PETROQUEST ENERGY INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended: September 30, 2002

[ ] 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: 019020

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PETROQUEST ENERGY, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 72-1440714
(State of Incorporation) (I.R.S. Employer Identification No.)

400 E. KALISTE SALOOM RD., SUITE 6000
LAFAYETTE, LOUISIANA 70508
(Address of principal executive offices) (Zip code)

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Registrant's telephone number, including area code: (337) 232-7028

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 X No
--- ---

As of November 8, 2002, there were 42,852,394 shares of the
registrant's common stock, par value $.001 per share, outstanding.

1

PETROQUEST ENERGY, INC.

Table of Contents

Page No.
Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets as of
September 30, 2002 and December 31, 2001................................................ 3

Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2002 and 2001................................. 4

Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2002 and 2001.......................................... 5

Notes to Consolidated Financial Statements.................................................. 6

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................... 9

Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 13

Item 4. Controls and Procedures.................................................................... 13

Part II. Other Information

Item 1. Legal Proceedings........................................................................... 14

Item 2. Changes in Securities and Use of Proceeds................................................... 14

Item 3. Defaults upon Senior Securities............................................................. 14

Item 4. Submission of Matters to a Vote of Security Holders........................................ 14

Item 5. Other Information........................................................................... 14

Item 6. Exhibits and Reports on Form 8-K............................................................ 14

2

PETROQUEST ENERGY, INC.
Consolidated Balance Sheets
(Amounts in Thousands)

See accompanying Notes to Consolidated Financial Statements.

3

PETROQUEST ENERGY, INC.
Consolidated Statements of Operations
(unaudited)
(Amounts in Thousands, Except Per Share Data)

See accompanying Notes to Consolidated Financial Statements.

4

PETROQUEST ENERGY, INC.
Consolidated Statements of Cash Flows
(unaudited)
(Amounts in Thousands)

See accompanying Notes to Consolidated Financial Statements.

5

PETROQUEST ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 BASIS OF PRESENTATION

The consolidated financial information for the three- and nine-month periods
ended September 30, 2002 and 2001, respectively, have been prepared by the
Company and was not audited by its independent public accountants. In the
opinion of management, all normal and recurring adjustments have been made to
present fairly the financial position, results of operations, and cash flows of
the Company at September 30, 2002 and for all reported periods. Results of
operations for the interim periods presented are not necessarily indicative of
the operating results for the full year or any future periods.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted. These consolidated
financial statements should be read in conjunction with the financial statements
and related notes thereto included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001.

Unless the context otherwise indicates, any references in this Quarterly Report
on Form 10-Q to "PetroQuest" or the "Company" refer to PetroQuest Energy, Inc.
(Delaware) and its wholly-owned consolidated subsidiaries, PetroQuest Energy,
L.L.C. (a single member Louisiana limited liability company) and PetroQuest Oil
& Gas, L.L.C. (a single member Louisiana limited liability company).

Certain reclassifications of prior year amounts have been made to conform with
the current year presentation.

NOTE 2 EARNINGS PER SHARE

Basic earnings or loss per common share was computed by dividing net income or
loss by the weighted average number of shares of common stock outstanding during
the relevant periods. Diluted earnings or loss per common share is determined on
a weighted average basis using common shares issued and outstanding adjusted for
the effect of stock options considered dilutive computed using the treasury
stock method.

Options to purchase 572,751 and 273,667 shares of common stock were outstanding
during the three- and nine-month periods ended September 30, 2002, but were not
included in the computation of diluted earnings per share because the options'
exercise prices were greater than the average market prices of the common shares
during the periods. These options' exercise prices were between $4.95-$7.65 and
between $5.56-$7.65, respectively, and expire in 2011-2012. Options to purchase
80,000 and 180,000 shares of common stock were outstanding during the three- and
nine-month periods ended September 30, 2001, respectively, but were not included
in the computation of diluted earnings per share because the options' exercise
prices were greater than the average market prices of the common shares during
the periods. These options' exercise prices were $7.65 and between $5.89-$7.65,
respectively, and expire in 2011.

