We have audited the accompanying consolidated statements of operations, changes in stockholders’ equity and cash flows of Approach Resources Inc. and subsidiaries (collectively, the “Company”) for the year ended December 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Approach Resources Inc. and subsidiaries for the year ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
Notes to Consolidated Financial Statements
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 focused on the exploration, development, production and acquisition of unconventional 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 accompanying 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 natural 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. For all periods reported, other comprehensive loss equals net loss.
F-10
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Going Concern
These consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and other commitments in the normal course of business for the twelve-month period following the date of issuance of these consolidated financial statements. As such, the accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amount, or the amount and classification of liabilities that may result should the Company be unable to continue as a going concern.
Our liquidity and ability to comply with debt covenants under our revolving credit facility have been negatively impacted by the recent decrease in commodity prices. Our revolving credit facility contains three principal financial covenants: (i) a consolidated interest coverage ratio, (ii) a consolidated modified current ratio and (iii) a consolidated total leverage ratio. See Note 3 for additional information regarding the financial covenants under our revolving credit facility. At December 31, 2018, we were in compliance with all of our covenants, and there were no existing defaults or events of default, under our debt instruments.
At December 31, 2018, our total leverage ratio was 6.6 to 1.0, which is above the level that will be required as of March 31, 2019, of 5.0 to 1.0. If we are unable to improve our total leverage ratio by March 31, 2019, the obligations of the Company under the revolving credit facility may be accelerated, which would have a material adverse effect on our business. See Note 3 for additional information regarding the financial covenants under our revolving credit facility. Our total leverage ratio has decreased from 9.7 to 1.0 as of December 31, 2016, to 6.6 to 1.0 as of December 31, 2018. Based on our current operating and commodity price forecast and capital structure, and in the absence of deleveraging transactions as discussed below, we do not believe we will be able to comply with the leverage ratio covenant beginning with the measurement date of March 31, 2019. These factors raise substantial doubt about our ability to continue as a going concern.
In order to continue to improve our leverage position to meet the financial covenants under the revolving credit facility, we are currently pursuing or considering a number of actions, which in certain cases may require the consent of current lenders, stockholders or bond holders. On April 12, 2018, our largest shareholder, Wilks Brothers, LLC, and its affiliate SDW Investments, LLC (collectively, “Wilks”), disclosed on Schedule 13D/A that they intended to engage in discussions with the Company regarding their investment in the Company, including the possible acquisition of additional shares of common stock through the exchange of approximately $60 million aggregate principal amount of 7 % Senior Notes due 2021 (the “Senior Notes”) currently held by Wilks (the “Exchange Transaction”). In April 2018, our board of directors formed a committee of independent directors (the “Special Committee”) to evaluate a potential Exchange Transaction as well as other strategic alternatives. The Special Committee hired financial and legal advisors to advise the Special Committee on these matters. The Special Committee engaged in discussions with Wilks regarding an Exchange Transaction in 2018, but in mid-2018 the Wilks and the Committee deferred further discussions regarding a stand-alone Exchange Transaction pending resolution of the Company’s discussions regarding the potential transaction described in the following paragraph.
In addition, management has reviewed numerous cash flow producing properties for potential acquisition over the last several years in order to grow our production base and reduce our leverage ratio to a sustainable level and one that is in compliance with our financial covenants. In early 2018, we retained a financial advisor, separate from the Special Committee’s advisor, and began discussions with a potential seller and multiple financing counterparties for the purchase of a set of substantial cash flow producing properties. Despite a deteriorating commodity price market, discussions with both the seller and financing parties progressed throughout 2018. However, no definitive agreements ultimately were executed, and the negotiations currently are not active.
In March 2019, our board of directors expanded the scope of the Special Committee to explore, in addition to an Exchange Transaction, other financing alternatives and deleveraging transactions, including without limitation (i) amendments or waivers to the covenants or other provisions of our revolving credit facility, (ii) raising new capital in private or public markets and (iii) restructuring our balance sheet either in court or through an out of court agreement with creditors. We are also considering operational matters such as adjusting our capital budget and improving cash flows from operations by continuing to reduce costs, and intend to continue to pursue and consider other strategic alternatives, including: (i) acquiring assets with existing production and cash flows by issuing preferred and common equity to finance such acquisitions; (ii) selling existing producing or midstream assets; and (iii) merging with a strategic partner. The Special Committee has re-commenced discussions with the Wilks
F-11
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
regarding an Exchang
e Transaction and intends to continue those discussions as part of its review of financing alternatives and
deleveraging
transactions.
As of December 31, 2018, we have incurred approximately $1.5 million in costs related to the potential issuance of equity in the above alternatives, which are recorded in prepaid expenses and other current assets. There can be no assurance that we will be able to implement any of these plans successfully, or that such plans, if executed, will result in compliance with our credit facility covenants.
Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. At times, the amount of cash and cash equivalents on deposit in financial institutions exceeds federally insured limits. We monitor the soundness of the financial institutions and believe the Company’s risk is negligible.
Oil and Gas Properties
Capitalized Costs
. Our oil and gas properties comprised the following (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Mineral interests in properties:
|
|
|
|
|
|
|
|
|
Unproved leasehold costs
|
|
$
|
29,039
|
|
|
$
|
28,737
|
|
Proved leasehold costs
|
|
|
60,276
|
|
|
|
60,077
|
|
Wells and related equipment and facilities
|
|
|
1,866,729
|
|
|
|
1,819,836
|
|
Support equipment
|
|
|
8,802
|
|
|
|
8,459
|
|
Uncompleted wells, equipment and facilities
|
|
|
11,853
|
|
|
|
13,468
|
|
Total costs
|
|
|
1,976,699
|
|
|
|
1,930,577
|
|
Less accumulated depreciation, depletion and
amortization
|
|
|
(910,795
|
)
|
|
|
(850,301
|
)
|
Net capitalized costs
|
|
$
|
1,065,904
|
|
|
$
|
1,080,276
|
|
We follow the successful efforts method of accounting for our oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties and to drill and equip development wells and related asset retirement costs are capitalized. Costs to drill exploratory wells are capitalized pending determination of whether the wells have proved reserves. If we determine that the wells do not have proved reserves, the costs are charged to exploration expense. There were no exploratory wells capitalized, pending determination of whether the wells have proved reserves, at December 31, 2018 or 2017. Geological and geophysical costs, including seismic studies are charged to exploration expense as incurred. We capitalize interest on expenditures for significant exploration and development projects that last more than six months while activities are in progress to bring the assets to their intended use and while these expenditures are excluded from our depletable base. Through December 31, 2018, we have capitalized no interest costs because our individual wells and infrastructure projects are generally developed in less than six months. Costs incurred to maintain wells and related equipment are charged to expense as incurred.
On the sale or retirement of a complete unit of a proved property, the cost and related accumulated depreciation, depletion and amortization are eliminated from the property accounts, and the resulting gain or loss is recognized. On the retirement or sale of a partial unit of proved property, the cost is charged to accumulated depreciation, depletion and amortization with no gain or loss recognized in income.
Capitalized amounts attributable to proved oil and gas properties are depleted by the unit-of-production method over proved reserves using the unit conversion ratio of six Mcf of gas to one barrel of oil equivalent (“Boe”), and one barrel of NGLs to one Boe. The ratios of six Mcf of natural gas to one Boe and one barrel of NGLs to one Boe do not assume price equivalency and, given price differentials, the price for a Boe for natural gas may differ significantly from the price for a barrel of oil.
Capitalized costs of proved mineral interests are depleted over
F-12
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
total estimated proved reserves, and capitalized costs of wells and related equipment and facilities are depleted over estimated proved develope
d reserves.
Depreciation, depletion and amortization expense for oil and gas producing property and related equipment was $
61.2
million, $
7
0.3
million and $
78.7
million for the years ended December 31, 201
8
, 201
7
and 201
6
, respectively.
