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 September 30, 2009
 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.
  
 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
    
    76116(Zip Code)(Address of principal executive offices)
 (Registrants telephone number, including area code)
 
 þ o
 o o
  Large accelerated filer   o
    
    Accelerated filer   þ
    
    Non-accelerated filer   o
    
    Smaller reporting company   o(Do not check if smaller reporting company)
 o þ




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##### 



PART I  FINANCIAL INFORMATION
 Item 1. Financial statements.
 APPROACH RESOURCES INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per-share amounts)
 September 30,
    
    
    December 31,2009
    
    
    2008ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    700
    
    
    $
    4,077Accounts receivable:Joint interest owners
    
    
    3,559
    
    
    
    16,228Oil and gas sales
    
    
    2,586
    
    
    
    5,936Unrealized gain on commodity derivatives
    
    
    854
    
    
    
    8,017Prepaid expenses and other current assets
    
    
    510
    
    
    
    579Total current assets
    
    
    8,209
    
    
    
    34,837PROPERTIES AND EQUIPMENT:Oil and gas properties, at cost, using the successful efforts method of accounting
    
    
    381,656
    
    
    
    362,805Furniture, fixtures and equipment
    
    
    1,452
    
    
    
    977383,108
    
    
    
    363,782Less accumulated depletion, depreciation and amortization
    
    
    (79,004
    )
    
    
    (60,378
    )Net properties and equipment
    
    
    304,104
    
    
    
    303,404Other assets
    
    
    220
    
    
    
    Total assets
    
    $
    312,533
    
    
    $
    338,241LIABILITIES AND
STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    3,275
    
    
    $
    13,564Oil and gas sales payable
    
    
    2,743
    
    
    
    4,631Accrued liabilities
    
    
    2,782
    
    
    
    9,810Current portion of deferred income taxes
    
    
    399
    
    
    
    2,770Total current liabilities
    
    
    9,199
    
    
    
    30,775NON-CURRENT LIABILITIES:Long-term debt
    
    
    36,939
    
    
    
    43,537Unrealized loss on commodity derivatives
    
    
    1,426
    
    
    
    Deferred income taxes
    
    
    38,085
    
    
    
    35,891Asset retirement obligations
    
    
    4,454
    
    
    
    4,225Total liabilities
    
    
    90,103
    
    
    
    114,428COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $0.01 par value, 90,000,000 shares authorized, 20,927,467 and
20,715,357 issued and 20,738,585 and 20,680,584 outstanding, respectively
    
    
    209
    
    
    
    207Additional paid-in capital
    
    
    168,709
    
    
    
    167,349Retained earnings
    
    
    53,806
    
    
    
    56,753Accumulated other comprehensive loss
    
    
    (294
    )
    
    
    (496
    )Total stockholders equity
    
    
    222,430
    
    
    
    223,813Total liabilities and stockholders equity
    
    $
    312,533
    
    
    $
    338,241
 See accompanying notes to these consolidated financial statements.
 1




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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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    2008
    
    
    2009
    
    2008REVENUES:Oil and gas sales
    
    $
    8,787
    
    
    $
    22,015
    
    
    $
    28,767
    
    
    $
    65,177EXPENSES:Lease operating
    
    
    1,894
    
    
    
    1,842
    
    
    
    6,016
    
    
    
    5,095Severance and production taxes
    
    
    455
    
    
    
    968
    
    
    
    1,392
    
    
    
    2,891Exploration
    
    
    534
    
    
    
    
    
    
    
    534
    
    
    
    1,478General and administrative
    
    
    2,237
    
    
    
    1,923
    
    
    
    7,277
    
    
    
    5,686Depletion, depreciation and amortization
    
    
    5,595
    
    
    
    5,016
    
    
    
    18,766
    
    
    
    16,257Total expenses
    
    
    10,715
    
    
    
    9,749
    
    
    
    33,985
    
    
    
    31,407OPERATING (LOSS) INCOME
    
    
    (1,928
    )
    
    
    12,266
    
    
    
    (5,218
    )
    
    
    33,770OTHER:Interest expense, net
    
    
    (451
    )
    
    
    (423
    )
    
    
    (1,353
    )
    
    
    (914
    )Realized gain (loss) on commodity derivatives
    
    
    4,271
    
    
    
    (195
    )
    
    
    11,896
    
    
    
    (676
    )Unrealized (loss) gain on commodity
derivatives
    
    
    (6,414
    )
    
    
    18,611
    
    
    
    (8,589
    )
    
