Swift Energy Company (SFY) Investor/Analyst Day Call March 15, 2012 09:00 ET Executives Paul Vincent – Director, Finance and Investor Relations Terry Swift – Chairman and Chief Executive Officer Bruce Vincent – President Bob Banks – Executive Vice President and Chief Operating Officer Steve Tomberlin – Senior Vice President, Resource Development and Engineering John Branca – Vice President, Exploration & Geosciences Steve Schmitt – Vice President, Energy Marketing Alton Heckaman – Executive Vice President and Chief Financial Officer Analysts Leo Mariani – RBC Capital Markets Neal Dingmann – SunTrust Michael Hall – Robert W. Baird Adam Leight – RBC Andrew Coleman – Raymond James Mark Lear – Credit Suisse Presentation Paul Vincent – Director, Finance and Investor Relations
We do have one break scheduled today. We are going to try to honor that and keep that to between 10 and 15 minutes. It should give everyone plenty of time to get their refreshments and make any necessary phone calls etcetera. With that all being said, thank you gain for your attention and thank you again for your participation and interest at Swift Energy. And as always, I'd say it’s a distinct honor to introduce to you Terry Swift, our Chairman and CEO of Swift Energy CompanyTerry Swift – Chairman and Chief Executive Officer Thank you, Paul and thank you for joining us today. We always found ourselves each year gathered here and we like to go through all the activity of the past year and show our accomplishments, but we also really like to focus on what’s coming next. I think that’s what you are most interested in, but today you will see a little bit of last year, and some of the things that set us up, but we are still excited because this year we can see even more visible inventory and I want to clearly lead with two very important statements I think. The Swift Energy Company is absolutely positioned for the future and that future has a very significant footprint in liquids. And as we’re very familiar with the times liquids, liquids, liquids that’s really the focus of not only the industry right now, but Swift Energy Company is a very interesting dynamic. This is not new for us. We have always had liquids. We have always had an inventory of such, but today we are going to be focusing on that. That’s not to say that we won’t have the same issues in terms of forward-looking statements, we'll have to make sure that from the legal perspective that you understand that we are going to be showing you scenarios today, and we put forward this forward-looking statement to remind you that the future is somewhat uncertain, but not to overlook the fact that we need to show you what we think we can do and today we are going to do that.
As we dipped into today’s agenda, we are going to begin with a strategic overview and an industry overview, I’ll take that first opening part, then Bruce will come up and then we’ll go into the details of the operation from South Texas to Louisiana, both in the Central and Southeast areas, and then we’ll wrap up with a financial overview before we go to the Q&A.Today’s speakers we have listed here myself, Bruce Vincent, President; Bob Banks, our Chief Operating Officer; Alton Heckaman, Chief Financial Officer; Steve Tomberlin, Resource Development and Engineering, Senior Vice President; John Branca, Exploration and Geosciences; Steve Schmitt, Energy Marketing, and of course, Paul has introduced to us as Director of our Finance and Investor Relations. This is just a sample of the talent we have at Swift Energy Company. I hope you will see today that in these presentations, we have brought a lot of depth to our operations. We are very focused on the asset teams that we have, and I hope that shines for today that we not only have the inventory of great projects, we also have an incredible staff of very highly skilled individuals work in these projects, and we’ve got the balance sheet and the financing to be able to do the things that we need to do. To not avoid the obvious, a lot of companies, I don’t want to talk about gas at all and I thought that we talk about gas at the very beginning, kind of get that out of the way. There maybe a few more discussions, a little bit later in the day, but I thought we would share a little bit of the industry history, and some of the rationale for why we find ourselves right now with some very low natural gas prices.
You could see by this chart that the natural gas production in the U.S. from 74, back to 74 all the way at present, has had all the seasonal variations from summer to winter and that’s what all of our cycles are at the spikes and valleys, but in general we had that gas bubble in the mid 80s, that we all went through, and then we had the period of declining production in the early 2000 and then we have had this phenomenal change in our industry as a result of resource plays and as a result of technology. We’re going to show you a lot of technology today and of course we’ve seen this incredible increase in natural gas production although it’s a very different than productions from the past. Production from the past came from much more high quality reservoirs in terms of porosity and permeability had much lower declined curves back in the 70s.Today’s natural gas is more than manufacturing process with much higher declines, but much more certainty in terms of many, many locations to drill as you go forward. You can see the projections from the EIA in terms of gas production going forward; they’re predicting it to be about flat at 65 Bcf a day into the next several years. What this meant for gas prices. Well, here we’ve done the cycle, look, and we go all the way back -- not all the way back, but to January 2001, where we had a really nice peak. And so we index that as zero and say what happens when gas prices go through the cycles and go down and go up. So we’ve taken the peak, January 2001, we saw a cycle that had a bottom about 12 months after the peak. And then it rose again and popped up two years after the peak and came back to the next peak not 48 months later and then we have another cycle that began in March 2003, that cycle had its trough about eight months into that cycle and then a peak 32 months out. And then October 2005 another trough that was pretty flat 40% down for a long period, but about 24 months later, we’ve started rising again to a new peak.
