Swift Energy Company reports a loss for 2008 of $260.5 million, or $8.50 per diluted share, which includes a non-cash ceiling test write-down (after-tax) of its oil and gas properties of $473.1 million, or $15.15 per share.
The Company’s loss for 2008 from continuing operations was $257.1 million, or $8.39 per diluted share, which also includes the non-cash ceiling test write-down. Without the effects of this write-down, income from continuing operations (a non-GAAP measure) for the full year 2008 would have been $216.0 million, or $6.92 per diluted share, a 42% increase compared to $152.6 million of income from continuing operations for 2007, or $4.98 per diluted share. (Unless otherwise noted, the production, revenue, expense, cash flow and income information reported for the fourth quarter and full-year 2008 are the results of continuing operations of Swift Energy)
For the fourth quarter 2008, Swift Energy had a loss from continuing operations of $452.5 million, or $14.66 per diluted share. Without the effects of the non-cash ceiling test write-down, income from continuing operations for the fourth quarter 2008 would have been $20.6 million, or $0.66 per diluted share, a decrease of 61% compared to $52.7 million ($1.71 per diluted share) earned in the same quarter in 2007 from continuing operations.
Swift Energy’s full year 2008 production was 10.0 million barrels of oil equivalent (“MMBoe”), which is a 5% decrease compared to 2007 production of 10.6 MMBoe. The Company estimates that approximately 0.8 MMboe of production was shut-in during the third and fourth quarters of 2008 as a result of hurricanes Gustav and Ike which made landfall along the gulf coast in September 2008. Production for the fourth quarter 2008 decreased 12% to 2.5 MMBoe compared to fourth quarter 2007 production of 2.8 MMBoe. The Company estimates that approximately 0.3 MMboe of production remained shut-in during the fourth quarter due to Hurricane Gustav.
Adjusted cash flow (cash flow before working capital changes, a non-GAAP measure) for 2008 increased 25% to a record $559.9 million, or $17.93 per diluted share, compared to $447.7 million, or $14.61 per diluted share, for the full year 2007. Fourth quarter 2008 adjusted cash flow of $85.3 million, or $2.73 per diluted share, decreased 35% compared to $130.3 million of adjusted cash flow, or $4.23 per diluted share, for the fourth quarter of 2007. Swift Energy also reported record revenues of $820.8 million for the full year 2008, an increase of 25% over 2007 revenue levels. Increases in revenues, income without the effects of a non-recurring non-cash ceiling test write-down of its oil and gas properties and cash flow for the full year 2008 are primarily the result of higher commodity prices.
Terry Swift, CEO of Swift Energy, commented, “The fourth quarter of 2008 challenged all oil and gas companies with a global financial crisis, significantly lower commodity pricing and a global recession. We have adjusted our operational and financial strategies to deal with the uncertainties of this new environment. In spite of these events, we believe that we are opportunity rich and will seek to further exploit our prospects. Our recent discovery well at the Shasta prospect in Southeast Louisiana represents another exploration success generated by our large, regional 3D datasets, and the success of the R Bracken 33H horizontal well drilled in the AWP field opens up an opportunity utilizing today’s advancing technologies and completion methods to continue developing and growing an asset we have operated for the past 20 years. Including the recent Shasta discovery, the Company currently has 3,000 – 5,000 net barrels of oil equivalent (“Boe”) per day of shut-in production awaiting pipeline construction or facilities repairs in the Bay de Chene area. We expect 2009 will be a difficult operating environment and will require greater discipline and emphasis on reducing our costs across the enterprise, which we have already begun. I am confident that we have the people, the strategy, the assets and opportunities to emerge from this commodity price downturn a stronger, more profitable company.”
Revenues and Expenses
Swift Energy reported record revenues of $820.8 million for 2008, an increase of 25% over 2007 revenue levels. These increases were primarily attributable to higher commodity prices. Total revenues for the fourth quarter of 2008 decreased 26% to $145.4 million from the $196.4 million of revenues generated in the fourth quarter of 2007.
Full-year 2008 lease operating expenses (“LOE”), before severance and ad valorem taxes averaged $10.44 per barrel of oil equivalent (“Boe”), compared to $6.68 per Boe in 2007, and severance and ad valorem taxes increased to $8.00 per Boe compared to $6.95 in 2007. In the fourth quarter of 2008, LOE averaged $10.10 per Boe, which increased from $7.56 per Boe for these expenses in the fourth quarter of 2007. Severance and ad valorem taxes decreased to $4.57 per Boe from $7.32 per Boe in the same comparable fourth quarter periods due to decreases in crude oil pricing leading to lower severance taxes for Swift Energy’s crude oil production.
