Approach Resources Inc. Reports Second Quarter 2018 Results

Company Approach Resources Inc 
Tags Unconventional Resources, Hedging, Exploration, Upstream Activities, Capital Spending, Financial & Operating Data, Strategy - Corporate
Date August 01, 2018

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, , 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.

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            (3,513      (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                2,108                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       
                       
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 .

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                2,108                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   
             

Source: EvaluateEnergy® ©2019 EvaluateEnergy Ltd