10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: June 30, 2010

o 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	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)

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 þ     No o

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 o     No o

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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No þ

As of August 2, 2010, there were 63,196,836 shares of the registrant’s common stock, par value $.001 per share, outstanding.

PETROQUEST ENERGY, INC.

Table of Contents

	Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009		1
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009		2
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009		3
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2010 and 2009		4
Notes to Consolidated Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3. Quantitative and Qualitative Disclosures About Market Risk		20
Item 4. Controls and Procedures		21
Part II. Other Information
Item 1. Legal Proceedings		21
Item 1A. Risk Factors		21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 3. Defaults upon Senior Securities		23
Item 4. (Removed and Reserved)		23
Item 5. Other Information		23
Item 6. Exhibits		23
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PETROQUEST ENERGY, INC.

Consolidated Balance Sheets

(Amounts in Thousands)

	June 30,			December 31,
	2010			2009
	(unaudited)			(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	57,844		$	20,772
Revenue receivable		13,798			16,457
Joint interest billing receivable		18,902			11,792
Hedging asset		6,482			2,796
Prepaid drilling costs		1,070			2,383
Drilling pipe inventory		16,576			19,297
Other current assets		3,453			1,619
Total current assets		118,125			75,116
Property and equipment:
Oil and gas properties:
Oil and gas properties, full cost method		1,366,573			1,296,177
Unevaluated oil and gas properties		62,279			108,079
Accumulated depreciation, depletion and amortization		(1,145,600	)		(1,082,381	)
Oil and gas properties, net		283,252			321,875
Gas gathering assets		4,177			4,848
Accumulated depreciation and amortization of gas gathering assets		(1,347	)		(1,198	)
Total property and equipment		286,082			325,525
Long-term receivable		19,029			5,731
Other assets, net of accumulated depreciation and amortization of $9,342 and $8,342, respectively		3,388			4,087
Total assets	$	426,624		$	410,459
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable to vendors	$	36,119		$	27,113
Advances from co-owners		3,239			3,662
Oil and gas revenue payable		7,755			7,886
Accrued interest and preferred stock dividend		3,018			3,133
Asset retirement obligation		1,941			4,517
Other accrued liabilities		4,938			4,106
Total current liabilities		57,010			50,417
Bank debt		—			29,000
10 3/8% Senior Notes		149,413			149,267
Asset retirement obligation		16,940			19,399
Other liabilities		364			271
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.001 par value; authorized 5,000 shares; issued and outstanding 1,495 shares		1			1
Common stock, $.001 par value; authorized 150,000 shares; issued and outstanding 61,434 and 61,177 shares, respectively		61			61
Paid-in capital		263,505			259,981
Accumulated other comprehensive income		4,071			1,768
Accumulated deficit		(64,741	)		(99,706	)
Total stockholders’ equity		202,897			162,105
Total liabilities and stockholders’ equity	$	426,624		$	410,459

See accompanying Notes to Consolidated Financial Statements.

1

PETROQUEST ENERGY, INC.

Consolidated Statements of Operations

(unaudited)

(Amounts in Thousands, Except Per Share Data)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2010		2009			2010			2009
Revenues:
Oil and gas sales	$	41,857	$	55,376		$	89,402		$	114,610
Gas gathering revenue		61		(115	)		130			100
		41,918		55,261			89,532			114,710
Expenses:
Lease operating expenses		9,020		8,373			18,715			19,506
Production taxes		1,599		846			2,947			3,020
Depreciation, depletion and amortization		13,744		18,374			28,728			50,193
Ceiling test writedown		—		—			—			103,582
Gas gathering costs		—		88			11			167
General and administrative		5,816		4,197			10,325			9,022
Accretion of asset retirement obligation		408		472			876			1,124
Interest expense		2,379		3,388			4,189			6,564
		32,966		35,738			65,791			193,178
Gain on legal settlement		—		—			12,400			—
Gain on sale of assets		—		—			—			485
Other income (expense)		94		(2,339	)		11			(5,309	)
Income (loss) from operations		9,046		17,184			36,152			(83,292	)
Income tax expense (benefit)		2,511		8,151			(1,380	)		(26,648	)
Net income (loss)		6,535		9,033			37,532			(56,644	)
Preferred stock dividend		1,287		1,287			2,567			2,567
Net income (loss) available to common stockholders	$	5,248	$	7,746		$	34,965		$	(59,211	)
Earnings per common share:
Basic
Net income (loss) per share	$	0.08	$	0.15		$	0.56		$	(1.20	)
Diluted
Net income (loss) per share	$	0.08	$	0.15		$	0.56		$	(1.20	)
Weighted average number of common shares:
Basic		61,425		49,631			61,335			49,489
Diluted		62,421		50,188			67,356			49,489

See accompanying Notes to Consolidated Financial Statements.

2

PETROQUEST ENERGY, INC.

Consolidated Statements of Cash Flows

(unaudited)

(Amounts in Thousands)

	Six Months Ended
	June 30,
	2010			2009
Cash flows from operating activities:
Net income (loss)	$	37,532		$	(56,644	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Deferred tax benefit		(1,380	)		(26,648	)
Depreciation, depletion and amortization		28,728			50,193
Ceiling test writedown		—			103,582
Non-cash gain on legal settlement		(4,164	)		—
Gain on sale of assets		—			(485	)
Accretion of asset retirement obligation		876			1,124
Inventory impairment		—			861
Share based compensation expense		3,752			3,525
Amortization costs and other		787			748
Payments to settle asset retirement obligations		(5,389	)		(591	)
Changes in working capital accounts:
Revenue receivable		2,659			6,699
Joint interest billing receivable		(7,110	)		12,871
Prepaid drilling and pipe costs		4,034			9,910
Accounts payable and accrued liabilities		8,359			(51,864	)
Advances from co-owners		(423	)		(5,149	)
Other		(1,943	)		(2,638	)
Net cash provided by operating activities		66,318			45,494
Cash flows from (used in) investing activities:
Investment in oil and gas properties		(68,822	)		(30,811	)
Proceeds from sale of unevaluated properties		36,473			—
Proceeds from sale of oil and gas properties		35,000			4,772
Net cash provided by (used in) investing activities		2,651			(26,039	)
Cash flows from (used in) financing activities:
Net payments for share based compensation		(228	)		(234	)
Deferred financing costs		(104	)		(63	)
Net proceeds from common stock offering		—			38,030
Payment of preferred stock dividend		(2,565	)		(2,569	)
Repayment of bank borrowings		(29,000	)		—
Net cash provided by (used in) financing activities		(31,897	)		35,164
Net increase in cash and cash equivalents		37,072			54,619
Cash and cash equivalents, beginning of period		20,772			23,964
Cash and cash equivalents, end of period	$	57,844		$	78,583
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	8,237		$	10,509
Income taxes	$	3		$	—

See accompanying Notes to Consolidated Financial Statements.

3

PETROQUEST ENERGY, INC.

Consolidated Statements of Comprehensive Income

(unaudited)

(Amounts in Thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010		2009
Net income (loss)	$	6,535		$	9,033		$	37,532	$	(56,644	)
Change in fair value of derivative instruments, accounted for as hedges, net of tax benefit (expense) of $2,508, $8,151, ($1,383) and $2,198, respectively		(4,266	)		(13,846	)		2,303		(3,710	)
Comprehensive income (loss)	$	2,269		$	(4,813	)	$	39,835	$	(60,354	)

See accompanying Notes to Consolidated Financial Statements.

4

PETROQUEST ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1 — Basis of Presentation

The consolidated financial information for the three and six month periods ended June 30, 2010 and 2009, respectively, have been prepared by the Company and were not audited by its independent registered 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 June 30, 2010 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.

The balance sheet at December 31, 2009 has been derived from the audited financial statements at that date. 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 audited financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

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), PetroQuest Oil & Gas, L.L.C. (a single member Louisiana limited liability company), TDC Energy LLC (a single member Louisiana limited liability company) and Pittrans, Inc. (an Oklahoma corporation).

Note 2 — 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.

Mandatory conversion. On or after October 20, 2010, 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 3.4433 shares of the Company’s common stock (which is based on an initial conversion price of approximately $14.52 per share of common stock, subject to 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.

5

Note 3 — Earnings Per Share

A reconciliation between basic and diluted earnings (loss) per share computations (in thousands, except per share amounts) is as follows:

	Income			Shares		Per
For the Three Months Ended June 30, 2010	(Numerator)			(Denominator)		Share Amount
Net income available to common stockholders	$	5,248			61,425
Attributable to participating securities		(145	)		—
BASIC EPS	$	5,103			61,425	$	0.08
Effect of dilutive securities:
Stock options		—			381
Restricted stock		145			615
Series B preferred stock		—			—
DILUTED EPS	$	5,248			62,421	$	0.08

	Income			Shares		Per
For the Three Months Ended June 30, 2009	(Numerator)			(Denominator)		Share Amount
Net income available to common stockholders	$	7,746			49,631
Attributable to participating securities		(208	)		—
BASIC EPS	$	7,538			49,631	$	0.15
Effect of dilutive securities:
Stock options		—			202
Restricted stock		208			355
Series B preferred stock		—			—
DILUTED EPS	$	7,746			50,188	$	0.15

	Income			Shares		Per
For the Six Months Ended June 30, 2010	(Numerator)			(Denominator)		Share Amount
Net income available to common stockholders	$	34,965			61,335
Attributable to participating securities		(891	)		—
BASIC EPS	$	34,074			61,335	$	0.56
Effect of dilutive securities:
Stock options		—			375
Restricted stock		891			498
Series B preferred stock		2,567			5,148
DILUTED EPS	$	37,532			67,356	$	0.56

	Loss			Shares		Per
For the Six Months Ended June 30, 2009	(Numerator)			(Denominator)		Share Amount
BASIC EPS
Net loss available to common stockholders	$	(59,211	)		49,489	$	(1.20	)
Effect of dilutive securities:
Stock options		—			—
Restricted stock		—			—
Series B preferred stock		—			—
DILUTED EPS	$	(59,211	)		49,489	$	(1.20	)

6

Common shares issuable upon the assumed conversion of the Series B preferred stock totaling 5,148,000 shares were not included in the computation of diluted earnings per share for the three month periods ended June 30, 2010 and 2009 because the inclusion would have been anti-dilutive. Restricted stock and stock options totaling 514,768 shares and common shares issuable upon the assumed conversion of the Series B preferred stock totaling 5,148,000 shares were not included in the computation of diluted earnings per share for the six-month period ended June 30, 2009 because the inclusion would have been anti-dilutive as a result of the net loss reported for the period.

Options to purchase 2.1 million shares of common stock were outstanding during the three and six month periods ended June 30, 2010 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. During each of the three and six month periods ended June 30, 2009, options to purchase approximately 1.7 million shares of common stock were outstanding 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.

Note 4 — Common Stock Offering

On June 30, 2009, the Company received approximately $38 million in net proceeds through the public offering of 11.5 million shares of its common stock, which included the issuance of 1.5 million shares pursuant to the underwriters’ over-allotment option.

Note 5 — Long-Term Debt

The Company and PetroQuest Energy, L.L.C. have outstanding $150 million of 10 3/8% Senior Notes that are due in 2012 (the “Notes”). At June 30, 2010, the estimated fair value of the Notes was $151.9 million, based upon a market quote provided by an independent broker. The Notes have numerous covenants including restrictions on liens, incurrence of indebtedness, asset sales, dividend payments and other restricted payments. Interest is payable semi-annually on May 15 and November 15. At June 30, 2010, $1.9 million had been accrued in connection with the November 15, 2010 interest payment and the Company was in compliance with all of the covenants contained in the Notes.

The Company and PetroQuest Energy, L.L.C. (the “Borrower”) have a Credit Agreement (as amended, the “Credit Agreement”) with JPMorgan Chase Bank, N.A., Calyon New York Branch, Bank of America, N.A., Wells Fargo Bank, N.A., and Whitney National Bank. The Credit Agreement provides the Company with a $300 million revolving credit facility that permits borrowings based on the available borrowing base as determined in accordance with the Credit Agreement. The Credit Agreement also allows the Company to use up to $25 million of the borrowing base for letters of credit. The Credit Agreement matures on February 10, 2012; provided, however, if on or prior to such date the Company prepays or refinances, subject to certain conditions, the Notes, the maturity date will be extended to October 2, 2013. As of June 30, 2010, the Company had no borrowings outstanding under (and no letters of credit issued pursuant to) the Credit Agreement.

The borrowing base under the Credit Agreement is based upon the valuation of the reserves attributable to the Company’s oil and gas properties as of January 1 and July 1 of each year. The borrowing base, which was based upon the valuation of the reserves attributable to the Company’s oil and gas properties as of January 1, 2010, is $100 million effective March 22, 2010. The next borrowing base redetermination is scheduled to occur by September 30, 2010. The Company or the lenders may request two additional borrowing base redeterminations each year. Each time the borrowing base is to be re-determined, the administrative agent under the Credit Agreement will propose a new borrowing base as it deems appropriate in its sole discretion, which must be approved by all lenders if the borrowing base is to be increased, or by lenders holding two-thirds of the amounts outstanding under the Credit Agreement if the borrowing base remains the same or is reduced.

The indenture governing the Notes also limits the Company’s ability to incur indebtedness under the Credit Agreement. Under the indenture, the Company cannot incur additional secured indebtedness under the Credit Agreement if at the time of such incurrence, the total amount of indebtedness under the Credit Agreement is in excess of the greater of (i) $75 million and (ii) 20% of its ACTNA (as defined in the indenture). That calculation is based primarily on the valuation of the Company’s estimated reserves of oil and natural gas using the trailing 12 month average commodity pricing methodology as of the prior year-end. As of June 30, 2010, the indenture limits the Company’s borrowings under the Credit Agreement to $75 million.

7

The Credit Agreement is secured by a first priority lien on substantially all of the assets of the Company and its subsidiaries, including a lien on all equipment and at least 85% of the aggregate total value of the Company’s oil and gas properties. Outstanding balances under the Credit Agreement bear interest at the alternate base rate (“ABR”) plus a margin (based on a sliding scale of 1.625% to 2.625% depending on borrowing base usage) or the adjusted LIBO rate (“Eurodollar”) plus a margin (based on a sliding scale of 2.5% to 3.5% depending on borrowing base usage). The alternate base rate is equal to the highest of (i) the JPMorgan Chase prime rate, (ii) the Federal Funds Effective Rate plus 0.5% or (iii) the adjusted LIBO rate plus 1%. For the purposes of the definition of alternative base rate only, the adjusted LIBO rate is equal to the rate at which dollar deposits of $5,000,000 with a one month maturity are offered by the principal London office of JPMorgan Chase Bank, N.A. in immediately available funds in the London interbank market. For all other purposes, the adjusted LIBO rate is equal to the rate at which Eurodollar deposits in the London interbank market for one, two, three or six months (as selected by the Company) are quoted, as adjusted for statutory reserve requirements for Eurocurrency liabilities. Outstanding letters of credit are charged a participation fee at a per annum rate equal to the margin applicable to Eurodollar loans, a fronting fee and customary administrative fees. In addition, the Company pays commitment fees of 0.5%.

The Company and its subsidiaries are subject to certain restrictive financial covenants under the Credit Agreement, including a maximum ratio of total debt to EBITDAX, determined on a rolling four quarter basis, of 3.0 to 1.0 and a minimum ratio of consolidated current assets to consolidated current liabilities of 1.0 to 1.0, all as defined in the Credit Agreement. The Credit 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 June 30, 2010, the Company was in compliance with all of the covenants contained in the Credit Agreement.

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 all changes to the Company’s asset retirement obligation liability (in thousands):

Asset retirement obligation at January 1, 2010	$	23,916
Liabilities settled		(6,478	)
Accretion expense		876
Revisions in estimated cash flows		567
Asset retirement obligation at June 30, 2010		18,881
Less: current portion of asset retirement obligation		(1,941	)
Long-term asset retirement obligation	$	16,940

Liabilities settled during the six months ended June 30, 2010 included two offshore fields that were completely decommissioned and the liability for an additional offshore platform that was transferred to a third party related to a farmout.

Note 7 — Share Based Compensation

The Company accounts for share-based compensation in accordance with ASC Topic 718. Share-based compensation expense is reflected as a component of the Company’s general and administrative expense. A detail of share-based compensation for the periods ended June 30, 2010 and 2009 is as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
Stock options:
Incentive Stock Options	$	197	$	146	$	432	$	440
Non-Qualified Stock Options		502		448		1,074		1,117
Restricted stock		1,071		751		2,246		1,968
Share based compensation	$	1,770	$	1,345	$	3,752	$	3,525

8

Note 8 — Ceiling Test

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 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.

As a result of lower prices at March 31, 2009, and the associated negative impact on certain of the Company’s proved reserves and estimated future net cash flows, the Company recognized a ceiling test write-down of $103.6 million at March 31, 2009.

Note 9 — Derivative Instruments

The Company seeks to reduce its exposure to commodity price volatility by hedging a portion of its production through commodity derivative instruments. The Company accounts for commodity derivatives in accordance with ASC Topic 815. When the conditions for hedge accounting specified in ASC Topic 815 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 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 would be recorded in the income statement as derivative income or expense. At June 30, 2010, the Company’s outstanding derivative instruments were considered effective cash flow hedges.

Oil and gas sales include additions related to the settlement of gas hedges of $4,756,000 and $22,441,000 and oil hedges of zero and $1,470,000 for the three months ended June 30, 2010 and 2009, respectively. For the six-month periods ended June 30, 2010 and 2009, oil and gas sales include additions related to the settlement of gas hedges of $6,287,000 and $36,419,000 and oil hedges of zero and $3,515,000, respectively.

As of June 30, 2010, the Company had entered into the following gas contracts accounted for as cash flow hedges:

	Instrument		Weighted
Production Period	Type	Daily Volumes	Average Price
Natural Gas:
July-December 2010	Costless Collar	40,000 Mmbtu	$	5.62 – 6.27

At June 30, 2010, the Company recognized a net asset of approximately $6.5 million related to the estimated fair value of these derivative instruments. Based on estimated future commodity prices as of June 30, 2010, the Company would realize a $4.1 million gain, net of taxes, as an increase in gas sales during the next 12 months. These gains are expected to be reclassified based on the schedule of gas volumes stipulated in the derivative contracts.

All of the Company’s derivative instruments at June 30, 2010 were designated as hedging instruments under ASC Topic 815. The following tables reflect the fair value of the Company’s derivative instruments in the consolidated financial statements (in thousands):

Effect of Derivative Instruments on the Consolidated Balance Sheet at June 30, 2010:

	Asset Derivatives
	Balance Sheet
Instrument	Location	Fair Value
Commodity Derivatives	Hedging asset	$	6,482

Effect of Derivative Instruments on the Consolidated Balance Sheet at December 31, 2009:

Instrument	Location	Fair Value
Commodity Derivatives	Hedging asset	$	2,796

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Effect of Derivative Instruments on the Consolidated Statement of Operations for the three months ended June 30, 2010 and 2009:

	Amount of Loss			Location of	Amount of Gain
	Recognized in Other			Gain Reclassified	Reclassified into
Instrument	Comprehensive Income			into Income	Income
Commodity Derivatives at June 30, 2010	$	(4,266	)	Oil and gas sales	$	4,756
Commodity Derivatives at June 30, 2009	$	(13,846	)	Oil and gas sales	$	23,911

Effect of Derivative Instruments on the Consolidated Statement of Operations for the six months ended June 30, 2010 and 2009:

	Amount of Income (Loss)			Location of	Amount of Gain
	Recognized in Other			Gain Reclassified	Reclassified into
Instrument	Comprehensive Income			into Income	Income
Commodity Derivatives at June 30, 2010	$	2,303		Oil and gas sales	$	6,287
Commodity Derivatives at June 30, 2009	$	(3,710	)	Oil and gas sales	$	39,934

As defined in ASC Topic 820, fair value is 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. ASC Topic 820 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 June 30, 2010 were in the form of costless collars based on NYMEX pricing. 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.

