2007 ANNUAL REPORT
Significant Events
Letter to Shareholders
Core Producing Areas
Review of Operations
Management’s Discussion & Analysis
Management’s Report
Report of Independent Registered
Public Accounting Firm
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Corporate Information
03
04
07
12
19
42
43
44
48
70
Paramount Drilling Rig 2E drilling the Summit Federal
#1-25H Nisku well in Golden Valley County, North Dakota.
Photo taken by Area Geologist R. Gutiw.
F I N A N C I A L A N d o p e r A t I N g H I g H L I g H t S (1)
($ millions, except as noted)
FINANCIAL
Petroleum and natural gas sales
Funds flow from operations
Per share – diluted
Net earnings (loss)
Per share – diluted
Capital expenditures
Long-term investments (2)
Total assets
Net debt (3)
Common shares outstanding (thousands)
OpErAtINg
Average daily sales volumes:
Natural gas (MMcf/d)
Oil and natural gas liquids (Bbl/d)
Total sales (Boe/d)
Gas weighting
rEsErvEs
Proved plus probable (4)
Natural gas (Bcf)
Crude oil and NGL (MBbl)
Total (MBoe)
EstImAtED NEt prEsENt vALuE bEFOrE tAx @ 10%
Proved
Proved plus probable
Net undeveloped land holdings (thousands of acres)
Total wells drilled (gross)
Year Ended December 31
2007
2006
Change
283.4
100.5
1.42
416.2
5.89
336.7
322.1
1,299.8
15.9
67,681
78.8
3,536
16,669
79%
192.8
9,135
41,270
477.3
679.5
1,287
159
312.6
171.6
2.53
(17.8)
(0.26)
528.8
582.9
1,419.0
593.4
70,279
81.6
3,653
17,256
79%
277.0
10,055
56,225
591.0
972.1
2,286
398
(29.2)
(71.1)
(1.11)
434.0
6.15
(192.1)
(260.8)
(119.2)
577.5
(2,598)
(2.8)
(117)
(587)
-
(84.2)
(920)
(14,955)
(113.7)
(292.6)
(999)
(239)
() Readers are referred to the advisories concerning non-GAAP measures and barrel of oil equivalent under the heading “Advisories”
in Management’s Discussion and Analysis.
(2) Based on the period-end closing prices of Trilogy Energy Trust units and MGM Energy Corp. shares on the Toronto Stock Exchange,
$2.00/share for North American (2006) and book value of the remaining long-term investments.
(3) Net debt is a non-GAAP measure, it is calculated and defined in the Liquidity and Capital Resources section of Management’s
Discussion and Analysis.
(4) Working interest reserves before royalty deductions, using forecast prices and costs.
S I g N I F I C A N t e v e N t S
During 2007 Paramount continued its transition to a more focused exploration and production company by
disposing of certain non-core properties and other investments and focusing on its core areas within each
Corporate Operating Unit. Paramount also continued to add to its portfolio of strategic investments.
3
S t r A t e g I C I N v e S t m e N t S
Paramount sold two investments and began operations in Paramount Drilling.
+
+
+
Sold the Company’s investment in North American Oil Sands Corporation for cash proceeds of
$682.4 million resulting in a before tax gain of $528.6 million.
Sold the Company’s Surmont properties for total consideration of $301.7 million resulting in a
before tax gain of $271.0 million.
Successfully completed the spinout of MGM Energy and retained an equity interest in the
new entity.
+
Invested an additional $9.0 million in 3.3 million common shares of MGM Energy.
+
Invested $14.2 million in 2.1 million units of Trilogy and participated in Trilogy’s distribution
reinvestment program acquiring an additional 0.6 million units.
p r I N C I p A L p r o p e r t I e S
Paramount continued to focus on the major properties within each Corporate Operating Unit, including
more development opportunities in the United States.
+ Commenced oil program in North Dakota using Paramount’s two new drilling rigs.
+
Received regulatory approval for waterflood and commenced Good Production Practice at Crooked
Creek in Grande Prairie.
C o r p o r A t e
Paramount used the proceeds from asset disposals to achieve greater balance sheet flexibility.
+ Reduced debt by $374.2 million.
+
Purchased 3.3 million Common Shares for cancellation under Paramount’s Normal Course Issuer
Bid program for $54.9 million.
4
L e t t e r t o S H A r e H o L d e r S
Paramount had a transformational year in 2007; completing the spinout of MGM Energy
Corp. as well as divesting of most of its oilsands investments, leaving the Company in
arguably the best financial position in its almost 30 year history. The Company maintains
approximately 5,000 Boe/d of current production, holds over $300 million of long term
corporate investments and additional long term future value in the recovery of bitumen in
the Grosmont carbonate trend in Northeast Alberta.
During 2007, Paramount produced an average of 6,669 Boe/d, generated $00.5 million of cash flow, reinvested
in a capital program of over $300 million, had earnings of $46.2 million, and ended the year with net debt of just
$5.9 million. Reserves at the end of 2007 were estimated to be 4.3 million Boe.
After successfully delineating the Surmont oilsands leases through the winter of 2006-2007, Paramount marketed
and divested its 00% ownership in the Surmont leases along with the associated ancillary shut-in gas reserves.
Paramount received $75.0 million in cash, a $75.0 million debenture which was subsequently repaid, and 3.7
million shares of MEG Energy Corp. valued at $5.7 million, for total proceeds of $30.7 million. Paramount
also tendered its 34. million shares of North American oilsands Corporation to the takeover bid made by Statoil
ASA for $682.4 million of cash. In addition, Paramount completed a number of non-core property divestitures,
receiving over $35 million in consideration. These divestitures brought in aggregate value of over $ billion
which was used to pay out the Company’s $00 million subordinated debt facility, uS$50 million term loan
B facility, borrowings under the revolving credit facility and to repurchase the majority of the uS$23.6 million
senior subordinated notes, resulting in a total net debt balance at year end of just $5.9 million.
Subsequent to the closing of these divestitures, Paramount repurchased approximately 3.3 million of its
outstanding shares, acquired approximately 5 million additional units of Trilogy Energy Trust through open market
purchases and participation in Trilogy’s Distribution Reinvestment Plan, and acquired a further 3.3 million shares
in MGM Energy. our wholly-owned subsidiary Paramount Drilling u.S., LLC also took delivery of two newly
constructed drilling rigs and began drilling operations in North Dakota. In addition, Paramount made its first
investment into a new company – Paxton Corporation – whose business plan is to create zero emissions power
plants and to apply its proprietary technology of point source production of electrical power and subsequent
sequestration of carbon dioxide into depleted oil reservoirs for enhanced oil recovery.
After two years of negative momentum in the natural gas market, market sentiment has turned remarkably
positive. The natural gas industry in North America is just coming to grips with the notion that it is less tied to a
continental natural gas market and really part of a world wide market for the commodity. While Canadian natural
gas production has dropped by over Bcf/d in 2007, production from the united States has reversed its decline
and increased by some 3 Bcf/d during the same period. After one of the warmest winters on record in Europe,
natural gas demand in 2007 was significantly reduced and the surplus natural gas carried by large Liquefied
Natural Gas (LNG) tanker ships normally bound for Europe found its way to North America through much of
2007. This served to double LNG deliveries into North America, increasing deliveries by close to 2 Bcf/d. The
combination of these factors saw incremental natural gas supply on the market in North America of some 4 Bcf/
d and served to increase storage to record levels of over 3.5 Tcf by November, 2007. A return to normal heating
demand in North America this winter and ever increasing demand for natural gas for the generation of electricity
has reduced storage levels in recent months, resulting in a supply / demand relationship that may indicate a
shortage. In response, prices in North America have recovered to levels similar to those in the rest of the world.
Paramount will continue to monitor whether prices are sufficient to restore balance to the natural gas market.
P A R A M O U N T R E S O U R C E S L T D . | 2 0 0 7 A N N u A L R E P o R T
L E T T E R T O S h A R E h O L D E R S
5
The single largest effect on Paramount’s business has been the rapid appreciation in the value of the Canadian
dollar relative to the u.S. dollar. The increase in the Canadian / u.S. dollar exchange rate from $0.85 CDN/uS to
a peak of $.0 CDN/u.S. resulted in Paramount’s realized gas price declining by approximately 30%. While the
exchange rate has moderated to the current rate of close to par, it still represents a significant reduction in gas
prices received.
During the fall of 2007, the Alberta government received and made public the results of its royalty review
process. The Alberta government is moving forward with changes to the royalty framework that has served
the people of Alberta and industry well for decades. It was the view of the royalty review panel, and accepted
by the Alberta government, that the people of Alberta were not receiving their “fair share” of the resource
wealth that had been diligently developed by industry. It is my view that this government unfortunately does
not fully understand its largest contributing industry to the economy of Alberta. The new royalty framework is
expected by government to extract an additional $.4 billion annually from the oil and gas industry. It is very
likely that the ultimate economic result will in fact be value destruction in excess of the annual $.4 billion
targeted, as reinvestment to generate future royalty revenue for the province, and economic stimulus from this
reinvestment, will simply vanish. The Alberta advantage has been eroded further, and it is truly unfortunate that
the Alberta government did not try to better understand its most important industry. Paramount continues to
await the release of the final regulations which will administer the new royalty framework, but it appears at the
very least that the Company’s deep oil play at Puskwa will be most negatively affected while many of the other
plays will be more modestly affected.
Industry conditions continue their rapid changes with costs moderating and technology improving. The
technology to drill horizontal wells and perform multiple fracture stimulations in tighter silt and shale reservoirs
has been attributed to the remarkable turnaround in onshore production in the united States. It appears that this
onshore unconventional gas completion technology is set to make the same impact on this industry that 3-D
seismic made decades ago. Paramount plans to use this technology in a number of its plays such as the Bakken
in North Dakota as well as some of the tight sand formations in the Deep Basin environment in Western Canada.
Paramount continues to monitor its lands in Northeast British Columbia for potential shale gas development as
offset operators begin to disclose positive results from this play type.
Paramount intends to focus its efforts going forward principally on the projects it has assembled in the Kaybob
Deep Basin area, deep light oil exploration at Puskwa, and its light oil play in the Bakken in North Dakota. At
the same time, the Company continues to nurture its significant corporate investment portfolio as well as the
leases on the bituminous carbonate fairway to further enhance value to shareholders. Paramount’s long term
value creation plan remains intact and the Company looks forward to reporting further progress to shareholders
in 2008 and the years to come.
Jim riddell
President and Chief Operating Officer
March 14, 2008
1 Northern
Natural Gas Production: 25.7 MMcf/d
Crude Oil & NGL Production: 865 Bbl/d
Oil Equivalent Production: 5,5 Boe/d
Gross Undeveloped Land: 79,995 acres
2 Grande Prairie
Natural Gas Production: .2 MMcf/d
Crude Oil & NGL Production: 765 Bbl/d
Oil Equivalent Production: 2,640 Boe/d
Gross Undeveloped Land: 338,563 acres
3 Kaybob
Natural Gas Production: 22.3 MMcf/d
Crude Oil & NGL Production: 533 Bbl/d
Oil Equivalent Production: 4,245 Boe/d
Gross Undeveloped Land: 267,4 acres
NU
4 Southern
Natural Gas Production: 8. MMcf/d
Crude Oil & NGL Production: ,369 Bbl/d
Oil Equivalent Production: 4,389 Boe/d
Gross Undeveloped Land: 227,276 acres
SK
MB
YK
BC
NWT
1
2
3
AB
4
WA
ID
MT
ND
OR
P A R A M O U N T R E S O U R C E S L T D . | 2 0 0 7 A N N u A L R E P o R T
C o r e p r o d u C I N g A r e A S
Kaybob
C O R E P R O D U C I N G A R E A S
7
The Kaybob Corporate operating unit (“Kaybob”) produces natural gas, natural gas liquids (“NGLs”), and crude
oil in West Central Alberta. The core natural gas producing areas in Kaybob include Musreau, Resthaven, and
Smoky and the primary crude oil producing area is Kakwa. The horizons being pursued within Kaybob are in the
Deep Basin, which are high pressure, liquids rich, tight gas formations with large reservoir potential.
Total sales for Kaybob averaged 4,245 Boe/d in 2007, comprised of 22.3 MMcf/d of natural gas and 533 Bbl/d
of crude oil and NGLs. Sales volumes increased in 2007 by 42 percent from 2006, primarily as a result of drilling
and tie-in activities at Musreau and Resthaven.
Kaybob’s capital expenditures for 2007 totaled $36 million (excluding land), and were focused on drilling, completion
and facility work, including the addition of compression and dehydration capacity, in the Musreau area.
Since 2004, Paramount has invested over $350 million in the Deep Basin areas of Kakwa, Musreau, Resthaven
and Smoky; acquiring significant undeveloped acreage, constructing production infrastructure, and commencing
a drilling program to further delineate the potential of this long-term development. To date, project economics
have been challenging because of the high costs of drilling, completing and equipping these deep multi-zone
wells, lower per-well reserves additions than originally expected, and depressed natural gas prices over the past
2 to 8 months.
The Company continues to believe that development of the Kaybob Deep Basin area provides significant value
potential, and is working to improve project economics. A significant focus of this effort is on reducing per-well
drilling, completion, equipping and tie-in costs – by a targeted one third. Based on knowledge gained over the
past three years, cost reductions are expected from downspacing to four wells per section and using a pad
drilling and group production facility approach to reduce rig mobilization / demobilization and equipping costs.
Paramount is working with its partners to obtain the required regulatory approval for downspacing. Additional
cost savings are anticipated by using new drilling mud technology to reduce fluid loss and eliminate the need
for intermediate casing, and by improving the efficiency of fracturing the multiple prospective producing zones
of wells. The Company has reduced budgeted 2008 spending in the Kaybob Deep Basin area to allow for
further development of Kaybob’s cost reduction strategy, and the return of natural gas prices to sustained levels
that will support project economics. The Deep Basin continues to be the core area for Kaybob, and as project
economics improve, is expected to be developed as a significant growth platform for the Company over the
next five to ten years.
In 2008, Paramount plans to drill 0 (5.5 net) wells and complete and tie-in 0 (6.3 net) wells that were drilled in
prior years in Kaybob. The majority of the 2008 capital investment will be focused in the Musreau, Resthaven,
and Smoky areas targeting multiple Cretaceous formations.
Previous investments in the Smoky and Resthaven gas plants and contractual agreements with a third-party-
operated facility in Musreau are anticipated to meet Kaybob’s near term processing requirements.
Capital Expenditures
($ millions, includes land)
Net Undeveloped Land
(acres)
Production
(Boe/d)
200
150
100
500
0
200,000
138.2
150,000
141,891
100,000
50,000
4,245
5,000
4,000
3,000
2,000
1,000
05
06
07
05
06
07
05
06
07
8
Grande Prairie
The Grande Prairie Corporate operating unit (“Grande Prairie”) produces natural gas, NGLs, and crude oil in
Central Alberta. The core natural gas producing areas in Grande Prairie include established properties at Mirage
and Saddle Hills and more recently developed sour gas properties at Ante Creek. Grande Prairie’s primary crude
oil producing property is located at Crooked Creek. Paramount continues to evaluate the reservoir dynamics and
develop more efficient exploitation and production practices at Ante Creek and Crooked Creek.
Total sales for Grande Prairie averaged 2,640 Boe/d in 2007, comprised of .2 MMcf/d of natural gas and 765
Bbl/d of crude oil and NGLs. Sales volumes decreased in 2007 by 7 percent from 2006 primarily due normal
production declines at Mirage and Saddle Hills.
At Crooked Creek, where Good Production Practice (“GPP”) was used on a trial basis from July to october,
Paramount’s share of production was in excess of ,00 Boe/d, however, fourth quarter production was reduced
to match water injection rates.
Grande Prairie’s capital expenditures for 2007 totaled $3 million (excluding land), the majority of which was
focused on Crooked Creek. Drilling activity in 2007 at Crooked Creek consisted of four (0.7 net) crude oil wells,
two (0.4 net) water injection wells, and the re-drilling of one (0.2 net) water well that supports waterflood in
the Beaverhill Lake “A” pool. Three of the crude oil wells drilled in 2007 were completed at year end and
were capable of gross oil production at an aggregate ,00 Boe/d, with the fourth well in the process of being
completed. Paramount anticipates developing the remaining Beaverhill acreage over the next three winter
drilling seasons, and plans to drill three wells in the first quarter of 2008, with production expected in late 2008
or early 2009.
In addition to Grande Prairie’s capital program at Crooked Creek, Paramount undertook development activities
during 2007 at Ante Creek and Karr. A total of three (.7 net) wells were drilled at Ante Creek in 2007 on the
hydrothermal dolomite zone of which two wells were completed but not tied in, and one well was cased and
awaiting completion. Due to limited infrastructure capabilities and high tie-in costs, 2008 capital investment
in Ante Creek will be minimal. Following-up on a deep tight gas discovery in 2006, an additional well was
completed at Karr in early 2007 and brought on production in December 2007 at restricted rates.
In 2007, Grande Prairie employed a strategic plan to acquire undeveloped land positions and drill critical, pool
defining wells. Approximately 53,000 acres of land were acquired, primarily on the deep, light sweet oil trend at
Crooked Creek and in adjacent and surrounding land at Karr.
In 2008, Paramount anticipates focusing on drilling and tie-in activities at Crooked Creek.
Capital Expenditures
($ millions, includes land)
Net Undeveloped Land
(acres)
Production
(Boe/d)
120
100
80
60
40
20
0
252,847
300000
250000
200000
150000
100000
50000
3,500
3,000
2,500
2,000
1,500
1,000
500
2,640
40.8
05
06
07
05
06
07
05
06
07
P A R A M O U N T R E S O U R C E S L T D . | 2 0 0 7 A N N u A L R E P o R T
C O R E P R O D U C I N G A R E A S
9
Northern
The Northern Corporate operating unit (“Northern”) includes properties in Northwest Alberta, Northeast British
Columbia, and extends into the Cameron Hills and Fort Liard areas of the Northwest Territories. Northern’s
primary focus remains at Cameron Hills in the Northwest Territories, where properties generate a significant
portion of Northern’s total natural gas, crude oil and NGLs production. other significant natural gas producing
properties within Northern are located at Bistcho and Haro in Northwest Alberta and Clarke Lake in Northeast
British Columbia.
In Northwest Alberta, the zones targeted are characterized by Pleistocene-aged sands and gravels at depths
of 30 meters through Cretaceous-aged Bluesky/Gething sands, Mississippian carbonates, and end with middle
Devonian carbonates at depths of ,600 meters in Alberta and the Cameron Hills area.
Total sales for Northern averaged 5,5 Boe/d in 2007, comprised of 25.7 MMcf/d of natural gas and 865 Bbl/d
of crude oil and NGLs. Sales volumes decreased in 2007 by 23 percent from 2006 primarily due to natural
declines across most properties in Northern, the shut-in of the Maxhamish, British Columbia facility on october
3, 2007, and premature subsurface pump failures in the Cameron Hills area. Paramount is awaiting certain
regulatory / community approvals to resume its drilling program in Cameron Hills.
The Maxhamish facility was shut-in as a result of declining gas volumes, low prices and high operating costs,
and was sold subsequent to year-end. Northern is also in the process of suspending the West Liard facility,
which is expected to be complete by the end of March 2008, and is the result of declining production, low
prices, and high operating costs.
Northern’s capital expenditures for 2007 totaled $40 million (excluding land). During 2007, Northern drilled 3
(9.8 net) wells, of which one (.0 net) well was dry and abandoned and six (5.3 net) wells were in the Cameron
Hills area. The majority of Northern’s field activities occurred in the first quarter of 2007 because of restricted
seasonal access.
In 2008, Paramount anticipates drilling five (2.5 net) operated gas wells in Bistcho, stimulating one (0.9 net) oil
well in Cameron Hills, stimulating one (0.5 net) producing gas well in Haro, Alberta, and tying in one (.0 net)
gas well in Haro.
Capital Expenditures
($ millions, includes land)
Net Undeveloped Land
(acres)
Production
(Boe/d)
80
70
60
50
40
30
20
10
40.8
2,000,000
1,500,000
1,000,000
500,000
512,181
10,000
8,000
6,000
4,000
2,000
5,151
05
06
07
05
06
07
05
06
07
0
Southern
The Southern Corporate operating unit (“Southern”) produces crude oil and natural gas in Southern Alberta,
Montana and North Dakota. Southern’s core areas comprise the gas producing Chain / Craigmyle field near
Drumheller, Alberta and the oil producing area near Medora, North Dakota.
