##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2011
 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 
6500 West Freeway, Suite 800
Fort Worth, Texas
(Address of principal executive offices)
    
    76116
(Zip Code)
 (817) 989-9000
 N/A
 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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TABLE OF CONTENTS  PART IFINANCIAL INFORMATIONItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II-OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 6. ExhibitsSIGNATURESIndex to ExhibitsEX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 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 31,2011
    
    
    2010ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    1,255
    
    
    $
    23,465Accounts receivable:Joint interest owners
    
    
    446
    
    
    
    8,319Oil and gas sales
    
    
    8,882
    
    
    
    6,044Unrealized gain on commodity derivatives
    
    
    394
    
    
    
    862Prepaid expenses and other current assets
    
    
    635
    
    
    
    322Deferred income taxes  current
    
    
    2,533
    
    
    
    2,318Total current assets
    
    
    14,145
    
    
    
    41,330PROPERTIES AND EQUIPMENT:Oil and gas properties, at cost, using the successful efforts method of accounting
    
    
    584,581
    
    
    
    474,917Furniture, fixtures and equipment
    
    
    1,460
    
    
    
    1,077586,041
    
    
    
    475,994Less accumulated depletion, depreciation and amortization
    
    
    (112,778
    )
    
    
    (106,784
    )Net properties and equipment
    
    
    473,263
    
    
    
    369,210OTHER ASSETS
    
    
    2,491
    
    
    
    2,549Total assets
    
    $
    489,899
    
    
    $
    413,089LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Advances from non-operators
    
    $
    
    
    
    $
    509Accounts payable
    
    
    9,278
    
    
    
    11,426Oil and gas sales payable
    
    
    3,271
    
    
    
    5,534Accrued liabilities
    
    
    11,828
    
    
    
    10,686Unrealized loss on commodity derivatives
    
    
    965
    
    
    
    1,085Total current liabilities
    
    
    25,342
    
    
    
    29,240NON-CURRENT LIABILITIES:Long-term debt
    
    
    76,700
    
    
    
    Unrealized loss on commodity derivatives
    
    
    672
    
    
    
    871Deferred income taxes
    
    
    45,643
    
    
    
    44,616Asset retirement obligations
    
    
    6,087
    
    
    
    5,416Total liabilities
    
    
    154,444
    
    
    
    80,143COMMITMENTS 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, 28,455,085 and
28,226,890 issued and outstanding, respectively
    
    
    284
    
    
    
    282Additional paid-in capital
    
    
    274,956
    
    
    
    273,912Retained earnings
    
    
    60,450
    
    
    
    58,986Accumulated other comprehensive loss
    
    
    (235
    )
    
    
    (234
    )Total stockholders equity
    
    
    335,455
    
    
    
    332,946Total liabilities and stockholders equity
    
    $
    489,899
    
    
    $
    413,089
 See accompanying notes to these consolidated financial statements.
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Approach Resources Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
(In thousands, except shares and per-share amounts)
 Three Months EndedMarch 31,2011
    
    
    2010REVENUES:Oil, NGL and gas sales
    
    $
    20,183
    
    
    $
    13,220EXPENSES:Lease operating
    
    
    2,647
    
    
    
    1,840Severance and production taxes
    
    
    1,103
    
    
    
    694Exploration
    
    
    4,628
    
    
    
    1,490General and administrative
    
    
    3,500
    
    
    
    2,509Depletion, depreciation and amortization
    
    
    6,052
    
    
    
    5,835Total expenses
    
    
    17,930
    
    
    
    12,368OPERATING INCOME
    
    
    2,253
    
    
    
    852OTHER:Interest expense, net
    
    
    (513
    )
    
    
    (466
    )Realized gain on commodity derivatives
    
    
    197
    
    
    
    230Unrealized (loss) gain on commodity derivatives
    
    
    (149
    )
    
    
    5,095Gain on sale of oil and gas properties
    
    
    488
    
    
    
    INCOME BEFORE INCOME TAX PROVISION
    
    
    2,276
    
    
    
    5,711INCOME TAX PROVISION
    
    
    812
    
    
    
    2,148NET INCOME
    
    $
    1,464
    
    
    $
    3,563EARNINGS PER SHARE:Basic
    
    $
    0.05
    
    
    $
    0.17Diluted
    
    $
    0.05
    
    
    $
    0.17WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    28,293,654
    
    
    
    20,996,202Diluted
    
    
    28,542,932
    
    
    