NOTE 3 LONG-TERM DEBT

PetroQuest and our subsidiary PetroQuest Energy, L.L.C. (the "Borrower") have a
$100 million revolving credit facility with a group of three banks which permits
the Borrower to borrow amounts from time to time based on its available
borrowing base as determined in the credit facility. The credit facility is
secured by a mortgage on substantially all of the Borrower's oil and gas
properties, a pledge of the membership interest of the Borrower and PetroQuest's
corporate guarantee of the indebtedness of the Borrower. The borrowing base
under this credit facility is based upon the valuation on March 31 and September
30 of the Borrower's mortgaged properties, projected oil and gas prices, and any
other factors deemed relevant by the lenders. The Company or the lenders may
also request additional borrowing base redeterminations. On September 30, 2002,
the borrowing base under the credit facility was adjusted to $25 million and is
subject to quarterly reductions of $5 million commencing on January 31, 2003.

Outstanding balances on the revolving credit facility bear interest at either
the prime rate (plus 0.375% per year whenever the borrowing base usage under the
credit facility is greater than or equal to 90%) or the Eurodollar rate plus a
margin (based on a sliding scale of 1.625% to 2.375% depending on borrowing base
usage). The credit facility also allows the Company to use up to $10 million of
the borrowing base for letters of credit for fees of 2%

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per annum. At September 30, 2002, the Company had $16 million of borrowings and
a $2.6 million letter of credit issued pursuant to the credit facility.

The credit facility contains covenants and restrictions common to borrowings of
this type, including maintenance of certain financial ratios. The Company was in
compliance with all of its covenants at September 30, 2002. The credit facility
matures on June 30, 2004.

During the fourth quarter of 2001, the Company entered into three $5 million
interest rate swaps covering its floating rate debt. The swaps, which are for
one, two and three year periods, have fixed interest rates of 2.78%, 2.78%-4.56%
and 3.05%-5.665%, respectively. The swaps are stated at their fair value and are
marked-to-market through other income in the Company's income statement. At
September 30, 2002, the Company recognized a liability of $490,000 related to
these derivative instruments.

NOTE 4 NEW ACCOUNTING STANDARDS

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations," which requires recording the fair value of a liability for an
asset retirement obligation in the period incurred with the associated asset
retirement costs being capitalized as a part of the carrying amount of the
long-lived asset. SFAS No. 143 also includes disclosure requirements that
provide a description of asset retirement obligations and reconciliation of
changes in the components of those obligations. The Company currently records
its plugging and abandonment costs, net of salvage value, with respect to its
natural gas and oil properties as additional depreciation, depletion and
amortization expense using the units-of-production method. This statement will
require the Company to recognize a liability for the fair value of its plugging
and abandonment liability, excluding salvage value, with the associated costs as
part of its natural gas and oil property balance. The Company is still
evaluating the future financial effects of adopting SFAS No. 143 and expects to
adopt the standard effective January 1, 2003.

NOTE 5 EQUITY

Other Comprehensive Income

The following table presents a recap of the Company's comprehensive income for
the three- and nine-month periods ended September 30, 2002 and 2001 (in
thousands):

The Company accounts for derivatives in accordance with Statement of Financial
Accounting Standards No. 133, as amended (SFAS 133). When the conditions
specified in SFAS 133 are met, the Company may designate these derivatives as
hedges. As of September 30, 2002, the Company had one fixed price swap contract
with a third party, whereby a fixed price has been established for a certain
period. This agreement in effect through December 2002 is for oil volume of
25,000 barrels per month at a price of $27.25. At September 30, 2002, the
Company recognized a liability of $206,000 related to this derivative
instrument, which has been designated as a cash flow hedge.

