##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 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 number)One Ridgmar Centre 
6500 W. Freeway, Suite 800
Fort Worth, Texas(Address of principal executive offices)
    
    76116(Zip Code)
 (Registrants telephone number, including area code)
 
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONItem 1. Financial statementsItem 2. Managements discussion and analysis of financial condition and results of operationsItem 3. Quantitative and qualitative disclosures about market riskItem 4T. Controls and proceduresPART II  OTHER INFORMATIONItem 1. Legal proceedingsItem 1A. Risk factorsItem 2. Unregistered sales of equity securities and use of proceedsItem 3. Defaults upon senior securitiesItem 4. Submission of matters to a vote of security holdersItem 5. Other informationItem 6. ExhibitsSIGNATURESIndex to ExhibitsCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906    Table of Contents  
 PART I  FINANCIAL INFORMATION
 
 Item 1. Financial statements.
 APPROACH RESOURCES INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per share amounts)
 June 30,
    
    
    December 31,2008
    
    
    2007ASSETSCURRENT ASSETS:Cash
    
    $
    140
    
    
    $
    4,785Accounts receivable:Joint interest owners
    
    
    9,683
    
    
    
    5,272Oil and gas sales
    
    
    12,566
    
    
    
    5,524Unrealized gain on commodity derivatives
    
    
    
    
    
    
    793Prepaid expenses and other current assets
    
    
    2,416
    
    
    
    773Total current assets
    
    
    24,805
    
    
    
    17,147PROPERTIES AND EQUIPMENT:Oil and gas properties, at cost, using the successful efforts method of accounting
    
    
    301,798
    
    
    
    266,905Furniture, fixtures and equipment
    
    
    794
    
    
    
    433302,592
    
    
    
    267,338Less accumulated depletion, depreciation and amortization
    
    
    (48,079
    )
    
    
    (36,860
    )Net properties and equipment
    
    
    254,513
    
    
    
    230,478INVESTMENT
    
    
    917
    
    
    
    917UNREALIZED GAIN ON COMMODITY DERIVATIVES
    
    
    
    
    
    
    75OTHER ASSETS
    
    
    3
    
    
    
    109Total assets
    
    $
    280,238
    
    
    $
    248,726LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    6,395
    
    
    $
    5,459Oil and gas sales payable
    
    
    6,983
    
    
    
    1,794Accrued liabilities
    
    
    12,170
    
    
    
    14,764Unrealized loss on commodity derivatives
    
    
    10,266
    
    
    
    Total current liabilities
    
    
    35,814
    
    
    
    22,017NON-CURRENT LIABILITIES:Long-term debt
    
    
    7,553
    
    
    
    Unrealized loss on commodity derivatives
    
    
    3,417
    
    
    
    Deferred income taxes
    
    
    28,775
    
    
    
    26,342Asset retirement obligations
    
    
    638
    
    
    
    548Total liabilities
    
    
    76,197
    
    
    
    48,907COMMITMENTS 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, 20,675,831 and
20,622,746 shares issued and 20,651,591 and 20,622,746 shares outstanding,
respectively
    
    
    207
    
    
    
    206Additional paid-in capital
    
    
    166,733
    
    
    
    166,141Retained earnings
    
    
    37,057
    
    
    
    33,367Accumulated other comprehensive income
    
    
    44
    
    
    
    105Total stockholders equity
    
    
    204,041
    
    
    
    199,819Total liabilities and stockholders equity
    
    $
    280,238
    
    
    $
    248,726
 See accompanying notes to these consolidated financial statements.
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APPROACH RESOURCES INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except shares and per share amounts)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007REVENUES:Oil and gas sales
    
    $
    24,144
    
    
    $
    9,690
    
    
    $
    43,162
    
    
    $
    19,082EXPENSES:Lease operating
    
    
    1,856
    
    
    
    1,043
    
    
    
    3,253
    
    
    
