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EXCEL - IDEA: XBRL DOCUMENT - Approach Resources Inc | Financial_Report.xls |
10-Q - FORM 10-Q - Approach Resources Inc | d82554e10vq.htm |
EX-32.2 - EX-32.2 - Approach Resources Inc | d82554exv32w2.htm |
EX-23.1 - EX-23.1 - Approach Resources Inc | d82554exv23w1.htm |
EX-32.1 - EX-32.1 - Approach Resources Inc | d82554exv32w1.htm |
EX-31.2 - EX-31.2 - Approach Resources Inc | d82554exv31w2.htm |
EX-31.1 - EX-31.1 - Approach Resources Inc | d82554exv31w1.htm |
Exhibit 99.1
DeGolyer and MacNaughton
5001 Spring Valley Road
Suite 800 East
Dallas, Texas 75244
5001 Spring Valley Road
Suite 800 East
Dallas, Texas 75244
July 18, 2011
Approach Resources, Inc.
6500 West Freeway
Suite 800
Fort Worth, TX 76116
6500 West Freeway
Suite 800
Fort Worth, TX 76116
Gentlemen:
Pursuant to your request, we have conducted a reserves evaluation of the net proved crude oil,
condensate, natural gas liquids (NGL), and natural gas reserves, as of June 30, 2011, of certain
properties owned by Approach Resources, Inc. (Approach). The properties appraised are located in
Limestone, Crockett, and Schleicher Counties, Texas. Approach has represented that these properties
account for 100 percent of Approachs net proved reserves as of June 30, 2011. The net proved
reserves estimates prepared by us have been prepared in accordance with the reserves definitions of
Rules 410(a) (1)(32) of Regulation SX of the Securities and Exchange Commission (SEC) of the
United States.
Reserves included herein are expressed as net reserves. Gross reserves are defined as the
total estimated petroleum to be produced from these properties after June 30, 2011. Net reserves
are defined as that portion of the gross reserves attributable to the interests owned by Approach
after deducting all interests owned by others. Gas quantities estimated herein are expressed as
sales gas. Sales gas is defined as that portion of the total gas to be delivered into a gas
pipeline for sale after separation, processing, fuel use, and flare. Gas reserves are expressed at
a temperature base of 60 degrees Fahrenheit (°F) and at a pressure base of 14.65 pounds per square
inch absolute (psia). Condensate reserves estimated herein are those to be recovered by
conventional lease separation.
Estimates of oil, condensate, NGL, and natural gas should be regarded only as estimates that may
change as further production history and additional information become available. Not only are such
reserves estimates based on that information which is currently available, but such estimates are
also subject to the
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uncertainties inherent in the application of judgmental factors in interpreting such information.
Data used in this evaluation were obtained from reviews with Approach personnel, Approach
files, from records on file with the appropriate regulatory agencies, and from public sources. In
the preparation of this report we have relied, without independent verification, upon such
information furnished by Approach with respect to property interests, production from such
properties, current costs of operation and development, current prices for production, agreements
relating to current and future operations and sale of production, and various other information and
data that were accepted as represented. A field examination of the properties was not considered
necessary for the purposes of this report.
Methodology and Procedures
Estimates of reserves were prepared by the use of appropriate geologic, petroleum
engineering, and evaluation principles and techniques that are in accordance with practices
generally recognized by the petroleum industry as presented in the publication of the Society of
Petroleum Engineers entitled Standards Pertaining to the Estimating and Auditing of Oil and Gas
Reserves Information (Revision as of February 19, 2007). The method or combination of methods used
in the analysis of each reservoir was tempered by experience with similar reservoirs, stage of
development, quality and completeness of basic data, and production history.
When applicable, the volumetric method was used to estimate the original oil in place (OOIP)
and the original gas in place (OGIP). Structure and isopach maps were constructed to estimate
reservoir volume. Electrical logs, radioactivity logs, core analyses, and other available data were
used to prepare these maps as well as to estimate representative values for porosity and water
saturation. When adequate data were available and when circumstances justified, material balance
and other engineering methods were used to estimate OOIP or OGIP.
