SWIFT ENERGY COMPANY 2004 ANNUAL REPORT


Supplemental Information (Unaudited)

Capitalized Costs. The following table presents our aggregate capitalized costs relating to oil and gas producing activities and the related depreciation, depletion, and amortization:

Total Domestic New Zealand
---------------------- ---------------------- ----------------------
December 31, 2004:
   Proved oil and gas properties

$1,479,681,903

$ 1,271,354,490

$208,327,413

   Unproved oil and gas properties

80,121,509

46,751,416

33,370,093

---------------------- ---------------------- ----------------------
1,559,803,412 1,318,105,906 241,697,506
   Accumulated depreciation, depletion, and amortization (641,917,990) (590,906,014) (51,011,976)
---------------------- ---------------------- ----------------------
   Net capitalized costs $ 917,885,422 $ 727,199,892 $ 190,685,530
============ ============ ============
December 31, 2003:
   Proved oil and gas properties

$1,305,110,582

$ 1,135,615,117

$169,495,465

   Unproved oil and gas properties

67,557,969

31,802,621

35,755,348

---------------------- ---------------------- ----------------------
1,372,668,551 1,167,417,738 205,250,813
   Accumulated depreciation, depletion, and amortization (560,961,013) (529,272,658) (31,688,355)
---------------------- ---------------------- ----------------------
   Net capitalized costs $ 811,707,538 $ 638,145,080 $ 173,562,458
============ ============ ============

 

Of the $46.7 million of domestic Unproved property costs (primarily seismic and lease acquisition costs) at December 31, 2004, excluded from the amortizable base, $30.3 million was incurred in 2004, $2.9 million was incurred in 2003, $2.5 million was incurred in 2002, and $11.1 million was incurred in prior years. When we are in an active drilling mode, we evaluate the majority of these unproved costs within a two to four year time frame.

Of the $33.4 million of New Zealand Unproved property costs at December 31, 2004, excluded from the amortizable base, $3.7 million was incurred in 2004, $8.3 million was incurred in 2003, $17.0 million was incurred or acquired in 2002, and $4.4 million was incurred in prior years. We expect to continue drilling in New Zealand to delineate our prospects there within a two to four year time frame.

Capitalized asset retirement obligations have been included in the Proved properties as of December 31, 2004 and 2003, as we adopted SFAS No. 143 "Accounting for Asset Retirement Obligations" effective January 1, 2003.

 

Costs Incurred. The following table sets forth costs incurred related to our oil and gas operations:

Year Ended December 31, 2004

Total Domestic New Zealand
----------------- ----------------- -------------------
Acquisition of proved and unproved properties

$   31,771,094

$   31,771,094

$             ---

Lease acquisitions and prospect costs1

34,545,393

27,713,059

6,832,334

Exploration

17,430,265

16,714,982

715,283

Development

105,947,485

78,163,289

27,784,196

----------------- ----------------- -------------------
     Total acquisition, exploration, and development2 $189,694,237 $154,362,424 $35,331,813
----------------- ----------------- -------------------
Processing plants

$   1,283,515

$ 147,317

$  1,136,198

Field compression facilities

1,028,091

1,028,091

--

----------------- ----------------- -------------------
     Total plants and facilities $2,311,606 $1,175,408 $1,136,198
----------------- ----------------- -------------------
Total costs incurred3 $192,005,843 $155,537,832 $36,468,011
============ ============ ============
Year Ended December 31, 2003

Total Domestic New Zealand
----------------- ----------------- -------------------
Acquisition of proved and unproved properties

$   1,942,868

$   1,635,316

$    307,552

Lease acquisitions and prospect costs1

18,869,099

12,440,144

6,428,955

Exploration

14,467,455

11,789,700

2,677,755

Development

116,451,112

100,549,351

15,901,761

----------------- ----------------- -------------------
     Total acquisition, exploration, and development2 $151,730,534 $126,414,511 $25,316,023
----------------- ----------------- -------------------
Processing plants

$   6,192,199

$  907,771

$  5,284,428

Field compression facilities

3,521,522

3,521,522

--

----------------- ----------------- -------------------
     Total plants and facilities $9,713,721 $4,429,293 $5,284,428
----------------- ----------------- -------------------
Total costs incurred3 $161,444,255 $130,843,804 $30,600,451
============ ============ ============
Year Ended December 31, 2002

