##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 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.
 (Exact name of registrant as specified in its charter)
 
 Delaware
    
    51-0424817(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification number)One Ridgmar Centre6500 W. Freeway, Suite 800Fort Worth, Texas
    
    76116(Address of principal executive offices)
    
    (Zip Code)
 (Registrants telephone number, including area code)
 o þ
  o o þ
 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 3. Defaults upon senior securitiesItem 4. Submission of matters to a vote of security holdersItem 5. Other informationItem 6. ExhibitsSIGNATURESIndex to ExhibitsRestated Certificate of IncorporationRestated BylawsCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906    Table of Contents  
 PART I  FINANCIAL INFORMATION
 
 Item 1. Financial statements.
 APPROACH RESOURCES INC. AND AFFILIATED ENTITIES
UNAUDITED COMBINED BALANCE SHEETS
 September 30,
    
    
    December 31,2007
    
    
    2006CURRENT ASSETS:Cash
    
    $
    17,755,892
    
    
    $
    4,911,241Accounts receivable:Joint interest owners
    
    
    3,997,226
    
    
    
    4,812,439Oil and gas sales
    
    
    3,831,504
    
    
    
    3,457,948Unrealized gain on commodity derivatives
    
    
    2,182,400
    
    
    
    4,504,996Prepaid expenses and other current assets
    
    
    1,183,906
    
    
    
    424,081Total current assets
    
    
    28,950,928
    
    
    
    18,110,705PROPERTIES AND EQUIPMENT:Oil and gas properties, at cost, using the successful
efforts method of accounting
    
    
    186,490,333
    
    
    
    155,627,580Furniture, fixtures and equipment
    
    
    313,909
    
    
    
    255,451186,804,242
    
    
    
    155,883,031Less
accumulated depletion, depreciation and amortization
    
    
    (32,978,704
    )
    
    
    (23,771,187
    )Net properties and equipment
    
    
    153,825,538
    
    
    
    132,111,844INVESTMENT
    
    
    917,100
    
    
    
    3⁄4UNREALIZED GAIN ON COMMODITY DERIVATIVES
    
    
    205,872
    
    
    
    3⁄4OTHER ASSETS
    
    
    919,114
    
    
    
    86,169Total assets
    
    $
    184,818,552
    
    
    $
    150,308,718CURRENT LIABILITIES:Accounts payable
    
    $
    7,390,769
    
    
    $
    7,513,219Oil and gas sales payable
    
    
    3,408,137
    
    
    
    4,940,415Accrued liabilities
    
    
    6,637,569
    
    
    
    2,967,780Total current liabilities
    
    
    17,436,475
    
    
    
    15,421,414NON-CURRENT LIABILITIES:Long-term debt
    
    
    53,292,000
    
    
    
    47,619,000Convertible debt
    
    
    20,000,000
    
    
    
    3⁄4Deferred income taxes
    
    
    19,416,416
    
    
    
    17,549,107Asset retirement obligations
    
    
    183,898
    
    
    
    147,644Total liabilities
    
    
    110,328,789
    
    
    
    80,737,165COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred stock
    
    
    3⁄4
    
    
    
    3⁄4Common stock
    
    
    96,175
    
    
    
    97,353Additional paid-in capital
    
    
    39,232,815
    
    
    
    43,000,301Retained earnings
    
    
    35,160,773
    
    
    
    30,658,223Loans to stockholders
    
    
    3⁄4
    
    
    
    (4,184,324
    )Total stockholders equity
    
    
    74,489,763
    
    
    
    69,571,553Total liabilities and stockholders equity
    
    $
    184,818,552
    
    
    $
    150,308,718
 See accompanying notes to these combined financial statements.
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APPROACH RESOURCES INC. AND AFFILIATED ENTITIES
UNAUDITED COMBINED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006REVENUES:Oil and gas sales
    
    $
    8,292,482
    
    
    $
    10,397,342
    
    
    $
    27,374,413
    
    
    $
    36,787,037EXPENSES:Lease operating expense
    
    
    760,260
    
    
    
    822,179
    
    
    
    2,783,104
    
    
    
    2,814,497Severance and production taxes
    
    
    399,971
    
    
    
    540,394
    
    
    
    1,148,462
    
    
    
    1,381,831Exploration
    
    
    
    
    
    
    572,008
    
    
    
    632,958
    
    
    
    1,564,451General and administrative
    
    
    1,374,837
    
    
    
    500,302
    
    
    
    4,105,006
    
    
    
