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Current AREX Stock Info

Approach Resources Inc. (ticker: AREX) is an independent oil and gas company with core operations, production and reserves located in the Permian Basin in West Texas. The company targets multiple oil and liquids-rich formations in the Permian Basin, where the company operates approximately 152,000 net acres.

Approach announced on September 19, 2013 the definitive agreement to sell its interest in an oil pipeline system in the southern Midland Basin for $108 million before taxes. AREX’s total investment in the partnership was $16 million. The sale at $108 million represents a 575% return on investment.

Approach, together with its partner in Wildcat Permian Services LLC, entered into an Equity Purchase Agreement with affiliates of JP Energy Development LP, under which JP Energy will acquire all of the equity interests in Wildcat for a purchase price of $210 million. The transaction is expected to close in late third quarter or early fourth quarter 2013.

Though JP Energy will now own and operate Wildcat’s oil pipeline system in Texas’ Crockett and Reagan Counties, AREX will continue to have firm crude oil purchase agreements for transportation of its crude volumes. The pipeline system consists of approximately 50 miles of high-pressure, steel pipeline with throughput capacity of 100,000 BOPD, truck terminal and LACT bay facilities, multiple receipt points and 40,000 barrels of crude oil storage.

According to AREX’s Q2’13 release, the company began utilizing the transportation joint venture with Wildcat in April 2013. Transportation via pipeline rather than by truck reduced costs and improved regional (Midland/Cushing) differential during the quarter. As a result of reduced transportation costs and improved differentials, AREX’s total differential relative to NYMEX WTI of $5.86/BOE reflected a 43% and 53% decrease compared to second quarter 2012 and first quarter 2013, respectively. The cost savings should remain as AREX has negotiated similar terms for its crude volumes.

Use of Proceeds

Though the company did not outline a specific use of proceeds, it is reasonable to expect that it will go toward funding a portion of the company’s $260 million 2013 capital program. At June 30, 2013, AREX had a $500 million revolving credit facility with a $315 million borrowing base and no outstanding borrowings. 90% of the capital program will be directed to the Company’s Wolfcamp program where the company anticipates completing 40 to 42 wells using three horizontal rigs. This year’s program is targeting the Wolfcamp A, B and C and is testing “stacked-wellbore” development and optimizing well spacing and completion design. The $108 million from the pipeline divestiture in combination with the undrawn borrowing base gives AREX the liquidity and flexibility to ramp up operations based on results from the current program.

AREX_CS_v2-2Analyst Commentary

Gordon Douthat, Senior Analyst at Wells Fargo Securities, gave AREX an “Outperform” rating in his note on September 19, 2013. He says the sale is an unexpected positive and improves AREX’s liquidity. “Assuming a 35% tax rate, we estimate PF liquidity as of Q2 2013 of ~$450MM, giving AREX ample flexibility to develop its Permian assets,” he said. “We project a capital outspend of ~$80MM for the remainder of 2013 and $122MM in 2014. We’d note that the deal could help provide acceleration capital, we expect an update on 2014 plans in November.”

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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.