e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from
to
Commission file number: 001-33801
APPROACH RESOURCES INC.
(Exact name of registrant as specified in its charter)
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Delaware
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51-0424817 |
(State or other jurisdiction of
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(I.R.S. employer |
incorporation or organization)
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identification number) |
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One Ridgmar Centre |
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6500 W. Freeway, Suite 800 |
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Fort Worth, Texas
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76116 |
(Address of principal executive offices)
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(Zip Code) |
(817) 989-9000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Act). Yes o No þ
The number of shares of the registrants common stock, $0.01 par value, outstanding as of April 30,
2008 was 20,651,591.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial statements.
APPROACH RESOURCES INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
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March 31, |
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December 31, |
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(In thousands, except shares and per share amounts) |
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2008 |
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2007 |
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ASSETS
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CURRENT ASSETS: |
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Cash |
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$ |
1,336 |
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$ |
4,785 |
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Accounts receivable: |
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Joint interest owners |
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7,422 |
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5,272 |
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Oil and gas sales |
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8,589 |
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5,524 |
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Unrealized gain on commodity derivatives |
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793 |
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Prepaid expenses and other current assets |
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1,232 |
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773 |
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Total current assets |
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18,579 |
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17,147 |
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PROPERTIES AND EQUIPMENT: |
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Oil and gas properties, at cost, using the successful efforts method of accounting |
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281,985 |
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266,905 |
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Furniture, fixtures and equipment |
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530 |
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433 |
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282,515 |
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267,338 |
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Less accumulated depletion, depreciation and amortization |
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(42,072 |
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(36,860 |
) |
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Net properties and equipment |
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240,443 |
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230,478 |
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INVESTMENT |
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917 |
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917 |
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UNREALIZED GAIN ON COMMODITY DERIVATIVES |
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75 |
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OTHER ASSETS |
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98 |
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109 |
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Total assets |
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$ |
260,037 |
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$ |
248,726 |
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LIABILITIES AND STOCKHOLDERS EQUITY
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
3,068 |
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$ |
5,459 |
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Oil and gas sales payable |
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3,377 |
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1,794 |
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Accrued liabilities |
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11,265 |
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14,764 |
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Unrealized loss on commodity derivatives |
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3,644 |
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Total current liabilities |
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21,354 |
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22,017 |
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NON-CURRENT LIABILITIES: |
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Long-term debt |
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7,290 |
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Unrealized loss on commodity derivatives |
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367 |
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Deferred income taxes |
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27,601 |
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26,342 |
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Asset retirement obligations |
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588 |
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548 |
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Total liabilities |
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57,200 |
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48,907 |
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COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS EQUITY : |
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Preferred stock, $0.01 par value, 10,000,000 shares authorized none outstanding |
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Common stock, $0.01 par value, 90,000,000 shares authorized, 20,622,746 shares
issued and outstanding |
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206 |
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206 |
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Additional paid-in capital |
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166,367 |
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166,141 |
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Retained earnings |
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36,129 |
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33,367 |
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Accumulated other comprehensive income |
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135 |
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105 |
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Total stockholders equity |
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202,837 |
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199,819 |
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Total liabilities and stockholders equity |
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$ |
260,037 |
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$ |
248,726 |
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See accompanying notes to these consolidated financial statements.
1
APPROACH RESOURCES INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended |
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March 31, |
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(In thousands, except shares and per share amounts) |
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2008 |
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2007 |
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REVENUES: |
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Oil and gas sales |
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$ |
19,018 |
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$ |
9,392 |
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EXPENSES: |
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Lease operating |
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1,397 |
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980 |
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Severance and production taxes |
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753 |
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375 |
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Exploration |
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491 |
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623 |
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General and administrative |
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1,946 |
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1,512 |
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Depletion, depreciation and amortization |
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5,216 |
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3,091 |
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Total expenses |
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9,803 |
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6,581 |
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OPERATING INCOME |
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9,215 |
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2,811 |
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OTHER: |
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Interest expense, net |
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(148 |
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(956 |
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Realized gain on commodity derivatives |
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61 |
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2,155 |
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Unrealized loss on commodity derivatives |
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(4,879 |
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(4,626 |
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INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES |
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4,249 |
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(616 |
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PROVISION (BENEFIT) FOR INCOME TAXES |
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1,487 |
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(35 |
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NET INCOME (LOSS) |
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$ |
2,762 |
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$ |
(581 |
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EARNINGS (LOSS) PER SHARE: |
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Basic |
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$ |
0.13 |
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$ |
(0.06 |
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Diluted |
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$ |
0.13 |
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$ |
(0.06 |
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WEIGHTED AVERAGE SHARES OUTSTANDING: |
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Basic |
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20,622,746 |
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9,501,390 |
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Diluted |
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20,757,513 |
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9,501,390 |
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See accompanying notes to these consolidated financial statements.
2
APPROACH RESOURCES INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three Months Ended |
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March 31, |
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(In thousands) |
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2008 |
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2007 |
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OPERATING ACTIVITIES: |
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Net income (loss) |
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$ |
2,762 |
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$ |
(581 |
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Adjustments to reconcile net income (loss) to net
cash provided by operating activities: |
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Depletion, depreciation and amortization |
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5,216 |
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3,091 |
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Unrealized loss on commodity derivatives |
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4,879 |
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4,626 |
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Exploration expense |
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491 |
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623 |
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Share-based compensation expense |
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226 |
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Deferred income taxes |
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1,259 |
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(35 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(5,215 |
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2,347 |
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Prepaid expenses and other assets |
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(448 |
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(404 |
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Accounts payable |
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(2,391 |
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(2,449 |
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Oil and gas sales payable |
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1,583 |
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467 |
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Accrued liabilities |
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(3,499 |
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(1,997 |
) |
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Cash provided by operating activities |
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4,863 |
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5,688 |
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INVESTING ACTIVITIES: |
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Additions to oil and gas properties |
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(15,509 |
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(9,717 |
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Additions to other property and equipment, net |
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(97 |
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(1 |
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Cash used in investing activities |
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(15,606 |
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(9,718 |
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FINANCING ACTIVITIES: |
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Loan origination fees |
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(57 |
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Borrowings under credit facility |
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13,790 |
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22,600 |
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Repayment of amounts outstanding under credit facility |
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(6,500 |
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(18,050 |
) |
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Cash provided by financing activities |
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7,290 |
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4,493 |
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CHANGE IN CASH AND CASH EQUIVALENTS |
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(3,453 |
) |
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463 |
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EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH AND CASH
EQUIVALENTS |
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4 |
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CASH AND CASH EQUIVALENTS, beginning of period |
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$ |
4,785 |
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$ |
4,911 |
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CASH AND CASH EQUIVALENTS, end of period |
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$ |
1,336 |
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$ |
5,374 |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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Cash paid for interest |
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$ |
221 |
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$ |
1,273 |
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Cash paid for income taxes |
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$ |
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$ |
1,200 |
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SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION: |
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Retirement of loans to stockholders in exchange for
shares of common stock |
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$ |
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$ |
4,184 |
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See accompanying notes to these consolidated financial statements.
