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Geoffrey Jordan

SFY AT A GLANCE

P/E ► -1.84   EV/EBITDA ► -2.39   ROA ► -26.5% LOW ROE ► -59% AVG Debt to Equity ► 1.11 AVG Current Ratio ► 0.763 AVG Interest Coverage Ratio ► -26.1 LOW

 

 

 

 

 

 

Swift Energy (NYSE: SFY) develops and operates oil and natural gas properties, with a focus on oil and natural gas reserves onshore and in the inland waters of Louisiana and Texas. The company hires independent contractors to extract crude oil and natural gas from its properties, and then it sells these commodities on the open market to oil companies such as Royal Dutch Shell (RDS'A), Chevron Corporation (CVX), and Exxon Mobil (XOM). In 2008, Swift Energy's total proved reserves were comprised of approximately 43% crude oil, 42% natural gas, and 15% natural gas liquids (NGLs).^[1]

Swift Energy is the largest producer of crude oil in the state of Louisiana. The company has become predominantly an oil producer, with oil constituting 54% of its 2008 domestic production, and oil and natural gas liquids together making up 66% of its 2008 domestic production.^[2] Like many operators of oil and natural gas properties in the U.S., Swift Energy reported a large loss in 2008 and in the first quarter of 2009, totaling $260.49 million and $59.1 million, respectively.^[3] The unprofitability of Swift Energy's business was caused by the sharp declines in energy prices in 2008; the aggregate average price of energy (including both oil and natural gas) decreased 58% from $77.80 per barrel of oil equivalent in the first quarter of 2008 to $32.29 in the first quarter of 2009.^[4] Swift Energy earns higher revenue on oil and natural gas sold when energy prices are high, so the sharp decline in prices in 2008 and into 2009 substantially reduced the company's revenue. The company also decreased its production volume by 5% in 2008 to 10 MMBoe (million barrels of oil equivalent) due to lower oil and natural gas demand.^[2]

The fall in demand for crude oil is tied to the 2007 Credit Crunch, the 2008 Financial Crisis, and the ensuing recession. When the demand for crude oil fell in the second half of 2008, oil prices fell from a record high of about $147 per barrel to around $50 a barrel in the first quarter of 2009.^[5] However, NYMEX crude oil is trading at about $70 per barrel as of mid-June 2009, up from its February low of about $42.^[6] Rising oil prices are caused by a variety of factors, including a weak U.S. Dollar (USD), OPEC production quotas, and the rising demand for energy in emerging markets such as China and India. Ultimately, rising oil and natural gas prices make Swift Energy's business model more profitable.

While oil and gas dominate the world's supply of energy, alternative energies such as wind energy, solar energy, and geothermal energy pose a long-term threat to the oil industry and to Swift Energy's business. At the same time, fossil fuels are estimated to account for 70% to 80% of global energy supply in 2100,^[7] and the comparatively low price of crude oil does not favor the economics of renewable energy, though government subsidies are helping to spur the adoption of alternative energy.

Company Overview

Swift Energy manages the development of its oil wells and supervises well operations and maintenance. The company does not own drilling rigs; instead, independent contractors are hired to provide drilling equipment and personnel. Swift Energy employs drilling, production, and reservoir engineers, geologists, and other specialists who work to improve production rates, increase reserves, and lower the cost of operating oil and natural gas properties.^[8]

Swift Energy does not refine oil or process natural gas.^[8] Once oil and natural gas are extracted from Swift Energy's wells, the company sells these commodities to other energy companies on the open market.^[8] In 2008, several companies accounted for 10% or more of the company's total revenues.^[8] For example, Royal Dutch Shell (RDS'A) accounted for approximately 29% of Swift Energy's total oil and gas sales in 2008, and Chevron Corporation (CVX) accounted for 25% of oil and gas sales.^[8] Oil produced by Swift Energy is moved from drilling sites via crude oil pipelines, barges, and trucks.^[8] Natural gas is usually delivered to El Paso’s Tennessee Gas Pipeline system and then sold on the spot market.^[8]

