Approach Resources, Inc. (NASDAQ:AREX) Q1 2019 Earnings Conference Call Transcript

May 10, 2019 • 11:00 am ET

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Approach Resources, Inc. (NASDAQ:AREX) Q1 2019 Earnings Conference Call Transcript

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Presentation
Executive
Sergei Krylov

employees while focusing our business strategy and operations management towards the primary goal of maximizing return on capital deployed. We will not be risking our balance sheet to meet arbitrary production growth targets.

Before we get into operations and our first quarter financial results, I would like to address our ongoing balance sheet restructuring activities. While we want to provide a comprehensive update on Company's position and plan, please bear in mind that our current fluid circumstances limit what we can share at this time. As a result of current market conditions, including the significant WAHA differential discount, our financial metrics, as measured in our credit facility, exceed required thresholds, resulting in an event of default under credit facility.

To address our leverage and financial metrics, we believe we will need to significantly restructure our balance sheet. As previously disclosed, we have been engaging constructive discussions with our largest stockholder and noteholder regarding, among other things, a potential debt-for-equity exchange and additional capital infusion to the Company. In addition, we're engaged in discussions with our lenders regarding amendment and extension of the credit facility and the banks have agreed to provide us with additional time needed to find a workable solution. Those discussions remain ongoing.

As we address our leverage and liquidity challenges, we remain focused on operating our assets safely and responsibly and as long-term owners. In order to manage liquidity, we have temporarily suspended our drilling and completion activity and have taken decisive steps to reduce our corporate overhead expense. We have also undertaken a comprehensive operational review to optimize and improve our operating practices and evaluate capital deployment options.

I will now turn the call over to Troy to discuss our first quarter operational highlights and provide additional color on some of these longer-term initiatives.

Executive
Troy Hoefer

Thanks, Sergei. Good morning, everyone. As you can see on Slide 5 of our investor presentation, WAHA gas differential significantly widened and has remained high into the second quarter and is not expected to improve until later this year. In light of our liquidity management, as well as continued commodity price volatility and the extreme WAHA gas discount in the basin, we continued to defer drilling and completion activities in the first quarter 2019. Our capital expenditures on oil and gas properties in the quarter remained very low at $0.2 million, which is essentially flat compared to the fourth quarter of 2018.

In 2019, as Sergei mentioned earlier, we initiated a comprehensive review of our operating practices in an effort to manage natural production decline and surface facility optimization and operating efficiencies. We also continue to review economics for all capital spending and plan to deploy near-term capital on cost-effective well repairs, workover and maintenance in the second quarter. Operationally, we are committed to safe and environmentally responsible operations and believe our extensive infrastructure network of centralized production facilities, water transportation, handling and recycling system; gas lift lines, and saltwater disposal wells continue to provide sustainable competitive advantage.

Moving to Slide 6