##### 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, 2008
 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)
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a 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 4T. 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 ExhibitsEX-10.10EX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 PART I  FINANCIAL INFORMATION
 
 Item 1. Financial statements.
 APPROACH RESOURCES INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per share amounts)
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    1,626
    
    
    $
    4,785Accounts receivable:Joint interest owners
    
    
    9,814
    
    
    
    5,272Oil and gas sales
    
    
    9,852
    
    
    
    5,524Unrealized gain on commodity derivatives
    
    
    4,537
    
    
    
    793Prepaid expenses and other current assets
    
    
    254
    
    
    
    432Total current assets
    
    
    26,083
    
    
    
    16,806PROPERTIES AND EQUIPMENT:Oil and gas properties, at cost, using the successful efforts method of accounting
    
    
    338,743
    
    
    
    267,246Furniture, fixtures and equipment
    
    
    890
    
    
    
    433339,633
    
    
    
    267,679Less accumulated depletion, depreciation and amortization
    
    
    (53,082
    )
    
    
    (36,860
    )Net properties and equipment
    
    
    286,551
    
    
    
    230,819INVESTMENT
    
    
    917
    
    
    
    917UNREALIZED GAIN ON COMMODITY DERIVATIVES
    
    
    391
    
    
    
    75OTHER ASSETS
    
    
    1
    
    
    
    109Total assets
    
    $
    313,943
    
    
    $
    248,726LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    4,341
    
    
    $
    5,459Oil and gas sales payable
    
    
    8,365
    
    
    
    1,794Accrued liabilities
    
    
    15,716
    
    
    
    14,764Total current liabilities
    
    
    28,422
    
    
    
    22,017NON-CURRENT LIABILITIES:Long-term debt
    
    
    23,528
    
    
    
    Deferred income taxes
    
    
    36,917
    
    
    
    26,342Asset retirement obligations
    
    
    695
    
    
    
    548Total liabilities
    
    
    89,562
    
    
    
    48,907COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY :Preferred stock, $0.01 par value, 10,000,000 shares authorized, none outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 90,000,000 shares authorized, 20,683,605 and
20,622,746 shares issued and 20,651,591 and 20,622,746 shares outstanding,
respectively
    
    
    207
    
    
    
    206Additional paid-in capital
    
    
    167,037
    
    
    
    166,141Retained earnings
    
    
    56,905
    
    
    
    33,367Accumulated other comprehensive income
    
    
    232
    
    
    
    105Total stockholders equity
    
    
    224,381
    
    
    
    199,819Total liabilities and stockholders equity
    
    $
    313,943
    
    
    $
    248,726
 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 30,2008
    
    
    2007
    
    
    2008
    
    
    2007REVENUES:Oil and gas sales
    
    $
    22,015
    
    
    $
    8,293
    
    
    $
    65,177
    
    
    $
    27,374EXPENSES:Lease operating
    
    
    1,842
    
    
    
    760
    
    
    
    5,095
    
    
    
    2,783Severance and production taxes
    
    
    968
    
    
    
    400
    
    
    
    2,891
    
    
    
    1,148Exploration
    
    
    
    
    
    
    
    
    
    
    1,478
    
    
    
    633General and administrative
    
    
    1,923
    
    
    
    1,375
    
    
    
    5,686
    
    
    
    4,105Depletion, depreciation and amortization
    
    
    5,016
    
    
    
    3,109
    
    
    
    16,257
    
    
    
    9,217Total expenses
    
    
    9,749
    
    
    
    5,644
    
    
    
    31,407
    
    
    
    17,886OPERATING INCOME
    
    
    12,266
    
    
    
    2,649
    
    
    
    33,770
    
    
    
    9,488OTHER:Interest expense, net
    
    
    (423
    )
    
    
    (1,108
    )
    
    
    (914
    )
    
    
    (3,062
    )Realized (loss) gain on commodity derivatives
    
    
    (195
    )
    
    
    1,079
    
    
    
    (676
    )
    
