Approach Resources, Inc. (AREX)
Q4 2012 Earnings Call
February 22, 2013 11:00 AM ET
Executives
Ross Craft – President and CEO
Steve Smart – EVP and CFO
Qingming Yang – COO
Analysts
Leo Mariani – RBC
Joe Allman – JPMorgan
Jack Aydin – KeyBanc
Gordon Douthat – Wells Fargo
Irene Haas – Wunderlich
Welles Fitzpatrick – Johnson Rice
Steve Berman – Canaccord Genuity
Joe Magner – Macquarie Capital
Mike Kelly – Global Hunter Securities
Presentation
Operator
Good morning, everyone, and welcome to the Approach Resources Full Year and Fourth Quarter 2012 Earnings Conference Call and Audio Webcast. Today’s call is being recorded. (Operator Instructions) We will conduct a question-and-answer session at the end of today’s conference call.
Management’s remarks today will include forward-looking statements. These statements are subject to many factors that could cause actual results to differ materially from management’s expectations as expressed in those forward-looking statements. Those factors are described in the company’s SEC filings and management refers you to the company’s website or to the SEC’s website to review those filings. The company takes no obligation to publicly update or revise any forward-looking statements.
During the call, management will refer to certain non-GAAP financial measures. Reconciliations of these measures are provided in the full year and fourth quarter 2012 earnings release and have been posted to the company’s website under the Non-GAAP Financial Information page at www.approachresources.com.
Also, a new presentation has been posted to the company’s website and is accessible from the Home page. The company also incorporates by reference the cautionary statement regarding reserves, estimates and resource potential that appear in its presentation and at the bottom of its earnings release.
Now I’m going to turn the call over to Ross Craft, Approach’s President and CEO. Please proceed, sir.
Ross Craft
Good morning, everyone. Thank you for participating this morning and for your interest in Approach.
With me on the call today: Steve Smart, Chief Financial Officer; Qingming Yang, Chief Operating Officer; Curtis Henderson, our General Counsel; and Megan Hays, Manager of Investor Relations. I’ll first review our fourth quarter and full year production and year end estimated proved reserves. Then Steve will discuss the financials. I will conclude with a review of our recent well results, our updated drilling inventory and resource potential and 2013 outlook.
Production for the fourth quarter of 2012 totaled 8.5 thousand BOEs per day, up 21% from the fourth quarter 2011. Significantly, fourth quarter 2012 crude oil volumes were up 75% year-over-year and 20% sequentially. Our production volumes in 2012 hit the midpoint of our guidance, or 2.9 million BOEs reflecting year-over-year growth of 24%. Oil production for 2012 increased over 100% compared to 2011 due to our horizontal Wolfcamp drilling. We first discussed the Wolfcamp shale play with our investors and analysts in late 2010. Since then, we have tripled our oil productions. We believe this is an exceptional performance for an oil gas company of any size.
Year-end 2012 proved reserves totaled 95.5 million BOEs, up 24% year-end 2011. During 2012 we increased our proved oil reserves by 106% to 37.3 million barrels and since year-end 2009 we have increased our oil reserves more than seven times.
Our reserve growth is the result of our horizontal drilling in the Wolfcamp play. At year-end 2012 we had approximately 60.1 million BOEs of proved reserves attributed to the Wolfcamp. We booked approximately three to four PUD locations per proved developed location, which is in line with our historical booking ratio.
Current horizontal Wolfcamp PUD locations represent just two to 2.5 years of drilling inventory compared to our multi-decade inventory of identified horizontal Wolfcamp locations. Due to our horizontal development of Project Pangea, we reclassified 8.9 million BOEs of vertical canyon PUDs as probable undeveloped. We will integrate these wells back into our program once we’ve seen net gas ratings closer to $4.00.
We also had 2.4 million BOEs of negative price revisions due to lower natural gas and NGL prices. Overall, we replaced 1,300% of our production at a drill-bit finding cost of $7.45 per BOE. Our all-in finding cost was $13.90 per BOE.
With that I’m going to turn it over to Steve and then I’ll sum it up at the end.
Steve Smart
Okay, thank you, Ross. Revenues for 2012 totaled $128.9 million. Revenues for 2012 were supported by higher production volumes, but offset by lower NGL and gas price realizations. Our average realized price for 2012 before the effect of commodity derivatives was $44.63 per BOE compared to $46.37 per BOE for the prior year. Our average realized price for 2012 including the effect of commodity derivatives was $44.60 per BOE compared to $47.81 per BOE for the prior year.
Net income for 2012 was $6.4 million or $0.18 per share. This compares to net income for 2011 of $7.2 million or $0.25 per diluted share. Net income for the 2012 period included an unrealized gain on commodity derivatives of $3.9 million. Excluding the unrealized gain on commodity derivatives and the related income tax effect, adjusted net income was $3.8 million or $0.11 per diluted share. EBITDAX for 2012 was $83 million or $2.37 per share compared to $79.4 million or $2.72 per share in 2011.
Well expenses trended higher in 2012, which offset increased in production. Lease operating expense for 2012 was $6.58 per BOE. Operating expense rose due to increases in workover compression, water hauling, well repairs and maintenance. Total production ad valorem taxes were up in 2012 due to an increase in oil, NGL and gas sales. Production ad valorem taxes per BOE however were lower in 2012 at $3.20 per BOE or 7.2% of oil NGL and gas sales.
General and administrative expenses were $8.62 per BOE and increased primarily due to higher personnel costs associated with increasing staff and an increase in share-based compensation. DD&A for 2012 was $20.91 per BOE. DD&A increased primarily due to high production and increased investment in the Wolfcamp shale play relative to the estimated BDP reserves book.
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