Quarterly Report (10-q)

Date : 08/02/2018 @ 8:36PM
Source : Edgar (US Regulatory)
Stock : Approach Resources Inc. (AREX)
Quote : 1.28  0.0 (0.00%) @ 12:00PM

Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

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

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

One Ridgmar Centre

6500 West Freeway, Suite 800

Fort Worth, Texas

 

 

76116

(Address of principal executive offices)

(Zip Code)

(817) 989-9000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       Yes       No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)       Yes       No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).       Yes       No

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of July 30, 2018, was 94,486,849.

 

 

 


PART I―FINANCI AL INFORMATION

Item 1. Financial Statements.

Approach Resources Inc. and Subsidiaries

Unaudited Consolidated Balance Sheets

(In thousands, except shares and per-share amounts) 

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22

 

 

$

21

 

Accounts receivable:

 

 

 

 

 

 

 

 

Joint interest owners

 

 

85

 

 

 

117

 

Oil, NGLs and gas sales

 

 

10,838

 

 

 

9,678

 

Derivative instruments

 

 

366

 

 

 

1,398

 

Prepaid expenses and other current assets

 

 

2,465

 

 

 

5,486

 

Total current assets

 

 

13,776

 

 

 

16,700

 

 

 

 

 

 

 

 

 

 

PROPERTIES AND EQUIPMENT:

 

 

 

 

 

 

 

 

Oil and gas properties, at cost, using the successful efforts method of accounting

 

 

1,957,837

 

 

 

1,930,577

 

Furniture, fixtures and equipment

 

 

5,689

 

 

 

5,658

 

Total oil and gas properties and equipment

 

 

1,963,526

 

 

 

1,936,235

 

Less accumulated depletion, depreciation and amortization

 

 

(885,653

)

 

 

(853,359

)

Net oil and gas properties and equipment

 

 

1,077,873

 

 

 

1,082,876

 

Total assets

 

$

1,091,649

 

 

$

1,099,576

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

8,245

 

 

$

9,450

 

Oil, NGLs and gas sales payable

 

 

5,986

 

 

 

5,363

 

Derivative instruments

 

 

4,645

 

 

 

2,181

 

Accrued liabilities

 

 

10,891

 

 

 

8,073

 

Total current liabilities

 

 

29,767

 

 

 

25,067

 

 

 

 

 

 

 

 

 

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Senior secured credit facility, net

 

 

296,135

 

 

 

289,275

 

Senior notes, net

 

 

84,335

 

 

 

84,185

 

Deferred income taxes

 

 

78,228

 

 

 

82,102

 

Asset retirement obligations

 

 

11,163

 

 

 

11,065

 

Other non-current liabilities

 

 

807

 

 

 

466

 

Total liabilities

 

 

500,435

 

 

 

492,160

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 10,000,000 shares authorized, none outstanding

 

 

 

 

Common stock, $0.01 par value, 180,000,000 shares authorized,

     94,470,636 and 94,533,246 issued and outstanding, respectively

 

 

945

 

 

 

945

 

Additional paid-in capital

 

 

742,863

 

 

 

742,391

 

Accumulated other comprehensive loss

 

 

(156

)

 

 

 

Accumulated deficit

 

 

(152,438

)

 

 

(135,920

)

Total stockholders’ equity

 

 

591,214

 

 

 

607,416

 

Total liabilities and stockholders’ equity

 

$

1,091,649

 

 

$

1,099,576

 

 

See accompanying notes to these unaudited consolidated financial statements

1


Approach Resources Inc. and Subsidiaries

Unaudited Consolidated Statements of Operations

(In thousands, except shares and per-share amounts) 

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil, NGLs and gas sales

 

$

30,326

 

 

$

24,969

 

 

$

59,098

 

 

$

51,324

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating

 

 

5,032

 

 

 

4,238

 

 

 

10,300

 

 

 

8,408

 

Production and ad valorem taxes

 

 

2,569

 

 

 

2,252

 

 

 

5,069

 

 

 

4,609

 

Exploration

 

 

3

 

 

 

2,108

 

 

 

3

 

 

 

3,151

 

General and administrative (1)

 

 

6,086

 

 

 

6,548

 

 

 

12,653

 

 

 

12,476

 

