UPDATE: J.P. Morgan Downgrades Approach Resources on Cash Flow Concerns

J.P. Morgan analyst Joseph Allman downgraded Approach Resources Inc. (NASDAQ: AREX) from Overweight to Underweight and lowered the price target from $38.50 to $25.50.

Allman noted lower production in Q3 from Q2 and changed the model for the royalty rate, increasing it from 14 percent to 24 percent. The analyst is also concerned with the company's outspending cash flow raking in too much debt. The stock has continued to underperform since the 2Q13 earnings release date and analysts believe this trend will continue into 2014.

The analyst reminded investors that “AREX benefits from the premium pricing of liquids production to natural gas production, and a significant amount of AREX's liquid production is NGLs,” and, “if the NGL market starts to strengthen, AREX could outperform the group.” Despite this, Allman remained consistent with his thesis on AREX's “likely production miss of its ambitious guidance.”

J.P. Morgan decreased the December 2014 PT from $38.50 to $25.50.

AREX closed at $23.29 on Friday.