Approach Resources Inc (Form: S-1/A, Received: 10/18/2007 06:01:14)

As filed with the Securities and Exchange Commission on October 18, 2007

Registration No. 333-144512

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 2

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)

One Ridgmar Centre

6500 W. Freeway, Suite 800

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

One Ridgmar Centre

6500 W. Freeway, Suite 800

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 Wesley P. Williams Jessica W. Hammons 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

Proposed maximum

Title of each class of

Amount to be

aggregate offering

Amount of

Securities to be registered

registered(1)

price per shares(2)

price(2)

registration fee(3)

Common stock, par value $0.01 per share

8,816,667

16.00

141,066,672

4,331


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


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


(3)		$4,061 was previously paid.

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 October 18, 2007

Prospectus

7,666,667 shares

Common stock

Approach Resources Inc. is selling 5,605,377 shares of common stock, and the selling stockholder identified in this prospectus is selling an additional 2,061,290 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 $14.00 and $16.00 per share.

Prior to this offering, there has been no public market for our common stock. We have applied 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 1,150,000 additional shares of our common stock 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 14.

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

Wachovia Securities


KeyBanc Capital Markets	TudorPickering

, 2007

(GRAPHIC)

Table of contents


Prospectus summary			1
Risk factors			14
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			50
Business			68
Management			86
Security ownership of certain beneficial owners and management			107
Certain relationships and related party transactions			108
Selling stockholder			113
Description of capital stock			114
Shares eligible for future sale			118
Material United States federal income and estate tax considerations for non-United States holders			121
Underwriting			125
Legal matters			128
Experts			128
Where you can find more information			129
Glossary of selected oil and gas terms			130
Index to financial statements of Approach Resources Inc. and affiliated entities			F-1
Form of Underwriting Agreement
Specimen Common Stock Certificate
Opinion of Thompson & Knight LLP
Form of Business Opportunities Agreement
Form of Summary of Stock Option Grant Under 2007 Stock Incentive Plan
Form of Stock Award Agreement Under 2007 Stock Incentive Plan
Gas Purchase Contract
Lease Crude Oil Purchase Agreement
Consent of Hein & Associates LLP
Consent of DeGolyer and 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.

The numbers contained in this prospectus relating to our gross and net leasehold acreage have been rounded to the nearest hundred 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. You should read this entire prospectus carefully, including the information contained under the heading “Risk factors,” our 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 66,500 gross (51,700 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 22.7 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 July 31, 2007, we had identified a total of 833 drilling locations, of which 644 were located in the Ozona Northeast field, 126 in our Cinco Terry project and 63 in our North Bald Prairie prospect in East Texas.

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 and Western Canada. Since May 2006, we have acquired leasehold interests covering 13,600 gross (4,900 net) acres in East Texas, 90,300 gross (81,000 net) acres in Northern New Mexico, 74,000 gross (44,400 net) acres in Western Kentucky and 32,700 gross (7,400 net) acres in Western Canada. In total we have assembled leasehold interests of 277,100 gross (189,400 net) acres in our five operating areas—West Texas (Wolfcamp, Canyon Sands and Ellenburger), East Texas (Cotton Valley Sands, Bossier and Cotton Valley Lime), Northern New Mexico (Mancos Shale), Western Kentucky (New Albany Shale) and Western Canada (Triassic Shale and tight gas sands).

At December 31, 2006, our standardized measure of discounted future net cash flows was $128.6 million, and our PV-10 was $179.9 million. 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		22.5
Cinco Terry		1.8		0.9		4.2		0.2


Total		148.8		75.8	$	179.9		22.7


(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 August 31, 2007, as well as identified drilling locations as of July 31, 2007. We currently anticipate drilling 67 gross (47.4 net) wells in 2007, at an estimated cost of $58.6 million (gross) and $40.3 million (net).



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


Ozona Northeast		26,900		17,100		44,000		644	$	23.4	$	29.5
Cinco Terry		1,000		6,700		7,700		126		6.6		10.1
East Texas		—		4,900		4,900		63		7.3		14.0
Northern New Mexico		—		81,000		81,000		—		—		3.6
Western Kentucky		—		44,400		44,400		—		1.8		2.6
Western Canada		—		7,400		7,400		—		1.2		2.9


Total		27,900		161,500		189,400		833	$	40.3	$	62.7


(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, 178 are classified as proved. 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 $8.0 million and $800,000 for 2007 and 2008, respectively, budgeted for lease acquisition, geophysical and geologic costs is not reflected here. Estimated capital expenditures for 2007 and 2008 give effect to 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 October 1, 2007.

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 44,600 gross (44,000 net) acres. Beginning with our first well in February 2004, through June 30, 2007, we have drilled 257 successful wells out of 271 total wells drilled, which is a 95% success rate. As of December 31, 2006, we had 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 644 additional drilling locations in the field, and we estimate that completed costs for a vertical well 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 21,900 gross (7,700 net) acres five miles west of the Ozona Northeast field to evaluate the Wolfcamp, Canyon and Ellenburger formations. As of June 30, 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.

East Texas

North Bald Prairie prospect (Cotton Valley Sands, Bossier and Cotton Valley Lime)

In July 2007, we entered into a joint drilling venture with EnCana Oil & Gas (USA) Inc. in the East Texas Cotton Valley/Bossier trend. As part of the joint venture, we agreed to drill up to five wells at our cost to earn a 50% working interest in approximately 13,600 gross (4,900 net) acres. We believe significant potential exists for producing from multiple zones in the prospect area. Our primary targets are the Cotton Valley Sands, Bossier and Cotton Valley Lime, all unconventional tight gas formations where we believe we can apply our technical and operational expertise to successfully recover natural gas. Secondary targets include the shallower Rodessa, Pettit and Travis Peak formations. We have identified 63 potential drilling locations in the joint venture. We began drilling operations on the initial Cotton Valley well in August 2007.

Northern New Mexico

El Vado East prospect (Mancos Shale)

Our El Vado East prospect is a 90,300 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 Puerto Chiquito West and Puerto Chiquito East fields and the Boulder field, which collectively have produced in excess of 29 MMBoe of oil and gas. 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 second quarter of 2008 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.

Western Kentucky

Boomerang prospect (New Albany Shale)

Our Boomerang prospect is a 74,000 gross (44,400 net) acre New Albany Shale play located in Western Kentucky in an area of the Illinois Basin that has not been widely explored. We believe the attributes of the New Albany Shale in the Boomerang prospect make it a promising unconventional resource play for natural gas, 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 completion of these three test wells in the fourth quarter of 2007 or first quarter of 2008. After evaluating the results of our initial drilling and completion activities, we will determine our development program in this prospect.

Western Canada

British Columbia prospect (Triassic Shale and tight gas sands)

In August 2007, we acquired a 25% non-operating, working interest in a lease acquisition and drilling project targeting unconventional gas reserves in the emerging Triassic shale and tight gas sands play in Northeast British Columbia. The project covers 32,700 gross (7,400 net) acres. Our primary targets are the Triassic-aged shale and tight gas sands. The operator began drilling operations in the project in August 2007.

Recent Developments

Our net average production at September 30, 2007 was 20.6 MMcfe/d, composed of 19.3 MMcfe/d from Ozona Northeast and 1.3 MMcfe/d from Cinco Terry. We drilled 12 Canyon wells in Ozona Northeast in the third quarter of 2007, three of which were awaiting completion at September 30, 2007. We drilled six wells in Cinco Terry in the third quarter of 2007 (three Canyon, two Ellenburger and one Wolfcamp well), three of which were awaiting completion at September 30, 2007. We drilled one Cotton Valley well, which is awaiting completion, and spudded a second Cotton Valley well, in our East Texas North Bald Prairie prospect in September 2007. We expect to complete and turn both of these Cotton Valley wells to sales in the fourth quarter of 2007. Finally, our Canadian operating partner drilled one Triassic tight gas well in Western Canada in September 2007, which is awaiting completion and a final pipeline connection and which we expect will be turned to sales in the fourth quarter of 2007.

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 770 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 East Texas, Northern New Mexico, Western Kentucky and Western Canada prospects, we have over 210,000 gross acres of unexplored tight gas and 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:

•


•	Low risk, multi-year drilling inventory. We have identified 833 drillable, low to moderate risk locations on our West Texas and East 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 95% 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 three of our primary operating areas and have an aggregate leasehold position of 277,100 gross (189,400 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.


•	Financial flexibility. Upon the completion of this offering, we expect to have approximately $19.2 million in cash, no long-term debt and at least $75.0 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.

Our challenges and risks

The implementation of our business strategy, maintenance of our strengths and our future operating results and financial condition are subject to a number of challenges, risks and uncertainties. These include the following:

•

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. In addition, as of December 31, 2006, more than 94% of our estimated proved reserves were natural gas. We are particularly exposed to volatility in natural gas prices.

•

Drilling and exploring for, and producing, gas and oil involve significant risks, including the potential unavailability of capital at attractive or acceptable costs, the possibility that we will not encounter commercially productive oil or natural gas reservoirs, the potential need to incur significant costs to drill and complete wells and the possibility that drilling operations may be curtailed, delayed or canceled as a result of unexpected drilling conditions, pressure or irregularities in formations, equipment failures or accidents, weather conditions and shortages, delays in the delivery of equipment or other factors that could adversely affect our business, financial condition or results of operations.


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

•

We face significant risks associated with our acquisition activities, including potential difficulties integrating operations, potential disruptions of operations, the potential failure to identify all risks associated with an acquisition, the potential failure to correctly evaluate reserve data or the exploitation potential of properties and the need to incur significant expenditures to identify and acquire properties.


•	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, results of operations and future growth.


•	Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any significant inaccuracies in these reserve estimates or underlying assumptions could materially affect the quantities and value of our reserves.

You should carefully consider these challenges and risks as well as all of the information contained in this prospectus prior to investing in the common stock. In particular, we urge you to carefully review the information under “Risk factors” so that you understand the risks associated with an investment in our company and our common stock.

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 One Ridgmar Centre, 6500 W. Freeway, Suite 800, Fort Worth, Texas 76116. Our telephone number is (817) 989-9000.

The offering


Common stock offered by us		5,605,377 shares


Common stock offered by the selling stockholder		2,061,290 shares


Common stock to be outstanding after this offering		19,255,789 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 $76.9 million, based on an assumed offering price of $15.00 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 $48.0 million outstanding under our revolving credit facility, to repurchase 2,021,148 shares of our common stock held by Neo Canyon Exploration, L.P. at a purchase price of approximately $28.2 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 three for one 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 $15.00, 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 June 30, 2007, and the combined pro forma statements of operations for the year ended December 31, 2006 and for the six months ended June 30, 2007 assume that the acquisition of the Neo Canyon interest occurred on January 1, 2006. 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
										Six months									Six months
										ended						Year ended			ended
(in thousands, except shares and per	Year ended December 31,									June 30,						December 31,			June 30,
share data)	2004			2005			2006			2006			2007			2006			2007

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

Statement of operations data
Revenues:
Oil and gas sales	$	5,682		$	43,263		$	46,672		$	26,390		$	19,082		$	66,230		$	26,905
Expenses:
Lease operating expense		179			2,910			3,889			1,992			2,023			5,418			2,744
Severance and production taxes		407			1,975			1,736			841			748			2,452			1,088
Exploration		2,396			733			1,640			993			633			1,640			633
Impairment of non-producing properties		—			—			558			—			—			558			—
General and administrative		1,943			2,659			2,416			1,234			2,730			2,755			2,942
Accretion of discount on asset retirement obligations		1			5			10			—			—			14			—
Depletion, depreciation and amortization		1,223			8,006			14,541			6,973			6,108			21,447			8,717


Total expenses		6,149			16,288			24,790			12,033			12,242			34,284			16,124


Operating income (loss)		(467	)		26,975			21,882			14,357			6,840			31,946			10,781
Other:
Interest income (expense), net		201			(802	)		(3,814	)		(1,709	)		(1,954	)		(3,814	)		(1,954	)
Realized gain (loss) on commodity derivatives		—			(2,924	)		6,222			3,085			2,244			6,222			2,244
Change in fair value of commodity derivatives		—			(4,163	)		8,668			5,447			(2,902	)		8,668			(2,902	)


Income (loss) before provision (benefit) for income taxes		(266	)		19,086			32,958			21,180			4,228			43,022			8,169
Provision (benefit) for income taxes		—			7,028			11,756			7,435			1,818			15,480			3,184


Net income (loss)	$	(266	)	$	12,058		$	21,202		$	13,745		$	2,410		$	27,542		$	4,985


Earnings (loss) per share(1):
Basic	$	(0.14	)	$	4.03		$	7.04		$	4.62		$	0.81		$	5.91		$	1.09
Diluted	$	(0.14	)	$	4.03		$	6.84		$	4.49		$	0.74		$	5.80		$	1.02
Weighted average shares outstanding(1):
Basic		1,928,225			2,988,986			3,012,414			2,975,138			2,984,105			4,663,022			4,576,905
Diluted		1,928,225			2,988,986			3,101,180			3,060,083			3,297,655			4,751,788			4,890,455
Statement of cash flow data
Net cash provided (used) by:
Operating activities	$	4,527		$	40,589		$	34,305		$	17,345		$	12,859
Investing activities		(26,859	)		(72,224	)		(59,384	)		(37,598	)		(18,285	)
Financing activities		22,474			32,199			26,771			17,254			19,007
Other financial data
EBITDA(2)		756			27,894			51,313			29,862			12,290			68,283			18,840
Capital expenditures		25,313			73,770			59,384			37,603			17,358


(1)		Does not give effect to our three for one common stock split.


(2)		See “Selected historical combined financial data—Reconciliation of non-GAAP financial measures” for a reconciliation of our EBITDA to cash provided by operating activities.



													Pro forma
											Pro forma		as adjusted(1)
											As of		As of
	As of December 31,						As of June 30,				June 30,		June 30,
(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	$	220	$	18,492	$	18,492	$	19,196
Other current assets		6,458		16,305		13,200		15,688		9,882		9,882		9,882
Property and equipment, net, successful efforts method		24,223		88,803		132,112		118,436		142,754		206,410		206,410
Other assets		1,565		89		86		126		1,179		1,179		840


Total assets	$	34,902	$	108,416	$	150,309	$	134,470	$	172,307	$	235,963	$	236,328


Current liabilities	$	9,827	$	32,746	$	15,421		23,531		14,697		14,697		14,674
Long-term debt		100		29,425		47,619		44,567		46,769		46,769		—
Other long-term liabilities		99		6,555		17,697		14,215		18,772		18,839		18,839
Convertible debt		—		—		—		—		20,000		20,000		—
Stockholders’ equity		24,876		39,690		69,572		52,157		72,069		135,658		202,815


Total liabilities and stockholders’ equity	$	34,902	$	108,416	$	150,309	$	134,470	$	172,307	$	235,963	$	236,328


(1)		As adjusted for (i) the consummation of the transactions described under “Certain relationships and related party transactions—The contribution agreement,” (ii) our three for one common stock split, (iii) the sale of 5,605,377 shares of common stock in this offering at an assumed initial public offering price of $15.00 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,” (iv) our receipt of $240,380 pursuant to an exercise of stock options covering 72,114 shares of our common stock by a former executive officer, (v) the conversion of $20.0 million of principal and $540,822 of accrued interest under convertible notes into 1,472,460 shares of our common stock along with the recognition of the related beneficial conversion feature amounting to $1,546,083, (vi) the grant of 322,500 restricted shares to our named executive officers and the related bonus for taxes as set forth under “Management—Grants of plan-based awards” and (vii) the election by each of Messrs. Brandi, Lubar and Whyte to receive 5,666 shares of our common stock and Mr. Crain to receive 2,833 shares of our common stock in lieu of cash for all or a portion of their 2007 director fees.

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 six months ended June 30, 2007 and combined pro forma operating data for the year ended December 31, 2006 and the six months ended June 30, 2007, after giving effect to our acquisition of the Neo Canyon interest:



										Pro forma
							Six					Six
							months					months
							ended			Year ended		ended
	Year ended December 31,						June 30,			December 31,		June 30,
	2004		2005		2006		2007			2006		2007


Gross wells
Drilled		54		120		83		25			83		25
Completed		46		115		81		20	(1)		81		20	(1)
Net wells
Drilled		34.9		77.2		55.1		17.0			79.6		23.1
Completed		29.6		74.8		53.5		13.6			77.3		19.4
Net production data
Net volume (MMcfe)		908		5,012		6,744		2,608			9,580		3,680
Average daily volume (MMcfe/d)		4		14		18		14			26		20
Average sales price (per Mcfe)
Average sales price (without the effects of commodity derivatives)	$	6.26	$	8.63	$	6.92	$	7.32		$	6.91	$	7.31
Average sales price (with the effects of commodity derivatives)		6.26		8.05		7.84		8.18			7.56		7.92
Expenses (per Mcfe)
Lease operating	$	0.20	$	0.58	$	0.58	$	0.78		$	0.57	$	0.75
Production taxes		0.45		0.39		0.26		0.29			0.26		0.30
General and administrative		2.14		0.53		0.36		1.05			0.29		0.80
Exploration		2.64		0.15		0.24		0.24			0.17		0.17
Impairment		—		—		0.08		—			0.06		—
Depreciation, depletion and amortization		1.35		1.60		2.16		2.34			2.24		2.37


(1)		At June 30, 2007, five wells were awaiting completion.

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 and 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
Standardized measure of oil and gas quantities (millions)	$	60.3	$	146.4	$	77.9	$	128.6


(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 the oil and natural gas industry and our business

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 measurement (December 31, 2006), 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 from $6.55 per Mcf to $5.55 per Mcf, then our PV-10 as of December 31, 2006 would decrease from $179.9 million to $110.1 million. The average market price received for our natural gas production on December 31, 2006, after basis and Btu adjustments, was $6.55 per Mcf. The average market price received for our natural gas production on August 31, 2007, after basis and Btu adjustments, was $6.05 per Mcf.

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 commodity derivative 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 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.

After this offering, 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, will beneficially own approximately 47.2% of our outstanding common stock in the

aggregate (44.6% if the underwriters’ over-allotment option is exercised in full). In addition, one Yorktown representative serves on our board of directors, and our management team and employees will beneficially own or control approximately 7.4% of our common stock outstanding (7.0% 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.

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.

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 our financial condition

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 $53.6 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 June 30, 2007, outstanding borrowings under our revolving credit facility totaled approximately $46.8 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.

We engage in commodity derivative 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 commodity derivative 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 commodity derivative. 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 commodity derivative arrangement or the counterparties to the commodity derivative agreements fail to perform under the contracts.

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 19,255,789 shares of common stock. Of these shares, the 7,666,667 shares we and the selling stockholder are selling in this offering 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 11,589,122 shares 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.

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 2,027,440 shares of our common stock issued or reserved for issuance under our stock incentive plan, which number is subject to adjustment pursuant to the terms of the 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. Any of these events may dilute your ownership interest in us 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.

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.

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 $4.47 per share.

Based on an assumed initial public offering price of $15.00 per share, purchasers of our common stock in this offering will experience an immediate and substantial dilution of $4.47 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 June 30, 2007 after giving effect to this offering would be $10.53 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;

•	uncertainty of commodity prices in oil and gas;

•	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;

•	uncertainty regarding our future operating results;


•	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 $76.9 million (or $90.8 million if the underwriters exercise their over-allotment option in full), in each case based on an offering price of $15.00 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 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 $5.2 million.

We intend to use the net proceeds of this offering to repay approximately $48.0 million outstanding under our revolving credit facility, to repurchase 2,021,148 shares of our common stock held by Neo Canyon Exploration, L.P. at a purchase price of approximately $28.2 million and the remainder of approximately $700,000 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.

Our revolving credit facility bore interest at 6.87% per annum as of June 30, 2007 and matures on July 31, 2010. At June 30, 2007, outstanding borrowings under our revolving credit facility totaled approximately $46.8 million. 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 $75.0 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 June 30, 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

•

on pro forma as adjusted basis, reflecting (i) the consummation of the transactions described under “Certain relationships and related party transactions—The contribution agreement,” (ii) our three for one common stock split, (iii) our sale of 5,605,377 shares of common stock in this offering at an assumed initial public offering price of $15.00 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” and (iv) certain other transactions.



	As of June 30, 2007
					Pro forma
(in thousands)	Actual		Pro forma		as adjusted(1)


Cash and cash equivalents	$	18,492	$	18,492	$	19,196


Long-term debt	$	46,769	$	46,769	$	—
Convertible debt		20,000		20,000		—
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, 4,594,885 shares issued and outstanding pro forma, 19,255,789 shares issued and outstanding pro forma as adjusted		30		46		192
Additional paid-in capital		38,971		102,544		178,559
Retained earnings		33,068		33,068		24,064


Total stockholders’ equity		72,069		135,658		202,815


Total capitalization	$	138,838	$	202,427	$	202,815


(1)		Includes the effects of (i) our receipt of $240,380 pursuant to an exercise of stock options covering 72,114 shares of our common stock by a former executive officer, (ii) the conversion of $20.0 million of principal and $540,822 of accrued interest under convertible notes into 1,472,460 shares of our common stock along with the recognition of the related beneficial conversion feature amounting to $1,546,083, (iii) the grant of 322,500 restricted shares to our named executive officers and the related bonus for taxes as set forth under “Management—Grants of plan based awards” and (iv) the election by each of Messrs. Brandi, Lubar and Whyte to receive 5,666 shares of our common stock and Mr. Crain to receive 2,833 shares of our common stock in lieu of cash for all or a portion of their 2007 director fees.

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 June 30, 2007, after giving effect to the issuance of 5,228,400 shares as described under “Certain relationships and related party transactions—The contribution agreement,” certain other transactions, principally the conversion of certain convertible promissory notes as described under “Certain relationships and related party transactions—Convertible notes” and our three for one common stock split, the pro forma net tangible book value per share of our common stock was $154.1 million, or $9.83 per share of common stock. After giving effect to the sale of 5,605,377 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 June 30, 2007 would have been approximately $202.8 million, or $10.53 per share. This represents an immediate and substantial increase in the pro forma as adjusted net tangible book value of $0.70 per share to existing stockholders and an immediate dilution of $4.47 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. All per share amounts in this section have been adjusted for our three for one common stock split. 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)			$	15.00
Adjusted net tangible book value per share at June 30, 2007(2)	$	9.83
Increase per share attributable to new public investors(3)	$	0.70

As adjusted net tangible book value per share after this offering(3)			$	10.53

Dilution in as adjusted net tangible book value per share to new investors			$	4.47


(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 into account underwriting discounts and estimated offering expenses.

A $1.00 increase (decrease) in the assumed public offering price of $15.00 would increase (decrease) our as adjusted net tangible book value per share after this offering by $0.27 per share and the dilution in net tangible book value to new investors by $0.73 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 June 30, 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(1)				Total consideration				Average price
	Number		Percent		Amount		Percent		per share


Existing stockholders(1)		15,671,560		74%		130,052,220		61%		8.30
New investors		5,605,377		26%		84,080,655		39%		15.00


Total		21,276,937		100%		214,132,875		100%		10.06


(1)		The number of shares disclosed for the existing stockholders includes shares being sold by the selling stockholder in this offering. The number of shares disclosed for the new investors does not include the shares being purchased by the new investors from the selling stockholder in this offering.

A $1.00 increase (decrease) in the assumed initial public offering price per share would increase (decrease) total consideration paid by new investors by $5.6 million, or increase (decrease) the percent of total consideration paid by new investors to 1.5%, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same.

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.

The unaudited combined pro forma financial statements and the accompanying notes presented herein do not give effect to our three for one common stock split.

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 June 30, 2007 is based on our unaudited combined balance sheet as of June 30, 2007, appearing elsewhere in this prospectus, and gives effect to the transactions described above as if they occurred on June 30, 2007.

The combined pro forma statement of operations for the six months ended June 30, 2007 is based on our unaudited combined statement of operations for the six months ended June 30, 2007 and the unaudited Historical Summary of Revenues and Direct Operating Expenses of Properties to be Acquired by Approach Resources Inc. for the six months ended June 30, 2007, 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 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 SEC 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
June 30, 2007



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


Assets
Current assets:
Cash and cash equivalents	$	18,492		$	—		$	18,492
Accounts receivable:
Joint interest owners		3,338			—			3,338
Oil and gas sales		3,941			—			3,941
Prepaid expenses and other current assets		2,603			—			2,603


Total current assets		28,374			—			28,374
Property and equipment:
Oil and gas properties, using the successful efforts method of accounting		172,363			63,656	(a)		236,019
Furniture, fixtures and equipment		264			—			264
Less accumulated depreciation, depletion and amortization		(29,873	)		—			(29,873	)


Net property and equipment		142,754			63,656			206,410
Other assets		1,179			—			1,179


Total assets	$	172,307		$	63,656		$	235,963


Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	6,807		$	—		$	6,807
Oil and gas payables		5,431			—			5,431
Accrued liabilities		2,459			—			2,459


Total current liabilities		14,697			—			14,697
Non-current liabilities:
Long-term debt		46,769			—			46,769
Convertible debt		20,000			—			20,000
Asset retirement obligation		163			67	(a)		230
Deferred tax liability		18,609						18,609


Total liabilities		100,238			67			100,305
Stockholders’ equity:
Common stock		30			14	(a)		46
					2	(b)
Additional paid-in capital		38,971			63,575	(a)
					(2	)(b)		102,544
Retained earnings		33,068			—			33,068


Total stockholders’ equity		72,069			63,589			135,658


Total liabilities and stockholders’ equity	$	172,307		$	63,656		$	235,963

See accompanying notes.

Approach Resources Inc.
Unaudited combined pro forma statement of operations
Six months ended June 30, 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	$	19,082		$	7,823	$	—		$	26,905
Expenses:
Lease operating		2,023			933		(212	)(c)		2,744
Severance and production taxes		748			340		—			1,088
Exploration		633			—		—			633
General and administrative		2,730			—		212	(c)		2,942
Accretion of discount on asset retirement obligations		—			—		—			—
Depreciation, depletion and amortization		6,108			—		2,609	(d)		8,717


Total expenses		12,242			1,273		2,609			16,124


Operating income		6,840			6,550		(2,609	)		10,781
Other income (expense):
Interest expense, net		(1,954	)		—		—			(1,954	)
Realized gain (loss) on commodity derivatives		2,244			—		—			2,244
Change in fair value of commodity derivatives		(2,902	)		—		—			(2,902	)


Income (loss) before provision (benefit) for income taxes		4,228			6,550		(2,609	)		8,169
Provision (benefit) for income taxes		1,818					1,366	(e)		3,184


Net income (loss)	$	2,410		$	6,550	$	(3,975	)	$	4,985


Earnings (loss) per share:
Basic	$	0.81							$	1.09

Diluted	$	0.74							$	1.02

Weighted average shares outstanding:
Basic		2,984,105					1,592,800	(g)		4,576,905

Diluted		3,297,655					1,592,800	(g)		4,890,455

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	$	46,672		$	19,558	$	—		$	66,230
Expenses:
Lease operating		3,889			1,868		(339	)(c)		5,418
Severance and production taxes		1,736			716		—			2,452
Exploration		1,640			—		—			1,640
Impairment of non-producing properties		558			—		—			558
General and administrative		2,416			—		339	(c)		2,755
Accretion of discount on asset retirement obligations		10			—		4	(f)		14
Depreciation, depletion and amortization		14,541			—		6,906	(d)		21,447


Total expenses		24,790			2,584		6,910			34,284


Operating income		21,882			16,974		(6,910	)		31,946
Other income (expense):
Interest expense, net		(3,814	)		—		—			(3,814	)
Realized gain (loss) on commodity derivatives		6,222			—		—			6,222
Change in fair value of commodity derivatives		8,668			—		—			8,668


Income before provision for income taxes		32,958			16,974		(6,910	)		43,022
Provision for income taxes		11,756			—		3,724	(e)		15,480


Net income (loss)	$	21,202		$	16,974	$	(10,634	)	$	27,542


Earnings per share:
Basic	$	7.04							$	5.91

Diluted	$	6.84							$	5.80

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

Diluted		3,101,180					1,650,608	(h)		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 June 30, 2007 assumes that the acquisition of the Neo Canyon interest occurred as of June 30, 2007. The unaudited combined pro forma statement of operations for the year ended December 31, 2006 and the six months ended June 30, 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 $63.7 million by the issuance of 1,413,081 shares of Approach Resources Inc. common stock at June 30, 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 (i) changes in the relative value of the future net cash flows associated with the Neo Canyon interest to the combined future net cash flows after giving effect to any financing transactions and acquisitions consummated by Approach Resources Inc. and Approach Oil & Gas Inc. after the execution of the contribution agreement but before the closing of the offering, and (ii) a proposed three for one stock split of Approach Resources Inc. common stock.

We determined the purchase price for the Neo Canyon interests based on a formula that compares the discounted future net cash flows attributable to the Neo Canyon interest with the discounted future net cash flows of the combined oil and gas reserves of Approach Resources Inc., Approach Oil & Gas Inc. and the Neo Canyon interest. We made such comparison using January 1, 2007 reserve data priced using forward strip gas prices at March 31, 2007. Based on this comparison, we determined that the discounted future net cash flows related to the Neo Canyon interest would represent approximately 30% of the combined discounted future net cash flows after all of the transactions contemplated in this pro forma information had occurred. We determined the number of shares to be issued in connection with the acquisition of the Neo Canyon interest as the number of shares that would represent 30% of our common shares outstanding after the all of the transactions contemplated in this pro forma financial information had occurred. The price per share is $45.00, which represents the midpoint of the range of our estimated initial public offering price set forth on the cover of this prospectus on a pre-split basis.

The following is a summary of the purchase price and its allocation (in thousands) based on our estimates described above:




Purchase price:
Issuance of 1,413,081 shares of Approach Resources Inc. common stock valued at $45.00 per share	$	63,589
Plus: assumption of asset retirement obligations		67

Total purchase price	$	63,656

Allocation:
Mineral interests in oil and gas properties	$	4,709
Wells and equipment and related facilities		58,947

Total	$	63,656


(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 six months ended June 30, 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 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 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 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		(41,047	)		(16,974	)		(58,021	)
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		(4,303	)		(3,651	)		(7,954	)


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 six months ended June 30, 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,															Six months
	2002 to			Year ended December 31,												ended June 30,
	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)

Operating results data
Revenues:
Oil and gas sales	$	—		$	—		$	5,682		$	43,263		$	46,672		$	26,390		$	19,082
Expenses:
Lease operating expense		—			—			179			2,910			3,889			1,992			2,023
Severance and production taxes		—			—			407			1,975			1,736			841			748
Exploration		—			442			2,396			733			1,640			993			633
Impairment of non-producing properties		—			—			—			—			558			—			—
General and administrative		406			1,535			1,943			2,659			2,416			1,234			2,730
Accretion of discount on asset retirement obligations		—			—			1			5			10			—			—
Depletion, depreciation and amortization		2			9			1,223			8,006			14,541			6,973			6,108


Total expenses		408			1,986			6,149			16,288			24,790			12,033			12,242


Operating income (loss)		(408	)		(1,986	)		(467	)		26,975			21,882			14,357			6,840
Other:
Interest income (expense), net		(1	)		59			201			(802	)		(3,814	)		(1,709	)		(1,954	)
Realized gain (loss) on commodity derivatives		—			—			—			(2,924	)		6,222			3,085			2,244
Change in fair value of commodity derivatives		—			—			—			(4,163	)		8,668			5,447			(2,902	)


Income (loss) before provision for income taxes		(409	)		(1,927	)		(266	)		19,086			32,958			21,180			4,228
Provision (benefit) for income taxes		—			—			—			7,028			11,756			7,435			1,818


Net income (loss)	$	(409	)	$	(1,927	)	$	(266	)	$	12,058		$	21,202		$	13,745		$	2,410


Earnings (loss) per share(1):
Basic	$	—		$	(3.44	)	$	(0.14	)	$	4.03		$	7.04		$	4.62		$	0.81


Diluted	$	—		$	(3.44	)	$	(0.14	)	$	4.03		$	6.84		$	4.49		$	0.74


Statement of cash flows data
Net cash provided (used) by:
Operating activities	$	(258	)	$	(2,391	)	$	4,527		$	40,589		$	34,305		$	17,345		$	12,859
Investing activities		(3	)		(15	)		(26,859	)		(72,224	)		(59,384	)		(37,598	)		(18,285	)
Financing activities		282			4,898			22,474			32,199			26,771			17,254			19,007
Other financial data
EBITDA(2)		(406	)		(1,977	)		756			27,894			51,313			29,862			12,290
Capital expenditures		3			15			25,313			73,770			59,384			37,603			17,358


(1)		Does not give effect to our three for one common stock split.


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



	As of December 31,											As of June 30,
						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	$	220	$	18,492
Other current assets		92			410		6,458		16,305		13,200		15,688		9,882
Property and equipment, net, successful efforts method		—			35		24,223		88,803		132,112		118,436		142,754
Other assets		29			—		1,565		89		86		126		1,179


Total assets	$	142		$	2,958	$	34,902	$	108,416	$	150,309	$	134,470	$	172,307


Current liabilities	$	499		$	86	$	9,827	$	32,746	$	15,421	$	23,531	$	14,697
Long-term debt		—			—		100		29,425		47,619		44,567		46,769
Other long-term liabilities		—			—		99		6,555		17,697		14,215		18,772
Convertible debt		—			—		—		—		—		—		20,000
Stockholders’ equity (deficit)		(357	)		2,872		24,876		39,690		69,572		52,157		72,069


Total liabilities and stockholders’ equity	$	142		$	2,958	$	34,902	$	108,416	$	150,309	$	134,470	$	172,307

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 EBITDA. EBITDA is defined as net income or loss excluding income tax, depreciation, depletion and amortization and interest expense. Although EBITDA is not calculated in accordance with GAAP, management believes that it is a measure commonly reported and used by investors as a financial indicator providing additional information about our profitability, ability to meet our future requirements for debt service, capital expenditures and working capital. EBITDA 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 EBITDA to permit a more complete comparative analysis of our operating performance and debt servicing ability relative to other companies, investors should be cautioned that EBITDA as reported by us may not be comparable in all instances to EBITDA as reported by other companies. In addition, EBITDA 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,													Six months				Pro forma
	2002 to			Year ended December 31,										ended June 30,						Six months
	December 31,						2004			2005		2006		2006		2007		Year ended		ended
	2002			2003			combined			combined		combined		combined		combined		December 31,		June 30,
(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	$	13,745	$	2,410	$	27,542	$	4,985
Income taxes		—			—			—			7,028		11,756		7,435		1,818		15,480		3,184
Depreciation, depletion and amortization		2			9			1,223			8,006		14,541		6,973		6,108		21,447		8,717
Interest expense (income)		1			(59	)		(201	)		802		3,814		1,709		1,954		3,814		1,954


EBITDA	$	(406	)	$	(1,977	)	$	756		$	27,894	$	51,313	$	29,862	$	12,290	$	68,283	$	18,840

We believe the most closely related GAAP measure of liquidity is cash provided by operating activities. Below is a reconciliation of EBITDA to our cash provided by operating activities included in our Combined Statements of Cash Flows in our financial statements.



