The transformation of American Explorer LLC and Optima Petroleum Corp. into PetroQuest Energy Inc. was extensive. Into the chute went a Vancouver-based public company (Optima) and a Lafayette, Louisiana-based private company (American Explorer). Out came a Lafayette-based public entity traded on Nasdaq and on the Toronto Stock Exchange. There was a common thread, however: both companies' assets were exclusively in the Gulf of Mexico and on the Gulf Coast. The reverse merger was completed in September 1998. Then an important problem immediately presented itself. While the deal was under way, oil and gas prices continued a slide that had begun in the fall of 1997, and so did E&P stock prices. Right away, chairman and chief executive officer Charles Goodson was talking to Nasdaq attorneys. The stock, PQUE, was trading below $1, which is the minimum requirement for trading on the exchange, so it was delisted. The company appealed and, receiving a rare favorable ruling, resumed trading on Nasdaq. The price recently hit $9 per share and was trading at press time at about $6.80. Its market cap at year-end 1998 was about $15 million; less than three years later it is more than $200 million. The company's story goes back to 1990 when Goodson, now 45, formed American Explorer with partners who also were managing their own and their families' oil and gas assets. He had been a landman from 1978-80 for Mobil and, until 1985, for Callon Petroleum Co., which was a drilling-fund company at the time. He left Callon to form his own firm and rolled it into American Explorer five years later. His interest in a reverse merger with Optima began in 1995. The companies had been partners in many Gulf Coast projects since 1988, and Goodson had come to know many of Optima's stockholders-such as State Street Research & Management and Wellington Management. In 1995, Optima's board decided that trying to sell a Gulf Coast E&P story out of Calgary and Vancouver just wasn't working. Goodson tried to do a reverse merger then "but when we got to the altar we couldn't get it closed." American Explorer lacked an independent audit history and a chief financial officer. Plus, Optima still had some Canadian assets. "I'd have had to move to Calgary or Vancouver if the merger had gone through." He went back to Lafayette and put together a rejection-proof plan. Bob Brooksher, now vice president of investor relations, was brought in as CFO. Arthur Andersen was retained as auditor. And Ryder Scott was brought in as an independent reserves evaluator. In late 1997, he was talking to Optima again, but about partnering in additional offshore Gulf projects. His Canadian friends said the time had come again for a merger. American Explorer was ready, they believed. Plus, Optima had sold its Canadian assets. They revived the merger and it won shareholder approval. Analyst interest in the stock has been great. Coverage includes Hibernia Southcoast Capital; Morgan Keegan & Co.; Raymond James & Associates; and A.G. Edwards & Sons. John J. Gerdes, E&P analyst for Raymond James, has rated PQUE a Strong Buy and expects it to reach $8 again in the next year. He's very excited about PetroQuest's prospects. "The company's current drilling inventory should expose it to 760 billion cubic feet equivalent of net unrisked reserves...during the next two to three years," he says. The figure is 10 times the company's current proven reserves. Here, Goodson talks with Oil and Gas Investor about the company and his plans for it. Investor Why didn't you just buy Optima's assets and then go public? Goodson We were also interested in the Nasdaq listing. We ended up with 40% of the company. It was a win-win deal. We would have ended up with less of the company if we had done a private-equity offering and just acquired the assets. Our 40% of the company has grown from 40% of a $15-million company to 30% of $200 million. Investor Did your original shareholders survive the poor stock price? Goodson All those who stayed in have gotten their money back and made money. Wellington and State Street were in Optima when we took it over. Bob (Brooksher) and I convinced them to stay in. They have benefited from that decision. We did everything we said we would do, and more. Since then, we have significantly increased our institutional ownership. Investor Was it your intention to take American Explorer public? Goodson We were satisfied with the company as a private entity, but as the equity market opened in the 1990s, we only had one rung of the ladder-the debt market. We could debt up but couldn't use a cycle in the equity markets to climb to the next rung. Investor What's your plan? Goodson To grow the company to a market cap of $1 billion-plus, using Gulf Coast and Gulf of Mexico assets. It's very achievable. A lot of companies don't have that aspiration and they show that by not building the staff necessary to grow through the debt and equity cycles. We've always had a staff better suited to the next stage. During the last 12 months, we've brought in a group of senior vice presidents that will allow this company to grow beyond $1 billion-and with the drillbit. Dalton Smith, senior vice president, business development and land, had been with Unocal/Spirit Energy 76 and Mobil. Art Mixon, senior vice president, operations, was with BP Amoco for 20 years. Steve Green, vice president of exploration, was VP of exploration in the Gulf region for Ocean Energy and was an explorationist for Newfield Exploration. Mike Aldridge, CFO, was with Ocean Energy through its tremendous growth. Dan Fournerat, senior vice president and general counsel, was involved in more than $1 billion in Gulf Coast asset transactions, while with a private law firm. Investor What is your financial strength? Goodson Our strength is a growing reserve base. And, we've been able to attract a banking group, led by Hibernia National Bank, with whom we can grow. Our current line of credit is $50 million, of which $30 million is drawn. This is a healthy level of debt-to-book-capitalization of 37% and debt-to-EBITDA of less than 1.0. The equity market is also open to us. Investor When will you go to the equity market again? Goodson When it is accretive to the company. In the summer of 1999, our private placement was at $1 a share. It allowed us to grow to $2.50. We did another one in the summer of 2000 that allowed us to take the stock up to as high as $9. (Each placement was of approximately 5 million shares.) Investor Tell us about your assets. Goodson Fifty percent are onshore South Louisiana and 50% are