##### 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 September 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 of incorporation or organization)
    
    51-0424817
(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
(Do not check if smaller reporting company)
    
    Smaller reporting company o
 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-10.2EX-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)
 September 30,
    
    
    December 31,2010
    
    
    2009ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    417
    
    
    $
    2,685Accounts receivable:Joint interest owners
    
    
    7,960
    
    
    
    3,088Oil and gas sales
    
    
    4,873
    
    
    
    4,607Unrealized gain on commodity derivatives
    
    
    1,232
    
    
    
    786Prepaid expenses and other current assets
    
    
    291
    
    
    
    582Deferred income taxes  current
    
    
    1,815
    
    
    
    255Total current assets
    
    
    16,588
    
    
    
    12,003PROPERTIES AND EQUIPMENT:Oil and gas properties, at cost, using the successful efforts method of accounting
    
    
    438,302
    
    
    
    387,792Furniture, fixtures and equipment
    
    
    2,193
    
    
    
    1,540440,495
    
    
    
    389,332Less accumulated depletion, depreciation and amortization
    
    
    (101,296
    )
    
    
    (84,849
    )Net properties and equipment
    
    
    339,199
    
    
    
    304,483OTHER ASSETS
    
    
    2,521
    
    
    
    2,440Total assets
    
    $
    358,308
    
    
    $
    318,926LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Advances from nonoperators
    
    $
    848
    
    
    $
    2,689Accounts payable
    
    
    9,095
    
    
    
    3,074Oil and gas sales payable
    
    
    6,072
    
    
    
    3,774Accrued liabilities
    
    
    12,228
    
    
    
    10,935Unrealized loss on commodity derivatives
    
    
    
    
    
    
    1,524Total current liabilities
    
    
    28,243
    
    
    
    21,996NONCURRENT LIABILITIES:Long-term debt
    
    
    51,069
    
    
    
    32,319Unrealized loss on commodity derivatives
    
    
    232
    
    
    
    1,144Deferred income taxes
    
    
    43,979
    
    
    
    38,374Asset retirement obligations
    
    
    5,120
    
    
    
    4,597Total liabilities
    
    
    128,643
    
    
    
    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, 21,527,145 and
20,959,285 issued and outstanding, respectively
    
    
    215
    
    
    
    209Additional paid-in capital
    
    
    170,958
    
    
    
    168,993Retained earnings
    
    
    58,725
    
    
    
    51,524Accumulated other comprehensive loss
    
    
    (233
    )
    
    
    (230
    )Total stockholders equity
    
    
    229,665
    
    
    
    220,496Total liabilities and stockholders equity
    
    $
    358,308
    
    
    $
    318,926
 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 Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009REVENUES:Oil and gas sales
    
    $
    14,916
    
    
    $
    8,787
    
    
    $
    41,291
    
    
    $
    28,767EXPENSES:Lease operating
    
    
    1,995
    
    
    
    1,894
    
    
    
    6,038
    
    
    
    6,016Severance and production taxes
    
    
    743
    
    
    
    455
    
    
    
    2,047
    
    
    
    1,392Exploration
    
    
    568
    
    
    
    534
    
    
    
    2,245
    
    
    
    534General and administrative
    
    
    3,212
    
    
    
    2,237
    
    
    
    7,902
    
    
    
    7,277Depletion, depreciation and amortization
    
    
    5,832
    
    
    
    5,595
    
    
    
    16,677
    
    
    
    18,766Total expenses
    
    
    12,350
    
    
    
    10,715
    
    
    
    34,909
    
    
    
    33,985OPERATING INCOME (LOSS)
    
    
    2,566
    
    
    
    (1,928
    )
    
    
    6,382
    
    
    
    (5,218
    )OTHER:Interest expense, net
    
    
    (615
    )
    
    
    (451
    )
    
    
    (1,631
    )
    
    
    (1,353
    )Realized gain on commodity derivatives
    
    
    1,615
    
    
    
    4,271
    
    
    
    3,613
    
    
    
