Approach Resources Inc (Form: S-1, Received: 07/12/2007 15:52:09)

Proposed maximum

aggregate offering

Amount of

Title of each class of Securities to be registered

price(1)(2)

registration fee

Common stock, par value $0.01 per share

$132,250,000

As filed with the Securities and Exchange Commission on July 12, 2007

Registration No. 333-

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Approach Resources Inc.

(Exact name of registrant as specified in its charter)


Delaware	1311	51-0424817
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

6300 Ridglea Place, Suite 1107

Fort Worth, Texas 76116

(817) 989-9000

(Address, including zip code, and telephone number, including

area code, of registrant’s principal executive offices)

J. Ross Craft

President and Chief Executive Officer

6300 Ridglea Place, Suite 1107

Fort Worth, Texas 76116

(817) 989-9000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:


Joe Dannenmaier Thompson & Knight LLP 1700 Pacific Avenue, Suite 3300 Dallas, Texas 75201 (214) 969-1700		Gerald S. Tanenbaum, Esq. Cahill Gordon & Reindel LLP 80 Pine Street New York, New York 10005 (212) 701-3000

As soon as practicable after this Registration Statement is declared effective.
(Approximate date of commencement of proposed sale to the public)

If any securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box. o

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

CALCULATION OF REGISTRATION FEE


(1)		Estimated solely for the purpose of calculating the registration fee under Rule 457(o) under the Securities Act.

(2)		Includes common stock issuable upon exercise of the underwriters’ option to purchase additional shares of common stock.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholder may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to completion, dated July 12, 2007

Prospectus

shares

Approach Resources Inc.

Common stock

Approach Resources Inc. is selling shares of common stock, and the selling stockholder identified in this prospectus is selling an additional shares. We will not receive any of the proceeds from the sale of the shares by the selling stockholder. This is the initial public offering of our common stock. The estimated initial public offering price is between $ and $ per share.

Prior to this offering, there has been no public market for our common stock. We intend to apply to have our common stock listed on the NASDAQ Global Market under the symbol “AREX.”



	Per share	Total



Initial public offering price	$	$

Underwriting discount	$	$

Proceeds to Approach Resources Inc., before expenses	$	$

Proceeds to selling stockholder, before expenses(1)	$	$


(1)		Expenses associated with the offering, other than underwriting discounts, will be paid by us.

We and the selling stockholder have granted the underwriters an option for a period of 30 days to purchase up to additional shares of our common stock from us and up to additional shares of our common stock from the selling stockholder on the same terms and conditions set forth above to cover over-allotments, if any.

Investing in our common stock involves a high degree of risk. See “Risk factors” beginning on page 13.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to investors on , 2007.


JPMorgan	A.G. Edwards


Book running manager	Joint lead manager

, 2007

(APPROACH RESOURCES AREAS OF OPERATIONS GRAPHIC)

Table of contents


Prospectus summary			1
Risk factors			13
Cautionary statement regarding forward-looking statements			31
Use of proceeds			33
Dividend policy			33
Capitalization			34
Dilution			35
Unaudited combined pro forma financial data			37
Selected historical combined financial data			45
Management’s discussion and analysis of financial condition and results of operations			49
Business			64
Management			80
Security ownership of certain beneficial owners and management			99
Certain relationships and related party transactions			100
Selling stockholder			105
Description of capital stock			106
Shares eligible for future sale			110
Material United States federal income and estate tax considerations for non-United States holders			113
Underwriting			117
Legal matters			120
Experts			120
Where you can find more information			121
Glossary of selected oil and gas terms			122
Index to financial statements of Approach Resources Inc. and affiliated entities			F-1
Restated Certificate of Incorporation
Restated Bylaws
Contribution Agreement
Employment Agreement - J. Ross Craft
Employment Agreement - Steven P. Smart
Employment Agreement - Glenn W. Reed
2007 Stock Incentive Plan
Convertible Promissory Note - Yorktown Energy Parnters VII, L.P.
Convertible Promissory Note - Lubar Equity Fund, LLC
$100,000,000 Revolving Amended and Restated Credit Agreement
Amendment to Amended and Restated Credit Agreement
Form of Option Agreement
Restricted Stock Award Agreement
List of Subsidiaries
Consent of Hein & Associates LLP
Consent of DeGolyer & MacNaughton
Consent of Cawley, Gillespie & Associates, Inc

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

No action is being taken in any jurisdiction outside the United States to permit a public offering of the common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to those jurisdictions.

The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, governmental publications, reports by market research firms or other independent sources. Some data are also based on our good faith estimates. Although we believe these third-party sources are reliable, we have not independently verified the information and cannot guarantee its accuracy and completeness.

The numbers contained in this prospectus relating to our gross and net leasehold acreage have been rounded to the nearest thousand acres.

We have filed an application for registration of a service mark for “Approach Resources Inc.” Other products, services and company names mentioned in this prospectus are the service marks/trademarks of their respective owners.

Prospectus summary

This summary highlights information contained elsewhere in this prospectus. Because this section is only a summary, it does not contain all of the information that may be important to you or that you should consider before making an investment decision. For a more complete understanding of this offering, we encourage you to read this entire prospectus, including the information contained under the heading “Risk factors.” You should read the following summary together with the more detailed information, pro forma financial information and combined financial information and the notes thereto included elsewhere in this prospectus. In this prospectus, unless the context otherwise requires, the terms “Approach Resources,” “Approach,” “we,” “us” and “our” refer to the combined operations of Approach Resources Inc. and Approach Oil & Gas Inc. and their respective subsidiaries on a pro forma basis after giving effect to the acquisition by Approach Resources Inc. from Neo Canyon Exploration, L.P. of the 30% working interest in the Ozona Northeast field that Approach does not already own, which we refer to as the Neo Canyon interest.

Approach Resources Inc.

Overview

We are an independent energy company engaged in the exploration, development, exploitation, production and acquisition of unconventional natural gas and oil properties. Our principal operations are located in the Ozona Northeast field in West Texas, where we originally acquired approximately 28,000 gross (27,000 net) acres of leasehold interests in 2004. Since that time, through a series of strategic leasehold acquisitions, we have increased our West Texas acreage to 67,000 gross (52,000 net) acres located in the Ozona Northeast field and our nearby Cinco Terry project. Our management team has extensive experience finding and exploiting unconventional reservoirs, particularly tight gas sands like Ozona Northeast, by applying advanced completion, fracturing and drilling techniques. Substantially all of our growth has been through our own drilling efforts. Since 2004, we have added approximately 149 Bcfe of proved gas and oil reserves from unconventional reservoir formations.

At December 31, 2006, all of our proved reserves and production were located in West Texas and substantially all of those reserves and production were located in the Ozona Northeast field. As of such date, we owned working interests in 241 gross (226 net) producing wells with an average net production of approximately 22 MMcfe/d for the month of December 2006. At December 31, 2006, our total proved gas and oil reserves were approximately 149 Bcfe with a reserve life index of approximately 19 years. Our proved reserves are 94% gas and 51% proved developed. As the operator of substantially all of our proved reserves, we have a high degree of control over capital expenditures and other operating matters. As of December 31, 2006, we had identified a total of 795 drilling locations, of which 668 were located in the Ozona Northeast field and 127 in our Cinco Terry project.

Our growth efforts are focused primarily on finding and developing natural gas reserves in known tight gas sands and shale areas onshore in the United States. Since May 2006, we have acquired leasehold interests covering 74,000 gross (44,000 net) acres in Western Kentucky and 90,000 gross (81,000 net) acres in Northern New Mexico. In total we have assembled leasehold interests of 231,000 gross (177,000 net) acres in our three operating areas — West Texas

(Wolfcamp, Canyon Sands and Ellenburger), Western Kentucky (New Albany Shale) and Northern New Mexico (Mancos Shale).

The following table sets forth a summary of our estimated proved reserves and net average production attributable to our principal areas of operation as of December 31, 2006.



	Estimated proved reserves
			Proved				Net average
	Total		developed		PV-10(1)		production
	(Bcfe)		(Bcfe)		(millions)		(MMcfe/d)


Ozona Northeast		147.0		74.9	$	175.7		21.9
Cinco Terry		1.8		0.9		4.2		0.3
Western Kentucky		—		—		—		—
Northern New Mexico		—		—		—		—


Total		148.8		75.8	$	179.9		22.2


(1)		PV-10 is a non-GAAP financial measure and generally differs from the standardized measure of discounted future net cash flows, the most directly comparable GAAP financial measure, because it does not include the effects of income taxes on future net revenues. See “Selected historical combined financial data—Reconciliation of non-GAAP financial measures” for our definition of PV-10 and a reconciliation of PV-10 to the standardized measure of discounted future net cash flows. Our calculation of PV-10 set forth in this table is based on gas and oil and condensate prices actually received by us on December 31, 2006, held flat for the life of the reserves. The weighted average price over the life of the Ozona Northeast reserves was $6.55 per Mcf of gas and $58.05 per Bbl of oil. The weighted average price over the life of the Cinco Terry reserves was $5.65 per Mcf of gas and $58.05 per Bbl of oil.

The following table sets forth a summary of our net acreage leasehold and estimated capital budget attributable to our principal areas of operation as of May 31, 2007, as well as identified drilling locations as of December 31, 2006. We currently anticipate drilling 60 wells in 2007, at an estimated total cost of $44.9 million.



							Identified		Capital budget(2)
	Net acreage leasehold						drilling		2007		2008
	Developed		Undeveloped		Total		locations(1)		(millions)		(millions)


Ozona Northeast		27,000		17,000		44,000		668	$	34.3	$	50.5
Cinco Terry		1,000		7,000		8,000		127		2.2		4.1
Western Kentucky		—		44,000		44,000		—		4.6		6.6
Northern New Mexico		—		81,000		81,000		—		3.8		4.5


Total		28,000		149,000		177,000		795	$	44.9	$	65.7


(1)		Identified drilling locations represent total gross locations specifically identified by management as an estimate of our future multi-year drilling inventory on existing acreage. Of the total locations shown in the table, 203 are classified as proved. As of May 31, 2007, we had completed drilling 17 locations shown in the table, including 15 proved undeveloped locations. Our actual drilling activities may change depending on gas and oil prices, the availability of capital, costs, drilling results, regulatory approvals and other factors. See “Risk factors—Risks related to our business.”

(2)		An additional $4.4 million and $800,000 for 2007 and 2008, respectively, budgeted for lease acquisition, geophysical and geologic costs is not reflected here.

Areas of operation

West Texas

Ozona Northeast field (Canyon Sands)

The Ozona Northeast field, in Crockett and Schleicher counties, Texas, is our largest operating area on the basis of proved reserves and production. The Canyon Sands of the Val Verde Basin in West Texas are located in a prolific tight gas reservoir with more than 11,800 total productive wells and cumulative historical production of more than 3.8 Tcfe over more than 50 years. In 2004, we began operations in the field through a farmout arrangement and have increased our total acreage position to 45,000 gross (44,000 net) acres. Beginning with our first well in February 2004, through December 31, 2006, we have drilled 237 successful wells out of 250 total wells drilled, which is a 95% success rate. As of December 31, 2006, we had 237 producing wells with proved reserves of 147 Bcfe. From 2004 through 2006, as a result of our own drilling efforts, we achieved a compound annual production growth rate of over 100%. We have identified 668 additional drilling locations in the field, and we estimate that completed costs per location currently are approximately $770,000, based on current markets for drilling services and equipment. Additionally, we own and operate 65 miles of gas gathering lines in the area that transport our gas to several regional pipeline systems.

Cinco Terry project (Wolfcamp, Canyon Sands and Ellenburger)

Since late 2005, we have leased and acquired options to lease 22,000 gross (8,000 net) acres five miles west of the Ozona Northeast field to evaluate the Wolfcamp, Canyon and Ellenburger formations. As of May 31, 2007, we had drilled and completed three Canyon wells and one Ellenburger well at a total cost of $5.9 million gross and $3.0 million net. As of December 31, 2006, we had proved reserves in the Cinco Terry project of 1.8 Bcfe. Wolfcamp wells in this area have demonstrated significant commercial production, and we are evaluating the formation for possible horizontal completions. Based upon data collected in the process of drilling the Canyon and Ellenburger wells, we believe we could achieve additional success in the shallower Wolfcamp formation. We own and operate seven miles of gas gathering lines in the area that transport our gas to several regional pipeline systems.

Western Kentucky

Boomerang prospect (New Albany Shale)

Our Boomerang prospect is a 74,000 gross (44,000 net) acre New Albany Shale play located in Western Kentucky in an under-explored area of the Illinois Basin. We believe the attributes of the New Albany Shale in the Boomerang prospect make it a promising resource play, particularly with the introduction of horizontal drilling technology. In the first quarter of 2007, we drilled three vertical test wells. We have contracted to have core samples from these three wells analyzed. We expect to begin the horizontal completion of these three test wells in the third quarter of 2007. After evaluating the results of our initial drilling and completion activities, we will determine our development program in this prospect.

Northern New Mexico

El Vado East prospect (Mancos Shale)

Our El Vado East prospect is a 90,000 gross (81,000 net) acre Mancos Shale play located in the Chama Basin in Northern New Mexico in close proximity to several highly productive fields, including the West and East Puerto Chiquito fields and the Boulder field, which collectively have produced in excess of 18 MMBoe of oil. Although our primary objective in the El Vado East prospect is the Mancos Shale, finding commercial production in the Dakota, Morrison, Todilto and Entrada formations is a secondary objective. We expect that in the third quarter of 2007 we will spud the first of four vertical test wells to be identified and drilled in the El Vado East prospect. Depending on the initial results of these wells, we may elect to shoot 3-D seismic over a portion of this prospect at locations which have yet to be identified.

Strategy

Our strategy is to increase stockholder value by profitably growing our reserves, production, cash flow and earnings using a balanced program of (1) developing existing properties, (2) exploring and exploiting undeveloped properties, (3) completing strategic acquisitions and (4) maintaining financial flexibility. The following are key elements of our strategy:


•	Continue to develop our existing West Texas properties. We intend to develop further the significant remaining potential of our West Texas properties, where we have identified 795 drilling locations. From 2004 through 2006, we drilled 257 wells in our West Texas fields, making us one of the top ten most active drillers in West Texas and the second most active driller in the Canyon Sands during that time period.

•	Pursue unconventional gas and oil opportunities. With our Boomerang and El Vado East prospects, we have 164,000 gross acres of unexplored shale gas and oil inventory to explore and produce. We seek to add proved reserves and production from these properties through the application of advanced technologies, including horizontal drilling and advanced completion techniques.

•	Acquire strategic assets. We continually review opportunities to acquire producing properties, undeveloped acreage and drilling prospects. We focus particularly on opportunities where we believe our reservoir management and operational expertise in unconventional gas and oil properties will enhance value and performance. We remain focused on unconventional resource opportunities, but also look at conventional opportunities based on individual project economics.

•	Operate our properties as a low cost producer. We strive to minimize our operating costs by concentrating our assets within geographic areas where we can consolidate operating control and thus create operating efficiencies. We are the operator of substantially all of our producing properties and plan to continue to operate substantially all of our producing properties in the future. Operating control allows us to better manage timing and risk as well as the cost of exploration and development, drilling and ongoing operations.

Competitive strengths

We believe our historical success is, and future performance will be, directly related to the following combination of strengths that enable us to implement our strategy:


•	Experienced executive and technical team with significant employee ownership . The members of our executive and technical team (including our Chief Executive Officer) have an average of more than 26 years of experience in the oil and gas industry and significant experience in building and managing independent oil and gas companies. The majority of our executive and technical team have spent their entire careers developing unconventional gas and oil properties. Our team has a proven record of analyzing complex structural and stratigraphic formations using 3-D seismic and geological techniques, producing and optimizing gas reservoirs and drilling and completing unconventional gas reservoirs. Our management team and employees will own approximately % of our common stock after this offering, aligning their objectives with those of our stockholders.

•	Low risk, multi-year drilling inventory. We have identified 795 drillable, low to moderate risk locations on our West Texas properties, providing us with approximately 10 years of drilling inventory at our current drilling rate. Our technical team’s ability to locate and execute on repeatable low-risk drilling opportunities in our large and productive West Texas acreage holdings has helped us to achieve a drilling success rate of 94% since our inception.

•	Stable producing asset base. We own an operated asset base comprising of long-lived reserves. Approximately 94% of our reserves are gas, and all of our proved reserves are located in West Texas. These properties should produce stable cash flows to fund our development, exploitation and exploration opportunities.

•	Large acreage positions. We are a significant acreage holder in each of our three primary operating areas with an aggregate leasehold position of 231,000 gross (177,000 net) acres. We believe we have assembled a portfolio of properties, both in prolific producing gas and oil fields and in under-explored reservoirs, that would be difficult to replicate.

•	Operated asset base. We operate substantially all of our estimated reserves. By maintaining operating control, we are able to more effectively control our expenses, capital allocation and the timing and method of exploitation and development of our properties.

•	Low cost structure. Our reserve potential in our operating areas, our technical expertise and our high rate of drilling success have allowed us to achieve relatively low finding and development costs. Since our inception and through December 31, 2006, we have invested approximately $200 million to drill and complete 241 wells in our West Texas operating areas, achieving an average finding and development cost of $1.38 per Mcfe. See “Business—Historical finding and development costs.“ During the same time period, our lease operating costs, including production taxes, averaged $0.91 per Mcfe.

•	Financial flexibility. Upon the completion of this offering, we expect to have approximately $ million in cash, no long-term debt and at least $ million available for borrowings under our revolving credit facility, providing us with significant financial flexibility to pursue our business strategy.

•	Control of gathering infrastructure and gas marketing. We own and operate approximately 72 miles of gas gathering lines in West Texas. Owning and operating this infrastructure allows


	us to maintain greater control of our gathering pressures and to minimize down time associated with the system.

Risk factors

There are a number of risks that could limit our competitive strengths or ability to successfully implement our business strategies, including the speculative nature of gas and oil exploration, competition, volatile gas and oil prices and the other risks described in this prospectus. In addition, while we may implement our business strategies, the benefits derived from such implementation may be mitigated, in whole or in part, if we suffer from one or more of the risks described in “Risk factors.”

Our structure

Approach Resources Inc. was formed as a Delaware corporation in September 2002. Our operations are currently conducted by two separate entities under common control, Approach Resources Inc. and Approach Oil & Gas Inc. Pursuant to a contribution agreement, the operations of Approach Oil & Gas Inc. will be combined under Approach Resources Inc., and we also will acquire the Neo Canyon interest immediately prior to the closing of this offering. For more information about our restructuring and our acquisition of the Neo Canyon interest, please read “Certain relationships and related party transactions—The contribution agreement.”

Our executive offices

Our principal executive offices are located at 6300 Ridglea Place, Suite 1107, Fort Worth, Texas 76116. Our telephone number is (817) 989-9000.

The offering


Common stock offered by us		shares

Common stock offered by the selling stockholder		shares

Common stock to be outstanding after this offering		shares

Use of proceeds		We expect to receive net proceeds from the sale of shares offered by us, after deducting estimated offering expenses and underwriting discounts, of approximately $ million, based on an assumed offering price of $ per share (the mid-point of the price range set forth on the front cover of this prospectus). We intend to use the net proceeds of this offering to repay approximately $ million outstanding under our revolving credit facility, to repurchase shares of our common stock held by Neo Canyon Exploration, L.P. at a purchase price of $ million and the remainder for general corporate purposes, including exploration and development activities, gas and oil reserve and leasehold acquisitions in the ordinary course of business and for working capital. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholder. See “Use of proceeds.”

Dividend policy		We do not anticipate paying any cash dividends on our common stock. See “Dividend policy.”

Risk factors		For a discussion of factors you should consider in making an investment, see “Risk factors.”

Proposed NASDAQ Global Market symbol		“AREX”

Other information about this prospectus		Unless specifically stated otherwise, the information in this prospectus:

		• is adjusted to reflect a for stock split of our shares of common stock to be effected in the form of a stock dividend concurrent with the consummation of this offering;

		• assumes no exercise of the underwriters’ option to purchase additional shares of our common stock to cover over-allotments, if any; and

		• assumes an initial public offering price of $ , which is the mid-point of the range set forth on the front cover of this prospectus.

Summary combined historical and combined
pro forma financial data

The following table sets forth our summary historical combined and combined pro forma financial and operating data as of the dates and for the periods shown. Our operations are currently conducted by two separate operating entities under common control, Approach Resources Inc. and Approach Oil & Gas Inc. Pursuant to a contribution agreement, the operations of Approach Oil & Gas Inc. will be combined under Approach Resources Inc., and we also will acquire the Neo Canyon interest immediately prior to the closing of this offering. The amounts for each historical annual period presented below were derived from the audited combined financial statements of Approach Resources Inc. and Approach Oil & Gas Inc. included in this prospectus. The combined pro forma financial information gives effect to our acquisition of the Neo Canyon interest. The combined pro forma balance sheet assumes that the acquisition of the Neo Canyon interest occurred as of March 31, 2007, and the combined pro forma statements of operations for the year ended December 31, 2006 and for the three months ended March 31, 2007 assume that the acquisition of the Neo Canyon interest occurred on the first day of the respective period. The combined pro forma balance sheet and the combined pro forma statement of operations were derived by adjusting the historical combined financial statements of Approach Resources Inc. and Approach Oil & Gas Inc. These adjustments are based on currently available information and certain estimates and assumptions, and, therefore, the actual effects of the acquisition of the Neo Canyon interest may differ from the effects reflected in the combined pro forma financial statements. However, management believes that the assumptions provide a reasonable basis for presenting the significant effects of this transaction as contemplated and that the pro forma adjustments give appropriate effect to those assumptions. The pro forma financial information is not necessarily indicative of the financial condition or results of operations of Approach Resources Inc. had the contribution and the acquisitions taken place on the assumed dates and should not be viewed as indicative of operations in the future. The following information should be read in conjunction with “Capitalization,” “Management’s discussion and analysis of financial condition and results of operations” and the historical combined and combined pro forma financial statements included in this prospectus.



																Pro forma
										Three months									Three months
										ended						Year ended			ended
(in thousands, except shares and per	Year ended December 31,									March 31,						December 31,			March 31,
share data)	2004			2005			2006			2006			2007			2006			2007


											(unaudited	)		(unaudited	)		(unaudited	)		(unaudited	)
Statement of operations data
Revenues:
Oil and gas sales	$	5,682		$	40,339		$	52,894		$	15,680		$	11,547		$	72,452		$	15,349
Overhead and services income		131			408			514			122			133			175			32


Total revenues		5,813			40,747			53,408			15,802			11,680			72,627			15,381
Expenses:
Lease operating expense		179			2,910			3,889			973			979			5,757			1,416
Severance and production taxes		407			1,975			1,736			380			375			2,452			526
Exploration		2,396			733			1,640			196			623			1,640			623
Impairment of non-producing properties		—			—			558			—			—			558			—
General and administrative		2,074			3,067			2,930			750			1,646			2,930			1,646
Accretion of discount on asset retirement obligations		1			5			10			—			3			14			3
Depletion, depreciation and amortization		1,223			8,006			14,541			3,281			3,088			22,055			4,737


Total expenses		6,280			16,696			25,304			5,580			6,714			35,406			8,951


Operating income (loss)		(467	)		24,051			28,104			10,222			4,966			37,221			6,430
Other:
Interest income (expense), net		201			(802	)		(3,814	)		(725	)		(956	)		(3,814	)		(956	)
Change in fair value of commodity derivatives		—			(4,163	)		8,668			6,192			(4,626	)		8,668			(4,626	)


Income (loss) before provision (benefit) for income taxes		(266	)		19,086			32,958			15,689			(616	)		42,075			848
Provision (benefit) for income taxes		—			7,028			11,756			5,280			(35	)		15,129			473


Net income (loss)	$	(266	)	$	12,058		$	21,202		$	10,409		$	(581	)	$	26,946		$	375


Earnings (loss) per share:
Basic	$	(0.14	)	$	4.03		$	7.04		$	3.49		$	(0.19	)	$	5.78		$	0.08
Diluted	$	(0.14	)	$	4.03		$	6.84		$	3.39		$	(0.19	)	$	5.67		$	0.08
Weighted average shares outstanding:
Basic		1,928,225			2,988,986			3,012,414			2,985,000			2,987,411			4,663,022			4,580,211
Diluted		1,928,225			2,988,986			3,101,180			3,069,945			2,987,411			4,751,788			4,693,441
Statement of cash flow data
Net cash provided (used) by:
Operating activities	$	4,527		$	40,304		$	34,110		$	12,616		$	5,687
Investing activities		(26,859	)		(71,939	)		(59,189	)		(24,578	)		(9,717	)
Financing activities		22,474			32,199			26,771			9,918			4,493
Other financial data
EBITDAX(1)		3,152			32,791			44,877			13,699			8,677			61,508			11,790
Capital expenditures		25,313			73,485			59,189			24,578			9,717


(1)		See “Selected historical combined financial data—Reconciliation of non-GAAP financial measures” for a reconciliation of our net income (loss) to EBITDAX.



													Pro forma
											Pro forma		as adjusted(1)
											As of		As of
	As of December 31,						As of March 31,				March 31,		March 31,
(in thousands)	2004		2005		2006		2006		2007		2007		2007

							(unaudited)		(unaudited)		(unaudited)		(unaudited)

Balance sheet data
Cash and cash equivalents	$	2,656	$	3,219	$	4,911	$	1,175	$	5,374	$	5,374
Other current assets		6,458		16,305		13,200		16,660		6,776		6,776
Property and equipment, net, successful efforts method		24,223		88,803		132,112		109,904		138,123		207,586
Other assets		1,565		89		86		101		119		119


Total assets	$	34,902	$	108,416	$	150,309	$	127,840	$	150,392	$	219,855


Current liabilities	$	9,827	$	32,746	$	15,421	$	26,811	$	11,564	$	11,564
Long-term debt		100		29,425		47,619		40,660		52,169		52,169
Other long-term liabilities		99		6,555		17,697		11,562		17,669		17,732
Stockholders’ equity		24,876		39,690		69,572		48,807		68,990		138,390


Total liabilities and stockholders’ equity	$	34,902	$	108,416	$	150,309	$	127,840	$	150,392	$	219,855


(1)		As adjusted for the consummation of the transactions described under “Certain relationships and related party transactions—The contribution agreement,” our for common stock split and the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting underwriting discounts and estimated offering expenses payable by us and the application of the estimated net proceeds from this offering as set forth under “Use of proceeds.”

Summary oil and gas data

Operating data

The following table presents certain information with respect to the combined historical operating data for the years ended December 31, 2004, 2005 and 2006 and for the three months ended March 31, 2007 and combined pro forma operating data for the year ended December 31, 2006 and the three months ended March 31, 2007, after giving effect to our acquisition of the Neo Canyon interest:



									Pro forma
							Three				Three
							months				months
							ended		Year ended		ended
	Year ended December 31,						March 31,		December 31,		March 31,
	2004		2005		2006		2007		2006		2007


Gross wells
Drilled		54		120		83		9		83		9
Completed		46		115		81		8		81		8
Net wells
Drilled		34.9		77.2		55.1		6.3		79.6		9.0
Completed		29.6		74.8		53.5		5.6		77.3		8.0
Net production data
Net volume (MMcfe)		908		5,012		6,744		1,357		9,580		1,910
Average daily volume (MMcfe/d)		4		14		18		15		26		21
Average sales price (per Mcfe)
Average sales price (without hedge)	$	6.26	$	8.63	$	6.92	$	6.92	$	6.91	$	6.91
Average sales price (with hedge)		6.26		8.05		7.84		8.51		7.56		8.04
Expenses (per Mcfe)
Lease operating	$	0.20	$	0.58	$	0.58	$	0.72	$	0.60	$	0.74
Production taxes		0.45		0.39		0.26		0.28		0.26		0.28
General and administrative		2.28		0.61		0.43		1.21		0.31		0.86
Depreciation, depletion and amortization		1.35		1.60		2.16		2.26		2.30		2.47

Estimated reserve data

The estimates in the table below of proved reserves as of December 31, 2004 and 2005 are based on reserve reports prepared by our engineering staff and Cawley, Gillespie & Associates, Inc. The estimates as of December 31, 2006 are based on reserve reports prepared by our engineering staff and DeGolyer & MacNaughton.



							Pro forma(1)
	December 31,						December 31,
	2004		2005		2006		2006


Estimated proved reserves
Gas (Bcf)		57.7		102.4		98.7		139.8
Oil (MMBbls)		0.4		1.1		1.1		1.5


Total proved reserves (Bcfe)		59.8		108.9		105.4		148.8
Total proved developed reserves (Bcfe)		17.6		49.8		53.1		75.8
PV-10 value (millions)(2)
Proved developed reserves	$	44.1	$	151.9	$	112.8	$	158.3
Proved undeveloped reserves		56.6		97.4		15.6		21.6


Total PV-10	$	100.7	$	249.3	$	128.4	$	179.9


(1)		Gives effect to our acquisition of the Neo Canyon interest.

(2)		PV-10 is a non-GAAP financial measure and generally differs from the standardized measure of discounted future net cash flows, the most directly comparable GAAP financial measure, because it does not include the effects of income taxes on future net revenues. See “Selected historical combined financial data—Reconciliation of non-GAAP financial measures” for our definition of PV-10 and a reconciliation of PV-10 to the standardized measure of discounted future net cash flows. Our calculation of PV-10 set forth in this table is based on gas and oil and condensate prices actually received by us on December 31, 2006, held flat for the life of the reserves. The weighted average price over the life of the Ozona Northeast reserves was $6.55 per Mcf of gas and $58.05 per Bbl of oil. The weighted average price over the life of the Cinco Terry reserves was $5.65 per Mcf of gas and $58.05 per Bbl of oil.

Risk factors

You should carefully consider the risk factors set forth below as well as the other information contained in this prospectus before investing in our common stock. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. In such a case, you may lose all or part of your investment. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially adversely affect our business, financial condition or results of operations.

Risks related to our business

Gas and oil prices are volatile, and a decline in gas or oil prices could significantly affect our business, financial condition or results of operations and our ability to meet our capital expenditure requirements and financial commitments.

Our revenues, profitability and cash flow depend substantially upon the prices and demand for gas and oil. The markets for these commodities are volatile, and even relatively modest drops in prices can affect significantly our financial results and impede our growth. Prices for gas and oil fluctuate widely in response to relatively minor changes in the supply and demand for gas and oil, market uncertainty and a variety of additional factors beyond our control, such as:


•	domestic and foreign supply of gas and oil;

•	price and quantity of foreign imports;

•	commodity processing, gathering and transportation availability and the availability of refining capacity;

•	domestic and foreign governmental regulations;

•	political conditions in or affecting other gas producing and oil producing countries, including the current conflicts in the Middle East and conditions in South America and Russia;

•	the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls;

•	weather conditions, including unseasonably warm winter weather;

•	technological advances affecting gas and oil consumption;

•	overall United States and global economic conditions; and

•	price and availability of alternative fuels.

Further, gas prices and oil prices do not necessarily fluctuate in direct relationship to each other. Because more than 94% of our estimated proved reserves as of December 31, 2006 were gas reserves, our financial results are more sensitive to movements in gas prices. In the past, the price of gas has been extremely volatile, and we expect this volatility to continue. For example, during the year ended December 31, 2006, the NYMEX gas spot price ranged from a high of $9.90 per MMBtu to a low of $3.66 per MMBtu. The NYMEX gas spot price at December 31, 2006 was $5.50 per MMBtu. At May 1, 2007, the NYMEX gas spot price was $7.64 per MMBtu.

The results of higher investment in the exploration for and production of gas and other factors may cause the price of gas to drop. Lower gas and oil prices may not only cause our revenues to decrease but also may reduce the amount of gas and oil that we can produce economically. Substantial decreases in gas and oil prices would render uneconomic some or all of our drilling locations. This may result in our having to make substantial downward adjustments to our estimated proved reserves and could have a material adverse effect on our financial condition, results of operations and cash flow.

Drilling and exploring for, and producing, gas and oil are high risk activities with many uncertainties that could adversely affect our business, financial condition or results of operations.

Drilling and exploration are the main methods we use to replace our reserves. However, drilling and exploration operations may not result in any increases in reserves for various reasons. Exploration activities involve numerous risks, including the risk that no commercially productive gas or oil reservoirs will be discovered. In addition, the future cost and timing of drilling, completing and producing wells is often uncertain. Furthermore, drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including:


•	lack of acceptable prospective acreage;

•	inadequate capital resources;

•	unexpected drilling conditions, pressure or irregularities in formations, equipment failures or accidents;

•	adverse weather conditions, including tornados;

•	unavailability or high cost of drilling rigs, equipment or labor;

•	reductions in gas and oil prices;

•	limitations in the market for gas and oil;

•	surface access restrictions;

•	title problems;

•	compliance with governmental regulations; and

•	mechanical difficulties.

Our decisions to purchase, explore, develop and exploit prospects or properties depend in part on data obtained through geophysical and geological analyses, production data and engineering studies, the results of which are often uncertain. Even when used and properly interpreted, 3-D seismic data and visualization techniques only assist geoscientists and geologists in identifying subsurface structures and hydrocarbon indicators. They do not allow the interpreter to know conclusively if hydrocarbons are present or producible economically. In addition, the use of 3-D seismic and other advanced technologies require greater predrilling expenditures than traditional drilling strategies.

In addition, higher gas and oil prices generally increase the demand for drilling rigs, equipment and crews and can lead to shortages of, and increasing costs for, such drilling equipment, services and personnel. Such shortages could restrict our ability to drill the wells and conduct the operations that we currently have planned. Any delay in the drilling of new wells or

significant increase in drilling costs could adversely affect our ability to increase our reserves and production and reduce our revenues.

Currently, the vast majority of our producing properties are located in two counties in Texas, and our proved reserves are primarily attributable to one field in that area, making us vulnerable to risks associated with having our production concentrated in a small area.

The vast majority of our producing properties are geographically concentrated in two counties in Texas, and our proved reserves are primarily attributable to one field in that area. As a result of this concentration, we may be disproportionately exposed to the impact of delays or interruptions of production from these wells caused by significant governmental regulation, transportation capacity constraints, curtailments of production, natural disasters, interruption of transportation of gas produced from the wells in these basins or other events that impact these areas.

Certain of our undeveloped leasehold acreage is subject to leases and options that may expire in the near future.

As of December 31, 2006, we held mineral leases in each of our areas of operations that are still within their original lease term and are not currently held by production. Unless we establish commercial production on the properties subject to these leases, most of these leases will expire between 2008 and 2015. Options covering approximately 12,000 gross acres in our Cinco Terry project are scheduled to expire before June 1, 2008. If these leases or options expire, we will lose our right to develop the related properties.

Identified drilling locations that we decide to drill may not yield gas or oil in commercially viable quantities and are susceptible to uncertainties that could materially alter the occurrence or timing of their drilling.

Our drilling locations are in various stages of evaluation, ranging from locations that are ready to be drilled to locations that will require substantial additional evaluation and interpretation. There is no way to predict in advance of drilling and testing whether any particular drilling location will yield gas or oil in sufficient quantities to recover drilling or completion costs or to be economically viable. The use of seismic data and other technologies and the study of producing fields in the same area will not enable us to know conclusively before drilling whether gas or oil will be present or, if present, whether gas or oil will be present in commercial quantities. The analysis that we perform may not be useful in predicting the characteristics and potential reserves associated with our drilling locations. As a result, we may not find commercially viable quantities of gas and oil.

Our drilling locations represent a significant part of our growth strategy. Our ability to drill and develop these locations depends on a number of factors, including gas and oil prices, costs, the availability of capital, seasonal conditions, regulatory approvals and drilling results. Because of these uncertainties, we do not know when the unproved drilling locations we have identified will be drilled or if they will ever be drilled or if we will be able to produce gas or oil from these or any proved drilling locations. As such, our actual drilling activities may be materially different from those presently identified, which could adversely affect our business, results of operations or financial condition.

Unless we replace our gas and oil reserves, our reserves and production will decline.

Our future gas and oil production depends on our success in finding or acquiring additional reserves. If we fail to replace reserves through drilling or acquisitions, our level of production and cash flows will be affected adversely. In general, production from gas and oil properties declines as reserves are depleted, with the rate of decline depending on reservoir characteristics. Our total proved reserves will decline as reserves are produced unless we conduct other successful exploration and development activities or acquire properties containing proved reserves, or both. Our ability to make the necessary capital investment to maintain or expand our asset base of gas and oil reserves would be impaired to the extent cash flow from operations is reduced and external sources of capital become limited or unavailable. We may not be successful in exploring for, developing or acquiring additional reserves.

Our actual production, revenues and expenditures related to our reserves are likely to differ from our estimates of our proved reserves. We may experience production that is less than estimated and drilling costs that are greater than estimated in our reserve reports. These differences may be material.

The proved gas and oil reserve information included in this prospectus represents estimates. Petroleum engineering is a subjective process of estimating underground accumulations of gas and oil that cannot be measured in an exact manner. Estimates of economically recoverable gas and oil reserves and of future net cash flows necessarily depend upon a number of variable factors and assumptions, including:


•	historical production from the area compared with production from other similar producing areas;

•	the assumed effects of regulations by governmental agencies;

•	assumptions concerning future gas and oil prices; and

•	assumptions concerning future operating costs, severance and excise taxes, development costs and workover and remedial costs.

Because all reserve estimates are to some degree subjective, each of the following items may differ materially from those assumed in estimating proved reserves:


•	the quantities of gas and oil that are ultimately recovered;

•	the production and operating costs incurred;

•	the amount and timing of future development expenditures; and

•	future gas and oil prices.

As of December 31, 2006, approximately 49% of our proved reserves were proved undeveloped. Estimates of proved undeveloped reserves are even less reliable than estimates of proved developed reserves.

Furthermore, different reserve engineers may make different estimates of reserves and cash flows based on the same available data. Our actual production, revenues and expenditures with respect to reserves will likely be different from estimates and the differences may be material. The discounted future net cash flows included in this prospectus should not be considered as the current market value of the estimated gas and oil reserves attributable to our properties. As

required by the Securities and Exchange Commission, or the SEC, the estimated discounted future net cash flows from proved reserves are generally based on prices and costs as of the date of the estimate, while actual future prices and costs may be materially higher or lower. Actual future net cash flows also will be affected by factors such as:


•	the amount and timing of actual production;

•	supply and demand for gas and oil;

•	increases or decreases in consumption; and

•	changes in governmental regulations or taxation.

In addition, the 10% discount factor, which is required by the SEC to be used to calculate discounted future net cash flows for reporting purposes, is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and gas industry in general.

You should not assume that the present value of future net revenues from our proved reserves referred to in this prospectus is the current market value of our estimated gas and oil reserves. In accordance with SEC requirements, we generally base the estimated discounted future net cash flows from our proved reserves on prices and costs on the date of the estimate. Actual future prices and costs may differ materially from those used in the present value estimate. If gas prices decline by $1.00 per Mcf, then our PV-10 as of December 31, 2006 would decrease from $179.9 million to $110.1 million.

We will require additional capital to fund our future activities. If we fail to obtain additional capital, we may not be able to implement fully our business plan, which could lead to a decline in reserves.

We depend on our ability to obtain financing beyond our cash flow from operations. Historically, we have financed our business plan and operations primarily with internally generated cash flows, borrowings under our revolving credit facility and issuances of common stock. We also require capital to fund our capital budget, which is expected to be approximately $49.3 million for 2007. As of December 31, 2006, approximately 49% of our total estimated proved reserves were undeveloped. Recovery of such reserves will require significant capital expenditures and successful drilling operations. We will be required to meet our needs from our internally generated cash flows, debt financings and equity financings.

If our revenues decrease as a result of lower commodity prices, operating difficulties, declines in reserves or for any other reason, we may have limited ability to obtain the capital necessary to sustain our operations at current levels. We may, from time to time, need to seek additional financing. Our revolving credit facility contains covenants restricting our ability to incur additional indebtedness without lender consent. There can be no assurance that our bank lenders will provide this consent or as to the availability or terms of any additional financing. If we incur additional debt, the related risks that we now face could intensify.

Even if additional capital is needed, we may not be able to obtain debt or equity financing on terms favorable to us, or at all. If cash generated by operations and available under our revolving credit facility is not sufficient to meet our capital requirements, the failure to obtain additional financing could result in a curtailment of our operations relating to exploration and

development of our projects, which in turn could lead to a possible loss of properties and a decline in our gas reserves.

Our bank lenders can limit our borrowing capabilities, which may materially impact our operations.

At March 31, 2007, outstanding borrowings under our revolving credit facility totaled approximately $52.2 million. We intend to use a portion of the proceeds from this offering to repay the outstanding balance under our revolving credit facility. The borrowing base limitation under our revolving credit facility is redetermined semi-annually. Redeterminations are based upon information contained in an engineering report prepared by an independent petroleum engineering firm, including, without limitation, commodity prices and reserve levels. In addition, as is typical in the oil and gas industry, our bank lenders have substantial flexibility to reduce our borrowing base on the basis of subjective factors. Upon a redetermination, we could be required to repay a portion of our outstanding borrowings, including the total face amounts of all outstanding letters of credit and the amount of all unpaid reimbursement obligations, to the extent such amounts exceed the redetermined borrowing base. We may not have sufficient funds to make such required repayment, which could result in a default under the terms of the revolving credit facility and an acceleration of the loan. We intend to finance our development, acquisition and exploration activities with cash flow from operations, borrowings under our revolving credit facility and other financing activities. In addition, we may significantly alter our capitalization to make future acquisitions or develop our properties. These changes in capitalization may significantly increase our level of debt. If we incur additional debt for these or other purposes, the related risks that we now face could intensify. A higher level of debt also increases the risk that we may default on our debt obligations. Our ability to meet our debt obligations and to reduce our level of debt depends on our future performance which will be affected by general economic conditions and financial, business and other factors. Many of these factors are beyond our control. Our level of debt affects our operations in several important ways, including the following:


•	a portion of our cash flow from operations is used to pay interest on borrowings;

•	the covenants contained in the agreements governing our debt limit our ability to borrow additional funds, pay dividends, dispose of assets or issue shares of preferred stock and otherwise may affect our flexibility in planning for, and reacting to, changes in business conditions;

•	a high level of debt may impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes;

•	a leveraged financial position would make us more vulnerable to economic downturns and could limit our ability to withstand competitive pressures; and

•	any debt that we incur under our revolving credit facility will be at variable rates which makes us vulnerable to increases in interest rates.

The unavailability or high cost of drilling rigs, equipment, supplies, personnel and oilfield services could adversely affect our ability to execute our exploration and development plans on a timely basis and within our budget.

Our industry is cyclical, and from time to time there is a shortage of drilling rigs, equipment, supplies and qualified personnel. During these periods, the costs and delivery times of rigs, equipment and supplies are substantially greater. As a result of historically strong prices of gas, the demand for oilfield and drilling services has risen, and the costs of these services are increasing. For example, average day rates for land based rigs have increased substantially during the last two years. We are particularly sensitive to higher rig costs and drilling rig availability, as we presently have two rigs under contract, one of which is on a well-to-well basis. If the unavailability or high cost of drilling rigs, equipment, supplies or qualified personnel were particularly severe in the areas where we operate, we could be materially and adversely affected.

Competition in the oil and gas industry is intense, and many of our competitors have resources that are greater than ours.

We operate in a highly competitive environment for acquiring prospects and productive properties, marketing gas and oil and securing equipment and trained personnel. Many of our competitors are major and large independent oil and gas companies that possess and employ financial, technical and personnel resources substantially greater than ours. Those companies may be able to develop and acquire more prospects and productive properties than our financial or personnel resources permit. Our ability to acquire additional prospects and discover reserves in the future will depend on our ability to evaluate and select suitable properties and consummate transactions in a highly competitive environment. Also, there is substantial competition for capital available for investment in the oil and gas industry. Larger competitors may be better able to withstand sustained periods of unsuccessful drilling and absorb the burden of changes in laws and regulations more easily than we can, which would adversely affect our competitive position. We may not be able to compete successfully in the future in acquiring prospective reserves, developing reserves, marketing hydrocarbons, attracting and retaining quality personnel and raising additional capital.

Our customer base is concentrated, and the loss of our key customer could therefore adversely affect our financial results.

In 2006, Ozona Pipeline Energy Company, which we refer to as Ozona Pipeline, accounted for approximately 89.6% of our total gas and oil sales excluding realized hedge settlements. To the extent that Ozona Pipeline reduces its purchases in gas or oil or defaults on its obligations to us, we would be adversely affected unless we were able to make comparably favorable arrangements with other customers. Ozona Pipeline’s default or non-performance could be caused by factors beyond our control. A default could occur as a result of circumstances relating directly to the customer, or due to circumstances related to other market participants with which the customer has a direct or indirect relationship.

We depend on our management team and other key personnel. Accordingly, the loss of any of these individuals could adversely affect our business, financial condition and the results of operations and future growth.

Our success largely depends on the skills, experience and efforts of our management team and other key personnel. The loss of the services of one or more members of our senior management team or of our other employees with critical skills needed to operate our business could have a negative effect on our business, financial condition, results of operations and future growth. We have entered into employment agreements with J. Ross Craft, our President and Chief Executive Officer, Steven P. Smart, our Executive Vice President and Chief Financial Officer and Glenn W. Reed, our Senior Vice President—Operations. See “Executive compensation—Other benefits—Employment agreements and other arrangements.” If any of these officers or other key personnel resign or become unable to continue in their present roles and are not adequately replaced, our business operations could be materially adversely affected. Our ability to manage our growth, if any, will require us to continue to train, motivate and manage our employees and to attract, motivate and retain additional qualified personnel. Competition for these types of personnel is intense, and we may not be successful in attracting, assimilating and retaining the personnel required to grow and operate our business profitably.

We are subject to complex governmental laws and regulations that may adversely affect the cost, manner or feasibility of doing business.

Our operations and facilities are subject to extensive federal, state and local laws and regulations relating to the exploration for, and the development, production and transportation of, gas and oil, and operating safety, and protection of the environment, including those relating to air emissions, wastewater discharges, land use, storage and disposal of wastes and remediation of contaminated soil and groundwater. Future laws or regulations, any adverse changes in the interpretation of existing laws and regulations or our failure to comply with existing legal requirements may harm our business, results of operations and financial condition. We may encounter reductions in reserves or be required to make large and unanticipated capital expenditures to comply with governmental laws and regulations, such as:


•	price control;

•	taxation;

•	lease permit restrictions;

•	drilling bonds and other financial responsibility requirements, such as plug and abandonment bonds;

•	spacing of wells;

•	unitization and pooling of properties;

•	safety precautions; and

•	permitting requirements.

Under these laws and regulations, we could be liable for:


•	personal injuries;

•	property and natural resource damages;


•	well reclamation costs, soil and groundwater remediation costs; and

•	governmental sanctions, such as fines and penalties.

Our operations could be significantly delayed or curtailed, and our cost of operations could significantly increase as a result of environmental safety and other regulatory requirements or restrictions. We are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations. We may be unable to obtain all necessary licenses, permits, approvals and certificates for proposed projects. Intricate and changing environmental and other regulatory requirements may require substantial expenditures to obtain and maintain permits. If a project is unable to function as planned, for example, due to costly or changing requirements or local opposition, it may create expensive delays, extended periods of non-operation or significant loss of value in a project. See “Business—Regulation.”

Operating hazards, natural disasters or other interruptions of our operations could result in potential liabilities, which may not be fully covered by our insurance.

The oil and gas business involves certain operating hazards such as:


•	well blowouts;

•	cratering;

•	explosions;

•	uncontrollable flows of gas, oil or well fluids;

•	fires;

•	pollution; and

•	releases of toxic gas.

The occurrence of one of the above may result in injury, loss of life, suspension of operations, environmental damage and remediation and/or governmental investigations and penalties.

In addition, our operations in Texas are especially susceptible to damage from natural disasters such as tornados and involve increased risks of personal injury, property damage and marketing interruptions. Any of these operating hazards could cause serious injuries, fatalities or property damage, which could expose us to liabilities. The payment of any of these liabilities could reduce, or even eliminate, the funds available for exploration, development, exploitation and acquisition, or could result in a loss of our properties. Consistent with insurance coverage generally available to the industry, our insurance policies provide limited coverage for losses or liabilities relating to pollution, with broader coverage for sudden and accidental occurrences. Our insurance might be inadequate to cover our liabilities. The insurance market in general and the energy insurance market in particular have been difficult markets over the past several years. Insurance costs are expected to continue to increase over the next few years and we may decrease coverage and retain more risk to mitigate future cost increases. If we incur substantial liability and the damages are not covered by insurance or are in excess of policy limits, or if we incur liability at a time when we are not able to obtain liability insurance, then our business, results of operations and financial condition could be materially adversely affected.

Our results are subject to quarterly and seasonal fluctuations.

Our quarterly operating results have fluctuated in the past and could be negatively impacted in the future as a result of a number of factors, including:


•	seasonal variations in gas and oil prices;

•	variations in levels of production; and

•	the completion of exploration and production projects.

Market conditions or transportation impediments may hinder our access to gas and oil markets or delay our production.

Market conditions, the unavailability of satisfactory gas and oil processing and transportation may hinder our access to gas and oil markets or delay our production. Although currently we control the pipeline operations for a majority of our production in the Ozona Northeast field, we do not have such control in other areas in which we expect to conduct operations. The availability of a ready market for our gas and oil production depends on a number of factors, including the demand for and supply of gas and oil and the proximity of reserves to pipelines or trucking and terminal facilities. In addition, the amount of gas and oil that can be produced and sold is subject to curtailment in certain circumstances, such as pipeline interruptions due to scheduled and unscheduled maintenance, excessive pressure, physical damage to the gathering or transportation system or lack of contracted capacity on such systems. The curtailments arising from these and similar circumstances may last from a few days to several months, and in many cases we are provided with limited, if any, notice as to when these circumstances will arise and their duration. As a result, we may not be able to sell, or may have to transport by more expensive means, the gas and oil production from wells or we may be required to shut in gas wells or delay initial production until the necessary gathering and transportation systems are available. Any significant curtailment in gathering system or pipeline capacity, or significant delay in construction of necessary gathering and transportation facilities, could adversely affect our business, financial condition or results of operations.

Environmental liabilities may expose us to significant costs and liabilities.

There is inherent risk of incurring significant environmental costs and liabilities in our gas and oil operations due to the handling of petroleum hydrocarbons and generated wastes, the occurrence of air emissions and water discharges from work-related activities and the legacy of pollution from historical industry operations and waste disposal practices. We may incur joint and several or strict liability under these environmental laws and regulations in connection with spills, leaks or releases of petroleum hydrocarbons and wastes on, under or from our properties and facilities, many of which have been used for exploration, production or development activities for many years, oftentimes by third parties not under our control. Private parties, including the owners of properties upon which we conduct drilling and production activities as well as facilities where our petroleum hydrocarbons or wastes are taken for reclamation or disposal, may also have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations or for personal injury or property damage. In addition, changes in environmental laws and regulations occur frequently, and any such changes that result in more stringent and costly waste handling, storage, transport, disposal or remediation requirements could have a material adverse effect on

our production or our operations or financial position. We may not be able to recover some or any of these costs from insurance. See “Business—Regulation—Environmental regulations.”

Our growth strategy could fail or present unanticipated problems for our business in the future, which could adversely affect our ability to make acquisitions or realize anticipated benefits of those acquisitions.

Our growth strategy may include acquiring oil and gas businesses and properties. We may not be able to identify suitable acquisition opportunities or finance and complete any particular acquisition successfully.

Furthermore, acquisitions involve a number of risks and challenges, including:


•	diversion of management’s attention;

•	the need to integrate acquired operations;

•	potential loss of key employees of the acquired companies;

•	potential lack of operating experience in a geographic market of the acquired business; and

•	an increase in our expenses and working capital requirements.

Any of these factors could adversely affect our ability to achieve anticipated levels of cash flows from the acquired businesses or realize other anticipated benefits of those acquisitions.

We engage in hedging transactions which involve risks that can harm our business.

To manage our exposure to price risks in the marketing of our gas and oil production, we enter into gas and oil price hedging agreements. While intended to reduce the effects of volatile oil and gas prices, such transactions may limit our potential gains and increase our potential losses if gas and oil prices were to rise substantially over the price established by the hedge. In addition, such transactions may expose us to the risk of loss in certain circumstances, including instances in which our production is less than expected, there is a widening of price differentials between delivery points for our production and the delivery point assumed in the hedge arrangement or the counterparties to the hedging agreements fail to perform under the contracts.

The requirements of complying with the Securities Exchange Act of 1934 may strain our resources and distract management.

As a public company we will be subject to the reporting requirements of the Securities Exchange Act of 1934, referred to as the Exchange Act, and the Sarbanes Oxley Act of 2002 and related rules of the SEC. In addition, the NASDAQ Global Market regulates corporate governance practices of public companies. These requirements may place a strain on our systems and resources as we will be required to carry out activities we have not conducted previously, and we will incur significant legal, accounting and other expenses that we did not incur in the past. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes Oxley Act of 2002 requires that we maintain effective disclosure controls and procedures, corporate governance standards and internal controls over financial reporting. For example, under Section 404 of the Sarbanes Oxley Act, for our annual report on Form 10-K for the year ending December 31, 2008, we will need to document and test our internal control procedures, our management will need to assess and

report on our internal control over financial reporting and our independent accountants will need to issue an opinion on the effectiveness of those controls. If we identify any issues in complying with those requirements (for example, if we or our independent auditors identify a material weakness or significant deficiency in our internal control over financial reporting), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect us, our reputation or investor perceptions of us. We also expect that it could be difficult and will be significantly more expensive to obtain directors’ and officers’ liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. Advocacy efforts by stockholders and third parties also may prompt even more changes in governance and reporting requirements. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. Additionally, in connection with these heightened duties, significant resources and management oversight will be required as we may need to devote additional time and personnel to legal, financial and accounting activities to ensure our ongoing compliance with public company reporting requirements. The effort to prepare for these obligations may divert management’s attention from other business concerns, which could have a material adverse affect on our business, financial condition, results of operations or cash flow.

Failure by us to achieve and maintain effective internal control over financial reporting in accordance with the rules of the SEC could harm our business and operating results and/or result in a loss of investor confidence in our financial reports, which could in turn have a material adverse effect on our business and stock price.

Under current rules of the SEC, we will be required to document and test our internal control over financial reporting so that our management can certify as to the effectiveness of our internal control over financial reporting and our independent registered public accounting firm can render an opinion on the effectiveness of our internal control over financial reporting. We are in the process of documenting our internal control systems to allow management to evaluate and report on, and our independent auditors to audit, our internal control over financial reporting. Once the documentation is complete, we will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes Oxley Act of 2002. We will be required to comply with Section 404 for the year ending December 31, 2008. However, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations. Furthermore, upon completion of this process, we may identify control deficiencies of varying degrees of severity under applicable SEC and Public Company Accounting Oversight Board rules and regulations that remain unremediated. As a public company, we will be required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal controls that, or that are reasonably likely to, materially affect internal control over financial reporting. A “material weakness” is a significant deficiency or combination of significant deficiencies that results in a reasonable likelihood that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected. If we fail to implement the requirements of Section 404 in a timely manner, we might be subject to sanctions or investigation by regulatory authorities such as the SEC. In addition, failure to comply with Section 404 or the report by us of a material weakness may cause investors to lose confidence in our consolidated financial statements, and our stock price may be adversely

affected as a result. If we fail to remedy any material weakness, our consolidated financial statements may be inaccurate, we may face restricted access to the capital markets and our stock price may be adversely affected.

We have three affiliated stockholders with a controlling interest in our company, whose interests may differ from your interests and who will be able to determine the outcome of matters voted upon by our stockholders.

Yorktown Energy Partners V, L.P., Yorktown Energy Partners VI, L.P. and Yorktown Energy Partners VII, L.P., or collectively, Yorktown, which are under common management, own approximately % of our outstanding common stock. After giving effect to this offering, Yorktown will continue to beneficially own approximately % of our outstanding common stock in the aggregate ( % if the underwriters’ over-allotment option is exercised in full). In addition, one Yorktown representative serves on our board of directors, and our officers will beneficially own or control approximately % of our common stock outstanding ( % if the underwriters’ over-allotment option is exercised in full). See “Security ownership of certain beneficial owners and management.” As a result of this ownership, Yorktown will have the ability to control the vote in any election of directors. Yorktown also will have control over our decisions to enter into significant corporate transactions and, in its capacity as our majority stockholder, will have the ability to prevent any transactions that it does not believe are in Yorktown’s best interest. As a result, Yorktown will be able to control, directly or indirectly and subject to applicable law, all matters affecting us, including the following:


•	any determination with respect to our business direction and policies, including the appointment and removal of officers;

•	any determinations with respect to mergers, business combinations or dispositions of assets;

•	our capital structure;

•	compensation, option programs and other human resources policy decisions;

•	changes to other agreements that may adversely affect us; and

•	the payment, or nonpayment, of dividends on our common stock.

Yorktown also may have an interest in pursuing transactions that, in their judgment, enhance the value of their respective equity investments in our company, even though those transactions may involve risks to you as a minority stockholder. In addition, circumstances could arise under which their interests could be in conflict with the interests of our other stockholders or you, a minority stockholder. Also, Yorktown and their affiliates have and may in the future make significant investments in other companies, some of which may be competitors. Yorktown and its affiliates are not obligated to advise us of any investment or business opportunities of which they are aware, and they are not restricted or prohibited from competing with us.

We have renounced any interest in specified business opportunities, and certain members of our board of directors and certain of our stockholders generally have no obligation to offer us those opportunities.

In accordance with Delaware law, we have renounced any interest or expectancy in any business opportunity, transaction or other matter in which our non-employee directors and certain of our stockholders, each referred to as a Designated Party, participates or desires to participate in

that involves any aspect of the exploration and production business in the oil and industry. If any such business opportunity is presented to a Designated Person who also serves as a member of our board of directors, the Designated Party has no obligation to communicate or offer that opportunity to us, and the Designated Party may pursue the opportunity as he sees fit, unless:


•	it was presented to the Designated Party solely in that person’s capacity as a director of our company and with respect to which, at the time of such presentment, no other Designated Party has independently received notice of or otherwise identified the business opportunity; or

•	the opportunity was identified by the Designated Party solely through the disclosure of information by or on behalf of us.

For a more complete discussion of this agreement, please read “Certain relationships and related party transactions—Business opportunities renunciation.” As a result of this renunciation, our non-employee directors should not be deemed to be breaching any fiduciary duty to us if they or their affiliates or associates pursue opportunities as described above and our future competitive position and growth potential could be adversely affected.

Severe weather could have a material adverse impact on our business.

Our business could be materially and adversely affected by severe weather. Repercussions of severe weather conditions may include:


•	curtailment of services;

•	weather-related damage to drilling rigs, resulting in suspension of operations;

•	weather-related damage to our facilities;

•	inability to deliver materials to jobsites in accordance with contract schedules; and

•	loss of productivity.

A terrorist attack or armed conflict could harm our business.

Terrorist activities, anti-terrorist efforts and other armed conflict involving the United States may adversely affect the United States and global economies and could prevent us from meeting our financial and other obligations. If any of these events occur or escalate, the resulting political instability and societal disruption could reduce overall demand for gas and oil, potentially putting downward pressure on demand for our services and causing a reduction in our revenue. Gas and oil related facilities could be direct targets for terrorist attacks, and our operations could be adversely impacted if significant infrastructure or facilities we use for the production, transportation or marketing of our gas and oil production are destroyed or damaged. Costs for insurance and other security may increase as a result of these threats, and some insurance coverage may become difficult to obtain, if available at all.

Risks related to this offering

There has been no public market for our common stock, and our stock price may fluctuate significantly.

There is currently no public market for our common stock, and an active trading market may not develop or be sustained after the sale of all of the shares covered by this prospectus. The market price of our common stock could fluctuate significantly as a result of:


•	our operating and financial performance and prospects;

•	quarterly variations in the rate of growth of our financial indicators, such as net income per share, net income and revenues;

•	changes in revenue or earnings estimates or publication of research reports by analysts about us or the exploration and production industry;

•	liquidity and registering our common stock for public resale;

•	actual or unanticipated variations in our reserve estimates and quarterly operating results;

•	changes in gas and oil prices;

•	speculation in the press or investment community;

•	sales of our common stock by our stockholders;

•	increases in our cost of capital;

•	changes in applicable laws or regulations, court rulings and enforcement and legal actions;

•	changes in market valuations of similar companies;

•	adverse market reaction to any increased indebtedness we incur in the future;

•	additions or departures of key management personnel;

•	actions by our stockholders;

•	general market and economic conditions, including the occurrence of events or trends affecting the price of gas; and

•	domestic and international economic, legal and regulatory factors unrelated to our performance.

If a trading market develops for our common stock, stock markets in general experience volatility that often is unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.

We do not anticipate paying any dividends on our common stock in the foreseeable future.

We do not expect to declare or pay any cash or other dividends in the foreseeable future on our common stock, as we intend to use cash flow generated by operations to expand our business. Our revolving credit facility will restrict our ability to pay cash dividends on our common stock, and we may also enter into credit agreements or other borrowing arrangements in the future that restrict or limit our ability to pay cash dividends on our common stock.

Certain stockholders’ shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly.

After this offering, we will have outstanding shares of common stock. Of these shares, the shares we and the selling stockholder are selling in this offering, or shares if the underwriters exercise their over-allotment option in full, will be freely tradeable without restriction under the Securities Act except for any shares purchased by one of our “affiliates” as defined in Rule 144 under the Securities Act. A total of shares, or shares if the underwriters exercise their over-allotment option in full, will be “restricted securities” (within the meaning of Rule 144 under the Securities Act) or subject to lock-up arrangements. In connection with this offering, we, our executive officers and directors and the other holders of our common stock (including the selling stockholder) have agreed that, during the period beginning from the date of this prospectus and continuing to and including the day 180 days after the date of this prospectus, neither we nor any of them will, directly or indirectly, offer, sell, offer to sell, contract to sell or otherwise dispose of any shares of our common stock without the prior written consent of J.P. Morgan Securities Inc., on behalf of the underwriters, except in limited circumstances. See “Underwriting” for a description of these lock-up arrangements. An aggregate of of these shares will become available for resale in the public market as shown in the chart below.



Number of shares		Date of eligibility for resale into public market


		No less than 180 days after the date of this prospectus (in accordance with lock-up agreements with the underwriters).
		Between 181 and 365 days after the date of this prospectus due to the requirements of the federal securities laws.

Sales of a substantial number of shares of our common stock in the public markets following this offering by any of our existing stockholders (or persons to whom our existing stockholders may distribute shares of our common stock), or the perception that such sales might occur, could have a material adverse effect on the price of our common stock or could impair our ability to obtain capital through an offering of equity securities.

As soon as practicable after this offering, we intend to file one or more registration statements with the SEC on Form S-8 providing for the registration of shares of our common stock issued or reserved for issuance under our stock incentive plan. Subject to the exercise of unexercised options or the expiration or waiver of vesting conditions for restricted stock and the expiration of lock-ups we and certain of our stockholders have entered into, shares registered under these registration statements on Form S-8 will be available for resale immediately in the public market without restriction.

You may experience dilution of your ownership interests due to the future issuance of additional shares of our common stock.

We may in the future issue our previously authorized and unissued securities, resulting in the dilution of the ownership interests of our present stockholders and purchasers of common stock offered hereby. We are currently authorized to issue 90 million shares of common stock and 10 million shares of preferred stock with preferences and rights as determined by our board of directors. The potential issuance of such additional shares of common stock may create downward pressure on the trading price of our common stock. We may also issue additional

shares of our common stock or other securities that are convertible into or exercisable for common stock in connection with the hiring of personnel, future acquisitions, future public offerings or private placements of our securities for capital raising purposes, or for other business purposes.

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock may rely in part on the research and reports that equity research analysts publish about us and our business. We do not control the opinions of these analysts. The price of our stock could decline if one or more equity analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

The availability of shares for sale in the future could reduce the market price of our common stock.

In the future, we may issue securities to raise cash for acquisitions. We may also acquire interests in outside companies by using a combination of cash and our common stock or just our common stock. We may also issue securities convertible into our common stock. Any of these events may dilute your ownership interest in our company and have an adverse impact on the price of our common stock.

In addition, sales of a substantial amount of our common stock in the public market, or the perception that these sales may occur, could reduce the market price of our common stock. This could also impair our ability to raise additional capital through the sale of our securities.

Certain provisions of Delaware law, our restated certificate of incorporation and our restated bylaws could hinder, delay or prevent a change in control of our company, which could adversely affect the price of our common stock.

Certain provisions of Delaware law, our restated certificate of incorporation and our restated bylaws have the effect of discouraging, delaying or preventing transactions that involve an actual or threatened change in control of our company. Delaware law imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. In addition, our restated certificate of incorporation and restated bylaws include the following provisions:


•	Written consent of stockholders. Our restated certificate of incorporation and restated bylaws provide that any action required or permitted to be taken by our stockholders must be taken at a duly called meeting of stockholders and not by written consent.

•	Call of special meetings of stockholders. Our restated bylaws provide that special meetings of stockholders may be called at any time only by our board of directors, chairman or Chief Executive Officer and not the stockholders.

•	Classified board of directors. Our board of directors will be divided into three classes with staggered terms of office of three years each. The classification and staggered terms of office of our directors make it more difficult for a third party to gain control of our board of directors. At least two annual meetings of stockholders, instead of one, generally would be required to effect a change in a majority of the board of directors.


•	Removal of directors. Under our restated certificate of incorporation, a director may be removed only for cause and only by the affirmative vote of at least 67% of the voting power of the outstanding shares of our capital stock.

•	Number of directors, board vacancies, term of office. Our restated certificate of incorporation and our restated bylaws provide that only the board of directors may set the number of directors. We have elected to be subject to certain provisions of Delaware law which vest in the board of directors the exclusive right, by the affirmative vote of a majority of the remaining directors, to fill vacancies on the board even if the remaining directors do not constitute a quorum. When effective, these provisions of Delaware law, which are applicable even if other provisions of Delaware law or the charter or bylaws provide to the contrary, also provide that any director elected to fill a vacancy shall hold office for the remainder of the full term of the class of directors in which the vacancy occurred, rather than the next annual meeting of stockholders as would otherwise be the case, and until his or her successor is elected and qualifies.

•	Advance notice provisions for stockholder nominations and proposals . Our restated bylaws require advance written notice for stockholders to nominate persons for election as directors at, or to bring other business before, any meeting of stockholders. This bylaw provision limits the ability of stockholders to make nominations of persons for election as directors or to introduce other proposals unless we are notified in a timely manner prior to the meeting.

•	Amending the bylaws. Our restated certificate of incorporation permits our board of directors to adopt, alter or repeal any provision of the restated bylaws or to make new bylaws. Our restated certificate of incorporation also provides that our restated bylaws may be amended by the affirmative vote of the holders of at least 67% of the voting power of the outstanding shares of our capital stock.

•	Authorized but unissued shares. Under our restated certificate of incorporation, our board of directors has authority to cause the issuance of preferred stock from time to time in one or more series and to establish the terms, preferences and rights of any such series of preferred stock, all without approval of our stockholders. Nothing in our restated certificate of incorporation precludes future issuances without stockholder approval of the authorized but unissued shares of our common stock.

See “Description of capital stock—Anti-takeover effects of provisions of Delaware law, our restated certificate of incorporation and restated bylaws.” Any one or more of these factors could have the effect of delaying or preventing a change in control or the removal of management, and deterring potential acquirers from making an offer to our stockholders, even if that event potentially would be favorable to the interests of our stockholders.

Purchasers of common stock in this offering will experience immediate and substantial dilution of $ per share.

Based on an assumed initial public offering price of $ per share, purchasers of our common stock in this offering will experience an immediate and substantial dilution of $ per share in the as adjusted pro forma net tangible book value per share of common stock from the initial public offering price, and our pro forma as adjusted net tangible book value as of December 31, 2006 after giving effect to this offering would be $ per share. See “Dilution.”

Cautionary statement regarding
forward-looking statements

Various statements in this prospectus, 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 “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 prospectus 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, management’s assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this prospectus 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 listed in the “Risk factors” section and elsewhere in this prospectus. All forward-looking statements speak only as of the date of this prospectus. 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;

•	technology;

•	our financial position;

•	our cash flow and liquidity;

•	declines in the prices we receive for our gas and oil affecting our operating results and cash flow;

•	economic slowdowns that can adversely affect consumption of gas and oil by businesses and consumers;

•	uncertainties in estimating our gas and oil reserves;

•	replacing our gas and oil reserves;

•	uncertainties in exploring for and producing gas and oil;

•	our inability to obtain additional financing necessary to fund our operations and capital expenditures and to meet our other obligations;


•	availability of drilling and production equipment and field service providers;

•	disruptions to, capacity constraints in or other limitations on the pipeline systems which deliver our gas and other processing and transportation considerations;

•	competition in the oil and gas industry;

•	marketing of gas and oil;

•	exploitation or property acquisitions;

•	our inability to retain and attract key personnel;

•	the effects of government regulation and permitting and other legal requirements;

•	costs associated with perfecting title for mineral rights in some of our properties;

•	plans, objectives, expectations and intentions contained in this prospectus that are not historical; and

•	other factors discussed under “Risk factors.”

Use of proceeds

We estimate that the net proceeds to us from the sale of common stock in this offering will be approximately $ million (or $ million if the underwriters exercise their over-allotment option in full), in each case based on an offering price of $ per share, the mid-point of the estimated price range shown on the front cover of this prospectus, and after deducting the underwriting discounts and the estimated offering expenses of $ payable by us. Each dollar increase (decrease) in the per share offering price will increase (decrease) the amount of net proceeds we receive from this offering by $ .

We intend to use the net proceeds of this offering to repay approximately $ million outstanding under our revolving credit facility, to repurchase shares of our common stock held by Neo Canyon Exploration, L.P. at a purchase price of $ million and the remainder for general corporate purposes, including exploration and development activities, gas and oil reserves and leasehold acquisitions in the ordinary course of business and for working capital.

At March 31, 2007, outstanding borrowings under our revolving credit facility totaled approximately $52.2 million with an interest rate of 7.02%. We incurred the debt under our revolving credit facility principally to meet our capital expenditure requirements and other working capital needs. We will have no outstanding borrowings under our revolving credit facility after the closing of this offering, leaving us with approximately $ million available for future borrowings under such revolving credit facility. See “Management’s discussion and analysis of financial condition and results of operations—Credit facility” for a description of our revolving credit facility.

We will not receive any proceeds from the sale of shares of common stock by the selling stockholder.

Dividend policy

We do not expect to pay any cash or other dividends in the foreseeable future on our common stock, as we intend to reinvest cash flow generated by operations in our business. Our revolving credit facility currently restricts our ability to pay cash dividends on our common stock, and we may also enter into credit agreements or other borrowing arrangements in the future that restrict or limit our ability to pay cash dividends on our common stock.

Capitalization

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2007:


•	on an actual historical basis;

•	on a pro forma basis, reflecting the consummation of the transactions described under “Certain relationships and related party transactions—The contribution agreement” and our for common stock split; and

•	on a pro forma as adjusted basis, reflecting the consummation of the transactions described under “Certain relationships and related party transactions—The contribution agreement,” our for common stock split and the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting underwriting discounts and estimated offering expenses payable by us and the application of the estimated net proceeds from this offering as set forth under “Use of proceeds.”



	As of March 31, 2007
					Pro forma
(in thousands)	Actual		Pro forma		as adjusted


Cash and cash equivalents	$	5,374	$		$


Long-term debt	$	52,169	$		$
Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding actual, no shares issued and outstanding pro forma, no shares issued and outstanding pro forma as adjusted		—		—		—
Common stock, $0.01 par value, 90,000,000 shares authorized, 3,002,085 shares issued and outstanding actual, shares issued and outstanding pro forma, shares issued and outstanding pro forma as adjusted		30
Additional paid-in capital		38,883
Retained earnings		30,077


Total stockholders’ equity	$	68,990	$		$


Total capitalization	$	121,159	$		$

Dilution

Purchasers of common stock in this offering will experience immediate and substantial dilution in the net tangible book value per share of the common stock for accounting purposes. Net tangible book value per share is determined by dividing our tangible net worth (tangible assets less total liabilities) by the total number of outstanding shares of common stock. At March 31, 2007, after giving effect to the transactions described under “Certain relationships and related party transactions—The contribution agreement” and our for common stock split, the pro forma net tangible book value per share of our common stock was $ , or $ per share of common stock. After giving effect to the sale of shares of common stock in this offering and assuming the receipt of the estimated net proceeds, after deducting the underwriters’ discounts and estimated offering expenses, our pro forma as adjusted net tangible book value at March 31, 2007 would have been approximately $ , or $ per share. This represents an immediate and substantial increase in the pro forma as adjusted net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors purchasing common stock in this offering, resulting from the difference between the initial public offering price and the pro forma as adjusted net tangible book value after this offering. The following table illustrates the per share dilution to new investors purchasing common stock in this offering:



Assumed initial public offering price per share(1)		$
Adjusted net tangible book value per share at March 31, 2007(2)	$
Increase per share attributable to new public investors(3)	$

As adjusted net tangible book value per share after this offering(3)		$

Dilution in as adjusted net tangible book value per share to new investors		$


(1)		Before deduction of underwriting discounts and estimated offering expenses.

(2)		Net tangible book value is defined as stockholders’ equity less intangible assets.

(3)		Takes in to account underwriting discounts and commissions and estimated offering expenses.

A $1.00 increase (decrease) in the assumed public offering price of $ would increase (decrease) our as adjusted net tangible book value per share after this offering by $ per share and the dilution in net tangible book value to new investors by $ per share, assuming the number of shares offered by us, as set forth on the cover of this preliminary prospectus, remains the same and after deducting estimated underwriting discounts and estimated offering expenses payable by us.

The following table sets forth, on the pro forma as adjusted basis set forth above as of March 31, 2007, the total number of shares of common stock owned by existing stockholders and to be owned by new investors, the total consideration paid and the average price per share paid by our existing stockholders and to be paid by new investors in this offering calculated before deduction of estimated underwriting discounts:

Shares purchased

Total consideration

Average price

Number

Percent

Amount

Percent

per share

Existing stockholders(1)(2)

New investors(3)

Total

100%


(1)		Reflects ownership of shares to be sold by selling stockholder prior to this offering.

(2)		With respect to our executive officers, directors and 10%-or-greater stockholders, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by all of those affiliated persons, are as follows:

Shares purchased

Total consideration

Average price

Number

Percent

Amount

Percent

per share

Affiliated persons


(3)		Excludes shares being sold by the selling stockholder.

If the underwriters’ over-allotment option to purchase additional shares is exercised in full, the number of shares held by new investors will be increased to or approximately of the total number of shares of common stock outstanding immediately following this offering.

The preceding tables exclude shares of common stock subject to options outstanding as of March 31, 2007, which have a weighted average exercise price of $ per share. As of March 31, 2007, options to purchase shares of our common stock were currently exercisable. If these options were exercised at the average exercise price, the additional dilution per share to new investors would be $ .

As of , 2007, there were shares of our common stock outstanding held by stockholders. Sales by the selling stockholder in this offering will reduce the number of shares of common stock held by existing stockholders to or approximately % of the total number of shares of common stock outstanding after this offering and will increase the number of shares of common stock held by new investors by to approximately % of the total number of shares of common stock outstanding after this offering.

Unaudited combined pro forma financial data

The following combined pro forma financial information gives effect to the following transactions:


•	The issuance of 1,413,081 shares of Approach Resources Inc. common stock to Neo Canyon Exploration, L.P. for its 30% working interest in the Ozona Northeast field that Approach does not already own; and

•	The issuance of 329,719 shares of Approach Resources Inc. common stock in exchange for 150,000 shares of Approach Oil & Gas Inc. common stock, representing all of the issued and outstanding shares of Approach Oil & Gas Inc. common stock.

Our operations are currently conducted by two separate operating entities under common control: Approach Resources Inc. and Approach Oil & Gas Inc. Pursuant to a contribution agreement, the operations of Approach Oil & Gas Inc. will be combined under Approach Resources Inc., and we will also acquire the Neo Canyon interest immediately prior to the closing of this offering.

The combined pro forma balance sheet as of March 31, 2007 is based on our unaudited combined balance sheet as of March 31, 2007, appearing elsewhere in this prospectus, and gives effect to the transactions described above as if they occurred on March 31, 2007.

The combined pro forma statement of operations for the three months ended March 31, 2007 is based on our unaudited combined statement of operations for the three months ended March 31, 2007 and the unaudited Historical Summary of Revenues and Direct Operating Expenses of Properties to be Acquired by Approach Resources Inc. for the three months ended March 31, 2007, both of which appear elsewhere in this prospectus, and gives effect to the transactions described above as if they occurred on January 1, 2007.

The combined pro forma statement of operations for the year ended December 31, 2006 is based on our audited combined statement of operations for the year ended December 31, 2006, and the audited Historical Summary of Revenues and Direct Operating Expenses of Properties to be Acquired by Approach Resources Inc. for the year ended December 31, 2006, both of which appear elsewhere in this prospectus, and gives effect to the transactions described above as if they occurred on January 1, 2006.

The unaudited combined pro forma financial statements presented herein have been included as required by the rules of the Securities and Exchange Commission and are provided for comparative purposes only. These unaudited combined pro forma financial statements should be read in conjunction with our historical combined financial statements and related notes for the periods presented.

The unaudited combined pro forma financial statements presented herein are based upon assumptions and include adjustments as explained in the notes to the unaudited combined pro forma financial statements, and the actual recording of the transactions could differ. The unaudited combined pro forma financial statements presented herein are not necessarily indicative of the financial results that would have occurred had the transactions described above occurred on the dates indicated and should not be viewed as indicative of operations in the future. However, management believes that the assumptions used provide a reasonable basis for presenting the significant effects of the transactions discussed above and that the pro forma adjustments give appropriate effect to those assumptions.

Approach Resources Inc.
Unaudited combined pro forma balance sheet
March 31, 2007



	Approach
	Resources Inc.
	combined						Combined
	historical			Pro forma			pro forma
(in thousands)	amounts			adjustments			amounts


Assets
Current assets:
Cash and cash equivalents	$	5,374		$	—		$	5,374
Accounts receivable:
Joint interest owners		2,463			—			2,463
Oil and gas sales		3,461			—			3,461
Prepaid expenses and other current assets		852			—			852


Total current assets		12,150			—			12,150
Property and equipment:
Oil and gas properties, using the successful efforts method of accounting		164,726			69,463	(a)		234,189
Furniture, fixtures and equipment		256			—			256
Less accumulated depreciation, depletion and amortization		(26,859	)		—			(26,859	)


Net property and equipment		138,123			69,463			207,586
Other assets		119			—			119


Total assets	$	150,392		$	69,463		$	219,855


Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	5,065		$	—		$	5,065
Oil and gas payables		5,407			—			5,407
Accrued liabilities		971			—			971
Unrealized loss on commodity derivatives		121			—			121


Total current liabilities		11,564			—			11,564
Non-current liabilities:
Long-term debt		52,169			—			52,169
Deferred income taxes		17,514			—			17,514
Asset retirement obligations		155			63	(a)		218


Total liabilities		81,402			63			81,465
Stockholders’ equity:
Common stock		30			14	(a)
					2	(b)		46
Additional paid-in capital		38,883			69,386	(a)
					(2	)(b)		108,267
Retained earnings		30,077			—			30,077


Total stockholders’ equity		68,990			69,400			138,390


Total liabilities and stockholders’ equity	$	150,392		$	69,463		$	219,855

See accompanying notes.

Approach Resources Inc.
Unaudited combined pro forma statement of operations
Three months ended March 31, 2007



	Approach
	Resources Inc.
	combined			Neo Canyon					Combined
(in thousands, except shares and per share	historical			historical		Pro forma			pro forma
data)	amounts			amounts		adjustments			amounts


Revenues:
Oil and gas sales	$	11,547		$	3,802	$	—		$	15,349
Overhead and services income		133			—		(101	)(c)		32


Total revenues		11,680			3,802		(101	)		15,381
Expenses:
Lease operating		979			437		—			1,416
Severance and production taxes		375			151		—			526
Exploration		623			—		—			623
General and administrative		1,646			—		—			1,646
Accretion of discount on asset retirement obligations		3			—		—			3
Depreciation, depletion and amortization		3,088			—		1,649	(d)		4,737


Total expenses		6,714			588		1,649			8,951


Operating income		4,966			3,214		(1,750	)		6,430
Other income (expense):
Interest expense, net		(956	)		—		—			(956	)
Change in fair value of commodity derivatives		(4,626	)		—		—			(4,626	)


Total other income (expense)		(5,582	)		—		—			(5,582	)


Income (loss) before provision (benefit) for income taxes		(616	)		3,214		(1,750	)		848
Provision (benefit) for income taxes		(35	)		—		508	(e)		473


Net income (loss)	$	(581	)	$	3,214	$	(2,258	)	$	375


Earnings (loss) per share:
Basic	$	(0.19	)						$	0.08

Diluted	$	(0.19	)						$	0.08

Weighted average shares outstanding:
Basic		2,987,411					1,592,800	(g)		4,580,211

Diluted		2,987,411					1,706,030	(h)		4,693,441

See accompanying notes.

Approach Resources Inc.
Unaudited combined pro forma statement of operations
Year ended December 31, 2006



	Approach
	Resources Inc.
	combined			Neo Canyon					Combined
	historical			historical		Pro forma			pro forma
(in thousands, except shares and per share data)	amounts			amounts		adjustments			amounts


Revenues:
Oil and gas sales	$	52,894		$	19,558	$	—		$	72,452
Overhead and services income		514			—		(339	)(c)		175


Total revenues		53,408			19,558		(339	)		72,627
Expenses:
Lease operating		3,889			1,868		—			5,757
Severance and production taxes		1,736			716		—			2,452
Exploration		1,640			—		—			1,640
Impairment of non-producing properties		558			—		—			558
General and administrative		2,930			—		—			2,930
Accretion of discount on asset retirement obligations		10			—		4	(f)		14
Depreciation, depletion and amortization		14,541			—		7,514	(d)		22,055


Total expenses		25,304			2,584		7,518			35,406


Operating income		28,104			16,974		(7,857	)		37,221
Other income (expense):
Interest expense, net		(3,814	)		—		—			(3,814	)
Change in fair value of commodity derivatives		8,668			—		—			8,668


Total other income (expense)		4,854			—		—			4,854


Income before provision for income taxes		32,958			16,974		(7,857	)		42,075
Provision for income taxes		11,756			—		3,373	(e)		15,129


Net income (loss)	$	21,202		$	16,974	$	(11,230	)	$	26,946


Earnings per share:
Basic	$	7.04							$	5.78

Diluted	$	6.84							$	5.67

Weighted average shares outstanding:
Basic		3,012,414					1,650,608	(i)		4,663,022

Diluted		3,101,180					1,650,608	(i)		4,751,788

See accompanying notes.

Approach Resources Inc.
Notes to unaudited combined pro forma
financial statements

The accompanying unaudited combined pro forma balance sheet at March 31, 2007 assumes that the acquisition of the Neo Canyon interest occurred as of March 31, 2007. The unaudited combined pro forma statement of operations for the year ended December 31, 2006 and the three months ended March 31, 2007 assume the acquisition occurred as of January 1, 2006 and January 1, 2007, respectively. The following adjustments have been made to the accompanying pro forma statements:

(a)

To record the acquisition of the Neo Canyon interest for $69.4 million by the issuance of 1,413,081 shares of Approach Resources Inc. common stock at March 31, 2007, and the assumption of related asset retirement obligations at that date. The issuance of 1,413,081 shares of common stock is subject to adjustment based on a potential split of Approach Resources Inc. common stock. The following is a summary of the purchase price and its allocation (in thousands):



Purchase price:
Issuance of 1,413,081 shares of Approach Resources Inc. common stock valued at $49.11 per share	$	69,400
Plus: assumption of asset retirement obligations		63

Total purchase price	$	69,463

Allocation:
Leasehold costs	$	750
Lease and well equipment		18,572
Intangible drilling costs		50,141

Total	$	69,463


(b)	To record the issuance of 329,719 shares of Approach Resources Inc. common stock in exchange for 150,000 shares of Approach Oil & Gas Inc. common stock.

(c)	To eliminate operating overhead recoveries by Approach from Neo Canyon.

(d)	To adjust annual depletion and depreciation expense for the Neo Canyon interest based on the acquisition price valued at $69.5 million. The pro forma adjustment is based on the production and reserve information summarized under Pro Forma Supplementary Financial Information for Oil and Gas Producing Activities (Unaudited) below.

(e)	To record additional provision for income tax related to the acquisition of the Neo Canyon interest based on an effective income tax rate of 34.66%.

(f)	To record additional accretion of discount on asset retirement obligations related to the obligations assumed in the acquisition of the Neo Canyon interest. The pro forma amount for the three months ended March 31, 2007 is inconsequential.


(g)	To adjust the weighted average shares outstanding for the issuance of shares to Neo Canyon in exchange for the interest acquired as well as shares issued to stockholders of Approach Oil & Gas Inc. The pro forma adjustment comprises the following:



Issuance of shares for the acquisition of Neo Canyon interest	1,413,081
Issuance of shares for the Approach Oil & Gas Inc. combination	329,719
Purchase of Approach Oil & Gas Inc. common shares	(150,000	)

Total	1,592,800


(h)	To adjust the weighted average shares outstanding for the items discussed in (f) and to record the dilutive impact of restricted shares and stock options outstanding that would have been anti-dilutive based on Approach Resources Inc. historical amounts. The pro forma adjustment comprises the following:



Issuance of shares for the acquisition of Neo Canyon interest	1,413,081
Issuance of shares for the Approach Oil & Gas Inc. combination	329,719
Purchase of Approach Oil & Gas Inc. common shares	(150,000	)
Dilutive impact of non-vested restricted stock grants	21,250
Dilutive impact of stock options outstanding, treasury method	91,980

Total	1,706,030


(i)	To adjust the weighted average shares outstanding for the issuance of shares to Neo Canyon in exchange for the interest acquired as well as shares issued to stockholders of Approach Oil & Gas Inc. The pro forma adjustment comprises the following:



Issuance of shares for the acquisition of Neo Canyon interest	1,413,081
Issuance of shares for the Approach Oil & Gas Inc. combination	329,719
Purchase of Approach Oil & Gas Inc. common shares (represents the weighted average shares outstanding of Approach Oil & Gas Inc. for the year ended December 31, 2006)	(92,192	)

Total	1,650,608

Pro forma supplementary financial information for oil and gas producing activities (unaudited)

The following tables present certain unaudited pro forma information concerning Approach’s proved oil and gas reserves giving effect to the acquisition of the Neo Canyon interest as if it had occurred on January 1, 2006. There are numerous uncertainties inherent in estimating the quantities of proved reserves and projecting future rates of production and timing of development expenditures. The following reserve data represent estimates only and should not be construed as being exact. The proved oil and gas reserve information for Approach and Neo Canyon is as of December 31, 2006 and reflects prices and costs as of those dates.



	Approach Resources Inc.			Neo Canyon			Combined
	combined historical			historical			pro forma
Reserves—Crude oil & natural gas liquids (MBbls)	amounts			amounts			amounts


Reserves at beginning of period		1,086			467			1,553
Extensions and discoveries		339			61			400
Revisions of previous estimates		(226	)		(105	)		(331	)
Production		(77	)		(32	)		(109	)


Reserves at end of period		1,122			391			1,513


Proved developed producing reserves at end of period		496			170			666



	Approach Resources Inc.			Neo Canyon			Combined
	combined historical			historical			pro forma
Reserves—Natural gas (MMcf):	amounts			amounts			amounts


Reserves at beginning of period		102,405			42,899			145,304
Extensions and discoveries		15,655			6,421			22,076
Revisions of previous estimates		(13,121	)		(5,526	)		(18,647	)
Production		(6,282	)		(2,645	)		(8,927	)


Reserves at end of period		98,657			41,149			139,806


Proved developed producing reserves at end of period		51,004			21,400			72,404

Standardized measure of discounted future cash flows (in thousands):



	Approach Resources Inc.			Neo Canyon			Combined
	combined historical			historical			pro forma
	amounts			amounts			amounts


Future cash inflows	$	709,184		$	292,399		$	1,001,583
Future production costs		(198,023	)		(81,784	)		(279,807	)
Future development costs		(108,451	)		(45,957	)		(154,408	)
Future income taxes		(109,784	)		(1,647	)		(111,431	)


Future net cash flows		292,926			163,011			455,937
10% annual discount		(215,049	)		(112,306	)		(327,355	)


Standardized measure of discounted future net cash flows	$	77,877		$	50,705		$	128,582

Changes in standardized measure of discounted future cash flows (in thousands):



	Approach Resources Inc.			Neo Canyon			Combined
	combined historical			historical			pro forma
	amounts			amounts			amounts


Balance at beginning of period	$	146,439		$	109,078		$	255,517
Net changes in prices and production costs		(106,246	)		(56,734	)		(162,980	)
Net changes in future development costs		(43,229	)		(9,707	)		(52,936	)
Sales of oil and gas produced, net		(40,852	)		(16,974	)		(57,826	)
Net change due to extensions, discoveries and improved recovery techniques		28,418			10,265			38,683
Revisions of previous quantity estimates		(22,112	)		(9,314	)		(31,426	)
Previously estimated development costs incurred		52,108			22,332			74,440
Net change in income taxes		52,303			(726	)		51,577
Accretion of discount		15,546			6,136			21,682
Other		(4,498	)		(3,651	)		(8,149	)


Balance at end of period	$	77,877		$	50,705		$	128,582

Selected historical combined financial data

The following table sets forth our selected historical combined financial data as of the dates and for the periods shown. Our operations are currently conducted in two separate entities under common control, Approach Resources Inc. and Approach Oil & Gas Inc. Pursuant to a contribution agreement, the operations of Approach Oil & Gas Inc. will be combined under Approach Resources Inc., and we will also acquire the Neo Canyon interest immediately prior to the closing of this offering. The historical financial data for the year ended December 31, 2002 has been derived from our unaudited financial statements, which are not included in this prospectus. The historical financial data for the year ended December 31, 2003 have been derived from our audited financial statements, which are not included in this prospectus. The historical combined financial data for the years ended December 31, 2004, 2005 and 2006 and for the three months ended March 31, 2006 and 2007 have been derived from the combined financial statements of Approach Resources Inc. and Approach Oil & Gas Inc. included in this prospectus. The following information should be read in conjunction with “Capitalization,” “Management’s discussion and analysis of financial condition and results of operations” and the historical combined and combined pro forma financial statements included in this prospectus.



	September 13,															Three months
	2002 to			Year ended December 31,												ended March 31,
	December 31,						2004			2005			2006			2006			2007
	2002			2003			combined			combined			combined			combined			combined
(in thousands, except per share data)	historical			historical			historical			historical			historical			historical			historical

	(unaudited)															(unaudited)			(unaudited)

Statement of operations data
Revenues:
Oil and gas sales	$	—		$	—		$	5,682		$	40,339		$	52,894		$	15,680		$	11,547
Overhead and services income		133			—			131			408			514			122			133


Total revenues		133			—			5,813			40,747			53,408			15,802			11,680
Expenses:
Lease operating expense		—			—			179			2,910			3,889			973			979
Severance and production taxes		—			—			407			1,975			1,736			380			375
Exploration		—			442			2,396			733			1,640			196			623
Impairment of non-producing properties		—			—			—			—			558			—			—
General and administrative		539			1,535			2,074			3,067			2,930			750			1,646
Accretion of discount on asset retirement obligations		—			—			1			5			10			—			3
Depletion, depreciation and amortization		2			9			1,223			8,006			14,541			3,281			3,088


Total expenses		541			1,986			6,280			16,696			25,304			5,580			6,714


Operating income (loss)		(408	)		(1,986	)		(467	)		24,051			28,104			10,222			4,966
Other:
Interest income (expense), net		(1	)		59			201			(802	)		(3,814	)		(725	)		(956	)
Change in fair value of commodity derivatives		—			—			—			(4,163	)		8,668			6,192			(4,626	)


Income (loss) before provision for income taxes		(409	)		(1,927	)		(266	)		19,086			32,958			15,689			(616	)
Provision (benefit) for income taxes		—			—			—			7,028			11,756			5,280			(35	)


Net income (loss)	$	(409	)	$	(1,927	)	$	(266	)	$	12,058		$	21,202		$	10,409		$	(581	)


Earnings (loss) per share:
Basic	$	—		$	(3.44	)	$	(0.14	)	$	4.03		$	7.04		$	3.49		$	(0.19	)


Diluted	$	—		$	(3.44	)	$	(0.14	)	$	4.03		$	6.84		$	3.39		$	(0.19	)



Statement of cash flows data
Net cash provided (used) by:
Operating activities	$	(258	)	$	(2,391	)	$	4,527		$	40,304		$	34,110		$	12,616		$	5,687
Investing activities		(3	)		(15	)		(26,859	)		(71,939	)		(59,189	)		(24,578	)		(9,717	)
Financing activities		282			4,898			22,474			32,199			26,771			9,918			4,493
Other financial data
EBITDAX(1)		(406	)		(1,535	)		3,152			32,791			44,877			13,699			8,677
Capital expenditures		3			15			25,313			73,485			59,189			24,578			9,717


(1)		See “—Reconciliation of non-GAAP financial measures” below for additional information.



	As of December 31,											As of March 31,
						2004		2005		2006		2006		2007
	2002			2003		combined		combined		combined		combined		combined
(in thousands)	historical			historical		historical		historical		historical		historical		historical

	(unaudited)											(unaudited)		(unaudited)

Balance sheet data
Cash	$	21		$	2,513	$	2,656	$	3,219	$	4,911	$	1,175	$	5,374
Other current assets		—			410		6,458		16,305		13,200		16,660		6,776
Property and equipment, net, successful efforts method		92			35		24,223		88,803		132,112		109,904		138,123
Other assets		29			—		1,565		89		86		101		119


Total assets	$	142		$	2,958	$	34,902	$	108,416	$	150,309	$	127,840	$	150,392


Current liabilities	$	499		$	86	$	9,827	$	32,746	$	15,421	$	26,811	$	11,564
Long-term debt		—			—		100		29,425		47,619		40,660		52,169
Other long-term liabilities		—			—		99		6,555		17,697		11,562		17,669
Stockholders’ equity (deficit)		(357	)		2,872		24,876		39,690		69,572		48,807		68,990


Total liabilities and stockholders’ equity	$	142		$	2,958	$	34,902	$	108,416	$	150,309	$	127,840	$	150,392

Reconciliation of non-GAAP financial measures

The following table shows our reconciliation of our PV-10 to our standardized measure of discounted future net cash flows (the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles, or GAAP). PV-10 is our estimate of the present value of future net revenues from estimated proved gas reserves after deducting estimated production and ad valorem taxes, future capital costs and operating expenses, but before deducting any estimates of future income taxes. The estimated future net revenues are discounted at an annual rate of 10% to determine their “present value.” We believe PV-10 to be an important measure for evaluating the relative significance of our gas and oil properties and that the presentation of the non-GAAP financial measure of PV-10 provides useful information to investors because it is widely used by professional analysts and sophisticated investors in evaluating gas and oil companies. Because there are many unique factors that can impact an individual company when estimating the amount of future income taxes to be paid, we believe the use of a pre-tax measure is valuable for evaluating our company. We believe that most other companies in the oil and gas industry calculate PV-10 on the same basis.

PV-10 should not be considered as an alternative to the standardized measure of discounted future net cash flows as computed under GAAP.



	As of
	December 31,
(in thousands)	2006


PV-10	$	179,865
Less: Undiscounted income taxes		(111,431	)
Plus: 10% discount factor		60,148

Discounted income taxes		(51,283	)

Standardized measure of discounted future net cash flows	$	128,582

The following table reconciles our net income to EBITDAX. EBITDAX is defined as net income or loss excluding income tax, non-cash compensation, changes in fair value of commodity derivatives, exploration and other impairment costs, depreciation, depletion and amortization and interest expense. Although EBITDAX is not calculated in accordance with GAAP, management believes that it is a widely accepted financial indicator that provides additional information about our profitability, ability to meet our future requirements for debt service, capital expenditures and working capital. EBITDAX should not be considered in isolation or as a substitute for net income, operating income, net cash provided by operating activities or any other measure of financial performance presented in accordance with GAAP.

While we have disclosed our EBITDAX to permit a more complete comparative analysis of our operating performance and debt servicing ability relative to other companies, investors should be cautioned that EBITDAX as reported by us may not be comparable in all instances to EBITDAX as reported by other companies. In addition, EBITDAX amounts may not be fully available for management’s discretionary use, due to the requirements to conserve funds for capital expenditures, debt service or other commitments.



	September 13,														Three months						Pro forma
	2002 to			Year ended December 31,											ended March 31,									Three months
	December 31,						2004			2005		2006			2006			2007			Year ended			ended
	2002			2003			combined			combined		combined			combined			combined			December 31,			March 31,
(in thousands)	historical			historical			historical			historical		historical			historical			historical			2006			2007

	(unaudited)														(unaudited)			(unaudited)			(unaudited)			(unaudited)

Net income (loss)	$	(409	)	$	(1,927	)	$	(266	)	$	12,058	$	21,202		$	10,409		$	(581	)	$	26,946		$	375
Income taxes		—			—			—			7,028		11,756			5,280			(35	)		15,129			473
Non-cash compensation		—			—			—			—		34			—			—			34			—
Change in fair value of commodity derivatives		—			—			—			4,163		(8,668	)		(6,192	)		4,626			(8,668	)		4,626
Exploration and impairment costs		—			442			2,396			734		2,198			196			623			2,198			623
Depreciation, depletion and amortization		2			9			1,223			8,006		14,541			3,281			3,088			22,055			4,737
Interest expense (income)		1			(59	)		(201	)		802		3,814			725			956			3,814			956


EBITDAX	$	(406	)	$	(1,535	)	$	3,152		$	32,791	$	44,877		$	13,699		$	8,677		$	61,508		$	11,790

Management’s 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. Our combined financial statements and the accompanying notes included elsewhere in this prospectus contain additional information that should be referred to when reviewing this material. 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.

Overview

We are an independent energy company engaged in the exploration, development, exploitation, production and acquisition of unconventional oil and gas properties onshore in the United States. We are focusing our growth efforts primarily on finding and developing natural gas reserves in known tight gas sands and shale areas and have assembled leasehold interests aggregating approximately 231,000 gross (177,000 net) acres. We expect to leverage our management team’s proven track record of finding and exploiting unconventional reservoirs through application of advanced completion, fracturing and drilling techniques. As the operator of substantially all of our proved reserves, we have a high degree of control over capital expenditures and other operating matters.

We currently operate in three areas: West Texas (Wolfcamp, Canyon Sands and Ellenburger), Western Kentucky (New Albany Shale) and Northern New Mexico (Mancos Shale). As of December 31, 2006, all of our proved reserves and production were located in our West Texas operating area and substantially all of those reserves and production were located in the Ozona Northeast field.

Our financial results depend upon 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 have led to higher demand for drilling rigs, operating personnel and field supplies and services and have caused increases in the costs of those goods and services. To date, the higher sales prices have more than offset the higher drilling and operating costs. Given the inherent volatility of gas prices, which are influenced by many factors beyond our control, we plan our activities and budget based on conservative sales price assumptions, which generally are lower than the average sales prices received. We focus our efforts on increasing 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.

Like all oil and gas production companies, we face the challenge of natural production declines. Oil and gas production from a given well naturally decreases over time. Additionally, our

reserves have a rapid initial decline. We attempt to overcome this natural decline by drilling to develop and identify additional reserves 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 will 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. We plan to use the proceeds of this offering to repay the $ million of outstanding borrowings under our revolving credit facility plus accrued interest. At that point, we believe we will have adequate unused borrowing capacity under our revolving credit facility for possible acquisitions, temporary working capital needs and any expansion of our drilling program. Funding for future acquisitions also may require additional sources of financing, which may not be available.

Our operations are currently conducted in two separate entities under common control, Approach Resources Inc. and Approach Oil & Gas Inc. Pursuant to a contribution agreement, the operations of these two entities will be combined under Approach Resources Inc., and we will also acquire the Neo Canyon interest immediately before the closing of this offering.

Critical accounting policies and estimates

The discussion and analysis of our financial condition and results of operations are based upon our combined financial statements, which have been prepared in accordance with accounting policies generally accepted in the United States. The preparation of our combined financial statements requires us to make estimates and assumptions that affect our reported results of operations and the amount of reported assets, liabilities and proved oil and gas reserves. Some accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. Actual results may differ from the estimates and assumptions used in the preparation of our combined financial statements. Described below are the most significant policies we apply in preparing our combined financial statements, some of which are subject to alternative treatments under GAAP. We also describe the most significant estimates and assumptions we make in applying these policies. See notes to the financial statements under the heading “Summary of significant accounting policies” for additional accounting policies and estimates by management.

Oil and gas activities

Accounting for oil and gas activities is subject to special, unique rules. We use the successful efforts method for accounting for our oil and gas activities. The significant principles for this method are:


•	geological and geophysical evaluation costs are expensed as incurred;

•	dry holes for exploratory wells are expensed, and dry holes for developmental wells are capitalized; and

•	impairments of properties, if any, are based on the evaluation of the carrying value of properties against their fair value based upon pools of properties grouped by geographical and geological conformity.

Our engineering estimates of proved oil and gas reserves directly impact financial accounting estimates including depletion, depreciation and amortization expense, evaluation of impairment of properties and the calculation of plugging and abandonment liabilities. Proved oil and gas reserves are the estimated quantities of oil and gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under period-end economic and operating conditions. The process of estimating quantities of proved reserves is very complex, requiring significant subjective decisions in the evaluation of all geological, engineering and economic data for each reservoir. The data for any reservoir may change substantially over time as a result of changing results from operational activity and results. Changes in commodity prices, operation costs and techniques may also affect the overall evaluation of reservoirs. A hypothetical 10% decline in our December 31, 2006 proved reserves volumes would have resulted in approximately $1.4 million of additional depletion expense for the year ended December 31, 2006.

Our estimated proved reserves as of December 31, 2006 were prepared by DeGolyer and MacNaughton.

Derivative instruments and hedging activities

All derivative instruments are recorded on the balance sheet at fair value. Changes in the derivative’s fair value are currently recognized in the statement of operations unless specific hedge accounting criteria are met. For qualifying cash-flow hedges, the gain or loss on the derivative is deferred in accumulated other comprehensive income (loss) to the extent the hedge is effective. The ineffective portion of the hedge is recognized immediately in the statement of operations. Gains and losses on hedging instruments included in cumulative other comprehensive income (loss) are reclassified to oil and gas sales revenue in the period that the related production is delivered. Derivative contracts that do not qualify for hedge accounting treatment are recorded as derivative assets and liabilities at fair value in the balance sheet, and the associated unrealized gains and losses are recorded as current income or expense in the statement of operations.

Historically, we have not designated our derivative instruments as cash-flow hedges. We record our open derivative instruments at fair value on our combined balance sheets as either unrealized gains or losses on commodity derivatives. We record changes in such fair value in earnings on our combined statements of operations under the caption entitled “change in fair value of commodity derivatives.”

Although we have not designated our derivative instruments as cash-flow hedges, we use those instruments to reduce our exposure to fluctuations in commodity prices related to our oil and gas production. Accordingly, we record realized gains and losses under those instruments in oil and gas sales revenues on our combined statements of operations. For the years ended December 31, 2005 and 2006, we recognized an unrealized loss of $4,163,098 and an unrealized gain of $8,668,095 from changes in the fair values of commodity derivatives, respectively. A 10% increase in the NYMEX floating prices would have resulted in a $2.0 million decrease in the December 31, 2006 fair value recorded on our balance sheet, and a corresponding increase to loss on commodity derivatives in our statement of operations.

Recent accounting pronouncements

On December 16, 2004, the Financial Accounting Standards Board, or FASB, published Statement of Financial Accounting Standards No. 123 (Revised 2004), Share Based Payment , or SFAS 123(R). SFAS 123(R) requires compensation cost related to share based payment transactions to be recognized in the financial statements. Share based payment transactions within the scope of SFAS 123(R) include stock options, restricted stock plans, performance based awards, stock appreciation rights and employee share purchase plans. The provisions of SFAS 123(R) were effective for us as of the first annual reporting period beginning after December 15, 2005. Accordingly, we implemented the revised standard on January 1, 2006.

In March 2005, FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations , or FIN 47. FIN 47 clarifies the definition and treatment of conditional asset retirement obligations as discussed in FASB Statement No. 143, Accounting for Asset Retirement Obligations . A conditional asset retirement obligation is defined as an asset retirement activity in which the timing and/or method of settlement are dependent on future events that may be outside our control. FIN 47 states that we must record a liability when incurred for conditional asset retirement obligations if the fair value of the obligation is reasonably estimable. This interpretation is intended to provide more information about long-lived assets, future cash outflows for these obligations and more consistent recognition of these liabilities. FIN 47 is effective for fiscal years ending after December 15, 2005. We do not believe that our financial position, results of operations or cash flows will be impacted by FIN 47.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 , or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We adopted FIN 48 on January 1, 2007 and it did not have a material impact on our financial statements.

In September 2006, the FASB issued FAS No. 157, Fair Value Measurements , or FAS 157. FAS 157 defines fair value to measure assets and liabilities, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value. FAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. FAS 157 does not expand or require any new fair value measures. FAS 157 is effective for our fiscal year beginning January 1, 2008. We are currently evaluating the impact that the adoption of FAS 157 will have on our financial position or results of operations.

