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, 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(State or other jurisdiction of 
incorporation or organization)
    
    51-0424817(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
 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)
 June 30,
    
    
    December 31,2009
    
    
    2008ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    1,417
    
    
    $
    4,077Accounts receivable:Joint interest owners
    
    
    4,937
    
    
    
    16,228Oil and gas sales
    
    
    3,514
    
    
    
    5,936Unrealized gain on commodity derivatives
    
    
    6,697
    
    
    
    8,017Prepaid expenses and other current assets
    
    
    667
    
    
    
    579Total current assets
    
    
    17,232
    
    
    
    34,837PROPERTIES AND EQUIPMENT:Oil and gas properties, at cost, using the successful efforts method of accounting
    
    
    379,326
    
    
    
    362,805Furniture, fixtures and equipment
    
    
    1,198
    
    
    
    977380,524
    
    
    
    363,782Less accumulated depletion, depreciation and amortization
    
    
    (73,458
    )
    
    
    (60,378
    )Net properties and equipment
    
    
    307,066
    
    
    
    303,404Total assets
    
    $
    324,298
    
    
    $
    338,241LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    3,011
    
    
    $
    13,564Oil and gas sales payable
    
    
    3,014
    
    
    
    4,631Accrued liabilities
    
    
    1,967
    
    
    
    9,810Current portion of deferred income taxes
    
    
    2,385
    
    
    
    2,770Total current liabilities
    
    
    10,377
    
    
    
    30,775NON-CURRENT LIABILITIES:Long-term debt
    
    
    46,237
    
    
    
    43,537Unrealized loss on commodity derivatives
    
    
    855
    
    
    
    Deferred income taxes
    
    
    37,396
    
    
    
    35,891Asset retirement obligations
    
    
    4,372
    
    
    
    4,225Total liabilities
    
    
    99,237
    
    
    
    114,428COMMITMENTS 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, 20,930,153 and
20,715,357 issued and 20,737,107 and 20,680,584 outstanding, respectively
    
    
    209
    
    
    
    207Additional paid-in capital
    
    
    168,307
    
    
    
    167,349Retained earnings
    
    
    56,950
    
    
    
    56,753Accumulated other comprehensive loss
    
    
    (405
    )
    
    
    (496
    )Total stockholders equity
    
    
    225,061
    
    
    
    223,813Total liabilities and stockholders equity
    
    $
    324,298
    
    
    $
    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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008REVENUES:Oil and gas sales
    
    $
    9,915
    
    
    $
    24,144
    
    
    $
    19,980
    
    
    $
    43,162EXPENSES:Lease operating
    
    
    1,753
    
    
    
    1,856
    
    
    
    4,122
    
    
    
    3,253Severance and production taxes
    
    
    507
    
    
    
    1,170
    
    
    
    937
    
    
    
    1,923Exploration
    
    
    
    
    
    
    987
    
    
    
    
    
    
    
    1,478General and administrative
    
    
    2,230
    
    
    
    1,817
    
    
    
    5,040
    
    
    
    3,763Depletion, depreciation and amortization
    
    
    6,223
    
    
    
    6,025
    
    
    
    13,171
    
    
    
    11,241Total expenses
    
    
    10,713
    
    
    
    11,855
    
    
    
    23,270
    
    
    
    21,658OPERATING (LOSS) INCOME
    
    
    (798
    )
    
    
    12,289
    
    
    
    (3,290
    )
    
    
    21,504OTHER:Interest expense, net
    
    
    (457
    )
    
    
    (343
    )
    
    
    (902
    )
    
    
    (491
    )Realized gain (loss) on commodity derivatives
    
    
    4,444
    
    
    
    (542
    )
    
    
    7,625
    
    
    
    (481
    )Unrealized loss on commodity derivatives
    
    
    (4,320
    )
    
    
    (9,672
    )
    
    
    (2,175
    )
    
    
    (14,551
    )(LOSS) INCOME BEFORE INCOME TAX PROVISION
    
    
    (1,131
    )
    
    
    1,732
    
    
    
    1,258
    
    
    
    5,981INCOME TAX (BENEFIT) PROVISION
    
    
    (460
    )
    
    
    804
    
    
    
    1,061
    
    
    
    2,291NET (LOSS) INCOME
    
    $
    (671
    )
    
    $
    928
    
    
    $
    197
    
    
    $
    3,690(LOSS) EARNINGS PER SHARE:Basic
    
    $
    (0.03
    )
    