Depletion, depreciation and amortization

 

 

16,849

 

 

 

19,543

 

 

 

32,529

 

 

 

37,505

 

Total expenses

 

 

30,539

 

 

 

34,689

 

 

 

60,554

 

 

 

66,149

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING LOSS

 

 

(213

)

 

 

(9,720

)

 

 

(1,456

)

 

 

(14,825

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(6,184

)

 

 

(4,916

)

 

 

(12,070

)

 

 

(10,379

)

Gain on debt extinguishment

 

 

 

 

 

 

 

 

 

 

 

5,053

 

Commodity derivative (loss) gain

 

 

(4,884

)

 

 

1,231

 

 

 

(6,812

)

 

 

4,675

 

Other (expense) income

 

 

(13

)

 

 

 

 

 

(12

)

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOSS BEFORE INCOME TAX (BENEFIT) PROVISION

 

 

(11,294

)

 

 

(13,405

)

 

 

(20,350

)

 

 

(15,473

)

INCOME TAX (BENEFIT) PROVISION

 

 

(2,222

)

 

 

(4,509

)

 

 

(3,832

)

 

 

134,191

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS

 

$

(9,072

)

 

$

(8,896

)

 

$

(16,518

)

 

$

(149,664

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOSS PER SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.10

)

 

$

(0.10

)

 

$

(0.17

)

 

$

(1.91

)

Diluted

 

$

(0.10

)

 

$

(0.10

)

 

$

(0.17

)

 

$

(1.91

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

94,470,636

 

 

 

86,340,634

 

 

 

94,548,898

 

 

 

78,418,977

 

Diluted

 

 

94,470,636

 

 

 

86,340,634

 

 

 

94,548,898

 

 

 

78,418,977

 

(1)  Includes non-cash share-based compensation expense as follows:

 

 

656

 

 

 

1,029

 

 

 

1,484

 

 

 

2,188

 

 

See accompanying notes to these unaudited consolidated financial statements

 


2


Approach Resources Inc. and Subsidiaries

Unaudited Consolidated Statements of Comprehensive Loss

(In thousands) 

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

NET LOSS

 

$

(9,072

)

 

$

(8,896

)

 

$

(16,518

)

 

$

(149,664

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized loss on cash flow hedges (1)

 

 

(156

)

 

 

 

 

 

(156

)

 

 

 

Other comprehensive loss

 

 

(156

)

 

 

 

 

 

(156

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE LOSS

 

$

(9,228

)

 

$

(8,896

)

 

$

(16,674

)

 

$

(149,664

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Includes income tax benefit as follows:

 

$

41

 

 

$

 

 

$

41

 

 

$

 

 

See accompanying notes to these unaudited consolidated financial statements

 

3


Approach Resources Inc. and Subsidiaries

Unaudited Consolidated Statements of Cash Flows

(In thousands) 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2018

 

 

2017

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(16,518

)

 

$

(149,664

)

Adjustments to reconcile net loss to cash provided by operating activities:

 

 

 

 

 

 

 

 

Depletion, depreciation and amortization

 

 

32,529

 

 

 

37,505

 

Amortization of debt issuance costs

 

 

525

 

 

 

429

 

Gain on debt extinguishment

 

 

 

 

 

(5,053

)

Commodity derivative loss (gain)

 

 

6,812

 

 

 

(4,675

)

Settlements of commodity derivatives

 

 

(3,513

)

 

 

(958

)

Exploration expense

 

 

 

 

 

3,105

 

Share-based compensation expense

 

 

1,484

 

 

 

2,188

 

Deferred income tax (benefit) provision

 

 

(3,832

)

 

 

134,191

 

Other non-cash items

 

 

12

 

 

 

(3

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,123

)

 

 

1,126

 

Prepaid expenses and other current assets

 

 

(811

)

 

 

(519

)

Accounts payable

 

 

(4,047

)

 

 

(4,258

)

Oil, NGLs and gas sales payable

 

 

620

 

 

 

382

 

Accrued liabilities

 

 

2,112

 

 

 

2,424

 

Cash provided by operating activities

 

 

14,250

 

 

 

16,220

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Additions to oil and gas properties

 

 

(27,142

)

 

 

(37,819

)

Additions to furniture, fixtures and equipment, net

 

