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Approach Resources Inc. Reports First Quarter 2019 Results

Share:

Approach Resources Inc. (NASDAQ:AREX) today reported first
quarter 2019 financial and operational results.

Financial and operational highlights for first quarter 2019

  • Production of 906 MBoe or 10.1 MBoe/day
  • Net loss was $16.8 million or $0.18 per diluted share, and adjusted
    net loss (non-GAAP) was $8.2 million or $0.09 per diluted share
  • Generated $9.8 million of EBITDAX (non-GAAP)
  • Streamlined senior management structure, significantly decreasing
    current management compensation expenses

Adjusted net loss and EBITDAX are non-GAAP measures. See
"Supplemental Non-GAAP Financial and Other Measures" below for our
definitions and reconciliations of adjusted net loss and EBITDAX to net
loss.

Management Comment

Sergei Krylov, Approach's CEO, commented, "The Company's primary
near-term focus is improving our balance sheet and liquidity. We
continue to have constructive conversations with our largest
stakeholders, including the lenders in our revolving credit facility,
with respect to potential deleveraging transactions and our efforts to
improve our leverage and liquidity. In order to manage liquidity, we
have temporarily suspended our drilling and completion activity and have
taken decisive steps to reduce our corporate overhead. We have also
undertaken a comprehensive operational review to optimize and improve
our operating practices and evaluate capital deployment options focusing
on increasing investment returns."

Company Continues to Explore Deleveraging Alternatives

As of March 31, 2019, we were not in compliance with certain of our
financial covenants under our revolving credit facility. In order to
improve our leverage position, we have been and currently are, pursuing
or considering a number of deleveraging and strategic actions, which in
certain cases may require the consent of current lenders, stockholders
or bondholders.

As part of our review of deleveraging transactions, we are currently
engaged in discussions with Wilks Brothers, LLC, and its affiliate SDW
Investments, LLC (collectively, "Wilks") regarding their investment in
the Company, including, without limitation, a possible debt for equity
exchange and additional capital infusion into Approach. There can be no
assurance that these discussions will result in the consummation of any
transaction in a timely matter, if at all.

We have also reached an agreement with our credit facility lenders to
forgo enforcement of remedies for an event of default caused by our
failure to comply with certain financial covenants in the credit
facility for a period of 45 days. This agreement will terminate on June
22, 2019, unless earlier terminated due to additional events of default
under our credit facility, or a default under the agreement. In
addition, we are in continuing discussions with the lenders regarding a
potential extension of and amendments to the existing credit agreement.

As we have previously disclosed, our Board has formed a committee of
independent directors (the "Committee") to evaluate a potential exchange
transaction with the Wilks (the "Exchange Transaction") as well as 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 evaluate 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.

There can be no assurance that we will be able to implement any of these
plans successfully, or that any of these discussions will result in an
agreement.

First Quarter 2019 Results

Production for first quarter 2019 totaled 906 Mboe, or 10.1 MBoe/d, made
up of 24% oil, 36% NGLs and 40% natural gas. Average realized commodity
prices for first quarter 2019, before the effect of commodity
derivatives, were $51.64 per Bbl of oil, $15.95 per Bbl of NGLs and
$1.25 per Mcf of natural gas. Our average realized price, including the
effect of commodity derivatives, was $22.87 per Boe for first quarter
2019. Our realized prices for natural gas have been adversely impacted
by the extreme WAHA discount in the basin, and we expect our realized
natural gas prices to be depressed until the fourth quarter of 2019.

Net loss for first quarter 2019 was $16.8 million, or $0.18 per diluted
share, on revenues of $19.2 million. Excluding the decrease in the fair
value of our commodity derivatives of $4.3 million, restructuring
expenses of $6.3 million and an impairment of $0.3 million adjusted net
loss (non-GAAP) for the first quarter 2019 was $8.2 million, or $0.09
per diluted share. EBITDAX (non-GAAP) for the first quarter 2019 was
$9.8 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 ("LOE") averaged $5.38 per Boe. Production and
ad valorem taxes averaged $2.13 per Boe, or 10.1% of oil, NGL and gas
sales. Total general and administrative ("G&A") costs averaged $4.15 per
Boe, including cash G&A costs of $4.58 per Boe. Depletion, depreciation
and amortization expense averaged $15.02 per Boe. Interest expense
totaled $6.8 million.