    
    3,323Unrealized gain (loss) on commodity
derivatives
    
    
    18,611
    
    
    
    785
    
    
    
    4,060
    
    
    
    (2,117
    )INCOME BEFORE PROVISION FOR
INCOME TAXES
    
    
    30,259
    
    
    
    3,405
    
    
    
    36,240
    
    
    
    7,632PROVISION FOR INCOME TAXES
    
    
    10,411
    
    
    
    1,312
    
    
    
    12,702
    
    
    
    3,130NET INCOME
    
    $
    19,848
    
    
    $
    2,093
    
    
    $
    23,538
    
    
    $
    4,502EARNINGS PER SHARE:Basic
    
    $
    0.96
    
    
    $
    0.22
    
    
    $
    1.14
    
    
    $
    0.47Diluted
    
    $
    0.95
    
    
    $
    0.20
    
    
    $
    1.13
    
    
    $
    0.41WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    20,651,591
    
    
    
    9,538,883
    
    
    
    20,640,327
    
    
    
    9,507,449Diluted
    
    
    20,851,848
    
    
    
    11,636,944
    
    
    
    20,837,166
    
    
    
    11,632,889
 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 30,2008
    
    
    2007OPERATING ACTIVITIES:Net income
    
    $
    23,538
    
    
    $
    4,502Adjustments to reconcile net income to net cash provided by
operating activities:Depletion, depreciation and amortization
    
    
    16,257
    
    
    
    9,217Unrealized (gain) loss on commodity derivatives
    
    
    (4,060
    )
    
    
    2,117Exploration expense
    
    
    1,478
    
    
    
    633Share-based compensation expense
    
    
    800
    
    
    
    175Deferred income taxes
    
    
    11,789
    
    
    
    1,867Changes in operating assets and liabilities:Accounts receivable
    
    
    (9,003
    )
    
    
    442Prepaid expenses and other assets
    
    
    285
    
    
    
    (675
    )Accounts payable
    
    
    (1,118
    )
    
    
    (122
    )Oil and gas sales payable
    
    
    6,571
    
    
    
    (1,532
    )Accrued liabilities
    
    
    (641
    )
    
    
    3,670Cash provided by operating activities
    
    
    45,896
    
    
    
    20,294INVESTING ACTIVITIES:Additions to oil and gas properties
    
    
    (72,213
    )
    
    
    (31,469
    )Investments
    
    
    
    
    
    
    (917
    )Additions to other property and equipment, net
    
    
    (457
    )
    
    
    (59
    )Cash used in investing activities
    
    
    (72,670
    )
    
    
    (32,445
    )FINANCING ACTIVITIES:Proceeds from issuance of common stock
    
    
    97
    
    
    
    240Loan origination fees
    
    
    
    
    
    
    (143
    )Borrowings under credit facility
    
    
    83,878
    
    
    
    53,542Repayment of amounts outstanding under credit facility
    
    
    (60,350
    )
    
    
    (47,869
    )Proceeds from issuance of convertible debt
    
    
    
    
    
    
    20,000Deferred offering costs
    
    
    
    
    
    
    (774
    )Cash provided by financing activities
    
    
    23,625
    
    
    
    24,996CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    (3,149
    )
    
    
    12,845EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH AND CASH
EQUIVALENTS
    
    
    (10
    )
    
    
    CASH AND CASH EQUIVALENTS, beginning of period
    
    
    4,785
    
    
    
    4,911CASH AND CASH EQUIVALENTS, end of period
    
    $
    1,626
    
    
    $
    17,756SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    527
    
    
    $
    3,360Cash paid for income taxes
    
    $
    49
    
    
    $
    1,200SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION:Adjustment to Neo Canyon acquisition purchase price allocation
    
    $
    509
    
    
    $
    Retirement of loans to stockholders in exchange for shares of
common stock
    
    $
    
    
    
    $
    4,184
 See accompanying notes to these consolidated financial statements.
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APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
 1. Summary of significant accounting policies
 Organization and nature of operations
  Consolidation, basis of presentation and significant estimates
   Comprehensive income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2008
    