Capitalized costs related to proved oil and gas properties, including wells and related equipment and facilities, are periodically evaluated for impairment based on an analysis of undiscounted future net cash flows in accordance with ASC 360,
Accounting for the Impairment or Disposal of Long-Lived Assets
, as events or changes in circumstances indicate that the carrying values of those assets may not be recoverable. If undiscounted cash flows are insufficient to recover the net capitalized costs related to proved properties, then we recognize an impairment charge equal to the difference between the net capitalized costs related to proved properties and their estimated fair values based on the present value of the related future net cash flows. Estimating future net cash flows involves the use of judgments, including estimation of the proved and unproved oil and natural gas reserve quantities, timing of development and production, expected future commodity prices, capital expenditures and production costs. We recorded no impairment of our proved properties for the years ended December 31, 2018, 2017 and 2016.
Unproved oil and gas properties that are individually significant are periodically assessed for impairment of value, and a loss is recognized at the time of impairment by providing an impairment allowance.
On the sale of an entire interest in an unproved property for cash or cash equivalents, gain or loss on the sale is recognized, taking into consideration the amount of any recorded impairment if the property had been assessed individually. If a partial interest in an unproved property is sold, the amount received is treated as a reduction of the cost of the interest retained.
Other Property
Furniture, fixtures and equipment are carried at cost. Depreciation of furniture, fixtures and equipment is provided using the straight-line method over estimated useful lives ranging from three to 15 years. Gain or loss on retirement or sale or other disposition of assets is included in income in the period of disposition. Depreciation expense for other property and equipment was $262,000, $237,000 and $343,000 for the years ended December 31, 2018, 2017 and 2016, respectively.
Financial Instruments
The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value, as of December 31, 2018 and 2017. See Note 7 for fair value disclosures.
Income Taxes
We are subject to U.S. federal income taxes along with state income taxes in Texas. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes on the consolidated statements of operations.
F-13
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Based on our analysis, we did not have any uncertain tax positions as of December 31, 201
8
or 201
7
. The
Company’s income tax returns are subject to examination by the relevant taxing authorities as follows: U.S. Federal income tax returns for tax years 201
5
and forward and Texas income and margin tax returns for tax years 201
5
and forward. There are current
ly no income tax examinations underway for these jurisdictions.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the tax rate in effect for the year in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the year of the enacted tax rate change.
We monitor our deferred tax assets by jurisdiction to assess their potential realization, and a valuation allowance is recognized on deferred tax assets when we believe that certain of these assets are more likely than not to be realized. In performing this review, we make estimates and assumptions regarding projected future taxable income, the expected timing of reversals of existing temporary differences and the implementation of tax planning strategies. To the extent that a valuation allowance is established or changed during any period, we would recognize expense or benefit within our consolidated tax expense. We currently have a valuation allowance of $0.5 million on our deferred tax assets.
Derivative Activity
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.”
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. As of December 31, 2018, we had no outstanding derivative instruments designated as cash-flow hedges.
Prepaid Expenses and Other Assets
In April 2017, we entered into an agreement that secured pricing and availability of a dedicated 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.
Asset Retirement Obligations
Our asset retirement obligations relate to future plugging and abandonment expenses on oil and gas properties. Based on the expected timing of payments, the full asset retirement obligation is classified as non-current. There were no significant changes to the asset retirement obligations for the years ended December 31, 2018, 2017 and 2016.
Share-Based Compensation
We measure and record compensation expense for share-based payment awards to employees and outside directors based on estimated grant date fair values. We recognize compensation costs for awards granted over the
F-14
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
requisite service period based on the grant date fair value in general and administrative expense
s
on our consolidated statements of operations.
Additionally, we
recognize forfeitures of share-based compensation as they occur.
In 2018 and 2016, we awarded cash-settled performance awards, subject to certain performance conditions, to our executive officers.
The cash-settled performance awards represent a non-equity unit with a conversion value equal to the fair market value of a share of the Company’s common stock at the vesting date. These awards are classified as liability awards due to the cash settlement feature. Compensation costs associated with the cash-settled performance awards are re-measured at each interim reporting period and an adjustment is recorded in general and administrative expenses on our consolidated statements of operations.
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 are reconciliations of the numerators and denominators of our basic and diluted earnings per share (dollars in thousands, except per-share amounts):
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Income (numerator):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income — basic
|
|
$
|
(19,911
|
)
|
|
$
|
(112,359
|
)
|
|
$
|
(52,243
|
)
|
Weighted average shares (denominator):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares — basic
|
|
|
94,581,294
|
|
|
|
83,404,104
|
|
|
|
41,488,206
|
|
Dilution effect of share-based compensation,
treasury method (1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average shares — diluted
|
|
|
94,581,294
|
|
|
|
83,404,104
|
|
|
|
41,488,206
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.21
|
)
|
|
$
|
(1.35
|
)
|
|
$
|
(1.26
|
)
|
Diluted
|
|
$
|
(0.21
|
)
|
|
$
|
(1.35
|
)
|
|
$
|
(1.26
|
)
|
(1)
|
Approximately 39,000 options to purchase our common stock were excluded from this calculation because they were antidilutive for the year ended December 31, 2016. No options were outstanding for the years ended December 31, 2018 and 2017, as they had expired.
|
Oil and Gas Operations
Revenue and Accounts Receivable
.
Revenues from 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 years ended December 31, 2018, 2017 and 2016 (in thousands)
F-15
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
$
|
66,319
|
|
|
$
|
52,748
|
|
|
$
|
48,311
|
|
NGLs
|
|
|
33,604
|
|
|
|
27,702
|
|
|
|
19,761
|
|
Gas
|
|
|
14,033
|
|
|
|
24,899
|
|
|
|
22,230
|
|
Total revenue from contracts with customers
|
|
|
113,956
|
|
|
|
105,349
|
|
|
|
90,302
|
|
Commodity derivatives designated as cash-flow hedges
|
|
|
79
|
|
|
|
—
|
|
|
|
—
|
|
Total oil NGLs and gas sales
|
|
$
|
114,035
|
|
|
$
|
105,349
|
|
|
$
|
90,302
|
|
Accounts receivable, joint interest owners, consist of uncollateralized joint interest owner obligations due within 30 days of the invoice date. Accounts receivable, oil, NGLs and gas sales, consist of uncollateralized accrued revenues due under normal trade terms, generally requiring payment within 30 to 60 days of production. No interest is charged on past-due balances. Payments made on all accounts receivable are applied to the earliest unpaid items. We review accounts receivable periodically and reduce the carrying amount by a valuation allowance that reflects our best estimate of the amount that may not be collectible. No such allowance was considered necessary at December 31, 2018 or 2017.
Oil, NGLs and Gas Sales Payable.
Oil, NGLs and gas sales payable represents amounts collected from purchasers for oil, NGLs and gas sales which are either revenues due to other revenue interest owners or severance taxes due to the respective state or local tax authorities. Generally, we are required to remit amounts due under these liabilities within 60 days of the end of the month in which the related production occurred.
Production Costs.
Production costs, including compressor rental and repair, pumpers’ and supervisors’ salaries, saltwater disposal, insurance, repairs and maintenance, expensed workovers and other operating expenses are expensed as incurred and included in lease operating expenses on our consolidated statements of operations.
Exploration expenses.
Exploration expenses include lease expirations, delay rentals, geological and geophysical costs and dry hole costs. In 2018, we incurred exploration expense of $0.4 million to drill an exploratory monitor well used for gathering geological, geophysical or engineering data concerning one or more potentially productive formations in other wells.
Dependence on Major Customers.
For the year ended December 31, 2018, sales to American Midstream, LP (“AMID”), a successor to JP Energy Development, LP (“JP Energy”), and DCP Midstream, LP (“DCP”) accounted for approximately 56% and 41%, respectively, of our total sales. As of December 31, 2018, we had dedicated the majority of our oil production from Project Pangea through September 2022 to AMID. In addition, as of December 31, 2018, we had contracted to sell the majority of our NGLs and natural gas production from Project Pangea to DCP through August 2023. For the year ended December 31, 2017, sales to AMID and DCP accounted for approximately 52% and 47%, respectively, of our total sales. For the year ended December 31, 2016, sales to DCP and JP Energy accounted for approximately 46% and 54%, respectively of our total sales. We believe that there are potential alternative purchasers and that it may be necessary to establish relationships with new purchasers. However, there can be no assurance that we can establish such relationships and that those relationships will result in increased purchasers. Although we are exposed to a concentration of credit risk, we believe that all of our purchasers are credit worthy.