3
APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
(Unaudited)
1. Summary of significant accounting policies
Organization and nature of operations
Approach Resources Inc. (Approach, ARI, the Company, we, us or our) is an independent
energy company engaged in the exploration, development, production and acquisition of
unconventional natural gas and oil properties in the United States and British Columbia. We focus
on natural gas and oil reserves in tight sands and shale. We currently operate or have oil and gas
properties or interests in Texas, New Mexico, Kentucky and British Columbia.
Consolidation, basis of presentation and significant estimates
The interim consolidated financial statements of the Company are unaudited and contain all
adjustments (consisting primarily of normal recurring accruals) necessary for a fair statement of
the results for the interim periods presented. Results for interim periods are not necessarily
indicative of results to be expected for a full year or for previously reported periods due in
part, but not limited to, the volatility in prices for crude oil and natural gas, future commodity
prices for commodity derivative contracts, interest rates, estimates of reserves, drilling risks,
geological risks, transportation restrictions, the timing of acquisitions, product demand, market
competition and interruptions of production. You should read these consolidated interim financial
statements in conjunction with the audited consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2007 and filed with the
Securities and Exchange Commission on March 28, 2008.
The accompanying interim consolidated financial statements have been prepared in accordance with
the accounting principles generally accepted in the United States of America and include the
accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions
are eliminated. In preparing the accompanying financial statements, we have made certain estimates
and assumptions that affect reported amounts in the financial statements and disclosures of
contingencies. Actual results may differ from those estimates. Significant assumptions are required
in the valuation of proved oil and natural gas reserves, which may affect the amount at which oil
and natural gas properties are recorded, accrual of capital expenditures, asset retirement
obligations and share-based compensation. It is at least reasonably possible these estimates could
be revised in the near term, and these revisions could be material. Certain prior year amounts
have been reclassified to conform to current year presentation. These classifications have no
impact on the net income reported.
Comprehensive income
For the three months ended March 31, 2007, there were no elements of comprehensive income
other than net income. Following is a summary of our comprehensive income for the three
months ended March 31, 2008 (in thousands):
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Net income |
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$ |
2,762 |
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Other comprehensive income: |
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Foreign currency translation adjustments |
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30 |
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Comprehensive income |
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$ |
2,792 |
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4
APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
(Unaudited)
Earnings (loss) per common share
We report basic earnings (loss) per common share, which excludes the effect of potentially dilutive
securities, and diluted earnings (loss) per common share, which includes the effect of all
potentially dilutive securities unless their impact is anti-dilutive. The following are
reconciliations of the numerators and denominators of our basic and diluted earnings per share (dollars in thousands, except per share
amounts):
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Three Months Ended March 31, 2008 |
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Income (numerator) |
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Shares (denominator) |
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Per-share amount |
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Basic earnings per share: |
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Net income |
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$ |
2,762 |
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20,622,746 |
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$ |
0.13 |
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Effect of dilutive securities: |
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Share-based compensation,
treasury method |
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134,767 |
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Net income plus assumed conversions |
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$ |
2,762 |
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20,757,513 |
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$ |
0.13 |
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Three Months Ended March 31, 2007 |
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Income (numerator) |
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Shares (denominator) |
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Per-share amount |
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Basic loss per share: |
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Net loss |
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$ |
(581 |
) |
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9,501,390 |
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$ |
(0.06 |
) |
Effect of dilutive securities: |
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Share-based compensation,
treasury method(1) |
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Net loss plus assumed conversions |
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$ |
(581 |
) |
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9,501,390 |
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$ |
(0.06 |
) |
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(1) |
|
Options to acquire approximately 350,000 shares of our common stock were anti-dilutive for
the three months ended March 31, 2007. |
2. Line of credit
In January 2008 we entered into a new, $200.0 million revolving loan agreement (Loan Agreement)
with ARI as borrower, Approach Oil & Gas Inc. (AOG), Approach Oil & Gas (Canada) Inc. and
Approach Resources I, LP as guarantors, and The Frost National Bank and JPMorgan Chase Bank, NA, as
lenders (collectively, the Lender). The borrowing base under the Loan Agreement was initially
set at $75.0 million and will be redetermined semi-annually on or before each April 1 and October 1
based on our oil and gas reserves. We or the Lender can each request one additional borrowing base
redetermination each calendar year. In May 2008, the Lender increased the borrowing base to $100.0
million. The maturity date under the Loan Agreement is July 2010. The borrowings bear interest
based on the banks prime rate, or the sum of the LIBOR plus an applicable margin ranging from
1.25% to 2.00% based on the borrowings outstanding compared to the borrowing base (approximately
5.3 % at March 31, 2008), at our election. We had outstanding borrowings of $7.3 million at March
31, 2008. There were no outstanding borrowings at December 31, 2007. Principal payments are not
required until the final maturity date of the Loan Agreement, at which time any outstanding loan
balances shall be due and payable in full. In addition, the Loan Agreement requires payment of a
quarterly fee equal to three eighths of one percent (0.375%) of the unused portion of the borrowing
base. The borrowings are collateralized by substantially all of our oil and gas properties. The
Loan Agreement contains various covenants, the most restrictive of which requires us to maintain a
modified current ratio of at least one. The modified current ratio represents the quotient of our
current assets, less any unrealized gains on commodity derivatives plus amounts available under the
Loan Agreement divided by our current
5
APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
(Unaudited)
liabilities less unrealized losses on commodity derivatives. We were in compliance with the
covenants at March 31, 2008.
We also have outstanding unused letters of credit under the Loan Agreement totaling $400,000 at
March 31, 2008, which reduce amounts available for borrowing under the Loan Agreement.
3. Income taxes
Total income tax expense (benefit) differed from the amounts computed by applying the U.S. Federal
statutory tax rates and estimated state rates to pre-tax income for the three months ended March
31, 2007 due primarily to adjustments to the valuation allowance applied to net operating loss
carryforwards of AOG. At December 31, 2006, AOG provided a valuation allowance related to its
deferred tax assets resulting primarily from net operating loss carryforwards, based upon our
inability to assess the amount to be realized until our acquisition of all outstanding AOG capital
stock in November 2007.
