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, 2016

OR

o

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     o   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     o   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.

 

Large accelerated filer

o

 

Accelerated filer

x

Non-accelerated filer

o

(Do not check if smaller reporting company)

Smaller reporting company

o

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

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of April 28, 2016, was 41,541,578.

 

 

 

 


 

PART I―FINANCI AL 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,

 

 

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

840

 

 

$

600

 

Accounts receivable:

 

 

 

 

 

 

 

 

Joint interest owners

 

 

127

 

 

 

142

 

Oil, NGL and gas sales

 

 

7,372

 

 

 

11,747

 

Unrealized gain on commodity derivatives

 

 

6,256

 

 

 

6,737

 

Prepaid expenses and other current assets

 

 

1,621

 

 

 

1,212

 

Total current assets

 

 

16,216

 

 

 

20,438

 

 

 

 

 

 

 

 

 

 

PROPERTIES AND EQUIPMENT:

 

 

 

 

 

 

 

 

Oil and gas properties, at cost, using the successful efforts method of accounting

 

 

1,858,112

 

 

 

1,853,781

 

Furniture, fixtures and equipment

 

 

5,631

 

 

 

5,628

 

Total oil and gas properties and equipment

 

 

1,863,743

 

 

 

1,859,409

 

Less accumulated depletion, depreciation and amortization

 

 

(724,875

)

 

 

(704,863

)

Net oil and gas properties and equipment

 

 

1,138,868

 

 

 

1,154,546

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,155,084

 

 

$

1,174,984

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

13,767

 

 

$

10,799

 

Oil, NGL and gas sales payable

 

 

3,211

 

 

 

4,245

 

Accrued liabilities

 

 

10,971

 

 

 

13,464

 

Total current liabilities

 

 

27,949

 

 

 

28,508

 

 

 

 

 

 

 

 

 

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Senior secured credit facility, net

 

 

269,917

 

 

 

270,748

 

Senior notes, net

 

 

226,042

 

 

 

225,839

 

Unrealized loss on commodity derivatives

 

 

476

 

 

 

 

Deferred income taxes

 

 

24,534

 

 

 

31,779

 

Asset retirement obligations

 

 

10,274

 

 

 

10,143

 

Other noncurrent liabilities

 

 

41

 

 

 

 

Total liabilities

 

 

559,233

 

 

 

567,017

 

 

 

 

 

 

 

 

 

 

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, 41,541,578

   and 40,788,705 issued and outstanding, respectively

 

 

410

 

 

 

408

 

Additional paid-in capital

 

 

582,165

 

 

 

580,623

 

Retained earnings

 

 

13,276

 

 

 

26,936

 

Total stockholders’ equity

 

 

595,851

 

 

 

607,967

 

Total liabilities and stockholders’ equity

 

$

1,155,084

 

 

$

1,174,984

 

 

See accompanying notes to these unaudited consolidated financial statements

 

1


 

Approach Resources Inc. and Subsidiaries

Unaudited Consolidated Statements of Operations

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

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

REVENUES:

 

 

 

 

 

 

 

 

Oil, NGL and gas sales

 

$

17,615

 

 

$

33,298

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

Lease operating

 

 

6,356

 

 

 

7,146

 

Production and ad valorem taxes

 

 

1,664

 

 

 

2,828

 

Exploration

 

 

569

 

 

 

1,090

 

General and administrative (1)

 

 

6,051

 

 

 

8,102

 

Depletion, depreciation and amortization

 

 

20,229

 

 

 

26,520

 

Total expenses

 

 

34,869

 

 

 

45,686

 

 

 

 

 

 

 

 

 

 

OPERATING LOSS

 

 

(17,254

)

 

 

(12,388

)

 

 

 

 

 

 

 

 

 

OTHER:

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(6,298

)

 

 

(5,922

)

Realized gain on commodity derivatives

 

 

3,500

 

 

 

15,901

 

Unrealized loss on commodity derivatives

 

 

(957

)

 

 

(9,321

)

Other income

 

 

104

 

 

 

26

 

 

 

 

 

 

 

 

 

 

LOSS BEFORE INCOME TAX BENEFIT

 

 

(20,905

)

 

 

(11,704

)

INCOME TAX BENEFIT

 

 

(7,245

)

 

 

(3,996

)

 

 

 

 

 

 

 

 

 

NET LOSS

 

$

(13,660

)

 

$

(7,708

)

 

 

 

 

 

 

 

 

 

LOSS PER SHARE:

 

 

 

 

 

 

 

 

Basic

 

$

(0.33

)

 

$

(0.19

)

Diluted

 

$

(0.33

)

 

$

(0.19

)

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

Basic

 

 

41,069,071

 

 

 

40,157,164

 

Diluted

 

 

41,069,071

 

 

 

40,157,164

 

(1)  Includes non-cash share-based compensation expense as follows:

 

 

 

 

 

 

 

 

 

 

 

1,550

 

 

 

2,217

 

 

See accompanying notes to these unaudited consolidated financial statements

 

2


 

Approach Resources Inc. and Subsidiaries

Unaudited Consolidated Statements of Cash Flows

(In thousands) 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(13,660

)

 

$

(7,708

)

Adjustments to reconcile net loss to cash provided by operating activities:

 

 

 

 

 

 

 

 

Depletion, depreciation and amortization

 

 

20,229

 

 

 

26,520

 

Amortization of debt issuance costs

 

 

372

 

 

 

393

 

Unrealized loss on commodity derivatives

 

 

957

 

 

 

9,321

 

Exploration expense

 

 

505

 

 

 

592

 

Share-based compensation expense

 

 

1,550

 

 

 

2,217

 

Deferred income tax benefit

 

 

(7,245

)

 

 

(3,996

)

Other non-cash items

 

 

(104

)

 

 

26

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

4,390

 

 

 

2,219

 

Prepaid expenses and other current assets

 

 

(348

)

 

 

(625

)

Accounts payable

 

 

535

 

 

 

1,697

 

Oil, NGL and gas sales payable

 

 

(1,034

)

 

 

(3,705

)

Accrued liabilities

 

 

(856

)

 

 

228

 

Cash provided by operating activities

 

 

5,291

 

 

 

27,179

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Additions to oil and gas properties

 

 

(4,874

)

 

 

(74,540

)

Additions to furniture, fixtures and equipment, net

 

 

(3

)

 

 

(52

)

Change in working capital related to investing activities

 

 

1,563

 

 

 

(12,690

)

Cash used in investing activities

 

 

(3,314

)

 

 

(87,282

)

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Borrowings under credit facility

 

 

12,600

 

 

 

99,500

 

Repayment of amounts outstanding under credit facility

 

 

(13,600

)

 

 

(39,500

)

Tax withholdings related to restricted stock

 

 

(6

)

 

 

(35

)

Change in working capital related to financing activities

 

 

(731

)

 

 

 

Cash (used in) provided by financing activities

 

 

(1,737

)

 

 

59,965

 

 

 

 

 

 

 

 

 

 

CHANGE IN CASH AND CASH EQUIVALENTS

 

 

240

 

 

 

(138

)

CASH AND CASH EQUIVALENTS , beginning of period

 

$

600

 

 

$

432

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS , end of period

 

$

840

 

 

$

294

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,873

 

 

$

1,177

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION:

 

 

 

 

 

 

 

 

Asset retirement obligations capitalized

 

$

28

 

 

$

62

 

 

See accompanying notes to these unaudited consolidated financial statements

 

 

 

3


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016

 

 

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, natural gas liquids (“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, 2015, filed with the Securities and Exchange Commission on March 4, 2016.

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 loss reported.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update for “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in “Topic 605, Revenue Recognition.” This accounting standard update provides new guidance concerning recognition and measurement of revenue and requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from contracts with customers. This new guidance permits adoption through the use of either a full retrospective approach or a modified retrospective approach for annual reporting periods beginning on or after December 15, 2016, with early adoption not permitted. In July 2015, FASB delayed the effective date one year, making the new standard effective for interim periods and annual periods beginning after December 15, 2017. We have not determined which transition method we will use and are continuing to evaluate our existing revenue recognition policies to determine whether any of our contracts will be affected by the new requirements.

In September 2015, FASB issued an accounting standards update for “Business Combinations,” which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. We adopted this new guidance prospectively in the first quarter of 2016. This new guidance did not have a significant impact on the consolidated financial statements.

In February 2016, FASB issued an accounting standards update for “Leases,” which amends existing guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. This new guidance will be adopted under a modified retrospective approach, and is effective for interim and annual periods beginning after December 15, 2018. The Company is evaluating the impact of this new guidance on its consolidated financial statements.