Unearned Deferred Compensation

In April 2001, the original owners, (the "Original Owners") of American Explorer
L.L.C. entered into an agreement with an officer of the Company whereby the
Original Owners granted to the officer an option to acquire, at a fixed

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price, certain of the shares the Original Owners were issued in the September 1,
1998 merger and reorganization (the "Merger"). As the fixed price of the April
grant was below the market price as of the date of grant, the Company is
recognizing non-cash compensation expense over the three-year vesting period of
the option. In addition, the Original Owners granted to the officer an interest
in a portion of the 1,667,001 shares of common stock issuable pursuant to the
Contingent Stock Issue Rights (the "CSIRs") issued to the Original Owners in the
Merger, if any, that might be issued. This agreement is similar to agreements
previously entered into with two other officers of the Company. Non-cash
compensation expense is being recognized for the common stock issuable pursuant
to the CSIRs granted to the three officers over the three-year vesting period
based on the fair value of the common stock issuable pursuant to the CSIRs in
May 2001, when the common stock issuable pursuant to the CSIRs was issued to the
Original Owners. The Company has recorded the effects of the transactions as
deferred compensation until fully amortized. The Company recorded non-cash
compensation expense of $86,000 and $258,000 during the quarter and nine months
ended September 30, 2002, respectively, which is included in general and
administrative expense. The Company recorded non-cash compensation expense of
$86,000 and $266,000, respectively during the quarter and nine months ended
September 30, 2001.

Public Offering

During February and March 2002, the Company completed the offering of 5,193,600
shares of its common stock. The shares were sold to the public for $4.40 per
share. After underwriting discounts, the Company realized proceeds of
approximately $21.9 million.

NOTE 6 DISPOSITION OF PROPERTY

On March 1, 2002, the Company closed the sale of its interest in Valentine Field
for $18.6 million. The transaction had an effective date of January 1, 2002. At
December 31, 2001, the Company's independent reservoir engineering firm
attributed 7.3 Bcfe of proved reserves net to the Company's interest in this
field. Consistent with the full cost method of accounting, the Company did not
recognize any gain or loss as a result of this sale. The proceeds were treated
as a reduction of the full cost pool through an increase in accumulated
depreciation, depletion and amortization.

NOTE 7 SUBSEQUENT EVENT

Public Offering

During October and November 2002, the Company completed the offering of
5,000,000 shares of its common stock. The shares were sold to the public for
$4.25 per share. After underwriting discounts, the Company realized proceeds of
approximately $20.4 million. In addition, the Company has granted the
underwriter an option to purchase up to an additional 750,000 shares of its
common stock by November 29, 2002 to cover over-allotments, which may have been
made in connection with the offering.

8

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

PetroQuest Energy, Inc. is an independent oil and gas company engaged in the
exploration, development, acquisition and operation of oil and gas properties
onshore and offshore in the Gulf Coast Region. The Company and its predecessors
have been active in this area since 1986, which gives the Company extensive
geophysical, technical and operational expertise in this area.

The Company's business strategy is to increase production, cash flow and
reserves through exploration, development and acquisition of properties located
in the Gulf Coast Region. At September 30, 2002, the Company operated
approximately 95% of all of its proved reserves. For the nine months ended
September 30, 2002, approximately 42% of the Company's equivalent production was
oil and 58% was natural gas.

CRITICAL ACCOUNTING POLICIES

Full cost method

The Company uses the full cost method of accounting, which involves
capitalizing all acquisition, exploration and development costs. Once incurred,
costs are recorded in the full cost pool or in unevaluated properties.
Unevaluated property costs are not subject to depletion. The Company reviews its
unevaluated costs on an ongoing basis, and the Company expects for such costs to
be evaluated in one to three years and transferred to the full cost pool at that
time.

The Company calculates depletion using the units-of-production method.
Under this method, the full cost pool and all estimated future development costs
are divided by the total amount of proved reserves. This rate is applied to the
Company's total production for the period, and the appropriate expense is
recorded.

The Company capitalizes a portion of the interest costs incurred on its
debt. Capitalized interest is calculated using the amount of the Company's
unevaluated property and its effective borrowing rate. The Company also
capitalizes the portion of general and administrative costs that are
attributable to its acquisition, exploration and development activities.

To the extent that total capitalized oil and gas property costs (net of
accumulated depreciation, depletion and amortization) exceed the present value
(using a 10% discount rate) of estimated future net cash flow from proved oil
and natural gas reserves, and the lower of cost and fair value of unproved
properties, excess costs are charged to operations. Once incurred, a write-down
of oil and natural gas properties is not reversible at a later date even if oil
or natural gas prices increase. The Company could be required to write-down its
oil and gas properties if there is a decline in oil and natural gas prices, or
downward adjustments are made to its proved reserves.

