Approach Resources Inc (Form: 10-Q, Received: 05/09/2014 16:15:03)

Large accelerated filer x

Accelerated filer

Non-accelerated filer ¨ (Do not check if smaller reporting company)

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-33801

APPROACH RESOURCES INC.

(Exact name of registrant as specified in its charter)


Delaware		51-0424817
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Ridgmar Centre 6500 West Freeway, Suite 800 Fort Worth, Texas		76116
(Address of principal executive offices)		(Zip Code)

(817) 989-9000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of April 30, 2014, was 39,371,517.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Approach Resources Inc. and Subsidiaries

Unaudited Consolidated Balance Sheets

(In thousands, except shares and per-share amounts)


	March 31,			December 31,
	2014			2013
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	4,341		$	58,761
Restricted cash		7,350			7,350
Accounts receivable:
Joint interest owners		101			158
Oil, NGL and gas sales		21,058			22,871
Unrealized gain on commodity derivatives		2,989			—
Prepaid expenses and other current assets		1,203			592
Deferred income taxes – current		2,715			681

Total current assets		39,757			90,413
PROPERTIES AND EQUIPMENT:
Oil and gas properties, at cost, using the successful efforts method of accounting		1,421,046			1,320,195
Furniture, fixtures and equipment		4,487			2,537

Total oil and gas properties and equipment		1,425,533			1,322,732
Less accumulated depletion, depreciation and amortization		(299,219	)		(275,702	)

Net oil and gas properties and equipment		1,126,314			1,047,030
Unrealized gain on commodity derivatives		3,997			—
Other assets		7,824			8,041

Total assets	$	1,177,892		$	1,145,484

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	39,151		$	38,575
Oil, NGL and gas sales payable		8,085			6,101
Accrued liabilities		45,559			37,918
Unrealized loss on commodity derivatives		10,539			1,847

Total current liabilities		103,334			84,441
NON-CURRENT LIABILITIES:
Senior secured credit facility		—			—
Senior notes		250,000			250,000
Deferred income taxes		95,598			91,883
Unrealized loss on commodity derivatives		4,536			315
Asset retirement obligations		8,564			8,350

Total liabilities		462,032			434,989
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY :
Preferred stock, $0.01 par value, 10,000,000 shares authorized none outstanding		—			—
Common stock, $0.01 par value, 90,000,000 shares authorized, 39,371,955 and 39,047,699 issued and outstanding, respectively		390			390
Additional paid-in capital		567,657			565,237
Retained earnings		147,813			144,868

Total stockholders’ equity		715,860			710,495

Total liabilities and stockholders’ equity	$	1,177,892		$	1,145,484

See accompanying notes to these unaudited consolidated financial statements.

Approach Resources Inc. and Subsidiaries

Unaudited Consolidated Statements of Operations

(In thousands, except shares and per-share amounts)


	Three Months Ended March 31,
	2014			2013
REVENUES:
Oil, NGL and gas sales	$	61,927		$	36,269
EXPENSES:
Lease operating		7,851			5,383
Production and ad valorem taxes		4,169			2,556
Exploration		738			260
General and administrative		8,535			6,410
Depletion, depreciation and amortization		23,606			17,056

Total expenses		44,899			31,665

OPERATING INCOME		17,028			4,604
OTHER:
Interest expense, net		(5,137	)		(1,229	)
Equity in losses of investee		—			(116	)
Realized (loss) gain on commodity derivatives		(1,339	)		307
Unrealized loss on commodity derivatives		(5,926	)		(4,100	)

INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT)		4,626			(534	)
INCOME TAX PROVISION (BENEFIT)		1,681			(187	)

NET INCOME (LOSS)	$	2,945		$	(347	)

EARNINGS (LOSS) PER SHARE:
Basic	$	0.08		$	(0.01	)

Diluted	$	0.08		$	(0.01	)

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic		39,243,296			38,924,163
Diluted		39,259,480			38,924,163

See accompanying notes to these unaudited consolidated financial statements.

Approach Resources Inc. and Subsidiaries

Unaudited Consolidated Statements of Cash Flows

(In thousands)


	Three Months Ended March 31,
	2014			2013
OPERATING ACTIVITIES:
Net income (loss)	$	2,945		$	(347	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depletion, depreciation and amortization		23,606			17,056
Amortization of loan origination fees		217			—
Unrealized loss on commodity derivatives		5,926			4,100
Exploration expense		738			260
Share-based compensation expense		2,654			2,257
Deferred income tax expense (benefit)		1,681			(187	)
Equity in losses of investee		—			116
Changes in operating assets and liabilities:
Accounts receivable		1,870			2,548
Prepaid expenses and other current assets		(611	)		(297	)
Accounts payable		342			5,955
Oil, NGL and gas sales payable		1,984			(123	)
Accrued liabilities		7,641			(1,700	)

Cash provided by operating activities		48,993			29,638

INVESTING ACTIVITIES:
Additions to oil and gas properties		(101,463	)		(69,455	)
Contribution to equity method investment		—			(6,280	)
Additions to furniture, fixtures and equipment, net		(1,950	)		(251	)

Cash used in investing activities		(103,413	)		(75,986	)

FINANCING ACTIVITIES:
Borrowings under credit facility		17,500			79,975
Repayment of amounts outstanding under credit facility		(17,500	)		(33,800	)

Cash provided by financing activities		—			46,175

CHANGE IN CASH AND CASH EQUIVALENTS		(54,420	)		(173	)
CASH AND CASH EQUIVALENTS , beginning of period	$	58,761		$	767

CASH AND CASH EQUIVALENTS , end of period	$	4,341		$	594

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	429		$	806

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION:
Asset retirement obligations capitalized	$	126		$	74

See accompanying notes to these unaudited consolidated financial statements.

Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2014

1. Summary of Significant Accounting Policies

Organization and Nature of Operations

Approach Resources Inc. (“Approach,” the “Company,” “we,” “us” or “our”) is an independent energy company engaged in the exploration, development, production and acquisition of oil and gas properties. We focus on finding and developing oil and natural gas reserves in oil shale and tight gas sands. Our properties are primarily located in the Permian Basin in West Texas. We also own interests in the East Texas Basin.

Consolidation, Basis of Presentation and Significant Estimates

The interim consolidated financial statements of the Company are unaudited and contain all adjustments (consisting primarily of normal recurring accruals) necessary for a fair statement of the results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for a full year due in part to the volatility in prices for oil, NGLs and gas, future commodity prices for commodity derivative contracts, global economic and financial market conditions, interest rates, access to sources of liquidity, estimates of reserves, drilling risks, geological risks, transportation restrictions, the timing of acquisitions, product supply and demand, market competition and interruptions of production. You should read these consolidated interim financial statements in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on February 25, 2014.

The accompanying interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions are eliminated. In preparing the accompanying financial statements, 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 gas reserves, which affect our estimate of depletion expense as well as our impairment analyses. Significant assumptions also are required in our estimation of accrued liabilities, commodity derivatives, income tax provision, share-based compensation and asset retirement obligations. It is at least reasonably possible these estimates could be revised in the near term, and these revisions could be material. Certain prior-year amounts have been reclassified to conform to current-year presentation. These classifications have no impact on the net income reported.

Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2014

2. Equity Method Investment

In September 2012, we entered into a joint venture to build an oil pipeline in Crockett and Reagan Counties, Texas, which is used to transport our oil to market. In October 2012, we made an initial contribution of $10 million to the joint venture for pipeline and facilities construction, and in 2013, we contributed $8.3 million to the joint venture for pipeline and facilities construction. Our contributions are recorded at cost and are included in investing activities under “Contribution to equity method investment” on our consolidated statements of cash flows. Our share of the investee’s earnings was recorded on our consolidated statement of operations for the three months ended March 31, 2013. In October 2013, we completed the sale of the joint venture, and net proceeds to Approach at closing totaled approximately $109.1 million, after deducting our share of transactional costs paid at closing. Of the $109.1 million in proceeds, $7.4 million is restricted pursuant to an escrow agreement and recorded as restricted cash at March 31, 2014. The escrow termination date is June 1, 2014.

3. Earnings Per Common Share

We report basic earnings per common share, which excludes the effect of potentially dilutive securities, and diluted earnings per common share, which includes the effect of all potentially dilutive securities unless their impact is antidilutive. The following table provides a reconciliation of the numerators and denominators of our basic and diluted earnings per share (dollars in thousands, except per-share amounts).


	Three Months Ended March 31,
	2014		2013
Income (numerator):
Net income (loss) – basic	$	2,945	$	(347	)

Weighted average shares (denominator):
Weighted average shares – basic		39,243,296		38,924,163
Dilution effect of share-based compensation, treasury method		16,184		—	(1)

Weighted average shares – diluted		39,259,480		38,924,163

Net income (loss) per share:
Basic	$	0.08	$	(0.01	)

Diluted	$	0.08	$	(0.01	)

(1)	Approximately 43,000 options to purchase our common stock were excluded from this calculation because they were antidilutive for the three months ended March 31, 2013.

Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2014

4. Long-Term Debt

The following table provides a summary of our long-term debt at March 31, 2014, and December 31, 2013 (in thousands).


	March 31,		December 31,
	2014		2013
Credit Facility	$	—	$	—
Senior Notes		250,000		250,000

Total long-term debt	$	250,000	$	250,000

Revolving Credit Facility

At March 31, 2014, the borrowing base under our revolving credit facility (the “Credit Facility”) was $350 million, with maximum commitments from the lenders of $500 million and a maturity date of July 31, 2016. The borrowing base is redetermined semi-annually in April and October based on our oil, NGL and gas reserves. We, or the lenders, can each request one additional borrowing base redetermination each calendar year.

Borrowings bear interest based on the agent bank’s prime rate plus an applicable margin ranging from 0.75% to 1.75%, or the sum of the Eurodollar rate plus an applicable margin ranging from 1.75% to 2.75%. Margins vary based on the borrowings outstanding compared to the borrowing base. In addition, we pay an annual commitment of 0.50% of unused borrowings available under our Credit Facility.

On January 23, 2014, we entered into a seventeenth amendment to the Credit Facility. This amendment provides the Company with more hedging flexibility by allowing the Company to enter into commodity derivative contracts on a rolling basis for (i) up to 85% of projected production from proved oil and gas properties for the two years following a commodities derivative contract, (ii) up to 100% of projected production from proved producing oil and gas properties during year three of such contract and (iii) up to 85% of projected production from proved producing oil and gas properties during years four and five of such contract.

We had no outstanding borrowings under our Credit Facility at March 31, 2014, and December 31, 2013. We had outstanding unused letters of credit under our Credit Facility totaling $0.3 million at March 31, 2014, and December 31, 2013, which reduce amounts available for borrowing under our Credit Facility.

Loans under our Credit Facility are secured by first-priority liens on substantially all of our West Texas assets, a pledge of our equity interests in our subsidiaries and are guaranteed by our subsidiaries.

Covenants

Our Credit Facility contains two principal financial covenants:

•

a consolidated modified current ratio covenant (as defined in the Credit Facility) that requires us to maintain a ratio of not less than 1.0 to 1.0 at all times; and

•

a consolidated funded debt-to-consolidated EBITDAX ratio covenant (as defined in the Credit Facility) that requires us to maintain a ratio of not more than 4.0 to 1.0 as of the last day of any fiscal quarter.

Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2014

Our Credit Facility also restricts cash dividends and other restricted payments, transactions with affiliates, incurrence of other debt, consolidations and mergers, the level of operating leases, asset sales, investments in other entities and liens on properties.

In May 2014, we entered into a new, $1 billion senior secured revolving credit facility (the “New Credit Facility”) with an initial $450 million borrowing base. The New Credit Facility has a maturity date of May 7, 2019. Borrowings under the New Credit Facility bear interest based on the agent bank’s prime rate plus an applicable margin ranging from 0.50% to 1.50%, or the sum of the LIBOR rate plus an applicable margin ranging from 1.50% to 2.50%. We pay an annual commitment fee ranging from 0.375% to 0.50% of unused borrowings available under the New Credit Facility. Margins vary based on the borrowings outstanding compared to the borrowing base. In addition, the New Credit Facility, among other things, (i) replaces the consolidated funded debt-to-consolidated EBITDAX ratio covenant with a consolidated interest coverage ratio covenant that requires us to maintain a ratio of consolidated EBITDAX to interest of not less than 2.5 to 1.0 as of the last day of any fiscal quarter, (ii) adds three banks as lenders to the bank syndicate, and (iii) increases the maximum amount of senior unsecured notes allowable to $550 million without a required reduction in the borrowing base.

