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, 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(State or other jurisdiction ofincorporation or organization)
    
    51-0424817(I.R.S. EmployerIdentification No.)One Ridgmar Centre 
6500 West Freeway, Suite 800
Fort Worth, Texas(Address of principal executive offices)
    
    76116(Zip Code)
 (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)
 June 30,
    
    
    December 31,2010
    
    
    2009ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    293
    
    
    $
    2,685Accounts receivable:Joint interest owners
    
    
    7,180
    
    
    
    3,088Oil and gas sales
    
    
    4,499
    
    
    
    4,607Unrealized gain on commodity derivatives
    
    
    1,839
    
    
    
    786Prepaid expenses and other current assets
    
    
    468
    
    
    
    582Deferred
income taxes  current
    
    
    1,605
    
    
    
    255Total current assets
    
    
    15,884
    
    
    
    12,003PROPERTIES AND EQUIPMENT:Oil and gas properties, at cost, using the successful efforts method of accounting
    
    
    416,118
    
    
    
    387,792Furniture, fixtures and equipment
    
    
    1,940
    
    
    
    1,540418,058
    
    
    
    389,332Less accumulated depletion, depreciation and amortization
    
    
    (95,516
    )
    
    
    (84,849
    )Net properties and equipment
    
    
    322,542
    
    
    
    304,483OTHER ASSETS
    
    
    2,518
    
    
    
    2,440Total assets
    
    $
    340,944
    
    
    $
    318,926LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Advances from nonoperators
    
    $
    315
    
    
    $
    2,689Accounts payable
    
    
    7,939
    
    
    
    3,074Oil and gas sales payable
    
    
    5,142
    
    
    
    3,774Accrued liabilities
    
    
    10,773
    
    
    
    10,935Unrealized loss on commodity derivatives
    
    
    
    
    
    
    1,524Total current liabilities
    
    
    24,169
    
    
    
    21,996NONCURRENT LIABILITIES:Long-term debt
    
    
    42,169
    
    
    
    32,319Unrealized loss on commodity derivatives
    
    
    528
    
    
    
    1,144Deferred income taxes
    
    
    42,602
    
    
    
    38,374Asset retirement obligations
    
    
    4,940
    
    
    
    4,597Total liabilities
    
    
    114,408
    
    
    
    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, 21,090,007 and
20,959,285 issued and outstanding, respectively
    
    
    210
    
    
    
    209Additional paid-in capital
    
    
    169,918
    
    
    
    168,993Retained earnings
    
    
    56,638
    
    
    
    51,524Accumulated other comprehensive loss
    
    
    (230
    )
    
    
    (230
    )Total stockholders equity
    
    
    226,536
    
    
    
    220,496Total liabilities and stockholders equity
    
    $
    340,944
    
    
    $
    318,926
 See
accompanying notes to these consolidated financial statements.
 1




---



##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except shares and per-share amounts)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    2009
    
    
    2010
    
    2009REVENUES:Oil and gas sales
    
    $
    13,155
    
    
    $
    9,915
    
    
    $
    26,375
    
    
    $
    19,980EXPENSES:Lease operating
    
    
    2,203
    
    
    
    1,753
    
    
    
    4,043
    
    
    
    4,122Severance and production taxes
    
    
    610
    
    
    
    507
    
    
    
    1,304
    
    
    
    937Exploration
    
    
    187
    
    
    
    
    
    
    
    1,677
    
    
    
    General and administrative
    
    
    2,181
    
    
    
    2,230
    
    
    
    4,690
    
    
    
    5,040Depletion, depreciation and amortization
    
    
    5,010
    
    
    
    6,223
    
    
    
    10,845
    
    
    
    13,171Total expenses
    
    
    10,191
    
    
    
    10,713
    
    
    
    22,559
    
    
    
    23,270OPERATING INCOME (LOSS)
    
    
    2,964
    
    
    
    (798
    )
    
    
    3,816
    
    
    
    (3,290
    )OTHER:Interest expense, net
    
    
    (550
    )
    