The following table summarizes the valuation of the Company’s derivatives subject to fair value measurement on a recurring basis as of June 30, 2010 and December 31, 2009 (in thousands):

	Fair Value Measurements Using
	Quoted Prices		Significant Other		Significant
	in Active		Observable		Unobservable
Instrument	Markets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Commodity Derivatives:
At June 30, 2010	$	—	$	6,482	$	—
At December 31, 2009	$	—	$	2,796	$	—

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Note 10 — Woodford Shale Joint Development Agreement

In May 2010, PetroQuest Energy, L.L.C. entered into a joint development agreement with WSGP Gas Producing LLC (WSGP), a subsidiary of NextEra Energy Resources, LLC, whereby WSGP acquired 50% of the Company’s Woodford proved undeveloped reserves as well as the right to earn 50% of the Company’s undeveloped Woodford acreage position through a two phase drilling program. The Company received $57.4 million in cash at closing, net of $2.6 million in fees incurred in relation to the transaction, and recorded a long-term receivable for an additional $14 million to be received on November 30, 2011. The Company recorded the total consideration of approximately $71 million as an adjustment to capitalized costs with no gain or loss recognized. If certain production performance metrics are achieved, the Company will receive an additional $14 million during the drilling program. Additionally, WSGP will fund a share of the future drilling costs under a drilling program.

Note 11 — Gain on Legal Settlement and Other Expense

In January 2010, the Company recorded a gain relative to a $9 million cash settlement received from a lawsuit that was originally filed by the Company in 2008 relating to disputed interests in certain oil and gas assets purchased in 2007. The gain was reduced by approximately $0.8 million of costs incurred by the Company directly related to the settlement. In addition to the cash proceeds received, the Company was assigned additional working interests in certain producing properties. The Company recorded an additional $4.2 million gain representing the estimated fair market value of those interests on the effective date of the settlement.

Other expense during the three and six month periods ended June 30, 2009 included approximately $2.4 million and $4.6 million, respectively, related to payments made in connection with a drilling rig contract. Because this rig was not utilized, there were no corresponding assets to record in connection with the fixed payments required, regardless of actual rig usage. Therefore, the costs were recorded as a component of other expense. This contract expired during July 2009.

Note 12 — Income Taxes

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 the ceiling test write-downs recognized during 2008 and 2009, the Company has incurred a cumulative three-year loss. As a result of this cumulative loss and the impact it has on the determination of the recoverability of deferred tax assets through future earnings, the Company established a valuation allowance for a portion of the deferred tax asset. The Company reduced the valuation allowance by $15 million during the first half of 2010, the impact of which is included in the Company’s effective tax rate. The valuation allowance was $9.6 million as of June 30, 2010.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

PetroQuest Energy, Inc. is an independent oil and gas company engaged in the exploration, development, acquisition and production of oil and gas reserves in the Arkoma Basin, East Texas, South Louisiana and the shallow waters of the Gulf of Mexico shelf. 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 in 1985 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. 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.

Utilizing the cash flow generated by our higher margin Gulf Coast Basin assets, we have successfully diversified into onshore, longer life assets, including the Woodford and Fayetteville shales in Oklahoma and Arkansas and the Southeast Carthage field in Texas. Beginning in 2003, with our acquisition of the Southeast Carthage Field, through 2009, we have invested approximately $650 million into growing our longer life assets. During the six year period ended December 31, 2009, we have more than doubled our estimated proved reserves to 179 MMcfe and realized a 97% drilling success rate on 551 gross wells drilled. We have continued to focus our efforts on properties we control. We currently operate approximately 75% of our total estimated proved reserves and manage the drilling and completion activities on an additional 15% of such reserves. We have grown our production to 80.6 MMcfe per day for the quarter ended June 30, 2010. At June 30, 2010, 82% of our estimated proved reserves and 54% of our second quarter 2010 production were derived from our longer life assets.

During late 2008, in response to declining commodity prices and the global financial crisis, we shifted our focus from increasing production and reserves to building liquidity and strengthening our balance sheet. As a result of our significant operational control over our drilling prospects, we were able to reduce our capital expenditures, including capitalized interest and overhead, by 83% from $357.8 million in 2008 to $59.1 million in 2009. In addition, we reduced our lease operating expenses, production taxes and general and administrative costs, by a combined 23% from 2008 to 2009. Finally, in June 2009 we completed a public offering of 11.5 million shares of our common stock, receiving net proceeds of approximately $38 million. As a result of these and other liquidity building efforts, we have repaid $130 million of borrowings outstanding under our bank credit facility since August 2009. As of June 30, 2010, we had no borrowings outstanding under this facility.

Having achieved our 2009 goals of building liquidity and strengthening our balance sheet, in 2010 we have refocused on the key elements of our business strategy with the goal of growing our reserves and production in a fiscally prudent manner. To that end, in May 2010, we entered into a joint development agreement with WSGP Gas Producing LLC (WSGP), a subsidiary of NextEra Energy Resources, LLC, whereby WSGP acquired 50% of our Woodford proved undeveloped reserves as well as the right to earn 50% of our undeveloped Woodford acreage position through a two phase drilling program. We received $57.4 million in cash at closing, net of $2.6 million in transaction fees, and will receive an additional $14 million on November 30, 2011. If certain production performance metrics are achieved, we will receive an additional $14 million during the drilling program. Additionally, WSGP will fund a share of our future drilling costs under a drilling program. The additional capital provided by this agreement will allow us to accelerate the pace of our development of the Woodford Shale and pursue opportunities in other basins.

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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.

On December 29, 2008, the SEC issued a revision to Staff Accounting Bulletin 113 (“SAB 113”) which established guidelines related to modernizing accounting and disclosure requirements for oil and natural gas companies. The revised disclosure requirements 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 revised rules also allow companies the option to disclose probable and possible reserves in addition to the existing requirement to disclose proved reserves. The revised 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. A significant change to the rules involves the pricing at which reserves are measured. The revised rules utilize a 12-month average price using beginning of the month pricing during the 12-month period prior to the ending date of the balance sheet to report oil and natural gas reserves rather than period-end prices. In addition, the 12-month average will also be used to measure ceiling test impairments and to compute depreciation, depletion and amortization. The revised rules were effective for reserve estimation at December 31, 2009 with first reporting for calendar year companies in their 2009 annual reports.

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 proved oil and gas properties 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.

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.

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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 property and our effective borrowing rate.

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 proved oil and gas reserves, 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 proved oil and gas reserves will change in the near term. If oil or gas prices decline, even for only a short period of time, or if we have downward revisions to our estimated proved reserves, it is possible that 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

The estimated fair values of our commodity derivative instruments are recorded in the consolidated balance sheet. At inception, all of our commodity derivative instruments represent hedges of the price of future oil and gas production. The changes in fair value of those derivative instruments that qualify for hedge accounting treatment are recorded in other comprehensive income 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 or expense.

Our hedges are specifically referenced to NYMEX prices. 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 prices 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 prices at which the hedges will be settled. At June 30, 2010, our derivative instruments were considered 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 obtain 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.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
Production:
Oil (Bbls)		154,285		138,788		298,926		313,599
Gas (Mcf)		6,406,710		7,728,284		13,266,573		16,775,499
Total Production (Mcfe)		7,332,420		8,561,012		15,060,129		18,657,093
Sales:
Total oil sales	$	11,910,281	$	9,424,297	$	23,287,394	$	18,703,580
Total gas sales		29,946,896		45,951,367		66,114,527		95,906,225
Total oil and gas sales	$	41,857,177	$	55,375,664	$	89,401,921	$	114,609,805
Average sales prices:
Oil (per Bbl)	$	77.20	$	67.90	$	77.90	$	59.64
Gas (per Mcf)		4.67		5.95		4.98		5.72
Per Mcfe		5.71		6.47		5.94		6.14

The above sales and average sales prices include additions related to the settlement of gas hedges of $4,756,000 and $22,441,000 and the settlement of oil hedges of zero and $1,470,000 for the three months ended June 30, 2010 and 2009, respectively. The above sales and average sales prices include additions related to the settlement of gas hedges of $6,287,000 and $36,419,000 and the settlement of oil hedges of zero and $3,515,000 for the six months ended June 30, 2010 and 2009, respectively.

Net income available to common stockholders totaled $5,248,000 and $7,746,000 for the quarters ended June 30, 2010 and 2009, respectively, while net income (loss) available to common stockholders for the six-month periods ended June 30, 2010 and 2009 totaled $34,965,000 and ($59,211,000), respectively. The primary fluctuations were as follows:

Production Production decreased 19% in the first half of 2010, as compared to the 2009 period, as a result of reduced capital spending during 2009. In addition, during the second quarter of 2010, we experienced unanticipated shut-ins at our Ship Shoal 72 and Main Pass 74 fields due to facility maintenance and third party pipeline repairs. Production at Ship Shoal 72 has been fully restored while production at Main Pass 74 is currently partially restored but is anticipated to be fully restored during August 2010. Because our capital expenditure budget for 2010 is significantly increased as compared to our budget for 2009, we expect quarterly production growth during the remainder of 2010. However, we expect total 2010 production to be slightly lower than volumes produced during 2009.

Gas production during the three and six month periods ended June 30, 2010 decreased 17% and 21%, respectively, from the comparable periods in 2009. The decrease in gas production was primarily the result of reduced capital spending during 2009 and normal production declines in Oklahoma, where initial production rates are higher than the sustained rates over the life of the wells, combined with the unanticipated shut-ins at Ship Shoal Block 72 and Main Pass Block 74.

Oil production during the three month period ended June 30, 2010 increased 11% from the 2009 period due to the restoration of production at our Ship Shoal 225 field after repairs and a recompletion following Hurricanes Katrina and Rita. Oil production decreased 5% during the six month period ended June 30, 2010 from the comparable 2009 period, primarily due to reduced capital spending during 2009 and normal production declines.

Prices Including the effects of our hedges, average gas prices per Mcf for the three and six month periods ended June 30, 2010 were $4.67 and $4.98, respectively, as compared to $5.95 and $5.72 for the respective 2009 periods. Average oil prices per Bbl for the three and six months ended June 30, 2010 were $77.20 and $77.90, respectively, as compared to $67.90 and $59.64, respectively, for the 2009 periods. Stated on an Mcfe basis, unit prices received during the quarter and six months ended June 30, 2010 were 12% and 3% lower than the prices received during the comparable 2009 periods.

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Revenue Including the effects of hedges, oil and gas sales during the quarter and six months ended June 30, 2010 decreased 24% and 22% to $41,857,000 and $89,402,000, respectively, as compared to oil and gas sales of $55,376,000 and $114,610,000 during the 2009 periods. The decreased revenue during 2010 was primarily the result of lower production and a decrease in hedge settlements realized during the first half of 2010 as compared to 2009. As a result of the impact of the settlements of our higher valued 2009 hedge positions on 2009 oil and gas sales as compared to the expected impact of our 2010 hedge positions, we expect oil and gas revenue to decline during 2010 as compared to 2009.

Expenses Lease operating expenses for the three month period ended June 30, 2010 increased to $9,020,000 as compared to $8,373,000 during the 2009 period primarily as a result of unanticipated maintenance costs. Per unit lease operating expenses totaled $1.23 per Mcfe during the three month period ended June 30, 2010 as compared to $0.98 per Mcfe during the 2009 period. Lease operating expenses for the six month period ended June 30, 2010 decreased to $18,715,000 as compared to $19,506,000 during the 2009 period. Per unit lease operating expenses totaled $1.24 per Mcfe during the six month period ended June 30, 2010 as compared to $1.05 per Mcfe during the 2009 period. Although per unit lease operating expenses increased, absolute lease operating expenses during the first six months of 2010 decreased as compared to the 2009 period primarily due to the overall reduction in produced volumes, as well as lower insurance costs. We expect that lease operating expenses during 2010 will generally approximate lease operating expenses during 2009.

Production taxes during the quarter and six months ended June 30, 2010 totaled $1,599,000 and $2,947,000, respectively, as compared to $846,000 and $3,020,000 during the 2009 periods. Production taxes during the second quarter of 2009 included approximately $570,000 of production tax refunds for several Oklahoma horizontal wells.

General and administrative expenses during the quarter and six months ended June 30, 2010 totaled $5,816,000 and $10,325,000, respectively, as compared to expenses of $4,197,000 and $9,022,000 during the 2009 periods. Included in general and administrative expenses was share-based compensation expense related to ASC Topic 718, as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
Stock options:
Incentive Stock Options	$	197	$	146	$	432	$	440
Non-Qualified Stock Options		502		448		1,074		1,117
Restricted stock		1,071		751		2,246		1,968
Share based compensation	$	1,770	$	1,345	$	3,752	$	3,525

We capitalized $3,802,000 and $6,526,000 of general and administrative costs during the three and six month periods ended June 30, 2010 and $2,195,000 and $4,227,000 of such costs during the comparable 2009 periods. We expect that 2010 general and administrative expenses will be higher than 2009 expenses due to increased employee related costs including increased staffing necessary to accelerate our Woodford Shale development pursuant to the Woodford Shale joint development agreement.

The price of natural gas used in computing our estimated proved reserves at March 31, 2009 had a negative impact on our estimated proved reserves from certain of our longer-life properties and reduced the estimated future net cash flows from our estimated proved reserves. As a result, we recorded a non-cash ceiling test write-down of our oil and gas properties during the first quarter of 2009 totaling $103,582,000. No such write-down was recorded during the first half of 2010.

Depreciation, depletion and amortization (“DD&A”) expense on oil and gas properties for the three and six months ended June 30, 2010 totaled $13,483,000, or $1.84 per Mcfe, and $28,219,000, or $1.87 per Mcfe, respectively, as compared to $18,087,000, or $2.11 per Mcfe, and $49,625,000, or $2.66 per Mcfe, during the comparable 2009 periods. The decline in our DD&A per Mcfe was primarily the result of the ceiling test write-downs of a substantial portion of our proved oil and gas properties during 2009 as a result of lower commodity prices, the impact of the joint development agreement, as well as reserve additions during 2010 from our Woodford operations. We expect DD&A per Mcfe for the remainder of 2010 to generally approximate the second quarter of 2010 rate.

Interest expense, net of amounts capitalized on unevaluated properties, totaled $2,379,000 and $4,189,000 during the quarter and six months ended June 30, 2010 as compared to $3,388,000 and $6,564,000 during the 2009 periods. We capitalized $2,083,000 and $4,723,000 of interest during three and six month periods of 2010 and $2,208,000 and $4,237,000 during the 2009 periods. We have reduced the outstanding borrowings under our bank credit facility from $130 million at June 30, 2009 to zero at June 30, 2010. As a result, we anticipate interest expense to be lower in 2010.

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In January 2010, we recorded a gain relative to a $9,000,000 cash settlement received from a lawsuit filed by us in 2008 relating to disputed interests in certain oil and gas assets purchased in 2007. The gain was reduced by $775,000 of costs incurred by us directly related to the settlement. In addition to the cash proceeds received, we were assigned additional working interests in certain producing properties. We recorded an additional $4,164,000 gain representing the estimated fair market value of those interests on the effective date of the settlement.

Other expense during the second quarter and six months of 2009 included $2,396,000 and $4,646,000, respectively, related to payments made in connection with a drilling rig contract. Because we elected to idle this drilling rig, there were no corresponding assets to record in connection with the fixed payments required under this contract, regardless of actual rig usage. As a result, the costs were recorded as a component of other expense. This contract expired during July 2009.

Income tax expense (benefit) during the quarter and six months ended June 30, 2010 totaled $2,511,000 and ($1,380,000), respectively, as compared to $8,151,000 and ($26,648,000) during the comparable 2009 periods. 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 during 2008 and 2009, we have incurred a cumulative three-year loss. As a result of this cumulative loss and the impact it has on the determination of the recoverability of deferred tax assets through future earnings, we established a valuation allowance for a portion of the deferred tax asset. We reduced the valuation allowance by $14,989,000 during the first half of 2010, the impact of which is included in our effective tax rate. The valuation allowance was $9,624,000 as of June 30, 2010. Our effective tax rate in future periods will be impacted by future adjustments to the valuation allowance.

Liquidity and Capital Resources

We have financed our acquisition, exploration and development activities to date principally through cash flow from operations, bank borrowings, private and public offerings of equity and debt securities, joint development agreements and sales of assets. At June 30, 2010, we had a working capital surplus of $61.1 million compared to a surplus of $24.7 million at December 31, 2009. The increase was primarily due to the cash received from the Woodford Shale joint development agreement.

Prices for oil and natural gas are subject to many factors beyond our control such as weather, the overall condition of the global financial markets and economies, relatively minor changes in the outlook of supply and demand, and the actions of OPEC. Oil and natural gas prices have a significant impact on our cash flows available for capital expenditures and our ability to borrow and raise additional capital. The amount we can borrow under our bank 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 oil and natural gas that we can economically produce. Lower prices and/or lower production may decrease revenues, cash flows and the borrowing base under the bank credit facility, thus reducing the amount of financial resources available to meet our capital requirements. Lower prices and reduced cash flow may also make it difficult to incur debt, including under our bank credit facility, because of the restrictive covenants in the indenture governing the Notes. See “Source of Capital: Debt” below. Our ability to comply with the covenants in our debt agreements is dependent upon the success of our exploration and development program and upon factors beyond our control, such as oil and natural gas prices.

Source of Capital: Operations

Net cash flow from operations increased from $45,494,000 during the six months ended June 30, 2009 to $66,318,000 during the 2010 period. The increase in operating cash flow during 2010 was primarily attributable to the timing of payments made in 2009 to reduce our accounts payable to vendors and the cash received during the first quarter of 2010 in connection with a legal settlement. Partially offsetting these increases was an increase to our joint interest billing receivables, which is a result of the increase in drilling activity.

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Source of Capital: Debt

We have outstanding $150 million of our 10 3/8% Senior Notes that are due in 2012 (the “Notes”), which have numerous covenants including restrictions on liens, incurrence of indebtedness, asset sales, dividend payments and other restricted payments. Interest is payable semi-annually on May 15 and November 15. At June 30, 2010, $1.9 million had been accrued in connection with the November 15, 2010 interest payment and we were in compliance with all of the covenants under the Notes.

We have a Credit Agreement (as amended, the “Credit Agreement”) with JPMorgan Chase Bank, N.A., Calyon New York Branch, Bank of America, N.A., Wells Fargo Bank, N.A., and Whitney National Bank. The Credit Agreement provides for a $300 million revolving credit facility that permits borrowings based on the available borrowing base as determined in accordance with the Credit Agreement. The Credit Agreement also allows us to use up to $25 million of the borrowing base for letters of credit. The Credit Agreement matures on February 10, 2012; provided, however, if on or prior to such date we prepay or refinance, subject to certain conditions, the Notes, the maturity date will be extended to October 2, 2013. We had no borrowings outstanding as of June 30, 2010 under (and no letters of credit issued pursuant to) the Credit Agreement.

The borrowing base under the Credit Agreement is based upon the valuation as of January 1 and July 1 of each year of the reserves attributable to our oil and gas properties. The current borrowing base, which was based upon the valuation of the reserves attributable to our oil and gas property as of January 1, 2010, is $100 million effective March 22, 2010. The next borrowing base redetermination is scheduled to occur by September 30, 2010. We or the lenders may request two additional borrowing base redeterminations each year. Each time the borrowing base is to be redetermined, the administrative agent under the Credit Agreement will propose a new borrowing base as it deems appropriate in its sole discretion, which must be approved by all lenders if the borrowing base is to be increased, or by lenders holding two-thirds of the amounts outstanding under the Credit Agreement if the borrowing base remains the same or is reduced.

The indenture governing the Notes also limits our ability to incur indebtedness under the Credit Agreement. Under the indenture, we will not be able to incur additional secured indebtedness under the Credit Agreement if at the time of such incurrence, the total amount of indebtedness under the Credit Agreement is in excess of the greater of (i) $75 million and (ii) 20% of our ACTNA (as defined in the indenture). That calculation is based primarily on the valuation of our estimated reserves of oil and natural gas using the trailing 12 month average commodity pricing methodology as of the prior year-end. As of June 30, 2010, the indenture limits our borrowings under the Credit Agreement to $75 million.

The Credit Agreement is secured by a first priority lien on substantially all of our assets, including a lien on all equipment and at least 85% of the aggregate total value of our oil and gas properties. Outstanding balances under the Credit Agreement bear interest at the alternate base rate (“ABR”) plus a margin (based on a sliding scale of 1.625% to 2.625% depending on borrowing base usage) or the adjusted LIBO rate (“Eurodollar”) plus a margin (based on a sliding scale of 2.5% to 3.5% depending on borrowing base usage). The alternate base rate is equal to the highest of (i) the JPMorgan Chase prime rate, (ii) the Federal Funds Effective Rate plus 0.5% or (iii) the adjusted LIBO rate plus 1%. For the purposes of the definition of alternative base rate only, the adjusted LIBO rate is equal to the rate at which dollar deposits of $5,000,000 with a one month maturity are offered by the principal London office of JPMorgan Chase Bank, N.A. in immediately available funds in the London interbank market. For all other purposes, the adjusted LIBO rate is equal to the rate at which Eurodollar deposits in the London interbank market for one, two, three or six months (as selected by us) are quoted, as adjusted for statutory reserve requirements for Eurocurrency liabilities. Outstanding letters of credit are charged a participation fee at a per annum rate equal to the margin applicable to Eurodollar loans, a fronting fee and customary administrative fees. In addition, we pay commitment fees of 0.5%.