Senior Notes

In June 2013, we completed our public offering of $250 million principal amount of 7% Senior Notes due 2021 (the “Senior Notes”). Annual interest on the Senior Notes is $17.5 million, payable semi-annually on June 15 and December 15.

We issued the Senior Notes under a senior indenture dated June 11, 2013, as supplemented by a supplemental indenture of even date, among the Company, our subsidiary guarantors and Wells Fargo Bank, National Association, as trustee.

On and after June 15, 2016, we may redeem some or all of the Senior Notes at specified redemption prices, plus accrued and unpaid interest to the redemption date. Before June 15, 2016, we may redeem up to 35% of the Senior Notes at a redemption price of 107% of the principal amount, plus accrued and unpaid interest to the redemption date, with the proceeds of certain equity offerings. In addition, before June 15, 2016, we may redeem some or all of the Notes for cash at a redemption price equal to 100% of their principal amount plus an applicable make-whole premium and accrued and unpaid interest to the redemption date. If we sell certain of our assets or experience specific kinds of changes of control, we may be required to offer to purchase the Senior Notes from holders. The Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by each of our subsidiaries, subject to certain customary release provisions. A subsidiary guarantor may be released from its obligations under the guarantee:

•

in connection with any sale or other disposition of all or substantially all of the assets of that guarantor (including by way of merger or consolidation) to a person that is not (either before or after giving effect to such transaction) the Company or a subsidiary guarantor, if the sale or other disposition otherwise complies with the indenture;

•

in connection with any sale or other disposition of the capital stock of that guarantor to a person that is not (either before or after giving effect to such transaction) the Company or a

Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2014

subsidiary guarantor, if that guarantor no longer qualifies as a subsidiary of the Company as a result of such disposition and the sale or other disposition otherwise complies with the indenture;

•

if the Company designates any restricted subsidiary that is a guarantor to be an unrestricted subsidiary in accordance with the indenture;

•

upon defeasance or covenant defeasance of the notes or satisfaction and discharge of the indenture, in each case, in accordance with the indenture;

•

upon the liquidation or dissolution of that guarantor, provided that no default or event of default occurs under the indenture as a result thereof or shall have occurred and is continuing; or

•

in the case of any restricted subsidiary that, after the issue date of the notes is required under the indenture to guarantee the notes because it becomes a guarantor of indebtedness issued or an obligor under a credit facility with respect to the Company and/or its subsidiaries, upon the release or discharge in full from its (i) guarantee of such indebtedness or (ii) obligation under such credit facility, in each case, which resulted in such restricted subsidiary’s obligation to guarantee the notes.

The Indenture restricts our ability, among other things, to (i) sell certain assets, (ii) pay distributions on, redeem or repurchase, equity interests, (iii) incur additional debt, (iv) make certain investments, (v) enter into transactions with affiliates, (vi) incur liens and (vii) merge or consolidate with another company. These restrictions are subject to a number of important exceptions and qualifications. If at any time the Senior Notes are rated investment grade by both Moody’s Investors Service and Standard & Poor’s Ratings Services and no default (as defined in the Indenture) has occurred and is continuing, many of these restrictions will terminate. The Indenture contains customary events of default.

Subsidiary Guarantors

The Senior Notes are guaranteed on a senior unsecured basis by each of our consolidated subsidiaries. Approach Resources Inc. is a holding company with no independent assets or operations. The subsidiary guarantees are full and unconditional and joint and several, and any subsidiaries of the Company other than the subsidiary guarantors are minor. There are no significant restrictions on the Company’s ability, or the ability of any subsidiary guarantor, to obtain funds from its subsidiaries through dividends, loans, advances or otherwise.

At March 31, 2014, we were in compliance with all of our covenants, and there were no existing defaults or events of default, under our debt instruments.

5. Commitments and Contingencies

Our contractual obligations include long-term debt, daywork drilling contracts, operating lease obligations, asset retirement obligations and employment agreements with our executive officers. On January 3, 2014, we entered into an employment agreement with Sergei Krylov as the Company’s Executive Vice President and Chief Financial Officer. Our maximum commitment under this employment agreement, which would apply if Mr. Krylov were terminated without cause, is $1.3 million. Since December 31, 2013, there have been no other material changes to our contractual obligations.

We are involved in various legal and regulatory proceedings arising in the normal course of business. While we cannot predict the outcome of these proceedings with certainty, we do not believe that an adverse result in any pending legal or regulatory proceeding, individually or in the aggregate, would be material to our consolidated financial condition or cash flows.

Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2014

6. Income Taxes

The effective income tax rate for the three months ended March 31, 2014 and 2013, was 36.3% and 35.1%, respectively. Total income tax expense for the three months ended March 31, 2014 and 2013, differed from amounts computed by applying the U.S. federal statutory tax rates to pre-tax income due primarily to state taxes.

7. Fair Value of Financial and Derivative Instruments

The following table provides our outstanding commodity derivative positions at March 31, 2014.


Commodity and Period	Contract Type	Volume Transacted	Contract Price
Crude Oil
April 2014 – December 2014	Collar	550 Bbls/d	$90.00/Bbl – $105.50/Bbl
April 2014 – December 2014	Collar	950 Bbls/d	$85.05/Bbl – $95.05/Bbl
April 2014 – December 2014	Collar	2,000 Bbls/d	$89.00/Bbl – $98.85/Bbl
April 2014 – March 2015	Collar	1,500 Bbls/d	$85.00/Bbl – $95.30/Bbl
January 2015 – December 2015	Collar	2,600 Bbls/d	$84.00/Bbl – $91.00/Bbl
Natural Gas Liquids
Propane
April 2014 – December 2014	Swap	500 Bbls/d	$41.16/Bbl
Natural Gasoline
April 2014 – December 2014	Swap	175 Bbls/d	$83.37/Bbl
Natural Gas
April 2014 – December 2014	Swap	360,000 MMBtu/month	$4.18/MMBtu
April 2014 – December 2014	Swap	35,000 MMBtu/month	$4.29/MMBtu
April 2014 – December 2014	Swap	160,000 MMBtu/month	$4.40/MMBtu
September 2014 – June 2015	Collar	80,000 MMBtu/month	$4.00/MMBtu – $4.74/MMBtu
January 2015 – December 2015	Swap	200,000 MMBtu/month	$4.10/MMBtu
January 2015 – December 2015	Collar	130,000 MMBtu/month	$4.00/MMBtu – $4.25/MMBtu

The following table summarizes the fair value of our open commodity derivatives as of March 31, 2014, and December 31, 2013 (in thousands).

Asset Derivatives

Liability Derivatives

Fair Value

Balance Sheet Location

Fair Value

March 31,

December 31,

March 31,

December 31,

Balance Sheet Location

2014

2013

2014

2013

Derivatives not designated as hedging instruments

Commodity derivatives

Unrealized gain on commodity derivatives

6,986

9,108

Unrealized loss on commodity derivatives

15,075

11,270

Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2014

The following table summarizes the change in the fair value of our commodity derivatives (in thousands).


	Income Statement Location	Three Months Ended March 31,
	Income Statement Location	2014			2013
Derivatives not designated as hedging instruments
Commodity derivatives	Unrealized loss on commodity derivatives	$	(5,926	)	$	(4,100	)
	Realized (loss) gain on commodity derivatives		(1,339	)		307

		$	(7,265	)	$	(3,793	)

Unrealized gains and losses, at fair value, are included on our consolidated balance sheets as current or non-current assets or liabilities based on the anticipated timing of cash settlements under the related contracts. Changes in the fair value of our commodity derivative contracts are recorded in earnings as they occur and included in other income (expense) on our consolidated statements of operations. We estimate the fair values of swap contracts based on the present value of the difference in exchange-quoted forward price curves and contractual settlement prices multiplied by notional quantities. We internally valued the option contracts using industry-standard option pricing models and observable market inputs. We use our internal valuations to determine the fair values of the contracts that are reflected on our consolidated balance sheets. Realized gains and losses are also included in other income (expense) on our consolidated statements of operations.

We are exposed to credit losses in the event of nonperformance by the counterparties on our commodity derivatives positions and have considered the exposure in our internal valuations. However, we do not anticipate nonperformance by the counterparties over the term of the commodity derivatives positions.

To estimate the fair value of our commodity derivatives positions, we use market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the market approach for recurring fair value measurements and attempt to use the best available information. We determine the fair value based upon the hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and lowest priority to unobservable inputs (Level 3 measurement). The three levels of fair value hierarchy are as follows:

•

Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. At March 31, 2014, we had no Level 1 measurements.

•

Level 2 — Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Our derivatives, which consist primarily of commodity swaps and collars, are valued using commodity market data which is derived by combining raw inputs

Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2014

and quantitative models and processes to generate forward curves. Where observable inputs are available, directly or indirectly, for substantially the full term of the asset or liability, the instrument is categorized in Level 2. At March 31, 2014, all of our commodity derivatives were valued using Level 2 measurements.

•

Level 3 — Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. At March 31, 2014, we had no Level 3 measurements.

Financial Instruments Not Recorded at Fair Value

The following table sets forth the fair values of financial instruments that are not recorded at fair value on our financial statements (in thousands).


	March 31, 2014
	Carrying Amount		Fair Value
Senior Notes	$	250,000	$	258,775

The fair value of the Senior Notes uses pricing that is readily available in the public market. Accordingly, the fair value of the Senior Notes would be classified as Level 2 in the fair value hierarchy.

8. Share-Based Compensation

In February 2014, we awarded an aggregate of 245,157 restricted shares to our executive officers, of which 163,438 shares are subject to certain performance conditions and 81,719 shares are subject to three-year total shareholder return (“TSR”) conditions, assuming maximum TSR is achieved. Assuming target TSR is achieved, then 54,479 shares are subject to three-year TSR conditions. The aggregate fair market value of the award, assuming target TSR is achieved is $4.5 million, which will be expensed over a service period of approximately three years, subject to performance and three-year TSR conditions.

Item 2. 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. This section should be read in conjunction with management’s discussion and analysis contained in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission (“SEC”) on February 25, 2014. Our consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q contain additional information that should be referred to when reviewing this material. Certain statements in this discussion may be forward-looking. These forward-looking statements involve risks and uncertainties, which could cause actual results to differ from those expressed in this report. A glossary containing the meaning of the oil and gas industry terms used in this management’s discussion and analysis follows the “Results of Operations” table in this Item 2.

Cautionary Statement Regarding Forward-Looking Statements

Various statements in this report, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements may include projections and estimates concerning the timing and success of specific projects, typical well economics and our future reserves, production, revenues, costs, income, capital spending, 3-D seismic operations, interpretation and results and obtaining permits and regulatory approvals. When used in this report, the words “will,” “believe,” “intend,” “expect,” “may,” “should,” “anticipate,” “could,” “estimate,” “plan,” “predict,” “project,” “potential” or their negatives, other similar expressions or the statements that include those words, are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words.

These forward-looking statements 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. We caution all readers that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed or referred to in the “Risk Factors” section and elsewhere in this report. All forward-looking statements speak only as of the date of this report. We disclaim any obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise, unless required by law. 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:

•

uncertainties in drilling, exploring for and producing, oil and gas;

•

oil, NGL and gas prices;

•

overall United States and global economic and financial market conditions;

•

domestic and foreign demand and supply for oil, NGLs, gas and the products derived from such hydrocarbons;

•

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

•

the effect of government regulation and permitting and other legal requirements, including laws or regulations that could restrict or prohibit hydraulic fracturing;

•

disruption of credit and capital markets;

•

our financial position;

•

our cash flows and liquidity;

•

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

•

marketing of oil, NGLs and gas;

•

high costs, shortages, delivery delays or unavailability of drilling and completion equipment, materials, labor or other services;

•

competition in the oil and gas industry;

•

uncertainty regarding our future operating results;

•

interpretation of 3-D seismic data;

•

replacing our oil, NGL and gas reserves;

•

our ability to retain and attract key personnel;

•

our business strategy, including our ability to recover oil, NGLs and gas in place associated with our Wolfcamp shale oil resource play in the Permian Basin;

•

development of our current asset base or property acquisitions;

•

estimated quantities of oil, NGL and gas reserves and present value thereof;

•

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

•

other factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 25, 2014.

