OIL & GAS FINANCIAL JOURNAL: Congratulations to you on entering Swift Energy's 35th anniversary year. We last interviewed you both five years ago on your company's 30th anniversary. How have things changed for Swift since that time? Have the changes been what you expected?
SWIFT ENERGY: Over the past five years, Swift Energy has transitioned from being one of the largest crude oil producers in the state of Louisiana, operating mainly in the Gulf Coast region, to becoming predominantly a resource player and one of the leaders in developing the Eagle Ford shale play in Texas.
OGFJ: Swift has assets in South Texas, Southeast Louisiana, and Central Louisiana. Can you give our readers a brief overview of Swift's operations, particularly Lake Washington, which has been a core operation for you for many years?
SWIFT ENERGY: We have approximately 80,000 acres in South Texas that are prospective for the Eagle Ford shale and Olmos tight sands. This acreage position spans the various hydrocarbon windows and has some of the best rock properties in the entire trend. Our South Texas assets are our primary focus for future growth at this time.
In Central Louisiana, we have three fields producing from the Austin Chalk and Wilcox formations. We expect to sell these assets in 2014, and they are currently being marketed for sale.
Lake Washington, in Southeast Louisiana, is truly a rare asset. Discovered in the 1930s, this field has produced more than 300 million barrels of oil to date. We believe that with advanced seismic imaging and processing and the potential for sub-salt development, Lake Washington may have another 300 million barrels yet to discover.
OGFJ: Is Swift the operator for all these properties?
SWIFT ENERGY: We operate just about everything we do across our portfolio. We have a non-operated position in a portion of our Central Louisiana acreage, but aside from that we operate what we have.
OGFJ: What impact has the "Shale Revolution" had on Swift? It's obviously had an effect on natural gas prices.
SWIFT ENERGY: Commodity prices are going to respond to supply and demand, as they should. We have definitely witnessed the response of natural gas prices to the incredible volumes of domestic natural gas discovered over the past decade. Over the past 18 months, as demand has increased and the economy has recovered, we've seen natural gas prices respond favorably.
From the time Swift Energy drilled its first Eagle Ford shale well in 2009 to today, we've changed our business considerably. Organizationally and operationally, shale development is considerably different than the explore, discover, develop model that had been employed for so many years in this industry. In addition to continual operational performance and cost improvements in our drilling and completion operations, we've sharpened our focus on supply chain management and the logistics aspects of our business and have considered joint ventures and partnerships as ways to accelerate our pace of development.
OGFJ: Under the right circumstances, would the company consider expansion into emerging shale plays such as the Tuscaloosa Marine Shale, which might be a good geographic fit for you?
SWIFT ENERGY: We are always evaluating additional opportunities. The nature of a new shale opportunity and the commitment necessary to make it work brings in a whole host of decisions aside from geography and geology. We really need to assess our human resource and financial constraints when we pursue an opportunity as well as its potential. We've been fortunate to have an excellent business development team that keeps us engaged in the marketplace for transactions.
SWIFT ENERGY: Our third quarter 2013 production was approximately 53% crude oil and liquids. Over the long term, we believe it will be beneficial to be long in both crude oil and natural gas as an operator. We've worked hard to maintain exposure to both commodities in our asset portfolio and intend to pursue our most commercial opportunities.
OGFJ: When the US starts exporting natural gas in the form of LNG in large volumes, do you think gas prices will rebound as a consequence?
SWIFT ENERGY: Predicting commodity prices can be a troubling exercise. We do think that the current disparity between natural gas and crude oil prices creates an incentive for energy consumers to look to natural gas as a more economic fuel choice. To the extent demand increases for natural gas as a result, we would expect natural gas prices to respond, but perhaps with less volatility than we have seen in the past.
OGFJ: Given that it takes a great deal of time to build liquefaction facilities and export terminals and to get all the permitting approved, how long do you think it will be before we begin to see significant LNG exports? Three to five years? Longer?
SWIFT ENERGY: Based on what we've observed, you could start seeing exports increase as early as the second half of 2016 and strengthening through the next several years. Large-scale projects seem to be subject to Murphy's Law, and it wouldn't be surprising if the current estimates for export increases moved out a year or two as we get closer to currently expected online dates.
OGFJ: I've talked to a number of upstream executives who say they are not asset restrained, but are cash restrained. This is what is preventing them from producing more oil and gas. Is this an issue for Swift as well? How do you fund drilling and development?
SWIFT ENERGY: You bring up an interesting point. As an industry, we have decades of wells to drill in shale plays across the country. The amount of capital that will be needed to efficiently bring the vast resources in these plays to market is enormous. Fixed income and equity investors have found the oil patch an excellent way to boost their returns as we have continuously improved our operational and financial performance over time. This relationship has served all parties well, but most companies including ours do find themselves somewhat constrained by capital, particularly at a favorable cost. However, the bigger issue we face, as I'm sure many other operators do, is the human resource constraint. We simply don't have enough qualified oil and gas professionals to do everything we want to do.