    2,023Severance and production taxes
    
    
    1,170
    
    
    
    373
    
    
    
    1,923
    
    
    
    748Exploration
    
    
    987
    
    
    
    10
    
    
    
    1,478
    
    
    
    633General and administrative
    
    
    1,817
    
    
    
    1,218
    
    
    
    3,763
    
    
    
    2,730Depletion, depreciation and amortization
    
    
    6,025
    
    
    
    3,017
    
    
    
    11,241
    
    
    
    6,108Total expenses
    
    
    11,855
    
    
    
    5,661
    
    
    
    21,658
    
    
    
    12,242OPERATING INCOME
    
    
    12,289
    
    
    
    4,029
    
    
    
    21,504
    
    
    
    6,840OTHER:Interest expense, net
    
    
    (343
    )
    
    
    (998
    )
    
    
    (491
    )
    
    
    (1,954
    )Realized (loss) gain on commodity derivatives
    
    
    (542
    )
    
    
    88
    
    
    
    (481
    )
    
    
    2,243Unrealized (loss) gain on commodity
derivatives
    
    
    (9,672
    )
    
    
    1,724
    
    
    
    (14,551
    )
    
    
    (2,902
    )INCOME BEFORE PROVISION FOR
INCOME TAXES
    
    
    1,732
    
    
    
    4,843
    
    
    
    5,981
    
    
    
    4,227PROVISION FOR INCOME TAXES
    
    
    804
    
    
    
    1,853
    
    
    
    2,291
    
    
    
    1,818NET INCOME
    
    $
    928
    
    
    $
    2,990
    
    
    $
    3,690
    
    
    $
    2,409EARNINGS PER SHARE:Basic
    
    $
    0.04
    
    
    $
    0.32
    
    
    $
    0.18
    
    
    $
    0.25Diluted
    
    $
    0.04
    
    
    $
    0.29
    
    
    $
    0.18
    
    
    $
    0.25WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    20,646,519
    
    
    
    9,481,662
    
    
    
    20,634,633
    
    
    
    9,491,472Diluted
    
    
    20,913,832
    
    
    
    10,261,753
    
    
    
    20,921,994
    
    
    
    9,866,066
 See accompanying notes to these consolidated financial statements.
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APPROACH RESOURCES INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Six Months EndedJune 30,2008
    
    
    2007OPERATING ACTIVITIES:Net income
    
    $
    3,690
    
    
    $
    2,409Adjustments to reconcile net income to net cash provided by
operating activities:Depletion, depreciation and amortization
    
    
    11,241
    
    
    
    6,108Unrealized loss on commodity derivatives
    
    
    14,551
    
    
    
    2,902Exploration expense
    
    
    1,478
    
    
    
    633Share-based compensation expense
    
    
    496
    
    
    
    88Deferred income taxes
    
    
    2,057
    
    
    
    1,060Changes in operating assets and liabilities:Accounts receivable
    
    
    (11,586
    )
    
    
    991Prepaid expenses and other assets
    
    
    (1,537
    )
    
    
    (607
    )Accounts payable
    
    
    936
    
    
    
    (707
    )Oil and gas sales payable
    
    
    5,189
    
    
    
    491Accrued liabilities
    
    
    (2,594
    )
    
    
    (508
    )Cash provided by operating activities
    
    
    23,921
    
    
    
    12,860INVESTING ACTIVITIES:Additions to oil and gas properties
    
    
    (35,819
    )
    
    
    (17,360
    )Investments
    
    
    
    
    
    
    (917
    )Additions to other property and equipment, net
    
    
    (361
    )
    
    
    (9
    )Cash used in investing activities
    
    
    (36,180
    )
    
    
    (18,286
    )FINANCING ACTIVITIES:Proceeds from issuance of common stock
    
    
    97
    
    
    
    Loan origination fees
    
    
    
    
    
