Intrinsic value of Approach Resources - AREX

Previous Close

$2.41

  Intrinsic Value

$3.71

stock screener

  Rating & Target

str. buy

+54%

  Value-price divergence*

-23%

Previous close

$2.41

 
Intrinsic value

$3.71

 
Up/down potential

+54%

 
Rating

str. buy

 
Value-price divergence*

-23%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of AREX stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 0.1

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -31.30
  44.40
  40.46
  36.91
  33.72
  30.85
  28.27
  25.94
  23.84
  21.96
  20.26
  18.74
  17.36
  16.13
  15.01
  14.01
  13.11
  12.30
  11.57
  10.91
  10.32
  9.79
  9.31
  8.88
  8.49
  8.14
  7.83
  7.55
  7.29
  7.06
  6.86
Revenue, $m
  90
  130
  183
  250
  334
  437
  561
  706
  875
  1,067
  1,283
  1,524
  1,788
  2,077
  2,388
  2,723
  3,080
  3,459
  3,859
  4,280
  4,722
  5,185
  5,667
  6,171
  6,695
  7,240
  7,807
  8,396
  9,008
  9,644
  10,305
Variable operating expenses, $m
 
  390
  548
  750
  1,003
  1,312
  1,683
  2,119
  2,625
  3,201
  3,850
  4,571
  5,365
  6,230
  7,165
  8,169
  9,240
  10,377
  11,578
  12,841
  14,167
  15,554
  17,002
  18,512
  20,084
  21,719
  23,420
  25,187
  27,023
  28,932
  30,915
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  136
  390
  548
  750
  1,003
  1,312
  1,683
  2,119
  2,625
  3,201
  3,850
  4,571
  5,365
  6,230
  7,165
  8,169
  9,240
  10,377
  11,578
  12,841
  14,167
  15,554
  17,002
  18,512
  20,084
  21,719
  23,420
  25,187
  27,023
  28,932
  30,915
Operating income, $m
  -45
  -260
  -365
  -500
  -668
  -875
  -1,122
  -1,413
  -1,750
  -2,134
  -2,566
  -3,047
  -3,576
  -4,153
  -4,777
  -5,446
  -6,160
  -6,918
  -7,719
  -8,561
  -9,445
  -10,369
  -11,335
  -12,341
  -13,389
  -14,480
  -15,613
  -16,791
  -18,016
  -19,288
  -20,610
EBITDA, $m
  34
  -146
  -205
  -280
  -375
  -490
  -629
  -792
  -981
  -1,196
  -1,439
  -1,708
  -2,005
  -2,328
  -2,678
  -3,053
  -3,454
  -3,879
  -4,327
  -4,800
  -5,295
  -5,813
  -6,355
  -6,919
  -7,507
  -8,118
  -8,753
  -9,414
  -10,100
  -10,813
  -11,555
Interest expense (income), $m
  26
  26
  39
  55
  76
  103
  135
  174
  220
  273
  333
  401
  477
  560
  651
  749
  854
  967
  1,086
  1,212
  1,344
  1,483
  1,629
  1,780
  1,939
  2,104
  2,275
  2,453
  2,639
  2,831
  3,031
Earnings before tax, $m
  -77
  -286
  -404
  -555
  -745
  -977
  -1,257
  -1,587
  -1,970
  -2,407
  -2,900
  -3,449
  -4,053
  -4,713
  -5,428
  -6,195
  -7,015
  -7,885
  -8,804
  -9,773
  -10,789
  -11,852
  -12,963
  -14,122
  -15,328
  -16,583
  -17,888
  -19,245
  -20,654
  -22,119
  -23,641
Tax expense, $m
  -25
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Net income, $m
  -52
  -286
  -404
  -555
  -745
  -977
  -1,257
  -1,587
  -1,970
  -2,407
  -2,900
  -3,449
  -4,053
  -4,713
  -5,428
  -6,195
  -7,015
  -7,885
  -8,804
  -9,773
  -10,789
  -11,852
  -12,963
  -14,122
  -15,328
  -16,583
  -17,888
  -19,245
  -20,654
  -22,119
  -23,641

