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FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1994SECURITIES AND EXCHANGE COMMISSION
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| TEXAS | 74-2073055 |
| (State of Incorporation) | (I.R.S. Employer Identification No.) |
16825 Northchase Dr., Suite 400
Houston, Texas 77060
(713) 874-2700
(Address and telephone number of principal executive offices)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date.
| Common Stock | 6,685,137 Shares |
| ($.01 Par Value) | (Outstanding at October 31, 1994) |
| (Class of Stock) |
| September 30, | December 31, | |
| 1994 | 1993 | |
| (Unaudited) | (Note 1) | |
| ASSETS | ||
| Current Assets: | ||
| Cash and cash equivalents | $ 476,329 | $ 636,349 |
| Accounts receivable - | ||
| Oil and gas sales | 14,449,091 | 13,938,932 |
| Associated limited partnerships and joint ventures | 22,986,222 | 28,507,948 |
| Joint interest owners | 2,485,458 | 2,923,797 |
| Producing oil and gas properties held for transfer | 6,301,810 | 15,436,853 |
| Limited partnership formation and marketing costs | 2,456,000 | 2,227,100 |
| Other current assets | 465,177 | 1,636,141 |
| ------------ | ------------ | |
| Total Current Assets | 49,620,087 | 65,307,120 |
| ------------- | ------------- | |
| Property and Equipment: | ||
| Oil and gas, using full-cost accounting | ||
| Proved properties being amortized | 123,596,558 | 106,251,713 |
| Unproved properties not being amortized | 13,237,084 | 7,932,557 |
| ------------- | ------------- | |
| 136,833,642 | 114,184,270 | |
| Furniture, fixtures and other equipment | 3,280,153 | 2,969,389 |
| ------------- | ------------- | |
| 140,113,795 | 117,153,659 | |
| Less-Accumulated depreciation, depletion | ||
| and amortization | (33,154,370) | (25,847,271) |
| ------------- | ------------- | |
| 106,959,425 | 91,306,388 | |
| ------------- | ------------- | |
| Other Assets: | ||
| Limited partnership formation and | ||
| marketing costs, net of current portion | 3,170,467 | 2,904,274 |
| Deferred charges | 1,296,715 | 1,375,135 |
| ------------- | ------------- | |
| 4,467,182 | 4,279,409 | |
| ------------- | ------------- | |
| $161,046,694 | $160,892,917 | |
| ========== | ========== |
See accompanying notes to condensed consolidated financial statements.
| September 30, | December 31, | |
| 1994 | 1993 | |
| (Unaudited) | (Note 1) | |
| Liabilities and Stockholders' Equity | ||
| Current Liabilities: | ||
| Short-term bank borrowings | $29,000,000 | $2,650,000 |
| Accounts payable and accrued liabilities | 5,729,420 | 7,518,577 |
| Payable to associated limited partnerships | 1,149,858 | 769,373 |
| Payable related to producing oil and gas property acquisitions | --- | 27,118,706 |
| Undistributed oil and gas revenues | 17,430,383 | 17,508,781 |
| --------------- | --------------- | |
| Total Current Liabilities | 53,309,661 | 55,565,437 |
| -------------- | --------------- | |
| Long-Term Debt | 28,750,000 | 28,750,000 |
| Deferred Revenues | 8,285,867 | 9,819,530 |
| Deferred Income Taxes | 12,940,932 | 12,292,236 |
| Commitments and Contingencies | ||
| Stockholders' Equity: | ||
| Preferred stock $.01 par value, 5,000,000 | ||
| shares authorized, none outstanding | --- | --- |
| Common stock, $.01 par value, 35,000,000 | ||
| shares authorized, 6,668,725 and 6,001,075 | ||
| shares issued and outstanding, respectively | 66,687 | 60,011 |
| Additional paid-in capital | 24,749,460 | 17,515,417 |
| Retained earnings | 32,944,087 | 36,890,286 |
| -------------- | --------------- | |
| 57,760,234 | 54,465,714 | |
| --------------- | --------------- | |
| $161,046,694 | $160,892,917 | |
| ========== | ========== |
See accompanying notes to condensed consolidated financial statements.