4


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016

 

In March 2016, FASB i ssued an accounting standards update for “Compensation – Stock Compensation,” which amends existing guidance related to the accounting for forfeitures, employer tax withholding on share-based compensation and financial statement presentation of excess tax benefits or deficiencies.  This standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company is evaluating the impact of this new guidance on its consolidated financial stateme nts.

 

2.  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,

 

 

 

 

2016

 

 

 

2015

 

 

Income (numerator):

 

 

 

 

 

 

 

 

 

 

Net loss – basic

 

$

(13,660

)

 

 

$

(7,708

)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares (denominator):

 

 

 

 

 

 

 

 

 

 

Weighted average shares – basic

 

 

41,069,071

 

 

 

 

40,157,164

 

 

Dilution effect of share-based compensation, treasury

   method

 

 

 

(1)

 

 

 

(1)

Weighted average shares – diluted

 

 

41,069,071

 

 

 

 

40,157,164

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.33

)

 

 

$

(0.19

)

 

Diluted

 

$

(0.33

)

 

 

$

(0.19

)

 

 

(1)

Approximately 39,000 options to purchase our common stock were excluded from this calculation because they were antidilutive for the three months ended March 31, 2016 and 2015.

 

 

3. Long-Term Debt

The following table provides a summary of our long-term debt at March 31, 2016, and December 31, 2015 (in thousands).

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Senior secured credit facility:

 

 

 

 

 

 

 

 

Outstanding borrowings

 

$

272,000

 

 

$

273,000

 

Debt issuance costs

 

 

(2,083

)

 

 

(2,252

)

Senior secured credit facility, net

 

 

269,917

 

 

 

270,748

 

Senior notes:

 

 

 

 

 

 

 

 

Principal

 

 

230,320

 

 

 

230,320

 

Debt issuance costs

 

 

(4,278

)

 

 

(4,481

)

Senior notes, net

 

 

226,042

 

 

 

225,839

 

Total long-term debt

 

$

495,959

 

 

$

496,587

 

 

Senior Secured Credit Facility

At March 31, 2016, the borrowing base and aggregate lender commitments under our amended and restated senior secured credit facility (the “Credit Facility”) were $450 million, with maximum commitments from the lenders of $1 billion. The Credit

5


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016

 

Facility has a maturity date of May 7, 2019.  The borrowing base is redetermined semi-annually based on our oil, NGL and gas reserves.  We, or th e lenders, can each request one additional borrowing base redetermination each calendar year.

At March 31, 2016, borrowings under the Credit Facility bore 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%.  In addition, we pay an annual commitment fee ranging from 0.375% to 0.50% of unused borrowings available under the Credit Facility. Margins vary based on the borrowings outstanding compared to the borrowing base of the lenders.

We had outstanding borrowings of $272 million under the Credit Facility at March 31, 2016, compared to $273 million of outstanding borrowings at December 31, 2015. The weighted average interest rate applicable to borrowings under the Credit Facility for the three months ended March 31, 2016, was 2.4%. We had outstanding unused letters of credit under the Credit Facility totaling $0.3 million at March 31, 2016, and December 31, 2015, which reduce amounts available for borrowing under the Credit Facility.

Obligations under the Credit Facility are secured by mortgages on substantially all of the oil and gas properties of the Company and its subsidiaries. The Company is required to grant liens in favor of the lenders covering the oil and gas properties of the Company and its subsidiaries representing at least 80% of the total value of all oil and gas properties of the Company and its subsidiaries. At March 31, 2016, we were in compliance with all of our covenants.

On May 3, 2016, we entered into a third amendment to the Credit Facility. The third amendment, among other things, (a) decreased the borrowing base to $325 million from $450 million, (b) revised the Company’s permitted ratio of EBITDAX (as defined in the Credit Facility) to Interest Expense (as defined in the Credit Facility) to 1.25 to 1.0 (or 1.0 to 1.0 following the issuance of second lien indebtedness), through December 31, 2017, 1.5 to 1.0 through December 31, 2018, and 2.0 to 1.0 thereafter; (c) increased the applicable margin rates on borrowings by 100 basis points, (d) permits the Company to issue up to $150 million of second lien indebtedness, subject to various conditions and limitations, (e) permits the Company to repurchase outstanding debt with proceeds of certain asset sales, equity issuances or second lien indebtedness, (f) requires that the Company grant liens in favor of the lenders covering at least 90% of the total value of all oil and gas properties and (g) requires cash and cash equivalents in excess of $35 million held by the Company to be applied to reduce outstanding borrowings under the Credit Facility.

Covenants

The Credit Facility, as amended on May 3, 2016, contains two principal financial covenants:

 

·

a consolidated interest coverage ratio covenant (as defined in the Credit Facility) that requires us to maintain a ratio of consolidated EBITDAX to interest as of the last day of any fiscal quarter of not less than 1.25 to 1.0 (or 1.0 to 1.0 following the issuance of second lien indebtedness) on or before December 31, 2017, a ratio of not less than 1.5 to 1.0 through December 31, 2018, and 2.0 to 1.0 thereafter, and  

 

·

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 as of the last day of any fiscal quarter.

The Credit Facility also contains covenants restricting cash distributions and other restricted payments, transactions with affiliates, incurrence of other debt, consolidations and mergers, the level of operating leases, asset sales, investment in other entities and liens on properties.

In addition, the obligations of the Company may be accelerated upon the occurrence of an Event of Default (as defined in the Credit Facility). Events of Default include customary events for a financing agreement of this type, including, without limitation, payment defaults, the inaccuracy of representations and warranties, defaults in the performance of affirmative or negative covenants, defaults on other indebtedness of the Company or its subsidiaries, bankruptcy or related defaults, defaults related to judgments and the occurrence of a Change of Control (as defined in the Credit Facility), which includes instances where a third party becomes the beneficial owner of more than 50% of the Company’s outstanding equity interests entitled to vote.

Senior Notes

In June 2013, we completed our public offering of $250 million principal amount of 7% Senior Notes due 2021 (the “Senior Notes”). Interest on the Senior Notes is payable semi-annually on June 15 and December 15. In 2015, we repurchased Senior Notes in the open market with an aggregate face value of $19.7 million.

6


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016

 

We issued the Senior Notes under a senior indenture dated June 11, 2013, among the Company, our subsidiary guarantors and Wells Fargo Bank, National Association, as trustee. The senior indenture, as supplemented by a supplemental indenture dated June 11, 2013, is referred to as the “Indenture.”

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 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, 2016, we were in compliance with all of our covenants, and there were no existing defaults or events of default, under our debt instruments.

 

 

7


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016

 

4.  Commitments and Contingencies

Our contractual obligations include long-term debt, operating lease obligations, asset retirement obligations and employment agreements with our executive officers.  At March 31, 2016, outstanding borrowings under the Credit Facility were $272 million, compared to $273 million at December 31, 2015. Since December 31, 2015, 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.

 

 

5.  Income Taxes

The effective income tax rate for the three months ended March 31, 2016 and 2015, was 34.7% and 34.1%, respectively.  Total income tax expense for the three months ended March 31, 2016, differed from the amount computed by applying the U.S. federal statutory tax rate to pre-tax income due primarily to a tax shortfall related to share-based compensation of $0.2 million and state taxes.  Total income tax expense for the three months ended March 31, 2015, differed from the amount computed by applying the U.S. federal statutory tax rate to pre-tax income due primarily to a tax shortfall related to share-based compensation of $0.2 million and state taxes.

 

 

6.  Derivative Instruments and Fair Value Measurements

The following table provides our outstanding commodity derivative positions at March 31, 2016.

 

Commodity and Period

 

Contract

Type

 

Volume Transacted

 

Contract Price

Crude Oil

 

 

 

 

 

 

April 2016 – December 2016

 

Swap

 

500 Bbls/d

 

$62.50/Bbl

April 2016 – December 2016

 

Swap

 

250 Bbls/d

 

$62.55/Bbl

April 2016 – June 2016

 

Swap

 

500 Bbls/d

 

$40.25/Bbl

April 2016 – June 2016

 

Swap

 

1,000 Bbls/d

 

$40.00/Bbl

April 2016 – September 2016

 

Swap

 

750 Bbls/d

 

$43.00/Bbl

 

 

 

 

 

 

 

Natural Gas

 

 

 

 

 

 

April 2016 – December 2016

 

Swap

 

100,000 MMBtu/month

 

$2.91/MMBtu

April 2016 – December 2016

 

Swap

 

100,000 MMBtu/month

 

$2.95/MMBtu

April 2016 – March 2017

 

Swap

 

100,000 MMBtu/month

 

$2.463/MMBtu

April 2016 – March 2017

 

Swap

 

300,000 MMBtu/month

 

$2.45/MMBtu

April 2017 – December 2017

 

Collar

 

200,000 MMBtu/month

 

$2.30/MMBtu - $2.60/MMBtu

 

The following table summarizes the fair value of our open commodity derivatives as of March 31, 2016, and December 31, 2015 (in thousands).