    $
    0.04
    
    
    $
    0.01
    
    
    $
    0.18Diluted
    
    $
    (0.03
    )
    
    $
    0.04
    
    
    $
    0.01
    
    
    $
    0.18WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    20,827,745
    
    
    
    20,646,519
    
    
    
    20,794,121
    
    
    
    20,634,633Diluted
    
    
    20,827,745
    
    
    
    20,913,832
    
    
    
    20,847,284
    
    
    
    20,921,994
 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)
 Six Months EndedJune 30,2009
    
    
    2008OPERATING ACTIVITIES:Net income
    
    $
    197
    
    
    $
    3,690Adjustments to reconcile net income to net cash provided by
operating activities:Depletion, depreciation and amortization
    
    
    13,171
    
    
    
    11,241Unrealized loss on commodity derivatives
    
    
    2,175
    
    
    
    14,551Exploration expense
    
    
    
    
    
    
    1,478Share-based compensation expense
    
    
    1,020
    
    
    
    496Deferred income taxes
    
    
    1,419
    
    
    
    2,057Changes in operating assets and liabilities:Accounts receivable
    
    
    13,713
    
    
    
    (11,586
    )Prepaid expenses and other assets
    
    
    (88
    )
    
    
    (1,537
    )Accounts payable
    
    
    (10,572
    )
    
    
    936Oil and gas sales payable
    
    
    (1,617
    )
    
    
    5,189Accrued liabilities
    
    
    (8,232
    )
    
    
    (2,594
    )Cash provided by operating activities
    
    
    11,186
    
    
    
    23,921INVESTING ACTIVITIES:Additions to oil and gas properties
    
    
    (16,324
    )
    
    
    (35,819
    )Additions to other property and equipment, net
    
    
    (221
    )
    
    
    (361
    )Cash used in investing activities
    
    
    (16,545
    )
    
    
    (36,180
    )FINANCING ACTIVITIES:Proceeds from issuance of common stock
    
    
    
    
    
    
    97Borrowings under credit facility
    
    
    45,415
    
    
    
    38,503Repayment of amounts outstanding under credit facility
    
    
    (42,715
    )
    
    
    (30,950
    )Cash provided by financing activities
    
    
    2,700
    
    
    
    7,650CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    (2,659
    )
    
    
    (4,609
    )EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH AND CASH
EQUIVALENTS
    
    
    (1
    )
    
    
    (36
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    4,077
    
    
    
    4,785CASH AND CASH EQUIVALENTS, end of period
    
    $
    1,417
    
    
    $
    140SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    998
    
    
    $
    124Cash paid for income taxes
    
    $
    
    
    
    $
    41SUPPLEMENTAL 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
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    (671
    )
    
    $
    928
    
    
    $
    197
    
    
    $
    3,690Other comprehensive (loss) income:Foreign currency translation, net related income tax
    
    
    128
    
    
    
    (91
    )
    
    
    91
    
    
    
    (61
    )Total comprehensive (loss) income
    
    $
    (543
    )
    
    $
    837
    
    
    $
    288
    
    
    $
    3,629
 See accompanying notes to these consolidated financial statements.
 4




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##### 



APPROACH
RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)
 1. Summary of significant accounting policies
 Organization and nature of operations
  Consolidation, basis of presentation and significant estimates
   Derivative instruments and commodity derivative activities
 Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB Statement 133
 5




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##### 



APPROACH
RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)
 Earnings per common share
  Three Months Ended June 30, 2009Income (numerator)
    
    
    Shares (denominator)
    
    
    Per-share amountBasic loss per share:Net loss
    
    $
    (671
    )
    
    
    20,827,745
    
    
    $
    (0.03
    )Effect of dilutive securities:Share-based compensation,
treasury method
    
    
    
    
    
    
    Net loss plus assumed conversions
    
    $
    (671
    )
    
    
    20,827,745
    
    
    $
    (0.03
    )
 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
 Six Months Ended June 30, 2009Income (numerator)
    
    
    Shares (denominator)
    
    
    Per-share amountBasic earnings per share:Net income
    
    $
    197
    
    
    
    20,794,121
    
    
    $
    0.01Effect of dilutive securities:Share-based compensation,
treasury method
    
    
    
    
    
    
    53,163Net income plus assumed conversions
    
    $
    197
    
    
    
    20,847,284
    
    
    $
    0.01
 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
 2. Revolving credit facility
  6




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##### 



APPROACH
RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 more specifically in the credit agreement) by
Consolidated Current Liabilities (as defined more specifically 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 more specifically in the credit agreement) by Consolidated EBITDAX (as
defined more specifically 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)
 7




