SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
Commission File Number 1-8754
SWIFT ENERGY COMPANY
(Exact Name of Registrant as Specified in its Charter)
TEXAS 74-2073055
(State of Incorporation) (I.R.S. Employer Identification No.)
16825 Northchase Drive, Suite 400
Houston, Texas 77060
(281) 874-2700
(Address and telephone number of principal executive offices)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-----
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Common Stock 17,004,527 Shares
($.01 Par Value) (Outstanding at April 30, 1999)
(Class of Stock)
<PAGE>
SWIFT ENERGY COMPANY
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
- March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income
- For the Three-month periods ended March 31, 1999 and 1998 5
Condensed Consolidated Statements of Stockholders' Equity
- March 31, 1999 and December 31, 1998 6
Condensed Consolidated Statements of Cash Flows
- For the Three-month periods ended March 31, 1999 and 1998 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk. - None
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 19
Item 2. Changes in Securities and Use of Proceeds 19
Items 3 - 6. - None
SIGNATURES 20
</TABLE>
2
<PAGE>
SWIFT ENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
---------------------- --------------------------
(Unaudited) (Note 1)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,721,389 $ 1,630,649
Accounts receivable -
Oil and gas sales 12,810,233 12,764,568
Associated limited partnerships
and joint ventures 8,411,583 10,058,239
Joint interest owners 4,171,288 9,767,940
Other current assets 2,885,247 1,025,035
---------------------- -------------------------
Total Current Assets 29,999,740 35,246,431
---------------------- -------------------------
Property and Equipment:
Oil and gas, using full-cost accounting
Proved properties being amortized 506,658,322 497,296,068
Unproved properties not being amortized 56,349,358 56,041,886
----------------------- -------------------------
563,007,680 553,337,954
Furniture, fixtures, and other equipment 7,338,818 7,098,305
---------------------- -------------------------
570,346,498 560,436,259
Less-Accumulated depreciation, depletion,
and amortization (211,376,212) (200,713,621)
---------------------- -------------------------
358,970,286 359,722,638
---------------------- -------------------------
Other Assets:
Receivables from associated limited
partnerships, net of current portion 2,212,338 3,170,067
Limited partnership formation and
marketing costs 1,313,671 917,189
Deferred income taxes --- 254,984
Deferred charges 4,205,963 4,333,958
---------------------- -------------------------
7,731,972 8,676,198
---------------------- -------------------------
$ 396,701,998 $ 403,645,267
====================== =========================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
SWIFT ENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
--------------------- ------------------------
(Unaudited) (Note 1)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued liabilities $ 16,425,477 $ 18,639,649
Payable to associated limited partnerships 884,184 380,692
Undistributed oil and gas revenues 11,077,602 12,394,713
--------------------- ------------------------
Total Current Liabilities 28,387,263 31,415,054
--------------------- ------------------------
Convertible Notes 115,000,000 115,000,000
Bank Borrowings 141,800,000 146,200,000
Deferred Revenues 1,363,484 1,667,574
Deferred Income Taxes 356,825 ---
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized, none outstanding --- ---
Common stock, $.01 par value, 35,000,000
shares authorized, 16,994,937 and 16,972,517
shares issued, and 16,135,481 and 16,291,242
shares outstanding, respectively 169,949 169,725
Additional paid-in capital 148,534,862 148,901,270
Treasury stock held, at cost, 859,456 and
681,275 shares, respectively (12,325,668) (11,841,884)
Retained earnings (26,584,717) (27,866,472)
--------------------- ------------------------
109,794,426 109,362,639
--------------------- ------------------------
$ 396,701,998 $ 403,645,267
===================== ========================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
SWIFT ENERGY COMPANY
Condensed Consolidated Statements of Income
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Revenues:
Oil and gas sales $ 21,095,636 $ 15,801,911
Fees from limited partnerships
and joint ventures 42,377 79,931
Interest income 13,744 18,499
Other, net 336,330 574,888
------------------ ------------------
21,488,087 16,475,229
------------------ ------------------
Costs and Expenses:
General and administrative, net of
reimbursement 1,109,674 1,000,479
Depreciation, depletion, and amortization 10,748,473 6,734,722
Oil and gas production 4,420,144 2,519,760
Interest expense, net 3,304,377 1,384,766
------------------ ------------------
19,582,668 11,639,727
------------------ ------------------
Income before Income Taxes 1,905,419 4,835,502
Provision for Income Taxes 623,664 1,605,887
------------------ ------------------
Net Income $ 1,281,755 $ 3,229,615
================== ==================
Per share amounts -
Basic: $ 0.08 $ 0.20
================== ===================