Depreciation, depletion and amortization (“DD&A”) expenses increased for the full year 2008 to $22.12 per Boe from $17.75 per Boe in 2007. DD&A expenses increased to $24.45 per Boe in the fourth quarter of 2008 from $19.48 per Boe in the comparable period in 2007, primarily as a result of increases to our oil and gas properties and lower reserve estimates. For the full year 2008, net general and administrative expenses increased to $3.85 per Boe from $3.22 per Boe in 2007. Net general and administrative expenses increased to $3.39 per Boe during the fourth quarter 2008 from $3.11 per Boe in the same period in 2007. These increases in expenses on a per-unit basis were primarily attributable to lower production levels. For the full year 2008, interest expense averaged $3.09 per Boe for 2008 compared to $2.65 per Boe in 2007. Interest expense decreased slightly to $2.93 per Boe in the fourth quarter 2008 compared to $2.99 per Boe for the same period in 2007 due to decreased bank debt levels and lower interest rates under the Company’s line of credit.
Production & Pricing
Swift Energy’s total fourth quarter 2008 production was 2.5 MMBoe, a decrease of 12% when compared to 2007 fourth quarter production of 2.8 MMBoe. Sequentially, production increased 6% from the 2.3 MMBoe produced in the third quarter of 2008. As a result of two substantial hurricanes, Gustav and Ike, the Company estimates that approximately 0.3 MMboe of production was shut-in during the fourth quarter 2008 and approximately 0.8 MMboe of production was shut-in in total during 2008.
Aggregate realized average prices increased for the full year 2008 to $79.00 per Boe from $61.49 per Boe in 2007. In the fourth quarter of 2008, Swift Energy realized an aggregate average price of $47.28 per Boe, a decrease of 33% from fourth quarter 2007 price levels, which averaged $70.33 per Boe.
Swift Energy’s average full year 2008 crude oil prices increased to $101.38 per barrel from $71.92 per barrel in 2007. During fourth quarter 2008, crude oil prices decreased to $58.70 per barrel from $89.23 per barrel realized in the same period of 2007. Swift Energy’s average full year 2008 natural gas prices increased to $8.54 per thousand cubic feet (“Mcf”) from $6.42 per Mcf in 2007. Meanwhile, natural gas prices averaged $5.68 per Mcf in the fourth quarter of 2008, a decrease of 14% from the $6.62 per Mcf received during the same period in 2007. Prices for natural gas liquids (“NGL”) rose to $57.15 per barrel for the full year 2008 from $49.72 per barrel in 2007, while fourth quarter 2008 NGL prices averaged $32.00 per barrel, a 44% decrease over fourth quarter 2007 NGL prices of $56.65.
Drilling Activity
In 2008, Swift Energy drilled and completed 110 of 126 wells for an 87% completion rate with 108 of 123 development wells completed (88% completion rate). During the fourth quarter 2008, Swift Energy completed 29 of 32 wells drilled. In Swift Energy’s Southeast Louisiana core area, 5 wells were drilled in the Lake Washington field while 1 development well and 1 exploratory well were drilled at Bay de Chene. In the Company’s South Texas core area, 12 development wells were drilled and completed in the AWP Olmos field, 5 of 7 development wells drilled were completed in the Briscoe Ranch field, and 4 of 5 wells drilled were completed in the Sun TSH field. In the Central Louisiana/East Texas core area, 1 development well was drilled and completed in the South Bearhead Creek field.
Swift Energy maintains a substantial inventory of drilling projects but currently has no rigs operating. The Company intends to commence its 2009 drilling program once oil field drilling and service costs accurately reflect the current operating and lower pricing environment.
Operations Update
During the fourth quarter 2008, Swift Energy continued to recover from damage caused by Hurricanes Gustav and Ike. As previously disclosed, approximately 0.3 MMboe of production remained shut-in during the fourth quarter 2008 and a total of 0.8 MMboe of production was shut-in as a result of these hurricanes for the full year 2008.
Facilities construction and upgrades in the Bay de Chene field commenced during the fourth quarter allowing for high pressure gas production to resume. Production and processing equipment is being ordered and will be installed during the first half of 2009 on a large concrete barge, similar to one of the barges the Company used to build its Westside facility in Lake Washington. Once constructed, this equipment will sit approximately 18 feet above water level, which should reduce the risks of catastrophic damage from hurricanes and severe storms in the future. The Company expects Bay de Chene production to be at or above pre-storm levels once these new facilities have been fully commissioned during the third quarter of 2009.
In Bay de Chene during the fourth quarter, the BDC VUC #9 well was drilled to 14,809 ft. and encountered 78 ft. of net pay in 1 zone. This well tested with production rates up to 4.8 million cubic feet per day (“MMcf/d”) of gas on a 23/64th inch choke with 1,750 pounds flowing tubing pressure and is currently producing to sales.