	September 13,															Six months ended
	2002 to			Year ended December 31,												June 30,
	December 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)

EBITDA	$	(406	)	$	(1,977	)	$	756		$	27,894		$	51,313		$	29,862		$	12,290
Items excluded from EBITDA but included in cash provided by operating activities
Interest (expense) income		(1	)		59			201			(802	)		(3,814	)		(1,709	)		(1,954	)
Income taxes		—			—			—			(7,028	)		(11,756	)		(7,435	)		(1,818	)
Change in fair value of commodity derivatives		—			—			—			4,163			(8,668	)		(5,447	)		2,902
Dry hole costs		—			—			—			1,187			2,173			993			633
Deferred income taxes		—			—			—			6,448			11,102			7,061			1,060
Interest earned on loans to stockholders		—			(24	)		(124	)		(235	)		—			—			—
Amortization of loan origination fees		—			—			1			47			72			40			52
Accretion of discount on asset retirement obligations		—			—			—			5			10			—			—
Non-cash compensation		—			—			—			—			33			33			87
Changes in operating assets and liabilities:		149			(449	)		3,693			8,910			(6,160	)		(6,053	)		(393	)


Net cash provided by operating activities	$	(258	)	$	(2,391	)	$	4,527		$	40,589		$	34,305		$	17,345		$	12,859

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 and Western Canada. 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 277,100 gross (189,400 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 five areas: West Texas (Wolfcamp, Canyon Sands and Ellenburger), East Texas (Cotton Valley Sands, Bossier and Cotton Valley Lime), Northern New Mexico (Mancos Shale), Western Kentucky (New Albany Shale) and Western Canada (Triassic Shale and tight gas sands). 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 approximately $48.0 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. The average market price received for our natural gas production on December 31, 2006, after basis and Btu adjustments, was $6.55 per Mcf. The average market price received for our natural gas production on August 31, 2007, after basis and Btu adjustments, was $6.05 per Mcf.

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

Derivative instruments and commodity derivative activities

All derivative instruments are recorded on the balance sheet at fair value. We determine the fair value of our derivatives by estimating the present value of future net cash flows expected from those contracts. We compute the estimate by multiplying the notional quantities specified in our contracts by the difference between exchange-quoted forward prices and the strike price specified in our contracts. We then compute the present value of those cash flows using our credit-adjusted risk-free rate. Changes in the derivative’s fair value are currently recognized in the statement of operations unless specific commodity derivative accounting criteria are met. For qualifying cash-flow commodity derivatives, the gain or loss on the derivative is deferred in accumulated other comprehensive income (loss) to the extent the commodity derivative is effective. The ineffective portion of the commodity derivative is recognized immediately in the statement of operations. Gains and losses on commodity derivative 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 commodity derivative 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 other 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. 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, referred to as our 2007 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. See “Management—Executive compensation—Discussion of summary compensation and plan-based awards tables—Description of the 2007 Plan.”

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

Six months ended June 30, 2006 and 2007



	Six months ended
	June 30,
	2006		2007


Revenues (in thousands):
Gas	$	23,677	$	16,916
Oil		2,713		2,166


Total oil and gas sales		26,390		19,082
Realized gain on commodity derivatives		3,085		2,244


Total oil and gas sales including derivative impact		29,475		21,326
Production:
Gas (MMcf)		3,366		2,376
Oil (MBbl)		42		39


Total (MMcfe)		3,619		2,608
Average prices:
Gas, per Mcf	$	7.03	$	7.12
Oil, per Bbl		64.15		55.93


Total, per Mcfe		7.29		7.32
Realized gain on commodity derivatives, per Mcfe		0.85		0.86


Total per Mcfe including derivative impact		8.14		8.18
Costs and expenses (per Mcfe):
Lease operating expenses	$	0.55	$	0.78
Severance and production taxes		0.23		0.29
Depreciation, depletion and amortization		1.93		2.34
Exploration		0.27		0.24
General and administrative		0.34		1.05

Oil and gas sales. Oil and gas sales decreased $7.3 million, or 27.7%, for the six months ended June 30, 2007 to $19.1 million from $26.4 million for the six months ended June 30, 2006. The decrease in gas sales principally resulted from the natural decline in production of our tight gas sands in the Ozona Northeast 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 six months 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. The average price per Mcfe we received for our production remained relatively unchanged as reflected in the table above. Gas sales represented 88.7% of the total oil and gas sales for the six months ended June 30, 2007 compared to 89.8% for the six months ended June 30, 2006.

Commodity derivative activities. Realized gains from our commodity derivative activity increased our earnings $2.2 million for the six months ended June 30, 2007. In comparison, our commodity

derivative activity increased our earnings $3.1 million for the six months ended June 30, 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.

Lease operating expense. Our lease operating expenses increased $31,000, or 1.5%, for the six months ended June 30, 2007 to $2.0 million ($0.78 per Mcfe) from 2.0 million ($0.58 per Mcfe) for the six months ended June 30, 2006. The primary factor in the slight increase in lease operating expense was an increase of approximately $200,000 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 $93,000, or 11.0%, for the six months ended June 30, 2007 to $748,000 from $841,000 for the six months ended June 30, 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.

Exploration. Our dry hole costs associated with exploratory drilling decreased $360,000 to $633,000 for the six months ended June 30, 2007 from $993,000 for the six months ended June 30, 2006. The 2007 dry hole costs resulted from a mechanical failure in the drilling of a test well in our Boomerang prospect. Exploration expense in 2006 resulted primarily from two dry holes drilled on our Pecos County project, which was abandoned in the fourth quarter of 2006.

General and administrative. Our general and administrative expenses increased $1.5 million or 121.2%, to $2.7 million for the six months ended June 30, 2007 from $1.2 million for the six months ended June 30, 2006. The increase in general and administrative expense was principally due to bonus payments made in the first six months 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.” Additionally, the 2007 period includes a severance obligation of $350,000 related to a former employee.

Depreciation, depletion and amortization (DD&A). Our DD&A expense decreased $865,000, or 12.4%, to $6.1 million for the six months ended June 30, 2007 from $7.0 million for the six months ended June 30, 2006. Our DD&A expense per Mcfe produced increased by $0.41, or 21.2%, to $2.34 per Mcfe for the six months ended June 30, 2007, as compared to $1.93 per Mcfe for the six months ended June 30, 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.

Interest income (expense), net. Our interest expense increased $246,000, or 14.4%, to $2.0 million for the six months ended June 30, 2007 from $1.7 million for the six months ended June 30, 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 for income taxes decreased $5.6 million, or 75.6%, to $1.8 million for the six months ended June 30, 2007, from a provision of $7.4 million for the six months ended June 30, 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 six months ended June 30, 2006 amounted to 35.1% compared with 43.0% for the six months ended June 30, 2007. The increase 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


Revenues (in thousands):
Gas	$	40,085		$	41,851
Oil		3,179			4,821


Total oil and gas sales		43,264			46,672
Realized gain (loss) on commodity derivatives		(2,924	)		6,222


Total oil and gas sales including derivative impact		40,340			52,894
Production:
Gas (MMcf)		4,668			6,282
Oil (MBbl)		57			77


Total (MMcfe)		5,012			6,744
Average prices:
Gas, per Mcf	$	8.59		$	6.66
Oil, per Bbl		55.54			62.65


Total, per Mcfe		8.63			6.92
Realized gain (loss) on commodity derivatives, per Mcfe		(0.58	)		0.92


Total per Mcfe including derivative impact		8.05			7.84
Costs and expenses (per Mcfe):
Lease operating expenses	$	0.58		$	0.58
Severance and production taxes		0.39			0.26
Depreciation, depletion and amortization		1.60			2.16
Exploration		0.15			0.24
Impairment of non-producing properties		—			0.08
General and administrative		0.53			0.36

Oil and gas sales. Oil and gas sales increased $3.4 million, or 7.9%, for the year ended December 31, 2006 to $46.7 million from $43.3 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. The effects of increased production were offset by a decrease in price. The average price before the effect of commodity derivatives 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 earnings $6.2 million for the year ended December 31, 2006. In comparison, realized losses from our commodity derivative activity decreased our earnings $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.

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. Our natural gas production from the Ozona Northeast field is afforded a severance tax rate lower than the normal rate (7.5%). However, we are required to file abatement requests with the State of Texas to receive the lower rate. Until the abatement requests are approved, we are required to pay the normal rate. During 2005, we were still awaiting approvals for abatements on several of our Ozona Northeast wells. We received such approvals during 2006, which resulted in the refunds mentioned above.

Exploration and impairment of non-producing properties. Our exploration costs increased $907,000 to $1.6 million for the year ended December 31, 2006 from $734,000 for the year ended December 31, 2005. The 2006 period included dry hole costs of $1.3 million related to two wells drilled on a prospect in Pecos County, Texas, $195,000 from one well in Ozona Northeast and $165,000 from a well in our Boomerang prospect. The 2005 period included dry hole costs of $902,000 from Pecos County and $285,000 from the same well mentioned above in Ozona Northeast. Additionally, the 2005 period included the recoupment of $564,000 of geological evaluation costs from a participant in the Pecos County project. The balance of the 2005 expense is geological and geophysical costs mostly attributable to Ozona Northeast.

Our impairment of non-producing properties of $558,000 in 2006 arose from the abandonment of our leasehold position in Pecos County. As a result of the abandonment, we no longer anticipate incurring any costs related to this area.

General and administrative. Our general and administrative expenses decreased $243,000, or 9.1%, to $2.4 million for the year ended December 31, 2006 from $2.7 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. Additionally, operating overhead recoveries in 2006 were $514,000 as compared to $408,000 in 2005.

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.

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. Interest rates attributable to amounts outstanding under our revolving credit facility amounted to 6.75% at December 31, 2005, compared with 7.75% at December 31, 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


Revenues (in thousands):
Gas	$	5,302	$	40,085
Oil		380		3,179


Total oil and gas sales		5,682		43,264
Realized loss on commodity derivatives		—		(2,924	)


Total oil and gas sales including derivative impact		5,682		40,340
Production:
Gas (MMcf)		858		4,668
Oil (MBbl)		8		57


Total (MMcfe)		908		5,012
Average prices:
Gas, per Mcf	$	6.18	$	8.59
Oil, per Bbl		45.56		55.54


Total, per Mcfe		6.26		8.63
Realized loss on commodity derivatives, per Mcfe		—		(0.58	)


Total per Mcfe including derivative impact		6.26		8.05
Costs and expenses (per Mcfe):
Lease operating expenses	$	0.20	$	0.58
Severance and production taxes		0.45		0.39
Depreciation, depletion and amortization		1.35		1.60
Exploration		2.64		0.15
General and administrative		2.14		0.53

Oil and gas sales. Oil and gas sales increased $37.6 million to $43.3 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 120 and completed 115 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 earnings $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.

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.

Exploration. Our exploration costs decreased $1.7 million to $734,000 for the year ended December 31, 2005 from $2.4 million for the year ended December 31, 2004. The 2005 period included dry hole costs of $902,000 related to two wells drilled on a prospect in Pecos County, Texas and $285,000 from a well in Ozona Northeast. Additionally, the 2005 period included the recoupment of $564,000 of geological evaluation costs from a participant in the Pecos County project. The balance of the 2005 expense is geological and geophysical costs mostly attributable to Ozona Northeast. The 2004 period included geological and geophysical costs of $1.5 million from the Pecos County, Texas area and $873,000 from Ozona Northeast. The Pecos County project was abandoned at the end of 2006.

General and administrative. Our general and administrative expenses increased $715,000, or 36.8%, to $2.7 million for the year ended December 31, 2005 from $1.9 million for the year ended December 31, 2004. This increase was largely due to the accrual of $800,000 for bonuses in 2005. Additionally, operating overhead recoveries in 2005 were $408,000, as compared to $278,000 in 2004.

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.

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 six months ended June 30, 2007, the majority of our cash was generated from operating and financing activities. We used $19.2 million of net proceeds from bank and convertible debt

borrowings and cash flow from operations of $12.9 million to fund $17.4 million of capital expenditures related to our drilling program activities and our $917,000 investment in a Canadian-based private exploration company. During the same six months in 2006, we used $17.3 million of cash flow from operations and $18.6 million of proceeds from borrowings under a note with one of our stockholders and our revolving credit facility and available cash to fund $37.6 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 $40.6 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:



										Six months ended
	Year ended December 31,									June 30,
(in thousands)	2004			2005			2006			2006			2007


Cash flows provided by operating activities	$	4,527		$	40,589		$	34,305		$	17,345		$	12,859
Cash flows used in investing activities		(26,859	)		(72,224	)		(59,384	)		(37,598	)		(18,285	)
Cash flows provided by financing activities		22,474			32,199			26,771			17,254			19,007


Net increase (decrease) in cash and cash equivalents	$	142		$	564		$	1,692		$	(2,999	)	$	13,581

Operating activities

For the six months ended June 30, 2007, our cash flow from operations was used for drilling activities. The $12.9 million in cash flow generated in the first six months of 2007 decreased $4.5 million from the first six 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 $40.6 million in 2005 and to $34.3 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 $6.3 million in part due to a 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 six months of 2007, $12.7 million was for the continued development of the Ozona Northeast field, $1.0 million for the drilling of the test wells in our Boomerang prospect, $2.7 million for the acquisition of the El Vado East leasehold, $873,000 for wells in our Cinco Terry project and $917,000 for our investment in a Canadian-based private exploration company. For the comparable period of 2006, $32.1 million was for the drilling of Ozona Northeast wells, $3.4 million was for the acquisition of the Boomerang leasehold and $2.1 million was used for acreage cost and the drilling of Cinco Terry 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 $3.6 million was invested in the initial wells in our Cinco Terry project.

We have established an exploratory and development budget of $48.3 million and $63.5 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 $19.2 million net under convertible notes and our revolving credit facility in the first six months of 2007 as compared to $18.6 million net in the first six months of 2006. In addition, $1.3 million was spent in the first six 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. In June 2007, we amended our credit facility agreement to extend the due date of any balance outstanding at maturity to July 2010. As of June 30, 2007, we had an outstanding balance under the credit facility of approximately $46.8 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 and borrowings under our revolving credit facility will finance substantially all of our anticipated drilling, exploration and capital needs. We will also 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(2)
	year ended		Year ending
	December 31,		December 31,
(in thousands)	2006(1)		2007		2008


Capital expenditures:
Ozona Northeast	$	52,303	$	23,400	$	29,500
Cinco Terry		3,176		6,600		10,100
East Texas		—		7,300		14,000
Northern New Mexico		—		—		3,600
Western Kentucky		—		1,800		2,600
Western Canada		—		1,200		2,900
Lease acquisition, geological, geophysical and other		3,873		8,000		800


Total capital expenditures	$	59,352	$	48,300	$	63,500


(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 give effect to 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 October 1, 2007.

Credit facility

In September 2007, we amended our credit facility agreement to clarify the annual date for delivery of our year-end reserve report from our independent engineering firm. 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 base rate, which is the bank’s prime rate, or (ii) the sum of the LIBOR 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 June 30, 2007, the outstanding balance under our revolving credit facility was $47.6 million and $46.8 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 January 2008, we will begin rent payments of approximately $20,000 per month, including common area expenses. We have signed subleases for approximately two-thirds of our current office space beginning in October 2007.

The following table summarizes these commitments as of December 31, 2006 (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(1)	$	47,619	$	—	$	47,619	$	—	$	—
Operating lease obligations(2)		285		117		168		—		—
Asset retirement obligations		148		—		—		—		148
Employment agreements with executive officers and other key personnel(3)		1,463		1,463		—		—		—


Total	$	49,515	$	1,580	$	47,787	$	—	$	148


(1)		Excludes accrued interest amounts. In June 2007, we extended the due date of any balance outstanding at maturity to July 2010; therefore, our contractual obligation related to our revolving credit facility is now due in 3-5 years.

(2)		Operating lease obligation is for office space.

(3)		These agreements contain automatic renewal provisions providing that such agreements may be 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, was approximately $1,463,000 at December 31, 2006. 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 commodity derivative and investment purposes, not for trading purposes.

Commodity price risk

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

To designate a derivative as a cash flow hedge, we document at the commodity derivative’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 commodity derivative, 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 commodity derivative’s term, we determine the commodity derivative is no longer highly effective, commodity derivative 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 commodity derivative 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 June 30, 2007, we had two gas swaps in place for the remainder of 2007 for an average volume of 230,000 MMBtu per month. One of the swaps provides for us to be paid a notional price averaging $8.72 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 June 30, 2007, the fair value of our open derivative contracts was an asset of approximately $4.5 million and $1.6 million, 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 commodity derivatives were for an average volume of approximately 186,000 MMBtu per month.

We have reviewed the financial strength of our commodity derivative counterparty and believe our credit risk to be minimal. Our commodity derivative counterparty is a participant in our credit facility and the collateral for the outstanding borrowings under our revolving credit facility is used as collateral for our commodity derivatives.

Business

Overview

We are an independent energy company engaged in the exploration, development, exploitation, production and acquisition of unconventional natural gas and oil properties. We were formed as a Delaware corporation in September 2002. We received our initial round of equity financing from Yorktown Energy Partners V, L.P. and members of our management team in January 2003 and began our evaluation of potential lease acquisition, drilling and seismic projects later that year.

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 through a Farmout Agreement with the predecessors of Neo Canyon Exploration, L.P. Since that time, through a series of strategic leasehold acquisitions, we have increased our West Texas acreage to 66,500 gross (51,700 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.

Presently, Approach Resources Inc. and Approach Oil & Gas Inc. are operated as two separate yet affiliated entities with the operations of each conducted primarily though their respective operating subsidiaries. Each of Approach Resources Inc. and Approach Oil & Gas Inc. is controlled by funds affiliated with Yorktown Partners LLC. Upon consummation of the transactions described under “Certain relationships and related party transactions—The contribution agreement,” Approach Oil & Gas Inc. and its operating subsidiaries will become operating subsidiaries of Approach Resources Inc.

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 22.7 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 July 31, 2007, we had identified a total of 833 drilling locations, of which 644 were located in the Ozona Northeast field, 126 in our Cinco Terry project and 63 in our North Bald Prairie prospect in East Texas. Of the total, 178 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.

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 and Western Canada. Since May 2006, we have acquired leasehold interests covering 13,600 gross (4,900 net) acres in East Texas, 90,300 gross (81,000 net) acres in Northern New Mexico, 74,000 gross (44,000 net) acres in Western Kentucky and 32,700 gross (7,400 net) acres in Western Canada. In total we have assembled leasehold interests of 277,100 gross (189,400 net) acres in our five operating areas—West Texas (Wolfcamp, Canyon Sands and Ellenburger), East Texas (Cotton Valley Sands, Bossier and Cotton Valley Lime), Northern New Mexico (Mancos Shale), Western Kentucky (New Albany Shale) and Western Canada (Triassic Shale and tight gas sands).

Status as a controlled company

We expect to qualify as a “controlled company” under the NASDAQ Marketplace Rules because more than 50% of our voting power will be held collectively by Yorktown Energy Partners V, L.P., Yorktown Energy Partners VI, L.P. and Yorktown Energy Partners VII, L.P., which are under common management by Yorktown Partners, LLC. Under the NASDAQ Marketplace Rules, a “controlled company” may elect not to comply with certain NASDAQ corporate governance requirements, including (1) the requirement that a majority of the board of directors consist of independent directors, (2) the requirement that the nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities and (3) the requirement that the compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. However, we do not currently intend to rely on the controlled company exception to the NASDAQ corporate governance requirements following this offering. See “Management—Board of directors; committees of the board” for a discussion of our compliance with the corporate governance requirements of the NASDAQ Marketplace Rules.

As a result of Yorktown’s ownership of our outstanding securities, 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 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.

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 770 drilling locations.


	•	We acquired our initial position in the Ozona Northeast field through a Farmout Agreement with the predecessors of Neo Canyon Exploration, L.P. In January 2004. The agreement covered 28,000 gross (27,400 net) acres. During 2005, we leased an additional 16,600 gross (16,600 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 sought regulatory approval for 20-acre down spacing. By the end of 2005, we had drilled another 120 wells with a 96% success rate. In December 2005, we obtained regulatory approval for 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 45 wells in 2007 and 40 wells in 2008. We estimate that as of July 31, 2007, we had 644 identified drilling locations in the Ozona Northeast field, 175 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 644 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. We drilled six wells in Cinco Terry in the third quarter of 2007 (three Canyon, two Ellenburger and one Wolfcamp). We plan to drill six Canyon/Ellenburger/Wolfcamp/wells in the fourth quarter of 2007 and 24 Canyon/Ellenburger/Wolfcamp wells in 2008.

•

Pursue unconventional gas and oil opportunities. With our East Texas, Northern New Mexico, Western Kentucky and Western Canada prospects, we have over 210,000 gross acres of unexplored tight gas and shale inventory to explore and produce. We spudded our first wells in East Texas and Western Canada in August 2007. We expect to drill three gross (1.5 net) wells in 2007 and 11 gross (5.5 net) wells in 2008 on our North Bald Prairie prospect. We plan to begin the completion of our three Western Kentucky test wells in the New Albany Shale in the fourth quarter of 2007 or first quarter of 2008. We also plan to identify and begin drilling up to four Mancos Shale wells in El Vado East in the second quarter of 2008. We intend to


	support our unconventional tight gas and shale exploration with cash flow from our long-lived, producing properties in West Texas and borrowings under our revolving credit facility.


•	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 commodity derivative 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 initial implementation of CO ₂ foam fracs in 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 7.4% of our common stock after this offering, aligning their objectives with those of our stockholders.


•	Low risk, multi-year drilling inventory. We have identified 833 drillable, low to moderate risk locations on our West Texas and East 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 95% 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 three of our primary operating areas and have an aggregate leasehold position of 277,100 gross (189,400 net) acres. We believe we have assembled a portfolio of properties, both in 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.


•	Financial flexibility. Upon the completion of this offering, we expect to have approximately $19.2 million in cash, no long-term debt and at least $75.0 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 44,600 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 644 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. We currently have no plans to drill horizontal wells in our Ozona Northeast drilling program.

Cinco Terry project (Wolfcamp, Canyon Sands and Ellenburger)

Since late 2005, we have leased and acquired options to lease 21,900 gross (7,700 net) acres five miles west of our Ozona Northeast field in order to evaluate the Wolfcamp, Canyon and Ellenburger formations. As of June 30, 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.

East Texas

North Bald Prairie prospect (Cotton Valley Sands, Bossier, Cotton Valley Lime)

Our North Bald Prairie prospect is a joint venture with EnCana Oil & Gas (USA) Inc., covering 13,600 gross (4,900 net) acres in Limestone and Robertson Counties, Texas. As part of the joint venture, we have agreed to drill up to five wells at our cost to earn a 50% working interest in the project. We plan to exploit tight gas reservoirs in North Bald Prairie where we can use our expertise in fracturing and stimulating low permeability formations. Our primary targets are the Cotton Valley Sands, Bossier and Cotton Valley Lime formations. Other potential zones include the Rodessa, Pettit and Travis Peak formations. We have identified 63 potential drilling locations in the North Bald Prairie prospect. Initially, we expect to offset several productive Cotton Valley and Rodessa wells in the prospect area. We expect the average gross drilling and completion costs per location for a vertical well in this prospect to be approximately $2.4 million.

Northern New Mexico

El Vado East prospect (Mancos Shale)

Our El Vado East prospect is a 90,300 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 Puerto Chiquito West and Puerto Chiquito East fields and the Boulder field. The Puerto Chiquito West field has produced over 22 MMBoe of oil and natural gas, the Puerto Chiquito East field has produced over 5 MMBoe of oil and natural gas and the Boulder Field has produced over 2 MMBoe of oil and natural gas. 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 second quarter of 2008. 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.

Western Kentucky

Boomerang prospect (New Albany Shale)

Our Boomerang prospect is a 74,000 gross (44,400 net) acre New Albany Shale play located in Western Kentucky in an area of the Illinois Basin that we believe has not been widely explored. 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 unconventional resource play for natural gas, 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 completion of these three test wells in the fourth quarter of 2007 or first quarter of 2008. After evaluating the results of our initial drilling and completion activities, we will determine our development program in the Boomerang prospect.

Western Canada

British Columbia Prospect (Triassic Shale and tight gas sands)

We own a 25% non-operating, working interest in a Canadian joint venture focused on unconventional shale and tight gas sands in Northeast British Columbia. The project covers 32,700 gross acres and our working interest represents 7,400 net acres. Our primary targets are Triassic-aged thick shales and interbedded silts and sandstones capped by shallow carbonates and evaporates. Historically, the Triassic section has been a focus of drilling for conventional

reservoirs in northeastern British Columbia. Recently, the Triassic has seen renewed industry activity, focused primarily on the potential of unconventional shale and tight gas sand reservoirs. Current operators in the trend include EnCana Corporation, Murphy Oil Corporation and Duvernay Oil Corp.

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		644		22.5		99%
Cinco Terry		0.9		0.9		1.8		1%		4.2		126		0.2		1%


Total		75.8		73.0		148.8		100%	$	179.9		770		22.7		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 July 31, 2007. Of the total, 178 locations are classified as proved. The table excludes 63 identified locations in our North Bald Prairie prospect in East Texas, none of which are 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.

The average market price received for our natural gas production on December 31, 2006, after basis and Btu adjustments, was $6.55 per Mcf. The average market price received for our natural gas production on August 31, 2007, after basis and Btu adjustments, was $6.05 per Mcf.

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 six months ended June 30, 2007 and combined pro forma operating data for the year ended December 31, 2006 and the six months ended June 30, 2007, after giving effect to our acquisition of the Neo Canyon interest:



										Pro forma
							Six					Six
							months			Year		months
							ended			ended		ended
	Year ended December 31,						June 30,			December 31,		June 30,
	2004		2005		2006		2007			2006		2007


Gross wells
Drilled		54		120		83		25			83		25
Completed		46		115		81		20	(1)		81		20	(1)
Net wells
Drilled		34.9		77.2		55.1		17.0			79.6		23.1
Completed		29.6		74.8		53.5		13.6			77.3		19.4
Net production data
Net volume (MMcfe)		908		5,012		6,744		2,608			9,580		3,680
Average daily volume (MMcfe/d)		4		14		18		14			26		20
Average sales price (per Mcfe)
Average sales price (without the effects of commodity derivatives)	$	6.26	$	8.63	$	6.92	$	7.32		$	6.91	$	7.31
Average sales price (with the effects of commodity derivatives)		6.26		8.05		7.84		8.18			7.56		7.92
Expenses (per Mcfe)
Lease operating	$	0.20	$	0.58	$	0.58	$	0.78		$	0.57	$	0.75
Production taxes		0.45		0.39		0.26		0.29			0.26		0.30
General and administrative		2.14		0.53		0.36		1.05			0.29		0.80
Exploration		2.64		0.15		0.24		0.24			0.17		0.17
Impairment		—		—		0.08		—			0.06		—
Depreciation, depletion and amortization		1.35		1.60		2.16		2.34			2.24		2.37


(1)		At June 30, 2007, five wells were awaiting completion.

At December 31, 2006, our standardized measure of discounted future net cash flows was $128.6 million, and our PV-10 was $179.9 million. 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 and 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
Standardized measure of oil and gas quantities (millions)	$	77.9	$	128.6


(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)
			Six months		Estimated(2)
	Year ended		ended		Year ending
	December 31,		June 30,		December 31,
(in thousands)	2006		2007		2007		2008


Capital expenditures:
Ozona Northeast	$	52,303	$	12,742	$	23,400	$	29,500
Cinco Terry		3,176		873		6,600		10,100
East Texas		—		—		7,300		14,000
Northern New Mexico		—		—		—		3,600
Western Kentucky		—		1,040		1,800		2,600
Western Canada		—		—		1,200		2,900
Lease acquisition, geological, geophysical and other		3,873		2,704		8,000		800


Total capital expenditures	$	59,352	$	17,359	$	48,300	$	63,500


(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 give effect to 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 October 1, 2007.

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, an affiliate of Neo Canyon Exploration, L.P., the selling stockholder, was our most significant purchaser, accounting for approximately 89.6% of our total 2006 gas and oil sales excluding realized commodity derivative 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 August 31, 2007.



	Developed				Undeveloped				Total
	Gross		Net		Gross		Net		Gross		Net


Ozona Northeast		27,500		27,000		17,100		17,000		44,600		44,000
Cinco Terry		1,900		1,000		20,000		6,700		21,900		7,700
East Texas (North Bald Prairie)		—		—		13,600		4,900		13,600		4,900
Northern New Mexico (El Vado East)		—		—		90,300		81,000		90,300		81,000
Western Kentucky (Boomerang)		—		—		74,000		44,400		74,000		44,400
Western Canada		—		—		32,700		7,400		32,700		7,400


Total		29,400		28,000		247,700		161,400		277,100		189,400

The following table sets forth the number of gross and net undeveloped acres as of December 31, 2006 that will expire over the next three years by region unless production is established within the spacing units covering the acreage prior to the expiration dates:



	2007				2008				2009
	Gross		Net		Gross		Net		Gross		Net


Ozona Northeast		—		—		14,000		13,000		3,000		2,200
Cinco Terry		—		—		11,600		4,000		1,800		400
East Texas (North Bald Prairie)(1)(2)		1,500		600		4,400		2,000		—		—
Northern New Mexico (El Vado East)(1)(3)		—		—		—		—		90,300		81,000
Western Kentucky (Boomerang)(4)		—		—		—		——		—		—
Western Canada(1)		—		—		7,700		1,200		—		—


Total		1,500		600		37,700		20,200		95,100		83,600


(1)		East Texas, Northern New Mexico and Western Canada are as of August 31, 2007, as we acquired our interests in these properties in 2007.

(2)		Assumes the exercise of options to extend current primary terms by three additional years (beginning June 2007 through November 2008) on approximately 7,700 gross (2,000 net) acres for $125 to $250 per net acre.


(3)		We have an eight-well drilling commitment during the primary term, which expires in April 2009. If we meet this requirement, we will have two options to extend the primary term by one year each for $15 per net acre, for a total extension of two years at $30 per net acre.

(4)		Assumes the exercise of options to extend the current primary terms by three additional years (beginning July 2009 through September 2009) on approximately 700 gross (400 net) acres for $45 per net acre.

Drilling activity

The following table sets forth information on our historical drilling activity during the periods indicated and pro forma activity, after giving effect to our acquisition of the Neo Canyon Interest for 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.



																		Pro forma
																						Six months
	Year ended																	Year ended				ended
	December 31,												Six months ended					December 31,				June 30,
	2004				2005				2006				June 30, 2007					2006				2007
	Gross		Net		Gross		Net		Gross		Net		Gross			Net		Gross		Net		Gross			Net


Development:
Productive		46.0		29.6		115.0		74.8		81.0		53.3		20.0(1	)		13.6		81.0		77.3		20.0	(1)		19.4
Non-productive		1.0		0.7		7.0		4.3		6.0		4.2		—			—		6.0		6.0		—			—
Exploratory:
Productive		—		—		1.0		0.5		2.0		1.0		—			—		2.0		1.6		—			—
Non-productive		—		—		2.0		1.0		—		—		1.0			1.0		—		—		1.0			1.0
Total:
Productive		46.0		29.6		116.0		75.3		83.0		54.3		20.0(1	)		13.6		83.0		78.9		20.0	(1)		19.4
Non-productive		1.0		0.7		9.0		5.3		6.0		4.2		1.0			1.0		6.0		6.0		1.0			1.0


(1)		Excludes five wells awaiting completion at June 30, 2007.

Commodity derivative activity

Derivative instruments and commodity derivative activities

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

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 commodity derivative accounting criteria are met. For qualifying cash-flow commodity derivatives, the gain or loss on the derivative is deferred in accumulated other comprehensive income (loss) to the extent the commodity derivative is effective. The ineffective portion of the commodity derivative is recognized immediately in the statement of operations. Gains and losses on commodity derivative 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 commodity derivative 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 commodity derivatives. 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.”

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 August 31, 2007, we had 19 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 October 15, 2007.



Name	Age		Position(s) held


J. Ross Craft		50	President, Chief Executive Officer and Class III Director (Principal Executive Officer)
Steven P. Smart		53	Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
J. Curtis Henderson		45	Executive Vice President and General Counsel
Glenn W. Reed		56	Senior Vice President—Operations
Ralph P. Manoushagian		56	Senior Vice President—Land
Bryan H. Lawrence		65	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		51	Class I Director

J. Ross Craft has been our President and Chief Executive Officer and a member of our board of directors 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 in 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 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. In addition to the above, Mr. Craft is an Eagle Scout. 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 promoted to 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 began his career as a lawyer in the corporate and securities section of Locke Lord Bissell & Liddell (formerly Locke Purnell Rain Harrell), Mr. Henderson has over 20 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 group of investment 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 the

Yorktown group of investment 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., 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. Brandi, Crain and Whyte serve on the Audit Committee of our board of directors. Each of Messrs. Brandi, Crain and Whyte is “independent” under the listing standards of the National Association of Securities Dealers, Inc. and SEC rules. In addition, our board of directors has designated Mr. Crain as 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. Brandi and Lubar 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.