(Unaudited)
| Three months ended Sept. 30, | Nine months ended Sept. 30, | |||
| 1994 | 1993 | 1994 | 1993 | |
| ----------- | ----------- | ----------- | ----------- | |
| Revenues: | ||||
| Oil and gas sales | $5,534,789 | $4,073,699 | $15,014,095 | $11,561,971 |
| Earned interests and fees from limited partnerships and | ||||
| joint ventures | 203,813 | 1,330,112 | 1,195,659 | 3,017,696 |
| Supervision fees | 947,382 | 940,021 | 2,842,454 | 2,735,953 |
| Interest income | 7,914 | 94,440 | 28,757 | 115,869 |
| Other, net | 268,714 | 165,333 | 776,660 | 509,344 |
| ----------- | ----------- | ----------- | ----------- | |
| 6,962,612 | 6,603,605 | 19,857,625 | 17,940,833 | |
| ----------- | ----------- | ----------- | ----------- | |
| Costs and Expenses: | ||||
| General and administrative, net of reimbursement | 1,352,469 | 1,326,342 | 3,768,772 | 3,927,142 |
| Depreciation, depletion and amortization | 2,692,496 | 1,941,740 | 7,334,315 | 5,323,056 |
| Oil and gas production | 1,577,911 | 1,156,658 | 3,938,290 | 3,356,355 |
| Interest expense | 448,960 | 272,985 | 1,210,363 | 272,985 |
| ----------- | ----------- | ----------- | ----------- | |
| 6,071,836 | 4,697,725 | 16,251,740 | 12,879,538 | |
| ----------- | ----------- | ----------- | ----------- | |
| Income before Income Taxes | 890,776 | 1,905,880 | 3,605,885 | 5,061,295 |
| Provision for Income Taxes | 122,615 | 464,331 | 883,202 | 1,410,956 |
| ----------- | ----------- | ----------- | ----------- | |
| Net Income | $768,161 | $1,441,549 | $2,722,683 | $3,650,339 |
| ======== | ======== | ======== | ======== | |
| Per share amounts - | ||||
| Primary: | $0.12 | $0.22 | $0.41 | $0.55 |
| Fully diluted: | $0.12 | $0.19 | $0.40 | $0.52 |
| ======== | ======== | ======== | ======== | |
| Weighted Average Shares Outstanding | 6,667,752 | 6,594,847 | 6,631,530 | 6,583,813 |
| ======== | ======== | ======== | ======== | |
See accompanying notes to condensed consolidated financial statements.
| Additional | ||||
| Common | Paid-In | Retained | ||
| Stock (1) | Capital | Earnings | Total | |
| Balance, December 31, 1992 | $59,686 | $17,227,567 | $31,994,033 | $49,281,286 |
| Stock issued for benefit plans (19,096 shares) | 191 | 170,059 | --- | 170,250 |
| Stock options exercised (13,400 shares) | 134 | 117,791 | --- | 117,925 |
| Net income | --- | --- | 4,896,253 | 4,896,253 |
| -------------- | -------------- | -------------- | -------------- | |
| Balance, December 31, 1993 | $60,011 | $17,515,417 | $36,890,286 | $54,465,714 |
| Stock issued for benefit plans (26,488 shares) | 265 | 271,176 | --- | 271,441 |
| Stock options exercised (5,060 shares) | 50 | 40,365 | --- | 40,415 |
| Employee stock purchase plan (29,840 shares) | 298 | 259,683 | --- | 259,981 |
| 10% stock dividend (606,262 shares) | 6,063 | 6,662,819 | (6,668,882) | --- |
| Net income | --- | --- | 2,722,683 | 2,722,683 |
| -------------- | -------------- | -------------- | -------------- | |
| Balance, September 30, 1994 (unaudited) | $ 66,687 | $ 24,749,460 | $ 32,944,087 | $ 57,760,234 |
| ========= | ========= | ========= | ========= |
(1) $.01 Par Value
See accompanying notes to condensed consolidated financial statements.