    1,734,300Depletion, depreciation and amortization
    
    
    3,109,180
    
    
    
    3,796,270
    
    
    
    9,217,028
    
    
    
    10,768,987Total expenses
    
    
    5,644,248
    
    
    
    6,231,153
    
    
    
    17,886,558
    
    
    
    18,264,066OPERATING INCOME
    
    
    2,648,234
    
    
    
    4,166,189
    
    
    
    9,487,855
    
    
    
    18,522,971OTHER:Interest expense, net
    
    
    (1,107,628
    )
    
    
    (1,058,196
    )
    
    
    (3,062,046
    )
    
    
    (2,766,608
    )Realized gain on commodity derivatives
    
    
    1,079,390
    
    
    
    1,125,850
    
    
    
    3,323,360
    
    
    
    4,210,377Change in fair value of commodity derivatives
    
    
    785,080
    
    
    
    3,694,750
    
    
    
    (2,116,724
    )
    
    
    9,141,701INCOME BEFORE PROVISION FOR INCOME TAXES
    
    
    3,405,076
    
    
    
    7,928,593
    
    
    
    7,632,445
    
    
    
    29,108,441PROVISION FOR INCOME TAXES
    
    
    1,312,273
    
    
    
    2,864,456
    
    
    
    3,129,895
    
    
    
    10,299,030NET INCOME
    
    $
    2,092,803
    
    
    $
    5,064,137
    
    
    $
    4,502,550
    
    
    $
    18,809,411EARNINGS PER SHARE:Basic
    
    $
    0.22
    
    
    $
    0.52
    
    
    $
    0.47
    
    
    $
    1.93Diluted
    
    $
    0.20
    
    
    $
    0.51
    
    
    $
    0.41
    
    
    $
    1.87WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    9,538,883
    
    
    
    9,735,312
    
    
    
    9,507,449
    
    
    
    9,754,712Diluted
    
    
    11,636,944
    
    
    
    10,025,982
    
    
    
    11,632,889
    
    
    
    10,045,382
 See accompanying notes to these combined financial statements.
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APPROACH RESOURCES INC. AND AFFILIATED ENTITIES
UNAUDITED COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
 Loans toStockholdersAdditional
    
    
    
    
    
    
    IncludingCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    AccruedShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Interest
    
    
    TotalBALANCE,January 1, 2007
    
    
    9,735,312
    
    
    $
    97,353
    
    
    $
    43,000,301
    
    
    $
    30,658,223
    
    
    $
    (4,184,324
    )
    
    $
    69,571,553Retirement of loans to
stockholders
    
    
    (253,650
    )
    
    
    (2,536
    )
    
    
    (4,181,788
    )
    
    
    3⁄4
    
    
    
    4,184,324
    
    
    
    3⁄4Issuance of restricted
stock
    
    
    63,750
    
    
    
    637
    
    
    
    (637
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Issuance of stock upon
exercise of stock options
    
    
    72,114
    
    
    
    721
    
    
    
    239,659
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    240,380Share-based compensation
expense
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    175,280
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    175,280Net income
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    4,502,550
    
    
    
    3⁄4
    
    
    
    4,502,550BALANCE, September 30, 2007
    
    
    9,617,526
    
    
    $
    96,175
    
    
    $
    39,232,815
    
    
    $
    35,160,773
    
    
    $
    3⁄4
    
    
    $
    74,489,763
 See accompanying notes to these combined financial statements.
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APPROACH RESOURCES INC. AND AFFILIATED ENTITIES
UNAUDITED COMBINED STATEMENTS OF CASH FLOWS
 Nine Months EndedSeptember 30,2007
    
    
    2006OPERATING ACTIVITIES:Net income
    
    $
    4,502,550
    
    
    $
    18,809,411Adjustments to reconcile net income to net cash provided
by operating activities:Depletion, depreciation and amortization
    
    
    9,217,028
    
    
    
    10,768,987Amortization of loan origination fees
    
    
    84,790
    
    
    
    59,640Change in fair value of commodity derivatives
    
    
    2,116,724
    
    
    
    (9,141,701
    )Dry hole costs
    
    
    632,958
    
    
    
    1,564,451Stock-based compensation expense
    
    
    175,280
    
    
    
    33,612Deferred income taxes
    
    
    1,867,309
    
    
    
    9,785,906Changes in operating assets and liabilities:Accounts receivable
    
    
    441,657
    
    
    
    7,316,720Prepaid expenses and other current assets
    
    
    (759,825
    )
    
    
    (369,014
    )Accounts payable
    
    
    (122,450
    )
    
