AN INTERVIEW WITH TERRY SWIFT AND BRUCE VINCENT OF SWIFT ENERGY

OIL & GAS FINANCIAL JOURNAL: Congratulations on your company's 30th anniversary. It's been three decades since Earl Swift founded Swift Energy in October of 1979. On your company website, you mention that back in the mid-1980s oil and gas prices fell off a cliff and that many of your competitors didn't make it. Swift Energy not only survived – it prospered. We're now in another downturn. How are you doing this time around?

TERRY SWIFT: Well, I'd say there's no question that we're surviving. We've really got our momentum back, and while this has been a difficult time for everybody in our industry, we see a lot of prosperity going forward. We've positioned ourselves very nicely in South Texas and South Louisiana. We're very technology driven, which has been one of our core strategies from the beginning. That strategy is to not necessarily be the first to deploy a new technology, but certainly to not be the last. In both areas, South Louisiana and South Texas, we've got the technologies. We've got a very nice position in the Eagle Ford shale play down in South Texas, and it's compatible with the position we've had going back to the 1980s. We've got a substantial footprint in South Texas, and we're starting to exploit the Eagle Ford. Whereas South Texas is primarily a gas province, South Louisiana has been very good to us from the oil side. We've been increasing our position there. We were the leading oil producer in South Louisiana for a long time, and we're fighting hard to get that position back.

BRUCE VINCENT: One of the keys to our strategy, which is perhaps different from some of the companies out there, is that we run our business to be in business for a long period of time. We've been in business for 30 years, and we expect to be in business 30 years from now. Our operating strategy is very focused and relies on up-to-date, leading-edge technology without having to do a lot of R&D to get more out of the ground and to do it with less risk. Our financial strategy has always been low leverage and high liquidity – in other words, little debt and lots of cash. And if that is your policy, you're going to live through thick and thin. We often find that the best time to make money in the business is at the bottom of the cycle when others aren't doing too well.

OGFJ: What sort of opportunities do you think this situation could create?

VINCENT: Well there are opportunities out there, and we think there will be even more as gas prices continue to erode and companies develop liquidity problems. We don't rely on that for our growth – we've got a drillbit strategy – but we've always used a tandem approach of drilling and acquisitions to grow the company. A certain percentage of your inventory is drilling projects. Terry talked about South Louisiana and South Texas, tight sands and shale play – that's your inventory. But you also need to be opportunistic when the right things come along.

OGFJ: What unconventional gas plays are you in currently?

VINCENT: Well, to begin with, I'm doing my best in this industry to get rid of this word "unconventional." What people called unconventional a few years ago is now conventional. It's just a different technology. As frac technology developed, what was uneconomic a few years ago has become economic. These shale plays were not unconventional – but they were uneconomic because we didn't have the technology to unlock the hydrocarbons. Now we do, and we're able to exploit them commercially. A good example is the Eagle Ford, which we think could be one of the best shale plays in the US.

OGFJ: From what standpoint?

SWIFT: In terms of the quality of the rock. The shale plays are not all the same. You have to look at the mineralogy, as well as the characteristics or petrophysics of the rock. When you compare the Eagle Ford to the Haynesville, the Woodford, or the Fayetteville shales, it comes out very favorably. There are different tiers in the Eagle Ford that we're looking at. One of our competitors has already drilled some very good wells, but there is a shallow Eagle Ford play and another that is a little more condensate rich. We have some acreage that's more in the shallow window, we've got acreage in this middle window that is already looking very productive, and we have some acreage in the higher-pressure window. We're pretty excited about the different types of potential we can get out of the Eagle Ford. The rock is generally the same, but the pressure and types of fluids you can get out of it can be different as the play emerges.

OGFJ: How would you compare the Eagle Ford with, say, the Haynesville?