    21,124,615
 See accompanying notes to these consolidated financial statements.
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Approach Resources Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
(In thousands)
 Three Months EndedMarch 31,2011
    
    
    2010OPERATING ACTIVITIES:Net income
    
    $
    1,464
    
    
    $
    3,563Adjustments to reconcile net income to cash provided by
operating activities:Depletion, depreciation and amortization
    
    
    6,052
    
    
    
    5,835Unrealized loss (gain) on commodity derivatives
    
    
    149
    
    
    
    (5,095
    )Gain on sale of oil and gas properties
    
    
    (488
    )
    
    
    Exploration expense
    
    
    4,628
    
    
    
    1,490Share-based compensation expense
    
    
    835
    
    
    
    580Deferred income taxes
    
    
    812
    
    
    
    2,139Changes in operating assets and liabilities:Accounts receivable
    
    
    5,059
    
    
    
    (705
    )Prepaid expenses and other assets
    
    
    (277
    )
    
    
    (218
    )Accounts payable
    
    
    (2,719
    )
    
    
    (4,719
    )Oil and gas sales payable
    
    
    (2,263
    )
    
    
    738Accrued liabilities
    
    
    1,142
    
    
    
    3,544Cash provided by operating activities
    
    
    14,394
    
    
    
    7,152INVESTING ACTIVITIES:Additions to oil and gas properties
    
    
    (113,555
    )
    
    
    (13,894
    )Proceeds from gain on sale of oil and gas properties, net
    
    
    361
    
    
    
    Additions to other property and equipment, net
    
    
    (383
    )
    
    
    (147
    )Cash used in investing activities
    
    
    (113,577
    )
    
    
    (14,041
    )FINANCING ACTIVITIES:Proceeds from issuance of common stock upon exercise of stock
options
    
    
    268
    
    
    
    Borrowings under credit facility, net of debt issuance costs
    
    
    78,200
    
    
    
    20,050Repayment of amounts outstanding under credit facility
    
    
    (1,500
    )
    
    
    (15,250
    )Cash provided by financing activities
    
    
    76,968
    
    
    
    4,800CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    (22,215
    )
    
    
    (2,089
    )EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH AND CASH EQUIVALENTS
    
    
    5
    
    
    
    (1
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    $
    23,465
    
    
    $
    2,685CASH AND CASH EQUIVALENTS, end of period
    
    $
    1,255
    
    
    $
    595SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    451
    
    
    $
    555
 See accompanying notes to these consolidated financial statements.
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Approach Resources Inc. and Subsidiaries
Unaudited Consolidated Statements of Comprehensive Income
(In thousands)
 Three Months EndedMarch 31,2011
    
    
    2010Net income
    
    $
    1,464
    
    
    $
    3,563Other comprehensive loss:Foreign currency translation, net of related income tax
    
    
    (1
    )
    
    
    (5
    )Total comprehensive income
    
    $
    1,463
    
    
    $
    3,558
 See accompanying notes to these consolidated financial statements.
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Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2011
 1. Summary of Significant Accounting Policies
 Organization and Nature of Operations
   Consolidation, Basis of Presentation and Significant Estimates
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Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2011
 2. Working Interest Acquisition
   Purchase price:Acquisition price
    
    $
    76,000Asset retirement obligations assumed
    
    
    547Post-closing purchase price adjustments
    
    
    (6,366
    )Total
    
    $
    70,181Allocation:Wells, equipment and related facilities
    
    $
    50,979Mineral interests in oil and gas properties
    
    
    19,202Total
    
    $
    70,181
 3. Earnings Per Common Share
  Three Months EndedMarch 31,2011
    
    
    2010Income (numerator):Net income  basic
    
    $
    1,464
    
    
    $
    3,563Weighted average shares (denominator):Weighted average shares  basic
    
    
    28,293,654
    
    
    
    20,996,202Dilution effect of share-based
compensation, treasury method
    
    
    249,278
    
    
    
    128,413Weighted average shares  diluted
    
    
    28,542,932
    
    
    
    21,124,615Net income per share:Basic
    
    $
    0.05
    
    
    $
    0.17Diluted
    
    $
    0.05
    
    
    $
    0.17
 4. Revolving Credit Facility
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Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2011
       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
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Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2011
 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 (x) gains or losses from sales or dispositions of assets, (y) unrealized
gain on commodity derivatives and (z) extraordinary or nonrecurring gains. For
purposes of calculating this ratio, consolidated EBITDAX for a fiscal quarter is
annualized pursuant to the credit agreement.
    5. Commitments and Contingencies
 Approach Operating, LLC v. EnCana Oil & Gas (USA) Inc., Cause No. 29.070A
  8