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##### 



APPROACH
RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)
 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.
    3. Income taxes
  8




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##### 



APPROACH
RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
 4. Derivatives
  Volume (MMBtu)
    
    
    $/MMBtuPeriod
    
    Monthly
    
    
    Total
    
    
    Floor
    
    
    Ceiling
    
    
    FixedNYMEX  Henry HubCostless collars 2009
    
    
    180,000
    
    
    
    1,080,000
    
    
    $
    7.50
    
    
    $
    10.50Costless collars 2009
    
    
    130,000
    
    
    
    780,000
    
    
    $
    8.50
    
    
    $
    11.70Fixed price swaps 3rd  4th quarter 2009
    
    
    150,000
    
    
    
    900,000
    
    
    
    
    
    
    
    
    
    
    $
    4.50Fixed price swaps 2010
    
    
    150,000
    
    
    
    1,800,000
    
    
    
    
    
    
    
    
    
    
    $
    5.85Fixed price swaps 2010
    
    
    150,000
    
    
    
    1,800,000
    
    
    
    
    
    
    
    
    
    
    $
    6.40WAHA differentialFixed price swaps 2009
    
    
    200,000
    
    
    
    1,200,000
    
    
    
    
    
    
    
    
    
    
    $
    (0.61
    )Fixed price swaps 3rd quarter 2009
    
    
    300,000
    
    
    
    900,000
    
    
    
    
    
    
    
    
    
    
    $
    (0.58
    )Fixed price swaps 4th quarter 2009
    
    
    300,000
    
    
    
    900,000
    
    
    
    
    
    
    
    
    
    
    $
    (0.67
    )Fixed price swaps 2010
    
    
    415,000
    
    
    
    4,980,000
    
    
    
    
    
    
    
    
    
    
    $
    (0.71
    )
 9




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##### 



APPROACH
RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)
  Asset Derivatives
    
    Liability DerivativesBalance Sheet
    
    
    
    
    
    
    
    
    
    Balance SheetLocation
    
    Fair Value
    
    Location
    
    Fair ValueJune 30,
    
    December 31,
    
    
    
    June 30,
    
    December 31,2009
    
    2008
    
    
    
    2009
    
    2008Derivatives not 
designated as 
hedging instruments 
under SFAS 133Commodity 
derivatives
    
    Unrealized gain on
commodity
derivatives
    
    $
    6,697
    
    
    $
    8,017
    
    
    Unrealized loss on
commodity
derivatives
    
    $
    855
    
    
    $    
  Asset DerivativesIncome StatementLocation
    
    Fair ValueThree Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2009
    
    2008
    
    2009
    
    2008Derivatives not 
designated as 
hedging instruments 
under SFAS 133Commodity 
derivatives
    
    Unrealized loss
on commodity
derivatives
    
    $
    (4,320
    )
    
    $
    (9,672
    )
    
    $
    (2,175
    )
    
    $
    (14,551
    )Realized gain
(loss) on commodity
derivatives
    
    
    4,444
    
    
    
    (542
    )
    
    
    7,625
    
    
    
    (481
    )$
    124
    
    
    $
    (10,214
    )
    
    $
    5,450
    
    
    $
    (15,032
    )
   10




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##### 



APPROACH
RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)
   
    
    Level 1  Quoted prices are available in active markets for identical assets or
liabilities as of the reporting date. At June 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 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, 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 June 30, 2009, our Level 3
measurements were limited to our asset retirement obligation.
 5. Share-based compensation
  11




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##### 



APPROACH
RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)
 Weighted AverageGrant-DateShares
    
    Fair ValueNonvested at January 1, 2009
    
    
    56,023
    
    
    $
    18.96Granted
    
    
    166,354
    
    
    
    8.72Vested
    
    
    (8,081
    )
    
    
    23.46Nonvested at June 30, 2009
    
    
    214,296
    
    
    $
    10.49
 6. Subsequent event
  12




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##### 



Item 2.
    