 

 

 

Asset Derivatives

 

 

Liability Derivatives

 

 

 

Balance Sheet Location

 

Fair Value

 

 

Balance Sheet Location

 

Fair Value

 

 

 

 

 

March 31,

 

 

December   31,

 

 

 

 

March 31,

 

 

December   31,

 

 

 

 

 

2016

 

 

2015

 

 

 

 

2016

 

 

2015

 

Derivatives not designated as hedging

   instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

Unrealized gain on commodity

   derivatives

 

$

6,256

 

 

$

6,737

 

 

Unrealized loss on commodity

   derivatives

 

$

(476

)

 

$

 

 

8


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016

 

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

 

 

 

Income Statement Location

 

Three Months Ended

 

 

 

 

 

March 31,

 

 

 

 

 

2016

 

 

2015

 

Derivatives not designated as hedging

   instruments

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

Unrealized loss on commodity

   derivatives

 

$

(957

)

 

$

(9,321

)

 

 

Realized gain on commodity

   derivatives

 

 

3,500

 

 

 

15,901

 

 

 

 

 

$

2,543

 

 

$

6,580

 

 

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 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 income (expense) on our consolidated statements of operations.  Accounts receivable related to oil, NGL and gas sales includes $0.7 million and $4.8 million from realized gains on commodity derivatives at March 31, 2016, and December 31, 2015, respectively.

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, 2016, 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 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, 2016, 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, 2016, we had no Level 3 measurements.

9


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016

 

Fina ncial 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, 2016

 

 

 

Carrying

Amount

 

 

Fair Value

 

Senior Notes

 

$

226,042

 

 

$

110,554

 

 

The fair value of the Senior Notes is based on quoted market prices, but the Senior Notes are not actively traded in the public market. Accordingly, the fair value of the Senior Notes would be classified as Level 2 in the fair value hierarchy.

 

 

7.  Share-Based Compensation

In March 2016, we awarded 1,100,543 cash-settled performance awards, subject to certain performance conditions, and 550,272 shares, subject to three-year total shareholder return (“TSR”) conditions, assuming maximum TSR, were granted to our executive officers. The aggregate fair market value of the cash-settled shares and TSR shares, assuming target TSR is achieved, on the grant date was approximately $1 million and $0.3 million, respectively, to be expensed over a remaining service period of approximately 3.5 years, subject to performance and three-year TSR conditions.

The cash-settled performance awards represent a non-equity unit with a conversion value equal to the fair market value of a share of the Company’s common stock at the vesting date. These awards are classified as liability awards due to the cash settlement feature. Compensation costs associated with the cash-settled performance awards are re-measured at each interim reporting period and an adjustment is recorded in general and administrative expenses on our consolidated statements of operations. For the three months ended March 31, 2016, we recognized $41,000 in expense, and at March 31, 2016, we recorded a liability of $41,000 related to the cash-settled performance awards in other noncurrent liabilities on our consolidated balance sheets.

 

 

 

 

 

 

10


 

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, 2015, filed with the Securities and Exchange Commission (“SEC”) on March 4, 2016.  Our consolidated financial statements and the accompanying notes included elsewhere in this report 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 natural gas prices;

 

·

overall United States and global economic and financial market conditions;

 

·

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

 

·

the willingness and ability of the Organization of Petroleum Exporting Countries (“OPEC”) to set and maintain oil price and production controls;

 

·

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

 

·

our ability to maintain a sound financial position;

 

·

our cash flows and liquidity;

 

·

the effects 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;

 

·

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

 

·

marketing of oil, NGLs and natural gas;

11


 

 

·

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;

 

·

profitability of drilling locations;

 

·

interpretation of 3-D seismic data;

 

·

replacing our oil, NGL and natural gas reserves;

 

·

our ability to retain and attract key personnel;

 

·

our business strategy, including our ability to recover oil, NGLs and natural 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 natural 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, 2015, filed with the SEC on March 4, 2016.

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 126,000 net acres as of March 31, 2016.  We believe our concentrated acreage position provides us an opportunity to achieve cost, operating and recovery efficiencies in the development of our drilling inventory.  Our long-term business strategy is to develop 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, 2015, our estimated proved reserves were 166.6 million barrels of oil equivalent (“MMBoe”), made up of 33% oil, 30% NGLs, 37% gas and 37% proved developed reserves.  Substantially all of our proved reserves are located in the Permian Basin in Crockett and Schleicher counties, Texas.  At March 31, 2016, we owned working interests in 812 producing oil and gas wells.

First Quarter 2016 Activity

 

Although our long-term strategy remains to develop resource potential from the Wolfcamp shale oil formation, the growth of our reserves and production, as well as achievable rates of return, depends on commodity prices. During 2014-2015, we experienced dramatic price decreases in the commodities we produce. Through the first quarter of 2016, commodity prices had not recovered sufficiently to allow us to resume our long-term business strategy of growth. 

During the three months ended March 31, 2016, we produced 1,165 MBoe, or 12.8 MBoe/d.  We drilled four horizontal wells and did not complete any horizontal wells. At March 31, 2016, we had nine horizontal Wolfcamp wells waiting on completion.  We currently have no horizontal rigs running in Project Pangea.

2016 Capital Expenditures

For the three months ended March 31, 2016, our capital expenditures totaled $4.9 million, consisting of $4 million for drilling activities and $0.9 million for infrastructure projects and equipment.  Our 2016 capital budget is a range of $20 million to $80 million. We have the operational flexibility to increase the capital budget in case of a commodity price recovery in 2016 or to further adjust our capital budget downward in response to further commodity price decreases.

12


 

Our 2016 capital budget e xcludes acquisitions and lease extensions and renewals and is subject to change depending upon a number of factors, including prevailing and anticipated prices for oil, NGLs and gas, results of horizontal drilling and completions, economic and industry con ditions at the time of drilling, the availability of sufficient capital resources for drilling prospects, our financial results and the availability of lease extensions and renewals on reasonable terms. Although the impact of changes in these collective fa ctors in a sustained, low commodity price environment is difficult to estimate, we currently expect to execute our development plan based on current conditions. To the extent there is a significant increase or decrease in commodity prices in the future, we will assess the impact on our development plan at that time, and we may respond to such changes by altering our capital budget or our development plan.

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, 2016 and 2015.  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,

 

 

 

2016

 

 

2015

 

Revenues (in thousands):

 

 

 

 

 

 

 

 

Oil

 

$

9,687

 

 

$

21,302

 

NGLs

 

 

3,224

 

 

 

5,152

 

Gas

 

 

4,704

 

 

 

6,844

 

Total oil, NGL and gas sales

 

 

17,615

 

 

 

33,298

 

 

 

 

 

 

 

 

 

 

Realized gain on commodity derivatives

 

 

3,500

 

 

 

15,901

 

Total oil, NGL and gas sales including derivative

   impact

 

$

21,115

 

 

$

49,199

 

 

 

 

 

 

 

 

 

 

Production:

 

 

 

 

 

 

 

 

Oil (MBbls)

 

 

357

 

 

 

493

 

NGLs (MBbls)

 

 

362

 

 

 

370

 

Gas (MMcf)

 

 

2,673

 

 

 

2,539

 

Total (MBoe)

 

 

1,165

 

 

 

1,287

 

Total (MBoe/d)

 

 

12.8

 

 

 

14.3

 

 

 

 

 

 

 

 

 

 

Average prices:

 

 

 

 

 

 

 

 

Oil (per Bbl)

 

$

27.10

 

 

$

43.17

 

NGLs (per Bbl)

 

 

8.90

 

 

 

13.92

 

Gas (per Mcf)

 

 

1.76

 

 

 

2.70

 

Total (per Boe)

 

 

15.12

 

 

 

25.87

 

 

 

 

 

 

 

 

 

 

Realized gain on commodity derivatives (per Boe)

 

 

3.00

 

 

 

12.36

 

Total including derivative impact (per Boe)

 

$

18.12

 

 

$

38.23

 

 

 

 

 

 

 

 

 

 

Costs and expenses (per Boe):

 

 

 

 

 

 

 

 

Lease operating

 

$

5.45

 

 

$

5.55

 

Production and ad valorem taxes

 

 

1.43

 

 

 

2.20

 

Exploration

 

 

0.49

 

 

 

0.85

 

General and administrative

 

 

5.19

 

 

 

6.30

 

Depletion, depreciation and amortization

 

 

17.36

 

 

 

20.61

 

 

Glossary

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

13


 

Boe.   Barrel of oil equivalent, determined using the ratio of six Mcf of natural 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.