Reserves

Oil and gas reserve estimates are prepared by the Company's independent
petroleum and geological engineers. Proved reserves, and the cash flows related
to these reserves, are estimated based on a combination of historical data and
estimates of future activity. Reserve estimates are used in calculating
depletion and in preparation of the full cost ceiling test.

Derivative Instruments

The Company follows SFAS 133 accounting for derivative instruments. The
accounting standard requires that the Company record its derivatives at fair
market value as of the balance sheet date. The calculations of fair value are
estimates of the derivatives future values based on current factors.

9

For a more complete discussion of the Company's accounting policies see
the Company's Annual Report on Form 10-K for the year ended December 31, 2001,
including the financial statements and the notes thereto.

RESULTS OF OPERATIONS

The following table (unaudited) sets forth certain operating information with
respect to our oil and gas operations for the periods noted:

Net income totaled $950,000 and $2,508,000 for the quarters ended September 30,
2002 and 2001, respectively. Net income totaled $841,000 and $10,503,000 for the
nine-month periods ended September 30, 2002 and 2001, respectively. The results
are attributable to the following components:

PRODUCTION. Oil production in 2002 increased 1% and 15% over the third quarter
and nine months ended September 30, 2001, respectively. Natural gas production
in 2002 decreased 48% and 2% over the third quarter and nine months ended
September 30, 2001, respectively. On an Mcfe basis, production for the third
quarter and nine months decreased and increased 32% and 4% over the same periods
in 2001, respectively. The decrease in production in the quarter ended September
30, 2002 as compared to 2001 was due to weather and certain well performance at
the Ship Shoal 72 and Turtle Bayou fields.

PRICES. Average oil prices per Bbl for the third quarter and nine months ended
September 30, 2002 were $26.73 and $24.29, respectively, as compared to $25.95
and $26.79, respectively, for the same periods in 2001. Average gas prices per
Mcf were $3.34 and $2.84, respectively, for the third quarter and nine months
ended September 30, 2002, as compared to $3.36 and $4.51, respectively, for the
same periods in 2001. Stated on a Mcfe basis, unit prices received during the
third quarter and nine months of 2002 were 6% higher and 26% lower,
respectively, than the prices received during the comparable 2001 periods.

REVENUE. Oil and gas sales during the third quarter and nine months ended
September 30, 2002 decreased to $11,220,000 and $33,085,000, respectively, as
compared to sales of $15,611,000 and $42,546,000, respectively for the same
periods in 2001. The decrease in commodity prices and production volumes,
resulted in a decrease in revenue.

EXPENSES. Lease operating expenses for the third quarter and nine months ended
September 30, 2002 increased to $2,487,000 and $7,240,000, respectively, as
compared to $1,984,000 and $5,140,000, respectively, for the third quarter and
nine months ended September 30, 2001. On a Mcfe basis, lease operating expenses
for the third quarter and nine months ended September 30, 2002 increased to
$0.86 and $0.73, respectively, as compared to $.47 and $0.54, respectively, for
the same periods in 2001. The increases during the third quarter and nine months
ended September 30, 2002, as compared to the same periods in 2001 are primarily
due to an increase in the repairs and maintenance at the Ship Shoal 72 Field.

10

General and administrative expenses during the third quarter and nine months
ended September 30, 2002 totaled $1,016,000 and $3,758,000, respectively, as
compared to expenses of $1,264,000 and $3,179,000, respectively, during the 2001
periods. The Company capitalized $784,000 and $2,752,000, respectively, of
general and administrative costs during the quarter and nine months ended
September 30, 2002 as compared to $688,000 and $1,924,000, respectively in the
comparable 2001 periods. The increase in general and administrative expenses is
primarily due to an increase in staffing levels related to the generation of
prospects, exploration for oil and gas reserves and operation of properties. We
have recognized $86,000 and $258,000, respectively, of non-cash compensation
expense during the quarter and nine months ended September 30, 2002. We recorded
non-cash compensation expense of $86,000 and $266,000, respectively, during the
quarter and nine months ended September 30, 2001.