Operations and Capital Budget

As we evaluate our deleveraging alternatives, and in light of changes to
company management, we are reevaluating our development plan. This
includes a review of our capital expenditure budget, the rates of return
across our portfolio of assets, the pace of development, drilling and
completion techniques and workovers. We initially set our 2019 capital
expenditure budget at a range of $30 million to $60 million, and
provided production and operating expense guidance assuming a capital
budget of $30 million. Our actual capital expenditures for 2019 will
depend on the results of our potential deleveraging transactions. The
previously provided production and operating expense guidance will be
revised after we update our annual capital expenditures budget. Assuming
no new well completions during 2019, we would still anticipate our
annual production to average 9.4 to 9.6 MBoe per day.

Liquidity

We have historically defined liquidity as funds available under our
revolving credit facility and cash and cash equivalents. However, due to
our non-compliance with financial covenants under our revolving credit
facility, our current liquidity is limited to our available cash of
$15.7 million as of March 31, 2019.

Commodity Derivatives

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.

    Contract        
Commodity and Period Type Volume Transacted Contract Price
Crude Oil
April 2019 – December 2019 Collar 500 Bbls/day $65.00/Bbl - $71.00/Bbl
 
NGLs (C3 - Propane)
April 2019 – June 2019 Swap 75 Bbls/day $42.00/Bbl
NGLs (C5 - Pentane)
April 2019 – December 2019 Swap 200 Bbls/day $65.205/Bbl
 

Conference Call Information and Summary Presentation

The Company will host a conference call on May 10, 2019, at 10:00 AM CT
(11:00 AM ET) to discuss first quarter 2019 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     7965058
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 on the Company's website or by
dialing:

Replay Toll-Free:     (855) 859-2056
Replay International: (404) 537-3406
Conference ID: 7965058

In addition, a first quarter 2019 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. These assumptions, risks and
uncertainties include, but are not limited to, our ability to execute
plans, the result of such plans if executed, our ability to reach
agreements with our lenders, our ability to comply with the covenants in
our revolving credit facility, our leverage negatively affecting a
redetermination or amendment under our credit facility, oil, NGL and
natural gas prices, our ability to obtain financing to fund our
long-term forecasted capital budget, and our ability to access capital
markets. Should one or more of these risks or uncertainties occur, or
should underlying assumptions prove incorrect, our actual results may
differ materially from those implied or expressed by the forward-looking
statements. Further information on assumptions, risks and uncertainties
related to the Company is available in the Company's SEC filings,
including our Annual Report on Form 10-K and subsequent quarterly
reports on Form 10-Q. The Company's SEC filings are also 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
March 31,
  2019         2018  
Revenues (in thousands):
Oil $ 11,356 $ 16,343
NGLs 5,169 7,332
Gas   2,718     5,097  
Total oil, NGLs and gas sales 19,243 28,772
 
Net cash receipt (payment) on derivative settlements   1,477     (1,531 )
Total oil, NGLs and gas sales including derivative

impact

$ 20,720   $ 27,241  
 
Production:
Oil (MBbls) 220 272
NGLs (MBbls) 324 352
Gas (MMcf)   2,172     2,376  
Total (MBoe) 906 1,020
Total (MBoe/d) 10.1 11.3
 
Average prices:
Oil (per Bbl) $ 51.64 $ 60.04
NGLs (per Bbl) 15.95 20.84
Gas (per Mcf)   1.25     2.15  
Total (per Boe) 21.24 28.21
 
Net cash receipt (payment) on derivative settlements (per Boe)   1.63     (1.50 )
Total including derivative impact (per Boe) $ 22.87   $ 26.71  
 
Costs and expenses (per Boe):
Lease operating $ 5.38 $ 5.16
Production and ad valorem taxes 2.13 2.45
Exploration 0.01
General and administrative (1) 4.15 6.44
Depletion, depreciation and amortization 15.02 15.37
 
(1) Below is a summary of general and administrative expense:
General and administrative - cash component $ 4.58 $ 5.63
General and administrative - noncash component (share-based
compensation)
(0.43 ) 0.81
 
