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Swift Deal Marks Change In 1998 Spending Focus

July 13, 1998
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Swift Deal Marks Change In 1998 Spending Focus

Living up to its name Swift Energy Co. has moved to capitalize on low oil prices by picking up producing properties from a seller willing to let them go at a loss. Swift agreed with Sonat Exploration last week to pay $87.6 million for producing oil and gas properties that will increase its reserves by about 25%. The deal signifies a redirection of Swift spending plans from drilling to acquisition in light of depressed oil prices. Sonat sold the properties at a loss as part of an ongoing asset divestiture and restructuring program.

"With current lower crude oil prices, we have the opportunity to purchase high-quality, lower-risk producing properties from Sonat with substantial upside potential that simply was not available in the recent past. Consequently, we have deferred some portion of our drilling activity in favor of these acquisitions," said A. Earl Swift, CEO of Swift.

With one stroke the company has exceeded its 1998 reserves growth target and added to cash flow and earnings per share.

As of April 1, the properties were estimated to have proved reserves of 91.1 Bcf of gas equivalents, of which 56% was gas. Estimated production for the interests being acquired is about 70 MMcfe/d. Included in the purchase are extensive production facilities, interests in two gas processing plants and more than 200,000 undeveloped net acres. The properties are being purchased as proved producing assets. Any additional drilling activity beyond wells in progress will be scheduled only after economic drilling conditions improve.

The properties to be purchased include all of Sonat's interests in 156 producing gas and oil wells in the Brookeland Field in southeast Texas and the Masters Creek Field area in western Louisiana. Swift will assume operation of 113 of these wells. As part of the transaction, Swift is to acquire Sonat's 20% interest in both the Brookeland and the Masters Creek gas liquids plants, which together will have a combined capacity of up to 250 MMcf/d.

Chalk Revenues Fund Acquisitions

"With these Sonat properties, the company will exceed its reserves growth target for 1998 and coupled with its other planned activities, Swift believes its year-end proved reserves will increase to over 500 Bcfe, of which 75% will be natural gas," Swift said. "At year-end, approximately 29% of Swift's reserve base will be located in the Austin chalk trend. The company's 1998 production was previously forecasted to grow in excess of 30% over 1997, and we expect to substantially exceed this goal. This forecasted growth should translate into increased cash flow and earnings per share for 1998, even with the increased financing costs associated with funding the acquisitions.

"Our strategy with respect to Chalk production has been and remains to use the cash flow from the rapid depletion to add reserves from lower decline rate properties."

Swift has been active in drilling and operating horizontal wells in the Austin Chalk trend since 1992. The Masters Creek properties represent Swift's first entry into the Louisiana portion of the Austin Chalk.

After acquiring Zilkha Energy in January, Sonat began review of its exploration and production business, which led to the decision to sell oil and gas properties having 487 Bcfe proven reserves and daily production of about 200 MMcfe/d. In addition to the Austin Chalk properties sold to Swift, properties in the Arkoma Basin, the Gulf of Mexico, and substantially all onshore Gulf Coast properties are to be sold, said Sonat spokesman Bruce Connery. The divestiture is expected to be completed by the end of the third quarter. Based on a preliminary estimate of sales proceeds and costs related to restructuring, the company expects to take an after-tax charge of $250 million to $275 million in the second quarter of 1998, substantially all of which will be non-cash.

Joe Fisher, Houston

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