(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, 1995 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.
The statements contained in this Quarterly Report on Form 10-Q ("Quarterly
Report") that are not historical facts, including statements found in Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations, are
forward-looking statements as that term is defined in Section 21E of the Securities and
Exchange Act of 1934, as amended, that involve a number of risks and uncertainties. The
actual results of the future events described in such forward-looking statements in this
Quarterly Report could differ materially. Among the factors that could cause actual
results to differ materially are: general economic conditions, competition and government
regulations, and fluctuations in oil and natural gas prices, as well as the risks and
uncertainties set forth from time to time in the Company's other public reports, filings,
and public statements. Also, because of the volatility in oil and gas prices and other
factors, 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. Such costs include
lease acquisitions, geological and geophysical services, drilling, completion, equipment,
and certain general and administrative costs directly associated with acquisition,
exploration, and development activities. General and administrative costs related to
production and general overhead are expensed as incurred. No gains or losses are
recognized upon the sale or disposition of oil and gas properties, except in transactions
that involve a significant amount of reserves. The proceeds from the sale of oil and gas
properties are generally treated as a reduction of oil and gas property costs. 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.
Future development, site restoration, and dismantlement and abandonment costs, net of
salvage values, are estimated on a property-by-property basis based on current economic
conditions and are amortized to expense as the Company's capitalized oil and gas property
costs are amortized. The Company's properties are all onshore and historically the salvage
value of the tangible equipment offsets the Company's site restoration and dismantlement
and abandonment costs. The Company expects this relationship will continue.
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
- including future development, site restoration, and dismantlement and abandonment costs
but 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.
At the end of each quarterly reporting period, the unamortized cost of oil and gas
properties, net of related deferred income taxes, is limited to the sum 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, 1996, is net of accumulated amortization
of $297,692.
Hedging Activities
The Company's revenues are primarily the result of sales of its oil and natural gas
production. Market prices of oil and natural gas may fluctuate and adversely affect
operating results. To mitigate some of this risk, the Company does engage periodically in
certain limited hedging activities, but only to the extent of buying protection price
floors for portions of its and the limited partnerships' oil and gas production. Costs
and/or benefits derived from these price floors are accordingly recorded as a reduction or
increase in oil and gas sales revenue and was not significant for any period presented.
Deferred Revenues
In May 1992, the Company purchased interests in certain wells using funds 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
Between 1991 and 1995, the Company formed limited partnerships and joint ventures for
the purpose of acquiring interests in producing oil and gas properties and, since 1993,
partnerships engaged in drilling for oil and gas reserves. The Company serves as managing
general partner or manager of these entities. The Company's investments in associated oil
and gas partnerships and its joint ventures are accounted for using the proportionate
consolidation method, whereby the Company's proportionate share of each entity's assets,
liabilities, revenues and expenses is included in the appropriate classifications in the
consolidated financial statements. Because the Company serves as the general partners of
these entities, under state partnership law it is contingently liable for the liabilities
of these partnerships, which liabilities are not material for any of the periods presented
in relation to the partnerships' respective assets. These partnerships' liabilities
generally consist of third party borrowings from time to time to fund capital expenditures
for development of oil and gas properties, and will be repaid from oil and gas sales
proceeds of the partnerships in future periods.
Under the Swift Depositary Interests limited partnership offering ("SDI
Offering") which commenced in March 1991 and concluded after the formation of its
last two partnerships on December 14, 1995, the Company received a reimbursement of
certain costs and a fee, both payable out of revenues. The Company bore all front-end
costs of the offering and partnership formations for which it received an interest in the
partnerships.
The Company acquires producing oil and gas properties and transfers those 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.
Commencing September 15, 1993, the Company began offering, on a private placement
basis, general and limited partnership interests in limited partnerships to be formed to
drill for oil and gas. As managing general partner, the Company pays for all front-end
costs incurred in connection with this offering, for which the Company receives an
interest in the partnerships. Through March 31, 1996, approximately $19,900,000 been
raised in five partnerships in which the proceeds are to be invested in development
drilling and exploratory drilling. The first five partnerships closed December 8, 1993,
July 18, 1994, March 15, 1995, August 1, 1995, and December 8, 1995.
