Approach Resources (Nasdaq:AREX) is a small capitalization exploration and production company focused on the Permian Basin, where it is developing various oil bearing formations. The stock has tripled in price since August, 2010 as investors scour the market for undiscovered companies that are devoted to oil and liquids development.

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Approach Resources reported average daily production of 27 million cubic feet of natural gas equivalents in the third quarter of 2010. This production has grown from an average of only 13.7 million per day in 2005. The company had proved reserves of 46.38 million barrel of oil equivalent as of June 30, 2010. These were split about evenly between natural gas and oil and natural gas liquids. Ninety-five percent of the company's proved reserves are in the Permian Basin. This reserve profile has changed dramatically over the last six years, as only 6% of proved reserves were composed of crude oil and natural gas liquids in 2005.

Wolffork Shale
Approach Resources has approximately 93,000 net acres in the Permian Basin and is targeting many different producing zones including the Clearfork, Wolfcamp, Canyon Sands, Strawn and Ellenburger formations.

The company is also planning to develop what it calls the Wolffork Shale. This is an unconventional resource oil play that has commingled production from the Wolfcamp and Clearfork formations. The Clearfork lies above the Wolfcamp formation and is separated from it by the Dean formation. Approach Resources has drilled four wells in a pilot program to the Wolffork and the results were good enough to set up an extensive drilling program targeting this area in 2011.

Capital Spending
Approach Resources recently announced its capital budget for 2011. The company has allocated $100 million to the Wolffork play, and will operate four rigs during the year to drill approximately 42 net wells.

Permian Basin
The Permian Basin has seen a resurrection of development over the last few years due to the strong price of oil and improved technology to make many formations economical to develop. Concho Resources (NYSE:CXO) is working on the Bone Spring and other formations in the Permian and recently picked up an additional 100,000 acres here. SandRidge Energy (NYSE:SD) recently sold acreage prospective for the Bone Spring formation for $2,750 per acre, yielding $110 million in proceeds.

El Paso (NYSE:EP) was the winning bidder at a lease auction in Texas and picked up 123,000 acres for future development.

The Bottom Line
Approach Resources is an oily exploration and production company working almost exclusively in the Permian Basin. The company is developing several promising formation and has seen strong interest from investors. (For related reading, take a look at our Oil And Gas Industry Primer.)

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