Diluted: $ 0.08 $ 0.20
================== ===================
Weighted Average Shares Outstanding 16,156,449 16,500,385
================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
SWIFT ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Unearned
Common Paid-In Treasury ESOP Retained
Stock(1) Capital Stock Compensation Earnings Total
------------- ------------- -------------- -------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ 168,470 $ 147,542,977 $ (8,519,665) $ (150,055) $ 20,359,193 $ 159,400,920
Stock issued for benefit plans
(20,032 shares) 200 367,058 --- --- --- 367,258
Stock options exercised
(84,757 shares) 847 735,746 --- --- --- 736,593
Employee stock purchase plan
(20,756 shares) 208 317,340 --- --- --- 317,548
10/97 stock dividend adj
(16 shares) --- 461 --- --- (461) ---
Allocation of ESOP shares --- (62,312) --- 150,055 --- 87,743
Purchase of 293,474 shares as
treasury stock --- --- (3,322,219) --- --- (3,322,219)
Net loss --- --- --- --- (48,225,204) (48,225,204)
------------- ------------- -------------- -------------- ---------------- -----------------
Balance, December 31, 1998 $ 169,725 $ 148,901,270 $ (11,841,884) $ --- $ (27,866,472) $ 109,362,639
============= ============= ============== ============== ================ =================
Stock issued for benefit plans
(90,738 shares)(2) 224 (366,408) 978,956 --- --- 612,772
Purchase of 246,500 shares as
treasury stock (2) --- --- (1,462,740) --- --- (1,462,740)
Net income (2) --- --- --- --- 1,281,755 1,281,755
------------- -------------- --------------- ------------- ---------------- ------------------
Balance, March 31, 1999(2) $ 169,949 $ 148,534,862 $ (12,325,668) $ --- $ (26,584,717) $ 109,794,426
============= ============= ============== ============== ================ =================
(1) $.01 Par Value
(2) Unaudited
</TABLE>
See accompanying notes to condensed financial statements.
6
<PAGE>
SWIFT ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Period Ended March 31,
-------------------------------------------
1999 1998
------------------ -------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 1,281,755 $ 3,229,615
Adjustments to reconcile net income to net cash provided
by operating activities -
Depreciation, depletion, and amortization 10,748,473 6,734,722
Deferred income taxes 611,809 1,484,983
Deferred revenue amortization related to production payment (294,223) (335,896)
Other 127,995 115,639
Change in assets and liabilities -
(Increase) decrease in accounts receivable 875,447 (51,807)
Increase in accounts payable and accrued
liabilities, excluding income taxes payable 1,453,976 1,722,205
Increase in income taxes payable 32,200 120,404
------------------. -------------------
Net Cash Provided by Operating Activities 14,837,432 13,019,865
------------------ -------------------
Cash Flows From Investing Activities:
Additions to property and equipment (13,194,175) (27,980,380)
Proceeds from the sale of property and equipment 430,191 1,146,100
Net cash received (distributed) as operator
of oil and gas properties 2,610,703 2,821,264
Net cash received (distributed) as operator
of partnerships and joint ventures 1,646,656 3,834,710
Limited partnership formation and marketing costs (396,482) (452,883)
Other (95,749) (15,633)
------------------ -------------------
Net Cash Used in Investing Activities (8,998,856) (20,646,822)
------------------ -------------------
Cash Flows From Financing Activities:
Net proceeds from (payments of) bank borrowings (4,400,000) 7,209,000
Net proceeds from issuances of common stock 114,904 859,837
Purchase of treasury stock (1,462,740) (573,627)
------------------ -------------------
Net Cash Provided by (Used in) Financing Activities (5,747,836) 7,495,210
------------------ -------------------
Net Increase (Decrease) in Cash and Cash Equivalents 90,740 (131,747)
Cash and Cash Equivalents at Beginning of Period 1,630,649 2,047,332
------------------ -------------------
Cash and Cash Equivalents at End of Period $ 1,721,389 $ 1,915,585
================== ===================
Supplemental disclosures of cash flows information:
Cash paid during period for interest, net of amounts
capitalized $ 1,379,507 $ ---
Cash paid during period for income taxes $ --- $ 500
</TABLE>
See accompanying notes to condensed financial statements.
7
<PAGE>
SWIFT ENERGY COMPANY
NOTES TO CONDENSED CONSOLIDATEDS FINANCIAL STATEMENTS
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
(1) GENERAL INFORMATION
The condensed consolidated financial statements included herein have
been prepared by Swift Energy Company (the "Company") and are unaudited,
except for the balance sheet at December 31, 1998, which has been prepared
from the audited financial statements at that date. The financial
statements reflect necessary adjustments, all of which were of a recurring
nature, and are in the opinion of management, necessary for a fair
presentation. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). The Company
believes that the disclosures presented are adequate to allow the
information presented not to be misleading. The condensed consolidated
financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the latest Form
10-K and Annual Report.