(Unaudited)
| Periods ended September 30, | ||
| 1994 | 1993 | |
| -------------- | -------------- | |
| Cash Flows from Operating Activities: | ||
| Net income | $2,722,683 | $3,650,339 |
| Adjustments to reconcile net income to net cash provided | ||
| by operating activities - | ||
| Depreciation, depletion and amortization | 7,334,315 | 5,323,056 |
| Deferred income taxes | 648,696 | 888,902 |
| Earned interests from limited partnerships and joint ventures | (649,524) | (2,441,144) |
| Deferred revenue amortization related to production payment | (1,518,804) | (1,745,363) |
| Other | 78,420 | 24,933 |
| Change in assets and liabilities - | ||
| Increase in accounts receivable | (793,689) | (389,163) |
| Increase in accounts payable and accrued | ||
| liabilities, excluding income taxes payable | 509,465 | 499,387 |
| Increase in income taxes payable | 160,487 | 22,054 |
| ------------- | ------------- | |
| Net Cash Provided by Operating Activities | 8,492,049 | 5,833,001 |
| ------------- | ------------- | |
| Cash Flows From Investing Activities: | ||
| Additions to property and equipment | (22,310,612) | (12,492,406) |
| Net cash received (distributed) as operator | ||
| of oil and gas properties | (1,435,150) | (4,714,071) |
| Property acquisition costs (incurred on behalf of) | ||
| reimbursed by partnerships and joint ventures | (12,461,940) | (6,016,885) |
| Limited partnership formation and marketing costs | (495,093) | --- |
| Prepaid drilling costs | 1,170,964 | --- |
| Other | (42,075) | (15,906) |
| ------------- | ------------- | |
| Net Cash Used in Investing Activities | (35,573,906) | (23,239,268) |
| ------------- | ------------- | |
| Cash Flows From Financing Activities: | ||
| Proceeds from long-term debt | --- | 28,750,000 |
| Net proceeds from short-term bank borrowings | 26,350,000 | --- |
| Net proceeds from issuances of common stock | 571,837 | 278,270 |
| Payments of debt issuance costs | --- | (1,425,000) |
| ------------- | ------------- | |
| Net Cash Provided by Financing Activities | 26,921,837 | 27,603,270 |
| ------------- | ------------- | |
| Net Increase (Decrease) in Cash and Cash Equivalents | ($160,020) | $10,197,003 |
| Cash and Cash Equivalents at Beginning of Period | 636,349 | 1,316,974 |
| ------------- | ------------- | |
| Cash and Cash Equivalents at End of Period | $476,329 | $11,513,977 |
| ======= | ========= | |
| Supplemental disclosures of cash flow information: | ||
| Cash paid during period for interest, net of amounts capitalized | $743,804 | $3,145 |
| Cash paid during period for income taxes | $11,951 | $500,000 |
See accompanying notes to condensed consolidated financial statements.
(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. Using prices in effect at September 30, 1994, the Company's oil and gas properties would have been written down at September 30, 1994 with a resulting non-cash pre-tax charge to earnings of approximately $5,500,000. However, these temporarily low quarter-end prices rebounded and by using prices in effect at the filing date, the Company's unamortized cost of oil and gas properties were not limited by this calculation.
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 September 30, 1994 of $1,296,715 is net of accumulated amortization of $128,285.
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 and the second partnership closed July 18, 1994. The Company anticipates it will form the next partnership in late 1994 or early 1995.
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.
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.
Primary income per share has been retroactively restated in all periods presented to give recognition to an equivalent change in capital structure as a result of a 10% stock dividend. On September 6, 1994, the Company declared a 10% stock dividend to shareholders of record on September 19, 1994, which was paid on September 29, 1994 resulting in an additional 606,262 shares being issued.