Estimates of ultimate recovery were obtained after applying recovery factors to OOIP or OGIP.
These recovery factors were based on consideration of the type of energy inherent in the
reservoirs, analyses of the petroleum, the structural positions of the properties, and the
production histories. When applicable, material balance and other engineering methods were used to
estimate recovery factors. An analysis
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of reservoir performance, including production rate, reservoir pressure, and gas-oil ratio behavior, was used in the estimation of reserves.
For depletion-type reservoirs or those whose performance disclosed a reliable decline in
producing-rate trends or other diagnostic characteristics, reserves were estimated by the
application of appropriate decline curves or other performance relationships. In the analyses of
production-decline curves, reserves were estimated only to the limits of economic production
or to the limit of the production licenses as appropriate.
Definition of Reserves
Petroleum reserves estimated by us included in this report are classified by degree of
proof as proved and are judged to be economically producible in future years from known reservoirs
under existing economic and operating conditions and assuming continuation of current regulatory
practices using conventional production methods and equipment. In the analyses of
production-decline curves, reserves were estimated only to the limit of economic rates of
production under existing economic and operating conditions using prices and costs consistent with
the effective date of this report, including consideration of changes in existing prices provided
only by contractual arrangements but not including escalations based upon future conditions. Proved
reserves classifications used by us in this report are in accordance with the reserves definitions
of Rules 410(a) (1)(32) of Regulation SX of the SEC. The petroleum reserves are classified as
follows:
Proved oil and gas reserves Proved oil and gas reserves are those quantities of
oil and gas, which, by analysis of geoscience and engineering data, can be
estimated with reasonable certainty to be economically produciblefrom a given
date forward, from known reservoirs, and under existing economic conditions,
operating methods, and government regulationsprior to the time at which
contracts providing the right to operate expire, unless evidence indicates that
renewal is reasonably certain, regardless of whether deterministic or
probabilistic methods are used for the estimation. The project to extract the
hydrocarbons must have commenced or the operator must be reasonably certain that
it will commence the project within a reasonable time.
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(i) The area of the
reservoir considered as proved includes:
(A) The area
identified by drilling and limited by fluid contacts, if any,
and (B) Adjacent undrilled portions of the reservoir that can, with
reasonable certainty, be judged to be continuous with it and to contain
economically producible oil or gas on the basis of available geoscience
and engineering data.
(ii) In the absence of data on fluid contacts, proved quantities in a
reservoir are limited by the lowest known hydrocarbons (LKH) as seen in a
well penetration unless geoscience, engineering, or performance data
and reliable technology establishes a lower contact with reasonable
certainty.
(iii) Where direct observation from well penetrations has defined a
highest known oil (HKO) elevation and the potential exists for an
associated gas cap, proved oil reserves may be assigned in the
structurally higher portions of the reservoir only if geoscience,
engineering, or performance data and reliable technology establish the
higher contact with reasonable certainty.
(iv) Reserves which can be produced economically through application of
improved recovery techniques (including, but not limited to, fluid
injection) are included in the proved classification when:
(A) Successful testing by a pilot project in an area of the reservoir with
properties no more favorable than in the reservoir as a whole, the
operation of an installed program in the reservoir or an analogous
reservoir, or other evidence using reliable technology establishes the
reasonable certainty of the engineering analysis on which the project or
program was based; and (B) The project has been approved for development
by all necessary parties and entities, including governmental entities.
(v) Existing economic conditions include prices and costs at which
economic producibility from a reservoir is to be determined. The price
shall be the average price during the 12-month period prior to the ending
date of the period covered
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by the report, determined as an unweighted
arithmetic average of the first-day-of-the-month price for each month
within such period, unless prices are defined by contractual arrangements,
excluding escalations based upon future conditions.