    
    4,060(LOSS) INCOME BEFORE INCOME TAX (BENEFIT)
PROVISION
    
    
    (4,522
    )
    
    
    30,259
    
    
    
    (3,264
    )
    
    
    36,240INCOME TAX (BENEFIT) PROVISION
    
    
    (1,378
    )
    
    
    10,411
    
    
    
    (317
    )
    
    
    12,702NET (LOSS) INCOME
    
    $
    (3,144
    )
    
    $
    19,848
    
    
    $
    (2,947
    )
    
    $
    23,538(LOSS) EARNINGS PER SHARE:Basic
    
    $
    (0.15
    )
    
    $
    0.96
    
    
    $
    (0.14
    )
    
    $
    1.14Diluted
    
    $
    (0.15
    )
    
    $
    0.95
    
    
    $
    (0.14
    )
    
    $
    1.13WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    20,929,508
    
    
    
    20,651,591
    
    
    
    20,839,746
    
    
    
    20,640,327Diluted
    
    
    20,929,508
    
    
    
    20,851,848
    
    
    
    20,839,746
    
    
    
    20,837,166
 See accompanying notes to these consolidated financial statements.
 2




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##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Nine Months EndedSeptember 30,2009
    
    2008OPERATING ACTIVITIES:Net income
    
    $
    (2,947
    )
    
    $
    23,538Adjustments to reconcile net income to net cash provided by
operating activities:Depletion, depreciation and amortization
    
    
    18,766
    
    
    
    16,257Unrealized loss (gain) on commodity derivatives
    
    
    8,589
    
    
    
    (4,060
    )Exploration expense
    
    
    534
    
    
    
    1,478Share-based compensation expense
    
    
    1,434
    
    
    
    800Deferred income taxes
    
    
    (314
    )
    
    
    11,789Changes in working capital:Accounts receivable
    
    
    16,019
    
    
    
    (9,003
    )Prepaid expenses and other assets
    
    
    99
    
    
    
    285Accounts payable
    
    
    (10,315
    )
    
    
    (1,118
    )Oil and gas sales payable
    
    
    (1,888
    )
    
    
    6,571Accrued liabilities
    
    
    (7,047
    )
    
    
    (641
    )Cash provided by operating activities
    
    
    22,930
    
    
    
    45,896INVESTING ACTIVITIES:Additions to oil and gas properties
    
    
    (18,993
    )
    
    
    (72,213
    )Additions to other property and equipment, net
    
    
    (475
    )
    
    
    (457
    )Cash used in investing activities
    
    
    (19,468
    )
    
    
    (72,670
    )FINANCING ACTIVITIES:Proceeds from issuance of common stock
    
    
    
    
    
    
    97Borrowings under credit facility, net of debt issuance costs
    
    
    55,677
    
    
    
    83,878Repayment of amounts outstanding under credit facility
    
    
    (62,525
    )
    
    
    (60,350
    )Cash (used in) provided by financing activities
    
    
    (6,848
    )
    
    
    23,625CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    (3,386
    )
    
    
    (3,149
    )EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH AND CASH
EQUIVALENTS
    
    
    9
    
    
    
    (10
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    4,077
    
    
    
    4,785CASH AND CASH EQUIVALENTS, end of period
    
    $
    700
    
    
    $
    1,626SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    1,199
    
    
    $
    527Cash paid for income taxes
    
    $
    
    
    
    $
    49SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION:Adjustment to Neo Canyon acquisition purchase price allocation
    
    $
    
    
    
    $
    509
 See accompanying notes to these consolidated financial statements.
 3




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##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    2008
    
    
    2009
    
    2008Net income
    
    $
    (3,144
    )
    
    $
    19,848
    
    
    $
    (2,947
    )
    
    $
    23,538Other comprehensive income:Foreign currency translation, net related income tax
    
    
    111
    
    
    
    188
    
    
    
    202
    
    
    
    127Total comprehensive (loss) income
    
    $
    (3,033
    )
    
    $
    20,036
    
    
    $
    (2,745
    )
    
    $
    23,665
 See accompanying notes to these consolidated financial statements.
 4




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##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)
 1. Summary of significant accounting policies
 Organization and nature of operations
  Consolidation, basis of presentation and significant estimates
   2. Current accounting pronouncements
 Disclosures about Derivative Instruments and Hedging Activities, an
amendment of FASB Statement 133
 Subsequent Events
 5




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##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)
  Accounting Standards
Codification TM and the Hierarchy of Generally Accepted Accounting Principles TM
 3. (Loss) earnings per common share
  Three Months Ended September 30, 2009Income (numerator)
    
