UNITED STATES
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, 2006
Commission File Number 1-8754
SWIFT ENERGY COMPANY
(Exact Name of Registrant as Specified in its Charter)
TEXAS 20-3940661
(State of Incorporation) (I.R.S. Employer Identification No.)
16825 Northchase Drive, Suite 400
Houston, Texas 77060
(Address of principal executive offices) (Zip Code)
(281) 874-2700
(Registrant's telephone number, including area code)
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 Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
---- ----
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer Non-accelerated filer
---- ---- ----
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No x
---- ----
Indicate the number of shares outstanding of each of the Issuer's classes
of common stock, as of the latest practicable date.
Common Stock 29,133,803 Shares
($.01 Par Value) (Outstanding at April 30, 2006)
(Class of Stock)
1
SWIFT ENERGY COMPANY
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets 3
- March 31, 2006 and December 31, 2005
Condensed Consolidated Statements of Income 4
- For the Three month periods ended March 31, 2006 and 2005
Condensed Consolidated Statements of Stockholders' Equity
- For the Three month periods ended March 31, 2006 and
year ended December 31, 2005 5
Condensed Consolidated Statements of Cash Flows 6
- For the Three month periods ended March 31, 2006 and 2005
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 23
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
Item 4. Controls and Procedures 34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 1A. Risk Factors 35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders None
Item 5. Other Information 35
Item 6. Exhibits 36
SIGNATURES 37
2
Condensed Consolidated Balance Sheets
Swift Energy Company and Subsidiaries
March 31, December 31, 2005
2006
----------------- -------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 55,227,167 $ 53,004,562
Accounts receivable-
Oil and gas sales 51,633,643 45,518,260
Joint interest owners 4,765,417 1,082,187
Other Receivables 9,850,320 3,795,080
Deferred tax asset 22,130,793 ---
Other current assets 18,578,260 11,655,046
----------------- -------------------
Total Current Assets 162,185,600 115,055,135
----------------- -------------------
Property and Equipment:
Oil and gas, using full-cost accounting
Proved properties 1,802,196,935 1,731,866,298
Unproved properties 100,954,114 87,553,220
----------------- -------------------
1,903,151,049 1,819,419,518
Furniture, fixtures, and other equipment 20,673,961 15,313,277
----------------- -------------------
1,923,825,010 1,834,732,795
Less - Accumulated depreciation, depletion, and amortization (791,057,946) (755,699,056)
----------------- -------------------
1,132,767,064 1,079,033,739
----------------- -------------------
Other Assets:
Debt issuance costs 7,733,329 8,026,780
Restricted assets 2,219,173 2,296,968
----------------- -------------------
9,952,502 10,323,748
----------------- -------------------
$ 1,304,905,166 $ 1,204,412,622
================= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 50,549,403 $ 51,973,004
Accrued capital costs 47,893,579 30,073,728
Accrued interest 10,333,272 8,508,196
Undistributed oil and gas revenues 4,320,520 7,866,086
----------------- -------------------
Total Current Liabilities 113,096,774 98,421,014
----------------- -------------------
Long-Term Debt 350,000,000 350,000,000
Deferred Income Taxes 171,170,929 129,306,891
Asset Retirement Obligation 19,500,324 19,095,368
Lease Incentive Obligation 975,212 271,182
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, none
outstanding --- ---
Common stock, $.01 par value, 85,000,000 shares authorized,
29,541,526 and 29,458,974 shares issued, and 29,114,440
and 29,009,530 shares outstanding, respectively 295,415 294,590
Additional paid-in capital 363,945,910 365,085,695
Treasury stock held, at cost, 427,086 and 449,444 shares,
respectively (6,124,944) (6,445,586)
Unearned compensation --- (5,849,820)
Retained earnings 291,617,263 254,302,757
Accumulated other comprehensive income (loss), net of income tax 428,283 (69,469)
----------------- -------------------
650,161,927 607,318,167
----------------- -------------------
$ 1,304,905,166 $ 1,204,412,622
================= ===================
See accompanying notes to condensed consolidated financial statements.
3
Condensed Consolidated Statements of Income
Swift Energy Company and Subsidiaries
Three Months Ended March 31,
2006 2005
----------------- -----------------
Revenues:
Oil and gas sales $ 134,952,993 $ 95,521,333
Price-risk management and other, net 1,215,938 99,351
----------------- -----------------
136,168,931 95,620,684
----------------- -----------------
Costs and Expenses:
General and administrative, net 7,686,909 4,874,308
Depreciation, depletion, and amortization 35,406,497 24,205,378
Accretion of asset retirement obligation 291,515 186,507
Lease operating cost 14,394,489 11,048,782
Severance and other taxes 14,753,606 9,203,081
Interest expense, net 5,860,919 6,344,009
----------------- -----------------
78,393,935 55,862,065
----------------- -----------------
Income Before Income Taxes 57,774,996 39,758,619
Provision for Income Taxes 20,460,490 14,069,467
----------------- -----------------
Net Income $ 37,314,506 $ 25,689,152
================= =================
Per Share Amounts-
Basic: Net Income $ 1.28 $ 0.91
================= =================
Diluted: Net Income $ 1.24 $ 0.89
================= =================
Weighted Average Shares Outstanding 29,071,764 28,160,949
================= =================
See accompanying notes to condensed consolidated financial statements.
4
Condensed Consolidated Statements of Stockholders' Equity
Swift Energy Company and Subsidiaries
Additional Other
Common Paid-In Treasury Unearned Retained Comprehensive
Stock(1) Capital Stock Compensation Earnings Income(Loss) Total
--------- ------------- ------------ ------------ ------------ ------------- -------------
Balance, December 31, 2004 $ 285,706 $ 343,536,298 $ (6,896,245) $ (1,728,585) $138,524,301 $ 450,665 $ 474,172,140
Stock issued for benefit
plans(31,424 shares) --- 435,134 450,659 --- --- --- 885,793
Stock options exercised
(840,847 shares) 8,409 9,804,555 --- --- --- --- 9,812,964
Tax benefits from exercise
of stock options --- 4,366,236 --- --- --- --- 4,366,236
Employee stock purchase
plan (32,495 shares) 325 642,354 --- --- --- --- 642,679
Issuance of restricted stock
(15,000 shares) 150 --- --- --- --- --- 150
Grants of restricted stock
(158,500 shares) --- 6,668,608 --- (6,072,008) --- --- 596,600
Forfeitures of restricted
stock --- (367,490) --- 367,490 --- --- ---
Amortization of restricted
stock compensation --- --- --- 1,583,283 --- --- 1,583,283
Comprehensive Income:
Net income --- --- --- --- 115,778,456 --- 115,778,456
Other Comprehensive Income --- --- --- --- --- (520,134) (520,134)
-------------
Total Comprehensive Income --- --- --- --- --- --- 115,258,322
--------- ------------- ------------ ------------ ------------ ------------- -------------
Balance, December 31, 2005 $ 294,590 $ 365,085,695 $ (6,445,586) $ (5,849,820) $254,302,757 $ (69,469) $ 607,318,167
========= ============= ============ ============ ============ ============= =============
Stock issued for benefit
plans (22,358 shares) --- 714,049 320,642 --- --- --- 1,034,691
Stock options exercised
(68,372 shares) 683 984,297 --- --- --- --- 984,980
Adoption of SFAS No. 123R --- (5,875,280) --- 5,849,820 --- --- (25,460)
Excess tax benefits from
stock-based awards --- 550,218 --- --- --- --- 550,218
Issuance of restricted stock
(14,180 shares) 142 (142) --- --- --- --- ---
Amortization of stock
compensation --- 2,487,073 --- --- --- --- 2,487,073
Comprehensive Income:
Net income --- --- --- --- 37,314,506 --- 37,314,506
Other Comprehensive Income --- --- --- --- --- 497,752 497,752
-------------
Total Comprehensive
Income --- --- --- --- --- --- 37,812,258
--------- ------------- ------------ ------------ ------------ ------------- -------------
Balance, March 31, 2006 $ 295,415 $ 363,945,910 $ (6,124,944) $ --- $291,617,263 $ 428,283 $ 650,161,927
========= ============= ============ ============ ============ ============= =============
(1) $.01 Par Value
See accompanying notes to condensed consolidated financial statements.
5
Condensed Consolidated Statements of Cash Flows
Swift Energy Company and Subsidiaries
Three Months Ended March 31,
------------------------------------
2006 2005
----------------- ----------------
Cash Flows from Operating Activities:
Net income $ 37,314,506 $ 25,689,152
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation, depletion, and amortization 35,406,497 24,205,378
Accretion of asset retirement obligation 291,515 186,507
Deferred income taxes 19,992,384 14,069,467
Stock-based compensation expense 1,710,417 95,836
Other (3,120,456) 889,553
Change in assets and liabilities-
Increase in accounts receivable (9,798,613) (18,122)
Decrease in accounts payable and accrued
liabilities (189,060) (1,603,411)
Increase in income taxes payable 468,106 ---
Increase in accrued interest 1,825,076 1,137,196
----------------- ----------------
Net Cash Provided by Operating Activities 83,900,372 64,651,556
----------------- ----------------
Cash Flows from Investing Activities:
Additions to property and equipment (77,963,107) (44,526,775)
Proceeds from the sale of property and equipment 45,962 121,777
Net cash distributed as operator of oil and gas properties (5,587,868) (7,913,657)
Net cash received (distributed) as operator of
partnerships and joint ventures 339,655 (884,798)
Other (47,607) 4,977
----------------- ----------------
Net Cash Used in Investing Activities (83,212,965) (53,198,476)
----------------- ----------------
Cash Flows from Financing Activities:
Payments of bank borrowings --- (7,500,000)
Net proceeds from issuances of common stock 984,980 841,394
Excess tax benefits from stock-based awards 550,218 ---
----------------- -----------------
Net Cash Provided by (Used in)Financing
Activities 1,535,198 (6,658,606)
----------------- -----------------
Net Increase in Cash and Cash Equivalents $ 2,222,605 $ 4,794,474
Cash and Cash Equivalents at Beginning of Period 53,004,562 4,920,118
----------------- ----------------
Cash and Cash Equivalents at End of Period $ 55,227,167 $ 9,714,592
================= ================
Supplemental Disclosures of Cash Flows Information:
Cash paid during period for interest, net of amounts $ 3,747,050 $ 4,923,109
capitalized
Cash paid during period for income taxes $ --- $ ---
See accompanying notes to condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SWIFT ENERGY COMPANY AND SUBSIDIARIES
(1) General Information
The condensed consolidated financial statements included herein have
been prepared by Swift Energy Company and reflect necessary adjustments,
all of which were of a recurring nature, and are in the opinion of our
management necessary for a fair presentation. Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United
States have been omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. We believe 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 Annual Report on Form 10-K as filed with
the Securities and Exchange Commission.
(2) Summary of Significant Accounting Policies
Holding Company Structure
In December 2005, we implemented a holding company structure pursuant
to Texas and federal law in a manner designed to be a non-taxable
transaction. The new parent holding company assumed the Swift Energy
Company name and its common stock and continued to trade on the New York
and Pacific Stock Exchanges. The purposes of this new holding company
structure are to separate Swift Energy's domestic and international
operations to better reflect management practices, to improve our
economics, and to provide greater administrative and organizational
flexibility. Under the new organizational structure, four new
subsidiaries were formed with the Texas parent holding company wholly
owning three Delaware subsidiaries, which in turn wholly own Swift
Energy's operating subsidiaries. Swift Energy Operating, LLC is the
operator of record for Swift Energy's domestic properties. Swift Energy's
name, charter, bylaws, officers, board of directors, authorized shares
and shares outstanding remain substantially identical. The Company's
international operations continue to be conducted through Swift Energy
International, Inc. Swift Energy amended its bank credit agreement, debt
indentures and various other plans and documents to accommodate the
internal reorganization, but the Company's day-to-day conduct of business
was not impacted. Accordingly, there was no impact on our financial
position or results of operations.
Property and Equipment
We follow 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 exploration, development, and
acquisition of oil and gas reserves are capitalized. Such costs may be
incurred both prior to and after the acquisition of a property and
include lease acquisitions, geological and geophysical services,
drilling, completion, and equipment. Internal costs incurred that are
directly identified with exploration, development, and acquisition
activities undertaken by us for our own account, and which are not
related to production, general corporate overhead, or similar activities,
are also capitalized. For the three months ended March 31, 2006 and 2005,
such internal costs capitalized totaled $6.0 million and $4.1 million,
respectively. Interest costs are also capitalized to unproved oil and gas
properties. For the three months ended March 31, 2006 and 2005,
capitalized interest on unproved properties totaled $2.1 million, and
$1.8 million, respectively. Interest not capitalized and 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 involving a significant amount
of reserves or where the proceeds from the sale of oil and gas properties
would significantly alter the relationship between capitalized costs and
proved reserves of oil and gas attributable to a cost center. Internal
costs associated with selling properties are expensed as incurred.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
Future development costs are estimated property-by-property based on
current economic conditions and are amortized to expense as our
capitalized oil and gas property costs are amortized.
We compute the provision for depreciation, depletion, and amortization
of oil and gas properties by the unit-of-production method. Under this
method, we compute the provision by multiplying the total unamortized
costs of oil and gas properties--including future development costs, gas
processing facilities, and both capitalized asset retirement obligations
and undiscounted abandonment costs of wells to be drilled, net of salvage
values, 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 at
the beginning of the period. This calculation is done on a
country-by-country basis, and the period over which we will amortize
these properties is dependent on our production from these properties in
future years. Furniture, fixtures, and other equipment, held at cost, are
depreciated by the straight-line method at rates based on the estimated
useful lives of the property, which range between three and 20 years.
Repairs and maintenance are charged to expense as incurred. Renewals and
betterments are capitalized.
Geological and geophysical (G&G) costs incurred on developed properties
are recorded in "Proved properties" and therefore subject to
amortization. G&G costs incurred that are directly associated with
specific unproved properties are capitalized in "Unproved properties" and
evaluated as part of the total capitalized costs associated with a
prospect. 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. In determining whether such costs should
be impaired, we evaluate current drilling results, lease expiration
dates, current oil and gas industry conditions, international economic
conditions, capital availability, foreign currency exchange rates, the
political stability in the countries in which we have an investment, and
available geological and geophysical information. Any impairment assessed
is added to the cost of proved properties being amortized. To the extent
costs accumulate in countries where there are no proved reserves, any
costs determined by management to be impaired are charged to expense.
Full-Cost Ceiling Test.