The calculation of fully diluted income per share assumes conversion of the Company's Convertible Subordinated Debentures as of the beginning of the period and the elimination of the related after-tax interest expense and assumes, as of the beginning of the period, exercise (using the treasury stock method) of stock options and warrants. The conversion price of the Convertible Subordinated Debentures was revised to reflect the 10% stock dividend declared September 6, 1994. The original conversion price was $13.50 per common share and the revised conversion price per common share is $12.27. Fully diluted income per share has also been retroactively restated for all periods presented to give effect to the resulting conversion price revision stemming from the 10% stock dividend. The weighted average number of shares used in the computation of fully diluted per share amounts were 9,064,308 and 9,100,530 for the respective nine-month and three-month periods ended September 30, 1994. The weighted average number of shares used in the computation of fully diluted per share amounts were 7,519,543 and 9,092,652 for the respective nine-month and three-month periods ended September 30, 1993.
(3) Short-Term Bank Borrowings
The Company had available through a two bank group, a revolving line of credit of $29,000,000 at September 30, 1994 and $20,000,000 at December 31, 1993 bearing interest at the banks' base rate plus 0.5% (8.25% at September 30, 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 and has continued in the second and third quarters of 1994. The entire $15,000,000 balance outstanding at September 30, 1994, was at the LIBOR plus 2.25% rate of 7.125% ($10,000,000) and 7.3% ($5,000,000). The outstanding amounts under this facility at September 30, 1994 ($15,000,000) 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 and to fund the Company's working capital and capital expenditures needs.
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 cash dividends have been declared on the Company's common stock. The Company presently intends to continue a policy of using retained earnings for expansion of its business. As of September 30, 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.
On June 21, 1994, the Company entered into a new Acquisition Advance Agreement with the same two bank group, bearing interest at the greater of (a) the bank's base rate plus 1% (8.75% at September 30, 1994) or (b) the Federal Funds rate plus 1.5%, to be secured by producing oil and gas properties acquired and held for transfer. At September 30, 1994, $9,000,000 was outstanding under this agreement which was borrowed to fund the advance purchase of producing properties on behalf of affiliated partnerships and/or joint ventures to be subsequently reimbursed. This credit agreement extends through June 15, 1995.
The Company's third credit facility is an amended and restated revolving line of credit with the lead bank for $5,000,000 bearing interest at the bank's base rate (7.75% at September 30, 1994 and 6% at December 31, 1993), secured by certain Company receivables. There were no outstanding amounts under this facility at December 31, 1993. At September 30, 1994, $5,000,000 was outstanding under this facility. 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 on the revolving line of credit 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 fee on the Acquisition Advance Agreement is .5% of the amount of the advance. The aggregate amounts of commitment fees paid by the Company were $121,000 for the first nine 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 $12.27 per share, subject to adjustment upon the occurrence of certain events, which reflects an adjustment of the original conversion price of $13.50 per share to reflect the 10% stock dividend declared September 6, 1994. 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 $1,479,982 for the nine-month period ending September 30, 1994. Of this amount, $269,619 was capitalized primarily as part of oil and gas property costs.
(5) Stockholders' Equity
On September 6, 1994, the Company declared a 10% stock dividend to shareholders of record on September 19, 1994, which was paid on September 29, 1994. The transaction was valued based on the closing price ($11.00) of the Company's common stock on the New York Stock Exchange on September 6, 1994. Retained earnings were charged $6,668,882, with the capital accounts credited by the same amount as a result of the issuance of 606,262 shares of the Company's common stock. Income per share has been restated to reflect the stock dividend declared.
(6) Foreign Activities
Russia
On September 3, 1993, the Company 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 September 30, 1994 the Company's investment in Russia was approximately $3,350,000 and is included in the unproved properties portion of oil and gas properties.
Venezuela
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 Quiriquire Unit, however, other fields and opportunities are continuing to be evaluated in Venezuela. At September 30, 1994 the Company's investment in Venezuela was approximately $749,000 and is included in the unproved properties portion of oil and gas properties net of impairments of $45,668.
(7) 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 $32,700,000 of the properties were transferred to affiliated partnerships formed under the Company's SDI offering, and approximately $10,600,000 of the properties were retained by the Company for its own account.
During the second quarter of 1994, the Company acquired approximately $18,100,000 of producing oil and gas properties in a single acquisition transaction. Approximately $10,000,000 of the properties were transferred to affiliated partnerships formed under the Company's SDI offering, approximately $1,800,000 of the properties were retained by the Company for its own account and the remaining amount of approximately $6,300,000 is included as a current asset in "Producing oil and gas properties held for transfer" at September 30, 1994.