Total sales for Southern averaged 4,389 Boe/d in 2007, comprised of 8. MMcf/d of natural gas and ,369 Bbl/d
of crude oil and NGLs. Sales volumes increased in 2007 by percent from 2006 primarily due to increased
natural gas and coal bed methane production at Chain.
Average sales volumes for the fourth quarter included oil production of over ,000 Bbl/d from Southern’s
properties in Montana and North Dakota.
As Southern concentrated on strategic assets and lowering operating costs in 2007, it disposed of several
properties having average daily production of approximately 600 Boe/d. This has left Southern a more focused
business unit with operating costs averaging $8.49/Boe, a reduction of 27 percent from 2006.
Southern’s capital expenditures for 2007 totaled $52 million (excluding land). In the Chain region, an additional
27 shallow production wells were drilled in 2007 to maintain production capacity, and most of the wells that
were drilled in 2006 were tied into Paramount’s low pressure production system. The Company anticipates
maintaining a flat production profile in Chain in 2008, while reducing capital expenditures.
In the united States, where Paramount operates through a wholly owned subsidiary Summit Resources, Inc.
(“Summit”), the Company commissioned the construction of two drilling rigs for use by Southern. The rigs
arrived in July and were operating on a trial basis by the end of summer. Commissioning of the rigs was
completed in the fall, and five wells had been drilled in North Dakota by year-end; targeting Madison, Birdbear
and Red River production. Four of these wells have been completed subsequent to December 3, 2007,
providing net production to Paramount of approximately 460 Boe/d.
In Montana, Summit has been participating in a development at the outlook Field, targeting the Birdbear
and Winnipeosis formations. During 2007, Summit successfully brought two oil wells onto production and in
December drilled an additional well.
In 2008, Paramount anticipates the majority of capital investment for Southern will be directed to drilling 20
wells in North Dakota, targeting light oil from the Madison, Birdbear and Bakken formations.
Capital Expenditures
($ millions, includes land)
Net Undeveloped Land
(acres)
Production
(Boe/d)
80
70
60
50
40
30
20
10
54.5
05
06
07
1,200,000
1,000,000
800,000
600,000
400,000
200,000
165,453
05(1)
06
07
(1) includes East Coast acreage
5,000
4,000
3,000
2,000
1,000
4,389
05
06
07
P A R A M O U N T R E S O U R C E S L T D . | 2 0 0 7 A N N u A L R E P o R T
2
r e v I e w o F o p e r A t I o N S
Paramount’s average daily sales volumes by corporate operating unit for the years ended December 3, 2007
and 2006 are summarized below:
Natural gas sales (MMcf/d)
Kaybob
Grande Prairie
Northern
Southern
Other
Total
Crude Oil and Natural gas Liquids sales (Bbl/d)
Kaybob
Grande Prairie
Northern
Southern
Other
Total
total sales (Boe/d)
Kaybob
Grande Prairie
Northern
Southern
Other
Total
2007
22.3
11.2
25.7
18.1
1.5
78.8
533
765
865
1,369
4
3,536
4,245
2,640
5,151
4,389
244
16,669
2006
15.3
15.0
33.7
15.2
2.4
81.6
456
678
1,088
1,426
5
3,653
2,999
3,180
6,714
3,962
401
17,256
Change (%)
46
(25)
(24)
19
(38)
(3)
17
13
(20)
(4)
(20)
(3)
42
(17)
(23)
11
(39)
(3)
Natural Gas Price
(after realized gains and losses
on financial instruments)
($/Mcf)
Crude Oil and
Natural Gas Liquids Price
(after realized gains and losses
on financial instruments) ($/Bbl)
7.30
10
8
6
4
2
66.28
70
60
50
40
30
20
10
04
05
06
07
04
05
06
07
P A R A M O U N T R E S O U R C E S L T D . | 2 0 0 7 A N N u A L R E P o R T
Capital Expenditures
($ millions)
Geological and geophysical
Drilling and completions
Production equipment and facilities
Exploration and development expenditures
Land
Property acquisitions
Cash proceeds on property dispositions
principal properties
Strategic Investments
Cash proceeds on disposal of Strategic Investments
Corporate
Net capital expenditures
R E v I E w O f O P E R A T I O N S
3
2007
4.3
158.1
104.4
266.8
13.5
0.4
(28.1)
252.6
54.2
(78.7)
1.8
229.9
2006
9.1
257.2
120.2
386.5
34.1
15.8
(7.2)
429.2
92.0
–
0.4
521.6
Land
The following table summarizes the Company’s land position at December 3:
Land (thousand of acres)
Land assigned reserves
Undeveloped land
Total
Value of undeveloped land (2) ($ millions)
2007
Net
301
1,287
1,588
$ 142.9
gross
565
1,847
2,412
Average
Working
Interest
53%
70%
66%
Gross
736
3,428
4,164
2006
Net
416
2,286
2,702
$ 172.8
Average
Working
Interest
57%
67%
65%
() Based on McDaniel & Associates Consultants Ltd. appraisal summary of acreage evaluation.
Exploration and
Development Expeditures
($ millions)
2007 Exploration and
Development Expenditures
$266.8 million
400
350
300
250
200
150
100
50
266.8
04
05
06
07
Drilling and completion
Geological & geophysical
Production equipment
and facilities
4
Drilling
Drilling activity for the year ended December 3, 2007 is as follows:
Gas
Oil
Dry & Abandoned
Oil Sands and other
Total
Gas
Oil
Dry & Abandoned
Oil sands
Total
Development
2007
Exploration
total
gross
58
18
2
46
124
Net
39.4
6.4
1.5
44.2
91.5
gross
29
4
2
–
35
Development
2006
Exploration
Gross
178
14
10
124
326
Net
113.8
6.3
6.9
62.0
189.0
Gross
57
6
6
–
72
Net
12.5
3.1
1.0
–
16.6
Net
32.8
3.7
5.5
–
42.0
gross
87
22
4
46
159
Gross
235
20
19
124
398
Total
Net
51.9
9.5
2.5
44.2
108.1
Net
146.6
10.0
12.4
62.0
231.0
Wells Drilled
(gross)
Drilling Distribution
159 Wells
Drilling Success Rate
(gross) (%)
400
350
300
250
200
150
100
50
159
Kaybob
Grande Prairie
Northern
Southern Alberta
Heavy Oil
97
100
80
60
40
20
04
05
06
07
04
05
06
07
P A R A M O U N T R E S O U R C E S L T D . | 2 0 0 7 A N N u A L R E P o R T
R E v I E w O f O P E R A T I O N S
Reserves
Paramount’s reserves for the year ended December 3, 2007 were evaluated by McDaniel & Associates
Consultants Ltd. (“McDaniel”) and prepared in accordance with the National Instrument 5-0 definitions,
standards and procedures.
Gross working interest reserves for the year ended December 3, 2007 using forecast prices and costs
are as follows:
5
gross proved
and probable reserves (1)
before Income tax Net
present value (1) ($ millions)
Natural
gas
Light and
medium
Crude Oil
Natural
gas
Liquids
(Bcf)
(MBbl)
(MBbl)
77.8
26.3
14.6
118.8
73.2
2,089
516
–
2,606
1,672
691
137
43
871
388
boe (2)
(MBoe)
15,751
5,041
2,479
23,270
14,267
Discount rate
0%
5%
10%
418.7
100.4
47.8
566.9
321.9
363.7
78.4
27.0
469.1
238.9
322.7
63.2
15.6
401.5
185.7
192.0
4,278
1,259
37,538
888.8
708.1
587.2
0.5
–
0.1
0.6
0.2
0.8
119.3
73.5
192.8
2,603
5
56
2,663
880
3,543
5,269
2,552
7,821
34
–
6
40
14
54
2,718
7
73
2,797
935
3,732
110.3
(0.3)
3.9
113.8
40.3
154.1
911
402
1,314
26,068
15,202
41,270
680.7
362.1
1,042.9
87.4
(0.3)
3.4
90.5
23.8
114.4
559.7
262.8
822.5
73.0
(0.3)
3.1
75.9
16.4
92.3
477.3
202.1
679.5
reserve Category
Canada
Proved
Developed Producing
Developed Non-Producing
Undeveloped
Total Proved
Probable
Total Proved Plus Probable
Canada
united states
Proved
Developed Producing
Developed Non-Producing
Undeveloped
Total Proved
Probable
Total Proved Plus Probable USA
total Company
Total Proved
Total Probable
total reserves
() Columns and rows may not add due to rounding.
(2) Please refer to the discussion of Barrels of oil Equivalent Conversions under the heading “Advisories” in Management’s Discussion
and Analysis.
Natural Gas Reserves
Proved and Probable
(gross before royalties) (Bcf)
Crude Oil and Natural
Gas Liquid Reserves
Proved and Probable
(gross before royalties) (MBbl)
Reserves
Proved and Probable
(gross before royalties) (MBoe)
700
600
500
400
300
200
100
25,000
20,000
15,000
10,000
5,000
193
120,000
100,000
80,000
60,000
40,000
20,000
9,135
41,270
04
05
06
07
04
05
06
07
04
05
06
07
6
Reserve Reconciliation
The following table reconciles Paramount’s gross working interest reserves for the year ended December 3,
2007 using forecasted prices and costs:
proved reserves
probable reserves
proved & probable reserves
Natural
gas
bcf
148.4
(6.0)
9.6
(28.1)
(4.6)
boe (4)
Oil &
NgLs
mbbl mboe
31,177
6,437
(1,239)
(238)
2,210
610
(5,958)
(1,278)
(124)
650
Natural
gas
bcf
128.6
(30.4)
6.5
–
(31.3)
boe (4)
Oil &
NgLs
mbbl mboe
25,048
3,619
(5,197)
(135)
1,417
330
–
–
(6,066)
(860)
Natural
gas
bcf
277.0
(36.4)
16.1
(28.1)
(35.9)
boe (4)
Oil &
NgLs
mbbl mboe
56,225
10,055
(6,436)
(373)
3,627
940
(5,958)
(1,278)
(6,189)
(210)
119.3
6,180
26,068
73.5
2,954
15,202
192.8
9,135
41,270
January 1, 2007
Dispositions (1)
Extensions and Discoveries
Production (2)
Technical Revisions (1)
December 31, 2007 (3)
() Paramount estimates.
(2) Excludes production from royalty interests.
(3) Columns and rows may not add due to rounding.
(4) Please refer to the discussion of Barrels of oil Equivalent Conversions under the heading “Advisories” in Management’s Discussion
and Analysis.
finding And Development Costs
Finding and development (“F&D”) costs associated with the 2007 exploration and development program were
as follows:
($ millions)
2007 Finding and Development Capital (1)
Exploration and development expenditures (including land)
Less: increase in value of undeveloped land
Change in future capital
total Finding and Development Capital
() Excludes corporate capital expenditures and Paramount Drilling capital expenditures.
proved
280.8
(4.6)
276.2
(28.7)
247.5
proved plus
probable
280.8
(4.6)
276.2
(50.6)
225.6
Finding and Development Costs
($/Boe) (2)
Including long-term development capital (3)
Proved
Proved plus Probable (4)
Excluding long-term development capital (3)
Proved
Proved plus Probable (4)
2007
2006
2005 (1)
118.66
N/A
118.66
N/A
51.88
45.17
45.15
39.83
48.67
50.68
43.49
45.31
3 Year
Average
58.51
69.53
53.12
63.29
() 2005 excludes capital expenditures associated with Trilogy spinout properties.
(2) Please refer to Barrels of oil Equivalent in Management’s Discussion and Analysis.
(3) Long-term development capital during fiscal 2006 and 2005 related to oil Sands, MacKenzie delta, and Colville Lake expenditures.
Paramount did not incur significant long-term development capital expenditures in 2007.
(4) 2007 finding and development costs not applicable due to negative technical revisions.
P A R A M O U N T R E S O U R C E S L T D . | 2 0 0 7 A N N u A L R E P o R T
R E v I E w O f O P E R A T I O N S
Pre-tax Net Asset value
An estimate of Paramount’s pre-tax net asset value as of December 3, 2007 is as follows:
7
($ millions)
Present value of reserves (1) (9)
Appraised value of undeveloped land (2)
Seismic (at cost)
Projects under evaluation (at cost) (3)
Value of short-term investments
Market value of long-term investments (4)
Other (6)
Total assets
Long-term debt - excludes unamortized financing fees
Working capital surplus and other (5)(8)
Total liabilities
Pre-tax net asset value
Pre-tax net asset value per basic common share (7)
2007
$ 679.5
142.9
83.6
33.6
95.7
322.1
54.3
1,411.7
136.5
(24.9)
111.6
$ 1,300.1
$ 19.21
() Based on McDaniel & Associates Consultants Ltd. forecast prices and costs and proved plus probable reserves discounted at 0
percent before income tax.
(2) Based on McDaniel & Associates Consultants Ltd. Summary of Acreage Evaluation.
(3) Excludes non-depletable wells assigned probable reserves.
(4) Based on the period-end closing prices of Trilogy Energy Trust units and MGM Energy Corp. shares on the Toronto Stock Exchange,
and book value of the remaining long-term investments.
(5) Excludes short-term investments but includes current portion of stock-based compensation liability.
(6) Includes inventory, drilling rigs, and corporate assets.
(7) outstanding shares: December 3, 2007 – 67,78,774.
(8) Includes fair value of financial instruments extending past December 3, 2007, which are not included in the present
value of reserves.
(9) Reserve values have been evaluated under a blow-down scenario.
8
P A R A M O U N T R E S O U R C E S L T D . | 2 0 0 7 A N N u A L R E P o R T
M D & A
19
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S
This Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with the audited
Consolidated Financial Statements of Paramount Resources Ltd. (“Paramount” or the “Company”) for the
year ended December 31, 2007 and Paramount’s audited Consolidated Financial Statements and MD&A for
the year ended December 31, 2006. Information included in this MD&A and the audited Consolidated Financial
Statements has been presented in Canadian dollars in accordance with Canadian Generally Accepted Accounting
Principles (“GAAP”), unless otherwise stated. The effect of significant differences between Canadian GAAP
and United States GAAP is disclosed in Note 16 of the Consolidated Financial Statements.
This MD&A contains forward-looking statements, non-GAAP measures and disclosures of barrels of oil equivalent
volumes. Readers are referred to the advisories concerning such matters under the heading “Advisories” in this
document.
In this document “funds flow from operations”, “funds flow from operations per share - diluted”, “netback”
and “net debt”, collectively the “Non-GAAP measures”, are presented as indicators of Paramount’s financial
performance. The Non-GAAP measures do not have standardized meanings prescribed by GAAP and, therefore,
are unlikely to be comparable to similar measures presented by other issuers.
This MD&A is dated March 12, 2008. Additional information concerning Paramount, including its Annual
Information Form, can be found on the SEDAR website at www.sedar.com.
Paramount is an independent Canadian energy company involved in the exploration, development, production,
processing, transportation and marketing of petroleum and natural gas. Management’s strategy is to maintain a
balanced portfolio of opportunities, to grow reserves and production in Paramount’s Principal Properties while
maintaining a large inventory of undeveloped acreage, and to selectively invest in and enter into joint ventures
for higher risk/higher return prospects. Paramount has spun-out three public entities: (i) Paramount Energy Trust
in February, 2003; (ii) Trilogy Energy Trust (“Trilogy”) in April, 2005; and (iii) MGM Energy Corp.(“MGM Energy”)
in January, 2007. Paramount continues to hold investments in the securities of Trilogy and MGM Energy and
also holds investments in the securities of MEG Energy Corp. (“MEG Energy”) as part of its portfolio of Strategic
Investments.
Paramount has defined its continuing operations into three business segments, established by management to
assist in resource allocation, assessing operating performance and achieving long-term strategic objectives: i)
Principal Properties; ii) Strategic Investments; and iii) Corporate.
Paramount’s Principal Properties are divided into four Corporate Operating Units (“COU’s”) as follows:
•
Kaybob consisting of properties in West Central Alberta;
• Grande Prairie consisting of properties in Central Alberta;
• Northern consisting of properties in Northern Alberta, the Northwest Territories and Northeast British
Columbia; and
•
Southern consisting of properties in Southern Alberta, Saskatchewan, as well as Montana and North Dakota
in the United States.
Strategic Investments include investments in other entities, including affiliates, development stage properties
and assets where there is no near-term expectation of production, but a longer-term value proposition based on
spin-outs, sales, or future revenue generation.
The Corporate segment is comprised of income and expense items, including general and administrative
expense, interest expense and taxes that have not been specifically allocated to Principal Properties or
Strategic Investments.
20
Highlights
Years ended December 31
($ millions, except as noted)
Financial
Funds flow from operations
per share - diluted ($/share)
Net earnings (loss)
per share - basic ($/share)
per share - diluted ($/share)
Petroleum and natural gas sales
Total assets
Long-term debt
Net debt
Operational
Sales volumes
Natural gas (MMcf/d)
Oil and NGLs (Bbl/d)
Total (Boe/d)
Average realized price
Natural gas ($/Mcf)
Oil and NGLs ($/Bbl)
Wells drilled (net)
2007 significant events
strategic Investments
2007
2006
2005
100.5
1.42
416.2
5.94
5.89
283.4
1,299.8
134.6
15.9
78.8
3,536
16,669
6.77
68.74
108
171.6
2.53
(17.8)
(0.26)
(0.26)
312.6
1,419.0
508.8
593.4
81.6
3,653
17,256
7.66
63.27
231
252.5
3.89
(63.9)
(0.99)
(0.99)
482.7
1,111.5
353.9
428.7
122.6
4,452
24,888
8.61
60.01
172
•
•
•
•
•
Successfully completed the spinout of MGM Energy on January 12, 2007.
Sold the Company’s investment in North American Oil Sands Corporation, (“North American”) during the
second quarter for $682.4 million resulting in a before tax gain of $528.6 million.
Sold the Company’s oil sands leases and natural gas rights in the Surmont area of Alberta (“the Surmont
Assets”) during the second quarter for $301.7 million resulting in a before tax gain of $271.0 million.
Proceeds included $151.7 million in common shares of the purchaser, MEG Energy.
Invested $9.0 million in 3.3 million common shares of MGM Energy pursuant to a public offering by MGM
Energy. Following the offering, Paramount’s ownership interest in MGM Energy was 16.7 percent.
Invested $14.2 million in 2.1 million units of Trilogy through open market purchases and participated in
Trilogy’s distribution reinvestment plan, acquiring an additional 0.6 million units, increasing Paramount’s
equity ownership from 16.2 percent to 18.8 percent at December 31, 2007.
• Completed the construction and commissioning of two drilling rigs, now in service for Paramount’s North
Dakota oil drilling program.
P A r A M o u n t r e s o u r c e s L t D . | 2 0 0 7 A N N U A l R E P O R T
M D & A
21
Principal Properties
• Drilled five oil wells by December 31, 2007 in North Dakota.
• Received regulatory approval for waterflood and commenced Good Production Practice at Crooked Creek
in Grande Prairie.
corporate
• Applied a portion of the proceeds from asset dispositions to reduce year end net debt to $15.9 million,
$577.5 million lower than net debt at December 31, 2006.
•
Purchased 3.3 million Common Shares for cancellation under Paramount’s Normal Course Issuer Bid
(“NCIB”) program for $54.9 million.
• Reduced annual interest expense by $2.2 million and generated interest income of $8.9 million.
Funds Flow From operations
The following is a reconciliation of funds flow from operations to the nearest GAAP measure:
($ millions)
Cash flow from operating activities
Change in non-cash working capital
Funds flow from operations
Funds flow from operations per boe
2007
98.7
1.8
100.5
16.52
2006
182.4
(10.8)
171.6
27.25
Paramount’s funds flow from operations decreased by 41 percent in 2007 to $100.5 million from $171.6 million
in 2006. This decrease was primarily due to:
•
•
•
lower realized gains on financial forward commodity contracts;
lower revenue as a result of lower realized natural gas prices and lower product sales volumes;
lower distributions from Paramount’s investment in Trilogy; and
• Higher operating expenses.
These decreases were partially offset by:
•
•
Increased other income; and
lower cash stock-based compensation payments.