At the end of each quarterly reporting period, the unamortized cost of
oil and gas properties, including gas processing facilities, capitalized
asset retirement obligations, net of related salvage values and deferred
income taxes, and excluding the recognized asset retirement obligation
liability is limited to the sum of the estimated future net revenues from
proved properties, excluding cash outflows from recognized asset
retirement obligations, including future development and abandonment
costs of wells to be drilled, using period-end prices, adjusted for the
effects of hedging, discounted at 10%, and the lower of cost or fair
value of unproved properties, adjusted for related income tax effects
("Ceiling Test"). Our hedges at March 31, 2006 consisted of natural gas
and crude oil price floors with strike prices higher than the period end
price but did not materially affect prices used in this calculation. This
calculation is done on a country-by-country basis.
The calculation of the Ceiling Test and provision for depreciation,
depletion, and amortization ("DD&A") 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 estimates. Accordingly, reserves estimates
are often different from the quantities of oil and gas that are
ultimately recovered.
Given the volatility of oil and gas prices, it is reasonably possible
that our estimate of discounted future net cash flows from proved oil and
gas reserves could change in the near term. If oil and gas prices decline
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
from our period-end prices used in the Ceiling Test, even if only for a
short period, it is possible that non-cash write-downs of oil and gas
properties could occur in the future.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Swift Energy Company and its wholly owned subsidiaries, which are
engaged in the exploration, development, acquisition, and operation of
oil and natural gas properties, with a focus on inland waters and onshore
oil and natural gas reserves in Louisiana and Texas, as well as onshore
oil and natural gas reserves in New Zealand. Our undivided interests in
gas processing plants, and investments in oil and gas limited
partnerships where we are the general partner are accounted for using the
proportionate consolidation method, whereby our proportionate share of
each entity's assets, liabilities, revenues, and expenses are included in
the appropriate classifications in the accompanying consolidated
financial statements. Intercompany balances and transactions have been
eliminated in preparing the accompanying consolidated financial
statements.
Revenue Recognition
Oil and gas revenues are recognized when production is sold to a
purchaser at a fixed or determinable price, when delivery has occurred
and title has transferred, and if collectibility of the revenue is
probable. Processing costs for natural gas and natural gas liquids (NGLs)
that are paid in-kind are deducted from revenues. The Company uses the
entitlement method of accounting in which the Company recognizes its
ownership interest in production as revenue. If our sales exceed our
ownership share of production, the natural gas balancing payables are
reported in "Accounts payable and accrued liabilities" on the
accompanying balance sheet. Natural gas balancing receivables are
reported in "Other current assets" on the accompanying balance sheet when
our ownership share of production exceeds sales. As of March 31, 2006, we
did not have any material natural gas imbalances.
Accounts Receivable
We assess the collectibility of accounts receivable, and based on our
judgment, we accrue a reserve when we believe a receivable may not be
collected. At both March 31, 2006 and December 31, 2005, we had an
allowance for doubtful accounts of less than $0.1 million. The allowance
for doubtful accounts has been deducted from the total "Accounts
receivable" balances on the accompanying balance sheets. Receivables
related to insurance reimbursement are computed in accordance with
applicable accounting guidance; and we monitor our costs incurred and
their collectibility under our insurance policies and believe all amounts
recorded are recoverable.
Inventories
We value inventories at the lower of cost or market value. Cost of
crude oil inventory is determined using the weighted average method and
all other inventory is accounted for using the first in, first out method
("FIFO"). The major categories of inventories, which are included in
"Other current assets" on the accompanying balance sheets, are shown as
follows:
Balance at Balance at
March 31, 2006 December 31,2005
(000's) (000's)
--------------- ----------------
Materials, Supplies and Tubulars... $ 12,428 $ 8,494
Crude Oil .......................... 772 916
--------------- ----------------
Total .........................$ 13,200 $ 9,410
=============== ================
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States (GAAP) requires us to
make estimates and assumptions that affect the reported amount of certain
assets and liabilities and the reported amounts of certain revenues and
expenses during each reporting period. We believe our estimates and
assumptions are reasonable; however, such estimates and assumptions are
subject to a number of risks and uncertainties that may cause actual
results to differ materially from such estimates. Significant estimates
underlying these financial statements include:
o the estimated quantities of proved oil and natural gas reserves used to
compute depletion of oil and natural gas properties and the related
present value of estimated future net cash flows there-from,
o accruals related to oil and gas revenues, capital expenditures and
lease operating expenses,
o estimates of insurance recoveries related to property damage,
o estimates of stock compensation expense,
o the estimated future cost and timing of asset retirement obligations,
and
o estimates made in our income tax calculations.
While we are not aware of any material revisions to any of our
estimates, there will likely be future revisions to our estimates
resulting from matters such as changes in ownership interests, payouts,
joint venture audits, re-allocations by purchasers or pipelines, or other
corrections and adjustments common in the oil and gas industry, many of
which require retroactive application. These types of adjustments cannot
be currently estimated and will be recorded in the period during which
the adjustment occurs.
Income Taxes
Under SFAS No. 109, "Accounting for Income Taxes," deferred taxes are
determined based on the estimated future tax effects of differences
between the financial statement and tax basis of assets and liabilities,
given the provisions of the enacted tax laws. The effective tax rate for
the three months ended March 31, 2006 and 2005 was higher than the U.S.
Federal statutory tax rate primarily due to state income taxes, partially
offset by reductions from the New Zealand statutory rate attributable to
the currency effect on the New Zealand deferred tax calculation. As of
March 31, 2006, we believe we will utilize all of our domestic operating
loss carryforwards during the 2006 tax year, and these amounts are
classified as current in the "Deferred tax asset" account on the
accompanying balance sheet.
Accounts Payable and Accrued Liabilities
Included in "Accounts payable and accrued liabilities," on the
accompanying balance sheets, at March 31, 2006 and December 31, 2005 are
liabilities of approximately $12.1 million and $9.9 million,
respectively, representing the amount by which checks issued, but not
presented to the Company's banks for collection, exceeded balances in the
applicable disbursement bank accounts.
Accumulated Other Comprehensive Income (Loss), Net of Income Tax
We follow the provisions of SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting comprehensive income.
In addition to net income, comprehensive income or loss includes all
changes to equity during a period, except those resulting from
investments and distributions to the owners of the Company. At March 31,
2006, we recorded $0.4 million, net of taxes of $0.2 million, of
derivative gains in "Accumulated other comprehensive income (loss), net
of income tax" on the accompanying balance sheet. The components of
accumulated other comprehensive Income (loss) and related tax effects for
2006 were as follows:
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
Gross Value Tax Effect Net of Tax Value
------------------- ----------------- -------------------
Other comprehensive income at December 31, 2005 $ (110,094) $ 40,625 $ (69,469)
Change in fair value of cash flow hedges (104,721) 38,642 (66,079)
Effect of cash flow hedges settled
during the period 889,687 (325,856) 563,831
------------------- ----------------- -------------------
Other comprehensive income at March 31, 2006 $ 674,872 $ (246,589) $ 428,283
=================== ================= ===================
Total comprehensive income was $37.8 million and $24.7 million for the
first quarter of 2006 and 2005, respectively.
Price-Risk Management Activities
The Company follows SFAS No. 133, which requires that changes in the
derivative's fair value are recognized currently in earnings unless
specific hedge accounting criteria are met. The statement also
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded
in other contracts) is recorded in the balance sheet as either an asset
or a liability measured at its fair value. Hedge accounting for a
qualifying hedge allows the gains and losses on derivatives to offset
related results on the hedged item in the income statements and requires
that a company formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. Changes in the fair value
of derivatives that do not meet the criteria for hedge accounting, and
the ineffective portion of the hedge, are recognized currently in income.
We have a price-risk management policy to use derivative instruments to
protect against declines in oil and gas prices, mainly through the
purchase of price floors and collars. During the first quarter of 2006
and 2005, we recognized a net gain of $0.9 million and a net loss of $0.1
million, respectively, relating to our derivative activities. This
activity is recorded in "Price-risk management and other, net" on the
accompanying statements of income. At March 31, 2006, the Company had
recorded $0.4 million, net of taxes of $0.2 million, of derivative gains
in "Accumulated other comprehensive income (loss), net of income tax" on
the accompanying balance sheet. This amount represents the change in fair
value for the effective portion of our hedging transactions that
qualified as cash flow hedges. The ineffectiveness reported in
"Price-risk management and other, net" for the first quarters of 2006 and
2005 were not material. We expect to reclassify all amounts currently
held in "Accumulated other comprehensive income (loss), net of income
tax" into the statement of income within the next three months when the
forecasted sale of hedged production occurs.
At March 31, 2006, we had in place price floors in effect for April
2006 through the June 2006 contract month for natural gas that cover a
portion of our domestic natural gas production for April 2006 to June
2006. The natural gas price floors cover notional volumes of 1,275,000
MMBtu, with a weighted average floor price of $8.00 per MMBtu. Our
natural gas price floors in place at March 31, 2006 are expected to cover
approximately 35% to 45% of our estimated domestic natural gas production
from April 2006 to June 2006.
When we entered into these transactions discussed above, they were
designated as a hedge of the variability in cash flows associated with
the forecasted sale of natural gas production. Changes in the fair value
of a hedge that is highly effective and is designated and documented and
qualifies as a cash flow hedge, to the extent that the hedge is
effective, are recorded in "Accumulated other comprehensive income
(loss), net of income tax." When the hedged transactions are recorded
upon the actual sale of oil and natural gas, these gains or losses are
reclassified from "Accumulated other comprehensive income (loss), net of
income tax" and recorded in "Price-risk management and other, net" on the
accompanying statement of income. The fair value of our derivatives is
computed using the Black-Scholes-Merton option pricing model and is
periodically verified against quotes from brokers. The fair value of
these instruments at March 31, 2006, was $1.1 million and is recognized
on the accompanying balance sheet in "Other current assets."
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
Supervision Fees
Consistent with industry practice, we charge a supervision fee to the
wells we operate including our wells in which we own up to a 100% working
interest. Supervision fees are recorded as a reduction to general and
administrative, net based on our estimate of the costs incurred to
operate the wells. The total amount of supervision fees charged to the
wells we operate was $2.0 million in the first quarter of 2006 and $1.7
million in the first quarter of 2005.
Asset Retirement Obligation
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." The
statement requires entities to record the fair value of a liability for
legal obligations associated with the retirement obligations of tangible
long-lived assets in the period in which it is incurred. When the
liability is initially recorded, the carrying amount of the related
long-lived asset is increased. The liability is discounted from the year
the well is expected to deplete. Over time, accretion of the liability is
recognized each period, and the capitalized cost is depreciated on a
unit-of-production basis over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for
its recorded amount or incurs a gain or loss upon settlement. This
standard requires us to record a liability for the fair value of our
dismantlement and abandonment costs, excluding salvage values. Based on
our experience and analysis of the oil and gas services industry, we have
not factored a market risk premium into our asset retirement obligation.
SFAS No. 143 was adopted by us effective January 1, 2003. The following
provides a roll-forward of our asset retirement obligation:
2006 2005
----------------- ----------------
Asset Retirement Obligation recorded as of January 1 ..................$ 19,356,367 $ 17,639,136
Accretion expense for the three months ended March 31 ............... 291,515 186,507
Liabilities incurred for new wells and facilities construction ...... 174,139 29,622
Reductions due to sold, or plugged and abandoned wells .............. --- (166,452)
Decrease due to currency exchange rate fluctuations ................. (60,697) (11,960)
----------------- ----------------
Asset Retirement Obligation as of March 31 ............................$ 19,761,324 $ 17,676,853
----------------- ----------------
At both March 31, 2006 and December 31, 2005, approximately $0.3
million of our asset retirement obligation is classified as a current
liability in "Accounts payable and accrued liabilities" on the
accompanying balance sheets.
New Accounting Pronouncements
EITF 04-05 addresses when a limited partnership should be consolidated
by its general partner. EITF 04-05 presumes that a sole general partner
in a limited partnership controls the limited partnership, and therefore
should consolidate the limited partnership. The presumption of control
can be overcome if the limited partners have (a) the substantive ability
to remove the sole general partner or otherwise dissolve the limited
partnership or (b) substantive participating rights. The EITF reached a
tentative conclusion on the circumstances in which either kick-out rights
or participating rights would be considered substantive and preclude
consolidation by the general partner. The FASB ratified the EITF
consensus at the June 2005 EITF meeting. This EITF was adopted January 1,
2006 and did not have a material impact on our consolidated financial
statements because we believe our limited partners have substantive
kick-out rights under paragraph B20 of FIN 46R.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections: a replacement of APB Opinion No. 20 and FASB Statement No.
3. SFAS No. 154 requires voluntary changes in accounting principles to be
applied retrospectively, unless it is impracticable. SFAS No. 154's
retrospective application requirement replaces APB 20's requirement to
recognize most voluntary changes in accounting principle by including in
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
net income of the period of the change the cumulative effect of changing
to the new accounting principle. If retrospective application for all
prior periods is impracticable, the method used to report the change and
the reason the retrospective application is impracticable are to be
disclosed.
Under SFAS No. 154, retrospective application will be the transition
method in the unusual instance that a newly issued accounting
pronouncement does not provide specific transition guidance. It is
expected that many pronouncements will specify transition methods other
than retrospective. SFAS No. 154 is effective for accounting changes made
in fiscal years beginning after December 15, 2005, and the adoption of
this statement had no impact on our financial position or results of
operations.
In July 2005, the FASB issued an exposure draft "Accounting for
Uncertain Tax Positions, a proposed interpretation of FASB Statement No.
109." The proposed interpretation would apply to all open tax positions
under FASB No. 109. The conclusions in this interpretation include:
initial recognition of tax benefits, recognition and de-recognition of
tax positions, measurement of tax benefits and classifications of tax
liabilities. The comment period on this exposure draft ended in September
2005, and we are currently assessing the impact, if any, that this
interpretation would have on our financial position and results of
operations. The FASB has not issued an effective date for this
interpretation, and a final standard will likely be issued in 2006.
(3) Share-Based Compensation
We have various types of share-based compensation plans, refer to Note
6 of our consolidated financial statements in our Annual Report on Form
10-K for the fiscal year ended December 31, 2005, for additional
information related to these share-based compensation plans.
Effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123 (R), "Share-Based Payment" (SFAS No.
123R) utilizing the modified prospective approach. Prior to the adoption
of SFAS No. 123R, we accounted for stock option grants in accordance with
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees" (the intrinsic value method), and accordingly,
recognized no compensation expense for employee stock option grants.