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Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2011
  6. Income Taxes
  7. Derivatives
  Volume (MMBtu)
    
    
    $/MMBtuPeriod
    
    Monthly
    
    
    Total
    
    
    FixedNYMEX  Henry HubPrice swaps 2011
    
    
    230,000
    
    
    
    2,070,000
    
    
    $
    4.86Price call 2012
    
    
    230,000
    
    
    
    2,760,000
    
    
    $
    6.00WAHA basis differentialBasis swaps 2011
    
    
    300,000
    
    
    
    2,700,000
    
    
    $
    (0.53
    )
  Volume (Bbls)
    
    
    $/BblPeriod
    
    Daily
    
    
    Total
    
    
    Floor
    
    
    CeilingNYMEX  West Texas Intermediate
Collars May 2011  December 2011
    
    
    1,000
    
    
    
    245,000
    
    
    $
    100.00
    
    
    $
    127.00
 Volume (MMBtu)
    
    
    $/MMBtuPeriod
    
    Monthly
    
    
    Total
    
    
    FixedNYMEX  Henry Hub
Price swaps June 2011  December 2011
    
    
    200,000
    
    
    
    1,400,000
    
    
    $
    4.74
  Asset Derivatives
    
    Liability DerivativesFair Value
    
    
    
    Fair ValueBalance Sheet
    
    March 31,
    
    December 31,
    
    Balance Sheet
    
    March 31,
    
    December 31,Location
    
    2011
    
    2010
    
    Location
    
    2011
    
    2010Derivatives not 
designated as hedging 
instrumentsCommodity
derivatives
    

Unrealized
gain on
commodity
derivatives
    
    $
    394
    
    
    $
    862
    
    

Unrealized
loss on
commodity
derivatives
    
    $
    1,637
    
    
    $
    1,956
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Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2011
  Asset DerivativesFair ValueThree Months EndedMarch 31,Income Statement Location
    
    
    2011
    
    
    2010Derivatives not designated as
hedging instrumentsCommodity derivatives
    
    Unrealized (loss) gain on commodity derivatives
    
    $
    (149
    )
    
    $
    5,095Realized gain on commodity derivatives
    
    
    197
    
    
    
    230$
    48
    
    
    $
    5,325
    
    
    Level 1  Quoted prices are available in active markets for identical assets or
liabilities as of the reporting date. At March 31, 2011, 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
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Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2011
 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, 2011, 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,
2011, our Level 3 measurements were limited to our asset retirement obligation.
 8. Share-Based Compensation
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
  Cautionary Statement Regarding Forward-Looking Statements
   
    
    our business strategy, including our ability to recover oil and gas in place
associated with our Wolffork oil resource play in the Permian Basin;
 
    
    estimated quantities of oil, NGL and gas reserves;
 
    
    uncertainty of commodity prices in oil, gas and NGLs;
 
    
    overall United States and global economic and financial market conditions;
 
    
    domestic and foreign demand and supply for oil, gas, NGLs and the products derived
from such hydrocarbons;
 
    
    disruption of credit and capital markets;
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
    
    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;
 
    
    high costs, shortages, delivery delays or unavailability of drilling and completion,
equipment, materials, 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;
 
    
    development 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, 2010, filed with the SEC on March 11, 2011.
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Overview
   First Quarter of 2011 Activity
  Acquisition of Acreage
  Working Interest Acquisition
  14




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Plans for 2011
    15




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Results of Operations
  Three Months EndedMarch 31,2011
    
    
    2010Revenues (in thousands)Gas
    
    $
    7,106
    
    
    $
    7,682Oil
    
    
    8,024
    
    
    
    3,555NGLs
    
    
    5,053
    
    
    
    1,983Total oil, NGL and gas sales
    
    
    20,183
    
    
    
    13,220Realized gain on commodity derivatives
    
    
    197
    
    
    
    230Total oil, NGL and gas sales including
derivative impact
    
    $
    20,380
    
    
    $
    13,450ProductionGas (MMcf)
    
    
    1,652
    
    
    
    1,424Oil (MBbls)
    
    
    88
    
    
    
    47NGLs (MBbls)
    
    
    105
    
    
    
    46Total (MBoe)
    
    
    469
    
    
    
    330Total (MBoe/d)
    
    
    5.2
    
    
    
    3.7Average pricesGas (per Mcf)
    
