SWIFT ENERGY COMPANY
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED March 31, 1994
INDEX

SWIFT ENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements.

Liabilities and Stockholders' Equity

SWIFT ENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements.

SWIFT ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

SWIFT ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(1) $.01 Par Value


See accompanying notes to condensed consolidated financial statements.

SWIFT ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

SWIFT ENERGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1994 (UNAUDITED) AND DECEMBER 31, 1993

(1) General Information-

 

The condensed consolidated financial statements included herein have been prepared by Swift Energy Company (the "Company") and are unaudited, except for the balance sheet at December 31, 1993 which has been prepared from the audited financial statements at that date. The financial statements reflect necessary adjustments, all of which were of a recurring nature, and are in the opinion of management, necessary for a fair presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The Company believes that the disclosures presented are adequate to allow the information presented not to be misleading. The condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the latest Form 10-K and Annual Report.

Because of the volatility in oil and gas prices, the Company's reliance on limited partner and joint venture capital and periodic differences in the availability of commercially attractive oil and gas properties for purchase, interim results are not necessarily indicative of those for a full year.

Certain reclassifications have been made to the prior year balances to conform to current year presentation.

(2) Summary of Significant Accounting Policies -

Oil and Gas Properties

 

For financial reporting purposes, the Company follows the "full-cost" method of accounting for oil and gas property and equipment costs. Under this method of accounting, all productive and nonproductive costs incurred in the acquisition, exploration, and development of oil and gas reserves are capitalized, including interests earned in limited partnerships and joint ventures formed for the purpose of acquiring interests in producing oil and gas properties. No gains or losses are recognized upon the sale or disposition of oil and gas properties, except in extraordinary transactions. Instead, the proceeds from the sale of oil and gas properties are treated as a reduction of oil and gas property costs. Management fees from associated oil and gas exploration and development limited partnerships are credited to oil and gas property costs to the extent they do not represent reimbursement of general and administrative expenses currently charged to expense.

The Company computes the provision for depreciation, depletion, and amortization of oil and gas properties on the unit-of-production method. Under this method, the Company computes the provision by multiplying the total unamortized cost of oil and gas properties, excluding costs of unproved properties, by an overall rate determined by dividing the physical units of oil and gas produced during the period by the total estimated units of proved oil and gas reserves. The cost of unproved properties not being amortized is assessed quarterly to determine whether the value has been impaired below the capitalized cost. Any impairment assessed is added to the cost of proved properties being amortized.

The unamortized cost of oil and gas properties, net of related deferred income taxes, is limited to the sum, calculated on a quarterly basis, of the estimated future net revenues from proved properties using current prices, discounted at 10%, and the lower of cost or fair value of unproved properties, adjusted for related income tax effects.

Deferred Charges

 

Legal and accounting fees, underwriting fees, printing costs and other direct expenses associated with the issuance of the Company's Convertible Subordinated Debentures in June 1993 have been capitalized and are being amortized over the life of the Debentures, which mature on June 30, 2003. The balance at March 31, 1994 of $1,349,305, is net of accumulated amortization of $75,695.

Deferred Revenues

 

In May 1992, the Company purchased additional interests in certain wells in which the Company has previously owned interests. The funds for this purchase were provided by the Company's sale of a volumetric production payment in these properties. Under the terms of the production payment agreement, the Company continues to own the properties purchased but is required to deliver a minimum quantity of hydrocarbons produced from the properties (meeting certain quality and heating equivalent requirements) over a specified period. Since entering into this agreement, the Company has met all scheduled deliveries. Net proceeds from the sale of the production payment were recorded as deferred revenues. Deliveries under the production payment agreement are recorded as oil and gas sales revenues and a corresponding reduction of deferred revenues.

Limited Partnerships and Joint Ventures

 

The Company forms limited partnerships and joint ventures for the purpose of acquiring interests in producing oil and gas properties. The Company serves as managing general partner or manager of these entities. Under the Swift Depositary Interests limited partnership offering ("SDI Offering") which commenced in March 1991, the Company receives a reimbursement of certain costs and a fee, both payable out of revenues. The Company bears all front-end costs of the offering and partnership formations for which it receives an interest in the partnerships. In addition, the Company also receives a fee ("earned interest") in the form of additional interests (which vary based on the expected levels of cash distributions to the limited partners/joint venturers) in the net revenues of the producing oil and gas properties acquired by these entities. The amount of earned interest is calculated by multiplying the estimated additional interest in the entity's net revenues by the purchase price of the property and is recognized as revenue upon acquisition of the producing properties by the entities.