Under the modified prospective approach, SFAS No. 123R applies to new
awards and to awards that were outstanding on January 1, 2006 as well as
those that are subsequently modified, repurchased or cancelled. Under the
modified prospective approach, compensation cost recognized for the three
months ended March 31, 2006 includes compensation cost for all
share-based awards granted prior to, but not yet vested as of January 1,
2006, based on the grant-date fair value estimated in accordance with the
original provisions of SFAS No. 123, and compensation cost for all
share-based awards granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS
No. 123R. Prior periods were not restated to reflect the impact of
adopting the new standard.
As a result of adopting SFAS No. 123R on January 1, 2006, our income
before taxes, net income and basic and diluted earnings per share for the
three months ended March 31, 2006, were $1.1 million, $0.7 million,
$0.02, and $0.02 lower, respectively, than if we had continued to account
for share-based compensation under APB Opinion No. 25 for our stock
option grants. Upon adoption of SFAS 123R, we recorded an immaterial
cumulative effect of a change in accounting principle as a result of our
change in policy from recognizing forfeitures as they occur to one
recognizing expense based on our expectation of the amount of awards that
will vest over the requisite service period for our restricted stock
awards. This amount was recorded in "General and Administrative, net" in
the accompanying condensed consolidated statements of operations.
We receive a tax deduction for certain stock option exercises during
the period the options are exercised, generally for the excess of the
price at which the stock is sold over the exercise price of the options.
In addition, we receive an additional tax deduction when restricted stock
vests at a higher value than the value used to recognize compensation
expense at the date of grant. Prior to adoption of SFAS No. 123R, we
reported all tax benefits resulting from the award of equity instruments
as operating cash flows in our condensed consolidated statements of cash
flows. In accordance with SFAS No. 123R, we are required to report excess
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
tax benefits from the award of equity instruments as financing cash
flows, these benefits totaled $0.6 million for the three months ended
March 31, 2006.
Net cash proceeds from the exercise of stock options were $1.0 million
for the three months ended March, 31, 2006. The actual income tax benefit
realized from stock option exercises was $0.3 million for the same
period.
Stock compensation expense for both stock options and restricted stock
issued to both employees and non-employees is recorded in "General and
Administrative, net" in the accompanying condensed consolidated statement
of income, and was $1.7 million and $0.1 million for the three months
ended March 31, 2006 and 2005, respectively. We view all awards of stock
compensation as a single award with an expected life equal to the average
expected life of component awards and amortize the award on a
straight-line basis over the life of the award.
The following table illustrates the effect on March 31, 2005 operating
results and per share information had the Company accounted for
share-based compensation in accordance with SFAS No. 123R. Our net income
and earnings per share would have been adjusted to the following pro
forma amounts:
Three Months Ended
March 31, 2005
--------------------------
Net Income: As Reported .................................. $25,689,152
Stock-based employee compensation expense
determined under fair value method
for all awards, net of tax ................ (859,151)
--------------------------
Pro Forma .................................... $24,830,001
Basic EPS: As Reported .................................. $.91
Pro Forma .................................... $.88
Diluted EPS: As Reported .................................. $.89
Pro Forma .................................... $.86
Stock Options
We use the Black-Scholes-Merton option pricing model to estimate the
fair value of stock-option awards with the following weighted-average
assumptions for the indicated periods.
Three Months Ended
March 31,
----------------------------
2006 2005
----------------------------
Dividend yield 0% 0%
Expected volatility 40% 40%
Risk-free interest rate 4.8% 3.5%
Expected life of options (in years) 6.3 3.2
Weighted-average grant-date fair value $ 21.02 $ 8.40
The expected term has been calculated using the Securities and Exchange
Commission Staff's shortcut approach from Staff Accounting Bulleting No.
107. We have analyzed historical volatility and based on an analysis of
all relevent factors use a three-year period to estimate expected
volatility of our stock option grants.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
At March 31, 2006, there was $5.9 million of unrecognized compensation
cost related to stock options which is expected to be recognized over a
weighted-average period of 1.7 years.
The following table represents stock option activity for the three
months ended March 31, 2006:
March 31, 2006
--------------------------------------
Wtd. Avg. Wtd. Avg.
Exer. Contract
Shares Price Life
----------- --------- ------------
Options outstanding, beginning of period 2,118,179 $ 21.28
Options granted 139,339 $ 44.14
Options canceled (24,440) $ 19.02
Options exercised (71,785) $ 17.59
----------- ------------
Options outstanding, end of period 2,161,293 $ 22.87 5.8 Yrs
=========== ============
Options exercisable, end of period 1,140,761 $ 21.52 4.6 Yrs
=========== ============
The aggregate intrinsic value of options outstanding at March 31, 2006
was $33.2 million, and the aggregate intrinsic value of options
exercisable was $18.2 million. Total intrinsic value of options exercised
was $1.9 million for the three months ended March 31, 2006.
Restricted Stock
The plans, as described in Note 6 of our consolidated financial
statements in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2005, allow for the issuance of restricted stock awards that
may not be sold or otherwise transferred until certain restrictions have
lapsed. The unrecognized compensation cost related to these awards is
expected to be expensed over the period the restrictions lapse (generally
18 months to five years).
The compensation expense for these awards was determined based on the
market price of our stock at the date of grant applied to the total
numbers of shares that were anticipated to fully vest. As of March 31,
2006, we have unrecognized compensation expense of $10.0 million
associated with these awards which are expected to be recognized over a
weighted-average period of 2.5 years.
The following table represents restricted stock activity for the three
months ended March 31, 2006:
March 31, 2006
-------------------------
Wtd.
Avg.
Grant
Shares Price
----------- ------------
Restricted shares outstanding, beginning
of period 236,950 $ 34.79
Restricted shares granted 114,980 $ 43.68
Restricted shares canceled (10,230) $ 39.51
Restricted shares vested (14,180) $ 25.18
Restricted shares outstanding, end of
period 327,520 $ 41.56
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
(4) Earnings Per Share
Basic earnings per share ("Basic EPS") have been computed using the
weighted average number of common shares outstanding during the
respective periods. Diluted earnings per share ("Diluted EPS") for all
periods also assumes, as of the beginning of the period, exercise of
stock options and restricted stock grants to employees using the treasury
stock method. Certain of our stock options, that could potentially dilute
Basic EPS in the future, were antidilutive for periods ended March 31,
2006 and 2005, and are discussed below.
The following is a reconciliation of the numerators and denominators
used in the calculation of Basic and Diluted EPS for the periods ended
March 31, 2006 and 2005:
Three Months Ended March 31,
-------------------------------------------------------------------------------
2006 2005
--------------------------------------- --------------------------------------
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
------------- ----------- ----------- ------------ ----------- -----------
Basic EPS:
Net Income and Share Amounts......$ 37,314,506 29,071,764 $ 1.28 $ 25,689,152 28,160,949 $ 0.91
Dilutive Securities:
Restricted Stock ................. --- 78,501 --- 11,242
Stock Options .................... --- 845,633 --- 641,115
------------- ------------ ------------ -----------
Diluted EPS:
Net Income and Assumed Share
Conversions ....................$ 37,314,506 29,995,898 $ 1.24 $ 25,689,152 28,813,306 $ 0.89
-------------- ----------- ------------ -----------
Options to purchase approximately 2.2 million shares at an average
exercise price of $22.87 were outstanding at March 31, 2006, while
options to purchase 2.9 million shares at an average exercise price of
$18.97 were outstanding at March 31, 2005. Approximately 1.6 million and
0.7 million stock options and non-vested shares of restricted stock were
not included in the computation of Diluted EPS for the periods ended
March 31, 2006, and 2005, respectively, because these options were
antidilutive in that the option price was greater than the average
closing market price for the common shares during those periods.
Restricted stock grants to consultants of 1,200 shares, were not included
in the computation of Diluted EPS for the period ended March 31, 2006, as
performance conditions surrounding the vesting of these shares had not
occurred.
(5) Long-Term Debt
Our long-term debt, including the current portion, as of March 31, 2006
and December 31, 2005, was as follows (in thousands):
March 31, December 31,
2006 2005
------------------ -------------------
Bank Borrowings .............................$ --- $ ---
7-5/8% senior notes due 2011 ................ 150,000 150,000
9-3/8% senior subordinated notes due 2012 ... 200,000 200,000
------------------ -------------------
Long-Term Debt ....................$ 350,000 $ 350,000
------------------ -------------------
Bank Borrowings
At March 31, 2006, we had no outstanding borrowings under our $400.0
million credit facility with a syndicate of ten banks that has a
borrowing base of $250.0 million and expires in October 2008. The
interest rate is either (a) the lead bank's prime rate (7.75% at March
31, 2006) or (b) the adjusted London Interbank Offered Rate ("LIBOR")
plus the applicable margin depending on the level of outstanding debt.
The applicable margin is based on the ratio of the outstanding balance to
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
the last calculated borrowing base. In June 2004, we renewed this credit
facility, increasing the facility to $400 million from $300 million and
extending its expiration to October 1, 2008 from October 1, 2005. The
other terms of the credit facility, such as the borrowing base amount and
commitment amount, stayed largely the same. The covenants related to this
credit facility changed somewhat with the extension of the facility and
are discussed below. We incurred $0.4 million of debt issuance costs
related to the renewal of this facility in 2004, which is included in
"Debt issuance costs" on the accompanying balance sheets and will be
amortized to interest expense over the life of the facility.
The terms of our credit facility include, among other restrictions, a
limitation on the level of cash dividends (not to exceed $5.0 million in
any fiscal year), a remaining aggregate limitation on purchases of our
stock of $15.0 million, requirements as to maintenance of certain minimum
financial ratios (principally pertaining to adjusted working capital
ratios and EBITDAX), and limitations on incurring other debt or
repurchasing our 7-5/8% senior notes due 2011 or 9-3/8% senior
subordinated notes due 2012. Since inception, no cash dividends have been
declared on our common stock. We are currently in compliance with the
provisions of this agreement. The credit facility is secured by our
domestic oil and gas properties. We have also pledged 65% of the stock in
our two New Zealand subsidiaries as collateral for this credit facility.
The borrowing base is re-determined at least every six months and was
reconfirmed by our bank group at $250.0 million effective May 1, 2006. We
requested that the commitment amount with our bank group be reduced to
$150.0 million effective May 9, 2003. Under the terms of the credit
facility, we can increase this commitment amount back to the total amount
of the borrowing base at our discretion, subject to the terms of the
credit agreement. The next scheduled borrowing base review is in November
2006.
Interest expense on the credit facility, including commitment fees and
amortization of debt issuance costs, totaled $0.2 million and $0.3
million for the first quarters of 2006 and 2005, respectively. The amount
of commitment fees included in interest expense, net was $0.1 million for
both the first quarters of 2006 and 2005.
Senior Notes Due 2011
These notes consist of $150.0 million of 7-5/8% senior notes due 2011,
which were issued on June 23, 2004 at 100% of the principal amount and
will mature on July 15, 2011. The notes are senior unsecured obligations
that rank equally with all of our existing and future senior unsecured
indebtedness, are effectively subordinated to all our existing and future
secured indebtedness to the extent of the value of the collateral
securing such indebtedness, including borrowing under our bank credit
facility, and rank senior to all of our existing and future subordinated
indebtedness. Interest on these notes is payable semi-annually on January
15 and July 15, and commenced on January 15, 2005. On or after July 15,
2008, we may redeem some or all of the notes, with certain restrictions,
at a redemption price, plus accrued and unpaid interest, of 103.813% of
principal, declining to 100% in 2010 and thereafter. In addition, prior
to July 15, 2007, we may redeem up to 35% of the notes with the net
proceeds of qualified offerings of our equity at a redemption price of
107.625% of the principal amount of the notes, plus accrued and unpaid
interest. We incurred approximately $3.9 million of debt issuance costs
related to these notes, which is included in "Debt issuance costs" on the
accompanying balance sheets and will be amortized to interest expense,
net over the life of the notes using the effective interest method. Upon
certain changes in control of Swift Energy, each holder of notes will
have the right to require us to repurchase all or any part of the notes
at a purchase price in cash equal to 101% of the principal amount, plus
accrued and unpaid interest to the date of purchase. The terms of these
notes include, among other restrictions, a limitation on how much of our
own common stock we may repurchase. We are currently in compliance with
the provisions of the indenture governing these senior notes.
Interest expense on the 7-5/8% senior notes due 2011, including
amortization of debt issuance costs totaled $3.0 million in both the
first quarter of 2006 and 2005.
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
Senior Subordinated Notes Due 2012
These notes consist of $200.0 million of 9-3/8% senior subordinated
notes due May 2012, which were issued on April 16, 2002, and will mature
on May 1, 2012. The notes are unsecured senior subordinated obligations
and are subordinated in right of payment to all our existing and future
senior debt, including our bank credit facility and 7-5/8% senior notes.
Interest on these notes is payable semiannually on May 1 and November 1,
and commenced on November 1, 2002. On or after May 1, 2007, we may redeem
these notes, with certain restrictions, at a redemption price, plus
accrued and unpaid interest, of 104.688% of principal, declining to 100%
in 2010. In addition, prior to May 1, 2005, we could have redeemed up to
33.33% of these notes with the net proceeds of qualified offerings of our
equity at 109.375% of the principal amount of these notes, plus accrued
and unpaid interest. Upon certain changes in control of Swift Energy,
each holder of these notes will have the right to require us to
repurchase the notes at a purchase price in cash equal to 101% of the
principal amount, plus accrued and unpaid interest to the date of
purchase. The terms of these notes include, among other restrictions, a
limitation on how much of our own common stock we may repurchase. We are
currently in compliance with the provisions of the indenture governing
these subordinated notes.
Interest expense on the 9-3/8% senior subordinated notes due 2012,
including amortization of debt issuance costs totaled $4.8 million in
both the first quarters of 2006 and 2005.
The aggregate maturities on our long-term debt are $150 million for
2011 and $200 million for 2012.
We have capitalized interest on our unproved properties in the amount
of $2.1 million and $1.8 million, for the first quarters of 2006 and
2005, respectively.
(6) Foreign Activities
As of March 31, 2006, our gross capitalized oil and gas property costs
in New Zealand totaled approximately $305.6 million. Approximately $273.5
million has been included in the "Proved properties" portion of our oil
and gas properties, while $32.1 million is included as "Unproved
properties." Our functional currency in New Zealand is the U.S. Dollar.
Net assets of our New Zealand operations total $252.1 million at March
31, 2006.
