AREX Approach Resources Inc

Approach Resources Inc. (NASDAQ: AREX) today reported second quarter 2018 financial and operational results.

Financial and operational highlights for the second quarter of 2018

• Production at the high end of quarterly guidance, driven primarily by liquids growth, increased production to 1,056 MBoe or 11.6 MBoe/day, an increase of 2% over prior quarter
• Reduced lease operating expense (“LOE”) per Boe by 8% from previous quarter, peer leading LOE of $4.77 for the second quarter
• Oil marketing contributed to an 8% increase in realized oil prices, over prior quarter
• Revenues of $30.3 million, a 21% increase over the prior year quarter
• Net loss was $9.1 million or $0.10 per diluted share, adjusted net loss (non-GAAP) was $6.8 million, or $0.07 per diluted share
• Improved unhedged cash margin (non-GAAP) by 37% over the prior year quarter
• Generated $15.3 million of EBITDAX (non-GAAP)

Adjusted net loss, EBITDAX and unhedged cash margin are non-GAAP measures. See “Supplemental Non-GAAP Financial and Other Measures” below for our definitions and reconciliations of adjusted net loss, EBITDAX to net loss and unhedged cash margin.

Management Comment

Ross Craft, Approach’s Chairman and CEO, commented, “We wrapped up another solid quarter on multiple fronts delivering growth in oil production, revenue, unhedged cash margin and EBITDAX while lowering lease-operating expense. We delivered production of 11.6 MBoe/d, at the high end of quarterly guidance, and increased daily oil production quarter over quarter. Our oil marketing arrangement allows us to sell at Cushing pricing and mitigate the impact of recent Midland - Cushing differentials. We continue to experiment with our completion techniques and gas lift optimization and are pleased with the solid results we are realizing. In spite of the multiple challenges faced by our industry over the last several years, our knowledge, experience and strong focus on day-to-day operations has continuously improved the performance of our asset and maintained our efficient cost structure.

“Our focus for the remainder of 2018 is strengthening our balance sheet through acquisitions or other deleveraging opportunities so that we have the appropriate capital structure to execute a growth strategy that is accretive to our shareholders.”

Second Quarter 2018 Results

Production for second quarter 2018 totaled 1,056 Mboe, or 11.6 MBoe/d, made up of 26% oil, 36% NGLs and 38% natural gas. Average realized commodity prices for second quarter 2018, before the effect of commodity derivatives, were $65.09 per Bbl of oil, $23.49 per Bbl of NGLs and $1.40 per Mcf of natural gas. Our average realized price, including the effect of commodity derivatives, was $26.85 per Boe for second quarter 2018.

Net loss for second quarter 2018 was $9.1 million, or $0.10 per diluted share, on revenues of $30.3 million. Excluding the decrease in the fair value of our commodity derivatives of $2.9 million, adjusted net loss (non-GAAP) for second quarter 2018 was $6.8 million, or $0.07 per diluted share. EBITDAX (non-GAAP) for second quarter 2018 was $15.3 million. See “Supplemental Non-GAAP Financial and Other Measures” below for our reconciliation of adjusted net loss and EBITDAX to net loss.

Lease operating expense averaged $4.77 per Boe, an 8% decrease from the prior quarter. Production and ad valorem taxes averaged $2.43 per Boe, or 8.5% of oil, NGL and gas sales. Total general and administrative (“G&A”) costs averaged $5.77 per Boe, including cash G&A costs of $5.14 per Boe. Depletion, depreciation and amortization expense averaged $15.96 per Boe. Interest expense totaled $6.2 million.

Operations Update

During the second half of the second quarter 2018, we completed three horizontal wells. One in Pangea West in the Wolfcamp A bench and two wells in Baker, one well in the Wolfcamp B bench and one well in the Wolfcamp C bench. At June 30, 2018, we had three horizontal wells waiting on completion. We plan to have one rig running intermittently during the second half of 2018.