 

(31

)

 

 

(14

)

Change in working capital related to investing activities

 

 

7,710

 

 

 

9,308

 

Cash used in investing activities

 

 

(19,463

)

 

 

(28,525

)

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Borrowings under credit facility

 

 

60,850

 

 

 

54,250

 

Repayment of amounts outstanding under credit facility

 

 

(54,350

)

 

 

(40,250

)

Equity issuance costs

 

 

 

 

 

(2,762

)

Tax withholdings related to restricted stock

 

 

(632

)

 

 

(117

)

Debt issuance costs

 

 

(14

)

 

 

 

Change in working capital related to financing activities

 

 

(640

)

 

 

1,341

 

Cash provided by financing activities

 

 

5,214

 

 

 

12,462

 

 

 

 

 

 

 

 

 

 

CHANGE IN CASH AND CASH EQUIVALENTS

 

 

1

 

 

 

157

 

CASH AND CASH EQUIVALENTS , beginning of period

 

$

21

 

 

$

21

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS , end of period

 

$

22

 

 

$

178

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

11,619

 

 

$

10,410

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION:

 

 

 

 

 

 

 

 

Asset retirement obligations capitalized

 

$

2

 

 

$

31

 

 

See accompanying notes to these unaudited consolidated financial statements

 

 

 

4


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2018

 

 

1.  Summary of Significant Accounting Policies

Organization and Nature of Operations

Approach Resources Inc. (“Approach,” the “Company,” “we,” “us” or “our”) is an independent energy company engaged in the exploration, development, production and acquisition of oil and gas properties.  We focus on finding and developing oil and natural gas reserves in oil shale and tight gas sands.  Our properties are primarily located in the Permian Basin in West Texas. We also own interests in the East Texas Basin.

Consolidation, Basis of Presentation and Significant Estimates

The interim consolidated financial statements of the Company are unaudited and contain all adjustments (consisting primarily of normal recurring accruals) necessary for a fair statement of the results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for a full year, due in part to the volatility in prices for oil, natural gas liquids (“NGLs”) and gas, future commodity prices for commodity derivative contracts, global economic and financial market conditions, interest rates, access to sources of liquidity, estimates of reserves, drilling risks, geological risks, transportation restrictions, the timing of acquisitions, product supply and demand, market competition and interruptions of production. You should read these consolidated interim financial statements in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on March 9, 2018.

The accompanying interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions are eliminated.  In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the financial statements and disclosures of contingencies. Actual results may differ from those estimates. Significant assumptions are required in the valuation of proved oil and gas reserves, which affect our estimate of depletion expense as well as our impairment analyses. Significant assumptions also are required in our estimation of accrued liabilities, commodity derivatives, income tax provision, share-based compensation and asset retirement obligations. It is at least reasonably possible these estimates could be revised in the near term, and these revisions could be material.  Certain prior-year amounts have been reclassified to conform to current-year presentation.  These classifications have no impact on the net loss reported.

Recent Accounting Pronouncements

On January 1, 2018, we adopted the Financial Accounting Standards Board (“FASB”) accounting standards update for “Revenue from Contracts with Customers,” which superseded the revenue recognition requirements in “Topic 605, Revenue Recognition,” using the modified retrospective method. Adoption of this standard did not have a significant impact on our consolidated statements of operations or cash flows. We implemented processes to ensure new contracts are reviewed for the appropriate accounting treatment and generate the disclosures required under the new standard. See Note 2 for additional disclosures required under this accounting standards update related to the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers including disaggregation of revenue.

In February 2016, FASB issued an accounting standards update for “Leases,” which amends existing guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. This new guidance is effective for interim and annual periods beginning after December 15, 2018, and we will adopt it using a modified retrospective approach. Currently, the Company is evaluating the standard’s applicability to our various contractual arrangements. We believe that the adoption of this standard will result in recognition of assets and liabilities on the balance sheet for current operating leases. The Company is still evaluating the impact of this new guidance on its consolidated financial statements.

In January 2017, FASB issued an accounting standards update for “Clarifying the Definition of a Business,” which provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This standard requires entities to use a screen test to determine when an integrated set of assets and activities is not a business or if the integrated set of assets and activities needs to be further evaluated against the framework. We have adopted this standard as of January 1, 2018. Adoption of this standard did not impact our consolidated statements of operations or cash flows. 