22
The variances in funds flow from operations between 2006 and 2007 are summarized as follows:
2006 Funds Flow From Operations
Favourable (unfavourable) variance
Petroleum and natural gas sales
Realized gain on financial commodity contracts
Royalties
Operating and transportation expense
General and administrative expense
Stock-based compensation expense
Interest expense
Distributions from equity investments
Other income
Other
Total variance
2007 Funds Flow From Operations
$ millions
171.6
(29.2)
(30.2)
5.3
(13.2)
(4.3)
13.3
2.2
(21.0)
15.1
(9.1)
(71.1)
100.5
The 2006 funds flow from operations of $171.6 million was $80.9 million lower than funds flow from operations
of $252.5 million in 2005. Significant items contributing to the decrease included $59.8 million attributable to
the spin-out of properties to Trilogy, and $75.4 million related to natural gas price and volume decreases. These
decreases were partially offset by increased realized gains on financial instruments of $54.2 million and lower
royalty expenses of $18.0 million.
net earnings (Loss)
Paramount’s net earnings increased in 2007 to $416.2 million from a net loss of $17.8 million in 2006. The
increase in net earnings was primarily due to:
• Higher income from equity investments, including the gain on sale of North American shares of
$528.6 million;
• Higher gains on sale of property, plant and equipment, including the gain on sale of the Surmont Assets of
$271.0 million;
•
Increased investment and other income; and
• Unrealized foreign exchange gains.
These changes were partially offset by:
• A higher future income tax provision;
• A higher write-down of petroleum and natural gas properties;
• Unrealized losses on financial instruments in 2007 versus unrealized gains on financial instruments in
2006; and
• Higher dry hole expense.
P A r A M o u n t r e s o u r c e s L t D . | 2 0 0 7 A N N U A l R E P O R T
The variances in net earnings (loss) between 2006 and 2007 are summarized as follow:
2006 Net Loss
Favourable (unfavourable) variance
Impact of variances in funds flow from operations
Unrealized gain (loss) on financial commodity contracts
Stock-based compensation – non cash portion
Depletion, depreciation and accretion
Exploration
Dry hole
Gain on sale of property, plant and equipment
Income from equity investments
Write-down of petroleum and natural gas properties and goodwill
Unrealized foreign exchange
Future income tax
Other
Total variance
2007 Net Earnings
M D & A
23
$ millions
(17.8)
(71.1)
(48.1)
(3.0)
22.2
7.5
(34.1)
282.6
395.6
(90.1)
27.6
(93.9)
38.8
434.0
416.2
Paramount’s 2006 net loss decreased to $17.8 million from a net loss of $63.9 million in 2005. This change was
primarily due to higher income from equity investments, which included dilution gains totalling $129.7 million,
lower non-cash stock based compensation expense, and higher unrealized gains on financial instruments.
These increases were partially offset by lower product sales revenues and a higher write-down of petroleum
and natural gas properties in 2006 compared to 2005.
Principal Properties
netbacks and segment Loss
($ millions)
Revenue
Royalties
Operating expenses
Transportation expenses
Netback excluding realized financial commodity contracts
Realized gain on financial commodity contracts
Netback including realized gain on commodity contracts
Other Principal Property items (see below)
Segment loss
revenue
($ millions)
Natural gas sales
Oil and NGLs sales
Total
2007
194.7
88.7
283.4
2007
283.4
(42.7)
(83.3)
(15.9)
141.5
12.0
153.5
(445.0)
(291.5)
2006
228.3
84.3
312.6
2006
312.6
(48.0)
(71.9)
(14.2)
178.5
42.2
220.7
(363.6)
(142.9)
% change
(15)
5
(9)
24
Revenue from natural gas, oil and NGls sales in 2007 was $283.4 million, down nine percent from 2006 due
primarily to the impact of lower realized natural gas prices and sales volumes, partially offset by higher realized
oil and NGls prices.
The impact of changes in prices and volumes on petroleum and natural gas sales revenue for the year ended
December 31, 2007 are as follows:
($ millions)
Year ended December 31, 2006
Effect of changes in prices
Effect of changes in sales volumes
Year ended December 31, 2007
sales Volumes
Natural gas
228.3
(25.8)
(7.8)
194.7
Oil and NGLs
84.3
7.2
(2.8)
88.7
2007
Oil
and
NGLs
Bbl/d
533
765
865
1,369
4
3,536
Natural
Gas
MMcf/d
22.3
11.2
25.7
18.1
1.5
78.8
2006
Change
Natural
Gas
Boe/d MMcf/d
Total
Oil and
NGLs
Bbl/d
Natural
Gas
Total
Boe/d MMcf/d
Oil and
NGLs
Bbl/d
4,245
2,640
5,151
4,389
244
16,669
15.3
15.0
33.7
15.2
2.4
81.6
456
678
1,088
1,426
5
3,653
2,999
3,180
6,714
3,962
401
17,256
7.0
(3.8)
(8.0)
2.9
(0.9)
(2.8)
77
87
(223)
(57)
(2)
(118)
Kaybob
Grande Prairie
Northern
Southern
Other
Total
312.6
(18.6)
(10.6)
283.4
Total
Boe/d
1,246
(540)
(1,563)
427
(157)
(587)
Average daily natural gas sales volumes decreased to 78.8 MMcf/d in 2007 compared to 81.6 MMcf/d in
2006. The decrease was primarily a result of production declines in Northern at Bistcho and the shut-in of
the Maxhamish facility in October 2007, and normal production declines in Grande Prairie at Mirage. These
decreases were partially offset by increases in daily natural gas sales volumes as a result of drilling and
tie-in activities from Paramount’s 2007 capital program, primarily at Musreau and Resthaven in Kaybob and
Chain in Southern.
Average daily crude oil and NGls sales volumes decreased to 3,536 Bbl/d in 2007 compared to 3,653 Bbl/d
in 2006, primarily as a result of declines in Cameron Hills oil production in Northern, partially offset by new
production in Grande Prairie and Kaybob. Oil production increased in Southern in the fourth quarter of 2007 as
new wells in North Dakota were bought on production.
Paramount’s original 2007 annual production outlook was 21,000 Boe/d and actual production was 16,669
Boe/d. The reduction from budget was due to several factors including: weather delays in Southern and Kaybob,
lower production than expected in Kaybob, non-core property and facility disposals, equipment and other facility
issues, and delays in rig arrival and commissioning in Southern.
P A r A M o u n t r e s o u r c e s L t D . | 2 0 0 7 A N N U A l R E P O R T
commodity Prices
Key monthly average commodity price benchmarks and foreign exchange rates are as follows:
M D & A
25
Natural Gas
New York Mercantile Exchange
(Henry Hub Close) (US$/MMbtu)
AECO (Cdn$/GJ)
Crude Oil
West Texas Intermediate (US$/Bbl)
Edmonton Par (Cdn$/Bbl)
Foreign Exchange
Cdn$/1US$
Average realized Prices
Natural gas ($/Mcf)
Oil and NGLs ($/Bbl)
Total ($/Boe)
2007
6.86
6.27
72.34
77.02
1.07
2007
6.77
68.74
46.59
2006
% change
7.22
6.62
66.25
73.34
1.13
2006
7.66
63.27
49.63
(5)
(5)
9
5
(5)
% change
(12)
9
(6)
Paramount’s average realized natural gas price for 2007, before realized gains on financial commodity contracts,
decreased to $6.77/Mcf compared to $7.66/Mcf in 2006. Paramount’s average realized natural gas price is
based on prices received at the various markets in which it sells natural gas. Paramount’s natural gas sales
portfolio primarily consists of sales priced at the Alberta spot market, Eastern Canadian markets, and California
markets. Paramount’s natural gas production is sold in a combination of daily and monthly contracts.
Paramount’s average realized oil and NGls price for 2007, before realized losses on financial commodity contracts,
increased to $68.74/Bbl compared to $63.27/Bbl in 2006. Paramount’s Canadian oil and NGls sales portfolio
primarily consists of sales priced relative to Edmonton Par, adjusted for transportation and quality differentials.
Paramount’s United States oil and NGls sales portfolio is sold at the lease with differentials negotiated relative
to West Texas Intermediate crude oil prices.
commodity Price Management
Paramount, from time to time, uses financial and physical commodity price instruments to reduce exposure to
commodity price volatility. Financial instruments are limited to production periods of no longer than 12 months
and a cumulative maximum of 50 percent of Paramount’s forecast production on a barrel of oil equivalent basis
over the term of the instrument.
Paramount’s outstanding financial and physical contracts are disclosed in the Consolidated Financial Statements
in Note 11 - Financial Instruments. Paramount has not designated any of the financial instrument contacts as
hedges, and as a result changes in the fair value of these contracts are recognized in earnings.
26
The realized and unrealized gain (loss) on financial forward commodity contracts are as follows:
($ millions, except as noted)
Realized gain
Unrealized gain (loss)
Total gain (loss)
Realized gain ($/Boe)
Unrealized gain (loss) ($/Boe)
Total gain (loss) ($/Boe)
2007
12.0
(25.2)
(13.2)
1.98
(4.14)
(2.16)
2006
42.2
22.9
65.1
6.70
3.63
10.33
Paramount used floating to fixed natural gas price swaps to fix the sales price of natural gas from January to
March of 2007 resulting in realized gains of $15.2 million. Paramount used a series of floating to fixed swaps to
reduce oil price volatility resulting in realized losses of $3.2 million during 2007. Paramount also has a long-term
physical contract to sell 3,400 GJ/d of natural gas at a fixed price of $2.52/GJ plus an escalation factor, expiring
in 2011.
royalties
($ millions, except as noted)
Natural gas
Oil and NGLs
Total
$/Boe
Royalty rate (%)
2007
27.3
15.4
42.7
7.02
15.1
2006
32.7
15.3
48.0
7.62
15.4
% change
(17)
1
(11)
(8)
(2)
Royalties decreased 11 percent to $42.7 million in 2007 compared to $48.0 million in 2006, primarily as a result
of decreases in Paramount’s revenue. The 2007 royalty expense included the impact of allowable deductions
for operating and capital costs for royalty purposes on frontier lands in the Northwest Territories and lower deep
gas royalty holidays in Kaybob.
The impact of changes in revenue and royalty rates on royalty expense for the year ended December 31, 2007
is as follows:
($ millions)
Year ended December 31, 2006
Effect of changes in revenue
Effect of changes in royalty rates
Year ended December 31, 2007
operating expense
($ millions, except as noted)
Operating expense
$ / Boe
Total
48.0
(4.4)
(0.9)
42.7
2007
83.3
13.70
2006
71.9
11.42
% change
16
20
Operating expenses increased 16 percent to $83.3 million in 2007 compared to $71.9 million in 2006, primarily
as a result of higher plant equalization and turnaround costs in Northern and higher costs in Kaybob associated
with production increases. General increases in the costs of goods and services, combined with an increased
level of maintenance activities and workovers also contributed to the current year increase.
P A r A M o u n t r e s o u r c e s L t D . | 2 0 0 7 A N N U A l R E P O R T
M D & A
27
transportation expense
($ millions, except as noted)
Transportation expense
$ / Boe
2007
15.9
2.61
2006
14.2
2.25
% change
12
16
Transportation expense increased to $15.9 million in 2007 compared to $14.2 million in 2006, primarily as a
result of increased transportation costs associated with Kaybob volumes and higher pipeline tariffs.
netbacks
The following table shows Paramount’s reported netbacks by product type for 2007 and 2006:
2007
2006
Natural gas ($/Mcf)
Revenue
Royalties
Operating expenses
Transportation
Netback excluding realized financial commodity contracts
Realized gain on natural gas financial commodity contracts
Netback including realized gain on commodity contracts
Conventional oil ($/Bbl)
Revenue
Royalties
Operating expenses
Transportation
Netback excluding realized financial commodity contracts
Realized loss on crude oil financial commodity contracts
Netback including realized loss on financial commodity contracts
Natural gas liquids ($/Bbl)
Revenue
Royalties
Operating expenses
Transportation
Netback
All products ($/Boe)
Revenue
Royalties
Operating expenses
Transportation
Netback excluding realized financial commodity contracts
Realized gain on financial commodity contracts
Netback including realized gain on financial commodity contracts
6.77
0.95
2.37
0.52
2.93
0.53
3.46
68.85
11.99
12.19
0.50
44.17
(3.16)
41.01
68.33
11.62
9.85
1.10
45.76
46.59
7.02
13.70
2.61
23.26
1.98
25.24
7.66
1.10
1.93
0.41
4.22
1.45
5.67
63.65
9.80
10.71
1.42
41.72
(1.12)
40.60
62.01
16.86
10.72
1.76
32.67
49.63
7.62
11.42
2.25
28.34
6.70
35.04
28
other Principal Property Items
($ millions)
Depreciation, depletion, and accretion
Exploration expense
Dry hole expense
Write-down of petroleum and natural gas properties
Write-down of goodwill
Gain on sale of property plant and equipment
Unrealized gain (loss) on commodity contracts and other expenses
Other income
Total
2007
133.1
6.2
27.7
272.0
2.0
(13.7)
23.0
(5.3)
445.0
2006
156.2
15.0
24.1
183.8
-
(1.9)
(13.6)
–
363.6
Depletion, depreciation and accretion expense (“DD&A expense”) decreased to $133.1 million or $21.88/Boe
in 2007 compared to $156.2 million or $24.80/Boe in 2006. The decrease in DD&A expense is primarily the
result of lower per unit depletion rates. The per Boe DD&A expense rate for 2007 decreased 12%, related
to property write-downs at December 31, 2006 and at September 30, 2007, which reduce the balance subject
to depletion.
Exploration expense consists of geological and geophysical costs, seismic, and lease rentals expenses. The
decrease in 2007 is consistent with Paramount’s lower capital spending and includes lower seismic expenditures
in Grande Prairie and Kaybob.
Dry hole expense was $27.7 million for 2007 compared to $24.1 million in 2006. The 2007 dry hole expense
related primarily to unsuccessful wells in Northern.
During 2007, the Company recognized a write-down of petroleum and natural gas properties of $272.0 million, of
which $79.6 million was recorded in the third quarter. The write-down related primarily to natural gas properties
in Kaybob, Northern, and Grande Prairie. The write-down within Kaybob was a result of technical revisions
to previously recognized reserves and development costs exceeding the present value of reserves found. At
Northern, the write-down was primarily the result of shutting in the Maxhamish area because of low gas prices
and high costs in West liard. Within Grande Prairie the write-down was focused on natural gas producing areas
primarily at Ante Creek. Paramount also recorded an impairment provision of $8.0 million related to equipment
inventory purchased over the last two drilling seasons that is now surplus to the Company.
The gain on sale of property, plant and equipment includes gains on non-core Principal Properties of $12.7
million as the Company continues to divest properties and assets that are not considered strategic.
Other income includes a royalty refund of $4.3 million (“Royalty Refund”) related to the confirmation of the
inclusion of certain wells for a reduced royalty rate and calculating the impact of the rate change on historic
royalty estimates.
strategic Investments
($ millions)
Income from equity investments
Gain on sale of property, plant and equipment
General and administrative
Stock based compensation
Depreciation
Exploration
Dry hole
Non-controlling interest
Segment Earnings
P A r A M o u n t r e s o u r c e s L t D . | 2 0 0 7 A N N U A l R E P O R T
2007
548.8
270.8
(4.5)
(0.9)
(0.9)
(3.8)
(39.8)
10.9
780.6
2006
154.5
–
(1.0)
–
–
(2.8)
(9.4)
–
141.3
M D & A
29
Strategic Investments at December 31, 2007 include the following:
•
•
•
equity investments in Trilogy and MGM Energy;
oil sands investments, including shares in MEG Energy and carbonate bitumen holdings; and
drilling rigs in the United States operated by Paramount’s wholly owned subsidiary, Paramount Drilling U.S.
llC (“Paramount Drilling”).
Income from equity investments includes a $528.6 million gain on sale of Paramount’s investment in North
American shares. This gain is net of expenses, including a bonus of 150,000 Common Shares of Paramount
paid to the chairman and CEO of Paramount under the Company’s stock incentive plan. Income from equity
investments also includes net dilution gains of $23.1 million and net equity losses of $1.7 million. Prior
year equity earnings include dilution gains of $111.3 million related to North American and $18.4 million related
to Trilogy.
The gain on sale of property, plant and equipment primarily relates to the Surmont Assets. Total proceeds
included $75.0 million cash, a $75.0 million interest bearing note receivable (the “MEG Note”) and common
shares of MEG Energy valued at $151.7 million. The MEG Note is secured by certain of MEG Energy’s assets
and was repaid subsequent to December 31, 2007.
MEG Energy is a private Canadian energy company focused on oil sands development in the Athabasca region
of Alberta. MEG owns a reported 100 percent working interest in over 750 square miles of oil sands leases with
its reported principal asset being 80 contiguous square miles of oil sands leases in Christina lake.
Paramount Drilling conducts its drilling operations with two drilling rigs that were constructed during 2006 and
2007. The drilling operations commenced during the second half of 2007 after rig delivery and commissioning
were completed. Depreciation consists of drilling rig depreciation.
General and administrative expense and stock-based compensation for 2007 were incurred primarily by MGM
Energy, when MGM Energy was consolidated by Paramount. Other general and administrative and stock-based
compensation related to Paramount Drilling.
Dry hole and exploration expenses for 2007 related to MGM Energy’s 2006/2007 winter drilling program, when
MGM Energy was consolidated by Paramount and for the period to January 12, 2007 when the MGM Energy
properties were owned by Paramount.
Until May 29, 2007, Paramount owned greater than 50 percent of MGM Energy’s common shares and the
results of operations and cash-flows of MGM Energy were consolidated in the financial results of Paramount.
As a result of the May 30, 2007 issuance of common shares by MGM Energy, Paramount’s ownership of
MGM Energy was reduced to less than 50 percent and accordingly, subsequent to May 29, 2007, Paramount
accounts for its investment in MGM Energy using the equity method. Prior to the January 12, 2007 spin-
out, the Mackenzie Delta and other Northern assets were owned by Paramount and included in the Strategic
Investment segment.
corporate
($ millions)
General and administrative
Stock-based compensation
Interest and financing charges
Debt extinguishment
Foreign exchange (gain) loss
Other income
Corporate costs
2007
31.1
(14.6)
32.1
11.1
(20.0)
(10.1)
29.6
2006
30.4
(3.4)
34.3
–
5.3
(0.4)
66.2
Corporate segment net costs totalled $29.6 million in 2007 compared to net costs of $66.2 million in 2006. The
reduced costs were associated with foreign exchange gains and a higher stock-based compensation recovery.
Paramount’s general and administrative expenses increased primarily due to lower recoveries from Trilogy and
increased compensation costs.
30
Interest and financing charges for 2007 were $32.1 million compared to $34.3 million in 2006, as Paramount had
lower average debt levels in 2007 following the repayment of US$225.4 million of long-term debt, Paramount’s
short-term facility, and the credit facility mid-way through 2007. Paramount expensed $11.1 million in connection
with the Term loan B facility (“TlB”) extinguishment and US Senior Notes purchases. Included in the foreign
exchange gain in 2007 is a gain on US dollar denominated debt of $48.3 million, offset by losses on foreign
exchange collars of $22.0 million. Paramount uses foreign exchange collars to offset volatility caused by foreign
exchange changes associated with US dollar denominated debt. The prior year foreign exchange loss of $5.3
million was related to foreign exchange losses on US dollar denominated debt partially offset by an unrealized
gain of $4.5 million on a foreign exchange collar.
Other income includes interest income earned on Paramount’s short-term investments including the
MEG Note.
capital expenditures
($ millions)
Geological and geophysical
Drilling and completions
Production equipment and facilities
Exploration and development expenditures
Land
Property acquisitions
Cash proceeds on property dispositions
Principal Properties
Strategic Investments
Cash proceeds on disposal of Strategic Investments
Corporate
Net capital expenditures
2007
4.3
158.1
104.4
266.8
13.5
0.4
(28.1)
252.6
54.2
(78.7)
1.8
229.9
2006
9.1
257.2
120.2
386.5
34.1
15.8
(7.2)
429.2
92.0
–
0.4
521.6
During 2007, exploration and development expenditures totalled $266.8 million compared to $386.5 million
in 2006. Paramount’s 2007 capital budget was $300 million, consisting of $265 million for exploration and
development expenditures, excluding land acquisitions and $35 million for oil sands projects. Exploration and
development expenditures were $266.8 million or $1.8 million higher than budgeted. Variations from budget
included decreases in Southern due primarily to drilling rig delays offset by overspending in Grande Prairie
related to additional costs associated with the 2006/2007 winter drilling program.