    
    (143
    )Borrowings under credit facility
    
    
    38,503
    
    
    
    39,419Repayment of amounts outstanding under credit facility
    
    
    (30,950
    )
    
    
    (40,269
    )Proceeds from issuance of convertible debt
    
    
    
    
    
    
    20,000Cash provided by financing activities
    
    
    7,650
    
    
    
    19,007CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    (4,609
    )
    
    
    13,581EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH AND CASH
EQUIVALENTS
    
    
    (36
    )
    
    
    CASH AND CASH EQUIVALENTS, beginning of period
    
    
    4,785
    
    
    
    4,911CASH AND CASH EQUIVALENTS, end of period
    
    $
    140
    
    
    $
    18,492SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    124
    
    
    $
    1,869Cash paid for income taxes
    
    $
    41
    
    
    $
    1,200SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION:Adjustment to Neo Canyon acquisition purchase price allocation
    
    $
    509
    
    
    $
    Retirement of loans to stockholders in exchange for shares of
common stock
    
    $
    
    
    
    $
    4,184
 See accompanying notes to these consolidated financial statements.
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APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
 1. Summary of significant accounting policies
 Organization and nature of operations
  Consolidation, basis of presentation and significant estimates
   Comprehensive income
  Three Months Ended
    
    
    Six Months EndedJune 30, 2008
    
    
    June 30, 2008Net income
    
    $
    928
    
    
    $
    3,690Other comprehensive income:Foreign currency translation adjustments
    
    
    (91
    )
    
    
    (61
    )Comprehensive income
    
    $
    837
    
    
    $
    3,629
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APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
 Earnings per common share
  Three Months Ended June 30, 2008Income (numerator)
    
    
    Shares (denominator)
    
    
    Per-share amountBasic earnings per share:Net income
    
    $
    928
    
    
    
    20,646,519
    
    
    $
    0.04Effect of dilutive securities:Share-based compensation,
treasury method
    
    
    
    
    
    
    267,313Net income plus assumed conversions
    
    $
    928
    
    
    
    20,913,832
    
    
    $
    0.04
 Three Months Ended June 30, 2007Income (numerator)
    
    
    Shares (denominator)
    
    
    Per-share amountBasic loss per share:Net income
    
    $
    2,990
    
    
    
    9,481,662
    
    
    $
    0.32Effect of dilutive securities:Share-based compensation,
treasury method
    
    
    
    
    
    
    339,960Convertible debt, if-converted
method(1)
    
    
    23
    
    
    
    440,131Net income plus assumed conversions
    
    $
    3,013
    
    
    
    10,261,753
    
    
    $
    0.29
 Six Months Ended June 30, 2008Income (numerator)
    
    
    Shares (denominator)
    
    
    Per-share amountBasic earnings per share:Net income
    
    $
    3,690
    
    
    
    20,634,633
    
    
    $
    0.18Effect of dilutive securities:Share-based compensation, treasury
method
    
    
    
    
    
    
    287,361Net income plus assumed conversions
    
    $
    3,690
    
    
    
    20,921,994
    
    
    $
    0.18
 Six Months Ended June 30, 2007Income (numerator)
    
    
    Shares (denominator)
    
    
    Per-share amountBasic loss per share:Net income
    
    $
    2,409
    
    
    
    9,491,472
    
    
    $
    0.25Effect of dilutive securities:Share-based compensation, treasury
method
    
    
    
    
    
    
    313,558Convertible debt, if-converted
method(1)
    
    
    13
    
    
    
    61,036Net income plus assumed conversions
    
    $
    2,422
    
    
    
    9,866,066
    
    
    $
    0.25
 
 (1)
    
    Upon the consummation of our initial public offering in November 2007, the convertible debt was converted
into shares of common stock. 5




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APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
 2. Contribution Agreement
   Purchase price:Issuance of 4,239,243 shares of Approach Resources Inc. common
stock valued at $12.00 per share
    
