SWIFT ENERGY COMPANY
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED March 31, 1997
INDEX

SWIFT ENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

Liabilities and Stockholders' Equity

See accompanying notes to condensed consolidated financial statements.

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
(2) Unaudited

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, 1997 (UNAUDITED) AND DECEMBER 31, 1996

(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, 1996 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.

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 6.5% Convertible Subordinated Debentures due 2003 (the "Debentures") in June 1993 were capitalized and through June 1996 were being amortized over the life of the Debentures. Due to the conversion of all outstanding Debentures into common stock in August 1996, the related unamortized costs ($1,097,551) were transferred to the Company's appropriate capital accounts in the third quarter of 1996. The issuance costs associated with the Company’s 6.25% Convertible Subordinated Notes (the "Notes") sold in a public offering in November 1996 have been capitalized and are being amortized over the life of the Notes, which mature on November 15, 2006. The balance of these issuance costs at March 31, 1997 ($4,434,442) is net of accumulated amortization of $115,558.

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 recorded as a reduction or increase, as applicable, in oil and gas sales revenue and were not significant for any period presented. The costs to purchase put options are amortized over the option period.

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. Volumes remaining to be delivered through October 2000, under the volumetric production payment (approximately 2.7 Bcf at March 31, 1997) are not included in the Company's proved reserves. 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. Hydrocarbons produced in excess of the amount required to be delivered are sold by the Company for its own account.

Limited Partnerships and Joint Ventures

 

Between 1991 and 1995 (and for prior periods), 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 Company’s Consolidated Financial Statements. Because the Company serves as the general partner of these entities, under state partnership law it is contingently liable for the liabilities of these partnerships, virtually all of which are owed to the Company and are not material for any of the periods presented in relation to the partnerships' respective assets.

Under the Swift Depositary Interests limited partnership offering ("SDI Offering"), which commenced in March 1991 and concluded in December 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. 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 Company’s oil and gas properties account.

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 these offerings, for which the Company receives an interest in the partnerships. Through March 31, 1997, approximately $41,900,000 had been raised in eight partnerships, one formed in each of 1993 and 1994, and three in each of 1995 and 1996. In July, September, and November 1996, the Company closed the sixth, seventh, and eighth partnerships with total subscriptions of approximately $4,900,000, $10,000,000, and $7,100,000, respectively. Costs of syndication 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.

During 1996, the limited partners in 18 partnerships, which had been in operation over nine years and have produced a substantial majority of their reserves, voted to sell their remaining properties and liquidate the limited partnerships. In 1996, 10 of the earliest public income partnerships were liquidated, and in early 1997 eight private drilling partnerships will be liquidated. The Company intends to make similar proposals to other partnerships for an orderly sale of their properties and liquidation of the partnerships over the next several years. The Company may offer to acquire certain portions of the remaining property interests owned by these limited partnerships.

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 Debentures were not and the Notes are not common stock equivalents for the purpose of computing primary income per share.

The calculation of fully diluted income per share assume conversion of the Company's Notes and Debentures as of the beginning of the period and the elimination of the related after-tax interest expense and assume, as of the beginning of the period, exercise (using the treasury stock method) of stock options and warrants. The weighted average number of shares used in the computation of fully diluted per share amounts was 18,991,102 and 15,133,648 for the respective three-month period ended March 31, 1997 and 1996. Due to the August 1996 conversion of these Debentures into 2.34 million shares of common stock, as described below, the effect of such conversion in the March 31, 1997 period is included in primary income per share.

In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" which establishes new standards for computing and presenting earnings per share. The provisions of the statement are effective for fiscal years ending after December 15, 1997. If the provisions of SFAS No. 128 had been adopted in the first quarter of 1997 and 1996, basic and diluted earnings per share would have been the same as currently reported for primary and fully diluted earnings per share.