    
    Shares (denominator)
    
    
    Per-share amountBasic loss per share:Net loss
    
    $
    (3,144
    )
    
    
    20,929,508
    
    
    $
    (0.15
    )Effect of dilutive securities(1):Share-based compensation, treasury
method
    
    
    
    
    
    
    Net loss plus assumed conversions
    
    $
    (3,144
    )
    
    
    20,929,508
    
    
    $
    (0.15
    )
 Three Months Ended September 30, 2008Income (numerator)
    
    
    Shares (denominator)
    
    
    Per-share amountBasic earnings per share:Net income
    
    $
    19,848
    
    
    
    20,651,591
    
    
    $
    0.96Effect of dilutive securities:Share-based compensation, treasury
method
    
    
    
    
    
    
    172,214Non-vested restricted shares
    
    
    
    
    
    
    28,043Net income plus assumed conversions
    
    $
    19,848
    
    
    
    20,851,848
    
    
    $
    0.95
 6




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##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)
 Nine Months Ended September 30, 2009Income (numerator)
    
    
    Shares (denominator)
    
    
    Per-share amountBasic earnings per share:Net loss
    
    $
    (2,947
    )
    
    
    20,839,746
    
    
    $
    (0.14
    )Effect of dilutive securities(1):Share-based compensation, treasury method
    
    
    
    
    
    
    Net income plus assumed conversions
    
    $
    (2,947
    )
    
    
    20,839,746
    
    
    $
    (0.14
    )
 Nine Months Ended September 30, 2008Income (numerator)
    
    
    Shares (denominator)
    
    
    Per-share amountBasic earnings per share:Net income
    
    $
    23,538
    
    
    
    20,640,327
    
    
    $
    1.14Effect of dilutive securities:Share-based compensation, treasury method
    
    
    
    
    
    
    184,769Non-vested restricted shares
    
    
    
    
    
    
    12,070Net income plus assumed conversions
    
    $
    23,538
    
    
    
    20,837,166
    
    
    $
    1.13
 
 (1)
    
    Approximately 416,000 stock options were excluded from assumed conversions because they were anti-dilutive for the three
and nine months ended September 30, 2009. 4. Revolving credit facility
     7




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##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)
     Covenants
  
    
    a consolidated modified current ratio covenant that requires us to maintain a ratio of not
less than 1.0 to 1.0 at all times. The consolidated modified current ratio is calculated by
dividing Consolidated Current Assets (as defined in the credit agreement) by Consolidated
Current Liabilities (as defined in the credit agreement). As defined more specifically in the
credit agreement, the consolidated modified current ratio is calculated as current assets less
current unrealized gains on commodity derivatives plus the available borrowing base at the
respective balance sheet date, divided by current liabilities less current unrealized losses
on commodity derivatives at the respective balance sheet date.
    
    a consolidated funded debt to consolidated EBITDAX ratio covenant that requires us to
maintain a ratio of not more than 3.5 to 1.0 at the end of each fiscal quarter. The
consolidated funded debt to consolidated EBITDAX ratio is calculated by dividing Consolidated
Funded Debt (as defined in the credit agreement) by Consolidated EBITDAX (as defined in the
credit agreement). As defined more specifically in the credit agreement, consolidated EBITDAX
is calculated as net income (loss), plus (1) exploration expense, (2) depletion, depreciation
and amortization expense, (3) share-based compensation expense, (4) unrealized loss on
commodity derivatives, (5) interest expense, (6) income and franchise taxes, and (7) certain
other non-cash expenses, less (1) gains or losses from sales or dispositions of assets, (2)
unrealized gain on commodity derivatives and (3) extraordinary or non-recurring gains. For
purposes of calculating this ratio, consolidated EBITDAX for a fiscal quarter is annualized
pursuant to the credit agreement.
   8




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##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)
   5. Commitments and Contingencies
    6. Income taxes
  9




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##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)
 7. Derivatives
  Volume (MMBtu)
    
    $/MMBtuPeriod
    
    Monthly
    
    Total
    
    Floor
    
    Ceiling
    
    FixedNYMEX  Henry HubPrice collars 2009
    
    
    180,000
    
    
    
    540,000
    
    
    $
    7.50
    
    
    $
    10.50Price collars 2009
    
    
    130,000
    
    
    
    390,000
    
    
    $
    8.50
    
    
    $
    11.70Price swaps 2009
    
    
    150,000
    
    
    
    450,000
    
    
    
    
    
    
    
    
    