    $
    50,871Deferred tax liabilities assumed
    
    
    9,465Asset retirement obligations assumed
    
    
    133Post-closing purchase price adjustments
    
    
    265Total
    
    $
    60,734Allocation:Wells and equipment and related facilities
    
    $
    59,936Mineral interests in oil and gas properties
    
    
    798Total
    
    $
    60,734
 3. Line of credit
  6




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APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
   4. Income taxes
  5. Derivatives
  Period
    
    Volume (MMBtu)
    
    $/MMBtuMonthly
    
    Total
    
    Floor
    
    Ceiling
    
    FixedNYMEX  Henry HubCostless collars 2008
    
    
    178,000
    
    
    
    1,070,000
    
    
    $
    7.50
    
    
    $
    11.45Costless collars 2008 (3rd quarter)
    
    
    100,000
    
    
    
    300,000
    
    
    $
    7.00
    
    
    $
    9.10Costless collars 2008 (3rd - 4th quarter)
    
    
    200,000
    
    
    
    1,200,000
    
    
    $
    9.00
    
    
    $
    12.20Costless collars 2009
    
    
    180,000
    
    
    
    2,160,000
    
    
    $
    7.50
    
    
    $
    10.50Costless collars 2009
    
    
    130,000
    
    
    
    1,560,000
    
    
    $
    8.50
    
    
    $
    11.70Fixed price swaps4th quarter 2008
    
    
    100,000
    
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    $
    8.63WAHA differentialFixed price swaps 2008
    
    
    178,000
    
    
    
    1,070,000
    
    
    
    
    
    
    
    
    
    
    
    (0.69
    )Fixed price swaps 2008 (3rd - 4th quarter)
    
    
    100,000
    
    
    
    600,000
    
    
    
    
    
    
    
    
    
    
    
    (0.67
    )Fixed price swaps 2009
    
    
    200,000
    
    
    
    2,400,000
    
    
    
    
    
    
    
    
    
    
    
    (0.61
    )
  7




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APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
   Adoption of Statement of Financial Accounting Standards No. 157 (FAS 157)
  
    
    Level 1  Quoted prices are available in active markets for identical assets or
liabilities as of the reporting date. At June 30, 2008, 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 June 30, 2008, 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 June 30, 2008, we had no Level
3 measurements.
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APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
 6. Share-based compensation
  Sharessubject tostockoptionsOutstanding at January 1, 2008
    
    
    479,991Granted
    
    
    74,345Exercised
    
    
    (28,845
    )Canceled
    
    
    (34,050
    )Outstanding at June 30, 2008
    
    
    491,441
  7. Subsequent event
 Ozona Northeast deep rights acquisition
   9




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Item 2. Managements discussion and analysis of financial condition and results of operations.
  Cautionary statement regarding forward-looking statements
   
    
    our business strategy,
    
    estimated quantities of gas and oil reserves,
    
    uncertainty of commodity prices in oil and gas,
    
    our financial position,
    
    our cash flow and liquidity,
    
    replacing our gas and oil reserves,
    
    our inability to retain and attract key personnel,
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
    
    uncertainty regarding our future operating results,
    
    uncertainties in exploring for and producing gas and oil,
    
    high costs, shortages, delivery delays or unavailability of drilling rigs, equipment, labor
or other services,
    
    disruptions to, capacity constraints in or other limitations on the pipeline systems which
deliver our gas and other processing and transportation considerations,
    
    our inability to obtain additional financing necessary to
fund our operations and capital expenditures and to meet our other obligations,
    
    competition in the oil and gas industry,
    
    marketing of gas and oil,
    
    exploitation or property acquisitions,
    
    technology,
    
    the effects of government regulation and permitting and other legal requirements,
    
    plans, objectives, expectations and intentions contained in this report that are not historical,
and
    
    other factors discussed in our Annual Report on Form 10-K for the year ended December 31,
2007 filed with the SEC on March 28, 2008.
 11