In the second quarter of 1998, the Company began netting supervision
fees against general and administrative expenses and oil and gas
production costs. This reclassification has been made to all periods
presented. Certain other reclassifications have also been made to prior
year amounts to conform to current year presentation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Oil and Gas Properties
The Company follows the "full-cost" method of accounting for oil and
gas property and equipment costs. Under this method of accounting, all
productive and nonproductive costs incurred in the acquisition,
exploration, and development of oil and gas reserves are capitalized.
Under the full-cost method of accounting, such costs may be incurred both
prior to or after the acquisition of a property and include lease
acquisitions, geological and geophysical services, drilling, completion,
equipment, and certain general and administrative costs directly
associated with acquisition, exploration, and development activities.
Interest costs related to unproved properties are also capitalized to
unproved oil and gas properties. General and administrative costs related
to production and general overhead are expensed as incurred.
No gains or losses are recognized upon the sale or disposition of oil
and gas properties, except in transactions that involve a significant
amount of reserves. The proceeds from the sale of oil and gas properties
are generally treated as a reduction of oil and gas property costs. Fees
from associated oil and gas exploration and development limited
partnerships are credited to oil and gas property costs to the extent they
do not represent reimbursement of general and administrative expenses
currently charged to expense.
Future development, site restoration, and dismantlement and abandonment
costs, net of salvage values, are estimated on a property-by-property
basis based on current economic conditions and are amortized to expense as
the Company's capitalized oil and gas property costs are amortized. The
Company's properties are all onshore and historically the salvage value of
the tangible equipment offsets the Company's site restoration and
dismantlement and abandonment costs. The Company expects this relationship
will continue in the future.
8
<PAGE>
SWIFT ENERGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
The Company computes the provision for depreciation, depletion, and
amortization of oil and gas properties on the unit-of-production method.
Under this method, the Company computes the provision by multiplying the
total unamortized costs of oil and gas properties - including future
development, site restoration, and dismantlement and abandonment costs,
but excluding costs of unproved properties - by an overall rate determined
by dividing the physical units of oil and gas produced during the period
by the total estimated units of proved oil and gas reserves. This
calculation is done on a country by country basis for those countries with
oil and gas production. The Company currently has production in the United
States only.
The cost of unproved properties not being amortized is assessed
quarterly, on a country by country basis, to determine whether such
properties have been impaired. Domestically, any impairment assessed is
added to the cost of proved properties being amortized. To the extent
costs accumulated in the Company's international initiatives are
determined by management to be costs that will not result in the addition
of proved reserves, any impairment is charged to income. In determining
whether such costs should be impaired, the Company's management evaluates,
among other factors, current oil and gas industry conditions,
international economic conditions, capital availability, foreign currency
exchange rates, the political stability in the countries in which the
Company has an investment, and available geological and geophysical
information.
The calculation of the Ceiling Test and provision for depreciation,
depletion, and amortization is based on estimates of proved reserves.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting the future rates of production, timing,
and plan of development. The accuracy of any reserves estimate is a
function of the quality of available data and of engineering and
geological interpretation and judgment. Results of drilling, testing, and
production subsequent to the date of the estimate may justify revision of
such estimate. Accordingly, reserves estimates are often different from
the quantities of oil and gas that are ultimately recovered.
Hedging Activities
The Company's revenues are primarily the result of sales of its oil and
natural gas production. Market prices of oil and natural gas may fluctuate
and adversely affect operating results. To mitigate some of this risk, the
Company does engage periodically in certain limited hedging activities,
but only to the extent of buying protection price floors for portions of
its and the limited partnerships' oil and natural gas production. Costs
and any benefits derived from these price floors are accordingly recorded
as a reduction or increase, as applicable, in oil and gas sales revenue
and were not significant for any period presented. The costs to purchase
put options are amortized over the option period. The costs related to
1999 hedging activities through March 31, totaled approximately $344,600
with benefits of approximately $348,400 being received, resulting in a net
cash inflow of approximately $3,800. The costs related to open contracts
as of March 31, 1999 totaled approximately $261,900 and had a fair market
value of $35,000.
Earnings Per Share
Basic earnings per share ("Basic EPS") has been computed using the
weighted average number of common shares outstanding during the respective
periods. Basic EPS has been retroactively restated in all periods
presented to give recognition to the 10% stock dividend declared in
October 1997 that resulted in an additional 1,494,622 shares being issued.