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 have been 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, now estimated to average between 13% and 17% of total investor subscriptions over the life of the program, depending on the level of fund sales.
For the nine months ended September 30, 1994, under the SDI offering, six partnerships had raised investor subscriptions totaling approximately $24,300,000 ($7,100,000 through April 15, $9,300,000 from April 16 through June 30 and $7,900,000 in the third quarter). Partnerships normally are formed on the last day of the quarter. The first partnerships 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. This compares to $34,100,000 of subscriptions in the first nine months of 1993 ($8,300,000 in the first quarter, $15,900,000 in the second quarter and $9,900,000 in the third quarter).
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. On July 18, 1994, the Company closed the second partnership under this offering. Subscriptions, which totaled approximately $1,400,000 in the first partnership and approximately $2,600,000 in the second partnership, 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 the next partnership in late 1994 or early 1995.
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. At September 30, 1994, the credit facilities were used to finance approximately $14,200,000 of such producing oil and gas property purchases. Approximately $7,900,000 of these properties were placed into partnerships at September 30, 1994, as reflected in the "Associated limited partnerships and joint ventures" receivable account on the balance sheet. The Company received reimbursement for that amount in October 1994. The remaining $6,300,000 of these properties are reflected in the "Producing oil and gas properties held for transfer" account on the balance sheet which is comprised of the properties acquired during the second quarter of 1994 as described in Note 6 to the Company's condensed financial statements included herein.
The principal terms and restrictions of these credit facilities and the amounts outstanding under the facilities at September 30, 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 September 30, 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 $5,626,467, an increase of $495,093, when compared with the December 31, 1993 balance. This increase, however, is primarily the result of costs incurred in filing the specific properties supplement, as described above, as well as costs incurred annually during the second quarter for updating and printing the SDI prospectus.
The Company's working capital has decreased significantly over the last nine months, from $9,741,683 at December 31, 1993 to deficit working capital of $3,689,574 at September 30, 1994. This decrease is primarily the result of the investment of a portion of current working capital into oil and gas property assets as described under capital expenditures below, intended to increase the Company's revenues from oil and gas sales, and in turn the Company's cash flow from operations in future periods. Due to the nature of the Company's business highlighted above, the individual components of working capital fluctuate considerably from month to month.
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 nine months of 1994 were $22,310,612. These capital expenditures include: (a) $5,500,000 of drilling costs, both exploratory and developmental; (b) $5,000,000 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) $4,000,000 to fund the Company's general partner capital contribution to partnerships formed under its SDI offering; (d) $3,400,000 spent to purchase limited partners interests in previously formed partnerships through the right of presentment arrangement provided in those partnerships; (e) $2,600,000 invested in foreign business opportunities in Russia (approximately $2,300,000) and in Venezuela (approximately $300,000), as described in Note 6 to the Company's condensed financial statements included herein; (f) $1,500,000 to acquire producing properties for the Company's own account and (g) $300,000 spent for furniture and fixtures, primarily computer equipment. In the remaining three months of 1994, the Company expects capital expenditures to range between $7,000,000 and $10,000,000, including investments in all areas in which investments were made during the first half of the year as described above, in approximately the same proportions, except that drilling expenditures are anticipated to increase and limited partner interest purchases are expected to decrease.
Net Cash From Operations
For the nine month period ended September 30, 1994, cash flows from operating activities increased to $8,492,049 as compared to $5,833,001 during the first nine months of 1993. The nine-month 1994 increase of $2,659,000 was due to the cash flow from oil and gas sales, which increased $3,679,000 or 37%, 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."
The increase of $5,300,000 in Unproved properties not being amortized was a result of the $5,000,000 in prospect costs and the $2,600,000 invested in foreign business opportunities as described above. Approximately $2,300,000 in prospect costs previously classified as unproved properties, which are not amortized, were reclassified during the first nine months of 1994 to proved properties subject to amortization. The expenditures on prospect costs and the reclassification are a direct result of the Company's increased drilling activity.