SWIFT: The gas in the Haynesville tends to be a lot drier thus far than what we've seen in the Eagle Ford. Drier in terms of dry gas as opposed to having condensate liquids. The Eagle Ford is still very much an emerging play. As with all these types of plays, you start out with numerous counties, but there are going to be sweet spots. We've got quite a large footprint in South Texas in the AWP field, where we've been since 1989; the Sun TSH field; we've got acreage in the Briscoe Ranch field; and right up against the border on the Rio Grande River, we've got the Fasken field. However, our major footprint is in the AWP area in McMullen County.

OGFJ: Who else is active in the Eagle Ford?

VINCENT: There are a lot of companies that are active down there. It's kind of THE hot play right now in terms of acreage activity, leasing companies trying to find a position. Petrohawk is probably the leader in terms of permitting and drilling wells because they were in there earlier than most and have acquired a lot of properties, but there are many large and small, public and private companies that are active in the area. If you think about it, the Eagle Ford covers a substantial area, all the way from the Mexican border up to near Houston. It was named after Eagle Ford, Texas, which is just outside of Fort Worth, so it curves and goes north from South Texas and uplifts near Eagle Ford.

"Our financial strategy has always been low leverage and high liquidity – in other words, little debt and lots of cash. And if that is your policy, you're going to live through thick and thin."– Bruce Vincent

SWIFT: There are at least three counties in South Texas that are highly prospective – McMullen, La Salle, Dimmit, and perhaps Webb. [The shale] goes all the way from the Rio Grande up towards the Edwards trend. The Eagle Ford is a very pervasive source rock for a lot of the accumulations all the way along the Giddings play, and it's right underneath the Austin chalk.

OGFJ: Moving on to the financial area, the value of Swift's assets has declined, as it has with other energy companies, as commodity prices have dropped precipitously in the past year or so. Oil has made a bit of a recovery, but natural gas prices are still extremely low. What steps has Swift taken to deal with this situation?

SWIFT: Well, we're a full cost accounting company, and as a result of that, we do our accounting in accordance with full cost accounting and so when you have these big price swings downward, you have the write-offs that come with them. We've all had to endure oil prices falling from $145 to $30 a barrel, and now they're back up to around $70, although we're still seeing the lower end of gas prices. I think the company has done a good job of protecting itself through this period. We have taken assets off the balance sheet. It's a write-down. And when commodity prices come back up, full cost accounting doesn't provide for those to come back on the balance sheet, so you won't see the value come back in that regard. But certainly you should see better cash flow and better earnings as prices rise again.

I think this downturn has helped in some ways. Service costs and tangible costs were sky high, and now they've gone down to a more sustainable level. And now we've seen steel prices mitigate, the vendors are becoming more efficient, and we've reduced our costs during this period. We've implemented processes, and we're working closer with our vendors for new drilling operations. I think you'll see the value come back.

VINCENT: I'll just second what Terry said. You have to keep your costs down and continue to grow your reserves. This isn't our first downturn, and most of us in this business have a lot of gray hair. So we know what to do. You have to look at the opportunities that present themselves during a downturn. When you have these wonderful peaks, they feel good for a short while, but they do just take your costs way out of line. The service companies and the drilling contractors want their share of the pie, too. And, like all pendulums, they tend to swing too far and downturns help them correct. So there are good things that come out of downturns. We need to recognize that it's probably going to be a slow road back, but what we've done at Swift is to position ourselves financially with a strong balance sheet. We know we're going to be around, and we've got a very deep inventory of projects. So we just need to get at it and make it happen.

OGFJ: Since oil prices are up and gas prices are still depressed, will you concentrate your efforts on oil projects?

VINCENT: When we talk about our company, we use the words "balance" and "diversity" a lot. The answer to that is that we believe we need a balanced strategy. We've already kicked up our capital expenditures this year based on higher prices from what we budgeted originally to give us more balance sheet strength. We're applying some of that in South Louisiana, basically oil projects in the intermediate depths of Lake Washington, and gas projects in South Texas. We're taking this technology that is so successful in the shale resource plays and applying it to the tight sands that we've been developing for 20 years. And no one's done that. We've drilled one well and it was very successful, and now we're drilling a second and a third.