Capital expenditures incurred during second quarter 2018 totaled $13.5 million, consisting of $11.2 million for drilling and completion activities, $2 million for infrastructure projects and equipment and $0.3 million for lease acquisitions. For the six months ended June 30, 2018, our capital expenditures totaled $27.2 million, consisting of $23.6 million for completion activities, $3.3 million for infrastructure projects and equipment and $0.3 million for lease acquisitions.

Liquidity Update

At June 30, 2018, we had a $1 billion revolving credit facility in place, with a borrowing base and lender commitment amount of $325 million, and liquidity of $27.2 million. See “Supplemental Non-GAAP Financial and Other Measures” below for our definition and calculation of liquidity.

Commodity Derivatives Update

We enter into commodity derivatives positions to reduce the risk of commodity price fluctuations. The table below is a summary of our current derivatives positions.

      Commodity and Period Contract

Type

Volume Transacted Contract Price

Crude Oil

July 2018 – December 2018 Swap 300 Bbls/day $50.00/Bbl July 2018 – September 2018 Swap 1,500 Bbls/day $60.50/Bbl  

CMA Roll

July 2018 – December 2018 Swap 2,000 Bbls/day $0.66/Bbl  

Natural Gas

July 2018 – December 2018 Swap 200,000 MMBtu/month $3.085/MMBtu July 2018 – December 2018 Swap 250,000 MMBtu/month $3.084/MMBtu  

NGLs (C2 - Ethane)

July 2018 – December 2018 Swap 1,000 Bbls/day $11.424/Bbl

NGLs (C3 - Propane)

July 2018 – December 2018 Swap 600 Bbls/day $32.991/Bbl

August 2018 – December 2018

Swap

400 Bbls/day

$40.74/Bbl

NGLs (IC4 - Isobutane)

July 2018 – December 2018 Swap 50 Bbls/day $38.262/Bbl

NGLs (NC4 - Butane)

July 2018 – December 2018 Swap 200 Bbls/day $38.22/Bbl

NGLs (C5 - Pentane)

July 2018 – December 2018 Swap 200 Bbls/day $56.364/Bbl  

Conference Call Information and Summary Presentation

The Company will host a conference call on Thursday, August 2, 2018, at 10:00 AM CT (11:00 AM ET) to discuss second quarter 2018 financial and operating results.

Those wishing to listen to the conference call, may do so by visiting the Events and Presentations page under the Investor Relations section of the Company’s website, www.approachresources.com, or by phone:

     

Conference ID:

7988794 Participant Toll-Free Dial-In Number: (844) 884-9950 Participant International Dial-In Number: (661) 378-9660   A replay of the call will be available onthe Company’s website or by dialing:   Replay Toll-Free: (855) 859-2056 Replay International: (404) 537-3406 Conference ID: 7988794  

In addition, a second quarter 2018 summary presentation will be available on the Company’s website.

About Approach Resources

Approach Resources Inc. is an independent energy company focused on the exploration, development, production and acquisition of unconventional oil and natural gas reserves in the Midland Basin of the greater Permian Basin in West Texas. For more information about the Company, please visit www.approachresources.com. Please note that the Company routinely posts important information about the Company under the Investor Relations section of its website.

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included in this press release that address activities, events or developments that the Company expects, believes or anticipates will or may occur in the future are forward-looking statements. Without limiting the generality of the foregoing, forward-looking statements contained in this press release specifically include expectations of anticipated financial and operating results. These statements are based on certain assumptions made by the Company based on management’s experience, perception of historical trends and technical analyses, current conditions, anticipated future developments and other factors believed to be appropriate and reasonable by management. When used in this press release, the words “will,” “potential,” “believe,” “estimate,” “intend,” “expect,” “may,” “should,” “anticipate,” “could,” “plan,” “predict,” “project,” “profile,” “model” or their negatives, other similar expressions or the statements that include those words, are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the Company, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements. Further information on such assumptions, risks and uncertainties is available in the Company’s Securities and Exchange Commission (“SEC”) filings. The Company’s SEC filings are available on the Company’s website at www.approachresources.com. Any forward-looking statement speaks only as of the date on which such statement is made and the Company undertakes no obligation to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable law.