The new cycle is not like the old cycle. As you see we come from the last peak in June 2008 and we’ve had quite a trough and the trough has gotten deeper as of late. So, it’s pretty clear that natural gas at least from a historical standpoint and cycle standpoint in terms of that supply and demand cycle we’re used to it’s very different. I think there is a bold and bright future for natural gas going forward, but it’s not the thing to be focusing on today. Just a few more comments about natural gas before we move to oil. What’s the pricing outlook? All of us look at the futures market and we found this to be very interesting information, where you take the historical gas prices for the past two years or so in terms of spot gas prices and if you look from that blue line on this chart what are known, where you can see going forward the EIA pricing in terms of Henry Hub natural gas prices and its a purple line, it shows rising up to about $4 in the next several years. If you look at the NYMEX price you can see that being similar a little under the EIA pricing.But what’s interesting to me is there is a lower confidence bandwidth at an upper confidence band, and when you look at the options market going forward, you see about 95% of the confidence stays within these bands, But there is more optimism about gas coming up and people putting their money, where their optimism is when gas going down much further. So hopefully this chart is indicative that we’re near the bottom, though it’s not going to necessarily recover really quickly. If we look at one more chart in terms of trying to cover you downside and we look at that this probability of how low might the gas go or how might it recover. We have one more in applied chart in terms of the natural gas options market and is about a 60% or greater, 60% in the near-term or 80% in the longer term looking about 18 months out. The natural gas prices will be staying about $2.50 in MMBtu based again on the futures market in the option pricing that’s out there right now.
All that said about pricing, how is the market reacting to this? So, we look at the rigs and again we see a very different trend in terms of the past. We see on the chart here looking at all rigs, they now account for about two-thirds of all activity. I’m on slide 16 or 19, I think that's 16, the title of the slide is oil rigs now account for about two-thirds of oil rig activity.The U.S. drilling rigs going back to 1990, you can see that big uptick in natural gas rigs, where we got up to 1,600 rigs around 2008 and oil rigs were down there pretty low about 200 oil rigs prior to that, but you can see the big ramp up in oil rigs. That’s clearly because we are seeing phenomenal oil prices relative to gas prices and its almost unprecedented differentials in terms of MMBtu equivalents. On the right side of this chart, we look at the actual percentage of the rigs that are drilling for gas versus oil and you’ll see a similar trend, but it’s actually a much more encouraging trend, because natural gas really come down from almost 90% of all drilling back in 2005 about 30% of drilling is still following right now. I don’t think we’re seeing the bottom in this curve. The oil is now over 60% of the drilling activity, but with oil does come some natural gas, and that can be a good thing in terms of the associated liquids and it’s a very important for you to know what plays where and whether you'll be looking at dry gas or gas is associated with liquid. The oil processing is very good. If I look at this next chart, the EIA short-term price projections, we can see that forecasting about $100 oil going forward, NYMEX future price is very similar. And again, if we look at this 95% confidence band, we see that there tends to be in terms of the marketplace more upside to the pricing right now than downside.
Finally, in terms of looking at the external industry, I want to wrap up with this slide, I am sorry, next side 12 there, I believe, production from the Eagle Ford shale is nearly 50% of the liquid. It’s phenomenal. If you look back in 2010 roughly you could see about 20% oil and condensate liquids coming out of the Eagle Ford shale and the trend has been ramping up and as of late year about 50% oil and condensate liquids coming from the Eagle Ford shale that’s a phenomenal growth that tells you, you’re in the right place that leads us right into the day of presentation in term of liquids, liquids and liquids. I’ll talk for a minute about our strategic growth with Swift Energy Company.We have balanced diversity and focus. We are in three core areas along with U.S. and Gulf Coast. We’re very focused in that regard. We’ve got an extensive long life property base with a reserved production ratio of over 15, 15.2. We believe it’s very balanced in terms of spread of the number of properties, number of wells, number of locations, and we diversified across the commodities that most oil and natural gas liquids as well as what we believe that kind of natural gas, the natural gas – it does have associated liquids with it. We also have a low risk development program with high reward exploration particularly in South Louisiana where we show a lot about our development programs today as well as some of our higher reward activities that are liquids focused in South Louisiana. We have significant resource base – that comes with the assets that we’ve had so many years, 80% of our fourth quarter 2011 corporate oil, crude oil price received in HLS and LLS pricing, we are going to talk about that today, that puts us in a great advantage because most part people look at it – your typical U.S. pricing and cushing, and we actually get much closer to the Brent pricing, we show these some of that today.