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Overview
   West Texas
 
    
    Ozona Northeast (Wolfcamp, Canyon Sands, Strawn and Ellenburger)
    
    Cinco Terry (Wolfcamp, Canyon Sands and Ellenburger)
 East Texas
 
    
    North Bald Prairie (Cotton Valley Sands, Bossier and Cotton Valley Lime)
 Northeast British Columbia
 
    
    Montney tight gas and Doig Shale
 Northern New Mexico
 
    
    El Vado East (Mancos Shale)
 Southwest Kentucky
 
    
    Boomerang (New Albany Shale)
    12




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Recent developments
 Ozona Northeast deep rights acquisition
   British Columbia asset divestiture
  Northern New Mexico update
  13




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Results of operations
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues (in thousands):Gas
    
    $
    18,572
    
    
    $
    8,662
    
    
    $
    33,444
    
    
    $
    16,916Oil
    
    
    4,165
    
    
    
    975
    
    
    
    7,250
    
    
    
    2,065NGLs
    
    
    1,407
    
    
    
    53
    
    
    
    2,468
    
    
    
    101Total oil and gas sales
    
    
    24,144
    
    
    
    9,690
    
    
    
    43,162
    
    
    
    19,082Realized (loss) gain on commodity derivatives
    
    
    (542
    )
    
    
    88
    
    
    
    (481
    )
    
    
    2,243Total oil and gas sales including
derivative impact
    
    $
    23,602
    
    
    $
    9,778
    
    
    $
    42,681
    
    
    $
    21,325Production:Gas (MMcf)
    
    
    1,674
    
    
    
    1,145
    
    
    
    3,339
    
    
    
    2,376Oil (MBbls)
    
    
    34
    
    
    
    16
    
    
    
    66
    
    
    
    36NGLs (MBbls)
    
    
    26
    
    
    
    1
    
    
    
    47
    
    
    
    3Total (MMcfe)
    
    
    2,036
    
    
    
    1,251
    
    
    
    4,016
    
    
    
    2,608Average prices:Gas (per Mcf)
    
    $
    11.10
    
    
    $
    7.57
    
    
    $
    10.02
    
    
    $
    7.12Oil (per Bbl)
    
    
    121.29
    
    
    
    59.76
    
    
    
    110.10
    
    
    
    57.83NGLs per (Bbl)
    
    
    53.93
    
    
    
    36.92
    
    
    
    52.61
    
    
    
    33.39Total (per Mcfe)
    
    $
    11.86
    
    
    $
    7.74
    
    
    $
    10.75
    
    
    $
    7.32Realized (loss) gain on commodity derivatives
(per Mcfe)
    
    
    (0.27
    )
    
    
    0.07
    
    
    
    (0.12
    )
    
    
    0.86Total per Mcfe including derivative impact
    
    $
    11.59
    
    
    $
    7.81
    
    
    $
    10.63
    
    
    $
    8.18Costs and expenses (per Mcfe):Lease operating expenses
    
    $
    0.91
    
    
    $
    0.83
    
    
    $
    0.81
    
    
    $
    0.78Severance and production taxes
    
    
    0.57
    
    
    
    0.30
    
    
    
    0.48
    
    
    
    0.29Exploration
    
    
    0.48
    
    
    
    0.01
    
    
    
    0.37
    
    
    
    0.24General and administrative
    
    
    0.89
    
    
    
    0.97
    
    
    
    0.94
    
    
    
    1.05Depletion, depreciation and amortization
    
    
    2.93
    
    
    
    2.41
    
    
    
    2.78
    
    
    
    2.34
  Three months ended June 30, 2008 compared to three months ended June 30, 2007
 Oil and gas sales
 14




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Commodity derivative activities
 Lease operating
 Severance and production taxes
 Exploration
 General and administrative
 15




