TEXT-S&P summary: Swift Energy Co.
May 25 -
Summary analysis -- Swift Energy Co. ------------------------------ 25-May-2012
CREDIT RATING: B+/Stable/-- Country: United States
Primary SIC: Crude petroleum
and natural gas
Mult. CUSIP6: 870738
Credit Rating History:
Local currency Foreign currency
26-Jan-2009 B+/-- B+/--
27-Dec-2000 BB-/-- BB-/--
The ratings on Houston-based independent exploration and production (E&P) firm Swift Energy Co. (Swift) reflect our assessment of the company's "weak" business risk and "aggressive" financial risk. The ratings incorporate Swift's small and geographically concentrated reserve base, high proportion of proved undeveloped reserves (65%), along with our projection of operating cash flow deficits in 2012 and 2013. Our ratings also reflect Swift's balanced production mix between oil and natural gas, long proved reserve life, and low debt leverage for the rating category.
Swift had approximately 160 million barrels of oil equivalent (mmboe) of total proved reserves as of Dec. 31, 2011, of which a low 35% is proved developed and 65% is natural gas. First-quarter 2012 daily production averaged 31 thousand barrels of oil equivalent (mboe), resulting in a long proven reserve life of 14 years, which helps mitigate near-term depletion risk. However, its proved developed reserve life is much shorter at about five years. This indicates substantial development-spending requirements to convert the reserves into production. Swift operates primarily in the onshore regions of south Louisiana and south Texas. The majority of this year's capital spending has been allocated to the Eagle Ford shale in South Texas, which is the region driving the company's production growth.
Although Swift's high finding and development (F&D) costs have historically weighed on its business risk profile. Recent results have been in line with peers, and we expect costs to remain competitive going forward. F&D costs have dropped primarily because of the company's shift away from riskier exploitation and development projects to the more predictable Eagle Ford shale. In 2011, Swift's all-in F&D cost (including revisions) was $1.85/mcfe (thousand cubic foot equivalent), compared with its prior three-year average of $7.85/mcfe.
We consider Swift's financial risk profile to be aggressive, given our estimate that the company will outspend funds from operations (FFO) in 2012 and 2013 and that leverage will increase. Based on our 2012 pricing assumptions for West Texas Intermediate (WTI) oil and Henry Hub natural gas of $85/barrel (bbl) and $2.00/mcf, respectively, incorporating the company's hedges (18% of its crude oil volumes hedged at $101/bbl) and assuming 15% production growth, we estimate 2012 EBITDAX of $345 million and FFO of $300 million. We estimate the company will spend $600 million on exploration and development activities, which results in a $300 million shortfall. This gap was essentially prefunded by Swift's $250 million bond issuance in November 2011. In 2013, based on our pricing assumptions for oil and natural gas of $80/bl and $2.75/mcf, respectively, and assuming 5% production growth, we estimate EBITDAX of $335 million and FFO of $285 million. Assuming capital spending of $450 million, we estimate a cash flow deficit of $165 million, which could be funded by drawing down its credit facility ($300 million currently committed and available).
Although projected to increase over the next one to two years, Swift's credit metrics remain strong for the rating category. At year-end 2011, debt to EBITDAX stood at 1.9x, and we project leverage will increase to 2.9x at year-end 2012 and 3.5x by the end of 2013.
We classify Swift's liquidity as "adequate." Key elements of our liquidity profile include:
-- As of Dec. 31, 2011, Swift had $252 million cash on hand ($127 million as of March 31, 2012).
-- Swift's borrowing base was recently redetermined at $375 million (up from $325 million), but the company elected to retain the $300 million commitment amount. As of March 31, 2012, nothing was drawn on the revolver.
-- We expect Swift to remain in compliance over the next 12 to 24 months with the facility's two financial covenants, which require the company to maintain a minimum current ratio of 1x and a minimum interest coverage ratio of 2.75x.
-- Capital spending will likely exceed FFO by $300 million in 2012 and $165 million in 2013, respectively, under our current commodity pricing assumptions. We expect the company to fund its cash flow deficit with proceeds from its recent bond offering and borrowings from its revolver.
-- Swift has no near-term debt maturities.
The rating on the company's senior unsecured debt is 'B+' (the same as the corporate credit rating), with a recovery rating of '3', indicating our expectations that bondholders would receive meaningful (50% to 70%) recovery in the event of a payment default. For a more detailed analysis, see our recovery report on Swift Energy, published Nov. 18, 2011, on RatingsDirect.
The outlook is stable. Positive rating actions are unlikely near term given the company's limited scale and geographic diversity. We would lower the rating if Swift's debt to EBITDAX ratio exceeds 4.5x on a sustained basis, which would most likely occur as a result of more aggressive capital spending or poor operating performance. For this target to be breached in 2013, EBITDAX would have to fall nearly 25% from our 2012 estimate.