Approach Resources issues 39.2 million shares in exchange for 7% notes, expects to swap remainder

By Susanna Moon

Chicago, Jan. 27 – Approach Resources Inc. issued 39,165,600 new shares of common stock in exchange for $130,552,000 of its 7% senior notes due 2021.

The exchange was made at an implied issue price of $3.33 per share with Wilks Brothers, LLC and SDW Investments, LLC, entities beneficially owned by the Wilks Family Office, according to a company announcement.

The company also has agreed to offer to exchange the remaining $99,768,000 principal amount of its outstanding senior notes for common stock, which will begin “as promptly as practical.”

The company announced the exchange on Nov. 2 and said it would offer to exchange the remaining notes as part of a plan to substantially reduce its long-term debt.

“The closing of the Exchange Transaction is a critical step for us to strengthen our balance sheet and reposition the company for future growth,” J. Ross Craft, the company’s chairman and chief executive officer, said in the company’s press release.

“We look forward to working with the Wilks Family Office as we begin the next phase of the company.”

As previously announced, the company entered into an exchange agreement with Wilks Brothers, LLC and SDW Investments, LLC, entities beneficially owned by the Wilks Family Office and collectively the largest holder of the company’s 7% notes, to exchange $130,552,000 principal amount of notes for 39,165,600 new shares of common stock, representing an exchange ratio of 300 shares per $1,000 principal amount of notes.

The initial exchange price of $3.33 per share represents a 23% premium to the closing share price on Nov. 2.

Accrued interest on the notes held by Wilks will be paid in cash.

Immediately following the close of the initial exchange, Wilks will hold 48.6% of the company’s outstanding common stock.

As part of the exchange agreement, the Wilks holders consented to amendments to eliminate most of the restrictive covenants and some events of default in the indenture governing the notes. These amendments will become effective once the initial exchange closes.

Follow-on exchange offer

Subject to completion of the initial exchange and stockholder approval of an amendment to the company’s certificate of incorporation increasing its authorized capital stock, the company will then offer to exchange its remaining $99,768,000 principal amount of outstanding notes for stock on similar economic terms to the initial exchange.

The follow-on exchange offer will be at the initial exchange ratio or a lesser ratio as determined by the company, which in any event may not be less than a ratio per $1,000 principal amount of notes equal to $953.62 divided by the 30-day volume-weighted average price at the time of launch of the follow-on exchange offer.

Assuming 100% participation in the follow-on exchange offer and assuming the follow-on exchange ratio is equal to the initial exchange ratio, existing (non-Wilks) stockholders would hold 37.5% of the stock, Wilks would hold 35.5% of the stock and other holders of the notes would hold 27% of the outstanding stock immediately following closing of the follow-on exchange offer.

If all holders exchange their notes, the company’s pro forma leverage will decrease to 4.3 times from 8 times as of Sept. 30.

The company’s $275 million senior credit facility will remain outstanding.

Approach Resources is a Fort Worth, Texas-based oil and gas company.

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