In August 2017, FASB issued an accounting standards update for “Derivatives and Hedging,”  which amends existing guidance related to the recognition and presentation requirements of hedge accounting, including eliminating the requirement to

5


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2018

 

separately measure and report hedge ineffectiveness, and presenting all items that affect earnings in the same income statement line item as the hedged item. This standard is effective for i nterim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. We have elected to early adopt this standard in the first quarter of 2018. Adoption of this standard did not  impact our consolidated statements of operati ons or cash flows.  Although we have not historically designated our derivative contracts as cash-flow hedges, we designated swap derivative contracts entered in April 2018 as cash-flow hedges. See Note 8 for additional information related to the derivative contracts designated as cash-flow hedges.

 

Prepaid Expenses and Other Assets

 

In April 2017, we entered into an agreement that secured pricing of a hydraulic fracturing services crew. Under this agreement, we made a prepayment of $5 million, to be used as we completed wells. We have used $1.2 million of this prepayment related to hydraulic fracturing services provided during the first year of the agreement. In March 2018, this agreement was terminated and $3.8 million of the unused prepaid balance was refunded to us.

 

2.  Revenue Recognition

 

Revenues for the sale of oil, NGLs, and gas are recognized as the product is delivered to our customers’ custody transfer points and collectability is reasonably assured. We fulfill the performance obligations under our customer contracts through daily delivery of oil, NGLs and gas to our customers’ custody transfer points and revenues are recorded on a monthly basis. The prices received for oil, NGLs and natural gas sales under our contracts are generally derived from stated market prices which are then adjusted to reflect deductions including transportation, fractionation and processing. As a result, our revenues from the sale of oil, natural gas and NGLs will decrease if market prices decline. The sales of oil, NGLs and gas as presented on the Consolidated Statements of Operations represent the Company’s share of revenues net of royalties and excluding revenue interests owned by others. When selling oil, NGLs and gas on behalf of royalty owners or working interest owners, the Company is acting as an agent and thus reports the revenue on a net basis. To the extent actual volumes and prices of oil and natural gas sales are unavailable for a given reporting period because of timing or information not received from third parties, the expected sales volumes and prices for those properties are estimated and recorded.

 

The following table presents our disaggregated revenue by major source for the three and six months ended June 30, 2018, and 2017 (in thousands).

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil

 

$

18,044

 

 

$

12,508

 

 

$

34,388

 

 

$

26,202

 

NGLs

 

 

8,852

 

 

 

6,019

 

 

 

16,184

 

 

 

12,079

 

Gas

 

 

3,368

 

 

 

6,442

 

 

 

8,464

 

 

 

13,043

 

Total revenue from contracts with customers

 

 

30,264

 

 

 

24,969

 

 

 

59,036

 

 

 

51,324

 

Commodity derivatives designated as cash flow hedges

 

 

62

 

 

 

 

 

 

62

 

 

 

 

Total oil, NGLs and gas sales

 

$

30,326

 

 

$

24,969

 

 

$

59,098

 

 

$

51,324

 

 

6


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2018

 

3 .  Earnings Per Common Share

We report basic earnings per common share, which excludes the effect of potentially dilutive securities, and diluted earnings per common share, which includes the effect of all potentially dilutive securities unless their impact is antidilutive. The following table provides a reconciliation of the numerators and denominators of our basic and diluted earnings per share (dollars in thousands, except per-share amounts).

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Income (numerator):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss – basic

 

$

(9,072

)

 

$

(8,896

)

 

$

(16,518

)

 

$

(149,664

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares (denominator):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares – basic

 

 

94,470,636

 

 

 

86,340,634

 

 

 

94,548,898

 

 

 

78,418,977

 

Dilution effect of share-based compensation, treasury

   method (1)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares – diluted

 

 

94,470,636

 

 

 

86,340,634

 

 

 

94,548,898

 

 

 

78,418,977

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.10

)

 

$

(0.10

)

 

$

(0.17

)

 

$

(1.91

)

Diluted

 

$

(0.10

)

 

$

(0.10

)

 

$

(0.17

)

 

$

(1.91

)

 

(1)

Approximately 39,000 options to purchase our common stock were excluded from this calculation because they were antidilutive for the three and six months ended June 30, 2017. No options were outstanding as of June 30, 2018, as they had expired.