Segment Reporting
The Company presently operates in one business segment, the exploration and production of oil, NGLs and natural gas.
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
F-16
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
a significant impact on our consolidated statements of operations or cash f
lows. We implemented processes to ensure new contracts are reviewed for the appropriate accounting treatment and generate the disclosures required under the new standard.
A
dditional 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
,
were included above
.
In February 2016, FASB issued an accounting standards update for “Leases,” which amends existing guidance to require lessees to recognize liabilities and right-of-use (“ROU”) assets 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 adopted it using a modified retrospective approach on January 1, 2019 using the transition method that allows a cumulative-effect adjustment to the opening balance to retained earnings in the period of adoption.
We currently enter into lease agreements to support our operations. These agreements are for leases on assets such as office space, compressors and well equipment. We have substantially completed our process to implement this standard, and we have designed processes and internal controls necessary for adoption of this standard. We have made policy elections to (i) not capitalize short-term leases for all asset classes, (ii) to not separate non-lease components from lease components for all of our current asset classes, (iii) apply the package of practical expedients that allows us to not reassess: whether any expired or existing contracts contain leases, lease classification for any expired or existing leases and initial direct costs for existing leases, (iv) apply the land easement practical expedient to not evaluate land easements that existed or expired prior to adoption and (v) apply the practical expedient to apply hindsight in estimating lease term and impairment.
The impact of applying this standard is not expected to significantly impact our results of operations or cash flows. As of January 1, 2019, we expect to recognize ROU assets and liabilities of approximately $15 million from operating leases on our consolidated balance sheet. We expect an increase in our working capital deficit due to the adoption of this standard as the entire ROU asset balance will be presented as a non-current asset, and a portion of the lease liability will be presented as a current liability. Under the terms of our revolving credit facility, the current liability related to operating leases will not be considered in our modified current ratio financial covenant calculation.
In March 2016, FASB issued an accounting standards update for “Compensation — Stock Compensation,”
which amends existing guidance related to the accounting for forfeitures, employer tax withholding on share-based compensation and financial statement presentation of excess tax benefits or deficiencies. This standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. We applied this standard u
sing a modified retrospective approach. We have elected to (i) recognize forfeitures of share-based compensation as they occur, (ii) permit tax withholdings in excess of the minimum statutory requirements and (iii) recognize previously un-recognized excess tax benefits related to share-based compensation in the current year. As a result, we have recognized an increase in accumulated earnings in 2016 of $1.7 million related to the change in accounting principal as of January 1, 2016. Adoption of this guidance did not impact our consolidated statements of operations or cash flows.
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. This standard is effective for interim and annual reporting periods beginning after December 15, 2016.
The Company is evaluating the impact of this new guidance on its consolidated financial statements.
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 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 interim 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 operations or cash flows.
Although we have not historically designated our derivative contracts as
F-17
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
cash-flow hedges, we
designated
CMA Roll
swap derivative contracts entered in April 2018 as cash-flow hedges. See Note
6
for additional information related to the derivative contracts designated as cash-flow hedges.
2.
|
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 2017 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 3.
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 “2017 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 2017 Exchange Transactions were accounted for as a debt extinguishment. A gain of $5.1 million was recognized on the 2017 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 2017 Exchange Transactions, which were recorded as a reduction to additional paid-in capital.
The 2017 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 reduced our NOL deferred tax assets by $139.1 million.
Acquisition
On November 1, 2017, we entered into a definitive 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 is subject to customary post-closing adjustments. 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.
The
Bolt-On
Acquisition was accounted for using the acquisition method under ASC Topic 805, “
Business Combinations
,” which requires the acquired assets and liabilities to be recorded at fair values as of the acquisition date.
In connection with the Bolt-On Acquisition, we incurred $0.1 million of acquisition-related costs which were expensed as incurred and are included in general and administrative expenses on our consolidated statements of operations.
F-18
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table summarizes the
final estimated fair value
of the assets acquired and liabilities assumed as a result of
the Bolt-On
Acquisition (in thousands):
Accounts receivable
|
|
$
|
562
|
|
Proved leasehold costs
|
|
|
13,967
|
|
Lease and well equipment
|
|
|
3,492
|
|
Total assets acquired
|
|
|
18,021
|
|
Accounts payable
|
|
|
(199
|
)
|
Oil, NGLs and gas sales payable
|
|
|
(237
|
)
|
Accrued liabilities
|
|
|
(21
|
)
|
Asset retirement obligations
|
|
|
(71
|
)
|
Total liabilities assumed
|
|
|
(528
|
)
|
Estimated fair value of net assets acquired
|
|
$
|
17,493
|
|
We estimated the fair value of oil and gas properties and equipment and asset retirement obligations as of November 20, 2017, using a discounted cash flow model, which is a non-recurring Level 3 fair value measurement. Significant inputs to the valuation of natural gas and oil properties include estimates of: (i) future sales prices for oil and gas based on NYMEX strip prices, (ii) pricing adjustments for differentials, (iii) production costs, (iv) future oil and gas reserves to be recovered and the timing thereof, and (v) discount rates.
The following table provides a summary of our long-term debt at December 31, 2018, and December 31, 2017 (in thousands).
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Senior secured credit facility:
|
|
|
|
|
|
|
|
|
Outstanding borrowings
|
|
$
|
301,500
|
|
|
$
|
291,000
|
|
Debt issuance costs
|
|
|
(993
|
)
|
|
|
(1,725
|
)
|
Senior secured credit facility, net
|
|
|
300,507
|
|
|
|
289,275
|
|
Senior notes:
|
|
|
|
|
|
|
|
|
Principal
|
|
|
85,240
|
|
|
|
85,240
|
|
Debt issuance costs
|
|
|
(754
|
)
|
|
|
(1,055
|
)
|
Senior notes, net
|
|
|
84,486
|
|
|
|
84,185
|
|
Total long-term debt
|
|
$
|
384,993
|
|
|
$
|
373,460
|
|
Senior Secured Credit Facility
At December 31, 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.
Borrowings under the Credit Facility bear 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 $301.5 million of outstanding borrowings under the Credit Facility at December 31, 2018, compared to $291 million of outstanding borrowings under the Credit Facility at December 31, 2017. The weighted average interest rate applicable to borrowings under the Credit Facility in 2018 was 6%. We had outstanding unused letters
F-19
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
of credit under our Credit Facility totaling $0.
3
million at December 31, 201
8 and 201
7
, 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, and (c) required the Company to hedge 50% of the Company’s estimated 2018 oil and gas production from proved developed producing reserves. In connection with the fourth amendment to the Credit Facility we incurred $1 million of debt issuance costs.
On May 3, 2016, we entered into a third amendment to the Credit Facility. The third amendment,
among other things, (a) decreased the borrowing base to
$325
million from $450 million, (b)
increased the applicable margin rates on borrowings by 100 basis points, (c) permits the Company to issue up to $150 million of second lien indebtedness, subject to various conditions and limitations, (d) permits the Company to repurchase outstanding debt with proceeds of certain asset sales, equity issuances or second lien indebtedness, and (e) requires cash and cash equivalents in excess of $35 million held by the Company to be applied to reduce outstanding borrowings under the Credit Facility.
In connection with the third amendment to the Credit Facility, $0.6 million of debt issuance costs were written off as a result of the reduction in the borrowing base, and we incurred $0.2 million of debt issuance costs.