Strategic Investment capital expenditures for 2007 totalled $54.2 million and include $35.3 million in the
Mackenzie Delta area, of which $30.1 million was expended by MGM Energy while it was consolidated by
Paramount, and $16.7 million for the Surmont Assets prior to disposal. Prior year expenditures include $56.5
million related to properties transferred to North American and $19.8 million for drilling rigs. Paramount’s other
oil sands project spending was $18 million in 2007, a decrease of $17 million from budget, due primarily to the
mid-year disposal of the Surmont Assets and the postponement of other oil sands projects.
P A r A M o u n t r e s o u r c e s L t D . | 2 0 0 7 A N N U A l R E P O R T
Wells drilled for the past three years are as follows:
(wells drilled)
2007
2006
2005
Gross(1)
Net(2)
Gross(1)
Net(2)
Gross(1)
Net(2)
M D & A
31
Gas
Oil
Heavy oil and oil sands evaluation
Dry & Abandoned (3)
Total
(1) Gross wells is the number of wells that Paramount has a working interest or a royalty interest that may be converted to a
working interest.
(2) Net wells is the aggregate number of wells obtained by multiplying each gross well by Paramount’s percentage of working interest.
(3) Dry & Abandoned for 2007 includes two (2.0 net) wells drilled by MGM Energy.
235
20
124
19
398
139
9
14
10
172
273
18
35
15
341
147
10
62
12
231
87
22
46
4
159
52
9
44
3
108
Liquidity and capital resources
($ millions)
Working capital deficit (surplus)
Credit facility
Term loan B facility(2)
US Senior Notes (2)
Stock-based compensation liability (1)
Net debt (1)
Share capital
Contributed surplus
Retained earnings
Total
2007
(120.6)
–
–
136.5
–
15.9
313.8
1.4
593.5
924.6
2006
84.3
85.1
174.8
248.9
0.3
593.4
341.1
–
222.7
1,157.2
Change
204.9
(85.1)
(174.8)
(112.4)
0.3
(577.5)
(27.3)
1.4
370.8
(232.6)
(1) Paramount has excluded the stock-based compensation liability related to Paramount Options for 2006 as it was Paramount’s
practice to decline optionholders requests for cash payments, thereby necessitating optionholders to exercise their vested
Paramount Options from August 2005 to June 2007.
(2) Excludes unamortized financing charges.
Working capital
Paramount’s working capital surplus position at December 31, 2007 was $120.6 million compared to a deficit of
$84.3 million at December 31, 2006. Included in working capital as of December 31, 2007 was $83.3 million in
cash and cash equivalents and $95.7 million in short-term investments, including the MEG Note. The increase
in working capital is primarily the result of the disposition of certain Strategic Investments and non-core Principal
Properties during the year for total proceeds of in excess of $1.0 billion. In March 2007, Paramount closed a six
month $100 million short-term facility that was repaid and cancelled on June 29, 2007.
Paramount expects to finance its 2008 operations, contractual obligations, and budgeted capital expenditures
from its existing working capital surplus, funds flow from operations, and from available borrowing capacity, if
required. Paramount may use its funds and available credit to add to its portfolio of Strategic Investments or for
other purposes.
Bank credit Facility
At December 31, 2007, Paramount’s credit agreement had a $170 million gross borrowing base with a net
borrowing base of $155 million. At Paramount’s request, the banking syndicate has provided aggregate
commitments to lend up to $125 million. As of December 31, 2007, no balances were drawn on the credit
facility, however, Paramount had undrawn letters of credit outstanding totalling $15.5 million that reduce the
amount available to the Company under the credit facility.
32
us senior notes
During the third quarter of 2007, Paramount made open market purchases of US$75.4 million principal amount
of its 8.5% US Senior Notes, reducing the net principal outstanding to US$138.2 million (CAD$ 136.5 million) at
December 31, 2007. Paramount may re-market the purchased debt at its discretion.
term Loan B Facility
On July 3, 2007, Paramount repaid the entire principal outstanding of its US$150 million TlB Facility. The TlB
Facility is no longer available to the Company.
share capital
The Company received regulatory approval for a NCIB ending on May 6, 2008. Under the NCIB, the Company
was permitted to purchase up to 3,298,526 of its Common Shares for cancellation. Effective December 19,
2007, Paramount received regulatory approval for an amendment to the NCIB which increased the number
of shares available for purchase to 3,546,859. To December 31, 2007, Paramount purchased and cancelled
3,298,526 Common Shares for $54.9 million.
At March 10, 2008, Paramount had 67,686,374 Common Shares outstanding, 6,206,750 Stock Options (with
each entitling the holder to acquire one Common Share) outstanding (872,850 exercisable) and 300,625 Holdco
options outstanding (226,125 exercisable).
contractual obligations
Paramount had the following contractual obligations as at December 31, 2007:
($ millions)
US Senior Notes, including interest
Asset retirement obligations
Pipeline transportation commitments (1)
Capital and drilling spending commitment
Operating leases
Total
2008
11.7
1.6
14.2
4.8
3.2
35.5
2009-2010
23.4
1.7
23.8
–
5.4
54.3
2011-2013
167.4
46.0
25.9
–
3.0
242.3
After 2013
–
172.0
43.4
–
–
215.4
Total
202.5
221.3
107.3
4.8
11.6
547.5
(1) Certain of the pipeline transportation commitments are secured by outstanding letters of credit totaling $3.8 million at
December 31, 2007.
contingencies
Paramount is party to various legal claims associated with the ordinary conduct of business. Paramount does
not anticipate that these claims will have a material impact on its financial position.
Tax and royalty legislation and regulations, and government interpretation and administration thereof, continually
changes. As a result, there are often tax and royalty matters under review by relevant government authorities.
All tax filings are subject to subsequent government audit and potential reassessments. Accordingly, the finally
determined income tax liability may differ materially from amounts estimated and recorded.
Crown royalties for Paramount’s production from frontier lands in the Northwest Territories have been provided
for in the Consolidated Financial Statements based on the Company’s interpretation of the relevant legislation
and regulations. At present, Paramount has not received assessments from the Government of Canada for
a significant portion of its past Northwest Territories royalty filings. Although Paramount believes that its
interpretation of the relevant legislation and regulations has merit, Paramount is unable to predict the ultimate
outcome of audits and/or assessments by the Government of Canada. Additional material amounts could
potentially become payable.
Paramount, as the original lessee, has committed to discharge MGM Energy’s office lease payment should
MGM Energy not fulfill its lease obligation.
P A r A M o u n t r e s o u r c e s L t D . | 2 0 0 7 A N N U A l R E P O R T
M D & A
33
Quarterly Information
($ millions, except as noted)
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2007
2006
Funds flow from operations
per share - diluted ($/share)
18.0
0.26
21.7
0.31
18.0
0.25
42.8
0.60
26.1
0.38
37.3
0.54
65.8
0.95
42.4
0.63
Petroleum and natural gas sales
61.8
61.9
80.9
78.8
73.1
77.9
73.7
87.9
Net earnings (loss)
per share - basic ($/share)
per share - diluted ($/share)
(156.5)
(2.29)
(2.29)
(82.2)
(1.17)
(1.17)
671.0
9.46
9.34
(16.1)
(0.23)
(0.23)
(159.6)
(2.32)
(2.32)
22.2
0.33
0.32
111.9
1.65
1.61
7.8
0.12
0.12
Sales volumes
Natural gas (MMcf/d)
Oil and NGLs (Bbl/d)
Total (BOE/d)
Average realized price
Natural gas ($/Mcf)
Oil and NGLs ($/Bbl)
67.6
2,984
14,248
73.5
3,977
16,231
89.5
3,561
18,480
84.8
3,636
17,773
79.0
3,937
17,104
81.4
3,901
17,471
83.2
3,423
17,297
82.9
3,339
17,152
6.43
79.77
5.31
70.99
7.35
64.66
7.72
60.84
7.20
57.47
7.07
69.32
6.98
66.79
9.39
59.39
significant Items Impacting Quarterly results
Quarterly earnings variances include the impacts of changing production volumes and market prices.
Fourth quarter 2007 earnings include a $192.4 million write-down of petroleum and natural gas properties,
primarily related to natural gas producing properties.
Third quarter 2007 earnings include a write-down of petroleum and natural gas properties of $79.6 million
related to Kaybob and Northern.
Second quarter 2007 net earnings include a pre-tax $528.6 million gain on the sale of North American and a pre-
tax gain of $282.2 million on the sale of property, plant and equipment, including $271.0 million related to the
sale of the Surmont Assets.
First quarter 2007 net earnings include $47.6 million of dry hole expenses, including $39.8 million related to
MGM Energy’s 2006/2007 drilling program and an $18.9 million future income tax recovery.
Fourth quarter 2006 net earnings included a write-down of petroleum and natural gas properties of $182.5
million.
Third quarter 2006 net earnings included $24.2 million of financial instrument gains and a $14.7 million stock-
based compensation recovery.
Second quarter 2006 net earnings included a dilution gain of $101.0 million from Trilogy and North American and
dry hole expenses of $12.2 million.
First quarter 2006 net earnings included a $28.5 million gain on financial commodity instruments and a $19.3
million stock-based compensation expense.
34
Fourth Quarter review
netback
($ millions, except as noted)
Revenue
Royalties
Operating expenses
Transportation expenses
Netback excluding realized financial instruments
Realized (loss) gain on financial instruments – commodity contracts
Netback including realized (loss) gain on commodity contracts
Netback per Boe
Funds Flow from operations
($ millions, except as noted)
Cash flow (used in) from operating activities
Change in non-cash working capital
Funds flow from operations
Funds flow from operations per Boe
2007
61.8
(5.2)
(21.6)
(3.4)
31.6
(4.2)
27.4
20.92
2007
(53.3)
71.2
17.9
13.66
2006
73.1
(11.9)
(16.1)
(3.4)
41.7
10.2
51.9
32.98
2006
8.6
17.5
26.1
16.59
Paramount’s fourth quarter production of 14,248 Boe/d consisted of 67.6 MMcf/d of natural gas and 2,984 Bbl/d
of oil and NGls, generating production revenue of $61.8 million, a decrease of $11.3 million from the prior year
comparable quarter. The decrease included the impact of lower sales volumes and gas prices partially offset by
increased oil and NGl prices.
Fourth quarter royalties decreased to $5.2 million in 2007 compared to $11.9 million in 2006, primarily the
result of lower revenues. Northern’s 2007 royalty expense was lower as a result of production declines and
the impact of allowable capital expense deductions reducing the crown royalties payable on frontier lands in
the Northwest Territories. Similarly, Grande Prairie’s royalty expense is lower in the current year quarter due to
significant production decreases from the fourth quarter in 2006. Kaybob and Southern had moderately higher
royalty expenses as production continues to grow in those areas.
Operating expenses increased in the fourth quarter of 2007 and included provisions for additional plant
equalizations and increased workover expenditures. The current year quarter also includes lower processing
income due to a facility shut-in in Northern.
Paramount continued to invest in Trilogy, both through purchases of 1.7 million units and by participating in
Trilogy’s dividend reinvestment plan acquiring 0.6 million units. Paramount also made additional NCIB share
purchases, acquiring 1.4 million Common Shares.
Included in Other Income in the quarter is the Royalty Refund of $4.3 million.
P A r A M o u n t r e s o u r c e s L t D . | 2 0 0 7 A N N U A l R E P O R T
M D & A
35
subsequent events
Subsequent to December 31, 2007 Paramount:
•
•
•
•
•
•
Purchased US$45.0 million principal amount of US Senior Notes on the open market;
Paid $22.3 million to settle the outstanding foreign exchange collar and entered a new foreign exchange
collar with a notional amount of US$90.0 million, a floor of CDN$1.0200/USD and ceiling of CDN$0.9821/
USD expiring July 31, 2008;
Purchased 6,400 Paramount Common Shares for $0.1 million under the Amended NCIB;
Purchased 1.9 million units of Trilogy for $13.7 million and acquired 0.4 million units by participating in
Trilogy’s distribution reinvestment plan;
Purchased 3.5 million common shares of Paxton Corporation (“Paxton”), a private company, representing
approximately 20 percent of the outstanding common shares for $4.8 million. Certain directors of Paramount
are also directors and shareholders of Paxton;
Entered into financial commodity contracts to sell 40,000MMbtu/d of natural gas from April to October
2008 at a weighted average NYMEX price of US$9.07/MMbtu and 20,000MMbtu/d from November 2008
to March 2009 at a weighted average NYMEX price of US$9.99/MMbtu;
• Received $75.0 million cash on repayment of the note receivable from MEG Energy; and
•
Sold non-core Northern properties for $6.4 million.
related Party transactions
Paramount provides certain operational and administrative services to Trilogy Energy ltd., a wholly-owned
subsidiary of Trilogy, and MGM Energy, at cost and cost plus 10 percent, respectively. Transactions with Trilogy
and MGM Energy are settled monthly. In addition, as a result of the respective spinouts, certain employees of
Trilogy and MGM Energy hold Paramount and / or Holdco Options and, therefore, stock-based compensation
expense accrues to Paramount. The following table summarizes the related party transactions:
($ millions)
Trilogy
MGM Energy
Trilogy
MGM Energy
2007
2006
Services Agreement
Stock-based Compensation
1.1
(0.4)
0.7
1.0
(0.1)
0.9
1.9
0.7
2.6
–
–
–
Included in accounts payable and accrued liabilities is $2.0 million due to a supplier for the construction of
Paramount’s drilling rigs. An individual who is a part owner of the supplier is also a director of a company
affiliated with Paramount.
MGM spinout
On January 12, 2007, Paramount Resources ltd. completed a reorganization pursuant to a plan of arrangement
under the Business Corporations Act (Alberta) (the “MGM Spinout”) involving Paramount Resources
ltd., its shareholders and MGM Energy, a wholly-owned subsidiary of Paramount immediately prior to the
MGM Spinout.
36
through the MGM spinout:
•
•
Paramount’s shareholders received an aggregate of approximately 2.8 million common shares of MGM
Energy (“MGM Shares”) and approximately 14.2 million warrant units of MGM Energy, with each warrant
unit consisting of one MGM Energy short term warrant (each, a “Short Term Warrant”) and one MGM
Energy longer term warrant (each, a “longer Term Warrant”);
Paramount received a demand promissory note and 18.2 million voting Class A Preferred Shares of MGM
Energy, which note was subsequently repaid by MGM Energy and which shares were subsequently
converted into MGM Shares; and
• MGM Energy became the owner of; (i) rights and obligations under an area-wide farm-in agreement (the
“Farm-in Agreement”) respecting Mackenzie Delta, Northwest Territories Exploration licence #394,
Exploration licence #427 and two Inuvialuit concession agreements; (ii) oil and gas properties in the Colville
lake / Sahtu area of the Central Mackenzie Valley, Northwest Territories; and (iii) an interest in one well
in the Cameron Hills area of the southern portion of the Northwest Territories, all of such property, rights
and obligations formerly being owned by Paramount. Paramount continued to be jointly and severally liable
for obligations of MGM Energy under the Farm-in Agreement to the extent that such obligations were not
satisfied by MGM Energy for so long as MGM Energy was an “affiliate” of Paramount as such term was
defined in the Farm-in Agreement. As a result of equity issuances by MGM Energy during 2007, MGM
Energy and Paramount are no longer “affiliates” as defined.
As a result of the MGM Spinout, the carrying value of Paramount’s Common Shares was reduced by $3.5
million, retained earnings were reduced by $5.9 million and future tax liability was increased by $3.3 million. The
net book value of the assets transferred by Paramount to MGM Energy was $45.2 million.
significant equity Investees
The following table summarizes the assets, liabilities and results of operations of Paramount’s significant
equity investees. The amounts summarized in the table below have been derived directly from the investees’
financial statements as at and for the years ended December 31, 2007 and 2006. Amounts summarized do not
incorporate adjustments that Paramount makes in applying the equity basis of accounting for such investments.
As a result, the amounts included in the table below cannot be used to directly recompute Paramount’s equity
income and net investment respecting such investees.
($ millions)
As at December 31
Current assets
Long term assets
Current liabilities
Long term liabilities
Equity
Years ended December 31
Revenue
Expenses
Taxes
Net Earnings (loss)
Units/shares outstanding at December 31
Paramount’s proportionate interest (1)
in equity investee at December 31
MGM Energy
Trilogy
$
$
2007
52.3
875.9
76.2
470.0
382.0
$
2006
88.4
994.3
149.6
412.3
520.9
$
2007
112.0
205.6
15.9
1.2
345.6
2007
304.3
285.0
69.1
(49.8)
94,608,704
2006
417.1
276.3
-
140.8
92,566,681
2007
3.1
88.7
(23.2)
(62.3)
128,944,844
2006
-
-
-
-
-
2006
-
-
-
-
1
18.8%
16.2%
16.7%
100%
(1) Readers are cautioned that Paramount does not have any direct or indirect interest in or right to the equity investees’ assets
or revenue nor does Paramount have any direct or indirect obligation in respect of or liability for the equity investees’ expenses
or obligations. The Company is a security holder of Trilogy and MGM Energy, just like any other security holder of Trilogy and MGM
Energy, and accordingly, the fair value of the Company’s investment in Trilogy and MGM Energy is based on the value of Trilogy
and MGM Energy securities held.
P A r A M o u n t r e s o u r c e s L t D . | 2 0 0 7 A N N U A l R E P O R T
Trilogy had 4.1 million trust unit options outstanding (0.2 million exercisable) at December 31, 2007 at exercise
prices ranging from $6.65 to $23.95 per unit. MGM Energy had 3.1 million stock options outstanding (nil
exercisable) at December 31, 2007 at exercise prices ranging from $2.42 to $5.00 per share.
37
M D & A
outlook
Paramount’s Board has approved a 2008 exploration and development budget of $130 million, excluding land
purchases, and expects 2008 annual average production of approximately 15,250 Boe/d. The 2008 budget will
focus on the development of conventional oil opportunities in North Dakota, Montana and at Crooked Creek in
Alberta, natural gas opportunities in the Deep Basin at Kaybob, and maintaining coal bed methane production
at Chain.
risks and risk Management
The exploration for and production of oil and natural gas involves a number of risks and uncertainties, including
commodity pricing, industry competition, production practices, exploration uncertainty, transportation restrictions,
foreign exchange rates, interest rates and government and regulatory practices.
Natural gas and oil prices are influenced by market supply and demand fundamentals as well as weather,
political climate, and other events. As the majority of Paramount’s natural gas and oil sales are priced to US
markets, the Canada/US dollar exchange rate also impacts revenue.
Exploration and operating uncertainty includes risks and hazards such as unusual or unexpected geological
formations, high reservoir pressures, environmental damage, and other risks involved in drilling and operating
wells. Drilling success is improved by using current technologies and shooting or purchasing seismic information.
Paramount also attempts to minimize exploration and operating risks using prudent safety programs including
insurance coverage against potential losses. Where an environmental breach occurs, fines and penalties may
be incurred.
Paramount uses financial instruments in addition to fixed price physical delivery contracts with the objective
of reducing exposure to the impacts of volatile commodity prices. The use of derivative instruments is limited
to pre-approved policies and limits governed by Paramount’s Board of Directors. Paramount does not use
financial instruments for trading or speculative purposes. Paramount is exposed to credit risk from financial
instruments to the extent of non-performance by counterparties. Paramount minimizes credit risk associated
with possible non-performance by financial instrument counterparties by entering into contracts with only
highly rated counterparties and by controlling third party credit risk with credit approvals, limits on individual
counterparty exposure, and monitoring procedures. Paramount sells production to a variety of purchasers under
normal industry sale and payment terms. Paramount also uses long-term foreign exchange instruments to
offset changes in the carrying value of US denominated debt.
Regulatory policies, royalties, and income taxes imposed by the various levels of government can be amended
from time to time. Further, tax and royalty filings are subject to subsequent government audit and potential
reassessments. Accordingly, the final income tax or royalty balance may differ materially from amounts recorded.
Paramount attempts to ensure that it is in compliance with current regulations and can respond to changes as
they occur by employing qualified personnel and engaging subject specialists as necessary.
On October 25, 2007, the Alberta Government announced a new Alberta Royalty Framework (the “Framework”)
to become effective January 1, 2009. The Framework included changes to the crown royalty rates for both new
and existing developments and is subject to further modifications prior to final legislation. The final impact of the
Framework on Paramount’s royalties in Alberta may be material and will depend on future commodity prices and
production rates, and enacted legislation and regulations.
Paramount also secures long-term transportation commitments to minimize transportation restrictions and
cost volatility.
