Swift Energy announced today that its income from continuing operations for the third quarter of 2008 increased 45% to $62.3 million, or $1.98 per diluted share, compared to $42.9 million, or $1.40 per diluted share of income from continuing operations earned in the third quarter of 2007. Adjusted cash flow from continuing operations for the third quarter of 2008 increased 23% to $154.0 million, or $4.90 per diluted share, compared to $125.3 million of adjusted cash flow, or $4.08 per diluted share, for the same period of 2007.
Swift Energy produced 2.32 million barrels of oil equivalent ("MMBoe") from continuing operations during the third quarter of 2008, which is a 14% decrease when compared to third quarter 2007 production of 2.70 MMBoe from continuing operations. Approximately 0.52 MMBoe were shut-in during the just-completed quarter due to Hurricanes Gustav and Ike. The Company estimates that including this shut-in production with the production realized during the third quarter of 2008 would have resulted in a 5% production increase over third quarter production levels a year earlier.
Terry Swift, CEO of Swift Energy, commented, "The third quarter of 2008 was a strong one for Swift Energy, even after two substantial hurricanes that caused disruptions to our South Louisiana operations and Houston headquarters. If production shut-ins during the quarter associated with these storms is included with our realized production, our quarterly production would have exceeded our previously announced guidance. Recent declines in oil and gas commodity prices together with the global crisis in the financial markets have created some new challenges. For many years, we have sought to balance our annual operational budget with our realized cash flows. As we finish up 2008 and enter into 2009, we are protecting our balance sheet and adjusting our future capital spending downward based on lower energy prices. We fully expect cash flows to support our capital spending budget, which is to be finalized in January, and allow us to deliver production and reserves growth."
Revenues and Expenses
Total revenues from continuing operations for the third quarter of 2008 increased 25% to $213.8 million from the $171.3 million from continuing operations generated in the third quarter of 2007, due to higher commodity prices.
Depreciation, depletion and amortization expense ("DD&A") of $22.52 per barrel of oil equivalent ("Boe") in the third quarter 2008 increased from $17.93 per Boe of DD&A in the comparable period in 2007 primarily as a result of an increased depletable base, partially offset by higher reserves and production shut-ins during the 2008 period. Lease operating expenses, before severance and ad valorem taxes, were $10.77 per Boe in the third quarter 2008, an increase of 63% compared to $6.62 per Boe in the third quarter of 2007. The increase in per unit lease operating expenses was predominately due to lower production resulting from hurricane related shut-ins and higher field expenses associated with increased activity. Also, severance and ad valorem taxes were up appreciably to $8.69 per Boe from $7.23 per Boe in the comparable period due to higher realized commodity prices.
General and administrative expenses associated with increased staffing levels and lower production resulting from hurricane related shut-ins rose to $4.36 per Boe during the third quarter 2008 from $3.07 per Boe in the same period in 2007.Interest expense per Boe increased 42% to $2.99 per Boe in the third quarter 2008 compared to $2.11 per Boe for the same period in 2007 due to lower production resulting from hurricane related shut-ins, increased bank debt and lower capitalized interest.
Production & Pricing
Swift Energy’s third quarter 2008 production from continuing operations of 2.32 MMBoe represents a 14% decrease when compared to production from continuing operations in the same period in 2007 and a 14% decrease compared to second quarter 2008 production. During the quarter, two substantial hurricanes, Gustav and Ike, caused the Company to shut-in approximately 0.52 MMBoe of production. The Company estimates that if production during the third quarter of 2008 is combined with hurricane-related production shut-in during the quarter, the Company's most recent quarterly production would have exceeded third quarter 2007 production by 5%. Year-over-year third quarter production benefited from increased activity in the AWP, Bay de Chene and South Bearhead Creek fields. The Company now estimates that approximately 0.3 MMboe will remain shut-in during the fourth quarter of 2008.
The Company realized an aggregate average price of $92.34 per Boe for its continuing operations, an increase of 47% from the $62.92 average price received in the third quarter of 2007. In the third quarter of 2008, average crude oil prices increased 61% to $122.71 per barrel from $76.20 per barrel realized in the same period in 2007. For the same periods, average natural gas prices were $9.70 per thousand cubic feet ("Mcf"), an increase of 71% from the $5.68 per Mcf average realized a year earlier. Prices for natural gas liquids ("NGL") averaged $70.55 per barrel in the third quarter for a 44% increase over third quarter 2007 NGL prices of $48.89 per barrel.