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 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 December 31, 2018, our consolidated interest coverage ratio was 2.5 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 December 31, 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 (iii) 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 December 31, 2018, our leverage ratio was 6.6 to 1.0.
|
Failure to comply with any of the financial covenants under the Credit Facility would represent an event of default. In the case of an event of default, the lenders (i) would not be required to lend any additional amounts to us, (ii) could elect to declare all outstanding borrowings, together with accrued and unpaid interest and fees to be due
F-20
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
and payable, (iii) could require us to apply all of our available cash to repay these borrowings
and
(iv)
could
prevent us from making debt service payments under our other agre
ements.
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 December 31, 2018, and 2017, $85.2 million principal amount of 7% Senior Notes due 2021 (the “Senior Notes”) was outstanding. Annual interest on the Senior Notes is payable semi-annually on June 15 and December 15. On December 15, 2018, we made a semi-annual interest payment of $3 million.
During the year ended December 31, 2017, we completed t
he 2017 Exchange Transactions which reduced the outstanding principal balance of our Senior Notes by $145.1 million and reduced future interest payments by $44.3 million over the remaining term of the Senior Notes.
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 a supplemental indenture dated June 11, 2013, is referred to as the “Indenture.”
On December 20, 2016, we entered into the second supplemental indenture (the “Second Supplemental Indenture”), which became effective on January 27, 2017, in connection with the closing of the Initial Exchange. The Second Supplemental Indenture (i) eliminated certain definitions and references to definitions contained in the Indenture, (ii) eliminated and revised, as applicable, certain events of default contained in the Indenture, (iii) eliminated certain conditions to consolidation, merger, conveyance, transfer or lease contained in the Indenture, (iv) eliminated certain covenants contained in the Indenture, including substantially all of the restrictive covenants set forth therein, and (v) supplemented and amended the Senior Notes and the securities guarantees, as and to the same extent as the Indenture has been amended and supplemented in accordance with the preceding clauses (i), (ii), (iii) and (iv).
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;
|
F-21
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
|
•
|
upon defeasance or covenant defeasance of the notes or satisfaction and discharge of the
I
ndenture, 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 the revolving 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 revolving credit facility, in each case, which resulted in such restricted subsidiary’s obligation to guarantee the notes.
|
As a result of the Second Supplemental Indenture, 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 December 31, 2018, we were in compliance with all of our covenants, and there were no existing defaults or events of default, under our debt instruments.
4
.
|
Share-Based Compensation
|
In June 2018, our board of directors and stockholders approved the Long Term Incentive Plan (the “2018 Plan”). Under the 2018 Plan, we may grant restricted stock, stock options, stock appreciation rights, restricted stock units, performance awards, unrestricted stock awards and other incentive awards. The maximum number of shares of common stock available for the grant of awards under the 2018 Plan is 6,950,000. Awards of any stock options are to be priced at not less than the fair market value at the date of the grant. We use (i) the closing stock price on the date of grant for the fair value of restricted stock awards, including performance-based awards, (ii) the Monte Carlo simulation method for the fair value of market-based awards, (iii) the fair market value of our common stock on the valuation date for cash-settled performance awards and (iv) the Black-Scholes option price model to measure the fair value of stock options. The vesting period of any stock award is to be determined by the board or an authorized committee at the time of the grant.
Share-based compensation expense amounted to $3 million, $4.7 million and $6.3 million for the years ended December 31, 2018, 2017 and 2016, respectively. Such amounts represent the estimated fair value of stock awards for which the requisite service period elapsed during those periods. Share-based compensation expense for the years ended December 31, 2018, 2017 and 2016, included $384,000, $449,000 and $214,000, respectively, related to grants to non-employee directors.
Stock Options
There were no stock option grants during the years ended December 31, 2018, 2017 and 2016. During the year ended December 31, 2017, 38,525 options expired, and no options were outstanding as of December 31, 2018, and 2017. There were no options exercised during the years ended December 31, 2018, 2017 and 2016.
Nonvested Shares
Share grants totaling 1,348,488 shares, 2,343,522 shares and 1,318,229 shares with an approximate aggregate fair market value of $2.6 million, $5.6 million and $2.5 million, based on the closing price of our common stock on the date of grant, were granted to employees and non-employee directors during the years ended December 31,
F-22
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
201
8
, 201
7
and 201
6
, respectively. Included in the share grants for
2018, 2017 and 2016
,
are
387
,
295
shares,
1,492,652
shares and
550,272
shares, respectively, awarded to our executive officers. The aggregate fair market value of these shares on the grant date was $
0.8
million, $
3.6
million and $
0.3
million, respectively, to be expensed over
a service period of approximately three years, subject to certain performance restrictions. The share grants for executive officers noted above does not include the cash-settled performance awards, which are discussed in more detail below.
A summary of the status of nonvested shares for the years ended December 31, 2018, 2017 and 2016, is presented below:
|
|
Shares
|
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Nonvested at January 1, 2016
|
|
|
1,735,256
|
|
|
$
|
8.60
|
|
Granted
|
|
|
1,318,229
|
|
|
|
1.90
|
|
Vested
|
|
|
(992,461
|
)
|
|
|
7.03
|
|
Canceled
|
|
|
(107,960
|
)
|
|
|
17.33
|
|
Nonvested at December 31, 2016
|
|
|
1,953,064
|
|
|
$
|
4.39
|
|
Granted
|
|
|
2,343,522
|
|
|
|
2.39
|
|
Vested
|
|
|
(902,197
|
)
|
|
|
6.73
|
|
Canceled
|
|
|
(89,728
|
)
|
|
|
5.17
|
|
Nonvested at December 31, 2017
|
|
|
3,304,661
|
|
|
$
|
2.21
|
|
Granted
|
|
|
1,348,488
|
|
|
|
1.91
|
|
Vested
|
|
|
(1,555,454
|
)
|
|
|
2.84
|
|
Canceled
|
|
|
(242,023
|
)
|
|
|
4.09
|
|
Nonvested at December 31, 2018
|
|
|
2,855,672
|
|
|
$
|
1.75
|
|
As of December 31, 2018, unrecognized compensation expense related to the nonvested shares amounted to $3.1 million, which will be recognized over a remaining service period of two years.
Cash-settled performance awards
In 2018 and 2016, in addition to the share grants discussed above, we awarded cash-settled performance awards, subject to certain performance conditions, of 774,590 and 1,100,542 to our executive officers, respectively. The fair market value of these cash-settled performance awards on the grant date was $2.4 million and $1 million, respectively. During the years ended December 31, 2018, and 2017, 625,045 and 366,847 cash-settled performance awards vested. As of December 31, 2018, we had 883,240 unvested cash-settled performance awards, subject to certain performance conditions outstanding. As of December 31, 2018, t
he aggregate fair market value of the outstanding cash-settled performance awards was approximately $1 million, to be expensed over a remaining service period of approximately 1.3 years, subject to performance conditions.
The cash-settled performance awards represent a non-equity unit with a conversion value equal to the fair market value of a share of the Company’s common stock at the vesting date. These awards are classified as liability awards due to the cash settlement feature. Compensation costs associated with the cash-settled performance awards are re-measured, based on the fair market value of our common stock of the vested portion of the award, at each interim reporting period and an adjustment is recorded in general and administrative expenses on our consolidated statements of operations. For the years ended December 31, 2018, 2017 and 2016, we recognized $0.2 million, $0.8 million and $1.3 million in expense related to the cash-settled performance awards, respectively. As of December 31, 2018, we recorded a current liability of $1.2 million and a non-current liability of $0.1 million on our consolidated balance sheet related to these awards. During the year ended December 31, 2018, we paid $1 million related to vested cash-settled performance awards.
F-23
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Employee Benefit Plan
The Company has a defined contribution employee benefit plan covering substantially all of its employees. We make a matching contribution equal to 100% of each pre-tax dollar contributed by the participant on the first 3% of eligible compensation and 50% on the next 2% of eligible compensation. The Company made contributions to the plan of approximately $335,000, $333,000 and $338,000 during the years ended December 31, 2018, 2017 and 2016, respectively.