38
critical Accounting estimates
The preparation of the Consolidated Financial Statements in accordance with GAAP requires management to
make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and disclosure of contingent assets and liabilities. The following is a discussion of the accounting
estimates that are considered critical.
Property Plant and equipment
Paramount follows the successful efforts method of accounting for its petroleum and natural gas operations.
The application of the successful efforts method of accounting requires the use of judgment to determine,
among other things, the designation of wells as development or exploratory, and whether exploratory wells
have discovered economically recoverable quantities of proved reserves. All costs of development wells are
capitalized. Costs of drilling exploratory wells are initially capitalized, pending evaluation of proved reserves.
If economically recoverable reserves are not found, such costs are charged to earnings. The results of
drilling an exploratory well can take considerable time and judgment to determine if proved reserves have
been discovered.
Ultimately, these determinations affect whether such costs are capitalized and depleted on a unit-of-production
basis or are charged to earnings as dry hole expense.
reserve estimates
Reserve engineering is an inherently complex and subjective process of estimating underground accumulations
of petroleum and natural gas reserves. The process relies on interpretations of available geological, geophysical,
engineering and production data. The accuracy of a reserves estimate is a function of the quality and quantity of
available data, the interpretation of that data, the accuracy of various economic assumptions and the judgment
of the persons preparing the estimate.
In 2007, 100 percent of Paramount’s reserves were evaluated by qualified independent reserves evaluators.
Because these estimates depend on many assumptions, all of which may differ from actual results, reserves
estimates may be different from the quantities of petroleum and natural gas that are ultimately recovered. The
results of drilling, testing and production after the date of an estimate may justify revisions to the estimate.
The estimates of reserves impact; (i) the assessment of whether or not an exploratory well has found economically
producible reserves; (ii) depletion rates; and (iii) impairment assessments of oil and gas properties, all of which
could have a material impact on earnings.
Impairment of Petroleum and natural Gas Properties
Paramount reviews its proved properties for impairment annually, or as economic events dictate, on a field
basis. An impairment provision is recorded when the carrying value of a field exceeds its estimated expected
future cash flows from proved and probable petroleum and natural gas reserves. Reserve estimates, as well as
estimates for petroleum and natural gas prices, royalties and production costs, may change and there can be no
assurance that additional impairment provisions will not be required in the future.
Asset retirement obligations
Paramount recognizes the fair value of an asset retirement obligation in the period in which it is incurred and
when a reasonable estimate of the fair value can be made. The accumulated asset retirement obligation is
adjusted for the passage of time, which is recognized in depletion, depreciation and accretion expense, and for
revisions in either the timing or the amount of the original estimated cash flows associated with the liability.
Estimates of the associated asset retirement costs are subject to uncertainty associated with the method,
timing, and extent of future retirement activities. Accordingly, the actual payments to settle the obligations may
differ materially from estimated amounts.
P A r A M o u n t r e s o u r c e s L t D . | 2 0 0 7 A N N U A l R E P O R T
M D & A
39
recent Accounting Pronouncements
canadian GAAP
Effective January 1, 2008, Paramount will adopt new accounting standards for Capital Disclosures. The Company
will disclose its objectives, policies and procedures for managing capital, and additional information with respect
to capital compliance requirements.
Also effective January 1, 2008, Paramount will adopt new accounting standards for the Disclosure and Presentation
of Financial Instruments. The Company will disclose additional information regarding the significance of financial
instruments on the Company’s financial position and performance, the nature and extent of risks arising from
financial instruments, and how the Company manages those risks. The new sections also establish standards
for the presentation of financial instruments and non-financial derivatives.
Paramount does not anticipate that the adoption of these new standards will have an impact on the consolidated
financial statements as they relate only to note disclosures.
International Financial reporting standards
The Accounting Standards Board of Canada has announced that accounting standards in Canada, as used by public
companies, will be converged to International Financial Reporting Standards (“IFRS”) over a transition period
that is to be complete by 2011. The Company is currently assessing the impact of these new standards.
us GAAP
Effective for fiscal years beginning after November 15, 2007, Financial Accounting Standards Board (“FASB”)
Statement 157, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value
and includes expanded disclosures about fair value measurements. Paramount will also have the option to
measure certain financial instruments and other items at fair value. Paramount is currently evaluating the effects
of these standards.
Disclosure controls and Procedures
Management has assessed the effectiveness of Paramount’s disclosure controls and procedures as at December
31, 2007, and has concluded that such disclosure controls and procedures were effective as at that date.
Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those
systems and controls determined to be effective can only provide reasonable assurance with respect to financial
statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with policies or procedures may deteriorate.
Advisories
Forward-looking Statements
Certain statements included in this document constitute forward-looking statements or information under
applicable securities legislation. Forward-looking statements or information typically contain statements with
words such as “anticipate”, “believe”, “expect”, “plan”, “intend”, “estimate”, “propose”, or similar words
suggesting future outcomes or statements regarding an outlook. Forward-looking statements or information in
this document include, but are not limited to: business strategies and objectives, capital expenditures, reserve
quantities and the undiscounted and discounted present value of future net revenues from such reserves,
anticipated tax liabilities, future production levels, exploration and development plans and the timing thereof,
abandonment and reclamation plans and costs, acquisition and disposition plans, operating and other costs and
royalty rates.
40
Such forward-looking statements or information are based on a number of assumptions which may prove to
be incorrect. The following assumptions have been made, in addition to any other assumptions identified in
this document:
•
•
•
•
•
•
•
•
the ability of Paramount to obtain required capital to finance its exploration, development and operations;
the ability of Paramount to obtain equipment, services and supplies in a timely manner to carry
out its activities;
the ability of Paramount to market its oil and natural gas successfully to current and new customers;
the timing and costs of pipeline and storage facility construction and expansion and the ability of Paramount
to secure adequate product transportation;
the ability of Paramount and its industry partners to obtain drilling success consistent with expectations;
the timely receipt of required regulatory approvals;
currency, exchange and interest rates; and
future oil and gas prices.
Although Paramount believes that the expectations reflected in such forward-looking statements or information
are reasonable, undue reliance should not be placed on forward-looking statements because Paramount can
give no assurance that such expectations will prove to be correct. Forward-looking statements or information
are based on current expectations, estimates and projections that involve a number of risks and uncertainties
which could cause actual results to differ materially from those anticipated by Paramount and described in the
forward-looking statements or information. These risks and uncertainties include but are not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the ability of Paramount’s management to execute its business plan;
the risks of the oil and gas industry, such as operational risks in exploring for, developing and producing
crude oil and natural gas and market demand for oil and gas;
the ability of Paramount to obtain required capital to finance its exploration, development and operations
and the adequacy and costs of such capital;
fluctuations in oil and gas prices, foreign currency exchange rates and interest rates;
risks and uncertainties involving the geology of oil and gas deposits;
risks inherent in Paramount’s marketing operations, including credit risk;
the uncertainty of reserves estimates and reserves life;
the value and liquidity of Paramount’s investments in other entities and the returns on such investments;
the uncertainty of estimates and projections relating to exploration and development costs and expenses;
the uncertainty of estimates and projections relating to future production and the results of exploration,
development and drilling;
potential delays or changes in plans with respect to exploration or development projects or capital
expenditures;
the availability of future growth prospects and Paramount’s expected financial requirements;
Paramount’s ability to obtain equipment, services, supplies and personnel in a timely manner to carry out
its activities;
Paramount’s ability to enter into or continue leases;
health, safety and environmental risks;
Paramount’s ability to secure adequate product transportation and storage;
imprecision in estimates of product sales and the anticipated revenues from such sales;
the ability of Paramount to add production and reserves through development and exploration activities;
P A r A M o u n t r e s o u r c e s L t D . | 2 0 0 7 A N N U A l R E P O R T
M D & A
41
• weather conditions;
•
•
•
•
•
•
•
•
•
•
•
•
the possibility that government laws, regulations or policies may change or governmental approvals may be
delayed or withheld;
uncertainty in amounts and timing of royalty payments and changes to royalty regimes and government
regulations regarding royalty payments;
changes in taxation laws and regulations and the interpretation thereof;
changes in environmental laws and regulations and the interpretation thereof;
the cost of future abandonment activities and site restoration;
the ability to obtain necessary regulatory approvals;
risks associated with existing and potential future law suits and regulatory actions against Paramount;
uncertainty regarding aboriginal land claims and co-existing with local populations;
loss of the services of any of Paramount’s executive officers or key employees;
the impact of market competition;
general economic and business conditions; and
other risks and uncertainties described elsewhere in this document or in Paramount’s other filings with
Canadian securities authorities and the United States Securities and Exchange Commission.
The forward-looking statements or information contained in this document are made as of the date hereof
and Paramount undertakes no obligation to update publicly or revise any forward-looking statements or
information, whether as a result of new information, future events or otherwise, unless so required by applicable
securities laws.
non-GAAP Measures
“Funds flow from operations” is used to assist management in measuring the Company’s ability to finance
capital programs and meet financial obligations and refers to cash flows from operating activities before net
changes in operating working capital. “Netback” equals petroleum and natural gas sales less royalties, operating
costs and transportation costs. Refer to the calculation of “Net debt” in the liquidity and capital resources section
of this document. Non-GAAP measures should not be considered in isolation or construed as alternatives to
their most directly comparable measure calculated in accordance with GAAP, or other measures of financial
performance calculated in accordance with GAAP.
Barrels of oil equivalent conversions
This document contains disclosure expressed as “Boe” and “Boe/d”. All oil and natural gas equivalency volumes
have been derived using the ratio of six thousand cubic feet of natural gas to one barrel of oil. Equivalency
measures may be misleading, particularly if used in isolation. A conversion ratio of six thousand cubic feet of
natural gas to one barrel of oil is based on an energy equivalency conversion method primarily applicable at the
burner tip and does not represent a value equivalency at the well head.
42
M a n a g e M e n t ’ s R e p o R t
the accompanying Consolidated Financial Statements of paramount Resources ltd. (the “Company”) are the
responsibility of Management and have been approved by the Board of Directors. the Consolidated Financial
Statements have been prepared by Management in Canadian dollars in accordance with Canadian Generally
Accepted Accounting principles and include certain estimates that reflect Management’s best judgments.
When alternative accounting methods exist, Management has chosen those it considers most appropriate
in the circumstances. Financial information contained throughout the annual report is consistent with these
Consolidated Financial Statements.
Management is also responsible for establishing and maintaining adequate internal control over the Company’s
financial reporting. the Company’s internal control system was designed to provide reasonable assurance that
all transactions are accurately recorded, that transactions are recorded as necessary to permit preparation of
financial statements in accordance with Generally Accepted Accounting principles, and that the Company’s
assets are safeguarded.
the Board of Directors is responsible for ensuring that Management fulfills its responsibilities for financial
reporting and internal control. the Board of Directors exercises this responsibility through the Audit Committee.
the Audit Committee meets regularly with Management and the independent auditors to ensure that
Management’s responsibilities are properly discharged and to review the Consolidated Financial Statements.
the Audit Committee reports its findings to the Board of Directors for consideration when approving the annual
Consolidated Financial Statements for issuance to the shareholders. the Audit Committee also considers,
for review by the Board of Directors and approval by the shareholders, the engagement or re-appointment
of the external auditors. the Audit Committee of the Board of Directors is comprised entirely of non-
management directors.
ernst & Young llp, independent auditors appointed by the shareholders of the Company, conducts an examination
of the Consolidated Financial Statements in accordance with Canadian Generally Accepted Auditing Standards
and the standards of the public Company Accounting oversight Board (united States). ernst & Young llp has
full and free access to the Audit Committee and Management.
Clayton H. Riddell
Chief executive officer
March 12, 2008
Bernard K. lee
Chief Financial officer
P a r a m o u n t r e s o u r c e s L t d . | 2 0 0 7 A n n u A l R e p o R t
R e p o R t o f I n d e p e n d e n t R e g I s t e R e d
p u b l I c a c c o u n t I n g f I R M
to the Shareholders of paramount Resources ltd.
F i n a n c i a L s t a t e m e n t s
43
We have audited the consolidated balance sheets of paramount Resources ltd. (the “Company”) as at December
31, 2007 and 2006 and the consolidated statements of earnings (loss), shareholders’ equity, comprehensive
income (loss), and cash flows for the years then ended. these financial statements are the responsibility of the
Company’s management. our responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian Generally Accepted Auditing Standards and the standards
of the public Company Accounting oversight Board (united States). those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial
position of the Company as at December 31, 2007 and 2006 and the results of its operations and its cash flows
for the years then ended in accordance with Canadian Generally Accepted Accounting principles.
As disclosed in note 1 to the consolidated financial statements, in 2007 the Company changed its method of
accounting for financial instruments, comprehensive income and hedges. Also, as disclosed in note 16, in 2007
the company changed its method of accounting for uncertainty in income taxes under united States Generally
Accepted Accounting principles.
We also have audited, in accordance with the standards of the public Company Accounting oversight Board
(united States), the Company’s internal control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring organizations of
the treadway Commission and our report dated March 12, 2008 expressed an unqualified opinion thereon.
Chartered Accountants
Calgary, Canada
March 12, 2008
44
p a R a M o u n t R e s o u R c e s l t d .
consolidated Balance sheets
($ thousands)
As at December 31
ASSETS (Note 6)
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable
Financial instruments (Note 11)
Prepaid expenses and other
Property, plant and equipment (Note 3)
Long-term investments and other assets (Notes 4 and 6)
Goodwill
Future income taxes (Note 10)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities
Financial instruments (Note 11)
Current portion of stock-based compensation liability (Note 9)
Long-term debt (Note 6)
Asset retirement obligations (Note 7)
Stock-based compensation liability (Note 9)
Non-controlling interest
Future income taxes (Note 10)
Commitments and contingencies (Notes 11 and 14)
Shareholders’ equity
Share capital (Note 8)
Contributed surplus
Retained earnings (Note 8)
Accumulated other comprehensive loss
2007
2006
$
$
$
$
$
$
83,304
95,675
63,982
–
1,874
244,835
754,947
289,775
10,258
–
1,299,815
91,896
28,980
3,333
124,209
134,606
97,359
66
–
34,926
391,166
313,828
1,375
593,450
(4)
908,649
1,299,815
$
$
14,357
3,890
105,730
22,758
3,059
149,794
983,059
232,948
12,221
41,002
1,419,024
228,814
–
5,243
234,057
508,849
83,815
28,004
549
–
855,274
341,071
–
222,679
–
563,750
1,419,024
See the accompanying notes to these Consolidated Financial Statements.
on behalf of the Board
J.H.t. Riddell
Director
J.C. Gorman
Director
P a r a m o u n t r e s o u r c e s L t d . | 2 0 0 7 A n n u A l R e p o R t
p a R a M o u n t R e s o u R c e s l t d .
consolidated statements of earnings (Loss)
($ thousands, except as noted)
F i n a n c i a L s t a t e m e n t s
45
Years ended December 31
2007
2006
Revenue
Petroleum and natural gas sales
Gain (loss) on financial commodity contracts (Note 11)
Royalties
Expenses
Operating
Transportation
General and administrative (Note 13)
Stock-based compensation (Notes 9 and 13)
Depletion, depreciation and accretion
Exploration
Dry hole
Gain on sale of property, plant and equipment
Write-down of petroleum and natural gas properties
Write-down of goodwill
Interest and financing charges
Debt extinguishment
Foreign exchange (gain) loss (Note 11)
Provision for doubtful accounts
Income from equity investments (Note 4)
Other income
Non-controlling interest
Earnings (loss) before tax
Income and other tax expense (recovery) (Note 10)
Current and other tax expense
Future income tax expense (recovery)
Net earnings (loss)
Net earnings (loss) per common share ($/share)
Basic
Diluted
$
$
$
$
283,446
(13,194)
(42,699)
227,553
83,371
15,904
35,644
(13,633)
133,997
9,966
67,548
(284,474)
271,959
1,963
32,118
11,063
(20,011)
(1,852)
343,563
549,957
14,247
11,243
459,437
1,084
42,112
43,196
416,241
5.94
5.89
$
$
$
$
312,596
65,101
(47,957)
329,740
71,943
14,181
31,378
(3,436)
156,190
17,798
33,464
(1,850)
183,799
–
34,273
–
5,355
9,306
552,401
154,464
338
(15)
(67,874)
1,682
(51,763)
(50,081)
(17,793)
(0.26)
(0.26)
See the accompanying notes to these Consolidated Financial Statements.
46
p a R a M o u n t R e s o u R c e s l t d .
consolidated statements of shareholders’ equity
($ thousands, except as noted)
Years ended December 31
Share Capital
Balance, beginning of year
Issued on exercise of stock options (Note 9)
Issued for cash
Share issuance costs, net of tax benefit
Tax effect of flow-through share renunciations and other
Common shares repurchased (Note 8)
Unvested common shares under stock incentive plan
Adjustment on MGM Spinout (Note 13)
Balance, end of year
Contributed Surplus
Balance, beginning of year
Stock-based compensation expense on investees’ options
Balance, end of year
Retained Earnings
Balance, beginning of year
Adjustment on MGM Spinout (Note 13)
Share in equity investee capital transactions
Common shares repurchased (Note 8)
Net earnings (loss)
Balance, end of year
Accumulated other comprehensive loss
Balance, beginning of year
Unrealized loss on available-for-sale investments
Balance, end of year
Total Shareholders’ Equity
2007
2006
Shares
000’s
70,279
701
–
–
–
(3,299)
–
–
67,681
Amount
$ 341,071
14,197
–
(165)
(21,684)
(15,308)
(775)
(3,508)
$ 313,828
$
$
–
1,375
1,375
$ 222,679
(5,901)
–
(39,569)
416,241
$ 593,450
$
–
(4)
(4)
$
$ 908,649
Shares
000’s
66,222
857
3,200
–
–
–
–
–
70,279
Amount
$ 198,417
27,749
123,734
(1,935)
(6,894)
–
–
–
$ 341,071
$
$
–
–
–
$ 238,404
–
2,068
–
(17,793)
$ 222,679
$
–
–
–
$
$ 563,750
See the accompanying notes to these Consolidated Financial Statements.
consolidated statements of comprehensive income (Loss)
($ thousands)
Years ended December 31
Net earnings (loss)
Other comprehensive income, net of tax
Unrealized loss on available-for-sale investments
Comprehensive income (loss)
$
$
2007
416,241
(4)
416,237
$
$
2006
(17,793)
–
(17,793)
See the accompanying notes to these Consolidated Financial Statements.
P a r a m o u n t r e s o u r c e s L t d . | 2 0 0 7 A n n u A l R e p o R t
F i n a n c i a L s t a t e m e n t s
47
2007
2006
$
416,241
$
(17,793)
p a R a M o u n t R e s o u R c e s l t d .
consolidated statements of cash Flows
($ thousands)
Years ended December 31
Operating activities
net earnings (loss)
Add (deduct)
Items not involving cash (Note 12)
Asset retirement obligation expenditures (Note 7)
Exploration and dry hole
Settlement of foreign exchange contract
Debt extinguishment costs
Change in non-cash working capital (Note 12)
Cash from operating activities
Financing activities
Net repayment of short-term debt and revolving long-term debt
Issuance of long-term debt
Repayment of long-term debt
Settlement of foreign exchange contract
Common shares issued, net of issuance costs
Common shares repurchased
MGM Energy shares issued, net of issuance costs (Notes 1 and 13)
Cash from (used in) financing activities
Investing activities
Expenditures on property, plant and equipment and exploration
Proceeds on sale of property, plant and equipment
Long-term investments
Reorganization costs and other
Proceeds on disposal of investments, net (Note 4)
Change in non-cash working capital (Note 12)
Change in basis of presentation - MGM Energy (Note 1)
Cash from (used in) investing activities
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
$
Supplemental cash flow information (Note 12)
See the accompanying notes to these Consolidated Financial Statements.
