Items 1 and 2. Business and Properties

See pages 59 and 60 for explanations of abbreviations and terms used herein.

General

Swift Energy Company is engaged in developing, exploring, acquiring, and operating oil and gas properties, with a focus on onshore oil and natural gas reserves in Texas and Louisiana and onshore oil and natural gas reserves in New Zealand. The Company was founded in 1979 and is headquartered in Houston, Texas. As of December 31, 2001, we had interests in 1,235 wells located domestically in five states, in federal offshore waters, and in New Zealand. We operated 854 of these wells representing 95% our proved reserves. At year-end 2001, we had estimated proved reserves of 645.8 Bcfe, of which approximately 50% was natural gas and 50% was proved developed. Our proved reserves are concentrated 53% in Texas, 28% in Louisiana, and 16% in New Zealand.

We currently focus primarily on development and exploration in four domestic core areas and in New Zealand:

The AWP Olmos and Lake Washington areas and New Zealand are characterized by long-lived reserves that we expect to be steadily produced over a long period of time. The Brookeland and Masters Creek areas are characterized by shorter-lived reserves with high initial rates of production that decline rapidly. We believe these shorter-lived reserves complement our long-lived reserves. We focus on drilling the long-lived properties during periods of decreasing commodity prices, while the shorter-lived properties provide additional drillable projects in periods of rising commodity prices. Based on 2001 year-end domestic proved reserves and 2001 domestic production, our average domestic reserve life was 12.3 years. Based on a report by an independent engineering firm, prepared as part of the mining license application process, the Rimu/Kauri development area is estimated to have a 25-30 year economic life.

We purchased interests in the Brookeland and Masters Creek areas from Sonat Exploration Company in the third quarter of 1998 for approximately $85.8 million in cash. Of this purchase price, $55.5 million was spent for producing properties, $15.0 million for 20% interests in two natural gas processing plants, and $15.3 million for leasehold properties. This acquisition generated two new core areas. Then in late December 1999, we purchased additional working interests in the Masters Creek area from Dominion Reserves, Inc., for approximately $14.0 million in cash and purchased additional working interests in the S. Burr Ferry portion of the Masters Creek area from Union Pacific for approximately $1.9 million. We expect to use our operating expertise in this geological trend to continue to successfully develop and exploit these properties.

In the first quarter of 2001, we purchased interests in the Lake Washington field from Elysium Energy, LLC, for approximately $30.5 million in cash. This acquisition created the newest core area for the Company.

Our strategy is to increase our reserves and production through both drilling and acquisitions, shifting the balance between the two activities in response to market conditions. In addition, we seek to enhance the results of our drilling and production efforts through the implementation of advanced technologies. For 1999, in response to lower oil and gas prices in 1998 that continued in the first half of 1999, we decreased our capital expenditures budget to $54.2 million, of which $36.0 million was targeted for drilling, $31.3 million for development drilling, and $4.7 million for exploratory drilling. The remaining $18.2 million was targeted principally for leasehold, seismic, and geological costs of prospects. After oil and gas prices rebounded in the second half of the year, we increased our capital expenditures during the fourth quarter. We funded the $78.1 million of capital expenditures spent in 1999 primarily through our internally generated cash flows of $73.6 million, while the remainder was funded with net proceeds from our third quarter 1999 public offering of common stock and Senior Notes that remained after paying off our bank debt.

For 2000, in response to the strengthening of oil and gas prices and the resulting increase in cash flows generated from these commodity prices, we increased our capital expenditures to $173.3 million, of which $105.8 million was targeted for drilling in the United States, with $90.3 million for development drilling and $15.5 million for exploratory drilling. We spent $9.7 million in drilling to further delineate our Rimu discovery in New Zealand. Additionally, $33.4 million was spent for producing property acquisitions. The remaining $24.4 million was used principally for leasehold, seismic, and geological costs of prospects. We funded the $173.3 million of capital expenditures in 2000 primarily through our internally generated cash flows of $128.2 million, while the remainder was funded with net proceeds from our third quarter 1999 public offering of common stock and Senior Notes that remained after paying off our bank debt and funding capital expenditures in 1999.