The previously announced discovery well at the Shasta prospect in the Company’s Southeast Louisiana core area was tested during the fourth quarter. The well tested at a rate of 11.0 MMcf/d and 739 barrels of oil per day (“Bo/d”) at 11,279 psi on a 14/64 choke. Swift Energy has a 50% working interest in this well. Due to the distance of this discovery from production facilities, further delineation will occur later in 2009 after a pipeline has been built to the Company’s Westside facility in its Lake Washington field. The pipeline will be approximately 8 miles long and will be completed during the first half of 2009.
In the AWP field, located in the Company’s South Texas core area, the Company drilled the R Bracken 33H well in the southern portion of the field to a measured depth of 14,322 ft. This includes a horizontal lateral leg of 3,530 ft. in the Olmos formation. A nine stage simultaneous hydraulic fracture enhancement was performed while completing this well. Peak test rates of 10.4 MMcfe/d were achieved on a 36/64” choke with flowing tubing pressure of 2,725 psi after fracture enhancement and is now flowing to sales at a sustained rate of 6.3 MMcfe/d on a 32/64” choke with flowing tubing pressure of 1880 psi. At least 3 additional horizontal wells are planned to be drilled in the Olmos sands as part of Swift Energy’s 2009 capital program. The results of these wells will be used to determine the extent to which this type of drilling and completion technology will be applicable to the Olmos formation in the AWP and Sun TSH fields as well as acreage the Company has recently acquired in the area. Further analysis of the R Bracken 33H will be conducted to determine the effectiveness of the multi stage fracture enhancements, decline rates associated with the reservoir and potential implications on future reserves bookings. The Company currently has approximately 120,000 acres leased in South Texas, which may be prospective for further Olmos development. During 2009, Swift Energy will also drill a well to test the potential of the Eagleford Shale formation. The Company currently has approximately 45,000 acres leased in areas that may be prospective for this formation. Included in these acreage numbers are 16,203 net acres the Company has acquired in 2009, which are prospective for both horizons.
Reserve Estimates & Ceiling Test Write-Down
Swift Energy’s year-end 2008 reserves consist of 116.4 MMboe (698.6 Bcfe). This is 13% less than 2007 year-end reserves from continuing operations of 133.8 MMboe (802.7 Bcfe). Of these reserves, 53% were proved developed compared to 47% of reserves classified as proved developed at year-end 2007. The decrease in year end reserve volumes is attributable to a combination of price related and technical revisions. Swift Energy also estimates that at year-end 2008, the Company had 51.1 MMboe of probable reserves and 68.9 MMboe of possible reserves which conform to the Petroleum Reserves Definitions approved by the Society of Petroleum Engineers, Inc. (see cautionary statement regarding probable and possible reserves on page 6). Swift Energy’s proved, probable and possible reserves are prepared by internal engineers and are audited annually by its outside engineering firm, H. J. Gruy and Associates. Swift Energy’s year-end 2008 proved reserves totaled approximately $1.4 billion of present value discounted at 10% per year (PV-10, a non-GAAP measure - see page 6 for reconciliation to the GAAP measure), compared to $3.8 billion PV-10 for the Company’s 2007 year-end proved reserves from continuing operations. Pricing for reserves and PV-10 calculations utilized $44.09 per barrel for crude oil and $4.96 per thousand cubic feet (“Mcf”) for natural gas at year-end 2008, compared to $93.24 per barrel and $6.65 per Mcfe at year-end 2007.
Swift Energy’s reserves from continuing operations are comprised 43% of crude oil, 42% of natural gas and 15% of natural gas liquids. These percentages are relatively unchanged from 2007 year-end reserves.
Swift Energy uses the full cost method of accounting for its oil and gas properties. As a result of low year-end 2008 commodity prices, Swift Energy recorded an after-tax non-cash ceiling test write-down of its oil and gas properties of $473.1 million for fourth quarter 2008. The pre-tax non-cash ceiling test write down of its oil and gas properties was $754.3. Neither the Company’s current banking relationships nor bank covenants are impacted by this non-cash charge
2009 Outlook
Swift Energy currently plans to balance its 2009 capital expenditures and 2009 cash flow with current spending plans set at $125 million to $150 million in total capital expenditures in 2009, net of minor non-core dispositions and excluding any property acquisitions. Approximately 35% of the capital budget is targeted for activities in the Company’s Southeast Louisiana core area, while about 35% is planned for activities in the South Texas core area. For 2009, Swift Energy is targeting production to decrease 1.0 to 1.5 MMboe and proved reserves to decrease 2.0 to 5.0 MMboe over respective 2008 levels.