RESULTS OF OPERATIONS – Nine Months Ended September 30, 1994 and 1993
Net income ($2,722,683) and earnings per share ($0.41) decreased 25% in the first nine months of 1994 when compared to the same period for 1993. Lower net income primarily reflected the effect on revenues of lower earned interests and lower oil prices.
Revenues
The 11% increase in revenues during the first nine 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 30% to $15,014,095 in the first nine months of 1994, compared to $11,561,971 for the comparative period in 1993, primarily as a result of the acquisition of interests in producing properties by Swift for its own account in late 1993 and in the third quarter of 1994, and as a result of production from exploratory and developmental wells drilled in late 1993 and in the first nine months of 1994.
As a percentage of total revenues, oil and gas sales have risen from 64% in the first nine months of 1993 to 76% in the same period of 1994. Approximately 68% of these revenues were derived from the sale of the Company's gas production. 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 nine months of 1994 increased by 32% (1,713,556 equivalent Mcf) over volumes in the comparable 1993 period.
Oil prices decreased 10% while gas prices increased 3% when comparing average prices received over the nine-month period to those received in the comparable period. The 31% increase in gas production along with the 3% increase in gas price resulted in a 34% increase in revenue derived from gas sales for the first nine months of 1994 compared to a year earlier. The benefit of the 35% increase in oil production in the first nine months of 1994 as compared to the comparable period in 1993 was partially offset by the 10% decrease in oil prices, resulting in only a 23% increase in revenue derived from oil sales between the two periods.
The following table provides additional information regarding the Company's oil and gas sales.
| NET SALES VOLUME | AVERAGE SALES PRICE | |||
|---|---|---|---|---|
| Oil(Bbl) | Gas(Mcf) | Oil(Bbl) | Gas(Mcf) | |
| ----------- | ----------- | ----------- | ----------- | |
| 1993: | ||||
| 3 MONTHS ENDED 3/31/93 | 80,734 | 1,169,751 | $15.69 | $1.91 |
| 3 MONTHS ENDED 6/30/93 | 81,445 | 1,269,710 | $17.32 | $2.03 |
| 3 MONTHS ENDED 9/30/93 | 85,236 | 1,410,919 | $14.70 | $2.00 |
| ----------- | ----------- | |||
| 9 MONTHS ENDED 9/30/93 | 247,415 | 3,850,380 | $15.89 | $1.98 |
| ======= | ======= | |||
| 1994: | ||||
| 3 MONTHS ENDED 3/31/94 | 99,992 | 1,643,348 | $11.80 | $2.21 |
| 3 MONTHS ENDED 6/30/94 | 105,854 | 1,582,699 | $14.47 | $1.98 |
| 3 MONTHS ENDED 9/30/94 | 128,841 | 1,814,257 | $16.09 | $1.91 |
| ----------- | ----------- | |||
| 9 MONTHS ENDED 9/30/94 | 334,687 | 5,040,304 | $14.30 | $2.03 |
| ======= | ======= | |||
Earned Interest and Cash Management Fees. Earned interest recognized in the first nine months of 1994 solely from limited partnerships totaled $649,524 compared to $2,441,144 recognized in earned interest in the first nine months of 1993. Cash management fees received in the first nine months of 1994 solely from limited partnerships were $546,135, a small decrease from the comparable 1993 total of $576,552. The decrease in earned interest from limited partnerships relates to (a) the decrease in properties placed into partnerships (b) the increased percentage applied toward formation and marketing costs which causes a reduction in the earned interest percentage and (c) the low quarter end pricing used to compute the earned interest amount (which is likely to reduce earned interest in future periods). The earned interest in the first nine months of 1993 was recognized through the placement of approximately $39,100,000 of properties into partnerships, approximately $14,900,000 of which was due to properties purchased with funds from partnerships formed in 1992 with funds to invest awaiting producing properties available for transfer. The earned interest recognized in the first nine months of 1994 was through the placement of approximately $15,900,000 of producing properties into partnerships, all of which were formed in the first six months of 1994. The placement of approximately $7,900,000 into partnerships during the third quarter of 1994, resulted in no recognition of earned interest, due to the combination of factors discussed above.
