Questerre Energy Corp (Canada) T.QEC

Dundee maintaining Buy Rating-Oct.4,2010

[shoesin]

A DundeeWealth Inc. Company Please see Disclosures and Disclaimers on the last two pages of this report.

Questerre Energy Corp.
(QEC-T: C$1.84) Idea Support

October 4, 2010
BUY, Speculative Risk*
12-month target price: C$6.50 (was C$8.00)
Grant Daunheimer, CFA / [phone]
[e-mail]
Steven Buytels, CFA / [phone]
[e-mail]
Aaron Swanson, CFA / [phone]
[e-mail]
Where Do We Go From Here??

Market Cap (MM)$467.7
Basic Shares (MM) 233.8
F.D. Shares (MM) 254.2
52-week High/Low
3-Month Avg Daily Trading Vol 2,231,950
Potential Return253%
FYE: Dec. 312009A2010E2011E
Crude Oil ($US/bbl) $61.99 $77.50 $85.00
NYMEX ($US/mcf) $3.94 $4.40 $4.75
Exchange ($US/Cdn)
.88
.97
.96
Oil/Liquids (bbl/d)378 307 275
Gas (mmcf/d)2.61.52.1
boe/d (6:1)810 552 617
% Natural Gas53% 44% 55%
Cash Flow (MM)$2.9 $1.1 $4.1
CFPS (FD)
.01
.00
.02
Net Debt YE (MM) -$46.5 -$150.3 -$107.4
Market Information (C$)
$2.12-$5.40
Financial Data

Source: See Note 1
QEC: Price/Volume Chart

Source: Thomson ONE
Company Description
Questerre Energy is a Junior E&P company
primarily targeting natural gas in the Utica
shale in Quebec, the Horn River in northeast
B.C. as well as light oil in Antler Saskatchewan

It is clear the market was not impressed with the Gentilly results and the delay
in activity. In our opinion, although the Gentilly results were at the lower end of
our expectations, the test rate does not spell the end of the Utica as the share
activity would suggest. Delays in activity are always disappointing and the play
is going to take longer to pan out than originally expected, but we believe
those investors with a longer time horizon should find the current share price
an attractive entry point.
From a news perspective the next catalyst is test rates from Leclercville that
could be released on November 2nd in Talisman’s Q3 results. Note Questerre
does not have an interest in this well hence the challenge in getting
information to the market. Post this; news will be scarce until completion crews
can be brought back some time in the spring of 2011. This delay is likely to be
a drag on the stock price but is simply a delay, not a cancellation of activity.
We are maintaining our BUY rating, Speculative Risk ranking, but lowering our
target price to $6.50 from $8.00. Two thirds of this change relates to Dundee
revising its commodity price assumptions, including the long term gas price, to
US$5.50 from US$6.00/mcf (details for our conventional coverage universe
can be seen in today’s sector report). The remaining third of the drop is a
result of the time value of money given the impact of rolling the beginning of
full scale development out until 2013 with peak drilling starting in 2017.
Exhibit 1 details our new valuation sensitivity using our consistent 3/3 well and
a 2/2 well for a worst case scenario.
Exhibit 1: Valuation Sensitivity
0
1
2
3
4
5
6
7
8
2009 W. Can
ReservesCash$4.50 Nymex $5.50 Nymex$6 Nymex
S
h
a
re
P
r
ic
e
2X2 well 3X3 well
Current Share Price
$1.84

Source: Company Reports, DSC.
Questerre Energy
October 4, 2010

Page 2
For those that missed the action on Friday we summarize the news here again (the
below was taken from our October 1st note: "Gentilly Test on Low End, General
Delays Continue in Quebec"):

Gentilly Test Rate:
•720 mcf/d after 30 days with no contribution from the Lower Utica, as we
expected
•The last seven days of the test were 700 mcf/d, proving lower decline rates
•Our September 27th note ("Gentilly Results Expected Soon, Tempering
Expectations") had an expected range of 750 mcf/d to 1.5 mmcf/d
•Results were in line with company expectations and in our opinion with
improvements over time supports the long term viability of the play
•As a reminder versus St. Edouard Gentilly had fewer fracs (3 vs 8 in Middle
Utica), was drilled improperly into the Middle and Lower Utica zone, was 700
meters versus 1,000 meters horizontally, was in a less over pressured area of
the play, and was placed in an unstructured vs structured part of the play
•On the positive side the completion job was completed in one week with five
fracs in total, operationally are getting better as both St. Edouard and
Leclercville had operational issues
•Well seems to have flattend quickly, not exhibiting high initial decline rates like
at St. Edouard which was in the significantly over pressured part of the play


Other Quebec news and Utica Timing
•Not able to secure completion crews for Fortierville or St. Gertrude, likely a
spring 2011 completion
•Has signed an agreement with Gazmetro for a 20 kilometre natural gas sales
pipeline with initial capacity of 15 mmcf/d, timing of build not known and likely
dependant on Leclercville test
•Permitting operations are underway on a 3-D seismic program at St. Edouard
•Public hearings on the development of shale gas will begin next week, key is
“the development” not “if the development” of shale gas happens
•Drilling moratorium for offshore wells has no impact on QEC, as we previously
stated


Questerre Energy
October 4, 2010

Page 3
Disclosures & Disclaimers
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Explanation of Recommendations and Risk Ratings
Valuation methodologies used in determining the 12-month target price(s) for the issuer(s) mentioned in this report are contained
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Questerre Energy
October 4, 2010

Page 4
BUY: total returns expected to be materially better than the overall market with higher return expectations needed for
more risky securities. NEUTRAL: total returns expected to be in line with the overall market. SELL: total returns
expected to be materially lower than the overall market. TENDER: the analyst recommends tendering shares to a
formal tender offer.
*Risk Ratings: risk assessment is defined as Medium, High, Speculative or Venture. Medium: securities with reasonable
liquidity and volatility similar to the market. High: securities with poor liquidity or high volatility. Speculative: where the
company's business or financial risk is high and is difficult to value. Venture: an early stage company where the
business or financial risk is high, and there are limited financial metrics upon which to base a reasonable valuation.
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methodology based on liquidity and volatility. Analysts will have the discretion to raise the risk rating if it is determined a
higher risk rating is warranted. Securities with poor liquidity or high volatility are considered to be High risk. Liquidity and
volatility are measured using the following methodology: a) Price Test: All securities with a price <= $3.00 per share are
considered high risk for the purpose of this test. b) Liquidity Test: This is a two-tiered calculation that looks at the market
capitalization and trading volumes of a company. Smaller capitalization stocks (<$300MM) are assumed to have less
liquidity, and are, therefore, more subject to price volatility. In order to avoid discriminating against smaller cap equities
that have higher trading volumes, the risk rating will consider 12 month average trading volumes and if a company has
traded >70% of its total shares outstanding it will be considered a liquid stock for the purpose of this test. c) Volatility
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