(7) Acquisitions and Dispositions
In November 2005, we acquired interests in the South Bearhead Creek
field in Central Louisiana. This field is approximately 50 miles south of
our Masters Creek field. We paid approximately $24.3 million in cash for
these interests. After taking into account internal acquisition costs of
$2.6 million, and assumed liabilities of $1.4 million, our total cost was
$28.3 million. We allocated $26.2 million of the acquisition price to
"Proved properties," $2.5 million to "Unproved properties," and recorded
a liability for $0.4 million to "Asset retirement obligation" on our
accompanying consolidated balance sheet. In December 2005 we acquired
additional interests in this field. We paid approximately $4.6 million in
cash for these additional interests. After taking into account internal
acquisition costs of $0.6 million, our total cost was $5.2 million. We
allocated $4.9 million of the acquisition price to "Proved properties,"
$0.4 million to "Unproved properties," and recorded a liability for $0.1
million to "Asset retirement obligation" on our accompanying consolidated
balance sheet. These acquisitions were accounted for by the purchase
method of accounting. We made these acquisitions to increase our
exploration and development opportunities in this area. The revenues and
expenses from these properties have been included in our accompanying
consolidated statements of income from the date of acquisition forward,
however, given the acquisitions were in November and December 2005, these
amounts were immaterial for 2005.
(8) Subsequent Events
In April 2006, we sold our minority interests in the Brookeland and
Masters Creek natural gas processing plants for approximately $20.3
million in cash. Under the "full-cost" method of accounting for oil and
gas property and equipment costs, the proceeds of this sale will be
applied against our oil and gas properties and equipment balance, and no
gain or loss will be recognized on this transaction.
18
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
(9) Condensed Consolidating Financial Information
In December 2005, we amended the indenture for our 9-3/8% Senior
Subordinated Notes due 2012 and our 7-5/8% Senior Notes due 2011 to
reflect our new holding company organizational structure (as discussed in
Note 1). As part of this restructuring our indentures were amended so
that both Swift Energy Company and Swift Energy Operating, LLC (a wholly
owned indirect subsidiary of Swift Energy Company) became co-obligors of
these senior notes and senior subordinated debt. The co-obligations are
full and unconditional and are joint and several. Prior to this
restructure, Swift Energy Company was the sole obligor. The following is
condensed consolidating financial information for Swift Energy Company,
Swift Energy Operating, LLC, and significant subsidiaries:
Condensed Consolidating Balance Sheets
(in 000's) March 31, 2006
-------------------------------------------------------------------------------------
Swift Energy Co. Swift Energy
(Parent and Operating, LLC Other Swift Energy Co.
Co-obligor) (Co-obligor) Subsidiaries Eliminations Consolidated
----------------- -------------- ------------ -------------- ----------------
ASSETS
Current assets $ --- $ 135,829 $ 26,357 $ --- $ 162,186
Property and equipment --- 910,152 222,615 --- 1,132,767
Investment in subsidiaries (equity
method) 650,162 --- 449,968 (1,100,130) ---
Other assets --- 33,813 609 (24,470) 9,953
----------------- -------------- ------------ -------------- ----------------
Total assets $ 650,162 $ 1,079,794 $ 699,549 $ (1,124,600) $ 1,304,905
================= ============== ============ ============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ --- $ 96,262 $ 16,834 $ --- $ 113,097
Long-term liabilities --- 533,564 32,553 (24,470) 541,646
Stockholders' equity 650,162 449,968 650,162 (1,100,130) 650,162
----------------- -------------- ------------ -------------- ----------------
Total liabilities and
stockholders' equity $ 650,162 $ 1,079,794 $ 699,549 $ (1,124,600) $ 1,304,905
================= ============== ============ =============== ================
19
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
(in 000's) December 31, 2005
-------------------------------------------------------------------------------------
Swift Energy Co. Swift Energy
(Parent and Operating, LLC Other Swift Energy Co.
Co-obligor) (Co-obligor) Subsidiaries Eliminations Consolidated
----------------- -------------- ------------ -------------- ----------------
ASSETS
Current assets $ --- $ 92,788 $ 22,267 $ --- $ 115,055
Property and equipment --- 862,717 216,316 --- 1,079,034
Investment in subsidiaries (equity
method) 607,318 --- 410,612 (1,017,930) ---
Other assets --- 31,955 682 (22,313) 10,324
----------------- -------------- ------------ -------------- ----------------
Total assets $ 607,318 $ 987,460 $ 649,877 $ (1,040,243) $ 1,204,413
================= ============== ============ ============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ --- $ 85,472 $ 12,949 $ --- $ 98,421
Long-term liabilities --- 491,376 29,610 (22,313) 498,674
Stockholders' equity 607,318 410,612 607,318 (1,017,930) 607,318
----------------- -------------- ------------ -------------- ----------------
Total liabilities and
stockholders' equity $ 607,318 $ 987,460 $ 649,877 $ (1,040,243) $ 1,204,413
================= ============== ============ ============== ================
Condensed Consolidating Statements of Income
(in 000's) Three Months Ended March 31, 2006
-------------------------------------------------------------------------------------
Swift Energy Co. Swift Energy
(Parent and Operating, LLC Other Swift Energy Co.
Co-obligor) (Co-obligor) Subsidiaries Eliminations Consolidated
----------------- -------------- ------------ -------------- ----------------
Revenues $ --- $ 119,438 $ 16,731 $ --- $ 136,169
Expenses --- 65,798 12,596 --- 78,394
----------------- -------------- ------------ -------------- ----------------
Income (loss) before the following: --- 53,640 4,135 --- 57,775
Equity in net earnings of
subsidiaries 37,315 --- 33,828 (71,143) ---
----------------- -------------- ------------ -------------- ----------------
Income before income taxes 37,315 53,640 37,963 (71,143) 57,775
Income tax provision (benefit) --- 19,812 648 --- 20,460
----------------- -------------- ------------ -------------- ----------------
Net income $ 37,315 $ 33,828 $ 37,315 $ (71,143) $ 37,315
================= ============== ============ ============== ================
20
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
(in 000's) Three Months Ended March 31, 2005
---------------------------------------------------------------------
Swift Energy Co.
(Parent and Swift Energy
Issuer) Other Subsidiaries Eliminations Consolidated
----------------- ------------------ ------------ ---------------
Revenues $ 76,768 $ 18,855 $ (2) $ 95,621
Expenses 44,437 11,427 (2) 55,862
----------------- ------------------ ------------ ---------------
Income (loss) before the following: 32,331 7,428 --- 39,759
Equity in net earnings of
subsidiaries 5,379 --- (5,379) ---
----------------- ------------------ ------------ ---------------
Income before income taxes 37,710 7,428 (5,379) 39,759
Income tax provision (benefit) 12,020 2,049 --- 14,069
----------------- ------------------ ------------ ---------------
Net income $ 25,690 $ 5,379 $ (5,379) $ 25,690
================= ================== ============ ===============
Condensed Consolidating Statements of Cash Flows
(in 000's) Three Months Ended March 31, 2006
-------------------------------------------------------------------------------------
Swift Energy Co. Swift Energy
(Parent and Operating, LLC Other Swift Energy Co.
Co-obligor) (Co-obligor) Subsidiaries Eliminations Consol.
---------------- ----------------- ------------- ------------ ----------------
Cash flow from operations $ --- $ 76,061 $ 7,839 $ --- $ 83,900
Cash flow from investing
activities --- (71,734) (13,637) 2,157 (83,213)
Cash flow from financing
activities --- 1,535 2,157 (2,157) 1,535
---------------- ----------------- ------------- ------------ ----------------
Net increase in cash $ --- $ 5,862 $ (3,640) $ --- $ 2,223
Cash, beginning of period --- 44,911 8,094 --- 53,005
---------------- ----------------- ------------- ------------ ----------------
Cash, end of period $ --- $ 50,773 $ 4,454 $ --- $ 55,227
================ ================= ============= ============ ================
21
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
(in 000's) Three Months Ended March 31, 2005
--------------------------------------------------------------------------
Swift Energy Co.
(Parent and Other Swift Energy Co.
Issuer) Subsidiaries Eliminations Consolidated
---------------- ----------------- ----------------- ----------------
Cash flow from operations $ 50,871 $ 13,781 $ --- $ 64,652
Cash flow from investing activities (39,834) (15,147) 1,783 (53,198)
Cash flow from financing activities (6,659) 1,783 (1,783) (6,659)
---------------- ----------------- ----------------- ----------------
Net increase (decrease) in cash 4,378 417 --- 4,795
Cash, beginning of period 205 4,715 --- 4,920
---------------- ----------------- ----------------- ----------------
Cash, end of period $ 4,583 $ 5,132 $ --- $ 9,715
================ ================= ================= ================
(10) Segment Information
The Company has two reportable segments, one domestic and one foreign,
which are in the business of crude oil and natural gas exploration and
production. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. We evaluate
our performance based on profit or loss from oil and gas operations
before price-risk management and other, net, general and administrative,
net, and interest expense, net. Our reportable segments are managed
separately based on their geographic locations. Financial information by
operating segment is presented below:
Three Months Ended March 31,
-----------------------------------------------------------------------------------------------------
2006 2005
---------------------------------------------------- -----------------------------------------------
New New
Domestic Zealand Total Domestic Zealand Total
--------------- ---------------- ----------------- -------------- -------------- ---------------
Oil and gas sales $ 118,084,694 $ 16,868,299 $ 134,952,993 $ 76,775,769 $ 18,745,564 $ 95,521,333
Costs and Expenses:
Depreciation, depletion
and amortization 28,021,752 7,384,745 35,406,497 17,673,698 6,531,680 24,205,378
Accretion of asset
retirement obligation 255,672 35,843 291,515 153,857 32,650 186,507
Lease operating costs 11,307,560 3,086,929 14,394,489 8,244,217 2,804,565 11,048,782
Severance and other taxes 13,607,937 1,145,669 14,753,606 8,030,686 1,172,395 9,203,081
Income from oil and gas
operations $ 64,891,773 $ 5,215,113 $ 70,106,886 $ 42,673,311 $ 8,204,274 $ 50,877,585
Price-risk management
and other, net 1,215,938 99,351
General and
administrative, net 7,686,909 4,874,308
Interest expense, net 5,860,919 6,344,009
Income Before Income Taxes $ 57,774,996 $ 39,758,619
--------------- ---------------- ----------------- -------------- -------------- ---------------
Total Assets $ 1,052,793,307 $ 252,111,859 $ 1,304,905,166 $ 800,313,774 $ 218,951,614 $ 1,019,265,388
=============== ================ ================= ============== ============== ===============
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SWIFT ENERGY COMPANY AND SUBSIDIARIES
ITEM 2.
You should read the following discussion and analysis in conjunction
with our financial information and our condensed consolidated financial
statements and notes thereto included in this report and our Form 10-K
for the year ended December 31, 2005. The following information contains
forward-looking statements. For a discussion of limitations inherent in
forward-looking statements, see "Forward-Looking Statements" on page 32
of this report.
Overview
Swift Energy had record net income and production for the first quarter
of 2006. Net income increased 45% to $37.3 million and production
increased 7% to 16.6 Bcfe over first quarter 2005 levels. Cash flow from
operating activities increased 30% to $83.9 million over first quarter
2005 levels. We also had record revenues of $136.2 million for the first
quarter of 2006, an increase of 42% over 2005 first quarter levels. The
strong commodity prices during the first quarter of 2006 and increases in
production supported the increase in our revenues as compared to the same
period in 2005.
Our efforts and capital throughout the first quarter of 2006 remained
primarily focused on infrastructure improvements, increased production,
and the development of long-lived reserves through exploration and
exploitation activities primarily in four of our regions: South
Louisiana, South Texas, Toledo Bend, and New Zealand. We expect to
continue this focus throughout 2006. We are reviewing further potential
capacity increases of our facilities in Lake Washington, and expect the
new 3-D seismic survey over the Cote Blanche Island area to be completed
in the third quarter of 2006, and have recently acquired seismic on our
offshore Kaheru exploration permit in New Zealand. In March 2006, we
signed a participation agreement to explore several sites in onshore
Alaska's Cook Inlet Basin. Under the joint venture we will have a 37.5%
working interest in about 54,500 acres. We started drilling an
exploratory well, in which we own a 50% working interest, on this acreage
in April 2006.
Our overall costs and expenses increased in the first quarter of 2006.
Although costs for equipment and services are continuing to rise in the
industry at this time, we are working to manage our costs and expenses to
remain at this same general level for the remainder of 2006. The largest
increase in these costs and expenses is due to increased depreciation,
depletion and amortization expense as a result of increased estimates for
future development costs and additional capital expenditures over prior
year levels. We experienced higher costs due to increased oil production
in Lake Washington, along with higher severance taxes due to increased
revenues. We also saw an increase in our general and administrative
expenses due to an increased workforce and stock compensation expense
associated with the adoption of FAS No. 123(R). We expect cost pressures
to continue to affect the industry throughout 2006, especially along the
Gulf Coast following the two 2005 hurricanes, with tightening
availability of crews as well as increasing costs of services and basic
equipment.
Our financial position remains strong and flexible, allowing us to take
advantage of future opportunities for organic growth through drilling and
strategic growth through acquisitions. Our financial ratios have also
continued to improve. Our debt to capitalization ratio was 35% at March
31, 2006 compared to 37% at year-end 2005, as debt levels remained at the
same level as year-end 2005 and retained earnings increased as a result
of the current period profit. Including our cash on hand at the end of
the quarter, our net debt to capital ratio would have been 29%.
There are a number of factors that support our belief that Swift
Energy's performance for 2006 will be strong. We think that strong
commodity prices will continue over the foreseeable future, based in part
on forward-strip pricing. Although production was impacted by the
hurricane activity in the second half of 2005, all of Swift Energy's
operations in the South Louisiana region are back on production at or
above pre-Katrina production levels, except for the Cote Blanche Island
field. Cote Blanche Island is expected to be back online during the
second quarter of 2006. Our merged 3-D seismic data offsets around our
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
fields in southern Louisiana have yielded success in our exploration and
development activities, as demonstrated by our year-end drilling
successes at our Newport and Bondi prospects in the Lake Washington area.
Continued work-over and recompletion activity is expected to take place
in 2006, particularly in the Bay de Chene and Cote Blanche Island fields
in southern Louisiana; however, this work has been delayed somewhat due
to our recovery efforts from Hurricanes Katrina and Rita. We also
acquired additional property in our Toledo Bend region during the fourth
quarter of 2005, the South Bearhead Creek property. Our diversified
drilling portfolio positions us for higher impact exploration drilling as
well as expanded exploitation efforts in 2006.