    
    September 30, 2008Net income
    
    $
    19,848
    
    
    $
    23,538Other comprehensive income:Foreign currency translation adjustments
    
    
    188
    
    
    
    127Comprehensive income
    
    $
    20,036
    
    
    $
    23,665
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APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
 Earnings per common share
  Three Months Ended September 30, 2008Income (numerator)
    
    
    Shares (denominator)
    
    
    Per-share amountBasic earnings per share:Net income
    
    $
    19,848
    
    
    
    20,651,591
    
    
    $
    0.96Effect of dilutive securities:Stock options, treasury method
    
    
    
    
    
    
    172,214Non-vested restricted shares
    
    
    
    
    
    
    28,043Net income plus assumed conversions
    
    $
    19,848
    
    
    
    20,851,848
    
    
    $
    0.95
 Three Months Ended September 30, 2007Income (numerator)
    
    
    Shares (denominator)
    
    
    Per-share amountBasic earnings per share:Net income
    
    $
    2,093
    
    
    
    9,538,883
    
    
    $
    0.22Effect of dilutive securities:Share-based compensation,
treasury method
    
    
    
    
    
    
    208,514Non-vested restricted shares

    
    
    
    
    
    
    63,750Convertible debt, if-converted
method(1)
    
    
    227
    
    
    
    1,825,797Net income plus assumed conversions
    
    $
    2,320
    
    
    
    11,636,944
    
    
    $
    0.20
 Nine Months Ended September 30, 2008Income (numerator)
    
    
    Shares (denominator)
    
    
    Per-share amountBasic earnings per share:Net income
    
    $
    23,538
    
    
    
    20,640,327
    
    
    $
    1.14Effect of dilutive securities:Stock options, treasury method
    
    
    
    
    
    
    184,769Non-vested restricted shares
    
    
    
    
    
    
    12,070Net income plus assumed conversions
    
    $
    23,538
    
    
    
    20,837,166
    
    
    $
    1.13
 Nine Months Ended September 30, 2007Income (numerator)
    
    
    Shares (denominator)
    
    
    Per-share amountBasic earnings per share:Net income
    
    $
    4,502
    
    
    
    9,507,449
    
    
    $
    0.47Effect of dilutive securities:Share-based compensation, treasury
method
    
    
    
    
    
    
    235,893Non-vested restricted shares
    
    
    
    
    
    
    63,750Convertible debt, if-converted
method(1)
    
    
    242
    
    
    
    1,825,797Net income plus assumed conversions
    
    $
    4,744
    
    
    
    11,632,889
    
    
    $
    0.41
 
 (1)
    
    Upon the consummation of our initial public offering in November 2007, the convertible debt was converted
into shares of common stock. 5




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APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
 2. Ozona Northeast deep rights acquisition
   3. Contribution Agreement
   Purchase price:Issuance of 4,239,243 shares of Approach Resources Inc. common
stock valued at $12.00 per share
    
    $
    50,871Deferred tax liabilities assumed
    
    
    9,465Asset retirement obligations assumed
    
    
    133Post-closing purchase price adjustments
    
    
    265Total
    
    $
    60,734Allocation:Wells and equipment and related facilities
    
    $
    59,936Mineral interests in oil and gas properties
    
    
    798Total
    
    $
    60,734
 6




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APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
 4. Line of credit
    7




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APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
 5. Income taxes
  6. Derivatives
  Period
    
    Volume (MMBtu)
    
    $/MMBtuMonthly
    
    Total
    
    Floor
    
    Ceiling
    
    FixedNYMEX  Henry HubCostless collars 2008
    
    
    173,000
    
    
    
    520,000
    
    
    $
    7.50
    
    
    $
    11.45Costless collars 2008
    
    
    200,000
    
    
    
    600,000
    
    
    $
    9.00
    
    
    $
    12.20Costless collars 2009
    
    
    180,000
    
    
    