    
    (10,972,481
    )Oil and gas sales payable
    
    
    (1,532,278
    )
    
    
    (1,195,735
    )Accrued liabilities
    
    
    3,669,789
    
    
    
    (63,532
    )Cash provided by operating activities
    
    
    20,293,532
    
    
    
    26,596,264INVESTING ACTIVITIES:Investments
    
    
    (917,100
    )
    
    
    3⁄4Additions to oil and gas properties
    
    
    (31,468,968
    )
    
    
    (49,777,894
    )Additions to other property and equipment, net
    
    
    (58,458
    )
    
    
    (11,250
    )Cash used in investing activities
    
    
    (32,444,526
    )
    
    
    (49,789,144
    )FINANCING ACTIVITIES:Proceeds from issuance of common stock
    
    
    240,380
    
    
    
    6,500,000Borrowings under credit facility, net
    
    
    53,541,500
    
    
    
    99,526,000Repayments of borrowings under credit facility
    
    
    (47,868,500
    )
    
    
    (80,783,000
    )Proceeds from issuance of convertible debt
    
    
    20,000,000
    
    
    
    3⁄4Borrowing from stockholder
    
    
    3⁄4
    
    
    
    3,500,000Purchase of common stock
    
    
    3⁄4
    
    
    
    (997,463
    )Stock option cancellation payment
    
    
    3⁄4
    
    
    
    (273,547
    )Deferred offering costs
    
    
    (774,358
    )
    
    
    3⁄4Income taxes on interest income from loans to stockholders
    
    
    3⁄4
    
    
    
    (60,995
    )Loan origination fees
    
    
    (143,377
    )
    
    
    (76,616
    )Cash provided by financing activities
    
    
    24,995,645
    
    
    
    27,334,379CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    12,844,651
    
    
    
    4,141,499CASH AND CASH EQUIVALENTS, beginning of period
    
    
    4,911,241
    
    
    
    3,219,463CASH AND CASH EQUIVALENTS, end of period
    
    $
    17,755,892
    
    
    $
    7,360,962SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:Cash paid for interest
    
    $
    3,360,497
    
    
    $
    2,189,523Cash paid for income taxes
    
    $
    1,200,000
    
    
    $
    450,000SUPPLEMENTAL DISCLOSURE OF NON-CASH
TRANSACTION:Conversion of stockholder note into common stock
    
    $
    3⁄4
    
    
    $
    3,500,000Retirement of loans to stockholders in exchange for shares
of common stock
    
    $
    4,184,324
    
    
    $
    333,499
 See accompanying notes to these combined financial statements.
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APPROACH RESOURCES INC. AND AFFILIATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
September 30, 2007
(Unaudited)
 1. Organization and nature of operations
     Subsequent events
 2. Summary of significant accounting policies
 Basis of presentation and use of estimates
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New accounting pronouncements
    Earnings (loss) per common share
  6




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Three Months Ended September 30, 2006Income (numerator)
    
    
    Shares (denominator)
    
    
    Per-share amountBasic earnings per share:Net income
    
    $
    5,064,137
    
    
    
    9,735,312
    
    
    $
    0.52Effect of dilutive securities:Stock options, treasury
method
    
    
    
    
    
    
    290,670Net income plus assumed conversions
    
    $
    5,064,137
    
    
    
    10,025,982
    
    
    $
    0.51
 Three Months Ended September 30, 2007Income (numerator)
    
    
    Shares (denominator)
    
    
    Per-share amountBasic earnings per share:
    
    $
    2,092,803
    
    
    
    9,538,883
    
    
    $
    0.22Net incomeEffect of dilutive securities:Stock options, treasury
method
    
    
    
    
    
    
    208,514Non-vested restricted shares(1)
    
    
    
    
    
    
    63,750Convertible debt, if-converted
method(2)
    
    
    227,040
    
    
    
    1,825,797Net income plus assumed conversions
    
    $
    2,319,843
    
    
    
    11,636,944
    
    
    $
    0.20
 Nine Months Ended September 30, 2006Income (numerator)
    
    
    Shares (denominator)
    
    
    Per-share amountBasic earnings per share:
    
    $
    18,809,411
    
    
    
    9,754,712
    
    
    $
    1.93Net incomeEffect of dilutive securities:Stock options, treasury
method
    
    
    
    
    
    
    290,670Net income plus assumed conversions
    
    $
    18,809,411
    
    
    
    10,045,382
    
    
    $
    1.87
 Nine Months Ended September 30, 2007Income (numerator)
    