Effects of inflation

Inflation in the United States has been relatively low in recent years and did not have a material impact on our results of operations for the years ended December 31, 2004, 2005 or 2006. Although the impact of inflation has been insignificant in recent years, it is still a factor in the United States economy and may increase the cost to acquire or replace property, plant and equipment. It may also increase the cost of labor or supplies. To the extent permitted by competition, regulation and our existing agreements, we have and will continue to pass along increased costs to our customers in the form of higher prices.

Stock based and other compensation

Our 2007 Stock Incentive Plan allows grants of stock and options to management and key employees. Granting of awards may increase our general and administrative expenses subject to the size and timing of the grants.

Public company expenses

We believe that our general and administrative expenses will increase in connection with the completion of this offering as a result of us operating as a public company. This increase will consist of legal and accounting fees and additional expenses associated with compliance with the Sarbanes Oxley Act of 2002 and other regulations. We anticipate that our ongoing general and administrative expenses also will increase as a result of being a publicly traded company. This increase will be due primarily to the cost of accounting support services, filing annual and quarterly reports with the SEC, investor relations, directors’ fees, directors’ and officers’ insurance and registrar and transfer agent fees. As a result, we believe that our general and administrative expenses for future periods will increase significantly. Our consolidated financial statements following the completion of this offering will reflect the impact of these increased expenses and affect the comparability of our financial statements with periods before the completion of this offering.

Results of operations

Three months ended March 31, 2006 and 2007



	Three months ended
	March 31,
	2006		2007


Net production (MMcfe)		1,837		1,357
Average sales prices (per Mcfe) (before hedging)	$	7.76	$	6.92
Costs and expenses (in thousands):
Lease operating expenses	$	973	$	980
Production taxes		380		375
Depreciation, depletion and amortization		3,281		3,088
General and administrative		750		1,646

Oil and gas sales. Oil and gas sales decreased $4.1 million, or 26.4%, for the three months ended March 31, 2007 to $11.6 million from $15.7 million for the three months ended March 31, 2006. The decrease in gas sales principally resulted from the natural decline in production of our tight gas sands in the Northeast Ozona field. Further, we had four rigs drilling in the second half of 2005 and the first half of 2006, which dramatically increased production in the first quarter of 2006 from new wells placed in production compared to the use of only one rig in the latter part of 2006 and early 2007. Additionally, the average price for gas including the effects of hedging increased slightly by $0.11 per Mcfe, or 1.3%, from $8.40 per Mcfe for the three months ended March 31, 2006 to $8.51 per Mcfe for the three months ended March 31, 2007, which partially offset the production decline. Gas sales represented 87.9% of the total oil and

gas sales for the three months ended March 31, 2007 compared to 90.1% for the three months ended March 31, 2006.

Commodity derivative activities. Realized gains from our commodity derivative activity increased our revenues $2.2 million for the three months ended March 31, 2007. In comparison, our commodity derivative activity increased our revenues $1.4 million for the three months ended March 31, 2006. The increase resulted from the relative movement of the NYMEX gas prices in relation to the fixed notional pricing for the respective time periods.

Overhead and services income. Overhead and services income for the three months ended March 31, 2007 increased $11,000, or 9.5%, to $133,000 from $122,000 for the three months ended March 31, 2006. This increase resulted from our continued development of the Ozona Northeast field.

Lease operating expense. Our lease operating expenses increased $7,000, or 0.7%, for the three months ended March 31, 2007 to $980,000 ($0.72 per Mcfe) from $973,000 ($0.53 per Mcfe) for the three months ended March 31, 2006. The primary factor in the slight increase in lease operating expense was an increase of approximately $100,000 in our estimated ad valorem taxes in the 2007 period, which partially was offset by the release later in 2006 of one of our seven rented compressors and an amine unit.

Severance and production taxes. Our production taxes decreased $5,000, or 1.3%, for the three months ended March 31, 2007 to $375,000 from $380,000 for the three months ended March 31, 2006. The decrease in production taxes was a function of the reduced oil and gas sales in 2007, offset partly by the timing of severance tax refunds in the 2006 period.

Depreciation, depletion and amortization (DD&A). Our DD&A expense decreased $200,000, or 5.9%, to $3.1 million for the three months ended March 31, 2007 from $3.3 million for the three months ended March 31, 2006. Our DD&A expense per Mcfe produced increased by $0.47, or 26.3%, to $2.26 per Mcfe for the three months ended March 31, 2007, as compared to $1.79 per Mcfe for the three months ended March 31, 2006. This increase was primarily attributable to our drilling of mostly proved undeveloped locations in the 2007 period, which were previously recorded in our prior year’s reserves, which had the effect of increasing production but did not increase reserves to the same degree.

Exploration. Our dry hole costs associated with exploratory drilling increased $427,000 to $623,000 for the three months ended March 31, 2007 from $196,000 for the three months ended March 31, 2006. The 2007 dry hole costs resulted from a mechanical failure in the drilling of a test well in our Boomerang prospect.

General and administrative. Our general and administrative expenses increased $895,000, or 119.3%, to $1.6 million for the three months ended March 31, 2007 from $750,000 for the three months ended March 31, 2006. The increase in general and administrative expense was principally due to bonus payments made in the first quarter of 2007 to cover tax liabilities incurred by management in connection with the repayment of management notes in January 2007. See “Certain relationships and related party transactions—Other related party transactions.”

Interest income (expense), net. Our interest expense increased $231,000, or 31.8%, to $956,000 for the three months ended March 31, 2007 from $725,000 for the three months ended March 31, 2006. This increase was a function of increased borrowings in 2006 to fund our development of the Ozona Northeast field and higher interest rates.

Income taxes. Our provision (benefit) for income taxes decreased $5.3 million, or 100.7%, to a benefit of $35,000 for the three months ended March 31, 2007, from a provision of $5.3 million for the three months ended March 31, 2006. The decrease in income tax expense is consistent with the decrease in our income before income taxes. Our effective income tax rate for the three months ended March 31, 2006 amounted to 33.7% compared with 5.7% for the three months ended March 31, 2007. The decrease in the effective rate results primarily from changes in the valuation allowance provided against net operating loss carryovers for Approach Oil & Gas Inc. We do not recognize a tax benefit for the net operating loss carryovers of Approach Oil & Gas Inc. based on our assessment of the likelihood of Approach Oil & Gas Inc. being able to utilize those carryovers to reduce future taxable income. Subsequent to the combination of Approach Oil & Gas Inc. and Approach Resources Inc., we believe that the net operating loss carryovers of Approach Oil & Gas Inc. will be available to offset our future taxable income, subject to certain limits.

Years ended December 31, 2005 and 2006



	Year ended December 31,
	2005		2006


Net production (MMcfe)		5,012		6,744
Average sales prices (per Mcfe) (before hedging)	$	8.63	$	6.92
Costs and expenses (in thousands):
Lease operating expenses	$	2,910	$	3,889
Production taxes		1,975		1,736
Depreciation, depletion and amortization		8,006		14,541
General and administrative		3,067		2,930

Oil and gas sales. Oil and gas sales increased $12.6 million, or 31.1%, for the year ended December 31, 2006 to $52.9 million from $40.3 million for the year ended December 31, 2005. The increase in sales principally resulted from a 34.6% increase in production, as we drilled and completed 81 gross (53.5 net) wells in 2006. Additionally, the average price for gas before the effect of hedging decreased $1.71 per Mcfe, or 19.8%, from $8.63 per Mcfe in 2005 to $6.92 per Mcfe in 2006 as the 2005 period included the effects of the spike in gas prices after Hurricane Katrina and Hurricane Rita. Gas sales represented 89.7% of the total oil and gas sales in 2006 compared to 92.7% in 2005.

Commodity derivative activities. Realized gains from our commodity derivative activity increased our revenues $6.2 million for the year ended December 31, 2006. In comparison, realized losses from our commodity derivative activity decreased our revenues $2.9 million for the year ended December 31, 2005. During the years ended December 31, 2005 and 2006, we used gas swaps to mitigate commodity price risk. During 2005, commodity prices tended to be higher than the notional prices specified in our swap agreements, which resulted in a loss to us. In contrast, during 2006, commodity prices tended to be lower than the prices specified in our swap agreements, which resulted in a gain to us.

Overhead and services income. Overhead and services income increased $106,000, or 26.0%, for the year ended December 31, 2006 to $514,000 from $408,000 for the year ended December 31, 2005. This increase resulted from the addition of wells from our drilling program.

Lease operating expense. Our lease operating expenses increased $1.0 million, or 33.7%, for the year ended December 31, 2006 to $3.9 million from $2.9 million for the year ended December 31, 2005. This increase primarily was the result of a $765,000 increase in ad valorem taxes and from increased pumper costs of $200,000 from the continued development of the Ozona Northeast properties.

Severance and production taxes. Our production taxes decreased $239,000, or 12.1%, for the year ended December 31, 2006 to $1.7 million from $2.0 million for the year ended December 31, 2005. The decrease in production taxes is a function of increased oil and gas revenues that were more than offset by refunds received applicable to prior years.

Depreciation, depletion and amortization (DD&A). Our DD&A expense increased $6.5 million, or 81.6%, to $14.5 million for the year ended December 31, 2006 from $8.0 million for the year ended December 31, 2005. Our DD&A expense per Mcfe produced increased by $0.56, or 35.0%, to $2.16 per Mcfe for the year ended December 31, 2006, as compared to $1.60 per Mcfe for the year ended December 31, 2005. This increase was primarily attributable to increased production and increased oil and gas property costs in 2006.

Exploration. Our dry hole costs associated with exploratory drilling increased $907,000 to $1.6 million for the year ended December 31, 2006 from $700,000 for the year ended December 31, 2005. We had nominal charges for geological evaluation costs.

General and administrative. Our general and administrative expenses decreased $137,000, or 4.5%, to $2.9 million for the year ended December 31, 2006 from $3.1 million for the year ended December 31, 2005. The decrease in general and administrative expense was principally due to the accrual in 2005 of bonuses totaling approximately $800,000 that did not recur in 2006, offset by increases in 2006 for professional fees, the number of employees and increases in their compensation and benefits.

Interest income (expense), net. Our interest expense increased $3.0 million, or 375%, to $3.8 million for the year ended December 31, 2006 from $802,000 for the year ended December 31, 2005. This significant increase was a function of increased borrowings under our revolving credit facility and an increase in interest rates during 2006.

Income taxes. Income taxes increased $4.8 million, or 67.3%, to $11.8 million for the year ended December 31, 2006 from $7.0 million for the year ended December 31, 2005. Income taxes increased consistent with our income before tax, offset by a decrease in our effective tax rates, which amounted to 36.8% and 35.7% for the years ended December 31, 2005 and 2006, respectively. Our effective tax rate decreased due primarily to a change in the tax law in the State of Texas which changed the tax from 4.5% of net income to 1% of our “margin,” as defined in the new law. Based on this change in the Texas tax law, we reduced our deferred tax liability by approximately $1.1 million for the year ended December 31, 2006.

Years ended December 31, 2004 and 2005



	Year ended December 31,
	2004		2005


Net production (MMcfe)		908		5,012
Average sales prices (per Mcfe) (before hedging)	$	6.26	$	8.63
Costs and expenses (in thousands):
Lease operating expenses	$	179	$	2,910
Production taxes		406		1,975
Depreciation, depletion and amortization		1,223		8,006
General and administrative		2,074		3,067

Oil and gas sales. Oil and gas sales increased $34.6 million to $40.3 million for the year ended December 31, 2005 from $5.7 million for the year ended December 31, 2004. This increase in oil and gas sales principally resulted from the substantial increase in gas prices in the aftermath of Hurricane Katrina and Hurricane Rita in the third quarter of 2005 and our increased drilling activities in 2005. We drilled 113 and completed 110 successful wells during the year ended December 31, 2005 in the Ozona Northeast field in West Texas. In addition, our first few wells in the Ozona Northeast field were not completed and producing until May 2004 and, therefore, the full year of production from these wells in 2005 further contributed to the increase in gas and oil production from 2004 to 2005.

Commodity derivative activities. We had no commodity derivatives in place prior to 2005. Realized losses from our commodity derivative activity decreased our revenues $2.9 million for the year ended December 31, 2005. During the year ended December 31, 2005, we used gas swaps to mitigate commodity price risk. During 2005, commodity prices tended to be higher than the notional prices specified in our swap agreements, which resulted in a loss to us.

Overhead and services income. Overhead and services income increased $278,000 to $408,000 for the year ended December 31, 2005 from $130,000 for the year ended December 31, 2004. This increase was a result of the addition of wells from our drilling program.

Lease operating expense. Lease operating expense increased $2.7 million to $2.9 million for the year ended December 31, 2005 from $179,000 for the year ended December 31, 2004. This increase was primarily attributable to our increased compression facility costs to handle the increase in gas produced.

Severance and production taxes. Our production taxes increased $1.6 million to $2.0 million for the year ended December 31, 2005 from $406,000 for the year ended December 31, 2004. This increase was a function of increased production and increased pricing.

Depreciation, depletion and amortization (DD&A). Our DD&A expense increased $6.8 million to $8.0 million for the year ended December 31, 2005 from $1.2 million for the year ended December 31, 2004. Our DD&A expense per Mcfe produced increased by $0.25, or 18.5%, to $1.60 per Mcfe for the year ended December 31, 2005, as compared to $1.35 per Mcfe for the year ended December 31, 2004. This increase was primarily attributable to increased production and oil and gas property costs in 2005.

General and administrative. Our general and administrative expenses increased $1.0 million, or 47.9%, to $3.1 million for the year ended December 31, 2005 from $2.1 million for the year ended December 31, 2004. This increase was largely due to the accrual of $800,000 for bonuses in 2005.

Interest expense. Our interest expense, net of interest income, increased $1.0 million to $802,000 for the year ended December 31, 2005 from interest income of $201,000 for the year ended December 31, 2004. This increase was primarily attributable to the increase in the average amount borrowed under our revolving credit facility as a result of increased costs from our drilling program.

Income taxes. Our income tax expense increased for the year ended December 31, 2005 compared to 2004 as net income increased from 2004 to 2005. We recorded an accrual of $580,000 as an estimate of the current taxes due for 2005. Additionally, we recorded a deferred tax provision of $6.4 million in 2005 largely due to the difference in depletion, depreciation and capitalization methods for oil and gas properties. No taxes were accrued for 2004 as we utilized net operating loss carryforwards to offset any potential liability.

Liquidity and capital resources

For the three months ended March 31, 2007, the majority of our cash was generated from operating and financing activities. We used $4.5 million of proceeds from borrowings and cash flow from operations of $5.7 million to fund $9.7 million of capital expenditures related to our drilling program activities. During the same three months in 2006, we used $12.6 million of cash flow from operations and $11.2 million of proceeds from borrowings under our revolving credit facility and available cash to fund $24.6 million for our drilling program and $1.3 million to repurchase shares and options.

Our primary sources of cash in 2006 were from financing and operating activities. Approximately $18.2 million from borrowings under our revolving credit facility, $6.5 million from the issuance of common stock, $3.5 million from a loan from one of our stockholders and cash from operations were used to fund our drilling program and the acquisition of another working interest in the Ozona Northeast field.

For the year ended December 31, 2005, cash flow from operations of $40.3 million, borrowings under our revolving credit facility of $29.3 million and $3.0 million from the issuance of common stock provided the funds to drill additional wells in the Ozona Northeast field.

For the year ended December 31, 2004, operating cash flow of $4.5 million combined with $22.4 million from the issuance of common stock funded our initial drilling activities in the Ozona Northeast field.

Our cash flow from operations is driven by commodity prices and production volumes. Prices for oil and gas are driven 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 decrease our exploration and development expenditures. Cash flows from operations were primarily used to fund exploration and development of our mineral interests. Our cash flows from operations increased dramatically between 2004 and 2005 as we developed the Ozona Northeast field. In comparing

2005 and 2006, our cash flows from operations declined slightly due to a $6.2 million decrease in working capital components partially offset by the increase in oil and gas sales in 2006.

The following table summarizes our sources and uses of funds for the periods noted:



										Three months ended
	Year ended December 31,									March 31,
(in thousands)	2004			2005			2006			2006			2007


Cash flows provided by operating activities	$	4,527		$	40,304		$	34,110		$	12,616		$	5,687
Cash flows used in investing activities		(26,859	)		(71,939	)		(59,189	)		(24,578	)		(9,717	)
Cash flows provided by financing activities		22,474			32,199			26,771			9,918			4,493


Net increase (decrease) in cash and cash equivalents	$	142		$	564		$	1,692		$	(2,044	)	$	463

Operating activities

For the three months ended March 31, 2007, our cash flow from operations was used for drilling activities. The $5.7 million in cash flow generated in the first three months of 2007 decreased $6.9 million from the first three months of 2006 due mostly to lower oil and gas sales and higher general and administrative expenses in the 2007 period.

Net cash provided by operating activities increased from $4.5 million in 2004 to $40.3 million in 2005 and to $34.1 million in 2006. The increase in 2005 resulted from increased sales volumes from our successful drilling activities and increased commodity prices. In comparing 2005 and 2006, our cash flows from operations declined in part due to a $6.2 million decrease in working capital components partially offset by the increase in oil and gas sales and net income in 2006 from our continued development of the Ozona Northeast field in West Texas.

Investing activities

Of the cash flows used in investing activities in the first three months of 2007, $4.8 million was for the continued development of the Ozona Northeast field, $1.8 million for the drilling of the test wells in our Boomerang prospect, $2.7 million for the acquisition of the El Vado East leasehold and $400,000 for wells in our Cinco Terry project. For the comparable period of 2006, $24.6 million was for the drilling of Ozona Northeast wells.

The majority of our cash flows used in investing activities for 2004 through 2006 have been used for the continued development of the Ozona Northeast field. In 2006, an additional $4.1 million was used for undeveloped leaseholds in our Cinco Terry and Boomerang fields, and $3.4 million was invested in the initial wells in our Cinco Terry project.

We have established an exploratory and development budget of $47.9 million and $66.0 million for 2007 and 2008, respectively, after the completion of the acquisition of the Neo Canyon interest. Our budgets are established based on expected volumes to be produced and commodity prices.

Financing activities

We borrowed $4.6 million under our revolving credit facility in the first three months of 2007 as compared to $11.2 million in the first three months of 2006. In addition, $1.3 million was spent in the first three months of 2006 to purchase common stock and related options from a former employee.

During 2006, we sold approximately $6.5 million of common stock. These proceeds were primarily used to fund the acquisition of our Boomerang prospect and drilling costs for our Cinco Terry project.

In February 2007, we entered into an amended and restated $100 million revolving credit facility with The Frost National Bank. As of December 31, 2006, we had an outstanding balance under the previous facility of approximately $47.6 million, with a borrowing base of $75 million. The borrowing base is subject to adjustment twice each year. The assessment by the bank petroleum engineers is based on their evaluation of the future cash flows from proved oil and gas reserves using the bank’s pricing parameters.

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 will finance substantially all of our anticipated drilling, exploration and capital needs and therefore, allow us to use our revolving credit facility for possible acquisitions, temporary working capital needs through 2008 and any expansion of our drilling program.

Future capital expenditures for 2007 and 2008

The following table summarizes information regarding our historical 2006 and estimated 2007 and 2008 capital expenditures. The 2007 and 2008 estimates include the interest of Neo Canyon after completion of the acquisition of the 30% working interest in the Ozona Northeast field that we do not already own. We will be required to meet our needs from our internally generated cash flow, 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.



	Historical		Estimated
	year ended		Year ending
	December 31,		December 31,
(in thousands)	2006		2007		2008


Capital expenditures:
Ozona Northeast	$	52,108	$	34,300	$	50,500
Cinco Terry		3,176		2,200		4,100
Western Kentucky		3,873		4,600		6,600
Northern New Mexico		—		3,800		4,500
Geological, geophysical and other		—		4,400		800


Total capital expenditures	$	59,157	$	49,300	$	66,500

Credit facility

In February 2007, we entered into an amended and restated $100 million revolving credit facility with The Frost National Bank. In June 2007, we extended the due date of any balance outstanding at maturity to July 2010. The availability of funds under our revolving credit facility is subject to a borrowing base which was initially set at, and currently is, $75 million. The borrowing base will be redetermined every six months or, upon the election by us or the bank, one additional time each calendar year.

Our revolving credit facility provides for interest on outstanding amounts to accrue at a rate calculated, at our option, at either (i) the adjusted base rate, or (ii) the London Interbank Offered Rate plus a margin which ranges from 1.25% to 2.0% per annum, as applicable, as amounts outstanding under our revolving credit facility increase as a percentage of the borrowing base. In addition, we pay an annual commitment fee of 0.375% of non-utilized borrowings available under our revolving credit facility.

We are subject to a financial covenant requiring maintenance of a minimum modified ratio of current assets to current liabilities. In addition, we are subject to covenants restricting cash dividends and other restricted payments, transactions with affiliates, incurrence of other debt, consolidations and mergers, the level of operating leases, assets sales, investments in other entities and liens on properties.

Loans under our revolving credit facility are secured by first priority liens on substantially all of our West Texas assets including equity interests in our subsidiaries. All outstanding amounts under our revolving credit facility are due and payable in July 2010.

We anticipate that the proceeds to us from this offering will be used to pay off outstanding borrowings under our revolving credit facility. As of December 31, 2006 and March 31, 2007, the outstanding balance under our revolving credit facility was $47.6 million and $52.2 million, respectively.

Contractual commitments

We have a lease for our current office space in Fort Worth, Texas, that expires in May 2009. Our obligation under this lease is approximately $119,000 per year. In April 2007, we signed a five-year lease for approximately 13,000 square feet of space in Fort Worth, Texas. In November 2007, we will begin rent payments of approximately $20,000 per month, including common area expenses. We expect to sublet our current office space.

The following table summarizes these commitments as of May 31, 2007 (in thousands):



			Less than						More than
Contractual obligations	Total		1 year		1-3 years		3-5 years		5 years


Long-term debt obligations—revolving credit facility	$	52,169	$	—	$	—	$	52,169	$	—
Operating lease obligations(1)		1,592		321		625		532		114
Asset retirement obligations		155		—		—		—		155
Employment agreements with executive officers and other key personnel(2)		1,946		775		1,171		—		—


Total	$	55,862	$	1,096	$	1,796	$	52,701	$	269


(1)		Operating lease obligation is for office space.

(2)		These agreements are automatically renewed for successive terms of one year unless employment is terminated at the end of the term by written notice given to the employee not less than 60 days prior to the end of such term. Our maximum commitment under the employment agreements, which would apply if the employees covered by these agreements were all terminated without cause, is approximately $1,171,000 at December 31, 2007. See “Executive compensation—Other benefits—Employment agreements and other arrangements.”

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 December 31, 2006, 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.

Quantitative and qualitative disclosure 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 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 hedging 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.

To designate a derivative as a cash flow hedge, we document at the hedge’s inception our assessment as to whether the derivative will be highly effective in offsetting expected changes in cash flows from the item hedged. This assessment, which is updated at least quarterly, is generally based on the most recent relevant historical correlation between the derivative and the item hedged. The ineffective portion of the hedge, if any, is calculated as the difference between the change in fair value of the derivative and the estimated change in cash flows from the item hedged.

If, during a hedge’s term, we determine the hedge is no longer highly effective, hedge accounting is prospectively discontinued and any remaining unrealized gains or losses on the effective portion of the derivative are reclassified to earnings when the underlying transaction occurs. If it is determined that the designated hedge transaction is not likely to occur, any unrealized gains or losses are recognized immediately in the consolidated statements of income as a derivative fair value gain or loss.

As of March 31, 2007, we had two gas swaps in place for the remainder of 2007 for an average volume of 243,000 MMBtu per month. One of the swaps provides for us to be paid a notional price averaging $8.48 as compared to the floating NYMEX price for that period. In addition, we have in place a WAHA basis swap of $1.02 per MMBtu for the remainder of 2007. At December 31, 2006 and March 31, 2007, the fair value of our open derivative contracts was an asset of approximately $4.5 million and a liability of $121,312, respectively.

In May 2007, we entered into a gas collar for 2008 based on the NYMEX floating MMBtu price with a $7.50 floor and a $11.45 ceiling. In addition, we entered into a WAHA basis swap for 2008 for $0.69 per MMBtu. Both of these hedges were for an average volume of approximately 186,000 MMBtu per month.

We have reviewed the financial strength of our hedge counterparty and believe our credit risk to be minimal. Our hedge 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 hedges.

Business

Overview

At December 31, 2006, all of our proved reserves and production were located in our West Texas operating area and substantially all of those reserves and production were located in the Ozona Northeast field. As of such date, we owned working interests in 241 gross (226 net) producing wells with an average net production of approximately 22 MMcfe/d for the month of December 2006. At December 31, 2006, our estimated total proved gas and oil reserves were approximately 149 Bcfe with a reserve life index of approximately 19 years. Our proved reserves are 94% gas and 51% proved developed. As the operator of substantially all of our proved reserves, we have a high degree of control over capital expenditures and other operating matters.

As of December 31, 2006, we had identified a total of 795 drilling locations, of which 668 were located in the Ozona Northeast field and 127 in our Cinco Terry project. Of the total, 203 locations were classified as proved. The final determination of whether or not to drill any particular well, including those wells currently budgeted, will depend on 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 gas and oil and the availability of drilling rigs and crews, our financial results, the availability of leases on reasonable terms and our success in obtaining permits for potential drilling locations.

Strategy

Our strategy is to increase stockholder value by profitably growing our reserves, production, cash flow and earnings using a balanced program of (1) developing existing properties,

(2) exploring and exploiting undeveloped properties, (3) completing strategic acquisitions and (4) maintaining financial flexibility. The following are key elements of our strategy:


•	Continue to develop our existing West Texas properties . We intend to develop further the significant remaining potential of our West Texas properties, where we have identified 795 drilling locations.


	•	We acquired our initial position in the Ozona Northeast field through a Farmout Agreement in January 2004. The agreement covered 28,000 gross (27,000 net) acres. During 2005, we leased an additional 17,000 gross (17,000 net) acres. We began our drilling program late in the first quarter of 2004 and by year-end we had drilled 54 wells with an 85% success rate. In early 2005, in response to increased gas prices, we increased our drilling rig inventory from two rigs to four rigs and filed for optional 20-acre down spacing with the Texas Railroad Commission. By the end of 2005, we had drilled another 120 wells with a 96% success rate. During the first quarter of 2006, the Texas Railroad Commission granted the 20-acre down spacing, which substantially increased our proved undeveloped inventory. During the first half of 2006, we elected not to renew two of our four drilling rig contracts due to increased rig pricing. By year-end 2006, we had drilled 79 additional wells with a 97% success rate. We currently plan to continue to develop the Ozona Northeast field by drilling an additional 43 wells in 2007 and 64 wells in 2008. We estimate that as of December 31, 2006, we had 668 identified drilling locations in the Ozona Northeast field, 192 of which were proved.

	•	In January 2007 we implemented several changes to our drilling and completion techniques for our developmental Canyon wells in Ozona Northeast, where we have 688 remaining drilling locations. Primarily, we streamlined our casing design and modified our stimulation process. We estimate that these changes have resulted in current drilling and completion cost savings of approximately $50,000 per well, based on current markets for drilling services and equipment.

	•	We believe our Cinco Terry project has significant potential reserves in both the (i) established Canyon and Ellenburger formations and (ii) shallower and less-explored Wolfcamp trend. During the second quarter of 2007, we recompleted one of our existing wells into the Wolfcamp formation and we plan to drill two Canyon/Ellenburger wells in the third quarter of 2007 and two Canyon/Ellenburger wells in the fourth quarter of 2007.


•	Pursue unconventional gas and oil opportunities. With our Boomerang and El Vado East prospects, we have 164,000 gross acres of unexplored shale gas and oil inventory to explore and produce. We plan to extend our three Western Kentucky vertical test wells horizontally into the New Albany Shale in the third quarter of 2007 and drill four additional evaluation wells in the fourth quarter of 2007. We also plan to identify and drill up to four Mancos Shale wells in El Vado East by the end of this year. We intend to support our unconventional shale gas and oil exploration with cash flow from our long-lived tight gas properties in West Texas.

•	Acquire strategic assets. We continually review opportunities to acquire producing properties, undeveloped acreage and drilling prospects. We focus particularly on opportunities where we believe our reservoir management and operational expertise in unconventional gas and oil properties will enhance value and performance. We remain focused on unconventional resource opportunities, but also look at conventional opportunities based on individual project economics. We may enter into hedging agreements in connection with future


	acquisitions to protect our return on investment. Our management team members have gained significant acquisition experience during their careers with Approach and previous employers.

•

Operate our producing properties as a low-cost producer. We strive to minimize our operating costs by concentrating our assets within geographic areas where we can consolidate operating control and thus capture operating efficiencies. We are the operator of substantially all of our producing properties and plan to continue to operate substantially all of our producing properties in the future. Operating control allows us to better manage timing and risk as well as the cost of exploration and development, drilling and ongoing operations. We believe that in the competitive market for drilling rigs it is advantageous to have the flexibility to control the length of rig commitments in order to secure service at the lowest cost.

Competitive strengths

We believe our historical success is, and future performance will be, directly related to the following combination of strengths which enable us to implement our strategy:


•	Experienced executive and technical team with significant employee ownership . The members of our executive and technical team (including our Chief Executive Officer) have an average of over 26 years of experience in the oil and gas industry and significant experience in building and managing independent oil and gas companies. The majority of our executive and technical team have spent their entire careers developing unconventional gas and oil properties. Our technical team includes two geologists and three petroleum engineers with industry expertise in working with shallow to intermediate depth tight gas sand wells. Our team has a proven record of analyzing complex structural and stratigraphic formations using 3-D seismic and geological expertise, producing and optimizing gas reservoirs and drilling and completing unconventional gas reservoirs. Further, our professionals have developed completion techniques that enhance initial production rates and ultimate reserve recoveries in mature tight gas fields. Our team was responsible for the introduction of CO ₂ foam fracs to West Texas Canyon Sands tight gas fields and certain areas of the Piceance Basin in Colorado in the late 1980s. This same team has presented technical papers and delivered numerous industry presentations covering CO ₂ foam fracing on low pressure, water-sensitive tight gas reservoirs. Several of our directors also have significant experience in managing both public and private oil and gas companies. Our management team and employees will own approximately % of our common stock after this offering, aligning their objectives with those of our stockholders.

•	Low risk, multi-year drilling inventory. We have identified 795 drillable, low to moderate risk locations on our West Texas properties, providing us with approximately 10 years of drilling inventory at our current drilling rate. Our technical team’s ability to locate and execute on repeatable low-risk drilling opportunities in our large and productive West Texas acreage holdings has helped us to achieve a drilling success rate of 94% since our inception. In addition, our technical expertise also has allowed us to improve our production rates and ultimate hydrocarbon recoveries on our wells.

•	Stable producing asset base. We own an operated asset base comprising long-lived reserves. Approximately 94% of our reserves are gas, and all of our proved reserves are located in West Texas. These properties should produce stable cash flows to fund our development, exploitation and exploration opportunities.


•	Large acreage positions. We are a significant acreage holder in each of our three primary operating areas with an aggregate leasehold position of 231,000 gross (177,000 net) acres. We believe we have assembled a portfolio of properties, both in prolific producing natural gas and oil fields and in under-explored reservoirs, that would be difficult to replicate.

•	Operated asset base. We operate substantially all of our estimated reserves. By maintaining operating control, we are able to more effectively control our expenses, capital allocation and the timing and method of exploitation and development of our properties.

•	Low cost structure. Our reserve potential in our operating areas, our technical expertise and high drilling success have allowed us to achieve relatively low finding and development costs. Since our inception and through December 31, 2006, we have invested approximately $200 million to drill and complete 241 wells in our West Texas operating areas, achieving an average finding and development cost of $1.38 per Mcfe. See“—Historical finding and development costs.” During the same time period, our lease operating costs, including production taxes, averaged $0.91 per Mcfe.

•	Financial flexibility. Upon the completion of this offering, we expect to have approximately $ million in cash, no long-term debt and at least $ million available for borrowings under our revolving credit facility, providing us with significant financial flexibility to pursue our business strategy.

•	Control of gathering infrastructure and gas marketing. We own and operate approximately 72 miles of gas gathering lines in West Texas that collect and transport our production to multiple delivery points for several regional and interstate pipelines. Owning and operating this infrastructure allows us to maintain greater control of our gathering pressures and to minimize down time associated with the system. We intend to purchase or construct additional gas gathering assets as necessary to fully develop our tight gas and shale opportunities in West Texas, Western Kentucky and Northern New Mexico.

Areas of operation

West Texas

The Wolfcamp Canyon Sands play is the predominant producer in Edwards, Sutton, Schleicher and Crockett Counties in West Texas. There have been over 11,800 Canyon Sands wells drilled to date. Major canyon fields located in this area are Sawyer Canyon, Ozona Canyon, Ozona Northeast Proper Canyon, Davidson Ranch Canyon, Henderson Canyon and Ozona Northeast Canyon. To date, the combined production from these fields is over 3.8 Tcfe. The Canyon Sands are a tight sand and siltstone reservoir that requires large fracture stimulation. The large independent companies currently active in the Canyon Sands play include Anadarko Petroleum Corp., Dominion Resources Inc. and Encore Acquisition Company along with several smaller companies, including Approach.

Ozona Northeast field (Canyon Sands)

The Ozona Northeast field, in Crockett and Schleicher counties, Texas, is our largest operating area on the basis of proved reserves and production. The Ozona Northeast field is one of the top 100 gas fields in the United States in both reserves and production. In 2004, we entered the field through a farmout arrangement and have since increased our total acreage position to 45,000 gross (44,000 net) acres. In February 2004, we drilled our first well, and, as of

December 31, 2006, we had 237 producing wells with proved reserves of 147 Bcfe. During that period we have achieved an average compound annual production growth rate of over 100% as a result of our own drilling efforts. We have identified 668 additional drilling locations in the field, and we estimate that completed costs per location currently are approximately $770,000, based on current markets for drilling services and equipment.

Cinco Terry project (Wolfcamp, Canyon Sands and Ellenburger)

Since late 2005, we have leased and acquired options to lease 22,000 gross (8,000 net) acres five miles west of our Ozona Northeast field in order to evaluate the Wolfcamp, Canyon and Ellenburger formations. As of May 31, 2007, we had drilled and completed three Canyon wells and one Ellenburger well at a total cost of $5.9 million gross and $3.0 million net. Proved reserves in the Cinco Terry project are estimated to be 1.8 Bcfe at December 31, 2006. Wolfcamp wells in this area have demonstrated significant commercial production, and we are evaluating the formation for possible horizontal completions. Based upon data collected in the process of drilling the Canyon and Ellenburger wells, we believe additional success could be achieved in the shallower Wolfcamp formation.

Ozona pipeline system

We own and operate 72 miles of gas gathering lines for the Ozona Northeast and Cinco Terry production that transport our gas to a custody transfer point. We rent all compression equipment, which minimizes our overall cost to add or remove compression depending on field requirements. Owning and operating the gathering systems allows us to maintain control of our gathering pressures as well as minimizing down time associated with the system. Our system delivers into Ozona Pipeline Energy Company and Duke Energy Corp.’s pipeline system.

Western Kentucky

Boomerang prospect (New Albany Shale)

Our Boomerang prospect is a 74,000 gross (44,000 net) acre New Albany Shale play located in Western Kentucky in an under-explored area of the Illinois Basin. The New Albany Shale produces both biogenic and thermogenic gas from fractured reservoirs across a wide area in Illinois and Indiana. Thermogenic gas fields have been successfully developed in Kentucky, most notably in the Appalachian Basin part of Eastern Kentucky. Renewed interest in the Illinois Basin shale gas play has resulted in recent activity by several independent operators.

We believe the attributes of the New Albany Shale in our Boomerang prospect make it a promising resource play, particularly with the introduction of horizontal drilling technology. In the first quarter of 2007, we drilled the last of three vertical test wells. We have contracted to have core samples from these three wells analyzed for their geological, petrophysical, geomechanical, geochemical and production properties. We expect to begin the horizontal completion of these three test wells in the third quarter of 2007. After evaluating the results of our initial drilling and completion activities, we will determine our development program in the Boomerang prospect.

Northern New Mexico

El Vado East prospect (Mancos Shale)

Our El Vado East prospect is a 90,000 gross (81,000 net) acre Mancos Shale play located in the Chama Basin in Northern New Mexico in proximity to several highly productive fields, including the West and East Puerto Chiquito fields and the Boulder field. The West Puerto Chiquito Field has produced over 17 MMBbls, the East Puerto Chiquito Field has produced over 4 MMBbls and the Boulder Field has produced approximately 1.8 MMBbls. Other producing Mancos Shale fields in the San Juan Basin include the Gavilan and Verde Fields. The Mancos Shale is a thick, organic-rich Upper Cretaceous marine shale. We believe considerable exploration and development potential exists for this play.

Although our primary objective in the El Vado East prospect is the Mancos Shale, the possibility of finding commercial production in the Dakota, Morrison, Todilto and Entrada formations is a secondary objective. We anticipate spudding our initial test well in the El Vado East, which we expect to be the first of four vertical test wells, in the third quarter of 2007. Depending on the initial results of these wells, we may elect to shoot 3-D seismic over a portion of this prospect at locations which have yet to be identified.

Estimated proved reserves

As of December 31, 2006, all of our proved reserves and production were located in our West Texas operating area and substantially all of those reserves and production were located in the Ozona Northeast field. The following table sets forth a summary of our estimated proved reserves and estimated average daily net production for the month ended December 31, 2006.



													Production for the month ended
	Estimated proved reserves at December 31, 2006												December 31, 2006
							Percent				Identified		Net
	Developed		Undeveloped		Total		of total		PV-10(1)		drilling		average		Percent
	(Bcfe)		(Bcfe)		(Bcfe)		reserves		(millions)		locations(2)		MMcfe/d		of total


Ozona Northeast		74.9		72.1		147.0		99%	$	175.7		668		21.9		99%
Cinco Terry		0.9		0.9		1.8		1%		4.2		127		0.3		1%


Total		75.8		73.0		148.8		100%	$	179.9		795		22.2		100%


(1)		PV-10 is a non-GAAP financial measure and generally differs from standardized measure of discounted future net cash flows, the most directly comparable GAAP financial measure, because it does not include the effects of income taxes on future net revenues. See “Selected historical combined financial data—Reconciliation of non-GAAP financial measures” for our definition of PV-10 and a reconciliation of PV-10 to the standardized measure of discounted future net cash flows. Our calculation of PV-10 set forth in this table is based on gas and oil and condensate prices actually received by us on December 31, 2006, held flat for the life of the reserves. The weighted average price over the life of the Ozona Northeast reserves was $6.55 per Mcf of gas and $58.05 per Bbl of oil. The weighted average price over the life of the Cinco Terry reserves was $5.65 per Mcf of gas and $58.05 per Bbl of oil.

(2)		Represents total gross drilling locations identified by management as of December 31, 2006. Of the total, 203 locations are classified as proved. The final determination with respect to the drilling of any well, including those currently budgeted, will depend on 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 gas and oil and the availability of drilling rigs and crews, our financial results and the availability of leases on reasonable terms and permitting for the potential drilling locations.

Operating data

The following table presents certain information with respect to our historical operating data for the years ended December 31, 2004, 2005 and 2006 and for the three months ended March 31, 2007 and combined pro forma operating data for the year ended December 31, 2006 and the three months ended March 31, 2007, after giving effect to our acquisition of the Neo Canyon interest:



									Pro forma
							Three				Three
							months		Year		months
							ended		ended		ended
	Year ended December 31,						March 31,		December 31,		March 31,
	2004		2005		2006		2007		2006		2007


Gross wells
Drilled		54		120		83		9		83		9
Completed		46		115		81		8		81		8
Net wells
Drilled		34.9		77.2		55.1		6.3		79.6		9.0
Completed		29.6		74.8		53.5		5.6		77.3		8.0
Net production data
Net volume (MMcfe)		908		5,012		6,744		1,357		9,580		1,910
Average daily volume (MMcfe/d)		4		14		18		15		26		21
Average sales price (per Mcfe)
Average sales price (without hedge)	$	6.26	$	8.63	$	6.92	$	6.92	$	6.91	$	6.91
Average sales price (with hedge)		6.26		8.05		7.84		8.51		7.56		8.04
Expenses (per Mcfe)
Lease operating	$	0.20	$	0.58	$	0.58	$	0.72	$	0.60	$	0.74
Production taxes		0.45		0.39		0.26		0.28		0.26		0.28
General and administrative		2.28		0.61		0.43		1.21		0.31		0.86
Depreciation, depletion and amortization		1.35		1.60		2.16		2.26		2.30		2.47

The estimates in the table below of proved reserves as of December 31, 2006 are based on a reserve report prepared by us and audited by DeGolyer & MacNaughton.



	As of		Pro forma
	December 31,		December 31,
	2006		2006(1)


Estimated proved reserves
Gas (Bcf)		98.7		139.8
Oil (MMBbls)		1.1		1.5


Total proved reserves (Bcfe)		105.4		148.8
Total proved developed reserves (Bcfe)		53.1		75.8
PV-10 (millions)(2)
Proved developed reserves	$	112.8	$	158.3
Proved undeveloped reserves		15.6		21.6


Total PV-10 value	$	128.4	$	179.9


(1)		Gives effect to our acquisition of the Neo Canyon interest.

(2)		PV-10 is a non-GAAP financial measure and generally differs from standardized measure of discounted future net cash flows, the most directly comparable GAAP financial measure, because it does not include the effects of income taxes on future net revenues. See “Selected historical combined financial data—Reconciliation of non-GAAP financial measures” for our definition of PV-10 and a reconciliation of PV-10 to the standardized measure of discounted future net cash flows. Our calculation of PV-10 set forth in this table is based on gas and oil and condensate prices actually received by us on December 31, 2006, held flat for the life of the reserves. The weighted average price over the life of the Ozona Northeast reserves was $6.55 per Mcf of gas and $58.05 per Bbl of oil. The weighted average price over the life of the Cinco Terry reserves was $5.65 per Mcf of gas and $58.05 per Bbl of oil.

Development and exploration projects

The following table summarizes our historical 2006 and our estimated 2007 and 2008 capital expenditures. The estimated 2007 and 2008 capital expenditures shown are preliminary full year estimates. The estimated capital expenditures are subject to change depending upon a number of factors, including availability of capital, drilling results, oil and gas prices, costs of drilling and completion and availability of drilling rigs, equipment and labor.



	Historical(1)
			Three months		Estimated(2)
	Year ended		ended		Year ending
	December 31,		March 31,		December 31,
(in thousands)	2006		2007		2007		2008


Capital expenditures:
Ozona Northeast	$	52,108	$	4,793	$	34,300	$	50,500
Cinco Terry		3,176		374		2,200		4,100
Western Kentucky		3,873		1,858		4,600		6,600
Northern New Mexico		—		2,660		3,800		4,500
Geological, geophysical and other		—		31		4,400		800


Total capital expenditures	$	59,157	$	9,716	$	49,300	$	66,500


(1)		Historical amounts here include actual amounts incurred to the interest of Approach Resources Inc. and Approach Oil & Gas Inc.

(2)		Estimated capital expenditures for 2007 and 2008 include the acquisition of the Neo Canyon interest in combination with the interest of Approach Resources Inc. and Approach Oil & Gas Inc. as if the Neo Canyon interest were acquired on January 1, 2007.

Historical finding and development costs

From our inception in September 2002 to December 31, 2006, our acquisition, finding and development costs have averaged $1.38 per Mcfe. The cost of finding and developing reserves is calculated by taking the sum of the cost incurred for exploration, development and acquisition for the period, and dividing such amount by the total proved reserve additions for the period. The calculation does not include estimated future development costs for proved undeveloped reserves, which at December 31, 2006 totaled $108.5 million. Management believes that this information is useful to an investor in evaluating Approach because it measures the efficiency of a company in adding proved reserves as compared to others in the industry.


	September 13, 2002 (inception) through
($ in thousands, unless otherwise indicated)	December 31, 2006


All in average F&D cost:
Proved properties acquisition costs	$	11,948
Unproved properties acquisition costs		4,992
Exploration costs		6,285
Development costs		140,153

Total	$	163,378

Reserve purchases, extensions, discoveries and revisions (Mmcfe)		118,053

F&D cost per Mcfe	$	1.38

Markets and customers

The revenues generated by our operations are highly dependent upon the prices of, and demand for, gas and oil. The price we receive for our gas and oil production depends on numerous factors beyond our control, including seasonality, the conditions of the United States economy, particularly in the manufacturing sector, political conditions in other oil and gas producing countries, the extent of domestic production and imports of gas and oil, the proximity and capacity of gas pipelines and other transportation facilities, demand for oil and gas, the marketing of competitive fuels and the effects of state and federal regulation. The oil and gas industry also competes with other industries in supplying the energy and fuel requirements of industrial, commercial and individual consumers.

During the year ended December 31, 2006, Ozona Pipeline was our most significant purchaser, accounting for approximately 89.6% of our total 2006 gas and oil sales excluding realized hedge settlements.

Productive wells

The following table sets forth the number of productive gas and oil wells in which we owned a working interest at December 31, 2006.



	Gross		Net


Gas		239		227
Oil		2		1


Total		241		228

Acreage

The following table sets forth certain information with respect to our developed and undeveloped acreage as of May 31, 2007.



	Developed				Undeveloped				Total
	Gross		Net		Gross		Net		Gross		Net


Ozona Northeast		28,000		27,000		17,000		17,000		45,000		44,000
Cinco Terry		2,000		1,000		20,000		7,000		22,000		8,000
Western Kentucky (Boomerang)		—		—		74,000		44,000		74,000		44,000
Northern New Mexico (El Vado East)		—		—		90,000		81,000		90,000		81,000


Total		30,000		28,000		201,000		149,000		231,000		177,000

Drilling activity

The following table sets forth information on our drilling activity during the periods indicated. The information should not be considered indicative of future performance, nor should it be

assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value.



	Year ended December 31,												Three months ended
	2004				2005				2006				March 31, 2007
	Gross		Net		Gross		Net		Gross		Net		Gross		Net


Development:
Productive		46.0		42.2		115.0		106.6		81.0		77.3		9.0		9.0
Non-productive		1.0		1.0		7.0		5.8		6.0		6.0		—		—
Exploratory:
Productive		—		—		1.0		0.5		2.0		1.6		—		—
Non-productive		—		—		2.0		1.0		—		—		—		—
Total:
Productive		46.0		42.2		116.0		107.1		83.0		78.9		9.0		9.0
Non-productive		1.0		1.0		9.0		6.8		6.0		6.0		—		—

Hedging activity

Derivative instruments and hedging activities

We enter into financial swaps and collars to hedge future gas and oil production to mitigate portions of the risk of market price fluctuations.

Title to properties

Our properties are subject to customary royalty interests, liens incident to operating agreements, liens for current taxes and other burdens, including other mineral encumbrances and

restrictions. We do not believe that any of these burdens materially interfere with our use of the properties in the operation of our business.

We believe that we have generally satisfactory title to or rights in all of our producing properties. As is customary in the oil and gas industry, we make a general investigation of title at the time we acquire undeveloped properties. We receive title opinions of counsel before we commence drilling operations. We believe that we have satisfactory title to all of our other assets. Although title to our properties is subject to encumbrances in certain cases, we believe that none of these burdens will materially detract from the value of our properties or from our interest therein or will materially interfere with our use of the properties in the operation of our business.

Competition

The oil and gas industry is highly competitive, and we compete with a substantial number of other companies that have greater resources. Many of these companies explore for, produce and market oil and gas, carry on refining operations and market the resultant products on a worldwide basis. The primary areas in which we encounter substantial competition are in locating and acquiring desirable leasehold acreage for our drilling and development operations, locating and acquiring attractive producing oil and gas properties, and obtaining purchasers and transporters of the oil and gas we produce. There is also competition between producers of oil and gas and other industries producing alternative energy and fuel. Furthermore, competitive conditions may be substantially affected by various forms of energy legislation and/or regulation considered from time to time by the United States government. However, it is not possible to predict the nature of any such legislation or regulation that may ultimately be adopted or its effects upon our future operations. Such laws and regulations may, however, substantially increase the costs of exploring for, developing or producing gas and oil and may prevent or delay the commencement or continuation of a given operation. The effect of these risks cannot be accurately predicted.

Regulation

The oil and gas industry in the United States is subject to extensive regulation by federal, state and local authorities. At the federal level, various federal rules, regulations and procedures apply, including those issued by the United States Department of Interior as noted above, and the United States Department of Transportation (Office of Pipeline Safety). At the state and local level, various agencies and commissions regulate drilling, production and midstream activities. These federal, state and local authorities have various permitting, licensing and bonding requirements. Various remedies are available for enforcement of these federal, state and local rules, regulations and procedures, including fines, penalties, revocation of permits and licenses, actions affecting the value of leases, wells or other assets, and suspension of production. As a result, there can be no assurance that we will not incur liability for fines and penalties or otherwise subject us to the various remedies as are available to these federal, state and local authorities. However, we believe that we are currently in material compliance with these federal, state and local rules, regulations and procedures.

Transportation and sale of gas

The Federal Energy Regulation Commission, or FERC, regulates interstate gas pipeline transportation rates and service conditions. Although the FERC does not regulate gas producers such as us, the agency’s actions are intended to foster increased competition within all phases of the gas industry. To date, the FERC’s pro-competition policies have not materially affected our business or operations. It is unclear what impact, if any, future rules or increased competition within the gas industry will have on our gas sales efforts.

The FERC or other federal or state regulatory agencies may consider additional proposals or proceedings that might affect the gas industry. In addition, new legislation may affect the industries and markets in which we operate. We cannot predict when or if these proposals will become effective or any effect they may have on our operations. We do not believe, however, that any of these proposals will affect us any differently than other gas producers with which we compete.

Regulation of production

Oil and gas production is regulated under a wide range of federal and state statutes, rules, orders and regulations. State and federal statutes and regulations require permits for drilling operations, drilling bonds and reports concerning operations. The states in which we own and operate properties have regulations governing conservation matters, including provisions for the unitization or pooling of oil and gas properties, the establishment of maximum rates of production from oil and gas wells and the regulation of the spacing, plugging and abandonment of wells. Also, each state generally imposes an ad valorem, production or severance tax with respect to production and sale of oil, gas and gas liquids within its jurisdiction.

Environmental regulations

The exploration for and development of oil and gas and the drilling and operation of wells, fields and gathering systems are subject to extensive federal, state and local laws and regulations governing environmental protection as well as discharge of materials into the environment. These laws and regulations may, among other things:


•	require the acquisition of various permits before drilling commences;

•	require the installation of expensive pollution control equipment;

•	restrict the types, quantities and concentration of various substances that can be released into the environment in connection with oil and gas drilling production, transportation and processing activities;

•	suspend, limit or prohibit construction, drilling and other activities in certain lands lying within wilderness, wetlands and other protected areas; and

•	require remedial measures to mitigate and remediate pollution from historical and ongoing operations, such as the closure of waste pits and plugging of abandoned wells.

These laws, rules and regulations may also restrict the rate of oil and gas production below the rate that would otherwise be possible. The regulatory burden on the oil and gas industry increases the cost of doing business in the industry and consequently affects profitability.

Governmental authorities have the power to enforce compliance with environmental laws, regulations and permits, and violations are subject to injunction, as well as administrative, civil and criminal penalties. The effects of existing and future laws and regulations could have a material adverse impact on our business, financial condition and results of operations. While we believe that we are in substantial compliance with existing environmental laws and regulations and that continued compliance with current requirements would not have a material adverse effect on us, there is no assurance that this will continue in the future.

The following is a summary of some of the existing laws, rules and regulations to which our business operations are subject.

Comprehensive Environmental Response, Compensation and Liability Act

The Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, also known as the Superfund law, imposes strict, and under certain circumstances, joint and several liability, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the owner or operator of the site where the release occurred, and anyone who disposed or arranged for the disposal of a hazardous substance released at the site. Under CERCLA, such persons may be subject to strict, joint and several liabilities for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third-parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. While we generate materials in the course of our operations that may be regulated as hazardous substances, we have not received notification that we may be potentially responsible for cleanup costs under CERCLA.

Waste handling

The Resource Conservation and Recovery Act, or RCRA, and comparable state statutes, regulate the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. Under the auspices of the Federal Environmental Protection Agency, or EPA, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Drilling fluids, produced waters and most of the other wastes associated with the exploration, development, exploitation and production of oil or gas are currently regulated under RCRA’s non-hazardous waste provisions. However, it is possible that certain oil and gas exploration and production wastes now classified as non-hazardous could be classified as hazardous wastes in the future. Any such change could result in an increase in our operating expenses, which could have a material adverse effect on our results of operations and financial position.

We currently own or lease, and have in the past owned or leased, properties that for many years have been used for oil and gas exploration, production and development activities. Although we used operating and disposal practices that were standard in the industry at the time, petroleum hydrocarbons or wastes may have been disposed of or released on, under or from the properties owned or leased by us or on, under or from other locations where such wastes have been taken for disposal. In addition, some of these properties have been operated by third parties whose treatment and disposal or release of petroleum hydrocarbons and wastes was not under our control. These properties and the materials disposed or released on, at, under or from them may be subject to CERCLA, RCRA and analogous state laws. Under such laws, we could be

required to remove or remediate previously disposed wastes or contamination, or to perform remedial activities to prevent future contamination.

Air emissions

The federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, the EPA has developed, and continues to develop, stringent regulations governing emissions of hazardous and toxic air pollutants at specified sources. These regulatory programs may require us to obtain permits before commencing construction on a new source of air emissions and may require us to reduce emissions at existing facilities. As a result, we may be required to incur increased capital and operating costs. Additionally, federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the federal Clean Air Act and analogous state laws and regulations.

Water discharges

The Federal Water Pollution Control Act, also known as the Clean Water Act, and analogous state laws, impose restrictions and strict controls with respect to the discharge of pollutants, including spills and leaks of oil and other substances into regulated waters, including wetlands. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or an analogous state agency. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with discharge permits or other requirements of the Clean Water Act and analogous state laws and regulations.

Other laws and regulations

In February 2005, the Kyoto Protocol to the United Nations Framework Convention on Climate Change entered into force. Pursuant to the Protocol, adopting countries are required to implement national programs to reduce emissions of certain gases, generally referred to as greenhouse gases, which are suspected of contributing to global warming. The United States is not currently a participant in the Protocol. However, Congress has enacted legislation directed at reducing greenhouse gas emissions and the EPA may be required to regulate greenhouse gas emissions, and many states have already adopted legislation or undertaken regulatory initiatives addressing greenhouse gas emissions from various sources. The oil and gas exploration and production industry is a direct source of certain greenhouse gas emissions, namely carbon dioxide and methane, and future restrictions on such emissions would likely adversely impact our future operations, results of operations and financial condition. At this time, although it is not possible to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business, passage of such laws or regulation affecting areas in which we conduct business could have an adverse effect on our operations.

Employees

At May 31, 2007, we had 16 full-time employees. None of our employees is represented by a labor union or covered by any collective bargaining agreement. We believe that our relations with our employees are satisfactory.

Legal proceedings

From time to time, we are subject to legal proceedings and claims that arise in the ordinary course of business. Like other gas and oil producers and marketers, our operations are subject to extensive and rapidly changing federal and state environmental, health and safety and other laws and regulations governing air emissions, wastewater discharges, and solid and hazardous waste management activities.

As of the date of this prospectus, we are not aware of any pending or overtly threatened legal actions that we believe, based on our experience to date, would have a material adverse impact on our business, financial position or results of operations.

Insurance matters

As is common in the oil and gas industry, we will not insure fully against all risks associated with our business either because such insurance is not available or because premium costs are considered prohibitive. A loss not fully covered by insurance could have a materially adverse effect on our financial position or results of operations.

Management

Executive officers and directors

The following table sets forth the names, ages and positions of our executive officers and directors as of May 31, 2007.



Name	Age		Position(s) held


J. Ross Craft		50	President, Chief Executive Officer and Class III Director
Steven P. Smart		52	Executive Vice President and Chief Financial Officer
J. Curtis Henderson		44	Executive Vice President and General Counsel
Glenn W. Reed		55	Senior Vice President—Operations
Ralph P. Manoushagian		56	Senior Vice President—Land
Bryan H. Lawrence		64	Chairman, Class III Director
James H. Brandi		59	Class II Director
James C. Crain		59	Class II Director
Sheldon B. Lubar		78	Class I Director
Christopher J. Whyte		50	Class I Director

J. Ross Craft has been our President and Chief Executive Officer since our inception in September 2002. Before Approach, Mr. Craft co-founded Athanor Resources Inc., an international exploration and production company with operations in the United States and Tunisia, in 1998 and was its Executive Vice President from 1998 until its merger with Nuevo Energy Company in September 2002. From 1988 to 1997, Mr. Craft served in various positions with American Cometra Inc., an independent exploration and production company with operations in the United States, including Vice President—Operations from 1995 to 1997. American Cometra was sold in two parts, to Range Resources in 1995 and Pioneer Natural Resources in 1997. Mr. Craft has 27 years of experience the oil and gas industry. Mr. Craft, who holds a B.S. in Petroleum Engineering from Texas A&M University, is a registered Professional Engineer licensed in the State of Texas. In addition to membership in the Society of Petroleum Engineers, Mr. Craft is also a member of the Texas Oil and Gas Association and Independent Petroleum Association of America. Mr. Craft has served on the board of the Fort Worth chapter of the Society of Petroleum Engineers as well as on the board of the Fort Worth Petroleum Engineers Club where his last position was President. Mr. Craft is the brother-in-law of J. Curtis Henderson, our Executive Vice President and General Counsel.

Steven P. Smart has been our Treasurer since our inception in September 2002. Mr. Smart was named Vice President—Finance in August 2005, and Executive Vice President and Chief Financial Officer in June 2007. From 2000 to 2002, Mr. Smart was Controller and Treasurer of Prize Energy Corp., a public exploration and production company. From 1998 to 2000, Mr. Smart was a Senior Manager in the Energy Industry group at Arthur Andersen LLP. Prior to 2000, Mr. Smart served in senior executive financial positions with several public and private oil and gas companies, including Magnum Hunter Resources Inc. and Saxon Oil Co. Mr. Smart began his career in public accounting with Deloitte & Touche (formerly Touche Ross). Mr. Smart has more than 30 years of experience in both public and private companies in the oil and gas industry. Mr. Smart, who holds a B.B.A. in Accounting from Angelo State University, is a Certified Public Accountant with an active license.

J. Curtis Henderson joined us in February 2007 as Executive Vice President and General Counsel. From 2005 to 2007, Mr. Henderson served as President and Chief Executive Officer of Coterie Capital Partners, Ltd., a private equity partnership in Dallas, Texas. From 1998 to 2005, Mr. Henderson served as General Counsel of Nucentrix Broadband Networks, Inc., a public broadband wireless telecommunications company based in Dallas. While he was at Nucentrix, Mr. Henderson oversaw the sale of that company to an affiliate of Nextel Communications Inc. under Section 363 of the United States Bankruptcy Code in 2004. Mr. Henderson has over 19 years experience in public and private securities, mergers and acquisitions, corporate finance and regulatory affairs. Mr. Henderson holds a B.A. in Political Science from Austin College and a J.D. from Washington and Lee University School of Law. Mr. Henderson is the brother-in-law of J. Ross Craft, our Chief Executive Officer and President.

Glenn W. Reed has been our Senior Vice President—Operations since June 2007. Mr. Reed served as our Vice President—Operations from our inception in September 2002 to June 2007. Mr. Reed was Manager of Operations for Athanor Resources Inc. from 1999 to 2002, where he was responsible for petroleum engineering and operations before Athanor was sold to Nuevo Energy Company in September 2002. From 1988 to 1999, Mr. Reed supervised operations for American Cometra. Mr. Reed, who holds a B.S. in Petroleum Engineering from Texas Tech University, is a registered Professional Engineer licensed in Texas and has 28 years of experience in the oil and gas industry.

Ralph P. Manoushagian has been our Senior Vice President—Land since June 2007. Mr. Manoushagian joined us in 2004 as Land Manager. In 2003, Mr. Manoushagian worked as an independent landman. From 2001 to 2003, Mr. Manoushagian was the President of Hudco Fuels, a privately owned fuel distributorship. Mr. Manoushagian has been an active landman and oil and gas operator for 30 years. Mr. Manoushagian, who holds a B.B.A. in Finance from the University of North Texas, has been a Certified Professional Landman since 1988. Mr. Manoushagian is a director of the First Financial Bank of Southlake, Texas. He previously served as a director and Vice President of the Texas Independent Producers and Royalty Owners and as a director of the Texas Alliance of Energy Producers.

Bryan H. Lawrence has been a member of our board of directors since 2002. Mr. Lawrence is a founder and Senior Manager of Yorktown Partners LLC, the manager of the Yorktown group of investment partnerships, which make investments in companies in the energy industry. The Yorktown partnerships were formerly affiliated with the investment firm of Dillon, Read & Co. Inc., where Mr. Lawrence had been employed since 1966, serving as a Managing Director until the merger of Dillon Read with SBC Warburg in September 1997. Mr. Lawrence also serves as a director of Crosstex Energy, Inc. and Crosstex Energy GP, LLC, midstream natural gas companies; Hallador Petroleum Company, an independent company engaged in the production of coal and the exploration and production of oil and natural gas; the general partner of Star Gas Partners, L.P., a home heating oil distributor and services provider; Winstar Resources, a public Canadian oil and gas company; Ellora Energy Inc., an independent oil and gas company; and certain non-public companies in the energy industry in which Yorktown partnerships hold equity interests. Mr. Lawrence is a graduate of Hamilton College and also has an M.B.A. from Columbia University.

James H. Brandi joined us as a director in June 2007. Since November 2005, Mr. Brandi has been a partner at Hill Street Capital, a private investment and financial advisory firm. From 2000 until November 2005, Mr. Brandi was a Managing Director at UBS Securities, LLC, where he was the Deputy Global Head of the Energy and Power Group. Prior to 2000, Mr. Brandi was a Managing Director at Dillon, Read & Co. Inc. and later its successor firm, UBS Warburg, concentrating on

transactions in the energy and consumer goods areas. Mr. Brandi serves on the boards of Energy East Corporation, a utility holding company, and Armstrong Land Company, LLC, a coal reserves owning company. Mr. Brandi is a trustee of The Kenyon Review and a former trustee of Kenyon College. Mr. Brandi holds a B.A. in History from Yale University and an M.B.A. from Harvard Business School and attended Columbia Law School as a Harlan Fiske Stone Scholar.

James C. Crain joined us as a director in June 2007. Mr. Crain has been involved in the energy industry for over 30 years, both as an attorney and as an executive officer. Since 1984, Mr. Crain has been an officer of Marsh Operating Company, an investment management company focusing on energy investing, including his current position of President which he has held since 1989. Mr. Crain has served as general partner of Valmora Partners, L.P., a private investment partnership that invests in the oil and gas sector, among others, since 1997. Prior to joining Marsh in 1984, Mr. Crain was a partner in the law firm of Jenkens & Gilchrist, where he headed the firm’s energy section. Mr. Crain currently is a director of Crosstex Energy, Inc. and Crosstex Energy GP, LLC, midstream natural gas companies, and GeoMet, Inc., a coalbed methane natural gas exploration and production company. Mr. Crain holds a B.B.A., an M.P.A. and a J.D. from the University of Texas at Austin.

Sheldon B. Lubar joined us as a director in June 2007. Mr. Lubar has been Chairman of the Board of Lubar & Co. Incorporated, a private investment and venture capital firm he founded, since 1977. He was Chairman of the Board of Christiana Companies, Inc., a logistics and manufacturing company, from 1987 until its merger with Weatherford International in 1995. Mr. Lubar is currently a director of Crosstex Energy, Inc. and Crosstex Energy GP, LLC, midstream natural gas companies; Weatherford International, Inc., an energy services company; Ellora Energy Inc., an independent oil and gas company; and the general partner of Star Gas Partners, L.P., a home heating oil distributor and services provider. Mr. Lubar previously held governmental appointments under three United States Presidents, including Commissioner of the White House Conference on Small Business from 1979 to 1980 under President Carter, Assistant Secretary, Housing Production and Mortgage Credit, Department of Housing and Urban Development, Commissioner of the Federal Housing Administration and Director of the Federal National Mortgage Association from 1973 to 1974 under Presidents Nixon and Ford. Mr. Lubar is a past president of the Board of Regents of the University of Wisconsin System. Mr. Lubar holds a B.S. in Business Administration and a J.D. from the University of Wisconsin—Madison. Mr. Lubar was awarded an honorary Doctor of Commercial Science degree from the University of Wisconsin—Milwaukee.

Christopher J. Whyte has been a member of our board of directors since June 2007. Mr. Whyte has been President, Chief Executive Officer and a director of PetroSantander Inc., an affiliate of Yorktown Partners LLC which owns and operates oil and gas production in Colombia, Kansas and Brazil, since 1995. Mr. Whyte holds a B.A. from the University of Pittsburgh.

Board of directors; committees of the board

Our board of directors currently consists of six directors, Messrs. Brandi, Craft, Crain, Lawrence, Lubar and Whyte. Our restated certificate of incorporation and restated bylaws provide for a classified board of directors consisting of three classes of directors, each serving staggered three-year terms. As a result, stockholders will elect a portion of our board of directors each year. Class I directors’ terms will expire at the annual meeting of stockholders to be held in 2008, Class II directors’ terms will expire at the annual meeting of stockholders to be held in 2009 and Class III directors’ terms will expire at the annual meeting of stockholders to be held in 2010. Presently, the Class I directors are Messrs. Lubar and Whyte, the Class II directors are

Messrs. Brandi and Crain and the Class III directors are Messrs. Craft and Lawrence. At each annual meeting of stockholders held after the initial classification, the successors to directors whose terms will then expire will be elected to serve from the time of election until the third annual meeting following election. The division of our board of directors into three classes with staggered terms may delay or prevent a change of our management or a change in control. See “Description of capital stock—Anti-takeover effects of provisions of Delaware Law, our restated certificate of incorporation and restated bylaws—Classified board.”

In addition, our restated bylaws provide that the authorized number of directors, which shall constitute the whole board of directors, may be changed by resolution duly adopted by our board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, to the extent possible, any newly-created directorships shall be added to those classes whose terms of office are to expire at the latest dates following such increase. Vacancies and newly-created directorships may be filled by the affirmative vote of a majority of our directors then in office, even if less than a quorum.

Our board of directors has established an Audit Committee and a Compensation and Nominating Committee. As a controlled company as defined by the NASDAQ Marketplace Rules, we are not required to have separate compensation and nominating committees.

Messrs. , and serve on the Audit Committee of our board of directors. Each of Messrs. , and is “independent” under the listing standards of National Association of Securities Dealers, Inc. and SEC rules. In addition, our board of directors has determined that Mr. is an “audit committee financial expert,” as defined under the rules of the SEC. The Audit Committee recommends to our board of directors the independent public accountants to audit our financial statements and oversees the annual audit. The Committee also approves any other services provided by public accounting firms. The Audit Committee provides assistance to our board of directors in fulfilling its oversight responsibility to the stockholders, the investment community and others relating to the integrity of our financial statements, our compliance with legal and regulatory requirements, the independent auditor’s qualifications and independence and the performance of our internal audit function, as applicable. The Committee oversees our system of disclosure controls and procedures and system of internal controls regarding financial, accounting, legal compliance and ethics that management and our board of directors have established. In doing so, it is the responsibility of the Committee to maintain free and open communication between the Committee and our independent auditors, the internal accounting function and our management.

Messrs. and serve on the Compensation and Nominating Committee of our board of directors. This Committee nominates candidates to serve on our board of directors and approves director compensation. The Committee is also responsible for monitoring a process to assess board effectiveness, developing and implementing our corporate governance guidelines and taking a leadership role in shaping our corporate governance. See “Executive compensation—Our Compensation and Nominating Committee” for a description of the additional duties of the Compensation and Nominating Committee.

Indemnification

Our restated certificate of incorporation and restated bylaws provide indemnification rights to the members of our board of directors. Additionally, we will enter into separate indemnification agreements with the members of our board of directors to provide additional indemnification benefits, including the right to receive in advance reimbursements for expenses incurred in connection with a defense for which the director is entitled to indemnification.

Compensation committee interlocks and insider participation

None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more of its executive officers serving as a member of our board of directors or Compensation and Nominating Committee.

Executive compensation

Compensation discussion and analysis

This compensation discussion describes the material elements of compensation awarded to, earned by or paid to our Chief Executive Officer, Chief Financial Officer and our three other most highly compensated executive officers, each as named in the tables below. We refer to all of these officers as “named executive officers.” While this compensation discussion focuses primarily on the information contained in the following tables and related footnotes, as well as the narrative relating to the last completed fiscal year, we also describe compensation actions taken before or after the last completed fiscal year to the extent that such discussion enhances the understanding of our executive compensation disclosure.

We believe our success depends on the continued contributions of our named executive officers. Our executive compensation programs are designed with the philosophy of attracting, motivating and retaining experienced and qualified executive officers and directors with compensation that is consistent with comparable public companies and that recognizes individual merit and overall business results. Our policies are also intended to support the attainment of our strategic objectives by tying the interests of our executive officers with those of our stockholders through operational and financial performance goals and equity-based compensation.

The principal elements of our executive compensation programs are base salary, annual cash incentives, long-term equity incentives in the form of stock options and stock awards, as well as other benefits and perquisites. The other benefits and perquisites provided to our executive officers consist of life, disability and health insurance benefits, a qualified 401(k) savings plan, paid vacation and holidays, automobile allowances and reimbursement for certain club membership dues, cell phone expenses, professional association dues and fees, and continuing professional educational programs. Our salary and benefits are intended to be competitive with similarly situated companies and our objective is to position the aggregate of these elements at a level that is commensurate with our size and sustained performance.

Our Compensation and Nominating Committee

The Compensation and Nominating Committee of our board of directors is responsible for the approval, evaluation and oversight of all of our compensation plans, policies and programs. The primary purpose of the Compensation and Nominating Committee is to assist our board of directors in establishing and implementing our compensation policies and monitoring our compliance with such policies. The members of our Compensation and Nominating Committee are (chairman) and , each of whom is an independent director in accordance with the NASDAQ Marketplace rules. From time to time, the Compensation and Nominating Committee may, whenever it deems appropriate, form and delegate authority to various subcommittees to the extent authorized by the Compensation and Nominating Committee.

Mr. , as chairman of the Committee, is responsible for selecting the time and place of meetings and the agendas therefor.

The function of the Compensation and Nominating Committee is more fully described in its charter, which our board of directors adopted, effective as of , 2007. The Compensation and Nominating Committee reviews and assesses, on an annual basis, the adequacy of the charter and recommends any proposed changes to our board of directors for approval.

Acting on behalf of the board of directors, the responsibilities of the Compensation and Nominating Committee include the following:


•	reviewing and making recommendations to our board of directors with respect to our general compensation policies;

•	reviewing and approving our goals and objectives relating to the compensation of our executive officers, evaluating such officers’ performance in light of these goals and recommending compensation levels to our board of directors based on these evaluations;

•	reviewing market data to assess our position with respect to the compensation of our executive officers in order to ensure we are competitive with comparable public companies;

•	administering our stock option and restricted stock plans or other similar plans including selecting to whom grants under any such plans are made and determining the terms and type of any such grant;

•	recommending to our board of directors the adoption of amendments to any of our plans and modifying or canceling any existing grants under such plans;

•	reviewing the sufficiency of the shares available for grant under any of our plans based on our goals for hiring, bonus and retention grants and assessing our competitive position with respect to the level of our equity compensation, vesting schedules and other terms with comparable public companies; and

•	preparing the “Report of the Compensation and Nominating Committee” to be included in our proxy statement.

Compensation program objectives

The objectives of our executive compensation programs are as follows:


•	attract and retain talented and experienced executives;

•	motivate and reward executives whose knowledge, skills and performance are critical to our success;

•	align the interests of our executive officers and stockholders by motivating executive officers to increase stockholder value and rewarding executive officers when stockholder value increases;

•	provide a competitive compensation package that is weighted heavily towards pay for performance, and in which total compensation is primarily determined by company and individual results and the creation of stockholder value;

•	insure fairness among the executive management team by recognizing the contributions each executive makes to our success;

•	foster a shared commitment among executives by coordinating their company and individual goals; and

•	compensate our executives accordingly to meet our long-term objectives.

The Compensation and Nominating Committee will evaluate the objectives of our executive compensation programs on a regular basis. In determining the objectives of our executive

compensation programs, the Compensation and Nominating Committee will examine the appropriate matching of compensation to performance as an individual and as an executive group. The Compensation and Nominating Committee is responsible for comparative analysis of our executive compensation plan against others in the industry to insure that the executive compensation plans are competitive.

The Compensation and Nominating Committee is responsible for reviewing and making recommendations to our board of directors regarding our executive compensation programs. These programs will be implemented to achieve the objectives to be established by the Compensation and Nominating Committee for compensating our executive officers. The Compensation and Nominating Committee will review our executive compensation programs on an annual basis to determine if such programs are effective in achieving the objectives established by the Compensation and Nominating Committee. Compensation objectives will be established based upon various measurements of profitability, share value enhancement and specific transaction conclusion, both as individuals and as a management group.

To assist management and the Compensation and Nominating Committee in assessing and determining compensation packages, the Compensation and Nominating Committee may engage compensation consultants or consider relevant market compensation data prepared by such consultants based upon the specific needs of the Compensation and Nominating Committee. The Compensation and Nominating Committee will contract with any consultants directly and will control and direct the work to be performed.

The Compensation and Nominating Committee will meet outside the presence of all of our executive officers to consider the appropriate compensation for our Chief Executive Officer. For all other named executive officers, the Compensation and Nominating Committee will meet outside the presence of all executive officers, except our Chief Executive Officer. Our Chief Executive Officer will annually review the performance of each named executive officer with the Compensation and Nominating Committee and will make recommendations to the Compensation and Nominating Committee with respect to the appropriate base salary, payments to be made under our annual cash incentive plan and the grant of long-term equity incentive awards. Based in part on these recommendations from our Chief Executive Officer and the other considerations discussed below, the Compensation and Nominating Committee will approve the annual compensation package of each of our executive officers, other than our Chief Executive Officer. The Compensation and Nominating Committee will analyze the performance of our Chief Executive Officer and determine the base salary, payments to be made under our annual cash incentive plan and the grant of long-term equity incentive awards. Input or suggestions applicable to group or individual compensation from other executive officers will be solicited by the Compensation and Nominating Committee.

Compensation for each executive officer will be determined by the Compensation and Nominating Committee by evaluating such officer’s performance, our performance and the officer’s impact on our performance. Based upon these evaluations, the Compensation and Nominating Committee will determine the compensation for each of our executive officers, consistent with the objectives established by the Compensation and Nominating Committee.

The Compensation and Nominating Committee intends to establish specific performance targets that our executive officers must achieve in order to receive certain types of compensation, including annual bonuses, base pay increases and performance awards under our 2007 Stock Incentive Plan, referred to as our 2007 Plan, which is an amendment and restatement of our 2003 Stock Option Plan, referred to as our prior plan. The performance targets to be established

will be designed to serve as accurate indicators of the executive officers’ impact on our operational success and provide specific standards that motivate the officers to perform in our best interest and in our stockholders best interests. These targets are expected to include performance measures that increase the value of the company, such as: net income, EBITDAX, reserve growth and specific major tasks that need to be accomplished to insure the financial health of the company. Each officer’s individual goals will be set based upon those activities that they can control.

Our Compensation and Nominating Committee has not adopted any formal or informal policies or guidelines for allocating compensation between long-term and currently paid out compensation, between cash and non-cash compensation or among different forms of non-cash compensation.

Our executive compensation programs

Overall, we intend for our executive compensation programs to be consistent with the objectives and principals set forth above. The basic elements of our executive compensation programs are summarized in the table below, followed by a more detailed discussion of each compensation program.



Element	Characteristics	Purpose


Base salary	Competitive to industry	Attract and retain
Incentive bonus	Based upon performance individually and as an executive group	To motivate enhanced share value, short and long term financial growth and stability of the company
Stock incentive plan awards	Based upon performance individually and as an executive group	To retain and motivate our executives over a longer term
Retirement savings opportunity	Competitive to industry	Enhance overall compensation package
Health and welfare benefits	Competitive to industry	Attract and retain
Other perquisites	Competitive to industry	Attract, retain and motivate

All pay elements are cash-based except for the stock incentive program, which is an equity-based award. We expect to consider market pay practices and practices of industry peers in determining the overall amounts to be paid. Compensation opportunities for our executive officers, including our named executive officers, are designed to be competitive with peer companies. We believe that a substantial portion of each named executive officer’s compensation should be in performance based pay.

In determining whether to increase or decrease compensation to our executive officers, including our named executive officers, we intend to take into account annually the changes (if any) in the market pay levels based on our industry peers, the contributions made by the executive officer, the performance of the executive officer, the increases or decreases in responsibilities and roles of the executive officer, the business needs of the executive officer, the transferability of managerial skills to another employer, the relevance of the executive officer’s experience to

other potential employers and the ability of the executive officer to assume a more significant role with another organization.

In general, compensation or amounts realized by executives from prior compensation from us, such as gains from previously awarded stock options or options awards, will not be taken into account in setting other elements of compensation, such as base pay, incentive bonuses or awards of stock options under our long-term equity incentive program. With respect to new executive officers, we take into account their prior base salary and annual cash incentives, as well as the contributions expected to be made by the new executive officer, the business needs and the role of the executive officer with us. We believe that our executive officers should be fairly compensated each year relative to market pay levels of our industry peers and the internal pay levels of our executive officers.

Annual cash compensation

To attract and retain executives with the ability and the experience necessary to lead us and deliver strong performance to our stockholders, we provide a competitive total compensation package. Base salaries are intended to be competitive with our industry peers, while total compensation is intended to exceed that of our industry peers, considering individual performance and experience, to ensure that each executive is appropriately compensated.

Base salary

We intend to review salary ranges and individual salaries for our executive officers annually. We establish the base salary for each executive officer based on consideration of pay levels of our industry peers and internal factors, such as the individual’s performance and experience, and the pay of others on the executive team.

We consider market pay levels among individuals in comparable positions with transferable skills within the oil and gas industry and comparable companies in general industry. When establishing the base salary of any executive officer, we also consider business requirements for certain skills, individual experience and contributions, the roles and responsibilities of the executive and other factors. We believe competitive base salary is necessary to attract and retain an executive management team with the appropriate abilities and experience required to lead us.

The base salaries paid to our named executive officers are set forth below in the Summary Compensation Table. See “—Summary of compensation.”

Annual incentive bonuses

We provide the opportunity for our named executive officers and other executives to earn an annual cash incentive award. We provide this opportunity to attract and retain an appropriate caliber of talent for the position and to motivate executives to achieve our annual business goals. We plan to review annual cash incentive awards for our named executive officers and other executives annually in January or February to determine award payments for the last completed fiscal year, as well as to establish award opportunities for the current fiscal year. The Compensation and Nominating Committee or the board of directors may exercise discretion and take into account individual performance in determining the awards.

No incentive bonuses were paid in 2006. In 2007, the named executive officers received bonuses to cover out-of-pocket taxes incurred in 2007 as a result of the sale of their respective shares of

our common stock to us as repayment of their respective management notes, as follows: J. Ross Craft—$356,282; Steven P. Smart—$72,814, Glenn W. Reed—$86,851; and Ralph P. Manoushagian —$72,301. See “Certain relationships and related party transactions—Other related party transactions.” In 2007, our board approved a bonus pool of $1.0 million payable one-half upon the filing of the registration statement of which this prospectus is a part, and one-half upon this registration statement being declared effective, as follows: J. Ross Craft—$275,000; Steven P. Smart—$182,500; J. Curtis Henderson—$182,500; Glenn W. Reed—$120,000; Ralph P. Manoushagian—$120,000; and other key employees—$120,000. Beginning in 2008, we intend to establish individual performance goals for our executives.

Stock incentive compensation

We plan to award long-term equity incentive grants to executive officers, including the named executive officers, as part of our total compensation package, under our 2007 Plan.

The 2007 Plan allows for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock awards and other incentive awards. The primary purpose of the 2007 Plan is to enhance our ability to attract and retain highly qualified officers, directors, key employees and other persons, and to motivate such persons to continue in our service and to expend maximum effort to improve our business results and earnings, by providing to such persons an opportunity to acquire or increase a direct proprietary interest in our operations and future success.

After the closing of this offering, the Compensation and Nominating Committee will administer the 2007 Plan and in doing so, the Compensation and Nominating Committee will select participants to receive awards, determine the types of awards and the terms and conditions of the awards and interpret the provisions of the 2007 Plan.

Other benefits

Retirement savings opportunity

All employees may participate in our 401(k) Retirement Savings Plan, or the 401(k) Plan, established in 2003. Each employee may make before tax contributions of up to 25% of their base salary, subject to the current Internal Revenue Service limits. We provide this 401(k) Plan to help our employees save a portion of their cash compensation for retirement in a tax efficient manner. We match contributions made by our employees to the 401(k) Plan 100% up to 3% of an employee’s base salary and 50% from 3% to 5% of an employee’s base salary. We do not provide an option for our employees to invest in our stock in the 401(k) plan.

Health and welfare benefits

All full-time employees, including our named executive officers, may participate in our health and welfare benefit programs, including medical, dental and vision care coverage, disability insurance and life insurance.

Other items of compensation

Other items of compensation for our named executive officers and key employees may include automobile allowances, reimbursement for certain club membership dues, cell phone expenses, professional association dues and fees and continuing professional educational programs.

Employment agreements and other arrangements

We have entered into employment agreements with each of Messrs. Craft, Reed and Smart. These employment agreements have an initial term of two years but are automatically extended for successive one-year terms unless either party gives written notice within 60 days prior to the end of the term to the other party that such party desires not to renew the employment agreement. The employment agreements provide for a minimum annual base salary of $210,000 for Mr. Craft, $190,000 for Mr. Smart and $165,000 for Mr. Reed. In 2007, our board approved an increase in Mr. Craft’s annual base salary to $270,000 and Mr. Smart’s annual base salary to $225,000, effective upon the filing of the registration statement of which this prospectus is a part, and an increase in Mr. Reed’s annual base salary to $185,000. In addition, each of Messrs. Craft, Reed and Smart are eligible to participate in any annual bonus plan applicable to the executive and approved by the board of directors or the Compensation and Nominating Committee, in amounts to be determined by the Compensation and Nominating Committee, based on criteria established by the Compensation and Nominating Committee. During the period of employment under these agreements, each of the employees is entitled to additional benefits, including reimbursement of business and entertainment expense, paid vacation and participation in other company benefits, plans or programs that may be available to other executive employees of our company.

If any of Mr. Craft, Mr. Reed or Mr. Smart is terminated for cause, we will be obligated to pay such named executive officer his base salary then in effect through the date of his termination, prorated for any partial period of employment, and we shall have no further obligations to such named executive officer under his respective employment agreement. “Cause” means any of the following: the willful and continue failure of the named executive officer substantially to perform his duties under the employment agreement (other than any such failure resulting from such employee becoming disabled); the willful engaging by the named executive officer in misconduct that is materially injurious to us; any misconduct in the course and scope of the named executive officer’s employment, including but not limited to dishonesty, disloyalty, disorderly conduct, insubordination, harassment of other employees or third parties, abuse of alcohol or controlled substances or other violations of our rules; or any material violation of such named executive officer’s employment agreement or a voting and stockholders’ agreement (which agreement will terminate immediately prior to the closing of this offering).

If the employment of Mr. Craft or Mr. Reed is involuntarily terminated without cause, Mr. Craft or Mr. Reed, as appropriate, is entitled to continue to receive his base salary plus benefits for a period of 24 months from the date of termination. If Mr. Craft’s involuntary termination occurs during a change of control period, he will be deemed to have been terminated without cause. Additionally, Mr. Craft may terminate his employment for good reason, which will include our failure to perform under his employment agreement. If Mr. Craft terminates his employment for good reason, he is entitled to a lump sum cash payment equal to 50% of his current base salary within 20 days of his termination, a lump sum cash payment equal to 150% of his current based salary within 90 days of his termination and continuation of all applicable benefits for an additional year following his termination. If Mr. Smart’s employment is involuntarily terminated

without cause, Mr. Smart is entitled to continue to receive his base salary plus benefits for a period of six months from the date of termination.

In addition, each of these employment agreements contain provisions that prohibit, with certain limitations, Messrs. Craft, Reed and Smart from competing with us; soliciting any of our customers, vendors or acquisition candidates; or soliciting or hiring any of our employees or inducing any of them to terminate their employment with us. This non-competition restriction with respect to Mr. Craft continues for a period of (i) one year following termination of employment if Mr. Craft voluntarily resigns other than on account of a change of control, or his employment is terminated with or without cause or (ii) six months if Mr. Craft terminates his employment for good reason other than a change of control. This non-competition restriction with respect to Mr. Reed continues for a period of one year following termination of employment if Mr. Reed voluntarily resigns other than on account of a change of control, or his employment is terminated with or without cause. This non-competition restriction with respect to Mr. Smart continues for a period of six months following termination of employment if Mr. Smart voluntarily resigns other than on account of a change of control, or his employment is terminated with or without cause. If any of Messrs. Craft, Reed or Smart is terminated on account of a change of control, this non-competition restriction will not apply post-termination. This offering will not constitute a change of control under these agreements.

Stock ownership guidelines

Stock ownership guidelines have not been implemented by the Compensation and Nominating Committee for our executive officers. Until recently, our common stock was subject to a stockholders agreement that limited a stockholder’s ability to transfer stock. We will continue to periodically review best practices and reevaluate our position with respect to stock ownership guidelines.

Tax deductibility of executive compensation

Limitations on deductibility of compensation may occur under Section 162(m) of the Internal Revenue Code, which generally limits the tax deductibility of compensation paid by a public company to its Chief Executive Officer and certain other highly compensated executive officers to $1 million in the year the compensation becomes taxable to the executive officer. There is an exception to the limit on deductibility for performance based compensation that meets certain requirements.

Although deductibility of compensation is preferred, tax deductibility is not a primary objective of our compensation programs. We believe that achieving our compensation objectives set forth above is more important than the benefit of tax deductibility and we reserve the right to maintain flexibility in how we compensate our executive officers that may result in limiting the deductibility of amounts of compensation from time to time.

Conclusion

We believe the compensation we have provided to each of our executive officers is reasonable and appropriate to facilitate the achievement of our operational objectives. The compensation programs and policies that we have designed effectively incentivize our executive officers on both a short-term and long-term basis to perform at a level necessary to achieve these objectives. The various elements of compensation combine to align the best interests of our

executive officers with the best interests of our stockholders and our best interests in order to maximize stockholder value.

Summary of compensation

The following table shows information concerning the annual compensation for services provided to us by our Chief Executive Officer, our Chief Financial Officer and our two other most highly compensated executive officers during 2006.



								Stock		Option		All other
Name and principal positions	Year		Salary			Bonus		awards		awards		compensation(1)		Total


J. Ross Craft President and Chief Executive Officer		2006	$	210,000	(2)	$	—	$	—	$	—	$	29,899	$	239,899
Steven P. Smart Executive Vice President and Chief Financial Officer		2006	$	165,000	(3)	$	—	$	—	$	—	$	21,763	$	186,763
Glenn W. Reed Senior Vice President— Operations		2006	$	165,000	(4)	$	—	$	—	$	—	$	19,204	$	184,204
Ralph P. Manoushagian Senior Vice President—Land		2006	$	127,000	(5)	$	—	$	—	$	—	$	185	$	127,185


(1)		All other compensation reported for Mr. Craft represents a $15,800 matching contribution by our company to our 401(k) plan, $8,400 in automobile allowance, $855 relating to cell phone expenses, $2,230 relating to club membership dues, $420 relating professional licenses and fees, $750 for life insurance premiums and $1,444 relating to continuing professional educational programs. All other compensation reported for Mr. Smart represents a $12,200 matching contribution by our company to our 401(k) plan, $6,000 in automobile allowance, $710 relating to cell phone expenses, $1,119 relating to professional licenses and fees and $1,734 for continuing professional educations programs. All other compensation reported for Mr. Reed represents a $7,000 matching contribution by our company to our 401(k) plan, $8,400 in automobile allowance, $1,875 relating to cell phone expenses, $38 relating to professional licenses and fees, $496 for life insurance premiums and $1,395 for continuing professional educations programs. All other compensation reported for Mr. Manoushagian represents $185 relating to professional licenses and fees.

(2)		In June 2007, the board approved an increase in Mr. Craft’s annual base salary to $270,000 effective upon the filing of the registration statement of which this prospectus forms a part.

(3)		In the first quarter of 2007, the board increased Mr. Smart’s annual base salary to $190,000. In June 2007, the board approved an increase in Mr. Smart’s annual base salary to $225,000 effective upon the filing of the registration statement of which this prospectus forms a part.

(4)		In June 2007, the board approved an increase in Mr. Reed’s annual base salary to $185,000.

(5)		In June 2007, the board approved an increase in Mr. Manoushagian’s annual base salary to $160,000.

In February 2007, we hired J. Curtis Henderson to serve as our Executive Vice President, and General Counsel at an annual base salary of $190,000. In June 2007, the board approved an increase in Mr. Henderson’s annual base salary to $225,000 effective upon the filing of the registration statement of which this prospectus forms a part. In connection with his employment, Mr. Henderson was awarded 21,250 shares of our common stock as restricted stock, one-third of which will vest upon the closing of this offering, one-third of which will vest upon the one-year anniversary of the closing of this offering, and one-third of which will vest upon the two-year anniversary of the closing of this offering.

Grants of plan-based awards

During 2006, we did not make any awards under any plan to our named executive officers.

In June 2007, our board authorized the grant of stock awards under the 2007 Plan covering 100,000 shares of common stock (pre-split) to our named executive officers and a member of our technical team, which grants will become effective upon the closing of this offering. These stock awards were granted as follows: J. Ross Craft — 30,000 shares; Steven P. Smart — 20,000 shares, J. Curtis Henderson — 20,000 shares; Glenn W. Reed — 10,000 shares; Ralph P. Manoushagian — 10,000 shares; and a technical team member — 10,000 shares. As a related matter, our board also approved special bonuses to cover out-of-pocket taxes that will be incurred as a result of the receipt by these executives of stock awards.

Discussion of summary compensation and plan-based awards tables

Our executive compensation policies and practices, pursuant to which the compensation set forth in the Summary Compensation Table and the grants of Plan Based Awards table was paid or awarded, are described above under “—Compensation discussion and analysis.” A summary of certain material terms of our compensation plans and arrangements is set forth below.

Description of the 2007 Plan

The 2007 Plan allows for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, unrestricted stock awards and other incentive awards. The primary purpose of the 2007 Plan is to enhance our ability to attract and retain highly qualified officers, directors, key employees and other persons, and to motivate these persons to continue in our service and to expend maximum effort to improve our business results and earnings, by providing to these persons an opportunity to acquire or increase a direct proprietary interest in our operations and future success. We have reserved 10% of our outstanding shares of common stock for grant of awards under the 2007 Plan (which will be adjusted each year to remain at 10% of outstanding shares of our common stock), plus all shares of common stock that remain available for grant of awards under the prior plan, plus shares of common stock subject to outstanding awards under the prior plan that later cease to be subject to those awards for any reason other than those awards having been exercised. In addition, there are 115,385 shares of common stock (pre-split) subject to outstanding options under the prior plan that may be issued under the 2007 Plan.

Administration. The 2007 Plan provides for administration by the board of directors or compensation committee of the board of directors or another committee of the board of directors designated by the board of directors. Subject to the terms of the 2007 Plan, the board or the committee may select participants to receive awards, determine the types of awards and terms and conditions of awards and interpret provisions of the 2007 Plan. Currently, the 2007 Plan is administered by the board of directors but we expect that the Compensation and Nominating Committee will administer the 2007 Plan after the closing of this offering.

Common stock reserved for issuance under the 2007 Plan. Our common stock issued or to be issued under the 2007 Plan consists of authorized but unissued shares. If an award granted under the 2007 Plan expires, is forfeited or becomes unexercisable for any reason without having been exercised in full, the undelivered shares of common stock which were subject to the award shall become available for future awards under the 2007 Plan.

The maximum number of shares of common stock that may be subject to incentive stock options granted under the 2007 Plan is 1,100,000. The maximum number of shares of common stock that may be subject to all awards granted to any one participant each fiscal year is

330,000 shares. The maximum number of shares of common stock that may be subject to nonqualified stock options and stock appreciation rights granted to any one participant during a fiscal year is 330,000. The maximum amount that may be paid in cash pursuant to performance awards granted to a participant that are intended to satisfy the qualified performance-based compensation exception to Section 162(m) of the Internal Revenue Code is $5,000,000 for each fiscal year during the applicable performance period.

Adjustments for stock dividends and similar events. We may make appropriate adjustments in outstanding awards and the number of shares available for issuance under the 2007 Plan, including the individual limitations on awards, to reflect recapitalizations, reclassifications, stock spits, reverse splits, stock dividends and other similar events.

Eligibility. Awards may be made under the 2007 Plan to our employees, directors and consultants, including any employee who is an officer or director, and to any other person who, in the opinion of the committee, is in a position to make a significant contribution our success.

Amendment or termination of the 2007 Plan. Our board of directors may amend, suspend or terminate the 2007 Plan at any time and for any reason. The 2007 Plan shall terminate in any event ten years after the date of its approval by the stockholders. Amendments to the 2007 Plan will be submitted for stockholder approval if an amendment increases the maximum number of shares available under the 2007 Plan (except as otherwise allowable under the 2007 Plan), changes the designation or class of persons eligible to receive awards under the 2007 Plan, or if required by applicable law or by applicable stock exchange listing requirements. Amendments to limit the scope of the 2007 Plan or to comply with statutory or regulatory requirements do not require stockholder approval.

Options. The 2007 Plan permits the granting of options to purchase shares of common stock intended to qualify as incentive stock options under the Internal Revenue Code and stock options that do not qualify as incentive stock options. The exercise price of each stock option may not be less than 100% of the fair market value of the common stock on the date of grant. In the case of certain 10% stockholders who receive incentive stock options, the exercise price may not be less than 110% of the fair market value of the common stock on the date of grant. An exception to these requirements is made for options that we grant in substitution for options held by employees of companies that we acquire. In such a case, the exercise price is adjusted to preserve the economic value of the employee’s stock option from his or her former employer.

The term of each stock option is fixed at the time of grant and may not exceed 10 years from the date of grant. The committee determines at what time or times each option may be exercised and the period of time, if any, after retirement, death, disability or termination of employment during which options may be exercised. Options may be made exercisable in installments. The exercisability of options may be accelerated by the committee.

In general, a participant may pay the exercise price of an option in cash or in cash equivalents, by tendering shares of common stock having an aggregate fair market value at the time of exercise equal to the total exercise price, by surrendering a sufficient portion of the shares with respect to which the option is exercised having an aggregate fair market value at the time of exercise equal to the total exercise price, or in a combination of these forms.

Stock options granted under the 2007 Plan may not be sold, transferred, pledged or assigned other than by will or under applicable laws of descent and distribution. However, we may

permit in an award agreement the limited transfers of non-qualified options for the benefit of the family members of the optionees.

Other awards. The 2007 Plan permits the granting of the following additional types of awards:


•	shares of unrestricted stock, which are shares of common stock issued at no cost or for a purchase price and are free from any transferability and forfeiture restrictions;

•	shares of restricted stock, which are shares of common stock subject to transferability restrictions and a substantial risk of forfeiture;

•	restricted stock units, which constitute a promise to transfer common stock or an equivalent value in cash in the future;

•	dividend equivalent rights with respect to restricted stock units, which are rights entitling the recipient to receive either payments or credits of cash or additional restricted stock units equal in amount to the dividends that would be paid on the common stock subject to the restricted stock units;

•	stock appreciation rights, which are rights to receive a number of shares or, in the discretion of the committee, an amount in cash or a combination of shares and cash, based on the increase in the fair market value of the shares underlying the rights during a specified period of time;

•	performance awards, ultimately payable in common stock or cash (or a combination), as determined by the committee. Performance awards are conditioned upon the level of achievement of one or more stated performance goals over a specified performance period that is not shorter than one year. An award agreement will specify the amount, or a formula for determining the amount, that may be earned under the performance award, the performance criteria and level of achievement versus the performance criteria that will determine the amount payable under the performance award, and the performance period over which performance is measured. Awards to individuals who are covered employees under Section 162(m) of the Internal Revenue Code, or who are likely to be covered in the future, may be designed to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code to the extent that the committee so designates; and

•	other incentive awards, which may be payable in common stock, cash or other property as determined by the committee.

The committee establishes the terms and conditions of awards.

Change of Control. In the event of a “Change of Control” (as defined in the 2007 Plan), the vesting of all awards will be accelerated and any performance criteria will be deemed to be achieved to the maximum extent possible. If there is a Change of Control and we are not the surviving corporation (or we survive only as a subsidiary of another corporation), unless the committee determines otherwise, awards will be replaced with similar awards of the surviving corporation (or parent of the surviving corporation). The committee may require the surrender to us by selected participants of some or all of the outstanding awards held by such participants, at which time we will cancel those awards and cause to be paid to each affected participant a certain amount of cash per share, as specified in the 2007 Plan.

Outstanding equity awards at fiscal year-end

The following table summarizes the number of securities underlying outstanding plan awards for each named executive officer as of December 31, 2006. This table contains historical numbers and does not reflect the effect of our for stock split, effected in the form of a stock dividend, which will occur immediately prior to the closing of this offering.



	Option awards
	Number of
	securities underlying				Option		Option
	unexercised options				exercise		expiration
Name	Exercisable		Unexercisable		price		date


J. Ross Craft President and Chief Executive Officer		50,964		—	$	10.00	August 16, 2014
Steven P. Smart Executive Vice President and Chief Financial Officer		9,615		—	$	10.00	August 16, 2014
Glenn W. Reed Senior Vice President—Operations		11,538		—	$	10.00	August 16, 2014
Ralph P. Manoushagian Senior Vice President—Land		9,615		—	$	10.00	August 16, 2014

Option exercises

Our named executive officers did not exercise any stock options in 2006.

Pension benefits

We do not have any plan that provides for payments or other benefits at, following or in connection with retirement, other than our 401(k) plan.

Non-qualified deferred compensation

We do not have any plan that provides for the deferral of compensation on a basis that is not tax qualified.

Director compensation

Historically, our directors have not received any compensation for serving on our board, although we did reimburse directors for expenses incurred in connection with attendance at meetings of the board of directors. Following this offering, each non-employee member of our board of directors will receive compensation for service on our board of directors and committees thereof. Following this offering, non-employee and non-Yorktown directors will receive $85,000 per year in shares of our common stock or cash, at the election of each director, plus meeting expenses of $1,000 per board and $500 per committee meeting. The chairman of the Audit Committee will receive $7,500 per year and the chairs of the Compensation and Nominating Committee will receive $3,500 per year.

Employee directors will not receive compensation for service on our board of directors. All directors will be reimbursed for reasonable out-of-pocket expenses incurred in attending

meetings of the board or committees and for other reasonable expenses incurred in connection with service on the board and any committee.

Potential payments upon termination or change in control

We have employment agreements with certain of our named executive officers. Under the terms of the agreements, these officers receive an annual base salary and are eligible to participate in an annual bonus plan, to be administered by our board of directors or otherwise by the Compensation and Nominating Committee. If any of Mr. Craft, Mr. Reed or Mr. Smart is terminated for cause, we will be obligated to pay such named executive officer his base salary then in effect through the date of termination, prorated for any partial period of employment, and we shall have no further obligations to such named executive officer under his respective employment agreement.

The employment agreement of Messrs. Craft and Reed also provide that if such officer is terminated by us without cause, he will be entitled to continue to receive his respective base salary plus applicable benefits for a period of 24 months from the date of termination. Mr. Craft’s employment agreement provides that his termination during a change of control period will be deemed a termination without cause. Mr. Smart’s employment agreement provides that if he is terminated by us without cause, he will be entitled to continue to receive his base salary plus applicable benefits for a period of six months from the date of termination. Additionally, Mr. Craft’s employment agreement provides that if he terminates his employment for good reason, he will be entitled to receive severance compensation consisting of a 50% base salary lump sum payment within 20 days of termination and a 150% base salary lump sum payment within 90 days of termination.

If Mr. Craft, Mr. Reed or Mr. Smart had been terminated without cause on December 31, 2006, the approximate value of the severance benefits, assuming two weeks of accrued unused vacation time, under the employment agreement of each such named executive would have been as follows: Mr. Craft $429,000, Mr. Reed $337,000 and Mr. Smart $89,000.

For more information about these agreements, please read “—Executive compensation—Other benefits—Employment agreements and other arrangements.” We are not obligated to make any cash payments to any other named executive officer if their employment is terminated by us or by the executive. No severance benefits are provided for any of the named executive officers in the event of death or disability.

Pursuant to the terms of a restricted stock award agreement between the company and Mr. Henderson, our Executive Vice President and General Counsel, in the event of a change of control of the company (as defined in such award agreement), all unvested shares of restricted stock held by Mr. Henderson will fully vest.

This offering will not constitute a change in control of the company under these agreements.

Security ownership of certain beneficial owners
and management

The following table sets forth certain information regarding the beneficial ownership of Approach Resources Inc. common stock as of June 30, 2007, giving effect to the transactions contemplated by the contribution agreement, for:

(i) each person who, to our knowledge, beneficially owns more than 5% of our common stock;

(ii) each of our directors and executive officers; and

(iii) all of our executive officers and directors as a group, before our initial public offering and after the completion of our initial public offering.

Shares of Approach

common stock

beneficially owned

prior to offering(1)

after offering(2)

Name and address of beneficial owner

Number

Percent

Number

Percent

J. Ross Craft(3)(4)

Steven P. Smart(3)(4)

J. Curtis Henderson(3)

Glenn W. Reed(3)(4)

Ralph P. Manoushagian(3)(4)

Bryan H. Lawrence(5)(6)

James H. Brandi(7)

James C. Crain(8)

Sheldon B. Lubar(9)(10)

Christopher J. Whyte(11)

Yorktown Energy Partners V, L.P.(5)

Yorktown Energy Partners VI, L.P.(5)

Yorktown Energy Partners VII, L.P.(5)

Lubar Equity Fund, LLC(9)

Neo Canyon Exploration, L.P.(12)

All officers and directors as a group (10 persons)(4)


*		Less than one percent.

(1)		Unless otherwise indicated, all shares of stock are held directly with sole voting and investment power.

(2)		For purposes of calculating the percent of the class outstanding held by each owner shown above with a right to acquire additional shares, the total number of shares excludes the shares which all other persons have the right to acquire within 60 days after the date of this prospectus, pursuant to the exercise of outstanding stock options and warrants.

(3)		Has a principal business address of c/o Approach Resources Inc., 6300 Ridglea Place, Suite 1107, Fort Worth, Texas 76116.


(4)		The number of shares beneficially owned includes the following shares that are subject to options that are currently exercisable or will become exercisable within 60 days of the date of this prospectus:



		Shares subject
Name of beneficial owner		to options


J. Ross Craft
Steven P. Smart
Glenn W. Reed
Ralph P. Manoushagian


(5)		Has a principal business address of 410 Park Avenue, 19 ^th floor, New York, New York 10022.

(6)		Includes attribution of shares held by Yorktown Energy Partners V, L.P., Yorktown Energy Partners VI, L.P. and Yorktown Energy Partners VII, L.P.

(7)		Has a principal business address of 126 East 56th Street, New York, New York 10022.

(8)		Has a principal business address of 300 Crescent Court, Suite 900, Dallas, Texas 75201.

(9)		Has a principal business address of 700 N. Water Street, Suite 1200, Milwaukee, Wisconsin 53202.

(10)		Includes attribution of shares held by Lubar Equity Fund, LLC.

(11)		Has a principal business address of 6363 Woodway, Suite 350, Houston, Texas 77057.

(12)		Has a principal business address of 325 North St. Paul, Suite 4300, Dallas, Texas 75201.

Certain relationships and related party transactions

The contribution agreement

Immediately prior to the closing of this offering, Approach Resources Inc. will acquire all of the outstanding capital stock of Approach Oil & Gas Inc. and will acquire the 30% working interest in the Ozona Northeast field that Approach Resources Inc. does not already own from Neo Canyon Exploration, L.P. Upon the closing of the transactions contemplated by the contribution agreement, Neo Canyon Exploration, L.P. and each of the stockholders of Approach Oil & Gas Inc. will receive shares of stock in Approach Resources Inc. in exchange for their respective contributions. In addition, we have agreed to include up to shares of stock in the registration statement of which this prospectus is a part on behalf of the selling stockholder.

Convertible notes

On June 25, 2007, Yorktown Energy Partners VII, L.P. and Lubar Equity Fund, LLC loaned an aggregate of $20,000,000 to Approach Oil & Gas Inc. under two convertible promissory notes of $10,000,000 each. These notes bear interest at a rate of 7.00% per annum and mature on June 25, 2010. These notes are convertible at the election of the lender into shares of equity securities of Approach Oil & Gas Inc. upon the occurrence of certain events and automatically, and without further action required by any person, convert into shares of our common stock upon the consummation of this offering. The number of shares of our common stock to be issued upon the automatic conversion of these notes will be equal to the quotient obtained by dividing (a) the outstanding principal and accrued interest on each respective note by (b) the initial public offering price per share, less any underwriting discount per share for the shares of our common stock that are issued in this offering. The shares of our common stock issued to Yorktown Energy Partners VII, L.P. and Lubar Equity Fund, LLC upon such automatic conversion will be entitled to the same registration rights as those provided to certain holders of our common stock in connection with the contribution agreement. The total principal and interest

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owed under these notes as of June 30, 2007 was $20,023,014, consisting of $10,011,507 owed to each of Yorktown Energy Partners VII, L.P. and Lubar Equity Fund, LLC. Yorktown Energy Partners VII, L.P. is an affiliate of the Yorktown entities, and Lubar Equity Fund, LLC is an affiliate of Sheldon B. Lubar, who serves as a member of our board of directors.

