With his passing in 2006, Swift Energy’s founder A. Earl Swift left many legacies. Among the most important of these were the people-centered values he embedded within the company.

In one of a series of published papers he wrote a few years before his death, he summarized his views on the role of leadership within an organization: "Leaders help others accomplish their individual goals. They help others become part of a team. Most importantly, leaders help others reach beyond themselves to accomplish some greater purpose." He built Swift Energy around his belief that people are the company’s greatest asset. For him, helping employees hone their potential—their personal expertise, their ability to interact with one another as a team, and their motivation to achieve a common mission—was the right thing to do for them as individuals and for the company as a whole.

Our emphasis on employee development provides for smooth transitions in succession. At all levels, from the field to the boardroom, our company is set up to maintain stability when the baton of leadership is handed from one person to another. As a result, when Terry Swift was re-elected in 2006 for a three-year term to the Board of Directors and also named its chairman, he had more than 25 years of experience with the company, including six years as a member of the board and five years as chief executive officer, with earlier positions as president and executive vice president.

With respect to the board as a whole, we feel that diversity of its members in both age and skill sets is important and that outside directors should be in the majority, as they have been for many years, to provide a strong measure of external control. Our current board members vary in age from 46 to 75 years, with each selected for the specific area of expertise and unique perspective that he or she can offer in guiding the company. Three-fourths of the members are independent outside directors.

The full board is shown on page 23 of this report. Those re-elected in 2006 include: Raymond E. Galvin, a former president of Chevron U.S.A. Production Company and a member of the board since 2003, who was re-elected for a one-year term and also named vice chairman of the board; Charles J. Swindells, a former U.S. ambassador to New Zealand, who was elected to his first full three-year term; and Clyde W. Smith, Jr., president of electronics manufacturer Ascentron, Inc., and a member of the board since 1984, who was elected to another three-year term.

As we do with our directors, we seek a balance of diverse skill sets and ages among our employees. Over the past three years, the size of our staff has increased by 43% as we have sought talented individuals to add to our in-house mix of skills. At year-end 2006, we had 345 employees, the highest number in our history. Among those recently joining our team are three new vice presidents: Edward A. Duncan, who joined us in February 2006 as vice president of exploration after consulting with our company for several years and having more than 25 years of experience in domestic and international exploration programs, especially along the Gulf Coast and upper Texas coastal plain; David P. Coatney, who in 2006 became vice president of production operations following his oversight of field operations for Swift Energy New Zealand; and D. Gregg Jones, who joined us in 2007 as vice president of corporate administration with over 25 years of human resources management experience.

In another management appointment, Robert J. Banks was named vice president of international operations and strategic ventures of Swift Energy Company in 2006. He also will continue to serve as vice president of international operations of Swift Energy International, a position he has held since 2004.

We know that passing knowledge from one generation to the next will become increasingly critical as our industry matures, with more geoscience professionals scheduled to retire than there are college graduates to replace them. To help address this, we began participation in a University of Texas mentoring program with science teachers and students. This mentoring program is part of our effort to nurture students who may be interested in the oil and gas industry, particularly in the geoscience field. Mentoring takes place within our company as well, with the aim of strengthening the proficiency of professionals in all departments, both individually and as a group.

To further promote professional development, we initiated the cataloguing of individual education, experience, and skills for all of our employees in 2006. These knowledge networks, as we call them, cover three broad areas of expertise—the geoscience, engineering, and commercial/administrative disciplines—and they are designed to track each employee’s areas of competence, to more clearly define each employee’s role in regard to our mission, and to identify areas of professional development needed to achieve our goals.

These knowledge networks add a third dimension to the matrix organizational structure we have had in place for many years. In addition to grouping our staff by function (exploration, exploitation, operations, and support activities) and by our major regions of operation (South Louisiana, South Texas, Toledo Bend, and New Zealand), we are now also grouping people in our matrix system by our three knowledge networks. This creates a three-dimensional matrix system that offers richer interconnectivity in our organizational relationships, helping us make the most of the collaborative potential generated by the digital revolution that is transforming our industry. Multiple pathways are created for information to flow both up and down the hierarchy and between departments and disciplines, facilitating faster and more reliable flows of information.

To ensure that the full potential of our matrix system is realized, we have well-defined but flexible processes in place to aid in the execution of our strategy. One key control process is our annual budget, which serves as a guide and benchmark for the subsequent year’s activity, focusing primarily on planning and forecasting our capital expenditures. In effect, our annual budget serves as the bridge between long-term strategy and day-to-day decision making. After rigorous internal review and debate of various budget scenarios, selected scenarios are presented to the board of directors for final consideration, with the board approving one scenario as the consolidated budget for the coming year.

Implementing projects from the approved budget begins with an authority-for-expenditure process, in which budgeted projects are approved for implementation through a two-tiered process of operating and financial reviews.

Our approval process for budgeted projects was designed to push cooperation and transparency throughout the organization. It forces teamwork and communication between disciplines and departments, and it provides flexibility for responding to unexpected situations. Since the creation of this current process in 2002, our review procedures have proven to be critical tools for setting the tone of our organizational culture.

For longer term planning, we are guided by a well-defined strategic plan that is updated every four to six years, with routine monitoring of our progress toward the plan’s goals throughout each year. Our strategic goals have traditionally included financial targets, such as goals for per-share earnings and for the ratio of debt to proved reserves, and operational targets, such as goals for growth in proved reserves and production and for holding down costs and expenses.

Together, the annual budget, the implementation procedure for the budget, and the strategic plan are the key processes we use to guide our company toward achieving our goals. As we carry out our plans for 2007, the groundwork that has been laid in 2006 will continue to take root and grow, moving us toward our vision and honoring the values set in place by Earl Swift.