Our provision for income taxes comprised the following (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(66
|
)
|
|
$
|
(66
|
)
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total current provision for income taxes
|
|
$
|
(66
|
)
|
|
$
|
(66
|
)
|
|
$
|
—
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(4,747
|
)
|
|
$
|
75,341
|
|
|
$
|
(24,957
|
)
|
State
|
|
|
466
|
|
|
|
1,146
|
|
|
|
539
|
|
Total deferred provision for income taxes
|
|
$
|
(4,281
|
)
|
|
$
|
76,487
|
|
|
$
|
(24,418
|
)
|
Total income tax expense differed from the amounts computed by applying the U.S. Federal statutory tax rates to pre-tax income (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Statutory tax at 21%, 35% and 35%, respectively
|
|
$
|
(5,094
|
)
|
|
$
|
(12,578
|
)
|
|
$
|
(26,831
|
)
|
State taxes, net of federal impact
|
|
|
466
|
|
|
|
528
|
|
|
|
578
|
|
Share-based compensation tax shortfall
|
|
|
264
|
|
|
|
1,279
|
|
|
|
1,826
|
|
Nondeductible compensation
|
|
|
11
|
|
|
|
—
|
|
|
|
—
|
|
Permanent differences
|
|
|
6
|
|
|
|
11
|
|
|
|
11
|
|
Other differences
|
|
|
—
|
|
|
|
30
|
|
|
|
(2
|
)
|
Change in federal tax rate
|
|
|
—
|
|
|
|
(51,939
|
)
|
|
|
—
|
|
Write-off of deferred tax assets
|
|
|
—
|
|
|
|
139,090
|
|
|
|
—
|
|
Total
|
|
$
|
(4,347
|
)
|
|
$
|
76,421
|
|
|
$
|
(24,418
|
)
|
T
he 2017 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 future use of our pre-change net operating losses (“NOLs”). Accordingly, we reduced our NOL deferred tax assets by $139.1 million.
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. We recorded a net tax benefit of $51.9 million to reflect the impact of the Tax Cuts and Jobs Act as of December 31, 2017, as it is required to reflect the change in the period in which the law is enacted.
In 2018, 2017 and 2016, the Company recorded a tax shortfall related to share-based compensation of $0.3 million, $1.3 million and $1.8 million, respectively. This shortfall is for grants in which the realized tax deduction was less than the expense booked for these grants due to a decline in share price from the time of grant.
F-24
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
In 2016, we early adopted
accounting standards update for “Compensation — Stock Compensation.” As a result, we recognized an increase in accumulated earnings and our NOLs in
2016
of $1.7 million related to the change in accounting principal as of January 1, 2016.
Deferred tax assets and liabilities are the result of temporary differences between the financial statement carrying values and tax basis of assets and liabilities. Our net deferred tax assets and liabilities are recorded as a long-term liability of $77.8 million and $82.1 million at December 31, 2018 and 2017, respectively.
Significant components of net deferred tax assets and liabilities are (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
58,900
|
|
|
$
|
39,991
|
|
Derivative liabilities
|
|
|
—
|
|
|
|
471
|
|
Interest expense
|
|
|
2,747
|
|
|
|
—
|
|
Other
|
|
|
144
|
|
|
|
533
|
|
Total deferred tax assets
|
|
|
61,791
|
|
|
|
40,995
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Difference in depreciation, depletion and
capitalization methods — oil and gas properties
|
|
|
(137,868
|
)
|
|
|
(122,335
|
)
|
Derivative assets
|
|
|
(1,284
|
)
|
|
|
(302
|
)
|
Total deferred tax liabilities
|
|
|
(139,152
|
)
|
|
|
(122,637
|
)
|
Valuation allowance
|
|
|
(460
|
)
|
|
|
(460
|
)
|
Net deferred tax liability
|
|
$
|
(77,821
|
)
|
|
$
|
(82,102
|
)
|
T
he 2017 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 future use of our pre-change NOLs. Accordingly, we reduced our NOL deferred tax assets by $139.1 million in the year ended December 31, 2017.
At December 31, 2018, we had federal NOLs of $191.2 million, after the reduction under Section 382 limitation, that expire between 2030 and 2037, and federal NOLs of $89.3 million that do not expire.
As of December 31, 2018, we
have a valuation allowance of $0.5 million on our deferred tax assets.
6.
|
Derivative Instruments and Fair Value Measurements
|
At December 31, 2018, we had the following commodity derivatives positions outstanding:
Commodity and Period
|
|
Contract
Type
|
|
Volume Transacted
|
|
Contract Price
|
Crude Oil
|
|
|
|
|
|
|
January 2019 — December 2019
|
|
Collar
|
|
500 Bbls/day
|
|
$65.00/Bbl - $71.00/Bbl
|
|
|
|
|
|
|
|
NGLs (C2 - Ethane)
|
|
|
|
|
|
|
January 2019 — March 2019
|
|
Swap
|
|
900 Bbls/day
|
|
$14.123/Bbl
|
NGLs (C3 - Propane)
|
|
|
|
|
|
|
January 2019 — March 2019
|
|
Swap
|
|
600 Bbls/day
|
|
$35.165/Bbl
|
January 2019 — June 2019
|
|
Swap
|
|
75 Bbls/day
|
|
$42.00/Bbl
|
NGLs (NC4 - Butane)
|
|
|
|
|
|
|
January 2019 — March 2019
|
|
Swap
|
|
200 Bbls/day
|
|
$38.63/Bbl
|
NGLs (C5 - Pentane)
|
|
|
|
|
|
|
January 2019 — December 2019
|
|
Swap
|
|
100 Bbls/day
|
|
$65.10/Bbl
|
January 2019 — December 2019
|
|
Swap
|
|
100 Bbls/day
|
|
$65.31/Bbl
|
F-25
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following summarizes the fair value of our open commodity derivatives as of December 31, 2018 and 2017 (in thousands):
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Derivatives not designated as hedging
instruments
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
Derivative assets
|
|
$
|
5,946
|
|
|
$
|
1,398
|
|
Commodity derivatives
|
|
Derivative liabilities
|
|
$
|
—
|
|
|
|
(2,181
|
)
|
The following summarizes the cash settlements and change in the fair value of our commodity derivatives (in thousands):
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (payment) receipt on derivative settlements
|
|
$
|
(7,050
|
)
|
|
$
|
(4,359
|
)
|
|
$
|
6,132
|
|
|
|
Non-cash fair value gain (loss) on derivatives
|
|
|
6,729
|
|
|
|
4,097
|
|
|
|
(11,616
|
)
|
|
|
Commodity derivative loss
|
|
$
|
(321
|
)
|
|
$
|
(262
|
)
|
|
$
|
(5,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil, NGLs and gas sales
|
|
$
|
79
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The following table summarizes the changes in accumulated other comprehensive income (“AOCI”) for the year ended December 31, 2018 (in thousands).
|
|
|
|
Pre-Tax
|
|
|
Tax Effect
|
|
|
Net of Tax
|
|
Balance at December 31, 2017
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Other comprehensive income before reclassifications
|
|
|
79
|
|
|
|
(17
|
)
|
|
|
62
|
|
|
|
Amounts reclassified from AOCI
|
|
|
(79
|
)
|
|
|
17
|
|
|
|
(62
|
)
|
|
|
Net other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at December 31, 2018
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative assets and liabilities, at fair value, are included on our consolidated balance sheets as 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”.
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. As of December 31, 2018, we had no outstanding derivative instruments designated as cash-flow hedges.
We estimate the fair value of swap contracts based on the present value of the difference in exchange-quoted forward price curves and contractual settlement prices multiplied by notional quantities. We internally valued the option contracts using industry-standard option pricing models and observable market inputs. We use our internal valuations to determine the fair values of the contracts that are reflected on our consolidated balance sheets.
F-26
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
We are exposed to credit losses in the event of nonperformance by the
counterparties on our commodity derivatives positions and have considered the exposure in our internal valuations. However, we do not anticipate nonperformance by the counterparties over the term of the commodity derivatives positions.