OGFJ: What technology is that?

VINCENT: It's basically horizontal drilling with multi-stage fracturing. In South Texas, we've drilled over 500 wells in the last 20 years and probably done 1,000 fracs – but they're all vertical wells. We understand that sand reservoir really well, so what we've done is taken it to the edge of the economic limit of the field, drilled a horizontal well to 3,500 feet, did nine multi-stage fracs, and ended up with a well that is substantially better than nine vertical wells but drilled for half the cost. By doing this, we believe we've created a whole new opportunity set to develop tight sands that were non-economic or barely economic. Essentially, we're drilling for half the cost and getting twice the performance. We don't think this will work in all tight sands, but we believe the Olmos [in South Texas] is one where it looks like it will work. And so we're trying to prove this up and turn it into something that becomes more of a manufacturing operation. At the same time, we're developing the Eagle Ford shale, which is a virgin resource play. We have yet to drill a well there, but our acreage is situated right in a big part of the sweet spot. We're preparing to begin drilling in the Eagle Ford in the fourth quarter of this year.

OGFJ: Some companies, Newfield for example, have announced they are shutting in some gas production this year due to low prices. Has Swift shut in any production?

VINCENT: No. What is happening is that some of this is voluntary and some of it's involuntary. There have been significant pipeline pressures that are backing you up, forcing you to shut in. We have not experienced any of this. The only shut-ins we might have had would be related to mechanical issues or a pipeline was out of service for a few days.

SWIFT: We have made no corporate business decision to shut-in production.

OGFJ: Roughly what percentage of your production is oil and what percentage is gas?

VINCENT: Roughly 60% is liquids. That breaks down to 47% oil, 13% natural gas liquids, and 40% natural gas.

OGFJ: How do you minimize exploration risk in your company?

SWIFT: What we've tried to do with exploration is to make sure that we have strong data sets, principally 3-D seismic in South Louisiana, and we also have a fair amount of seismic – both 3D and 2D in South Texas, then processing that seismic and integrating it. If you go to our website, you'll see that we have a patchwork quilt of over 50 different shoots and we've merged them together so that you get a much more high-quality shoot in South Louisiana. We've shot some original proprietary data over our major fields. We're got a core footprint that we think helps mitigate that exploration risk. And also, in terms of wildcats, we mostly drill exploration wells around our own property and tend to stay pretty close to home where we have the knowledge and experience.

VINCENT: Another thing we do to mitigate risk is to try to work in areas – South Louisiana is probably the perfect place – that have multiple horizons. Lake Washington is probably the best example. It has over 70 different sand horizons, so we'll often identify an exploration target that's deep, but we'll have development targets on the way there. And so you're drilling development targets, extending the well, and basically doing exploration on the margins, which helps take some of the risk out.

OGFJ: Are you one of the major players around Lake Washington?

VINCENT: Yes. We're one of the major players in South Louisiana, the onshore and the water area. Swift has been one of the most active drillers in the state for the last several years. We're also one of the largest crude oil producers in the state.

OGFJ: How did you first get into South Louisiana? Tell us the story.

VINCENT: Well, the majors like Exxon and Chevron and Shell and Texaco dominated this area for decades. All of a sudden in the early 1970s, activity in this area virtually stopped. That's when the majors shifted their focus to offshore, and the onshore activity shifted into a maintenance mode along the intracoastal area. We didn't get into Lake Washington until 2001. Even though it was basically a maintenance operation during the '70s, '80s, and '90s, Exxon wasn't willing to sell those assets. Lake Washington specifically was purchased by a small independent in 1998, the first time that Exxon would let go of it. Bay de Chene was sold by Texaco to a small independent in the early 2000s. And we subsequently bought the fields from the independents. We had some experience back in the '80s buying from Amoco up in Oklahoma. The majors are smart people. We don't pretend to be smarter than them, but their focus is different from ours. The expected returns were below Exxon's threshold, but they could be very meaningful to a company our size.