We are subject to certain restrictive financial covenants under the Credit Agreement, including a maximum ratio of total debt to EBITDAX, determined on a rolling four quarter basis, of 3.0 to 1.0 and a minimum ratio of consolidated current assets to consolidated current liabilities of 1.0 to 1.0, all as defined in the Credit Agreement. The Credit 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 June 30, 2010, we were in compliance with all of the covenants contained in the Credit Agreement.

18

Source of Capital: Issuance of Securities

On June 30, 2009, we received net proceeds of approximately $38 million through the public offering of 11.5 million shares of our common stock, which included the issuance of 1.5 million shares pursuant to the underwriters’ over-allotment option.

During July 2009, a new shelf registration statement was declared effective and allows us to publicly offer and sell up to $200 million of any combination of debt securities, shares of common and preferred stock, depositary shares and warrants. The registration statement does not provide any assurance that we will or could sell any such securities.

Source of Capital: Joint Ventures

In May 2010, we entered into a joint development agreement with WSGP, a subsidiary of NextEra Energy Resources, LLC, whereby WSGP acquired 50% of our Woodford proved undeveloped reserves as well as the right to earn 50% of our undeveloped Woodford acreage position through a two phase drilling program. We received $57.4 million in cash at closing, net of $2.6 million in transaction fees, and will receive an additional $14 million on November 30, 2011. If certain production performance metrics are achieved, we will receive an additional $14 million during the drilling program. Additionally, WSGP will fund a share of our future drilling costs under a drilling program. The additional capital provided by this agreement will allow us to accelerate the pace of our development of the Woodford Shale and pursue opportunities in other basins.

Source of Capital: Divestitures

We do not budget property divestitures; however, we are continually 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 non-strategic assets in order to provide liquidity to strengthen our balance sheet or capital to be reinvested in higher rate of return projects. We cannot assure you that we will be able to sell any of our assets in the future.

Use of Capital: Exploration and Development

Our 2010 capital budget, which includes capitalized interest and general and administrative costs, is expected to range between $100 million and $110 million, of which approximately $69 million was spent to develop oil and gas properties during the first half of 2010. This represents a significant increase from the capital spending in 2009. Because we operate the majority of our proved reserves, we expect to be able to control the timing of a substantial portion of our capital investments. As a result of this flexibility, we plan to actively manage our 2010 capital budget to stay within our projected cash flow from operations, based upon our expectations of commodity prices, production rates and capital costs.

However, if commodity prices decline or if actual production or costs vary significantly from our expectations, our 2010 exploration and development activities could be reduced or could be financed through a combination of cash on hand or borrowings under the credit facility.

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 our ability to find oil and natural gas reserves that are economically recoverable, the volatility of oil and natural gas prices and the significantly depressed natural gas prices since the middle of June 2008, the uncertain economic conditions in the United States and globally, declines in the values of our properties that have resulted and may in the future result in additional ceiling test write-downs, our ability to replace reserves and sustain production, our estimate of the sufficiency of our existing capital sources, our ability to raise additional capital to fund cash requirements for future operations, in prospect development and property acquisitions or dispositions and in projecting future rates of production or future reserves, the timing of development expenditures and drilling of wells, hurricanes and other natural disasters, including the impact of the oil spill in the Gulf of Mexico on our present and future operations, 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.

19

When used in this 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 Discussion 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

We experience market risks primarily in two areas: commodity prices and interest rates. Because our properties are located within the United States, we do not believe that our business operations are exposed to significant foreign currency exchange risks.

Our revenues are derived from the sale of our crude oil and natural gas production. Based on projected sales volumes for the remainder of 2010, a 10% change in the prices we receive for our crude oil and natural gas production would have an approximate $6.5 million impact on our revenues.

We seek to reduce our exposure to commodity price volatility by hedging a portion of 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 quarter and six month periods ended June 30, 2010 we received from the counterparties to our derivative instruments $4,756,000 and $6,287,000, respectively, 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 Credit Agreement requires that the counterparties to our hedge contracts be lenders under the Credit Agreement or, if not a lender under the Credit Agreement, rated A/A2 or higher by S&P or Moody’s. Currently, the counterparties to our existing hedge contracts are lenders under the Credit Agreement. To the extent we enter into additional hedge contracts, we would expect that certain of the lenders under the Credit Agreement would serve as counterparties.

As of June 30, 2010, we had entered into the following gas contracts accounted for as cash flow hedges:

	Instrument		Weighted
Production Period	Type	Daily Volumes	Average Price
Natural Gas:
July-December 2010	Costless Collar	40,000 Mmbtu	$	5.62 – 6.27

At June 30, 2010, we recognized a net asset of approximately $6.5 million related to the estimated fair value of these derivative instruments. Based on estimated future commodity prices as of June 30, 2010, we would realize a $4.1 million gain, net of taxes, as an increase to gas sales during the next 12 months. These gains are expected to be reclassified based on the schedule of gas volumes stipulated in the derivative contracts.

Although we presently have no borrowings outstanding under our bank credit facility, future borrowings under such facility would be subject to a floating interest rate. An increase in interest rates could impact our interest expense to the extent of any future borrowings under our bank credit facility.

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Item 4. 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, completed an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded:

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 Controls

There have been no changes in the Company’s internal controls over financial reporting during the period covered by this report that have materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II

Item 1. LEGAL PROCEEDINGS

NONE.

Item 1A. RISK FACTORS

Oil and natural gas prices are volatile, and natural gas prices have been significantly depressed since the middle of 2008. An extended decline in the prices of oil and natural gas would likely have a material adverse effect on 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. Prices for natural gas have been significantly depressed since the middle of 2008 and future oil and natural gas prices are subject to large fluctuations in response to a variety of 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;

21

• domestic and foreign governmental regulation and taxes, including price controls adopted by the Federal Energy Regulatory Commission;

• 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 may 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 may require us to record additional ceiling test write-downs. 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 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.

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. During 2009, we recognized $156.1 million in ceiling test write-downs as a result of the decline in commodity prices.

We review the net capitalized costs of our properties quarterly, using, effective for fiscal periods ending on or after December 31, 2009, a single price based on the beginning of the month average of oil and natural gas prices for the prior 12 months. We also assess investments in unproved properties periodically to determine whether impairment has occurred. The risk that we will be required to further write down 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 unproved property values, or if estimated future development costs increase. We may experience further ceiling test write-downs or other impairments in the future. In addition, any future ceiling test cushion would be subject to fluctuation as a result of acquisition or divestiture activity.

A drilling moratorium in the U.S. Gulf of Mexico, or other regulatory initiatives in response to the current oil spill in the Gulf of Mexico, could adversely affect our business.

As has been widely reported, on April 20, 2010, a fire and explosion occurred onboard the semisubmersible drilling rig Deepwater Horizon, leading to the oil spill currently affecting the Gulf of Mexico. In response to this incident, the Minerals Management Service (now known as the Bureau of Ocean Energy Management, Regulation and Enforcement, or the BOE) of the U.S. Department of the Interior issued a notice on May 30, 2010 implementing a six-month moratorium on certain drilling activities in the U.S. Gulf of Mexico. Implementation of the moratorium was blocked by a U.S. district court, which was subsequently affirmed on appeal, but on July 12, 2010, the BOE issued a new moratorium that applies to deep-water drilling operations that use subsea blowout preventers or surface blowout preventers on floating facilities. The new moratorium will last until November 30, 2010, or until such earlier time that the BOE determines that deep-water drilling operations can proceed safely. The BOE is also expected to issue new safety and environmental guidelines or regulations for drilling in the U.S. Gulf of Mexico, and potentially in other geographic regions, and may take other steps, affecting both onshore and offshore operations, that could increase the costs of exploration and production, reduce the area of operations and result in permitting delays. This incident could also result in drilling suspensions or other regulatory initiatives in other areas of the U.S. and/or at a state level. In addition, bills have been, and may continue to be, introduced in Congress to increase or eliminate certain liability limitations for oil spills under federal law (such as H.R. 3534 which was passed by the House of Representatives on July 30, 2010 and eliminates the cap on damage from spills at offshore facilities that are recoverable under the Oil Pollution Act of 1990). Although it is difficult to predict the ultimate impact of the moratorium or any new guidelines, regulations or legislation, a prolonged suspension of drilling activity in the U.S. Gulf of Mexico and other areas, new regulations, increased insurance costs or decreased insurance availability, and increased liability for companies operating in this sector could adversely affect our operations in the U.S. Gulf of Mexico and elsewhere.

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Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth certain information with respect to repurchases of our common stock during the quarter ended June 30, 2010.

					Total Number of
					Shares		Maximum Number (or
					Purchased as		Approximate Dollar
					Part of Publicly		Value) of Shares that
	Total Number of		Average Price		Announced		May be Purchased Under
	Shares Purchased (1)		Paid Per Share		Plan or Program		the Plans or Programs
April 1 - April 30, 2010		—	$	—		—		—
May 1 - May 31, 2010		2,315		6.28		—		—
June 1 - June 30, 2010		391		6.46		—		—

(1) All shares repurchased were surrendered by employees to pay tax withholding upon the vesting of restricted stock awards.

Item 3. DEFAULTS UPON SENIOR SECURITIES

NONE.

Item 4. (REMOVED AND RESERVED)

Item 5. OTHER INFORMATION

NONE.

Item 6. EXHIBITS

Exhibit 10.1, PetroQuest Energy, Inc. Annual Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 13, 2010).

Exhibit 10.2, Joint Development Agreement dated May 17, 2010, among PetroQuest Energy, L.L.C., a Louisiana limited liability company, WSGP Gas Producing, LLC, a Delaware limited liability company, and NextEra Energy Gas Producing, LLC, a Delaware limited liability company.

Exhibit 10.3, PetroQuest Energy, Inc. Annual Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 8, 2010).

Exhibit 31.1, 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.

Exhibit 31.2, 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.

Exhibit 32.1, Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2, Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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: August 5, 2010	/s/ J. Bond Clement
	J. Bond Clement
	Executive Vice President, Chief Financial Officer and Treasurer (Authorized Officer and Principal Financial Officer)

24

EX-10.2

Exhibit 10.2

JOINT DEVELOPMENT AGREEMENT

dated May 17, 2010

by and among

PETROQUEST ENERGY, L.L.C.

and

WSGP GAS PRODUCING, LLC

and

NEXTERA ENERGY GAS PRODUCING, LLC

COAL, HASKELL, HUGHES, LATIMER AND PITTSBURG COUNTIES, OKLAHOMA

Table of Contents

	Page
ARTICLE I DEFINITIONS
1.1 Defined Terms		2
ARTICLE II SELECTED PUDS
2.1 Selected PUDs		9
2.2 Assignment		9
ARTICLE III REMAINING ASSETS
3.1 Purchase Price		10
3.2 Remaining Assets Assignment Further Conditioned		11
ARTICLE IV DRILLING PROGRAM
4.1 Drilling Program		11
4.2 Operated by Others (“OBO”) Drilling Activity		11
4.3 WSGP’s Carry		12
4.4 Participation Elections		14
4.5 Non-Consent Elections		14
4.6 Interests Earned in Each Well by Drilling		16
4.7 Applicability of WSGP’s Carry		16
ARTICLE V ASSIGNMENTS TO WSGP
5.1 Program Well Assignments		17
5.2 Early Termination		17
ARTICLE VI REPRESENTATIONS AND WARRANTIES
6.1 Representations and Warranties of PetroQuest		17
6.2 Representations and Warranties of WSGP		21
ARTICLE VII PRE-CLOSING COVENANTS
7.1 Conduct of Business		23
7.2 Notifications		24
7.3 Access		24
ARTICLE VIII CONDITIONS TO CLOSING
8.1 Representations		24
8.2 Performance		24
8.3 No Legal Proceedings		24
8.4 Consent and Waivers		25
8.5 Closing Deliverables		25
8.6 No Material Event		25
ARTICLE IX CLOSING
9.1 Closing Date		25
9.2 Closing Obligations		25

i 

	Page
ARTICLE X POST CLOSING COVENANTS
10.1 Restrictions on Transfer		26
10.2 Permitted Transfers		27
10.3 Burdens Created by PetroQuest		27
10.4 Additional Gathering System		28
10.5 Cooperation		28
10.6 Existing Gas Purchase Contracts.		28
10.7 Assumption		30
ARTICLE XI AMI
11.1 Area of Mutual Interest		30
11.2 Lease Acquisition Procedures		31
11.3 Administrative Overhead		31
ARTICLE XII OPERATIONS
12.1 Operating Agreement		31
12.2 Overhead		31
12.3 Third Party Working Interest Owners		32
12.4 Commingling of Production		32
12.5 Amendment of Exhibit “A” to Operating Agreement		32
12.6 Gas Marketing Agreement		32
ARTICLE XIII FORCE MAJEURE
13.1 Force Majeure		33
ARTICLE XIV EARLY TERMINATION
14.1 Pre-Closing Early Termination.		33
14.2 Post-Closing Early Termination		34
14.3 Status of Assignments to WSGP Upon Early Termination		35
14.4 Intervention Termination		35
ARTICLE XV FAILURE TO PAY DRILLING COSTS; FAILURE TO PERFORM
15.1 Failure By WSGP		35
15.2 Good Faith Dispute		35
15.3 Assignment of Relinquished Interest		36
15.4 Failure to Perform		36
ARTICLE XVI TAX PARTNERSHIP
ARTICLE XVII INDEMNIFICATION
17.1 WSGP’s Indemnification		36
17.2 PetroQuest’s Indemnification		37
17.3 Negligence, Notice of Claim, Assumption or Defense and Settlement of Claim		37

ii 

	Page
ARTICLE XVIII GENERAL TERMS AND PROVISIONS
18.1 Further Assurances		38
18.2 Confidentiality Agreement		38
18.3 Time of the Essence		39
18.4 Binding Effect		39
18.5 Notices		39
18.6 Legal Representation; Costs and Attorney’s Fees		40
18.7 No Special Relationship or Special Duty		40
18.8 Counterparts		40
18.9 Entire Agreement; Waiver		41
18.10 Governing Law		41
18.11 Waiver of Jury Trial		41
18.12 Waiver of Consequential Damages		41
18.13 No Partnership		41
18.14 Survival of Representations and Warranties		41
18.15 No Third Party Beneficiaries		42
18.16 Disputes		42
18.17 Term of Agreement		42
18.18 Construction of Agreement		42
18.19 Publicity		43
18.20 Binding and Non-Binding Terms		43
18.21 NEGP Guaranty		43
18.22 Specific Performance		44

iii 

Exhibits and Schedules to Agreement

Schedule 1	Current Unrecorded Commitments
Schedule 6.1.15	Fee Interests
Schedule 10.4	Existing Gas Gathering Agreements
Exhibit “A”	Transaction Assets
Exhibit “B”	Area of Mutual Interest
Exhibit “C”	Selected PUDs
Exhibit “D”	Form of PUD Assignment
Exhibit “E”	Drilling Program
Exhibit “F”	Form of Program Well Assignment
Exhibit “G”	Form of Operating Agreement
Exhibit “H”	Memorandum of Agreement
Exhibit “I”	Arbitration Provisions

iv 

JOINT DEVELOPMENT AGREEMENT

This Joint Development Agreement (the “Agreement”) is made and entered into this 17th day of May 2010, by and between PETROQUEST ENERGY, L.L.C. (“PetroQuest”), a Louisiana limited liability company, whose address is 400 E. Kaliste Saloom Rd, Suite 6000, Lafayette, LA 70508, WSGP GAS PRODUCING, LLC (“WSGP”), a Delaware limited liability company, whose address is 1000 Louisiana, Suite 5550, Houston, TX 77002, and NextEra Energy Gas Producing, LLC (“NEGP”), a Delaware limited liability company whose address is 1000 Louisiana, Suite 5550, Houston, TX 77002, for the limited purpose of securing the payment obligations of WSGP hereunder. PetroQuest and WSGP are each a “Party” and collectively the “Parties”.

RECITALS:

WHEREAS, PetroQuest owns certain oil, gas or mineral leases and interests covering certain lands in Coal, Haskell, Hughes, Latimer and Pittsburg Counties, Oklahoma as described on the attached Exhibit “A”, in each case limited to those depths below the base of the Hartshorne Sand (as defined herein) (collectively the “Transaction Assets”), all located within the area described on the attached Exhibit “B” (the “AMI” as more fully discussed herein);

WHEREAS, PetroQuest has entered into multiple transactions resulting in unrecorded obligations which reduce PetroQuest’s working interest in and to certain of the Transaction Assets prior to any assignments to WSGP hereunder in a cumulative amount of no more than 1.625% of PetroQuest’s interest in and to the Transaction Assets, as detailed on Schedule 1 (the “Current Unrecorded Commitments”), and each reference herein to PetroQuest’s interest in and to all or any subset of the Transaction Assets shall be net of the reduction effected by the Current Unrecorded Commitments;

WHEREAS, PetroQuest has identified the Selected PUDs (as defined herein) within the AMI;

WHEREAS, WSGP desires to purchase from PetroQuest, and PetroQuest desires to sell to WSGP, subject to the terms, conditions and limitations set forth herein, an undivided fifty percent (50%) of PetroQuest’s interest in and to the Selected PUDs;

WHEREAS, PetroQuest desires to grant to WSGP, and WSGP desires to receive, the right to earn fifty percent (50%) of PetroQuest’s interest in and to the Transaction Assets other than the Selected PUDs (collectively the “Remaining Assets”) on and subject to the terms and conditions specified herein;

WHEREAS, the Parties have entered into that certain Interim Leasing Agreement pending Woodford Joint Venture Agreement, dated March 8, 2010 with respect to the joint acquisition of oil, gas and mineral leases or other mineral interests within Pittsburg, Haskell, Hughes, Atoka, Latimer and Coal Counties, Oklahoma prior to the execution of this Agreement (the “Interim Leasing Agreement”); and

1

WHEREAS, the Parties desire to set forth the terms, conditions, covenants, rights and obligations of the Parties with respect to the joint exploration and development of the Remaining Assets and Selected PUDs and each Party’s participation in the Drilling Program (as defined herein).

NOW THEREFORE, for and in consideration of the premises, the mutual covenants set forth herein, the benefits to be derived by each party from this Agreement, and for other good and valuable consideration, the receipt and sufficiency of all of which are hereby acknowledged the Parties hereby enter into this Agreement.

ARTICLE I
DEFINITIONS

1.1 Defined Terms. As used in this Agreement, each of the following initially capitalized words and terms shall have the meaning ascribed to it herein:

1.1.1 “25% Level” is defined in Section 4.5.6.

1.1.2 “6 Month Tranche” is defined in Section 4.3.2.

1.1.3 “12 Well Minimum Content” is defined in Section 4.3.2.

1.1.4 “Acquired Interest” is defined in Section 11.1.

1.1.5 “Administrative Fee” is defined in Section 11.3.

1.1.6 “AFE” means authority for expenditure.

1.1.7 “Affiliate” means with respect to a specified Person, any Person that directly or indirectly controls, is controlled by, or is under common control with, the specified Person. As used in this definition, the term “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise.

1.1.8 “Agreement” is defined in the preamble.

1.1.9 “AMI” is defined in the recitals.

1.1.10 “AMI Well” is defined in Section 14.2.1.

1.1.11 “Applicable Law” means all laws, statutes, treaties, rules, codes, ordinances, regulations, permits, official guidelines, certificates, orders, licenses, leases and permits of any Governmental Authority, and judgments, decrees, injunctions, writs, orders or like action of any court, arbitrator or other judicial tribunal of competent jurisdiction and all requirements of law.

2

1.1.12 “Arbitration Provisions” means the provisions described in Exhibit “I”.

1.1.13 “Average Production” is defined in Section 3.1.3.

1.1.14 “Binding Provisions” is defined in Section 18.20.

1.1.15 “Business Day” means each day other than Saturday, Sunday, and any day on which nationally chartered banks in Houston, Texas are not required to be open for the conduct of retail banking business.

1.1.16 “Carried Amount” is defined in Section 4.3.

1.1.17 “Closing” is defined in Section 9.1.

1.1.18 “Closing Date” means the date on which the Closing occurs.

1.1.19 “Confidentiality Agreement” means that certain Confidentiality Agreement dated November 23, 2009, by and between the Parties.

1.1.20 “Counterparty Group” is defined in Section 18.2.1.