To estimate the fair value of our commodity derivatives positions, we use market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the market approach for recurring fair value measurements and attempt to use the best available information. We determine the fair value based upon the hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and lowest priority to unobservable inputs (Level 3 measurement). The three levels of fair value hierarchy are as follows:
|
•
|
Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. At December 31, 2018, 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 December 31, 2018, 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. The fair value of oil and gas properties acquired in the Bolt-on Acquisition represents a Level 3 measurement. At December 31, 2018, we had no recurring Level 3 measurements.
|
Financial Instruments Not Recorded at Fair Value
The following table sets forth the fair values of financial instruments that are not recorded at fair value on our financial statements (in thousands).
|
|
December 31, 2018
|
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
Senior Notes, net
|
|
$
|
84,486
|
|
|
$
|
81,773
|
|
The fair value of the Senior Notes is based on quoted market prices, but the Senior Notes are not actively traded in the public market. Accordingly, the fair value of the Senior Notes would be classified as Level 2 in the fair value hierarchy.
7
.
|
Commitments and Contingencies
|
At December 31, 2018, we had outstanding employment agreements with all four of our executive officers that contained automatic renewal provisions providing that such agreements may be automatically renewed for successive terms of one year unless the employment is terminated at the end of the term by written notice given to the employee not less than 60 days prior to the end of such term. Our maximum commitment under the employment agreements, which would apply if the employees covered by these agreements were each terminated without cause, resigned for good reason, or received a notice of non-renewal was approximately $6.5 million at December 31, 2018. This estimate assumes the maximum potential bonus for 2018 is earned by each executive officer during 2018.
F-27
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
In
2016,
we recorded a contractual settlement of $1.4 million, which is recorded in other income on our consolidated statements of operations.
We lease our office space in Fort Worth, Texas, under a non-cancelable agreement that expires on September 30, 2021. We also have non-cancelable operating lease commitments related to office equipment that expire by 2022. The following is a schedule by years of future minimum rental payments required under our operating lease arrangements as of December 31, 2018 (in thousands):
2019
|
|
$
|
899
|
|
2020
|
|
|
914
|
|
2021
|
|
|
708
|
|
2022
|
|
|
4
|
|
2023
|
|
|
—
|
|
Total
|
|
$
|
2,525
|
|
Rent expense under our lease arrangements amounted to $942,000, $748,000 and $1,025,000 for the years ended December 31, 2018, 2017 and 2016, respectively.
Litigation
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.
In 2016,
we received $1.1 million from a service provider in a legal settlement, which reduced our current liabilities on our consolidated balance sheets and is recorded as a reduction in additions to oil and gas properties on our consolidated statements of cash flows.
Environmental Issues
We are engaged in oil and gas exploration and production and may become subject to certain liabilities or damages as they relate to environmental clean up of well sites or other environmental restoration or ground water contamination, in connection with drilling or operating oil and gas wells. In connection with our acquisition of existing or previously drilled well bores, we may not be aware of what environmental safeguards were taken at the time such wells were drilled or during such time the wells were operated. Should it be determined that a liability exists with respect to any environmental clean up, restoration or contamination, we would be responsible for curing such a violation or paying damages. No claim has been made, nor are we aware of any liability that exists, as it relates to any environmental clean up, restoration, contamination or the violation of any rules or regulations relating thereto.
8
.
|
Related Party Transactions
|
Wilks, a related party, purchased a portion of our outstanding Senior Notes in the open market subsequent to the Exchange Transactions. The Company believes that Wilks held approximately $60 million aggregate principal amount of our outstanding Senior Notes as of December 31, 2018. The Senior Notes held by Wilks are included in Senior Notes, net on our consolidated balance sheets. Our interest expense includes interest attributable to any Senior Notes held by Wilks on our consolidated statements of operations.
As of December 31, 2018, we recorded a current liability $0.1 million of accrued interest attributable to the Senior Notes held by Wilks.
On April 12, 2018, Wilks disclosed on Schedule 13D/A that they intend to engage in discussions with the Company regarding their investment in the Company, including the possible acquisition of additional shares of common stock through the exchange of the Senior Notes currently held by Wilks. In connection with these discussions the Company has incurred $0.1 million of legal fees on behalf of Wilks.
F-28
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
In April 2018, we engaged ProFrac Services, LLC (“ProFrac”) to perform completion services
for
the Company.
There is no required minimum or maximum number of wells committed, and we
may
use ProFrac on a well-by-well basis throughout 2019. Matthew D. Wilks, a member of our Board of Directors, serves as the Chief Financial Officer of ProFrac, and Wilks has an equ
ity ownership interest in ProFrac. During the year ended December 31, 2018, we incurred capital expenditures of $8.1 million for hydraulic fracturing services with ProFrac, which is included in additions to oil and gas properties
on our consolidated statem
ents of cash flows. As of December 31, 2018, there is no recorded liability due to ProFrac.
9.
|
Oil and Gas Producing Activities
|
Set forth below is certain information regarding the costs incurred for oil and gas property acquisition, development and exploration activities (in thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Property acquisition costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unproved properties
|
|
$
|
406
|
|
|
$
|
231
|
|
|
$
|
17
|
|
Proved properties(1)
|
|
|
—
|
|
|
|
17,331
|
|
|
|
—
|
|
Exploration costs
|
|
|
420
|
|
|
|
3,657
|
|
|
|
3,923
|
|
Development costs(2)
|
|
|
45,929
|
|
|
|
43,202
|
|
|
|
15,884
|
|
Total costs incurred
|
|
$
|
46,755
|
|
|
$
|
64,421
|
|
|
$
|
19,824
|
|
|
(1)
|
For the year ended December 31, 2017, acquisition costs of proved properties included the fair value of assets acquired in the Bolt-On Acquisition. See Note 2 for additional disclosures related to the Bolt-On Acquisition.
|
|
(2)
|
For the years ended December 31, 2018, 2017 and 2016, development costs included $19,000, $39,000 and $36,000, respectively, in non-cash asset retirement obligations.
|
Set forth below is certain information regarding the results of operations for oil and gas producing activities (in thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
114,035
|
|
|
$
|
105,349
|
|
|
$
|
90,302
|
|
Production costs
|
|
|
(30,052
|
)
|
|
|
(26,546
|
)
|
|
|
(27,467
|
)
|
Exploration expense
|
|
|
(420
|
)
|
|
|
(3,657
|
)
|
|
|
(3,923
|
)
|
Depletion
|
|
|
(60,266
|
)
|
|
|
(70,521
|
)
|
|
|
(79,044
|
)
|
Income tax (expense) benefit
|
|
|
(5,030
|
)
|
|
|
(1,641
|
)
|
|
|
7,144
|
|
Results of operations
|
|
$
|
18,267
|
|
|
$
|
2,984
|
|
|
$
|
(12,988
|
)
|
10.
|
Disclosures About Oil and Gas Producing Activities (unaudited)
|
Proved Reserves
All of our estimated oil and natural gas reserves are attributable to properties within the United States, primarily in the Permian Basin in West Texas. The estimates of proved reserves and related valuations for the years ended December 31, 2018, 2017 and 2016, were prepared by DeGolyer and MacNaughton, independent petroleum engineers. Each year’s estimate of proved reserves and related valuations were also prepared in accordance with then-current rules and guidelines established by the Securities and Exchange Commission and the Financial Accounting Standards Board.
F-29
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table summarizes the prices used in the reserve estimates for
2018,
201
7 and
201
6
. Commodity prices used for the reserve estimates, adjusted for basis differentials, grade and quality, are as follows:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Oil (per Bbl)
|
|
$
|
65.68
|
|
|
$
|
51.34
|
|
|
$
|
42.69
|
|
Natural gas liquids (per Bbl)
|
|
$
|
24.12
|
|
|
$
|
18.67
|
|
|
$
|
14.12
|
|
Gas (per Mcf)
|
|
$
|
3.17
|
|
|
$
|
2.99
|
|
|
$
|
2.47
|
|
Oil, NGLs and natural gas reserve estimates are subject to numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. The accuracy of such estimates is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of subsequent drilling, testing and production may cause either upward or downward revision of previous estimates. Further, the volumes considered to be commercially recoverable fluctuate with changes in prices and operating costs. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of currently producing oil and natural gas properties. Accordingly, these estimates are expected to change as additional information becomes available in the future.