MMBtu. Million British thermal units.

MMcf.   Million cubic feet of natural gas.

NGLs.   Natural gas liquids.

NYMEX. New York Mercantile Exchange.

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

Oil, NGL and gas sales .  Oil, NGL and gas sales decreased $15.7 million, or 47%, for the three months ended March 31, 2016, to $17.6 million, compared to $33.3 million for the three months ended March 31, 2015.  The decrease in oil, NGL and gas sales was due to a decrease in average realized commodity prices ($10.1 million) and a decrease in production volumes ($5.6 million).  Production volumes decreased as a result of reduced drilling and completion activity.

Net loss .  Net loss for the three months ended March 31, 2016, was $13.7 million, or $0.33 per diluted share, compared to $7.7 million, or $0.19 per diluted share, for the three months ended March 31, 2015.  Net loss for the three months ended March 31, 2016, included a realized gain on commodity derivatives of $3.5 million and an unrealized loss on commodity derivatives of $1 million. The increase in the net loss for the three months ended March 31, 2016, was primarily due to lower revenues ($15.7 million) due to depressed commodity prices, partially offset by a decrease in expenses ($10.8 million).

Oil, NGL and gas production.   Production for the three months ended March 31, 2016, totaled 1,165 MBoe (12.8 MBoe/d), compared to production of 1,287 MBoe (14.3 MBoe/d) in the prior-year period, a 9% decrease.  Production for the three months ended March 31, 2016, was 31% oil, 31% NGLs and 38% gas, compared to 38% oil, 29% NGLs and 33% gas in the 2015 period.  Production volumes decreased during the three months ended March 31, 2016, as a result of reduced drilling and completion activity.

Commodity derivative activities. Our commodity derivative activity resulted in a realized gain of $3.5 million and $15.9 million for the three months ended March 31, 2016 and 2015, respectively.  Our average realized price, including the effect of commodity derivatives, was $18.12 per Boe for the three months ended March 31, 2016, compared to $38.23 per Boe for the three months ended March 31, 2015.  Realized gains and losses on commodity derivatives are derived from the relative movement of commodity prices in relation to the fixed notional pricing of our derivatives contracts for the respective periods.  The unrealized loss on commodity derivatives was $1 million and $9.3 million for the three months ended March 31, 2016 and 2015, 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 earnings on our consolidated statements of operations under the caption entitled “unrealized loss on commodity derivatives.”

14


 

Lease operating. Our lease operating expenses (“LOE”) decreased $0.7 million, or 11%, for the three months ended March 31, 2016, to $6.4 million, or $5.45 per Boe, compared to $7.1 million, or $5.55 per Boe, for the three months e nded March 31, 2015.  The decrease in LOE per Boe for the three months ended March 31, 2016, was primarily due to increased efficiency in our water hauling operations, a decrease in compressor rental and repair, lower pumpers and supervision costs due to a reduction in our workforce, partially offset by an increase in well repairs, workovers and maintenance. The following table summarizes LOE per Boe.

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

2015

 

 

Change

 

 

 

 

 

 

 

$MM

 

 

Boe

 

 

$MM

 

 

Boe

 

 

$MM

 

 

Boe

 

 

% Change (Boe)

 

Compressor rental and repair

 

$

2.2

 

 

$

1.83

 

 

$

2.8

 

 

$

2.17

 

 

$

(0.6

)

 

$

(0.34

)

 

 

(15.7

)%

Water hauling and other

 

 

1.8

 

 

 

1.57

 

 

 

2.5

 

 

 

1.99

 

 

 

(0.7

)

 

 

(0.42

)

 

 

(21.1

)

Well repairs, workovers and maintenance

 

 

1.7

 

 

 

1.46

 

 

 

0.6

 

 

 

0.43

 

 

 

1.1

 

 

 

1.03

 

 

 

239.5

 

Pumpers and supervision

 

 

0.7

 

 

 

0.59

 

 

 

1.2

 

 

 

0.96

 

 

 

(0.5

)

 

 

(0.37

)

 

 

(38.5

)

Total

 

$

6.4

 

 

$

5.45

 

 

$

7.1

 

 

$

5.55

 

 

$

(0.7

)

 

$

(0.10

)

 

 

(1.8

)%

 

Production and ad valorem taxes. Our production and ad valorem taxes decreased $1.1 million, or 41%, for the three months ended March 31, 2016, to $1.7 million compared to $2.8 million for the three months ended March 31, 2015.  The decrease in production and ad valorem taxes was primarily a function of the decrease in oil, NGL and gas sales between the two periods.  Production and ad valorem taxes were $1.43 per Boe and $2.20 per Boe and approximately 9.4% and 8.5% of oil, NGL and gas sales for the three months ended March 31, 2016 and 2015, respectively.

Exploration. We recorded $0.6 million, or $0.49 per Boe, and $1.1 million, or $0.85 per Boe, of exploration expense for the three months ended March 31, 2016 and 2015, respectively.  The decrease in exploration expense was primarily due to the early termination of one of our daywork drilling contracts in 2015.

General and administrative . Our general and administrative expenses (“G&A”) decreased $2 million, or 25%, to $6.1 million, or $5.19 per Boe, for the three months ended March 31, 2016, compared to $8.1 million, or $6.30 per Boe, for the three months ended March 31, 2015.  The decrease in G&A and G&A per Boe was primarily due to lower salaries and benefits, share-based compensation and other cost saving initiatives.  We expect G&A to decline from prior year levels due to cost saving initiatives for the remainder of 2016.  The following table summarizes G&A in millions and G&A per Boe.

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

2015

 

 

Change

 

 

 

 

 

 

 

$MM

 

 

Boe

 

 

$MM

 

 

Boe

 

 

$MM

 

 

Boe

 

 

% Change (Boe)

 

Salaries and benefits

 

$

2.8

 

 

$

2.38

 

 

$

3.5

 

 

$

2.72

 

 

$

(0.7

)

 

$

(0.34

)

 

 

(12.5

)%

Share-based compensation

 

 

1.6

 

 

$

1.33

 

 

 

2.2

 

 

 

1.72

 

 

 

(0.6

)

 

 

(0.39

)

 

 

(22.7

)

Professional fees

 

 

0.6

 

 

$

0.50

 

 

 

0.9

 

 

 

0.68

 

 

 

(0.3

)

 

 

(0.18

)

 

 

(26.5

)

Other

 

 

1.1

 

 

$

0.98

 

 

 

1.5

 

 

 

1.18

 

 

 

(0.4

)

 

 

(0.20

)

 

 

(16.9

)

Total

 

$

6.1

 

 

$

5.19

 

 

$

8.1

 

 

$

6.30

 

 

$

(2.0

)

 

$

(1.11

)

 

 

(17.6

)%

 

Depletion, depreciation and amortization.   Our depletion, depreciation and amortization expense (“DD&A”) decreased $6.3 million, or 24%, to $20.2 million for the three months ended March 31, 2016, compared to $26.5 million for the three months ended March 31, 2015.  Our DD&A per Boe decreased by $3.25, or 16%, to $17.36 per Boe for the three months ended March 31, 2016, compared to $20.61 per Boe for the three months ended March 31, 2015.  The decrease in DD&A expense over the prior-year period was primarily due to lower 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 $0.4 million, or 6%, to $6.3 million for the three months ended March 31, 2016, compared to $5.9 million for the three months ended March 31, 2015.  This increase was primarily due to higher interest expense from increased borrowings under our revolving credit facility, partially offset by interest savings of $0.4 million from our 2015 repurchase of $19.7 million aggregate face value of our 7% Senior Notes due 2021 on the open market.  We expect our interest expense to remain higher than the prior-year period as a result of a higher outstanding balance under our revolving credit facility and an increase in the applicable margin rates under our revolving credit facility.