Business and Financial Metrics

SFY's Revenue and Net Income, 2005-2008, in millions of USD.^[3]

Swift Energy has grown its proved reserves from 107.4 MMBoe to 116.4 MMBoe over the five-year period ended December 31, 2008.^[1] Over the same period, annual production grew from 5.6 MMBoe to 10.0 MMBoe.^[1] Growth in both proved reserves and production was due to drilling activities and acquisitions of new properties.^[1] Swift Energy's total proved reserves at the end of 2008 were comprised of approximately 43% crude oil, 42% natural gas, and 15% natural gas liquids.^[1] Swift Energy's reserves are geographically concentrated with 61% of the total in Louisiana, 38% in Texas, and 1% in other states.^[1]

First Quarter 2009 Summary
Swift Energy reported a loss for the first quarter of $59.1 million.^[4] Cash flow decreased 66% to $46.3 million, compared to $136.3 million in the first quarter 2008.^[4] Swift Energy produced 2.37 million barrels of oil equivalent during the first quarter of 2009, which is an 8% decrease compared to first quarter 2008 production of 2.57 MMBoe.^[4] First quarter production decreased as a result of no new drilling activity. Total revenues for the first quarter of 2009 decreased 62% to $76.4 million from the $199.0 million generated in the first quarter of 2008, primarily attributable to lower commodity prices.^[4] The company realized an aggregate average price of $32.29 per Boe during the quarter, a decrease of 58% from the $77.80 average price received in the first quarter of 2008.^[4] In the first quarter of 2009, average crude oil prices decreased 59% to $41.15 per barrel, natural gas prices decreased 47% to $4.19 per thousand cubic feet, and natural gas liquids prices decreased 62% to $22.52 per barrel.^[4]

2008 Performance
In 2008 Swift Energy reported record cash flows which increased 32% over 2007 amounts to $582 million.^[1] The company also reported record revenues of $793.86 million for 2008, an increase of 25% over comparable 2007 levels.^[2] Swift Energy's weighted average sales price, which includes prices for oil and natural gas, increased 28% to $79.00 per barrel of oil-equivalent (Boe) for 2008 from $61.49 in 2007.^[2] Swift Energy's increase in revenue resulted from higher oil and gas prices during 2008, offset partially by a decrease in production:

• Average prices for oil increased to $101.38 per barrel in 2008 from $71.92 per barrel in 2007^[2]
• Average natural gas prices increased to $8.54 per thousand cubic feet (Mcf) in 2008 from $6.42 per Mcf in 2007^[2]
• Average natural gas liquid prices increased to $57.15 per barrel in 2008 from $49.72 per barrel in 2007^[2]
• The company's net sales volumes in 2008 decreased by 5%, or 0.6 million barrels of oil equivalent (MMBoe)^[2]

Swift Energy's net income was negative in 2008, with the company reporting losses of $260.49 million.^[3]

Effect of the Global Recession and Credit Crisis
Rapidly falling prices for oil and natural gas beginning in the third quarter of 2008 had a significant impact on Swift Energy's cash flows, capital expenditures, and liquidity. Oil and natural gas prices continued to decline during the fourth quarter of 2008, leading to a 49% decline in average prices when compared to average prices received in the third quarter of 2008.^[2] Swift Energy has taken the following steps to mitigate the effects of the recession:

• 2009 capital expenditures are budgeted at $125 million to $150 million, down from $674.8 million in 2008^[2]
• The company reduced its workforce by 11% (40 employees) to lower general and administrative costs^[9]
• The company adjusted its operations and facility usage levels to reduce lease operating expenses^[2]

Geographic Segments

Swift Energy's total proved reserves at the end of 2008 were comprised of approximately 43% crude oil, 42% natural gas, and 15% natural gas liquids.^[1] Although the company primarily produces these three commodities, it does not divide its operations into three business segments. Rather, Swift Energy divides its operations by geography, with 61% of its operations in Louisiana, 38% in Texas, and 1% in other states.^[1] The company's four core operational areas are Southeast Louisiana, South Louisiana, Central Louisiana/East Texas, and South Texas.