(384,586)
(6,958)
75,380
(4,900)
5,278
100,455
(1,781)
98,674
(78,628)
–
(246,539)
4,900
3,574
(54,878)
78,546
(293,025)
(336,659)
106,773
(27,586)
(3,840)
680,357
(105,343)
(50,404)
263,298
68,947
14,357
83,304
$
141,420
(779)
48,786
–
171,634
10,807
182,441
(20,327)
162,473
–
–
125,985
–
–
268,131
(528,865)
7,183
(485)
(1,427)
20,132
67,247
–
(436,215)
14,357
–
14,357
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
48
n o t e s t o c o n s o l I d a t e d f I n a n c I a l s t a t e M e n t s
($ thousands, except as noted)
1. summary of significant accounting Policies
paramount Resources ltd. (“paramount” or the “Company”) is an independent Canadian energy company that
explores for, develops, processes, transports, and markets petroleum and natural gas. paramount’s principal
properties are located in Alberta, the northwest territories, British Columbia, and Saskatchewan, in Canada,
and in Montana and north Dakota in the united States. these Consolidated Financial Statements are stated in
Canadian dollars and have been prepared in accordance with Canadian Generally Accepted Accounting principles
(“GAAp”), which differ in some respects from GAAp in the united States. these differences are described in
note 16 – united States Generally Accepted Accounting principles Reconciliation.
a) Principles of consolidation
these Consolidated Financial Statements include the accounts of paramount Resources ltd. and its subsidiaries,
including Summit Resources, Inc. and paramount Drilling u.S. llC (“paramount Drilling”).
Investments in jointly controlled companies, jointly controlled partnerships and unincorporated joint ventures
are accounted for using the proportionate consolidation method, whereby paramount’s proportionate share of
revenues, expenses, assets, and liabilities are included in the accounts.
Investments in entities in which paramount does not have direct or joint control over the strategic operating,
investing, and financing decisions, but over which it has significant influence, are accounted for using the equity
method. other investments are accounted for at cost.
b) measurement uncertainty
the timely preparation of these Consolidated Financial Statements in conformity with GAAp requires that
management make estimates and assumptions and use judgment that affect: (i) the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and (ii)
the reported amounts of revenues and expenses during the reported periods. Such estimates primarily relate to
unsettled transactions and events as of the date of the Consolidated Financial Statements. Actual results could
differ from these estimates.
the amounts recorded for depletion, depreciation and accretion, asset retirement obligations, and amounts used
for impairment test calculations are based on estimates of reserves, future costs, petroleum and natural gas
prices and other relevant assumptions. By their nature, these estimates are subject to measurement uncertainty
and the impact of changes in these estimates and assumptions on the Consolidated Financial Statements of
future periods could be material.
Crown royalties for paramount’s production in the northwest territories have been accrued based on the
Company’s interpretation of the relevant legislation and regulations. At present, paramount has not received
assessments from the Government of Canada for a significant portion of its past northwest territories royalty
filings. Although paramount believes that its interpretation of the relevant legislation and regulations has merit,
paramount is unable to predict the ultimate outcome of audits and/or assessments by the Government of
Canada. Additional material amounts could potentially become payable.
c) revenue recognition
Revenues associated with the sale of petroleum and natural gas are recognized when title passes from
paramount to third parties. Revenues associated with the Company’s drilling rigs (the “Rigs”) are recognized as
services are rendered and collectibility is reasonably assured. When the Rigs drill on a property owned by the
Company, paramount capitalizes its working interest share of the intercompany drilling costs and eliminates the
intercompany drilling revenue and profit.
P a r a m o u n t r e s o u r c e s L t d . | 2 0 0 7 A n n u A l R e p o R t
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
49
d) cash and cash equivalents
Cash and cash equivalents are recorded at cost and include short-term investments with original maturities of
three months or less.
e) Property, Plant and equipment
paramount follows the successful efforts method of accounting for its petroleum and natural gas operations.
under this method, all development costs, including property acquisitions, and costs of drilling and equipping
development wells are capitalized. Costs of drilling exploratory wells are initially capitalized, pending determination
of proved reserves. If economically recoverable reserves are not found, such costs are charged to earnings as
dry hole expense. exploratory wells are assessed annually, or more frequently as economic conditions dictate,
for determination of reserves. All other exploration costs, including geological and geophysical costs and annual
lease rentals are expensed as incurred.
producing areas and significant unproved properties are assessed annually, or more frequently as economic
events dictate, for potential impairment. If the carrying value of the oil and gas assets is assessed not to be
recoverable, an impairment loss is recognized to the extent that the carrying value exceeds the sum of the
discounted cash flows expected from the production of proved plus probable reserves.
paramount’s Rigs are carried at cost, including costs of direct material, labour, and overhead. Where costs are
incurred to extend the useful life of the Rigs or to increase capabilities, the amounts are capitalized to the related
asset. Costs incurred to maintain and repair the rigs are expensed as incurred.
f) depletion and depreciation
Capitalized costs of proved oil and gas properties are depleted using the unit-of-production method. For
purposes of these calculations, natural gas production and reserves are converted to barrels on an energy
equivalent basis.
the costs of successful exploratory wells and development wells are depleted over proved developed
reserves. Acquisition costs of probable reserves are not depleted or amortized while under active evaluation for
commercial reserves.
Costs associated with significant development projects are not depleted until commercial
production commences.
Depreciation of gas plants, gathering systems and production equipment is provided on a straight-line basis
over their expected useful lives, varying from 12 to 40 years. Depreciation of other equipment is provided on a
declining balance method at rates varying from 20 to 50 percent.
the Rigs are depreciated over their total expected useful lives.
g) asset retirement obligations
Asset retirement obligations include those legal obligations where paramount will be required to retire tangible
long-lived assets such as producing well sites, natural gas processing plants, and access roads. the Company
recognizes the fair value of an asset retirement obligation in the period in which it is incurred and when a
reasonable estimate of the fair value can be made. the fair values of the asset retirement costs are capitalized as
part of the related long-lived asset and depreciated on the same basis as the underlying asset. the accumulated
asset retirement obligation is adjusted for the passage of time, which is recognized as accretion expense, and
for revisions to the timing or the amount of the original liability. Actual costs incurred are charged against the
asset retirement obligation to the extent of the liability recorded. Differences between the actual costs incurred
upon settlement of the asset retirement obligation and the liability recorded are recognized in earnings in the
period in which the settlement occurs.
h) Goodwill
Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is not amortized
and is assessed by paramount for impairment at least annually. Impairment is assessed based on a comparison
of the fair value of each reporting unit to its carrying value, including goodwill. Any excess of the carrying value
of the properties, including goodwill, over the fair value is written off as an impairment charge.
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
50
i) Foreign currency translation
paramount’s functional currency is the Canadian dollar. the Company’s foreign operations are considered
integrated and therefore, the accounts related to such operations are translated into Canadian dollars using the
temporal method.
Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at
exchange rates in effect at the balance sheet date. non-monetary assets and liabilities are translated using
historical rates of exchange. Results of foreign operations are translated into Canadian dollars at the monthly
average exchange rates for revenues and expenses, except for depreciation and depletion which are
translated at the rate of exchange applicable to the related assets. Resulting translation gains and losses are
included in earnings.
j) Financial instruments, comprehensive income and hedges
paramount periodically uses derivative instruments such as forwards, futures, swaps and options to manage
its exposure to fluctuations in petroleum and natural gas prices, foreign exchange rates, and interest rates.
paramount does not use derivative instruments for speculative purposes.
on January 1, 2007, paramount adopted, without restatement, the following sections of the Canadian Institute
of Chartered Accountants (“CICA”) Handbook: Section 1530 “Comprehensive Income”, Section 3251 “equity”,
Section 3855 “Financial Instruments – Recognition and Measurement”, Section 3861 “Financial Instruments
– Disclosure and presentation”, and Section 3865 “Hedges”. the adoption of these standards had no material
impact on paramount’s earnings or cash flows. the other effects of the implementation of the new standards
are discussed below.
Comprehensive Income
the new standards introduce comprehensive income (loss), which consists of earnings and other comprehensive
income (“oCI”). For paramount, oCI is currently comprised of the changes in the market value of available for
sale investments. oCI is presented in the Consolidated Statements of Comprehensive Income. the cumulative
changes in oCI are included in accumulated other comprehensive income (“AoCI”), which is presented as a
new category within shareholders’ equity. on adoption, paramount recognized an unrealized gain of $0.2 million
on short-term investments designated as available-for-sale.
Financial Instruments
the financial instruments standard establishes the recognition and measurement criteria for financial assets,
financial liabilities, and derivatives. All financial instruments are required to be measured at fair value on initial
recognition of the instrument, except for certain related party transactions. Measurement in subsequent periods
depends on whether the financial instrument has been classified as “held-for-trading”, “available-for-sale”,
“held-to-maturity”, “loans and receivables”, or “other financial liabilities” as defined by the standard.
Financial assets and financial liabilities “held-for-trading” are measured at fair value, with changes in fair values
recognized in earnings. Financial assets “available-for-sale” are measured at fair value, with changes in fair
values recognized in oCI. Financial assets “held-to-maturity”, “loans and receivables” and “other financial
liabilities” are measured at amortized cost using the effective interest method of amortization. Derivative
financial instruments are classified as “held-for-trading” unless designated for hedge accounting.
paramount also uses fixed price physical contracts to reduce exposure to commodity price volatility. Where
paramount designates and documents the contracts as the ‘normal sales’ exception, the fair values are not
recognized in the Consolidated Financial Statements until the associated volumes are delivered. Where
paramount does not use the ‘normal exception’, the contract is measured at fair value and changes in fair value
are recognized in earnings.
paramount recognizes earnings and cash flow effects of derivatives with the related underlying items.
At January 1, 2007, $7.0 million of unamortized financing fees were reclassified to long-term debt from other
assets. the financing fees are amortized using the effective interest method over the life of the related long-term
debt. unamortized balances are fully expensed in the period when the related debt instrument is extinguished.
P a r a m o u n t r e s o u r c e s L t d . | 2 0 0 7 A n n u A l R e p o R t
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
51
Hedges
paramount does not presently designate any of its financial instruments as hedges, therefore the adoption of
Section 3865 had no effect on the Company.
k)
income taxes
paramount follows the liability method of accounting for income taxes. under this method, future income taxes
are recognized for the effect of any difference between the carrying amount of an asset or liability reported in
the Consolidated Financial Statements and its respective tax basis, using substantively enacted income tax
rates. Accumulated future income tax balances are adjusted to reflect changes in substantively enacted income
tax rates, with adjustments being recognized in earnings in the period in which the change occurs.
l) Flow-through shares
paramount has financed a portion of its exploration activities through the issue of flow-through shares. As
permitted under the Income tax Act (Canada), the tax attributes of eligible expenditures incurred with the
proceeds of flow-through share issuances are renounced to subscribers. on the date that paramount files the
renouncement documents with the tax authorities, a future income tax liability is recognized and shareholders’
equity is reduced for the tax effect of expenditures renounced to subscribers.
m) stock-Based compensation
paramount uses the intrinsic value method to recognize compensation expense for stock options, whereby
a liability and expense are recorded over the vesting period of the options, based on the difference between
the market price or fair value of the underlying securities and the option exercise price. When options are
surrendered for cash, the cash settlement paid reduces the outstanding liability to the extent the liability was
accrued. When options are exercised for common shares, consideration paid by the option holder and the
previously recognized liability associated with the options are recorded as an increase to share capital.
n) mGm energy - Basis of Presentation
on January 12, 2007, paramount completed the spinout of MGM energy Corp. (“MGM energy”) (refer to Related
party transactions – note 13). until May 29, 2007, paramount owned greater than 50 percent of the issued and
outstanding common shares of MGM energy (“MGM Shares”), and MGM energy’s financial position, results
of operations and cashflows were included in the Consolidated Financial Statements of paramount. As a result
of an issuance of common shares by MGM energy on May 30, 2007, paramount’s ownership interest in MGM
energy was reduced to less than 50 percent and accordingly, subsequent to May 29, 2007, paramount accounts
for its investment in MGM Shares using the equity method.
MGM energy has granted stock options to its employees and directors. For the period that paramount
consolidated MGM energy, paramount recognized compensation expense associated with stock options
granted by MGM energy using the fair value method. Fair values were determined using the Black-Scholes-
Merton option pricing model and relevant assumptions on the date options were granted. Compensation costs
were recognized over the vesting period of the options.
o) comparative Figures
Certain comparative figures have been
statement presentation.
p) changes in accounting Policies
reclassified
to conform
to
the current year’s financial
effective January 1, 2008, paramount will adopt new accounting standards for Capital Disclosures. the Company
will disclose its objectives, policies and procedures for managing capital, and additional information with respect
to capital compliance requirements.
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
52
Also effective January 1, 2008, paramount will adopt new accounting standards for the Disclosure and presentation
of Financial Instruments. the Company will disclose additional information regarding the significance of financial
instruments on the Company’s financial position and performance, the nature and extent of risks arising from
financial instruments, and how the Company manages those risks. the new sections also establish standards
for the presentation of financial instruments and non-financial derivatives.
paramount does not anticipate that the adoption of these new standards will have an impact on the Consolidated
Financial Statements as they relate only to note disclosures.
International Financial Reporting Standards
the Accounting Standards Board of Canada has announced that accounting standards in Canada, as used by
public companies, will be converged to International Financial Reporting Standards (“IFRS”) over a transition
period to be complete by 2011. the Company is currently assessing the impact of these new standards.
2. segmented information
paramount defines its operations into the following segments, which have been established by senior
management to assist in resource allocation, assessing operating performance, and achieving long-term
strategic objectives:
•
•
principal properties: principal properties consist of the Kaybob Corporate operating unit (“Cou”), which
includes properties in West Central Alberta, the Grande prairie Cou, which includes properties in Central
Alberta, the northern Cou which includes properties in northern Alberta, the northwest territories, and
British Columbia, and the Southern Cou, which includes properties in Southern Alberta, Saskatchewan,
and Montana and north Dakota in the united States. Goodwill is included in principal properties.
Strategic Investments: Strategic investments include investments in other entities, including affiliates, and
development stage properties and assets where there is no near-term expectation of production; but a
longer-term value proposition, based on spinouts, sales, or future revenue generation. paramount Drilling is
included in Strategic Investments.
• Corporate: Corporate is comprised of income and expense items, including general and administrative
expense, interest expense, and taxes that have not been specifically allocated to principal properties or
strategic investments.
P a r a m o u n t r e s o u r c e s L t d . | 2 0 0 7 A n n u A l R e p o R t
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
Principal
Properties
Strategic
Investments
Corporate
Total
53
$
$ 240,747
(13,194)
227,553
$
–
–
–
–
–
–
$ 240,747
(13,194)
227,553
Year ended December 31, 2007
Revenue
Petroleum and natural gas sales, net of royalties
Loss on financial commodity contracts
Expenses
Operating and transportation
General and administrative
Stock-based compensation
Depletion, depreciation and accretion
Exploration
Dry hole
Gain on sale of property, plant and equipment
Write-down of petroleum and natural gas
properties and goodwill
Interest, financing charges,
and debt extinguishment
Foreign exchange loss (gain)
Provision for doubtful accounts
Income from equity investments and other income
Non-controlling interest
Segment earnings (loss)
Income and other tax expense
Net earnings
Year ended December 31, 2006
Revenue
Petroleum and natural gas sales, net of royalties
Gain on financial commodity contracts
Expenses
Operating and transportation
General and administrative
Stock-based compensation
Depletion, depreciation and accretion
Exploration
Dry hole
Gain on sale of property, plant and equipment
Write-down of petroleum and
natural gas properties
Interest
Foreign exchange loss (gain)
Provision for doubtful accounts
Income from equity investments and other income
Non-controlling interest
Segment earnings (loss)
Income and other tax recovery
Net loss
$
$
$
99,275
–
–
133,101
6,191
27,724
(13,669)
273,922
–
–
(1,852)
524,692
5,300
302
(291,537)
–
4,491
926
896
3,775
39,824
(270,805)
–
31,153
(14,559)
–
–
–
–
99,275
35,644
(13,633)
133,997
9,966
67,548
(284,474)
–
–
273,922
–
–
–
(220,893)
548,769
10,941
780,603
$
43,181
(20,011)
–
39,764
10,135
–
(29,629)
$
43,181
(20,011)
(1,852)
343,563
564,204
11,243
459,437
43,196
$ 416,241
Principal
Properties
Strategic
Investments
Corporate
Total
264,639
65,101
329,740
86,124
–
–
156,190
15,004
24,091
(1,850)
183,799
–
–
9,306
472,664
–
(15)
(142,939)
$
$
–
–
–
$
–
–
–
–
993
–
–
2,794
9,373
–
–
–
–
–
13,160
154,464
–
141,304
$
–
30,385
(3,436)
–
–
–
–
–
34,273
5,355
–
66,577
338
–
(66,239)
$
$
264,639
65,101
329,740
86,124
31,378
(3,436)
156,190
17,798
33,464
(1,850)
183,799
34,273
5,355
9,306
552,401
154,802
(15)
(67,874)
(50,081)
(17,793)
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
54
Year ended December 31, 2007
Capital Expenditures
Total Assets at December 31, 2007
Strategic
Investments
Principal
Properties
$ 279,702 $
829,886 $
$
55,145 $
289,775 $
Corporate
Total
336,659
180,154 $ 1,299,815
1,812 $
Capital expenditures for principal properties
paramount Drilling.
include $5.4 million of drilling costs provided by
Year ended December 31, 2006
Capital Expenditures
Total Assets at December 31, 2006
Geographical information
Year ended December 31, 2007
Canada
United States
Total
Year ended December 31, 2006
Canada
United States
Total
Strategic
Investments
Principal
Properties
$ 436,470 $
$ 1,118,236 $
91,997 $
253,452 $
Corporate
Total
528,865
47,336 $ 1,419,024
398 $
Property,
Plant and
Equipment
$ 662,852
92,095
$ 754,947
Property,
Plant and
Equipment
$ 915,355
67,704
$ 983,059
Goodwill
7,796
2,462
10,258
$
$
Goodwill
12,221
–
12,221
$
$
Petroleum
and Natural
Gas Sales
$ 262,506
20,940
$ 283,446
Petroleum
and Natural
Gas Sales
$ 291,965
20,631
$ 312,596
Capital
Expenditures
304,200
32,459
336,659
Capital
Expenditures
491,982
36,883
528,865
3. Property, Plant and equipment
Petroleum and natural gas assets
Drilling rigs
Other
2007
Accumulated
Depletion and
Depreciation
$ (847,921)
(722)
(14,376)
$ (863,019)
2006
Net Book
Value
$ 720,708
29,910
4,329
$ 754,947
Net Book
Value
$ 953,972
21,976
7,111
$ 983,059
Cost
$ 1,568,629
30,632
18,705
$ 1,617,966
Capitalized costs associated with non-producing petroleum and natural gas properties totaling approximately
$212.7 million (2006 – $335.4 million) are currently not subject to depletion.
on June 4, 2007, paramount closed the sale of its oil sands leases and shut-in and producing natural gas rights
in the Surmont area of Alberta for consideration of $301.7 million, resulting in a before tax gain of $271.0 million.
total proceeds included $75.0 million in cash, $151.7 million in common shares of the purchaser, MeG energy
Corp. (“MeG energy”), and a $75.0 million interest bearing note receivable, secured by certain of MeG energy’s
assets, due June 30, 2008. the note receivable is included in short-term investments. paramount’s investment
in the MeG energy common shares is included in long-term investments and is accounted for using the
cost method.
For the year ended December 31, 2007, paramount expensed $67.5 million
(2006 - $33.5 million).
in dry hole costs
P a r a m o u n t r e s o u r c e s L t d . | 2 0 0 7 A n n u A l R e p o R t
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
During the year, the Company assessed its petroleum and natural gas properties for impairment and recognized
aggregate write-downs totalling $264.0 million (2006 – $183.8 million). A write-down of $8.0 million was
recognized on major spare parts assets where it was determined that book cost exceeded net realizable value.
the Company recognized a $2.0 million impairment of goodwill due to an excess of carrying value over the fair
value of a reporting unit.
55
continuity of suspended exploratory Well costs
Balance at January 1
Additions pending the determination of proved reserves
Reclassifications to proved reserves
Well costs charged to dry hole expense
Wells sold
Change in basis of presentation - MGM Energy (Note 1)
Balance at December 31
aging of capitalized exploratory Well costs
Exploratory well costs that have been capitalized for one year or less
Exploratory well costs that have been capitalized for greater than one year
Balance at December 31
Number of projects with exploratory well costs that have been
capitalized for greater than one year
$
$
$
$
2007
157,773
54,546
(50,174)
(18,128)
(23,896)
(66,502)
53,619
2007
24,131
29,488
53,619
66
$
$
$
2006
142,737
134,821
(95,674)
(12,204)
(11,907)
–
157,773
2006
63,265
94,508
$
157,773
92
At December 31, 2007, the capitalized costs of suspended exploratory wells primarily relate to projects where
infrastructure decisions are dependent upon environmental conditions and production capacity, or where
paramount is continuing to assess reserves and their potential development.
