3. Long-Term Debt

The following table provides a summary of our long-term debt at September 30, 2013, and December 31, 2012 (in thousands).


	September 30,		December 31,
	2013		2012
Credit Facility	$	—	$	106,000
Senior Notes		250,000		—

Total long-term debt	$	250,000	$	106,000

Credit Facility

Our credit facility (as amended, the “Credit Facility”) has a maturity date of July 31, 2016. At September 30, 2013, our borrowing base was $315 million, with maximum commitments from the lenders in the Credit Facility of $500 million. The borrowing base is redetermined semi-annually on or before each April 1 and October 1 based on our oil, NGL and gas reserves. We, or the lenders, can each request one additional borrowing base redetermination each calendar year.

Borrowings bear interest based on the agent bank’s prime rate plus an applicable margin ranging from 0.75% to 1.75%, or the sum of the Eurodollar rate plus an applicable margin ranging from 1.75% to 2.75%. Margins vary based on the borrowings outstanding compared to the borrowing base. In addition, we pay an annual commitment of 0.50% of unused borrowings available under our Credit Facility.

On November 6, 2013, we entered into a sixteenth amendment to the Credit Facility, which, among other things, increased the borrowing base to $350 million from $315 million.

We had no outstanding borrowings under our Credit Facility at September 30, 2013, compared to outstanding borrowings of $106 million at December 31, 2012. The weighted average interest rate applicable to borrowings under our Credit Facility at December 31, 2012, was 2.7%. We also had outstanding unused letters of credit under our Credit Facility totaling $325,000 at September 30, 2013, which reduce amounts available for borrowing under our Credit Facility.

Loans under our Credit Facility are secured by first priority liens on substantially all of our West Texas assets and are guaranteed by certain of our subsidiaries.

Covenants

Our Credit Facility contains two principal financial covenants:

•

a consolidated modified current ratio covenant that requires us to maintain a ratio of not less than 1.0 to 1.0 at all times. The consolidated modified current ratio is calculated by dividing consolidated current assets (as defined in the Credit Facility) by consolidated current liabilities (as defined in the Credit Facility). As defined more specifically in the Credit Facility, the consolidated modified current ratio is calculated as current assets less current unrealized gains on commodity derivatives plus the available borrowing base at the respective balance sheet date, divided by current liabilities less current unrealized losses on commodity derivatives at the respective balance sheet date.

•

a consolidated funded debt-to-consolidated EBITDAX ratio covenant that requires us to maintain a ratio of not more than 4.0 to 1.0 at the end of each fiscal quarter. The consolidated funded debt to consolidated EBITDAX ratio is calculated by dividing consolidated funded debt (as defined in the Credit Facility) by consolidated EBITDAX (as defined in the Credit Facility). As defined more specifically in the Credit Facility, consolidated EBITDAX is calculated as net income (loss), plus (1) exploration expense, (2) depletion, depreciation and amortization expense, (3) share-based compensation expense, (4) unrealized loss on commodity derivatives, (5) interest expense, (6) income and franchise taxes and (7) certain other noncash expenses, less (1) gains or losses from sales or dispositions of assets, (2) unrealized gain on commodity derivatives and (3) extraordinary or nonrecurring gains. For purposes of calculating this ratio, consolidated EBITDAX for a fiscal quarter is annualized pursuant to the Credit Facility.

Our Credit Facility also restricts cash dividends and other restricted payments, transactions with affiliates, incurrence of other debt, consolidations and mergers, the level of operating leases, asset sales, investments in other entities and liens on properties.

In addition, our Credit Facility contains customary events of default that would permit our lenders to accelerate the debt under our Credit Facility if not cured within applicable grace periods, including, among others, failure to make payments of principal or interest when due, materially incorrect representations and warranties, failure to make mandatory prepayments in the event of borrowing base deficiencies, breach of covenants, defaults upon other obligations in excess of $500,000, events of bankruptcy, the occurrence of one or more unstayed judgments in excess of $500,000 not covered by an acceptable policy of insurance, failure to pay any obligation in excess of $500,000 owed under any derivatives transaction or in any amount if the obligation under the derivatives transaction is secured by collateral under the Credit Facility, any event of default by the Company occurs under any agreement entered into in connection with a derivatives transaction, liens securing the loans under the credit agreement cease to be in place, a change in control (as defined under the Credit Facility) of the Company occurs, and dissolution of the Company.

Senior Notes

In June 2013, we completed our public offering of $250 million principal amount of 7% senior notes due 2021 (the “Senior Notes”). Interest on the Senior Notes is payable semi-annually on June 15 and December 15, beginning December 15, 2013. We received net proceeds from the issuance of the Senior Notes of approximately $243 million, after deducting fees and expenses. We used a portion of the net proceeds from the offering to repay all outstanding borrowings under our Credit Facility.

We issued the Senior Notes under a senior indenture dated June 11, 2013, among the Company, our subsidiary guarantors and Wells Fargo Bank, National Association, as trustee. The senior indenture, as supplemented by a supplemental indenture dated June 11, 2013, is referred to as the “Indenture.”

On and after June 15, 2016, we may redeem some or all of the Senior Notes at specified redemption prices, plus accrued and unpaid interest to the redemption date. Before June 15, 2016, we may redeem up to 35% of the Senior Notes at a redemption price of 107% of the principal amount, plus accrued and unpaid interest to the redemption date, with the proceeds of certain equity offerings. In addition, before June 15, 2016, we may redeem some or all of the Notes for cash at a redemption price equal to 100% of their principal amount plus an applicable make-whole premium and accrued and unpaid interest to the redemption date. If we sell certain of our assets or experience specific kinds of changes of control, we may be required to offer to purchase the Senior Notes from holders. The Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by each of our subsidiaries.

The Indenture restricts our ability, among other things, to (i) sell assets, (ii) pay distributions on, redeem or repurchase, equity interests, (iii) incur additional debt, (iv) make certain investments, (v) enter into transactions with affiliates, (v) incur liens and (vi) merge or consolidate with another company. These restrictions are subject to a number of important exceptions and qualifications. If at any time the Senior Notes are rated investment grade by both Moody’s Investors Service and Standard & Poor’s Ratings Services and no default (as defined in the Indenture) has occurred and is continuing, many of these restrictions will terminate. The Indenture contains customary events of default.

At September 30, 2013, we were in compliance with all of our covenants, and there were no existing defaults or events of default, under our debt instruments.

Subsidiary Guarantors

The Senior Notes are guaranteed on a senior unsecured basis by each of our consolidated subsidiaries. Approach Resources Inc. is a holding company with no independent assets or operations. The subsidiary guarantees are full and unconditional and joint and several, and any subsidiaries of the Company other than the subsidiary guarantors are minor. There are no significant restrictions on the Company’s ability, or the ability of any subsidiary guarantor, to obtain funds from its subsidiaries through dividends, loans, advances or otherwise.