 

4. Equity Exchange Transactions

 

Debt exchange

 

On November 2, 2016, we entered into an exchange agreement with Wilks Brothers, LLC and SDW Investments, LLC (collectively, “Wilks”) the largest holder of our 7% Senior Notes due 2021 (the “Senior Notes”), to exchange $130,552,000 principal amount of our Senior Notes for 39,165,600 newly issued shares of common stock, par value $0.01 per share (the “Initial Exchange”). On January 26, 2017, our stockholders approved the Exchange Transactions (defined below) and an increase in our authorized common stock from 90 million shares to 180 million shares.  We closed the Initial Exchange on January 27, 2017, and paid $1.1 million of accrued interest on the Senior Notes held by Wilks. In connection with the Initial Exchange, a second supplemental indenture became effective, which removed certain covenants and events of default from the indenture governing our Senior Notes and eliminated certain restrictive covenants discussed in Note 5.

 

On March 22, 2017, we exchanged an additional $14,528,000 principal amount of outstanding Senior Notes for 4,009,728 shares of our common stock (the “Follow-On Exchange”).

 

The Initial Exchange and the Follow-On Exchange (together, the “Exchange Transactions”) reduced the principal amount of outstanding Senior Notes by $145.1 million and reduced interest payments by $44.3 million over the remaining term of the Senior Notes.  The Exchange Transactions were accounted for as a debt extinguishment. A gain of $5.1 million was recognized on the Exchange Transactions for the difference between the fair market value of the shares issued, a Level 1 fair value measurement, and the net carrying value of the Senior Notes exchanged. We incurred equity issuance costs of $2.8 million related to the Exchange Transactions, which were recorded as a reduction to additional paid-in capital.

 

The Exchange Transactions triggered a cumulative change in ownership of our common stock by more than 50% under Section 382 of the Internal Revenue Code as of March 22, 2017. This established an annual limitation on the usage of our pre-change net operating losses (“NOLs”) in the future. Accordingly, we recognized a write-off of deferred tax assets of $139.1 million.

 

7


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2018

 

Acquisition

 

On November 1, 2017, we entered into a definitive agreement (the “Purchase Agreement”) to acquire producing properties directly adjacent to our acreage in the Permian Basin (the “Bolt-On Acquisition”). The Bolt-On Acquisition closed on November 20, 2017, and we issued 7,573,403 newly issued shares of common stock, par value $0.01 per share, with an effective date of September 1, 2017. The purchase price was finalized in April 2018, and we received 142,362 of the previously issued shares of our common stock, which were retired, pursuant to adjustments under the Purchase Agreement.

 

5. Long-Term Debt

The following table provides a summary of our long-term debt at June 30, 2018, and December 31, 2017 (in thousands).

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Senior secured credit facility:

 

 

 

 

 

 

 

 

Outstanding borrowings

 

$

297,500

 

 

$

291,000

 

Debt issuance costs

 

 

(1,365

)

 

 

(1,725

)

Senior secured credit facility, net

 

 

296,135

 

 

 

289,275

 

Senior notes:

 

 

 

 

 

 

 

 

Principal

 

 

85,240

 

 

 

85,240

 

Debt issuance costs

 

 

(905

)

 

 

(1,055

)

Senior notes, net

 

 

84,335

 

 

 

84,185

 

Total long-term debt

 

$

380,470

 

 

$

373,460

 

 

Senior Secured Credit Facility

At June 30, 2018, the borrowing base and aggregate lender commitments under our amended and restated senior secured credit facility (the “Credit Facility”) were $325 million, with maximum commitments from the lenders of $1 billion. The Credit Facility has a maturity date of May 7, 2020.  The borrowing base is redetermined semi-annually based on our oil, NGLs and gas reserves.  We, or the lenders, can each request one additional borrowing base redetermination each calendar year. Our semi-annual borrowing base redetermination was completed on May 1, 2018, and our borrowing base and aggregate lender commitments were reaffirmed at $325 million.

