1999: A Foundation Is Laid for Growth in the 21st Century

(Letter to Stockholders from Swift Energy's 1999 Annual Report.)

As Swift Energy Company entered the 21st century, it also entered its 21st year of operation, giving us reason to reflect on our past. We could, for example, point out that over our history we had a compounded growth rate of 30% per year in proved reserves per share. And, based upon shareholder equity contributions and year-end net asset value, we had experienced an internal rate of return of over 20% per year.

During 1999, we had a 10% increase in production and a 36% increase in oil and gas sales, despite very low oil and natural gas prices at the beginning of the year. We also had a 36% rise in net cash provided by operating activities.

These are statistics we can be proud of, but perhaps their greatest value lies in their implications for Swift Energy’s future. They showed that the Company’s management and technical teams not only had successfully navigated through the difficult low price environment of 1998 and early 1999, but also had consistently made decisions that placed us in a strong competitive position for the year 2000 and beyond.

In 1998, for example, we decided to take advantage of low prices for in-the-ground reserves by making the largest acquisition of producing properties in our history. Located in the Austin Chalk trend, these properties have provided us with two new core areas of operation—the Masters Creek Area in Louisiana and the Brookeland Area in Texas. Since their purchase, our development of these properties has increased their reserves volume far more than we anticipated, the combined proved reserves in the two areas being 2.2 times larger at year-end 1999 than the volume estimated at the time of our initial purchase. Also, by year-end 1999 over half of the original investment dollars had already been returned through oil and gas sales, even considering additional funds invested in the areas since the original purchase. Moreover, we are identifying potential exploratory prospects in both areas for reservoir formations above and below the Austin Chalk trend, at least one of which will be drilled in 2000.

Our earlier decision, in 1992, to enter the Giddings Area along the Texas Gulf Coast not only led to a still-ongoing exploration and development program in the Austin Chalk trend, but also to new exploration prospects in other horizons. Four exploratory wells scheduled to be drilled in the Giddings Area in 2000 will target both the Austin Chalk trend and the underlying Edwards formation.

Looking back even further, we are particularly pleased with our 1989 decision to begin operations in the AWP Olmos Field in McMullen County, Texas, and with its potential for further development. As the largest operator in the field, we have leasehold acreage that includes 460 producing wells and 141 proved undeveloped locations. The AWP Field with its tight Olmos sand has presented numerous challenges our technical teams have successively overcome. As a result, we have an economically viable producing area with wells that will produce for up to 20 years and with many locations yet to be drilled.

Perhaps the most exciting recent event in our history, however, has resulted from our decision in 1995 to explore in New Zealand. At year-end 1999, we were testing the Rimu #A-1, our first operated exploratory well in New Zealand’s Taranaki Basin. While flow rates during the test were intentionally restricted because of temporary limitations on storage and transportation capacities, the stabilized bottom-hole open flow potential was estimated at approximately 2,000 barrels of oil and 6.0 million cubic feet of natural gas per day.

We are now conducting a combination onshore/offshore seismic survey of the discovery with the intention of drilling a delineation development well during the second half of 2000. The seismic shoot will also be evaluating the entire structural complex associated with the Company’s exploration permit, which includes other excellent exploratory prospects.

In addition, we are continuing to develop U.S. exploration prospects outside our core operating areas. During 2000, we plan to drill two prospects in Wyoming and four prospects along the Texas Gulf Coast outside the Giddings Area.

Strategic acquisitions carried out under well-defined criteria will also continue to be an important part of our reserves growth strategy. In 1999 we acquired additional reserves in the Masters Creek Area, and during 2000 we will focus on identifying another core area of operation to acquire.

Our ability to pursue reserves growth through drilling and acquisitions was significantly strengthened in 1999 by our improved net cash flows of $73.6 million, which financed most of our $78.1 million capital expenditures during the year. Also during 1999, we ensured financial flexibility by underwriting an offering of common stock and an offering of 10.25% senior notes due in 2009, which resulted in net proceeds of $163 million, allowing us to more than pay off our bank debt. We should be able to fund our $114.8 million capital budget for 2000 through our cash flows, the remaining proceeds of the 1999 offerings, and limited use of our bank borrowing facility.

In summary, our outlook for building shareholder value early in the 21st century is very bright. We have a number of U.S. drilling opportunities identified for the year 2000 and beyond, a strong track record of success in our four core areas of domestic operation, and considerable exploratory and development potential in New Zealand. We also have the financial flexibility required to fund all of our budgeted capital expenditures. If oil and gas prices remain reasonably strong, the beginning of the 21st century could make our 21st year of operation the most exciting and profitable year we have ever experienced.

This page was last updated on Tuesday, June 10, 2008, at 10:04:06 AM.

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