    
    Shares (denominator)
    
    
    Per-share amountBasic earnings per share:
    
    $
    4,502,550
    
    
    
    9,507,449
    
    
    $
    0.47Net incomeEffect of dilutive securities:Stock options, treasury
method
    
    
    
    
    
    
    235,893Non-vested restricted shares(1)
    
    
    
    
    
    
    63,750Convertible debt, if-converted
method(2)
    
    
    241,848
    
    
    
    1,825,797Net income plus assumed conversions
    
    $
    4,744,398
    
    
    
    11,632,889
    
    
    $
    0.41
 
 (1)
    
    We issued these shares in March 2007. Prior to that time, there were no restricted shares outstanding.(2)
    
    The outstanding principal and interest under our convertible debt was converted on November 7, 2007 into shares of common stock
(see Note 11 for further discussion). We issued the convertible debt that gives rise to these dilutive securities during June 2007.
Prior to that time, there was no convertible debt outstanding. 3. Loans to stockholders and stockholder notes payable
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4. Line of credit
   5. Stockholders equity and share-based compensation
  PREFERRED STOCK:Par value, per share
    
    $
    0.01Shares authorized
    
    
    10,000,000Shares issued and outstanding at:September 30, 2007
    
    
    December 31, 2006
    
    
    COMMON STOCK:Par value, per share
    
    $
    0.01Shares authorized
    
    
    90,000,000Shares issued and outstanding at:September 30, 2007
    
    
    9,617,526December 31, 2006
    
    
    9,735,312
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6. Income taxes
  9




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7. Derivatives
  Volume (MMBtu)
    
    $/MMBtuPeriod
    
    Monthly
    
    Total
    
    Floor
    
    Ceiling
    
    FixedNYMEX  Henry HubFixed price swaps
2007
    
    
    230,000
    
    
    
    690,000
    
    
    
    
    
    
    
    
    
    
    $
    9.22Costless collars
2008
    
    
    186,000
    
    
    
    2,232,000
    
    
    $
    7.50
    
    
    $
    11.45WAHA differentialFixed price swaps
2007
    
    
    230,000
    
    
    
    690,000
    
    
    
    
    
    
    
    
    
    
    $
    (1.02
    )Fixed price
swaps 2008
    
    
    186,000
    
    
    
    2,232,000
    
    
    
    
    
    
    
    
    
    
    
    (0.69
    )
    8. Commitments and contingencies
 Employment agreements
  Operating leases
  9. Convertible debt
  10




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Subsequent events
 10. Canadian unconventional gas investment
  11. Subsequent events
 Contribution agreement
   11




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Purchase price:Issuance of 4,239,243 shares of Approach Resources Inc.
common stock valued at $12.00 per share
    
    $
    50,871Plus: assumption of asset retirement obligations
    
    
    67Total purchase price
    
    $
    50,938Allocation:Mineral interests in oil and gas properties
    
    $
    3,708Wells and equipment and related facilities
    
    
    47,230Total
    
    $
    50,938
  Nine MonthsEnded September 30,2007
    
    2006Operating revenues
    
    $
    38,509,000
    
    
    $
    52,110,000Total expenses
    
    $
    22,850,000
    
    
    $
    24,708,000Earnings applicable to common stock
    
    $
    8,535,000
    
    
    $
    24,403,000Net earnings per share  basic
    
    $
    0.62
    
    
    $
    2.04Net earnings per share  diluted
    
    $
    0.55
    
    
    $
    1.99
 Initial public offering
  Repayment of revolving credit facility
    
    $
    51.1Repurchase of common stock held by Selling Stockholder
    
    $
    22.5
 Stock split
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Convertible notes
   13




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Item 2. Managements discussion and analysis of financial condition and results of operations.
  Overview
      14




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Recent developments
 Contribution Agreement.
 Initial Public Offering.
 Repayment of revolving credit facility
    
