Swift Energy Company

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Swift Energy Company

16825 Northcase Drive, Suite 400
Houston, Texas 77060
U.S.A.
Telephone: (281) 874-2700
Toll Free: (800) 777-2412
Fax: (281) 874-2726
Web site: http://www.swiftenergy.com

Public Company
Incorporated: 1979
Employees: 241
Sales: $211.1 million (2003)
Stock Exchanges: New York
Ticker Symbol: SFY
NAIC: 211111 Crude Petroleum and Natural Gas Extraction

Swift Energy Company is a Houston-based independent oil and natural gas company with a dual geographical focus: the onshore and inland water areas of the Texas and Louisiana Gulf Coast, and onshore properties in New Zealand. The publicly traded company owns interests in nearly 1,000 wells, evenly balanced between oil and gas. Of Swift's proven reserves, 40 percent is located in Louisiana, 37 percent in Texas, and 21 percent in New Zealand. A. Earl Swift is chairman of the company, and his son, Terry E. Swift, serves as president and CEO.

Founding the Company in 1979

Earl Swift grew up in Oklahoma, part of a family well versed in the oil business. His grandfather worked as a muleskinner moving drilling equipment from site to site, and his father worked in the Oklahoma oilfields at $1 a day. According to his own recollections Swift encountered his first oil rig at the age of three. At the time, such rigs were steam-powered, and the child made the mistake of backing up against the hot metal with his bare legs. As a result, the oil industry made a vivid, if not searing, first impression on him. He grew up fascinated with the oil business, but at the insistence of his parents, who had no formal education past the eighth grade, he delayed the start of his working life until after college. He would more than exceed his parents' expectations. After receiving a petroleum engineering degree from the University of Oklahoma, he went on to earn an M.B.A. from Pepperdine University. Still not satisfied, he took a law degree from South Texas College of Law. In 1955 he went to work as a petroleum engineer for Humble Oil Company, Exxon's predecessor. He then joined American Natural Resources Co. and worked for their affiliates, ultimately rising to the post of vice-president of Exploration and Production for Michigan-Wisconsin Pipe Line Company. But after 17 years of working for others, Swift, at the age of 45, decided he wanted to start his own oil business and in 1979 he tendered his resignation and formed Swift Energy.

Earl Swift accepted some consulting jobs in the early months as he became organized, and then began to assemble limited partnerships to purchase producing properties. He took the company public in 1981, at which point he was joined in the business by his oldest brother, Virgil N. Swift, who was also a professional petroleum engineer and well seasoned in the oil industry. Over the course of 28 years he held a number of positions with Gulf Oil Corporation and its subsidiaries. Before joining Swift Energy, he served as general manager of drilling for Gulf Canada Resources, Inc. Because the brothers had many years of accumulated wisdom between them, they were well aware of the cyclical nature of the oil and gas business, but they were also willing to employ new tools to help in making decisions. The company came to rely heavily on computer programs that mapped long-term energy trends. Because of these factors, Swift Energy proved to be especially effective in determining when the industry was in a down cycle and properties could be bought on the cheap and when the cycle was peaking and the company was better off sitting on the sidelines.

During the late 1970s oil prices surged to unprecedented levels, prompting many in the industry to take on massive debt in order to buy up reserves and producing properties at what proved to be inflated prices. In its early years, Swift Energy stayed out of the market, opting instead to make money drilling development and exploration wells for others. In 1983 the Swift brothers recognized that conditions in the market were changing and they felt it was a more opportune time to acquire producing oil and gas properties. As a result, the company shifted into acquisition mode and prepared to manage these purchases through limited partnerships. The first property was bought in 1984, a year in which the company was successful in raising approximately $4.5 million. The next year it raised another $9.5 million. Although the limited partnerships were saddled with time-consuming paperwork, which caused many competitors to cease their involvement in such endeavors, the Swifts believed that partnerships were an excellent investment vehicle and a better alternative than taking on excessive debt in a highly cyclical industry. At the close of fiscal 1985 Swift Energy had just $23,000 in long-term debt. Many others, who had assumed too much debt during the boom times of the late 1970s, would soon be ruined.