Overview

Approach Resources Inc. is an independent energy company focused on the exploration, development, production and acquisition of unconventional oil and gas reserves in the Midland Basin of the greater Permian Basin in West Texas, where we lease approximately 144,000 net acres. We believe our concentrated acreage position provides us an opportunity to achieve cost, operating and recovery efficiencies in the development of our drilling inventory. We are currently developing significant resource potential from the Wolfcamp shale oil formation. Additional drilling targets could include the Clearfork, Canyon Sands, Strawn and Ellenburger zones. We sometimes refer to our development project in the Permian Basin as “Project Pangea,” which includes “Pangea West.” Our management and technical team have a proven track record of finding and developing reserves through advanced drilling and completion techniques. As the operator of all of our estimated proved reserves and production, we have a high degree of control over capital expenditures and other operating matters.

At December 31, 2013, our estimated proved reserves were 114.7 million barrels of oil equivalent (“MMBoe”), made up of 40% oil, 29% NGLs, 31% gas and 39% proved developed. Substantially all of our proved reserves are located in the Permian Basin in Crockett and Schleicher Counties, Texas. At March 31, 2014, we owned working interests in 753 producing oil and gas wells.

First Quarter 2014 Activity

During the three months ended March 31, 2014, we produced 1,067 MBoe, or 11.9 MBoe/d. We drilled 16 horizontal wells and completed 19 horizontal wells. We currently have three horizontal rigs running in Project Pangea.

2014 Capital Expenditures

For the three months ended March 31, 2014, our capital expenditures totaled $103.4 million, consisting of $97.1 million for drilling and completion activities, $6.1 million for infrastructure projects and equipment and $0.2 million for acreage acquisitions and extensions. Our 2014 capital budget is $400 million, including $385 million for horizontal drilling and completion activity and $15 million for infrastructure projects and equipment.

Our 2014 capital budget excludes acquisitions and lease extensions and renewals and is subject to change depending upon a number of factors, including additional data on our Wolfcamp shale oil resource play, results of horizontal drilling and completions, economic and industry conditions at the time of drilling, prevailing and anticipated prices for oil, NGLs and gas, the availability of sufficient capital resources for drilling prospects, our financial results and the availability of lease extensions and renewals on reasonable terms.

Results of Operations

The following table sets forth summary information regarding oil, NGL and gas revenues, production, average product prices and average production costs and expenses for the three months ended March 31, 2014 and 2013. We determine a barrel of oil equivalent using the ratio of six Mcf of natural gas to one Boe, and one barrel of NGLs to one Boe. The ratios of six Mcf of natural gas to one Boe and one barrel of NGLs to one Boe do not assume price equivalency and, given price differentials, the price for a Boe for natural gas or NGLs may differ significantly from the price for a barrel of oil.


	Three Months Ended March 31,
	2014			2013
Revenues (in thousands):
Oil	$	41,745		$	25,462
NGLs		10,298			6,237
Gas		9,884			4,570

Total oil, NGL and gas sales		61,927			36,269
Realized (loss) gain on commodity derivatives		(1,339	)		307

Total oil, NGL and gas sales including derivative impact	$	60,588		$	36,576

Production:
Oil (MBbls)		450			310
NGLs (MBbls)		295			214
Gas (MMcf)		1,934			1,378

Total (MBoe)		1,067			754
Total (MBoe/d)		11.9			8.4
Average prices:
Oil (per Bbl)	$	92.77		$	82.01
NGLs (per Bbl)		34.94			29.17
Gas (per Mcf)		5.11			3.32

Total (per Boe)		58.04			48.10
Realized (loss) gain on commodity derivatives (per Boe)		(1.26	)		0.41

Total including derivative impact (per Boe)	$	56.78		$	48.51

Costs and expenses (per Boe):
Lease operating	$	7.36		$	7.14
Production and ad valorem		3.91			3.39
Exploration		0.69			0.34
General and administrative		8.00			8.50
Depletion, depreciation and amortization		22.12			22.62

Glossary

Bbl. One stock tank barrel, of 42 U.S. gallons liquid volume, used herein to reference oil, condensate or NGLs.

Boe. Barrel of oil equivalent, determined using the ratio of six Mcf of gas to one Bbl of oil equivalent, and one Bbl of NGLs to one Bbl of oil equivalent.

MBbl. Thousand barrels of oil, condensate or NGLs.

MBoe . Thousand barrels of oil equivalent.

Mcf. Thousand cubic feet of natural gas.

MMBoe. Million barrels of oil equivalent.

MMcf. Million cubic feet of natural gas.

NGLs. Natural gas liquids.

/d. “Per day” when used with volumetric units or dollars.

Oil, NGL and gas sales. Oil, NGL and gas sales increased $25.6 million, or 71%, for the three months ended March 31, 2014, to $61.9 million, from $36.3 million for the three months ended March 31, 2013. The increase in oil, NGL and gas sales was due to an increase in production volumes ($18.6 million), and an increase in average realized commodity prices ($7 million). Production volumes increased as a result of our continued development in Project Pangea. We expect our oil, NGL and gas sales to increase during the remainder of 2014 due to increased production volumes from our development project in the Permian Basin.

Net income . Net income for the three months ended March 31, 2014, was $2.9 million, or $0.08 per diluted share, compared to a net loss of $0.3 million, or $0.01 per diluted share, for the three months ended March 31, 2013. Net income for the three months ended March 31, 2014, included an unrealized loss on commodity derivatives of $5.9 million and a realized loss on commodity derivatives of $1.3 million. Net income for the three months ended March 31, 2014, increased due to higher revenues ($25.6 million), partially offset by higher depletion, depreciation and amortization expense, interest expense, and losses on both our realized and unrealized commodity derivatives.

Oil, NGL and gas production. Production for the three months ended March 31, 2014, totaled 1,067 MBoe (11.9 MBoe/d), compared to production of 754 MBoe (8.4 MBoe/d) in the prior-year period, a 42% increase. Production for the three months ended March 31, 2014, was 42% oil, 28% NGLs and 30% gas, compared to 41% oil, 28% NGLs and 31% gas in the 2013 period. Production volumes increased during the three months ended March 31, 2014, as a result of our development in Project Pangea. We expect production to continue to increase during 2014 due to our development project in the Permian Basin.

Commodity derivative activities . Our commodity derivative activity resulted in a realized loss of $1.3 million and a realized gain of $0.3 million for the three months ended March 31, 2014 and 2013, respectively. Our average realized price, including the effect of commodity derivatives, was $56.78 per Boe for the three months ended March 31, 2014, compared to $48.51 per Boe for the three months ended March 31, 2013. Realized gains and losses on commodity derivatives are derived from the relative movement of commodity prices in relation to the fixed pricing in our derivatives contracts for the respective periods. The unrealized loss on commodity derivatives was $5.9 million and $4.1 million for the three months ended March 31, 2014 and 2013, respectively. As commodity prices increase or decrease, the fair value of the open portion of those positions decreases or increases, respectively.

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

Lease operating . Our lease operating expenses (“LOE”) increased $2.5 million, or 46%, for the three months ended March 31, 2014, to $7.9 million, or $7.36 per Boe, from $5.4 million, or $7.14 per Boe, for the three months ended March 31, 2013. The increase in LOE per Boe for the three months ended March 31, 2014, was primarily due to higher well repairs, workovers, maintenance and higher compressor rental and repair due to extreme weather-related compressor maintenance expenses, partially offset by decreases in expenses related to water hauling, insurance, and pumpers and supervision. The following table summarizes LOE per Boe.


	Three Months Ended March 31,
	2014		2013		Change			% Change
Well repairs, workovers and maintenance	$	2.88	$	2.67	$	0.21			7.9	%
Compressor rental and repair		2.04		1.60		0.44			27.5
Water hauling, insurance and other		1.54		1.89		(0.35	)		(18.5	)
Pumpers and supervision		0.90		0.98		(0.08	)		(8.2	)

Total	$	7.36	$	7.14	$	0.22			3.1	%

Production and ad valorem taxes . Our production and ad valorem taxes increased $1.6 million, or 63%, for the three months ended March 31, 2014, to $4.2 million from $2.6 million for the three months ended March 31, 2013. The increase in production and ad valorem taxes was primarily a function of the increase in oil, NGL and gas sales between the two periods. Production and ad valorem taxes were $3.91 per Boe and $3.39 per Boe and approximately 6.7% and 7.1% of oil, NGL and gas sales for the three months ended March 31, 2014 and 2013, respectively.

Exploration . We recorded $0.7 million, or $0.69 per Boe, and $0.3 million, or $0.34 per Boe, of exploration expense for the three months ended March 31, 2014 and 2013, respectively. Exploration expense for the respective periods resulted primarily from lease expirations and the acquisition of 3-D seismic data.

General and administrative . Our general and administrative expenses (“G&A”) increased $2.1 million, or 33%, to $8.5 million, or $8.00 per Boe, for the three months ended March 31, 2014, from $6.4 million, or $8.50 per Boe, for the three months ended March 31, 2013. The increase in G&A was primarily due to higher salaries and benefits resulting from increased staffing. We expect G&A per Boe to decline due to production increases for the remainder of 2014. The following table summarizes G&A in millions and G&A per Boe.


	Three Months Ended March 31,
	2014				2013				Change
	$MM		Boe		$MM		Boe		$MM		Boe			% Change
Salaries and benefits	$	3.5	$	3.27	$	2.2	$	3.05	$	1.3	$	0.22			7.2	%
Share-based compensation		2.6		2.49		2.3		2.99		0.3		(0.50	)		(16.7	)
Professional fees		0.7		0.65		0.4		0.52		0.3		0.13			25.0
Other		1.7		1.59		1.5		1.94		0.2		(0.35	)		(18.0	)

Total	$	8.5	$	8.00	$	6.4	$	8.50	$	2.1	$	(0.50	)		(5.9	)%

Depletion, depreciation and amortization. Our depletion, depreciation and amortization expense (“DD&A”) increased $6.5 million, or 38%, to $23.6 million for the three months ended March 31, 2014, from $17.1 million for the three months ended March 31, 2013. Our DD&A per Boe decreased by $0.50, or 2%, to $22.12 per Boe for the three months ended March 31, 2014, compared to $22.62 per Boe for the three months ended March 31, 2013. The increase in DD&A expense over the prior-year period was primarily due to higher production. The decrease in DD&A per Boe over the prior-year period was primarily due to lower oil and gas property carrying costs relative to estimated proved developed reserves.

Interest expense, net. Our interest expense, net, increased $3.9 million, or 318%, to $5.1 million for the three months ended March 31, 2014, from $1.2 million for the three months ended March 31, 2013. This increase was primarily due to higher interest expense from the issuance of Senior Notes in

June 2013, partially offset by decreased borrowings under our revolving credit facility (the “Credit Facility”). We expect our interest expense to remain higher than the prior-year period as a result of increased borrowings during 2014 and interest payable under our Senior Notes.

Income taxes. Our income taxes increased $1.9 million to an income tax expense of $1.7 million for the three months ended March 31, 2014, from a benefit of $0.2 million for the three months ended March 31, 2013. The increase in income taxes was primarily due to an increase in income before income taxes in the 2014 period. Our effective income tax rate for the three months ended March 31, 2014, was 36.3%, compared to 35.1% for the three months ended March 31, 2013.

Liquidity and Capital Resources

We generally will rely on cash generated from operations, borrowings under our Credit Facility and, to the extent that credit and capital market conditions will allow, future public equity and debt offerings to satisfy our liquidity needs. Our ability to fund planned capital expenditures and to make acquisitions depends upon our future operating performance, availability of borrowings under our Credit Facility, and more broadly, on the availability of equity and debt financing, which is affected by prevailing economic conditions in our industry and financial, business and other factors, some of which are beyond our control. We cannot predict whether additional liquidity from equity or debt financings beyond our Credit Facility will be available on acceptable terms, or at all, in the foreseeable future.

Our cash flow from operations is driven by commodity prices, production volumes and the effect of commodity derivatives. Prices for oil and gas are affected by national and international economic and political environments, national and global supply and demand for hydrocarbons, seasonal influences of weather and other factors beyond our control. Cash flows from operations are primarily used to fund exploration and development of our oil and gas properties.

We believe we have adequate liquidity from cash on hand, cash generated from operations and unused borrowing capacity under our Credit Facility for current working capital needs and maintenance of our current development project. However, we may determine to use various financing sources, including the issuance of common stock, preferred stock, debt, convertible securities and other securities for future development of reserves, acquisitions, additional working capital or other liquidity needs, if such financing is available on acceptable terms. We cannot guarantee that such financing will be available on acceptable terms or at all. Using some of these financing sources may require approval from the lenders under our Credit Facility.

