Approach Resources Inc. Reports Full Year And Fourth Quarter 2012 Results, Announces 2012 Proved Reserves And Increases Horizontal Wolfcamp Shale Drilling Inventory And Resource Potential

Liquidity and Commodity Derivatives Update

At December 31, 2012, we had a $300.0 million revolving credit agreement with a $280.0 million borrowing base and $106.0 million outstanding. At December 31, 2012, our liquidity and long-term debt-to-capital ratio were $174.4 million and 14.3%, respectively. See “Supplemental Non-GAAP Financial and Other Measures” below for our calculation of “liquidity” and “long-term debt-to-capital ratio.”

We enter into commodity derivatives positions to reduce the risk of commodity price fluctuations. We have added to our 2013 commodity derivatives positions with a Midland/Cushing basis differential swap covering 2,300 Bbls/d at a price of $1.10/Bbl from March 2013 through December 2013. We expect this swap will limit our exposure to the Midland/Cushing differential, which has been volatile during fourth quarter 2012 and first quarter 2013. Please refer to the “Unaudited Commodity Derivatives Information” table below for a detailed summary of the Company’s current derivatives positions.

Fourth Quarter 2012 Conference Call

Approach will host a conference call on Friday, February 22, 2013, at 10:00 a.m. Central Time (11:00 a.m. Eastern Time) to discuss full year and fourth quarter 2012 financial and operating results. To participate in the conference call, domestic participants should dial [phone] and international participants should dial [phone] approximately 15 minutes before the scheduled conference time. To access the simultaneous webcast of the conference call, please visit the Calendar of Events page under the Investor Relations section of the Company’s website, www.approachresources.com, 15 minutes before the scheduled conference time to register for the webcast and install any necessary software. The webcast will be archived for replay on the Company’s website until May 23, 2013. In addition, the Company will host a telephone replay of the call, which will be available for one week. U.S. callers may access the telephone replay by dialing [phone] and international callers may dial [phone]. The passcode is 51273543.

Participation in Upcoming Conference

The Company will participate in the Wells Fargo Securities Exploration & Production Forum in Boston, MA, on Thursday, March 7, 2013. The presentation for the event will be available on the Investor Relations section of the Company’s website, www.approachresources.com.

Approach Resources Inc. is an independent oil and gas company with core operations, production and reserves located in the Permian Basin in West Texas. The Company targets multiple oil and liquids-rich formations in the Permian Basin, where the Company operates approximately 148,000 net acres. The Company’s estimated proved reserves as of December 31, 2012, total 95.5 million Boe, comprised of 39% oil, 30% NGLs and 31% natural gas. 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.

Forward-Looking and Cautionary Statements

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 estimated proved reserves, expected drilling locations and resource potential, as well as anticipated financial results of the Company. 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.

The SEC permits oil and gas companies, in their filings with the SEC, to disclose only proved, probable and possible reserves that meet the SEC’s definitions for such terms, and price and cost sensitivities for such reserves, and prohibits disclosure of resources that do not constitute such reserves. The Company uses the terms “estimated ultimate recovery,” “EUR,” reserve or resource “potential,” “upside” or other descriptions of volumes of reserves potentially recoverable through additional drilling or recovery techniques that the SEC’s rules may prohibit the Company from including in filings with the SEC. These estimates are by their nature more speculative than estimates of proved, probable and possible reserves and accordingly are subject to substantially greater risk of being actually realized by the Company.

Potential drilling locations and resource potential estimates have not been risked by the Company. Actual locations drilled and quantities that may be ultimately recovered from the Company’s interest may differ substantially from the Company’s estimates. There is no commitment by the Company to drill all of the drilling locations that have been attributed to these quantities. Factors affecting ultimate recovery include the scope of the Company’s ongoing drilling program, which will be directly affected by the availability of capital, drilling and production costs, availability of drilling and completion services and equipment, drilling results, lease expirations, regulatory approval and actual drilling results, as well as geological and mechanical factors. Estimates of unproved reserves, type/decline curves, per well EUR and resource potential may change significantly as development of the Company’s oil and gas assets provides additional data.

Information in this release regarding the Standardized Measure and costs incurred is preliminary and unaudited. Final and audited results will be provided in our annual report on Form 10-K for the year ended December 31, 2012, to be filed on or before March 1, 2013.

For a glossary of oil and gas terms and abbreviations used in this release, please see our Annual Report on Form 10-K filed with the SEC on March 12, 2012.

UNAUDITED RESULTS OF OPERATIONS
					Three Months Ended								Twelve Months Ended
					December 31,								December 31,
					2012				2011				2012				2011
Revenues (in thousands):
Oil					$	23,398			$	14,671			$	82,087			$	42,463
NGLs						7,014				11,613				30,811				41,029
Gas						4,897				4,839				15,994				24,895
Total oil, NGL and gas sales						35,309				31,123				128,892				108,387
Realized (loss) gain on commodity derivatives						(408	)			1,720				(108	)			3,375
Total oil, NGL and gas sales including derivative impact					$	34,901			$	32,843			$	128,784			$	111,762
Production:
Oil (MBbls)						299				171				969				482
NGLs (MBbls)						232				225				904				798
Gas (MMcf)						1,522				1,516				6,089				6,345
Total (MBoe)						784				649				2,888				2,338
Total (MBoe/d)						8.5				7.1				7.9				6.4
Average prices:
Oil (per Bbl)					$	78.27			$	85.56			$	84.70			$	88.18
NGLs (per Bbl)						30.27				51.71				34.09				51.39
Gas (per Mcf)						3.22				3.19				2.63				3.92
Total (per Boe)					$	45.02			$	47.98			$	44.63			$	46.37
Realized (loss) gain on commodity derivatives (per Boe)						(0.52	)			2.65				(0.03	)			1.44
Total including derivative impact (per Boe)					$	44.50			$	50.63			$	44.60			$	47.81
Costs and expenses (per Boe):
Lease operating					$	7.29			$	4.44			$	6.58			$	4.57
Production and ad valorem taxes(1)						3.12				3.41				3.20				3.61
Exploration						2.72				4.11				1.58				4.08
Impairment						—				28.48				—				7.90
General and administrative						10.79				9.28				8.62				7.66
Depletion, depreciation and amortization						22.99				15.53				20.91				13.89