    11,896Unrealized (loss) gain on commodity
derivatives
    
    
    (312
    )
    
    
    (6,414
    )
    
    
    2,882
    
    
    
    (8,589
    )INCOME (LOSS) BEFORE INCOME TAX PROVISION
(BENEFIT)
    
    
    3,254
    
    
    
    (4,522
    )
    
    
    11,246
    
    
    
    (3,264
    )INCOME TAX PROVISION (BENEFIT)
    
    
    1,167
    
    
    
    (1,378
    )
    
    
    4,045
    
    
    
    (317
    )NET INCOME (LOSS)
    
    $
    2,087
    
    
    $
    (3,144
    )
    
    $
    7,201
    
    
    $
    (2,947
    )EARNINGS (LOSS) PER SHARE:Basic
    
    $
    0.10
    
    
    $
    (0.15
    )
    
    $
    0.34
    
    
    $
    (0.14
    )Diluted
    
    $
    0.10
    
    
    $
    (0.15
    )
    
    $
    0.34
    
    
    $
    (0.14
    )WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    21,357,682
    
    
    
    20,929,508
    
    
    
    21,139,089
    
    
    
    20,839,746Diluted
    
    
    21,484,465
    
    
    
    20,929,508
    
    
    
    21,265,794
    
    
    
    20,839,746
 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)
 Nine Months EndedSeptember 30,2010
    
    
    2009OPERATING ACTIVITIES:Net income (loss)
    
    $
    7,201
    
    
    $
    (2,947
    )Adjustments to reconcile net income (loss) to cash provided
by operating activities:Depletion, depreciation and amortization
    
    
    16,677
    
    
    
    18,766Unrealized (gain) loss on commodity derivatives
    
    
    (2,882
    )
    
    
    8,589Exploration expense
    
    
    2,245
    
    
    
    534Share-based compensation expense
    
    
    2,043
    
    
    
    1,434Deferred income taxes
    
    
    3,974
    
    
    
    (314
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (5,053
    )
    
    
    16,019Prepaid expenses and other assets
    
    
    477
    
    
    
    99Accounts payable
    
    
    4,182
    
    
    
    (10,315
    )Oil and gas sales payable
    
    
    2,298
    
    
    
    (1,888
    )Accrued liabilities
    
    
    1,293
    
    
    
    (7,047
    )Cash provided by operating activities
    
    
    32,455
    
    
    
    22,930INVESTING ACTIVITIES:Additions to oil and gas properties
    
    
    (52,385
    )
    
    
    (18,993
    )Additions to other property and equipment, net
    
    
    (730
    )
    
    
    (475
    )Cash used in investing activities
    
    
    (53,115
    )
    
    
    (19,468
    )FINANCING ACTIVITIES:Borrowings under credit facility, net of debt issuance costs
    
    
    81,046
    
    
    
    55,677Repayment of amounts outstanding under credit facility
    
    
    (62,650
    )
    
    
    (62,525
    )Cash provided by (used in) financing activities
    
    
    18,396
    
    
    
    (6,848
    )CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    (2,264
    )
    
    
    (3,386
    )EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH AND CASH
EQUIVALENTS
    
    
    (4
    )
    
    
    9CASH AND CASH EQUIVALENTS, beginning of period
    
    
    2,685
    
    
    
    4,077CASH AND CASH EQUIVALENTS, end of period
    
    $
    417
    
    
    $
    700SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    1,524
    
    
    $
    1,199
 See accompanying notes to these consolidated financial statements.
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Approach Resources Inc. and Subsidiaries
Unaudited Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income (loss)
    
    $
    2,087
    
    
    $
    (3,144
    )
    
    $
    7,201
    
    
    $
    (2,947
    )Other comprehensive (loss) income:Foreign currency translation, net of related income tax
    
    
    (3
    )
    
    
    111
    
    
    
    (3
    )
    
    
    202Total comprehensive income (loss)
    
    $
    2,084
    
    
    $
    (3,033
    )
    