The following table provides a summary of the changes of the total proved reserves for the years ended December 31, 2018, 2017 and 2016, as well as proved developed and proved undeveloped reserves at the beginning and end of each respective year.
Total Proved Reserves
|
|
Oil
(MBbls)
|
|
|
NGLs
(MBbls)
|
|
|
Natural Gas
(MMcf)
|
|
|
Total
(MBoe)
|
|
Balance — January 1, 2016
|
|
|
54,496
|
|
|
|
49,486
|
|
|
|
375,988
|
|
|
|
166,646
|
|
Extensions and discoveries
|
|
|
6,529
|
|
|
|
4,564
|
|
|
|
33,347
|
|
|
|
16,651
|
|
Production(1)
|
|
|
(1,275
|
)
|
|
|
(1,529
|
)
|
|
|
(11,734
|
)
|
|
|
(4,759
|
)
|
Revisions to previous estimates
|
|
|
(9,719
|
)
|
|
|
(4,887
|
)
|
|
|
(45,324
|
)
|
|
|
(22,161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance — December 31, 2016
|
|
|
50,031
|
|
|
|
47,634
|
|
|
|
352,277
|
|
|
|
156,377
|
|
Extensions and discoveries
|
|
|
10,546
|
|
|
|
9,975
|
|
|
|
76,710
|
|
|
|
33,307
|
|
Acquisition of minerals in place
|
|
|
710
|
|
|
|
394
|
|
|
|
2,808
|
|
|
|
1,572
|
|
Production(1)
|
|
|
(1,107
|
)
|
|
|
(1,486
|
)
|
|
|
(11,148
|
)
|
|
|
(4,452
|
)
|
Revisions to previous estimates
|
|
|
(10,120
|
)
|
|
|
1,431
|
|
|
|
20,581
|
|
|
|
(5,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance — December 31, 2017
|
|
|
50,060
|
|
|
|
57,948
|
|
|
|
441,228
|
|
|
|
181,545
|
|
Extensions and discoveries
|
|
|
14,572
|
|
|
|
8,819
|
|
|
|
69,362
|
|
|
|
34,951
|
|
Production(1)
|
|
|
(1,070
|
)
|
|
|
(1,443
|
)
|
|
|
(10,793
|
)
|
|
|
(4,312
|
)
|
Revisions to previous estimates
|
|
|
(11,104
|
)
|
|
|
(8,788
|
)
|
|
|
(73,359
|
)
|
|
|
(32,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance — December 31, 2018
|
|
|
52,458
|
|
|
|
56,536
|
|
|
|
426,438
|
|
|
|
180,067
|
|
(1)
|
Production included 1,330 MMcf, 1,319 MMcf and 1,385 MMcf related to field fuel in 2016, 2017 and 2018, respectively.
|
F-30
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Total Proved Reserves
|
|
Oil
(MBbls)
|
|
|
NGLs
(MBbls)
|
|
|
Natural Gas
(MMcf)
|
|
|
Total
(MBoe)
|
|
Proved Developed Reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2016
|
|
|
15,667
|
|
|
|
20,414
|
|
|
|
154,652
|
|
|
|
61,856
|
|
December 31, 2016
|
|
|
13,466
|
|
|
|
20,375
|
|
|
|
150,208
|
|
|
|
58,875
|
|
December 31, 2017
|
|
|
13,853
|
|
|
|
23,180
|
|
|
|
176,201
|
|
|
|
66,399
|
|
December 31, 2018
|
|
|
13,406
|
|
|
|
23,799
|
|
|
|
178,334
|
|
|
|
66,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved Undeveloped Reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2016
|
|
|
38,829
|
|
|
|
29,072
|
|
|
|
221,335
|
|
|
|
104,790
|
|
December 31, 2016
|
|
|
36,565
|
|
|
|
27,259
|
|
|
|
202,069
|
|
|
|
97,502
|
|
December 31, 2017
|
|
|
36,207
|
|
|
|
34,768
|
|
|
|
265,028
|
|
|
|
115,146
|
|
December 31, 2018
|
|
|
39,051
|
|
|
|
32,737
|
|
|
|
248,104
|
|
|
|
113,139
|
|
The following is a discussion of the material changes in our proved reserve quantities for the years ended December 31, 2018, 2017 and 2016:
Year Ended December 31, 2018
Extensions and discoveries for 2018 were 35 MMBoe, primarily attributable to our development project in the Wolfcamp shale oil resource play in the Permian Basin. During 2018, we reclassified 33.1 MMBoe of proved undeveloped reserves to unproved reserves. The reserves reclassified are attributable to horizontal well locations in Project Pangea that are no longer expected to be developed within five years from their initial booking, as required by SEC rules. Revisions included an increase of 0.2 MMBoe resulting from updated well performance and technical parameters, and an increase of 1.9 MMBoe due to higher commodity prices, partially offset by a decrease of 1.4 MMBoe due to an increase in operating expenses and natural gas price differentials. We produced 4.3 MMBoe during 2018. This production included 1,385 MMcf of gas that was produced and used as field fuel (primarily for compressors and artificial lift) before the gas was delivered to a sales point.
Year Ended December 31, 2017
Extensions and discoveries for 2017 were 33.3 MMBoe, primarily attributable to our development project in the Wolfcamp shale oil resource play in the Permian Basin. During 2017, we acquired 1.6 MMBoe of proved reserves through the Bolt-On Acquisition, and we reclassified 17.7 MMBoe of proved undeveloped reserves to unproved reserves. The reserves reclassified are attributable to horizontal well locations in Project Pangea that are no longer expected to be developed within five years from their initial booking, as required by SEC rules. Revisions included an increase of 9.4 MMBoe resulting from updated well performance and technical parameters and an increase of 3.1 MMBoe due to higher commodity prices We produced 4.5 MMBoe during 2017. This production included 1,319 MMcf of gas that was produced and used as field fuel (primarily for compressors and artificial lift) before the gas was delivered to a sales point.
Year Ended December 31, 2016
Extensions and discoveries for 2016 were 16.7 MMBoe, primarily attributable to our development project in the Wolfcamp shale oil resource play in the Permian Basin. During 2016, we reclassified 22.4 MMBoe of proved undeveloped reserves to unproved reserves. The reserves reclassified are attributable to horizontal well locations in Project Pangea that are no longer expected to be developed within five years from their initial booking, as required by SEC rules. Revisions included an increase of 2.1 MMBoe resulting from cost reductions, updated well performance and technical parameters, offset by a decrease of 1.9 MMBoe due to lower commodity prices. We produced 4.8 MMBoe during 2016. This production included 1,330 MMcf of gas that was produced and used as field fuel (primarily for compressors and artificial lift) before the gas was delivered to a sales point.
F-31
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Standardized Measure of Discounted
Future Net Cash Flows Relating to Proved Reserves
The standardized measure of discounted future net cash flows is computed by applying the 12-month unweighted average of the first-day-of-the-month pricing for oil and natural gas (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved oil and natural gas reserves less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, discounted using a rate of 10 percent per year to reflect the estimated timing of the future cash flows. Future income taxes are calculated by comparing undiscounted future cash flows to the tax basis of oil and natural gas properties plus available carryforwards and credits and applying the current tax rates to the difference.
Discounted future cash flow estimates like those shown below are not intended to represent estimates of the fair value of oil and natural gas properties. Estimates of fair value would also consider probable and possible reserves, anticipated future oil and natural gas prices, interest rates, changes in development and production costs and risks associated with future production. Because of these and other considerations, any estimate of fair value is necessarily subjective and imprecise.
