Attached files
file | filename |
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10-K - FORM 10-K - Approach Resources Inc | d71439e10vk.htm |
EX-10.7 - EX-10.7 - Approach Resources Inc | d71439exv10w7.htm |
EX-23.2 - EX-23.2 - Approach Resources Inc | d71439exv23w2.htm |
EX-31.2 - EX-31.2 - Approach Resources Inc | d71439exv31w2.htm |
EX-31.1 - EX-31.1 - Approach Resources Inc | d71439exv31w1.htm |
EX-32.1 - EX-32.1 - Approach Resources Inc | d71439exv32w1.htm |
EX-32.2 - EX-32.2 - Approach Resources Inc | d71439exv32w2.htm |
EX-21.1 - EX-21.1 - Approach Resources Inc | d71439exv21w1.htm |
EX-23.1 - EX-23.1 - Approach Resources Inc | d71439exv23w1.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
February 5, 2010
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 prepared estimates of the extent and value of the net proved
crude oil, condensate, natural gas liquids (NGL), and natural gas reserves, as of December 31,
2009, 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 December 31, 2009.
Estimates of proved reserves presented in this report have been prepared in compliance with
the regulations promulgated by the United States Securities and Exchange Commission (SEC). These
reserves definitions are discussed in detail in the Definition of Reserves section of this report.
Reserves included herein are expressed as net reserves. Gross reserves are defined as the
total estimated petroleum to be produced from these properties after December 31, 2009. 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.
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Values of proved reserves shown herein are expressed in terms of estimated future gross
revenue, future net revenue, and present worth. Future gross revenue is that revenue which will
accrue to the appraised interests from the production and sale of the estimated net reserves.
Future net revenue is calculated by deducting estimated severance taxes, ad valorem taxes,
operating expenses, and capital costs from the future gross revenue. Operating expenses include
field operating expenses, transportation expenses, compression charges, and an allocation of
overhead that directly relates to production activities. Future income tax expenses were not taken
into account in the preparation of these estimates. Present worth is defined as future net revenue
discounted at a specified arbitrary discount rate compounded monthly over the expected period of
realization.
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 uncertainties inherent in the application of judgmental factors in
interpreting such information.
Data used in this audit 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 standard geological and engineering methods
generally accepted by the petroleum industry. 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.
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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 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 included in this report are classified as proved. Only proved reserves have
been evaluated for this report. Reserves classifications used in this report are in accordance with
the reserves definitions of Rules 4-10(a) (1)-(32) of Regulation S-X of the SEC. Reserves 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. The petroleum reserves are classified as
follows:
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And MacNaughton
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 producible
from a given
date forward, from known reservoirs, and under existing economic conditions,
operating methods, and government regulations prior 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.
(i)The area of the reservoir considered as proved includes:
(A) The area indentified 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:
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And MacNaughton
(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 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
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And MacNaughton
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 210.4-10 (a) 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 a West
Texas Intermediate (WTI) price of $61.04 per barrel. The WTI base price is
the average price for WTI crude on the first of each month during 2009.
Local differentials are based on the difference between the actual price
received and the WTI price on the first day of each month during 2009. The
weighted average price over the lives of the properties was $56.04 per
barrel.
Natural Gas Prices
Prices used in this evaluation were based on local differentials to a
Henry Hub gas price of $3.87 per million British thermal units (MMBtu).
The Henry Hub base price is the average price
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And MacNaughton
for Henry Hub gas on the first of each month during 2009. Local
differentials are based on the difference between the actual price
received and the Henry Hub price on the first day of each month during
2009. The weighted average price over the lives of the properties was
$3.881 per thousand cubic feet (Mcf).
NGL Prices
Prices used in this evaluation were based on the average price received on
the first day of each month during 2009. The weighted average price, held
constant over the lives of the properties, was $27.20 per barrel.