Prior to this offering, we did not have a compensation committee, and compensation decisions were made by our prior board of directors based on recommendations made by our chief executive officer.

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 Mr. Lubar (chairman) and Mr. Brandi, 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. Lubar, as chairman of the Compensation and Nominating 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 October 9, 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; 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. In making decisions regarding executive compensation for 2007, our prior board of directors considered the “Oil and Gas E&P 2006 Compensation Survey” prepared by Effective Compensation Incorporated, or ECI. The ECI survey contains compensation information from 99 public and private oil and gas companies in the United States from 2006. In addition, the board considered Ellora Energy Inc., GeoMet Inc. and Concho Resources Inc. to be “peer companies” whose executive compensation also should be considered in determining our executive compensation. All three companies operate within the oil and gas industry, and are all affiliated with Yorktown Partners, LLC and follow the same or similar management plans, which include compensating executives in a manner that will attract and retain the most highly-skilled and experienced people in the industry.

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 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, EBITDA, 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. We separately review our executive officers’ base salaries and their annual and long-term incentive opportunities (including equity-based incentive opportunities) to ensure that each component, individually, is competitive with market practices, supports our executive recruitment and retention objectives and is internally equitable among our executive officers. As such, our decisions regarding base salaries do not directly impact our decisions in establishing equity-based incentives and cash incentive compensation.

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

In establishing base salaries for 2007, our prior board of directors considered the “Oil and Gas E&P 2006 Compensation Survey” prepared by ECI. Based on our evaluation of the information contained in the ECI survey and our knowledge of the oil and gas industry, our board established 2007 base salaries for our executive officers within the range of our peer companies in the ECI survey after taking into account the individual performance and experience of each such executive officer. Although the ECI survey included the names of the 99 oil and gas companies participating in the survey, it did not list compensation information by company. Rather, the survey grouped compensation information into various revenue categories and whether the companies were independent, public or private. In addition to the individual experience and performance of our executive officers, our board primarily considered compensation information in the ECI survey from independent oil and gas companies (both public and private) with revenues of $100 million or less.

Although we have no written policies or guidelines for setting the base salaries of our executive officers within a specified range of the compensation levels of our industry peers, our executive officer salaries are intended to be competitive with our industry peers. Our board of directors recognizes that there is a substantial amount of competition in the oil and gas industry for attracting and retaining qualified management teams. Our philosophy is to set our executive officers’ base salaries at levels which we believe will enable us to retain them, with the goal of creating stockholder growth on a going forward basis. The increase in base salaries of our executive officers in 2007 reflects the increased demand and additional responsibilities imposed on our executive officers as a result of our becoming a public company and our objective of maintaining our current management team intact.

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. In making its decision on this bonus pool, in addition to the individual experience and performance of our executive officers, our prior board took into consideration similar bonus pools for executive management of Ellora Energy Inc. and Concho Resources Inc., both of whom are in the oil and gas industry and affiliated with

Yorktown Partners LLC. GeoMet, Inc., another Yorktown-affiliated oil and gas company considered by our board in its bonus decision, did not have a similar bonus pool related to its initial public offering. These bonus payments to our executive officers and other key employees upon the filing and effectiveness of our registration statement reflect the increased demand and additional responsibilities imposed on our executive officers as a result of our becoming a public company and our objective of maintaining our current management team intact. The filing and effectiveness of this registration statement is the only individual performance goal that was considered in setting compensation for 2007. 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 we give such employee notice within 60 days prior to the end of the term that we do not wish 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 63,750 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

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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 prior board authorized the grant of stock awards under the 2007 Plan covering 300,000 shares of common stock to our named executive officers and a member of our technical team, which grants will become effective upon the execution and delivery of the underwriting agreement relating to this offering. These stock awards were granted as follows: J. Ross Craft — 90,000 shares; Steven P. Smart — 60,000 shares, J. Curtis Henderson — 60,000 shares; Glenn W. Reed — 30,000 shares; Ralph P. Manoushagian — 30,000 shares; and a technical team member — 30,000 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. In making its decision on these stock awards, in addition to the individual experience and performance of our executive officers, our prior board took into consideration stock ownership levels of executive management at Ellora Energy Inc., Concho Resources Inc. and GeoMet, Inc., each of whom are in the oil and gas industry and affiliated with Yorktown Partners LLC. These stock awards to our executive officers, which will be effective upon the closing of this offering, reflect the increased demand and additional responsibilities imposed on our executive officers as a result of our becoming a public company and our objective of maintaining our current management team intact.

In June 2007, our board also authorized the grant of options to purchase a total of 225,000 shares of common stock to key employees. These grants will become effective upon the execution and delivery of the underwriting agreement relating to this offering. The exercise price for these options will be the initial public offering price of our common stock.

In October 2007, our Compensation and Nominating Committee authorized the grant of a stock award under the 2007 Plan covering 22,500 shares of common stock to J. Curtis Henderson, our Executive Vice President and General Counsel. The Compensation and Nominating Committee also approved a special bonus to cover out-of-pocket taxes that will be incurred as a result of the receipt of this award. This stock award reflects (i) the increased demand and additional responsibilities imposed on Mr. Henderson as a result of our becoming a public company and (ii) a more internally balanced level of equity ownership among our executive officers.

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 was approved by the board of directors and the existing stockholders on June 26, 2007. 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

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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 274,041 shares of common stock 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 3,300,000. The maximum number of shares of common stock that may be subject to all awards granted to any one participant each fiscal year is 990,000 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 990,000. 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

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required by applicable law or by applicable stock exchange listing requirements. Amendments to limit the scope of the 2007 Plan 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;

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•	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.



	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		152,892		—	$	3.33	August 16, 2014
Steven P. Smart Executive Vice President and Chief Financial Officer		28,845		—	$	3.33	August 16, 2014
Glenn W. Reed Senior Vice President—Operations		34,614		—	$	3.33	August 16, 2014
Ralph P. Manoushagian Senior Vice President—Land		28,845		—	$	3.33	August 16, 2014

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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

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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.

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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 October 15, 2007 and after giving effect to the offering and certain other transactions 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					Shares of Approach
	common stock					common stock
	beneficially owned					beneficially owned
	prior to offering(1)					after offering(2)
Name and address of beneficial owner	Number		Percent			Number		Percent


J. Ross Craft(3)(4)		591,129		6.7	%		681,129		3.5	%
Steven P. Smart(3)(4)		111,540		1.3	%		171,540		*
J. Curtis Henderson(3)		63,750		*			146,250		*
Glenn W. Reed(3)(4)		133,908		1.6	%		163,908		*
Ralph P. Manoushagian(3)(4)		111,690		1.3	%		141,690		*
Bryan H. Lawrence(5)(6)		7,500,000		86.9	%		9,225,387		47.9	%
James H. Brandi(7)		—		—			5,666		*
James C. Crain(8)		—		—			2,833		*
Sheldon B. Lubar(9)(10)		—		—			741,896		3.9	%
Christopher J. Whyte(11)		—		—			5,666		*
Yorktown Energy Partners V, L.P.(5)		7,500,000		86.9	%		7,664,892		39.8	%
Yorktown Energy Partners VI, L.P.(5)		—		—			824,265		4.3	%
Yorktown Energy Partners VII, L.P.(5)		—		—			736,230		3.8	%
Lubar Equity Fund, LLC(9)		—		—			736,230		3.8	%
Neo Canyon Exploration, L.P.(12)		—		—			156,805		*
All officers and directors as a group (10 persons)(4)		8,512,017		95.9	%		11,285,965		70.9	%


*		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. Gives effect to (i) the consummation of the transactions described under “Certain relationships and related party transactions—The contribution agreement,” (ii) the sale of 5,605,377 shares of common stock in this offering, (iii) the conversion of convertible notes into 1,472,460 shares of our common stock, (iv) the grant of 322,500 restricted shares to our named executive officers and the related bonus for taxes as set forth under “Management—Grants of plan based awards,” and (v) the election by each of Messrs. Brandi, Lubar and Whyte to receive 5,666 shares of our common stock and Mr. Crain to receive 2,833 shares of our common stock in lieu of cash for all or a portion of their 2007 director fees.

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(3)		Has a principal business address of c/o Approach Resources Inc., One Ridgmar Centre, 6500 W. Freeway, Suite 800, 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		152,892
Steven P. Smart		28,845
Glenn W. Reed		34,614
Ralph P. Manoushagian		28,845


(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

Since our inception, we have entered into the following transactions and contractual arrangements with our officers, directors and principal stockholders. Although we have not historically had formal policies and procedures regarding the review and approval of related party transactions, all transactions outside of the ordinary course of business between us and any of our officers, directors and principal stockholders were approved by our board of directors. Prior to the completion of this offering, our board of directors intends to adopt a written policy that will require our Audit Committee to review on an annual basis all transactions with related parties, or in which a related party has a direct or indirect interest, and to determine whether to ratify or approve the transaction after consideration of the related party’s interest in the transaction and other material facts. We believe that the terms of these arrangements and agreements are at least as favorable as they would have been had we contracted with an unrelated third party.

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 common stock of Approach Resources Inc. in exchange for their respective contributions. Neo Canyon Exploration, L.P. will receive an aggregate of 4,239,243 shares of our common stock, of which 2,061,290 shares are being offering hereby, 156,805 shares are subject to the over-allotment option granted to the underwriters by the selling stockholder and 2,021,148 shares are being redeemed by us. The stockholders of Approach Oil & Gas Inc. are receiving an aggregate of 989,157 shares of our common stock.

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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, at which time all principal and interest are due. These notes are initially convertible at the election of the lender into shares of equity securities of Approach Oil & Gas Inc. at $100 per share on December 31, 2007, or earlier if we sell substantially all of the assets of Approach Oil & Gas Inc. Upon consummation of the offering contemplated by this prospectus, the notes will 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 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 Yorktown, which has one representative, Bryan H. Lawrence, who serves as a member of our board of directors. 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

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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.

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

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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 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 1,246,155 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 253,650 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 April 26, 2006, Yorktown Energy Partners VI, L.P. loaned $3,500,000 to Approach Oil & Gas Inc. under a convertible promissory note to fund the acquisition of leaseholds in Kentucky. This

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note accrued interest at a rate of 6.00% per annum and was due and payable within 60 days following written demand by the lender. The note was convertible at the election of the lender into shares of equity securities of Approach Oil & Gas Inc. at any time prior to December 31, 2006. In complete satisfaction of the note, Approach Oil & Gas Inc. issued 35,000 shares of Approach Oil & Gas Inc. common stock to Yorktown Energy Partners VI, L.P. on July 5, 2006. Yorktown Energy Partners VI, L.P. is an affiliate of Yorktown, which has one representative, Bryan H. Lawrence, who serves as a member of our board of directors.

On May 10, 2006, we acquired interests in oil and gas properties in Western Kentucky from Hallador Petroleum Company for approximately $3.4 million in cash. Hallador Petroleum Company was owned 32% by Yorktown Energy Partners VI, L.P., an affiliate of Yorktown, 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.

We have a gas purchase contract with Ozona Pipeline Energy Company, pursuant to which we sell and deliver natural gas to Ozona Pipeline. Ozona Pipeline could be deemed to be an affiliate of Neo Canyon Exploration, L.P. Immediately after the closing of this offering, Neo Canyon Exploration, L.P. will own 0.8% of our outstanding common stock. The amount of gas purchased by Ozona Pipeline from us was approximately $10,220,516 in 2004, $79,852,806 in 2005 and $81,288,448 in 2006. Ozona Pipeline has purchased approximately $32,134,908 of gas from us through June 30, 2007, and we anticipate selling additional gas to Ozona Pipeline following this offering. We believe that the terms of these transactions reflect, and will continue to reflect, terms that would be no less favorable to us than those that would be available between unaffiliated third parties.

We have paid the following amounts to Neo Canyon Exploration, L.P. with respect to Neo Canyon’s working interest in the Ozona Northeast field: $14,077,357 in 2005, $20,073,261 in 2006 and $7,536,208 through June 2007.

In addition, we have paid the following amounts to J. Cleo Thompson and James Cleo Thompson Jr., L.P. for their portion of the 30% working interest and a royalty interest related to the Ozona Northeast and Cinco Terry fields: $943,869 in 2004, $1,942,485 in 2005, $3,283,819 in 2006 and $1,555,933 through June 2007. J. Cleo Thompson and James Cleo Thompson Jr., L.P. could be deemed to be an affiliate of Neo Canyon Exploration, Ltd.

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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 immediately prior to and immediately following the closing of 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)

Name of selling stockholder(1)

Number

Percent

offered

redeemed by us

Number

Percent

Neo Canyon Exploration, L.P.(4)

4,239,243

27.0%

2,061,290

2,021,148

156,805

0.8%


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


(2)		Based upon an aggregate of 15,671,560 shares to be outstanding following (i) the consummation of the transactions described under “Certain relationships and related party transactions—The contribution agreement,” (ii) the conversion of convertible notes into 1,472,460 shares of our common stock, (iii) the grant of 322,500 restricted shares to our named executive officers and the related bonus for taxes as set forth under “Management—Grants of plan based awards,” and (iv) the election by each of Messrs. Brandi, Lubar and Whyte to receive 5,666 shares of our common stock and Mr. Crain to receive 2,833 shares of our common stock in lieu of cash for all or a portion of their 2007 director fees.


(3)		Based upon an aggregate of 19,255,789 shares to be outstanding following this offering. In addition to the shares referenced in footnote (2) above, this also gives effect to our repurchase of shares of our common stock from the selling stockholder.


(4)		James Cleo Thompson, Jr. is the managing member of J. Cleo Thompson Petroleum Management, L.L.C., which is the sole general partner of this selling stockholder. By virtue of his position with J. Cleo Thompson Petroleum Management, L.L.C., Mr. Thompson is deemed to hold investment power and voting control over the shares held by this selling stockholder. The selling stockholder is not a registered broker-dealer or an affiliate of a registered broker-dealer. For a description of how the selling stockholder received its shares, see “Certain relationships and related party transactions—The contribution agreement.”

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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

As of October 15, 2007 we had a total of 8,628,369 shares of our common stock outstanding. Additionally, options to purchase 274,041 shares of common stock are currently outstanding and have been granted to certain members of our management and employees. 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 19,255,789 shares of common stock outstanding, or 20,405,789 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 $0.01 per share, covering up to an aggregate of 10,000,000 shares of preferred stock. Each class

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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;

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

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

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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, (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,

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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

American Stock Transfer & Trust Company 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.

Upon the closing of this offering, we will have 19,255,789 shares of common stock outstanding and outstanding options to purchase 274,041 shares of our common stock. All of the 7,666,667 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 this offering (a total of 11,589,122 shares) will be “restricted securities” within the meaning of Rule 144 under the Securities Act and may not

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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 552,894 shares that are currently held by former employees not subject to a lock-up agreement or issuable upon the exercise of options outstanding under our long-term incentive plan and up to an additional 2,027,440 shares covered by grants that we are permitted to award under our existing long-term 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, 11,589,122 shares 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.

Stock issued under employee plans

We intend to file a registration statement on Form S-8 under the Securities Act to register approximately 2,027,440 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

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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, commodity derivative transaction, 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 Wachovia Capital Markets, LLC 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.
Wachovia Capital Markets, LLC
KeyBanc Capital Markets Inc.
Tudor, Pickering & Co. Securities, Inc.

Total		7,666,667

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, pro rata, up to an additional 993,195 shares of common stock from us and 156,805 shares of common stock from 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 383,333 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

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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.

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.

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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 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 $1.3 million.

We and the selling stockholder have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, to the extent they arise out of untrue statements or alleged untrue statements of material facts contained in the offering materials, including this prospectus, or omissions or alleged omissions of material facts required or necessary to be stated therein, with an exception for certain information furnished to us by the underwriters for use in such offering materials.

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.

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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.

Affiliates of J.P. Morgan Securities Inc. will receive in excess of 10% of the net proceeds from this offering. As a result, J.P. Morgan Securities Inc. may be deemed to have a “conflict of interest” under Rule 2710(h)(1) of the Conduct Rules of the Financial Industry Regulatory Authority, also referred to as FINRA. Accordingly, this offering will be made in compliance with Conduct Rule 2720(c)(3), which requires that the initial public offering price can be no higher than that recommended by a “qualified independent underwriter,” as defined by FINRA. In view of J.P. Morgan Securities Inc.’s relationship with us, the offering is being conducted in accordance with the rules of FINRA, Wachovia Capital Markets, LLC 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 Wachovia Capital Markets, LLC 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,

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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 and MacNaughton, an independent engineering firm, and present values of proved reserves as of December 31, 2005 and 2004 prepared by Cawley, Gillespie & Associates, Inc, an independent engineering firm. These estimates are included in this prospectus in reliance upon the authority of DeGolyer and 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 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 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., One Ridgmar Centre, 6500 W. Freeway, Suite 800, 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 Mcf 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.

Offset well. An existing wellbore close to a proposed well that can provide information for planning the proposed well, such as subsurface geology and pressure regimes.

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.

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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.

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. Has the meaning given to such term in Rule 4-10(a)(3) of Regulation S-X, which defines proved developed reserves as follows:

Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as proved developed reserves only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.

Proved reserves. Has the meaning given to such term in Rule 4-10(a)(2) of Regulation S-X, which defines proved reserves as follows:

Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions.

(i) Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test. The area of a reservoir considered proved includes (A) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any, and (B) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir.

(ii) Reserves which can be produced economically through application of improved recovery techniques (such as fluid injection) are included in the proved classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based.

(iii) Estimates of proved reserves do not include the following: (A) Oil that may become available from known reservoirs but is classified separately as indicated additional reserves; (B) crude oil, natural gas, and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors; (C) crude oil, natural gas, and natural gas liquids, that may occur in undrilled prospects; and (D) crude oil, natural gas, and natural gas liquids, that may be recovered from oil shales, coal, gilsonite and other such sources.

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Proved undeveloped reserves or “PUDs.” Has the meaning given to such term in Rule 4-10(a)(4) of Regulation S-X, which defines proved undeveloped reserves as follows:

Proved undeveloped oil and gas reserves are 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. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir.

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.

Successful 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.

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Tcfe. Trillion cubic feet equivalent, determined using the ratio of six Mcf of gas to one Bbl of oil, condensate or gas liquids.

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
Unaudited Combined Balance Sheet as of December 31, 2006 and June 30, 2007		F-27
Unaudited Combined Statements of Operations for the six months ended June 30, 2006 and 2007		F-28
Unaudited Combined Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2007		F-29
Unaudited Combined Statements of Cash Flows for the six months ended June 30, 2006 and 2007		F-30
Notes to Unaudited Combined Financial Statements		F-31
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-37
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 six months ended June 30, 2006 and 2007 (unaudited)		F-38
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 six months ended June 30, 2006 and 2007 (unaudited)		F-39

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.

/s/ 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 sales payable		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		$	43,263,789		$	46,671,926
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		1,943,366			2,658,791			2,415,546
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		6,149,320			16,288,111			24,789,894


OPERATING INCOME (LOSS)		(467,040	)		26,975,678			21,882,032
OTHER:
Interest income (expense), net		200,870			(802,065	)		(3,813,589	)
Realized gain (loss) on commodity derivatives		—			(2,924,351	)		6,221,927
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	)
Share-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
Dry hole costs		—			1,187,284			1,614,324
Share-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			40,589,141			34,304,823
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	)		(73,730,179	)		(59,351,506	)
Additions to other property and equipment, net		(147,516	)		(39,950	)		(32,139	)


Cash used in investing activities		(26,859,220	)		(72,224,069	)		(59,383,645	)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock		22,394,142			2,990,759			6,498,335
Borrowings under credit facility		2,700,000			103,775,000			119,547,000
Repayment of amounts outstanding under credit facility		(2,600,000	)		(74,450,000	)		(101,353,000	)
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
Retirement of loan to stockholder in exchange for shares of common stock	$	—		$	—		$	333,499

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.

F-7

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

Oil and gas properties and operations

Capitalized costs

Our oil and gas properties comprised the following at December 31:



	2005			2006


Mineral interests in properties
Unproved properties	$	694,375		$	4,206,767
Proved properties		11,813,506			12,166,474
Wells and related equipment and facilities		82,767,971			137,753,247
Uncompleted wells, equipment and facilities		2,534,360			1,501,092


Total costs		97,810,212			155,627,580
Less accumulated depreciation, depletion and amortization		(9,144,817	)		(23,621,460	)


	$	88,665,395		$	132,006,120

We follow the successful efforts method of accounting for our oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells that find proved reserves, to drill and equip development wells and related asset retirement costs are capitalized. Costs to drill exploratory wells are capitalized pending determination of whether the wells have found proved reserves. If we determine that the wells do not find proved reserves, the costs are charged to expense. There were no exploratory wells capitalized pending determination of whether the wells found proved reserves at December 31, 2005 or 2006. Geological and geophysical costs, including seismic studies, and costs of carrying and retaining unproved properties are charged to expense as incurred. We capitalize interest on expenditures for significant exploration and development projects that last more than six months while activities are in progress to bring the assets to their intended use. Through December 31, 2006, we have capitalized no interest costs because our exploration and development projects individually last less than two months. Costs incurred to maintain wells and related equipment are charged to expense as incurred.

On the sale or retirement of a complete unit of a proved property, the cost and related accumulated depreciation, depletion, and amortization are eliminated from the property accounts, and the resultant gain or loss is recognized. On the retirement or sale of a partial unit of proved property, the cost is charged to accumulated depreciation, depletion, and amortization with a resulting gain or loss recognized in income.

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 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.

Unproved oil and gas properties that are individually significant are periodically assessed for impairment of value, and a loss is recognized at the time of impairment by providing an

F-8

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

impairment allowance. We noted no impairments of our unproved properties during either year ended December 31, 2004 or 2005. However, we recorded an impairment of $558,446 during the year ended December 2006 related to our assessment of unproved properties. The impairment resulted from our conclusion that proved reserves would not be economically recovered from our leaseholds in our Pecos County, Texas prospect because we drilled dry holes on the prospect and decided to abandon drilling efforts in this area.

Capitalized costs related to proved oil and gas properties, including wells and related equipment and facilities, are evaluated for impairment based on an analysis of undiscounted future net cash flows in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets . If undiscounted cash flows are insufficient to recover the net capitalized costs related to proved properties, then we recognize an impairment charge in income from operations equal to the difference between the net capitalized costs related to unproved properties and their estimated fair values based on the present value of the related future net cash flows. We noted no impairment of our proved properties based on our analysis for the years ended December 31, 2004, 2005 or 2006.

On the sale of an entire interest in an unproved property for cash or cash equivalent, gain or loss on the sale is recognized, taking into consideration the amount of any recorded impairment if the property had been assessed individually. If a partial interest in an unproved property is sold, the amount received is treated as a reduction of the cost of the interest retained.

Oil and gas operations

Production costs, including pumpers’ salaries, saltwater disposal, ad valorem taxes, repairs and maintenance, expensed workovers and other operating expenses are expensed as incurred and included in lease operating expense on our combined statements of operations.

Exploration expenses include dry hole costs, delay rentals and geological and geophysical costs.

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.

F-9

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

Oil and gas sales payable represents amounts collected from purchasers for oil and gas sales which are either revenues due to other revenue interest owners or severance taxes due to the respective state or local tax authorities. Generally, we are required to remit amounts due under these liabilities within 30 days of the end of the month in which the related production occurred.

Dependence on major customers

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.

Dependence on suppliers

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 oil and 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. We believe that there are potential alternative providers of drilling services and that it may be necessary to establish relationships with new contractors. However, there can be no assurance that we can establish such relationships and that those relationships will result in increased availability of drilling rigs.

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 $3,500,000 and the payment of approximately $7,000,000 in January 2006. The note provided

F-10

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

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 commodity derivative accounting criteria are met. For qualifying cash flow commodity derivatives, the gain or loss on the derivative is deferred in accumulated other comprehensive income (loss) to the extent the commodity derivative is effective. The ineffective portion of the commodity derivative is recognized immediately in the statement of operations. Gains and losses on commodity derivative 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 commodity derivative 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-11

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.

Share-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-12

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-13

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 February 2006, one of our employees voluntarily resigned. At the time of his resignation, the employee held 34,615 shares of ARI common stock and 9,615 options to acquire ARI common stock at $10.00 per share. Additionally, the employee owed us $333,499 of principal and interest under a full-recourse note receivable for the initial purchase of his shares. On February 17, 2006, we entered into an agreement to repurchase the shares and options, net of the principal and interest due under the note receivable. We paid $38.45 per share, the fair value of our common stock on February 17, 2006, for the 34,615 shares, or $1,300,962 less the outstanding principal and interest of $333,499 for total cash of $997,463. As discussed in Note 5,

F-14

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

Stock Options, we paid $273,547 in cash to cancel the vested options held by the employee on February 17, 2006.

On January 8, 2007, the remaining notes and accrued interest were repaid in exchange for 84,550 shares of common stock held by management, based on the fair value of ARI common shares of $49.49 per share at that date. 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 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

On April 17, 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 on July 5, 2006.

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. The bank determines our borrowing base semi-annually on or before each March 1 and September 1 based on our oil and gas reserves. We or the bank can each request one additional borrowing base redetermination each calendar year. 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 sum of the LIBOR plus an applicable margin ranging from 1.25% to 2.00% based on the borrowings outstanding compared to the borrowing base. The interest rate applicable to our outstanding borrowings was approximately 7.75 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

F-15

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

of at least one. The modified current ratio represents the quotient of our current assets, less any unrealized gains on commodity derivatives plus amounts available under the Agreement divided by our current liabilities less unrealized losses on commodity derivatives. 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.


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-16

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

Had we followed the fair value recognition provisions of SFAS 123 for the years ended December 31, 2004 and 2005, our operating results and earnings per share would have been affected as follows:



	2004			2005


Net income (loss) as reported	$	(266,170	)	$	12,058,248


Basic and diluted earnings (loss) per share as reported	$	(0.14	)	$	4.03


Share-based employee compensation costs, net of related tax effects, included in net income (loss) as reported		—			—
Share-based employee compensation costs, net of related tax effects, that would have been included in net income (loss) if the fair-value-based method had been applied to all awards		(33,612	)		(33,612	)


Pro forma net income (loss) as if the fair-value-based method had been applied to all awards	$	(299,782	)	$	12,024,636


Pro forma basic and diluted earnings (loss) per share as if the fair-value-based method had been applied to all awards	$	(0.16	)	$	4.02

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		Aggregate
				exercise		term		intrinsic
	Shares			price		(in years)		value


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	$	4,556,554


Exercisable (fully vested) at December 31, 2006		115,385		$	10.00		7.63	$	4,556,554

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.

F-17

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

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.

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

F-18

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

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 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.

F-19

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

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

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. Other income (expense) on our combined statement of operations includes 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.

F-20

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

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 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 possible resolution of these matters is expected to result in losses not already accrued at December 31, 2006 ranging from zero to $60,000.

F-21

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

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		1,347		3,769
Development costs		24,713		59,972		51,820


Total costs incurred	$	27,661	$	73,280	$	60,016

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	$	5,682		$	43,264		$	46,672
Production costs		(586	)		(4,885	)		(5,624	)
Exploration expenses		(2,396	)		(734	)		(1,640	)
Depletion		(1,223	)		(8,006	)		(14,541	)
Income tax expenses		(1,110	)		(11,101	)		(9,114	)


Results of operations	$	367		$	18,538		$	15,753

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-22

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 following is a discussion of the material changes in our proved reserve quantities for the years ended December 31, 2004, 2005 and 2006:

Year ended December 31, 2004
The success of our drilling program in our Ozona Northeast field resulted in our classification of reserves as proved, which accounts for the additional quantities under extensions and discoveries.

F-23

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

Year ended December 31, 2005
The continued success of our drilling program in our Ozona Northeast field resulted in our classification of reserves as proved, which accounts for the additional quantities listed under extensions and discoveries. Additionally we purchased the working interests of one of the non-operating participants in our Ozona Northeast field during 2005, which accounts for the additional quantities listed under purchases of minerals in place. The approval of the 20-acre down spacing in December 2005 and the increase in average gas price attributable to our proved reserves from $6.93 per Mcf at December 31, 2004 to $9.20 per Mcf at December 31, 2005, were the primary reason for the additional quantities listed under revisions to previous estimates.

Year ended December 31, 2006
The continued success of our drilling program in our Ozona Northeast field along with the success of our drilling program in our Cinco Terry field resulted in our classification of reserves as proved, which accounts for the additional quantities listed under extensions and discoveries. The average gas price attributable to our proved reserves decreased from $9.20 per Mcf at December 31, 2005 to $6.55 per Mcf at December 31, 2006, which was the primary reason for the decrease in quantities listed under revisions to previous estimates.

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 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.

F-24

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

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 commodity derivative transactions outstanding at each period end. The effect of commodity derivative transactions on the future cash flows for the years ended December 31, 2004, 2005, and 2006 was immaterial.

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		(5,097	)		(38,379	)		(41,047	)
Net change due to extensions, discoveries and improved recovery		65,375			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			(4,303	)
Net changes in income taxes		—			(62,478	)		52,303


	$	60,278		$	146,439		$	77,877

F-25

Approach Resources Inc. and affiliated entities
Notes to combined financial statements—(continued)

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-26

Approach Resources Inc. and affiliated entities
Unaudited combined balance sheets



December 31, 2006				June 30, 2007


ASSETS
CURRENT ASSETS:
Cash	$	4,911,241		$	18,492,273
Accounts receivable:
Joint interest owners		4,812,439			3,338,088
Oil and gas sales		3,457,948			3,941,065
Unrealized gain on commodity derivatives		4,504,996			1,518,541
Prepaid expenses and other current assets		424,081			1,084,706


Total current assets		18,110,705			28,374,673
PROPERTIES AND EQUIPMENT:
Oil and gas properties, at cost, using the successful efforts method of accounting		155,627,580			172,362,797
Furniture, fixtures and equipment		255,451			264,483


		155,883,031			172,627,280
Less accumulated depreciation, depletion and amortization		(23,771,187	)		(29,873,129	)


Net properties and equipment		132,111,844			142,754,151
INVESTMENT		—			917,100
UNREALIZED GAIN ON COMMODITY DERIVATIVES		—			84,651
OTHER ASSETS		86,169			176,858


Total assets	$	150,308,718		$	172,307,433



LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	7,513,219		$	6,806,587
Oil and gas sales payable		4,940,415			5,431,411
Accrued liabilities		2,967,780			2,459,442


Total current liabilities		15,421,414			14,697,440
NON-CURRENT LIABILITIES:
Long-term debt		47,619,000			46,769,000
Convertible debt		—			20,000,000
Deferred income taxes		17,549,107			18,609,049
Asset retirement obligations		147,644			163,004


Total liabilities		80,737,165			100,238,493
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock		—			—
Common stock		30,654			30,021
Additional paid-in capital		43,067,000			38,970,949
Retained earnings		30,658,223			33,067,970
Loans to stockholders		(4,184,324	)		—


Total stockholders’ equity		69,571,553			72,068,940


Total liabilities and stockholders’ equity	$	150,308,718		$	172,307,433

See accompanying notes to these combined financial statements.

F-27

Approach Resources Inc. and affiliated entities
Unaudited combined statements of operations



	For the six months ended June 30,
	2006			2007


REVENUES:
Oil and gas sales	$	26,389,695		$	19,081,931
EXPENSES:
Lease operating expense		1,992,318			2,022,844
Severance and production taxes		841,437			748,491
Exploration		992,443			632,958
General and administrative		1,233,998			2,730,169
Depletion, depreciation and amortization		6,972,717			6,107,848


Total expenses		12,032,913			12,242,310


OPERATING INCOME		14,356,782			6,839,621
OTHER:
Interest income (expense), net		(1,708,412	)		(1,954,418	)
Realized gain on commodity derivatives		3,084,527			2,243,970
Change in fair value of commodity derivatives		5,446,951			(2,901,804	)


INCOME BEFORE PROVISION FOR INCOME TAXES		21,179,848			4,227,369
PROVISION FOR INCOME TAXES		7,434,574			1,817,622


NET INCOME	$	13,745,274		$	2,409,747


EARNINGS PER SHARE:
Basic	$	4.62		$	0.81


Diluted	$	4.49		$	0.74


WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic		2,975,138			2,984,105


Diluted		3,060,083			3,297,655

See accompanying notes to these combined financial statements.

F-28

Approach Resources Inc. and affiliated entities
Unaudited combined statement
of changes in stockholders’ equity
for the six months ended June 30, 2007



												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	)		—		—			—
Share-based compensation expense		—			—			87,640			—		—			87,640
Net income		—			—			—			2,409,747		—			2,409,747


BALANCE, June 30, 2007		3,002,085		$	30,021		$	38,970,949		$	33,067,970	$	—		$	72,068,940

See accompanying notes to these combined financial statements.

