average prices during 2016 (“PV-10”) of $67.3
million. The decrease in our estimated proved reserves during 2016 was primarily the result of the divestiture of our remaining
Oklahoma assets, which represented 20 Bcfe of our estimated proved reserves as of December 31, 2015 as well as the 75% reduction
in capital spending during 2016, as compared to 2015. See the reconciliation of standardized measure of discounted cash flows
to PV-10 below. Our standardized measure of discounted cash flows and PV-10 utilized prices (adjusted for field differentials)
for the years ended December 31, 2016 and 2015 as follows:
Oil per Bbl
Natural gas per Mcf
Ngl per Mcfe
12/31/2016 12/31/2015
$50.29
$40.85
$2.40
$1.82
$2.41
$2.24
Ryder Scott Company, L.P., a nationally recognized independent petroleum engineering firm, prepared the estimates of
our proved reserves and future net cash flows (and present value thereof) attributable to such proved reserves at December 31,
2016. Our internal reservoir engineering staff is managed by an individual with 35 years of industry experience as a reservoir and
production engineer, including fourteen years as a reservoir engineering manager with PetroQuest. This individual is responsible
for overseeing the estimates prepared by Ryder Scott.
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Our internal controls that are used in our reserve estimation process are designed to provide reasonable assurance that
our reserve estimates are computed and reported in accordance with SEC rules and regulations and generally accepted accounting
principles ("GAAP"). These internal controls are regularly tested in connection with our annual assessment of internal controls
over financial reporting and include:
•
•
•
Utilizing documented process workflows;
Employing qualified professional engineering, geological, land, financial and marketing personnel; and
Providing continuing education and training for all personnel involved in our reserve estimation process.
Each quarter, our Reservoir Engineering Manager presents the status of the changes to our reserve estimates to our
executive team, including our Chief Executive Officer. These reserve estimates are then presented to our Board of Directors in
connection with quarterly meetings. In addition, our reserve booking policies and procedures are reviewed annually by one of
the members of our Board of Directors, acting on behalf of our Audit Committee.
With respect to proved undeveloped reserves (“PUD reserves”), we maintain a five year development plan that is updated
and approved annually by our PUD Review Committee (as described below) with input from our executive team and asset managers
and reviewed quarterly by our executive team and asset managers. Our development plan includes only PUDs that we are reasonably
certain will be drilled within five years of booking based upon qualitative and quantitative factors including estimated risk-based
returns, current pricing forecasts, recent drilling results, availability of services, equipment and personnel, seasonal weather patterns
and changes in drilling and completion techniques and technology. Our PUD reserves are based upon our substantial basin-specific
technical and operating experience relative to the location of the reserves. Over the last five years, we have realized a 100%
drilling success rate on 20 gross wells drilled in East Texas where 100% of our PUD reserves are currently booked. Furthermore,
because all of our longer life, onshore PUD reserves are direct offsetting locations to producing wells, we have comprehensive
data available, which enables us to forecast economic results, including drilling and operating costs, with reasonable certainty.
During 2014, we established a committee that annually reviews our PUD reserves. Our PUD Review Committee (the
“Committee”) is comprised of our Executive Vice President of Operations, Chief Financial Officer and Reservoir Engineering
Manager and meets annually in connection with each year-end reserve report. The Committee is responsible for reviewing all
PUD locations, not only in terms of technical and financial merits as reviewed by our independent petroleum engineering firm,
but also to apply a robust evaluation of the timing and reasonable certainty of the development plan in light of all known
circumstances including our budget, the outlook for commodity prices and the location of ongoing drilling programs. The
Committee’s evaluation of reasonable certainty of the development plan includes a thorough assessment of near term drilling plans
to develop PUDs, a review of adherence to previously adopted development plans and a review of historical PUD conversion
rates.
The following table sets forth certain information about our estimated proved reserves as of December 31, 2016:
Proved Developed
Proved Undeveloped
Total Proved
Oil (MBbls) NGL (Mmcfe)
13,073
13,502
26,575
1,212
185
1,397
Natural Gas
(Mmcf)
47,349
33,175
80,524
Total Mmcfe*
67,694
47,787
115,481
*
Oil conversion to Mcfe at one Bbl of crude oil, condensate or natural gas liquids to six Mcf of natural gas.
As of December 31, 2016, our PUD reserves totaled 47.8 Bcfe, a 36% decrease from our PUD reserves at December 31,
2015. During 2016, we spent $2.1 million converting 5.4 Bcfe of PUD reserves at December 31, 2015 to proved developed reserves
at December 31, 2016.
The following table presents an analysis of the change in our PUD reserves from December 31, 2015 to December 31, 2016:
PUD Reserve balance at December 31, 2015
Conversions to proved developed
Divestitures
Revisions of previous estimates
PUD Reserve balance at December 31, 2016
7
MMcfe
74,389
(5,392)
(6,524)
(14,686)
47,787
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All of our PUD reserves at December 31, 2016 were associated with the future development of our East Texas properties.
The revisions of previous estimates reflected in the table above include the reclassification of approximately 10.7 Bcfe of PUDs
to probable reserves due to our expectation that those locations would not be developed within five years from initial booking.
We expect all of our PUD reserves at December 31, 2016 to be developed over the next five years. However, our PUD reserve
inventory does not encompass all drilling activities over the next five years. For example, during 2016 we converted 1.5 Bcfe of
reserves that were classified as probable reserves at December 31, 2015 to proved developed producing at December 31, 2016
and therefore were not included in the above table. We expect to continue to allocate capital to projects that do not have proved
reserves ascribed to them. At December 31, 2016, we had no PUD reserves booked for longer than five years. Estimated future
costs related to the development of PUD reserves are expected to total $13.5 million in 2017, $4.3 million in 2018, $14.6 million
in 2019 and $8.8 million in 2020. During 2017, we expect to convert approximately 18.1 Bcfe of PUDs at December 31, 2016
to proved developed reserves.
The estimated cash flows from our proved reserves at December 31, 2016 were as follows:
Estimated pre-tax future net cash flows (1)
Discounted pre-tax future net cash flows (PV-10) (1)
Total standardized measure of discounted future net cash flows
Proved Developed
(M$)
Proved
Undeveloped
(M$)
$
$
66,920
57,709
$
$
31,111
9,560
Total Proved
(M$)
$
$
$
98,031
67,269
67,269
(1) Estimated pre-tax future net cash flows and discounted pre-tax future net cash flows (PV-10) are non-GAAP measures
because they exclude income tax effects. Management believes these non-GAAP measures are useful to investors as they
are based on prices, costs and discount factors which are consistent from company to company, while the standardized
measure of discounted future net cash flows is dependent on the unique tax situation of each individual company. As a
result, the Company believes that investors can use these non-GAAP measures as a basis for comparison of the relative
size and value of the Company’s reserves to other companies. The Company also understands that securities analysts and
rating agencies use these non-GAAP measures in similar ways.
The following table reconciles undiscounted and discounted future net cash flows to standardized measure of discounted
cash flows as of December 31, 2016:
Estimated pre-tax future net cash flows
10% annual discount
Discounted pre-tax future net cash flows
Future income taxes discounted at 10%
Standardized Measure of discounted future net cash flows
Total Proved (M$)
$
$
98,031
30,762
67,269
—
67,269
We have not filed any reports with other federal agencies that contain an estimate of total proved net oil and gas reserves.
Core Areas
The following table sets forth estimated proved reserves and annual production from each of our core areas (in Bcfe) for
the years ended December 31, 2016 and 2015.
Gulf Coast Basin
East Texas
Oklahoma Woodford (1)
Other
2016
2015
Reserves
Production
Reserves
Production
32.9
82.6
—
—
115.5
12.8
9.0
1.7
—
23.5
43.9
114.1
20.0
—
178.0
13.8
11.1
9.2
0.1
34.2
(1) In June 2015, we divested the majority of our Oklahoma Woodford assets (representing 227.2 Bcfe of proved reserves at
December 31, 2014) which contributed 7.0 Bcfe of production in 2015. In April and October 2016, we divested the remainder
of our Oklahoma assets (representing 20 Bcfe of proved reserves at December 31, 2015) which contributed 1.7 Bcfe of
production in 2016.
8
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East Texas
During 2016, we invested $3.9 million in our East Texas properties where we drilled one gross well, achieving a 100%
success rate. Net production from our East Texas assets averaged 24.7 MMcfe per day during 2016, a 19% decrease from 2015
average daily production, and our estimated proved reserves decreased 28% from 2015 due to the reduced capital spending in this
core area during 2016 as well as the reclassification of certain PUD reserves to probable reserves. We have allocated approximately
77% of our 2017 capital budget to drilling and performing various re-completions at our Carthage Field.
Gulf Coast Basin
During 2016, we invested $6.1 million in this core area. Production from this area decreased 8% from 2015 totaling 34.9
MMcfe per day in 2016 due to normal production declines in the Gulf Coast area offset by a full year of production from our
Thunder Bayou discovery. Our estimated proved reserves in this area decreased 25% from 2015 primarily as a result of the 12.8
Bcfe of production in 2016. We have allocated approximately 23% of our 2017 capital budget to performing various re-completions
and plugging and abandonment projects in the Gulf Coast Basin.
Oklahoma - Woodford
During 2016, we invested $0.3 million and completed four gross wells, achieving a 100% success rate. Average daily
production from our Oklahoma properties during 2016 totaled 5 MMcfe per day, an 82% decrease from 2015 average daily
production primarily as a result of the Oklahoma Divestitures. During 2016, we sold 21.9 Bcfe of proved reserves in connection
with our exit from this core area.
Markets and Customers
We sell our oil and natural gas production under fixed or floating market contracts. Customers purchase all of our oil and
natural gas production at current market prices. The terms of the arrangements generally require customers to pay us within 30
days after the production month ends. As a result, if the customers were to default on their payment obligations to us, near-term
earnings and cash flows would be adversely affected. However, due to the availability of other markets and pipeline connections,
we do not believe that the loss of these customers or any other single customer would adversely affect our ability to market
production. Our ability to market oil and natural gas from our wells depends upon numerous factors beyond our control, including:
•
•
•
•
•
•
•
•
the extent of domestic production and imports of oil and natural gas;
the proximity of the natural gas production to pipelines;
the availability of capacity in such pipelines;
the demand for oil and natural gas by utilities and other end users;
the availability of alternative fuel sources;
the effects of inclement weather;
state and federal regulation of oil and natural gas production; and
federal regulation of gas sold or transported in interstate commerce.
We cannot assure you that we will be able to market all of the oil or natural gas we produce or that favorable prices can
be obtained for the oil and natural gas we produce.
A portion of the natural gas production that we operate in East Texas is committed to a minimum volumetric delivery
contract with a third party pipeline company. Under the terms of the agreement, we are required to deliver 11.0 Bcfe of natural
gas during the eighteen-month period from July 1, 2017 through December 31, 2018 and each of the twelve-month periods ended
December 31, 2019, 2020 and 2021, respectively. Based upon our projected drilling plans, current estimated proved developed
reserves and production, we expect that this commitment will be met.
In view of the many uncertainties affecting the supply and demand for oil, natural gas and refined petroleum products,
we are unable to predict future oil and natural gas prices and demand or the overall effect such prices and demand will have on
the Company. During 2016, one customer accounted for 23%, one accounted for 17%, one accounted for 14% and one accounted
for 10% of our oil and natural gas revenue. During 2015, one customer accounted for 21%, one accounted for 18%, one accounted
9
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for 17% and one accounted for 10% of our oil and natural gas revenue. During 2014, one customer accounted for 30%, one
accounted for 24% and one accounted for 14% of our oil and natural gas revenue. These percentages do not consider the effects
of commodity hedges. We do not believe that the loss of any of our oil or natural gas purchasers would have a material adverse
effect on our operations due to the availability of other purchasers.
10
Table of Contents
Production, Pricing and Production Cost Data
The following table sets forth our production, pricing and production cost data during the periods indicated. Our remaining
core areas, Gulf Coast Basin and East Texas, both represented approximately 15% or more of our total estimated proved reserves
at December 31, 2016.
Production:
Oil (Bbls):
Gulf Coast Basin
East Texas
Other (3)
Total Oil (Bbls)
Gas (Mcf):
Gulf Coast Basin
East Texas
Other (3)
Total Gas (Mcf)
NGL (Mcfe):
Gulf Coast Basin
East Texas
Other (3)
Total NGL (Mcfe)
Total Production (Mcfe):
Gulf Coast Basin
East Texas
Other (3)
Total Production (Mcfe)
Average sales prices (1):
Oil (per Bbl):
Gulf Coast Basin
East Texas
Other (3)
Total Oil (per Bbl)
Gas (per Mcf)
Gulf Coast Basin
East Texas
Other (3)
Total Gas (per Mcf)
NGL (per Mcfe)
Gulf Coast Basin
East Texas
Other (3)
Total NGL (per Mcfe)
Total Per Mcfe:
Gulf Coast Basin
East Texas
Other (3)
Total Per Mcfe
Average Production Cost per Mcfe (2):
Gulf Coast Basin
East Texas
Other (3)
Total Average Production Cost per Mcfe
(1) Does not include the effect of hedges.
(2) Production costs do not include production taxes.
(3) Includes Oklahoma-Woodford.
11
Year Ended December 31,
2015
2014
2016
463,903
38,154
144
502,201
8,596,488
6,350,712
1,669,378
16,616,578
1,395,614
2,471,936
3,397
3,870,947
12,775,520
9,051,572
1,673,639
23,500,731
473,846
50,739
3,944
528,529
9,421,031
7,838,144
8,242,676
25,501,851
1,548,228
2,946,185
992,826
5,487,239
13,812,335
11,088,763
9,259,166
34,160,264
687,855
62,013
52,641
802,509
10,825,424
6,636,174
13,566,073
31,027,671
1,325,288
2,672,885
3,484,137
7,482,310
16,277,842
9,681,137
17,366,056
43,325,035
$
$
41.27
38.35
37.85
41.05
$
48.94
48.28
50.88
48.89
2.27
2.31
1.17
2.18
3.12
1.50
5.22
2.09
3.37
2.19
1.18
2.76
1.50
0.88
0.80
1.21
2.55
2.63
1.75
2.32
3.03
1.94
3.49
2.53
3.76
2.60
1.96
2.89
1.86
0.90
0.48
1.17
96.71
92.21
95.74
96.30
4.38
4.08
3.27
3.83
6.00
4.17
3.68
4.27
7.49
4.54
3.59
5.26
1.59
1.21
0.63
1.12
Table of Contents
Oil and Gas Producing Wells
The following table details the productive wells in which we owned an interest as of December 31, 2016:
Productive Wells:
Oil:
Gulf Coast Basin
East Texas
Gas:
Gulf Coast Basin
East Texas
Total
Gross
Net
17
—
17
12
71
83
100
9.43
—
9.43
6.82
44.53
51.35
60.78
Of the 100 gross productive wells at December 31, 2016, one had a dual completion.
Oil and Gas Drilling Activity
The following table sets forth the wells drilled and completed by us during the periods indicated. All wells were drilled
in the continental United States.
2016
2015
2014
Gross
Net
Gross
Net
Gross
Net
Exploration:
Productive:
Gulf Coast Basin
East Texas
Other (1)
Non-productive:
Gulf Coast Basin
East Texas
Other (1)
Total
Development:
Productive:
Gulf Coast Basin
East Texas
Other (1)
Non-productive:
Gulf Coast Basin
East Texas
Other (1)
Total
—
—
—
—
—
—
—
—
—
—
1
4
5
—
—
—
—
5
—
—
—
—
—
—
—
—
—
—
0.81
0.02
0.83
—
—
—
—
0.83
—
4
22
26
3
—
—
3
29
—
—
27
27
—
—
—
—
27
—
3.31
5.05
8.36
1.22
—
—
1.22
9.58
—
—
4.30
4.30
—
—
—
—
4.30
2
4
19
25
2
—
2
4
29
—
2
26
28
—
—
1
1
29
1.19
3.10
7.14
11.43
1.12
—
2.00
3.12
14.55
—
1.55
6.05
7.60
—
—
0.50
0.50
8.10
(1) Includes Oklahoma-Woodford.
At December 31, 2016, we had 2 gross (1.26 net) wells in progress.
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Leasehold Acreage
The following table shows our approximate developed and undeveloped (gross and net) leasehold acreage as of
December 31, 2016:
Kansas
Louisiana
Texas
Federal Waters
Total
Leasehold Acreage
Developed
Undeveloped
Gross
Net
Gross
Net
—
4,378
39,803
31,532
75,713
—
1,550
20,860
23,198
45,608
160
731
9,844
6,420
17,155
80
78
5,896
6,420
12,474
Leases covering 5% of our net undeveloped acreage are scheduled to expire in 2017, 9% in 2018, 5% in 2019 and 82%
thereafter. At December 31, 2016, we do not have any PUD reserves attributed to acreage that has an expiration date preceding
the scheduled date for initial development. Of the acreage subject to leases scheduled to expire during 2017, 84% relates to
undeveloped acreage in the Carthage area in East Texas where we plan to drill eight to ten wells during 2017.
Title to Properties
Title to properties is subject to contractual arrangements customary in the oil and gas industry, liens for taxes not yet due
and, in some instances, other encumbrances. We believe that such burdens do not materially detract from the value of properties
or from the respective interests therein or materially interfere with their use in the operation of the business.
As is customary in the industry, other than a preliminary review of local records, little investigation of record title is made
at the time of acquisitions of undeveloped properties. Investigations, which generally include a title opinion of outside counsel,
are made prior to the consummation of an acquisition of producing properties and before commencement of drilling operations
on undeveloped properties. Our properties are typically subject, in one degree or another, to one or more of the following:
•
•
•
•
•
royalties and other burdens and obligations, express or implied, under oil and gas leases;
overriding royalties and other burdens created by us or our predecessors in title;
a variety of contractual obligations (including, in some cases, development obligations) arising under operating
agreements, farmout agreements, production sales contracts and other agreements that may affect the properties or
their titles;
back-ins and reversionary interests existing under purchase agreements and leasehold assignments;
liens that arise in the normal course of operations, such as those for unpaid taxes, statutory liens securing obligations
to unpaid suppliers and contractors and contractual liens under operating agreements; pooling, unitization and
communitization agreements, declarations and orders; and
•
easements, restrictions, rights-of-way and other matters that commonly affect property.
To the extent that such burdens and obligations affect our rights to production revenues, they have been taken into account
in calculating our net revenue interests and in estimating the size and value of our reserves. We believe that the burdens and
obligations affecting our properties are conventional in the industry for properties of the kind that we own.
Federal Regulations
Sales and Transportation of Natural Gas. Historically, the transportation and sales for resale of natural gas in interstate
commerce have been regulated pursuant to the Natural Gas Act of 1938 (“NGA”), the Natural Gas Policy Act of 1978 and the
Federal Energy Regulatory Commission (“FERC”) regulations. Effective January 1, 1993, the Natural Gas Wellhead Decontrol
Act deregulated the price for all “first sales” of natural gas. Thus, all of our sales of gas may be made at market prices, subject to
applicable contract provisions. Sales of natural gas are affected by the availability, terms and cost of pipeline transportation. Since
1985, the FERC has implemented regulations intended to make natural gas transportation more accessible to gas buyers and sellers
on an open-access, non-discriminatory basis. We cannot predict what further action the FERC will take on these matters. Some
of the FERC's more recent proposals may, however, adversely affect the availability and reliability of interruptible transportation
13
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service on interstate pipelines. We do not believe that we will be affected by any action taken materially differently than other
natural gas producers, gatherers and marketers with which we compete.
The Outer Continental Shelf Lands Act (the “OCSLA”), which was administered by the Bureau of Ocean Energy
Management, Regulation and Enforcement (the “BOEMRE”) and, after October 1, 2011, its successors, the Bureau of Ocean
Energy Management (the “BOEM”) the Bureau of Safety and Environmental Enforcement (the “BSEE”), and the FERC, requires
that all pipelines operating on or across the shelf provide open-access, non-discriminatory service. There are currently no regulations
implemented by the FERC under its OCSLA authority on gatherers and other entities outside the reach of its NGA jurisdiction.
Therefore, we do not believe that any FERC, BOEM or BSEE action taken under OCSLA will affect us in a way that materially
differs from the way it affects other natural gas producers, gatherers and marketers with which we compete.
Our natural gas sales are generally made at the prevailing market price at the time of sale. Therefore, even though we
sell significant volumes to major purchasers, we believe that other purchasers would be willing to buy our natural gas at comparable
market prices.
Natural gas continues to supply a significant portion of North America's energy needs and we believe the importance of
natural gas in meeting this energy need will continue. The impact of the sudden drop in crude oil prices has not yet had a significant
impact on gas prices, but a continued drop in crude oil prices could eventually impact gas markets. At this time, we are not in a
position to predict the scope of any loss of market due to lower crude oil prices.
On August 8, 2005, the Energy Policy Act of 2005 (the “2005 EPA”) was signed into law. This comprehensive act contains
many provisions that intended to encourage oil and gas exploration and development in the U.S. The 2005 EPA directs the FERC,
BOEM and other federal agencies to issue regulations that will further the goals set out in the 2005 EPA. The 2005 EPA amends
the NGA to make it unlawful for “any entity”, including otherwise non-jurisdictional producers such as us, to use any deceptive
or manipulative device or contrivance in connection with the purchase or sale of natural gas or the purchase or sale of transportation
services subject to regulation by the FERC, in contravention of rules prescribed by the FERC. On January 20, 2006, the FERC
issued rules implementing this provision. The rules make it unlawful in connection with the purchase or sale of natural gas subject
to the jurisdiction of the FERC, or the purchase or sale of transportation services subject to the jurisdiction of the FERC, for any
entity, directly or indirectly, to use or employ any device, scheme or artifice to defraud; to make any untrue statement of material
fact or omit to make any such statement necessary to make the statements made not misleading; or to engage in any act or practice
that operates as a fraud or deceit upon any person. The new anti-manipulation rule does not apply to activities that relate only to
intrastate or other non-jurisdictional sales or gathering, but does apply to activities of otherwise non-jurisdictional entities to the
extent the activities are conducted “in connection with” gas sales, purchases or transportation subject to FERC jurisdiction. It
therefore reflects a significant expansion of the FERC's enforcement authority. To date, we do not believe we have been, nor do
we anticipate we will be affected any differently than other producers of natural gas.
In 2007, the FERC issued a final rule on annual natural gas transaction reporting requirements, as amended by subsequent
orders on rehearing (“Order 704”). Under Order 704, wholesale buyers and sellers of more than 2.2 million MMBtu of physical
natural gas in the previous calendar year, including interstate and intrastate natural gas pipelines, natural gas gatherers, natural
gas processors and natural gas marketers are now required to report, on May 1 of each year, beginning in 2009, aggregate volumes
of natural gas purchased or sold at wholesale in the prior calendar year to the extent such transactions utilize, contribute to, or may
contribute to the formation of price indices. It is the responsibility of the reporting entity to determine which individual transactions
should be reported based on the guidance of Order 704. The monitoring and reporting required by these rules have increased our
administrative costs. To date, we do not believe we have been, nor do we anticipate that we will be affected any differently than
other producers of natural gas.
Sales and Transportation of Crude Oil. The spot markets for oil, gas and natural gas liquids ("NGLs") are subject to
volatility and supply and demand factors fluctuations. Our sales of crude oil, condensate and natural gas liquids are not currently
regulated, and are subject to applicable contract provisions made at market prices and typically under short term agreements with
third parties. Additionally, we may periodically enter into financial hedging arrangements or fixed-price contracts associated with
a portion of our oil, gas or natural gas liquids production. In a number of instances, however, the ability to transport and sell such
products is dependent on pipelines whose rates, terms and conditions of service are subject to the FERC's jurisdiction under the
Interstate Commerce Act. In other instances, the ability to transport and sell such products is dependent on pipelines whose rates,
terms and conditions of service are subject to regulation by state regulatory bodies under state statutes.
The regulation of pipelines that transport crude oil, condensate and natural gas liquids is generally more light-handed
than the FERC's regulation of gas pipelines under the NGA. Regulated pipelines that transport crude oil, condensate, and natural
gas liquids are subject to common carrier obligations that generally ensure non-discriminatory access. With respect to interstate
pipeline transportation subject to regulation of the FERC under the Interstate Commerce Act, rates generally must be cost-based,
although market-based rates or negotiated settlement rates are permitted in certain circumstances. Pursuant to FERC Order No. 561,
pipeline rates are subject to an indexing methodology. Under this indexing methodology, pipeline rates are subject to changes in
14
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the Producer Price Index for Finished Goods, minus one percent. A pipeline can seek to increase its rates above index levels
provided that the pipeline can establish that there is a substantial divergence between the actual costs experienced by the pipeline
and the rate resulting from application of the index. A pipeline can seek to charge market based rates if it establishes that it lacks
significant market power. In addition, a pipeline can establish rates pursuant to settlement if agreed upon by all current shippers.
A pipeline can seek to establish initial rates for new services through a cost-of-service proceeding, a market-based rate proceeding,
or through an agreement between the pipeline and at least one shipper not affiliated with the pipeline.
Federal Leases. We maintain operations located on federal oil and natural gas leases, which are administered by the
BOEM or the BSEE, pursuant to the OCSLA. The BOEM and the BSEE regulate offshore operations, including engineering and
construction specifications for production facilities, safety procedures, plugging and abandonment of wells on the Gulf of Mexico
shelf, and removal of facilities.
The BOEM handles offshore leasing, resource evaluation, review and administration of oil and gas exploration and
development plans, renewable energy development, National Environmental Policy Act analysis and environmental studies, and
the BSEE is responsible for the safety and enforcement functions of offshore oil and gas operations, including the development
and enforcement of safety and environmental regulations, permitting of offshore exploration, development and production
activities, inspections, offshore regulatory programs, oil spill response and newly formed training and environmental compliance
programs. Our federal oil and natural gas leases are awarded based on competitive bidding and contain relatively standardized
terms. These leases require compliance with detailed regulations and orders that are subject to interpretation and change by the
BOEM or BSEE. We are currently subject to regulations governing the plugging and abandonment of wells located offshore and
the installation and removal of all production facilities, structures and pipelines, and the BOEM or the BSEE may in the future
amend these regulations. Please read “Risk Factors” beginning on page 20 for more information on new regulations.
To cover the various obligations of lessees on the Outer Continental Shelf (the “OCS”), the BOEM generally requires
that lessees have substantial net worth or post bonds or other acceptable assurances that such obligations will be satisfied. While
we have been exempt from such supplemental bonding requirements in the past, beginning in 2014 we were required to post
supplemental bonding or alternate form of collateral for certain of our offshore properties. We have been able to satisfy the
collateral requirements using a combination of our existing cash on hand and the issuance of supplemental bonds. Under some
circumstances, the BOEM may require any of our operations on federal leases to be suspended or terminated. Any such suspension
or termination could materially adversely affect our financial condition and results of operations. As a result of certain bankruptcies
of Gulf of Mexico operations, BSEE and BOEM are currently reassessing decommissioning liability and supplemental bonding
requirements for all operations on the Gulf of Mexico OCS with respect to decommissioning wells and platforms in the Gulf of
Mexico and are updating all decommissioning costs in the Gulf of Mexico. The Department of the Interior through the BOEM
and BSEE has made enforcement of decommissioning liabilities one of its top priorities. Recent Department of Interior guidance
has indicated that well abandonment and decommissioning requirements are not necessarily tied to lease termination. Based on
the ongoing review of such decommissioning and abandonment costs, the Company’s potential liability for such costs has become
more expensive and as a result supplemental bonding costs may continue to increase, which along with any future directives or
changes to BOEM’s current supplemental bonding requirements, could materially and adversely affect our financial condition,
cash flows, and results of operations. Because we are not exempt from the BOEM’s supplemental bonding requirements, we
engage a number of surety companies to post the requisite bonds. Pursuant to the terms of our agreements with these surety
companies, we are required to post collateral at the outset of the agreement or subsequently on demand, the amount of which
typically may be increased at the surety companies’ discretion. Two of our surety companies requested that we post collateral to
support certain of the bonds that are issued on our behalf and to date, we have provided cash deposits totaling $6.2 million to
satisfy these requests. We cannot assure you that we will be able to satisfy future demands for collateral for the requisite bonds
or comply with new supplemental bonding requirements. If we fail to do so, we may be in default under the Multidraw Term Loan
Agreement and potentially the indentures governing the 10% second-lien senior secured notes due 2021 (the" 2021 Notes") and
the 10% second lien senior secured PIK notes due 2021 (the "2021 PIK Notes").
In addition, on July 14, 2016, the BOEM issued a notice to lessees ("NTL") No. 2016-N01 effective September 12, 2016
to clarify the procedures and criteria that the BOEM will use to determine if and when additional security is required for OCS
leases. This notice may result in an increase to the amount of surety bonds or other security required to be posted by us pursuant
to these updated BOEM financial assurance and risk management requirements. On January 6, 2017, the BOEM announced that
it was extending the implementation timeline for NTL No. 2016-N01 by an additional six months as to leases, rights-of-way and
rights of use and easement for which there are co-lessees and/or predecessors in interest, except in circumstances in which the
BOEM determines there is a substantial risk of nonperformance of the interest holder's decommissioning liabilities. All of our
decommissioning liabilities as of the date hereof have co-lessees and/or predecessors in interest and are expected to be included
in this extended implementation timeline. We can provide no assurance that we can continue to obtain bonds or other surety in
all cases given these new expenses and updated BOEM requirements or that we will have sufficient liquidity to support such
supplemental bonding requirements. If we are unable to obtain the additional required bonds, assurances or the increased amount
of required collateral as requested, the BOEM may require any of our operations on federal leases to be suspended, canceled or
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otherwise impose monetary penalties, and one or more of such actions could have a material adverse effect on our business,
prospects, results of operations, financial condition, and liquidity.
Hurricanes in the Gulf of Mexico can have a significant impact on oil and gas operations on the OCS. The effects from
past hurricanes have included structural damage to pipelines, wells, fixed production facilities, semi-submersibles and jack-up
drilling rigs. The BOEM and the BSEE will continue to be concerned about the loss of these facilities and rigs as well as the
potential for catastrophic damage to key infrastructure and the resultant pollution from future storms. In an effort to reduce the
potential for future damage, the BOEMRE historically issued guidance aimed at improving platform survivability by taking into
account environmental and oceanic conditions in the design of platforms and related structures. It is possible that similar, if not
more stringent, requirements will be issued by the BOEM or the BSEE for future hurricane seasons. New requirements, if any,
could increase our operating costs due to future storms.
The Office of Natural Resources Revenue (the “ONRR”) in the U.S. Department of the Interior administers the collection
of royalties under the terms of the OCSLA and the oil and natural gas leases issued thereunder. The amount of royalties due is
based upon the terms of the oil and natural gas leases as well as the regulations promulgated by the ONRR.
Federal, State or American Indian Leases. In the event we conduct operations on federal, state or American Indian oil
and gas leases, such operations must comply with numerous regulatory restrictions, including various nondiscrimination statutes,
and certain of such operations must be conducted pursuant to certain on-site security regulations and other appropriate permits
issued by the Bureau of Land Management (“BLM”) or the BOEM or other appropriate federal or state agencies.