Depreciation, depletion and amortization ("DD&A") expense for the three- and
nine-month periods ended September 30, 2002 decreased 18% and increased 27%,
respectively, from the 2001 periods. On a Mcfe basis, which reflects the changes
in production, the DD&A rate for the third quarter of 2002 was $2.05 per Mcfe as
compared to $1.70 per Mcfe for the same period in 2001. The DD&A rate for the
nine months ended September 30, 2002 was $1.98 per Mcfe compared to $1.63 per
Mcfe for the same period in 2001. The increase in 2002 as compared to 2001 is
due primarily to the significant capital and future development costs related to
our offshore projects, as well as drilling costs in excess of previous estimates
during the previous twelve months.

Interest expense, net of amounts capitalized on unevaluated prospects, decreased
$674,000 and $1,430,000 during the third quarter and nine months ended September
30, 2002, respectively, as compared to same periods in 2001. The decreases are
the result of a decrease in the average debt levels and interest rates during
the current year. We capitalized $150,000 and $215,000 of interest during the
three months ended September 30, 2002 and 2001, respectively, and $457,000 and
$823,000 during the nine months ended September 30, 2002 and 2001, respectively.

Income tax of $511,000 and $453,000 was recognized during the third quarter and
nine months ended September 30, 2002, respectively, as compared to $1,473,000
and $6,170,000 during the same periods of 2001. The decreases are the result of
a decrease in the operating profit during the current year. We provide for
income taxes at a statutory rate of 35%.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our exploration and development activities to date principally
through cash flow from operations, bank borrowings, property sales, and private
and public offerings of our common stock. Net cash flow from operations before
working capital changes during the nine-month periods ended September 30,
decreased from $33,633,000 in 2001 to $21,829,000 in 2002. This decrease is
primarily a result of decreases in commodity prices during 2002. These decreases
in commodity prices caused lower revenues and operating cash flows during the
current year. The working capital deficit (before considering debt) increased
from $(10.4) million at December 31, 2001 to $(18.9) million at September 30,
2002. The increase in our working capital deficit is due to higher capital
expenditures resulting from increased drilling costs at the Berry Lake and other
prospects and completion costs for successful wells.

During February and March 2002, we completed the offering of 5,193,600 shares of
our common stock. The shares were sold to the public for $4.40 per share. After
underwriting discounts, we realized proceeds of approximately $21.9 million.

During October and November 2002, the Company completed the offering of
5,000,000 shares of its common stock. The shares were sold to the public for
$4.25 per share. After underwriting discounts, the Company realized proceeds of
approximately $20.4 million. In addition, the Company has granted the
underwriter an option to purchase up to an additional 750,000 shares of its
common stock by November 29, 2002 to cover over-allotments, which may have been
made in connection with the offering.

The Company has an effective universal shelf registration statement, relating to
the potential public offer and sale by the Company of any combination of debt
securities, common stock, preferred stock, depositary shares, and warrants from
time to time or when financing needs arise. The registration statement does not
provide assurance that the Company will or could sell any such securities.

11

On March 1, 2002, we closed the sale of our interest in Valentine Field for
$18.6 million. The transaction had an effective date of January 1, 2002. At
December 31, 2001, our independent reservoir engineering firm attributed 7.3
Bcfe of proved reserves net to our interest in this field. Consistent with the
full cost method of accounting, we did not recognize any gain or loss as a
result of this sale. The proceeds were treated as a reduction of the full cost
pool.

PetroQuest and our subsidiary PetroQuest Energy, L.L.C. (the "Borrower") have a
$100 million revolving credit facility with a group of three banks which permits
us to borrow amounts from time to time based on our available borrowing base as
determined in the credit facility. The credit facility is secured by a mortgage
on substantially all of the Borrower's oil and gas properties, a pledge of the
membership interest of the Borrower and PetroQuest's corporate guarantee of the
indebtedness of the Borrower. The borrowing base under this credit facility is
based upon the valuation on March 31 and September 30 of the Borrower's
mortgaged properties, projected oil and gas prices, and any other factors deemed
relevant by the lenders. We or the lenders may also request additional borrowing
base redeterminations. On September 30, 2002, the borrowing base under the
credit facility was adjusted to $25 million and is subject to quarterly
reductions of $5 million commencing on January 31, 2003.