SFY's Geographic Breakdown of Oil and Natural Gas Production (total reserves in parentheses). SFY's proved reserves total 116.4 MMBoe and oil and natural gas production totals 10 MMBoe.^[13]

Southeast Louisiana

Lake Washington
At the end of 2008 Swift Energy owned drilling and production rights in 37,825 net acres in the Lake Washington field located in Southeast Louisiana.^[2] Since its discovery in the 1930’s, the field has produced over 300 million Boe.^[2] In 2008, the company drilled and completed 23 development wells in Lake Washington and had 119 proved undeveloped locations in this field.^[2]

Bay de Chene
The Bay de Chene is approximately 25 miles away from the Lake Washington field. At the end of 2008, Swift owned drilling and production rights in approximately 17,564 net acres in the Bay de Chene field.^[2] Partial production from the field remains shut due to damages that occurred from Hurricane Gustav in September 2008.^[2]

South Louisiana

Cote Blanche Island
The Cote Blanche Island field comprises 14,699 net acres.^[2] The company completed one exploratory well in the Cote Blanche Island field in 2008 and had 10 proved undeveloped locations in the field at the end of 2008.

Bayou Sale, Horseshoe Bayou, Jeanerette, and Bayou Penchant
In October 2006 Swift Energy acquired interests in these four onshore fields, with 5,700 acres in Bayou Sale, 10,512 acres in Horseshoe Bayou, 5,207 acres in Jeanerette, and 2,997 acres in Bayou Penchant.^[2] The company had 18 proved undeveloped locations in these four fields at the end of 2008.^[2]

Central Louisiana/East Texas

Brookeland
At the end of 2008 Swift Energy owned drilling and production rights in 79,063 net acres and 63,894 fee mineral acres in this field.^[2] The reserves are approximately 63% oil and natural gas liquids. The company had nine proved undeveloped locations in the field at the end of 2008.^[2]

Masters Creek
The company owned drilling and production rights in 40,080 net acres and 31,200 fee mineral acres in the Masters Creek field at the end of 2008.^[2] The reserves are approximately 72% oil and natural gas liquids. Swift Energy had nine proved undeveloped locations in this field at the end of 2008.^[2]

South Bearhead Creek
In 2005 and 2006, Swift Energy acquired 9,185 acres in this field.^[2] At the end of 2008 the company had 16 proved undeveloped locations in this field.

South Texas

AWP
The company owned 46,608 net acres in this field at the end of 2008 and operated 565 wells producing oil and natural gas from the Olmos sand formation at depths from 9,000 to 11,500 feet.^[2] Field reserves are approximately 62% natural gas. The company had 102 proved undeveloped locations in the field at the end of 2008.

Sun TSH, Briscoe Ranch, and Las Tiendas
Acquired in 2007, these fields produce primarily natural gas. At the end of 2008 Swift Energy owned drilling and production rights in 88,652 net acres in these fields (12,552 in Sun TSH, 67,478 in Briscoe Ranch, and 8,622 in Las Tiendas).^[2] The company operated 257 wells in these fields and had 71 proved undeveloped locations.^[2]

Discontinued New Zealand Operations

In June 2008, Swift Energy closed the sale of all of its New Zealand assets for $82.7 million.^[2] As a result of the sale, a third party brought a lawsuit against Swift Energy for breach of a contract related to obtaining their consent to transfer the permit. Pending the outcome of the litigation, Swift Energy deferred the potential gain on the permit sale.^[2]

Key Trends and Forces

Weak demand for oil and natural gas and falling energy prices limit Swift Energy's revenues and profitability

The U.S. Energy Information Administration reported that consumption in 2008 of refined products in the United States declined by nearly 6 percent from the 2007 average, representing the largest annual decline since 1980.^[14] This decline, following record-high retail gas prices and crude oil prices during the first half of the year, was prompted by the severe economic downturn in the second half of the year.