(3) BANK BORROWINGS

 

The Company has available through a two bank-group, a revolving line of credit. 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 at March 31, 1997, was $5,000,000, and will be redetermined periodically. Prior to December 1, 1996, the borrowing base was $30,000,000. At the Company’s request, it was reduced to the $5,000,000 amount effective December 1, 1996. This was requested in order to reduce the amount of commitment fees paid on this facility, the calculation of which is described below. Depending on the level of outstanding debt, the interest rate will be either the bank's base rate (8.25% at March 31, 1997) or the bank’s base rate plus 0.25%. This facility also allows, at the Company's option, draws which bear interest for specific periods at the London Interbank Offered Rate ("LIBOR"). The LIBOR option will now vary from plus 1% to plus 1.5%. There was no outstanding balance under this line of credit at either March 31, 1997 or December 31, 1996. 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, 1997 and December 31, 1996, the Company was in compliance with the provisions of these agreements.

The Company's other credit facility, which is the Company's only secured facility, is an amended and restated revolving line of credit with the lead bank of the two bank-group, secured by certain Company receivables. This facility, effective April 30, 1996, was amended to $7,000,000 with interest at the bank's base rate less 0.25% (8% at March 31, 1997). The available borrowing base is $2,000,000 at March 31, 1997, and will be redetermined periodically. This borrowing base decrease from $7,000,000 was also effective December 1, 1996, at the Company’s request. There was no outstanding amount on this facility at either March 31, 1997 or December 31, 1996. 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 letters of credit outstanding during the period. The aggregate amounts of commitment fees paid by the Company were $6,600 for the first three months of 1997 and $120,000 for the twelve-month period in 1996.

(4) LONG-TERM DEBT

 

The Company’s long-term debt at March 31, 1997 and December 31, 1996, consists of $115,000,000 of 6.25% Convertible Subordinated Notes due 2006 ("Notes"). The Notes were issued on November 25, 1996, and will mature on November 15, 2006. The Notes are convertible into common stock of the Company at the option of the holders at any time prior to maturity at a conversion price of $34.69 per share, subject to adjustment upon the occurrence of certain events. Interest on the Notes is payable semiannually on May 15 and November 15, commencing with the first payment on May 15, 1997. On or after November 15, 1999, the Notes are redeemable for cash at the option of the Company, with certain restrictions, at 104.375% of principal, declining to 100.625% in 2005. 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 Notes will have the right to require the Company to repurchase the Notes 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.

The Company's long-term debt previously consisted of $28,750,000 of 6.5% Convertible Subordinated Debentures due 2003 ("Debentures"). The Debentures were issued on June 30, 1993 under terms making them convertible into common stock of the Company at an adjusted conversion price of $12.27 per share. The Debentures became redeemable for cash at the option of the Company after June 30, 1996. On July 1, 1996, the Company called all of the Debentures for redemption on August 5, 1996 at 104.55% of their face amount. Prior to the redemption date, the holders of all of the outstanding Debentures elected to convert their Debentures into shares of common stock, resulting in the issuance of 2.34 million shares of common stock in August 1996. Upon conversion of the Debentures into common stock, the approximate $27,650,000 net carrying amount of the debt (the face amount less unamortized deferred charges) was transferred to the Company's appropriate capital accounts during the third quarter of 1996.

Interest expense on the Notes, including amortization of debt issuance costs, totaled $1,873,914 for the three-month period ending March 31, 1997, while interest expense on both the Notes and Debentures, including amortization of debt issuance costs, totaled $1,731,194 for the twelve-month period ending December 31, 1996.

(5) STOCKHOLDERS' EQUITY

 

In August 1996, the holders of the Company's Debentures converted such Debentures into 2.34 million shares of the Company's common stock, which resulted in a third quarter 1996 increase in the Company's capital accounts of approximately $27,650,000.

In 1996, the Company established an Employee Stock Ownership Plan ("ESOP"), effective January 1, 1996. All employees over the age of 21 with one year of service are participants. The Plan has a five year cliff vesting, and service is recognized after the Plan effective date. The ESOP is designed to enable employees of the Company to accumulate stock ownership. While there will be no employee contributions, participants will receive an allocation of stock which has been contributed by the Company. Compensation costs are reported when such shares are released to employees. The Plan may also acquire Swift Energy Company common stock purchased at fair market value. The ESOP can borrow money from the Company to buy Company stock as was done in September 1996 to purchase 25,000 shares from the Company’s chairman. Benefits will be paid in a lump sum or installments, and the participants generally have the choice of receiving cash or stock. At March 31, 1997 and December 31, 1996, the unearned portion of the ESOP ($225,083) and ($521,354), respectively, was recorded as a contra-equity account entitled "Unearned ESOP Compensation."