    
    (457
    )
    
    
    (1,016
    )
    
    
    (902
    )Realized gain on commodity derivatives
    
    
    1,768
    
    
    
    4,444
    
    
    
    1,998
    
    
    
    7,625Unrealized (loss) gain on commodity
derivatives
    
    
    (1,901
    )
    
    
    (4,320
    )
    
    
    3,194
    
    
    
    (2,175
    )INCOME
(LOSS) BEFORE INCOME TAX PROVISION (BENEFIT)
    
    
    2,281
    
    
    
    (1,131
    )
    
    
    7,992
    
    
    
    1,258INCOME TAX PROVISION (BENEFIT)
    
    
    730
    
    
    
    (460
    )
    
    
    2,878
    
    
    
    1,061NET INCOME (LOSS)
    
    $
    1,551
    
    
    $
    (671
    )
    
    $
    5,114
    
    
    $
    197EARNINGS (LOSS) PER SHARE:Basic
    
    $
    0.07
    
    
    $
    (0.03
    )
    
    $
    0.24
    
    
    $
    0.01Diluted
    
    $
    0.07
    
    
    $
    (0.03
    )
    
    $
    0.24
    
    
    $
    0.01WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    21,059,413
    
    
    
    20,827,745
    
    
    
    21,027,982
    
    
    
    20,794,121Diluted
    
    
    21,184,331
    
    
    
    20,827,745
    
    
    
    21,154,647
    
    
    
    20,847,284
 See
accompanying notes to these consolidated financial statements.
 2




---



##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Six Months EndedJune 30,2010
    
    
    2009OPERATING ACTIVITIES:Net income
    
    $
    5,114
    
    
    $
    197Adjustments to reconcile net income to cash provided by
operating activities:Depletion, depreciation and amortization
    
    
    10,845
    
    
    
    13,171Unrealized (gain) loss on commodity derivatives
    
    
    (3,194
    )
    
    
    2,175Exploration expense
    
    
    1,677
    
    
    
    Share-based compensation expense
    
    
    996
    
    
    
    1,020Deferred income taxes
    
    
    2,807
    
    
    
    1,419Changes in operating assets and liabilities:Accounts receivable
    
    
    (3,846
    )
    
    
    13,713Prepaid expenses and other assets
    
    
    235
    
    
    
    (88
    )Accounts payable
    
    
    2,492
    
    
    
    (10,572
    )Oil and gas sales payable
    
    
    1,368
    
    
    
    (1,617
    )Accrued liabilities
    
    
    (162
    )
    
    
    (8,232
    )Cash provided by operating activities
    
    
    18,332
    
    
    
    11,186INVESTING ACTIVITIES:Additions to oil and gas properties
    
    
    (29,757
    )
    
    
    (16,324
    )Additions to other property and equipment, net
    
    
    (477
    )
    
    
    (221
    )Cash used in investing activities
    
    
    (30,234
    )
    
    
    (16,545
    )FINANCING ACTIVITIES:Borrowings under credit facility, net of debt issuance costs
    
    
    51,162
    
    
    
    45,415Repayment of amounts outstanding under credit facility
    
    
    (41,650
    )
    
    
    (42,715
    )Cash provided by financing activities
    
    
    9,512
    
    
    
    2,700CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    (2,390
    )
    
    
    (2,659
    )EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH AND CASH
EQUIVALENTS
    
    
    (2
    )
    
    
    (1
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    2,685
    
    
    
    4,077CASH AND CASH EQUIVALENTS, end of period
    
    $
    293
    
    
    $
    1,417SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    1,017
    
    
    $
    998
 See
accompanying notes to these consolidated financial statements.
 3




---



##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    2009
    
    
    2010
    
    2009Net income (loss)
    
    $
    1,551
    
    
    $
    (671
    )
    
    $
    5,114
    
    
    $
    197Other comprehensive income:Foreign currency translation, net of related income tax
    
    
    5
    
    
    
    128
    
    
    
    
    
    
    
    91Total comprehensive income (loss)
    