9
<PAGE>
SWIFT ENERGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
The calculation of diluted earnings per share ("Diluted EPS") assumes
conversion of the Company's Convertible Notes as of the beginning of the
respective periods and the elimination of the related after-tax interest
expense and assumes, as of the beginning of the period, exercise of stock
options and warrants (using the treasury stock method). Certain of the
Company's stock options that would potentially dilute Basic EPS in the
future were not included in the computation of Diluted EPS because to do
so would have been antidilutive for the periods presented. Diluted EPS has
also been retroactively restated for all periods presented to give effect
to the 10% stock dividend. The original conversion price of the
Convertible Notes of $34.6875 has been revised to $31.534 to reflect the
October 1997 stock dividend declared.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an
asset or liability measured at its fair value. SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows the gains and losses on derivatives to offset
related results on the hedged item in the income statements and requires
that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 133
is effective for fiscal years beginning after June 15, 1999. The Company
is currently evaluating the new standard, but has not yet determined the
impact it will have on its financial position and results of operations.
(3) BANK BORROWINGS
Under its new $250.0 million revolving credit facility with a syndicate
of ten banks (the "New Credit Facility"), at March 31, 1999, the Company
had outstanding borrowings of $141.8 million. At December 31, 1998, the
Company had outstanding borrowings of $146.2 million under its borrowing
arrangements. At March 31, 1999, the New Credit Facility consisted of a
$250.0 million revolving line of credit with a $170.0 million borrowing
base. The interest rate is either (a) the lead bank's prime rate (7.75% at
March 31, 1999) or (b) the adjusted London Interbank Offered Rate
("LIBOR") plus the applicable margin depending on the level of outstanding
debt (a weighted average of 6.38% at March 31, 1999). The applicable
margin is based on the Company's ratio of outstanding balance on the New
Credit Facility to the last calculated borrowing base. Of the $141.8
million borrowed at March 31, 1999, $140.0 million was borrowed at the
LIBOR rate.
The terms of the New Credit Facility include, among other restrictions,
a limitation on the level of cash dividends (not to exceed $2.0 million in
any fiscal year), requirements as to maintenance of certain minimum
financial ratios (principally pertaining to working capital, debt, and
equity ratios), and limitations on incurring other debt. Since inception,
no cash dividends have been declared on the Company's common stock. The
Company is currently in compliance with the provisions of this agreement.
The borrowing base is redetermined at least every six months and is
currently under its May review but had not been determined as of the date
of the filing of this report. The New Credit Facility will extend until
August 2002.
10
<PAGE>
SWIFT ENERGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
(4) ACQUISITION OF PROPERTIES
In the third quarter of 1998, the Company purchased from Sonat
Exploration Company ("Sonat"), a subsidiary of Sonat Inc., the Toledo Bend
Properties located in Texas and Louisiana in the vicinity of Toledo Bend
Lake for approximately $84.5 million in cash, with approximately $54.2
million of the total spent for producing properties, approximately $15.0
million to purchase an interest in two gas processing plants, and
approximately $15.3 million to acquire leasehold properties.
As of December 31, 1998, estimated proved reserves for the Toledo Bend
Properties were 130.5 Bcfe, of which approximately 58% was natural gas,
and 59% was proved undeveloped. At such date the properties include 162
producing oil and natural gas wells in the Brookeland Field in Southeast
Texas and the Masters Creek Field in Western Louisiana, 23 saltwater
disposal wells, a 20% interest in two natural gas plants, associated
production facilities, working interests in approximately 200,875 gross
undeveloped (125,378 net undeveloped) acres, and approximately 114,000
undeveloped fee mineral acres. The Company has become operator of 115 of
the 162 wells. The Company's production on these properties amounted to
approximately 11.6 Bcfe in 1998 and 6.4 Bcfe in the first quarter of 1999,
of which 44% was natural gas in each of these periods. The two gas plants
are operated by a third party and have combined capacity of 250 MMcfe per
day.
This acquisition was accounted for by the purchase method and was
incorporated into the Company's results of operations in the third quarter
of 1998. The following unaudited pro forma supplemental information
presents consolidated results of operations as if this acquisition had
occurred 12 on January 1, 1998:
<TABLE>
<CAPTION>
Three months
ended March 31,
1998
---------------
(Thousands, except per share amounts) (Unaudited)
<S> <C>
Revenue $ 36,700
Net Income Before Income Taxes $ 12,680
Net Income $ 8,407
Per Share Amounts-
Basic $ 0.51
Diluted $ 0.46
</TABLE>
11
<PAGE>
SWIFT ENERGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
(5) FOREIGN ACTIVITIES
New Zealand. Since October 1995, the Company has been issued two
Petroleum Exploration Permits by the New Zealand Minister of Energy. The
first permit covered approximately 65,000 acres in the Onshore Taranaki
Basin of New Zealand's North Island, and the second covered approximately
69,300 adjacent acres. A wholly-owned subsidiary, Swift Energy New Zealand
Limited, formed in late 1997, conducts the Company's New Zealand
activities and owns the interest in the permits. In March 1998, the
Company surrendered approximately 46,400 acres covered in the first
permit, and the remaining acreage has been included as an extension of the
area covered in the second permit. Under the terms of the expanded permit,
the Company is obligated to and expects to drill one exploratory well
prior to August 12, 1999. All other obligations under the permit have been
fulfilled, including the reinterpretation of existing seismic data and the
acquisition and processing of new seismic data.