    Managements discussion and analysis of financial condition and results of operations.
  Cautionary statement 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,
    
    continued disruption of credit and capital markets,
    
    our financial position,
    
    our cash flow and liquidity,
 13




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##### 




    
    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,
    
    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 Annual Report on Form 10-K for the year ended December 31,
2008 filed with the SEC on March 13, 2009 and in this Quarterly Report on Form 10-Q.
 Overview
    14




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##### 



15




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##### 



Results of operations
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009

    2008
    
    
    2009

    2008Revenues (in thousands):Gas
    
    $
    5,326
    
    
    $
    18,572
    
    
    $
    11,936
    
    
    $
    33,444Oil
    
    
    3,182
    
    
    
    4,165
    
    
    
    5,210
    
    
    
    7,250NGLs
    
    
    1,407
    
    
    
    1,407
    
    
    
    2,834
    
    
    
    2,468Total oil and gas sales
    
    
    9,915
    
    
    
    24,144
    
    
    
    19,980
    
    
    
    43,162Realized gain (loss) on commodity derivatives
    
    
    4,444
    
    
    
    (542
    )
    
    
    7,625
    
    
    
    (481
    )Total oil and gas sales including
derivative impact
    
    $
    14,359
    
    
    $
    23,602
    
    
    $
    27,605
    
    
    $
    42,681Production:Gas (MMcf)
    
    
    1,624
    
    
    
    1,674
    
    
    
    3,395
    
    
    
    3,339Oil (MBbls)
    
    
    57
    
    
    
    34
    
    
    
    116
    
    
    
    66NGLs (MBbls)
    
    
    52
    
    
    
    26
    
    
    
    120
    
    
    
    47Total (MMcfe)
    
    
    2,282
    
    
    
    2,036
    
    
    
    4,815
    
    
    
    4,016Total (MMcfe/d)
    
    
    25.1
    
    
    
    22.4
    
    
    
    26.6
    
    
    
    22.1Average prices:Gas (per Mcf)
    
    $
    3.28
    
    
    $
    11.10
    
    
    $
    3.52
    
    
    $
    10.02Oil (per Bbl)
    
    
    55.60
    
    
    
    121.29
    
    
    
    44.83
    
    
    
    110.10NGLs (per Bbl)
    
    
    26.84
    
    
    
    53.93
    
    
    
    23.54
    
    
    
    52.61Total (per Mcfe)
    
    $
    4.35
    
    
    $
    11.86
    
    
    $
    4.15
    
    
    $
    10.75Realized gain (loss) on commodity derivatives
(per Mcfe)
    
    
    1.95
    
    
    
    (0.27
    )
    
    
    1.58
    
    
    
    (0.12
    )Total
including derivative impact (per Mcfe)
    
    $
    6.30
    
    
    $
    11.59
    
    
    $
    5.73
    
    
    $
    10.63Costs and expenses (per Mcfe):Lease operating
    
    $
    0.77
    
    
    $
    0.91
    
    
    $
    0.86
    
    
    $
    0.81Severance and production taxes
    
    
    0.22
    
    
    
    0.57
    
    
    
    0.19
    
    
    
    0.48Exploration
    
    
    
    
    
    
    0.48
    
    
    
    
    
    
    
    0.37General and administrative
    
    
    0.98
    
    
    
    0.89
    
    
    
    1.05
    
    
    
    0.94Depletion, depreciation and amortization
    
    
    2.73
    
    
    
    2.93
    
    
    
    2.74
    
    
    
    2.78
 
 Bbl.
 MBbl.
 Mcf.
 Mcfe.
 MMcf.
 MMcfe
 NGLs.
 /d.
 16




---



##### 



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




---



##### 



Three Months EndedJune 30,2009
    
    2008
    
    
    Change
    
    
    % ChangeCompression and gas treating
    
    $
    0.27
    
    
    $
    0.29
    
    
    $
    (0.02
    )
    
    
    (6.9
    )%Water hauling, insurance and other
    
    
    0.21
    
    
    
    0.16
    
    
    
    0.05
    
    
    
    31.3Pumpers and supervision
    
    
    0.13
    
    
    
    0.13
    
    
    
    
    
    
    
    Well repairs and maintenance
    
    
    0.08
    
    
    
    0.18
    
    
    
    (0.10
    )
    
    
    (55.6
    )Ad valorem taxes
    
    
    0.06
    
    
    
    0.14
    
    
    
    (0.08
    )
    
    
    (57.1
    )Workovers
    
    
    0.02
    
    
    
    0.01
    
    
    
    0.01
    
    
    
    100.0Total
    
    $
    0.77
    
    
    $
    0.91
    
    
    $
    (0.14
    )
    
    
    (15.4
    )%
 Severance and production taxes
 Exploration
 General and administrative
 Three Months EndedJune 30,2009
    