The Company acquires and transfers producing oil and gas properties to the entities at cost including interest, other carrying costs, closing costs, and screening and evaluation costs of properties not acquired, or in certain instances at fair market value based upon the opinion of an independent expert. These costs are reduced by net operating revenues from the effective date of the acquisition to the date of transfer to the entities.

Certain designated oil and gas properties acquired in advance of formation of partnerships or joint ventures and held by the Company pending resale to those partnerships or joint ventures are classified as "Producing oil and gas properties held for transfer".

Costs of syndication, registration, and qualification of the SDI limited partnerships incurred by the Company have been deferred. Under the current SDI limited partnership offering, selling and formation costs borne by the Company serve as the Company's general partner contribution to such partnerships.

Commencing September 15, 1993, the Company began offering on a private placement basis general and limited partnership interests in Swift Energy Drilling Ventures ("SEDV Offering"), a series of limited partnerships to be formed. As managing general partner, the Company will pay for all front-end costs incurred in connection with this offering, for which the Company will receive an interest in the partnerships. The offering is for a maximum of $12,000,000 with each partnership having a $1,000,000 minimum. The proceeds will be invested in development drilling (approximately 50%) and exploratory drilling (approximately 25%), with the remaining 25% dependent upon the results of the initial drilling activities. The first partnership closed December 8, 1993. The Company anticipates it will form two additional partnerships in 1994.

Income Taxes

 

The Company accounts for Income Taxes using Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 utilizes the liability method and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of the enacted tax laws. Prior to the adoption of SFAS No. 109, the Company accounted for income taxes using Accounting Principles Board Opinion No. 11.

Income taxes for the interim periods have been provided using the estimated annualized effective tax rate.

The Omnibus Budget Reconciliation Act of 1993 (the "Act") was enacted on August 10, 1993. The Act contains several changes to federal income tax provisions, including an increase in the highest corporate tax rate from 34% to 35%, for companies with taxable income in excess of $10,000,000. The effect of the Act on income tax expense for the three-month period ended March 31, 1994 and the Company's net deferred tax liability is not material.

Income Per Share

 

Primary income per share has been computed using the weighted average number of common shares outstanding during the respective periods. Stock options and warrants outstanding do not have an effect on primary income per share. The Company's Convertible Subordinated Debentures are not common stock equivalents for the purpose of computing primary income per share.

Fully diluted earnings per share, assuming conversion of the Debentures, was not significantly different than primary earnings per share for all periods presented.

(3) Short-Term Bank Borrowings

 

The Company had available through a two bank group, a revolving line of credit of $20,000,000 at both March 31, 1994 and at December 31, 1993 bearing interest at the banks' base rate plus 0.5% (6.75% at March 31, 1994 and 6.5% at December 31, 1993), secured by the Company's interests in certain oil and gas properties and general partner interests. This facility also allows, at the Company's option, draws which bear interest for 30 day periods at the London Interbank Offered Rate ("LIBOR") plus 2.25%. This option was used during the first quarter of 1994 for the first time. Of the balance outstanding at March 31, 1994, $6,000,000 was at 6.75% (bank's base rate plus 0.5%) while the remaining $8,000,000 was at the LIBOR plus 2.25% rate of 5.81% ($5,000,000) and 5.88% ($3,000,000). The outstanding amounts under this facility at March 31, 1994 ($14,000,000) and at December 31, 1993 ($2,650,000) were borrowed primarily to fund the advance purchase of producing properties on behalf of affiliated partnerships and/or joint ventures to be subsequently reimbursed.

The terms of the revolving line of credit include, among other restrictions, a limitation on the level of cash dividends (not to exceed $424,000 in any fiscal year), requirements as to maintenance of certain minimum financial ratios (principally pertaining to working capital, debt, and equity ratios) and limitations on incurring other debt. Since inception, no dividends have been declared on the Company's common stock, and the Company does not expect to declare dividends in the near future. The Company presently intends to continue a policy of using retained earnings for expansion of its business. As of March 31, 1994 and December 31, 1993, the Company was in compliance with the provisions of these agreements. The revolving line of credit extends through May 1, 1995.

During 1993, the Company also had available with the same two bank group a line of credit for producing oil and gas property acquisitions, bearing interest at the banks' base rate plus 1% (7% at December 31, 1993), to be secured by producing oil and gas properties acquired and held for transfer. There were no outstanding amounts under this facility at December 31, 1993. This facility was terminated on January 18, 1994 at the request of the Company.