4. Derivatives
At March 31, 2008, we had the following commodity derivative positions outstanding:
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Volume (MMBtu) |
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$/MMBtu |
Period |
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Monthly |
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Total |
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Floor |
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Ceiling |
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Fixed |
NYMEX Henry Hub |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costless collars 2008 |
|
|
182,000 |
|
|
|
1,640,000 |
|
|
$ |
7.50 |
|
|
$ |
11.45 |
|
|
|
|
|
Costless collars 2008 (3rd quarter) |
|
|
100,000 |
|
|
|
300,000 |
|
|
$ |
7.00 |
|
|
$ |
9.10 |
|
|
|
|
|
Costless collars 2008 (2nd 4th quarter) |
|
|
200,000 |
|
|
|
1,800,000 |
|
|
$ |
9.00 |
|
|
$ |
12.20 |
|
|
|
|
|
Costless collars 2009 |
|
|
180,000 |
|
|
|
2,160,000 |
|
|
$ |
7.50 |
|
|
$ |
10.50 |
|
|
|
|
|
Costless collars 2009 |
|
|
130,000 |
|
|
|
1,560,000 |
|
|
$ |
8.50 |
|
|
$ |
11.70 |
|
|
|
|
|
Fixed price swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2nd quarter 2008 |
|
|
100,000 |
|
|
|
300,000 |
|
|
|
|
|
|
|
|
|
|
$ |
8.10 |
|
4th quarter 2008 |
|
|
100,000 |
|
|
|
300,000 |
|
|
|
|
|
|
|
|
|
|
$ |
8.63 |
|
WAHA differential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed price swaps 2008 |
|
|
182,000 |
|
|
|
1,640,000 |
|
|
|
|
|
|
|
|
|
|
|
(0.69 |
) |
Fixed price swaps 2008 (2nd 4th quarter) |
|
|
100,000 |
|
|
|
900,000 |
|
|
|
|
|
|
|
|
|
|
|
(0.67 |
) |
Fixed price swaps 2009 |
|
|
200,000 |
|
|
|
2,400,000 |
|
|
|
|
|
|
|
|
|
|
|
(0.61 |
) |
Unrealized gains and losses, at fair value, are included on our consolidated balance sheets as
current or non-current assets or liabilities based on the anticipated timing of cash settlements
under the related contracts. Changes in the fair value of our commodity derivative contracts are
recorded in earnings as they occur and included in other income (expense) on our consolidated
statements of operations. We estimate the fair values of swap contracts based on the present value
of the difference in exchange-quoted forward price curves and contractual settlement prices
multiplied by notional quantities. We internally valued the contracts and then obtained
mark-to-market valuations for our collar positions from our counterparty and reviewed such
valuations for reasonableness based on forward prices in relation to our contractual ceiling and
floor prices. We use our internal valuations to determine the fair values of the contracts that
are reflected on our consolidated balance sheets. Realized gains and losses are also included in
other income (expense) on our consolidated statements of operations.
We are
exposed to credit losses in the event of nonperformance by the counterparty on our oil and gas
swaps. However, we do not anticipate nonperformance by the counterparty over the term of the swaps.
6
APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
(Unaudited)
Adoption of Statement of Financial Accounting Standards No. 157 (FAS 157)
Effective January 1, 2008, we adopted FAS 157, which among other things, requires enhanced
disclosures about assets and liabilities carried at fair value. As defined in FAS 157, fair value
is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (exit price). We utilize market
data or assumptions that market participants would use in pricing the asset or liability, including
assumptions about risk and the risks inherent in the inputs to the valuation technique. These
inputs can be readily observable, market corroborated or generally unobservable. We primarily apply
the market approach for recurring fair value measurements and attempt to utilize the best available
information. FAS 157 establishes a fair value hierarchy that prioritizes the inputs used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (Level 1 measurement) and lowest priority to unobservable
inputs (Level 3 measurement). The three levels of fair value hierarchy defined by FAS 157 are as
follows:
|
|
|
Level 1 Quoted prices are available in active markets for identical assets or
liabilities as of the reporting date. At March 31, 2008, we have no Level 1 measurements. |
|
|
|
|
Level 2 Pricing inputs are other than quoted prices in active markets included in
Level 1, which are either directly or indirectly observable as of the reporting date. Level
2 includes those financial instruments that are valued using models or other valuation
methodologies. These models are primarily industry-standard models that consider various
assumptions, including quoted forward prices for commodities, time value, volatility
factors and current market and contractual prices for the underlying instruments, as well
as other relevant economic measures. Our derivatives, which consist primarily of commodity
swaps and collars, are valued using commodity market data which is derived by combining raw
inputs and quantitative models and processes to generate forward curves. Where observable
inputs are available, directly or indirectly, for substantially the full term of the asset
or liability, the instrument is categorized in Level 2. At March 31, 2008, our commodity
derivatives are valued using Level 2 measurements. |
|
|
|
|
Level 3 Pricing inputs include significant inputs that are generally less observable
from objective sources. These inputs may be used with internally developed methodologies
that result in managements best estimate of fair value. At March 31, 2008, we have no
Level 3 measurements. |
7
APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
(Unaudited)
5. Share-based compensation
The following is a summary of stock option activity during the three months ended March 31, 2008:
|
|
|
|
|
|
|
Shares |
|
|
subject to |
|
|
stock |
|
|
options |
Outstanding at January 1, 2008 |
|
|
479,991 |
|
Granted |
|
|
11,835 |
|
Canceled |
|
|
(34,050 |
) |
|
|
|
|
|
Outstanding at March 31, 2008 |
|
|
457,776 |
|
|
|
|
|
|
On April 1, 2008, we granted options to acquire approximately 62,500 shares of our common stock.
The total fair market value of these options on the grant date was $587,000 to be expensed over a
service period of three years.
8
Item 2. Managements discussion and analysis of financial condition and results of operations.
The following discussion is intended to assist in understanding our results of operations and our
financial condition. This section should be read in conjunction with managements discussion and
analysis contained in our Annual Report on Form 10-K for the year ended December 31, 2007 filed
with the Securities and Exchange Commission (SEC) on March 28, 2008. Our consolidated financial
statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q
contain additional information that should be referred to when reviewing this material. Certain
statements in this discussion may be forward-looking. These forward-looking statements involve
risks and uncertainties, which could cause actual results to differ from those expressed in this
report.
Cautionary statement regarding forward-looking statements
Various statements in this report, including those that express a belief, expectation or intention,
as well as those that are not statements of historical fact, are forward-looking statements. The
forward-looking statements may include projections and estimates concerning the timing and success
of specific projects and our future reserves, production, revenues, income and capital spending.
When we use the words will, believe, intend, expect, may, should, anticipate,
could, estimate, plan, predict, project or their negatives, other similar expressions or
the statements that include those words, it usually is a forward-looking statement.