The Mineral Leasing Act of 1920 (“Mineral Act”) prohibits direct or indirect ownership of any interest in federal onshore
oil and gas leases by a foreign citizen of a country that denies “similar or like privileges” to citizens of the United States. Such
restrictions on citizens of a “non-reciprocal” country include ownership of holding or controlling stock in a corporation that holds
a federal onshore oil and gas lease. If this restriction is violated, the corporation's lease can be cancelled in a proceeding instituted
by the United States Attorney General. Although the regulations of the BLM (which administers the Mineral Act) provide for
agency designations of non-reciprocal countries, there are presently no such designations in effect. We own interests in numerous
federal onshore oil and gas leases. It is possible that holders of our equity interests may be citizens of foreign countries, which at
some time in the future might be determined to be non-reciprocal under the Mineral Act.
State Regulations
Most states regulate the production and sale of oil and natural gas, including:
•
•
•
•
•
requirements for obtaining drilling permits;
the method of developing new fields;
the spacing and operation of wells;
the prevention of waste of oil and gas resources; and
the plugging and abandonment of wells.
The rate of production may be regulated and the maximum daily production allowable from both oil and gas wells may
be established on a market demand or conservation basis or both.
We may enter into agreements relating to the construction or operation of a pipeline system for the transportation of
natural gas. To the extent that such gas is produced, transported and consumed wholly within one state, such operations may, in
certain instances, be subject to the jurisdiction of such state’s administrative authority charged with the responsibility of regulating
intrastate pipelines. In such event, the rates that we could charge for gas, the transportation of gas, and the construction and
operation of such pipeline would be subject to the rules and regulations governing such matters, if any, of such administrative
authority.
Legislative Proposals
In the past, Congress has been very active in the area of natural gas regulation. New legislative proposals in Congress
and the various state legislatures, if enacted, could significantly affect the petroleum industry. At the present time it is impossible
to predict what proposals, if any, might actually be enacted by Congress or the various state legislatures and what effect, if any,
such proposals might have on our operations.
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Environmental Regulations
General. Our activities are subject to existing federal, state and local laws and regulations governing environmental
quality and pollution control. Although no assurances can be made, we believe that, absent the occurrence of an extraordinary
event, compliance with existing federal, state and local laws, regulations and rules regulating the release of materials into the
environment or otherwise relating to the protection of human health, safety and the environment will not have a material effect
upon our capital expenditures, earnings or competitive position with respect to our existing assets and operations. We cannot
predict what effect additional regulation or legislation, enforcement policies, and claims for damages to property, employees, other
persons and the environment resulting from our operations could have on our activities.
Our activities with respect to exploration and production of oil and natural gas, including the drilling of wells and the
operation and construction of pipelines and other facilities for extracting, transporting or storing natural gas and other petroleum
products, are subject to stringent environmental regulation by state and federal authorities, including the United States
Environmental Protection Agency (the “USEPA”). Such regulation can increase the cost of planning, designing, installing and
operating such facilities. Although we believe that compliance with environmental regulations will not have a material adverse
effect on us, risks of substantial costs and liabilities are inherent in oil and gas production operations, and there can be no assurance
that significant costs and liabilities will not be incurred. Moreover it is possible that other developments, such as spills or other
unanticipated releases, stricter environmental laws and regulations, and claims for damages to property or persons resulting from
oil and gas production, would result in substantial costs and liabilities to us.
Solid and Hazardous Waste. We own or lease numerous properties that have been used for production of oil and gas
for many years. Although we have utilized operating and disposal practices standard in the industry at the time, hydrocarbons or
solid wastes may have been disposed or released on or under these properties. In addition, many of these properties have been
operated by third parties that controlled the treatment of hydrocarbons or solid wastes and the manner in which such substances
may have been disposed or released. State and federal laws applicable to oil and gas wastes and properties have gradually become
stricter over time. Under these laws, we could be required to remove or remediate previously disposed wastes (including wastes
disposed or released by prior owners or operators) or property contamination (including groundwater contamination by prior
owners or operators) or to perform remedial plugging operations to prevent future contamination.
Wastes, including hazardous wastes, are subject to regulation under the federal Resource Conservation and Recovery Act
(“RCRA”) and state statutes. Much of the waste we generate in our operations at exploration and production sites, including
hazardous waste, is exempt from regulation under RCRA, but generally remains subject to state storage, treatment and disposal
requirements. We also generate wastes not subject to the RCRA exemption. The USEPA has limited the disposal options for
certain hazardous wastes. It is possible that certain wastes generated by our oil and gas operations which are currently exempt
from regulation under RCRA as “hazardous wastes” may in the future be designated as “hazardous wastes” under RCRA or other
applicable statutes, and therefore be subject to more rigorous and costly disposal requirements.
Naturally Occurring Radioactive Materials (“NORM”) are radioactive materials which precipitate on production
equipment or area soils during oil and natural gas extraction or processing. NORM wastes are regulated under the RCRA framework,
although such wastes may qualify for the oil and gas hazardous waste exclusion. Primary responsibility for NORM regulation
has been a state function. Standards have been developed for worker protection; treatment, storage and disposal of NORM waste;
management of waste piles, containers and tanks; and limitations upon the release of NORM-contaminated land for unrestricted
use. We believe that our operations are in material compliance with all applicable NORM standards.
Superfund. The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), also known
as the “Superfund” law, imposes liability, without regard to fault or the legality of the original conduct, on certain persons with
respect to the release or threatened release of a “hazardous substance” into the environment. These persons include the owner and
operator of a site and persons that disposed or arranged for the disposal of hazardous substances at a site. CERCLA also authorizes
the USEPA and, in some cases, third parties to take actions in response to threats to the public health or the environment and to
seek to recover from the responsible persons the costs of such action. State statutes impose similar liability.
Under CERCLA, the term “hazardous substance” does not include “petroleum, including crude oil or any fraction thereof,”
unless specifically listed or designated and the term does not include natural gas, natural gas liquids, liquefied natural gas, or
synthetic gas usable for fuel. While this “petroleum exclusion” lessens the significance of CERCLA to our operations, we may
generate waste that may fall within CERCLA's definition of a “hazardous substance” in the course of our ordinary operations. We
also currently own or lease properties that for many years have been used for the exploration and production of oil and natural
gas. Although we and, to our knowledge, our predecessors have used operating and disposal practices that were standard in the
industry at the time, “hazardous substances” may have been disposed or released on, under or from the properties owned or leased
by us or on, under or from other locations where these wastes have been taken for disposal. At this time, we do not believe that
we have any liability associated with any Superfund site, and we have not been notified of any claim, liability or damages under
CERCLA.
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Endangered Species Act. Federal and state legislation including, in particular, the federal Endangered Species Act of
1973 (“ESA”), impose requirements to protect imperiled species from extinction by conserving and protecting threatened and
endangered species and the habitat upon which they depend. With specified exceptions, the ESA prohibits the “taking,” including
killing, harassing or harming, of any listed threatened or endangered species, as well as any degradation or destruction of its habitat.
In addition, the ESA mandates that federal agencies carry out programs for conservation of listed species. Many state laws similarly
protect threatened and endangered species and their habitat. We operate in areas in which listed species may be present. As a
result, we may be required to adopt protective measures, obtain incidental take permits, and otherwise adjust our drilling plans to
comply with ESA requirements.
Oil Pollution Act. The Oil Pollution Act of 1990 (the “OPA”) and regulations thereunder impose a variety of requirements
on “responsible parties” related to the prevention of oil spills and liability for damages resulting from such spills in United States
waters. A “responsible party” includes the owner or operator of a facility or vessel, or the lessee or permittee of the area in which
an offshore facility is located. The OPA assigns liability to each responsible party for oil removal costs and a variety of public and
private damages. While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill
was caused by gross negligence or willful misconduct or resulted from violation of federal safety, construction or operating
regulations. If the party fails to report a spill or to cooperate fully in the cleanup, liability limits likewise do not apply. Few defenses
exist to the liability imposed by the OPA.
The OPA establishes a liability limit for onshore facilities of $633.8 million and for offshore facilities of all removal costs
plus $133.65 million, and lesser limits for some vessels depending upon their size. The regulations promulgated under OPA impose
proof of financial responsibility requirements that can be satisfied through insurance, guarantee, indemnity, surety bond, letter of
credit, qualification as a self-insurer, or a combination thereof. The amount of financial responsibility required depends upon a
variety of factors including the type of facility or vessel, its size, storage capacity, oil throughput, proximity to sensitive areas,
type of oil handled, history of discharges and other factors. We carry insurance coverage to meet these obligations, which we
believe is customary for comparable companies in our industry. A failure to comply with OPA's requirements or inadequate
cooperation during a spill response action may subject a responsible party to civil or criminal enforcement actions.
As a result of the explosion and sinking of the Deepwater Horizon drilling rig in the Gulf of Mexico in 2010, Congress
considered but did not enact legislation that would eliminate the current cap on liability for damages and increase minimum levels
of financial responsibility under OPA. If enacted, such legislation could increase our obligations and potential liability, but adoption
of such legislation is uncertain. We are not aware of the occurrence of any action or event that would subject us to liability under
OPA, and we believe that compliance with OPA's financial responsibility and other operating requirements will not have a material
adverse effect on us.
Discharges. The Clean Water Act (“CWA”) regulates the discharge of pollutants to waters of the United States, including
wetlands, and requires a permit for the discharge of pollutants, including petroleum, to such waters. The CWA also requires a
permit for the discharge of dredged or fill material into wetlands. A revised regulatory definition of “Waters of the United States”
that would expand requirements for CWA permitting, has been promulgated, but these regulations have been stayed pending the
outcome of judicial challenges. Certain facilities that store or otherwise handle oil are required to prepare and implement Spill
Prevention, Control and Countermeasure Plans and Facility Response Plans relating to the possible discharge of oil to surface
waters. We are required to prepare and comply with such plans and to obtain and comply with discharge permits. We believe we
are in substantial compliance with these requirements and that any noncompliance would not have a material adverse effect on
us. The CWA also prohibits spills of oil and hazardous substances to waters of the United States in excess of levels set by regulations
and imposes liability in the event of a spill. State laws further provide civil and criminal penalties and liabilities for spills to both
surface and groundwaters and require permits that set limits on discharges to such waters.
Hydraulic Fracturing. Our exploration and production activities may involve the use of hydraulic fracturing techniques
to stimulate wells and maximize natural gas production. Citing concerns over the potential for hydraulic fracturing to impact
drinking water, human health and the environment, and in response to a Congressional directive, the USEPA commissioned a
study to identify potential risks associated with hydraulic fracturing and to improve scientific understanding to guide USEPA’s
regulatory oversight, guidance and, where appropriate, rulemaking related to hydraulic fracturing. A final report for this study was
released in December 2016 and provided information regarding potential vulnerability of drinking water resources to hydraulic
fracturing, but did not reach conclusions regarding the frequency or severity of impacts due to data gaps and uncertainties. Some
states now regulate utilization of hydraulic fracturing and others are in the process of developing, or are considering development
of, such rules to address the potential for drinking water impacts, induced seismicity, and other concerns. In several localities and
in New York, use of hydraulic fracturing has been banned, although local fracking bans are prohibited in Texas and Louisiana.
These states currently address hydraulic fracturing concerns by requiring disclosures of the content of fluids used in the process.
Our drilling activities could be subjected to new or enhanced federal, state and/or local requirements governing hydraulic fracturing.
Air Emissions. Our operations are subject to local, state and federal regulations for the control of emissions from sources
of air pollution. Administrative enforcement actions for failure to comply strictly with air regulations or permits may be resolved
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by payment of monetary fines and correction of any identified deficiencies. Alternatively, regulatory agencies could impose civil
or criminal liability for non-compliance. An agency could require us to forego construction or operation of certain air emission
sources. We believe that we are in substantial compliance with air pollution control requirements.
According to certain scientific studies, emissions of carbon dioxide, methane, nitrous oxide and other gases commonly
known as greenhouse gases (“GHG”) may be contributing to global warming of the earth's atmosphere and to global climate
change. In response to the scientific studies, legislative and regulatory initiatives have been underway to limit GHG emissions.
The U.S. Supreme Court determined that GHG emissions fall within the federal Clean Air Act (“CAA”) definition of an “air
pollutant”, and in response the USEPA promulgated an endangerment finding paving the way for regulation of GHG emissions
under the CAA. The USEPA has also promulgated rules requiring large sources to report their GHG emissions. Sources subject
to these reporting requirements include on- and offshore petroleum and natural gas production and onshore natural gas processing
and distribution facilities that emit 25,000 metric tons or more of carbon dioxide equivalent per year in aggregate emissions from
all site sources. We are not subject to GHG reporting requirements. In addition, the USEPA promulgated rules that significantly
increase the GHG emission threshold that would identify major stationary sources of GHG subject to CAA permitting programs.
As currently written and based on current Company operations, we are not subject to federal GHG permitting requirements.
Regulation of GHG emissions is developing and highly controversial, and further regulatory, legislative and judicial developments
are likely to occur. Such developments may affect how these GHG initiatives will impact the Company. Due to the uncertainties
surrounding the regulation of and other risks associated with GHG emissions, the Company cannot predict the financial impact
of related developments on the Company.
The USEPA has promulgated rules to limit air emissions from many hydraulically fractured natural gas wells. These
regulations require use of equipment to capture gases that come from the well during the drilling process, mandate tighter standards
for emissions associated with gas production, storage and transport, and seek to limit flaring. Such regulations have been highly
controversial, have been challenged, and their future is uncertain. While such requirements would be expected to increase the cost
of natural gas production, we do not anticipate that we will be affected any differently than other producers of natural gas.
Coastal Coordination. There are various federal and state programs that regulate the conservation and development of
coastal resources. The federal Coastal Zone Management Act (“CZMA”) was passed to preserve and, where possible, restore the
natural resources of the Nation's coastal zone. The CZMA provides for federal grants for state management programs that regulate
land use, water use and coastal development.
The Louisiana Coastal Zone Management Program (“LCZMP”) was established to protect, develop and, where feasible,
restore and enhance coastal resources of the state. Under the LCZMP, coastal use permits are required for certain activities, even
if the activity only partially infringes on the coastal zone. Among other things, projects involving use of state lands and water
bottoms, dredge or fill activities that intersect with more than one body of water, mineral activities, including the exploration and
production of oil and gas, and pipelines for the gathering, transportation or transmission of oil, gas and other minerals require such
permits. General permits, which entail a reduced administrative burden, are available for a number of routine oil and gas
activities. The LCZMP and its requirement to obtain coastal use permits may result in additional permitting requirements and
associated project schedule constraints.
The Texas Coastal Coordination Act (“CCA”) provides for coordination among local and state authorities to protect
coastal resources through regulating land use, water, and coastal development and establishes the Texas Coastal Management
Program that applies in the nineteen counties that border the Gulf of Mexico and its tidal bays. The CCA provides for the review
of state and federal agency rules and agency actions for consistency with the goals and policies of the Coastal Management
Plan. This review may affect agency permitting and may add a further regulatory layer to some of our projects.
OSHA. We are subject to the requirements of the federal Occupational Safety and Health Act (“OSHA”) and comparable
state statutes. The OSHA hazard communication standard, the USEPA community right-to-know regulations under Title III of the
federal Superfund Amendments and Reauthorization Act, and similar state statutes require us to organize and/or disclose
information about hazardous materials used or produced in our operations. Certain of this information must be provided to
employees, state and local governmental authorities and local citizens.
Management believes that we are in substantial compliance with current applicable environmental laws and regulations
described above and that continued compliance with existing requirements will not have a material adverse impact on us.
Corporate Offices
Our headquarters are located in Lafayette, Louisiana, in approximately 46,600 square feet of leased space, with an
exploration office in The Woodlands, Texas in approximately 13,100 square feet of leased space. We also maintain owned or leased
field offices in the areas of the major fields in which we operate properties or have a significant interest. Replacement of any of
our leased offices would not result in material expenditures by us as alternative locations to our leased space are anticipated to be
readily available.
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Employees
We had 64 full-time employees as of February 13, 2017. In addition to our full time employees, we utilize the services
of independent contractors to perform certain functions. We believe that our relationships with our employees are satisfactory.
None of our employees are covered by a collective bargaining agreement.
Available Information
We make available free of charge, or through the “Investors—SEC Documents” section of our website at
www.petroquest.com, access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after such material is filed or furnished to the Securities and Exchange Commission. Our Code of Business Conduct
and Ethics, our Corporate Governance Guidelines and the charters of our Audit, Compensation and Nominating and Corporate
Governance Committees are also available through the “Investors—Corporate Governance” section of our website or in print to
any stockholder who requests them.
Item 1A. Risk Factors
Risks Related to Our Business, Industry and Strategy
Oil and natural gas prices are volatile and an extended decline in the prices of oil and natural gas would likely have a material
adverse effect our financial condition, liquidity, ability to meet our financial obligations and results of operations.
Our future financial condition, revenues, results of operations, profitability and future growth, and the carrying value of
our oil and natural gas properties depend primarily on the prices we receive for our oil and natural gas production. Our ability to
maintain or increase our borrowing capacity and to obtain additional capital on attractive terms also substantially depends upon
oil and natural gas prices. Historically, the markets for oil and natural gas have been volatile and oil prices have been significantly
depressed since the end of 2014 as demonstrated by the SEC pricing for the value of crude oil and natural gas, which had decreased
significantly as of December 31, 2016 as compared to December 31, 2014. For example, the SEC pricing at December 31, 2016
for crude oil (WTI Cushing) and natural gas (Henry Hub) was $42.75 per Bbl and $2.49 per MMBtu, respectively, as compared
to $94.99 per Bbl to a low of $4.35 per MMBtu for crude oil and natural gas, respectively, at December 31, 2014. These markets
will likely continue to be volatile in the future. The prices we will receive for our production, and the levels of our production,
will depend on numerous factors beyond our control.
These factors include:
•
•
relatively minor changes in the supply of or the demand for oil and natural gas;
the condition of the United States and worldwide economies;
• market uncertainty;
•
the level of consumer product demand;
• weather conditions in the United States, such as hurricanes;
•
•
•
•
•
the actions of the Organization of Petroleum Exporting Countries;
domestic and foreign governmental regulation and taxes, including price controls adopted by the FERC;
political conditions or hostilities in oil and natural gas producing regions, including the Middle East and South
America;
the price and level of foreign imports of oil and natural gas; and
the price and availability of alternate fuel sources.
We cannot predict future oil and natural gas prices and such prices may decline further. An extended decline in oil and
natural gas prices has, and may continue to, adversely affect our financial condition, liquidity, ability to meet our financial obligations
and results of operations. Lower prices have reduced and may further reduce the amount of oil and natural gas that we can produce
economically and has required and will likely require us to record additional ceiling test write-downs and may cause our estimated
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proved reserves at December 31, 2017 to decline compared to our estimated proved reserves at December 31, 2016. Substantially
all of our oil and natural gas sales are made in the spot market or pursuant to contracts based on spot market prices.
Our sales are not made pursuant to long-term fixed price contracts. To attempt to reduce our price risk, we periodically
enter into hedging transactions with respect to a portion of our expected future production. We cannot assure you that we can enter
into effective hedging transactions in the future or that such transactions will reduce the risk or minimize the effect of any decline
in oil or natural gas prices. Any substantial or extended decline in the prices of or demand for oil or natural gas would have a
material adverse effect on our financial condition, liquidity, ability to meet our financial obligations and results of operations.
Our outstanding indebtedness may adversely affect our cash flow and our ability to operate our business, remain in compliance
with debt covenants and make payments on our debt.
The aggregate principal amount of our outstanding indebtedness, net of cash on hand, as of December 31, 2016 was
$265.3 million. We currently have $40 million of additional availability under the Multidraw Term Loan Agreement, subject to
compliance with the covenants contained therein. We may also incur additional indebtedness in the future. Our high level of debt
could have important consequences for you, including the following:
•
•
it may be more difficult for us to satisfy our obligations with respect to our outstanding indebtedness, including our
2017 Notes, 2021 Notes, 2021 PIK Notes and amounts borrowed under the Multidraw Term Loan Agreement, and
any failure to comply with the obligations of any of our debt agreements, including financial and other restrictive
covenants, could result in an event of default under the agreements governing such indebtedness;
the covenants contained in our debt agreements limit our ability to borrow money in the future for acquisitions,
capital expenditures or to meet our operating expenses or other general corporate obligations and may limit our
flexibility in operating our business;
• we will need to use a substantial portion of our cash flows to pay interest on our debt of approximately $5.9 million
per year for interest on our 2017 Notes, 2021 Notes and 2021 PIK Notes alone (assuming we elect our PIK interest
option with respect to the first three semi-annual interest payments on the 2021 PIK Notes (the “PIK Interest Option”)),
and to pay quarterly dividends (which we suspended beginning with the dividend payment due in April 2016), if
permissible under the terms of our debt agreements and declared by our Board of Directors, on our 6.875% Series
B Cumulative Convertible Perpetual Preferred Stock (the "Series B Preferred Stock") of approximately $5.1 million
per year, which will reduce the amount of money we have for operations, capital expenditures, expansion, acquisitions
or general corporate or other business activities;
• we may have a higher level of debt than some of our competitors, which may put us at a competitive disadvantage;
• we may be more vulnerable to economic downturns and adverse developments in our industry or the economy in
general, especially extended or further declines in oil and natural gas prices; and
•
our debt level could limit our flexibility in planning for, or reacting to, changes in our business and the industry in
which we operate.
Our ability to meet our expenses and debt obligations will depend on our future performance, which will be affected by
financial, business, economic, regulatory and other factors. We will not be able to control many of these factors, such as economic
conditions and governmental regulation. We cannot be certain that our cash flow from operations will be sufficient to allow us to
pay the principal and interest on our debt, including our 2017 Notes, 2021 Notes, 2021 PIK Notes and amounts borrowed under
the Multidraw Term Loan Agreement, and meet our other obligations. If we do not have enough cash to service our debt, we may
be required to refinance all or part of our existing debt, including our 2017 Notes, 2021 Notes, 2021 PIK Notes and the Multidraw
Term Loan Agreement, sell assets, borrow more money or raise equity. We may not be able to refinance our debt, sell assets,
borrow more money or raise equity on terms acceptable to us, if at all.
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To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors
beyond our control, and any failure to meet our debt obligations could harm our business, financial condition and results of
operations.
Our ability to make payments on and to refinance our indebtedness, including our 2017 Notes, 2021 Notes, 2021 PIK
Notes and amounts borrowed under the Multidraw Term Loan Agreement, and to fund planned capital expenditures will depend
on our ability to generate sufficient cash flow from operations in the future. To a certain extent, this is subject to general economic,
financial, competitive, legislative and regulatory conditions and other factors that are beyond our control, including the prices that
we receive for our oil and natural gas production.
We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will
be available to us under the Multidraw Term Loan Agreement in an amount sufficient to enable us to pay principal and interest
on our indebtedness, including our 2017 Notes, 2021 Notes and 2021 PIK Notes, or to fund our other liquidity needs. If our cash
flow and capital resources are insufficient to fund our debt obligations, we may be forced to reduce our planned capital expenditures,
sell assets, seek additional equity or debt capital or restructure our debt. We cannot assure you that any of these remedies could,
if necessary, be affected on commercially reasonable terms, or at all. In addition, any failure to make scheduled payments of
interest and principal on our outstanding indebtedness would likely result in a reduction of our credit rating, which could harm
our ability to incur additional indebtedness on acceptable terms. Our cash flow and capital resources may be insufficient for
payment of interest on and principal of our debt in the future, including payments on our 2017 Notes, 2021 Notes, 2021 PIK Notes
and amounts borrowed under the Multidraw Term Loan Agreement, and any such alternative measures may be unsuccessful or
may not permit us to meet scheduled debt service obligations, which could cause us to default on our obligations and could impair
our liquidity.
We may not be able to obtain adequate financing when the need arises to execute our long-term operating strategy.
Our ability to execute our long-term operating strategy is highly dependent on having access to capital when the need
arises. We historically have addressed our long-term liquidity needs through bank credit facilities, second lien term credit facilities,
issuances of equity and debt securities, sales of assets, joint ventures and cash provided by operating activities. We will examine
the following alternative sources of long-term capital as dictated by current economic conditions:
•
•
•
•
•
•
borrowings from banks or other lenders;
the sale of certain assets;
the issuance of debt securities;
the sale of common stock, preferred stock or other equity securities;
joint venture financing; and
production payments.
The availability of these sources of capital when the need arises will depend upon a number of factors, some of which
are beyond our control. These factors include general economic and financial market conditions, oil and natural gas prices, our
credit ratings, interest rates, market perceptions of us or the oil and gas industry, our market value and our operating performance.
We may be unable to execute our long-term operating strategy if we cannot obtain capital from these sources when the need arises.
Borrowings under the Multidraw Term Loan Agreement are subject to our compliance with a significant financial ratio.
Under the terms of the Multidraw Term Loan Agreement, our ability to borrow is based on our maintaining a ratio of (i)
the present value, discounted at 10% per annum, of the estimated future net revenues in respect of our oil and gas properties, before
any state, federal, foreign or other income taxes, attributable to proved developed reserves, using three-year strip prices in effect
at the end of each calendar quarter, including swap agreements in place at the end of each quarter, to (ii) the sum of the outstanding
term loans thereunder and the then outstanding commitments to provide term loans, that shall not be less than (a) 1.7 to 1.0 as
measured on December 31, 2016, and March 31, 2017, and (b) 2.0 to 1.0 as measured on June 30, 2017, and the last day of each
calendar quarter thereafter. We may not be able to comply with this restrictive financial ratio in the future and, as a result, our
ability to borrow money under the Multidraw Term Loan Agreement could be limited, in which case we would need to find other
sources of liquidity including, but not limited to, negotiated renewals of our borrowings, arranging new financing or selling a
portion of our assets.
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Restrictive debt covenants could limit our growth and our ability to finance our operations, fund our capital needs, respond to
changing conditions and engage in other business activities that may be in our best interests.
The Multidraw Term Loan Agreement and the indentures governing our 2021 Notes and 2021 PIK Notes contain a number
of significant covenants that, among other things, restrict or limit our ability to:
•
•
pay dividends or distributions on our capital stock or issue preferred stock;
repurchase, redeem or retire our capital stock or subordinated debt;
• make certain loans and investments;
•
•
•
•
•
place restrictions on the ability of subsidiaries to make distributions;
sell assets, including the capital stock of subsidiaries;
enter into certain transactions with affiliates;
create or assume certain liens on our assets;
enter into sale and leaseback transactions;
• merge or enter into other business combination transactions;
•
•
enter into transactions that would result in a change of control of us; or
engage in other corporate activities.
Also, the Multidraw Term Loan Agreement requires us to maintain compliance with specified financial ratios and satisfy
certain financial condition tests. Our ability to comply with these ratios and financial condition tests may be affected by events
beyond our control, and we cannot assure you that we will meet these ratios and financial condition tests.
Further, these financial ratio restrictions and financial condition tests could limit our ability to obtain future financings,
make needed capital expenditures, withstand a future downturn in our business or the economy in general or otherwise conduct
necessary corporate activities. We may also be prevented from taking advantage of business opportunities that arise because of
the limitations that the restrictive covenants under the Multidraw Term Loan Agreement and the indentures governing our 2021
Notes and 2021 PIK Notes impose on us.
A breach of any of these covenants or our inability to comply with the required financial ratios or financial condition
tests could result in a default under the Multidraw Term Loan Agreement, the 2021 Notes and the 2021 PIK Notes. A default, if
not cured or waived, could result in all indebtedness outstanding under the Multidraw Term Loan Agreement, the 2021 Notes and
the 2021 PIK Notes to become immediately due and payable. If that should occur, we may not be able to pay all such debt or
borrow sufficient funds to refinance it. Even if new financing were then available, it may not be on terms that are acceptable to
us. If we were unable to repay those amounts, the lenders could accelerate the maturity of the debt or proceed against any collateral
granted to them to secure such defaulted debt.
We may be able to incur substantially more debt, which could exacerbate the risks associated with our indebtedness.
The PIK Interest Option of the 2021 PIK Notes will increase the aggregate amount of debt that must be repaid at maturity
or otherwise. In addition, we and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although
covenants under the Multidraw Term Loan Agreement and the indentures governing our 2021 Notes and 2021 PIK Notes will
limit our ability to incur additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and
indebtedness incurred in compliance with these restrictions could be significant.
If new debt is added to our current debt levels, the related risks that we and our subsidiaries now face could intensify.
Any of these risks could result in a material adverse effect on our business, financial condition, results of operations, business
prospects and ability to satisfy our obligations under our outstanding indebtedness.
A financial downturn or negative credit market conditions may have lasting effects on our liquidity, business and financial
condition that we cannot predict.
Liquidity is essential to our business. Our liquidity could be substantially negatively affected by an inability to obtain
capital in the long-term or short-term debt capital markets or equity capital markets or an inability to access bank or other financing.
A prolonged credit crisis or turmoil in the domestic or global financial systems could materially affect our liquidity, business and
financial condition. These conditions have adversely impacted financial markets previously and created substantial volatility and
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uncertainty, and could do so again, with the related negative impact on global economic activity and the financial markets. Negative
credit market conditions could materially affect our liquidity and may inhibit our lender from fully funding our Multidraw Term
Loan Agreement or cause our lender to make the terms of our Multidraw Term Loan Agreement costlier and more restrictive. A
weak economic environment could also adversely affect the collectability of our trade receivables or performance by our suppliers
and cause our commodity derivative arrangements to be ineffective if our counterparties are unable to perform their obligations
or seek bankruptcy protection. Additionally, negative economic conditions could lead to reduced demand for oil, natural gas and
NGLs or lower prices for oil, natural gas and NGLs, which could have a negative impact on our revenues.
Our hedging program may limit potential gains from increases in commodity prices or may result in losses or may be inadequate
to protect us against continuing and prolonged declines in commodity prices.
We enter into hedging arrangements from time to time to reduce our exposure to fluctuations in oil and natural gas prices
and to achieve more predictable cash flow. Our hedges at December 31, 2016 and as of the date of this report are in the form of
swaps placed with Shell Trading Risk Management LLC. We cannot assure you that this or future counterparties will not become
credit risks in the future. Hedging arrangements expose us to risks in some circumstances, including situations when the counterparty
to the hedging contract defaults on the contractual obligations or there is a change in the expected differential between the underlying
price in the hedging agreement and actual prices received. These hedging arrangements may also limit the benefit we could receive
from increases in the market or spot prices for oil and natural gas.
For the year ended December 31, 2016, our total oil and gas sales included additions related to the settlement of gas
hedges of $1.8 million, which in total represented 3% of our total oil and gas sales for the year. We cannot assure you that the
hedging transactions we have entered into, or will enter into, will adequately protect us from fluctuations in oil and natural gas
prices. In addition, as of the date of this report, we had approximately 11.0 Bcf of gas volumes hedged for 2017 and 2.7 Bcfe of
gas volumes hedged for 2018. These hedges may be inadequate to protect us from continuing and prolonged declines in oil and
natural gas prices. To the extent that oil and natural gas prices remain at current levels or decline further, we will not be able to
hedge future production at the same pricing level as our current hedges and our results of operations and financial condition would
be negatively impacted.
We may be required to post additional collateral to satisfy the collateral requirements related to the surety bonds that secure
our offshore decommissioning obligations or to increase the amount of surety bonds or other security required pursuant to
updated BOEM financial assurance and risk management requirements.
To cover the costs for various obligations of lessees on the OCS, including costs for such decommissioning obligations
as the plugging of wells, the removal of platforms and other facilities, the decommissioning of pipelines and the clearing of the
seafloor of obstructions typically performed at the end of production, the BOEM generally requires that the lessees post substantial
bonds or other acceptable financial assurances that such obligations will be met. Failure to post the requisite bonds or otherwise
satisfy the BOEM’s security requirements could have a material adverse effect on our ability to operate in the U.S. Gulf of Mexico.