Swift Energy completed 27 of 28 development wells in the third quarter of 2008 for a 96% success rate. One non-operated development well and one non-operated exploration well were drilled during the quarter and were unsuccessful. As a result of Hurricanes Gustav and Ike, drilling was suspended on 5 wells in the Lake Washington area for a period of 26 days during the third quarter.
In the Company's Lake Washington area in South Louisiana, 5 development wells were drilled in the Lake Washington Field in Plaquemines Parish and 2 development wells were drilled in the Bay de Chene Field in Jefferson and Lafourche Parishes. The Company currently has 5 barge rigs contracted in this area, with 4 operating in Lake Washington and 1 operating in Bay de Chene. Up to 10 wells will be drilled in this area during the fourth quarter. Current plans to adjust the Company’s 2009 capital spending budget downward include releasing certain rigs based on the commodity price environment.
At Lake Washington in the third quarter, the SL 212 #167 ST2 was completed and tested at rates above 1,000 Boe per day with flowing tubing pressure above 800 psi. This well encountered 378 ft. of true vertical pay in nine separate zones and is currently on production. The CM #398 ST2 was also drilled during the quarter and encountered 234 ft. of true vertical pay in six separate zones. This well is producing at rates over 400 Boe per day with flowing tubing pressure of 720 psi.
The Bay de Chene field experienced damage to production facilities and equipment during the recent hurricanes. Repairs are being made in the facilities, but it is anticipated that production will not reach pre-storm levels until sometime in the latter part of the first half of 2009. The Company is working to resume limited production during the fourth quarter of this year. Two wells were drilled in Bay de Chene during the quarter but will not be placed on production until repairs have been completed.
We anticipate 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, will approximate $20 million, and we believe a portion of this will be reimbursed by insurance coverage.
Progress was made during the quarter in expanding the pressure maintenance project at Lake Washington. Permits were submitted to the state to provide additional water injection into the Newport reservoir for pressure maintenance. Water injection into the current injection well is averaging 1200-1300 barrels per day. A second 6" diameter production line was installed between the Newport header and Westside facility during the quarter. The line successfully reduced back pressure on the wells at the Newport header and resulted in a production increase of about 600 barrels of oil per day. The positive impact of this line on third quarter production was over shadowed by the negative impact of the two hurricanes.
Updating the Company’s strategic 3-D based South Louisiana exploration program, which began during the third quarter in areas outside of the Company’s existing fields, two wells have been drilled with one being classified as successful. The SL 18669 #1, previously referred to as the Shasta prospect, reached a measured depth of 18,855 feet during the fourth quarter.
This well encountered 30 feet of measured pay in two zones and will be completed and tested late in the fourth quarter. This well is anticipated to be on production in 2009. Swift Energy, with a 50% working interest, will operate this well. One non-operated prospect drilled during the third quarter, where the Company has a 25% working interest and which was drilled closer to Swift Energy's High Island field, was unsuccessful.
The Company is currently drilling one additional high potential prospect in the Westside area of Lake Washington. This well is intended to be a 12,000-15,000 foot test. Swift maintains a 100% working interest in this prospect. Further, the Company continues to carry out the work necessary to design and plan an 18,000 – 20,000 foot sub-salt test in the Lake Washington area for drilling sometime during 2009.
In the Lafayette South area, also in South Louisiana, 1 development well was drilled in the Bayou Sale Field. The St. Mary Parish Land Co. #82 was drilled to a depth of 14,380 feet, encountering 46 feet of true vertical pay. The first of three intervals to be tested was non-commercial. Completion activities are underway in a second prospective zone.
In the South Texas area, the Company completed 8 of 8 development wells drilled in its Cotulla area in La Salle, Dimmit and Webb Counties, Texas and 11 of 11 development wells targeting the Olmos sand in its AWP area in McMullen County, Texas. The Company will have two rigs in its AWP field and two rigs in its Cotulla area during much of the fourth quarter.
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