1997 ANNUAL REPORT 

Strategies for Achieving Financial Flexibility

One of the major trends to sweep the oil and gas industry during the past decade has been the increase in volatility of natural gas prices. Price swings were relatively negligible in the early 1980s compared to recent years in which wellhead prices have fallen and risen by as much as 30% from one month to the next.

MONTHLY PERCENTAGE CHANGES IN NATURAL GAS WELLHEAD PRICES
		The increasing importance of the spot market in the mid 1980s and the beginning of the natural gas futures market in 1990 led to greater volatility in natural gas wellhead prices.

Several major factors have driven this surge in price volatility, including the government’s deregulation of natural gas transportation and marketing, the industry’s shift from long-term contracts to monthly sales on the spot market in the late 1980s, and the advent of the natural gas futures market in 1990 as a risk management tool. Oil prices also increased in volatility when crude oil markets became internationalized following the decline of U.S. oil reserves and production in the 1970s.

Swift Energy has excelled in this challenging environment because of its strategy of maintaining diversity and flexibility in financing, investments, and organization.

Having maintained the discipline of a strong balance sheet with limited debt since its inception, Swift has long focused on well-diversified financing. In 1997, the Company funded its capital expenditures primarily with net proceeds from its November 1996 $115 million public offering of 6.25% Convertible Subordinated Notes and with internally generated cash flows.

Other financial instruments that Swift has utilized in recent years include an equity offering in 1995 and a debt offering in 1993, with net proceeds of $45.7 million and $28.75 million respectively. Also available is a $100 million revolving line of credit. In addition, the Company has raised funds through private limited partnerships and public income partnerships, the latter having projected lives of five to nine years followed by liquidation when a substantial majority of their reserves have been produced. This liquidation program continued in 1997 for partnerships that met the appropriate criteria and is expected to proceed in 1998.

Swift’s achievement in obtaining external financing relates strongly to the Company’s successful investment strategy, which has built investor confidence through both its diversity and its flexibility.

In the 1980s and 1990s, the expansion and deregulation of global capital markets created opportunities for independent oil and gas producers, a segment of the industry that has traditionally required external sources of capital. At the same time, deregulation of the natural gas industry led to greater volatility in product prices. Producers who had the financial and organizational flexibility to respond to industry changes achieved a competitive advantage in attracting capital. (Collage: Exterior and interior views of the New York Stock Exchange.)

Swift achieves its primary mission of reserves growth through investments in a combined program of exploratory and development drilling and acquisitions of producing properties, shifting its emphasis as needed to take advantage of current industry trends.

Swift’s core domestic properties are diverse in terms of geographic location and reserves life. For example, the Company’s wells in its largest tight sands property, the AWP Olmos Field in South Texas, have long productive lives, while those in the Austin Chalk trend along the Gulf Coast have shorter but more intense productive lives. Swift also is active in areas such as the Ark-La-Tex region and the Rocky Mountains region, and the Company pursues a number of international projects to further diversify its investments.

The Company strives for diversity in its natural gas marketing capabilities as well, with sales being made in a wide variety of natural gas markets across the nation. Swift implements a price risk management approach using protection price floors to mitigate the effects of potential price declines.

Swift’s matrix organization is another cornerstone of its success in its financial achievements. Small interdisciplinary teams of reservoir engineers, operations engineers, geologists, geophysicists, landmen, and others are assembled on an as-needed basis, and the inherent flexibility of these teams allows Swift to respond rapidly to advances in technology, competitive challenges, and industry trends.

This atmosphere of teamwork is enhanced through the use of employee incentives such as a stock purchase plan, an employee stock ownership plan, a savings plan, stock options, and stock bonuses, which align the interests of employees with those of shareholders.

In recognition of its accomplishments in recent years and in anticipation of future growth, Swift issued a 10% Common Stock Dividend in October 1997. This was consistent with the Company’s policy of reinvesting earnings rather than paying cash dividends, which allows Swift to achieve growth in proved oil and natural gas reserves and should promote growth in the value of the Company’s common stock over time.

With its success in achieving flexibility and diversity in all these critical areas, Swift Energy stands prepared to meet the challenges of the 21st century.

This page was last updated on Saturday, February 08, 2003, at 07:28:45 PM.

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