Because we are not exempt from the BOEM’s supplemental bonding requirements, we engage surety companies to post
the requisite bonds. Pursuant to the terms of our surety agreements, we may be required to post collateral at the surety companies’
discretion. Two of our surety companies requested collateral be posted to support certain of the bonds issued on our behalf. To
date, we have provided cash deposits totaling $6.2 million to satisfy these requests. The surety companies may request additional
collateral which could have a material adverse effect on our liquidity position. If we fail to satisfy the request for collateral, we
may be in default under our agreements with the surety companies, which could cause a cross-default under the indentures governing
the 2021 Notes and the 2021 PIK Notes and our Multidraw Term Loan Agreement.
In addition, on July 14, 2016, the BOEM issued a notice to lessees ("NTL") No. 2016-N01 effective September 12, 2016
to clarify the procedures and criteria that the BOEM will use to determine if and when additional security is required for OCS
leases. This notice may result in an increase to the amount of surety bonds or other security required to be posted by us pursuant
to these updated BOEM financial assurance and risk management requirements. On January 6, 2017, the BOEM announced that
it was extending the implementation timeline for NTL No. 2016-N01 by an additional six months as to leases, rights-of-way and
rights of use and easement for which there are co-lessees and/or predecessors in interest, except in circumstances in which BOEM
determines there is a substantial risk of nonperformance of the interest holder's decommissioning liabilities. All of our
decommissioning liabilities as of the date hereof have co-lessees and/or predecessors in interest and are expected to be included
in this extended implementation timeline.
We can provide no assurance that we can continue to obtain bonds or other surety in all cases given these new expenses
and updated BOEM requirements or that we will have sufficient liquidity to support such supplemental bonding requirements,
and if we are unable to obtain the additional required bonds, assurances or the increased amount of required collateral as requested,
the BOEM may require any or all of our operations on federal leases to be suspended or canceled or otherwise impose monetary
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penalties, and any one or more of such actions could have a material adverse effect on our business, prospects, results of operations,
financial condition, and liquidity.
Our future success depends upon our ability to find, develop, produce and acquire additional oil and natural gas reserves that
are economically recoverable.
As is generally the case in the Gulf of Mexico and Gulf Coast Basin where approximately 54% of our current production
is located, many of our producing properties are characterized by a high initial production rate, followed by a steep decline in
production. In order to maintain or increase our reserves, we must constantly locate and develop or acquire new oil and natural
gas reserves to replace those being depleted by production. We must do this even during periods of low oil and natural gas prices
when it is difficult to raise the capital necessary to finance our exploration, development and acquisition activities. Without
successful exploration, development or acquisition activities, our reserves and revenues will decline rapidly. We may not be able
to find and develop or acquire additional reserves at an acceptable cost or have access to necessary financing for these activities,
either of which would have a material adverse effect on our financial condition.
Approximately 54% of our production is exposed to the additional risk of severe weather, including hurricanes and tropical
storms, as well as flooding, coastal erosion and sea level rise.
At December 31, 2016, approximately 54% of our production and approximately 28% of our estimated proved reserves
are located in the Gulf of Mexico and along the Gulf Coast Basin. Operations in this area are subject to severe weather, including
hurricanes and tropical storms, as well as flooding, coastal erosion and sea level rise. Some of these adverse conditions can be
severe enough to cause substantial damage to facilities and possibly interrupt production. For example, certain of our Gulf Coast
Basin properties have experienced damages and production downtime as a result of storms including Hurricanes Katrina and Rita,
and more recently Hurricanes Gustav and Ike. In addition, according to certain scientific studies, emissions of carbon dioxide,
methane, nitrous oxide and other gases commonly known as greenhouse gases may be contributing to global warming of the earth's
atmosphere and to global climate change, which may exacerbate the severity of these adverse conditions. As a result, such conditions
may pose increased climate-related risks to our assets and operations.
In accordance with customary industry practices, we maintain insurance against some, but not all, of these risks; however,
losses could occur for uninsured risks or in amounts in excess of existing insurance coverage. We cannot assure you that we will
be able to maintain adequate insurance in the future at rates we consider reasonable or that any particular types of coverage will
be available. An event that is not fully covered by insurance could have a material adverse effect on our financial position and
results of operations.
SEC rules could limit our ability to book additional proved undeveloped reserves or require us to write down our proved
undeveloped reserves.
SEC rules require that, subject to limited exceptions, proved undeveloped reserves may only be booked if they relate to
wells scheduled to be drilled within five years of the date of booking. This requirement may limit our potential to book additional
proved undeveloped reserves as we pursue our drilling program. Moreover, we may be required to write down our proved
undeveloped reserves if we do not develop those reserves within the required five-year time frame.
Our actual production, revenues and expenditures related to our reserves are likely to differ from our estimates of proved
reserves. We may experience production that is less than estimated and drilling costs that are greater than estimated in our
reserve report. These differences may be material.
Although the estimates of our oil and natural gas reserves and future net cash flows attributable to those reserves were
prepared by Ryder Scott Company, L.P., our independent petroleum and geological engineers, we are ultimately responsible for
the disclosure of those estimates. Reserve engineering is a complex and subjective process of estimating underground accumulations
of oil and natural gas that cannot be measured in an exact manner. Estimates of economically recoverable oil and natural gas
reserves and of future net cash flows necessarily depend upon a number of variable factors and assumptions, including:
•
•
•
•
historical production from the area compared with production from other similar producing wells;
the assumed effects of regulations by governmental agencies;
assumptions concerning future oil and natural gas prices; and
assumptions concerning future operating costs, severance and excise taxes, development costs and work-over and
remedial costs.
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Because all reserve estimates are to some degree subjective, each of the following items may differ materially from those
assumed in estimating proved reserves:
•
•
•
•
the quantities of oil and natural gas that are ultimately recovered;
the production and operating costs incurred;
the amount and timing of future development expenditures; and
future oil and natural gas sales prices.
Furthermore, different reserve engineers may make different estimates of reserves and cash flows based on the same
available data. Historically, the difference between our actual production and the production estimated in a prior year's reserve
report has not been material. Our 2016 production, excluding the impact from successful exploration wells which are not included
in the prior year reserve report, was approximately 18% lower than amounts projected in our 2015 reserve report as a result of the
divestiture of the remainder of our Oklahoma assets. We cannot assure you that these differences will not be material in the future.
Approximately 41% of our estimated proved reserves at December 31, 2016 are undeveloped and 21% were developed,
non-producing. Recovery of undeveloped reserves requires significant capital expenditures and successful drilling operations. The
reserve data assumes that we will make significant capital expenditures to develop and produce our reserves. Although we have
prepared estimates of our oil and natural gas reserves and the costs associated with these reserves in accordance with industry
standards, we cannot assure you that the estimated costs are accurate, that the development will occur as scheduled or that the
actual results will be as estimated. In addition, the recovery of certain developed non-producing reserves (primarily in the Gulf
of Mexico) is generally subject to the approval of development plans and related activities by applicable state and/or federal
agencies. Statutes and regulations may affect both the timing and quantity of recovery of estimated reserves. Such statutes and
regulations, and their enforcement, have changed in the past and may change in the future, and may result in upward or downward
revisions to current estimated proved reserves.
You should not assume that the standardized measure of discounted cash flows is the current market value of our estimated
oil and natural gas reserves. In accordance with SEC requirements, the standardized measure of discounted cash flows from proved
reserves at December 31, 2016 are based on twelve-month, first day of month, average prices and costs as of the date of the
estimate. These prices and costs will change and may be materially higher or lower than the prices and costs as of the date of the
estimate. Any changes in consumption by oil and natural gas purchasers or in governmental regulations or taxation may also affect
actual future net cash flows. The actual timing of development activities, including related production and expenses, will affect
the timing of future net cash flows and any differences between estimated development timing and actual could have a material
effect on standardized measure. In addition, the 10% discount factor we use when calculating standardized measure of discounted
cash flows for reporting requirements in compliance with accounting requirements is not necessarily the most appropriate discount
factor. The effective interest rate at various times and the risks associated with our operations or the oil and natural gas industry
in general will affect the accuracy of the 10% discount factor.
We may be unable to successfully identify, execute or effectively integrate future acquisitions, which may negatively affect our
results of operations.
Acquisitions of oil and gas businesses and properties have been an important element of our business, and we will continue
to pursue acquisitions in the future. In the last several years, we have pursued and consummated acquisitions that have provided
us opportunities to grow our production and reserves. Although we regularly engage in discussions with, and submit proposals to,
acquisition candidates, suitable acquisitions may not be available in the future on reasonable terms. If we do identify an appropriate
acquisition candidate, we may be unable to successfully negotiate the terms of an acquisition, finance the acquisition or, if the
acquisition occurs, effectively integrate the acquired business into our existing business. Negotiations of potential acquisitions
and the integration of acquired business operations may require a disproportionate amount of management's attention and our
resources. Even if we complete additional acquisitions, continued acquisition financing may not be available or available on
reasonable terms, any new businesses may not generate revenues comparable to our existing business, the anticipated cost
efficiencies or synergies may not be realized and these businesses may not be integrated successfully or operated profitably. The
success of any acquisition will depend on a number of factors, including the ability to estimate accurately the recoverable volumes
of reserves, rates of future production and future net revenues attainable from the reserves and to assess possible environmental
liabilities. Our inability to successfully identify, execute or effectively integrate future acquisitions may negatively affect our
results of operations.
Even though we perform due diligence reviews (including a review of title and other records) of the major properties we
seek to acquire that we believe is consistent with industry practices, these reviews are inherently incomplete. It is generally not
feasible for us to perform an in-depth review of every individual property and all records involved in each acquisition. However,
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even an in-depth review of records and properties may not necessarily reveal existing or potential problems or permit us to become
familiar enough with the properties to assess fully their deficiencies and potential. Even when problems are identified, we may
assume certain environmental and other risks and liabilities in connection with the acquired businesses and properties. The discovery
of any material liabilities associated with our acquisitions could harm our results of operations.
In addition, acquisitions of businesses may require additional debt or equity financing, resulting in additional leverage
or dilution of ownership. Our Multidraw Term Loan Agreement and the indentures governing our 2021 Notes and 2021 PIK Notes
contain certain covenants that limit, or which may have the effect of limiting, among other things acquisitions, capital expenditures,
the sale of assets and the incurrence of additional indebtedness.
The loss of key management or technical personnel could adversely affect our ability to operate.
Our operations are dependent upon a diverse group of key senior management. In addition, we employ numerous other
skilled technical personnel, including geologists, geophysicists and engineers that are essential to our operations. We cannot assure
you that such individuals will remain with us for the immediate or foreseeable future. The unexpected loss of the services of one
or more of any of these key management or technical personnel could have an adverse effect on our operations.
Losses and liabilities from uninsured or underinsured drilling and operating activities could have a material adverse effect on
our financial condition and operations.
We maintain several types of insurance to cover our operations, including worker's compensation, maritime employer's
liability and comprehensive general liability. Amounts over base coverages are provided by primary and excess umbrella liability
policies. We also maintain operator's extra expense coverage, which covers the control of drilling or producing wells as well as
redrilling expenses and pollution coverage for wells out of control.
We may not be able to maintain adequate insurance in the future at rates we consider reasonable, or we could experience
losses that are not insured or that exceed the maximum limits under our insurance policies. If a significant event that is not fully
insured or indemnified occurs, it could materially and adversely affect our financial condition and results of operations.
Lower oil and natural gas prices may cause us to record ceiling test write-downs, which could negatively impact our results of
operations.
We use the full cost method of accounting to account for our oil and natural gas operations. Accordingly, we capitalize
the cost to acquire, explore for and develop oil and natural gas properties. Under full cost accounting rules, the net capitalized
costs of oil and natural gas properties may not exceed a “full cost ceiling” which is based upon the present value of estimated
future net cash flows from proved reserves, including the effect of hedges in place, discounted at 10%, plus the lower of cost or
fair market value of unproved properties. If at the end of any fiscal period we determine that the net capitalized costs of oil and
natural gas properties exceed the full cost ceiling, we must charge the amount of the excess to earnings in the period then ended.
This is called a “ceiling test write-down.” This charge does not impact cash flow from operating activities, but does reduce our
net income and stockholders' equity. Once incurred, a write-down of oil and natural gas properties is not reversible at a later date.
We review the net capitalized costs of our properties quarterly, using a single price based on the twelve-month, first day
of month, average price of oil and natural gas for the prior 12 months. We also assess investments in unevaluated properties
periodically to determine whether impairment has occurred. The risk that we will be required to recognize further write downs of
the carrying value of our oil and gas properties increases when oil and natural gas prices are low or volatile. In addition, write-
downs may occur if we experience substantial downward adjustments to our estimated proved reserves or our unevaluated property
values, or if estimated future development costs increase. As a result of the decline in commodity prices, we recognized ceiling
test write-downs totaling $40.3 million and $266.6 million during the years ended December 31, 2016 and 2015, respectively.
Utilizing current strip prices for oil and natural gas prices for the first quarter of 2017 and projecting the effect on the estimated
future net cash flows from our estimated proved reserves as of March 31, 2017, we do not expect to recognize an additional ceiling
test write-down in the first quarter of 2017.
Factors beyond our control affect our ability to market oil and natural gas.
The availability of markets and the volatility of product prices are beyond our control and represent a significant risk.
The marketability of our production depends upon the availability and capacity of natural gas gathering systems, pipelines and
processing facilities. The unavailability or lack of capacity of these systems and facilities could result in the shut-in of producing
wells or the delay or discontinuance of development plans for properties. Our ability to market oil and natural gas also depends
on other factors beyond our control. These factors include:
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the level of domestic production and imports of oil and natural gas;
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•
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the proximity of natural gas production to natural gas pipelines;
the availability of pipeline capacity;
the demand for oil and natural gas by utilities and other end users;
the availability of alternate fuel sources;
the effect of inclement weather, such as hurricanes;
state and federal regulation of oil and natural gas marketing; and
federal regulation of natural gas sold or transported in interstate commerce.
If these factors were to change dramatically, our ability to market oil and natural gas or obtain favorable prices for our
oil and natural gas could be adversely affected.
The explosion and sinking of the Deepwater Horizon drilling rig in the Gulf of Mexico in April 2010 and the resulting oil spill
may significantly increase our risks, costs and delays.
The explosion and sinking of the Deepwater Horizon drilling rig in the Gulf of Mexico in April 2010 and the resulting
oil spill may significantly impact the risks we face. The Deepwater Horizon incident and resulting legislative, regulatory and
enforcement changes, including increased tort liability, could increase our liability if any incidents occur on our offshore operations.
We cannot predict the ultimate impact the Deepwater Horizon incident and resulting changes in regulation of offshore oil and
natural gas operations will have on our business or operations.
In response to the spill, and during a moratorium on deepwater (below 500 feet) drilling activities implemented between
May 30, 2010 and October 12, 2010, the BOEMRE issued a series of active NTLs, and adopted changes to its regulations to
impose a variety of new measures intended to help prevent a similar disaster in the future.
Offshore operators, including those operating in deepwater, OCS waters and shallow waters, where we have substantial
operations, must comply with strict new safety and operating requirements. For example, permit applications for drilling projects
must meet new standards with respect to well design, casing and cementing, blowout preventers, safety certification, emergency
response, and worker training. Operators in all offshore waters are also required to demonstrate the availability of adequate spill
response and blowout containment resources. In addition, the BSEE imposed, for the first time, requirements that offshore operators
maintain comprehensive safety and environmental programs. Such developments have the potential to increase our costs of doing
business.
Federal and state legislation and regulatory initiatives relating to oil and natural gas development and hydraulic fracturing
could result in increased costs and additional operating restrictions or delays.
Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into rock formations to enhance
oil and natural gas production. Hydraulic fracturing using fluids other than diesel is currently exempt from regulation under the
federal Safe Drinking Water Act, but opponents of hydraulic fracturing have called for further study of the technique's environmental
effects and, in some cases, further regulation of the technique under various federal and state authorities. A number of states,
including Louisiana and Texas, have required operators or service companies to disclose chemical components in fluids used for
hydraulic fracturing and some states have imposed bans or moratoria on new natural gas development or the use of hydraulic
fracturing. Further regulation may include, among other things, additional permitting requirements, enhanced reporting obligations,
and stricter standards for discharges and emissions associated with gas production, storage and transport. The future of such
regulation is controversial and uncertain. Such requirements, if imposed, would be expected to increase the cost of natural gas
production.
Recent seismic events have been observed in some areas (including Texas) where hydraulic fracturing has taken place.
Some scientists believe the increased seismic activity may result from deep well fluid injection associated with use of hydraulic
fracturing. Additional regulatory measures designed to minimize or avoid damage to geologic formations have been imposed in
states, including Texas, to address such concerns.
Concerns regarding climate change have led the Congress, various states and environmental agencies to consider a number
of initiatives to restrict or regulate emissions of greenhouse gases, such as carbon dioxide and methane. Stricter regulations of
greenhouse gases could require us to incur costs to reduce emissions of greenhouse gases associated with our operations, or could
adversely affect demand for the oil and natural gas we produce. In addition, climate change that results in physical effects such
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as increased frequency and severity of storms, floods and other climatic events, could disrupt our exploration and production
operations and cause us to incur significant costs in preparing for and responding to those effects.
Although it is not possible at this time to predict any additional federal, state or local legislation or regulation regarding
hydraulic fracturing, management of drilling fluids, stricter emission standards, well integrity requirements or climate change,
federal or state restrictions imposed on oil and gas exploration and production activities in areas in which we conduct business
could significantly increase our operating, capital and compliance costs as well as delay our ability to develop oil and natural gas
reserves. In addition to increased regulation of our business, we may also experience an increase in litigation seeking damages
as a result of heightened public concerns related to air quality, water quality, and other environmental impacts.
The adoption of derivatives legislation by Congress, and implementation of that legislation by federal agencies, could have an
adverse impact on our ability to mitigate risks associated with our business.
On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Reform Act”), which, among other provisions, establishes federal oversight and regulation of the over-the-counter
derivatives market and entities that participate in that market. The legislation required the Commodities Futures Trading
Commission, (the “CFTC”), and the SEC to promulgate rules and regulations implementing the new legislation, which they have
done since late 2010. The CFTC has introduced dozens of proposed rules coming out of the Dodd-Frank Reform Act, and has
promulgated numerous final rules based on those proposals. The effect of the proposed rules and any additional regulations on
our business is not yet entirely clear, but it is increasingly clear that the costs of derivatives-based hedging for commodities will
likely increase for all market participants. Of particular concern, the Dodd-Frank Reform Act does not explicitly exempt end users
from the requirements to post margin in connection with hedging activities. While several senators have indicated that it was not
the intent of the Dodd-Frank Reform Act to require margin from end users, the exemption is not in the Dodd- Frank Reform Act.
While rules proposed by the CFTC and federal banking regulators appear to allow for non-cash collateral and certain exemptions
from margin for end users, the rules are not final and uncertainty remains. The full range of new Dodd-Frank Reform Act
requirements to be enacted, to the extent applicable to us or our derivatives counterparties, may result in increased costs and cash
collateral requirements for the types of derivative instruments we use to mitigate and otherwise manage our financial and commercial
risks related to fluctuations in oil and natural gas prices. In addition, final rules were promulgated by the CFTC imposing federally-
mandated position limits covering a wide range of derivatives positions, including non-exchange traded bilateral swaps related to
commodities including oil and natural gas. These position limit rules were vacated by a Federal court in September 2012. However,
in November 2013, the CFTC proposed new rules that would place limits on positions in certain core futures and equivalent swaps
contracts for or linked to certain physical commodities, subject to exceptions for certain bona fide hedging transactions. As these
new position limit rules are not yet final, their impact on us is uncertain at this time. If these position limits rules go into effect in
the future, they are likely to increase regulatory monitoring and compliance costs for all market participants, even where a given
trading entity is not in danger of breaching position limits. These and other regulatory developments stemming from the Dodd-
Frank Reform Act, including stringent new reporting requirements for derivatives positions and detailed criteria that must be
satisfied to continue to enter into uncleared swap transactions, could have a material impact on our derivatives trading and hedging
activities in the form of increased transaction costs and compliance responsibilities. Any of the foregoing consequences could
have a material adverse effect on our financial position, results of operations and cash flows.
Proposed changes to U.S. tax laws, if adopted, could have an adverse effect on our business, financial condition, results of
operations and cash flows.
From time to time legislative proposals are made that would, if enacted, make significant changes to U.S. tax laws. These
proposed changes have included, among others, eliminating the immediate deduction for intangible drilling and development
costs, eliminating the deduction from income for domestic production activities relating to oil and natural gas exploration and
development, repealing the percentage depletion allowance for oil and natural gas properties and extending the amortization period
for certain geological and geophysical expenditures. Such proposed changes in the U.S. tax laws, if adopted, or other similar
changes that reduce or eliminate deductions currently available with respect to oil and natural gas exploration and development,
could adversely affect our business, financial condition, results of operations and cash flows.
We face strong competition from larger oil and natural gas companies that may negatively affect our ability to carry on
operations.
We operate in the highly competitive areas of oil and natural gas exploration, development and production. Factors that
affect our ability to compete successfully in the marketplace include:
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•
the availability of funds and information relating to a property;
the standards established by us for the minimum projected return on investment; and
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•
the transportation of natural gas.
Our competitors include major integrated oil companies, substantial independent energy companies, affiliates of major
interstate and intrastate pipelines and national and local natural gas gatherers, many of which possess greater financial and other
resources than we do. If we are unable to successfully compete against our competitors, our business, prospects, financial condition
and results of operations may be adversely affected.
Operating hazards may adversely affect our ability to conduct business.
Our operations are subject to risks inherent in the oil and natural gas industry, such as:
•
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•
•
•
unexpected drilling conditions including blowouts, cratering and explosions;
uncontrollable flows of oil, natural gas or well fluids;
equipment failures, fires or accidents;
pollution and other environmental risks; and
shortages in experienced labor or shortages or delays in the delivery of equipment.
These risks could result in substantial losses to us from injury and loss of life, damage to and destruction of property and
equipment, pollution and other environmental damage and suspension of operations. Our offshore operations are also subject to
a variety of operating risks peculiar to the marine environment, such as hurricanes or other adverse weather conditions and more
extensive governmental regulation. These regulations may, in certain circumstances, impose strict liability for pollution damage
or result in the interruption or termination of operations.
Environmental compliance costs and environmental liabilities could have a material adverse effect on our financial condition
and operations.
Our operations are subject to numerous federal, state and local laws and regulations governing the discharge of materials
into the environment or otherwise relating to environmental protection. These laws and regulations may:
•
•
•
•
•
require the acquisition of permits before drilling commences;
restrict the types, quantities and concentration of various substances that can be released into the environment from
drilling and production activities;
limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas;
require remedial measures to mitigate pollution from former operations, such as plugging abandoned wells; and
impose substantial liabilities for pollution resulting from our operations.
The trend toward stricter requirements and standards in environmental legislation and regulation is likely to continue.
Our drilling plans may be delayed, modified or precluded as a result of new or modified environmental mandates, including those
imposed to protect the American Burying Beetle and other endangered species that may be present in the vicinity of our operations.
The enactment of stricter legislation or the adoption of stricter regulations could have a significant impact on our operating costs,
as well as on the oil and natural gas industry in general.
Our operations could result in liability for personal injuries, property damage, oil spills, discharge of hazardous materials,
remediation and clean-up costs and other environmental damages. We could also be liable for environmental damages caused by
previous property owners. As a result, substantial liabilities to third parties or governmental entities may be incurred which could
have a material adverse effect on our financial condition and results of operations. We maintain insurance coverage for our
operations, including limited coverage for sudden and accidental environmental damages, but this insurance may not extend to
the full potential liability that could be caused by sudden and accidental environmental damages nor continue to be available in
the future, and if available, may not cover environmental damages that occur over time. Accordingly, we may be subject to liability
or may lose the ability to continue exploration or production activities upon substantial portions of our properties if certain
environmental damages occur.
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We cannot control the activities on properties we do not operate and we are unable to ensure the proper operation and profitability
of these non-operated properties.
We do not operate all of the properties in which we have an interest. As a result, we have limited ability to exercise
influence over, and control the risks associated with, the operation of these properties. The success and timing of drilling and
development activities on our partially owned properties operated by others therefore will depend upon a number of factors outside
of our control, including the operator's:
•
•
•
•
•
timing and amount of capital expenditures;
expertise and diligence in adequately performing operations and complying with applicable agreements;
financial resources;
inclusion of other participants in drilling wells; and
use of technology.
As a result of any of the above or an operator's failure to act in ways that are in our best interest, our allocated production
revenues and results of operations could be adversely affected.
Ownership of working interests and overriding royalty interests in certain of our properties by certain of our officers and
directors potentially creates conflicts of interest.
Certain of our executive officers and directors or their respective affiliates are working interest owners or overriding
royalty interest owners in certain properties. In their capacity as working interest owners, they are required to pay their proportionate
share of all costs and are entitled to receive their proportionate share of revenues in the normal course of business. As overriding
royalty interest owners they are entitled to receive their proportionate share of revenues in the normal course of business. There
is a potential conflict of interest between us and such officers and directors with respect to the drilling of additional wells or other
development operations with respect to these properties.
Loss of our information and computer systems could adversely affect our business.
We are heavily dependent on our information systems and computer based programs, including our well operations
information, seismic data, electronic data processing and accounting data. If any of such programs or systems were to fail or create
erroneous information in our hardware or software network infrastructure, possible consequences include our loss of
communication links, inability to find, produce, process and sell oil and natural gas and inability to automatically process
commercial transactions or engage in similar automated or computerized business activities. Any such consequence could have
a material adverse effect on our business.
A terrorist attack or armed conflict could harm our business.
Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States or other countries may
adversely affect the United States and global economies and could prevent us from meeting our financial and other obligations.
If any of these events occur, the resulting political instability and societal disruption could reduce overall demand for oil and
natural gas, potentially putting downward pressure on demand for our production and causing a reduction in our revenues. Oil
and natural gas related facilities could be direct targets of terrorist attacks, and our operations could be adversely impacted if
infrastructure integral to our customers' operations is destroyed or damaged. Costs for insurance and other security may increase
as a result of these threats, and some insurance coverage may become more difficult to obtain, if available at all.
We are subject of putative class action lawsuits that may result in substantial expenditures and divert management's attention.
We are the subject of two putative class actions lawsuits in Oklahoma with respect to the alleged failure to pay interest
with respect to untimely royalty payments and with respect to the alleged underpayment or failure to pay royalties by various
means. These lawsuits seek various remedies, including damages, injunctive relief and attorney's fees. For additional information
on these lawsuits, see Part II - Item 1. Legal Proceedings in this Form 10-K.
Although we believe that the allegations in these lawsuits are without merit and intend to defend such litigation vigorously,
litigation is subject to inherent uncertainties, and an adverse result in one of these lawsuits or other matters that may arise from
time to time could have a material adverse effect on our business, results of operations and financial condition. Defending the
lawsuits may be costly and, further, could require significant involvement of our senior management and may divert management's
attention from our business and operations.
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Risks Relating to Our Outstanding Common Stock
Our stock price could be volatile, which could cause you to lose part or all of your investment.
The stock market has from time to time experienced significant price and volume fluctuations that may be unrelated to
the operating performance of particular companies. In particular, the market price of our common stock, like that of the securities
of many other energy companies, has been and may continue to be highly volatile. During 2016, the sales price of our stock ranged
from a low of $1.32 per share (on January 11, 2016) to a high of $4.51 per share (on November 30, 2016). Factors such as
announcements concerning changes in prices of oil and natural gas, the success of our acquisition, exploration and development
activities, the availability of capital, and economic and other external factors, as well as period-to-period fluctuations and financial
results, may have a significant effect on the market price of our common stock.
From time to time, there has been limited trading volume in our common stock. In addition, there can be no assurance
that there will continue to be a trading market or that any securities research analysts will continue to provide research coverage
with respect to our common stock. It is possible that such factors will adversely affect the market for our common stock.
If we cannot meet the New York Stock Exchange’s continuing listing requirements and rules, the New York Stock Exchange
may delist our securities, which could negatively affect our company, the price of our securities and your ability to sell our
securities.
On December 8, 2015, we received a notice from NYSE Regulation, Inc. informing us that we were not in compliance
with the continued listing standards set forth in 802.01C of the Listed Company Manual of the New York Stock Exchange (the
“Listed Company Manual”), because the average closing price of the our common stock fell below $1.00 per share for a period
of over 30 consecutive trading days. On May 18, 2016, we effected a 1:4 reverse stock split (the "Reverse Split") to attempt to
increase the per share trading price of our common stock in order to regain compliance with the NYSE's continued listing standards.
On June 2, 2016, we received a notice from the New York Stock Exchange ("NYSE") that the Company has regained compliance
with this continued listing standard.
On December 28, 2015, we received another notice from NYSE Regulation, Inc. informing us that we were not in
compliance with the continued listing standards set forth in Section 802.01B of the Listed Company Manual because our average
global market capitalization fell below $50 million over a trailing consecutive 30 trading-day period and our last reported
stockholders’ equity was less than $50 million. We developed and submitted a business plan to the NYSE demonstrating how,
within the next eighteen months, we intended to regain compliance with the continued listing standards set forth in Section 802.01B
of the Listed Company Manual. On March 21, 2016, we received notice from the NYSE that our business plan had been accepted,
that we will be subject to quarterly monitoring for compliance with the business plan and that our common stock will continue to
trade on the NYSE during the eighteen month period, subject to our compliance with other NYSE continued listing requirements.
The NYSE may choose to shorten the usual compliance period if prior to the end of the eighteen month period our global market
capitalization exceeds $50 million for two consecutive quarters.
If our common stock ultimately were to be delisted for any reason, trading of our securities would thereafter be conducted
in the over-the-counter market or on the National Association of Securities Dealers Inc.’s “electronic bulletin board.” As a
consequence, our stockholders would likely find it more difficult to dispose of, or to obtain accurate quotations as to the prices of
our securities. Such a delisting could negatively impact us by (i) reducing the liquidity and market price of our common stock;
(ii) reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to
raise equity financing; (iii) limiting our ability to use a registration statement to offer and sell freely tradable securities, thereby
preventing us from accessing the public capital markets; and (iv) impairing our ability to provide equity incentives to our employees.
The terms of our debt agreements currently restrict and Delaware law may restrict us from making cash payments with respect
to our Series B Preferred Stock.
Quarterly dividends and cash payments upon conversion or repurchase of our Series B Preferred Stock will be paid only
if payment of such amounts is not prohibited by our debt agreements, such as the Multidraw Term Loan Agreement, and assets
are legally available to pay such amounts. Quarterly dividends will only be paid if such dividends are declared by our board of
directors. The board of directors is not obligated or required to declare quarterly dividends even if we have funds available for
such purposes.
The terms of the Multidraw Term Loan Agreement currently restrict us from paying cash dividends on our Series B
Preferred Stock. We previously suspended the cash dividend on our Series B Preferred Stock beginning with the dividend payment
due on April 15, 2016. Under the terms of the Series B Preferred Stock, any unpaid dividends will accumulate. If we fail to pay
six quarterly dividends on the Series B Preferred Stock, whether or not consecutive, holders of the Series B Preferred Stock, voting
as a single class, will have the right to elect two additional directors to our board of directors until all accumulated and unpaid
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dividends on the Series B Preferred Stock are paid in full. We plan to periodically re-evaluate the dividend payment policy, subject
to the terms of our Multidraw Term Loan Facility.