Liquidity

We define liquidity as funds available under our Credit Facility, cash and cash equivalents. At March 31, 2014, and December 31, 2013, we had no borrowings outstanding under our Credit Facility and liquidity of $354 million and $408.4 million, respectively. The table below summarizes our liquidity position at March 31, 2014, and December 31, 2013 (dollars in thousands).


	Liquidity at March 31,			Liquidity at December 31,
	2014			2013
Borrowing base	$	350,000		$	350,000
Cash and cash equivalents		4,341			58,761
Long-term debt – Credit Facility		—			—
Undrawn letters of credit		(325	)		(325	)

Liquidity	$	354,016		$	408,436

In May 2014, we entered into a new, $1 billion senior secured revolving credit facility (the “New Credit Facility”) with an initial borrowing base of $450 million. Additional information regarding the New Credit Facility is included in Note 4. “Long-Term Debt.”

Working Capital

Our working capital is affected primarily by our cash and cash equivalents balance and our capital spending program. We had a working capital deficit of $63.6 million at March 31, 2014, compared to a working capital surplus of $6 million at December 31, 2013. The primary reason for the change in working capital was an increase in accrued liabilities, and a decrease in our cash balance due to an increase in our capital expenditures. To the extent we operate, or end fiscal year 2014, with a working capital deficit, we expect such deficit to be more than offset by liquidity available under our Credit Facility.

Cash Flows

The following table summarizes our sources and uses of funds for the periods noted (in thousands).


	Three Months Ended March 31,
	2014			2013
Cash flows provided by operating activities	$	48,993		$	29,638
Cash flows used in investing activities		(103,413	)		(75,986	)
Cash flows provided by financing activities		—			46,175

Net decrease in cash and cash equivalents	$	(54,420	)	$	(173	)

Operating Activities

Cash flows provided by operating activities increased by 65%, or $19.4 million, to $49 million during the three months ended March 31, 2014, compared to the prior-year period. The increase in our cash flows provided by operating activities was primarily due to an increase in oil, NGL and gas sales from higher production and the timing of payments and receipts of working capital components, partially offset by an increase in total expenses.

Investing Activities

Cash flows used in investing activities increased by $27.4 million for the three months ended March 31, 2014, to $103.4 million, compared to the prior-year period. Cash flows used in investing activities for the three months ended March 31, 2014, were primarily attributable to drilling and development ($97.1 million), infrastructure projects and, equipment ($6.1 million) and acreage acquisitions and extensions ($0.2 million). During the three months ended March 31, 2014, we drilled a total of 16 horizontal wells and completed 19 horizontal wells.

Financing Activities

During the three months ended March 31, 2014, cash flows provided by financing activities decreased by $46.2 million, compared to the prior-year period. We had no outstanding borrowings under our Credit Facility at March 31, 2014. During the three months ended March 31, 2013, net cash flows provided by financing activities included borrowings under our Credit Facility of $80 million that were partially offset by repayments of outstanding borrowings of $33.8 million.

Credit Facility

At March 31, 2014, the borrowing base under our Credit Facility was $350 million, with maximum commitments from the lenders of $500 million and a maturity date of July 31, 2016. We had no outstanding borrowings under our Credit Facility at March 31, 2014, and December 31, 2013. The borrowing base is redetermined semi-annually in April and October based on our oil, NGL and gas reserves. We, or the lenders, can each request one additional borrowing base redetermination each calendar year. Loans under our Credit Facility are secured by first-priority liens on substantially all of our West Texas assets, a pledge of our equity interests in our subsidiaries and are guaranteed by our subsidiaries.

In May 2014, we entered into the New Credit Facility, a $1 billion senior secured revolving credit facility with an initial $450 million borrowing base. The New Credit Facility has a maturity date of May 7, 2019. Additional information regarding our credit arrangements is included in Note 4. “Long-Term Debt.”

To date, we have experienced no disruptions in our ability to access our Credit Facility. However, our lenders have substantial ability to reduce our borrowing base on the basis of subjective factors, including the loan collateral value that each lender, in its discretion and using the methodology, assumptions and discount rates as such lender customarily uses in evaluating oil and gas properties, assigns to our properties.

Contractual Obligations

Our contractual obligations include long-term debt, daywork drilling contracts, operating lease obligations, asset retirement obligations and employment agreements with our executive officers. On January 3, 2014, we entered into an employment agreement with Sergei Krylov as the Company’s Executive Vice President and Chief Financial Officer. Our maximum commitment under Mr. Krylov’s employment agreement, which would apply if Mr. Krylov were terminated without cause, is $1.3 million. Since December 31, 2013, there have been no other material changes to our contractual obligations.

Off-Balance Sheet Arrangements

From time to time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations. As of March 31, 2014, the off-balance sheet arrangements and transactions that we have entered into include undrawn letters of credit and operating lease agreements. We do not believe that these arrangements have or are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

General Trends and Outlook

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 domestic and foreign supply of oil and gas, overall domestic and global economic conditions, commodity processing, gathering and transportation availability and the availability of refining capacity, price and availability of alternative fuels, price and quantity of foreign imports, domestic and foreign governmental regulations, political conditions in or affecting other gas producing and oil producing countries, weather and technological advances affecting oil and gas consumption. 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. A substantial or extended decline in oil and gas prices

could have a material adverse effect on our business, financial condition, results of operations, quantities of oil and gas reserves that may be economically produced and liquidity that may be accessed through our borrowing base under our Credit Facility and through capital markets.

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. We focus our efforts on increasing oil and gas reserves and production while controlling costs at a level that is appropriate for long-term operations. Our future cash flow from operations will depend on our ability to manage our overall cost structure.

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, farm-ins or other joint drilling ventures, and by acquisitions. However, during times of severe price declines, we may from time to time reduce current capital expenditures and curtail drilling operations in order to preserve liquidity. A material reduction in capital expenditures and drilling activities could materially reduce our production volumes and revenues and increase future expected costs necessary to develop existing reserves.

We also face the challenge of financing exploration, development and future acquisitions. We believe we have adequate liquidity from cash generated from operations and unused borrowing capacity under our Credit Facility for current working capital needs and maintenance of our current development project. However, we may determine to use various financing sources, including the issuance of common stock, preferred stock, debt, convertible securities and other securities for future development of reserves, acquisitions, additional working capital or other liquidity needs, if such financing is available on acceptable terms. We cannot guarantee that such financing will be available on acceptable terms or at all. Using some of these financing sources may require approval from the lenders under our Credit Facility.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Some of the information below contains forward-looking statements. The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term “market risk” refers to the risk of loss arising from adverse 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

Given the current economic outlook, we expect commodity prices to remain volatile. Even modest decreases in commodity prices can materially affect our revenues and cash flow. In addition, if commodity prices remain suppressed for a significant amount of time, we could be required under successful efforts accounting rules to perform a write down of our oil and gas properties.

We enter into financial swaps and options to reduce the risk of commodity price fluctuations. We do not designate such instruments as cash flow hedges. Accordingly, we record open commodity derivative positions on our consolidated balance sheets at fair value and recognize changes in such fair values as other income (expense) on our consolidated statements of operations as they occur.

The following table provides our outstanding commodity derivative positions at March 31, 2014.


Commodity and Period	Contract Type	Volume Transacted	Contract Price
Crude Oil
April 2014 – December 2014	Collar	550 Bbls/d	$90.00/Bbl – $105.50/Bbl
April 2014 – December 2014	Collar	950 Bbls/d	$85.05/Bbl – $95.05/Bbl
April 2014 – December 2014	Collar	2,000 Bbls/d	$89.00/Bbl – $98.85/Bbl
April 2014 – March 2015	Collar	1,500 Bbls/d	$85.00/Bbl – $95.30/Bbl
January 2015 – December 2015	Collar	2,600 Bbls/d	$84.00/Bbl – $91.00/Bbl
Natural Gas Liquids
Propane
April 2014 – December 2014	Swap	500 Bbls/d	$41.16/Bbl
Natural Gasoline
April 2014 – December 2014	Swap	175 Bbls/d	$83.37/Bbl
Natural Gas
April 2014 – December 2014	Swap	360,000 MMBtu/month	$4.18/MMBtu
April 2014 – December 2014	Swap	35,000 MMBtu/month	$4.29/MMBtu
April 2014 – December 2014	Swap	160,000 MMBtu/month	$4.40/MMBtu
September 2014 – June 2015	Collar	80,000 MMBtu/month	$4.00/MMBtu – $4.74/MMBtu
January 2015 – December 2015	Swap	200,000 MMBtu/month	$4.10/MMBtu
January 2015 – December 2015	Collar	130,000 MMBtu/month	$4.00/MMBtu – $4.25/MMBtu

At March 31, 2014, the fair value of our open derivative contracts was a net liability of $8.1 million, compared to a net liability of $2.2 million at December 31, 2013.

JPMorgan Chase Bank, N.A. and KeyBank National Association are currently the only counterparties to our commodity derivatives positions. We are exposed to credit losses in the event of nonperformance by counterparties on our commodity derivatives positions. However, we do not anticipate nonperformance by the counterparties over the term of the commodity derivatives positions. JPMorgan is the administrative agent and a participant, and KeyBank is the documentation agent and a participant, in our Credit Facility, and the collateral for the outstanding borrowings under our Credit Facility is used as collateral for our commodity derivatives.

For the three months ended March 31, 2014 and 2013, we recorded an unrealized loss on commodity derivatives of $5.9 million and $4.1 million, respectively, from the change in fair value of our commodity derivatives positions. A hypothetical 10% increase in commodity prices would have resulted in a $23.5 million decrease in the fair value of our commodity derivative positions recorded on our balance sheet at March 31, 2014, and a corresponding increase in the unrealized loss on commodity derivatives recorded on our consolidated statement of operations for the three months ended March 31, 2014.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Such controls include those designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including the President and Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of March 31, 2014. Based on this evaluation, the CEO and CFO have concluded that, as of March 31, 2014, our disclosure controls and procedures were effective, in that they ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting

There were no changes made in our internal control over financial reporting (as defined in Rule 13a-15(f) promulgated under the Exchange Act) during the three months ended March 31, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations Inherent in All Controls

Our management, including the CEO and CFO, recognizes that the disclosure controls and procedures and internal controls (discussed above) cannot prevent all errors or all attempts at fraud. Any controls system, no matter how well-crafted and operated, can only provide reasonable, and not absolute, assurance of achieving the desired control objectives. Because of the inherent limitations in any control system, no evaluation or implementation of a control system can provide complete assurance that all control issues and all possible instances of fraud have been or will be detected.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

There have been no material developments in the legal proceedings described in Part I, Item 3. “Legal Proceedings” of our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 25, 2014.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the risks discussed in the following report that we have filed with the SEC, which risks could materially affect our business, financial condition and results of operations: Annual Report on Form 10-K for the year ended December 31, 2013, under the headings Item 1. “Business – Markets and Customers; Competition; and Regulation,” Item 1A. “Risk Factors,” Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – General Trends and Outlook” and Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” filed with the SEC on February 25, 2014.

There have been no material changes to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 25, 2014, which is accessible on the SEC’s website at www.sec.gov and our website at www.approachresources.com .

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table provides information relating to our purchase of shares of our common stock during the three months ended March 31, 2014. The repurchases reflect shares withheld upon vesting of restricted stock under our 2007 Stock Incentive Plan to satisfy statutory minimum tax withholding obligations.

ISSUER PURCHASES OF EQUITY SECURITIES


Period	(a) Total Number of Shares Purchased		(b) Average Price Paid Per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
Month #1 January 1, 2014 – January 31, 2014		11,790	$	19.32		—		—
Month #2 February 1, 2014 – February 28, 2014		181		21.09		—		—
Month #3 March 1, 2014 – March 31, 2014		36		23.06		—		—

Total		12,007	$	19.33		—		—

Item 6. Exhibits.

See “Index to Exhibits” following the signature page of this report for a description of the exhibits furnished as part of this report.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	APPROACH RESOURCES INC.

Date: May 9, 2014	By:	/s/ J. Ross Craft
		J. Ross Craft
		President and Chief Executive Officer (Principal Executive Officer)

Date: May 9, 2014	By:	/s/ Sergei Krylov
		Sergei Krylov
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Index to Exhibits


Exhibit Number		*Description of Exhibit*

3.1		Restated Certificate of Incorporation of Approach Resources Inc. (filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed December 13, 2007, and incorporated herein by reference).

3.2		Restated Bylaws of Approach Resources Inc. (filed as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed December 13, 2007, and incorporated herein by reference).