         

UNAUDITED RESULTS OF OPERATIONS

  Three Months Ended Six Months Ended June 30, June 30, 2018   2017 2018   2017 Revenues (in thousands): Oil $ 18,106 $ 12,508 $ 34,450 $ 26,202 NGLs 8,852 6,019 16,184 12,079 Gas   3,368     6,442   8,464     13,043   Total oil, NGLs and gas sales 30,326 24,969 59,098 51,324   Net cash (payment) receipt on derivative settlements   (1,982 )   3   (3,513 )   (958 )

Total oil, NGLs and gas sales including derivative impact

$ 28,344   $ 24,972 $ 55,585   $ 50,366     Production: Oil (MBbls) 278 281 550 560 NGLs (MBbls) 377 383 729 735 Gas (MMcf)   2,404     2,499   4,780     4,875   Total (MBoe) 1,056 1,080 2,076 2,107 Total (MBoe/d) 11.6 11.9 11.5 11.6   Average prices: Oil (per Bbl) $ 65.09 $ 44.50 $ 62.59 $ 46.83 NGLs (per Bbl) 23.49 15.72 22.21 16.43 Gas (per Mcf)   1.40     2.58   1.77     2.68   Total (per Boe) 28.73 23.11 28.47 24.36   Net cash (payment) receipt on derivative settlements (per Boe)   (1.88 )   —   (1.69 )   (0.46 ) Total including derivative impact (per Boe) $ 26.85   $ 23.11 $ 26.78   $ 23.90     Costs and expenses (per Boe): Lease operating $ 4.77 $ 3.92 $ 4.96 $ 3.99 Production and ad valorem taxes 2.43 2.09 2.44 2.19 Exploration — 1.95 — 1.50 General and administrative (1) 5.77 6.06 6.10 5.92 Depletion, depreciation and amortization 15.96 18.09 15.67 17.80  

(1) Below is a summary of general and administrative expense:

General and administrative - cash component $ 5.14 $ 5.11 $ 5.38 $ 4.88 General and administrative - noncash component (share-based compensation) 0.63 0.95 0.72 $ 1.04          

APPROACH RESOURCES INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

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

  Three Months Ended

June 30,

Six Months Ended

June 30,

2018   2017 2018   2017

REVENUES:

Oil, NGLs and gas sales $ 30,326 $ 24,969 $ 59,098 $ 51,324   EXPENSES: Lease operating 5,032 4,238 10,300 8,408 Production and ad valorem taxes 2,569 2,252 5,069 4,609 Exploration 3 2,108 3 3,151 General and administrative (1) 6,086 6,548 12,653 12,476 Depletion, depreciation and amortization   16,849     19,543     32,529     37,505   Total expenses   30,539     34,689     60,554     66,149     OPERATING LOSS (213 ) (9,720 ) (1,456 ) (14,825 )   OTHER: Interest expense, net (6,184 ) (4,916 ) (12,070 ) (10,379 ) Gain on debt extinguishment — — — 5,053 Commodity derivative (loss) gain (4,884 ) 1,231 (6,812 ) 4,675 Other (expense) income   (13 )   —     (12 )   3     LOSS BEFORE INCOME TAX (BENEFIT) PROVISION (11,294 ) (13,405 ) (20,350 ) (15,473 ) INCOME TAX (BENEFIT) PROVISION   (2,222 )   (4,509 )   (3,832 )   134,191     NET LOSS $ (9,072 ) $ (8,896 ) $ (16,518 ) $ (149,664 )   LOSS PER SHARE: Basic $ (0.10 ) $ (0.10 ) $ (0.17 ) $ (1.91 ) Diluted $ (0.10 ) $ (0.10 ) $ (0.17 ) $ (1.91 )   WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 94,470,636 86,340,634 94,548,898 78,418,977 Diluted 94,470,636 86,340,634 94,548,898 78,418,977

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

656 1,029 1,484 2,188           Unaudited Consolidated Balance Sheet Data

(in thousands)