4. Long-term investments and other assets
Equity accounted investments:
Trilogy Energy Trust (“Trilogy”)
MGM Energy
Private oil and gas company (“Privateco”)
North American Oil Sands Corporation
(“North American”)
Cost accounted investments:
MEG Energy Corp.
Unamortized financing costs and other
2007
2006
(Shares/
Units)
(000’s)
17,763
21,470
2,709
–
3,700
$
77,370
58,182
2,523
–
138,075
151,700
–
$ 289,775
(Shares/
Units)
(000’s)
15,035
–
2,709
34,121
$
60,821
–
2,042
161,626
224,489
–
–
8,459
$ 232,948
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
56
income From equity investments
the following table provides a summary of the components of income (loss) from equity investments:
Equity income (loss)
Dilution gain (loss)
Gain on sale of investments
and other
Trilogy
8,888
–
8,888
$
$
$
$
Year ended December 31, 2007
MGM
Energy
(4,991)
28,569
23,578
Privateco
480
–
480
North
American
(6,047)
(5,496)
(11,543)
$
$
$
$
Equity income (loss)
Dilution gain
Gain on sale of investments
and other
Trilogy
26,487
18,362
44,849
$
$
Year ended December 31, 2006
MGM
Energy
–
$
$
Privateco
1,419
–
1,419
$
North
American
(4,414)
111,345
$ 106,931
$
–
$
Total
(1,670)
23,073
21,403
$
$
528,554
$ 549,957
$
Total
23,492
129,707
$ 153,199
1,265
$ 154,464
During the three months ended March 31, 2007, north American filed renouncement documents with tax
authorities relating to flow-through shares it had issued during 2006, resulting in paramount recording a dilution
loss of $5.5 million before tax.
In June 2007, paramount sold its shares in north American for $682.4 million, resulting in a before tax gain of
$528.6 million. the gain is net of a bonus of 150,000 Common Shares valued at $3.7 million (as of June 1, 2007)
paid to the Chairman and Ceo of paramount under the Company’s stock incentive plan.
As a result of equity issuances by MGM energy during the year, paramount recognized before tax dilution gains
of $28.6 million. the Company’s equity interest in MGM energy was reduced to approximately 16.7 percent at
December 31, 2007.
During 2007, paramount made open market purchases of 2.1 million units of trilogy (2006 – nil) and commenced
participation in trilogy’s distribution reinvestment plan, acquiring an additional 0.6 million units, increasing its
ownership from 16.2 percent to 18.8 percent as of December 31, 2007.
5. short-term Bank indebtedness
In March 2007, paramount closed a six month $100 million senior unsecured non-revolving short-term bank
facility (the “Bridge Facility”). the full amount of the Bridge Facility was drawn at closing. on June 29, 2007, the
Bridge Facility was fully repaid and cancelled.
6. Long-term debt
Canadian Dollar Denominated Debt
Credit facilities
U.S. Dollar Denominated Debt
Term Loan B Facility due 2012 (2006 - US$150.0 million)
8 1/2 percent US Senior Notes due 2013 (US$138.2 million),
(2006 – US$213.6 million)
Debt financing costs - unamortized
$
$
P a r a m o u n t r e s o u r c e s L t d . | 2 0 0 7 A n n u A l R e p o R t
2007
2006
$
85,118
–
–
136,547
136,547
(1,941)
134,606
$
174,810
248,921
508,849
–
508,849
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
57
credit Facilities
At December 31, 2007, paramount’s credit agreement had a $170 million gross borrowing base and a net
borrowing base of $155 million. At paramount’s request, the banking syndicate has provided aggregate
commitments to lend up to $125 million. As of December 31, 2007 no balances were drawn on the credit facility,
however, paramount had undrawn letters of credit outstanding totaling $15.5 million that reduce the amount
available to the Company under the credit facility. Borrowings under the credit facility bear interest at floating
rates based on the lender’s prime rate, bankers’ acceptance rate, or lIBoR, at the discretion of paramount, plus
an applicable margin depending on certain conditions. the credit facilities are available on a revolving basis for a
period of 364 days from April 30, 2007 and can be extended a further 364 days upon request, subject to approval
by the lenders. Advances drawn on the credit facility are secured by a first fixed and floating charge over the
assets of paramount, excluding approximately 12.8 million of the trilogy trust units.
term Loan B Facility
on July 3, 2007, paramount repaid the entire principal outstanding of its uS$150 million term loan B Facility
plus accrued interest for Cdn $162.3 million, including a prepayment premium of $3.2 million. the term loan B
Facility is no longer available to the Company.
us senior notes
During the third quarter of 2007, paramount made open market purchases of uS$75.4 million principal amount
of uS Senior notes, plus a premium of $2.0 million and accrued interest, reducing the net principal outstanding
to uS$138.2 million. paramount may re-market the purchased debt at its discretion. the uS Senior notes bear
interest at 8.5 percent per annum, mature on January 31, 2013, and are redeemable at par plus a redemption
premium, if applicable, of up to 3.25 percent depending on when redeemed. they are secured by approximately
12.8 million of the trilogy trust units held by paramount.
7. asset retirement obligations
Asset retirement obligations, beginning of year
Reduction on disposal of properties
Liabilities incurred
Revision in estimated costs of abandonment
Liabilities settled
Accretion expense
Change in basis of presentation - MGM Energy (Note 1)
Effects of foreign exchange
Asset retirement obligations, end of year
2007
83,815
(13,107)
10,997
17,961
(6,958)
6,666
(966)
(1,049)
97,359
$
$
$
$
2006
66,203
(2,949)
6,684
7,256
(779)
7,304
–
96
83,815
the undiscounted asset retirement obligations at December 31, 2007 total $221.3 million (December 31, 2006
- $187.8 million), which have been discounted using credit-adjusted risk-free rates between 7 7/8 percent and 8
7/8 percent. these obligations will be settled over the useful lives of the assets which extend up to 45 years.
8. share capital
authorized
paramount’s authorized capital is comprised of an unlimited number of voting Class A Common Shares and an
unlimited number of non-voting preferred Shares issuable in series, both of such classes of shares without par
value. During 2007, the articles of the Company were amended to remove Class X preferred Shares, Class Y
preferred Shares, and Class Z preferred Shares from authorized capital.
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
58
normal course issuer Bid
on May 2, 2007, the Company received regulatory approval for a normal Course Issuer Bid commencing on
May 7, 2007 for a 12 month period. effective December 19, 2007 paramount received regulatory approval for
an amendment to the nCIB which increased the number of shares available for purchase to 3,546,859. For the
year ended December 31, 2007, paramount purchased 3,298,526 million Common Shares for a total cost of
$54.9 million, of which $15.3 million was charged to Share Capital and $39.6 million was charged to retained
earnings.
Weighted average shares
earnings (loss) per common share is calculated by dividing earnings available to common shareholders by the
weighted average number of Common Shares outstanding.
Years ended December 31
Weighted average common shares outstanding – Basic
Dilutive effect of stock options
Weighted average common shares outstanding – Diluted
2007
70,030
639
70,669
2006
67,859
–
67,859
9. stock-based compensation
Paramount options
paramount has a stock option plan (the “plan”) that enables the Board of Directors or its Compensation
Committee to grant to key paramount employees and directors options to acquire Common Shares of the
Company (“paramount options”). the exercise price of a paramount option is no lower than the closing market
price of the Common Shares on the day preceding the date of grant. options granted generally vest over four
years and expire within five years after the date granted.
Paramount Options
2007
2006
Weighted
Average
Exercise
Price
($ / share)
19.41
16.79
5.88
23.69
19.49
17.89
$
$
$
Weighted
Average
Exercise
Price
($ / share)
10.22
34.48
5.87
23.52
19.41
9.05
$
$
$
Options
4,468,925
3,377,000
(865,425)
(550,500)
6,430,000
910,600
Options
3,910,175
1,688,500
(857,550)
(272,200)
4,468,925
914,950
Balance, beginning of year
Granted
Exercised
Cancelled
Balance, end of year
Options exercisable, end of year
holdco options
As a result of the 2005 spinout of trilogy, paramount transferred 2.3 million of the trilogy trust units it received
through the spinout to a wholly owned, non-public subsidiary of paramount (“Holdco”).
each Holdco option entitles the holder thereof to acquire from paramount, common shares of Holdco (each
a “Holdco option”). Holdco’s shares are not listed for trading on any stock exchange. As a result, holders of
Holdco options have the right, alternatively, to surrender options for cancellation in return for a cash payment
from paramount. the amount of the payment in respect of each Holdco share subject to the surrendered option
is the difference between the fair market value of a Holdco share at the date of surrender and the exercise price.
the fair market value of a Holdco share is based on the fair market value of the trilogy trust units held and any
after-tax cash and investments (resulting from distributions on the trilogy trust units).
P a r a m o u n t r e s o u r c e s L t d . | 2 0 0 7 A n n u A l R e p o R t
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
Holdco Options
2007
2006
Balance, beginning of year
Exercised
Cancelled
Balance, end of year
Options exercisable, end of year
Weighted
Average
Exercise
Price
($ / share)
6.72
5.12
9.18
8.14
7.18
$
$
$
Options
737,625
(362,000)
(41,250)
334,375
236,375
Weighted
Average
Exercise
Price
($ / share)
5.79
4.99
10.70
6.72
5.86
$
$
$
59
Options
1,985,375
(1,191,500)
(56,250)
737,625
303,250
Additional information about stock options outstanding at December 31, 2007 is as follows:
Exercise Prices
Paramount Options
$4.33-$10.00
$10.01-$20.00
$20.01-$30.00
$30.01-$43.25
Total
Holdco Options
$4.58-$6.00
$6.01-$10.00
$10.03-$16.37
Total
Number
231,750
3,421,550
1,378,200
1,398,500
6,430,000
159,375
49,500
125,500
334,375
Outstanding
Weighted
Average
Contractual
Life
(years)
0.6
3.3
3.6
2.6
3.1
Weighted
Average
Exercise
Price
($ / share)
5.36
13.58
21.40
34.39
19.49
$
$
0.4
0.9
1.4
0.9
$
$
4.63
7.09
13.00
8.14
Exercisable
Weighted
Average
Exercise
Price
($ / share)
4.66
13.71
22.80
34.37
17.89
$
$
$
$
4.61
7.07
13.11
7.18
Number
174,250
422,750
94,600
219,000
910,600
156,375
12,000
68,000
236,375
mGm energy options
MGM energy has a stock option plan for key employees and directors. During the period from January 12, 2007
to May 29, 2007, while paramount’s investment in MGM energy was accounted for using the consolidation
method, compensation expense of $0.8 million and a contributed surplus amount of $0.8 million was recorded
by paramount in respect of the MGM energy stock option plan.
10. income taxes
the following table reconciles income taxes calculated at the Canadian statutory rate to paramount’s recorded
income tax expense:
For the years ended December 31
Earnings (loss) before tax
Effective Canadian statutory income tax rate
Expected income tax expense
Increase (decrease) resulting from:
Statutory and other rate differences
Non-taxable portion of (gain) loss
Income from equity investments and other
(Recognition) de-recognition of future tax assets
Stock based compensation
Other
Income and other tax expense (recovery)
2007
459,437
31.22%
143,436
6,222
(106,641)
(8,034)
12,724
(4,907)
396
43,196
$
$
$
$
$
$
2006
(67,874)
33.61%
(22,812)
6,126
4,308
(22,549)
(26,394)
1,338
9,902
(50,081)
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
60
components of Future income tax asset (Liability)
Timing of partnership items
Property, plant and equipment
Asset retirement obligations
Stock-based compensation liability
Non-capital and net operating losses carried forward
Other
Future income tax asset (liability)
$
$
2007
(51,005) $
3,996
25,312
770
15,360
(29,359)
(34,926) $
2006
(52,316)
73,958
24,457
1,757
16,028
(22,882)
41,002
paramount has $133.8 million of unused tax losses expiring between 2026 and 2027. In addition, paramount has
$56.4 million of deductible temporary differences for which no future income tax asset has been recognized.
11. Financial instruments
paramount is exposed to market risks from changes in commodity prices, foreign exchange rates, and interest
rates. paramount monitors its exposure to these market risks and may use derivative instruments, including
fixed price physical contracts, to mitigate these risks.
During 2007, paramount entered into foreign exchange collars to reduce the impacts of foreign exchange
changes on the Canadian dollar equivalent of uS dollar denominated debt.
the changes in the fair value of financial instruments are as follows:
Fair value of contracts, beginning of year
Change in fair value of financial contracts, including contracts
entered into during the year:
Commodity contracts
Foreign exchange contracts
Fair value of contracts realized during the year
Commodity contracts
Foreign exchange contracts
Fair value of contracts, end of year
$
2007
22,758
$
2006
(4,613)
(13,194)
(21,613)
(12,031)
(4,900)
(28,980)
$
65,101
4,468
(42,205)
7
22,758
$
At December 31, 2007, paramount was a party to the following derivative contracts:
Commodity
WTI Fixed Price
Foreign Exchange
Canadian/
US Collar
Total
Notional
Price
Fair Value
Expiry
1,000 Bbl/d
US$73.48/Bbl
$
(6,941)
December 2008
US$150 million
CDN/US$ - Floor $1.190 - Ceiling $1.1415
(22,039)
(28,980)
$
January 2008
P a r a m o u n t r e s o u r c e s L t d . | 2 0 0 7 A n n u A l R e p o R t
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
61
Physical instruments
paramount has an outstanding commitment to sell 3,400 GJ/d of natural gas at $2.52/GJ plus an escalation
factor to 2011, which has a fair value loss of $17.2 million at December 31, 2007 (2006 – loss of $24.4 million).
the Company has designated this contract as normal usage, and as a result does not recognize the fair value of
the contract in the Consolidated Financial Statements.
Fair Values of Financial assets and Liabilities
the fair value of derivative instruments is based on quotes provided by financial institutions, which represent
an approximation of amounts that would be received or paid to counterparties to settle these instruments at
year end. the carrying value of current financial instruments other than derivatives approximates fair value due
to their short-term maturities.
Borrowings under bank credit facilities are market rate based, thus, their respective carrying value approximates
fair value. paramount’s uS Senior notes were trading at approximately 100.3 percent at December 31, 2007.
credit risk
paramount is exposed to credit risk where a financial loss would be experienced if a counterparty to a
financial instrument failed to meet its obligations. the Company minimizes credit risk by entering into
contracts with institutions that possess high credit ratings, and by employing net settlement agreements and
monitoring procedures.
paramount sells production to a variety of purchasers under normal industry sale and payment terms. the
Company’s accounts receivable are with customers and joint venture partners in the petroleum and natural gas
industry and are subject to normal credit risk.
interest rate risk
paramount is exposed to interest rate risk to the extent that changes in market interest rates will impact
paramount’s credit facilities that have a floating interest rate.
12. consolidated statements of cash Flows – selected information
items not involving cash
Years ended December 31
Gain on sale of long-term investments
Unrealized loss (gain) on financial commodity contracts
Stock-based compensation – non cash portion
Depletion, depreciation and accretion
Gain on sale of property, plant and equipment
Unrealized Foreign exchange (gain) loss
Provision for doubtful accounts
Equity earnings in excess of cash distributions
Future income tax (recovery)
Write-down of petroleum and natural gas properties
Write-down of goodwill
Non-controlling interest
Non-cash extinguishment of debt, interest and other
2007
(528,554)
25,228
(18,608)
133,997
(284,474)
(17,325)
(2,315)
(5,115)
42,112
271,959
1,963
(11,243)
7,789
(384,586)
$
$
2006
–
(22,906)
(21,692)
156,190
(1,850)
5,406
9,306
(115,849)
(51,763)
183,799
–
15
764
141,420
$
$
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
62
changes in non-cash working capital
Years ended December 31
Short-term investments
Accounts receivable
Prepaid expenses
Account payable and accrued liabilities
Change in basis of presentation – MGM Energy (Note 1)
Operating activities
Investing activities
supplemental cash flow information
Years ended December 31
Interest paid
Large corporations and other taxes paid
13. related Party transactions
service agreements
2007
(19,715)
40,193
3,156
(136,784)
6,026
(107,124)
(1,781)
(105,343)
(107,124)
$
$
$
$
$
$
$
$
2006
5,284
(16,947)
810
88,907
–
78,054
10,807
67,247
78,054
$
$
2007
38,764
1,753
$
$
2006
31,368
6,208
paramount provides certain operational and administrative services to trilogy energy ltd., a wholly owned
subsidiary of trilogy, and MGM energy, at cost and cost plus 10 percent, respectively. transactions with trilogy
and MGM energy are settled monthly. In addition, as a result of the respective spinouts, certain employees of
trilogy and MGM energy hold paramount and/or Holdco options and, therefore, stock-based compensation
expense accrues to paramount. the following table summarizes the related party transactions:
Years ended December 31
2007
2006
Services agreement
Stock-based compensation
Trilogy
1,085
(352)
733
$
$
MGM
Energy
1,040
(90)
950
$
$
Trilogy
1,900
743
2,643
$
$
MGM
Energy
–
–
–
$
$
Included in accounts payable and accrued liabilities is $2.0 million due to a supplier for the construction of
paramount’s drilling rigs. An individual who is a part owner of the supplier is also a director of a company
affiliated with paramount.
mGm spinout
on January 12, 2007, paramount completed a reorganization pursuant to a plan of arrangement under the
Business Corporations Act (Alberta) (the “MGM Spinout”) involving paramount, its shareholders and MGM
energy, a wholly-owned subsidiary of paramount immediately prior to the MGM Spinout.
through the mGm spinout:
•
paramount’s shareholders received an aggregate of approximately 2.8 million MGM Shares and approximately
14.2 million warrant units of MGM energy, with each warrant unit consisting of one MGM energy short
term warrant (each, a “Short term Warrant”) and one MGM energy longer term warrant (each, a “longer
term Warrant”);
P a r a m o u n t r e s o u r c e s L t d . | 2 0 0 7 A n n u A l R e p o R t
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
•
paramount received a demand promissory note and 18.2 million voting Class A preferred Shares of MGM
energy, which note was subsequently repaid by MGM energy and which shares were subsequently
converted into MGM Shares; and
63
• MGM energy became the owner of; (i) rights and obligations under an area-wide farm-in agreement (the
“Farm-in Agreement”) respecting Mackenzie Delta, northwest territories exploration licence #394,
exploration licence #427 and two Inuvialuit concession agreements; (ii) oil and gas properties in the Colville
lake / Sahtu area of the Central Mackenzie Valley, northwest territories; and (iii) an interest in one well
in the Cameron Hills area of the southern portion of the northwest territories, all of such property, rights
and obligations formerly being owned by paramount. paramount continued to be jointly and severally liable
for obligations of MGM energy under the Farm-in Agreement to the extent that such obligations were not
satisfied by MGM energy for so long as MGM energy was an “affiliate” of paramount as such term was
defined in the Farm-in Agreement. As a result of equity issuances by MGM energy during 2007, MGM
energy and paramount are no longer “affiliates” as defined in the Farm-in Agreement.
As a result of the MGM Spinout, the carrying value of paramount’s common shares was reduced by $3.5 million,
retained earnings was reduced by $5.9 million, and future tax liability was increased by $3.3 million. the net
book value of the assets transferred by paramount to MGM energy was $45.2 million.
mGm energy Warrants and issuances of mGm shares
each warrant issued by MGM energy entitled the holder to purchase one MGM Share or one flow-through MGM
Share as described below. each longer term Warrant was not exercisable, and was not separable from the
corresponding Short term Warrant included in the warrant unit, unless the corresponding Short term Warrant
was exercised.
each Short term Warrant entitled the holder thereof to acquire, at the holder’s option, either (i) one MGM Share
at a price of $5.00; or (ii) one flow-through MGM Share at a price of $6.25 and was exercisable until February
16, 2007. A total of 7.9 million Short term Warrants were exercised for MGM Shares and 5.9 million Short
term Warrants were exercised for flow-through MGM Shares for aggregate gross proceeds to MGM energy of
$76.5 million.
As a result of the exercise of the Short term Warrants, 13.8 million longer term Warrants were separated
from the corresponding Short term Warrants and were exercisable until September 30, 2007. each longer
term Warrant entitled the holder thereof to acquire, at the holder’s option, either (i) one MGM Share at a price
of $6.00; or (ii) one flow-through MGM Share at a price of $7.50. A total of seventy five longer term Warrants
were exercised.
