Throughout its history, Swift Energy has practiced a disciplined approach to financial management. At the center is a strong capital structure that balances equity and debt and preserves the Company’s flexibility to adjust to the dynamics of a volatile industry. Key components include strategically balancing the capital budget between drilling and acquisitions, matching long-lived assets with long-term financing, establishing leverage targets that are reasonable given the volatility of oil and gas prices, accessing capital markets at opportune times, continually improving the Company’s credit profile, and effectively managing risk.

Rising oil and gas prices coupled with Swift’s production increases enabled the Company to expand its capital budget in 2005 from an initially projected range of $200 million to $220 million to capital expenditures of $265 million. Net cash provided by operating activities rose 56% to $285.3 million, and cash flow per diluted share rose 51% to $9.74 in 2005. Cash flows covered the majority of Swift’s budget expenditures for the year, allowing the Company to pursue its objectives and increase its cash on hand to $53 million as of December 31, 2005. EBITDA (a measure of cash flow, see Glossary on page 79) was $312 million for 2005, an increase of 47% over 2004 levels.

Swift continued to maintain its strong liquidity position in 2005, with no outstanding borrowings on its $400 million revolving line of credit at year-end. This credit facility, which has been extended to October 2008, has a commitment amount set at $150 million at Swift’s request and has a current borrowing base of $250 million.

As part of its goal of maintaining financial discipline, Swift was able to reduce its long-term debt to PV-10 ratio to 11% at year-end 2005, compared to 18% in 2004, and 22% in 2003. Working capital moved in a positive direction, totaling $16.6 million at year-end 2005, compared to a negative $14.2 million at year-end 2004 and a negative $35.9 million at year-end 2003.

Swift projects that its capital budget for 2006 will range between $300 million and $325 million, with internally generated cash flows expected to fund all expenditures. Factors that could affect Swift’s ability to generate expected cash flows include production levels and oil and gas prices.

As has been its policy for many years, Swift focuses its price risk management strategy on realizing the benefit of high commodity prices during periods of upswings while protecting against serious downturns. Swift’s exposure to volatile commodity prices—which are inherent in the oil and natural gas industry—is the Company’s major market risk.

Swift’s price risk management program is overseen by the Company’s Finance Committee, which is chaired by the president, and it is reviewed by the chief executive officer. The program accomplishes its hedging strategy through the use of floors, near-term forward physical sales, and participating collars. Some 20% to 50% of the Company’s volume of oil and U.S. natural gas production is typically targeted for coverage, with hedging implemented when market prices are strong. This strategy protects near-term cash flows and the capital budget while maintaining upside potential. In New Zealand, long-term contracts are used for price risk management of natural gas.

Another aspect of the Company’s risk management strategy includes insuring against natural disasters. Swift has submitted claims to its insurers for damages related to Hurricanes Katrina and Rita, and the insurers have provided cash advances covering a portion of those claims. Negotiations for the settlement of the remainder of the claims are currently under way.