Income taxes. Our income tax benefit increased $3.2 million to $7.2 million for the three months ended March 31, 2016, from $4 million for the three months ended March 31, 2015. The increase in the income tax benefit was primarily due to the increase in net

15


 

loss before income taxes in the 2016 period.  Our effective income tax rate for the three months ended March 31, 2016, was 34.7%, compared to 34.1% for the three months ended March 31, 2015.

Liquidity and Capital Resources

We generally will rely on cash generated from operations, borrowings, to the extent available, under our revolving credit facility and, to the extent that credit and capital market conditions will allow, future public or private 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 revolving 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 revolving 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. Cash flows from operations are primarily used to fund exploration and development of our oil and gas properties. If commodity prices remain at depressed levels or decline further, our operating cash flows will decrease and our lenders may further reduce our borrowing base, thus limiting the amounts available to fund future capital expenditures. If we are unable to replace our oil, NGL and gas reserves through acquisition, development and exploration, we may also suffer a reduction in operating cash flows and access to funds under our revolving credit facility.  

We believe we have adequate liquidity from cash generated from operations and unused borrowing capacity under our revolving 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 revolving credit facility.

 

In addition, we intend to explore, and have discussed with select parties, various alternatives to strengthen our balance sheet and preserve financial flexibility. These alternatives include additional debt buybacks, debt for debt or debt for equity exchanges or refinancings, strategic investments and joint ventures, sales of assets or working interests, and private or public equity raises and rights offerings. Many of these alternatives may require the consent of current lenders, stockholders or bond holders. There is no assurance that we will be able to execute any of these alternatives on acceptable terms or at all.

Liquidity

We define liquidity as funds available under our revolving credit facility and cash and cash equivalents.  At March 31, 2016, we had $272 million in outstanding borrowings under our revolving credit facility and liquidity of $178.5 million, compared to $273 million in outstanding borrowings under our revolving credit facility and liquidity of $177.3 million at December 31, 2015. The table below summarizes our liquidity position at March 31, 2016, and December 31, 2015 (dollars in thousands).

 

 

 

Liquidity at

March 31,

 

 

Liquidity at

December 31,

 

 

 

2016

 

 

2015

 

Borrowing base

 

$

450,000

 

 

$

450,000

 

Cash and cash equivalents

 

840

 

 

 

600

 

Long-term debt – Credit Facility

 

 

(272,000

)

 

 

(273,000

)

Undrawn letters of credit

 

 

(325

)

 

 

(325

)

Liquidity

 

$

178,515

 

 

$

177,275

 

 

In May 2016, the lenders under our revolving credit facility completed their semi-annual borrowing base redetermination, which decreased the borrowing base to $325 million from $450 million. The reduction in our borrowing base was attributable to a decrease in commodity prices. Additional information regarding our revolving credit facility is included in Note 3. “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 $11.7 million at March 31, 2016, compared to a working capital deficit of $8.1 million at December 31, 2015.  The change in working capital was due to the timing of settlement of current assets and liabilities and an increase in current

16


 

liabilities due to our capital expenditures for the three months ended March 31, 2016. To the extent we operate, or end fiscal year 2016, with a working capital deficit, we expect such deficit to be offset by liquidity available under our revolving 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,

 

 

 

2016

 

 

2015

 

Cash provided by operating activities

 

$

5,291

 

 

$

27,179

 

Cash used in investing activities

 

 

(3,314

)

 

 

(87,282

)

Cash (used in) provided by financing activities

 

 

(1,737

)

 

 

59,965

 

Net increase (decrease) in cash and cash equivalents

 

$

240

 

 

$

(138

)

 

Operating Activities

Cash provided by operating activities decreased by 81%, or $21.9 million, to $5.3 million during the three months ended March 31, 2016, compared to the prior-year period. The decrease in our cash provided by operating activities was primarily due to a decrease in oil, NGL and gas sales from lower commodity prices. 

Investing Activities

Cash used in investing activities decreased by $84 million for the three months ended March 31, 2016, to $3.3 million, compared to the prior-year period. Cash used in investing activities for the three months ended March 31, 2016, was primarily attributable to drilling and development ($4 million) and infrastructure projects and equipment ($0.9 million).  Cash used in investing activities was partially offset by changes in working capital associated with investing activities ($1.6 million).  During the three months ended March 31, 2016, we drilled a total of four and completed no horizontal wells.

Financing Activities

Cash provided by financing activities decreased by $61.7 million for the three months ended March 31, 2016, to $1.7 million of cash used in financing activities, compared to $60 million of cash provided by financing activities. We had $272 million in outstanding borrowings under our revolving credit facility at March 31, 2016, compared to $210 million in outstanding borrowings as of March 31, 2015. During the three months ended March 31, 2016, net cash used in financing activities included borrowings under our revolving credit facility of $12.6 million that were partially offset by repayments of outstanding borrowings under our revolving credit facility of $13.6 million.

As market conditions warrant, and subject to our contractual restrictions in our revolving credit facility or otherwise, liquidity position and other factors, we may from time to time seek to recapitalize, refinance or otherwise restructure our capital structure. We may accomplish this through open market or privately negotiated transactions, which may include, among other things, repurchases of our common stock or outstanding debt, debt for debt or debt for equity exchanges or refinancings, and private or public equity raises and rights offerings. Many of these alternatives may require the consent of current lenders, stockholders or bond holders, and there is no assurance that we will be able to execute any of these alternatives on acceptable terms or at all. The amounts involved in any such transaction, individually or in the aggregate, may be material.

Revolving Credit Facility

At March 31, 2016, the borrowing base and aggregate lender commitments under our revolving credit facility were $450 million, with maximum commitments from the lenders of $1 billion and a maturity date of May 7, 2019.  We had outstanding borrowings of $272 million and $273 million under our revolving credit facility at March 31, 2016, and December 31, 2015, respectively.  The weighted average interest rate applicable to borrowings under our revolving credit facility for the three months ended March 31, 2016, was 2.4%.

In order to provide more flexibility in managing our balance sheet, we entered into a third amendment to our revolving credit facility on May 3, 2016.  Specifically, the third amendment modified our interest coverage ratio covenant (as defined in the revolving credit facility) to 1.25 to 1.0 (or 1.0 to 1.0 following the issuance of second lien indebtedness), through December 31, 2017, 1.5 to 1.0 through December 31, 2018, and 2.0 to 1.0 thereafter (from previous ratio of 2.5 to 1.0).  Additionally, the third amendment (a) decreased the borrowing base to $325 million from $450 million, (b) increased the applicable margin rates on borrowings by 100 basis

17


 

points, (c) permits the Company to issue up to $150 million of second lien indebtedness, subject to various conditions an d limitations, and (d) permits the Company to repurchase outstanding debt with proceeds of certain asset sales, equity issuances or second lien indebtedness. Additional information regarding our credit arrangements is included in Note 3. “Long-Term Debt.”

At March 31, 2016, we were in compliance with all of our covenants, and there were no existing defaults or events of default under our debt instruments. To date, we have experienced no disruptions in our ability to access our revolving 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, operating lease obligations, asset retirement obligations and employment agreements with our executive officers. At March 31, 2016, outstanding borrowings under our revolving credit facility were $272 million, compared to $273 million at December 31, 2015. Since December 31, 2015, 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, 2016, 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, NGLs and gas. Commodity prices are affected by changes in market demand, which is impacted by domestic and foreign supply of oil, NGL 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 oil and gas producing countries, weather and technological advances affecting oil, NGL and gas consumption.  As a result, we cannot accurately predict future oil, NGL 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, NGL 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 the our revolving 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.

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 revolving credit facility for current working capital needs and execution 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 revolving credit facility.

18


 

We believe the outlook for our business is favorable despite the continued uncertainty of oil, NGL and gas prices. Our resourc e base, adequate current liquidity, risk management, including commodity derivative strategy, and disciplined investment of capital provide us with an opportunity to exploit and develop our positions and maximize efficiency in our key operating area.  

 

 

I tem 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 low for a significant amount of time, we could be required under successful efforts accounting rules to write down our oil and gas properties.

In the three months ended March 31, 2016, the NYMEX WTI prompt month price averaged $33.73 per barrel and ranged from a low of $26.10 per barrel to $41.50 per barrel. In the three months ended March 31, 2015, the NYMEX WTI prompt month price averaged $48.80 per barrel and ranged from a low of $43.46 per barrel to $53.53 per barrel.

In the three months ended March 31, 2016, the NYMEX Henry Hub natural gas prompt month price averaged $1.99 per MMBtu and ranged from a low of $1.64 per MMBtu to $2.47 per MMBtu. In the three months ended March 31, 2015, the NYMEX Henry Hub natural gas prompt month price averaged $2.82 per MMBtu and ranged from a low of $2.56 per MMBtu to $3.23 per MMBtu.