    $
    51.1Repurchase of stock held by Selling Stockholder
    
    $
    22.5
 Stock Split.
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Convertible Notes.
 Cautionary statement regarding forward-looking statements
   
    
    our business strategy;
    
    estimated quantities of gas and oil reserves;
    
    technology;
    
    uncertainty of commodity prices in oil and gas;
    
    our financial position;
    
    our cash flow and liquidity;
    
    declines in the prices we receive for our gas and oil affecting our operating results and
cash flow;
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
    
    economic slowdowns that can adversely affect consumption of gas and oil by businesses and
consumers;
    
    uncertainties in estimating our gas and oil reserves;
    
    replacing our gas and oil reserves;
    
    uncertainty regarding our future operating results;
    
    uncertainties in exploring for and producing gas and oil;
    
    our inability to obtain additional financing necessary to fund our operations and capital
expenditures and to meet our other obligations;
    
    availability of drilling and production equipment and field service providers;
    
    disruptions to, capacity constraints in or other limitations on the pipeline systems which
deliver our gas and other processing and transportation considerations;
    
    competition in the oil and gas industry;
    
    marketing of gas and oil;
    
    exploitation or property acquisitions;
    
    our inability to retain and attract key personnel;
    
    the effects of government regulation and permitting and other legal requirements;
    
    costs associated with perfecting title for mineral rights in some of our properties; and
    
    plans, objectives, expectations and intentions contained in our Prospectus dated November
7, 2007 and filed with the SEC pursuant to Rule 424(b) on November 8, 2007 that are not
historical.
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Results of operations
 Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues (in thousands):Gas
    
    
    7,194
    
    
    
    9,371
    
    
    
    24,110
    
    
    
    33,048Oil
    
    
    1,099
    
    
    
    1,026
    
    
    
    3,264
    
    
    
    3,739Total oil and gas sales
    
    
    8,293
    
    
    
    10,397
    
    
    
    27,374
    
    
    
    36,787Realized gain on commodity derivatives
    
    
    1,079
    
    
    
    1,126
    
    
    
    3,323
    
    
    
    4,210Total oil and gas sales including derivative impact
    
    
    9,372
    
    
    
    11,523
    
    
    
    30,697
    
    
    
    40,997Production:Gas (MMcf)
    
    
    1,135
    
    
    
    1,484
    
    
    
    3,511
    
    
    
    4,849Oil (MBbl)
    
    
    16
    
    
    
    15
    
    
    
    55
    
    
    
    57Total (MMcfe)
    
    
    1,232
    
    
    
    1,573
    
    
    
    3,840
    
    
    
    5,192Average prices:Gas, per Mcf
    
    
    6.34
    
    
    
    6.32
    
    
    
    6.87
    
    
    
    6.82Oil, per Bbl
    
    
    68.10
    
    
    
    68.81
    
    
    
    59.51
    
    
    
    65.37Total, per Mcfe
    
    
    6.73
    
    
    
    6.61
    
    
    
    7.13
    
    
    
    7.08Realized gain on commodity derivatives, per Mcfe
    
    
    0.88
    
    
    
    0.72
    
    
    
    0.86
    
    
    
    0.82Total per Mcfe including derivative impact
    
    
    7.61
    
    
    
    7.33
    
    
    
    7.99
    
    
    
    7.90Costs and expenses (per Mcfe):Lease operating expenses
    
    
    0.62
    
    
    
    0.52
    
    
    
    0.72
    
    
    
    0.54Severance and production taxes
    
    
    0.32
    
    
    
    0.34
    
    
    
    0.30
    
    
    
    0.27Depletion, depreciation and amortization
    
    
    2.52
    
    
    
    2.41
    
    
    
    2.40
    
    
    
    2.07Exploration
    
    
    
    
    
    
    0.36
    
    
    
    0.16
    
    
    
    0.30General and administrative
    
    
    1.12
    
    
    
    0.32
    
    
    
    1.07
    
    
    
    0.33
 Three months ended September 30, 2007 compared to three months ended September 30, 2006
 Oil and gas sales
 Commodity derivative activities
 Lease operating expense
 18




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##### Table of Contents



Severance and production taxes
 Exploration
 General and administrative
 Depletion, depreciation and amortization (DD&A)
 Interest income (expense), net.
 Income taxes
 Nine months ended September 30, 2007 compared to nine months ended September 30, 2006
 Oil and gas sales
 19




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##### Table of Contents



Commodity derivative activities
 Lease operating expense
 Severance and production taxes
 Exploration
 General and administrative
 Depletion, depreciation and amortization (DD&A)
 Interest income (expense), net
 Income taxes
 20




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##### Table of Contents



Pro forma information
 Pro formaNine Months EndedSeptember 30,2007
    
    
    2006Revenues (in thousands):Gas
    
    $
    34,005
    
    
    $
    46,806Oil
    
    
    4,504
    
    
    
    5,304Total oil and gas sales
    
    
    38,509
    
    
    
    52,110Realized gain on commodity derivatives
    
    
    3,323
    
    
    
    4,210Total oil and gas sales including derivative impact
    
    
    41,832
    
    
    
    56,320Production:Gas (MMcf)
    