    $
    7,198
    
    
    $
    (2,745
    )
 See accompanying notes to these consolidated financial statements.
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Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2010
 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)
September 30, 2010
 2. Earnings Per Common Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Income (numerator):Net income (loss)  basic
    
    $
    2,087
    
    
    $
    (3,144
    )
    
    $
    7,201
    
    
    $
    (2,947
    )Weighted average shares (denominator):Weighted average shares  basic
    
    
    21,357,682
    
    
    
    20,929,508
    
    
    
    21,139,089
    
    
    
    20,839,746Dilution effect of share-based
compensation, treasury method
    
    
    126,783
    
    
    
    
    (1)
    
    
    126,705
    
    
    
    
    (1)Weighted average shares  diluted
    
    
    21,484,465
    
    
    
    20,929,508
    
    
    
    21,265,794
    
    
    
    20,839,746Net income (loss) per share:Basic
    
    $
    0.10
    
    
    $
    (0.15
    )
    
    $
    0.34
    
    
    $
    (0.14
    )Diluted
    
    $
    0.10
    
    
    $
    (0.15
    )
    
    $
    0.34
    
    
    $
    (0.14
    )
 
 (1)
    
    Approximately 416,000 stock options were excluded from assumed conversions because they were
anti-dilutive for the three and nine months ended September 30, 2009. 3. Revolving Credit Facility
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Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2010
    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.
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Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2010
   4. Commitments and Contingencies
 Approach Operating, LLC v. EnCana Oil & Gas (USA) Inc., Cause No. 29.070A
  5. Income Taxes
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Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2010
 6. Derivatives
  Volume (MMBtu)
    
    
    $/MMBtuPeriod
    
    Monthly
    
    
    Total
    
    
    FixedNYMEX  Henry HubPrice swaps 2010
    
    
    150,000
    
    
    
    450,000
    
    
    $
    5.85Price swaps 2010
    
    
    150,000
    
    
    
    450,000
    
    
    $
    6.40Price swaps 2010
    
    
    100,000
    
    
    
    300,000
    
    
    $
    6.36Weighted average price ($/MMBtu)
    
    
    
    
    
    
    
    
    
    $
    6.18WAHA basis differentialBasis swaps 2010
    
    
    415,000
    
    
    
    1,245,000
    
    
    $
    (0.71
    )Basis swaps 2011
    
    
    300,000
    
    
    
    3,600,000
    
    
    $
    (0.53
    )
  Asset Derivatives
    
    
    Liability DerivativesFair Value
    
    
    
    
    
    
    Fair ValueBalance Sheet
    
    
    September 30,
    
    
    December 31,
    
    
    Balance Sheet
    
    
    September 30,
    
    
    December 31,Location
    
    
    2010
    
    
    2009
    
    
    Location
    
    
    2010
    
    
    2009Derivatives
not designated as hedging instrumentsCommodity derivatives
    

Unrealized
gain on commodity  derivatives
    
    $
    1,232
    
    
    $
    786
    
    

Unrealized
loss on commodity derivatives
    
    $
    232
    
    
    $
    2,668
  Asset DerivativesThree Months Ended
    
    
    Nine Months EndedIncome Statement
    
    
    September 30,
    
    
    September 30,Location
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Derivatives
not designated as hedging instruments under SFAS 133Commodity derivatives
    

Realized
gain on commodity derivatives
    
    $
    1,615
    
    
    $
    4,271
    
    
    $
    3,613
    
    
    $
    11,896Unrealized
(loss) gain  on commodity derivatives
    
    
    (312
    )
    
    
    (6,414
    )
    
    
    2,882
    
    
    
    (8,589
    )$
    1,303
    
    
    $
    (2,143
    )
    
    $
    6,495
    
    
    $
    3,307
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Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2010
    
    
    Level 1  Quoted prices are available in active markets for identical assets or
liabilities as of the reporting date. At September 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 September 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 September
30, 2010, we had no Level 3 measurements.
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Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2010
 7. Share-Based Compensation
  Weighted AverageShares
    
