Approach Resources Inc. Reports Fourth Quarter and Full-Year 2018 Financial and Operating Results

Approach Resources Inc. (NASDAQ: AREX) today reported financial
and operational results for the fourth quarter and full-year 2018,
estimated year-end 2018 proved reserves and provided an update on its
efforts to pursue deleveraging alternatives.

Fourth Quarter 2018 Highlights

• Fourth quarter production of 963 MBoe or 10.5 MBoe/d
• Net income was $0.9 million, or $0.01 per diluted share. Adjusted net
  loss (non-GAAP) was $6.9 million, or $0.07 per diluted share
• EBITDAX (non-GAAP) of $13.5 million
• Cash operating expenses (non-GAAP) of $8.85 per Boe, a 28% decrease
  over the prior quarter

Full-Year 2018 Highlights

• Full year production of 4,082 MBoe or 11.2 MBoe/d
• Year-end 2018 proved reserves 180.1 MMBoe, an increase in oil reserves
  of 5% over the prior year
• Drilled six and completed nine horizontal Wolfcamp wells during the
  year with an inventory of seven drilled and uncompleted wells at
  year-end
• Net loss was $19.9 million, or $0.21 per diluted share. Adjusted net
  loss (non-GAAP) was $25 million, or $0.26 per diluted share
• EBITDAX (non-GAAP) of $59 million, a 7% increase over the prior year
• Revenue of $114 million, an 8% increase over the prior year
• Unhedged cash margin (non-GAAP) of $16.19 per Boe, a 16% increase over
  the prior year

Adjusted net loss, EBITDAX, cash operating expenses 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 and EBITDAX to net income (loss) and unhedged cash
margin to revenues.

Management Comment

Ross Craft, Approach’s Chairman and CEO, commented, “Due in part to the
sharp decline in commodity prices and extreme WAHA gas discount in the
basin in the fourth quarter, we focused on conserving capital and
reducing our cash operating expenses during the quarter. Additionally,
we continued to evaluate alternatives to reduce our leverage. In 2019,
we will continue to focus on alternatives to strengthen our balance
sheet and manage our covenants under our credit facility. Our capital
expenditure budget is designed to be funded primarily through cash flows
from operations. As a result of the current commodity price environment,
as well as our focus on addressing our leverage, we do not expect any
significant drilling and completion activity in the first quarter of
2019.”

Company Continues to Explore Deleveraging Alternatives

In order to improve our leverage position to meet upcoming financial
covenants under the revolving credit facility, 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 bond holders. If we do not accomplish
one or more of the deleveraging transactions discussed below, we do not
believe we will be able to comply with the total leverage ratio covenant
in our revolving credit facility beginning with the measurement date of
March 31, 2019.

On April 12, 2018, our largest shareholder, Wilks Brothers, LLC, and its
affiliate SDW Investments, LLC (collectively, “Wilks”), disclosed on
Schedule 13D/A that they intended to engage in discussions with the
Company regarding their investment in the Company, including the
possible acquisition of additional shares of common stock through the
exchange of approximately $60 million of 7% Senior Notes due 2021 (the
“Senior Notes”) currently held by Wilks (the “Exchange Transaction”). In
April 2018, our board of directors formed a committee of independent
directors (the “Committee”) to evaluate a potential Exchange Transaction
as well as other strategic alternatives (the “Competing Transactions”).
The Committee hired financial and legal advisors to advise the Committee
on these matters. The Committee engaged in discussions with Wilks
regarding an Exchange Transaction in 2018, but in mid-2018 the Wilks and
the Committee deferred further discussions regarding a stand-alone
Exchange Transaction pending resolution of the Company’s discussions
regarding the potential transaction described in the following paragraph.

In addition, management has reviewed numerous cash flow producing
properties for potential acquisition over the last several years in
order to grow our production base and reduce our leverage ratio to a
sustainable level and one that is in compliance with our financial
covenants. In early 2018, we retained a financial advisor, separate from
the Committee’s advisor, and began discussions with a potential seller
and multiple financing counterparties for the purchase of a set of
substantial cash flow producing properties. Despite a deteriorating
commodity price market, discussions with both the seller and financing
parties progressed throughout 2018. However, no definitive agreements
ultimately were executed, and the negotiations currently are not active.