    2,160,000
    
    
    $
    7.50
    
    
    $
    10.50Costless collars 2009
    
    
    130,000
    
    
    
    1,560,000
    
    
    $
    8.50
    
    
    $
    11.70Fixed price swaps4th quarter 2008
    
    
    100,000
    
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    $
    8.63WAHA differentialFixed price swaps 2008
    
    
    173,000
    
    
    
    520,000
    
    
    
    
    
    
    
    
    
    
    
    (0.69
    )Fixed price swaps 2008
    
    
    100,000
    
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    
    (0.67
    )Fixed price swaps 2009
    
    
    200,000
    
    
    
    2,400,000
    
    
    
    
    
    
    
    
    
    
    
    (0.61
    )
   Adoption of Statement of Financial Accounting Standards No. 157 (FAS 157)
  8




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APPROACH RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
  
    
    Level 1  Quoted prices are available in active markets for identical assets or
liabilities as of the reporting date. At September 30, 2008, we had no Level 1
measurements.
    
    Level 2  Pricing inputs are other than quoted prices in active markets included in
Level 1, which are either directly or indirectly observable as of the reporting date. Level
2 includes those financial instruments that are valued using models or other valuation
methodologies. These models are primarily industry-standard models that consider various
assumptions, including quoted forward prices for commodities, time value, volatility
factors and current market and contractual prices for the underlying instruments, as well
as other relevant economic measures. Our derivatives, which consist primarily of commodity
swaps and collars, are valued using commodity market data which is derived by combining raw
inputs and quantitative models and processes to generate forward curves. Where observable
inputs are available, directly or indirectly, for substantially the full term of the asset
or liability, the instrument is categorized in Level 2. At September 30, 2008, 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, 2008, our Level 3
measurements were limited to our asset retirement obligation.
 7. Share-based compensation
  Sharessubject tostockoptionsOutstanding at January 1, 2008
    
    
    479,991Granted
    
    
    74,345Exercised
    
    
    (28,845
    )Canceled
    
    
    (40,600
    )Outstanding at September 30, 2008
    
    
    484,891
  9




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Item 2. Managements discussion and analysis of financial condition and results of operations.
  Cautionary statement regarding forward-looking statements
   
    
    global economic and financial market conditions,
    
    our business strategy,
    
    estimated quantities of gas and oil reserves,
    
    uncertainty of commodity prices in oil and gas,
    
    continued disruption of credit and capital markets, such as the events that occurred during
the third quarter of 2008,
    
    our financial position,
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
    
    our cash flow and liquidity,
    
    replacing our gas and oil reserves,
    
    our inability to retain and attract key personnel,
    
    uncertainty regarding our future operating results,
    
    uncertainties in exploring for and producing gas and oil,
    
    high costs, shortages, delivery delays or unavailability of drilling rigs, equipment, labor
or other services,
    
    disruptions to, capacity constraints in or other limitations on the pipeline systems which
deliver our gas and other processing and transportation considerations,
    
    our inability to obtain additional financing necessary to
fund our operations and capital expenditures and to meet our other obligations,
    
    competition in the oil and gas industry,
    
    marketing of gas and oil,
    
    exploitation or property acquisitions,
    
    technology,
    
    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,
2007 filed with the SEC on March 28, 2008 and in this Quarterly Report on Form 10-Q.
 11




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Overview
   West Texas
 
    
    Ozona Northeast (Wolfcamp, Canyon Sands, Strawn and Ellenburger)
    
    Cinco Terry (Wolfcamp, Canyon Sands and Ellenburger)
 East Texas
 
    
    North Bald Prairie (Cotton Valley Sands, Bossier Sands, Bossier Shale
and Cotton Valley Lime)
 Northeast British Columbia
 
    
    Montney tight gas and Doig Shale
 Northern New Mexico
 
    
    El Vado East (Mancos Shale)
 Southwest Kentucky
 
    
    Boomerang (New Albany Shale)
    12




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Shut-in of production during third quarter of 2008
  British Columbia asset divestiture
   13




