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 March 31, 2010
 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 No.)One Ridgmar Centre
    
    761166500 West Freeway, Suite 800
    
    (Zip Code)Fort Worth, Texas(Address of principal
executive offices)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed
since last report)
 
 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. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per-share amounts)
 March 31,
    
    
    December 31,2010
    
    
    2009ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    595
    
    
    $
    2,685Accounts receivable:Joint interest owners
    
    
    3,913
    
    
    
    3,088Oil and gas sales
    
    
    4,473
    
    
    
    4,607Unrealized gain on commodity derivatives
    
    
    4,269
    
    
    
    786Prepaid expenses and other current assets
    
    
    857
    
    
    
    837Total current assets
    
    
    14,107
    
    
    
    12,003PROPERTIES AND EQUIPMENT:Oil and gas properties, at cost, using the successful efforts method of accounting
    
    
    400,315
    
    
    
    387,792Furniture, fixtures and equipment
    
    
    1,610
    
    
    
    1,540401,925
    
    
    
    389,332Less accumulated depletion, depreciation and amortization
    
    
    (90,559
    )
    
    
    (84,849
    )Net properties and equipment
    
    
    311,366
    
    
    
    304,483OTHER ASSETS
    
    
    2,447
    
    
    
    2,440Total assets
    
    $
    327,920
    
    
    $
    318,926LIABILITIES AND
 STOCKHOLDERS EQUITYCURRENT LIABILITIES:Advances from non-operators
    
    $
    489
    
    
    $
    2,689Accounts payable
    
    
    554
    
    
    
    3,074Oil and gas sales payable
    
    
    4,512
    
    
    
    3,774Deferred income taxes  current
    
    
    1,256
    
    
    
    Accrued liabilities
    
    
    14,479
    
    
    
    10,935Unrealized loss on commodity derivatives
    
    
    
    
    
    
    1,524Total current liabilities
    
    
    21,290
    
    
    
    21,996NON-CURRENT LIABILITIES:Long-term debt
    
    
    37,169
    
    
    
    32,319Unrealized loss on commodity derivatives
    
    
    1,056
    
    
    
    1,144Deferred income taxes
    
    
    39,011
    
    
    
    38,374Asset retirement obligations
    
    
    4,768
    
    
    
    4,597Total liabilities
    
    
    103,294
    
    
    
    98,430COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS 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, 21,003,513 and
20,959,285 issued and outstanding, respectively
    
    
    210
    
    
    
    209Additional paid-in capital
    
    
    169,564
    
    
    
    168,993Retained earnings
    
    
    55,087
    
    
    
    51,524Accumulated other comprehensive loss
    
    
    (235
    )
    
    
    (230
    )Total stockholders equity
    
    
    224,626
    
    
    
    220,496Total liabilities and stockholders equity
    
    $
    327,920
    
    
    $
    318,926
 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 EndedMarch 31,2010
    
    
    2009REVENUES:Oil and gas sales
    
    $
    13,220
    
    
    $
    10,065EXPENSES:Lease operating
    
    
    1,840
    
    
    
    2,369Severance and production taxes
    
    
    694
    
    
    
    430Exploration
    
    
    1,490
    
    
    
    General and administrative
    
    
    2,509
    
    
    
    2,810Depletion, depreciation and amortization
    
    
    5,835
    
    
    
    6,948Total expenses
    
    
    12,368
    
    
    
    12,557OPERATING INCOME (LOSS)
    
    
    852
    
    
    
    (2,492
    )OTHER:Interest expense, net
    
    
    (466
    )
    
    
    (445
    )Realized gain on commodity derivatives
    
    
    230
    
    
    
    3,181Unrealized gain on commodity derivatives
    
    
    5,095
    
    
    
    2,145INCOME BEFORE INCOME TAX PROVISION
    
    
    5,711
    
    
    
    2,389INCOME TAX PROVISION
    
    
    2,148
    
    
    
    1,521NET INCOME
    
    $
    3,563
    
    
    $
    868EARNINGS PER SHARE:Basic
    
    $
    0.17
    
    
    $
    0.04Diluted
    
    $
    0.17
    
    
    $
    0.04WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    20,996,202
    
    
    
