Production increased 7% for the second quarter of 2004 to 14.3 billion cubic feet equivalent ("Bcfe") from the 13.3 Bcfe produced in the second quarter of 2003 and was the same as the 14.3 Bcfe produced in the first quarter of 2004. The increase compared to the second quarter of 2003 was primarily due to higher levels of domestic production at Lake Washington. Second quarter 2004 production included 10.2 Bcfe of domestic production (a 20% increase) and 4.1 Bcfe produced in New Zealand (a 15% decrease), in both cases when compared to production in the same period in 2003.
Terry Swift, President and CEO, noted, "Swift Energy is pleased with its accomplishments for the first half of 2004. These include the issuance of new 7-5/8% senior notes and the extension and increase in our bank credit facility, both of which enhanced our balance sheet and liquidity. The proceeds from the new senior notes enabled us to repurchase all Swift's outstanding 10-1/4% notes as of August 1, 2004. Swift Energy's production for the first half of 2004 was a record high. The robust commodity prices and increased production have set the stage for Swift Energy's increased profits in 2004, and we believe that the recently increased capital spending program for the remainder of 2004 will give Swift Energy strategic momentum as we go forward into 2005."
Through the first six months of 2004, production totaled 28.5 Bcfe, an increase of 9% from 26.1 Bcfe seen last year for the same period. Total revenues for the first six months of 2004 were $136.4 million, up 31% from $104.2 million during the same period last year. During the first half of 2004, net income increased 106% to $27.5 million ($0.98 per diluted share) from $13.3 million of ($0.49 per diluted share) in the first half of 2003. Cash flow before changes in working capital (a non-GAAP measure, see reconciliation on page 10) increased 35% in the first half of 2004 to $79.1 million ($2.81 per diluted share) from $58.4 million ($2.13 per diluted share) in the same period in 2003. Net cash provided by operating activities for the first half of 2004 increased 41% to $75.3 million ($2.67 per diluted share) from $53.5 million ($1.96 per diluted share) in the 2003 period. Increased revenues, net income and cash flow in 2004 are primarily the result of our increased production and higher commodity prices.
Revenues and Expenses
Total revenues for the second quarter of 2004 increased 40% to $71.0 million from the $50.7 million of total revenues in the second quarter of 2003. Swift Energy's increased revenues for the second quarter of 2004 are attributable to both higher commodity prices and increased levels of production.
Lease operating expenses, before severance and ad valorem taxes, were $0.73 per thousand cubic feet equivalent ("Mcfe") in the second quarter of 2004, an increase of 6% compared to $0.69 per Mcfe in the second quarter of 2003. The increase was predominately due to the facility repairs in Lake Washington, along with higher currency exchange rates and plant maintenance costs in New Zealand. General and administrative expenses increased to $0.29 per Mcfe during the second quarter of 2004, as compared to $0.25 in the 2003 period, predominantly due to continued Sarbanes-Oxley compliance related expenditures. Primarily as a result of increased estimates for future development costs depreciation, depletion and amortization increased to $1.37 per Mcfe in the second quarter of 2004 compared to $1.18 per Mcfe in the second quarter of 2003. Interest expense was $0.50 per Mcfe, the same level as the 2003 period. Also, severance and ad valorem taxes were up appreciably on a per unit basis in the second quarter of 2004 to $0.49 per Mcfe from $0.35 per Mcfe in the comparable 2003 period due to higher commodity prices, and up overall due to higher production levels.
As of August 1, Swift Energy redeemed the remaining 10-1/4% senior subordinated notes due 2009. The Company will record an approximate $6.9 million charge (approximately $4.4 million or $0.16 per diluted share after tax) in the third quarter as the remainder of the debt retirement expense.
Production & Pricing
Domestically, second quarter 2004 total production increased by 20% to 10.2 Bcfe compared with 8.5 Bcfe produced in the same 2003 period and decreased 2% sequentially compared to the 2004 first quarter production of 10.4 Bcfe. This year-to-year production growth is a result of the Company's successful shallow drilling efforts in the Lake Washington area.
New Zealand accounted for 28% of total production with 4.1 Bcfe produced in the second quarter of 2004. This 15% decrease from the 4.8 Bcfe produced in the second quarter of 2003 and 5% increase from first quarter 2004 production levels was in line with the Company's guidance. Production in New Zealand was lower as expected due to increased use of hydroelectricity in New Zealand that has contributed to a short-term reduction in market demand for natural gas, which is expected to continue throughout 2004.