During 2001, as oil and gas prices continued to rise early in the year and stayed strong through the first half of the year, our cash flow generated due to these commodity prices increased as well. As a result of this cash flow and our continued efforts in New Zealand, along with the opportunity to acquire the Lake Washington assets, we increased our capital expenditures to $275.1 million. Of this amount, $157.0 million was spent on drilling in the United States, with $120.6 million for development drilling and $36.4 million for exploratory drilling. We spent $26.2 million on drilling in New Zealand, with $19.0 million on development drilling and $7.2 million on exploratory drilling. We also spent $17.9 million constructing a gas processing plant in New Zealand and $40.5 million for domestic producing property acquisitions, primarily for the Lake Washington acquisition. The remaining $33.5 million was spent primarily on leasehold, seismic and geological costs of prospects, both in the United States and New Zealand. During 2001, we relied upon internally generated cash flows of $139.9 million to partially fund our capital expenditures; the remainder was funded with increases in borrowings under our bank credit facility.

Due to falling oil and gas prices in the second half of 2001 and continuing into 2002, we have again reduced our 2002 capital expenditures budget and intend on focusing on low risk development drilling on long-lived reserve properties. Therefore, our 2002 drilling will focus in Lake Washington and on developing our Rimu and Kauri areas in New Zealand. We anticipate spending approximately $132.5 million in 2002 for capital expenditures, with approximately $50.9 million of this amount for drilling activity. The TAWN acquisition, which closed in January 2002, accounted for $54.4 million of this budget. This $132.5 million budget also excludes any property acquisition that may present itself in this low price environment and also excludes any property sales.

We have increased our proved reserves from 258.7 Bcfe at year-end 1996 to 645.8 Bcfe at year-end 2001, which has resulted in the replacement of 302% of our production during the same five-year period. In 2001, we increased our proved reserves by 3%, which replaced 136% of our 2001 production. Our five-year average reserves replacement costs were $1.26 per Mcfe. Our 2001 production increased by 6% in relation to 2000 production. We have increased our production from 19.4 Bcfe at year-end 1996 to 44.8 Bcfe at year-end 2001. Primarily due to increased production, along with strong 2001 commodity prices, this has resulted in average annual growth in net cash provided by operating activities of 30% per year from year-end 1996 to year-end 2001.

Domestic Properties

AWP Olmos Area. As of December 31, 2001, we owned approximately 28,562 net acres in the AWP Olmos area. We have extensive expertise and a long history of experience with low-permeability, tight-sand formations typical of this area, having acquired our first acreage there in 1988. These reserves are approximately 74% gas. At year-end 2001, we owned interests in 496 wells and were the operator of 492 wells in this area producing gas from the Olmos sand formation at a depth of approximately 10,000 to 11,500 feet. We own nearly 100% of the working interests in all wells in which we are the operator.

In 2001, we drilled 11 development wells in the AWP Olmos area, all of which were successful. At year-end 2001, we had 122 proved undeveloped locations. Also in 2001, we purchased interests in the AWP Olmos area from partnerships we manage. Our planned 2002 capital expenditures in this area will focus on performing fracture extensions and installing coiled tubing velocity strings.

Brookeland Area. As of December 31, 2001, we owned drilling and production rights in 127,703 gross acres (79,874 net acres) and 15,000 fee mineral acres in this area, which contains substantial proved undeveloped reserves. This area was part of the acquisition from Sonat in 1998 and is located in East Texas near the border of Louisiana in Jasper and Newton counties. It primarily contains horizontal wells producing from the Austin Chalk formation. The reserves are approximately 60% oil and natural gas liquids. In 2001, we drilled or participated in the drilling of 11 development wells there, all of which were successful. At year-end 2001, we had 17 proved undeveloped locations in this area.

Lake Washington Field. As of December 31, 2001, we owned drilling and production rights in 13,595 net acres in the Lake Washington field. This area is located in Plaquemines Parish in South Louisiana. The reserves are approximately 95% oil and natural gas liquids. We acquired interests in the Lake Washington field in March 2001. This field produces oil from multiple Miocene sands ranging in depth from less than 2,000 feet to greater than 10,000 feet. The field is located on a salt dome and has produced over 300 million BOE since its inception. The area around the dome is heavily faulted, thereby creating a large number of potential traps. Oil and gas from approximately 25 producing wells is gathered from four platforms located in water depths from 6 to 11 feet, with drilling and workover operations performed with barge rigs. In 2001, four development wells and one exploratory well were drilled in the area, all of which were successful. At year-end 2001, we had 29 proved undeveloped locations in this field. Our planned 2002 capital expenditures in this area are approximately $25.0 million and include 20 development wells and two exploratory wells.