    20,760,124Diluted
    
    
    21,124,615
    
    
    
    20,866,449
 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)
 Three Months EndedMarch 31,2010
    
    2009OPERATING ACTIVITIES:Net income
    
    $
    3,563
    
    
    $
    868Adjustments to reconcile net income to cash provided by
operating activities:Depletion, depreciation and amortization
    
    
    5,835
    
    
    
    6,948Unrealized gain on commodity derivatives
    
    
    (5,095
    )
    
    
    (2,145
    )Exploration expense
    
    
    1,490
    
    
    
    Share-based compensation expense
    
    
    580
    
    
    
    679Deferred income taxes
    
    
    2,139
    
    
    
    649Changes in operating assets and liabilities:Accounts receivable
    
    
    (705
    )
    
    
    8,984Prepaid expenses and other assets
    
    
    (218
    )
    
    
    (308
    )Accounts payable
    
    
    (4,719
    )
    
    
    (5,209
    )Oil and gas sales payable
    
    
    738
    
    
    
    (1,435
    )Accrued liabilities
    
    
    3,544
    
    
    
    (3,419
    )Cash provided by operating activities
    
    
    7,152
    
    
    
    5,612INVESTING ACTIVITIES:Additions to oil and gas properties
    
    
    (13,894
    )
    
    
    (13,205
    )Additions to other property and equipment, net
    
    
    (147
    )
    
    
    (158
    )Cash used in investing activities
    
    
    (14,041
    )
    
    
    (13,363
    )FINANCING ACTIVITIES:Borrowings under credit facility, net of debt issuance costs
    
    
    20,050
    
    
    
    28,780Repayment of amounts outstanding under credit facility
    
    
    (15,250
    )
    
    
    (24,600
    )Cash provided by financing activities
    
    
    4,800
    
    
    
    4,180CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    (2,089
    )
    
    
    (3,571
    )EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH AND CASH
EQUIVALENTS
    
    
    (1
    )
    
    
    (4
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    $
    2,685
    
    
    $
    4,077CASH AND CASH EQUIVALENTS, end of period
    
    $
    595
    
    
    $
    502SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    555
    
    
    $
    360
 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 EndedMarch 31,2010
    
    2009Net income
    
    $
    3,563
    
    
    $
    868Other comprehensive loss:Foreign currency translation, net of related income tax
    
    
    (5
    )
    
    
    (37

    )Total comprehensive income
    
    $
    3,558
    
    
    $
    831
 See accompanying notes to these consolidated financial statements.
 4




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##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
 1. Summary of Significant Accounting Policies
 Organization and Nature of Operations
  Consolidation, Basis of Presentation and Significant Estimates
   2. Earnings Per Common Share
  5




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##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
 Three Months Ended March 31, 2010Income (Numerator)
    
    
    Shares (Denominator)
    
    
    Per-Share AmountBasic earnings per share:Net income
    
    $
    3,563
    
    
    
    20,996,202
    
    
    $
    0.17Effect of dilutive securities:Share-based
compensation, treasury
method
    
    
    
    
    
    
    128,413
    
    
    
    Net income plus assumed
conversions
    
    $
    3,563
    
    
    
    21,124,615
    
    
    $
    0.17Three Months Ended March 31, 2009Income (Numerator)
    
    
    Shares (Denominator)
    
    
    Per-Share AmountBasic earnings per share:Net income
    
    $
    868
    
    
    
    20,760,124
    
    
    $
    0.04Effect of dilutive securities:Share-based
compensation, treasury
method
    
    
    
    
    
    
    106,325
    
    
    
    Net income plus assumed
conversions
    
    $
    868
    
    
    
    20,866,449
    
    
    $
    0.04
 3. Revolving Credit Facility
      6




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##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(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.
    7




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##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
 4. Commitments and Contingencies
 Approach Operating, LLC v. EnCana Oil & Gas (USA) Inc., Cause No. 29.070A
  5. Income Taxes
  6. Derivatives
  Volume (MMBtu)
    