Employment and indemnification agreements

We have entered into employment agreements with certain of our executive officers. See “Management—Executive compensation—Other benefits—Employment agreements and other arrangements” for a detailed description of these agreements. Additionally, we will enter into indemnification agreements with our officers and the members of our board of directors.

Indemnification of directors and officers

Section 145 of the Delaware General Corporation Law, or the DGCL, permits indemnification of officers, directors and other corporate agents under specific circumstances and subject to specific limitations. Our restated certificate of incorporation and restated bylaws provide that we will indemnify our directors and officers to the full extent permitted by the DGCL, including in circumstances in which indemnification is otherwise discretionary under Delaware law.

We will enter into indemnity agreements with our directors and executive officers that provide the maximum indemnity allowed to directors and executive officers by Section 145 of the DGCL, as well as certain additional procedural protections. The indemnity agreements provide that directors are and will be indemnified to the fullest extent not prohibited by law against all expenses (including attorneys’ fees) and settlement amounts paid or incurred by them in any action or proceeding as our directors or executive officers, including any action on account of their services as executive officers or directors of any other company or enterprise when they are serving in such capacities at our request, and including any action by us or in our right. In addition, the indemnity agreements provide for reimbursement of expenses incurred in conjunction with being a witness in any proceeding to which the indemnitee is not a party. We are required to pay in advance of a final disposition of a proceeding or claim the expenses incurred by the indemnitee no later than ten days after our receipt of an undertaking by or on behalf of the indemnitee to repay the amount of the expenses to the extent that it is ultimately determined that the indemnitee is not entitled to be indemnified by us. The indemnity agreements also provide the indemnitee with remedies in the event that we do not fulfill our obligations under the indemnity agreements.

Section 102(b)(7) of the DGCL permits a corporation to provide in its certificate of incorporation that a director of the corporation will not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for payments of unlawful dividends or unlawful stock repurchases or redemptions or (iv) for any transaction from which the director derived an improper personal benefit. Our certificate of incorporation provides for that limitation of liability.

We will maintain policies of insurance under which our directors and officers are insured, within the limits and subject to the limitations of the policies, against specific expenses in connection with the defense of, and specific liabilities which might be imposed as a result of, actions, suits or proceedings to which they are parties by reason of being or having been directors or officers.

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Business opportunities renunciation

All of our non-employee directors and certain of our stockholders may from time to time have investments in other exploration and production companies that may compete with us. Section 122(17) of the DGCL permits a Delaware corporation, such as Approach Resources Inc., to renounce in its certificate of incorporation or by action of its board of directors any interest or expectancy of the corporation in certain opportunities, effectively eliminating the ambiguity in a Delaware corporation’s ability to do so in advance arising out of prior Delaware case law. Under corporate law concepts of fiduciary duty, officers and directors generally have a duty to disclose to us opportunities that are related to our business and are generally prohibited from pursuing those opportunities unless we determine that we are not going to pursue them. Our restated certificate of incorporation and our Business Opportunities Agreement provide that so long as any of the parties to the Business Opportunities Agreement, which we refer to as “Designated Parties,” is serving as a member of our board of directors, we renounce any interest or expectancy in any business opportunity, transaction or other matter in and that involves any aspect of the oil and gas exploration, exploitation, development and production other than:


•	any business opportunity that is brought to the attention of a Designated Party solely in such person’s capacity as a director of our company and with respect to which, at the time of such presentment, no other Designated Party has independently received notice or otherwise identified such opportunity; or

•	any business opportunity that is identified by a Designated Party solely through the disclosure of information by or on behalf of us.

Thus, for example, a Designated Party may pursue opportunities in the oil and gas exploration and production industry for their own account. Our restated certificate of incorporation provides that the Designated Parties have no obligation to offer such opportunities to us.

Pursuant to this Business Opportunities Agreement approved by our board of directors, each of the Designated Parties will not have a duty to inform us of a business opportunity that he becomes aware of so long as he did not become aware of the opportunity solely as a consequence of serving as a member of our board of directors. Furthermore, the Designated Parties will each be permitted to pursue that opportunity even if it is competitive with our business. This business opportunities agreement does not prohibit us from pursuing any business opportunity to which we have renounced any interest or expectancy. It will provide the Designated Parties and their respective affiliates with some certainty that opportunities that they independently pursue will not be required to be first offered to us.

Registration rights agreement

In connection with the contribution agreement and certain other transactions, we will enter into a registration rights agreement with our existing stockholders, pursuant to which we will grant certain demand and “piggyback” registration rights.

Under the registration rights agreement, each of Yorktown Energy Partners V, L.P., Yorktown Energy Partners VI, L.P. and Yorktown Energy Partners VII, L.P. and the members of our management team will have the right to require us to file a registration statement for the public sale of all of the shares of common stock owned by it or them any time after six months following the date the SEC declares the registration statement of which this prospectus forms a part effective. In addition, if we sell any shares of our common stock in a registered

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underwritten offering, each of our existing stockholders will have the right to include his or its shares in that offering. The underwriters of any such offering will have the right to limit the number of shares to be included in such sale.

We will pay all expenses relating to any demand or piggyback registration, except for underwriters’ or brokers’ commission or discounts. The securities covered by the registration rights agreement will no longer be registrable under the registration rights agreement if they have been sold to the public either pursuant to a registration statement or under Rule 144 promulgated under the Securities Act.

Other related party transactions

In connection with the formation of Approach Resources Inc. and subsequent financing transactions, approximately 415,385 shares of our common stock were issued to certain of our executive officers and other key members of management in exchange for notes receivable. The notes issued by our executive officers and other key members of management, including J. Ross Craft, Steven P. Smart, Glenn W. Reed and Ralph P. Manoushagian, were full recourse, earned interest at an annual rate of 6.00%, and matured upon the earlier of (i) December 31, 2008 or, (ii) if earlier, the date upon which the Company or any successor to the Company registers any class of its securities under Section 12 of the Securities Exchange Act of 1934, is required to file periodic reports under Section 15(d) of the 1934 Act, or files a registration statement under the Securities Act of 1933, as amended. The note holders repaid these notes with interest in January 2007 by selling us an aggregate of 84,550 shares of our common stock in satisfaction of the management holders’ aggregate outstanding indebtedness of $4,184,324. The note holders received bonuses to cover out-of-pocket taxes incurred in 2007 as a result of the sale of their respective shares of our common stock to us as repayment for their respective management notes.

On May 10, 2006, we acquired interests in oil and gas properties in Western Kentucky from Hallador Petroleum Company for approximately $3.3 million in cash. Hallador Petroleum Company was owned 32% by Yorktown Energy Partners VI, L.P., an affiliate of the Yorktown entities, at the time of the acquisition. The valuation of the New Albany Shale oil and gas interests held by Hallador Petroleum Company was determined by arms-length negotiations between us and Hallador. At the time of the acquisition, Mr. Lawrence was a member of the board of directors of Hallador and a member of our board of directors. Under the terms of this agreement, 60 days after we drilled three exploratory gas wells, Hallador had the option to purchase a one-third working interest in the project by paying one-third of the land costs expended by us. In October 2006, Hallador sold one-half of its rights under this option to T.H. McElvain Oil & Gas Limited Partnership, an unaffiliated third party. Drilling began in December 2006. Hallador and McElvain jointly exercised the option in April 2007, leaving Hallador’s net ownership in the project at one-sixth.

Procedures for review and approval of related person transactions

Before the effective date of the registration statement of which this prospectus forms a part, we plan to adopt a written code of conduct. Under this written code of conduct, our executive officers and directors will not be permitted to enter into any transactions with us without the approval of either our audit committee or our board of directors. In approving or rejecting such proposed transactions, the audit committee or board of directors, as applicable, will consider the relevant facts and circumstances available and deemed relevant to the audit committee or

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board of directors, as applicable, including the risks, costs, benefits to the company, the terms of the transactions, the availability of other sources for comparable services or products and, if applicable, the impact on a director’s independence. Our audit committee and/or board of directors will approve only those transactions that, in light of known circumstances, are in, or are not inconsistent with, our best interests, as our audit committee or board of directors determines in the good faith exercise of its discretion. We will designate a compliance officer to generally oversee compliance with our code of conduct.

All of the transactions described above were entered into before the adoption of our code of conduct. Instead, their approvals are as described herein. The contribution agreement and related transactions were unanimously approved by our board of directors. The convertible notes were unanimously approved by our board of directors. The employment agreements, director and officer indemnification agreements and the business opportunities agreements were unanimously approved by our board of directors. The registration rights agreement was unanimously approved by our board of directors. The Ozona Pipeline and Hallador transactions were unanimously approved by our board of directors.

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Selling stockholder

The following table sets forth certain information with respect to the ownership by the selling stockholder of our common stock as of , 2007 and as adjusted to give effect to this offering. To our knowledge, the selling stockholder will have sole voting and investment power as to the shares shown. The selling stockholder is not a director, officer or employee of ours or an affiliate of such person.

Shares

owned prior

Number of

Shares owned

to offering(2)

shares being

after offering(3)(4)

Name of selling stockholder(1)

Number

Percent

offered(3)

redeemed by us

Number

Percent

Neo Canyon Exploration, L.P.


(1)		Ownership is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934.

(2)		Based upon an aggregate of shares to be outstanding following the consummation of the transactions described under “Certain relationships and related party transactions—The contribution agreement.”

(3)		Assumes no exercise of the underwriters’ over-allotment option.

(4)		Based upon an aggregate of shares to be outstanding following the consummation of the transactions described under “Certain relationships and related party transactions—The contribution agreement,” the automatic conversion of notes described under “Certain relationships and related party transactions—Convertible notes,” our for common stock split and this offering.

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Description of capital stock

The following description is based on relevant portions of the DGCL and on our restated certificate of incorporation and restated bylaws. This summary is not necessarily complete, and we refer you to the DGCL, and our restated certificate of incorporation and restated bylaws for a more detailed description of the provisions summarized below.

Our authorized capital stock consists of 90,000,000 shares of common stock, $0.01 par value per share, and 10,000,000 shares of preferred stock, par value $0.01 per share. Under Delaware law, our stockholders shall not be personally liable for our debts or obligations except as they may be liable by reason of their own conduct or acts.

Common stock

We have a total of shares of our common stock outstanding. Additionally, options to purchase shares of common stock are currently outstanding and have been granted to certain members of our management and employees and shares have been reserved for future grants. We have reserved 10% of our outstanding shares of common stock for grant of awards under the 2007 Plan (which shall be adjusted each year to remain at 10% of the outstanding shares of our common stock), plus all shares of common stock that remain available for grant of awards under the prior plan, plus shares of common stock subject to outstanding awards under the prior plan that later cease to be subject to those awards for any reason other than those awards having been exercised. Upon completion of this offering, we will have shares of common stock outstanding, or shares if the underwriters exercise their over-allotment option in full.

Holders of our common or restricted stock are entitled to one vote for each share held on all matters submitted to a vote of our stockholders. Because holders of common stock do not have cumulative voting rights, the holders of a majority of the shares of common stock can elect all of the members of the board of directors standing for election.

Holders of our common stock are entitled to receive dividends if, as and when such dividends are declared by our board of directors out of assets legally available therefor after payment of dividends required to be paid on shares of preferred stock, if any. Upon our dissolution, liquidation or winding up, and subject to any prior rights of outstanding preferred stock, the holders of our common stock will be entitled to share pro rata in the distribution of all our assets available for distribution to our stockholders after satisfaction of our debts and other liabilities and the payment of the liquidation preference of any preferred stock that may be outstanding. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and nonassessable. The holders of our common stock have no preemptive, conversion, redemption or other subscription rights. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of holders of shares of any series of preferred stock that we may designate and issue in the future.

Preferred stock

Subject to the provisions of our restated certificate of incorporation and limitations prescribed by law, our board of directors is authorized, without further stockholder approval, to establish and to issue from time to time one or more classes or series of preferred stock, par value

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$0.01 per share, covering up to an aggregate of 10,000,000 shares of preferred stock. Each class or series of preferred stock will cover the number of shares and will have preferences, voting powers, qualifications and special or relative rights or privileges as is determined by the board of directors, which may include, among others, dividend rights, liquidation preferences, voting rights, conversion rights, preemptive rights and redemption rights.

The rights of the holders of common stock will be subject to the rights of holders of any preferred stock issued in the future. The issuance of preferred stock could adversely affect the voting power of holders of common stock and reduce the likelihood that common stockholders will receive dividend payments and payments upon liquidation. The issuance of preferred stock could also have the effect of decreasing the market price of the common stock and could delay, deter or prevent a change in control of our company.

The existence of authorized but unissued shares of preferred stock could have anti-takeover effects because we could issue preferred stock with special dividend or voting rights that could discourage potential bidders. For example, a business combination could be impeded by the issuance of a series of preferred stock containing class voting rights that would enable the holder or holders of such series to block any such transaction. Alternatively, a business combination could be facilitated by the issuance of a series of preferred stock having sufficient voting rights to provide a required percentage vote of our stockholders. In addition, under some circumstances, the issuance of preferred stock could adversely affect the voting power and other rights of the holders of common stock and could also affect the likelihood that holders of our common stock will receive dividend payments and payments on liquidation. Although prior to issuing any series of preferred stock our board of directors will be required to make a determination as to whether the issuance is in the best interest of our stockholders, our board of directors could act in a manner that would discourage an acquisition attempt or other transaction that some, or a majority, of our stockholders might believe to be in their best interests or in which our stockholders might receive a premium for their stock over prevailing market prices of such stock. Our board of directors does not at present intend to seek stockholder approval prior to any issuance of currently authorized preferred stock, unless otherwise required by law or applicable stock exchange requirements.

Registration rights agreement

In connection with the contribution transaction and certain other transactions, we entered into a registration rights agreement with certain holders of our common stock prior to this offering. See “Certain relationships and related party transactions—Registration rights agreement.”

Anti-takeover effects of provisions of Delaware law, our restated certificate of incorporation and restated bylaws

A number of provisions in our restated certificate of incorporation, our restated bylaws and the DGCL may make it more difficult to acquire control of us. These provisions could deprive our stockholders of opportunities to realize a premium on the shares of common stock owned by them. In addition, these provisions may adversely affect the prevailing market price of our common stock. These provisions are intended to:


•	enhance the likelihood of continuity and stability in the composition of the board of directors and in the policies formulated by the board of directors;

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•	discourage transactions which may involve an actual or threatened change in control of us;

•	discourage tactics that may be involved in proxy fights; and

•	encourage persons seeking to acquire control of our company to consult first with the board of directors to negotiate the terms of any proposed business combination or offer.

Written consent of stockholders. Our restated certificate of incorporation and restated bylaws provide that any action required or permitted to be taken by our stockholders must be taken at a duly called meeting of stockholders and not by written consent.

Call of special stockholder meetings. Our restated bylaws provide that stockholders are not permitted to call special meetings of stockholders. Only our board of directors, chairman or Chief Executive Officer is permitted to call a meeting of stockholders.

Amending the bylaws. Our restated certificate of incorporation permits our board of directors to adopt, alter or repeal any provision of the restated bylaws or to make new bylaws. Our restated certificate of incorporation also provides that our restated bylaws may be amended by the affirmative vote of at least 67% of the voting power of the outstanding shares of our capital stock.

Classified board. Our restated certificate of incorporation provides that our board of directors is divided into three classes of directors, with the classes to be as nearly equal in number as possible. As a result, approximately one-third of our board of directors will be elected each year. The classification of directors has the effect of making it more difficult for stockholders to change the composition of our board of directors. Our restated certificate of incorporation and restated bylaws provide that the number of directors will be fixed from time to time pursuant to a resolution adopted by the board of directors.

Advance notice procedures for stockholder proposals and director nominations. Our restated bylaws provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual meeting of stockholders, must provide timely notice thereof in writing. To be timely, a stockholder’s notice generally must be delivered to or mailed and received at our principal executive offices not less than 90 and no more than 120 calendar days before the first anniversary of the date on which we first mailed our proxy materials for the preceding year’s annual meeting of stockholders. In addition, our restated bylaws specify requirements for the form and content of a stockholder’s notice. These provisions may preclude stockholders from bringing matters before an annual meeting of stockholders or from making nominations for directors at an annual meeting of stockholders.

Filling board of directors vacancies; removal. Our restated certificate of incorporation provides that vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by the affirmative vote of a majority of our directors then in office, though less than a quorum. Each director will hold office until his or her successor is elected and qualified, or until the director’s earlier death, resignation, retirement or removal from office. Any director may resign at any time upon written notice to us. Our restated certificate of incorporation provides, in accordance with the DGCL, that the stockholders may remove directors only for cause and by the affirmative vote of at least 67% of the voting power of all of the then-outstanding shares of our common stock. We believe that the removal of directors by the stockholders only for cause, together with the classification of the board of

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directors, will promote continuity and stability in our management and policies and that this continuity and stability will facilitate long-range planning.

No cumulative voting. The DGCL provides that stockholders are not entitled to use cumulative voting in the election of directors unless our restated certificate of incorporation provides otherwise. Under cumulative voting, a majority stockholder holding a sufficient percentage of a class of shares may be able to ensure the election of one or more directors. Our restated certificate of incorporation expressly precludes cumulative voting.

Authorized but unissued shares. Our restated certificate of incorporation provides that the authorized but unissued shares of preferred stock are available for future issuance without stockholder approval. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares of common stock and preferred stock could discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.

Delaware Business Combination Statute. We are subject to Section 203 of the DGCL regulating corporate takeovers. This section prevents a Delaware corporation from engaging in a business combination which includes a merger or sale of more than 10% of the corporation’s assets with a stockholder who owns 15% or more of the corporation’s outstanding voting stock, as well as affiliates and associates of any of those persons. That prohibition extends for three years following the date that stockholder acquired that amount of stock unless:


•	the transaction in which that stockholder acquired the stock is approved by the board of directors prior to that date;

•	upon completion of the transaction that resulted in the acquisition of the stock, the stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding those shares owned by various employee benefit plans or persons who are directors and also officers; or

•	on or after the date the stockholder acquired the stock, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock that is not owned by the stockholder.

Stockholders may, by adopting an amendment to our restated certificate of incorporation or our restated bylaws, elect for the corporation not to be governed by Section 203 of the DGCL. Such amendment shall not become effective until 12 months after the date it is adopted or applies to a stockholder. Neither our restated certificate of incorporation or restated bylaws exempt us from the restrictions imposed under Section 203. It is anticipated that the provisions of Section 203 may encourage companies interested in acquiring us to negotiate in advance with our board of directors. Section 203 will not apply to a business combination between us and Yorktown or a Yorktown affiliate because Yorktown held more than 15% of our stock prior to the effective date of our restated certificate of incorporation.

Limitation of liability of directors and officers; indemnification. Our restated certificate of incorporation provides that to the fullest extent permitted by Delaware law, as that law may be amended and supplemented from time to time, our directors shall not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the company or our stockholders,

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(ii) for acts or omissions not in good faith or which involve intentional misconduct, fraud or a knowing violation of law, (iii) the payment of dividends in violation of Section 174 of the DGCL, or (iv) for any transaction from which the director derived any improper personal benefit. The effect of the provision of our restated certificate of incorporation is to eliminate the rights of the company and our stockholders (through stockholders’ derivative suits on our behalf) to recover monetary damages against a director for breach of the fiduciary duty of care as a director (including breaches resulting from negligent behavior) except in the situations described in clauses (i) through (iv) above. Our restated bylaws also set forth certain indemnification provisions and provide for the advancement of expenses incurred by a director in defending a claim by reason of the fact that he was one of our directors (or was serving as a director or officer of another entity at our request), provided that the director agrees to repay the amounts advanced if the director is not entitled to be indemnified by us under the provisions of the DGCL. The indemnification provisions of our restated certificate of incorporation may reduce the likelihood of derivative litigation against directors and may discourage or deter stockholders or management from bringing a lawsuit against directors for breaches of their fiduciary duties, even though an action, if successful, otherwise might have benefited us and our stockholders.

The right to indemnification and advancement of expenses are not exclusive of any other rights to indemnification our directors or officers may be entitled to under any agreement, vote of stockholders or disinterested directors or otherwise. We intend to enter into indemnification agreements with each of our directors and some of our officers pursuant to which we agree to indemnify the director or officer against expenses, judgments, fines or amounts paid in settlement incurred by the director or officer and arising in his capacity as a director, officer, employee and/or agent of the company or other enterprise of which he is a director, officer, employee or agent acting at our request to the maximum extent permitted by applicable law, subject to certain limitations. Additionally, under Delaware law, we may purchase and maintain insurance for the benefit and on behalf of our directors and officers insuring against all liabilities that may be incurred by the director or officer in or arising out of his capacity as our director, officer, employee and/or agent.

Transfer agent and registrar

will be the transfer agent and registrar for our common stock.

Shares eligible for future sale

Prior to this offering, there has been no public market for our common stock. Sales of substantial amounts of common stock in the public market after we complete this offering, or the perception that such sales may occur, could adversely affect the prevailing market price of our common stock and could impair our ability to raise equity capital in the future through the sale of our equity securities.

As of , 2007, we had shares of common stock outstanding. Upon the closing of this offering, we will have shares of common stock outstanding and outstanding options to purchase shares of our common stock. All of the shares of our common stock sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by one of our “affiliates” as that term is defined in Rule 144 under the Securities Act. All of the shares outstanding other than the shares sold in

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this offering (a total of shares, or shares if the underwriters exercise their option to purchase additional shares in full) will be “restricted securities” within the meaning of Rule 144 under the Securities Act and may not be sold other than through registration under the Securities Act or pursuant to an exemption from registration, subject to the restrictions on transfer contained in the lock-up agreements described below and in “Underwriting.”

Persons who may be deemed affiliates generally include individuals or entities that control, are controlled by or are under common control with us and may include our officers, directors and significant stockholders.

Lock-up arrangements

In connection with this offering, we, our executive officers and directors and the other holders of our common stock (including the selling stockholder) have agreed that, during the period beginning from the date of this prospectus and continuing to and including the date 180 days after the date of this prospectus, neither we nor any of them will, directly or indirectly, offer, sell, offer to sell, contract to sell or otherwise dispose of any shares of our common stock without the prior written consent of J.P. Morgan Securities Inc., on behalf of the underwriters, with limited exceptions. This lock-up will not apply to approximately shares that are issuable upon the exercise of options outstanding under our long-term incentive plan and up to an additional shares covered by grants that we are permitted to award under our existing stock incentive plan during the 180-day lock-up period. See “Underwriting” for a description of these lock-up arrangements. Upon the expiration of these lock-up agreements, shares, or shares if the underwriters exercise their over-allotment option in full, will be eligible for sale in the public market under Rule 144 of the Securities Act, subject to volume limitations and other restrictions contained in Rule 144.

Rule 144

In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person, or persons whose shares are aggregated, who have beneficially owned restricted shares for at least one year, including the holding period of any prior owner (other than an “affiliate” of ours), would be entitled to sell within any three-month period a number of shares that does not exceed the greater of (i) 1% of the number of shares of common stock then outstanding or (ii) the average weekly trading volume of our common stock on the NASDAQ Global Market during the four calendar weeks preceding the filing of a Form 144 with respect to the sale.

Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of certain public information about us.

Rule 144(k)

Under Rule 144(k), a person who is not deemed to have been one of our “affiliates” at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner (other than an “affiliate” or ours) is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.

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Stock issued under employee plans

We intend to file a registration statement on Form S-8 under the Securities Act to register approximately shares of common stock issuable with respect to options and other equity incentive awards that have been granted or are reserved for issuance under our employee plans or otherwise. This registration statement is expected to be filed following the effective date of the registration statement of which this prospectus is a part and will be effective upon filing. Shares issued under our 2007 Plan will be eligible for resale in the public market without restriction after the effective date of the Form S-8 registration statements, subject to Rule 144 limitations applicable to affiliates. Under Rule 701 under the Securities Act, as currently in effect, each of our employees, officers, directors and consultants who purchased or received shares pursuant to a written compensatory plan or contract is eligible to resell these shares 90 days after the effective date of this offering in reliance upon Rule 144, but without compliance with specific restrictions. Rule 701 provides that affiliates may sell their Rule 701 shares under Rule 144 without complying with the holding period requirement and that non-affiliates may sell their shares in reliance on Rule 144 without complying with the holding period, public information, volume limitation or notice provisions of Rule 144.

Registration rights

In connection with the contribution transaction and certain other transactions, we entered into a registration rights agreement with certain of our stockholders covering shares of common stock owned by such stockholders. For a description of the registration rights agreement, see “Certain relationships and related party transactions—Registration rights agreement.”

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Material United States federal income and estate tax considerations for non-United States holders

The following is a summary of material United States federal income and, to a limited extent, estate tax considerations relating to the purchase, ownership and disposition of our common stock by persons that are non-United States holders (as defined below), but does not purport to be a complete analysis of all the potential tax considerations relating thereto. This summary is based upon the current provisions of the Internal Revenue Code of 1986, as amended, or the Code, Treasury Regulations, administrative rulings, published positions of the Internal Revenue Service, or the IRS, court decisions thereunder and other applicable authorities, all as now in effect and all of which are subject to change or differing interpretations, in each case, possibly with retroactive effect. This summary deals only with non-United States holders that will hold our common stock as a “capital asset” (generally, property held for investment). In addition, this discussion does not address all of the United States federal income tax consequences that may be relevant to a particular person in light of its particular circumstances and tax considerations applicable to investors that may be subject to special rules under United States federal income tax law, such as (without limitation):


•	certain former citizens or residents of the United States;

•	stockholders that hold out common stock as part of a straddle, appreciated financial position, synthetic security, hedge, conversion transaction or other integrated investment or risk reduction transaction;

•	stockholders who acquired our common stock through the exercise of employee stock options or otherwise as compensation or through a tax qualified retirement plan;

•	stockholders that are S corporations, entities or arrangements treated as partnerships for United States federal income tax purposes or other pass through entities or owners thereof;

•	financial institutions;

•	insurance companies;

•	tax-exempt entities;

•	dealers in securities or foreign currencies; and

•	traders in securities that mark to market.

Furthermore, this summary does not address any aspect of state, local, foreign or other tax laws or the gift tax or alternative minimum tax provisions of the Code.

If a partnership (including an entity or arrangement treated as a partnership for United States federal income tax purposes) holds the common stock, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partnership (including an entity or arrangement treated as a partnership for United States federal income tax purposes) holding our common stock or a partner of such a partnership, you should consult your tax advisor.

We have not sought any ruling from the IRS with respect to the statements made and the conclusions reached in the following summary. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of those set forth below.

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As used in this discussion, except as otherwise defined for estate tax purposes, a “non-United States holder” is a beneficial owner of common stock (other than an entity treated as a partnership for United States federal income tax purposes) that for United States federal income tax purposes is not:


•	an individual who is a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or who meets the “substantial presence” test under Section 7701(b) of the Code;

•	a corporation, or other entity treated as a corporation for United States federal income tax purposes, that was created or organized in or under the laws of the United States or any political subdivision thereof;

•	an estate whose income is subject to United States federal income taxation regardless of its source; or

•	a trust (i) if its administration is subject to the supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (ii) that has a valid election in effect under applicable United States Treasury Regulations to be treated as a United States person.

INVESTORS CONSIDERING THE PURCHASE OF COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME AND ESTATE TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.

Dividends

We do not presently expect to declare or pay any dividends on our common stock in the foreseeable future. However, if we do make distributions on our common stock, such distributions will constitute dividends for United States federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under United States federal income tax principles. Distributions in excess of earnings and profits will constitute a return of capital that is applied against and reduces the non-United States holder’s adjusted tax basis in our common stock (on a share by share basis). Any remaining excess will be treated as gain realized on the sale or other disposition of the common stock and will be treated as described under “—Gain on disposition of common stock” below. The gross amount of any dividend (out of earnings and profits) paid to a non-United States holder of common stock generally will be subject to United States withholding tax at a rate of 30% unless the holder is entitled to an exemption from or reduced rate of withholding under an applicable income tax treaty. In order to receive a reduced treaty rate, prior to the payment of a dividend a non-United States holder must provide us with a properly completed IRS Form W-8BEN (or successor form) certifying qualification for the reduced rate.

Dividends paid to a non-United States holder that are effectively connected with a trade or business conducted by the non-United States holder in the United States (and, where a tax treaty applies, are attributable to a permanent establishment maintained by the non-United States holder in the United States) generally will be exempt from the withholding tax described above and instead will be subject to United States federal income tax on a net income basis at the regular graduated individual or corporate United States federal income tax rates in much

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the same manner as if the non-United States holder were a resident of the United States. In order to obtain this exemption from withholding tax prior to the payment of a dividend, a non-United States holder must provide us with an IRS Form W-8ECI or W-8BEN, as applicable, (or other applicable form) properly certifying eligibility for such exemption. A corporate non-United States holder also may be subject to an additional “branch profits” tax at a rate of 30% of its effectively connected earnings and profits or such lower rate as may be specified by an applicable tax treaty.

A non-United States holder who provides us with an IRS Form W-8BEN or an IRS Form W-8ECI may be required to periodically update such form.

If a non-United States holder is eligible for a reduced rate of United States withholding tax pursuant to an income tax treaty, the non-United States holder may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS.

Gain on disposition of common stock

Any gain realized on the sale or other disposition of our common stock by a non-United States holder generally will not be subject to United States federal income tax unless:


•	the gain is effectively connected with a trade or business conducted by the non-United States holder in the United States, and, if required by an applicable income tax treaty, is attributable to a United States permanent establishment of the non-United States holder;

•	the non-United States holder is an individual who is present in the United States for 183 days or more in the taxable year of disposition and certain other conditions are met; or

•	we are or have been a “United States real property holding corporation” for United States federal income tax purposes.

A non-corporate non-United States holder described in the first bullet point immediately above will be subject to tax on the net gain derived from the sale under regular graduated United States federal income tax rates. If a non-United States holder that is a foreign corporation falls under the first bullet point immediately above, it generally will be subject to tax on its net gain in the same manner as if it were a United States person as defined under the Code and, in addition, may be subject to the branch profits tax equal to 30% of its effectively connected earnings and profits or at such lower rate as may be specified by an applicable income tax treaty.

An individual described in the second bullet point will be subject to tax on such gain (net of certain U.S. source losses) at a rate of 30%, unless otherwise specified by an applicable treaty.

As to the third bullet point, we believe that we are currently a “United States real property holding corporation” for United States federal income tax purposes. So long as our common stock is “regularly traded on an established securities market,” only a non-United States holder who holds or held (at any time during the shorter of the five year period preceding the date of disposition or the holder’s holding period) more than 5% of our common stock will be subject to United States federal income tax on the disposition of our common stock. If our common stock were not considered to be “regularly traded on an established securities market,” all non-United States holders would be subject to United States federal income tax on a disposition of our common stock.

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Non-United States holders should consult their own tax advisors with respect to the application of the foregoing rules to their ownership and disposition of our common stock.

Federal estate taxes

If an individual non-United States holder (which for United States federal estate tax purposes is neither a citizen nor a domiciliary of the United States) is treated as the owner, or has made certain lifetime transfers, of an interest in our common stock, then the value thereof will be included in his or her gross estate for United States federal estate tax purposes, and such individual’s estate and may be subject to United States federal estate tax, unless an applicable estate tax treaty provides otherwise.

Information reporting and backup withholding

We must report annually to the IRS and to each non-United States holder the amount of dividends paid to such holder and the tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the non-United States holder resides under the provisions of an applicable income tax treaty or other agreement.

Payments of dividends or of proceeds on the disposition of stock made to a non-United States holder may be subject to additional information reporting and backup withholding. Backup withholding will not apply if the non-United States holder establishes an exemption, for example, by properly certifying its non-United States status on an IRS Form W-8BEN (or successor form).

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a non-United States holder’s United States federal income tax liability provided the required information is timely furnished to the IRS.

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Underwriting

J.P. Morgan Securities Inc. is acting as sole book-runner and joint lead manager, and A.G. Edwards & Sons, Inc. is acting as joint lead manager for this offering.

We, the selling stockholder and the underwriters named below have entered into an underwriting agreement covering the common stock to be sold in this offering. Each underwriter has severally agreed to purchase, and we and the selling stockholder have agreed to sell to each underwriter, the number of shares of common stock set forth opposite their names in the following table.



Name		Number of shares


J.P. Morgan Securities Inc.
A.G. Edwards & Sons, Inc.

Total

The underwriting agreement provides that if the underwriters take any of the shares presented in the table above, then they must take all of the shares. No underwriter is obligated to take any shares allocated to a defaulting underwriter except under limited circumstances. The underwriting agreement provides that the obligations of the underwriters are subject to certain conditions precedent, including the absence of any material adverse change in our business and the receipt of certain certificates, opinions and letters from us, our counsel and our independent auditors.

The underwriters are offering the shares of common stock, subject to the prior sale of shares, and when, as and if such shares are delivered to and accepted by them. The underwriters will initially offer to sell shares to the public at the initial public offering price shown on the front cover page of this prospectus. The underwriters may sell shares to securities dealers at a discount of up to $ per share from the initial public offering price. Any such securities dealers may resell shares to certain other brokers or dealers at a discount of up to $ per share from the initial public offering price. After the initial public offering, the underwriters may vary the public offering price and other selling terms.

If the underwriters sell more shares than the total number shown in the table above, the underwriters have the option to buy up to an additional shares of common stock from us and the selling stockholder to cover such sales. They may exercise this option during the 30-day period from the date of this prospectus. If any shares are purchased under this option, the underwriters will purchase shares in approximately the same proportion as shown in the table above. If any additional shares of common stock are purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered.

At our request, the underwriters have reserved up to shares of common stock offered hereby for sale to our employees and other persons associated with us or our officers or directors, which we refer to as our directed share program. The number of shares of common stock available for sale to the general public in the initial public offering will be reduced to the extent these persons purchase any reserved shares pursuant to the directed share program. Any shares not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered in this prospectus.

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The following table shows the per share and total underwriting discounts that we and the selling stockholder will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares.

Paid by

Approach Resources Inc.

selling stockholder

Without

With full

Without

With full

over-allotment

exercise

Per share

Total

The underwriters have advised us that they may make short sales of our common stock in connection with this offering, resulting in the sale by the underwriters of a greater number of shares than they are required to purchase pursuant to the underwriting agreement. The short position resulting from those short sales will be deemed a “covered” short position to the extent that it does not exceed the shares subject to the underwriters’ over-allotment option and will be deemed a ”naked” short position to the extent that it exceeds that number. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the trading price of the common stock in the open market that could adversely affect investors who purchase shares in this offering. The underwriters may reduce or close out their covered short position either by exercising the over-allotment option or by purchasing shares in the open market. In determining which of these alternatives to pursue, the underwriters will consider the price at which shares are available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. Any “naked” short position will be closed out by purchasing shares in the open market. Similar to the other stabilizing transactions described below, open market purchases made by the underwriters to cover all or a portion of their short position may have the effect of preventing or retarding a decline in the market price of our common stock following this offering. As a result, our common stock may trade at a price that is higher than the price that otherwise might prevail in the open market.

The underwriters have advised us that, pursuant to Regulation M under the Securities Exchange Act of 1934, they may engage in transactions, including stabilizing bids or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the shares of common stock at a level above that which might otherwise prevail in the open market. A “stabilizing bid” is a bid for or the purchase of shares of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A “penalty bid” is an arrangement permitting the underwriters to claim the selling concession otherwise accruing to an underwriter or syndicate member in connection with the offering if the common stock originally sold by that underwriter or syndicate member is purchased by the underwriters in the open market pursuant to a stabilizing bid or to cover all or part of a syndicate short position. The underwriters have advised us that stabilizing bids and open market purchases may be effected on the NASDAQ Global Market, in the over-the-counter market or otherwise and, if commenced, may be discontinued at any time.

One or more of the underwriters may facilitate the marketing of this offering online directly or through one of its affiliates. In those cases, prospective investors may view offering terms and a

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prospectus online and, depending upon the particular underwriter, place orders online or through their financial advisor.

We estimate that our total expenses for this offering, excluding underwriting discounts, will be approximately $ .

We and the selling stockholder have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act.

We, our executive officers and directors, the selling stockholder and certain significant holders of our outstanding common stock have agreed that, during the period beginning from the date of this prospectus and continuing to and including the date 180 days after the date of this prospectus, neither we nor any of them will, directly or indirectly, offer, sell, offer to sell, contract to sell or otherwise dispose of any shares of our common stock without the prior written consent of J.P. Morgan Securities Inc., except in limited circumstances.

The underwriters have informed us that they do not intend sales to discretionary accounts to exceed 5% of the total number of shares of our common stock offered by them and that no sales to discretionary accounts may be made without prior written approval of the customer.

We have applied to list our common stock on the NASDAQ Global Market under the symbol “AREX.” The underwriters intend to sell shares of our common stock so as to meet the distribution requirements of this listing.

There has been no public market for the common stock prior to this offering. We, the selling stockholder and the underwriters will negotiate the initial public offering price. In determining the initial public offering price, we, the selling stockholder and the underwriters expect to consider a number of factors in addition to prevailing market conditions, including:


•	the information set forth in this prospectus and otherwise available to the underwriters;

•	the history of and prospects for our industry;

•	an assessment of our management;

•	our present operations;

•	our historical results of operations;

•	the trend of our revenues and earnings;

•	our earnings prospects;

•	the general condition of the securities markets at the time of this offering;

•	the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and

•	other factors deemed relevant by us, the selling stockholder and the underwriters.

We, the selling stockholder and the underwriters will consider these and other relevant factors in relation to the price of similar securities of generally comparable companies. Neither the Company, the selling stockholder nor the underwriters can assure investors that an active trading market will develop for the common stock, or that the common stock will trade in the public market at or above the initial public offering price.

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Affiliates of J.P. Morgan Securities Inc. will receive in excess of 10% of the net proceeds from this offering. According to Rule 2720 of the National Association of Securities Dealers, Inc.’s, also referred to as the NASD, Conduct Rules, the offering must comply with the requirements of Rule 2720 of the NASD Conduct Rules. That rule requires that the initial public offering price can be no higher than that recommended by a “qualified independent underwriter,” as defined by the NASD. In view of J.P. Morgan Securities Inc.’s relationship with us, the offering is being conducted in accordance with the rules of the NASD, and A.G. Edwards & Sons, Inc. will serve in the capacity of “qualified independent underwriter” and will perform due diligence investigations and review and participate in the preparation of the registration statement of which this prospectus forms a part. We have agreed to reimburse A.G. Edwards & Sons, Inc. for its expenses, if any, incurred as a result of its engagement as qualified independent underwriter. The underwriters may not confirm sales to any discretionary account without the prior specific written approval of the customer.

From time to time in the ordinary course of their respective businesses, certain of the underwriters and their affiliates perform various financial advisory, investment banking and commercial banking services from time to time for us and our affiliates. For example, certain affiliates of the underwriters to this offering are lenders under our revolving credit facility. JPMorgan Chase Bank, N.A., an affiliate of J.P. Morgan Securities Inc., is a lender under our revolving credit facility. See “Use of proceeds.”

Legal matters

The validity of our shares of common stock offered by this prospectus will be passed upon for us by Thompson & Knight LLP, Dallas, Texas. Legal matters in connection with this offering will be passed upon for the underwriters by Cahill Gordon & Reindel LLP , New York, New York.

Experts

The combined financial statements of Approach Resources Inc. and affiliated entities as of December 31, 2005 and 2006, and for each of the three years in the period ended December 31, 2006 included in this prospectus have been audited by Hein & Associates LLP, independent registered public accountants, as stated in their report appearing in this registration statement, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

The Historical Summaries of Revenues and Direct Operating Expenses of Properties to be Acquired by Approach Resources Inc. as of December 31, 2005 and 2006, and for the years then ended included in this prospectus have been audited by Hein & Associates LLP, independent registered public accountants, as stated in their report appearing in this registration statement, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing

The information included in this prospectus regarding estimated quantities of proved reserves, the future net revenues from those reserves and their present value is based, in part, on our estimates of the proved reserves, present values of proved reserves as of December 31, 2006 prepared by DeGolyer & MacNaughton, an independent engineering firm, and present values of proved reserves as of December 31, 2005 and 2004 prepared by Cawley, Gillespie & Associates,

120

Inc, an independent engineering firm. These estimates are included in this prospectus in reliance upon the authority of DeGolyer & MacNaughton and Cawley, Gillespie and Associates, Inc. as experts in these matters.

Where you can find more information

We have filed with the SEC a registration statement on Form S-1, including exhibits, under the Securities Act with respect to the common stock to be sold in this offering. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits that are part of the registration statement. For further information about us and our common stock, you should refer to the registration statement. Any statements made in this prospectus as to the contents of any contract, agreement or other document are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the registration statement, you should refer to the exhibit for a more complete description of the matter involved, and each statement in this prospectus shall be deemed qualified in its entirety by this reference.

You may read, without charge, and copy, at prescribed rates, all or any portion of the registration statement or any reports, statements or other information in the files at the public reference facilities of the SEC’s principal office at Room 1580, 100 F Street, N.E., Washington, D.C., 20549. You can request copies of these documents upon payment of a duplicating fee by writing to the SEC. You may call the SEC at 1-800-SEC-0330 for further information on the operation of its public reference rooms. Our filings, including the registration statement, will also be available to you on the Internet web site maintained by the SEC at http://www.sec.gov.

After the completion of this offering, we will file with or furnish to the SEC periodic reports and other information. These reports and other information may be inspected and copied at the public reference facilities maintained by the SEC or obtained from the SEC’s website as provided above. After the completion of this offering, we expect our website on the Internet to be located at http://www.approachresources.com , and we expect to make our periodic reports and other information filed with or furnished to the SEC available, free of charge, through our website, as soon as reasonably practical after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus. You may also request a copy of these filings at no cost, by writing or telephoning us at: Approach Resources Inc., 6300 Ridglea Place, Suite 1100, Fort Worth, Texas 76116, (817) 989-9000.

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Glossary of selected oil and gas terms

The following is a description of the meanings of some of the oil and gas industry terms used in this prospectus.

3-D seismic. (Three Dimensional Seismic Data) Geophysical data that depicts the subsurface strata in three dimensions. 3-D seismic data typically provides a more detailed and accurate interpretation of the subsurface strata than two dimensional seismic data.

Basin. A large natural depression on the earth’s surface in which sediments generally brought by water accumulate.

Bbl. One stock tank barrel, of 42 U.S. gallons liquid volume, used herein in reference to oil, condensate or natural gas liquids.

Bcfe. Billion cubic feet of natural gas equivalent, determined using the ratio of six Mcf of gas to one Bbl of oil, condensate or gas liquids.

Biogenic gas. Natural gas formed at low temperatures by anaerobic bacterial decomposition of organic matter.

Btu or British Thermal Unit. The quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit.

Completion. The installation of permanent equipment for the production of oil or gas.

Conventional resources or reserves. Natural gas or oil resources or reserves that are generally trapped by hydrodynamic processes and commonly contain discrete, measurable accumulations of hydrocarbons.

Developed acreage. The number of acres that are allocated or assignable to productive wells or wells that are capable of production.

Developmental well. A well drilled within the proved boundaries of an oil or gas reservoir with the intention of completing the stratigraphic horizon known to be productive.

Dry hole. A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes.

Dry hole costs. Costs incurred in drilling a well, assuming a well is not successful, including plugging and abandonment costs.

Exploitation. Ordinarily considered to be a form of development within a known reservoir.

Exploratory well. A well drilled to find and produce oil or gas reserves not classified as proved, to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir or to extend a known reservoir.

Farmout. An agreement whereby the owner of a leasehold or working interest agrees to assign an interest in certain specific acreage to the assignees, retaining an interest such as an overriding royalty interest, an oil and gas payment, offset acreage or other type of interest, subject to the drilling of one or more specific wells or other performance as a condition of the assignment.

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Field. An area consisting of either a single reservoir or multiple reservoirs, all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.

Finding and development costs. Capital costs incurred in the acquisition, exploration, development, exploitation and revisions of proved oil and gas reserves divided by proved reserve additions.

Fracing or Fracture stimulation technology. The technique of improving a well’s production or injection rates by pumping a mixture of fluids into the formation and rupturing the rock, creating an artificial channel. As part of this technique, sand or other material may also be injected into the formation to keep the channel open, so that fluids or gases may more easily flow through the formation.

Gross acres or gross wells. The total acres or wells, as the case may be, in which a working interest is owned.

Lease operating expenses. The expenses of lifting oil or gas from a producing formation to the surface, and the transportation and marketing thereof, constituting part of the current operating expenses of a working interest, and also including labor, superintendence, supplies, repairs, short lived assets, maintenance, allocated overhead costs, ad valorem taxes and other expenses incidental to production, but excluding lease acquisition or drilling or completion expenses.

MBbls. Thousand barrels of oil or other liquid hydrocarbons.

Mcf. Thousand cubic feet of natural gas.

Mcfe. Thousand cubic feet equivalent, determined using the ratio of six Mcf of gas to one Bbl of oil, condensate or gas liquids.

MMBbls. Million barrels of oil or other liquid hydrocarbons.

MMBoe. Million barrels of oil equivalent, with six thousand cubic feet of natural gas being equivalent to one barrel of oil.

MMBtu. Million British thermal units.

MMcf. Million cubic feet of gas.

MMcfe. Million cubic feet equivalent, determined using the ratio of six Mcf of gas to one Bbl of oil, condensate or gas liquids.

Net acres or net wells. The sum of the fractional working interests owned in gross acres or wells, as the case may be.

NYMEX. New York Mercantile Exchange.

Productive well. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes.

Prospect. A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of commercial hydrocarbons.

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Proved developed producing reserves. Proved developed reserves that are expected to be recovered from completion intervals currently open in existing wells and capable of production to market.

Proved developed reserves. Proved reserves that can be expected to be recovered from existing wells with existing equipment and operating methods.

Proved reserves. The estimated quantities of oil, gas and gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.

Proved undeveloped reserves or “PUDs.” Proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion.

PV-10 or present value of estimated future net revenues. An estimate of the present value of the estimated future net revenues from proved oil and gas reserves at a date indicated after deducting estimated production and ad valorem taxes, future capital costs and operating expenses, but before deducting any estimates of federal income taxes. The estimated future net revenues are discounted at an annual rate of 10%, in accordance with the Securities and Exchange Commission’s practice, to determine their “present value.” The present value is shown to indicate the effect of time on the value of the revenue stream and should not be construed as being the fair market value of the properties. Estimates of future net revenues are made using oil and gas prices and operating costs at the date indicated and held constant for the life of the reserves.

Recompletion. The addition of production from another interval or formation in an existing wellbore.

Reserve life index. This index is calculated by dividing year-end reserves by our annualized December 2006 average net daily production to estimate the number of years of remaining production.

Reservoir. A porous and permeable underground formation containing a natural accumulation of producible oil and/or gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.

Spacing. The distance between wells producing from the same reservoir. Spacing is expressed in terms of acres, e.g., 40-acre spacing, and is established by regulatory agencies.

Standardized Measure. The present value of estimated future net revenues to be generated from the production of proved reserves, determined in accordance with the rules and regulations of the SEC (using prices and costs in effect as of the period end date) without giving effect to non-property related expenses such as general and administrative expenses, debt service and future income tax expenses or to depreciation, depletion and amortization and discounted using an annual discount rate of 10%. Standardized measure does not give effect to derivative transactions.

Tcfe. Trillion cubic feet equivalent, determined using the ratio of six Mcf of gas to one Bbl of oil, condensate or gas liquids.

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Thermogenic gas. Natural gas formed by thermal cracking of sedimentary organic matter into hydrocarbon liquids and gas, and thermal cracking of oil at high temperatures into gas and pyrobitumen.

Tight gas sands. A formation with low permeability that produces natural gas with low flow rates for long periods of time.

Unconventional resources or reserves. Natural gas or oil resources or reserves from (i) low-permeability sandstone and shale formations, such as tight gas and gas shales, respectively, and (ii) coalbed methane.

Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil or gas regardless of whether or not such acreage contains proved reserves.

Wellbore. The hole drilled by the bit that is equipped for gas and oil production on a completed well. Also called well or borehole.

Working interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and receive a share of production.

Workover. Operations on a producing well to restore or increase production.

/d. “Per day” when used with volumetric units or dollars.

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Index to financial statements of Approach Resources Inc. and affiliated entities


	Page

Approach Resources Inc. and Affiliated Entities Combined Financial Statements:
Annual Financial Statements
Report of Independent Registered Public Accounting Firm		F-2
Combined Balance Sheets as of December 31, 2005 and 2006		F-3
Combined Statements of Operations for the years ended December 31, 2004, 2005 and 2006		F-4
Combined Statement of Changes in Stockholders’ Equity for the years ended December 31, 2004, 2005 and 2006		F-5
Combined Statements of Cash Flows for the years ended December 31, 2004, 2005 and 2006		F-6
Notes to Combined Financial Statements		F-7
Unaudited Financial Statements
Combined Balance Sheet as of March 31, 2007 (unaudited)		F-24
Unaudited Combined Statements of Operations for the three months ended March 31, 2006 and 2007		F-25
Combined Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2007 (unaudited)		F-26
Unaudited Combined Statements of Cash Flows for the three months ended March 31, 2006 and 2007		F-27
Notes to Unaudited Combined Financial Statements		F-28
Historical Summaries of Revenues and Direct Operating Expenses of Properties to be Acquired by Approach Resources Inc.
Report of Independent Registered Public Accounting Firm		F-32
Statements of Revenue and Direct Operating Expenses of properties to be acquired by Approach Resources Inc. for the years ended December 31, 2005 and 2006 and the three months ended March 31, 2006 and 2007 (unaudited)		F-33
Notes to Historical Summaries of Revenue and Direct Operating Expenses of Properties to be Acquired by Approach Resources Inc. for the years ended December 31, 2005 and 2006 and the three months ended March 31, 2006 and 2007 (unaudited)		F-34

F-1

Report of independent registered public accounting firm

To the Board of Directors

Approach Resources Inc.

Fort Worth, Texas

We have audited the accompanying combined balance sheets of Approach Resources Inc. and affiliated entities (the “Company”) as of December 31, 2005 and 2006, and the related combined statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Approach Resources Inc. and affiliated entities as of December 31, 2005 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

Hein & Associates LLP

Dallas, Texas

May 7, 2007

F-2

Approach Resources Inc. and affiliated entities
Combined balance sheets



	December 31,
	2005			2006



ASSETS
CURRENT ASSETS:
Cash	$	3,219,463		$	4,911,241
Accounts receivable:
Joint interest owners		8,826,035			4,812,439
Oil and gas sales		6,833,717			3,457,948
Unrealized gain on commodity derivatives		—			4,504,996
Prepaid expenses and other current assets		644,740			424,081


Total current assets		19,523,955			18,110,705
PROPERTIES AND EQUIPMENT:
Oil and gas properties, at cost, using the successful efforts method of accounting		97,810,212			155,627,580
Furniture, fixtures and equipment		232,648			255,451


		98,042,860			155,883,031
Less accumulated depreciation, depletion and amortization		(9,239,953	)		(23,771,187	)


Net properties and equipment		88,802,907			132,111,844
OTHER ASSETS		88,995			86,169


Total assets	$	108,415,857		$	150,308,718


LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	20,529,911		$	7,513,219
Oil and gas payables		6,644,579			4,940,415
Accrued liabilities		1,408,196			2,967,780
Unrealized loss on commodity derivatives		4,163,098			—


Total current liabilities		32,745,784			15,421,414
NON-CURRENT LIABILITIES:
Long-term debt		29,425,000			47,619,000
Deferred income taxes		6,447,916			17,549,107
Asset retirement obligations		107,230			147,644


Total liabilities		68,725,930			80,737,165
COMMITMENTS AND CONTINGENCIES (Notes 8 and 9)
STOCKHOLDERS’ EQUITY (Note 4) :
Preferred stock		—			—
Common stock		30,000			30,654
Additional paid-in capital		34,501,930			43,067,000
Retained earnings		9,456,318			30,658,223
Loans to stockholders		(4,298,321	)		(4,184,324	)


Total stockholders’ equity		39,689,927			69,571,553


Total liabilities and stockholders’ equity	$	108,415,857		$	150,308,718

See accompanying notes to these combined financial statements.

F-3

Approach Resources Inc. and affiliated entities
Combined statements of operations



	For the years ended December 31,
	2004			2005			2006


REVENUES:
Oil and gas sales	$	5,682,280		$	40,339,438		$	52,893,853
Overhead and services income		130,309			408,016			514,209


Total revenues		5,812,589			40,747,454			53,408,062
EXPENSES:
Lease operating expense		179,298			2,909,639			3,888,854
Severance and production taxes		406,364			1,975,105			1,735,839
Exploration		2,396,370			733,548			1,640,340
Impairment of non-producing properties		—			—			558,446
General and administrative		2,073,675			3,066,807			2,929,755
Accretion of discount on asset retirement obligations		582			4,974			10,299
Depletion, depreciation and amortization		1,223,340			8,006,054			14,540,570


Total expenses		6,279,629			16,696,127			25,304,103


OPERATING INCOME (LOSS)		(467,040	)		24,051,327			28,103,959
OTHER:
Interest income (expense), net		200,870			(802,065	)		(3,813,589	)
Change in fair value of commodity derivatives		—			(4,163,098	)		8,668,094


INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES		(266,170	)		19,086,164			32,958,464
PROVISION FOR INCOME TAXES		—			7,027,916			11,756,559


NET INCOME (LOSS)	$	(266,170	)	$	12,058,248		$	21,201,905


EARNINGS (LOSS) PER SHARE:
Basic	$	(0.14	)	$	4.03		$	7.04


Diluted	$	(0.14	)	$	4.03		$	6.84


WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic		1,928,225			2,988,986			3,012,414


Diluted		1,928,225			2,988,986			3,101,180

See accompanying notes to these combined financial statements.

F-4

Approach Resources Inc. and affiliated entities
Combined statements of changes in stockholders’ equity
for the years ended December 31, 2004, 2005 and 2006



													Loans to
										Retained			stockholders
							Additional			earnings			including
	Common stock						paid-in			(accumulated			accrued
	Shares			Amount			capital			deficit)			interest			Total


BALANCE , January 1, 2004		560,000		$	5,600		$	5,646,429		$	(2,335,760	)	$	(444,302	)	$	2,871,967
Issuance of Approach Resources Inc. common stock for cash		2,390,000			23,900			23,865,242			—			(3,495,000	)		20,394,142
Issuance of Approach Oil & Gas Inc. common stock for cash		20,000			200			1,999,800			—			—			2,000,000
Accrual of interest on loans to stockholders		—			—			—			—			(124,119	)		(124,119	)
Net loss		—			—			—			(266,170	)		—			(266,170	)


BALANCE , December 31, 2004		2,970,000			29,700			31,511,471			(2,601,930	)		(4,063,421	)		24,875,820
Issuance of Approach Oil & Gas Inc. common stock for cash		30,000			300			2,990,459			—			—			2,990,759
Accrual of interest on loans to stockholders		—			—			—			—			(234,900	)		(234,900	)
Net income		—			—			—			12,058,248			—			12,058,248


BALANCE , December 31, 2005		3,000,000			30,000			34,501,930			9,456,318			(4,298,321	)		39,689,927
Purchase and cancellation of Approach Resources Inc. common stock		(34,615	)		(346	)		(1,330,616	)		—			333,499			(997,463	)
Issuance of Approach Oil & Gas Inc. common stock for cash		65,000			650			6,497,685			—			—			6,498,335
Issuance of Approach Oil & Gas Inc. common stock for conversion of stockholder note		35,000			350			3,499,650			—			—			3,500,000
Stock option cancellation payment		—			—			(273,547	)		—			—			(273,547	)
Stock-based compensation expense		—			—			33,612			—			—			33,612
Accrual of interest on loans to stockholders, net of related income tax		—			—			138,286			—			(219,502	)		(81,216	)
Net income		—			—			—			21,201,905			—			21,201,905


BALANCE , December 31, 2006		3,065,385		$	30,654		$	43,067,000		$	30,658,223		$	(4,184,324	)	$	69,571,553

See accompanying notes to these combined financial statements.

F-5

Approach Resources Inc. and affiliated entities
Combined statements of cash flows



	For the years ended December 31,
	2004			2005			2006


OPERATING ACTIVITIES:
Net income (loss)	$	(266,170	)	$	12,058,248		$	21,201,905
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depletion, depreciation and amortization		1,223,340			8,006,054			14,540,570
Amortization of loan origination fees		833			47,123			72,335
Accretion of discount on asset retirement obligations		582			4,974			10,299
Change in fair value of commodity derivatives		—			4,163,098			(8,668,094	)
Impairment of non producing leasehold costs		—			—			558,446
Exploration expense		—			902,336			1,419,375
Stock-based compensation expense		—			—			33,612
Deferred income taxes		—			6,447,916			11,101,191
Interest earned on loans to stockholders		(124,119	)		(234,900	)		—
Changes in operating assets and liabilities:
Accounts receivable		(5,881,208	)		(9,778,543	)		7,389,365
Prepaid expenses and other current assets		(166,444	)		(67,896	)		220,659
Accounts payable		8,314,994			12,128,687			(13,016,692	)
Oil and gas payables		1,375,519			5,269,060			(1,704,164	)
Accrued liabilities		50,160			1,358,036			951,067


Cash provided by operating activities		4,527,487			40,304,193			34,109,874
INVESTING ACTIVITIES:
Advances under note receivable		(1,587,820	)		(4,151,773	)		—
Payments received under note receivable		41,760			5,697,833			—
Additions to oil and gas properties		(25,165,644	)		(73,445,231	)		(59,156,557	)
Additions to other property and equipment, net		(147,516	)		(39,950	)		(32,139	)


Cash used in investing activities		(26,859,220	)		(71,939,121	)		(59,188,696	)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock		22,394,142			2,990,759			6,498,335
Borrowings under credit facility, net		100,000			29,325,000			18,194,000
Purchase of common stock		—			—			(997,463	)
Borrowing from stockholder		—			—			3,500,000
Stock option cancellation payment		—			—			(273,547	)
Income taxes on interest income from loans to stockholders		—			—			(81,216	)
Loan origination fees		(20,000	)		(116,951	)		(69,509	)


Cash provided by financing activities		22,474,142			32,198,808			26,770,600


CHANGE IN CASH AND CASH EQUIVALENTS		142,409			563,880			1,691,778
CASH AND CASH EQUIVALENTS , beginning of year		2,513,174			2,655,583			3,219,463


CASH AND CASH EQUIVALENTS , end of year	$	2,655,583		$	3,219,463		$	4,911,241


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	1,935		$	600,070		$	3,268,593


Cash paid for income taxes	$	—		$	—		$	2,148


SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION:
Conversion of stockholder note into common stock	$	—		$	—		$	3,500,000

See accompanying notes to these combined financial statements.

F-6

Approach Resources Inc. and affiliated entities
Notes to combined financial statements


1.	Summary of significant accounting policies

Organization and nature of operations

Approach Resources Inc. (“ARI”) is a Delaware corporation formed September 13, 2002. ARI has three wholly owned subsidiaries. In November 2004, Approach Oil & Gas Inc. (“AOG”) and three wholly owned subsidiaries were formed and acquired leasehold positions in Kentucky and New Mexico. Collectively, ARI and AOG and their respective subsidiaries are referred to as “we,” “our,” “Approach” or “the Company.” We are engaged in the acquisition, development and operation of oil and gas properties located in Texas, Kentucky and New Mexico. Our plans are to explore for or acquire and develop oil and gas properties primarily in the United States.

Basis of combination and presentation

The accompanying combined financial statements include the accounts of ARI and its subsidiaries and AOG and its subsidiaries. These entities are related due to their common ownership. All significant intercompany transactions and balances have been eliminated.

The combination of ARI and AOG is to occur simultaneously with the closing of an initial public offering with Approach Resources Inc. as the surviving entity.

Cash and cash equivalents

We consider all highly liquid debt instruments purchased with a remaining maturity of three months or less to be cash equivalents.

Financial instruments

The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, notes receivable, accounts payable and accrued liabilities and long-term debt approximate fair value, as of December 31, 2005 and 2006.

Oil and gas properties

We follow the successful efforts method of accounting for our oil and gas producing activities. Costs incurred by the Company related to the acquisition of oil and gas properties and the cost of drilling all development wells and successful exploratory wells are capitalized. Costs incurred to maintain wells and related equipment and lease and well operating costs are charged to expense as incurred. Gains and losses arising from sales of properties are included in income. Unproved properties are assessed periodically for possible impairment. No such impairment was recorded during either year ended December 31, 2004 or 2005. An impairment of $558,446 was recorded in 2006 for unproved properties. The Company had unproved properties amounting to $1,787,422 and $5,597,411 as of December 31, 2005 and 2006, respectively.

Capitalized amounts attributable to proved oil and gas properties are depleted by the unit-of-production method based on proved reserves. Depreciation and depletion expense for oil and

F-7

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

gas producing property and related equipment was $1,193,562, $7,951,256 and $14,476,643 for the years ended December 31, 2004, 2005 and 2006, respectively.

Capitalized costs are evaluated for impairment based on an analysis of undiscounted future net cash flows in accordance with Financial Accounting Standards Board Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets . If impairment is indicated, the asset is written down to its estimated fair value based on expected discounted future net cash flows. No impairment was recorded during the years ended December 31, 2004, 2005 or 2006.

Revenue and accounts receivable

We recognize revenue for our production when the quantities are delivered to or collected by the respective purchaser. Prices for such production are defined in sales contracts and are readily determinable based on certain publicly available indices. All transportation costs are accounted for as a reduction of oil and natural gas sales revenue.

Accounts receivable, joint interest owners, consist of uncollateralized joint interest owner obligations due within 30 days of the invoice date. Accounts receivable, oil and gas sales, consist of uncollateralized accrued revenues due under normal trade terms, generally requiring payment within 30 to 60 days of production. No interest is charged on past-due balances. Payments made on all accounts receivable are applied to the earliest unpaid items. We review receivables periodically and reduce the carrying amount by a valuation allowance that reflects our best estimate of the amount that may not be collectible. No such allowance was considered necessary at December 31, 2005 or 2006.

Concentrations of credit risk

For the years ended December 31, 2004, 2005 and 2006, we sold substantially all of our oil and gas produced to four purchasers. We do not believe that the loss of any one of these purchasers would have a material adverse effect on our results of operations or cash flows because we believe we could readily locate other purchasers.

Other property

Furniture, fixtures and equipment are carried at cost. Depreciation of furniture, fixtures and equipment is provided using the straight-line method over estimated useful lives ranging from three to ten years. Gain or loss on retirement or sale or other disposition of assets is included in income in the period of disposition. Depreciation expense for other property and equipment was $29,778, $54,798 and $63,927 for the years ended December 31, 2004, 2005 and 2006, respectively.

Note receivable

In conjunction with a farmout agreement, a full recourse revolving promissory note was entered into for the benefit of a working interest owner to fund its costs incurred drilling wells under the farmout agreement. Effective December 31, 2005, we purchased the working interest for $10,500,000 by the retirement of the note receivable and accrued interest of approximately

F-8

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

$3,500,000 and the payment of approximately $7,000,000 in January 2006. The note provided for interest at 6 percent and was collateralized by the working interest in the wells drilled under the farmout agreement.

Income taxes

We follow the provisions of Financial Account Standard No. 109, Accounting for Income Taxes (“FAS 109”). Under the asset and liability method of FAS 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the tax rate in effect for the year in which those temporary differences are expected to be recovered or settled. Under FAS 109, the effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the year of the enacted tax rate change.

Derivative activity

All derivative instruments are recorded on the balance sheet at fair value. Changes in the derivative’s fair value are currently recognized in the statement of operations unless specific hedge accounting criteria are met. For qualifying cash flow hedges, the gain or loss on the derivative is deferred in accumulated other comprehensive income (loss) to the extent the hedge is effective. The ineffective portion of the hedge is recognized immediately in the statement of operations. Gains and losses on hedging instruments included in cumulative other comprehensive income (loss) are reclassified to oil and natural gas sales revenue in the period that the related production is delivered. Derivative contracts that do not qualify for hedge accounting treatment are recorded as derivative assets and liabilities at fair value in the balance sheet, and the associated unrealized gains and losses are recorded as current income or expense in the statement of operations.

Although we have not designated our derivative instruments as cash-flow hedges, we use those instruments to reduce our exposure to fluctuations in commodity prices related to our natural gas and oil production. Accordingly, we record realized gains and losses under those instruments in natural gas and oil sales revenues on our combined statements of operations. For the years ended December 31, 2005 and 2006, we recognized an unrealized loss of $4,163,098 and an unrealized gain of $8,668,094 from changes in the fair values of commodity derivatives, respectively. See Note 7 for further discussion of our derivative activity.

F-9

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

Comprehensive income (loss)

We had no elements of comprehensive income other than net income (loss) during the years ended December 31, 2004, 2005 or 2006.

Use of estimates and certain significant estimates

The preparation of our financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates. Significant assumptions are required in the valuation of proved oil and gas reserves, which as described above may affect the amount at which oil and gas properties are recorded. The estimate of asset retirement obligations also utilizes significant assumptions. It is at least reasonably possible these estimates could be revised in the near term and these revisions could be material.

Stock-based compensation

Prior to January 1, 2006, we accounted for stock option awards granted under our 2003 Stock Option Plan in accordance with the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and related Interpretations, as permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). Share-based employee compensation expense was not recognized in the Company’s combined statements of operations prior to January 1, 2006, as all stock option awards granted had an exercise price equal to or greater than the estimated fair market value of the common stock on the date of the grant. As permitted by SFAS No. 123, we reported pro-forma disclosures presenting results and earnings (loss) per share as if we had used the fair value recognition provisions of SFAS No. 123 in the Notes to Combined Financial Statements. Share-based compensation related to non-employees and modifications of options granted were accounted for based on the fair value of the related stock or options in accordance with SFAS No. 123 and its interpretations.

Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123(R)”), which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. We adopted SFAS No. 123(R) using the modified prospective transition method. In accordance with the modified prospective application provisions of SFAS No. 123(R), compensation cost for the portion of awards that were outstanding as of January 1, 2006, for which the requisite service was not rendered, are recognized as the requisite service is rendered, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Additionally, compensation costs for awards granted after January 1, 2006 are recognized over the requisite service period based on the grant-date fair value. In accordance with the modified prospective transition method, our combined financial statements for prior periods have not been restated to reflect the impact of SFAS No. 123(R). In connection with the adoption of SFAS 123(R) on January 1, 2006, we recorded compensation expense of $33,612 for options vesting during 2006.

F-10

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

Asset retirement obligation

Our asset retirement obligations relate to future plugging and abandonment expenses on oil and gas properties. The following table shows the changes in the balance of the ARO during the years ended December 31, 2006 and 2005:



	2005			2006


Asset retirement obligation, January 1	$	99,312		$	107,230
Changes in assumptions		(63,375	)		(13,612	)
Liabilities incurred during the year		66,319			43,727
Liabilities settled during the year		—			—
Accretion expense		4,974			10,299


Asset retirement obligation, December 31	$	107,230		$	147,644

Based on the expected timing of payments, the full asset retirement obligation is classified as non-current.

Earnings (loss) per common share

In accordance with SFAS No. 128, Earnings Per 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. Stock options were the only dilutive securities outstanding during the years ended December 31, 2004, 2005 and 2006. During the years ended December 31, 2004 and 2005, the effects of options to acquire 125,000 common shares were excluded from diluted weighted average shares outstanding because their effects would have been anti-dilutive. The following is a reconciliation of basic and diluted weighted average shares outstanding for the year ended December 31, 2006:



Weighted average shares outstanding, basic			3,012,414
Dilutive effect of stock options			88,766

Weighted average shares outstanding, diluted			3,101,180

New accounting pronouncements

In September 2006, Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”), was issued. SFAS 157 provides guidance for using fair value to measure assets and liabilities. It applies whenever other standards require or permit assets or liabilities to be measured at fair value, but it does not expand the use of fair value in any new circumstances. The provisions of SFAS 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007. The effect of adopting SFAS 157 has not been determined, but it is not expected to have a significant effect on our reported financial position or earnings.

F-11

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

In February 2007, SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities -Including an Amendment of FASB Statement No. 115 (“SFAS 159”), was issued. SFAS 159 permits an entity to choose to measure many financial instruments and certain other items at fair value. The fair value option established by SFAS 159 permits all entities to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected are to be recognized in earnings at each subsequent reporting date. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The effect of adopting SFAS 159 has not been determined, but it is not expected to have a significant effect on reported financial position or earnings.

In July 2006, FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN 48”), was issued. FIN 48 clarifies financial statement recognition and disclosure requirements for uncertain tax positions taken or expected to be taken in a tax return. Financial statement recognition of the tax position is dependent on an assessment of a 50% or greater likelihood that the tax position will be sustained upon examination, based on the technical merits of the position. The provisions of FIN 48 must be adopted as of the beginning of fiscal years beginning after December 15, 2006, with the cumulative effect reported as an adjustment to retained earnings at the adoption date. The effect of adoption of FIN 48 has not been determined, but is not expected to have a significant effect on our reported financial position or earnings.

In September 2006, the SEC staff issued Staff Accounting Bulletin Topic 1N, Financial Statements—Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 provides guidance on how prior year misstatements should be evaluated when determining the materiality of misstatements in current year financial statements. SAB 108 requires materiality to be determined by considering the effect of prior year misstatements on both the current year balance sheet and statement of operations, with consideration of their carryover and reversing effects. SAB 108 also addresses how to correct material misstatements. The provisions of SAB 108 are effective for financial statements issued for fiscal years ending after November 15, 2006. SAB 108 did not have any effect on our reported financial position or earnings.

2. Loans to stockholders and stockholder notes payable

During each of the years ended December 31, 2003 and 2004, in exchange for cash and notes receivable from employees and entities owned by or affiliated with management, we issued 450,000 shares of common stock. In January 2007, the remaining notes and accrued interest were repaid in exchange for 84,550 shares of common stock held by management. The notes provided for interest at 6 percent and were payable upon the earlier of December 31, 2008, the registration of the underlying common stock, or upon a merger with another entity or upon a divestiture of our assets. The notes were collateralized by the underlying common stock purchased and are reported in the accompanying balance sheet as loans to stockholders including accrued interest, reducing stockholders’ equity. Interest earned is reported net of related tax income as a component of additional paid-in capital in the accompanying statement

F-12

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

of changes in stockholders’ equity. The following is a summary of the balance of principal and interest outstanding under the notes receivable at December 31:



	2005		2006


Principal	$	3,915,000	$	3,613,850
Accrued interest		383,321		570,474


Total	$	4,298,321	$	4,184,324

In 2006, AOG borrowed $3,500,000 from a stockholder to fund the acquisition of leaseholds in Kentucky. The terms of the borrowing provided for interest at 6 percent and was due on demand. The borrowing was settled through the issuance of 35,000 shares of AOG common stock.

3. Line of credit

We have a revolving loan agreement with Frost Bank (the “Agreement”), which provides a borrowing base determined by the bank based on oil and gas reserve values. As of December 31, 2006, the borrowing base was $60,000,000. Borrowings outstanding under the Agreement at December 31, 2005 and 2006 were $29,425,000 and $47,619,000, respectively. In February 2007, the line of credit was raised to $100,000,000 and the borrowing base was increased to $75,000,000. The borrowings bear interest based on the bank’s prime rate or the LIBOR. The interest rate applicable to our outstanding borrowings was approximately 8.25 percent as of December 31, 2006. Principal payments are not required until January 31, 2008, the final maturity date of the Agreement, at which time any outstanding loan balances shall be due and payable in full. In addition, the Agreement requires payment of a quarterly fee equal to three-eights 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 Agreement contains various covenants, the most restrictive of which requires us to maintain a modified current ratio of at least one. We were in compliance with the covenants at December 31, 2006.

We also have outstanding unused letters of credit under the Agreement totaling $300,000, which reduce amounts available for borrowing under the Agreement.

F-13

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

4. Stockholders’ equity

Stockholders’ equity on our combined balance sheets as of December 31, 2005 and 2006 includes the equity accounts of ARI and AOG. Details of authorized and outstanding shares and their related par values are as follows:



	Approach		Approach
	Resources Inc.		Oil & Gas Inc.		Combined


PREFERRED STOCK:
Par value, per share	$	0.01	$	0.01	$	0.01
Shares authorized		1,000,000		100,000		1,100,000
Shares issued and outstanding at:
December 31, 2005		—		—		—
December 31, 2006		—		—		—
COMMON STOCK:
Par value, per share	$	0.01	$	0.01	$	0.01
Shares authorized		4,000,000		1,000,000		5,000,000
Shares issued and outstanding at:
December 31, 2005		2,950,000		50,000		3,000,000
December 31, 2006		2,915,385		150,000		3,065,385

5. Stock options

In January 2003, our stockholders approved the 2003 Stock Option Plan (“the Plan”). Under the Plan, we may grant options to selected employees and directors for up to 150,000 shares of common stock at a price not less than the fair market value at the date of the grant, as determined by the Board of Directors. The options granted under the Plan generally have a term of ten years and vest over a three year period.

As discussed in Note 1, Significant Accounting Policies—Shared-Based Compensation , effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), using the modified prospective transition method. Share-based compensation expense resulting from the adoption of SFAS No. 123(R) amounted to $33,612 for the year ended December 31, 2006. Such amount represents the estimated fair value of options for which the requisite service period elapsed during 2006. There was no tax benefit recognized in relation to this change.

F-14

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

The following table summarizes stock options outstanding and activity as of and for the year ended December 31, 2006:



						Weighted
						average
				Weighted		remaining
				average		contractual
				exercise		term
	Shares			price		(in years)


Outstanding at January 1, 2006		125,000		$	10.00
Granted		—		$	—
Canceled		(9,615	)	$	10.00
Exercised		—		$	—


Outstanding at December 31, 2006		115,385		$	10.00		7.63


Exercisable (fully vested) at December 31, 2006		115,385		$	10.00		7.63

There have been no exercises of options through December 31, 2006. Additionally, the Plan is a qualified plan under the Internal Revenue Code. Accordingly, we do not anticipate realizing any tax deductions related to the exercise of stock options. Upon exercise, we expect to issue the full amount of shares exercisable per the term of the options from new shares. We have no plans to repurchase those shares in the future.

Total unrecognized share-based compensation expense from unvested stock options as of December 31, 2006 was zero since all options are fully vested at December 31, 2006.

During the year ended December 31, 2006, we paid $273,547 in cash to cancel the vested options held by an employee who voluntarily resigned. Such amount has been recorded as a reduction to additional paid in capital as the payment did not exceed the estimated fair value of the options at the time of the cancellation.

F-15

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

6. Income taxes

Our provision for income taxes comprised the following during the years ended December 31:



	2004		2005		2006


Current:
Federal	$	—	$	509,402	$	549,864
State		—		70,598		105,504


Total current		—		580,000		655,368
Deferred:
Federal		—		5,663,074		11,242,568
State		—		784,842		(141,377	)


Total deferred		—		6,447,916		11,101,191


Provision for income taxes	$	—	$	7,027,916	$	11,756,559

Total income tax expense (benefit) differed from the amounts computed by applying the U.S. Federal statutory tax rates to pre-tax income for the years ended December 31, 2006, 2005 and 2004 as follows:



	2004			2005			2006


Statutory tax (benefit) at 34%	$	(90,498	)	$	6,489,796		$	11,205,149
State taxes (benefit), net of federal impact		(7,905	)		568,635			989,337
Changes in enacted rates		—			—			(1,076,794	)
Other differences		(25,597	)		(249,515	)		(173,133	)
Change in valuation allowance		124,000			219,000			812,000


	$	—		$	7,027,916		$	11,756,559

In May 2006, the State of Texas enacted a margin tax which will require us to pay a tax of 1.0% on our “taxable margin,” as defined in the law, based on our operating results beginning January 1, 2007. The margin to which the tax rate will be applied generally will be calculated as our gross revenues for federal income tax purposes less the cost of goods sold, as defined for Texas margin tax purposes. Cost of goods sold includes the following expenses that are related to our production of goods: our lease operating expenses, production taxes, depletion and depreciation expense, and labor costs. Most of our operations are within the State of Texas. Under the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes , we are required to record the effects on deferred taxes for a change in tax rates or tax law in the period which includes the enactment date. Previously, our results of operations were subject to the franchise tax in Texas at a rate of 4.5%, before consideration of federal benefits of those state taxes. Temporary differences between book and tax income related to our oil and gas properties will affect our computation of the Texas margin tax, and we have

F-16

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

reduced our deferred tax liabilities by approximately $1,076,000 as of December 31, 2006 as the result of this change.

Deferred tax assets and liabilities are the result of temporary differences between the financial statement carrying values and tax bases of assets and liabilities. Our net deferred tax assets and liabilities are recorded as a long-term liability of $6,447,916 and $17,549,107 at December 31, 2005 and 2006, respectively. Significant components of net deferred tax assets and liabilities are:



	December 31,
	2005			2006


Deferred tax assets:
Difference in depreciation and capitalization methods—furniture, fixtures and equipment	$	33,300		$	28,017
Net operating loss carryforwards		941,000			1,805,000
Unrealized loss on commodity derivatives		1,457,084			—
Other		23,000			—


Total deferred tax assets		2,454,384			1,833,017
Less: valuation allowance		(783,000	)		(1,595,000	)


Net deferred tax assets		1,671,384			238,017
Deferred tax liability:
Difference in depreciation, depletion and capitalization methods—oil and gas properties		(8,119,300	)		(16,225,692	)
Unrealized gain on commodity derivatives		—			(1,561,432	)


Total deferred tax liabilities		(8,119,300	)		(17,787,124	)


Net deferred tax (liability)	$	(6,447,916	)	$	(17,549,107	)

At December 31, 2005 and 2006, AOG provided a valuation allowance related to its deferred tax assets resulting primarily from net operating loss carryforwards of $783,000 and $1,595,000, respectively, based upon management’s inability to assess the amount to be realized until completion of the merger with ARI.

Net operating loss carryforwards for tax purposes have the following expiration dates:



Expiration dates	Amounts


2024	$	1,523,000
2025		1,082,000
2026		2,603,000

	$	5,208,000

F-17

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

7. Derivatives

In 2005, we entered into three natural gas swap agreements. The first two swaps were for 170,000 MMBtu per month and expired in September 2005. The other swap was for an average of 282,000 MMBtu per month through December 2006. In January 2006, we entered into a natural gas swap for approximately 257,000 MMBtu per month that expired in December 2006. In June 2006, we entered into a natural gas swap for 100,000 MMBtu per month for the fourth quarter of 2006 and an average of 250,000 MMBtu per month for 2007. Our oil and gas sales revenues include realized losses of $2,924,351 and realized gains of $6,221,927 from the swaps for the years ended December 31, 2005 and 2006, respectively. The estimated unrealized gain or loss from the swaps amounted to a loss of $4,163,098 and a gain of $4,504,996 at December 31, 2005 and 2006, respectively. Changes in unrealized gains and losses are reflected in other income (expense) on our statements of operations. The net unrealized gain and loss is reflected as a current asset and liability, respectively, based on the associated production months. The fair value of commodity derivatives were estimated based on the present value of the difference in exchange-quoted forward price curves and contractual settlement prices multiplied by notional quantities.

We are exposed to credit loss 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.

8. Environmental issues

We are engaged in oil and gas exploration and production and may become subject to certain liabilities as they relate to environmental clean up of well sites or other environmental restoration procedures as they relate to the drilling of oil and gas wells and the operation thereof. In connection with our acquisition of existing or previously drilled well bores, we may not be aware of what environmental safeguards were taken at the time such wells were drilled or during such time the wells were operated. Should it be determined that a liability exists with respect to any environmental clean up or restoration, we would be responsible for curing such a violation. No claim has been made, nor are we aware of any liability that exists, as it relates to any environmental clean up, restoration or the violation of any rules or regulations relating thereto.

9. Commitments and contingencies

We have employment agreements with our officers and selected other employees. These agreements are automatically renewed for successive terms of one year unless employment is terminated at the end of the term by written notice given to the employee not less than 60 days prior to the end of such term. Our maximum commitment under the employment agreements, which would apply if the employees covered by these agreements were all terminated without cause, is approximately $1,400,000 at December 31, 2006.

We lease our office space in Fort Worth, Texas under a non-cancelable agreement that expires on May 31, 2009. We also have non-cancelable operating lease commitments related to office

F-18

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

equipment that expire in 2009 and 2011. The following is a schedule by years of future minimum rental payments required under our operating lease arrangements as of December 31, 2006:



2007	$	125,824
2008		127,481
2009		56,385
Remainder		4,632

Total	$	314,322

Rent expense under our lease arrangements amounted to $132,247, $129,657, and $136,532 for the years ended December 31, 2004, 2005 and 2006, respectively.

In April 2007, we signed a five-year lease for approximately 13,000 square feet of office space in Fort Worth, Texas. That lease calls for minimum monthly rent payments of approximately $20,000 from August 2007 through October 2012.

Litigation

We are involved in various claims and legal actions arising in the normal course of business. In our opinion, the resolution of these matters is not expected to have a material adverse effect on our financial position or results of operations.

10. Oil and gas producing activities

Set forth below is certain information regarding the costs incurred for oil and gas property acquisition, development and exploration activities (in thousands):



	For the years ended December 31,
	2004		2005		2006


Property acquisition costs:
Unproved properties	$	552	$	369	$	4,071
Proved properties		—		11,592		356
Exploration costs		2,396		2,249		1,640
Development costs		24,863		60,087		55,203


Total costs incurred	$	27,811	$	74,297	$	61,270

F-19

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

Set forth below is certain information regarding the results of operations for oil and gas producing activities (in thousands):



	For the years ended December 31,
	2004			2005			2006


Revenues	$	5,813		$	40,747		$	53,408
Production costs		(586	)		(4,885	)		(5,624	)
Exploration expenses		(2,396	)		(734	)		(1,640	)
Depletion		(1,223	)		(8,006	)		(14,541	)
Income tax expenses		(1,157	)		(10,169	)		(12,221	)


Results of operations	$	451		$	16,953		$	19,382

11. Disclosures about oil and gas producing activities (unaudited):

The estimates of proved reserves and related valuations for the years ended December 31, 2004, 2005 and 2006 were based upon the reports prepared by Cawley, Gillespie & Associates, Inc., independent petroleum engineers (for 2004 and 2005), and by DeGolyer and MacNaughton, Inc., independent petroleum engineers (for 2006). Each year’s estimate of proved reserves and related valuations was prepared in accordance with the provisions of Statement of Financial Accounting Standards No. 69 (“SFAS No. 69”), Disclosures about Oil and Gas Producing Activities . Estimates of proved reserves are inherently imprecise and are continually subject to revision based on production history, results of additional exploration and development, price changes and other factors.

F-20

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

All of our oil and natural gas reserves are attributable to properties within the United States. A summary of Approach’s changes in quantities of proved oil and natural gas reserves for the years ended December 31, 2004, 2005 and 2006, are as follows:



	Natural gas			Oil

	(MMcf)			(MBbl)

Balance—January 1, 2004		—			—
Extensions and discoveries		58,555			361
Sales of minerals in place		—			—
Purchases of minerals in place		—			—
Production		(858	)		(8	)
Revisions to previous estimates		—			—


Balance—December 31, 2004		57,697			353
Extensions and discoveries		2,755			26
Sales of minerals in place		—			—
Purchases of minerals in place		6,400			68
Production		(4,666	)		(58	)
Revisions to previous estimates		40,219			697


Balance—December 31, 2005		102,405			1,086
Extensions and discoveries		15,655			339
Sales of minerals in place		—			—
Purchases of minerals in place		—			—
Production		(6,282	)		(77	)
Revisions to previous estimates		(13,121	)		(226	)


Balance—December 31, 2006		98,657			1,122


Proved developed reserves:
December 31, 2004		16,986			102


December 31, 2005		47,078			454


December 31, 2006		51,004			496

The standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves and the changes in standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves were prepared in accordance with the provisions of SFAS No. 69. Future cash inflows were computed by applying prices at year end to estimated future production. Future production and development costs are computed by estimating the expenditures to be incurred in developing and producing the proved oil and natural gas

F-21

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

reserves at year end, based on year-end costs and assuming continuation of existing economic conditions.

Future income tax expenses are calculated by applying appropriate year-end tax rates to future pretax net cash flows relating to proved oil and natural gas reserves, less the tax basis of properties involved.

Future income tax expenses give effect to permanent differences, tax credits and loss carryforwards relating to the proved oil and natural gas reserves. Future net cash flows are discounted at a rate of 10% annually to derive the standardized measure of discounted future net cash flows. This calculation procedure does not necessarily result in an estimate of the fair market value of Approach’s oil and natural gas properties.

The standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves are as follows (in thousands):



	2004			2005			2006


Future cash flows	$	414,417		$	1,003,363		$	709,184
Future production costs		(81,441	)		(193,171	)		(198,023	)
Future development costs		(53,115	)		(101,152	)		(108,451	)
Future income tax expense		(94,316	)		(238,013	)		(109,784	)


Future net cash flows		185,545			471,027			292,926
10% annual discount for estimated timing of cash flows		(125,267	)		(324,588	)		(215,049	)


Standardized measure of discounted future net cash flows	$	60,278		$	146,439		$	77,877

Future cash flows as shown above were reported without consideration for the effects of hedging transactions outstanding at each period end. The effect of hedging transactions on the future cash flows for the years ended December 31, 2004, 2005, and 2006 was immaterial.

F-22

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

The changes in the standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves are as follows (in thousands):



	2004			2005			2006


Balance, beginning of period	$	—		$	60,278		$	146,439
Net change in sales and transfer prices and in production (lifting) costs related to future production		—			53,167			(106,246	)
Changes in estimated future development costs		—			(87,109	)		(43,229	)
Sales and transfers of oil and gas produced during the period		(5,503	)		(38,379	)		(40,852	)
Net change due to extensions, discoveries and improved recovery		65,781			7,613			28,418
Net change due to purchase of minerals in place		—			17,804			—
Net change due to revisions in quantity estimates		—			116,125			(22,112	)
Previously estimated development costs incurred during the period		—			53,116			52,108
Accretion of discount		—			16,686			15,546
Other		—			9,616			(4,498	)
Net changes in income taxes		—			(62,478	)		52,303


	$	60,278		$	146,439		$	77,877

Average wellhead prices in effect at December 31, 2004, 2005 and 2006 inclusive of adjustments for quality and location used in determining future net revenues related to the standardized measure calculation are as follows:



	2004		2005		2006


Oil (per Bbl)	$	41.33	$	56.50	$	58.05
Natural gas liquids (per Bbl)	$	—	$	—	$	30.55
Gas (per Mcf)	$	6.93	$	9.20	$	6.55

*************

F-23

Approach Resources Inc. and affiliated entities
Combined balance sheet



	March 31, 2007

	(unaudited)

ASSETS
CURRENT ASSETS:
Cash	$	5,374,312
Accounts receivable:
Joint interest owners		2,463,016
Oil and gas sales		3,460,716
Unrealized gain on commodity derivatives		—
Prepaid expenses and other current assets		851,984

Total current assets		12,150,028
PROPERTIES AND EQUIPMENT:
Oil and gas properties, at cost, using the successful efforts method of accounting		164,725,412
Furniture, fixtures and equipment		256,144

		164,981,556
Less accumulated depreciation, depletion and amortization		(26,859,117	)

Net properties and equipment		138,122,439
OTHER ASSETS		119,313

Total assets	$	150,391,780


LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	5,064,424
Oil and gas payables		5,407,044
Accrued liabilities		970,819
Unrealized loss on commodity derivatives		121,312

Total current liabilities		11,563,599
NON-CURRENT LIABILITIES:
Long-term debt		52,169,000
Deferred income taxes		17,514,107
Asset retirement obligations		154,817

Total liabilities		81,401,523
COMMITMENTS AND CONTINGENCIES STOCKHOLDERS’ EQUITY:
Preferred stock		—
Common stock		30,021
Additional paid-in capital		38,883,309
Retained earnings		30,076,927
Loans to stockholders		—

Total stockholders’ equity		68,990,257

Total liabilities and stockholders’ equity	$	150,391,780

See accompanying notes to these combined financial statements.

F-24

Approach Resources Inc. and affiliated entities
Combined statements of operations



	For the three months ended March 31,
	2006			2007

	(unaudited)			(unaudited)

REVENUES:
Oil and gas sales	$	15,679,887		$	11,546,458
Overhead and services income		121,945			133,496


Total revenues		15,801,832			11,679,954
EXPENSES:
Lease operating expense		972,741			979,581
Severance and production taxes		380,105			375,140
Exploration		196,345			623,040
General and administrative		750,272			1,645,552
Depletion, depreciation and amortization		3,280,592			3,090,726


Total expenses		5,580,055			6,714,039


OPERATING INCOME (LOSS)		10,221,777			4,965,915
OTHER:
Interest income (expense), net		(725,067	)		(955,903	)
Change in fair value of commodity derivatives		6,192,708			(4,626,308	)


INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES		15,689,418			(616,296	)
PROVISION (BENEFIT) FOR INCOME TAXES		5,280,326			(35,000	)


NET INCOME (LOSS)	$	10,409,092		$	(581,296	)


EARNINGS (LOSS) PER SHARE:
Basic	$	3.49		$	(0.19	)


Diluted	$	3.39		$	(0.19	)


WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic		2,985,000			2,987,411


Diluted		3,069,945			2,987,411

See accompanying notes to these combined financial statements.

F-25

Approach Resources Inc. and affiliated entities
Combined statement of changes in stockholders’ equity
for the three months ended March 31, 2007 (unaudited)



													Loans to
										Retained			stockholders
							Additional			earnings			including
	Common stock						paid-in			(accumulated			accrued
	Shares			Amount			capital			deficit)			interest			Total


BALANCE, January 1, 2007		3,065,385		$	30,654		$	43,067,000		$	30,658,223		$	(4,184,324	)	$	69,571,553
Retirement of loans to stockholders		(84,550	)		(846	)		(4,183,478	)		—			4,184,324			—
Issuance of restricted stock		21,250			213			(213	)		—			—			—
Net loss		—			—			—			(581,296	)		—			(581,296	)


BALANCE, March 31, 2007 (unaudited)		3,002,085		$	30,021		$	38,883,309		$	30,076,927		$	—		$	68,990,257

See accompanying notes to these combined financial statements.

F-26

Approach Resources Inc. and affiliated entities
Unaudited combined statements of cash flows



	For the three months ended March 31,
	2006			2007

	(unaudited)			(unaudited)
OPERATING ACTIVITIES:
Net income (loss)	$	10,409,092		$	(581,296	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depletion, depreciation and amortization		3,280,592			3,087,930
Amortization of loan origination fees		12,763			23,830
Accretion of discount on asset retirement obligations		—			2,796
Change in fair value of commodity derivatives		(6,192,708	)		4,626,308
Exploration expense		196,345			623,040
Deferred income taxes		5,006,746			(35,000	)
Changes in operating assets and liabilities:
Accounts receivable		1,913,515			2,346,655
Prepaid expenses and other current assets		(239,321	)		(427,903	)
Accounts payable		945			(2,448,795	)
Oil and gas payables		(1,003,810	)		466,629
Accrued liabilities		(768,394	)		(1,996,961	)


Cash provided by operating activities		12,615,765			5,687,233
INVESTING ACTIVITIES:
Additions to oil and gas properties		(24,585,618	)		(9,716,495	)
Additions to other property and equipment, net		7,178			(693	)


Cash used in investing activities		(24,578,440	)		(9,717,188	)
FINANCING ACTIVITIES:
Borrowings under credit facility, net		11,235,000			4,550,000
Purchase of common stock		(997,463	)		—
Stock option cancellation payment		(273,547	)		—
Income taxes on interest income from loans to stockholders		(20,771	)		—
Loan origination fees		(25,000	)		(56,974	)


Cash provided by financing activities		9,918,219			4,493,026


CHANGE IN CASH AND CASH EQUIVALENTS		(2,044,456	)		463,071
CASH AND CASH EQUIVALENTS , beginning of period		3,219,463			4,911,241


CASH AND CASH EQUIVALENTS , end of period	$	1,175,007		$	5,374,312


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	552,943		$	1,273,057


Cash paid for income taxes	$	450,000		$	1,200,000


SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION:
Return of common shares in exchange for retirement of loans to stockholders	$	—		$	4,184,324

See accompanying notes to these combined financial statements.

F-27

Approach Resources Inc. and affiliated entities
Notes to unaudited combined financial statements


1.	Summary of significant accounting policies

Basis of presentation and use of estimates

The interim combined financial statements of Approach Resources Inc. 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 derivative hedging 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 combined interim financial statements in conjunction with the audited combined financial statements and notes thereto included in this Prospectus beginning on page F-2.

The accompanying combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of Approach Resources Inc. (“ARI”) and its wholly-owned subsidiaries and Approach Oil & Gas Inc. (“AOG”) and its wholly-owned subsidiaries. Collectively, ARI and AOG are referred to as “we,” “our,” “Approach” or “the Company.” Intercompany accounts and transactions are eliminated. In preparing the accompanying financial statements, management has 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. It is at least reasonably possible these estimates could be revised in the near term, and these revisions could be material.

Earnings (loss) per common share

In accordance with SFAS No. 128, Earnings Per 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. Stock options were the only dilutive securities outstanding during the three months ended March 31, 2007. During the three months ended March 31, 2007, the effects of 21,250 non-vested restricted shares granted on March 14, 2007 and options to acquire 115,385 common shares were excluded from diluted weighted average shares outstanding because their effects would have been anti-dilutive. The following is a reconciliation of basic and diluted weighted average shares outstanding for the three months ended March 31, 2006:




Weighted average shares outstanding, basic			2,985,000
Dilutive effect of stock options			84,945

Weighted average shares outstanding, diluted			3,069,945

F-28

Approach Resources Inc. and affiliated entities
Notes to unaudited combined financial statements—(continued)

2. Loans to stockholders and stockholder notes payable

During each of the years ended December 31, 2003 and 2004, in exchange for cash and notes receivable from employees and entities owned by or affiliated with management, we issued 450,000 shares of common stock. The notes had an outstanding principal balance of $3,613,850 at December 31, 2006. In January 2007, the remaining notes and accrued interest of $570,474 were retired in exchange for 84,550 shares of common stock held by management. The notes provided for interest at 6 percent and were payable upon the earlier of December 31, 2008, the registration of the underlying common stock, or upon a merger with another entity or upon a divestiture of our assets. The notes were collateralized by the underlying common stock purchased.


3.	Line of credit

We have a revolving loan agreement with Frost Bank (the “Agreement”), which provides a borrowing base determined by the bank based on oil and gas reserve values. As of December 31, 2006, the borrowing base was $60,000,000. Borrowings outstanding under the Agreement at December 31, 2006 and March 31, 2007 were $47,619,000 and $52,169,000, respectively. In February 2007, the line of credit was raised to $100,000,000 and the borrowing base was increased to $75,000,000. In June 2007, the maturity date of the Agreement was extended to July 2010. The borrowings bear interest based on the bank’s prime rate or the LIBOR. The interest rate applicable to our outstanding borrowings was approximately 8.25% as of December 31, 2006 and 7.02% as of March 31, 2007. Principal payments are not required until the final maturity date of the agreement, at which time any outstanding loan balances shall be due and payable in full. In addition, the Agreement requires payment of a quarterly fee equal to three-eights 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 Agreement contains various covenants, the most restrictive of which requires us to maintain a modified current ratio of at least one. We were in compliance with the covenants at December 31, 2006 and March 31, 2007.

We also have outstanding unused letters of credit under the Agreement totaling $400,000, which reduce amounts available for borrowing under the Agreement.


4.	Stock based compensation

Restricted stock grants

On March 14, 2007, we granted 21,250 restricted shares to an employee. Such shares had a grant-date fair value of $49.49 per share, and vest in three equal increments—one third on the earlier of the closing date of an initial public offering of Approach common stock, or February 21, 2008 (the “Initial Vesting Date”), and one-third on each of the two following anniversaries of the Initial Vesting Date. As of March 31, 2007, all of the restricted shares were unvested.

F-29

Approach Resources Inc. and affiliated entities
Notes to unaudited combined financial statements—(continued)

5. 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, 2006 and 2007 due primarily to adjustments to the valuation allowance applied to net operating loss carryovers of AOG. AOG provided a valuation allowance related to its deferred tax assets resulting primarily from net operating loss carryforwards based upon management’s inability to assess the amount to be realized until completion of the merger with ARI.


6.	Derivatives

In 2005, we entered into three natural gas swap agreements. The first two swaps were for 170,000 MMBtu per month and expired in September 2005. The other swap was for an average of 282,000 MMBtu per month through December 2006. In January 2006, we entered into a natural gas swap for approximately 257,000 MMBtu per month that expired in December 2006. In June 2006, we entered into a natural gas swap for 100,000 MMBtu per month for the fourth quarter of 2006 and an average of 250,000 MMBtu per month for 2007. In May 2007, we entered into a natural gas collar for 2008 based on the NYMEX floating price with a $7.50 floor and a $11.45 ceiling. In addition, we entered into a WAHA basis swap for 2008 for $0.69 per mcf. Both of these hedges were for an average volume of approximately 186,000 MMBtu per month. Our oil and gas sales revenues include realized gains of $1,424,277 and $2,155,140 from the swaps for the three months ended March 31, 2006 and 2007, respectively. The estimated unrealized gain or loss from the swaps amounted to a gain of $6,192,708 and a loss of $4,626,308 at March 31, 2006 and 2007, respectively. Changes in unrealized gains and losses are reflected in other income (expense) on our statements of operations. The net unrealized gain and loss is reflected as a current asset and liability, respectively, based on the associated production months. The fair value of commodity derivatives were estimated based on the present value of the difference in exchange-quoted forward price curves and contractual settlement prices multiplied by notional quantities.

We are exposed to credit loss 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.


7.	Commitments and contingencies

Employment agreements

F-30

Approach Resources Inc. and affiliated entities
Notes to unaudited combined financial statements—(continued)

Operating leases

Litigation


8.	Subsequent events

Equity financing

Canadian unconventional gas investment

In May 2007, we acquired shares of common stock of a Canadian-based private exploration company focused on tight gas and shale gas opportunities in Canada. Our investment amounted to approximately $917,000 and is a non-controlling interest.

*************

F-31

Report of independent registered public accounting firm

Board of Directors

Approach Resources Inc.

Fort Worth, Texas

We have audited the accompanying Historical Summaries of Revenues and Direct Operating Expenses of Properties to be Acquired by Approach Resources Inc., for the years ended December 31, 2005 and 2006 (“Historical Summaries”). The Historical Summaries are the responsibility of the management of Approach Resources Inc. Our responsibility is to express an opinion on the Historical Summaries based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Historical Summaries are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Historical Summaries. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall Historical Summaries presentation. We believe that our audit provides a reasonable basis for our opinion.

The accompanying Historical Summaries were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission as described in Note 1 and are not intended to be a complete presentation of the properties’ revenues and expenses.

In our opinion, the Historical Summaries referred to above present fairly, in all material respects, the revenues and direct operating expenses of the properties to be acquired by Approach Resources Inc. in conformity with accounting principles generally accepted in the United States of America.

May 7, 2007

Dallas, Texas

F-32

Statements of revenue and direct operating expenses of properties to be acquired by Approach Resources Inc.
for the years ended December 31, 2005 and 2006 and the three months ended March 31, 2006 and 2007 (unaudited)



					Three months ended
	Year ended December 31,				March 31,
	2005		2006		2006		2007

					(unaudited)		(unaudited)

Crude oil and natural gas sales	$	19,371,892	$	19,558,497	$	5,936,955	$	3,801,767
Direct operating expenses		2,484,364		2,584,567		729,895		587,286


Net revenue	$	16,887,528	$	16,973,930	$	5,207,060	$	3,214,481

See notes to Historical Summaries.

F-33

Notes to historical summaries of revenue and direct
operating expenses of properties to be acquired by Approach Resources Inc.
for the years ended December 31, 2005 and 2006 and the three months ended March 31, 2006 and 2007 (unaudited)

1. Basis of preparation

The accompanying statements of revenue and direct operating expenses relate to the operations of certain crude oil and natural gas properties in the Ozona Northeast field located in Texas that are to be acquired by Approach Resources Inc. (“Approach”) to be completed upon the effectiveness of Approach completing its initial public offering. The acquired properties are referred to herein as the Neo Canyon Acquisition Properties.

Approach is the operator of the properties prior to the acquisition of the additional interest. The accompanying statements of revenues and direct operating expenses were derived from the historical accounting records of Approach and reflect the acquired interest in the revenues and direct operating expenses of the Neo Canyon Acquisition Properties. Such amounts may not be representative of future operations. The statements do not include depreciation, depletion and amortization, general and administrative expenses, income taxes or interest expense as these costs may not be comparable to the expenses to be incurred by Approach on a prospective basis.

Revenue is recognized when crude oil and natural gas quantities are delivered to or collected by the respective purchaser. Title to the produced quantities transfers to the purchaser at the time the purchaser collects or receives the quantities. Prices for such production are defined in sales contracts and are readily determinable based on certain publicly available indices. All transportation costs are accounted for as a reduction of crude oil and natural gas sales revenue.

As of December 31, 2005 and 2006, crude oil production was sold to one independent purchaser and natural gas production was sold to one affiliated purchaser.

Direct operating expenses are recorded when the related liability is incurred. Direct operating expenses include lease operating expenses and production taxes.

The process of preparing financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions regarding certain types of revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.

Historical financial statements reflecting financial position, results of operations and cash flows required by generally accepted accounting principles are not presented as such information is not meaningful to the Neo Canyon Acquisition Properties. Accordingly, the historical summaries of revenue and direct operating expenses are presented in lieu of the financial statements required under Rule 3-05 of the Securities and Exchange Commission Regulation S-X.

F-34

Interim financial information

In the opinion of Approach’s management, the information furnished herein reflects all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results of the interim periods reported herein. Operating results for the three months ended March 31, 2007 may not necessarily be indicative of the results for the year ending December 31, 2007.

2. Related party transactions

The properties were operated by Approach Resources Inc. during the three months ended March 31, 2006 and 2007 and the years ended December 31, 2005 and 2006. During those periods, Approach Resources Inc. charged the properties overhead amounting to approximately $69,224, $100,467 $168,514 and $338,991, respectively. Such overhead charges are included in direct operating expenses.

3. Supplemental information on oil and gas reserves (unaudited)

All of the operations of the Neo Canyon Acquisition Properties are directly related to crude oil and natural gas producing activities located in West Texas. The Neo Canyon Acquisition Properties’ proved crude oil and natural gas reserves have been estimated by independent petroleum engineers. Proved reserves are the estimated quantities that geologic and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods. Due to the inherent uncertainties and the limited nature of reservoir data, such estimates are subject to change as additional information becomes available. The reserves actually recovered and the timing of production of these reserves may be substantially different from the original estimate. Revisions result primarily from new information obtained from development drilling and production history; acquisitions of oil and gas properties; and changes

F-35

in economic factors. The Neo Canyon Acquisition Properties’ proved reserves are summarized in the table below.



	Natural gas			Oil
	(MMcf)			(MBbl)


Reserves at January 1, 2005		24,727			151
Extensions and discoveries		1,181			11
Revisions to previous estimates		19,073			330
Production		(2,082	)		(25	)


Reserves at December 31, 2005		42,899			467
Extensions and discoveries		6,421			61
Revisions to previous estimates		(5,526	)		(105	)
Production		(2,645	)		(32	)


Reserves at December 31, 2006		41,149			391


Proved developed reserves
December 31, 2005		19,595			198
December 31, 2006		21,400			170

Standardized measure

The standardized measure of discounted future net cash flows (“standardized measure”) and changes in such cash flows are prepared using assumptions required by the Financial Accounting Standards Board. Such assumptions include the use of year-end prices for crude oil and natural gas and year-end costs for estimated future development and production expenditures to produce year-end estimated proved reserves. Discounted future net cash flows are calculated using a 10% discount rate.

The standardized measure does not represent management’s estimate of our future cash flows or the value of proved crude oil and natural gas reserves. Probable and possible reserves, which may become proved in the future, are excluded from the calculations. Furthermore, year-end prices used to determine the standardized measure of discounted cash flows, are influenced by seasonal demand and other factors and may not be the most representative in estimating future revenues or reserve data.

Price and cost revisions are primarily the net result of changes in year-end prices, based on beginning of year reserve estimates. Quantity estimate revisions are primarily the result of

F-36

higher prices resulting in extended economic lives of proved reserves and significant amounts of proved undeveloped reserves becoming economic, as well as increased development activities.

The standardized measure of discounted future net cash flows related to proved crude oil and natural gas reserves at December 31, 2005 and 2006 is as follows (in thousands):



	2005			2006


Future cash inflows	$	420,581		$	292,399
Future production		(76,357	)		(81,784	)
Future development costs		(42,895	)		(45,957	)
Future income taxes		—			(1,647	)


Future net cash flows		301,329			163,011
10% annual discount		(192,251	)		(112,306	)


Standardized measure of discounted future net cash flows	$	109,078		$	50,705

The primary changes in the standardized measure of discounted future net cash flows for the twelve months ended December 31, 2005 and 2006 are as follows (in thousands):



	2005			2006


Balance at beginning of year	$	43,139		$	109,078
Net changes in prices and production costs		16,646			(56,734	)
Net changes due to extensions, discoveries and improved recovery		3,402			10,265
Net changes in future development costs		(33,524	)		(9,707	)
Sales of oil and gas produced, net		(16,888	)		(16,974	)
Revisions of previous quantity estimates		57,406			(9,314	)
Net change in income taxes		—			(726	)
Previously estimated development costs incurred		22,764			22,332
Accretion of discount		5,453			6,136
Other		10,680			(3,651	)


Balance at end of year	$	109,078		$	50,705

F-37

shares

Common stock

Prospectus


JPMorgan	A.G. Edwards


Book running manager	Joint lead manager

, 2007

Until , 2007 (25 days after the date of this prospectus), all dealers that effect transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

Part II
Information not required in prospectus


Item 13.	*Other expenses of issuance and distribution*

The following table sets forth estimates of all expenses payable by the registrant in connection with the sale of common stock being registered. The selling stockholder will not bear any portion of such expenses. With the exception of SEC registration fee, the NASD filing fee and the NASDAQ Global Market application and entry listing fee, the amounts set forth below are estimates.