1.1.21 “Current Unrecorded Commitments” is defined in the Recitals.

1.1.22 “Deemed Non-Consent” is defined in Section 4.5.1.

1.1.23 “Deferred RA Purchase Price” is defined in Section 3.1.2.

1.1.24 “Development Well” is defined in Section 4.3.

1.1.25 “Drilling Program” is defined in Section 4.1.

1.1.26 “Drilling Unit” means the applicable drilling and spacing unit prescribed by the Oklahoma Corporation Commission or other Governmental Authority having jurisdiction over the applicable well.

1.1.27 “Early Termination” is defined in Section 14.2.

1.1.28 “Effective Time” means the date upon which WSGP executes the first AFE submitted by PetroQuest pursuant to the Drilling Program.

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1.1.29 “Environmental Matters” means any condition in, on, or under any of the Transaction Assets that is in violation of or subject to liability under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601 et seq.; the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq.; the Federal Water Pollution Control Act, 33 U.S.C. § 1251 et seq.; the Clean Air Act, 42 U.S.C. § 7401 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. § 1471 et seq.; the Toxic Substances Control Act, 15 U.S.C. §§ 2601 through 2629; the Oil Pollution Act, 33 U.S.C. § 2701 et seq.; the Emergency Planning and Community Right to Know Act, 42 U.S.C. § 11001 et seq.; and the Safe Drinking Water Act, 42 U.S.C. §§ 300f through 300j, in each case as the same have been amended to the date hereof, and all similar laws, rules or regulations as of the date hereof of any Governmental Authority having jurisdiction over the property in question addressing pollution or protection of the environment or biological or cultural resources and all regulations implementing the foregoing.

1.1.30 “Exchange Act” is defined in Section 18.2.1.

1.1.31 “Execution Date” means the date of execution of this Agreement as first set forth in the preamble.

1.1.32 “Existing Gas Purchase Contracts” is defined in Section 10.6.

1.1.33 “Existing Wells” means any oil or gas well located on any of the Transaction Assets drilled (or in the process of drilling) prior to the Execution Date, whether such well be producing or non-producing, shut-in or abandoned.

1.1.34 “Final Performance Report” is defined in Section 3.1.3.

1.1.35 “Final Qualifying Wells” is defined in Section 3.1.4.

1.1.36 “Force Majeure” means any event which wholly or partly prevents or delays the performance of any obligation arising under this Agreement, but only if and to the extent (i) such event is not within the reasonable control, directly or indirectly, of the Party affected, (ii) such event, despite the exercise of reasonable diligence, cannot be prevented, avoided or overcome by such Party, (iii) the Party affected has taken all reasonable precautions and measures in order to avoid the effect of such event on such Party’s ability to perform its obligations under this Agreement and to mitigate the consequences thereof, and (iv) such event is not the direct or indirect result of a Party’s negligence or the failure of such Party to perform any of its obligations under this Agreement or to comply with Applicable Law. A Force Majeure Event may include any of the following: acts of God (excluding adverse weather conditions other than tornadoes, flooding, tropical storms or hurricanes), riots, strikes, wars (declared or undeclared), insurrection, rebellions, terrorist acts, civil disturbances, dispositions or orders of Governmental Authority, unavailability of labor, services, equipment, rigs, supplies or fuel, third party operated gathering system unavailability or capacity restraint, or any act or cause (other than financial distress or inability to pay debts when due) that is not within the control of a party hereto, but “Force Majeure” shall not include general or regional changes in economic conditions including fluctuations in the prices at which oil, gas or other minerals can be sold, processed, transported, or handled, or fluctuations in the costs and expenses of drilling, obtaining field services or supplies, labor, materials, or equipment; and equipment, rigs and supplies. For purposes of this Agreement, “Force Majeure” also shall include an Intervention.

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1.1.37 “Force Majeure Notice” is defined in Section 13.1.

1.1.38 “Fundamental Representations” is defined in Section 18.14.

1.1.39 “Governmental Authority” means any federal, tribal, state, local, municipal, or other governments; any governmental, regulatory or administrative agency, commission, body or other authority exercising or entitled to exercise any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power; and any court or governmental tribunal exercising, having or claiming jurisdiction over this Transaction, the Parties, or any of the Transaction Assets.

1.1.40 “Hartshorne Sand” means the geological strata generally referred to as the Hartshorne Sand, as encountered between 3,660 and 3,740 feet measured depth in the log of the Marbet #11 well (API#35121222510000), situated in Section 2, 6N R14E Pittsburg County, Oklahoma.

1.1.41 “Indemnified Party” is defined in Section 17.3.

1.1.42 “Indemnifying Party” is defined in Section 17.3.

1.1.43 “Infill Well” is defined in Section 4.6.

1.1.44 “Interim Leasing Agreement” is defined in the recitals.

1.1.45 “Intervention” means an action, restriction, regulation, prohibition or other intervention by a Governmental Authority (including changes to Applicable Law) which would prohibit: (i) the drilling of all oil or gas wells within the AMI, or (ii) all hydraulic fracturing of oil or gas wells within the AMI.

1.1.46 “Intervention Termination” is defined in Section 14.4.

1.1.47 “Joint Expenditures” is defined in Section 11.3.

1.1.48 “Laclede” is defined in Section 10.6.1.1.

1.1.49 “Lease Maintenance” is defined in Section 11.2.

1.1.50 “Leases” is defined in Section 6.1.14.

1.1.51 “Lender” or “Lenders” means any and all Persons or successors in interest thereof lending money or extending credit (whether directly to a Party or to an Affiliate of a Party) as follows: (i) for the financing or refinancing of the Drilling Program or the Transaction Assets; (ii) for working capital or other ordinary business requirements related to the Drilling Program or the Transaction Assets; or (iii) for any credit support, credit enhancement or interest rate protection in connection with the Drilling Program or Transaction Assets.

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1.1.52 “Letter Agreements” means those agreements providing NEGP (or an appropriate affiliated entity) with certain rights to participate with PetroQuest in drilling programs related to the Marcellus Shale and the Eagle Ford Shale.

1.1.53 “Losses” is defined in Section 17.1.

1.1.54 “Material Adverse Effect” is defined in Section 6.1.9.

1.1.55 “Material Event” means (a) with respect to PetroQuest (and for the purposes of this definition, PetroQuest shall include its parent), that PetroQuest, and (b) with respect to WSGP (for the purposes of this definition, WSGP shall include its parent), that WSGP: (i) is dissolved (other than pursuant to internal reorganization the ordinary course of business which does not result in a change in control of such entity); (ii) becomes insolvent or is unable to pay its debts or fails to pay or admits in writing its inability generally to pay its debts as they become due; (iii) makes a general assignment, arrangement or composition with or for the benefit of its creditors; (iv) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors’ rights, or a petition is presented for its winding-up or liquidation, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition (A) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation or (B) is not dismissed, discharged, stayed or restrained in each case within sixty (60) days of the institution or presentation thereof; (v) has a resolution passed for its winding up, official management pursuant to an applicable statutory remedy or liquidation (other than pursuant to an internal reorganization in the ordinary course of business which does not result in a change in control of such entity); (vi) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or a substantial portion of its leases; (vii) has a secured party take possession of all or a substantial portion of its leases or has a distress, execution, attachment, sequestration or other legal process levied, enforced or sued on or against all or a substantial portion of its Leases and such secured party maintains possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within sixty (60) days thereafter; or (viii) causes or is subject to any event with respect to which, under the Applicable Laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (i) through (vii).

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1.1.56 “Memorandum of Agreement” is defined in Section 9.2.1.

1.1.57 “Minimum Commitment” is defined in Section 4.3.2.

1.1.58 “Non-Binding Provisions” is defined in Section 18.20.

1.1.59 “Non-transferring Party” is defined in Section 10.1.

1.1.60 “OBO” is defined in Section 4.2.

1.1.61 “Operating Agreement” or “JOA” means any operating agreement for which PetroQuest shall serve as initial operator to be entered into by the Parties pursuant to Section 12.1, in substantially the form attached hereto as Exhibit “G”.

1.1.62 “Outside Date” is defined in Section 18.20.

1.1.63 “Parties” and “Party” are defined in the preamble.

1.1.64 “Performance Payment” is defined in Section 3.1.3.

1.1.65 “Performance Report” is defined in Section 3.1.3.

1.1.66 “Performance Standards” is defined in Section 3.1.3.

1.1.67 “Person” means an individual, partnership, limited partnership, limited liability company, trust, estate, corporation, custodian, trustee, executor, administrator, nominee, or other entity in its own or a representative capacity.

1.1.68 “PetroQuest” is defined in the preamble.

1.1.69 “PetroQuest Indemnitees” is defined in Section 17.1.

1.1.70 “PetroQuest Production” is defined in Section 10.6.1.1.

1.1.71 “PetroQuest’s Knowledge” means the actual knowledge of the current officers and directors of PetroQuest after reasonable inquiry within PetroQuest with respect to the matter in question.

1.1.72 “Phase 1” is defined in Section 4.3.1.

1.1.73 “Phase 1 Commitment” is defined in Section 4.3.1.

1.1.74 “Phase 2” is defined in Section 4.3.1.

1.1.75 “Phase 2 Notice” is defined in Section 4.3.1.

1.1.76 “Program Well” is defined in Section 4.3.

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1.1.77 “Program Well Assignment” is defined in Section 5.1.

1.1.78 “Prospective Transferee” is defined in Section 10.1.

1.1.79 “PUD Assignment” is defined in Section 2.2.

1.1.80 “PUD Purchase Price” is defined in Section 2.1.

1.1.81 “PUD Wells” is defined in Section 4.3.

1.1.82 “Qualifying Well” means a well drilled by PetroQuest pursuant to this Agreement (whether or not WSGP participated in such well) within the AMI after Closing for which a minimum of 180 days of production data is available.

1.1.83 “Quarterly Meeting” is defined in Section 4.1.

1.1.84 “Remaining Assets” is defined in the recitals.

1.1.85 “Remaining Assets Purchase Price” is defined in Section 3.1.

1.1.86 “Representatives” means, individually and collectively, a Party’s directors, officers, employees, auditors, counsel, Lenders and other advisors or consultants, and Affiliates and such Affiliates’ directors, officers, employees, auditors, counsel, Lenders and other advisors or consultants.

1.1.87 “Required Well” means a well which is required to be drilled by the terms of any lease or other agreement affecting the lands upon which such well is to be drilled in order to earn acreage or depths from a third party or to prevent the termination or relinquishment of all or any portion of a lease. A prospective well shall be deemed a Required Well at that point in time when less than six (6) months remain in which to commence such well in order to earn or prevent termination or relinquishment of the applicable portion of the lease, or the contractual right to earn the same.

1.1.88 “Selected PUDs” means those certain prospective well locations within the AMI identified on the attached Exhibits “C-1” and “C-2”, and the 640 acre Drilling Unit or governmental section (as illustrated on Exhibit “C-2”) upon which each such prospective well location is situated.

1.1.89 “Spud Date” means the date upon which actual drilling operations commence for a given well drilled hereunder.

1.1.90 “Third-Party JOA” is defined in Section 12.3.

1.1.91 “Tranche Election” is defined in Section 4.3.3.

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1.1.92 “Transaction” means collectively, the transactions contemplated by this Agreement, including the purchase and sale of the Selected PUDs, the conduct of the Drilling Program and the activities associated therewith pursuant to the terms of this Agreement.

1.1.93 “Transaction Assets” is defined in the recitals.

1.1.94 “Transfer” is defined in Section 10.1.

1.1.95 “Transferring Party” is defined in Section 10.1.

1.1.96 “Vendor Penalties” means the actual and documented monetary costs, penalties, fees, surcharges or fines owed by PetroQuest to third-party service providers or vendors pursuant to contracts entered into by PetroQuest after the Effective Time (with the approval of WSGP, not to be unreasonably withheld, conditioned or delayed, but in any event WSGP shall communicate to PetroQuest its approval or disapproval within no more than two (2) Business Days of the proposal to enter into such contract) arising solely due to a non-consent election or elections made by WSGP pursuant to Section 4.5, provided, however, that the Parties shall have identified such contracts as qualifying for the Vendor Penalty prior to the execution of such contracts.

1.1.97 “Wire Account” is defined in Section 9.2.2.

1.1.98 “WSGP” is defined in the preamble.

1.1.99 “WSGP Indemnitees” is defined in Section 17.2.

1.1.100 “WSGP’s Carry” is defined in Section 4.3.

1.1.101 “WSGP’s Knowledge” means the actual knowledge of the current officers and directors of WSGP after reasonable inquiry within WSGP with respect to the matter in question.

ARTICLE II
SELECTED PUDS

2.1 Selected PUDs. On the Closing Date, WSGP shall pay to PetroQuest, via wire transfer in immediately available funds, the amount of Thirty-Five Million Dollars ($35,000,000), (the “PUD Purchase Price”) for the purchase of an undivided fifty percent (50%) of PetroQuest’s right, title and interest in and to the Selected PUDs. PetroQuest shall retain all Existing Wells (and all production therefrom) on the acreage attributable to each such Selected PUD, and each Selected PUD so purchased shall be understood to be limited only to such depths as such Selected PUD covers below the base of the Hartshorne Sand.

2.2 Assignment. Upon receipt of the PUD Purchase Price, PetroQuest shall deliver to WSGP a fully executed, recordable assignment (one for each applicable county), in the form attached hereto as Exhibit “D” (the “PUD Assignment”), conveying the interest described in Section 2.1 in and to the Selected PUDs. The Parties understand and agree that no PUD Assignment shall include any interest in and to any Existing Well. The delivery by PetroQuest of the PUD Assignment will transfer to WSGP an undivided fifty percent (50%) of PetroQuest’s right, title and interest in and to the oil and gas leasehold or mineral interest and associated net revenue interest comprising each Selected PUD.

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ARTICLE III
REMAINING ASSETS

3.1 Purchase Price. In consideration for the right to participate in the Drilling Program and as partial consideration for the purchase of fifty percent (50%) of PetroQuest’s right, title and interest in and to the Remaining Assets, WSGP shall pay to PetroQuest a total of Fifty-Three Million Dollars ($53,000,000) (as described herein, the “Remaining Assets Purchase Price”), by wire transfer in immediately available funds subject to the conditions of and in the installments described in the following:

3.1.1 On the Closing Date, WSGP shall pay PetroQuest Twenty Five Million Dollars ($25,000,000) by wire transfer in immediately available funds;

3.1.2 On November 30, 2011, WSGP shall pay PetroQuest Fourteen Million Dollars ($14,000,000) by wire transfer in immediately available funds (the “Deferred RA Purchase Price”);

3.1.3 On the later to occur of November 30, 2011 or the date on which eighteen (18) wells drilled hereunder qualify as Qualifying Wells (provided, in either case, no Force Majeure Notice has been delivered by either Party indicating an Intervention has occurred prior to such date, in which event the obligations in this Section 3.1.3 shall be tolled for the duration of such Intervention) PetroQuest shall provide a report (the “Performance Report”) to WSGP identifying each Qualifying Well and specifying the aggregate amount of production for each such well. In the event the Performance Standards for such Qualifying Wells have been achieved as evidenced by the Performance Report, WSGP shall pay PetroQuest an additional Fourteen Million Dollars ($14,000,000) by wire transfer in immediately available funds as a “Performance Payment” within five (5) Business Days of receipt of the Performance Report. “Performance Standards” means the Average Production for all Qualifying Wells is at least (i) 423,000 Mcf for the first one hundred eighty (180) days of production and (ii) 57,000 Mcf for the last thirty (30) days of such one hundred eighty (180) day period. “Average Production” means the aggregate production for all of the Qualifying Wells for the relevant time period divided by the number of Qualifying Wells. In the event the Average Production for the Qualifying Wells included in the Performance Report does not meet the Performance Standards, PetroQuest shall be deemed not to have earned the Performance Payment, and the full amount of such Performance Payment shall be provisionally added to the Carried Amount as set forth in Section 4.3. Any such deferred Performance Payment amount added to the Carried Amount as set forth above shall be subject to a “Final Performance Report” as set forth in Section 3.1.4.

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3.1.4 If PetroQuest fails to earn the Performance Payment pursuant to Section 3.1.3, on the later of (i) twelve (12) months from the commencement of Phase 2 or (ii) date on which eighteen (18) wells drilled qualify as Qualifying Wells, PetroQuest shall provide WSGP with a Final Performance Report identifying each well drilled within Phase 2 that qualifies as a Qualifying Well as of the date of the Final Performance Report (each a “Final Qualifying Well”), specifying the amount of production for each such well. In the event the Final Performance Report evidences that the Average Production for all such Final Qualifying Wells meets the Performance Standards, the Carried Amount shall be increased by an amount equal to the unpaid Performance Payment. In the event the Average Production from such Final Qualifying Wells does not meet the Performance Standards, PetroQuest shall be deemed not to have earned, and will not be entitled to, the Performance Payment.

3.2 Remaining Assets Assignment Further Conditioned. Notwithstanding the payment of the Remaining Assets Purchase Price pursuant to Section 3.1, the Parties agree and understand that WSGP’s participation in the Drilling Program and the payment of the applicable amount of WSGP’s Carry, as and when paid by WSGP, are required consideration for WSGP to earn assignments of interests in and to the Remaining Assets. Article IV sets forth the terms and conditions by which WSGP can earn its fifty percent (50%) share of PetroQuest’s right, title and interest in and to the Remaining Assets.

ARTICLE IV
DRILLING PROGRAM

4.1 Drilling Program. The Parties hereby agree, subject to Section 4.3 and 4.5 with respect to non-participation elections, to participate in the drilling and completion of wells within the AMI in the locations described and on the timetable set forth in the attached Exhibit “E”, as amended from time to time pursuant to the mutual agreement of the Parties (the “Drilling Program”). Exhibit “E” attached hereto represents the current best estimate and plan of development by the Parties as of the Execution Date, but shall be revised from time to time as set forth herein. PetroQuest shall serve as initial Operator under each JOA and shall execute its obligations as Operator consistent with the Drilling Program, this Agreement and the JOA. The Parties agree to meet at least once per calendar quarter to update, modify and supplement the Drilling Program, through mutual agreement, to efficiently and reasonably develop the lands within the AMI (each such meeting a “Quarterly Meeting”).

4.2 Operated by Others (“OBO”) Drilling Activity. The Parties acknowledge and agree that certain wells and leases within the AMI may be operated by third parties. The Drilling Program shall take into account OBO drilling activity and provide estimates for the amount of capital expenditures likely to be involved with participation in such OBO activities. Notwithstanding anything to the contrary herein, if WSGP elects to participate in an OBO well, WSGP’s Carry and the Carried Amount shall be applicable to OBO drilling activities with respect thereto. For the sake of clarity, WSGP shall be entitled to non-consent to OBO operations pursuant to the terms of the applicable Third Party JOA without regard to the limitations on non-consent elections set forth in Sections 4.5, however, WSGP shall not be obligated to pay any WSGP Carry with respect to OBO wells in which WSGP does not participate.