F-29

Approach Resources Inc. and affiliated entities
Unaudited combined statements of cash flows



	For the six months ended June 30,
	2006			2007

	(unaudited)			(unaudited)
OPERATING ACTIVITIES:
Net income (loss)	$	13,745,274		$	2,409,747
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depletion, depreciation and amortization		6,972,717			6,107,848
Amortization of loan origination fees		39,770			52,574
Change in fair value of commodity derivatives		(5,446,951	)		2,901,804
Dry hole costs		992,443			632,958
Share-based compensation expense		33,612			87,640
Deferred income taxes		7,060,908			1,059,942
Changes in operating assets and liabilities:
Accounts receivable		2,918,923			991,234
Prepaid expenses and other current assets		(420,085	)		(660,625	)
Accounts payable		(6,679,914	)		(706,632	)
Oil and gas sales payable		(1,430,969	)		490,996
Accrued liabilities		(440,652	)		(508,338	)


Cash provided by operating activities		17,345,076			12,859,148
INVESTING ACTIVITIES:
Additions to oil and gas properties		(37,602,807	)		(17,358,721	)
Investments		—			(917,100	)
Changes in other property and equipment, net		4,509			(9,032	)


Cash used in investing activities		(37,598,298	)		(18,284,853	)
FINANCING ACTIVITIES:
Borrowings under credit facility, net		72,805,000			39,418,500
Repayments of borrowings under credit facility		(57,663,000	)		(40,268,500	)
Proceeds from issuance of convertible debt		—			20,000,000
Borrowing from stockholder		3,500,000			—
Purchase of common stock		(997,463	)		—
Stock option cancellation payment		(273,547	)		—
Income taxes on interest income from loans to stockholders		(40,773	)		—
Loan origination fees		(76,616	)		(143,263	)


Cash provided by financing activities		17,253,601			19,006,737


CHANGE IN CASH AND CASH EQUIVALENTS		(2,999,621	)		13,581,032
CASH AND CASH EQUIVALENTS , beginning of period		3,219,463			4,911,241


CASH AND CASH EQUIVALENTS , end of period	$	219,842		$	18,492,273


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	1,641,098		$	1,868,550


Cash paid for income taxes	$	450,000		$	1,200,000


SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION:
Retirement of loans to stockholders in exchange for shares of common stock	$	333,499		$	4,184,324

See accompanying notes to these combined financial statements.

F-30

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 commodity derivative contracts, interest rates, estimates of reserves, drilling risks, geological risks, transportation restrictions, the timing of acquisitions, product demand, market competition, and interruptions of production. You should read these 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

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

F-31

Approach Resources Inc. and affiliated entities
Notes to unaudited combined financial statements—(continued)

potentially dilutive securities unless their impact is anti-dilutive. The following are reconciliations of the numerators and denominators of our basic and diluted earnings per share:



	Six Months Ended June 30, 2006
	Income (numerator)		Shares (denominator)		Per-share amount


Basic earnings per share:
Net income		13,745,274		2,975,138	$	4.62

Effect of dilutive securities:
Stock options, treasury method		—		84,945
Non-vested restricted shares(1)		—		—
Convertible debt, if-converted method(2)		—		—


Net income plus assumed conversions		13,745,274		3,060,083	$	4.49



	Six Months Ended June 30, 2007
	Income (numerator)		Shares (denominator)		Per-share amount


Basic earnings per share:
Net income		2,409,747		2,984,105	$	0.81

Effect of dilutive securities:
Stock options, treasury method		—		92,070
Non-vested restricted shares(1)		—		21,250
Convertible debt, if-converted method(2)		23,014		200,230


Net income plus assumed conversions		2,432,761		3,297,655	$	0.74


(1)		We issued these shares in March 2007. Prior to that time, there were no restricted shares outstanding.

(2)		The outstanding principal and interest under our convertible debt is convertible into AOG common shares at $100 per share at June 30, 2007. We issued the convertible debt that gives rise to these dilutive securities during June 2007. Prior to that time, there was no convertible debt outstanding.


2.	Loans to stockholders and stockholder notes payable

During each of the years ended December 31, 2003 and 2004, we issued 450,000 shares of common stock in exchange for $585,000 in cash and $3,915,000 in full-recourse notes receivable from employees and entities owned by or affiliated with management. The notes had an outstanding principal balance of $3,613,850 at December 31, 2006. On January 8, 2007, the remaining notes and accrued interest of $570,474 were repaid in exchange for 84,550 shares of

F-32

Approach Resources Inc. and affiliated entities
Notes to unaudited combined financial statements—(continued)

common stock held by management, based on the fair value of ARI common shares of $49.49 per share at that date. The notes provided for interest at 6.00% 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 was reported net of related tax income as a component of additional paid-in capital in the accompanying statement of changes in stockholders’ equity.


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. The bank determines our borrowing base semi-annually on or before each March 1 and September 1 based on our oil and gas reserves. We or the bank can each request one additional borrowing base redetermination each calendar year. As of December 31, 2006, the borrowing base was $60,000,000. Borrowings outstanding under the Agreement at December 31, 2006 and June 30, 2007 were $47,619,000 and $46,769,000, 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 sum of the LIBOR plus an applicable margin ranging from 1.25% to 2.00% based on the borrowings outstanding compared to the borrowing base. The interest rate applicable to our outstanding borrowings was approximately 7.75% as of December 31, 2006 and 6.87% as of June 30, 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 eighths of one percent (0.375%) of the unused portion of the borrowing base. The borrowings are collateralized by substantially all of our oil and gas properties. The Agreement contains various covenants, the most restrictive of which requires us to maintain a modified current ratio of at least one. The modified current ratio represents the quotient of our current assets, less any unrealized gains on commodity derivatives plus amounts available under the Agreement divided by our current liabilities less unrealized losses on commodity derivatives. We were in compliance with the covenants at December 31, 2006 and June 30, 2007.

We also have outstanding unused letters of credit under the Agreement totaling $400,000 at June 30, 2007, which reduce amounts available for borrowing under the Agreement. An additional letter of credit for $2.6 million was issued in July 2007.


4.	Share-based compensation

On March 14, 2007, we granted 21,250 restricted shares to an executive officer in connection with his employment. 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. The grant-date fair value of the restricted shares was determined by the management and approved by the Board of

F-33

Approach Resources Inc. and affiliated entities
Notes to unaudited combined financial statements—(continued)

Directors based upon an analysis of management’s estimates of the equity value of the Company. These estimates of equity value were based on an analysis of estimated cash flow and net asset value for the Company relative to comparable public companies’ cash flow, net asset valuations and equity valuations. As of June 30, 2007, all of the restricted shares were unvested.

In June 2007, the board of directors and stockholders approved the 2007 Stock Incentive Plan (“the 2007 Plan”). Under the 2007 Plan, we may grant stock options, stock appreciation rights, restricted stock units, performance awards, unrestricted stock awards and other incentive awards. The 2007 Plan reserves 10 percent of our outstanding common shares as adjusted each year, plus shares of common stock that were available for grant of awards under our prior plan. Awards of any stock options are to be priced at not less than the fair market value at the date of the grant. The vesting period of any stock option award is to be determined by the board at the time of the grant. The term of each stock option is to be fixed at the time of grant and may not exceed 10 years. In June 2007, our board of directors authorized the grant of a total of 100,000 shares of common stock to our named executive officers and a member of our technical team. In addition, our board of directors authorized the grant of options to purchase 75,000 shares of common stock to key employees. These grants will become effective upon the execution and delivery of the underwriting agreement relating to this offering. The exercise price for the authorized stock options will be the initial public offering price of our common stock. At June 30, 2007, no awards had been made under the 2007 Plan.

In July 2007, we received $240,380 in cash pursuant to an exercise of options to purchase 24,038 shares of our common stock.


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 six months ended June 30, 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 commodity derivatives were for an average volume of approximately 186,000 MMBtu per month. Realized gains from the swaps amounted to $3,084,527 and $2,243,970 for the six months ended June 30, 2006 and 2007, respectively. The estimated

F-34

Approach Resources Inc. and affiliated entities
Notes to unaudited combined financial statements—(continued)

unrealized gain or loss from the swaps amounted to a gain of $5,446,951 and a loss of $2,901,804 at June 30, 2006 and 2007, respectively. Realized gains and losses and 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

Operating leases


8.	Convertible debt

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, at which time all principal and interest are due. These notes are initially convertible at the election of the lender into shares of equity securities of Approach Oil & Gas Inc. at $100 per share on December 31, 2007, or earlier if we sell substantially all of the assets of Approach Oil & Gas Inc. Upon consummation of the offering contemplated by this prospectus, the notes will automatically, and without further action required by any person, convert into shares of Approach Resources Inc. common stock. The number of shares of Approach Resources Inc. 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 Approach Resources Inc. 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

F-35

Approach Resources Inc. and affiliated entities
Notes to unaudited combined financial statements—(continued)

agreement. The total principal and interest 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 Yorktown, which has one representative, Bryan H. Lawrence, who serves as a member of our board of directors. Lubar Equity Fund, LLC is an affiliate of Sheldon B. Lubar, who serves as a member of our board of directors.

The automatic conversion of the notes into shares of Approach Resources Inc. common stock upon the closing of the offering contemplated by this prospectus constitutes a contingent beneficial conversion feature because the price per share into which these notes will be convertible is less than the price to be paid by other parties acquiring Approach Resources Inc. common stock. Immediately upon the closing of the offering contemplated by this prospectus, we will be required to measure the intrinsic value of the beneficial conversion feature and record such value as a charge to interest expense. The value of the beneficial conversion feature, and therefore the amount of interest expense, that would have been recognized if the notes were converted on June 30, 2007, amounted to $1,507,108.


9.	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-36

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.

/s/ Hein & Associates LLP

Dallas, Texas

May 7, 2007

F-37

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 six months ended June 30, 2006 and 2007 (unaudited)



					Six months ended
	Year ended December 31,				June 30,
	2005		2006		2006		2007

					(unaudited)		(unaudited)

Crude oil and natural gas sales	$	19,371,892	$	19,558,497	$	11,055,943	$	7,822,649
Direct operating expenses		2,484,364		2,584,567		1,413,899		1,272,435


Net revenue	$	16,887,528	$	16,973,930	$	9,642,044	$	6,550,214

See notes to historical summaries.

F-38

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 six months ended June 30, 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-39

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 six months ended June 30, 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 six months ended June 30, 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 $151,667, $212,357, $168,514 and $338,991, respectively. Such overhead charges are included in direct operating expenses.

F-40

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 in economic factors. The Neo Canyon Acquisition Properties’ proved reserves are summarized in the table below. The data in the following tables represents the reserve quantities and future net cash flows attributable to the approximately 30% working interest in the Ozona Northeast field not already owned by Approach.



	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

F-41

The following is a discussion of the material changes in our proved reserve quantities for the years ended December 31, 2005 and 2006:

Year ended December 31, 2005

The success of our exploratory drilling program in our Ozona Northeast field resulted in our classification of reserves as proved, which accounts for the additional quantities listed under extensions and discoveries. The average gas price attributable to our proved reserves increased from $6.93 per Mcf at December 31, 2004 to $9.20 per Mcf at December 31, 2005, which was the primary reason for the additional quantities listed under revisions to previous estimates.

Year ended December 31, 2006

The continued success of our exploratory drilling program in our Ozona Northeast field resulted in our classification of reserves as proved, which accounts for the additional quantities listed under extensions and discoveries. The average gas price attributable to our proved reserves decreased from $9.20 per Mcf at December 31, 2005 to $6.55 per Mcf at December 31, 2006, which was the primary reason for the decrease in quantities listed under revisions to previous estimates.

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 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.

F-42

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-43

7,666,667 shares

Common stock

Prospectus


JPMorgan	Wachovia Securities


Book running manager	Joint lead manager


KeyBanc Capital Markets	TudorPickering

, 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	$	4,331
NASD filing fee		14,607
NASDAQ Global Market application and entry listing fee		100,000
Accounting fees and expenses		200,000
Legal fees and expenses		700,000
Printing and engraving		150,000
Transfer agent and registrar fees		10,000
Miscellaneous fees and expenses		121,062

Total	$	1,300,000


*		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

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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.

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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.

5. On July 20, 2007, the Company issued 24,038 shares of common stock pursuant to the exercise of stock options held by a former executive officer at an exercise price of $10.00 per share. The issuance of these shares was exempt from the registration requirements of the Securities Act pursuant to Rule 701.


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.

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Exhibit
number			Description


	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 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.
	10	.16*	Second 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 July 20, 2007.
	10	.17*	Form of Registration Rights Agreement among Approach Resources Inc. and investors identified therein.
	10	.18*	Gas Purchase Contract dated May 1, 2004 between Ozona Pipeline Energy Company, as Buyer, and Approach Resources I, L.P. and certain other parties identified therein.
	10	.19*	Agreement Regarding Gas Purchase Contract dated May 26, 2006 between Ozona Pipeline Energy Company, as Buyer, and Approach Resources I, L.P. and certain other parties identified therein.
	10	.20*	Third 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 September 1, 2007.
	10	.21*	Partial Assignment of Oil and Gas Leases and Related Property dated effective August 1, 2006 among Neo Canyon Exploration, L.P. and the other assignors identified therein, and Approach Resources I, L.P., as assignee.
	10	.22*	Carry and Earning Agreement dated July 13, 2007 by and between EnCana Oil & Gas (USA) Inc. and Approach Oil & Gas Inc.
	10	.23*	Oil & Gas Lease dated February 27, 2007 between the lessors identified therein and Approach Oil & Gas Inc., as successor to Lynx Production Company, Inc.
	10	.24*	Specimen Oil and Gas Lease for Boomerang prospect between lessors and Approach Oil & Gas Inc., as successor to The Keeton Group, LLC, as lessee.
	10	.25	Gas Purchase Contract dated June 1, 2006 by and between Approach Operating, L.P. and Belvan Partners, L.P.
	10	.26	Lease Crude Oil Purchase Agreement dated May 1, 2004 by and between ConocoPhillips and Approach Operating LLC.
	21	.1*	List of Subsidiaries.
	23	.1	Consent of Hein & Associates LLP.
	23	.2	Consent of DeGolyer and MacNaughton.
	23	.3	Consent of Cawley, Gillespie & Associates, Inc.

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Exhibit
number			Description


	23	.4	Consent of Thompson & Knight LLP (contained in Exhibit 5.1).
	24	*	Power of Attorney.


*		Previously filed.


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.

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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 18th day of October, 2007.

APPROACH RESOURCES INC.


	By:	/s/ J. Ross Craft

J. Ross Craft

President and Chief Executive Officer


Signature		Title

/s/ J. Ross Craft J. Ross Craft		President, Chief Executive Officer and Director (Principal Executive Officer)

* Steven P. Smart		Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

* Bryan H. Lawrence		Director and Chairman of the Board of Directors

* James H. Brandi		Director

* James C. Crain		Director

* Sheldon B. Lubar		Director

* Christopher J. Whyte		Director

*By:	/s/ J. Ross Craft Attorney-in-fact

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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 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.
	10	.16*	Second 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 July 20, 2007.
	10	.17*	Form of Registration Rights Agreement among Approach Resources Inc. and investors identified therein.

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Exhibit
Number			Description


	10	.18*	Gas Purchase Contract dated May 1, 2004 between Ozona Pipeline Energy Company, as Buyer, and Approach Resources I, L.P. and certain other parties identified therein.
	10	.19*	Agreement Regarding Gas Purchase Contract dated May 26, 2006 between Ozona Pipeline Energy Company, as Buyer, and Approach Resources I, L.P. and certain other parties identified therein.
	10	.20*	Third 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 September 1, 2007.
	10	.21*	Partial Assignment of Oil and Gas Leases and Related Property dated effective August 1, 2006 among Neo Canyon Exploration, L.P. and the other assignors identified therein, and Approach Resources I, L.P., as assignee.
	10	.22*	Carry and Earning Agreement dated July 13, 2007 by and between EnCana Oil & Gas (USA) Inc. and Approach Oil & Gas Inc.
	10	.23*	Oil & Gas Lease dated February 27, 2007 between the lessors identified therein and Approach Oil & Gas Inc., as successor to Lynx Production Company, Inc.
	10	.24*	Specimen Oil and Gas Lease for Boomerang prospect between lessors and Approach Oil & Gas Inc., as successor to The Keeton Group, LLC, as lessee.
	10	.25	Gas Purchase Contract dated June 1, 2006 by and between Approach Operating, L.P. and Belvan Partners, L.P.
	10	.26	Lease Crude Oil Purchase Agreement dated May 1, 2004 by and between ConocoPhillips and Approach Operating LLC.
	21	.1*	List of Subsidiaries.
	23	.1	Consent of Hein & Associates LLP.
	23	.2	Consent of DeGolyer and 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.


*		Previously filed.

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Exhibit 1.1

APPROACH RESOURCES INC.

[ ] Shares of Common Stock

Underwriting Agreement

[ ], 2007

J.P. Morgan Securities Inc.
Wachovia Capital Markets, LLC
      As Representatives of the
      several Underwriters listed
      in Schedule 1 hereto

c/o J.P. Morgan Securities Inc.
277 Park Avenue
New York, New York 10172

Ladies and Gentlemen:

Approach Resources Inc., a Delaware corporation (the “Company”), proposes to issue and sell to the several Underwriters listed in Schedule 1 hereto (the “Underwriters”), for whom J.P. Morgan Securities Inc. (“JPMorgan”) and Wachovia Capital Markets, LLC (“Wachovia”) are acting as representatives (each a “Representative” and together, the “Representatives”), an aggregate of [ ] shares of common stock, par value $0.01 per share, of the Company (the “Common Stock”), and Neo Canyon Exploration, L.P., a Texas limited partnership (the “Selling Stockholder”), proposes to sell to the Underwriters [ ] shares of the Common Stock of the Company. The aggregate of [ ] shares to be sold by the Company and the Selling Stockholder is herein called the “Underwritten Shares.” At the option of the Underwriters, the Company proposes to issue and sell up to an additional [ ] shares of Common Stock and the Selling Stockholder proposes to sell an additional [ ] shares of Common Stock. The aggregate of [ ] additional shares to be sold by the Company and the Selling Stockholder is herein called the “Option Shares.” The Underwritten Shares and the Option Shares are herein referred to as the “Shares.” The shares of Common Stock of the Company to be outstanding after giving effect to the sale of the Shares are herein referred to as the “Stock.”

The Company and the Selling Stockholder hereby confirm their agreement with the several Underwriters concerning the purchase and sale of the Shares, as follows:

1. Registration Statement . The Company has prepared and filed with the Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the “Securities Act”), a registration statement (File No. 333-144512) including a prospectus, relating to the Shares. Such registration statement, as amended at the time it becomes effective, including the information, if any, deemed pursuant to Rule 430A, 430B or 430C under the Securities Act to be part of the registration statement at the time of its effectiveness (“Rule 430 Information”), is referred to herein as the “Registration Statement,” and as used herein, the term “Preliminary Prospectus” means each prospectus included in such registration statement (and any amendments thereto) before it becomes effective, any prospectus filed with the Commission pursuant to Rule 424(a) under the Securities Act and the prospectus included in the Registration Statement at the time of its effectiveness that omits Rule 430 Information, and the term “Prospectus” means the prospectus in the form first used (or made available upon request of purchasers pursuant to Rule 173 under the Securities Act) in connection with confirmation of sales of the Shares. If the Company has filed an abbreviated registration statement pursuant to Rule 462(b) under the Securities Act (the “Rule 462 Registration Statement”), then

any reference herein to the term “Registration Statement” shall be deemed to include such Rule 462 Registration Statement. Capitalized terms used but not defined herein shall have the meanings given to such terms in the Registration Statement and the Prospectus.

At the Time of Sale (as defined below), the Company had prepared the following information (collectively with the pricing information set forth on Annex C hereto, the “Time of Sale Information”): a Preliminary Prospectus dated [ ], 2007 (the “Marketing Preliminary Prospectus”), and each “free-writing prospectus” (as defined pursuant to Rule 405 under the Securities Act) listed on Annex C hereto. “Time of Sale” means [ ] P.M. (Eastern time) on the date of this Agreement.

2. Purchase of the Shares by the Underwriters .

(a) The Company agrees to issue and sell, and the Selling Stockholder agrees, severally and not jointly, to sell the Underwritten Shares to the several Underwriters as provided in this Agreement, and each Underwriter, on the basis of the representations, warranties and agreements set forth herein and subject to the conditions set forth herein, agrees, severally and not jointly, to purchase from the Company and the Selling Stockholder at a price per share of $[ ] (the “Purchase Price”) the number of Underwritten Shares (to be adjusted by you so as to eliminate fractional shares) determined by multiplying the aggregate number of Underwritten Shares to be sold by the Company and the Selling Stockholder by a fraction, the numerator of which is the aggregate number of Underwritten Shares to be purchased by such Underwriter as set forth opposite the name of such Underwriter in Schedule 1 hereto and the denominator of which is the aggregate number of Underwritten Shares to be purchased by all the Underwriters from the Company and the Selling Stockholder hereunder. The public offering price of the Shares is not in excess of the price recommended by Wachovia, acting as a “qualified independent underwriter” within the meaning of Rule 2720 of the Rules of Conduct of the National Association of Securities Dealers, Inc. (the “NASD”).

In addition, the Company agrees to issue and sell, and the Selling Stockholder agrees, severally and not jointly, to sell the Option Shares pro rata to the several Underwriters as provided in this Agreement, and each Underwriter, on the basis of the representations, warranties and agreements herein contained and subject to the conditions set forth herein, shall have the option to purchase, severally and not jointly, from the Company and the Selling Stockholder at the Purchase Price that portion of the number of Option Shares as to which such election shall have been exercised (to be adjusted by you so as to eliminate fractional shares) determined by multiplying such number of Option Shares to be sold by the Company and the Selling Stockholder by a fraction, the numerator of which is the maximum number of Option Shares which such Underwriter shall be entitled to be purchased as set forth opposite the name of such Underwriter in Schedule 1 hereto and the denominator of which is the aggregate number of Option Shares which all of the Underwriters are entitled to be purchased.

The Underwriters may exercise the option to purchase the Option Shares at any time in whole, or from time to time in part, on or before the thirtieth day following the date of the Prospectus, by written notice from the Representatives to the Company and the Selling Stockholder; provided, however, that such option may be exercised only for the purpose of covering any over-allotments that may be made by the Underwriters in the sale of the Firm Shares. No Option Shares shall be sold or delivered unless the Underwritten Shares previously have been, or simultaneously are, sold and delivered. Such notice shall set forth the aggregate number of Option Shares as to which the option is being exercised and the date and time when the Option Shares are to be delivered and paid for, which may be the same date and time as the Closing Date (as hereinafter defined) but shall not be earlier than the Closing Date nor later than the tenth full business day (as hereinafter defined) after the date of such notice (unless such time and date are postponed

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in accordance with the provisions of Section 12 hereof). Any such notice shall be given at least two business days prior to the date and time of delivery specified therein.

(b) The Company and the Selling Stockholder understand that the Underwriters intend to make a public offering of the Shares as soon after the effectiveness of this Agreement as in the judgment of the Representatives is advisable, and initially to offer the Shares on the terms set forth in the Prospectus. The Company and the Selling Stockholder acknowledge and agree that the Underwriters may offer and sell Shares to or through any affiliate of an Underwriter and that any such affiliate may offer and sell Shares purchased by it to or through any Underwriter.

(c) Payment for the Shares shall be made by wire transfer in immediately available funds to the account specified by the Company with respect to the Shares to be purchased from the Company and to the account specified by the Attorneys-in-Fact (as defined below) with respect to the Shares to be purchased from the Selling Stockholder to the Representatives in the case of the Underwritten Shares, at the offices of Thompson & Knight LLP, 1700 Pacific Avenue, Suite 3300, Dallas, Texas 75201 at 9:00 A.M., Dallas time, on [ ], 2007, or at such other time or place on the same or such other date, not later than the fifth business day thereafter, as the Representatives, the Company and the Attorneys-in-Fact may agree upon in writing in the case of the Underwritten Shares or, in the case of the Option Shares, on the date and at the time and place specified by the Representatives in the written notice of the Underwriters’ election to purchase such Option Shares. The time and date of such payment for the Underwritten Shares is referred to herein as the “Closing Date,” and the time and date for such payment for the Option Shares, if other than the Closing Date, is herein referred to as the “Additional Closing Date.”

Payment for the Shares to be purchased on the Closing Date or the Additional Closing Date, as the case may be, shall be made against delivery through the facilities of the Depository Trust Company (“DTC”) to the Representatives for the respective accounts of the several Underwriters of the Shares to be purchased on such date in definitive form registered in such names and in such denominations as the Representatives shall request in writing not later than two full business days prior to the Closing Date or the Additional Closing Date, as the case may be, with any transfer taxes payable in connection with the sale of the Shares duly paid by the Company or the Selling Stockholder, as applicable. Any certificates for the Shares will be made available for inspection and packaging by the Representatives at the office of DTC or its designated custodian not later than 1:00 P.M., Dallas time, on the business day prior to the Closing Date or the Additional Closing Date, as the case may be.

(d) The Company and the Selling Stockholder acknowledge and agree that the Underwriters are acting solely in the capacity of an arm’s length contractual counterparty to the Company and the Selling Stockholder with respect to the offering of Shares contemplated hereby (including in connection with determining the terms of the offering) and not as a financial advisor or a fiduciary to, or an agent of, the Company, the Selling Stockholder, or any other person. Additionally, neither the Representatives nor any other Underwriter is advising the Company, the Selling Stockholder, or any other person as to any legal, tax, investment, accounting or regulatory matters in any jurisdiction. Each of the Company and the Selling Stockholder shall consult with its own advisors concerning such matters and shall be responsible for making its own independent investigation and appraisal of the transactions contemplated hereby, and the Underwriters shall have no responsibility or liability to the Company or the Selling Stockholder with respect thereto. Any review by the Underwriters of the Company, the Selling Stockholder, the transactions contemplated hereby or other matters relating to such transactions will be performed solely for the benefit of the Underwriters and shall not be on behalf of the Company or the Selling Stockholder.

-3-

3. Representations and Warranties of the Company . The Company represents and warrants to each Underwriter that:

(a) Preliminary Prospectus . No order preventing or suspending the use of any Preliminary Prospectus has been issued by the Commission, and the Marketing Preliminary Prospectus, at the time of filing thereof, complied in all material respects with the Securities Act and did not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Company makes no representation and warranty with respect to any statements or omissions made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use in any Preliminary Prospectus, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in Section 9(c) hereof.

(b) Time of Sale Information . The Time of Sale Information, at the Time of Sale, did not, and at the Closing Date and as of the Additional Closing Date, as the case may be, will not, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Company makes no representation and warranty with respect to any statements or omissions made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use in such Time of Sale Information, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in Section 9(c) hereof. No statement of material fact included in the Prospectus has been omitted from the Time of Sale Information, and no statement of material fact included in the Time of Sale Information that is required to be included in the Prospectus has been omitted therefrom.

(c) Issuer Free Writing Prospectus . Other than the Registration Statement, the Preliminary Prospectus and the Prospectus, the Company (including its agents and representatives, other than the Underwriters in their capacity as such) has not prepared, made, used, authorized, approved or referred to and will not prepare, make, use, authorize, approve or refer to any “written communication” (as defined in Rule 405 under the Securities Act) that constitutes an offer to sell or solicitation of an offer to buy the Shares (each such communication by the Company or its agents and representatives (other than a communication referred to in clause (i) below), an “Issuer Free Writing Prospectus”) other than (i) any document not constituting a prospectus pursuant to Section 2(a)(10)(a) of the Securities Act or Rule 134 under the Securities Act or (ii) the documents listed on Annex C hereto, each electronic road show and any other written communications approved in writing in advance by the Representatives. Each such Issuer Free Writing Prospectus complied in all material respects with the Securities Act, has been filed in accordance with the Securities Act (to the extent required thereby) and, when taken together with the Preliminary Prospectus accompanying, or delivered prior to delivery of, such Issuer Free Writing Prospectus, did not, and at the Closing Date and at the Additional Closing Date, as the case may be, will not, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Company makes no representation and warranty with respect to any statements or omissions made in each such Issuer Free Writing Prospectus in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use in any Issuer Free Writing Prospectus, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in Section 9(c) hereof. Each such Issuer Free Writing Prospectus, as of its issue date and at all subsequent times through the completion of the public offer and sale of the Shares or until any earlier date that the issuer notified or notifies

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the Representatives as described in Section 5(e), did not, does not and will not include any information that conflicted, conflicts or will conflict with the information contained in the Registration Statement or the Prospectus, including any document incorporated by reference therein and any Preliminary Prospectus deemed to be a part thereof that has not been superseded or modified.

(d) Registration Statement and Prospectus . The Registration Statement has been declared effective by the Commission. No order suspending the effectiveness of the Registration Statement has been issued by the Commission and no proceeding for that purpose or pursuant to Section 8A of the Securities Act against the Company or related to the offering of the Shares has been initiated or threatened by the Commission; as of the applicable effective date of the Registration Statement and any post-effective amendment thereto, the Registration Statement complied and will comply in all material respects with the Securities Act, and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading; and as of the date of the Prospectus and any amendment or supplement thereto and as of the Closing Date and as of the Additional Closing Date, as the case may be, the Prospectus does not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Company makes no representation and warranty with respect to any statements or omissions made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use in the Registration Statement and the Prospectus and any amendment or supplement thereto, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in Section 9(c) hereof.

(e) Financial Statements . The financial statements and the related notes thereto of the Company and its consolidated subsidiaries included in the Registration Statement, the Time of Sale Information and the Prospectus comply in all material respects with the applicable requirements of the Securities Act and present fairly in all material respects the financial position of the Company and its consolidated subsidiaries as of the dates indicated and the results of their operations and the changes in their cash flows for the periods specified; such financial statements have been prepared in conformity with United States generally accepted accounting principles applied on a consistent basis throughout the periods covered thereby, and the supporting schedules included in the Registration Statement present fairly the information required to be stated therein; the other financial information included in the Registration Statement, the Time of Sale Information and the Prospectus has been derived from the accounting records of the Company and its consolidated subsidiaries and presents fairly in all material respects the information shown thereby; and the pro forma financial information and the related notes thereto included in the Registration Statement, the Time of Sale Information and the Prospectus have been prepared in all material respects consistently with the applicable requirements of the Securities Act and give effect to assumptions made on a reasonable basis as set forth in the Registration Statement, the Time of Sale Information and the Prospectus.

(f) No Material Adverse Change . Since the date of the most recent financial statements of the Company included in the Registration Statement, the Time of Sale Information and the Prospectus, except, in each case, as otherwise disclosed in the Registration Statement, the time of Sale Information and the Prospectus, (i) there has not been any change in the capital stock or material change in the long-term debt of the Company or any of its subsidiaries, or any dividend or distribution of any kind declared, set aside for payment, paid or made by the Company on any class of capital stock, or any material adverse change, or any development involving a prospective material adverse change, in or affecting the business, properties, management, financial position, stockholders’ equity, results of operations or prospects of the Company and its subsidiaries taken as a whole; (ii) neither the Company nor any of its subsidiaries has

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entered into any transaction or agreement that is material to the Company and its subsidiaries taken as a whole or incurred any liability or obligation, direct or contingent, that is material to the Company and its subsidiaries taken as a whole; and (iii) neither the Company nor any of its subsidiaries has sustained any material loss or interference with its business from fire, explosion, flood, tornado or other calamity, whether or not covered by insurance, or from any labor disturbance or dispute or any action, order or decree of any court or arbitrator or governmental or regulatory authority.

(g) Organization and Good Standing . The Company and each of its subsidiaries have been duly organized and are validly existing and in good standing under the laws of their respective jurisdictions of organization, are duly qualified to do business and are in good standing in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification, and have all power and authority necessary to own or hold their respective properties and to conduct the businesses in which they are engaged, except where the failure to be so qualified or have such power or authority would not, individually or in the aggregate, have a material adverse effect on the business, properties, management, financial position, stockholders’ equity, results of operations or prospects of the Company and its subsidiaries taken as a whole or on the performance by the Company of its obligations under this Agreement (a “Material Adverse Effect”). The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed in Exhibit 21.1 to the Registration Statement.

(h) Capitalization . The Company has authorized capital stock as set forth in the Registration Statement, the Time of Sale Information and the Prospectus under the heading “Capitalization;” all the shares of capital stock of the Company that will be outstanding immediately prior to the Closing Date will have been duly and validly authorized and issued and will be fully paid and non-assessable and will not be subject to any preemptive or similar rights; except as described in or expressly contemplated by the Time of Sale Information and the Prospectus, immediately prior to the Closing Date there will be no outstanding rights (including, without limitation, preemptive rights), warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interest in the Company or any of its subsidiaries, or any contract, commitment, agreement, understanding or arrangement of any kind relating to the issuance of any capital stock of the Company or any such subsidiary, any such convertible or exchangeable securities or any such rights, warrants or options; the capital stock of the Company conforms in all material respects to the description thereof contained in the Registration Statement, the Time of Sale Information and the Prospectus; and all the outstanding shares of capital stock or other equity interests of each subsidiary owned directly or indirectly, the Company have been duly and validly authorized and issued, are fully paid and non-assessable (except as otherwise described in the Registration Statement, the Time of Sale Information and the Prospectus) and are owned directly or indirectly by the Company, free and clear of any lien, charge, encumbrance, security interest, restriction on voting or transfer or any other claim of any third party other than those arising under the Company’s Amended and Restated Credit Agreement dated February 15, 2007, as amended.

(i) Stock Options . With respect to the stock options (the “Stock Options”) granted pursuant to the stock-based compensation plans of the Company and its subsidiaries (the “Company Stock Plans”), each such grant was made in accordance with the terms of the Company Stock Plans, and all other applicable laws and regulatory rules or requirements.

(j) Due Authorization . The Company has full right, power and authority to execute and deliver this Agreement and the Contribution Agreement by and among Approach Resources Inc. and the equity holders identified therein, dated June 29, 2007 (the “Contribution Agreement,” and collectively with this Agreement, the “Transaction Documents”) and to perform its obligations hereunder and thereunder; and all action required to be taken for the due and proper authorization, execution and delivery by it of each of

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the Transaction Documents and the consummation by it of the transactions contemplated thereby or by the Time of Sale Information and the Prospectus has been duly and validly taken.

(k) Underwriting Agreement . This Agreement has been duly authorized, executed and delivered by the Company.

(l) The Shares . The Shares to be issued and sold by the Company hereunder have been duly authorized by the Company and, when issued and delivered and paid for as provided herein, will be duly and validly issued and will be fully paid and non-assessable and will conform to the description thereof in the Registration Statement, the Time of Sale Information and the Prospectus; and the issuance of the Shares to be sold by the Company is not subject to any preemptive or similar rights. The Shares to be sold by the Selling Stockholder have been duly and validly issued and are fully paid and non-assessable and conform to the description thereof in the Registration Statement, the Time of Sale Information and the Prospectus.