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  1,105
  1,604
  2,254
  3,085
  4,126
  5,399
  6,925
  8,721
  10,801
  13,173
  15,842
  18,810
  22,077
  25,637
  29,486
  33,619
  38,027
  42,704
  47,645
  52,845
  58,300
  64,008
  69,968
  76,181
  82,650
  89,380
  96,377
  103,650
  111,207
  119,060
  127,223
Adjusted assets (=assets-cash), $m
  1,105
  1,604
  2,254
  3,085
  4,126
  5,399
  6,925
  8,721
  10,801
  13,173
  15,842
  18,810
  22,077
  25,637
  29,486
  33,619
  38,027
  42,704
  47,645
  52,845
  58,300
  64,008
  69,968
  76,181
  82,650
  89,380
  96,377
  103,650
  111,207
  119,060
  127,223
Revenue / Adjusted assets
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
  0.081
Average production assets, $m
  1,123
  1,622
  2,278
  3,119
  4,170
  5,457
  6,999
  8,815
  10,916
  13,314
  16,012
  19,012
  22,313
  25,912
  29,802
  33,979
  38,434
  43,162
  48,156
  53,412
  58,925
  64,694
  70,718
  76,997
  83,536
  90,338
  97,410
  104,761
  112,399
  120,336
  128,586
Working capital, $m
  -14
  -13
  -18
  -25
  -33
  -44
  -56
  -71
  -87
  -107
  -128
  -152
  -179
  -208
  -239
  -272
  -308
  -346
  -386
  -428
  -472
  -518
  -567
  -617
  -669
  -724
  -781
  -840
  -901
  -964
  -1,031
Total debt, $m
  498
  742
  1,060
  1,468
  1,978
  2,601
  3,349
  4,229
  5,248
  6,411
  7,719
  9,173
  10,774
  12,518
  14,404
  16,429
  18,589
  20,881
  23,302
  25,850
  28,523
  31,320
  34,240
  37,285
  40,455
  43,752
  47,181
  50,744
  54,447
  58,296
  62,295
Total liabilities, $m
  542
  786
  1,104
  1,512
  2,022
  2,645
  3,393
  4,273
  5,292
  6,455
  7,763
  9,217
  10,818
  12,562
  14,448
  16,473
  18,633
  20,925
  23,346
  25,894
  28,567
  31,364
  34,284
  37,329
  40,499
  43,796
  47,225
  50,788
  54,491
  58,340
  62,339
Total equity, $m
  563
  818
  1,149
  1,574
  2,104
  2,753
  3,532
  4,448
  5,508
  6,718
  8,079
  9,593
  11,259
  13,075
  15,038
  17,145
  19,394
  21,779
  24,299
  26,951
  29,733
  32,644
  35,684
  38,852
  42,152
  45,584
  49,152
  52,861
  56,716
  60,721
  64,884
Total liabilities and equity, $m
  1,105
  1,604
  2,253
  3,086
  4,126
  5,398
  6,925
  8,721
  10,800
  13,173
  15,842
  18,810
  22,077
  25,637
  29,486
  33,618
  38,027
  42,704
  47,645
  52,845
  58,300
  64,008
  69,968
  76,181
  82,651
  89,380
  96,377
  103,649
  111,207
  119,061
  127,223
Debt-to-equity ratio
  0.885
  0.910
  0.920
  0.930
  0.940
  0.940
  0.950
  0.950
  0.950
  0.950
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
Adjusted equity ratio
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510
  0.510