Quickening Acquisition Pace in 1986

In 1986, many in the industry predicted that oil prices, which were in the $10 to $12 a barrel range, would dip even further, to as low as $5 a barrel, making the acquisition of oil and gas reserves a foolhardy act. But Swift Energy defied conventional wisdom and picked up its rate of making acquisitions, acting on the belief that oil prices would rise beyond $20 by the early 1990s. In 1986 the company picked up $35 million in new investments. Time would also prove management right about the trajectory of oil prices. At this point, the company was involved in three basic areas: operating and developing properties, performing joint venture work with larger partners, and acting as fund managers for the limited partnerships. In addition to the acquisition of producing properties, the company bought some leases, and also delved into some side areas, such as the marketing of a blowout preventer through subsidiary Pet-Tech Tools Inc. While others in the industry struggled, and many failed, Swift Energy from 1983 to 1988 enjoyed a 47 percent annual rate of growth. It was also at the close of this period that Earl Swift's son, Terry, joined the business after earning a degree in chemical engineering and an M.B.A.

In 1988, on behalf of its limited partners, Swift Energy spent $55.9 million on oil and gas interests. In 1989 Swift Energy continued to acquire oil and gas interests at discounted prices. In conjunction with chief partner Denver-based Manville Corp., the company paid about $52.1 million to acquire assets in oil and gas wells located in Arkansas, Kansas, Louisiana, New Mexico, Oklahoma, and Texas. To fuel ongoing growth without adding debt, Swift Energy made a secondary offering of stock in October 1989, netting $6.1 million. But primarily the company continued to acquire properties through joint ventures and limited partnerships, generally taking on a 25 percent ownership stake. Not only did this approach keep down debt, it also provided the economies of scale associated with a company four times its size. As a result, Swift Energy would be able to maintain in-house 3-D seismic and horizontal drilling capabilities that would prove highly beneficial when the company returned its focus to drilling and exploration. Early in 1990 Swift and its partnerships paid another $42.5 million to add oil and gas producing properties in Oklahoma, Louisiana, and Texas in five separate acquisitions.

Again responding to changing conditions, Swift Energy in 1991 began to transition away from the acquisition of producing properties, choosing instead to return to its roots and concentrate on drilling and development activities. From 1991 to 1995 the company production grew by 180 percent, while at the same time proved oil and gas reserves increased by more than 260 percent. In addition, revenues almost doubled, from $14.9 million in 1991 to nearly $29 million in 1995. Net income in 1991 totaled $2.5 million, improving to $4.9 million in 1995. Cash flow from operating activities also increased more than 140 percent during this period. It was during this time that Swift Energy first became involved in the Giddings Field of Central Texas, part of the well-known Austin Chalk trend, infamous for its many fractures that proved frustrating for traditional vertical wells. While oil might flow fast in the beginning, wells in this region were notorious for going dry very quickly. Horizontal drilling techniques used later in the 1990s would finally solve this problem, making Swift's investment in the region pay off handsomely.

In addition to its U.S. activities, Swift also began to look for opportunities overseas. In 1993 the company reached an agreement with Senega, one of the privately held Russian oil and gas companies that emerged after the breakup of the Soviet Union. The deal called for Swift to provide technical and managerial assistance to develop and produce reserves in two Western Siberia sites, near the Arctic circle and close to the largest natural gas field in the world, work for which it was slated to receive at least 5 percent of net profits. Swift also paid $300,000 for a 1 percent net profit interest. The company then formulated a $325 million plan to develop the properties and arranged the investment of the federal Overseas Private Investment Corp., as well as forging an alliance with McDermott International, Hungary's national oil company, to help with the work. It was a high-risk venture that, if successful, promised a high reward. Swift kept its investment modest, and with good reason: Conducting business in the new Russia was fraught with unforeseen difficulties, including currency problems and political uncertainties. At the close of 1997, after spending $10 million on the project, Swift terminated its agreement with Senega. Although the company retained a minimum 6 percent net profit interest in the fields, the fate of the project was now out of its hands and it relied on the eventual success of outside parties to recover its investment.