In March 1997, the Company’s board of directors approved a common stock repurchase program for up to $20.0 million of the Company’s common stock throughout 1997. Purchases of shares are made in the open market. Under the program, through March 31, 1997, approximately 157,900 shares have been acquired at a total cost of $3.76 million and are included in "Treasury stock held, at cost" on the balance sheet at March 31, 1997.

(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 providing the Company with 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, under which, in return for undertaking to obtain financing for development of these fields, Swift is entitled to receive a 49% interest in production income derived by Senega from this project after repayment of costs.

On July 12, 1996, the Company entered into a partnership agreement which provides for the Company to contribute its rights under the Participation and Management Agreement to the partnership and for the partners to share equally revenues and costs of developing the Samburg Field and funding and management of the license areas, all in conjunction with Senega. The partnership is to be funded by the partners upon fulfillment of certain conditions and completion of certain further arrangements with Senega. It is currently anticipated that these activities would be funded principally through project financing. At March 31, 1997, the Company's investment in Russia was approximately $9,744,000, 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. Although, the Company did not win the bids, it has continued to pursue cooperative ventures involving other fields and opportunities in Venezuela. Currently, the Company is evaluating a number of Blocks being offered by Petroleos de Venezuela, S.A. under the Third Operating Agreement Round. At March 31, 1997, the Company's investment in Venezuela was approximately $2,113,000 and is included in the unproved properties portion of oil and gas properties net of impairments of $45,668.

New Zealand

 

Since October 1995, the Company has been issued two Petroleum Exploration Permits by the New Zealand Minister of Energy. The first permit covers approximately 65,000 acres in the Onshore Taranaki Basin of New Zealand’s North Island, and the second covers approximately 69,300 adjacent acres. Under the terms of the permits, the Company is obligated to analyze and interpret certain seismic data, acquire certain new seismic data and drill one exploratory well, to be followed by a development well or additional seismic work, all of which is to be performed on a staged basis in order to maintain the permits, over periods extending through July 2000 for the first permit and August 1999 for the second permit. At March 31, 1997, the Company's investment in New Zealand was approximately $1,376,000 and is included in the unproved properties portion of oil and gas properties.

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

The following discussion should be read in conjunction with the Company's Condensed Consolidated Financial Statements and Notes thereto.

GENERAL

 

The Company was formed in 1979, and from 1985 to 1991 grew primarily through the acquisition of producing properties funded through limited partnership financing. Commencing in 1991, the Company began to reemphasize the addition of reserves through increased exploration and development drilling activity. This emphasis on exploration and development drilling has led to additions of increasing quantities of reserves in each of 1994, 1995, 1996, and the first three months of 1997.

The statements contained in this Quarterly Report on Form 10-Q ("Quarterly Report") that are not historical facts are forward-looking statements as that term is defined in Section 21E of the Securities and Exchange Act of 1934, as amended, and therefore involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements in this Quarterly Report, including those regarding the Company's financial results, levels of oil and gas production or revenues, capital expenditures, and capital resource activities, could differ materially from those estimated. 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.

LIQUIDITY AND CAPITAL RESOURCES

 

In 1991, the Company’s strategy shifted toward an increased reliance on exploration and development activities, and the Company has significantly expanded reserves added through these efforts. Previously, the Company relied on limited partnership capital as its principal financing vehicle to fund its acquisitions of producing properties. As a result of this shift in strategy, the Company has reduced its reliance on cash flows generated from and capital raised through limited partnerships. Cash and working capital are provided through internally generated cash flows and debt and equity financing.

During the first ten months of 1996, the Company relied upon internally generated cash flows and bank borrowings to fund its capital expenditures. In November 1996, the Company realized $110.45 million in net proceeds from an offering of 6.25% Convertible Subordinated Notes due 2006 that provided sufficient capital to repay the Company’s bank financing and finance its capital expenditures through the first quarter of 1997 and is expected to provide, along with internally generated cash flows, for capital expenditures and working capital needs for the remainder of 1997. Described below are the major elements of the Company’s liquidity and capital resources.