    
    Grant-Date Fair ValueNonvested at January 1, 2010
    
    
    225,880
    
    
    $
    9.73Granted
    
    
    541,139
    
    
    
    7.01Vested
    
    
    (74,496
    )
    
    
    10.01Cancelled
    
    
    (5,897
    )
    
    
    10.09Nonvested at September 30, 2010
    
    
    686,626
    
    
    $
    7.56
  8. Subsequent Event
  11




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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, 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 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;
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
    
    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 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, our Quarterly Report on Form
10-Q for the three months ended June 30, 2010, filed with the SEC on August 4, 2010,
and factors discussed herein.
    13




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Overview
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Recent Developments
  
    
    Drill one horizontal well, the Cinco Terry M 901-H, targeting the Wolfcamp Shale.
We expect to complete the horizontal well during the first quarter of 2011.
    
    Recomplete the Cinco Terry 1601, targeting the Wolfcamp Shale zone.
    
    Recomplete two wells in Ozona Northeast (southeast portion of Project Pangea),
targeting the Wolffork.
    
    Complete the Baker C 1201, targeting the Wolffork and Canyon Sands zones.
   Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues (in thousands)Gas
    
    $
    7,216
    
    
    $
    5,001
    
    
    $
    21,762
    
    
    $
    16,936Oil
    
    
    5,135
    
    
    
    2,490
    
    
    
    12,630
    
    
    
    7,700NGLs
    
    
    2,565
    
    
    
    1,296
    
    
    
    6,899
    
    
    
    4,131Total oil and gas sales
    
    
    14,916
    
    
    
    8,787
    
    
    
    41,291
    
    
    
    28,767Realized gain on commodity derivatives
    
    
    1,615
    
    
    
    4,271
    
    
    
    3,613
    
    
    
    11,896Total oil and gas sales
including derivative impact
    
    $
    16,531
    
    
    $
    13,058
    
    
    $
    44,904
    
    
    $
    40,663
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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009ProductionGas (MMcf)
    
    
    1,664
    
    
    
    1,505
    
    
    
    4,646
    
    
    
    4,900Oil (MBbls)
    
    
    71
    
    
    
    39
    
    
    
    172
    
    
    
    155NGLs (MBbls)
    
    
    70
    
    
    
    44
    
    
    
    174
    
    
    
    164Total (MMcfe)
    
    
    2,511
    
    
    
    2,003
    
    
    
    6,723
    
    
    
    6,817Total (MMcfe/d)
    
    
    27.3
    
    
    
    21.8
    
    
    
    24.6
    
    
    
    25.0Average pricesGas (per Mcf)
    
    $
    4.34
    
    
    $
    3.32
    
    
    $
    4.68
    
    
    $
    3.46Oil (per Bbl)
    
    
    72.19
    
    
    
    63.49
    
    
    
    73.41
    
    
    
    49.53NGLs (per Bbl)
    
    
    36.65
    
    
    
    29.72
    
    
    
    39.64
    
    
    
    25.18Total (per Mcfe)
    
    $
    5.94
    
    
    $
    4.39
    
    
    $
    6.14
    
    
    $
    4.22Realized gain on commodity derivatives
(per Mcfe)
    
    
    0.64
    
    
    
    2.13
    
    
    
    0.54
    
    
    
    1.75Total including derivative impact
(per Mcfe)
    
    $
    6.58
    
    
    $
    6.52
    
    
    $
    6.68
    
    
    $
    5.97Costs and expenses (per Mcfe)Lease operating (1)
    
    $
    0.79
    
    
    $
    0.95
    
    
    $
    0.90
    
    
    $
    0.88Severance and production taxes
    
    
    0.30
    
    
    
    0.23
    
    
    
    0.30
    
    
    
    0.20Exploration
    
    
    0.23
    
    
    
    0.27
    
    
    
    0.33
    
    
    
    0.08General and administrative
    
    
    1.28
    
    
    
    1.12
    
    
    
    1.18
    
    
    
    1.07Depletion, depreciation and amortization
    
    
    2.32
    
    
    
    2.79
    
    
    
    2.48
    
    
    
    2.75
 
 (1)
    
    Lease operating expenses per Mcfe include ad valorem taxes.GlossaryBbl.
    