Costs of syndication, registration, and qualification of these limited partnerships
incurred by the Company have been deferred. Under the current private limited partnership
offerings, selling and formation costs borne by the Company serve as the Company's general
partner contribution to such partnerships. Upon the Company's decision to conclude the SDI
offering at the end of 1995, the remaining limited partnership formation and marketing
costs related to the SDI offering (approximately $1,750,000) were accordingly transferred
to the oil and gas properties account.
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.
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 a dilutive 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.
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. The weighted average
number of shares used in the computation of fully diluted per share amounts was 15,133,648
for the three-month period ended March 31, 1996. During 1995 such amounts were
antidilutive.
(3) Short-Term Bank Borrowings
The Company had available through a two bank-group, a revolving line of credit of
$35,000,000 at both March 31, 1996, and at December 31, 1995, bearing interest at the
banks' base rate plus 0.5% (8.75% at March 31, 1996, and 9% at December 31, 1995), 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 specific periods at the London Interbank Offered Rate ("LIBOR") plus 2.25%.
There was no outstanding balance under this line of credit at December 31, 1995. At March
31, 1996, $2,000,000 of the $7,000,000 outstanding was at the LIBOR plus 2.25% rate of
7.63%. The outstanding amount under this facility at March 31, 1996 ($7,000,000) was
borrowed primarily to fund the Company's working capital and capital expenditures needs.
Effective April 30, 1996, this credit agreement was restated. The facility was increased
to $100,000,000 and is now unsecured. The available borrowing base currently will not
change and will be redetermined periodically. Depending on the level of outstanding debt,
the interest rate currently will be either the bank's base rate or the bank's base rate
plus 0.25%. The LIBOR option will now vary from plus 1% to plus 1.5%. The restated
revolving line of credit extends through September 30, 1999.
The terms of the revolving line of credit include, among other restrictions, a
limitation on the level of cash dividends (not to exceed $2,000,000 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 March 31, 1996 and December 31, 1995, the Company was in compliance
with the provisions of these agreements.
The Company's other credit facility is an amended and restated revolving line of credit
with the lead bank of the two bank-group for $5,000,000 bearing interest at the bank's
base rate (8.25% at March 31, 1996, and 8.5% at December 31, 1995), secured by certain
Company receivables. At March 31, 1996, $5,000,000 was outstanding under this facility.
There was no outstanding amount on this facility at December 31, 1995. This facility,
effective April 30, 1996, was amended to $7,000,000, with interest at the bank's base rate
plus 0.25%. This restated credit facility extends through September 30, 1999.
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 aggregate amounts of commitment fees paid by the Company
were $53,000 for the first three months of 1996 and $154,000 for the twelve-month period
in 1995.
(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. The conversion price reflects
an adjustment of the original conversion price of $13.50 per share to reflect the 10%
stock dividend declared September 6, 1994 and distributed September 29, 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 the 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 $496,945 for the three-month period ending March 31, 1996, and $1,981,639 for the
twelve-month period ending December 31, 1995.
(5) Stockholders' Equity
During the third quarter of 1995, the Company closed the sale to the public of
5,750,000 shares of common stock at a price of $8.50 per share. Net proceeds from this
offering were $45,698,912 and were used to repay outstanding indebtedness, with the
remaining proceeds being used to finance the Company's exploration and development
activities, and to acquire producing oil and gas properties, including limited partnership
interests.
(6) Foreign Activities
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. Under the terms of the Participation Agreement, 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. Additionally, the
Company purchased a 1% net profits interest from Senega for $300,000. In May 1995, the
Company executed a Management Agreement with Senega. In return for undertaking to obtain
financing for development of these fields, Swift is entitled to a 49% interest in
production income derived by Senega from this project after repayment of costs. At March
31, 1996, the Company's investment in Russia was approximately $7,485,000 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 March 31, 1996, the
Company's investment in Venezuela was approximately $1,190,000 and is included in the
unproved properties portion of oil and gas properties net of impairments of $45,668.
New Zealand
On October 12, 1995, the Company was approved for the grant of Petroleum Exploration
Permit by the New Zealand Minister of Energy and the acceptance of which was approved by
the Company's board of directors on November 7, 1995. This permit (PEP 38717) covers
approximately 65,000 acres in the Onshore Taranaki Basin region. This permit primarily
requires the Company to : (a) post a $175,000 bond (which was done by the Company on
December 22, 1995) before January 11, 1996; (b) before December 31, 1997, analyze and
interpret approximately 460 kilometers of existing seismic data and acquire approximately
100 kilometers of new seismic data; (c) commence drilling one well prior to July 31, 1998;
(d) review results prior to July 31, 1999, and (e) prior to July 31, 2000, drill a
development well or acquire additional seismic data. At March 31, 1996, the Company's
investment in New Zealand was approximately $270,000 and is included in the unproved
properties portion of oil and gas properties.
