Maintaining PetroQuest At Outperform On Expected Woodford Production Growth

11/4/2009 3:16 AM ET

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(RTTNews) - FBR Capital Markets on Tuesday maintained its "Outperform" rating on PetroQuest Energy Inc. (PQ: News ), as the brokerage expects production to improve significantly in the first quarter of fiscal 2010, helped by strong growth in Woodford operated drilling program.

Analysts Rehan Rashid said in a research note that the company restarted activity in the Woodford with one operated rig. It plans to drill a second well on a two-well pad, resulting in savings of about $250,000 per well in drilling costs. Additionally, PetroQuest will also complete the two wells drilled last year. The firm expects the company to grow production from the first quarter of 2010 on the back of Woodford production growth.

PetroQuest has about 50,000 net acres in the Southeast Carthage Field with Bossier shale potential. The brokerage noted that with a stable liquidity position, the capital expenditure budget for fiscal 2010, which is up for board approval, can be expected to increase activity in the Woodford and the Gulf Coast region.

Referring to the company's earnings reported earlier in the day, FBR noted that PetroQuest posted third-quarter adjusted earnings per share of $0.07 and cash flow per share of $0.55, compared to the brokerage's estimates of $0.13 and $0.58, respectively. The company's third-quarter production was 86.9 MMcfe/d, compared to the research firm's estimate of 87.1 MMcfe/d.

The analysts said the average production rate for the company's properties would continue to decline this year. The firm looks for Woodford completions and capital deployment to stabilize 2010 volumes.

''We are maintaining our Outperform rating, given these growth prospects, and awaiting drilling plans and capex budget to be released for FY10. Our $8.00 per share price target represents 8.0x 2010 EV/DACF, in line with small-cap, gas-levered resource peers,'' the firm said.

However, the brokerage noted that like its peers, the primary risk with PetroQuest is a depressed oil and gas price environment, which reduces the company's cash flow generation. While setting a capital expenditure budget associated with long-term projects becomes particularly risky in extremely volatile price environment, PetroQuest mitigates a portion of this volatility through hedging strategies, FBR Research noted.

Since PetroQuest is producing from only a few fields, its expected oil and gas production can vary more than that of a larger, well-diversified producer, the firm added. The company has a short reserve to production life, increasing its reinvestment risk.