SEC registration fee	$	4,061
NASD filing fee		13,725
NASDAQ Global Market application and entry listing fee		100,000
Accounting fees and expenses		*
Legal fees and expenses		*
Printing and engraving		*
Advisory fee		*
Miscellaneous fees and expenses		*

Total	$	*


*		To be completed by amendment.


Item 14.	*Indemnification of directors and officers*

Our restated certificate of incorporation provides that no director or officer will be liable to the corporation or any of its stockholders for damages for breach of fiduciary duty as a director or officer occurring on or after the date of incorporation; provided, however, that the foregoing provision shall not eliminate or limit the liability of a director or officer (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involved intentional misconduct, fraud or a knowing violation of the law, (iii) the payment of dividends in violation of Section 174 of the General Corporation Law of the State of Delaware or (iv) for any transaction from which the director derived an improper personal benefit. In addition, if the General Corporation Law of the State of Delaware is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. Our restated bylaws provide that the corporation will indemnify, and advance expenses to, any officer or director to the fullest extent authorized by the General Corporation Law of the State of Delaware.

Section 145 of the General Corporation Law of the State of Delaware provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement in connection with specified actions, suits and proceedings whether civil, criminal, administrative or investigative, other than a derivative action by or in the right of the corporation, if they acted

II-1

in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. A similar standard is applicable in the case of derivative actions, except that indemnification extends only to expenses, including attorneys’ fees, incurred in connection with the defense or settlement of such action and the statute requires court approval before there can be any indemnification where the person seeking indemnification has been found liable to the corporation. The statute provides that it is not exclusive of other indemnification that may be granted by a corporation’s charter, bylaws, disinterested director vote, stockholder vote, agreement or otherwise.

Our restated certificate of incorporation also contains indemnification rights for our directors and our officers. Specifically, our restated certificate of incorporation provides that we shall indemnify our officers and directors to the fullest extent authorized by the General Corporation Law of the State of Delaware. Further, we may maintain insurance on behalf of our officers and directors against expenses, liability or loss asserted incurred by them in their capacities as officers and directors.

We will obtain directors’ and officers’ insurance to cover our directors, officers and some of our employees for certain liabilities.

We will enter into written indemnification agreements with our directors and executive officers. Under these agreements, if an officer or director makes a claim of indemnification to us, either a majority of the independent directors or independent legal counsel selected by the independent directors must review the relevant facts and make a determination whether the officer or director has met the standards of conduct under Delaware law that would permit (under Delaware law) and require (under the indemnification agreement) us to indemnify the officer or director.

The registration rights agreement we entered into in connection with our earlier financings provide for the indemnification by the investors in those financings of our officers and directors for certain liabilities.


Item 15.	*Recent sales of unregistered securities*

In the three years preceding the filing of this registration statement, we have issued and sold the following securities that were not registered under the Securities Act:

1. On August 16, 2004, we issued 1,130,000 shares of our common stock to Yorktown Energy Partners V, L.P. and certain of our employees in consideration of $11,300,000, $1,202,500 of which was evidenced by full recourse promissory notes secured by pledge of the securities purchased. These shares were issued in a transaction exempt from the registration requirements of the Securities Act under Section 4(2) of the Securities Act.

2. On August 30, 2004, we issued 125,000 shares of our common stock to certain of our employees in consideration of $1,250,000 evidenced by full recourse promissory notes secured by pledge of the securities purchased. These shares were issued in a transaction exempt from the registration requirements of the Securities Act under Section 4(2) of the Securities Act.

3. On March 14, 2007, we issued 21,250 shares of restricted common stock to one of our executive officers. These shares were issued in a transaction exempt from the registration requirements of the Securities Act pursuant to Rule 701, promulgated under the Securities Act.

II-2

4. On June 25, 2007, Approach Oil & Gas Inc. issued convertible promissory notes to each of Yorktown Energy Partners VII, L.P. and Lubar Equity Fund, LLC in the aggregate amount of $20,000,000. The notes are convertible into shares of equity securities of Approach Oil & Gas Inc. at the election of the individual lender upon the occurrence of certain events and are automatically convertible into shares of our common stock upon the consummation of the offering described in the prospectus contained within this registration statement. The number of shares of our common stock to be issued upon the automatic conversion of these notes will be equal to the quotient obtained by dividing (a) the outstanding principal and accrued interest on each respective note by (b) the initial public offering price per share, less any underwriting discount per share for the shares of our common stock that are issued in this offering. These notes were issued in a transaction exempt from the registration requirements of the Securities Act under Section 4(2) of the Securities Act.


Item 16.	*Exhibits and financial statement schedules*



Exhibit
number			Description


	1	.1*	Form of Underwriting Agreement.
	3	.1	Form of Restated Certificate of Incorporation of Approach Resources Inc.
	3	.2	Form of Restated Bylaws of Approach Resources Inc.
	4	.1*	Specimen Common Stock Certificate.
	5	.1*	Opinion of Thompson & Knight LLP regarding legality of securities issued
	10	.1*	Form of Indemnity Agreement between Approach Resources Inc. and each of its directors and officers.
	10	.2	Contribution Agreement by and among Approach Resources Inc. and the equity holders identified therein, dated June 29, 2007.
	10	.3	Employment Agreement by and between Approach Resources Inc. and J. Ross Craft dated January 1, 2003.
	10	.4	Employment Agreement by and between Approach Resources Inc. and Steven P. Smart dated January 1, 2003.
	10	.5	Employment Agreement by and between Approach Resources Inc. and Glenn W. Reed dated January 1, 2003.
	10	.6	Approach Resources Inc. 2007 Stock Incentive Plan, effective as of June 28, 2007.
	10	.7	Convertible Promissory Note issued by Approach Oil & Gas Inc. to Yorktown Energy Partners VII, L.P. dated June 25, 2007.
	10	.8	Convertible Promissory Note issued by Approach Oil & Gas Inc. to Lubar Equity Fund, LLC dated June 25, 2007.
	10	.9	$100,000,000 Revolving Amended and Restated Credit Agreement by and among Approach Resources I, LP, as borrower, The Frost National Bank, as administrative agent and lender, and the financial institutions party thereto, dated February 15, 2007.
	10	.10	Amendment to Amended and Restated Credit Agreement dated as of February 15, 2007 between Approach Resources I, LP, The Frost National Bank, as administrative agent, and the lenders party thereto, dated June 14, 2007.
	10	.11*	Form of Business Opportunities Agreement dated , 2007, among Approach Resources Inc. and the other signatories thereto.
	10	.12	Form of Option Agreement under 2003 Stock Option Plan.

II-3



Exhibit
number			Description


	10	.13	Restricted Stock Award Agreement by and between Approach Resources Inc. and J. Curtis Henderson dated March 14, 2007.
	10	.14*	Form of Summary of Stock Option Grant under Approach Resources Inc. 2007 Stock Incentive Plan.
	10	.15*	Form of Stock Award Agreement under Approach Resources Inc. 2007 Stock Incentive Plan.
	21	.1	List of Subsidiaries.
	23	.1	Consent of Hein & Associates LLP.
	23	.2	Consent of DeGolyer & MacNaughton.
	23	.3	Consent of Cawley, Gillespie & Associates, Inc.
	23	.4*	Consent of Thompson & Knight LLP (contained in Exhibit 5.1).
	24		Power of Attorney (contained on the signature page hereto).


*		To be filed by amendment.


Item 17.	*Undertakings*

The undersigned registrant hereby undertakes:

(a) Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 14 or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

(b) To provide the underwriter(s) at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

(c) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(d) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offering therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II-4

Signatures

Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fort Worth, and State of Texas, on the 12 ^th day of July, 2007.

APPROACH RESOURCES INC.


	By:	/s/ J. Ross Craft

J. Ross Craft

President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities indicated on July 12, 2007. Each person whose signature appears below constitutes and appoints J. Ross Craft and Steven P. Smart, and each of them individually, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement under the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto and other documents in connection therewith, with the SEC, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This document may be executed by the signatories hereto on any number of counterparts, all of which constitute one and the same instrument.


Signature				Title

/s/ J. Ross Craft J. Ross Craft				President, Chief Executive Officer and Director (Principal Executive Officer)

/s/ Steven P. Smart Steven P. Smart				Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

/s/ Bryan H. Lawrence Bryan H. Lawrence				Director and Chairman of the Board of Directors

/s/ James H. Brandi James H. Brandi				Director

/s/ James C. Crain James C. Crain				Director

/s/ Sheldon B. Lubar Sheldon B. Lubar				Director

/s/ Christopher J. Whyte Christopher J. Whyte				Director

II-5

Exhibit index



Exhibit
Number			Description


	1	.1*	Form of Underwriting Agreement.
	3	.1	Form of Restated Certificate of Incorporation of Approach Resources Inc.
	3	.2	Form of Restated Bylaws of Approach Resources Inc.
	4	.1*	Specimen Common Stock Certificate.
	5	.1*	Opinion of Thompson & Knight LLP regarding legality of securities issued.
	10	.1*	Form of Indemnity Agreement between Approach Resources Inc. and each of its directors and officers.
	10	.2	Contribution Agreement by and among Approach Resources Inc. and the equity holders identified therein, dated June 29, 2007.
	10	.3	Employment Agreement by and between Approach Resources Inc. and J. Ross Craft dated January 1, 2003.
	10	.4	Employment Agreement by and between Approach Resources Inc. and Steven P. Smart dated January 1, 2003.
	10	.5	Employment Agreement by and between Approach Resources Inc. and Glenn W. Reed dated January 1, 2003.
	10	.6	Approach Resources Inc. 2007 Stock Incentive Plan, effective as of June 28, 2007.
	10	.7	Convertible Promissory Note issued by Approach Oil & Gas Inc. to Yorktown Energy Partners VII, L.P. dated June 25, 2007.
	10	.8	Convertible Promissory Note issued by Approach Oil & Gas Inc. to Lubar Equity Fund, LLC dated June 25, 2007.
	10	.9	$100,000,000 Revolving Amended and Restated Credit Agreement by and among Approach Resources I, LP, as borrower, The Frost National Bank, as administrative agent and lender, and the financial institutions party thereto, dated February 15, 2007.
	10	.10	Amendment to Amended and Restated Credit Agreement dated as of February 15, 2007 between Approach Resources I, LP, The Frost National Bank, as administrative agent, and the lenders party thereto, dated June 14, 2007.
	10	.11*	Form of Business Opportunities Agreement dated , 2007, among Approach Resources Inc. and the other signatories thereto.
	10	.12	Form of Option Agreement under 2003 Stock Option Plan.
	10	.13	Restricted Stock Award Agreement by and between Approach Resources Inc. and J. Curtis Henderson dated March 14, 2007.
	10	.14*	Form of Summary of Stock Option Grant under Approach Resources Inc. 2007 Stock Incentive Plan.
	10	.15*	Form of Stock Award Agreement under Approach Resources Inc. 2007 Stock Incentive Plan.
	21	.1	List of Subsidiaries.
	23	.1	Consent of Hein & Associates LLP.
	23	.2	Consent of DeGolyer & MacNaughton.
	23	.3	Consent of Cawley, Gillespie & Associates, Inc.
	23	.4*	Consent of Thompson & Knight LLP (contained in Exhibit 5.1).
	24		Power of Attorney (contained on the signature page hereto).


*		To be filed by amendment.

II-6

Exhibit 3.1

RESTATED CERTIFICATE OF INCORPORATION

APPROACH RESOURCES INC.

J. Ross Craft hereby certifies that:

ONE: He is the duly elected and acting President and Chief Executive Officer of Approach Resources Inc., a Delaware corporation originally incorporated as of September 12, 2002.

TWO: This Restated Certificate of Incorporation was duly adopted by the Board of Directors of the Corporation in accordance with the provisions of Sections 242 and 245 of the Delaware General Corporation Law and was duly adopted by vote of the stockholders of the Corporation in accordance with the provisions of Sections 228 and 242 of the Delaware General Corporation Law.

THREE: The Certificate of Incorporation of this corporation is hereby amended and restated in its entirety to read as follows:

Article 1. NAME

The name of this corporation is Approach Resources Inc. (the “ Corporation ”).

Article 2. REGISTERED OFFICE AND AGENT

The registered office of the Corporation shall be located at Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801 in the County of New Castle. The registered agent of the Corporation at such address shall be The Corporation Trust Company.

Article 3. PURPOSE AND POWERS

The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware (the “ DGCL ”). The Corporation shall have all power necessary or convenient to the conduct, promotion or attainment of such acts and activities.

Article 4. CAPITAL STOCK

4.1. Authorized Shares

The total number of shares of all classes of stock that the Corporation shall have the authority to issue is 100,000,000, of which 90,000,000 of such shares shall be Common Stock, all of one class, having a par value of $0.01 per share (“ Common Stock ”), and 10,000,000 of such shares shall be Preferred Stock, having a par value of $0.01 per share (“ Preferred Stock ”).

4.2. Common Stock

(a) The holders of the Common Stock shall have and possess all rights as stockholders of the Corporation except as such rights may be limited by the preferences, privileges and voting powers, and the restrictions and limitations of the outstanding Preferred Stock. All Common Stock, when duly issued, shall be fully paid and nonassessable. The holders of Common Stock shall be entitled to receive such dividends as may be declared from time to time by the Board of Directors.

(b) Each stockholder of record shall have one vote for each share of Common Stock standing in his name on the books of the Corporation and entitled to vote.

(c) The holders of shares of the Common Stock shall be entitled to participate ratably on a per share basis in all distributions in any dissolution, liquidation or winding up of the Corporation, subject to the payment of any preferences thereto applicable to outstanding Preferred Stock.

4.3. Preferred Stock

The Corporation may divide and issue the Preferred Stock in series. Preferred Stock of each series when issued shall be designated to distinguish them from the shares of all other series. The Board of Directors hereby is expressly vested with authority to divide the class of Preferred Stock into series and to fix and determine the relative rights, limitations and preferences of the shares of any such series so established to the full extent permitted by this Certificate of Incorporation and the DGCL in respect of the following:

(a) The number of shares to constitute such series, and the distinctive designations thereof;

(b) The rate and preference of any dividends and the time of payment of any dividends, whether dividends are cumulative and the date from which any dividends shall accrue;

(d) The amount payable upon shares in event of involuntary liquidation;

(e) The amount payable upon shares in event of voluntary liquidation;

(f) Sinking fund or other provisions, if any, for the redemption or purchase of shares;

(g) The terms and conditions on which shares may be converted, if the shares of any series are issued with the privilege of conversion;

(h) Voting rights, if any; and

(i) Any other relative rights and preferences of shares of such series, including without limitation any restriction on an increase in the number of shares of any series theretofore authorized and any limitation or restriction of rights or powers to which shares of any future series shall be subject.

Notwithstanding the fixing of the number of shares constituting the particular series upon the issuance thereof, the Board of Directors may at any time thereafter authorize the issuance of additional shares of the same series or may reduce the number of shares constituting such series.

The Board of Directors expressly is authorized to vary the provisions relating to the foregoing matters between the various series of Preferred Stock, but in all other respects the shares of each series shall be of equal rank with each other, regardless of series. All Preferred Stock in any one series shall be identical in all respects.

4.4. Preemptive Rights

Ownership of shares of any class of the capital stock of the Corporation shall not entitle the holders thereof to any preemptive rights to subscribe for or purchase or to have offered to them for subscription or purchase any additional shares of capital stock of any class of the Corporation or any securities convertible into any class of capital stock of the Corporation, whether now or hereafter authorized, however acquired, issued or sold by the Corporation, it being the purpose and intent hereof that the Board of Directors shall have the full right, power and authority to offer for subscription or sell or to make any disposal of any or all unissued shares of the capital stock of the Corporation or any securities convertible into stock or any or all shares of stock or convertible securities issues and thereafter acquired by the Corporation, for such consideration, in money or property, as the Board of Directors in its sole discretion may determine.

Article 5. BOARD OF DIRECTORS

5.1. Management

(a) The governing body of this Corporation shall be known as the Board of Directors, and the number of directors of the Corporation may from time to time be increased or decreased in such manner as shall be provided by the Bylaws of the Corporation. The exact number of directors shall be fixed from time to time pursuant to a resolution adopted by the directors or as provided in the Bylaws of the Corporation.

(b) The Board of Directors shall be and is divided into three (3) classes as nearly as equal in size as is practicable, hereby designated Class I, Class II and

Class III. If a fraction is contained in the quotient arrived at by dividing the authorized number of directors by three, then, if such fraction is one-third, the extra director shall be a member of Class III, and if such fraction is two-thirds, one of the extra directors shall be a member of Class II and one of the extra directors shall be a member of Class III, unless otherwise provided from time to time by resolution adopted by the Board of Directors.

(c) Holders of Common Stock shall elect all directors of the Corporation. Elections of directors need not be by written ballot except as and to the extent provided in the Bylaws of the Corporation. Cumulative voting for the election of directors is not allowed.

(d) Each director shall serve for a term ending on the date of the third annual meeting following the annual meeting at which such director was elected; provided , that each initial director in Class I shall serve for a term expiring at the Corporation’s annual meeting held in 2008; each initial director in Class II shall serve for a term expiring at the Corporation’s annual meeting held in 2009; and each initial director in Class III shall serve for a term expiring at the Corporation’s annual meeting held in 2010; provided, further , that the term of each director shall continue until the election and qualification of his successor and shall be subject to his earlier death, resignation or removal.

(e) The initial directors of the Corporation, who shall serve as the directors of the Corporation until their successors are elected and qualify or until their earlier death, resignation or removal from office, and their respective classifications and terms shall be as follows:


Class	Expiration of Term	Directors
I	Next succeeding annual meeting	Sheldon B. Lubar
		Christopher J. Whyte

II	Second succeeding annual meeting	James H. Brandi
		James C. Crain

III	Third succeeding annual meeting	J. Ross Craft
		Bryan H. Lawrence

(f) Subject to the rights of the holders of any series of Preferred Stock to remove directors under specified circumstances, (i) no director may be removed without cause and (ii) the affirmative vote of the holders of at least sixty-seven (67%) of the voting power of all of the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to remove any director or the entire Board of Directors for cause.

(g) In the event of any increase or decrease in the authorized number of directors, (i) each director then serving as such shall nevertheless continue as a director of the class of which he is a member until the expiration of his current term, subject to his earlier death, resignation or removal, and (ii) the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors in accordance with the provisions of subsection (b) above. To the extent possible, consistent with the provisions of subsection (b) above, any newly created directorships shall be added to those classes whose terms of office are to expire at the latest dates following such allocation, and any newly eliminated directorships shall be subtracted from those classes whose terms of offices are to expire at the earliest dates following such allocation, unless otherwise provided from time to time by resolution adopted by the Board of Directors.

(h) Unless and until filled by the stockholders, any vacancy in the Board of Directors, however occurring, including a vacancy resulting from an enlargement of the Board, may be filled by a vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director. A director elected to fill a vacancy shall be elected to hold office until the next election of the class for which such director shall have been chosen, subject to the election and qualification of his successor and to his earlier death, resignation or removal.

5.2. Stockholder Nominations of Directors and Introduction of Business

Advanced notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner and to the extent provided in the Bylaws of the Corporation.

Article 6. DIRECTOR AND OFFICER LIABILITY

6.1 Elimination of Director and Officer Liability

To the fullest extent permitted by the DGCL as the same exists or may hereafter be amended, no director or officer of the corporation shall be personally liable to the corporation or any of its stockholders for damages for breach of fiduciary duty as a director or officer occurring on or after the date of incorporation; provided, however, that the foregoing provision shall not eliminate or limit the liability of a director or officer (i) for any breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct, fraud or a knowing violation of law, (iii) the payment of dividends in violation of Section 174 of the DGCL or (iv) for any transaction for which the director derived an improper personal benefit. If the DGCL is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the

Corporation shall be eliminated or limited to the fullest extent permitted by the DGCL, as so amended. Any repeal or modification of this Section 6.1 by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director or officer of the Corporation for acts or omissions prior to such repeal or modification.

6.2 Indemnification and Insurance

(a) Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “ proceeding ”), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation, or serves, in any capacity, any corporation, partnership or other entity in which the Corporation has a partnership or other interest, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the DGCL, as the same exists or may hereafter be amended (but, in case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, the Corporation shall indemnify any such person seeking indemnification pursuant to this subsection in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The Corporation may, by action of its Board of Directors, provide indemnification to employees or agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers.

(b) Nonexclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article 6 shall not be exclusive of any right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise.

(c) Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the

corporation would have the power to indemnify such person against such expense, liability or loss under the DGCL.

(d) Severability. If any subsection of this Section 6.2 shall be deemed to be invalid or ineffective in any proceedings, the remaining subsections hereof shall not be affected and shall remain in full force and effect.

Article 7. TERM

The Corporation shall have perpetual existence.

Article 8. BYLAWS

The Board of Directors shall have the power to adopt, amend or repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of the Bylaws of the Corporation by the Board of Directors shall require the approval of a majority of the total number of directors fixed by resolution of the Board of Directors regardless of whether there exist any vacancies in such fixed number of directorships. The stockholders shall also have the power to adopt, amend or repeal the Bylaws of the Corporation; provided, however, that, in addition to any vote of the holders of any class or series of capital stock of the Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least sixty-seven percent (67%) of the voting power of all of the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to adopt, amend or repeal any provision of the Bylaws of the Corporation in the event of such a vote.

Article 9. STOCKHOLDER MEETINGS

Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. Only the Board of Directors, the Chairman of the Board of Directors or the Chief Executive Officer shall be permitted to call a special meeting of stockholders.

Article 10. AMENDMENT TO CERTIFICATE OF INCORPORATION

The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation; provided however, that the affirmative vote of the holders of at least sixty-seven percent (67%) of the shares of capital stock of the Corporation issued and outstanding and entitled to vote, voting together as a single class, shall be required to alter, amend or repeal Articles 5, 6 and 9 of this Certificate of Incorporation; provided, however, that this Article 10 shall not apply to, and such sixty-seven percent (67%) vote shall not be required for, any amendment, repeal or adoption unanimously recommended by the Board of Directors.

Article 11. RENUNCIATION OF BUSINESS OPPORTUNITIES

(a) Renouncement of Business Opportunities . The Corporation hereby renounces any interest or expectancy in any business opportunity, transaction or other matter in which any Designated Party participates or desires or seeks to participate in and that involves any aspect of the E&P Business (each, a “ Business Opportunity ”) other than a Business Opportunity that (i) is first presented to a Designated Party solely in such person’s capacity as a director of the Corporation or its Subsidiaries and with respect to which, at the time of such presentment, no other Designated Party has independently received notice of or otherwise identified such Business Opportunity or (ii) is identified by a Designated Party solely through the disclosure of information by or on behalf of the Corporation (each Business Opportunity other than those referred to in clauses (i) or (ii) are referred to as a “ Renounced Business Opportunity ”). No Designated Party shall have any obligation to communicate or offer any Renounced Business Opportunity to the Corporation, and any Designated Party may pursue a Renounced Business Opportunity. The Corporation shall not be prohibited from pursuing any Business Opportunity with respect to which it has renounced any interest or expectancy as a result of this Article 11. Nothing in this Article 11 shall be construed to allow any director to usurp a Business Opportunity of the Corporation or its Subsidiaries solely for his or her personal benefit.

(b) Consent . Any Person purchasing or otherwise acquiring any interest in shares of the capital stock of the Company shall be deemed to have consented to these provisions.

(c) Amendment . Any proposed amendment to this Article 11 shall require the approval of at least 67% of the outstanding voting stock of the Corporation entitled to vote generally in the election of directors.

(d) Term . The provisions of this Article 11 shall terminate and be of no further force and effect at such time as no Designated Party serves as a director (including Chairman of the Board) of the Company or its Subsidiaries.

(e) As used in this Article 11, the following definitions shall apply:

(i) “ Affiliate ” means with respect to a specified person, a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified, and any directors, officers, partners or 5% or more owners of such person.

(ii) “ Designated Parties ” means James H. Brandi, James C. Crain, Bryan H. Lawrence, Sheldon B. Lubar, Christopher J. Whyte, all Affiliates of the foregoing, Yorktown Energy Partners V, L.P., Yorktown Energy Partners

VI, L.P., Yorktown Energy Partners VII, L.P., any other investment fund sponsored or managed by Yorktown Partners LLC, including any fund still to be formed, and such other persons as the Board of Directors of the Corporation shall, from time to time, determine by resolution.

(iii) “ E&P Business ” means the oil and gas exploration, exploitation, development and production business and includes without limitation (a) the ownership of oil and gas property interests (including working interests, mineral fee interests and royalty and overriding royalty interests), (b) the ownership and operation of real and personal property used or useful in connection with exploration for Hydrocarbons, development of Hydrocarbon reserves upon discovery thereof and production of Hydrocarbons from wells located on oil and gas properties and (c) the ownership of debt of or equity interests in corporations, partnerships or other entities engaged in the exploration for Hydrocarbons, the development of Hydrocarbon reserves and the production and sale of Hydrocarbons.

(v) “ Hydrocarbons ” means oil, gas or other liquid or gaseous hydrocarbons or other minerals produced from oil and gas wells.

(vi) “ Person ” means an individual, corporation, partnership, limited liability company, trust, joint venture, unincorporated organization or other legal or business entity.

(vii) “ Subsidiary ” or “ Subsidiaries ” means, with respect to any Person, any other Person the majority of the voting securities of which are owned, directly or indirectly, by such first Person.

* * * * *

IN WITNESS WHEREOF , Approach Resources Inc. has caused this Restated Certificate of Incorporation to be executed by its President and Chief Executive Officer who hereby certifies that the facts hereinabove stated are truly set forth, this day of , 2007.


	APPROACH RESOURCES INC.
	By:
		J. Ross Craft,
		President and Chief Executive Officer

Exhibit 3.2

Restated Bylaws
of
Approach Resources, Inc.

ARTICLE I
OFFICES

Section 1. Name . The name of the corporation is Approach Resources Inc. (hereinafter called the “ Corporation ”).

Section 2. Registered Office . The registered office of the Corporation required by the state of incorporation of the Corporation to be maintained in the state of incorporation of the Corporation shall be the registered office named in the certificate of incorporation of the Corporation, or such other office as may be designated from time to time by the Board of Directors in the manner provided by law.

Section 3. Other Offices . The Corporation shall also have such offices, and keep the books and records of the Corporation as may be required by law, and at such other place or places as the Board of Directors may from time to time determine or the business of the Corporation require.

ARTICLE II
MEETINGS OF STOCKHOLDERS

Section 1. Annual Meetings . The annual meetings of stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held during each calendar year on a date and at such hour as may be fixed by the Board of Directors, beginning in 2008, at such place as designated by the Board of Directors in the notice of such meeting.

Section 2. Special Meetings . Special meetings of the stockholders for any purpose or purposes may be called by a majority of the entire Board of Directors, the Chairman of the Board of Directors or the Chief Executive Officer. Only such business as is specified in the notice of any special meeting of the stockholders shall come before such meeting.

Section 3. Notice of Meetings . Except as otherwise provided by law, written notice of each meeting of the stockholders, whether annual or special, shall be given, either by personal delivery or by mail, not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder of record entitled to notice of the meeting. If mailed, such notice shall be deemed given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder’s address as it appears on the records of the Corporation. Each such notice shall state the place, date and hour of the meeting, and the purpose or purposes for which the meeting is called. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy without protesting, prior to or at the commencement of the meeting, the lack of proper notice to such stockholder. Notice of adjournment of a meeting of stockholders need not be given if the time and place to

which it is adjourned are announced at such meeting, unless the adjournment is for more than thirty (30) days or, after adjournment, a new record date is fixed for the adjourned meeting.

Section 4. Quorum; Adjournment of Meetings .

(a) Unless otherwise required by law or provided in the certificate of incorporation of the Corporation (the “ Certificate of Incorporation ”) or these Bylaws, (i) the holders of a majority of the shares of stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at any meeting of the stockholders for the transaction of business and (ii) where a separate vote by a class or classes is required, a majority of the outstanding shares of such class or classes, present in person or represented by proxy shall constitute a quorum entitled to take action with respect to the vote on that matter. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum.

(b) Notwithstanding the other provisions of the Certificate of Incorporation or these Bylaws, the chairman of the meeting or the holders of a majority of the issued and outstanding stock, present in person or represented by proxy and entitled to vote thereat, at any meeting of stockholders, whether or not a quorum is present, shall have the power to adjourn such meeting from time to time, without any notice other than announcement at the meeting of the time and place of the holding of the adjourned meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at such meeting. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted that might have been transacted at the meeting as originally called.

Section 5. Voting . At each meeting of the stockholders, in all matters, other than the election of directors (except as otherwise provided in the Certificate of Incorporation), the affirmative vote of the holders of a majority of such stock so present or represented by proxy at any meeting of stockholders at which a quorum is present shall constitute the act of the stockholders. There shall be no separate votes of classes of capital stock, except as specifically required by law, the Certificate of Incorporation, or the Bylaws. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of the directors. Where a separate vote by a class or classes is required, the affirmative vote of the majority of the shares of such class or classes present in person or represented by proxy at the meeting shall be the act of such class. Each stockholder entitled to vote at any meeting of stockholders may authorize any person or persons to act for such stockholder by a proxy signed by such stockholder or such stockholder’s attorney-in-fact.

Unless otherwise required by law or provided in the Certificate of Incorporation, each stockholder shall on each matter submitted to a vote at a meeting of stockholders have one vote for each share of the stock entitled to vote which is registered in his name on the record date for the meeting. For the purposes hereof, each election to fill a directorship shall constitute a separate matter. Shares registered in the name of another entity, domestic or foreign, may be voted by such officer, agent or proxy as the organizational documents of such entity may determine. Shares registered in the name of a deceased person may be voted by the executor or administrator of such person’s estate, either in person or by proxy.

All voting, except as required by the Certificate of Incorporation or where otherwise required by law, may be by a voice vote; provided, however, upon request of the chairman of the meeting or upon demand therefor by stockholders holding a majority of the issued and outstanding stock present in person or by proxy at any meeting, a stock vote shall be taken. Every stock vote shall be taken by written ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. All elections of directors shall be by written ballots, unless otherwise provided in the Certificate of Incorporation.

At any meeting at which a vote is taken by written ballots, the chairman of the meeting may appoint one or more inspectors, each of whom shall subscribe an oath or affirmation to execute faithfully the duties of inspector at such meeting with strict impartiality and according to the best of such inspector’s ability. Such inspector shall receive the written ballots, count the votes and make and sign a certificate of the result thereof. The chairman of the meeting may appoint any person to serve as inspector, except no candidate for the office of director shall be appointed as an inspector.

Unless otherwise provided in the Certificate of Incorporation, cumulative voting for the election of directors shall be prohibited.

Section 6. Participation in Meeting by Means of Communication Equipment . Any stockholder may participate in any meeting of the stockholders by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at such meeting.

Section 7. Notice of Stockholder Business . At an annual or special meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before a meeting of stockholders, business must be (i) specified in the notice of meeting (or any supplement thereto) given at the direction of the Board of Directors, (ii) properly brought before the meeting by or at the direction of the Board of Directors or (iii) properly brought before a meeting by a stockholder who is a stockholder of record on the date of the giving of the notice provided for in this Section 7 and on the record date for the determination of stockholders entitled to vote at such annual meeting and who complies with the notice provisions set forth in this Section 7. For business to be properly brought before a meeting by a stockholder, it must be a proper matter for stockholder action under the Delaware General Corporation Law, and the stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation.

To be timely, notice by a stockholder must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than ninety (90) and no more than one hundred twenty (120) calendar days prior to the one year anniversary of the date of the Corporation’s proxy statement issued in connection with the prior year’s annual meeting in the case of an annual meeting, and not less than sixty (60) days prior to the meeting in the case of a special meeting; provided however, that if a public announcement of the date of the special meeting is not given at least seventy (70) days before the scheduled date for such special meeting, then a stockholder’s notice shall be timely if it is received at the principal executive

offices of the Corporation within ten (10) days following the date public notice of the meeting date is first given, whether by press release or other public filing.

To be in proper written form, notice by a stockholder to the Secretary of the Corporation shall set forth as to each matter the stockholder proposes to bring before the annual or special meeting (i) a description of the business desired to be brought before the meeting, (ii) the name and address of the stockholder proposing such business and of the beneficial owner, if any, on whose behalf the business is being brought, (iii) the class, series and number of shares of the Corporation which are beneficially owned by the stockholder and such other beneficial owner, (iv) any material interest of the stockholder and such other beneficial owner in such business and (v) a representation that such stockholder intends to appear in person or by proxy at the annual or special meeting to bring such business before such meeting. In no event shall an announcement of an adjournment or postponement of a meeting of stockholders commence a new time period (or extend any time period) for the giving of a stockholder’s notice as described above.

Section 8. Nomination of Director Candidates . Subject to any provision of the Certificate of Incorporation or any Certificate of Designations establishing the rights of holders of any class or series of capital stock then outstanding, nominations for the election or re-election of directors at a meeting of the stockholders may be made by (i) the Board of Directors or a duly authorized committee thereof or (ii) any stockholder entitled to vote in the election of directors generally who complies with the procedures set forth in these Bylaws and who is a stockholder of record at the time notice is delivered to the Secretary of the Corporation and on the record date for the determination of stockholders entitled to vote at such annual meeting and who complies with the notice provisions set forth in this Section 8. Subject to any provision of the Certificate of Incorporation or any Certificate of Designations establishing the rights of holders of any class or series of capital stock then outstanding, any stockholder entitled to vote in the election of directors generally may nominate one or more persons for election or re-election as directors at an annual meeting only if timely notice of such stockholder’s intent to make such nominations has been given in writing to the Secretary of the Corporation.

To be timely, notice of a stockholder nomination for a director to be elected must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than ninety (90) and no more than one hundred twenty (120) calendar days prior to the one year anniversary of the date of the Corporation’s proxy statement issued in connection with the prior year’s annual meeting in the case of an annual meeting, and not less than sixty (60) days prior to the meeting the case of a special meeting; provided however, that if a public announcement of the date of the special meeting is not given at least seventy (70) days before the scheduled date for such special meeting, then a stockholder’s notice shall be timely if it is received at the principal executive offices of the Corporation within ten (10) days following the date public notice of the meeting date is first given, whether by press release or other public filing.

To be in proper written form, notice by a stockholder to the Secretary of the Corporation shall set forth as to each matter the stockholder proposes to bring before the annual or special meeting (i) the name and address of the stockholder who intends to make the nomination, of the beneficial owner, if any on whose behalf the nomination is being made and of each person to be nominated, (ii) a representation that the stockholder is the holder of record of stock of the Corporation entitled to vote for the election of directors on the date of such notice and intends to appear in person or by proxy at the meeting to nominate each person specified in the notice, (iii)

a description of all the arrangements or understandings between the stockholder or such beneficial owner and each nominee and any other person (naming such person) pursuant to which the nomination is to be made by the stockholder, (iv) such other information regarding each nominee proposed by such stockholder as would be required to be included in solicitations of proxies for the election of directors in an election contest or is otherwise required pursuant to the federal securities laws and regulations, had the nominee been nominated, or intended to be nominated, by the Board of Directors and (v) the consent of each nominee to serve as a director of the Corporation if so elected.

Notwithstanding the foregoing, in the event that the number of directors to be elected at an annual meeting is increased and there is no public announcement by the Corporation naming the nominees for the additional directorships at least 130 days prior to such meeting, a stockholder’s notice required by this Section 8 shall also be considered timely, but only with respect to nominees for the additional directorships, if it shall be delivered to the Secretary of the Corporation no later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. In no event shall an announcement of an adjournment or postponement of a meeting of stockholders commence a new time period (or extend any time period) for the giving of a stockholder’s notice as described above.

Section 9. Stockholder List . A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in the name of such stockholder, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The stockholder list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.

Section 10. Proxies .

Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for him by proxy. Proxies for use at any meeting of stockholders shall be filed with the Secretary, or such other officer as the Board of Directors may from time to time determine by resolution, before or at the time of the meeting. A written proxy may be in the form of a telegram, cablegram or other means of electronic transmission which sets forth or is submitted with information from which it can be determined that the telegram, cablegram or other means of electronic transmission was authorized by the person. All proxies shall be received and taken charge of and all ballots shall be received and canvassed by the secretary of the meeting, who shall decide all questions touching upon the qualification of voters, the validity of the proxies, and the acceptance or rejection of votes, unless an inspector or inspectors shall have been appointed by the chairman of the meeting, in which event such inspector or inspectors shall decide all such questions.

No proxy shall be valid after three (3) years from its date, unless the proxy provides for a longer period. Each proxy shall be revocable unless expressly provided therein to be irrevocable and coupled with an interest sufficient in law to support an irrevocable power.

Should a proxy designate two or more persons to act as proxies, unless such instrument shall provide the contrary, a majority of such persons present at any meeting at which their powers thereunder are to be exercised shall have and may exercise all the powers of voting thereby conferred, or if only one be present, then such powers may be exercised by that one; or, if an even number attend and a majority do not agree on any particular issue, each proxy so attending shall be entitled to exercise such powers in respect of such portion of the shares as is equal to the reciprocal of the fraction equal to the number of proxies representing such shares divided by the total number of shares represented by such proxies.

Section 11. Treasury Stock . The Corporation shall not vote, directly or indirectly, shares of its own stock owned by it and such shares shall not be counted for quorum purposes. Nothing in this Section 11 shall be construed as limiting the right of the Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity.

Section 12. Stockholder Action . Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders.

ARTICLE III
BOARD OF DIRECTORS

Section 1. Number . The Board of Directors shall consist of not less than three (3) and not more than nine (9) directors, and the exact number of directors which shall constitute the Board of Directors shall be fixed from time to time by resolution of the Board; provided, however, that no decrease in the number of directors constituting the Board shall have the effect of shortening the term of any incumbent director. None of the directors needs to be a stockholder of the Corporation or a resident of the State of Delaware.

Section 2. Vacancies . Any vacancies in the Board of Directors for any reason, and any newly created directorships resulting from any increase in the authorized number of directors, may be filled only by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders and until their successors are duly elected and qualified or until their earlier resignation or removal. If there are no directors in office, then an election of directors may be held in the manner provided by statute.

Section 3. Quorum and Manner of Acting . A majority of the entire Board of Directors shall constitute a quorum for the transaction of business at any meeting of the Board, and the vote of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board. In the absence of a quorum, a majority of the directors present may adjourn the meeting to another time and place. At any adjourned meeting at which a quorum is present, any business that might have been transacted at the meeting as originally called may be transacted.

Section 4. Regular and Special Meetings . Regular meetings of the Board of Directors shall be held at such times and places as the Board shall from time to time by

resolution determine. Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board, the President, or by at least two (2) of the directors.

Section 5. Participation in Meeting by Means of Communication Equipment . Any one or more members of the Board of Directors or any committee thereof may participate in any meeting of the Board or of any such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at such meeting.

Section 6. Committees . The Board of Directors may, by unanimous resolution, designate one or more committees, each committee to consist of two (2) or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; provided, however, that in the absence or disqualification of any member of such committee or committees the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required.

Section 7. Compensation . The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as a director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings.

Section 8. Resignations . Any director of the Corporation may at any time resign by giving written notice to the Board of Directors, the Chairman of the Board, the President or the Secretary of the Corporation. Such resignation shall take effect at the time specified therein or, if the time be not specified, upon receipt thereof; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

Section 9. Reliance upon Books, Reports and Records . A member of the Board of Directors, or a member of any committee designated by the Board of Directors, shall, in the performance of such person’s duties, be protected to the fullest extent permitted by law in relying upon the records of the Corporation and upon information, opinions, reports or statements presented to the Corporation.

Section 10. Consents . Any action which may be taken at a meeting of the Board of Directors or any committee thereof may be taken without a meeting in compliance with Delaware General Corporation Law.

ARTICLE IV
NOTICES

Section 1. Whenever, under the provisions of the statutes or of the certificate of incorporation or of these Bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by prepaid telegram, facsimile, or reputable courier service.

Section 2. Whenever any notice is required to be given under the provisions of the statutes or of the certificate of incorporation or of these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.

ARTICLE V
OFFICERS

Section 1. Number, Term of Office . The officers of the Corporation shall be a Chairman of the Board, a Chief Executive Officer, a President, one or more Vice Presidents, a Treasurer, a Secretary and such other officers or agents with such titles and such duties as the Board of Directors may from time to time determine (including a Chief Operating Officer), each to have such authority, functions or duties as in these Bylaws provided or as the Board may from time to time determine, and each to hold office for such term as may be prescribed by the Board and until such person’s successor shall have been chosen and shall qualify, or until such person’s death or resignation, or until such person’s removal in the manner hereinafter provided. The Chairman of the Board shall be elected from among the directors. One person may hold the offices and perform the duties of any two or more of said officers; provided, however, that no officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument is required by law, the Certificate of Incorporation of the Corporation or these Bylaws to be executed, acknowledged or verified by two (2) or more officers. The Board may from time to time authorize any officer to appoint and remove any such other officers and agents and to prescribe their powers and duties. The Board may require any officer or agent to give security for the faithful performance of such person’s duties.

Section 2. Removal . Any officer may be removed, either with or without cause, by the Board of Directors at any meeting thereof called for that purpose, or, except in the case of any officer elected by the Board, by any committee or superior officer upon whom such power may be conferred by the Board.

Section 3. Resignation . Any officer may at any time resign by giving written notice to the Board of Directors, the President or the Secretary of the Corporation. Any such resignation shall take effect at the date of receipt of such notice or at any later date specified therein, and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

Section 4. Vacancies . A vacancy in any office because of death, resignation, removal or any other cause may be filled for the unexpired portion of the term by the Board of Directors in the manner prescribed in these Bylaws for election to such office.

Section 5. Chairman of the Board . The Chairman of the Board of Directors shall preside at meetings of the Board of Directors and of the stockholders. He shall have general power to execute bonds, mortgages and other instruments requiring a seal, under the seal of the Corporation, except when the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent. When the Board of Directors designates the Chairman of the Board as the Chief Executive Officer of the Corporation he shall have general supervision, direction and active management of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. The Chairman of the Board shall have such other specific duties as shall be assigned to him by the Board of Directors from time to time.

Section 6. Chief Executive Officer . The Chief Executive Officer shall be the chief executive officer of the Corporation and as such shall have general supervision and direction of the business and affairs of the Corporation, subject to the control of the Board of Directors. The Chief Executive Officer shall, if present and in the absence of the Chairman of the Board, preside at meetings of the stockholders and at meetings of the Board of Directors. The Chief Executive Officer shall perform such other duties as the Board may from time to time determine. The Chief Executive Officer may sign and execute in the name of the Corporation deeds, mortgages, bonds, contracts or other instruments authorized by the Board of Directors or any committee thereof empowered to authorize the same, except when the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent.

Section 7. President . The President, in the absence or disability of the Chairman of the Board of Directors and the Chief Executive Officer, shall preside at meetings of the Board of Directors and of the stockholders and shall perform the duties and exercise the powers of the Chairman of the Board of Directors. He shall have general power to execute deeds, mortgages, bonds, contracts or other instruments authorized by the Board of Directors or any committee thereof empowered to authorize the same, except when the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. When designated as Chief Executive Officer of the Corporation, the President shall have general supervision, direction and active management of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect; otherwise, he shall be the chief operating officer of the Corporation and shall perform such other duties as may be prescribed by the Board of Directors or by the Chairman of the Board of Directors.

Section 8. Vice Presidents . Each Vice President shall have such powers and duties as shall be prescribed by the Chairman of the Board, the President or the Board of Directors. Any Vice President may sign and execute in the name of the Corporation deeds, mortgages, bonds, contracts or other instruments authorized by the Board or any committee thereof empowered to authorize the same, except when the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent.

Section 9. Treasurer . The Treasurer shall perform all duties incident to the office of Treasurer and such other duties as from time to time may be assigned to the Treasurer by the Chairman of the Board, the President or the Board of Directors.

Section 10. Secretary . It shall be the duty of the Secretary to act as secretary at all meetings of the Board of Directors and of the stockholders and to record the proceedings of such meetings in a book or books to be kept for that purpose; the Secretary shall see that all notices required to be given by the Corporation are duly given and served; the Secretary shall be custodian of the seal of the Corporation and shall affix the seal or cause it to be affixed to all certificates of stock of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile, as hereinafter provided) and to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized in accordance with the provisions of these Bylaws. The Secretary shall have charge of the stock ledger and also of the other books, records and papers of the Corporation and shall see that the reports, statements and other documents required by law are properly kept and filed; and the Secretary shall in general perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to such person by the Chairman of the Board, Chief Executive Officer, President or the Board of Directors.

Section 11. Assistant Treasurers and Secretaries . The Assistant Treasurers and the Assistant Secretaries shall perform such duties as shall be assigned to them by the Treasurer or Secretary, respectively, or by the Chairman of the Board, Chief Executive Officer, President or the Board of Directors.

ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS

Section 1. Power to Indemnify in Actions, Suits or Proceedings . Subject to Section 2 of this Article VI, the Corporation shall indemnify and hold harmless to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), any person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “ proceeding ”), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, against all expense, liability and loss (including attorneys’ fees, judgments, fines or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that except as provided in Article VI, Section 2 of these Bylaws, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was

authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this section of Article VI shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition.

Section 2. Indemnification by a Court . Notwithstanding anything to the contrary contained herein, any director or officer may apply to any court of competent jurisdiction in the State of Delaware for indemnification. The basis of such indemnification by a court shall be a determination by such court that indemnification of the director or officer is proper in the circumstances because he has met the applicable standards of conduct set forth in the Delaware General Corporation Law. Notice of any application for indemnification pursuant to this Section 2 shall be given to the Corporation promptly upon the filing of such application. If successful, in whole or in part, the director or officer seeking indemnification shall also be entitled to be paid the expense of prosecuting such application.

Section 3. Expenses Payable in Advance . Expenses incurred by a director or officer in defending or investigating a threatened or pending action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized this Article VI.

Section 4. Nonexclusivity of Indemnification and Advancement of Expenses . The indemnification and advancement of expenses provided by or granted pursuant to this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any Bylaw, agreement, contract, vote of stockholders or disinterested directors or pursuant to the direction (howsoever embodied) of any court of competent jurisdiction or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, it being the policy of the Corporation that indemnification of the persons specified in this Article VI shall be made to the fullest extent permitted by law. The provisions of this Article VI shall not be deemed to preclude the indemnification of any person who is not specified in Sections 1 or 2 of this Article VI but whom the Corporation has the power or obligation to indemnify under the provisions of the General Corporation Law of the State of Delaware, or otherwise.

Section 5. Insurance . The Corporation may purchase and maintain insurance on behalf of any person who is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power or the obligation to indemnify him against such liability under the provisions of this Article VI.

Section 6. Certain Definitions . For purposes of this Article VI, references to “the Corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors,

officers and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this section with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. For purposes of this Article VI, references to “fines” shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to “serving at the request of the Corporation” shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director or officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not opposed to the best interests of the Corporation.

Section 7. Survival of Indemnification and Advancement of Expenses . The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VI shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person.

Section 8. Limitation on Indemnification . Notwithstanding anything contained in this Article VI to the contrary, except for proceedings to enforce rights to indemnification (which shall be governed by Section 2 hereof), the Corporation shall not be obligated to indemnify any director or officer in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the Board of Directors of the Corporation.

Section 9. Indemnification of Employees and Agents . The Corporation may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article VI to directors and officers of the Corporation.

ARTICLE VII
CAPITAL STOCK

Section 1. Certificates of Stock . The Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of its capital stock shall be uncertificated shares. The certificates for shares of the capital stock of the Corporation shall be in such form, not inconsistent with that required by law and the certificate of incorporation of the Corporation, as shall be approved by the Board of Directors. Every holder of capital stock represented by certificates shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairman of the Board, the Chief Executive Officer, President, a Vice President or such other officer as designated by the Board of Directors and the Secretary or an assistant Secretary or the Treasurer or an assistant Treasurer of the Corporation representing the number of shares (and, if the capital stock of the Corporation shall be divided into classes or series, certifying the class and series of such shares) owned by such stockholder which are registered in certified form; provided, however, that any of or all the signatures on the certificate may be facsimile. The stock record books and the blank stock certificate books shall be kept by

the Secretary or at the office of such transfer agent or transfer agents as the Board of Directors may from time to time determine. In case any officer, transfer agent or registrar who shall have signed or whose facsimile signature or signatures shall have been placed upon any such certificate or certificates shall have ceased to be such officer, transfer agent or registrar before such certificate is issued by the Corporation, such certificate may nevertheless be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. The stock certificates shall be consecutively numbered and shall be entered in the books of the Corporation as they are issued and shall exhibit the holder’s name and number of shares.

Section 2. Transfer of Shares . In respect of certificated shares of capital stock, such shares of capital stock of the Corporation shall be transferable only on the books of the Corporation by the holders thereof in person or by their duly authorized attorneys or legal representatives upon surrender and cancellation of certificates for a like number of shares. Upon surrender to the Corporation or a transfer agent of the Corporation of such certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. In respect of uncertificated shares of capital stock, such shares of capital stock of the Corporation shall be transferable only on the books of the Corporation by the holders thereof in person or by their duly authorized attorneys or legal representatives upon the compliance with such rules and procedures as may be proscribed by the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President or such other officer as designated by the Board of Directors.

Section 3. Ownership of Shares . The Corporation shall be entitled to treat the holder of record of any share or shares of capital stock of the Corporation as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the state of incorporation of the Corporation.

Section 4. Regulations Regarding Certificates . The Board of Directors shall have the power and authority to make all such rules and regulations as they may deem expedient concerning the issue, transfer and registration or the replacement of certificates for shares of capital stock of the Corporation.

Section 5. Lost or Destroyed Certificates . The Board of Directors may determine the conditions upon which the Corporation may issue a new certificate for shares of capital stock in place of a certificate theretofore issued by it which is alleged to have been lost, stolen or destroyed and may require the owner of such certificate or such owner’s legal representative to give bond, with surety sufficient to indemnify the Corporation and each transfer agent and registrar against any and all losses or claims which may arise by reason of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate in the place of the one so lost, stolen or destroyed.

ARTICLE VIII
MISCELLANEOUS

Section 1. Seal . The corporate seal shall have inscribed thereon the name of the corporation and shall be in such form as may be approved from time to time by the Board of Directors. The seal may be used by causing it or a facsimile thereof to be impressed, affixed, imprinted or in any manner reproduced.

Section 2. Facsimile Signatures . In addition to the provision for the use of facsimile signatures elsewhere in these Bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors.

Section 3. Application of Bylaws . In the event that any provision of these Bylaws is or may be in conflict with any law of the United States, of the state of incorporation of the Corporation or of any other governmental body or power having jurisdiction over the Corporation, or over the subject matter to which such provision of these Bylaws applies, or may apply, such provision of these Bylaws shall be inoperative to the extent only that the operation thereof unavoidably conflicts with such law or provision, and shall in all other respects be in full force and effect.

ARTICLE IX
AMENDMENTS

These Bylaws may be altered, amended or repealed or new bylaws may be adopted by the stockholders or by the Board of Directors at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new bylaws be contained in the notice of such special meeting. Any adoption, amendment or repeal of these Bylaws or adoption of new bylaws by the Board of Directors shall require the approval of a majority of the total number of directors fixed by resolution of the Board of Directors regardless of whether there exist any vacancies in such fixed number of directorships. In addition to any vote of the holders of any class or series of capital stock of the Corporation required by law or by the certificate of incorporation, the affirmative vote of the holders of at least sixty-seven percent (67%) of the voting power of all of the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to adopt, amend or repeal any provision of the Bylaws of the Corporation or to adopt new bylaws.

Date of adoption: , 2007

Exhibit 10.2

CONTRIBUTION AGREEMENT

by and among

APPROACH RESOURCES INC.,

THE STOCKHOLDERS OF

APPROACH OIL & GAS INC.,

LUBAR EQUITY FUND, LLC,

YORKTOWN ENERGY PARTNERS VII, L.P.

and

NEO CANYON EXPLORATION, L.P.

and joined in by

THE GENERAL PARTNER OF NEO CANYON EXPLORATION, L.P.

June 29, 2007

TABLE OF CONTENTS


	Page
ARTICLE I. DEFINITIONS		1

ARTICLE II. CONTRIBUTION TRANSACTION		9
2.1 Contribution of AOG Common Stock to ARI		9
2.2 Contribution of Neo Canyon Assets to ARI		9
2.3 Contribution of Lubar Note to ARI		9
2.4 Contribution of Yorktown Note to ARI		9
2.5 Issuance of New Certificates		9
2.6 Certificate Legends		9
2.7 Fractional Shares		10
2.8 Certain Adjustments		10
2.9 Proration of Costs and Revenues		10
2.10 Receipts Not Reflected		10
2.11 Expenses Not Reflected		11
2.12 Transfer Taxes		11

ARTICLE III. CLOSING		11
3.1 Time and Place		11
3.2 Deliveries at Closing		12

ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF AOG		12
4.1 Organization and Power		12
4.2 Authorizations; Execution and Validity		12
4.3 Capitalization		12
4.4 Financial Statements; Other Financial Data		13
4.5 Consents		13
4.6 No Defaults or Conflicts		14
4.7 Agreements, Contracts and Commitments		14
4.8 Litigation		14
4.9 ERISA Compliance; Labor		14
4.10 Taxes		15
4.11 Brokers		16
4.12 Absence of Certain Changes or Events		16
4.13 Compliance with Laws		16
4.14 Transactions with Related Parties		16
4.15 Agents		17
4.16 Books and Records		17
4.17 Information Furnished		17
4.18 Directors and Officers		17
4.19 Bank Accounts		17
4.20 Owned Real Property		17

TABLE OF CONTENTS


	Page
4.21 Leased Real Property		17
4.22 Insurance		18
4.23 Title to Oil and Gas Properties		18
4.24 Environmental Matters		18
4.25 Patents, Trademarks and Similar Rights		20

ARTICLE V. REPRESENTATIONS AND WARRANTIES OF NEO CANYON		20
5.1 Organization and Power		20
5.2 Authorization; Execution and Validity		20
5.3 Consents		20
5.4 No Defaults or Conflicts		21
5.5 Brokers		21
5.6 Litigation		21
5.7 Title to the Neo Canyon Oil and Gas Properties		21
5.8 Environmental Matters		21
5.9 Taxes and Assessments		22
5.10 Outstanding Capital Commitments		23
5.11 Compliance with Laws		23
5.12 Forward Sales		23
5.13 Properties		23
5.14 Consents and Preferential Purchase Rights		23
5.15 Contracts		23
5.16 Intentionally Omitted		23
5.17 Intentionally Omitted		24
5.18 Intellectual Property		24
5.19 Accredited Investor		24
5.20 Restricted Securities		24
5.21 Investment Intent		24

ARTICLE VI. REPRESENTATIONS AND WARRANTIES OF THE AOG STOCKHOLDERS, LUBAR AND YORKTOWN VII		24
6.1 Organization and Good Standing		24
6.2 Authority and Enforceability		25
6.3 No Conflict; Required Filings and Consents		25
6.4 Ownership		25
6.5 Accredited Investor		25
6.6 Restricted Securities		25
6.7 Investment Intent		26

ARTICLE VII. REPRESENTATIONS AND WARRANTIES OF ARI		26
7.1 Organization and Power		26
7.2 Authorizations; Execution and Validity		26
7.3 Capitalization		27
7.4 Financial Statements; Other Financial Data		28

TABLE OF CONTENTS


	Page
7.5 Consents		28
7.6 No Defaults or Conflicts		28
7.7 Agreements, Contracts and Commitments		28
7.8 Litigation		29
7.9 ERISA Compliance; Labor		29
7.10 Taxes		29
7.11 Brokers		30
7.12 Absence of Certain Changes or Events		30
7.13 Compliance with Laws		30
7.14 Transactions with Related Parties		31
7.15 Agents		31
7.16 Books and Records		31
7.17 Information Furnished		31
7.18 Directors and Officers		32
7.19 Bank Accounts		32
7.20 Owned Real Property		32
7.21 Leased Real Property		32
7.22 Insurance		32
7.23 Title to Oil and Gas Properties		33
7.24 Environmental Matters		33
7.25 Patents, Trademarks and Similar Rights		34
7.26 Plugging and Abandonment		34
7.27 Additional Drilling Obligations		34
7.28 Gas Imbalances		34

ARTICLE VIII. COVENANTS		34
8.1 Ordinary Course of Business		34
8.2 AOG Restricted Activities and Transactions		35
8.3 Neo Canyon Restricted Activities and Transactions		36
8.4 HSR and Other Regulatory Matters		37
8.5 Commercially Reasonable Efforts		37
8.6 New ARI Charter		38
8.7 Officers and Directors		38
8.8 Access to Information		38
8.9 Section 351		38
8.10 ARI Registration Statement		38
8.11 Blue Sky		39
8.12 Notification Of Certain Matters		39
8.13 Consents and Preferential Rights		39
8.14 Assumption and Indemnification		39
8.15 Indemnification Procedures		41
8.16 Limits on Indemnification		42
8.17 Further Assurances		42
8.18 Over-allotment Option		42

iii

TABLE OF CONTENTS


	Page
ARTICLE IX. CONDITIONS		42
9.1 Conditions to Obligations of Each Party		42
9.2 Conditions to Obligations of Neo Canyon		43
9.3 Conditions to Obligations of ARI		44
9.4 Conditions to Obligations of AOG		45
9.5 Conditions to Obligations of each of the AOG Stockholders, Lubar and Yorktown VII		46

ARTICLE X. TERMINATION		47
10.1 Termination		47
10.2 Effect of Termination		47
10.3 Fees and Expenses		47

ARTICLE XI. MISCELLANEOUS		48
11.1 Waiver And Amendment		48
11.2 Nonsurvival of Representations and Warranties		48
11.3 Assignment		48
11.4 Notices		48
11.5 Governing Law		49
11.6 Severability		49
11.7 Counterparts		49
11.8 Headings		49
11.9 Enforcement Of The Contribution Agreement		50
11.10 Entire Agreement; Third Party Beneficiaries		50
11.11 Certain Assignments		50
11.12 Representation		50
11.13 Joinder		50

EXHIBITS


Exhibit A	—	AOG Oil and Gas Properties – Leases and Wells
Exhibit B	—	ARI Oil and Gas Properties – Leases and Wells
Exhibit C	—	Neo Canyon Oil and Gas Properties – Leases and Wells
Exhibit D	—	Form of Conveyance
Exhibit E	—	Registration Rights Agreement

DISCLOSURE SCHEDULES


Schedule 4.3(b)	—	AOG Subsidiaries
Schedule 4.3(c)	—	AOG Stockholders’ Agreements and Voting Trusts
Schedule 4.4	—	AOG Financial Statements
Schedule 4.5	—	AOG Consents
Schedule 4.7	—	AOG Material Contracts
Schedule 4.8	—	AOG Legal Proceedings
Schedule 4.9	—	AOG Employee Benefit Plans
Schedule 4.10	—	AOG Taxes
Schedule 4.12	—	Absence of Certain Changes (AOG)
Schedule 4.14	—	AOG Related Parties
Schedule 4.15	—	AOG Agents
Schedule 4.18	—	AOG Directors and Officers
Schedule 4.19	—	AOG Bank Accounts
Schedule 4.21	—	AOG Real Property Leases
Schedule 4.22	—	AOG Insurance
Schedule 4.23	—	Title to AOG Oil and Gas Properties
Schedule 4.24	—	AOG Environmental Matters
Schedule 4.25	—	AOG Intellectual Property
Schedule 5.3	—	Neo Canyon Consents
Schedule 5.6	—	Neo Canyon Legal Proceedings
Schedule 5.7	—	Title to Neo Canyon Oil and Gas Properties
Schedule 5.8	—	Neo Canyon Environmental Matters
Schedule 5.10	—	Neo Canyon Capital Commitments
Schedule 5.12	—	Neo Canyon Forward Sales
Schedule 5.13	—	Neo Canyon Oil and Gas Properties Subject to Sales Contract
Schedule 5.14	—	Neo Canyon Leases Subject to Consents or Preferential Purchase Rights
Schedule 5.15	—	Neo Canyon Contracts
Schedule 5.18	—	Neo Canyon Intellectual Property
Schedule 7.3(a)	—	ARI Capitalization
Schedule 7.3(b)	—	ARI Subsidiaries
Schedule 7.3(c)	—	ARI Stockholders’ Agreements and Voting Trusts
Schedule 7.4	—	ARI Financial Statements
Schedule 7.5	—	ARI Consents
Schedule 7.7	—	ARI Material Contracts
Schedule 7.8	—	ARI Legal Proceedings


Schedule 7.9	—	ARI Employee Benefit Plans
Schedule 7.10	—	ARI Taxes
Schedule 7.12	—	ARI Financial Statements
Schedule 7.14	—	ARI Related Parties
Schedule 7.15	—	ARI Agents
Schedule 7.18	—	ARI Directors and Officers
Schedule 7.19	—	ARI Bank Accounts
Schedule 7.21	—	ARI Real Property Leases
Schedule 7.22	—	ARI Insurance
Schedule 7.23	—	Title to ARI Oil and Gas Properties
Schedule 7.24	—	ARI Environmental Matters
Schedule 7.25	—	ARI Intellectual Property
Schedule 7.27	—	ARI Additional Drilling Obligations
Schedule 7.28	—	ARI Gas Imbalances
Schedule 8.2	—	Restricted Activities

Execution version

CONTRIBUTION AGREEMENT

THIS CONTRIBUTION AGREEMENT, dated as of June 29, 2007 (this “ Contribution Agreement ”), is by and among Approach Resources Inc., a Delaware corporation (“ ARI ”), Approach Oil & Gas Inc., a Delaware corporation (“ AOG ”), all of the stockholders of AOG listed on the signature pages hereto (the “ AOG Stockholders ”), Lubar Equity Fund, LLC, a Wisconsin limited liability company (“ Lubar ”), Yorktown Energy Partners VII, L.P., a Delaware limited partnership (“ Yorktown VII ”), and Neo Canyon Exploration, L.P., a Texas limited partnership (“ Neo Canyon ”), and is joined in by J. Cleo Thompson Petroleum Management, L.L.C., a Texas limited liability company and the general partner of Neo Canyon (“ Neo Canyon GP ”).

W I T N E S S E T H:

WHEREAS, the AOG Stockholders currently own all of the outstanding common stock of AOG and have agreed to transfer to ARI all of the outstanding capital stock of AOG owned by them in exchange for shares of ARI Common Stock;

WHEREAS, Neo Canyon currently owns certain oil and gas properties in the Ozona Northeast Field located in Crockett and Schleicher Counties, Texas and has agreed to transfer to ARI all of its interest in such oil and gas properties in exchange for shares of ARI Common Stock on the terms and subject to the conditions set forth in this Agreement;

WHEREAS, the parties intend for the foregoing transfers to qualify under Section 351(a) of the Internal Revenue Code of 1986, as amended (the “ Code ”); and

WHEREAS, the transactions contemplated by this Contribution Agreement shall be effective upon the consummation of the ARI Initial Public Offering.

NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements herein contained, the parties hereto agree as follows:

ARTICLE I.

DEFINITIONS

The terms set forth below in this Article I shall have the meanings ascribed to them below or in the part of this Contribution Agreement referred to below:

“ Acquisition Proposal ” means (i) any proposal for a merger, consolidation or other business combination involving ARI or AOG, (ii) any proposal or offer to acquire in any manner a substantial equity interest in ARI or AOG, (iii) any proposal or offer to acquire in any manner a substantial portion of the ARI Oil and Gas Properties or the AOG Oil and Gas Properties, (iv) any proposal or offer with respect to any recapitalization or restructuring (whether of equity or debt or a combination thereof) with respect to ARI or AOG, or (v) any proposal or offer with respect to any other transaction similar to any of the foregoing with respect to ARI or AOG.

“ AFEs ” shall have the meaning set forth in Section 5.10 hereto.

“ Affiliate ” shall have the meaning ascribed to such term in Rule 12b-2 of the general rules and regulations under the Securities Exchange Act of 1934, as in effect on the date of this Contribution Agreement.

“ Aggregated Group ” has the meaning set forth in Section 4.9(a) hereto.

“ AOG ” has the meaning set forth in the introductory paragraph hereto.

“ AOG Audited Financial Statements ” has the meaning set forth in Section 4.4 hereto.

“ AOG Board ” means the board of directors of AOG.

“ AOG Common Stock ” means the common stock of AOG, par value $0.01 per share.

“ AOG Financial Statements ” has the meaning set forth in Section 4.4 hereto.

“ AOG Oil and Gas Properties ” means all Oil and Gas Properties of AOG or any of its Subsidiaries. Attached hereto as Exhibit A is a description of each Lease belonging to AOG, or in which AOG has an interest, which Exhibit A shall be a part of the definition of “AOG Oil and Gas Properties.” The respective “net revenue interest” and “working interest” of AOG or any of its Subsidiaries in the AOG Oil and Gas Properties described on Exhibit A shall be a part of the definition of “AOG Oil and Gas Properties.”

“ AOG Preferred Stock ” means the preferred stock of AOG, par value $0.01 per share.

“ AOG Stockholders ” has the meaning set forth in the introductory paragraph hereto.

“ AOG Unaudited Balance Sheet ” has the meaning set forth in Section 4.4 hereto.

“ ARI ” has the meaning set forth in the introductory paragraph hereto.

“ ARI Audited Financial Statements ” has the meaning set forth in Section 7.4 hereto.

“ ARI Board ” means the board of directors of ARI.

“ ARI Bylaws ” means the bylaws of ARI, dated as of September 12, 2002, as amended.

“ ARI Common Stock ” means the common stock of ARI, par value $0.01 per share, which par value is subject to adjustment in connection with the ARI Initial Public Offering.

“ ARI Financial Statements ” has the meaning set forth in Section 7.4 hereto.

“ ARI Initial Public Offering ” means the initial public offering of the ARI Common Stock contemplated by the ARI Registration Statement.

“ ARI Material Adverse Effect ” means a Material Adverse Effect on ARI, AOG and Neo Canyon, taken as a whole.

“ ARI Oil and Gas Properties ” means all Oil and Gas Properties of ARI or any of its Subsidiaries. Attached hereto as Exhibit B is a description of each Lease and Well belonging to ARI, or in which ARI has an interest, which Exhibit B shall be a part of the definition of “ARI Oil and Gas Properties.” The respective “net revenue interest” and “working interest” of ARI or any of its Subsidiaries in the ARI Oil and Gas Properties described on Exhibit B shall be a part of the definition of “ARI Oil and Gas Properties.”

“ ARI Preferred Stock ” means the preferred stock of ARI, par value $0.01 per share.

“ ARI Registration Statement ” means the Registration Statement on Form S-1 relating to the ARI Common Stock to be filed with the Commission by ARI in accordance with Section 8.9 , and any amendments thereto.

“ ARI Stockholders ” means the holders of all of the outstanding shares of capital stock of ARI as of the date hereof.

“ ARI Unaudited Financial Statements ” has the meaning set forth in Section 7.4 hereto.

“ ARI’s Senior Lender ” means Frost National Bank, N.A.

“ Basket Amount ” shall have the meaning set forth in Section 8.16 .

“ Business Day ” means any day other than a Saturday, a Sunday or any other day when banks are not open for business generally in the State of New York.

“ CERCLA ” means the Comprehensive Environmental Response, Compensation and Liability Act, as amended.

“ CERCLIS ” means the Comprehensive Environmental Response, Compensation and Liability Information System List.

“ Closing ” has the meaning set forth in Section 3.1 hereto.

“ Closing Date ” has the meaning set forth in Section 3.1 hereto.

“ Code ” has the meaning set forth in the recitals hereto.

“ Contribution Agreement ” has the meaning set forth in the introductory paragraph hereto.

“ Commission ” means the U.S. Securities and Exchange Commission.

“ Conveyance ” shall mean a Conveyance to effect the sale, transfer and conveyance of the Neo Canyon Oil and Gas Properties, substantially in the form set forth in Exhibit D .

“ Defensible Title ” means with, respect to the Oil and Gas Properties, such title and ownership by ARI, AOG or Neo Canyon, as applicable, that:

(a) Except as set forth on Schedules 4.23 , 5.7 and 7.23 , respectively entitles ARI, AOG or Neo Canyon, as applicable, to receive and retain, without reduction, suspension or termination, not less than the percentage set forth in Exhibits A , B or C , respectively, as the “net revenue interest” of all Hydrocarbons produced, saved and marketed from each Lease comprising such Oil and Gas Property as set forth in Exhibits A , B or C , respectively, through plugging, abandonment and salvage of all wells comprising or included in such Oil and Gas Property, and except for changes or adjustments that result from the establishment of units, changes in existing units (or the participating areas therein), or the entry into of pooling or unitization agreements after the date hereof;

(b) obligates ARI, AOG or Neo Canyon, as applicable, to bear not greater than the percentage set forth in Exhibits A , B or C , respectively, as the “working interest” of the costs and expenses relating to the maintenance, development and operation of each Lease comprising such Oil and Gas Property (including the plugging and abandonment and site restoration with respect to all existing and future wells located thereon or attributable thereto), through plugging, abandonment and salvage of all wells comprising or included in such Oil and Gas Property, and except for changes or adjustments that result from the establishment of units, changes in existing units (or the participating areas therein), or the entry into of pooling or unitization agreements after the date hereof;

(d) reflects that all royalties, rentals, Pugh clause payments, shut-in gas payments and other payments due with respect to such Oil and Gas Property have been properly and timely paid, except for payments held in suspense for title or other reasons which are customary in the industry and which will not result in grounds for cancellation of the Company’s rights in such Oil and Gas Property as such suspense payments are set forth on Schedules 4.23 , 5.7 and 7.23 , respectively; and

(e) reflects that all consents to assignment, notices of assignment or preferential purchase rights which are applicable to or must be complied with in connection with the transaction contemplated by this Agreement, or any prior sale, assignment or the transfer of such Oil and Gas Property as such rights are set forth on Schedule 5.7 , have been obtained and complied with to the extent the failure to obtain or comply with the same could have an ARI Material Adverse Effect;

provided, that: (i) the legal proceedings, if any, scheduled on Schedule 4.8 , Schedule 5.6 and Schedule 7.8 shall not be considered to effect a reduction in the value of the assets, and (ii) no fact, circumstance or condition of the title to an Oil and Gas Property shall be considered to effect a reduction in the value of the assets, unless such fact, circumstance or condition is of the type that can generally be expected to be encountered in the area involved and is usually and customarily acceptable to reasonable and prudent operators, interest owners and purchasers engaged in the business of the ownership, development and operation of Oil and Gas Properties.

“ Effective Time ” means the date and time of the closing under the Underwriting Agreement.

“ Employee Benefit Plan ” means any “employee benefit plan” within the meaning of Section 3(3) of ERISA and any bonus, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, vacation, severance, disability, death benefit, hospitalization or insurance plan providing benefits to any present or former employee or contractor of the Company or any member of the Aggregated Group maintained by any such entity.

“ Environmental Law ” means any Law of any Governmental Authority whose purpose is to conserve or protect human health, the environment, wildlife or natural resources, including: the Clean Air Act, as amended, the Federal Water Pollution Control Act, as amended, the Rivers and Harbors Act of 1899, as amended, the Safe Drinking Water Act, as amended, CERCLA, the Superfund Amendments and Reauthorization Act of 1986, as amended, the Resource Conservation and Recovery Act of 1976, as amended, the Hazardous and Solid Waste Amendments Act of 1984, as amended, the Toxic Substances Control Act, as amended, the Occupational Safety and Health Act, as amended, the Hazardous Materials Transportation Act, as amended, and any other federal, state and local law.

“ Governmental Authorities ” means the federal, state, county, city and political subdivisions in which any property of ARI, AOG or Neo Canyon, respectively, is located or which exercises jurisdiction over any such property or entity, and any agency, department, commission, board, bureau or instrumentality of any of them which exercises jurisdiction over any such property or entity.

“ Hazardous Material ” means (i) any “hazardous substance,” as defined by CERCLA; (ii) any “hazardous waste” or “solid waste,” in either case as defined by the Resource Conservation and Recovery Act of 1976, as amended; (iii) any solid, hazardous, dangerous or toxic chemical, material, waste or substance, within the meaning of and regulated by any Environmental Law; (iv) any asbestos containing materials in any form or condition; (v) any polychlorinated biphenyls in any form or condition; (vi) petroleum, petroleum hydrocarbons, or any fraction or byproducts thereof; or (vii) any air pollutant which is so designated by the United States Environmental Protection Agency as authorized by the Clean Air Act, as amended.

“ Hedging Transaction ” means any futures, hedge, swap, collar, put, call, floor, cap, option or other contract that is intended to benefit from, relate to or reduce or eliminate the risk of fluctuations in the price of commodities, including Hydrocarbons, interest rates, currencies or securities.

“ HSR Act ” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

“ Hydrocarbons ” means oil, condensate, gas, casinghead gas and other liquid or gaseous hydrocarbons.

“ Indemnified Party ” shall have the meaning set forth in Section 8.15 .

“ Indemnifying Party ” shall have the meaning set forth in Section 8.15 .

“ Intellectual Property ” means (a) patent rights, (b) trademark rights, and (c) copyrights.

“ Knowledge ” means actual knowledge of any officer or director of such party and, in the case of Neo Canyon, the actual knowledge of any officer or manager of Neo Canyon GP.

“ Law ” means any federal, state, local or foreign law, statute, rule, ordinance, code or regulation.

“ Legal Proceedings ” means any judicial, administrative or arbitral action, suit, proceeding (public or private), litigation, investigation, complaint, claim or governmental proceeding.

“ Lien ” means a lien, mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, easement, preference, priority, assessment, security interest, lease, sublease, charge, claim, adverse claim, levy, interest of other Persons or other encumbrance of any kind.

“ Lubar ” has the meaning set forth in the introductory paragraph hereto.

“ Lubar Note ” means that certain Convertible Promissory Note dated June 25, 2007 in the principal amount of $10,000,000 payable by AOG to Lubar.

“ Material Adverse Effect ” means a material adverse effect on the business, operations, prospects, properties (including intangible properties), assets, operating results or condition (financial or otherwise) liabilities or reserves of such Person; provided, however, that a general deterioration in the economy or changes in oil and gas prices or other changes affecting the oil and gas industry generally shall not be deemed to be a Material Adverse Effect.

“ Material Contracts ” means all leases, contracts, agreements and instruments to which such Person is a party as of the date hereof involving payment by or to such Person of more than $1,000,000 and extending for a term of more than six months from the date of this Contribution Agreement and not terminable without payment or penalty upon less than sixty (60) days’ notice.

“ Neo Canyon ” has the meaning set forth in the introductory paragraph hereto.

“ Neo Canyon GP ” has the meaning set forth in the introductory paragraph hereto.

“ Neo Canyon Oil and Gas Properties ” means all Oil and Gas Properties of Neo Canyon, except as specifically excluded on Exhibit C . Attached hereto as Exhibit C is a description of each Lease and Well belonging to Neo Canyon, or in which Neo Canyon has an interest, which Exhibit C shall be a part of the definition of “Neo Canyon Oil and Gas Properties.” The respective “net revenue interest” and “working interest” of Neo Canyon or any of its Subsidiaries in the Neo Canyon Oil and Gas Properties described on Exhibit C shall be a part of the definition of “Neo Canyon Oil and Gas Properties.”

“ New ARI Bylaws ” shall mean the Amended and Restated Bylaws of ARI in such form as shall be approved by the ARI Board prior to the Closing.

“ New ARI Charter ” shall mean the Amended and Restated Certificate of Incorporation of ARI in such form as shall be approved by the ARI Board and the ARI Stockholders prior to

the Closing and which shall authorize a sufficient number of ARI Common Stock as shall be necessary to cover the shares of ARI Common Stock issuable pursuant to Article II .

“ Oil and Gas Properties ” means all right, title, interest and estate, real or personal, recorded or unrecorded, movable or immovable, tangible or intangible, in and to: (i) oil and gas leases, oil, gas and mineral leases, subleases and other leaseholds, royalties, overriding royalties, net profit interests, mineral fee interests, carried interests and other properties and interests (the “Leases”) and the lands covered thereby (“Land(s)”) and any and all oil, gas, water or injection wells thereon or applicable thereto (the “Wells”); (ii) any pools or units which include all or a part of any Land or include any Well (the “Units”) and including, without limitation, all right, title and interest in production from any such Unit, whether such Unit production comes from wells located on or off of the Lands, and all tenements, hereditaments and appurtenances belonging to, used or useful in connection with the Leases, Lands and Units; (iii) interests under or derived from all contracts, agreements and instruments applicable to or by which such properties are bound or created, to the extent applicable to such properties, including, without limitation, operating agreements, gathering agreements, marketing agreements (including commodity swap, collar and/or similar derivative agreements), transportation agreements, processing agreements, seismic, geological and geophysical agreements, unitization, pooling and communitization agreements, declarations and orders, joint venture agreements, and farmin and farmout agreements; (iv) easements, permits, licenses, servitudes, rights-of-way, surface leases and other surface rights appurtenant to, and used or held for use to the extent applicable to such properties; (v) equipment, machinery, fixtures and other tangible personal property and improvements located on or used or obtained in connection with such properties and (vi) seismic and interpretive data applicable to such properties.

“ Order ” means any order, judgment, injunction, ruling, writ, award, decree, statute, Law, ordinance, rule or regulation.

“ Over-allotment Option ” shall have the meaning set forth in Section 8.18 .

“ Permit ” means any permit, license, certificate (including a certificate of occupancy) registration, authorization, application, filing, notice, qualification, waiver of any of the foregoing or approval of a Governmental Authority.

“ Permitted Liens ” means Liens (including mechanics’, workers’, repairers’, materialmens’, warehousemens’, landlord’s and other similar Liens) arising in the ordinary course of business as would not individually or in the aggregate materially adversely affect the value of, or materially adversely interfere with the use of, the property subject to them.

“ Person ” means an individual, corporation, partnership (limited or general), limited liability company, trust, joint stock company, Governmental Authority, unincorporated association or other legal entity.

“ Property Costs ” means all operating and production expenses of the Oil and Gas Properties (including, without limitation, costs of insurance and ad valorem, property, severance, production and similar Taxes based upon or measured by the ownership or operation of the Oil and Gas Properties or the production of Hydrocarbons therefrom, but excluding any other

Taxes), capital expenditures incurred in the ownership and operation of the Oil and Gas Properties in the ordinary course of business (including, without limitation, cash advances or cash call amounts paid under applicable operating agreements), and overhead costs charged to the Oil and Gas Properties under the applicable operating agreement or if none, charged to the Oil and Gas Properties on the same basis as charged on the date of this Contribution Agreement.

“ Proscribed Action ” shall have the meaning set forth in Section 8.9 .

“ Real Property Leases ” has the meaning set forth in Section 4.21 hereto.

“ Registration Rights Agreement ” means the registration rights agreement providing for the registration under the Securities Act of the shares of ARI Common Stock to be received by the ARI Stockholders, the AOG Stockholders, Lubar, Yorktown VII and Neo Canyon pursuant to this Contribution Agreement in the form attached hereto as Exhibit E .

“ Securities Act ” means the Securities Act of 1933, as amended.

“ Stockholders’ Agreement ” means that certain Voting and Stockholders’ Agreement, dated as of January 1, 2003, by and among ARI and each of the ARI Stockholders.

“ Subsidiary ” or “ Subsidiaries ” means, with respect to any Person, each entity as to which such Person (either alone or through or together with any other Subsidiary) (i) owns beneficially or of record or has the power to vote or control, 50% or more of the voting securities of such entity or of any class of equity interests of such entity the holders of which are ordinarily entitled to vote for the election of the members of the board of directors or other persons performing similar functions, (ii) in the case of partnerships, serves as a general partner, (iii) in the case of a limited liability company, serves as a managing member or owns a majority of the equity interests or (iv) otherwise has the ability to elect a majority of the directors, trustees or managing members thereof.

“ Tax ” or “ Taxes ” means all income, profits, franchise, gross receipts, capital, sales, use, withholding, value added, ad valorem, transfer, employment, social security, disability, occupation, asset, property, severance, documentary, stamp, excise and other taxes, duties and similar governmental charges or assessments imposed by or on behalf of any Governmental Authority and any interest, fines, penalties or additions relating to any such tax, duty, charge or assessment.

“ Tax Return ” means any return, report, information statement, or similar statement required to be filed with respect to any Taxes (including any attached schedules), including, without limitation, any information return, claim for refund, amended return and declaration of estimated Tax.

“ Underwriting Agreement ” has the meaning set forth in Section 9.1(d) hereto.

“ Yorktown VII ” has the meaning set forth in the introductory paragraph hereto.

“ Yorktown Note ” means that certain Convertible Promissory Note dated June 25, 2007 in the principal amount of $10,000,000 payable by AOG to Yorktown VII.

ARTICLE II.

CONTRIBUTION TRANSACTION

2.1 Contribution of AOG Common Stock to ARI . Subject to Section 2.8 , immediately prior to the Effective Time, each AOG Stockholder shall contribute all of its shares of AOG Common Stock to ARI in exchange for the number of shares of ARI Common Stock set forth opposite such Person’s name in the table below:


	Number of AOG Shares		Number of ARI
	Owned and to be		Shares to be
Stockholder	Contributed to ARI		Received
Yorktown Energy Partners V, L.P.		25,000		54,964
Yorktown Energy Partners VI, L.P.		125,000		274,755

2.2 Contribution of Neo Canyon Assets to ARI . Subject to Section 2.8 , immediately prior to the Effective Time, Neo Canyon shall contribute, transfer and assign to ARI all of its right, title and interest in and to the Neo Canyon Oil and Gas Properties, and ARI shall acquire the Neo Canyon Oil and Gas Properties in exchange for 1,413,081 shares of ARI Common Stock.

2.3 Contribution of Lubar Note to ARI . Immediately prior to the Effective Time, Lubar shall contribute to ARI the Lubar Note in exchange for that number of shares of ARI Common Stock into which the Lubar Note is convertible on the IPO Conversion Date (as such term is defined in the Lubar Note).

2.4 Contribution of Yorktown Note to ARI . Immediately prior to the Effective Time, Yorktown VII shall contribute to ARI the Yorktown Note in exchange for that number of shares of ARI Common Stock into which the Yorktown Note is convertible on the IPO Conversion Date (as such term is defined in the Yorktown Note).

2.5 Issuance of New Certificates. At the Effective Time, ARI shall issue to each AOG Stockholder, Neo Canyon, Lubar and Yorktown VII a certificate or certificates representing the number each of shares of ARI Common Stock to be issued to such Person pursuant to Sections 2.1 , 2.2 , 2.3 and 2.4 , subject to adjustment as provided in Section 2.8 . Each such certificate shall be registered in the name of the Person or Persons specified by the recipient thereof to ARI in writing at least two (2) Business Days prior to the Closing.

2.6 Certificate Legends. The certificates evidencing the ARI Common Stock delivered pursuant to Section 2.5 shall bear a legend substantially in the form set forth below and containing such other information as ARI may deem necessary or appropriate:

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR

ANY STATE SECURITIES LAWS, AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND SUCH LAWS OR PURSUANT TO AN EXEMPTION THEREFROM WHICH, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE.

2.7 Fractional Shares. No fractional shares of ARI Common Stock or scrip shall be issued as a result of the transactions contemplated by Sections 2.3 , 2.4 and 2.8 . Any fractional share of ARI Common Stock which would otherwise be issuable as a result of the such transactions shall be rounded up to the nearest whole share.

2.8 Certain Adjustments. The ARI Board may adjust the number of shares of ARI Common Stock to be issued to each AOG Stockholder and to Neo Canyon pursuant to Sections 2.1 and 2.2 in order to reflect a capitalization of ARI that the ARI Board reasonably determines to be in the best interests of ARI and its stockholders (including the AOG Stockholders and Neo Canyon) based on (i) the actual pricing of the ARI Initial Public Offering, (ii) the number of shares of ARI Common Stock issuable pursuant to Sections 2.3 and 2.4 and (iii) subject to Section 10.1(d) , the relative net asset valuations (as determined in the reasonable business judgment of the ARI Board using the same valuation methodology for ARI Oil and Gas Properties and Neo Canyon Oil and Gas Properties) of ARI, AOG and the Neo Canyon Oil and Gas Properties after giving effect to any financing transactions and acquisitions consummated by AOG or ARI (in each case to have been approved by the AOG Board or the ARI Board, as applicable) after the execution of this Contribution Agreement and before the Effective Time.

2.9 Proration of Costs and Revenues . Except as otherwise expressly set forth in this Contribution Agreement, ARI shall be entitled to all production of Hydrocarbons from or attributable to the Neo Canyon Oil and Gas Properties at and after the Closing Date (and all products and proceeds attributable thereto) and to all other income, proceeds, receipts and credits earned with respect to the Neo Canyon Oil and Gas Properties at or after the Closing Date, and shall be responsible for (and entitled to any refunds with respect to) all Property Costs incurred at and after the Closing Date. Neo Canyon shall be entitled to all production of Hydrocarbons from or attributable to the Neo Canyon Oil and Gas Properties prior to the Closing Date (and all products and proceeds attributable thereto), and to all other income, proceeds, receipts and credits earned with respect to the Neo Canyon Oil and Gas Properties prior to the Closing Date, and shall be responsible for (and entitled to any refunds with respect to) all Property Costs incurred prior to the Closing Date. “Earned” and “incurred”, as used in this Contribution Agreement, shall be interpreted in accordance with GAAP and the Council of Petroleum Accountant Societies (COPAS) standards.

2.10 Receipts Not Reflected . Except as otherwise provided in this Contribution Agreement, any production of Hydrocarbons from or attributable to the Neo Canyon Oil and Gas Properties (and all products and proceeds attributable thereto) and any other income, proceeds and receipts earned with respect to the Neo Canyon Oil and Gas Properties shall be treated as follows: (i) all production of Hydrocarbons from or attributable to the Oil and Gas Properties

(and all products and proceeds attributable thereto) and all other income, proceeds and receipts earned with respect to the Oil and Gas Properties to which ARI is entitled under Section 2.9 shall be the sole property and entitlement of ARI, and, to the extent received by Neo Canyon, Neo Canyon shall fully disclose, account for and remit the same promptly to ARI, and (ii) all production of Hydrocarbons from or attributable to the Neo Canyon Oil and Gas Properties (and all products and proceeds attributable thereto) and all other income, proceeds and receipts earned with respect to the Neo Canyon Oil and Gas Properties to which Neo Canyon is entitled under Section 2.9 shall be the sole property and entitlement of Neo Canyon and, to the extent received by ARI, ARI shall fully disclose, account for and remit the same promptly to Neo Canyon.

2.11 Expenses Not Reflected. Except as otherwise provided in this Contribution Agreement, any Property Costs shall be treated as follows: (i) all Property Costs for which Neo Canyon is responsible under Section 2.9 shall be the sole obligation of Neo Canyon and Neo Canyon shall promptly pay, or if paid by ARI, promptly reimburse ARI for and hold ARI harmless from and against same; and (ii) all Property Costs for which ARI is responsible under Section 2.9 shall be the sole obligation of ARI and ARI shall promptly pay, or if paid by Neo Canyon, promptly reimburse Neo Canyon for and hold Neo Canyon harmless from and against same. Neo Canyon is entitled to resolve all joint interest audits and other audits of Property Costs covering periods for which Neo Canyon is responsible under the terms of this Contribution Agreement. ARI is entitled to resolve all joint interest audits and other audits of Property Costs covering periods for which ARI is in whole or in part responsible, provided that ARI shall not agree to any adjustments to previously assessed costs for which Neo Canyon is liable without the prior written consent of Neo Canyon, such consent not to be unreasonably withheld. ARI shall provide Neo Canyon with a copy of all applicable audit reports and written audit agreements received by ARI and relating to periods for which Neo Canyon is partially responsible.

2.12 Transfer Taxes. All transfer, documentary, sales, use, stamp, registration and other such taxes and fees (“Transfer Taxes”) incurred in connection with the contribution transaction contemplated by Article II of this Contribution Agreement shall be borne 70% by ARI and AOG on the one hand, and 30% by Neo Canyon on the other; provided, that such allocations shall be adjusted proportionately with any adjustments made pursuant to Section 2.9 . The parties shall reasonably cooperate with each other to provide any information and documentation reasonably requested that may be necessary to obtain any exemption from any Transfer Taxes.

ARTICLE III.

CLOSING

3.1 Time and Place. The closing of the transactions contemplated hereby (the “ Closing ”) shall be held at the offices of Thompson & Knight LLP, 1700 Pacific Avenue, Dallas, Texas 75201 at 10:00 a.m., Dallas time, immediately prior to the Effective Time; provided that all of the conditions contained in Article IX have been satisfied or waived, or at such other place or time as the parties hereto may mutually agree. The date of the Closing is referred to herein as the “ Closing Date .”

3.2 Deliveries at Closing. Subject to the provisions of Article IX hereof, at the Closing there shall be delivered the certificates and other documents required to be delivered pursuant to Article IX hereof.

ARTICLE IV.

REPRESENTATIONS AND WARRANTIES OF AOG

AOG represents and warrants to ARI and Neo Canyon that the statements contained in this Article IV are correct and complete as of the date hereof (it being recognized that each such representation and warranty with respect to AOG’s operations and the AOG Oil and Gas Properties shall be deemed to refer to AOG and each of its Subsidiaries, taken as a whole).

4.1 Organization and Power. Each of AOG and its Subsidiaries is duly incorporated or formed (as the case may be), validly existing and in good standing (as applicable) under the Laws of its respective jurisdiction of incorporation or formation, and is qualified and in good standing to transact business in each jurisdiction in which such qualification is required by Law, except where the failure to be so qualified would not have an ARI Material Adverse Effect. AOG has all requisite corporate power and authority to execute, deliver and perform its obligations under this Contribution Agreement and to consummate the transactions contemplated hereby. AOG has heretofore delivered or made available to ARI and Neo Canyon complete and correct copies of (a) its certificate of incorporation and bylaws, each as amended to date, and (b) its Subsidiaries’ respective certificates of incorporation and bylaws, or other comparable organizational documents, each as amended to date.

4.2 Authorizations; Execution and Validity. The execution and delivery of this Contribution Agreement by AOG, the performance of this Contribution Agreement by AOG and the consummation by AOG of the transactions contemplated hereby and thereby to be consummated by it, have been duly authorized by all necessary corporate action and no other corporate action on the part of AOG is necessary with respect thereto. This Contribution Agreement has been duly executed and delivered by AOG and, when duly and validly executed and delivered, will constitute a valid and binding obligation of AOG and is enforceable against and AOG in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization and similar Laws affecting creditors generally and by the availability of equitable remedies.

4.3 Capitalization.

(a) The authorized capital stock of AOG consists solely of 1,000,000 shares of AOG Common Stock and 100,000 shares of AOG Preferred Stock. As of the date hereof, there are an aggregate of 150,000 shares of AOG Common Stock issued and outstanding, all of which shares are owned of record and beneficially by the AOG Stockholders with each AOG Stockholder owning the number of shares set forth in Section 2.1 hereto, and have been duly authorized and validly issued, and are fully-paid and non-assessable. No shares of AOG Preferred Stock are issued and outstanding. As of the date hereof, the issued and outstanding amount of AOG Common Stock on a fully diluted basis is 150,000 shares. Except as contemplated by the Lubar Note, the Yorktown Note, future issuances of equity or convertible

debt in connection with financing transactions or acquisitions that the AOG Board reasonably determines to be in the best interests of AOG and its stockholders, and with respect to options, warrants, rights or other equity based awards issued as part of reasonable compensation plans approved by the AOG Board, as of the Closing Date, there shall be no outstanding options, subscriptions, warrants, calls, commitments, pre-emptive rights or other rights obligating AOG to issue or sell any shares of its capital stock or any securities convertible into or exercisable for any shares of its capital stock, or otherwise requiring AOG to give any Person the right to receive any benefits or rights similar to any rights enjoyed by or accruing to the holders of shares of capital stock of AOG or any rights to participate in the equity or net income of AOG. All of the issued shares of AOG’s capital stock were issued, and to the extent purchased or transferred, have been so purchased or transferred, in compliance with all applicable Laws, including federal and state securities Laws, and any preemptive rights and any other statutory or contractual rights of any AOG Stockholder.

(b) AOG has no Subsidiaries other than those set forth on Schedule 4.3(b) . AOG, directly or indirectly, owns all capital of and other equity interests in its Subsidiaries, and there are no outstanding options, subscriptions, warrants, calls, commitments, pre-emptive rights or other rights in favor of any Person other than AOG or other AOG Subsidiaries obligating AOG or any of its Subsidiaries to issue or sell any shares or other equity interests of any of AOG’s Subsidiaries or any securities convertible into or exercisable for any shares or other equity interests of any such Subsidiary, or otherwise requiring AOG or any of its Subsidiaries to give any Person (other than AOG or any of its Subsidiaries) the right to receive any benefits or rights similar to any rights enjoyed by or accruing to the holders of shares or other equity interests of any such Subsidiary or any rights to participate in the equity or net income of any such Subsidiary. AOG does not own, directly or indirectly, any capital of or other equity interest in or have any other investment in any other Person other than its Subsidiaries. Except as otherwise set forth on Schedule 4.3(c) , there are no stockholders’ agreements, voting trusts or other agreements or understandings between or among AOG Stockholders or to which AOG is a party or by which it is bound with respect to the transfer or voting of any capital stock of AOG, none of which shall be in effect following the Closing.

4.4 Financial Statements; Other Financial Data. Attached hereto on Schedule 4.4 are correct and complete copies of the audited consolidated balance sheet of AOG and its Subsidiaries as of December 31, 2006 with the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year then ended (the “ AOG Audited Financial Statements ”) and the unaudited consolidated balance sheet of AOG and its Subsidiaries as of March 31, 2007 (the “ AOG Unaudited Balance Sheet ” and, together with the AOG Audited Financial Statements, the “ AOG Financial Statements ”). The AOG Financial Statements present fairly in all material respects the financial position of AOG as of the dates indicated, and the results of its operations for the respective periods indicated. The AOG Audited Financial Statements are in conformity with GAAP, consistently applied. The AOG Unaudited Balance Sheet is unaudited and, therefore, is subject to normal recurring year-end adjustments and the absence of footnotes.

4.5 Consents. Neither the execution and delivery by AOG of this Contribution Agreement nor the consummation or performance by AOG of the transactions contemplated by this Contribution Agreement to be consummated or performed by it will require prior to the

Closing (on the part of AOG) any consent from, authorization or approval or other action by, notice to or declaration, filing or a registration with, any Governmental Authority or any other third party, except, if required, to comply with the HSR Act or as specified in Schedule 4.5 .

4.6 No Defaults or Conflicts. Neither the execution and delivery by AOG of this Contribution Agreement nor the consummation or performance by AOG of the transactions contemplated by this Contribution Agreement to be consummated or performed by it (i) results or will result in any violation of the certificate of incorporation or bylaws of AOG or other organizational or governing documents of AOG or any of its Subsidiaries; or (ii) violates or conflicts with, or constitutes a breach of any of the terms or provisions of or a default under, or results in the creation or imposition of any Lien upon any property or asset of AOG, the trigger of any charge, payment or requirement of consent, or the acceleration or increase of the maturity of any payment date under: (A) any Material Contract to which AOG is a party or (B) any applicable Law or Order to which AOG or any of its respective properties is subject, other than, in each case, where such failure, conflict or breach would not have an ARI Material Adverse Effect.

4.7 Agreements, Contracts and Commitments. AOG has listed in Schedule 4.7 all Material Contracts to which it is a party (true and correct copies of each such document have been previously delivered or made available to ARI and Neo Canyon). Except as set forth in Schedule 4.7 , AOG has not breached, nor to AOG’s Knowledge is there any claim or any legal basis for a claim that AOG or any third party has breached, any of the terms or conditions of any Material Contract if any such breach, whether considered individually or in the aggregate, could result in the imposition of damages or the loss of benefits in an amount or of a kind that would have an ARI Material Adverse Effect to AOG and its Subsidiaries taken as a whole.

4.8 Litigation. Schedule 4.8 lists all Legal Proceedings pending or, to AOG’s Knowledge, threatened against or affecting AOG or any of its assets. Except as disclosed on Schedule 4.8 , AOG is not subject to any Order. There are no Legal Proceedings pending against or, to AOG’s Knowledge, threatened in writing against, AOG that questions the validity or legality of any of this Contribution Agreement or any action taken or to be taken by AOG in connection herewith or therewith.

4.9 ERISA Compliance; Labor.

(a) Except as set forth on Schedule 4.9 , neither AOG nor any other entity required to be aggregated with AOG under Section 414 of the Code (the “ Aggregated Group ”) including AOG sponsors, maintains or contributes to any Employee Benefit Plan.

(b) No labor associations, organizations, or unions have been certified to represent any employee of AOG, and no collective bargaining agreement or other labor union contract has been requested by any employee or group of employees of AOG, and no discussions or negotiations with respect to any such agreement or contract have occurred.

(c) AOG and its Subsidiaries are in material compliance with all Laws, rules, regulations and Orders relating to the employment of labor, including all such Laws, rules, regulations and Orders relating to wages, hours, collective bargaining, discrimination, civil

rights, safety and health, workers’ compensation and the collection and payment of withholding or Social Security Taxes and similar Taxes.

4.10 Taxes. Except as disclosed on Schedule 4.10 :

(a) All material Tax Returns required to be filed on or before the Closing Date by or on behalf of AOG have been or will be filed within the time prescribed by Law (including extensions of time permitted by Law) and such Tax Returns are true, correct, complete and accurate in all material respects and reflect accurately in all material respects all liability for Taxes of AOG or any of its Subsidiaries.

(b) AOG has paid, on a timely basis, all material Taxes of AOG and of any of its Subsidiaries that are due on or before December 31, 2006, and will have paid all material Taxes of AOG and of any of its Subsidiaries that are due on or before the Closing Date.

(c) The provision for Taxes and other accrued Tax liabilities reflected in the Financial Statements are sufficient to cover all material liabilities for Taxes in respect of Tax Periods ending at or prior to the relevant Financial Statement date.

(d) There are no Liens for Taxes upon any of the properties or assets of AOG or of any of its Subsidiaries (except for Permitted Liens).

(e) There are no pending Orders, audits, actions, proceedings, investigations, disputes or claims instigated by any Governmental Authority with respect to any Taxes payable by or asserted against AOG or any of its Subsidiaries. Neither AOG nor any of its Subsidiaries has received notice from any taxing authority of its intent to examine or audit any of its Tax Returns.

(f) Neither AOG nor any of its Subsidiaries is subject to Tax or has done business in any country other than the United States.

(g) No agreements relating to allocation or sharing of, or liability or indemnification for, Taxes exist between AOG or any of its Subsidiaries and any other Person. Any internal tax allocation agreement shall terminate at the Closing.

(h) All Taxes required to be withheld, collected or deposited by AOG or any of its Subsidiaries (including, without limitation, amounts required to be withheld, collected or deposited with respect to amounts paid or owing to any employee, creditor, independent contractor or other Person) have been timely withheld, collected or deposited and, to the extent required, have been timely paid to the relevant taxing authority.

(i) Neither AOG nor any of its Subsidiaries has made any payments, is obligated to make any payments, or is a party to any agreement that could obligate it to make any payments that will not be deductible under Section 280G of the Code.

(j) There are no outstanding agreements or waivers that would extend the statutory period in which a taxing authority may assess or collect a Tax against AOG or any of its Subsidiaries.

4.11 Brokers. AOG has not paid or become obligated to pay any fee or commission to any broker, finder or intermediary in connection with the transactions contemplated hereby for which AOG, ARI or Neo Canyon shall have liability following the Closing.

4.12 Absence of Certain Changes or Events. Except as set forth on Schedule 4.12 or as disclosed in the AOG Audited Financial Statements or the AOG Unaudited Balance Sheet or as contemplated by the Lubar Note or the Yorktown Note, since March 31, 2007, there has not been any transaction or occurrence in which AOG has:

(a) suffered any Material Adverse Effect;

(b) declared, set aside or paid any dividend or other distribution (whether in cash, stock or property) with respect to any of its outstanding capital stock, or made any redemption, purchase or other acquisition of any of its equity securities;

(d) suffered any uninsured casualty loss or damage in excess of $500,000 individually;

(e) amended any term of any equity security of AOG other than as contemplated by this Contribution Agreement; or

(f) made any change in its accounting methods, principles or practices.

4.13 Compliance with Laws. AOG holds all material Permits necessary for the lawful conduct of its business and is in compliance in all material respects, with all Laws and Orders applicable to its business and has filed with the proper authorities all statements and reports required by the Laws and Orders to which AOG or any of its properties or operations are subject. No claim has been made by any Governmental Authority (and, to AOG’s Knowledge, no such claim is anticipated) to the effect that the business conducted by AOG fails to comply, in any respect, with any Law.

4.14 Transactions with Related Parties. Except for transactions with any of AOG’s Subsidiaries and as otherwise set forth on Schedule 4.14 :

(a) No Affiliate has entered into, or has had any direct or indirect financial interest in, any AOG Material Contract, transaction or business dealings involving AOG;

(b) No Affiliate owns or has any interest in, directly or indirectly, in whole or in part, any tangible or intangible property used in the conduct of the business of AOG;

(c) Other than amounts owed to AOG pursuant to any intercompany debts, joint interest billing and general and administrative allocations, or expense advance reimbursements in the ordinary course of business, no Affiliate owes any money to, nor is any such Affiliate owed any money by, AOG other than as set forth in this Contribution Agreement; and

(d) AOG has not, directly or indirectly, guaranteed or assumed any indebtedness for borrowed money or otherwise for the benefit of any Affiliate of AOG.

4.15 Agents. Except as set forth on Schedule 4.15 , AOG has not designated or appointed any person or other entity to act for it or on its behalf pursuant to any power of attorney or any agency which is presently in effect (other than such of AOG’s directors, officers and employees to whom AOG has given the authority to act for AOG in the ordinary course of its business) or shall continue after the Closing Date.

4.16 Books and Records. The minute books and records of AOG are current as of the date hereof (and shall be current as of the Closing) with respect to all undertakings and authorizations, and contain a true, complete and correct record of all actions taken at all meetings and by all written consents in lieu of meetings of AOG’s board of directors, or any committees thereof, and AOG Stockholders. The stock ledger and related stock transfer records of AOG contain a true, complete and correct record of the original issuance, transfer and other capitalization matters of the capital stock of AOG. The accounting, financial reporting, tax and business books and records of AOG accurately and fairly reflect in all material respects the business and condition of AOG and the transactions and the assets and liabilities of AOG with respect thereto. Without limiting the generality of the foregoing, AOG has not engaged in any transaction with respect to its business or operations, maintained any bank account therefor or used any funds of AOG in the conduct thereof except for transactions, bank accounts and funds that have been and are reflected in the normally maintained books and records of the business.

4.17 Information Furnished. AOG has made available to ARI and Neo Canyon and their respective directors, officers, employees, counsel, representatives, financing sources, customers, creditors, accountants and auditors, true and correct copies of all agreements, documents, and other items listed on the Schedules to this Contribution Agreement and all books and records of AOG.

4.18 Directors and Officers. Schedule 4.18 lists all of the directors and officers of AOG as of the date hereof.

4.19 Bank Accounts. Attached hereto as Schedule 4.19 is a list of all banks or other financial institutions with which AOG has an account, showing the type and account number of each such account.

4.20 Owned Real Property. Other than the AOG Oil and Gas Properties, AOG does not own any real property.

4.21 Leased Real Property. Other than the AOG Oil and Gas Properties, Schedule 4.21 contains a complete and correct list of all real property leases and any and all amendments thereto relating to the leased real property to which AOG is a party or is bound (the “ Real Property Leases ”). AOG has provided or made available to ARI and Neo Canyon correct and complete copies of the Real Property Leases. Except as disclosed in Schedule 4.21 , (i) each of the Real Property Leases is in full force and effect, and, to AOG’s Knowledge, is enforceable against the landlord which is party thereto in accordance with its terms (except as such enforceability may be limited by bankruptcy, insolvency, reorganization and similar laws

affecting creditors generally and by the availability of equitable remedies), (ii) there are no subleases under the Real Property Leases and none of the Real Property Leases has been assigned (other than collateral assignments to AOG’s Senior Lender), (iii) no notices of default or notices of termination have been received by AOG with respect to the Real Property Leases which have not been withdrawn or canceled and (iv) AOG is not, and to AOG’s Knowledge, no other party is, in default under any Real Property Lease. There is no AOG Knowledge of, nor has there been receipt of any written notice of a proceeding in eminent domain or other similar proceeding affecting property listed on Schedule 4.21 .