The forward-looking statements contained in this report are largely based on our expectations,
which reflect estimates and assumptions made by our management. These estimates and assumptions
reflect our best judgment based on currently known market conditions and other factors. Although we
believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve
a number of risks and uncertainties that are beyond our control. In addition, managements
assumptions about future events may prove to be inaccurate. We caution all readers that the
forward-looking statements contained in this report are not guarantees of future performance, and
we cannot assure any reader that such statements will be realized or the forward-looking events and
circumstances will occur. Actual results may differ materially from those anticipated or implied in
the forward-looking statements due to the factors detailed below and discussed in our Annual Report
on Form 10-K for the year ended December 31, 2007 filed with the SEC on March 28, 2008. All
forward-looking statements speak only as of the date of this report. We do not intend to publicly
update or revise any forward-looking statements as a result of new information, future events or
otherwise. These cautionary statements qualify all forward-looking statements attributable to us,
or persons acting on our behalf. The risks, contingencies and uncertainties relate to, among other
matters, the following:
|
|
our business strategy, |
|
|
|
estimated quantities of gas and oil reserves, |
|
|
|
uncertainty of commodity prices in oil and gas, |
|
|
|
our financial position, |
|
|
|
our cash flow and liquidity, |
|
|
|
replacing our gas and oil reserves, |
|
|
|
our inability to retain and attract key personnel, |
9
|
|
uncertainty regarding our future operating results, |
|
|
|
uncertainties in exploring for and producing gas and oil, |
|
|
|
high costs, shortages, delivery delays or unavailability of drilling rigs, equipment, labor
or other services, |
|
|
|
disruptions to, capacity constraints in or other limitations on the pipeline systems which
deliver our gas and other processing and transportation considerations, |
|
|
|
our inability to obtain additional financing necessary to
fund our operations and capital expenditures and to meet our other obligations, |
|
|
|
competition in the oil and gas industry, |
|
|
|
marketing of gas and oil, |
|
|
|
exploitation or property acquisitions, |
|
|
|
technology, |
|
|
|
the effects of government regulation and permitting and other legal requirements, |
|
|
|
plans, objectives, expectations and intentions contained in this report that are not historical,
and |
|
|
|
other factors discussed in our Annual Report on Form 10-K for the year ended December 31,
2007 and filed with the SEC on March 28, 2008. |
10
Overview
We are an independent energy company engaged in the exploration, development, production and
acquisition of unconventional natural gas and oil properties onshore in the United States and
British Columbia. We focus on natural gas and oil reserves in tight sands and shale and have
assembled leasehold interests aggregating approximately 283,282 gross (196,081 net) acres.
We currently operate or have interests in the following areas:
West Texas
|
|
|
Ozona Northeast (Wolfcamp and Canyon Sands) |
|
|
|
|
Cinco Terry (Wolfcamp, Canyon Sands, Ellenburger) |
East Texas
|
|
|
North Bald Prairie (Cotton Valley Sands, Bossier and Cotton Valley Lime) |
Northeast British Columbia
|
|
|
Montney tight gas and Doig Shale |
Northern New Mexico
|
|
|
El Vado East (Mancos Shale) |
Southwest Kentucky
|
|
|
Boomerang (New Albany Shale) |
At December 31, 2007, we had estimated proved reserves of approximately 180.4 Bcfe. At March 31,
2008, we owned working interests in 311 producing oil and gas wells and were producing 21.7 MMcfe/d
(based on production for the first quarter of 2008). Our average daily net production for the
month of April 2008 was 22.4 MMcfe/d.
Our financial results depend on many factors, particularly the price of oil and gas. Commodity
prices are affected by changes in market demand, which is impacted by overall economic activity,
weather, pipeline capacity constraints, inventory storage levels, gas price differentials and other
factors. As a result, we cannot accurately predict future oil and gas prices, and therefore, we
cannot determine what effect increases or decreases will have on our capital program, production
volumes and future revenues. In addition to production volumes and commodity prices, finding and
developing sufficient amounts of oil and gas reserves at economical costs are critical to our
long-term success. Future finding and development costs are subject to changes in the industry,
including the costs of acquiring, drilling and completing our projects.
Higher oil and gas prices generally increase the demand for drilling rigs, operating personnel and
field supplies and services and can cause increases in the costs of those goods and services. To
date, higher sales prices have more than offset any increase in drilling and operating costs. We
focus on increasing oil and gas reserves and production while controlling costs at a level that is
appropriate for long-term operations. Our future cash flow from operations will depend on our
ability to manage our overall cost structure.
11
Like all oil and gas production companies, we face the challenge of natural production declines.
Oil and gas production from any given well naturally decreases over time. Additionally, our
reserves have a rapid initial decline, a characteristic of tight gas sands. We attempt to overcome
this natural decline by drilling to develop and identify additional reserves, farm-ins or other
drilling ventures, and by acquisitions. Our future growth will depend upon our ability to continue
to add oil and gas reserves in excess of production at a reasonable cost. We intend to maintain our
focus on the costs of adding reserves through drilling and acquisitions as well as the costs
necessary to produce such reserves.
We also face the challenge of financing future acquisitions. After completion of the initial public
offering of our common stock, we repaid all amounts outstanding on our revolving credit facility.
At March 31, 2008, we had $7.3 million outstanding under our revolving credit facility. We believe
we have adequate unused borrowing capacity under our revolving credit facility for possible
acquisitions, temporary working capital needs and further expansion of our drilling program.
Funding for future acquisitions also may require additional sources of financing, which may not be
available.
Recent developments
Cinco Terry acreage acquisition
We have acquired an additional 9,482 gross (4,899 net) acres of leasehold interests adjacent
to our Cinco Terry project in Crockett County, Texas. We acquired this additional acreage in two
transactions. In April 2008, we purchased 7,843 gross (4,052 net) acres in The University of Texas
Systems 113th Lease Sale for $1.9 million. Additionally, we acquired 1,639 gross (847
net) acres from an independent operator for $216,000 in February 2008. We believe this acreage is
prospective for Ellenburger and Canyon Sands production. The additional acreage expands our Cinco
Terry project to a total of 31,382 gross (14,406 net) acres.
Northern New Mexico update
In late April 2008, the Board of County Commissioners of Rio Arriba County, New Mexico adopted
an ordinance purporting to impose a 120-day moratorium on all oil and gas drilling on private lands
in Rio Arriba County. The moratorium covers all of our 90,300-acre El Vado East prospect in Rio
Arriba County. In addition to the moratorium, we have received notice from Rio Arriba County that,
after the expiration of the moratorium, the county intends to require us to apply for a local
zoning permit for oil and gas development in El Vado East. The county has informed us that the
local permitting process, including public hearings, could take an additional 120 days.
We are evaluating our alternatives, but the countys recent actions are expected to cause
delays in our drilling plans in El Vado East. As a result, we may not be able to meet our
commitment under the mineral lease for El Vado East to drill a minimum of eight wells before the
primary term of the lease expires on April 2, 2009. The failure to meet this drilling commitment
could result in the termination of the mineral lease, unless we agree with our mineral lessor to
extend the primary term of the lease or the drilling commitment is otherwise extended under the
terms of the lease. Our lease for El Vado East provides that if our drilling operations are
delayed or prevented as a result of a governmental or regulatory order or by failure to obtain
permits, then our drilling commitment will be extended until 60 days after the cause of the delay
is removed, as long as the primary term of the lease is not extended by more than four years. We
have notified the lessor of the expected delay.
