PURSUING A RESERVES  GROWTH STRATEGY
	1993 ANNUAL REPORT
Management's Discussion and Analysis of Financial Condition and Results of Operations

Liquidity and Capital Resources

Swift Energy Company’s principal corporate objective is the accumulation of crude oil and natural gas reserves for current and future production and sale and the enhancement of the net present value of those reserves. The Company’s capital historically has been provided principally by public and private limited partnerships and joint ventures, which are sponsored, formed and managed by the Company, and to a lesser degree by equity offerings. Supplemental cash and working capital are provided through financing arrangements with banks. In the second quarter of 1993, the Company successfully completed its first public debt offering.

Capital Raised. In 1993, the Company raised $44,100,000 in limited partnership subscriptions. This is a 12% decrease from the $50,200,000 total raised in 1992. In 1991, the Company raised $30,900,000 from both partnership subscriptions ($25,700,000) and a joint venturer ($5,200,000).

In March 1991, the Company commenced offering Swift Depositary Interests (SDI), its limited partnership offering to purchase producing properties. Under the SDI structure, the Company pays all of the front-end partnership offering and formation costs, estimated to average 13% of total investor subscriptions over the life of the program. During 1993, eight partnerships closed under the SDI offering with subscriptions totaling approximately $8,300,000 in the first quarter, $15,900,000 in the second quarter, $9,900,000 in the third quarter, and $8,600,000 in the fourth quarter.

On December 8, 1993, the Company closed the first partnership under a private placement offering (Swift Energy Drilling Ventures or SEDV) of both general and limited partnership interests. Subscriptions, which totaled approximately $1,400,000, will be invested by the partnership in development drilling (approximately 50%), exploratory drilling (approximately 25%), with the use of the remaining 25% to depend upon the results of initial drilling activities. The Company anticipates formation of two additional partnerships in 1994.

Sale of Convertible Subordinated Debentures. On June 30, 1993, the Company issued $28,750,000 of Convertible Subordinated Debentures (Debentures) due June 30, 2003, in a public offering. Proceeds of the offering are being used primarily to acquire producing oil and gas properties and to finance the Company’s expanding exploration and development programs. The principal terms of these Debentures are described in Note 4 to the Company’s financial statements.

Sale of Common Stock. In May 1992, the Company received proceeds of $6,400,000, net of selling expenses and issuance costs, from the sale of an additional 990,000 shares of common stock through an institutional offering.

Sale of Producing Properties. During 1992, the Company sold certain oil and gas properties, previously held in producing oil and gas properties held for transfer and the Company’s oil and gas property account, to partnerships formed under the SDI limited partnership offering. The properties were sold to affiliated partnerships for proceeds equal to the properties’ fair market value, $30,500,000, as determined by an independent expert. Approximately $14,000,000 of the total proceeds from the sale were attributed to properties held in the Company’s oil and gas property account with the remainder attributable to producing oil and gas properties held for transfer.

Net Cash from Operations. In 1993, 1992, and 1991, the Company’s operating activities provided net cash of $7,238,000, $6,349,000, and $5,912,000, respectively. The 1993 increase of $889,000 was substantially due to (i) the cash flow from oil and gas sales, which increased $2,478,000 or 23%, exclusive of the non-cash amortization of deferred revenues associated with the Company’s volumetric production payment ($2,304,000), (ii) supervision fees (which increased $275,000 or 8%), and (iii) interest income and other revenues (which increased $177,000 or 28%), partially offset by a $606,000 increase in oil and gas production costs, a $521,000 increase in interest expense, a $88,000 increase in general and administrative costs, a $261,000 decrease in cash management fees, and an approximate $400,000 payment of income taxes in excess of the current income tax provision.

The 1992 increase of $437,000 was substantially due to (i) the cash flow from oil and gas sales, which increased $2,392,000 or 29%, exclusive of the non-cash amortization of deferred revenues associated with the Company’s volumetric production payment ($1,666,000), and (ii) cash management fees (which increased $352,000 or 52%), partially offset by a $1,492,000 increase in oil and gas production costs, a $321,000 increase in general and administrative costs, and a $105,000 decrease in interest income and other revenues.

The Company’s working capital has improved from a positive working capital of $2,953,486 at December 31, 1992, to a positive working capital of $9,741,683 at December 31, 1993. The primary contributing factor to the $6,788,197 improvement was the June 1993 sale of Convertible Subordinated Debentures. The $27,300,000 in net proceeds from the offering were received on June 30, 1993. Portions of the proceeds were immediately employed toward the reduction of short-term bank borrowings, which were outstanding as the result of the purchase of producing oil and gas properties held for transfer. These properties were transferred effective September 30, 1993, to partnerships formed as of that date. Approximately $7,000,000 of the Debenture proceeds were also used to fund property acquisitions transferred to partnerships formed December 31, 1993 (which amounts will be subsequently reimbursed), thus resulting in the higher year end balance in associated limited partnerships and joint ventures accounts receivable without incurring a corresponding amount in short-term bank borrowings. Approximately $20,000,000 of the Debenture proceeds were used to fund the Company’s capital expenditures.

