SWIFT ENERGY COMPANY 2006 ANNUAL REPORT 

 

Financial Flexibility

 

 

 

Reflecting Balance & Strength

 

As we prepare for future growth, maintaining financial flexibility remains the underpinning of all our endeavors, providing us with the means to turn bright ideas into reality and allowing us to take advantage of the opportunities that come our way.

In a disciplined approach to financial management, we provide this flexibility by prudently balancing equity and debt, using capital wisely, aligning our capital expenditures to our cash flows, and maintaining a strategic hedging program that protects near-term cash flows and the capital budget while maintaining upside potential. One tactic we have long practiced is balancing our capital budget between drilling and acquisitions, shifting between the two activities in response to market conditions and strategic opportunities. We generally focus on drilling when oil and natural gas prices are strong, shifting to acquisitions when a strategic opportunity arises or when prices weaken and the per-unit cost of acquisitions becomes more attractive. With this balanced approach, we have been able to grow in a cost-effective manner, replacing 169% of our production, excluding sales of minerals in place, at an average cost of $2.76 per Mcfe over the five-year period through year-end 2006. Other aspects of our financial management approach include 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, and continually improving our credit profile.

2006 FINANCIAL OVERVIEW In 2006, our record-high cash flows of $424.9 million, up 49% over 2005 levels, allowed us to expand our capital budget from an initial projection of $300 million to $325 million to expenditures of $557.5 million. More than three-fourths (76%) of these 2006 capital expenditures were covered by net cash provided by operating activities, with the combination of credit facility borrowings, proceeds from property sales, and cash balances providing the remainder. We have a $500 million bank credit facility with a syndicate of 10 banks, which was extended during 2006 through October 2011. At year-end, we had outstanding bank borrowings of $31.4 million, which is less than 13% of our current borrowing base. Additionally, our long-term debt as of year-end 2006 included $150 million of 7-5/8% senior notes maturing July 15, 2011, and $200 million of 9-3/8% senior subordinated notes maturing May 1, 2012.

As of December 31, 2006, our total long-term debt comprised approximately 32% of our total book value capitalization. Our debt to PV-10 ratio was 14% at year-end 2006 compared to 11% in 2005, primarily due to lower natural gas prices at year-end 2006 and an increase in our total debt, partially offset by higher oil and natural gas reserves volumes.

Working capital at year-end fell to a negative $53.4 million, primarily because we invested $194.3 million in strategic acquisitions, the bulk of which was financed with cash balances and net cash provided by operating activities.

Overall, we continued to maintain a strong liquidity position in 2006 and will strive to do so in the future.

NYMEX Crude Oil Futures
$ per Barrel, Near-Month Contract, 1/1/1990 to 2/28/2007

  

NYMEX Natural Gas Futures
 $ per Million BTUs, Near-Month Contract, 1/1/1990 to 2/28/2007

 

 

RISK MANAGEMENT As has long been our policy, we focus our price risk management strategy on realizing the benefit of high commodity prices during periods of upswings while protecting against serious pricing downturns. Our company’s exposure to volatile commodity prices inherent in the oil and gas industry is our major market risk.

A committee chaired by our president oversees our price risk management program, and its actions must be approved by our chief executive officer. Our hedging strategy is implemented through the use of floors and near-term forward physical sales. We expect to target a portion of our domestic oil and gas production for coverage in 2007, with hedging implemented when market prices are strengthening.

Our risk management of potential natural disasters includes insurance coverage that we consider reasonable and that is similar to that maintained by comparable companies in the oil and gas industry. In 2006, we settled all insurance claims with our insurers related to 2005 damage from hurricanes Katrina and Rita for approximately $30.5 million and entered into a confidential final settlement agreement.

2007 OUTLOOK At the start of 2007, our financial position remains strong and flexible, positioning us to grow organically through drilling and strategically through acquisitions, as well as to meet our goals of becoming digitally integrated and broadening our high-tech capabilities. Our 2007 capital expenditures are currently budgeted at $350 million to $400 million (net of minor non-core dispositions and excluding any property acquisitions), based on the assumption of average 2007 oil prices of $55 per barrel and natural gas prices of $6.50 per MMbtu. During 2007, our capital budget may be revised in response to changes in product prices.

We plan to focus over two-thirds of our capital budget on enhancing our potential in South Louisiana, including continued expansion of our processing facilities for the region and drilling exploratory prospects and development wells based on our digitally integrated three-dimensional geoscience databases. Overall, approximately 95% of our 2007 budget is targeted for domestic activities, primarily in South Louisiana, with about 5% planned for activities in New Zealand. We anticipate funding the majority of our 2007 capital expenditures through cash flows, with access available to our bank credit facility if needed.

 

This page was last updated on Monday, May 21, 2007, at 01:30:47 PM.

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