Operating Expenses and Capital Costs
Estimates of operating expense 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
2009 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 December 31, 2009,
estimated oil and gas volumes. The reserves estimated in this report can be produced under current
regulatory guidelines.
Summary of Oil and Gas Reserves and Revenue
The estimates of net proved reserves attributable to the properties appraised, as of December
31, 2009, are summarized by geographic area as follows, expressed in thousands of barrels (Mbbl),
millions of cubic feet (MMcf):
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Oil and | Natural Gas | Sales | ||||||||||
Condensate | Liquids | Gas | ||||||||||
(Mbbl) | (Mbbl) | (MMcf) | ||||||||||
Proved Developed |
||||||||||||
North Bald Prairie |
0 | 0 | 1,712 | |||||||||
Cinco Terry |
776 | 1,879 | 11,827 | |||||||||
Ozona Northeast |
463 | 0 | 61,265 | |||||||||
Total Proved Developed |
1,239 | 1,879 | 74,804 | |||||||||
Proved Undeveloped |
||||||||||||
North Bald Prairie |
0 | 0 | 13,772 | |||||||||
Cinco Terry |
2,203 | 2,215 | 14,408 | |||||||||
Ozona Northeast |
896 | 0 | 65,350 | |||||||||
Total Proved Undeveloped |
3,099 | 2,215 | 93,530 | |||||||||
Total Proved |
4,338 | 4,094 | 168,334 |
The estimated revenue and expenditures attributable to Approachs interests in the proved
reserves, as of December 31, 2009, of the properties appraised under the aforementioned assumptions
concerning future prices and costs are summarized as follows:
Proved | ||||||||||||||||
Developed | Developed | Total | ||||||||||||||
Producing | Nonproducing | Undeveloped | Proved | |||||||||||||
(M$) | (M$) | (M$) | (M$) | |||||||||||||
Future Gross Revenue |
383,749 | 30,225 | 593,729 | 1,007,703 | ||||||||||||
Production and Ad Valorem Taxes |
33,901 | 2,628 | 50,335 | 86,864 | ||||||||||||
Operating Expenses |
115,025 | 8,374 | 148,012 | 271,411 | ||||||||||||
Capital Costs |
2,269 | 4,449 | 206,443 | 213,161 | ||||||||||||
Future Net Revenue* |
232,554 | 14,774 | 188,939 | 436,267 | ||||||||||||
Present Worth at 10 Percent* |
108,838 | 4,914 | 15,184 | 128,936 |
* | Future income taxes have not been taken into account in the preparation of these estimates. Note: Numbers in tables may not add due to rounding. |
In our opinion, the information relating to estimated proved reserves, estimated future
net revenue from proved reserves, and present worth of estimated future net revenue from 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, 932-235-50-9,
932-235-50-30, and 932-235-50-31(a), (b), and (e) 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
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Standards Board and Rules 4-10(a) (1)-(32) of Regulation S-X and Rules 302(b), 1201, 1202(a) (1),
(2), (3), (4), (8), and 1203(a) of Regulations S-K of the Securities and Exchange Commission;
provided, however, future income tax expenses have not been taken into account in estimating the
future net revenue and present worth values set forth herein.
DeGolyer and MacNaughton is an independent petroleum engineering consulting firm that has been
providing petroleum consulting services throughout the world for over 70 years. 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 and should not be used for purposes other than those for which it is intended.
DeGolyer and MacNaughton has used all 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 | ||||
[State of Texas Registered |
/s/ Paul J. Szatkowski, P.E. | |||
Professional Engineer Seal] |
Paul J. Szatkowski, P.E. | |||
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, 75224 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 February 5, 2010, 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 35 years of experience in the oil and gas reservoir
studies and reserves evaluations. |
[State of Texas Registered |
/s/ Paul J. Szatkowski, P.E. | ||
Professional Engineer Seal] |
Paul J. Szatkowski, P.E. | ||
Senior Vice President | |||
DeGolyer and MacNaughton |