1998 THIRD QUARTER REPORTLetter to StockholdersFor the three months ending September 30, 1998, Swift Energy Company experienced two significant and contrasting events: (1) The Company’s oil and natural gas production reached the highest level in its history at 12.2 billion cubic feet of natural gas equivalent (Bcfe), and (2) the Company’s earnings were reduced with non-cash impairment charges totaling $90.8 million ($59.9 million after taxes). The impairment charges were primarily the result of persistently low oil and gas prices, which, of course, also reduced revenues from sales. However, with the sharply increased production largely offsetting the low prices, the net cash flow from operating activities, before temporary working capital changes, was 29% higher than the cash flow in the third quarter of 1997. The third-quarter production represented an 87% increase over the production for the same period in 1997 and a 68% increase over the production for the preceding quarter. Revenues from oil and gas sales for the period were 45% higher than those from 1997 third-quarter sales, despite the fact that the average oil and gas prices were lower by 28% and 22%, respectively. For the nine months ending September 30, 1998, production was 43% higher than for the same period in 1997 and revenues from sales were 13% higher, largely offsetting average oil and gas prices that were lower by 33% and 18%, respectively. The increases in production during the third quarter resulted from Swift’s previously announced acquisition from Sonat Exploration Company of properties located in Texas and Louisiana in the vicinity of Toledo Bend Lake. When the Company assumed operations of most of these "Toledo Bend" properties, which primarily produce from the Austin Chalk trend, they included 10 dual-horizontal wells in the Masters Creek Field in Vernon Parish, Louisiana, that had been shut in awaiting completion or the installation of production facilities. By the end of the third quarter, five of the wells had been placed on production and, with Swift’s net revenue interests of 25-40%, were adding 23.1 million cubic feet of gas equivalent per day to the Company’s production. The remaining five wells are expected to be placed on production before year end. Also during the third quarter, Swift participated in the drilling and completion of a horizontal well in the Chasmore Field near the Masters Creek Field. Other third-quarter additions to the Company’s production resulted from a successful well Swift drilled in the Olmos Field in McMullen County, Texas, and from its participation in two successful horizontal wells, one each in Fayette County and Washington County, Texas. Net income for the third quarter totaled $2.5 million, or $0.15 per diluted share, before the non-cash impairment charges. For the first nine months of 1998, net income was $8.5 million before the charges. One of the impairment charges was necessitated by the low prices prevailing at the end of September, resulting in the Company’s domestic capitalized oil and gas property costs exceeding its full-cost ceiling. As a result, we experienced a before-tax non-cash charge of $77.2 million to our earnings ($50.9 million after tax). While this charge represents a write-down in the capitalized oil and gas property costs for the third quarter, it does not reflect a reduction in the volume of the Company’s reserves, which during the last few months have been extensively reviewed not only by our staff but also by two independent engineering firms and by a syndicate of ten of the world’s leading banks. A second non-cash charge was related to our investments in Russia and Venezuela. The severe tightening of international credit markets, the increasing political uncertainty in Russia, currency concerns in both Russia and Venezuela, and the continuing price volatility led us to reevaluate the timing of the recovery of our capitalized costs in those countries. This resulted in an additional non-cash charge of $13.6 million to our before-tax earnings ($9.0 million after tax). The two non-cash impairment charges led to a net loss of $57.4 million for the quarter, or $3.50 per diluted share, compared to net earnings of $4.7 million, or $0.27 per diluted share, for the third quarter of 1997. For the nine months ended September 30, 1998, the net loss was $51.3 million, or $3.11 per diluted share, compared to earnings of $15.6 million, or $0.88 per diluted share, for the same period in 1997. Net cash provided by operating activities for the third quarter was $16.8 million before temporary working capital changes of approximately $4.2 million that are primarily related to the acquisition of the Toledo Bend properties. As noted earlier, this represents a 29% increase in cash flow from the third quarter of 1997. Also, as a result of the intensive review by the 10-bank syndicate during the third-quarter of 1998, we increased our unsecured revolving credit facility to $250 million, which allowed us to acquire the Toledo Bend properties. While the increased debt associated with the acquisition also increases our interest expense, the higher interest is more than compensated for by the increase in oil and gas sales. As has been the case for the entire oil and gas industry, the continuing low prices have severely challenged Swift Energy throughout this calendar year; however, they have also created opportunities, the most obvious, of course, being the opportunity to acquire the Toledo Bend properties from Sonat that have so significantly increased our reserves, production, and sales. At the same time, the Company has an inventory of development drilling sites that is at record levels, as well as a high-quality portfolio of exploration projects. Given these and other potential projects and our strong cash flow, together with the expertise and experience of our technical staff, we have every reason to anticipate continued growth for the Company.
This page was last updated on Saturday, February 08, 2003, at 07:45:48 PM. Copyright © 1994-2008 by Swift Energy Company.
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