    
    4,979
    
    
    
    6,876Oil (MBbl)
    
    
    75
    
    
    
    81Total (MMcfe)
    
    
    5,429
    
    
    
    7,365Average prices:Gas, per Mcf
    
    $
    6.83
    
    
    $
    6.81Oil, per Bbl
    
    
    60.00
    
    
    
    65.13Total, per Mcfe
    
    
    7.09
    
    
    
    7.08Realized gain on commodity derivatives, per Mcfe
    
    
    0.61
    
    
    
    0.57Total per Mcfe including derivative impact
    
    
    7.70
    
    
    
    7.65Costs and expenses (per Mcfe):Lease operating expenses
    
    $
    0.71
    
    
    $
    0.56Severance and production taxes
    
    
    0.30
    
    
    
    0.28Depletion, depreciation and amortization
    
    
    2.27
    
    
    
    2.04Exploration
    
    
    0.12
    
    
    
    0.21General and administrative
    
    
    0.82
    
    
    
    0.27
 Liquidity and capital resources
   21




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##### Table of Contents



Nine Months EndedSeptember 30,(in thousands)
    
    2007
    
    
    2006Cash flows provided by operating
activities
    
    $
    20,294
    
    
    $
    26,596Cash flows used in investing
activities
    
    
    (32,445
    )
    
    
    (49,789
    )Cash flows provided by financing
activities
    
    
    24,996
    
    
    
    27,334Net increase (decrease) in cash
and cash equivalents
    
    $
    12,845
    
    
    $
    4,141
 Operating activities
  Investing activities
   Financing activities
  22




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##### Table of Contents



Future capital expenditures for 2007 and 2008
  Estimated(1)Year EndingDecember 31,(in thousands)
    
    2007
    
    
    2008Capital expenditures:Ozona Northeast
    
    $
    23,400
    
    
    $
    29,500Cinco Terry
    
    
    6,600
    
    
    
    10,900East Texas
    
    
    8,500
    
    
    
    14,400Northern New Mexico
    
    
    
    
    
    
    3,600Western Kentucky
    
    
    900
    
    
    
    1,800Western Canada
    
    
    1,200
    
    
    
    3,200Lease acquisition, geological, geophysical and other
    
    
    8,000
    
    
    
    900Total capital expenditures
    
    $
    48,600
    
    
    $
    64,300
 
 (1)
    
    Estimated capital expenditures for 2007 and 2008 include
additional capital expenditures attributable to the approximately 30%
working interest we acquired from Neo Canyon on November 14,
2007, but do not include the capital expenditure associated with our
acquisition of that interest. 23




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##### Table of Contents



Credit facility
      Off-balance sheet arrangements
  
 Item 3. Quantitative and qualitative disclosures about market risk.
  24




---



##### Table of Contents



Commodity price risk
     Volume (MMBtu)
    
    
    $/MMBtuPeriod
    
    Monthly
    
    
    Total
    
    
    Floor
    
    
    Ceiling
    
    FixedNYMEX  Henry HubFixed price swaps 2007
    
    
    230,000
    
    
    
    690,000
    
    
    
    
    
    
    
    
    
    
    $
    9.22Costless collars
2008
    
    
    186,000
    
    
    
    2,232,000
    
    
    $
    7.50
    
    
    $
    11.45WAHA differentialFixed price swaps 2007
    
    
    230,000
    
    
    
    690,000
    
    
    
    
    
    
    
    
    
    
    $
    (1.02
    )Fixed price
swaps 2008
    
    
    186,000
    
    
    
    2,232,000
    
    
    
    
    
    
    
    
    
    
    
    (0.69
    )
    
 Item 4. Controls and procedures.
  25




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##### Table of Contents



26




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal proceedings.
  
 Item 1A. Risk factors.
  
 Item 2. Unregistered sales of equity securities and use of proceeds.
   
 Item 3. Defaults upon senior securities.
  
 Item 4. Submission of matters to a vote of security holders.
  