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 income (expense) on our consolidated statements of operations as they occur.

The following table provides our outstanding commodity derivative positions at March 31, 2016.

 

Commodity and Period

 

Contract

Type

 

Volume Transacted

 

Contract Price

Crude Oil

 

 

 

 

 

 

April 2016 – December 2016

 

Swap

 

500 Bbls/d

 

$62.50/Bbl

April 2016 – December 2016

 

Swap

 

250 Bbls/d

 

$62.55/Bbl

April 2016 – June 2016

 

Swap

 

500 Bbls/d

 

$40.25/Bbl

April 2016 – June 2016

 

Swap

 

1,000 Bbls/d

 

$40.00/Bbl

April 2016 – September 2016

 

Swap

 

750 Bbls/d

 

$43.00/Bbl

 

 

 

 

 

 

 

Natural Gas

 

 

 

 

 

 

April 2016 – December 2016

 

Swap

 

100,000 MMBtu/month

 

$2.91/MMBtu

April 2016 – December 2016

 

Swap

 

100,000 MMBtu/month

 

$2.95/MMBtu

April 2016 – March 2017

 

Swap

 

100,000 MMBtu/month

 

$2.463/MMBtu

April 2016 – March 2017

 

Swap

 

300,000 MMBtu/month

 

$2.45/MMBtu

April 2017 – December 2017

 

Collar

 

200,000 MMBtu/month

 

$2.30/MMBtu - $2.60/MMBtu

 

At March 31, 2016, the fair value of our open derivative contracts was a net asset of $5.8 million, compared to an asset of $6.7 million at December 31, 2015.

We are exposed to credit losses in the event of nonperformance by counterparties on our commodity derivative positions. We do not anticipate nonperformance by the counterparties over the term of the commodity derivatives positions; however, we cannot be certain that we will not experience such losses in the future.  All of the counterparties to our commodity derivative positions are participants in our revolving credit facility, and the collateral for the outstanding borrowings under the revolving credit facility is used as collateral for our commodity derivatives.

19


 

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 ca sh 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 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 mo dels 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 income (expense) on our consolidated sta tements of operations.

For the three months ended March 31, 2016 and 2015, we recorded an unrealized loss on commodity derivatives of $1 million and $9.3 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 $3.9 million decrease in the fair value of our commodity derivative positions recorded on our balance sheet at March 31, 2016, 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, 2016.

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 Chairman, Chief Executive Officer and President (“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, 2016. Based on this evaluation, the CEO and CFO have concluded that, as of March 31, 2016, 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, 2016, 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.

 

 

20


 

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, 2015, filed with the SEC on March 4, 2016.

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, 2015, 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 March 4, 2016.

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, 2015, filed with the SEC on March 4, 2016, 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, 2016.  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

 

January 1, 2016 – January 31, 2016

 

 

4,579

 

 

$

1.10

 

 

 

 

 

 

 

February 1, 2016 – February 29, 2016

 

 

64

 

 

 

0.76

 

 

 

 

 

 

 

March 1, 2016 – March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

4,643

 

 

$

1.10

 

 

 

 

 

 

 

 

Item 6. Exhibits.

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

 

 

 

21


 

SIGN AT URES

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 5, 2016

By:

 

/s/ J. Ross Craft

 

 

 

J. Ross Craft

 

 

 

Chairman of the Board, Chief Executive Officer and President

(Principal Executive Officer)

 

Date: May 5, 2016

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

 

Second Amended and Restated Bylaws of Approach Resources Inc. (filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed November 8, 2013, 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

 

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).

 

 

 

4.3

 

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).

 

 

 

10.1

 

Third Amendment dated as of May 3, 2016, to Amended and Restated Credit Agreement dated as of May 7, 2014, by and amount the Company, JPMorgan Chase Bank, N.A., as Administrative Agent, and each of the Lenders party thereto (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 4, 2016, and incorporated herein by reference).

 

 

 

*10.2†

 

Fourth Amendment to the Approach Resources Inc. 2007 Stock Incentive Plan.

 

 

 

*10.3†

 

Form of Cash Settled Performance Share Unit Award Agreement under Approach Resources Inc. 2007 Stock Incentive Plan.

 

 

 

*31.1

 

Certification by the Chairman, Chief Executive Officer and President 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 Chairman, Chief Executive Officer and President 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 or compensatory plan arrangement.

 

 

 

Exhibit 10.2

FOURTH AMENDMENT TO THE

APPROACH RESOURCES INC.

2007 STOCK INCENTIVE PLAN

 

This Fourth Amendment (the “ Fourth Amendment ”) to the Approach Resources Inc. 2007 Stock Incentive Plan, as amended from time to time (the “ Plan ”), is made effective as of March 2, 2016 (the Amendment Effective Date ”), by Approach Resources Inc., a Delaware corporation (“ Approach ”).  

 

W I T N E S S E T H :

 

WHEREAS, Approach established the Plan, originally effective as of June 28, 2007 and most recently amended and approved by Approach’s stockholders effective June 2, 2015, under which Approach is authorized to grant equity-based incentive awards to certain employees and service providers of Approach and its subsidiaries;

WHEREAS, Section 14.1 of the Plan provides that Approach’s board of directors (the “ Board ”) may amend the Plan from time to time; and

WHEREAS, the Board now desires to amend the Plan in the manner contemplated hereby.  

 

NOW, THEREFORE, the Plan shall be amended as of the Amendment Effective Date, as set forth below:

 

1. Section 14.1 of the Plan is hereby deleted and replaced in its entirety with the following:

 

The Board may at any time amend, alter, suspend, discontinue or terminate this Plan or the Committee’s authority to grant Awards under this Plan without the consent of stockholders or Participants, except that any amendment or alteration to this Plan, including any increase in any share limitation, shall be subject to the approval of the Company’s stockholders if such stockholder approval is required by any applicable law or regulation or the rules or other listing requirements of any stock exchange or automated quotation system on which the Common Stock may then be listed or quoted, and the Board may otherwise, in its discretion, determine to submit other such changes to this Plan to stockholders for approval; provided , that, without the consent of an affected Participant (or the Permitted Transferee), no such Board action shall adversely affect in any material way any Award previously granted under the Plan.  Upon termination of the Plan, the terms and provisions of the Plan shall, notwithstanding such termination, continue to apply to Awards granted prior to such termination.  Notwithstanding the foregoing, Approach may amend any Award Agreement to be exempt from Code Section 409A or to comply with the requirements of Code Section 409A or to modify any provision that causes an Award that is intended to be classified as an “equity instrument” under FAS 123R to be classified as a liability on Approach’s financial statements.

 

2. Article VI of the Plan is hereby amended by inserting Section 6.4 as follows:

6.4 Minimum Vesting Period . The minimum vesting or forfeiture restriction period with respect to Awards that are Options or SARs for which a Participant pays (or the value or amount payable under the Award is reduced by) an amount equal to or exceeding the Fair Market Value of the Common Stock determined as of the date of grant shall be three years, subject to the Committee’s authority pursuant to Section 3.1 of the Plan in the event of a Participant’s termination of employment or service or upon the occurrence of certain events.

 

 


 

3 . Except as set forth above, the Plan shall continue to read in its current state.    

 

IN WITNESS WHEREOF, Approach has caused the execution of this Fourth Amendment by its duly authorized officer, effective as of the Amendment Effective Date.  

 

APPROACH RESOURCES INC.

 

By:

/s/ J. Ross Craft  

 

J. Ross Craft

 

Chairman, Chief Executive Officer and President

 

 

 

Exhibit 10.3

APPROACH RESOURCES INC.
2007 STOCK INCENTIVE PLAN

2016 CASH-SETTLED PERFORMANCE SHARE UNIT AWARD AGREEMENT

PERFORMANCE VESTING AND TIME VESTING REQUIREMENTS

THIS 2016 CASH-SETTLED PERFORMANCE SHARE UNIT AWARD AGREEMENT (the “ Agreement ”) is made and entered into as of the [●] day of [●], 2016, by and between Approach Resources Inc., a Delaware corporation (“ Approach ”), and [●], an employee, outside director or other individual providing services to Approach or one of its Affiliates (“ Participant ”).