Results of Operations - Three Months Ended March 31, 2006 and 2005
Revenues. Our revenues in the first quarter of 2006 increased by 42%
compared to revenues in the same period in 2005, due primarily to an
increase in commodity prices and the production increase principally from
our Lake Washington field. Revenues from our oil and gas sales comprised
substantially all of net revenues for the first quarter of 2006 and 2005.
In the first quarter of 2006, oil production made up 58% of total
production, natural gas made up 36%, and NGL represented 6%. In the first
quarter of 2005, oil production made up 51% of total production, natural
gas made up 40%, and NGL represented 9%. The percentage of our total
production from oil increased as Lake Washington production, which is
almost entirely oil, increased over first quarter of 2005 levels.
Our first quarter 2006 weighted average prices increased 32% to $8.14
per Mcfe from $6.16 in the first quarter of 2005, with oil prices
appreciating 28% to $60.83 from $47.66 during the first quarter of 2005,
natural gas prices increasing 27% to $5.38 from $4.25, and NGL prices
rose 13% to $30.34 from $26.79.
The following table provides additional information regarding the
changes in the sources of our oil and gas sales and volumes for the
periods ended March 31, 2006 and 2005.
Three Months Ended March 31,
----------------------------
Area Oil and Gas Sales (In Millions) Net Oil and Gas Sales Volumes (Bcfe)
---- ----------------------------------- ---------------------------------------
2006 2005 2006 2005
---- ---- ---- ----
AWP Olmos ................... $ 15.3 $ 11.3 1.9 1.9
Brookeland .................. 4.3 4.0 0.5 0.7
Lake Washington ............. 85.3 51.4 8.7 6.8
Masters Creek ............... 3.9 4.7 0.5 0.7
Other ....................... 9.3 5.4 1.2 0.9
---------------- ----------------- ---------------- ---------------------
Total Domestic ...... $ 118.1 $ 76.8 12.8 11.0
---------------- ----------------- ---------------- ---------------------
Rimu/Kauri .................. 8.7 12.5 1.6 2.4
TAWN ........................ 8.2 6.2 2.2 2.1
---------------- ----------------- ---------------- ---------------------
Total New Zealand ... $ 16.9 $ 18.7 3.8 4.5
---------------- ----------------- ---------------- ---------------------
Total ....................... $ 135.0 $ 95.5 16.6 15.5
================ ================= ================ =====================
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
The following table provides additional information regarding our
quarterly oil and gas sales:
Sales Volume Average Sales Price
------------ -------------------
Oil NGL Gas Combined Oil NGL Gas
(MBbl) (MBbl) (Bcf) (Bcfe) (Bbl) (Bbl) (Mcf)
---------- --------- --------- ---------- ---------- --------- ---------
2006
----
Three Months Ended March 31:
Domestic .................... 1,487 90 3.3 12.8 $60.56 $39.75 $7.42
New Zealand ................. 124 62 2.7 3.8 $64.13 $16.68 $2.91
---------- --------- --------- ----------
Total ................. 1,611 152 6.0 16.6 $60.83 $30.34 $5.38
========== ========= ========= ==========
2005
----
Three Months Ended March 31:
Domestic .................... 1,184 143 3.0 11.0 $47.20 $31.79 $5.41
New Zealand ................. 137 80 3.3 4.5 $51.68 $17.80 $3.17
---------- --------- --------- ----------
Total ................. 1,321 223 6.3 15.5 $47.66 $26.79 $4.25
========== ========= ========= ==========
In the first quarter of 2006, our $39.4 million increase in oil, NGL,
and natural gas sales resulted from:
oPrice variances that had a $28.5 million favorable impact on sales, of
which $21.2 million was attributable to the 28% increase in
average oil prices received, $6.8 million was attributable to the
27% increase in average gas prices received, and $0.5 million was
attributable to the 13% increase in average NGL prices received;
and
oVolume variances that had a $10.9 million favorable impact on sales,
with $13.9 million of increases coming from the 290,000 Bbl
increase in oil sales volumes, offset by $1.1 million of decreases
due to the 0.3 Bcf decrease in gas sales volumes, and $1.9 million
of decreases attributable to the 71,000 Bbl decrease in NGL sales
volumes.
Costs and Expenses. Our expenses in the first quarter of 2006 increased
$22.5 million, or 40%, compared to expenses in the same period of 2005.
The increase was due to an $11.2 million increase in DD&A, a $5.6 million
increase in severance and other taxes, and a $3.3 million increase in
lease operating costs, all of which are primarily due to increased
production volumes and higher oil and gas prices in the first quarter of
2006.
Our first quarter 2006 general and administrative expenses, net,
increased $2.8 million, or 58%, from the level of such expenses in the
same 2005 period. This increase was primarily due an increase in stock
compensation expense resulting from the adoption of SFAS No. 123R. Our
stock compensation expense recorded in general and administrative, net
increased by $1.6 million, net of capitalized amounts, over first quarter
of 2005 levels. For the first quarters of 2006 and 2005, our capitalized
general and administrative costs, excluding stock compensation, totaled
$6.0 million and $4.1 million, respectively. Our capitalized general and
administrative expenses increased due to the expansion of our workforce
and the capitalization of stock compensation related to geological and
geophysical workforce. Our net general and administrative expenses per
Mcfe produced increased to $0.46 per Mcfe in the first quarter of 2006
from $0.31 per Mcfe in the same 2005 period. The portion of supervision
fees recorded as a reduction to general and administrative expenses was
$2.0 million for the first quarter of 2006 and $1.7 million for the 2005
period.
DD&A increased $11.2 million, or 46%, in the first quarter of 2006 from
the level of those expenses in the same period of 2005. Domestically,
DD&A increased $10.3 million in the first quarter of 2006 due to
increases in the depletable oil and gas property base, including future
development costs and higher production in the 2006 period. In New
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
Zealand, DD&A increased by $0.9 million in the first quarter of 2006 due
to increases in the depletable oil and gas property base and lower
reserves volumes, partially offset by lower production in the 2006
period. Our DD&A rate per Mcfe of production was $2.13 and $1.56 in the
first quarters of 2006 and 2005, respectively.
We recorded $0.3 million and $0.2 million of accretions to our asset
retirement obligation in the first quarters of 2006 and 2005,
respectively.
Our lease operating costs per Mcfe produced were $0.87 in the first
quarter of 2006 and $0.71 in the first quarter of 2005. Our lease
operating costs in the first quarter of 2006 increased $3.3 million, or
30%, over the level of such expenses in the same 2005 period. Almost all
of the increase was related to our domestic operations, which increased
primarily due to higher production from our Lake Washington area and
higher insurance costs. Our lease operating costs in New Zealand
increased in the first quarter of 2006 by $0.3 million due to higher well
operating costs.
In the first quarter of 2006, severance and other taxes increased $5.6
million, or 60%, over levels in the first quarter of 2005. The increase
was due primarily to higher commodity prices and increased Lake
Washington production. Severance taxes on oil in Louisiana are 12.5% of
oil sales, which is higher than the other states where we have
production. As our percentage of oil production in Louisiana increases,
the overall percentage of severance costs to sales also increases.
Severance and other taxes, as a percentage of oil and gas sales, were
approximately 10.9% and 9.6% in the first quarters of 2006 and 2005,
respectively.
Interest expense on our 7-5/8% senior notes due 2011 issued in June
2004, including amortization of debt issuance costs, totaled $3.0 million
in the first quarter of 2006. Interest expense on our 9-3/8% senior
subordinated notes due 2012 issued in April 2002, including amortization
of debt issuance costs, totaled $4.8 million in both the first quarter of
2006 and 2005. Interest expense on our bank credit facility, including
commitment fees and amortization of debt issuance costs, totaled $0.2
million in the first quarter of 2006 and $0.3 million in the same period
in 2005. Our total interest cost in the first quarter of 2006 was $8.0
million, of which $2.1 million was capitalized. Our total interest cost
in the first quarter of 2005 was $8.1 million, of which $1.8 million was
capitalized. We capitalize a portion of interest related to unproved
properties. The decrease of interest expense in the first quarter of 2006
was primarily attributable to higher capitalized costs along with lower
credit facility costs resulting from a decrease in borrowings against the
credit facility.
Our overall effective tax rate was 35.4% in both the first quarter of
2006 and 2005. The effective income tax rate for both the first quarter
of 2006 and 2005 was lower than the statutory tax rates primarily due to
reductions from the New Zealand statutory rate attributable to the
currency effect on the New Zealand deferred tax calculation.
Net Income. For the first quarter of 2006, our net income of $37.3
million was 45% higher, and Basic EPS of $1.28 was 41% higher, than our
first quarter of 2005 net income of $25.7 million and Basic EPS of $0.91.
Our Diluted EPS in the first quarter of 2006 of $1.24 was 40% higher than
our first quarter 2005 Diluted EPS of $0.89. These higher amounts are due
to our increased oil and gas revenues, which in turn were higher due to
continued strong commodity prices and increased production during the
first quarter of 2006.
Share-Based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123R,
"Share-Based Payment" utilizing the modified prospective approach. Prior
to the adoption of SFAS No. 123R, we accounted for stock option grants in
accordance with APB No. 25, "Accounting for Stock Issued to Employees"
(the intrinsic value method), and accordingly, recognized no compensation
expense for employee stock option grants. The adoption of SFAS No. 123R
will increase our compensation expense related to employee stock option
grants over prior period levels.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
Under the modified prospective approach, SFAS No. 123R applies to new
awards and to awards that were outstanding on January 1, 2006 as well as
those that are subsequently modified, repurchased or cancelled. Under the
modified prospective approach, compensation cost recognized in the three
months ended March 31, 2006 includes compensation cost for all
share-based awards granted prior to, but not yet vested as of January 1,
2006, based on the grant-date fair value estimated in accordance with the
original provisions of SFAS No. 123, and compensation cost for all
share-based awards granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS
No. 123R. Prior periods were not restated to reflect the impact of
adopting the new standard.
As a result of adopting SFAS No. 123R on January 1, 2006, our income
before taxes, net income and basic and diluted earnings per share for the
three months ended March 31, 2006, were $1.1 million, $0.7 million,
$0.02, and $0.02 lower, respectively, than if we had continued to account
for share-based compensation under APB Opinion No. 25 for our stock
option grants. Upon adoption of SFAS 123R, we recorded an immaterial
cumulative effect of a change in accounting principle as a result of our
change in policy from recognizing forfeitures as they occur to
recognizing expense based on our expectation of the amount of awards that
will vest over the requisite service period for our restricted stock
awards. This amount was recorded in "General and Administrative, net" in
the accompanying condensed consolidated statements of operations.
We continue to use the Black-Scholes-Merton option pricing model to
estimate the fair value of stock-option awards with the following
weighted-average assumptions for the indicated periods.
Three Months Ended
----------------------------
March 31,
2006 2005
----------------------------
Dividend yield 0% 0%
Expected volatility 40% 40%
Risk-free interest rate 4.8% 3.5%
Expected life of options (in years) 6.3 3.2
Weighted-average grant-date fair value $ 21.02 $ 8.40
The expected term has been calculated using the Securities and Exchange
Commission Staff's shortcut approach from Staff Accounting Bulleting No.
107. We have analyzed historical volatility and based on analysis of all
relevant factors use a three-year perior to estimate expected volatility
of our stock option grants. We view all awards of stock compensation as a
single award with an expected life equal to the average expected life of
component awards and amortize the award on a straight-line basis over the
life of the award.
The compensation expense for restricted stock awards was determined
based on the market price of our stock at the date of grant applied to
the total numbers of shares that were anticipated to fully vest. At March
31, 2006, there was $5.9 million of unrecognized compensation cost
related to stock options, which are expected to be recognized over a
weighted-average period of 1.7 years, and unrecognized compensation
expense of $10.0 million related to restricted stock awards which are
expected to be recognized over a weighted-average period of 2.5 years.
Contractual Commitments and Obligations
We had no material changes in our contractual commitments and
obligations from December 31, 2005 amounts referenced under "Contractual
Commitments and Obligations" in Management's Discussion and Analysis" in
our Annual Report on form 10-K for the period ending December 31, 2005.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
Commodity Price Trends and Uncertainties
Oil and natural gas prices historically have been volatile and are
expected to continue to be volatile in the future. The price of oil has
increased over the last two years and is currently significantly higher
when compared to longer-term historical prices. Factors such as worldwide
supply disruptions, worldwide economic conditions, weather conditions,
actions taken by OPEC, and fluctuating currency exchange rates can cause
wide fluctuations in the price of oil. Domestic natural gas prices
continue to remain higher when compared to longer-term historical prices.
North American weather conditions, the industrial and consumer demand for
natural gas, storage levels of natural gas, and the availability and
accessibility of natural gas deposits in North America can cause
significant fluctuations in the price of natural gas. Such factors are
beyond our control.
Income Tax Regulations
The tax laws in the jurisdictions we operate in are continuously
changing and professional judgments regarding such tax laws can differ.
As of March 31, 2006, we believe we will utilize all of our domestic
operating loss carryforwards during the 2006 tax year, and these amounts
are classified as current in the "Deferred tax asset" account on the
accompanying balance sheet.
Liquidity and Capital Resources
During the first quarter of 2006, we relied upon our net cash provided
by operating activities of $83.9 million to fund capital expenditures of
$78.0 million. During the first quarter of 2005, we relied upon our net
cash provided by operating activities of $64.7 million to fund capital
expenditures of $44.5 million and to pay down our bank borrowings by $7.5
million.
Net Cash Provided by Operating Activities. For the first quarter of
2006, our net cash provided by operating activities was $83.9 million,
representing a 30% increase as compared to $64.7 million generated during
the same 2005 period. The $19.2 million increase in the first quarter of
2006 was primarily due to an increase of $39.4 million in oil and gas
sales, attributable to higher commodity prices and production, offset in
part by higher lease operating costs due to higher production and
severance taxes.
Accounts Receivable. We assess the collectibility of accounts
receivable, and based on our judgment, we accrue a reserve when we
believe a receivable may not be collected. At both March 31, 2006 and
December 31, 2005, we had an allowance for doubtful accounts of less than
$0.1 million. The allowance for doubtful accounts has been deducted from
the total "Accounts receivable" balances on the accompanying balance
sheets. Receivables related to insurance reimbursement are computed in
accordance with applicable accounting guidance; and we monitor our costs
incurred and their collectibility under our insurance policies and
believe all amounts recorded are recoverable.