On October 23, 1998, the Company entered into separate agreements with
Marabella Enterprises Ltd. ("Marabella"), a subsidiary of Bligh Oil &
Minerals N.L., an Australian company, to obtain from Marabella a 25%
working interest in another New Zealand Petroleum Exploration Permit and
for Marabella to become a 5% participant in the Company's Permit. An
exploration well on the Marabella permit commenced drilling on October 16,
1998, the results of which were unsuccessful. Accordingly, the $0.4
million costs of such well were charged against earnings in the fourth
quarter of 1998. The Company has also agreed in principle to participate
with Marabella in an additional permit as a 17.5% working interest owner.
At March 31, 1999, the Company's investment in New Zealand was
approximately $5.2 million and is included in the unproved properties
portion of oil and gas properties.
12
<PAGE>
SWIFT ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's principal corporate objectives are the accumulation of
crude oil and natural gas reserves for production and sale and the
enhancement of the net present value of those reserves. The Company was
formed in 1979 and, commencing in 1991, the Company began to emphasize the
addition of reserves through increased development and exploration
drilling activity. The Company also adds reserves through strategic
property acquisitions when conditions warrant such activity, as it did in
the third quarter of 1998 with the purchase of the Toledo Bend Properties.
This flexible strategy using both drilling and acquisitions has led to
additions of reserves in excess of the Company's production in each of the
years 1996, 1997, and 1998. The Company's revenues are primarily comprised
of oil and gas sales attributable to properties in which the Company owns
a direct or indirect interest.
LIQUIDITY AND CAPITAL RESOURCES
During the first three months of 1999, the Company relied upon its
internally generated cash flows of $14.8 million to fund its capital
expenditures of $13.2 million. Cash and working capital for the remainder
of 1999 are expected to be provided through internally generated cash
flows. During 1998, the Company relied upon $138.3 million of bank
borrowings, along with its internally generated cash flows of $54.2
million, to fund capital expenditures of $183.8 million.
Net Cash Provided by Operating Activities
For the three month period ended March 31, 1999, net cash provided by
operating activities increased by 14% to $14.8 million, as compared to
$13.0 million during the first three months of 1998. The 1999 increase of
$1.8 million was primarily due to the $5.3 million increase in oil and gas
sales, partially offset by the $1.9 million increase in oil and gas
production costs and the $1.9 million increase in interest expense.
Existing Credit Facilities
At March 31, 1999, the Company had outstanding borrowings of $141.8
million under its new credit facility syndicated in August 1998. At
December 31, 1998, the Company had outstanding borrowings of $146.2
million under such borrowing arrangements. Currently, the new credit
facility consists of a $250.0 million revolving line of credit with a
$170.0 million borrowing base. The Company's $250.0 million revolving
credit facility includes, among other restrictions, requirements as to
maintenance of certain minimum financial ratios (principally pertaining to
working capital, debt, and equity ratios), and limitations on incurring
other debt. The Company is currently in compliance with the provisions of
this agreement. The new credit facility will extend until August 2002.
Working Capital
The Company's working capital decreased over the last three months from
$3.8 million at December 31, 1998, to $1.6 million at March 31, 1999. This
decrease is primarily the result of a decrease in joint interest owners
receivables resulting from the Company's decrease in drilling activity in
response to the decrease in commodity prices and a capital expenditures
budget based on internally generated cash flows.
Due to the nature of the Company's business highlighted above, the
individual components of its working capital fluctuate considerably from
period to period. The
13
<PAGE>
SWIFT ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED
Company incurs significant working capital requirements in connection with
its role as operator of approximately 836 wells and its drilling and
acquisition activities. In this capacity, the Company is responsible for
certain day-to-day cash management, including the collection and
disbursement of oil and gas revenues and related expenses.
Common Stock Repurchase Program
In March 1997, the Company's commenced a common stock repurchase
program under which $13.3 million had been spent through March 31, 1999 to
acquire 927,774 shares at an average cost of $14.34 per share. In March
1999, the Company used 68,318 shares of its treasury stock to fund its
employer match in the 401-K. Under the current repurchase program for up
to $10.0 million of the Company's common stock which extends until June
30, 1999, the Company has used approximately $4.0 million of working
capital since July 1998 to acquire 492,500 shares for an average cost of
$8.04 per share.
