The Value of Discipline
Our disciplined approach to financing has
long been one of the cornerstones of our strategy for achieving
sustained growth in shareholder value. As with any kind of
discipline, the key to effective financial discipline is to
maintain a healthy balance between the present and the future—on
the one hand to reap immediate rewards from current
opportunities and on the other hand to make the investments
required for even better results down the road. Since we’ve outlived the vast majority of our
competitors in our 28-year history, we think it’s clear that our
emphasis on financial discipline gives us a competitive
advantage. We preserve our conservative balance sheet by
proactively controlling our mix of equity and debt; we monitor
our credit profile and work to continually improve it; and we
manage the risk of short-term price fluctuations by protecting
against sudden price declines while retaining the potential of
upside gains. Together, these efforts provide the financial
flexibility to take advantage of immediate opportunities, while
simultaneously preserving our financial integrity for long-term
growth. 2007 OVERVIEW. A look at some year-end
benchmarks for 2007 illustrates our ability to set records while
staying the course with a conservative financial strategy. In a
year in which we achieved all-time highs in both operational and
financial performance, we were also able to end the year with a
very sound balance sheet. Our current ratio was 0.95 at the end
of 2007, up 64% from 0.58 in 2006. And though our fourth-quarter
acquisition increased long-term debt levels, the ratio of our
debt to our domestic reserves value (domestic PV-10 ratio) was
15% at year-end, well below our target of less than 25%. Our
debt to capitalization ratio was 41% at year-end 2007, and our
debt per domestic Boe was $4.39. All of these long-term debt
ratios will further improve once we receive the proceeds from
the sale of the majority of our New Zealand assets. These
proceeds, which we expect to receive in the first half of 2008
when the transaction is complete, will be used to reduce our
outstanding borrowings under our bank facility. This financial strength was made possible by
years of record cash flows. In 2007, for the fourth year in a
row, we set an all-time high in cash flow from continuing
operations, allowing us to achieve a five-year average growth
rate for cash flows of 51% per year. This record cash flow
performance—along with cash balances and bank borrowings for our
fourth-quarter acquisition—allowed us to expand our capital
budget during the year. Our capital expenditures for continuing
operations were $650.6 million in 2007, up from initial
projections of $350 million to $400 million, which excluded
acquisitions, and up from our 2006 capital expenditures of
$488.2 million. We strengthened our liquidity in 2007 by
increasing the borrowing base of our $500 million bank credit
facility held with a syndicate of 10 banks. In April of 2007 we
increased our borrowing base from $250 million to $350 million,
and then in November we raised it again to $400 million. At
year-end 2007, we had $187 million outstanding on this facility.
Other long-term debt at year-end 2007 included $150 million of
7-5/8% senior notes issued in 2004 and due 2011, and $250
million of 7-1/8% senior notes issued in 2007 and due 2017. The
latter replaced senior subordinated notes at 9-3/8% due in 2012
that we redeemed in mid-2007 to take advantage of lower interest
rates. 2008 OUTLOOK. Our objectives for
preserving our financial integrity in 2008 include enhancing our
balance sheet to maintain liquidity, holding our debt/PV-10
ratio to less than 25% as we have done for many years, and
continuing our price-risk management strategy to protect our
capital budget.
In regard to the latter, we’re aiming in 2008
to improve both our finding and development costs and our
per-unit operating costs as a percentage of oil and gas prices,
a difficult task given the inflationary cost environment
prevalent in our industry during recent years. We believe we are
now well positioned to better control costs because of our
recent investments in seismic data, technology, and facilities.
These advances are expected to lead to lower costs as a
percentage of oil and gas prices by enabling us to more
effectively increase production and add reserves. Our projected capital expenditure budget for
2008 is $425 million to $475 million, net of minor non-core
dispositions and excluding any property acquisitions. We expect
to fund these expenditures with our anticipated cash flow from
continuing operations. As we have done in recent years, we may
increase our capital expenditure budget if conditions warrant.
Such conditions would include higher than expected cash
flow—from either an increase in oil and gas prices during the
year or higher than expected production volumes—and any
opportunities that might arise to make strategic acquisitions
financed through cash flows or our bank credit facility. Our price-risk management strategy targets
20% to 50% of our oil and gas production using low-cost floors,
near-term forward sales, or participating costless collars to
protect our cash flow and capital budget against short-term
price declines. At the beginning of 2008, we purchased natural
gas floors covering about 30% to 35% of expected domestic
natural gas production in the first quarter of 2008 and about
40% to 44% of natural gas production expected in the second
quarter of 2008. For crude oil production, we purchased floors
covering 40% to 43% of expected first-quarter 2008 oil
production. We believe our disciplined financial strategy
has helped put us in a good position to grow. In our operations,
we’ve become digitally integrated, broadened our high-tech
capabilities, built geoscience databases, and developed a sound
portfolio of exploration and development opportunities. We are
poised to grow organically through drilling and strategically
through acquisitions, and because of our financial discipline,
we have the liquidity to augment our cash flow as needed. As we
have said in the past, our conservative capital structure is one
of the reasons we’ve been in business so long, outliving some
85% of our competitors, and it’s also a reason why we’ll
continue to build shareholder value for many years to come. |
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This page was last updated on Wednesday, August 06, 2008, at 10:05:18 PM. Copyright © 1994-2008 by Swift Energy Company. |
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