In March 2019, our board of directors expanded the scope of the
Committee to explore, in addition to an Exchange Transaction, 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 pursue and consider 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; (iii)
merging with a strategic partner. The Committee has re-commenced
discussions with the Wilks regarding an Exchange Transaction and intends
to continue those discussions as part of its review of financing
alternatives and deleveraging transactions. We currently are in
discussions with our CEO regarding his separation from the Company. We
expect to engage in discussions with our President and Chief
Administrative Officer regarding their continued employment or potential
separation. The Company is evaluating plans for succession. There can be
no assurance that we will be able to implement any of these plans
successfully, or that such plans, if executed, will result in compliance
with our credit facility covenants.

If an event of default under our credit facility occurred, our lenders
could accelerate the maturity of the outstanding indebtedness, making it
immediately due and payable, and we would not have sufficient liquidity
to repay those amounts. However, we believe we have adequate liquidity
for current, near-term working capital needs from cash generated from
operations and, to the extent available, unused borrowing capacity under
our revolving credit facility, each assuming (i) no reduction in our
borrowing base from our semi-annual borrowing base redetermination and
(ii) no acceleration of amounts due under our revolving credit facility.

Fourth Quarter 2018 Results

Production for fourth quarter 2018 totaled 963 MBoe (10.5 MBoe/d), made
up of 26% oil, 35% NGLs and 39% natural gas. Average realized commodity
prices for fourth quarter 2018, before the effect of commodity
derivatives, were $55.23 per Bbl of oil, $19.91 per Bbl of NGLs and
$0.79 per Mcf of natural gas. Our average realized price, including the
effect of commodity derivatives, was $22.86 per Boe for fourth quarter
2018.

Net income for fourth quarter 2018 was $0.9 million, or $0.01 per
diluted share, on revenues of $22.4 million. Excluding the increase in
the fair value of our commodity derivatives of $10.1 million, adjusted
net loss (non-GAAP) for fourth quarter 2018 was $6.9 million, or $0.07
per diluted share. EBITDAX (non-GAAP) for fourth quarter 2018 was $13.5
million. See “Supplemental Non-GAAP Financial and Other Measures” below
for our reconciliation of adjusted net loss and EBITDAX to net income.

Lease operating expense (“LOE”) averaged $5.21 per Boe. Production and
ad valorem taxes averaged $1.80 per Boe, or 7.7% of oil, NGLs and gas
sales. Exploration costs were $0.43 per Boe. Total general and
administrative (“G&A”) costs averaged $2.80 per Boe, including cash G&A
costs of $1.84 per Boe. Depletion, depreciation and amortization expense
averaged $14.96 per Boe. Interest expense totaled $6.6 million.

Full-Year 2018 Results

Production for 2018 was 4,082 MBoe (11.2 MBoe/d), made up of 26% oil,
36% NGLs and 38% natural gas. Average realized commodity prices for
2018, before the effect of commodity derivatives, were $62.04 per Bbl of
oil, $23.28 per Bbl of NGLs and $1.49 per Mcf of natural gas. Our
average realized price, including the effect of commodity derivatives,
was $26.21 per Boe for 2018.

Net loss for 2018 was $19.9 million, or $0.21 per diluted share, on
revenues of $114 million. Excluding the increase in fair value of our
commodity derivatives of $6.7 million, adjusted net loss (non-GAAP) for
2018 was $25 million, or $0.26 per diluted share. EBITDAX (non-GAAP) for
2018 was $59 million. See “Supplemental Non-GAAP Financial and Other
Measures” below for our reconciliation of adjusted net loss and EBITDAX
to net loss.

LOE averaged $5.18 per Boe. Production and ad valorem taxes averaged
$2.19 per Boe, or 7.8% of oil, NGLs and gas sales. Exploration costs
were $0.10 per Boe. Total G&A costs averaged $5.13 per Boe, including
cash G&A costs of $4.38 per Boe. Depletion, depreciation and
amortization expense averaged $15.05 per Boe. Interest expense totaled
$25.1 million.

Operations Update

In light of continued commodity price deterioration and the extreme WAHA
gas discount in the basin, we deferred third and fourth quarter 2018
drilling and completion activities, and incurred capital expenditures of
$0.2 million in the fourth quarter.