The following discussion should be read in conjunction with the Company's Condensed
Consolidated Financial Statements and Notes thereto.
General
The Company has historically financed most of its growth with capital raised through
limited partnership financing, having raised approximately $463 million through limited
partnership financing from 1979 through 1995. Beginning in 1985, the Company increasingly
emphasized this financing vehicle thereby enabling the Company to accelerate its growth
and purchase larger producing properties. Commencing in 1991, the Company began
re-emphasizing the addition of reserves through increased drilling on internally generated
exploration and development prospects.
The Company's revenue is primarily comprised of oil and gas sales attributable to
properties in which the Company owns a direct or indirect interest. In May 1992, the
Company purchased interests in certain wells from the Manville Corporation for $13.8
million using funds provided by the Company's sale of a volumetric production payment in
these properties to a subsidiary of Enron Corp. Net proceeds from the sale of the
production were recorded as deferred revenues. Deliveries under the volumetric production
payment are recorded as oil and gas sales revenues which are offset by a corresponding
reduction of deferred revenues. Under this arrangement, the Company is required to deliver
a fixed quantity of hydrocarbons produced from the properties over specified periods
through October 2000. Volumes remaining to be delivered under the volumetric production
payment (approximately 3.8 Bcf) are not included in the Company's proved reserves. Under
the volumetric production payment, hydrocarbons produced in excess of the amount required
to be delivered are sold by the Company for its own account.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has relied on limited partnership capital as its principal
financing vehicle to fund its acquisitions of producing properties. Since 1991, however,
the Company's strategy has shifted toward increased reliance on exploration and
development activities, and it has significantly expanded reserves added through these
efforts. As a result, the Company has reduced its reliance on cash flows generated from,
and capital raised through, limited partnerships. Supplemental cash and working capital
are provided through internally generated cash flows and debt and equity financing.
Net Cash From Operations
For the three-month period ended March 31, 1996, cash flows from operating activities
increased significantly (109%) to $6,199,156 as compared to $2,964,097 during the first
three months of 1995. The 1996 increase of $3,235,059 was primarily due to an increase in
cash flows from oil and gas sales, which increased $4,846,700 (110%), exclusive of the
non-cash amortization of deferred revenues associated with the Company's volumetric
production payment.
1995 Equity Offering
During the third quarter of 1995, the Company closed the sale to the public of
5,750,000 shares of common stock at a price of $8.50 per share. Net proceeds from this
stock sale were $45,698,912. Consequently, the Company's stockholders' equity at March 31,
1996, has grown to over $97 million. Net proceeds from the offering were used to repay
outstanding indebtedness, and the remainder of the proceeds will be used or have been used
to finance the Company's exploration and development activities and to acquire producing
oil and gas properties, including limited partnership interests.
Other Financing Activities
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 were 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 consolidated financial statements
included herein.
Between 1991 and 1995, the Company offered interests in oil and gas production
partnerships under its Swift Depositary Interests (SDI), offering and since late 1993 has
offered private partnerships formed to drill for oil and gas. The SDI program concluded at
the end of 1995. Four SDI partnerships were formed during 1995, with total subscriptions
of approximately $12,400,000. During 1995, the Company closed three drilling partnerships
with a total of $15,900,000 of subscriptions. The Company anticipates that it will
continue to offer the drilling partnerships for the foreseeable future, with the next
partnership planned to be formed in the second quarter of 1996.
At March 31, 1996, limited partnership formation and marketing costs (which under the
current drilling partnership offerings are borne by the Company as part of the Company's
general partner contribution) amounted to $1,351,865, an increase of $493,306, when
compared with the December 31, 1995, balance. Upon the Company's decision to conclude the
SDI offering, the remaining limited partnership formation and marketing costs related to
the SDI offering (approximately $1,750,000) were accordingly transferred to the oil and
gas properties account in December 1995.
