Approach Resources Q1 2009 Revenue Down 47%

Published: 05-May-2009

By: Staff Writer Staff Writer Staff Writer

Approach Resources Inc. (Approach Resources), an oil and gas exploration and production company, has reported revenues of $10.1 million for the first quarter of 2009, down 47%, compared with the revenues of $19 million in the year-ago quarter. It also reported a net income of $0.9 million, or $0.04 per share, for the first quarter of 2009, compared with the net income of $2.8 million, or $0.13 per share, in the year-ago quarter.

Approach Resources has reported production of 2.5 Bcfe (28.1 MMcfe/d), for the first quarter of 2009, up 28%, compared with the production of 2 Bcfe (21.7 MMcfe/d) in the year-ago quarter. First quarter of 2009 production was 70% natural gas and 30% oil and NGLs, compared to 84% natural gas and 16% oil and NGLs in the year-ago quarter.

Revenues for the first quarter of 2009 were negatively impacted by a sharp decline in realized commodity prices over the year-ago quarter. Average realized natural gas, oil and NGL prices for the first quarter of 2009, before the effect of commodity derivatives, were $3.73 per Mcf, $34.37 per Bbl and $20.99 per Bbl, correspondingly, against $8.93 per Mcf, $97.91 per Bbl and $50.95 per Bbl, respectively, in the year-ago quarter. Approach Resources average realized price, including the effect of commodity derivatives, was $5.24 per Mcfe for the first quarter of 2009, compared to $9.64 per Mcfe in the year-ago quarter, down 46%. Of the $8.9 million decline in revenues, about $11.3 million was attributable to a decrease in oil and gas prices, which was partly equalized about $2.4 million attributable to an raise in production from Cinco Terry.

Net income for the first quarter of 2009 included a pre-tax, unrealized gain on commodity derivatives of $2.1 million. Excluding the unrealized gain on commodity derivatives and related income taxes, adjusted net (loss) income (a non-GAAP measure) for the first quarter of 2009 was a loss of $0.54 million, or $0.03 per diluted share, compared to adjusted net income of $5.9 million, or $0.29 per diluted share, in the year-ago quarter.

In addition to lower realized commodity prices, net income and adjusted net income for the first quarter of 2009 were negatively impacted by an increase in Approach Resources ’ effective income tax rate to 63.7% for the three months ended March 31, 2009.

EBITDAX for the first quarter of 2009 was $8.3 million, or $0.40 per diluted share, compared with the EBITDAX of $15.2 million, or $0.73 per diluted share, in the year-ago quarter.

Lease operating expenses (LOE) for the first quarter of 2009 were $2.4 million ($0.94 per Mcfe), compared with the $1.4 million ($0.71 per Mcfe) in the year-ago quarter. The raise in LOE over the previous year period was mainly a result of increased activities in our Cinco Terry field. Initial compression was installed in Cinco Terry during the first quarter of 2008 and has increased as a result of additional facilities required to compress and treat the natural gas produced from Cinco Terry. Compression and treating costs also included higher repair and maintenance costs attributable to the compression and treating facilities in both Cinco Terry and Ozona Northeast. In addition, the increase in LOE during the three months ended March 31, 2009 was partly attributable to a rise in anticipated ad valorem taxes and actual well-related repair and maintenance costs. We do not expect the level of LOE for the balance of 2009 to vary materially from the first quarter of 2009.

Severance and production taxes for first quarter of 2009 were $0.43 million, or 4.3% of oil and gas sales, compared with the $0.75 million, or 4% of oil and gas sales, in the year-ago quarter.

General and administrative (G&A) expenses for the first quarter of 2009 were $2.8 million ($1.11 per Mcfe), compared with the G&A of $1.9 million ($0.98 per Mcfe) in the year-ago quarter. Higher G&A expenses in the first quarter of 2009 were because of higher share-based compensation resulting from timing of payment of 2009 annual director fees, in addition to higher salaries and related employee benefit costs attributable to Approach Resources raise in staff from the previous year period. Except for $377,000 in non-cash, share-based compensation expense for 2009 annual director fees incurred in the first quarter of 2009, the company does not expect the level of G&A expenses for the balance of 2009 to vary materially from the first quarter of 2009.

Depletion, depreciation and amortization (DD&A) expenses for the first quarter of 2009 were $6.9 million ($2.74 per Mcfe), compared with the $5.2 million ($2.64 per Mcfe) year-ago quarter. The raise in DD&A expenses was mainly due to increased production and higher capital costs, partly equalized by an increase in its estimated proved reserves at December 31, 2008.

Approach Resources income tax provision was $1.5 million for the three months ended March 31, 2009 and 2008. The company’s effective income tax rate for the three months ended March 31, 2009 was 63.7%, compared with 35% for the three months ended March 31, 2008. The raise in the effective rate resulted mainly from a change in Approach Resources anticipated income tax expenses for the year ended December 31, 2008, along with an increased impact of permanent differences between book and taxable income and increased effective state income tax rates. Approach Resources anticipates the effective income tax rate to be about 39% for the remainder of 2009.

Capital Expenditures and Drilling Operations

Capital expenditures for drilling and development in the first quarter of 2009 totaled $13.2 million, and included the completion of 10 gross (five net) wells that were waiting on completion at December 31, 2008. During the first quarter of 2009, Approach Resources drilled a total of 13 (6.5 net) wells in Cinco Terry, four (two net) of which were completed as producers, seven (3.5 net) of which were in different stages of completion at March 31, 2009 and two (one net) of which were non-productive. The company’s expected average daily net production for the month of April 2009 was 25.7 MMcfe/d. Production for the month of April 2009 was negatively impacted by partial curtailment over about four days in Ozona Northeast because of scheduled maintenance at a downstream NGL fractionation facility.

As earlier announced, because of the continued weakness in commodity prices, Approach Resources did not extend the contracts for its two remaining drilling rigs after March 31, 2009, and the company has released these rigs during the first week of April 2009. Approach Resources now anticipates that its capital expenditures for the year ending December 31, 2009 could range from $15 million to $25 million. The company intends to fund its 2009 capital expenditures with internally-generated cash flow, with any excess cash flow applied to debt, working capital obligations or strategic acquisitions.

Approach Resources capital expenditure budget is subject to change depending upon a number of factors, including economic and industry conditions at the time of drilling, prevailing and anticipated prices for oil and gas, the results of the company’s development and exploration efforts, the availability of sufficient capital resources to the company and other participants for drilling prospects, Approach Resources financial results, the availability of leases on reasonable terms and its ability to obtain permits for the drilling locations.

Recent Acreage Acquisition

In April 2009, Approach Resources acquired an additional 2,702 gross (1,396 net) acres of leasehold interests adjacent to our Cinco Terry field in Crockett county, Texas through The University of Texas System's April 2009 lease sale process. The company believes the acreage is prospective for Ellenburger and Canyon Sands production. This purchase, plus additional purchases made during the first quarter of 2009, expands our Cinco Terry project to a total of 50,226 gross (20,994 net) acres.

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