Balance sheet changes in accounts receivables, producing oil and gas properties held for transfer, short-term bank borrowings, and payable related to producing oil and gas property acquisitions all principally derive from the particular timing of property purchases and payments made by and to the Company relating to the Company’s management of its affiliated partnerships.

Borrowed Funds. The Company has established line of credit facilities which are used principally to finance the Company’s purchase of producing oil and gas properties on an interim basis pending transfer of the properties to newly formed partnerships and joint ventures, and to a lesser extent to provide working capital. The principal terms and restrictions of these credit facilities are described in Note 3 to the Company’s financial statements. Outstanding amounts under the Company’s credit facilities have fluctuated and will continue to fluctuate as borrowings are made and repaid in connection with the timing of property purchases and sales and working capital needs.

The Company had $2,650,000 outstanding under these borrowing arrangements at December 31, 1993, primarily as the result of advance purchases of producing properties on behalf of the affiliated partnerships and/or joint ventures to be subsequently reimbursed. The Company had no outstanding debt under any of the borrowing arrangements at December 31, 1992, primarily because there were no advance purchases of producing properties on behalf of affiliated partnerships and/or joint ventures. The Company anticipates that in the future it will continue to use these facilities to finance the acquisition of producing properties on an interim basis pending purchase by newly formed production partnerships and/or joint ventures and for working capital purposes.

At December 31, 1993, limited partnership formation and marketing costs (which under the current offerings are borne by the Company as part of the Company’s general partner contribution) amounted to $5,131,374, an increase of $103,871, when compared with the December 31, 1992 balance. Included in the December 31, 1993 balance, however, are additional formation costs incurred on the new Swift Energy Drilling Ventures offering.

Volumetric Production Payment. In May 1992, the Company entered into a production payment arrangement, which provided the Company with proceeds of $13,790,000, with a subsidiary of Enron Corp. relating to property interests contemporaneously acquired from a subsidiary of Manville Corporation. Under this arrangement, to the extent monthly gas production from the properties exceeds the agreed upon deliverable quantities, the Company receives all proceeds from sale of the excess gas at current market prices.

Capital Expenditures. The Company’s capital expenditures were $24,200,000, $34,400,000, and $8,000,000, for 1993, 1992, and 1991, respectively. Approximately $5,900,000 (24%) of the 1993 capital expenditures were spent to fund the Company’s general partner capital contribution to partnerships formed under its SDI and SEDV offerings. Another $5,700,000 (24%) of the 1993 capital expenditures were spent on the purchase of producing oil and gas property interests as described in Note 9 to the Company’s financial statements. Another $5,100,000 of producing properties the Company committed to acquire in 1993 will be closed and paid for in early 1994. The Company expended approximately $3,900,000 (16%) relating to the Company’s investment in prospect costs (principally prospect leasehold, seismic and geological costs of unproven prospects for the Company’s account). Another $3,200,000 (13%) was incurred in developmental drilling and $2,200,000 (9%) was expended on exploratory drilling. In its foreign activities, as described in Note 9 to the Company’s financial statements, the Company invested another $1,500,000 (6%). The Company also purchased $1,000,000 of Limited Partner interests in previously formed partnerships through the right of presentment arrangement provided in those partnerships. Finally, the Company spent $200,000 on fixed assets, primarily for computer equipment. Capital expenditures increased over $26,000,000 from 1991 to 1992, with greater than one-half of the increase due to the purchase of properties from Manville Corporation discussed above.

Capital expenditures for 1993 were higher than originally anticipated due to the approximate $5,700,000 purchase of the producing properties for Swift’s own account. Funds for this purchase were provided through the sale of the Convertible Subordinated Debentures as described above. Expenditures for 1994 are estimated to be approximately $34,000,000, including investments in all areas in which 1993 capital was spent as described above, in approximately the same proportions, except that exploratory drilling expenditures are anticipated to increase. This level of investment reflects the Company’s positive assessment of current market conditions.

The Company believes that its current credit facilities, together with remaining proceeds from the sale of Convertible Subordinated Debentures and internally generated cash flow, which is anticipated to increase as the Company receives its portion of oil and gas revenues in a growing number of partnership and joint venture wells, wells acquired for its own account, and wells drilled, will be sufficient to finance the costs associated with its partnership offerings, other capital expenditures, and its liquidity needs.