    One stock tank barrel, of 42 U.S. gallons liquid volume, used herein to reference oil,
condensate or NGLs.LNG.
    
    Liquid natural gas.MBbl.
    
    Thousand barrels of oil, condensate or NGLs.Mcf.
    
    Thousand cubic feet of natural gas.Mcfe.
    
    Thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one
Bbl of oil, condensate or NGLs.MMBoe.
    
    Million barrels of oil equivalent, determined using the ratio of six Mcf of natural gas to
one Bbl of oil, condensate or NGLs.MMcf.
    
    Million cubic feet of natural gas.MMcfe.
    
    Million cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one
Bbl of oil, condensate or NGLs.NGLs.
    
    Natural gas liquids./d.
    
    Per day when used with volumetric units or dollars. 16




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##### Table of Contents



Three Months Ended September 30, 2010, Compared to Three Months Ended September 30, 2009
 Oil and gas production.
 Oil and gas sales
 Commodity derivative activities
 Lease operating expenses
 Three Months EndedSeptember 30,2010
    
    
    2009
    
    
    Change
    
    
    % ChangeCompression and gas treating
    
    $
    0.24
    
    
    $
    0.26
    
    
    $
    (0.02
    )
    
    
    (7.7
    )%Water hauling, insurance and other
    
    
    0.19
    
    
    
    0.18
    
    
    
    0.01
    
    
    
    5.6Ad valorem taxes
    
    
    0.18
    
    
    
    0.18
    
    
    
    
    
    
    
    Pumping and supervision
    
    
    0.13
    
    
    
    0.18
    
    
    
    (0.05
    )
    
    
    (27.8
    )Well repairs and maintenance
    
    
    0.04
    
    
    
    0.14
    
    
    
    (0.10
    )
    
    
    (71.4
    )Workovers
    
    
    0.01
    
    
    
    0.01
    
    
    
    
    
    
    
    Total
    
    $
    0.79
    
    
    $
    0.95
    
    
    $
    (0.16
    )
    
    
    (16.8
    )%
 Severance and production taxes
 17




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##### Table of Contents



Exploration
 General and administrative
 Three Months EndedSeptember 30,2010
    
    
    2009
    
    
    Change
    
    
    % Change$MM
    
    
    Mcfe
    
    
    $MM
    
    
    Mcfe
    
    
    $MM
    
    
    Mcfe
    
    
    McfeSalaries and benefits
    
    $
    1.1
    
    
    $
    0.43
    
    
    $
    1.0
    
    
    $
    0.48
    
    
    $
    0.1
    
    
    $
    (0.05
    )
    
    
    (10.4
    )%Share-based compensation
    
    
    1.1
    
    
    
    0.45
    
    
    
    0.4
    
    
    
    0.21
    
    
    
    0.7
    
    
    
    0.24
    
    
    
    114.3Professional fees
    
    
    0.4
    
    
    
    0.18
    
    
    
    0.3
    
    
    
    0.15
    
    
    
    0.1
    
    
    
    0.03
    
    
    
    20.0Rent expense
    
    
    0.1
    
    
    
    0.05
    
    
    
    0.1
    
    
    
    0.06
    
    
    
    
    
    
    
    (0.01
    )
    
    
    (16.7
    )Data processing
    
    
    0.1
    
    
    
    0.05
    
    
    
    0.1
    
    
    
    0.07
    
    
    
    
    
    
    
    (0.02
    )
    
    
    (28.6
    )Other
    
    
    0.4
    
    
    
    0.12
    
    
    
    0.3
    
    
    
    0.15
    
    
    
    0.1
    
    
    
    (0.03
    )
    