4.22 Insurance. Schedule 4.22 contains a true and complete list of all insurance policies, directors and officers liability policies, and formal self-insurance programs, and other forms of insurance and all fidelity bonds held by or applicable to AOG and its owned or leased properties. Schedule 4.22 describes (a) whether each insurance policy listed on Schedule 4.22 is occurrence-based or claims made based and (b) each pending claim thereunder for more than $500,000 per claim and a history of all such claims made against any such insurance policy of AOG for the past three (3) years. All insurance policies listed on Schedule 4.22 have been made available to ARI and Neo Canyon and are subject to the deductibles or retentions referenced on Schedule 4.22 . AOG maintains insurance for its benefit, in coverages and amounts to be customary and adequate in the oil and gas industry. AOG is not in default with respect to any provision in any current policy maintained for its benefit, and all such insurance is in full force and effect. AOG has not received, nor is there any AOG Knowledge of, any notice of cancellation or nonrenewal of any such insurance policy. AOG has not failed to give any notice or present any claim for more than $500,000 under any of the policies for the benefit of AOG in due and timely fashion. AOG has not been refused any insurance with respect to its assets, properties or businesses, nor has any such coverage been materially limited by any insurance carrier to which AOG has applied for any such insurance or with which AOG has carried insurance during the past three (3) years. Other than as described on Schedule 4.22 , no further payments of premiums will be due following the Closing by AOG with respect to insurance coverages prior to the Closing. Neither this Contribution Agreement nor any of the transactions contemplated by this Contribution Agreement to occur at the Closing will adversely affect AOG’s coverage under the terms of the insurance policies with respect to periods prior to the Closing.

4.23 Title to Oil and Gas Properties. AOG has Defensible Title to all AOG Oil and Gas Properties. All proceeds from the sale of AOG’s share of the Hydrocarbons being produced from the AOG Oil and Gas Properties are currently being paid in full to AOG by the purchasers thereof on a timely basis, and none of such proceeds are currently being held in suspense by such purchaser or any other party, except as set forth in Schedule 4.23 .

4.24 Environmental Matters. Except as set forth in Schedule 4.24 :

(a) to AOG’s Knowledge, it has conducted its business and operated its assets, and is conducting its business and operating its assets, and the condition of all facilities and properties (including off site storage or disposal of any Hazardous Materials from such facilities or properties) currently or formerly owned, leased or operated by AOG is, in material compliance with all Environmental Laws;

(b) AOG has not been notified by any Governmental Authority or other third party that any of the operations or assets of AOG is the subject of any investigation or inquiry by any Governmental Authority or other third party evaluating whether any material remedial action is needed to respond to a release or threatened release of any Hazardous Material or to the improper storage or disposal (including storage or disposal at offsite locations) of any Hazardous Material where such investigation or inquiry has not been fully resolved and satisfied as of the date hereof;

(c) neither AOG nor, to AOG’s Knowledge, any other Person has filed any notice under any federal, state or local Law indicating that (i) AOG is responsible for the improper release into the environment, or the improper storage or disposal, of any Hazardous Material, or (ii) any Hazardous Material is improperly stored or disposed of upon any property of AOG;

(d) to AOG’s Knowledge, it does not have any material liability (contingent or otherwise) in connection with (i) the release or threatened release into the environment at, beneath or on any property now or previously owned or leased by AOG, or (ii) the storage or disposal of any Hazardous Material;

(e) AOG has not received any claim, complaint, notice, inquiry or request for information involving any matter which remains unresolved as of the date hereof with respect to any alleged violation of any Environmental Law or regarding current or potential liability under any Environmental Law or any personal injury, property damage or natural resource damage claim relating to operations or conditions of any facilities or property (including off site storage or disposal or release of any Hazardous Material from such facilities or property) currently or formerly owned, leased or operated by AOG;

(f) to AOG’s Knowledge, no property now or previously owned, leased or operated by AOG is listed on the National Priorities List pursuant to CERCLA or on the CERCLIS or on any other federal or state list as sites requiring investigation or cleanup;

(g) to AOG’s Knowledge, it is not directly transporting, has not directly transported, is not directly arranging for the transportation of, or has not directly transported, any Hazardous Material to any location which is listed on the National Priorities List pursuant to CERCLA, on the CERCLIS, or on any similar federal or state list or which is the subject of federal, state or local enforcement actions or other investigations that may lead to material claims against AOG for remedial work, damage to natural resources or personal injury, including claims under CERCLA;

(h) except for the draining and backfilling of pits associated with drilling activities in the ordinary course, there are no sites, locations or operations at which AOG is obligated to undertake, is currently undertaking, or has completed, any remedial or response action relating to any disposal or release, as required by Environmental Laws; and

(i) AOG does not own or operate any underground storage tanks or solid waste disposal facilities.

4.25 Patents, Trademarks and Similar Rights. AOG owns or is properly licensed to use or otherwise has rights to use all Intellectual Property (specifically including any seismic license or Permit) material to the operations of the business of AOG as currently conducted. To AOG’s Knowledge, except as set forth on Schedule 4.25 , (i) the entry into this Contribution Agreement and the transactions contemplated hereby will not have any effect on any contracts related to Intellectual Property, and (ii) neither AOG nor, to AOG’s Knowledge, any other party, is in breach of or default under any Intellectual Property license or any other contract or legal requirement relating to the Intellectual Property, in each such case.

ARTICLE V.

REPRESENTATIONS AND WARRANTIES OF NEO CANYON

Each of Neo Canyon and Neo Canyon GP jointly and severally represents and warrants to ARI, AOG, the AOG Stockholders, Lubar and Yorktown VII that the statements contained in this Article V are correct and complete as of the date hereof.

5.1 Organization and Power. Neo Canyon is duly formed (as the case may be), validly existing and in good standing (as applicable) under the Laws of its jurisdiction of formation, and is qualified and in good standing to transact business in each jurisdiction in which such qualification is required by Law, except where the failure to be so qualified would not have an ARI Material Adverse Effect. Neo Canyon has all requisite corporate power and authority to execute, deliver and perform its obligations under this Contribution Agreement and to consummate the transactions contemplated hereby. Neo Canyon and Neo Canyon GP have heretofore delivered or made available to ARI, AOG, the AOG Stockholders, Lubar and Yorktown VII their respective certificates of formation, partnership or operating agreements or other comparable organizational documents, each as amended to date.

5.2 Authorization; Execution and Validity. The execution and delivery of this Contribution Agreement by Neo Canyon, the performance of this Contribution Agreement by Neo Canyon and the consummation by Neo Canyon of the transactions contemplated hereby and thereby to be consummated by it, have been duly authorized by all necessary corporate action and no other corporate action on the part of Neo Canyon is necessary with respect thereto. This Contribution Agreement has been duly executed and delivered by Neo Canyon and, when duly and validly executed and delivered, will constitute a valid and binding obligation of Neo Canyon and is enforceable against Neo Canyon in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization and similar Laws affecting creditors generally and by the availability of equitable remedies.

5.3 Consents. Neither the execution and delivery by Neo Canyon of this Contribution Agreement nor the consummation or performance by Neo Canyon of the transactions contemplated by this Contribution Agreement to be consummated or performed by it will require prior to the Closing (on the part of Neo Canyon) any consent from, authorization or approval or other action by, notice to or declaration, filing or a registration with, any Governmental Authority or any other third party, except, if required, to comply with the HSR Act or as specified in Schedule 5.3 .

5.4 No Defaults or Conflicts. Neither the execution and delivery by Neo Canyon of this Contribution Agreement nor the consummation or performance by Neo Canyon of the transactions contemplated by this Contribution Agreement to be consummated or performed by it (i) results or will result in any violation of the certificate of limited partnership or agreement of limited partnership of Neo Canyon or other organizational or governing documents of Neo Canyon or any of its Subsidiaries; or (ii) violates or conflicts with, or constitutes a breach of any of the terms or provisions of or a default under, or results in the creation or imposition of any Lien upon any property or asset of Neo Canyon, the trigger of any charge, payment or requirement of consent, or the acceleration or increase of the maturity of any payment date under: (A) any Material Contract to which Neo Canyon is a party or (B) any applicable Law or Order to which Neo Canyon or any of its respective properties is subject, other than, in each case, where such failure, conflict or breach would not have an ARI Material Adverse Effect.

5.5 Brokers. Neo Canyon has not paid or become obligated to pay any fee or commission to any broker, finder or intermediary in connection with the transactions contemplated hereby for which ARI, AOG, the AOG Stockholders or Neo Canyon shall have liability following the Closing.

5.6 Litigation. Schedule 5.6 lists all Legal Proceedings pending or, to Neo Canyon’s Knowledge, threatened against or affecting Neo Canyon or any of its assets. Except as disclosed on Schedule 5.6 , Neo Canyon is not subject to any Order. There are no Legal Proceedings pending against or, to Neo Canyon’s Knowledge, threatened in writing against, Neo Canyon that questions the validity or legality of any of this Contribution Agreement or any action taken or to be taken by Neo Canyon in connection herewith or therewith.

5.7 Title to the Neo Canyon Oil and Gas Properties. Neo Canyon has Defensible Title to all of the Neo Canyon Oil and Gas Properties. All proceeds from the sale of the Hydrocarbons being produced from the Neo Canyon Oil and Gas Properties are currently being paid in full to Neo Canyon by the purchasers thereof on a timely basis, and none of such proceeds are currently being held in suspense by such purchaser or any other party, except as set forth in Schedule 5.7 .

5.8 Environmental Matters. Except as set forth in Schedule 5.8 :

(a) to Neo Canyon’s Knowledge, the Neo Canyon Oil and Gas Properties have been and are being operated in compliance with all Environmental Laws;

(b) Neo Canyon has not been notified by any Governmental Authority or other third party that any of the Neo Canyon Oil and Gas Properties are the subject of any investigation or inquiry by any Governmental Authority or other third party evaluating whether any material remedial action is needed to respond to a release or threatened release of any Hazardous Material or to the improper storage or disposal (including storage or disposal at offsite locations) of any Hazardous Material where investigation or inquiry remains unresolved as of the date hereof;

(c) neither Neo Canyon nor, to Neo Canyon’s Knowledge, any other Person has filed any notice under any federal, state or local Law indicating that (i) Neo Canyon is

responsible for the improper release into the environment, or the improper storage or disposal, of any Hazardous Material, or (ii) any Hazardous Material is improperly stored or disposed of upon the Neo Canyon Oil and Gas Properties;

(d) to Neo Canyon’s Knowledge, Neo Canyon does not have any material liability (contingent or otherwise) in connection with (i) the release or threatened release into the environment at, beneath or on the Neo Canyon Oil and Gas Properties, or (ii) the storage or disposal of any Hazardous Material thereon;

(e) Neo Canyon has not received any claim, complaint, notice, inquiry or request for information involving any matter which remains unresolved as of the date hereof with respect to any alleged violation of any Environmental Law or regarding current or potential liability under any Environmental Law or any personal injury, property damage or natural resource damage claim relating to operations or conditions of the Neo Canyon Oil and Gas Properties (including off site release of any Hazardous Material from the Neo Canyon Oil and Gas Properties);

(f) to Neo Canyon’s Knowledge, none of the Neo Canyon Oil and Gas Properties are listed on the National Priorities List pursuant to CERCLA or on the CERCLIS or on any other federal or state list as sites requiring investigation or cleanup;

(g) to Neo Canyon’s Knowledge, Neo Canyon is not directly transporting, has not directly transported, is not directly arranging for the transportation of, or has not directly transported, any Hazardous Material to any location which is listed on the National Priorities List pursuant to CERCLA, on the CERCLIS, or on any similar federal or state list or which is the subject of federal, state or local enforcement actions or other investigations that may lead to material claims against the Neo Canyon Oil and Gas Properties for remedial work, damage to natural resources or personal injury, including claims under CERCLA; and

(h) there are no sites, locations or operations with respect to the Neo Canyon Oil and Gas Properties at which Neo Canyon is obligated to undertake, is currently undertaking, or has completed, any remedial or response action relating to any disposal or release, as required by Environmental Laws.

5.9 Taxes and Assessments Neo Canyon has caused to be timely filed all material Tax returns relating to the Neo Canyon Oil and Gas Properties the failure to pay which could result in the placement of a Lien on all or a portion of the Neo Canyon Oil and Gas Properties. Neo Canyon has paid or caused to be paid all ad valorem, property, production, severance and similar Taxes based upon or measured by the ownership of or the production of Hydrocarbons from the Oil and Gas Properties, except those being contested in good faith and disclosed to ARI in writing. Neo Canyon has not received written notice of any pending claim against Neo Canyon from any applicable taxing authority for assessment of Taxes with respect to the Neo Canyon Oil and Gas Properties. There are no audits of Neo Canyon by any applicable taxing authority with respect to Taxes attributable to the Neo Canyon Oil and Gas Properties. Except for statutory liens for property taxes and ad valorem taxes not yet due and payable, there are no tax liens on or with respect to the Neo Canyon Oil and Gas Properties.

5.10 Outstanding Capital Commitments. Except for Neo Canyon’s commitments under the Authorizations for Expenditures (“ AFEs ”) for the currently drilling Wells and the matters which are set forth in Schedule 5.10 , there are no pending AFEs and there are no outstanding AFEs or other commitments to make capital expenditures, which are binding on Neo Canyon or the Neo Canyon Oil and Gas Properties and which Neo Canyon reasonably anticipates will individually (per AFE) require expenditures as of such date in excess of $150,000.00. However, the Neo Canyon Oil and Gas Properties are subject to active and ongoing exploration and Neo Canyon anticipates that there could be further well proposals at any time.

5.11 Compliance with Laws. Neo Canyon holds all material Permits necessary for the lawful conduct of its business and is in compliance in all material respects, with all Laws and Orders applicable to its business and has filed with the proper authorities all statements and reports required by the Laws and Orders to which Neo Canyon or any of its properties or operations are subject. No claim has been made by any Governmental Authority (and, to Neo Canyon’s Knowledge, no such claim is anticipated) to the effect that the business conducted by Neo Canyon fails to comply, in any respect, with any Law.

5.12 Forward Sales. Except as disclosed in Schedule 5.12 , Neo Canyon is not obligated by virtue of a take or pay payment, advance payment or other similar payment (other than royalties, overriding royalties and similar arrangements reflected on Exhibit C ), to deliver Hydrocarbons, or proceeds from the sale thereof, attributable to the Leases at some future time without receiving payment therefor at or after the time of delivery.

5.13 Properties. Except as set forth in Schedule 5.13 and except for Hydrocarbon sales contracts with a term not greater than thirty (30) days, no Hydrocarbons produced from the Neo Canyon Oil and Gas Properties are subject to a sales contract or other agreement relating to the marketing of Hydrocarbons, and no person has any call upon, option to purchase or similar rights with respect to such Neo Canyon Oil and Gas Properties or the rights therefrom, except for third party operator rights under operating agreements covering the Neo Canyon Oil and Gas Properties.

5.14 Consents and Preferential Purchase Rights. Except as set forth in Schedule 5.14 , none of the Leases are subject to any preferential rights to purchase or restrictions on assignment or required third-party consents to assignment which may be applicable to the transactions contemplated by this Contribution Agreement, except for governmental consents and approvals of assignments that are customarily obtained after Closing.

5.15 Contracts. Neither Neo Canyon nor to Neo Canyon’s Knowledge, any other party is in default under any contract except for such defaults as would not have an ARI Material Adverse Effect. There are no contracts with Affiliates of Neo Canyon which will be binding on the Neo Canyon Oil and Gas Properties after Closing. Except as set forth in Schedule 5.15 , none of the contracts consist of, nor are the Neo Canyon Oil and Gas Properties subject to any, Hedging Transaction which will be binding on ARI.

5.16 Intentionally Omitted.

5.17 Intentionally Omitted.

5.18 Intellectual Property. Except as disclosed on Schedule 5.18 , Neo Canyon does not own or use any Intellectual Property in the ownership and operation of the Neo Canyon Oil and Gas Properties. Neo Canyon has received no written notice, and has no knowledge of, any infringements or unauthorized or unlawful use of any Intellectual Property by Neo Canyon or any allegation that Neo Canyon’s use of such Intellectual Property has infringed similar properties of others.

5.19 Accredited Investor . Neo Canyon is an “accredited investor” within the meaning of Regulation D, Rule 501(a), promulgated by the Commission.

5.20 Restricted Securities . Neo Canyon understands that the shares of ARI Common Stock will not have been registered pursuant to the Securities Act or any applicable state securities laws, that the shares of ARI Common Stock will be characterized as “restricted securities” under federal securities laws, and that under such laws and applicable regulations the shares of ARI Common Stock cannot be sold or otherwise disposed of without registration under the Securities Act or an exemption therefrom. In this connection, Neo Canyon represents that it is familiar with Rule 144 promulgated under the Securities Act, as currently in effect, and understands the resale limitations imposed thereby and by the Securities Act. A legend indicating that the shares of ARI Common Stock have not been registered under applicable federal and state securities laws and referring to the restrictions on transferability and sale of the ARI Common Stock pursuant to this Contribution Agreement or otherwise may be placed on any certificate(s) or other document delivered to Neo Canyon or any substitute therefor and any transfer agent of ARI may be instructed to require compliance therewith.

5.21 Investment Intent. The ARI Common Stock is being acquired for Neo Canyon’s own investment portfolio and account (and not on behalf of, and without the participation of, any other Person) with the intent of holding the ARI Common Stock for investment and without the intent of participating, directly or indirectly, in a distribution of the ARI Common Stock and not with a view to, or for resale in connection with, any distribution of the ARI Common Stock in violation of applicable securities laws or any portion thereof in violation of applicable securities laws. As of the Closing Date, Neo Canyon does not have plans to transfer any of the ARI Common Stock on a specified date or to a specified person, other than as contemplated hereby.

ARTICLE VI.

REPRESENTATIONS AND WARRANTIES OF THE AOG STOCKHOLDERS, LUBAR AND YORKTOWN VII

Each of the AOG Stockholders, Lubar and Yorktown VII severally and not jointly represents and warrants to ARI and Neo Canyon that the statements contained in this Article VI are correct and complete as of the date hereof.

6.1 Organization and Good Standing . Each of such AOG Stockholders, Lubar and Yorktown VII is duly organized, validly existing and in good standing under the Laws of the jurisdiction in which it is organized and has all requisite power and authority to execute, deliver

and perform its obligations under this Contribution Agreement and to consummate the transactions contemplated hereby.

6.2 Authority and Enforceability . The execution and delivery by each of such AOG Stockholders, Lubar and Yorktown VII of this Contribution Agreement and the consummation of the transactions contemplated hereby (if such AOG Stockholder is not a natural Person) have been duly and validly authorized by all necessary corporate or other action and no other corporate or other proceedings are necessary to consummate the transactions contemplated hereby. This Contribution Agreement has been duly and validly executed and delivered and constitutes a valid and binding obligation of each of such AOG Stockholders, Lubar and Yorktown VII, enforceable against each of such AOG Stockholders, Lubar and Yorktown VII in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization and similar Laws affecting creditors generally and by the availability of equitable remedies.

6.3 No Conflict; Required Filings and Consents . The execution and delivery of this Contribution Agreement by each of such AOG Stockholders, Lubar and Yorktown VII do not, and the performance by each of such AOG Stockholders, Lubar and Yorktown VII of the transactions contemplated hereby or thereby will not violate, conflict with, require any consent under or result in a violation or breach of, or constitute a default (with or without due notice or lapse of time or both) under, or give any party the right to terminate or accelerate any obligation, or give rise to the creation of any Lien upon any property or asset of AOG under, any of the terms, conditions, or provisions of any organizational document, contract or other instrument or obligation to which each of such AOG Stockholders, Lubar and Yorktown VII is a party or by which it may be bound, or violate any Law or Order of any Governmental Authority binding upon each of such AOG Stockholders, Lubar and Yorktown VII. No consent of or registration, declaration, or filing with any Governmental Authority is required by or with respect to each of such AOG Stockholders, Lubar and Yorktown VII in connection with the execution and delivery of this Contribution Agreement by each of such AOG Stockholders, Lubar and Yorktown VII or the consummation of the transactions contemplated hereby.

6.4 Ownership . Such AOG Stockholder is the holder of record of and owns beneficially the AOG Common Stock identified as being owned by such AOG Stockholder in Section 2.1 and to be acquired by ARI in accordance with Section 2.1 , and, as of the Closing Date, such AOG Stockholder will be the holder of record and will own beneficially the AOG Common Stock, free and clear of all Liens. On the Closing Date, ARI will receive good and valid title to the AOG Common Stock owned by such AOG Stockholder, free and clear of all Liens.

6.5 Accredited Investor . Each of such AOG Stockholders, Lubar and Yorktown VII is an “accredited investor” within the meaning of Regulation D, Rule 501(a), promulgated by the Commission.

6.6 Restricted Securities . Each of such AOG Stockholders, Lubar and Yorktown VII understands that the shares of ARI Common Stock will not have been registered pursuant to the Securities Act or any applicable state securities laws, that the shares of ARI Common Stock will be characterized as “restricted securities” under federal securities laws, and that under such laws

and applicable regulations the shares of ARI Common Stock cannot be sold or otherwise disposed of without registration under the Securities Act or an exemption therefrom. In this connection, each of such AOG Stockholders, Lubar and Yorktown VII represents that it is familiar with Rule 144 promulgated under the Securities Act, as currently in effect, and understands the resale limitations imposed thereby and by the Securities Act. A legend indicating that the shares of ARI Common Stock have not been registered under applicable federal and state securities laws and referring to the restrictions on transferability and sale of the ARI Common Stock pursuant to this Contribution Agreement or otherwise may be placed on any certificate(s) or other document delivered to each of such AOG Stockholders, Lubar and Yorktown VII or any substitute therefor and any transfer agent of ARI may be instructed to require compliance therewith.

6.7 Investment Intent . The ARI Common Stock is being acquired for the own investment portfolio and account (and not on behalf of, and without the participation of, any other Person) of each of such AOG Stockholders, Lubar and Yorktown VII with the intent of holding the ARI Common Stock for investment and without the intent of participating, directly or indirectly, in a distribution of the ARI Common Stock and not with a view to, or for resale in connection with, any distribution of the ARI Common Stock in violation of applicable securities laws or any portion thereof in violation of applicable securities laws. As of the Closing Date, none of each AOG Stockholder, Lubar or Yorktown VII has plans to transfer any of the ARI Common Stock on a specified date or to a specified person, other than in connection with the ARI Initial Public Offering.

ARTICLE VII.

REPRESENTATIONS AND WARRANTIES OF ARI

ARI represents and warrants to AOG, the AOG Stockholders, Lubar, Yorktown VII and Neo Canyon that the statements contained in this Article VII are correct and complete as of the date hereof (it being recognized that each such representation and warranty with respect to ARI’s operations and the ARI Oil and Gas Properties shall be deemed to refer to ARI and each of its Subsidiaries, taken as a whole).

7.1 Organization and Power. Each of ARI and its Subsidiaries is duly incorporated or formed (as the case may be), validly existing and in good standing (as applicable) under the Laws of its respective jurisdiction of incorporation or formation, and is qualified and in good standing to transact business in each jurisdiction in which such qualification is required by Law, except where the failure to be so qualified would not have an ARI Material Adverse Effect. ARI has all requisite corporate power and authority to execute, deliver and perform its obligations under this Contribution Agreement and to consummate the transactions contemplated hereby. ARI has heretofore delivered or made available to the AOG Stockholders and Neo Canyon complete and correct copies of (a) its certificate of incorporation and bylaws, each as amended to date, and (b) its Subsidiaries’ respective certificates of incorporation and bylaws, or other comparable organizational documents, each as amended to date.

7.2 Authorizations; Execution and Validity. The execution and delivery of this Contribution Agreement by ARI, the performance of this Contribution Agreement by ARI and

the consummation by ARI of the transactions contemplated hereby and thereby to be consummated by it, have been duly authorized by all necessary corporate action and, except for the approval of the New ARI Charter as provided herein, no other corporate action on the part of ARI is necessary with respect thereto. This Contribution Agreement has been duly executed and delivered by ARI and, when duly and validly executed and delivered, will constitute a valid and binding obligation of ARI and is enforceable against ARI in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization and similar Laws affecting creditors generally and by the availability of equitable remedies.

7.3 Capitalization.

(a) As of the date hereof, the authorized capital stock of ARI consists solely of 4,000,000 shares of ARI Common Stock and 1,000,000 shares of ARI Preferred Stock. As of the date hereof, there are an aggregate of 2,852,085 shares of Common Stock issued and outstanding, all of which shares are owned of record and beneficially, by the ARI Stockholders with each ARI Stockholder owning the number of shares set forth on Schedule 7.3(a) hereto, and have been duly authorized and validly issued, and are fully-paid and non-assessable. No shares of ARI Preferred Stock are issued and outstanding. As of the date hereof, ARI had outstanding options which had been issued to the individuals and entities listed on Schedule 7.3(a) totaling 115,385 shares of ARI Common Stock. As of the date hereof, the issued and outstanding amount of ARI Common Stock on a fully diluted basis is 2,967,470 shares. Except as contemplated by the ARI Registration Statement, the Lubar Note, the Yorktown Note, future issuances of equity or convertible debt in connection with financing transactions or acquisitions that the ARI Board reasonably determines to be in the best interests of ARI and its stockholders, and with respect to options, warrants, rights or other equity based awards issued as part of reasonable compensation plans approved by the ARI Board, as of the Closing Date, there shall be no outstanding options, subscriptions, warrants, calls, commitments, pre-emptive rights or other rights obligating ARI to issue or sell any shares of its capital stock or any securities convertible into or exercisable for any shares of its capital stock, or otherwise requiring ARI to give any Person the right to receive any benefits or rights similar to any rights enjoyed by or accruing to the holders of shares of capital stock of ARI or any rights to participate in the equity or net income of ARI. All of the issued shares of ARI’s capital stock were issued, and to the extent purchased or transferred, have been so purchased or transferred, in compliance with all applicable Laws, including federal and state securities Laws, and any preemptive rights and any other statutory or contractual rights of any ARI Stockholder.

(b) ARI has no Subsidiaries other than those set forth on Schedule 7.3(b) . ARI, directly or indirectly, owns all capital of and other equity interests in its Subsidiaries, and there are no outstanding options, subscriptions, warrants, calls, commitments, pre-emptive rights or other rights in favor of any Person other than ARI or other ARI Subsidiaries obligating ARI or any of its Subsidiaries to issue or sell any shares or other equity interests of any of ARI’s Subsidiaries or any securities convertible into or exercisable for any shares or other equity interests of any such Subsidiary, or otherwise requiring ARI or any of its Subsidiaries to give any Person (other than ARI or any of its Subsidiaries) the right to receive any benefits or rights similar to any rights enjoyed by or accruing to the holders of shares or other equity interests of any such Subsidiary or any rights to participate in the equity or net income of any such Subsidiary. ARI does not own, directly or indirectly, any capital of or other equity interest in or

has any other investment in any other Person other than its Subsidiaries. Except for the Stockholders’ Agreement and as otherwise set forth on Schedule 7.3(c) , there are no stockholders’ agreements, voting trusts or other agreements or understandings between or among ARI Stockholders or to which ARI is a party or by which it is bound with respect to the transfer or voting of any capital stock of ARI, none of which, except as disclosed in Schedule 7.3(c) , shall be in effect following the Closing.

7.4 Financial Statements; Other Financial Data. Attached hereto on Schedule 7.4 are correct and complete copies of the audited consolidated balance sheet of ARI and its Subsidiaries as of December 31, 2006 with the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year then ended (the “ ARI Audited Financial Statements ”) and the unaudited consolidated balance sheet of ARI and its Subsidiaries as of March 31, 2007 with the related unaudited consolidated statements of operations, changes in stockholders’ equity, and cash flows for the quarter then ended (the “ ARI Unaudited Financial Statements ” and, together with the ARI Audited Financial Statements, the “ ARI Financial Statements ”). The ARI Financial Statements present fairly in all material respects the financial position of ARI as of the dates indicated, and the results of its operations for the respective periods indicated. The ARI Audited Financial Statements are in conformity with GAAP, consistently applied. The ARI Unaudited Financial Statements are unaudited and, therefore, are subject to normal recurring year-end adjustments and the absence of footnotes.

7.5 Consents. Neither the execution and delivery by ARI of this Contribution Agreement nor the consummation or performance by ARI of the transactions contemplated by this Contribution Agreement to be consummated or performed by it will require prior to the Closing (on the part of ARI) any consent from, authorization or approval or other action by, notice to or declaration, filing or a registration with, any Governmental Authority or any other third party, except, if required, to comply with the HSR Act or as specified in Schedule 7.5 .

7.6 No Defaults or Conflicts. Neither the execution and delivery by ARI of this Contribution Agreement nor the consummation or performance by ARI of the transactions contemplated by this Contribution Agreement to be consummated or performed by it (i) results or will result in any violation of the certificate of incorporation or bylaws of ARI or other organizational or governing documents of ARI or any of its Subsidiaries; or (ii) subject to obtaining the required consent, if any, from ARI’s Senior Lender, violates or conflicts with, or constitutes a breach of any of the terms or provisions of or a default under, or results in the creation or imposition of any Lien upon any property or asset of ARI, the trigger of any charge, payment or requirement of consent, or the acceleration or increase of the maturity of any payment date under: (A) any Material Contract to which ARI is a party or (B) any applicable Law or Order to which ARI or any of its respective properties is subject, other than, in each case, where such failure, conflict or breach would not have an ARI Material Adverse Effect.

7.7 Agreements, Contracts and Commitments. ARI has listed in Schedule 7.7 all Material Contracts to which it is a party (true and correct copies of each such document have been previously delivered or made available to the AOG Stockholders and Neo Canyon). Except as set forth in Schedule 7.7 , ARI has not breached, nor to ARI’s Knowledge is there any claim or any legal basis for a claim that ARI or any third party has breached, any of the terms or conditions of any Material Contract if any such breach, whether considered individually or in the

aggregate, could result in the imposition of damages or the loss of benefits in an amount or of a kind that would have an ARI Material Adverse Effect to ARI and its Subsidiaries taken as a whole.

7.8 Litigation. Schedule 7.8 lists all Legal Proceedings pending or, to ARI’s Knowledge, threatened against or affecting ARI or any of its assets. Except as disclosed on Schedule 7.8 , ARI is not subject to any Order. There are no Legal Proceedings pending against or, to ARI’s Knowledge, threatened in writing against, ARI that questions the validity or legality of any of this Contribution Agreement or any action taken or to be taken by ARI in connection herewith or therewith.

7.9 ERISA Compliance; Labor.

(a) Except as set forth on Schedule 7.9 , neither ARI nor any other Aggregated Group sponsors, maintains or contributes to any Employee Benefit Plan.

(b) No labor associations, organizations, or unions have been certified to represent any employee of ARI, and no collective bargaining agreement or other labor union contract has been requested by any employee or group of employees of ARI, and no discussions or negotiations with respect to any such agreement or contract have occurred.

(c) ARI and its Subsidiaries are in material compliance with all Laws, rules, regulations and Orders relating to the employment of labor, including all such Laws, rules, regulations and Orders relating to wages, hours, collective bargaining, discrimination, civil rights, safety and health, workers’ compensation and the collection and payment of withholding or Social Security Taxes and similar Taxes.

7.10 Taxes. Except as disclosed on Schedule 7.10 :

(a) All material Tax Returns required to be filed on or before the Closing Date by or on behalf of ARI have been or will be filed within the time prescribed by Law (including extensions of time permitted by Law) and such Tax Returns are true, correct, complete and accurate in all material respects and reflect accurately in all material respects all liability for Taxes of ARI or any of its Subsidiaries.

(b) ARI has paid, on a timely basis, all material Taxes of ARI and of any of its Subsidiaries that are due on or before December 31, 2006, and will have paid all material Taxes of ARI and of any of its Subsidiaries that are due on or before the Closing Date.

(d) There are no Liens for Taxes upon any of the properties or assets of ARI or of any of its Subsidiaries (except for Permitted Liens).

(e) There are no pending Orders, audits, actions, proceedings, investigations, disputes or claims instigated by any Governmental Authority with respect to any Taxes payable

by or asserted against ARI or any of its Subsidiaries. Neither ARI nor any of its Subsidiaries has received notice from any taxing authority of its intent to examine or audit any of its Tax Returns.

(f) Neither ARI nor any of its Subsidiaries is subject to Tax or has done business in any country other than the United States.

(g) All Taxes required to be withheld, collected or deposited by ARI or any of its Subsidiaries (including, without limitation, amounts required to be withheld, collected or deposited with respect to amounts paid or owing to any employee, creditor, independent contractor or other Person) have been timely withheld, collected or deposited and, to the extent required, have been timely paid to the relevant taxing authority.

(h) There are no outstanding agreements or waivers that would extend the statutory period in which a taxing authority may assess or collect a Tax against ARI or any of its Subsidiaries.

7.11 Brokers. Other than the commission payable pursuant to the Underwriting Agreement, ARI has not paid or become obligated to pay any fee or commission to any broker, finder or intermediary in connection with the transactions contemplated hereby for which ARI, AOG or Neo Canyon shall have liability following the Closing.

7.12 Absence of Certain Changes or Events. Except as set forth on Schedule 7.12 or as disclosed in the ARI Audited Financial Statements or the ARI Unaudited Financial Statements, since March 31, 2007, there has not been any transaction or occurrence in which ARI has:

(a) suffered any Material Adverse Effect;

(d) suffered any uninsured casualty loss or damage in excess of $2,500,000 individually;

(e) amended any term of any equity security of ARI other than as contemplated by this Contribution Agreement; or

(f) made any change in its accounting methods, principles or practices.

7.13 Compliance with Laws. ARI holds all material Permits necessary for the lawful conduct of its business and is in compliance in all material respects, with all Laws and Orders applicable to its business and has filed with the proper authorities all statements and reports required by the Laws and Orders to which ARI or any of its properties or operations are subject. No claim has been made by any Governmental Authority (and, to ARI’s Knowledge, no such

claim is anticipated) to the effect that the business conducted by ARI fails to comply, in any respect, with any Law.

7.14 Transactions with Related Parties. Except for the Stockholders’ Agreement, transactions with any of ARI’s Subsidiaries and as otherwise set forth on Schedule 7.14 :

(a) No Affiliate has entered into, or has had any direct or indirect financial interest in, any ARI Material Contract, transaction or business dealings involving ARI;

(b) No Affiliate owns or has any interest in, directly or indirectly, in whole or in part, any tangible or intangible property used in the conduct of the business of ARI;

(c) Other than amounts owed to ARI pursuant to any intercompany debts, joint interest billing and general and administrative allocations, or expense advance reimbursements in the ordinary course of business, no Affiliate owes any money to, nor is any such Affiliate owed any money by, ARI other than as set forth in this Contribution Agreement; and

(d) ARI has not, directly or indirectly, guaranteed or assumed any indebtedness for borrowed money or otherwise for the benefit of any Affiliate of ARI.

7.15 Agents. Except as set forth on Schedule 7.15 , ARI has not designated or appointed any person or other entity to act for it or on its behalf pursuant to any power of attorney or any agency which is presently in effect (other than such of ARI’s directors, officers and employees to whom ARI has given the authority to act for ARI in the ordinary course of its business) or shall continue after the Closing Date.

7.16 Books and Records. The minute books and records of ARI are current as of the date hereof (and shall be current as of the Closing) with respect to all undertakings and authorizations, and contain a true, complete and correct record of all actions taken at all meetings and by all written consents in lieu of meetings of the ARI Board, or any committees thereof, and the ARI Stockholders. The stock ledger and related stock transfer records of ARI contain a true, complete and correct record of the original issuance, transfer and other capitalization matters of the capital stock of ARI. The accounting, financial reporting, tax and business books and records of ARI accurately and fairly reflect in all material respects the business and condition of ARI and the transactions and the assets and liabilities of ARI with respect thereto. Without limiting the generality of the foregoing, ARI has not engaged in any transaction with respect to its business or operations, maintained any bank account therefor or used any funds of ARI in the conduct thereof except for transactions, bank accounts and funds that have been and are reflected in the normally maintained books and records of the business.

7.17 Information Furnished. ARI has made available to AOG and Neo Canyon and their respective directors, officers, employees, counsel, representatives, financing sources, customers, creditors, accountants and auditors, true and correct copies of all agreements, documents, and other items listed on the Schedules to this Contribution Agreement and all books and records of ARI.

7.18 Directors and Officers. Schedule 7.18 lists all of the directors and officers of ARI as of the Closing Date.

7.19 Bank Accounts. Attached hereto as Schedule 7.19 is a list of all banks or other financial institutions with which ARI has an account, showing the type and account number of each such account.

7.20 Owned Real Property. Other than the ARI Oil and Gas Properties, ARI does not own any real property.

7.21 Leased Real Property. Other than the ARI Oil and Gas Properties, Schedule 7.21 contains a complete and correct list of all Real Property Leases. ARI has provided or made available to the AOG Stockholders and Neo Canyon correct and complete copies of the Real Property Leases. Except as disclosed in Schedule 7.21 , (i) each of the Real Property Leases is in full force and effect, and, to ARI’s Knowledge, is enforceable against the landlord which is party thereto in accordance with its terms (except as such enforceability may be limited by bankruptcy, insolvency, reorganization and similar laws affecting creditors generally and by the availability of equitable remedies), (ii) there are no subleases under the Real Property Leases and none of the Real Property Leases has been assigned (other than collateral assignments to ARI’s Senior Lender), (iii) no notices of default or notices of termination have been received by ARI with respect to the Real Property Leases which have not been withdrawn or canceled and (iv) ARI is not, and to ARI’s Knowledge, no other party is, in default under any Real Property Lease. There is no ARI Knowledge of, nor has there been receipt of any written notice of a proceeding in eminent domain or other similar proceeding affecting property listed on Schedule 7.21 .

7.22 Insurance. Schedule 7.22 contains a true and complete list of all insurance policies, directors and officers liability policies, and formal self-insurance programs, and other forms of insurance and all fidelity bonds held by or applicable to ARI and its owned or leased properties. Schedule 7.22 describes (a) whether each insurance policy listed on Schedule 7.22 is occurrence-based or claims made based and (b) each pending claim thereunder for more than $1,000,000 per claim and a history of all such claims made against any such insurance policy of ARI for the past three (3) years. All insurance policies listed on Schedule 7.22 have been made available to the AOG Stockholders and Neo Canyon and are subject to the deductibles or retentions referenced on Schedule 7.22 . ARI maintains insurance for its benefit, in coverages and amounts to be customary and adequate in the oil and gas industry. ARI is not in default with respect to any provision in any current policy maintained for its benefit, and all such insurance is in full force and effect. ARI has not received, nor is there any ARI Knowledge of, any notice of cancellation or nonrenewal of any such insurance policy. ARI has not failed to give any notice or present any claim for more than $1,000,000 under any of the policies for the benefit of ARI in due and timely fashion. ARI has not been refused any insurance with respect to its assets, properties or businesses, nor has any such coverage been materially limited by any insurance carrier to which ARI has applied for any such insurance or with which ARI has carried insurance during the past three (3) years. Other than as described on Schedule 7.22 , no further payments of premiums will be due following the Closing by ARI with respect to insurance coverages prior to the Closing. Neither this Contribution Agreement nor any of the transactions contemplated by this Contribution Agreement to occur at the Closing will adversely affect ARI’s coverage under the terms of the insurance policies with respect to periods prior to the Closing.

7.23 Title to Oil and Gas Properties. ARI has Defensible Title to all ARI Oil and Gas Properties. All proceeds from the sale of ARI’s share of the Hydrocarbons being produced from the ARI Oil and Gas Properties are currently being paid in full to ARI by the purchasers thereof on a timely basis, and none of such proceeds are currently being held in suspense by such purchaser or any other party, except as set forth in Schedule 7.23 .

7.24 Environmental Matters. Except as set forth in Schedule 7.24 :

(a) to ARI’s Knowledge, it has conducted its business and operated its assets, and is conducting its business and operating its assets, and the condition of all facilities and properties (including off site storage or disposal of any Hazardous Materials from such facilities or properties) currently or formerly owned, leased or operated by ARI is, in material compliance with all Environmental Laws;

(b) ARI has not been notified by any Governmental Authority or other third party that any of the operations or assets of ARI is the subject of any investigation or inquiry by any Governmental Authority or other third party evaluating whether any material remedial action is needed to respond to a release or threatened release of any Hazardous Material or to the improper storage or disposal (including storage or disposal at offsite locations) of any Hazardous Material where such investigation or inquiry has not been fully resolved and satisfied as of the date hereof;

(c) neither ARI nor, to ARI’s Knowledge, any other Person has filed any notice under any federal, state or local Law indicating that (i) ARI is responsible for the improper release into the environment, or the improper storage or disposal, of any Hazardous Material, or (ii) any Hazardous Material is improperly stored or disposed of upon any property of ARI;

(d) to ARI’s Knowledge, it does not have any material liability (contingent or otherwise) in connection with (i) the release or threatened release into the environment at, beneath or on any property now or previously owned or leased by ARI, or (ii) the storage or disposal of any Hazardous Material;

(e) ARI has not received any claim, complaint, notice, inquiry or request for information involving any matter which remains unresolved as of the date hereof with respect to any alleged violation of any Environmental Law or regarding current or potential liability under any Environmental Law or any personal injury, property damage or natural resource damage claim relating to operations or conditions of any facilities or property (including off site storage or disposal or release of any Hazardous Material from such facilities or property) currently or formerly owned, leased or operated by ARI;

(f) to ARI’s Knowledge, no property now or previously owned, leased or operated by ARI is listed on the National Priorities List pursuant to CERCLA or on the CERCLIS or on any other federal or state list as sites requiring investigation or cleanup;

(g) to ARI’s Knowledge, it is not directly transporting, has not directly transported, is not directly arranging for the transportation of, or has not directly transported, any Hazardous Material to any location which is listed on the National Priorities List pursuant to

CERCLA, on the CERCLIS, or on any similar federal or state list or which is the subject of federal, state or local enforcement actions or other investigations that may lead to material claims against ARI for remedial work, damage to natural resources or personal injury, including claims under CERCLA;

(h) except for the draining and backfilling of pits associated with drilling activities in the ordinary course, there are no sites, locations or operations at which ARI is obligated to undertake, is currently undertaking, or has completed, any remedial or response action relating to any disposal or release, as required by Environmental Laws; and

(i) ARI does not own or operate any underground storage tanks or solid waste disposal facilities.

7.25 Patents, Trademarks and Similar Rights. ARI owns or is properly licensed to use or otherwise has rights to use all Intellectual Property (specifically including any seismic license or Permit) material to the operations of the business of ARI as currently conducted. To ARI’s Knowledge, except as set forth on Schedule 7.25 , (i) the entry into this Contribution Agreement and the transactions contemplated hereby will not have any effect on any contracts related to Intellectual Property, and (ii) neither ARI nor, to ARI’s Knowledge, any other party, is in breach of or default under any Intellectual Property license or any other contract or legal requirement relating to the Intellectual Property, in each such case.

7.26 Plugging and Abandonment. As to Wells operated by ARI, there are no Wells that: (i) ARI is currently obligated by Law or contract to plug and abandon; or (ii) have been plugged and abandoned in a manner that does not comply in all material respects with Law, in each such case, where the obligation or failure to comply would reasonably be expected to have an ARI Material Adverse Effect.

7.27 Additional Drilling Obligations. To ARI’s Knowledge, except as set forth on Schedule 7.27 , there are no current obligations or assessments of ARI or any of its Subsidiaries (other than implied obligations under leases to which ARI is a party concerning protection from drainage and further development that is customary in the oil and gas industry) that require the drilling of additional Wells or other material development operations (including re-entry of existing Wells) in order to earn or to continue to hold all or any portion of the Oil and Gas Properties, where the obligation or assessment would, individually or in the aggregate, reasonably be expected to have an ARI Material Adverse Effect.

7.28 Gas Imbalances. Except as set forth in Schedule 7.28 , ARI has no gas production imbalances attributable to the ARI Oil and Gas Properties.

ARTICLE VIII.

COVENANTS

8.1 Ordinary Course of Business . Except as otherwise contemplated herein or in connection with the ARI Initial Public Offering, between the date of this Contribution Agreement and the earlier to occur of the Closing Date or the termination of this Contribution Agreement, ARI, AOG and Neo Canyon, as applicable, will carry on their respective businesses

diligently and in the ordinary and usual course and consistent with past practice, and, without limiting the generality of the foregoing, and ARI, AOG and Neo Canyon will use, and Neo Canyon GP will cause Neo Canyon to use, commercially reasonable efforts to preserve their respective business organizations intact, keep available the services of their respective present executive officers and employees and preserve their respective present relationships with persons having business dealings with it.

8.2 AOG Restricted Activities and Transactions . Except as otherwise contemplated herein or in connection with the ARI Initial Public Offering, as set forth on Schedule 8.2 , or as otherwise consented to in writing by ARI, AOG, Neo Canyon, Lubar and Yorktown VII, between the date of this Contribution Agreement and the earlier to occur of the Closing Date or the termination of this Contribution Agreement, (i) the AOG Stockholders shall not sell, transfer or otherwise deliver their common stock in AOG, and (ii) AOG will not:

(a) except (i) as contemplated by the Lubar Note and the Yorktown Note, (ii) subject to Section 10.1(d) , for future issuances of equity or convertible debt in connection with financing transactions or acquisitions that the ARI Board reasonably determines to be in the best interests of ARI and its stockholders, or (iii) for options, warrants, rights, or other equity-based awards issued as part of reasonable compensation plans approved by the ARI Board or the AOG Board, issue or commit to issue any of its capital stock or other ownership or equity interests;

(b) except (i) as contemplated by the Lubar Note and the Yorktown Note, (ii) subject to Section 10.1(d) , for future issuances of equity or convertible debt in connection with financing transactions or acquisitions that the ARI Board reasonably determines to be in the best interests of ARI and its stockholders, or (iii) for options, warrants, rights, or other equity-based awards issued as part of reasonable compensation plans approved by the ARI Board or the AOG Board, grant or commit to grant any options, warrants, convertible securities or other rights to subscribe for, purchase or otherwise acquire any shares of its capital stock or other ownership or equity interests;

(c) declare, set aside, or pay any dividend or distribution or make any other payment with respect to its capital stock or other ownership interests except in the ordinary and usual course and consistent with past practice;

(d) directly or indirectly redeem, purchase or otherwise acquire or commit to acquire any of its capital stock or other ownership or equity interests;

(e) effect a split or reclassification of any of its capital stock or a recapitalization or other reorganization;

(f) amend or otherwise alter its certificate of incorporation, bylaws, limited liability agreement or limited partnership agreement or other governing instruments;

(g) enter into or make any change in any of its Employee Benefit Plans or grant any increase in compensation (other than increases in compensation in the ordinary course of business for field and office personnel who are not managers or executives), or provide any special severance arrangement involving any of its employees, officers or directors;

(h) except in the ordinary course of business or as otherwise permitted under this Contribution Agreement and except for budgeted capital expenditures, enter into or agree to enter into any agreement or transaction involving the incurrence of an obligation to pay an amount in excess of an aggregate of $30,000,000;

(i) create, assume or permit to exist any Lien on any of its assets, tangible or intangible, except (i) as permitted under its existing credit facilities with banks and any renewals, modifications or rearrangements thereof on terms and conditions not materially less favorable to the respective borrower or (ii) in the ordinary course of business consistent with past practice;

(j) except as in the ordinary and usual course of business and consistent with past practice or as otherwise contemplated or permitted herein, (i) cancel or agree to cancel any debts or claims, (ii) lease, sublease, sell or transfer, agree to sublease, sell or transfer, or grant or agree to grant any preferential rights to lease or acquire, any of its assets, property or rights having a fair market value in excess of $2,000,000 or (iii) make or permit any material amendment or termination of any Material Contract, agreement, license or other right to which it is a party;

(k) settle any threatened or pending litigation that is not fully covered by insurance other than for immaterial consideration or for an amount less than that reserved as of the date hereof for such litigation on its books and records; or

(l) commit itself to do any of the foregoing.

8.3 Neo Canyon Restricted Activities and Transactions . Between the date of this Contribution Agreement and the earlier to occur of the Closing Date or the termination of this Agreement, Neo Canyon will and Neo Canyon GP will cause Neo Canyon to (except as consented to in writing by ARI, AOG, Lubar and Yorktown VII or otherwise permitted under this Agreement):

(a) not terminate, amend or extend any material contracts affecting the Neo Canyon Oil and Gas Properties, or enter into or commit to enter into any new material contract relating to the Neo Canyon Oil and Gas Properties, or settle, compromise or waive any right relating to the Neo Canyon Oil and Gas Properties,

(b) maintain insurance coverage on the Neo Canyon Oil and Gas Properties in the amounts and of the types presently in force,

(c) use commercially reasonable efforts to cause the operator to maintain in full force and effect the Leases and other Neo Canyon Oil and Gas Properties, and pay all costs and expenses and perform all material obligations of the owner of the Neo Canyon Oil and Gas Properties promptly when due,

(d) use commercially reasonable efforts to cause the operator to maintain all Permits,

(e) not transfer, sell, hypothecate, encumber or otherwise dispose of any Neo Canyon Oil and Gas Properties except for sales and dispositions of Hydrocarbons made in the ordinary course of business consistent with past practices,

(f) not grant or create any preferential right to purchase, right of first opportunity or other transfer restriction or requirement with respect to the Neo Canyon Oil and Gas Properties except in connection with the renewal or extension of Neo Canyon Oil and Gas Properties after the Closing Date if granting or creating such right or requirement is a condition of such renewal or extension,

(g) use commercially reasonable efforts to cause the operator to maintain the equipment in at least as good a condition as it is on the date hereof, ordinary wear and tear excepted, and

(h) not make any change in any method of accounting or accounting practice or policy with respect to the Neo Canyon Oil and Gas Properties.

8.4 HSR and Other Regulatory Matters. Each of the parties hereto agrees to make all necessary filings on a timely basis with respect to the HSR Act, and other applicable laws and will use its commercially reasonable efforts to obtain any other regulatory approvals which may be required to consummate the transactions contemplated herein. Notwithstanding anything in this Contribution Agreement to the contrary, if any party hereto or any Affiliate thereof is required to make a filing under any such acts in connection with the transactions contemplated by this Contribution Agreement, the filing fees of such Person shall be borne by the party whose equity ownership gave rise to such filing obligation.

8.5 Commercially Reasonable Efforts . Upon the terms and subject to the conditions hereof, each of the parties hereto agrees to use its commercially reasonable efforts to take, or cause to be taken, all appropriate action, and to do or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions as contemplated by this Contribution Agreement and to cooperate in connection with the foregoing, including commercially reasonable efforts:

(a) to obtain any necessary waivers, consents and approvals from other parties to material notes, licenses, agreements and other instruments and obligations;

(b) to obtain any material consents, approvals, authorizations and Permits required to be obtained under any Law or Order;

(c) to defend all lawsuits or other Legal Proceedings challenging this Contribution Agreement or the consummation of the transactions as contemplated hereby; and

(d) to effect promptly all necessary filings and notifications including, but not limited to, filings under the HSR Act, and prompt submissions of information requested by Governmental Authorities.

8.6 New ARI Charter. Subject to approval of the New ARI Charter by the ARI Stockholders, ARI will file the New ARI Charter with the Secretary of State of the State of Delaware.

8.7 Officers and Directors. The duly elected officers and directors of ARI who hold office immediately prior to the Effective Time shall be the officers and directors of ARI and shall thereafter continue to hold such positions until their successors have been duly elected.

8.8 Access to Information . From the date hereof to the Effective Time, each of the parties hereto shall afford the officers, employees and representatives of the others, complete access at all reasonable times to its respective officers, employees, agents, properties, books and records, as applicable, and shall furnish the others all financial, operating and other data and information as the others, through their officers, employees or representatives, may reasonably request.

8.9 Section 351 . For United States federal income tax purposes and any applicable state or local income tax purposes, the parties hereto recognize that (i) the contributions described in Section 2.1 will be treated to the AOG Stockholders as contributions by the AOG Stockholders of common stock in AOG to ARI in exchange for shares of ARI Common Stock to which Section 351(a) of the Code applies, (ii) the contributions described in Section 2.2 will be treated to Neo Canyon as contributions by Neo Canyon of assets in Neo Canyon to ARI in exchange for shares of ARI Common Stock to which Section 351(a) of the Code applies and (iii) the contribution described in Sections 2.3 and 2.4 will be treated to Lubar and Yorktown VII as contributions by them of notes payable to ARI in exchange for shares of ARI Common Stock to which Section 351(a) of the Code applies. No party shall file any income Tax Return or otherwise take any position for income Tax purposes that is inconsistent with such treatment unless required to do so pursuant to a “determination” within the meaning of Section 1313(a) of the Code or the corresponding provision of state or local income Tax Law. Additionally, each party agrees to take no action which, alone or in combination with the actions of others, reasonably could prevent the transactions from qualifying for nonrecognition of gain or loss under Section 351(a) of the Code (a “ Proscribed Action ”), including, without limitation, any prearranged sale, contribution or other disposition of ARI Common Stock. For purposes of this Section 8.9 , the parties shall assume that Neo Canyon will sell to third parties in a registered secondary offering in connection with the ARI Initial Public Offering up to the maximum number of shares that it could sell without violating the “control” requirements in Section 351 of the Code and any such sale by Neo Canyon of such shares of ARI Common Stock shall not, with respect to Neo Canyon, be considered a Proscribed Action. A Proscribed Action shall not include a distribution of ARI Common Stock by the AOG Stockholders and Yorktown VII to their respective partners.

8.10 ARI Registration Statement. Each of the parties hereto shall cooperate in the preparation and filing of the ARI Registration Statement and to consummate the ARI Initial Public Offering. As promptly as is practicable following the execution of this Contribution Agreement, AOG, the AOG Stockholders and Neo Canyon shall cooperate with ARI to cause such ARI Registration Statement to be filed with the Commission under and pursuant to the provisions of the Securities Act for the purpose of registering ARI Common Stock for sale to the public in the ARI Initial Public Offering.

8.11 Blue Sky . ARI will use commercially reasonable efforts to obtain prior to the Effective Time all necessary Blue Sky Permits and approvals required to permit the issuance of ARI Common Stock in accordance with the provisions of this Contribution Agreement.

8.12 Notification Of Certain Matters . Each party hereto will give prompt notice of (i) the occurrence or non-occurrence of any event, the occurrence or nonoccurrence of which would be likely to cause any representation or warranty of such Person contained herein to be untrue or inaccurate in any material respect at or prior to the Effective Time, (ii) any material failure of any such Person to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by such Person hereunder and (iii) any material adverse change in the business, operations, operating results or condition (financial or otherwise) of such party. The delivery or deemed delivery of any notice pursuant to this Section 8.12 shall not be deemed to (i) modify the representations or warranties hereunder of the party delivering such notice, (ii) modify the conditions set forth in Article IX , or (iii) limit or otherwise affect the remedies available hereunder to the party receiving such notice.

8.13 Consents and Preferential Rights . Neo Canyon shall promptly prepare and send, and Neo Canyon GP shall cause Neo Canyon to promptly prepare and send, (i) notices to the holders of any required consents to assignment which are set forth on Schedule 5.3 requesting such consents and (ii) notices to the holders of any applicable preferential rights to purchase which are set forth on the Schedules requesting waivers of such preferential rights to purchase. Neo Canyon shall use, and Neo Canyon GP shall cause Neo Canyon to use, commercially reasonable efforts to cause such consents and waivers of preferential rights to purchase (or the exercise thereof) to be obtained and delivered prior to Closing. ARI shall cooperate with Neo Canyon in seeking to obtain such consents and waivers of preferential rights.

8.14 Assumption and Indemnification .

(a) FROM AND AFTER CLOSING, AND EXCEPT AS PROVIDED IN SECTION 8.14(b) , ARI SHALL INDEMNIFY, DEFEND AND HOLD HARMLESS NEO CANYON, NEO CANYON GP AND THEIR RESPECTIVE AFFILIATES, OFFICERS, DIRECTORS, AGENTS, EMPLOYEES AND REPRESENTATIVES FROM AND AGAINST ALL LOSSES (as defined below in Section 8.14(c) ) INCURRED OR SUFFERED BY NEO CANYON:

(i) CAUSED BY OR ARISING OUT OF OR RESULTING FROM THE OWNERSHIP, USE OR OPERATION OF THE NEO CANYON OIL AND GAS PROPERTIES, ON OR AFTER THE CLOSING DATE (INCLUDING, WITHOUT LIMITATION, ANY OBLIGATION TO PLUG AND ABANDON ANY INACTIVE WELL THAT IS PART OF THE PROPERTIES OR TO REMEDIATE ANY ENVIRONMENTAL CONDITION WHETHER SUCH ENVIRONMENTAL CONDITION AROSE PRIOR TO OR AFTER THE CLOSING DATE),

(ii) CAUSED BY OR ARISING OUT OF OR RESULTING FROM ARI’S BREACH OF ANY OF ARI’S COVENANTS OR AGREEMENTS THAT SPECIFICALLY SURVIVES CLOSING AS SET FORTH IN SECTION 11.2 OF THIS CONTRIBUTION AGREEMENT.

Upon and after Closing, ARI shall assume and perform all the rights, duties, obligations and liabilities of ownership and operation of the Neo Canyon Oil and Gas Properties including, without limitation: (i) all of Neo Canyon’s express and implied obligations and covenants after the Closing Date under the terms of the Leases, the Material Contracts, and all other orders, rules and regulations to which the Neo Canyon Oil and Gas Properties are subject; (ii) responsibility for all royalties, overriding royalties, rentals, shut-in payments and other burdens or encumbrances to which the Neo Canyon Oil and Gas Properties are subject accruing after the Closing Date; (iii) responsibility for compliance with all applicable Laws pertaining to the Neo Canyon Oil and Gas Properties, and the procurement and maintenance of all permits required by public authorities in connection with the Neo Canyon Oil and Gas Properties after the Closing Date; and (iv) all other obligations assumed by ARI under this Contribution Agreement. With respect to non operating interests in the Neo Canyon Oil and Gas Properties being contributed to ARI under this Contribution Agreement, ARI shall assume full responsibility and liability for that portion of the foregoing rights, duties, obligations and liabilities for which non-operators are responsible. Neo Canyon remains responsible for all costs, expenses and liabilities incurred by Neo Canyon in connection with the ownership or operation of the Neo Canyon Oil and Gas Properties before the Closing Date, except (i) those for which ARI indemnifies Neo Canyon, or (ii) those which ARI expressly assumes in this Contribution Agreement.

(b) FROM AND AFTER CLOSING, AND EXCEPT AS PROVIDED IN SECTION 8.14(a) , NEO CANYON AND NEO CANYON GP SHALL INDEMNIFY, DEFEND AND HOLD HARMLESS ARI AND ITS OFFICERS, DIRECTORS, AGENTS, EMPLOYEES AND REPRESENTATIVES AGAINST AND FROM NEO CANYON’S SHARE OF ALL LOSSES INCURRED OR SUFFERED BY ARI:

(i) CAUSED BY OR ARISING OUT OF OR RESULTING FROM THE OWNERSHIP, USE OR OPERATION OF THE NEO CANYON OIL AND GAS PROPERTIES BEFORE THE CLOSING DATE;

(ii) ATTRIBUTABLE TO OR ARISING OUT OF THE ACTIONS, SUITS, OR PROCEEDINGS, IF ANY, SET FORTH ON SCHEDULE 5.6 ;

(iii) CAUSED BY OR ARISING OUT OF OR RESULTING FROM NEO CANYON’S BREACH OF ANY OF ITS COVENANTS OR AGREEMENTS THAT SPECIFICALLY SURVIVES CLOSING AS SET FORTH IN SECTION 11.2 OF THIS CONTRIBUTION AGREEMENT.

(c) “Losses,” for purposes of this Article VIII shall mean the amount of any actual liability, loss, cost, expense, claim, award or judgment incurred or suffered by any Indemnified Party (as defined in Section 8.15 ) arising out of or resulting from the indemnified matter, including reasonable fees and expenses of attorneys, consultants, accountants or other agents and experts reasonably incident to matters indemnified against, and the costs of investigation and/or monitoring of such matters, and the costs of enforcement of the indemnity; provided, however, that ARI, Neo Canyon and Neo Canyon GP shall not be entitled to indemnification under this Section 8.14 for, and “Losses” shall not include, (i) loss of profits or other consequential damages suffered by the party claiming indemnification, or (ii) any special

or punitive damages (other than indirect, consequential, special or punitive damages suffered by third Persons and payable by an Indemnified Person).

(d) The indemnity of each party provided in this Article VIII shall be for the benefit of and extend to such party’s present and former Affiliates, and its and their respective directors, officers, employees, and agents. Any claim for indemnity under this Article VIII by any such Affiliate, director, officer, employee, or agent must be brought and administered by the applicable party to this Contribution Agreement. No Indemnified Party other than Neo Canyon, Neo Canyon GP and ARI shall have any rights against Neo Canyon or Neo Canyon GP, on the one hand, and ARI, on the other hand, under the terms of this Article VIII except as may be exercised on its behalf by ARI or Neo Canyon GP, as applicable, pursuant to this Section 8.14(d) . Neo Canyon and ARI may elect to exercise or not exercise indemnification rights under this Section 8.14 on behalf of the other Indemnified Parties affiliated with it in its sole discretion and shall have no liability to any such other Indemnified Party for any action or inaction under this Section 8.14 . For purposes of this Article VIII , but not for any other purpose, each of the AOG Stockholders, Lubar and Yorktown VII shall be considered Affiliates of ARI.

8.15 Indemnification Procedures .

(a) If any third party asserts any claim against a party to this Contribution Agreement which, if successful, would entitle the party to indemnification under this Article VIII (the “ Indemnified Party ”), it shall give notice of such claim to the party from whom it intends to seek indemnification (the “ Indemnifying Party ”) and the Indemnifying Party shall have the right to assume the defense and, subject to Section 8.15(b) , settlement of such claim at its expense by representatives of its own choosing acceptable to the Indemnified Party (which acceptance shall not be unreasonably withheld). The failure of the Indemnified Party to notify the Indemnifying Party of such claim shall not relieve the Indemnifying Party of any liability that the Indemnifying Party may have with respect to such claim, except to the extent that the defense is materially prejudiced by such failure. The Indemnified Party shall have the right to participate in the defense of such claim at its expense (which expense shall not be deemed to be a Loss), in which case the Indemnifying Party shall cooperate in providing information to and consulting with the Indemnified Party about the claim. If the Indemnifying Party fails or does not assume the defense of any such claim within fifteen (15) days after written notice of such claim has been given by the Indemnified Party to the Indemnifying Party, the Indemnified Party may defend against or, subject to Section 8.15(b) , settle such claim with counsel of its own choosing at the expense (to the extent reasonable under the circumstances) of the Indemnifying Party.

(b) If the Indemnifying Party does not assume the defense of a claim involving the asserted liability of the Indemnified Party under this Article VIII , no settlement of such claim shall be made by the Indemnified Party without the prior written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. If the Indemnifying Party assumes the defense of such a claim, (i) no settlement thereof may be effected by the Indemnifying Party without the Indemnified Party’s consent unless (A) there is no finding or admission of any violation of Law or any violation of the rights of any Person and no effect on any other claim that may be made against the Indemnified Party, (B) the sole relief provided is monetary damages that have been paid in full by the Indemnifying Party, and (C) the settlement includes, as an unconditional term thereof, the giving by the claimant or the plaintiff

to the Indemnified Party of a release in form and substance reasonably satisfactory to the Indemnified Party, from all liability in respect of such claim, and (ii) the Indemnified Party shall have no liability with respect to any compromise or settlement thereof effected without its consent.

8.16 Limits on Indemnification . Notwithstanding anything to the contrary contained in this Contribution Agreement:

(a) Neo Canyon and Neo Canyon GP shall not have any obligation to provide indemnification for Losses with respect to any specific occurrence, event or circumstance giving rise to a right to be indemnified pursuant to Section 8.14 unless the amount of the claim giving rise to the right to be indemnified with respect to such specific occurrence, event or circumstance exceeds $250,000 (the “ Basket Amount ”).

(b) ARI shall not have any obligation to provide indemnification for Losses with respect to any specific occurrence, event or circumstance giving rise to a right to be indemnified pursuant to Section 8.14 unless the amount of the claim giving rise to the right to be indemnified with respect to such specific occurrence, event or circumstance exceeds the Basket Amount.

8.17 Further Assurances . The parties hereto agree to execute and deliver, or cause to be executed and delivered, such further instruments or documents or take such other action as may be reasonably necessary or convenient to carry out the transactions contemplated hereby.

8.18 Over-allotment Option. If the underwriters exercise the over-allotment option to purchase additional shares of ARI Common Stock in the ARI Initial Public Offering (the “ Over-allotment Option ”), Neo Canyon shall be entitled to sell in a registered secondary offering in connection with the Over-allotment Option the maximum number shares of ARI Common Stock owned by Neo Canyon which would allow the transactions described in Section 8.9 to qualify under Section 351 of the Code (as determined by Neo Canyon in its reasonable discretion). ARI shall apply a portion of the net proceeds received by it from the Over-allotment Option to purchase from Neo Canyon (at a price per share equal to the initial public offering price per share of ARI Common Stock less the underwriting discount) that number of its shares of ARI Common Stock equal to the quotient of (i) a proportionate dollar amount of the gross proceeds received from the Over-allotment Option based on the ratio that the aggregate purchase price paid to Neo Canyon by ARI pursuant to Section 9.2(e) bears to the aggregate gross proceeds realized by ARI and Neo Canyon in the ARI Initial Public Offering (excluding any proceeds realized in the Over-allotment Option), divided by (ii) the initial public offering price per share of ARI Common Stock.

ARTICLE IX.

CONDITIONS

9.1 Conditions to Obligations of Each Party. Notwithstanding any other provision of this Contribution Agreement, the respective obligations of each party to effect the transactions

contemplated by this Contribution Agreement shall be subject to the fulfillment at or prior to the Closing Date of the following conditions:

(a) the waiting period (and any extension thereof) applicable to the consummation of the transactions contemplated herein under the HSR Act shall have expired or been terminated;

(b) no Order shall have been entered and remained in effect in any action or proceeding before any federal, foreign, state or provincial court or Governmental Authority or other federal, foreign, state or provincial regulatory or administrative agency or commission that would prevent or make illegal the consummation of the transactions contemplated herein;

(c) the ARI Registration Statement shall be effective on the Closing Date and all post-effective amendments filed shall have been declared effective or shall have been withdrawn, and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the parties, threatened by the Commission;

(d) ARI and the underwriters named in the ARI Registration Statement shall have executed an underwriting agreement (the “ Underwriting Agreement ”) for a firm commitment underwriting as described in the ARI Registration Statement; and

(e) all other approvals of Governmental Authorities and of non-governmental persons or entities shall have been obtained (i) the granting of which is necessary for the consummation of the transactions contemplated herein and (ii) the non-receipt of which will have an ARI Material Adverse Effect.

9.2 Conditions to Obligations of Neo Canyon . Notwithstanding any other provision of this Contribution Agreement, the obligations of Neo Canyon to effect the transactions contemplated by this Contribution Agreement shall be subject to the fulfillment at or prior to the Closing Date of the following conditions:

(a) the conditions set forth in Section 9.1;

(b) the representations and warranties of AOG, each of the AOG Stockholders, Lubar and Yorktown VII contained in this Contribution Agreement shall have been true and correct as of the Closing Date (or, if given as of a specific date, at and as of such date), except for such failures to be true which (i) have been cured prior to the Closing Date or (ii) do not, in the aggregate, constitute an ARI Material Adverse Effect;

(c) the contributions of the AOG Stockholders, Lubar and Yorktown VII pursuant to Article II and covenants of each of the parties hereto (other than Neo Canyon) to be complied with or performed on or before the Closing Date pursuant to the terms hereof shall have been duly complied with or performed, except for such failures to comply or perform which do not, in the aggregate, constitute an ARI Material Adverse Effect;

(d) (d) the ARI Registration Statement shall have included for sale in a registered secondary offering by Neo Canyon in connection with the ARI Initial Public Offering

the maximum number shares of ARI Common Stock owned by Neo Canyon which would allow the transactions described in Section 8.9 to qualify under Section 351 of the Code (as determined by Neo Canyon in its reasonable discretion) (the “ 351 Limit Shares ”), provided, however, if the managing underwriter or underwriters advise ARI in writing that, in its view, the total amount of Included Shares proposed to be sold in such registered secondary offering may adversely affect the success of the ARI Initial Public Offering or prevent ARI from offering a sufficient number of shares in the ARI Initial Public Offering to repay its then outstanding indebtedness under its Credit Facility, then the amount of Included Shares to be offered by Neo Canyon shall be reduced to the extent necessary to reduce the total amount of securities to be included in the ARI Initial Public Offering to the amount recommended by such managing underwriter or underwriters;

(e) (e) a portion of the net proceeds from the ARI Initial Public Offering (excluding any proceeds from the Over-allotment Option) shall be applied to purchase from Neo Canyon (at a price per share equal to the initial public offering price per share of ARI Common Stock less the underwriting discount) that number of additional shares of ARI Common Stock equal to the quotient of (A) the difference of (i) $60,000,000 minus (ii) the underwriting discount attributable to $60,000,000 in gross proceeds from the ARI Initial Public Offering minus (iii) the aggregate gross proceeds realized by Neo Canyon from its sale of the 351 Limit Shares, divided by , (B) the initial public offering price per share of ARI Common Stock;

(f) assignment agreements and stock powers in form and substance reasonably acceptable to ARI evidencing the transfers of the AOG Common Stock, the Lubar Note and the Yorktown Note contemplated by Article II shall have been executed and delivered by each of the AOG Stockholders, Lubar and Yorktown VII, as applicable;

(g) the Registration Rights Agreement duly executed by all parties thereto, other than Neo Canyon;

(h) the New ARI Charter shall have been approved by the ARI Stockholders and filed with the Secretary of State of the State of Delaware; and

(i) the New ARI Bylaws shall have been approved by the ARI Board.

9.3 Conditions to Obligations of ARI. Notwithstanding any other provision of this Contribution Agreement, the obligations of ARI to effect the transactions contemplated by this Contribution Agreement shall be subject to the fulfillment at or prior to the Closing Date of the following conditions:

(a) the conditions set forth in Section 9.1;

(b) the representations and warranties of AOG, Neo Canyon, each of the AOG Stockholders, Lubar and Yorktown VII contained in this Contribution Agreement shall have been true and correct as of the Closing Date (or, if given as of a specific date, at and as of such date), except for such failures to be true which (i) have been cured prior to the Closing Date or (ii) do not, in the aggregate, constitute an ARI Material Adverse Effect;

(c) the contributions of the AOG Stockholders, Neo Canyon, Lubar and Yorktown VII pursuant to Article II and covenants of each of the parties hereto (other than ARI) to be complied with or performed on or before the Closing Date pursuant to the terms hereof shall have been duly complied with or performed, except for such failures to comply or perform which do not, in the aggregate, constitute an ARI Material Adverse Effect;

(d) assignment agreements and stock powers in form and substance reasonably acceptable to ARI evidencing the transfers of the AOG Common Stock, the Neo Canyon Oil and Gas Properties, the Lubar Note and the Yorktown Note contemplated by Article II shall have been executed and delivered by each of the AOG Stockholders, Neo Canyon, Lubar and Yorktown VII, as applicable;

(e) the Registration Rights Agreement duly executed by all parties thereto, other than ARI;

(f) the New ARI Charter shall have been approved by the ARI Stockholders and filed with the Secretary of State of the State of Delaware;

(g) the New ARI Bylaws shall have been approved by the ARI Board; .

(h) the Conveyance in sufficient duplicate originals to allow recording in all appropriate jurisdictions and offices, duly executed and delivered by Neo Canyon; and

(i) Letters-in-lieu of transfer orders covering the Neo Canyon Oil and Gas Properties, duly executed and delivered by Neo Canyon.

9.4 Conditions to Obligations of AOG. Notwithstanding any other provision of this Contribution Agreement, the obligations of AOG to effect the transactions contemplated by this Contribution Agreement shall be subject to the fulfillment at or prior to the Closing Date of the following conditions:

(a) the conditions set forth in Section 9.1 ;

(b) the representations and warranties of Neo Canyon and ARI contained in this Contribution Agreement shall have been true and correct as of the Closing Date (or, if given as of a specific date, at and as of such date), except for such failures to be true which (i) have been cured prior to the Closing Date or (ii) do not, in the aggregate, constitute an ARI Material Adverse Effect;

(c) the contributions of the Neo Canyon pursuant to Article II and covenants of each of the parties hereto (other than ARI) to be complied with or performed on or before the Closing Date pursuant to the terms hereof shall have been duly complied with or performed, except for such failures to comply or perform which do not, in the aggregate, constitute an ARI Material Adverse Effect;

(d) assignment agreements in form and substance reasonably acceptable to ARI evidencing the transfers of the Neo Canyon Oil and Gas Properties contemplated by Article II shall have been executed and delivered by New Canyon;

(e) the Conveyance in sufficient duplicate originals to allow recording in all appropriate jurisdictions and offices, duly executed and delivered by Neo Canyon; and

(f) Letters-in-lieu of transfer orders covering the Neo Canyon Oil and Gas Properties, duly executed and delivered by Neo Canyon.

9.5 Conditions to Obligations of each of the AOG Stockholders, Lubar and Yorktown VII. Notwithstanding any other provision of this Contribution Agreement, the obligations of each of the AOG Stockholders, Lubar and Yorktown VII to effect the transactions contemplated by this Contribution Agreement shall be subject to the fulfillment at or prior to the Closing Date of the following conditions:

(a) the conditions set forth in Section 9.1 ;

(c) the contributions of Neo Canyon pursuant to Article II and covenants of each of the parties hereto (other than the AOG Stockholders, Lubar and Yorktown VII) to be complied with or performed on or before the Closing Date pursuant to the terms hereof shall have been duly complied with or performed, except for such failures to comply or perform which do not, in the aggregate, constitute an ARI Material Adverse Effect;

(d) assignment agreements and stock powers in form and substance reasonably acceptable to ARI evidencing the transfers of the Neo Canyon Oil and Gas Properties contemplated by Article II shall have been executed and delivered by Neo Canyon;

(e) the Registration Rights Agreement duly executed by all parties thereto, other than the AOG Stockholders, Lubar and Yorktown VII;

(f) the New ARI Charter shall have been approved by the ARI Stockholders and filed with the Secretary of State of the State of Delaware;

(g) the New ARI Bylaws shall have been approved by the ARI Board; .

(h) the Conveyance in sufficient duplicate originals to allow recording in all appropriate jurisdictions and offices, duly executed and delivered by Neo Canyon; and

(i) Letters-in-lieu of transfer orders covering the Neo Canyon Oil and Gas Properties, duly executed and delivered by Neo Canyon.

ARTICLE X.

TERMINATION

10.1 Termination . This Contribution Agreement may be terminated and the transactions contemplated herein may be abandoned at any time prior to the Effective Time:

(a) by any party hereto if the Effective Time shall not have occurred on or before March 31, 2008 (unless the Effective Time has not occurred as the result of a breach of the terms hereof by the party desiring to exercise the termination right, which date may be extended by mutual agreement of the parties hereto);

(b) by any party hereto if a final unappealable Order to restrain, enjoin or otherwise prevent, or awarding substantial damages in connection with, consummation of this Contribution Agreement or the transactions contemplated in connection herewith shall have been entered;

(c) with the written consent of (i) ARI, (ii) each of the AOG Stockholders, (iii) Neo Canyon, (iv) Lubar and (v) Yorktown VII;

(d) by Neo Canyon, if ARI or AOG consummates a financing transaction or an acquisition that reduces Neo Canyon’s pro forma ownership percentage in ARI (after giving effect to Sections 2.1 and 2.2 , but excluding any reduction resulting from the ARI Initial Public Offering and the issuance of shares pursuant to Sections 2.3 and 2.4 ) by 17.5% or more;

(e) by ARI, if ARI receives an Acquisition Proposal that the ARI Board determines in good faith is reasonably likely to be consummated and is in the best interests of ARI and its stockholders and necessary in order for the ARI Board to discharge its fiduciary duties to ARI’s stockholders under applicable Law; provided, however, that, prior to any such termination, ARI shall use its reasonable best efforts to cause the Neo Canyon Oil and Gas Properties to be included in such Acquisition Proposal; or

(f) by AOG, if AOG receives an Acquisition Proposal that the AOG Board determines in good faith is reasonably likely to be consummated and is in the best interests of AOG and its stockholders and necessary in order for the AOG Board to discharge its fiduciary duties to AOG’s stockholders under applicable Law.

10.2 Effect of Termination . In the event of any termination of this Contribution Agreement pursuant to Section 10.1 , the parties hereto shall have no obligation or liability to any other party hereto except the provisions of this Section 10.2 and Sections 10.3 , 11.5 , 11.6 , 11.8 , 11.9 , 11.10 , and 11.12 hereof shall survive any such termination and, except as provided in this Section 10.2 , all documents executed in connection with this Contribution Agreement shall be null and void.

10.3 Fees and Expenses . Each party shall bear their own costs and expenses incurred by it hereto in connection with this Contribution Agreement and the transactions contemplated hereby.

ARTICLE XI.

MISCELLANEOUS

11.1 Waiver And Amendment . Any provision of this Contribution Agreement may be waived at any time by the party that is entitled to the benefits thereof. This Contribution Agreement may not be amended or supplemented at any time, except by an instrument in writing signed on behalf of each party hereto.

11.2 Nonsurvival of Representations and Warranties . No representation and warranty made in this Contribution Agreement shall survive the Effective Time. This Section 11.2 shall not limit the term of any covenant or agreement which by its terms contemplates performance after the Closing Date.

11.3 Assignment. This Contribution Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors, heirs, devisees and assigns. Except as set forth in this Contribution Agreement, this Contribution Agreement shall not be assignable until after the Closing Date (except by inheritance or devise) by the parties hereto, except with the prior written consent of the other parties.

11.4 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered if delivered in person, by cable, telegram, telex, or telecopy and shall be deemed to have been duly given three (3) Business Days after deposit with a United States post office if delivered by registered or certified mail (postage prepaid, return receipt requested) to the respective parties as follows:

If to ARI, AOG, the AOG Stockholders or Yorktown VII:

Approach Resources Inc.
6300 Ridglea Place, Suite 1107
Fort Worth, Texas 76116
Fax: (817) 989-9001
Attn: J. Ross Craft

with a copy to:

Thompson & Knight LLP
1700 Pacific Avenue, Suite 3300
Dallas, TX 75201
Fax: (214) 969-1751
Attn: Jeffrey A. Zlotky, Esq.

if to Neo Canyon or Neo Canyon GP:

Neo Canyon Exploration, L.P.
325 North Saint Paul, Suite 4300
Dallas, Texas 75201
Fax: (214) 969-7433
Attn: James Cleo Thompson, Jr.

with a copy to:

Carrington, Coleman, Sloman & Blumenthal, L.L.P.
901 Main Street, Suite 5500
Dallas Texas, 75202
Fax: (214) 758-3732
Attn: David G. Drumm, Esq.

If to Lubar:

Lubar Equity Fund, LLC
700 N. Water Street, Suite 1200
Milwaukee, WI 53202
Fax: (414) 291-9061
Attn: David Kuehl

or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall only be effective upon receipt.

11.5 Governing Law . This Contribution Agreement shall be governed by and construed in accordance with the substantive law of the State of Delaware without giving effect to the principles of conflicts of law thereof.

11.6 Severability . If any term or other provisions of this Contribution Agreement is invalid, illegal or incapable of being enforced by any rule of Law or public policy, all other conditions and provisions of this Contribution Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner material to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Contribution Agreement so as to effect the original intent of the parties as closely as possible.

11.7 Counterparts . This Contribution Agreement may be executed in counterparts, each of which shall be an original document, but all of which together shall constitute one and the same agreement.

11.8 Headings. The section headings herein are for convenience only and are not intended to be part of or to affect the meaning or interpretation of the Contribution Agreement.

11.9 Enforcement Of The Contribution Agreement . The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Contribution Agreement were not performed in accordance with their specific terms or otherwise breached. It is accordingly agreed that the parties hereto shall be entitled to any injunction or injunctions to prevent breaches of this Contribution Agreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedies to which they are entitled at law or in equity. In addition, each of the parties hereto consents to submit itself to the personal jurisdiction of any federal or state court sitting in the State of Delaware in the event any dispute arises out of this Contribution Agreement and agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court.

11.10 Entire Agreement; Third Party Beneficiaries . This Contribution Agreement, including the documents and information supplied in writing, and instruments referred to herein, constitute the entire agreement and supersedes all other prior agreements, and understandings, both oral and written, among the parties or any of them, with respect to the subject matter hereof. This Contribution Agreement shall be binding upon and inure solely to the benefit of the parties hereto, and nothing in this Contribution Agreement, including the documents and information supplied in writing, and instruments referred to herein, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Contribution Agreement.

11.11 Certain Assignments . Each of the parties hereto acknowledge and agree that each AOG Stockholder, Lubar and Yorktown VII may transfer and assign their respective shares, or their right to receive such shares, of ARI Common Stock to be received pursuant to Section 2.5 to an Affiliate of such AOG Stockholder, Lubar and Yorktown VII, respectively; provided, however, that each transferee pursuant to this Section 11.11 shall in connection with such transfer agree to be bound by, and shall become a party to, this Contribution Agreement.

11.12 Representation . The parties hereto agree that in connection with the negotiation and execution of this Contribution Agreement, Thompson & Knight LLP has represented ARI, AOG, the AOG Stockholders and Yorktown VII. Each of Neo Canyon, Neo Canyon GP and Lubar hereby acknowledges that it has been advised to consult with its own counsel regarding legal matters concerning this Contribution Agreement and has been afforded the opportunity to consult with counsel that such party deems advisable in connection with the negotiation and execution of this Contribution Agreement.

11.13 Joinder . Neo Canyon GP is joining in this Contribution Agreement for the purpose of making specified representations and warranties covenants and conditions as set forth herein, including those set forth in Articles V, VIII, IX and XI .

[Remainder of page intentionally left blank]

[Signature pages follow]

IN WITNESS WHEREOF, the parties to this Contribution Agreement have caused it to be duly executed as of the date first above written.


		ARI:

		APPROACH RESOURCES INC.

		By: Name:		/s/ J. Ross Craft J. Ross Craft
		Title:		President and Chief Executive Officer

		AOG:

		APPROACH OIL & GAS INC.

		By: Name:		/s/ J. Ross Craft J. Ross Craft
		Title:		President and Chief Executive Officer

		NEO CANYON:

		NEO CANYON EXPLORATION, L.P.

		By: J. Cleo Thompson Petroleum Management,
				L.L.C., its general partner

		By: Name:		/s/ James Cleo Thompson, Jr. James Cleo Thompson, Jr.
		Title:		Member-Manager

		NEO CANYON GP:

		J. CLEO THOMPSON PETROLEUM MANAGEMENT, L.L.C.

		By: Name:		/s/ James Cleo Thompson, Jr. James Cleo Thompson, Jr.
		Title:		Member-Manager


		AOG STOCKHOLDERS:

		YORKTOWN ENERGY PARTNERS V, L.P.

		By: Yorktown V Company LLC, its general partner

		By: Name:		/s/ W. Howard Keenan, Jr. W. Howard Keenan, Jr.
		Title:		Managing Member

		YORKTOWN ENERGY PARTNERS VI, L.P.

		By: Yorktown VI Company LP, its general partner

		By: Yorktown VI Associates LLC, its general partner

		By: Name:		/s/ W. Howard Keenan, Jr. W. Howard Keenan, Jr.
		Title:		Managing Member

		LUBAR:

		LUBAR EQUITY FUND, LLC

		By: Lubar & Co., Incorporated, Manager

		By: Name:		/s/ David Lubar David Lubar
		Title:		President

		YORKTOWN VII:

		YORKTOWN ENERGY PARTNERS VII, L.P.

		By: Yorktown VII Company LP, its general partner

		By: Yorktown VII Associates LLC, its general partner

		By: Name:		/s/ W. Howard Keenan, Jr. W. Howard Keenan, Jr.
		Title:		Managing Member

Exhibit A

AOG OIL AND GAS PROPERTIES — LEASES AND WELLS

Exhibit A-1

Exhibit B

ARI OIL AND GAS PROPERTIES — LEASES AND WELLS

Exhibit B-1

Exhibit C

NEO CANYON OIL AND GAS PROPERTIES — LEASES AND WELLS

Exhibit C-1

Exhibit D

FORM OF CONVEYANCE

Exhibit D-1

Exhibit E

REGISTRATION RIGHTS AGREEMENT

Exhibit E-1

Exhibit 10.3

EMPLOYMENT AGREEMENT

This Employment Agreement (the “Agreement”) is entered into as of January 1, 2003 (the “Effective Date”), by and between APPROACH RESOURCES INC., a Delaware corporation (the “Company”), and J. ROSS CRAFT, an individual residing in the State of Texas (“Employee”).

RECITALS

WHEREAS, the Company desires to employ Employee as its President pursuant to the terms of this Agreement;

WHEREAS, Employee desires to be employed by the Company as its President pursuant to the terms of this Agreement;

WHEREAS, both the Company and Employee have read and understood the terms of this Agreement, and have been afforded a reasonable opportunity to review this Agreement with their respective legal counsel;

WHEREAS, Employee acknowledges that in the course of his employment by the Company and performance of services on behalf of the Company and its subsidiaries, if any (collectively, the “Related Parties”), he will become privy to various business opportunities of the Related Parties;

WHEREAS, it is a condition to (i) the sale of the Company’s common stock to Employee occurring on or about the Effective Date, (ii) the grant to Employee of options to acquire common stock of the Company occurring on or about the Effective Date, and (iii) the continuing employment of Employee by the Related Parties, that Employee enter into this Agreement; and

WHEREAS, in connection with the sale on even date herewith to Employee of shares of the Company’s common stock, Employee is simultaneously purchasing 19,950 shares of the Company’s common stock in consideration of a promissory note payable to the Company (and committing to purchase an additional 28,500 shares of the Company’s common stock) (collectively, the “Note Shares”);

NOW, THEREFORE, in consideration of the mutual promises and covenants contained in this Agreement, the parties agree as follows:

AGREEMENT

1.		Employment . The Company will employ Employee as its President, subject to the terms of this Agreement. Employee hereby accepts employment as the Company’s President, subject to the terms of this Agreement.

2.		Duties . Employee will perform in the capacity described in paragraph 1 and shall have such duties, responsibilities, and authorities as may be reasonably assigned by the Company’s Board of Directors (the “Board”), in its sole discretion. Employee will devote his full time, best efforts, abilities, knowledge, and experience to the Company’s business and affairs as necessary to faithfully perform his duties, responsibilities, and authorities under this Agreement.

3.		Place of Performance . In connection with his employment under this Agreement, Employee shall be based at the Company’s offices maintained in Fort Worth, Texas. The Company shall provide without cost to Employee such office space, secretarial, and administrative services, equipment, furniture, and furnishings as are suitable and appropriate to Employee’s titles and duties.

4.		Term of Agreement . The term of this Agreement shall be defined and determined as follows:

	a.		Initial Term . This Agreement shall continue in full force and effect for two years (the “Initial Term”), commencing on the Effective Date and expiring on the second anniversary of the Effective Date (the “Expiration Date”), unless terminated before the Expiration Date in accordance with paragraph 6.

	b.		Renewal Term . Notwithstanding paragraph 4(a), the term of this Agreement will automatically be extended for an additional one year term (a “Renewal Term”) on the Expiration Date and on each successive anniversary of the Expiration Date, unless and until the Agreement terminated in accordance with paragraph 6.

Compensation and Employment Benefits . The Company agrees to pay Employee the following compensation and employment benefits during his employment under this Agreement:

	a.		Base Salary . From the Effective Date until changed as provided in this paragraph, the Company agrees to pay Employee an annual base salary of $175,000.00 (the “Base Salary”), pro-rated for any partial period of employment. The Base Salary will be payable semi-monthly in accordance with the Company’s ordinary payroll policies and procedures for employee compensation. The Company agrees that during Employee’s employment under this Agreement, Employee’s Base Salary will be subject to an annual review and adjustment by the Board; provided, however, that once established at an increased specified rate, at no time thereafter during Employee’s employment under this Agreement will the Base Salary be reduced below the increased amount set forth in this paragraph.

	b.		Bonus .

	(i)		In addition to the Base Salary, Employee is eligible to participate in an annual employee bonus pool (the “Pool”) to be determined annually, in its discretion, by the Board or a committee of two members of the Board designated as the Compensation Committee (the “Compensation Committee”), initially comprised of Bryan H. Lawrence and J. Ross Craft.

	(ii)		If the Board or the Compensation Committee gives Employee the option,

Employment Agreement — Page 2

			Employee may choose to receive his bonus in cash or shares of the Company’s common stock (with the valuation thereof set by the Board or the Compensation Committee), or any combination thereof.

	(iii)		The Board, or the Compensation Committee, as the case may be, in its discretion, will determine Employee’s participation in the Pool based on the relative contribution of Employee during the year for which the Pool is determined to the profitability and welfare of the Company.

Employment Benefits . The Company agrees to provide Employee with the employment benefits that the Company ordinarily provides to its employees. Such employment benefits shall be governed by the applicable plan documents, insurance policies, and/or employment policies, and may be modified, suspended, or revoked in accordance with the terms of the applicable documents or policies. In addition to those benefits, the Company agrees to provide or cause to provide the following benefits upon satisfaction by Employee of the any eligibility requirements, subject to the following limitations:

	(1)		Sick-Leave Benefits and Disability Insurance . To the extent made available to other employees of the Company, and unless this Agreement is terminated pursuant to paragraph 6, Employee shall be paid sick leave benefits at his then prevailing Base Salary rate during his absence due to illness or other incapacity.

	(2)		Vacations . The Company will provide Employee with a minimum of 20 business days paid vacation per calendar year during his employment under this Agreement. Such vacation must be utilized in the calendar year in which it is granted or else it will be forfeited, unless the Company has adopted a plan pursuant to which some or all of such days of paid vacation may be rolled over to the next succeeding year. Employee agrees that the time and duration of any vacation shall be subject to advance notice to the Board. The Company also agrees to provide Employee with all paid holidays ordinarily given by the Company to its employees. The Company also agrees to pay Employee for any accrued unused vacation should this Agreement terminate pursuant to paragraph 6.

Reimbursement of Business Expenses . Employee is authorized to incur ordinary, necessary, and reasonable business expenses in connection with the performance of his duties, responsibilities, and authorities under this Agreement and for the promotion of the Company’s business and activities during this Agreement, including but not limited to expenses for necessary travel and entertainment and other items of expenses required in the normal and routine course of Employee’s employment under this Agreement. The Company will promptly reimburse Employee from time to time for all such business expenses incurred pursuant to and in conformity with this paragraph and the policies and practices of the Company then in effect relative to the

Employment Agreement — Page 3

reimbursement of business expenses.

Termination of Agreement . This Agreement may be terminated as follows:

	a.		Death . This Agreement shall terminate immediately in the event of Employee’s death; provided, however, that Employee’s estate shall be paid the Base Salary that Employee earned through the date of his death in the time and manner in which Employee would have been paid such compensation.

	b.		Disability . This Agreement shall terminate immediately in the event that Employee becomes “Disabled” as defined below. For purposes of this Agreement, Employee shall be deemed to have become “Disabled” when (i) he receives disability benefits under either Social Security or the Company’s disability plan, if any, (ii) the Board, upon the written report of a qualified physician designated by the Board or its insurers, shall have determined (after a complete physical examination of Employee at any time after he has been absent from the Company for a period of at least 120 calendar days since the Effective Date) that Employee has become physically and/or mentally incapable of performing his essential job functions with or without reasonable accommodation as required by law, or (iii) Employee is otherwise unable for a continuous period of 180 calendar days to perform his essential job functions with or without reasonable accommodation as required by law due to injury, illness, or other incapacity (physical or mental).

	c.		With Cause . The Company shall be entitled to terminate this Agreement immediately, without any further liability to Employee, except as provided otherwise in this Agreement, for any “Cause” as defined below.

(i)

For purposes of this Agreement, “Cause” shall be defined as follows:

	(A)		the willful and continued failure by Employee substantially to perform his duties hereunder (other than any such failure resulting from Employee becoming Disabled);

	(B)		the willful engaging by Employee in misconduct that is materially injurious to the Company;

	(C)		any misconduct in the course and scope of Employee’s employment under this Agreement, including but not limited to dishonesty, disloyalty, disorderly conduct, insubordination, harassment of other employees or third parties, abuse of alcohol or controlled substances, or other violations of the Company’s rules; or

	(D)		any material violation of this Agreement or the Voting and Stockholders’ Agreement dated even date herewith among the Company and its stockholders.

Employment Agreement — Page 4

For purposes of this paragraph, no act, or failure to act, on Employee’s part shall be considered “willful” unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Company.

(ii)

If the Company believes Cause exists for terminating this Agreement pursuant to this paragraph, it shall give Employee written notice of the acts or omissions constituting Cause, and no termination of this Agreement shall be effective unless and until Employee fails to cure such acts or omissions within 10 days after receiving such notice.

	d.		Without Cause . The Company shall be entitled to terminate this Agreement for any reason other than death, disability, or Cause, at any time during Employee’s employment by providing 90 days written notice to Employee that the Company is terminating the Agreement without Cause as defined in this paragraph (a termination “without Cause”).

	e.		Good Reason . At his option, Employee may terminate his employment hereunder (a termination for “Good Reason”) in the event of:

	(i)		a material change in the nature or scope of Employee’s authorities, powers, functions, duties, or responsibilities, including without limitation, a material change in the business or operations of the Company (it being recognized that the purchase or sale of oil and gas properties by the Company, regardless of the location of such properties, does not constitute a material change for this purpose);

	(ii)		any demotion of Employee to a non-officer position or an officer position junior to the position indicated in paragraph 1 hereof or a removal from or any failure to elect or reelect Employee to the Board, except in connection with termination of Employee’s employment as permitted in the foregoing provisions of this paragraph 6; or

	(iii)		any material breach of this Agreement by the Company, provided that the Company has failed to cure any such material breach within 10 days of Employee providing notice of such breach to the Board.

Expiration of Term . The Employee’s employment shall terminate upon the expiration of the Initial Term or any successive Renewal Term, provided that the Company notify Employee at least 60 days before the expiration of the Initial Term or any successive Renewal Term of its intention not to extend this Agreement pursuant to paragraph 4(b).

Compensation Upon Termination . Upon termination of Employee’s employment for one of

Employment Agreement — Page 5

the following reasons, whether before or after the consummation of a Change in Control (as defined below), Employee shall be entitled to the following compensation:

	a.		Cause . If Employee’s employment shall be terminated for Cause, the Company shall pay Employee his Base Salary then in effect through the Date of Termination, prorated as provided in paragraph 5(a), and the Company shall have no further obligations to Employee under this Agreement.

	b.		Breach by the Company or for Good Reason . If (i) in breach of this Agreement the Company shall terminate Employee’s employment (it being understood that a purported termination of Employee’s employment by the Company pursuant to any provision of this Agreement that is disputed and finally determined not to have been proper shall be a termination by the Company in breach of this Agreement) or (ii) Employee should terminate his employment for Good Reason, then the Company shall pay or provide Employee, in lieu of any further salary payments to Employee for any remaining portion of the Term of this Agreement following the Date of Termination:

	(A)		on or before the 20th day following the Date of Termination, a lump sum in cash equal to 50% of his Base Salary in effect as of the Date of Termination;

	(B)		on or before the 90th day following the Date of Termination, a lump sum in cash equal to 150% of Employee’s Base Salary in effect as of the Date of Termination;

	(C)		all benefits Employee may be entitled to receive pursuant to any pension or employee benefit plan or other arrangement or life insurance policy maintained by the Company; and

	(D)		for a period of one year following the Date of Termination, a continuation of all benefits then applicable to Employee and his immediate family under any pension or employee benefit plan or other arrangement then maintained by the Company, including without limitation health, dental and life insurance benefits.

Employment Agreement — Page 6

forgiveness of the outstanding indebtedness under any promissory note made to purchase the Note Shares. The acquisition of the Note Shares by the Company shall be at a price no less than the price paid by the Employee for the Note Shares; provided that to the extent such purchase price is below the fair market value of the common stock of the Company at the time of such purchase, Employee shall be responsible for any taxes associated with the Company’s purchase of the Note Shares. Notwithstanding the preceding two sentences, Employee shall have the right to pay off the indebtedness in full under any promissory note made to purchase the Note Shares within 30 days after the notice of termination without Cause.

Change in Control . The parties acknowledge that Employee has entered into this Agreement based on his confidence in the current stockholders of the Company and the support of the Board. Accordingly, if the Company should undergo a “Change in Control” as defined in this paragraph, the parties agree as follows:

	a.		Compensation . If there is a “Change in Control” as defined in this paragraph, then Employee will be deemed to be terminated without Cause.

	b.		Definitions . For purposes of this Agreement, a “Change of Control” shall be deemed to exist in the following circumstances:

	(1)		Change in Control : a Change in Control of the Company shall be deemed to have occurred if members of the Incumbent Board cease for any reason at any time prior to any Public Offering to constitute at least a majority of the Board, except to the extent that the Incumbent Board consents to such change; provided , that the words “upon,” “after,” “at the time of” or any other words of similar import, when used with reference to a Change in Control, shall mean and shall be deemed to include any period of time during which events occur in support or furtherance of or which otherwise directly or indirectly result in a Change in Control. A Change in Control also shall be deemed to have occurred upon the occurrence of any of the following events: (1) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company’s common stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company’s common stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger; or (2) any sales, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company; or (3) the stockholders of the Company approve any plan or proposal for liquidation or dissolution of the Company.

	(2)		Incumbent Board : shall mean all individuals who, as of the Effective Date, constitute the Board of the Company; provided, however, that in the case of

Employment Agreement — Page 7

any member of the Board that is employed by Yorktown Partners LLC or its affiliates, shall include any successor to such person who is also employed by Yorktown Partners LLC.

	(3)		Person : shall include any natural person, group or association of persons, or legal entity of any nature whatsoever.

	(4)		Public Offering : shall mean an offering of the Company’s equity securities with the result that such securities become registered under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

Notwithstanding anything to the contrary in this paragraph 8(b), a transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction.

Other Provisions Relating to Termination .

	a.		Notice of Termination . Any termination of Employee’s employment by the Company or by Employee (other than termination because of Death) shall be communicated by written Notice of Termination to the other party thereto. For purposes of this Agreement, a “Notice of Termination” shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon, and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee’s employment under the provision so indicated.

	b.		Date of Termination . For purposes of this Agreement, “Date of Termination” shall mean (i) if Employee’s employment is terminated by Death, the date of Death; (ii) if Employee’s employment is terminated because of Employee becoming Disabled, then 60 days after Notice of Termination is given (provided that Employee shall not have returned to the performance of his duties on a full-time basis during such 60 day period); (iii) if (a) Employee’s employment is terminated by the Company for Cause or by Employee for Good Reason or (b) Employee’s employment is terminated by Employee, then in each case the date specified in the Notice of Termination; (iv) if this Agreement is not renewed, the last date of the Initial Term or the Renewal Term as the case may be; and (v) if Employee’s employment is terminated for any other reason, the date on which a Notice of Termination is given; provided that if within 30 days after any Notice of Termination is given (other than with respect to a termination without Cause) the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding and final arbitration award, or by a final judgment order or decree of a court of competent jurisdiction (the time for

Employment Agreement — Page 8

appeal therefrom having expired and no appeal having been perfected), as applicable.

	c.		Mitigation . Employee shall not be required to mitigate the amount of any payment provided for in paragraph 7 by seeking other employment or otherwise, nor shall the amount of any payment provided for therein be reduced by any compensation earned by Employee as the result of employment by another employer after the Date of Termination, or otherwise.

	d.		Interest . Until paid, all past due amounts required to be paid by the Company under any provision of this Agreement shall bear interest at 8% per annum compounded daily.

10.

Business Opportunities and Intellectual Property; Personal Investments; Confidentiality; Covenant not to Compete .

	a.		Employee shall promptly disclose to the Company all “Business Opportunities” and “Intellectual Property” (as defined below).

	b.		For purposes hereof “Business Opportunities” shall mean all business ideas, prospects, proposals or other opportunities pertaining to the lease, acquisition, exploration, production, gathering or marketing of hydrocarbons and related products and the exploration potential of geographical areas on which hydrocarbon exploration prospects are located, that are developed by Employee during the period that Employee is employed by any of the Related Parties (the “Employment Term”) or originated by any third party and brought to the attention of Employee during the Employment Term, together with information relating thereto (including, without limitation, geological and seismic data and interpretations thereof, whether in the form of maps, charts, logs, seismographs, calculations, summaries, memoranda, opinions, or other written or charted means).

	c.		For purposes hereof, “Intellectual Property” shall mean all ideas, inventions, discoveries, processes, designs, methods, substances, articles, computer programs, and improvements (including, without limitation, enhancements to, or further interpretation or processing of, information that was in the possession of Employee prior to the date of this Agreement), whether or not patentable or copyrightable, that do not fall within the definition of Business Opportunities, that Employee discovers, conceives, invents, creates, or develops, alone or with others, during the Employment Term, if such discovery, conception, invention, creation, or development (i) occurs in the course of Employee’s employment with the Related Parties or (ii) occurs with the use of any of the Related Parties’ time, materials, or facilities.

11.

Non-Compete Obligations During Employment Term . Employee agrees that during the Employment Term and except as provided below or as otherwise permitted by the Company (acting upon the instruction of the Board):

Employment Agreement — Page 9

	a.		Employee will not, other than through the Related Parties, engage or participate in any manner, whether directly or indirectly through any family member or as an employee, employer, consultant, agent, principal, partner, more than one percent shareholder, officer, director, licensor, lender, lessor, or in any other individual or representative capacity, in any business or activity that is engaged in leasing, acquiring, exploring, developing or producing hydrocarbons and related products; and

	b.		all investments made by Employee (whether in his own name or in the name of any family members or made by Employee’s controlled affiliates), which relate to the lease, acquisition, exploration, development or production of hydrocarbons and related products shall be made solely through the Related Parties; and Employee will not (directly or indirectly through any family members), and will not permit any of his controlled affiliates to: (A) invest or otherwise participate alongside the Related Parties in any Business Opportunities or (B) invest or otherwise participate in any business or activity relating to a Business Opportunity, regardless of whether any of the Related Parties ultimately participates in such business or activity;

provided that this paragraph 11 shall not apply to (x) the existing personal oil and gas investments owned by Employee, his family members and his controlled affiliates as of the date hereof (the “Existing Personal Investments”); (y) future expenditures made by Employee and his family members and his controlled affiliates that are required to maintain, but not increase, their respective current ownership interests in the Existing Personal Investments, excluding however, any expenditure to participate in the acquisition, exploration, or development of any acreage that is not currently included in the Existing Personal Investments as of the date hereof; and (z) any opportunity that is first offered to, and subsequently declined by, the Company (acting through the Board).

12.

Confidentiality Obligations .

Employee hereby acknowledges that all trade secrets and confidential or proprietary information of the Related Parties (collectively referred to herein as “Confidential Information”) constitute valuable, special and unique assets of the Related Parties’ business, and that access to and knowledge of such Confidential Information is essential to the performance of Employee’s duties. Employee agrees that during the Employment Term and during the one-year period following the Date of Termination, Employee will hold the Confidential Information in strict confidence and will not publish, disseminate, or otherwise disclose, directly or indirectly, to any person other than the Related Parties and their respective officers, directors, and employees, any Confidential Information or use any Confidential Information for Employee’s own personal benefit or for the benefit of anyone other than the Related Parties. The Company agrees to provide Confidential Information to Employee in exchange for Employee’s agreement to keep such Confidential Information, and any Confidential Information to which Employee has already become privy, in strict confidence as provided in this Agreement.

Employment Agreement — Page 10

For purposes of this paragraph 12, it is agreed that Confidential Information includes, without limitation, any information heretofore or hereafter acquired, developed, or used by any of the Related Parties relating to Business Opportunities or Intellectual Property or other geological, geophysical, economic, financial, or management aspects of the business, operations, properties, or prospects of the Related Parties whether oral or in written form in a Related Parties’ business records, but shall exclude any information that (i) has become part of common knowledge or understanding in the oil and gas industry or otherwise in the public domain (other than from disclosure by Employee in violation of this Agreement), or (ii) was rightfully in the possession of Employee, as shown by Employee’s records, prior to the date of this Agreement (including Employee’s method of selecting, purchasing, and reworking oil and gas properties, which the Company and Employee may utilize subsequent to the Employment Term (subject to the other limitations contained in this Agreement)); provided, however, that Employee shall provide to the Company copies of all information described in clause (ii); provided further, however, that this paragraph12 shall not be applicable to the extent Employee is required to testify in a judicial or regulatory proceeding pursuant to the order of a judge or administrative law judge after Employee requests that such Confidential Information be preserved.

13.

Obligations After Termination Date .

The purpose of the provisions of paragraph 12 and this paragraph 13 are to protect the Company from unfair loss of goodwill and business advantage and to shield Employee from pressure to use or disclose Confidential Information or to trade on the goodwill belonging to the Company. Accordingly, during the “Post-Termination Non-Compete Term” (as defined below), Employee will not engage or participate in any manner, whether directly or indirectly through any family member or as an employee, employer, consultant, agent, principal, partner, shareholder, officer, director, licensor, lender, lessor, or in any other individual or representative capacity, in any business or activity that is in engaged in leasing, acquiring, exploring, developing or producing hydrocarbons and related products within the boundaries of, or within a three (3) mile radius of the boundaries of, any mineral property interest of any of the Related Parties (including, without limitation, a mineral lease, overriding royalty interest, production payment, net profits interest, mineral fee interest, or option or right to acquire any of the foregoing, or an area of mutual interest as designated pursuant to contractual agreements between the Related Party and any third party) or any other property on which the Related Parties have an option, right, license, or authority to conduct or direct exploratory activities, such as three dimensional seismic acquisition or other seismic, geophysical and geochemical activities (but not including any preliminary geological mapping), as of the Termination Date or as of the end of the six-month period following such Termination Date; provided that, this paragraph 13 shall not preclude Employee from making personal investments in securities of oil and gas companies that are registered on a national stock exchange, if the aggregate amount owned by Employee

Employment Agreement — Page 11

and all family members and affiliates does not exceed one percent (1%) of such company’s outstanding securities.