The following table provides the standardized measure of discounted future net cash flows at December 31, 2018, 2017 and 2016 (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Future cash flows
|
|
$
|
5,412,555
|
|
|
$
|
4,451,665
|
|
|
$
|
3,319,551
|
|
Future production costs
|
|
|
(1,426,887
|
)
|
|
|
(1,279,777
|
)
|
|
|
(1,054,211
|
)
|
Future development costs
|
|
|
(1,059,064
|
)
|
|
|
(982,284
|
)
|
|
|
(829,926
|
)
|
Future income tax expense
|
|
|
(478,247
|
)
|
|
|
(323,308
|
)
|
|
|
(132,834
|
)
|
Future net cash flows
|
|
|
2,448,357
|
|
|
|
1,866,296
|
|
|
|
1,302,580
|
|
10% annual discount for estimated timing of cash
flows
|
|
|
(1,788,327
|
)
|
|
|
(1,405,265
|
)
|
|
|
(1,004,825
|
)
|
Standardized measure of discounted future net
cash flows
|
|
$
|
660,030
|
|
|
$
|
461,031
|
|
|
$
|
297,755
|
|
Future cash flows as shown above were reported without consideration for the effects of commodity derivative transactions outstanding at each period end.
F-32
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Changes in Standardized Measure of Discounted Future Net Cash Flows
The changes in the standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves are as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Balance, beginning of period
|
|
$
|
461,031
|
|
|
$
|
297,755
|
|
|
$
|
460,395
|
|
Net change in sales and transfer prices and in
production (lifting) costs related to future
production
|
|
|
218,911
|
|
|
|
229,139
|
|
|
|
(191,841
|
)
|
Changes in estimated future development costs
|
|
|
(60,409
|
)
|
|
|
(72,439
|
)
|
|
|
17,405
|
|
Sales and transfers of oil and gas produced during
the period
|
|
|
(83,983
|
)
|
|
|
(78,803
|
)
|
|
|
(62,835
|
)
|
Net change due to acquisition of minerals in place
|
|
|
—
|
|
|
|
17,331
|
|
|
|
—
|
|
Net change due to extensions, discoveries and
improved recovery
|
|
|
104,860
|
|
|
|
49,377
|
|
|
|
13,988
|
|
Net change due to revisions in quantity estimates
|
|
|
(39,091
|
)
|
|
|
(3,817
|
)
|
|
|
(25,236
|
)
|
Previously estimated development costs incurred
during the period
|
|
|
45,929
|
|
|
|
43,202
|
|
|
|
15,884
|
|
Accretion of discount
|
|
|
51,898
|
|
|
|
30,789
|
|
|
|
46,040
|
|
Other
|
|
|
2,717
|
|
|
|
(1,677
|
)
|
|
|
(9,500
|
)
|
Net change in income taxes
|
|
|
(41,833
|
)
|
|
|
(49,826
|
)
|
|
|
33,455
|
|
Standardized Measure of discounted future net
cash flows
|
|
$
|
660,030
|
|
|
$
|
461,031
|
|
|
$
|
297,755
|
|
Selected Quarterly Financial Data (unaudited), (dollars in thousands, except per-share amounts):
|
|
2018 Quarters Ended
|
|
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
Net revenues
|
|
$
|
22,375
|
|
|
$
|
32,562
|
|
|
$
|
30,326
|
|
|
$
|
28,772
|
|
Net operating expenses
|
|
|
(24,254
|
)
|
|
|
(28,018
|
)
|
|
|
(30,539
|
)
|
|
|
(30,015
|
)
|
Interest expense, net
|
|
|
(6,595
|
)
|
|
|
(6,452
|
)
|
|
|
(6,184
|
)
|
|
|
(5,886
|
)
|
Commodity derivative gain (loss)
|
|
|
9,747
|
|
|
|
(3,256
|
)
|
|
|
(4,884
|
)
|
|
|
(1,928
|
)
|
Other income (expense)
|
|
|
1
|
|
|
|
(18
|
)
|
|
|
(13
|
)
|
|
|
1
|
|
Loss before income tax benefit
|
|
|
1,274
|
|
|
|
(5,182
|
)
|
|
|
(11,294
|
)
|
|
|
(9,056
|
)
|
Income tax (benefit) provision
|
|
|
406
|
|
|
|
(921
|
)
|
|
|
(2,222
|
)
|
|
|
(1,610
|
)
|
Net income (loss)
|
|
$
|
868
|
|
|
$
|
(4,261
|
)
|
|
$
|
(9,072
|
)
|
|
$
|
(7,446
|
)
|
Basic net earnings (loss) applicable to common stockholders
per common share
|
|
$
|
0.01
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.08
|
)
|
Diluted net earnings (loss) applicable to common stockholders
per common share
|
|
$
|
0.01
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.08
|
)
|
F-33
Approach Resources Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
|
|
2017 Quarters Ended
|
|
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
Net revenues
|
|
$
|
28,417
|
|
|
$
|
25,608
|
|
|
$
|
24,969
|
|
|
$
|
26,355
|
|
Net operating expenses
|
|
|
(29,365
|
)
|
|
|
(29,543
|
)
|
|
|
(34,689
|
)
|
|
|
(31,460
|
)
|
Interest expense, net
|
|
|
(5,370
|
)
|
|
|
(5,304
|
)
|
|
|
(4,916
|
)
|
|
|
(5,463
|
)
|
Gain on debt extinguishment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,053
|
|
Commodity derivative (loss) gain
|
|
|
(1,377
|
)
|
|
|
(3,560
|
)
|
|
|
1,231
|
|
|
|
3,444
|
|
Other income (expense)
|
|
|
—
|
|
|
|
29
|
|
|
|
—
|
|
|
|
3
|
|
Loss before income tax (benefit) provision
|
|
|
(7,695
|
)
|
|
|
(12,770
|
)
|
|
|
(13,405
|
)
|
|
|
(2,068
|
)
|
Income tax (benefit) provision
|
|
|
(53,512
|
)
|
|
|
(4,258
|
)
|
|
|
(4,509
|
)
|
|
|
138,700
|
|
Net income (loss)
|
|
$
|
45,817
|
|
|
$
|
(8,512
|
)
|
|
$
|
(8,896
|
)
|
|
$
|
(140,768
|
)
|
Basic net earnings (loss) applicable to common stockholders
per common share
|
|
$
|
0.51
|
|
|
$
|
(0.10
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(2.00
|
)
|
Diluted net earnings (loss) applicable to common stockholders
per common share
|
|
$
|
0.51
|
|
|
$
|
(0.10
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(2.00
|
)
|
|
|
2016 Quarters Ended
|
|
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
Net revenues
|
|
$
|
26,505
|
|
|
$
|
23,749
|
|
|
$
|
22,433
|
|
|
$
|
17,615
|
|
Net operating expenses
|
|
|
(33,564
|
)
|
|
|
(32,201
|
)
|
|
|
(34,534
|
)
|
|
|
(34,869
|
)
|
Interest expense, net
|
|
|
(7,086
|
)
|
|
|
(7,067
|
)
|
|
|
(6,808
|
)
|
|
|
(6,298
|
)
|
Write-off of debt issuance costs
|
|
|
—
|
|
|
|
—
|
|
|
|
(563
|
)
|
|
|
—
|
|
Commodity derivative (loss) gain
|
|
|
(2,901
|
)
|
|
|
1,541
|
|
|
|
(6,667
|
)
|
|
|
2,543
|
|
Other income (expense)
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
1,417
|
|
|
|
104
|
|
Loss before income tax benefit
|
|
|
(17,046
|
)
|
|
|
(13,988
|
)
|
|
|
(24,722
|
)
|
|
|
(20,905
|
)
|
Income tax benefit
|
|
|
(3,571
|
)
|
|
|
(4,915
|
)
|
|
|
(8,687
|
)
|
|
|
(7,245
|
)
|
Net loss
|
|
$
|
(13,475
|
)
|
|
$
|
(9,073
|
)
|
|
$
|
(16,035
|
)
|
|
$
|
(13,660
|
)
|
Basic net loss applicable to common stockholders
per common share
|
|
$
|
(0.32
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.33
|
)
|
Diluted net loss applicable to common stockholders
per common share
|
|
$
|
(0.32
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.33
|
)
|
F-34