Capital Expenditures
Capital expenditures for property, plant, and equipment during the
first three months of 1999 were $13.2 million. These capital expenditures
included: (a) $7.4 million of drilling costs, both development and
exploratory, (b) $4.0 million of domestic prospect costs (principally
prospect leasehold, seismic and geological costs of unproved prospects for
the Company's account), (c) $1.4 million spent on field facilities and
production equipment, (d) $0.2 million invested in New Zealand, with the
remaining $0.2 million spent primarily for computer equipment and software
and furniture and fixtures.
In the remaining nine months of 1999, the Company expects capital
expenditures to be approximately $41.0 million, including investments in
all areas in which investments were made during the first three months of
the year as described above. Of the wells drilling in the first three
months of 1999, two were completed, both as successful development wells.
The Company anticipates drilling a total of 20 wells (15 development and
five exploratory) in 1999.
The Company believes that 1999's anticipated internally generated cash
flows will be sufficient to finance the costs associated with its
currently budgeted remaining 1999 capital expenditures.
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1999 and 1998
Revenues
The Company's revenues increased 30% during the first three months of
1999 as compared to the same period in 1998, due primarily to the increase
in oil and gas sales, a result of the increase in production volumes,
offset somewhat by the lower commodity prices.
Oil and Gas Sales
Oil and gas sales increased 34% to $21.1 million in the first three
months of 1999, compared to $15.8 million for the comparable period in
1998. The 23% increase in natural gas production and the 273% increase in
oil production were primarily the result of production 16 from the recent
Toledo Bend Properties acquisition. The Company's net sales
14
<PAGE>
SWIFT ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED
volume in the first three months of 1999 increased by 65% or 4.6 Bcfe
(billion cubic feet equivalent) over volumes in the comparable 1998
period. The increases in volume were significantly offset by a 20%
decrease in natural gas prices and a 14% decrease in oil prices received
between the two periods, as highlighted in the table below.
The elements of the Company's $5.3 million increase in oil and gas
sales during the first three months of 1999 included: (1) volume increases
that added $9.8 million of sales from the 1.4 Bcf increase in gas sales
volumes ($3.1 million) and from the 532,696 barrel increase in oil sales
volumes ($6.7 million) and (2) price variances that had a $4.5 million
unfavorable impact on sales due to the decrease in average gas prices
received ($3.3 million), and a decrease in average oil prices received
($1.2 million). Oil and gas sales during the first three months of 1999
from the Toledo Bend Properties were $12.2 million (none in 1998) from 6.4
Bcfe of net sales volume, while sales from the AWP Olmos Field were $6.9
million ($8.3 million in 1998) from 3.7 Bcfe of net sales volumes (4.0
Bcfe in 1998) for a decrease of 0.3 Bcfe, while the Austin Chalk trend
generated oil and gas sales of $1.5 million ($4.2 million in 1998) from
0.9 Bcfe of net sales volume (1.8 Bcfe in 1998) for a decrease of 0.9
Bcfe.
Revenues from oil and gas sales comprised 98% and 96%, respectively, of
total revenues for the first three months of 1999 and 1998. The majority
(62% and 84%, respectively) of these revenues were derived from the sale
of the Company's gas production. The acquisition of the Toledo Bend
Properties, which has a higher percentage of its production from oil, has
decreased somewhat the Company's predominate gas production mix. Even
though the Company has scaled back its 1999 capital expenditures budget,
the Company expects oil and gas sales volumes to increase in 1999 when
compared to 1998, primarily due to the full year of production from the
Toledo Bend Properties.
The following table provides additional information regardig the
Company's oil and gas sales.
<TABLE>
<CAPTION>
Net Sales Volume Average Sales Price
---------------- -------------------
Oil (Bbl) Gas (Mcf) Oil (Bbl) Gas (Mcf)
--------- --------- --------- ---------
1998
----
<S> <C> <C> <C> <C>
3 Months Ended 03-31-98 195,114 5,858,509 $12.61 $2.28
1999
----
3 Months Ended 03-31-99 727,810 7,224,188 $10.87 $1.82
</TABLE>
Costs and Expenses
General and administrative expenses for the first three months of 1999
increased by approximately $0.1 million, or 11%, when compared to the same
period in 1998. This increase in costs reflects the increase in the
Company's activities. However, the Company's general and administrative
expenses per Mcfe produced decreased by 33% from $0.14 per Mcfe produced
for the first three months of 1998 to $0.10 per Mcfe produced for the
comparable period in 1999. Supervision fees netted from general and
administrative expenses for the first three months of 1999 and 1998 were
$0.7 million and $0.6 million, respectively.
Depreciation, depletion, and amortization ("DD&A") increased 60%
(approximately $4.0 million) for the first three months of 1999, primarily
due to the Company's reserves
15
<PAGE>
SWIFT ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED
additions and associated costs and to the related sale of increased
quantities (65%) of oil and gas produced therefrom. The Company's DD&A
rate per Mcfe of production has decreased from $0.96 per Mcfe produced in
the 1998 period to $0.93 per Mcfe produced in the 1999 period.