In the second quarter of 2004, Swift Energy realized an aggregate global average price of $5.04 per Mcfe, an increase of 31% from second quarter 2003 price levels when the price averaged $3.84 per Mcfe. Domestically, the Company realized an aggregate average price of $5.86 per Mcfe, an increase of 24% over the $4.71 received in the second quarter of 2003. In New Zealand, the Company received an aggregate average price of $2.98 per Mcfe for the second quarter in 2004, an increase of 31% over the $2.28 per Mcfe realized in the same period of 2003.
Swift Energy realized average domestic natural gas prices of $6.09 per thousand cubic feet ("Mcf") in the second quarter of 2004, an increase of 18% from the $5.15 per Mcf for the same period in 2003. Meanwhile, second quarter 2004 average domestic crude oil prices increased 32% to $37.22 per barrel from $28.25 per barrel realized in the same period of 2003. Prices for NGLs domestically averaged $19.42 per barrel in the second quarter, a 14% increase over second quarter 2003 NGL prices of $17.07.
In New Zealand, Swift Energy received an average natural gas price of $2.13 per Mcf for the second quarter of 2004 under its long-term contracts, a 22% increase over the $1.75 per Mcf received in the second quarter of 2003. Also in New Zealand, the sales price of the Company's McKee blend crude oil averaged $37.37 per barrel, a 40% increase over prices for the same period in 2003, and the Company's NGL contracts yielded an average price of $17.69 per barrel for the second quarter of 2004. New Zealand natural gas and NGL price contracts are remitted in New Zealand dollars, which has continued to strengthen during the second quarter 2004 against the U.S. dollar compared to the same period in 2003, but weakened when compared to the first quarter 2004.
During the third quarter 2004, Swift Energy will be completing the data acquisition phase of its 3-D project in Lake Washington and will begin to correlate and process this data, which will play a key role in the Company's drilling plans for 2005 and beyond. Because of the 3-D project and repairs to facilities, Swift Energy has reduced current drilling to one rig and emphasized the long-term planning for improvement of the facilities in this field. The Company is in the planning and design stages for further expansion of the Lake Washington production facilities, looking to expand two of the production platforms and the possibility of adding a fourth production platform. One expansion will be at the CM3 platform, which processes sour crude production and is currently at capacity. The Company is also rebuilding the amine plant located on the caseload platform, which recently went down. As a consequence of this downtime, as much as 3,500 barrels of daily production has been shut-in for the last several weeks.
Swift Energy completed 9 of 13 wells domestically in the second quarter of 2004. Of these 13 wells, 11 were development wells and two were exploration wells. In Lake Washington, the Company completed 5 of 6 development wells but was unsuccessful with an exploration well. Swift Energy also completed 4 of 5 development wells in the AWP Olmos area. In South Texas, Swift successfully drilled a development well in Kenedy County and was unsuccessful with a non-operated exploration well in Willacy County.
Swift Energy currently has three drilling rigs operating domestically, one drilling for oil in the Lake Washington area, one drilling for natural gas in South Texas and one non-operated rig in Alabama.
New Zealand Operations
In New Zealand, Swift Energy began its development program in the Manutahi Sand, a shallow oil-bearing sand, and successfully drilled five of these development wells in the Rimu/Kauri area during the second quarter of 2004. One exploration well targeting the Manutahi sand in a prospective fault block to the south was unsuccessful. The Kauri-E5 well, the first of two more wells in the area targeting both a development location of the Kauri Sand and an exploration target of the deeper Tariki Sand, is currently being completed in the Kauri Sand interval. The Kauri-E6 well is expected to be drilled following the Kauri-E5 well completion.
Price Risk Management
Swift Energy also announced that since its last update on July 20, 2004, it has continued to enter into price risk management transactions. The Company recently sold forward 1,500 barrels per day of crude oil for October and November 2004, each at a NYMEX strike price of $41.42 and $41.67 per barrel, respectively. These NYMEX crude oil strike prices do not take into account transportation charges or crude oil quality differentials that could result in deductions ranging from $2.00 to $3.00 per barrel. Details of all of Swift Energy's price risk management activities can be found on the Company's website.
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