Company Perspectives:

As a natural resource company, Swift Energy's mission has always been to achieve efficient, sustained growth in the volume and net present value of its proved reserves. The underlying premise is that reserves growth leads to increases in oil and gas production and sales, which in turn lead to higher cash flows and earnings and ultimately to increases in shareholder value.

New Zealand Venture in 1995

Swift also looked to Venezuela, in 1993 forming a subsidiary in order to bid on a contract to construct and operate a methane pipeline. As with the Russian venture, this project failed to come to fruition, costing the company nearly $3 million. Officially, both investments were relegated to the unproved properties section of the company's portfolio.

Swift, however, enjoyed much better success with its investment in New Zealand, where it established a presence in 1995 by obtaining the first of two petroleum exploration permits for the country's North Island. New Zealand was certainly a worthwhile risk. It was one of the few remaining areas of untapped promise in the world. Despite the potential for hydrocarbons, only around 500 exploration wells were drilled in the country throughout the 20th century, primarily because of New Zealand's remote location, which increased service costs, and its small economy, which offered a modest local market for the gas and oil the wells might produce. As a result, even though New Zealand shared the same geological features of other area countries, oil and gas companies elected to set up drilling operations in Australia, Indonesia, and the South China Sea. In essence, New Zealand lacked investment more than it lacked hydrocarbons. For such American companies as Swift, New Zealand offered obvious advantages, namely the language spoken was English, the laws familiar, the political situation stable, and the government friendly. Late in 1999 the company completed its first exploratory well. Further tests followed in 2000, during which Swift announced that it believed that it had discovered a new oilfield, one that could contain 500 million barrels. Furthermore, the company believed that it had only intersected the edge of the field. More wells were scheduled to be drilled later in the year.

In the meantime, Swift began boosting its profile stateside, increasing its domestic drilling activity to gain the attention of investors. In 1995 the company was able to raise $46.2 million with the issuance of 5.8 million new shares of common stock, 70 percent of the money promised to be spent on the development of reserves in the Giddings Fields and the AWP Field in Texas. A further benefit of the offering was that Swift topped the $100 million threshold in total market capitalization, meaning that large institutional investors would now give the stock consideration. In 1997 Terry Swift replaced his father as president of the company, part of a succession program that would soon make him chief executive officer; his father remained chairman of the board.

Swift suffered a minor setback in 1998 when an article in the Wall Street Journal claimed that the company was inflating its reserves in Texas. The company's stock was adversely impacted at a time when similar companies were enjoying a surge in stock prices, triggering an aggressive response from management, which maintained that the negative report was based on information produced by short-sellers of its stock. Management threatened to sue in order to depose the engineer responsible for the study of its drilling program and reserves. More important, the company hired an independent consultant to review its holdings. The resulting study was within 10 percent of the information Swift had submitted to the SEC, silencing critics. Swift further demonstrated its belief in its Austin Chalk interests in 1998 by paying $87 million in cash for Sonat Exploration Company, which brought with it 156 wells, interests in two gas plants, and 355,000 acres in the region. It was considered a gamble, but Swift soon drilled some high-producing wells, all in excess of a million barrels.

With two solid drilling programs in the United States and New Zealand, Swift saw its stock price increase 227 percent in 2000. For the year, the company recorded revenues of $191.6 million and income of $59.2 million. In 2001 the company added important properties in Louisiana, located in the Lake Washington Field, where management focused much of its domestic drilling activities in 2002 and into 2003. Swift also acquired assets to bolster its New Zealand position, spending more than $55 million. Following two years of declining numbers, Swift rebounded in 2003 with revenues of $211 million. As the company embarked on 2004, its 25th anniversary, management was pleased with the diversification of its drilling activities and fully expected record-setting performance.