Production costs per Mcfe increased to $0.38 per Mcfe produced in the
1999 period from $0.36 per Mcfe produced in the 1998 period. Primarily due
to the 65% increase in production volumes, oil and gas production costs
increased by 75% (approximately $1.9 million) in the first three months of
1999 when compared to the first three months of 1998. Supervision fees
netted from production costs for the first three months of 1999 and 1998
were $0.7 million and $0.6 million, respectively.
Interest expense on the Convertible Notes, including amortization of
debt issuance costs, were the same in the first three months of 1999 and
1998, totaling $1.9 million, while interest expense on the existing credit
facilities, including commitment fees and amortization of debt issuance
costs, totaled $2.4 million in the 1999 period ($0.3 million in the 1998
period) for total interest charges of $4.3 million (of which $1.0 million
was capitalized). In the first three months of 1998, these charges totaled
$2.2 million (of which $0.8 million was capitalized). The Company
capitalizes that portion of interest related to its exploration,
partnership, and foreign business development activities. The increase in
interest expense in 1999 is attributable to the increase in interest
incurred on the amounts outstanding on its existing credit facilities.
Net Income
Net income of $1.3 million and Basic EPS of $0.08 for the first three
months of 1999 were both 60% lower than net income of $3.2 million and
Basic EPS of $0.20 in the same period for 1998. This decrease primarily
reflected the effect of the 20% and 14% decrease in natural gas and oil
prices while costs and expenses increased 68% in relation to the 65%
increase in production volumes discussed above.
Year 2000
The Year 2000 issue results from computer programs and embedded
computer chips with date fields that cannot distinguish between the years
1900 and 2000. The Company is currently implementing the steps necessary
to make the Company's operations capable of addressing the Year 2000.
These steps include upgrading, testing, and certifying its computer
systems and field operation services and obtaining Year 2000 compliance
certification from the Company's critical business suppliers, customers,
venders, and other service providers. The Company formed a task force
during 1998 to address the Year 2000 issue and prepare the Company's
business systems for the Year 2000. By mid-1999 the Company expects the
mission critical systems to be either replaced or updated and testing to
be virtually completed.
The Company's business systems are almost entirely comprised of
off-the-shelf software. Most of the necessary changes in computer
instructional code can be made by upgrading such software. The Company is
currently in the process of either upgrading the off-the-shelf software or
receiving certification as to Year 2000 compliance from vendors or
third-party consultants. A testing phase is being conducted as the
software is updated or certified and is expected to be completed by
mid-1999.
The Company does not believe that costs incurred to address the Year
2000 issue with respect to its business systems will have a material
effect on the Company's results of
16
<PAGE>
SWIFT ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED
operations or its liquidity and financial condition. The estimated total
cost to address Year 2000 issues is projected to be less than $150,000,
most of which will be spent during the testing phase.
The failure to correct a material Year 2000 problem could result in an
interruption or failure of certain normal business activities or
operations. Based on activities to date, the Company believes that it will
be able to resolve any Year 2000 problems concerning its financial and
administrative systems. It is undeterminable how all the aspects of the
Year 2000 issue will impact the Company; however, field operations and the
myriad of peripheral technical applications which perform the Company's
core business functions of oil and gas exploration are primarily
non-information technology systems which are not date specific and are
predicted to perform correctly. The most reasonably likely worst case
scenario, therefore, would involve a prolonged disruption of external
power sources upon which core equipment relies, resulting in a substantial
decrease in the Company's oil and gas production activities. Although the
Company maintains limited on-site secondary power supplies such as
generators, it is not economically feasible to maintain a secondary power
supply to fully replace primary power; therefore, a prolonged interruption
could materially affect the Company's operations, liquidity or capital
resources. In addition, pipeline operators to whom the Company sells
natural gas, as well as other customers and suppliers, could be prone to
Year 2000 problems that could not be assessed or detected by the Company.
The Company is contacting its major purchasers, customers, suppliers,
financial institutions and others with whom it conducts business to
determine whether they will be able to resolve in a timely manner any Year
2000 problems directly affecting the Company and to inform them of the
Company's internal assessment of its Year 2000 review. There can be no
assurance that such third parties will not fail to appropriately address
their Year 2000 issues or will not themselves suffer a Year 2000
disruption that could have a material adverse effect on the Company's
business, financial condition, or operating results. Based upon these
responses and any problems that arise during the testing phase,
contingency plans or back-up systems would be determined and addressed.
The Company has utilized, and will continue to utilize, both internal and
external resources to complete tasks and perform testing necessary to
address the Year 2000 problem.