WHEREAS, the Compensation Committee of Approach’s Board of Directors or such other committee designated by Approach’s Board of Directors (the “ Committee ”), acting under Approach’s 2007 Stock Incentive Plan, as amended (the “ Plan ”), has the authority to grant Performance Awards denominated in shares of Approach’s common stock, $0.01 par value per share (the “ Common Stock ”), to employees, outside directors or other individuals providing services to Approach or an Affiliate;

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

WHEREAS, a copy of the Plan has been made available to Participant and shall be deemed a part of this Agreement as if fully set forth herein and the terms capitalized but not defined herein shall have the meanings set forth in the Plan.

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

1. Performance Share Unit Award .  On the terms and conditions and subject to the restrictions, including forfeiture, hereinafter set forth, Approach hereby awards to Participant, and Participant hereby accepts, a Performance Award (the “ Award ”) of [●] performance units (each a “ Performance Unit ”).  The Award is made on the [●] day of [●], 2016 (the “ Grant Date ”).  Each Performance Unit represents a contractual right to receive an amount of cash equal to the 30-Day Volume-Weighted Average Stock Price, subject to the terms and conditions of this Agreement; provided that in no event shall the aggregate cash received in settlement of Performance Units  granted under this Agreement exceed $5,000,000 in any fiscal year.  Participant’s right to receive a cash settlement in respect of Performance Units is generally contingent, in whole or in part, upon, except as otherwise provided in Section 2(c) , (a) the achievement of the Performance Vesting Requirement outlined in Section 2(a)(i) below, and (b) Participant’s satisfaction of the Time Vesting Requirement outlined in Section 2(a)(ii) below.  The Performance Units contemplated herein are described in the Plan as Performance Awards payable in cash pursuant to Article XI of the Plan. For purposes of this Agreement, the “ 30-Day Volume-Weighted Average Stock Price ” means, in respect of any vesting date, the volume-weighted average closing price of a share of the Common Stock as reported on the NASDAQ Global Select Market (or such other exchange on which the Common Stock is listed) for the 30 consecutive full trading days ending at the close of regular hours trading on the NASDAQ Global Select Market on the full trading day immediately preceding such vesting date.

2. Vesting and Forfeiture .  

(a) Vesting Restrictions .  The Performance Units shall be subject to a restricted period that shall commence on the Grant Date and shall end on the time-based vesting dates described in Section 2(a)(ii) below (the “ Performance Period ”), subject to the satisfaction of the Performance Vesting Requirement described in Section 2(a)(i) and the provisions of Section 2(c) .  During the Performance Period, the Performance Units shall be subject to being forfeited by Participant to Approach as provided in this Agreement, and

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Participant may not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of any of the Performance Units (the “ Restrictions ”).  

(i) Performance Vesting Requirement .  The “ Performance Vesting Requirement ” means the performance-based vesting Restrictions for the Performance Units.  The Performance Vesting Requirement shall be satisfied by the achievement of the “ Performance Goal ,” which is performance criteria established by the Committee pursuant to Article XI of the Plan and set forth in Appendix A attached hereto.  Within 75 days after the end of the 2016 calendar year, the Committee will review and analyze Approach’s performance for the 2016 calendar year and determine whether the Performance Vesting Requirement has been satisfied.  If the Committee determines that the Performance Vesting Requirement has been satisfied, the Committee will certify the achievement of the Performance Goal for the 2016 calendar year and then the Time Vesting Requirement in Section 2(a)(ii) below will be the remaining Restriction applicable to the Performance Units; for the avoidance of doubt, except as provided in Section 2(c) , no Performance Units shall become vested and no payments with respect to Performance Units shall be made prior to satisfaction of the Time Vesting Requirement applicable to such Performance Units.  If the Committee determines that the Performance Vesting Requirement has not been satisfied, (i) the Participant shall have no rights whatsoever in and to any cash settlement in respect of any of the Performance Units, (ii) all of the Performance Units shall automatically revert to Approach at no cost and (iii) neither the Participant nor any of his or her heirs, beneficiaries, executors, administrators or other personal representatives shall have any rights with respect thereto.  The Committee’s certification of the achievement of the Performance Goal will be effective as of December 31, 2016, regardless of any delay in the Committee’s determination of whether the Performance Goal was satisfied for the 2016 calendar year.  The Committee shall have the sole discretion for determining whether the Performance Vesting Requirement has been satisfied and any such determination shall be conclusive.  

(ii) Time Vesting Requirement .  The “ Time Vesting Requirement ” means the time-based vesting Restrictions for the Performance Units during the Performance Period. Provided the Committee certifies that the Performance Vesting Requirement has been satisfied, the time-based Restrictions on the Performance Units shall lapse and the Performance Units shall become vested as to:

(A) 33.33% of the Performance Units (if a fractional number, then the next lower whole number) on December 31, 2017 , provided Participant is in the continuous active service of Approach or an Affiliate until such date;

(B) 33.33% of the Performance Units (if a fractional number, then the next lower whole number) on December 31, 2018 , provided Participant is in the continuous active service of Approach or an Affiliate until such date; and

(C) the remaining Performance Units on December 31, 2019 , provided Participant is in the continuous active service of Approach or an Affiliate until such date.

(b) Termination Generally .  Subject to Section 2(c) , upon termination of Participant’s employment or service with Approach or an Affiliate, (i) Participant shall have no rights whatsoever in and to any cash settlement in respect of any of the Performance Units as to which the Restrictions have not lapsed pursuant to Section 2(a) as of the date of the Participant’s termination of employment or service, (ii) all of the Performance Units as to which the Restrictions have not lapsed pursuant to Section 2(a) as of the date of the Participant’s termination of employment or service shall automatically revert to Approach at no cost and (iii) neither Participant nor any of his or her heirs, beneficiaries, executors, administrators or other personal representatives shall have any rights with respect thereto.

(c) Change of Control and Termination of Employment or Service for Death or Disability .  

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(i) Change of Control . In the event Participant is in the continuous active service of Approach or an Affiliate from the Grant Date until the occurrence of a Change of Control, then, upon the occurrence of such Change of Control, any remaining Restrictions on the Performance Units shall automatically lapse in full as to any outstanding Performance Units the Participant may hold at the time of such Change of Control, with any remaining Restrictions imposed upon the Performance Units as a result of the Performance Vesting Requirement deemed satisfied at the “maximum” levels necessary to satisfy the Performance Vesting Requirement at the time of the Change of Control.    

(ii) Termination of Employment or Service for Death or Disability .  If Participant’s employment or service relationship with Approach or an Affiliate is terminated as a result of the Participant’s death or Disability, then, upon such termination, any remaining Restrictions on the Performance Units shall automatically lapse in full as to any outstanding Performance Units the Participant may hold at the time of such a termination of employment or service, with any remaining Restrictions imposed upon the Performance Units as a result of the Performance Vesting Requirement deemed satisfied at the “maximum” levels necessary to satisfy the Performance Vesting Requirement at the time of the Participant’s termination of employment or service as a result of the Participant’s death or Disability.

3. Payment in Settlement of Vested Performance Units .  Following the lapse of the Restrictions on any Performance Units pursuant to both the Performance Vesting Requirement and the Time Vesting Requirement in accordance with Section 2(a) or 2(c) , as applicable, Approach shall, as soon as administratively feasible, but not later than 15 days following the date such Restrictions lapse and the Performance Units become vested, pay to Participant a cash payment equal to the 30-Day Volume-Weighted Average Stock Price, multiplied by the number of Performance Units becoming vested; provided that in no event shall the aggregate cash received in settlement of Performance Units  granted under this Agreement exceed $5,000,000 in any fiscal year.  Upon settlement of vested Performance Units in cash, such Performance Units shall be canceled and terminated.

4. No Rights as Stockholder; Dividend Equivalents .  Participant shall have no rights as a stockholder of the Company with respect to the Performance Units; provided that, (a) Participant shall have cash dividend equivalent rights with respect to a number of shares of Common Stock equal to the number of outstanding Performance Units then held by Participant (the “ Underlying Shares ”), with any cash dividends attributable thereto paid to Participant at the time cash dividends are paid to Approach’s stockholders generally, but in any event no later than the 15th day of the third month of the calendar year following the calendar year in which the dividend is declared by Approach; and (b) if and to the extent Approach shall effect a stock split, stock dividend or similar distribution with respect to the Common Stock, the number of Performance Units subject to this Award  shall be increased or decreased by a number equal to the number of shares of Common Stock that would be distributed in connection with such stock split, stock dividend or similar distribution with respect to the Underlying Shares if they were actual shares of Common Stock.      

