Approach Resources Shares Plunged: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of oil and natural gas exploration company Approach Resources (Nasdaq: AREX) are losing as much as 11% today, more than a day after reporting relatively strong fourth-quarter results and providing full-year guidance.

So what: Investors' reactions were quite muted after Approach Resources reported its results Tuesday night. The company reported a quarterly profit of $0.13, which gushed past the consensus estimates that called for $0.10. The company also provided guidance of $220 million in capital expenditures next year.

Now what: Today's move looks like a combination of profit-taking and worry. The stock itself has had a tremendous run from $6 in July to as high as $34 just last week, and remains highly leveraged to the price of oil. With West Texas Intermediate oil moving sharply off its highs on surplus concerns, we've seen Approach follow suit. In its filing it even stated that of the $17 million jump in revenue for the full year, $12 million was attributed to favorable oil and natural gas pricing.

The other side of the coin today appears to be concern over the marked increase in capital expenditure spending forecast in 2011. After spending only $90 million this year, the company projects spending $130 million on drilling projects and another $90 million to buy the final 38% stake in Cinco Terry. For a small-cap company, this jump in spending could spell trouble if oil prices pull back significantly. Given the run Approach Resources has already had and given how tied the company is to the price of oil, I'd have to pass at these levels.

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