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -52
  -286
  -404
  -555
  -745
  -977
  -1,257
  -1,587
  -1,970
  -2,407
  -2,900
  -3,449
  -4,053
  -4,713
  -5,428
  -6,195
  -7,015
  -7,885
  -8,804
  -9,773
  -10,789
  -11,852
  -12,963
  -14,122
  -15,328
  -16,583
  -17,888
  -19,245
  -20,654
  -22,119
  -23,641
Depreciation, amort., depletion, $m
  79
  114
  160
  220
  294
  384
  493
  621
  769
  938
  1,128
  1,339
  1,571
  1,825
  2,099
  2,393
  2,707
  3,040
  3,391
  3,761
  4,150
  4,556
  4,980
  5,422
  5,883
  6,362
  6,860
  7,378
  7,915
  8,474
  9,055
Funds from operations, $m
  26
  -172
  -243
  -335
  -451
  -593
  -764
  -966
  -1,201
  -1,469
  -1,772
  -2,110
  -2,482
  -2,889
  -3,329
  -3,802
  -4,308
  -4,845
  -5,413
  -6,011
  -6,639
  -7,297
  -7,983
  -8,699
  -9,445
  -10,221
  -11,028
  -11,867
  -12,739
  -13,645
  -14,586
Change in working capital, $m
  0
  -4
  -5
  -7
  -8
  -10
  -12
  -15
  -17
  -19
  -22
  -24
  -26
  -29
  -31
  -33
  -36
  -38
  -40
  -42
  -44
  -46
  -48
  -50
  -52
  -55
  -57
  -59
  -61
  -64
  -66
Cash from operations, $m
  26
  -168
  -238
  -329
  -443
  -583
  -752
  -952
  -1,184
  -1,450
  -1,751
  -2,086
  -2,456
  -2,860
  -3,298
  -3,769
  -4,272
  -4,807
  -5,373
  -5,969
  -6,595
  -7,250
  -7,935
  -8,649
  -9,393
  -10,167
  -10,972
  -11,808
  -12,678
  -13,581
  -14,520
Maintenance CAPEX, $m
  0
  -79
  -114
  -160
  -220
  -294
  -384
  -493
  -621
  -769
  -938
  -1,128
  -1,339
  -1,571
  -1,825
  -2,099
  -2,393
  -2,707
  -3,040
  -3,391
  -3,761
  -4,150
  -4,556
  -4,980
  -5,422
  -5,883
  -6,362
  -6,860
  -7,378
  -7,915
  -8,474
New CAPEX, $m
  -20
  -499
  -656
  -841
  -1,052
  -1,287
  -1,542
  -1,815
  -2,102
  -2,397
  -2,698
  -3,000
  -3,301
  -3,599
  -3,891
  -4,176
  -4,455
  -4,728
  -4,994
  -5,256
  -5,513
  -5,769
  -6,024
  -6,280
  -6,539
  -6,802
  -7,072
  -7,350
  -7,638
  -7,938
  -8,250
Cash from investing activities, $m
  -24
  -578
  -770
  -1,001
  -1,272
  -1,581
  -1,926
  -2,308
  -2,723
  -3,166
  -3,636
  -4,128
  -4,640
  -5,170
  -5,716
  -6,275
  -6,848
  -7,435
  -8,034
  -8,647
  -9,274
  -9,919
  -10,580
  -11,260
  -11,961
  -12,685
  -13,434
  -14,210
  -15,016
  -15,853
  -16,724
Free cash flow, $m
  2
  -745
  -1,008
  -1,330
  -1,714
  -2,163
  -2,679
  -3,260
  -3,907
  -4,616
  -5,386
  -6,214
  -7,096
  -8,030
  -9,013
  -10,044
  -11,121
  -12,242
  -13,407
  -14,616
  -15,870
  -17,169
  -18,515
  -19,909
  -21,354
  -22,852
  -24,406
  -26,018
  -27,693
  -29,434
  -31,244
Issuance/(repayment) of debt, $m
  0
  244
  318
  408
  510
  624
  748
  880
  1,019
  1,162
  1,308
  1,455
  1,600
  1,745
  1,886
  2,025
  2,160
  2,292
  2,421
  2,548
  2,673
  2,797
  2,920
  3,044
  3,170
  3,298
  3,429
  3,563
  3,703
  3,848
  4,000
Issuance/(repurchase) of shares, $m
  0
  541
  735
  979
  1,275
  1,627
  2,035
  2,503
  3,030
  3,617
  4,261
  4,963
  5,719
  6,529
  7,391
  8,303
  9,263
  10,270
  11,324
  12,425
  13,571
  14,763
  16,003
  17,290
  18,627
  20,016
  21,457
  22,954
  24,508
  26,124
  27,804
Cash from financing (excl. dividends), $m  
  -3
  785
  1,053
  1,387
  1,785
  2,251
  2,783
  3,383
  4,049
  4,779
  5,569
  6,418
  7,319
  8,274
  9,277
  10,328
  11,423
  12,562
  13,745
  14,973
  16,244
  17,560
  18,923
  20,334
  21,797
  23,314
  24,886
  26,517
  28,211
  29,972
  31,804
Total cash flow (excl. dividends), $m
  -1
  40
  45
  57
  71
  87
  105
  123
  143
  163
  183
  204
  224
  244
  264
  283
  302
  321
  339
  357
  374
  391
  409
  426
  444
  461
  480
  499
  518
  538
  560
Retained Cash Flow (-), $m
  45
  -541
  -735
  -979
  -1,275
  -1,627
  -2,035
  -2,503
  -3,030
  -3,617
  -4,261
  -4,963
  -5,719
  -6,529
  -7,391
  -8,303
  -9,263
  -10,270
  -11,324
  -12,425
  -13,571
  -14,763
  -16,003
  -17,290
  -18,627
  -20,016
  -21,457
  -22,954
  -24,508
  -26,124
  -27,804
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  -501
  -690
  -922
  -1,204
  -1,539
  -1,931
  -2,380
  -2,888
  -3,454
  -4,078
  -4,759
  -5,495
  -6,285
  -7,127
  -8,019
  -8,961
  -9,950
  -10,986
  -12,068
  -13,197
  -14,372
  -15,594
  -16,865
  -18,184
  -19,554
  -20,977
  -22,455
  -23,990
  -25,586
  -27,245
Discount rate, %
 