Masters Creek Area. As of December 31, 2001, we owned drilling and production rights in 194,212 gross acres (149,400 net acres) and 141,000 fee mineral acres in this area, which contains substantial proved undeveloped reserves. This area was also part of the acquisition from Sonat in 1998. It is located in Central Louisiana near the Texas-Louisiana border in the two parishes of Vernon and Rapides. It contains horizontal wells producing both oil and gas from the Austin Chalk formation. The reserves are approximately 74% oil and natural gas liquids. In 2001, we drilled nine development wells in the area, all of which were successful. At year-end 2001, we had 18 proved undeveloped locations in the area.

Exploration and Development Drilling Activities

We pursue a "controlled risk" approach to exploratory and development drilling, focusing our domestic activities on specific regions in which our technical staff has considerable experience and which are located close to known producing horizons. In our foreign operations, we chose New Zealand based on its hydrocarbon potential combined with its political and economic attributes. We seek to minimize our exploration risk by investing in multiple prospects, farming out interests to third parties, using advanced technologies, and drilling in diverse types of geological formations, often in areas with multiple objectives. We use basin studies to analyze targeted formations based on their potential size, risk profile, and economic characteristics.

In 1991, we began an intensive effort to develop an inventory of exploration and development drilling prospects, identifying drilling locations through integrated geological and geophysical studies of our undeveloped acreage and other prospects. As a result, we added 64.9 Bcfe of proved reserves through drilling in 1999, 184.7 Bcfe in 2000 (122.5 Bcfe from New Zealand), and 105.8 Bcfe in 2001 (17.4 Bcfe from New Zealand). The 2001 additions were a result of our development success rate, as 38 of 40 development wells drilled were successful, while 6 of 13 exploratory wells were successful.

Our development strategy is designed to maximize the value and productivity of our existing properties through development drilling and recovery methods, enhancing production results through improved field production techniques, lowering production costs, and applying our technical expertise and resources to exploit producing properties efficiently. We utilize various recovery techniques, which include employing water flooding and acid treatments, fracturing reservoir rock through the injection of high-pressure fluid, and inserting coiled tubing velocity strings to enhance and maintain gas flow. We believe that the application of fracturing technology and coiled tubing over the years has resulted in significant increases in production and decreases in completion and operating costs, particularly in our AWP Olmos area. In 2001, however, as the exploration and production industry rushed to get new projects into production to take advantage of the commodity prices in the first half of the year, service sector capacity was constrained and the costs of services skyrocketed. This, along with increased severance and ad-valorem taxes, caused our production costs to increase in 2001.

Our exploration and development activities are conducted by our staff of professionals, including reservoir engineers, geologists, geophysicists, petrophysicists, landmen, and drilling and production engineers. We believe that one of the keys to our success has been our team approach, which integrates multiple disciplines to maximize efficient utilization of information leading to drillable projects.

We have increasingly used advanced seismic technology to enhance the results of our drilling and production efforts, including 2-D and 3-D seismic analysis, amplitude versus offset studies, and detailed formation depletion studies. We have a number of computer workstations from which seismic data is analyzed and enhanced with advanced software programs, including Landmark, Geographix, and SMT workstations. As a result, we have maintained internal seismic expertise and have compiled an extensive database.

During 1997, we completed our first international seismic acquisition program in two key areas in New Zealand. In the Rimu prospect, we acquired 30 kilometers (18.7 miles) of 2-D cross-swath data, as well as 14.5 kilometers (9 miles) of 2-D line data in the Tawa prospect, complementing existing 2-D seismic coverage. Following our 1999 Rimu discovery, we conducted a second seismic acquisition in March 2000 in which we obtained 42 kilometers (26 miles) of 2-D lines to more fully identify the extent of the Rimu structure. We also obtained approximately 72.5 kilometers (45 miles) of data from a number of 2-D transitional zone seismic lines tied to existing marine and land seismic grids in order to study the Kauri structure to the southeast of Rimu. During 2001, we acquired approximately 30 kilometers (18.7 miles) of 2-D line data in PEP 38730, in which we own a 100% working interest. Further processing and analysis of the data will continue in 2002.