The Company's third credit facility is an amended and restated revolving line of credit with the lead bank for $5,000,000 and bearing interest at the bank's base rate (6.25% at March 31, 1994 and 6% at December 31, 1993), secured by certain Company receivables. There were no outstanding amounts under this facility at March 31, 1994 or at December 31, 1993. This credit facility extends through May 1, 1996.

In addition to interest on these credit facilities, the Company pays a commitment fee to compensate the banks for making funds available. The fee is calculated on the average daily remainder, if any, of the commitment amount less the aggregate principal amounts outstanding plus the amount of all outstanding letters of credit during the period. The aggregate amount paid by the Company was $26,000 for the first three months of 1994 and $112,000 for the twelve month period in 1993.

(4) Long-Term Debt

 

The Company's long-term debt consists of $28,750,000 of 6.5% Convertible Subordinated Debentures ("Debentures").

The Debentures were issued on June 30, 1993, and will mature on June 30, 2003. The Debentures are convertible into common stock of the Company by the holders at any time prior to maturity at a conversion price of $13.50 per share, subject to adjustment upon the occurrence of certain events. Interest on the Debentures is payable semi-annually on June 30, and December 31, commencing with the payment made at December 31, 1993. After June 30, 1997 (or in certain circumstances after June 30, 1996), the Debentures are redeemable for cash at the option of the Company, with certain restrictions, at 104.55% of principal, declining to 100.65% in 2002. Upon certain changes in control of the Company, if the price of the Company's common stock is not above certain levels each holder of Debentures will have the right to require the Company to repurchase Debentures at the principal amount thereof, together with accrued and unpaid interest to the date of repurchase but after the repayment of any Senior Indebtedness, as defined.

Interest expense on the Debentures, including amortization of debt issuance costs, totaled $493,017 for the three month period ending March 31, 1994. Of this amount, $99,349 was capitalized as part of oil and gas property costs and $34,693 was reimbursed from certain affiliated partnerships for interest related to a portion of the Debenture proceeds used to fund the advance purchase of producing oil and gas properties on behalf of the affiliated partnerships.

(5) Foreign Activities

 

The Company on September 3, 1993, signed a Participation Agreement with Senega, a Russian Federation joint stock company (in which the Company has an indirect interest of less than 1%), to assist in the development and production of reserves from two fields in Western Siberia. The Company will receive a minimum 5% net profits interest from the sale of hydrocarbon products from the fields for providing managerial, technical and financial support to Senega limited to an initial capital investment of less than $5,000,000. At March 31, 1994 the Company's investment in Russia was approximately $1,820,000 and is included in the unproved properties portion of oil and gas properties.

The Company formed a wholly-owned subsidiary, Swift Energy de Venezuela, C.A. for the purpose of submitting a bid on August 5, 1993 under the Venezuelan Marginal Oil Field Reactivation Program on the Quiriquire Unit located in Northeastern Venezuela. Swift (together with a minority interest holder) was one of six bidders on the Quiriquire Unit. The Company did not win the bid for the Ouiriquire Unit, however, other fields and opportunities are continuing to be evaluated in Venezuela. At March 31, 1994 the Company's investment in Venezuela was approximately $530,000 and is included in the unproved properties portion of oil and gas properties net of impairments.

(6) Acquisition of Properties by Swift

 

During the fourth quarter of 1993, the Company acquired approximately $43,300,000 of producing oil and gas properties in five separate acquisitions. Approximately $18,000,000 of the properties were transferred to affiliated partnerships formed during 1993 under the Company's SDI offering, approximately $10,600,000 of the properties were retained by the Company for its own account and the remaining amount of approximately $14,700,000 is included as a current asset in "Producing oil and gas properties held for transfer" at March 31, 1994.

SWIFT ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES

 

The Company's capital historically has been provided principally by public and private limited partnerships and joint ventures, which are sponsored, formed and managed by the Company, and to a lesser degree by equity offerings. Supplemental cash and working capital are provided through financing arrangements with banks. In the second quarter of 1993, the Company successfully completed its first public debt offering.

On June 30, 1993, the Company issued $28,750,000 of Convertible Subordinated Debentures (Debentures) due June 30, 2003, in a public offering. Proceeds of the offering are being used primarily to acquire producing oil and gas properties and to finance the Company's expanding exploration and development programs. The principal terms of these Debentures are described in Note 4 to the Company's condensed financial statements included herein.

In March 1991, the Company commenced offering Swift Depositary Interests (SDI), its limited partnership offering to purchase producing properties. Under the SDI structure, the Company pays all of the front-end offering and formation costs, estimated to average between 13% and 14% of total investor subscriptions over the life of the program.