At June 30, 2018, borrowings under the Credit Facility bore interest based on the agent bank’s prime rate plus an applicable margin ranging from 2% to 3%, or the sum of the LIBOR rate plus an applicable margin ranging from 3% to 4%.  In addition, we pay an annual commitment fee of 0.50% of unused borrowings available under the Credit Facility. Margins vary based on the borrowings outstanding compared to the borrowing base of the lenders.

We had outstanding borrowings of $297.5 million under the Credit Facility at June 30, 2018, compared to $291 million of outstanding borrowings at December 31, 2017. The weighted average interest rate applicable to borrowings under the Credit Facility for the three months ended June 30, 2018, was 5.8%. We had outstanding unused letters of credit under the Credit Facility totaling $0.3 million at June 30, 2018, and December 31, 2017, respectively, which reduce amounts available for borrowing under the Credit Facility.

Obligations under the Credit Facility are secured by mortgages on substantially all of the oil and gas properties of the Company and its subsidiaries. The Company is required to grant liens in favor of the lenders covering the oil and gas properties of the Company and its subsidiaries representing at least 95% of the total value of all oil and gas properties of the Company and its subsidiaries.

On December 21, 2017, we entered into a fourth amendment to the Credit Facility. The fourth amendment, among other things, (a) extended the maturity date of the Credit Facility from May 7, 2019, to May 7, 2020, (b) increased the applicable margin rates on borrowings by  50 basis points, (c) required the Company to hedge 50% of the Company’s estimated 2018 oil and gas production from proved developed producing reserves and (d) amended our financial covenants as described below. In connection with the fourth amendment to the Credit Facility, we incurred $1 million of debt issuance costs.

8


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2018

 

Covenants

The Credit Facility contains three principal financial covenants:

 

a consolidated interest coverage ratio covenant that requires us to maintain a ratio of (i) consolidated EBITDAX for the period of four fiscal quarters then ending to (ii) Cash Interest Expense for such period as of the last day of any fiscal quarter of not less than 1.75 to 1.0 through December 31, 2018, a ratio of not less than 2.25 to 1.0 through December 31, 2019, and a ratio of not less than 2.5 to 1.0 thereafter. EBITDAX is defined as consolidated net (loss) income plus (i) interest expense, net, (ii) income tax provision (benefit), (iii) depreciation, depletion, amortization, (iv) exploration expenses and (v) other noncash loss or expense (including share-based compensation and the change in fair value of any commodity derivatives), less noncash income. Cash Interest Expense is calculated as interest expense, net less amortization of debt issuance costs. At June 30, 2018, our consolidated interest coverage ratio was 2.6 to 1.0;

 

a consolidated modified current ratio covenant that requires us to maintain a ratio of not less than 1.0 to 1.0 as of the last day of any fiscal quarter. The consolidated modified current ratio is defined as the ratio of (i) current assets plus funds available under our revolving credit facility, less the current derivative asset, to (ii) current liabilities less the current derivative liability. At June 30, 2018, our consolidated modified current ratio was 1.6 to 1.0; and

 

a consolidated total leverage ratio covenant that imposes a maximum permitted ratio of (i) Total Debt to (ii) EBITDAX for the period of four fiscal quarters then ending of not more than 5.0 to 1.0, as of the last day of any fiscal quarter from March 31, 2019, through June 30, 2019, thereafter not more than 4.75 to 1.0 as of the last day of any fiscal quarter through December 31, 2019, and not more than 4.0 to 1.0 as of the last day of any fiscal quarter thereafter. Total Debt is defined as the face or principal amount of debt. Our leverage ratio is currently above the level that will be required as of March 31, 2019. At June 30, 2018, our leverage ratio was 6.7 to 1.0.

The Credit Facility also contains covenants restricting cash distributions and other restricted payments, transactions with affiliates, incurrence of other debt, consolidations and mergers, the level of operating leases, asset sales, investment in other entities and liens on properties.

In addition, the obligations of the Company may be accelerated upon the occurrence of an Event of Default (as defined in the Credit Facility). Events of Default include customary events for a financing agreement of this type, including, without limitation, payment defaults, the inaccuracy of representations and warranties, defaults in the performance of affirmative or negative covenants, defaults on other indebtedness of the Company or its subsidiaries, bankruptcy or related defaults, defaults related to judgments and the occurrence of a Change of Control (as defined in the Credit Facility), which includes instances where a third party becomes the beneficial owner of more than 50% of the Company’s outstanding equity interests entitled to vote.