    $
    4.30
    
    
    $
    5.39Oil (per Bbl)
    
    
    90.67
    
    
    
    75.42NGLs (per Bbl)
    
    
    48.04
    
    
    
    43.33Total (per Boe)
    
    
    43.03
    
    
    
    40.02Realized gain on commodity derivatives (per Boe)
    
    
    0.42
    
    
    
    0.70Total including derivative impact (per Boe)
    
    $
    43.45
    
    
    $
    40.72Costs and expenses (per Boe)Lease operating (1)
    
    $
    5.64
    
    
    $
    5.58Severance and production taxes
    
    
    2.35
    
    
    
    2.10Exploration
    
    
    9.87
    
    
    
    4.52General and administrative
    
    
    7.46
    
    
    
    7.60Depletion, depreciation and amortization
    
    
    12.90
    
    
    
    17.68
 
 (1)
    
    Lease operating expense per Boe includes ad valorem taxes. Glossary
 Bbl.
 Boe.
 MBbl.
 MBoe.
 Mcf.
 16




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MMBoe.
 MMcf.
 NGLs.
 /d.
 Oil, NGL and gas sales.
 Oil, NGL and gas production.
 Commodity derivative activities
 Lease operating expenses
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Three Months EndedMarch 31,2011
    
    
    2010
    
    
    Change
    
    
    % ChangeCompression and gas treating
    
    $
    1.38
    
    
    $
    1.53
    
    
    $
    (0.15
    )
    
    
    (9.8
    )%Pumping and supervision
    
    
    1.08
    
    
    
    1.29
    
    
    
    (0.21
    )
    
    
    (16.3
    )Water hauling, insurance and other
    
    
    1.14
    
    
    
    1.08
    
    
    
    0.06
    
    
    
    5.6Ad valorem taxes
    
    
    1.12
    
    
    
    1.10
    
    
    
    0.02
    
    
    
    1.8Well repairs and maintenance
    
    
    0.92
    
    
    
    0.58
    
    
    
    0.34
    
    
    
    58.6Total
    
    $
    5.64
    
    
    $
    5.58
    
    
    $
    0.06
    
    
    
    1.1
    %
 Severance and production taxes
 Exploration
 General and administrative
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Three Months EndedMarch 31,2011
    
    
    2010
    
    
    Change$MM
    
    
    Boe
    
    
    $MM
    
    
    Boe
    
    
    $MM
    
    
    Boe
    
    
    % ChangeSalaries and benefits
    
    $
    1.4
    
    
    $
    2.87
    
    
    $
    1.1
    
    
    $
    3.19
    
    
    $
    0.3
    
    
    $
    (0.32
    )
    
    
    27.3
    %Share-based compensation
    
    
    0.8
    
    
    
    1.78
    
    
    
    0.6
    
    
    
    1.76
    
    
    
    0.2
    
    
    
    0.02
    
    
    
    33.3Professional fees
    
    
    0.5
    
    
    
    1.05
    
    
    
    0.3
    
    
    
    0.92
    
    
    
    0.2
    
    
    
    0.13
    
    
    
    66.7Data processing
    
    
    0.2
    
    
    
    0.42
    
    
    
    0.1
    
    
    
    0.41
    
    
    
    0.1
    
    
    
    0.01
    
    
    
    100.0Rent expense
    
    
    0.1
    
    
    
    0.31
    
    
    
    0.1
    
    
    
    0.33
    
    
    
    
    
    
    
    (0.02
    )
    
    
    Other
    
    
    0.5
    
    
    
    1.03
    
    
    
    0.3
    
    
    
    0.99
    
    
    
    0.2
    
    
    
    0.04
    
    
    
    66.7Total
    
    $
    3.5
    
    
    $
    7.46
    
    
    $
    2.5
    
    
    $
    7.60
    
    
    $
    1.0
    
    
    $
    (0.14
    )
    
    
    40.0
    %
 Depletion, depreciation and amortization.
 Interest expense, net.
 Income taxes.
 Liquidity and Capital Resources
   19




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Liquidity
   Liquidity withBorrowing BaseIncrease at
    
    
    Liquidity atMarch 31,
    
    
    March 312011
    
    
    2011
    
    
    2010Borrowing base
    
    $
    200,000
    
    
    $
    150,000
    
    
    $
    115,000Cash and cash equivalents
    
    
    1,255
    
    
    
    1,255
    
    
    
    595Long-term debt
    
    
    (76,700
    )
    
    
    (76,700
    )
    