5. Withholding Taxes .  

(a) Approach may from time to time require Participant to pay to Approach or the appropriate Affiliate, or make arrangements satisfactory to Approach or such Affiliate regarding payment of, the amount Approach deems necessary to satisfy any federal, state or local taxes of any kind required by law to be withheld with respect to the Performance Units.  Unless otherwise permitted by Approach, the amount of such taxes required by law to be withheld with respect to the settlement of Performance Units shall be satisfied by withholding the amount of cash necessary to satisfy Approach’s obligation to withhold taxes from any cash payments to be made under Sections 3 or 4 .

(b) Any provision of this Agreement to the contrary notwithstanding, if Participant does not satisfy his or her obligations under Section 5(a) , Approach shall, to the extent permitted by law, have the right to

3

 

 


 

deduct from any payments made under the Plan, regardless of the form of such payment, or from any other compensation payable to Participant, whether or not pursuant to this Agreement or the Plan and regardless of the form of payment, any federal, state or local taxes of any kind required by law to be withheld with respect to the Performance Unit s.  

6. Reclassification of Shares .  In the event of any reorganization, recapitalization, stock split, stock dividend, merger, consolidation, combination of shares or other change affecting the Common Stock, the Committee shall make adjustments in accordance with the Plan.  Any such adjustments made by the Committee shall be conclusive.

7. Effect on Employment .  Nothing contained in this Agreement shall confer upon Participant the right to continue in the employment of Approach or any Affiliate, or affect any right which Approach or any Affiliate may have to terminate the employment of Participant.  This shall not be construed as any agreement or understanding, express or implied, that Approach or any Affiliate will retain Participant as an employee for any period of time or at any particular rate of compensation or other terms and conditions of employment unrelated to Performance Units.

8. Assignment .  Approach may assign all or any portion of its rights and obligations under this Agreement.  The Award, the Performance Units and the rights and obligations of Participant under this Agreement may not be assigned, sold, transferred, pledged, exchanged, hypothecated or otherwise disposed of by Participant other than by will or the applicable laws of descent and distribution.

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

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

11. Governing Law; Exclusive Forum; Consent to Jurisdiction .  This Agreement shall be governed by the laws of the State of Delaware except for its laws with respect to conflict of laws.  The exclusive forum for any lawsuit arising from or related to this Agreement shall be a state or federal court in Tarrant County, Texas.  This provision does not prevent Approach from removing to an appropriate federal court any action brought in state court.  NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED AS PROHIBITING REMOVAL TO FEDERAL COURT BY APPROACH OF ANY ACTION BROUGHT AGAINST IT BY PARTICIPANT.

12. Execution of Receipts and Releases .  Any payment to Participant or Participant’s legal representative, heir, legatee or distributee, in accordance with the provisions of this Agreement, shall be in full satisfaction of all claims of such persons hereunder related to the Award.  Approach may require Participant or Participant’s legal representative, heir, legatee or distributee, as a condition precedent to such payment, to execute such a release and receipt therefore in such form as Approach may determine.

13. Severability .  If any provision of this Agreement is held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions hereof, but such provision shall be fully severable and this Agreement shall be construed and enforced as if the illegal or invalid provision had never been included herein.

14. Headings .  The titles and headings of Sections are included for convenience of reference only and are not to be considered in construction of the provisions hereof.

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15. Amendment .  The Committee may amend the terms of this Award and this Agreement at any time, although no such amendment shall adversely affect, in any material way, the Participant’s (or a Participant’s Permitted Transferee’s) rights under an outstanding Award without the prior consent of the Participant (or the Participant’s Permitted Transferee) then holding the Award .  The Committee may amend the terms of this Award and this Agreement at any time following the Grant Date to provide for the settlement of vested Performance Units in the form of shares of Common Stock instead of (or in combination with) cash and, for purposes of clarity, any such amendment will be deemed not to adversely affect the Participant’s ( or a Participant’s Permitted Transferee’s) rights in any material way and therefore may be made without Participant’s ( or a Participant’s Permitted Transferee’s) prior consent .  

16. Entire Agreement .  This Agreement constitutes the entire agreement between the parties concerning its subject matter and supersedes all prior agreements, understandings, and statements, both written and oral, between the parties with respect to such subject matter.  In signing this Agreement, the Participant is not relying on any written or oral statement, promise, or representation from Approach or its Affiliates concerning this Agreement other than as set above in this Agreement.

17. Section 409A Compliance .  The parties hereto intend that any amounts payable hereunder comply with or, to the maximum extent possible, are exempt from Section 409A of the Code and the applicable Treasury regulations and administrative guidance issued thereunder (collectively, “ Section 409A ”), and this Agreement shall be construed and administered in accordance with such intent.  Neither this Section 17 nor any other provision of the Agreement or the Plan, however, is or contains a representation to the Participant regarding the tax consequences of the grant, vesting, or settlement of the Performance Units granted hereunder, and should not be interpreted as such.  In no event shall Approach be liable for all or any portion of any taxes, penalties, interest or other expenses that may be incurred by the Participant on account of non-compliance with Section 409A.  Approach and the Participant agree to negotiate in good faith to make such amendments to the Agreement as the parties mutually agree are necessary or desirable to avoid the imposition of taxes, penalties or interest under Section 409A.  For purposes of Section 409A, each of the payments that may be made under this Agreement shall be deemed to be a separate payment for purposes of Section 409A.  Any payments to be made under this Agreement upon a termination of Participant’s employment or service shall only be made if such termination of employment constitutes a “separation from service” under Section 409A.  The applicable provisions of Section 409A are hereby incorporated by reference and shall control over any Plan or Award Agreement provision in conflict therewith.

 

18. Miscellaneous . Notwithstanding anything to the contrary in this Agreement, Approach will not be required to comply with any term, covenant or condition of this Agreement if and to the extent prohibited by applicable law. Participant shall reimburse Approach for incentive-based or equity-based compensation and profits realized from the Award covered by this Agreement as required by applicable law, including, but not limited to, Section 304 of the Sarbanes-Oxley Act of 2002 and Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and agrees that Approach need not comply with any term, covenant or condition of this Agreement to the extent that doing so would require that Participant reimburse Approach for such amounts pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 and/or Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

 


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

 

Approach Resources Inc.

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

 

 

PARTICIPANT

 

 

 

By:

 

 

Name:

 

 

 

 

 

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APPENDIX A

TO 2016 CASH-SETTLED PERFORMANCE SHARE UNIT AWARD AGREEMENT

 

Performance Goal for Performance Vesting Requiremen t

 

The Performance Goal for the Performance Units shall be comprised of the company performance goal set forth in Section 1 of this Appendix A .  The Performance Goal must be met or exceeded for the Performance Vesting Requirement for the Performance Units to be satisfied.  The Committee shall have the sole discretion for determining whether the Performance Vesting Requirement has been satisfied and any such determination shall be conclusive.  

 

1.

Performance Goal .  The following Performance Goal shall apply with respect to the Performance Units and relate to the calendar year ending December 31, 2016 (the “ 2016 calendar year ”):

Approach’s cash operating expenses per Boe shall not exceed $15.00/Boe with respect to the 2016 calendar year.

 

2.

Definitions and Calculations Procedures

 

(a)

Cash operating expenses are defined as operating expenses, excluding (1) exploration expense, (2) depletion, depreciation and amortization expense, (3) share-based compensation expense (cash and non-cash), (4) termination costs, and (5) impairment of oil and gas properties, and otherwise as set forth in Approach’s year-end 2016 earnings report.

 

(b)

Boe is one barrel of oil equivalent, using a conversion ratio of six thousand cubic feet of natural gas to one barrel of oil, condensate or natural gas liquids.

 

 

 

Exhibit 31.1

Certification

I, J. Ross Craft, certify that:

 

1.

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

 

2.

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;

 

3.

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;

 

4.

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

 

5.

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 5, 2016

 

/s/ J. Ross Craft

 

 

J. Ross Craft

 

 

Chairman of the Board, Chief Executive Officer and President

 

 

(Principal Executive Officer)

 

Exhibit 31.2

Certification

I, Sergei Krylov, certify that:

 

1.

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

 

2.

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;

 

3.

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;

 

4.

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

 

5.

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 5, 2016

 

/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, 2016, 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 5, 2016

 

/s/ J. Ross Craft

 

 

J. Ross Craft

 

 

Chairman of the Board, Chief Executive Officer and President

 

 

(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, 2016, 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 5, 2016

 

/s/ Sergei Krylov

 

 

Sergei Krylov

 

 

Executive Vice President and Chief Financial Officer

 

 

(Principal Financial Officer)