Net Cash Provided by Operating Activities

 

For the three month period ended March 31, 1997, net cash provided by operating activities increased significantly (215%) to $19.5 million, as compared to $6.2 million during the first three months of 1996. The 1997 increase of $13.3 million was primarily due to an increase in cash flows from oil and gas sales, which increased $8.7 million (94%), exclusive of the noncash amortization of deferred revenues associated with the Company's volumetric production payment. This increase in oil and gas sales was primarily the result of increased production volumes and higher product prices, as described below.

Sale of Convertible Subordinated Notes

 

In November 1996, the Company issued $115.0 million of 6.25% Convertible Subordinated Notes due November 15, 2006, in a public offering. Proceeds of the offering were used for repayment in full of all the Company’s bank borrowings ($33.1 million on November 25, 1996) and for capital expenditures through the first quarter of 1997, with the remainder of the proceeds to be used, along with internally generated cash flows, to fund capital expenditures and working capital needs. The principal terms of these Notes are more fully described in Note 4 to the Company’s Condensed Consolidated Financial Statements.

Other Financing Activities

 

Convertible Subordinated Debentures. On June 30, 1993, the Company issued $28.75 million of 6.5% Convertible Subordinated Debentures due 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 program. As described in Note 4 to the Company's Condensed Consolidated Financial Statements included herein, in August 1996 the Debentures were converted by their holders into 2.34 million shares of the Company's common stock following the Company's July 1996 announcement of their redemption in August 1996, unless earlier converted. As a result of this conversion, the Company’s stockholders’ equity increased approximately $27.65 million.

Credit Facilities

 

In recent years, the Company's credit facilities have been used to fund a portion of the Company's exploration and development activities. Formerly, the Company established credit facilities which 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. These credit facilities consist of a $100.0 million unsecured revolving line of credit with a $5.0 million borrowing base, and a $7.0 million secured revolving line of credit with a $2.0 million borrowing base. The principal terms and restrictions of these credit facilities are described in Note 3 to the Company's Condensed Consolidated Financial Statements included herein.

At March 31, 1997 and at December 31, 1996, the Company had no outstanding balances under these borrowing arrangements, since those borrowings were repaid with proceeds from the Company’s 6.25% Convertible Subordinated Notes offering in 1996.

Partnership Programs. Since late 1993, the Company has offered private partnerships formed to drill for oil and gas. During 1996, the Company formed three drilling partnerships with total subscriptions of approximately $22.0 million and in May 1997 formed a $4.4 million partnership. The Company anticipates that it will continue to offer the drilling partnerships for the foreseeable future and expects to form its second 1997 partnership on or about June 30, 1997.

At March 31, 1997, 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 $973,000, an increase of $463,000, when compared with the December 31, 1996 balance. In May 1997, this balance will be reduced as associated contribution costs of the first 1997 partnership will be transferred to the oil and gas properties account as the Company’s general partner contribution in that partnership.

During 1996, the limited partners in 18 partnerships, which had been in operation over nine years and have produced a substantial majority of their reserves, voted to sell their remaining properties and liquidate the limited partnerships. In 1996, 10 of the earliest public income partnerships were liquidated, and in early 1997 eight private drilling partnerships will be liquidated. The Company intends to make similar proposals to other partnerships for an orderly sale of their properties and liquidation of the partnerships over the next several years. The Company may offer to acquire certain portions of the remaining property interests owned by these limited partnerships.

Working Capital

 

The Company's working capital has decreased over the last three months, from $68.7 million at December 31, 1996, to $52.5 million at March 31, 1997. This decrease is primarily the result of the Company’s capital expenditures as described below.

Since year end 1996, the Company's receivable account from limited partnerships decreased due to repayments made with funds generated from (a) property sales proceeds realized by these partnerships, and (b) the continuation of strong oil and gas prices received by these partnerships. Both of these increased the cash flows of these partnerships, thus allowing them to reduce their balances owed to the Company.

Due to the nature of the Company's business highlighted above, the individual components of its working capital fluctuate considerably from period to period. The Company incurs significant working capital requirements in connection with its role as operator of approximately 870 wells, its accelerated drilling programs, 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.