(1)

Ad valorem taxes have been reclassified from lease operating to production and ad valorem taxes. This reclassification has no impact on net (loss) income reported in this release.

APPROACH RESOURCES INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except shares and per-share amounts)
			Three Months Ended									Twelve Months Ended
			December 31,									December 31,
				2012				2011					2012				2011
REVENUES:
Oil, NGL and gas sales			$	35,309			$	31,123				$	128,892			$	108,387
EXPENSES:
Lease operating				5,716				2,880					19,002				10,687
Production and ad valorem taxes				2,448				2,212					9,255				8,447
Exploration				2,131				2,669					4,550				9,546
Impairment				—				18,476					—				18,476
General and administrative				8,455				6,022					24,903				17,900
Depletion, depreciation and amortization				18,027				10,080					60,381				32,475
Total expenses				36,777				42,339					118,091				97,531
OPERATING (LOSS) INCOME				(1,468	)			(11,216	)				10,801				10,856
OTHER:
Interest expense, net				(926	)			(1,010	)				(4,737	)			(3,402	)
Equity in losses of investee				(108	)			—					(108	)			—
Realized (loss) gain on commodity derivatives				(408	)			1,720					(108	)			3,375
Unrealized gain (loss) on commodity derivatives				1,292				(4,168	)				3,874				(347	)
(Loss) gain on sale of oil and gas properties				—				(243	)				—				248
(LOSS) INCOME BEFORE INCOME TAX (BENEFIT) PROVISION				(1,618	)			(14,917	)				9,722				10,730
INCOME TAX (BENEFIT) PROVISION				(781	)			(5,632	)				3,338				3,488
NET (LOSS) INCOME			$	(837	)		$	(9,285	)			$	6,384			$	7,242
(LOSS) EARNINGS PER SHARE:
Basic			$	(0.02	)		$	(0.30	)			$	0.18			$	0.25
Diluted			$	(0.02	)		$	(0.30	)			$	0.18			$	0.25
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic				38,862,091				30,511,637					34,965,182				28,930,792
Diluted				38,862,091				30,511,637					35,030,323				29,158,598

UNAUDITED SELECTED FINANCIAL DATA
Unaudited Consolidated Balance Sheet Data			December 31,				December 31,
(in thousands)			2012				2011
Cash and cash equivalents			$	767			$	301
Other current assets				14,889				11,085
Property and equipment, net, successful efforts method				828,467				595,284
Equity method investment				9,892				—
Other assets				1,724				1,224
Total assets			$	855,739			$	607,894
Current liabilities			$	60,247			$	43,625
Long-term debt				106,000				43,800
Other long-term liabilities				56,024				53,020
Stockholders’ equity				633,468				467,449
Total liabilities and stockholders’ equity			$	855,739			$	607,894

Unaudited Consolidated Cash Flow Data			Twelve Months Ended December 31,
(in thousands)				2012					2011
Net cash provided (used) by:
Operating activities			$	90,585				$	95,770
Investing activities			$	(307,414	)			$	(284,758	)
Financing activities			$	217,295				$	165,843
Effect of foreign currency translation			$	—				$	(19	)

UNAUDITED COMMODITY DERIVATIVES INFORMATION
Commodity and Time Period			Contract Type			Volume Transacted			Contract Price
Crude Oil
2013			Collar			650 Bbls/d			$90.00/Bbl – $105.80/Bbl
2013			Collar			450 Bbls/d			$90.00/Bbl – $101.45/Bbl
February 2013 – December 2013			Collar			1,200 Bbls/d			$90.35/Bbl – $100.35/Bbl
2014			Collar			550 Bbls/d			$90.00/Bbl – $105.50/Bbl
Crude Oil Basis Differential (Midland/Cushing)
March 2013 – December 2013			Swap			2,300 Bbls/d			$1.10/Bbl
Natural Gas
2013			Swap			200,000 MMBtu/month			$3.54/MMBtu
2013			Swap			190,000 MMBtu/month			$3.80/MMBtu

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 Income

This release contains the non-GAAP financial measures adjusted net income and adjusted net income per diluted share, which excludes (1) impairment, (2) unrealized (gain) loss on commodity derivatives, (3) loss (gain) on sale of oil and gas properties, and (4) related income tax effect. The amounts included in the calculation of adjusted net income and adjusted net income per diluted share below were computed in accordance with GAAP. We believe adjusted net income and adjusted net income per diluted share are useful to investors because they provide readers with a more 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.

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