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2003: Swift Builds on a Strong Foundation(Letter to Stockholders from Swift Energy's 2003 Annual Report.) At Swift Energy, we have laid a strong foundation for a dynamic 21st century organization. Using four cornerstones from our past—a focused mission, a flexible strategy, shared values, and an experienced management team—we have constructed the foundation block by block, adding new core areas and a mix of strategic variables that respond to important changes in our industry. With this foundation in place, we are poised to build significant additional value for our shareholders. Our mission, the first of the four cornerstones, has always been to increase the volume and value of our proved oil and natural gas reserves. Reserves growth leads to sustained growth in production, sales, cash flows, and earnings, and ultimately to growth in shareholder value. In 2003, we increased our proved reserves by 9% to 820.4 Bcfe. We also increased production by 7%, oil and gas sales by 49%, cash flows from operations by 55%, and diluted earnings per share by 140%. Largely based on these achievements, our 2003 year-end stock price was 74% higher than at the end of 2002. However, success cannot be measured by one year’s accomplishments alone. Consistent growth in proved reserves also requires the support of our second cornerstone, a flexible strategy that adapts to the volatile price cycles inherent in our industry. We have a tandem approach that generally emphasizes producing property acquisitions when oil and gas prices are low and focuses more on exploration and development drilling when prices are relatively high. In 2003, oil and gas prices strengthened (see charts below). The average composite prices we received increased by 40%, leading us to focus primarily on drilling. We successfully drilled five of nine exploratory wells and 56 of 66 development wells, with all of the successful exploratory wells and 42 of the successful development wells located in our Lake Washington Area in Louisiana.
Lake Washington is one of six core areas that we currently operate. The others are the AWP Olmos Area and the Brookeland Area in Texas, the Masters Creek Area in Louisiana, and the Rimu/Kauri Area and TAWN Area in New Zealand. Our strategy is to seek reserves and significant acreage positions within core areas that have substantial exploration and development potential. The benefits of this core area strategy include economies of scale in drilling and production, greater operational control, and more flexibility in implementing strategic decisions. Equally important, the diversity within our core areas provides a balance of strategic variables—oil versus natural gas, developed versus undeveloped reserves, properties with a long reserves life versus properties with a high initial deliverability, exploration versus development drilling, and domestic versus international opportunities. As industry conditions change, we strive to maintain an optimum balance of risk and reward by adjusting these strategic variables through the reallocation of capital expenditures. We anticipate that Lake Washington, which is our newest domestic core area, will continue to provide a good mix of opportunities for some time. Over the last couple of years, our success in this area has helped us respond to fluctuations in industry prices and costs by lowering our average reserves replacement costs, reducing our overall production decline rate, increasing our domestic production, and retaining a diversified inventory of proved undeveloped drilling locations and unproved exploratory prospects. We have achieved diversification both within Lake Washington itself, which has many different productive zones at a variety of depths, and between Lake Washington and our other core areas. Currently, all of our domestic core areas are onshore or in the inland waters of the Texas and Louisiana Gulf Coast, while all of our New Zealand core areas are onshore in the Taranaki Basin on New Zealand’s north island. These regions provide significant unexploited potential in a mix of geological environments, and they are both in proximity to growing markets with relatively low political risk. In 2004, we plan to drill 25 to 30 wells in Lake Washington and 15 to 18 wells in AWP, along with one well in Brookeland and one to two wells in Masters Creek. We also plan a three-dimensional seismic shoot in Lake Washington and several exploration wells in South Texas. In New Zealand, we plan to drill three to four wells in Rimu/Kauri targeting the Kauri sands and four to six wells targeting the Manutahi sand. In TAWN, additional exploitation and exploration drilling activity will focus on the Tariki sands and deeper pool tests. Our Company-wide goals for 2004 include increasing proved reserves by 5% to 8% and annual production by 11% to 17% within a capital budget of $130 million to $150 million, financed primarily by cash flows from operations. The budget, which is net of dispositions but excludes potential acquisitions, may be adjusted as the year progresses, depending on performance and industry conditions. As production increases, we anticipate that per-unit costs will decline as a percentage of wellhead prices, enhancing our profitability. Over the next several years, we intend to limit finding costs and production costs each to 33% or less of the three-year average for wellhead prices. Our focused mission and flexible strategy provide us with a clear sense of direction, but success also depends on our third cornerstone—shared values that balance individual initiative, teamwork, and authoritative control and oversight. This balance provides the creativity and flexibility needed to respond quickly to changes in the competitive environment, while also guaranteeing a measure of control and transparency within a system of checks and balances. A fundamental aspect of this philosophy is a commitment to the highest ethical standards and a dedication to clear and open communication, not only between the Company and its investors but also between internal departments. In today’s volatile environment, access to timely and accurate information is a key competitive advantage, and in recent years we have greatly improved our access to real-time information using advanced networking and database technologies. Our activities are also guided by a number of other principles. In operations, we are committed to protecting health and safety and preserving environmental quality. These principles have served us particularly well in Lake Washington, where wildlife and oyster farms are in close proximity to the field. In financing, we maintain financial flexibility through a disciplined approach to debt that matches long-term assets with long-term financing. This principle is reflected in our strategic goal of limiting long-term debt to approximately $0.40 per Mcfe of proved reserves. Since the Company’s inception, we have emphasized our fourth and final cornerstone—the ongoing development of strong, experienced, and forward-thinking leadership. Toward this end, we have generally promoted employees from within the organization who have been instrumental in our success. The result has been a capable management team with a strong track record and many years of experience, both in the industry and in working together at Swift. As the world has moved into the 21st century, our industry has moved into a new era. It is an era of higher prices and increased volatility, an era of major opportunities and some significant threats. By building our organization upon a strong foundation that can withstand the winds of change, a foundation anchored to the four cornerstones of our past—our mission, strategy, values, and leadership—we can look forward with confidence to building value for our shareholders in 2004 and beyond.
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This page was last updated on Tuesday, June 10, 2008, at 10:01:36 AM. Copyright © 1994-2008 by Swift Energy Company.
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