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Results of operations
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Revenues (in thousands):Gas
    
    $
    14,456
    
    
    $
    7,194
    
    
    $
    47,900
    
    
    $
    24,110Oil
    
    
    5,973
    
    
    
    1,010
    
    
    
    13,223
    
    
    
    3,075NGLs
    
    
    1,586
    
    
    
    89
    
    
    
    4,054
    
    
    
    189Total oil and gas sales
    
    
    22,015
    
    
    
    8,293
    
    
    
    65,177
    
    
    
    27,374Realized (loss) gain on commodity derivatives
    
    
    (195
    )
    
    
    1,079
    
    
    
    (676
    )
    
    
    3,323Total oil and gas sales including
derivative impact
    
    $
    21,820
    
    
    $
    9,372
    
    
    $
    64,501
    
    
    $
    30,697Production:Gas (MMcf)
    
    
    1,588
    
    
    
    1,135
    
    
    
    4,927
    
    
    
    3,511Oil (MBbls)
    
    
    54
    
    
    
    14
    
    
    
    120
    
    
    
    50NGLs (MBbls)
    
    
    28
    
    
    
    2
    
    
    
    75
    
    
    
    5Total (MMcfe)
    
    
    2,080
    
    
    
    1,232
    
    
    
    6,097
    
    
    
    3,840Average prices:Gas (per Mcf)
    
    $
    9.10
    
    
    $
    6.34
    
    
    $
    9.72
    
    
    $
    6.87Oil (per Bbl)
    
    
    110.61
    
    
    
    72.14
    
    
    
    110.19
    
    
    
    61.50NGLs (per Bbl)
    
    
    56.64
    
    
    
    44.50
    
    
    
    54.05
    
    
    
    37.80Total (per Mcfe)
    
    $
    10.58
    
    
    $
    6.73
    
    
    $
    10.69
    
    
    $
    7.13Realized (loss) gain on commodity derivatives
(per Mcfe)
    
    
    (0.09
    )
    
    
    0.88
    
    
    
    (0.11
    )
    
    
    0.86Total per Mcfe including derivative impact
    
    $
    10.49
    
    
    $
    7.61
    
    
    $
    10.58
    
    
    $
    7.99Costs and expenses (per Mcfe):Lease operating expenses
    
    $
    0.89
    
    
    $
    0.62
    
    
    $
    0.84
    
    
    $
    0.72Severance and production taxes
    
    
    0.47
    
    
    
    0.32
    
    
    
    0.47
    
    
    
    0.30Exploration
    
    
    
    
    
    
    
    
    
    
    0.24
    
    
    
    0.16General and administrative
    
    
    0.92
    
    
    
    1.12
    
    
    
    0.93
    
    
    
    1.07Depletion, depreciation and amortization
    
    
    2.41
    
    
    
    2.52
    
    
    
    2.67
    
    
    
    2.40
  Three months ended September 30, 2008 compared to three months ended September 30, 2007
 Oil and gas sales
 14




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##### Table of Contents



Commodity derivative activities
 Lease
operating
 Severance and production taxes
 General and administrative
 Depletion,
depreciation and amortization (DD&A)
 15




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##### Table of Contents



Interest expense, net.
 Income taxes
 Nine months ended September 30, 2008 compared to nine months ended September 30, 2007
 Oil and gas sales
 Commodity derivative activities
 16




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##### Table of Contents



Lease
operating
 Severance and production taxes
 Exploration
 General and administrative
 Depletion,
depreciation and amortization (DD&A)
 Interest expense, net.
 17




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##### Table of Contents



Income taxes
 Liquidity and capital resources
    Nine Months EndedSeptember 30,(in thousands)
    
    2008
    
    2007Cash flows provided by operating
activities
    
    $
    45,896
    
    
    $
    20,294Cash flows used in investing activities
    
    
    (72,670
    )
    
    
    (32,445
    )Cash flows provided by financing
activities
    
    
    23,625
    
    
    