12
Results of operations
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2008 |
|
2007 |
Revenues (in thousands): |
|
|
|
|
|
|
|
|
Gas |
|
$ |
14,872 |
|
|
$ |
8,255 |
|
Oil |
|
|
3,085 |
|
|
|
1,090 |
|
NGLs |
|
|
1,061 |
|
|
|
47 |
|
|
|
|
Total oil and gas sales |
|
|
19,018 |
|
|
|
9,392 |
|
|
|
|
|
|
|
|
|
|
Realized gain on commodity derivatives |
|
|
61 |
|
|
|
2,155 |
|
|
|
|
Total oil and gas sales including derivative impact |
|
$ |
19,079 |
|
|
$ |
11,547 |
|
|
|
|
|
|
|
|
|
|
Production: |
|
|
|
|
|
|
|
|
Gas (MMcf) |
|
|
1,666 |
|
|
|
1,231 |
|
Oil (MBbls) |
|
|
32 |
|
|
|
19 |
|
NGLs (MBbls) |
|
|
21 |
|
|
|
2 |
|
|
|
|
Total (MMcfe) |
|
|
1,979 |
|
|
|
1,357 |
|
|
|
|
|
|
|
|
|
|
Average prices: |
|
|
|
|
|
|
|
|
Gas (per Mcf) |
|
$ |
8.93 |
|
|
$ |
6.70 |
|
Oil (per Bbl) |
|
|
97.91 |
|
|
|
56.22 |
|
NGLs per (Bbl) |
|
|
50.95 |
|
|
|
30.12 |
|
|
|
|
Total (per Mcfe) |
|
$ |
9.61 |
|
|
$ |
6.92 |
|
|
|
|
|
|
|
|
|
|
Realized gain on commodity derivatives (per Mcfe) |
|
|
0.03 |
|
|
|
1.59 |
|
|
|
|
Total per Mcfe including derivative impact |
|
$ |
9.64 |
|
|
$ |
8.51 |
|
|
|
|
|
|
|
|
|
|
Costs and expenses (per Mcfe): |
|
|
|
|
|
|
|
|
Lease operating expenses |
|
$ |
0.71 |
|
|
$ |
0.72 |
|
Severance and production taxes |
|
|
0.38 |
|
|
|
0.28 |
|
Exploration |
|
|
0.25 |
|
|
|
0.46 |
|
General and administrative |
|
|
0.98 |
|
|
|
1.11 |
|
Depletion, depreciation and amortization |
|
|
2.64 |
|
|
|
2.28 |
|
Three months ended March 31, 2008 compared to three months ended March 31, 2007
Oil and gas sales. Oil and gas sales increased $9.6 million, or 102.5%, for the three months ended
March 31, 2008 to $19.0 million from $9.4 million for the three months ended March 31, 2007. The
increase in oil and gas sales principally resulted from our increased ownership in the Ozona
Northeast field as a result of our acquisition of the Neo Canyon interest in the fourth quarter of
2007. We now own a 100% working interest in Ozona Northeast. Of the 1,979 MMcfe production
reported for the 2008 period, 594 MMcfe was attributable to the interest acquired from Neo Canyon.
The increase in oil and gas sales also resulted from continued development of our Cinco Terry and
North Bald Prairie fields. Cinco Terry production rose by 284 MMcfe compared to the prior year
period. Further, the average price per Mcfe we received for our production increased from $6.92 to
$9.61 per Mcfe as oil and gas prices rose sharply between the two periods. Of the $9.6 million
increase in revenues, $6.0 million was attributable to growth in volumes with the remaining $3.6
million growth due to oil and gas price increases. Natural gas sales represented 78.2% of the
total oil and gas sales for the three months ended
13
March 31, 2008, compared to 87.9% for the prior year period, as our Cinco Terry field has a larger
component of oil and natural gas liquids (NGLs) in its production.
Commodity derivative activities. Realized gains from our commodity derivative activity increased
our earnings by $61,000 and $2.2 million for the three months ended March 31, 2008 and 2007,
respectively. Realized gains are derived from the relative movement of the NYMEX gas prices in
relation to the range of prices in our collars or the fixed notional pricing for the respective
time periods. The unrealized losses on commodity derivatives were $4.9 million and $4.6 million
for the three months ended March 31, 2008 and 2007, respectively. Both of these variances are the
result of the sharp increase in underlying gas commodity prices. As natural gas commodity prices
increase, the gains we realize as our derivative instruments settle decrease and the value of the
open portion of those positions decreases. Historically, we have not designated our derivative
instruments as cash-flow hedges. We record our open derivative instruments at fair value on our
consolidated balance sheets as either unrealized gains or losses on commodity derivatives. We
record changes in such fair value in earnings on our consolidated statements of operations under
the caption entitled unrealized loss on commodity derivatives.
Lease operating. Our lease operating expenses increased $417,000, or 42.6%, for the three months
ended March 31, 2008 to $1.4 million ($0.71 per Mcfe) from $980,000 ($0.72 per Mcfe) for the three
months ended March 31, 2007. The primary factors in the increase in lease operating expense were
the acquisition of the Neo Canyon interest and the increase in the number of wells from our ongoing
development of our three producing fields. We anticipate the lease operating expenses for Cinco
Terry and North Bald Prairie fields will be approximately the same per Mcfe as our Ozona Northeast
field.
Severance and production taxes. Our production taxes increased $378,000, or 100.8%, for the three
months ended March 31, 2008 to $753,000 from $375,000 for the three months ended March 31, 2007.
The increase in production taxes was a function of the increase in oil and gas sales between the
two periods. Severance and productions taxes amounted to
approximately 4% of oil and gas sales for both periods.
Exploration. We recorded $491,000 of dry hole costs for the three months ended March 31, 2008,
compared to $623,000 for the three months ended March 31, 2007. Exploration expense in 2008
resulted from one dry hole drilled in Ozona Northeast while the 2007 dry hole costs resulted from
the drilling of a test well in our Boomerang project.
General and administrative. Our general and administrative expenses increased $434,000, or 28.7%,
to $1.9 million for the three months ended March 31, 2008 from $1.5 million for the three months
ended March 31, 2007. The increase in general and administrative expense was principally due to
increased staffing, salaries and professional fees in the 2008 period over the 2007 period. The
2008 period increase was partially offset by bonus payments made in the 2007 period to cover tax
liabilities incurred by management in connection with the exchange of shares of common stock to
repay management notes before our initial public offering.
Depletion, depreciation and amortization (DD&A). Our DD&A expense increased $2.1 million, or 68.7%,
to $5.2 million for the three months ended March 31, 2008 from $3.1 million for the three months
ended March 31, 2007. Our DD&A expense per Mcfe produced increased by $0.36, or 15.8%, to $2.64 per
Mcfe for the three months ended March 31, 2008, compared to $2.28 per Mcfe for the three months
ended March 31, 2007. The increase in DD&A was primarily attributable to increased production and
higher capital costs during the year ended December 31, 2007. The higher expense per Mcfe is
attributable to reserve revisions in Ozona Northeast and higher capital costs incurred in our North
Bald Prairie field. In North Bald Prairie, we paid capital costs attributable to the 50% working
interest owned by our working interest partner pursuant to our farm-in agreement on the first five
wells drilled during the
14
year ended
December 31, 2007 and the first quarter of 2008. The reserve revision at December 31, 2007 relates to the reserves in
our Ozona Northeast field, which we revised downward in connection with the performance in that
field.