In 2018, we focused on executing a disciplined capital budget and
managing natural production decline through surface facility
optimization, operating efficiencies and investment in well repairs,
workovers and maintenance. During 2018, we drilled six and completed
nine horizontal Wolfcamp wells. Of these, three wells were completed in
the A bench, three wells were completed in the B bench and three wells
were completed in the C bench. At December 31, 2018, we had seven
horizontal wells waiting on completion.

Our extensive infrastructure network of centralized production
facilities, water transportation, handling and recycling system, gas
lift lines and salt water disposal wells continues to provide
sustainable competitive advantages and environmentally responsible
facility operations. In 2018, we maintained an industry leading average
drilling and completion cost of $4.6 million per horizontal well and LOE
per Boe of $5.18.

Fourth Quarter and Full-Year 2018 Production

Fourth quarter 2018 production totaled 963 MBoe (10.5 MBoe/d). Full-year
2018 production totaled 4,082 MBoe (11.2 MBoe/d).

2018 Estimated Proved Reserves and Costs Incurred

Year-end 2018 proved reserves totaled 180.1 MMBoe. Year-end 2018 proved
reserves were 29% oil, 31% NGLs and 40% natural gas. Proved developed
reserves represent approximately 37% of total year-end 2018 proved
reserves.

At December 31, 2018, substantially all of our proved reserves were
located in our core operating area in the southern Midland Basin.
Year-end 2018 estimated proved reserves included 168.2 MMBoe
attributable to the horizontal Wolfcamp shale play.

Extensions and discoveries for 2018 were 35 MMBoe, primarily
attributable to our development project in the Wolfcamp shale oil
resource play in the Permian Basin. During 2018, we reclassified 33.1
MMBoe of proved undeveloped reserves to unproved reserves. The
reclassified reserves are attributable to horizontal well locations in
Project Pangea that are no longer expected to be developed within five
years from their initial booking, as required by SEC rules. Revisions
included an increase of 0.2 MMBoe resulting from updated well
performance and technical parameters, and an increase of 1.9 MMBoe due
to higher commodity prices, partially offset by a decrease of 1.4 MMBoe
due to an increase in operating expenses and natural gas price
differentials.

The following table summarizes the changes in our estimated proved
reserves during 2018.

(1) Production includes 1,385 MMcf related to field fuel.

Our preliminary, unaudited estimate of the standardized after-tax
measure of discounted future net cash flows (“standardized measure”) of
our proved reserves at December 31, 2018, was $660 million. The PV-10
(non-GAAP), or pre-tax present value of our proved reserves discounted
at 10%, of our proved reserves at December 31, 2018, was $761.8 million.

The independent engineering firm DeGolyer and MacNaughton prepared our
estimates of year-end 2018 proved reserves and PV-10 at SEC pricing.
PV-10 is a non-GAAP measure. See “Supplemental Non-GAAP Financial and
Other Measures” below for our definition of PV-10 and reconciliation to
the standardized measure (GAAP). Our reserve estimates and our
calculation of standardized measure and PV-10 are based on the 12-month
average of the first-day-of-the-month pricing of $65.68 per Bbl of oil,
$24.12 per Bbl of NGLs and $3.17 per MMBtu of natural gas during 2018.

Capital Expenditures

Fourth quarter capital expenditures were $0.2 million. Net capital
expenditures incurred during 2018 totaled $46.8 million and were
attributable to drilling and development ($39.4 million), infrastructure
projects and equipment ($6.6 million), exploratory project ($0.4
million) and acreage acquisitions and extensions ($0.4 million).

Liquidity Update

At December 31, 2018, we had a $1 billion senior secured revolving
credit facility in place with a borrowing base of $325 million, and
liquidity of $23.2 million. Our credit facility is subject to scheduled
redeterminations of our borrowing base semi-annually, based on our
reserves. Our next anticipated redetermination is expected to take place
in the second quarter of 2019, although our lender has the option to
redetermine our borrowing base outside of our anticipated schedule.
Continued low commodity prices may adversely impact the results of the
upcoming redetermination, and have a significant negative impact on the
Company’s liquidity. If our borrowing base is reduced below the amount
outstanding under our credit agreement, we may be required to repay a
portion of our outstanding borrowings, and we may not have sufficient
liquidity to meet this requirement. 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. At present, approximately 19% of 2019
forecasted oil and 19% of NGL production is hedged. The table below is a
summary of our current derivatives positions.