  9.00
  9.45
  9.92
  10.42
  10.94
  11.49
  12.06
  12.66
  13.30
  13.96
  14.66
  15.39
  16.16
  16.97
  17.82
  18.71
  19.65
  20.63
  21.66
  22.74
  23.88
  25.07
  26.33
  27.64
  29.03
  30.48
  32.00
  33.60
  35.28
  37.05
PV of cash for distribution, $m
 
  -460
  -576
  -694
  -810
  -916
  -1,006
  -1,072
  -1,112
  -1,123
  -1,104
  -1,057
  -986
  -896
  -794
  -685
  -576
  -472
  -376
  -291
  -219
  -160
  -114
  -78
  -52
  -33
  -21
  -12
  -7
  -4
  -2
Current shareholders' claim on cash, %
  100
  42.1
  18.5
  8.3
  3.9
  1.8
  0.9
  0.4
  0.2
  0.1
  0.1
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0

Approach Resources, Inc., an independent energy company, focuses on the acquisition, exploration, development, and production of unconventional oil and gas reserves in the United States. The company’s properties are primarily located in the Permian Basin in west Texas. It also owns interests in east Texas Basin. As of December 31, 2015, it had estimated proved reserves of approximately 166.6 million barrels of oil equivalent in Crockett and Schleicher counties, Texas; and owned and operated 803 producing oil and gas wells in the Permian Basin. Approach Resources, Inc. was incorporated in 2002 and is headquartered in Fort Worth, Texas.

FINANCIAL RATIOS  of  Approach Resources (AREX)

Valuation Ratios
P/E Ratio -1.9
Price to Sales 1.1
Price to Book 0.2
Price to Tangible Book
Price to Cash Flow 3.9
Price to Free Cash Flow 16.8
Growth Rates
Sales Growth Rate -31.3%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -86.8%
Cap. Spend. - 3 Yr. Gr. Rate -41.7%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 88.5%
Total Debt to Equity 88.5%
Interest Coverage -2
Management Effectiveness
Return On Assets -3%
Ret/ On Assets - 3 Yr. Avg. -3.3%
Return On Total Capital -4.8%
Ret/ On T. Cap. - 3 Yr. Avg. -5%
Return On Equity -8.9%
Return On Equity - 3 Yr. Avg. -8.8%
Asset Turnover 0.1
Profitability Ratios
Gross Margin 70%
Gross Margin - 3 Yr. Avg. 73.5%
EBITDA Margin 31.1%
EBITDA Margin - 3 Yr. Avg. 3.9%
Operating Margin -51.1%
Oper. Margin - 3 Yr. Avg. -75%
Pre-Tax Margin -85.6%
Pre-Tax Margin - 3 Yr. Avg. -85.1%
Net Profit Margin -57.8%
Net Profit Margin - 3 Yr. Avg. -56.3%
Effective Tax Rate 32.5%
Eff/ Tax Rate - 3 Yr. Avg. 35.1%
Payout Ratio 0%

AREX stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the AREX stock intrinsic value calculation we used $90 million for the last fiscal year's total revenue generated by Approach Resources. The default revenue input number comes from 2016 income statement of Approach Resources. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our AREX stock valuation model: a) initial revenue growth rate of 44.4% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 9%, whose default value for AREX is calculated based on our internal credit rating of Approach Resources, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Approach Resources.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of AREX stock the variable cost ratio is equal to 300%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for AREX stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5.2% for Approach Resources.

Corporate tax rate of 27% is the nominal tax rate for Approach Resources. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the AREX stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for AREX are equal to 1247.8%.

Life of production assets of 14.2 years is the average useful life of capital assets used in Approach Resources operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for AREX is equal to -10%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $563 million for Approach Resources - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 37.959 million for Approach Resources is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Approach Resources at the current share price and the inputted number of shares is $0.1 billion.

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COMPANY NEWS

▶ Approach Resources reports 2Q loss   [Aug-04-17 01:08AM  Associated Press]
▶ 5 Zombie Stocks Coming Back From the Dead   [May-20-17 03:00PM  Motley Fool]
▶ Oil and Gas Stock Roundup: Crude Oil Mounts a Comeback   [May-13-17 10:00AM  Motley Fool]
▶ Approach Resources reports 1Q loss   [May-04-17 07:25PM  Associated Press]
▶ Approach Resources reports 4Q loss   [Mar-09-17 05:04PM  Associated Press]
▶ Conference-OGIS New York for Approach Resources, Inc.   [Mar-08-17 05:56PM  at Company Spotlight]
▶ [$$] Approach Completes Debt Exchange With Wilks Brothers   [Jan-31-17 03:45PM  at The Wall Street Journal]
▶ Three Oil & Gas Stocks to Buy in 2017 (HP, RSPP)   [Dec-27-16 11:18AM  at Investopedia]
Stock chart of AREX Financial statements of AREX
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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