    
    $
    4.50Price swaps 2010
    
    
    150,000
    
    
    
    1,800,000
    
    
    
    
    
    
    
    
    
    
    $
    5.85Price swaps 2010
    
    
    150,000
    
    
    
    1,800,000
    
    
    
    
    
    
    
    
    
    
    $
    6.40WAHA basis differentialBasis swaps 2009
    
    
    200,000
    
    
    
    600,000
    
    
    
    
    
    
    
    
    
    
    $
    (0.61
    )Basis swaps 2009
    
    
    300,000
    
    
    
    900,000
    
    
    
    
    
    
    
    
    
    
    $
    (0.67
    )Basis swaps 2010
    
    
    415,000
    
    
    
    4,980,000
    
    
    
    
    
    
    
    
    
    
    $
    (0.71
    )Basis swaps 2011
    
    
    300,000
    
    
    
    3,600,000
    
    
    
    
    
    
    
    
    
    
    $
    (0.53
    )
  Asset Derivatives
    
    Liability DerivativesBalance Sheet
    
    
    
    
    
    
    
    
    
    Balance SheetLocation
    
    Fair Value
    
    Location
    
    Fair ValueSeptember 30,
    
    December 31,
    
    
    

September 30,
    
    December 31,2009
    
    2008
    
    
    
    2009
    
    2008Derivatives not 
designated as 
hedging instrumentsCommodity 
derivatives
    
    Unrealized gain on
commodity
derivatives
    
    $
    854
    
    
    $
    8,017
    
    
    Unrealized loss on
commodity
derivatives
    
    $
    1,426
    
    
    $    
 10




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##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)
  Asset DerivativesIncome StatementLocation
    
    Fair ValueThree Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Derivatives not 
designated as 
hedging instrumentsCommodity
derivatives
    

Unrealized
(loss) gain on commodity derivatives
    
    $
    (6,414
    )
    
    $
    18,611
    
    
    $
    (8,589
    )
    
    $
    4,060Realized
gain(loss) on commodity derivatives
    
    
    4,271
    
    
    
    (195
    )
    
    
    11,896
    
    
    
    (676
    )$
    (2,143
    )
    
    $
    18,416
    
    
    $
    3,307
    
    
    $
    3,384
    
    
    Level 1  Quoted prices are available in active markets for identical assets or
liabilities as of the reporting date. At September 30, 2009, 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
 11




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##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)
 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 September 30, 2009, 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 September 30, 2009, our Level
3 measurements were limited to our asset retirement obligation.
  8. Share-based compensation
  Weighted AverageGrant-DateShares
    
    
    Fair ValueNonvested at January 1, 2009
    
    
    56,023
    
    
    $
    18.96Granted
    
    
    166,354
    
    
    
    8.80Vested
    
    
    (10,280
    )
    
    
    21.75Canceled
    
    
    (1,967
    )
    
    
    11.16Nonvested at September 30, 2009
    
    
    210,130
    
    
    $
    10.35
 12




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##### 



Item 2. Managements discussion and analysis of financial condition and results of
operations.
  Cautionary statements regarding forward-looking statements
   
    
    global economic and financial market conditions,
    
    our business strategy,
    
    estimated quantities of oil and gas reserves,
    
    uncertainty of commodity prices in oil and gas,
    
    disruption of credit and capital markets,
    
    our financial position,
    
    our cash flow and liquidity,
    
    replacing our oil and gas reserves,
 13




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##### 




    
    our inability to retain and attract key personnel,
    
    uncertainty regarding our future operating results,
    
    uncertainties in exploring for and producing oil and gas,
    
    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 oil, gas and natural gas liquids,
    
    exploitation of our current asset base or property acquisitions,
    
    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 2008 Annual Report on Form 10-K and subsequent filings,
including this Quarterly Report on Form 10-Q.
 Overview
     14




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##### 



15




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##### 



Results of operations
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    

    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues (in thousands):Gas
    
    $
    5,001
    
    
    $
    14,456
    
    
    $
    16,936
    
    
    $
    47,900Oil
    
    
    2,490
    
    
    
    5,973
    
    
    
    7,700
    
    
    
    13,223NGLs
    
    
    1,296
    
    
    
    1,586
    
    
    
    4,131
    
    
    
    4,054Total oil and gas sales
    
    
    8,787
    
    
    
    22,015
    
    
    
    28,767
    
    
    
    65,177Realized gain (loss) on commodity derivatives
    
    
    4,271
    
    
    
    (195
    )
    
    
    11,896
    
    
    