Senior Notes

At June 30, 2018, and December 31, 2017, $85.2 million of Senior Notes were outstanding. We issued the Senior Notes under a senior indenture dated June 11, 2013, among the Company, our subsidiary guarantors and Wilmington Trust, National Association, as successor trustee. The senior indenture, as supplemented by supplemental indentures dated June 11, 2013, and December 20, 2016, is referred to as the “Indenture.”

We may redeem some or all of the Senior Notes at specified redemption prices, plus accrued and unpaid interest to the redemption date. The Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by each of our subsidiaries, subject to certain customary release provisions. A subsidiary guarantor may be released from its obligations under the guarantee:

 

in connection with any sale or other disposition of all or substantially all of the assets of that guarantor (including by way of merger or consolidation) to a person that is not (either before or after giving effect to such transaction) the Company or a subsidiary guarantor, if the sale or other disposition otherwise complies with the Indenture;

 

in connection with any sale or other disposition of the capital stock of that guarantor to a person that is not (either before or after giving effect to such transaction) the Company or a subsidiary guarantor, if that guarantor no longer qualifies as a subsidiary of the Company as a result of such disposition and the sale or other disposition otherwise complies with the Indenture;

 

if the Company designates any restricted subsidiary that is a guarantor to be an unrestricted subsidiary in accordance with the Indenture;

9


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2018

 

 

upon defeasance or covenant defeasance of the notes or satisfaction and discharge of the Indenture, in each case, in accordance with the Indenture;

 

upon the liquidation or dissolution of that guarantor, provided that no default or event of default occurs under the Indenture as a result thereof or shall have occurred and is continuing; or

 

in the case of any restricted subsidiary that, after the issue date of the notes is required under the Indenture to guarantee the notes because it becomes a guarantor of indebtedness issued or an obligor under a credit facility with respect to the Company and/or its subsidiaries, upon the release or discharge in full from its (i) guarantee of such indebtedness or (ii) obligation under such credit facility, in each case, which resulted in such restricted subsidiary’s obligation to guarantee the notes.

The Indenture contains limited events of default.

Subsidiary Guarantors

The Senior Notes are guaranteed on a senior unsecured basis by each of our consolidated subsidiaries.  Approach Resources Inc. is a holding company with no independent assets or operations. The subsidiary guarantees are full and unconditional and joint and several, and any subsidiaries of the Company other than the subsidiary guarantors are minor. There are no significant restrictions on the Company’s ability, or the ability of any subsidiary guarantor, to obtain funds from its subsidiaries through dividends, loans, advances or otherwise.

At June 30, 2018, we were in compliance with all of our covenants, and there were no existing defaults or events of default, under our debt instruments.

 

 

6.  Commitments and Contingencies

Our contractual obligations include long-term debt, operating lease obligations, asset retirement obligations and employment agreements with our executive officers.  At June 30, 2018, outstanding borrowings under the Credit Facility were $297.5 million, compared to $291 million at December 31, 2017. Since December 31, 2017, there have been no other material changes to our contractual obligations.

We are involved in various legal and regulatory proceedings arising in the normal course of business.  While we cannot predict the outcome of these proceedings with certainty, we do not believe that an adverse result in any pending legal or regulatory proceeding, individually or in the aggregate, would be material to our consolidated financial condition or cash flows.

 

 

7.  Income Taxes

For the three months ended June 30, 2018, our income tax benefit was $2.2 million, compared to $4.5 million for the three months ended June 30, 2017. The following table reconciles our income tax expense for the three and six months ended June 30, 2018, and 2017, to the U.S. federal statutory rates of 21% and 35%, respectively (dollars in thousands).