Stock Repurchase Program

 

In March 1997, the Company’s board of directors approved a common stock repurchase program for up to $20.0 million of the Company’s common stock throughout 1997. Purchases of shares are made in the open market. As of March 31, 1997, the Company used $3.76 million of working capital to acquire 157,900 shares at an average cost of $23.81 per share. Through April, 383,900 shares have been acquired at a total cost of $8.44 million ($21.99 per share).

Capital Expenditures

 

Capital expenditures for property, plant, and equipment during the first three months of 1997 were $28.4 million. These capital expenditures included: (a) $23.6 million of drilling costs, both exploratory and developmental (primarily in the AWP Olmos Field and Austin Chalk trend), (b) $3.3 million of prospect costs (principally prospect leasehold, seismic and geological costs of unproved prospects for the Company's account), (c) $1.3 million invested in foreign business opportunities in New Zealand (approximately $628,000), in Venezuela (approximately $508,000), and in Russia (approximately $211,000), as described in Note 6 to the Company's Condensed Consolidated Financial Statements included herein, with the remainder spent primarily for computer equipment and furniture and fixtures. In the remaining nine months of 1997, the Company expects capital expenditures to be approximately $85.0 million, 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 exploratory and development drilling. The Company currently plans to participate in the drilling of 178 gross wells this year, compared to 153 wells in 1996. Through March 31, 1997, the Company had participated in drilling 60 wells (5 exploratory and 55 development wells with 3 exploratory successes and 54 development successes). The steady growth in the Company's unproved property account which is not being amortized is indicative of the shift to a focus on drilling activity, as the Company acquires prospect acreage. This unproved property account also reflects $1.3 million of capital expenditures in the first three months of 1997 made in relation to the Company's foreign business opportunities, as described above.

The Company believes that 1997’s anticipated internally generated cash flows (expected to increase as the Company’s production base increases as a result of its accelerated drilling program), together with the remainder of the net proceeds from the November 1996 Notes offering, will be sufficient to finance the costs associated with its currently budgeted 1997 capital expenditures and other uses of working capital. Further liquidity needs may also be met by its existing credit facilities.

RESULTS OF OPERATIONS – Comparison of Three Months Ended March 31, 1997 and 1996

 

Net income of $6.8 million and earnings per share of $0.45 for the first three months of 1997 were 120% and 80% higher, respectively, than net income of $3.1 million, and earnings per share of $0.25 in the same period for 1996. This increase in net income primarily reflected the effect of a 90% increase in oil and gas sales revenues as a result of a 55% increase in natural gas production volumes, a 4% increase in crude oil production volumes, plus product price improvements. The lower percentage increase in earnings per share reflects a 21% increase in weighted average shares outstanding for the period, as a result of the conversion of the 1993 Debentures into 2.34 million shares of common stock in the third quarter of 1996.

Revenues

 

The Company’s revenues increased 90% during the first three months of 1997 from the comparative period in 1996, due primarily to the increase in oil and gas sales. Oil and gas sales increased 90% to $18.4 million in the first quarter of 1997, compared to $9.7 million for the comparative period in 1996. The 55% increase in natural gas production and the 4% increase in oil production were primarily the result of production from recent drilling activity, most notably from the Company's two primary development areas, the AWP Olmos Field and the Austin Chalk trend. The Company's net sales volume (including the volumetric production payment) in the first three months of 1997 increased by 43% or 1.8 Bcfe (billion cubic feet equivalent) over volumes in the comparable 1996 period. Oil and gas sales were also aided by 13% and 42% increases in average prices received for oil and gas, respectively, between the two periods, as highlighted in the table below.

The Company’s $8.7 million increase in oil and gas sales during the first quarter of 1997 was comprised of volume variances of $3.8 million from the 1.7 Bcf increase in gas sales volumes and $0.1 million from the 7,100 barrel increase in oil sales volumes, while price variances contributed $4.4 million from the increase in average gas prices received and $0.4 million from the increase in average oil prices received. The Company’s 1997 oil and gas sales from the AWP Olmos Field were $11.1 million ($4.6 million in 1996) from 3.7 Bcfe of net sales volumes (2.1 Bcfe in 1996) for an increase of 1.6 Bcfe, while the Austin Chalk trend generated oil and gas sales of $3.0 million ($1.6 million in 1996) from 1.0 Bcfe of net sales volume (0.7 Bcfe in 1996) for an increase of 0.3 Bcfe.

