A. Earl Swift, President,
Chief Executive Officer, and
Chairman

Most public oil and gas companies will state somewhere in their annual reports that they are committed to increasing shareholder value. Swift Energy Company is also committed to that goal, and to make higher shareholder value a reality, the Company has formulated a strategic plan that focuses on increasing proved oil and gas reserves.

Over the years, Swift has successfully implemented its plan, and in 1993 investors began to see the impact of Swift’s success on the price of the Company’s common stock. Although the stock market’s fourth-quarter reaction to falling crude oil prices reduced some of the appreciation in stock price experienced earlier in the year, for 1993 as a whole, the daily average closing price of Swift’s common stock was over 40% higher than the corresponding average for 1992.

A Reserves Growth Strategy. Swift Energy’s strategy has always been premised on the belief that since proved oil and gas reserves are the major source of value for independent producers, no parameter better predicts the future of an independent oil and gas company than its track record of reserves growth. Swift’s 53% growth in proved reserves during 1993—which brought the Company’s year-end total to over 15 million barrels of oil equivalent (BOEs)—increased the present value of the estimated future net cash flows from those reserves to approximately $83.8 million (before income taxes and discounted at 10% per year). Since Swift’s initial strategic plan was formally adopted in 1988, the Company has consistently exceeded its reserves growth targets, averaging a compounded growth rate of approximately 40% per year.

Success in reserves growth leads to success in other areas, as the Company’s 1993 accomplishments will attest. Swift achieved a 25% increase in oil and gas sales, a 20% increase in net income, a 14% increase in cash flows from operating activities, and a 12% increase in primary income per share. Each of these accomplishments illustrates a fundamental point. Increases in proved reserves lead to growth in oil and gas sales, which in turn leads to growth in earnings and cash flows from oil and gas operations. Growth in earnings and cash flows leads to growth in shareholder value.

Swift’s strategy of reserves growth emphasizes natural gas. At the end of 1993, approximately 72% of the Company’s reserves were natural gas, as were about 72% of the proved reserves added in 1993 by producing property acquisitions and drilling activities. The natural gas prices experienced during 1993 reinforced the Company’s belief that the price of gas is in a long-term upward trend. Swift received an average of $1.96 per thousand cubic feet (Mcf) for its 1993 natural gas production, compared to $1.58 in 1991. On the other hand, crude oil prices fell to unexpectedly low levels, averaging $15.10 per barrel compared to $18.26 in 1991. Long-term trends in supply and demand suggest that the decline in oil prices will be a short-term phenomenon.

Property Acquisitions. One of the activities that has most directly influenced the growth of the Company’s proved reserves is the acquisition of producing properties. During its 14-year history, the Company has acquired over $440 million of proved oil and gas properties on behalf of itself and other investors in over 100 separate transactions.

Swift has acquired approximately $95 million of producing properties for its own account, either through its interests in limited partnerships or joint ventures or through direct purchases. In 1993 alone, the Company acquired for its own account 4.4 million BOEs of proved oil and gas reserves for a total cost of $21.8 million. Almost one-half of these reserves were purchased directly by the Company.

In selecting 10 acquisition packages from over 200 potential transactions during 1993, teams of diverse professionals worked together to accurately and efficiently assess the value and upside potential of acquisition opportunities. The Company also continued to pursue its direct solicitation effort, which seeks to find strategically located acquisitions where economies of scale or other factors give Swift a competitive advantage in operating a property.

Exploration and Development. The Company’s strategic plan calls for a re-emphasis on exploration and development drilling as natural gas prices rise. Swift’s 1993 drilling activities added 2.3 million BOEs to its reserves and placed into production an additional 206,000 BOEs of previously proved undeveloped reserves. The reserves added through drilling in 1993 were significantly higher than during any previous year of Swift’s history, and even larger increases are anticipated during the next two years. Swift’s 1993 capital expenditures related to all these activities, including lease acquisition and geophysical costs for wells to be drilled in the future, totaled $9.3 million.

The application of the team concept to the Company’s drilling activities has led to procedures for integrating traditional geologic analyses with advanced geophysical techniques in order to lower the risks associated with exploration and development drilling. In 1993, this integrated approach produced high success rates for the Company’s drilling program. Swift participated in 12 exploratory wells with five successes, yielding an exploratory success rate of over 40%. The Company also participated in 22 development wells with 21 successes, for a development success rate of over 95%.

Swift has adopted a portfolio approach for its drilling activities in which investments are diversified among a number of prospects featuring different geological and geographic environments with varying reserve potentials and risk profiles. In 1994, the Company plans to drill 64 prospects, 33 of which will be exploratory. The number of planned exploratory wells is almost three times the number drilled in 1993. Major centers of exploratory activity include the Anadarko Basin, the North Louisiana Salt Dome Basin, the Powder River Basin, and the Texas Gulf Coast Basin. Planned development wells include several locations identified by exploratory wells drilled in 1993.

Swift Energy expects to continue its annual 40% growth rate in proved reserves during 1994.

At the end of 1993, Swift Energy held a total of 15.0 million BOEs of proved oil and gas reserves distributed among 16 states; however, approximately 90% of the Company's reserves were located in the three states of Texas, Oklahoma, and Louisiana (highlighted in red). In keeping with Swift's natural gas emphasis, about 72% of the Company's year-end reserves were natural gas.

Capital Formation. In order to fund acquisition and drilling programs, the Company relies upon a diversified capital formation strategy incorporating a number of financing vehicles. During the last few years, Swift has raised capital through an offering of common stock, a production payment agreement, and public income and pension funds. Cash flow from operations also provides an increasingly important source of capital, and the Company has an aggregate line of credit with banks of $25 million. In 1993, Swift continued the diversification and geographic expansion of its capital resources, while taking advantage of historically low interest rates, by issuing $28,750,000 of 6.5% Convertible Subordinated Debentures due June 30, 2003. A new private drilling fund was also initiated during the year.

Assets Management. Because Swift manages producing properties on behalf of many of its co-investors, the Company’s success in raising capital from a variety of external sources has resulted in Swift managing properties considerably larger than its own oil and gas assets. By combining the Company’s own investment capital with the capital of others, Swift is able to diversify its investments among a larger number of producing properties and drilling prospects, lowering the risks associated with investments in oil and gas reserves. In addition, the combined supervision and operation of Swift-owned properties with those managed by Swift on behalf of others allows economies of scale beneficial to all owners of the properties.

Oil and Gas Operations. Nowhere are economies of scale more important than in the Company’s oil and gas operations. As Swift continues to grow, oil and gas sales will remain the major contributor to the Company’s revenues and earnings. In 1993, for example, oil and gas sales comprised 64% of Swift’s total revenues, compared to just 27% in 1989. Economies of scale can be seen in several of Swift’s areas of operation, including the AWP Olmos Field in Texas and the Weatherford Area of Oklahoma.

In 1993, the Company began for the first time to look for opportunities to apply its operating expertise overseas. During the year, it signed a Participation Agreement with a Russian Federation joint stock company to provide technical and managerial expertise for developing and producing oil and natural gas reserves in two fields located in western Siberia. Swift is also evaluating growth opportunities in Venezuela.

Having successfully met its reserves target for 1993, the Company now looks forward to meeting its very ambitious reserves growth goal for the coming year. With teamwork, dedication, and an unwavering focus on basic value-adding activities, this goal can be met, and shareholder value can continue its upward trend.

A. Earl Swift

March 28, 1994