    
    (20.0
    )Total
    
    $
    3.2
    
    
    $
    1.28
    
    
    $
    2.2
    
    
    $
    1.12
    
    
    $
    1.0
    
    
    $
    0.16
    
    
    
    14.3
    %
 Depletion, depreciation and amortization.
 Interest expense, net.
 Income taxes.
 18




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##### Table of Contents



Nine Months Ended September 30, 2010, Compared to Nine Months Ended September 30, 2009
 Oil and gas production.
 Oil and gas sales
 Commodity derivative activities
 19




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##### Table of Contents



Lease operating expenses
 Nine Months EndedSeptember 30,2010
    
    
    2009
    
    
    Change
    
    
    % ChangeCompression and gas treating
    
    $
    0.25
    
    
    $
    0.30
    
    
    $
    (0.05
    )
    
    
    (16.7
    )%Ad valorem taxes
    
    
    0.20
    
    
    
    0.16
    
    
    
    0.04
    
    
    
    25.0Water hauling, insurance and other
    
    
    0.18
    
    
    
    0.16
    
    
    
    0.02
    
    
    
    12.5Pumping and supervision
    
    
    0.16
    
    
    
    0.15
    
    
    
    0.01
    
    
    
    6.7Well repairs and maintenance
    
    
    0.10
    
    
    
    0.10
    
    
    
    
    
    
    
    Workovers
    
    
    0.01
    
    
    
    0.01
    
    
    
    
    
    
    
    Total
    
    $
    0.90
    
    
    $
    0.88
    
    
    $
    0.02
    
    
    
    2.3
    %
 Severance and production taxes
 Exploration
 General and administrative
 Nine Months EndedSeptember 30,2010
    
    
    2009
    
    
    Change
    
    
    % Change$MM
    
    
    Mcfe
    
    
    $MM
    
    
    Mcfe
    
    
    $MM
    
    
    Mcfe
    
    
    McfeSalaries and benefits
    
    $
    3.3
    
    
    $
    0.48
    
    
    $
    3.0
    
    
    $
    0.43
    
    
    $
    0.3
    
    
    $
    0.05
    
    
    
    11.6
    %Share-based compensation
    
    
    2.0
    
    
    
    0.30
    
    
    
    1.5
    
    
    
    0.22
    
    
    
    0.5
    
    
    
    0.08
    
    
    
    36.4Professional fees
    
    
    1.0
    
    
    
    0.14
    
    
    
    0.9
    
    
    
    0.14
    
    
    
    0.1
    
    
    
    
    
    
    
    Data processing
    
    
    0.4
    
    
    
    0.05
    
    
    
    0.5
    
    
    
    0.08
    
    
    
    (0.1
    )
    
    
    (0.03
    )
    
    
    (37.5
    )Rent expense
    
    
    0.3
    
    
    
    0.05
    
    
    
    0.4
    
    
    
    0.05
    
    
    
    (0.1
    )
    
    
    
    
    
    
    Other
    
    
    0.9
    
    
    
    0.16
    
    
    
    1.0
    
    
    
    0.15
    
    
    
    (0.1
    )
    
    
    0.01
    
    
    
    6.7Total
    
    $
    7.9
    
    
    $
    1.18
    
    
    $
    7.3
    
    
    $
    1.07
    
    
    $
    0.6
    
    
    $
    0.11
    
    
    
    10.3
    %
 20




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##### Table of Contents



Depletion, depreciation and amortization.
 Interest expense, net.
 Income taxes.
 Liquidity and Capital Resources
    21




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##### Table of Contents



Nine Months EndedSeptember 30,2010
    
    
    2009Cash flows provided by operating activities
    
    $
    32,455
    
    
    $
    22,930Cash flows used in investing activities
    
    
    (53,115
    )
    
    
    (19,468
    )Cash flows provided by (used in) financing
activities
    
    
    18,396
    
    
    
    (6,848
    )Effect of Canadian exchange rate
    
    
    (4
    )
    
    
    9Net decrease in cash and cash equivalents
    
    $
    (2,268
    )
    