    
    $/MMBtuPeriod
    
    Monthly
    
    
    Total
    
    
    FixedNYMEX  Henry HubPrice swaps 2010
    
    
    150,000
    
    
    
    1,350,000
    
    
    $
    5.85Price swaps 2010
    
    
    150,000
    
    
    
    1,350,000
    
    
    $
    6.40Price swaps 2010
    
    
    100,000
    
    
    
    900,000
    
    
    $
    6.36Weighted average price ($/MMBtu)
    
    
    
    
    
    
    
    
    
    $
    6.18WAHA basis differentialBasis swaps 2010
    
    
    415,000
    
    
    
    3,735,000
    
    
    $
    (0.71
    )Basis swaps 2011
    
    
    300,000
    
    
    
    3,600,000
    
    
    $
    (0.53
    )
 8




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##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
  Asset Derivatives
    
    Liability DerivativesBalance Sheet
    
    
    
    
    
    
    
    
    
    Balance SheetLocation
    
    Fair Value
    
    Location
    
    Fair ValueMarch 31,
    
    December 31,
    
    
    
    March 31,
    
    December 31,2010
    
    2009
    
    
    
    2010
    
    2009Derivatives
not
designated as
hedging instrumentsCommodityderivatives
    
    Unrealized gain on 
commodityderivatives
    
    $
    4,269
    
    
    $
    786
    
    
    Unrealized loss on 
commodityderivatives
    
    $
    1,056
    
    
    $    2,668
  Asset DerivativesIncome StatementLocation
    
    
    Fair ValueThree Months EndedMarch 31,2010
    
    
    2009Derivatives not designated
as hedging instruments under
SFAS 133Commodity derivatives
    
    Unrealized gain on commodity derivates
    
    $
    5,095
    
    
    $
    2,145Realized gain on commodity derivatives
    
    
    230
    
    
    
    3,181$
    5,325
    
    
    $
    5,326
    9




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##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
  
    
    Level 1  Quoted prices are available in active markets for identical assets or
liabilities as of the reporting date. At March 31, 2010, 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, 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, 2010, 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,
2010, we had no Level 3 measurements.
 10




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
  Cautionary Statements Regarding Forward-Looking Statements
   
    
    our business strategy;
    
    estimated quantities of oil and gas reserves;
    
    uncertainty of commodity prices in oil, gas and NGLs;
    
    global economic and financial market conditions;
    
    disruption of credit and capital markets;
    
    our financial position;
    
    our cash flow and liquidity;
    
    replacing our oil and gas reserves;
    
    our inability to retain and attract key personnel;
    
    uncertainty regarding our future operating results;
    
    uncertainties in exploring for and producing oil and gas;
 11




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##### 




    
    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
that 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 NGLs;
    
    interpretation of 3-D seismic data;
    
    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 Annual Report on Form 10-K for the year ended
December 31, 2009, filed with the SEC on March 12, 2010.
 Overview
   West Texas  Permian Basin
 
    
    Ozona Northeast (Wolfcamp, Canyon Sands, Strawn and Ellenburger)
 
    
    Cinco Terry (Wolfcamp, Canyon Sands and Ellenburger)
 East Texas  East Texas Basin
 
    
    North Bald Prairie (Cotton Valley Sand and Cotton Valley Lime)
 Northern New Mexico  Chama Basin
 
    
    El Vado East (Mancos Shale/Niobrara)
 Southwest Kentucky  Illinois Basin
 
    
    Boomerang (New Albany Shale)
    12




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13




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##### 



Results of operations
 Three Months Ended March 31, 2010 and 2009
  Three Months EndedMarch 31,2010
    
    
    2009Revenues (in thousands)Gas
    
    $
    7,682
    
    
    $
    6,610Oil
    
    
    3,555
    
    
    
    2,028NGLs
    
    
    1,983
    
    
    
    1,427Total oil and gas sales
    
    
    13,220
    
    
    
    10,065Realized gain on commodity derivatives
    
    
    230
    
    
    