For purposes hereof, the “Post Termination Non-Compete Term” is:

	(i)		in the event that (A) Employee voluntarily resigns or otherwise terminates his position as an officer or employee of the Related Parties other than on account of a Change of Control, or (B) Employee’s employment or engagement by the Related Parties is terminated for Cause, the one-year period following the Termination Date;

	(ii)		if Employee terminates his employment for Good Reason other than on account of a Change of Control, the sixth month period following the Termination Date;

	(iii)		in the event that Employee’s employment is terminated on account of a Change of Control, there shall not be a Post Termination Non-Compete Term; and

	(iv)		in the event that Employee’s employment is terminated without Cause, the one-year period following the Termination Date.

Employee will not, during the one-year period following the Termination Date, solicit, entice, persuade, or induce, directly or indirectly, any employee (or person who within the preceding ninety (90) days was an employee) of any of the Related Parties or any other person who is under contract with or rendering services to any of the Related Parties, to (i) terminate his employment by, or contractual relationship with, such person, (ii) refrain from extending or renewing the same (upon the same or new terms), (iii) refrain from rendering services to or for such person, (iv) become employed by or to enter into contractual relations with any Persons other than such person, or (v) enter into a relationship with a competitor of any of the Related Parties.

14.		Common Law Duties . Employee acknowledges and agrees that his restrictive covenants in paragraphs 10, 11, 12, and 13 of this Agreement will supplement, rather than supplant, his common law duties of confidentiality and loyalty owed to the Company.

15.		Survival of Covenants; Enforcement of Covenants; and Remedies .

Survival of Covenants . Employee acknowledges and agrees that his covenants in paragraphs 10, 11, 12, and 13 of this Agreement shall survive the termination of this Agreement and shall be construed as agreements independent of any other provision of this Agreement, and the existence of any claim or cause of action of Employee against the Company whether predicated on this Agreement or otherwise shall not constitute a defense to the enforcement by the Company of those covenants.

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	b.		Enforcement of Covenants . Employee acknowledges and agrees that his covenants in paragraphs 10, 11, 12 and 13 of this Agreement are ancillary to the otherwise enforceable agreements to provide Employee with Confidential Information and are supported by independent, valuable consideration. Employee further acknowledges and agrees that the limitations as to time, geographical area, and scope of activity to be restrained by those covenants are reasonable and acceptable to Employee and do not import any greater restraint than is reasonably necessary to protect the Company’s goodwill and other legitimate business interests. Employee further agrees that if, at some later date, a court of competent jurisdiction determines that any of the covenants in paragraphs 10,11, 12, or 13 are unreasonable, any such covenants shall be reformed by the court and enforced to the maximum extent permitted under the law.

	c.		Remedies . In the event of breach or threatened breach by Employee of any of his covenants in paragraphs 10, 11, 12, and 13 of this Agreement, the Company shall be entitled to equitable relief by temporary restraining order, temporary injunction, or permanent injunction or otherwise, in addition to other legal and equitable relief to which it may be entitled, including any and all monetary damages that the Company may incur as a result of said breach, violation, or threatened breach or violation. The Company may pursue any remedy available to it concurrently or consecutively in any order as to any breach, violation, or threatened breach or violation, and the pursuit of one of such remedies at any time will not be deemed an election of remedies or waiver of the right to pursue any other of such remedies as to such breach, violation, or threatened breach or violation, or as to any other breach, violation, or threatened breach or violation.

16.		Successors and Assigns . The parties acknowledge and agree that this Agreement may not be assigned by the Company to any other person or entity without Employee’s written consent; provided, however, that in the event of a Change in Control, the Company shall cause the surviving entity in any such transaction to assume the payment obligations of paragraph 6, to the extent such obligations have not yet been fully performed. The parties further acknowledge and agree that Employee’s duties, responsibilities, authorities, compensation, and benefits are personal to Employee and may not be assigned to any person or entity other than a Related Party without written consent from the Board. In the event of Employee’s death, this Agreement shall be enforceable by Employee’s estate, executors, or legal representatives, but only to the extent that such person may collect any compensation due to Employee under this Agreement, as provided in paragraph 6(a). This Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, legal representatives, successors, and assigns; provided, however, that Employee may not assign or otherwise transfer this Agreement or any of Employee’s rights or obligations under this Agreement without the prior written consent of the Board.

17.		Representations of Employee . Employee hereby represents and warrants that he has not previously assumed any obligations inconsistent with those contained in this Agreement.

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Employee further represents and warrants that he has entered into this Agreement pursuant to his own initiative and that the Company did not induce him to execute this Agreement in contravention of any existing commitments. Employee further acknowledges that the Company has entered into this Agreement in reliance upon the foregoing representations of Employee.

18.

Dispute Resolution . The parties agree to the following dispute resolution terms:

	a.		Definition of “Dispute” . Any controversy, claim, or cause of action, whether based on statute, contract, tort, misrepresentation, or any other legal theory, arising out of or relating to this Agreement (a “Dispute”), shall be resolved solely in accordance with the terms of this paragraph; provided, however, that the term “Dispute” shall not include (i) Employee’s claims for workers’ compensation or unemployment compensation benefits (although any claim asserted under Ch. 451 of the Texas Labor Code shall be considered a “Dispute” subject to dispute resolution under this paragraph), or (ii) the Company’s claims for injunctive and/or other equitable relief for Employee’s breach or threatened breach of his restrictive covenants in paragraphs 10, 11, 12, or 13. The parties acknowledge and agree that, notwithstanding the provisions of this paragraph, nothing in this Agreement shall be construed to require the mediation or arbitration of any claim arising out of or relating to Employee’s covenants in paragraphs 10, 11, 12, or 13. Those covenants shall be enforceable by any court of competent jurisdiction, in accordance with paragraph 26, and shall not be subject to dispute resolution under this paragraph.

	b.		Mediation . If a Dispute cannot be settled by good faith negotiation between the parties, the parties shall submit the Dispute to nonbinding mediation. If complete agreement cannot be reached within 30 calendar days of submission to mediation (“Mediation Period”), any remaining issues will be resolved by binding arbitration in accordance with the provisions of this paragraph. The Federal Arbitration Act, 9 U.S.C. §§ 1-15, not state law, will govern the arbitrability of all Disputes.

	c.		Arbitration . A mutually agreeable arbitrator who is knowledgeable of the Company’s industry or in commercial matters will conduct the arbitration. If the parties cannot select a mutually agreeable arbitrator within 15 days after the expiration of the Mediation Period, the mediator shall be selected according to rules of the American Arbitration Association (“AAA”). The arbitrator’s decision and award will be final and binding and may be entered in any court with jurisdiction. The arbitrator will not have authority to limit, expand, or otherwise modify the terms of this Agreement.

	d.		Rules of Conduct for Mediation and Arbitration . The mediation and, if necessary, the arbitration will be conducted under the then current rules of the alternate dispute resolution (“ADR”) firm selected by the parties, or if the parties are unable to agree on an ADR firm, the parties will conduct the mediation and, if necessary, the arbitration under the then current rules and supervision of the AAA. Each party will bear its own attorneys’ fees associated with the mediation and, if necessary, the

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arbitration. The parties will pay all other costs and expenses of the mediation/arbitration as the rules of the selected ADR firm provide. The parties and their representatives shall hold the existence, content, and result of the mediation and arbitration in confidence.

Limit on Discovery . There shall be no discovery during the mediation process. If arbitration is necessary, no discovery shall be conducted except by agreement of the parties or after approval by the arbitrator, who shall attempt to minimize the burden of discovery.

19.		Waiver of Rights to Jury Trial and Class-Action Participation . Notwithstanding any other provision of this Agreement, Employee agrees to irrevocably waive the right to trial by jury or participate in any class or collective action with respect to any Dispute, controversy, claim, or cause of action arising out of or relating to Employee’s employment with the Company, the termination of Employee’s employment with the Company, or this Agreement (either alleged breach or enforcement).

20.		Attorneys’ Fees and Other Costs . If either party breaches this Agreement, or if a dispute arises between the parties based on or involving this Agreement, the party that enforces its rights under this Agreement against the breaching party, or that prevails in the resolution of such dispute, is entitled to recover from the other party its reasonable attorneys’ fees, court costs, and expenses incurred in enforcing such rights or resolving such dispute. For purposes of this paragraph 20, the finder of fact shall be requested to answer affirmatively as to whether a party “prevailed” in order to recoup attorneys’ fees and other costs pursuant to this paragraph 20.

21.		Entire Agreement . This Agreement constitutes the entire agreement between the parties concerning the Agreement’s subject matter and supersedes all prior agreements and understandings, whether written or oral, between the parties with respect to its subject matter.

22.		Amendment of Agreement . This Agreement may not be modified or amended in any respect except by an instrument in writing signed by the party against whom such modification or amendment is sought to be enforced. No modification or amendment may be enforced against the Company unless such modification or amendment is in writing and signed by the Board.

23.		Waiver . The waiver by either party of a breach of any term of this Agreement shall not operate or be construed as a waiver of a subsequent breach of the same provision by either party or of the breach of any other term or provision of this Agreement.

24.		Severability . If any provision of this Agreement is held to be illegal, invalid, or unenforceable, (a) this Agreement shall be considered divisible, (b) such provision shall be deemed inoperative to the extent it is deemed illegal, invalid, or unenforceable, and (c) in all other respects this Agreement shall remain in full force and effect; provided, however, that if

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any such provision may be made enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law.

25.		Governing Law; Venue . Except as otherwise provided in this Agreement, this Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas. Exclusive venue for purposes of any controversy, claim, or cause of action not covered by paragraph 18, and brought by any party under this Agreement, is in any state or federal court of competent jurisdiction in and for Tarrant County, Texas. Nothing in this Agreement, however, precludes the Company or Employee from seeking to remove a civil action from any state court to federal court.

26.		Notices . All notices under this Agreement shall be in writing and shall be deemed to have been delivered on the date personally delivered or three calendar days after the date deposited in a receptacle maintained by the United States Postal Service for such purpose, postage prepaid, by certified mail, return receipt requested, addressed to the Company at its headquarters or Employee at the address of such person as set forth in the Company’s records. Either party may designate a different address by providing written notice of such new address to the other party.

27.		Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument.

[ signature page to follow ]

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		EMPLOYEE:

		/s/ J. Ross Craft

		Name: J. Ross Craft

		COMPANY:

		APPROACH RESOURCES INC.
		a Delaware Corporation

		By:		/s/ David A. Badley

		Name:		David A. Badley
		Title:		Executive Vice President

Employment Agreement — Page 17

Exhibit 10.4

EMPLOYMENT AGREEMENT

This Employment Agreement (the “Agreement”) is entered into as of January 1, 2003 (the “Effective Date”), by and between APPROACH RESOURCES INC., a Delaware corporation (the “Company”), and STEVEN SMART, an individual residing in the state of Texas (“Employee”).

RECITALS

WHEREAS, the Company desires to employ Employee pursuant to the terms of this Agreement;

WHEREAS, Employee desires to be employed by the Company pursuant to the terms of this Agreement;

WHEREAS, in connection with the sale on even date herewith to Employee of shares of the Company’s common stock, Employee is simultaneously purchasing 3,500 shares of the Company’s common stock in consideration of a promissory note payable to the Company (and committing to purchase an additional 5,000 shares of the Company’s common stock) (collectively, the “Note Shares”);

NOW, THEREFORE, in consideration of the mutual promises and covenants contained in this Agreement, the parties agree as follows:

AGREEMENT

1.		Employment . The Company will employ Employee subject to the terms of this Agreement. Employee hereby accepts employment subject to the terms of this Agreement.

2.		Duties . The Employee shall serve as Controller of the Company. The Employee shall report to the President and Executive Vice President of the Company.

3.		Place of Performance . In connection with his employment under this Agreement, Employee shall be based at the Company’s offices maintained in Fort Worth, Texas. The Company shall provide without cost to Employee such office space, secretarial, and administrative services, equipment, furniture, and furnishings as are suitable and appropriate to Employee’s titles and duties.

4.		Term of Agreement . The term of this Agreement shall be defined and determined as follows:

	a.		Initial Term . This Agreement shall continue in full force and effect for two years (the “Initial Term”), commencing on the Effective Date and expiring on the second anniversary of the Effective Date (the “Expiration Date”), unless terminated before the Expiration Date in accordance with paragraph 6.

	b.		Renewal Term . Notwithstanding paragraph 4(a), the term of this Agreement will automatically be extended for an additional one year term (a “Renewal Term”) on the Expiration Date and on each successive anniversary of the Expiration Date, unless and until the Agreement terminated in accordance with paragraph 6.

Compensation and Employment Benefits . The Company agrees to pay Employee the following compensation and employment benefits during his employment under this Agreement:

	a.		Base Salary . From the Effective Date until changed as provided in this paragraph, the Company agrees to pay Employee an annual base salary of $115,000.00 (the “Base Salary”), pro-rated for any partial period of employment. The Base Salary will be payable semi-monthly in accordance with the Company’s ordinary payroll policies and procedures for employee compensation. The Company agrees that during Employee’s employment under this Agreement, Employee’s Base Salary will be subject to an annual review and adjustment by the Company’s Board of Directors.

	b.		Bonus .

	(i)		In addition to the Base Salary, Employee is eligible to participate in an annual employee bonus pool (the “Pool”) to be determined annually, in its discretion, by the Board or a committee of two members of the Board designated as the Compensation Committee (the “Compensation Committee”), initially comprised of Bryan H. Lawrence and J. Ross Craft.

	(ii)		If the Board or the Compensation Committee gives Employee the option, Employee may choose to receive his bonus in cash or shares of the Company’s common stock (with the valuation thereof set by the Board or the Compensation Committee), or any combination thereof.

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(iii)

The Board, or the Compensation Committee, as the case may be, in its discretion, will determine Employee’s participation in the Pool based on the relative contribution of Employee during the year for which the Pool is determined to the profitability and welfare of the Company.

	(1)		Sick-Leave Benefits and Disability Insurance . To the extent made available to other employees of the Company, and unless this Agreement is terminated pursuant to paragraph 6, Employee shall be paid sick leave benefits at his then prevailing Base Salary rate during his absence due to illness or other incapacity.

	(2)		Vacations . The Company will provide Employee with a minimum of 20 business days paid vacation per calendar year during his employment under this Agreement. Such vacation must be utilized in the calendar year in which it is granted or else it will be forfeited, unless the Company has adopted a plan pursuant to which some or all of such days of paid vacation may be rolled over to the next succeeding year. Employee agrees that the time and duration of any vacation shall be subject to advance notice to the Board. The Company also agrees to provide Employee with all paid holidays ordinarily given by the Company to its employees. The Company also agrees to pay Employee for any accrued unused vacation should this Agreement terminate pursuant to paragraph 6.

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Termination of Agreement . This Agreement may be terminated as follows:

	a.		Death . This Agreement shall terminate immediately in the event of Employee’s death; provided, however, that Employee’s estate shall be paid the Base Salary that Employee earned through the date of his death in the time and manner in which Employee would have been paid such compensation.

	b.		Disability . This Agreement shall terminate immediately in the event that Employee becomes “Disabled” as defined below. For purposes of this Agreement, Employee shall be deemed to have become “Disabled” when (i) he receives disability benefits under either Social Security or the Company’s disability plan, if any, (ii) the Board, upon the written report of a qualified physician designated by the Board or its insurers, shall have determined (after a complete physical examination of Employee at any time after he has been absent from the Company for a period of at least 120 calendar days since the Effective Date) that Employee has become physically and/or mentally incapable of performing his essential job functions with or without reasonable accommodation as required by law, or (iii) Employee is otherwise unable for a continuous period of 180 calendar days to perform his essential job functions with or without reasonable accommodation as required by law due to injury, illness, or other incapacity (physical or mental).

	c.		With Cause . The Company shall be entitled to terminate this Agreement immediately, without any further liability to Employee, except as provided otherwise in this Agreement, for any “Cause” as defined below.

(i)

For purposes of this Agreement, “Cause” shall be defined as follows:

	(A)		the willful and continued failure by Employee substantially to perform his duties hereunder (other than any such failure resulting from Employee becoming Disabled);

	(B)		the willful engaging by Employee in misconduct that is materially injurious to the Company;

	(C)		any misconduct in the course and scope of Employee’s employment under this Agreement, including but not limited to dishonesty, disloyalty, disorderly conduct, insubordination, harassment of other employees or third parties, abuse of alcohol or controlled substances, or other violations of the Company’s rules; or

	(D)		any material violation of this Agreement or the Voting and Stockholders’ Agreement dated even date herewith among the Company and its stockholders.

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(ii)

	d.		Without Cause . The Company shall be entitled to terminate this Agreement for any reason other than death, disability, or Cause, at any time during Employee’s employment by providing 90 days written notice to Employee that the Company is terminating the Agreement without Cause as defined in this paragraph (a termination “without Cause”).

	e.		Expiration of Term . The Employee’s employment shall terminate upon the expiration of the Initial Term or any successive Renewal Term, provided that the Company notify Employee at least 60 days before the expiration of the Initial Term or any successive Renewal Term of its intention not to extend this Agreement pursuant to paragraph 4(b).

Compensation Upon Termination . Upon termination of Employee’s employment for one of the following reasons, Employee shall be entitled to the following compensation:

	a.		Cause . If Employee’s employment shall be terminated for Cause, the Company shall pay Employee his Base Salary then in effect through the Date of Termination, prorated as provided in paragraph 5(a), and the Company shall have no further obligations to Employee under this Agreement.

	b.		Breach by the Company . If in breach of this Agreement the Company shall terminate Employee’s employment (it being understood that a purported termination of Employee’s employment by the Company pursuant to any provision of this Agreement that is disputed and finally determined not to have been proper shall be a termination by the Company in breach of this Agreement), then the Company shall pay or provide Employee, in lieu of any further salary payments to Employee for any remaining portion of the Term of this Agreement following the Date of Termination:

	(A)		on or before the 20th day following the Date of Termination, a lump sum in cash equal to 25% of his Base Salary in effect as of the Date of Termination;

	(B)		on or before the 90th day following the Date of Termination, a lump sum in cash equal to 25% of Employee’s Base Salary in effect as of the Date of Termination; and

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(C)

all benefits Employee may be entitled to receive pursuant to any pension or employee benefit plan or other arrangement or life insurance policy maintained by the Company.

Without Cause or Expiration of Term of Agreement . If Employee’s employment shall be terminated without Cause as provided in paragraph 6(d) or if the Company elects not to extend this Agreement as provided in paragraph 6(e), the Company shall continue to pay Employee his Base Salary plus benefits for the period of 6 months from the date of termination. Such Base Salary and benefits shall be paid from time to time during such 6 month period in accordance with the time periods set forth in paragraph 5(a). Additionally, upon a termination of Employee’s employment without Cause or if the Company elects not to extend this Agreement, within 60 days after such event, the Company hereby agrees to purchase from Employee, and Employee hereby agrees to sell to the Company, all of the Note Shares in consideration for the forgiveness of the outstanding indebtedness under any promissory note made to purchase the Note Shares. The acquisition of the Note Shares by the Company shall be at a price no less than the price paid by the Employee for the Note Shares; provided that to the extent such purchase price is below the fair market value of the common stock of the Company at the time of such purchase, Employee shall be responsible for any taxes associated with the Company’s purchase of the Note Shares. Notwithstanding the preceding two sentences, Employee shall have the right to pay off the indebtedness in full under any promissory note made to purchase the Note Shares within 30 days after the notice of termination without Cause.

8.		Intentionally Omitted .

9.		Other Provisions Relating to Termination .

	a.		Notice of Termination . Any termination of Employee’s employment by the Company or by Employee (other than termination because of Death) shall be communicated by written Notice of Termination to the other party thereto. For purposes of this Agreement, a “Notice of Termination” shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon, and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee’s employment under the provision so indicated.

	b.		Date of Termination . For purposes of this Agreement, “Date of Termination” shall mean (i) if Employee’s employment is terminated by Death, the date of Death; (ii) if Employee’s employment is terminated because of Employee becoming Disabled, then 60 days after Notice of Termination is given (provided that Employee shall not have returned to the performance of his duties on a full-time basis during such 60 day period); (iii) if (a) Employee’s employment is terminated by the Company for Cause or (b) Employee’s employment is terminated by Employee, then in each case the date specified in the Notice of Termination; (iv) if this Agreement is not renewed, the last

Employment Agreement — Page 6

date of the Initial Term or the Renewal Term as the case may be; and (v) if Employee’s employment is terminated for any other reason, the date on which a Notice of Termination is given; provided that if within 30 days after any Notice of Termination is given (other than with respect to a termination without Cause) the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding and final arbitration award, or by a final judgment order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected), as applicable.

	c.		Mitigation . Employee shall not be required to mitigate the amount of any payment provided for in paragraph 7 by seeking other employment or otherwise, nor shall the amount of any payment provided for therein be reduced by any compensation earned by Employee as the result of employment by another employer after the Date of Termination, or otherwise.

	d.		Interest . Until paid, all past due amounts required to be paid by the Company under any provision of this Agreement shall bear interest at 8% per annum compounded daily.

10.

Business Opportunities and Intellectual Property; Personal Investments; Confidentiality; Covenant not to Compete .

	a.		Employee shall promptly disclose to the Company all “Business Opportunities” and “Intellectual Property” (as defined below).

	b.		For purposes hereof “Business Opportunities” shall mean all business ideas, prospects, proposals or other opportunities pertaining to the lease, acquisition, exploration, production, gathering or marketing of hydrocarbons and related products and the exploration potential of geographical areas on which hydrocarbon exploration prospects are located, that are developed by Employee during the period that Employee is employed by any of the Related Parties (the “Employment Term”) or originated by any third party and brought to the attention of Employee during the Employment Term, together with information relating thereto (including, without limitation, geological and seismic data and interpretations thereof, whether in the form of maps, charts, logs, seismographs, calculations, summaries, memoranda, opinions, or other written or charted means).

	c.		For purposes hereof, “Intellectual Property” shall mean all ideas, inventions, discoveries, processes, designs, methods, substances, articles, computer programs, and improvements (including, without limitation, enhancements to, or further interpretation or processing of, information that was in the possession of Employee prior to the date of this Agreement), whether or not patentable or copyrightable, that do not fall within the definition of Business Opportunities, that Employee discovers,

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conceives, invents, creates, or develops, alone or with others, during the Employment Term, if such discovery, conception, invention, creation, or development (i) occurs in the course of Employee’s employment with the Related Parties or (ii) occurs with the use of any of the Related Parties’ time, materials, or facilities.

11.

	a.		Employee will not, other than through the Related Parties, engage or participate in any manner, whether directly or indirectly through any family member or as an employee, employer, consultant, agent, principal, partner, more than one percent shareholder, officer, director, licensor, lender, lessor, or in any other individual or representative capacity, in any business or activity that is engaged in leasing, acquiring, exploring, developing or producing hydrocarbons and related products; and

	b.		all investments made by Employee (whether in his own name or in the name of any family members or made by Employee’s controlled affiliates), which relate to the lease, acquisition, exploration, development or production of hydrocarbons and related products shall be made solely through the Related Parties; and Employee will not (directly or indirectly through any family members), and will not permit any of his controlled affiliates to: (A) invest or otherwise participate alongside the Related Parties in any Business Opportunities or (B) invest or otherwise participate in any business or activity relating to a Business Opportunity, regardless of whether any of the Related Parties ultimately participates in such business or activity;

12.

Confidentiality Obligations .

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Termination, Employee will hold the Confidential Information in strict confidence and will not publish, disseminate, or otherwise disclose, directly or indirectly, to any person other than the Related Parties and their respective officers, directors, and employees, any Confidential Information or use any Confidential Information for Employee’s own personal benefit or for the benefit of anyone other than the Related Parties. The Company agrees to provide Confidential Information to Employee in exchange for Employee’s agreement to keep such Confidential Information, and any Confidential Information to which Employee has already become privy, in strict confidence as provided in this Agreement.

For purposes of this paragraph 12, it is agreed that Confidential Information includes, without limitation, any information heretofore or hereafter acquired, developed, or used by any of the Related Parties relating to Business Opportunities or Intellectual Property or other geological, geophysical, economic, financial, or management aspects of the business, operations, properties, or prospects of the Related Parties whether oral or in written form in a Related Parties’ business records, but shall exclude any information that (i) has become part of common knowledge or understanding in the oil and gas industry or otherwise in the public domain (other than from disclosure by Employee in violation of this Agreement), or (ii) was rightfully in the possession of Employee, as shown by Employee’s records, prior to the date of this Agreement (including Employee’s method of selecting, purchasing, and reworking oil and gas properties, which the Company and Employee may utilize subsequent to the Employment Term (subject to the other limitations contained in this Agreement)); provided, however, that Employee shall provide to the Company copies of all information described in clause (ii); provided further, however, that this paragraph 12 shall not be applicable to the extent Employee is required to testify in a judicial or regulatory proceeding pursuant to the order of a judge or administrative law judge after Employee requests that such Confidential Information be preserved.

13.

Obligations After Termination Date .

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designated pursuant to contractual agreements between the Related Party and any third party) or any other property on which the Related Parties have an option, right, license, or authority to conduct or direct exploratory activities, such as three dimensional seismic acquisition or other seismic, geophysical and geochemical activities (but not including any preliminary geological mapping), as of the Termination Date or as of the end of the six-month period following such Termination Date; provided that, this paragraph 13 shall not preclude Employee from making personal investments in securities of oil and gas companies that are registered on a national stock exchange, if the aggregate amount owned by Employee and all family members and affiliates does not exceed one percent (1%) of such company’s outstanding securities.

For purposes hereof, the “Post Termination Non-Compete Term” is:

	(i)		in the event that (A) Employee voluntarily resigns or otherwise terminates his position as an officer or employee of the Related Parties other than on account of a change of control, or (B) Employee’s employment or engagement by the Related Parties is terminated for Cause, the six month period following the Termination Date;

	(ii)		in the event that Employee’s employment is terminated on account of a change of control in the ownership of the Company, there shall not be a Post Termination Non-Compete Term; and

	(iii)		in the event that Employee’s employment is terminated without Cause, the six month period following the Termination Date.

14.		Common Law Duties . Employee acknowledges and agrees that his restrictive covenants in paragraphs 10, 11, 12, and 13 of this Agreement will supplement, rather than supplant, his common law duties of confidentiality and loyalty owed to the Company.

15.		Survival of Covenants; Enforcement of Covenants; and Remedies .

Survival of Covenants . Employee acknowledges and agrees that his covenants in

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paragraphs 10, 11, 12, and 13 of this Agreement shall survive the termination of this Agreement and shall be construed as agreements independent of any other provision of this Agreement, and the existence of any claim or cause of action of Employee against the Company whether predicated on this Agreement or otherwise shall not constitute a defense to the enforcement by the Company of those covenants.

	b.		Enforcement of Covenants . Employee acknowledges and agrees that his covenants in paragraphs 10, 11, 12 and 13 of this Agreement are ancillary to the otherwise enforceable agreements to provide Employee with Confidential Information and are supported by independent, valuable consideration. Employee further acknowledges and agrees that the limitations as to time, geographical area, and scope of activity to be restrained by those covenants are reasonable and acceptable to Employee and do not import any greater restraint than is reasonably necessary to protect the Company’s goodwill and other legitimate business interests. Employee further agrees that if, at some later date, a court of competent jurisdiction determines that any of the covenants in paragraphs 10,11, 12, or 13 are unreasonable, any such covenants shall be reformed by the court and enforced to the maximum extent permitted under the law.

	c.		Remedies . In the event of breach or threatened breach by Employee of any of his covenants in paragraphs 10, 11, 12, and 13 of this Agreement, the Company shall be entitled to equitable relief by temporary restraining order, temporary injunction, or permanent injunction or otherwise, in addition to other legal and equitable relief to which it may be entitled, including any and all monetary damages that the Company may incur as a result of said breach, violation, or threatened breach or violation. The Company may pursue any remedy available to it concurrently or consecutively in any order as to any breach, violation, or threatened breach or violation, and the pursuit of one of such remedies at any time will not be deemed an election of remedies or waiver of the right to pursue any other of such remedies as to such breach, violation, or threatened breach or violation, or as to any other breach, violation, or threatened breach or violation.

16.

Successors and Assigns . The parties acknowledge and agree that this Agreement may not be assigned by the Company to any other person or entity without Employee’s written consent; provided, however, that in the event of a change in control of the Company’s ownership, the Company shall cause the surviving entity in any such transaction to assume the payment obligations of paragraph 6, to the extent such obligations have not yet been fully performed. The parties further acknowledge and agree that Employee’s duties, responsibilities, authorities, compensation, and benefits are personal to Employee and may not be assigned to any person or entity other than a Related Party without written consent from the Board. In the event of Employee’s death, this Agreement shall be enforceable by Employee’s estate, executors, or legal representatives, but only to the extent that such person may collect any compensation due to Employee under this Agreement, as provided in paragraph 6(a). This Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, legal representatives, successors, and assigns; provided, however, that Employee may

Employment Agreement — Page 11

not assign or otherwise transfer this Agreement or any of Employee’s rights or obligations under this Agreement without the prior written consent of the Board.

17.		Representations of Employee . Employee hereby represents and warrants that he has not previously assumed any obligations inconsistent with those contained in this Agreement. Employee further represents and warrants that he has entered into this Agreement pursuant to his own initiative and that the Company did not induce him to execute this Agreement in contravention of any existing commitments. Employee further acknowledges that the Company has entered into this Agreement in reliance upon the foregoing representations of Employee.

18.		Dispute Resolution . The parties agree to the following dispute resolution terms:

	a.		Definition of “Dispute” . Any controversy, claim, or cause of action, whether based on statute, contract, tort, misrepresentation, or any other legal theory, arising out of or relating to this Agreement (a “Dispute”), shall be resolved solely in accordance with the terms of this paragraph; provided, however, that the term “Dispute” shall not include (i) Employee’s claims for workers’ compensation or unemployment compensation benefits (although any claim asserted under Ch. 451 of the Texas Labor Code shall be considered a “Dispute” subject to dispute resolution under this paragraph), or (ii) the Company’s claims for injunctive and/or other equitable relief for Employee’s breach or threatened breach of his restrictive covenants in paragraphs 10, 11, 12, or 13. The parties acknowledge and agree that, notwithstanding the provisions of this paragraph, nothing in this Agreement shall be construed to require the mediation or arbitration of any claim arising out of or relating to Employee’s covenants in paragraphs 10, 11, 12, or 13. Those covenants shall be enforceable by any court of competent jurisdiction, in accordance with paragraph 26, and shall not be subject to dispute resolution under this paragraph.

	b.		Mediation . If a Dispute cannot be settled by good faith negotiation between the parties, the parties shall submit the Dispute to nonbinding mediation. If complete agreement cannot be reached within 30 calendar days of submission to mediation (“Mediation Period”), any remaining issues will be resolved by binding arbitration in accordance with the provisions of this paragraph. The Federal Arbitration Act, 9 U.S.C. §§ 1-15, not state law, will govern the arbitrability of all Disputes.

	c.		Arbitration . A mutually agreeable arbitrator who is knowledgeable of the Company’s industry or in commercial matters will conduct the arbitration. If the parties cannot select a mutually agreeable arbitrator within 15 days after the expiration of the Mediation Period, the mediator shall be selected according to rules of the American Arbitration Association (“AAA”). The arbitrator’s decision and award will be final and binding and may be entered in any court with jurisdiction. The arbitrator will not have authority to limit, expand, or otherwise modify the terms of this Agreement.

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	d.		Rules of Conduct for Mediation and Arbitration . The mediation and, if necessary, the arbitration will be conducted under the then current rules of the alternate dispute resolution (“ADR”) firm selected by the parties, or if the parties are unable to agree on an ADR firm, the parties will conduct the mediation and, if necessary, the arbitration under the then current rules and supervision of the AAA. Each party will bear its own attorneys’ fees associated with the mediation and, if necessary, the arbitration. The parties will pay all other costs and expenses of the mediation/arbitration as the rules of the selected ADR firm provide. The parties and their representatives shall hold the existence, content, and result of the mediation and arbitration in confidence.

	e.		Limit on Discovery . There shall be no discovery during the mediation process. If arbitration is necessary, no discovery shall be conducted except by agreement of the parties or after approval by the arbitrator, who shall attempt to minimize the burden of discovery.

19.		Waiver of Rights to Jury Trial and Class-Action Participation . Notwithstanding any other provision of this Agreement, Employee agrees to irrevocably waive the right to trial by jury or participate in any class or collective action with respect to any Dispute, controversy, claim, or cause of action arising out of or relating to Employee’s employment with the Company, the termination of Employee’s employment with the Company, or this Agreement (either alleged breach or enforcement).

20.		Attorneys’ Fees and Other Costs . If either party breaches this Agreement, or if a dispute arises between the parties based on or involving this Agreement, the party that enforces its rights under this Agreement against the breaching party, or that prevails in the resolution of such dispute, is entitled to recover from the other party its reasonable attorneys’ fees, court costs, and expenses incurred in enforcing such rights or resolving such dispute. For purposes of this paragraph 20, the finder of fact shall be requested to answer affirmatively as to whether a party “prevailed” in order to recoup attorneys’ fees and other costs pursuant to this paragraph 20.

21.		Entire Agreement . This Agreement constitutes the entire agreement between the parties concerning the Agreement’s subject matter and supersedes all prior agreements and understandings, whether written or oral, between the parties with respect to its subject matter.

22.		Amendment of Agreement . This Agreement may not be modified or amended in any respect except by an instrument in writing signed by the party against whom such modification or amendment is sought to be enforced. No modification or amendment may be enforced against the Company unless such modification or amendment is in writing and signed by the Board.

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23.		Waiver . The waiver by either party of a breach of any term of this Agreement shall not operate or be construed as a waiver of a subsequent breach of the same provision by either party or of the breach of any other term or provision of this Agreement.

24.		Severability . If any provision of this Agreement is held to be illegal, invalid, or unenforceable, (a) this Agreement shall be considered divisible, (b) such provision shall be deemed inoperative to the extent it is deemed illegal, invalid, or unenforceable, and (c) in all other respects this Agreement shall remain in full force and effect; provided, however, that if any such provision may be made enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law.

25.		Governing Law; Venue . Except as otherwise provided in this Agreement, this Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas. Exclusive venue for purposes of any controversy, claim, or cause of action not covered by paragraph 18, and brought by any party under this Agreement, is in any state or federal court of competent jurisdiction in and for Tarrant County, Texas. Nothing in this Agreement, however, precludes the Company or Employee from seeking to remove a civil action from any state court to federal court.

26.		Notices . All notices under this Agreement shall be in writing and shall be deemed to have been delivered on the date personally delivered or three calendar days after the date deposited in a receptacle maintained by the United States Postal Service for such purpose, postage prepaid, by certified mail, return receipt requested, addressed to the Company at its headquarters or Employee at the address of such person as set forth in the Company’s records. Either party may designate a different address by providing written notice of such new address to the other party.

27.		Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument.

[ signature page to follow ]

Employment Agreement — Page 14


		EMPLOYEE:

		/s/ Steven Smart

		Name: Steven Smart

		COMPANY:

		APPROACH RESOURCES INC.
		a Delaware Corporation

		By:		/s/ J. Ross Craft

		Name:		J. Ross Craft
		Title:		President

Employment Agreement — Page 15

Exhibit 10.5

EMPLOYMENT AGREEMENT

This Employment Agreement (the “Agreement”) is entered into as of January 1, 2003 (the “Effective Date”), by and between APPROACH RESOURCES INC., a Delaware corporation (the “Company”), and GLENN REED, an individual residing in the state of Texas (“Employee”).

RECITALS

WHEREAS, the Company desires to employ Employee pursuant to the terms of this Agreement;

WHEREAS, Employee desires to be employed by the Company pursuant to the terms of this Agreement;

WHEREAS, in connection with the sale on even date herewith to Employee of shares of the Company’s common stock, Employee is simultaneously purchasing 2,800 shares of the Company’s common stock in consideration of a promissory note payable to the Company (and committing to purchase an additional 4,000 shares of the Company’s common stock) (collectively, the “Note Shares”);

NOW, THEREFORE, in consideration of the mutual promises and covenants contained in this Agreement, the parties agree as follows:

AGREEMENT

1.		Employment . The Company will employ Employee subject to the terms of this Agreement. Employee hereby accepts employment subject to the terms of this Agreement.

2.		Duties . The Employee shall serve as Operations Manager of the Company. In such capacity, the Employee shall be required to perform all duties as may be required from time to time by the President of the Company.

3.		Place of Performance . In connection with his employment under this Agreement, Employee shall be based at the Company’s offices maintained in Fort Worth, Texas. The Company shall provide without cost to Employee such office space, secretarial, and administrative services, equipment, furniture, and furnishings as are suitable and appropriate to Employee’s titles and duties.

4.		Term of Agreement . The term of this Agreement shall be defined and determined as follows:

	a.		Initial Term . This Agreement shall continue in full force and effect for two years (the “Initial Term”), commencing on the Effective Date and expiring on the second anniversary of the Effective Date (the “Expiration Date”), unless terminated before the Expiration Date in accordance with paragraph 6.

	b.		Renewal Term . Notwithstanding paragraph 4(a), the term of this Agreement will automatically be extended for an additional one year term (a “Renewal Term”) on the Expiration Date and on each successive anniversary of the Expiration Date, unless and until the Agreement terminated in accordance with paragraph 6.

Compensation and Employment Benefits . The Company agrees to pay Employee the following compensation and employment benefits during his employment under this Agreement:

	a.		Base Salary . From the Effective Date until changed as provided in this paragraph, the Company agrees to pay Employee an annual base salary of $115,000.00 (the “Base Salary”), pro-rated for any partial period of employment. The Base Salary will be payable semi-monthly in accordance with the Company’s ordinary payroll policies and procedures for employee compensation. The Company agrees that during Employee’s employment under this Agreement, Employee’s Base Salary will be subject to an annual review and adjustment by the Company’s Board of Directors.

	b.		Bonus .

	(i)		In addition to the Base Salary, Employee is eligible to participate in an annual employee bonus pool (the “Pool”) to be determined annually, in its discretion, by the Board or a committee of two members of the Board designated as the Compensation Committee (the “Compensation Committee”), initially comprised of Bryan H. Lawrence and J. Ross Craft.

	(ii)		If the Board or the Compensation Committee gives Employee the option, Employee may choose to receive his bonus in cash or shares of the Company’s common stock (with the valuation thereof set by the Board or the Compensation Committee), or any combination thereof.

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(iii)

	(1)		Sick-Leave Benefits and Disability Insurance . To the extent made available to other employees of the Company, and unless this Agreement is terminated pursuant to paragraph 6, Employee shall be paid sick leave benefits at his then prevailing Base Salary rate during his absence due to illness or other incapacity.

	(2)		Vacations . The Company will provide Employee with a minimum of 20 business days paid vacation per calendar year during his employment under this Agreement. Such vacation must be utilized in the calendar year in which it is granted or else it will be forfeited, unless the Company has adopted a plan pursuant to which some or all of such days of paid vacation may be rolled over to the next succeeding year. Employee agrees that the time and duration of any vacation shall be subject to advance notice to the Board. The Company also agrees to provide Employee with all paid holidays ordinarily given by the Company to its employees. The Company also agrees to pay Employee for any accrued unused vacation should this Agreement terminate pursuant to paragraph 6.

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Termination of Agreement . This Agreement may be terminated as follows:

	a.		Death . This Agreement shall terminate immediately in the event of Employee’s death; provided, however, that Employee’s estate shall be paid the Base Salary that Employee earned through the date of his death in the time and manner in which Employee would have been paid such compensation.

	b.		Disability . This Agreement shall terminate immediately in the event that Employee becomes “Disabled” as defined below. For purposes of this Agreement, Employee shall be deemed to have become “Disabled” when (i) he receives disability benefits under either Social Security or the Company’s disability plan, if any, (ii) the Board, upon the written report of a qualified physician designated by the Board or its insurers, shall have determined (after a complete physical examination of Employee at any time after he has been absent from the Company for a period of at least 120 calendar days since the Effective Date) that Employee has become physically and/or mentally incapable of performing his essential job functions with or without reasonable accommodation as required by law, or (iii) Employee is otherwise unable for a continuous period of 180 calendar days to perform his essential job functions with or without reasonable accommodation as required by law due to injury, illness, or other incapacity (physical or mental).

	c.		With Cause . The Company shall be entitled to terminate this Agreement immediately, without any further liability to Employee, except as provided otherwise in this Agreement, for any “Cause” as defined below.

(i)

For purposes of this Agreement, “Cause” shall be defined as follows:

	(A)		the willful and continued failure by Employee substantially to perform his duties hereunder (other than any such failure resulting from Employee becoming Disabled);

	(B)		the willful engaging by Employee in misconduct that is materially injurious to the Company;

	(C)		any misconduct in the course and scope of Employee’s employment under this Agreement, including but not limited to dishonesty, disloyalty, disorderly conduct, insubordination, harassment of other employees or third parties, abuse of alcohol or controlled substances, or other violations of the Company’s rules; or

	(D)		any material violation of this Agreement or the Voting and Stockholders’ Agreement dated even date herewith among the Company and its stockholders.

For purposes of this paragraph, no act, or failure to act, on Employee’s part shall be considered “willful” unless done, or omitted to be done, by him not

Employment Agreement — Page 4

in good faith and without reasonable belief that his action or omission was in the best interest of the Company.

(ii)

	d.		Without Cause . The Company shall be entitled to terminate this Agreement for any reason other than death, disability, or Cause, at any time during Employee’s employment by providing 90 days written notice to Employee that the Company is terminating the Agreement without Cause as defined in this paragraph (a termination “without Cause”).

	e.		Expiration of Term . The Employee’s employment shall terminate upon the expiration of the Initial Term or any successive Renewal Term, provided that the Company notify Employee at least 60 days before the expiration of the Initial Term or any successive Renewal Term of its intention not to extend this Agreement pursuant to paragraph 4(b).

Compensation Upon Termination . Upon termination of Employee’s employment for one of the following reasons, Employee shall be entitled to the following compensation:

	a.		Cause . If Employee’s employment shall be terminated for Cause, the Company shall pay Employee his Base Salary then in effect through the Date of Termination, prorated as provided in paragraph 5(a), and the Company shall have no further obligations to Employee under this Agreement.

	b.		Breach by the Company . If in breach of this Agreement the Company shall terminate Employee’s employment (it being understood that a purported termination of Employee’s employment by the Company pursuant to any provision of this Agreement that is disputed and finally determined not to have been proper shall be a termination by the Company in breach of this Agreement), then the Company shall pay or provide Employee, in lieu of any further salary payments to Employee for any remaining portion of the Term of this Agreement following the Date of Termination:

	(A)		on or before the 20th day following the Date of Termination, a lump sum in cash equal to 50% of his Base Salary in effect as of the Date of Termination;

	(B)		on or before the 90th day following the Date of Termination, a lump sum in cash equal to 150% of Employee’s Base Salary in effect as of the Date of Termination; and

	(C)		all benefits Employee may be entitled to receive pursuant to any pension or employee benefit plan or other arrangement or life insurance policy

Employment Agreement — Page 5

maintained by the Company.

Without Cause or Expiration of Term of Agreement . If Employee’s employment shall be terminated without Cause as provided in paragraph 6(d) or if the Company elects not to extend this Agreement as provided in paragraph 6(e), the Company shall continue to pay Employee his Base Salary plus benefits for the period of 24 months from the date of termination. Such Base Salary and benefits shall be paid from time to time during such 24 month period in accordance with the time periods set forth in paragraph 5(a). Additionally, upon a termination of Employee’s employment without Cause or if the Company elects not to extend this Agreement, within 60 days after such event, the Company hereby agrees to purchase from Employee, and Employee hereby agrees to sell to the Company, all of the Note Shares in consideration for the forgiveness of the outstanding indebtedness under any promissory note made to purchase the Note Shares. The acquisition of the Note Shares by the Company shall be at a price no less than the price paid by the Employee for the Note Shares; provided that to the extent such purchase price is below the fair market value of the common stock of the Company at the time of such purchase, Employee shall be responsible for any taxes associated with the Company’s purchase of the Note Shares. Notwithstanding the preceding two sentences, Employee shall have the right to pay off the indebtedness in full under any promissory note made to purchase the Note Shares within 30 days after the notice of termination without Cause.

8.		Intentionally Omitted .

9.		Other Provisions Relating to Termination .

	a.		Notice of Termination . Any termination of Employee’s employment by the Company or by Employee (other than termination because of Death) shall be communicated by written Notice of Termination to the other party thereto. For purposes of this Agreement, a “Notice of Termination” shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon, and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee’s employment under the provision so indicated.

	b.		Date of Termination . For purposes of this Agreement, “Date of Termination” shall mean (i) if Employee’s employment is terminated by Death, the date of Death; (ii) if Employee’s employment is terminated because of Employee becoming Disabled, then 60 days after Notice of Termination is given (provided that Employee shall not have returned to the performance of his duties on a full-time basis during such 60 day period); (iii) if (a) Employee’s employment is terminated by the Company for Cause or (b) Employee’s employment is terminated by Employee, then in each case the date specified in the Notice of Termination; (iv) if this Agreement is not renewed, the last date of the Initial Term or the Renewal Term as the case may be; and (v) if Employee’s employment is terminated for any other reason, the date on which a Notice of Termination is given; provided that if within 30 days after any Notice of Termination is given (other than with respect to a termination without Cause) the

Employment Agreement — Page 6

party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding and final arbitration award, or by a final judgment order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected), as applicable.

	c.		Mitigation . Employee shall not be required to mitigate the amount of any payment provided for in paragraph 7 by seeking other employment or otherwise, nor shall the amount of any payment provided for therein be reduced by any compensation earned by Employee as the result of employment by another employer after the Date of Termination, or otherwise.

	d.		Interest . Until paid, all past due amounts required to be paid by the Company under any provision of this Agreement shall bear interest at 8% per annum compounded daily.

10.

Business Opportunities and Intellectual Property; Personal Investments; Confidentiality; Covenant not to Compete .

	a.		Employee shall promptly disclose to the Company all “Business Opportunities” and “Intellectual Property” (as defined below).

	b.		For purposes hereof “Business Opportunities” shall mean all business ideas, prospects, proposals or other opportunities pertaining to the lease, acquisition, exploration, production, gathering or marketing of hydrocarbons and related products and the exploration potential of geographical areas on which hydrocarbon exploration prospects are located, that are developed by Employee during the period that Employee is employed by any of the Related Parties (the “Employment Term”) or originated by any third party and brought to the attention of Employee during the Employment Term, together with information relating thereto (including, without limitation, geological and seismic data and interpretations thereof, whether in the form of maps, charts, logs, seismographs, calculations, summaries, memoranda, opinions, or other written or charted means).

	c.		For purposes hereof, “Intellectual Property” shall mean all ideas, inventions, discoveries, processes, designs, methods, substances, articles, computer programs, and improvements (including, without limitation, enhancements to, or further interpretation or processing of, information that was in the possession of Employee prior to the date of this Agreement), whether or not patentable or copyrightable, that do not fall within the definition of Business Opportunities, that Employee discovers, conceives, invents, creates, or develops, alone or with others, during the Employment Term, if such discovery, conception, invention, creation, or development (i) occurs in the course of Employee’s employment with the Related Parties or (ii) occurs with the use of any of the Related Parties’ time, materials, or facilities.

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11.

	a.		Employee will not, other than through the Related Parties, engage or participate in any manner, whether directly or indirectly through any family member or as an employee, employer, consultant, agent, principal, partner, more than one percent shareholder, officer, director, licensor, lender, lessor, or in any other individual or representative capacity, in any business or activity that is engaged in leasing, acquiring, exploring, developing or producing hydrocarbons and related products; and

	b.		all investments made by Employee (whether in his own name or in the name of any family members or made by Employee’s controlled affiliates), which relate to the lease, acquisition, exploration, development or production of hydrocarbons and related products shall be made solely through the Related Parties; and Employee will not (directly or indirectly through any family members), and will not permit any of his controlled affiliates to: (A) invest or otherwise participate alongside the Related Parties in any Business Opportunities or (B) invest or otherwise participate in any business or activity relating to a Business Opportunity, regardless of whether any of the Related Parties ultimately participates in such business or activity;

12.

Confidentiality Obligations .

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exchange for Employee’s agreement to keep such Confidential Information, and any Confidential Information to which Employee has already become privy, in strict confidence as provided in this Agreement.

For purposes of this paragraph 12, it is agreed that Confidential Information includes, without limitation, any information heretofore or hereafter acquired, developed, or used by any of the Related Parties relating to Business Opportunities or Intellectual Property or other geological, geophysical, economic, financial, or management aspects of the business, operations, properties, or prospects of the Related Parties whether oral or in written form in a Related Parties’ business records, but shall exclude any information that (i) has become part of common knowledge or understanding in the oil and gas industry or otherwise in the public domain (other than from disclosure by Employee in violation of this Agreement), or (ii) was rightfully in the possession of Employee, as shown by Employee’s records, prior to the date of this Agreement (including Employee’s method of selecting, purchasing, and reworking oil and gas properties, which the Company and Employee may utilize subsequent to the Employment Term (subject to the other limitations contained in this Agreement)); provided, however, that Employee shall provide to the Company copies of all information described in clause (ii); provided further, however, that this paragraph 12 shall not be applicable to the extent Employee is required to testify in a judicial or regulatory proceeding pursuant to the order of a judge or administrative law judge after Employee requests that such Confidential Information be preserved.

13.

Obligations After Termination Date .

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making personal investments in securities of oil and gas companies that are registered on a national stock exchange, if the aggregate amount owned by Employee and all family members and affiliates does not exceed one percent (1%) of such company’s outstanding securities.

For purposes hereof, the “Post Termination Non-Compete Term” is:

	(i)		in the event that (A) Employee voluntarily resigns or otherwise terminates his position as an officer or employee of the Related Parties other than on account of a change of control, or (B) Employee’s employment or engagement by the Related Parties is terminated for Cause, the one-year period following the Termination Date;

	(ii)		in the event that Employee’s employment is terminated on account of a change of control in the ownership of the Company, there shall not be a Post Termination Non-Compete Term; and

	(iii)		in the event that Employee’s employment is terminated without Cause, the one-year period following the Termination Date.

14.		Common Law Duties . Employee acknowledges and agrees that his restrictive covenants in paragraphs 10, 11, 12, and 13 of this Agreement will supplement, rather than supplant, his common law duties of confidentiality and loyalty owed to the Company.

15.		Survival of Covenants; Enforcement of Covenants; and Remedies .

	a.		Survival of Covenants . Employee acknowledges and agrees that his covenants in paragraphs 10, 11, 12, and 13 of this Agreement shall survive the termination of this Agreement and shall be construed as agreements independent of any other provision of this Agreement, and the existence of any claim or cause of action of Employee against the Company whether predicated on this Agreement or otherwise shall not constitute a defense to the enforcement by the Company of those covenants.

	b.		Enforcement of Covenants . Employee acknowledges and agrees that his covenants in paragraphs 10, 11, 12 and 13 of this Agreement are ancillary to the otherwise

Employment Agreement — Page 10

enforceable agreements to provide Employee with Confidential Information and are supported by independent, valuable consideration. Employee further acknowledges and agrees that the limitations as to time, geographical area, and scope of activity to be restrained by those covenants are reasonable and acceptable to Employee and do not import any greater restraint than is reasonably necessary to protect the Company’s goodwill and other legitimate business interests. Employee further agrees that if, at some later date, a court of competent jurisdiction determines that any of the covenants in paragraphs 10,11, 12, or 13 are unreasonable, any such covenants shall be reformed by the court and enforced to the maximum extent permitted under the law.

Remedies . In the event of breach or threatened breach by Employee of any of his covenants in paragraphs 10, 11, 12, and 13 of this Agreement, the Company shall be entitled to equitable relief by temporary restraining order, temporary injunction, or permanent injunction or otherwise, in addition to other legal and equitable relief to which it may be entitled, including any and all monetary damages that the Company may incur as a result of said breach, violation, or threatened breach or violation. The Company may pursue any remedy available to it concurrently or consecutively in any order as to any breach, violation, or threatened breach or violation, and the pursuit of one of such remedies at any time will not be deemed an election of remedies or waiver of the right to pursue any other of such remedies as to such breach, violation, or threatened breach or violation, or as to any other breach, violation, or threatened breach or violation.

16.		Successors and Assigns . The parties acknowledge and agree that this Agreement may not be assigned by the Company to any other person or entity without Employee’s written consent; provided, however, that in the event of a change in control of the Company’s ownership, the Company shall cause the surviving entity in any such transaction to assume the payment obligations of paragraph 6, to the extent such obligations have not yet been fully performed. The parties further acknowledge and agree that Employee’s duties, responsibilities, authorities, compensation, and benefits are personal to Employee and may not be assigned to any person or entity other than a Related Party without written consent from the Board. In the event of Employee’s death, this Agreement shall be enforceable by Employee’s estate, executors, or legal representatives, but only to the extent that such person may collect any compensation due to Employee under this Agreement, as provided in paragraph 6(a). This Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, legal representatives, successors, and assigns; provided, however, that Employee may not assign or otherwise transfer this Agreement or any of Employee’s rights or obligations under this Agreement without the prior written consent of the Board.

17.		Representations of Employee . Employee hereby represents and warrants that he has not previously assumed any obligations inconsistent with those contained in this Agreement. Employee further represents and warrants that he has entered into this Agreement pursuant to his own initiative and that the Company did not induce him to execute this Agreement in contravention of any existing commitments. Employee further acknowledges that the Company has entered into this Agreement in reliance upon the foregoing representations of Employee.

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18.

Dispute Resolution . The parties agree to the following dispute resolution terms:

	a.		Definition of “Dispute” . Any controversy, claim, or cause of action, whether based on statute, contract, tort, misrepresentation, or any other legal theory, arising out of or relating to this Agreement (a “Dispute”), shall be resolved solely in accordance with the terms of this paragraph; provided, however, that the term “Dispute” shall not include (i) Employee’s claims for workers’ compensation or unemployment compensation benefits (although any claim asserted under Ch. 451 of the Texas Labor Code shall be considered a “Dispute” subject to dispute resolution under this paragraph), or (ii) the Company’s claims for injunctive and/or other equitable relief for Employee’s breach or threatened breach of his restrictive covenants in paragraphs 10, 11, 12, or 13. The parties acknowledge and agree that, notwithstanding the provisions of this paragraph, nothing in this Agreement shall be construed to require the mediation or arbitration of any claim arising out of or relating to Employee’s covenants in paragraphs 10, 11, 12, or 13. Those covenants shall be enforceable by any court of competent jurisdiction, in accordance with paragraph 26, and shall not be subject to dispute resolution under this paragraph.

	b.		Mediation . If a Dispute cannot be settled by good faith negotiation between the parties, the parties shall submit the Dispute to nonbinding mediation. If complete agreement cannot be reached within 30 calendar days of submission to mediation (“Mediation Period”), any remaining issues will be resolved by binding arbitration in accordance with the provisions of this paragraph. The Federal Arbitration Act, 9 U.S.C. §§ 1-15, not state law, will govern the arbitrability of all Disputes.

	c.		Arbitration . A mutually agreeable arbitrator who is knowledgeable of the Company’s industry or in commercial matters will conduct the arbitration. If the parties cannot select a mutually agreeable arbitrator within 15 days after the expiration of the Mediation Period, the mediator shall be selected according to rules of the American Arbitration Association (“AAA”). The arbitrator’s decision and award will be final and binding and may be entered in any court with jurisdiction. The arbitrator will not have authority to limit, expand, or otherwise modify the terms of this Agreement.

	d.		Rules of Conduct for Mediation and Arbitration . The mediation and, if necessary, the arbitration will be conducted under the then current rules of the alternate dispute resolution (“ADR”) firm selected by the parties, or if the parties are unable to agree on an ADR firm, the parties will conduct the mediation and, if necessary, the arbitration under the then current rules and supervision of the AAA. Each party will bear its own attorneys’ fees associated with the mediation and, if necessary, the arbitration. The parties will pay all other costs and expenses of the mediation/arbitration as the rules of the selected ADR firm provide. The parties and their representatives shall hold the existence, content, and result of the mediation and arbitration in confidence.

Employment Agreement — Page 12

19.		Waiver of Rights to Jury Trial and Class-Action Participation . Notwithstanding any other provision of this Agreement, Employee agrees to irrevocably waive the right to trial by jury or participate in any class or collective action with respect to any Dispute, controversy, claim, or cause of action arising out of or relating to Employee’s employment with the Company, the termination of Employee’s employment with the Company, or this Agreement (either alleged breach or enforcement).

20.		Attorneys’ Fees and Other Costs . If either party breaches this Agreement, or if a dispute arises between the parties based on or involving this Agreement, the party that enforces its rights under this Agreement against the breaching party, or that prevails in the resolution of such dispute, is entitled to recover from the other party its reasonable attorneys’ fees, court costs, and expenses incurred in enforcing such rights or resolving such dispute. For purposes of this paragraph 20, the finder of fact shall be requested to answer affirmatively as to whether a party “prevailed” in order to recoup attorneys’ fees and other costs pursuant to this paragraph 20.

21.		Entire Agreement . This Agreement constitutes the entire agreement between the parties concerning the Agreement’s subject matter and supersedes all prior agreements and understandings, whether written or oral, between the parties with respect to its subject matter.

22.		Amendment of Agreement . This Agreement may not be modified or amended in any respect except by an instrument in writing signed by the party against whom such modification or amendment is sought to be enforced. No modification or amendment may be enforced against the Company unless such modification or amendment is in writing and signed by the Board.

23.		Waiver . The waiver by either party of a breach of any term of this Agreement shall not operate or be construed as a waiver of a subsequent breach of the same provision by either party or of the breach of any other term or provision of this Agreement.

24.		Severability . If any provision of this Agreement is held to be illegal, invalid, or unenforceable, (a) this Agreement shall be considered divisible, (b) such provision shall be deemed inoperative to the extent it is deemed illegal, invalid, or unenforceable, and (c) in all other respects this Agreement shall remain in full force and effect; provided, however, that if any such provision may be made enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law.

25.		Governing Law; Venue . Except as otherwise provided in this Agreement, this Agreement shall be governed by and construed and enforced in accordance with the laws of the State of

Employment Agreement — Page 13

Texas. Exclusive venue for purposes of any controversy, claim, or cause of action not covered by paragraph 18, and brought by any party under this Agreement, is in any state or federal court of competent jurisdiction in and for Tarrant County, Texas. Nothing in this Agreement, however, precludes the Company or Employee from seeking to remove a civil action from any state court to federal court.

26.		Notices . All notices under this Agreement shall be in writing and shall be deemed to have been delivered on the date personally delivered or three calendar days after the date deposited in a receptacle maintained by the United States Postal Service for such purpose, postage prepaid, by certified mail, return receipt requested, addressed to the Company at its headquarters or Employee at the address of such person as set forth in the Company’s records. Either party may designate a different address by providing written notice of such new address to the other party.

27.		Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument.

[ signature page to follow ]

Employment Agreement — Page 14


		EMPLOYEE:

		/s/ Glenn W. Reed

		Name: Glenn Reed

		COMPANY:

		APPROACH RESOURCES INC.
		a Delaware Corporation

		By:		/s/ J. Ross Craft

		Name:		J. Ross Craft
		Title:		President

Employment Agreement — Page 15

Exhibit 10.6

APPROACH RESOURCES INC.
2007 STOCK INCENTIVE PLAN

ARTICLE I. ESTABLISHMENT AND PURPOSE

1.1 Establishment. Approach Resources Inc. (“Approach”) hereby establishes the Approach Resources Inc. 2007 Stock Incentive Plan, as set forth in this document, as an amendment and restatement of the Approach Resources Inc. 2003 Stock Option Plan. Awards granted pursuant to the Approach Resources Inc. 2003 Stock Option Plan shall continue to be governed by the terms of such plan as in effect at the time of the award and the terms of the related award agreement.

1.2 Purpose. The purposes of this Plan are to attract and retain highly qualified individuals to perform services for the Company, to further align the interests of those individuals with those of the stockholders of Approach, and to more closely link compensation with Company performance. Approach is committed to creating long-term stockholder value. Approach’s compensation philosophy is based on the belief that Approach can best create stockholder value if key employees, officers, directors and others performing services for Approach and its Affiliates act and are rewarded as business owners. Approach believes that an equity stake through equity compensation programs effectively aligns service provider and stockholder interests by motivating and rewarding performance that will enhance stockholder value.

1.3 Effectiveness and Term. This Plan shall become effective on June 28, 2007 (the “Effective Date”), the date of its approval by the holders of at least a majority of the shares of Common Stock either (a) present or represented and entitled to vote at a special meeting of the stockholders of Approach duly held in accordance with applicable law or (b) by written action in lieu of a meeting in accordance with applicable law. Unless terminated earlier by the Board pursuant to Section 14.1, this Plan shall terminate on the day prior to the tenth anniversary of the Effective Date.

ARTICLE II. DEFINITIONS

2.1 “ Affiliate ” means any corporation, partnership, limited liability company or partnership, association, trust or other organization which, directly or indirectly, controls, is controlled by, or is under common control with, Approach. For purposes of the preceding sentence, “control” (including, with correlative meanings, the terms “controlled by” and “under common control with”), as used with respect to any entity or organization, shall mean the possession, directly or indirectly, of the power (a) to vote more than 50% of the securities having ordinary voting power for the election of directors of the controlled entity or organization, or (b) to direct or cause the direction of the management and policies of the controlled entity or organization, whether through the ownership of voting securities or by contract or otherwise.

2.2 “ Approach ” means Approach Resources Inc., a Delaware corporation, or any successor thereto.

2.3 “ Award ” means an award granted to a Participant in the form of Options, SARs, Restricted Stock, Restricted Stock Units, Performance Awards, Stock Awards or Other Incentive Awards, whether granted singly or in combination.

2.4 “ Award Agreement ” means a written agreement between Approach and a Participant that sets forth the terms, conditions, restrictions and limitations applicable to an Award.

2.5 “ Board ” means the Board of Directors of Approach.

2.6 “Cash Dividend Right” means a contingent right, granted in tandem with a specific Restricted Stock Unit Award, to receive an amount in cash equal to the cash distributions made by Approach with respect to a share of Common Stock during the period such Award is outstanding.

2.7 “ Cause ” means any of the following: (a) a Participant’s conviction of, or plea of nolo contendere to, any felony or to any crime or offense causing substantial harm to Approach or its Affiliates or involving acts of theft, fraud, embezzlement, moral turpitude or similar conduct; (b) a Participant’s repeated intoxication by alcohol or drugs during the performance of his duties in a manner that materially and adversely affects the Participant’s performance of such duties; (c) malfeasance in the conduct of the Participant’s duties, including, but not limited to (i) willful and intentional misuse or diversion of funds of Approach or its Affiliates, (ii) embezzlement or (iii) fraudulent or willful and material misrepresentations or concealments on any written reports submitted to Approach or its Affiliates; (d) a Participant’s material violation of any provision of any employment, nonsolicitation, noncompetition or other agreement with Approach or any of its Affiliates; or (e) a Participant’s material failure to perform the duties of the Participant’s employment or material failure to follow or comply with the reasonable and lawful written directives of the Board or senior officers of Approach, in any case under clause (d) or (e) only after the Participant shall have been informed in writing of such material failure and given a period of not more than 30 days to remedy same.

2.8 “ Change of Control ” means (a) any consolidation or merger of Approach in which Approach is not the continuing or surviving corporation or pursuant to which shares of Approach’s Common Stock would be converted into cash, securities or other property, other than a merger of Approach in which the holders of Approach’s Common Stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, (b) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all, of the assets of Approach and its subsidiaries to any other person or entity (other than an Affiliate of Approach), (c) the stockholders of Approach approve any plan or proposal for liquidation or dissolution of Approach, (d) any person or entity (other than Yorktown Energy Partners V, L.P., or any of its affiliated funds), including a “group” as contemplated by section 13(d)(3) of the Exchange Act acquires or gains ownership or control (including, without limitation, power to vote) of more than 50% of the outstanding shares of Approach’s voting stock (based upon voting power) or (e) as a result of or in connection with a contested election of Directors, the persons who were Directors of Approach before such election shall cease to constitute a majority of the Board.

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Notwithstanding the foregoing, a Change of Control shall not include the initial public offering of the Common Stock.

2.9 “ Code ” means the Internal Revenue Code of 1986, as amended from time to time, including regulations thereunder and successor provisions and regulations.

2.10 “ Committee ” means the Compensation Committee of the Board or such other committee of the Board as may be designated by the Board to administer the Plan, which committee shall consist of two or more members of the Board; provided, however, that with respect to the application of the Plan to Awards made to Outside Directors, the “Committee” shall be the Board. During such time as the Common Stock is registered under Section 12 of the Exchange Act, each member of the Committee shall be an Outside Director. To the extent that no Committee exists that has the authority to administer the Plan, the functions of the Committee shall be exercised by the Board. If for any reason the appointed Committee does not meet the requirements of Rule 16b-3 or Section 162(m) of the Code, such noncompliance with such requirements shall not affect the validity of Awards, grants, interpretations or other actions of the Committee.

2.11 “ Common Stock ” means the common stock of Approach, $0.01 par value per share, or any stock or other securities hereafter issued or issuable in substitution or exchange for the Common Stock.

2.12 “ Company ” means Approach and any Affiliate.

2.13 “ Disability ” means (a) the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months or (b) the Participant is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under an accident or health plan covering employees of Approach or an Affiliate.

2.14 “ Dividend Unit Right ” means a contingent right, granted in tandem with a specific Restricted Stock Unit Award, to have an additional number of Restricted Stock Units credited to a Participant in respect of the Award equal to the number of shares of Common Stock that could be purchased at Fair Market Value with the amount of each cash distribution made by Approach with respect to a share of Common Stock during the period such Award is outstanding.

2.15 “ Effective Date ” means the date this Plan becomes effective as provided in Section 1.3.

2.16 “ Employee ” means an employee of the Company; provided, however, that the term “Employee” does not include an Outside Director or an individual performing services for the Company who is treated for tax purposes as an independent contractor at the time of performance of services.

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2.17 “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.

2.18 “ Fair Market Value ” means (a) if the Common Stock is listed on any established stock exchange or a national market system, including without limitation Nasdaq Global Select Market, Nasdaq Global Market, Nasdaq Capital Market and the New York Stock Exchange, the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the date of the determination (or if there was no quoted price for such date, then for the last preceding business day on which there was a quoted price), as reported in The Wall Street Journal or such other source as the Committee deems reliable, (b) if the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the mean between the high bid and low asked prices for the Common stock for the date of the determination, as reported in The Wall Street Journal or such other source as the Committee deems reliable or (c) if the Common Stock is not reported or quoted by any such organization, (i) with respect to Incentive Stock Options, the fair market value of the Common Stock as determined in good faith by the Committee within the meaning of Section 422 of the Code or (ii) with respect to other Awards, fair market value of the Common Stock as determined in good faith by the Committee using a “reasonable application of a reasonable valuation method” within the meaning of Section 409A of the Code and the regulations and other guidance thereunder.

2.19 “ Grant Date ” means the date an Award is determined to be effective by the Committee upon the grant of such Award.

2.20 “ Inability to Perform ” means and shall be deemed to have occurred if the Participant has been determined under the Company’s or any co-employer’s long-term disability plan to be eligible for long-term disability benefits. In the absence of the Participant’s participation in, application for benefits under, or existence of such a plan, “Inability to Perform” means a finding by the Committee in its sole judgment that the Participant is, despite any reasonable accommodation required by law, unable to perform the essential functions of his position because of an illness or injury for (a) 60% or more of the normal working days during six consecutive calendar months or (b) 40% or more of the normal working days during twelve consecutive calendar months.

2.21 “ Incentive Stock Option ” means an Option that is intended to meet the requirements of Section 422(b) of the Code.

2.22 “ NASDAQ ” means The NASDAQ Stock Market, Inc.

2.23 “ Nonqualified Stock Option ” means an Option that is not an Incentive Stock Option.

2.24 “ Option ” means an option to purchase shares of Common Stock granted to a Participant pursuant to Article VII. An Option may be either an Incentive Stock Option or a Nonqualified Stock Option, as determined by the Committee.

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2.25 “ Other Incentive Award ” means an incentive award granted to a Participant pursuant to Article XII.

2.26 “ Outside Director ” means a member of the Board who (a) meets the independence requirements of the principal exchange or quotation system upon which the shares of Common Stock are listed or quoted, (b) from and after the date on which the remuneration paid (or Awards made) pursuant to the Plan becomes subject to the deduction limitation under Section 162(m) of the Code, qualifies as an “outside director” under Section 162(m) of the Code, (c) qualifies as a “non-employee director” of Approach under Rule 16b-3 and (d) satisfies independence criteria under any other applicable laws or regulations relating to the issuance of shares of Common Stock to Employees.

2.27 “ Participant ” means an Employee, Outside Director or other individual or entity performing services for the Company that has been granted an Award; provided, however, that no Award that may be settled in Common Stock may be issued to a Participant that is not a natural person.

2.28 “ Performance Award ” means an Award granted to a Participant pursuant to Article XI to receive cash or Common Stock conditioned in whole or in part upon the satisfaction of specified performance criteria.

2.29 “ Permitted Transferee ” shall have the meaning given such term in Section 15.4.

2.30 “ Plan ” means the Approach Resources Inc. 2007 Stock Incentive Plan, as in effect from time to time.

2.31 “ Prior Plan ” means the Approach Resources Inc. 2003 Stock Option Plan, as in effect prior to the Effective Date.

2.32 “ Restricted Period ” means the period established by the Committee with respect to an Award of Restricted Stock or Restricted Stock Units during which the Award remains subject to forfeiture.

2.33 “ Restricted Stock ” means a share of Common Stock granted to a Participant pursuant to Article IX that is subject to such terms, conditions and restrictions as may be determined by the Committee.

2.34 “ Restricted Stock Unit ” means a fictional share of Common Stock granted to a Participant pursuant to Article X that is subject to such terms, conditions and restrictions as may be determined by the Committee.

2.35 “ Rule 16b-3 ” means Rule 16b-3 promulgated by the SEC under the Exchange Act, or any successor rule or regulation that may be in effect from time to time.

2.36 “ SEC ” means the United States Securities and Exchange Commission, or any successor agency or organization.

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2.37 “ Securities Act ” means the Securities Act of 1933, as amended.

2.38 “ Stock Appreciation Right ” or “ SAR ” means a right granted to a Participant pursuant to Article VIII with respect to a share of Common Stock to receive upon exercise cash, Common Stock or a combination of cash and Common Stock, equal to the appreciation in value of a share of Common Stock.

ARTICLE III. PLAN ADMINISTRATION

3.1 Plan Administrator and Discretionary Authority. The Plan shall be administered by the Committee. The Committee shall have total and exclusive responsibility to control, operate, manage and administer the Plan in accordance with its terms. The Committee shall have all the authority that may be necessary or helpful to enable it to discharge its responsibilities with respect to the Plan. Without limiting the generality of the preceding sentence, the Committee shall have the exclusive right to (a) interpret the Plan and the Award Agreements executed hereunder, (b) decide all questions concerning eligibility for, and the amount of, Awards granted under the Plan, (c) construe any ambiguous provision of the Plan or any Award Agreement, (d) prescribe the form of Award Agreements, (e) correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award Agreement, (f) issue administrative guidelines as an aid to administering the Plan and make changes in such guidelines as the Committee from time to time deems proper, (g) make regulations for carrying out the Plan and make changes in such regulations as the Committee from time to time deems proper, (h) determine whether Awards should be granted singly or in combination, (i) to the extent permitted under the Plan, grant waivers of Plan terms, conditions, restrictions and limitations, (j) accelerate the exercise, vesting or payment of an Award when such action or actions would be in the best interests of the Company, (k) require Participants to hold a stated number or percentage of shares of Common Stock acquired pursuant to an Award for a stated period and (l) take any and all other actions the Committee deems necessary or advisable for the proper operation or administration of the Plan. The Committee shall have authority in its sole discretion with respect to all matters related to the discharge of its responsibilities and the exercise of its authority under the Plan, including without limitation its construction of the terms of the Plan and its determination of eligibility for participation in, and the terms of Awards granted under, the Plan. The decisions of the Committee and its actions with respect to the Plan shall be final, conclusive and binding on all persons having or claiming to have any right or interest in or under the Plan, including without limitation Participants and their respective Permitted Transferees, estates, beneficiaries and legal representatives. In the case of an Award intended to be eligible for the performance-based compensation exemption under section 162(m) of the Code, the Committee shall exercise its discretion consistent with qualifying the Award for such exemption.

3.2 Liability; Indemnification. No member of the Committee, nor any person to whom it has delegated authority, shall be personally liable for any action, interpretation or determination made in good faith with respect to the Plan or Awards granted hereunder, and each member of the Committee (or delegatee of the Committee) shall be fully indemnified and protected by Approach with respect to any liability he may incur with respect to any such action, interpretation or determination, to the maximum extent permitted by applicable law.

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ARTICLE IV. SHARES SUBJECT TO THE PLAN

4.1 Available Shares .

(a) Subject to adjustment as provided in Sections 4.2, the maximum number of shares of Common Stock that shall be available for grant of Awards under the Plan shall be (i) ten percent of the outstanding shares of Common Stock, as adjusted on the first business day after the closing of the initial public offering of the Common Stock and thereafter on the first business day of each calendar year, plus (ii) all shares of Common Stock that, as of the Effective Date, remain available for grant of awards under the Prior Plan, plus (iii) shares of Common Stock subject to outstanding awards under the Prior Plan on the Effective Date, that later cease to be subject to such awards for any reason other than such awards having been exercised. In addition, subject to adjustment as provided in Section 4.2, 115,385 shares of Common Stock covered by awards granted under the Prior Plan and outstanding as of the Effective Date, shall be available for issuance under this Plan, but shall available for grant of Awards under this Plan only as provided in (iii) above. If an Award granted under this Plan expires, is forfeited or becomes unexercisable for any reason without having been exercised in full, the undelivered shares of Common Stock which were subject to the Award shall, unless the Plan shall have been terminated, become available for future Awards under the Plan.

(b) The maximum number of shares of Common Stock that may be subject to Incentive Stock Options granted under the Plan is 1,100,000. The maximum number of shares of Common Stock that may be subject to all Awards granted under the Plan to any one Participant each fiscal year is 330,000 shares. The maximum number of shares of Common Stock that may be subject to Nonqualified Stock Options and SARs granted under the Plan to any one Participant during a fiscal year is 330,000. The limitations provided in this Section 4.1(b) shall be subject to adjustment as provided in Section 4.2.

(c) Shares of Common Stock issued pursuant to the Plan may be original issue or treasury shares or a combination of the foregoing, as the Committee, in its sole discretion, shall from time to time determine. During the term of this Plan, Approach will at all times reserve and keep available such number of shares of Common Stock as shall be sufficient to satisfy the requirements of the Plan.

(d) Notwithstanding any provision of this Plan to the contrary, the Board or the Committee shall have the right to substitute or assume awards in connection with mergers, reorganizations, separations or other transactions to which Section 424(a) of the Code applies, provided such substitutions or assumptions are permitted by Section 424 of the Code (or, if applicable, Section 409A of the Code) and the regulations promulgated thereunder.

4.2 Adjustments for Recapitalizations and Reorganizations. Subject to Article XIII, if there is any change in the number or kind of shares of Common Stock outstanding (a) by reason of a stock dividend, spin-off, recapitalization, stock split or combination or exchange of shares, (b) by reason of a merger, reorganization or consolidation, (c) by reason of a reclassification or change in par value or (d) by reason of any other extraordinary or unusual

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event affecting the outstanding Common Stock as a class without Approach’s receipt of consideration, or if the value of outstanding shares of Common Stock is reduced as a result of a spin-off or Approach’s payment of an extraordinary cash dividend, or distribution or dividend or distribution consisting of any assets of Approach other than cash, the maximum number and kind of shares of Common Stock available for issuance under the Plan, the maximum number and kind of shares of Common Stock for which any individual may receive Awards in any fiscal year or under the Plan, the number and kind of shares of Common Stock covered by outstanding Awards, and the price per share or the applicable market value or performance target of such Awards will be appropriately adjusted by the Committee to reflect any increase or decrease in the number of, or change in the kind or value of, issued shares of Common Stock to preclude, to the extent practicable, the enlargement or dilution of rights under such Awards; provided, however, that any fractional shares resulting from such adjustment shall be eliminated; provided, further, that the number and kind of shares of Common Stock available for issuance as Incentive Stock Options under the Plan shall be adjusted only in accordance with Sections 422 and 424 of the Code and the regulations thereunder.

4.3 Adjustments for Awards. The Committee shall have sole discretion to determine the manner in which shares of Common Stock available for grant of Awards under the Plan are counted. Without limiting the discretion of the Committee under this Section 4.3, unless otherwise determined by the Committee, the following rules shall apply for the purpose of determining the number of shares of Common Stock available for grant of Awards under the Plan:

(a) Options, Restricted Stock and Stock Awards. The grant of Options, Restricted Stock or Stock Awards shall reduce the number of shares of Common Stock available for grant of Awards under the Plan by the number of shares of Common Stock subject to such an Award.

(b) SARs. The grant of SARs that may be paid or settled (i) only in Common Stock or (ii) in either cash or Common Stock shall reduce the number of shares available for grant of Awards under the Plan by the number of shares subject to such an Award; provided, however, that upon the exercise of SARs, the excess of the number of shares of Common Stock with respect to which the Award is exercised over the number of shares of Common Stock issued upon exercise of the Award shall again be available for grant of Awards under the Plan. The grant of SARs that may be paid or settled only for cash shall not affect the number of shares available for grant of Awards under the Plan.

(c) Restricted Stock Units. The grant of Restricted Stock Units (including those credited to a Participant in respect of a Dividend Unit Right) that may be paid or settled (i) only in Common Stock or (ii) in either cash or Common Stock shall reduce the number of shares available for grant of Awards under the Plan by the number of shares subject to such an Award; provided, however, that upon settlement of the Award, the excess, if any, of the number of shares of Common Stock that had been subject to such Award over the number of shares of Common Stock issued upon its settlement shall again be available for grant of Awards under the Plan. The grant of Restricted Stock Units that may be paid or settled only for cash shall not affect the number of shares available for grant of Awards under the Plan.

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(d) Performance Awards and Other Incentive Awards. The grant of a Performance Award or Other Incentive Award in the form of Common Stock or that may be paid or settled (i) only in Common Stock or (ii) in either Common Stock or cash shall reduce the number of shares available for grant of Awards under the Plan by the number of shares subject to such an Award; provided, however, that upon settlement of the Award, the excess, if any, of the number of shares of Common Stock that had been subject to such Award over the number of shares of Common Stock issued upon its settlement shall again be available for grant of Awards under the Plan. The grant of a Performance Award or Other Incentive Award that may be paid or settled only for cash shall not affect the number of shares available for grant of Awards under the Plan.

(e) Cancellation, Forfeiture and Termination. If any Award referred to in Sections 4.3(a), (b), (c) or (d) (other than an Award that may be paid or settled only for cash) is canceled or forfeited, or terminates, expires or lapses, for any reason, the shares then subject to such Award shall again be available for grant of Awards under the Plan.

(f) Payment of Exercise Price and Withholding Taxes. If shares of Common Stock are used to pay the exercise price of an Award, the number of shares available for grant of Awards under the Plan shall be increased by the number of shares delivered as payment of such exercise price. If shares of Common Stock are used to pay withholding taxes payable upon exercise, vesting or payment of an Award, or shares of Common Stock that would be acquired upon exercise, vesting or payment of an Award are withheld to pay withholding taxes payable upon exercise, vesting or payment of such Award, the number of shares available for grant of Awards under the Plan shall be increased by the number of shares delivered or withheld as payment of such withholding taxes.

ARTICLE V. ELIGIBILITY

The Committee shall select Participants from those Employees, Outside Directors and other individuals or entities providing services to the Company that, in the opinion of the Committee, are in a position to make a significant contribution to the success of the Company. Once a Participant has been selected for an Award by the Committee, the Committee shall determine the type and size of Award to be granted to the Participant and shall establish in the related Award Agreement the terms, conditions, restrictions and limitations applicable to the Award, in addition to those set forth in the Plan and the administrative guidelines and regulations, if any, established by the Committee.

ARTICLE VI. FORM OF AWARDS

6.1 Form of Awards. Awards may be granted under the Plan, in the Committee’s sole discretion, in the form of Options pursuant to Article VII, SARs pursuant to Article VIII, Restricted Stock pursuant to Article IX, Restricted Stock Units pursuant to Article X, Performance Awards pursuant to Article XI and Stock Awards and Other Incentive Awards pursuant to Article XII, or a combination thereof. All Awards shall be subject to the terms, conditions, restrictions and limitations of the Plan. The Committee may, in its sole discretion,

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subject any Award to such other terms, conditions, restrictions and/or limitations (including without limitation the time and conditions of exercise, vesting or payment of an Award and restrictions on transferability of any shares of Common Stock issued or delivered pursuant to an Award), provided they are not inconsistent with the terms of the Plan. The Committee may, but is not required to, subject an Award to such conditions as it determines are necessary or appropriate to ensure than an Award constitutes “qualified performance based compensation” within the meaning of Section 162(m) of the Code and the regulations thereunder. Awards under a particular Article of the Plan need not be uniform, and Awards under more than one Article of the Plan may be combined in a single Award Agreement. Any combination of Awards may be granted at one time and on more than one occasion to the same Participant. Subject to compliance with applicable tax law, an Award Agreement may provide that a Participant may elect to defer receipt of income attributable to the exercise or vesting of an Award.

6.2 No Repricing or Reload Rights. Except for adjustments made pursuant to Section 4.2, no Award may be repriced, replaced, regranted through cancellation or otherwise modified without stockholder approval, if the effect would be to reduce the exercise price for the shares underlying such Award. The Committee may not cancel an outstanding Option that is under water for the purpose of granting a replacement Award of a different type.

6.3 Loans. The Committee may, in its sole discretion, approve the extension of a loan by the Company to a Participant who is an Employee to assist the Participant in paying the exercise price or purchase price of an Award; provided, however, that no loan shall be permitted if the extension of such loan would violate any provision of applicable law. Any loan will be made upon such terms and conditions as the Committee shall determine.

ARTICLE VII. OPTIONS

7.1 General. Awards may be granted in the form of Options that may be Incentive Stock Options or Nonqualified Stock Options, or a combination of both; provided, however, that Incentive Stock Options may be granted only to employees of Approach or a “parent corporation” or a “subsidiary corporation” of Approach, as those terms are defined in Sections 424(e) and (f) of the Code, respectively. Nonqualified Stock Options may be granted only to Employees, Outside Directors or other individuals or entities performing services for a corporation or other type of entity in a chain of corporations or other entities, starting with Approach, in which each corporation or other entity has a “controlling interest” in another corporation or entity in the chain, but not corporations or other entities in the chain below the corporation or other entity for which the Employees, Outside Directors or other individuals or entities are providing services on the date of grant of the Nonqualified Stock Options. For purposes of this Section, “controlling interest” means (i) in the case of a corporation, ownership of stock possessing at least 50% of total combined voting power of all classes of stock entitled to vote of such corporation or at least 50% of the total value of shares of all classes of stock of such corporation; (ii) in the case of a partnership, ownership of at least 50% of the profits interest or capital interest of such partnership; (iii) in the case of a sole proprietorship, ownership of the sole proprietorship; or (iv) in the case of a trust or estate, ownership of an actuarial interest (as defined in Treasury Regulation Section 1.414(c)-2(b)(2)(ii)) of at least 50% of such trust or estate.

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7.2 Terms and Conditions of Options. An Option shall be exercisable in whole or in such installments and at such times as may be determined by the Committee. The price at which a share of Common Stock may be purchased upon exercise of an Option shall be determined by the Committee, but such exercise price shall not be less than 100% of the Fair Market Value per share of Common Stock on the Grant Date unless the Option is granted through the assumption of, or in substitution for, outstanding awards previously granted to individuals who became Employees (or other service providers) as a result of a merger, consolidation, acquisition or other corporate transaction involving the Company and complies with Section 409A of the Code. Except as otherwise provided in Section 7.3, the term of each Option shall be as specified by the Committee; provided, however, that no Options shall be exercisable later than 10 years after the Grant Date. Options may be granted with respect to Restricted Stock or shares of Common Stock that are not Restricted Stock, as determined by the Committee in its sole discretion.

7.3 Restrictions Relating to Incentive Stock Options.

(a) Options granted in the form of Incentive Stock Options shall, in addition to being subject to the terms and conditions of Section 7.2, comply with Section 422(b) of the Code. To the extent the aggregate Fair Market Value (determined as of the dates the respective Incentive Stock Options are granted) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by an individual during any calendar year under all incentive stock option plans of Approach and its parent and subsidiary corporations exceeds $100,000, such excess Incentive Stock Options shall be treated as options that do not constitute Incentive Stock Options. The Committee shall determine, in accordance with the applicable provisions of the Code, which of a Participant’s Incentive Stock Options will not constitute Incentive Stock Options because of such limitation and shall notify the Participant of such determination as soon as practicable after such determination. The price at which a share of Common Stock may be purchased upon exercise of an Incentive Stock Option shall be determined by the Committee, but such exercise price shall not be less than 100% of the Fair Market Value of a share of Common Stock on the Grant Date. No Incentive Stock Option shall be granted to an Employee under the Plan if, at the time such Option is granted, such Employee owns stock possessing more than 10% of the total combined voting power of all classes of stock of Approach or of its parent or subsidiary corporations, within the meaning of Section 422(b)(6) of the Code, unless (i) on the Grant Date of such Option, the exercise price of such Option is at least 110% of the Fair Market Value of the Common Stock subject to the Option and (ii) such Option by its terms is not exercisable after the expiration of five years from the Grant Date of the Option.

(b) Each Participant awarded an Incentive Stock Option shall notify Approach in writing immediately after the date he or she makes a disqualifying disposition of any shares of Common Stock acquired pursuant to the exercise of such Incentive Stock Option. A disqualifying disposition is any disposition (including any sale) of such Common Stock before the later of (i) two years after the Grant Date of the Incentive Stock Option or (ii) one year after the date of exercise of the Incentive Stock Option.

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7.4 Exercise of Options.

(a) Subject to the terms and conditions of the Plan, Options shall be exercised by the delivery of a written notice of exercise to Approach, setting forth the number of whole shares of Common Stock with respect to which the Option is to be exercised, accompanied by full payment for such shares.

(b) Upon exercise of an Option, the exercise price of the Option shall be payable to Approach in full either (i) in cash or an equivalent acceptable to the Committee, (ii) in the sole discretion of the Committee and in accordance with any applicable administrative guidelines established by the Committee, (A) by tendering one or more previously acquired nonforfeitable, unrestricted shares of Common Stock having an aggregate Fair Market Value at the time of exercise equal to the total exercise price or (B) by surrendering a sufficient portion of the shares with respect to which the Option is exercised having an aggregate Fair Market Value at the time of exercise equal to the total exercise price or (iii) in a combination of the forms specified in (i) or (ii) of this subsection; provided, however, that payment of the exercise price by means of tendering or surrendering shares of Common Stock shall not be permitted when the same may, in the reasonable opinion of the Committee, cause Approach to record a loss or expense as a result thereof.

(c) During such time as the Common Stock is registered under Section 12 of the Exchange Act, to the extent permissible under applicable law, payment of the exercise price of an Option may also be made, in the absolute discretion of the Committee, by delivery to Approach or its designated agent of an executed irrevocable option exercise form together with irrevocable instructions to a broker-dealer to sell or margin a sufficient portion of the shares with respect to which the Option is exercised and deliver the sale or margin loan proceeds directly to Approach to pay the exercise price and any required withholding taxes.

(d) As soon as reasonably practicable after receipt of written notification of exercise of an Option and full payment of the exercise price and any required withholding taxes, Approach shall (i) deliver to the Participant, in the Participant’s name or the name of the Participant’s designee, a stock certificate or certificates in an appropriate aggregate amount based upon the number of shares of Common Stock purchased under the Option or (ii) cause to be issued in the Participant’s name or the name of the Participant’s designee, in book-entry form, an appropriate number of shares of Common Stock based upon the number of shares purchased under the Option.

7.5 Termination of Employment or Service. Each Award Agreement embodying the Award of an Option shall set forth the extent to which the Participant shall have the right to exercise the Option following termination of the Participant’s employment or service with the Company. Such provisions shall be determined by the Committee in its absolute discretion, need not be uniform among all Options granted under the Plan and may reflect distinctions based on the reasons for termination of employment or service. In the event a Participant’s Award Agreement embodying the award of an Option does not set forth such termination provisions, the following termination provisions shall apply with respect to such Award:

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(a) Termination For Cause. If the employment or service of a Participant shall terminate for Cause, each outstanding Option held by the Participant shall automatically terminate as of the date of such termination of employment or service, and the right to exercise the Option shall immediately terminate.

(c) Termination By Reason of Death or Disability. In the event of a Participant’s death or Disability while employed by or in the service of Approach or an Affiliate, each outstanding Option shall remain outstanding and may be exercised by the person who acquires the Option by will or the laws of descent and distribution, or by the Participant, as the case may be, but only (i) within the one year period following the date of death or Disability (if otherwise prior to the date of expiration of the Option), and not thereafter, and (ii) to purchase the number of shares of Common Stock that were subject to purchase upon exercise of the Option at the time of such death or Disability, plus the number of shares of Common Stock that would have become purchasable upon the next vesting date.

(c) Termination For Reasons Other Than Cause, Death or Disability. If a Participant’s employment or service with Approach and its Affiliates is terminated voluntarily by the Participant or by action of Approach or an Affiliate for reasons other than for Cause, an Option may be exercised, but only (i) within three months after such termination (if otherwise prior to the date of expiration of the Option), and not thereafter, and (ii) to purchase the number of shares of Common Stock, if any, that could be purchased upon exercise of the Option at the date of termination of the Participant’s employment or service.

Notwithstanding the foregoing, an Option will not be treated as an Incentive Stock Option unless at all times beginning on the Grant Date and ending on the day three months (one year in the case of a Participant who is “disabled” within the meaning of Section 22(e)(3) of the Code) before the date of exercise of the Option, the Participant is an employee of Approach or a “parent corporation” or a “subsidiary corporation” of Approach, as those terms are defined in Sections 424(e) and (f) of the Code, respectively (or a corporation or a parent or subsidiary corporation of such corporation issuing or assuming an option in a transaction to which Section 424(a) of the Code applies).

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ARTICLE VIII. STOCK APPRECIATION RIGHTS

8.1 General.

(a) The Committee may grant Awards in the form of SARs in such numbers and at such times as it shall determine. SARs shall vest and be exercisable in whole or in such installments and at such times as may be determined by the Committee. The price at which SARs may be exercised shall be determined by the Committee but shall not be less than 100% of the Fair Market Value per share of Common Stock on the Grant Date unless the SARs are granted through the assumption of, or in substitution for, outstanding awards previously granted to individuals who became Employees (or other service providers) as a result of a merger, consolidation, acquisition or other corporate transaction involving the Company and comply with Section 409A of the Code. The term of each SAR shall be as specified by the Committee; provided, however, that no SARs shall be exercisable later than 10 years after the Grant Date. At the time of an Award of SARs, the Committee may, in its sole discretion, prescribe additional terms, conditions, restrictions and limitations applicable to the SARs, including without limitation rules pertaining to the termination of employment or service (by reason of death, permanent and total disability, or otherwise) of a Participant prior to exercise of the SARs, as it determines are necessary or appropriate, provided they are not inconsistent with the Plan.

(b) SARs may be granted only to an Employee, Outside Director or other individual or entity performing services for a corporation or other type of entity in a chain of corporations or other entities, starting with Approach, in which each corporation or other entity has a “controlling interest” in another corporation or entity in the chain, but not corporations or other entities in the chain below the corporation or other entity for which the Employee, Outside Director or other individual or entity is providing services on the date of grant of the SARs. For purposes of this subsection, “controlling interest” means (i) in the case of a corporation, ownership of stock possessing at least 50% of total combined voting power of all classes of stock entitled to vote of such corporation or at least 50% of the total value of shares of all classes of stock of such corporation; (ii) in the case of a partnership, ownership of at least 50% of the profits interest or capital interest of such partnership; (iii) in the case of a sole proprietorship, ownership of the sole proprietorship; or (iv) in the case of a trust or estate, ownership of an actuarial interest (as defined in Treasury Regulation Section 1.414(c)-2(b)(2)(ii)) of at least 50% of such trust or estate.

8.2 Exercise of SARs. SARs shall be exercised by the delivery of a written notice of exercise to Approach, setting forth the number of whole shares of Common Stock with respect to which the Award is being exercised. Upon the exercise of SARs, the Participant shall be entitled to receive an amount equal to the excess of the aggregate Fair Market Value of the shares of Common Stock with respect to which the Award is exercised (determined as of the date of such exercise) over the aggregate exercise price of such shares. Such amount shall be payable to the Participant in cash or in shares of Common Stock, as provided in the Award Agreement.

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ARTICLE IX. RESTRICTED STOCK

9.1 General. Awards may be granted in the form of Restricted Stock in such numbers and at such times as the Committee shall determine. The Committee shall impose such terms, conditions and restrictions on Restricted Stock as it may deem advisable, including without limitation providing for vesting upon the achievement of specified performance goals pursuant to a Performance Award and restrictions under applicable Federal or state securities laws. A Participant shall not be required to make any payment for Restricted Stock unless required by the Committee pursuant to Section 9.2.

9.2 Purchased Restricted Stock. The Committee may in its sole discretion require a Participant to pay a stipulated purchase price for each share of Restricted Stock.

9.3 Restricted Period. At the time an Award of Restricted Stock is granted, the Committee shall establish a Restricted Period applicable to such Restricted Stock. Each Award of Restricted Stock may have a different Restricted Period in the sole discretion of the Committee.

9.4 Other Terms and Conditions. Restricted Stock shall constitute issued and outstanding shares of Common Stock for all corporate purposes. Restricted Stock awarded to a Participant under the Plan shall be registered in the name of the Participant or, at the option of Approach, in the name of a nominee of Approach, and shall be issued in book-entry form or represented by a stock certificate. Subject to the terms and conditions of the Award Agreement, a Participant to whom Restricted Stock has been awarded shall have the right to receive dividends thereon during the Restricted Period, to vote the Restricted Stock and to enjoy all other stockholder rights with respect thereto, except that (a) Approach shall retain custody of any certificates evidencing the Restricted Stock during the Restricted Period and (b) the Participant may not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of the Restricted Stock during the Restricted Period. A breach of the terms and conditions established by the Committee pursuant to the Award of the Restricted Stock may result in a forfeiture of the Restricted Stock. At the time of an Award of Restricted Stock, the Committee may, in its sole discretion, prescribe additional terms, conditions, restrictions and limitations applicable to the Restricted Stock, including without limitation rules pertaining to the termination of employment or service (by reason of death, permanent and total disability, retirement, cause or otherwise) of a Participant prior to expiration of the Restricted Period.

9.5 Miscellaneous. Nothing in this Article shall prohibit the exchange of shares of Restricted Stock pursuant to a plan of merger or reorganization for stock or other securities of Approach or another corporation that is a party to the reorganization, provided that the stock or securities so received in exchange for shares of Restricted Stock shall, except as provided in Article XIII, become subject to the restrictions applicable to such Restricted Stock. Any shares of Common Stock received as a result of a stock split or stock dividend with respect to shares of Restricted Stock shall also become subject to the restrictions applicable to such Restricted Stock.

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ARTICLE X. RESTRICTED STOCK UNITS

10.1 General. Awards may be granted in the form of Restricted Stock Units in such numbers and at such times as the Committee shall determine. The Committee shall impose such terms, conditions and restrictions on Restricted Stock Units as it may deem advisable, including without limitation prescribing the period over which and the conditions upon which a Restricted Stock Unit may become vested or be forfeited, and providing for vesting upon the achievement of specified performance goals pursuant to a Performance Award. Upon the lapse of restrictions with respect to each Restricted Stock Unit, the Participant shall be entitled to receive one share of Common Stock or an amount of cash equal to the Fair Market Value of one share of Common Stock, as provided in the Award Agreement. A Participant shall not be required to make any payment for Restricted Stock Units.

10.2 Restricted Period. At the time an Award of Restricted Stock Units is granted, the Committee shall establish a Restricted Period applicable to such Restricted Stock Units. Each Award of Restricted Stock Units may have a different Restricted Period in the sole discretion of the Committee.

10.3 Cash Dividend Rights and Dividend Unit Rights. To the extent provided by the Committee in its sole discretion, a grant of Restricted Stock Units may include a tandem Cash Dividend Right or Dividend Unit Right grant. A grant of Cash Dividend Rights may provide that such Cash Dividend Rights shall be paid directly to the Participant at the time of payment of related dividend, be credited to a bookkeeping account subject to the same vesting and payment provisions as the tandem Award (with or without interest in the sole discretion of the Committee), or be subject to such other provisions or restrictions as determined by the Committee in its sole discretion. A grant of Dividend Unit Rights may provide that such Dividend Unit Rights shall be subject to the same vesting and payment provisions as the tandem Award or be subject to such other provisions and restrictions as determined by the Committee in its sole discretion.

10.4 Other Terms and Conditions. At the time of an Award of Restricted Stock Units, the Committee may, in its sole discretion, prescribe additional terms, conditions, restrictions and limitations applicable to the Restricted Stock Units, including without limitation rules pertaining to the termination of employment or service (by reason of death, Disability, retirement, Cause or otherwise) of a Participant prior to expiration of the Restricted Period.

ARTICLE XI. PERFORMANCE AWARDS

11.1 General. Awards may be granted in the form of Performance Awards that may be payable in the form of cash, shares of Common Stock or a combination of both, in such amounts and at such times as the Committee shall determine. Performance Awards shall be conditioned upon the level of achievement of one or more stated performance goals over a specified performance period that shall not be shorter than one year. Performance Awards may be combined with other Awards to impose performance criteria as part of the terms of such other Awards.

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11.2 Terms and Conditions. Each Award Agreement embodying a Performance Award shall set forth (a) the amount, including a target and maximum amount if applicable, a Participant may earn in the form of cash or shares of Common Stock or a formula for determining such amount, (b) the performance criteria and level of achievement versus such criteria that shall determine the amount payable or number of shares of Common Stock to be granted, issued, retained and/or vested, (c) the performance period over which performance is to be measured, (d) the timing of any payments to be made, (e) restrictions on the transferability of the Award and (f) such other terms and conditions as the Committee may determine that are not inconsistent with the Plan.

11.3 Code Section 162(m) Requirements. From and after the date on which remuneration paid (or Awards granted) pursuant to the Plan becomes subject to the deduction limitation of Section 162(m) of the Code, the Committee shall determine in its sole discretion whether all or any portion of a Performance Award shall be intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code (the “162(m) Requirements”). The performance criteria for any Performance Award that is intended to satisfy the 162(m) Requirements shall be established in writing by the Committee based on one or more performance goals as set forth in Section 11.4 not later than 90 days after commencement of the performance period with respect to such Award, provided that the outcome of the performance in respect of the goals remains substantially uncertain as of such time. The maximum amount that may be paid in cash pursuant to Performance Awards granted to a Participant with respect to a Approach’s fiscal year that are intended to satisfy the 162(m) Requirements is $5,000,000; provided, however, that such maximum amount with respect to a Performance Award that provides for a performance period longer than one fiscal year shall be the foregoing limit multiplied by the number of full fiscal years in the performance period. At the time of the grant of a Performance Award and to the extent permitted under Code Section 162(m) and regulations thereunder for a Performance Award intended to satisfy the 162(m) Requirements, the Committee may provide for the manner in which the performance goals will be measured in light of specified corporate transactions, extraordinary events, accounting changes and other similar occurrences.

11.4 Performance Goals. The performance measure(s) to be used for purposes of Performance Awards may be described in terms of objectives that are related to the individual Participant or objectives that are Company-wide or related to a subsidiary, division, department, region, function or business unit of the Company in which the Participant is employed or with respect to which the Participant performs services, and may consist of one or more or any combination of the following criteria: (a) earnings or earnings per share (whether on a pre-tax, after-tax, operational or other basis), (b) return on equity, (c) return on assets or net assets, (d) return on capital or invested capital and other related financial measures, (e) cash flow or EBITDA or EBITDAX, (f) revenues, (g) income or operating income, (h) expenses or costs or expense levels or cost levels (absolute or per unit), (i) one or more operating ratios, (j) stock price, (k) total stockholder return, (l) operating profit, (m) profit margin, (n) capital expenditures, (o) net borrowing, debt leverage levels, credit quality or debt ratings, (p) the accomplishment of mergers, acquisitions, dispositions, public offerings or similar extraordinary business transactions, (q) net asset value per share, (r) economic value added, (s) individual business objectives, (t) growth in production, (u) growth in reserves, (v) reserve replacement ratio and/or

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(w) finding and development cost per unit. The performance goals based on these performance measures may be made relative to the performance of other business entities.

11.5 Certification and Negative Discretion. Prior to the payment of any compensation pursuant to a Performance Award that is intended to satisfy the 162(m) Requirements, the Committee shall certify the extent to which the performance goals and other material terms of the Award have been achieved or satisfied. The Committee in its sole discretion shall have the authority to reduce, but not to increase, the amount payable and the number of shares to be granted, issued, retained or vested pursuant to a Performance Award.

ARTICLE XII. STOCK AWARDS AND OTHER INCENTIVE AWARDS

12.1 Stock Awards. Stock Awards may be granted to Participants upon such terms and conditions as the Committee may determine. Shares of Common Stock issued pursuant to Stock Awards may be issued for cash consideration or for no cash consideration. The Committee shall determine the number of shares of Common Stock to be issued pursuant to a Stock Award.

12.2 Other Incentive Awards. Other Incentive Awards may be granted in such amounts, upon such terms and at such times as the Committee shall determine. Other Incentive Awards may be granted based upon, payable in or otherwise related to, in whole or in part, shares of Common Stock if the Committee, in its sole discretion, determines that such Other Incentive Awards are consistent with the purposes of the Plan. Each grant of an Other Incentive Award shall be evidenced by an Award Agreement that shall specify the amount of the Other Incentive Award and the terms, conditions, restrictions and limitations applicable to such Award. Payment of Other Incentive Awards shall be made at such times and in such form, which may be cash, shares of Common Stock or other property (or a combination thereof), as established by the Committee, subject to the terms of the Plan.

ARTICLE XIII. CHANGE OF CONTROL

13.1 Vesting of Awards. Except as provided otherwise in an Award Agreement at the time an Award is granted, notwithstanding any provision of this Plan to the contrary, in the event of a Change of Control, any time periods, conditions or contingencies relating to the exercise or realization of, or lapse of restrictions under, an Award granted hereunder shall be accelerated or waived (assuming with respect to any Performance Awards, all performance criteria and other conditions are achieved or fulfilled to the maximum extent possible) so that:

(a) if no exercise of the Award is required, the Award may be realized in full at the time of the occurrence of the Change of Control (the “Change Effective Time”) or

(b) if exercise of the Award is required, the Award may be exercised in full at the Change Effective Time;

provided, however, that with respect to any Award that consists of deferred compensation within the meaning of Section 409A of the Code, in the event of a Change of Control that does not satisfy the requirements for a change in the ownership or effective control of Approach or a

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change in the ownership of a substantial portion of the assets of Approach within the meaning of Section 409A of the Code and Treasury guidance and regulations thereunder, then delivery of payment with respect to such Award as provided herein shall be made upon the earliest of (i) the Participant’s “separation from service” (within the meaning of Code Section 409A and the regulations thereunder), (ii) the Participant’s becoming disabled (within the meaning of Code Section 409A(a)(2)(C)), (iii) the Participant’s death or (iv) a Change of Control that does satisfy the requirements for a change in the ownership or effective control of Approach or a change in the ownership of a substantial portion of the assets of Approach within the meaning of Section 409A of the Code and Treasury guidance and regulations thereunder; provided, however, that delivery of payment upon separation from service to a Participant who is a “specified employee” (as defined in Code Section 409A and the regulations thereunder) as of the date of his or her separation from service shall be delayed for a period of six months after the Participant’s separation from service (or, if earlier than the end of the six-month period, the date of death of the Participant).

13.2 Assumption of Awards. Upon a Change of Control where Approach is not the surviving corporation (or survives only as a subsidiary of another corporation), unless the Committee determines otherwise, all outstanding Options that are not exercised before the Change of Control will be assumed by or replaced with comparable options or rights in the surviving corporation (or a parent of the surviving corporation) in accordance with Section 424(a) of the Code and the regulations thereunder, and other outstanding Awards will be converted into similar awards of the surviving corporation (or a parent of the surviving corporation).