    (676
    )Total oil and gas sales including
derivative impact
    
    $
    13,058
    
    
    $
    21,820
    
    
    $
    40,663
    
    
    $
    64,501Production:Gas (MMcf)
    
    
    1,505
    
    
    
    1,588
    
    
    
    4,900
    
    
    
    4,927Oil (MBbls)
    
    
    39
    
    
    
    54
    
    
    
    155
    
    
    
    120NGLs (MBbls)
    
    
    44
    
    
    
    28
    
    
    
    164
    
    
    
    75Total (MMcfe)
    
    
    2,003
    
    
    
    2,080
    
    
    
    6,817
    
    
    
    6,097Total (MMcfe/d)
    
    
    21.8
    
    
    
    22.6
    
    
    
    25.0
    
    
    
    22.3Average prices:Gas (per Mcf)
    
    $
    3.32
    
    
    $
    9.10
    
    
    $
    3.46
    
    
    $
    9.72Oil (per Bbl)
    
    
    63.49
    
    
    
    110.61
    
    
    
    49.53
    
    
    
    110.19NGLs (per Bbl)
    
    
    29.72
    
    
    
    56.64
    
    
    
    25.18
    
    
    
    54.05Total (per Mcfe)
    
    $
    4.39
    
    
    $
    10.58
    
    
    $
    4.22
    
    
    $
    10.69Realized gain (loss) on commodity
derivatives (per Mcfe)
    
    
    2.13
    
    
    
    (0.09
    )
    
    
    1.75
    
    
    
    (0.11
    )Total including derivative impact (per
Mcfe)
    
    $
    6.52
    
    
    $
    10.49
    
    
    $
    5.97
    
    
    $
    10.58Costs and expenses (per Mcfe):Lease operating
    
    $
    0.95
    
    
    $
    0.89
    
    
    $
    0.88
    
    
    $
    0.84Severance and production taxes
    
    
    0.23
    
    
    
    0.47
    
    
    
    0.20
    
    
    
    0.47Exploration
    
    
    0.27
    
    
    
    
    
    
    
    0.08
    
    
    
    0.24General and administrative
    
    
    1.12
    
    
    
    0.92
    
    
    
    1.07
    
    
    
    0.93Depletion, depreciation and amortization
    
    
    2.79
    
    
    
    2.41
    
    
    
    2.75
    
    
    
    2.67
 
 Glossary
 Bbl.
 Bcf.
 Bcfe.
 MBbl.
 Mcf.
 Mcfe.
 MMBtu.
 MMcf.
 MMcfe Million cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one
Bbl of oil, condensate or NGLs.
 NGLs.
 /d.
 16




---



##### 



Three months ended September 30, 2009 compared to three months ended September 30, 2008
 Oil and gas production.
 Oil and gas sales
 Commodity derivative activities
 Lease operating expenses
 17




---



##### 



Three Months EndedSeptember 30,2009
    
    
    2008
    
    
    Change
    
    
    % ChangeCompression and gas treating
    
    $
    0.26
    
    
    $
    0.24
    
    
    $
    0.02
    
    
    
    8.3
    %Water hauling, insurance and other
    
    
    0.18
    
    
    
    0.16
    
    
    
    0.02
    
    
    
    12.5Pumping and supervision
    
    
    0.18
    
    
    
    0.13
    
    
    
    0.05
    
    
    
    38.5Ad valorem taxes
    
    
    0.18
    
    
    
    0.21
    
    
    
    (0.03
    )
    
    
    (14.3
    )Well repairs and maintenance
    
    
    0.14
    
    
    
    0.11
    
    
    
    0.03
    
    
    
    27.3Workovers
    
    
    0.01
    
    
    
    0.04
    
    
    
    (0.03
    )
    
    
    (75.0
    )Total
    
    $
    0.95
    
    
    $
    0.89
    
    
    $
    0.06
    
    
    
    6.7
    %
 Severance and production taxes
 Exploration
 General and administrative
 Three Months EndedSeptember 30,2009
    2008
    
    
    Change$MM
    
    
    Mcfe
    
    
    $MM
    
    
    Mcfe
    
    
    $MM
    
    
    Mcfe
    
    
    % ChangeSalaries and benefits
    
    $
    1.0
    
    
    $
    0.48
    
    
    $
    0.8
    
    
    $
    0.40
    
    
    $
    0.2
    
    
    $
    0.08
    
    
    
    20.0
    %Share-based compensation
    
    
    0.4
    
    
    
    0.21
    
    
    
    0.3
    
    
    