If in the future we are permitted to pay such cash dividends under the terms of our existing debt agreements, including
the Multidraw Term Loan Agreement, and any debt agreements that we enter into in the future, we may continue to be limited in
our ability to pay cash dividends on our Series B Preferred Stock and our ability to make any cash payment upon conversion or
repurchase of our Series B Preferred Stock by the terms of such debt agreements. Furthermore, if we are in default under the
Multidraw Term Loan Agreement or the indenture governing the 2021 Notes or the 2021 PIK Notes, we will not be permitted to
pay any cash dividends on our Series B Preferred Stock or make any cash payment upon conversion or repurchase of our Series
B Preferred Stock in the absence of a waiver of such default or an amendment or refinancing of such debt agreements.
Delaware law provides that we may pay dividends on our Series B Preferred Stock only to the extent that assets are
legally available to pay such dividends. Cash payments we may make upon repurchase or conversion of our Series B Preferred
Stock would be generally subject to the same restrictions under Delaware law. Legally available assets is defined as the amount
of surplus. Our surplus is the amount by which the fair value of total assets exceeds the sum of:
•
•
the fair value of our total liabilities, including our contingent liabilities; and
the amount of our capital.
If there is no surplus, legally available assets will mean, in the case of a dividend, our net profits for the fiscal year in
which the dividend payment occurs and/or the preceding fiscal year.
Issuance of shares in connection with financing transactions or under stock incentive plans will dilute current stockholders.
We have issued 1.5 million shares of Series B Preferred Stock, which are presently convertible into 1.3 million shares of
our common stock. In addition, pursuant to our stock incentive plan, our management is authorized to grant stock awards to our
employees, directors and consultants. You will incur dilution upon the conversion of the Series B Preferred Stock, the exercise of
any outstanding stock awards or the grant of any restricted stock. In addition, if we raise additional funds by issuing additional
common stock, or securities convertible into or exchangeable or exercisable for common stock, further dilution to our existing
stockholders will result, and new investors could have rights superior to existing stockholders.
The number of shares of our common stock eligible for future sale could adversely affect the market price of our stock.
At December 31, 2016, we had reserved approximately 1.4 million shares of common stock for issuance under outstanding
options and approximately 1.3 million shares issuable upon conversion of the Series B Preferred Stock. All of these shares of
common stock are registered for sale or resale on currently effective registration statements. In addition, we recently issued
approximately 7.8 million shares (4.6 million shares as adjusted for the Reverse Split) of common stock in connection with the
2016 debt exchanges that are eligible for future sale under Rule 144 of the Securities Act. We may issue additional restricted
securities or register additional shares of common stock under the Securities Act in the future. The issuance of a significant number
of shares of common stock upon the exercise of stock options, the granting of restricted stock or the conversion of the Series B
Preferred Stock, or the availability for sale, or sale, of a substantial number of the shares of our common stock eligible for future
sale under effective registration statements, under Rule 144 or otherwise, could adversely affect the market price of the common
stock.
Provisions in our certificate of incorporation and bylaws could delay or prevent a change in control of our company, even if
that change would be beneficial to our stockholders.
Certain provisions of our certificate of incorporation and bylaws may delay, discourage, prevent or render more difficult
an attempt to obtain control of our company, whether through a tender offer, business combination, proxy contest or otherwise.
These provisions include:
•
•
•
the charter authorization of “blank check” preferred stock;
a restriction on the ability of stockholders to call a special meeting and take actions by written consent; and
provisions regulating the ability of our stockholders to nominate directors for election or to bring matters for action
at annual meetings of our stockholders.
We do not intend to pay dividends on our common stock and our ability to pay dividends on our common stock is restricted.
We have not paid dividends on our common stock, in cash or otherwise, and intend to retain our cash flow from operations
for the future operation and development of our business. We are currently restricted from paying dividends on our common stock
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by our Multidraw Term Loan Agreement, the indentures governing the 2021 Notes and 2021 PIK Notes and, in some circumstances,
by the terms of our Series B Preferred Stock. Any future dividends also may be restricted by our then-existing debt agreements.
Item 1B Unresolved Staff Comments
None
Item 3.
Legal Proceedings
The Company is involved in litigation relating to claims arising out of its operations in the normal course of business,
including worker’s compensation claims, tort claims and contractual disputes. Some of the existing known claims against us are
covered by insurance subject to the limits of such policies and the payment of deductible amounts by us. Although we cannot
predict the outcome of these proceedings with certainty, management believes that the ultimate disposition of all uninsured or
unindemnified matters resulting from existing litigation will not have a material adverse effect on the Company's business or
financial position.
On May 27, 2016, the Company was named as a defendant in a putative class action lawsuit filed on behalf of holders
of the 2017 Notes in the U.S. District Court for the Southern District of New York. The lawsuit alleges that, as a result of the
February 2016 debt exchange, the Company violated the Trust Indenture Act of 1939, the indenture governing the 2017 Notes
and the implied covenant of good faith and fair dealing by benefiting itself and a minority of noteholders who are qualified
institutional buyers ("QIBs"). According to the lawsuit, as a result of the February 2016 debt exchange in which only QIBs (and
non-U.S. persons under Regulation S) were eligible to participate, the Company unjustly enriched itself at the expense of class
members by reducing indebtedness, extending the maturity date of its long term debt and reducing the value of the 2017 Notes.
The lawsuit seeks damages and attorney's fees, in addition to declaratory relief that the debt exchange and the liens created for
the benefit of the 2021 Notes are null and void and that the debt exchange resulted in a default under the indenture for the 2017
Notes. In August 2016, the lawsuit was transferred to the U.S. District Court for the Western District of Louisiana. On January
25, 2017, the lawsuit was voluntarily dismissed.
On October 11, 2016, the Company's subsidiary, PetroQuest Energy, L.L.C. ("PQ LLC"), and another exploration and
production company were named as defendants in a putative class action lawsuit filed on behalf of royalty owners in the state
district court in Hughes County, Oklahoma. The lawsuit alleges that PQ LLC and the other defendant failed to pay interest with
respect to untimely royalty payments. The lawsuit seeks actual and punitive damages, an accounting, disgorgement, injunctive
relief and attorney's fees. On November 28, 2016, the Company removed the lawsuit to the U.S. District Court for the Eastern
District of Oklahoma.
On October 25, 2016, PQ LLC and another exploration and production company were named as defendants in a putative
class action lawsuit filed on behalf of royalty owners in the U.S. District Court for the Eastern District of Oklahoma. The lawsuit
alleges that PQ LLC and the other defendant underpaid royalties or did not pay royalties by various means. The lawsuit seeks
actual, compensatory and punitive damages, and attorney's fees.
We continue to vigorously defend against each of the pending claims. At this time we are unable to express an opinion
with respect to the likelihood of an unfavorable outcome or provide an estimate of potential losses, if any.
Item 4.
Mine Safety Disclosures
Not applicable.
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PART II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
The following graph illustrates the yearly percentage change in the cumulative stockholder return on our common stock,
compared with the cumulative total return on the NYSE/AMEX Stock Market (U.S. Companies) Index, the NYSE Stocks—Crude
Petroleum and Natural Gas Index and the Morningstar Oil and Gas E&P Index, for the five years ended December 31, 2016.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 31, 2016
PetroQuest Energy,
Inc.
NYSE/AMEX/
NASDAQ Market
(US Companies)
NYSE Stocks (SIC
1310-1319 US
Companies) Crude
Petroleum and
Natural Gas
Morningstar Oil &
Gas E&P Index
12/31/2011
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
$100.00
75.00
65.45
56.67
7.58
12.54
$100.00
102.61
102.74
83.89
57.62
78.36
$100.00
97.82
117.23
94.82
62.59
84.26
$100.00
115.63
152.02
168.47
162.20
186.49
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Market Price of and Dividends on Common Stock
Our common stock trades on the New York Stock Exchange under the symbol “PQ.” The following table lists high and
low sales prices per share for the periods indicated. The prices per share of our common stock prior to the 1 for 4 reverse stock
split effective for trading purposes on May 19, 2016 have been adjusted to reflect this stock split on a retroactive basis and may
not represent actual transactions.
2015
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2016
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
$
$
High
15.32 $
10.96
7.96
6.04
2.96 $
3.79
3.64
4.51
Low
7.80
6.80
4.20
1.24
1.32
1.77
1.71
2.83
As of March 2, 2017, there were 165 common stockholders of record.
We have never paid a dividend on our common stock, cash or otherwise, and intend to retain our cash flow from operations
for the future operation and development of our business. In addition, under our Multidraw Term Loan Agreement and the indentures
governing the 2021 Notes and 2021 PIK Notes, and, in some circumstances, the terms of our Series B Preferred Stock, we are
restricted from paying cash dividends on our common stock. The payment of future dividends, if any, will be determined by our
Board of Directors in light of conditions then existing, including our earnings, financial condition, capital requirements, restrictions
in financing agreements, business conditions and other factors. See Item 1A. “Risk Factors – Risks Relating to our Outstanding
Common Stock – We do not intend to pay dividends on our common stock and our ability to pay dividends on our common stock
is restricted.”
The following table sets forth certain information with respect to repurchases of our common stock during the quarter
ended December 31, 2016.
Total Number of
Shares
Purchased (1)
Average Price
Paid Per Share
1,242 $
36,274 $
— $
4.06
3.20
—
Total Number of
Shares Purchased
as Part of
Publicly
Announced Plan
or Program
Maximum Number (or
Approximate Dollar
Value) of Shares that May
be Purchased Under the
Plans or Programs
—
—
—
—
—
—
October 1—October 31, 2016
November 1—November 30, 2016
December 1—December 31, 2016
(1) All shares repurchased were surrendered by employees to pay tax withholding upon the vesting of restricted stock awards.
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Item 6.
Selected Financial Data
The following table sets forth, as of the dates and for the periods indicated, selected financial information for the Company.
The financial information for each of the five years in the period ended December 31, 2016 has been derived from the audited
Consolidated Financial Statements of the Company for such periods. The information should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial
Statements and notes thereto. The following information is not necessarily indicative of future results of the Company. All amounts
are stated in U.S. dollars unless otherwise indicated.
2016 (1)
2015 (2)
2014
2013
2012 (3)
Year Ended December 31,
Average sales price per Mcfe
Revenues
Net income (loss) available to common stockholders
$
2.84
66,667
(96,245)
Net income (loss) available to common stockholders
per share:
(in thousands except per share and per Mcfe data)
$
$
$
3.39
115,969
(299,929)
5.19
225,021
26,051
4.80
182,804
8,943
$
4.17
141,433
(137,218)
Basic
Diluted
Oil and gas properties, net
Total assets
Long-term debt, including current portion
Stockholders’ equity
(5.24)
(5.24)
89,062
144,860
293,645
(251,095)
(18.45)
(18.45)
165,952
379,319
347,008
(163,067)
1.57
1.57
683,812
786,108
420,213
136,909
0.56
0.56
581,242
660,018
417,828
99,095
(8.80)
(8.80)
333,946
430,647
147,244
87,591
(1) The year ended December 31, 2016 includes a pre-tax ceiling test write-down of $40.3 million.
(2) The year ended December 31, 2015 includes a pre-tax ceiling test write-down of $266.6 million.
(3) The year ended December 31, 2012 includes a pre-tax ceiling test write-down of $137.1 million.
Item 7.
Overview
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PetroQuest Energy, Inc. is an independent oil and gas company incorporated in the State of Delaware with primary
operations in Texas, Louisiana and the shallow waters of the Gulf of Mexico. We seek to grow our production, proved reserves,
cash flow and earnings at low finding and development costs through a balanced mix of exploration, development and acquisition
activities. From the commencement of our operations through 2002, we were focused exclusively in the Gulf Coast Basin with
onshore properties principally in southern Louisiana and offshore properties in the shallow waters of the Gulf of Mexico shelf.
During 2003, we began the implementation of our strategic goal of diversifying our reserves and production into longer life and
lower risk onshore properties with our acquisition of the Carthage Field in East Texas. As part of the strategic shift to diversify
our asset portfolio and lower our geographic and geologic risk profile, we refocused our opportunity selection processes to reduce
our average working interest in higher risk projects, shift capital to higher probability of success onshore wells and mitigate the
risks associated with individual wells by expanding our drilling program across multiple basins. From 2005 through 2015, we
were actively acquiring acreage and drilling wells primarily in the Woodford Shale play in Oklahoma. We divested all of our
acreage and producing wells in Oklahoma in three transactions that closed in June 2015, April 2016 and October 2016 ("the
Oklahoma Divestitures"). See Note 2 - Acquisitions and Divestitures.
Our liquidity position has been negatively impacted by the prolonged decline in commodity prices that began in late
2014. In response, we executed the following actions during 2015 and 2016 aimed at preserving liquidity, reducing overall debt
levels and extending debt maturities:
• Completed the Oklahoma Divestitures for $292.6 million;
• Reduced our 2016 capital expenditures by 75%, as compared to 2015 capital expenditures of approximately $65
million;
• Completed two debt exchanges reducing debt maturing in 2017 from $350 million to $22.7 million;
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• Reduced total debt 32% from $425 million at December 31, 2014 to $290.3 million at December 31, 2016;
• Entered into a new $50 million Multidraw Term Loan Agreement maturing in 2020;
•
•
Suspended the quarterly dividend on our outstanding Series B Preferred Stock saving $5.1 million annually; and
Secured a new drilling joint venture in East Texas.
In addition to extending the maturity on approximately $113.0 million of debt due in 2017 to 2021, our September 2016
debt exchange permits us to reduce our cash interest expense on $243.5 million of debt from 10% cash to 1% cash and 9% payment-
in-kind for the first three semi-annual interest payments, which is expected to provide us with more than $30 million of cash
interest savings during 2017 and 2018. To enhance our liquidity and provide capital to address the remaining 2017 Notes, in
October 2016, we entered into a new $50 million Multidraw Term Loan Agreement maturing in 2020, that replaced our prior bank
credit facility which had no borrowing base on the date of termination. We currently have a more favorable outlook on oil and
gas prices for 2017 than prices we experienced in 2016. We have recently recompleted our Thunder Bayou well in South Louisiana
into a larger sand package and commenced the East Texas joint venture drilling program where we expect to drill eight to ten gross
wells during 2017. As a result, we expect to begin growing production during 2017 as compared to 2016.
Critical Accounting Policies
Reserve Estimates
Our estimates of proved oil and gas reserves constitute those quantities of oil and gas, which, by analysis of geoscience
and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from
known reservoirs, and under existing economic conditions, operating methods, and government regulations prior to the time at
which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of
whether deterministic or probabilistic methods are used for the estimation. At the end of each year, our proved reserves are estimated
by independent petroleum engineers in accordance with guidelines established by the SEC. These estimates, however, represent
projections based on geologic and engineering data. Reserve engineering is a subjective process of estimating underground
accumulations of oil and gas that are difficult to measure. The accuracy of any reserve estimate is a function of the quantity and
quality of available data, engineering and geological interpretation and professional judgment. Estimates of economically
recoverable oil and gas reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions,
such as historical production from the area compared with production from other producing areas, the assumed effect of regulations
by governmental agencies, and assumptions governing future oil and gas prices, future operating costs, severance taxes,
development costs and workover costs. The future drilling costs associated with reserves assigned to proved undeveloped locations
may ultimately increase to the extent that these reserves may be later determined to be uneconomic. Any significant variance in
the assumptions could materially affect the estimated quantity and value of the reserves, which could affect the carrying value of
our oil and gas properties and/or the rate of depletion of such oil and gas properties.
Disclosure requirements under Staff Accounting Bulletin No. 113 (“SAB 113”) include provisions that permit the use of
new technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable
conclusions about reserve volumes. The rules also allow companies the option to disclose probable and possible reserves in addition
to the existing requirement to disclose proved reserves. The disclosure requirements also require companies to report the
independence and qualifications of third party preparers of reserves and file reports when a third party is relied upon to prepare
reserves estimates. Pricing is based on a 12-month, first day of month, average price during the 12-month period prior to the ending
date of the balance sheet to report oil and natural gas reserves. In addition, the 12-month average is also used to measure ceiling
test impairments and to compute depreciation, depletion and amortization.
Full Cost Method of Accounting
We use the full cost method of accounting for our investments in oil and gas properties. Under this method, all acquisition,
exploration and development costs, including certain related employee costs, incurred for the purpose of exploring for and
developing oil and natural gas are capitalized. Acquisition costs include costs incurred to purchase, lease or otherwise acquire
property. Exploration costs include the costs of drilling exploratory wells, including those in progress and geological and
geophysical service costs in exploration activities. Development costs include the costs of drilling development wells and costs
of completions, platforms, facilities and pipelines. Costs associated with production and general corporate activities are expensed
in the period incurred. Sales of oil and gas properties, whether or not being amortized currently, are accounted for as adjustments
of capitalized costs, with no gain or loss recognized, unless such adjustments would significantly alter the relationship between
capitalized costs and proved reserves of oil and gas.
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The costs associated with unevaluated properties are not initially included in the amortization base and primarily relate
to ongoing exploration activities, unevaluated leasehold acreage and delay rentals, seismic data and capitalized interest. These
costs are either transferred to the amortization base with the costs of drilling the related well or are assessed quarterly for possible
impairment or reduction in value.
We compute the provision for depletion of oil and gas properties using the unit-of-production method based upon
production and estimates of proved reserve quantities. Unevaluated costs and related carrying costs are excluded from the
amortization base until the properties associated with these costs are evaluated. In addition to costs associated with evaluated
properties, the amortization base includes estimated future development costs related to non-producing reserves. Our depletion
expense is affected by the estimates of future development costs, unevaluated costs and proved reserves, and changes in these
estimates could have an impact on our future earnings.
We capitalize certain internal costs that are directly identified with acquisition, exploration and development activities.
The capitalized internal costs include salaries, employee benefits, costs of consulting services and other related expenses and do
not include costs related to production, general corporate overhead or similar activities. We also capitalize a portion of the interest
costs incurred on our debt. Capitalized interest is calculated using the amount of our unevaluated properties and our effective
borrowing rate.
Capitalized costs of oil and gas properties, net of accumulated depreciation, depletion and amortization ("DD&A") and
related deferred taxes, are limited to the estimated future net cash flows from proved oil and gas reserves, including the effect of
cash flow hedges in place, discounted at 10 percent, plus the lower of cost or fair value of unproved properties, as adjusted for
related income tax effects (the full cost ceiling). If capitalized costs exceed the full cost ceiling, the excess is charged to write-
down of oil and gas properties in the quarter in which the excess occurs.
Given the volatility of oil and gas prices, it is probable that our estimate of discounted future net cash flows from estimated
proved oil and gas reserves will change in the near term. If oil or gas prices remain at current levels or decline further, even for
only a short period of time, or if we have downward revisions to our estimated proved reserves, it is possible that further write-
downs of oil and gas properties could occur in the future.
Future Abandonment Costs
Future abandonment costs include costs to dismantle and relocate or dispose of our production platforms, gathering
systems, wells and related structures and restoration costs of land and seabed. We develop estimates of these costs for each of our
properties based upon the type of production structure, depth of water, reservoir characteristics, depth of the reservoir, market
demand for equipment, currently available procedures and consultations with construction and engineering consultants. Because
these costs typically extend many years into the future, estimating these future costs is difficult and requires management to make
estimates and judgments that are subject to future revisions based upon numerous factors, including changing technology, the
timing of estimated costs, the impact of future inflation on current cost estimates and the political and regulatory environment.
Derivative Instruments
We seek to reduce our exposure to commodity price volatility by hedging a portion of our production through commodity
derivative instruments. The estimated fair values of our commodity derivative instruments are recorded in the consolidated balance
sheet. The changes in fair value of those derivative instruments that qualify for hedge accounting treatment are recorded in other
comprehensive income (loss) until the hedged oil or natural gas quantities are produced. If a hedge becomes ineffective because
the hedged production does not occur, or the hedge otherwise does not qualify for hedge accounting treatment, the changes in the
fair value of the derivative are recorded in the income statement as derivative income (expense).
Our hedges are specifically referenced to NYMEX prices for natural gas. We evaluate the effectiveness of our hedges at
the time we enter the contracts, and periodically over the life of the contracts, by analyzing the correlation between NYMEX and
the posted prices we receive from our designated production. Through this analysis, we are able to determine if a high correlation
exists between the prices received for the designated production and the NYMEX price at which the hedges will be settled. At
December 31, 2016, our derivative instruments were designated effective cash flow hedges.
Estimating the fair value of derivative instruments requires valuation calculations incorporating estimates of future
NYMEX prices, discount rates and price movements. As a result, we calculate the fair value of our commodity derivatives using
an independent third-party’s valuation model that utilizes market-corroborated inputs that are observable over the term of the
derivative contract. Our fair value calculations also incorporate an estimate of the counterparties’ default risk for derivative assets
and an estimate of our default risk for derivative liabilities.
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Results of Operations
The following table sets forth certain information with respect to our oil and gas operations for the periods noted. These
historical results are not necessarily indicative of results to be expected in future periods.
Production:
Oil (Bbls)
Gas (Mcf)
Ngl (Mcfe)
Total Production (Mcfe)
Sales:
Total oil sales
Total gas sales
Total ngl sales
Total oil and gas sales
Average sales prices:
Oil (per Bbl)
Gas (per Mcf)
Ngl (per Mcfe)
Per Mcfe
Year Ended December 31,
2016
2015
2014
502,201
16,616,578
3,870,947
23,500,731
20,613,964
37,962,622
8,090,292
66,666,878
41.05
2.28
2.09
2.84
$
$
$
528,529
25,501,851
5,487,239
34,160,264
26,532,240
75,070,130
14,367,024
115,969,394
50.20
2.94
2.62
3.39
$
$
$
802,509
31,027,671
7,482,310
43,325,035
78,176,377
114,613,267
32,231,090
225,020,734
97.41
3.69
4.31
5.19
$
$
$
The above sales and average sales prices include increases (reductions) to revenue related to the settlement of gas hedges of
$1,811,000, $15,940,000 and ($4,237,000), oil hedges of $0, $644,000 and $897,000, and Ngl hedges of $0, $530,000 and $296,000
for the twelve months ended December 31, 2016, 2015 and 2014, respectively.
Comparison of Results of Operations for the Years Ended December 31, 2016 and 2015
Net loss available to common stockholders totaled $96,245,000 and $299,929,000 for the years ended December 31, 2016 and
2015, respectively. The primary fluctuations were as follows:
Production Total production decreased 31% during the year ended December 31, 2016 as compared to the 2015 period. The
decrease in total production was due primarily to the Oklahoma Divestitures and normal production declines at our Gulf Coast
and East Texas fields as a result of the reduction in capital expenditures during 2016. As a result of the successful recompletion
of our Thunder Bayou well in the first quarter of 2017 as well as the commencement of our East Texas drilling program, we expect
our total production in 2017 to be higher than production during 2016.
Gas production during the year ended December 31, 2016 decreased 35% from the 2015 period. The decrease in gas production
was primarily the result of the Oklahoma Divestitures and normal production declines at our Gulf Coast and East Texas fields. As
a result of the successful recompletion of our Thunder Bayou well during the first quarter of 2017 and our drilling program in East
Texas, we expect our 2017 average daily gas production to increase as compared to 2016.
Oil production during the year ended December 31, 2016 decreased 5% as compared to the 2015 period due primarily to normal
production declines at our Gulf Coast and East Texas fields and downtime due to pipeline constraints at one of our Gulf of Mexico
properties. As a result of the successful recompletion of our Thunder Bayou well during the first quarter of 2017 and our drilling
program in East Texas, we expect our average daily oil production to increase during 2017 as compared to 2016.
Ngl production during the year ended December 31, 2016 decreased 29% from the 2015 period primarily due to the Oklahoma
Divestitures and normal production declines at certain of our Gulf Coast and East Texas fields. As a result of the successful
recompletion of our Thunder Bayou well during the first quarter of 2017 and our drilling program in East Texas, we expect our
daily Ngl production for 2017 to increase compared to that of 2016.
Prices Including the effects of our hedges, average gas prices per Mcf for the year ended December 31, 2016 were $2.28 as
compared to $2.94 for the 2015 period. Average oil prices per Bbl for the year ended December 31, 2016 were $41.05 as compared
to $50.20 for the 2015 period and average Ngl prices per Mcfe were $2.09 for the year ended December 31, 2016, as compared
to $2.62 for the 2015 period. Stated on an Mcfe basis, unit prices received during the year ended December 31, 2016 were 16%
lower than the prices received during the 2015 period.
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Revenue Including the effects of hedges, oil and gas sales during the twelve months ended December 31, 2016 decreased 43%
to $66,667,000, as compared to oil and gas sales of $115,969,000 during the 2015 period. The decreased revenue during 2016 was
primarily the result of the decreased production during 2016 as discussed above, as well as lower average realized prices.
Expenses Lease operating expenses for the year ended December 31, 2016 totaled $28,508,000, or $1.21 per Mcfe, as compared
to $40,130,000, or $1.17 per Mcfe, during the 2015 period. The decrease in total lease operating expenses for the year ended
December 31, 2016 is primarily a result of the Oklahoma Divestitures. Additionally, lease operating expenses decreased overall
at our Gulf Coast and East Texas fields as a result of certain cost saving measures put in place during 2016. We expect lease
operating expenses during 2017 to generally approximate 2016 expenses on an absolute value basis and to decrease on a per unit
basis.
Production taxes for the year ended December 31, 2016 totaled $354,000, or $0.02 per Mcfe, as compared to $2,470,000, or $0.07
per Mcfe, during the 2015 period. The decrease in total production taxes was primarily due to the receipt in 2016 of $1,292,000
of production tax refunds on certain of our East Texas wells that qualified for a gas tax credit. Additionally, production taxes
decreased as a result of lower commodity prices for our production during the 2016 period as compared to the 2015 period. The
majority of our properties that are subject to severance taxes are assessed on the oil and gas sales value. As a result of the expected
increases in production and completion of the two-year severance tax exemption on our Thunder Bayou well, we expect an increase
in our total and per unit production taxes during 2017 as compared to 2016.
General and administrative expenses during the year ended December 31, 2016 totaled $26,040,000 as compared to $20,777,000
during the 2015 period. General and administrative expenses increased 25% during the year ended December 31, 2016 primarily
due to the inclusion of $10,139,000 of costs related to the issuance of the 2021 Notes and 2021 PIK Notes. ASC Topic 470-60
"Troubled Debt Restructurings by Debtors" requires financing costs related to a troubled debt restructuring to be expensed in the
period incurred. Offsetting this increase were lower employee related costs, including share-based compensation. Included in
general and administrative expenses for 2016 are share-based compensation costs, net of amounts capitalized, of $1,582,000,
compared to $4,388,000 during the 2015 period. We capitalized $6,623,000 of general and administrative costs during the year
ended December 31, 2016 as compared to $8,210,000 during the comparable 2015 period. Excluding the non-recurring debt
restructuring fees included in 2016, we expect general and administrative expenses to decrease during 2017 as compared to 2016
due to an approximate 50% reduction in staff levels during 2016.
Depreciation, depletion and amortization ("DD&A") expense on oil and gas properties for the year ended December 31, 2016
totaled $27,962,000, or $1.19 per Mcfe, as compared to $62,138,000, or $1.82 per Mcfe, during the comparable 2015 period. The
decrease in the per unit DD&A rate is primarily the result of recent ceiling test write-downs. We expect our DD&A rate for 2017
to approximate the rate during 2016.
At December 31, 2016, the prices used in computing the estimated future net cash flows from our estimated proved reserves,
including the effect of hedges in place at that date, averaged $2.51 per Mcf of natural gas, $40.85 per barrel of oil and $1.82 per
Mcfe of natural gas liquids, respectively. As a result of lower commodity prices and their negative impact on our estimated proved
reserves and estimated future net cash flows, we recognized a ceiling test write-down of approximately $40,304,000 during the
year ended December 31, 2016. At December 31, 2015, the prices used in computing the estimated future net cash flows from
our estimated proved reserves, including the effect of hedges in place at that date, averaged $2.42 per Mcf of natural gas, $50.29
per barrel of oil and $2.21 per Mcfe of natural gas liquids, respectively. As a result of lower commodity prices and their negative
impact on our estimated proved reserves and estimated future net cash flows, we recognized a ceiling test write-down of
approximately $266,562,000 during the year ended December 31, 2015. See Note 11, "Ceiling Test" for further discussion of the
ceiling test write-downs. Utilizing current strip prices for oil and gas prices for the first quarter of 2017 and projecting the effect
on the estimated future net cash flows from our estimated proved reserves as of March 31, 2017, we do not expect to recognize
an additional ceiling test write-down during the first quarter of 2017.
Interest expense, net of amounts capitalized on unevaluated properties, totaled $30,019,000 during the year ended December 31,
2016, as compared to $33,766,000 during 2015. During the year ended December 31, 2016, our capitalized interest totaled $935,000
as compared to $4,671,000 during the 2015 period. The decrease in interest expense was a result of the February 2016 debt
exchange, including a $1,479,000 non-cash reduction related to the amortization of the excess carrying value of the 2017 Notes
tendered in the February 2016 debt exchange and the 2021 Notes tendered in the September 2016 debt exchange (see Note 9 -
Long-Term Debt). In addition, during the February 2016 debt exchange, we redeemed $53,627,000 of 2017 Notes with cash on
hand. Partially offsetting this decrease in interest expense was the decrease in capitalized interest as a result of lower unevaluated
oil and gas properties. While we expect interest expense for 2017 to approximate 2016, cash interest costs during 2017 are expected
to be significantly lower than those in 2016 due to the payment-in-kind feature of the 2021 PIK Notes.
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Income tax expense during the year ended December 31, 2016 totaled $543,000, as compared to $2,626,000 during the 2015
period. We typically provide for income taxes at a statutory rate of 35% adjusted for permanent differences expected to be realized,
primarily statutory depletion, non-deductible stock compensation expenses and state income taxes.
As a result of the ceiling test write-downs recognized, we have incurred a three-year cumulative loss. Because of the impact the
cumulative loss has on the determination of the recoverability of deferred tax assets through future earnings, we assessed the
realizability of our deferred tax assets based on the future reversals of existing deferred tax liabilities. Accordingly, we established
a valuation allowance for a portion of our deferred tax asset. The valuation allowance was $177,405,000 as of December 31, 2016.
Comparison of Results of Operations for the Years Ended December 31, 2015 and 2014
Net income (loss) available to common stockholders totaled ($299,929,000) and $26,051,000 for the years ended December 31,
2015 and 2014, respectively. The primary fluctuations were as follows:
Production Total production decreased 21% during the year ended December 31, 2015 as compared to the 2014 period. The
decrease in total production was due primarily to the 2015 Oklahoma divestiture and normal production declines at our Gulf Coast
fields. Partially offsetting these decreases were increases relating to the successful drilling program in our Carthage field as well
as our Thunder Bayou discovery.
Gas production during the year ended December 31, 2015 decreased 18% from the 2014 period. The decrease in gas production
was due to the 2015 Oklahoma divestiture and normal production declines at our Gulf Coast fields, partially offset by the successful
drilling program in our Carthage field and the completion of our Thunder Bayou discovery.
Oil production during the year ended December 31, 2015 decreased 34% as compared to the 2014 period due primarily to normal
production declines at our Gulf Coast fields, downtime at certain of our Gulf of Mexico properties and the divestiture of our Fort
Trinidad field in July 2015 and our Eagleford field in September 2014.
