SWIFT ENERGY COMPANY 2000 ANNUAL REPORT
Quantitative and Qualitative Disclosures About Market Risk

 

Commodity Risk. Our major market risk exposure is the commodity pricing applicable to our oil and natural gas production. Realized commodity prices received for such production are primarily driven by the prevailing worldwide price for crude oil and spot prices applicable to natural gas. The effects of such pricing volatility are discussed above, and such volatility is expected to continue.

 

Our price risk program permits the utilization of agreements and financial instruments (such as futures, forward and options contracts, and swaps) to mitigate price risk associated with fluctuations in oil and natural gas prices. Below is a description of the financial instruments we have utilized to hedge our exposure to price risk.

  • Price Floors. Costs and any benefits derived from price floors were recorded as a reduction or increase, as applicable, in oil and gas sales revenues. The costs to purchase put options were amortized over the option period. Below is a summary of the utilization of price floors for the years ending December 31, 2000, 1999, and 1998.

  • The costs related to 2000 hedging activities totaled approximately $1,083,000, with benefits of approximately $579,000 being received, resulting in a net cash outlay of approximately $504,000, or $0.012 per Mcfe. The costs related to the open contracts as of December 31, 2000, totaled approximately $823,000, which is our maximum exposure under these contracts. These open contracts covering production for 2001, had a fair market value of approximately $209,000 at that date. Each of these contracts expire on or before March 31, 2001.

  • The costs related to 1999 hedging activities totaled approximately $909,000, with benefits of approximately $348,000 being received, resulting in a net cash outlay of approximately $561,000, or $0.013 per Mcfe. The costs related to the open contracts as of December 31, 1999, totaled approximately $98,000 and had a fair market value of $112,500.

  • The costs related to 1998 hedging activities totaled approximately $377,000, with benefits of approximately $101,000 being received, resulting in a net cash outlay of approximately $276,000, or $0.007 per Mcfe.

  • Participating Collars. During the fourth quarter of 1999, we entered into participating collars to hedge oil production through June 2000. Below is a summary of the collar arrangements for 2000. The participating collars were designated as hedges, and realized losses were recognized in oil and gas revenues when the associated production occurred.

  • We hedged 100,000 Bbls of oil per month for the months January through June 2000, with a floor price of $19.00 per Bbl and a ceiling price of $23.60 per Bbl, whereby we participate in 75% of any amount above the $23.60 ceiling price. These participating collars closed with our recording a loss of approximately $610,000, or $0.014 per Mcfe produced. There were no open participating collars at year-end 2000.

Our adoption of SFAS No. 133, as amended, is discussed in Note 1 to the Consolidated Financial Statements.

Interest Rate Risk. Our Senior Notes have a fixed interest rate, so consequently we are not exposed to cash flow or fair value risk from market interest rate changes on our Senior Notes. At December 31, 2000, we had $10.6 million borrowed under our credit facility, which is subject to floating rates, and therefore susceptible to interest rate fluctuations. The result of a 10% fluctuation in the bank's base rate would constitute 95 basis points and would impact 2001 cash flows by approximately $0.1 million.

Financial Instruments & Debt Maturities. Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, bank borrowings, and notes. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the highly liquid nature of these short-term instruments. The fair values of the bank borrowings approximate the carrying amounts as of December 31, 2000 and 1999, and were determined based upon interest rates currently available to us for borrowings with similar terms. Based on quoted market prices as of the respective dates, the fair value of our Senior Notes was $115.1 million at December 31, 2000 and $117.9 million at December 31, 1999, and the fair value of our Convertible Notes was $89.7 million at December 31, 1999. Our credit facility with the banks expires August 18, 2002. Our $125.0 million Senior Notes mature on August 1, 2009.

 

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