Sarbanes-Oxley Act Compliance Costs. We have incurred substantial costs
to comply with the Sarbanes-Oxley Act of 2002. These expenditures have
reduced our net cash provided by operating activities in each of the last
three years. Sarbanes-Oxley Act compliance costs, including internal and
external costs, are reflected in "General and administrative, net" on the
accompanying statements of income.
Bank Credit Facility. We had no borrowings under our bank credit
facility at March 31, 2006 and December 31, 2005. Our bank credit
facility at March 31, 2006 consisted of a $400.0 million revolving line
of credit with a $250.0 million borrowing base. The borrowing base is
re-determined at least every six months and was reaffirmed by our bank
group at $250.0 million, effective May 1, 2006. We maintained the
commitment amount at $150.0 million, which amount was set at our request
effective May 9, 2003. We can increase this commitment amount to the
total amount of the borrowing base at our discretion, subject to the
terms of the credit agreement. Our revolving credit facility includes,
among other restrictions that changed somewhat as the facility was
renewed and extended, requirements to maintain certain minimum financial
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
ratios (principally pertaining to adjusted working capital ratios and
EBITDAX), and limitations on incurring other debt. We are in compliance
with the provisions of this agreement.
Our access to funds from our credit facility is not restricted under
any "material adverse condition" clause, a clause that is common for
credit agreements to include. A "material adverse condition" clause can
remove the obligation of the banks to fund the credit line if any
condition or event would reasonably be expected to have an adverse or
material effect on our operations, financial condition, prospects or
properties, and would impair our ability to make timely debt repayments.
Our credit facility includes covenants that require us to report events
or conditions having a material adverse effect on our financial
condition. The obligation of the banks to fund the credit facility is not
conditioned on the absence of a material adverse effect.
Debt Maturities. Our credit facility extends until October 1, 2008. Our
$150.0 million of 7-5/8% senior notes mature July 15, 2011, and our
$200.0 million of 9-3/8% senior subordinated notes mature May 1, 2012.
Working Capital. Our working capital improved from a surplus of $16.6
million at December 31, 2005, to a surplus of $49.1 million at March 31,
2006. The improvement primarily resulted from the reclassification of our
deferred tax asset, and an increase in our accounts receivable balances,
partially offset by an increase in accrued capital costs due to an
increase in our drilling and facility construction activities from
year-end 2005 levels.
Capital Expenditures. In the first quarter of 2006, we relied upon our
net cash provided by operating activities of $83.9 million to fund
capital expenditures of $78.0 million. Our total capital expenditures of
approximately $78.0 million in the first quarter of 2006 included:
Domestic expenditures of $60.7 million as follows:
o $38.5 million for drilling and developmental activity costs,
predominantly in our Lake Washington and AWP areas;
o $16.8 million of domestic prospect costs, principally related to
our Cote Blanche Island seismic activities, prospect leasehold,
and geological costs of unproved prospects;
o $5.3 million primarily for leasehold improvements in our Houston
office, software, computer equipment, vehicles, furniture, and
fixtures;
o less than $0.1 million on gas processing plants.
New Zealand expenditures of $17.3 million as follows:
o $13.9 million for drilling and developmental activity costs;
o $2.9 million on prospect costs and geological costs of unproved
properties;
o $0.4 million on gas processing plants;
o less than $0.1 million for computer equipment, software,
furniture, and fixtures.
We successfully completed 16 of 19 wells in the first quarter of 2006,
for a success rate of 84%. Domestically, we completed 13 of 15
development wells for a success rate of 87%. A total of five wells were
drilled in the Lake Washington area, of which four were completed, and
seven wells were drilled in the AWP Olmos area, of which six were
completed. Three additional wells were drilled successfully in Bay de
Chene, Cote Blanche Island, and South Bearhead Creek. In New Zealand, we
drilled four wells, three of which were successful. In the Manutahi Sand,
one development well was successful and one exploratory well was
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
unsuccessful. The Kauri-E11 was drilled successfully and the Trapper well
is currently testing in deeper zones to determine prospectivity.
Our current 2006 capital expenditure budget was increased to $325
million to $375 million, net of $20 million to $25 million of
dispositions and excluding any acquisitions. Approximately 85% of the
2006 budget is targeted for domestic activities, with about 15% planned
for activities in New Zealand. We plan to spend $200 million to $225
million in our South Louisiana region, which includes Lake Washington,
Bay de Chene and Cote Blanche Island. Of this amount, approximately $50
million to $60 million will be focused in Bay de Chene and Cote Blanche
Island, which includes approximately $11 million designated for the Cote
Blanche Island 3-D seismic acquisition planned for 2006. The $20 million
to $25 million of dispositions relate to non-core properties planned for
later in 2006 and is inclusive of the sale of our minority interest in
the Brookeland and Masters Creek natural gas processing plants. We expect
that our 2006 capital expenditures to approximate our cash flows provided
from operating activities during 2006, as was the case in 2005. During
2006, we may utilize our free cash flow to expand our capital budget and
accelerate our drilling inventory plans to take advantage of current
commodity prices, potential acquisitions, debt repayment or stock
repurchases. For 2006, we are targeting an increase of 14% to 18% for
total production and an increase of 5% to 8% for proved reserves, over
the 2005 levels.
For the last nine months of 2006, we expect to make capital
expenditures of approximately $250 to $300 million. These estimated 2006
amounts include an increase due to higher drilling and services costs
over prior year levels. Capital expenditures for 2005 were $236 million.
If producing property acquisitions become attractive during the
remaining nine months of 2006, we will explore the use of debt and/or
equity offerings, along with using our cash flows in excess of capital
expenditures, to fund such activity.
During the last nine months of 2006, we anticipate drilling or
participating in the drilling of up to an additional 17 to 21 wells in
the Lake Washington area, an additional 10 to 13 wells in the AWP Olmos
area, and several additional wells, with varying working interest
percentages, mainly in South Texas. In addition, we plan on drilling 5 to
7 wells in New Zealand.
Our 2006 capital expenditures continue to be focused on developing and
producing long-lived reserves in our Lake Washington, AWP Olmos, and
Rimu/Kauri area. We expect our 2006 total production to increase over
2005 levels, primarily from the Lake Washington, Bay de Chene, Cote
Blanche Island and Rimu/Kauri areas. We expect production in our other
core areas to decrease as a limited amount of new drilling is currently
budgeted to offset the natural production decline of these properties.
New Accounting Pronouncements
EITF 04-05 addresses when a limited partnership should be consolidated
by its general partner. EITF 04-05 presumes that a sole general partner
in a limited partnership controls the limited partnership, and therefore
should consolidate the limited partnership. The presumption of control
can be overcome if the limited partners have (a) the substantive ability
to remove the sole general partner or otherwise dissolve the limited
partnership or (b) substantive participating rights. The EITF reached a
tentative conclusion on the circumstances in which either kick-out rights
or participating rights would be considered substantive and preclude
consolidation by the general partner. The FASB ratified the EITF
consensus at the June 2005 EITF meeting. This EITF was adopted January 1,
2006 and did not have a material impact on our consolidated financial
statements because we believe our limited partners have substantive
kick-out rights under paragraph B20 of FIN 46R.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections: a replacement of APB Opinion No. 20 and FASB Statement No.
3. SFAS No. 154 requires voluntary changes in accounting principles to be
applied retrospectively, unless it is impracticable. SFAS No. 154's
retrospective application requirement replaces APB 20's requirement to
recognize most voluntary changes in accounting principle by including in
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
net income of the period of the change the cumulative effect of changing
to the new accounting principle. If retrospective application for all
prior periods is impracticable, the method used to report the change and
the reason the retrospective application is impracticable are to be
disclosed.
Under SFAS No. 154, retrospective application will be the transition
method in the unusual instance that a newly issued accounting
pronouncement does not provide specific transition guidance. It is
expected that many pronouncements will specify transition methods other
than retrospective. SFAS No. 154 is effective for accounting changes made
in fiscal years beginning after December 15, 2005, and the adoption of
this statement had no impact on our financial position or results of
operations.
In July 2005, the FASB issued an exposure draft "Accounting for
Uncertain Tax Positions, a proposed interpretation of FASB Statement No.
109." The proposed interpretation would apply to all open tax positions
under FASB No. 109. The conclusions in this interpretation include:
initial recognition of tax benefits, recognition and de-recognition of
tax positions, measurement of tax benefits and classifications of tax
liabilities. The comment period on this exposure draft ended in September
2005, and we are currently assessing the impact, if any, that this
interpretation would have on our financial position and results of
operations. The FASB has not issued an effective date for this
interpretation, and a final standard will likely be issued in 2006.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Continued
SWIFT ENERGY COMPANY AND SUBSIDIARIES
Forward Looking Statements
The statements contained in this 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. Such forward-looking
statements may pertain to, among other things, financial results, 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," "future,"
"estimate," "expect," "budget," "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, upon
current market conditions, and upon engineering and geologic information
available at this time, and is subject to change and to a number of risks
and uncertainties, and therefore, actual results may differ materially.
Among the factors that could cause actual results to differ materially
are the uncertainty of finding, replacing, developing or acquiring
reserves; adequate availability of skilled personnel, services and
supplies; hurricanes or tropical storms affecting operations; volatility
in oil and gas prices; fluctuations of the prices received or demand for
our oil and natural gas; the uncertainty of drilling results and reserves
estimates; operating hazards; requirements for capital; general economic
conditions; changes in geologic or engineering information; changes in
market conditions; competition and government regulations; as well as the
risks and uncertainties discussed herein, and set forth from time to time
in our 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.
32
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Commodity Risk
Our major market risk exposure is the volatile commodity pricing
applicable to our oil and natural gas production. Realized commodity
prices received for such production are primarily driven by the
prevailing worldwide price for crude oil and spot prices applicable to
natural gas. The effects of such pricing volatility are expected to
continue.
Our price-risk management policy permits the utilization of derivative
instruments (such as futures, forward contracts, swaps, and option
contracts such as floors and collars) to mitigate price risk associated
with fluctuations in oil and natural gas prices. Below is a description
of the derivative instruments we have utilized to hedge our exposure to
price risk.
oPrice Floors - At March 31, 2006, we had in place price floors in effect
through the June 2006 contract month for natural gas, which are
expected to cover approximately 35% to 45% of our domestic natural gas
production for April 2006 to June 2006. The natural gas price floors
cover notional volumes of 1,275,000 MMBtu, and expire at various dates
from April 2006 to June 2006, with a weighted average floor price of
$8.00 per MMBtu.
oNew Zealand Gas Contracts - All of our current gas production in New
Zealand is sold under long-term, fixed-price contracts denominated in
New Zealand dollars. These contracts protect against price volatility,
and our revenue from these contracts will vary only due to production
fluctuations and foreign exchange rates.
Customer Credit Risk
We are exposed to the risk of financial non-performance by customers.
Our ability to collect on sales to our customers is dependent on the
liquidity of our customer base. To manage customer credit risk, we
monitor credit ratings of customers and seek to minimize exposure to any
one customer where other customers are readily available. Due to
availability of other purchasers, we do not believe that the loss of any
single oil or gas customer would have a material adverse effect on our
financial position or results of operations.
Foreign Currency Risk
We are exposed to the risk of fluctuations in foreign currencies, most
notably the New Zealand dollar. Fluctuations in rates between the New
Zealand dollar and U.S. dollar may impact our financial results from our
New Zealand subsidiaries since we have receivables, liabilities, natural
gas and NGL sales contracts, and New Zealand income tax obligations, all
denominated in New Zealand dollars.
Interest Rate Risk
Our Senior Notes due 2011 and Senior Subordinated Notes due 2012 have
fixed interest rates; consequently we are not exposed to cash flow risk
from market interest rate changes on these notes. However, there is a
risk that market rates will decline and the required interest payments on
our Senior Notes and Senior Subordinated Notes may exceed those payments
based on the current market rate. At March 31, 2006, we had no borrowings
under our credit facility, which is subject to floating rates and
therefore susceptible to interest rate fluctuations. The result of a 10%
fluctuation in the bank's base rate would constitute 78 basis points and
would not have a material adverse effect on our 2006 cash flows based on
this same level or a modest level of borrowing.
33
Item 4.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our filings under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission rules and
forms. Our chief executive officer and chief financial officer have evaluated
our disclosure controls and procedures as of the end of the period covered by
this report and have concluded that such disclosure controls and procedures are
effective in ensuring that material information required to be disclosed in this
report is accumulated and communicated to them and our management to allow
timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during
the first quarter of 2006 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
34
SWIFT ENERGY COMPANY
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.
No material legal proceedings are pending other than ordinary, routine
litigation incidental to the Company's business.
Item 1A. Risk Factors.
There have been no material changes in our risk factors from those disclosed in
our 2005 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
On May 1, 2006, Swift Energy entered into a Consulting Agreement with Mr. A.
Earl Swift effective as of July 1, 2006, in connection with the termination of
Mr. A. E. Swift's current employment agreement at about that time. The
Consulting Agreement is for a period terminating three years after Mr. Swift's
service as a member of the Board of Directors of the Company ends. During this
period, Mr. Swift will be paid compensation as a non-employee director of the
Company, in cash and equity, as such amounts may be increased by the Company
from time to time for non-employee directors; $150,000 per year, with a 4% per
annum inflation adjustment; equity compensation; such other compensation as may
be awarded by the Compensation Committee of the Board of Directors of the
Company. These amounts are also payable in one lump sum, discounted to present
value, upon Mr. Swift's death or disability, which also triggers 100% vesting of
all unexercised options or restricted stock or awards and shall remain
exercisable for one year, plus continuation of insurance for his spouse and
dependents for one year. In the event of a change of control, Mr. Swift is to be
paid a lump sum equal to the discounted present value of amounts payable during
the remainder of the contract, plus a one-year continuation of medical and
dental coverage, and a tax gross-up if such payments are deemed to be subject to
"parachute payment" excise taxes. Upon termination of Mr. Swift's consulting
agreement during the contract term, other than for cause, Mr. Swift is entitled
to receive continuation of his salary for a period of one year plus 4 weeks'
salary for every year of service to the Company prior to that date. Insurance
coverage is to be continued while he is being paid, and all unexercised stock
options or restricted stock or awards held at such date are to become vested.
Also on May 1, 2006, Swift Energy entered into a new Consulting Agreement with
Mr. Virgil N. Swift effective as of July 1, 2006, which will replace his prior
consulting agreement that has been in effect since July 2000. Under his
agreement, Mr. V. Swift will be paid $5,000 per month, plus an annual inflation
adjustment of 4% per annum, for
35
providing advisory and consulting services to the Company and as otherwise
designated by, or agreed upon with, the Executive Committee of the Board of
Directors, the Chief Executive Officer or the Board of Directors of the Company.