    $
    1,556
    
    
    $
    (543
    )
    
    $
    5,114
    
    
    $
    288
 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, 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
June 30, 2010
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    2009
    
    
    2010
    
    2009Income (numerator):Net income (loss)  basic
    
    $
    1,551
    
    
    $
    (671
    )
    
    $
    5,114
    
    
    $
    197Weighted average shares (denominator):Weighted
average shares  basic
    
    
    21,059,413
    
    
    
    20,827,745
    
    
    
    21,027,982
    
    
    
    20,794,121Dilution effect of share-based
compensation, treasury method
    
    
    124,918
    
    
    
    
    
    
    
    126,665
    
    
    
    53,163Weighted
average shares  diluted
    
    
    21,184,331
    
    
    
    20,827,745
    
    
    
    21,154,647
    
    
    
    20,847,284Net income (loss) per share:Basic
    
    $
    0.07
    
    
    $
    (0.03
    )
    
    $
    0.24
    
    
    $
    0.01Diluted
    
    $
    0.07
    
    
    $
    (0.03
    )
    
    $
    0.24
    
    
    $
    0.01
 3. Revolving Credit Facility
       6




---



##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 noncash
expenses, less (1) gains or losses from sales or dispositions of assets, (2) unrealized
gain on commodity derivatives and (3) extraordinary or nonrecurring gains. For
purposes of calculating this ratio, consolidated EBITDAX for a fiscal quarter is
annualized pursuant to the credit agreement.
    4. Commitments and Contingencies
 Approach Operating, LLC v. EnCana Oil & Gas (USA) Inc., Cause No. 29.070A
 7




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##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
   5. Income Taxes
   6. Derivatives
  Volume (MMBtu)
    
    
    $/MMBtuPeriod
    
    Monthly
    
    
    Total
    
    
    FixedNYMEX  Henry HubPrice swaps 2010
    
    
    150,000
    
    
    
    900,000
    
    
    $
    5.85Price swaps 2010
    
    
    150,000
    
    
    
    900,000
    
    
    $
    6.40Price swaps 2010
    
    
    100,000
    
    
    
    600,000
    
    
    $
    6.36Weighted average price ($/MMBtu)
    
    
    
    
    
    
    
    
    
    $
    6.18WAHA basis differentialBasis swaps 2010
    
    
    415,000
    
    
    
    2,490,000
    
    
    $
    (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
June 30, 2010
(Unaudited)
  Asset Derivatives
    
    
    Liability DerivativesBalance Sheet
    
    
    
    
    
    
    
    
    
    
    Balance SheetLocation
    
    
    Fair Value
    
    
    Location
    
    
    Fair ValueJune 30,
    
    
    December 31,
    
    
    
    
    
    
    June 30,
    
    
    December 31,2010
    
    
    2009
    
    
    
    
    
    
    2010
    
    
    2009Derivatives
not
designated as
hedging instrumentsUnrealized
    
    
    
    
    
    
    
    
    
    UnrealizedCommodity
    
    gain on
    
    
    
    
    
    
    
    
    
    loss onderivatives
    
    commodity
    
    
    
    
    
    
    
    
    
    commodityderivatives
    
    $
    1,839
    
    
    $
    786
    
    
    derivatives
    
    $
    528
    
    
    $
    2,668
  Asset DerivativesIncome Statement
    
    
    Three Months Ended
    
    
    Six Months EndedLocation
    
    
    June 30,
    
    
    June 30,2010
    
    2009
    
    
    2010
    
    2009Derivatives not
designated as
hedginginstruments
under SFAS 133Realized gain onCommodity
    
    commodityderivatives
    
    derivatives
    
    $
    1,768
    
    
    $
    4,444
    
    
    $
    1,998
    
    
    $
    7,625Unrealized (loss)gain on commodityderivatives
    
    
    (1,901
    )
    
    
    (4,320
    )
    
    
    3,194
    
    
    
    (2,175
    )$
    (133
    )
    