Outstanding balances on the revolving credit facility bear interest at either
the prime rate (plus 0.375% per year whenever the borrowing base usage under the
credit facility is greater than or equal to 90%) or the Eurodollar rate plus a
margin (based on a sliding scale of 1.625% to 2.375% depending on borrowing base
usage). The credit facility also allows us to use up to $10 million of the
borrowing base for letters of credit for fees of 2% per annum. At September 30,
2002, we had $16 million of borrowings and a $2.6 million letter of credit
issued pursuant to the credit facility.

The credit facility contains covenants and restrictions common to borrowings of
this type, including maintenance of certain financial ratios. We were in
compliance with all of our covenants at September 30, 2002. The credit facility
matures on June 30, 2004.

Natural gas and oil prices have a significant impact on the Company's cash flows
available for capital expenditures and its ability to borrow and raise
additional capital. The amount the Company can borrow under its credit facility
is subject to periodic re-determination based in part on changing expectations
of future prices. Lower prices may also reduce the amount of natural gas and oil
that the Company can economically produce. Additionally, the production declines
of certain producing wells resulted in lower production in 2002. Lower prices
and/or lower production may decrease revenues, cash flows and the borrowing base
under the credit facility, thus reducing the amount of financial resources
available to meet the Company's capital requirements.

We have an exploration and development program budget for the year 2002 which
will require significant capital. Our budget for direct capital for new projects
in 2002 is approximately $60 million of which approximately $49 million has been
incurred as of September 30, 2002. Although we have not determined our budget
for direct capital for new projects in 2003, we are currently planning for six
wells to be drilled in the first half of 2003, which will expose us to
approximately 162 Bcfe of net unrisked reserves along with anticipated
development activity on these projects. Our management believes the cash flows
from operations, proceeds from our recent offering and anticipated available
borrowing capacity under our credit facility will be sufficient to fund
remaining planned 2002 and identified 2003 exploration and development
activities. In the future, our exploration and development activities could
require additional financings, which may include sales of additional equity or
debt securities, additional bank borrowings, or joint venture arrangements with
industry partners. There can be no assurances that such additional financings
will be available on acceptable terms, if at all. If we are unable to obtain
additional financing, we could be forced to delay or even abandon some of our
exploration and development opportunities or be forced to sell some of our
assets on an untimely or unfavorable basis.

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

This Form 10-Q 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-Q 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. Among those risks, trends and
uncertainties are the Company's estimate of the sufficiency of its existing
capital sources, its ability to raise additional capital to fund cash
requirements for future operations, the uncertainties involved in estimating

12

quantities of proved oil and natural gas reserves, in prospect development and
property acquisitions and in projecting future rates of production, the timing
of development expenditures and drilling of wells, and the operating hazards
attendant to the oil and gas business. In particular, careful consideration
should be given to cautionary statements made in the various reports the Company
has filed with the Securities and Exchange Commission. The Company undertakes no
duty to update or revise these forward-looking statements.

When used in the Form 10-Q, 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 Discussions and Analysis
of Financial Condition and Results of Operations" and elsewhere in this Form
10-Q.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company experiences market risks primarily in two areas: interest rates and
commodity prices. The Company believes that its business operations are not
exposed to significant market risks relating to foreign currency exchange risk.

The Company's revenues are derived from the sale of its crude oil and natural
gas production. Based on projected annual sales volumes for the remaining three
months of 2002, a 10% change in the prices the Company receives for its crude
oil and natural gas production would have an approximate $1.5 million impact on
the Company's revenues.

