Petroquest Energy Inc. (PQ)

[Picassa]

PetroQuest (PQ) reported numbers yesterday below analyst expectations with a loss of $155M for 4Q08. Earnings were impacted by a $247M hit on reserve write-down ($155 M on a post-tax basis).

The stock is currently trading 16% lower and 92% of its peak. This seems to be unwarranted given good prospects. The company has guided for higher volumes for FY09 (90-100 M mcfe/d vs 92.6 M mcfe/d in 2008) with 60% hedged at $8 per mcfe

The hedge at $8 per mcfe for 60% of the volumes leaves the company's projected capex of $80-100M adequately protected.

PQ could be one of the key beneficiaries of rise in gas prices from current levels. Pointers towards higher gas prices include higher futures prices and current under-investment in drilling that will reduce volumes as we go through the year. A sample of this is PQ with volumes guided to decline from 105-110M mcfe/d in 1Q09 to 90-100 M mcfe/d in FY09. This could be partly due to seasonality in gas demand with 1Q and 4Q being the highest demand periods.

Rough estimates for FY09 based on current gas prices point to $0.45 of earnings and $30-35 M of free cash flow. Upsides to these numbers exist from higher oil and gas prices.

It's worth a look given improved risk-reward.