Total Domestic New Zealand
----------------- ----------------- -------------------
Acquisition of proved and unproved properties $ 64,229,283 $ 5,415,932 $ 58,813,351
Lease acquisitions and prospect costs1 16,009,939 10,789,876 5,220,063
Exploration 18,395,335 7,571,215 10,824,120
Development 47,407,087 40,366,378 7,040,709
----------------- ----------------- -------------------
     Total acquisition, exploration, and development2 $146,041,644 $64,143,401 $81,898,243
----------------- ----------------- -------------------
Processing plants $7,845,520 $1,313,299 $6,532,221
Field compression facilities 2,251,247 2,251,247 ---
----------------- ----------------- -------------------
     Total plants and facilities $10,096,767 $3,564,546 $6,532,221
----------------- ----------------- -------------------
Total costs incurred $156,138,411 $67,707,947 $88,430,464
============ ============ ============

(1)These are actual amounts as incurred by year, including both proved and unproved lease costs. The annual lease acquisition amounts added to proved oil and gas properties in 2004, 2003, and 2002 were $17,811,217, $20,702,276, and $23,454,234, respectively.

(2)Includes capitalized general and administrative costs directly associated with the acquisition, exploration, and development efforts of approximately $13.1 million, $11.5 million, and $10.7 million in 2004, 2003, and 2002, respectively. In addition, total includes $6.5 million, $6.8 million, and $7.0 million in 2004, 2003, and 2002, respectively, of capitalized interest on unproved properties.

(3)Asset retirement obligations incurred have been included in exploration, development and acquisition costs as applicable for the years ended December 31, 2004 and 2003, as we adopted SFAS No. 143 "Accounting for Asset Retirement Obligations" effective January 1, 2003.

 

 

Results of Operations. 

Year Ended December 31, 2004

Total Domestic New Zealand
--------------------- --------------------- ---------------------
Oil and gas sales

$311,285,172

$258,663,936

$52,621,236

Lease operating cost

(41,214,256)

(30,191,889)

(11,022,367)

Severance and other taxes

(30,401,293)

(26,713,592)

(3,687,701)

Depreciation and depletion

(80,504,043)

(61,478,364)

(19,025,679)

Accretion of asset retirement obligation

(673,654)

(505,174)

(168,480)

--------------------- --------------------- ---------------------

158,491,926

139,774,917

18,717,009

Provision for income taxes

53,093,022

51,576,944

1,516,078

--------------------- --------------------- ---------------------
Results of producing activities $ 105,398,904 $ 88,197,973 $17,200,931
============ ============ ============
Amortization per physical unit of production
   (equivalent Mcf of gas) $1.38 $1.46 $1.17
============ ============ ============
Year Ended December 31, 2003

Total Domestic New Zealand
--------------------- --------------------- ---------------------
Oil and gas sales

$211,032,639

$164,167,390

$46,865,249

Lease operating cost

(33,833,198)

(24,022,412)

(9,810,786)

Severance and other taxes

(19,033,604)

(15,290,669)

(3,742,935)

Depreciation and depletion

(62,037,680)

(43,818,709)

(18,218,971)

Accretion of asset retirement obligation

(857,356)

(623,948)

(233,408)

--------------------- --------------------- ---------------------

95,270,801

80,411,652

14,859,149

Provision for income taxes

32,321,635

29,696,023

2,625,612

--------------------- --------------------- ---------------------
Results of producing activities $ 62,949,166 $ 50,715,629 $12,233,537
============ ============ ============
Amortization per physical unit of production
   (equivalent Mcf of gas) $1.17 $1.30 $0.94
============ ============ ============
Year Ended December 31, 2002

Total Domestic New Zealand
--------------------- --------------------- ---------------------
Oil and gas sales

$141,195,713

$112,065,003

$29,130,710

Lease operating cost

(28,918,858)

(23,308,444)

(5,610,414)

Severance and other taxes

(12,578,454)

(9,780,514)

(2,797,940)

Depreciation and depletion

(55,254,467)

(42,807,364)

(12,447,103)

--------------------- --------------------- ---------------------
44,443,934 36,168,681 8,275,253
Provision for income taxes 15,860,064 13,129,231 2,730,833
--------------------- --------------------- ---------------------
Results of producing activities $ 28,583,870 $ 23,039,450 $ 5,544,420
============ ============ ============
Amortization per physical unit of production
   (equivalent Mcf of gas) $1.11 $1.25 $0.80
============ ============ ============

 

These results of operations do not include the losses from our hedging activities of $1.3 million, $2.8 million, and $0.2 million for 2004, 2003, and 2002, respectively. Our lease operating costs per Mcfe produced were $0.71 in 2004, $0.64 in 2003, and $0.58 in 2002.