In a typical hedge transaction, the Company will have the right to receive from
the counterparts 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, the Company is required
to pay the counterparts this difference multiplied by the quantity hedged. The
Company is required to pay the difference between the floating price and the
fixed price (when the floating price exceeds the fixed price) regardless of
whether the Company has 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 the Company to make payments under
the hedge agreements even though such payments are not offset by sales of
production. Hedging will also prevent the Company from receiving the full
advantage of increases in oil or gas prices above the fixed amount specified in
the hedge. The Company had one fixed price swap contract with a third party,
whereby a fixed price has been established for a certain period. This agreement
in effect through December 2002 is for oil volume of 25,000 barrels per month at
a price of $27.25. At September 30, 2002, the Company recognized a liability of
$206,000 related to this derivative instrument, which has been designated as a
cash flow hedge.

During the fourth quarter of 2001, we entered into three $5 million interest
rate swaps covering our floating rate debt. The swaps, which are for one, two
and three year periods, have fixed interest rates of 2.78%, 2.78%-4.56% and
3.05%-5.665%, respectively. The swaps are stated at their fair value and are
marked-to-market through other income in our income statement. At September 30,
2002, the Company recognized a liability of $490,000 related to these derivative
instruments.

The Company also evaluated the potential effect that reasonably possible near
term changes may have on the Company's credit facility. Debt outstanding under
the facility is subject to a floating interest rate and represents 100% of the
Company's total debt as of September 30, 2002. Based upon an analysis, utilizing
the actual interest rate in effect and balances outstanding as of September 30,
2002 and assuming a 10% increase in interest rates and no changes in the amount
of debt outstanding, the potential effect on interest expense for the remaining
three months of 2002 is approximately $15,000.

Item 4. CONTROLS AND PROCEDURES

Within the 90-day period prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's

13

disclosure controls and procedures are effective, in all material respects, with
respect to the recording, processing, summarizing and reporting, within the time
periods specified in the Securities and Exchange Commission's rules and forms,
of information required to be disclosed by the issuer in the reports that it
files or submits under the Exchange Act.

There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date the Company carried out its evaluation.

PART II

Item 1. LEGAL PROCEEDINGS

On October 9, 2002, the Company's wholly owned subsidiary,
PetroQuest Energy, L.L.C. ("PetroQuest Energy"), entered into a settlement
agreement with Schlumberger Well Services, a division of Schlumberger Technology
Corporation, Dowell, a division of Schlumberger Technology Corporation,
Schlumberger Technology Corporation, Petroleum Engineers International, Inc. and
Jeff Dunman ("Schlumberger, et al.") relating to lawsuit filed by PetroQuest
Energy against Schlumberger, et al. to recover cost overruns which were incurred
in the completion of the OCSG-15243 #2 Well located at Eugene Island Block 147.
Under the terms of the settlement agreement, the Company received a cash
settlement and the parties dismissed their respective lawsuits with prejudice.

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

NONE.

Item 3. DEFAULTS UPON SENIOR SECURITIES

NONE.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

NONE.

Item 5. OTHER INFORMATION

NONE.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

(b) Reports on Form 8-K:

The Company filed a report on Form 8-K on July 1, 2002, relating
to changes in its certifying accountant.

The Company filed a report on Form 8-K on July 31, 2002, relating
to second quarter 2002 results.

The Company filed a report on Form 8-K on August 15, 2002,
relating to a discovery at one of its prospects.

14

SIGNATURE

Pursuant to the requirements 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.

PETROQUEST ENERGY, INC.

Date: November 14, 2002 By: /s/ Michael O. Aldridge
------------------------ --------------------------------------
Michael O. Aldridge
Senior Vice President, Chief
Financial Officer and Treasurer
(Authorized Officer and Principal
Financial and Accounting Officer)

15

CERTIFICATIONS

I, Charles T. Goodson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of PetroQuest
Energy, Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002 By: /s/ Charles T. Goodson
---------------------------------------
Charles T. Goodson
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)

16

I, Michael O. Aldridge, certify that:

1. I have reviewed this quarterly report on Form 10-Q of PetroQuest
Energy, Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002 By: /s/ Michael O. Aldridge
----------------------------------------
Michael O. Aldridge
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)

17

EXHIBIT INDEX