World oil consumption was forecast in April 2009 by the EIA to fall by 1.35 million bbl/d in 2009.^[15] The fall in demand for crude oil is tied to the 2007 Credit Crunch, the 2008 Financial Crisis, and the ensuing recession. When the demand for crude oil fell in the second half of 2008, oil prices fell from a record high of about $147 per barrel to around $50 a barrel in the first quarter of 2009.^[16] As a result of lower crude oil prices, Swift Energy earns a lower profit margin on oil it sells to oil companies such as Royal Dutch Shell (RDS'A), Exxon Mobil (XOM), and Chevron Corporation (CVX). However, NYMEX crude oil is trading at about $70 per barrel as of mid-June 2009, up from its February low of about $42.^[17] Rising oil prices are caused by a variety of factors, including a weak U.S. dollar, OPEC production quotas, and rising demand for energy in emerging markets such as China and India. Ultimately, rising oil and natural gas prices make Swift Energy's business model more profitable.

The rise of renewable energy threatens Swift Energy's business model in the long run

Alternative energy has not been widely adopted because it is not yet economically feasible when compared to cheap, plentiful fossil fuels. However, if energy sources such as solar or wind become more economically sound, the negative impact on the oil and gas industry will be immense. Specifically, Swift Energy's revenue is driven by the demand for oil and natural gas by oil companies such as Chevron Corporation (CVX). If the demand for fossil fuels is eventually replaced by the demand for alternative energy, Swift Energy's revenue will decline substantially.

Although infrastructure is being installed for renewable energy and solar power and wind energy are advancing on the technological front, the fall in oil prices after July 2008 has put the economics of renewable energy into question. With energy once again cheap and plentiful, the imperative to develop renewable energy has weakened. On the other hand, concern over global climate change has continued to rise, increasing government support for renewable energy grants and subsidies. For example, President Obama called for the U.S. to double its use of renewable energy by 2012 as part of his plan to stimulate the economy and pull the country out of recession. His plan, which includes up to $800 billion over two years in subsidies and tax cuts for renewable energy, energy efficiency, and electric grid modernization projects, has the potential to pull the industry out of the slump caused by the 2008 Financial Crisis.^[18] Moreover, Obama pushed through a stimulus plan that earmarks $80 billion for green projects, including $7.6 billion in renewable energy loan guarantees and bonds, as well as grants of up to 30% for business/homeowner investments in renewables.^[19] A further $10 billion has been earmarked for energy efficiency, $11 bn for efficient power grid expansion, $6 billion for clean energy research, and $2 billion for hybrid cars.^[20]

While oil and gas dominate the world's supply of energy, alternative energies such as wind energy, solar energy, and geothermal energy pose a long-term threat to the oil industry. On the other hand, some research institutes forecast that fossil fuels will account for 70% to 80% of global energy supply in 2100.^[7] It is clear that fossil fuels are essential to the functioning of the global economy, suggesting the intermediate-term viability of Swift Energy's business model, but the prospect of a transition to alternative energy threatens it in the long-run.

Adverse weather conditions such as hurricanes can potentially devastate Swift Energy's Louisiana and Texas operations

Approximately 49% of Swift Energy's 2008 reserves and 61% of its 2008 production are located in its South Louisiana and Southeast Louisiana core areas.^[2] These areas are vulnerable to hurricanes during the Atlantic hurricane season, which runs from June 1 to November 30.^[21] Increased hurricane activity between 2005 and 2008 resulted in lower production and physical damage to Swift Energy's operations. For example, a significant percentage of the company's production was shut down by Hurricanes Katrina and Rita in 2005, and by Hurricanes Gustav and Ike in 2008.^[22]

In 2008, production decreased 5% to 10.0 MMBoe as a result of production shut-ins necessitated by Hurricanes Gustav and then Ike. Additionally, the effects of the hurricanes were felt through the third and fourth quarters as the drilling and completion of several wells were delayed as the company moved drilling rigs into safe harbor before the hurricanes and then had to return them to the field. Hurricane Ike in mid-September caused damage to several fields in the company's South Louisiana core area and its High Island field due to high water levels.^[2] Swift Energy estimates that the total cost for the replacement of assets, repairs, and clean-up costs related to Hurricanes Gustav and Ike, primarily in the Bay de Chene field, were approximately $25 million.^[2]

Competition

Although the oil industry is dominated by the oil majors, including Chevron Corporation (CVX), CONOCOPHILLIPS (COP), and Exxon Mobil (XOM), 56% of US natural gas and 59% of U.S. oil is produced from companies with under 20 employees, according to the Independent Petroleum Association of America.^[9] Swift Energy's primary competition comes from other small, independent oil and gas companies that develop and operate properties throughout the U.S.