    0.15
    
    
    
    0.1
    
    
    
    0.06
    
    
    
    40.0Professional fees
    
    
    0.3
    
    
    
    0.15
    
    
    
    0.3
    
    
    
    0.15
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    0.5
    
    
    
    0.28
    
    
    
    0.5
    
    
    
    0.22
    
    
    
    
    
    
    
    0.06
    
    
    
    27.3Total
    
    $
    2.2
    
    
    $
    1.12
    
    
    $
    1.9
    
    
    $
    0.92
    
    
    $
    0.3
    
    
    $
    0.20
    
    
    
    21.7
    %
 Depletion, depreciation and amortization.
 Interest expense, net.
 Income taxes.
 18




---



##### 



Nine months ended September 30, 2009 compared to nine months ended September 30, 2008
 Oil and gas production.
 Oil and gas sales
 Commodity derivative activities
 Lease operating expenses
 19




---



##### 



Nine Months EndedSeptember 30,2009
    
    2008
    
    
    Change
    
    
    % ChangeCompression and gas treating
    
    $
    0.30
    
    
    $
    0.24
    
    
    $
    0.06
    
    
    
    25.0
    %Water hauling, insurance and other
    
    
    0.16
    
    
    
    0.14
    
    
    
    0.02
    
    
    
    14.3Ad valorem taxes
    
    
    0.16
    
    
    
    0.17
    
    
    
    (0.01
    )
    
    
    (5.9
    )Pumping and supervision
    
    
    0.15
    
    
    
    0.13
    
    
    
    0.02
    
    
    
    15.4Well repairs and maintenance
    
    
    0.10
    
    
    
    0.13
    
    
    
    (0.03
    )
    
    
    (23.1
    )Workovers
    
    
    0.01
    
    
    
    0.03
    
    
    
    (0.02
    )
    
    
    (66.7
    )Total
    
    $
    0.88
    
    
    $
    0.84
    
    
    $
    0.04
    
    
    
    4.8
    %
 Severance and production taxes
 Exploration
 General and administrative
 Nine Months EndedSeptember 30,2009
    
    2008
    
    
    Change$MM
    
    
    Mcfe
    
    
    $MM
    
    
    Mcfe
    
    
    $MM
    
    
    Mcfe
    
    
    % ChangeSalaries and benefits
    
    $
    3.0
    
    
    $
    0.43
    
    
    $
    2.4
    
    
    $
    0.39
    
    
    $
    0.6
    
    
    $
    0.04
    
    
    
    10.3
    %Share-based compensation
    
    
    1.5
    
    
    
    0.22
    
    
    
    0.8
    
    
    
    0.14
    
    
    
    0.7
    
    
    
    0.08
    
    
    
    57.1Professional fees
    
    
    0.9
    
    
    
    0.14
    
    
    
    1.1
    
    
    
    0.17
    
    
    
    (0.2
    )
    
    
    (0.03
    )
    
    
    (17.6
    )State franchise taxes
    
    
    0.4
    
    
    
    0.06
    
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    0.06
    
    
    
    Other
    
    
    1.5
    
    
    
    0.22
    
    
    
    1.4
    
    
    
    0.23
    
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    (4.3
    )Total
    
    $
    7.3
    
    
    $
    1.07
    
    
    $
    5.7
    
    
    $
    0.93
    
    
    $
    1.6
    
    
    $
    0.14
    
    
    
    15.1
    %
 Depletion, depreciation and amortization.
 Interest expense, net.
 20




---



##### 



Income taxes.
 Liquidity and capital resources
    Nine Months EndedSeptember 30,2009
    
    2008Cash flows provided by operating activities
    
    $
    22,930
    
    
    $
    45,896Cash flows used in investing activities
    
    
    (19,468
    )
    
    
    (72,670
    )Cash flows (used in) provided by financing activities
    
    
    (6,848
    )
    
    
    23,625Effect of Canadian exchange rate
    
    
    9
    
    
    
    (10
    )Net (decrease) in cash and cash equivalents
    
    $
    (3,377
    )
    
    $
    (3,159
    )
 Operating activities
  21




---



##### 



Working capital
  Investing activities
  Capital expenditures for 2009
   Estimated capital expenditures for 2010
  EstimatedYear EndedDecember 31, 2010Area of Operation
    