The accretion of asset retirement obligation has been included in the 2004 and 2003 periods, as we adopted SFAS No. 143 "Accounting for Asset Retirement Obligations" effective January 1, 2003.

We used our effective tax rate in each country to compute the provision for income taxes in each year presented.

Supplemental Reserve Information. The following information presents estimates of our proved oil and gas reserves. Reserves were determined by us and audited by H. J. Gruy and Associates, Inc. ("Gruy"), independent petroleum consultants. Gruy has audited 100% of our proved reserves. Gruy’s audit was conducted according to standards approved by the Board of Directors of the Society of Petroleum Engineers, Inc. and included examination, on a test basis, of the evidence supporting our reserves. Gruy’s audit was based upon review of production histories and other geological, economic, and engineering data provided by Swift. Where Gruy had material disagreements with Swift reserve estimates, we revised our estimates to be in agreement. Gruy’s report dated January 27, 2005, is set forth as an exhibit to the Form 10-K Report for the year ended December 31, 2004, and includes definitions and assumptions that served as the basis for the audit of proved reserves and future net cash flows. Such definitions and assumptions should be referred to in connection with the following information:

Estimates of Proved Reserves

Total

Domestic

New Zealand




Oil, NGL, and Oil, NGL, and Oil, NGL, and
Natural Gas Condensate Natural Gas Condensate Natural Gas Condensate
(Mcf) (Bbls) (Mcf) (Bbls) (Mcf) (Bbls)
--------------- --------------- --------------- --------------- --------------- ---------------
Proved reserves as of December 31, 2001 324,912,125 53,482,636 288,489,500 42,564,733 36,422,625 10,917,903
   Revisions of previous estimates1 (29,972,714) 5,298,439 (29,470,419) 8,675,082 (502,295) (3,376,643)
   Purchases of minerals in place 51,940,044 3,711,948 226,245 24,207 51,713,799 3,687,741
   Sales of minerals in place (3,839,124) (464,490) (3,839,124) (464,490) --- ---
   Extensions, discoveries, and other additions 10,822,919 12,180,558 197,919 11,304,782 10,625,000 875,776
   Production (27,131,578) (3,770,128) (15,780,059) (3,074,674) (11,351,519) (695,454)
--------------- --------------- --------------- --------------- --------------- ---------------
Proved reserves as of December 31, 2002 326,731,672 70,438,963 239,824,062 59,029,640 86,907,610 11,409,323
   Revisions of previous estimates1

(6,445,114)

4,975,920

(1,418,312)

3,497,022

(5,026,802)

1,478,898

   Purchases of minerals in place

273,623

35,472

273,623

35,472

--

--

   Sales of minerals in place

(3,984,209)

(228,505)

(3,984,209)

(228,505)

--

--

   Extensions, discoveries, and other additions

47,231,609

9,730,665

21,370,151

8,018,766

25,861,458

1,711,899

   Production

(28,002,719)

(4,192,612)

(13,744,040)

(3,336,702)

(14,258,679)

(855,910)

--------------- --------------- --------------- --------------- --------------- ---------------
Proved reserves as of December 31, 2003

335,804,862

80,759,903

242,321,275

67,015,693

93,483,587

13,744,210

   Revisions of previous estimates1

(3,306,705)

(1,117,715)

(1,619,531)

695,274

(1,687,174)

(1,812,989)

   Purchases of minerals in place

9,808,953

5,602,508

9,808,953

5,602,508

--

--

   Sales of minerals in place

(2,524,760)

(44,803)

(2,524,760)

(44,803)

--

--

   Extensions, discoveries, and other additions

2,205,670

830,111

2,205,670

830,111

--

--

   Production

(23,741,726)

(5,762,796)

(12,299,772)

(4,959,740)

(11,441,954)

(803,056)

--------------- --------------- --------------- --------------- --------------- ---------------
Proved reserves as of December 31, 2004