(m) Other Transaction Documents . The Contribution Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and legally binding agreement of the Company enforceable against the Company in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors’ rights generally or by equitable principles relating to enforceability; provided that the indemnity, contribution and exoneration provisions contained therein may be limited by applicable laws and public policy.

(n) Descriptions of Transaction Documents . Each Transaction Document conforms in all material respects to the description thereof contained in the Registration Statement, the Time of Sale Information and the Prospectus.

(o) No Violation or Default . Neither the Company nor any of its subsidiaries is (i) in violation of its charter or by-laws or similar organizational documents; (ii) in default, and no event has occurred that, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject; or (iii) in violation of any law or statute or any judgment, order, rule or regulation of any court or arbitrator or governmental or regulatory authority, except, in the case of clauses (ii) and (iii) above, for any such default or violation that would not, individually or in the aggregate, have a Material Adverse Effect.

(p) No Conflicts . The execution, delivery and performance by the Company of each of the Transaction Documents, the issuance and sale of the Shares by the Company (including the use of proceeds therefrom) and the consummation by the Company of the transactions contemplated by the Transaction Documents will not (i) conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, (ii) result in any violation of the provisions of the charter or by-laws or similar organizational documents of the Company or any of its subsidiaries or (iii) result in the violation of any law or statute or any judgment, order, rule or regulation of any court or arbitrator or governmental or regulatory authority, except in the cases of clauses (i) and (iii) above, for such conflicts, breaches or violations that would not, individually or in the aggregate, have a Material Adverse Effect.

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(q) No Consents Required . No consent, approval, authorization, order, registration or qualification of or with any court or arbitrator or governmental or regulatory authority is required for the execution, delivery and performance by the Company of each of the Transaction Documents, the issuance and sale of the Shares (including the use of proceeds therefrom) and the consummation of the transactions contemplated by the Transaction Documents, except for the registration of the Shares under the Securities Act and such consents, approvals, authorizations, orders and registrations or qualifications as may be required under applicable state securities laws in connection with the purchase and distribution of the Shares by the Underwriters and any consent, approval, authorization, order, registration or qualification that either has been, or prior to the Closing Date will have been, obtained or made, or which if not obtained or made, would not, individually or in the aggregate, have a Material Adverse Effect and would not adversely affect the Company’s ability to fulfill its obligations under the Transaction Documents.

(r) Legal Proceedings . Except as described in the Registration Statement, the Time of Sale Information and the Prospectus, there are no legal, governmental or regulatory investigations, actions, suits or proceedings pending to which the Company or any of its subsidiaries is or may be a party or to which any property of the Company or any of its subsidiaries is or may be the subject that, individually or in the aggregate, if determined adversely to the Company or any of its subsidiaries, could reasonably be expected to have a Material Adverse Effect or materially and adversely affect the ability of the Company to perform its obligations under the Transaction Documents; to the knowledge of the Company, no such investigations, actions, suits or proceedings are threatened or contemplated by any governmental or regulatory authority or others; and (i) there are no current or pending legal, governmental or regulatory actions, suits or proceedings that are required under the Securities Act to be described in the Registration Statement that are not so described in the Registration Statement, the Time of Sale Information and the Prospectus and (ii) there are no statutes, regulations or contracts or other documents that are required under the Securities Act to be filed as exhibits to the Registration Statement or described in the Registration Statement, the Time of Sale Information or the Prospectus that are not so filed as exhibits to the Registration Statement or described in the Registration Statement, the Time of Sale Information and the Prospectus.

(s) Independent Accountants . Hein & Associates LLP, who has certified certain financial statements of the Company and its subsidiaries, is an independent registered public accountants with respect to the Company and its subsidiaries within the applicable rules and regulations adopted by the Commission and the Public Company Accounting Oversight Board (United States) and as required by the Securities Act.

(t) Title to Real and Personal Property . The Company and its subsidiaries have good and marketable title to all real and other property they own, in each case free and clear of all liens, encumbrances, and defects except those (i) described in the Registration Statement, the Time of Sale Information and the Prospectus or (ii) that would not, individually or in the aggregate, have a Material Adverse Effect. Except as described in the Registration Statement, the Time of Sale Information and the Prospectus, all items of real and other property leased by the Company and its subsidiaries are leased under valid and enforceable leases, except as would not, individually or in the aggregate, have a Material Adverse Effect.

(u) Title to Intellectual Property . The Company and its subsidiaries own or possess adequate rights to use all material patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses and know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) necessary for the conduct of their respective businesses; and the Company and its subsidiaries have not received any notice of any claim of infringement or conflict with any such rights of others.

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(v) No Undisclosed Relationships . No relationship, direct or indirect, exists between or among the Company or any of its subsidiaries, on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company or any of its subsidiaries, on the other, that is required by the Securities Act to be described in the Registration Statement and the Prospectus and that is not so described in such documents and in the Time of Sale Information.

(w) Investment Company Act . The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Registration Statement, the Time of Sale Information and the Prospectus, will not be required to register as an “investment company” or an entity “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended, and the rules and regulations of the Commission thereunder (collectively, “Investment Company Act”).

(x) Taxes . The Company and its subsidiaries have paid all federal, state, local and foreign taxes and filed all tax returns required to be paid or filed through the date hereof; and except as otherwise disclosed in the Registration Statement, the Time of Sale Information and the Prospectus or as would not, individually or in the aggregate, have a Material Adverse Effect, there is no tax deficiency that has been, or could reasonably be expected to be, asserted against the Company or any of its subsidiaries or any of their respective properties or assets.

(y) Licenses and Permits . The Company and its subsidiaries possess all licenses, certificates, permits and other authorizations issued by, and have made all declarations and filings with, the appropriate federal, state, local or foreign governmental or regulatory authorities that are necessary for the ownership or lease of their respective properties or the conduct of their respective businesses as described in the Registration Statement, the Time of Sale Information and the Prospectus, except where the failure to possess or make the same would not, individually or in the aggregate, have a Material Adverse Effect; and except as described in the Registration Statement, the Time of Sale Information and the Prospectus or as would not, individually or in the aggregate, have a Material Adverse Effect, neither the Company nor any of its subsidiaries has received notice of any revocation or modification of any such license, certificate, permit or authorization or has any reason to believe that any such license, certificate, permit or authorization will not be renewed in the ordinary course.

(z) No Labor Disputes . No labor disturbance by or dispute with employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is contemplated or threatened and the Company is not aware of any existing or imminent labor disturbance by, or dispute with, the employees of any of its or its subsidiaries’ principal suppliers, contractors or customers, except as would not have a Material Adverse Effect.

(aa) Compliance With Environmental Laws . (i) The Company and its subsidiaries (x) are in compliance with any and all applicable federal, state, local and foreign laws, rules, regulations, requirements, decisions and orders relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (collectively, “Environmental Laws”); (y) have received and are in compliance with all permits, licenses, certificates or other authorizations or approvals required of them under applicable Environmental Laws to conduct their respective businesses; and (z) except as described in the Registration Statement, the Time of Sale Information and the Prospectus, have not received notice of any actual or potential liability for the investigation or remediation of any disposal or release of hazardous or toxic substances or wastes, pollutants or contaminants, and (ii) there are no costs or liabilities associated with Environmental Laws of or relating to the Company or its subsidiaries, except in the case of each of (i) and (ii) above, for any such failure to comply, or failure to receive

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required permits, licenses or approvals, or cost or liability, as would not, individually or in the aggregate, have a Material Adverse Effect.

(bb) Hazardous Substances . There has been no storage, generation, transportation, handling, treatment, disposal, discharge, emission, or other release of any kind of toxic wastes or hazardous substances, including, but not limited to, any naturally occurring radioactive materials, brine, drilling mud, crude oil, natural gas liquids and other petroleum materials, by, due to or caused by the Company or any of its subsidiaries upon any of the property now owned or leased by the Company or any of its subsidiaries, in violation of any Environmental Laws, except for any violation or liability which would not, individually or in the aggregate, have a Material Adverse Effect.

(cc) Compliance with ERISA . Each employee benefit plan, within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), that is maintained, administered or contributed to by the Company or any of its affiliates for employees or former employees of the Company and its affiliates has been maintained in compliance, in all material respects, with its terms and the requirements of any applicable statutes, orders, rules and regulations, including but not limited to ERISA and the Internal Revenue Code of 1986, as amended (the “Code”); no prohibited transaction, within the meaning of Section 406 of ERISA or Section 4975 of the Code, has occurred with respect to any such plan excluding transactions effected pursuant to a statutory or administrative exemption, and transactions which, individually or in the aggregate, would not have a Material Adverse Effect, and no such plan is subject to the funding rules of Section 412 of the Code or Section 302 of ERISA.

(dd) Accounting Controls . The Company and its subsidiaries maintain systems of “internal control over financial reporting” (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder (collectively, the “Exchange Act”)) that comply with the requirements of the Exchange Act and have been designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, including those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made in accordance with and authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements. Except as disclosed in the Registration Statement, the Time of Sale Information and the Prospectus, there are no material weaknesses in the Company’s internal control over financial reporting. The Company’s auditors and the Audit Committee of the Board of Directors of the Company have been advised of all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information.

(ee) Insurance . The Company and its subsidiaries have insurance covering their respective properties, operations, personnel and businesses, which insurance is in reasonable amounts and insures against such losses and risks as are reasonably adequate to protect the Company and its subsidiaries and their respective businesses; and neither the Company nor any of its subsidiaries has (i) received notice from any insurer or agent of such insurer that capital improvements or other expenditures are required or necessary to be made in order to continue such insurance or (ii) any reason to believe that it will not be

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able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage at reasonable cost from similar insurers as may be necessary to continue its business.

(ff) No Unlawful Payments . Neither the Company nor any of its subsidiaries nor, to the knowledge of the Company, any director, officer, agent, employee or other person associated with or acting on behalf of the Company or any of its subsidiaries has (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; (iii) violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977; or (iv) made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment.

(gg) Compliance with Money Laundering Laws . The operations of the Company and its subsidiaries are and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines issued, administered or enforced by any governmental agency (collectively, the “Money Laundering Laws”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries with respect to the Money Laundering Laws is pending or, to the knowledge of the Company, threatened.

(hh) Compliance with OFAC . None of the Company, any of its subsidiaries or, to the knowledge of the Company, any director, officer, agent, employee or Affiliate of the Company or any of its subsidiaries is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”); and the Company will not directly or indirectly use the proceeds of the offering of the Shares hereunder, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.

(ii) No Restrictions on Subsidiaries . Other than pursuant to the Company’s Amended and Restated Credit Facility with The Frost National Bank, no subsidiary of the Company is currently prohibited, directly or indirectly, under any agreement or other instrument to which it is a party or is subject, from paying any dividends to the Company, from making any other distribution on such subsidiary’s capital stock, from repaying to the Company any loans or advances to such subsidiary from the Company or from transferring any of such subsidiary’s properties or assets to the Company or any other subsidiary of the Company.

(jj) No Broker’s Fees . Neither the Company nor any of its subsidiaries is a party to any contract, agreement or understanding with any person (other than this Agreement) that would give rise to a valid claim against the Company or any of its subsidiaries or any Underwriter for a brokerage commission, finder’s fee or like payment in connection with the offering and sale of the Shares.

(kk) No Registration Rights . Except as disclosed in the Registration Statement, the Time of Sale Information and the Prospectus, no person has the right to require the Company or any of its subsidiaries to register any securities for sale under the Securities Act by reason of the filing of the Registration Statement with the Commission or the issuance and sale of the Shares.

(ll) No Stabilization . The Company has not taken, directly or indirectly, any action designed to or that could reasonably be expected to cause or result in any stabilization or manipulation of the price of the Shares.

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(mm) Margin Rules . The application of the proceeds from the sale of the Shares to be sold by the Company pursuant to this Agreement as described in the Registration Statement, the Time of Sale Information and the Prospectus will not violate Regulation T, U or X of the Board of Governors of the Federal Reserve System or any other regulation of such Board of Governors.

(nn) Forward-Looking Statements . No forward-looking statement (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) contained in the Registration Statement, the Time of Sale Information and the Prospectus has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith.

(oo) Statistical and Market Data . Nothing has come to the attention of the Company that has caused the Company to believe that the statistical and market-related data included in the Registration Statement, the Time of Sale Information and the Prospectus is not based on or derived from sources that are reliable and accurate in all material respects.

(pp) Sarbanes-Oxley Act . There is and has been no failure on the part of the Company or any of its directors and officers, in their capacity as such, to comply with any applicable provision of the Sarbanes-Oxley Act of 2002 and any applicable rules and regulations promulgated in connection therewith (the “Sarbanes-Oxley Act”) including Section 402 related to loans.

(qq) Status under the Securities Act . The Company is not an ineligible issuer as defined under the Securities Act, at the times specified in the Securities Act in connection with the offering of the Shares.

(rr) Reserve Data . (i) (A) The oil and natural gas reserve estimates of the Company and its subsidiaries as of December 31, 2004, 2005 and 2006 contained in the Registration Statement, the Time of Sale Information and the Prospectus are derived from reports that have been prepared by, or have been audited by, either (a) DeGolyer & MacNaughton or (b) Cawley, Gillespie & Associates, Inc., as set forth and to the extent indicated therein, and (B) such estimates fairly reflect the oil and natural gas reserves of the Company and its subsidiaries, as applicable, at the dates indicated therein and are in accordance, in all material respects, with Commission guidelines applied on a consistent basis throughout the periods involved; and

(ss) Independent Petroleum Engineers . Each of DeGolyer & MacNaughton and Cawley, Gillespie & Associates, Inc. have represented to the Company that they are, and the Company believes them to be, independent petroleum engineers with respect to the Company and its subsidiaries and for the periods set forth in the Registration Statement, the Time of Sale Information and the Prospectus.

(tt) No Ratings . There are no securities or preferred stock of or guaranteed by the Company or any of its subsidiaries that are rated by a “nationally recognized statistical rating organization,” as such term is defined by the Commission for purposes of Rule 436(g)(2) under the Securities Act.

4. Representations and Warranties of the Selling Stockholder . The Selling Stockholder represents and warrants to each Underwriter that:

(a) Required Consents; Authority . All consents, approvals, authorizations and orders necessary for the execution and delivery by the Selling Stockholder of this Agreement and the Power of Attorney (the “Power of Attorney”) and the Custody Agreement (the “Custody Agreement”) hereinafter referred to, and for the sale and delivery of the Shares to be sold by the Selling Stockholder hereunder, have been obtained; and the Selling Stockholder has full right, power and authority to enter into this Agreement, the Power of Attorney and the Custody Agreement and to sell, assign, transfer and deliver the Shares to be

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sold by the Selling Stockholder hereunder; this Agreement, the Power of Attorney and the Custody Agreement has been duly authorized, executed and delivered by the Selling Stockholder.

(b) No Conflicts . The execution, delivery and performance by the Selling Stockholder of this Agreement, the Power of Attorney and the Custody Agreement, the sale of the Shares to be sold by the Selling Stockholder and the consummation by the Selling Stockholder of the transactions contemplated herein or therein will not (i) conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Selling Stockholder pursuant to, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Selling Stockholder is a party or by which the Selling Stockholder is bound or to which any of the property or assets of the Selling Stockholder is subject, (ii) result in any violation of the provisions of the charter or by-laws or similar organizational documents of the Selling Stockholder or (iii) result in the violation of any law or statute or any judgment, order, rule or regulation of any court or arbitrator or governmental or regulatory agency.

(c) Title to Shares. The Selling Stockholder has good and valid title to the Shares to be sold by the Selling Stockholder at the Closing Date or the Additional Closing Date, as the case may be, by the Selling Stockholder hereunder, free and clear of all liens, encumbrances, equities or adverse claims; the Selling Stockholder will have, immediately prior to the Closing Date or the Additional Closing Date, as the case may be, good and valid title to the Shares to be sold by the Selling Stockholder at the Closing Date or the Additional Closing Date, as the case may be, by the Selling Stockholder, free and clear of all liens, encumbrances, equities or adverse claims; and, upon delivery of the certificates representing such Shares and payment therefor pursuant hereto, good and valid title to such Shares, free and clear of all liens, encumbrances, equities or adverse claims, will pass to the several Underwriters.

(d) No Stabilization. The Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that could reasonably be expected to cause or result in any stabilization or manipulation of the price of the Shares.

(e) Time of Sale Information . The Time of Sale Information, at the Time of Sale did not, and at the Closing Date and as of the Additional Closing Date, as the case may be , will not, contain any untrue statement of a material fact concerning or relating to the Selling Stockholder or omit to state a material fact concerning or relating to the Selling Stockholder (or any trustee or beneficiary thereof) necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. No statement of material fact concerning or relating to the Selling Stockholder included in the Prospectus has been omitted from the Time of Sale Information and no statement of material fact concerning or relating to the Selling Stockholder included in the Time of Sale Information that is required to be included in the Prospectus has been omitted therefrom.

(f) Issuer Free Writing Prospectus. Other than the Registration Statement, the Preliminary Prospectus and the Prospectus, the Selling Stockholder (including its agents and representatives, other than the Underwriters in their capacity as such) has not made, used, prepared, authorized, approved or referred to and will not prepare, make, use, authorize, approve or refer to any Issuer Free Writing Prospectus, other than (i) any document not constituting a prospectus pursuant to Section 2(a)(10)(a) of the Securities Act or Rule 134 under the Securities Act or (ii) the documents listed on Annex C hereto, each electronic road show and any other written communications approved in writing in advance by the Company and the Representatives.

(g) Registration Statement and Prospectus. As of the applicable effective date of the Registration Statement and any amendment thereto, the Registration Statement complied and will comply in all material respects with the Securities Act, and did not and will not contain any untrue statement of a material

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fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading; and as of the date of the Prospectus and any amendment or supplement thereto and as of the Closing Date and as of the Additional Closing Date, as the case may be, the Prospectus will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Selling Stockholder makes no representation and warranty with respect to any statements or omissions made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use in the Registration Statement, the Time of Sale Information and the Prospectus and any amendment or supplement thereto, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in Section 9(c) hereof.

(h) Material Information . (i) As of the date hereof, as of the Closing Date and as of the Additional Closing Date, as the case may be, that the sale of the Shares to be sold by the Selling Stockholder is not and will not be prompted by any material information concerning the Company which is not set forth in the Registration Statement, the Time of Sale Information or the Prospectus.

The Selling Stockholder represents and warrants that certificates in negotiable form representing all of the Shares to be sold by the Selling Stockholder hereunder have been placed in custody under a Custody Agreement relating to such Shares, in the form heretofore furnished to you, duly executed and delivered by the Selling Stockholder to the Company, as custodian (the “Custodian”), and that the Selling Stockholder has duly executed and delivered a Power of Attorney, in the form heretofore furnished to you, appointing the persons indicated in Schedule 2 hereto, and each of them, as the Selling Stockholder’s Attorneys-in-fact (the “Attorneys-in-Fact” or any one of them, the “Attorney-in-Fact”) with authority to execute and deliver this Agreement on behalf of the Selling Stockholder, to determine the purchase price to be paid by the Underwriters to the Selling Stockholder as provided herein, to authorize the delivery of the Shares to be sold by the Selling Stockholder hereunder and otherwise to act on behalf of the Selling Stockholder in connection with the transactions contemplated by this Agreement, the Custody Agreement and the Power of Attorney.

The Selling Stockholder agrees that the Shares represented by the certificates held in custody for the Selling Stockholder under the Custody Agreement are subject to the interests of the Underwriters hereunder, and that the arrangements made by the Selling Stockholder for such custody, and the appointment by the Selling Stockholder of the Attorneys-in-Fact by the Power of Attorney, are to that extent irrevocable. The Selling Stockholder agrees that the obligations of the Selling Stockholder hereunder shall not be terminated by operation of law, by the dissolution of such partnership or by the occurrence of any other event. If the Selling Stockholder should be dissolved, or if any other such event should occur, before the delivery of the Shares hereunder, certificates representing such Shares shall be delivered by or on behalf of the Selling Stockholder in accordance with the terms and conditions of this Agreement and the Custody Agreement, and actions taken by the Attorneys-in-Fact pursuant to the Power of Attorney shall be as valid as if such dissolution or other event had not occurred, regardless of whether or not the Custodian, the Attorneys-in-Fact, or any of them, shall have received notice of such dissolution or other event.

5. Further Agreements of the Company . The Company covenants and agrees with each Underwriter and the Selling Stockholder that:

(a) Required Filings . The Company will file the final Prospectus with the Commission within the time periods specified by Rule 424(b) and Rule 430A, 430B or 430C under the Securities Act, will file any Issuer Free Writing Prospectus (to the extent not previously delivered) to the extent required

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by Rule 433 under the Securities Act. The Company will furnish copies of the Prospectus and each Issuer Free Writing Prospectus (to the extent not previously delivered) to the Underwriters in New York City prior to 10:00 A.M., New York City time, on the business day next succeeding the date of this Agreement in such quantities as the Representatives may reasonably request.

(b) Delivery of Copies . The Company will deliver, without charge, (i) to the Representatives, three signed copies of the Registration Statement as originally filed and each amendment thereto, in each case including all exhibits and consents filed therewith; and (ii) to each Underwriter (A) a conformed copy of the Registration Statement as originally filed and each amendment thereto (without exhibits) and (B) during the Prospectus Delivery Period (as defined below), as many copies of the Prospectus (including all amendments and supplements thereto) and each Issuer Free Writing Prospectus as the Representatives may reasonably request. As used herein, the term “Prospectus Delivery Period” means such period of time after the first date of the public offering of the Shares as in the opinion of counsel for the Underwriters a prospectus relating to the Shares is required by law to be delivered (or required to be delivered but for Rule 172 under the Securities Act) in connection with sales of the Shares by any Underwriter or dealer.

(c) Amendments or Supplements, Issuer Free Writing Prospectuses . Before preparing, using, authorizing, approving, referring to or filing any Issuer Free Writing Prospectus, and before filing any amendment or supplement to the Registration Statement or the Prospectus, the Company will furnish to the Representatives and counsel for the Underwriters a copy of the proposed Issuer Free Writing Prospectus, amendment or supplement for review and will not prepare, use, authorize, approve, refer to or file any such Issuer Free Writing Prospectus or file any such proposed amendment or supplement to which the Representatives reasonably object.

(d) Notice to the Representatives . The Company will advise the Representatives promptly, and confirm such advice in writing, (i) when the Registration Statement has become effective; (ii) when any amendment to the Registration Statement has been filed or becomes effective; (iii) when any supplement to the Prospectus or any amendment to the Prospectus or any Issuer Free Writing Prospectus has been filed; (iv) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or the receipt of any comments from the Commission relating to the Registration Statement or any other request by the Commission for any additional information; (v) of the issuance by the Commission of any order suspending the effectiveness of the Registration Statement or preventing or suspending the use of any Preliminary Prospectus, any of the Time of Sale Information or the Prospectus or the initiation or threatening of any proceeding for that purpose or pursuant to Section 8A of the Securities Act; (vi) of the occurrence of any event within the Prospectus Delivery Period as a result of which the Prospectus, the Time of Sale Information or any Issuer Free Writing Prospectus as then amended or supplemented would include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances existing when the Prospectus, the Time of Sale Information or any such Issuer Free Writing Prospectus is delivered to a purchaser, not misleading; and (vii) of the receipt by the Company of any notice with respect to any suspension of the qualification of the Shares for offer and sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and the Company will use its best efforts to prevent the issuance of any such order suspending the effectiveness of the Registration Statement, preventing or suspending the use of any Preliminary Prospectus, any of the Time of Sale Information or the Prospectus or suspending any such qualification of the Shares and, if any such order is issued, will obtain as soon as possible the withdrawal thereof.

(e) Ongoing Compliance . (1) If during the Prospectus Delivery Period (i) any event shall occur or condition shall exist as a result of which the Prospectus as then amended or supplemented would

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include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances existing when the Prospectus is delivered to a purchaser, not misleading or (ii) it is necessary to amend or supplement the Prospectus to comply with law, the Company will immediately notify the Underwriters thereof and forthwith prepare and, subject to paragraph (c) above, file with the Commission and furnish to the Underwriters and to such dealers as the Representatives may designate, such amendments or supplements to the Prospectus as may be necessary so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances existing when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus will comply with law and (2) if at any time prior to the Closing Date (i) any event shall occur or condition shall exist as a result of which the Time of Sale Information as then amended or supplemented would include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing when the Time of Sale Information is delivered to a purchaser, not misleading or (ii) it is necessary to amend or supplement the Time of Sale Information to comply with law, the Company will immediately notify the Underwriters thereof and forthwith prepare and, subject to paragraph (c) above, file with the Commission (to the extent required) and furnish to the Underwriters and to such dealers as the Representatives may designate, such amendments or supplements to the Time of Sale Information as may be necessary so that the statements in the Time of Sale Information as so amended or supplemented will not, in the light of the circumstances, be misleading or so that the Time of Sale Information will comply with law.

(f) Blue Sky Compliance . The Company will qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Representatives shall reasonably request and will continue such qualifications in effect so long as required for distribution of the Shares; provided that the Company shall not be required to (i) qualify as a foreign corporation or other entity or as a dealer in securities in any such jurisdiction which it would not otherwise be required to so qualify, (ii) file any general consent to service of process in any such jurisdiction or (iii) subject itself to taxation in any such jurisdiction if it is not otherwise so subject.

(g) Earning Statement . The Company will make generally available to its security holders and the Representatives as soon as practicable an earning statement that satisfies the provisions of Section 11(a) of the Securities Act and Rule 158 of the Commission promulgated thereunder covering a period of at least twelve months beginning with the first fiscal quarter of the Company occurring after the “effective date” (as defined in Rule 158) of the Registration Statement.

(h) Clear Market . For a period of 180 days after the date of the initial public offering of the Shares, the Company will not (i) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of Stock or any securities convertible into or exercisable or exchangeable for Stock or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Stock or such other securities, in cash or otherwise, without the prior written consent of JPMorgan, other than the Shares to be sold hereunder, shares of Stock issued pursuant to those certain Convertible Promissory Notes issued by the Company to each of Yorktown Energy Partners VII, L.P. and Lubar Equity Fund, LLC and each dated June 25, 2007, and any shares of Stock of the Company issued upon the exercise of options granted under existing employee stock option plans, grants by the Company of any Award (as defined in the Plan) in accordance with the terms of the Company’s 2007 Stock Incentive Plan as in effect on the date hereof (the “Plan”) and the filing by the Company of any registration statement with the Commission on Form S-8 relating to the offering of securities pursuant to the terms of the Plan. Notwithstanding the foregoing, if (1)

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during the last 17 days of the 180-day restricted period, the Company issues an earnings release or material news or a material event relating to the Company occurs; or (2) prior to the expiration of the 180-day restricted period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the 180-day restricted period, the restrictions imposed by this Agreement shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event; provided , however , that in no event shall such restrictions extend past 214 days from the date of the Prospectus.

(i) Use of Proceeds . The Company will apply the net proceeds from the sale of the Shares as described in the Registration Statement, the Time of Sale Information and the Prospectus under the heading “Use of proceeds.”

(j) No Stabilization . The Company will not take, directly or indirectly, any action designed to or that could reasonably be expected to cause or result in any stabilization or manipulation of the price of the Shares.

(k) Exchange Listing . The Company will use its best efforts to list for quotation the Shares on The Nasdaq Global Market (the “Nasdaq Global Market”).

(l) Reports . So long as the Shares are outstanding, the Company will furnish to the Representatives, as soon as they are available, copies of all reports or other communications (financial or other) furnished to holders of the Shares, and copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange or automatic quotation system.

(m) Record Retention . The Company will, pursuant to reasonable procedures developed in good faith, retain copies of each Issuer Free Writing Prospectus that is not filed with the Commission in accordance with Rule 433 under the Securities Act.

(n) Filings . The Company will file with the Commission such reports as may be required by Rule 463 under the Securities Act.

6. Further Agreements of the Selling Stockholder .

(a) Clear Market . For a period of 180 days after the date of the initial public offering of the Shares, the Selling Stockholder will not (i) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of Stock or any securities convertible into or exercisable or exchangeable for Stock or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Stock or such other securities, in cash or otherwise or (iii) make any demand for or exercise any right with respect to the registration of any shares of Stock or any security convertible into or exercisable or exchangeable for Stock without the prior written consent of JPMorgan other than the Shares to be sold by the Selling Stockholder hereunder. Notwithstanding the foregoing, if (1) during the last 17 days of the 180-day restricted period, the Company issues an earnings release or material news or a material event relating to the Company occurs; or (2) prior to the expiration of the 180-day restricted period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the 180-day restricted period, the restrictions imposed by this Agreement shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event; provided , however , that in no event shall such restrictions extend past 214 days from the date of the Prospectus.

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(b) Tax Form. It will deliver to the Representatives prior to or at the Closing Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by the Treasury Department regulations in lieu thereof) in order to facilitate the Underwriters’ documentation of their compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 with respect to the transactions herein contemplated.

7. Certain Agreements of the Underwriters . Each Underwriter hereby represents and agrees that:

(a) It has not and will not use, authorize use of, refer to, or participate in the planning for use of, any “free writing prospectus,” as defined in Rule 405 under the Securities Act (which term includes use of any written information furnished to the Commission by the Company and not incorporated by reference into the Registration Statement and any press release issued by the Company), other than (i) a free writing prospectus that contains no “issuer information” (as defined in Rule 433(h)(2) under the Securities Act) that was not included (including through incorporation by reference) in the Preliminary Prospectus or a previously filed Issuer Free Writing Prospectus, (ii) any Issuer Free Writing Prospectus listed on Annex C or prepared pursuant to Section 3(c) or Section 5(c) above or (iii) any free writing prospectus prepared by such Underwriter and approved by the Company in advance in writing (each such free writing prospectus referred to in clauses (i) or (iii), an “Underwriter Free Writing Prospectus”).

(b) It has not and will not use, without the prior written consent of the Company, any free writing prospectus that contains the final terms of the Shares unless such terms have previously been included in a free writing prospectus filed with the Commission; provided that Underwriters may use a term sheet substantially in the form of Annex D hereto without the consent of the Company; provided further that any Underwriter using such term sheet shall notify the Company, and provide a copy of such term sheet to the Company, prior to, or substantially concurrently with, the first use of such term sheet.

(c) It is not subject to any pending proceeding under Section 8A of the Securities Act with respect to the offering (and will promptly notify the Company and the Selling Stockholder if any such proceeding against it is initiated during the Prospectus Delivery Period).

8. Conditions of Underwriters’ Obligations . The obligation of each Underwriter to purchase the Underwritten Shares on the Closing Date or the Option Shares on the Additional Closing Date, as the case may be, as provided herein is subject to the performance by the Company and the Selling Stockholder of their respective covenants and other obligations hereunder and to the following additional conditions:

(a) Registration Compliance; No Stop Order . No order suspending the effectiveness of the Registration Statement shall be in effect, and no proceeding for such purpose or pursuant to Section 8A under the Securities Act shall be pending before or threatened by the Commission; the Prospectus and each Issuer Free Writing Prospectus shall have been timely filed with the Commission under the Securities Act (in the case of an Issuer Free Writing Prospectus, to the extent required by Rule 433 under the Securities Act) and in accordance with Section 5(a) hereof; and all requests by the Commission for additional information shall have been complied with to the reasonable satisfaction of the Representatives.

(b) Representations and Warranties . The representations and warranties of the Company and the Selling Stockholder contained herein shall be true and correct on the date hereof and on and as of the Closing Date or the Additional Closing Date, as the case may be; and the statements of the Company and its officers and of the Selling Stockholder made in any certificates delivered pursuant to this Agreement shall be true and correct on and as of the Closing Date or the Additional Closing Date, as the case may be.

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(c) No Material Adverse Change . No event or condition of a type described in Section 3(f) hereof shall have occurred or shall exist, which event or condition is not described in the Time of Sale Information (excluding any amendment or supplement thereto) and the Prospectus (excluding any amendment or supplement thereto) and the effect of which in the judgment of the Representatives makes it impracticable or inadvisable to proceed with the offering, sale or delivery of the Shares on the Closing Date or the Additional Closing Date, as the case may be, on the terms and in the manner contemplated by this Agreement, the Time of Sale Information and the Prospectus.

(d) Officer’s Certificate . The Representatives shall have received on and as of the Closing Date or the Additional Closing Date, as the case may be, a certificate of each of (i) the chief financial officer or chief accounting officer of the Company and one additional senior executive officer of the Company who is satisfactory to the Representatives (A) confirming that such officers have carefully reviewed the Registration Statement, the Time of Sale Information and the Prospectus and, to the knowledge of such officers, the representations set forth in Sections 3(b) and 3(c) hereof are true and correct, (B) confirming that the other representations and warranties of the Company in this Agreement are true and correct and that the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date and (C) to the effect set forth in paragraphs (a) and (c) above and (ii) the Selling Stockholder confirming that the representations of the Selling Stockholder in this Agreement are true and correct and that the Selling Stockholder has complied with all agreements and satisfied all conditions on their part to be performed or satisfied hereunder at or prior to such Closing Date.

(e) Comfort Letters . On the date of this Agreement and on the Closing Date or the Additional Closing Date, as the case may be, Hein & Associates LLP shall have furnished to the Representatives, at the request of the Company, letters, dated the respective dates of delivery thereof and addressed to the Underwriters, in form and substance reasonably satisfactory to the Representatives, containing statements and information of the type customarily included in accountants’ “comfort letters” to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement, the Time of Sale Information and the Prospectus; provided , that the letter delivered on the Closing Date or the Additional Closing Date, as the case may be, shall use a “cut-off” date no more than three business days prior to such Closing Date or such Additional Closing Date, as the case may be.

(f) Opinion of Counsel for the Company . Each of (i) Thompson & Knight LLP, counsel for the Company, and (ii) J. Curtis Henderson, General Counsel of the Company, shall have furnished to the Representatives, at the request of the Company, their respective written opinion, dated the Closing Date or the Additional Closing Date, as the case may be, and addressed to the Underwriters, in form and substance reasonably satisfactory to the Representatives, to the effect set forth in Annex A-1 and A-2 hereto.