in the Gulf on the Shelf. Of the offshore properties, one is in Texas state water and the rest are in federal water. We operate 95% of our reserves, and 52% are gas. Being the operator is one of the ways we've been able to continue to grow, as a private firm and now as a public company. And, we're able to tell the shareholders, the analysts and the bankers what we're going to do, when we're going to do it and how. Investor Are you shopping for assets? Goodson A logical place to expand is into the Texas Gulf Coast, via an acquisition of a public or private company or a group of assets that would come with employees. Then, as we approach $1 billion in size, it could be necessary to look at deeper water and other areas in North America. But that is not necessary now. Investor You like to buy underdeveloped properties. Goodson What we call an acquisition is not a proved, developed, producing (PDP) acquisition but a field onshore or offshore that is significantly underdeveloped, where we ramp up production. An example is Ship Shoal 72, which we acquired from ExxonMobil and others. We took it from zero production in December 2000 to 30 million cubic feet of gas equivalent (MMcfe) per day, gross, and 22 MMcfe net. Most of our acquisitions have been privately negotiated. We're looking at every possibility right now at underdeveloped projects-fields that have been walked away from. Investor Could you get to $1 billion just on the Gulf Coast? Goodson Yes. Stone Energy (also based in Lafayette) has done an excellent job of it, as have Newfield and a number of private companies. We had midyear reserves of 75 Bcfe, and a project inventory with potential unrisked reserves of more than 700 Bcfe net. We go through a strict risking process, so a huge amount of scrutiny has been given to that inventory. What we call a project, we will definitely drill. We will be drilling through the inventory in the next 36 to 48 months, and that could bring us very close to $1 billion. Investor How will you add to your existing project inventory? Goodson We currently have interest in 85,000 undeveloped acres, onshore and offshore. Also, we recently entered a joint venture with a private company to substantially increase our offshore 3-D data over 490 blocks in which we earn a 50% working interest in any prospect we propose. This increases our Gulf of Mexico 3-D seismic database to 5,240 square miles and more than 638 offshore blocks. Onshore we have another 160 square miles of 3-D data. The private company contributed the data; we will contribute sweat equity-generate the opportunities and operate them. Investor Tell us about some of your recent discoveries. Goodson Our discoveries last year were Vermilion 375 and 376 (Hawk and Falcon) and Eugene Island 146/147 (Jaguar). They came online in late 2000 and early 2001. This year, we've drilled four wells at Ship Shoal 72 and booked 39 Bcfe. It has essentially doubled our daily production. We're currently drilling an offsetting fault block (called Turtle Bayou Field) to the UPR/Anadarko-Cabot Etouffee discovery in Southeast Louisiana that is reported to be in excess of 250 Bcfe. Our well (with a 64% working interest) will target the same objectives. That's the largest project we're going to drill in the second half of 2001. Investor You're going to exceed your 2001 reserves and production goal? Goodson Our goal was to double reserves and production by year-end 2001. At year-end 2000, we were producing approximately 20 MMcfe of gas per day and had reserves of about 48 Bcfe. In June, production was 42 MMcfe per day and reserves were 75 Bcfe. Forgetting the exploratory well we're drilling, just by drilling two additional development wells at Ship Shoal 72, we can close the year at close to 100 Bcfe. Investor Of your increased reserves this year, how much were acquired? Goodson We booked 10 Bcfe from Ship Shoal 72 last year. All the reserve additions so far this year (from 48- to 75 Bcfe) were by the drillbit. Investor You don't talk up the Turtle Bayou potential. Goodson This well can have a large impact on the company-it could double or triple our reserves. We've done everything we can to diffuse the concern that, if it is a dry hole, we will not experience growth. We will. Even if this large-impact project is dry, we are going to show tremendous growth this year just through development drilling, and can do the same next year. We have additional high-impact exploration projects. Investor From where else would you book the additional reserves? Goodson We already have at Ship Shoal 72 seven projects that have a probability of success of 90% or better and would add another 70 Bcfe of reserves to our existing 75 Bcfe. So in the next 12 months, we're going to be able to double the size of this company from midyear to midyear just by drilling those projects. At the same time, we have Turtle Bayou (330 Bcfe net unrisked reserve potential), Valentine (58 Bcfe), Murphy Castle (57 Bcfe) and Little Chenier (80 Bcfe) projects, each able to add significantly to our reserves. Investor What's your idea of retirement? Goodson When I stop having fun. You should run a company five or seven years and look around to see if there is someone who could do a better job. Since 1985, I've essentially run three different companies: my own assets in the late 1980s; American Explorer, a private company with a number of partners, into 1998; and this one. At $1 billion, we will look at who is the best person to drive the car. There are other people here who have that capability. Investor What else? Goodson The personnel. You need to do everything to hire, keep and incentivize people who are literally more capable than the company needs at the time. Beginning in January, the three executives of the company (the founders of American Explorer)-myself, Al Thomas (president) and Ralph Daigle (executive vice president)-gave up our salaries (totaling approximately $600,000) and brought in some very talented executives, so we wouldn't significantly increase overhead this year. The board of directors also brings tremendous value to the company. We have Billy Rucks [a founder of Ocean Energy and a native of Lafayette] and other people who could give us tremendous advice on the public markets. Jay Langer started a company called Hudson General Corp., of which he is currently honorary chairman. Wayne Nordberg started as an energy analyst with CitiBank and is currently vice chairman of KBW Asset Management. Investor The exit strategy? Goodson We could easily be a destination, rather than a divestiture, candidate.