June 30, 2018 December 31, 2017 Cash and cash equivalents $ 22 $ 21 Other current assets 13,754 16,679 Property and equipment, net, successful efforts method   1,077,873   1,082,876 Total assets $ 1,091,649 $ 1,099,576   Current liabilities $ 29,767 $ 25,067 Long-term debt (1) 380,470 373,460 Deferred income taxes 78,228 82,102 Other long-term liabilities 11,970 11,531 Stockholders' equity   591,214   607,416 Total liabilities and stockholders' equity $ 1,091,649 $ 1,099,576

 

(1) Long-term debt at June 30, 2018, is comprised of $85.2 million in 7% senior notes due 2021 and $297.5 million in outstanding borrowings under our revolving credit facility, net of issuance costs of $0.9 million and $1.4 million, respectively. Long-term debt at December 31, 2017, is comprised of $85.2 million in 7% senior notes due 2021 and $291 million in outstanding borrowings under our revolving credit facility, net of issuance costs of $1.1 million and $1.7 million, respectively.

Supplemental Non-GAAP Financial and Other Measures

This release contains certain financial measures that are non-GAAP measures. We have provided reconciliations below of the non-GAAP financial measures to the most directly comparable GAAP financial measures and on the Non-GAAP Financial Information page in the Investor Relations section of our website at www.approachresources.com.

Adjusted Net Loss

This release contains the non-GAAP financial measures adjusted net loss and adjusted net loss per diluted share, which exclude (1) non-cash fair value loss (gain) on derivatives, (2) gain on debt extinguishment, (3) write-off of deferred tax assets, (4) tax effect and other discrete tax items. The amounts included in the calculation of adjusted net loss and adjusted net loss per diluted share below were computed in accordance with GAAP. We believe adjusted net loss and adjusted net loss per diluted share are useful to investors because they provide readers with a meaningful measure of our profitability before recording certain items whose timing or amount cannot be reasonably determined. However, these measures are provided in addition to, and not as an alternative for, and should be read in conjunction with, the information contained in our financial statements prepared in accordance with GAAP (including the notes), included in our SEC filings and posted on our website.

The table below provides a reconciliation of adjusted net loss to net loss for the three and six months ended June 30, 2018 and 2017 (in thousands, except per-share amounts).

          Three Months Ended

June 30,

Six Months Ended

June 30,

2018   2017 2018   2017 Net Loss $ (9,072 ) $ (8,896 ) $ (16,518 ) $ (149,664 ) Adjustments for certain items: Non-cash fair value loss (gain) on derivatives 2,902 (1,228 ) 3,299 (5,633 ) Gain on debt extinguishment — — — (5,053 ) Write-off of deferred tax assets — — — 139,090 Tax effect and other discrete tax items (1)   (610 )   452     (623 )   4,052   Adjusted net loss $ (6,780 ) $ (9,672 ) $ (13,842 ) $ (17,208 ) Adjusted net loss per diluted share $ (0.07 ) $ (0.11 ) $ (0.15 ) $ (0.22 )

 

(1) The estimated income tax impacts on adjustments to net loss are computed based upon a statutory rate of 21% and 35%, for the three and six months ended June 30, 2018, and three and six months ended June 30, 2017, respectively. Additionally, this includes the tax impact of a tax shortfall related to share-based compensation of $22,000, $70,000, $0.3 million, for the three months ended June 30, 2017, six months ended June 30, 2018, and six months ended June 30, 2018, respectively.

EBITDAX

We define EBITDAX as net loss, plus (1) exploration expense, (2) depletion, depreciation and amortization expense, (3) share-based compensation expense, (4) non-cash fair value loss (gain) on derivatives, (5) gain on debt extinguishment, (6) interest expense, net, and (7) income tax (benefit) provision. EBITDAX is not a measure of net income or cash flow as determined by GAAP. The amounts included in the calculation of EBITDAX were computed in accordance with GAAP. EBITDAX is presented herein and reconciled to the GAAP measure of net loss because of its wide acceptance by the investment community as a financial indicator of a company's ability to internally fund development and exploration activities. This measure is provided in addition to, and not as an alternative for, and should be read in conjunction with, the information contained in our financial statements prepared in accordance with GAAP (including the notes), included in our SEC filings and posted on our website.