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##### Table of Contents



Depletion, depreciation and amortization (DD&A)
 Interest expense, net.
 Income taxes
 Six months ended June 30, 2008 compared to six months ended June 30, 2007
 Oil and gas sales
 Commodity derivative activities
 16




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Lease operating
 Severance and production taxes
 Exploration
 General and administrative
 Depletion, depreciation and amortization (DD&A)
 17




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##### Table of Contents



Interest expense, net.
 Income taxes
 Liquidity and capital resources
    Six Months EndedJune 30,(in thousands)
    
    2008
    
    2007Cash flows provided by operating
activities
    
    $
    23,921
    
    
    $
    12,860Cash flows used in investing activities
    
    
    (36,180
    )
    
    
    (18,286
    )Cash flows provided by financing
activities
    
    
    7,650
    
    
    
    19,007Effect of Canadian exchange rate
    
    
    (36
    )
    
    
    Net (decrease) increase in cash and
cash equivalents
    
    $
    (4,645
    )
    
    $
    13,581
 18




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##### Table of Contents



Operating activities
  Investing activities
  Future capital expenditures for 2008
  Estimatedyear endedDecember 31,(in thousands)
    
    2008Capital expenditures:Ozona Northeast
    
    
    $37,500Cinco Terry
    
    
    20,200North Bald Prairie
    
    
    14,400British Columbia
    
    
    3,000El Vado East
    
    
    Boomerang
    
    
    1,800Lease acquisition, geological, geophysical and
other
    
    
    3,100Total capital expenditures
    
    
    $80,000
 Financing activities
  19




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##### Table of Contents



Credit facility
    Contractual obligations
  Off-balance sheet arrangements
  
 Item 3. Quantitative and qualitative disclosures about market risk.
  20




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##### Table of Contents



Commodity price risk
   Period
    
    Volume (MMBtu)
    
    $/MMBtuMonthly
    
    Total
    
    Floor
    
    Ceiling
    
    FixedNYMEX
 Henry HubCostless collars 2008
    
    
    178,000
    
    
    
    1,070,000
    
    
    $
    7.50
    
    
    $
    11.45Costless collars 2008 (3rd quarter)
    
    
    100,000
    
    
    
    300,000
    
    
    $
    7.00
    
    
    $
    9.10Costless collars 2008 (3rd - 4th quarter)
    
    
    200,000
    
    
    
    1,200,000
    
    
    $
    9.00
    
    
    $
    12.20Costless collars 2009
    
    
    180,000
    
    
    
    2,160,000
    
    
    $
    7.50
    
    
    $
    10.50Costless collars 2009
    
    
    130,000
    
    
    
    1,560,000
    
    
    $
    8.50
    
    
    $
    11.70Fixed price
swaps4th quarter 2008
    
    
    100,000
    
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    $
    8.63WAHA differentialFixed price swaps 2008
    
    
    178,000
    
    
    
    1,070,000
    
    
    
    
    
    
    
    
    
    
    
    (0.69
    )Fixed price swaps 2008 (3rd - 4th quarter)
    
    
    100,000
    
    
    
    600,000
    
    
    
    
    
    
    
    
    
    
    
    (0.67
    )Fixed price swaps 2009
    
    
    200,000
    
    
    
    2,400,000
    
    
    
    
    
    
    
    
    
    
    
    (0.61
    )
   
 Item 4T. Controls and procedures.
   21




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22




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal proceedings.
  
 Item 1A. Risk factors.
  
 Item 2. Unregistered sales of equity securities and use of proceeds.
  
 Item 3. Defaults upon senior securities.
  
 Item 4. Submission of matters to a vote of security holders.
   Results of Voting
    
    Votes For
    
    Withheld1. Election of DirectorsSheldon B. Lubar
    
    
    19,393,521
    
    
    
    44,210Christopher J. Whyte
    
    
    19,432,051
    
    
    
    5,680
 BrokerVoted For
    
    Against
    
    Abstentions
    
    Non-Votes2. Appointment of Hein & Associates
LLP
    
    
    19,435,191
    
    
    
    1,940
    
    
    
    600
    
    
    
    
 
 Item 5. Other information.
  