SWIFT ENERGY: We have built strong relationships with a wide variety of financial institutions and institutional investors. We maintain a diversified capital structure that allows us to finance our business through the most attractive vehicles at any given time.
OGFJ: What capital providers do you work with?
SWIFT ENERGY: We have built strong relationships with a wide variety of financial institutions and institutional investors. We maintain a diversified capital structure that allows us to finance our business through the most attractive vehicles at any given time.
OGFJ: I assume you hedge a portion of your production. Can you tell us a little about your hedging program? Who do you work with on this?
SWIFT ENERGY: Before we got involved in the Eagle Ford shale, we viewed hedging as a way to protect our downside without giving away the upside, and it was part of our price risk management. We primarily used put options to protect enough of our production to ensure we could slow down our capital spending if commodity prices decreased precipitously without jeopardizing our balance sheet. As our business has changed, so has our hedging behavior. With much of the geologic risk of conventional assets eliminated in shale plays, we now focus on protecting rates of return and margins, which is best done with swaps and collars. We can deploy this strategy over longer periods of time allowing us to make longer-term commitments to our development plans.
OGFJ: I recently interviewed an attorney, Bob Pease with Bracewell & Giuliani, who is a former federal regulator with FERC and the CFTC. He says that the Dodd-Frank Act will have an impact on all companies that are involved in energy trading, including those that are simply doing a little hedging. What effect, if any, do you think this new regulatory environment will have on your business?
SWIFT ENERGY: We now have to spend more time with our board on the strategies we're using as well as the transactions we're entering into. We also need to move a bit more deliberately to ensure we have considered any potential risks or exposure our hedging strategy can cause.
OGFJ: Bruce, I know you've been heavily involved with the IPAA in recent years, including responding to pending legislation that negatively impacts the petroleum industry. Do you think we're being over-regulated now? If so, is this bad for the business climate in general? Can you elaborate?
SWIFT ENERGY: We've certainly seen a significant increase in regulation from the current administration, and we expect that to continue. While some regulation is good, there does come a point where too much puts a damper on economic growth. The oil and gas industry has always found a way to thrive regardless of the regulatory and political environment. Through my work with the IPAA, I do everything I can to get our industry and our partners in Congress and the regulatory agencies to be aligned so we're working together for what's best for our country. We all want the industry to be successful and aid the economy as it has for decades, and we all want to achieve this in a safe, environmentally responsible way that has a positive impact on the communities we serve.
OGFJ: You alluded to this previously. When the oil and gas business is going through an "up" cycle as it is now, it tends to mean qualified employees are in great demand. Is getting experienced help more difficult today? What is Swift doing to attract highly qualified employees?
SWIFT ENERGY: It is always difficult to attract the best people for an organization, more so when effective workers have choices. We actively pursue folks with our straight-forward vision of our business, and we believe our culture, values, and rewards, along with a multi-year, premium inventory of exciting projects, a long-term track record of success, and a high quality roster of existing personnel provide an attraction to join our team.
OGFJ: How about rig availability? Is that a problem now, or do you expect it will be a problem going forward? Can you discuss your relationship with service and supply vendors, including any specific examples?
SWIFT ENERGY: We've seen a loosening of the service markets recently as new equipment has been commissioned and deployed to the most active shale plays. We view what might be termed a problem as an opportunity to align ourselves with our vendors and manage our entire supply chain to fit with our project and development plans. Through a mix of long- and short-term commitments, we believe we have the service and vendor capacity to execute our plans.
SWIFT ENERGY: We've employed all of the above in 2013 to lower our drilling and completion costs in 2013 by more than 10% and to improve our performance with the wells we drill. We now use seismic to land our well bores in a specific portion of the lower Eagle Ford, while drilling longer laterals. We are also logging our laterals before completion to make sure we are only treating productive rock in each well bore. Finally, we have reduced the length of our frac stages, redesigned our perforation configuration in each frac stage and dramatically increased our sand volumes pumped during completion. These efficiencies are increasing the yield of our wells while also reducing costs. We expect to further reduce costs with these methods in 2014.
OGFJ: What vendors, especially oil service companies, do you work with, and are you satisfied with the results you're getting?
SWIFT ENERGY: We work with more vendors than we have space to list and I'd be remiss to only name a few. All of our vendors and their people do a phenomenal job of teaming with our technical teams and ensuring that we are utilizing the most effective equipment and techniques available to us in our operations.
OGFJ: I was talking to Floyd Wilson a while back about his new company, Halcon Resources. His model seems to be to build up a company, sell it at its peak, and cash out. Then start over again and do the same. He tells his employees not to expect to retire from the company because he won't keep it that long. After 35 years, that doesn't seem to be the model for Swift Energy. To what do you attribute the company's longevity?
SWIFT ENERGY: When you're good at something and you enjoy doing it, you want to just keep moving forward with it. We treat our people right, adjust our business model as our company grows and the environment changes, and keep a multi-year inventory out in front of us. Swift Energy is a place where people can succeed, be part of a family and know that the organization is always looking towards long-term growth.
OGFJ: Thank you both very much for taking the time to talk with us.