4.1		Specimen Common Stock Certificate (filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A filed October 18, 2007 (File No. 333-144512), and incorporated herein by reference).

4.2		Senior Indenture, dated as of June 11, 2013, among Approach Resources Inc., as issuer, the subsidiary guarantors named therein, as guarantors, and Wells Fargo Bank, National Association, as trustee (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed June 11, 2013, and incorporated herein by reference).

4.3		First Supplemental Indenture, dated as of June 11, 2013, among Approach Resources Inc., as issuer, the subsidiary guarantors named therein, as guarantors, and Wells Fargo Bank, National Association, as trustee (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed June 11, 2013, and incorporated herein by reference).

*10.1†		Employment Agreement by and between Approach Resources Inc. and Sergei Krylov dated January 3, 2014.

10.2		Amendment No. 17 dated as of January 23, 2014, to Credit Agreement dated as of January 18, 2008, among Approach Resources Inc., as Borrower, JPMorgan Chase Bank, N.A., as administrative agent and lender, KeyBank National Association, Frost Bank, Royal Bank of Canada and Wells Fargo Bank, N.A., as lenders, and Approach Oil & Gas Inc., Approach Resources I, LP, Approach Services, LLC and Approach Midstream Holdings LLC, as guarantors (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 24, 2014, and incorporated herein by reference).

*31.1		Certification by the President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*31.2		Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*32.1		Certification by the President and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*32.2		Certification by the Chief Financial Officer Pursuant to U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*101.INS		XBRL Instance Document.

*101.SCH		XBRL Taxonomy Extension Schema Document.

*101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.

*101.LAB		XBRL Taxonomy Extension Label Linkbase Document.

*101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

*101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

*	Filed herewith.

†	Denotes management contract

Exhibit 10.1

Execution Copy

EMPLOYMENT AGREEMENT

This Employment Agreement (the “ Agreement ”) is entered into as of January 3, 2014 (the “ Effective Date ”), by and between APPROACH RESOURCES INC., a Delaware corporation (the “ Company ”), and SERGEI KRYLOV, an individual residing in the State of Texas (“ Employee ”).

RECITALS

WHEREAS, the Company desires to employ Employee, and Employee desires to be employed by the Company, subject to the terms and conditions of this Agreement.

NOW, THEREFORE, in consideration of the mutual promises and covenants contained in this Agreement and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree to the following terms:

TERMS

Employment and Position . Effective as of the Effective Date of this Agreement, the Company shall employ Employee as its Executive Vice President and Chief Financial Officer, and Employee shall serve in such capacities, subject to the terms of this Agreement, and Employee shall report directly to the Company’s President and Chief Executive Officer (the “ President ”) and/or Board of Directors (the “ Board ”).

Duties . Employee shall perform in the capacities described in paragraph 1 and shall have such duties, responsibilities, and authorities as may be reasonably assigned by the President and/or Board, in his or its sole discretion, including without limitation duties, responsibilities, and authorities for the Company’s Affiliates (as defined below). Employee shall devote his full time, best efforts, abilities, knowledge, and experience to the Company’s business and affairs as necessary to faithfully perform his duties, responsibilities, and authorities under this Agreement.

Place of Performance . Although Employee shall be expected to work at all Company locations from time to time and travel as necessary to perform his duties, responsibilities, and authorities under this Agreement, Employee’s primary work location shall be at the Company’s corporate headquarters or within 50 miles from the Company’s corporate headquarters. The Company shall provide without cost to Employee such office space, secretarial, and administrative services, equipment, furniture, and furnishings as are suitable and appropriate to Employee’s titles and positions.

4.	Term of Agreement .

(a)

Initial Term . This Agreement shall continue in full force and effect for the initial term described in this subparagraph 4(a) (the “ Initial Term ”), commencing on the Effective Date and expiring on January 3, 2016 (the “ Expiration Date ”), unless terminated before the Expiration Date in accordance with paragraph 6.

(b)

Renewal Term . Notwithstanding subparagraph 4(a), the effectiveness of this Agreement shall automatically be extended for an additional one-year term on the Expiration Date and on each successive anniversary of the Expiration Date (each, a “ Renewal Date ”), unless and until (i) either party gives written notice of non-renewal at least 120 days prior to the Expiration Date or any Renewal Date; or (ii) the Agreement is terminated earlier in accordance with paragraph 6 (each, a “ Renewal Term ”).

(c)

Term . The Initial Term and any Renewal Terms shall be referred to below collectively as the “ Term ” of this Agreement.

5.	Compensation and Employment Benefits . In consideration for the performance of Employee’s duties, responsibilities, and authorities under this Agreement, the Company shall provide Employee with the following compensation and employment benefits:

(a)

Base Salary . From the Effective Date until changed as provided in this subparagraph, the Company shall pay Employee an annual base salary of $375,000, less applicable deductions and withholdings (the “ Base Salary ”), prorated for any partial period of employment. The Base Salary shall be payable semi-monthly in accordance with the Company’s ordinary payroll policies and procedures for employee compensation. During the Term, Employee’s Base Salary shall be subject to an annual review and adjustment by the Board in its sole discretion.

(b)

Bonus .

(i)

Performance Plan . In addition to the Base Salary, Employee shall be eligible to participate in the Company Performance Incentive Plan or another bonus plan or program maintained by the Company or an Affiliate, including, but not limited to, the Short-Term Incentive Plan (collectively a “ Performance Plan ”) at set levels to be determined annually by the Compensation Committee of the Board in its sole discretion. For purposes of this Agreement, “ Bonus ” means any annual bonus payable pursuant to the Performance Plan to Employee.

(ii)

Payout Option . The Bonus may be paid in cash, common stock of the Company, or a combination thereof, as determined by the Compensation Committee in its sole discretion; provided, however , that the Compensation Committee may offer Employee the option to elect to receive the value of any Bonus in cash, common stock, or a combination thereof, subject to applicable law and such terms, conditions, and limitations as the Compensation Committee may establish from time to time.

(iii)

Discretionary Participation Level . The Compensation Committee, in its sole discretion, shall determine Employee’s participation in the

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Performance Plan and amount or range of the Bonus available to Employee based on achievement of performance goals during the fiscal year or other performance period.

(iv)

Payment . Any Bonus or other discretionary compensation payments due under this Agreement shall be paid to Employee at the time specified by the Compensation Committee at the time any such Bonus or other discretionary compensation payment is awarded, but in no event later than 2 ¹ ⁄ ₂ months after the end of the taxable year in which any substantial risk of forfeiture with respect to such Bonus or other payment lapses. Unless otherwise specifically provided for in this Agreement or a plan, policy or program of the Company, Employee must be employed by the Company or an Affiliate on the date the Bonus or other payment is made to be entitled to receive the Bonus or other payment.

(c)

Employment Benefits . The Company shall provide Employee with the employment benefits that the Company ordinarily provides to its executive-level employees. Such employment benefits shall be governed by the applicable plan documents, insurance policies, and/or employment policies, and may be modified, suspended, revoked, or terminated in accordance with the terms of the applicable documents or policies without violating this Agreement. In addition to those benefits, the Company shall provide or cause to provide the following benefits upon satisfaction by Employee of any eligibility requirements, subject to the following limitations:

(i)

Sick-Leave Benefits . To the extent made available to other employees of the Company, and unless this Agreement is terminated pursuant to paragraph 6 in which case no sick-leave benefits shall be payable, Employee shall be paid sick leave benefits at his then prevailing Base Salary rate during his absence due to illness or other incapacity up to a maximum of 180 days in any one-year period, prorated for any partial year of service.

(ii)

Vacations . The Company shall provide Employee with a minimum of four weeks of paid vacation per calendar year during the Term, prorated for the first calendar year of the Term. Unless the Company has adopted a plan or policy pursuant to which some or all of such vacation may be rolled over to the next succeeding year in which case only a maximum of four weeks of paid vacation may be carried over, such vacation may not be carried over from calendar year to calendar year and accrued unused vacation shall be forfeited if not used by the end of the calendar year in which it was granted. The time and duration of any vacation shall be subject to advance notice to the President. The Company shall provide Employee with all paid holidays ordinarily given by the Company to its employees. Employee shall be paid for any accrued unused vacation should this Agreement terminate pursuant to paragraph 6.

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(d)

Reimbursement of Business Expenses . Employee may incur ordinary, necessary, and reasonable business expenses in connection with the performance of his duties, responsibilities, and authorities under this Agreement and for the promotion of the Company’s business and activities during the Term, including but not limited to expenses for necessary travel and entertainment and other items of expenses required in the normal and routine course of Employee’s employment. The Company shall promptly reimburse Employee from time to time for all such business expenses incurred pursuant to and in conformity with this subparagraph and the policies and practices of the Company relative to the reimbursement of business expenses. Notwithstanding the foregoing, (i) the amount of expenses eligible for reimbursement during a calendar year may not affect the expenses eligible for reimbursement in any other calendar year, (ii) the reimbursement must be made on or before the last day of the calendar year following the calendar year in which the expense was incurred, and (iii) the right to reimbursement shall not be subject to liquidation or exchange for any other benefit.

6.	Termination of Agreement . This Agreement may be terminated as follows; provided, however , that any termination of this Agreement shall also constitute a termination of Employee’s employment with the Company:

(a)

Death . This Agreement shall terminate immediately upon Employee’s death.

(b)

Permanent Disability . This Agreement shall immediately terminate in the event that Employee becomes Permanently Disabled. For purposes of this Agreement, Employee shall be deemed to have become “ Permanently Disabled ” when (i) he receives disability benefits under either Social Security or the Company’s long-term disability plan, if any, (ii) the President and/or the Board, upon the written report of a qualified physician designated by the President and/or the Board or its insurers, shall have determined (after a complete physical examination of Employee at any time after he has been absent from the Company for a total period of 180 or more calendar days in any 12-month period) that Employee has become physically and/or mentally incapable of performing his essential job functions with or without reasonable accommodation as required by law, or (iii) Employee is otherwise unable for a continuous period of 90 calendar days to perform his essential job functions with or without reasonable accommodation as required by law due to injury, illness, or other incapacity (physical or mental).

(c)

With Cause . The Company shall be entitled to terminate this Agreement immediately for any Cause.

(i)

Definition of Cause . For purposes of this Agreement, “ Cause ” shall be defined as follows:

(A)

the willful and continued failure by Employee substantially to perform his duties, responsibilities, or authorities hereunder (other than any such failure resulting from Employee becoming Permanently Disabled);

A MENDED AND R ESTATED E MPLOYMENT A GREEMENT - Page 4

(B)

the willful engaging by Employee in misconduct that is materially injurious to the Company;

(C)

any misconduct by Employee in the course and scope of Employee’s employment under this Agreement, including but not limited to dishonesty, disloyalty, disorderly conduct, insubordination, harassment of other employees or third parties, abuse of alcohol or controlled substances, or other violations of the Company’s personnel policies, rules, or Code of Conduct;

(D)

any material violation by Employee of this Agreement; or

(E)

any violation by Employee of any fiduciary duty owed by Employee to the Company or its Affiliates.

For purposes of this subparagraph, no act, or failure to act, on Employee’s part shall be considered “ willful ” unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Company.

(ii)

Limited Notice and Opportunity to Cure . If the Company determines in its reasonable, good faith discretion that a cure is possible and appropriate, the Company will give Employee written notice of the acts or omissions constituting Cause and no termination of this Agreement shall be for Cause unless and until Employee fails to cure such acts or omissions within 10 days following receipt of such written notice. If the Company determines in its reasonable, good faith discretion that a cure is not possible and appropriate, Employee shall have no notice or cure rights before this Agreement is terminated for Cause.

(d)

Without Cause . The Company shall be entitled to terminate this Agreement for any reason other than death, Employee becoming Permanently Disabled, or Cause, at any time by providing 90 days written notice to Employee that the Company is terminating the Agreement without Cause.

(e)

With Good Reason . Employee shall be permitted to terminate this Agreement for any Good Reason.

(i)

Definition of Good Reason . For purposes of this Agreement, “ Good Reason ” shall exist in the event any of the following actions are taken without Employee’s consent:

(A)

a material diminution in Employee’s Base Salary, duties, responsibilities, or authorities;

A MENDED AND R ESTATED E MPLOYMENT A GREEMENT - Page 5

(B)

a requirement that Employee report to an officer or employee other than the President or the Board (or similar governing body);

(C)

a material relocation of Employee’s primary work location more than 50 miles away from the Company’s corporate headquarters; or

(D)

any other action or inaction by the Company that constitutes a material breach by the Company of its obligations under this Agreement.