Ngl production during the year ended December 31, 2015 decreased 27% from the 2014 period due to the 2015 Oklahoma divestiture
and normal production declines at our Gulf Coast fields, partially offset by the successful drilling program in our Carthage field
and the completion of our Thunder Bayou discovery.
Prices Including the effects of our hedges, average gas prices per Mcf for the year ended December 31, 2015 were $2.94 as
compared to $3.69 for the 2014 period. Average oil prices per Bbl for the year ended December 31, 2015 were $50.20 as compared
to $97.41 for the 2014 period and average Ngl prices per Mcfe were $2.62 for the year ended December 31, 2015, as compared
to $4.31 for the 2014 period. Stated on an Mcfe basis, unit prices received during the year ended December 31, 2015 were 35%
lower than the prices received during the 2014 period.
Revenue Including the effects of hedges, oil and gas sales during the twelve months ended December 31, 2015 decreased 48%
to $115,969,000, as compared to oil and gas sales of $225,021,000 during the 2014 period. The decreased revenue during 2015
was primarily due to decreased production during 2015 as a result of the 2015 Oklahoma divestiture, as well as lower average
realized prices.
Expenses Lease operating expenses for the year ended December 31, 2015 totaled $40,130,000, or $1.17 per Mcfe, as compared
to $48,597,000, or $1.12 per Mcfe, during the 2014 period. The increase in per unit lease operating expenses for the year ended
December 31, 2015 is primarily a result of the 2015 Oklahoma divestiture, which included properties with a lower relative per
unit cost, as well as normal production declines and downtime at certain of our Gulf Coast fields.
Production taxes for the year ended December 31, 2015 totaled $2,470,000, or $0.07 per Mcfe, as compared to $5,927,000, or
$0.14 per Mcfe, during the 2014 period. The decrease in total production taxes was primarily due to lower commodity prices for
our production during the 2015 period as compared to the 2014 period. The majority of our properties that are subject to severance
taxes are assessed on the oil and gas sales value.
General and administrative expenses during the year ended December 31, 2015 totaled $20,777,000 as compared to $22,870,000
during the 2014 period. General and administrative expenses decreased 9% during the year ended December 31, 2015 primarily
due to lower employee related costs including share-based compensation during the 2015 period which was only partially offset
by lower capitalized costs. Included in general and administrative expenses for 2015 are share-based compensation costs, net of
amounts capitalized, of $4,388,000, compared to $6,808,000 during the 2014 period. We capitalized $8,210,000 of general and
administrative costs during the year ended December 31, 2015 as compared to $12,122,000 during the comparable 2014 period.
Depreciation, depletion and amortization ("DD&A") expense on oil and gas properties for the year ended December 31, 2015
totaled $62,138,000, or $1.82 per Mcfe, as compared to $86,406,000, or $1.99 per Mcfe, during the comparable 2014 period. The
decrease in the per unit DD&A rate is primarily the result of ceiling test write-downs in the 2015 period.
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At December 31, 2015, the prices used in computing the estimated future net cash flows from our estimated proved reserves,
including the effect of hedges in place at that date, averaged $2.42 per Mcf of natural gas, $50.29 per barrel of oil and $2.21 per
Mcfe of natural gas liquids, respectively. As a result of lower commodity prices and their negative impact on our estimated proved
reserves and estimated future net cash flows, we recognized a ceiling test write-down of approximately $266,562,000 during the
year.
Interest expense, net of amounts capitalized on unevaluated properties, totaled $33,766,000 during the year ended December 31,
2015, as compared to $29,281,000 during 2014. During the year ended December 31, 2015, our capitalized interest totaled
$4,671,000 as compared to $9,999,000 during the 2014 period. The increase in interest expense was a result of lower capitalized
interest on our reduced unevaluated property balance which declined as a result of the 2015 Oklahoma divestiture.
Income tax expense (benefit) during the year ended December 31, 2015 totaled $2,626,000, as compared to ($2,941,000) during
the 2014 period. We typically provide for income taxes at a statutory rate of 35% adjusted for permanent differences expected to
be realized, primarily statutory depletion, non-deductible stock compensation expenses and state income taxes.
As a result of the ceiling test write-downs recognized, we have incurred a three-year cumulative loss. Because of the impact the
cumulative loss has on the determination of the recoverability of deferred tax assets through future earnings, we assessed the
realizability of our deferred tax assets based on the future reversals of existing deferred tax liabilities. Accordingly, we established
a valuation allowance for a portion of our deferred tax asset. The valuation allowance was $143,508,000 as of December 31, 2015.
Liquidity and Capital Resources
We have historically financed our acquisition, exploration and development activities principally through cash flow from
operations, borrowings from banks and other lenders, issuances of equity and debt securities, joint ventures and sales of assets.
However, our liquidity position has been negatively impacted by the prolonged decline in commodity prices that began in late
2014. In response to lower commodity prices, we executed a number of transactions during 2015 and 2016 aimed at preserving
liquidity, reducing overall debt levels and extending debt maturities. Through these transactions, which included two debt
exchanges, we have reduced debt maturing in 2017 from $350 million to $22.7 million and have reduced total debt 32% from
$425 million at December 31, 2014 to $290.3 million at December 31, 2016. In addition to extending the maturity on the majority
of our debt due in 2017, our September 2016 debt exchange permits us to reduce our cash interest expense on $243.5 million of
debt from 10% cash to 1% cash and 9% payment-in-kind for the first three semi-annual interest payments, which is expected to
provide us with more than $30 million in cash interest savings during 2017 and 2018. Finally, in October 2016, we entered into
a new $50 million Multidraw Term Loan Agreement maturing in 2020 that replaced our prior bank credit facility, which had no
borrowing base on the date of termination. The Multidraw Term Loan Agreement will provide capital for general corporate purposes,
including refinancing the $22.7 million of remaining 2017 Notes. For additional information, see "Source of Capital: Debt" below.
At December 31, 2016 we had a working capital deficit of $37.8 million compared to a surplus of $50.5 million at
December 31, 2015. The decrease in our working capital is primarily due to the $63.8 million in cash payments made in connection
with the 2016 debt exchanges and the inclusion of the 2017 Notes in current liabilities as discussed in "Source of Capital: Debt"
below.
Our liquidity may be negatively impacted by federal bonding requirements related to our properties located on the Outer
Continental Shelf (the "OCS"). To cover the various obligations of lessees on the OCS, the Bureau of Ocean Energy Management
(the "BOEM") and the Bureau of Safety and Environmental Enforcement (the "BSEE") generally require that lessees have
substantial net worth or post bonds or other acceptable assurances that such obligations will be satisfied. Because we are not
exempt from the BOEM's supplemental bonding requirements, we engage surety companies to post the requisite bonds. Pursuant
to the terms of our surety agreements, we may be required to post collateral at the surety companies' discretion. Two of our surety
companies requested collateral be posted to support certain of the bonds issued on our behalf and to date, we have provided cash
deposits totaling $6.2 million to satisfy these requests. The surety companies may request additional collateral which could have
a material adverse effect on our liquidity position. If we fail to satisfy future requests for collateral, we may be in default under
our agreements with the surety companies, which could cause a cross-default under the Multidraw Term Loan Agreement and
potentially the indentures governing the 2021 Notes and 2021 PIK Notes. In addition, recently updated BOEM financial assurance
and risk management requirements may increase the amount of surety bonds or other security required to be provided by us. For
additional information, see "Item 1A Risk Factors - We may be required to post additional collateral to satisfy the collateral
requirements related to the surety bonds that secure our offshore decommissioning obligations or to increase the amount of surety
bonds or other security required pursuant to updated BOEM financial assurance and risk management requirements".
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Source of Capital: Operations
Net cash flow provided by (used in) operations decreased from $30.1 million during the year ended December 31, 2015
to $(56.6) million during the 2016 period. The decrease in operating cash flow during 2016 as compared to 2015 was primarily
attributable to decreases in oil and gas revenues as well as the timing of payment of payables based on operational activity.
Source of Capital: Divestitures
We do not budget property divestitures; however, we are continuously evaluating our property base to determine if there
are assets in our portfolio that no longer meet our strategic objectives. From time to time we may divest certain assets in order to
provide liquidity to strengthen our balance sheet or provide capital to be reinvested in higher rate of return projects. We are currently
exploring divestment opportunities for certain of our legacy Gulf of Mexico assets. We cannot assure you that we will be able to
sell any of our assets in the future.
In June 2015, we sold a majority of our interests in the Woodford and Mississippian Lime fields for cash proceeds of
$274.1 million. Net proceeds from the sale were used to repay all borrowings outstanding under our bank credit facility and increase
our cash on hand. In 2016, we sold our remaining assets in Oklahoma for approximately $18.5 million.
Source of Capital: Debt
On August 19, 2010, we issued $150 million in principal amount of our 10% Senior Notes due 2017. On July 3, 2013,
we issued an additional $200 million in principal amount of our 10% Senior Notes due 2017 (collectively, the "2017 Notes").
On February 17, 2016, we closed a private exchange offer (the "February Exchange") and consent solicitation (the
"February Consent Solicitation") to certain eligible holders of our outstanding 2017 Notes. In satisfaction of the tender of $214.4
million in aggregate principal amount of the 2017 Notes, representing approximately 61% of the then outstanding aggregate
principal amount of 2017 Notes, we (i) paid approximately $53.6 million of cash, (ii) issued $144.7 million aggregate principal
amount of our new 10% Second Lien Senior Secured Notes due 2021 (the "2021 Notes") and (iii) issued approximately 4.3 million
shares (1.1 million shares as adjusted for the Reverse Split) of our common stock. Following the completion of the February
Exchange, $135.6 million in aggregate principal amount of the 2017 Notes remained outstanding. The February Consent Solicitation
eliminated or waived substantially all of the restrictive covenants contained in the indenture governing the 2017 Notes.
On September 27, 2016, we closed private exchange offers (the "September Exchange") and a consent solicitation (the
"September Consent Solicitation") to certain eligible holders of our outstanding 2017 Notes and 2021 Notes. In satisfaction of the
consideration of $113.0 million in aggregate principal amount of the 2017 Notes, representing approximately 83% of the then
outstanding aggregate principal amount of 2017 Notes, and $130.5 million in aggregate principal amount of the then 2021 Notes,
representing approximately 90% of the then outstanding aggregate principal amount of 2021 Notes, we issued (i) $243.5 million
in aggregate principal amount of our new 10% Second Lien Senior Secured PIK Notes due 2021 (the "2021 PIK Notes") and (ii)
approximately 3.5 million shares of our common stock. We also paid, in cash, accrued and unpaid interest on the 2017 Notes and
2021 Notes accepted in the September Exchange from the last applicable interest payment date to, but not including, September 27,
2016. Following the consummation of the September Exchange, there is $22.7 million in aggregate principal amount of the 2017
Notes outstanding and $14.2 million in aggregate principal amount of the 2021 Notes outstanding. The September Consent
Solicitation amended certain provisions of the indenture governing the 2021 Notes and amended the registration rights agreement
with respect to the 2021 Notes.
Unless we exercise our payable in kind ("PIK") interest option, the 2021 PIK Notes bear interest at a rate of 10% per
annum on the principal amount and interest is payable semi-annually in arrears on February 15 and August 15 of each year, starting
on February 15, 2017. We may, at our option, for one or more of the first three interest payment dates of the 2021 PIK Notes, pay
interest at (i) the annual rate of 1% in cash plus (ii) the annual rate of 9% PIK (the "PIK Interest") payable by increasing the
principal amount outstanding of the 2021 PIK Notes or by issuing additional 2021 PIK Notes in certificated form. We exercised
this PIK option in connection with the interest payment on February 15, 2017. As of the date hereof, we are in compliance with
all of the covenants under the 2021 PIK Notes.
The 2021 Notes bear interest at a rate of 10% per annum on the principal amount and interest is payable semi-annually
in arrears on February 15 and August 15 of each year. As of the date hereof, we are in compliance with all of the covenants under
the 2021 Notes.
The 2017 Notes bear interest at a rate of 10% per annum on the principal amount and interest is payable semi-annually
in arrears on March 1 and September 1 of each year and the 2017 Notes mature on September 1, 2017. As of the date hereof, we
are in compliance with the remaining covenants under the 2017 Notes. On March 1, 2017, we notified the holders of the 2017
Notes that we will redeem the remaining $22.7 million of 2017 Notes on March 31, 2017 at a redemption price of 100% of the
principal amount thereof, plus accrued interest to the redemption date. We expect to pay the redemption price with a combination
of cash on hand and amounts borrowed under the Multidraw Term Loan Agreement described below.
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The February Exchange and September Exchange were accounted for as troubled debt restructurings pursuant to
Accounting Standards Codification ("ASC") Topic 470-60 "Troubled Debt Restructurings by Debtors." We determined that the
future undiscounted cash flows from the 2021 PIK Notes issued in the September Exchange through the maturity date exceeded
the adjusted carrying amount of the 2017 Notes and the 2021 Notes tendered in the September Exchange. Accordingly, no gain
or loss on extinguishment of debt was recognized in connection with the September Exchange. The net shortfall of the remaining
carrying value of the 2017 Notes and 2021 Notes tendered as compared to the principal amount of the 2021 PIK Notes issued in
the September Exchange of $0.6 million is reflected as part of the carrying value of the 2021 PIK Notes. Such shortfall is being
amortized under the effective interest method over the term of the 2021 PIK Notes.
We previously determined that the future undiscounted cash flows from the 2021 Notes issued in the February Exchange
through the maturity date exceeded the adjusted carrying amount of the 2017 Notes tendered in the February Exchange. Accordingly,
no gain on extinguishment of debt was recognized in connection with the February Exchange. The excess of the remaining carrying
value of the 2017 Notes tendered over the principal amount of the 2021 Notes issued in the February Exchange of $13.9 million
was reflected as part of the carrying value of the 2021 Notes. The amount of the excess carrying value attributable to the 2021
Notes tendered in the September Exchange is now reflected as part of the carrying value of the 2021 PIK Notes. The excess
carrying value attributable to the remaining 2021 Notes is being amortized under the effective interest method over the term of
the 2021 Notes. At December 31, 2016, $1.2 million of the excess remained as part of the carrying value of the 2021 Notes and
we recognized $1.5 million of amortization expense as a reduction to interest expense during the year ended December 31, 2016.
The indentures governing the 2021 PIK Notes and the 2021 Notes contain affirmative and negative covenants that, among
other things, limit our ability and the ability of the subsidiary guarantors of the 2021 PIK Notes and the 2021 Notes to incur
indebtedness; purchase or redeem stock; make certain investments; create liens that secure debt; enter into transactions with
affiliates; sell assets; refinance certain indebtedness; merge with or into other companies or transfer substantially all of our assets;
and, in certain circumstances, to pay dividends or make other distributions on stock. The 2021 PIK Notes and the 2021 Notes are
fully and unconditionally guaranteed on a senior basis by certain of our wholly-owned subsidiaries.
The 2021 PIK Notes and the 2021 Notes are secured equally and ratably by second-priority liens on substantially all of
our and the subsidiary guarantors' oil and gas properties and substantially all of our other assets to the extent such properties and
assets secure the Multidraw Term Loan Agreement (as defined below), except for certain excluded assets. Pursuant to the terms
of an intercreditor agreement, the security interest in those properties and assets that secure the 2021 PIK Notes and the 2021
Notes and the guarantees are contractually subordinated to liens that secure the Multidraw Term Loan Agreement and certain other
permitted indebtedness. Consequently, the 2021 PIK Notes and the 2021 Notes and the guarantees will be effectively subordinated
to the Multidraw Term Loan Agreement and such other indebtedness to the extent of the value of such assets.
On October 17, 2016, we entered into the Multidraw Term Loan Agreement (the "Multidraw Term Loan Agreement")
with Franklin Custodian Funds - Franklin Income Fund ("Franklin"), as a lender, and Wells Fargo Bank, National Association, as
administrative agent, replacing the credit agreement with JPMorgan Chase Bank, N.A. The Multidraw Term Loan Agreement
provides a multi-advance term loan facility, with borrowing availability for three years, in a principal amount of up to $50.0 million.
The loans drawn under the Multidraw Term Loan Agreement (collectively, the “Term Loans”) may be used to repay existing debt,
including the 2017 Notes, to pay transaction fees and expenses, to provide working capital for exploration and production operations
and for general corporate purposes. The Term Loans mature on October 17, 2020. As of the date hereof, we have $10.0 million
of borrowings outstanding under the Term Loans.
Our obligations under the Multidraw Term Loan Agreement and the Term Loans are secured by a first priority lien on
substantially all of our assets and certain of our subsidiaries, including a lien on all equipment and at least 90% of the aggregate
total value of our oil and gas properties and our subsidiaries, a pledge of the equity interests of PetroQuest Energy, L.L.C. (the
"Borrower") and certain of our other subsidiaries, and corporate guarantees of our and certain of our other subsidiaries of the
indebtedness of the Borrower. Term Loans under the Multidraw Term Loan Agreement bear interest at the rate of 10% per annum.
We and our subsidiaries are subject to a restrictive financial covenant under the Multidraw Term Loan Agreement,
consisting of maintaining a ratio of (i) the present value, discounted at 10% per annum, of the estimated future net revenues in
respect of our and our subsidiaries’ oil and gas properties, before any state, federal, foreign or other income taxes, attributable to
proved developed reserves, using three-year strip prices in effect at the end of each calendar quarter, including swap agreements
in place at the end of each quarter, to (ii) the sum of the outstanding Term Loans and the then outstanding commitments to provide
Term Loans, that shall not be less than (a) 1.7 to 1.0 as measured on December 31, 2016 and March 31, 2017, and (b) 2.0 to 1.0
as measured on June 30, 2017, and the last day of each calendar quarter thereafter (the "Coverage Ratio").
Sales of our and our subsidiaries’ oil and gas properties outside the ordinary course of business are limited under the
terms of the Multidraw Term Loan Agreement. In addition, the Multidraw Term Loan Agreement prohibits us from declaring and
paying dividends on our Series B Preferred Stock.
The Multidraw Term Loan Agreement also includes customary restrictions with respect to debt, liens, dividends,
distributions and redemptions, investments, loans and advances, nature of business, international operations and foreign
45
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subsidiaries, leases, sale or discount of receivables, mergers or consolidations, sales of properties, transactions with affiliates,
negative pledge agreements, gas imbalances and swap agreements. As of the date hereof, no default or event of default exists
under the Multidraw Term Loan Agreement and we were in compliance with all covenants contained in the Multidraw Term Loan
Agreement including the Coverage Ratio.
The 2017 Notes are reflected net of $0.1 million and $3.0 million of related unamortized financing costs at December
31, 2016 and 2015, respectively. The 2021 Notes are reflected net of $0.1 million of related unamortized financing costs as of
December 31, 2016 and the Term Loans are reflected net of $2.8 million of related unamortized financing costs as of December 31,
2016.
The following table reconciles the face value of the 2017 Notes, 2021 Notes, 2021 PIK Notes and Term Loans to the
carrying value included in our Consolidated Balance Sheet as of December 31, 2016 and 2015 (in thousands):
December 31, 2016
December 31, 2015
2017
Notes
2021
Notes
2021 PIK
Notes
Term
Loans
2017
Notes
2021
Notes
2021 PIK
Notes
Term
Loans
Face Value
$
22,650 $
14,177 $ 243,468 $
10,000
$ 350,000 $
— $
— $
Unamortized Deferred
Financing Costs
Excess (shortfall)
Carrying Value
Accrued PIK Interest
(82)
(108)
—
(2,751)
(2,992)
—
—
1,159
—
(590)
5,722
—
—
—
—
—
—
—
—
—
—
Carrying Value
$
22,568 $
15,228 $ 248,600 $
7,249
$ 347,008 $
— $
— $
—
—
—
—
—
Use of Capital: Exploration and Development
Our 2017 capital budget, which includes capitalized interest and general and administrative costs, is expected to range
between $40 million and $48 million, which from the midpoint of such range, represents a 176% increase from our 2016 capital
expenditures. Because we operate the majority of our drilling activities, we expect to be able to control the timing of a substantial
portion of our capital investments. We plan to fund our capital expenditures with cash flow from operations and cash on hand.
To the extent additional capital is required, we may utilize our Multidraw Term Loan Agreement, sales of equity or debt securities,
evaluate the sale of additional assets or we may reduce our capital expenditures to manage our liquidity position.
Use of Capital: Acquisitions
We do not budget acquisitions; however, we are continuously evaluating opportunities to expand our existing asset base
or establish positions in new core areas.
We expect to finance our future acquisition activities, if consummated, through cash on hand. We may also utilize sales
of equity or debt securities, borrowings under our Multidraw Term Loan Agreement, sales of properties or assets or joint venture
arrangements with industry partners, if necessary. We cannot assure you that such additional financings will be available on
acceptable terms, if at all.
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Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2016 (in thousands):
10% senior notes due 2017 (1)
$
24,915
$
24,915
$
— $
— $
— $
— $ —
Total
2017
2018
2019
2020
2021
After
2021
10% senior secured notes due
2021 (1)
10% senior secured PIK Notes
due 2021 (1)
Multidraw Term Loan (1)
Operating leases (2)
Asset retirement obligations (3)
Other commitments (4)
20,558
1,418
1,418
1,418
1,418
14,886
392,806
21,997
26,919
27,511
13,922
3,815
36,558
12,218
1,000
1,208
4,160
2,318
1,000
470
3,535
2,475
1,000
447
1,778
2,475
27,511
10,922
445
20,840
2,475
288,868
—
434
3,751
2,475
—
—
—
811
2,494
—
Total
$
504,792
$
57,016
$
35,817
$
34,629
$
63,611
$ 310,414
$ 3,305
(1) Includes principal and estimated interest.
(2) Consists primarily of leases for office space and office equipment.
(3) Consists of estimated future obligations to abandon our oil and gas properties.
(4) Consists of a drilling rig contract and a volumetric commitment in East Texas.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
We experience market risks primarily in commodity prices. Because all of our properties are located within the United
States, we believe that our business operations are not exposed to significant market risks relating to foreign currency exchange
risk.
Our revenues are derived from the sale of our crude oil, natural gas, and natural gas liquids production. Based on projected
annual sales volumes for 2017, a 10% decline in the estimated average prices we expect to receive for our crude oil, natural gas
and natural gas liquids production would result in an approximate $8.4 million decline in our revenues for 2017.
We periodically seek to reduce our exposure to commodity price volatility by hedging a portion of our production through
commodity derivative instruments. In the settlement of a typical hedge transaction, we will have the right to receive from the
counterparties to the hedge the excess of the fixed price specified in the hedge over a floating price based on a market index,
multiplied by the quantity hedged. If the floating price exceeds the fixed price, we are required to pay the counterparties this
difference multiplied by the quantity hedged. During the year ended December 31, 2016, we received approximately $1.8 million
from the counterparties to our derivative instruments in connection with net hedge settlements.
We are required to pay the difference between the floating price and the fixed price (when the floating price exceeds the
fixed price) regardless of whether we have sufficient production to cover the quantities specified in the hedge. Significant reductions
in production at times when the floating price exceeds the fixed price could require us to make payments under the hedge agreements
even though such payments are not offset by sales of production. Hedging will also prevent us from receiving the full advantage
of increases in oil or gas prices above the fixed amount specified in the hedge.
Our Multidraw Term Loan Agreement requires that the counterparties to our hedge contracts be rated A-/A3 or higher
by S&P or Moody’s. Currently, the counterparty to our existing hedge contracts is Shell Trading Risk Management LLC.
As of December 31, 2016, we had entered into the following gas hedge contracts:
Production Period
Natural Gas:
January 2017 - December 2017
January 2017 - March 2018
April 2017 - March 2018
Instrument Type Daily Volumes Weighted Average Price
Swap
Swap
Swap
10,000 Mmbtu
10,000 Mmbtu
10,000 Mmbtu
$3.26
$3.01
$3.40
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During March 2017, we entered into the following additional hedge contract accounted for as a cash flow hedge:
Production Period
Natural Gas:
Instrument Type Daily Volumes Weighted Average Price
October 2017 - March 2018
Swap
10,000 Mmbtu
$3.22
After executing the above transactions, the Company has approximately 11.0 Bcf of gas volumes, at an average price of
$3.21 per Mcf hedged for 2017 and approximately 2.7 Bcf of gas volumes, at an average price of $3.21 per Mcf hedged for 2018.
Item 8.
Financial Statements and Supplementary Data
Information concerning this Item begins on page F-1.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company’s management, including its Chief Executive Officer
and Chief Financial Officer, carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures
pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded the following:
i.
that the Company’s disclosure controls and procedures are designed to ensure (a) that information required to be
disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules and forms, and (b) that such
information is accumulated and communicated to the Company’s management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure; and
ii.
that the Company’s disclosure controls and procedures are effective.
Notwithstanding the foregoing, there can be no assurance that the Company’s disclosure controls and procedures will
detect or uncover all failures of persons within the Company and its consolidated subsidiaries to disclose material information
otherwise required to be set forth in the Company’s periodic reports. There are inherent limitations to the effectiveness of any
system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the
controls and procedures.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the quarter ended
December 31, 2016 that have materially affected, or that are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, and for
performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2016. Internal control
over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our
system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have
a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management performed an assessment of the effectiveness of our internal control over financial reporting as of
December 31, 2016 based upon criteria in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework). Based on our assessment, management believes that our internal
control over financial reporting was effective as of December 31, 2016 based on these criteria.
Ernst & Young LLP, our independent registered public accounting firm, has issued their report on the effectiveness of
the Company's internal control over financial reporting as of December 31, 2016.
March 9, 2017
/s/ Charles T. Goodson
Charles T. Goodson
Chairman and
Chief Executive Officer
/s/ J. Bond Clement
J. Bond Clement
Executive Vice President-
Chief Financial Officer
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
PetroQuest Energy, Inc.
We have audited PetroQuest Energy, Inc.’s internal control over financial reporting as of December 31, 2016, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework) (the COSO criteria). PetroQuest Energy, Inc.’s management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, PetroQuest Energy, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2016, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the accompanying consolidated balance sheets of PetroQuest Energy, Inc. as of December 31, 2016 and 2015, and the
related consolidated statements of operations, comprehensive income (loss), cash flows, and stockholders’ equity for each of the
three years in the period ended December 31, 2016 and our report dated March 9, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New Orleans, Louisiana
March 9, 2017
Item 9B.
Other Information
NONE
Items 10, 11, 12, 13, & 14.
PART III
Pursuant to General Instruction G of Form 10-K, the information concerning Item 10. Directors, Executive Officers and
Corporate Governance, Item 11. Executive Compensation, Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters, Item 13. Certain Relationships and Related Transactions, and Director
Independence and Item 14. Principal Accounting Fees and Services, is incorporated by reference to the information set forth in
the definitive Proxy Statement of PetroQuest Energy, Inc. relating to the Annual Meeting of Stockholders to be held May 16, 2017,
to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 with the Securities and Exchange Commission.
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Item 15.
Exhibits, Financial Statement Schedules
(a) 1. FINANCIAL STATEMENTS
PART IV
The following financial statements of the Company and the Report of the Company’s Independent Registered Public
Accounting Firm thereon are included on pages F-1 through F-27 of this Form 10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations for the three years ended December 31, 2016
Consolidated Statements of Comprehensive Income (Loss) for the three years ended December 31, 2016
Consolidated Statements of Cash Flows for the three years ended December 31, 2016
Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2016
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted because the required information is inapplicable or the information is presented in the Financial
Statements or the notes thereto.
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3.
EXHIBITS:
** 2.1
** 2.2
** 2.3
** 2.4
** 2.5
**#2.6
**#2.7
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
4.1
Plan and Agreement of Merger by and among Optima Petroleum Corporation, Optima Energy
(U.S.) Corporation, its wholly-owned subsidiary, and Goodson Exploration Company, NAB
Financial L.L.C., Dexco Energy, Inc., American Explorer, L.L.C. (incorporated herein by reference
to Appendix G of the Proxy Statement on Schedule 14A filed July 22, 1998).
Purchase and Sale Agreement dated as of June 19, 2013, between PetroQuest Energy, L.L.C. and
Hall-Houston Exploration II, L.P. (incorporated herein by reference to Exhibit 2.1 to Form 8-K
filed on June 20, 2013).
Purchase and Sale Agreement dated as of June 19, 2013, between PetroQuest Energy, L.L.C. and
Hall-Houston Exploration III, L.P. (incorporated herein by reference to Exhibit 2.2 to Form 8-K
filed on June 20, 2013).
Purchase and Sale Agreement dated as of June 19, 2013, between PetroQuest Energy, L.L.C. and
Hall-Houston Exploration IV, L.P. (incorporated herein by reference to Exhibit 2.3 to Form 8-K
filed on June 20, 2013).
Purchase and Sale Agreement dated as of June 19, 2013, between PetroQuest Energy, L.L.C. and
GOM-H Exploration, LLC (incorporated herein by reference to Exhibit 2.4 to Form 8-K filed on
June 20, 2013).
Purchase and Sale Agreement dated as of June 4, 2015, by and between PetroQuest Energy, L.L.C.
and WSGP Gas Producing, LLC (incorporated herein by reference to Exhibit 2.1 to Form 10-Q
filed on August 5, 2015).
Purchase and Sale Agreement dated as of April 20, 2016, by and between PetroQuest Energy,
L.L.C. and GR Woodford Properties, LLC (incorporated herein by reference to Exhibit 2.1 to Form
10-Q filed on August 3, 2016).
Certificate of Incorporation of PetroQuest Energy, Inc. (incorporated herein by reference to Exhibit
4.1 to Form 8-K filed September 16, 1998).
Certificate of Domestication of Optima Petroleum Corporation (incorporated herein by reference to
Exhibit 4.4 to Form 8-K filed September 16, 1998).
Certificate of Designations, Preferences, Limitations and Relative Rights of The Series a Junior
Participating Preferred Stock of PetroQuest Energy, Inc. (incorporated herein by reference to
Exhibit A of the Rights Agreement attached as Exhibit 1 to Form 8-A filed November 9, 2001).
Certificate of Designations establishing the 6.875% Series B Cumulative Convertible Perpetual
Preferred Stock, dated September 24, 2007 (incorporated herein by reference to Exhibit 3.1 to Form
8-K filed on September 24, 2007).
Certificate of Amendment to Certificate of Incorporation dated May 14, 2008 (incorporated herein
by reference to Exhibit 3.1 to Form 8-K filed June 23, 2009).
Certificate of Amendment to Certificate of Incorporation dated May 18, 2016 (incorporated herein
by reference to Exhibit 3.1 to Form 8-K filed on May 20, 2016).
Certificate of Amendment to Certificate of Incorporation dated May 18, 2016 (incorporated herein
by reference to Exhibit 3.2 to From 8-K filed on May 20, 2016).
Bylaws of PetroQuest Energy, Inc., as amended of February 19, 2016 (incorporated herein by
reference to Exhibit 3.1 to Form 8-K filed February 22, 2016).
Indenture, dated August 19, 2010, between PetroQuest Energy, Inc. and The Bank of New York
Mellon Trust Company, N.A. (incorporated herein by reference to Exhibit 4.2 to Form 8-K filed on
August 19, 2010).
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4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
†10.1
†10.2
First Supplemental Indenture, dated August 19, 2010, among PetroQuest Energy, Inc., the
Subsidiary Guarantors identified therein, and The Bank of New York Mellon Trust Company, N.A.
(incorporated herein by reference to Exhibit 4.3 to Form 8-K filed on August 19, 2010).