• Rosetta Resources (ROSE) is an independent oil and gas company that develops oil and gas properties in North America. The company’s operations are concentrated in the areas of the Sacramento Basin of California, the Rockies, and South Texas.^[23]
• Delta Petroleum (DPTR) is an independent oil and gas company that develops natural gas and crude oil properties. The company’s core areas of operation are the Rocky Mountain and onshore Gulf Coast regions.^[24]
• Carrizo Oil & Gas (CRZO) is an independent energy company that develops natural gas and oil reserves. The company’s operations are focused on producing natural gas in the Barnett Shale area in North Texas.^[25] It also operates onshore in the Gulf Coast areas of Texas, Louisiana and Alabama. The company also owns property in the United Kingdom and in the North Sea.^[25]
• APCO Argentina (APAGF) is an international oil and gas exploration and production company. Apco has interests in seven oil and gas producing concessions and one exploration permit in Argentina.^[26]

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8} SFY 10-k 2009, "Demonstrated Ability to Grow Reserves and Production" p. 4
2. ↑ ^{2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 2.11 2.12 2.13 2.14 2.15 2.16 2.17 2.18 2.19 2.20 2.21 2.22 2.23 2.24 2.25 2.26 2.27 2.28 2.29 2.30 2.31} SFY 10-k 2009 "Management's Discussion and Analysis of Financial Condition and Results of Operations" Item 7, p. 30
3. ↑ ^{3.0 3.1 3.2} Google Finance: SFY Income Statement
4. ↑ ^{4.0 4.1 4.2 4.3 4.4 4.5 4.6} Swift Energy Company News: SWIFT ENERGY ANNOUNCES FIRST QUARTER 2009 RESULTS
5. ↑ BBC News: Oil price goes below $50 a barrel
6. ↑ Wikinvest: Oil Prices
7. ↑ ^{7.0 7.1} Peak oil, peak coal, peak gas and projected fossil fuel use
8. ↑ ^{8.0 8.1 8.2 8.3 8.4 8.5 8.6} SFY 10-k 2009 "Operations" p. 14
9. ↑ ^{9.0 9.1} Financial Times: Producers run low to beat recession
10. ↑ SFY 10-k 2009 "Estimated Proved Oil and Natural Gas Reserves" p.11
11. ↑ SFY 10-k 2009 "Oil and Gas Acreage" p. 14
12. ↑ SFY 10-k 2009 "Marketing of Production" p. 16
13. ↑ SFY 10-k 2009 "Operating Areas" p. 7
14. ↑ Chevron Supplement to the 2008 Annual Report, p. 45
15. ↑ Energy Information Administration - Short-Term Energy and Summer Fuels Outlook
16. ↑ BBC News: Oil price goes below $50 a barrel
17. ↑ Wikinvest: Oil Prices
18. ↑ SeekingAlpha: "Obama Calls for Doubling Renewable Energy in Three Years"
19. ↑ FT: Fiscal sun shines on renewables groups
20. ↑ FT: Fiscal sun shines on renewables groups
21. ↑ About.com: When is hurricane season?
22. ↑ SFY 10-k 2009 "Risk Factors"
23. ↑ Google Finance: ROSE
24. ↑ ^{24.0 24.1} Google Finance: DPTR
25. ↑ ^{25.0 25.1} Reuters: Carrizo Oil & Gas
26. ↑ Google Finance: APAGF
27. ↑ Google Finance: SFY
28. ↑ ROSE 10-k 2009 "Results of Operations" p. 32
29. ↑ CRZO 10-k 2009 "Oil and Natural Gas Reserves" p. 13
30. ↑ Google Finance: APAGF
31. ↑ APAGF 10-k 2009