Credit Facilities
The Company has established credit facilities which formerly were 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
provide working capital. More recently, the Company's credit facilities have been used to
fund a portion of the Company's exploration and development activities. The principal
terms and restrictions of these credit facilities are described in Note 3 to the Company's
condensed consolidated financial statements included herein in December 1995.
At March 31, 1996, the Company had $12,000,000 outstanding under these borrowing
arrangements used, along with internally generated cash flows, principally to fund the
Company's capital expenditures in the first quarter of 1996, and to a lesser extent, to
provide working capital. At December 31, 1995, the Company had no outstanding balances
under these borrowing arrangements, since these borrowings were repaid with proceeds from
the Company's 1995 stock offering.
Working Capital
The Company's working capital has decreased over the last three months, from positive
working capital of $3,247,185 at December 31, 1995, to a working capital deficit of
$1,315,670 at March 31, 1996. This decrease is primarily the result of the Company's
capital expenditures as described below.
Due to the nature of the Company's business highlighted above, the individual
components of working capital fluctuate considerably from period to period. The Company
incurs significant working capital requirements in connection with its role as operator of
approximately 770 wells, its accelerated drilling program, and the management of
affiliated partnerships. In this capacity, the Company is responsible for certain
day-to-day cash management, including the collection and disbursement of oil and gas
revenues and related expenses.
Capital Expenditures
Additions to property, plant, and equipment during the first three months of 1996 were
$11,480,579. These capital expenditures include: (a) $7,500,000 of drilling costs, both
exploratory and developmental; (b) $2,400,000 of prospect costs (principally prospect
leasehold, seismic and geological costs of unproved prospects for the Company's account);
(c) $800,000 invested in foreign business opportunities in Russia (approximately
$670,000), in Venezuela (approximately $70,000), and in New Zealand (approximately
$70,000), as described in Note 6 to the Company's condensed consolidated financial
statements included herein and (d)$800,000 spent for furniture and fixtures. In the
remaining nine months of 1996, the Company expects capital expenditures to be
approximately $51,000,000, including investments in all areas in which investments were
made during the first three months of the year as described above, with a particular focus
on exploration and development drilling. The Company currently plans to participate in the
drilling of 110 gross wells this year, compared to 76 wells in 1995. Through March 31,
1996, the Company had participated in drilling 2 exploratory and 28 development wells with
2 exploratory successes and 26 development successes.
The Company believes that 1996's anticipated internally generated cash flows (expected
to increase as the Company's production base increases as a result of its accelerated
drilling program) and its existing credit facilities, will be sufficient to finance the
costs associated with its currently budgeted capital expenditures at least through 1996.
Further liquidity needs may also be met by additional availability under its credit
facilities based upon the value of the Company's proved reserves, as management
continually evaluates future use of debt and/or equity to finance its capital needs.
RESULTS OF OPERATIONS -
Three Months Ended March 31, 1996 and 1995
Net income of $3,082,381 and earnings per share of $0.25 for the first quarter of 1996
were 488% and 213% higher, respectively than net income of $524,600 and earnings per share
of $0.08 in the same period for 1995. This increase in net income primarily reflected the
effect of a 99% increase in oil and gas sales revenues as a result of an 86% increase in
natural gas production, an 18% increase in crude oil production, and product price
improvements. The lower percentage increase in earnings per share reflects an 87% increase
in weighted average shares outstanding for the period, as a result of the sale of
5,750,000 shares of common stock in the third quarter of 1995.
Revenues
Oil and Gas Sales. Oil and gas sales increased 99% to $9,691,962 in the first quarter
of 1996, compared to $4,876,041 for the comparative period in 1995. The 86% increase in
natural gas production and the 18% increase in oil production were primarily the result of
production from exploratory and developmental wells drilled in late 1995 and in the first
three months of 1996, most notably from the Company's two primary development areas, the
AWP Olmos and Giddings fields. The Company's net sales volume (including the volumetric
production payment) in the first three months of 1996 increased by 64% or 1,616,915 Mcfe
(thousand cubic feet equivalent) over volumes in the comparable 1995 period. Oil and gas
sales were also aided by a 33% and 14% increase, respectively in gas prices received and
in oil prices received between the two periods.
Oil and gas sales comprised 87% and 78%, respectively of total revenues for the first
three months of 1996 and 1995. The majority 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 active drilling programs.
The following table provides additional information regarding the Company's oil and gas
sales.