Results of Operations

Revenues. The Company’s revenues in 1993 increased by 26% over revenues in 1992, and are 64% higher than 1991 revenues. Since 1991 oil and gas sales have been the largest contributor to the Company’s total revenues, followed by supervision fees. The reasons for these trends are discussed by revenue component below. This contrasts with the composition of the Company’s revenues from 1985 to 1990, when the largest share of the Company’s revenues came from cash management fees and earned interests derived from the Company’s sponsorship and management of production partnerships and joint ventures.

Oil and Gas Sales. Oil and gas sales have grown steadily over the last 13 years primarily as the result of the ongoing property acquisitions by the limited partnerships and joint ventures through which the Company derives an interest. In 1994, the Company expects these derived interests will continue to play a strong role. Oil and gas sales levels in 1994 will also be aided by acquisition interests in producing properties that Swift made for its own account in late 1993, as well as interests in both exploratory and developmental wells drilled in the later part of 1993. As a percentage of total revenues, oil and gas sales have comprised 64%, 65%, and 57% of total revenues for the respective years 1993, 1992, and 1991.

The Company’s net sales volume (including the volumetric production payment associated with 1993 and 1992 production) in 1993 increased by 30% (1,689,986 equivalent Mcf) over volumes in 1992 and by 85% (3,388,297 equivalent Mcf) over net sales volumes in 1991. Combined oil and gas sales revenues increased by 25% ($3,115,449) over those revenues for 1992, and by 86% ($7,173,900) over oil and gas sales in 1991 due to the different price mix received for products sold in each period. Average prices for oil dropped from $18.26 per Bbl in 1991, to $17.19 per Bbl in 1992, to $15.10 per Bbl in 1993 while average gas prices increased from $1.58 per Mcf in 1991, to $1.90 per Mcf in 1992, to $1.96 per Mcf in 1993.

Of 1993’s increased oil and gas sales, 46% is attributable to the sale of production from the properties acquired from Manville Corporation in May 1992. The Company records the entire amount of hydrocarbons sold as revenue, which was $4,562,503 from 2,448,650 equivalent Mcf sold in 1993, of which 51% was a non-cash amortization of deferred revenues associated with the volumetric production payment, while the remaining 49% equals cash proceeds from sale of oil and excess gas for the Company’s account. Over 70% of 1992’s increased oil and gas sales were due to these same properties. For the last eight months of 1992, the Company recorded $3,126,968 of revenue from the sale of 1,573,051 equivalent Mcf, of which 53% was non-cash amortization of deferred revenues and 47% cash proceeds from sale of oil and excess gas. During the period May 1992 to December 1992, Swift received proceeds from excess gas sales of $450,000 and $1,011,000 from oil production, for a total of $1,461,000. During 1993, Swift received proceeds from excess gas sales of $996,000 and $1,263,000 from oil production for a total of $2,259,000.

Another 36% of the increase in the Company’s oil and gas sales revenues in 1993 was derived through the Company’s interest in partnerships formed in 1993 and 1992 that invested in producing properties which were placed into these partnerships in 1993. The Company received 488,187 equivalent Mcf and $1,113,875 of oil and gas sales revenues from its general partner share of these producing properties placed into these partnerships in 1993. In 1992, these amounts were 598,357 equivalent Mcf and $1,339,419 of oil and gas sales revenue, which constituted most of the remaining increase in 1992’s oil and gas sales over such sales in 1991.

Another 26% of the increase in the Company’s oil and gas sales revenues in 1993 was derived through the Company’s interest in exploratory and development wells placed into production in the third quarter and its interest in producing properties bought for its own account in the fourth quarter. These interests contributed 400,606 equivalent Mcf and $802,561 of oil and gas sales revenue.

Partially offsetting these increases was the reduction of sales volumes and revenues associated with the disposition in 1992 of $14,000,000 of producing properties from the Company’s oil and gas properties account.

Earned Interests and Cash Management Fees. Under partnerships formed by the Company through the first quarter of 1991, it received management and offering fees and reimbursement for certain direct costs. Under the Company’s SDI and SEDV offering, the reimbursement of certain costs and fees are payable solely from revenues, rather than from investor subscriptions.

In the Company-sponsored SDI limited partnerships and joint ventures, the Company earns a promoted "earned interest" in each entity, in addition to the interest to which the Company is entitled by virtue of its capital contribution. In the SDI offering, in which the Company is paying all front-end costs, the paid interest is estimated to average approximately 13% of subscriptions over the life of the program. In joint venture arrangements, the paid interest (if any) varies based on the terms of the negotiated agreements.