The consulting agreement is terminable at the end of any month by either party
for any or no reason upon two weeks written notice. Upon a change of control of
the Company or termination of the retention of Mr. V. Swift, all outstanding
stock options or restricted stock or awards held by Mr. V. Swift will become
100% vested.
Item 6. Exhibits.
10.1* Consulting Agreement between Swift Energy Company and
A. Earl Swift effective as of July 1, 2006.
10.2* Consulting Agreement between Swift Energy Company and
Virgil N. Swift effective asof July 1, 2006.
31.1* Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32* Certification of Chief Executive Officer and
Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
* Filed herewith
36
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 5, 2006 By: (original signed by)
---------------------- --------------------------------
Alton D. Heckaman, Jr.
Executive Vice President -
Chief Financial Officer
Date: May 5, 2006 By: (original signed by)
---------------------- --------------------------------
David W. Wesson
Controller and Principal Accounting
Officer
37
Item 10.1
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT ("Agreement") is dated effective the 1st day
of July, 2006, and is by and between Swift Energy Company, a Texas corporation
(the "Company"), and A. Earl Swift ("Mr. Swift").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Mr. Swift currently serves as the Chairman of the Board and a
Director of the Company; and
WHEREAS, the Company and Mr. Swift wish to secure Mr. Swift's continued
involvement with and support of the Company;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the Company and Mr. Swift hereby agree as follows:
Term of Retention. Subject to the terms and conditions of this Agreement, the
Company hereby agrees to retain Mr. Swift, and Mr. Swift hereby agrees to serve
as a consultant to the Company, or in such other capacities as are mutually
acceptable to both Mr. Swift and the Company, for a period terminating three
years after Mr. Swift's service as a member of the Board of Directors of the
Company ends, unless earlier terminated (i) by Mr. Swift, at his option, upon
180 days prior written notice of termination given to the Board of Directors of
the Company specifying the date of such termination; or (ii) by the Board of
Directors of the Company by 180 days prior written notice given to Mr. Swift
enclosing a true copy of a formal, resolution of the Board of Directors of the
Company duly adopted in accordance with Section 7(a) hereof, specifying the date
of such termination.
Scope of Agreement. Mr. Swift will perform diligently to the best of his ability
those duties set forth in this Agreement in a manner that promotes the interests
and goodwill of the Company. Mr. Swift will be available for up to 46 weeks per
year according to a work schedule which may vary on a weekly or monthly basis
and is agreed upon with the Company from time to time, for consultation
regarding specific matters designated by, or particular assignments agreed upon
with, the Executive Committee of the Board of Directors, the Chief Executive
Officer of the Company or the Board of Directors of the Company, together with
serving in those specific Director's positions to which Mr. Swift is elected by
either the Board of Directors or by the shareholders of the Company, which
assignments may be performed from locations that are linked by computer to the
Company's principal executive offices in Houston, Texas and do not require Mr.
Swift's presence at the Company's principal executive offices.
Compensation and Change of Control.
Base Compensation. The Company shall compensate Mr. Swift for his services
38
hereunder as set out below, provided that during the term
of this Agreement if Mr. Swift is also serving as a Director of the
Company, in no event will Mr. Swift be paid both under this
Section 3(a) and as a non-employee Director of the Company:
$150,000 per year, plus an annual inflation adjustment on each anniversary date
of this Agreement of 4% per annum, which base compensation amount shall be
increased by the same percentage, if any, by which the base cash compensation of
non-employee members of the Board of Directors of the Company increases from
time to time (without regard to payment to them for service as chairmen of
committees of the Board of Directors); and
equity compensation equal to that paid, issued or granted to each of the
non-employee Directors of the Company, to be paid at the same time such equity
compensation is paid, issued or granted to each of the non-employee Directors of
the Company, and subject to the same restrictions and vesting as equity awards
paid, issued or granted to each non-employee Director of the Company; and such
other compensation as shall be determined by the Compensation Committee of the
Board of Directors of the Company from time to time.
Compensation upon Change of Control. Upon a "Change of Control" (as defined in
Section 7(b) below), Mr. Swift shall be paid a lump sum (discounted according to
Section 16 below) equal to the total compensation (including the dollar value on
the date of grant of equity compensation to be paid under Section 3(a)(ii)
above) which would otherwise be payable to Mr. Swift if he provided services to
the Company during the remainder of the entire term of this Agreement.
Additional Compensation and Benefits. As additional compensation for Mr. Swift's
services under this Agreement, during the term hereof the Company agrees to
provide Mr. Swift with the following reimbursements and benefits:
The Company shall reimburse Mr. Swift for reasonable and necessary expenses
incurred by Mr. Swift in furtherance of the Company's business, including
reimbursement of out-of-pocket travel costs between the Company's offices and
Mr. Swift's home in Maine, provided that such expenses are incurred in
accordance with the Company's policies and upon presentation of documentation in
accordance with expense reimbursement policies of the Company as they may exist
from time to time, and submission to the Company of adequate documentation in
accordance with federal income tax regulations.
Mr. Swift may participate in any non-cash benefits provided by the Company to
its senior executives as such benefits may exist from time to time. The Company
will provide Mr. Swift at the Company's expense, benefits which shall include
medical and dental insurance, accidental death and dismemberment insurance and
disability benefits, as such benefits may hereafter be provided by the Company
to its senior executives in accordance with its policies in force from time to
time. In addition, in the event of Mr. Swift's death during the term of this
Agreement, for a twelve-month period after his death the Company shall make
available to Mr. Swift's spouse and his dependents who would otherwise be
eligible as dependents under Company policies applicable to its senior
39
executives, at the expense of the Company, medical and dental insurance
comparable to that provided under the Company's then existing medical and dental
insurance policies, and thereafter for the remainder of the period covered by
the term of this Agreement such medical and dental insurance shall be provided
to Mr. Swift's spouse and such dependents, with Mr. Swift's spouse to reimburse
the Company for the cost for comparable family coverage under the Company's
medical and dental insurance policies, unless otherwise prohibited by applicable
law.
The Company shall pay the expenses of a Company car for Mr. Swift, including
operating expenses. Upon termination of this Agreement, Mr. Swift shall have the
option to buy the car at then current book value.
The Company will provide Mr. Swift secretarial services when Mr. Swift is
present in the Company's offices.
Confidentiality.
Mr. Swift recognizes that the Company's business involves the handling of
confidential information of both the Company and the Company's affiliates and
subsidiaries and requires a confidential relationship between the Company and
its affiliates and subsidiaries and the Company and Mr. Swift. The Company's
business requires the fullest practical protection and confidential treatment of
unique and proprietary business and technical information, including but not
limited to inventions, trade secrets, patents, proprietary and confidential data
and knowledge of both the Company's affiliates and subsidiaries and the Company
(collectively, hereinafter called "Confidential Information") which is conceived
or obtained by Mr. Swift in the course of his retention hereunder. Accordingly,
during and after termination of his retention by the Company hereunder, Mr.
Swift agrees: (i) to not disclose to any third party any such Confidential
Information; (ii) not to use for Mr. Swift's own benefit any of the Company's
Confidential Information, and (iii) not to aid others in the use of such
Confidential Information in competition with the Company or its affiliates and
subsidiaries. These obligations shall exist during and after any termination of
his retention hereunder. Notwithstanding anything else contained herein, the
term "Confidential Information" shall not be deemed to include any general
knowledge, skills or experience acquired by Mr. Swift or any knowledge or
information known to the public in general.
Mr. Swift agrees that every item of Confidential Information referred to in this
Section 5 which relates to the Company's present business or which arises or is
contemplated to arise out of use of the Company's time, facilities, personnel or
funds prior to Mr. Swift's termination, is the property of the Company.
Mr. Swift further agrees that upon termination of his retention for any reason,
he will surrender to the Company all reports, manuals, procedures, guidelines,
documents, writing, illustrations, models and other such materials produced by
him or coming into his possession by virtue of his retention by the Company
40
during the term of this Agreement and agrees that all such materials are at all
times the property of the Company. Mr. Swift shall be entitled to review,
inspect and copy any of the Company information or material necessary for legal
or other proceedings to which Mr. Swift is a party defendant by reason of the
fact that he is or was a consultant to or Director of the Company.
Covenant Not to Compete.
Subject to the provisions of (d) of this section, without the express prior
written consent of the Company, Mr. Swift will not serve as an employee,
officer, director or consultant, or in any other similar capacity or make
investments (other than open market investments in no more than five percent
(5%) of the outstanding stock of any publicly traded company) in or on behalf of
any person, firm, corporation, association or other entity whose activities
directly compete with the activities of the Company existing or contemplated as
of the date Mr. Swift last worked on the Company's behalf pursuant to this
Agreement, in those oil and gas basins in which the Company is active or as to
which it has begun study or analysis, where such employment may involve working
for or with, or assisting, such competitor with activities that are the same as
or similar to activities Mr. Swift performed on behalf of the Company.
Subject to the provisions of (c) of this Section, without the express prior
written consent of the Company, he will not solicit, recruit or hire, or assist
any person, firm, corporation, association or other entity in the solicitation,
recruitment or hiring of any person engaged by the Company as an employee,
officer, director or consultant.
It is specifically agreed that Mr. Swift may serve as a director and shareholder
of Shumate Industries, Inc.
Mr. Swift's obligations under (a) and (b) of this section shall continue in
force only while he is receiving payments from the Company under this Agreement,
provided that if there has been a "Change in Control," as defined below, then
the provisions of (a) and (b) of this section shall have no further force and
effect after the date that such Change of Control occurs.
Termination.
By Mr. Swift or the Company. Mr. Swift may terminate this Agreement upon 180
days' written notice, and the Company, upon 180 days' written notice, may
terminate Mr. Swift's retention by the Company under this Agreement solely for
Cause. "Cause" shall be defined as (i) a final non-appealable judgment that Mr.
Swift has committed fraud against the Company, its subsidiaries or customers, or
(ii) final conviction of a felony. Any such termination by the Company shall
require the affirmative vote of a majority of the members of the Board of
Directors of the Company then in office who have been or will have been
Directors for the two-year period ending on the date notice of the meeting or
written consent to take such action is first provided to shareholders or
Directors, as the case may be, or those Directors who have been nominated for
election or elected to succeed such Directors by a majority of such Directors
(the "Continuing Directors").
41
In the case of termination due to Mr. Swift's resignation, except in those
circumstances covered by Section 7(b) below, Mr. Swift shall continue to receive
his then current base compensation (based upon the rate at which Mr. Swift is
being paid immediately prior to termination) (x) for a period of twelve months
from the date of termination of his retention hereunder, and (y) for a period
beginning in the thirteenth month thereafter and ending once the amounts paid
under this clause (y) equal the total of four weeks' then current base
compensation for every year of service to the Company prior to that date
(rounded up to the nearest month of service).
In addition to the amounts payable under Section 7(a) above, in the event of
either such termination, the Company shall continue at its expense such medical
and dental coverage as then in effect for the period during which Mr. Swift is
being paid under Section 7(a). In the event of Mr. Swift's termination for
Cause, he shall not be entitled to receive any further payments hereunder.
Change of Control.
In the event of a "Change in Control," as defined below, on the date of such
Change of Control, the Company: (x) shall pay Mr. Swift a lump sum equal to the
amounts to be paid under this Agreement as set out in Section 3(a)(ii), plus
amounts set out in Section 3(d), which amounts provide compensation for each
remaining year of the term of this Agreement, discounted to present value at a
rate of 8% per annum; and (y) shall continue at the Company's expense such
medical and dental coverage as then in effect for a twelve month period.
Effective as of the day prior to such Change of Control, all outstanding
unexercised stock options to purchase shares of common stock of the Company or
unvested restricted stock or unvested restricted awards or units held by Mr.
Swift as of such date will immediately become 100% vested.
"Change of Control," for purposes of this Agreement, shall be deemed to have
occurred upon the occurrence of any one (or more) of the following events, other
than a transaction with another person controlled by, or under common control
with, the Company:
Any person, including a "group" as defined in Section (3)(d)(3) of the
Securities Exchange Act of 1934, as amended, becomes the beneficial owner of
shares of the voting stock of the Company with respect to which 40% or more of
the total number of votes for the election of the Board may be cast;
As a result of, or in connection with, any cash tender offer, exchange offer,
merger or other business combination, sale of assets or contested election, or
combination of the above, persons who were Directors of the Company immediately
prior to such event shall cease to constitute a majority of the Board;
The stockholders of the Company shall approve an agreement providing either for
a transaction in which the Company will cease to be an independent publicly
owned corporation or for a sale or other disposition of all or substantially all
the assets of the Company; or
42
A tender offer or exchange offer is made for shares of the Company's Common
Stock (other than one made by the Company), and shares of Common Stock are
acquired thereunder ("Offer").
Notwithstanding anything to the contrary in this Agreement, in the event that
any payment, distribution, or other benefit provided by the Company to or for
the benefit of Mr. Swift, whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise (a
"Payment"), would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended, or any interest or penalties with
respect to such excise tax (such excise tax, together with any such interest or
penalties, are hereinafter collectively referred to as the "Excise Tax"), the
Company shall pay to Mr. Swift an additional payment (a "Gross-up Payment") in
an amount such that after payment by Mr. Swift of all taxes (including any
interest or penalties imposed with respect to such taxes), including any Excise
Tax imposed on any Gross-up Payment, Mr. Swift retains an amount of the Gross-up
Payment equal to the Excise Tax imposed upon the Payments. The Company and Mr.
Swift shall make an initial determination as to whether a Gross-up Payment is
required and the amount of any such Gross-up Payment. Mr. Swift shall notify the
Company immediately in writing of any claim by the Internal Revenue Service
which, if successful, would require the Company to make a Gross-up Payment (or a
Gross-up Payment in excess of that, if any, initially determined by the Company
and Mr. Swift) within fifteen days of the receipt of such claim. The Company
shall notify Mr. Swift in writing at least ten days prior to the due date of any
response required with respect to such claim if it plans to contest such claim.
If the Company decides to contest such claim, Mr. Swift shall cooperate fully
with the Company in such action; provided, however, the Company shall bear and
pay directly or indirectly all costs and expenses (including additional interest
and penalties) incurred in connection with such action and shall indemnify and
hold Mr. Swift harmless, on an after-tax basis, for any Excise Tax or income
tax, including interest and penalties with respect thereto, imposed as a result
of the Company's action. If, as a result of the Company's action with respect to
a claim, Mr. Swift receives a refund of any amount paid by the Company with
respect to such claim, Mr. Swift shall promptly pay such refund to the Company.