 
APPROACH RESOURCES INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except shares and per-share amounts)
 
    Three Months Ended
March 31,
  2019         2018  
REVENUES:
Oil, NGLs and gas sales $ 19,243 $ 28,772
 
EXPENSES:
Lease operating 4,871 5,268
Production and ad valorem taxes 1,935 2,500
Exploration 9
General and administrative (1) 3,762 6,567
Restructuring expenses 6,282
Depletion, depreciation and amortization 13,606 15,680
Impairment 300
Gain on sale of assets   (66 )    
Total expenses   30,699     30,015  
 
OPERATING LOSS (11,456 ) (1,243 )
 
OTHER:
Interest expense, net (6,773 ) (5,886 )
Commodity derivative loss (2,846 ) (1,928 )
Other income       1  
 
LOSS BEFORE INCOME TAX BENEFIT (21,075 ) (9,056 )
INCOME TAX BENEFIT   (4,279 )   (1,610 )
 
NET LOSS $ (16,796 ) $ (7,446 )
 
LOSS PER SHARE:
Basic $ (0.18 ) $ (0.08 )
Diluted $ (0.18 ) $ (0.08 )
 
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 94,757,311 70,409,303
Diluted 94,757,311 70,409,303
(1) Includes non-cash share-based compensation expense as follows: (394 ) 828
       
 
Unaudited Consolidated Balance Sheet Data
(in thousands) March 31, 2019 December 31, 2018
Cash and cash equivalents $ 15,721 $ 22
Other current assets 13,009 16,203
Property and equipment, net, successful efforts method 1,053,808 1,068,422
Other assets   13,903  
Total assets $ 1,096,441 $ 1,084,647
 
Current liabilities (1) $ 347,464 $ 21,077
Long-term debt (2) 84,562 384,993
Deferred income taxes 73,542 77,821
Other long-term liabilities 18,983 11,511
Stockholders' equity   571,890   589,245
Total liabilities and stockholders' equity $ 1,096,441 $ 1,084,647

(1) Current liabilities at March 31, 2019 includes $322 million in
outstanding borrowings under our revolving credit facility, net of
issuance costs of $0.8 million.

(2) Long-term debt at March 31, 2019, is comprised of $85.2
million in 7% senior notes due 2021 net of issuance costs of $0.7
million. Long-term debt at December 31, 2018, is comprised of
$85.2 million in 7% senior notes due 2021 and $301.5 million in
outstanding borrowings under our revolving credit facility, net of
issuance costs of $0.8 million and $1 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 on derivatives, (2) restructuring expenses, (3) impairment,
(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 months ended March 31, 2019 and 2018 (in thousands,
except per-share amounts).

    Three Months Ended
March 31,
  2019         2018  
Net Loss $ (16,796 ) $ (7,446 )
Adjustments for certain items:
Non-cash fair value loss on derivatives 4,323 397
Restructuring expenses 6,282
Impairment 300
Tax effect and other discrete tax items (1)   (2,301 )   (13 )
Adjusted net loss $ (8,192 ) $ (7,062 )
Adjusted net loss per diluted share $ (0.09 ) $ (0.07 )
(1) The estimated income tax impacts on adjustments to net loss are
computed based upon a statutory rate of 21%, for the three months
ended March 31, 2019, and March 31, 2018, respectively.
Additionally, this includes the tax impact of an excess tax benefit
related to share-based compensation of $11,000 and a tax shortfall
related to share-based compensation of $0.1 million for the three
months ended March 31, 2019, and March 31, 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 on derivatives, (5)
restructuring expenses, (6) impairment, (7) interest expense, net, and
(8) income tax benefit. 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 months ended March 31, 2019 and 2018 (in thousands).

    Three Months Ended
March 31,
  2019         2018  
Net Loss $ (16,796 ) $ (7,446 )
Exploration 9
Depletion, depreciation and amortization 13,606 15,680
Share-based compensation (394 ) 828
Non-cash fair value loss on derivatives 4,323 397
Restructuring expenses 6,282
Impairment 300
Interest expense, net 6,773 5,886
Income tax benefit   (4,279 )   (1,610 )
EBITDAX $ 9,824   $ 13,735  
 

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