Also in 1997, we acquired 21 miles of 2-D data in the AWP Olmos area in south Texas and 51 miles of data in the Fayette County portion of the Giddings area. Two more prospects in the North Louisiana Salt Basin were shot in the form of 2-D swaths of approximately 16 miles each. During 1998, we performed two additional 2-D acquisitions in Fayette County, Texas. In all our current and future projects, we have an on-going program in which we license existing seismic data for reprocessing with available new technologies. In certain areas we also complement existing data with proprietary seismic data designed for specific geologic targets. This results in an integrated approach to exploration (multidiscipline data analysis and interpretation) that helped identify a number of our exploration prospects for 2001.

In addition to operation, development and exploration activities in the AWP Olmos, Brookeland, Lake Washington and Masters Creek areas, we are currently pursuing development and exploration activities in the following emerging growth areas and in New Zealand.

The Frio Trend. Swift Energy has been focusing on the deep sands of the Frio formation (10,000 to 16,000 feet) in an area that straddles the border of Kenedy County and Willacy County in the southern tip of Texas and is identified as Garcia Ranch. Retaining a 65% working interest, Swift had two discoveries in the area in 2001, one in the Rome prospect in Willacy County at a depth of 16,388 feet, and the other in the Siena prospect in Kenedy County at a depth of 16,300 feet.

The Wilcox Sands. The Company had three discoveries in the Wilcox sands during 2001, two of which were located in Goliad County, Texas: the Nita prospect drilled to a depth of approximately 15,000 feet and the Brandon prospect drilled to a depth of about 13,000 feet. Swift’s working interests in the two wells are 73% and 60%, respectively. The third well, in which the Company has a 25% working interest, was in the Falcon Ridge prospect in Zapata County, Texas.

The Woodbine Formation. Swift drilled one well to the Woodbine formation during 2001—in the Lion prospect in San Jacinto County, Texas, down to a depth of 16,300 feet. Although hydrocarbon-bearing intervals were found, the well was determined to be noncommercial.

The Miocene Sands. Swift successfully drilled its first exploratory well in the Miocene sands in its new Lake Washington area in Plaquemines Parish, Louisiana—to a depth of 3,348 feet with a retained interest of 100%. This area has substantial exploration and development potential, with sands extending from shallow depths down to 10,000 feet or more. Current plans are to drill another exploratory well in the area during 2002.

Also in Plaquemines Parish, about 50 miles north of the Lake Washington area, is the Delacroix area where the Company has also been developing prospects for both shallow and deep horizons in the Miocene sands. The first well in this area, in the Grand Lake prospect, was drilled to a depth of 18,571 feet early in 2002 and was temporarily abandoned for a possible future sidetrack well.

New Zealand. We operate permit 38719 with a 90% working interest. After working several years and analyzing extensive seismic data, we commenced drilling a successful exploratory well, the Rimu-A1, in July 1999. In 2000, we drilled two successful Rimu development wells. Our permit contains 50,300 gross acres, including 12,800 adjacent offshore acres. In 2001, we drilled three development wells to further delineate our Rimu area, one of which was successful. We also drilled two exploratory wells in the Kauri area, one still being evaluated and the other one unsuccessful. In addition, we drilled one successful development well in our Kauri area and participated in a non-operated exploratory well in another permit area that was temporarily abandoned in 2001.

The Tawa prospect is located northwest of the Rimu and Kauri areas in the same permit. Its main targets are the Tikorangi limestone, the Kauri sandstone, and the Tariki sandstone. Consisting of a combination of structural and stratigraphic traps, this prospect was developed based upon Swift’s analysis of existing three-dimensional seismic data plus two-dimensional seismic data acquired during Company surveys in 1997 and 2000.

The Matai prospect, located on the southeast flank of the Tawa prospect also in permit 37819, will target the Moki sandstone. It was identified based upon the analysis of the two-dimensional seismic data Swift acquired in 2000.

The following table sets forth the results of our drilling activities during the three years ended December 31, 2001:

¹Oil production for 2001 includes New Zealand production of 84,261 barrels, at an average price per barrel of $21.64.

²Natural gas production for 2000 and 1999 includes 405,130 and 728,235 Mcf, respectively, delivered under the volumetric production payment agreement pursuant to which we were obligated to deliver certain monthly quantities of natural gas (see Note 1 to the Consolidated Financial Statements). Under the volumetric production payment entered into in 1992, we delivered the last remaining commitment of gas in October 2000, when such agreement expired.