(ii)

Notice and Opportunity to Cure . To exercise his right to terminate for Good Reason, Employee must provide written notice to the Company of his belief that Good Reason exists within 90 days of the initial existence of the condition(s) giving rise to Good Reason, and that notice shall describe the condition(s) believed to constitute Good Reason. The Company shall have 30 days to remedy the Good Reason condition(s). If not remedied within that 30-day period, Employee may terminate this Agreement; provided, however , that such termination must occur no later than 180 days after the date of the initial existence of the condition(s) giving rise to the Good Reason; otherwise, Employee is deemed to have accepted the condition(s), or the Company’s correction of such condition(s), that may have given rise to the existence of Good Reason.

(f)

Without Good Reason . Employee shall be entitled to terminate this Agreement without Good Reason at any time by providing 120 days written notice to Company that Employee is terminating the Agreement without Good Reason.

(g)

Expiration of Term . Either party may terminate this Agreement by providing a proper notice of non-renewal in accordance with subparagraph 4(b).

7.	Payments and Benefits Due Upon Termination .

(a)

Accrued Obligations . Upon any termination of this Agreement, the Company shall have no further obligation to Employee under this Agreement or otherwise, except as expressly provided in this Agreement and except for (i) payment to Employee of all earned but unpaid Base Salary through the Date of Termination, prorated as provided in subparagraph 5(a), (ii) payment to Employee, in accordance with the terms of the applicable benefit plan of the Company or to the extent required by law, of any benefits to which Employee has a vested entitlement as of the Date of Termination (other than any entitlement to severance or separation pay, if any), (iii) payment to Employee of any accrued unused vacation; and (iv) payment to Employee of any approved but un-reimbursed

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business expenses incurred in accordance with applicable Company policy and the terms of this Agreement. The payments and benefits described in (i)-(iv) shall be referred to in this Agreement as the “ Accrued Obligations ” and shall be paid in accordance with the Company’s plans and policies and applicable law.

(b)

Termination by the Company Due to Death or Permanent Disability . If this Agreement is terminated due to death or Employee becoming Permanently Disabled, then the Company shall have no further obligations to Employee under this Agreement or otherwise, except the Company shall provide the Accrued Obligations to Employee in accordance with subparagraph 7(a) in addition to the following severance payments and benefits payable to Employee or the personal representative of Employee’s estate, as applicable:

(i)

on the earliest date between 20 and 60 days following Employee’s Separation from Service when the Release described in subparagraph 10(a) has become fully enforceable and irrevocable, a lump sum in cash equal to 100% of his Base Salary in effect as of such Separation from Service; and

(ii)

on or before the 60th day following Employee’s Separation from Service, a lump sum in cash equal to 100% of the average of any Bonuses received by Employee from the Company in the two years immediately before the Separation from Service.

(c) Termination by the Company for Cause or by Employee Without Good Reason . Upon termination of this Agreement by (i) the Company for Cause in accordance with subparagraph 6(c) or (ii) Employee without Good Reason in accordance with subparagraph 6(f), the Company shall have no further obligations to Employee under this Agreement or otherwise, except the Company shall provide the Accrued Obligations to Employee in accordance with subparagraph 7(a).

(d)

Termination by the Company without Cause or by Employee for Good Reason . If this Agreement is terminated by (i) the Company without Cause in accordance with subparagraph 6(d) or (ii) Employee for Good Reason in accordance with subparagraph 6(e), then the Company shall have no further obligations to Employee under this Agreement or otherwise, except the Company shall provide the Accrued Obligations to Employee in accordance with subparagraph 7(a) in addition to the following severance payments and benefits:

(i)

on the earliest date between 20 and 60 days following Employee’s Separation from Service when the Release described in subparagraph 10(a) has become fully enforceable and irrevocable, a lump sum in cash equal to 200% of the greater of (A) the then-current Base Salary, and (B) the Base Salary at any time within two years immediately before the Separation from Service; and

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(ii)

on the date that annual bonuses are paid to other executive employees of the Company, but in no event later than 2 ¹ ⁄ ₂ months after the end of the taxable year in which any substantial risk of forfeiture with respect to such bonuses lapses, the Bonus that Employee would have received based on achievement of performance goals under subparagraph 5(b) had this Agreement not terminated for the year containing the Date of Termination; and

(iii)

during the portion, if any, of the 18-month period commencing on the date of Employee’s Separation from Service (12-month period if Employee terminates for Good Reason) that Employee is eligible to elect and elects to continue coverage for himself and his eligible dependents under the Company’s or an Affiliate’s group heath plan pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“ COBRA ”), or similar state law, the Company shall reimburse Employee on a monthly basis for the difference between the amount Employee pays to effect and continue such coverage and the employee contribution amount that active senior executive employees of the Company pay for the same or similar coverage.

(e)

Expiration of the Term . If this Agreement is terminated by Employee providing a proper notice of non-renewal in accordance with subparagraph 4(b), the Company shall have no further obligations to Employee under this Agreement or otherwise, except the Company shall provide the Accrued Obligations to Employee in accordance with subparagraph 7(a). If this Agreement is terminated by the Company providing a proper notice of non-renewal in accordance with subparagraph 4(b), then the Company shall have no further obligations to Employee under this Agreement or otherwise, except the Company shall provide the Accrued Obligations to Employee in accordance with subparagraph 7(a) in addition to the following severance payments and benefits:

(i)

on the earliest date between 20 and 60 days following Employee’s Separation from Service when the Release described in subparagraph 10(a) has become fully enforceable and irrevocable, a lump sum in cash equal to 200% of the greater of (A) the then-current Base Salary, and (B) the Base Salary at any time within two years immediately before the Separation from Service; and

(ii)

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during the period beginning the first day of the performance period containing the Date of Termination and ending on the Date of Termination, and the denominator of which is the number of days in the applicable performance period; and

(iii)

during the portion, if any, of the 18-month period commencing on the date of Employee’s Separation from Service that Employee is eligible to elect and elects to continue coverage for himself and his eligible dependents under the Company’s or an Affiliate’s group heath plan pursuant to COBRA or similar state law, the Company shall reimburse Employee on a monthly basis for the difference between the amount Employee pays to effect and continue such coverage and the employee contribution amount that active senior executive employees of the Company pay for the same or similar coverage.

8.	Change in Control . The parties acknowledge that Employee has entered into this Agreement based on his confidence in the current stockholders of the Company and the support of the Board. Accordingly, if the Company should undergo a Change in Control the parties agree as follows:

(a)

Definitions .

(i)

Affiliate : except as otherwise provided in this Agreement, for purposes of this Agreement, Affiliate means, with respect to the Company, any person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the Company; provided, however , that a natural person shall not be considered an Affiliate.

(ii)

Change in Control : a Change in Control means (a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company’s common stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company’s common stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, (b) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all, of the assets of the Company and the its subsidiaries to any other person or entity (other than an Affiliate of the Company), (c) the stockholders of the Company approve any plan or proposal for liquidation or dissolution of the Company, (d) any person or entity (other than Yorktown Energy Partners V, L.P., or any of its affiliated funds), including a “ group ” as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of more than 50% of the outstanding shares of the Company’s voting stock (based upon voting

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power) or (e) as a result of or in connection with a contested election of directors, the persons who were directors of the Company before such election shall cease to constitute a majority of the Board. Notwithstanding the foregoing, a Change of Control shall not include a public offering of the Company’s common stock or a transaction with its sole purpose to change the state of the Company’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction. Notwithstanding the foregoing, with respect to any compensation that is subject to Section 409A of the Code and with respect to which a Change in Control will accelerate payment, “Change in Control” shall mean an event that qualifies both as a “change in control” as defined herein as well as a “change of control event” as defined in the regulations and guidance issued under Section 409A of the Code.

(iii)

CIC Effective Date : means the date upon which a Change of Control occurs.

(iv)

Code : means Internal Revenue Code of 1986, as amended from time to time.

(b)

Change in Control Benefits and Payments . If Employee is employed by the Company on the CIC Effective Date and this Agreement is terminated on or before the first anniversary of the CIC Effective Date by the Company without Cause in accordance with subparagraph 6(d) or by Employee for Good Reason in accordance with subparagraph 6(e), then the Company shall have no further obligation to Employee under this Agreement or otherwise, except the Company shall provide Employee with the Accrued Obligations in accordance with subparagraph 7(a) plus the following Change in Control payments and benefits in lieu of any severance payments or benefits that may otherwise be due under subparagraph 7(d):

(i)

on the earliest date between 20 and 60 days following Employee’s Separation from Service when the Release described in subparagraph 10(a) has become fully enforceable and irrevocable, a lump sum in cash equal to 200% of the greater of (A) the then-current Base Salary, and (B) the Base Salary at any time within two years immediately before the CIC Effective Date; and

(ii)

on or before the 60th day following Employee’s Separation from Service, a lump sum in cash equal to 200% of the average of any Bonuses received by Employee from the Company in the two years before the CIC Effective Date; provided however, that if, as of the CIC Effective Date, Employee has not been employed on two dates on which Bonus payments have been made or would have been made had Employee been entitled to a Bonus for a given year, the amount payable to Employee under this Section

A MENDED AND R ESTATED E MPLOYMENT A GREEMENT - Page 10

8(b)(ii) shall be (x) a lump sum in cash equal to 200% of the target Bonus set by the Compensation Committee for Employee, if any, or (y) if no such target Bonus is set for Employee, then a lump sum in cash equal to 200% of the target Bonus set by the Compensation Committee for the Chief Operating Officer of the Company; and

(iii)

during the portion, if any, of the 18-month period commencing on the date of Employee’s Separation from Service that Employee is eligible to elect and elects to continue coverage for himself and his eligible dependents under the Company’s or an Affiliate’s (or a successor of either such entity) group heath plan pursuant to COBRA or similar state law, the Company shall reimburse Employee on a monthly basis for the difference between the amount Employee pays to effect and continue such coverage and the employee contribution amount that active senior executive employees of the Company pay for the same or similar coverage.

(c)

Effect of a Change in Control Following Date of Termination . Notwithstanding any contrary provision in this Agreement, if this Agreement is terminated by the Company without Cause in accordance with subparagraph 6(d) or by Employee for Good Reason in accordance with subparagraph 6(e), and a CIC Effective Date occurs within 120 days following the Date of Termination, then, in addition to the severance payments and benefits provided to Employee in accordance with subparagraph 7(d), the Company shall provide Employee (or to Employee’s estate in the event of his death following the Date of Termination) with the following Change in Control payments:

(i)

on or before the 60th day following the CIC Effective Date, a lump sum in cash equal to the excess, if any, of (A) the Change of Control payment that Employee would have been entitled to receive under subparagraph 8(b)(i) if he was employed by the Company or an Affiliate on the CIC Effective Date, over (B) the severance payment payable to Employee in accordance with subparagraph 7(d)(i); and

(ii)

on or before the 60th day following the CIC Effective Date, a lump sum in cash equal to the excess, if any, of (A) the Change of Control payment that Employee would have been entitled to receive under subparagraph 8(b)(ii) if he was employed by the Company or an Affiliate on the CIC Effective Date, over (B) the severance payment payable to Employee in accordance with subparagraph 7(d)(ii).

Parachute Payment Limitation . Notwithstanding any contrary provision in this Agreement, if Employee is a “ disqualified individual ” (as defined in Section 280G of the Code), and the Change in Control payments and benefits described in paragraph 8, together with any other payments which Employee has the right to receive from the Company, would constitute a “ parachute payment ” (as defined in Section 280G of the Code), the payments and benefits provided hereunder shall be either (a) reduced (but not

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below zero) so that the aggregate present value of such payments and benefits received by Employee from the Company shall be $1.00 less than three times Employee’s “ base amount ” (as defined in Section 280G of the Code) and so that no portion of such payments received by Employee shall be subject to the excise tax imposed by Section 4999 of the Code, or (b) paid in full, whichever produces the better net after-tax result for Employee (taking into account any applicable excise tax under Section 4999 of the Code and any applicable income tax). The determination as to whether any such reduction in the amount of the payments and benefits is necessary shall be made by the Company in good faith and such determination shall be conclusive and binding on Employee. If a reduced payment is made to Employee pursuant to clause (a) above and through error or otherwise that payment, when aggregated with other payments from the Company (or its affiliates) used in determining if a parachute payment exists, exceeds $1.00 less than three times Employee’s base amount, Employee shall immediately repay such excess to the Company upon notification that an overpayment has been made.

