1997: Strategic Management Leads to Sustained Growth

For Swift Energy, the year 1997 began and ended with high optimism. As strategized in earlier years, Swift’s teams of engineers, geologists, and geophysicists had increasingly honed their expertise for particular geographic regions, utilizing advanced technologies both to find new reserves and to reduce operational costs. Growth statistics for the year showed that management’s long-term strategy with its current emphasis on exploratory and development drilling remained sound, even though gas prices were fluctuating wildly and the average price received for the Company’s oil production was 11% lower than in the previous year.

Industry Source: U.S. Energy Information Administration With an experienced staff skilled in advanced technology, Swift Energy has exceeded the national average for exploratory drilling success rates for 10 consecutive years.

Compared to 1996, reserves increased in 1997 by 40% to 361.5 Bcfe, with production rising 31% to 25.4 Bcfe. Total revenues for 1997 rose 32% to $79.9 million, including $69 million from sales—a 31% increase. Net income increased by 17% to $22.3 million (or $1.35 per share), and cash flows from operating activities rose by 49% to $55.3 million.

Over the previous five years, compounded annual growth rates had been 44% for reserves, 41% for sales, 40% for net income, and 54% for cash flows from operating activities. Moreover, during the same period, the Company’s common stock, on average, had outperformed the S&P 500.

During 1997, the Company continued with an emphasis on its exploration and development programs. However, it also acquired producing properties totaling $8.4 million, a significant portion of which ($4.4 million) was to add 2,830 net acres to its operation in the AWP Olmos Field. Another $1.1 million was for a corporate piece of the last large acquisition Swift made for its public income partnerships. In addition, Swift increased its interests in several areas by purchasing properties from eight of its early (1979-1985) private drilling partnerships that had voted to liquidate. (During the year, 11 public income partnerships that had been formed in 1990-91 also voted to liquidate with the expectation that this would occur in 1998.)

Other smaller 1997 acquisitions included Swift’s corporate share of the last purchase it made for the public income partnerships.

In its exploration and development program, Swift participated in the drilling of 182 wells, serving as the operator of 128 of them. The resulting success rates of 47% for exploratory wells (7 of 15) and 95% for development wells (159 of 167) led to an overall success rate of 91%, which exceeded the industry average of approximately 78%.

Again, Swift’s largest operation was in the tight sands of the AWP Olmos Field in McMullen County, Texas, which at year end held 73.9% of the Company’s reserves on 40,568 net acres. Swift drilled 142 wells in the field, which included 137 successes. As a result, production from the field increased to 15.5 Bcfe, accounting for 61% of both the Company’s total production and its oil and gas sales.

As in previous years, the Company continued to focus on technological improvements for minimizing operational costs in the field. In particular, improvements in the techniques used for slim-hole drilling and hydraulic fracturing reduced costs, and the continued installation of small-diameter coiled tubing in wells speeded the upward flow of hydrocarbons, increasing production. In addition, the Company expanded its centralized gathering system as needed and relied heavily on the remote monitoring of its production. It also continued its remote monitoring from its Houston office of the fracturing jobs performed on each newly drilled well.

Swift also expanded its tight sands activities into a new geographic area in 1997 with a successful exploratory well drilled to the Queen City formation on a lease/option block in Jim Hogg County, Texas.

The Company’s second largest operation continued to be in the Austin Chalk trend, primarily in Fayette County, Texas, but also in the counties of Trinity, Washington, and others. During 1997, 39,000 net leasehold acres were added to Swift’s Austin Chalk holdings, which totaled 113,000 net acres at year end.

The Austin Chalk horizontal drilling program was significantly enlarged during the year, with Swift participating in 22 wells and serving as the operator of 13 of them. This number of wells was more than double the average of ten wells per year the Company had participated in since entering the area in 1992. Of the 22 wells, 18 were successful—two of five exploratory wells and 16 of 17 development wells, with 14 of the successful development wells located in Fayette County.

By year end, Swift had participated in 55 wells drilled in the Austin Chalk since 1992, with an overall success rate of approximately 91%. The reserves associated with the wells comprised 15.5% of Swift’s total reserves, and during the year 19% of both the Company’s total production and its oil and gas sales came from the Austin Chalk trend.