The table below provides a reconciliation of EBITDAX to net loss for the three and six months ended June 30, 2018 and 2017 (in thousands).

          Three Months Ended

June 30,

Six Months Ended

June 30,

2018   2017 2018   2017 Net Loss $ (9,072 ) $ (8,896 ) $ (16,518 ) $ (149,664 ) Exploration 3 2,108 3 3,151 Depletion, depreciation and amortization 16,849 19,543 32,529 37,505 Share-based compensation 656 1,029 1,484 2,188 Non-cash fair value loss (gain) on derivatives 2,902 (1,228 ) 3,299 (5,633 ) Gain on debt extinguishment — — — (5,053 ) Interest expense, net 6,184 4,916 12,070 10,379 Income tax (benefit) provision   (2,222 )   (4,509 )   (3,832 )   134,191   EBITDAX $ 15,300   $ 12,963   $ 29,035   $ 27,064    

Unhedged Cash Margin and Cash Operating Expenses

We define unhedged cash margin as revenue, less cash operating expenses. We define cash operating expenses as operating expenses, excluding (1) exploration expense, (2) depletion, depreciation and amortization expense, and (3) share-based compensation expense. Unhedged cash margin and cash operating expenses are not measures of operating income or cash flows as determined by GAAP. The amounts included in the calculations of unhedged cash margin and cash operating expenses were computed in accordance with GAAP. Unhedged cash margin and cash operating expenses are presented herein and reconciled to the GAAP measures of revenue and operating expenses. We use unhedged cash margin and cash operating expenses as an indicator of the Company’s profitability and ability to manage its operating income and cash flows. This measure is provided in addition to, and not as an alternative for, and should be read in conjunction with, the information contained in our financial statements prepared in accordance with GAAP (including the notes), included in our SEC filings and posted on our website.

The table below provides a reconciliation of unhedged cash margin and cash operating expenses to revenues and operating expenses for the three and six months ended June 30, 2018 and 2017 (in thousands, except per-Boe amounts).

      Three Months Ended

June 30,

Six Months Ended

June 30,

2018   2017 2018   2017 Revenues $ 30,326 $ 24,969 $ 59,098 $ 51,324 Production (Mboe) 1,056 1,080 2,076 2,107 Average realize price per Boe $ 28.73 $ 23.11 $ 28.47 $ 24.36   Operating expenses $ 30,539 $ 34,689 $ 60,554 $ 66,149 Exploration (3 ) (2,108 ) (3 ) (3,151 ) Depletion, depreciation and amortization (16,849 ) (19,543 ) (32,529 ) (37,505 ) Share-based compensation   (656 )   (1,029 )   (1,484 )   (2,188 ) Cash operating expenses $ 13,031 $ 12,009 $ 26,538 $ 23,305 Cash operating expenses per Boe $ 12.34   $ 11.12   $ 12.78   $ 11.06     Unhedged cash margin $ 17,295 $ 12,960 $ 32,560 $ 28,019 Unhedged cash margin per Boe $ 16.39   $ 11.99   $ 15.69   $ 13.30    

Liquidity

Liquidity is calculated by adding the net funds available under our revolving credit facility and cash and cash equivalents. We use liquidity as an indicator of the Company’s ability to fund development and exploration activities. However, this measurement has limitations. This measurement can vary from year-to-year for the Company and can vary among companies based on what is or is not included in the measurement on a company’s financial statements and may further be subject to covenants in a company’s loan agreements. This measurement is provided in addition to, and not as an alternative for, and should be read in conjunction with, the information contained in our financial statements prepared in accordance with GAAP (including the notes), included in our SEC filings and posted on our website.

The table below summarizes our liquidity at June 30, 2018 (in thousands).

      Liquidity at

June 30,

2018 Borrowing base $ 325,000 Cash and cash equivalents 22 Long-term debt – Credit Facility (297,500 ) Undrawn letters of credit   (325 ) Liquidity $ 27,197    

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Approach Resources Inc.Suzanne Ogle, 817-989-9000Vice President – Investor Relations & Corporate Communicationsir@approachresources.com