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Questerre Energy (QEC)

Price when published(CAD): 3.4

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Utica results approaching

Questerre will release its Q2'10 report next Friday and we look for updates on the company's horizontal well program in the Utica, where 1-2 test results are expected in Aug/Sept. With significant derisking taking place in the Quebec Utica shale play during H2'10 (in total 9 wells to be drilled in the area by various companies), we recommend to BUY, TP NOK 60/share

We expect figures to be fairly flat q/q

Questerre will report its Q2’10 figures on Friday 13 August 2010. We expect cash earnings of CAD 0.1m, down from CAD 0.5m in Q1’10, partly attributed to total production expected to come down from 600 boe/day in Q1’10, to 580 boe/day in Q2’10. QEC’s net cash position is expected to stand at CAD 165m at the end of Q2’10, vs. CAD 174m in Q1’10, following an estimated capex of CAD 8m in the second quarter.

Key test results from Utica this year

Operator Talisman (TLM) will test 4 horizontal wells in the Quebec Utica shale play this fall, with QEC being a partner at 3 of the wells. Results from QEC’s first partner well, Gentilly #2, is expected to be announced in Aug/Sept. The next two wells; Fortierville, where drilling was announced to be complete in July, and St. Gertrude, where drilling is now underway, will be tested later this fall and we expect results in Oct/Nov. We believe test results from the latter two to hold the greatest potential as the horizontal legs are considerably longer than that of Gentilly #2, which in turn allows the wells to be tested with more fractures. Timing of the announcement of the results from TLM’s 4th well, Leclercville (non-partner), is dependent upon Talisman.

Questerre represents an obvious take over target

In addition to the 4 TLM wells, we expect results from another 5 non-partner wells that are scheduled to be drilled and tested in H2’10. Combined, the results from these 9 scheduled wells will contribute to a significant further derisking of the Utica shale. We believe that in parallel with the commerciality of Utica being firmed up, the M&A activity in the region will pick up. With its significant land position, of which most of its 336’ net acres being located in the Utica fairway, QEC represents an obvious take over target for larger oil and gas companies seeking exposure to the Utica play.

We reiterate our BUY recommendation

With several key well results approaching this fall, we believe QEC represents an attractive risk/reward. We reiterate our BUY recommendation and Target Price of NOK 60/share. The recommendation was not presented to the issuer before dissemination