318,246,294

80,267,208

237,891,835

69,139,043

80,354,459

11,128,165

========= ======== ========= ======== ======== ========
Proved developed reserves:2
   December 31, 2001 181,651,578 23,759,574 167,401,736 20,393,142 14,249,842 3,366,432
   December 31, 2002 233,514,572 35,928,395 149,731,562 26,530,112 83,783,010 9,398,283
   December 31, 2003 210,119,927 45,525,366 138,173,341 38,767,983 71,946,586

6,757,383

   December 31, 2004 193,310,761 42,037,852 140,549,052 36,628,873 52,761,709

5,408,979

 

 

(1)Revisions of previous estimates are related to upward or downward variations based on current engineering information for production rates, volumetrics, and reservoir pressure. Additionally, changes in quantity estimates are affected by the increase or decrease in crude oil, NGL, and natural gas prices at each year-end. Proved reserves, as of December 31, 2004, were based upon prices in effect at year-end. Our hedges at year-end 2004 consisted of oil and natural gas price floors with strike prices mostly lower than the period end price and thus would not materially affect prices used in these calculations. The weighted average of 2004 year-end prices for total, domestic, and New Zealand were $5.16, $5.87, and $3.07 per Mcf of natural gas, $41.07, $42.21, and $33.60 per barrel of oil, and $25.48, $26.49 and $20.48 per barrel of NGL, respectively. This compares to $4.56, $5.53, and $2.04 per Mcf of natural gas, $30.16, $30.88, and $26.78 per barrel of oil, and $20.61, $21.81 and $14.10 per barrel of NGL as of December 31, 2003, for total, domestic, and New Zealand, respectively. The weighted average of 2002 year-end prices for total, domestic, and New Zealand were $3.49, $4.23, and $1.48 per Mcf of natural gas, $29.27, $29.36, and $28.80 per barrel of oil, and $16.54, $17.30, and $12.24 per barrel of NGL, respectively.

(2)At December 31, 2004, 56% of our reserves were proved developed, compared to 59% at December 31, 2003, 60% at December 31, 2002, and 50% at December 31, 2001.

 

Standardized Measure of Discounted Future Net Cash Flows. The standardized measure of discounted future net cash flows relating to proved oil and gas reserves is as follows:

Year Ended December 31, 2004

Total Domestic New Zealand
------------------------ ------------------------ ------------------------
Future gross revenues

$4,711,060,300

$4,122,705,861

$588,354,439

Future production costs

(1,029,449,670)

(819,035,166)

(210,414,504)

Future development costs

(480,093,684)

(434,305,537)

(45,788,147)

------------------------ ------------------------ ------------------------
Future net cash flows before income taxes

3,201,516,946

2,869,365,158

332,151,788

Future income taxes

(896,135,438)

(866,598,544)

(29,536,894)

------------------------ ------------------------ ------------------------
Future net cash flows after income taxes

2,305,381,508

2,002,766,614

302,614,894

Discount at 10% per annum

(840,436,013)

(746,227,690)

(94,208,323)

------------------------ ------------------------ ------------------------
Standardized measure of discounted future net cash flows
   relating to proved oil and gas reserves $    1,464,945,495 $  1,256,538,924 $ 208,406,571
============ ============ ============
Year Ended December 31, 2003

Total Domestic New Zealand
------------------------ ------------------------ ------------------------
Future gross revenues

$3,805,349,886

$3,279,884,680

$  525,465,206

Future production costs

(831,430,479)

(678,983,441)

(152,447,038)

Future development costs

(331,816,723)

(301,874,087)

(29,942,636)

------------------------ ------------------------ ------------------------
Future net cash flows before income taxes

2,642,102,684

2,299,027,152

343,075,532

Future income taxes

(729,624,048)

(657,354,849)

(72,269,199)

------------------------ ------------------------ ------------------------
Future net cash flows after income taxes

1,912,478,636

1,641,672,303

270,806,333

Discount at 10% per annum

(777,622,101)

(678,769,827)

(98,852,274)

------------------------ ------------------------ ------------------------
Standardized measure of discounted future net cash flows
   relating to proved oil and gas reserves $    1,134,856,535 $  962,902,476 $ 171,954,059
============ ============ ============
Year Ended December 31, 2002