(g) Opinion of Counsel for the Selling Stockholder. Carrington, Coleman, Sloman & Blumenthal, L.L.P., counsel for the Selling Stockholder, shall have furnished to the Representatives, at the request of the Selling Stockholder, their written opinion, dated the Closing Date or the Additional Closing Date, as the case may be, and addressed to the Underwriters, in form and substance reasonably satisfactory to the Representatives, to the effect set forth in Annex B hereto.

(h) Opinion of Counsel for the Underwriters . The Representatives shall have received on and as of the Closing Date or the Additional Closing Date, as the case may be, an opinion of Cahill Gordon & Reindel llp , counsel for the Underwriters, with respect to such matters as the Representatives may reasonably request, and such counsel shall have received such documents and information as they may reasonably request to enable them to pass upon such matters.

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(i) Reserve Letters . On the date of this Agreement and on the Closing Date or the Additional Closing Date, as the case may be, each of DeGolyer & MacNaughton and Cawley, Gillespie & Associates, Inc. shall have furnished to the Representatives, at the request of the Company, reserve report confirmation letters, dated the respective dates of delivery thereof and addressed to the Underwriters, in form and substance reasonably satisfactory to the Representatives, containing statements and information of the type customarily included in such letters to underwriters with respect to the reserve and other operational information contained in the Registration Statement, the Time of Sale Information and the Prospectus.

(j) No Legal Impediment to Issuance . No action shall have been taken and no statute, rule, regulation or order shall have been enacted, adopted or issued by any federal, state or foreign governmental or regulatory authority that would, as of the Closing Date or the Additional Closing Date, as the case may be, prevent the issuance or sale of the Shares; and no injunction or order of any federal, state or foreign court shall have been issued that would, as of the Closing Date or the Additional Closing Date, as the case may be, prevent the issuance or sale of the Shares.

(k) Good Standing . The Representatives shall have received on and as of the Closing Date or the Additional Closing Date, as the case may be, satisfactory evidence of the good standing of the Company and its subsidiaries in their respective jurisdictions of organization and their good standing as foreign entities in such other jurisdictions as the Representatives may reasonably request, in each case in writing or any standard form of telecommunication from the appropriate Governmental Authorities of such jurisdictions.

(l) Exchange Listing . The Shares to be delivered on the Closing Date or Additional Closing Date, as the case may be, shall have been approved for listing on the Nasdaq Global Market, subject to official notice of issuance.

(m) Lock-up Agreements . The “lock-up” agreements, each substantially in the form of Exhibit A hereto, between you and certain shareholders, officers and directors of the Company relating to sales and certain other dispositions of shares of Stock or certain other securities, delivered to you on or before the date hereof, shall be full force and effect on the Closing Date or Additional Closing Date, as the case may be.

(n) Additional Documents . On or prior to the Closing Date or the Additional Closing Date, as the case may be, the Company and the Selling Stockholder shall have furnished to the Representatives such further certificates and documents as the Representatives may reasonably request.

All opinions, letters, certificates and evidence mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for the Underwriters.

9. Indemnification and Contribution .

(a) Indemnification of the Underwriters by Company. The Company agrees to indemnify and hold harmless each Underwriter, its affiliates, directors and officers and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, legal fees and other expenses incurred in connection with any suit, action or proceeding or any claim asserted, as such fees and expenses are incurred), joint or several, that arise out of, or are based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or caused by any omission or alleged omission to state therein a material fact required to be

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stated therein or necessary in order to make the statements therein, not misleading, or (ii) any untrue statement or alleged untrue statement of a material fact contained in the Prospectus (or any amendment or supplement thereto), any Issuer Free Writing Prospectus or any Time of Sale Information (including any Time of Sale Information that has been subsequently amended), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, in each case except insofar as such losses, claims, damages or liabilities arise out of, or are based upon, any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with any information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use therein, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in subsection (c) below.

The Company also agrees to indemnify and hold harmless, Wachovia, its affiliates, directors and officers and each person, if any, who controls Wachovia within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities incurred as a result of Wachovia’s participation as a “qualified independent underwriter” within the meaning of the Rules of Conduct of the NASD in connection with the offering of the Shares.

(b) Indemnification of Underwriters by the Selling Stockholder . The Selling Stockholder agrees to indemnify and hold harmless each Underwriter, its affiliates, directors and officers and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the indemnity set forth in paragraph (a) above but only with respect to any losses, claims, damages or liabilities that arise out of, or are based upon, any untrue statement or omission or alleged untrue statement or omission concerning or relating to the Selling Stockholder in the Registration Statement, the Prospectus (or any amendment or supplement thereto), any Issuer Free Writing Prospectus or any Time of Sale Information.

The Selling Stockholder hereunder also agrees to indemnify and hold harmless Wachovia, its affiliates, directors and officers and each person, if any, who controls Wachovia within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities incurred as a result of Wachovia’s participation as a “qualified independent underwriter” within the meaning of the Rules of Conduct of the NASD in connection with the offering of the Shares.

(c) Indemnification of the Company and the Selling Stockholder . Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, their officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and the Selling Stockholder to the same extent as the indemnity set forth in paragraph (a) above, but only with respect to any losses, claims, damages or liabilities that arise out of, or are based upon, any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with any information relating to such Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use in the Registration Statement, the Prospectus (or any amendment or supplement thereto), any Issuer Free Writing Prospectus or any Time of Sale Information, it being understood and agreed upon that the only such information furnished by any Underwriter consists of the following information in the Prospectus furnished on behalf of each Underwriter: the concession and reallowance figures appearing in the fourth paragraph under the caption “Underwriting” and the information concerning stabilizing transactions and other information appearing under the caption “Underwriting” in the two paragraphs beginning

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with the words “The underwriters have advised us that they may make short sales . . .” and “The underwriters have advised us that, pursuant to Regulation M . . .”.

(d) Notice and Procedures . If any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be brought or asserted against any person in respect of which indemnification may be sought pursuant to the preceding paragraphs of this Section 9, such person (the “Indemnified Person”) shall promptly notify the person against whom such indemnification may be sought (the “Indemnifying Person”) in writing; provided that the failure to notify the Indemnifying Person shall not relieve it from any liability that it may have under paragraphs (a), (b) or (c) above except to the extent that it has been materially prejudiced (through the forfeiture of substantive rights or defenses) by such failure; and provided further , that the failure to notify the Indemnifying Person shall not relieve it from any liability that it may have to an Indemnified Person otherwise than under paragraphs (a), (b) or (c) above. If any such proceeding shall be brought or asserted against an Indemnified Person and it shall have notified the Indemnifying Person thereof, the Indemnifying Person shall retain counsel reasonably satisfactory to the Indemnified Person (who shall not, without the consent of the Indemnified Person, be counsel to the Indemnifying Person) to represent the Indemnified Person in such proceeding and shall pay the fees and expenses of such counsel related to such proceeding, as incurred. In any such proceeding, any Indemnified Person shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed to the contrary or (ii) the Indemnifying Person has failed within a reasonable time to retain counsel reasonably satisfactory to the Indemnified Person. It is understood and agreed that the Indemnifying Person shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnified Persons, and that all such fees and expenses shall be paid or reimbursed as they are incurred; provided , however , that if indemnity may be sought pursuant to the second paragraph of Section 9(a) above in respect of such proceeding, then in addition to such separate firm of the Underwriters, their affiliates and such control persons of the Underwriters the indemnifying party shall be liable for the fees and expenses of not more than one separate firm (in addition to any local counsel) for Wachovia in its capacity as a “qualified independent underwriter,” its affiliates and all persons, if any, who control Wachovia within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act. Any such separate firm for any Underwriter, its affiliates, directors and officers and any control persons of such Underwriter shall be designated in writing by the Representatives; any such separate firm for the Company, its directors, its officers who signed the Registration Statement and any control persons of the Company shall be designated in writing by the Company and any such separate firm for the Selling Stockholder shall be designated in writing by the Attorneys-in-Fact. The Indemnifying Person shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the Indemnifying Person agrees to indemnify each Indemnified Person from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an Indemnified Person shall have requested that an Indemnifying Person reimburse the Indemnified Person for fees and expenses of counsel as contemplated by this paragraph, the Indemnifying Person shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by the Indemnifying Person of such request and (ii) the Indemnifying Person shall not have reimbursed the Indemnified Person in accordance with such request prior to the date of such settlement. No Indemnifying Person shall, without the written consent of the Indemnified Person, effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Person is or could have been a party and indemnification could have been sought hereunder by such Indemnified Person, unless such settlement (x) includes an unconditional release of such Indemnified Person, in form and substance reasonably satisfactory to such Indemnified Person, from all liability on claims that are the

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subject matter of such proceeding and (y) does not include any statement as to or any admission of fault, culpability or a failure to act by or on behalf of any Indemnified Person.

(e) Contribution . If the indemnification provided for in paragraphs (a), (b), and (c) above is unavailable to an Indemnified Person or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Person under such paragraph, in lieu of indemnifying such Indemnified Person thereunder, shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholder, on the one hand, and the Underwriters or Wachovia in its capacity as a “qualified independent underwriter,” as the case may be, on the other, from the offering of the Shares or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Company and the Selling Stockholder, on the one hand, and the Underwriters or Wachovia in its capacity as a “qualified independent underwriter,” as the case may be, on the other, in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholder, on the one hand, and the Underwriters or Wachovia in its capacity as a “qualified independent underwriter,” as the case may be, on the other, shall be deemed to be in the same respective proportions as the net proceeds (before deducting expenses) received by the Company and the Selling Stockholder from the sale of the Shares and the total underwriting discounts and commissions received by the Underwriters in connection therewith, in each case as set forth in the table on the cover of the Prospectus, or the fee to be received by Wachovia in its capacity as a “qualified independent underwriter,” as the case may be, bear to the aggregate offering price of the Shares. The relative fault of the Company and the Selling Stockholder, on the one hand, and the Underwriters or Wachovia in its capacity as a “qualified independent underwriter,” as the case may be, on the other, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and the Selling Stockholder or by the Underwriters or Wachovia in its capacity as a “qualified independent underwriter,” as the case may be, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

(f) Limitation on Liability . The Company, the Selling Stockholder and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (e) above. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages and liabilities referred to in paragraph (e) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such Indemnified Person in connection with any such action or claim. Notwithstanding the provisions of this Section 9, in no event shall an Underwriter be required to contribute any amount in excess of the amount by which the total underwriting discounts and commissions received by such Underwriter with respect to the offering of the Shares exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters’ obligations to contribute pursuant to this Section 9 are several in proportion to their respective purchase obligations hereunder and not joint.

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(g) Non-Exclusive Remedies . The remedies provided for in this Section 9 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any Indemnified Person at law or in equity.

10. Effectiveness of Agreement . This Agreement shall become effective upon the execution and delivery hereof by the parties hereto.

11. Termination . This Agreement may be terminated in the absolute discretion of the Representatives, by notice to the Company and the Selling Stockholder, if after the execution and delivery of this Agreement and prior to the Closing Date or, in the case of the Option Shares, prior to the Additional Closing Date (i) trading generally shall have been suspended or materially limited on or by any of the New York Stock Exchange, the American Stock Exchange, the NASD, the Chicago Board Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade; (ii) trading of any securities issued or guaranteed by the Company shall have been suspended on any exchange or in any over-the-counter market; (iii) a general moratorium on commercial banking activities shall have been declared by federal or New York State authorities; or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis, either within or outside the United States, that, in the judgment of the Representatives, is material and adverse and makes it impracticable or inadvisable to proceed with the offering, sale or delivery of the Shares on the Closing Date or the Additional Closing Date, as the case may be, on the terms and in the manner contemplated by this Agreement, the Time of Sale Information and the Prospectus.

12. Defaulting Underwriter .

(a) If, on the Closing Date or the Additional Closing Date, as the case may be, any Underwriter defaults on its obligation to purchase the Shares that it has agreed to purchase hereunder on such date, the non-defaulting Underwriters may in their discretion arrange for the purchase of such Shares by other persons satisfactory to the Company and the Selling Stockholder on the terms contained in this Agreement. If, within 36 hours after any such default by any Underwriter, the non-defaulting Underwriters do not arrange for the purchase of such Shares, then the Company and the Selling Stockholder shall be entitled to a further period of 36 hours within which to procure other persons satisfactory to the non-defaulting Underwriters to purchase such Shares on such terms. If other persons become obligated or agree to purchase the Shares of a defaulting Underwriter, either the non-defaulting Underwriters or the Company and the Selling Stockholder may postpone the Closing Date or the Additional Closing Date, as the case may be, for up to five full business days in order to effect any changes that in the opinion of counsel for the Company, counsel for the Selling Stockholder or counsel for the Underwriters may be necessary in the Registration Statement and the Prospectus or in any other document or arrangement, and the Company agrees to promptly prepare any amendment or supplement to the Registration Statement and the Prospectus that effects any such changes. As used in this Agreement, the term “Underwriter” includes, for all purposes of this Agreement unless the context otherwise requires, any person not listed in Schedule 1 hereto that, pursuant to this Section 12, purchases Shares that a defaulting Underwriter agreed but failed to purchase.

(b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by the non-defaulting Underwriters and the Company and the Selling Stockholder as provided in paragraph (a) above, the aggregate number of Shares that remain unpurchased on the Closing Date or the Additional Closing Date, as the case may be, does not exceed one-eleventh of the aggregate number of Shares to be purchased on such date, then the Company and the Selling Stockholder shall have the right to require each non-defaulting Underwriter to purchase the number of Shares that such Underwriter agreed to purchase hereunder on such date plus such Underwriter’s pro rata share (based on

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the number of Shares that such Underwriter agreed to purchase on such date) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made.

(c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by the non-defaulting Underwriters and the Company and the Selling Stockholder as provided in paragraph (a) above, the aggregate number of Shares that remain unpurchased on the Closing Date or the Additional Closing Date, as the case may be, exceeds one-eleventh of the aggregate amount of Shares to be purchased on such date, or if the Company and the Selling Stockholder shall not exercise the right described in paragraph (b) above, then this Agreement or, with respect to any Additional Closing Date, the obligation of the Underwriters to purchase Shares on the Additional Closing Date, as the case may be, shall terminate without liability on the part of the non-defaulting Underwriters. Any termination of this Agreement pursuant to this Section 12 shall be without liability on the part of the Company and the Selling Stockholder, except that the Company will continue to be liable for the payment of expenses as set forth in Section 13 hereof and except that the provisions of Section 9 hereof shall not terminate and shall remain in effect.

(d) Nothing contained herein shall relieve a defaulting Underwriter of any liability it may have to the Company, the Selling Stockholder or any non-defaulting Underwriter for damages caused by its default.

13. Payment of Expenses .

(a) Whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, the Company will pay or cause to be paid all costs and expenses incident to the performance of its obligations hereunder, including without limitation, (i) the costs incident to the authorization, issuance, sale, preparation and delivery of the Shares and any taxes payable in that connection; (ii) the costs (other than the fees and expenses of underwriters’ counsel related thereto) incident to the preparation, printing and filing under the Securities Act of the Registration Statement, the Preliminary Prospectus, any Issuer Free Writing Prospectus, any Time of Sale Information and the Prospectus (including all exhibits, amendments and supplements thereto) and the distribution thereof; (iii) the costs of reproducing and distributing each of the Transaction Documents; (iv) the fees and expenses of the Company’s counsel and independent accountants; (v) the fees and expenses incurred in connection with the registration or qualification of the Shares under the laws of such jurisdictions as the Representatives may designate (including the related fees and expenses reasonably incurred of counsel for the Underwriters); (vi) the cost of preparing stock certificates; (vii) the costs and charges of any transfer agent and any registrar; (viii) all expenses and application fees incurred in connection with any filing with, and clearance of the offering by, the NASD; (ix) all expenses incurred by the Company in connection with any “road show” presentation to potential investors; and (x) all expenses and application fees related to the listing of the Shares on the Nasdaq Global Market; provided that notwithstanding clause (ix) above, the Underwriters shall pay one-half of the expenses associated with any airplane, which is used for the purposes of such “road show” presentations.

(b) If (i) the Company or the Selling Stockholder for any reason fails to tender the Shares for delivery to the Underwriters or (ii) the Underwriters decline to purchase the Shares for any reason permitted under this Agreement (other than Section 11), the Company agrees to reimburse the Underwriters for all out-of-pocket costs and expenses (including the fees and expenses of their counsel) reasonably incurred by the Underwriters in connection with this Agreement and the offering contemplated hereby.

14. Persons Entitled to Benefit of Agreement . This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and any controlling persons referred to in Section 9 hereof. Nothing in this Agreement is intended or shall be

-25-

construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. No purchaser of Shares from any Underwriter shall be deemed to be a successor merely by reason of such purchase.

15. Survival . The respective indemnities, rights of contribution, representations, warranties and agreements of the Company, the Selling Stockholder and the Underwriters contained in this Agreement or made by or on behalf of the Company, the Selling Stockholder or the Underwriters pursuant to this Agreement or any certificate delivered pursuant hereto shall survive the delivery of and payment for the Shares and shall remain in full force and effect, regardless of any termination of this Agreement or any investigation made by or on behalf of the Company, the Selling Stockholder or the Underwriters.

16. Certain Defined Terms . For purposes of this Agreement, (a) except where otherwise expressly provided, the term “affiliate” has the meaning set forth in Rule 405 under the Securities Act; (b) the term “business day” means any day other than a day on which banks are permitted or required to be closed in New York City; and (c) the term “subsidiary” has the meaning set forth in Rule 405 under the Securities Act.

17. Miscellaneous .

(a) Authority of the Representatives . Any action by the Underwriters hereunder may be taken by the Representatives on behalf of the Underwriters, and any such action taken by Representatives shall be binding upon the Underwriters.

(b) Notices . All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted and confirmed by any standard form of telecommunication. Notices to the Underwriters shall be given to the Representatives c/o J.P. Morgan Securities Inc., 277 Park Avenue, New York, New York 10172 (fax: (212) 622-8358); Attention: Equity Syndicate Desk. Notices to the Company and the Selling Stockholder shall be given to it at Approach Resources Inc., One Ridgmar Centre, 6500 West Freeway, Suite 800, Fort Worth, TX 76116, (fax: (817) 989-9001); Attention: J. Curtis Henderson, Executive Vice President and General Counsel.

(c) Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of New York.

(d) Counterparts . This Agreement may be signed in counterparts (which may include counterparts delivered by any standard form of telecommunication), each of which shall be an original and all of which together shall constitute one and the same instrument.

(e) Amendments or Waivers . No amendment or waiver of any provision of this Agreement, nor any consent or approval to any departure therefrom, shall in any event be effective unless the same shall be in writing and signed by the parties hereto.

(f) Headings . The headings herein are included for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement.

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If the foregoing is in accordance with your understanding, please indicate your acceptance of this Agreement by signing in the space provided below.


	Very truly yours, APPROACH RESOURCES INC.
	By:
		Name:
		Title:

-27-


NEO CANYON EXPLORATION, L.P.
By:
	Name:	[ ]
	Title:	[ ]

As Attorney-in-Fact acting on behalf of the Selling Stockholder.

-28-

Accepted: [ ], 2007

J.P. MORGAN SECURITIES INC.
WACHOVIA CAPITAL MARKETS, LLC

For themselves and on behalf of the
several Underwriters listed in
Schedule 1 hereto.

J.P. MORGAN SECURITIES INC.


By:

		Name:
		Title:

WACHOVIA CAPITAL MARKETS, LLC


By:

		Name:
		Title:

Schedule 1


	Number of Underwritten
Underwriter	Shares	Number of Option Shares
J.P. Morgan Securities Inc.
Wachovia Capital Markets, LLC
KeyBanc Capital Markets Inc.
Tudor, Pickering & Co.
Securities, Inc.

Total

Sched 1-1

Schedule 2


Attorneys-in-Fact
J. Ross Craft
J. Curtis Henderson

Sched 2-1

Annex A-1

Form of Opinion of Thompson & Knight LLP

(a) The Registration Statement was declared effective under the Securities Act as of the date and time specified in such opinion; the Prospectus was filed with the Commission pursuant to the subparagraph of Rule 424(b) under the Securities Act specified in such opinion on the date specified therein; and, to such counsel’s knowledge, no order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose or pursuant to Section 8A of the Securities Act against the Company or in connection with the offering is pending or, to the knowledge of such counsel, threatened by the Commission.

(b) The Company and each of its subsidiaries have been duly organized and are validly existing and in good standing under the laws of their respective jurisdictions of organization, are duly qualified to do business and are in good standing in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification, and have all power and authority necessary to own or hold their respective properties and to conduct the businesses in which they are engaged, except where the failure to be in good standing or so qualified or have such power or authority would not, individually or in the aggregate, have a Material Adverse Effect.

(c) The Registration Statement, the Marketing Preliminary Prospectus, each Issuer Free Writing Prospectus included in the Time of Sale Information and the Prospectus (other than the financial statements and notes and related schedules and other financial and accounting data and the oil and natural gas reserve estimates included therein or omitted therefrom as to which such counsel need express no opinion) apear on their face to comply as to form in all material respects with the requirements of the Securities Act.

(d) The Company has the requisite corporate power and authority to execute and deliver each of the Transaction Documents and to perform its obligations thereunder.

(e) The Underwriting Agreement has been duly authorized, executed and delivered by the Company.

(f) The Contribution Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and legally binding agreement of the Company enforceable against the Company in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors’ rights generally or by equitable principles relating to enforceability; provided that the indemnity, contribution and exoneration provisions contained therein may be limited by applicable laws and public policy.

(g) The Shares to be issued and sold by the Company hereunder have been duly authorized, and when delivered to and paid for by the Underwriters in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable and the issuance of the Shares is not subject to any preemptive rights granted under its Amended and Restated Certificate of Incorporation or Restated Bylaws of the Delaware General Corporation Law.

(h) The execution, delivery and performance by the Company of each of the Transaction Documents, the issuance and sale of the Shares by the Company being delivered on the Closing Date or the Additional Closing Date, as the case may be, and compliance by the Company with the terms of, and the consummation of the transactions contemplated by, the Transaction Documents will not (i) conflict

A-1-1

with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, any document filed as an exhibit to the Registration Statement, (ii) result in any violation of the provisions of the charter or by-laws or similar organizational documents of the Company or any of its subsidiaries or (iii) result in the violation of any law or statute or any judgment, order or regulation of any court or arbitrator or governmental or regulatory authority known to such counsel except, in the case of clauses (i) and (iii) above, for such conflict, breach or violation that would not, individually or in the aggregate, have a Material Adverse Effect. With respect to clause (iii) above, we express no opinion as to the application of any state securities or Blue Sky laws or federal or state antifraud laws, rules or regulations.

(i) No consent, approval, authorization, order, registration or qualification of or with any court or arbitrator or governmental or regulatory authority is required for the execution, delivery and performance by the Company of each of the Transaction Documents, the issuance and sale of the Shares being delivered on the Closing Date or the Additional Closing Date, as the case may be, and compliance by the Company with the terms thereof and the consummation of the transactions contemplated by the Underwriting Agreement, except for the registration of the Shares under the Securities Act and such consents, approvals, authorizations, orders and registrations or qualifications as may be required under applicable state securities laws in connection with the purchase and distribution of the Shares by the Underwriters, and any consent, approval, authorization, order, registration or qualification that either has been, or prior to the Closing Date will have been, obtained or made, or which if not obtained or made, would not individually or in the aggregate, have a Material Adverse Effect.

(j) The descriptions in the Registration Statement, the Time of Sale Information and the Prospectus under the headings “Material United States federal income and estate tax considerations for non-U.S. holders”, “Description of Capital Stock”, “Business — Regulation” and “Underwriting”, and in the Registration Statement in items 14 and 15, to the extent that they constitute summaries of the terms of stock, matters of law or regulation or legal conclusions, are accurate in all material respects; and, to the knowledge of such counsel, there are no current or pending legal, governmental or regulatory actions, suits or proceedings that are required under the Securities Act to be described in the Registration Statement and that are not so described in the Registration Statement, the Time of Sale Information and the Prospectus.

(k) The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Registration Statement, the Time of Sale Information and the Prospectus, will not be required to register as an “investment company” within the meaning of the Investment Company Act.

Such counsel shall also state that they have participated in conferences with representatives of the Company and with representatives of its independent accountants and counsel at which conferences the contents of the Registration Statement, the Time of Sale Information and the Prospectus and any amendment and supplement thereto and related matters were discussed and, although such counsel assume no responsibility for, or express any opinion regarding (other than as listed in opinion (j) above), the accuracy, completeness or fairness of the Registration Statement, the Time of Sale Information, the Prospectus and any amendment or supplement thereto (except as expressly provided above), based upon the participation described above (relying as to factual matters upon statements of fact made to us by representatives of the Company) and subject to the next succeeding sentence, nothing has come to the attention of such counsel to cause such counsel to believe that the Registration Statement, at the time of its effective date (including the information, if any, deemed pursuant to Rule 430A, 430B or 430C to be part of the Registration Statement at the time of effectiveness), contained any untrue statement of a material fact or omit ted to state a material fact required to be stated therein or necessary to make the statements therein not

A-1-2

misleading, that the Time of Sale Information, at the Time of Sale (which such counsel may assume to be the date of the Underwriting Agreement) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or that the Prospectus or any amendment or supplement thereto as of its date and the Closing Date contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. In making the foregoing statement, such counsel will not express any comment or belief with respect to the financial statements and notes and related schedules (and other financial and accounting data derived therefrom), and the oil and natural gas reserve estimates included in or omitted from the Registration Statement, the Time of Sale Information or the Prospectus.

In rendering such opinion, such counsel may rely as to matters of fact on certificates of responsible officers of the Company and public officials that are furnished to the Underwriters.

The opinion of Thompson & Knight LLP described above shall be rendered to the Underwriters at the request of the Company and shall so state therein.

A-1-3

Annex A-2

[Form of Opinion of General Counsel of the Company]

(a) The Company has authorized capital stock as set forth in the Registration Statement, the Time of Sale Information and the Prospectus under the heading “Capitalization”; all of the outstanding shares of capital stock of the Company have been duly and validly authorized and issued and are fully paid and non-assessable; the capital stock of the Company conforms in all material respects to the description thereof contained in the Registration Statement, the Time of Sale Information and the Prospectus.

(b) The execution, delivery and performance by the Company of each of the Transaction Documents, the issuance and sale of the Shares by the Company being delivered on the Closing Date or the Additional Closing Date, as the case may be, and the consummation of the transactions contemplated by, the Transaction Documents will not conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default under any contract to which the Company is a party.

(c) To the knowledge of such counsel, except as described in the Registration Statement, the Time of Sale Information and the Prospectus, there are no legal, governmental or regulatory investigations, actions, suits or proceedings pending to which the Company or any of its subsidiaries is or may be a party or to which any property of the Company or any of its subsidiaries is or may be the subject which, individually or in the aggregate, if determined adversely to the Company or any of its subsidiaries, could reasonably be expected to have a Material Adverse Effect; and to the knowledge of such counsel, no such investigations, actions, suits or proceedings are threatened or contemplated by any governmental or regulatory authority or threatened by others.

A-2-1

Annex B

[Form of Opinion of Counsel For
The Selling Stockholder]

(a) The Underwriting Agreement has been duly authorized, executed and delivered by or on behalf of the Selling Stockholder.

(b) A Power of Attorney and a Custody Agreement have been duly authorized, executed and delivered by the Selling Stockholder and constitute valid and binding agreements of the Selling Stockholder in accordance with their terms.

(b) The sale of the Shares and the execution and delivery by the Selling Stockholder of, and the performance by the Selling Stockholder of its obligations under, the Underwriting Agreement, and the consummation of the transactions contemplated therein, (i) have been duly authorized on the part of the Selling Stockholder, and (ii) will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which the Selling Stockholder is a party or by which the Selling Stockholder is bound or to which any of the property or assets of the Selling Stockholder is subject, nor will any such action result in any violation of limited partnership agreement of the Selling Stockholder or any applicable law or statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Selling Stockholder or any of its properties.

(c) No consent, approval, authorization or order of any governmental agency or body under United States federal or Texas state law that in such counsel’s experience is normally applicable to limited partnerships in relation to transactions of the type contemplated by the Underwriting Agreement or by the Time of Sale Information and the Prospectus is required to be obtained or made by the Selling Stockholder for the execution, delivery and performance of the Underwriting Agreement or in connection with the sale to the Underwriter of the Shares sold by each Selling Stockholder, except such as have been obtained and such as may be required under federal or state securities laws, as to which such counsel need not express any opinion.

(d) Upon (a) payment for the Shares to be sold by the Selling Stockholder to the Underwriter as provided in the Underwriting Agreement, (b) the delivery of such Shares to Cede & Co. (“Cede”) or such other nominee as may be designated by The Depository Trust Company (“DTC”), (c) the registration of such Shares in the name of Cede or such other nominee and (d) the crediting of such Shares on the records of DTC to security accounts in the name of the Underwriter (assuming that neither DTC nor the Underwriter has notice of any adverse claim (as such phrase is defined in Section 8-105 of the Uniform Commercial Code as in effect in the State of New York (the “UCC”)) to such Shares or any security entitlement in respect thereof), (i) DTC shall be a “protected purchaser” of such Shares within the meaning of Section 8-303 of the UCC, (ii) under Section 8-501 of the UCC, the Underwriter will acquire a security entitlement in respect of such Shares and (iii) to the extent governed by Article 8 of the UCC, no action based on any “adverse claim” (as defined in Section 8-102 of the UCC) to such Shares may be asserted against the Underwriter; it being understood that for purposes of this opinion, such counsel may assume that when such payment, delivery and crediting occur, (x) such Shares will have been registered in the name of Cede or such other nominee as may be designated by DTC, in each case on the Company’s share registry in accordance with its certificate of incorporation, by laws and applicable law, (y) DTC will be registered as a “clearing corporation” within the meaning of Section 8-102 of the UCC and (z) appropriate entries to the securities account or accounts in the name of the Underwriter on the records of DTC will have been made pursuant to the UCC.

B-1

The opinion of counsel described above shall be rendered to the Underwriters at the request of the Selling Stockholder and shall so state therein.

B-2

Annex C

Time of Sale Information

[Free Writing Prospectuses]

C-1

Annex D

Approach Resources Inc.

Pricing Term Sheet

[TO COME]

D-1

Exhibit A

FORM OF LOCK-UP AGREEMENT

_________, 2007

J.P. MORGAN SECURITIES INC.
WACHOVIA CAPITAL MARKETS, LLC
As Representatives of
the several Underwriters listed in
Schedule 1 to the Underwriting
Agreement referred to below
c/o J.P. Morgan Securities Inc.
277 Park Avenue
New York, NY 10172

Re: Approach Resources Inc. — Public Offering

Ladies and Gentlemen:

The undersigned understands that you, as Representatives of the several Underwriters, propose to enter into an Underwriting Agreement (the “Underwriting Agreement”) with Approach Resources Inc., a Delaware corporation (the “Company”), providing for the public offering (the “Public Offering”) by the several Underwriters to be named in Schedule 1 to the Underwriting Agreement (the “Underwriters”) of common stock of the Company (the “Securities”).

In consideration of the Underwriters’ agreement to purchase and make the Public Offering of the Securities, and for other good and valuable consideration receipt of which is hereby acknowledged, the undersigned hereby agrees that, without the prior written consent of J.P. Morgan Securities Inc. (“JPMorgan”) on behalf of the Underwriters, the undersigned will not, during the period ending 180 days after the date of the prospectus relating to the Public Offering (the “Prospectus”), (1) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock, par value $0.01 per share, of the Company (the “Common Stock”) or any securities convertible into or exercisable or exchangeable for Common Stock (including, without limitation, Common Stock which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the Securities and Exchange Commission and securities which may be issued upon exercise of a stock option or warrant) or (2) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. In addition, the undersigned agrees that, without the prior written consent of JPMorgan, it will not, during the period ending 180 days after the date of the Prospectus, make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock.

Notwithstanding the foregoing, if (1) during the last 17 days of the 180-day restricted period, the Company issues an earnings release or material news or a material event relating to the Company occurs; or (2) prior to the expiration of the 180-day restricted period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the 180-day period, the restrictions imposed by this Letter Agreement shall continue to apply until the expiration of the 18-day period begin-

Exh A-1

ning on the issuance of the earnings release or the occurrence of the material news or material event; provided , however , that in no event shall such restrictions extend past 214 days from the date of the Prospectus.

In furtherance of the foregoing, the Company, and any duly appointed transfer agent for the registration or transfer of the securities described herein, are hereby authorized to decline to make any transfer of securities if such transfer would constitute a violation or breach of this Letter Agreement.

The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Letter Agreement. All authority herein conferred or agreed to be conferred and any obligations of the undersigned shall be binding upon the successors, assigns, heirs or personal representatives of the undersigned.

The undersigned understands that, if the Underwriting Agreement does not become effective, or if the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the Common Stock to be sold thereunder, the undersigned shall be released from all obligations under this Letter Agreement.

The undersigned understands that the Underwriters are entering into the Underwriting Agreement and proceeding with the Public Offering in reliance upon this Letter Agreement.

In addition, the undersigned hereby waives any rights the undersigned may have, if any, to require registration of Common Stock in connection with the filing of a registrations statement relating to the Public Offering.

This Letter Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to the conflict of laws principles thereof.


	Very truly yours,
	By:
		Name:
		Title:

Exh A-2

Exhibit 4.1


NUMBER		SHARES

AR

COMMON STOCK	[ Approach Resources Inc. Logo ]	COMMON STOCK

INCORPORATED UNDER THE LAWS		CUSIP 03834A 10 3
OF THE STATE OF DELAWARE
		SEE REVERSE FOR CERTAIN DEFINITIONS

APPROACH RESOURCES INC.