10.	Conditions on Receipt of Severance and Change-in-Control Benefits .

(a)

Compliance with Post-Termination Obligations and Execution and Non-Revocation of General Release Agreement . Notwithstanding any other provision in this Agreement, the Company’s payment to Employee of the severance payments and benefits described in subparagraphs 7(b)(i), 7(d)(i)-(ii), and 7(e)(i) or the Change in Control payments and benefits described in subparagraphs 8(b)(i)-(ii) and 8(c)(i)-(ii) is subject to the condition that he complies with all applicable covenants under paragraphs 12, 13, 14, and 15 of this Agreement. The Company shall have the right to cease payment of any such payments or benefits, as well as to seek restitution of any such payments or benefits already paid, if such covenants have been breached by Employee but all other provisions of this Agreement shall remain in full force and effect. The Company’s payment of such payments or benefits to Employee is also subject to the condition that, within 55 days after the Date of Termination, he execute, deliver to the Company, and not revoke as permitted by applicable law a General Release Agreement in a form reasonably acceptable to the Company that fully and finally releases and waives any and all claims, demands, actions, and suits whatsoever which he has or may have against the Company and its Affiliates, whether under this Agreement or otherwise, that arose before the General Release Agreement was executed (the “ Release ”). For purposes of this Agreement, the Release shall not become fully enforceable and irrevocable until Employee has timely executed the Release and not revoked his acceptance of the Release within seven days after its execution.

(b)

Separation from Service Requirement . Notwithstanding any other provision of this Agreement, Employee shall be entitled to the severance or Change in Control benefits and payments in subparagraphs 7(b), 7(d), 7(e), or 8(b) only if Employee’s termination of employment constitutes a Separation from Service. For purposes of this Agreement, “ Separation from Service ” means separation from service (within the meaning of Code Section 409A and the regulations and other guidance promulgated thereunder (“ Section 409A ”)) with the group of

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employers that includes the Company and each of its Affiliates. For this purpose, “ Affiliate ” means any incorporated or unincorporated trade or business or other entity or person, other than the Company, that along with the Company is considered a single employer under Code Section 414(b) or Code Section 414(c), but (i) in applying Code Section 1563(a)(1), (2), and (3) for the purposes of determining a controlled group of corporations under Code Section 414(b), the phrase “at least 50 percent” shall be used instead of the phrase “at least 80 percent” in each place the phrase “at least 80 percent” appears in Code Section 1563(a)(1), (2), and (3), and (ii) in applying Treasury Regulation Section 1.414(c)-2 for the purposes of determining trades or businesses (whether or not incorporated) that are under common control for the purposes of Code Section 414(c), the phrase “at least 50 percent” shall be used instead of the phrase “at least 80 percent” in each place the phrase “at least 80 percent” appears in Treasury Regulation Section 1.414(c)-2.

11.	Other Provisions Relating to Termination .

(a) Notice of Termination . Any termination of this Agreement by the Company or by Employee (other than termination because of death) shall be communicated by written Notice of Termination to the other party thereto. For purposes of this Agreement, a “ Notice of Termination ” shall mean a notice that indicates the specific termination provision in this Agreement relied upon and sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated; provided, however , that any failure to provide such detail shall not delay the effectiveness of the termination.

(b) Date of Termination . For purposes of this Agreement, “ Date of Termination ” shall mean (i) if Employee’s employment is terminated by death, the date of death; (ii) if Employee’s employment is terminated because of Employee becoming Permanently Disabled, then 60 days after Notice of Termination is given (provided that Employee shall not have returned to the performance of his duties, responsibilities, and authorities on a full-time basis during such 60-day period); (iii) if (A) Employee’s employment is terminated by the Company with or without Cause or (B) Employee’s employment is terminated by Employee with or without Good Reason, then in each case the date specified in the Notice of Termination, which shall comply with the applicable notice requirements in paragraph 6; and (iv) if this Agreement is not renewed, the last date of the Initial Term or the Renewal Term as applicable.

(c) Mitigation . Employee shall not be required to mitigate the amount of any payment or benefits provided for in paragraphs 7 or 8 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for therein be reduced by any compensation earned by Employee as the result of employment by another employer after the Date of Termination, or otherwise.

(d) Interest . Until paid, all past due amounts required to be paid by the Company under any provision of this Agreement shall bear interest at 8% per annum compounded daily.

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12.	Business Opportunities and Intellectual Property .

(a)

Prompt Disclosure Required . Employee shall promptly disclose to the Board in writing all Business Opportunities and Intellectual Property.

(b)

Definition of Business Opportunities . For purposes of this Agreement, “ Business Opportunities ” shall mean all business ideas, prospects, proposals or other opportunities pertaining to the lease, acquisition, exploration, production, gathering or marketing of hydrocarbons and related products and the exploration potential of geographical areas on which hydrocarbon exploration prospects are located, that are developed by Employee before or during the Term or originated by any third party and brought to the attention of Employee before or during the Term, together with information relating thereto (including, without limitation, geological and seismic data and interpretations thereof, whether in the form of maps, charts, logs, seismographs, calculations, summaries, memoranda, opinions, or other written or charted means).

(c)

Definition of Intellectual Property . For purposes of this Agreement, “ Intellectual Property ” shall mean all ideas, inventions, discoveries, processes, designs, methods, substances, articles, computer programs, and improvements (including, without limitation, enhancements to, or further interpretation or processing of, information that was in the possession of Employee prior to the date of this Agreement), whether or not patentable or copyrightable, that do not fall within the definition of Business Opportunities, that Employee discovers, conceives, invents, creates, or develops, alone or with others, before or during the Term, if such discovery, conception, invention, creation, or development (i) occurs in the course of Employee’s employment with the Company or its Affiliates or (ii) occurs with the use of any time, materials, or facilities of the Company or its Affiliates.

13.	Non-Compete Obligations During Term . During the Term and except as provided below or as otherwise permitted by the Company (acting upon the instruction of the Board):

(a)

Employee shall not, other than through the Company or its Affiliates, engage or participate in any manner, whether directly or indirectly through any family member or as an employee, employer, consultant, agent, principal, partner, more than one percent shareholder, officer, director, licensor, lender, lessor, or in any other individual or representative capacity, in any business or activity that is engaged in leasing, acquiring, exploring, developing or producing hydrocarbons and related products; and

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(b)

all investments made by Employee (whether in his own name or in the name of any family members or made by Employee’s controlled affiliates), which relate to the lease, acquisition, exploration, development or production of hydrocarbons and related products shall be made solely through the Company or its Affiliates; and Employee shall not (directly or indirectly through any family members), and shall not permit any of his controlled affiliates to: (i) invest or otherwise participate alongside the Company or its Affiliates in any Business Opportunities or (ii) invest or otherwise participate in any business or activity relating to a Business Opportunity, regardless of whether the Company or any of its Affiliates ultimately participates in such business or activity;

provided, however , that this paragraph shall not apply to (x) the existing personal oil and gas investments owned by Employee, his family members, and his controlled affiliates as of the Effective Date of the Original Employment Agreement (the “ Existing Personal Investments ”); (y) future expenditures made by Employee and his family members and his controlled affiliates that are required to maintain, but not increase, their respective current ownership interests in the Existing Personal Investments, excluding however, any expenditure to participate in the acquisition, exploration, or development of any acreage that is not currently included in the Existing Personal Investments as of the Effective Date; and (z) any opportunity that is first offered to, and subsequently declined by, the Company (acting through the Board); and further provided, however , that this subparagraph shall not preclude Employee from making personal investments in securities of oil and gas companies that are registered on a national stock exchange, as long as such investments are made in accordance with any applicable insider trading policy of the Company and the aggregate amount owned by Employee and all family members and affiliates does not exceed 1% of such company’s outstanding securities.

14.	Confidentiality Obligations .

(a)

Confidentiality and Non-Disclosure Acknowledgments and Obligations . Employee hereby acknowledges that all trade secrets and confidential or proprietary information of the Company and its Affiliates (collectively referred to herein as “ Confidential Information ”) constitute valuable, special and unique assets of the business of the Company and its Affiliates, and that access to and knowledge of such Confidential Information is essential to the performance of Employee’s duties, responsibilities, and authorities under this Agreement. During the Term and the one-year period following the Date of Termination, Employee shall hold the Confidential Information in strict confidence and shall not publish, disseminate, or otherwise disclose, directly or indirectly, to any person other than the Company and its Affiliates and their respective officers, directors, and employees, any Confidential Information or use any Confidential Information for Employee’s own personal benefit or for the benefit of anyone other than the Company and its Affiliates. The Company agrees to provide previously undisclosed Confidential Information to Employee in exchange for Employee’s agreement to keep such Confidential Information, and any Confidential Information to which Employee has already become privy, in strict confidence as provided in this Agreement.

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(b)

Confidential Information Inclusions and Exclusions . For purposes of this Agreement, Confidential Information includes, without limitation, any information heretofore or hereafter acquired, developed, or used by the Company or its Affiliates relating to Business Opportunities or Intellectual Property or other geological, geophysical, economic, financial, or management aspects of the business, operations, properties, or prospects of the Company or its Affiliates whether oral or in written form in business records, but shall exclude any information that (i) has become part of common knowledge or understanding in the oil and gas industry or otherwise in the public domain (other than from disclosure by Employee in violation of this Agreement), or (ii) was rightfully in the possession of Employee, as shown by Employee’s records, prior to the Effective Date (including Employee’s method of selecting, purchasing, and reworking oil and gas properties, which the Company and Employee may utilize subsequent to the Term (subject to the other limitations contained in this Agreement)); provided, however , that Employee shall provide to the Company copies of all information described in clause (ii); and provided further, however , that this subparagraph shall not be applicable to the extent Employee is required to testify in a judicial or regulatory proceeding pursuant to the order of a judge or administrative law judge after Employee requests that such Confidential Information be preserved.

15.	Obligations After Date of Termination .

(a)

Non-Compete Obligations . The purposes of paragraph 14 and this paragraph 15 are to protect the Company from unfair loss of goodwill and business advantage and to shield Employee from pressure to use or disclose Confidential Information or to trade on the goodwill belonging to the Company. Accordingly, during the Post-Termination Non-Compete Term, Employee shall not engage or participate in any manner, whether directly or indirectly through any family member or as an employee, employer, consultant, agent, principal, partner, shareholder, officer, director, licensor, lender, lessor, or in any other individual or representative capacity, in any business or activity that is in engaged in leasing, acquiring, exploring, developing or producing hydrocarbons and related products within the boundaries of, or within a four mile radius of the boundaries of, any mineral property interest of the Company or its Affiliates (including, without limitation, a mineral lease, overriding royalty interest, production payment, net profits interest, mineral fee interest, or option or right to acquire any of the foregoing, or an area of mutual interest as designated pursuant to contractual agreements between the Company or its Affiliates and any third party) or any other property on which the Company or its Affiliates have an option, right, license, or authority to conduct or direct exploratory activities, such as three dimensional seismic acquisition or other seismic, geophysical and geochemical activities (but not including any preliminary geological mapping), as of the Date of Termination or as of the end of the six-month period following such Date of Termination; provided, however , that this subparagraph shall not preclude Employee from making personal investments

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in securities of oil and gas companies that are registered on a national stock exchange, if the aggregate amount owned by Employee and all family members and affiliates does not exceed 1% of such company’s outstanding securities.

(b)

Definition of Post-Termination Non-Compete Term . For purposes of this Agreement, the “ Post-Termination Non-Compete Term ” is the one-year period following the Date of Termination; provided, however , that the Post-Termination Non-Compete Term shall be reduced to the six-month period following the Date of Termination if this Agreement is terminated on or before the first anniversary of the CIC Effective Date either (i) by the Company without Cause in accordance with subparagraph 6(d) or (ii) by Employee for Good Reason in accordance with subparagraph 6(e).

(c)

Non-Solicitation Obligations . Employee shall not, during the Post Termination Non-Compete Term, solicit, entice, persuade, or induce, directly or indirectly, any employee (or person who within the preceding 90 days was an employee) of the Company or its Affiliates to (i) terminate his or her employment by such person, (ii) refrain from extending or renewing the same (upon the same or new terms), (iii) refrain from rendering services to or for such person, (iv) become employed by or to enter into contractual relations with any Persons other than such person, or (v) enter into a relationship with a competitor of the Company or its Affiliates.