Guidance

The Company’s capital budget for 2019 is a range of $30 million to $60
million, depending on commodity prices. The table below sets forth our
production and operating costs and expenses guidance for 2019,
anticipating a capital budget of $30 million funded primarily through
cash flows from operations. The eventual results of our strategic and
deleveraging efforts may have a substantial impact on the Company’s
ability to achieve the guidance set forth below.

As further discussed below under “Forward-Looking and Cautionary
Statements,” our guidance is forward-looking information that is subject
to a number of risks and uncertainties, many of which are beyond our
control. In addition, our 2019 capital budget excludes acquisitions and
lease extensions and renewals and is subject to change depending upon a
number of factors, including prevailing and anticipated prices for oil,
NGLs and natural gas, results of horizontal drilling and completions,
economic and industry conditions at the time of drilling, the
availability of sufficient capital resources for drilling prospects, our
financial results and the availability of lease extensions and renewals
on reasonable terms.

Conference Call Information and Summary Presentation

The Company will host a conference call on Tuesday, March 19, 2019, at
10:00 a.m. Central Time (11:00 a.m. Eastern Time) to discuss fourth
quarter and full-year 2018 financial and operational results. Those
wishing to listen to the conference call, may do so by visiting the
Events page under the Investor Relations section of the Company’s
website, www.approachresources.com,
or by phone:

In addition, a fourth quarter and full-year 2018 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 comply
with the covenants in our revolving credit facility, our leverage
negatively affecting a redetermination 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 to
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. 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.

(1) 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 $0.7
million and $1 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 under the
Financial Reporting subsection of 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 excludes (1) non-cash
fair value gain commodity derivatives, (2) gain on debt extinguishment,
(3) write-off of deferred tax assets, (4) acquisition related costs, (5)
tax benefit related to federal tax law change, and (6) related income
tax effect on adjustments 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
income (loss) for the three and twelve months ended December 31, 2018
and 2017 (in thousands, except per-share amounts).

(1) The estimated income tax impacts on adjustments to net income (loss)
are computed based upon a statutory rate of 21% and 35%, applicable to
2018 and 2017, respectively. Additionally, this includes the tax impact
of a tax shortfall related to share-based compensation of $0.2 million,
and $1 million for the three months ended December 31, 2018, and
December 31, 2017, respectively; and $0.3 million and $1.3 million for
the years ended December 31, 2018, and December 31, 2017, respectively.

EBITDAX

We define EBITDAX as net income (loss), plus (1) exploration expense,
(2) depletion, depreciation and amortization expense, (3) share-based
compensation expense, (4) non-cash fair value (gain) loss on
derivatives, (5) gain on debt extinguishment, (6) interest expense, net,
and (7) income tax provision (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 income (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 income
(loss) for the three and twelve months ended December 31, 2018 and 2017
(in thousands).

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 twelve months ended December 31, 2018 and 2017 (in thousands, except
per-Boe amounts).

PV-10

The present value of our proved reserves, discounted at 10% (“PV-10”),
was estimated at $761.8 million at December 31, 2018, and was calculated
based on the first-of-the-month, 12-month average prices for oil, NGLs
and gas, of $65.68 per Bbl of oil, $24.12 per Bbl of NGLs and $3.17 per
MMBtu of natural gas price during 2018, adjusted for basis
differentials, grade and quality.

PV-10 is our estimate of the present value of future net revenues from
proved oil and gas reserves after deducting estimated production and ad
valorem taxes, future capital costs and operating expenses, but before
deducting any estimates of future income taxes. The estimated future net
revenues are discounted at an annual rate of 10% to determine their
“present value.” We believe PV-10 to be an important measure for
evaluating the relative significance of our oil and gas properties and
that the presentation of the non-GAAP financial measure of PV-10
provides useful information to investors because it is widely used by
professional analysts and investors in evaluating oil and gas companies.
Because there are many unique factors that can impact an individual
company when estimating the amount of future income taxes to be paid, we
believe the use of a pre-tax measure is valuable for evaluating the
Company. We believe that PV-10 is a financial measure routinely used and
calculated similarly by other companies in the oil and gas industry.

The table below reconciles PV-10 to our standardized measure of
discounted future net cash flows, the most directly comparable measure
calculated and presented in accordance with GAAP. PV-10 should not be
considered as an alternative to the standardized measure as computed
under GAAP.

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. 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 December 31, 2018 and 2017
(in thousands).

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