    $
    124
    
    
    $
    5,192
    
    
    $
    5,450
   9




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##### 



APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
  
    
    Level 1  Quoted prices are available in active markets for identical assets or
liabilities as of the reporting date. At June 30, 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 June 30, 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 June 30,
2010, we had no Level 3 measurements.
 7. Share-Based Compensation
  Weighted AverageGrant-DateShares
    
    
    Fair ValueNonvested at January 1, 2010
    
    
    225,880
    
    
    $
    9.73Granted
    
    
    107,777
    
    
    
    7.53Vested
    
    
    (63,527
    )
    
    
    10.63Cancelled
    
    
    (1,680
    )
    
    
    15.48Nonvested at June 30, 2010
    
    
    268,450
    
    
    $
    8.60
 10




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Forward-Looking Statements and Cautionary Statements
   
    
    our business strategy;
 
    
    estimated quantities of oil and gas reserves;
 
    
    overall United States and global economic and financial market conditions;
 
    
    domestic and foreign demand and supply for oil, gas, NGLs and LNG;
 
    
    uncertainty of commodity prices in oil, gas and NGLs;
 
    
    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;
 
 11




---



##### 




    
    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
that deliver our gas and NGLs 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.
     12




---



##### 



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)
     13




---



##### 



Mid-Year 2010 Proved Oil and Gas Reserves
 Proved Reserves Table
  Proved ReservesReserves Category
    
    Natural Gas (MMcf)
    
    
    Oil (MBbls)
    
    
    NGLs (MBbls)
    
    
    Total (MMcfe)PROVEDDeveloped:Ozona Northeast
    
    
    49,184
    
    
    
    616
    
    
    
    6,628
    
    
    
    92,653Cinco Terry
    
    
    16,204
    
    
    
    1,161
    
    
    
    2,872
    
    
    
    40,402North Bald Prairie
    
    
    1,493
    
    
    
    
    
    
    
    
    
    
    
    1,493Total
    
    
    66,881
    
    
    
    1,777
    
    
    
    9,500
    
    
    
    134,548Undeveloped:Ozona Northeast
    
    
    47,454
    
    
    
    981
    
    
    
    6,822
    
    
    
    94,268Cinco Terry
    
    
    12,046
    
    
    
    1,834
    
    
    
    2,145
    
    
    
    35,919North Bald Prairie
    
    
    13,516
    
    
    
    
    
    
    
    
    
    
    
    13,516Total
    
    
    73,016
    
    
    
    2,815
    
    
    
    8,967
    
    
    
    143,703TOTAL PROVED at June 30, 2010
    
    
    139,897
    
    
    
    4,592
    
    
    
    18,467
    
    
    
    278,251
    14




---



##### 



As of June 30,2010(in thousands)PV-10
    
    $
    277,793Less income taxes:Undiscounted future income taxes
    
    
    (235,984
    )10% discount factor
    
    
    138,459Future discounted income taxes
    
    
    (97,525
    )Standardized measure of discounted future net cash flows
    
    $
    180,268
  15




---



##### 



Results of Operations
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    2009
    
    
    2010
    
    2009Revenues (in thousands)Gas
    
    $
    6,864
    
    
    $
    5,326
    
    
    $
    14,546
    
    
    $
    11,936Oil
    
    
    3,940
    
    
    
    3,182
    
    
    
    7,495
    
    
    
    5,210NGLs
    
    
    2,351
    
    
    
    1,407
    
    
    
    4,334
    
    
    
    2,834Total oil and gas sales
    
    
    13,155
    
    
    
    9,915
    
    
    
    26,375
    
    
    
    19,980Realized gain on commodity derivatives
    
    
    1,768
    
    
    
    4,444
    
    
    
    1,998
    
    
    
    7,625Total oil and gas sales including
derivative impact
    
    $
    14,923
    
    
    $
    14,359
    
    
    $
    28,373
    
    
    $
    27,605ProductionGas (MMcf)
    
    
    1,558
    
    
    
    1,624
    
    
    
    2,982
    
    
    
    3,395Oil (MBbls)
    