(d)

Discretionary Monthly Non-Compete Payments . The Company may, in its sole discretion, elect to continue on the Company’s regularly scheduled paydays Employee’s Base Salary in effect immediately before the Date of Termination during each month of the Post-Termination Non-Compete Term (the “ Monthly Non-Compete Payments ”). The Company shall provide written notice to Employee no later than 10 days after the Date of Termination or on or before the Company’s first regularly scheduled payday following the Date of Termination, whichever is sooner, of its election to make any Monthly Non-Compete Payments. If the Company does elect to make the Monthly Non-Compete Payments, the Company shall not be obligated to continue making any such Monthly Non-Compete Payments and shall be entitled in its sole discretion to cease making the Monthly Non-Compete Payments at any time and for any reason but only upon at least 30 days’ written notice to Employee, and the Company shall have no further obligation to Employee under this subparagraph. If the Company starts but ceases making the Monthly Non-Compete Payments, then, notwithstanding any contrary provision in this Agreement, the Post-Termination Non-Compete Term for purpose of subparagraph 15(a) shall expire on the last day of the month in which the final Monthly Non-Compete Payment was made by the Company.

16.	Common Law Duties . Employee acknowledges and agrees that his restrictive covenants in paragraphs 12, 13, 14, and 15 of this Agreement shall supplement, rather than supplant, his common law duties of confidentiality and loyalty owed to the Company.

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17.	Survival of Covenants; Enforcement of Covenants; and Remedies .

(a)

Survival of Covenants . Employee acknowledges and agrees that his covenants in paragraphs 12, 13, 14, and 15 of this Agreement shall survive the termination of this Agreement and shall be construed as agreements independent of any other provision of this Agreement, and the existence of any Dispute of Employee with or against the Company or its Affiliates whether predicated on this Agreement or otherwise shall not constitute a defense to the enforcement by the Company of those covenants.

(b)

Enforcement of Covenants . Employee acknowledges and agrees that his covenants in paragraphs 12, 13, 14, and 15 of this Agreement are ancillary to the otherwise enforceable agreements to provide Employee with Confidential Information and are supported by independent, valuable consideration. Employee further acknowledges and agrees that the limitations as to time, geographical area, and scope of activity to be restrained by those covenants are reasonable and acceptable to Employee and do not import any greater restraint than is reasonably necessary to protect the Company’s goodwill, Confidential Information, and other legitimate business interests. Employee further agrees that if, at some later date, a court of competent jurisdiction determines that any of the covenants in paragraphs 12, 13, 14, or 15 are unreasonable, any such covenants shall be reformed by the court and enforced to the maximum extent permitted under the law.

(c)

Remedies . In the event of breach or threatened breach by Employee of any of his covenants in paragraphs 12, 13, 14, or 15 of this Agreement, the Company shall be entitled to equitable relief by temporary restraining order, temporary injunction, or permanent injunction or otherwise, in addition to other legal and equitable relief to which it may be entitled, including any and all monetary damages that the Company may incur as a result of such breach, violation, or threatened breach or violation. The Company may pursue any remedy available to it concurrently or consecutively in any order as to any breach, violation, or threatened breach or violation, and the pursuit of one of such remedies at any time shall not be deemed an election of remedies or waiver of the right to pursue any other of such remedies as to such breach, violation, or threatened breach or violation, or as to any other breach, violation, or threatened breach or violation.

18.

Successors and Assigns . This Agreement may not be assigned by the Company to any other person or entity other than an Affiliate of the Company without Employee’s written consent; provided, however , that in the event of a Change in Control, the Company shall cause the surviving entity in any such transaction to assume the Company’s obligations under paragraphs 7 and 8 to the extent such obligations have not yet been fully performed. Employee’s duties, responsibilities, authorities, compensation, and benefits under this Agreement are personal to Employee and may not be assigned to any person or entity without written consent from the Board. In the event of Employee’s death, this Agreement shall be enforceable by Employee’s estate, executors, or legal representatives. This Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, legal representatives, successors, and permitted assigns.

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19.

Representations of Employee . Employee hereby represents and warrants that he has not previously assumed any obligations inconsistent with those in this Agreement. Employee further represents and warrants that he has entered into this Agreement pursuant to his own initiative and that the Company did not induce him to execute this Agreement in contravention of any existing commitments. Employee further acknowledges that the Company has entered into this Agreement in reliance upon the foregoing representations of Employee.

20.	Dispute Resolution . The parties agree to the following dispute resolution terms:

(a)

Definition of Dispute . Any controversy, claim, complaint, cause of action, or similar proceeding, whether based on statute, contract, common law, negligence, tort, misrepresentation, or any other legal theory, arising out of or relating to this Agreement or Employee’s employment with the Company (a “ Dispute ”), shall be resolved solely in accordance with the terms of this paragraph; provided, however , that the term Dispute shall not include Employee’s claims for workers’ compensation or unemployment compensation benefits (although any claim asserted under Ch. 451 of the Texas Labor Code shall be considered a Dispute subject to dispute resolution under this paragraph).

(b)

Mediation . If a Dispute cannot be settled by good faith negotiation between the parties, the parties shall submit the Dispute to nonbinding mediation as soon as reasonably possible after the Dispute arose. If complete agreement cannot be reached within five calendar days of submission to mediation, either party may file a civil action against the other party in any court of competent jurisdiction permitted under paragraph 26.

(c)

Waiver of Right to Jury Trial . NOTWITHSTANDING ANY OTHER PROVISION IN THIS AGREEMENT, THE PARTIES SHALL, AND HEREBY DO, IRREVOCABLY WAIVE THE RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY DISPUTE. IN ADDITION, EMPLOYEE SHALL, AND HEREBY DOES, IRREVOCABLY WAIVE THE RIGHT TO PARTICIPATE IN ANY CLASS OR COLLECTIVE ACTION WITH RESPECT TO ANY DISPUTE.

21.

Attorneys’ Fees and Other Costs . If either party breaches this Agreement, or if a Dispute arises between the parties based on or involving this Agreement, the party that enforces its rights under this Agreement against the breaching party, or that prevails in the resolution of such Dispute, shall be entitled to recover from the other party its reasonable attorneys’ fees, court costs, and expenses incurred in enforcing such rights or resolving such Dispute. For purposes of this paragraph, the finder of fact shall be requested to answer affirmatively as to whether a party prevailed in order to recoup attorneys’ fees and other costs pursuant to this paragraph.

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22.

Entire Agreement . This Agreement constitutes the entire agreement between the parties concerning its subject matters and supersedes all prior and contemporaneous agreements and understandings, both written and oral, between the parties with respect to its subject matters, including without limitation the Original Employment Agreement. Employee agrees that the Company has not made any promise or representation to him concerning this Agreement not expressed in this Agreement, and that, in signing this Agreement, he is not relying on any prior oral or written statement or representation by the Company but is instead relying solely on his own judgment and his legal and tax advisors, if any.

23.

Amendment of Agreement . This Agreement may not be modified or amended in any respect except by an instrument in writing signed by the party against whom such modification or amendment is sought to be enforced. Notwithstanding the previous sentence, the Company may modify or amend this Agreement in its sole discretion at any time without the further consent of the Employee in any manner necessary to comply with applicable law and regulations or the listing or other requirements of any stock exchange upon which the Company is listed. No modification or amendment may be enforced against the Company unless such modification or amendment is in writing and signed by the Board.

24.	Waiver . The waiver by either party of a breach of any term of this Agreement shall not operate or be construed as a waiver of a subsequent breach of the same provision by either party or of the breach of any other term or provision of this Agreement.

25.

Severability . If any provision of this Agreement is held to be illegal, invalid, or unenforceable, (a) this Agreement shall be considered divisible, (b) such provision shall be deemed inoperative to the extent it is deemed illegal, invalid, or unenforceable, and (c) in all other respects this Agreement shall remain in full force and effect; provided, however , that, if any such provision may be made enforceable by limitation, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law.

26.

Governing Law; Venue . This Agreement shall be governed by the laws of the State of Texas, without regard to its conflict-of-laws principles. Employee and the Company hereby irrevocably consent to the binding and exclusive venue for any Dispute between the parties arising out of or related to this Agreement being in the state or federal court of competent jurisdiction that regularly conducts proceedings in Tarrant County, Texas. Nothing in this Agreement, however, precludes Employee or the Company from seeking to remove a civil action from any state court to federal court.

27.

Notices . All notices under this Agreement shall be in writing and shall be deemed to have been delivered on the date personally delivered or three calendar days after the date deposited in a receptacle maintained by the United States Postal Service for such purpose, postage prepaid, by certified mail, return receipt requested, addressed to the Company at its headquarters or Employee at the address of such person as set forth in the Company’s records. Either party may designate a different address by providing written notice of such new address to the other party.

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28.

Counterparts . This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. The delivery of this Agreement in the form of a clearly legible facsimile or electronically scanned version by e-mail shall have the same force and effect as delivery of the originally executed document.

29.	Code Section 409A .

(a)

Intent . All or a portion of the payments and benefits provided under this Agreement is intended to be exempt from Section 409A and any ambiguous provision will be construed in a manner that is compliant with or exempt from the application of Section 409A. In particular, such payments and benefits are intended to constitute short-term deferrals described in Treasury Regulation Section 1.409A-1(b)(4) or a payment or benefit described in Treasury Regulation Section 1.409A-1(b)(9)(v). The provisions of this Agreement shall be interpreted in a manner consistent with this intent.

(b)

Specified Employee Postponement . Notwithstanding subparagraph (a) of this paragraph or any other provision of this Agreement to the contrary, if the Company or an Affiliate that is treated as a “ service recipient ” (as defined in Section 409A) is publicly traded on an established securities market (or otherwise) and Employee is a “ specified employee ” (as defined below) and is entitled to receive a payment that is subject to Section 409A on account of Employee’s Separation from Service, such payment may not be made earlier than six months following the date of his Separation from Service if required by Section 409A, in which case, the accumulated postponed amount shall be paid in a lump sum payment on the Section 409A Payment Date. The “ Section 409A Payment Date ” is the earlier of (i) the date of Employee’s death or (ii) the date that is six months and one day after Employee’s Separation from Service. If any payment to Employee is delayed pursuant to the foregoing sentence, such amount instead will be paid, with interest at the rate set out in Section 11(d), on the Section 409A Payment Date. For purposes of Section 409A, each payment amount or benefit due under this Agreement will be considered a separate payment and Employee’s entitlement to a series of payments or benefits under this Agreement is to be treated as an entitlement to a series of separate payments. The determination of whether Employee is a “specified employee” shall be made in accordance with Section 409A using the default provisions in the Section 409A unless another permitted method has been prescribed for such purpose by the Company.

30.

Right to Consult a Tax Advisor . Notwithstanding any contrary provision in this Agreement, Employee shall be solely responsible for any risk that the tax treatment of all or part of any payments provided by this Agreement may be affected by Section 409A, which may impose significant adverse tax consequences on him, including accelerated

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taxation, a 20% additional tax, and interest. Because of the potential tax consequences, Employee has the right, and is encouraged by this paragraph, to consult with a tax advisor of his choice before signing this Agreement.

[ Signature Page Follows ]

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EMPLOYEE:

/s/ Sergei Krylov
Name:		Sergei Krylov

COMPANY:

APPROACH RESOURCES INC., A Delaware Corporation

By:		/s/ J. Ross Craft
Name:		J. Ross Craft
Title:		President and Chief Executive Officer

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Exhibit 31.1

Certification

I, J. Ross Craft, certify that:

I have reviewed this quarterly report on Form 10-Q of Approach Resources Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date:	May 9, 2014	/s/ J. Ross Craft
		J. Ross Craft
		President and Chief Executive Officer
		(Principal Executive Officer)

Exhibit 31.2

Certification

I, Sergei Krylov, certify that:

I have reviewed this quarterly report on Form 10-Q of Approach Resources Inc.;

(a)

(b)

(c)

(d)

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date:	May 9, 2014	/s/ Sergei Krylov
		Sergei Krylov
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

Exhibit 32.1

Certification of President and Chief Executive Officer of Approach Resources Inc.

(Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002)

In connection with the Quarterly Report of Approach Resources Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. Ross Craft, President and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


		APPROACH RESOURCES INC.

Date:	May 9, 2014	/s/ J. Ross Craft
		J. Ross Craft
		President and Chief Executive Officer
		(Principal Executive Officer)

Exhibit 32.2

Certification of Chief Financial Officer of Approach Resources Inc.

(Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002)

In connection with the Quarterly Report of Approach Resources Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sergei Krylov, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


		APPROACH RESOURCES INC.

Date:	May 9, 2014	/s/ Sergei Krylov
		Sergei Krylov
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)