Despite the collapse and subsequent rebound in oil prices, Petroquest Energy (NYSE:PQ) continues its transformation from an offshore exploration and production company to one with a more balanced portfolio of assets. (For a primer on the oil industry, refer to our Oil and Gas Industry Primer)

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Who Are They?
Petroquest is an oil and gas exploration and production company with operations in the offshore Gulf Coast, South Louisiana, the Arkoma Basin and East Texas. The company had proven reserves of 185.3 Bcfe at the end of 2008.

Petroquest has spent the past several years trying to transform itself from an offshore company with short-lived reserves and more exploration risk, to a balanced company with some unconventional long-lived properties. The company has implemented this strategy successfully, and now 68% of the company's reserves are in onshore areas with longer reserve life, and less exploration risk. Its goal is to get that percentage to 75%.

New Onshore Developments
The two onshore areas that Petroquest has been targeting are the Woodford and Fayetteville Shale in the Arkoma Basin. They now have 48,000 acres in Woodford and 18,000 acres in Fayetteville under lease.

While Petroquest's Fayetteville Shale acreage is dwarfed by the more established players in the area, including Southwestern Energy (NYSE:SWN), which has 875,000 acres under net lease, and XTO Energy (NYSE:XTO) with 380,000 net acres, it is a decent position considering the size of Petroquest.

Petroquest also has as much acreage in the Woodford Shale as St. Mary Land and Exploration (NYSE:SM), which has 49,000 acres, and Continental Resources (NYSE:CLR), which has 47,000 acres under net lease. Both of these companies are much larger entities.

Woodford Shale
Petroquest produces 39 MMcf per day from the Woodford Shale and believes that it has 720 drilling locations left using 40 acre spacing. Another fact that might surprise investors is that according to the company, of the 492 wells drilled in the Woodford Shale as of December 31, 2008, the company's wells have 10 of the 21 highest initial production rates.

East Texas
Another area that Petroquest is working on is in East Texas, where it has 41.8 Bcfe of proven reserves. This area is adjacent to the Haynesville Shale across the border in Louisiana. The company has 23,900 net acres and at least 100 drilling locations in Panola County, Texas. Goodrich Petroleum (NYSE:GDP) just announced a successful well in Panola County with an initial production rate of 9 MMcf per day.

The Bottom Line
Petroquest has almost completed its transition from a predominately offshore exploration and production company to a more balanced onshore company with access to several high-growth, unconventional resource shale plays in North America. Petroquest now must prove these properties up efficiently and in a cost-effective manner and shareholders will no doubt be rewarded. (Read Buy When There's Blood In The Streets, to learn how contrarian investors find value in the worst market conditions.)

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Tickers in this Article: PQ, SWN, XTO, SM, CLR, GDP

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