    
    54
    
    
    
    57
    
    
    
    101
    
    
    
    116NGLs (MBbls)
    
    
    58
    
    
    
    52
    
    
    
    104
    
    
    
    120Total (MMcfe)
    
    
    2,231
    
    
    
    2,282
    
    
    
    4,212
    
    
    
    4,815Total (MMcfe/d)
    
    
    24.5
    
    
    
    25.1
    
    
    
    23.3
    
    
    
    26.6Average pricesGas (per Mcf)
    
    $
    4.41
    
    
    $
    3.28
    
    
    $
    4.88
    
    
    $
    3.52Oil (per Bbl)
    
    
    73.26
    
    
    
    55.60
    
    
    
    74.27
    
    
    
    44.83NGLs (per Bbl)
    
    
    40.33
    
    
    
    26.84
    
    
    
    41.65
    
    
    
    23.54Total (per Mcfe)
    
    $
    5.90
    
    
    $
    4.35
    
    
    $
    6.26
    
    
    $
    4.15Realized gain on commodity derivatives
(per Mcfe)
    
    
    0.79
    
    
    
    1.95
    
    
    
    0.47
    
    
    
    1.58Total including derivative impact
(per Mcfe)
    
    $
    6.69
    
    
    $
    6.30
    
    
    $
    6.73
    
    
    $
    5.73Costs and expenses (per Mcfe)Lease operating (1)
    
    $
    0.99
    
    
    $
    0.77
    
    
    $
    0.96
    
    
    $
    0.86Severance and production taxes
    
    
    0.27
    
    
    
    0.22
    
    
    
    0.31
    
    
    
    0.19Exploration
    
    
    0.08
    
    
    
    
    
    
    
    0.40
    
    
    
    General and administrative
    
    
    0.98
    
    
    
    0.98
    
    
    
    1.11
    
    
    
    1.05Depletion, depreciation and amortization
    
    
    2.25
    
    
    
    2.73
    
    
    
    2.57
    
    
    
    2.74
  
  Glossary Bbl.
 MBbl.
 Mcf.
 MMcf.
 MMcfe
 NGLs.
 /d.
 16




---



##### 



Three Months Ended June 30, 2010, Compared to Three Months Ended June 30, 2009
 Oil and gas production.
 Oil and gas sales
 Commodity derivative activities
 Lease operating expenses
 Three Months EndedJune 30,2010
    
    
    2009
    
    
    Change
    
    
    % ChangeCompression and gas treating
    
    $
    0.26
    
    
    $
    0.27
    
    
    $
    (0.01
    )
    
    
    (3.7
    )%Ad valorem taxes
    
    
    0.23
    
    
    
    0.06
    
    
    
    0.17
    
    
    
    283.3Water hauling, insurance and other
    
    
    0.21
    
    
    
    0.21
    
    
    
    
    
    
    
    Pumping and supervision
    
    
    0.14
    
    
    
    0.13
    
    
    
    0.01
    
    
    
    7.7Well repairs and maintenance
    
    
    0.12
    
    
    
    0.08
    
    
    
    0.04
    
    
    
    50.0Workovers
    
    
    0.03
    
    
    
    0.02
    
    
    
    0.01
    
    
    
    50.0Total
    
    $
    0.99
    
    
    $
    0.77
    
    
    $
    0.22
    
    
    
    28.6
    %
 17




---



##### 



Severance and production taxes
 Exploration
 General and administrative
 Three Months EndedJune 30,2010
    
    
    2009
    
    
    Change
    
    
    % Change$MM
    
    
    Mcfe
    
    
    $MM
    
    
    Mcfe
    
    
    $MM
    
    
    Mcfe
    
    
    McfeSalaries and benefits
    
    $
    1.0
    
    
    $
    0.46
    
    
    $
    1.0
    
    
    $
    0.43
    
    
    $
    
    
    
    $
    0.03
    
    
    
    7.0
    %Share-based compensation
    
    
    0.4
    
    
    
    0.17
    
    
    
    0.3
    
    
    