As of March 31, 1994, under the SDI offering, two partnerships had raised investor subscriptions totaling approximately $3,800,000. These partnerships which normally are formed during the first quarter were not closed until mid-April due to a delay in the offering while the Securities and Exchange Commission reviewed a specific properties supplement regarding properties to be included in those partnerships. Consequently the Company determined to close these partnerships on April 15, 1994 to provide an adequate offering period. On April 15, 1994, under the SDI offering, these two partnerships closed with investor subscriptions totaling approximately $7,100,000. This compares to $8,300,000 of subscriptions in the first three months of 1993.

On December 8, 1993, the Company closed the first partnership under a private placement offering (Swift Energy Drilling Ventures or SEDV) of both general and limited partnership interests. Subscriptions, which totaled approximately $1,400,000, are being invested by the partnership in development drilling (approximately 50%), exploratory drilling (approximately 25%), with the use of the remaining 25% to depend upon the results of initial drilling activities. The Company anticipates formation of two additional partnerships in 1994.

The Company has established line of credit facilities which are used principally to finance the Company's purchase of producing oil and gas properties on an interim basis pending transfer of the properties to newly formed partnerships and joint ventures, and to a lesser extent to provide working capital. The principal terms and restrictions of these credit facilities and the amounts outstanding under the facilities at March 31, 1994 and December 31, 1993 are described in Note 3 to the Company's condensed financial statements included herein. Outstanding amounts under the Company's credit facilities have fluctuated and will continue to fluctuate as borrowings are made and repaid in connection with the timing of property purchases and sales and working capital needs.

At March 31, 1994, limited partnership formation and marketing costs (which under the current offerings are borne by the Company as part of the Company's general partner contribution) amounted to $5,513,153, an increase of $381,779, when compared with the December 31, 1993 balance. This increase, however, is primarily the result of costs incurred in filing the post effective amendment, as described above, as well as a result of not closing the first two SDI partnership until April 15, 1994. Upon the April 15, 1994 closing of the partnerships, approximately $135,000 of these formation and marketing costs will be transferred to the Company's oil and gas property account as its general partner contribution in these two partnerships.

The Company's working capital has decreased over the last three months, from $9,741,683 at December 31, 1993 to working capital of $8,058,242 at March 31, 1994. This decrease is primarily the result of the continued investment of the debenture proceeds into oil and gas property assets. The $27.3 million in net proceeds from the offering were received on June 30, 1993. Virtually all of the debenture proceeds have been used or committed to fund the Company's capital expenditures, the results of which should increase the Company's revenues from oil and gas sales, which should in return increase the Company's cash flow from operations in future periods.

Due to the nature of the Company's business as highlighted above, the individual account components of working capital will fluctuate considerably from month to month, however the net working capital balance should not significantly change.

The Company believes that its current credit facilities, together with internally generated cash flow (which is anticipated to increase as the Company receives its portion of oil and gas revenues in a growing number of wells), will be sufficient to finance the costs associated with its capital expenditures and its liquidity needs.

Capital Expenditures

 

Additions to property, plant and equipment during the first three months of 1994 were $4,042,728. These capital expenditures include: (a) $1,800,000 of drilling costs, both exploratory and developmental; (b) $1,300,000 of prospect costs (principally prospect leasehold, seismic and geological costs of unproven prospects for the Company's account), for which the Company is actively pursuing joint venture participants to share in funding of this activity; (c) $900,000 invested in foreign business opportunities in Russia (approximately $800,000) and in Venezuela (approximately $100,000), as described in Note 5 to the Company's condensed financial statements included herein. In the remaining nine months of 1994, the Company expects capital expenditures to range between $25,000,000 and $30,000,000, predominantly for the Company's general partner capital contribution to partnerships formed under its SDI offering, and for all areas above with an increase in drilling expenditures in the later part of the year.

Net Cash From Operations

 

For the three month period ended March 31, 1994, cash flows from operating activities increased to $2,679,971 as compared to $1,557,145 during the first three months of 1993. The first quarter 1994 increase of $1,123,000 was due to the cash flow from oil and gas sales, which increased $1,356,000 or 47%, exclusive of the non-cash amortization of deferred revenues associated with the Company's volumetric production payment.