Developed oil and gas reserves Developed oil and gas reserves are reserves of
any category that can be expected to be recovered:
(i) Through existing wells with existing equipment and operating methods
or in which the cost of the required equipment is relatively minor
compared to the cost of a new well; and
(ii) Through installed extraction equipment and infrastructure operational
at the time of the reserves estimate if the extraction is by means not
involving a well.
Undeveloped oil and gas reserves Undeveloped oil and gas reserves are reserves
of any category that are expected to be recovered from new wells on undrilled
acreage, or from existing wells where a relatively major expenditure is required
for recompletion.
(i) Reserves on undrilled acreage shall be limited to those directly
offsetting development spacing areas that are reasonably certain of
production when drilled, unless evidence using reliable technology exists
that establishes reasonable certainty of economic producibility at greater
distances.
(ii) Undrilled locations can be classified as having undeveloped reserves
only if a development plan has been adopted indicating that they are
scheduled to be drilled within five years, unless the specific
circumstances, justify a longer time.
(iii) Under no circumstances shall estimates for undeveloped reserves be
attributable to any acreage for which an application of fluid injection or
other improved recovery technique is contemplated, unless such techniques
have been proved effective by actual projects in the same reservoir or an
analogous reservoir, as defined in [section 210.410 (a)
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Definitions], or
by other evidence using reliable technology establishing reasonable
certainty.
Primary Economic Assumptions
The following economic assumptions were used for estimating existing and future prices
and costs:
Oil Prices
Prices used in this evaluation were based on local differentials to the
West Texas Intermediate (WTI) price of $89.92 per barrel. The WTI base
price is the average price for WTI crude on the first day of the
month for the period July 1, 2010, through June 1, 2011. Local
differentials are based on the difference between the actual price
received and the WTI price on the first day of each month between July 1,
2010, and June 1, 2011. The weighted average price over the lives of the
properties was $85.92 per barrel.
Natural Gas Prices
Prices used in this evaluation were based on local differentials to a
Henry Hub gas price of $4.210 per million British thermal units (MMBtu).
The Henry Hub base price is the average price for Henry Hub gas on the
first day of each month for the period July 1, 2010, through June 1, 2011.
Local differentials are based on the difference between the actual price
received and the Henry Hub price on the first day of each month between
July 1, 2010, through June 1, 2011. The weighted average price over the
lives of the properties was $3.980 per thousand cubic feet.
For the Angus and Ozona areas, contractual arrangements for gas sales have
been taken into account in the preparation of this report. As of June 30,
2011, gas in the Angus area is sold at a differential to Henry Hub of
-$0.230 per MMBtu. Gas from
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the Ozona area, as of June 30, 2011 is being
sold at a differential of $0.210 per MMBtu.
NGL Prices
Prices used in this evaluation were based on the average price received on
the first day of each month for the period July 1, 2010, through June 1,
2011. The weighted average price, held constant over the lives of the
properties, was $44.96 per barrel.
Operating Expenses and Capital Costs
Estimates of operating expenses based on current expenses were used for
the lives of the properties with no increases in the future based on
inflation. In certain cases, future expenses, either higher or lower than
current expenses, may have been used because of anticipated changes in
operating conditions. Future capital expenditures were estimated using
2011 values and were not adjusted for inflation.
While the oil and gas industry may be subject to regulatory changes from time to time that
could affect an industry participants ability to recover its oil and gas reserves, we are not
aware of any such governmental actions which would restrict the recovery of the June 30, 2011,
estimated oil and gas volumes. The reserves estimated in this report can be produced under current
regulatory guidelines.
