1998 ANNUAL REPORTManaging Growth in a Volatile Environment
To Our Shareholders: No one should be surprised that the management of Swift Energy Company has had to adjust its tactics in response to the dramatic declines in crude oil and natural gas prices experienced during 1998. We scaled back our drilling activities, took advantage of acquisition opportunities, and reduced our costs per unit of production. At the same time, we have remained committed to our long-term strategy of building shareholder value through a diversified mix of development and exploratory drilling and producing property acquisitions. With that strategy, we increased our proved reserves in 1998 by 21% to 436 Bcfe, our production by 54% to 39 Bcfe, and our oil and gas sales by 16% to $80 million. Over the last five years, we have achieved compounded annual growth rates of 37% in proved reserves, 40% in production, 39% in oil and gas sales, and 50% in cash flows from operating activities. We have been able to sustain these growth rates primarily because our strategy for growth incorporates the flexibility needed to adapt to the price volatility that is inherent in our business. In 1998, that volatility resulted in our receiving a combined oil and natural gas price that was 25% lower than in the previous year. Crude oil price declines in 1998 were some of the largest in the history of the industry, and natural gas prices also fell dramatically. Because costs do not decline as quickly as prices, the drop in revenues caused by lower product prices had a disproportionate impact on profitability. Net income for the year, before a one-time non-cash charge to earnings primarily necessitated by the very low prices experienced at the end of the third quarter, totaled $11.7 million, or $0.71 per share. The non-cash charge totaled $90.8 million and resulted from a third-quarter $77.2 million ($50.9 million after tax) full-cost ceiling write-down of the Company’s domestic oil and gas properties and a $13.6 million ($9.0 million after tax) impairment related to the Company’s activities in Russia and Venezuela. With this non-cash charge, Swift’s net loss for the year totaled $48.2 million, or $2.93 per share. The full-cost ceiling write-down became necessary principally because of a downward fluctuation in product prices and accounting rules that require current pricing to be applied to long-term production projections. The impairment of international capitalized costs resulted from economic turmoil in Russia, along with the August 1998 Russian currency collapse, and from economic uncertainty and currency instability in Venezuela. Of course, the business environments in both nations were heavily influenced by very low crude oil prices on the world market. Although periods of low product prices are always difficult for the Company and its shareholders, the low phases of price cycles can also represent times of great opportunity. In particular, low prices create opportunities for producing property acquisitions as in-the-ground reserves values fall in response to lower prices at the wellhead.
In 1998, we took advantage of this opportunity by making the largest acquisition in the Company’s history— an $87.0 million purchase of properties in Texas and Louisiana that included 91.1 Bcfe of oil and natural gas reserves, over 200,000 net undeveloped acres (including over 100,000 fee mineral acres), and interests in two natural gas processing plants. The properties are located in the Austin Chalk trend where the Company has had experience since 1992. Using that experience, we began field work to enhance both the reserves and the production of the properties as soon as we took over operations. By December 31, 1998, the properties’ proved reserves had increased to 130.5 Bcfe, despite having produced 11.6 Bcfe during the last six months of the year. Although drilling activity was curtailed in 1998, we still had a number of important drilling successes, most notably in the Austin Chalk trend and the South Texas AWP Olmos Field. For the year as a whole, we drilled 75 wells with 58 successes for an overall success rate of 77%. The successes included 18 wells in the Austin Chalk, 31 wells in the AWP Field, and nine wells in other areas. Our accomplishments in acquisitions and drilling have provided us with relatively strong cash flows despite the current pricing environment. In addition, our access to working capital was strengthened by the completion of a $250,000,000 revolving credit facility, which replaced the Company’s previous $100,000,000 facility. Looking to the future, we have adjusted our growth targets for reserves and production in light of the current pricing environment. Our revised goals for the next several years are to increase our proved reserves at an average annual rate of 15% and our production at an average annual rate of 25%. Given currently depressed prices, our reserves and production growth over the near term will be accomplished primarily through the reinvestment of cash flows from ongoing operations. Our programs in the Austin Chalk trend and the AWP Field provide the potential for enhancing production from existing reserves, and we have a large inventory of development and exploration prospects available for future drilling. These development and exploration prospects also create an opportunity for us to expand our drilling activities quickly as prices improve. Our experience with past price cycles leads us to expect price appreciation in the near future. With our successes in 1998, we also believe that, even in today’s pricing environment, the Company’s stock price is greatly undervalued. We therefore remain confident that Swift Energy is positioned for a substantial appreciation in shareholder value as prices return to levels more in line with long-term trends.
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This page was last updated on Saturday, February 08, 2003, at 07:28:48 PM. Copyright © 1994-2008 by Swift Energy Company. |
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