    0.15
    
    
    
    0.1
    
    
    
    0.02
    
    
    
    13.3Professional fees
    
    
    0.2
    
    
    
    0.10
    
    
    
    0.2
    
    
    
    0.07
    
    
    
    
    
    
    
    0.03
    
    
    
    42.9Rent expense
    
    
    0.1
    
    
    
    0.05
    
    
    
    0.1
    
    
    
    0.05
    
    
    
    
    
    
    
    
    
    
    
    Data processing
    
    
    0.1
    
    
    
    0.04
    
    
    
    0.1
    
    
    
    0.07
    
    
    
    
    
    
    
    (0.03
    )
    
    
    (42.9
    )Other
    
    
    0.4
    
    
    
    0.16
    
    
    
    0.5
    
    
    
    0.21
    
    
    
    (0.1
    )
    
    
    (0.05
    )
    
    
    (23.8
    )Total
    
    $
    2.2
    
    
    $
    0.98
    
    
    $
    2.2
    
    
    $
    0.98
    
    
    $
    
    
    
    $
    
    
    
    
    
    %
 Depletion, depreciation and amortization.
 Interest expense, net.
 Income taxes.
 18




---



##### 



Six Months Ended June 30, 2010, Compared to Six Months Ended June 30, 2009
 Oil and gas production.
 Oil and gas sales
 Commodity derivative activities
 Lease operating expenses
 19




---



##### 



Six Months EndedJune 30,2010
    
    
    2009
    
    
    Change
    
    
    % ChangeCompression and gas treating
    
    $
    0.27
    
    
    $
    0.31
    
    
    $
    (0.04
    )
    
    
    (12.9
    )%Ad valorem taxes
    
    
    0.21
    
    
    
    0.15
    
    
    
    0.06
    
    
    
    40.0Pumping and supervision
    
    
    0.18
    
    
    
    0.14
    
    
    
    0.04
    
    
    
    28.6Water hauling, insurance and other
    
    
    0.18
    
    
    
    0.17
    
    
    
    0.01
    
    
    
    5.9Well repairs and maintenance
    
    
    0.11
    
    
    
    0.08
    
    
    
    0.03
    
    
    
    37.5Workovers
    
    
    0.01
    
    
    
    0.01
    
    
    
    
    
    
    
    Total
    
    $
    0.96
    
    
    $
    0.86
    
    
    $
    0.10
    
    
    
    11.6
    %
 Severance and production taxes
 Exploration
 General and administrative
 Six Months EndedJune 30,2010
    
    
    2009
    
    
    Change
    
    
    % Change$MM
    
    
    Mcfe
    
    
    $MM
    
    
    Mcfe
    
    
    $MM
    
    
    Mcfe
    
    
    McfeSalaries and benefits
    
    $
    2.0
    
    
    $
    0.48
    
    
    $
    2.0
    
    
    $
    0.40
    
    
    $
    
    
    
    $
    0.08
    
    
    
    20.0
    %Share-based compensation
    
    
    1.0
    
    
    
    0.24
    
    
    
    1.0
    
    
    
    0.21
    
    
    
    
    
    
    
    0.03
    
    
    
    14.3Rent expense
    
    
    0.7
    
    
    
    0.16
    
    
    
    0.6
    
    
    
    0.12
    
    
    
    0.1
    
    
    
    0.04
    
    
    
    33.3Professional fees
    
    
    0.5
    
    
    
    0.13
    
    
    
    0.6
    
    
    
    0.13
    
    
    
    (0.1
    )
    
    
    
    
    
    
    Data processing
    
    
    0.2
    
    
    
    0.05
    
    
    
    0.4
    
    
    
    0.08
    
    
    
    (0.2
    )
    
    
    (0.03
    )
    
    
    (37.5
    )Other
    
    
    0.3
    
    
    
    0.05
    
    
    
    0.4
    
    
    
    0.11
    
    
    
    (0.1
    )
    
    
    (0.06
    )
    