    
    (37,169
    )Unused letters of credit
    
    
    (350
    )
    
    
    (350
    )
    
    
    (350
    )Liquidity
    
    $
    124,205
    
    
    $
    74,205
    
    
    $
    78,076
  Working Capital
  20




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##### Table of Contents



Cash Flows
  Three Months EndedMarch 31,2011
    
    
    2010Cash flows provided by operating activities
    
    $
    14,394
    
    
    $
    7,152Cash flows used in investing activities
    
    
    (113,577
    )
    
    
    (14,041
    )Cash flows provided by financing activities
    
    
    76,968
    
    
    
    4,800Effect of Canadian exchange rate
    
    
    5
    
    
    
    (1
    )Net decrease in cash and cash equivalents
    
    $
    (22,210
    )
    
    $
    (2,090
    )
  Operating Activities
  Investing Activities
  Financing Activities
   21




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##### Table of Contents



2011 Capital Expenditures
   Revolving Credit Facility
       22




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##### Table of Contents



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 (x) gains or losses from sales or dispositions of assets, (y) unrealized
gain on commodity derivatives and (z) extraordinary or nonrecurring gains. For
purposes of calculating this ratio, consolidated EBITDAX for a fiscal quarter is
annualized pursuant to the credit agreement.
     23




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##### Table of Contents



Contractual Obligations
  Off-Balance Sheet Arrangements
  General Trends and Outlook
     24




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  Commodity Price Risk
    Volume (MMBtu)
    
    
    $/MMBtuPeriod
    
    Monthly
    
    
    Total
    
    
    FixedNYMEX  Henry HubPrice swaps 2011
    
    
    230,000
    
    
    
    2,070,000
    
    
    $
    4.86Price call 2012
    
    
    230,000
    
    
    
    2,760,000
    
    
    $
    6.00WAHA basis differentialBasis swaps 2011
    
    
    300,000
    
    
    
    2,700,000
    
    
    $
    (0.53
    )
  Volume (Bbls)
    
    
    $/BblPeriod
    
    Daily
    
    
    Total
    
    
    Floor
    
    
    CeilingNYMEX  West Texas IntermediateCollars May 2011  December 2011
    
    
    1,000
    
    
    
    245,000
    
    
    $
    100.00
    
    
    $
    127.00
 Volume (MMBtu)
    
    
    $/MMBtuPeriod
    
    Monthly
    
    
    Total
    
    
    FixedNYMEX  Henry HubPrice swaps June 2011  December 2011
    
    
    200,000
    
    
    
    1,400,000
    
    
    $
    4.74
  25




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##### Table of Contents



Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
   Internal Control over Financial Reporting
  26




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##### Table of Contents



Limitations Inherent in All Controls
  27




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##### Table of Contents



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
 (c)
    
    
    (d)Total Number of Shares
    
    
    Maximum Number of Shares(a)
    
    
    (b)
    
    
    Purchased as Part of
    
    
    that May Yet Be PurchasedTotal Number of Shares
    
    
    Average Price Paid
    
    
    Publicly Announced Plans
    
    
    Under the Plans orPeriod
    
    Purchased
    
    
    Per Share
    
    
    or Programs
    
    
    ProgramsMonth #1January 1, 2011  January 31, 2011
    
    
    2,197
    
    
    $
    24.54
    
    
    
    
    
    
    
    Month #2February 1, 2011  February 28, 2011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Month #3March 1, 2011  March 31, 2011
    
    
    348
    
    
    
    28.95
    
    
    
    
    
    
    
    Total
    
    
    2,545
    
    
    $
    25.14
    
    
    
    
    
    
    
    
 
 Item 6. Exhibits.
  28




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##### Table of Contents



SIGNATURES
  APPROACH RESOURCES INC.Date: May 5, 2011
    By:
    /s/ J. Ross CraftJ. Ross CraftPresident and Chief Executive Officer
(Principal Executive Officer)Date: May 5, 2011
    By:
    /s/ Steven P. SmartSteven P. SmartExecutive Vice President and
Chief Financial Officer
(Principal Financial and Chief Accounting Officer)




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##### Table of Contents



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. 10 dated as of May 4, 2011, to Credit Agreement dated as of January 18, 2008,
among Approach Resources Inc., as Borrower, JPMorgan Chase Bank, N.A., as administrative
agent and lender, BNP Paribas, KeyBank National Association, The Frost National Bank and
Royal Bank of Canada, as lenders, and Approach Oil & Gas 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 4, 2011, 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.