As with the AWP Field, the Company’s on-going success in the Austin Chalk trend was attributed to Swift’s expert knowledge of the area and to its use of technological advances appropriate for the region, especially those for horizontal drilling. Important support for the drilling operations was provided by Swift’s geologists and geophysicists, who by integrating their respective sets of data developed detailed projections of fracture locations in the Austin Chalk, from which the engineers charted the pathways for each well’s horizontal legs. Other support was provided by Swift’s landmen and in-house counsel, who ensured that the intended pathways were not hampered by legal barriers.

In the Ark-La-Tex region, the Company participated in two successful 1997 development wells, one drilled to the Smackover formation in Webster Parish, Louisiana, and one drilled to the Haynesville formation in Columbia County, Arkansas. In addition, two two-dimensional seismic swath surveys, each 12 miles in length, were conducted in Lafayette County, Arkansas. The analysis and integration of these data, as well as licensed two-dimensional data for Webster Parish, Louisiana, yielded promising results for continued operation in the region.

Along the Gulf Coast, Swift drilled two successful exploratory wells to the Frio formation in Jackson County, Texas, both partially based on the three-dimensional seismic acquisition the Company conducted in that county in 1994. Analyses of other sets of three-dimensional data, either licensed or obtained from industry partners, were also carried out for Gulf Coast prospects, particularly in Cameron Parish, Louisiana. 

Another successful exploratory well along the Gulf Coast, drilled to the Frio formation in Lavaca County, Texas, was largely based on Swift’s analysis of licensed two-dimensional data and was followed by a successful development well.

In the Rocky Mountains region, the analysis of a two-dimensional seismic swath obtained before 1997 led to a successful exploratory well drilled to the Minnelusa formation in Campbell County, Wyoming. Having operated in the Rocky Mountains region for years, primarily relying on geological projections, Swift in 1997 expanded its leaseholds in Wyoming by acquiring an additional 38,688 net acres in Campbell County and the adjacent Converse County.

At the end of 1997, Swift Energy had interests in 1,567 producing wells in ten states, and it was operating 650 wells that accounted for 91.2% of its reserves and 91.7% of its production.

Of the Company’s total production, 84% (21.4 Bcf) was natural gas, including 1.0 Bcf delivered under the AWP volumetric production payment agreement of 1992. Of the Company’s total reserves at year end, 87.0% was natural gas.

In 1997, the Company funded its capital expenditures primarily with net proceeds from its 1996 $115 million public offering of 6.25% Convertible Subordinated Notes and with internally generated cash flows. Also available was a $100 million revolving line of credit.

In recognition of its accomplishments in recent years and in anticipation of future growth, Swift issued a 10% Common Stock Dividend in October 1997. This was consistent with the Company’s policy of reinvesting earnings rather than paying cash dividends.

Based on the Company’s continued drilling successes and its belief that a significant reduction in its stock price was due to non-Company specific events, Swift’s board in March 1997 initiated a stock repurchase plan of up to $20 million. By December 15, the Company had purchased 383,900 shares of its common stock at $8.4 million and had extended its repurchase program until June 30, 1998.

In the international arena, New Zealand, Venezuela, and Russia continued to be the Company’s core focus areas outside the United States. In New Zealand, the Company conducted a two-dimensional seismic swath survey and a two-dimensional seismic line during 1997 as part of its exploration of the Onshore Taranaki Basin on the North Island. These data complemented the approximately 700 kilometers of existing two-dimensional seismic data and two sets of three-dimensional data that Swift analyzed in 1996.

In late 1997, the Company formed Swift Energy New Zealand Limited, a wholly owned subsidiary, to conduct its future New Zealand activities.

Also during the year, the previously formed Swift Energy de Venezuela, C.A., and the privately held Tecnoconsult, S.A., signed a consortium agreement to pursue the construction and operation of a natural gas transmission line in central Venezuela. 

In addition, a new agreement was signed with Senega, a Russian joint stock company, in which Swift’s Management Agreement was terminated and its Participation Agreement was amended, with Swift retaining its 6% net profits interest in the Samburg Field in western Siberia in return for its past investments.

At year end 1997, the Company had 194 employees.

This page was last updated on Wednesday, July 11, 2007, at 04:32:57 PM.

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