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Those of you who have been receiving Swift Energy Company's annual report through the
years are by now quite familiar with our primary mission and the strategy we have
implemented to accomplish it. The mission, of course, is to annually increase the volume
and net present value of our oil and natural gas reserves in the most economical manner
possible. Increased reserves in turn lead to increased cash flows from operating
activities and ultimately to growth in shareholder value.
During 1994, our proved reserves increased 15%, and our cash flows from operating
activities rose 44%. Over the last five years, proved reserves have grown at an annual
compounded rate of 35%, and cash flows from operating activities have risen at a
compounded rate of 30%.
The large increase in operating cash flows during 1994 is particularly noteworthy
considering the lower oil and natural gas prices experienced during the year. The increase
was sustained primarily by our higher production volumes. Gas production was up 42% over
1993, and oil production was up 44%.
We are proud of this successful track record and believe that it will lead to
appreciation in the price of our common stock. The appreciation potential of Swift
Energy's stock is evident when one considers the low ratio of the Company's market
capitalization to its operating cash flows. As shown in the accompanying table, the ratio
of Swift's stock price to cash flows for 1994 is estimated at only 4.7, whereas the
average ratio of Swift's peer companies is estimated at 8.5, or 81% higher.
One reason for this undervaluation, we believe, has been the lack of comparability
between our accounting methods and those of other oil and natural gas companies. For most
of the last decade, our reserves growth largely came from acquisitions of producing oil
and gas properties funded through offerings of public limited partnerships. Therefore, we
had adopted certain accounting principles similar to those utilized by other companies
offering limited partnerships, which recognized, as income, the Company's non-cash
interests earned in properties purchased by the partnerships.
Now, however, our reserves growth increasingly comes from drilling and acquisition
activities using corporate funds. Accordingly, effective January 1, 1994, Swift Energy
adopted a change in accounting policy that eliminates the recording of earned interests,
thereby facilitating Swift's comparability and presenting the Company with the opportunity
to better position itself within its peer group.
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A. Earl Swift, President,
Chief Executive Officer,
and Chairman
Year-end Proved Oil and Natural Gas Reserves (Bcfe)
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For several years we have been concentrating on developing a state-of-the-art expertise
that would facilitate both the discovery of new reserves and the enhancement of the
properties we are operating and/or managing. Although the acquisition of producing
properties remains an important component of our growth strategy, our re-emphasis on
exploration and development drilling during 1994 was especially apparent.
In that re-emphasis, we have focused on specific regions in the United States where our
technical staff has considerable knowledge and experience. This regional focus, as
demonstrated in our 1994 results, is bringing us success.
Proved Reserves. The most obvious measure of our success is our increased volume of
proved reserves. At year end, our proved reserves totaled 103.6 billion cubic feet of
natural gas equivalent (Bcfe)--or 17.3 million barrels of oil equivalent (BOEs). Of this
amount, 74% was natural gas, reflecting our emphasis on developing this clean-burning
fuel. Our production replacement ratio, based upon reserves additions from exploration and
development during 1994, was an enviable 3.01.
Equally important to our growth is our inventory of undeveloped properties that contain
not only proved reserves but also substantial amounts of unproved reserves. At year end,
Swift Energy owned interests in undeveloped leaseholds totaling over 101,000 gross acres
or 47,000 net acres.
Exploration and Development. Most of the Company's potential reserves, as well as
large volumes of the undeveloped proved reserves, are located in seven strategic regions
in which our exploration and development staff has been focusing its efforts. Distributed
in Texas, Oklahoma, Louisiana, Arkansas, and Wyoming, these regions also contain 66
drilling locations we have identified for 1995.
Our 1994 exploration and development program added 24.8 Bcfe (or 4.1 million BOEs) to
our proved reserves, including 16.3 Bcfe of newly proved undeveloped reserves. The
reserves increase through exploration and development was the highest in the Company's
history, exceeding for the first time in many years the volume of reserves added through
property acquisitions. The program's 1994 drilling activities resulted in six successful
exploratory wells and 26 successful development wells, representing success rates of 43%
and 87%, respectively. The costs associated with the program totaled $12.7 million in
1994, yielding a unit cost of $0.51 per Mcfe of reserves additions.
Property Acquisitions. Also adding to our proved reserves in 1994 was a major
acquisition of producing properties in Louisiana and Alabama, together with several
smaller acquisitions in these two states plus Texas and Mississippi. These properties,
acquired in conjunction with our limited partnerships and also through direct purchases,
added 12.9 Bcfe to the Company's reserves at a total cost of $13.1 million.
Capital Formation. To fund our drilling activities and property acquisitions, we
rely on a diversified capital formation strategy that includes our public limited
partnerships and also private drilling programs. Cash flows from operations are also
providing an increasing source of capital, and the Company has aggregate lines of credit
with banks of over $40 million.
Subscriptions to our public limited partnerships were $32.1 million during 1994, for a
cumulative total of $400.3 million since our first offering in 1984. Our most recent
private drilling program, Swift Energy Drilling Ventures, which was established in 1993,
provided $2.6 million in 1994, for a cumulative total of $4 million through the end of the
year. Sales of SEDV funds have significantly increased in 1995, with subscriptions in a
partnership closed in March exceeding $5 million.
Assets Management. The management of the proved oil and gas properties of our
co-investors remains an important component of our overall strategy for growth. Because
the proved reserves of the combined properties are three times as large as Swift's
reserves alone, we gain economies of scale in all our field operations and business
transactions. The larger enterprise also allows us to diversify our own investments.
Oil and Gas Operations. At year end, the properties managed by Swift Energy
included 4,172 wells distributed in 15 states; however, 61% of the total proved reserves
were associated with 750 Company-operated wells in 10 states. With the reserves additions
of recent years, our production reached an all-time high in 1994, 69% of it coming from
the Swift-operated wells. Sales of 5.4 Bcf of natural gas and approximately 467,000
barrels of oil, plus 1.4 Bcf of gas delivered as part of a volumetric production payment
agreement, provided 78% of the Company's 1994 revenues, compared to 64% in 1993 and 65% in
1992.
International Initiatives. As part of the Company's risk-management strategy, Swift
Energy uses a limited portion of its investment capital for higher-risk activities with
higher potential rewards. One such activity is our initiative in western Siberia in
Russia. Our initial capital exposure in this activity is limited to approximately $5
million. In return for this investment, Swift will receive a 5% net profits interest in
the oil and natural gas reserves associated with the Samburg and Evo-Yakha fields in the
Yamalo-Nenetsky area. The Company is also continuing to pursue opportunities in Venezuela.
Committed to Growth. We view our 1994 accomplishments with considerable pride and
remain committed to the reserves growth strategy that has brought us this far. We also
remain committed to you our shareholders, and in appreciation of your loyalty we issued
our first stock dividend in 1994. A total of 606,262 shares of common stock were issued to
increase by 10% the holdings of each shareholder of record on September 19. With the
actions we have taken this past year, and with our exciting plans for the future, Swift
Energy looks forward to the future with confidence.
A. Earl Swift
March 21, 1995
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Proved Reserves Added Through Exploration and Development (Bcfe)
In recent years, Swift Energy has achieved sustained growth in its oil
and natural gas reserves through increased drilling. Swift's strategy focuses upon
economical reserves
growth and low-cost production, leading to increases in cash flows and shareholder value
Oil and Gas Production (Bcfe)
Net Cash Provided by Operating Activities ($ millions)
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