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4.3 WSGP’s Carry. WSGP will carry PetroQuest (i.e., pay a share of the costs and expenses attributable to PetroQuest’s interest therein) in the Drilling Program for a total amount not to exceed One Hundred Forty-Six Million Six Hundred Thousand Dollars ($146,600,000) plus, if earned pursuant to Section 3.1.4, the Performance Payment (collectively the “Carried Amount”) to be applied as follows: (i) although the wells currently projected to be located on the Selected PUDs (“PUD Wells”) are a part of, and are included within the Drilling Program, all PUD Wells shall be drilled and completed on a heads-up, non-carried basis, and all costs and expenses attributable to such PUD Wells shall be excluded from the calculation of the Carried Amount; (ii) with respect to any development well drilled within a Selected PUD, other than the PUD Wells identified on Exhibits “C-1” and “C-2” (each such development well a “Development Well”), WSGP shall pay and be responsible for a 1.6:1 disproportionate share of all costs and expenses attributable to the drilling and completion for such Development Well, and all costs and expenses attributable to such Development Well shall be included in the calculation of the Carried Amount; (iii) with respect to each well (other than a PUD Well) drilled pursuant to the Drilling Program (each a “Program Well”), WSGP shall pay and be responsible for a 1.6:1 disproportionate share of all costs and expenses attributable to the drilling and completion for such Program Well (as described above, “WSGP’s Carry”). For purposes of this Agreement, and unless otherwise indicated, Development Wells are deemed to be Program Wells. For example, if, prior to execution of this Agreement, PetroQuest owned 100% of the leasehold working interest attributable to a proposed Program Well, WSGP would be responsible for eighty percent (80%), and PetroQuest would be responsible for twenty percent (20%), of the costs of drilling, completing and equipping such Program Well. WSGP’s Carry shall neither be paid nor applicable to any incremental charges in any individual PetroQuest operated well over the amount equal to 115% of the original AFE amount for drilling, completing and equipping such well. PetroQuest and WSGP shall bear and pay any such incremental charges on a proportionate 50%/50% non-promoted basis. This limitation on the applicability of WSGP’s Carry shall only be applied on an individual well basis, shall not apply to OBO wells, and shall in no way serve to diminish the then unpaid portion of the Carried Amount. Notwithstanding anything to the contrary herein, any amounts characterized as “Carry” pursuant to the Interim Leasing Agreement shall be credited against the Carried Amount at Closing and applied toward the Phase 1 Commitment. The Drilling Program shall be carried out in two (2) separate phases, each as described below:

4.3.1 Phase 1. The drilling schedule for the first phase of the Drilling Program (“Phase 1”) shall be a program for which PetroQuest’s estimate shall be delivered by PetroQuest to WSGP at Closing, and Phase 1 shall commence upon the Effective Time. Phase 1 shall expire at such time as WSGP has paid Fifty-Four Million Dollars ($54,000,000) of the Carried Amount (as calculated pursuant to Section 4.7) in the course of WSGP’s participation in the Drilling Program (the “Phase 1 Commitment”). At the point in time that PetroQuest estimates that sixty (60) days remain before WSGP has funded its Phase 1 Commitment, PetroQuest shall provide WSGP with a written proposal (the “Phase 2 Notice”) to enter into the second phase of the Drilling Program (“Phase 2”);

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4.3.2 Phase 2. Within fifteen (15) days of receipt of the Phase 2 Notice, WSGP shall provide PetroQuest written notice of its election to either pursue Phase 2 or terminate this Agreement. Failure to respond within such period shall be deemed an election to terminate this Agreement pursuant to Section 14.2.2. If WSGP elects to pursue Phase 2, upon the full funding of WSGP’s Phase 1 Commitment, Phase 2 shall commence. Phase 2 shall be divided into six (6) month periods of time, the first of which commencing upon WSGP’s agreement to enter into Phase 2 (each such six (6) period a “6 Month Tranche”). PetroQuest shall submit to WSGP in writing subsequent to each Quarterly Meeting a subset of wells identified in the Drilling Program (as modified from time to time) to be drilled within the applicable 6 Month Tranche. At a minimum, the wells proposed by PetroQuest within any 6 Month Tranche shall include six (6) Program Wells and six (6) PUD Wells (collectively the “12 Well Minimum Content”). PetroQuest may propose wells in addition to the 12 Well Minimum Content in any given 6 Month Tranche, subject to the further provisions of this Section 4.3.2. WSGP shall have a minimum commitment to participate in at least nine (9) wells proposed by PetroQuest within a 6 Month Tranche (either Program Wells or PUD Wells) with at least six (6) of such wells being subject to the WSGP Carry (the “Minimum Commitment”). WSGP shall have the right to non-consent any wells proposed within a 6 Month Tranche above the Minimum Commitment, subject to Section 4.3.3 and the non-consent provisions set forth in Section 4.5, provided, however, that WSGP shall not be obligated to pay the WSGP Carry on any well beyond the Minimum Commitment in which WSGP elects to non-consent. Notwithstanding anything to the contrary in this Section 4.3.2, or in Section 4.3.4, in the event the Parties mutually agree to pursue fewer than twelve (12) wells in any given 6 Month Tranche, the 12 Well Minimum Content, and WSGP’s Minimum Commitment shall apply, on a proportionately reduced basis, to the number of wells agreed to be pursued in such 6 Month Tranche.

4.3.3 Tranche Election. WSGP shall advise PetroQuest in writing at least thirty (30) days prior to the commencement of succeeding 6 Month Tranche whether or not it elects to pursue the next 6 Month Tranche (each a “Tranche Election”). WSGP’s election described in Section 4.3.2 with respect to the Phase 2 Notice shall be deemed for all purposes herein a Tranche Election with respect to the first 6 Month Tranche in Phase 2. If WSGP elects to pursue such 6 Month Tranche, then all of the terms and conditions of Section 4.3.2 shall apply to the Parties with respect to wells proposed for such 6 Month Tranche. A failure to timely affirmatively elect to pursue an upcoming 6 Month Tranche shall suspend WSGP’s rights to further participation in this Agreement until the completion of such 6 Month Tranche. If within such 6 Month Tranche, (i) PetroQuest fails to drill and complete (or plug and abandon, if a dry hole) at least twelve (12) wells from the Drilling Program, then WSGP’s right to participate shall no longer be suspended, and WSGP shall be entitled to a Tranche Election with respect to the next succeeding 6 Month Tranche; or (ii) PetroQuest drills and completes (or plugs and abandons, if a dry hole) at least twelve (12) wells from the Drilling Program, then this Agreement shall terminate pursuant to the applicable provisions of Section 14.2. In the event of such a termination, this Agreement shall be deemed to have terminated upon the date on which the final well in which WSGP elected to participate in the previous 6 Month Tranche has been completed (or plugged and abandoned, if a dry hole).

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4.3.4 Depletion of PUD Inventory. At that point in time when all PUD Wells have been drilled (or non-consented by WSGP) and there remains only Program Wells to be drilled hereunder, the 12 Well Minimum Content for any 6 Month Tranche thereafter shall be comprised of twelve (12) Program Wells. At such time, the Minimum Commitment shall be deemed to consist of nine (9) Program Wells in which WSGP must participate and at least twelve (12) Program Wells for which PetroQuest will receive the benefit of the WSGP Carry, until such time as the Carried Amount has been paid in full.

4.4 Participation Elections. Pursuant to the Drilling Program, and during each phase thereof, PetroQuest shall send WSGP an AFE for each well to be drilled hereunder detailing (i) the proposed location of the well along with the geological and geophysical justification for such location; (ii) the estimated drilling and completion costs for such well specifying WSGP’s share of such costs (either on a carried or heads-up basis, as applicable); (iii) the proposed Spud Date for such well; and (iv) customary title information and any other information reasonably material to WSGP’s decision whether or not to participate therein. WSGP shall have thirty (30) days from receipt of each AFE to elect, in writing to PetroQuest, to participate or not participate in the applicable well. For each Program Well or PUD Well in which WSGP elects to participate, PetroQuest shall send WSGP a cash call notice for WSGP’s proportionate share of the AFE cost for such well no earlier than fifteen (15) days prior to the estimated Spud Date for such well. WSGP shall pay the cash called amount for such well to PetroQuest within five (5) Business Days of receipt of the cash call notice, and shall thereafter be responsible, subject to Section 4.3, for its share of all costs and expenses for drilling, completing, equipping and producing such well (or plugging and abandoning, if a dry hole).

4.5 Non-Consent Elections.

4.5.1 For any well which is a Required Well, an election not to participate, or a failure to timely respond to such AFE, or a subsequent failure to pay WSGP’s share of such AFE costs (each of the foregoing a “Deemed Non-Consent”) shall result in forfeiture of all of WSGP’s right, title and interest in and to all lands that would be earned or preserved by such Required Well. In such event, the Required Well and the acreage earned or preserved thereby shall be excluded from the AMI, excluded from the Contract Area of the applicable JOA, and shall no longer be subject to the terms and conditions of this Agreement.

4.5.2 For any well which is a PUD Well, an election not to participate or a Deemed Non-Consent shall result in forfeiture of all of WSGP’s right, title and interest in and to the wellbore of such PUD Well.

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4.5.3 For each Program Well (other than Required Wells) which is the initial well on an applicable Drilling Unit, an election not to participate or Deemed Non-Consent shall result in WSGP forfeiting any right to earn an interest in and to the Drilling Unit for such Program Well. In such event, such Program Well and its Drilling Unit shall be excluded from the AMI, excluded from the Contract Area of the applicable JOA, and shall no longer be subject to the terms and conditions of this Agreement.

4.5.4 Any subsequent wells on a given Drilling Unit in which WSGP has participated (including any Development Wells) shall be subject to the non-consent penalties prescribed in the applicable JOA.

4.5.5 Notwithstanding anything in this Section 4.5 to the contrary, any forfeiture by WSGP due to non-consent or Deemed Non-Consent shall only apply so long as the applicable well is commenced in good faith and drilled with due diligence within ninety (90) days of such non-consent or Deemed Non-Consent; with the effect being that if such well is not commenced within the ninety (90) day period, WSGP’s election to participate right shall be revived.

4.5.6 Subject to the terms and conditions set forth in Section 4.5, WSGP’s right to non-consent to operations under the Drilling Program during Phase 1 shall not extend beyond that point in time where WSGP’s non-consented operations account for greater than twenty five percent (25%) of WSGP’s working interest share (unpromoted) of the total capital expenditures associated with Phase 1 of the Drilling Program (the “25% Level”). WSGP shall not be obligated to pay the WSGP Carry on any well operation below the 25% Level. If WSGP further desires not to participate in additional well proposals in Phase 1 beyond the 25% Level as AFE’d by PetroQuest, then WSGP shall have the right to submit to PetroQuest, in writing, an alternate well proposal(s) within fifteen (15) days of receipt of the originally proposed well AFE. In the event PetroQuest agrees with such alternate well proposal(s) (such agreement not unreasonably withheld, conditioned or delayed), then such alternate well proposal shall be deemed in all respects a substitute for the original well for which it was proposed. In the event PetroQuest does not agree with such alternate well proposal(s) and timely spuds the original well as non-consented by WSGP, then WSGP shall be obligated to pay PetroQuest the portion of the Carried Amount attributable to such original well as if WSGP had originally elected to participate therein, to the extent such well exceeds the 25% Level. The foregoing limitation shall not apply to OBO well proposals included in Phase 1.

4.5.7 Subject to the terms and conditions in Sections 4.3.2, 4.3.3, 4.3.4 and the other provisions of Section 4.5, WSGP’s right to non-consent to operations in any well beyond the Minimum Commitment attributable to a particular 6 Month Tranche in Phase 2 shall only result in WSGP being subject to the forfeiture and payment provisions set forth in Sections 4.5.1, 4.5.2, 4.5.3 and 4.5.4, as applicable.

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4.5.8 Subject to the terms and conditions in Section 4.3.4, at the time the Minimum Commitment in any 6 Month Tranche is comprised of only Program Wells, WSGP’s election to non-consent operations in each well (up to a maximum of three (3) Program Wells) above the minimum nine (9) wells in which WSGP must participate in a given 6 Month Tranche shall result in WSGP paying PetroQuest an amount equal to the carried portion of the costs of such well.

4.5.9 The Parties agree that in the event non-consent elections made by WSGP pursuant to its rights granted in this Section 4.5 result in PetroQuest (as Operator) being subject to Vendor Penalties, then WSGP shall remit to PetroQuest a cash payment in the amount of such Vendor Penalties within fifteen (15) days of receipt of an invoice documenting any such Vendor Penalties.

4.6 Interests Earned in Each Well by Drilling. For each Program Well (other than a Development Well or a subsequent well on a Drilling Unit previously assigned to WSGP (each such subsequent well an “Infill Well”) in which WSGP participates that is drilled and completed as a dry hole or a producer in the Drilling Program, WSGP will earn, effective as of the Spud Date for such Program Well, an undivided fifty percent (50%) of PetroQuest’s working interest and associated net revenue interest as of the Spud Date in and to the Program Well and the Drilling Unit for such well, the production and revenue attributable to such well, and all related equipment and other property associated therewith, and PetroQuest will retain fifty percent (50%) of its working interest and associated net revenue interest as of the Spud Date in each such well and its Drilling Unit, the production and revenue attributable to such well, and all related equipment and other property associated therewith. PetroQuest shall deliver to WSGP an assignment of the interests WSGP has earned in each such Program Well in accordance with Section 5.1. Each assignment earned by WSGP shall be made subject to this Agreement.

4.7 Applicability of WSGP’s Carry. Subject to Section 4.3, and WSGP’s non-consent elections, WSGP’s Carry shall apply to any and all costs and expenses, including overhead under the JOA, attributable to the drilling, completion, sidetracking, deepening, reworking, recompletion or repair of any Program Well, including the construction of gathering, treating and processing facilities exclusively servicing production from such Program Well until such time as the carried portion of all such costs and expenses actually paid by WSGP equals the Carried Amount. WSGP’s Carry shall not apply to any leasehold or mineral interest acquisitions within the AMI pursuant to Article XI, nor any costs to acquire seismic data in and to any portion of the AMI, all such costs and expenses being on a heads-up, non-carried 50%/50% basis, subject to Section 11.3 with respect to administrative overhead, and further subject to each Party’s election to participate or not participate in any such acquisition. PetroQuest shall furnish statements to WSGP, in form and substance reasonably acceptable to WSGP, on or before the 20^th day following the end of each calendar quarter (March 31, June 30, September 30 and December 31) detailing the amount paid and applied against the Carried Amount by WSGP from the prior quarter, the aggregate amount paid and applied against the Carried Amount by WSGP as of the end of such prior quarter and the amount remaining to be paid toward the Carried Amount. PetroQuest shall send written notice to WSGP within thirty (30) days of the date that WSGP has paid the entire Carried Amount. From and after the date on which such Carried Amount has been paid, all costs and expenses attributable or related to existing Program Wells, and any subsequent Program Wells shall be on a heads-up, non-carried 50%/50% basis.

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ARTICLE V
ASSIGNMENTS TO WSGP

5.1 Program Well Assignments. No later than five (5) Business Days following the Spud Date for each Program Well (other than a Development Well or a subsequent well upon a Drilling Unit previously assigned to WSGP) in which WSGP participates, subject to PetroQuest’s receipt of WSGP’s share of costs for such Program Well, PetroQuest shall prepare, execute and deliver to WSGP an assignment, in the form attached hereto as Exhibit “F” of an undivided 50% of PetroQuest’s right, title and interest in and to such Program Well and the Drilling Unit attributable thereto, with a like interest in and to the production and revenue attributable to such well, and all related equipment and other property associated therewith (a “Program Well Assignment”).

5.2 Early Termination. Upon Early Termination, PetroQuest shall prepare and deliver to WSGP the assignments required to be delivered pursuant to Section 14.3, subject to the terms of Article XIV.

ARTICLE VI
REPRESENTATIONS AND WARRANTIES

6.1 Representations and Warranties of PetroQuest. As of the Closing Date, PetroQuest represents and warrants to WSGP as follows:

6.1.1 PetroQuest is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Louisiana and is duly licensed and qualified to do business as a limited liability company and is in good standing in all jurisdictions in which such qualification is required under Applicable Law;

6.1.2 PetroQuest has all requisite power and authority to carry on its businesses as presently conducted;

6.1.3 PetroQuest has all requisite power and authority to enter into this Agreement and the other agreements contemplated hereby and to perform PetroQuest’s obligations contemplated hereunder and thereunder, and the consummation of the Transaction and the other agreements contemplated hereby will not violate or be in conflict with any provisions of PetroQuest’s organizational documents or other governing documents, or any material agreement or instrument to which it is a party or by which it is bound, or any judgment, decree, order, statute, rule or regulation applicable to PetroQuest;

6.1.4 the execution, delivery and performance of this Agreement and the consummation of the Transaction have been duly and validly authorized by all requisite action on the part of PetroQuest, and this Agreement and the other agreements contemplated hereby will constitute the valid, legal and binding obligation of PetroQuest, enforceable in accordance with their respective terms, subject to applicable bankruptcy and other similar laws of general application with respect to creditors;

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6.1.5 there are no bankruptcy, reorganization or arrangement proceedings pending, being contemplated by, or to the knowledge of PetroQuest, threatened against PetroQuest; and PetroQuest is able to pay its debts as such debts become due, and it has sufficient capital to carry on its respective present businesses and transactions and all businesses and transactions in which it is about to engage. PetroQuest (i) is not bankrupt or insolvent, (ii) has not made an assignment for the benefit of its creditors which not be remedied by the release to be delivered by PetroQuest at Closing, (iii) has not had a trustee or receiver appointed, (iv) has not had any bankruptcy, reorganization or insolvency proceedings instituted by or against it, or (v) shall not be rendered insolvent by its execution, delivery or performance of this Agreement;

6.1.6 there is no written claim for breach of contract, tort or violation of Applicable Law or investigation of which PetroQuest has received written notice, or any suit, action or litigation, by any Person, and no legal, administrative, or arbitration proceedings, (in each case) pending, or to PetroQuest’s Knowledge, threatened in writing against PetroQuest, or to which PetroQuest is a party, that would have a Material Adverse Effect upon the ability of PetroQuest to consummate the transactions contemplated by this Agreement;

6.1.7 the materials furnished to WSGP, contained in PetroQuest’s virtual data room, the responses to due diligence inquiries and all other documents, agreements and Schedules furnished or made available to WSGP prior to the date of this Agreement, by or on behalf of PetroQuest, were collected, prepared and provided, as the case may be, in good faith and, to PetroQuest’s Knowledge, the documents provided or made available to WSGP or its representatives (i) were authentic and complete copies of such documents, inclusive of all amendments and modifications, to the extent that PetroQuest possessed complete copies thereof and to the extent PetroQuest was legally authorized to provide complete copies giving effect to any applicable contractual restraints on disclosure or legal privilege, (ii) did not contain any untrue or incorrect statement of material fact, or omit to state any fact necessary to make the information therein not misleading, provided that many of such materials are based upon and contain projections, estimates and subjective interpretations, the accuracy and completeness of which are expressly disclaimed in Section 6.1.18, and (iii) other than the Current Unrecorded Commitments as described on the attached Schedule 1, and the Transaction Assets described on the attached Exhibit “A”, PetroQuest is unaware of any undisclosed, unrecorded agreement that burdens the interests to be acquired by WSGP under this Agreement;

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6.1.8 PetroQuest has incurred no liability, contingent or otherwise, for brokers’ or finders’ fees relating to the transaction contemplated by this Agreement for which WSGP shall have any responsibility whatsoever;

6.1.9 To PetroQuest’s Knowledge, PetroQuest has all governmental licenses, authorizations, consents and approvals required for the ownership of the Transaction Assets, and PetroQuest has complied with all applicable rules, regulations, and ordinances of any governmental authority having jurisdiction over the Transaction Assets and as to which noncompliance would have a Material Adverse Effect on any of the Transaction Assets. For purposes of this Agreement, “Material Adverse Effect” means the cumulative effect of facts, actions, or events relating to the Transaction Assets which, taken as a whole, would deprive WSGP of the right to receive the benefit of the bargain contemplated by this Agreement as to any Transaction Asset;

6.1.10 PetroQuest is not obligated by virtue of any prepayment made under any production sales contract or any other contract containing a “take-or-pay” clause or under any production payment, forward sale, deferred production, or similar arrangement to deliver oil, gas or other minerals produced from or allocated to any of the Transaction Assets at some future time without receiving full payment therefor at the time of delivery;

6.1.11 To PetroQuest’s Knowledge, there are no Imbalances between PetroQuest and any third party with respect to the Transaction Assets. The term “Imbalance” means any imbalance at the wellhead or pipeline between the amount of natural gas or other hydrocarbons produced from a well to which PetroQuest was entitled and the amount of production which PetroQuest was actually allocated for sale purposes, together with any appurtenant rights and obligations concerning future in-kind or cash balancing at the wellhead, or pipeline, as the case may be;

6.1.12 Except as reflected in Section 10.6 and on Schedule 10.4, there are no commodity swap, hedging or similar agreements which provide for physical delivery or financial sales of hydrocarbons during future periods following the Execution Date for which WSGP shall have any obligations following the Closing;

6.1.13 to PetroQuest’s Knowledge: (i) all permits, licenses, approvals and consents from appropriate Governmental Authorities necessary to conduct the operation of the Transaction Assets in compliance with all Applicable Laws have been obtained; and the operator of the Transaction Assets is in compliance with all such permits, licenses, approvals and consents; (ii) neither PetroQuest nor any third party operator of any of the Transaction Assets has received any notices of violation or orders for remediation for any Environmental Matter with respect to the Transaction Assets that have not been remediated or otherwise brought into compliance;

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6.1.14 with respect to the Transaction Assets and to PetroQuest’s Knowledge, except as would not be reasonably expected to have a Material Adverse Effect: (i) each of the oil and gas leases subject to the terms of this Agreement (the “Leases”) is in full force and effect; (ii) PetroQuest has not, by its act or omission, caused the breach or default, nor has there occurred any event, fact, or circumstance that, with the lapse of time or the giving of notice, or both, would constitute such a breach or default by PetroQuest with respect to any of its obligations under any Lease; (iii) no lessor under any Lease has given or threatened to give notice to PetroQuest of any action to terminate, cancel, rescind, repudiate, or procure a judicial reformation of any Lease or any provisions thereof; and (iv ) except as set forth on Schedule 6.1.15, PetroQuest does not own any real property in fee that affect the Transaction Assets;

6.1.15 with respect to the contracts which affect the Transaction Assets, to PetroQuest’s Knowledge, and except as would not reasonably be expected to have a Material Adverse Effect: (i) all such contracts are in full force and effect and are the valid and legally binding obligations of the parties thereto and are enforceable in accordance with their respective terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency and similar laws affecting creditors’ rights generally, and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law); (ii) PetroQuest is not in breach or default, nor has there occurred any event, fact or circumstance that, with the lapse of time or giving of notice or both, would constitute such a breach or default by PetroQuest with respect to any of its material obligations under any contract; (iii) no other party to any contract has given or threatened to give notice to PetroQuest of any action to terminate, cancel, rescind, or procure a judicial reformation of any contract or any provision thereof; and (iv) to the extent affecting the Selected PUDS, the contracts do not contain any obligations to drill additional wells or to engage in other development operations, except for obligations arising under provisions of operating agreements that allow the parties thereto to elect whether or not they will participate in such operations and except for obligations under the terms of the Leases which require drilling or development operations to maintain a lease in force beyond its primary term;

6.1.16 EXCEPT WITH RESPECT TO THE REPRESENTATIONS AND WARRANTIES SET FORTH HEREIN AND THE SPECIAL OR LIMITED BY, THROUGH AND UNDER WARRANTY OF TITLE TO BE CONTAINED IN THE PUD ASSIGNMENT AND THE OTHER ASSIGNMENTS TO BE DELIVERED PURSUANT HERETO, PETROQUEST MAKES NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, WITH RESPECT TO TITLE TO ANY OF THE TRANSACTION ASSETS, AND ANY AND ALL SUCH REPRESENTATIONS AND WARRANTIES ARE HEREBY EXPRESSLY DISCLAIMED.