 Item 5. Other information.
  27




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##### Table of Contents



Item 6. Exhibits.
 3.1
    
    Restated Certificate of Incorporation of Approach Resources Inc.3.2
    
    Restated Bylaws of Approach Resources Inc.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
    
    Contribution Agreement by and among Approach Resources Inc. and the equity
holders identified therein, dated June 29, 2007 (filed as Exhibit 10.2 to the Companys
Registration Statement on Form S-1 filed July 12, 2007 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
    
    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).10.5
    
    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).10.6
    
    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).10.7
    
    Convertible Promissory Note issued by Approach Oil & Gas Inc. to Yorktown
Energy Partners VII, L.P. dated June 25, 2007 (filed as Exhibit 10.7 to the Companys
Registration Statement on Form S-1 filed July 12, 2007 and incorporated herein by
reference).10.8
    
    Convertible Promissory Note issued by Approach Oil & Gas Inc. to Lubar Equity
Fund, LLC dated June 25, 2007 (filed as Exhibit 10.8 to the Companys Registration
Statement on Form S-1 filed July 12, 2007 and incorporated herein by reference).10.9
    
    $100,000,000 Revolving Amended and Restated Credit Agreement by and among
Approach Resources I, LP, as borrower, The Frost National Bank, as administrative agent
and lender, and the financial institutions part thereto, dated February 15, 2007 (filed
as Exhibit 10.9 to the Companys Registration Statement on Form S-1 filed July 12, 2007
and incorporated herein by reference).
 28




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##### Table of Contents



10.10
    
    Amendment to Amended and Restated Credit Agreement dated as of February 15,
2007 between Approach Resources I, LP, The Frost National Bank, as administrative agent
and lender, and the lenders party thereto, dated June 15, 2007 (filed as Exhibit 10.10
to the Companys Registration Statement on Form S-1 filed July 12, 2007 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 Stock Award Agreement under Approach Resources Inc. 2007 Stock
Incentive Plan (filed as Exhibit 10.15 to the Companys Registration Statement on Form
S-1/A filed October 18, 2007 (File No. 333-144512) and incorporated herein by
reference).10.16
    
    Second Amendment to Amended and Restated Credit Agreement dated as of February
15, 2007 between Approach Resources I, LP, The Frost National Bank, as administrative
agent, and the lenders party thereto, dated July 20, 2007 (filed as Exhibit 10.16 to
the Companys Registration Statement on Form S-1/A filed September 13, 2007 (File No.
333-144512) and incorporated herein by reference).10.17
    
    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).10.18
    
    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).10.19
    
    Agreement Regarding Gas Purchase Contract dated May 26, 2006 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).
 29




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##### Table of Contents



10.20
    
    Third Amendment to Amended and Restated Credit Agreement dated as of February
15, 2007 between Approach Resources I, LP, The Frost National Bank, as administrative
agent, and the lenders party thereto, dated September 1, 2007 (filed as Exhibit 10.20
to the Companys Registration Statement on Form S-1/A filed September 13, 2007 (File
No. 333-144512) and incorporated herein by reference).10.21
    
    Partial Assignment of Oil and Gas Leases and Related Property dated effective
August 1, 2006 among Neo Canyon Exploration, L.P. and the other assignors identified
therein, and Approach Resources I, L.P., as assignee (filed as Exhibit 10.21 to the
Companys Registration Statement on Form S-1/A filed September 13, 2007 (File No.
333-144512) and incorporated herein by reference).10.22
    
    Carry and Earning Agreement dated July 13, 2007 by and between EnCana Oil &
Gas (USA) (filed as Exhibit 10.22 to the Companys Registration Statement on Form S-1/A
filed September 13, 2007 (File No. 333-144512) and incorporated herein by reference).10.23
    
    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).10.24
    
    Specimen Oil and Gas Lease for Boomerang prospect between lessors and Approach
Oil & Gas Inc., as successor to The Keeton Group, LLC, as lessee (filed as Exhibit
10.24 to the Companys Registration Statement on Form S-1/A filed September 13, 2007
(File No. 333-144512) and incorporated herein by reference).10.25
    
    Gas Purchase Contract dated June 1, 2006 by and between Approach Operating,
L.P. and Belvan Partners, L.P. (filed as Exhibit 10.25 to the Companys Registration
Statement on Form S-1/A filed October 18, 2007 (File No. 333-144512) and incorporated
herein by reference).10.26
    
    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).10.27
    
    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).31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 30




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##### Table of Contents



SIGNATURES
  APPROACH RESOURCES INC.By:
    
    /s/ J. ROSS CRAFT

J. Ross Craft
President and Chief Executive Officer
  31




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##### Table of Contents



ExhibitNumber
    
    Exhibit3.1
    
    
    
    Restated Certificate of Incorporation of Approach Resources Inc.3.2
    
    
    
    Restated Bylaws of Approach Resources Inc.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
    
    
    
    Contribution Agreement by and among Approach Resources Inc. and
the equity holders identified therein, dated June 29, 2007
(filed as Exhibit 10.2 to the Companys Registration Statement
on Form S-1 filed July 12, 2007 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
    