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, Swift's capital contributions to each partnership 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 4% when comparing the first nine months of 1994 to the comparable 1993 period. Producing overhead increased 4% in 1994 due to the increase in the number of wells the Company operates, and due to the annual escalation in well overhead rates. Drilling overhead increased 5% in 1994 due to the Company's increased company operated drilling activity.
Expenses
Total expenses for the nine months ended September 30, 1994 increased 26% over the comparable period in 1993, as compared to the 11% increase in revenues.
General and administrative expenses for the first nine months of 1994 decreased $158,370 or 4% when compared to the same period in 1993.
The 17% 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 higher production costs relative to sales revenues.
The 38% 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 for the first nine months of 1994 on the Debentures, including amortization of debt issuance costs, totaled $1,479,982 for the nine month period ending September 30, 1994. Of this amount, $269,619 was capitalized primarily as part of oil and gas property costs.
This compares to only three months of interest expense on the Debentures for the first nine months of 1993, totaling $492,120 including amortization of debt issuance costs. Of this amount, $96,829 was capitalized as part of oil and gas property costs and $122,306 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.
RESULTS OF OPERATIONS – Three Months Ended September 30, 1994 and 1993
Net income and earnings per share decreased 47% and 48%, respectively in the third quarter of 1994 when compared to the same time period for 1993, with third quarter 1994 net income of $768,161. Lower net income primarily reflected the effect on revenues of lower earned interests.
Revenues
The 5% increase in revenues during the third quarter of 1994 from that of the comparable period in 1993 is due to the increase in oil and gas sales.
Oil and Gas Sales. Oil and gas sales increased 36% to $5,534,789 in the third quarter of 1994, compared to $4,073,699 for the comparative period in 1993, primarily due to the acquisition of interests in producing properties by Swift for its own account in late 1993 and the third quarter of 1994, and as a result of production from exploratory and developmental wells drilled in late 1993 and in the first nine months of 1994. The Company's net sales volume (including the volumetric production payment) in the third quarter of 1994 increased 35% (664,968 equivalent Mcf) over volumes in the comparable 1993 period.
Oil prices increased 9% and gas prices decreased 5% when comparing third quarter 1994 prices received to those received in the third quarter of 1993. The 29% increase in gas production was partially offset by the 5% decrease in gas prices, resulting in a 23% increase in gas sales when comparing third quarter 1994 amounts to those for 1993. The 51% increase in oil production for the third quarter of 1994 when compared to 1993 along with the 9% increase in prices, resulting in a 65% increase in oil sales when comparing the two periods. Approximately 63% of third quarter oil and gas sales were derived from the sale of the Company's gas production.
Earned Interest and Cash Management Fees. No earned interest was recognized in the third quarter of 1994, as a result of the same factors affecting the nine-month period. This compares to $1,150,047 from earned interest recognized in the third quarter of 1993. Cash management fees received in the third quarter of 1994 (solely from limited partnerships) were $203,813, an increase from the comparable 1993 amounts of $180,065.
Expenses
Total expenses for the three months ended September 30, 1994 increased 29% over the comparable period in 1993, as compared to the 5% increase in revenues.
General and administrative expenses increased during the third quarter of 1994 by $26,127 or 2%.
The 36% increase in oil and gas production costs relates to the growth of the Company's interests in producing properties and the related sale of increased quantities of oil and gas therefrom.
The 39% 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 $493,947 for the three-month period ending September 30, 1994. Of this amount, $44,987 was capitalized primarily as part of oil and gas property costs. Interest expense on the Debentures, including amortization of debt issuance costs, totaled $492,120 for the third quarter of 1993. Of this amount, $219,135 was capitalized or reimbursed as discussed above.
Item 1. Legal Proceedings - N/A Item 2. Changes in Securities - N/A Item 3. Defaults Upon Senior Securities - N/A Item 4. Submission of Matters to a Vote of Security Holders - N/A Item 5. Other Information - N/A Item 6. Exhibits & Reports on Form 8K - None