1994: Swift Focuses on Growth in Strategic Regions

Swift Energy’s sixteenth year was marked by three significant events:

• As a result of the Company’s continuing reemphasis on exploration and development, for the first time in many years additions to its proved reserves through exploration and development exceeded the additions through acquisitions of producing properties.

• In recognition of the Company’s decreasing dependency on its public limited partnerships, Swift adopted a change in accounting policy that eliminated the recording as income of Swift’s earned interests in properties purchased by its limited partnerships. This change made the Company’s accounting methods comparable to other oil and gas companies.

• For the first time ever, the Company issued a stock dividend, increasing by 10% the holdings of each shareholder of record on September 19.

During 1994, Swift acquired a two-dimensional seismic swath over a 6,500-acre tract in Fayette County, Texas, which included a 3,500-acre man-made lake. The integration of geological and seismic data has enabled the Company to achieve over a 90% success rate for horizontal Austin Chalk wells, such as those drilled in Fayette County.

Continuing the upward trend reestablished in 1992, Swift’s revenues again reached a record high—$25.4 million in 1994 compared to $24.1 million in 1993. However, the nonrecognition of earned interests, together with increased operating expenses, resulted in a 24% decrease in the Company’s net income for the year. In addition, the one-time accumulative effect of the change in accounting principle resulted in Swift reporting a net loss of $13 million for 1994.

At the same time, the Company reported a number of operational successes, one being a 44% increase in cash flows from operating activities. As in past years, the increases in revenues and cash flows were attributable to higher oil and gas sales, which rose 27% to $19.8 million. Again, this was accomplished in spite of decreases in average wellhead prices, 5% for oil and 2% for natural gas.

As in earlier years, the higher sales were made possible by the Company’s expanding reserves base, which by 1994 had been increasing at an annual compounded rate of 35% over a period of five years. At year end, Swift’s reserves totaled 103.6 Bcfe (billion cubic feet of natural gas equivalent), or 17.3 million BOEs.

The Company’s reserves were associated with interests in 4,172 wells located in 287 fields in 15 states, along with approximately 206 Bcfe owned by Swift’s limited partnerships and other co-investors. Altogether the Company at year end was managing proved reserves totaling about 310 Bcfe.

Swift’s reserves base included 24.8 Bcfe (or 4.1 million BOEs) that were added during 1994 by the Company’s exploration and development program, with associated capital costs of $12.7 million. These additions resulted both from the purchase of proven reserves on undeveloped leasehold acreage and from the discovery of new reserves through drilling.

Successful completions of wells drilled by Swift or one of its industry partners during 1994 included six exploratory wells (out of 14 drilled) and 26 development wells (out of 30 drilled), with most of the wells sited in strategic regions for which Swift’s staff had developed a specific expertise.

Of the 32 successful wells, eight development wells and one exploratory well were drilled in the Company’s AWP Olmos Field (in McMullen County), where Swift had developed an expertise for fracturing the field’s tight sands to promote the flow of the hydrocarbons into the wells. This field, together with an adjacent 8,830-acre leasehold acquired in 1994, held approximately 37% of the Company’s total proved reserves at year end.

Six development wells were drilled in the highly prolific Austin Chalk trend, primarily in Fayette County, Texas. In this region Swift had developed an expertise in both the horizontal drilling techniques and the seismic analysis techniques required to exploit the formation. During the year the Company collected data in a two-dimensional seismic swath over approximately 6,500 acres of the area, including a 3,500-acre lake.

Five development wells and three exploratory wells were drilled in five counties along the Texas coast, most to the Yegua trend. In this region, where the Company had previously performed intensive geological analyses, it carried out a second seismic survey designed to yield three-dimensional data on the Frio and Yegua trends.

Five development wells were drilled in the Red Fork formation of the Oklahoma Weatherford Area, where Swift’s geologists and geophysicists had for some time been locating wells through computer-based analyses of integrated geological and seismic data.

One exploratory well was drilled to the Jurassic Smackover limestone in the Ark-La-Tex region (in Miller County, Arkansas). Swift had been studying a large seismic data base for the region for several years.

One development well was drilled in South Louisiana, where during the year the Company embarked on a large subsurface review of a 20,000-acre track to guide future drilling.

In addition, a development well was drilled in Roger Mills County, Oklahoma, and an exploratory well was drilled in Schleicher County, Texas.

The 1994 exploration and development program also included continued studies of the Minnelusa formation in Campbell County, Wyoming, by Swift’s multidisciplinary teams which led to an early 1995 discovery well with high production.

Although exploration and development received more emphasis in 1994, acquisitions of producing properties remained an important part of Swift’s reserves growth strategy. The Company added 12.9 Bcfe (or 2.15 million BOEs) of reserves through acquisitions, approximately one-half of which resulted from Swift’s direct solicitation of and negotiation for an $18.1 million package on behalf of itself and its limited partnerships. The total package included 28 Bcfe of reserves in Louisiana and Alabama, 64% of it natural gas. Swift’s portion was 6.3 Bcfe, including 2.8 Bcfe purchased directly.

The remaining reserves obtained by the Company from acquisitions were associated with the limited partnerships, either as general partner interests from new property purchases or through the right of presentment arrangements provided by earlier partnerships.

The Company’s expenditures for acquisitions in 1994 totaled $13.1 million.

Of the 4,172 wells in which the Company had interests at year end, 750 wells distributed among 111 fields in 10 states were operated by Swift. These wells represented 61% of the reserves owned by the Company.

The production for Swift’s own account from all the wells in which the Company and its co-investors had interests reached an all-time high in 1994, totaling 8.2 Bcfe (or 1.4 million BOEs), with approximately 69% of it coming from the Swift-operated wells. As would be expected, the greatest production (25%) came from the AWP Olmos Field in McMullen County, Texas, from which an additional 1.4 Bcf was produced under the Company’s volumetric production payment agreement.

Production from the Austin Chalk formation, primarily in Fayette County, Texas, contributed 8% of the Company’s total production, and fields along the Texas Gulf Coast contributed 5%.

Altogether, these and other Texas fields provided 64% of the Company’s production in 1994. The remaining production was in Oklahoma (10%), Louisiana (10%), Mississippi (6%), Wyoming (4%), and ten additional states (6%).

Capital formation activities during the year were limited to the on-going subscriptions to the Company’s public income and pension offerings, Swift Depositary Interests (SDI), and its private drilling fund, Swift Energy Drilling Ventures (SEDV). SDI contributions totaled $32.1 million, a decrease from 1993, and SEDV contributions totaled $2.6 million. (Additional funds of over $5 million were contributed toward SEDV partnerships to be closed in 1995.)

In the international arena, Swift Energy continued work under its Participation Agreement with Senega, the Russian Federation joint stock company seeking technical and managerial assistance in developing and producing reserves in western Siberia, and it continued to evaluate potential projects in Venezuela. During the year, the joint Russian project was placed on the Pioneer Oil and Gas Projects list of the U.S.-Russia Joint Commission for Technological Cooperation. Swift, on behalf of itself and Senega, also signed a protocol with the Overseas Private Investment Corporation for the pursuit of $5 million in political risk insurance and $160 million for project financing. The Company envisioned that initial field work would begin in the fourth quarter of 1995.

At the end of 1994, Swift Energy Company had 209 employees.

This page was last updated on Tuesday, June 10, 2008, at 10:03:45 AM.

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