Interest expense, net. Our interest expense decreased $808,000, or 84.5%, to $148,000 for the three
months ended March 31, 2008 from $956,000 for the three months ended March 31, 2007. This decrease
was substantially the result of our lower debt level in the 2008 period. We had borrowings
outstanding under our revolving credit facility amounting to $52.2 million at March 31, 2007
compared to $7.3 million at March 31, 2008.
Income taxes. Our provision for income taxes increased to $1.5 million for the three months ended
March 31, 2008, from a benefit of $35,000 for the three months ended March 31, 2007. The increase
in income tax expense is consistent with the increase in our income before income taxes. Our
effective income tax rate for the three months ended March 31, 2008 was 35%, compared with 5.7% for
the three months ended March 31, 2007. The increase in the effective rate resulted primarily from
changes in the 2007 period in the valuation allowance provided against net operating loss
carryforwards for Approach Oil & Gas Inc.
Liquidity and capital resources
We will rely on cash generated from operations, borrowings under our revolving credit facility and
future public equity and debt offerings to satisfy our liquidity needs. Our ability to fund
planned capital expenditures and to make acquisitions will depend upon our future operating
performance, availability of borrowings under our revolving credit facility, and more broadly, on
the availability of equity and debt financing, which will be affected by prevailing economic
conditions in our industry and financial, business and other factors, some of which are beyond our
control.
Our cash flow from operations is driven by commodity prices and production volumes. Prices for oil
and gas are affected by seasonal influences of weather, national and international economic and
political environments and, increasingly, from heightened demand for hydrocarbons from emerging
nations, particularly China and India. Our working capital is significantly influenced by changes
in commodity prices and significant declines in prices could cause a decrease in our exploration
and development expenditures and production volumes. Cash flows from operations were primarily used
to fund exploration and development of our mineral interests.
The following table summarizes our sources and uses of funds for the periods noted:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
(in thousands) |
|
2008 |
|
2007 |
Cash flows provided by operating
activities |
|
$ |
4,863 |
|
|
$ |
5,688 |
|
Cash flows used in investing activities |
|
|
(15,606 |
) |
|
|
(9,718 |
) |
Cash flows provided by financing
activities |
|
|
7,290 |
|
|
|
4,493 |
|
Effect of Canadian exchange rate |
|
|
4 |
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and
cash equivalents |
|
$ |
(3,449 |
) |
|
$ |
463 |
|
|
|
|
15
Operating activities
For the three months ended March 31, 2008, our cash flow from operations, borrowings under our
credit facility and available cash were used for drilling activities. The $4.9 million in cash flow
generated in the first three months of 2008 decreased $825,000 from the first three months of 2007
due mostly to a $10.0 million reduction in working capital, partially offset by higher oil and gas
sales in the 2008 period.
Investing activities
The cash flows used in investing activities in the first three months of 2008 were for the
continued development of the Ozona Northeast field, Cinco Terry field and North Bald Prairie field.
For the comparable 2007 period, the cash flows used in investing activities were for the drilling
of Ozona Northeast wells, the acquisition of the Northern New Mexico leasehold, the drilling of
Boomerang test wells and the drilling of Cinco Terry wells.
Future capital expenditures for 2008
Our board of directors recently approved an increase in our capital budget for 2008, from $64.3
million to $80.0 million. The increase in the capital expenditure budget was in response to
several factors. First, we are operating in a favorable price environment for natural gas, oil and
NGLs. Also, we recently expanded our acreage position in Cinco Terry and are encouraged by the
success we have seen in Cinco Terry to date. Further, we are reprocessing 3-D seismic shot over
Ozona Northeast, which should allow us to identify Canyon sand channels more effectively.
The following table summarizes our current estimated 2008 capital expenditures. We will be required
to meet our capital needs from our internally generated cash flow, borrowings under our revolving
credit facility, debt financings and equity financings. The estimated capital expenditures are
subject to change depending upon a number of factors, including the results of our development and
exploration efforts, the availability of sufficient capital resources to us and other participants
for drilling prospects, economic and industry conditions at the time of drilling, including
prevailing and anticipated prices for oil and gas and the availability of drilling rigs and crews,
our financial results and the availability of leases on reasonable terms and our ability to obtain
permits for the drilling locations.
|
|
|
|
|
|
|
Estimated |
|
|
|
year ended |
|
|
|
December 31, |
|
(in thousands) |
|
2008 |
|
Capital expenditures: |
|
|
|
|
Ozona Northeast |
|
$ |
37,500 |
|
Cinco Terry |
|
|
20,200 |
|
North Bald Prairie |
|
|
14,400 |
|
British Columbia |
|
|
3,000 |
|
El Vado East |
|
|
|
|
Boomerang |
|
|
1,800 |
|
Lease acquisition, geological, geophysical and
other |
|
|
3,100 |
|
|
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
80,000 |
|
|
|
|
|
16
Financing activities
We borrowed $13.8 million and $22.6 million under our revolving credit facility during three months
ended March 31, 2008 and 2007, respectively. We repaid $6.5 million and $18.1 million of the
amounts borrowed under the credit facility during the three months ended March 31, 2008 and 2007,
respectively.
Our goal is to actively manage our borrowings to help us maintain the flexibility to expand and
invest, and to avoid the problems associated with highly leveraged companies of large interest
costs and possible debt reductions restricting ongoing operations.
We believe that cash flow from operations and borrowings under our revolving credit facility will
finance substantially all of our anticipated drilling, exploration and capital needs through 2008.
We will also use our revolving credit facility for possible acquisitions, temporary working capital
needs and any additional expansion of our drilling program through 2008. We also may determine to
access the public equity or debt market for potential acquisitions,
working capital or other liquidity needs, if such financing is available
on acceptable terms.
Credit facility
We have a $200.0 million revolving loan agreement (Loan Agreement) with a borrowing base
initially set at $75.0 million and which is redetermined semi-annually on or before each April 1
and October 1 based on our oil and gas reserves. We or the lenders can each request one additional
borrowing base redetermination each calendar year. In May 2008, the lenders increased the borrowing
base to $100.0 million. The maturity date under the Loan Agreement is July 2010. The borrowings
bear interest based on the banks prime rate, or the sum of the LIBOR plus an applicable margin
ranging from 1.25% to 2.00% based on the borrowings outstanding compared to the borrowing base. We
had outstanding borrowings of $7.3 million at March 31, 2008. There were no outstanding borrowings
at December 31, 2007. The interest rate applicable to our outstanding borrowings was approximately
5.3% and 6.6% as of March 31, 2008 and December 31, 2007, respectively. We were in compliance with
the covenants at March 31, 2008.