13.3 Cancellation of Awards. Notwithstanding the foregoing, in the event of a Change of Control of Approach, then the Committee, in its discretion, may, no later than the effective time of such Change of Control, require any Participant holding an Award to surrender such Award in exchange for (a) with respect to each share of Common Stock subject to an Option or SAR (whether or not vested), payment by the Company (or a successor), in cash, of an amount equivalent to the excess of the value of the consideration received for each share of Common Stock by holders of Common Stock in connection with such Change of Control (the “Change of Control Consideration”) over the exercise price or grant price per share, (b) with respect to each share of Common Stock subject to an Award of Restricted Stock Units or Other Incentive Awards, and related Cash Dividend Rights and Dividend Unit Rights (if applicable), payment by the Company (or a successor), in cash, of an amount equivalent to the value of any such Cash Dividend Rights and Dividend Unit Rights plus the value of the Change of Control Consideration for each share covered by the Award, assuming all restrictions or limitations (including risks of forfeiture) have lapsed and (c) with respect to a Performance Award, payment by the Company (or a successor), in cash, of an amount equivalent to the value of such Award, as determined by the Committee, taking into account, to the extent applicable, the Change of Control Consideration, and assuming all performance criteria and other conditions to payment of such Awards are achieved or fulfilled to the maximum extent possible. Payments made upon a Change of Control pursuant to this Section shall be made no later than the date on which the Change of Control occurs. Notwithstanding the foregoing, with respect to any Award that consists of deferred compensation within the meaning of Section 409A of the Code, in the event of a Change of Control that does not satisfy the requirements for a change in the ownership or effective control of Approach or a change in the ownership of a substantial portion of the assets

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of Approach within the meaning of Section 409A of the Code and Treasury guidance and regulations thereunder, then delivery of payment with respect to such Award as provided herein shall be made upon the earliest of (i) the Participant’s “separation from service” (within the meaning of Code Section 409A and the regulations thereunder), (ii) the Participant’s becoming disabled (within the meaning of Code Section 409A(a)(2)(C)), (iii) the Participant’s death or (iv) a Change of Control that does satisfy the requirements for a change in the ownership or effective control of Approach or a change in the ownership of a substantial portion of the assets of Approach within the meaning of Section 409A of the Code and Treasury guidance and regulations thereunder; provided, however, that delivery of payment upon separation from service to a Participant who is a “specified employee” (as defined in Code Section 409A and the regulations thereunder) as of the date of his or her separation from service shall be delayed for a period of six months after the Participant’s separation from service (or, if earlier than the end of the six-month period, the date of death of the Participant).

ARTICLE XIV. AMENDMENT AND TERMINATION

14.1 Plan Amendment and Termination. The Board may at any time suspend, terminate, amend or modify the Plan, in whole or in part; provided, however, that no amendment or modification of the Plan shall become effective without the approval of such amendment or modification by the holders of at least a majority of the shares of Common Stock if (a) such amendment or modification increases the maximum number of shares subject to the Plan (except as provided in Article IV) or changes the designation or class of persons eligible to receive Awards under the Plan or (b) counsel for Approach determines that such approval is otherwise required by or necessary to comply with applicable law or the listing requirements of NASDAQ or such other exchange or association on which the Common Stock is then listed or quoted. An amendment to the Plan shall not require stockholder approval if it curtails rather than expands the scope of the Plan, nor if it is made to conform the Plan to statutory or regulatory requirements, such as, without limitation, Code Section 409A, or regulations issued thereunder. Upon termination of the Plan, the terms and provisions of the Plan shall, notwithstanding such termination, continue to apply to Awards granted prior to such termination. Except as otherwise provided herein, no suspension, termination, amendment or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the consent of the Participant (or the Permitted Transferee) holding such Award. Notwithstanding the foregoing, Approach may amend any Award Agreement to be exempt from Code Section 409A or to comply with the requirements of Code Section 409A or to modify any provision that causes an Award that is intended to be classified as an “equity instrument” under FAS 123R to be classified as a liability on Approach’s financial statements.

14.2 Award Amendment and Cancellation. The Committee may amend the terms of any outstanding Award granted pursuant to the Plan, but except as otherwise provided herein, no such amendment shall adversely affect in any material way the Participant’s (or a Permitted Transferee’s) rights under an outstanding Award without the consent of the Participant (or the Permitted Transferee) holding such Award.

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ARTICLE XV. MISCELLANEOUS

15.1 Award Agreements. After the Committee grants an Award under the Plan to a Participant, Approach and the Participant shall enter into an Award Agreement setting forth the terms, conditions, restrictions and limitations applicable to the Award and such other matters as the Committee may determine to be appropriate. The Committee may permit or require a Participant to defer receipt of the payment of cash or the delivery of shares of Common Stock that would otherwise be due to the Participant in connection with any Award. Awards that are not paid currently shall be recorded as payable on Approach’s records for the Plan. The terms and provisions of the respective Award Agreements need not be identical. All Award Agreements shall be subject to the provisions of the Plan, and in the event of any conflict between an Award Agreement and the Plan, the terms of the Plan shall govern.

15.2 Listing; Suspension.

(a) As long as the Common Stock is listed on a national securities exchange or system sponsored by a national securities association, the issuance of any shares of Common Stock pursuant to an Award shall be conditioned upon such shares being listed on such exchange or system. Approach shall have no obligation to issue such shares unless and until such shares are so listed, and the right to exercise any Option or other Award with respect to such shares shall be suspended until such listing has been effected.

(b) If at any time counsel to Approach or its Affiliates shall be of the opinion that any sale or delivery of shares of Common Stock pursuant to an Award is or may in the circumstances be unlawful or result in the imposition of excise taxes on Approach or its Affiliates under the laws of any applicable jurisdiction, Approach or its Affiliates shall have no obligation to make such sale or delivery, or to make any application or to effect or to maintain any qualification or registration under the Securities Act, or otherwise, with respect to shares of Common Stock or Awards, and the right to exercise any Option or other Award shall be suspended until, in the opinion of such counsel, such sale or delivery shall be lawful or will not result in the imposition of excise taxes on Approach or its Affiliates.

(c) Upon termination of any period of suspension under this Section, any Award affected by such suspension that shall not then have expired or terminated shall be reinstated as to all shares available before such suspension and as to shares that would otherwise have become available during the period of such suspension, but no such suspension shall extend the term of any Award unless otherwise determined by the Committee in its sole discretion.

15.3 Additional Conditions. Notwithstanding anything in the Plan to the contrary (a) the Committee may, if it shall determine it necessary or desirable in its sole discretion, at the time of grant of any Award or the issuance of any shares of Common Stock pursuant to any Award, require the recipient of the Award or such shares of Common Stock, as a condition to the receipt thereof, to deliver to Approach a written representation of present intention to acquire the Award or such shares of Common Stock for his own account for investment and not for distribution, (b) the certificate for shares of Common Stock issued to a Participant may include

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any legend that the Committee deems appropriate to reflect any restrictions on transfer and (c) all certificates for shares of Common Stock delivered under the Plan shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the SEC, any stock exchange or association upon which the Common Stock is then listed or quoted, any applicable federal or state securities law, and any applicable corporate law, and the Committee may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions.

15.4 Transferability.

(a) All Awards granted to a Participant shall be exercisable during his lifetime only by such Participant, or if applicable, a Permitted Transferee as provided in subsection (c) of this Section; provided, however, that in the event of a Participant’s legal incapacity, an Award may be exercised by his guardian or legal representative. When a Participant dies, the personal representative, beneficiary, or other person entitled to succeed to the rights of the Participant may acquire the rights under an Award. Any such successor must furnish proof satisfactory to Approach of the successor’s entitlement to receive the rights under an Award under the Participant’s will or under the applicable laws of descent and distribution.

(b) Except as otherwise provided in this Section, no Award shall be subject to execution, attachment or similar process, and no Award may be sold, transferred, pledged, exchanged, hypothecated or otherwise disposed of, other than by will or pursuant to the applicable laws of descent and distribution. Any attempted sale, transfer, pledge, exchange, hypothecation or other disposition of an Award not specifically permitted by the Plan or the Award Agreement shall be null and void and without effect.

(c) If provided in the Award Agreement, Nonqualified Stock Options may be transferred by a Participant to a Permitted Transferee. For purposes of the Plan, “Permitted Transferee” means (i) a member of a Participant’s immediate family, (ii) any person sharing the Participant’s household (other than a tenant or employee of the Participant), (iii) trusts in which a person listed in (i) or (ii) above has more than 50% of the beneficial interest, (iv) a foundation in which the Participant or a person listed in (i) or (ii) above controls the management of assets, (v) any other entity in which the Participant or a person listed in (i) or (ii) above owns more than 50% of the voting interests, provided that in the case of the preceding clauses (i) through (v), no consideration is provided for the transfer and (vi) any transferee permitted under applicable securities and tax laws as determined by counsel to Approach. In determining whether a person is a “Permitted Transferee,” immediate family members shall include a Participant’s child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, including adoptive relationships.

(d) Incident to a Participant’s divorce, the Participant may request that Approach agree to observe the terms of a domestic relations order which may or may not be part of a qualified domestic relations order (as defined in Code Section 414(p)) with respect to all or a part of one or more Awards made to the Participant under the Plan.

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Approach’s decision regarding such a request shall be made by the Committee, in its sole and absolute discretion, based upon the best interests of Approach. The Committee’s decision need not be uniform among Participants. As a condition of participation, a Participant agrees to hold Approach harmless from any claim that may arise out of Approach’s observance of the terms of any such domestic relations order.

15.5 Withholding Taxes. The Company shall be entitled to deduct from any payment made under the Plan, regardless of the form of such payment, the amount of all applicable income and employment taxes required by law to be withheld with respect to such payment, may require the Participant to pay to the Company such withholding taxes prior to and as a condition of the making of any payment or the issuance or delivery of any shares of Common Stock under the Plan, and shall be entitled to deduct from any other compensation payable to the Participant any withholding obligations with respect to Awards. In accordance with any applicable administrative guidelines it establishes, the Committee may allow a Participant to pay the amount of taxes required by law to be withheld from or with respect to an Award by (a) withholding shares of Common Stock from any payment of Common Stock due as a result of such Award, or (b) permitting the Participant to deliver to the Company previously acquired shares of Common Stock, in each case having an aggregate Fair Market Value equal to the amount of such required withholding taxes. No payment shall be made and no shares of Common Stock shall be issued pursuant to any Award unless and until the applicable tax withholding obligations have been satisfied.

15.6 No Fractional Shares. No fractional shares of Common Stock shall be issued or delivered pursuant to the Plan or any Award granted hereunder, provided that the Committee in its sole discretion may round fractional shares down to the nearest whole share or settle fractional shares in cash.

15.7 Notices. All notices required or permitted to be given or made under the Plan or pursuant to any Award Agreement (unless provided otherwise in such Award Agreement) shall be in writing and shall be deemed to have been duly given or made if (a) delivered personally, (b) transmitted by first class registered or certified United States mail, postage prepaid, return receipt requested, (c) sent by prepaid overnight courier service or (d) sent by telecopy or facsimile transmission, with confirmation receipt, to the person who is to receive it at the address that such person has theretofore specified by written notice delivered in accordance herewith. Such notices shall be effective (a) if delivered personally or sent by courier service, upon actual receipt by the intended recipient, (b) if mailed, upon the earlier of five days after deposit in the mail or the date of delivery as shown by the return receipt therefore or (c) if sent by telecopy or facsimile transmission, when the answer back is received. Approach or a Participant may change, at any time and from time to time, by written notice to the other, the address that it or such Participant had theretofore specified for receiving notices. Until such address is changed in accordance herewith, notices hereunder or under an Award Agreement shall be delivered or sent (a) to a Participant at his address as set forth in the records of the Company or (b) to Approach at the principal executive offices of Approach clearly marked “Attention: Corporate Secretary.”

15.8 Compliance with Law and Stock Exchange or Association Requirements. In addition, it is the intent of Approach that Options designated Incentive Stock Options comply with the applicable provisions of Section 422 of the Code, and that Awards intended to constitute

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“qualified performance-based awards” comply with the applicable provisions of Section 162(m) of the Code and that any deferral of the receipt of the payment of cash or the delivery of shares of Common Stock that the Committee may permit or require, and all Awards either be exempt from Code section 409A or, if not exempt, comply with the requirements of Section 409A of the Code. To the extent that any legal requirement of Section 16 of the Exchange Act or Sections 422, 162(m) or 409A of the Code as set forth in the Plan ceases to be required under Section 16 of the Exchange Act or Sections 422, 162(m) or 409A of the Code, that Plan provision shall cease to apply. Any provision of this Plan to the contrary notwithstanding, the Committee may revoke any Award if it is contrary to law, governmental regulation or stock exchange or association requirements or modify an Award to bring it into compliance with any government regulation or stock exchange or association requirements. The Committee may agree to limit its authority under this Section.

15.9 Binding Effect. The obligations of Approach under the Plan shall be binding upon any successor corporation or organization resulting from the merger, consolidation or other reorganization of Approach, or upon any successor corporation or organization succeeding to all or substantially all of the assets and business of Approach. The terms and conditions of the Plan shall be binding upon each Participant and his Permitted Transferees, heirs, legatees, distributees and legal representatives.

15.10 Severability. If any provision of the Plan or any Award Agreement is held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions of the Plan or such agreement, as the case may be, but such provision shall be fully severable and the Plan or such agreement, as the case may be, shall be construed and enforced as if the illegal or invalid provision had never been included herein or therein.

15.11 No Restriction of Corporate Action. Nothing contained in the Plan shall be construed to prevent Approach or any Affiliate from taking any corporate action (including any corporate action to suspend, terminate, amend or modify the Plan) that is deemed by Approach or such Affiliate to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any Awards made or to be made under the Plan. No Participant or other person shall have any claim against Approach or any Affiliate as a result of such action.

15.12 Governing Law. The Plan shall be governed by and construed in accordance with the internal laws (and not the principles relating to conflicts of laws) of the State of Texas except as superseded by applicable federal law.

15.13 No Right, Title or Interest in Company Assets. No Participant shall have any rights as a stockholder of Approach as a result of participation in the Plan until the date of issuance of Common Stock in his name and, in the case of Restricted Stock, unless and until such rights are granted to the Participant pursuant to the Plan. To the extent any person acquires a right to receive payments from the Company under the Plan, such rights shall be no greater than the rights of an unsecured general creditor of the Company, and such person shall not have any rights in or against any specific assets of the Company. All Awards shall be unfunded.

15.14 Risk of Participation. Nothing contained in the Plan shall be construed either as a guarantee by Approach or its Affiliates, or their respective stockholders, directors, officers or

- 24 -

employees, of the value of any assets of the Plan or as an agreement by Approach or its Affiliates, or their respective stockholders, directors, officers or employees, to indemnify anyone for any losses, damages, costs or expenses resulting from participation in the Plan.

15.15 No Guarantee of Tax Consequences. No person connected with the Plan in any capacity, including without limitation Approach and the Affiliates and their respective directors, officers, agents and employees, makes any representation, commitment or guarantee that any tax treatment, including without limitation federal, state and local income, estate and gift tax treatment, will be applicable with respect to any Awards or payments thereunder made to or for the benefit of a Participant under the Plan or that such tax treatment will apply to or be available to a Participant on account of participation in the Plan.

15.16 Continued Employment or Service. Nothing contained in the Plan or in any Award Agreement shall confer upon any Participant the right to continue in the employ or service of the Company, or interfere in any way with the rights of the Company to terminate a Participant’s employment or service at any time, with or without cause. The loss of existing or potential profit in Awards will not constitute an element of damages in the event of termination of employment or service for any reason, even if the termination is in violation of an obligation of Approach or an Affiliate to the Participant.

15.17 Miscellaneous. Headings are given to the articles and sections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction of the Plan or any provisions hereof. The use of the masculine gender shall also include within its meaning the feminine. Wherever the context of the Plan dictates, the use of the singular shall also include within its meaning the plural, and vice versa.

IN WITNESS WHEREOF, this Plan has been executed as of the Effective Date.


		APPROACH RESOURCES INC.

		By:		/s/ J. Ross Craft

				J. Ross Craft
				President and Chief Executive Officer

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Exhibit 10.7

CONVERTIBLE PROMISSORY NOTE



$10,000,000		June 25, 2007

FOR VALUE RECEIVED, Approach Oil & Gas Inc., a Delaware corporation (the “Company”), hereby promises to pay to the order of YORKTOWN ENERGY PARTNERS VII, L.P., a Delaware limited partnership (the “Lender”), the principal sum of Ten Million and no/100 Dollars ($10,000,000), together with interest thereon from the date of this Convertible Promissory Note (this “Note”) on the unpaid principal balance. Interest shall accrue at a rate of seven percent (7%) per annum based on a three hundred sixty-five (365) – day year and compounded annually. Principal and accrued interest shall be due and payable on the third anniversary of the date of this Note; provided, that the Company shall have the right to prepay the principal in whole or in part from time to time without premium or penalty provided that the Company gives the Lender at least fifteen (15) days prior notice of such prepayment. Lender shall have the right to exercise its conversion rights in whole or in part prior to such prepayment.

All payments shall be made in lawful money of the United States of America at the principal office of the Lender, or at such other place as the holder hereof may from time to time designate in writing to the Company. All payments shall be credited first to the accrued interest then due and payable and the remainder applied to principal.

At any time commencing December 31, 2007 or earlier in connection with the Company’s prepayment hereof or the occurrence of a “Sales Event” as defined below, the Lender shall have the right, in its sole and absolute discretion, to convert all or any portion of the unpaid principal of and interest on this Note into shares of the equity securities of the Company or any successor to the Company of any class or classes issued by the Company or its successor prior to the date of the Lender’s election. Except as provided below with respect to an automatic conversion upon the occurrence of an IPO (defined below), the number of shares of such equity securities to be issued upon such conversion shall be equal to the quotient obtained by dividing (a) by (b), where (a) is the outstanding principal and accrued interest of this Note (or such portion as will be converted), and (b) is (i) the lowest price per share that equity securities in any such class have been issued by the Company, or (ii) if no such shares have been issued, then at One Hundred and no/100 Dollars ($100) per share. The conversion price will be subject to adjustment to provide the Lender with full antidilution protection in the case of any stock splits, recapitalizations or changes in capital structure of the Company or the issuance of options, warrants, or other rights to acquire or convertible into equity securities of the Company excluding only options, warrants, rights or other equity-based awards issued as part of reasonable compensation plans approved by the Company’s Board of Directors. Shares issued for consideration other than cash shall be deemed to be issued at the fair market value of the consideration given for them.

The first day on which both of the following transactions shall have been consummated shall be referred to herein as the “IPO Conversion Date”: (a) the initial sale by Approach Resources Inc., a Delaware corporation, of shares of its common stock, par value $0.01 per share

(the “Approach Common Stock”), to the public pursuant to a registration statement under the Securities Act of 1933, as amended (“IPO”), and (b) the exchange of all outstanding shares of Company Common Stock for shares of Approach Common Stock and the consummation of the other transactions contemplated by the terms of a contribution agreement by and among Approach, the Company and certain other parties thereto (the “Contribution Agreement”). Notwithstanding anything to the contrary contained herein, this Note shall, on the IPO Conversion Date, automatically and without further action required by any person, convert into shares of Approach Common Stock. The number of shares of Approach Common Stock to be issued upon such automatic conversion shall be equal to the quotient obtained by dividing (a) by (b), where (a) is the outstanding principal and accrued interest of this Note, and (b) is the initial public offering price per share, less any underwriting discount per share for the shares of Approach Common Stock that are issued in the IPO. The shares of Approach Common Stock issued to Lender upon any automatic conversion of this Note shall be entitled to the same registration rights as those provided to holders of shares of Company Common Stock whose shares are exchanged into shares of Approach Common Stock pursuant to the Contribution Agreement. Approach shall execute an agreement with the Lender reflecting those rights on or prior to the IPO Conversion Date.

The Lender shall be granted no less protective rights with regards to such shares of equity securities (including preferences and voting rights) acquired pursuant to the conversion of this Note as are granted to any other holder of such shares of equity securities. If only a portion of this Note is converted into equity securities, the Company shall return this Note to the Lender with a notation thereon of the remaining outstanding principal of this Note or, at the request of the Lender, shall issue and deliver to the Lender a replacement convertible secured promissory note for the remaining outstanding balance hereof, such Note containing the same material terms as set forth herein. The issuance of certificates for shares of equity securities upon conversion of this Note will be made without charge to the Lender for any issuance tax in respect thereof or other cost incurred by the Company in connection with such conversion and the related issuance of shares of equity securities. Upon conversion of this Note, the Company will take all such actions as are necessary in order to ensure that the shares issuable with respect to such conversion will be validly issued, fully paid and nonassessable.

The following will be deemed to constitute events of default under the Note:

	a)		The Company shall fail to make when due any payment of principal or interest under this Note and such failure shall remain uncured for a period of five (5) business days.

	b)		The Company shall fail to perform or observe, in any material respect, any provision of this Note or any material agreement or contract to which it is a party or by which it or its assets are bound, and such default shall continue for more than thirty (30) days after written notice from Lender is received by Borrower or,

			notwithstanding the foregoing, the Company fails to give a timely “Default Notice” as defined below.

	c)		Any representation or warranty made by the Company herein, or any statement, written information or certificate furnished by the Company in connection with the transactions contemplated hereby, proves untrue in any material respect as of the date of the issuance or making thereof or omits any statement necessary to make the statements contained therein, in light of the circumstances under which they were made, not false or misleading.

	d)		The Company shall default in the payment when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) of any amount owing in respect of any indebtedness in the aggregate principal amount of Two Hundred Fifty Thousand and no/100 Dollars ($250,000) or more, or shall default in the performance or observance of any obligation or condition with respect to any such indebtedness or any other event shall occur or condition exist, if the effect of such default, event or condition is to accelerate the maturity of any such indebtedness or to permit the holder or holders thereof, or any trustee or agent for such holders, to accelerate the maturity of any such indebtedness, or any such indebtedness shall become or be declared to be due and payable prior to its stated maturity and such default has not been cured within any grace period provided for in the instrument under which the default arose.

	e)		(i) The Company shall commence a voluntary case concerning itself under the United States Bankruptcy Code; (ii) an involuntary case is commenced against the Company and the petition is not contested within fifteen (15) days, or is not dismissed or stayed within sixty (60) days, after commencement of the case; (iii) a custodian (as defined in the United States Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of the Company or the Company commences any other proceedings under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or there is commenced against the Company any such proceeding which remains undismissed and unstayed for a period of sixty (60) days; (iv) any order of relief or other order approving any such case or proceeding is entered; (v) the Company is adjudicated insolvent or bankrupt; (vi) the Company suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged and unstayed for a period of fifteen (15) days; (vii) the Company makes a general assignment for the benefit of creditors; (viii) the Company shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due and such failure or inability to pay shall not have been cured within fifteen (15) days; (ix) the Company shall call a meeting of its creditors with a view to arranging a

			composition or adjustment of its debts; (x) the Company shall by any act or failure to act consent to, approve of or acquiesce in any of the foregoing; (xi) any corporate action is taken by the Company for the purpose of effecting any of the foregoing.

	f)		Any judgment, writ or warrant of attachment or of any similar post-judgment process in an amount in excess of Two Hundred Fifty Thousand and no/100 Dollars ($250,000) shall be entered or filed against the Company or against any of its properties or assets and remain unsatisfied and unstayed for a period of sixty (60) days; provided, that if any such judgment, writ or warrant is not satisfied or stayed within such sixty (60) – day period, an event of default shall not exist if prior to the end of such sixty (60) – day period the Company provides to Lender a statement from Lender’s insurance carrier that the entire amount of such judgment, writ or warrant is a covered loss under the insurance policies that the Company maintains with such carrier and that such carrier does not dispute such coverage and will provide the Company with such proceeds of insurance required to satisfy such judgment, writ or warrant;

	g)		The Company dissolves, liquidates or otherwise ceases to actively conduct business.

	h)		The Company shall fail in any material respect to comply with any law, rule, regulation or order to which it or its assets are subject and such failure to comply remains uncured for more than thirty (30) days after written notice from Lender is received by the Company.

Upon the occurrence of any condition, event or act described above, the Company shall give written notice thereof (a “Default Notice”) to the Lender within five (5) business days of receiving knowledge of such condition, event or act.

Upon the occurrence of any event of default described in section (a)-(d), or (f)-(h) above the Lender may, at its option upon written notice to the Company, declare the Note to be immediately due and payable in full. Upon the occurrence of any Event of Default described in section (e) the Note shall become immediately due and payable without any action on the part of the Lender.

The Company represents and warrants to the Lender that it has all power and authority to enter into this Note.

This Note shall be governed by and construed in accordance with the laws of the State of New York.

The Company hereby agrees, subject only to any limitation imposed by applicable law, to pay all expenses, including reasonable attorneys’ fees and legal expenses, incurred by the Lender in endeavoring to collect any amounts payable hereunder that are not paid when due, whether by declaration or otherwise.

Notwithstanding anything to the contrary contained in this Note, in no event shall the interest payable hereon, whether before or after maturity, exceed the maximum interest which, under applicable law, may be charged on this Note.

The Company hereby expressly waives presentment, demand for payment, dishonor, notice of dishonor, protest, notice of protest and any other formality.

The Company will give the Lender written notice of any contemplated “Sales Event,” at least ten (10) business days prior to the record date for determining which holders of equity securities may vote with respect to or participate in such Sales Event. Except as set forth below in this paragraph, “Sales Event” shall mean the sale or distribution of substantially all of the assets of the Company or a merger or consolidation of the Company with or into another entity or the sale of a majority of the Company’s stock by its shareholders. If the Lender does not elect to convert this Note prior to the occurrence of a Sales Event, it may declare the Note due and payable at any time up to the next business day after consummation of the Sales Event. Notwithstanding the above, neither the consummation of the Contribution Agreement nor the IPO shall constitute a Sales Event for purposes of this Note. Upon the consummation of the Contribution Agreement and the IPO, the conversion of this Note shall be governed by the terms of the fourth full paragraph herein.

So long as this Note is outstanding, the Company will deliver quarterly financial statements to the Lender within forty-five (45) days after the end of each calendar quarter and audited financial statements within one hundred twenty (120) days after the end of each calendar year and the Lender may inspect the books and records of the Company upon reasonable notice.

IN WITNESS WHEREOF, the undersigned, by its duly authorized and acting executive officer, has executed this Note as of the date first set forth above.


	APPROACH OIL & GAS INC.
	By:	/s/ J. Ross Craft
		J. Ross Craft,
		President and Chief Executive Officer

Exhibit 10.8

CONVERTIBLE PROMISSORY NOTE



$10,000,000		June 25, 2007

FOR VALUE RECEIVED, Approach Oil & Gas Inc., a Delaware corporation (the “Company”), hereby promises to pay to the order of LUBAR EQUITY FUND, LLC, a Wisconsin limited liability company (the “Lender”), the principal sum of Ten Million and no/100 Dollars ($10,000,000), together with interest thereon from the date of this Convertible Promissory Note (this “Note”) on the unpaid principal balance. Interest shall accrue at a rate of seven percent (7%) per annum based on a three hundred sixty-five (365) – day year and compounded annually. Principal and accrued interest shall be due and payable on the third anniversary of the date of this Note; provided, that the Company shall have the right to prepay the principal in whole or in part from time to time without premium or penalty provided that the Company gives the Lender at least fifteen (15) days prior notice of such prepayment. Lender shall have the right to exercise its conversion rights in whole or in part prior to such prepayment.

The following will be deemed to constitute events of default under the Note:

	a)		The Company shall fail to make when due any payment of principal or interest under this Note and such failure shall remain uncured for a period of five (5) business days.

	b)		The Company shall fail to perform or observe, in any material respect, any provision of this Note or any material agreement or contract to which it is a party or by which it or its assets are bound, and such default shall continue for more than thirty (30) days after written notice from Lender is received by Borrower or,

			notwithstanding the foregoing, the Company fails to give a timely “Default Notice” as defined below.

	c)		Any representation or warranty made by the Company herein, or any statement, written information or certificate furnished by the Company in connection with the transactions contemplated hereby, proves untrue in any material respect as of the date of the issuance or making thereof or omits any statement necessary to make the statements contained therein, in light of the circumstances under which they were made, not false or misleading.

	d)		The Company shall default in the payment when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) of any amount owing in respect of any indebtedness in the aggregate principal amount of Two Hundred Fifty Thousand and no/100 Dollars ($250,000) or more, or shall default in the performance or observance of any obligation or condition with respect to any such indebtedness or any other event shall occur or condition exist, if the effect of such default, event or condition is to accelerate the maturity of any such indebtedness or to permit the holder or holders thereof, or any trustee or agent for such holders, to accelerate the maturity of any such indebtedness, or any such indebtedness shall become or be declared to be due and payable prior to its stated maturity and such default has not been cured within any grace period provided for in the instrument under which the default arose.

	e)		(i) The Company shall commence a voluntary case concerning itself under the United States Bankruptcy Code; (ii) an involuntary case is commenced against the Company and the petition is not contested within fifteen (15) days, or is not dismissed or stayed within sixty (60) days, after commencement of the case; (iii) a custodian (as defined in the United States Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of the Company or the Company commences any other proceedings under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or there is commenced against the Company any such proceeding which remains undismissed and unstayed for a period of sixty (60) days; (iv) any order of relief or other order approving any such case or proceeding is entered; (v) the Company is adjudicated insolvent or bankrupt; (vi) the Company suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged and unstayed for a period of fifteen (15) days; (vii) the Company makes a general assignment for the benefit of creditors; (viii) the Company shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due and such failure or inability to pay shall not have been cured within fifteen (15) days; (ix) the Company shall call a meeting of its creditors with a view to arranging a

			composition or adjustment of its debts; (x) the Company shall by any act or failure to act consent to, approve of or acquiesce in any of the foregoing; (xi) any corporate action is taken by the Company for the purpose of effecting any of the foregoing.

	f)		Any judgment, writ or warrant of attachment or of any similar post-judgment process in an amount in excess of Two Hundred Fifty Thousand and no/100 Dollars ($250,000) shall be entered or filed against the Company or against any of its properties or assets and remain unsatisfied and unstayed for a period of sixty (60) days; provided, that if any such judgment, writ or warrant is not satisfied or stayed within such sixty (60) – day period, an event of default shall not exist if prior to the end of such sixty (60) – day period the Company provides to Lender a statement from Lender’s insurance carrier that the entire amount of such judgment, writ or warrant is a covered loss under the insurance policies that the Company maintains with such carrier and that such carrier does not dispute such coverage and will provide the Company with such proceeds of insurance required to satisfy such judgment, writ or warrant;

	g)		The Company dissolves, liquidates or otherwise ceases to actively conduct business.

	h)		The Company shall fail in any material respect to comply with any law, rule, regulation or order to which it or its assets are subject and such failure to comply remains uncured for more than thirty (30) days after written notice from Lender is received by the Company.

The Company represents and warrants to the Lender that it has all power and authority to enter into this Note.

This Note shall be governed by and construed in accordance with the laws of the State of New York.

The Company hereby expressly waives presentment, demand for payment, dishonor, notice of dishonor, protest, notice of protest and any other formality.

IN WITNESS WHEREOF, the undersigned, by its duly authorized and acting executive officer, has executed this Note as of the date first set forth above.


	APPROACH OIL & GAS INC.
	By:	/s/ J. Ross Craft
		J. Ross Craft,
		President and Chief Executive Officer

Exhibit 10.9

AMENDED AND RESTATED

CREDIT AGREEMENT

AMONG

APPROACH RESOURCES I, LP

AS BORROWER,

THE FROST NATIONAL BANK

AND THE INSTITUTIONS NAMED HEREIN

AS LENDERS,

AND

THE FROST NATIONAL BANK

AS ADMINISTRATIVE AGENT

FEBRUARY 15, 2007

$100,000,000 REVOLVING CREDIT

TABLE OF CONTENTS


			Page No.
1.	Definitions			1
2.	Commitments of Lenders			10
	(a)	Terms of Commitment		10
	(b)	Procedure for Borrowing		10
	(c)	Letters of Credit		11
	(d)	Procedure for Obtaining Letters of Credit		12
	(e)	Outstanding Letters of Credit		12
	(f)	Voluntary Reduction of Borrowing Base		12
	(g)	Mandatory Borrowing Base Reductions		12
	(h)	Several Obligations		13
	(i)	Type and Number of Advances		13
3.	Notes Evidencing Loans			13
	(a)	Form of Notes		13
	(b)	Issuance of Additional Notes		13
	(c)	Interest Rates		13
	(d)	Payment of Interest		13
	(e)	Payment of Principal		14
	(f)	Payment to Lenders		14
	(g)	Sharing of Payments, Etc.		14
	(h)	Non-Receipt of Funds by Agent		14
4.	Interest Rates			15
	(a)	Options		15
	(b)	Interest Rate Determination		16
	(c)	Conversion Option		16
	(d)	Recoupment		16
	(e)	Interest Rates Applicable After Default		16
5.	Special Provisions Relating to Loans			16
	(a)	Unavailability of Funds or Inadequacy of Pricing		17
	(b)	Change in Laws		17
	(c)	Increased Cost or Reduced Return		17
	(d)	Discretion of Lender as to Manner of Funding		19
	(e)	Breakage Fees		19
6.	Collateral Security			20
7.	Borrowing Base			21
	(a)	Initial Borrowing Base		21
	(b)	Subsequent Determinations of Borrowing Base		21
8.	Fees			22
	(a)	Up-Front Fee		22
	(b)	Unused Commitment Fee		22
9.	Prepayments			23
	(a)	Voluntary Prepayments		23
	(b)	Mandatory Prepayment For Borrowing Base Deficiency		23


			Page No.
10.	Representations and Warranties			23
	(a)	Organization and Qualification		23
	(b)	Power and Authority		23
	(c)	Binding Obligations		24
	(d)	No Legal Bar or Resultant Lien		24
	(e)	No Consent		24
	(f)	Financial Condition		24
	(g)	Liabilities		24
	(h)	Litigation		25
	(i)	Taxes; Governmental Charges		25
	(j)	Titles, Etc.		25
	(k)	Defaults		26
	(l)	Casualties; Taking of Properties		26
	(m)	Use of Proceeds; Margin Stock		26
	(n)	Location of Business and Offices		26
	(o)	Compliance with the Law		26
	(p)	No Material Misstatements		27
	(q)	Not A Utility		27
	(r)	ERISA		27
	(s)	Intentionally Deleted		27
	(t)	No Subsidiaries		27
	(u)	Environmental Matters		27
	(v)	Liens		27
	(w)	Solvency		28
	(x)	Insurance		28
11.	Conditions of Lending			28
12.	Affirmative Covenants			30
	(a)	Financial Statements and Reports of Borrower, Guarantor		30
	(b)	Hedging Report		31
	(c)	Additional Information		31
	(d)	Certificates of Compliance		31
	(e)	Taxes and Other Liens		31
	(f)	Compliance with Laws		31
	(g)	Further Assurances		32
	(h)	Performance of Obligations		32
	(i)	Insurance		32
	(j)	Accounts and Records		32
	(k)	Right of Inspection		32
	(l)	Notice of Certain Events		33
	(m)	Environmental Reports and Notices		33
	(n)	Compliance and Maintenance		33
	(o)	Operation of Properties		34
	(p)	Compliance with Leases and Other Instruments		34
	(q)	Certain Additional Assurances Regarding Maintenance and Operations of
		Properties		34
	(r)	Sale of Certain Assets/Prepayment of Proceeds		35
	(s)	Title Matters		35


			Page No.
	(t)	Change of Principal Place of Business		35
	(u)	Additional Collateral		35
13.	Negative Covenants			36
	(a)	Negative Pledge		36
	(b)	Current Ratio		36
	(c)	Consolidations and Mergers		36
	(d)	Limitation on Additional Indebtedness		36
	(e)	Restricted Payments		37
	(f)	Rate Management Transactions		37
	(g)	Certain Transactions		38
	(h)	Intentionally Deleted		38
	(i)	Limitation on Investments and New Businesses		38
	(j)	Limitation on Credit Extensions		38
	(k)	Fiscal Year		38
	(l)	Certain Agreements		38
	(m)	Lines of Business		38
14.	Events of Default			38
15.	Agent and Lenders			41
	(a)	Appointment and Authorization		41
	(b)	Note Holders		42
	(c)	Consultation with Counsel		42
	(d)	Documents		42
	(e)	Resignation or Removal of Agent		42
	(f)	Responsibility of Agent		43
	(g)	Independent Investigation		44
	(h)	Indemnification		44
	(i)	Benefit of Section 15		44
	(j)	Pro Rata Treatment		44
	(k)	Assumption as to Payments		45
	(l)	Other Financings		45
	(m)	Interests of Lenders		45
	(n)	Investments		45
	(o)	Delegation to Affiliates		46
	(p)	Execution of Collateral Documents		46
	(q)	Collateral Releases		46
16.	Exercise of Rights			46
17.	Notices			46
18.	Expenses			47
19.	Indemnity			47
20.	Non-Liability of Lenders			48
21.	Governing Law			48
22.	Invalid Provisions			48
23.	Maximum Interest Rate			48
24.	Amendments			49
25.	Multiple Counterparts			49
26.	Conflict			50

iii


		Page No.
27.	Survival	50
28.	Parties Bound	50
29.	Assignments and Participations	50
30.	Choice of Forum: Consent to Service of Process and Jurisdiction	52
31.	Waiver of Jury Trial	52
32.	Other Agreements	52
33.	Financial Terms	52
34.	Tri-Party Loan	52
35.	USA Patriot Act Notice	52
36.	Original Credit Agreement	52


Exhibits
Exhibit “A”	-	Form of Notice of Borrowing
Exhibit “B”	-	Form of Note
Exhibit “C”	-	Form of Certificate of Compliance
Exhibit “D”	-	Form of Assignment and Acceptance Agreement


Schedules
Schedule 1	-	Liens
Schedule 2	-	Financial Condition
Schedule 2(e)	-	Existing Letters of Credit
Schedule 3	-	Liabilities
Schedule 4	-	Litigation
Schedule 5	-	Subsidiaries
Schedule 6	-	Environmental Matters

AMENDED AND RESTATED CREDIT AGREEMENT

THIS AMENDED AND RESTATED CREDIT AGREEMENT (the “Agreement”) executed as of the 15th day of February, 2007, by and among APPROACH RESOURCES I, LP, a Texas limited partnership (“Borrower”), and each of the financial institutions which is a party hereto (as evidenced by the signature pages to this Agreement) or which may from time to time become a party hereto pursuant to the provisions of Section 29 hereof or any successor or permitted assignee thereof (collectively, “Lenders”, and individually, “Lender”), and THE FROST NATIONAL BANK, a national banking association (“Frost”), as Administrative Agent (“Agent”).

W I T N E S S E T H:

In consideration of the mutual covenants and agreements herein contained, the parties hereby agree as follows:

1. Definitions . When used herein the terms “Agent”, “Agreement”, “Borrower”, “Frost”, “Lender” and “Lenders”, shall have the meanings indicated above. When used herein the following terms shall have the following meanings:

Accounting Principles means generally accepted accounting principles in effect from time to time, applied in a manner consistent with prior periods.

Advance means a borrowing hereunder (i) made by some or all of Lenders on the same Borrowing Date, or (ii) converted or continued by Lenders on the same date of conversion or continuation, consisting, in either case, of the aggregate amount of the several Loans of the same type and, in the case of Eurodollar Loans, for the same Interest Period.

Affiliate means any Person which, directly or indirectly, controls, is controlled by or is under common control with the relevant Person. For the purposes of this definition, “control” (including, with correlative meanings, the terms “controlled by” and “under common control with”), as used with respect to any Person, shall mean a member of the board of directors, a partner or an officer of such Person, or any other Person with possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership (of record, as trustee, or by proxy) of voting shares, partnership interests or voting rights, through a management contract or otherwise. Any Person owning or controlling directly or indirectly ten percent or more of the voting shares, partnership interests or voting rights, or other equity interest of another Person shall be deemed to be an Affiliate of such Person.

Applicable Rate means, for any day, with respect to any Base Rate Loan or Eurodollar Loan, or with respect to the Unused Commitment Fees payable hereunder, as the case may be, the applicable rate per annum set forth below under the caption “Base Rate Margin”, “Eurodollar Margin” or “Unused Commitment Fee Rate”, as the case may be, based upon the Borrowing Base Usage applicable on such date:


			Unused
Borrowing Base	Eurodollar	Base Rate	Commitment
Usage	Margin	Margin	Fee Rate
³ 90%	200 b.p.	0 b.p.	37.5 b.p.

³ 75% and < 90%	175 b.p.	0 b.p.	37.5 b.p.

³ 50% and < 75%	150 b.p.	0 b.p.	37.5 b.p.

< 50%	125 b.p.	0. b.p.	37.5 b.p.

Each change in the Applicable Rate shall apply during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next change.

Approach Delaware means Approach Delaware, LLC, a Delaware limited liability company and the sole limited partner of Borrower.

Approach Operating means Approach Operating, LLC, a Delaware limited liability company and the sole general partner of Borrower.

Approach Resources means Approach Resources Inc., a Delaware corporation and sole member of Guarantors.

Assignment and Acceptance means a document substantially in the form of Exhibit “D” hereto.

Available Commitment means, at any time, the Commitment then in effect minus the Total Outstandings.

Base Rate means, as of any date, a rate of interest per annum equal to the Prime Rate for such date, plus the Applicable Rate.

Base Rate Loan means any loan during any period which bears interest based upon the Base Rate or which would bear interest based upon the Base Rate if the Maximum Rate ceiling was not in effect at that particular time.

Borrowing Base means, as of any date, the value assigned by Lenders from time to time to the Borrowing Base Properties pursuant to Section 7 hereof.

Borrowing Base Deficiency is used herein as defined in Section 9(b) hereof.

Borrowing Base Properties means the Oil and Gas Properties.

Borrowing Date means the date elected by Borrower pursuant to Section 2(b) hereof for

an Advance on the Loan.

Business Day means (i) with respect to any borrowing, payment or note selection of Eurodollar Loans, a day (other than Saturdays or Sundays) on which banks are legally open for business in Fort Worth, Texas and on which dealings in United States dollars are carried on in the London interbank market, and (ii) for all other purposes a day (other than Saturdays and Sundays) on which banks are legally open for business in Fort Worth, Texas.

Capital Lease means any lease of property, real or personal, which would be capitalized on a balance sheet of the lessee prepared in accordance with Accounting Principles.

Change of Control means the acquisition by any Person or group of Persons acting together, of a direct interest in more than a majority of the voting power of the voting stock of or membership interests in Borrower, by way of merger or consolidation or otherwise.

Collateral shall have the meaning assigned in Section 6 hereof.

Collateral Documents is used collectively to mean this Agreement, all Deeds of Trust, Mortgages, Security Agreements, Assignments of Production and Financing Statements, the Guaranties and other documents covering the Oil and Gas Properties and related personal property, equipment, oil and gas inventory and proceeds of the foregoing and other collateral documents, all such documents to be in form and substance reasonably satisfactory to Agent.

Commitment means (A) for all Lenders, the lesser of (i) $100,000,000 or (ii) the Borrowing Base, as reduced or increased from time to time pursuant to Sections 2 and 7 hereof, and (B) as to any Lender, its obligation to make Advances hereunder in amounts not exceeding, in the aggregate, an amount equal to such Lender’s Commitment Percentage times the total Commitment as of any date. The Commitment of each Lender hereunder shall be adjusted from time to time to reflect assignments made by such Lender pursuant to Section 29 hereof. Each reduction in the Commitment shall result in a Pro Rata reduction in each Lender’s Commitment.

Commitment Percentage means for each Lender the percentage set forth opposite the Lender’s name on the signature page hereto. The Commitment Percentage of each Lender hereunder shall be adjusted from time to time to reflect assignments made by such Lender pursuant to Section 29 hereof.

Current Assets means, as of any date, the current assets which would be reflected on a balance sheet of Borrower prepared as of such date in accordance with Accounting Principles; provided that Borrower’s Current Assets shall include the Available Commitment, and Current Assets shall not include the amount of any non-cash items as a result of the application of Financial Accounting Standards Board Statement No. 133 and any subsequent amendments thereto or the fair value of any Rate Management Transaction or any non-hedge derivative contract (whether deemed effective or non-effective).

Current Liabilities means, as of any date, the current liabilities which would be reflected on a balance sheet of Borrower prepared as of such date in accordance with Accounting Principles, but excluding any liabilities as a result of the application of Financial Accounting Standards Board Statement No. 133 and any subsequent amendments thereto or the fair value of

any Rate Management Transaction or any non-hedge derivative contract (whether deemed effective or non-effective).

Current Ratio means the ratio of Current Assets to Current Liabilities.

Dollar or $ means United States dollars.

Default means all the events specified in Section 14 hereof, regardless of whether there shall have occurred any passage of time or giving of notice, or both, that would be necessary in order to constitute such event as an Event of Default.

Default Rate is used herein as defined in Section 4(e) hereof.

Effective Date means the date of this Agreement.

Eligible Assignee means any of (i) a Lender or any Affiliate of a Lender; (ii) a commercial bank organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000; (iii) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development, or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000.00, provided that such bank is acting through a branch or agency located in the United States; and (iv) a Person that is primarily engaged in the business of commercial lending and that (A) is a subsidiary of a Lender, (B) a subsidiary of a Person of which a Lender is a subsidiary, or (C) a Person of which a Lender is a subsidiary; provided, however, that no Affiliate of Borrower shall be an Eligible Assignee.

Engineered Value is used herein as defined in Section 6 hereof.

Environmental Certificate shall have the meaning assigned to it in Section 4.2 hereof.

Environmental Laws means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C.A. §9601, et seq., the Resource Conservation and Recovery Act, as amended by the Hazardous Solid Waste Amendment of 1984, 42 U.S.C.A. §6901, et seq., the Clean Water Act, 33 U.S.C.A. §1251, et seq., the Clean Air Act, 42 U.S.C.A. §1251, et seq., the Toxic Substances Control Act, 15 U.S.C.A. §2601, et seq., The Oil Pollution Act of 1990, 33 U.S.G. §2701, et seq., and all other laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, orders, permits and restrictions of any federal, state, county, municipal and other governments, departments, commissions, boards, agencies, courts, authorities, officials and officers, domestic or foreign, relating to in any way the environment, preservation or reclamation of natural resources, oil pollution, air pollution, water pollution, noise control and/or the management, release or threatened release, handling, discharge, disposal or recovery of on-site or off-site asbestos, radioactive materials, spilled or leaked petroleum products, distillates or fractions and industrial solid waste or “hazardous substances” as defined by 42 U.S.C. § 9601, et seq., as amended, as each of the foregoing may be amended from time to time.

Environmental Liability means any claim, demand, obligation, cause of action, order,

violation, damage, injury, judgment, penalty or fine, cost of enforcement, cost of remedial action or any other costs or expense whatsoever, contingent or otherwise, including reasonable attorneys’ fees and disbursements and any liability for cleanups, costs of environmental remediation, fines or penalties, resulting from the violation or alleged violation of any Environmental Law or the release of any substance into the environment which is required to be remediated by a regulatory agency or governmental authority or the imposition of any Environmental Lien (as hereinafter defined), which could reasonably be expected to individually or in the aggregate have a Material Adverse Effect.

Environmental Lien means a Lien in favor of any court, governmental agency or instrumentality or any other Person (i) for any Environmental Liability or (ii) for damages arising from or cost incurred by such court or governmental agency or instrumentality or other person in response to a release or threatened release of asbestos or “hazardous substance” into the environment, the imposition of which Lien could reasonably be expected to have a Material Adverse Effect.

ERISA means the Employee Retirement Income Security Act of 1974, as amended.

Eurodollar Base Rate means the offered rate for the period equal to or greater than the Interest Period for U.S. dollar deposits of not less than $1,000,000 as of 11:00 a.m. City of London, England time two (2) Business Days prior to the first day of the Interest Period as shown on the display designated as “British Bankers Association Interest Settlement Rates” on Telerate for the purpose of displaying such rate. In the event such rate is not available on Telerate, then such offered rate shall be the comparable rate designated by Reuters or, if such a comparable rate is not designated by Reuters, such offered rate shall be otherwise independently determined by Agent from another alternate, substantially independent source available to Agent (such as, but not limited to, Bloomberg) or shall be calculated by Agent by substantially similar methodology as that theretofore used to determine such offered rate.

Eurodollar Loan means any Loan during any period which bears interest at the Eurodollar Rate, or which would bear interest at such rate if the Maximum Rate ceiling was not in effect at a particular time.

Eurodollar Rate means, with respect to a Eurodollar Loan for the relevant Interest Period, the sum of the quotient of (A) the Eurodollar Base Rate applicable to such Interest Period, divided by (B) one minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period. The Eurodollar Rate shall be rounded to the next higher multiple of 1/100th of one percent if the rate is not such a multiple.

Event of Default is used herein as defined in Section 14 hereof.

Facility Termination Date means the Maturity Date.

Federal Funds Effective Rate means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a

Business Day, the average of the quotations at approximately 10:00 a.m. (Fort Worth, Texas time) on such day on such transactions received by Agent from three (3) Federal funds brokers of recognized standing selected by Agent in its sole discretion.

Financial Statements means balance sheets, income statements, statements of cash flow, stockholder equity and appropriate footnotes and schedules, prepared in accordance with Accounting Principles.

Guarantors means Approach Operating and Approach Delaware.

Indebtedness with respect to Borrower means as of any date, all liabilities and contingent liabilities which would be reflected on a balance sheet and related notes thereto of Borrower prepared as of such date in accordance with the Accounting Principles, including without limitation: (i) all obligations for money borrowed; (ii) all obligations under conditional sale or other title retention agreements and all obligations issued or assumed as full or partial payment for property, whether or not any such obligations represent obligations for borrowed money; (iii) all indebtedness secured by any lien existing on property owned or acquired by Borrower subject to any such lien, whether or not the obligations secured thereby shall have been assumed but only to the extent of the value of the property so secured; (iv) the proportionate share of Borrower in all obligations, direct or indirect, to any joint venture, partnership or other entity of which Borrower is a member; (v) all obligations under guaranties, note purchase agreements and other documents having similar effect; (vi) all obligations for accounts payable or trade credit; (vii) indebtedness of any joint venture, partnership or other Person for which Borrower is directly or indirectly liable; (viii) all obligations and indebtedness arising under a Hedge and (ix) all obligations under capital leases, operating leases or any other leases only to the extent such leases would be treated as indebtedness in accordance with the Accounting Principles.

Interest Payment Date means the last day of each calendar quarter in the case of Base Rate Loans and, in the case of Eurodollar Loans, the last day of the applicable Interest Period, and if such Interest Period is longer than three (3) months, at three (3) month intervals following the first day of such Interest Period.

Interest Period means with respect to any Eurodollar Loan (i) initially, the period commencing on the date such Eurodollar Loan is made and ending one (1), two (2), three (3) or six (6) months thereafter as selected by Borrower pursuant to Section 4(a)(ii), and (ii) thereafter, each period commencing on the day following the last day of the next preceding Interest Period applicable to such Eurodollar Loan and ending one (1), two (2), three (3) or six (6) months thereafter, as selected by Borrower pursuant to Section 4(a)(ii); provided, however, that (A) if any Interest Period would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day unless the result of such extension would be to extend such Interest Period into the next calendar month, in which case such Interest Period shall end on the immediately preceding Business Day, (B) if any Interest Period begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) such Interest Period shall end on the last Business Day of a calendar month, and (iii) any Interest Period which would otherwise expire after the Maturity Date shall end on such Maturity Date.

Letters of Credit is used herein as defined in Section 2(c) hereof.

Lien means any mortgage, deed of trust, pledge, security interest, assignment, encumbrance or lien (statutory or otherwise) of every kind and character.

Loan Documents means this Agreement, the Notes, the Collateral Documents and all other documents executed by Borrower with Agent or Lenders in connection with the transaction described in this Agreement.

Loans means the Revolving Loans.

Material Adverse Effect means a material adverse effect on (i) the assets or properties, liabilities, financial condition, business or operations of Borrower, (ii) the ability of Borrower to carry out its businesses as of the date of this Agreement or as proposed at the date of this Agreement to be conducted, (iii) the ability of Borrower to perform fully and on a timely basis its obligations under any of the Loan Documents, (iv) the validity or enforceability of any of the Loan Documents or the rights and remedies of Agent or Lenders thereunder or (v) the Collateral, the Liens on the Collateral created pursuant to the Loan Documents or the priority of any such Lien.

Maturity Date means January 31, 2008.

Maximum Rate is used herein as defined in Section 23 hereof.

Notes means the Notes, substantially in the form of Exhibit “B” hereto issued or to be issued hereunder to each Lender, respectively, to evidence the indebtedness to such Lender arising by reason of the Advances on the Commitment, together with all modifications, renewals and extensions thereof or any part thereof.

Oil and Gas Properties means all oil, gas and mineral properties and interests and related personal properties, in which Borrower owns an interest.

Payor is used herein as defined in Section 3(h) hereof.

Permitted Liens means (i) royalties, overriding royalties, reversionary interests, production payments and similar burdens; (ii) sales contracts or other arrangements for the sale of production of oil, gas or associated liquid or gaseous hydrocarbons which would not (when considered cumulatively with the matters discussed in clause (i) above) deprive Borrower of any material right in respect of Borrower’s assets or properties (except for rights customarily granted with respect to such contracts and arrangements); (iii) statutory Liens for taxes or other assessments that are not yet delinquent (or that, if delinquent, are being contested in good faith by appropriate proceedings, levy and execution thereon having been stayed and continue to be stayed and for which Borrower has set aside on its books adequate reserves in accordance with Accounting Principles); (iv) easements, rights of way, servitudes, permits, surface leases and other rights in respect to surface operations, pipelines, grazing, logging, canals, ditches, reservoirs or the like, conditions, covenants and other restrictions, and easements of streets, alleys, highways, pipelines, telephone lines, power lines, railways and other easements and rights of way on, over or in respect of Borrower’s assets or properties and that do not individually or in

the aggregate cause a Material Adverse Effect; (v) materialmen’s, mechanic’s, repairman’s, employee’s, vendor’s, laborer’s, warehousemen’s, landlord’s, carrier’s, pipeline’s, contractor’s, sub-contractor’s, operator’s, non-operator’s (arising under operating or joint operating agreements), and other Liens (including any financing statements filed in respect thereof) incidental to obligations incurred by Borrower in connection with the construction, maintenance, development, transportation, processing, storage or operation of Borrower’s assets or properties to the extent not delinquent (or which, if delinquent, are being contested in good faith by appropriate proceedings and for which Borrower has set aside on its books adequate reserves in accordance with Accounting Principles); (vi) all contracts, agreements and instruments, and all defects and irregularities and other matters affecting Borrower’s assets and properties which were in existence at the time Borrower’s assets and properties were originally acquired by Borrower and all routine operational agreements entered into in the ordinary course of business, which contracts, agreements, instruments, defects, irregularities and other matters and routine operational agreements are not such as to, individually or in the aggregate, interfere materially with the operation, value or use of Borrower’s assets and properties, considered in the aggregate; (vii) Liens in connection with workmen’s compensation, unemployment insurance or other social security, old age pension or public liability obligations; (viii) legal or equitable encumbrances deemed to exist by reason of the existence of any litigation or other legal proceeding or arising out of a judgment or award with respect to which an appeal is being prosecuted in good faith and levy and execution thereon have been stayed and continue to be stayed; (ix) rights reserved to or vested in any municipality, governmental, statutory or other public authority to control or regulate Borrower’s assets and properties in any manner, and all applicable laws, rules and orders from any governmental authority; (x) landlord’s Liens; (xi) Liens incurred pursuant to the Collateral Documents and Liens that secure obligations under Rate Management Transactions permitted pursuant to Section 13(f) hereof; (xii) any inconsequential, insignificant or immaterial Liens against any of the Oil and Gas Properties which do not interfere with or impair Borrower’s ownership of, or right or ability to receive proceeds of production from, such property, and which, singularly or collectively with other inconsequential, insignificant or immaterial Liens, do not result in a Material Adverse Effect on Borrower; and (xiii) Liens existing at the date of this Agreement which are identified in Schedule “1” hereto.

Person means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

Plan means any plan subject to Title IV of ERISA and maintained by Borrower, or any such plan to which Borrower is required to contribute on behalf of its employees.

Pre-Approved Contracts means any contracts or agreements entered into in connection with any Rate Management Transaction which are designed to hedge, provide a price floor for, or swap crude oil or natural gas or otherwise sell up to 75%, or in the case of Rate Management Transactions resulting in a floor price per barrel or mcf, not more than 100% of Borrower’s Projected Production, (with oil and gas calculated separately) for Rate Management Transactions with Termination Dates of no more than thirty-six (36) months.

Prime Rate means the rate per annum equal to the Prime Rate announced from time to time by Agent (which is not necessarily the lowest rate charged to any customer), changing when

and as said Prime Rate changes.

Projected Production means the projected production from Borrower’s proved developed producing Oil and Gas Properties as of the date on which any calculation is made as forecasted in the most recent engineering report provided to Lenders.

Pro Rata or Pro Rata Part means for each Lender, (i) for all purposes where no Loan is outstanding, such Lender’s Commitment Percentage and (ii) otherwise, the proportion which the portion of the outstanding Loans owed to such Lender bears to the aggregate outstanding Loans owed to all Lenders at the time in question.

Rate Management Transaction means (i) any transaction (including an agreement with respect thereto) now existing or hereafter entered into by Borrower or any Affiliate which is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, forward exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures and (ii) any swap, collar, floor, cap, futures or other contract (including sales contracts with known prices) between Borrower and any Person which is intended to reduce or eliminate the risk of fluctuations in the price of hydrocarbons, including, without limitation, the purchase or sale of any hydrocarbons for future delivery, any transaction in a forward contract for the delivery of any hydrocarbons, any physical or spot transaction in any hydrocarbons, or any transaction involving the purchase or sale of an option on any of the foregoing.

Redetermination Date is used herein as defined in Section 7(b) hereof.

Regulation D means Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto and other regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System.

Reimbursement Obligations means, at any time, the obligations of Borrower in respect of all Letters of Credit then outstanding to reimburse amounts paid by any Lender in respect of any drawing or drawings under a Letter of Credit.

Release Price is used herein as defined in Section 12(r) hereof.

Required Lenders means Lenders holding 66-2/3% or more of the Commitments or if one or more of the Commitments has been terminated, Lenders holding 66-2/3% of the outstanding Loans.

Required Payment is used herein as defined in Section 3(h) hereof.

Reserve Requirement means, with respect to any Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is

imposed under Regulation D on Eurocurrency liabilities.

Revolving Loan or Loans means an Advance or Advances made pursuant to Section 2(a) hereof.

Termination Date means, with respect to any Rate Management Transaction, the date of expiration of that particular Rate Management Transaction.

Total Outstandings means the total principal balance outstanding on the Notes at any time plus (ii) the total face amount of all outstanding Letters of Credit, plus (iii) the total amount of all unpaid Reimbursement Obligations.

Tranche means a set of Eurodollar Loans made by Lenders at the same time and for the same Interest Period.

Unscheduled Redeterminations means a redetermination of the Borrowing Base made at any time other than on the dates set for the regular semi-annual redetermination of the Borrowing Base which are made (i) at the request of Borrower (but only once between Redetermination Dates) or (ii) at the request of Required Lenders (but only once between Redetermination Dates).

2. Commitments of Lenders .

(a) Terms of Commitment . On the terms and conditions hereinafter set forth, each Lender agrees severally to make Advances to Borrower from time to time during the period beginning on the Effective Date and ending on the Maturity Date in such amounts as Borrower may request up to an amount not to exceed, in the aggregate principal amount advanced at any time, its Pro Rata Part of the Available Commitment. Subject to the terms of this Agreement, Borrower may borrow, repay and reborrow at any time prior to the Maturity Date. The obligation of Borrower hereunder shall be evidenced by this Agreement and the Notes issued in connection herewith, said Notes to be as described in Section 3 hereof. Notwithstanding any other provision of this Agreement, no Advance shall be required to be made hereunder if any Default or Event of Default (as hereinafter defined) has occurred and is continuing. Each Advance under the Commitment shall be an aggregate amount of at least $500,000 or any whole multiples of $100,000 in excess thereof. Irrespective of the face amount of the Note or Notes, Lenders shall never have the obligation to Advance any amount or amounts in excess of the Commitment.

(b) Procedure for Borrowing . Whenever Borrower desires an Advance under the Commitment, it shall give Agent telegraphic, telex, facsimile or telephonic notice (“Notice of Borrowing”) of such requested Advance, which in the case of telephonic notice, shall be promptly confirmed in writing. Each Notice of Borrowing shall be in the form of Exhibit “A” attached hereto and shall be received by Agent not later than 11:00 a.m. Fort Worth, Texas time, on (i) the Borrowing Date in the case of the Base Rate Loan, or (ii) three Business Days prior to any proposed Borrowing Date in the case of Eurodollar Loans. Each Notice of Borrowing shall specify (i) the Borrowing Date (which shall be a Business Day), (ii) the principal amount to be borrowed, (iii) the portion of the Advance constituting Base Rate Loans and/or Eurodollar Loans and (iv) if any portion of the proposed Advance is to constitute Eurodollar Loans, the initial Interest Period

selected by Borrower pursuant to Section 4 hereof to be applicable thereto. Upon receipt of such Notice, Agent shall advise each Lender thereof; provided, that if Lenders have received at least one (1) day’s notice of such Advance prior to funding of a Base Rate Loan, or at least three (3) days’ notice of each Advance prior to funding in the case of a Eurodollar Loan, each Lender shall provide Agent at its office at 777 Main Street, Suite 500, Fort Worth, Texas, not later than 1:00 p.m., Fort Worth, Texas time, on the Borrowing Date, in immediately available funds, its Pro Rata share of the requested Advance, but the aggregate of all such fundings by each Lender shall never exceed such Lender’s Commitment. Not later than 2:00 p.m., Fort Worth, Texas time, on the Borrowing Date, Agent shall make available to Borrower at the same office, in like funds, the aggregate amount of such requested Advance. Neither Agent nor any Lender shall incur any liability to Borrower in acting upon any Notice of Borrowing referred to above which Agent or such Lender believes in good faith to have been given by a duly authorized officer or other person authorized to borrow on behalf of Borrower or for otherwise acting in good faith under this Section 2(b). Upon funding of Advances by Lenders and such funds being made available to Borrower in accordance with this Agreement, pursuant to any such Notice, Borrower shall have effected Advances hereunder.

(c) Letters of Credit . On the terms and conditions hereinafter set forth, Agent shall from time to time during the period beginning on the Effective Date and ending on the Maturity Date upon request of Borrower, issue standby and/or commercial Letters of Credit for the account of Borrower (the “Letters of Credit”) in such face amounts as Borrower may request, but not to exceed in the aggregate face amount at any time outstanding ten percent (10%) of the Borrowing Base then in effect. The face amount of all Letters of Credit issued and outstanding hereunder shall be considered as Advances on the Commitment for Borrowing Base purposes and all payments made by Agent on such Letters of Credit shall be considered as Advances under the Notes. Each Letter of Credit issued for the account of Borrower hereunder shall (i) be in favor of such beneficiaries as specifically requested by Borrower, (ii) have an expiration date not exceeding the earlier of (a) one year or (b) the Maturity Date, (iii) be in a minimum amount of $25,000.00 and (iv) contain such other terms and provisions as may be reasonable required by issuing Lender. Each Lender (other than Agent) agrees that, upon issuance of any Letter of Credit hereunder, it shall automatically acquire a participation in Agent’s liability under such Letter of Credit in an amount equal to such Lender’s Commitment Percentage of such liability, and each Lender (other than Agent) thereby shall absolutely, unconditionally and irrevocably assume, as primary obligor and not as surety, and shall be unconditionally obligated to Agent to pay and discharge when due, its Commitment Percentage of Agent’s liability under such Letter of Credit. Borrower hereby unconditionally agrees to pay and reimburse Agent for the amount of each demand for payment under any Letter of Credit that is in substantial compliance with the provisions of any such Letter of Credit at or prior to the date on which payment is to be made by Agent to the beneficiary thereunder, without presentment, demand, protest or other formalities of any kind. Upon receipt from any beneficiary of any Letter of Credit of any demand for payment under such Letter of Credit, Agent shall promptly notify Borrower of the demand and the date upon which such payment is to be made by Agent to such beneficiary in respect of such demand. Upon receipt of such notice from Agent,

Borrower shall advise Agent whether or not it intends to borrow hereunder to finance its obligations to reimburse Agent, and if so, submit a Notice of Borrowing as provided in Section 2(b) hereof. If Borrower fails to so advise Agent and thereafter fails to reimburse Agent, Agent shall notify each Lender of the demand and the failure of Borrower to reimburse Agent, and each Lender shall reimburse Agent for its Commitment Percentage of each such draw paid by Agent and unreimbursed by Borrower. All such amounts paid by Agent and/or reimbursed by Lenders shall be treated as an Advance or Advances under the Commitment, which Advances shall be immediately due and payable and shall bear interest at the Maximum Rate. Borrower agrees to pay Agent for the benefit of Lenders commissions for issuing the Letters of Credit (calculated separately for each Letter of Credit) in an amount equal to the greater of (i) $500 or, (ii) one percent (1.00%) of the maximum face amount of the Letter of Credit. Such commissions will be calculated on the basis of a year consisting of 360 days.

(d) Procedure for Obtaining Letters of Credit . The amount and date of issuance, renewal, extension or reissuance of a Letter of Credit pursuant to the Commitments shall be designated by Borrower’s written request delivered to Agent at least three (3) Business Days prior to the date of such issuance, renewal, extension or reissuance. Concurrently with or promptly following the delivery of the request for a Letter of Credit, Borrower shall execute and deliver to Agent an application and agreement with respect to the Letter of Credit, said application and agreement to be in the form used by Agent (in the event that there is any conflict between the terms of any such application and agreement for any Letter of Credit and this Agreement, the terms of this Agreement shall prevail). Agent shall not be obligated to issue, renew, extend or reissue any Letter of Credit if (i) the amount thereon when added to the face amount of the outstanding Letters of Credit plus any Reimbursement Obligations exceeds ten percent (10%) of the Borrowing Base or (ii) the amount thereof when added to the Total Outstandings would exceed the Commitment.

(e) Outstanding Letters of Credit . On the Effective Date, the Letters of Credit listed on Schedule 2(e) shall be deemed to have been issued under this Agreement by Agent, without payment of any fees otherwise due upon the issuance of a Letter of Credit, and Agent shall be deemed, without further action by any party hereto, to have sold to each Lender, and each Lender shall be deemed, without further action by any party hereto, to have purchased from Agent, a participation, to the extent of such Lender’s Pro Rata Part, in such Letters of Credit.

(f) Voluntary Reduction of Borrowing Base . Subject to the provisions of Section 5(c) hereof, Borrower may at any time, or from time to time, upon not less than three (3) Business Days’ prior written notice to Agent, reduce the Borrowing Base; provided, however, that (i) each reduction in the Borrowing Base must be in the amount of $1,000,000 or more, in increments of $1,000,000 and (ii) each reduction must be accompanied by a prepayment of the Notes in the amount by which the Total Outstandings exceed the Borrowing Base as reduced pursuant to this Section 2(f).

(g) Mandatory Borrowing Base Reductions . The Borrowing Base shall be reduced from time to time by an amount of any prepayment required by Section 12(r)

hereof upon the sale of assets. If, as a result of any such reduction in the Borrowing Base, the Total Outstandings ever exceed the Borrowing Base then in effect, Borrower shall make the mandatory prepayment of principal required pursuant to Section 9(b) hereof.

(h) Several Obligations . The obligations of Lenders under the Commitments are several and not joint. The failure of any Lender to make an Advance required to be made by it shall not relieve any other Lender of its obligation to make its Advance, and no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender. No Lender shall be required to lend hereunder any amount in excess of its legal lending limit.

(i) Type and Number of Advances . Any Advance on the Commitment may be a Base Rate Loan or a Eurodollar Loan, or a combination thereof, as selected by Borrower pursuant to Section 4 hereof. The total number of Tranches which may be outstanding at any time shall never exceed five (5).

3. Notes Evidencing Loans . The loans described above in Section 2 shall be evidenced by promissory notes of Borrower as follows:

(a) Form of Notes . The Loans shall be evidenced by a Note or Notes in the aggregate face amount of $100,000,000, and shall be in the form of Exhibit “B” hereto with appropriate insertions. Notwithstanding the face amount of the Notes, the actual principal amount due from Borrower to Lenders on account of the Notes, as of any date of computation, shall be the sum of Advances then and theretofore made on account thereof, less all principal payments actually received by Lenders in collected funds with respect thereto. Although the Notes may be dated as of the Effective Date, interest in respect thereof shall be payable only for the period during which the loans evidenced thereby are outstanding and, although the stated amount of the Notes may be higher, the Notes shall be enforceable, with respect to Borrower’s obligation to pay the principal amount thereof, only to the extent of the unpaid principal amount of the Loans. Irrespective of the face amount of the Notes, no Lender shall ever be obligated to advance on the Commitment any amount in excess of its Commitment then in effect.

(b) Issuance of Additional Notes . At the Effective Date there shall be outstanding Notes in the aggregate face amount of $100,000,000 payable to the order of Lenders . From time to time new Notes may be issued to other Lenders as such Lenders become parties to this Agreement. Upon request from Agent, Borrower shall execute and deliver to Agent any such new or additional Notes. From time to time as new Notes are issued Agent shall require that each Lender exchange its Note(s) for newly issued Note(s) to better reflect the extent of each Lender’s Commitments hereunder.

(c) Interest Rates . The unpaid principal balance of the Notes shall bear interest from time to time as set forth in Section 4 hereof.

(d) Payment of Interest . Interest on the Notes shall be payable on each Interest Payment Date unless earlier due in whole or in part as a result of an acceleration

of the amount due as a result of an Event of Default or pursuant to the mandatory prepayment provisions of Section 9(b) or 9(c) hereof.

(e) Payment of Principal . Principal of the Loans shall be due and payable to Agent for the ratable benefit of Lenders on the Maturity Date unless earlier due in whole or in part as a result of an acceleration of the amount due or pursuant to the mandatory prepayment provisions of Section 9(b) or 9(c) hereof.

(f) Payment to Lenders . Each Lender’s Pro Rata Part of payment or prepayment of the Loans shall be directed by wire transfer to such Lender by Agent at the address provided to Agent for such Lender for payments no later than 2:00 p.m., Fort Worth, Texas, time on the Business Day such payments or prepayments are deemed hereunder to have been received by Agent; provided, however, in the event that any Lender shall have failed to make an Advance as contemplated under Section 2 hereof (a “Defaulting Lender”) and Agent or another Lender or Lenders shall have made such Advance, payment received by Agent for the account of such Defaulting Lender or Lenders shall not be distributed to such Defaulting Lender or Lenders until such Advance or Advances shall have been repaid in full to Lender or Lenders who funded such Advance or Advances. Any payment or prepayment received by Agent at any time after 12:00 noon, Fort Worth, Texas, time on a Business Day shall be deemed to have been received on the next Business Day. Interest shall cease to accrue on any principal as of the end of the day preceding the Business Day on which any such payment or prepayment is deemed hereunder to have been received by Agent. If Agent fails to transfer any principal amount to any Lender as provided above, then Agent shall promptly direct such principal amount by wire transfer to such Lender.

(g) Sharing of Payments, Etc . If any Lender shall obtain any payment (whether voluntary, involuntary, or otherwise) on account of the Loans (including, without limitation, any set-off) which is in excess of its Pro Rata Part of payments on the Loans, as the case may be, obtained by all Lenders, such Lender shall purchase from the other Lenders such participation as shall be necessary to cause such purchasing Lender to share the excess payment Pro Rata with each of them; provided that, if all or any portion of such excess payment is thereafter recovered from such purchasing Lender , the purchase shall be rescinded and the purchase price restored to the extent of the recovery. Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section may, to the fullest extent permitted by law, exercise all of its rights of payment (including the right of offset) with respect to such participation as fully as if such Lender were the direct creditor of Borrower in the amount of such participation.

(h) Non-Receipt of Funds by Agent . Unless Agent shall have been notified by a Lender or Borrower (the “Payor”) prior to the date on which such Lender is to make payment to Agent of the proceeds of a Loan to be made by it hereunder Borrower is to make a payment to Agent for the account of one or more of Lenders, as the case may be (such payment being herein called the “Required Payment”), which notice shall be effective upon receipt, that Payor does not intend to make the Required Payment to Agent, Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient on such date and, if Payor has not in fact made the Required

Payment to Agent, the recipient of such payment shall, on demand, pay to Agent the amount made available to it together with interest thereon in respect of the period commencing on the date such amount was made available by Agent until the date Agent recovers such amount at the rate applicable to such portion of the applicable Loan.

4. Interest Rates .

(a) Options .

(i) Base Rate Loans . On all Base Rate Loans Borrower agrees to pay interest on the Notes calculated on the basis of a year consisting of 365 days or 366 days in a leap year, as the case may be, and for the actual number of days elapsed with respect to the unpaid principal amount of each Base Rate Loan from the date the proceeds thereof are made available to Borrower until maturity (whether by acceleration or otherwise), at a varying rate per annum equal to the lesser of (i) the Maximum Rate, or (ii) the Base Rate plus the Applicable Rate. Subject to the provisions of this Agreement as to prepayment, the principal of the Notes representing Base Rate Loans shall be payable as specified in Section 3(e) hereof and the interest in respect of each Base Rate Loan shall be payable on each Interest Payment Date applicable thereto. Past due principal and, to the extent permitted by law, past due interest in respect to each Base Rate Loan, shall bear interest, payable on demand, at a rate per annum equal to the Default Rate.

(ii) Eurodollar Loans . On all Eurodollar Loans Borrower agrees to pay interest calculated on the basis of a year consisting of 365 days or 366 days in a leap year, as the case may be, and for the actual number of days elapsed with respect to the unpaid principal amount of each Eurodollar Loan from the date the proceeds thereof are made available to Borrower until maturity (whether by acceleration or otherwise), at a varying rate per annum equal to the lesser of (i) the Maximum Rate, or (ii) the Eurodollar Rate plus the Applicable Rate. Subject to the provisions of this Agreement with respect to prepayment, the principal of the Notes shall be payable as specified in Section 3(e) hereof and the interest with respect to each Eurodollar Loan shall be payable on each Interest Payment Date applicable thereto. Past due principal and, to the extent permitted by law, past due interest shall bear interest, payable on demand, at a rate per annum equal to the Default Rate. Upon three (3) Business Days’ written notice prior to the making by Lenders of any Eurodollar Loan (in the case of the initial Interest Period therefor) or the expiration date of each succeeding Interest Period (in the case of subsequent Interest Periods therefor), Borrower shall have the option, subject to compliance by Borrower with all of the provisions of this Agreement, as long as no Event of Default exists, to specify whether the Interest Period commencing on any such date shall be a one (1), two (2), three (3) or six (6) month period, subject to availability. If Agent shall not have received timely notice of a designation of such Interest Period as herein provided, Borrower shall be deemed to have elected to convert all then maturing Eurodollar Loans to Base Rate Loans.

(b) Interest Rate Determination . Agent shall determine each interest rate applicable to the Loans hereunder. Agent shall give prompt written notice to Borrower and Lenders of each rate of interest so determined and its determination thereof shall be conclusive absent error.

(c) Conversion Option . Borrower may elect from time to time (i) to convert all or any part of its Eurodollar Loans to Base Rate Loans by giving Agent irrevocable notice of such election in writing prior to 10:00 a.m. (Fort Worth, Texas time) on the conversion date and such conversion shall be made on the requested conversion date, provided that any such conversion of a Eurodollar Loan shall only be made on the last day of the Interest Period with respect thereto, and (ii) to convert all or any part of its Base Rate Loans to Eurodollar Loans by giving Agent irrevocable written notice of such election no later than three (3) Business Days prior to the proposed conversion and such conversion shall be made on the requested conversion date or, if such requested conversion date is not a Business Day, on the next succeeding Business Day. Any such conversion shall not be deemed to be a prepayment of any of the loans for purposes of this Agreement or the Notes.

(d) Recoupment . If at any time the applicable rate of interest selected pursuant to Sections 4(a)(i) or 4(a)(ii) above shall exceed the Maximum Rate, thereby causing the interest on the Notes to be limited to the Maximum Rate, then any subsequent reduction in the interest rate so selected or subsequently selected shall not reduce the rate of interest on the Notes below the Maximum Rate until the total amount of interest accrued on the Notes equals the amount of interest which would have accrued on the Notes if the rate or rates selected pursuant to Sections 4(a)(i) or (ii), as the case may be, had at all times been in effect.

(e) Interest Rates Applicable After Defaul t. Notwithstanding anything to the contrary contained in this Section 4, during the continuance of an Event of Default the Required Lenders may, at their option, by notice from Agent to Borrower (which notice may be revoked at the option of the Required Lenders notwithstanding the provisions of Section 15 hereof, which requires all Lenders to consent to changes in interest rates) declare that no Advance may be made as, converted into, or continued as a Eurodollar Loan. During the continuance of an Event of Default, the Required Lenders, may, at their option, by notice from Agent to Borrower (which notice may be revoked at the option of Required Lenders notwithstanding the provisions of Section 15 hereof, which requires all Lenders to consent to changes in interest rates) declare that (i) each Eurodollar Loan shall bear interest for the remainder of the applicable Interest Period at the rate otherwise applicable to such Interest Period plus two percent (2%) per annum and (ii) each Base Rate Loan shall bear interest at the rate otherwise applicable to such Base Rate Loan plus two percent (2%), provided that, during the continuance of an Event of Default under Section 14(g) or 14(h), the interest rate set forth in clauses (i) and (ii) above (the “Default Rate”) shall be applicable to all outstanding Loans without any election or action on the part of Agent or any Lender.

5. Special Provisions Relating to Loans .

(a) Unavailability of Funds or Inadequacy of Pricing . In the event that, in connection with any proposed Eurodollar Loan, Agent reasonably determines, which determination shall, absent manifest error, be final, conclusive and binding upon all parties, due to changes in circumstances since the date hereof, adequate and fair means do not exist for determining the Eurodollar Rate or such rate will not accurately reflect the costs to Lenders of funding a Eurodollar Loan for such Interest Period, Agent shall give notice of such determination to Borrower and Lenders, whereupon, until Agent notifies Borrower and Lenders that the circumstances giving rise to such suspension no longer exist, the obligations of Lenders to make, continue or convert Loans into Eurodollar Loans shall be suspended, and all Loans to Borrower shall be Base Rate Loans during the period of suspension.

(b) Change in Laws . If at any time hereafter any new law or any change in existing laws or in the interpretation of any new or existing laws shall make it unlawful for any Lender to make or continue to maintain or fund Eurodollar Loans hereunder, then such Lender shall promptly notify Borrower in writing and such Lender’s obligation to make, continue or convert Loans into Eurodollar Loans under this Agreement shall be suspended until it is no longer unlawful for such Lender to make or maintain Eurodollar Loans. Upon receipt of such notice, Borrower shall either repay the outstanding Eurodollar Loans owed to such Lender, without penalty, on the last day of the current Interest Periods (or, if any Lender may not lawfully continue to maintain and fund such Eurodollar Loans, immediately), or Borrower may convert such Eurodollar Loans at such appropriate time to Base Rate Loans.

(i) If, after the date hereof, the adoption of any applicable law, rule, or regulation, or any change in any applicable law, rule, or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender with any request or directive (whether or not having the force of law) of any such governmental authority, central bank, or comparable agency:

(A) shall subject such Lender to any tax, duty, or other charge with respect to any Eurodollar Loans, its Notes, or its obligation to make Eurodollar Loans, or change the basis of taxation of any amounts payable to such Lender under this Agreement or its Notes in respect of any Eurodollar Loan (other than franchise taxes and taxes imposed on or measured by the overall net income of such Lender);

(B) shall impose, modify, or deem applicable any reserve, special deposit, assessment, or similar requirement (other than reserve requirements, if any, taken into account in the determination of the Eurodollar Rate) relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, such Lender, including the Commitment of such Lender hereunder; or

(C) shall impose on such Lender or on the London interbank market any other condition affecting this Agreement or its Notes or any of such extensions of credit or liabilities or commitments;

and the result of any of the foregoing is to increase the cost to such Lender of making, converting into, continuing, or maintaining any Eurodollar Loan or to reduce any sum received or receivable by such Lender under this Agreement or its Notes with respect to any Eurodollar Loan, then Borrower shall pay to such Lender on demand such amount or amounts as will reasonably compensate such Lender for such increased cost or reduction. If any Lender requests compensation by Borrower under this Section 5(c)(i), Borrower may, by notice to such Lender (with a copy to Agent), suspend the obligation of such Lender to make or continue Eurodollar Loans, or to convert all or part of the Base Rate Loans owing to such Lender to Eurodollar Loans, until the event or condition giving rise to such request ceases to be in effect (in which case the provisions of Section 5(c)(i) shall be applicable); provided that such suspension shall not affect the right of such Lender to receive the compensation so requested.

(ii) If, after the date hereof, any Lender shall have reasonably determined that the adoption of any applicable law, rule, or regulation regarding capital adequacy or any change therein or in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such governmental authority, central bank, or comparable agency, has or would have the effect of reducing the rate of return on the capital of such Lender or any corporation controlling such Lender as a consequence of such Lender’s obligations hereunder to a level below that which such Lender or such corporation could have achieved but for such adoption, change, request, or directive (taking into consideration its policies with respect to capital adequacy), then from time to time upon demand Borrower shall pay to such Lender such additional amount or amounts as will reasonably compensate such Lender for such reduction. If any Lender requests compensation by Borrower under this Section 5(c)(ii), Borrower may, by notice to such Lender (with a copy to Agent), suspend the obligation of such Lender to make or continue Eurodollar Loans, or to convert all or part of the Base Rate Loans owing to such Lender to Eurodollar Loans, until the event or condition giving rise to such request ceases to be in effect (in which case the provisions of Section 5(c)(ii) shall be applicable); provided that such suspension shall not affect the right of such Lender to receive the compensation so requested.

(iii) Each Lender shall promptly notify Borrower and Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Lender to compensation pursuant to this Section 5(c) and will designate a separate lending office, if applicable, if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Lender, be otherwise disadvantageous to it. Any Lender claiming compensation under this Section 5(c) shall furnish to Borrower and

Agent a statement setting forth the additional amount or amounts to be paid to it hereunder which shall be conclusive in the absence of manifest error. In determining such amount, such Lender may use any reasonable averaging and attribution methods.

(iv) Any Lender giving notice to Borrower through Agent pursuant to this Section 5(c) shall give to Borrower a statement signed by an officer of such Lender setting forth in reasonable detail the basis for, and the calculation of such additional cost, reduced payments or capital requirements, as the case may be, and the additional amounts required to compensate such Lender therefor.

(v) Within five (5) Business Days after receipt by Borrower of any notice referred to in this Section 5(c), Borrower shall pay to Agent for the account of Lender issuing such notice such additional amounts as are required to compensate such Lender for the increased cost, reduced payments or increased capital requirements identified therein, as the case may be.

(vi) Failure or delay on the part of any Lender to demand compensation pursuant to this Section shall not constitute a waiver of any such Lender’s right to demand such compensation.

(d) Discretion of Lender as to Manner of Funding . Notwithstanding any provisions of this Agreement to the contrary, each Lender shall be entitled to fund and maintain its funding of all or any part of its Loan in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if each Lender had actually funded and maintained each Eurodollar Loan through the purchase of deposits having a maturity corresponding to the last day of the Interest Period applicable to such Eurodollar Loan and bearing an interest rate at the applicable interest rate for such Interest Period.

(e) Breakage Fees . Without duplication under any other provision hereof, if any Lender incurs any loss, cost or expense including, without limitation, any loss of profit and loss, cost, expense or premium reasonably incurred by reason of the liquidation or re-employment of deposits or other funds acquired by such Lender to fund or maintain any Eurodollar Loan or the relending or reinvesting of such deposits or amounts paid or prepaid to Lenders as a result of any of the following events other than any such occurrence as a result in the change of circumstances described in Sections 5(a) and (b):

(i) any payment, prepayment or conversion of a Eurodollar Loan on a date other than the last day of its Interest Period (whether by acceleration, prepayment or otherwise);

(ii) any failure to make a principal payment of a Eurodollar Loan on the due date thereof, or

(iii) any failure by Borrower to borrow, continue, prepay or convert to a Eurodollar Loan on the dates specified in a notice given pursuant to Section 2(b) or 4(c) hereof;

then Borrower shall pay to such Lender such amount as will reimburse such Lender for such loss, cost or expense. If any Lender makes such a claim for compensation, it shall furnish to Borrower and Agent a statement setting forth the amount of such loss, cost or expense in reasonable detail (including an explanation of the basis for and the computation of such loss, cost or expense) and the amounts shown on such statement shall be conclusive and binding absent manifest error.

6. Collateral Security .

(a) To secure performance by Borrower of its obligations under this Agreement and the Notes, Borrower shall grant to Agent in its capacity as such Agent under this Agreement for the ratable benefit of Lenders hereunder, a first priority security interest in and Lien (and only Lien, except for Permitted Liens) on certain of the Oil and Gas Properties of Borrower as may be selected by Agent, in its capacity as such Agent under this Agreement, and the oil, gas and mineral production therefrom or attributable thereto, and in all operating agreements and oil or gas purchase contracts (now existing or hereafter arising) relating to such Oil and Gas Properties and in related personal properties, fixtures and other properties, as evidenced by mortgages, deeds of trust, assignments of production, security agreements, general security agreements, indentures, and other documents to be executed by Borrower and delivered to or on behalf of Agent, in its capacity as such Agent under this Agreement for the ratable benefit of Lenders. Obligations arising from agreements arising from Rate Management Transactions between Borrower and one or more of Lenders or an Affiliate of any of Lenders shall be secured by the Collateral covering the Oil and Gas Properties on a pari passu basis with the indebtedness and obligations of Borrower under the Loan Documents. Once agreements arising from Rate Management Transactions involving one or more Lenders, or an Affiliate of any Lender, are entered into, and pursuant to this provision become secured by the Collateral on a pari passu basis, said Collateral shall continue to secure such obligations until such agreements are no longer in force and effect irrespective of whether Lender involved in such agreement ceases to be a Lender under this Agreement. All Oil and Gas Properties and other collateral in which Borrower grants or hereafter grants to Agent for the ratable benefit of Lenders, a first and prior Lien (to the satisfaction of Agent) in accordance with this Section 6, as such properties and interests are from time to time constituted, are hereinafter collectively called the “Collateral”.

(b) The granting and assigning of such security interests and Liens by Borrower shall be pursuant to Collateral Documents in form and substance reasonably satisfactory to Agent. Concurrently with the delivery of each of the Collateral Documents or within a reasonable time thereafter, Borrower shall have furnished or caused to be furnished to Agent mortgage and title opinions and other title information reasonably satisfactory to Agent with respect to the title and Lien status of Borrower’s interests in not less than 75% of the Engineered Value of the mortgaged Borrowing Base Properties. “Engineered Value” for this purpose shall mean future net revenues discounted at the discount rate being used by Agent as of the date of any such determination utilizing the pricing parameters used in the engineering report furnished to Agent pursuant to Sections 7 and 12 hereof. Borrower will cause to be executed and delivered to Agent, in the future, additional Collateral Documents if Agent reasonably

deems such are necessary to insure perfection or maintenance of Lenders’ security interests and Liens in not less than 80% of the Engineered Value of Borrower’s Oil and Gas Properties which are included in the Borrowing Base then in effect.

(c) Guarantors shall unconditionally guarantee the Notes pursuant to a guaranty agreement in form and substance satisfactory to Agent.

7. Borrowing Base .

(a) Initial Borrowing Base . At the Effective Date, the Borrowing Base shall be $75,000,000.

(b) Subsequent Determinations of Borrowing Base . Subsequent determinations of the Borrowing Base shall be made by Lenders semi-annually on or before March 1 and September 1 of each year beginning September 1, 2007 (each “Redetermination Date”) or as Unscheduled Redeterminations. No later than August 1 of each year (for the September 1 Redetermination Date of such year) Borrower shall furnish to Lenders an engineering report in form and substance reasonably satisfactory to Agent prepared by DeGolyer and MacNaughton or such other independent petroleum engineering firm acceptable to Agent, said engineering report to utilize economic and pricing parameters used by Agent as established from time to time, together with such other information, reports and data concerning the value of Borrowing Base Properties as Agent shall deem reasonably necessary to determine the value of such Borrowing Base Properties. The engineering report prepared for the September 1 Redetermination Date shall be prepared as of the preceding July 1 of such year and the engineering report prepared for the March 1 Redetermination Date shall be prepared as of January 1 of such year. In addition to the scheduled semi-annual Borrowing Base Redeterminations, Borrower and Lenders may each request one Unscheduled Redetermination between Redetermination Dates. By February 1 of each year (for the March 1 Redetermination Date for such year) beginning February 1, 2008, or within thirty (30) days after either (i) receipt of notice from Agent that Lenders require an Unscheduled Redetermination, or (ii) Borrower gives notice to Agent of its desire to have an Unscheduled Redetermination performed, in each case Borrower shall furnish to Lenders an engineering report prepared by a petroleum engineer employed by Borrower and updating the most recent engineering report delivered to Lenders hereunder, in form and substance reasonably satisfactory to Agent, said engineering report to utilize economic and pricing parameters used by Agent as established from to time, together with such other information, reports and data concerning the value of such Borrowing Base Properties. Agent shall by written notice to Borrower within a reasonable time after each Redetermination Date (the date of such notice being herein called the “Determination Date”) notify Borrower of the designation by Lenders of the new Borrowing Base for the period beginning on such Determination Date and continuing until, but not including, the next Determination Date. If an Unscheduled Redetermination is to be made by Lenders, Agent shall notify Borrower within a reasonable time after receipt of all requested information of the new Borrowing Base, and such new Borrowing Base shall continue until the next Determination Date. If Borrower does not furnish all such information, reports and data by any date specified in this Section 7(b), unless such failure is of no fault of Borrower, Lenders nonetheless shall

designate the Borrowing Base at any amounts which Lenders in their discretion determine and redesignate the Borrowing Base from time to time thereafter until Lenders receive all such information, reports and data, whereupon Lenders shall designate a new Borrowing Base as described above. The procedure for determining the Borrowing Base at each redetermination shall be that Agent shall determine the Borrowing Base and submit the same to Lenders. Increases in the Borrowing Base will require approval of all Lenders, but other reaffirmations or changes in the Borrowing Base will be subject to the approval of Required Lenders. The failure of any Lender to respond within fifteen (15) days after receipt of the proposed Borrowing Base shall be deemed to be an approval of the proposed Borrowing Base. If Required Lenders (or all Lenders in the case of an increase in the Borrowing Base) do not approve of Agent’s proposed Borrowing Base, Agent shall poll Lenders to determine the highest Borrowing Base that is acceptable to such Lenders that constitute Required Lenders (or all Lenders in the case of an increase in the Borrowing Base), and such amount shall then become the new Borrowing Base. Each Lender shall determine the amount of the Borrowing Base based upon the loan collateral value which such Lender in its sole discretion (using such methodology, assumptions and discount rates as such Lender customarily uses in assigning collateral value to Borrowing Base Properties, oil and gas gathering systems, gas processing and plant operations) assigns to such Borrowing Base Properties of Borrower at the time in question and based upon such other credit factors consistently applied (including, without limitation, the assets, liabilities, cash flow, business, properties, prospects, management and ownership of Borrower and the effect of Rate Management Transactions in effect at such time) as such Lender customarily considers in evaluating similar oil and gas credits. If at any time any of the Borrowing Base Properties are sold, the Borrowing Base then in effect shall automatically be reduced as required by Section 12(r) hereof. It is expressly understood that Lenders have no obligation to designate the Borrowing Base at any particular amounts, except in the exercise of their discretion, whether in relation to the Commitments or otherwise. Provided, however, that Lenders shall not have the obligation to designate a Borrowing Base in an amount in excess of the Commitment.

8. Fees .

(a) Up-Front Fee . Upon execution of this Agreement, Borrower shall pay to Agent for the ratable benefit of Lenders, a fee of $37,500 (calculated as being 25 b.p. times the increase in the initial Borrowing Base under this Agreement from the Borrowing Base in effect under the Original Credit Agreement (defined in Section 36 below) as reasonable compensation to Lenders for making the Loans available to Borrower.

(b) Unused Commitment Fee . Borrower shall pay to Agent for the ratable benefit of Lenders an unused commitment fee (the “Unused Commitment Fee”) equivalent to the Unused Commitment Fee Rate times the daily average of the sum of the Borrowing Base minus Total Outstandings. Such Unused Commitment Fee shall be calculated on the basis of a year consisting of 360 days. The Unused Commitment Fee shall be payable in arrears on the last day of each calendar quarter beginning March 31, 2007 with the final fee payment due on the Maturity Date for any period then ending for which the Unused Commitment Fee shall not have been theretofore paid. In the event the

Commitment terminates on any date prior to the end of any such quarterly period, Borrower shall pay to Agent for the ratable benefit of Lenders, on the date of such termination, the total Unused Commitment Fee due for the period in which such termination occurs. If a date for payment of the Unused Commitment Fee shall be other than a Business Day such payment shall be made on the next succeeding Business Day.

9. Prepayments .

(a) Voluntary Prepayments . Subject to the provisions of Section 5(e) hereof, Borrower may at any time and from time to time, without penalty or premium, prepay the Notes, in whole or in part. Each such prepayment shall be made on at least three (3) Business Days’ notice to Agent in the case of Eurodollar Loan Tranches and without notice in the case of Base Rate Loans and shall be in a minimum amount of (i) $100,000 or any whole multiple of $100,000 in excess thereof (or the unpaid balance of the Notes, whichever is less), for Base Rate Loans, plus accrued interest thereon and (ii) $1,000,000 or any integral multiple thereof (or the unpaid balance on the Notes, whichever is less) for Eurodollar Loans, plus accrued interest thereon to the date of prepayment.

(b) Mandatory Prepayment For Borrowing Base Deficiency . In the event the Total Outstandings ever exceed the Borrowing Base as determined by Lenders pursuant to Section 7(b) hereof (a “Borrowing Base Deficiency”), Borrower shall, within fifteen (15) days after written notification from Agent, either (i) by instruments reasonably satisfactory in form and substance to Agent, provide Agent with collateral with value and quality in amounts satisfactory to all of Lenders in their discretion in order to increase the Borrowing Base by an amount at least equal to such excess, (ii) prepay, without premium or penalty, the principal amount of the Notes in an amount at least equal to such excess plus accrued interest thereon to the date of prepayment or (iii) commit to make six (6) equal monthly installment payments in the aggregate amount of the Borrowing Base Deficiency, with the first such installment being due on or before thirty (30) days after Borrower’s receipt of Agent’s notice of the Borrowing Base Deficiency.

10. Representations and Warranties . In order to induce Lenders to enter into this Agreement, Borrower represents and warrants to Lenders (which representations and warranties will survive the delivery of the Notes) that:

(a) Organization and Qualification . Borrower is a limited partnership duly organized and validly existing under the laws of the State of Texas and has all limited partnership power and authority required to own its property and carry on its business as presently conducted and proposed to be conducted. Each Guarantor is duly organized and validly existing under the laws of the State of Delaware and has all corporate power and authority required to own its property and carry on its business as presently conducted and proposed to be conducted. Approach Operating is authorized to do business in the State of Texas. Borrower has all power and authority to own its properties and assets and to transact the business in which it is engaged.

(b) Power and Authority . Borrower has the partnership power and requisite authority to execute, deliver and perform the necessary Loan Documents, including this

Agreement; and has taken all partnership action necessary for the due creation and issuance of the Notes and for the due execution, delivery and performance of the Loan Documents, including this Agreement. Each Guarantor has the corporate power and requisite authority to execute, deliver the Loan Documents which it has executed and has taken all company action necessary to duly authorize (i) the execution, delivery and performance by such Guarantor of the terms and provisions of the Loan Documents which it has executed and (ii) the performance by such Guarantor of its obligations under the Loan Documents.

(c) Binding Obligations . This Agreement does, and the Notes and other Loan Documents upon their creation, issuance, execution and delivery will, constitute valid and binding obligations of Borrower enforceable in accordance with its respective terms (except that enforcement may be subject to general principles of equity and any applicable bankruptcy, insolvency, or similar debtor relief laws now or hereafter in effect and relating to or affecting the enforcement of creditors’ rights generally).

(d) No Legal Bar or Resultant Lien . The Notes and the Loan Documents, including this Agreement, do not and will not, to the best of Borrower’s and each Guarantor’s knowledge, violate or conflict with or result in a default under any provisions of Borrower’s organizational documents or any contract, agreement, law, regulation, order, injunction, judgment, decree or writ to which Borrower or any Guarantor is subject, or result in the creation or imposition of any Lien or other encumbrance upon any assets or properties of Borrower or any Guarantor, other than those contemplated by this Agreement.

(e) No Consent . The execution, delivery and performance by Borrower of the Notes and the execution, delivery and performance by Borrower and Guarantors of the other Loan Documents that each has executed, including this Agreement, does not require the consent or approval of any other person or entity, including without limitation any regulatory authority or governmental body of the United States or any state thereof or any political subdivision of the United States or any state thereof except for consents required for federal, state and, in some instances, private leases, rights-of-ways and other conveyances or encumbrances of oil and gas leases all of which shall have been obtained.

(f) Financial Condition . The Financial Statements of Borrower and Guarantors which have been delivered to Lenders pursuant to the terms hereof are complete and correct in all material respects and fully and accurately reflect in all material respects the financial conditions and the results of the operations of Borrower and Guarantors as of the dates of such Financial Statements and no change has occurred between such date and the Effective Date in the condition, financial or otherwise of Borrower or any Guarantor which is reasonably expected to have a Material Adverse Effect, except as disclosed to Lenders in Schedule “2” attached hereto.

(g) Liabilities . Neither Borrower nor any Guarantor has any material liability, direct or contingent on the Effective Date, except as disclosed to Lenders in the Financial Statements or on Schedule “3” attached hereto. No unusual or unduly burdensome restrictions, restraint, or hazard exists by contract, law or governmental regulation or

otherwise relative to the business, assets or properties of Borrower or any Guarantor which is reasonably expected to have a Material Adverse Effect or which involve any of the Loan Documents.

(h) Litigation . Except as described in the Financial Statements, or as otherwise disclosed to Lenders in Schedule “4” attached hereto, on the Effective Date there is no litigation, legal or administrative proceeding, investigation or other action of any nature pending or, to the knowledge of Borrower, threatened against or affecting Borrower or any Guarantor which involves the possibility of any judgment or liability not fully covered by insurance, and which is reasonably expected to have a Material Adverse Effect.

(i) Taxes; Governmental Charges . Borrower and each Guarantor have filed all tax returns and reports required to be filed and have paid all taxes, assessments, fees and other governmental charges levied upon Borrower or any Guarantor or Borrower’s or any Guarantor’s assets, properties or income which are due and payable, including interest and penalties, the failure of which to pay could reasonably be expected to have a Material Adverse Effect, except such as are being contested in good faith by appropriate proceedings and for which adequate reserves for the payment thereof as required by Accounting Principles has been provided and levy and execution thereon have been stayed and continue to be stayed.

(j) Titles, Etc . Borrower has good and defensible title to all of its material assets, including without limitation, the Oil and Gas Properties, free and clear of all Liens except Permitted Liens. Borrower is entitled to receive not less than that percentage of oil, gas and other hydrocarbons produced from the land covered by the leases pertaining to the Oil and Gas Properties included in the Borrowing Base (after deduction of all royalties, overriding royalties and other interests payable from or measured by production) equal to the “net revenue interest” specified in the evaluation of such Oil and Gas Properties in the most recent engineering and/or reserve report(s) covering such Oil and Gas Properties which are delivered to Agent hereunder, with the term “net revenue interest” meaning the proportionate share of the production of oil, gas or other minerals to which Borrower is entitled after deduction of all royalties, overriding royalties and other interests payable from or measured by production. Borrower owns the “working interest” in the Oil and Gas Properties included in the Borrowing Base specified in the evaluation of such Oil and Gas Properties in the most recent engineering report(s) and/or reserve reports covering such Oil and Gas Properties which are delivered to Agent hereunder, with the term “working interest”, as used herein, meaning the right to explore for, drill and produce oil, gas or other minerals; and Borrower is not obligated to bear more than that percentage of the cost of all operations conducted on the Oil and Gas Properties equal to the “working interest” as above described (other than increases to Borrower’s working interest as a result of non-operator’s electing to not participate in a proposed operation under an operating agreement). All material oil, gas and mineral leases which constitute a portion of the Oil and Gas Properties are in full force and effect, and Borrower has not defaulted on any of its obligations thereunder so as to materially impair the value of such leases in the aggregate.

(k) Defaults . Neither Borrower nor any Guarantor is in default and no event or circumstance has occurred which, but for the passage of time or the giving of notice, or both, would constitute a default under any loan or credit agreement, indenture, mortgage, deed of trust, security agreement or other agreement or instrument to which Borrower or any Guarantor is a party in any respect that would be reasonably expected to have a Material Adverse Effect. No Default or Event of Default hereunder has occurred and is continuing.

(l) Casualties; Taking of Properties . Since the dates of the latest Financial Statements of Borrower and Guarantors delivered to Lenders, neither the business nor the assets or properties of Borrower or any Guarantor has been affected (to the extent it is reasonably expected to cause a Material Adverse Effect), as a result of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike or other labor disturbance, embargo, requisition or taking of property or cancellation of contracts, permits or concessions by any domestic or foreign government or any agency thereof, riot, activities of armed forces or acts of God or of any public enemy.

(m) Use of Proceeds; Margin Stock . The proceeds of the Commitment may be used by Borrower solely for the purposes of (i) refinancing existing indebtedness under the Original Credit Agreement, (ii) acquisition, exploration and development of Oil and Gas Properties, including capital expenditures to fund drilling activities on the Oil and Gas Properties, (iii) working capital; and (iv) other general corporate purposes in the ordinary course of Borrower’s business. Borrower is not engaged principally or as one of its important activities in the business of extending credit for the purpose of purchasing or carrying any “margin stock” as defined in Regulation U of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 221), or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry a margin stock or for any other purpose which might constitute this transaction a “purpose credit” within the meaning of said Regulation U.

Neither Borrower nor any person or entity acting on behalf of Borrower has taken or will take any action which might cause the loans hereunder or any of the Loan Documents, including this Agreement, to violate Regulation U or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Securities Exchange Act of 1934 or any rule or regulation thereunder, in each case as now in effect or as the same may hereafter be in effect.

(n) Location of Business and Offices . The principal place of business and chief executive office of Borrower is located at the address as stated in Section 17 hereof or such other places or offices for which notice has been provided to Agent according to Section 13(f).

(o) Compliance with the Law . To the best of Borrower’s knowledge, Borrower:

(i) is not in violation of any law, judgment, decree, order, ordinance, or governmental rule or regulation to which Borrower, or any of its or any Guarantor’s assets or properties are subject; or

(ii) has not failed to obtain any license, permit, franchise or other governmental authorization necessary to the ownership of any of its assets or properties or the conduct of its business;

which violation or failure is reasonably expected to have a Material Adverse Effect.

(p) No Material Misstatements . No information, exhibit or report furnished by Borrower to Lenders in connection with the negotiation of this Agreement contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statements contained therein not materially misleading.

(q) Not A Utility . Neither Borrower nor any Guarantor is a utility subject to regulation under the laws of the State of Texas as a result of being engaged in the (i) generation, transmission, or distribution and sale of electric power; (ii) transportation, distribution and sale through a local distribution system of natural or other gas for domestic, commercial, industrial, or other use; (iii) provision of telephone or telegraph service to others; (iv) production, transmission, or distribution and sale of steam or water; (v) operation of a railroad; or (vi) provision of sewer service to others.

(r) ERISA . Borrower maintains no employee benefit plan or other plan for employees of Borrower that are covered by Title IV of ERISA.

(s) Intentionally Deleted.

(t) No Subsidiaries . Borrower has neither formed nor acquired any subsidiaries and, during the term of the Loan, Borrower shall neither form nor acquire any subsidiary unless at the time such subsidiary is formed or created, such subsidiary shall unconditionally guarantee the Notes and the obligations of Borrower under this Agreement pursuant to a guaranty agreement in form and substance satisfactory to Agent.

(u) Environmental Matters . Except as disclosed on Schedule “6”, as of the Effective Date Borrower has not (i) received notice or otherwise learned or is otherwise aware of any Environmental Liability which would be reasonably expected to individually or in the aggregate have a Material Adverse Effect arising in connection with (A) any non-compliance with or violation of the requirements of any Environmental Law or (B) the release or threatened release of any toxic or hazardous waste into the environment, (ii) received notice or otherwise become aware of any threatened or actual liability in connection with the release or notice of any threatened release of any toxic or hazardous waste into the environment which would be reasonably expected to individually or in the aggregate have a Material Adverse Effect or (iii) received notice or otherwise learned of or otherwise become aware of any federal or state investigation evaluating whether any remedial action is needed to respond to a release or threatened release of any toxic or hazardous waste into the environment for which Borrower is or may be liable which would reasonably be expected to result in a Material Adverse Effect.

(v) Liens . Except (i) as disclosed on Schedule “1” hereto and (ii) for Permitted Liens, the assets and properties of Borrower are free and clear of all liens and

encumbrances.

(w) Solvency . Immediately after the consummation of the transactions to occur on the Effective Date and immediately following the making of each Loan made on the Effective Date and after giving effect to the application of the proceeds of such Loans, (i) the fair value of the assets of Borrower will exceed its debts and liabilities, subordinated, contingent or otherwise; (ii) the present fair saleable value of the property of Borrower will be greater than the amount that will be required to pay the probable liability of its debts and other liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; (iii) Borrower will be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (iv) Borrower will not have unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted following the Effective Date.

(x) Insurance . All insurance reasonably necessary in the ordinary course of Borrower’s business is maintained by or on behalf of Borrower and all premiums in respect of such insurance have been paid or will be paid prior to the date such premium payments are due.