Second Supplemental Indenture, dated July 3, 2013, among PetroQuest Energy, Inc., the Subsidiary
Guarantors identified therein, and The Bank of New York Mellon Trust Company, N.A.
(incorporated herein by reference to Exhibit 4.2 to Form 8-K filed on July 3, 2013).
Third Supplemental Indenture, dated October 23, 2013, among PetroQuest Energy, Inc., the
Subsidiary Guarantors identified therein, and The Bank of New York Mellon Trust Company, N.A.
(incorporated herein by reference to Exhibit 4.7 to Form 10-K filed on March 6, 2015)
Fourth Supplemental Indenture, dated February 1, 2015, among PetroQuest Energy, Inc., the
Subsidiary Guarantors identified therein, and U.S. Bank National Association, as successor trustee
to The Bank of New York Mellon Trust Company, N.A. (incorporated herein by reference to
Exhibit 4.1 to Form 8-K filed on February 3, 2016).
Registration Rights Agreement, dated February 17, 2016, among PetroQuest Energy, Inc., the
Subsidiary Guarantors identified therein, and Seaport Global Securities LLC, as representative of
the several investors named therein (incorporated herein by reference to Exhibit 4.2 to Form 8-K
filed on February 18, 2016).
Indenture, dated February 17, 2016, between PetroQuest Energy, Inc., the Subsidiary Guarantors
identified therein, and Wilmington Trust, National Association (incorporated herein by reference to
Exhibit 4.1 to Form 8-K filed on February 18, 2016).
First Supplemental Indenture, dated as of September 13, 2016, among PetroQuest Energy, Inc., the
Subsidiary Guarantors identified therein, and Wilmington Trust, National Association (incorporated
herein by reference to Exhibit 4.1 to Form 8-K filed on September 14, 2016).
Registration Rights Agreement, dated July 3, 2013, among PetroQuest Energy, Inc., the Subsidiary
Guarantors identified therein, and J.P. Morgan Securities LLC, as representative of the several
initial purchasers named therein (incorporated herein by reference to Exhibit 4.3 to Form 8-K filed
on July 3, 2013).
Waiver of Registration Rights, dated as of September 13, 2016, among PetroQuest Energy, Inc., the
Subsidiary Guarantors and Seaport Global Securities LLC (incorporated herein by reference to
Exhibit 4.2 to Form 8-K filed on September 14, 2016).
Indenture, dated September 27, 2016, among PetroQuest Energy, Inc., the Subsidiary Guarantors
identified therein, and Wilmington Trust, National Association (incorporated herein by reference to
Exhibit 4.1 to Form 8-K filed on September 27, 2016).
Registration Rights Agreement, dated September 27, 2016, among PetroQuest Energy, Inc., the
Subsidiary Guarantors identified therein, Jefferies LLC and Seaport Global Securities LLC
(incorporated herein by reference to Exhibit 4.2 to Form 8-K filed on September 27, 2016).
PetroQuest Energy, Inc. 1998 Incentive Plan, as amended and restated effective May 14, 2008 (the
“Incentive Plan”) (incorporated herein by reference to Appendix A of the Proxy Statement on
Schedule 14A filed April 9, 2008).
Form of Incentive Stock Option Agreement for executive officers (including Charles T. Goodson,
Arthur M. Mixon, III, J. Bond Clement and Edward E. Abels, Jr.) under the PetroQuest Energy, Inc.
1998 Incentive Plan (incorporated herein by reference to Exhibit 10.2 to Form 10-K filed February
27, 2009).
†10.3
Form of Nonstatutory Stock Option Agreement under the PetroQuest Energy, Inc. 1998 Incentive
Plan (incorporated herein by reference to Exhibit 10.3 to Form 10-K filed February 27, 2009).
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†10.4
†10.5
†10.6
†10.7
†10.8
†10.9
†10.10
†10.11
†10.12
†10.13
†10.14
†10.15
10.16
†10.17
†10.18
Form of Restricted Stock Agreement for executive officers (including Charles T. Goodson, Arthur
M. Mixon, III, J. Bond Clement and Edward E. Abels, Jr.) under the PetroQuest Energy, Inc. 1998
Incentive Plan (incorporated herein by reference to Exhibit 10.4 to Form 10-K filed February 27,
2009).
PetroQuest Energy, Inc. Annual Incentive Plan (incorporated herein by reference to Exhibit 10.1 to
Form 8-K filed on May 13, 2010).
PetroQuest Energy, Inc. Annual Incentive Plan, as amended and restated (incorporated herein by
reference to Exhibit 10.1 to Form 8-K filed on June 8, 2010).
PetroQuest Energy, Inc. 2012 Employee Stock Purchase Plan (incorporated herein by reference to
Appendix A to Schedule 14A filed March 28, 2012).
PetroQuest Energy, Inc. Long-Term Cash Incentive Plan (incorporated herein by reference to
Exhibit 10.1 to Form 8-K filed November 15, 2012).
PetroQuest Energy, Inc. 2013 Incentive Plan (incorporated herein by reference to Appendix A to the
Company’s Definitive Proxy Statement on Schedule 14A filed on April 9, 2013).
Form of Award Notice of Restricted Stock Units - Employees (including Charles T. Goodson,
Arthur M. Mixon, III, J. Bond Clement and Edward E. Abels, Jr.) under the PetroQuest Energy, Inc.
Long-Term Cash Incentive Plan (incorporated herein by reference to Exhibit 10.2 to Form 8-K filed
November 15, 2012).
Form of Award Notice of Restricted Stock Units - Outside Director/Consultant under the
PetroQuest Energy, Inc. Long-Term Cash Incentive Plan (incorporated herein by reference to
Exhibit 10.3 to Form 8-K filed November 15, 2012).
Form of Restricted Stock Agreement - Executive Officers (including Charles T. Goodson, Arthur
M. Mixon, III, J. Bond Clement and Edward E. Abels, Jr.) under the PetroQuest Energy, Inc. 1998
Incentive Plan (incorporated herein by reference to Exhibit 10.4 to Form 8-K filed November 15,
2012).
Form of Restricted Stock Units Agreement - Employees (including Charles T. Goodson, Arthur M.
Mixon, III, J. Bond Clement and Edward E. Abels, Jr.) under the PetroQuest Energy, Inc. 2013
Incentive Plan (incorporated herein by reference to Exhibit 10.1 to Form 8-K filed November 19,
2014).
Form of Award Notice of Phantom Stock Units - Employees (including Charles T. Goodson, Arthur
M. Mixon, III, J. Bond Clement and Edward E. Abels, Jr.) under the PetroQuest Energy, Inc. Long-
Term Cash Incentive Plan (incorporated herein by reference to Exhibit 10.2 to Form 8-K filed
November 19, 2014).
Form of Performance Unit Notice and Award- Employees (including Charles T. Goodson, Arthur
M. Mixon, III, J. Bond Clement and Edward E. Abels, Jr.) under the PetroQuest Energy, Inc. Long-
Term Cash Incentive Plan (incorporated herein by reference to Exhibit 10.1 to Form 8-K filed
November 21, 2014).
Multidraw Term Loan Agreement, dated as of October 17, 2016, among PetroQuest Energy, Inc.,
PetroQuest Energy, L.L.C., Franklin Custodian Funds - Franklin Income Fund, and Wells Fargo
Bank, National Association, as administrative agent (incorporated herein by reference to Exhibit
10.1 to Form 8-K filed on October 17, 2016).
Amended Executive Employment Agreement dated effective as of December 31, 2008, between
Charles T. Goodson and PetroQuest Energy, Inc. (incorporated herein by reference to Exhibit 10.1
to Form 8-K filed January 6, 2009).
Amended Executive Employment Agreement dated effective as of December 31, 2008, between
Arthur M. Mixon, III and PetroQuest Energy, Inc. (incorporated herein by reference to Exhibit 10.3
to Form 8-K filed January 6, 2009).
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†10.19
†10.20
†10.21
†10.22
†10.23
†10.24
10.25
10.26
Amended Executive Employment Agreement dated effective as of December 31, 2008, between J.
Bond Clement and PetroQuest Energy, Inc. (incorporated herein by reference to Exhibit 10.20 to
Form 10-K filed February 27, 2009).
Executive Employment Agreement dated February 1, 2014 between PetroQuest Energy, Inc. and
Edward E. Abels, Jr. (incorporated herein by reference to Exhibit 10.1 to Form 8-K filed February
5, 2014).
Form of Amended Termination Agreement between the Company and each of its executive officers,
including Charles T. Goodson, Arthur M. Mixon, III, and J. Bond Clement (incorporated herein by
reference to Exhibit 10.6 to Form 8-K filed January 6, 2009).
Termination Agreement dated February 1, 2014 between PetroQuest Energy, Inc. and Edward E.
Abels, Jr. (incorporated herein by reference to Exhibit 10.2 to Form 8-K filed February 5, 2014).
Form of Indemnification Agreement between PetroQuest Energy, Inc. and each of its directors and
executive officers, including Charles T. Goodson, Arthur M. Mixon, III, , J. Bond Clement, Edward
E. Abels, Jr., William W. Rucks, IV, E. Wayne Nordberg, J. Gerard Jolly, W.J. Gordon, III and
Charles F. Mitchell, II (incorporated herein by reference to Exhibit 10.21 to Form 10-K filed March
13, 2002).
Form of Surrender and Cancellation Agreement for Directors and Executive Officers (incorporated
herein by reference to Exhibit 10.1 to Form 8-K filed on September 16, 2010).
Collateral Trust Agreement, dated February 17, 2016, among PetroQuest Energy, Inc., the
guarantors from time to time party thereto, Wilmington Trust, National Association, as Trustee, the
other Parity Lien Debt Representatives from time to time party thereto and Wilmington Trust,
National Association, as Collateral Trustee (incorporated herein by reference to Exhibit 10.1 to
Form 8-K filed on February 18, 2016).
Intercreditor Agreement, dated February 17, 2016, by and between JPMorgan Chase Bank, N.A., as
Priority Lien Agent, and Wilmington Trust, National Association, as Second Lien Collateral Trustee
(incorporated herein by reference to Exhibit 10.2 to Form 8-K filed on February 18, 2016).
+10.27
PetroQuest Energy, Inc. 2016 Long Term Incentive Plan (incorporated herein by reference to
Appendix A to the Company's Definitive Proxy Statement on Schedule 14A filed on April 7, 2016).
14.1
Code of Business Conduct and Ethics (incorporated herein by reference to Exhibit 14.1 to Form 10-
K filed March 8, 2006).
*21.1
Subsidiaries of the Company.
*23.1
Consent of Independent Registered Public Accounting Firm.
*23.2
Consent of Ryder Scott Company, L.P.
*31.1
*31.2
*32.1
*32.2
Certification of Chief Executive Officer pursuant to Rule 13-a-14(a) / Rule 15d-14(a), promulgated
under the Securities Exchange Act of 1934, as amended.
Certification of Chief Financial Officer pursuant to Rule 13-a-14(a) / Rule 15d-14(a), promulgated
under the Securities Exchange Act of 1934, as amended.
Certification pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, of Chief Executive Officer.
Certification pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, of Chief Financial Officer.
*99.1
Reserve report letter as of December 31, 2016, as prepared by Ryder Scott Company, L.P.
55
Table of Contents
101.INS
XBRL Instance Document.
101.SCH
XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
XBRL Taxonomy Definitions Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
*
**
†
#
Filed herewith.
The registrant agrees to furnish supplementally a copy of any omitted schedule to the Agreements to the SEC upon
request.
Management contract or compensatory plan or arrangement
Confidential treatment has been granted for portions of this exhibit. Omissions are designated with brackets containing
asterisks. As part of our confidential treatment request, a complete version of this exhibit was filed separately with the
SEC.
(b) Exhibits. See Item 15 (a) (3) above.
(c) Financial Statement Schedules. None
Item 16.
10K-Summary
NONE
56
Table of Contents
GLOSSARY OF CERTAIN OIL AND NATURAL GAS TERMS
The following is a description of the meanings of some of the oil and natural gas used in this Form 10-K.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, of crude oil or other liquid hydrocarbons.
Bcf. Billion cubic feet of natural gas.
Bcfe. Billion cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate
or natural gas liquids.
Block. A block depicted on the Outer Continental Shelf Leasing and Official Protraction Diagrams issued by the U.S.
Minerals Management Service or a similar depiction on official protraction or similar diagrams issued by a state bordering on the
Gulf of Mexico.
Btu or British Thermal Unit. The quantity of heat required to raise the temperature of one pound of water by one degree
Fahrenheit.
Completion. The installation of permanent equipment for the production of natural gas or oil, or in the case of a dry hole,
the reporting of abandonment to the appropriate agency.
Condensate. A mixture of hydrocarbons that exists in the gaseous phase at original reservoir temperature and pressure,
but that, when produced, is in the liquid phase at surface pressure and temperature.
Deterministic estimate. The method of estimating reserves or resources is called deterministic when a single value for
each parameter (from the geoscience, engineering, or economic data) in the reserves calculation is used in the reserves estimation
procedure.
Developed acreage. The number of acres that are allocated or assignable to productive wells or wells capable of production.
Development well. A well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon
known to be productive.
Dry hole. A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the
sale of such production exceed production expenses and taxes.
Exploratory well. A well drilled to find a new field or to find a new reservoir in a field previously found to be productive
of oil or gas in another reservoir. Generally, an exploratory well is any well that is not a development well, an extension well, a
service well, or a stratigraphic test well as those items are defined in this section.
Extension well. A well drilled to extend the limits of a known reservoir.
Farm-in or farm-out. An agreement under which the owner of a working interest in a natural gas and oil lease assigns
the working interest or a portion of the working interest to another party who desires to drill on the leased acreage. Generally, the
assignee is required to drill one or more wells in order to earn its interest in the acreage. The assignor usually retains a royalty or
reversionary interest in the lease. The interest received by an assignee is a "farm-in" while the interest transferred by the assignor
is a "farm-out."
Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual
geological structural feature and/or stratigraphic condition.
Gross acres or gross wells. The total acres or wells, as the case may be, in which a working interest is owned.
Lead. A specific geographic area which, based on supporting geological, geophysical or other data, is deemed to have
potential for the discovery of commercial hydrocarbons.
MBbls. Thousand barrels of crude oil or other liquid hydrocarbons.
Mcf. Thousand cubic feet of natural gas.
Mcfe. Thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil,
condensate or natural gas liquids.
MMBls. Million barrels of crude oil or other liquid hydrocarbons.
MMBtu. Million British Thermal Units.
57
Table of Contents
MMcf. Million cubic feet of natural gas.
MMcfe. Million cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil,
condensate or natural gas liquids.
Ngl. Natural gas liquid.
Net acres or net wells. The sum of the fractional working interest owned in gross acres or wells, as the case may be.
Possible reserves. Those additional reserves that are less certain to be recovered than probable reserves.
Probabilistic estimate. The method of estimation of reserves or resources is called probabilistic when the full range of
values that could reasonably occur for each unknown parameter (from the geoscience and engineering data) is used to generate a
full range of possible outcomes and their associated probabilities of occurrence.
Probable reserves. Those additional reserves that are less certain to be recovered than proved reserves but which, together
with proved reserves, are as likely as not to be recovered.
Productive well. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds
from the sale of such production exceed production expenses and taxes.
Prospect. A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary
economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of commercial
hydrocarbons.
Proved area. The part of a property to which proved reserves have been specifically attributed.
Proved oil and gas reserves. Those quantities of oil and gas, which, by analysis of geoscience and engineering data, can
be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and
under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing
the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or
probabilistic methods are used for the estimation.
Proved properties. Properties with proved reserves.
Reasonable certainty. If deterministic methods are used, reasonable certainty means a high degree of confidence that the
quantities will be recovered. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually
recovered will equal or exceed the estimate. A high degree of confidence exists if the quantity is much more likely to be achieved
than not, and, as changes due to increased availability of geoscience (geological, geophysical, and geochemical), engineering, and
economic data are made to estimated ultimate recovery (EUR) with time, reasonably certain EUR is much more likely to increase
or remain constant than to decrease.
Reliable technology. A grouping of one or more technologies (including computational methods) that has been field tested
and has been demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated
or in an analogous formation.
Reserves. Estimated remaining quantities of oil and gas and related substances anticipated to be economically producible,
as of a given date, by application of development projects to known accumulations.
Reservoir. A porous and permeable underground formation containing a natural accumulation of producible oil and/or
gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.
Resources. Quantities of oil and gas estimated to exist in naturally occurring accumulations. A portion of the resources
may be estimated to be recoverable, and another portion may be considered to be unrecoverable. Resources include both discovered
and undiscovered accumulations.
Service well. A well drilled or completed for the purpose of supporting production in an existing field. Specific purposes
of service wells include gas injection, water injection, steam injection, air injection, salt-water disposal, water supply for injection,
observation, or injection for in-situ combustion.
Stratigraphic test well. A drilling effort, geologically directed, to obtain information pertaining to a specific geologic
condition. Such wells customarily are drilled without the intent of being completed for hydrocarbon production.
58
Table of Contents
Undeveloped oil and gas reserves. Undeveloped oil and gas reserves are reserves of any category that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for
recompletion.
Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the
production of commercial quantities of natural gas and oil regardless of whether such acreage contains proved reserves.
Unproved properties. Properties with no proved reserves
Working interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities
on the property and receive a share of production.
59
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 9, 2017.
SIGNATURES
PETROQUEST ENERGY, INC.
By:
/s/ Charles T. Goodson
CHARLES T. GOODSON
Chairman of the Board, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated on March 9, 2017.
By:
By:
By:
By:
By:
By:
By:
/s/ Charles T. Goodson
CHARLES T. GOODSON
Chairman of the Board, President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ J. Bond Clement
J. BOND CLEMENT
Executive Vice President, Chief Financial Officer, Treasurer
(Principal Financial and Accounting Officer)
/s/ W.J. Gordon, III
W.J. GORDON, III
/s/ J. Gerard Jolly
J. GERARD JOLLY
Director
Director
/s/ Charles F. Mitchell, II, M.D. Director
CHARLES F. MITCHELL, II,
M.D.
/s/ E. Wayne Nordberg
E. WAYNE NORDBERG
Director
/s/ William W. Rucks, IV
WILLIAM W. RUCKS, IV
Director
60
Table of Contents
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets of PetroQuest Energy, Inc. as of December
31, 2016 and 2015
Consolidated Statements of Operations of PetroQuest Energy, Inc. for the
three years ended December 31, 2016
Consolidated Statements of Comprehensive Income (Loss) of PetroQuest
Energy, Inc. for the three years ended December 31, 2016
Consolidated Statements of Cash Flows of PetroQuest Energy, Inc. for the
three years ended December 31, 2016
Consolidated Statements of Stockholders’ Equity of PetroQuest Energy,
Inc. for the three years ended December 31, 2016
Notes to Consolidated Financial Statements
F-1
F-2
F-3
F-4
F-5
F-6
F-7
61
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
PetroQuest Energy, Inc.
We have audited the accompanying consolidated balance sheets of PetroQuest Energy, Inc. as of December 31, 2016 and 2015,
and the related consolidated statements of operations, comprehensive income (loss), cash flows and stockholders’ equity for each
of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of PetroQuest Energy, Inc. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
PetroQuest Energy, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) and our report dated March 9, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New Orleans, Louisiana
March 9, 2017
F-1
PETROQUEST ENERGY, INC.
Consolidated Balance Sheets
(Amounts in Thousands)
ASSETS
Table of Contents
Current assets:
Cash and cash equivalents
Revenue receivable
Joint interest billing receivable
Derivative asset
Other current assets
Total current assets
Property and equipment:
Oil and gas properties:
Oil and gas properties, full cost method
Unevaluated oil and gas properties
Accumulated depreciation, depletion and amortization
Oil and gas properties, net
Other property and equipment
Accumulated depreciation of other property and equipment
Total property and equipment
Other assets, net of accumulated amortization of $4,385 and $3,842, respectively
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable to vendors
Advances from co-owners
Oil and gas revenue payable
Accrued interest and preferred stock dividend
Asset retirement obligation
Derivative liability
10% Senior Unsecured Notes due 2017
Other accrued liabilities
Total current liabilities
Multi-draw Term Loan
10% Senior Unsecured Notes due 2017
10% Senior Secured Notes due 2021
10% Senior Secured PIK Notes due 2021
Asset retirement obligation
Other long-term liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.001 par value; authorized 5,000 shares; issued and outstanding 1,495
shares
Common stock, $.001 par value; authorized 150,000 shares; issued and outstanding 21,197
and 16,410 shares, respectively
Paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying Notes to Consolidated Financial Statements.
F-2
December 31,
2016
December 31,
2015
$
$
$
$
$
$
28,312
10,294
7,632
—
2,353
48,591
1,323,333
9,015
(1,243,286)
89,062
10,951
(10,109)
89,904
6,365
144,860
25,265
2,330
22,146
2,047
4,160
3,947
22,568
3,938
86,401
7,249
—
15,228
248,600
32,450
6,027
148,013
6,476
49,374
1,508
3,874
209,245
1,310,891
12,516
(1,157,455)
165,952
11,229
(8,737)
168,444
1,630
379,319
97,999
16,118
18,911
12,795
6,015
—
—
6,946
158,784
—
347,008
—
—
36,541
53
1
1
21
304,341
(4,750)
(550,708)
(251,095)
144,860
$
16
290,432
947
(454,463)
(163,067)
379,319
$
Table of Contents
PETROQUEST ENERGY, INC.
Consolidated Statements of Operations
(Amounts in Thousands, Except Per Share Data)
Revenues:
Oil and gas sales
Expenses:
Lease operating expenses
Production taxes
Depreciation, depletion and amortization
Ceiling test write-down
General and administrative
Accretion of asset retirement obligation
Interest expense
Other income (expense):
Gain on sale of assets
Other income (expense)
Income (loss) from operations
Income tax expense (benefit)
Net income (loss)
Preferred stock dividend
Net income (loss) available to common stockholders
Earnings (loss) per common share:
Basic
Net income (loss) per share
Diluted
Net income (loss) per share
Weighted average number of common shares:
Basic
Diluted
Year Ended
December 31,
2016
2015
2014
$
66,667
$
115,969
$
225,021
28,508
354
28,720
40,304
26,040
2,515
30,019
156,460
—
(560)
(560)
(90,353)
543
(90,896)
5,349
40,130
2,470
63,497
266,562
20,777
3,259
33,766
430,461
21,937
391
22,328
(292,164)
2,626
(294,790)
5,139
$
(96,245) $ (299,929) $
48,597
5,927
87,818
—
22,870
2,958
29,281
197,451
—
679
679
28,249
(2,941)
31,190
5,139
26,051
$
$
(5.24) $
(18.45) $
1.57
(5.24) $
(18.45) $
1.57
18,354
18,354
16,256
16,256
16,051
16,056
See accompanying Notes to Consolidated Financial Statements.
F-3
Table of Contents
PETROQUEST ENERGY, INC.
Consolidated Statements of Comprehensive Income (Loss)
(Amounts in Thousands)
Net income (loss)
Change in fair value of derivatives, net of income tax (expense)
benefit of $561, $2,650 and ($3,211) respectively
Comprehensive income (loss)
Year Ended
December 31,
2016
(90,896) $ (294,790) $
2015
2014
31,190
(5,697)
(96,593) $ (299,263) $
(4,473)
6,516
37,706
$
$
See accompanying Notes to Consolidated Financial Statements.
F-4
Table of Contents
PETROQUEST ENERGY, INC.
Consolidated Statements of Cash Flows
(Amounts in Thousands)
Cash flows provided by (used in) operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Deferred tax expense (benefit)
Depreciation, depletion and amortization
Ceiling test writedown
Accretion of asset retirement obligation
Share based compensation expense
Gain on sale of assets
Amortization costs and other
Non-cash PIK interest
Payments to settle asset retirement obligations
Costs incurred to issue 2021 Notes and 2021 PIK Notes
Changes in working capital accounts:
Revenue receivable
Joint interest billing receivable
Accounts payable and accrued liabilities
Advances from co-owners
Other
Net cash provided by (used in) operating activities
Cash flows provided by (used in) investing activities:
Investment in oil and gas properties
Investment in other property and equipment
Sale of oil and gas properties
Net cash provided by (used in) investing activities
Cash flows used in financing activities:
Net payments for share based compensation
Deferred financing costs
Payment of preferred stock dividend
Proceeds from borrowings
Repayment of borrowings
Redemption of 2017 Notes
Costs incurred to issue 2021 Notes and 2021 PIK Notes
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest
Income taxes
Year Ended
December 31,
2016
2015
2014
$ (90,896) $ (294,790) $
31,190
543
28,720
40,304
2,515
1,444
—
2,106
5,722
(3,169)
10,139
(3,818)
41,400
(72,760)
(13,788)
(5,060)
(56,598)
(30,366)
(24)
25,482
(4,908)
2,626
63,497
266,562
3,259
4,617
(21,937)
2,259
—
(2,776)
—
10,009
223
(9,400)
3,299
2,657
30,105
(90,218)
(454)
271,769
181,097
11
(3,156)
(1,285)
10,000
—
(53,626)
(10,139)
(58,195)
(119,701)
148,013
28,312
(199)
(1,094)
(5,139)
70,000
(145,000)
—
—
(81,432)
129,770
18,243
$ 148,013
$
(2,941)
87,818
—
2,958
5,248
—
2,188
—
(3,623)
—
10,083
(20,276)
50,243
11,850
3,470
178,208
(174,633)
(926)
11,908
(163,651)
(75)
(253)
(5,139)
17,500
(17,500)
—
—
(5,467)
9,090
9,153
18,243
33,206
$
(18) $
36,217
$
— $
37,174
270
$
$
$
See accompanying Notes to Consolidated Financial Statements.
F-5
Table of Contents
PetroQuest Energy Inc.
Consolidated Statements of Stockholders’ Equity
(Amounts in Thousands)
Common
Stock
Preferred
Stock
Paid-In
Capital
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
$ 280,759
$
(1,096) $ (180,585) $
99,095
1,032
(1,309)
5,248
276
—
—
—
—
—
—
—
6,516
—
—
$ 286,006
$
5,420
December 31, 2013
Options exercised
Retirement of shares upon vesting of
restricted stock
Share-based compensation expense
Issuance of shares under employee
stock purchase plan
Derivative fair value adjustment, net
of tax
Preferred stock dividend
Net income
December 31, 2014
Options exercised
Retirement of shares upon vesting of
restricted stock
Share-based compensation expense
Issuance of shares under employee
stock purchase plan
Derivative fair value adjustment, net
of tax
Preferred stock dividend
Net loss
December 31, 2015
Issuance of shares in debt exchange
Retirement of shares upon vesting of
restricted stock
Share-based compensation expense
Issuance of shares under employee
stock purchase plan
Derivative fair value adjustment, net
of tax
Preferred stock dividend
Net loss
December 31, 2016
$
$
$
$
16
—
—
—
—
—
—
—
16
—
—
—
—
—
—
—
16
5
—
—
—
—
—
—
21
$
$
$
$
1
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
1
61
(451)
4,617
199
—
—
—
$ 290,432
$
12,520
(200)
1,444
145
—
—
—
$ 304,341
$
—
—
—
—
—
(5,139)
31,190
$ (154,534) $
—
—
—
—
1,032
(1,309)
5,248
276
6,516
(5,139)
31,190
136,909
61
(451)
4,617
199
—
(5,139)
(294,790)
(4,473)
(5,139)
(294,790)
$ (454,463) $ (163,067)
12,525
—
—
—
—
(200)
1,444
145
—
—
—
—
(4,473)
—
—
947
—
—
—
—
(5,697)
—
(5,697)
—
(5,349)
(5,349)
(90,896)
(90,896)
(4,750) $ (550,708) $ (251,095)
—
See accompanying Notes to Consolidated Financial Statements.
F-6
Table of Contents
PETROQUEST ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Organization and Summary of Significant Accounting Policies
PetroQuest Energy, Inc. (a Delaware Corporation) (“PetroQuest”) is an independent oil and gas company headquartered
in Lafayette, Louisiana with an exploration office in The Woodlands, Texas. It is engaged in the exploration, development,
acquisition and operation of oil and gas properties in Texas and the Gulf Coast Basin.
Principles of Consolidation
The consolidated financial statements include the accounts of PetroQuest and its subsidiaries, PetroQuest Energy, L.L.C.,
PetroQuest Oil & Gas, L.L.C, Pittrans, Inc. and TDC Energy LLC (collectively, the "Company"). All intercompany accounts and
transactions have been eliminated. Certain prior period amounts have been reclassified to conform to current year presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Estimates of proved oil and gas reserves and future net cash
flows from estimated proved reserves are based on geological and engineering data and depend upon a number of variable factors
and assumptions. Changes in estimated proved oil and gas reserves used in the calculation of depreciation, depletion and
amortization of oil and gas properties or the present value of the estimated future net cash flows from estimated proved reserves
used in the ceiling test could have a material impact on future results of operations.
Oil and Gas Properties
The Company utilizes the full cost method of accounting, which involves capitalizing all acquisition, exploration and
development costs incurred for the purpose of finding oil and gas reserves including the costs of drilling and equipping productive
wells, dry hole costs, lease acquisition costs and delay rentals. The Company also capitalizes the portion of general and
administrative costs that can be directly identified with acquisition, exploration or development of oil and gas properties.
Unevaluated property costs are transferred to evaluated property costs at such time as wells are completed on the properties, the
properties are sold, or management determines these costs to have been impaired. Interest is capitalized on unevaluated property
costs. Transactions involving sales of reserves in place are recorded as adjustments to accumulated depreciation, depletion and
amortization with no gain or loss recognized, unless such adjustments would cause a significant alteration in the relationship
between capitalized costs and proved reserves.
Depreciation, depletion and amortization of oil and gas properties is computed using the unit-of-production method based
on estimated proved reserves. All costs associated with evaluated oil and gas properties, including an estimate of future development
costs associated therewith, are included in the depreciable base. The costs of investments in unevaluated properties are excluded
from this calculation until the related properties are evaluated, proved reserves are established or the properties are determined to
be impaired. Proved oil and gas reserves are estimated annually by independent petroleum engineers.
The capitalized costs of proved oil and gas properties cannot exceed the present value of the estimated net future cash
flows from proved reserves based on historical twelve-month, first day of the month, average oil, gas and natural gas liquid prices,
including the effect of hedges in place (the full cost ceiling). If the capitalized costs of proved oil and gas properties exceed the
full cost ceiling, the Company is required to write-down the value of its oil and gas properties to the full cost ceiling amount. The
Company follows the provisions of Staff Accounting Bulletin (“SAB”) No. 106, regarding the application of Accounting Standards
Codification ("ASC") Topic 410-20 by companies following the full cost accounting method. SAB No. 106 indicates that estimated
future dismantlement and abandonment costs that are recorded on the balance sheet are to be included in the costs subject to the
full cost ceiling limitation. The estimated future cash outflows associated with settling the recorded asset retirement obligations
are excluded from the computation of the present value of estimated future net revenues used in applying the ceiling test.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a stated maturity of three months or less to be cash and cash
equivalents. The majority of the Company’s cash and cash equivalents are in overnight securities made through its commercial
bank accounts, which result in available funds the next business day.
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Accounts Receivable
In its capacity as operator, the Company incurs drilling and operating costs that are billed to its partners based on their
respective working interests.
Other Property and Equipment
The costs related to other furniture and fixtures are depreciated on a straight line basis over estimated useful lives ranging
from three to eight years.