Total Domestic New Zealand
------------------------ ------------------------ ------------------------
Future gross revenues $ 2,990,669,570 $ 2,578,435,576 $ 412,233,994
Future production costs (720,599,745) (612,094,088) (108,505,657)
Future development costs (224,792,520) (208,492,520) (16,300,000)
------------------------ ------------------------ ------------------------
Future net cash flows before income taxes 2,045,277,305 1,757,848,968 287,428,337
Future income taxes (599,195,484) (512,966,321) (86,229,163)
------------------------ ------------------------ ------------------------
Future net cash flows after income taxes 1,446,081,821 1,244,882,647 201,199,174
Discount at 10% per annum (609,212,030) (540,375,347) (68,836,683)
------------------------ ------------------------ ------------------------
Standardized measure of discounted future net cash flows
   relating to proved oil and gas reserves $    836,869,791 $  704,507,300 $ 132,362,491
============ ============ ============

 

The standardized measure of discounted future net cash flows from production of proved reserves was developed as follows:

1. Estimates are made of quantities of proved reserves and the future periods during which they are expected to be produced based on year-end economic conditions.

2. The estimated future gross revenues of proved reserves are priced on the basis of year-end prices, except in those instances where fixed and determinable gas price escalations are covered by contracts limited to the price we reasonably expect to receive.

3. The future gross revenue streams are reduced by estimated future costs to develop and to produce the proved reserves, as well as asset retirement obligation costs, net of salvage value, based on year-end cost estimates and the estimated effect of future income taxes.

4. Future income taxes are computed by applying the statutory tax rate to future net cash flows reduced by the tax basis of the properties, the estimated permanent differences applicable to future oil and gas producing activities, and tax carry forwards.

The estimates of cash flows and reserves quantities shown above are based on year-end oil and gas prices for each period. Our hedges at year-end 2004 consisted mainly of crude oil and natural gas price floors with strike prices lower than the period end price and thus did not materially affect prices used in these calculations. Subsequent changes to such year-end oil and gas prices could have a significant impact on discounted future net cash flows. Under Securities and Exchange Commission rules, companies that follow the full-cost accounting method are required to make quarterly Ceiling Test calculations using hedge adjusted prices in effect as of the period end date presented (see Note 1 to the consolidated financial statements). Application of these rules during periods of relatively low oil and gas prices, even if of short-term seasonal duration, may result in non-cash write-downs.

The standardized measure of discounted future net cash flows is not intended to present the fair market value of our oil and gas property reserves. An estimate of fair value would also take into account, among other things, the recovery of reserves in excess of proved reserves, anticipated future changes in prices and costs, an allowance for return on investment, and the risks inherent in reserves estimates.

The following are the principal sources of change in the standardized measure of discounted future net cash flows:

Year Ended December 31,


2004

2003

2002

------------------------

------------------------ ------------------------
Beginning balance

$1,134,856,535

$836,869,791

$454,557,905

------------------------ ------------------------ ------------------------
Revisions to reserves proved in prior years--
   Net changes in prices, and production costs

398,333,372

218,104,882

418,531,747

   Net changes in future development costs

(117,672,270)

(108,603,152)

(44,641,133)

   Net changes due to revisions in quantity estimates

(12,754,357)

48,194,999

2,582,633

   Accretion of discount

152,715,946

116,136,717

60,298,619

   Other

49,111,385

(57,822,716)

(88,675,455)

------------------------ ------------------------ ------------------------
Total revisions

469,734,076

216,010,730

348,096,411

New field discoveries and extensions, net of future
    production and development costs

30,609,517

243,183,114

190,461,371

Purchases of minerals in place

118,575,886

1,019,290

76,538,437

Sales of minerals in place

(7,339,601)

(13,660,012)

(5,769,642)

Sales of oil and gas produced, net of production costs

(239,669,623)

(158,165,836)

(99,698,403)

Previously estimated development costs incurred

98,924,021

77,404,994

48,752,814

Net change in income taxes

(140,745,316)

(67,805,536)

(176,069,102)

------------------------ ------------------------ ------------------------
Net change in standardized measure of discounted
   future net cash flows

330,088,960

297,986,744

382,311,886

------------------------ ------------------------ ------------------------
Ending balance

$1,464,945,495

$1,134,856,535

$836,869,791

============ ============ ============

 

Quarterly Data (Unaudited). The following table presents summarized quarterly financial information for the years ended December 31, 2003 and 2004:

Income
Before Income Basic EPS Diluted EPS
Taxes Income Before <