    2008
    
    
    Change
    
    
    %$MM
    
    
    Mcfe
    
    
    $MM
    
    
    Mcfe
    
    
    $MM
    
    
    Mcfe
    
    
    ChangeSalaries and benefits
    
    $
    1.0
    
    
    $
    0.42
    
    
    $
    0.8
    
    
    $
    0.39
    
    
    $
    0.2
    
    
    $
    0.03
    
    
    
    7.7
    %Share-based compensation
    
    
    0.3
    
    
    
    0.15
    
    
    
    0.3
    
    
    
    0.13
    
    
    
    
    
    
    
    0.02
    
    
    
    15.4State franchise taxes
    
    
    0.3
    
    
    
    0.15
    
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    0.15
    
    
    
    100.0Professional fees
    
    
    0.2
    
    
    
    0.07
    
    
    
    0.3
    
    
    
    0.14
    
    
    
    (0.1
    )
    
    
    (0.07
    )
    
    
    (50.0
    )Other
    
    
    0.4
    
    
    
    0.19
    
    
    
    0.4
    
    
    
    0.23
    
    
    
    
    
    
    
    (0.04
    )
    
    
    (17.4
    )Total
    
    $
    2.2
    
    
    $
    0.98
    
    
    $
    1.8
    
    
    $
    0.89
    
    
    $
    0.4
    
    
    $
    0.09
    
    
    
    10.1
    %
 Depletion, depreciation and amortization.
 18




---



##### 



Interest expense, net.
 Income taxes.
 Six months ended June 30, 2009 compared to three months ended June 30, 2008
 Oil and gas production.
 Oil and gas sales
 Commodity derivative activities
 Lease operating
 19




---



##### 



Six Months EndedJune 30,2009
    
    2008
    
    
    Change
    
    
    % ChangeCompression and gas treating
    
    $
    0.31
    
    
    $
    0.24
    
    
    $
    0.07
    
    
    
    29.2
    %Water hauling, insurance and other
    
    
    0.17
    
    
    
    0.13
    
    
    
    0.04
    
    
    
    30.8Ad valorem taxes
    
    
    0.15
    
    
    
    0.14
    
    
    
    0.01
    
    
    
    7.1Pumpers and supervision
    
    
    0.14
    
    
    
    0.13
    
    
    
    0.01
    
    
    
    7.7Well repairs and maintenance
    
    
    0.08
    
    
    
    0.14
    
    
    
    (0.06
    )
    
    
    (42.9
    )Workovers
    
    
    0.01
    
    
    
    0.03
    
    
    
    (0.02
    )
    
    
    (66.7
    )Total
    
    $
    0.86
    
    
    $
    0.81
    
    
    $
    0.05
    
    
    
    6.2
    %
 Severance and production taxes
 Exploration
 General and administrative
 Six Months EndedJune 30,2009
    
    2008
    
    
    Change
    
    
    %$MM
    
    
    Mcfe
    
    
    $MM
    
    
    Mcfe
    
    
    $MM
    
    
    Mcfe
    
    
    ChangeSalaries and benefits
    
    $
    2.0
    
    
    $
    0.42
    
    
    $
    1.6
    
    
    $
    0.39
    
    
    $
    0.4
    
    
    $
    0.03
    
    
    
    7.7
    %Share-based compensation
    
    
    1.0
    
    
    
    0.21
    
    
    
    0.5
    
    
    
    0.12
    
    
    
    0.5
    
    
    
    0.09
    
    
    
    75.0Professional fees
    
    
    0.6
    
    
    
    0.13
    
    
    
    0.7
    
    
    
    0.18
    
    
    
    (0.1
    )
    
    
    (0.05
    )
    
    
    (27.8
    )State franchise taxes
    
    
    0.3
    
    
    
    0.07
    
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    0.07
    
    
    
    100.0Other
    
    
    1.1
    
    
    
    0.22
    
    
    
    1.0
    
    
    
    0.25
    
    
    
    0.1
    
    
    
    (0.03
    )
    
    
    (12.0
    )Total
    
    $
    5.0
    
    
    $
    1.05
    
    
    $
    3.8
    
    
    $
    0.94
    
    
    $
    1.2
    
    
    $
    0.11
    
    
    
    11.7
    %
 Depletion, depreciation and amortization.
 20




---



##### 



Interest expense, net.
 Income taxes.
 Liquidity and capital resources
    Six Months EndedJune 30,2009
    
    2008Cash flows provided by operating activities
    
    $
    11,186
    
    
    $
    23,921Cash flows used in investing activities
    
    
    (16,545
    )
    