    24,996Effect of Canadian exchange rate
    
    
    (10
    )
    
    
    Net (decrease) increase in cash and
cash equivalents
    
    $
    (3,159
    )
    
    $
    12,845
 18




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##### Table of Contents



Operating activities
  Investing
activities
  Capital expenditures for 2008
   Estimated Year Ended
    
    
    Actual ThroughDecember 31, 2008
    
    
    September 30, 2008(in thousands)Capital Expenditures:Ozona Northeast
    
    $
    37,500
    
    
    $
    22,304Ozona Northeast deep rights acquisition
    
    
    
    
    
    
    11,500Cinco Terry
    
    
    20,200
    
    
    
    14,648North Bald Prairie
    
    
    14,400
    
    
    
    14,894British Columbia
    
    
    3,000
    
    
    
    2,951El Vado East
    
    
    
    
    
    
    92Boomerang
    
    
    1,800
    
    
    
    290Inventory
    
    
    
    
    
    
    2,366Lease acquisition, geological,
geophysical and other
    
    
    3,100
    
    
    
    3,168Total capital expenditures
    
    $
    80,000
    
    
    $
    72,213
 19




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Financing activities
    Credit facility
   20




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Contractual obligations
  Off-balance sheet arrangements
  21




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##### Table of Contents



Item 3. Quantitative and qualitative disclosures about market risk.
  Commodity price risk
    Period
    
    Volume (MMBtu)
    
    $/MMBtuMonthly
    
    Total
    
    Floor
    
    Ceiling
    
    FixedNYMEX  Henry HubCostless collars 2008
    
    
    173,000
    
    
    
    520,000
    
    
    $
    7.50
    
    
    $
    11.45Costless collars 2008
    
    
    200,000
    
    
    
    600,000
    
    
    $
    9.00
    
    
    $
    12.20Costless collars 2009
    
    
    180,000
    
    
    
    2,160,000
    
    
    $
    7.50
    
    
    $
    10.50Costless collars 2009
    
    
    130,000
    
    
    
    1,560,000
    
    
    $
    8.50
    
    
    $
    11.70Fixed price swaps4th quarter 2008
    
    
    100,000
    
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    $
    8.63WAHA differentialFixed price swaps 2008
    
    
    173,000
    
    
    
    520,000
    
    
    
    
    
    
    
    
    
    
    
    (0.69
    )Fixed price swaps 2008
    
    
    100,000
    
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    
    (0.67
    )Fixed price swaps 2009
    
    
    200,000
    
    
    
    2,400,000
    
    
    
    
    
    
    
    
    
    
    
    (0.61
    )
   22




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##### Table of Contents



Item 4T. Controls and procedures.
   23




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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
 Gas and oil prices are volatile, and a decline in gas or oil prices could significantly affect our
business, financial condition or results of operations and our ability to meet our capital
expenditure requirements and financial commitments.
  
    
    the level of domestic and foreign consumer demand for gas and oil,
    
    domestic and foreign supply of gas and oil,
    
    overall United States and global economic conditions,
    
    price and quantity of foreign imports,
    
    commodity processing, gathering and transportation availability and the availability of
refining capacity,
    
    domestic and foreign governmental regulations,
    
    political conditions in or affecting other gas producing and oil producing countries,
    
    the ability of the members of the Organization of Petroleum Exporting Countries to agree to
and maintain oil price and production controls,
    
    weather conditions, including unseasonably warm winter weather,
    
    technological advances affecting gas and oil consumption, and
    
    price and availability of alternative fuels.
 24




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##### Table of Contents



The deterioration of global economic and financial conditions and an extended decline in the price
of oil and natural gas would negatively impact our business, financial condition and results of
operations.
  If credit and capital markets worsen, then we may not be able to obtain funding under our current
revolving credit facility or fund on acceptable terms. The inability to obtain funding could deter
or prevent us from meeting our future capital needs to fund our development program.
   25




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##### Table of Contents



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.
  