In February 2007, MGM energy completed a private placement to certain directors of MGM energy of 160,000
flow-through MGM Shares at a price of $6.25 per share and 210,000 MGM Shares at a price of $5.00 per share,
each accompanied by one longer term Warrant. the aggregate gross proceeds of the issue were approximately
$2.1 million.
14. commitments and contingencies
commitments
paramount had the following commitments as at December 31, 2007:
2012
($ millions)
Pipeline transportation commitments (1)
8,501
–
Capital and drilling spending commitment
1,510
Operating leases
10,011
Total
(1) Certain of the pipeline transportation commitments are secured by outstanding letters of credit totaling $3.8 million at
2010
11,419
–
2,571
13,990
2009
12,378
–
2,862
15,240
2008
14,231
4,750
3,177
22,158
2011
10,100
–
1,510
11,610
December 31, 2007.
After
2012
50,654
–
–
50,654
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
64
paramount, as the original lessee, has committed to discharge MGM energy’s office lease payment should
MGM energy not fulfill its lease obligation.
contingencies
paramount is party to various legal claims associated with the ordinary conduct of business. paramount does
not anticipate that these claims will have a material impact on its financial position.
tax and royalty legislation and regulations, and government interpretation and administration thereof, continually
changes. As a result, there are often tax and royalty matters under review by relevant government authorities.
All tax filings are subject to subsequent government audit and potential reassessments. Accordingly, the finally
determined income tax liability may differ materially from amounts estimated and recorded.
Crown royalties for paramount’s production from frontier lands in the northwest territories have been provided
for in the Consolidated Financial Statements based on the Company’s interpretation of the relevant legislation
and regulations. At present, paramount has not received assessments from the Government of Canada for
a significant portion of its past northwest territories royalty filings. Although paramount believes that its
interpretation of the relevant legislation and regulations has merit, paramount is unable to predict the ultimate
outcome of audits and/or assessments by the Government of Canada. Additional material amounts could
potentially become payable.
15. subsequent events
Subsequent to December 31, 2007 paramount:
•
•
•
•
•
•
purchased uS$45.0 million principal amount of uS Senior notes on the open market;
paid $22.3 million to settle the outstanding foreign exchange collar and entered a new foreign exchange
collar with a notional amount of uS$90.0 million, a floor of CDn$1.0200/uSD and ceiling of CDn$0.9821/
uSD expiring July 31, 2008;
purchased 6,400 paramount Common Shares for $0.1 million under the Amended nCIB;
purchased 1.9 million units of trilogy for $13.7 million and acquired 0.4 million units by participating in
trilogy’s distribution reinvestment plan;
purchased 3.5 million common shares of paxton Corporation (“paxton”), a private company, representing
approximately 20 percent of the outstanding common shares for $4.8 million. Certain directors of paramount
are also directors and shareholders of paxton;
entered into financial commodity contracts to sell 40,000MMbtu/d of natural gas from April to october
2008 at a weighted average nYMeX price of uS$9.07/MMbtu and 20,000MMbtu/d from november 2008
to March 2009 at a weighted average nYMeX price of uS$9.99/MMbtu;
• Received $75.0 million cash on repayment of the note receivable from MeG energy; and
•
Sold non-core northern properties for $6.4 million.
P a r a m o u n t r e s o u r c e s L t d . | 2 0 0 7 A n n u A l R e p o R t
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
16. united states Generally accepted accounting Principles reconciliation
these Consolidated Financial Statements have been prepared in accordance with Canadian GAAp, which in most
respects, conform to united States Generally Accepted Accounting principles (“uS GAAp”). the significant
differences between Canadian GAAp and uS GAAp for paramount are described below.
65
net earnings and comprehensive income
Years ended December 31
Net earnings (loss) under Canadian GAAP
Adjustments under US GAAP, net of tax:
Future income taxes (a)
Depletion and depreciation expense (b)
Short-term investments (c)
Dilution gain (d)
Reorganization costs (f)
Stock-based compensation (g)
Net earnings (loss) under US GAAP before change in accounting policy
Change in accounting policy - stock-based compensation, net of tax
Net earnings (loss) under US GAAP
Other comprehensive income (loss) under Canadian GAAP
Unrealized gain (loss) on available-for-sale investments, net of tax
Comprehensive income (loss) under US GAAP
Net earnings (loss) per common share under US GAAP before change
in accounting policy
Basic
Diluted
Net earnings (loss) per common share under US GAAP
Basic
Diluted
$
$
$
$
$
$
$
$
2007
416,241 $
(5,278)
45
(105)
(25,260)
950
151
386,744 $
–
386,744 $
(4)
386,740 $
5.52 $
5.47 $
5.52 $
5.47 $
2006
(17,793)
(3,099)
547
(1,975)
(111,345)
(1,427)
(7,397)
(142,489)
(614)
(143,103)
–
(143,103)
(2.10)
(2.10)
(2.10)
(2.10)
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
66
consolidated Balance sheets
As at December 31
Assets
Cash and cash equivalents
Short-term investments (c)
Accounts receivable
Financial instruments
Prepaid expenses and other
Property, plant and equipment (b)
Long-term investments and other assets (d) (f)
Goodwill
Future income taxes (a) (b) (c) (d) (f) (g)
Liabilities
Accounts payable and accrued liabilities (b)
Financial instruments
Current portion of stock-based compensation liability (g)
Long-term debt
Asset retirement obligations
Stock-based compensation liability (g)
Non-controlling interest
Future income taxes (a) (b) (c) (d) (f) (g)
Shareholders’ Equity
Share capital (a)
Contributed surplus (g)
Retained earnings
Additional paid in capital (d) (g)
Accumulated other comprehensive loss
Total Shareholders’ Equity
2007
2006
CDN GAAP
US GAAP
CDN GAAP
US GAAP
$
83,304 $
95,675
63,982
–
1,874
244,835
754,947
289,775
10,258
–
83,304 $
14,357
95,675
4,043
63,982
105,730
–
22,758
1,874
3,059
244,835
149,947
752,308
980,355
281,986
227,370
10,258
12,221
–
44,120
$ 1,299,815 $ 1,289,387 $ 1,419,024 $ 1,414,013
14,357 $
3,890
105,730
22,758
3,059
149,794
983,059
232,948
12,221
41,002
$91,896
28,980
3,333
124,209
134,606
97,359
66
–
34,926
391,166
$99,040
28,980
7,750
135,770
134,606
97,359
3,025
–
31,991
402,751
$228,814
–
5,243
234,057
508,849
83,815
28,004
549
–
855,274
$252,364
–
5,684
258,048
508,849
83,815
35,159
549
–
886,420
313,828
1,375
593,450
–
(4)
908,649
339,852
–
76,396
111,345
–
527,593
$ 1,299,815 $ 1,289,387 $ 1,419,024 $ 1,414,013
341,071
–
222,679
–
–
563,750
334,293
–
420,582
131,765
(4)
886,636
consolidated statement of cash Flows
Years ended December 31
2007
2006
CDN GAAP
US GAAP
CDN GAAP
US GAAP
Cash flows from (used in) operating activities (h)
Cash flows from (used in) financing activities
Cash flows from (used in) used in investing activities (h)
$
98,674 $
31,126 $
(293,025)
263,298 $
(293,025)
330,846 $
$
182,441 $
268,131
(436,215) $
176,047
268,131
(429,821)
a) Future income taxes
the liability method of accounting for income taxes under Canadian GAAp is similar to the uS Statement of
Financial Accounting Standard (SFAS) no. 109 “Accounting for Income taxes”, which requires the recognition
of future tax assets and liabilities for the expected future tax consequences of events that have been recognized
P a r a m o u n t r e s o u r c e s L t d . | 2 0 0 7 A n n u A l R e p o R t
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
in paramount’s consolidated financial statements or tax returns. pursuant to uS GAAp, enacted tax rates are
used to calculate future income taxes, whereas Canadian GAAp uses substantively enacted tax rates. this
difference did not impact paramount’s financial position as at or the results of operations for the years ended
December 31, 2007 and 2006.
67
Accounting for the issuance of flow through shares is more specifically addressed under Canadian GAAp than
uS GAAp. under Canadian GAAp, when flow through shares are issued they are recorded based on proceeds
received. upon filing the renouncement documents with the tax authorities, a future tax liability is recognized
and shareholders’ equity is reduced for the tax effect of expenditures renounced to subscribers. under uS GAAp,
proceeds from the issuance of flow through shares are to be allocated between the sale of the shares and the
sale of the tax benefits. the allocation is made based on the difference between the amount the investor pays
for the flow through shares and the quoted market price of the existing shares. A liability is recognized for this
difference which is reversed upon the renunciation of the tax benefit. the difference between this liability and
the deferred tax liability is recorded as income tax expense.
to conform with uS GAAp, share capital is increased by $21.6 million and accounts payable and accrued liabilities
reduced by $16.4 million with the difference, $5.2 million, charged to future tax expense at December 31, 2007
due to the renunciation in 2007 of tax benefits relating to the flow through shares issued on March 30, 2006
and november 28, 2006.
For the year ended December 31, 2006, to conform with uS GAAp, share capital is increased by $6.7 million and
accounts payable and accrued liabilities is reduced by $2.3 million with the difference charged to future income
tax expense due to the renunciation in 2006 of tax benefits relating to the flow through shares issued on July
14, 2005. In addition, share capital is reduced by $23.6 million and a corresponding amount of accounts payable
and accrued liabilities is recognized as at December 31, 2006 for the difference between the cash proceeds
from the issuance of flow through shares on March 30, 2006 and november 28, 2006, and the quoted market
value of the shares.
b) Property, Plant and equipment
under both uS GAAp and Canadian GAAp, property, plant and equipment must be assessed for potential
impairments. effective January 1, 2004, the CICA implemented a new pronouncement on impairment of
long-lived assets, which eliminated the uS/Canadian GAAp difference going forward. the uS/Canadian GAAp
differences in recorded carrying values of impaired assets prior to January 1, 2004 results in differences in
depreciation, depletion and accretion expense until the related assets are fully depleted under Canadian GAAp.
For the years ended December 31, 2007 and 2006, a reduction in depletion expense of $0.1 million ($0.1 million
net of tax) and $0.5 million ($0.4 million net of tax), respectively, is recognized for uS GAAp purposes.
c) short -term investments
under uS GAAp, equity securities are classified as trading securities or available-for-sale. unrealized gains and
losses related to trading securities are included in earnings as incurred whereas unrealized gains and losses
related to available-for-sale securities are recognized in other comprehensive income. In 2006, under Canadian
GAAp, these gains and losses are recognized in earnings when the security is sold. paramount had unrealized
gains of $0.2 million (net of tax - $0.1 million) at December 31, 2006.
on January 1, 2007, paramount adopted CICA Handbook Section 1530 - Comprehensive Income, Section 3251
– equity, and Section 3855 - Financial Instruments – Recognition and Measurement. upon adoption, paramount
designated its short-term investments as available-for-sale under Canadian and uS GAAp eliminating the
GAAp difference.
d) Long -term investments and other assets
During the year ended December 31, 2006, paramount recognized a dilution gain of $111.3 million ($93.9 million
net of tax) related to its investment in north American oil Sands Corporation (“north American”), a development
stage entity. As a result, paramount recognized $17.4 million of previously unrecognized deductible temporary
differences. under uS GAAp, a dilution gain would not be recognized as the investee is a development stage
entity, but would be accounted for as an equity transaction. For uS GAAp, paramount derecognized the $111.3
million dilution gain, as well as the $17.4 million of deductible temporary differences and recorded it as additional
paid in capital.
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
68
During the first quarter of 2007, paramount completed its spinout of MGM energy and recorded a dilution loss
of $2.6 million as a reduction to retained earnings under Canadian GAAp. In addition, paramount recognized a
dilution gain of $29.6 million ($25.3 million net of tax) related to additional share issuances by MGM energy
during 2007. MGM energy is a development stage entity, therefore dilution gains and losses are recorded as
additional paid in capital under uS GAAp.
MGM energy issued flow through shares during 2007. under Canadian GAAp a future tax liability is recognized
when the tax attributes of eligible expenditures are renounced to subscribers, whereas for uS GAAp the
deferred tax liability is recognized when the flow through shares are issued. to conform with uS GAAp, long-
term investments and additional paid in capital are reduced by $3.7 million.
e) Buy/sell arrangements
For uS GAAp, buy/sell arrangements are disclosed on a gross basis. For the year ended December 31, 2007,
paramount had sales of $2.7 million (2006 - $14.8 million) and purchases of $2.6 million (2006 - $14.0 million),
related to buy/sell arrangements. the net gain of $0.1 million (2006 - $0.8 million gain) has been reflected in
revenue for Canadian GAAp purposes.
f) reorganization costs
In 2006, in connection with the MGM Spinout, paramount deferred estimated reorganization costs totaling
$1.4 million under Canadian GAAp. under uS GAAp these reorganization costs were expensed. During 2007,
paramount completed its spinout of MGM energy, and expensed the reorganization costs under Canadian
GAAp, eliminating the uS/Canadian GAAp difference.
g) stock-based compensation
For Canadian GAAp, paramount uses the intrinsic value method to recognize its stock-based compensation
liability. For uS GAAp, uS SFAS no. 123(R) requires paramount to calculate its liability relating to share-based
payments using the fair value method effective January 1, 2006. the effect of initially measuring the stock-
based compensation liability at its fair value on January 1, 2006 under uS GAAp resulted in a reduction of
stock-based compensation liability of $0.2 million ($0.6 million net of tax) which is shown as cumulative effect
of a change in accounting policy in the consolidated statements of earnings and retained earnings. For the
year-ended December 31, 2007, the application of uS SFAS no.123(R) resulted in a decrease in compensation
cost by $0.2 million ($0.1 million net of tax) and for 2006 an increase in compensation cost of $7.4 million ($6.8
million net of tax).
paramount uses the Black-Scholes option valuation method and the following key assumptions in estimating
the fair value of stock options:
Risk-free interest rate
Maximum expected life
Expected volatility:
Paramount options
Holdco options
Expected dividends
2007
3.8% - 3.9%
5 years
44%
37%
Nil
2006
4.07%
4.5 years
42%
33-36%
Nil
P a r a m o u n t r e s o u r c e s L t d . | 2 0 0 7 A n n u A l R e p o R t
( $ t h o u s a n d s ,
e x c e P t a s n o t e d )
n o t e s t o t h e c o n s o L i d a t e d
F i n a n c i a L s t a t e m e n t s
69
h) statements of cash Flow
the application of uS GAAp changes the cashflow presentation for certain investing and operating items.
under Canadian GAAp, dry hole costs of $67.5 million (2006 - $33.5 million) are added back to net earnings
in calculating cash flows from operating activities. under uS GAAp, dry hole costs represent cash flows from
operating activities.
i) accounting for uncertainty in income taxes
on January 1, 2007, paramount adopted FASB Interpretation 48 - Accounting for uncertainty in Income taxes
(“FIn 48”). FIn 48 prescribes the minimum recognition threshold a tax position is required to meet before
being recognized in the financial statements, and also provides guidance on derecognition, measurement,
classification, interest, and penalties. to the extent interest and penalties may be assessed by taxation authorities
on any underpayment of income tax, such amounts have been accrued and are classified as a component of
income taxes in the consolidated statement of earnings. FIn 48 utilizes a two-step approach for the evaluation
of tax positions. Recognition (step 1) occurs when an enterprise concludes that a tax position, based solely on
its technical merits, is more likely than not to be sustained upon examination. Measurement (step 2) recognizes
the tax benefit based on the largest amount of benefit, determined on a cumulative probability basis that is more
likely than not to be realized upon ultimate settlement. on the adoption of FIn 48, the cumulative effect of a
change in accounting policy was nil.
paramount’s income tax filings are subject to audit by taxation authorities and as at December 31, 2007 the
following tax years remained subject to examination; (i) Canada – 2003 to date; and (ii) united States - 2004
to date.
j) Fair Value measurements
In September 2006, FASB issued SFAS no. 157 – Fair Value Measurements. the Statement effective January
1, 2008, establishes a framework for measuring fair value, and expands disclosures relating to fair value inputs.
this Statement is generally to be applied prospectively and is not expected to have an impact on earning or
financing position.
k) Fair Value option for Financial assets and Financial Liabilities
In February 2007, FASB issued SFAS no. 159 - the Fair Value option for Financial Assets and Financial liabilities.
this Statement is effective for fiscal years beginning after november 15, 2007, and allows for the elective
measurement of eligible financial instruments and certain other items at fair value in order to mitigate volatility
in earnings without having to apply complex hedge accounting rules. this Statement is not expected to have an
impact on the Company’s earnings or financial position.
70
c o R p o R a t e I n f o R M a t I o n
offIceRs
dIRectoRs
Head offIce
c. H. Riddell
Chairman of the Board and
Chief executive officer
J. H.t. Riddell
president and
Chief operating officer
b. K. lee
Chief Financial officer
c. e. Morin
Corporate Secretary
l. M. doyle
Corporate operating officer
g.W. p. McMillan
Corporate operating officer
d.s. purdy
Corporate operating officer
J. Wittenberg
Corporate operating officer
l. a. friesen
Assistant Corporate Secretary
c. H. Riddell (3)
Chairman of the Board
and Chief executive officer
paramount Resources ltd.
Calgary, Alberta
J. H.t. Riddell
president and
Chief operating officer
paramount Resources ltd.
Calgary, Alberta
J. c. gorman (1)(4)
Retired
Calgary, Alberta
4700 Bankers Hall West
888 third Street S. W.
Calgary, Alberta
Canada t2p 5C5
telephone: (403) 290-3600
Facsimile: (403) 262-7994
www.paramountres.com
consultIng engIneeRs
Mcdaniel & associates
consultants ltd.
Calgary, Alberta
d. Jungé c.f.a. (4)
Chairman, Chief executive officer
and president,
pitcairn trust Company
Bryn Athyn, pennsylvania
audItoRs
ernst & Young llp
Calgary, Alberta
banKeRs
bank of Montreal
Calgary, Alberta
the bank of nova scotia
Calgary, Alberta
Royal bank of canada
Calgary, Alberta
ubs ag canada branch
toronto, ontario
RegIstRaR and
tRansfeR agent
computershare
Investor services
Calgary, Alberta
toronto, ontario
stocK eXcHange lIstIng
the toronto Stock exchange
(“pou”)
d. M. Knott
Managing General partner
Knott partners, l.p.
Syosset, new York
W. b. Macinnes, Q.c. (1) (2) (3) (4)
Retired
Calgary, Alberta
V. s. a. Riddell
Business executive
Calgary, Alberta
s. l. Riddell Rose
president and
Chief executive officer
paramount energy
operating Corp. (5)
Calgary, Alberta
J.b. Roy (1) (2) (3) (4)
Independent Businessman
Calgary, Alberta
a.s. thomson (1) (4)
Retired
Sidney, British Columbia
b. M. Wylie (2)
Business executive
Calgary, Alberta
(1) Member of Audit Committee
(2) Member of environmental, Health and
Safety Committee
(3) Member of Compensation Committee
(4) Member of Corporate
Governance Committee
(5) paramount energy operating Corp. is a
wholly owned subsidiary of paramount
energy trust
P a r a m o u n t r e s o u r c e s L t d . | 2 0 0 7 A n n u A l R e p o R t
A b b r e v i A t i o n s
bbls
bbl/d
bcf
barrels
barrels per day
billion cubic feet
bcfe billion cubic feet of gas equivalent
boe
Mcf
Mcfe
Mcf/d
MMcf
barrels of oil equivalent
thousand cubic feet
thousand cubic feet of gas equivalent
thousand cubic feet per day
million cubic feet
MMcf/d
million cubic feet per day
Mbbl
thousands of barrels
MMbtu
millions of British Thermal Units
Mboe
thousands of barrels of oil equivalent
MMcfe/d million cubic feet of gas equivalent per day
A n n u A l M e e t i n g o f s h A r e h o l d e r s
Shareholders are cordially invited to attend the Annual Meeting of Shareholders to be held Wednesday, May 14,
2008, at 10:30 a.m. MDT at Centrium Place in the Conference Centre, 332 6th Avenue S.W., Calgary, Alberta.
4
4700 Bankers Hall West
888 third street s.W.
calgary, alberta
canada t2P 5c5
telephone: (403) 290-3600
Facsimile: (403) 262-7994
www.paramountres.com
P a r a m o u n t r e s o u r c e s L t d . | 2 0 0 7 A n n U A l R e P o R T