    
    (36,180
    )Cash flows provided by financing activities
    
    
    2,700
    
    
    
    7,650Effect of Canadian exchange rate
    
    
    (1
    )
    
    
    (36
    )Net (decrease) increase in cash and cash equivalents
    
    $
    (2,660
    )
    
    $
    (4,645
    )
 Operating activities
  21




---



##### 



Investing activities
  Capital expenditures for 2009
    Financing activities
    22




---



##### 



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 Current Assets (as defined more specifically in the credit agreement) by
Consolidated Current Liabilities (as defined more specifically 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 more specifically in the credit agreement) by Consolidated EBITDAX (as
defined more specifically 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.
 23




---



##### 



Contractual obligations
  Off-balance sheet arrangements
  24




---



##### 



Item 3.
    
    Quantitative and qualitative disclosures about market risk.
  Commodity price risk
    Volume (MMBtu)
    
    
    $/MMBtuPeriod
    
    Monthly
    
    
    Total
    
    
    Floor
    
    
    Ceiling
    
    
    FixedNYMEX  Henry HubCostless collars 2009
    
    
    180,000
    
    
    
    1,080,000
    
    
    $
    7.50
    
    
    $
    10.50Costless collars 2009
    
    
    130,000
    
    
    
    780,000
    
    
    $
    8.50
    
    
    $
    11.70Fixed price swaps 3rd  4th quarter 2009
    
    
    150,000
    
    
    
    900,000
    
    
    
    
    
    
    
    
    
    
    $
    4.50Fixed price swaps 2010
    
    
    150,000
    
    
    
    1,800,000
    
    
    
    
    
    
    
    
    
    
    $
    5.85Fixed price swaps 2010
    
    
    150,000
    
    
    
    1,800,000
    
    
    
    
    
    
    
    
    
    
    $
    6.40WAHA differentialFixed price swaps 2009
    
    
    200,000
    
    
    
    1,200,000
    
    
    
    
    
    
    
    
    
    
    $
    (0.61
    )Fixed price swaps 3rd quarter 2009
    
    
    300,000
    
    
    
    900,000
    
    
    
    
    
    
    
    
    
    
    $
    (0.58
    )Fixed price swaps 4th quarter 2009
    
    
    300,000
    
    
    
    900,000
    
    
    
    
    
    
    
    
    
    
    $
    (0.67
    )Fixed price swaps 2010
    
    
    415,000
    
    
    
    4,980,000
    
    
    
    
    
    
    
    
    
    
    $
    (0.71
    )
    25




---



##### 



Item 4.
    
    Controls and procedures.
 Evaluation of disclosure controls and procedures
   Internal control over financial reporting
  Limitations inherent in all controls
  26




---



##### 



PART II  OTHER INFORMATION
 Item 1.
    
    Legal proceedings.
 Approach Operating, LLC v. EnCana Oil Gas (USA) Inc., Cause No. 29.070A
  Item 1A.
    
    Risk factors.
  www.sec.gov www.approachresources.com
 Legislation and regulatory initiatives relating to hydraulic fracturing could result in increased
costs, additional operating restrictions or delays or lower returns on our capital investments.
  The adoption of climate change legislation by Congress could result in increased operating costs
and reduced demand for the natural gas and oil we produce.
   27




---



##### 



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 #1(April 1, 2009  April 30, 2009)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Month #2(May 1, 2009  May 31, 2009)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Month #3(June 1, 2009  June 30, 2009)
    
    
    2,402
    
    
    $
    8.91
    
    
    
    
    
    
    
    Total
    
    
    2,402
    
    
    $
    8.91
    
    
    
    
    
    
    
    
 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 DirectorsJames H. Brandi
    
    
    20,084,302
    
    
    
    31,654James C. Crain
    
    
    20,061,520
    
    
    
    54,436
 BrokerVoted For
    
    Against
    
    Abstentions
    
    Non-Votes2.
    
    Appointment of Hein & Associates LLP
    
    
    20,108,471
    
    
    
    4,574
    
    
    
    2,911
    
    
    
    
 Item 5.
    
    Other information.
  Item 6.
    
    Exhibits.
  28




---



##### 



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 Financial Officer
(Principal Financial and 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).




---



##### 



ExhibitNumber
    
    Description of Exhibit10.21
    
    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).10.22
    
    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).




---



##### 



ExhibitNumber
    
    Description of Exhibit31.1*
    
    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.
    
    Denotes management contract or compensatory plan or arrangement.