775351--6/3/2009--QUEST_RESOURCE

related topics

{gas, price, oil}

{stock, price, share}

{loss, insurance, financial}

{operation, natural, condition}

{debt, indebtedness, cash}

{capital, credit, financial}

{cost, regulation, environmental}

{competitive, industry, competition}

{financial, litigation, operation}

{regulation, change, law}

{provision, law, control}

{acquisition, growth, future}

{control, financial, internal}

{investment, property, distribution}

{condition, economic, financial}

{operation, international, foreign}

{regulation, government, change}

{loan, real, estate}

We have identified significant and pervasive material weaknesses in our internal controls, which have and could continue to affect our ability to ensure timely and reliable financial reports and the ability of our auditors to attest to the effectiveness of our internal controls. Events of default are anticipated under the QRCP credit agreement, which could expose our assets to foreclosure or other collection efforts. The QELP borrowing base under its first lien credit agreement could be redetermined to an amount that creates a deficiency that QELP does not have the ability to pay. A default under the QELP first lien credit agreement would cause a cross default under the QELP second lien credit agreement. The definitive agreement for Recombination, if entered into, is expected to be subject to closing conditions that could result in the completion of the Recombination being delayed or not consummated, which could lead to liquidation or bankruptcy. Failure to complete the proposed Recombination could negatively impact the market price of the Company s common stock and our future business and financial results because of, among other things, the disruption that would occur as a result of uncertainties relating to a failure to complete the Recombination. The current financial crisis and economic conditions may have a material adverse impact on our business and financial condition that we cannot predict. Energy prices are very volatile, and if commodity prices remain low or continue to decline for a temporary or prolonged period, our revenues, profitability and cash flows will decline. A sustained or further decline in oil and natural gas prices may adversely affect our business, financial condition or results of operations and our ability to meet our capital expenditure obligations and financial commitments. Future price declines may result in a write-down of our asset carrying values. Unless we replace the reserves that we produce, our existing reserves and production will decline, which would adversely affect our revenues, profitability and cash flows. We may not be able to replace our reserves or generate cash flows if we are unable to raise capital. We face the risks of leverage. Our credit agreements have substantial restrictions and financial covenants that may restrict our business and financing activities. An increase in interest rates will cause our debt service obligations to increase. We are exposed to trade credit risk in the ordinary course of our business activities. U.S. government and internal investigations could affect our results of operations. There is a significant delay between the time QELP drills and completes a CBM well and when the well reaches peak production. As a result, there will be a significant lag time between when QELP expends capital expenditures and when QELP will begin to recognize significant cash flow from those expenditures. Our estimated proved reserves are based on assumptions that may prove to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves. Drilling for and producing oil and gas is a costly and high-risk activity with many uncertainties that could adversely affect our financial condition or results of operations. We have limited experience in drilling wells to the Marcellus Shale and less information regarding reserves and decline rates in the Marcellus Shale than in the Cherokee Basin. Wells drilled to the Marcellus Shale are deeper, more expensive and more susceptible to mechanical problems in drilling and completing than wells in the Cherokee Basin. Our hedging activities could result in financial losses or reduce our income. Because of our lack of asset and geographic diversification, adverse developments in our operating area would adversely affect our results of operations. We may be unable to compete effectively with larger companies, which may adversely affect our results of operations. We may have difficulty managing growth in our business. Our business involves many hazards and operational risks, some of which may not be fully covered by insurance. If a significant accident or event occurs that is not fully insured, our operations and financial results could be adversely affected. We have been named a defendant in a number of securities class action lawsuits and stockholder derivative lawsuits. These, and potential similar or related litigation, could result in significant expenses, monetary damages, penalties or injunctive relief against us that could significantly reduce our earnings and cash flows and harm our business. We may incur significant costs and liabilities in the future resulting from a failure to comply with new or existing environmental and operational safety regulations or an accidental release of hazardous substances into the environment. We may face unanticipated water disposal costs. Shortages of crews could delay our operations, adversely affect our ability to increase our reserves and production and adversely affect our results of operations. Quest Energy depends on one customer for sales of its natural gas. A reduction by this customer in the volumes of gas it purchases from Quest Energy could indirectly result in a substantial decline in our revenues and net income. Certain of our undeveloped leasehold acreage is subject to leases that may expire in the near future. Our identified drilling location inventories will be developed over several years, making them susceptible to uncertainties that could materially alter the occurrence or timing of their drilling, resulting in temporarily lower cash from operations, which may impact our results of operations. We may incur losses as a result of title deficiencies in the properties in which we invest. A change in the jurisdictional characterization of some of Quest Midstream s gathering assets by federal, state or local regulatory agencies or a change in policy by those agencies may result in increased regulation of its gathering assets, which may indirectly cause our revenues to decline and operating expenses to increase. The KPC Pipeline is subject to regulation by FERC, which could have an adverse impact on Quest Midstream s ability to establish transportation rates that would allow it to recover the full cost of operating the KPC pipeline, including a reasonable return, which may affect Quest Midstream s business and results of operations. The outcome of certain rate cases involving FERC policy statements is uncertain and could affect KPC s ability to include an income tax allowance in its cost of service based rates, which would in turn impact Quest Midstream s revenues and ability to pay distributions. We lack experience with and could be subject to penalties and fines if we fail to comply with FERC regulations. Pipeline integrity programs and repairs may impose significant costs and liabilities. Growing our business by constructing new assets is subject to regulatory, political, legal and economic risks. If third party pipelines and other facilities interconnected to Quest Midstream s natural gas pipelines become unavailable to transport or produce natural gas, its revenues and cash available for distribution could be adversely affected. Failure of the natural gas that Quest Midstream gathers on its gas gathering system to meet the specifications of interconnecting interstate pipelines could result in curtailments by the interstate pipelines. Quest Midstream s interstate natural gas pipeline has recorded certain assets that may not be recoverable from its customers. Reduction in firm reservation agreements and the demand for interruptible services could cause significant reductions in Quest Midstream s revenues and operating results. Operational limitations of the pipeline system could cause a significant decrease in Quest Midstream s revenues and operating results. Quest Midstream s industry is highly competitive, and increased competitive pressures could adversely affect its business and operating results. Quest Midstream does not own all of the land on which its pipelines are located or on which it may seek to locate pipelines in the future, which could disrupt its operations and growth. The revenues of Quest Midstream s interstate pipeline business are generated under contracts that must be renegotiated periodically. Fluctuations in energy commodity prices could adversely affect Quest Midstream s pipeline businesses. Our success, and the success of Quest Energy and Quest Midstream, depends on our key management personnel, the loss of any of whom could disrupt our respective businesses. If we do not make acquisitions on economically acceptable terms, our future growth and profitability will be limited. Risks Relating to Our Common Stock We currently are not in compliance with NASDAQ s continued listing requirements, and if our common stock is delisted, it could negatively impact the price of our common stock, our ability to access the capital markets and the liquidity of our common stock. Our stock price may be volatile. It is unlikely that we will be able to pay dividends on our common stock. The percentage ownership evidenced by the common stock is subject to dilution. Our common stock is an unsecured equity interest. Provisions in Nevada law could delay or prevent a change in control, even if that change would be beneficial to our stockholders. We have various mechanisms in place to discourage takeover attempts, which may reduce or eliminate our stockholders ability to sell their shares for a premium in a change of control transaction.

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775351--6/3/2009--QUEST_RESOURCE_CORP