    (in thousands)West TexasOzona Northeast
    
    $
    25,600Cinco Terry
    
    
    19,950Exploratory
    
    
    3,075Lease acquisition, geological and geophysical
    
    
    4,375Total capital expenditures
    
    $
    53,000
  22




---



##### 



Financing activities
    Revolving credit facility
      Covenants
  
    
    a consolidated modified current ratio covenant that requires us to maintain a ratio of not
less than 1.0 to 1.0 at all times. The consolidated modified current ratio is calculated by
dividing Consolidated
 23




---



##### 



Current Assets (as defined in the credit agreement) by Consolidated
Current Liabilities (as defined in the credit agreement). As defined more specifically in the
credit agreement, the consolidated
modified current ratio is calculated as current assets less current unrealized gains on
commodity derivatives plus the available borrowing base at the respective balance sheet date,
divided by current liabilities less current unrealized losses on commodity derivatives at the
respective balance sheet date.
    
    a consolidated funded debt to consolidated EBITDAX ratio covenant that requires us to
maintain a ratio of not more than 3.5 to 1.0 at the end of each fiscal quarter. The
consolidated funded debt to consolidated EBITDAX ratio is calculated by dividing Consolidated
Funded Debt (as defined in the credit agreement) by Consolidated EBITDAX (as defined in the
credit agreement). As defined more specifically in the credit agreement, consolidated EBITDAX
is calculated as net income (loss), plus (1) exploration expense, (2) depletion, depreciation
and amortization expense, (3) share-based compensation expense, (4) unrealized loss on
commodity derivatives, (5) interest expense, (6) income and franchise taxes, and (7) certain
other non-cash expenses, less (1) gains or losses from sales or dispositions of assets, (2)
unrealized gain on commodity derivatives and (3) extraordinary or non-recurring gains. For
purposes of calculating this ratio, consolidated EBITDAX for a fiscal quarter is annualized
pursuant to the credit agreement.
      24




---



##### 



Contractual obligations
  Off-balance sheet arrangements
  Item 3.
    
    Quantitative and qualitative disclosures about market risk.
  Commodity price risk
   25




---



##### 



Volume (MMBtu)
    
    
    $/MMBtuPeriod
    
    Monthly
    
    
    Total
    
    
    Floor
    
    
    Ceiling
    
    
    FixedNYMEX  Henry HubPrice collars 2009
    
    
    180,000
    
    
    
    540,000
    
    
    $
    7.50
    
    
    $
    10.50Price collars 2009
    
    
    130,000
    
    
    
    390,000
    
    
    $
    8.50
    
    
    $
    11.70Price swaps 2009
    
    
    150,000
    
    
    
    450,000
    
    
    
    
    
    
    
    
    
    
    $
    4.50Price swaps 2010
    
    
    150,000
    
    
    
    1,800,000
    
    
    
    
    
    
    
    
    
    
    $
    5.85Price swaps 2010
    
    
    150,000
    
    
    
    1,800,000
    
    
    
    
    
    
    
    
    
    
    $
    6.40WAHA basis differentialBasis swaps 2009
    
    
    200,000
    
    
    
    600,000
    
    
    
    
    
    
    
    
    
    
    $
    (0.61
    )Basis swaps 2009
    
    
    300,000
    
    
    
    900,000
    
    
    
    
    
    
    
    
    
    
    $
    (0.67
    )Basis swaps 2010
    
    
    415,000
    
    
    
    4,980,000
    
    
    
    
    
    
    
    
    
    
    $
    (0.71
    )Basis swaps 2011
    
    
    300,000
    
    
    
    3,600,000
    
    
    
    
    
    
    
    
    
    
    $
    (0.53
    )
    Item 4.
    
    Controls and procedures.
 Evaluation of disclosure controls and procedures
   26




---



##### 



Internal control over financial reporting
  Limitations inherent in all controls
  27




---



##### 



PART II  OTHER INFORMATION
 Item 1.   Legal proceedings.
    Item 1A.   Risk factors.
  www.sec.gov www.approachresources.com
 Item 2.   Unregistered sales of equity securities and use of proceeds.
  28




---



##### 



Issuer purchases of equity securities
 (a)
    
    
    
    
    
    
    (c)
    
    
    (d)Total
    
    
    (b)
    
    
    Total Number of
    
    
    Maximum Number ofNumber of
    
    
    Average
    
    
    Shares Purchased
    
    
    Shares that May Yet BeShares
    
    
    Price Paid
    
    
    as Part of Publicly
    
    
    Purchased Under thePeriod
    
    Purchased
    
    
    Per Share
    
    
    Announced Plans
    
    
    Plans or ProgramsMonth #1(July 1, 2009 July 31, 2009)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Month #2(August 1, 2009  August 31, 2009)
    