The percentage of earned interest which the Company receives under SDI is lower than in prior offerings, reflecting the decrease in the difference between the Company’s capital contributions to each partnership and its earned revenue interest. In return for its higher capital contribution in SDI, the Company is entitled to a higher percentage of oil and gas revenues. SDI gives the Company a larger interest in long-life oil and gas reserves while de-emphasizing receipt of front-end fees. The structure of SDI responds to investors’ desires to reduce front-end costs and align their interests with the Company’s interest.

Earned interest recognized in 1993 solely from limited partnerships totaled $3,309,000, compared to $1,692,000 and $1,560,000 recognized from the same source in 1992 and 1991, respectively. There was no earned interest from joint venture activity during any of these years. The increase in earned interest relates to the increase in properties placed into partnerships, including investments made in 1993 of funds raised by partnerships formed in 1992 but not invested awaiting producing property acquisitions.

Cash management fees received in 1993 solely from limited partnerships were $763,000, down from the comparable 1992 total of $1,024,000. Of the 1992 amounts $764,000 was attributable to limited partnerships and $260,000 to a joint venture partner. Comparable amounts during 1991 were $428,000 from limited partnerships and $244,000 from joint venture partners. Variance in these amounts are due to differences in the level of partnership subscriptions and the amount and terms of any joint venture fees.

Subscription levels in 1993 decreased $6,100,000 when compared to 1992. During 1993, eight partnerships closed under the SDI offering with subscriptions totaling approximately $42,700,000 for the full year. Under the SEDV offering, the first partnership closed December 8, 1993, with subscriptions totaling approximately $1,400,000.

Significant fluctuations in the Company’s earned interest revenues can occur from year to year, depending on the availability and acquisition of economically attractive oil and gas properties, the amount of partnership subscriptions, and the source of funds used for the purchase of properties.

Certain data related to partnership and joint venture activities are summarized below:

 

Supervision Fees. Supervision fees continue to increase, having grown from $3,362,800 in 1991, to $3,443,777 in 1992, to $3,718,829 in 1993 due to the change in properties operated by the Company and the annual escalation in well overhead rates.

Costs and Expenses. General and administrative expenses, net of reimbursement to the Company for services performed on behalf of its limited partnerships, increased 7% from 1991 to 1992 and 2% from 1992 to 1993. A substantial portion of the costs of personnel involved in property acquisitions and operational activities is reimbursed by the production partnerships and joint ventures for which such activities are performed. The 1992 increase of unreimbursed general and administrative expenses was primarily a result of decreased reimbursements in the property acquisition area of its business. In 1993, these expenses increased slightly over 1992 levels, primarily as a result of Swift receiving its general partner share of expenses in an increased number of partnerships.

Depreciation, depletion, and amortization (DD&A) has steadily increased due to significant growth in the Company’s interests in producing properties purchased by its limited partnerships and joint ventures, increased exploration and development activities, purchases of producing properties for the Company’s own account, and the related sale of increased quantities of oil and gas. The Company’s DD&A rate per equivalent Mcf of production has fluctuated from $0.92 in 1991 to $0.83 in 1992 to $0.96 in 1993, reflecting variations in the per unit cost of acquired properties and changes in the mix of reserves between years.

The 15% increase in oil and gas production costs also relates to and is generally in proportion to the sale of increased quantities of oil and gas.

Interest expense on the Debentures, including amortization of debt issuance costs, totaled $984,239 for the six month period ending December 31, 1993. Of this amount, $199,057 was capitalized as part of oil and gas property costs and $187,717 was reimbursed from certain affiliated partnerships for interest related to a portion of the Debenture proceeds used to fund the advance purchase of producing oil and gas properties on behalf of affiliated partnerships, resulting in the significant increase in net interest expense for 1993.

The Company, together with another 50% co-venturer, owned Pet-Tech Tools, Inc. ("Pet-Tech"), a company formed in 1982 to manufacture and lease a drilling safety tool. In the fourth quarter of 1992, as a result of the continuing depressed state of the domestic oil and gas drilling services industry, the Company decided to impair its entire 50% investment in Pet-Tech ($627,835).

Net Income. The Company’s consolidated effective tax rate was 33.0%, 32.4%, and 26.1% in 1991, 1992, and 1993, respectively. During 1992, the Company also recognized a $915,000 increase to income as a result of the cumulative effect of adopting Statement No. 109 of the Financial Accounting Standards Board as described in Note 2 to the Company’s financial statements, which increased first quarter 1992 income per share by $0.18.

Net income for 1993 as compared to 1992 increased 20%. Net income for 1992 as compared to 1991 increased 63%. The lower 12% increase in 1993 primary income per share reflects the dilutive effect of the sale of 990,000 shares in May 1992.

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