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Summary of Oil and Gas Reserves
Our estimates of the net proved reserves attributable to the properties appraised, as of
June 30, 2011, are summarized by geographic area as follows, expressed in thousands of barrels
(Mbbl), millions of cubic feet (MMcf):
Net Proved Reserves as of June 30, 2011 | ||||||||||||
Estimated by DeGolyer and MacNaughton | ||||||||||||
Oil and | Natural Gas | Sales | ||||||||||
Condensate | Liquids | Gas | ||||||||||
(Mbbl) | (Mbbl) | (MMcf) | ||||||||||
Proved Developed |
||||||||||||
Angus |
3,784 | 7,783 | 43,447 | |||||||||
Bald Prairie |
0 | 0 | 1,329 | |||||||||
Ozona |
634 | 6,419 | 44,580 | |||||||||
Total Proved Developed |
4,418 | 14,202 | 89,356 | |||||||||
Proved Undeveloped |
||||||||||||
Angus |
4,542 | 5,427 | 29,917 | |||||||||
Bald Prairie |
0 | 0 | 10,688 | |||||||||
Ozona |
1,167 | 7,161 | 49,627 | |||||||||
Total Proved Undeveloped |
5,709 | 12,588 | 90,232 | |||||||||
Total Proved |
10,127 | 26,790 | 179,588 |
In our opinion, the information relating to estimated proved reserves of oil, condensate,
natural gas liquids, and gas contained in this report has been prepared in accordance with
Paragraphs 932-235-50-4, 932-235-50-6, 932-235-50-7, and 932-235-50-9 of the Accounting Standards
Update 932-235-50, Extractive Industries Oil and Gas (Topic 932): Oil and Gas Reserve Estimation
and Disclosures (January 2010) of the Financial Accounting Standards Board and Rules 410(a)
(1)(32) of Regulation SX and Rules 302(b), 1201, 1202(a) (1), (2), (3), (4), (8), and 1203(a)
of Regulation SK of the Securities and Exchange Commission; provided, however, that the as-of
date of this report does not coincide with the fiscal year of Approach.
To the extent the above-enumerated rules, regulations, and statements require determinations
of an accounting or legal nature, we, as engineers, are necessarily unable to express an opinion as
to whether the above-described information is in accordance therewith or sufficient therefor.
DeGolyer and MacNaughton is an independent petroleum engineering consulting firm that has been
providing petroleum consulting services throughout
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the world since 1936. DeGolyer and MacNaughton does not have any financial interest, including
stock ownership, in Approach. Our fees were not contingent on the results of our evaluation. This
letter report has been prepared at the request of Approach. DeGolyer and MacNaughton has used all
data, assumptions, procedures, and methods that it considers necessary to prepare this report.
Submitted, |
||||
/s/ DeGolyer and MacNaughton | ||||
DeGOLYER and MacNAUGHTON | ||||
Texas Registered Engineering Firm F-716 |
/s/ Paul J. Szatkowski, P.E. | ||||
Paul J. Szatkowski, P.E. | ||||
[SEAL] | Senior Vice President DeGolyer and MacNaughton |
DeGolyer and MacNaughton
CERTIFICATE of QUALIFICATION
I, Paul J. Szatkowski, Petroleum Engineer with DeGolyer and MacNaughton, 5001 Spring Valley
Road, Suite 800 East, Dallas, Texas, 75244 U.S.A., hereby certify:
1. | That I am a Senior Vice President with DeGolyer and MacNaughton, which company did
prepare the letter report addressed to Approach dated July 18, 2011, and that I, as Senior
Vice President, was responsible for the preparation of this
report. |
||
2. | That I attended Texas A&M University, and that I graduated with a Bachelor of Science
degree in Petroleum Engineering in the year 1974; that I am a Registered Professional
Engineer in the State of Texas; that I am a member of the International Society of
Petroleum Engineers and the American Association of Petroleum Geologists; and that I have
in excess of 37 years of experience in oil and gas reservoir studies and reserves
evaluations. |
/s/ Paul J. Szatkowski, P.E. | ||||
Paul J. Szatkowski, P.E. | ||||
[SEAL] | Senior Vice President DeGolyer and MacNaughton |
|||