    
    (54.5
    )Total
    
    $
    4.7
    
    
    $
    1.11
    
    
    $
    5.0
    
    
    $
    1.05
    
    
    $
    (0.3
    )
    
    $
    0.06
    
    
    
    5.7
    %
 Depletion, depreciation and amortization.
 Interest
expense, net.
 20




---



##### 



Income taxes.
 21




---



##### 



Liquidity and Capital Resources
    Six Months EndedJune 30,2010
    
    
    2009Cash flows provided by operating activities
    
    $
    18,332
    
    
    $
    11,186Cash flows used in investing activities
    
    
    (30,234
    )
    
    
    (16,545
    )Cash flows provided by financing activities
    
    
    9,512
    
    
    
    2,700Effect of Canadian exchange rate
    
    
    (2
    )
    
    
    (1
    )Net decrease in cash and cash equivalents
    
    $
    (2,392
    )
    
    $
    (2,660
    )
 Operating Activities
   22




---



##### 



Investing Activities
  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
    23




---



##### 



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 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 noncash
expenses, less (1) gains or losses from sales or dispositions of assets, (2) unrealized
gain on commodity derivatives and (3) extraordinary or nonrecurring gains. For
 24




---



##### 



purposes of calculating this ratio, consolidated EBITDAX for a fiscal quarter is
annualized pursuant to the credit agreement.
      Contractual Obligations
  Off-Balance Sheet Arrangements
  25




---



##### 



Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk.
  Commodity Price Risk
    Volume (MMBtu)
    
    
    $/MMBtuPeriod
    
    Monthly
    
    
    Total
    
    
    FixedNYMEX  Henry HubPrice swaps 2010
    
    
    150,000
    
    
    
    900,000
    
    
    $
    5.85Price swaps 2010
    
    
    150,000
    
    
    
    900,000
    
    
    $
    6.40Price swaps 2010
    
    
    100,000
    
    
    
    600,000
    
    
    $
    6.36Weighted average price ($/MMBtu)
    
    
    
    
    
    
    
    
    
    $
    6.18WAHA basis differentialBasis swaps 2010
    
    
    415,000
    
    
    
    2,490,000
    
    
    $
    (0.71
    )Basis swaps 2011
    
    
    300,000
    
    
    
    3,600,000
    
    
    $
    (0.53
    )
    26




---



##### 



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.
  27




---



##### 



PART IIOTHER INFORMATION
 Item 1.
    
    Legal Proceedings.
  Item 1A.
    
    Risk Factors.
  www.sec.gov www.approachresources.com
 The adoption and implementation of new statutory and regulatory requirements for derivative
transactions could have an adverse impact on our ability to hedge risks associated with our
business.
    28




---



##### 



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 #1April 1, 2010  April 30, 2010
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    Month #2May 1,
2010  May 31, 2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Month #3June 1,
2010  June 30, 2010
    
    
    8,244
    
    
    
    7.35
    
    
    
    
    
    
    
    Total
    
    
    8,244
    
    
    $
    7.35
    
    
    
    
    
    
    
    
 Item 6.
    
    Exhibits.
  29




---



##### 



SIGNATURES
  APPROACH RESOURCES INC.Date: August 4, 2010
    By:
    /s/ J. Ross CraftJ. Ross CraftPresident and Chief Executive Officer
(Principal Executive Officer)Date: August 4, 2010
    By:
    /s/ Steve P. SmartSteven P. SmartExecutive Vice President and Chief Financial Officer
(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
    
    Amendment No. 8 dated as of May 3, 2010, to Credit
Agreement dated as of January 18, 2008, among Approach
Resources Inc., as Borrower, JPMorgan Chase Bank,
N.A., as Agent and Lender, The Frost National Bank,
BNP Paribas and KeyBank National Association, as
Lenders, Fortis Capital Corp., as Departing Lender 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 May 6, 2010, and incorporated herein
by reference).*23.1
    
    Consent of DeGolyer and MacNaughton.*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.*99.1
    
    Report of DeGolyer and MacNaughton.
 
 *
    
    Filed herewith.