Other Assets
Other assets at December 31, 2016 included $6.2 million related to cash collateral paid with respect to the Company's
surety bonds which secure its offshore decommissioning obligations. Other assets at December 31, 2015 included $1.4 million
related to deferred financing costs with respect to the Company's bank credit facility, which were written off upon termination of
the bank credit facility.
Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740. Provisions for income taxes include deferred
taxes resulting primarily from temporary differences due to different reporting methods for oil and gas properties for financial
reporting purposes and income tax purposes. For financial reporting purposes, all exploratory and development expenditures are
capitalized and depreciated, depleted and amortized on the unit-of-production method. For income tax purposes, only the equipment
and leasehold costs relative to successful wells are capitalized and recovered through depreciation or depletion. Generally, most
other exploratory and development costs are charged to expense as incurred; however, the Company may use certain provisions
of the Internal Revenue Code that allow capitalization of intangible drilling costs. Other financial and income tax reporting
differences occur primarily as a result of statutory depletion. Deferred tax assets are assessed for realizability and a valuation
allowance is established for any portion of the asset for which it is more likely than not will not be realized.
Revenue Recognition
The Company records natural gas and oil revenue under the sales method of accounting. Under the sales method, the
Company recognizes revenues based on the amount of natural gas or oil sold to purchasers, which may differ from the amounts
to which the Company is entitled based on its interest in the properties.
Concentrations
The Company’s production is sold on month to month contracts at prevailing prices. The Company attempts to diversify
its sales among multiple purchasers and obtain credit protection such as letters of credit and parental guarantees when necessary.
The following table identifies customers from whom the Company derived 10% or more of its oil and gas revenues during
the years presented. Based on the availability of other customers, the Company does not believe the loss of any of these customers
would have a significant effect on its business or financial condition.
Shell Trading Co
Laclede Energy Resources
Superior Natural Gas
BG Group
Unimark, LLC
(a) Less than 10 percent
Year Ended December 31,
2016
23%
17%
14%
10%
(a)
2015
18%
21%
(a)
10%
17%
2014
30%
24%
(a)
(a)
14%
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Derivative Instruments
Under ASC Topic 815, the nature of a derivative instrument must be evaluated to determine if it qualifies for hedge
accounting treatment. Instruments qualifying for hedge accounting treatment are recorded as an asset or liability measured at fair
value and subsequent changes in fair value are recognized in stockholders’ equity through other comprehensive income (loss), net
of related taxes, to the extent the hedge is effective. If a hedge becomes ineffective because the hedged production does not occur,
or the hedge otherwise does not qualify for hedge accounting treatment, the changes in the fair value of the derivative are recorded
in the statement of operations as derivative income (expense). The Company does not offset fair value amounts recognized for
derivative instruments.
The Company’s hedges are specifically referenced to NYMEX prices for natural gas. The effectiveness of hedges is
evaluated at the time the contracts are entered into, as well as periodically over the life of the contracts, by analyzing the correlation
between NYMEX prices and the posted prices received from the designated production. Through this analysis, the Company is
able to determine if a high correlation exists between the prices received for its designated production and the NYMEX prices at
which the hedges will be settled. At December 31, 2016, the Company’s derivative instruments were designated as effective cash
flow hedges. See Note 7 for further discussion of the Company’s derivative instruments.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-09, “Revenue from Contracts with Customers” to clarify the principles for recognizing revenue and to develop a common
revenue standard and disclosure requirements. The core principle of ASU 2014-09 is that an entity will recognize revenue when
it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled
in exchange for those goods and or services. In August 2015, the FASB issued ASU 2015-14 deferring the effective date of ASU
2014-09 by one year to interim and annual periods beginning on or after December 31, 2017. Entities can choose to apply the
standard using either a full retrospective approach or a modified retrospective approach, with the cumulative effect of initially
applying ASU 2014-09 recognized at the date of initial application. We expect to apply the modified retrospective approach upon
adoption of this standard. The Company is currently evaluating the effect that this new standard will have on its consolidated
financial statements and related disclosures, however, the Company does not expect the adoption of the standard will have a
material impact on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, "Disclosure of Uncertainties about an Entity’s Ability to Continue as a
Going Concern (Subtopic 205-40)." The guidance requires management to evaluate whether there are conditions and events that
raise substantial doubt about the company's ability to continue as a going concern within one year after the financial statements
are issued on both an interim and annual basis. Additionally, management is required to provide certain footnote disclosures if it
concludes that substantial doubt exists or when it concludes its plans alleviate substantial doubt about the company's ability to
continue as a going concern. ASU 2014-15 became effective for us on December 15, 2016. The standard did not impact the
Company's disclosures, financial position, results of operations or cash flows.
In November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes" to simplify the
presentation of deferred income taxes. The guidance allows for the presentation of all deferred tax assets and liabilities, along with
any related valuation allowance, to be classified as noncurrent on the balance sheet. We early adopted ASU 2015-17, on a
retrospective basis, which had no effect on our financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" to increase transparency and comparability
among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about
leasing arrangements. The standard is effective for public entities for fiscal years beginning after December 15, 2018, and for
interim periods within those fiscal years, with earlier application permitted. Upon adoption the lessee will apply the new standard
retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The Company
is currently evaluating the effect that this new standard may have on our financial statements.
In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718)" to simplify several
aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards
as either equity or liabilities, and forfeitures, as well as classification in the statement of cash flows. ASU 2016-09 is effective for
public entities for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. Early adoption
is permitted for any entity in any interim or annual period. An entity that elects early adoption must adopt all of the amendments
in ASU 2016-09 in the same period. We are currently evaluating the effect that this new standard may have on our financial
statements, but we do not anticipate the implementation of this new standard will have a material effect.
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Note 2—Acquisitions and Divestitures
Divestitures:
On June 4, 2015, the Company completed the sale of a majority of its interests in the Woodford Shale and Mississippian
Lime for $280 million, subject to customary post-closing purchase price adjustments, effective January 1, 2015. At closing, the
Company received $257.7 million in cash and recognized a receivable of $13.9 million, which was received in full during the
third quarter of 2015.
In connection with the sale, the Company entered into a Contract Operating Services Agreement ("COSA") whereby the
Company retained a minimal working interest in the assets sold and agreed to provide certain services as a contract operator for
the period of one year from the closing date of the sale. The COSA was terminated on November 1, 2016 and the remaining
working interest was transferred to the acquiring owner.
At December 31, 2014, the estimated proved reserves attributable to the assets sold totaled approximately 227.2 Bcfe
(unaudited), which represented approximately 57% (unaudited) of the Company's estimated proved reserves. Under the full cost
method of accounting, sales of oil and gas properties are accounted for as adjustments of capitalized costs with no gain or loss
recognized, unless the adjustment significantly alters the relationship between capitalized costs and proved reserves. A significant
alteration is generally not expected to occur for sales involving less than 25% of the total proved reserves. If the sale was accounted
for as an adjustment of capitalized costs with no gain or loss recognized, the adjustment would have significantly altered the
relationship between capitalized costs and proved reserves. Accordingly, the Company recognized a gain on the sale of $23.2
million during 2015. The carrying value of the properties sold was determined by allocating total capitalized costs within the full
cost pool between properties sold and properties retained based on their relative fair values.
In March 2016, the Company sold certain non-producing assets in East Texas for $7 million to a potential joint venture
partner. This sale was accounted for as an adjustment to the capitalized costs of oil and gas properties. After determining it would
not pursue a joint venture with this party, the Company repurchased the non-producing assets for $5 million in December, 2016
as per the terms of the purchase and sale agreement. The Company subsequently entered into a new drilling joint venture in East
Texas with another group of partners.
On April 20, 2016, the Company completed the sale of a majority of its remaining Woodford Shale assets in the East
Hoss field for approximately $18 million, subject to customary post-closing purchase price adjustments, effective April 1, 2016.
This sale was accounted for as an adjustment to the capitalized costs of oil and gas properties.
On October 31, 2016, the Company completed the sale of its remaining Oklahoma assets for approximately $0.7 million,
subject to customary post-closing purchase-price adjustments, effective November 1, 2016. This sale was accounted for as an
adjustment to the capitalized costs of oil and gas properties.
Note 3—Equity
Common Stock
On May 18, 2016, the Company effected a reverse split of the Company's common stock at a ratio of one share of newly
issued common stock for each four shares of issued and outstanding common stock (the "Reverse Split"). The purpose of the
Reverse Split was to increase the per share trading price of the Company's common stock in order to regain compliance with the
New York Stock Exchange continued listing standards. The Reverse Split proportionately reduced the total number of outstanding
shares of common stock from approximately 70.5 million shares to approximately 17.6 million shares. All references in the
consolidated financial statements and notes to consolidated financial statements to the number of shares, per share data, restricted
stock and stock option data have been retroactively adjusted to give effect to the Reverse Split.
Convertible Preferred Stock
The Company has 1,495,000 shares of 6.875% Series B Cumulative Convertible Perpetual Preferred Stock (the “Series
B Preferred Stock”) outstanding.
The following is a summary of certain terms of the Series B Preferred Stock:
Dividends. The Series B Preferred Stock accumulates dividends at an annual rate of 6.875% for each share of Series B
Preferred Stock. Dividends are cumulative from the date of first issuance and, to the extent payment of dividends is not prohibited
by the Company’s debt agreements, assets are legally available to pay dividends and the Company’s board of directors or an
authorized committee of the board declares a dividend payable, the Company pays dividends in cash, every quarter.
In connection with an amendment to the Company's bank credit facility, which was terminated in October, 2016,
prohibiting the Company from declaring or paying dividends on the Series B Preferred Stock, the Company suspended the quarterly
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cash dividend on it Series B Preferred Stock beginning with the dividend payment due on April 15, 2016. Under the terms of the
Series B Preferred Stock, any unpaid dividends will accumulate. As of December 31, 2016, the Company has deferred three
quarterly dividends and has accrued a $5.1 million payable related to the three deferred quarterly dividends and the quarterly
dividend that was payable on January 15, 2017, which is included in other long-term liabilities on the Consolidated Balance Sheet.
If the Company fails to pay six quarterly dividends on the Series B Preferred Stock, whether or not consecutive, holders of the
Series B Preferred Stock, voting as a single class, will have the right to elect two additional directors to the Company's Board of
Directors until all accumulated and unpaid dividends on the Series B Preferred Stock are paid in full. The Multidraw Term Loan
Agreement (see Note 9) currently restricts the Company from paying cash dividends on the Series B Preferred Stock.
Mandatory conversion. The Company may, at its option, cause shares of the Series B Preferred Stock to be automatically
converted at the applicable conversion rate, but only if the closing sale price of the Company’s common stock for 20 trading days
within a period of 30 consecutive trading days ending on the trading day immediately preceding the date the Company gives the
conversion notice equals or exceeds 130% of the conversion price in effect on each such trading day.
Conversion rights. Each share of Series B Preferred Stock may be converted at any time, at the option of the holder, into
0.8608 shares of the Company’s common stock (which is based on an initial conversion price of approximately $58.08 per share
of common stock, subject to further adjustment) plus cash in lieu of fractional shares, subject to the Company’s right to settle all
or a portion of any such conversion in cash or shares of the Company’s common stock. If the Company elects to settle all or any
portion of its conversion obligation in cash, the conversion value and the number of shares of the Company’s common stock it
will deliver upon conversion (if any) will be based upon a 20 trading day averaging period.
Upon any conversion, the holder will not receive any cash payment representing accumulated and unpaid dividends on
the Series B Preferred Stock, whether or not in arrears, except in limited circumstances. The conversion rate is equal to $50 divided
by the conversion price at the time. The conversion price is subject to adjustment upon the occurrence of certain events. The
conversion price on the conversion date and the number of shares of the Company’s common stock, as applicable, to be delivered
upon conversion may be adjusted if certain events occur.
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Note 4—Earnings Per Share
A reconciliation between the basic and diluted earnings per share computations (in thousands, except per share
amounts) is as follows:
For the Year Ended December 31, 2016
Loss(Numerator)
Shares
(Denominator)
Per
Share Amount
BASIC EPS
Net loss available to common stockholders
Stock options
Attributable to participating securities
DILUTED EPS
For the Year Ended December 31, 2015
BASIC EPS
Net loss available to common stockholders
Stock options
Attributable to participating securities
DILUTED EPS
For the Year Ended December 31, 2014
Net income available to common stockholders
Attributable to participating securities
BASIC EPS
Net income available to common stockholders
Effect of dilutive securities:
Stock options
Attributable to participating securities
DILUTED EPS
$
$
(96,245)
—
—
(96,245)
18,354
$
(5.24)
—
—
18,354
$
(5.24)
Loss(Numerator)
Shares
(Denominator)
Per
Share Amount
$
$
(299,929)
—
—
(299,929)
16,256
$
(18.45)
—
—
16,256
$
(18.45)
Income
(Numerator)
Shares
(Denominator)
Per
Share Amount
$
$
$
$
26,051
(855)
25,196
16,051
—
16,051
$
26,051
16,051
1.57
—
(854)
25,197
5
—
16,056
$
1.57
An aggregate of 0.9 million shares of common stock representing options to purchase common stock and unvested shares
of restricted common stock and common shares issuable upon the assumed conversion of the Series B Preferred Stock totaling
1.3 million shares were not included in the computation of diluted earnings per share for the year ended December 31, 2016,
because the inclusion would have been anti-dilutive as a result of the net loss reported for the year.
An aggregate of 0.1 million shares of common stock representing options to purchase common stock and unvested shares
of restricted common stock and common shares issuable upon the assumed conversion of the Series B Preferred Stock totaling
1.3 million shares were not included in the computation of diluted earnings per share during the year ended December 31, 2015,
because the inclusion would have been anti-dilutive as a result of the net loss reported for the year.
Common shares issuable upon the assumed conversion of the Series B Preferred Stock totaling 1.3 million shares during
the year ended December 31, 2014 were not included in the computation of diluted earnings per share because the inclusion would
have been anti-dilutive. Options to purchase 0.3 million shares of common stock were outstanding during the year ended
December 31, 2014 and were not included in the computation of diluted earnings per share because the options' exercise prices
were in excess of the average market price of the common shares.
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Note 5—Share-Based Compensation
The Company accounts for share-based compensation in accordance with ASC Topic 718. Share-based compensation
cost is recognized over the requisite service period. Compensation cost for awards with graded vesting is recognized using the
accelerated attribution method. Share-based compensation cost is reflected as a component of general and administrative expenses.
A detail of share-based compensation cost for the years ended December 31, 2016, 2015 and 2014 is as follows (in thousands):
Year Ended December 31,
2015
2014
2016
Stock options:
Incentive Stock Options (share settled)
Non-Qualified Stock Options (share settled)
Restricted stock (share settled)
Cash settled stock units
Share-based compensation
$
$
206
164
1,073
244
1,687
$
$
243
71
4,303
(439)
4,178
$
$
573
171
4,504
3,094
8,342
During the years ended December 31, 2016 and 2014, the Company capitalized $0.1 million, and $1.5 million, respectively,
of compensation cost related to cash settled restricted stock units to oil and gas properties. No such amounts were capitalized
during the year ended December 31, 2015. During the years ended December 31, 2016, 2015 and 2014, the Company recorded
income tax benefits of approximately $0.5 million, $1.5 million and $2.3 million, respectively, related to share-based compensation
expense recognized during those periods. Any excess tax benefits from the vesting of restricted stock and the exercise of stock
options will not be recognized in paid-in capital until the Company is in a current tax paying position. Presently, all of the Company’s
income taxes are deferred and the Company has net operating losses available to carryover to future periods. Accordingly, no
excess tax benefits have been recognized for any periods presented.
Share-Based compensation settled in shares
At December 31, 2016, the Company had $1.8 million of unrecognized compensation cost related to unvested restricted
stock and stock options. This amount will be recognized as compensation expense over a weighted average period of approximately
three years.
Stock Options
Stock options may be granted to employees and consultants and generally vest equally over a three-year period. Stock
options may also be granted to directors and generally vest one year or less from the date of grant to align with their term on the
board. Stock options must be exercised within 10 years of the grant date. The exercise price of each option may not be less than
100% of the fair market value of a share of common stock on the date of grant. Upon a change in control of the Company, all
outstanding options become immediately exercisable.
The Company computes the fair value of its stock options using the Black-Scholes option-pricing model assuming a
stock option forfeiture rate and expected term based on historical activity and expected volatility computed using historical stock
price fluctuations on a weekly basis for a period of time equal to the expected term of the option. Periodically, the Company adjusts
compensation expense based on the difference between actual and estimated forfeitures.
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Table of Contents
There were no stock options granted in 2015. The following table outlines the assumptions used in computing the fair
value of stock options granted during 2016 and 2014:
Dividend yield
Expected volatility
Risk-free rate
Expected term
Forfeiture rate
Stock options granted (1)
Wgtd. avg. grant date fair value per share
Fair value of grants (1)
Years Ended December 31,
2016
—%
62.0%-79.99%
1.255%-2.09%
6 years
5.0%
1,168,754
$1.96
$2,293,000
2014
—%
79.4% - 80.0%
1.81% - 2.015%
6 years
5.0%
17,359
$11.36
$197,000
(1) Prior to applying estimated forfeiture rate
The following table details stock option activity during the year ended December 31, 2016:
Outstanding at beginning of year
Granted
Expired/cancelled/forfeited
Exercised
Outstanding at end of year
Number of
Options
340,492
1,168,754
(96,306)
—
1,412,940
Wgtd. Avg.
Exercise Price
24.38
$
3.33
22.01
—
7.13
Options exercisable at end of year
Options expected to vest
256,013
1,355,094
$
24.11
7.29
Wgtd. Avg.
Remaining
Life
Aggregate
Intrinsic Value
(000’s)
8.74
4.73
8.71
$
$
$
186
—
176
The total fair value of stock options that vested during the years ended December 31, 2016, 2015 and 2014 was $0.4
million, $0.8 million and $1.0 million, respectively. The intrinsic value of stock options exercised was immaterial for all periods
presented.
The following table summarizes information regarding stock options outstanding at December 31, 2016:
Range of
Exercise
Price
$0.00-$2.49
$2.50-$3.49
$3.50-$4.99
$15.00-$30.32
Restricted Stock
Options
Outstanding
12/31/2016
66,373
878,833
206,769
260,965
1,412,940
Wgtd. Avg.
Remaining
Contractual Life
9.20
9.74
9.38
4.77
8.74
Wgtd. Avg.
Exercise
Price
$2.37
$3.17
$4.26
$23.94
$7.13
Options
Exercisable
12/31/2016
Wgtd. Avg.
Exercise
Price
—
—
—
$24.11
$24.11
256,013
256,013
The Company computes the fair value of its service based restricted stock using the closing price of the Company’s stock
at the date of grant, and compensation expense is recognized assuming a 5% estimated forfeiture rate. Restricted stock granted to
employees generally vests evenly over a three-year period. Restricted stock granted to directors vests one year or less from the
date of grant to align with their term on the board. Upon a change in control of the Company, all outstanding shares of restricted
stock will become immediately vested.
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Table of Contents
The following table details restricted stock activity during the year ended December 31, 2016:
Outstanding at beginning of year
Granted
Cancelled/forfeited
Lapse of restrictions
Outstanding at December 31, 2016
Number of
Shares
Wgtd. Avg.
Fair Value per
Share
296,259
—
(67,672)
(150,030)
78,557
$
$
16.32
—
16.97
15.90
16.57
The weighted average grant date fair value of restricted stock granted during the years ended December 31, 2015 and
2014 was $5.08 and $17.28, respectively, per share. No restricted stock was granted in 2016. The total fair value of restricted
stock that vested during the years ended December 31, 2016, 2015 and 2014 was $2.4 million, $4.7 million and $5.0 million,
respectively. At December 31, 2016, the weighted average remaining life of restricted stock outstanding was approximately one
year.
Share-Based compensation settled in cash
Restricted Stock Units
The Company may grant restricted stock units ("RSUs") to employees that vest evenly over a three-year period. Cash
payment will be made to employees on each vesting date based upon the Company's closing stock price on that date. Upon change
in control of the Company, all of the RSUs will immediately vest. The Company computes the fair value of the RSUs using the
closing price of the Company's stock at the end of each period and records a liability based on the percentage of requisite service
rendered at the reporting date. During 2016, the Company paid $0.3 million for 0.1 million RSUs that vested during the period.
Market Based Restricted Stock Units
The Company granted 60,767 market based restricted stock units ("MRSUs") to executive officers during November
2014. The executive officers can earn between 0-200% of the MRSUs granted based on the Company's performance versus a
defined peer group. The MRSUs vest in one-third increments on each of the first, second and third annual anniversaries starting
January 1, 2016. Upon change in control of the Company, all of the MRSUs will immediately vest. The number of MRSUs that
ultimately vest is based on the Company's total shareholder return in the last 20 days of the fiscal year in relation to the last 20
days of the previous fiscal year in comparison to a group of 12 selected peer stocks of similar sized companies which operate
within the same sector. The performance period ended on December 31, 2015 and executive officers earned 50% of the MRSUs.
The MRSUs are cash settled on each vesting date based on the number of MRSUs that vest multiplied by the Company's closing
stock price. The Company estimates the fair value of the outstanding MRSUs using a Monte Carlo valuation model and records
a liability based on the percentage of requisite service rendered at the reporting date. The Monte Carlo valuation model considers
such inputs as the Company's and its peer group's stock prices, a risk-free interest rate, and an estimated volatility for the Company
and its peer group. As of December 31, 2016, the Company had a liability for RSUs and MRSUs outstanding in the amount of
$0.1 million based upon the closing stock price at December 31, 2016.
The following table details MRSU and RSU activity during the year ended December 31, 2016:
Outstanding at beginning of year
Granted
Expired/Cancelled/Forfeited
Vested/Paid
Outstanding at December 31, 2016
MRSU
RSU
Total
25,821
—
(2,285)
(8,607)
14,929
188,337
—
(44,897)
(111,461)
31,979
214,158
—
(47,182)
(120,068)
46,908
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Table of Contents
Note 6—Asset Retirement Obligation
The Company accounts for asset retirement obligations in accordance with ASC Topic 410-20, which requires recording
the fair value of an asset retirement obligation associated with tangible long-lived assets in the period incurred. Asset retirement
obligations associated with long-lived assets included within the scope of ASC Topic 410-20 are those for which there is a legal
obligation to settle under existing or enacted law, statute, written or oral contract or by legal construction under the doctrine of
promissory estoppel. The Company has legal obligations to plug, abandon and dismantle existing wells and facilities that it has
acquired and constructed.
The following table describes the changes to the Company’s asset retirement obligation (in thousands):
Asset retirement obligation, beginning of period
Liabilities incurred
Liabilities settled
Accretion expense
Revisions in estimated cash flows
Divestiture of oil and gas properties
Asset retirement obligation, end of period
Less: current portion of asset retirement obligation
Long-term asset retirement obligation
Year Ended December 31,
2016
2015
$
$
42,556
—
(3,296)
2,515
(1,746)
(3,419)
36,610
(4,160)
32,450
$
$
54,970
466
(2,776)
3,259
(11,137)
(2,226)
42,556
(6,015)
36,541
Divestitures of oil and gas properties during 2016 included $3.3 million as a result of the sale of our remaining Oklahoma
assets. Divestitures of oil and gas properties during 2015 included $1.8 million as a result of the sale of our Woodford Shale and
Mississippian Lime assets. The liabilities incurred, revisions in estimated cash flows and divestitures represent non-cash investing
activities for purposes of the statement of cash flows.
Note 7—Derivative Instruments
The Company seeks to reduce its exposure to commodity price volatility by hedging a portion of its production through
commodity derivative instruments. When the conditions for hedge accounting are met, the Company may designate its commodity
derivatives as cash flow hedges. The changes in fair value of derivative instruments that qualify for hedge accounting treatment
are recorded in other comprehensive income (loss) until the hedged oil or natural gas quantities are produced. If a derivative does
not qualify for hedge accounting treatment, the changes in the fair value of the derivative are recorded in the statement of operations
as derivative income (expense). At December 31, 2016 and 2015, all of the Company's outstanding derivative instruments were
designated as cash flow hedges.
Oil and gas sales include additions (reductions) related to the settlement of gas hedges of $1.8 million, $15.9 million and
($4.2) million, Ngl hedges of $0, $0.5 million and $0.3 million, and oil hedges of $0, $0.6 million and $0.9 million, for the years
ended December 31, 2016, 2015 and 2014, respectively.
As of December 31, 2016, the Company had entered into the following gas hedge contracts:
Production Period
Natural Gas:
January 2017 - December 2017
January 2017 - March 2018
April 2017 - March 2018
Instrument
Type
Daily Volumes
Weighted Average
Price
Swap
Swap
Swap
10,000 Mmbtu
10,000 Mmbtu
10,000 Mmbtu
$3.26
$3.01
$3.40
At December 31, 2016, the Company had recognized a liability of approximately $4.8 million related to the estimated
fair value of these derivative contracts. Based on estimated future commodity prices as of December 31, 2016, the Company would
realize a $2.5 million loss, net of taxes, during the next 12 months. This loss is expected to be reclassified to oil and gas sales
based on the schedule of volumes stipulated in the derivative contracts.
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During March 2017, we entered into the following additional hedge contract accounted for as a cash flow hedge:
Production Period
Natural Gas:
Instrument Type Daily Volumes Weighted Average Price
October 2017 - March 2018
Swap
10,000 Mmbtu
$3.22
Derivatives designated as hedging instruments:
The following tables reflect the fair value of the Company’s effective cash flow hedges in the consolidated financial
statements (in thousands):
Effect of Cash Flow Hedges on the Consolidated Balance Sheet at December 31, 2016 and December 31, 2015:
Period
December 31, 2016
December 31, 2016
December 31, 2015
Commodity Derivatives
Balance Sheet
Location
Derivative liability
Other long-term liabilities
Derivative asset
Fair Value
(3,947)
(803)
1,508
$
$
$
Effect of Cash Flow Hedges on the Consolidated Statement of Operations for years ended December 31, 2016, 2015 and 2014:
Instrument
Commodity Derivatives at December 31, 2016
Commodity Derivatives at December 31, 2015
Commodity Derivatives at December 31, 2014
Note 8 - Fair Value Measurements
Amount of Gain (Loss)
Recognized in Other
Comprehensive Income
(4,447)
$
9,991
$
6,683
$
Location of
Gain (Loss)
Reclassified
into Income
Oil and gas sales
Oil and gas sales
Oil and gas sales
Amount of Gain (Loss)
Reclassified into
Income
$
$
$
1,811
17,114
(3,044)
ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date and establishes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value. As presented in the tables below, this hierarchy consists of three broad
levels:
• Level 1: valuations consist of unadjusted quoted prices in active markets for identical assets and liabilities and has the
highest priority;
• Level 2: valuations rely on quoted prices in markets that are not active or observable inputs over the full term of the asset
or liability;
• Level 3: valuations are based on prices or third party or internal valuation models that require inputs that are significant
to the fair value measurement and are less observable and thus have the lowest priority.
The Company classifies its commodity derivatives based upon the data used to determine fair value. The Company's
derivative instruments at December 31, 2016 and 2015 were in the form of swaps based on NYMEX pricing for natural gas. The
fair value of these derivatives is derived using an independent third-party’s valuation model that utilizes market-corroborated
inputs that are observable over the term of the derivative contract. The Company’s fair value calculations also incorporate an
estimate of the counterparties’ default risk for derivative assets and an estimate of the Company’s default risk for derivative
liabilities. As a result, the Company designates its commodity derivatives as Level 2 in the fair value hierarchy.
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The following table summarizes the Company’s assets (liabilities) that are subject to fair value measurement on a recurring
basis as of December 31, 2016 and December 31, 2015 (in thousands):
Instrument
Commodity Derivatives:
At December 31, 2016
At December 31, 2015
Fair Value Measurements Using
Quoted Prices
in Active
Markets (Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
$
$
— $
— $
(4,750) $
$
1,508
—
—
The fair value of the Company's cash and cash equivalents approximated book value at December 31, 2016 and 2015.
The fair value of the Multidraw Term Loan Agreement approximated face value as of December 31, 2016. The fair value of the
Company's bank credit facility, which was terminated in October 2016, approximated book value as of December 31, 2015. The
fair value of the Company's 2017 Notes, 2021 Notes and 2021 PIK Notes was determined based upon market quotes provided by
an independent broker, which represents a Level 2 input. The following table summarizes the fair value of the 2017 Notes, 2021
Notes and 2021 PIK Notes as of December 31, 2016 and 2015, respectively (in thousands).
Fair Value at
12/31/16
Face Value at
12/31/16
Carrying value
at 12/31/16
Fair Value at
12/31/15
Face Value at
12/31/15
Carrying value
at 12/31/15
2017 Notes
2021 Notes
2021 PIK Notes
$
$
21,970 $
22,650 $
22,568
$
238,000 $
350,000 $
347,008
12,192
177,732
14,177
243,468
15,228
248,600
—
—
—
—
—
—
211,894 $
280,295 $
286,396
$
238,000 $
350,000 $
347,008
Note 9—Long-Term Debt
On August 19, 2010, the Company issued $150 million in principal amount of its 10% Senior Notes due 2017. On July
3, 2013, the Company issued an additional $200 million in principal amount of its 10% Senior Notes due 2017 (collectively, the
"2017 Notes").
On February 17, 2016, the Company closed a private exchange offer (the "February Exchange") and consent solicitation
(the "February Consent Solicitation") to certain eligible holders of its outstanding 2017 Notes. In satisfaction of the tender of
$214.4 million in aggregate principal amount of the 2017 Notes, representing approximately 61% of the then outstanding aggregate
principal amount of 2017 Notes, the Company (i) paid approximately $53.6 million of cash, (ii) issued $144.7 million aggregate
principal amount of its new 10% Second Lien Senior Secured Notes due 2021 (the "2021 Notes") and (iii) issued approximately
1.1 million shares of its common stock. Following the completion of the February Exchange, $135.6 million in aggregate principal
amount of the 2017 Notes remained outstanding. The February Consent Solicitation eliminated or waived substantially all of the
restrictive covenants contained in the indenture governing the 2017 Notes.
On September 27, 2016, the Company closed private exchange offers (the "September Exchange") and a consent
solicitation (the "September Consent Solicitation") to certain eligible holders of its outstanding 2017 Notes and 2021 Notes. In
satisfaction of the consideration of $113.0 million in aggregate principal amount of the 2017 Notes, representing approximately
83% of the then outstanding aggregate principal amount of 2017 Notes, and $130.5 million in aggregate principal amount of the
2021 Notes, representing approximately 90% of the then outstanding aggregate principal amount of 2021 Notes, the Company
issued (i) $243.5 million in aggregate principal amount of its new 10% Second Lien Senior Secured PIK Notes due 2021 (the
"2021 PIK Notes") and (ii) approximately 3.5 million shares of its common stock. The Company also paid, in cash, accrued and
unpaid interest on the 2017 Notes and 2021 Notes accepted in the September Exchange from the last applicable interest payment
date to, but not including, September 27, 2016. Following the consummation of the September Exchange, there is $22.7 million
in aggregate principal amount of the 2017 Notes outstanding and $14.2 million in aggregate principal amount of the 2021 Notes
outstanding. The September Consent Solicitation amended certain provisions of the indenture governing the 2021 Notes and
amended the registration rights agreement with respect to the 2021 Notes.
