1997 ANNUAL REPORT 

Sustained Growth Through Strategic Management

To Our Shareholders: We have always taken great pride in our management team at Swift Energy, but never more than in the one that is currently guiding the Company. With the team’s combined talents, commitment, and experience, we are confident that we will continue achieving operating successes that will sustain growth in shareholder value far into the future.

Our record speaks for itself. In 1997, we realized increases of 40% in proved oil and gas reserves, 31% in both production and oil and gas sales, 17% in net income, and 49% in cash flows from operating activities.

Our longer term achievements have been equally impressive. During the last five years, we have realized compounded annual growth rates of 44% in proved reserves, 41% in oil and gas sales, 40% in net income, and 54% in cash flows from operating activities. In response to this growth, the Company’s common stock has, on average, outperformed the S&P 500 during the last five years.

These successes come from our continuing focus on increasing the Company’s volume of oil and natural gas reserves. Our current goal is to have reserves of one trillion cubic feet of natural gas equivalent by the end of the year 2000. Reaching that target will require reserves growth of about 40% per year, an ambitious but obtainable rate of increase considering our track record.

Our strategic planning for meeting this goal is based on identifying industry opportunities as they develop and pursuing those opportunities where Swift’s strengths provide a competitive advantage. In recent years, a number of growth opportunities have opened up for independent natural gas producers as the information age has made a host of new data-analysis tools and field technologies available. As a result, the success rates for U.S. exploration and development drilling have improved substantially.

For example, from 1990 to 1997, Swift Energy’s overall drilling success rate rose from 65% to 91%, while the gross number of wells drilled per year increased from 23 to 182. With these increases, the Company’s exploration and development program has contributed approximately 311 billion cubic feet of natural gas equivalent (Bcfe) to our proved reserves over the last three years. These reserves have been added at an average discovery cost of $0.71 per thousand cubic feet equivalent (Mcfe), with most of our new wells located in areas in which we have particular expertise and where we profit from economies of scale.

Building upon this success, we plan to drill an additional 21 exploratory wells and 113 development wells in 1998. The total number of wells in 1998 is less than in 1997; however, we are increasing the number of exploratory wells, and because of the overall rise in success rates, we are retaining higher working interests in those wells, increasing our net number of exploratory wells for 1998 to 13.0 as opposed to 7.2 in 1997.

In one of our focus areas, located in South Texas, we continue to take advantage of our long history of experience in producing natural gas from tight sands, a growing segment of U.S. production. Swift’s expertise in technologies such as slim-hole drilling and hydraulic formation fracturing, as well as in the use of coiled tubing strings in producing wells and remote electronic monitoring of production, has transformed tight sands development into an important domestic growth opportunity for the Company.

We also have a significant growth opportunity in another focus area, the Texas Austin Chalk trend. Since drilling our first horizontal well in the Austin Chalk in 1992, we have achieved great success in the trend as a direct result of the efforts of individuals from a variety of disciplines. Swift’s drilling engineers have an expertise for drilling horizontally through a relatively narrow target zone. Similarly, the Company’s geologists and geophysicists have a high level of skill in identifying multiple hydrocarbon deposits to be intercepted by the lateral legs of the horizontal wells. In addition, our Company’s landmen have become adept at acquiring leasehold acreage at a reasonable cost in this highly competitive area.

Similar efforts have been expended in other areas in which Swift Energy has interests, including the Rocky Mountains region, the Ark-La-Tex region, and the Gulf Coast region.

Thanks to our application of innovative technologies in these various areas, along with continuing improvements in drilling and production operations, our per-unit costs have remained low over the last couple of years despite higher industry-wide costs, increased industry activity, and rapid growth in the Company’s reserves and production. In 1997, our production costs; depreciation, depletion, and amortization; and general and administrative expenses (net of supervision fees) totaled $1.44 per Mcfe compared to an average of $1.43 per Mcfe over the previous two years.

With these relatively low per-unit costs and our increases in reserves and production, we can anticipate continued growth in cash flows and earnings even if the current volatility in natural gas prices fails to subside. The Company’s ability to successfully operate in an uncertain price environment is a tribute to Swift’s management and reaffirms our faith that we have assembled the best team available to lead us into the next century.

March 6, 1998

A. Earl Swift
Terry E. Swift

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