11. Conditions of Lending.

(a) The effectiveness of this Agreement, and the obligation to make the initial Advance under the Commitment shall be subject to satisfaction of the following conditions precedent:

(i) Borrower’s Execution and Delivery . Borrower shall have executed and delivered to Agent the Agreement, the Notes and other required Loan Documents, all in form and substance satisfactory to Agent;

(ii) Guaranty . Guarantors shall have executed an unconditional guaranty agreement of the Notes in form and substance satisfactory to Agent.

(iii) Partnership Agreement . Borrower shall have delivered to Agent a true and correct copy of the limited partnership agreement of Borrower, together with all amendments thereto, certified as being a true and correct copy thereof.

(iv) Partnership Authority Certificate . Borrower shall have delivered to Agent a Certificate of Partnership Authority of Borrower, certifying the name, title and signature of the Person authorized to sign the Loan Documents to which it is party on behalf of Borrower, duly executed by the partners of Borrower.

(v) Articles, Bylaws and Regulations . Borrower shall have delivered to Agent a true and correct copy of its articles of organization, together with all amendments thereto. Guarantors shall have delivered to Agent a true and correct copy of each of their regulations and the articles of incorporation and bylaws of Approach Resources, together with all amendments thereof, and being certified by the secretary of each Guarantor and Approach Resources as being a true and

correct copy thereof.

(vi) Resolutions . Borrower shall have caused to be delivered to Agent resolutions of the board of directors of Approach Resources and the member of each Guarantor approving Approach Resources’ and each Guarantor’s execution, delivery and performance of the Loan Documents to which it is a party, duly adopted by such board of directors, certified by the secretary or member of Approach Resources and each Guarantor, as being a true and correct copy of such resolutions and that such resolutions have not been amended or rescinded and remain in full force and effect.

(vii) Incumbency Certificate . Agent shall have received a signed certificate of the secretary or member of Approach Resources and each Guarantor certifying the name, office and signature of the member or officers of Approach Resources and each Guarantor authorized to sign the Loan Documents to which it is a party.

(viii) Other Certificates . Agent shall have received certificates of existence and (in the case of Guarantors and Approach Resources only) of good standing for Borrower, Approach Resources and each Guarantor issued by the Secretary of State of Texas (in the case of Borrower) and the Secretary of State of Delaware (in the case of Guarantors and Approach Resources).

(ix) Mortgage and Title . Agent shall have received the mortgage and title information required to be delivered by Borrower pursuant to Section 6 of this Agreement;

(x) Representation and Warranties . The representations and warranties of Borrower under this Agreement and the other Loan Documents shall be true and correct in all material respects as of such date, as if then made (except to the extent that such representations and warranties related solely to an earlier date);

(xi) No Event of Default . No Default or Event of Default shall have occurred and be continuing;

(xii) Legal Opinions . Agent shall have received from Borrower’s and each Guarantor’s legal counsel one or more favorable legal opinions in form and substance reasonably satisfactory to Agent.

(xiii) Other Documents . Agent shall have received such other instruments and documents incidental and appropriate to the transaction provided for herein as Agent or its counsel may reasonably request, and all such documents shall be in form and substance reasonably satisfactory to Agent; and

(xiv) Legal Matters Satisfactory . All legal matters incident to the consummation of the transactions contemplated hereby shall be reasonably satisfactory to special counsel for Agent retained at the expense of Borrower.

(b) The obligation of Lenders to make any Advance or issue any Letter of Credit under the Commitment (other than the initial Advance) shall be subject to the following additional conditions precedent that, at the date of making each such Advance or issuing such Letter of Credit and after giving effect thereto:

(xv) Representations and Warranties . The representations and warranties of Borrower under this Agreement and the other Loan Documents are true and correct in all material respects as of such date, as if then made (except to the extent that such representations and warranties related solely to an earlier date); and

(xvi) No Event of Default . No Default or Event of Default shall have occurred and be continuing; and

(xvii) Legal Matters Satisfactory . All legal matters incident to the consummation of the transactions contemplated hereby shall be reasonably satisfactory to special counsel for Agent retained at the expense of Borrower; and

(xviii) Total Outstandings . After giving effect to such Advance or Letter of Credit, the Total Outstandings do not exceed the Borrowing Base then in effect.

Each Borrowing Notice shall constitute a representation and warranty by Borrower that the conditions contained in Sections 11(b)(i) and (ii) have been satisfied.

12. Affirmative Covenants. A deviation from the provisions of this Section 12 shall not constitute a Default or an Event of Default under this Agreement if such deviation is expressly consented to in writing by Required Lenders prior to the date of deviation. Borrower will at all times comply with the covenants contained in this Section 12 from the date hereof and for so long as the Commitments are in existence or any amount is owed to Agent or Lenders under this Agreement or the other Loan Documents.

(a) Financial Statements and Reports of Borrower, Guarantor . Borrower shall furnish to Agent: (i) as soon as available, but in any event within ninety (90) days after the end of each fiscal year of Borrower and each Guarantor, commencing with the fiscal year ending December 31, 2006, an audited consolidated balance sheet of Borrower and Guarantors prepared as of the close of such fiscal year and audited consolidated statements of operations, changes in partners or shareholders/members equity and statements of cash flows of Borrower and Guarantors for such year, in each case setting forth in comparative form the figures for the preceding fiscal year, all in reasonable detail and certified by independent certified public accountants selected by Borrower and approved by Agent; and (ii) within sixty (60) days after the end of the first three fiscal quarters of each fiscal year of Borrower and Guarantors, commencing with the fiscal quarter ending March 30, 2007, an unaudited balance sheet (without footnotes) of Borrower and Guarantors prepared as of the close of such fiscal quarter and unaudited statements of operations (without footnotes) of Borrower and Guarantors for such quarter.

(b) Hedging Report . Concurrently with the furnishing of the Financial Statements required in (a) above and in connection with each Borrowing Base redetermination and at any other time when requested by Agent, Borrower will provide to Agent a hedging report in form and substance satisfactory to Agent which shall contain, without limitation, the Projected Production for the latest available calendar quarter with supporting data, a description of outstanding Rate Management Transactions, including the commodity, effective date, termination date, notional quantity, applicable price, cap, or floor, and such other details required by Agent.

(c) Additional Information . Promptly upon request of Agent from time to time any additional financial information or other information that the Agent may reasonably request.

(d) Certificates of Compliance . Concurrently with the furnishing of the Financial Statements pursuant to Subsection 12(a) hereof for the months coinciding with the end of each fiscal year or quarter, Borrower will furnish or cause to be furnished to Agent a certificate in the form of Exhibit “C” attached hereto, signed by the President, Treasurer or Chief Financial Officer of Approach Operating, as the sole general partner of Borrower, (i) stating that Borrower has fulfilled in all material respects its obligations under the Notes and the Loan Documents, including this Agreement, and that all representations and warranties made herein and therein continue (except to the extent they relate solely to an earlier date) to be true and correct in all material respects (or specifying the nature of any change), or if a Default has occurred, specifying the Default and the nature and status thereof, (ii) to the extent requested from time to time by Agent, specifically affirming compliance of Borrower in all material respects with any of its representations (except to the extent they relate solely to an earlier date) or obligations under said instruments; (iii) setting forth the computation, in reasonable detail as of the end of each period covered by such certificate, of compliance with Section 13(b); and (iv) containing or accompanied by such financial or other details, information and material as Agent may reasonably request to evidence such compliance.

(e) Taxes and Other Liens . Borrower and each Guarantor will pay and discharge promptly all taxes, assessments and governmental charges or levies imposed upon Borrower and such Guarantor, or upon the income or any assets or property of such Borrower, as well as all claims of any kind (including claims for labor, materials, supplies and rent) which, if unpaid, might become a Lien or other encumbrance upon any or all of the assets or property of Borrower or any Guarantor and which could reasonably be expected to result in a Material Adverse Effect; provided, however, that neither Borrower nor any Guarantor shall be required to pay any such tax, assessment, charge, levy or claim if the amount, applicability or validity thereof shall currently be contested in good faith by appropriate proceedings diligently conducted, levy and execution thereon have been stayed and continue to be stayed and if Borrower or Guarantors shall have set up adequate reserves therefor, if required, under Accounting Principles.

(f) Compliance with Laws . Borrower and Guarantors will observe and comply, in all material respects, with all applicable laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, orders and restrictions relating

to environmental standards or controls or to energy regulations of all federal, state, county, municipal and other governments, departments, commissions, boards, agencies, courts, authorities, officials and officers, domestic or foreign.

(g) Further Assurances . Borrower will cure promptly any defects in the creation and issuance of the Notes and the execution and delivery of the Notes and the Loan Documents, including this Agreement. Borrower at its sole expense will promptly execute and deliver to Agent upon its reasonable request all such other and further documents, agreements and instruments in compliance with or accomplishment of the covenants and agreements in this Agreement, or to correct any omissions in the Notes or more fully to state the obligations set out herein.

(h) Performance of Obligations . Borrower will pay the Notes and other obligations incurred by it hereunder according to the reading, tenor and effect thereof and hereof; and Borrower and Guarantors will do and perform every act and discharge all of the obligations provided to be performed and discharged by Borrower and Guarantors under the Loan Documents, including this Agreement, at the time or times and in the manner specified.

(i) Insurance . Borrower now maintains and will continue to maintain insurance with financially sound and reputable insurers with respect to its assets against such liabilities, fires, casualties, risks and contingencies and in such types and amounts as is customary in the case of persons engaged in the same or similar businesses and similarly situated. Upon request of Agent, Borrower will furnish or cause to be furnished to Agent from time to time a summary of the respective insurance coverage of Borrower in form and substance reasonably satisfactory to Agent, and, if requested, will furnish Agent copies of the applicable policies. Upon demand by Agent any insurance policies covering any such property shall be endorsed (i) to provide that such policies may not be canceled, reduced or affected in any manner for any reason without fifteen (15) days prior notice to Agent, (ii) to provide for insurance against fire, casualty and other hazards normally insured against, in the amount of the full value (less a reasonable deductible not to exceed amounts customary in the industry for similarly situated business and properties) of the property insured, and (iii) to provide for such other matters as Agent may reasonably require. Borrower shall at all times maintain adequate insurance with respect to all of its other assets and wells in accordance with prudent business practices.

(j) Accounts and Records . Borrower and Guarantors will keep proper books, records and accounts in which full, true and correct entries will be made of all dealings or transactions in relation to its business and activities, prepared in a manner consistent with prior years, subject to changes suggested by Borrower’s or Guarantors’ auditors.

(k) Right of Inspection . Borrower and Guarantors will permit, after reasonable notice to Borrower and Guarantors, any officer, employee or agent of Agent to examine Borrower’s and Guarantors’ books, records and accounts, and take copies and extracts therefrom, all at such reasonable times during normal business hours and as often as Lenders may reasonably request. Lenders will keep all Confidential Information (as herein defined) confidential and will not disclose or reveal the Confidential Information

or any part thereof other than (i) as required by law, (ii) to Lenders’, and Lenders’ subsidiaries, Affiliates, officers, employees, legal counsel and regulatory authorities or advisors to whom it is necessary to reveal such information for the purpose of effectuating the agreements and undertakings specified herein or as otherwise required in connection with the enforcement of Lenders’ and Agent’s rights and remedies under the Notes, this Agreement and the other Loan Documents and (iii) any assignee of or participant in, or any prospective assignee of or participant in, any Lender’s rights or obligations under this Agreement. As used herein, “Confidential Information” means information about Borrower or Guarantors furnished by Borrower or Guarantors, but does not include information (i) which was publicly known, or otherwise known to Lenders, at the time of the disclosure, (ii) which subsequently becomes publicly known through no act or omission by Lenders, or (iii) which otherwise becomes known to Lenders, other than through disclosure by Borrower and Guarantors.

(l) Notice of Certain Events . Borrower shall promptly notify Agent if Borrower learns of the occurrence of (i) any event which constitutes a Default or Event of Default together with a detailed statement by Borrower of the steps being taken to cure such Default or Event of Default; (ii) any legal, judicial or regulatory proceedings affecting Borrower or any Guarantor or any of the assets or properties of Borrower or any Guarantor which, if adversely determined, could reasonably be expected to have a Material Adverse Effect; (iii) any dispute between Borrower or any Guarantor and any governmental or regulatory body or any other Person or entity which, if adversely determined, would reasonably be expected to cause a Material Adverse Effect; and (iv) any other matter which in Borrower’s reasonable opinion could have a Material Adverse Effect.

(m) Environmental Reports and Notices . Borrower will deliver to Agent (i) promptly upon its becoming available, one copy of each report (other than routine informational filings) sent by Borrower to any court, governmental agency or instrumentality pursuant to any Environmental Law, (ii) notice, in writing, promptly upon Borrower’s receipt of notice or otherwise learning of any claim, demand, action, event, condition, report or investigation indicating any potential or actual liability arising in connection with (x) the non-compliance with or violation of the requirements of any Environmental Law which reasonably could be expected to have a Material Adverse Effect; (y) the release or threatened release of any hazardous substance, toxic or hazardous waste into the environment which reasonably could be expected to have a Material Adverse Effect or which release Borrower would have a duty to report to any court or government agency or instrumentality, or (iii) the existence of any Environmental Lien on any properties or assets of Borrower and Borrower shall promptly deliver a copy of any such notice to Agent.

(n) Compliance and Maintenance . Borrower will, (i) observe and comply in all material respects with all Environmental Laws; (ii) except as provided in Subsections 12(o) and 12(p) below, maintain the Borrowing Base Properties and other assets and properties in good and workable condition at all times and make all repairs, replacements, additions, betterments and improvements to the Borrowing Base Properties and other assets and properties as are needed and proper so that the business carried on in

connection therewith may be conducted properly and efficiently at all times in the opinion of Borrower, exercised in good faith; (iii) take or cause to be taken whatever actions are necessary or desirable to prevent an event or condition of default by any Borrower under the provisions of any gas purchase or sales contract or any other contract, agreement or lease comprising a part of the Borrowing Base Properties or other collateral security hereunder which default could reasonably be expected to result in a Material Adverse Effect; and (iv) furnish Agent upon request evidence reasonably satisfactory to Agent that there are no Liens, claims or encumbrances on the Borrowing Base Properties, except Permitted Liens.

(o) Operation of Properties . Except as provided in Subsections 12(p) and (q) below, Borrower will operate, or cause to be operated, all Borrowing Base Properties in a careful and efficient manner in accordance with the practice of the industry and in compliance in all material respects with all applicable laws, rules, and regulations, and in compliance in all material respects with all applicable proration and conservation laws of the jurisdiction in which the properties are situated, and all applicable laws, rules, and regulations, of every other agency and authority from time to time constituted to regulate the development and operation of the properties and the production and sale of hydrocarbons and other minerals therefrom; provided, however, that Borrower shall have the right to contest in good faith by appropriate proceedings, the applicability or lawfulness of any such law, rule or regulation and pending such contest may defer compliance therewith, as long as such deferment shall not subject the properties or any part thereof to foreclosure or loss.

(p) Compliance with Leases and Other Instruments . Borrower will pay or cause to be paid and discharge all rentals, delay rentals, royalties, production payment, and indebtedness required to be paid by such party (or required to keep unimpaired in all material respects the rights of such party in Borrowing Base Properties) accruing under, and perform or cause to be performed in all material respects each and every act, matter, or thing required of such party by each and all of the assignments, deeds, leases, subleases, contracts, and agreements in any way relating to such party or any of the Borrowing Base Properties and do all other things necessary of such party to keep unimpaired in all material respects the rights of such party thereunder and to prevent the forfeiture thereof or default thereunder; provided, however, that nothing in this Agreement shall be deemed to require Borrower to perpetuate or renew any oil and gas lease or other lease by payment of rental or delay rental or by commencement or continuation of operations nor to prevent Borrower from abandoning or releasing any oil and gas lease or other lease or well thereon when, in any of such events, in the opinion of Borrower exercised in good faith, it is not in the best interest of Borrower to perpetuate the same.

(q) Certain Additional Assurances Regarding Maintenance and Operations of Properties . With respect to those Borrowing Base Properties which are being operated by operators other than Borrower, Borrower shall not be obligated to perform any undertakings contemplated by the covenants and agreement contained in Subsections 12(o) or 12(p) hereof which are performable only by such operators and are beyond the control of Borrower; however, Borrower agrees to promptly take, or cause to be taken, all

reasonable actions available under any operating agreements or otherwise to bring about the performance of any such material undertakings required to be performed thereunder.

(r) Sale of Certain Assets/Prepayment of Proceeds . Borrower will immediately pay over to Agent for the ratable benefit of Lenders as a prepayment of principal on the Notes and a reduction of the Borrowing Base, an amount equal to 100% of the “Release Price” from the sale of Borrowing Base Properties, which sale has been approved in advance by Required Lenders (provided, however, that approval of Required Lenders shall not be required for the sales of Borrowing Base Properties aggregating an Engineered Value of ten percent (10%) or less of the Borrowing Base then in effect during any calendar year). The term “Release Price” means the amount by which the Total Outstandings exceed the Borrowing Base after the Borrowing Base is reduced as a result of the sale of Borrowing Base Properties. Any such prepayment of principal on the Notes required by this Section 12(r), shall not be in lieu of, but shall be in addition to, any mandatory prepayment of principal required to be paid pursuant to Section 9(b) hereof. The Borrowing Base shall be reduced by the amount equal to the Engineered Value of the Borrowing Base Properties sold according to the most recent reserve report provided to Lender (as determined by Agent) and, in addition thereto, upon the sale of any Borrowing Base Properties that require the prior approval of Required Lenders, if requested by Required Lenders, the Borrowing Base will be redetermined pursuant to an Unscheduled Redetermination, which redetermination will be in addition to any other Unscheduled Redetermination that may be requested by Required Lenders.

(s) Title Matters . As to any Borrowing Base Properties hereafter mortgaged to Agent, Borrower will promptly (but in no event more than sixty (60) days following such mortgaging) furnish, or cause to be furnished to Agent title information reasonably satisfactory to Agent that is necessary to cause Borrower to be in compliance with its obligations under Section 12(u) with respect to title information, showing good and defensible title of Borrower to such Borrowing Base Properties subject only to Permitted Liens.

(t) Change of Principal Place of Business . Borrower shall give Agent at least thirty (30) days prior written notice of its intention to move its principal place of business and executive offices from the address set forth in Section 17 hereof

(u) Additional Collateral . Borrower agrees to regularly monitor engineering data covering all producing oil and gas properties and interests owned or acquired by Borrower on or after the date hereof and to mortgage or cause to be mortgaged such of the same to Agent for the ratable benefit of Lenders in substantially the form of the Collateral Documents, as applicable, to the extent that Lenders shall at all times during the existence of the Commitment be secured by perfected Liens and security interests covering not less than eighty percent (80%) of the Engineered Value of the Borrowing Base Properties of Borrower. In addition, Borrower agrees that in connection with the mortgaging of such additional Borrowing Base Properties, it shall within a reasonable time thereafter, deliver or cause to be delivered to Agent such mortgage and title opinions and other title information with respect to the title and Lien status of such Borrowing Base Properties as may be necessary to maintain at all times a level of such title

information (showing good and defensible title) of not less than seventy-five percent (75%) of the Engineered Value of all Borrowing Base Properties mortgaged to Agent for the ratable benefit of Lenders.

13. Negative Covenants. A deviation from the provisions of this Section 13 shall not constitute an Event of Default under this Agreement if such deviation is consented to in writing by Required Lenders prior to the date of deviation. Borrower will at all times comply with the covenants contained in this Section 13 from the date hereof and for so long as the Commitment is in existence or any amount is owed to Agent or Lenders under this Agreement or the other Loan Documents.

(a) Negative Pledge . Borrower shall not, without the prior written consent of Required Lenders:

(i) create, incur, assume or permit to exist any Lien, security interest or other encumbrance on any of its assets or properties except Permitted Liens; or

(ii) during any annual period, sell, convey, exchange, lease or otherwise dispose of during any annual period any of its Oil and Gas Properties having an aggregate value as determined in the most recent engineering report delivered to Agent under Section 7(b) hereof in excess of ten percent (10%) of the Borrowing Base, excluding (i) obsolete or worn-out equipment and (ii) oil, gas and hydrocarbons sold in the ordinary course of Borrower’s business and (iii) Oil and Gas Properties that have been given no Engineered Value in the Borrowing Base then in effect. After a Borrowing Base has been determined, upon the sale of any oil and gas properties, the Borrowing Base shall be reduced, effective on the date of consummation of such sale, by an amount which the Required Lenders determine is the Borrowing Base value last assigned to such oil and gas properties according to the most recent reserve report or update thereof delivered to Agent. Agent shall provide Borrower with written notice of the redetermined Borrowing Base made in accordance with this Section 13(a)(ii), which written notice shall be sufficient to give effect to such redetermined Borrowing Base without further amendment to this Agreement.

(b) Current Ratio . Borrower will not allow the Current Ratio of Borrower to at any time be less than 1.0 to 1.0.

(c) Consolidations and Mergers . Borrower will not consolidate or merge with or into any other Person if Borrower is not the surviving entity or, if Borrower is the surviving entity, such merger or consolidation would cause an Event of Default to occur, or permit any other Person to consolidate with or merge into it if Borrower is not the surviving entity or, if Borrower is the surviving entity, such merger or consolidation would cause an Event of Default to occur or transfer all, or substantially all, of its property.

(d) Limitation on Additional Indebtednes s. Borrower will not incur, create, assume or in any manner become or be liable in respect of any indebtedness, nor will any

Borrower guarantee or otherwise in any manner become or be liable in respect of any indebtedness, liabilities or other obligations of any other person or entity, whether by agreement to purchase the indebtedness of any other person or entity or agreement for the furnishing of funds to any other person or entity through the purchase or lease of goods, supplies or services (or by way of stock purchase, capital contribution, advance or loan) for the purpose of paying or discharging the indebtedness of any other person or entity, or otherwise, except that the foregoing restrictions shall not apply to:

(i) the Notes and Letters of Credit, and any renewal or increase thereof, or other indebtedness of Borrower outstanding at the Effective Date which has heretofore disclosed to Lenders in Borrower’s Financial Statements or on Schedule “4” hereto; or

(ii) taxes, assessments or other government charges which are not yet due or are being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserve as shall be required by Accounting Principles shall have been made therefor and levy and execution thereon have been stayed and continue to be stayed; or

(iii) indebtedness (other than in connection with a loan or lending transaction) incurred in the ordinary course of business, including, but not limited to indebtedness for drilling, completing, leasing and reworking oil and gas wells; or

(iv) obligations under permitted Rate Management Transactions; or

(v) such other indebtedness not to exceed $1,000,000; or

(vi) trade payables and other accrued liabilities that are incurred in the ordinary course of business; and

(vii) any renewals or extensions of (but, other than in the case of the Notes, not increases in) any of the foregoing.

(e) Restricted Payments . Borrower will not declare or pay any cash dividend or distribution (whether in cash, securities or other property) purchase, redeem or otherwise acquire for value any of its stock interest now or hereafter outstanding, return any capital to its stockholders or make any distribution of its assets to its stockholders as such, except that, if no Event of Default has occurred and is continuing, Borrower may distribute to its shareholders an amount equal annually to their tax liability incurred as a result of their ownership interest in Borrower.

(f) Rate Management Transactions . Borrower will not enter into any Rate Management Transaction, except the foregoing prohibition shall not apply to (i) transactions consented to in writing by the Required Lenders which are on terms acceptable to the Required Lenders, or (ii) Pre-Approved Contracts. Once Borrower enters into a Rate Management Transaction, the terms and conditions of such Rate Management Transaction may not be materially amended or modified, nor may such Rate

Management Transaction be cancelled without Borrower having given Agent written notice of such amendment, modification or cancellation on the date not later than three (3) Business Days after the date such action takes place. Borrower further agrees to give Agent written notice of any bankruptcy, insolvency or similar proceeding commenced by or against any counterparty to any agreement entered into any such Rate Management Transaction.

(g) Certain Transactions . With respect to its Oil and Gas Properties, Borrower shall not enter into any transaction with any Affiliate except for transactions with Affiliates upon terms not less favorable to Borrower than would be obtainable at the time in comparable transactions of Borrower in arm’s length dealings with Persons other than Affiliates.

(h) Intentionally Deleted .

(i) Limitation on Investments and New Businesses . Borrower shall not engage directly or indirectly in any new business or make any acquisitions, investments, or commitments, except such businesses, operations, acquisitions, or investments which are incidental to or reasonably related to the present businesses and operations conducted by Borrower and except (i) investment in obligations of the United States government or any agency thereof or obligations guaranteed by the United States government having a maturity not in excess of one year, (ii) investments in certificates of deposit of financially sound commercial Bank having a maturity not in excess of one year, (iii) investments in commercial paper with a rating of at least “Prime 1” according to Moody’s Investors Service, Inc., or a similar rating of a comparable or successor service, having a maturity not in excess of one year.

(j) Limitation on Credit Extensions . Borrower shall not extend credit, make advances or make loans to any Person or entity other than normal and prudent extensions of credit in the ordinary course of business.

(k) Fiscal Year . Borrower shall not change its fiscal year.

(l) Certain Agreements . Neither Borrower nor any Guarantor shall enter into any agreement, which by its terms would expressly restrict its performance of its obligations pursuant to this Loan Agreement or the other Loan Documents.

(m) Lines of Business . Borrower shall not directly or indirectly engage in any business other than the acquisition, exploration, development, operation, management or resale of oil, gas and energy properties and the processing, gathering, marketing and transportation of production therefrom.

14. Events of Default. Any one or more of the following events shall be considered an “Event of Default” as that term is used herein:

(a) Borrower shall fail to pay when due or declared due the principal of the Notes or any Reimbursement Obligations with respect to any Letter of Credit, including

any payment of principal required under Section 9(b), and such failure to pay shall continue unremedied for a period of one (1) day; or

(b) Borrower shall fail to pay when due accrued interest on any of the Notes or any fees or other amounts payable hereunder or under any other Loan Document and such failure to pay shall continue unremedied for a period of three (3) days; or

(c) Any representation or warranty made by Borrower under this Agreement, or in any certificate or statement furnished or made to Lenders pursuant hereto, or in connection herewith, or in connection with any document furnished hereunder, shall prove to be untrue in any material respect as of the date on which such representation or warranty is made (or deemed made), or any representation, statement (including financial statements), certificate, report or other data furnished or to be furnished or made by Borrower under any Loan Document, including this Agreement, proves to have been untrue in any material respect; or

(d) Default shall be made in the due observance or performance of any of the covenants or agreements of Borrower contained in the Loan Documents, including this Agreement (excluding covenants contained in Section 13 of the Agreement for which there is no cure period), and such default shall continue for more than thirty (30) days after written notice from Agent is received by Borrower; or

(e) Default shall be made in the due observance or performance of the covenants of Borrower contained in Section 13 of this Agreement; or

(f) Default shall be made in respect of any obligation for borrowed money in excess of $500,000 other than the Notes, for which Borrower is liable (directly, by assumption, as guarantor or otherwise), or any obligations secured by any mortgage, pledge or other consensual security interest with respect thereto, on any asset or property of Borrower or in respect of any agreement relating to any such obligations, and if such default shall continue beyond the applicable grace period, if any; or

(g) Borrower or any Guarantor shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking an appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action authorizing the foregoing; or

(h) An involuntary case or other proceeding, shall be commenced against Borrower or any Guarantor seeking liquidation, reorganization or other relief with respect to its debts under any bankruptcy, insolvency or similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other

proceeding shall remain undismissed and unstayed for a period of sixty (60) days; or an order for relief shall be entered against Borrower or any Guarantor under the federal bankruptcy laws as now or hereinafter in effect; or

(i) A final judgment or order for the payment of money in excess of $500,000 (or judgments or orders aggregating in excess of $500,000) shall be rendered against Borrower and such judgments or orders shall continue unsatisfied and unstayed for a period of thirty (30) days; provided, however, that if any such judgment order is not satisfied or stayed within such 30-day period an Event of Default shall not exist if prior to the end of such 30-day period Borrower provides to Agent an unqualified statement from Borrower’s insurance carrier addressed to Agent that the entire amount of such judgment or order is a covered loss under the insurance policies that Borrower maintains with such insurance carrier and that such insurance carrier does not dispute such insurance coverage and will provide Borrower with such proceeds of insurance required to satisfy such judgment or order; or

(j) Borrower shall fail to pay any obligation owed under any Rate Management Transaction in an amount in excess of $500,000 or in any amount if the obligations of Borrower under any such Rate Management Transaction are secured by the Collateral Documents or any event of default (as defined therein) shall occur as a result of the action or inaction of Borrower under any agreement entered into in connection with any Rate Management Transaction; or

(k) The Liens securing the Loans cease to be in place and/or effective (other than as a result of Agent’s actions or inactions); or

(l) A Change of Control shall occur; or

(m) The dissolution of Borrower or any Guarantor.

Upon occurrence of any Event of Default specified in Subsections 14(g) and (h) hereof, the entire principal amount due under the Notes and all interest then accrued thereon, and any other liabilities of Borrower hereunder, shall become automatically and immediately due and payable all without notice and without presentment, demand, protest, notice of protest or dishonor or any other notice of default of any kind, all of which are hereby expressly waived by Borrower. Upon the occurrence of any other Event of Default, Agent, upon request of Required Lenders, shall by written notice to Borrower terminate the Commitment and declare the principal of, and all interest then accrued on, the Notes and any other liabilities hereunder to be forthwith due and payable, whereupon the same shall forthwith become due and payable without presentment, demand, protest, notice of intent to accelerate, notice of acceleration or other notice of any kind, all of which Borrower hereby expressly waives, anything contained herein or in the Notes to the contrary notwithstanding.

Upon the occurrence and during the continuance of any Event of Default, Lenders are hereby authorized at any time and from time to time, without notice to Borrower (any such notice being expressly waived by Borrower), to set-off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time

owing by any Lender to or for the credit or the account of Borrower against any and all of the indebtedness of Borrower under the Notes and the Loan Documents, including this Agreement, irrespective of whether or not Lenders shall have made any demand under the Loan Documents, including this Agreement or the Notes and although such indebtedness may be unmatured. Any amount set-off by any Lender shall be applied against the indebtedness owed Lenders by Borrower pursuant to this Agreement and the Notes. Lenders agree promptly to notify Borrower after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of Lenders under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which Lenders may have.

15. Agent and Lenders.

(a) Appointment and Authorization . Each Lender hereby appoints Agent as its nominee and agent, in its name and on its behalf: (i) to act as nominee for and on behalf of such Lender in and under all Loan Documents; (ii) to arrange the means whereby the funds of Lenders are to be made available to Borrower under the Loan Documents; (iii) to take such action as may be requested by any Lender under the Loan Documents (when such Lender is entitled to make such request under the Loan Documents); (iv) to receive all documents and items to be furnished to Lenders under the Loan Documents; (v) to be the secured party, mortgagee, beneficiary, and similar party in respect of, and to receive, as the case may be, any collateral for the benefit of Lenders; (vi) to promptly distribute to each Lender all material information, requests, documents and items received from Borrower under the Loan Documents; (vii) to promptly distribute to each Lender such Lender’s Pro Rata Part of each payment or prepayment (whether voluntary, as proceeds of insurance thereon, or otherwise) in accordance with the terms of the Loan Documents and (viii) to deliver to the appropriate Persons requests, demands, approvals and consents received from Lenders. Each Lender hereby authorizes Agent to take all actions and to exercise such powers under the Loan Documents as are specifically delegated to Agent by the terms hereof or thereof, together with all other powers reasonably incidental thereto. With respect to its Commitment hereunder and the Notes issued to it, Agent and any successor Agent shall have the same rights under the Loan Documents as any other Lender and may exercise the same as though it were not Agent; and the term “Lender” or “Lenders” shall, unless otherwise expressly indicated, include Agent and any successor Agent in its capacity as a Lender. Agent and any successor Agent and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of and generally engage in any kind of business with Borrower, and any person which may do business with Borrower, all as if Agent and any successor Agent was not Agent hereunder and without any duty to account therefor to Lenders; provided that, if any payments in respect of any property (or the proceeds thereof) now or hereafter in the possession or control of Agent which may be or become security for the obligations of Borrower arising under the Loan Documents by reason of the general description of indebtedness secured or of property contained in any other agreements, documents or instruments related to any such other business shall be applied to reduction of the obligations of Borrower arising under the Loan Documents, then each Lender shall be entitled to share in such application according to its Pro Rata Part thereof. Each Lender, upon request of any other Lender, shall disclose to all other Lenders all

indebtedness and liabilities, direct and contingent, of Borrower to such Lender as of the time of such request.

(b) Note Holders . From time to time as other Lenders become a party to this Agreement, Agent shall obtain execution by Borrower of additional Notes in amounts representing the Commitments of each such new Lender, up to an aggregate face amount of all Notes not exceeding $100,000,000. The obligation of such Lender shall be governed by the provisions of this Agreement, including but not limited to, the obligations specified in Section 2 hereof. From time to time, Agent may require that Lenders exchange their Notes for newly issued Notes to better reflect the Commitments of Lenders. Agent may treat the payee of any Note as the holder thereof until written notice of transfer has been filed with it, signed by such payee and in form satisfactory to Agent.

(c) Consultation with Counsel . Lenders agree that Agent may consult with legal counsel selected by Agent and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. LENDERS ACKNOWLEDGE THAT MURPHY MAHON KEFFLER & FARRIER, L.L.P. IS COUNSEL FOR FROST, BOTH AS AGENT AND AS A LENDER, AND THAT SUCH FIRM DOES NOT REPRESENT ANY OF THE OTHER LENDERS IN CONNECTION WITH THIS TRANSACTION.

(d) Documents . Agent shall not be under a duty to examine or pass upon the validity, effectiveness, enforceability, genuineness or value of any of the Loan Documents or any other instrument or document furnished pursuant thereto or in connection therewith, and Agent shall be entitled to assume that the same are valid, effective, enforceable and genuine and what they purport to be.

(e) Resignation or Removal of Agent . Subject to the appointment and acceptance of a successor Agent as provided below, Agent may resign at any time by giving written notice thereof to Lenders and Borrower, and Agent may be removed at any time with or without cause by Required Lenders (excluding Agent). If no successor Agent has been so appointed by Required Lenders (and approved by Borrower) and has accepted such appointment within thirty (30) days after the retiring Agent’s giving of notice of resignation or removal of the retiring Agent, then the retiring Agent may, on behalf of Lenders, appoint a successor Agent. Any successor Agent must be approved by Borrower, which approval will not be unreasonably withheld. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent, as the case may be, shall be discharged from its duties and obligations hereunder. After any retiring Agent’s resignation or removal hereunder as Agent, the provisions of this Section 15 shall continue in effect for its benefit in respect to any actions taken or omitted to be taken by it while it was acting as Agent. To be eligible to be an Agent hereunder the party serving, or to serve, in such capacity must own a Pro Rata Part of the Commitments equal to the level of Commitment required to be held by any Lender pursuant to Section 29 hereof.

(f) Responsibility of Agent . It is expressly understood and agreed that the obligations of Agent under the Loan Documents are only those expressly set forth in the Loan Documents as to each and that Agent shall be entitled to assume that no Default or Event of Default has occurred and is continuing, unless Agent has actual knowledge of such fact or has received notice from a Lender or Borrower that such Lender or Borrower considers that a Default or an Event of Default has occurred and is continuing and specifying the nature thereof. Neither Agent nor any of its directors, officers, attorneys or employees shall be liable for any action taken or omitted to be taken by them under or in connection with the Loan Documents, except for its or their own gross negligence or willful misconduct. Agent shall not incur liability under or in respect of any of the Loan Documents by acting upon any notice, consent, certificate, warranty or other paper or instrument believed by it to be genuine or authentic or to be signed by the proper party or parties, or with respect to anything which it may do or refrain from doing in the reasonable exercise of its judgment, or which may seem to it to be necessary or desirable.

Agent shall not be responsible to Lenders for any of Borrower’s recitals, statements, representations or warranties contained in any of the Loan Documents, or in any certificate or other document referred to or provided for in, or received by any Lender under, the Loan Documents, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of any of the Loan Documents or for any failure by Borrower to perform any of its obligations hereunder or thereunder. Agent may employ agents and attorneys-in-fact and shall not be answerable, except as to money or securities received by it or its authorized agents, for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care.

The relationship between Agent and each Lender is only that of agent and principal and has no fiduciary aspects. Nothing in the Loan Documents or elsewhere shall be construed to impose on Agent any duties or responsibilities other than those for which express provision is therein made. In performing its duties and functions hereunder, Agent does not assume and shall not be deemed to have assumed, and hereby expressly disclaims, any obligation or responsibility toward or any relationship of agency or trust with or for Borrower or any of its beneficiaries or other creditors. As to any matters not expressly provided for by the Loan Documents, Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of all Lenders and such instructions shall be binding upon all Lenders and all holders of the Notes; provided, however, that Agent shall not be required to take any action which is contrary to the Loan Documents or applicable law.

Agent shall have the right to exercise or refrain from exercising, without notice or liability to Lenders, any and all rights afforded to Agent by the Loan Documents or which Agent may have as a matter of law; provided, however, Agent shall not (i) except as provided herein and in Section 7(b) hereof, without the consent of Required Lenders approve the sale, release or substitution of Collateral other than the sale of Collateral permitted pursuant to Section 13(a)(ii) hereof, or (ii) without the consent of Required Lenders, take any other action with regard to amending the Loan Documents, waiving any Default under the Loan Documents, or taking any other action with respect to the Loan Documents. Agent shall not have liability to Lenders for failure or delay in exercising any right or power possessed by Agent pursuant to the Loan

Documents or otherwise unless such failure or delay is caused by the gross negligence of Agent, in which case only Agent responsible for such gross negligence shall have liability therefor to Lenders.

(g) Independent Investigation . Each Lender severally represents and warrants to Agent that it has made its own independent investigation and assessment of the financial condition and affairs of Borrower in connection with the making and continuation of its participation hereunder and has not relied exclusively on any information provided to such Lender by Agent in connection herewith, and each Lender represents, warrants and undertakes to Agent that it shall continue to make its own independent appraisal of the creditworthiness of Borrower while the Notes are outstanding or its commitments hereunder are in force. Agent shall not be required to keep itself informed as to the performance or observance by Borrower of this Agreement or any other document referred to or provided for herein or to inspect the properties or books of Borrower. Other than as provided in this Agreement, Agent shall not have any duty, responsibility or liability to provide any Lender with any credit or other information concerning the affairs, financial condition or business of Borrower which may come into the possession of Agent.

(h) Indemnification . Lenders agree to indemnify Agent, its Affiliates, its directors, officers, attorneys and employees (the “Indemnified Agents”), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any proper and reasonable kind or nature whatsoever which may be imposed on, incurred by or asserted against Agent in any way relating to or arising out of the Loan Documents or any action taken or omitted by any Indemnified Agent under the Loan Documents, provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from any Indemnified Agent’s gross negligence or willful misconduct. Each Lender shall be entitled to be reimbursed by any such Indemnified Agent for any amount such Lender paid to such Indemnified Agent under this Section 15(h) to the extent such Indemnified Agent has been reimbursed for such payments by Borrower or any other Person. THE PARTIES INTEND FOR THE PROVISIONS OF THIS SECTION TO APPLY TO AND PROTECT AGENT FROM THE CONSEQUENCES OF ANY LIABILITY INCLUDING STRICT LIABILITY IMPOSED OR THREATENED TO BE IMPOSED ON ANY INDEMNIFIED AGENT AS WELL AS FROM THE CONSEQUENCES OF ITS OWN NEGLIGENCE, WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE, CONTRIBUTING OR CONCURRING CAUSE OF ANY SUCH LIABILITY.

(i) Benefit of Section 15 . The agreements contained in this Section 15 are solely for the benefit of Agent and Lenders and are not for the benefit of, or to be relied upon by, Borrower, any affiliate of Borrower or any other person.

(j) Pro Rata Treatment . Subject to the provisions of this Agreement, each payment (including each prepayment) by Borrower and each collection by Lenders (including offsets) on account of the principal of and interest on the Notes and fees

provided for in this Agreement, that are payable by Borrower, shall be made Pro Rata; provided, however, in the event that any Defaulting Lender shall have failed to make an Advance as contemplated under Section 2 hereof and Agent or another Lender or Lenders shall have made such Advance, payment received by Agent for the account of such Defaulting Lender or Lenders shall not be distributed to such Defaulting Lender or Lenders until such Advance or Advances shall have been repaid in full to the Lender or Lenders who funded such Advance or Advances.

(k) Assumption as to Payments . Except as specifically provided herein, unless Agent shall have received notice from Borrower prior to the date on which any payment is due to Lenders hereunder that Borrower will not make such payment in full, Agent may, but shall not be required to, assume that Borrower has made such payment in full to Agent on such date and Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent Borrower shall not have so made such payment in full to Agent, each Lender shall repay to Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to Agent, at the interest rate applicable to such portion of the Loan.

(l) Other Financings . Without limiting the rights to which any Lender otherwise is or may become entitled, such Lender shall have no interest, by virtue of this Agreement or the Loan Documents, in (a) any present or future loans from, letters of credit issued by, or leasing or other financial transactions by, any other Lender to, on behalf of, or with Borrower (collectively referred to herein as “Other Financings”) other than the obligations hereunder; (b) any present or future guarantees by or for the account of Borrower which are not contemplated by the Loan Documents; (c) any present or future property taken as security for any such Other Financings; or (d) any property now or hereafter in the possession or control of any other Lender which may be or become security for the obligations of Borrower arising under any loan document by reason of the general description of indebtedness secured or property contained in any other agreements, documents or instruments relating to any such Other Financings.

(m) Interests of Lenders . Nothing in this Agreement shall be construed to create a partnership or joint venture between Lenders for any purpose. Agent, Lenders and Borrower recognize that the respective obligations of Lenders under the Commitments shall be several and not joint and that neither Agent nor any of Lenders shall be responsible or liable to perform any of the obligations of the other under this Agreement. Each Lender is deemed to be the owner of an undivided interest in and to all rights, titles, benefits and interests belonging and accruing to Agent under the Security Instruments, including, without limitation, liens and security interests in any collateral, fees and payments of principal and interest by Borrower under the Commitments on a Pro Rata basis. Each Lender shall perform all duties and obligations of Lenders under this Agreement in the same proportion as its ownership interest in the Loans outstanding at the date of determination thereof.

(n) Investments . Whenever Agent in good faith determines that it is uncertain

about how to distribute to Lenders any funds which it has received, or whenever Agent in good faith determines that there is any dispute among Lenders about how such funds should be distributed, Agent may choose to defer distribution of the funds which are the subject of such uncertainty or dispute. If Agent in good faith believes that the uncertainty or dispute will not be promptly resolved, or if Agent is otherwise required to invest funds pending distribution to Lenders, Agent may invest such funds pending distribution (at the risk of Lenders). All interest on any such investment shall be distributed upon the distribution of such investment and in the same proportions and to the same Persons as such investment. All monies received by Agent for distribution to Lenders (other than to the Person who is Agent in its separate capacity as a Lender) shall be held by Agent pending such distribution solely as Agent for such Lenders, and Agent shall have no equitable title to any portion thereof.

(o) Delegation to Affiliates . Borrower and Lenders agree that Agent may delegate any of its duties under this Agreement to any of its Affiliates. Any such Affiliate (and such Affiliate’s directors, officers, agents and employees) which perform duties in connection with this Agreement shall be entitled to the same benefits of the indemnification, waiver and other protective provisions to which Agent is entitled under Sections 15 and 18.

(p) Execution of Collateral Documents . Lenders hereby empower and authorize Agent to execute and deliver the Security Instruments and all related financing statements and other financing statements, agreements, documents or instruments that shall be necessary or appropriate to effect the purposes of the Security Instruments.

(q) Collateral Releases . Lenders hereby empower and authorize Agent to execute and deliver to Borrower on its behalf any agreements, documents, or instruments as shall be necessary or appropriate to reflect any releases of Collateral which shall be permitted by the terms hereof (including, without limitation, the release of Collateral that Borrower is permitted to sell pursuant to Section 13 hereof) or of any other Loan Document or which shall otherwise have been approved by the Required Lenders pursuant to Section 15 hereof.

16. Exercise of Rights. No failure to exercise, and no delay in exercising, on the part of Agent or Lenders, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right. The rights of Agent and Lenders hereunder shall be in addition to all other rights provided bylaw.

17. Notices. Any notices or other communications required or permitted to be given by this Agreement or any other documents or instruments referred to herein must be given in writing (which may be by bank wire, telecopy or similar writing) and shall be given to the party to whom such notice or communication is directed at the address or telecopy number of such party as follows: (a) BORROWER: Approach Resources I, LP, 6300 Ridglea Place, Suite 1107, Fort Worth, Texas 76116, Attention: J. Ross Craft, Facsimile No. (817) 989-9001; with copy to: Steve Smart, 6300 Ridglea Place, Suite 1107, Fort Worth, Texas 76116, Facsimile No. (817) 989-9001; (b) AGENT and LENDERS: c/o The Frost National Bank, 777 Main Street, Suite

500, Fort Worth, Texas 76102, Attention: John S. Warren, Facsimile No. (817) 420-5250. Any such notice or other communication shall be effective (a) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Section 17 and the appropriate answer back is received or receipt is otherwise confirmed, (b) if given by mail, three (3) days after deposit in the mails with first-class postage, prepaid, as addressed as aforesaid or (c) if given by any other method, when delivered at the address specified in this Section 17; provided, however, that notices to Agent under Sections 2, 3, 4 or 5 hereof shall not be effective until received. Any notice required to be given to Lenders shall be given to Agent and distributed to all Lenders by Agent.

18. Expenses. Borrower shall pay (i) all reasonable and necessary out-of-pocket expenses of Agent, including reasonable fees and disbursements of special counsel for Agent, in connection with the preparation of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or Event of Default or alleged Default or Event of Default hereunder, (ii) all reasonable and necessary out-of-pocket expenses of Agent, including reasonable fees and disbursements of special counsel for Agent in connection with the preparation of any participation agreement for a participant or participants requested by Borrower or any amendment thereof and (iii) if a Default or an Event of Default occurs, all reasonable and necessary out-of-pocket expenses incurred by Lenders, including reasonable fees and disbursements of counsel, in connection with such Default and Event of Default and collection and other enforcement proceedings resulting therefrom. BORROWER HEREBY ACKNOWLEDGES THAT MURPHY MAHON KEFFLER & FARRIER, L.L.P. IS SPECIAL COUNSEL TO FROST, AS AGENT AND AS A LENDER, UNDER THIS AGREEMENT AND THAT IT IS NOT COUNSEL TO, NOR DOES IT REPRESENT BORROWER IN CONNECTION WITH THE TRANSACTIONS DESCRIBED IN THIS AGREEMENT. Borrower is relying on separate counsel in the transaction described herein. Borrower shall indemnify Lenders, within thirty (30) days after written demand therefor, against any transfer taxes, document taxes, assessments or charges made by any governmental authority and paid by Lenders (or Agent on behalf of Lenders) by reason of the execution, delivery and filing of the Loan Documents. The obligations of this Section 18 shall survive any termination of this Agreement, the expiration of the Loans and the payment of all indebtedness of Borrower to Lenders hereunder and under the Notes.

19. Indemnity. Borrower hereby agrees to indemnify Agent, each Lender, their respective Affiliates, and each of their directors, officers, and employees (the “Indemnified Parties”) against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefor of any Indemnified Party, Agent, any Lender or any Affiliate that is a party thereto) which any of them may pay or incur arising out of or relating to this Agreement, the other Loan Documents, the transactions contemplated hereby or the direct or indirect application or proposed application of the proceeds of any loan hereunder even if any of the foregoing arises out of the ordinary negligence of the party seeking indemnification except to the extent that they are determined in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the party seeking indemnification. The indemnity set forth herein shall be in addition to any other obligations or liabilities of Borrower to any Indemnified Party, Agent, and each of Lenders hereunder or at common law or otherwise, and shall survive any termination of this Agreement, the expiration of the Loans and the payment of

all indebtedness of Borrower to Lenders hereunder and under the Notes. THE PARTIES INTEND FOR THE PROVISIONS OF THIS SECTION TO APPLY TO AND PROTECT EACH INDEMNIFIED PARTY FROM THE CONSEQUENCES OF ANY LIABILITY INCLUDING STRICT LIABILITY IMPOSED OR THREATENED TO BE IMPOSED ON AGENT AS WELL AS FROM THE CONSEQUENCES OF ITS OWN NEGLIGENCE, WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE, CONTRIBUTING, OR CONCURRING CAUSE OF ANY CLAIM.

20. Non-Liability of Lenders. The relationship between Borrower on the one hand and Lenders and Agent on the other hand shall be solely that of borrower and lender. Neither Agent, nor any Lender shall have any fiduciary responsibility to Borrower. Neither Agent, nor any Lender undertakes any responsibility to Borrower to review or inform Borrower of any matter in connection with any phase of Borrower’s businesses or operations. Borrower agrees that neither Agent, nor any Lender shall have any liability to Borrower (whether sounding in tort, contract or otherwise) for losses suffered by Borrower in connection with, arising out of, or in any way related to, the transactions contemplated and the relationship established by this Agreement and the other Loan Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such loss resulted from the gross negligence or willful misconduct of the party from which recovery is sought. Neither Agent, nor any Lender shall have any liability with respect to, and Borrower hereby waives, releases and agrees not to sue for, any special, indirect, consequential or punitive damages suffered by Borrower in connection with, arising out of, or in any way related to this Agreement, the Loan Documents or any transaction contemplated thereby.

21. Governing Law. THIS AGREEMENT IS BEING EXECUTED AND DELIVERED, AND IS INTENDED TO BE PERFORMED, IN FORT WORTH, TARRANT COUNTY, TEXAS, AND THE SUBSTANTIVE LAWS OF TEXAS SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT AND ALL OTHER DOCUMENTS AND INSTRUMENTS REFERRED TO HEREIN, UNLESS OTHERWISE SPECIFIED THEREIN.

22. Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term of this Agreement, such provisions shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of the Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement.

23. Maximum Interest Rate. Regardless of any provisions contained in this Agreement or in any other documents and instruments referred to herein, Lenders shall never be deemed to have contracted for or be entitled to receive, collect or apply as interest on the Notes any amount in excess of the Maximum Rate, and in the event any Lender ever receives, collects or applies as interest any such excess, or if an acceleration of the maturities of any Notes or if any prepayment by Borrower results in Borrower having paid any interest in excess of the Maximum Rate, such amount which would be excessive interest shall be applied to the reduction

of the unpaid principal balance of the Notes for which such excess was received, collected or applied, and, if the principal balance of such Note is paid in full, any remaining excess shall forthwith be paid to Borrower. All sums paid or agreed to be paid to Lenders for the use, forbearance or detention of the indebtedness evidenced by the Notes and/or this Agreement shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full so that the rate or amount of interest on account of such indebtedness does not exceed the Maximum Rate. In determining whether or not the interest paid or payable under any specific contingency exceeds the Maximum Rate of interest permitted by law, Borrower and Lenders shall, to the maximum extent permitted under applicable law, (i) characterize any non-principal payment as an expense, fee or premium, rather than as interest; and (ii) exclude voluntary prepayments and the effect thereof; and (iii) compare the total amount of interest contracted for, charged or received with the total amount of interest which could be contracted for, charged or received throughout the entire contemplated term of the Note at the Maximum Rate.

For purposes of Section 303 of the Texas Finance Code, to the extent applicable to any Lender or Agent, Borrower agrees that the Maximum Rate shall be the “weekly ceiling” as defined in said Chapter, provided that such Lender or Agent, as applicable, may also rely, to the extent permitted by applicable laws of the State of Texas and the United States of America, on alternative maximum rates of interest under the Texas Finance Code or other laws applicable to such Lender or Agent from time to time if greater (the “Maximum Rate”).

24. Amendments. This Agreement may be amended only by an instrument in writing executed by an authorized officer of the party against whom such amendment is sought to be enforced. No modification or waiver of any provision of the Loan Documents, including this Agreement, or the Notes nor consent to departure therefrom, shall be effective unless in writing signed by Borrower and Required Lenders; provided, however, that no amendment, waiver, or other action shall be effected pursuant to this Section 24 without the consent of all Lenders which: (a) would increase the Borrowing Base, (b) would reduce any fees hereunder, or the principal of, or the interest on, any Lender’s Note or Notes, (c) would postpone any date fixed for any payment of any fees hereunder, or any principal or interest of any Lender’s Note or Notes, (d) would increase the aggregate Commitments or any Lender’s individual Commitment hereunder or would materially alter Agent’s obligations to any Lender hereunder, (e) would release Borrower from its obligation to pay any Lender’s Note or Notes, (f) would release any Collateral (other than the Collateral that is sold or transferred with the prior consent of Required Lenders pursuant to Section 13(a)(ii)), (g) would change the definition of Required Lenders (or without the prior consent of Required Lenders if such consent is not required), or (h) would amend this sentence. No such consent or waiver shall extend beyond the particular case and purpose involved. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other circumstances without such notice or demand. No amendment of any provision of this Agreement relating to Agent shall be effective without the written consent of Agent.

25. Multiple Counterparts. This Agreement may be executed in a number of identical separate counterparts, each of which for all purposes is to be deemed an original, but all of which shall constitute, collectively, one agreement. No party to this Agreement shall be bound hereby until a counterpart of this Agreement has been executed by all parties hereto.

Delivery of an executed counterpart of a signature page of the Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement.

26. Conflict. In the event any term or provision hereof is inconsistent with or conflicts with any provision of the Loan Documents, the terms or provisions contained in this Agreement shall be controlling.

27. Survival. All covenants, agreements, undertakings, representations and warranties made in the Loan Documents, including this Agreement, the Notes or other documents and instruments referred to herein shall survive all closings hereunder and shall not be affected by any investigation made by any party.

28. Parties Bound. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided, however, that Borrower may not, without the prior written consent of all of Lenders, assign any rights, powers, duties or obligations hereunder.

29. Assignments and Participations .

(a) Each Lender shall have the right to sell, assign or transfer all or any part of its Note or Notes, its Commitment and its rights and obligations hereunder to one or more Affiliates, Lenders, financial institutions, pension plans, insurance companies, investment funds, or similar Persons who are Eligible Assignees or to a Federal Reserve Bank; provided, that each sale, assignment or transfer (other than to an Affiliate or a Federal Reserve Bank) shall require the consent of Agent and Borrower, which consents will not be unreasonably withheld; provided, however, that if an Event of Default has occurred and is continuing, the consent of Borrower shall not be required. Any such assignee, transferee or recipient shall have, to the extent of such sale, assignment, or transfer, the same rights, benefits and obligations as it would if it were such Lender and a holder of such Note, Commitment and rights and obligations, including, without limitation, the right to vote on decisions requiring consent or approval of all Lenders or Required Lenders and the obligation to fund its Commitment; provided, that (1) each such sale, assignment, or transfer (other than to an Affiliate or a Federal Reserve Bank) shall be in an aggregate principal amount not less than $5,000,000, (2) each remaining Lender shall at all times maintain Commitment then outstanding in an aggregate principal amount of at least equal to $5,000,000; (3) each such sale, assignment or transfer shall be of a Pro Rata Part of such Lender’s Commitment, (4) no Lender may offer to sell its Note or Notes, Commitment, rights and obligations or interests therein in violation of any securities laws; and (5) no such assignments (other than to a Federal Reserve Bank) shall become effective until the assigning Lender and its assignee delivers to Agent and Borrower an Assignment and Acceptance and the Note or Notes subject to such assignment and other documents evidencing any such assignment. An assignment fee in the amount of $3,500 for each such assignment (other than to an Affiliate, a Lender or the Federal Reserve Bank) will be payable by the transferring Lender to Agent by assignor or assignee. Within five (5) Business Days after its receipt of copies of the Assignment and Acceptance and the other documents relating thereto and the Note or Notes, Borrower shall execute and deliver to Agent (for delivery to the relevant assignee) a new Note or

Notes evidencing such assignee’s assigned Commitment and if the assignor Lender has retained a portion of its Commitment, a replacement Note in the principal amount of the Commitment retained by the assignor (except as provided in the last sentence of this paragraph (a) such Note or Notes to be in exchange for, but not in payment of, the Note or Notes held by such Lender). On and after the effective date of an assignment hereunder, the assignee shall for all purposes be a Lender, party to this Agreement and any other Loan Document executed by Lenders and shall have all the rights and obligations of a Lender under the Loan Documents, to the same extent as if it were an original party thereto, and no further consent or action by Borrower, Lenders or Agent shall be required to release the transferor Lender with respect to its Commitment assigned to such assignee and the transferor Lender shall henceforth be so released.

(b) Each Lender shall have the right to grant participations in all or any part of such Lender’s Notes and Commitment hereunder to one or more pension plans, investment funds, insurance companies, financial institutions or other Persons, provided, that:

(i) each Lender granting a participation shall retain the right to vote hereunder, and no participant shall be entitled to vote hereunder on decisions requiring consent or approval of Lender or Required Lenders (except as set forth in (iii) below);

(ii) in the event any Lender grants a participation hereunder, such Lender’s obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the holder of any such Note or Notes for all purposes under the Loan Documents, and Agent, each Lender and Borrower shall be entitled to deal with the Lender granting a participation in the same manner as if no participation had been granted; and

(iii) no participant shall ever have any right by reason of its participation to exercise any of the rights of Lenders hereunder, except that any Lender may agree with any participant that such Lender will not, without the consent of such participant (which consent may not be unreasonably withheld) consent to any amendment or waiver requiring approval of all Lenders.

(c) It is understood and agreed that any Lender may provide to assignees and participants and prospective assignees and participants financial information and reports and data concerning Borrower’s properties and operations which was provided to such Lender pursuant to this Agreement, provided, that each recipient thereto has first agreed, for the benefit of Borrower, to hold such information, reports and data in confidence on the terms set out in Section 12(j) hereof.

(d) Upon the reasonable request of either Agent or Borrower, each Lender will identify those to whom it has assigned or participated any part of its Notes and Commitment, and provide the amounts so assigned or participated.

30. Choice of Forum: Consent to Service of Process and Jurisdiction. THE OBLIGATIONS OF BORROWER UNDER THE LOAN DOCUMENTS ARE PERFORMABLE IN TARRANT COUNTY, TEXAS. ANY SUIT, ACTION OR PROCEEDING AGAINST BORROWER WITH RESPECT TO THE LOAN DOCUMENTS OR ANY JUDGMENT ENTERED BY ANY COURT IN RESPECT THEREOF, MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS, COUNTY OF TARRANT, OR IN THE UNITED STATES COURTS LOCATED IN TARRANT COUNTY, TEXAS AND BORROWER HEREBY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF SUCH COURTS FOR THE PURPOSE OF ANY SUCH SUIT, ACTION OR PROCEEDING. BORROWER HEREBY IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN ANY SUIT, ACTION OR PROCEEDING IN SAID COURT BY THE MAILING THEREOF BY LENDER BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO BORROWER, AT THE ADDRESS FOR NOTICES AS PROVIDED IN SECTION 17. BORROWER HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENT BROUGHT IN THE COURTS LOCATED IN THE STATE OF TEXAS, COUNTY OF TARRANT, AND HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

31. Waiver of Jury Trial. BORROWER, AGENT AND LENDERS HEREBY WAIVE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

32. Other Agreements. THIS WRITTEN CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

33. Financial Terms. All accounting terms used in this Agreement which are not specifically defined herein shall be construed in accordance with Accounting Principles.

34. Tri-Party Loan. Texas Finance Code, Section 346 shall not apply to loans evidenced by this Agreement or the Notes.

35. USA Patriot Act Notice. Each Lender hereby notifies Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Act”), it is required to obtain, verify and record information that identifies Borrower, which information includes the name and address of Borrower and other information that will allow such Lender to identify Borrower in accordance with the Act.

36. Original Credit Agreement. Effective upon the Effective Date, this Agreement shall supersede in its entirety the Credit Agreement dated November 23, 2004 between Borrower

and Frost (as amended, the “Original Credit Agreement”); provided, however, that all loans, letters of credit, and other indebtedness, obligations and liabilities outstanding under the Original Credit Agreement on such date shall continue to constitute Loans, Letters of Credit and other indebtedness, obligations and liabilities under this Agreement and the execution and delivery of this Agreement or any of the Loan Documents hereunder shall not constitute a novation, refinancing or any other fundamental change in the relationship among the parties and the Loans, Letters of Credit, and other indebtedness, obligations and liabilities outstanding hereunder, to the extent outstanding under the Original Credit Agreement immediately prior to the date hereof, shall constitute the same loans, letters of credit, and other indebtedness, obligations and liabilities as outstanding under the Original Credit Agreement.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written.

[Signature Pages to Follow]


		BORROWER:

		APPROACH RESOURCES I, LP, a Texas limited partnership

		By:		Approach Operating, LLC, a Delaware limited liability company, its general partner

		By:		Approach Resources Inc., a Delaware corporation, its sole member

		By:		/s/ J. Ross Craft
				J. Ross Craft, President

AGENT :


	THE FROST NATIONAL BANK
	By:	/s/ John S. Warren
		John S. Warren, Senior Vice President

LENDERS :


Commitment Percentage 50%	THE FROST NATIONAL BANK

	By:	/s/ John S. Warren

		John S. Warren, Senior Vice President


Commitment Percentage 50%	JPMORGAN CHASE BANK, NA

	By:	/s/ Wm. Mark Cranmer

		Wm. Mark Cranmer, Senior Vice President

EXHIBIT “A”

NOTICE OF BORROWING

The undersigned APPROACH RESOURCES I, LP, a Texas limited partnership (“Borrower”), is authorized to execute this Notice of Borrowing in the capacity stated below. With reference to that certain Amended and Restated Credit Agreement dated as of February ___, 2007 (as same may be amended, modified, increased, supplemented and/or restated from time to time, the “Agreement”) entered into by and among Borrower and THE FROST NATIONAL BANK (“Agent”), and the financial institutions parties thereto (the “Lenders”), Borrower further certifies, represents and warrants that all of the foregoing statements are true and correct (each capitalized term used herein having the same meaning given to it in the Agreement unless otherwise specified):

(a) Borrower requests that Lenders advance Borrower on the Loan the aggregate sum of $ by no later than . Immediately following such Advance, the aggregate outstanding balance of Advances shall equal $ on the Loan.

(b) This Advance shall be a: Base Rate Loan , or a Eurodollar Loan , (if Eurodollar please state requested Interest Period months).

(c) As of the date hereof, and as a result of the making of the requested Advance, there does not and will not exist any Default or Event of Default.

(d) Borrower has performed and complied in all material respects with all agreements and conditions contained in the Agreement which are required to be performed or complied with by Borrower before or on the date hereof.

(e) The representations and warranties contained in the Agreement are true and correct in all material respects as of the date hereof and shall be true and correct in all material respects upon the making of the Advance, with the same force and effect as though made on and as of the date hereof and thereof (except to the extent such representations and warranties related solely to an earlier date).

(f) No change that would cause a Material Adverse Effect to the condition, financial or otherwise, of Borrower has occurred since the most recent Financial Statement provided to Lenders.

EXECUTED AND DELIVERED this day of , 200 ___.


		APPROACH RESOURCES I, LP, a Texas limited partnership

		By:		Approach Operating, LLC,
				a Delaware limited liability company, its general partner

		By:		Approach Resources Inc.,
				a Delaware corporation, its sole member

		By:
				J. Ross Craft, President

EXHIBIT “B”

REVOLVING NOTE


$100,000,000.00		Fort Worth, Texas		February ___, 2007

FOR VALUE RECEIVED, the undersigned APPROACH RESOURCES I, LP, a Texas limited partnership (“Borrower”), hereby unconditionally promises to pay to the order of THE FROST NATIONAL BANK and the other financial institutions named in the Credit Agreement (as hereinafter defined) (the “Lenders”) at the offices of THE FROST NATIONAL BANK (the “Agent”) in Tarrant County, Texas, the principal sum of ONE HUNDRED MILLION AND NO/100 DOLLARS ($100,000,000.00), or so much thereof as may be advanced and outstanding at any time or from time to time pursuant to the Credit Agreement in lawful money of the United States of America together with interest from the date hereof until paid at the rates specified in the Credit Agreement. All payments of principal and interest due hereunder are payable at the offices of Agent at 777 Main Street, Suite ____, Fort Worth, Texas 76102, Attention: John S. Warren, or at such other address as Agent shall designate in writing to Borrower.

The principal and all accrued interest on this Note shall be due and payable in accordance with the terms and provisions of the Credit Agreement.

This Note is executed pursuant to that certain Credit Agreement (the “Credit Agreement”) dated of even date herewith by and among Borrower, the Agent and Lenders, and is one of the Notes referred to therein. Reference is made to the Credit Agreement and the Loan Documents (as that term is defined in the Credit Agreement) for a statement of prepayment rights and obligations of Borrower, for a statement of the terms and conditions under which the due date of this Note may be accelerated and for statements regarding other matters affecting this Note (including without limitation the obligations of the holder hereof to advance funds hereunder, principal and interest payment due dates, voluntary and mandatory prepayments, exercise of rights and remedies, payment of attorneys’ fees, court costs and other costs of collection and certain waivers by Borrower and others now or hereafter obligated for payment of any sums due hereunder). Upon the occurrence of an Event of Default (as that term is defined in the Credit Agreement and Loan Documents) the Agent may declare forthwith to be entirely and immediately due and payable the principal balance hereof and the interest accrued hereon, and the Lender shall have all rights and remedies of the Lender under the Credit Agreement and Loan Documents. This Note may be prepaid in accordance with the terms and provisions of the Credit Agreement.

Regardless of any provision contained in this Note, the holder hereof shall never be entitled to receive, collect or apply, as interest on this Note, any amount in excess of the Maximum Rate (as such term is defined in the Credit Agreement), and, if the holder hereof ever receives, collects, or applies as interest any such amount which would be excessive interest, it shall be deemed a partial prepayment of principal and treated hereunder as such; and, if the indebtedness evidenced hereby is paid in full, any remaining excess shall forthwith be paid to Borrower. In determining whether or not the interest paid or payable under any specific contingency exceeds the Maximum Rate, Borrower and the holder hereof shall, to the maximum extent permitted under applicable law (i) characterize any non-principal payment as an expense,

fee or premium rather than as interest, (ii) exclude voluntary prepayments and the effects thereof, and (iii) spread the total amount of interest throughout the entire contemplated term of the obligations evidenced by this Note and/or referred to in the Credit Agreement so that the interest rate is uniform throughout the entire term of this Note; provided that, if this Note is paid and performed in full prior to the end of the full contemplated term thereof and if the interest received for the actual period of existence thereof exceeds the Maximum Rate, the holder hereof shall refund to Borrower the amount of such excess or credit the amount of such excess against the indebtedness evidenced hereby, and, in such event, the holder hereof shall not be subject to any penalties provided by any laws for contracting for, charging, taking, reserving or receiving interest in excess of the Maximum Rate.

If any payment of principal or interest on this Note shall become due on a day other than a Business Day (as such term is defined in the Credit Agreement), such payment shall be made on the next succeeding Business Day and such extension of time shall in such case be included in computing interest in connection with such payment.

If this Note is placed in the hands of an attorney for collection, or if it is collected through any legal proceeding at law or in equity or in bankruptcy, receivership or other court proceedings, Borrower agrees to pay all costs of collection, including, but not limited to, court costs and reasonable attorneys’ fees.

Borrower and each surety, endorser, guarantor and other party ever liable for payment of any sums of money payable on this Note, jointly and severally waive presentment and demand for payment, notice of intention to accelerate the maturity, protest, notice of protest and nonpayment, as to this Note and as to each and all installments hereof, and agree that their liability under this Note shall not be affected by any renewal or extension in the time of payment hereof, or in any indulgences, or by any release or change in any security for the payment of this Note, and hereby consent to any and all renewals, extensions, indulgences, releases or changes.

THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA AND THE LAWS OF THE STATE OF TEXAS. BORROWER AGREES THAT THIS NOTE IS PERFORMABLE IN TARRANT COUNTY, TEXAS AND THAT SUCH COUNTY IS PROPER VENUE FOR ANY ACTION OR PROCEEDING INVOLVING THIS NOTE TO THE EXCLUSION OF ALL OTHER VENUES.

THIS INSTRUMENT SECURES A LINE OF CREDIT USED PRIMARILY FOR BUSINESS, COMMERCIAL OR AGRICULTURAL PURPOSES.

THIS WRITTEN NOTE, THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENTS BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

EXECUTED as of the date and year first above written.


		BORROWER :

		APPROACH RESOURCES I, LP, a Texas limited partnership

		By:		Approach Operating, LLC,
				a Delaware limited liability company, its general partner

		By:		Approach Resources Inc.,
				a Delaware corporation, its sole member

		By:
				J. Ross Craft, President

EXHIBIT “C”

CERTIFICATE OF COMPLIANCE

The undersigned APPROACH RESOURCES I, LP, a Texas limited partnership (“Borrowers”), hereby certifies that J. Ross Craft is authorized to execute this Certificate of Compliance (in the capacity stated in his signature below). With reference to that certain Amended and Restated Credit Agreement, dated as of February , 2007 (as same may be amended, modified, increased, supplemented and/or restated from time to time, the “Agreement”) entered into between the Borrower and THE FROST NATIONAL BANK as “Agent” and Lender, for itself and the Lenders signatory thereto (the “Lenders”), the undersigned further certifies, represents and warrants on behalf of Borrower that all of the following statements are true and correct (each capitalized term used herein having the same meaning given to it in the Agreement unless otherwise specified):

(a) Borrower has fulfilled in all material respects its obligations under the Notes and Loan Documents, including the Agreement, and all representations and warranties made herein and therein continue (except to the extent they relate solely to an earlier date) to be true and correct in all material respects.

(b) No Default or Event of Default has occurred under the Loan Documents, including the Agreement.

(c) To the extent requested from time to time by the Agent, the certifying party shall specifically affirm compliance of Borrower in all material respects with any of its representations and warranties (except to the extent they relate solely to an earlier date) or obligations under said instruments.

(d) Financial Computations for the period ending _____.

(i) Current Ratio:

EXECUTED, DELIVERED AND CERTIFIED TO this ___ day of ______, 200_.


		APPROACH RESOURCES I, LP, a Texas limited partnership

		By:		Approach Operating, LLC,
				a Delaware limited liability company, its general partner

		By:		Approach Resources Inc.,
				a Delaware corporation, its sole member

		By:
				J. Ross Craft, President

EXHIBIT “D”

ASSIGNMENT AND ACCEPTANCE AGREEMENT

This Assignment Agreement (“Assignment Agreement”) between (the “Assignor”) and (the “Assignee”) is dated as of , 2007. The parties hereto agree as follows:

1. PRELIMINARY STATEMENT . The Assignor is a party to a Credit Agreement (which, as it may be amended, modified, renewed or extended from time to time is herein called the “Credit Agreement”) described in Item 1 of Schedule 1 attached hereto (“Schedule 1”). Capitalized terms used herein and not otherwise defined herein shall have the meanings attributed to them in the Credit Agreement.

2. ASSIGNMENT AND ASSUMPTION . The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, an interest in and to the Assignor’s rights and obligations under the Credit Agreement and the other Loan Documents, such that after giving effect to such assignment the Assignee shall have purchased pursuant to this Assignment Agreement the percentage interest specified in Item 3 of Schedule 1 of all outstanding rights and obligations under the Credit Agreement and the other Loan Documents relating to the facilities listed in Item 3 of Schedule 1. The aggregate Commitment (or Loans, if the applicable Commitment has been terminated) purchased by the Assignee hereunder is set forth in Item 4 of Schedule 1.

3. EFFECTIVE DATE . The effective date of this Assignment Agreement (the “Effective Date”) shall be the later of the date specified in Item 5 of Schedule 1 or two Business Days (or such shorter period agreed to by the Agent) after this Assignment Agreement, together with any consents required under the Credit Agreement, are delivered to the Agent. In no event will the Effective Date occur if the payments required to be made by the Assignee to the Assignor on the Effective Date are not made on the proposed Effective Date.

4. PAYMENT OBLIGATIONS . In consideration for the sale and assignment of Loans hereunder, the Assignee shall pay the Assignor, on the Effective Date, the amount agreed to by the Assignor and the Assignee. On and after the Effective Date, the Assignee shall be entitled to receive from the Agent all payments of principal, interest and fees with respect to the interest assigned hereby. The Assignee will promptly remit to the Assignor any interest on Loans and fees received from the Agent which relate to the portion of the Commitment or Loans assigned to the Assignee hereunder for periods prior to the Effective Date and not previously paid by the Assignee to the Assignor. In the event that either party hereto receives any payment to which the other party hereto is entitled under this Assignment Agreement, then the party receiving such amount shall promptly remit it to the other party hereto.

5. RECORDATION FEE . The Assignor and Assignee each agree to pay one-half of the recordation fee required to be paid to the Agent in connection with this Assignment Agreement unless otherwise specified in Item 6 of Schedule 1.

6. REPRESENTATIONS OF THE ASSIGNOR; LIMITATIONS ON THE ASSIGNOR’S LIABILITY . The Assignor represents and warrants that (i) it is the legal and beneficial owner of the interest being assigned by it hereunder, (ii) such interest is free and clear of any adverse claim created by the Assignor and (iii) the execution and delivery of this Assignment Agreement by the Assignor is duly authorized. It is understood and agreed that the assignment and assumption hereunder are made without recourse to the Assignor and that the Assignor makes no other representation or warranty of any kind to the Assignee. Neither the Assignor nor any of its officers, directors, employees, agents or attorneys shall be responsible for (i) the due execution, legality, validity, enforceability, genuineness, sufficiency or collectability of any Loan Document, including without limitation, documents granting the Assignor and the other Lenders a security interest in assets of the Borrower [or Guarantor] , (ii) any representation, warranty or statement made in or in connection with any of the Loan Documents, (iii) the financial condition or creditworthiness of the Borrower [or Guarantor] , (iv) the performance of or compliance with any of the terms or provisions of any of the Loan Documents, (v) inspecting any of the property, books or records of the Borrower, (vi) the validity, enforceability, perfection, priority, condition, value or sufficiency of any collateral securing or purporting to secure the Loans or (vii) any mistake, error of judgment, or action taken or omitted to be taken in connection with the Loans or the Loan Documents.

7. REPRESENTATIONS AND UNDERTAKINGS OF THE ASSIGNEE . The Assignee (i) confirms that it has received a copy of the Credit Agreement and other Loan Documents, together with copies of the financial statements requested by the Assignee and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment Agreement, (ii) agrees that it will, independently and without reliance upon the Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, (iii) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto, (iv) confirms that the execution and delivery of this Assignment Agreement by the Assignee is duly authorized, (v) agrees that it will perform in accordance with its terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender, (vi) agrees that its payment instructions and notice instructions are as set forth in the attachment to Schedule 1, (vii) confirms that none of the funds, monies, assets or other consideration being used to make the purchase and assumption hereunder are “plan assets” as defined under ERISA and that its rights, benefits and interests in and under the Loan Documents will not be “plan assets” under ERISA, (viii) agrees to indemnify and hold the Assignor harmless against all losses, costs and expenses (including, without limitation, reasonable attorneys’ fees) and liabilities incurred by the Assignor in connection with or arising in any manner from the Assignee’s non-performance of the obligations assumed under this Assignment Agreement, and (ix) if applicable, attaches the forms prescribed by the Internal Revenue Service of the United States certifying that the Assignee is entitled to receive payments under the Loan Documents without deduction or withholding of any United States federal income taxes.

8. GOVERNING LAW . This Assignment Agreement shall be governed by the internal law, and not the law of conflicts, of the State of Texas

9. NOTICES . Notices shall be given under this Assignment Agreement in the manner set forth in the Credit Agreement. For the purpose hereof, the addresses of the parties hereto (until notice of a change is delivered) shall be the address set forth in the attachment to Schedule 1.

10. COUNTERPARTS; DELIVERY BY FACSIMILE . This Assignment Agreement may be executed in counterparts. Transmission by facsimile of an executed counterpart of this Assignment Agreement shall be deemed to constitute due and sufficient delivery of such counterpart and such facsimile shall be deemed to be an original counterpart of this Assignment Agreement.

IN WITNESS WHEREOF, the duly authorized officers of the parties hereto have executed this Assignment Agreement by executing Schedule 1 hereto as of the date first above written.


		[ASSIGNOR]

		By:

		Title:


		Address:




		[ASSIGNEE]

		By:

		Title:


		Address:

(If required)

ACKNOWLEDGED AND CONSENTED TO:

THE FROST NATIONAL BANK,
as Agent


By:
		John S. Warren, Senior Vice President

APPROACH RESOURCES I, LP, a Texas limited partnership

By:		Approach Operating, LLC, a Delaware limited liability company, its general partner

By:		Approach Resources Inc., a Delaware corporation, its sole member

By:
		J. Ross Craft, President

SCHEDULE 1
to Assignment Agreement


1.	Description and Date of Credit Agreement: $100,000,000 Amended and Restated Credit Agreement dated February ____, 2007

2.	Date of Assignment Agreement: , 2007

3.	Amounts (As of Date of Item 2 above):		Facility			Facility			Facility			Facility
				1*			2*			3*			4*

	a.	Assignee’s percentage of each
		Facility purchased under the
		Assignment Agreement**			%			%			%			%


	b.	Amount of each Facility purchased
		under the Assignment Agreement***	$			$			$			$


4.	Assignee’s Commitment (or Loans with respect to terminated Commitments) purchased hereunder:					$


5.	Proposed Effective Date:


6.	Non-standard Recordation Fee Arrangement

						[Assignor/Assignee to pay 100% of fee] [Fee waived by Agent]


Accepted and Agreed:

[NAME OF ASSIGNOR]						[NAME OF ASSIGNEE]

By:						By:

Title:						Title:


ACCEPTED AND CONSENTED TO BY APPROACH RESOURCES I, LP, a Texas limited partnership						ACCEPTED AND CONSENTED TO BY THE FROST NATIONAL BANK


		By:

By:	Approach Operating, LLC, a Delaware limited liability company, its general partner		John S. Warren, Senior Vice President

By:	Approach Resources, Inc., a Delaware corporation, its sole member

By:
	J. Ross Craft, President

Exhibit 10.10

June 14, 2007

The Frost National Bank
777 Main Street, Suite 500
Fort Worth, Texas 76102

Attention: Mr. John S. Warren


		Re:		Amendment to Amended and Restated Credit Agreement dated as of February 15, 2007 between Approach Resources I, LP, The Frost National Bank, as Administrative Agent, and the Lenders parties thereto

Gentlemen:

Reference is hereby made to that certain Amended and Restated Credit Agreement dated as of February 15, 2007 between Approach Resources I, LP (“Borrower”), The Frost National Bank, as Administrative Agent (“Agent”), and the Lenders parties thereto (as amended hereby, the “Loan Agreement”). All capitalized terms herein shall have the meanings ascribed to them in the Loan Agreement.

Pursuant to this letter amendment (the “Amendment”), Agent, Lenders and Borrower agree, effective as of June 14, 2007, to amend the Loan Agreement according to the terms and provisions set forth below.

1. Amendment to Definition of Maturity Date . The defined term “Maturity Date” as set forth in Section 1.1 of the Loan Agreement is amended in its entirety to read as follows:

“ Maturity Date ” shall mean July 31, 2010.

2. Extension Fee . As consideration for, and as a condition precedent to, Lenders’ agreement to extend the Maturity Date according to this Amendment, Borrower agrees to pay to Agent upon its execution of this Amendment, for the ratable benefit of Lenders, a fee in the amount of $62,500.

3. Ratification by Guarantors . Each Guarantor hereby ratifies and reaffirms all of its obligations under its Guaranty Agreement (the “Guaranty”) of Borrower’s obligations under the Loan Agreement, as amended hereby. Each Guarantor also hereby agrees that nothing in this Amendment shall adversely affect any right or remedy of Bank under the Guaranty and that the execution and delivery of this Amendment shall in no way change or modify its obligations as guarantor under the Guaranty. Although each Guarantor has been informed by Borrower of the matters set forth in this Amendment and such Guarantor has acknowledged and agreed to the same, such Guarantor understands that Bank has no duty to notify such Guarantor or to seek such Guarantor’s acknowledgment or agreement, and nothing contained herein shall create such a duty as to any transaction hereafter.

4. Confirmation and Ratification . Except as affected by the provisions set forth herein, the Loan Agreement shall remain in full force and effect and is hereby ratified and

confirmed by Borrower. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Bank under the Loan Agreement or the other Loan Documents.

5. Reference to Loan Agreement . Each of the Loan Agreement and the Loan Documents, and any and all other agreements, documents or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Loan Agreement, as amended hereby, are hereby amended so that any reference in the Loan Agreement, the Loan Documents and such other documents to the Loan Agreement shall mean a reference to the Loan Agreement as amended hereby.

6. Final Agreement . THE LOAN AGREEMENT, AS AMENDED BY THIS AMENDMENT, AND ALL PROMISSORY NOTES AND OTHER LOAN DOCUMENTS EXECUTED PURSUANT THERETO OR HERETO, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

Please signify your acceptance to the foregoing terms and provisions by executing a copy of this Amendment at the space provided below.

[SIGNATURE PAGES TO FOLLOW]

- 2 -



		Very truly yours,

		BORROWER :

		APPROACH RESOURCES I, LP, a Texas limited partnership

		By:		Approach Operating LLC., a Delaware limited liability company, its general partner

		By:		Approach Resources, Inc., a Delaware corporation, its sole member



		GUARANTORS :

		APPROACH OPERATING, LLC, a Delaware limited liability company

		By:		Approach Resources, Inc., a Delaware corporation, its sole member

- 3 -

ACCEPTED AND AGREED TO
effective as of the date and year
first above written:

AGENT :

THE FROST NATIONAL BANK


By:		/s/ John S. Warren

		John S. Warren, Senior Vice President

LENDERS :

THE FROST NATIONAL BANK



By:		/s/ John S. Warren

		John S. Warren, Senior Vice President

JPMORGAN CHASE BANK, NA



By:		/s/ Wm. Mark Cranmer

		Wm. Mark Cranmer, Senior Vice President

- 4 -

Exhibit 10.12

OPTION AGREEMENT

This Option Agreement (“Agreement”), made and entered into as of (the “Date of Grant”), is by and between Approach Resources Inc., a Delaware corporation (the “Company”), and (the “Optionee”).

WITNESSETH:

WHEREAS, the Company has adopted that certain 2003 Stock Option Plan (the “Plan”) effective as of January 1, 2003 (the “Plan Date”) for certain employees of the Company; and

WHEREAS, the Optionee is an employee of the Company eligible to participate in the Plan and the Board of Directors of the Company, as administrator of the Plan, has determined that the Company should recognize the potential contributions that the Optionee may make to the success of the Company by granting him an option to purchase shares of Common Stock in the Company pursuant to the Plan and upon the terms set forth herein;

NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements hereinafter set forth, the Company and Optionee hereby agree as follows:

1. Certain Definitions . Terms used in this Agreement and not otherwise defined shall have the respective meanings assigned to such terms in the Plan.

2. The Plan . The terms and provisions of the Plan are hereby incorporated into this Agreement as if set forth herein in their entirety. In the event of a conflict between any provision of this Agreement and the Plan, the provisions of the Plan shall control. A copy of the Plan may be obtained from the Company by the Optionee upon request. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Plan.

3. Grant of Option . Subject to the terms and conditions hereinafter set forth, the Company hereby irrevocably grants to the Optionee the right and option (the “Option”) to purchase shares (“Option Shares”) of Common Stock.

4. Option Price . The price to be paid by Optionee to the Company for each Option Share purchased pursuant to the exercise of this Option (“Option Price”) shall be $ .

5. Vesting of Right to Exercise Option . Subject to earlier vesting of the Option Shares pursuant to the Plan, 33 ¹ / ₃ % of the Option Shares shall vest immediately, 33 ¹ / ₃ % of the Option Shares shall vest on and the remaining 33 ¹ / ₃ % of the Option Shares shall vest on .

6. Restrictions on Exercise . The right to exercise the Option shall be subject to the following restrictions:

(a) Vesting . Optionee shall have no right to exercise this Option to purchase any Option Shares for which Optionee’s rights have not yet vested in accordance with Section 5.

(b) No Fractional Option Shares . The Option may be exercised only with respect to full Option Shares.

(c) Compliance with Law . The Option may not be exercised in whole or in part, and no Option Shares shall be issued nor certificates representing such Option Shares delivered pursuant to any exercise of the Option, if any requisite approval or consent of any governmental authority of any kind having jurisdiction over the exercise of options or the issuance and sale of Option Shares shall not have been obtained or if such exercise or issuance would violate any applicable law.

(d) Exercise by Optionee . The Option shall be exercisable only by the Optionee, any representative of the Optionee, and by any transferee who has received such Option in accordance with the Plan.

7. Exercise of Option .

(a) Subject to the other terms and provisions of this Agreement, the Option shall be exercisable by written notice timely given to the Company by the Optionee, which notice (i) shall state the number of Option Shares that the Optionee then desires to purchase, and (ii) shall be accompanied by payment in full of the Option Price for each of such Option Shares, which such payment shall be made in cash or certified check.

(b) The Company shall be entitled to require the Optionee to deliver to the Company such documents as the Company in its discretion shall deem necessary to confirm that (i) such exercise and the Company’s issuance and sale of such Option Shares are in compliance with the requirements of any applicable laws (including, but not limited to, the Securities Act of 1933, as amended (the “Securities Act”) all applicable state securities or “blue sky” laws (“State Law”)), and (ii) the Optionee shall be bound by and comply with all of the terms and provisions of the Stockholders Agreement.

(c) Unless the Company and Optionee shall make mutually acceptable alternative arrangements, at the time of exercise of the Option, Optionee shall pay to the Company, in cash, any federal, state and local taxes required by law to be paid or withheld in connection with such exercise.

8. Recapitalization or Reorganization . The existence of this Option shall not affect in any way the right or power of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company’s capital structure or its business, any merger or consolidation of, or share exchange involving, the Company, any issuance of additional Company securities with priority over the Common Stock or otherwise affecting the Common Stock or the rights thereof, the dissolution or liquidation of the Company’s Common Stock or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding.

9. Termination of Option . The Option shall terminate at such time as set forth in the Plan.

10. Restriction on Transfer of Option . The Option may not be sold, assigned, hypothecated or transferred, except by will or by the laws of descent and distribution or to a trust of which the Optionee is the sole trustee who retains all rights regarding the exercise and disposition of the Option. Any attempted transfer of the Option in violation of this provision or the other provisions of the Plan shall be void and of no effect whatsoever.

11. Certain Rights Incident to Divorce . If an interest in the Option is required by law to be transferred to a spouse of Optionee pursuant to an order of a court in a divorce proceeding (notwithstanding the provisions of Section 10 hereof), Optionee shall nevertheless retain all rights with respect to the exercise of the Option and any interest of such spouse shall be subject to such rights of Optionee. In addition, if it is determined that Optionee will be required to pay any taxes attributable to the interest of the spouse in the Option, any tax liability of Optionee which is attributable to such spouse’s interest shall be taken into account, and shall reduce such spouse’s interest in this Option.

12. Rights as a Stockholder . Optionee shall have no rights as a stockholder of the Company with respect to any Option Shares covered by the Option until the exercise of the Option.

13. Additional Documents . The Company and the Optionee will, upon request of the other party, promptly execute and deliver all additional documents, and take all such further action, reasonably deemed by such party to be necessary, appropriate or desirable to complete and evidence the sale, assignment and transfer of the Option Shares pursuant to this Agreement, including without limitation and if required by the Board, a counterpart signature page to the Stockholders Agreement.

14. Representations, Warranties and Covenants of Optionee .

(a) The Optionee acknowledges that neither the Option nor the Option Shares covered thereby have been registered under the Securities Act or State Law on the grounds that the issuance of the Option is, and the sale of any Option Shares pursuant to the exercise of the Option will be, exempt from registration under one or more provisions of each of such acts. The Optionee further understands that in determining the availability and applicability of such exemptions and in executing and delivering this Agreement and issuing and delivering any Option Shares upon exercise of the Option, the Company has relied and will rely upon the representations, warranties and covenants made by the Optionee herein and in any other documents which he may hereafter deliver to the Company. Accordingly, the Optionee represents and warrants to and covenants and agrees with the Company as follows:

(i) the Optionee is acquiring and will hold the Option, and will acquire and hold all securities which he acquires upon exercise of the Option, for his own account for investment and not with a view to or in connection with any sale or distribution of all or any part thereof; and

(ii) the Optionee will hold all securities acquired by him upon exercise of the Option, as well as any and all other securities issued in respect thereof, subject to all applicable provisions of the Stockholders’ Agreement, the 1933 Act and State Law, and will not at any time make any sale, transfer, pledge or other disposition or encumbrance

of any of such securities in violation of the Stockholders’ Agreement or in the absence of an effective registration statement for such securities under the 1933 Act and State Law or an applicable exemption from the registration requirements therefrom.

(b) The Optionee agrees (i) that the certificates representing the Option Shares or other securities purchased under this Option may bear such legend or legends as the Company deems appropriate in order to assure compliance with applicable securities laws, (ii) that the Company may refuse to register the transfer of the Option Shares or other securities purchased under this Option on the transfer records of the Company if such proposed transfer would in the opinion of counsel satisfactory to the Company constitute a violation of any applicable securities laws, (iii) that the Company may give related instructions to its transfer agent, if any, to stop registration of the transfer of the Option Shares or other securities purchased under this Option, (iv) that the Option Shares or other securities acquired upon exercise of this Option shall be subject, in all respects, to the Stockholders’ Agreement and (v) Optionee shall become party to the Stockholders’ Agreement prior to issuance of any certificate representing the Option Shares.

(c) Optionee acknowledges that the value of the Option over its life will be speculative and uncertain, that there is no market for the Option or the Option Shares or other securities that may be acquired upon exercise of the Option and it is unlikely that any market will develop, and consequently, the Optionee may ultimately realize no value from the Option.

15. Tax Withholding . Whenever under the Plan securities are to be delivered by an Optionee upon exercise of an Option, the Company shall be entitled to require as a condition of delivery that the Optionee remit or, in appropriate cases, agree to remit when due, an amount sufficient to satisfy all current or estimated future federal, state and local withholding tax and employment tax requirements relating thereto.

16. Optionee’s Employment . Nothing contained in the Plan or in this Agreement shall confer upon the Optionee any right with respect to the continuation of his employment by or service with the Company or interfere in any way with the right of the Company (subject to the terms of any separate agreement to the contrary) at any time to terminate such employment or service or to increase or decrease the compensation of the Optionee from the rate in existence at the date of this Agreement.

17. Notices . All notices required or permitted to be given hereunder shall be in writing and shall be deemed to have been given on the earlier of the date of receipt by the party to whom the notice is given or five days after being mailed by certified or registered United States mail, postage prepaid, addressed to the appropriate party at the address shown beside such party’s signature below or at such other address as such party shall have theretofore designated by written notice given to the other party.

18. Entirety and Modification . This Agreement contains the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, between such parties relating to such subject matter. No modification, alteration, amendment or supplement to this Agreement shall be valid or effective unless the same is in writing and signed by the party against whom it is sought to be enforced.

19. Severability . If any provision of this Agreement is held to be unenforceable, this Agreement shall be considered divisible, and such provision shall be deemed inoperative to the extent it is unenforceable, and in all other respects this Agreement shall remain in full force and effect; provided, however, that if any such provision may be made enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law.

20. Gender . Words used in this Agreement that refer to Optionee and denote the male gender shall also be deemed to include the female gender or the neuter gender when appropriate.

21. Headings . The headings of the various sections and subsections of this Agreement have been inserted for convenient reference only and shall not be construed to enlarge, diminish or otherwise change the express provisions hereof.

22. GOVERNING LAW . THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE (REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE DELAWARE PRINCIPLES OF CONFLICTS OF LAW).

23. Counterparts . This Agreement may be signed in counterparts, each of which shall be deemed an original and all of which shall constitute one and the same agreement.

* * * * * * * * * *

[Remainder of page intentionally left blank]

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above.

Addresses :



	THE COMPANY:

6300 Ridglea Fort Worth, Texas 76116	APPROACH RESOURCES INC.
	By:

		Name:

		Title:


	OPTIONEE:


	[Name]

Exhibit 10.13

APPROACH RESOURCES INC.
RESTRICTED STOCK AWARD AGREEMENT

This Restricted Stock Award Agreement (the “Agreement”) is made this 14th day of March 2007, between APPROACH RESOURCES INC., a Delaware corporation (the “Company”), and J. Curtis Henderson, an employee of the Company or one of its affiliates (“Employee”).

WHEREAS, the Company desires to afford Employee the opportunity to obtain shares of the Company’s common stock, $0.01 par value per share (the “Shares”).

NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereto agree as follows:

1. Grant of Award . The Company hereby grants to Employee as of the date set forth above (the “Date of Grant”) an aggregate of 21,250 Shares, such number of Shares being subject to adjustment as provided in paragraph 7 hereof, and on the terms and conditions herein set forth. The Shares granted pursuant to this Agreement are granted as restricted stock (the “Restricted Shares”).

2. Restricted Period; Other . (a) Except as otherwise provided in Paragraph 6, this award of Restricted Shares shall be subject to the following vesting periods: (i) One third (1/3) shall vest upon the closing of the first underwritten public offering (the “IPO”) of the Common Stock of the Company that is pursuant to a registration statement filed with, and declared effective by, the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “Securities Act”), covering the offer and sale of any Common Stock to the public for the Company’s account, or on February 21, 2008, whichever occurs earlier (the “Initial Vesting Date”); (ii) one third (1/3) shall vest one year following the Initial Vesting Date; and (iii) one third (1/3) shall vest two years following the Initial Vesting Date; provided Employee remains employed by the Company through each vesting date. Notwithstanding the foregoing, if Employee is terminated by the Company for reasons other than Cause or if events giving rise to Good Reason occur, the Employee shall vest as of the date of such termination by the Company or the date the event giving rise to Good Reason occurs, as applicable, in all unvested Restricted Shares.

(b) For purposes of this Agreement, “Cause” shall be defined as follows:

(i) the willful and continued failure by Employee to substantially perform his duties as an officer of the Company (other than any such failure resulting from Employee becoming Disabled);

(ii) the willful engaging by Employee in misconduct that is materially injurious to the Company;

(iii) any misconduct in the course and scope of Employee’s employment, including but not limited to dishonesty, disloyalty, disorderly conduct, insubordination, harassment of other employees or third parties, abuse of alcohol or controlled substances, or other violations of the Company’s rules;

(iv) Employee’s conviction of a felony or other crime involving moral turpitude; or

(v) any material violation of any agreement between Employee and the Company, including without limitation the Stockholders’ Agreement (defined below).

If the Company believes Cause exists for terminating Employee’s employment and forfeiting all unvested Restricted Shares, it shall give Employee written notice of the acts or omissions constituting Cause, and no termination of employment and related forfeiture of unvested Restricted Shares shall be effective unless and until Employee fails to cure such acts or omissions within 10 days after receiving such notice.

(i) a material adverse change in the nature or scope of Employee’s authorities, powers, functions, duties, or responsibilities (it being recognized that neither the IPO nor the purchase or sale of oil and gas properties by the Company, regardless of the location of such properties, will constitute a material adverse change for this purpose);

(ii) any demotion of Employee to a non-officer position or an officer position junior to Employee’s position on the date of this Agreement, except for Cause; or

(iii) any material adverse change in the Employee’s salary.

Employee shall give the Company written notice of any actions alleged to constitute Good Reason and the Company shall have 10 days to cure any such alleged Good Reason.

(d) For purposes of this Agreement, a “Disability” shall be deemed to have occurred when:

(i) Employee is determined to be eligible to receive long-term disability benefits under either Social Security or the Company’s long-term disability plan, if any;

(ii) the Board of Directors of the Company, upon the written report of a qualified physician designated by the Board or its insurers, shall have determined (after a complete physical examination of Employee at any time after he has been absent from the Company for a period of at least 120 calendar days since the date of this Agreement), that Employee has become physically and/or mentally incapable of performing his essential job functions with or without reasonable accommodation as required by law; or

(iii) Employee is otherwise unable for a continuous period of 180 calendar days to perform his essential job functions with or without reasonable accommodation as required by law due to injury, illness, or other incapacity (physical or mental).

(e) Determination of Cause, Good Reason or Disability shall be made by the Board of Directors in its good faith discretion.

3. Delivery of Shares . Certificate(s) representing the Restricted Shares shall be issued in the name of Employee (or, at the option of the Company, in the name of a nominee of the Company) as of the Date of Grant and delivered to Employee on the Date of Grant or as soon thereafter as practicable. Employee shall cause the certificate(s) representing the Restricted Shares, upon receipt thereof by Employee, to be deposited, together with stock powers and any other instrument of transfer reasonably requested by the Company duly endorsed in blank, with the Company, to be held by the Company in escrow for Employee’s benefit until such time as the Restricted Shares represented by such certificate(s) are either forfeited by Employee to the Company or the restrictions thereon terminate as set forth in this Agreement. If the restrictions terminate as set forth in this Agreement, the certificate(s) representing the vested shares shall be released from escrow to Employee. The Restricted Shares shall be subject in all respects to the terms and conditions of that certain Voting and Stockholders’ Agreement dated as of January 1, 2003 by and among the Company and the other stockholders of the Company (the “Stockholders’ Agreement”), which are incorporated by reference hereby.

4. Forfeiture . All Restricted Shares granted pursuant to this Agreement that have not vested in accordance with Paragraph 2 or Paragraph 6, as the case may be, shall be forfeited to the Company upon the date Employee is no longer employed by the Company or any of its affiliates.

5. Taxes . The Company will take any steps it deems necessary or desirable to satisfy its withholding tax obligations, if any; provided that the Employee shall have the right (by delivering written notice to the Secretary of the Company no less than 30 days nor more than 60 days prior to the date the restrictions are to be removed) to have Shares withheld from the certificate(s) to be delivered to Employee upon removal of the restrictions or to tender other Shares of Common Stock to meet such obligations.

6. Acceleration of Vesting and Delivery Dates .

(a) Notwithstanding the provisions of Paragraph 2 above relating to the vesting periods, the Restricted Shares shall be 100% vested upon a Change of Control (as defined below).

(b) For purposes of this Agreement, a “Change of Control” shall mean any of the following events: (a) the dissolution or liquidation of the Company; (b) a reorganization, merger or consolidation (other than a merger or consolidation effecting a reincorporation of the Company in another state or any other merger or consolidation in which the stockholders of the surviving corporation and their proportionate interests therein immediately after the merger or consolidation are substantially identical to the stockholders of the Company and their proportionate interests therein immediately prior to the merger or consolidation) of the Company with one or more corporations, following which the Company is not the surviving corporation (or survives only as a subsidiary of another corporation in a transaction in which the stockholders of the parent of the Company and their proportionate interests therein immediately after the transaction are not substantially identical to the stockholders of the Company and their proportionate interests therein immediately prior to the transaction); (c) the sale of all or substantially all the assets of the Company; or (d) any person or group of persons (as defined in Rule 13d-5 under the Securities

Exchange Act of 1934, as amended) together with such person or its affiliates, becomes the owner, directly or indirectly, of 50% or more of the total fair market value or total voting power of the Company; provided that if one or more persons acting as a group currently owns more than 50% of the Company, the acquisition of additional stock by the same person or persons is not considered to cause a Change in Control.

7. Adjustments of Shares Subject to Award . If any Shares shall at any time be changed or exchanged by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split, combination of shares or a dividend payable in stock, then the aggregate number of Restricted Shares subject to this Agreement shall be automatically adjusted such that Employee’s proportionate interest shall be maintained as before the occurrence of such event. The determination of any such adjustment by the Company shall be final, binding and conclusive. Shares distributed in connection with or resulting from any such adjustment with respect to Restricted Shares that have not yet vested shall enjoy the same privileges and be subject to the same restrictions pursuant to this Agreement that are applicable to the related Restricted Shares.

8. No Contract for Employment . Notwithstanding anything to the contrary contained herein, this Agreement does not constitute a contract for employment and shall not affect the right of the Company to terminate Employee’s employment for any reason whatsoever or for no reason.

9. Restrictions on Transfer; Rights as Shareholder . None of the Restricted Shares may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of prior to vesting. The Restricted Shares are also be subject to such other restrictions on transfer as set forth in the Stockholders’ Agreement. Subject to the restrictions referenced in the preceding sentences, and except as otherwise provided in this Agreement, Employee shall for all purposes be the record and beneficial owner of the Restricted Shares. Employee shall be entitled to vote the Shares at all meetings of stockholders and be entitled to receive and retain all cash dividends that may be paid with respect to the Shares.

10. Restriction on Issuance of Shares . The Company shall not be required to issue or deliver any certificates for Shares covered by this Agreement prior to the obtaining of any approval from any governmental agency that the Company shall, in its sole discretion, determine to be necessary or advisable, and the completion of any registration or other qualification of such Shares or their offering or sale under any state or federal law or ruling or regulations of any governmental body that the Company shall, in its sole discretion, determine to be necessary or advisable. In addition, if the offering and sale of Shares reserved for issuance pursuant to this Agreement shall not then be registered under the Securities Act of 1933, as amended, the Company may, upon Employee’s receipt of Shares issued pursuant to this Agreement, require Employee or his permitted transferee to represent in writing that the Shares being acquired are for investment and not with a view to distribution, and may mark the certificate(s) for the Shares with a legend restricting transfer and may issue stop transfer orders relating to such certificate(s) to the transfer agent.

11. Acknowledgment . Employee acknowledges that Thompson & Knight LLP has not represented such Employee in connection with the preparation and negotiation of this Agreement, and such counsel shall owe no duties directly to Employee. Employee confirms that Employee has been advised to consult with Employee’s own attorney regarding legal matters concerning the

Company and to consult with independent tax advisors regarding the tax consequences of receiving the Restricted Shares.

12. Binding Effect . This Agreement shall be binding upon the heirs, executors, administrators, and successors of the parties hereto.

13. Modification . No change or modification of this Agreement shall be valid or binding upon the parties unless the change or modification is in writing and signed by the parties; provided, however, that the Company may change or modify this Agreement without Employee’s consent or signature if the Company determines, in its sole discretion, that such change or modification is necessary for purposes of compliance with or exemption from the requirements of Section 409A of the Internal Revenue Code of 1986, as amended, or any regulations or other guidance issued thereunder.

14. Governing Instrument and Law . This Agreement shall be governed by the laws of the State of Delaware, without regard to its conflict of laws principles.

[Signature Page Follows]



	APPROACH RESOURCES INC.

	By:	/s/ J. Ross Craft

	J. Ross Craft, President

Accepted and Agreed:

/s/ J. Curtis Henderson	Date: March 14, 2007

J. Curtis Henderson

Exhibit 21.1

Subsidiaries of Approach Resources Inc.

Approach Operating, LLC
Approach Delaware, LLC
Approach Resources I, LP
Approach Oil & Gas Inc.
AOG Operating, LLC
AOG Delaware, LLC
AO&G, LP

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the use in this Registration Statement on Form S-1 of Approach Resources Inc. of our report dated May 7, 2007 relating to our audits of the combined financial statements of Approach Resources Inc. and affiliated entities as of December 31, 2005 and 2006 and for each of the three years in the period ended December 31, 2006, appearing in the Prospectus, which is part of this Registration Statement.

We consent to the use in this Registration Statement on Form S-1 of Approach Resources Inc. of our report dated May 7, 2007 relating to our audits of the Historical Summaries of Revenues and Direct Operating Expenses of Properties to be Acquired by Approach Resources Inc. for the years ended December 31, 2005 and 2006, appearing in the Prospectus, which is part of this Registration Statement.

We also consent to the reference to our firm under the caption “Experts” in such Prospectus.

Hein & Associates LLP
Dallas, Texas
July 10, 2007

Exhibit 23.2

DeGolyer and MacNaughton
5001 S pring V alley R oad
S uite 800 E ast
D allas , T exas 75244
July 11, 2007

Approach Resources Inc.
6300 Ridglea Place
Suite 1107
Fort Worth, Texas 76116

Ladies and Gentlemen:

We hereby consent to the use of the name DeGolyer and MacNaughton; to the inclusion of information taken from our “Appraisal Report as of December 31, 2006 on Certain Properties owned by Approach Resources and J Cleo Thompson” and “Appraisal Report as of December 31, 2006 on Certain Properties owned by Approach Oil and Gas, Inc.” (Our Reports) in the Registration Statement on Form S-1 of Approach Resources Inc. and the related prospectus that is part thereof dated on or about July 12, 2007 (Form S-1). We further consent to the reference to DeGolyer and MacNaughton under the heading “Experts” in the Form S-1.

Very truly yours,

/s/ DeGOLYER and MacNAUGHTON

DeGOLYER and MacNAUGHTON

Exhibit 23.3

Cawley, Gillespie & Associates, Inc.
PETROLEUM CONSULTANTS
302 FORT WORTH CLUB BUILDING
306 WEST SEVENTH STREET
FORT WORTH, TEXAS 76102-4987
(817) 336-2461

CONSENT OF CAWLEY, GILLESPIE & ASSOCIATES, INC.

The undersigned hereby consents to the references to our firm in the form and context in which they appear in this Registration Statement on Form S-1 of Approach Resources Inc. and the related prospectus that is a part thereof. We hereby further consent to the use in such Registration Statement and prospectus of information contained in our report setting forth the estimates of revenues from Approach Resources Inc.’s oil and gas reserves as of December 31, 2004 and December 31, 2005.

We further consent to the reference to this firm under heading “Experts.”



		CAWLEY, GILLESPIE & ASSOCIATES, INC.
Fort Worth, Texas July 11, 2007