If the Company fails to timely notify Mr. Swift whether it will contest such
claim or the Company determines not to contest such claim, then the Company
shall immediately pay to Mr. Swift the portion of such claim, if any, which it
has not previously paid to Mr. Swift.
In the event of termination due to Mr. Swift's death or as a result of sickness
or disability of a permanent nature rendering Mr. Swift unable to perform his
duties hereunder for a period of six (6) consecutive months ("Permanent
Disability") during the term of this Agreement, the Company shall pay to Mr.
Swift or to Mr. Swift's spouse, if she is then living, or otherwise shall pay to
the estate of Mr. Swift, as applicable, in the year of death or Permanent
Disability or the year thereafter (at the direction of Mr. Swift's estate or
guardian), a lump sum payment equal to the amounts to be paid under this
Agreement as set out in Section 3 hereof, discounted to present value at a rate
of 8% per annum. On the date of his death or Permanent Disability, the unvested
portions of all outstanding stock options issued to Mr. Swift to purchase shares
of common stock of the Company or unvested restricted stock or unvested
43
restricted awards or units held by Mr. Swift immediately prior to such date will
immediately become 100% vested and any such options shall remain exercisable by
Mr. Swift's estate or by Mr. Swift for one year following such death or
Permanent Disability.
Immediately prior to the date of termination of Mr. Swift's retention under this
Agreement by either party, all outstanding unexercised options to purchase
shares of common stock of the Company or unvested restricted stock or unvested
restricted awards or units held by Mr. Swift (as of the day prior to such
termination) shall immediately vest or be deemed to have vested, and otherwise
Mr. Swift shall retain such options, restricted stock or restricted units, with
no change in the terms of such options, restricted stock or restricted units.
Governing Law. This Agreement shall be governed by and construed under the laws
of the State of Texas. Venue and jurisdiction of any action relating to this
Agreement shall lie in Houston, Harris County, Texas.
Notice. Any notice, payment, demand or communication required or permitted to be
given by this Agreement shall be deemed to have been sufficiently given or
served for all purposes if delivered personally to and signed for by the party
or to any officer of the party to whom the same is directed or if sent by
registered or certified mail, return receipt requested, postage and charges
prepaid, addressed to such party at its address set forth below such party's
signature to this Agreement or to such other address as shall have been
furnished in writing by such party for whom the communication is intended. Any
such notice shall be deemed to be given on the date so delivered.
Severability. In the event any provisions hereof shall be modified or held
ineffective by any court, such adjudication shall not invalidate or render
ineffective the balance of the provisions hereof.
Entire Agreement. This Agreement constitutes the sole agreement between the
parties and supersedes any and all other agreements, oral or written, relating
to the subject matter covered by the Agreement with the exception of certain
Indemnity Agreements which may exist between the Company and Mr. Swift, and
which remain in force independent of this Agreement. This Agreement may be
executed in multiple counterparts with the same effect as one original document.
Waiver. Any waiver or breach of any of the terms of this Agreement shall not
operate as a waiver of any other breach of such terms or conditions, or any
other terms or conditions, nor shall any failure to enforce any provisions
hereof operate as a waiver of such provision or any other provision hereof.
Assignment. This Agreement is a personal consulting contract and the rights and
interests of Mr. Swift hereunder may not be sold, transferred, assigned or
pledged.
Successors. This Agreement shall be binding upon and inure to the benefit of the
44
parties hereto and their respective heirs, representatives, successors and
assigns.
Disputes. If a dispute arises out of or related to this Agreement and the
dispute cannot be settled through direct discussions, the Company and Mr. Swift
agree that if it then becomes necessary in Mr. Swift's judgment for him to sue
the Company in order to collect amounts to be paid to him under this Agreement
or otherwise enforce his rights under this Agreement, then the Company will be
obligated to pay both its own and Mr. Swift's legal fees in such litigation,
including the obligation of the Company to pay Mr. Swift's legal fees within
thirty days of receiving invoices therefore from Mr. Swift.
Lump Sum Payments. If payments to be made under any portion of this Agreement
provide for such payments to be made over a period of time, Mr. Swift and the
Company's Board of Directors may agree for such payments to be made in a lump
sum, which shall be determined by discounting the periodic payments using a
discount factor of 8% per annum.
IN WITNESS WHEREOF, the parties hereto affixed their signatures
hereunder as of the date first above written.
SWIFT ENERGY COMPANY
By /S/Bruce H. Vincent
------------------------------
Name: Bruce H. Vincent
Title: President
A. EARL SWIFT
/S/ A. Earl Swift
-----------------------------
Address: 2715 S. Southern Oaks
Houston, Texas 77068
45
Item 10.2
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT ("Agreement") is dated effective the 1st day
of July, 2006, and is by and between Swift Energy Company, a Texas corporation
(the "Company"), and Virgil Neil Swift ("Mr. Swift").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company and Mr. Swift wish to secure Mr. Swift's continued
involvement with and support of the Company;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the Company and Mr. Swift hereby agree as follows:
Term of Retention. Subject to the terms and conditions of this Agreement,
the Company hereby agrees to retain Mr. Swift, and Mr. Swift
hereby agrees to provide advisory and consulting services to the Company,
or to act in such other capacities as are mutually acceptable to both
Mr. Swift and the Company.
Scope of Agreement. Mr. Swift will perform diligently to the best of his ability
those duties set forth in this Agreement in a manner that promotes the interests
and goodwill of the Company. Mr. Swift will be available according to a work
schedule which may vary on a weekly or monthly basis and is agreed upon with the
Company from time to time, for consultation regarding specific matters
designated by, or particular assignments agreed upon with, the Executive
Committee of the Board of Directors, the Chief Executive Officer of the Company
or the Board of Directors of the Company, which assignments may be performed
from Mr. Swift's home, the Company's offices in Austin, Texas, or the Company's
principal executive offices in Houston, Texas.
Compensation.
The Company shall compensate Mr. Swift for his services Five Thousand Dollars
per month ($5,000) on the last day of each month for each month this Agreement
is in force and effect, plus an annual inflation adjustment on each anniversary
date of this Agreement of 4% per annum; and
Such other compensation as shall be determined by the Compensation Committee of
the Board of Directors of the Company from time to time.
Expense Reimbursement. The Company shall reimburse Mr. Swift for reasonable and
necessary expenses incurred by Mr. Swift in furtherance of the Company's
business, including reimbursement of out-of-pocket travel costs between the
46
Company's offices and Mr. Swift's home, provided that such expenses are incurred
in accordance with the Company's policies and upon presentation of documentation
in accordance with expense reimbursement policies of the Company as they may
exist from time to time, and submission to the Company of adequate documentation
in accordance with federal income tax regulations.
Confidentiality.
Mr. Swift recognizes that the Company's business involves the handling of
confidential information of both the Company and the Company's affiliates and
subsidiaries and requires a confidential relationship between the Company and
its affiliates and subsidiaries and the Company and Mr. Swift. The Company's
business requires the fullest practical protection and confidential treatment of
unique and proprietary business and technical information, including but not
limited to inventions, trade secrets, patents, proprietary and confidential data
and knowledge of both the Company's affiliates and subsidiaries and the Company
(collectively, hereinafter called "Confidential Information") which is conceived
or obtained by Mr. Swift in the course of his retention hereunder. Accordingly,
during and after termination of his retention by the Company hereunder, Mr.
Swift agrees: (i) to not disclose to any third party any such Confidential
Information; (ii) not to use for Mr. Swift's own benefit any of the Company's
Confidential Information, and (iii) not to aid others in the use of such
Confidential Information in competition with the Company or its affiliates and
subsidiaries. These obligations shall exist during and after any termination of
his retention hereunder. Notwithstanding anything else contained herein, the
term "Confidential Information" shall not be deemed to include any general
knowledge, skills or experience acquired by Mr. Swift or any knowledge or
information known to the public in general.
Mr. Swift agrees that every item of Confidential Information referred to in this
Section 5 which relates to the Company's present business or which arises or is
contemplated to arise out of use of the Company's time, facilities, personnel or
funds prior to Mr. Swift's termination, is the property of the Company.
Mr. Swift further agrees that upon termination of his retention for any reason,
he will surrender to the Company all reports, manuals, procedures, guidelines,
documents, writing, illustrations, models and other such materials produced by
him or coming into his possession by virtue of his retention by the Company
during the term of this Agreement and agrees that all such materials are at all
times the property of the Company. Mr. Swift shall be entitled to review,
inspect and copy any of the Company information or material necessary for legal
or other proceedings to which Mr. Swift is a party defendant by reason of the
fact that he is or was a consultant to or Director of the Company.
Covenant Not to Compete.
Subject to the provisions of (c) of this section, without the express prior
written consent of the Company, Mr. Swift will not serve as an employee,
officer, director or consultant, or in any other similar capacity or make
investments (other than open market investments in no more than five percent
47
(5%) of the outstanding stock of any publicly traded company) in or on behalf of
any person, firm, corporation, association or other entity whose activities
directly compete with the activities of the Company existing or contemplated as
of the date Mr. Swift last worked on the Company's behalf pursuant to this
Agreement, in those oil and gas basins in which the Company is active or as to
which it has begun study or analysis, where such employment may involve working
for or with, or assisting, such competitor with activities that are the same as
or similar to activities Mr. Swift performed on behalf of the Company.
Subject to the provisions of (c) of this Section, without the express prior
written consent of the Company, he will not solicit, recruit or hire, or assist
any person, firm, corporation, association or other entity in the solicitation,
recruitment or hiring of any person engaged by the Company as an employee,
officer, director or consultant.
It is specifically agreed that Mr. Swift may serve as a director and major
shareholder of Shumate Industries, Inc.
Mr. Swift's obligations under (a) and (b) of this section shall continue in
force only while he is receiving payments from the Company under this Agreement,
provided that if there has been a "Change in Control," as defined below, then
the provisions of (a) and (b) of this section shall have no further force and
effect after the date that such Change of Control occurs.
Termination.
Either party may terminate this Agreement at the end of any month, for any or no
reason, upon at least two weeks prior written notice of termination given to the
other party.
Immediately prior to the date of termination of Mr. Swift's retention under this
Agreement by either party, all outstanding unexercised options to purchase
shares of common stock of the Company or unvested restricted stock or unvested
restricted awards or units, if any, held by Mr. Swift (as of the day prior to
such termination) shall immediately vest or be deemed to have vested, and
otherwise Mr. Swift shall retain such options, restricted stock or restricted
units, with no change in the terms of such options, restricted stock or
restricted units.
Governing Law. This Agreement shall be governed by and construed under the laws
of the State of Texas. Venue and jurisdiction of any action relating to this
Agreement shall lie in Houston, Harris County, Texas.
Notice. Any notice, payment, demand or communication required or permitted to be
given by this Agreement shall be deemed to have been sufficiently given or
served for all purposes if delivered personally to and signed for by the party
or to any officer of the party to whom the same is directed or if sent by
registered or certified mail, return receipt requested, postage and charges
prepaid, addressed to such party at its address set forth below such party's
signature to this Agreement or to such other address as shall have been
48
furnished in writing by such party for whom the communication is intended. Any
such notice shall be deemed to be given on the date so delivered.
Severability. In the event any provisions hereof shall be modified or held
ineffective by any court, such adjudication shall not invalidate or render
ineffective the balance of the provisions hereof.
Entire Agreement. This Agreement constitutes the sole agreement between the
parties and supersedes any and all other agreements, oral or written, relating
to the subject matter covered by the Agreement with the exception of certain
Indemnity Agreements which may exist between the Company and Mr. Swift, and
which remain in force independent of this Agreement. This Agreement may be
executed in multiple counterparts with the same effect as one original document.
Waiver. Any waiver or breach of any of the terms of this Agreement shall not
operate as a waiver of any other breach of such terms or conditions, or any
other terms or conditions, nor shall any failure to enforce any provisions
hereof operate as a waiver of such provision or any other provision hereof.
Assignment. This Agreement is a personal consulting contract and the rights and
interests of Mr. Swift hereunder may not be sold, transferred, assigned or
pledged.
Successors. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, representatives, successors and
assigns.
Disputes. If a dispute arises out of or related to this Agreement and the
dispute cannot be settled through direct discussions, the Company and Mr. Swift
agree that if it then becomes necessary in Mr. Swift's judgment for him to sue
the Company in order to collect amounts to be paid to him under this Agreement
or otherwise enforce his rights under this Agreement, then the Company will be
obligated to pay both its own and Mr. Swift's legal fees in such litigation,
including the obligation of the Company to pay Mr. Swift's legal fees within
thirty days of receiving invoices therefore from Mr. Swift.
Lump Sum Payments. If payments to be made under any portion of this Agreement
provide for such payments to be made over a period of time, Mr. Swift and the
Company's Board of Directors may agree for such payments to be made in a lump
sum, which shall be determined by discounting the periodic payments using a
discount factor of 8% per annum.
IN WITNESS WHEREOF, the parties hereto affixed their signatures
hereunder as of the date first above written.
49
SWIFT ENERGY COMPANY VIRGIL NEIL SWIFT
By /S/ Bruce H. Vincent /S/ Virgil Neil Swift
------------------------------ ------------------------------
Name: Bruce H. Vincent Address: 10805 Olympia Fields Loop
Title: President Austin, Texas 78747
50
Exhibit 31.1
CERTIFICATION
I, Terry E. Swift, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended March
31, 2006, of Swift Energy Company;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting, to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: May 5, 2006
/s/ Terry E. Swift
------------------------------------
Terry E. Swift
Chief Executive Officer
51
Exhibit 31.2
CERTIFICATION
I, Alton D. Heckaman, Jr., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended March
31, 2006, of Swift Energy Company;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting, to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: May 5, 2006
/s/ Alton D. Heckaman, Jr.
----------------------------------------
Alton D. Heckaman, Jr.
Executive Vice President - Chief Financial
Officer
52
Exhibit 32
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the accompanying Quarterly Report on Form 10-Q for the period
ended March 31, 2006 (the "Report") of Swift Energy Company ("Swift") as filed
with the Securities and Exchange Commission on May 5, 2006, the undersigned, in
his capacity as an officer of Swift, hereby certifies pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of Swift.
Dated: May 5, 2006
/s/ Alton D. Heckaman, Jr.
-------------------------------
Alton D. Heckaman, Jr.
Executive Vice President -
Chief Financial Officer
Dated: May 5, 2006
/s/ Terry E. Swift
--------------------------------
Terry E. Swift
Chief Executive Officer