At Swift Energy Company, the word "balance" is deeply ingrained in our culture. We are constantly adjusting the balance of all sorts of strategic variables. With our reserves base, we think of oil versus natural gas, developed versus undeveloped, and high initial deliverability versus long reserves life. With operations, we look at domestic versus international, exploration versus development, and acquisitions versus drilling. In finances, we consider debt versus equity, and in management, we view corporate controls versus organizational flexibility. In each case, we examine the risk versus the reward.

Early in 2002, the concept of balance took on an even deeper meaning for us, because, frankly, the profound changes that occurred in our industry the previous year temporarily pushed us off balance. Along with others in our industry, we experienced the combination of plunging product prices, soaring drilling and operating costs, and declining stock prices. To adapt to the changed environment, we had to revise our overall strategy for meeting our 2002 reserves and production goals.

Our announced targets for 2002 were a 10% to 15% increase in both our proved reserves and our production. Significant contributions to both these goals were made early in the year when we completed our acquisition of four producing properties in New Zealand just north of our Rimu/Kauri Area. Largely producing gas and known collectively as the TAWN Area, these fields accounted for over 28% of our total 2002 production and held nearly 9% of our year-end proved reserves.

In the United States, it had been our intention to increase our 2002 reserves primarily with a diversified portfolio of drilling projects, but in the new environment it became mandatory to reduce our reserves replacement costs. This meant that we had to defer attractive but high-risk drilling projects and concentrate in an area with a mix of proven and probable reserves that were known to be long lived. The area chosen was our newest domestic core area of operation, the Lake Washington Field in Plaquemines Parish, Louisiana.

As a result of our focus in the area, Lake Washington’s production more than doubled in 2002 and its proved reserves, mostly oil, increased by approximately 160%. For the Company as a whole, our year-end proven reserves increased by 16% to 749.4 Bcfe and our production increased 11% to 49.8 Bcfe, meeting or exceeding our target ranges. Moreover, these increases were accomplished with an overall reserves replacement cost of $0.96 per Mcfe, much lower than the cost experienced in 2001. Also, during the first half of the year we improved our financial flexibility through a notes offering and an equity offering.

In addition to helping us meet our 2002 reserves and production goals, these operational and financial initiatives changed the balance of many of the key variables in our strategy with considerable import for the future. For example, our balance of oil and gas reserves shifted toward oil, responding not only to our present opportunities in Lake Washington but also to the current strength in crude oil prices. At the same time, our balance of developed versus undeveloped reserves moved toward developed, bringing new production on line and improving the value of our assets. We also tipped the scale away from high-deliverability assets toward properties with long-lived reserves, giving us a more stable, long-term production base.

NYMEX Crude Oil Futures $/Barrel, Near-Month Contract, 1/1/1990 to 2/28/2003

NYMEX Natural Gas Futures $/MMBtu, Near-Month Contract, 4/3/1990 to 2/28/2003

In operations, the TAWN acquisition helped us achieve a good balance between domestic and international production and also between discovered and acquired reserves. In finances, the debt and equity offerings improved our liquidity and rebalanced our debt-to-equity profile, and in management, additional controls improved our transparency and accountability both inside and outside the organization. All this was done while maintaining the Company’s flexibility, teamwork, and innovation. More fundamentally, we adopted a new, more balanced approach to risks and rewards, reflecting the current economic and industry environments.

Now that we have rebalanced these strategic variables, we are in a better position to pursue a number of exciting growth opportunities along the Texas and Louisiana Gulf Coast and in the Taranaki Basin in New Zealand. Both of these areas provide tremendous unexploited potential in a mix of geological environments, and they are both in proximity to growing markets with relatively low political risk compared to many other parts of the world. In short, they are both areas where an independent such as Swift can expand profitability for many years to come.

Domestically, we have identified 23 exploratory prospects and plan to drill four to eight of them in 2003. In New Zealand, we have analyzed four exploratory opportunities, with tentative plans to drill at least one in 2003. To reduce risk, we are seeking partners for most of these prospects.

We also intend to continue improving the value of our core properties in the United States and New Zealand through a combination of production enhancements and efficiency improvements. In the near term, the domestic driver of production growth will be the Lake Washington Field, where we plan to drill 50 to 60 development wells and two exploratory wells in 2003. Limited drilling will also be resumed in our other domestic core areas.

In the Rimu/Kauri Area in New Zealand, we have scheduled several capital projects for the first half of the year that are designed to increase the area’s productivity. After realizing early last year that our drilling and completion techniques were probably damaging the producing formations, we asked an independent consultant to analyze our procedures and give us recommendations both for remediation and for future drilling. Our 2003 projects will implement those recommendations and help us to pursue the large volumes of potential reserves we still believe exist in the area.

As we review the Company’s performance in 2002, it is clear that the dynamic balance of our revised strategy helped us stay the course and achieve our objectives. As a result, we have added to a strong asset base that we believe is worth substantially more than is indicated by our current stock price. We have maintained our balance through some very difficult times and are confident that we are in an excellent position to achieve stable growth in the future.