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6.1.17 EXCEPT WITH RESPECT TO THE REPRESENTATIONS AND WARRANTIES SET FORTH HEREIN, PETROQUEST MAKES NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, WITH RESPECT TO THE ENVIRONMENTAL CONDITION OF THE TRANSACTION ASSETS, AND ANY AND ALL SUCH REPRESENTATIONS AND WARRANTIES ARE HEREBY EXPRESSLY DISCLAIMED.

6.1.18 EXCEPT WITH RESPECT TO THE REPRESENTATIONS AND WARRANTIES SET FORTH HEREIN, PETROQUEST MAKES NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, WITH RESPECT TO (I) THE CONTENTS, CHARACTER OR NATURE OF ANY DESCRIPTIVE MEMORANDUM, OR ANY REPORT OF ANY PETROLEUM ENGINEERING CONSULTANT, OR ANY GEOLOGICAL OR GEOPHYSICAL DATA OR INTERPRETATION RELATING TO THE TRANSACTION ASSETS, (II) THE QUANTITY, QUALITY OR RECOVERABILITY OF PETROLEUM SUBSTANCES IN OR FROM THE TRANSACTION ASSETS, (III) ANY ESTIMATES OF THE VALUE OF THE TRANSACTION ASSETS OR FUTURE REVENUES GENERATED BY THE TRANSACTION ASSETS (IV) THE MAINTENANCE, REPAIR, CONDITION, QUALITY, SUITABILITY, DESIGN OR MARKETABILITY OF ANY OF THE TRANSACTION ASSETS, OR (V) ANY OTHER MATERIALS OR INFORMATION THAT MAY HAVE BEEN MADE AVAILABLE TO OR COMMUNICATED TO WSGP OR ITS AFFILIATES, OR ITS OR THEIR EMPLOYEES, AGENTS, CONSULTANTS, REPRESENTATIVES OR ADVISORS IN CONNECTION WITH THE TRANSACTION OR ANY DISCUSSION OR PRESENTATION RELATING THERETO, AND FURTHER DISCLAIMS ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR CONFORMITY TO MODELS OR SAMPLES OF MATERIALS OF ANY OF THE TRANSACTION ASSETS, IT BEING EXPRESSLY UNDERSTOOD AND AGREED BY THE PARTIES THAT EXCEPT AS SET FORTH IN THIS ARTICLE VI, WSGP SHALL BE DEEMED TO BE OBTAINING THE TRANSACTION ASSETS, AS AND WHEN PURCHASED OR EARNED PURSUANT TO THE TERMS HEREOF, IN THEIR PRESENT STATUS, CONDITION AND STATE OF REPAIR, “AS IS” AND “WHERE IS” WITH ALL FAULTS AND THAT WSGP HAS MADE OR CAUSED TO BE MADE SUCH INSPECTIONS AS WSGP DEEMS APPROPRIATE.

6.2 Representations and Warranties of WSGP. As of the Closing Date, WSGP represents and warrants to PetroQuest as follows:

6.2.1 WSGP is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware and is duly licensed and qualified to do business as a limited liability company and is in good standing in all jurisdictions in which such qualification is required under Applicable Law;

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6.2.2 WSGP has all requisite power and authority to carry on its businesses as presently conducted and is duly qualified with all appropriate Governmental Authorities to own the interests to be purchased or earned pursuant to this Agreement in the State of Oklahoma;

6.2.3 WSGP has all requisite power and authority to enter into this Agreement and the other agreements contemplated hereby and to perform WSGP’s obligations contemplated hereunder and thereunder, and the consummation of the Transaction and the other agreements contemplated hereby will not violate or be in conflict with any provisions of WSGP’s organizational documents or other governing documents, or any material agreement or instrument to which it is a party or by which it is bound, or any judgment, decree, order, statute, rule or regulation applicable to WSGP;

6.2.4 the execution, delivery and performance of this Agreement and the consummation of the Transaction have been duly and validly authorized by all requisite action on the part of WSGP, and this Agreement and the other agreements contemplated hereby will constitute the valid, legal and binding obligation of WSGP, enforceable in accordance with their respective terms, subject to applicable bankruptcy and other similar laws of general application with respect to creditors;

6.2.5 there are no bankruptcy, reorganization or arrangement proceedings pending, being contemplated by, or to NGEP’s Knowledge, threatened against WSGP; and WSGP is able to pay its debts as such debts become due, and it has sufficient capital to carry on its respective present businesses and transactions and all businesses and transactions in which it is about to engage. WSGP (i) is not bankrupt or insolvent, (ii) has not made an assignment for the benefit of its creditors, (iii) has not had a trustee or receiver appointed, (iv) has not had any bankruptcy, reorganization or insolvency proceedings instituted by or against it, or (v) shall not be rendered insolvent by its execution, delivery or performance of this Agreement;

6.2.6 there is no written claim for breach of contract, tort or violation of Applicable Law or investigation of which WSGP has received written notice, or any suit, action or litigation, by any Person, and no legal, administrative, or arbitration proceedings, (in each case) pending, or to WSGP’s Knowledge, threatened in writing against WSGP, or to which WSGP is a party, that would have a Material Adverse Effect upon the ability of WSGP to consummate the transactions contemplated by this Agreement; and,

6.2.7 WSGP (directly or through its Affiliates and advisors) is an informed and sophisticated purchaser, and has engaged expert advisors, experienced in the evaluation of transactions such as that contemplated hereunder. WSGP (directly or through its Affiliates) has undertaken such investigation as it has deemed necessary to enable it to make an informed and intelligent decision with respect to the execution, delivery and performance of this Agreement.

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ARTICLE VII
PRE-CLOSING COVENANTS

7.1 Conduct of Business. PetroQuest agrees that from and after the date hereof until the Closing Date, PetroQuest will:

7.1.1 give written notice to WSGP as soon as is practicable (but within five (5) Business Days) of any written notice received or given by PetroQuest or any of PetroQuest’s Affiliates with respect to (i) any alleged material breach of any Lease, (ii) any action to alter, terminate, rescind or procure a judicial reformation of any Lease or (iii) notice in writing of any new claim for damages or any new investigation, suit, action or litigation with respect to the Transaction Assets;

7.1.2 not transfer, sell, mortgage, pledge, encumber or dispose of any portion of the Transaction Assets except in the ordinary course of business and as would not have a Material Adverse Effect;

7.1.3 not grant or create any preferential right to purchase, right of first opportunity or other transfer restriction or requirement with respect to the Drilling Program or the Transaction Assets;

7.1.4 not, directly or indirectly, or through an owner, employee, representative, its Affiliates or by or through the use of any other conduit, offer to participate in the Drilling Program with, or sell, pledge or transfer the Transactions Assets to, a third party, or request, solicit or otherwise encourage inquiries, proposals or offers from anyone but WSGP or its Affiliates.

7.1.5 maintain insurance coverage with respect to any operations conducted upon the Transaction Assets in the amounts and types PetroQuest currently has in force;

7.1.6 use commercially reasonable efforts to maintain in full force and effect all rights with respect to the Drilling Program and the Transaction Assets.

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7.2 Notifications. If either PetroQuest or WSGP obtains actual knowledge that the other Party apparently has breached a representation, warranty, covenant or other agreement under this Agreement, that Party shall promptly inform the other Party of such potential breach so that it may attempt to remedy or cure such breach prior to Closing. Notwithstanding the foregoing, this Section shall not apply to breach of the Parties’ obligations at Closing and shall not operate to delay Closing. If any of PetroQuest’s or WSGP’s representations or warranties is untrue, or PetroQuest’s or WSGP’s covenants or agreements have not been performed or observed, but such breach or failure is cured to the reasonable satisfaction of the other Party by Closing (or, if Closing does not occur, by the earlier termination of this Agreement pursuant to Section 14.1), then such breach or failure shall be deemed not to have occurred for all purposes of this Agreement. Due to the fact that certain of PetroQuest’s representations and warranties hereunder may be rendered untrue due to circumstances occurring after the Execution Date, PetroQuest shall promptly notify WSGP of any occurrences prior to Closing that would render any of its representations or warranties in Sections 6.1.6 through 6.1.15 untrue, and update any applicable Schedules to account for any such occurrences. No such changes or occurrences, to the extent disclosed by PetroQuest pursuant to this Section 7.2 shall be deemed to give rise to a breach of the applicable representations or warranties for which damages or equitable remedies may be sought, provided, however, WSGP shall have the right, but not the obligation, to terminate this Agreement, such termination being WSGP’s sole and exclusive remedy.

7.3 Access. From and after the date hereof and up to and including the Closing (or earlier termination of this Agreement pursuant to Section 14.1), PetroQuest shall afford to WSGP and its Representatives full access, during normal business hours, to all records and other documents in PetroQuest’s possession relating to the Drilling Program or the Transaction Assets subject however to any applicable contractual restraints on disclosure or any applicable legal privilege. PetroQuest shall also make available to WSGP and WSGP’s Representatives, upon reasonable notice during normal business hours, PetroQuest’s personnel knowledgeable with respect to the Drilling Program or the Transaction Assets. WSGP shall coordinate its access rights and physical inspections of the Transaction Assets with PetroQuest to reasonably minimize any inconvenience to or interruption of the conduct of business by PetroQuest.

ARTICLE VIII
CONDITIONS TO CLOSING

The obligations of PetroQuest and WSGP to consummate the transactions provided for herein are subject, at the option of PetroQuest or WSGP (as appropriate), to the fulfillment on or prior to the Closing Date of each of the following conditions:

8.1 Representations. The representations and warranties of PetroQuest or WSGP (as appropriate) set forth in Section 6.1 and Section 6.2 shall be true and correct in all material respects as of the Closing Date as though made on and as of the Closing Date.

8.2 Performance. PetroQuest or WSGP (as appropriate) shall have performed or complied with all obligations, agreements, and covenants contained in this Agreement as to which performance or compliance by PetroQuest or WSGP (as appropriate) is required prior to or at the Closing.

8.3 No Legal Proceedings. No suit, action, or other proceeding instituted by a third party shall be pending before any Governmental Authority or arbitrator seeking to restrain, prohibit, enjoin, or declare illegal, or seeking substantial damages in connection with, the transactions contemplated by this Agreement. No order, award or judgment shall have been issued by any Governmental Authority or arbitrator to restrain, prohibit, enjoin, or declare illegal, or awarding substantial damages in connection with, the transactions contemplated by this Agreement.

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8.4 Consent and Waivers. All consents and approvals required from Governmental Authorities for the consummation of the transactions contemplated by this Agreement shall have been granted. The board approvals described in Section 18.20 shall have been granted and each Party shall have affirmatively notified the other of such approval.

8.5 Closing Deliverables. PetroQuest or WSGP (as appropriate) shall have delivered (or be ready, willing and able to deliver at Closing) to the appropriate Party the documents and other items required to be delivered pursuant to Section 9.2.

8.6 No Material Event. No Material Event with respect to PetroQuest or its Affiliates or WSGP or its Affiliates (as appropriate) shall have occurred and be continuing and no material default by PetroQuest or WSGP (as appropriate) under this Agreement shall have occurred and be continuing.

ARTICLE IX
CLOSING

9.1 Closing Date. The closing of the Transaction (the “Closing”) shall occur on May 24, 2010, or on such other date as WSGP and PetroQuest may agree upon in writing.

9.2 Closing Obligations. At the Closing, the following documents shall be delivered and the following events shall occur, the execution of each document and the occurrence of each event being a condition precedent to the others and each being deemed to have occurred simultaneously with the others:

9.2.1 Memorandum of Agreement. At the Closing, each of the Parties shall execute, acknowledge and deliver multiple counterparts of a Memorandum of Agreement (the “Memorandum of Agreement”) in the form attached hereto as Exhibit “H” describing the Transaction Assets, giving public notice of the existence of this Agreement between PetroQuest and WSGP with respect to the Transaction Assets and that PetroQuest holds record title in and to certain interests therein for the sole benefit of WSGP subject to the terms of this Agreement. Promptly, but in any event no later than three (3) Business Days following execution of the Memorandum of Agreement, PetroQuest shall record counterparts of such agreement in the appropriate real property, oil and gas, or other official public records of each county in which Transaction Assets are located.

9.2.2 Payment of PUD Purchase Price. WSGP will pay PetroQuest the Thirty-Five Million Dollar ($35,000,000) PUD Purchase Price by wire transfer in immediately available funds, to the following account (the “Wire Account”):

Bank:	JPMorgan Chase, NA
Account Name:	PetroQuest Energy LLC Operating Account
Account Number:	644369134

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9.2.3 Installment Payment of Remaining Assets Purchase Price. WSGP will additionally pay PetroQuest Twenty Five Million Dollars ($25,000,000) by wire transfer in immediately available funds, to the Wire Account pursuant to Section 3.1.1.

9.2.4 PUD Assignment. PetroQuest shall execute, notarize and deliver the PUD Assignment required pursuant to Section 2.2 hereof.

9.2.5 Phase 1 Drilling Program. PetroQuest shall deliver its estimated drilling schedule for Phase 1 of the Drilling Program to WSGP.

9.2.6 Mortgage Release. PetroQuest shall deliver to WSGP executed releases of the mortgages burdening PetroQuest’s interests in and to the Selected PUDs.

9.2.7 Letter Agreements. The Letter Agreements shall have been executed and delivered in a form satisfactory to each Party.

9.2.8 Board Approvals. PetroQuest shall deliver to WSGP an executed certificate from the secretary of PetroQuest Energy, Inc. certifying that the Board of Directors of PetroQuest has approved the Transaction as contemplated by this Agreement. WSGP shall deliver to PetroQuest an executed certificate from the secretary of FPL Group, Inc. certifying that the Board of Directors of FPL Group, Inc. has approved the Transaction as contemplated by this Agreement.

ARTICLE X
POST CLOSING COVENANTS

10.1 Restrictions on Transfer. The identity, capabilities and creditworthiness of each Party to this Agreement are of critical importance to the other Party. Therefore, a Party (the “Transferring Party”) may only effect an assignment, transfer, grant, mortgage, pledge, hypothecation or other conveyance (collectively a “Transfer”) of (i) any portion of its interest in and to any of the jointly owned interests of the Parties within the AMI, or (ii) any of its rights or obligations under this Agreement to a third party (the “Prospective Transferee”) without the prior written consent of the other Party (the “Non-transferring Party”) if:

10.1.1 In the Transfer from the Transferring Party to the Prospective Transferee, the Transferring Party remains wholly responsible to the Non-transferring Party for all of the obligations of the Transferring Party under this Agreement;

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10.1.2 The Transfer involves: (i) primarily the grant of a mortgage or security interest in all or substantially all of the Party’s oil and gas assets to such Party’s Lender to secure its corporate credit; (ii) is a an assignment of this Agreement or any rights acquired or held hereunder by either Party to any Lender as collateral security for obligations under the financing documents entered into with such Lender; or (iii) with respect to a Transfer by WSGP pursuant to the foregoing, is an assignment by the Lenders to a third party after the Lenders have exercised their foreclosure rights with respect to this Agreement or the interests acquired by WSGP hereunder. If such Transfer is as described in (ii) above, the Non-transferring Party shall, upon request by the Transferring Party and at the Transferring Party’s sole expense, cooperate reasonably to execute or arrange for the delivery of those normal, reasonable and customary certificates, consents and opinions (all in forms reasonably acceptable to the Non-transferring Party and including assumptions, caveats and exclusions typical for such documents or necessary for the accuracy or delivery thereof) as may be necessary to assist the Transferring Party in consummating the applicable financing;

10.1.3 The Transfer involves only the sale of undivided interests in and to wellbores (including ancillary rights in and to equipment, easements and the production and revenue attributable thereto) owned in record title by the Transferring Party at the time of the Transfer;

10.1.4 The Transfer is a mortgage, pledge, security interest, dedication or other encumbrance which is associated with any operating agreement, gas sales agreement or other agreement executed in the ordinary course of exploration, development and production which is not otherwise restricted by this Agreement;

10.1.5 The Prospective Transferee is an Affiliate of the Transferring Party and such Prospective Transferee expressly assumes in a writing reasonably satisfactory to the Non-transferring Party all (or, in the case of a partial transfer, its proportionate share) of the Transferring Party’s obligations under this Agreement.

Otherwise, during the term of this Agreement, neither Party shall effect a Transfer without first obtaining the written consent of the Non-transferring Party, which consent may not be unreasonably withheld, conditioned or delayed. Any Transfer in violation of this provision or Section 10.2 below shall be null and void ab initio.

10.2 Permitted Transfers. Any permitted Transfer by either Party to this Agreement, or any of their successors and assigns, shall be made expressly subject to this Agreement. Notwithstanding the provisions of Section 4.6 of this Agreement, prior to any permitted Transfer by PetroQuest which is in recordable form, PetroQuest shall prepare, execute and deliver to WSGP an assignment of all interests earned by WSGP under this Agreement for which WSGP has not received an assignment.

10.3 Burdens Created by PetroQuest. Without the prior written consent of WSGP, PetroQuest shall not enter into any agreements, commitments, contracts or other contractual obligations that would burden, encumber or otherwise affect any interest in the Transaction Assets earned or that may be earned by WSGP pursuant to this Agreement.

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10.4 Additional Gathering System. The PUD Assignment and each Program Well Assignment shall include an assignment to WSGP of an undivided fifty percent (50%) interest in and to those rights, if any, of PetroQuest as of the effective time of each such assignment under the oil, gas and mineral leases comprising the applicable assigned leasehold interest to use the surface and subsurface of the lands covered thereby to construct a gathering system, subject to (i) the Existing Gas Gathering Agreements as set forth in Schedule 10.4, and (ii) all the terms and conditions contained in each conveyed lease that may apply to or restrict the construction of such gathering system(s). Subject to such limitations, either Party may propose the construction of a gathering system and related equipment on the jointly owned acreage within the AMI by giving the other Party written notice specifying the proposed location and estimated cost of such gathering system, together with such other information as reasonably necessary for a Party to make its election. The Party receiving the notice shall have thirty (30) days after receipt of the notice within which to notify the Party wishing to construct the gathering system and related equipment whether it elects to participate in the cost thereof. In the event PetroQuest elects to participate, PetroQuest shall install and operate the system. If WSGP and PetroQuest both elect to participate in the construction of the proposed gathering system and related equipment, their respective ownership interests therein shall be fifty percent (50%) each, with each Party being responsible only for its proportionate, non-carried share of the costs and expenses of design, construction, installation and operation of such system. Failure to respond within the above described thirty (30) day period shall be deemed an election not to participate in the construction of the proposed gathering system. The proposing Party may proceed with the construction of the proposed gathering system at its own cost and expense following the above described thirty (30) day period if the non-proposing Party has elected or been deemed to have elected not to participate therein, and, in such event, the proposing Party shall own one hundred percent (100%) of the ownership interest in such gathering system.