 Item 6. Exhibits.
  26




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##### Table of Contents



SIGNATURES
  APPROACH RESOURCES INC.By:
    /s/ J. Ross CraftJ. Ross CraftPresident and Chief Executive Officer




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##### Table of Contents



Index to Exhibits
 ExhibitNumber
    
    Exhibit3.1
    
    
    
    Restated Certificate of Incorporation of Approach
Resources Inc. (filed as Exhibit 3.1 to the Companys
Quarterly Report on Form 10-Q filed December 13, 2007
and incorporated herein by reference).3.2
    
    
    
    Restated Bylaws of Approach Resources Inc. (filed as
Exhibit 3.2 to the Companys Quarterly Report on
Form 10-Q filed December 13, 2007 and incorporated
herein by reference).4.1
    
    
    
    Specimen Common Stock Certificate (filed as Exhibit
4.1 to the Companys Registration Statement on Form
S-1/A filed October 18, 2007 (File No. 333-144512) and
incorporated herein by reference).10.1
    
    
    
    Form of Indemnity Agreement between Approach Resources
Inc. and each of its directors and officers (filed as
Exhibit 10.1 to the Companys Registration Statement
on Form S-1/A filed September 13, 2007 (File No.
333-144512) and incorporated herein by reference).10.2
    
    
    
    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).10.3
    
    
    
    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).10.4
    
    
    
    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).10.5
    
    
    
    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).10.6
    
    
    
    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).10.7
    
    
    
    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).10.8
    
    
    
    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).




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##### Table of Contents



ExhibitNumber
    
    Exhibit10.9
    
    
    
    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).10.10*
    
    
    
    Form of Stock Award Agreement under Approach Resources
Inc. 2007 Stock Incentive Plan.10.11
    
    
    
    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).10.12
    
    
    
    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).10.13
    
    
    
    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).10.14
    
    
    
    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).10.15
    
    
    
    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).10.16
    
    
    
    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).10.17
    
    
    
    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).10.18
    
    
    
    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).




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##### Table of Contents



ExhibitNumber
    
    Exhibit10.19
    
    
    
    $200,000,000 Revolving Credit Agreement dated as of
January 18, 2008 among Approach Resources Inc., as
borrower, The Frost National Bank, as administrative
agent and lender, and the financial institutions named
therein (filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K filed January 18, 2008 and
incorporated herein by reference).10.20
    
    
    
    Amendment dated February 19, 2008 to Credit Agreement
among Approach Resources Inc., as borrower, The Frost
National Bank, as administrative agent and lender,
JPMorgan Chase Bank, NA, as lender, and Approach Oil &
Gas Inc., Approach Oil & Gas (Canada) Inc. and
Approach Resources I, LP, as guarantors, dated as of
January 18, 2008 (filed as Exhibit 10.1 to the
Companys Current Report on Form 8-K filed February
22, 2008 and incorporated herein by reference).10.21
    
    
    
    Amendment dated May 6, 2008 to Credit Agreement among
Approach Resources Inc., as borrower, The Frost
National Bank, as administrative agent and lender,
JPMorgan Chase Bank, NA, as lender, and Approach Oil &
Gas Inc., Approach Oil & Gas (Canada) Inc. and
Approach Resources I, LP, as guarantors, dated as of
January 18, 2008 (filed as Exhibit 99.1 to the
Companys Current Report on Form 8-K filed August 28,
2008 and incorporated herein by reference).10.22
    
    
    
    Amendment dated August 26, 2008 to Credit Agreement
among Approach Resources Inc., as borrower, The Frost
National Bank, as administrative agent and lender,
JPMorgan Chase Bank, NA, Fortis Capital Corp. and
KeyBank National Association, as lenders, and Approach
Oil & Gas Inc., Approach Oil & Gas (Canada) Inc. and
Approach Resources I, LP, as guarantors, dated as of
January 18, 2008 (filed as Exhibit 10.1 to the
Companys Current Report on Form 8-K filed August 28,
2008 and incorporated herein by reference).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.
 
 *
    
    Filed herewith