This Certifies that **[Specimen Stamp]**

is the owner of **[ Zero (0)]**

FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK OF $0.01 PAR VALUE EACH OF

APPROACH RESOURCES INC.

transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney on surrender of this certificate properly endorsed. This Certificate and the shares represented hereby are subject to the laws of the State of Delaware, and to the Restated Certificate of Incorporation and Restated Bylaws of the Corporation, as now or hereafter amended.

This certificate is not valid unless countersigned and registered by the Transfer Agent.

WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.

Dated:


/s/ J. Curtis Henderson	[ Approach Resources Inc. Seal ]	/s/ J. Ross Craft

SECRETARY		PRESIDENT

COUNTERSIGNED & REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(New York, NY)
TRANSFER AGENT AND REGISTRAR

By:
AUTHORIZED SIGNATURE

APPROACH RESOURCES INC.

THE CORPORATION IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS OF STOCK. THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS A COPY OF THE POWERS, DEISGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF, WHICH THE CORPORATION IS AUTHORIZED TO ISSUE, AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. ANY SUCH REQUEST MAY BE MADE TO THE CORPORATION OR THE TRANSFER AGENT.

KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN OR DESTROYED, THE CORPORATION WILL
REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE.

The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:


TEN COM	¾ as tenants in common	UNIF GIFT MIN ACT ¾		Custodian

TEN ENT	¾ as tenants by the entireties		(Cust)		(Minor)
JT TEN	¾ as joint tenants with right of		under Uniform Gifts to Minors Act
	survivorship and not as tenants

	in common		(State)
		UNIF TRF MIN ACT ¾		Custodian (until age )

			(Cust)		(Minor)
			under Uniform Transfers to Minors Act


			(State)

Additional abbreviations may also be used though not in the above list.

FOR VALUE RECEIVED, hereby sell, assign and transfer unto

(Please Print or Typewrite Name and Address, Including Zip Code, of Assignee)

(Please Insert Social Security or other Identifying Number of Assignee)

Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint

Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises.


Dated

	X

	X

	NOTICE:	THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.


Signature(s) Guaranteed

By:

THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.

Exhibit 5.1

Thompson & Knight LLP


DIRECT DIAL: EMAIL:		ATTORNEYS AND COUNSELORS 1700 Pacific Avenue • Suite 3300 DALLAS, TEXAS 75201-4693 (214) 969-1700 FAX (214) 969-1751 www.tklaw.com		AUSTIN DALLAS FORT WORTH HOUSTON NEW YORK ALGIERS LONDON MEXICO CITY MONTERREY PARIS RIO DE JANEIRO SãO PAULO VITóRIA

October 18, 2007

Approach Resources Inc.
One Ridgmar Centre
6500 W. Freeway
Suite 800
Fort Worth, Texas 76116

Ladies and Gentlemen:

We have acted as counsel for Approach Resources Inc., a Delaware corporation (the “Company”), in connection with the proposed offer and sale (the “Offering”) by the Company and the selling stockholders (the “Selling Stockholders”) pursuant to a prospectus forming a part of a Registration Statement on Form S-1, as amended (the “Registration Statement”), originally filed with the Securities and Exchange Commission on July 12, 2007 under the Securities Act of 1933, as amended (the “Securities Act”). The Registration Statement relates to the sale of an aggregate of 7,666,667 shares (the “Shares”) of the Company’s common stock, par value $.01 per share (the “Common Stock”), together with up to 1,150,000 additional shares (the “Additional Shares”) of Common Stock subject to the underwriters’ over-allotment option as described in the Registration Statement.

In connection with the opinion expressed herein, we have examined the originals or copies, certified or otherwise authenticated to our satisfaction, of the Registration Statement, the Company’s restated certificate of incorporation, the Company’s restated bylaws, the records of corporate proceedings that have occurred prior to the date hereof with respect to the Offering and the form of underwriting agreement relating to the Shares in the form filed as an exhibit to the Registration Statement and approved by the Board of Directors of the Company (the “Underwriting Agreement”). We have also reviewed such questions of law as we have deemed necessary or appropriate. As to matters of fact relevant to the opinion expressed herein, and as to factual matters arising in connection with our examination of corporate documents, records and other documents and writings, we relied upon certificates and other communications of corporate officers of the Company, without further investigation as to the facts set forth therein.

We have assumed that (i) all information contained in all documents reviewed by us is true, complete and correct, (ii) all signatures on all documents reviewed by us are genuine, (iii) all documents submitted to us as originals are true and complete, (iv) all documents submitted to us as copies are true and complete copies of the originals thereof, (v) each natural person signing any document reviewed by us had the legal capacity to do so, (vi) each natural person signing any document reviewed by us in a representative capacity had authority to sign in such capacity,

October 18, 2007
Page 2

(vii) the Registration Statement, and any amendments thereto (including post-effective amendments), will have become effective, and (viii) the Shares will be issued and sold in the manner described in the Registration Statement and the prospectus relating thereto.

Subject to the foregoing and on the basis of the aforementioned examinations and investigations, it is our opinion that, upon the sale of the Shares and Additional Shares in accordance with the Underwriting Agreement, the Shares and any Additional Shares will be duly authorized, validly issued, fully paid and nonassessable.

This opinion is limited in all respects to the Constitution of the State of Delaware and the Delaware General Corporation Law, as interpreted by the courts of the State of Delaware and of the United States.

We hereby consent to the statement with respect to us under the heading “Legal Matters” in the prospectus forming a part of the Registration Statement and to the filing of this opinion as an exhibit to the Registration Statement, but we do not thereby admit that we are within the class of persons whose consent is required under the provisions of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission issued thereunder.

Sincerely,

/s/ Thompson & Knight LLP

THOMPSON & KNIGHT LLP

WPW/JD

Exhibit 10.11

BUSINESS OPPORTUNITIES AGREEMENT

THIS BUSINESS OPPORTUNITIES AGREEMENT (this “ Agreement ”), dated as of , 2007, is entered into by and among Approach Resources Inc., a Delaware corporation (the “ Company ”), and the parties to this Agreement listed on Exhibit A hereto (each a “ Designated Party ” and collectively the “ Designated Parties ”).

RECITALS

A. Each of the Designated Parties engages, directly or indirectly, in the E&P Business. The businesses in which the Designated Parties engage are similar to those in which the Company engages.

B. In recognition that certain Designated Parties may engage, directly or indirectly, in the same or similar activities or lines of business and have an interest in the same or similar areas of business, and in recognition of the benefits to be derived by the Company through its continued contractual, corporate and business relations with each Designated Party (including services of employees, officers and directors of each Designated Party as directors and officers of the Company), this Agreement is set forth to regulate and define the conduct of certain affairs of the Company as they may involve each Designated Party, and as applicable, its employees, officers and directors, and the powers, rights, duties, liabilities, interests and expectations of the Company in connection therewith.

C. The law relating to duties that certain Designated Parties may owe to the Company is not clear. The application of such law to particular circumstances is often difficult to predict, and, if a court were to hold that any Designated Party breached any such duty, such Designated Party could be held liable for damages in a legal action brought on behalf of the Company.

D. In order to induce the Designated Parties to serve as directors of the Company, the Company is willing to enter into this Agreement, pursuant to Section 122 of the General Corporation Law of the State of Delaware, in order to renounce, effective upon the date hereof, any interest or expectancy it may have in the classes or categories of business opportunities specified herein that are presented to or identified by any Designated Party, as more fully described herein. As a result of this Agreement, each Designated Party, as applicable, may continue to conduct his or its business and to pursue certain business opportunities without an obligation to offer such opportunities to the Company or any of its Subsidiaries, and any Designated Party, as applicable, may continue to discharge his responsibilities as a director or employee of such Designated Party or any company in which such Designated Party has an interest.

NOW, THEREFORE, in consideration of the foregoing, the mutual covenants, rights, and obligations set forth in this Agreement and the benefits to be derived herefrom, and other good and valuable consideration, the receipt and the sufficiency of which each of the undersigned acknowledges and confesses, the undersigned agree as follows:

1. Renouncement of Business Opportunities . The Company 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 or officer of the Company 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 Company (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 Company, and any Designated Party may pursue a Renounced Business Opportunity, provided that such Renounced Business Opportunity is conducted by such Designated Party in accordance with the standard set forth in Section 2. The Company 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 Section 1. Nothing in this Section 1 shall be construed to allow any director to usurp a Business Opportunity of the Company or its Subsidiaries solely for his or her personal benefit.

2. Standards for Separate Conduct of Renounced Business Opportunities . In the event that a Designated Party acquires knowledge of a Renounced Business Opportunity, such Designated Party may pursue such Renounced Business Opportunity if such Renounced Business Opportunity is developed and pursued solely through the use of personnel and assets of the Designated Party (including, as applicable, such Designated Party in his capacity as a director, officer, employee or agent of the Designated Party).

3. Liability . Provided a Renounced Business Opportunity is conducted by a Designated Party in accordance with the standards set forth in Section 2 hereof, no Designated Party shall be liable to the Company or a Stockholder for breach of any fiduciary or other duty by reason of such Renounced Business Opportunity. In addition, no Designated Party shall be liable to the Company or a Stockholder for breach of any fiduciary duty as a director or controlling Stockholder, as applicable, by reason of the fact that such Designated Party conducts, pursues or acquires such Renounced Business Opportunity for itself, directs such Renounced Business Opportunity to another Person or does not communicate information regarding such Renounced Business Opportunity to the Company.

4. Disclosing Conflicts of Interest . Should any director of the Company have actual knowledge that he or his Affiliates is pursuing a Renounced Business Opportunity also pursued by the Company, he shall disclose to the Company’s board of directors that he may have a conflict of interest, so that the board of directors may consider his withdrawal from discussions in board deliberations, as appropriate.

5. Interpretation

(a) For purposes of this Agreement, “ Designated Parties ” shall include all Subsidiaries and Affiliates of each Designated Party (other than the Company and its Subsidiaries).

(b) As used in this Agreement, 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) “ 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) 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.

(iii) “ Hydrocarbons ” means oil, gas or other liquid or gaseous hydrocarbons or other minerals produced from oil and gas wells.

(iv) “ Person ” means an individual, corporation, partnership, limited liability company, trust, joint venture, unincorporated organization or other legal or business entity.

(v) “ Subsidiary ” or “ Subsidiaries ” shall mean, 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.

6. Miscellaneous.

(a) The provisions of this Agreement 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) or officer of the Company or its Subsidiaries.

(b) This Agreement does not prohibit or impact the Company’s ability to participate in any Business Opportunity.

(c) This Agreement may be signed by facsimile signature and in any number of counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts together shall constitute one instrument. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to conflicts of laws principles.

[SIGNATURE PAGES FOLLOW]

IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of the date set forth above.


	APPROACH RESOURCES INC.
	By:
		Name:
		Title:

	DESIGNATED PARTIES:


	James H. Brandi




	James C. Crain




	Bryan H. Lawrence




	Sheldon B. Lubar




	Christopher J. Whyte

[Signature Page to Business Opportunities Agreement]


YORKTOWN ENERGY PARTNERS V, L.P.
By:	Yorktown V Company, LLC, its general partner

By:
	Name:	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:	W. Howard Keenan, Jr.
	Title:	Managing Member


YORKTOWN ENERGY PARTNERS VII, L.P.
By:	Yorktown VII Company, LP, its general partner

By:	Yorktown VII Associates LLC, its general partner

By:
	Name:	W. Howard Keenan, Jr.
	Title:	Managing Member

[Signature Page to Business Opportunities Agreement]

EXHIBIT A

Designated Parties

Board Members
James H. Brandi
James C. Crain
Bryan H. Lawrence
Sheldon B. Lubar
Christopher J. Whyte
Such other persons as the Board of Directors of the Company shall from time to time determine
All Affiliates of the foregoing

Stockholders
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

EXHIBIT 10.14

APPROACH RESOURCES INC. 2007 STOCK INCENTIVE PLAN

SUMMARY OF STOCK OPTION GRANT

You, the Optionee named below, have been granted the following option (the “Option”) to purchase shares of the common stock, $0.01 par value per share (the “Common Stock”), of Approach Resources Inc., a Delaware corporation (“Approach”), on the terms and conditions set forth below and in accordance with the Stock Option Award Agreement (the “Agreement”) to which this Summary of Stock Option Grant is attached and the Approach Resources Inc. 2007 Stock Incentive Plan (the “Plan”):


		Optionee Name:

		Number of Option Shares Granted:

		Type of Option (check one):		o Incentive Stock Option

				o Nonqualified Stock Option

		Grant Date:		, 20___

		Exercise Price Per Share:		$


Vesting Schedule:		Subject to earlier vesting pursuant to the Plan, the Option shall vest over a period of time and shares of Common Stock subject to the Option shall become purchasable in installments in accordance with the following schedule: (i) one third of such shares (if a fractional number, then the next lower whole number) shall become purchasable, in whole at any time or in part from time to time, on the first anniversary of the Grant Date; (ii) an additional one third of such shares (if a fractional number, then the next lower whole number) shall become purchasable, in whole at any time or in part from time to time, on the second anniversary of the Grant Date, if Optionee is in the continuous service of Approach or an Affiliate until such vesting date; and (iii) the remaining shares shall become purchasable, in whole at any time or in part from time to time, on the third anniversary of the Grant Date, if the Optionee is in the continuous service of Approach or an Affiliate until such vesting date.

You, by your signature as Optionee below, acknowledge that you (i) have reviewed the Agreement and the Plan in their entirety and have had the opportunity to obtain the advice of counsel prior to executing this Summary of Stock Option Grant, (ii) understand that the Option is granted under and governed by the terms and provisions of the Agreement and the Plan, and (iii) agree to accept as binding all of the determinations and interpretations made by the Committee with respect to matters arising under or relating to the Option, the Agreement and the Plan.


OPTIONEE:	APPROACH RESOURCES INC.

	By:

(Signature of Optionee)		Name:

		Title:

APPROACH RESOURCES INC. 2007 STOCK INCENTIVE PLAN

STOCK OPTION AWARD AGREEMENT

THIS AGREEMENT is made as of the Grant Date (as set forth on the Summary of Stock Option Grant) between Approach Resources Inc., a Delaware corporation (“Approach”), and Optionee pursuant to the Approach Resources Inc. 2007 Stock Incentive Plan (the “Plan”).

WHEREAS, the Board of Directors of Approach or the Compensation and Nominating Committee of Approach’s Board of Directors or such other committee designated by the Board of Directors of Approach (the “Committee”), acting under the Plan, has the authority to grant Options to employees, directors and other individuals performing services for Approach and its Affiliates; and

WHEREAS, pursuant to the Plan, the Committee has determined to grant an Option to Participant on the terms and conditions set forth in the Plan and this Agreement, and Participant desires to accept such Option;

NOW, THERFORE, in consideration of the premises and mutual covenants and agreements contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

1. Effect of Plan and Authority of Committee . This Agreement and the Option granted hereunder are subject to the Plan, which is incorporated herein by reference. The Committee is authorized to make all determinations and interpretations with respect to matters arising under or relating to the Plan, this Agreement and the Option granted hereunder. Capitalized terms used and not otherwise defined herein have the respective meanings given them in the Plan or in the Summary of Stock Option Grant, which are attached hereto and incorporated herein by this reference for all purposes.

2. Grant of Option . On the terms and conditions set forth in this Agreement, the Summary of Stock Option Grant and the Plan, as of the Grant Date, Approach hereby grants to Optionee the option to purchase the number of shares of Common Stock set forth on the Summary of Stock Option Grant at the Exercise Price per share set forth on the Summary of Stock Option Grant (the “Option”). The Option is intended to be an Incentive Stock Option or a Nonqualified Stock Option, as provided in the Summary of Stock Option Grant. If the Option is intended to be an Incentive Stock Option, it is agreed that the exercise price is at least 100% of the Fair Market Value of a share of Common Stock on the Grant Date (110% of the Fair Market Value if Optionee owns stock possessing more than 10% of the total combined voting power of all classes of stock of Approach or any Affiliate, within the meaning of Section 422(b)(6) of the Code). If this Option is intended to be an Incentive Stock Option, but the aggregate Fair Market Value of Common Stock with respect to which Incentive Stock Options granted to Optionee (including all options qualifying as incentive stock options pursuant to Section 422 of the Code granted to Optionee under any other plan of Approach or any Affiliate) are exercisable for the first time by Optionee during any calendar year exceeds $100,000 (determined as of the date the Incentive Stock Option is granted), this Option shall not be void but shall be deemed to be an Incentive Stock Option to the extent it does not exceed the $100,000 limit and shall be deemed a Nonqualified Stock Option to the extent it exceeds that limit.

3. Vesting . This Option may be exercised only to the extent it is vested on the vesting dates in accordance with the Vesting Schedule set forth in the Summary of Stock Option Grant. The vested percentage indicated in such Vesting Schedule shall be exercisable, as to all or part of the vested shares, at any time or times after the respective vesting date and until the expiration or termination of the Option. The

vesting of this Option may be accelerated in certain events which are set forth in the Plan. The unvested portion of this Option shall terminate and be forfeited immediately on the date of Optionee’s termination of employment or service. Notwithstanding any provision of this Agreement or the Summary of Stock Option Grant to the contrary, (a) the Change of Control provisions in Article XIII of the Plan shall apply with respect to this Option and (b) this Option shall terminate and be forfeited in the event that the initial public offering of Approach’s Common Stock does not close on or before March 15, 2008.

4. Term .

(a) Term of Option . This Option may not be exercised after the expiration of ten years from the Grant Date (five years from the Grant Date if the Option is an Incentive Stock Option and Optionee owns stock possessing more than 10% of the total combined voting power of all classes of stock of Approach or any Affiliate, within the meaning of Section 422(b)(6) of the Code, as of the Grant Date). If the expiration date of this Option or any termination date provided for in this Agreement shall fall on a Saturday, Sunday or a day on which the executive offices of the Company are not open for business, then such expiration or termination date shall be deemed to be the last normal business day of the Company at its executive offices preceding such Saturday, Sunday or day on which such offices are closed.

(b) Early Termination . Except as provided below, this Option may not be exercised unless Optionee shall have been in the continuous employ or service of Approach or any Affiliate from the Grant Date to the date of exercise of the Option. This Option may be exercised after the date of Optionee’s termination of employment or service with Approach and its Affiliates only in accordance with Section 7.5 of the Plan.

5. Manner of Exercise and Payment . The Optionee (or his or her representative, guardian, devisee or heir, as applicable) may exercise any portion of this Option that has become exercisable in accordance with the terms hereof as to all or any of the shares of Common Stock then available for purchase by delivering to Approach written notice, in a form satisfactory to the Committee, specifying:

(a) the number of whole shares of Common Stock to be purchased together with payment in full of the purchase price of such shares;

(b) the address to which dividends, notices, reports and other information are to be sent; and

Payment of the purchase price of the shares of Common Stock shall be made (i) in cash, or by certified or cashier’s check payable to the order of Approach, free from all collection charges, (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) by a combination of cash (or certified or cashier’s check) and such already-owned shares of Common Stock. Optionee also may elect to pay all or a portion of the purchase price of such shares of Common Stock through a special sale and remittance procedure pursuant to which Optionee shall concurrently provide (1) irrevocable instructions to a broker-dealer to effect the immediate sale or margin of a sufficient portion of the purchased shares and remit directly to Approach, out of the sale proceeds available on the settlement

date, sufficient funds to cover the purchase price payable for the purchased shares plus all applicable taxes required to be withheld by reason of such exercise and (2) an executed irrevocable option exercise form to Approach along with instructions to Approach to deliver the certificates for the purchased shares directly to such broker-dealer to complete the sale. This Option shall be deemed to have been exercised on the first date upon which Approach receives written notice of exercise as described above, payment of the purchase price and all other documents, information and amounts required with respect to such exercise under this Agreement and the Plan. Notwithstanding the foregoing provisions of this Section 5, the Committee may, in its discretion, reject payment of the purchase price of the shares of Common Stock subject to this Option in the form of already-owned shares, through surrender of Option shares, or through a sale and remittance procedure with a broker-dealer in the event that the Committee determines that such payment forms violate the provisions of applicable law or result in negative accounting treatment to Approach.

6. Withholding Tax . Promptly after demand by Approach, and at its direction, Optionee shall pay to Approach or the appropriate Affiliate an amount equal to the applicable withholding taxes due in connection with the exercise of the Option. Pursuant to Section 15.5 of the Plan, such withholding taxes may be paid in cash or, subject to the further provisions of this Section 6 of this Agreement, in whole or in part, by having Approach withhold from the shares of Common Stock otherwise issuable upon exercise of the Option a number of shares of Common Stock having a value equal to the amount of such withholding taxes or by delivering to Approach or the appropriate Affiliate a number of previously acquired issued and outstanding shares of Common Stock (excluding restricted shares still subject to a risk of forfeiture) having a value equal to the amount of such withholding taxes. The value of any shares of Common Stock so withheld by or delivered to Approach or the appropriate Affiliate shall be based on the Fair Market Value (as defined in the Plan) of such shares on the date on which the tax withholding is to be made. Optionee shall pay to Approach or the appropriate Affiliate in cash the amount, if any, by which the amount of such withholding taxes exceeds the value of the shares of Common Stock so withheld or delivered. An election by Optionee to have shares withheld or to deliver shares to pay withholding taxes shall be made in accordance with administrative guidelines established by the Committee.

7. Delivery of Shares . Delivery of the certificates representing the shares of Common Stock purchased, upon exercise of this Option shall be made as soon as reasonably practicable after receipt of notice of exercise and full payment of the Exercise Price and any required withholding taxes. If Approach so elects, its obligation to deliver shares of Common Stock upon the exercise of this Option shall be conditioned upon its receipt from the person exercising this Option of an executed investment letter, in a form and content satisfactory to Approach and its legal counsel, evidencing the investment intent of such person and such other matters as Approach may reasonably require. If Approach so elects, the certificate or certificates representing the shares of Common Stock issued upon exercise of this Option shall bear a legend to reflect any restrictions on transferability.

8. Optional Issuance in Book-Entry Form . Notwithstanding the provisions of Section 7, at the option of Approach, any shares of Common Stock that under the terms of this Agreement are issuable in the form of a stock certificate may instead be issued in book-entry form.

9. Transferability .

(a) This Option is personal to Optionee and during Optionee’s lifetime may be exercised only by Optionee or his or her guardian or legal representative upon the events and in accordance with the terms and conditions set forth in the Plan, and shall not be transferred except by will or by the laws of descent and distribution, nor may it be otherwise sold, transferred, pledged, exchanged, hypothecated or otherwise disposed of in any way (by operation of law or otherwise) and it shall not

be subject to execution, attachment or similar process. Any attempted sale, transfer, pledge, exchange, hypothecation or other disposition of this Option not specifically permitted by the Plan or this Agreement shall be null and void and without effect.

(b) No shares of Common Stock or other form of payment shall be issued with respect to any Option unless Approach shall be satisfied based on the advice of its counsel that such issuance will be in compliance with applicable federal and state securities laws. Certificates evidencing shares of Common Stock delivered pursuant to exercise of this Option may 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 Securities and Exchange Commission, any securities exchange or transaction reporting system upon which the Common Stock is then listed or to which it is admitted for quotation and any federal or state securities law. The Committee may cause a legend or legends to be placed upon such certificates (if any) to make appropriate reference to such restrictions.

10. Notices . All notices between the parties hereto shall be in writing and given in the manner provided in Section 15.7 of the Plan. Notices to Optionee shall be given to Optionee’s address as contained in Approach’s records. Notices to Approach shall be addressed to its Corporate Secretary at the principal executive offices of Approach as set forth in Section 15.7 of the Plan.

11. Relationship With Contract of Employment or Services .

(a) The grant of an Option does not form part of Optionee’s entitlement to remuneration or benefits pursuant to his or her contract of employment or services, if any, and, except as otherwise provided in a written contract of employment or for services, the existence of such a contract between any person and Approach or any Affiliate does not give such person any right or entitlement to have an Option granted to him or any expectation that an Option might be granted to him whether subject to any conditions or at all.

(b) The rights and obligations of Optionee under the terms of his or her contract of employment or other contract or agreement for services with Approach or any Affiliate, if any, shall not be affected by the grant of an Option.

(c) The rights granted to Optionee upon the grant of an Option shall not afford Optionee any rights or additional rights to compensation or damages in consequence of the loss or termination of his or her office, employment or service with Approach or any Affiliate for any reason whatsoever.

(d) Optionee shall not be entitled to any compensation or damages for any loss or potential loss which he or she may suffer by reason of being or becoming unable to exercise an Option as a consequence of the loss or termination of his or her office, employment or service with Approach or any Affiliate for any reason (including, without limitation, any breach of contract by Approach or any Affiliate) or in any other circumstances whatsoever.

12. Market Standoff Agreement . Optionee agrees in connection with any public offering of Approach’s securities that, upon request of Approach or the managing underwriter(s) of such offering, Optionee will not sell or otherwise dispose of any Common Stock acquired pursuant to this Agreement without the prior written consent of Approach or such managing underwriter(s), as the case may be, for a period of time (not to exceed 180 days) after the effective date of the registration requested by such

managing underwriter(s) and subject to all restrictions as Approach or the managing underwriter(s) may specify for employee or other service provider stockholders generally.

13. Governing Law; Exclusive Forum; Consent to Jurisdiction . This Agreement 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 Delaware, except as superseded by applicable federal law. The exclusive forum for any action concerning this Agreement or the transactions contemplated hereby shall be in a court of competent jurisdiction in Tarrant County, Texas, with respect to a state court, or the United States District Court for the Northern District of Texas, with respect to a federal court. OPTIONEE HEREBY CONSENTS TO THE EXERCISE OF JURISDICTION OF A COURT IN THE EXCLUSIVE FORUM AND WAIVES ANY RIGHT HE OR SHE MAY HAVE TO CHALLENGE OR CONTEST THE REMOVAL AT ANY TIME BY APPROACH OR ANY OF ITS AFFILIATES TO FEDERAL COURT OF ANY SUCH ACTION HE OR SHE MAY BRING AGAINST IT IN STATE COURT.

Exhibit 10.15

APPROACH RESOURCES INC.

2007 STOCK INCENTIVE PLAN

STOCK AWARD AGREEMENT

THIS AGREEMENT, made and entered into as of the ___ day of , 20___, by and between Approach Resources Inc., a Delaware corporation (“Approach”), and , an employee, director or other individual providing services to Approach or one of its Affiliates (“Participant”).

WHEREAS, the Board of Directors or the Compensation and Nominating Committee of Approach’s Board of Directors or such other committee designated by Approach’s Board of Directors (the “Committee”), acting under Approach’s 2007 Stock Incentive Plan (the “Plan”), has the authority to make Stock Awards, which are awards of unrestricted shares of Approach’s common stock, $0.01 par value per share (the “Common Stock”), to employees, directors or other individuals providing services to Approach or its Affiliates; and

WHEREAS, pursuant to the Plan, the Committee has determined to make such an award to Participant on the terms and conditions set forth in the Plan and this Agreement, and Participant desires to accept such award;

1. Stock Award . On the terms and conditions hereinafter set forth, Approach hereby awards to Participant, and Participant hereby accepts, a Stock Award (the “Award”) of shares of Common Stock (the “Shares”). The Award is made on the ___ day of , 20___ (the “Grant Date”). A certificate representing the Shares shall be issued in the name of Participant as of the Grant Date and delivered to Participant on the Grant Date or as soon thereafter as practicable. Notwithstanding the foregoing, at the option of Approach, any Shares that, under the terms of this Agreement, are issuable in the form of a stock certificate may instead be issued in book-entry form.

2. Vesting and Forfeiture . The Shares shall be fully vested and not subject to a substantial risk of forfeiture. Participant shall be free to sell, transfer, pledge, exchange, hypothecate or otherwise dispose of the Shares, subject to applicable securities laws and the policies of Approach.

3. Rights as Stockholder . Subject to the provisions of this Agreement, upon the issuance of a certificate or certificates representing the Shares to Participant, or the issuance of the Shares in book-entry form, Participant shall become the record and beneficial owner thereof for all purposes and shall have all rights as a stockholder with respect to the Shares.

4. Withholding Taxes . Participant will pay to Approach or the appropriate Affiliate, or make arrangements satisfactory to Approach or such Affiliate regarding payment of, any federal, state or local taxes of any kind required by law to be withheld with respect to the Shares. Any provision of this Agreement to the contrary notwithstanding, if Participant does not satisfy his or her obligations under this Section, Approach shall, to the extent permitted by law, have the right to deduct from any payments made under the Plan, regardless of the form of such payment, or from any other compensation payable to Participant, whether or not pursuant to this Agreement or the Plan and regardless of the form of payment, any federal, state or local taxes of any kind required by law to be withheld with respect to the Shares.

5. Effect on Employment or Service . Nothing contained in this Agreement shall confer upon Participant the right to continue in the employment or service of Approach or any Affiliate, or affect any right which Approach or any Affiliate may have to terminate the employment or service of Participant. This Agreement does not constitute evidence of any agreement or understanding, express or implied, that Approach or any Affiliate will retain Participant as an employee, director or other service provider for any period of time or at any particular rate of compensation.

6. Investment Representations .

(a) The Shares are being received for Participant’s own account with the intent of holding them and without the intent of participating, directly or indirectly, in a distribution of such Shares and not with a view to, or for resale in connection with, any distribution of such Shares or any portion thereof.

(b) A legend may be placed on any certificate(s) or other document(s) delivered to Participant or substitute therefore referring to any stop transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, NASDAQ or any other stock exchange or association upon which the common stock of Approach is then listed or quoted, any applicable federal or state securities laws, and any applicable corporate law, and any transfer agent of Approach shall be instructed to require compliance therewith.

7. Binding Effect . This Agreement shall be binding upon and inure to the benefit of (i) Approach and its successors and assigns, and (ii) Participant and his or her heirs, devisees, executors, administrators and personal representatives.

8. Notices . All notices between the parties hereto shall be in writing and given in the manner provided in Section 15.7 of the Plan. Notices to Participant shall be given to Participant’s address as contained in Approach’s records. Notices to Approach shall be addressed to the Corporate Secretary at the principal executive offices of Approach as set forth in Section 15.7 of the Plan.

9. Governing Law; Exclusive Forum; Consent to Jurisdiction . This Agreement shall be governed by the laws of the State of Delaware except for its laws with respect to conflict of laws. The exclusive forum for any lawsuit arising from or related to this Agreement shall be a state or federal court in Tarrant County, Texas. This provision does not prevent Approach from removing to an appropriate federal court any action brought in state court. PARTICIPANT HEREBY CONSENTS TO, AND WAIVES ANY OBJECTIONS TO, REMOVAL TO FEDERAL COURT BY APPROACH OF ANY ACTION BROUGHT AGAINST IT BY PARTICIPANT.

10. Definitions . Capitalized terms used but not defined herein shall have the meaning ascribed to them in the Plan.

IN WITNESS WHEREOF, Approach and Participant have executed this Agreement as of the date first written above.


		APPROACH RESOURCES INC.

		By:

				Name:
				Title:


		PARTICIPANT


		Participant Signature


		Participant Printed Name

Exhibit 10.25

APPROACH OPERATING, L.P.,

GAS PURCHASE CONTRACT

DATED

June 1, 2006

By and Between

APPROACH OPERATING, L.P., as “Seller”

and

BELVAN PARTNERS, L.P.,

as “Buyer”

GAS PURCHASE CONTRACT

THIS CONTRACT, made and entered into on this 1st day of June, 2006, by and between APPROACH OPERATING, LLC., referred to herein as “Seller” (whether one or more), and BELVAN PARTNERS, L.P., referred to herein as “Buyer”. The parties hereto may be referred to herein jointly as the “Parties”.

WITNESSETH:

WHEREAS, Seller owns or controls a certain valid and subsisting oil and gas mining lease or leases and/or rights to oil and gas or interests therein covering the land described or depicted in Exhibit “A”, attached hereto and made a part hereof. The land described is hereinafter referred to as “Premises”; and,

WHEREAS, Seller has or contemplates having a supply of gas from present and future wells and desires to deliver and sell such gas; and

WHEREAS, in the vicinity of Premises, Buyer contemplates the construction of, or has in operation a gas gathering system and related facilities in order to purchase Seller’s gas and that of others; and

WHEREAS, Buyer desires to purchase gas production therefrom for the purpose of extracting hydrocarbon liquids and for other purposes.

NOW, THEREFORE, in consideration of the premises and mutual covenants hereinafter specified, Seller hereby agrees to sell and deliver to Buyer and Buyer agrees to purchase and take from Seller all gas now or hereafter produced from wells on the lands and leases hereinabove described, subject, however, to the following terms and conditions:

ARTICLE I.
Definitions

For the purpose of this Contract, certain terms herein used are defined as follows:


				(a) “Gas” or “gas” shall mean all gas produced in its natural state from present and future wells, including wells classified by the Railroad Commission of the State of Texas as an oil or gas well, and gas, including tank vapors, remaining after recovery by Seller of free liquid hydrocarbons by use of conventional lease separation equipment.

				(b) “Day” shall mean a period of twenty-four (24) consecutive hours beginning and ending at seven o’clock a.m., Central Time.

				(c) “Month” shall mean the period beginning at seven o’clock a.m., on the first day of the calendar month and ending at seven o’clock a.m., on the first day of the next succeeding calendar month.


				(d) “Plant” shall mean the plant and all related facilities owned and operated by Buyer or Buyer’s designee, in the vicinity of or downstream from the lands and leases subject to this Contract.

				(e) “MCF” or “Mcf” shall mean one thousand (1,000) cubic feet of gas measured in accordance with the provisions of Article X hereof.

				(f) “Measuring Station” shall mean those facilities presently or hereinafter installed by Buyer at the point(s) of delivery hereunder, to measure gas produced and delivered to Buyer’s Plant from Seller’s lease or leases covered hereby. Buyer may install additional measuring stations if in its sole opinion such additional measuring stations are necessary and feasible to measure gas subject to this Contract.