Forward Looking Statements
The statements contained in this Quarterly Report on Form 10-Q
("Quarterly Report") that are not historical facts are forward-looking
statements as that term is defined in Section 21E of the Securities and
Exchange Act of 1934, as amended, and therefore involve a number of risks
and uncertainties. Such forward-looking statements may be or may concern,
among other things, capital expenditures, drilling activity, development
activities, cost savings, production efforts and volumes, hydrocarbon
reserves, hydrocarbon prices, liquidity, regulatory matters and
competition. Such forward-looking statements generally are accompanied by
words such as "plan," "estimate," "expect," "predict," "anticipate,"
"projected," "should," "believe" or other words that convey the
uncertainty of future events or outcomes. Such forward-looking information
is based upon management's current plans, expectations, estimates and
assumptions and is subject to a number of risks and uncertainties that
could significantly affect current plans, anticipated actions, the timing
of such actions and the Company's financial condition and results of
operations. As a consequence, actual results may differ materially from
expectations, estimates or assumptions expressed in or implied by any
forward-looking statements made by or on behalf of the Company, including
those regarding the Company's financial results, levels of oil and gas
production or revenues, capital expenditures, and capital resource
activities. Among the factors that could cause actual results to differ
materially are: fluctuations of the prices received or demand for the
Company's oil and natural gas, the uncertainty of drilling results and
reserve estimates,
17
<PAGE>
SWIFT ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED
operating hazards, requirements for capital, general economic conditions,
competition and government regulations, as well as the risks and
uncertainties discussed in this Quarterly Report, including, without
limitation, the portions referenced above, and the uncertainties set forth
from time to time in the Company's other public reports, filings and
public statements. Also, because of the volatility in oil and gas prices
and other factors, interim results are not necessarily indicative of those
for a full year.
18
<PAGE>
SWIFT ENERGY COMPANY
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings -
The description contained under "Item 3. - Legal Proceedings" in the
Company's Form 10-K Report for the year ended December 31, 1998 is
incorporated by reference herein.
Item 2. Changes in Securities and Use of Proceeds -
(a) Effective March 31, 1999, Swift Energy Company and American
Stock Transfer & Trust Company (the "Rights Agent") amended Sections
1(b) and 1(c)(ii) of the Rights Agreement, originally dated as of
August 1, 1997 (the "Rights Agreement"), and executed the Rights
Agreement (as Amended and Restated as of March 31, 1999) on April 16,
1999.
Under the original Rights Agreement, the terms "Affiliate" and
"Associate" are defined in Section 1(b) in the same way those terms are
defined in Rule 12b-2 under the Securities Exchange Act of 1934 (the
"Exchange Act"), which includes as an Associate any entity of which a
person beneficially owns 10% or more of a class of the entity's equity
securities. The first change modifies this Rule 12b-2 definition as it
applies to any investment adviser to only apply when a person
beneficially owns 20% or more of the equity securities of an entity.
The second change to the Rights Agreement in certain circumstances
excepts from the definition of "Beneficial Owner" in Section 1(c)(ii)
common stock acquirable under convertible securities of the Company.
Presently this definition includes, for purposes of determining whether
a person owns 15% of the Company's common stock then outstanding, any
securities acquirable upon exercising conversion rights. The
modification excludes from the definition of securities which are
beneficially owned those acquirable under conversion rights if the
market price for the Company's common stock is not more than 50% of the
conversion price of such convertible securities.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SWIFT ENERGY COMPANY
(Registrant)
Date: May 13, 1999 By: (Original Signed By)
-------------------- ----------------------
John R. Alden
Sr. Vice President-Finance
Chief Financial Officer, Secretary
Date: May 13, 1999 By: Original Signed By)
-------------------- ----------------------
Alton D. Heckaman, Jr.
Vice President,
Controller and Principal
Accounting Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Swift Energy
Company's financial statements contained in its quarterly report on Form 10-Q
for the period ended March 31, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,721,389
<SECURITIES> 0
<RECEIVABLES> 27,605,442
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,999,740
<PP&E> 570,346,498
<DEPRECIATION> (211,376,212)
<TOTAL-ASSETS> 396,701,998
<CURRENT-LIABILITIES> 28,387,263
<BONDS> 0
0
0
<COMMON> 169,949
<OTHER-SE> 109,624,477
<TOTAL-LIABILITY-AND-EQUITY> 396,701,998
<SALES> 21,095,636
<TOTAL-REVENUES> 21,488,087
<CGS> 0
<TOTAL-COSTS> 15,168,617<F1>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,304,377
<INCOME-PRETAX> 1,905,419
<INCOME-TAX> 623,664
<INCOME-CONTINUING> 1,281,755
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,281,755
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
<FN>
<F1>Includes depreciation, depletion and amortization expense and oil and gas
production costs. Excludes general and administrative and interest expense.
</FN>
</TABLE>