    
    
    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).10.5
    
    
    
    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).10.6
    
    
    
    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).10.7
    
    
    
    Convertible Promissory Note issued by Approach Oil & Gas Inc.
to Yorktown Energy Partners VII, L.P. dated June 25, 2007
(filed as Exhibit 10.7 to the Companys Registration Statement
on Form S-1 filed July 12, 2007 and incorporated herein by
reference).10.8
    
    
    
    Convertible Promissory Note issued by Approach Oil & Gas Inc.
to Lubar Equity Fund, LLC dated June 25, 2007 (filed as Exhibit
10.8 to the Companys Registration Statement on Form S-1 filed
July 12, 2007 and incorporated herein by reference).10.9
    
    
    
    $100,000,000 Revolving Amended and Restated Credit Agreement by
and among Approach Resources I, LP, as borrower, The Frost
National Bank, as administrative agent and lender, and the
financial institutions part thereto, dated February 15, 2007
 32




---



##### Table of Contents



ExhibitNumber
    
    Exhibit(filed as Exhibit 10.9 to the Companys Registration Statement
on Form S-1 filed July 12, 2007 and incorporated herein by
reference).10.10
    
    
    
    Amendment to Amended and Restated Credit Agreement dated as of
February 15, 2007 between Approach Resources I, LP, The Frost
National Bank, as administrative agent and lender, and the
lenders party thereto, dated June 15, 2007 (filed as Exhibit
10.10 to the Companys Registration Statement on Form S-1 filed
July 12, 2007 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 Stock Award Agreement under Approach Resources Inc.
2007 Stock Incentive Plan (filed as Exhibit 10.15 to the
Companys Registration Statement on Form S-1/A filed October
18, 2007 (File No. 333-144512) and incorporated herein by
reference).10.16
    
    
    
    Second Amendment to Amended and Restated Credit Agreement dated
as of February 15, 2007 between Approach Resources I, LP, The
Frost National Bank, as administrative agent, and the lenders
party thereto, dated July 20, 2007 (filed as Exhibit 10.16 to
the Companys Registration Statement on Form S-1/A filed
September 13, 2007 (File No. 333-144512) and incorporated
herein by reference).10.17
    
    
    
    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).10.18
    
    
    
    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).10.19
    
    
    
    Agreement Regarding Gas Purchase Contract dated May 26, 2006
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
 33




---



##### Table of Contents



ExhibitNumber
    
    ExhibitStatement
on Form S-1/A filed September 13, 2007 (File No. 333-144512)
and incorporated herein by reference).10.20
    
    
    
    Third Amendment to Amended and Restated Credit Agreement dated
as of February 15, 2007 between Approach Resources I, LP, The
Frost National Bank, as administrative agent, and the lenders
party thereto, dated September 1, 2007 (filed as Exhibit 10.20
to the Companys Registration Statement on Form S-1/A filed
September 13, 2007 (File No. 333-144512) and incorporated
herein by reference).10.21
    
    
    
    Partial Assignment of Oil and Gas Leases and Related Property
dated effective August 1, 2006 among Neo Canyon Exploration,
L.P. and the other assignors identified therein, and Approach
Resources I, L.P., as assignee (filed as Exhibit 10.21 to the
Companys Registration Statement on Form S-1/A filed September
13, 2007 (File No. 333-144512) and incorporated herein by
reference).10.22
    
    
    
    Carry and Earning Agreement dated July 13, 2007 by and between
EnCana Oil & Gas (USA) (filed as Exhibit 10.22 to the Companys
Registration Statement on Form S-1/A filed September 13, 2007
(File No. 333-144512) and incorporated herein by reference).10.23
    
    
    
    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).10.24
    
    
    
    Specimen Oil and Gas Lease for Boomerang prospect between
lessors and Approach Oil & Gas Inc., as successor to The Keeton
Group, LLC, as lessee (filed as Exhibit 10.24 to the Companys
Registration Statement on Form S-1/A filed September 13, 2007
(File No. 333-144512) and incorporated herein by reference).10.25
    
    
    
    Gas Purchase Contract dated June 1, 2006 by and between
Approach Operating, L.P. and Belvan Partners, L.P. (filed as
Exhibit 10.25 to the Companys Registration Statement on Form
S-1/A filed October 18, 2007 (File No. 333-144512) and
incorporated herein by reference).10.26
    
    
    
    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).10.27
    
    
    
    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).31.1
    
    
    
    Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    
    Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    
    Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    
    Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 34