ARTICLE II.
Seller’s Representative

1. In the event Seller is one of two or more parties selling gas under the terms and conditions of this Contract, Seller agrees that Seller will join with such other parties to appoint one of their number to serve as their representative hereunder for doing and receiving all things provided for concerning Seller in this Contract. Buyer may act, and shall be fully protected in acting, in reliance upon any and all acts and things done or performed by, or agreements with respect to all matters dealt with herein made by such representative on behalf of the parties Seller as fully and effectively as though each had done, performed, made or executed the same. The aforementioned parties may change their representative and designate one of their number as the new representative from time to time by delivery of written notice of change and designation to Buyer, provided that any such new representative shall be the same party as designated by all such parties.

ARTICLE III.
Reservations of Seller

1. Seller hereby expressly reserves the right to use gas produced from leaseholds and/or lands subject hereto for:

	(a)		Above ground lease use including but not limited to drilling, development and operation of such leaseholds and/or lands including compressors and/or other equipment necessary to cause the delivery of gas to Buyer hereunder; and

	(b)		Delivery to the lessors in Seller’s leases of the gas which such lessors are entitled to use under the original terms of such leases. Any gas so used by Seller shall be taken by Seller prior to its delivery to Buyer.

2. Seller hereby expressly reserves the right to produce, control, manage and operate the wells, leaseholds and/or lands dedicated hereunder as Seller deems appropriate in its sole-judgment, including the right to use gas for any efficient, modern, or improved method for increased production. Seller shall also have the sole-judgment right to surrender or abandon any

lease and/or lands dedicated hereunder, provided that before any such lease and/or lands are taken out of service for any reason whatsoever, Seller shall at its sole risk, cost and expense, first disconnect same from Buyer’s facilities.

ARTICLE IV.
Commitment and Date of Delivery

1. Subject to the terms and conditions of this Contract, Seller hereby commits and dedicates to the performance of this Contract all of Seller’s Gas delivered at the delivery point described on Exhibit “A” hereto, warrants the faithful performance of the provisions of this Contract, and covenants to sell and deliver Seller’s Gas exclusively to Buyer at the delivery point(s) specified below without other disposition, except as herein otherwise provided. The delivery and reception of gas under the terms and provisions of this Contract shall begin on the date of initial deliveries following the installation of Buyer’s and Seller’s facilities, including Buyer’s Measuring Station, necessary to deliver and receive Seller’s gas hereunder. Furthermore, Buyer agrees to reimburse Seller’s expense as an aid to construction for labor and materials for the installation of Buyer’s Measuring Station.

2. The effective date of this Contract shall be June 1, 2006.

ARTICLE V.
Delivery Point

1. The delivery point(s) for Seller’s gas hereunder shall be at a mutually agreeable point on Buyer’s existing pipeline. Seller will install, own, maintain, and operate the pipeline and equipment located upstream from the delivery point(s), and Buyer will install, own, maintain, and operate the pipeline and measurement equipment located downstream from the delivery point. Title to the gas shall pass at such point(s) from Seller and shall vest in Buyer without regard to the purpose for which said gas may thereafter be used by Buyer.

2. Any distillate, condensate and/or liquids accumulating in the drips, separators and lines from Seller’s wells to the delivery points shall belong to the Seller and all distillate, condensate and/or liquids accumulating or recovered in drips, scrubbers, station, plants and lines after the point of delivery shall belong to the Buyer. Buyer shall be entitled to retain all of the revenue received from the resale of any such substance as partial compensation in order to offset the cost incurred to recover and dispose of such and repair any damage done.

ARTICLE VI.
Delivery Pressure

1. Delivery of gas hereunder shall be made by Seller at a pressure sufficient to enter Buyer’s gathering lines against the varying pressures maintained therein by Buyer. Seller may compress the gas in order to facilitate delivery hereunder, but such compression shall be installed and operated so as to not impair the accuracy of Buyer’s measurement of Seller’s gas or be harmful to Buyer’s facilities.

ARTICLE VII.
Quality

1. Seller warrants that it shall deliver its gas for receipt by Buyer that is of merchantable quality, free of dust, gums, liquids, hazardous materials, bacteria, and other deleterious substances, shall conform to the quality specifications of the transmission pipeline connected to the outlet of Buyer’s facilities, as such may vary from time to time, and shall in addition conform to the following specifications.


				(a) Oxygen: The gas shall not contain any oxygen.

				(b) Hydrogen Sulfide and Sulfur: The gas shall not contain more than one quarter (1/4) grain of hydrogen sulfide nor more than five (5) grains of organic sulfur (mercaptans) per one hundred (100) standard cubic feet.

				(c) Non-Hydrocarbons: The gas shall not have a carbon dioxide content of more than two percent (2%) by volume; and shall not have more than five percent (5%) by volume of non-hydrocarbons.

				(d) Heating Value: The Btu content of the gas shall be greater than 1,050 Btu.

				(e) Temperature: The flowing temperature of gas delivered hereunder shall be less than one hundred (100) and more than forty (40) degrees Fahrenheit.

2. Seller shall have the right to treat gas prior to its delivery to Buyer to cause the gas to conform to the above specifications. As to gas that contains more than one quarter grain of hydrogen sulfide per one hundred standard feet of gas and/or gas that contains more than two mol percent (2.0%) carbon dioxide, Buyer may, but shall not be obligated to, accept delivery of such gas, and Buyer may deduct from the payments otherwise due Seller hereunder a treating fee. Said fee shall be equal to eight cents ($0.08) per MMBtu plus the product of multiplying the mol percentage, or fraction thereof, of acid gas by four cents ($0.04) per MMBtu. If neither party elects to treat gas failing to meet the specifications contained in 1(b) or 1(c) above, then Seller shall have the right upon thirty (30) days prior written notice to Buyer, to receive a release of such gas from this Contract, provided, however, that should Buyer begin taking any such gas during said thirty (30) day notice period, said notice shall be invalid and such gas shall remain committed to this Contract.

3. Seller agrees to employ only conventional type mechanical separation equipment on any of the leases covered by this Contract. Low temperature, refrigeration, adsorption, absorption, cryogenic, or other process or similar separation facilities shall not be deemed to be conventional type mechanical separation equipment. Except for liquids removed through operation of conventional mechanical separators, vapor recovery units, compressors used to effect deliver of gas hereunder and except for removal of components as required to enable Seller to comply with the provisions of this Article, Seller agrees that no liquefiable hydrocarbons shall be removed prior to delivery to Buyer.

ARTICLE VIII.
Price

1. Each month, Buyer shall pay Seller for all Gas delivered hereunder a consideration based on the value of (a) the plant products and (b) the surplus residue gas attributable to Seller’s gas hereunder.

(a) The amount of payment due Seller each month for plant products (being ethane and heavier hydrocarbons extracted by Buyer’s, or its designee’s, gas processing plant) shall be equal to eighty-five percent (85%) of the plant products value set forth below in Article IX.

(b) The amount of payment due Seller each month for surplus residue gas attributable to Seller’s gas hereunder shall be equal to eighty-five percent (85%) of the surplus residue gas value set forth below in Article IX.

2. Notwithstanding any other provisions of this Contract, Buyer shall have the right at any time or times to reduce the proceeds otherwise due Seller for gas delivered hereunder, in accordance with the following. If gas delivered to Buyer at a delivery point hereunder averages ten (10) Mcf per day or less during a production month, Buyer shall be entitled to reduce for any such month the payments otherwise due Seller for gas at that particular point by fifty percent (50%). Notwithstanding anything to the contrary herein, in no event shall the above referenced reduction amount to more than one hundred and fifty dollars ($150.00) or the net amount due Seller and attributable to Seller’s gas delivered at a particular point hereunder during a production month.

ARTICLE IX.
Allocation and Values of Plant Products and Residue Gas

1. Plant Products: The plant products value attributable to Seller’s gas delivered hereunder each month shall be determined by multiplying the recovered plant product gallons attributable to Seller’s gas delivered during the production month.

The recovered plant product gallons shall be determined by multiplying (i) Seller’s inlet Mcf volume (dry basis) of gas hereunder by (ii) the plant product GPM (provided by gas chromatograph analysis referred to in Section 3 of this Article) and by (iii) the fixed plant product recovery factors. Seller’s inlet Mcf volume shall be determined (in consideration for Field Fuel or Loss) by multiplying the volume of gas (dry basis) recorded by Buyer at Seller’s Delivery Point(s) by ninety-four percent (94%) for gas delivered hereunder into Buyer’s low pressure gas gathering system. The fixed plant product recovery factors shall be, for purposes of this Contract, as specified in Table 9.1 below:


		Table 9.1
Component		Fixed Plant Product Recovery Factor
Ethane		Sixty Percent (60%)
Propane		Eighty-three Percent (83%)
Butanes		Ninety-five Percent (95%)
Pentanes and Heavier		Ninety-nine Percent (99%)

The plant product price used each production month to compute the amount of payment due Seller hereunder for ethane, propane, iso-butane, normal butane, and pentanes and heavier products shall be the average component price per gallon published during the production month by the “Oil Price Information Service” or “OPIS” publication for Mt. Belvieu, (“Purity Ethane” for ethane and “Non-TET” for propane and heavier hydrocarbons), less $0.05 per gallon for product transportation, fractionation, handling, and marketing charges. Said product transportation and fractionation charge shall be adjusted simultaneously and proportionately with any unaffiliated third party transportation and fractionation fee escalations and/or de-escalations incurred after the effective date of this Contract. Should the above mentioned OPIS publication or the referenced prices no longer be available, a mutually acceptable replacement listing component product prices at Mt. Belvieu shall be used.

2. Residue Gas: The surplus residue gas value attributable to Seller’s gas shall be determined by multiplying the production month’s MMBtu volume of surplus residue gas attributable to Seller’s gas delivered hereunder by the surplus residue price.

Seller’s inlet Mcf volume of gas delivered during a production month hereunder shall be multiplied by the Btu content of Seller’s gas (provided by the gas chromatograph analysis referred to below in Section 3 of this Article) in order to determine the inlet MMBtu volume of Seller’s gas so delivered. Seller’s Plant fuel and loss shall be determined by multiplying the volume of gas (dry basis) recorded by Buyer at Seller’s Delivery Point(s) by the Btu content of Seller’s gas and by six percent (6%) The sum of the recovered plant product MMBtu volume plus the Plant fuel and loss attributable to Seller’s gas hereunder for same said production month shall be subtracted from the Seller’s inlet MMBtu volume of gas and the remainder shall be the MMBtu volume of surplus residue gas attributable to Seller’s gas delivered during such month.

The MMBtu volume of the recovered plant products content of Seller’s gas hereunder shall be determined by multiplying the recovered plant product gallons attributable to Seller’s gas delivered hereunder during a production month by the appropriate MMBtu per gallon factor for each component.

The term “surplus residue price”, as used herein, shall mean the index price published on or about the first day of each production month by McGraw-Hill’s “Inside F.E.R.C.’s Gas Market Report” for “El Paso Natural Gas Co. — Permian Basin” under the Table entitled “Prices of Spot Gas Delivered To Pipelines”. In the event said index price is no longer available, another index price shall be used reflecting the monthly spot gas price paid for gas into El Paso’s transmission lines in the Permian Basin area of West Texas.

3. A representative sample of the gas from each delivery point hereunder shall be taken at least: 1) semi-annually for points averaging less than 100 Mcf/d, 2) quarterly for points averaging over 100 Mcf/d and less than 1,000 Mcf/d and 3) monthly for points averaging over 1,000 Mcf/d. Such samples shall be obtained by Buyer or Buyer’s representative to determine the composition of Seller’s gas and to allocate plant products and residue gas to Seller. Such sample shall be analyzed at no cost to Seller by chromatograph to determine the composition and Btu content thereof. The component analyses of each routine set of samples shall be used for allocation purposes commencing with the first of the month following the month in which samples were taken. Buyer will notify Seller reasonably in advance of the time of any sampling so that Seller may conveniently have its representative present to witness the sampling procedure.

ARTICLE X.
Meters and Computations of Volumes

1. All of the gas delivered hereunder shall be measured by means of a meter or meters of standard make, furnished, installed and kept in repair by Buyer at the aforesaid point(s) of delivery and such equipment shall be operated in accordance with that prescribed by the 1985 AGA specifications. Buyer shall pull and inspect the office plates and test its measuring equipment at or near the same time as that prescribed above in Article IX for gas sampling. If necessary, Buyer shall adjust and/or repair its measuring equipment to read accurately in accordance with the 1985 AGA specifications and Buyer shall make the appropriate retroactive adjustments pursuant to the provisions outlined below. Said meter(s) shall be, at all reasonable times, subject to inspection by Seller in the presence of Buyer. In case any questions arise as to the accuracy of the meter measurement, said meter, or meters, shall be tested upon the demand of either party. The expense of such tests shall be borne by the party demanding same if the meter is found to be correct and by Buyer if found incorrect. A registration within two percent (2%) shall be considered accurate in computing deliveries hereunder; however, the equipment shall be adjusted at once to record correctly. When any test shall show an error of more than two percent (2%) and such error would result in an adjustment amounting to more than one hundred (100) Mcf in measurement of a production month’s volume, correction shall be made for that production month during the period that the meter was known to be in error, and if this period cannot be ascertained, correction shall be made for one-half (1/2) of the period elapsed since the date of the last previous test, not exceeding ninety (90) days. Buyer shall give Seller notice of the time of all tests of meters at least ten (10) days in advance of the making of such tests in order that the Seller may conveniently have its representative present.

2. In the event a meter is out of service or registering inaccurately, the volume of gas delivered hereunder shall be estimated by (1) using the registration of any check meter or meters if installed and accurately registering, or (2) by correcting the error if the percent of error is ascertainable by calibration or mathematical computation, or (3) in the absence of both (1) and (2) by estimating the volume delivered during periods of similar conditions when the meter was registering accurately.

3. Seller may, at its option and expense, install and operate meters to check Buyer’s meter, provided such check meter installation in no way interferes with the proper operation of Buyer’s meter.

4. The computations of all gas volumes, for the purpose of this Contract, shall be in accordance with the American Gas Measurement Committee Report No. 3 of the American Gas Association and shall be corrected to a base pressure of 14.65 pounds per square inch absolute and a base temperature of sixty (60) degrees Fahrenheit. There shall be used an assumed atmospheric pressure of 13.2 pounds per square inch absolute (regardless of actual atmospheric at which the gas is measured). An assumed flowing temperature of sixty (60) degrees Fahrenheit shall be used unless the flowing temperature of the gas is determined by Buyer to be other than sixty (60) degrees Fahrenheit and Buyer installs a continuous temperature-recording device to

determine the average flowing temperature. It is agreed that the compressibility of the gas deviates from Boyles’ Law, and that correction shall be made for such deviation from this law and that the values of the Reynolds number factor and the expansion factor shall also be calculated.

5. The specific gravity of the gas shall be determined in accordance with the specifications and test procedures of the Natural Gas Processors Association for the determination of specific gravity of natural gases by the balance method based on the chromatograph test provided for in Article IX section 3 above. The tests for specific gravity of the gas shall be made at the same time as the meters are tested for accuracy.

6. Seller agrees to endeavor to deliver gas to Buyer at stable rates of flow. Seller agrees to use reasonable efforts to monitor its deliveries of gas so that any differential pressure pulsations at the delivery point shall not exceed ten percent (10%).

ARTICLE XI.
Unprofitable Gas

1. Seller hereby agrees to sell and deliver it gas exclusively to Buyer, and Buyer agrees to purchase and receive from Seller, subject to the stipulations and conditions herein specified, all of Seller’s gas available for sale now or hereafter produced from the well(s) on the lands described in Exhibit “A” provided that Buyer shall not be obligated to take gas testing less than two (2) gallons of plant products per thousand cubic feet. It is recognized that Buyer may be unable to receive and process for recovery of natural gas liquids all of the gas available to the Plant during temporary periods or for such time as is required to make necessary changes or additions to the Plant. Buyer’s obligation to receive and process hereunder shall be reduced in the ratio that the Plant capacity bears to the total volume of gas of all types available to the Plant. Nothing herein shall be construed as an obligation on the part of the Buyer to enlarge its processing facilities to process Seller’s gas hereunder. In the event the purchase of gas from any well or wells under this Contract is or becomes unprofitable due to its volume, quality or any other cause, Buyer shall not be obligated to take or may cease taking the gas therefrom so long as such condition exists. It is further provided that if at any time the volume and/or gasoline content of the gas available to Buyer, or if any cause beyond its control shall render the operation of said Plant unprofitable, Buyer may upon thirty (30) days notice, in writing, and payment or tender to Seller of ten dollars ($10.00) terminate this Contract.

2. If through no fault of Seller, Buyer fails for any reason to take all of Seller’s gas available at the delivery point(s) for at least seventy-five (75) days during any three (3) consecutive months (a “deficient take event”), then Seller shall have the right to terminate this Contract by giving Buyer thirty (30) days written notice of its election to terminate which shall be Seller’s sole remedy. Promptly after delivery of Seller’s deficient take notice, Buyer and Seller shall meet and use good faith efforts to attempt to remedy the deficient take situation. This Contract shall terminate at the end of the thirty (30) day notice period unless either (a) Buyer resumes consistent takes of all of Seller’s gas available at the delivery point(s) or (b) an agreed resolution has been reached within said thirty (30) day notice period. Seller agrees to work in good faith with Buyer to provide an extension of said thirty (30) day notice period if Buyer has initiated construction of facilities or taken other action necessary to remedy its failure to take all

of Seller’s gas available at the delivery point(s) and pursues same with due diligence. Buyer shall be deemed to have resumed consistent takes of all of Seller’s gas only if Buyer takes all of Seller’s gas available at the delivery point(s) for at least seventy-five (75) of the next ninety (90) days following the end of the thirty (30) day notice period or the end of any agreed extension of said notice period. If during the thirty (30) day notice period Buyer resumes consistent takes but fails to take all of Seller’s gas available at the delivery point(s) for at least seventy-five (75) of the next ninety (90) days (“subsequent deficient take event”), Seller may then terminate this Contract by giving Buyer written notice of its election to terminate no later than sixty (60) days following the subsequent deficient take event, or Seller’s right to terminate shall be deemed to be waived. Seller shall use good faith efforts to promptly provide notice to Buyer of a deficient take event after the occurrence of such an event. For purposes of this Article XI section 1 time is of the essences.

ARTICLE XII.
Payment

1. Buyer shall furnish to Seller by the twenty-fifth (25th) day of the month a settlement statement for the gas purchased hereunder during the preceding month. Payment shall be made by Buyer for all gas purchased hereunder on or before the last day of the month following the month of production, and in the event that payment has not been issued by said date, Buyer shall wire transfer any such payment to Seller. Examination by the Seller of the books of accounts kept by Buyer respecting said gas accounts shall be permitted by the Buyer at any and all reasonable hours. Buyer shall be obligated to preserve said books of accounts for a period of no more than two (2) years. Payment shall be final unless questioned within two (2) years from the date on which the payment is issued.

2. Seller agrees to make proper settlement and accounting to the owners of royalty, overriding royalty and production payments attributable to or payable from the proceeds from the sale of Seller’s gas delivered to Buyer hereunder. Seller warrants title to the gas delivered hereunder and the right to deliver same, and that such gas is free from all liens, prior gas purchase contracts and adverse claims. Seller agrees to indemnify Buyer and save it harmless from all suits, actions, debts, accounts, damages, costs, losses and expenses arising from or out of the adverse claims of any and all persons to said gas or royalties, charges and taxes thereon. Any and all overpayments made by Buyer hereunder shall be refunded to Buyer within thirty days of invoice. Seller shall obtain appropriate ratification of this Contract from its interest owners associated with the gas dedicated and produced from the lands described under the Exhibit “A” attached hereto.

3. In the event of any dispute, question, or litigation at any time concerning Seller’s title to the lease(s), or the gas produced therefrom, or proceeds from the sale thereof, Buyer shall be entitled to suspend payment for the portion of gas in question that is purchased by it hereunder and withhold the proceeds payable therefore, without interest, until such dispute, defect, or question of title is corrected or removed to Buyer’s satisfaction or until the Seller furnishes security conditioned to save Buyer harmless in form and with surety satisfactory to Buyer.

ARTICLE XIII.
Taxes

1. Seller agrees to pay or cause to be paid all taxes levied or due on the gas hereunder prior to its delivery to Buyer and Buyer agrees to pay or cause to be paid all taxes levied on such gas after its receipt by Buyer. The price provided for in Article VIII shall be considered to be inclusive of tax reimbursement and production related cost amounts payable to Seller hereunder. Buyer may pay on behalf of Seller, and deduct from payments otherwise due Seller, any taxes assessed on the gas delivered hereunder.

ARTICLE XIV.
Term

1. This Contract shall be effective from the date hereof and shall continue and remain in force and effect until November 1, 2006 and continue from month to month thereafter, until cancelled by either party serving ninety (90) days advance written notice to the other.

ARTICLE XV.
Force Majeure

1. In the event either party hereto is rendered unable wholly or in part by force majeure to carry out its obligations under this Contract, it is agreed that such obligations including the obligation to purchase gas hereunder shall upon written notice be suspended during the continuance of any inability so caused, except for payment, and shall be as far as possible remedied with all reasonable dispatch.

2. The term “force majeure” as employed herein shall mean acts of God, strikes, lockouts, or other industrial disturbances, acts of the public enemy, wars, terrorism, blockades, insurrections, riots, epidemics, landslides, lightning, earthquakes, fires, storms, floods, washouts, arrest and restraints of rulers and people, arrests and restraints of the Government, either Federal or State, inability of any party hereto to obtain necessary materials, right-of-way, supplies, or permits due to existing or future rules, orders and laws of governmental authorities (both Federal and State), interruptions by government or court orders, present and future orders of any regulatory body having proper jurisdiction, civil disturbances, explosions, sabotage, breakage or accident to machinery or lines of pipe, failure of products pipeline or residue gas purchaser’s pipeline, freezing of wells or lines of pipe, partial or entire failure of wells and any other causes, whether of the kind herein enumerated or otherwise not within the control of the party claiming suspension and which by the exercise of due diligence such party is unable to overcome.

3. It is understood and agreed that the settlement of strikes or lockouts shall be entirely within the discretion of the party having the difficulty, and that the above requirement of the due diligence in restoring normal operating conditions shall not require the settlement of strikes or lockouts by acceding to the terms of the opposing party when such course is inadvisable in the discretion of the party having the difficulty.

ARTICLE XVI.
Miscellaneous

1. Right-of-Way : Seller hereby grants to Buyer, insofar as Seller has the right to do so at no cost to Seller, the right of ingress and egress, the right to lay and maintain pipelines, telephone and telegraph lines and to install any other necessary equipment on and across any lands covered by this Contract. All lines and other equipment placed by Buyer on said lands shall remain the personal property of Buyer, and subject to the terms of this Contract, may be removed by Buyer at any time.

2. Indemnity : Buyer shall indemnify and hold Seller harmless against any claims for damages growing out of the operations conducted hereunder by Buyer. Likewise, Seller shall indemnify and hold Buyer harmless against claims for damages growing out of Seller’s operations,

3. Waiver of Breach : The waiver of any party of any breach of any of the provisions of the Contract shall not constitute a continuing waiver of other breaches of the same or other provisions of this Contract.

4. Regulatory Bodies : The Contract and all operations hereunder are subject to the applicable Federal and State laws and the applicable orders, rules, and regulations of the Railroad Commission of Texas and any other State or Federal authority having or asserting jurisdiction; but nothing contained herein shall be construed as a waiver of any right to question or contest any such law, order, or regulation in any form having jurisdiction in the premises.

5. Notices : All notices provided for herein shall be in writing and shall be deemed to be delivered to Seller when addressed to Seller at:

APPROACH OPERATING, LLC.
6300 RIDGLEA PL., S-1107,
FORT WORTH, TX 76116

and deposited in the United States mail, postage prepaid, and shall be deemed to be delivered to Buyer when addressed to:

Belvan Partners, L.P.
Midway Lane Gas Plant
211 No. Colorado
Midland, Texas 79701

and deposited in the United States mail, postage prepaid, or to such other single name and address as either party may by like notice give to the other party.

6. Assignment : All the covenants, stipulations, terms, conditions and provisions of this Contract shall extend to and be binding upon the respective successors and assigns of the parties hereto, and shall be covenants running with the land for the full term herein set forth; provided, however, that no assignment of this Contract by Seller as to a part or parts less than the

whole as applied to the lands covered hereby shall affect or impair the rights of Buyer, nor in any case increase Buyer’s obligations under this Contract as to the part or parts so segregated.

7. Prior Gas Contracts : This Contract terminates and supersedes any prior Gas Purchase Contracts or Agreements by and between the Parties as to Seller’s interest in gas produced from wells delivered to the delivery point described on Exhibit “A” attached hereto.

8. This Contract shall apply to lease extensions, renewals and re-acquisitions of lease or leases by Seller, its successors or assigns, during the term of this Contract. Any Amendment to this Contract shall not be valid unless it is agreed to in writing and signed by both Buyer and Seller. In the event that more than the lease is described in Exhibit “A” attached hereto, this Contract shall be considered as a separate Contract on each lease.

9. The terms and provisions herein contained constitute the entire agreement between the parties hereto and shall supersede all previous communications, representations or agreements, either verbal or written, between the parties with respect to the subject matter hereof, and no part shall be altered, modified or amended except by agreement in writing, signed by both parties hereto.

IN WITNESS WHEREOF , this Contract has been executed in duplicate originals by the parties hereto as of the day and year first herein written.


ATTEST/WITNESS:	“BUYER”

	BELVAN PARTNWERS, L.P.,
	By Belvan Corporation, its general partner


	/s/ J. L. Davis

	By: J. L. Davis — President

ATTEST/WITNESS:	“SELLER”

	APPROACH OPERATING, L.P.,
	By Belvan Corporation, its general partner


	/s/ David A. Badley

	By:	David A. Badley
		Executive Vice President

EXHIBIT “A”
to
GAS PURCHASE CONTRACT
Between
APPROACH OPERATING, L.P., as “Seller”
and
BELVAN PARTNERS, L.P.
as “Buyer”
Dated: June 1, 2006

LOCATION OF DELIVERY POINT:
Section 13, Block CD, GC&SF Survey, Crockett County, Texas

Exhibit 10.26

Suite 600
505 N. Big Spring Street (79701)
P.O. Box 791
Midland, TX 79702
phone 915.682.8241
fax 915.686.7922

ConocoPhillips



Mr. David Badley		LEASE CRUDE OIL PURCHASE AGREEMENT
Approach Operating LLC		Dated: May 1, 2004
6300 Ridglea Place, Suite 1107
Ft. Worth, Texas 76116

Dear David:

THIS AGREEMENT is between ConocoPhillips, herein called “Buyer” and Approach Operating LLC, herein called “Seller”, covering the sale and delivery by Seller and the purchase and receipt by Buyer of the specified oil and condensate herein called “Production” upon the following terms and conditions:

1. SOURCE AND LOCATION

See Exhibit “A” attached and Incorporated by reference.

2. QUANTITY

Seller agrees to sell to Buyer and Buyer agrees to take such quantities of Production as may be determined in accordance with the field or pipeline run ticket, subject to state allowables and the termination provided for herein.

3. QUALITY

West Texas Intermediate Type Crude Oil

4. PRICE

For those leases listed on Exhibit “A”, a price equal to ConocoPhillips Company’s Posting for West Texas Intermediate, gravity deemed 40°, EDQ, plus the average Platt’s mean quotation for “P-Plus WTI” for the applicable trading month at Cushing, less the average difference between Platt’s WTI Cushing and WTI Midland quotations for the applicable trading month, less transportation and handling as listed on Exhibit “A”.

5. BILLING

All payments due Seller under this Agreement shall commence with the initial date of delivery, which shall be the effective date of this Agreement. On or before the fifteenth (15th) day of the month following the month of deliveries, Buyer shall render to Seller a statement showing total net quantity delivered from each well covered hereunder during the preceding month.

6. DELIVERY

Title to all Production sold and delivered to Buyer shall pass from Seller to Buyer as such Production passes the outlet flange of Seller’s tankage on the lease or leases from which such



		Page 2 of 3 to Contract Between ConocoPhillips Company and Approach Operating LLC Dated: May 1, 2004

Production is being purchased. Buyer agrees to promptly take delivery of the Production upon availability from the Seller’s tanks or through a pipeline. If Buyer takes delivery by a third party common carrier, Buyer shall immediately notify Seller of the carrier’s name and address.

7. WARRANTY AND INDEMNITY

Seller warrants title, free and clear of all taxes, liens and encumbrances, to the Production delivered hereunder and warrants that Production has been produced, handled and transported to the delivery point in accordance with the laws, rules and regulations of all local, state or federal authorities having jurisdiction.

Prior to the delivery of Production Seller will hold Buyer harmless against any loss from any claim or cause of action arising out of the sale and delivery of the Production. Buyer agrees that after delivery of the Production Seller will be held harmless against any loss from any claim or cause of action arising out of the sale and delivery of the Production.

8. TERM

Initial term of this contract shall be for one month, beginning May 1, 2004 through June 1, 2004, and continuing thereafter from month to month until cancelled by either party upon 30 days written notice.

9. FORCE MAJEURE

Neither party hereto shall be liable for failure or delay in making or accepting deliveries hereunder to the extent such failure or delay may be due to compliance with acts, orders, regulations or requests of any federal, state or local civilian or military authority, or any person purporting to act therefor, riots, strikes, labor difficulties, action of the elements, disruption or breakdown of production or transportation facilities, or any other cause, whether or not to the same class or kind, reasonably beyond control of such party. If such a failure or delay extends beyond any reasonable period for the performance of this Agreement, then either party may terminate this Agreement.

10. ASSIGNMENT

No assignments of this Agreement shall be valid or binding on either Buyer or Seller unless the written consent of both parties has been obtained.

11. MEASUREMENT AND TESTS

Quantities of crude oil delivered hereunder shall be delivered from tank gauges on 100% tank table basis, or by the use of mutually acceptable automatic measuring equipment. Volume and gravity (API) of said quantities shall be corrected for temperature to 60 degrees Fahrenheit in accordance with the latest-A.S.T.M.-I.P. Petroleum Measurement Tables. The crude oil delivered hereunder shall be merchantable and acceptable to the carriers involved, but not to exceed 2% BS&W. Full deduction shall be made for all BS&W content as determined by tests conducted according to the latest A.S.T.M. Standard Method then in effect. Each party shall have the right to have a representative present to witness all gauges, tests and measurements; however, in the absence of either party’s representative, the gauges, tests and measurements of the other party shall be deemed to be correct.



		Page 3 of 3 to Contract Between ConocoPhillips Company and Approach Operating LLC Dated: May 1, 2004

12. SPECIAL PROVISIONS

N/A

13. DIVISION ORDER AND TAXES

The basic division order will be held by Approach Operating LLC. ConocoPhillips will remit 100% of proceeds, less state taxes, to Approach. State taxes will be paid by ConocoPhillips. Division Order information including pay list, title opinion and/or assignments, should be sent to Vicki Catlin 860G POB, ConocoPhillips, P. O. Box 5400, Bartlesville, Oklahoma 74005.

14. PAYMENTS

Buyer agrees to make payment on or before the twenty-fifth (25th) day of the month following the month of delivery. In an effort to improve our service to our customers, ConocoPhillips has a program that will provide you the option of having your crude oil payments directly deposited to the financial institution of your choice. You may take advantage of the direct deposit service by completing the enclosed form and returning the form to the following address:

15. REGULATORY

N/A

16. LOGISTICS

N/A

17. MISCELLANEOUS

Any matter not specifically covered herein arising in connection with this Agreement shall be handled in accordance with customs and practice in the industry.

This letter evidences our understanding of the entire agreement and shall constitute the formal contract. Unless we receive written notice of your objections within ten (10) business days, we will consider the agreement as final and binding on both parties.

CONOCOPHILLIPS COMPANY

/s/ Karl G. Stuckey

Karl G. Stuckey
Representative, Lease Operations
West Texas and New Mexico

KS/ss



		Exhibit “A” to Contract Between ConocoPhillips Company, and Approach Operating LLC Dated: May 1, 2004

EXHIBIT “A”

COP

Crude

Lease No.

Operator

Lease Name

Type

Differential

Transporter

County

State

2877308

Approach Operating LLC

Clayton 1001

WTI

($1.25)

Sentinel Trucks

Crockett

Texas

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the use in this Amendment No. 2 to the Registration Statement on Form S-1 (Registration No. 333-144512) 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.



	/s/ Hein & Associates LLP
	Hein & Associates LLP

Dallas, Texas
October 15, 2007

Exhibit 23.2

DeGolyer and MacNaughton
5001 S pring V alley R oad
S uite 800 E ast
D allas , T exas 75244

October 15, 2007

Approach Resources Inc.
One Ridgmar Center
6500 West Freeway, Suite 800
Fort Worth, Texas 76116

Ladies and Gentlemen:

We hereby consent to the use of the name DeGolyer and MacNaughton; and 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 this Amendment No. 2 to the Registration Statement on Form S-1 (Registration No. 333-144512) of Approach Resources Inc. and the related prospectus that is part thereof dated on or about October 15, 2007 (Form S-1). We further consent to the reference to DeGolyer and MacNaughton under the heading “Experts” in this Amendment No. 2 to the Registration Statement on Form S-1.


	Very truly yours,
	/s/ DeGOLYER and MacNAUGHTON
	DeGOLYER and MacNAUGHTON

Exhibit 23.3

Cawley, Gillespie & Associates, Inc.
PETROLEUM CONSULTANTS



1000 LOUISIANA STREET, SUITE 625	306 WEST SEVENTH STREET, SUITE 302	9601 AMBERGLEN BLVD., SUITE 117
HOUSTON, TEXAS 77002-5008	FORT WORTH, TEXAS 76102-4987	AUSTIN, TEXAS 78729-1106
713-651-9944	817-336-2461	512-249-7000
FAX 713-651-9980	FAX 817-877-3728	FAX 512-233-2618

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 Amendment No. 2 to the Registration Statement on Form S-1 (Registration No. 333-144512) 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
October 15, 2007