Proven reserve and resource plays with multi-TCF upside over 100,000 acres perspective in the Eagle Ford and Olmos. And then significant operational expertise again we’re going to show you a lot of our data in terms of our geosciences, our 3D, the things we’ve done with the technology, and show off some of the actual work products from some of our professionals who are very good at the new technology both horizontal drilling combined with horizontal multi-stage factored completion.And again it’s very important that we keep a strong balance sheet and the liquidity to be able to adapt to these markets. And take advantage of the opportunity that comes with them. Our corporate strategy has been very consistent from many years, we’ve had a tandem drilling and acquisitions approach, we’ve always been technology focused. We always like to be in areas with more than one opportunity or multiple formations South Louisiana it’s a beautiful place we drill a well and you normally get at least to some times three or four behind pipe completions for your future. And then South Texas we got this beautiful opportunity not only in the Eagle Ford but the Olmos we love to be in where we can both exploit and explore. We do focus on reducing operating risks and maintaining the right R/P ratios. We like to operate our properties so that we have control of our operations we do operate the vast line share what we are doing and again a diverse resource and reserve base. And not to – to stay away from the fact this is the time where you got to be very excited and make sure that as you look at to your pricing, particularly natural gas and you bring on more liquids as you bring yourself more in line with cash flow.
So we’re going to talk to you about how our drilling programs are built, how we did raise money in the past that position ourselves to have very strong year and not lead too or too concerned about liquidity, but going forward we can assure you we’re focused on the balance sheet and making sure that under the various scenarios that would come out that we would have a strong balance sheet with good liquidity going forward.At this time, I’d like to turn over the presentation to Bruce Vincent and have Bruce continue with the presentation talking about our strategic objectives. Bruce Vincent – President Thanks Terry. Good morning everyone and thanks for being here. What’s Terry and I really wanted to cover today was some of the high points. We really want to spend most time let you see the team and action talking about our core areas and our operations and then what our specific plans are. So what I’m going to touch on briefly is our short-term 2012 strategic objective, what do we hope to do this year and I’m going to highlight some things about our assets by looking at our reserves. Most of you have seen that information in the 10-K, but I’ll use that to kind of highlight some things that we think are particularly important about it. So when we look at 2012, we want to grow production. We want grow production double-digits. We think we can do that 14% to 20%. Many of you know follow us, thought we had put out a little higher number in the fall, but as we relook at our budgets given the gas prices we really see a complete shift that virtually 95 plus percent of our capital being directed to liquids and that just really means lower volumes and so that’s why we pulled it back a little bit.
The bulk of that’s going to happen in South Texas that’s where 70% to 80% of the capital is going. We think we can grow production this year in a very similar fashion of what we did last year and you will see that in more detail. One of the nice things about South Texas and the assets that we have down there is your inventory is so much more line of site. It’s so much more predictable. It’s so much more reliable and that makes a huge difference in being able to do it and set out and accomplish your objectives because you can look further in advance.We can directly target and pretty much tell you what we are all, we are going to drill not just this year, but next year and the year after that and that makes a huge difference in planning your business and the predictability of that. It’s a cost business particularly in this resource play as you move into the manufacturing operation you really want to drive your cost down. The lowest cost producers are always going to win in a low price environment. The high cost producers where they can do once get lead it out prices come down. Obviously the gas market we think, gas is going to cause some shake out in the business, what it concerns us is when we look at our own cash flows being 50% liquids doesn’t bother us as much and we got an inventory of projects that we can devote virtually all our capital, not just this year, but the next couple of years in liquid focused area. While we will get some gas with that, the economics are really driven by the liquid side. So, we can let this gas market shake out and it will do that. Historically in this business, we’ve gone through these cycles before and when you get a low price environment, the industry pulls back capital, low prices stimulate demand and over time that brings the price backup. That will happen. Read the rest of this transcript for free on seekingalpha.com