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Commodity Risk. Our major market risk exposure is the commodity pricing applicable to our oil and natural gas production. Realized commodity prices received for such production are primarily driven by the prevailing worldwide price for crude oil and spot prices applicable to natural gas. The effects of such pricing volatility are expected to continue.Our price-risk management policy permits the utilization of agreements and financial instruments (such as futures, forward contracts, swaps and options contracts) to mitigate price risk associated with fluctuations in oil and natural gas prices. Below is a description of the financial instruments we have utilized to hedge our exposure to price risk.
Interest Rate Risk. Our senior notes and senior subordinated notes both have fixed interest rates, so consequently we are not exposed to cash flow risk from market interest rate changes on these notes. At December 31, 2006, we had borrowings of $31.4 million under our credit facility, which bears a floating rate of interest and therefore is susceptible to interest rate fluctuations. The result of a 10% fluctuation in the bank’s base rate would constitute 83 basis points and would not have a material adverse effect on our 2007 cash flows based on this same level or a modest level of borrowing.Income Tax Carryforwards. We had significant foreign net operating loss carryforwards at December 31, 2006. The foreign net operating losses have no expiration period, but would be cancelled if a change in control occurred at either the subsidiary or ultimate parent company level. Other loss carryforwards consist of state net operating losses and capital losses. The Company has not recorded a valuation allowance against the deferred tax assets attributable to the net operating carryovers at December 31, 2006, as management estimates that it is more likely than not that these assets will be fully utilized before they expire. The foreign net operating loss has no expiration period, but it would be cancelled if a change in control occurred at either the subsidiary or ultimate parent company level. A valuation allowance has been applied against the capital loss carryforward, as detailed in Note 3 of the accompanying consolidated financial statements. Significant changes in estimates caused by changes in oil and gas prices, production levels, capital expenditures, and other variables could impact the Company’s ability to utilize the carryover amounts. If we are not able to use our carryforwards, our results of operations and cash flows will be negatively impacted.Fair Value of Financial Instruments. Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, bank borrowings, and senior notes. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the highly liquid or short-term nature of these instruments. The fair values of the bank borrowings approximate the carrying amounts as of December 31, 2006 and 2005, and were determined based upon variable interest rates currently available to us for borrowings with similar terms. Based upon quoted market prices as of December 31, 2006 and 2005, the fair values of our senior subordinated notes due 2012 were $211.0 million, or 105.5% of face value, and $214.5 million, or 107.25% of face value, respectively. Based upon quoted market prices as of December 31, 2006 and 2005, the fair values of our senior notes due 2011 were $152.6 million, or 101.75% of face value, and $153.8 million, or 102.5% of face value. The carrying value of our senior subordinated notes due 2012 was $200.0 million at December 31 for both 2006 and 2005. The carrying value of our senior notes due 2011 was $150.0 million at December 31 for both 2006 and 2005.Foreign Currency Risk. We are exposed to the risk of fluctuations in foreign currencies, most notably the New Zealand Dollar. Fluctuations in rates between the New Zealand Dollar and U.S. Dollar may impact our financial results from our New Zealand subsidiaries since we have receivables, liabilities, natural gas and NGL sales contracts, and New Zealand income tax calculations, all denominated in New Zealand Dollars. We use the U.S. Dollar as our functional currency in New Zealand and because of this, our results of operations, cash flows and effective tax rate are impacted from fluctuations between the U.S. Dollar and the New Zealand Dollar.Customer Credit Risk. We are exposed to the risk of financial non-performance by customers. Our ability to collect on sales to our customers is dependent on the liquidity of our customer base. To manage customer credit risk, we monitor credit ratings of customers and seek to minimize exposure to any one customer where other customers are readily available. Due to availability of other purchasers, we do not believe the loss of any single oil or gas customer would have a material adverse effect on our results of operations.
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This page was last updated on Wednesday, April 11, 2007, at 10:51:14 AM. Copyright © 1994-2008 by Swift Energy Company. |
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