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Statutory tax at 21% and 35%, respectively

 

$

(2,372

)

 

$

(4,691

)

 

$

(4,274

)

 

$

(5,415

)

State taxes, net of federal impact

 

 

112

 

 

154

 

 

 

274

 

 

 

195

 

Share-based compensation tax shortfall

 

 

 

 

 

22

 

 

 

70

 

 

 

312

 

Nondeductible compensation

 

 

36

 

 

 

 

 

 

93

 

 

 

 

Other differences

 

 

2

 

 

 

6

 

 

 

5

 

 

 

9

 

Write-off of deferred tax assets

 

 

 

 

 

 

 

 

 

 

 

139,090

 

Income tax (benefit) provision

 

$

(2,222

)

 

$

(4,509

)

 

$

(3,832

)

 

$

134,191

 

 

On December 22, 2017, the Tax Cuts and Jobs Act was enacted which, among other things, lowered the U.S. Federal income tax rate applicable to corporations from 35% to 21% and repealed the corporate alternative minimum tax. 

10


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2018

 

The Exchange Transactions triggered a cumulative change in ownership of our common stock by more than 50% under Section 382 of the Internal Revenue Code as of March 22, 2017. This established a n annual limitation on the usage of our pre-change NOLs in the future. Accordingly, we recognized a write-off of our deferred tax assets of $139.1 million in the six months ended June 30 , 2017.

 

8.  Derivative Instruments and Fair Value Measurements

We enter commodity derivative contracts to reduce our exposure to fluctuations in commodity prices related to our oil, NGLs and gas production. We record our open derivative instruments at fair value on our consolidated balance sheets as either current or non-current assets or liabilities based on the anticipated timing of cash settlements under the related contracts. Changes in the fair value of our commodity derivative contracts, not designated as cash-flow hedges, and cash settlements are recorded in earnings as they occur on our consolidated statements of operations under the caption entitled “commodity derivative (loss) gain.”

 

In April 2018, we entered into swaps for the NYMEX Calendar Monthly Average Roll (the “CMA Roll”) covering 2,000 Bbls of oil per day for May 2018 through December 2018 at $0.66/bbl. Swaps for the CMA Roll are pricing adjustments to the trade month versus the delivery month for contract pricing. These derivative contracts were designated as cash-flow hedges. The changes in fair value of the derivative contracts designated as cash-flow hedges, to the extent the hedge is effective, will be recognized in other comprehensive income until the hedged item is recognized in revenue.

The following table provides our outstanding commodity derivative positions at June 30, 2018.

 

Commodity and Period

 

Contract

Type

 

Volume Transacted

 

Contract Price

Crude Oil

 

 

 

 

 

 

July 2018 – December 2018

 

Swap

 

300 Bbls/day

 

$50.00/Bbl

July 2018 – September 2018

 

Swap

 

1,500 Bbls/day

 

$60.50/Bbl

 

 

 

 

 

 

 

CMA Roll

 

 

 

 

 

 

July 2018 – December 2018 (1)

 

Swap

 

2,000 Bbls/day

 

$0.66/Bbl

 

 

 

 

 

 

 

Natural Gas

 

 

 

 

 

 

July 2018 – December 2018

 

Swap

 

200,000 MMBtu/month

 

$3.085/MMBtu

July 2018 – December 2018

 

Swap

 

250,000 MMBtu/month

 

$3.084/MMBtu

 

 

 

 

 

 

 

NGLs (C2 - Ethane)

 

 

 

 

 

 

July 2018 – December 2018

 

Swap

 

1,000 Bbls/day

 

$11.424/Bbl

NGLs (C3 - Propane)

 

 

 

 

 

 

July 2018 – December 2018

 

Swap

 

600 Bbls/day

 

$32.991/Bbl

NGLs (IC4 - Isobutane)

 

 

 

 

 

 

July 2018 – December 2018

 

Swap

 

50 Bbls/day

 

$38.262/Bbl

NGLs (NC4 - Butane)

 

 

 

 

 

 

July 2018 – December 2018

 

Swap

 

200 Bbls/day

 

$38.22/Bbl

NGLs (C5 - Pentane)

 

 

 

 

 

 

July 2018 – December 2018

 

Swap

 

200 Bbls/day

 

$56.364/Bbl

(1) Designated as a cash flow hedge

 

After June 30, 2018, we entered into propane swaps covering 400 Bbls per day at $40.74/Bbl for August 2018 through December 2018.

 

11


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2018

 

 

 

The following table summarizes the fair value of our open commodity derivatives as of June 30, 2018, and December 31, 2017 (in thousands).

 

 

 

Balance Sheet Location