Revenues from oil and gas sales comprised 86% and 87%, respectively, of total revenues for the first three months of 1997 and 1996. The majority (82% and 71%, respectively), 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 program.

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

Supervision fees increased 21%, having grown from $1.0 million in the first three months of 1996 to $1.2 million in the first three months of 1997. This increase is primarily due to the annual escalation in well overhead rates, and the increase in drilling activity by the Company, which in turn increases the drilling well overhead portion of such fees.

Costs and Expenses

 

General and administrative expenses for the first quarter of 1997 increased approximately $138,000 or 10% when compared to the same period in 1996. This increase in costs reflects the increase in the Company’s activities. However, the Company's general and administrative expenses per Mcfe produced decreased by 23% from $0.35 per Mcfe produced for the first quarter of 1996 to $0.27 per Mcfe produced for the comparable period in 1997. The majority of the companies in the oil and gas industry treat supervision fees as a reduction of their general and administrative expenses. If the Company were to follow this practice, these expenses net of supervision fees would have decreased from $0.10 per Mcfe produced for the first three months of 1996 to $0.06 per Mcfe produced for the same period in 1997.

Depreciation, depletion, and amortization ("DD&A") increased 65% (approximately $2.1 million) for the first three months of 1997, primarily due to the Company's reserves additions and associated costs and to the related sale of increased quantities of oil and gas therefrom. The Company's DD&A rate per Mcfe of production has increased from $0.79 per Mcfe produced in the 1996 period to $0.91 per Mcfe produced in the 1997 period, reflecting variations in the per unit cost of reserve additions.

The Company's production costs per Mcfe increased from $0.45 per Mcfe produced in the 1996 period to $0.47 per Mcfe produced in the 1997 period. This increase in rate per unit of production was due primarily to remedial well work performed during the first quarter of 1997. Primarily due to the 43% increase in production volumes, oil and gas production costs increased 49% (approximately $915,000) in the first three months of 1997 when compared to the first three months of 1996. As discussed above, the Company's increase in production is primarily through its drilling activities in the AWP Olmos Field and Austin Chalk trend, where the Company already has an established operating base. The increase in production costs is partially offset by an exemption in these same fields from the 7.5% Texas severance tax applicable to gas production from certain natural gas wells certified to be in tight formations or to be deep wells by the Texas Railroad Commission. Additionally, commencing September 1, 1996, certain wells certified as "high cost gas" wells are entitled to a reduction of severance tax based upon a formula amount, but not the full exemption of 7.5% received on certified wells drilled prior to September 1, 1996. Therefore, the increase in drilling activity and production has not been accompanied by a proportionate increase in operating costs. This tax exemption has had a positive impact on the Company’s production costs during 1996 and 1997, although under the new rules, the proportionate amount of the exemption may be reduced in future periods.

Interest expense in the first three months of 1997 on the 6.25% Notes, including amortization of debt issuance costs, totaled $1,874,000 ($497,000 in the 1996 period on the 6.5% Debentures), while commitment fees on the credit facilities totaled $10,000 ($204,000 in the 1996 period for interest expense and commitment fees) for a total interest expense of $1,884,000 (of which $535,000 was capitalized). In the first three months of 1996, these costs totaled $701,000 (of which $629,000 was capitalized). The Company capitalizes that portion of interest related to its exploration, partnership, and foreign business development activities. The increase in interest expense in 1997 is attributable to the increase in interest incurred on the 6.25% Notes ($115.0 million) compared to the 6.5% Debentures ($28.75 million), offset to some degree by outstanding balances under the Company’s credit facilities in 1996, and by the $1.0 million in interest income earned on the unused to date portion of the net proceeds on the 6.25% Notes.

SWIFT ENERGY COMPANY
PART II. - OTHER INFORMATION

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

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.

This page was last updated on Thursday, May 12, 2005 , at 10:33:54 AM .

Copyright © 1994-2008 by Swift Energy Company.
Click here to go to our home page or search page.
Please note the terms of use for the Swift Energy web site.
If you have comments or questions, see our feedback or requests pages.
Contact Swift Energy Company Stockholder Relations through e-mail info@swiftenergy.com or telephone (281) 874-2700.