    
    719
    
    
    $
    7.47
    
    
    
    
    
    
    
    Month #3(September 1, 2009  September 30, 2009)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    719
    
    
    $
    7.47
    
    
    
    
    
    
    
    
 Item 3.   Defaults upon senior securities.
  Item 4.   Submission of matters to a vote of security holders.
  Item 5.   Other information.
  Item 6.   Exhibits.
  29




---



##### 



SIGNATURES
  APPROACH RESOURCES INC.By:
    /s/ J. Ross CraftJ. Ross CraftPresident and Chief Executive Officer
(Principal Executive Officer)By:
    /s/ Steven P. SmartSteven P. SmartExecutive Vice President and Chief FinancialOfficer (Principal
Financial and Chief Accounting Officer)




---



##### 



Index to Exhibits
 ExhibitNumber
    
    Description of 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
    
    First Amendment to Form of Indemnity Agreement between Approach
Resources Inc. and each of its directors and officers (filed as
Exhibit 10.5 to the Companys Current Report on Form 8-K filed
December 31, 2008 and incorporated herein by reference).10.3
    
    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).10.4
    
    First Amendment to Employment Agreement by and between Approach
Resources Inc. and J. Ross Craft dated December 31, 2008 (filed
as Exhibit 10.2 to the Companys Current Report on Form 8-K
filed December 31, 2008 and incorporated herein by reference).10.5
    
    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).10.6
    
    First Amendment to Employment Agreement by and between Approach
Resources Inc. and Steven P. Smart dated December 31, 2008
(filed as Exhibit 10.3 to the Companys Current Report on Form
8-K filed December 31, 2008 and incorporated herein by
reference).10.7
    
    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).10.8
    
    First Amendment to Employment Agreement by and between Approach
Resources Inc. and Glenn W. Reed dated December 31, 2008 (filed
as Exhibit 10.4 to the Companys Current Report on Form 8-K
filed December 31, 2008 and incorporated herein by reference).10.9
    
    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).




---



##### 



ExhibitNumber
    
    Description of Exhibit10.10
    
    First Amendment dated December 31, 2008 to Approach Resources
Inc. 2007 Stock Incentive Plan, effective as of June 28, 2007
(filed as Exhibit 10.1 to the Companys Current Report on Form
8-K filed December 31, 2008 and incorporated herein by
reference).10.11
    
    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).10.12
    
    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).10.13
    
    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).10.14
    
    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).10.15
    
    Form of Restricted Stock Award Agreement under Approach
Resources Inc. 2007 Stock Incentive Plan (filed as Exhibit
10.10 to the Companys Quarterly Report on Form 10-Q filed
November 6, 2008 and incorporated herein by reference).10.16
    
    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).10.17
    
    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).10.18
    
    Agreement Regarding Gas Purchase Contract dated May 26, 2005
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).10.19
    
    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).10.20
    
    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).10.21
    
    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).




---



##### 



ExhibitNumber
    
    Description of Exhibit10.22
    
    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).10.23
    
    $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 23, 2008
and incorporated herein by reference).10.24
    
    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).10.25
    
    Amendment dated May 6, 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 99.1 to the
Companys Current Report on Form 8-K filed August 28, 2008 and
incorporated herein by reference).10.26
    
    Amendment dated August 26, 2008 to Credit Agreement among
Approach Resources Inc., as borrower, The Frost National Bank,
as administrative agent and lender, JPMorgan Chase Bank, NA,
Fortis Capital Corp. and KeyBank National Association, as
lenders, 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 August 28, 2008 and
incorporated herein by reference).10.27
    
    Amendment dated April 8, 2009 to Credit Agreement among
Approach Resources Inc., as borrower, The Frost National Bank,
as administrative agent and lender, JPMorgan Chase Bank, NA,
Fortis Capital Corp. and KeyBank National Association, as
lenders, 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 April 16, 2009 and
incorporated herein by reference).10.28
    
    Amendment dated July 8, 2009 to Credit Agreement among Approach
Resources Inc., as borrower, The Frost National Bank, as
administrative agent and lender, JPMorgan Chase Bank, NA,
Fortis Capital Corp. and KeyBank National Association, as
lenders, 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 July 14, 2009 and
incorporated herein by reference).31.1*
    
    Certification by the President and Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification by the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.




---



##### 



ExhibitNumber
    
    Description of Exhibit32.1*
    
    Certification by the President and Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2*
    
    Certification by the Chief Financial Officer Pursuant to U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith.
    
    Denotes management contract or compensatory plan or arrangement.