    3,181Total oil and gas sales including derivative impact
    
    $
    13,450
    
    
    $
    13,246ProductionGas (MMcf)
    
    
    1,424
    
    
    
    1,770Oil (MBbls)
    
    
    47
    
    
    
    59NGLs (MBbls)
    
    
    46
    
    
    
    68Total (MMcfe)
    
    
    1,982
    
    
    
    2,532Total (MMcfe/d)
    
    
    22.02
    
    
    
    28.13Average pricesGas (per Mcf)
    
    $
    5.39
    
    
    $
    3.73Oil (per Bbl)
    
    
    75.42
    
    
    
    34.37NGLs (per Bbl)
    
    
    43.33
    
    
    
    20.99Total (per Mcfe)
    
    $
    6.67
    
    
    $
    3.98Realized gain on commodity derivatives (per Mcfe)
    
    
    0.12
    
    
    
    1.26Total including derivative impact (per Mcfe)
    
    $
    6.79
    
    
    $
    5.24Costs and expenses (per Mcfe)Lease operating (1)
    
    $
    0.93
    
    
    $
    0.94Severance and production taxes
    
    
    0.35
    
    
    
    0.17Exploration
    
    
    0.75
    
    
    
    General and administrative
    
    
    1.27
    
    
    
    1.11Depletion, depreciation and amortization
    
    
    2.94
    
    
    
    2.74
  
 Glossary
 Bbl.
 MBbl.
 Mcf.
 MMcf.
 MMcfe
 NGLs.
 /d.
 14




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##### 



Oil and gas production.
 Oil and gas sales
 Commodity derivative activities
 Lease operating expenses
 Three Months EndedMarch 31,2010
    
    
    2009
    
    
    Change
    
    % ChangeCompression and gas treating
    
    $
    0.25
    
    
    $
    0.37
    
    
    $
    (0.12
    )
    
    
    (32.4
    )%Pumping and supervision
    
    
    0.21
    
    
    
    0.14
    
    
    
    0.07
    
    
    
    50.0Water hauling, insurance and other
    
    
    0.19
    
    
    
    0.10
    
    
    
    0.09
    
    
    
    90.0Ad valorem taxes
    
    
    0.18
    
    
    
    0.24
    
    
    
    (0.06
    )
    
    
    (25.0
    )Well repairs and maintenance
    
    
    0.10
    
    
    
    0.08
    
    
    
    0.02
    
    
    
    25.0Workovers
    
    
    
    
    
    
    0.01
    
    
    
    (0.01
    )
    
    
    (100.0
    )Total
    
    $
    0.93
    
    
    $
    0.94
    
    
    $
    (0.01
    )
    
    
    (1.0
    )%
 15




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##### 



Severance and production taxes
 Exploration
 General and administrative
 Three Months EndedMarch 31,2010
    
    
    2009
    
    
    Change$MM
    
    
    Mcfe
    
    
    $MM
    
    
    Mcfe
    
    
    $MM
    
    
    Mcfe
    
    
    % ChangeSalaries and benefits
    
    $
    1.1
    
    
    $
    0.57
    
    
    $
    1.1
    
    
    $
    0.42
    
    
    $
    
    
    
    $
    0.15
    
    
    
    35.7
    %Share-based compensation
    
    
    0.6
    
    
    
    0.29
    
    
    
    0.7
    
    
    
    0.29
    
    
    
    (0.1
    )
    
    
    
    
    
    
    Professional fees
    
    
    0.3
    
    
    
    0.15
    
    
    
    0.4
    
    
    
    0.17
    
    
    
    (0.1
    )
    
    
    (0.02
    )
    
    
    (11.8
    )Data processing
    
    
    0.1
    
    
    
    0.07
    
    
    
    0.2
    
    
    
    0.09
    
    
    
    (0.1
    )
    
    
    (0.02
    )
    
    
    (22.2
    )Rent expense
    
    
    0.1
    
    
    
    0.06
    
    
    
    0.1
    
    
    
    0.06
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    0.3
    
    
    