 Item 6. Exhibits.
  23




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##### Table of Contents



SIGNATURES
  APPROACH RESOURCES INC.By:
    /s/ J. Ross CraftJ. Ross CraftPresident and Chief Executive Officer




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##### Table of Contents



Index to Exhibits
 ExhibitNumber
    
    Exhibit3.1
    
    
    
    Restated Certificate of Incorporation of Approach
Resources Inc. (filed as Exhibit 3.1 to the Companys
Quarterly Report on Form 10-Q filed December 13, 2007 and
incorporated herein by reference).3.2
    
    
    
    Restated Bylaws of Approach Resources Inc. (filed as
Exhibit 3.2 to the Companys Quarterly Report on Form 10-Q
filed December 13, 2007 and incorporated herein by
reference).4.1
    
    
    
    Specimen Common Stock Certificate (filed as Exhibit 4.1 to
the Companys Registration Statement on Form S-1/A filed
October 18, 2007 (File No. 333-144512) and incorporated
herein by reference).10.1
    
    
    
    Form of Indemnity Agreement between Approach Resources
Inc. and each of its directors and officers (filed as
Exhibit 10.1 to the Companys Registration Statement on
Form S-1/A filed September 13, 2007 (File No. 333-144512)
and incorporated herein by reference).10.2
    
    
    
    Employment Agreement by and between Approach Resources
Inc. and J. Ross Craft dated January 1, 2003 (filed as
Exhibit 10.3 to the Companys Registration Statement on
Form S-1 filed July 12, 2007 and incorporated herein by
reference).10.3
    
    
    
    Employment Agreement by and between Approach Resources
Inc. and Steven P. Smart dated January 1, 2003 (filed as
Exhibit 10.4 to the Companys Registration Statement on
Form S-1 filed July 12, 2007 and incorporated herein by
reference).10.4
    
    
    
    Employment Agreement by and between Approach Resources
Inc. and Glenn W. Reed dated January 1, 2003 (filed as
Exhibit 10.5 to the Companys Registration Statement on
Form S-1 filed July 12, 2007 and incorporated herein by
reference).10.5
    
    
    
    Approach Resources Inc. 2007 Stock Incentive Plan,
effective as of June 28, 2007 (filed as Exhibit 10.6 to
the Companys Registration Statement on Form S-1 filed
July 12, 2007 and incorporated herein by reference).10.6
    
    
    
    Form of Business Opportunities Agreement among Approach
Resources Inc. and the other signatories thereto (filed as
Exhibit 10.11 to the Companys Registration Statement on
Form S-1/A filed October 18, 2007 (File No. 333-144512)
and incorporated herein by reference).10.7
    
    
    
    Form of Option Agreement under 2003 Stock Option Plan
(filed as Exhibit 10.12 to the Companys Registration
Statement on Form S-1 filed July 12, 2007 and incorporated
herein by reference).10.8
    
    
    
    Restricted Stock Award Agreement by and between Approach
Resources Inc. and J. Curtis Henderson dated March 14,
2007 (filed as Exhibit 10.13 to the Companys Registration
Statement on Form S-1 filed July 12, 2007 and incorporated
herein by reference).