Unless the Company exercises its payable in kind ("PIK") interest option, the 2021 PIK Notes bear interest at a rate of
10% per annum on the principal amount and interest is payable semi-annually in arrears on February 15 and August 15 of each
year, starting on February 15, 2017. The Company may, at its option, for one or more of the first three interest payment dates of
the 2021 PIK Notes, pay interest at (i) the annual rate of 1% in cash plus (ii) the annual rate of 9% PIK (the "PIK Interest") payable
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by increasing the principal amount outstanding of the 2021 PIK Notes or by issuing additional 2021 PIK Notes in certificated
form. We exercised this PIK option in connection with the interest payment due on February 15, 2017. As of December 31, 2016,
the Company was in compliance with all of the covenants under the 2021 PIK Notes.
The 2021 Notes bear interest at a rate of 10% per annum on the principal amount and interest is payable semi-annually
in arrears on February 15 and August 15 of each year. As of December 31, 2016, the Company was in compliance with all of the
covenants under the 2021 Notes.
The 2017 Notes bear interest at a rate of 10% per annum on the principal amount and interest is payable semi-annually
in arrears on March 1 and September 1 of each year and the 2017 Notes mature on September 1, 2017. As of December 31, 2016,
the Company was in compliance with the remaining covenants under the 2017 Notes.
The February Exchange and September Exchange were accounted for as troubled debt restructurings pursuant to ASC
Topic 470-60 "Troubled Debt Restructurings by Debtors." The Company determined that the future undiscounted cash flows from
the 2021 PIK Notes issued in the September Exchange through the maturity date exceeded the adjusted carrying amount of the
2017 Notes and the 2021 Notes tendered in the September Exchange. Accordingly, no gain or loss on extinguishment of debt was
recognized in connection with the September Exchange. The net shortfall of the remaining carrying value of the 2017 Notes and
2021 Notes tendered as compared to the principal amount of the 2021 PIK Notes issued in the September Exchange of $0.6 million
is reflected as part of the carrying value of the 2021 PIK Notes. Such shortfall is being amortized under the effective interest
method over the term of the 2021 PIK Notes.
The Company previously determined that the future undiscounted cash flows from the 2021 Notes issued in the February
Exchange through the maturity date exceeded the adjusted carrying amount of the 2017 Notes tendered in the February Exchange.
Accordingly, no gain on extinguishment of debt was recognized in connection with the February Exchange. The excess of the
remaining carrying value of the 2017 Notes tendered over the principal amount of the 2021 Notes issued in the February Exchange
of $13.9 million was reflected as part of the carrying value of the 2021 Notes. The amount of the excess carrying value attributable
to the 2021 Notes tendered in the September Exchange is now reflected as part of the carrying value of the 2021 PIK Notes. The
excess carrying value attributable to the remaining 2021 Notes is being amortized under the effective interest method over the
term of the 2021 Notes. At December 31, 2016, $1.2 million of the excess remained as part of the carrying value of the 2021
Notes and the Company recognized $1.5 million of amortization expense as a reduction to interest expense during the year ended
December 31, 2016.
The issuance of the 2021 Notes, 2021 PIK Notes and shares of common stock, as wells as the exchange of the 2017 Notes
and 2021 Notes in the February Exchange and September Exchange represent non-cash financing activities for purposes of the
statement of cash flows.
The indentures governing the 2021 PIK Notes and the 2021 Notes contain affirmative and negative covenants that, among
other things, limit the ability of the Company and the subsidiary guarantors of the 2021 PIK Notes and the 2021 Notes to incur
indebtedness; purchase or redeem stock; make certain investments; create liens that secure debt; enter into transactions with
affiliates; sell assets; refinance certain indebtedness; merge with or into other companies or transfer substantially all of their assets;
and, in certain circumstances, to pay dividends or make other distributions on stock. The 2021 PIK Notes and the 2021 Notes are
fully and unconditionally guaranteed on a senior basis, jointly and severally, by certain wholly-owned subsidiaries of the Company.
The 2021 PIK Notes and the 2021 Notes are secured equally and ratably by second-priority liens on substantially all of
the Company's and the subsidiary guarantors' oil and gas properties and substantially all of their other assets to the extent such
properties and assets secure the Multidraw Term Loan Agreement (as defined below), except for certain excluded assets. Pursuant
to the terms of an intercreditor agreement, the security interest in those properties and assets that secure the 2021 PIK Notes and
the 2021 Notes and the guarantees are contractually subordinated to liens that secure the Multidraw Term Loan Agreement and
certain other permitted indebtedness. Consequently, the 2021 PIK Notes and the 2021 Notes and the guarantees will be effectively
subordinated to the Multidraw Term Loan Agreement and such other indebtedness to the extent of the value of such assets.
On October 17, 2016, the Company entered into the Multidraw Term Loan Agreement (the "Multidraw Term Loan
Agreement") with Franklin Custodian Funds - Franklin Income Fund ("Franklin"), as a lender, and Wells Fargo Bank, National
Association, as administrative agent, replacing the credit agreement with JPMorgan Chase Bank, N.A. The Multidraw Term Loan
Agreement provides a multi-advance term loan facility, with borrowing availability for three years, in a principal amount of up to
$50.0 million. The loans drawn under the Multidraw Term Loan Agreement (collectively, the “Term Loans”) may be used to repay
existing debt (including the remaining 2017 Notes), to pay transaction fees and expenses, to provide working capital for exploration
and production operations and for general corporate purposes. The Term Loans mature on October 17, 2020. As of December 31,
2016, the Company has $10.0 million of borrowings outstanding under the Term Loans.
The Company’s obligations under the Multidraw Term Loan Agreement and the Term Loans are secured by a first priority
lien on substantially all of the assets of the Company and certain of its subsidiaries, including a lien on all equipment and at least
90% of the aggregate total value of the oil and gas properties of the Company and its subsidiaries, a pledge of the equity interests
of PetroQuest Energy, L.L.C. (the "Borrower") and certain of the Company’s other subsidiaries, and corporate guarantees of the
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Company and certain of the Company’s other subsidiaries of the indebtedness of the Borrower. Term Loans under the Multidraw
Term Loan Agreement bear interest at the rate of 10% per annum.
The Company and its subsidiaries are subject to a restrictive financial covenant under the Multidraw Term Loan Agreement,
consisting of maintaining a ratio of (i) the present value, discounted at 10% per annum, of the estimated future net revenues in
respect of the Company’s and its subsidiaries’ oil and gas properties, before any state, federal, foreign or other income taxes,
attributable to proved developed reserves, using three-year strip prices in effect at the end of each calendar quarter, including swap
agreements in place at the end of each quarter, to (ii) the sum of the outstanding Term Loans and the then outstanding commitments
to provide Term Loans, that shall not be less than (a) 1.7 to 1.0 as measured on December 31, 2016 and March 31, 2017, and (b)
2.0 to 1.0 as measured on June 30, 2017, and the last day of each calendar quarter thereafter (the "Coverage Ratio").
Sales of the Company’s and its subsidiaries’ oil and gas properties outside the ordinary course of business are limited
under the terms of the Multidraw Term Loan Agreement. In addition, the Multidraw Term Loan Agreement prohibits the Company
from declaring and paying dividends on its Series B Preferred Stock.
The Multidraw Term Loan Agreement also includes customary restrictions with respect to debt, liens, dividends,
distributions and redemptions, investments, loans and advances, nature of business, international operations and foreign
subsidiaries, leases, sale or discount of receivables, mergers or consolidations, sales of properties, transactions with affiliates,
negative pledge agreements, gas imbalances and swap agreements. As of December 31, 2016, no default or event of default existed
under the Multidraw Term Loan Agreement and the Company was in compliance with all covenants contained in the Multidraw
Term Loan Agreement, including the Coverage Ratio.
The 2017 Notes are reflected net of $0.1 million and $3.0 million of related unamortized financing costs at December
31, 2016 and 2015, respectively. The 2021 Notes are reflected net of $0.1 million of related unamortized financing costs as of
December 31, 2016 and the Term Loans are reflected net of $2.8 million of related unamortized financing costs as of December 31,
2016.
The following table reconciles the face value of the 2017 Notes, 2021 Notes, 2021 PIK Notes and Term Loans to the
carrying value included in the consolidated balance sheet as of December 31, 2016 and 2015 (in thousands):.
December 31, 2016
December 31, 2015
2017
Notes
2021
Notes
2021 PIK
Notes
Term
Loans
2017
Notes
2021
Notes
2021 PIK
Notes
Term
Loans
Face Value
$
22,650 $
14,177 $ 243,468 $
10,000
$ 350,000 $
— $
— $
Unamortized Deferred
Financing Costs
Excess (shortfall)
Carrying Value
Accrued PIK Interest
(82)
(108)
—
(2,751)
(2,992)
—
—
1,159
—
(590)
5,722
—
—
—
—
—
—
—
—
—
—
Carrying Value
$
22,568 $
15,228 $ 248,600 $
7,249
$ 347,008 $
— $
— $
—
—
—
—
—
On March 1, 2017, we notified the holders of the 2017 Notes that we will redeem the remaining $22.7 million of 2017
Notes on March 31, 2017 at a redemption price of 100% of the principal amount thereof, plus accrued interest to the redemption
date. We expect to pay the redemption price with a combination of cash on hand and amounts borrowed under the Multidraw
Term Loan Agreement described above.
Note 10—Related Party Transactions
Two of the Company’s senior officers, Charles T. Goodson and Stephen H. Green, or their affiliates, are working interest
owners and overriding royalty interest owners and E. Wayne Nordberg and William W. Rucks, IV, two of the Company’s directors,
are working interest owners in certain properties operated by the Company or in which the Company also holds a working interest.
As working interest owners, they are required to pay their proportionate share of all costs and are entitled to receive their
proportionate share of revenues in the normal course of business. As overriding royalty interest owners, they are entitled to receive
their proportionate share of revenues in the normal course of business.
During 2016, in their capacities as working interest owners or overriding royalty interest owners, revenues, net of costs,
were disbursed to (received from) Messrs. Goodson and Green, or their affiliates, in the amounts of $(15,000) and $25,000,
respectively, and with respect to Mr. Nordberg, costs billed exceeded revenues disbursed in the amount of $200. During 2015, in
their capacities as working interest owners or overriding royalty interest owners, revenues, net of costs, were disbursed to (received
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from) Messrs. Goodson and Green, or their affiliates, in the amounts of $(45,000) and $30,000, respectively, and with respect to
Mr. Nordberg, costs billed exceeded revenues disbursed in the amount of $300. During 2014, in their capacities as working interest
owners or overriding royalty interest owners, revenues, net of costs, were disbursed to Messrs. Goodson and Green, or their
affiliates, in the amounts of $80,000 and $116,000, respectively, and with respect to Mr. Nordberg, costs billed equaled revenues
disbursed. No such disbursements were made to Mr. Rucks during any reported period. With respect to Mr. Goodson, gross revenues
attributable to interests, properties or participation rights held by him prior to joining the Company as an officer and director on
September 1, 1998 represent all of the gross revenue received by him during these periods.
In its capacity as operator, the Company incurs drilling and operating costs that are billed to its partners based on their
respective working interests. At December 31, 2016, the Company’s joint interest billing receivable included approximately $8,000
from the related parties discussed above or their affiliates, attributable to their share of costs. This represents less than 1% of the
Company’s total joint interest billing receivable at December 31, 2016.
Periodically, the Company charters private aircraft for business purposes. During 2014, the Company paid approximately
$18,000 to a third party operator in connection with the Company’s use of flight hours owned by Charles T. Goodson through a
fractional ownership arrangement with the third party operator. These amounts represent the cost of the hours purchased by
Mr. Goodson. No such amounts were incurred during 2016 and 2015. The Company’s use of flight hours purchased by Mr. Goodson
was pre-approved by the Company’s Audit Committee and there is no agreement or obligation by or on behalf of the Company
to utilize this aircraft arrangement.
Note 11—Ceiling Test Write-down
The Company uses the full cost method to account for its oil and gas properties. Accordingly, the costs to acquire, explore
for and develop oil and gas properties are capitalized. Capitalized costs of oil and gas properties, net of accumulated DD&A and
related deferred taxes, are limited to the estimated future net cash flows from estimated proved oil and gas reserves, including the
effects of cash flow hedges in place, discounted at 10%, plus the lower of cost or fair value of unproved properties, as adjusted
for related income tax effects (the full cost ceiling). If capitalized costs exceed the full cost ceiling, the excess is charged to ceiling
test write-down of oil and gas properties in the quarter in which the excess occurs.
In accordance with SEC requirements, the estimated future net cash flows from estimated proved reserves are based on
an average of the first day of the month spot price for a historical 12-month period, adjusted for quality, transportation fees and
market differentials. At December 31, 2016 and 2015, the prices used in computing the estimated future net cash flows from the
Company’s estimated proved reserves, including the effect of hedges in place at that date, averaged $2.51 and $2.42, respectively,
per Mcf of natural gas, $40.85 and $50.29, respectively, per barrel of oil and $1.82 and $2.21, respectively, per Mcfe of Ngl. As
a result of lower commodity prices and their negative impact on the Company's estimated proved reserves and estimated future
net cash flows, the Company recognized ceiling test write-downs of approximately $40.3 million and $266.6 million, respectively,
during 2016 and 2015. The Company did not recognize a ceiling test write-down in the fourth quarter of 2016. The Company’s
cash flow hedges in place at December 31, 2015 decreased the ceiling test write-down by approximately $1.1 million. The Company
did not recognize a ceiling test write-down during 2014.
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Table of Contents
Note 12—Other Comprehensive Income (Loss)
The following table represents the changes in accumulated other comprehensive income (loss), net of tax, for the year
ended December 31, 2015 (in thousands):
Balance as of December 31, 2014
$
5,420
Gains and Losses on
Cash Flow Hedges
Other comprehensive income before
reclassifications:
Change in fair value of derivatives
Income tax effect
Net of tax
Amounts reclassified from accumulated
other comprehensive income:
Oil and gas sales
Income tax effect
Net of tax
Net other comprehensive loss
Balance as of December 31, 2015
$
9,991
(3,716)
6,275
(17,114)
6,366
(10,748)
(4,473)
947
The following table represents the changes in accumulated other comprehensive income (loss), net of tax, for the year
ended December 31, 2016 (in thousands):
Balance as of December 31, 2015
$
947
$
— $
947
Gains and Losses
on Cash Flow
Hedges
Change in
Valuation
Allowance
Total
Other comprehensive income before
reclassifications:
Change in fair value of derivatives
Income tax effect
Net of tax
Amounts reclassified from accumulated
other comprehensive income:
Oil and gas sales
Income tax effect
Net of tax
Net other comprehensive loss
Balance as of December 31, 2016
$
Note 13—Income Taxes
(4,447)
1,654
(2,793)
(1,811)
674
(1,137)
(3,930)
(2,983) $
—
(1,654)
(1,654)
—
(113)
(113)
(1,767)
(1,767) $
(4,447)
—
(4,447)
(1,811)
561
(1,250)
(5,697)
(4,750)
The Company typically provides for income taxes at a statutory rate of 35% adjusted for permanent differences expected
to be realized, primarily statutory depletion, non-deductible stock compensation expenses and state income taxes. As a result of
ceiling test write-downs, the Company has incurred a three-year cumulative loss. Because of the impact the cumulative loss had
on the determination of the recoverability of deferred tax assets through future earnings, the Company assessed the realizability
of its deferred tax assets based on the future reversals of existing deferred tax liabilities. The Company had a valuation allowance
of $177.4 million as of December 31, 2016.
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Table of Contents
An analysis of the Company’s deferred tax assets and liabilities follows (amounts in thousands):
Net operating loss carryforwards
Percentage depletion carryforward
Alternative minimum tax credits
Contributions carryforward and other
Temporary differences:
Oil and gas properties
Asset retirement obligation
Derivatives
Share-based compensation
Original issue discount on debt exchanges
Valuation allowance
Deferred tax asset (liability)
December 31,
2016
2015
$
92,072
$
9,372
784
282
27,992
13,620
1,767
1,870
29,646
(177,405)
$
— $
51,519
10,592
784
266
62,786
15,831
(561)
2,291
—
(143,508)
—
At December 31, 2016, the Company had approximately $260.1 million of operating loss carryforwards, of which $12.6
million relates to excess tax benefits with respect to share-based compensation that have not been recognized in the financial
statements. If not utilized, approximately $6.9 million of such carryforwards would expire in 2025 and the remainder would expire
by the year 2036. The Company has available for tax reporting purposes $26.8 million in statutory depletion deductions that may
be carried forward indefinitely.
Income tax expense (benefit) for each of the years ended December 31, 2016, 2015 and 2014 was different than the
amount computed using the Federal statutory rate (35%) for the following reasons (amounts in thousands):
For the Year Ended December 31,
2016
2015
2014
Amount computed using the statutory rate
$
(31,623) $
(102,257)
$
9,887
Increase (reduction) in taxes resulting from:
State & local taxes
Percentage depletion carryforward
Non-deductible stock option expense (1)
Share-based compensation (2)
Other
Change in valuation allowance
Income tax expense (benefit)
$
(2,000)
(163)
77
707
1,415
32,130
543
(6,477)
(404)
90
1,317
113
110,244
2,626
$
$
904
(1,564)
213
90
(643)
(11,828)
(2,941)
(1) Relates to compensation expense recognized on the vesting of Incentive Stock Options.
(2) Relates to the write-off of deferred tax assets associated with share-based compensation that will not be deductible for tax
purposes.
Note 14—Commitments and Contingencies
The Company is involved in litigation relating to claims arising out of its operations in the normal course of business,
including worker's compensation claims, tort claims and contractual disputes. Some of the existing known claims against us are
covered by insurance subject to the limits of such policies and the payment of deductible amounts by us. Although we cannot
predict the outcome of these proceedings with certainty, management believes that the ultimate disposition of all uninsured or
unindemnified matters resulting from existing litigation will not have a material adverse effect on the Company's business or
financial position.
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Lease Commitments
The Company has operating leases for office space and equipment, which expire on various dates through 2023. Future
minimum lease commitments as of December 31, 2016 under these operating leases are as follows (in thousands):
2017
2018
2019
2020
2021
Thereafter
$
$
1,208
470
447
445
434
811
3,815
Total rent expense under operating leases was approximately $1.5 million, $1.7 million and $1.6 million in 2016, 2015
and 2014, respectively.
Note 15—Supplementary Information on Oil and Gas Operations—Unaudited
The following tables disclose certain financial data relative to the Company’s oil and gas producing activities, which are
located onshore and offshore in the continental United States:
Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities
(amounts in thousands)
Acquisition costs:
Proved
Unproved (1)
Divestiture of proved leasehold
Exploration costs:
Proved
Unproved
Development costs
Capitalized general and administrative and interest costs
For the Year-Ended December 31,
2016
2015
2014
$
3,346
$
2,287
$
3,064
2,197
(7,000)
715
603
1,522
7,558
2,550
—
29,322
7,677
9,888
12,881
39,164
—
67,297
13,515
55,722
22,121
Total costs incurred
$
8,941
$
64,605
$ 200,883
Accumulated depreciation, depletion and
amortization (DD&A)
Balance, beginning of year
Provision for DD&A
Ceiling test writedown
Sale of proved properties and other (2) (3)
Balance, end of year
DD&A per Mcfe
For the Year-Ended December 31,
2016
2015
2014
$
$
$
(1,157,455) $
(27,962)
(40,304)
(17,565)
(1,243,286) $
(1,648,060) $
(62,138)
(266,562)
819,305
(1,157,455) $
(1,553,044)
(86,406)
—
(8,610)
(1,648,060)
1.19
$
1.82
$
1.99
(1) During 2014, the Company entered into a joint venture in Louisiana for an aggregate purchase price of $24 million for an
approximate 30,000 acre leasehold position.
F-24
Table of Contents
(2) During 2015, the Company sold its Woodford Shale and Mississippian Lime assets for an aggregate cash purchase price
of $274.1 million (see Note 2).
(3) During 2016, the Company sold its remaining Oklahoma producing assets for an aggregate purchase price of $17.6 million.
During 2015, the Company sold its Fort Trinidad assets for net proceeds of approximately $0.5 million and its East
Haynesville assets for net proceeds of approximately $0.1 million. During 2014, the Company sold its Eagle Ford assets
for net proceeds of approximately $9.8 million.
At December 31, 2016 and 2015, unevaluated oil and gas properties totaled $9.0 million and $12.5 million, respectively,
and were not subject to depletion. Unevaluated costs at December 31, 2016 included $0.4 million of costs related to one development
well in progress at year-end. These costs are expected to be transferred to evaluated oil and gas properties during 2017 upon the
completion of drilling. At December 31, 2015, unevaluated costs included $0.2 million related to 2 exploratory wells in progress.
All of these costs were transferred to evaluated oil and gas properties during 2016. The Company capitalized $0.9 million, $4.7
million and $10.0 million of interest during 2016, 2015 and 2014, respectively. Of the total unevaluated oil and gas property costs
of $9.0 million at December 31, 2016, $3.4 million, or 38%, was incurred in 2016, $1.1 million, or 12%, was incurred in 2015
and $4.5 million, or 50%, was incurred in prior years. The Company expects that the majority of the unevaluated costs at
December 31, 2016 will be evaluated within the next three years, including $1.8 million that the Company expects to be evaluated
during 2017.
Oil and Gas Reserve Information
The Company’s net proved oil and gas reserves at December 31, 2016 have been estimated by independent petroleum
engineers in accordance with guidelines established by the SEC using a historical 12-month, first of month, average pricing
assumption.
The estimates of proved oil and gas reserves constitute those quantities of oil, gas,and natural gas liquids, which, by
analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a
given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government
regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is
reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. However, there are
numerous uncertainties inherent in estimating quantities of proved reserves and in providing the future rates of production and
timing of development expenditures. The following reserve data represents estimates only and should not be construed as being
exact. In addition, the present values should not be construed as the current market value of the Company’s oil and gas properties
or the cost that would be incurred to obtain equivalent reserves.
F-25
Table of Contents
The following table sets forth an analysis of the Company’s estimated quantities of net proved and proved developed oil
(including condensate), gas and natural gas liquid reserves, all located onshore and offshore in the continental United States:
Proved reserves as of December 31, 2013
Revisions of previous estimates
Extensions, discoveries and other additions
Sale of reserves in place
Production
Proved reserves as of December 31, 2014
Revisions of previous estimates
Extensions, discoveries and other additions
Sale of reserves in place
Production
Proved reserves as of December 31, 2015
Revisions of previous estimates
Extensions, discoveries and other additions
Sale of reserves in place
Production
Proved reserves as of December 31, 2016
Proved developed reserves
As of December 31, 2014
Oil
in
MBbls
NGL
in
MMcfe
Natural Gas
in
MMcf
Total
Reserves
in MMcfe
3,031
(37)
475
(229)
(803)
2,437
(211)
163
(54)
(529)
1,806
247
—
(154)
(502)
1,397
28,430
2,894
49,990
(334)
(7,482)
73,498
(3,571)
16,078
(45,692)
(5,487)
34,826
(4,380)
—
—
(3,871)
26,575
250,109
9,976
82,364
(2,396)
(31,028)
309,025
(9,852)
45,645
(186,972)
(25,502)
132,344
(11,854)
1,485
(24,834)
(16,617)
80,524
296,723
12,650
135,205
(4,105)
(43,325)
397,148
(14,698)
62,702
(232,988)
(34,160)
178,004
(14,748)
1,485
(25,759)
(23,501)
115,481
2,089
42,584
182,567
237,688
As of December 31, 2015
1,549
15,792
78,533
103,615
As of December 31, 2016
1,212
13,073
47,349
67,694
Proved undeveloped reserves
As of December 31, 2014
As of December 31, 2015
As of December 31, 2016
Year Ended December 31, 2016
348
257
185
30,914
126,458
159,460
19,034
53,811
74,389
13,502
33,175
47,787
During 2016, the Company’s estimated proved reserves decreased by 35%. The decline in reserves was primarily due to
the divestiture of the Company's remaining Oklahoma assets and significant reductions in capital spending during 2016. Extensions,
discoveries and other additions of 1.5 Bcfe were primarily due to the successful completion of the Company's final Oklahoma
wells. Revisions of previous estimates included the reclassification of certain PUD reserves to probable reserves as a result of
the Company's assessment of the timing of development. Overall, the Company had a 100% drilling success rate during 2016 on
five gross wells drilled.
F-26
Table of Contents
Year Ended December 31, 2015
During 2015, the Company’s estimated proved reserves decreased by 55% primarily due to the divestiture of the majority
of the Company's Woodford Shale and Mississippian Lime assets. Extensions, discoveries and other additions of 63 Bcfe were
primarily due to successful drilling programs in the Company's Oklahoma and East Texas fields. The Company added
approximately 17 Bcfe of proved reserves in Oklahoma and 44 Bcfe in Texas. Overall, the Company had a 95% drilling success
rate during 2015 on 56 gross wells drilled.
Year Ended December 31, 2014
During 2014, the Company's estimated proved reserves increased by 34%. Extensions, discoveries and other additions
of 135 Bcfe were primarily due to successful drilling programs in the Company's Oklahoma and East Texas fields and its Thunder
Bayou discovery. The Company added approximately 72 Bcfe of proved reserves in Oklahoma, 46 Bcfe in Texas and 15 Bcfe in
the Gulf Coast. Overall, the Company had a 91% drilling success rate during 2014 on 58 gross wells drilled.
The following tables (amounts in thousands) present the standardized measure of future net cash flows related to proved
oil and gas reserves together with changes therein, as defined by ASC Topic 932. Future production and development costs are
based on current costs with no escalations. Estimated future cash flows have been discounted to their present values based on a
10% annual discount rate.
Standardized Measure
Future cash flows
Future production costs
Future development costs
Future income taxes
Future net cash flows
10% annual discount
$
Standardized measure of discounted future net cash flows $
Changes in Standardized Measure
December 31,
2016
2015
2014
299,035
(117,283)
(83,720)
—
98,032
(30,763)
67,269
$
$
487,834
(171,678)
(116,591)
—
199,565
(71,880)
127,685
$
$
1,711,404
(372,690)
(244,784)
(121,192)
972,738
(424,176)
548,562
Year Ended December 31,
2016
2015
2014
$
127,685
$
548,562
$
451,180
(35,993)
(30,427)
864
26,356
(14,889)
12,769
—
(16,701)
(2,395)
(60,416)
67,269
(55,849)
(267,710)
70,928
31,007
(14,427)
60,071
52,149
(194,454)
(102,592)
(420,877)
127,685
$
(173,540)
37,204
237,290
11,094
25,591
47,130
(32,034)
(7,240)
(48,113)
97,382
$
548,562
Standardized measure at beginning of year
Sales and transfers of oil and gas produced, net of production costs
Changes in price, net of future production costs
Extensions and discoveries, net of future production and development costs
Changes in estimated future development costs, net of development costs
incurred during this period
Revisions of quantity estimates
Accretion of discount
Net change in income taxes
Sale of reserves in place
Changes in production rates (timing) and other
Net increase (decrease) in standardized measure
Standardized measure at end of year
$
F-27
Table of Contents
The historical twelve-month, first day of the month, average prices of oil, gas and natural gas liquids used in determining
standardized measure were:
Oil, $/Bbl
Ngls, $/Mcfe
Natural Gas, $/Mcf
2016
2015
2014
$40.85
2.40
1.82
$50.29
2.24
2.41
$96.45
4.11
3.80
Note 16 - Summarized Quarterly Financial Information - Unaudited
Summarized quarterly financial information is as follows (amounts in thousands except per share data):
2016:
Revenues
Loss from operations (1)
Loss available to common stockholders (1)
Earnings per share:
Basic
Diluted
2015:
Revenues
Loss from operations (2)
Loss available to common stockholders (2)
Earnings per share:
Basic
Diluted
Quarter Ended
March 31
June 30
September 30 December 31
17,320 $
(37,557)
(39,137)
15,824 $
(22,383)
(24,143)
17,094 $
(22,039)
(23,306)
(2.09) $
(2.09) $
(1.38) $
(1.38) $
(1.31) $
(1.31) $
16,429
(8,374)
(9,659)
(0.46)
(0.46)
33,451 $
(121,887)
(122,240)
32,550 $
(57,796)
(61,083)
26,872 $
(50,617)
(51,910)
23,096
(61,864)
(64,696)
(7.55) $
(7.55) $
(3.77) $
(3.77) $
(3.19) $
(3.19) $
(3.94)
(3.94)
$
$
$
$
$
$
(1) Loss from operations and loss available to common stockholders reported during the three months ended March 31, June 30
and September 30, 2016 included pretax ceiling test write-downs of $18.9 million, $12.8 million and $8.7 million, respectively.
(2) Loss from operations and loss available to common stockholders reported during the three months ended March 31, June 30,
September 30 and December 31, 2015 included pretax ceiling test write-downs of $108.9 million, $65.5 million, $40.2 million
and $51.9 million, respectively. Additionally, loss from operations and loss available to common stockholders reported during the
three months ended June 30, 2015 included a pretax gain on sale of oil and gas properties of $21.5 million.
F-28
CORPORaTE inFORM aTiOn
bOaRD OF DiRECTORS
CORPORa TE aDDRESS
Charles T. Goodson
Chairman of the Board,
Chief Executive Officer, and President
William W. Rucks, IV *#^
Private Investments
E. Wayne Nordberg *#^
Hollow Brook Associates, LLC
W.J. Gordon III *#^
President, CEO, and Founder of TGA Global Consulting Group
Charles F. Mitchell II, M.D. *#^
Physician, Private Investments
J. Gerard Jolly *#^
CPA, Retired Partner at KPMG LLP
* Member of the Compensation Committee
# Member of the Audit Committee
^ Member of the Nominating and Corporate Governance Committee
SEniOR ManagEMEnT
Charles T. Goodson
Chairman of the Board,
Chief Executive Officer, and President
J. Bond Clement
Executive Vice President
Chief Financial Officer, and Treasurer
Art M. Mixon
Executive Vice President
Operations and Production
Edward E. Abels, Jr.
Executive Vice President, General Counsel,
and Corporate Secretary
Stephen H. Green
Senior Vice President
Exploration
Edgar A. Anderson
Vice President - ArkLaTex
PetroQuest Energy, Inc.
400 East Kaliste Saloom Road, Suite 6000
Lafayette, Louisiana 70508
Telephone: (337) 232-7028
Fax: (337) 232-0044
Web: www.petroquest.com
ExPl ORaTiOn OFFiCE
1800 Hughes Landing Blvd., Suite 200
The Woodlands, Texas 77380
Telephone: (281) 465-3900
Fax: (281) 465-3999
TRanSFER agEnT anD
REgiSTRaR
American Stock Transfer & Trust Company
59 Maiden Lane
New York, New York 10038
Telephone: (718) 921-8145
inDEPEnDEnT aUDiTORS
Ernst & Young LLP
New Orleans, Louisiana 70170
lEgal COUnSEl
Porter & Hedges, LLP
Houston, Texas 77002
Onebane Law Firm
Lafayette, Louisiana 70508
annU al MEETing
The Company’s Annual Meeting of Stockholders
will be held at 9:00 A.M. CDT on May 16, 2017,
at the City Club at River Ranch at 221 Elysian
Fields Drive, Lafayette, Louisiana, 70508.
FORM 10-K
Copies of the Company’s Annual Report on Form
10-K may be obtained, without charge, by writing
to our Corporate Secretary at our Corporate
Address or on the Company’s website at
www.petroquest.com.
COMMOn STOCK liSTing
Listed on NYSE as PQ
www.PETROQUEST.COM
nySE:PQ