We also have outstanding unused letters of credit under the Loan Agreement totaling $400,000 at
March 31, 2008, which reduce amounts available for borrowing under the Loan Agreement.
Contractual obligations
There have been no material changes to our contractual obligations during the three months ended
March 31, 2008, other than the increase in outstanding borrowings under the Loan Agreement to $7.3
million at March 31, 2008, discussed above under Credit facility.
Off-balance sheet arrangements
From time to time, we enter into off-balance sheet arrangements and transactions that can give rise
to
off-balance sheet obligations. As of March 31, 2008, the off-balance sheet arrangements and
transactions that we have entered into include undrawn letters of credit, operating lease
agreements and gas transportation commitments. We do not believe that these arrangements are
reasonably likely to materially affect our liquidity or availability of, or requirements for,
capital resources.
Item 3. Quantitative and qualitative disclosures about market risk.
Some of the information below contains forward-looking statements. The primary objective of the
following information is to provide forward-looking quantitative and qualitative information about
our potential exposure to market risks. The term market risk refers to the risk of loss arising
from adverse
17
changes in oil and gas prices, and other related factors. The disclosure is not meant to be a
precise indicator of expected future losses, but rather an indicator of reasonably possible losses.
This forward-looking information provides an indicator of how we view and manage our ongoing market
risk exposures. Our market risk sensitive instruments were entered into for commodity derivative
and investment purposes, not for trading purposes.
Commodity price risk
We enter into financial swaps and collars to hedge future oil and gas production to mitigate
portions of the risk of market price fluctuations. We do not designate such instruments as cash
flow hedges. Accordingly, we record open commodity derivative positions on our consolidated
balance sheets at fair value and recognizes changes in such fair values as income (expense) on our
consolidated statements of operations as they occur.
As of March 31, 2008, we had the following commodity derivative positions outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (MMBtu) |
|
$/MMBtu |
Period |
|
Monthly |
|
Total |
|
Floor |
|
Ceiling |
|
Fixed |
NYMEX Henry Hub |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costless collars 2008 |
|
|
182,000 |
|
|
|
1,640,000 |
|
|
$ |
7.50 |
|
|
$ |
11.45 |
|
|
|
|
|
Costless collars 2008 (3rd quarter) |
|
|
100,000 |
|
|
|
300,000 |
|
|
$ |
7.00 |
|
|
$ |
9.10 |
|
|
|
|
|
Costless collars 2008 (2nd 4th quarter) |
|
|
200,000 |
|
|
|
1,800,000 |
|
|
$ |
9.00 |
|
|
$ |
12.20 |
|
|
|
|
|
Costless collars 2009 |
|
|
180,000 |
|
|
|
2,160,000 |
|
|
$ |
7.50 |
|
|
$ |
10.50 |
|
|
|
|
|
Costless collars 2009 |
|
|
130,000 |
|
|
|
1,560,000 |
|
|
$ |
8.50 |
|
|
$ |
11.70 |
|
|
|
|
|
Fixed price swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2nd quarter 2008 |
|
|
100,000 |
|
|
|
300,000 |
|
|
|
|
|
|
|
|
|
|
$ |
8.10 |
|
4th quarter 2008 |
|
|
100,000 |
|
|
|
300,000 |
|
|
|
|
|
|
|
|
|
|
$ |
8.63 |
|
WAHA differential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed price swaps 2008 |
|
|
182,000 |
|
|
|
1,640,000 |
|
|
|
|
|
|
|
|
|
|
|
(0.69 |
) |
Fixed price swaps 2008 (2nd 4th quarter) |
|
|
100,000 |
|
|
|
900,000 |
|
|
|
|
|
|
|
|
|
|
|
(0.67 |
) |
Fixed price swaps 2009 |
|
|
200,000 |
|
|
|
2,400,000 |
|
|
|
|
|
|
|
|
|
|
|
(0.61 |
) |
At
March 31, 2008, the fair value of our open derivative contracts was a liability of $4.0 million.
At December 31, 2007, the fair value of our open derivative contracts was an asset $868,000.
We have reviewed the financial strength of our commodity derivative counterparty and believe our
credit risk to be minimal. Our commodity derivative counterparty is a participant in our credit
facility and the collateral for the outstanding borrowings under our revolving credit facility is
used as collateral for our commodity derivatives.
Item 4T. Controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) as of March
31, 2008. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of March 31, 2008, our disclosure controls and procedures were effective, in
that they ensure that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and (2) accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure.
18
No changes to our internal control over financial reporting occurred during the three months ended
March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act). The SECs rules under Section 404 of the Sarbanes-Oxley Act of 2002 become
applicable to us beginning with our Annual Report on Form 10-K for the year ending December 31,
2008 to be filed in the first quarter of 2009. We cannot give any assurance, however, that our
internal controls will be effective when Section 404 becomes applicable to us. Ineffective internal
controls could cause investors to lose confidence in our reported financial information and could
result in a lower trading price for our securities.
19
PART II OTHER INFORMATION
Item 1. Legal proceedings.
We are involved in various legal and regulatory proceedings arising in the normal course of
business. We do not believe that an adverse result in any pending legal or regulatory proceeding,
together or in the aggregate, would be material to our consolidated financial condition, results of
operations or cash flows.
Item 1A. Risk factors.
For a discussion of our potential risks and uncertainties, see the information under the heading
Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2007 filed with
the SEC on March 28, 2008, which is accessible on the SECs website at www.sec.gov. There have
been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the
year ended December 31, 2007.
Item 2. Unregistered sales of equity securities and use of proceeds.
None.
Item 3. Defaults upon senior securities.
None.
Item 4. Submission of matters to a vote of security holders.
None.
Item 5. Other information.
None.
Item 6. Exhibits.
See Index to Exhibits following the signature page of this report for a description of the
exhibits filed as part of this report.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
APPROACH RESOURCES INC.