10.5 Cooperation. From and after Closing, WSGP shall support and cooperate with PetroQuest and execute, upon request, all required filings, applications and permits required by any Governmental Authority or other instruments reasonably necessary for the formation of or otherwise related to any voluntary or involuntary units initiated by PetroQuest with respect to any of the Transaction Assets or other jointly owned acreage, including supporting PetroQuest as Operator in any application in which PetroQuest seeks operatorship.

10.6 Existing Gas Purchase Contracts. PetroQuest has previously entered into the following gas contracts (hereinafter collectively referred to as the “Existing Gas Purchase Contracts”):

a. Base Contract for Sale and Purchase of Natural Gas with Laclede Energy Resources, Inc. as of September 20, 2007 — Transaction Confirmation dated September 20, 2007.

b. Base Contract for Sale and Purchase of Natural Gas with Laclede Energy Resources, Inc. as of September 20, 2007 — Transaction Confirmation dated September 30, 2008.

c. Clarification of Transaction Confirmation effective November 1, 2008.

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Some or all of the gas produced from the Selected PUDs and the Remaining Assets is currently required to be delivered under the Existing Gas Purchase Contracts. WSGP and PetroQuest agree work together to minimize the amount of Gas that WSGP will be required to deliver under the Existing Gas Purchase Contracts such that WSGP will be able to market as much of its own gas as possible without breaching the Existing Gas Purchase Contracts. In furtherance of this agreement, the Parties agree as follows:

10.6.1 Upon the execution of this Agreement, WSGP and PetroQuest shall work together to develop nomination procedures under the Existing Gas Purchase Contracts to reflect the Parties’ intent that the amount of gas that WSGP will be required to deliver under such contracts will be minimized. In general, the nomination procedures should provide for the following result:

10.6.1.1 If PetroQuest’s portion of gas volumes produced by the jointly owned acreage within the AMI (the “PetroQuest Production”) is equal to or greater than the MaxDQ (as such term is defined in the applicable Existing Gas Purchase Contract), then PetroQuest would nominate the MaxDQ to the purchaser (“Laclede”) and the remainder to a mutually agreed upon counterparty(ies). For the avoidance of doubt, the PetroQuest Production shall consist not only of gas produced on acreage dedicated under the Existing Gas Purchase Contracts, but gas produced from wells drilled in the future on acreage not dedicated under the Existing Gas Purchase Contracts, but limited to gas produced from the Woodford formation. PetroQuest Production shall not include gas produced from any formation or common source of supply other than the Woodford, nor shall it include, existing Woodford production from wells (whether or not operated by PetroQuest) existing as of the date of this Agreement, but situated on acreage not dedicated under the Existing Gas Purchase Contracts. In the event that the portion of the PetroQuest Production produced on acreage dedicated under the Existing Gas Purchase Contracts is less than the MaxDQ, but the remaining PetroQuest Production equals or exceeds the MaxDQ, then PetroQuest shall financially allocate such production, as necessary, in order to the fulfill its obligations under the Existing Gas Purchase Contracts.

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10.6.1.2 If the PetroQuest Production is less than the MaxDQ, PetroQuest would nominate all of its gas to Laclede such volumes of WSGP’s gas from acreage dedicated under the Existing Gas Purchase Contracts as is needed to satisfy the Max DQ (i.e.,; up to WSGP’s total production); the remainder of WSGP’s production, if any, being nominated to a mutually agreed upon counterparty(ies).

10.6.1.3 The Parties recognize that gas production volumes will vary on a day to day basis and the nomination procedures will need to address such production variances.

10.7 Assumption. With respect to any interests conveyed to WSGP pursuant to this Agreement, WSGP shall be responsible for and hereby expressly assumes its proportionate share of plugging and abandonment liability and, subject to the indemnities provided in Article XVII, all Environmental Matters arising with respect to the interests assigned to WSGP by PetroQuest pursuant to this Agreement.

ARTICLE XI
AMI

11.1 Area of Mutual Interest. An AMI is hereby established as to those lands described on Exhibit “B” for a term of eight (8) years from the Closing Date. In the event either Party, or its Affiliate(s), acquires, either directly or indirectly, from a third party an interest in minerals, royalties, oil and gas leasehold or an option to acquire such interest, or contractual rights to earn such interest (hereinafter referred to as an “Acquired Interest”), including any renewals, extensions or replacement leases for any of the leases included in the Transaction Assets or previous Acquired Interests, which is obtained or earned by purchase, deed, assignment, option, extension, renewal, farmin, acreage contribution or other agreement covering lands situated in whole or in part within the AMI, the acquiring Party shall promptly notify the non-acquiring Party of such Acquired Interest and shall attach a copy of the instrument evidencing same, together with all title materials in its possession and an itemized statement of the acquisition costs attributable to each such Acquired Interest. Such acquisition costs shall exclude any overhead, financing or other internal costs incurred by the acquiring party. The non-acquiring Party shall have the option to participate for its proportionate share of the Acquired Interest, by notifying the acquiring Party of its election in writing within thirty (30) days of receipt of the election notice. The acquiring Party shall deliver an assignment of the non-acquiring Party’s proportionate share of the Acquired Interest in recordable form, in substantially the same form as the PUD Assignment, to the non-acquiring Party which has elected to participate in the acquisition of such an Acquired Interest upon receipt of such non-acquiring Party’s proportionate working interest share of the acquisition costs for such Acquired Interest.

11.1.1 In the event the non-acquiring Party elects not to participate in the Acquired Interest, the Acquired Interest shall not be subject to this Agreement, and the land covered thereby shall be excluded from the AMI and excluded from the Contract Area of the JOA.

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11.1.2 Regardless of which Party acquires or elects to participate in the acquisition of any Acquired Interest, the Parties understand and agree that all such Acquired Interests shall be burdened by the landowner’s royalty and any other lease burdens of record as of the date of acquisition. The acquiring Party shall not grant any overriding royalties, production payments or otherwise create any additional lease burdens or encumbrances upon the Acquired Interest prior to assignment to the other Party.

11.2 Lease Acquisition Procedures. Until the entire Carried Amount has been paid by WSGP pursuant to Section 4.3, PetroQuest shall be the only party to this Agreement or the Operating Agreement authorized to acquire any oil, gas or mineral lease(s) or any interest(s) in any oil, gas or mineral estate(s) within the AMI, and PetroQuest shall be responsible, pursuant to the Operating Agreement for the payment of delay rentals, shut-in well payments, minimum royalties and such other lease costs as may become due and payable (collectively “Lease Maintenance”).

11.3 Administrative Overhead. From and after the Closing Date, PetroQuest shall provide statements to WSGP on or before the fifteenth (15^th) day of the month following each calendar quarter detailing the total amount of all joint expenditures made by the Parties in the prior calendar quarter attributable to new leasehold acquisitions and any acquisitions of seismic data within the AMI (“Joint Expenditures”). Within fifteen (15) days of receipt of the foregoing statement, WSGP shall pay to PetroQuest, by wire transfer in immediately available funds to the Wire Account an administrative fee equal to eight percent (8%) of the WSGP’s working interest share of the Joint Expenditures detailed in such statement (the “Administrative Fee”). The Administrative Fee is in addition to any COPAS overhead charges provided for in the Operating Agreement.

ARTICLE XII
OPERATIONS

12.1 Operating Agreement. Any Operating Agreement to be entered into by the Parties hereunder for which PetroQuest shall serve as initial Operator shall be in substantially the form attached hereto as Exhibit “G”, the terms and conditions of which are incorporated by reference herein and effective as among the Parties. The Contract Area for each Operating Agreement shall be the applicable Drilling Unit within the AMI. The Parties shall execute a separate Operating Agreement for each Drilling Unit prior to the Spud Date for any Program Well (which is an initial well) drilled hereunder. All drilling, completion and other well operations contemplated by this Agreement shall be carried out pursuant to, and subject to the terms and conditions of the Operating Agreement. In the event of a conflict between the terms and conditions of this Agreement and the terms and conditions set forth in the Operating Agreement, this Agreement shall control.

12.2 Overhead. Operating overhead for PetroQuest operated wells will be as set forth on Exhibit “C” to the Operating Agreement. All overhead shall be subject to COPAS escalation.

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12.3 Third Party Working Interest Owners. Unless the Parties otherwise agree, if a third party working interest owner in any new well that is proposed to be drilled under the Agreement elects not to participate in such well, PetroQuest and WSGP will proportionately share such non-consenting working interest based upon each Party’s working interest in such well. If there is a separate operating agreement in effect between any third party working interest owner(s) and PetroQuest as of the Closing Date with respect to any of the Transaction Assets (a “Third-Party JOA”), then the Parties will exercise reasonable diligence in consultation with one another to attempt to cause any such third party to agree to join in the form of Operating Agreement attached hereto as Exhibit “G” with respect to the leases and lands covered by the Third-Party JOA. If, however, the third party fails to join in such Operating Agreement, then the Third-Party JOA shall govern as between PetroQuest or WSGP, on the one hand, and each such third party thereto, on the other hand; provided, however, that as between WSGP and PetroQuest, the Operating Agreement shall govern to the extent possible after PetroQuest and WSGP have complied with the terms of the Third-Party JOA as relates to the third party. PetroQuest shall promptly provide WSGP with any proposals, notices or other information received from any third party pursuant to any applicable Third-Party JOA to provide WSGP as much time is as practicable in which to make any elections or notify PetroQuest of any decisions relating to such third party proposals, notices or other information.

12.4 Commingling of Production. All or any portion of production from or attributable to the jointly owned acreage of the Parties within the AMI may be commingled in common tank batteries. If there is an objection to commingling of production from a particular well that is not resolved by mutual agreement of the Parties, the objecting Party shall, at its sole cost and expense, set its own tank battery and metering equipment for such well.

12.5 Amendment of Exhibit “A” to Operating Agreement. If the interest in any well or lease within the Contract Area of any Operating Agreement hereunder shall, as the result of a Party electing not to participate for any portion or all of such Party’s interest in any well, be different from the interest reflected in the then-existing Exhibit “A” to the Operating Agreement, the Parties, upon and contemporaneously with the assignment of interest by the non-participating Party to the participating Party, shall prepare and execute an additional and separate Exhibit “A” for such well(s) or lease(s) that shall reflect the correct interest of the Parties therein, and as to that well and the applicable proration unit or lease, the Operating Agreement shall apply separately to the same extent as if a separate Operating Agreement had been entered into.

12.6 Gas Marketing Agreement. Subject to the Parties’ obligations under the Existing Gas Purchase Contracts, the Parties shall work together to enter into an agreement(s) pursuant to which the Parties shall market their respective shares of production from the jointly owned acreage of the Parties within the AMI to a mutually agreeable counterparty.

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ARTICLE XIII
FORCE MAJEURE

13.1 Force Majeure. If, as a result of a Force Majeure, the Party claiming the Force Majeure is rendered wholly or partly unable to perform its obligations under this Agreement, such non-performing Party shall be excused from only that portion of its performance that is prevented by such Force Majeure event to the extent so prevented; provided that: (i) within seventy-two (72) hours of commencement of an event of Force Majeure, the non performing Party shall provide the other Party with oral notice of the event of Force Majeure and within two (2) weeks of such oral notice the non performing Party shall provide the other Party with Notice (a “Force Majeure Notice”) in the form of a letter describing in detail the particulars of the occurrence giving rise to the Force Majeure claim; (ii) suspension of performance due to a claim of Force Majeure must be of no greater scope and of no longer duration than is required by the Force Majeure event; and (iii) the Party claiming Force Majeure diligently pursues to eliminate or mitigate the effects of the Force Majeure condition. If at any time during the period of Force Majeure the non-performing Party fails to undertake or ceases undertaking its efforts to remedy its inability to perform, then the non-performing Party shall no longer be excused from its performance by reason of Force Majeure. Notwithstanding anything in this Agreement to the contrary, no payment obligation arising under this Agreement shall be excused or tolled by any event of Force Majeure, except to the extent that such payment obligation is directly related to an event impacted by Force Majeure.

ARTICLE XIV
EARLY TERMINATION

14.1 Pre-Closing Early Termination.

14.1.1 Termination Events. This Agreement may be terminated at any time after execution (i) by WSGP at any time after May 21, 2010, if a condition to WSGP’s obligation to close (as set forth in Article VIII) remains unwaived and unsatisfied (for reason other than nonperformance or breach by WSGP), (ii) by PetroQuest at any time after May 21, 2010, if a condition to PetroQuest’s obligation to close (as set forth in Article VIII) remains unwaived and unsatisfied (for reason other than nonperformance or breach by PetroQuest), or (iii) upon the mutual written agreement of WSGP and PetroQuest.

14.1.2 Procedure and Effect of Termination. Any termination of this Agreement pursuant to this Section 14.1 shall be effected by written notice from the terminating Party to the other Party. If this Agreement is terminated pursuant to this Section 14.1, all further obligations of the Parties will terminate without any liability on the part of either Party or its respective Affiliates and neither Party shall have any claim whatsoever against the other, any of its Affiliates, or any of their respective Representatives arising out of or relating to this Agreement or the Transaction contemplated hereby (whether sounding in contract, tort, or otherwise), except for any breach or threatened breach of the Confidentiality Agreement.

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14.2 Post-Closing Early Termination. This Agreement may be terminated prior to completion of the Drilling Program (a) by the mutual agreement of the Parties, (b) by WSGP at any time upon sixty (60) days prior notice or upon a termination pursuant to Section 4.3.2, or (c) by PetroQuest in the event WSGP (i) fails to remit any installment of the Remaining Assets Purchase Price within thirty (30) days of the due date, or (ii) has not paid the full Carried Amount in the course of drilling and completion operations pursuant to the Drilling Program within eight (8) years from the Closing Date, other than as a result of a PetroQuest Material Event, PetroQuest’s nonperformance or Force Majeure (“Early Termination”), at which point WSGP and PetroQuest shall have the following rights and obligations:

14.2.1 If Early Termination occurs prior to completion of Phase 1 of the Drilling Program, then WSGP shall pay to PetroQuest (i) all unpaid portions of the Remaining Assets Purchase Price including the Performance Payment, regardless of actual performance of the Qualifying Wells, (ii) the unfunded balance of the Phase 1 Commitment, and (iii) any Vendor Penalties as described and set forth in Section 4.5.3. In such event, WSGP shall be entitled to retain the Selected PUDS and receive an assignment of fifty percent 50% of PetroQuest’s right, title and interest in and to the wellbore only for those wells in which WSGP participated pursuant to the Drilling Program and for which WSGP has not received a previous assignment. With respect to any Program Well Assignments received by WSGP prior to Early Termination, WSGP shall relinquish and reassign to PetroQuest any interest in and to any leasehold interests previously assigned to WSGP in respect of any Program Wells in which WSGP participated, retaining only a wellbore interest in and to any such Program Wells. WSGP shall have no further rights to earn any additional assignments of Remaining Assets. Notwithstanding anything to the contrary herein, it being expressly understood that this provision shall survive the termination of this Agreement indefinitely, WSGP shall be entitled to participate in (subject to the provisions of the applicable JOA) and remain obligated to pay its disproportionate share, as described in Section 4.3, of the costs and expenses of (X) Development Wells, (Y) any wells commenced after the date of Early Termination upon acreage acquired pursuant to Section 11.1 (each such well an “AMI Well”). In the event of Early Termination, WSGP would remain obligated to pay any applicable Vendor Penalties as described and set forth in Section 4.5.7.

14.2.2 If Early Termination occurs after completion of Phase 1 of the Drilling Program, then WSGP shall be entitled to retain the Selected PUDS; receive an assignment of fifty percent 50% of PetroQuest’s right, title and interest in and to the wellbores only for those wells in which WSGP participated and for which WSGP has not received a previous assignment; and receive an assignment of twenty-five percent (25%) of PetroQuest’s right, title and interest in and to the leasehold or mineral interests within the Drilling Unit for each Program Well (other than a Development Well or Infill Well) drilled hereunder and in which WSGP participated. With respect to any Program Well Assignments received by WSGP prior to the Early Termination, WSGP shall relinquish and reassign to PetroQuest fifty percent (50%) of WSGP’s right, title and interest in and to any leasehold or mineral interests attributable to the Drilling Unit for the applicable Program Wells. WSGP shall have no further rights to earn additional assignments of Remaining Assets. Notwithstanding anything to the contrary herein, it being expressly understood that this provision shall survive the termination of this Agreement indefinitely, WSGP shall be entitled to participate in Development Wells, Infill Wells and AMI Wells (subject to the provisions of the applicable JOA) and, if WSGP so elects to participate, it shall remain obligated to pay (i) its disproportionate 1.6:1 share of the costs and expenses of the drilling, completing and equipping of Development Wells, Infill Wells and AMI Wells; (ii) to PetroQuest, pursuant to an invoice from PetroQuest, the amount of any Carried Amount attributable to the number of undrilled wells associated with a Minimum Commitment in the applicable 6 Month Tranche remaining at the time of such Early Termination, and (iii) any Vendor Penalties as described and set forth in Section 4.5.7.

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14.3 Status of Assignments to WSGP Upon Early Termination. Within thirty (30) days of the occurrence of Early Termination, and subject to WSGP’s obligations to pay any amounts or relinquish any interests pursuant to Section 14.2.1 or 14.2.2, as applicable, PetroQuest shall prepare and deliver to WSGP an executed, recordable assignment of the interests described in Section 14.2.1 or 14.2.2, as applicable. If PetroQuest fails to deliver or authorize the delivery to WSGP of assignments to which WSGP is entitled, as and when due under this Agreement, then WSGP shall have the right, but shall not be obligated, to pursue a declaratory judgment and injunctive relief pursuant to the Arbitration Provisions requiring PetroQuest to specifically perform such obligation under the Agreement, time being of the essence in the performance of all such obligations in addition to reimbursement of all reasonable costs incurred, including legal fees and costs of court.

14.4 Intervention Termination. In the event, despite both Parties efforts to eliminate or mitigate the effects of an Intervention, such Intervention has existed for a period of twenty-four (24) months following the issuance of a Force Majeure Notice for such Intervention, then either Party may terminate this Agreement, such termination effective after thirty (30) days’ prior written notice to the other Party (such termination an “Intervention Termination”). From and after the date of such Intervention Termination, neither Party shall have any further obligations or liability to the other under this Agreement, including any obligation to assign or relinquish any rights or interests of any kind hereunder or any payment obligations set forth herein, except as may be provided in any applicable JOA. For the avoidance of doubt, to the extent not earned prior to PetroQuest’s receipt of the Force Majeure Notice from WSGP related to an Intervention, PetroQuest shall not be entitled to the Performance Payment.

ARTICLE XV
FAILURE TO PAY DRILLING COSTS; FAILURE TO PERFORM

15.1 Failure By WSGP. Failure of WSGP to pay its proportionate share of drilling or other operating costs of any well which has been spudded, and in which PetroQuest and WSGP have both elected to participate, within the time periods specified herein or in the applicable JOA shall be deemed a material breach of this Agreement, subject, however, to the provisions of Section 15.2. Upon any such breach, PetroQuest shall deliver written notice to WSGP of such breach. Failure to cure such breach within sixty (60) days after receipt of notice from PetroQuest, will result in the ipso facto relinquishment and assignment to PetroQuest of all rights of WSGP in such well and the Drilling Unit attributable to the well.

15.2 Good Faith Dispute. If WSGP disputes in good faith its obligation to pay any amount allegedly owed by it with respect to its proportionate share of drilling costs, completion, equipping or any other costs arising out of or related to any well drilled hereunder, it shall timely pay any amount of such costs that it does not dispute, and provided that WSGP’s notifies the PetroQuest in writing at or prior to the time such payment is allegedly due of the amount in dispute, setting out reasonably full particulars regarding the basis on which the obligation to make payment is disputed, then so long as WSGP continues in good faith and by the exercise of appropriate negotiations or proceedings to resolve such dispute, the provisions of Section 15.1, to the extent of the amount subject to good faith dispute, shall not apply.

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15.3 Assignment of Relinquished Interest. If WSGP has relinquished its interest in any well to PetroQuest pursuant to Section 15.1 hereof, WSGP shall execute and deliver, upon the request of PetroQuest, a recordable assignment of such relinquished interest in such form as PetroQuest may reasonably request.

