Quarterly / Earnings Reports | Second Quarter (2Q) Update

Approach Resources Focuses on Strategic Alternatives in 2Q19

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   |    Friday,August 09,2019

Approach Resources Inc. reported second quarter 2019 financial and operational results.

Financial and operational results for second quarter 2019:

• Production of 875 MBoe or 9.6 MBoe/day
• Net loss was $13.6 million or $0.15 per diluted share, and adjusted net loss (non-GAAP) was $13.2 million or $0.14 per diluted share
• Generated $5.6 million of EBITDAX (non-GAAP)
• 29% reduction in general and administrative expenses compared to the second quarter of 2018

Sergei Krylov, Approach's CEO, commented, "We have continued 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. As we continue these discussions, we are conserving capital and have temporarily suspended our drilling and completion activity and we are realizing the benefits of our cost-saving initiatives."

Company Continues to Explore Deleveraging Alternatives

As of June 30, 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 and negotiations 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 (the "Exchange Transaction"). There can be no assurance that these discussions will result in the consummation of any transaction in a timely manner, or 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. This agreement will terminate on August 21, 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 amendment to the existing credit agreement. An extension of and amendments to the existing credit agreement would be contingent on the successful and timely consummation of an Exchange Transaction.

We have engaged advisors in these discussions and negotiations, but there can be no assurance that these discussions and negotiations will result in the consummation of any transaction in a timely manner, or at all. Further, the consummation of an Exchange Transaction is contingent on the successful consummation of an extension and amendment under our credit agreement. In the event the Exchange Transaction, and credit agreement extension and amendment, are not timely completed, we anticipate that we will pursue a restructuring of our balance sheet through an in-court Chapter 11 proceeding.

As we have previously disclosed, our Board has formed a committee of independent directors (the "Committee") to evaluate 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 continuing to reduce costs in an effort to improve cash flows from operations, and intend to continue to evaluate other strategic alternatives, including: (i) acquiring assets with existing production and cash flows by issuing preferred or common equity to finance such acquisitions; (ii) selling existing producing or midstream assets; and (iii) merging with a strategic partner.

Second Quarter 2019 Results

Production for second quarter 2019 totaled 875 Mboe, or 9.6 MBoe/d, made up of 23% oil, 37% NGLs and 40% natural gas. Average realized commodity prices for second quarter 2019, before the effect of commodity derivatives, were $56.54 per Bbl of oil, $12.49 per Bbl of NGLs and negative $0.27 per Mcf of natural gas. Our average realized price, including the effect of commodity derivatives, was $17.56 per Boe for second 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 second quarter 2019 was $13.6 million, or $0.15 per diluted share, on revenues of $14.7 million. Excluding the decrease in the fair value of our commodity derivatives of $0.3 million and restructuring expenses of $0.1 million adjusted net loss (non-GAAP) for the second quarter 2019 was $13.2 million, or $0.14 per diluted share. EBITDAX (non-GAAP) for the second quarter 2019 was $5.6 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 $4.78 per Boe. Production and ad valorem taxes averaged $1.76 per Boe, or 10.5% of oil, NGLs and gas sales. Total general and administrative ("G&A") costs averaged $4.93 per Boe, including cash G&A costs of $4.61 per Boe. Depletion, depreciation and amortization expense averaged $14.94 per Boe. Interest expense totaled $7.4 million.

Operations and Capital Budget

In the second quarter, we focused on conservation of capital as we pursued our deleveraging alternatives. We incurred $1.5 million in capital expenditures primarily related to cost effective, short payback cycle workovers to manage natural production decline. Additionally, we effectively managed our costs reducing LOE per Boe by 11% quarter over quarter.

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 liquidity as of June 30, 2019, was limited to our then available cash of $7.2 million.

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.