PuddleGlum, i've got two conflicting reports on SFY, here's the first:
The Wall Street Journal -- March 18, 1998
TEXAS JOURNAL
---
Heard in Texas:
Swift Energy May Be Digging
Itself Into a Hole With Its Drilling
----
By Jonathan Weil
Staff Reporter of The Wall Street Journal
Swift Energy may not be so swift when it comes to drilling
in Texas.
That's the conclusion of two petroleum engineers and two
geologists who have reviewed the Houston oil-and-gas
company's programs in its two core Texas fields, which
accounted for 79% of its production last year. These
experts contend that most of the wells the company drilled
there in 1997 won't produce enough oil and gas to cover
basic costs. And if Swift keeps on drilling so aggressively,
they say, it ultimately will run out of money.
"If they continue drilling there, these wells will never
produce a return on capital," says Gary Swindell,
president of Dallas-based Gary S. Swindell & Associates, a
petroleum-engineering firm hired last month by a group of
institutional investors to critique Swift's holdings. Mr.
Swindell won't identify his clients, who also commissioned
two San Antonio geologists.
The investors apparently aren't the only skeptics.
Short-sellers -- who sell borrowed shares in hopes of
buying them back at lower prices -- also see trouble ahead
for Swift. As of Feb. 13, they controlled 1.9 million, or
11.3%, of the company's 16.5 million shares outstanding.
Swift officials say the critics are way off base. And in fact,
according to First Call, seven of the 12 securities analysts
covering the company still maintain either "buy" or
"strong buy" ratings on the stock; the other five have
neutral ratings. Just last month, Van Levy of Jefferies &
Co. in Houston reiterated his "buy" rating, citing Swift's
"rapid pace of growth."
The company does look healthy. For 1997, it reported
$2.61 in per-share cash flow -- the most common measure
of an exploration-and-development company's
performance -- a 43% increase from 1996.
But at $17, Swift's stock has fallen 42% from its 12-month
high in October, in part because it missed analysts' oil-
and gas-production estimates for the past three quarters.
Mr. Swindell and his colleagues say there is probably more
bad news to come, and investors should be wary.
What's the basis for that verdict? Here is how Mr.
Swindell did his evaluation:
Using records on file at the Texas Railroad Commission,
Mr. Swindell looked at the wells Swift has drilled since
1995 in South Texas' AWP Field, which accounted for
61% of the company's production in 1997. He found that
each of 122 wells drilled in 1997 produced an average 10.5
million cubic feet of gas in the first month of operation.
That was 41% lower than the first-month production
levels Swift reported for the 40 AWP wells it drilled in
1995, and 33% lower than the first-month output of the
135 wells it drilled there in 1996.
Then, based on historical production figures, Mr. Swindell
plotted production-decline curves for the wells. His
conclusions: The average output of each 1995 well over its
lifetime will be 516 million cubic feet of
natural-gas-equivalent; of each 1996 well, 341 million
cubic feet; and of each 1997 well, 233 million cubic feet.
As for any well drilled in 1998, he reckons the output will
be 225 million cubic feet.
According to Mr. Swindell, an AWP well has to produce
about 490 million cubic feet over its life to break even.
The average such well costs $540,000 to drill -- Swift
doesn't dispute that figure -- and Mr. Swindell says his
review of the records and his knowledge of the field
indicates average operating costs total $1,250 a month.
That adds up to $646,250 over 85 months (about seven
years), which Mr. Swindell and many others say is the
average productive life of a well in the AWP.
But, according to Mr. Swindell, a well drilled there this
year would bring in only $455,475 in revenue over 85
months, figuring that average gas prices over that time
period will be $2 a thousand cubic feet, and average crude
oil prices $17.50 a barrel. (And the company would still
have to pay royalties and taxes, he notes.)
Why is first-month production declining? Mr. Swindell
says he suspects Swift is drilling wells so close together
that they're draining from each others' reservoirs.
Terry E. Swift, the company's president, disputes that --
and most every other contention from the petroleum
engineer. While Mr. Swindell asserts that all of Swift's
AWP wells will each pump out an average 320 million
cubic feet over their lives, Mr. Swift says they each will
produce 750 million cubic feet.
First off, Mr. Swift says, the company has experienced
drainage-interference at only 5% of its wells in the AWP.
Average first-month production has been off because of
some bad wells, but that isn't indicative of the field's
future, he says.
In addition, he says Mr. Swindell's production curve based
on historical volumes is wrongheaded, because it doesn't
take into account geological data or the advanced drilling
techniques being employed at older wells, among other
things.
As for the assumption that a typical AWP well's life is
about seven years, he counters that some will continue
producing for as many as 20. Monthly operating costs, he
says, are about 20% lower than the Swindell estimate.
And, he says, the average gas price used by Mr. Swindell is
too low, because the gas Swift is producing in the AWP is
of higher-than-average quality, and therefore about 16%
more valuable.
"I don't think there's any reason to believe his numbers
whatsoever," Mr. Swift says. "I'm a stockholder, and I
don't want to be spending money if some of the
expectations don't pan out into reality."
Still, Rodger Walker, an independent petroleum engineer
in Dallas who has reviewed Mr. Swindell's work, agrees
with the pessimistic estimates for AWP.
"His methodology is in line with accepted industry
standards," says Mr. Walker, who is a consultant for
exploration-and-production companies. "This is how one
would go about doing a field study. These wells are
nowhere near economic."
Messrs. Swindell and Walker, as well as the two geologists
hired by the investor group, also are pessimistic about
Swift's other core area, the Fayette County portion of the
Austin chalk trend.
That field accounted for 18% of Swift's 1997 production.
And the company has been successful in the
long-established shallower parts of the trend, where the
typical well depth is less than 12,000 feet. But that area is
nearly fully developed, and Swift has been moving to the
deeper part of the trend. Of the 13 wells drilled in 1997, 12
were to depths greater than 12,000 feet.
Scott Pollard, one of the San Antonio geologists and a
scout for companies active in the Austin chalk trend,
classifies only three of the deeper 1997 wells as
economically productive, based on Railroad Commission
data. As for the remaining nine wells, he counts four dry
holes, three wells that won't break even and two wells that
are too new to call. "I don't see how they can get their
money back on the deeper wells," says Mr. Pollard.
Adds the second geologist, Bill Maloy, "I've seen no
geological reason why they're going to be able to drill
good wells and avoid bad wells" in the deeper area. Mr.
Maloy is president of Centerline Oil & Gas and tracks
drilling in the chalk.
Once again, Mr. Swift says the naysayers are wrong.
Though he allows that at least four of the 12 deep chalk
wells probably won't be economically productive, he says
there were, in fact, only two dry holes.
"We've been very successful in both these core areas," he
says. The critics simply "haven't got all the data." |