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##### Table of Contents



ExhibitNumber
    
    Exhibit10.9
    
    
    
    Form of Summary of Stock Option Grant under Approach
Resources Inc. 2007 Stock Incentive Plan (filed as Exhibit
10.14 to the Companys Registration Statement on Form
S-1/A filed October 18, 2007 (File No. 333-144512) and
incorporated herein by reference).10.10
    
    
    
    Form of Stock Award Agreement under Approach Resources
Inc. 2007 Stock Incentive Plan (filed as Exhibit 10.15 to
the Companys Registration Statement on Form S-1/A filed
October 18, 2007 (File No. 333-144512) and incorporated
herein by reference).10.11
    
    
    
    Registration Rights Agreement dated as of November 14,
2007, by and among Approach Resources Inc. and investors
identified therein (filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K/A filed December 3, 2007 and
incorporated herein by reference).10.12
    
    
    
    Gas Purchase Contract dated May 1, 2004 between Ozona
Pipeline Energy Company, as Buyer, and Approach Resources
I, L.P. and certain other parties identified therein
(filed as Exhibit 10.18 to the Companys Registration
Statement on Form S-1/A filed September 13, 2007 (File No.
333-144512) and incorporated herein by reference).10.13
    
    
    
    Agreement Regarding Gas Purchase Contract dated May 26,
2006 between Ozona Pipeline Energy Company, as Buyer, and
Approach Resources I, L.P. and certain other parties
identified therein (filed as Exhibit 10.19 to the
Companys Registration Statement on Form S-1/A filed
September 13, 2007 (File No. 333-144512) and incorporated
herein by reference).10.14
    
    
    
    Carry and Earning Agreement dated July 13, 2007 by and
between EnCana Oil & Gas (USA) (filed as Exhibit 10.22 to
the Companys Registration Statement on Form S-1/A filed
September 13, 2007 (File No. 333-144512) and incorporated
herein by reference).10.15
    
    
    
    Oil & Gas Lease dated February 27, 2007 between the
lessors identified therein and Approach Oil & Gas Inc., as
successor to Lynx Production Company, Inc. (filed as
Exhibit 10.23 to the Companys Registration Statement on
Form S-1/A filed September 13, 2007 (File No. 333-144512)
and incorporated herein by reference).10.16
    
    
    
    Specimen Oil and Gas Lease for Boomerang prospect between
lessors and Approach Oil & Gas Inc., as successor to The
Keeton Group, LLC, as lessee (filed as Exhibit 10.24 to
the Companys Registration Statement on Form S-1/A filed
September 13, 2007 (File No. 333-144512) and incorporated
herein by reference).10.17
    
    
    
    Lease Crude Oil Purchase Agreement dated May 1, 2004 by
and between ConocoPhillips and Approach Operating LLC
(filed as Exhibit 10.26 to the Companys Registration
Statement on Form S-1/A filed October 18, 2007 (File No.
333-144512) and incorporated herein by reference).10.18
    
    
    
    Gas Purchase Agreement dated as of November 21, 2007
between WTG Benedum Joint Venture, as Buyer, and Approach
Oil & Gas Inc. and Approach Operating, LLC, as Seller
(filed as Exhibit 10.1 to the Companys Current Report on
Form 8-K filed November 28, 2007 and incorporated herein
by reference).




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##### Table of Contents



ExhibitNumber
    
    Exhibit10.19
    
    
    
    $200,000,000 Revolving Credit Agreement dated as of
January 18, 2008 among Approach Resources Inc., as
borrower, The Frost National Bank, as administrative agent
and lender, and the financial institutions named therein
(filed as Exhibit 10.1 to the Companys Current Report on
Form 8-K filed January 18, 2008 and incorporated herein by
reference).10.20
    
    
    
    Amendment dated February 19, 2008 to Credit Agreement
among Approach Resources Inc., as borrower, The Frost
National Bank, as administrative agent and lender,
JPMorgan Chase Bank, NA, as lender, and Approach Oil & Gas
Inc., Approach Oil & Gas (Canada) Inc. and Approach
Resources I, LP, as guarantors, dated as of January 18,
2008 (filed as Exhibit 10.1 to the Companys Current
Report on Form 8-K filed February 22, 2008 and
incorporated herein by reference).31.1
    
    
    
    Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    
    Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    
    Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    
    Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.