    0.13
    
    
    
    0.3
    
    
    
    0.08
    
    
    
    
    
    
    
    0.05
    
    
    
    62.5Total
    
    $
    2.5
    
    
    $
    1.27
    
    
    $
    2.8
    
    
    $
    1.11
    
    
    $
    (0.3
    )
    
    $
    0.16
    
    
    
    14.4
    %
 Depletion, depreciation and amortization.
 Interest expense, net.
 Income taxes.
 Liquidity and Capital Resources
  16




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##### 



Three Months EndedMarch 31,2010
    
    2009Cash flows provided by operating activities
    
    $
    7,152
    
    
    $
    5,612Cash flows used in investing activities
    
    
    (14,041
    )
    
    
    (13,363
    )Cash flows provided by financing activities
    
    
    4,800
    
    
    
    4,180Effect of Canadian exchange rate
    
    
    (1
    )
    
    
    (4
    )Net decrease in cash and cash equivalents
    
    $
    (2,090
    )
    
    $
    (3,575
    )
 Operating Activities
  Working Capital
  Investing Activities
  17




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##### 



Capital Expenditures for 2010
  Year EndingDecember 31, 2010(in thousands)West TexasOzona Northeast
    
    $
    25,600Cinco Terry
    
    
    19,950Exploratory
    
    
    3,075Lease acquisition, geological and geophysical
    
    
    4,375Total capital expenditures
    
    $
    53,000
  Financing Activities
    Revolving Credit Facility
   18




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##### 



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.
   19




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##### 



Contractual Obligations
  Off-Balance Sheet Arrangements
  20




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##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  Commodity Price Risk
    Volume (MMBtu)
    
    
    $/MMBtuPeriod
    
    Monthly
    
    
    Total
    
    
    FixedNYMEX  Henry HubPrice swaps 2010
    
    
    150,000
    
    
    
    1,350,000
    
    
    $
    5.85Price swaps 2010
    
    
    150,000
    
    
    
    1,350,000
    
    
    $
    6.40Price swaps 2010
    
    
    100,000
    
    
    
    900,000
    
    
    $
    6.36Weighted average price ($/MMBtu)
    
    
    
    
    
    
    
    
    
    $
    6.18WAHA basis differentialBasis swaps 2010
    
    
    415,000
    
    
    
    3,735,000
    
    
    $
    (0.71
    )Basis swaps 2011
    
    
    300,000
    
    
    
    3,600,000
    
    
    $
    (0.53
    )
    21




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##### 



Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
   Internal Control over Financial Reporting
  Limitations Inherent in All Controls
  Item 4T. Controls and Procedures.
  22




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##### 



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.
  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 #1January 1, 2010  January 31, 2010
    
    
    1,214
    
    
    $
    8.01
    
    
    
    
    
    
    
    Month #2February 1, 2010  February 28, 2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Month #3March 1, 2010  March 31, 2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,214
    
    
    $
    8.01
    
    
    
    
    
    
    
    
 Item 6. Exhibits.
  23




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##### 



SIGNATURES
  APPROACH RESOURCES INC.Date: May 6, 2010
    By:
    /s/ J. Ross CraftJ. Ross CraftPresident and Chief Executive Officer
(Principal Executive Officer)Date: May 6, 2010
    By:
    /s/ Steven P. SmartSteven P. SmartExecutive Vice President and Chief Financial Officer
(Principal Financial and Chief Accounting Officer)




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##### 



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
    
    
    Amendment No. 7 dated as of February 1, 2010, to
Credit Agreement dated as of January 18, 2008, among
Approach Resources Inc., as borrower, The Frost
National Bank, as agent and lender, JPMorgan Chase
Bank, N.A., as successor agent and lender, 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 (filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K filed February 4, 2010, and
incorporated herein by reference).*31.1
    
    
    Certification by the President and Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*31.2
    
    
    Certification by the Chief Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
    
    
    Certification by the President and Chief Executive
Officer Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*32.2
    
    
    Certification by the Chief Financial Officer Pursuant
to U.S.C. Section 1350, as adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith.