SWIFT ENERGY COMPANY
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
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)

	Three months ended June 30,			Six months ended June 30,
	1998	1997		1998	1997
	----------------	----------------		----------------	----------------
Revenues:
Oil and gas sales	$      15,681,004	$      14,071,526		$     31,482,915	$     32,441,177
Fees from limited partnerships and joint ventures	124,948	165,373		204,879	264,103
Interest income	44,376	751,351		62,875	1,750,176
Other, net	490,402	664,828		1,065,290	1,195,124
	----------------	----------------		----------------	----------------
	16,340,730	15,653,078		32,815,959	35,650,580
	----------------	----------------		----------------	----------------
Costs and Expenses:
General and administrative, net of reimbursement	879,945	857,260		1,880,424	1,808,430
Depreciation, depletion, and amortization	7,250,518	5,711,594		13,985,240	11,108,541
Oil and gas production	2,355,237	2,033,073		4,874,997	4,171,782
Interest expense, net	1,584,877	1,043,677		2,969,643	2,393,308
	----------------	----------------		----------------	----------------
	12,070,577	9,645,604		23,710,304	19,482,061
	----------------	---------------		----------------	----------------
Income Before Income Taxes	4,270,153	6,007,474		9,105,655	16,168,519
Provision for Income Taxes	1,373,683	1,893,785		2,979,570	5,285,567
	----------------	----------------		----------------	----------------
Net Income	$      2,896,470	$      4,113,689		$     6,126,805	$     10,882,952
	===========	===========		===========	===========
Per share amounts-
Basic:	$               0.18	$               0.25		$               0.37	$               0.66
	===========	===========		===========	===========
Diluted:	$               0.18	$               0.24		$               0.37	$               0.61
	===========	===========		===========	===========
Weighted Average Shares Outstanding	16,524,739	16,402,062		16,512,562	16,552,349
	===========	===========		===========	===========

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
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997

(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, 1997, 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.

In the second quarter of 1998, the Company began netting supervision fees against general and administrative expenses and oil and gas production costs. This reclassification has been made to all periods presented. Certain other reclassifications have also been made to prior year amounts to conform to current year presentation.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 own and its limited partnerships’ oil and gas production. Costs and any benefits derived from these price floors are accordingly 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.

For the first six months of 1998, the Company entered into oil and natural gas price hedging contracts covering a portion of the Company’s and its affiliated partnerships’ oil and natural gas production. For January, 1,500,000 MMBtu of natural gas was covered, providing a minimum price of $2.00 per MMBtu. For February, 3,000,000 MMBtu of gas was covered with a minimum price of $2.00. March was covered for 2,000,000 MMBtu at $1.80 and 500,000 MMBtu at $1.90. April, May, and June were each covered for 1,000,000 MMBtu of gas at $1.80, $1.90, and $2.10 respectively. Additionally, for July, 1,000,000 MMBtu of gas was covered with a minimum price of $2.10.

For the months of January and February, 60,000 Bbls of oil production were covered each month providing for a minimum price of $18.00 per Bbl. The costs related to 1998 hedging activities through June 30, totaled approximately $377,000 with benefits of approximately $101,000 being received, resulting in a net cash outlay of approximately $276,000 or $0.019 per Mcfe. The Company had no open contracts at June 30, 1998.

Income Per Share

 

The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which establishes new standards for computing and presenting earnings per share. Basic income per share has been computed using the weighted average number of common shares outstanding during the respective periods. Basic income per share has been retroactively restated in all periods presented to give recognition to the adoption of SFAS No. 128, as well as to give recognition to an equivalent change in capital structure as a result of a 10% stock dividend declared in October 1997 that resulted in an additional 1,494,622 shares being issued.

The calculation of diluted income per share assumes conversion of the Company’s Convertible Notes as of the beginning of the respective periods and the elimination of the related after-tax interest expense and assumes, as of the beginning of the period, exercise of stock options and warrants (using the treasury stock method). Diluted income per share has also been retroactively restated for all periods presented to give effect to the adoption of SFAS No. 128 and the 10% stock dividend. The original conversion price of the Convertible Notes of $34.6875 was revised to $31.534 to reflect the October 1997 stock dividend declared.

The following is a reconciliation of the calculation of basic and diluted earnings per share for the six months ended June 30, 1998, and 1997:

	Six Months Ended June 30,
		1998					1997
		Net				Per Share		Net				Per Share
		Income		Shares		Amount		Income		Shares		Amount
		-----------		------------		----------		-----------		-----------		----------
Basic EPS:
Net Income and Share
Amounts		$6,126,085		16,512,562		$ 0.37		$10,882,952		16,552,349		$ 0.66
Dilutive Securities:
Convertible Notes		2,092,227		3,646,847				1,818,850		3,646,847
Stock Options		---		174,556				---		493,985
		-----------		-----------				-----------		-----------
Diluted EPS:
Net Income and Assumed
Share Conversions		$8,218,312		20,333,965		$ 0.37		$12,701,802		20,693,181		$ 0.61
		========		========		=======		========		========		=======

(3) NEW ACCOUNTING PRONOUNCEMENTS

 

In the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which requires the display of comprehensive income and its components in the financial statements. Comprehensive income represents all changes in equity during the reporting period, including net income and charges directly to equity which are excluded from net income. The adoption of this statement does not have a material impact on the Company or its financial disclosures, as the Company has not historically and currently does not enter into transactions which result in charges (or credits) directly to equity (such as additional minimum pension liability changes, currency translation adjustments, and unrealized gains and losses on available for sale securities.)

In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities," which requires costs of start-up activities to be expensed as incurred. The statement is effective for financial statements beginning after December 15, 1998. The Company expects to expense currently capitalized costs related to start-up activities as a cumulative effect of a change in accounting principle when the statement is adopted in January 1999. The adoption of this standard is not expected to have a significant effect on the Company’s financial position or results of operations.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allow the gains and losses on derivatives to offset related results on the hedged item in the income statements, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting.

SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement SFAS No. 133 as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative instrument and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the Company’s election, before January 1, 1998).

The Company has not yet quantified the impacts of adopting SFAS No. 133 on its financial statements and has not determined the timing of or method of our adoption of SFAS No.133.

(3) SUBSEQUENT EVENTS

 

On July 2, 1998, the Company entered into a purchase agreement to acquire from Sonat Exploration Company ("Sonat"), a subsidiary of Sonat Inc., effective April 1, 1998, certain producing oil and gas properties (the "Sonat Properties") located in the Texas and Louisiana Austin Chalk trend for approximately $87.6 million in cash, with a majority of the purchase price being allocated to proved reserves. As of April 1, 1998, estimated proved reserves for the Sonat Properties were 91.1 Bcfe, of which approximately 56% was natural gas, with 1997 production of 22.0 Bcfe, of which approximately 51% was natural gas. The properties include 156 producing oil and natural gas wells in the Brookeland Field in Southeast Texas and the Masters Creek Field in Western Louisiana, 21 saltwater disposal wells, a 20% interest in two natural gas plants, associated production facilities and working interests in approximately 200,000 undeveloped net acres containing more than 50 drilling locations. The Company will become operator of 113 of the 156 wells. The two gas plants are outside operated and have combined capacity of 250 Mmcfe per day, and in 1997 had operating cash flow of $2.8 million. Certain other owners of oil and gas interests in the Sonat Properties have the preferential right to acquire certain additional interests which, if acquired, would reduce the interest acquired by the Company. The acquisition is expected to close in August 1998.

The Sonat Properties Acquisition will extend one of the Company’s core areas by adding producing reserves that the Company believes will significantly increase its production on a short-term basis. Furthermore, as a result of the Company’s extensive experience in other parts of the Austin Chalk trend, the Company believes that it can successfully exploit incremental drilling opportunities in the future.

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

GENERAL

 

The Company’s principal corporate objectives are the accumulation of crude oil and natural gas reserves for production and sale and the enhancement of the net present value of those reserves. 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 emphasize the addition of reserves through increased development and exploration drilling activity. This emphasis on development and exploration drilling has led to additions of increasing quantities of reserves in each of the years 1995 through 1997, and in the first six months of 1998. The Company’s revenues are primarily comprised of oil and gas sales attributable to properties in which the Company owns a direct or indirect interest.

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. Such forward-looking statements may be or may concern, among other things, capital expenditures, drilling activity, development activities, cost savings, production efforts and volumes, hydrocarbon reserves, hydrocarbon prices, liquidity, regulatory matters and competition. Such forward-looking statements generally are accompanied by words such as "plan," "estimate," "expect," "predict," "anticipate," "projected," "should," "believe" or other words that convey the uncertainty of future events or outcomes. Such forward-looking information is based upon management’s current plans, expectations, estimates and assumptions and is subject to a number of risks and uncertainties that could significantly affect current plans, anticipated actions, the timing of such actions and the Company’s financial condition and results of operations. As a consequence, actual results may differ materially from expectations, estimates or assumptions expressed in or implied by any forward-looking statements made by or on behalf of the Company, including those regarding the Company's financial results, levels of oil and gas production or revenues, capital expenditures, and capital resource activities. Among the factors that could cause actual results to differ materially are: fluctuations of the prices received or demand for the Company’s oil and natural gas, the uncertainty of drilling results and reserve estimates, operating hazards, requirements for capital, general economic conditions, competition and government regulations, as well as the risks and uncertainties discussed in this Quarterly Report, including, without limitation, the portions referenced above, and the 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

 

During the first six months of 1998, the Company relied upon its internally generated cash flow, along with $56.1 million of bank borrowings to fund its capital expenditures.

Cash and working capital for the remainder of 1998 are expected to be provided through internally generated cash flows, bank borrowings and debt or equity financing. During 1997, the Company relied upon net proceeds from its $115.0 million Convertible Notes and its internally generated cash flows, along with $7.9 million of bank borrowings.

Net Cash Provided by Operating Activities

 

For the six month period ended June 30, 1998, net cash provided by operating activities decreased by 16% to $25.5 million, as compared to $30.3 million during the first six months of 1997. The 1998 decrease of $4.8 million was primarily due to a decrease in cash flows from oil and gas sales, which decreased by $0.8 million (3%), exclusive of the non-cash amortization of deferred revenues associated with the Company’s volumetric production payment, along with the $1.7 million decrease in interest income and the $0.6 million increase in interest expense, a result of having expended all the net proceeds of the $115.0 million Convertible Notes offering and increased bank borrowings, as well as the $0.7 million increase in production costs which relates to the increase in production volumes. The decrease in oil and gas sales was due to substantially lower product prices, somewhat offset by increased production volumes, as discussed below.

Sale of Convertible Subordinated Notes

 

In November 1996, the Company issued $115.0 million of the Convertible Notes in a public offering. Proceeds of the offering were used to repay all of the Company’s bank borrowings ($33.1 million on November 25, 1996) and, together with internally generated cash flows, to fund capital expenditures and working capital needs through 1997.

Existing Credit Facilities

 

At June 30, 1998, the Company had outstanding borrowings of $64.0 million under its Existing Credit Facilities. At June 30, 1997, the Company had no outstanding balances under these borrowing arrangements, since the balance of those borrowings was repaid in November 1996 with proceeds from the Company’s $115.0 million Convertible Notes. Currently, the Existing Credit Facilities consist of a $100.0 million revolving line of credit with an $80.0 million borrowing base, and a $7.0 million revolving line of credit with a $5.1 million borrowing base. The terms of the Existing Credit Facilities include, among other restrictions, a limitation on the level of cash dividends (not to exceed $2.0 million 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 is currently in compliance with the provisions of these agreements. The Company expects to replace the Existing Credit Facilities with a new credit facility (the "New Credit Facility").

New Credit Facility

 

The Company expects to close in August 1998 on a $250.0 million revolving credit facility, of which the lead bank will commit $37.5 million and syndicate the balance with a group of banks. The New Credit Facility is expected to be subject to an initial borrowing base of $200.0 million with such borrowing base to be redetermined semi-annually.

The interest rate is expected to be either (i) the lead bank’s prime rate or (ii) adjusted LIBOR plus the applicable margin depending on the level of outstanding debt. The applicable margin will be based on the Company’s ratio of outstanding balance on the New Credit Facility to the last calculated borrowing base. The New Credit Facility is expected to extend for four years from the closing date.

It is expected that the terms of the New Credit Facility will include, among other restrictions, limitations on debt obligations, certain liens, dividends (not to exceed $2.0 million annually), as well as requirements as to maintenance of certain minimum financial ratios (principally pertaining to working capital, debt and equity ratios). The Company expects to provide a negative pledge on all of its assets to secure the loan.

Debt Maturities

 

Borrowings under the Company’s Existing Credit Facilities mature on September 30, 1999 and the New Credit Facility is expected to mature in 2002. The Company’s $115.0 million Convertible Notes mature November 15, 2006.

Recent Developments

 

The Company believes that declines in prices for oil and natural gas create opportunities for it to increase its reserve base through economically attractive acquisitions. The Company targets proved producing properties that it believes have the potential to increase cash flows through subsequent drilling activities and the application of improved drilling techniques. Accordingly, the Company plans to enter into the following transactions:

Sonat Properties Acquisition. On July 2, 1998, the Company entered into a purchase agreement to acquire from Sonat, effective April 1, 1998, certain producing oil and gas properties located in the Texas and Louisiana Austin Chalk trend for approximately $87.6 million in cash, with a majority of the purchase price being allocated to proved reserves. As of April 1, 1998, estimated proved reserves for the Sonat Properties were 91.1 Bcfe, of which approximately 56% was natural gas, with 1997 production of 22.0 Bcfe, of which approximately 51% was natural gas. The properties include 156 producing oil and natural gas wells in the Brookeland Field in Southeast Texas and the Masters Creek Field in Western Louisiana, 21 saltwater disposal wells, a 20% interest in two natural gas plants, associated production facilities and working interests in approximately 200,000 undeveloped net acres containing more than 50 drilling locations. The Company will become operator of 113 of the 156 wells. The two gas plants are outside operated and have combined capacity of 250 Mmcfe per day, and in 1997 had operating cash flow of $2.8 million. Certain other owners of oil and gas interests in the Sonat Properties have the preferential right to acquire certain additional interests which, if acquired, would reduce the interest acquired by the Company. The acquisition is expected to close in August 1998.

The Sonat Properties Acquisition will extend one of the Company’s core areas by adding producing reserves that the Company believes will significantly increase its production on a short-term basis. Furthermore, as a result of the Company’s extensive experience in other parts of the Austin Chalk trend, the Company believes that it can successfully exploit incremental drilling opportunities in the future.

Partnership Properties Acquisition. On April 21, 1998, the Company filed with the Securities and Exchange Commission a registration statement under which limited partners in 63 Swift-managed production partnerships formed between 1986 and 1994 will be asked to separately approve a proposal that each of their partnerships sell all of their oil and gas assets to the Company. The purchase price has been determined to be the higher of two market value estimates of the property interests owned by these Partnerships, as prepared by three independent appraisers, and adding to that higher estimate a 7.5% premium. If all 63 partnerships approve these proposals, the purchase price is anticipated to be approximately $70.6 million (after deducting the portion of the total purchase price allocated to the Company through its ownership interests in the partnerships). The quantities of any reserves purchased will be reduced by production which takes place after January 1, 1998. The partnerships have continued to make quarterly cash distributions to their investors during 1998. Accordingly, the purchase price paid to each Partnership will be reduced by the distributions received after January 1, 1998. The registration statement also related to the offering of 2.5 million shares of common stock to limited partners of partnerships that approve the proposed sale. Each limited partner in such partnerships can individually elect to purchase shares of common stock with some or all of their respective cash distribution from their partnership resulting from the property sales. The price at which the common stock will be offered will be based upon the average closing prices from the common stock during a future time frame close to the voting upon the proposals by the partnerships.

Working Capital

 

The Company's working capital increased over the last six months from $1.5 million at December 31, 1997, to $10.3 million at June 30, 1998. This increase is primarily the result of approximately $8.8 million in cash previously escrowed on the Sonat Properties (originally drawn on the revolving line of credit) being refunded to the Company and increasing cash and cash equivalents at period end.

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 650 wells, its 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.

Common 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, which terminated June 30, 1998. Under this program, the Company used approximately $9.4 million of working capital to acquire 435,274 shares in the open market at an average cost of $21.47 per share. The Board of Directors approved a new repurchase program on July 21, 1998 for up to $10.0 million of the Company’s common stock.

Common Stock Dividend

 

In October 1997, the Company declared a 10% stock dividend to shareholders of record. The transaction was valued based on the closing price ($28.8125) of the Company’s common stock on the New York Stock Exchange on October 1, 1997. As a result of the issuance of 1,494,622 shares of the Company’s common stock as a dividend, retained earnings were reduced by $43.1 million, with the common stock and additional paid-in capital accounts increased by the same amount.