SWIFT: Our company strategy pretty much emerged after we acquired Lake Washington, our first major core asset in South Louisiana. We enjoyed a tremendous amount of success drilling shallow exploitation wells and revitalized that field. We picked up Bay de Chene and Cote Blanche Island from EnerVest, and then we acquired the remainder of the fields from BP.

OGFJ: How much damage did Hurricane Katrina do to your operations back in 2005?

VINCENT: Well, it pretty much came ashore right over Lake Washington, so we caught the brunt of the storm. And last year, Hurricane Ike, because it was such a huge storm, the tidal surge affected our Louisiana facilities as well.

OGFJ: Did your insurance cover most of the damage?

VINCENT: Well, just like it would be if your house was destroyed by a hurricane, the insurance doesn't cover all the damage. And insurance rates in South Louisiana immediately went through the roof for everybody. However, at the time of Katrina, we were fortunate to have business interruption insurance. Not many people have this type of insurance. When our business was shut in after the storm, the insurance company actually paid us something for the loss of business. This was a big number for us. Unfortunately, after Katrina, this type of insurance became unaffordable.

"We're among the first companies to use horizontal drilling and multi-stage fracturing in tight sands in the Olmos in South Texas. We have some very good assets, and we think they are perfect for this technology."– Terry Swift

SWIFT: The takeaway from this terrible storm [Katrina] is that we didn't have anybody hurt, and our folks got back in the field very quickly. It was one of the shining moments in the company's history where we all worked together as a team and helped our folks, and our folks helped us, and we got our production facilities back up and running in record time. And we learned a lot from the storm damage. We learned how we wanted to build new facilities. We're just now finishing up in Bay de Chene, which was hit by Hurricane Gustav in 2008. We have some new facilities there that are much more resilient than the old facilities we bought. Future storm damage should be minimal due to the better facilities.

OGFJ: What are the analysts saying about Swift Energy?

VINCENT: I think we have some pretty good analyst coverage, and they are viewing Swift very favorably. What you find with the analysts is what you find with the investors. Everybody is interested in the new play. We haven't yet drilled a well in the Eagle Ford, but that's where a lot of the focus is. And rightly so. We think we have a really exciting position there, but we try to make sure they're also up to date on the Olmos and also South Louisiana.

SWIFT: My dad, Earl Swift, formed the company in 1979 and very shortly thereafter he was joined by Virgil, his older brother. Earl was more of a reservoir engineer, and Virgil was more of an operations engineer type. They put their skills together and pretty much put Swift Energy on the map. They were very technology driven from the start. And because they wanted to avoid any conflicts of interest with their previous companies, they picked West Virginia as the place to start – not Texas, even though they both lived in Texas. I joined them in 1981, and we got into a tight sands gas play in the Devonian shale in West Virginia. Although we were still many years away from horizontal drilling in shale, I remember having discussions about whether horizontal drilling and fracturing were a solution. Now, today, we're among the first companies to use horizontal drilling and multi-stage fracturing in tight sands in the Olmos in South Texas. We have some very good assets, and we think they are perfect for this technology.

OGFJ: Final question. You had a presentation called "Road to the Future" at the Howard Weil Energy Conference in New Orleans. What does the future hold for Swift Energy?

SWIFT: Well, the road to the future is, as Bruce said, to continue to grow the company and to be in business another 30 years. We think our strategy serves us well as far as having a balanced approach to the business – growing organically through the drillbit and through acquisitions as opportunities present themselves.

VINCENT: We do a lot of things here culturally with our people that help make us a better team together, help us be motivated, help us focus on the most important things. Every year we have a theme, and this year it's the "Road to the Future." It's the way forward, it's the way we're going, and it ties in perfectly with our 30th anniversary celebration this year.

OGFJ: Thank you both for taking the time to talk with me today and congratulations on your anniversary.

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