    $
    (3,377
    )
 Operating Activities
   Investing Activities
  22




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##### Table of Contents



Estimated Capital Expenditures for 2010
  As ofSeptember 30,2010West TexasOzona Northeast
    
    $
    12,584Cinco Terry
    
    
    28,285Inventory and other
    
    
    911Lease acquisition, geological and geophysical
    
    
    10,605
    (a)Total capital expenditures
    
    $
    52,385
 
 (a)
    
    Includes $9 million of lease acquisition costs and $1.6 million of 3-D seismic
costs.  Financing Activities
    23




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##### Table of Contents



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.
 24




---



##### Table of Contents




    
    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.
      25




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##### Table of Contents



Contractual Obligations
  Off-Balance Sheet Arrangements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  Commodity Price Risk
   26




---



##### Table of Contents



Volume (MMBtu)
    
    
    $/MMBtuPeriod
    
    Monthly
    
    
    Total
    
    
    FixedNYMEX  Henry HubPrice swaps 2010
    
    
    150,000
    
    
    
    450,000
    
    
    $
    5.85Price swaps 2010
    
    
    150,000
    
    
    
    450,000
    
    
    $
    6.40Price swaps 2010
    
    
    100,000
    
    
    
    300,000
    
    
    $
    6.36Weighted average price ($/MMBtu)
    
    
    
    
    
    
    
    
    
    $
    6.18WAHA basis differentialBasis swaps 2010
    
    
    415,000
    
    
    
    1,245,000
    
    
    $
    (0.71
    )Basis swaps 2011
    
    
    300,000
    
    
    
    3,600,000
    
    
    $
    (0.53
    )
     
 Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
  27




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##### Table of Contents



Internal Control over Financial Reporting
  Limitations Inherent in All Controls
  28




---



##### Table of Contents



PART IIOTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  www.sec.gov www.approachresources.com
 The use of geoscientific, petropyhsical and engineering analyses and other technical or operating
data to evaluate drilling prospects is uncertain and does not guarantee drilling success or
recovery of economically producible reserves.
  Climate
change legislation or regulations restricting emissions of greenhouse gasses
 could result in increased operating costs and reduced demand for the oil and natural
gas we produce.
   29




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  ISSUER PURCHASES OF EQUITY SECURITIES
 (c)
    
    
    (d)Total Number of
    
    
    Maximum(a)
    
    
    
    
    
    
    Shares
    
    
    Number of SharesTotal
    
    
    (b)
    
    
    Purchased as
    
    
    that May Yet BeNumber of
    
    
    Average
    
    
    Part of Publicly
    
    
    Purchased UnderShares
    
    
    Price Paid
    
    
    Announced
    
    
    the Plans orPeriod
    
    Purchased
    
    
    Per Share
    
    
    Plans or Programs
    
    
    ProgramsMonth #1
July 1, 2010  July 31, 2010
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    Month #2
August 1, 2010  August 31, 2010
    
    
    317
    
    
    
    8.22
    
    
    
    
    
    
    
    Month #3
September 1, 2010  September 30, 2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    317
    
    
    $
    8.22
    
    
    
    
    
    
    
    
 
 Item 6. Exhibits.
  30




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##### Table of Contents



SIGNATURES
  APPROACH RESOURCES INC.Date: November 3, 2010
    By:
    /s/ J. Ross CraftJ. Ross CraftPresident and Chief Executive Officer

(Principal Executive Officer)Date: November 3, 2010
    By:
    /s/ Steven P. SmartSteven P. SmartExecutive Vice President and Chief
Financial Officer
 (Principal Financial and
Chief Accounting Officer)




---



##### 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
    
    Ninth Amendment dated as of October 21, 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, 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 October 26, 2010,
and incorporated herein by reference).*10.2
    
    Form of Performance-Based, Time-Vesting Restricted Stock Award
Agreement under Approach Resources Inc. 2007 Stock Incentive
Plan.*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.
    
    Denotes management contract or compensatory plan or arrangement.