15.4 Failure to Perform. A Material Event or a failure by a Party to perform any material covenant or obligation set forth in this Agreement shall be deemed a material breach of this Agreement if such breach is not remedied within thirty (30) days after the breaching Party’s receipt of written notice from the non-breaching Party detailing the particulars of the alleged breach; provided, that if such breach is not reasonably capable of being remedied within such thirty (30) day cure period, the breaching Party shall have such additional time (not exceeding an additional thirty (30) days) as is reasonably necessary to remedy such breach, provided that the breaching Party advises the non-breaching Party of its plan to remedy the alleged breach and promptly commences and diligently pursues such remedy. If such breach is not cured within the period set forth above, the non-breaching Party shall have the right, but not the obligation, subject to Section 18.12 and Section 18.13 to pursue through arbitration as described in Exhibit “I” any rights and remedies available to it pursuant to Applicable Law and consistent with the terms of this Agreement.

ARTICLE XVI
TAX PARTNERSHIP

At the appropriate time as determined by the Parties, PetroQuest and NEGP shall execute a tax partnership agreement in a form mutually agreed to by the Parties.

ARTICLE XVII
INDEMNIFICATION

17.1 WSGP’s Indemnification. Provided that the Closing occurs and subject to the provisions of Section 18.12 (Waiver of Consequential Damages) and Section 17.3, WSGP shall pay any losses or damages incurred by PetroQuest and shall release, defend, indemnify and hold harmless PetroQuest, its partners, and their respective officers, directors, employees, agents, representatives, members, shareholders, affiliates, subsidiaries, successors and assigns (collectively, the “Petroquest Indemnitees”) from and against any and all claims, damages, liabilities, losses, causes of actions, costs and expenses (including involving theories of negligence or strict liability and including court costs and attorneys’ fees) (“Losses”) as a result of, arising out of, or related to: (i) WSGP’s breach of its representations or warranties set forth in Section 6.2, or (ii) WSGP’s breach of any covenants or agreements contained herein related to, arising from, or connected to the performance by the indemnifying party of its obligations hereunder.

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17.2 PetroQuest’s Indemnification. Provided that the Closing occurs and subject to the provisions of Section 18.12 (Waiver of Consequential Damages) and Section 17.3, PetroQuest shall pay any losses or damages incurred by WSGP and shall release, defend, indemnify and hold harmless WSGP, its partners, and their respective officers, directors, employees, agents, representatives, members, shareholders, affiliates and subsidiaries (collectively, the “WSGP Indemnitees”) from and against any and all Losses arising out of: (i) PetroQuest’s breach of its representations or warranties set forth in Section 6.1; (ii) PetroQuest’s breach of any covenants or agreements contained herein; (iii) the Existing Wells or the Unrecorded Commitments (other than any reduction in net revenue interest resulting from such Unrecorded Commitment and disclosed on Schedule 1). In addition to the foregoing, and subject to the occurrence of Closing and the provisions of Section 18.12 and Section 17.3, PetroQuest shall pay any losses or damages incurred by WSGP and shall release, defend, indemnify and hold harmless the WSGP Indemnitees from and against any and all Losses arising out of Environmental Matters affecting the Transaction Assets attributable to the actions or omissions of PetroQuest or any of its Affiliates prior to the Effective Time.

17.3 Negligence, Notice of Claim, Assumption or Defense and Settlement of Claim. The indemnification provisions of this Article XVII shall apply notwithstanding the active or passive negligence of the indemnified Party, but the indemnifying Party’s liability to the indemnified Party shall be reduced proportionately to the extent that an act or omission of the indemnified Party may have contributed to the loss, injury or property damage. Further, no indemnified Party shall be indemnified hereunder for its loss, liability, injury and damage resulting from its sole negligence or its gross negligence, fraud or willful misconduct. Promptly upon the discovery thereof, PetroQuest or WSGP, as may be the case, shall give written notice to the other of any claim with respect to which the party giving notice asserts it is entitled to indemnity or payment pursuant to this Section 17.3. The Party giving notice of a claim shall be referred to as the “Indemnified Party,” and the Party receiving notice of a claim shall be referred to as the “Indemnifying Party.” In the event that the Indemnified Party gives notice of a claim to the Indemnifying Party, such notice shall set forth the facts known to the Indemnified Party pertaining to the claim and shall specify the manner in which the Indemnified Party proposes to respond to the claimant. Within ten (10) days of receipt of such notice, the Indemnifying Party shall state in writing whether the Indemnifying Party shall assume responsibility for and conduct the negotiation, defense or settlement of the claim, and if so, the specific manner in which the Indemnifying Party proposes to proceed. In the event that the Indemnifying Party assumes control of the claim, the Indemnified Party shall at all times have the right to participate, at its sole cost and expense, in any resolution thereof. As a condition precedent to indemnification under this Section 17.3, up to the amount of indemnification, the Indemnified Party shall assign to the Indemnifying Party, and the Indemnifying Party shall become subrogated to all rights, claims and causes of action of the Indemnified Party against third persons arising out of or pertaining to the matters for which the Indemnifying Party provided indemnification. The indemnification obligations of the Parties shall apply only to claims for which written notice shall have been given to the Indemnifying Party on or before one (1) year from the date of Closing, except for claims arising out of breach of any of the Fundamental Representations, which obligation shall survive indefinitely.

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ARTICLE XVIII
GENERAL TERMS AND PROVISIONS

18.1 Further Assurances. Each of the Parties will execute, acknowledge and deliver such further instruments, and take such other actions, as may be reasonably necessary in order to more effectively carry out or implement the Transaction.

18.2 Confidentiality Agreement. PetroQuest and WSGP agree that the Confidentiality Agreement dated November 23, 2009, shall terminate, effective as of the Closing Date.

18.2.1 Each Party hereby agrees that, without the prior written consent of the other Party, during the period from the Closing Date until December 31, 2011, neither the Party nor any of its Affiliates, acting alone or as a part of a group, will (i) acquire or offer or agree to acquire, directly or indirectly, by purchase or otherwise, ownership (including beneficial ownership as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) of (a) any securities (or direct or indirect rights or options to acquire any securities) of the other Party or its parents, subsidiaries or Affiliates (collectively, the “Counterparty Group”), or (b) any material portion of the assets or properties of the Counterparty Group; (ii) make or participate in, directly or indirectly, any solicitation of proxies to vote, or to seek to influence or control, in any manner whatsoever, the voting of any securities of the Counterparty Group; (iii) make any public announcement with respect to, or solicit or submit a proposal or offer for, directly or indirectly, any merger, business combination, recapitalization, reorganization, asset purchase or other similar extraordinary transaction involving the Counterparty Group or any of its securities, assets or properties; (iv) form, join or in any way participate, directly or indirectly, in a “group” as defined in Section 13d-3 of the Exchange Act in connection with any of the foregoing; (v) otherwise seek to influence or control, in any manner whatsoever, alone or in concert with others, the management, board of directors or policies of the Counterparty Group; (vi) disclose, directly or indirectly, any intention, plan or arrangement inconsistent with any of the foregoing; (vii) advise, assist or encourage, directly or indirectly, any other person in connection with any of the foregoing; (viii) take any action that could reasonably be expected to require the Counterparty Group to make a public announcement regarding the possibility of any of the events described in this paragraph; or (ix) request the Counterparty Group, directly or indirectly, to amend or waive any provision of this paragraph.

18.2.2 Each Party acknowledges and agrees that it is aware (and that its Affiliates and its and their respective employees, directors, managers, agents and representatives are aware or, upon providing any material, non-public information disclosed under or pursuant to this Agreement to such Person, will be advised by such Party) that reports, materials, documentation and data being furnished under this Agreement may contain material, non-public information regarding the Counterparty Group and that the United States securities laws prohibit any persons who have such material, non-public information from purchasing or selling securities of the Counterparty Group on the basis of such information or from communicating such information to any person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell such securities on the basis of such information.

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18.3 Time of the Essence. Time is of the essence in the Parties performance of their respective obligations pursuant to this Agreement and the other agreements entered into pursuant hereto.

18.4 Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of each Party hereto and its successors and permitted assigns.

18.5 Notices. All consents, notices, requests, demands, instructions, reports, and other communications required or permitted to be given hereunder shall be in writing and shall be (a) delivered personally; (b) mailed by U.S. registered mail, or U.S. certified mail, return receipt requested, postage prepaid; (c) delivered by Federal Express or other reputable overnight courier service; or (d) delivered by facsimile transmission confirmed by written transmittal report to:

(i)	If to PetroQuest:
	PetroQuest Energy, L.L.C.
	Attention:
	400 E. Kaliste Saloom Rd, Suite 6000
	Lafayette, LA 70508
	Facsimile No. 337.234.4699
With a copy to:	Porter & Hedges, L.L.P.
	Attention: Robert Thomas
	1000 Main St. 36th Floor
	Houston, Texas 77002
	Facsimile No. 713.226.6236

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(ii)	If to WSGP:
	WSGP Gas Producing, LLC
	Attention: Larry A. Wall, Jr.
	1000 Louisiana, Suite 5550
	Houston, Texas 77002
	Facsimile No.
	If to NEGP:
	NextEra Energy Gas Producing, LLC
	Attention: Larry A. Wall, Jr.
	1000 Louisiana, Suite 5550
	Houston, Texas 77002
	Facsimile No.
With a copy to:	NextEra Energy Resources, LLC
	Attention: General Counsel
	700 Universe Boulevard
	Juno Beach, Florida 33408
	Facsimile No.

or to such other place as PetroQuest or WSGP may designate by written notice to the other. All notices, requests or consents shall be deemed given on the date of receipt at the appropriate address, except in the case of facsimile transmissions received after the normal close of business, which shall be deemed given on the next business day.

18.6 Legal Representation; Costs and Attorney’s Fees. Each Party hereto represents that it was represented by counsel in connection with the negotiation, preparation, and execution of this Agreement and understands its terms and provisions. Each Party hereto shall be solely and individually responsible for its attorney’s fees and other costs and expenses in connection with the negotiation and execution of this Agreement.

18.7 No Special Relationship or Special Duty. Neither Party hereto has any relationship of trust and confidence, confidential relationship, or other special relationship with the other Party hereto, and neither party hereto owes any fiduciary duties or duties of utmost good faith or fair dealing to the other Party pursuant to this Agreement. The duties owed by each Party to the other shall be solely the contractual duties expressly set forth in this Agreement and the other agreements executed pursuant hereto.

18.8 Counterparts. This Agreement may be executed in multiple counterparts and each Party may sign different counterparts, but all counterparts together shall constitute one and the same agreement.

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18.9 Entire Agreement; Waiver. This Agreement embodies the entire agreement between the Parties hereto and any supplement, amendment, or other modification hereto must be in writing and signed by all of the parties. The headings herein are for convenience only and shall have no significance in the interpretation hereof. The failure of any Party hereto at any time or times to require performance of any provision hereof shall in no manner affect its right at a later time to enforce same. No waiver by any Party hereto of any provision contained in this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such provision or waiver of any other provision.

18.10 Governing Law. This Agreement shall be governed, construed and enforced in accordance with the laws of the State of Oklahoma.

18.11 Waiver of Jury Trial. SUBJECT TO THE DISPUTE RESOLUTION PROCEDURE SET FORTH IN SECTION 18.16, EACH PARTY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT EACH OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT AND ANY AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY HERETO. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES ENTERING INTO THIS AGREEMENT.

18.12 Waiver of Consequential Damages. NOTWITHSTANDING ANY PROVISION IN THIS AGREEMENT TO THE CONTRARY, EXCEPT AS PROVIDED WITH RESPECT TO ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES INCURRED WITH RESPECT TO THIRD PARTY CLAIMS THAT ARE PART OF A LOSS WHICH MAY BE INDEMNIFIED UNDER SECTION 17.1 OR SECTION 17.2, IN NO EVENT SHALL ANY PARTY OR ITS AFFILIATES, OR ITS REPRESENTATIVES, BE LIABLE HEREUNDER AT ANY TIME FOR PUNITIVE, CONSEQUENTIAL, SPECIAL, OR INDIRECT LOSS OR DAMAGE OF ANY OTHER PARTY OR ANY OF SUCH PARTY’S AFFILIATES, INCLUDING LOSS OF PROFIT, LOSS OF REVENUE OR ANY OTHER SPECIAL OR INCIDENTAL DAMAGES, WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR OTHERWISE, AND EACH PARTY HEREBY EXPRESSLY RELEASES THE OTHER PARTY, ITS AFFILIATES, AND ITS RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES AND REPRESENTATIVES THEREFROM.

18.13 No Partnership. The Parties hereto do not intend to create, and this Agreement shall not be construed to create, a partnership, mining partnership, joint venture, association, trust, or other entity or relationship that makes one party liable for the acts or omissions of any other party hereto, except that solely for federal income tax purposes the Parties intend to create a tax partnership as provided in Article XVI.

18.14 Survival of Representations and Warranties. Other than those representations and warranties provided in Sections 6.1.1, 6.1.2, 6.1.3, 6.1.4, 6.1.5, 6.2.1, 6.2.2, 6.2.3, 6.2.4, 6.2.5 and 6.2.7 (collectively the “Fundamental Representations”), all representations, warranties, and covenants contained herein shall survive the execution of this Agreement for a period ending one (1) year from the Closing. The Fundamental Representations shall survive indefinitely.

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18.15 No Third Party Beneficiaries. This Agreement is intended for the exclusive benefit of the Parties hereto and their respective successors and permitted assigns, and nothing contained in this Agreement shall be construed as creating any rights or benefits in or to any third party.

18.16 Disputes. All disputes, claims and matters in question arising out of or in connection with this Agreement or the relationship between the parties created by this Agreement shall be resolved by binding arbitration pursuant to the Arbitration Provisions.

18.17 Term of Agreement. This Agreement shall terminate upon the completion or Early Termination of the Drilling Program and delivery of all assignments to which WSGP is entitled pursuant to the terms of this Agreement; provided, however, any Operating Agreement with respect to any jointly owned leasehold within the AMI shall remain in force and effect pursuant to its terms.

18.18 Construction of Agreement. In construing this Agreement:

(a) no consideration shall be given to the captions of the articles, sections, subsections, or clauses, which are inserted for convenience in locating the provisions of this Agreement and not as an aid in its construction;

(b) no consideration shall be given to the fact or presumption that one Party had a greater or lesser hand in drafting this Agreement;

(c) examples shall not be construed to limit, expressly or by implication, the matter they illustrate;

(d) the word “includes” and its derivatives means “includes, but is not limited to,” and corresponding derivative expressions;

(e) a defined term has its defined meaning throughout this Agreement, and each exhibit, attachment, and schedule to this Agreement, regardless of whether it appears before or after the place where it is defined;

(f) the plural shall be deemed to include the singular, and vice versa;

(g) all references to articles, sections, paragraphs, clauses, or exhibits refer to articles, sections, paragraphs and clauses of this Agreement, and to exhibits attached to this Agreement, unless expressly provided otherwise;

(h) each exhibit to this Agreement is a part of this Agreement, but if there is any conflict or inconsistency between the main body of this Agreement and any exhibit, the provisions of the main body of this Agreement shall prevail;

(i) the words “this Agreement,” “herein,” “hereof,” “hereby,” “hereunder” and words of similar import refer to this Agreement as a whole and not to any particular subdivision, unless expressly so limited; and

(j) the word “or” is not exclusive.

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18.19 Publicity. The Parties shall consult each other before issuing any press release or other public announcement regarding the execution or closing of this Agreement, and shall not issue any such press release or other public announcement of such events without the consent of the other Party (which consent shall not be unreasonably withheld) unless required by law, as advised by counsel, or by obligations pursuant to any listing agreement with any national securities exchange.

18.20 Binding and Non-Binding Terms. The terms of Sections 18.2, 18.3, 18.5, 18.6, 18.7, 18.8, 18.9, 18.10, 18.11, 18.12., 18.13, 18.15, 18.16, 18.18, 18.19 and 18.20 of this Agreement (the “Binding Provisions”) are binding upon and enforceable by the Parties. All other provisions of this Agreement other than the Binding Provisions (collectively, the “Non-Binding Provisions”) evidence a non-binding expression of the current intent of the Parties with respect to the Transaction. The Non-Binding Provisions of this Agreement shall become binding upon and enforceable by the Parties (and this Section 18.20 shall terminate and become void and have no effect) upon the approval on or before 11:59 p.m. Central Prevailing Time on May 21, 2010 (the “Outside Date”), by each of (i) the Board of Directors of PetroQuest Energy, Inc., and (ii) the Board of Directors of FPL Group, Inc., of the Transaction; provided, however, if such approval has not been granted on or before the Outside Date, this Agreement shall automatically terminate and become void and have no effect, without any liability on the part of either Party or its respective Affiliates or Representatives, except for the Binding Provisions, which shall survive such termination. Neither Party shall have any claim whatsoever against the other, any of its Affiliates, or any of their respective Representatives arising out of or relating to this Agreement or the Transaction contemplated hereby (whether sounding in contract, tort, or otherwise), except for any breach or threatened breach of the Binding Provisions or the Confidentiality Agreement. Nothing in this Agreement, no past or future action, course of conduct or failure to act relating to the Transaction may be relied upon by either Party as the basis for a contract by estoppel or otherwise, and WSGP expressly agrees, on behalf of itself and its Affiliates, that the execution by WSGP or any of its Affiliates of any commodities hedging transaction has not, is not, and will not be made, in reliance upon the consummation of the Transaction contemplated hereby.

18.21 NEGP Guaranty. NEGP, hereby unconditionally, absolutely, and irrevocably guarantees, as a primary obligor and not merely as a surety, the due and punctual payment of all monies when due from WSGP hereunder, in each case strictly in accordance with the terms hereof. In furtherance of the foregoing and not in limitation of any other right that PetroQuest may have at law or in equity against NEGP by virtue hereof, NEGP agrees that upon failure of WSGP to pay any obligations when and as the same shall become due, NEGP will, without any demand or notice whatsoever, forthwith pay or cause to be paid to PetroQuest in cash in immediately available funds, an amount equal to the unpaid amount of such obligations. In the event NEGP and/or WSGP transfers substantially all of its assets to another entity and (i) such entity fails to assume all of the obligations of NEGP as set forth in this Section 18.21 and/or the obligations of WSGP under this Agreement, as applicable, and (ii) such entity’s creditworthiness is materially weaker than that of NEGP and/or WSGP, as applicable, immediately prior to such transfer, then NEGP shall provide to PetroQuest alternative credit support the substance of which shall be substantially similar to that which existed prior to the transfer.

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18.22 Specific Performance. The Parties acknowledge and agree that a material failure to perform under this Agreement will be an actual, immediate and irreparable harm and injury and that the Parties would not have any adequate remedy at law in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise materially breached. Accordingly, it is agreed that the Parties shall be entitled to an injunction or injunctions to prevent breaches or threatened breaches of this Agreement and to specifically enforce the terms and provisions of this Agreement (including Sections 7.2 and 15.4) and any other agreement or instrument executed in connection herewith. The Parties further agree that they shall not object to, or take any position inconsistent with respect to, whether in a court of law, arbitration or otherwise, the appropriateness of specific performance as a remedy for a breach of this Agreement or any such other agreement or instrument and ach Party waives any requirement for the securing or posting of any bond in connection with any such remedy. The Parties further agree that by seeking the remedies provided for in this Section 18.22 a Party shall not in any respect waive its right to seek any other form of relief that may be available to a party under this Agreement, including monetary damages.

[Balance of Page Intentionally Left Blank]

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IN WITNESS WHEREOF, each party hereto has executed this Agreement as of the date first written above.

PETROQUEST ENERGY, L.L.C.	WSGP GAS PRODUCING, LLC
By: /s/ Mark K. Stover	By: /s/ Larry Wall
Mark K. Stover	Larry Wall
Executive Vice President — Exploration and Development	President
	NEXTERA ENERGY GAS PRODUCING, LLC, for the limited purposes set forth herein
	By: /s/ Larry Wall
	Larry Wall
	President

S-1

EX-31.1

EXHIBIT 31.1

I, Charles T. Goodson, certify that:

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

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Charles T. Goodson
Charles T. Goodson
Chief Executive Officer
August 5, 2010

EX-31.2

EXHIBIT 31.2

I, J. Bond Clement, certify that:

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

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ J. Bond Clement
J. Bond Clement
Chief Financial Officer
August 5, 2010

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of PetroQuest Energy, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2010 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Charles T. Goodson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Charles T. Goodson
Charles T. Goodson
Chief Executive Officer
August 5, 2010

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of PetroQuest Energy, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2010 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, J. Bond Clement, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ J. Bond Clement
J. Bond Clement
Chief Financial Officer
August 5, 2010

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.