Capital Expenditures

 

Capital expenditures for property, plant, and equipment during the first six months of 1998 were $70.0 million. These capital expenditures included: (a) $45.7 million of drilling costs, both development and exploratory (primarily in the AWP Olmos Field and Austin Chalk trend), (b) $14.3 million of domestic 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 $0.6 million), Venezuela (approximately $0.3 million), and Russia (approximately $0.4 million), (d) $1.5 million spent on field facilities and production equipment, and (e) $4.0 million on producing property acquisitions, with the remainder spent primarily for computer equipment and furniture and fixtures.

The consummation of the Sonat and Partnership Properties Acquisitions, estimated at a capital cost of $145.8 million, could impact the anticipated timing and nature of the remaining 1998 capital expenditures. The Company has budgeted capital expenditures of $241.5 million for 1998, comprised of $145.8 million for producing property acquisitions and $95.7 million for development and exploration. Approximately 59% of the $95.7 million is targeted for the continued development of the Company’s two core areas. In the remaining six months of 1998, the Company expects capital expenditures to be approximately $171.5 million, including investments in all areas in which investments were made during the first six months of the year as described above, with a particular focus on the acquisition of producing properties. The Company currently plans to participate in the drilling of 77 gross wells this year, compared to 182 wells in 1997. Through June 30, 1998, the Company had participated in drilling 55 wells (44 development wells and 11 exploratory with 38 development successes and 5 exploratory successes) at a capital cost of approximately $45.7 million to the Company. The steady growth in the Company’s unproved property account which is not being amortized is indicative of the Company’s continued focus on drilling, as the Company acquires prospect acreage, and continued foreign activities.

The Company believes that 1998’s anticipated internally generated cash flows (expected to increase as the Company’s production base increases as a result of its drilling program and the Sonat and Partnership Properties Acquisitions), together with bank borrowings will be sufficient to finance the costs associated with its currently budgeted 1998 capital expenditures.

RESULTS OF OPERATIONS – Comparison of Six Months Ended June 30, 1998 and 1997

Revenues

 

The Company’s revenues decreased 8% during the first six months of 1998 as compared to the same period in 1997, due primarily to the decrease in oil and gas sales, a result of lower commodity prices, and the decrease in interest income, resulting from expenditure of the net proceeds from the Convertible Notes by year-end 1997.

Oil and Gas Sales

 

Oil and gas sales decreased 3% to $31.5 million in the first six months of 1998, compared to $32.4 million for the comparable period in 1997. The 20% increase in natural gas production and the 18% increase in oil production were primarily the result of production from recent drilling activity, most notably from one of the Company's two core areas, the Austin Chalk trend. The Company’s other primary development area, the AWP Olmos Field, experienced a slight increase (3%) in equivalent production when compared to 1997. The Company's net sales volume (including the volumetric production payment volumes) in the first six months of 1998 increased by 19% or 2.3 Bcfe (billion cubic feet equivalent) over volumes in the comparable 1997 period. The increases in volume were more than offset by a 36% decrease in oil prices and a 15% decrease in gas prices received between the two periods, as highlighted in the table below.

The elements of the Company’s $1.0 million decrease in oil and gas sales during the first six months of 1998 included: (1) volume increases that added $5.1 million of sales from a 2.0 Bcf increase in gas sales volumes and $1.1 million of increased sales from the 58,800 barrel increase in oil sales volumes and (2) price variances that had a $7.2 million unfavorable impact on sales due to the decrease in average gas prices received ($4.6 million), and a decrease in average oil prices received ($2.6 million). Oil and gas sales for the first six months of 1998 from the AWP Olmos Field were $17.2 million ($20.3 million in 1997) from 7.8 Bcfe of net sales volumes (7.6 Bcfe in 1997) for an increase of 0.2 Bcfe, while the Austin Chalk trend generated oil and gas sales of $8.9 million ($5.5 million in 1997) from 3.9 Bcfe of net sales volume (2.1 Bcfe in 1997) for an increase of 1.8 Bcfe.

Revenues from oil and gas sales comprised 96% and 91%, respectively, of total revenues for the first six months of 1998 and 1997. The majority (85% and 81%, respectively) of these revenues were derived from the sale of the Company's gas production. The Company expects oil and gas production to continue to increase due to both the addition of oil and gas reserves through the Company's active drilling program and from the acquisition of proved properties as discussed above.

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