Change in Assets and Liabilities

 

Balance sheet changes in accounts receivable, producing oil and gas properties held for transfer, short-term bank borrowings, and payables related to producing oil and gas property acquisitions are principally determined by the timing of property purchases and payments made by and to the Company relating to the Company's management of its affiliated partnerships. The $27,100,000 balance classified as "Payable related to producing oil and gas property acquisitions" at December 31, 1993 was funded in the first quarter of 1994. These funds were made available through the Company's credit facilities with banks and by the reimbursement from existing partnerships for the portion of these properties transferred to such partnerships. This activity is evidenced by the changes in the balance sheet captions "Accounts receivable - Associated limited partnerships and joint ventures" and "Short-term bank borrowings".

RESULTS OF OPERATIONS – Three Months Ended March 31, 1994 and 1993

 

Net income and earnings per share both decreased 18% in the first three months of 1994 when compared to the same period for 1993. Lower net income reflected the effect on revenues of the second quarter closing of partnerships normally formed in the first quarter and lower oil prices. Net income of $814,325 increased retained earnings to $37,704,611 at March 31, 1994.

Revenues

 

The 15% increase in revenues during the first three months of 1994 from that of the comparable period in 1993 is due primarily to the increase in oil and gas sales.

Oil and Gas Sales. Oil and gas sales increased 38% to $4,817,270 in the first three months of 1994, compared to $3,503,269 for the comparative period in 1993, as a result of ongoing property acquisitions by the limited partnerships and joint ventures through which the Company derives an interest, of acquisition interests in producing properties that Swift made for its own account in late 1993, as well as interests in both exploratory and developmental wells drilled in late 1993 and in the first quarter of 1994.

As a percentage of total revenues, oil and gas sales have risen from 66% in the first three months of 1993 to 78% in the same period of 1994. The Company expects oil and gas sales to continue to increase as a direct consequence of the addition of oil and gas reserves through the Company's interest in a growing number of partnerships formed under the SDI offering and through its active drilling programs. The Company's net sales volume (including the volumetric production payment) in the first three months of 1994 increased by 36% (589,145 equivalent Mcf) over volumes in the comparable 1993 period. Oil prices decreased 25% while gas prices increased 16% when comparing first quarter prices received to those received in the comparable period.

The following table provides additional information regarding the Company's oil and gas sales.

Earned Interest and Cash Management Fees. There was no earned interest recognized in the first three months of 1994 as the first two partnerships for 1994 under the SDI offering were held open until April 15, 1994 as discussed above. This compares to $698,864 recognized in earned interest in the first three months of 1993. Cash management fees received in the first three months of 1994 solely from limited partnerships were $108,682, a decrease from the comparable 1993 total of $137,582.

Significant fluctuations in the Company's earned interest revenues can occur from year to year or quarter to quarter, depending on the availability and acquisition of economically attractive oil and gas properties, the amount of partnership subscriptions, and the source of funds used for the purchase of properties. The earned interest associated with Company-sponsored partnerships varies as a percentage of property acquisition costs (or in certain instances, fair market value), depending upon various factors set forth in each partnership agreement. The earned interest recognized on joint ventures varies with the particulars of each joint venture agreement.

Supervision Fees. Supervision fees increased 22% due to the increase in the number of wells the Company operates, and due to the annual escalation in well overhead rates.

Expenses

 

Total expenses for the three months ended March 31, 1994 increased 27% over the comparable period in 1993, as compared to the 15% increase in revenues, noting that 1994's first quarter revenues did not include any earned interest.

General and administrative expenses for the first three months of 1994 remained relatively flat when compared to the same period in 1993.

The 3% increase in oil and gas production costs relates to the growth in the Company's interests in producing properties and the related sale of increased quantities of oil and gas therefrom. However, the lower relative percentage increase in these costs when compared to the increase in oil and gas sales reflects the continuing disposition of low valued wells and their associated production costs.

The 44% increase in depreciation, depletion and amortization (DD&A) also relates to the increase in the Company's producing properties and the related sale of increased quantities of oil and gas therefrom.

Interest expense on the Debentures, including amortization of debt issuance costs, totaled $493,017 for the three month period ending March 31, 1994. Of this amount, $99,349 was capitalized as part of oil and gas property costs and $34,693 was reimbursed from certain affiliated partnerships for interest related to a portion of the Debenture proceeds used to fund the advance purchase of producing oil and gas properties on behalf of the affiliated partnerships.

SWIFT ENERGY COMPANY
PART II. - OTHER INFORMATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SWIFT ENERGY COMPANY
	(Registrant)
Date: May 12, 1994	By: (Original Signed By) John R. Alden Sr. Vice President, Secretary/ Principal Financial Officer
Date: May 12, 1994,	By: (Original Signed By) Alton D. Heckaman, Jr. Vice President, Controller and Principal Accounting Officer

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