|
|
|
By: |
/s/ J. Ross Craft
|
|
|
|
J. Ross Craft |
|
|
|
President and Chief Executive Officer |
|
|
Date: May 8, 2008
21
Index to Exhibits
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
|
|
Exhibit |
3.1
|
|
|
|
Restated Certificate of Incorporation of Approach
Resources Inc. (filed as Exhibit 3.1 to the Companys
Quarterly Report on Form 10-Q filed December 13, 2007 and
incorporated herein by reference). |
|
|
|
|
|
3.2
|
|
|
|
Restated Bylaws of Approach Resources Inc. (filed as
Exhibit 3.2 to the Companys Quarterly Report on Form 10-Q
filed December 13, 2007 and incorporated herein by
reference). |
|
|
|
|
|
4.1
|
|
|
|
Specimen Common Stock Certificate (filed as Exhibit 4.1 to
the Companys Registration Statement on Form S-1/A filed
October 18, 2007 (File No. 333-144512) and incorporated
herein by reference). |
|
|
|
|
|
10.1
|
|
|
|
Form of Indemnity Agreement between Approach Resources
Inc. and each of its directors and officers (filed as
Exhibit 10.1 to the Companys Registration Statement on
Form S-1/A filed September 13, 2007 (File No. 333-144512)
and incorporated herein by reference). |
|
|
|
|
|
10.2
|
|
|
|
Employment Agreement by and between Approach Resources
Inc. and J. Ross Craft dated January 1, 2003 (filed as
Exhibit 10.3 to the Companys Registration Statement on
Form S-1 filed July 12, 2007 and incorporated herein by
reference). |
|
|
|
|
|
10.3
|
|
|
|
Employment Agreement by and between Approach Resources
Inc. and Steven P. Smart dated January 1, 2003 (filed as
Exhibit 10.4 to the Companys Registration Statement on
Form S-1 filed July 12, 2007 and incorporated herein by
reference). |
|
|
|
|
|
10.4
|
|
|
|
Employment Agreement by and between Approach Resources
Inc. and Glenn W. Reed dated January 1, 2003 (filed as
Exhibit 10.5 to the Companys Registration Statement on
Form S-1 filed July 12, 2007 and incorporated herein by
reference). |
|
|
|
|
|
10.5
|
|
|
|
Approach Resources Inc. 2007 Stock Incentive Plan,
effective as of June 28, 2007 (filed as Exhibit 10.6 to
the Companys Registration Statement on Form S-1 filed
July 12, 2007 and incorporated herein by reference). |
|
|
|
|
|
10.6
|
|
|
|
Form of Business Opportunities Agreement among Approach
Resources Inc. and the other signatories thereto (filed as
Exhibit 10.11 to the Companys Registration Statement on
Form S-1/A filed October 18, 2007 (File No. 333-144512)
and incorporated herein by reference). |
|
|
|
|
|
10.7
|
|
|
|
Form of Option Agreement under 2003 Stock Option Plan
(filed as Exhibit 10.12 to the Companys Registration
Statement on Form S-1 filed July 12, 2007 and incorporated
herein by reference). |
|
|
|
|
|
10.8
|
|
|
|
Restricted Stock Award Agreement by and between Approach
Resources Inc. and J. Curtis Henderson dated March 14,
2007 (filed as Exhibit 10.13 to the Companys Registration
Statement on Form S-1 filed July 12, 2007 and incorporated
herein by reference). |
22
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
|
|
Exhibit |
10.9
|
|
|
|
Form of Summary of Stock Option Grant under Approach
Resources Inc. 2007 Stock Incentive Plan (filed as Exhibit
10.14 to the Companys Registration Statement on Form
S-1/A filed October 18, 2007 (File No. 333-144512) and
incorporated herein by reference). |
|
|
|
|
|
10.10
|
|
|
|
Form of Stock Award Agreement under Approach Resources
Inc. 2007 Stock Incentive Plan (filed as Exhibit 10.15 to
the Companys Registration Statement on Form S-1/A filed
October 18, 2007 (File No. 333-144512) and incorporated
herein by reference). |
|
|
|
|
|
10.11
|
|
|
|
Registration Rights Agreement dated as of November 14,
2007, by and among Approach Resources Inc. and investors
identified therein (filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K/A filed December 3, 2007 and
incorporated herein by reference). |
|
|
|
|
|
10.12
|
|
|
|
Gas Purchase Contract dated May 1, 2004 between Ozona
Pipeline Energy Company, as Buyer, and Approach Resources
I, L.P. and certain other parties identified therein
(filed as Exhibit 10.18 to the Companys Registration
Statement on Form S-1/A filed September 13, 2007 (File No.
333-144512) and incorporated herein by reference). |
|
|
|
|
|
10.13
|
|
|
|
Agreement Regarding Gas Purchase Contract dated May 26,
2006 between Ozona Pipeline Energy Company, as Buyer, and
Approach Resources I, L.P. and certain other parties
identified therein (filed as Exhibit 10.19 to the
Companys Registration Statement on Form S-1/A filed
September 13, 2007 (File No. 333-144512) and incorporated
herein by reference). |
|
|
|
|
|
10.14
|
|
|
|
Carry and Earning Agreement dated July 13, 2007 by and
between EnCana Oil & Gas (USA) (filed as Exhibit 10.22 to
the Companys Registration Statement on Form S-1/A filed
September 13, 2007 (File No. 333-144512) and incorporated
herein by reference). |
|
|
|
|
|
10.15
|
|
|
|
Oil & Gas Lease dated February 27, 2007 between the
lessors identified therein and Approach Oil & Gas Inc., as
successor to Lynx Production Company, Inc. (filed as
Exhibit 10.23 to the Companys Registration Statement on
Form S-1/A filed September 13, 2007 (File No. 333-144512)
and incorporated herein by reference). |
|
|
|
|
|
10.16
|
|
|
|
Specimen Oil and Gas Lease for Boomerang prospect between
lessors and Approach Oil & Gas Inc., as successor to The
Keeton Group, LLC, as lessee (filed as Exhibit 10.24 to
the Companys Registration Statement on Form S-1/A filed
September 13, 2007 (File No. 333-144512) and incorporated
herein by reference). |
|
|
|
|
|
10.17
|
|
|
|
Lease Crude Oil Purchase Agreement dated May 1, 2004 by
and between ConocoPhillips and Approach Operating LLC
(filed as Exhibit 10.26 to the Companys Registration
Statement on Form S-1/A filed October 18, 2007 (File No.
333-144512) and incorporated herein by reference). |
|
|
|
|
|
10.18
|
|
|
|
Gas Purchase Agreement dated as of November 21, 2007
between WTG Benedum Joint Venture, as Buyer, and Approach
Oil & Gas Inc. and Approach Operating, LLC, as Seller
(filed as Exhibit 10.1 to the Companys Current Report on
Form 8-K filed November 28, 2007 and incorporated herein
by reference). |
23
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
|
|
Exhibit |
10.19
|
|
|
|
$200,000,000 Revolving Credit Agreement dated as of
January 18, 2008 among Approach Resources Inc., as
borrower, The Frost National Bank, as administrative agent
and lender, and the financial institutions named therein
(filed as Exhibit 10.1 to the Companys Current Report on
Form 8-K filed January 18, 2008 and incorporated herein by
reference). |
|
|
|
|
|
10.20
|
|
|
|
Amendment dated February 19, 2008 to Credit Agreement
among Approach Resources Inc., as borrower, The Frost
National Bank, as administrative agent and lender,
JPMorgan Chase Bank, NA, as lender, and Approach Oil & Gas
Inc., Approach Oil & Gas (Canada) Inc. and Approach
Resources I, LP, as guarantors, dated as of January 18,
2008 (filed as Exhibit 10.1 to the Companys Current
Report on Form 8-K filed February 22, 2008 and
incorporated herein by reference). |
|
|
|
|
|
31.1
|
|
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
31.2
|
|
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
32.1
|
|
|
|
Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
32.2
|
|
|
|
Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
24