2 0 0 8 A N N U A L R E P O R T
2008 Overview
Letter to Shareholders
Core Producing Areas
Review of Operations
Management’s Discussion & Analysis
Management’s Report
Report of Independent Registered
Public Accounting Firm
Financial Statements
Notes to Consolidated Financial Statements
Corporate Summary
2
3
6
10
16
43
44
45
49
IBC
ANNUAL MEETiNg Of ShAREhOLdERS
Shareholders are cordially invited to attend
the Annual Meeting of Shareholders to be held
Wednesday, May 13, 2009 at 10:30 AM MDT
at Centrium Place in the Conference Centre,
332 6th Avenue S.W., Calgary, Alberta.
FINANCIAL AND OPERATING HIGHLIGHTS(1)
($ millions, except as noted)
Financial
Petroleum and natural gas sales
Funds flow from operations
Per share – diluted ($/share)
Net earnings (loss)
Per share – diluted ($/share)
Exploration and development capital expenditures
Investments(3)
Total assets
Net debt (4)
Common shares outstanding (thousands)
Operating
Natural gas sales (MMcf/d)
Oil and NGLs sales (Bbl/d)
Total (Boe/d)
Gas weighting
Average realized price
Natural gas ($/Mcf)
Oil and NGLs ($/Bbl)
Reserves
Proved plus probable (5)
Natural gas (Bcf)
Crude oil and NGLs (MBbl)
Total (MBoe)
Estimated net present value before tax @ 10%
Proved
Proved plus probable
Net undeveloped land (thousands of acres)
Total wells drilled (gross)
Year ended December 31
2008
2007 % Change
318.1
179.6
2.65
(116.6)
(1.72)
170.8
249.9
1,117.3
97.5
66,741
61.0
3,594
13,764
74%
8.64
95.12
163.9
9,062
36,379
445.7
659.7
1,221
71
283.4
100.5
1.42
416.2
5.89
266.8
322.1
1,299.8
(15.5)
67,681
78.8
3,536
16,669
79%
6.77
68.74
192.8
9,135
41,270
477.3
679.5
1,287
159
12
79
87
(128)
(129)
(36)
(22)
(14)
729
(1)
(23)
2
(17)
28
38
(15)
(1)
(12)
(7)
(3)
(5)
(55)
(1)
Readers are referred to the advisories concerning non-GAAP measures and oil and gas measures and definitions under the heading “Advisories” in
Management’s Discussion and Analysis.
Includes reclassification of foreign exchange collar to conform to current year’s presentation.
Based on the period-end closing prices of publicly traded enterprises and book value of the remaining investments.
Net debt, a non-GAAP measure, excludes risk management assets and liabilities and stock-based compensation liabilities.
(2)
(3)
(4)
(5) Working interest reserves before royalty deductions, using forecast prices and costs.
2008 Overview
(cid:131) Funds flow from operations in 2008 increased by 79 percent to $179.6 million from the prior year due to
higher realized commodity prices, lower interest, operating, and general and administrative expenses,
partially offset by lower natural gas production and higher royalties.
(cid:131) Net loss of $116.6 million in 2008 compared to net earnings of $416.2 million in 2007. The current year
includes $96.9 million of Strategic Investment write-downs and $54.9 million of property and goodwill
write-downs, partially offset by higher gains on financial commodity contracts and petroleum and natural
gas sales. Prior year net earnings included $799.4 million of Strategic Investment disposition gains
partially offset by $273.9 million of property and goodwill write-downs.
Principal Properties
(cid:131) Netback increased to $182.5 million in 2008 from $141.5 million in 2007, largely due to higher annual
average commodity prices and lower operating expenses, partially offset by lower sales volumes and
higher royalties.
(cid:131) Exploration and development capital spending decreased to $170.8 million from $266.8 million in 2007.
(cid:131) Grande Prairie received regulatory approval for waterflood at Crooked Creek with initial production of 150
Boe/d in December 2008 increasing to approximately 500 Boe/d by the end of February.
(cid:131) Kaybob received regulatory approval for downspacing to four wells per section in 62 sections of land, and
drilled its first two wells from a common lease including one horizontal well.
(cid:131) Drilled 16 (12.7 net) wells in the United States, as part of Southern’s light oil program.
(cid:131) Continued to dispose of non-core assets, recognizing net gains of $9.1 million.
Strategic Investments
(cid:131) Increased ownership in Trilogy to 23.3 percent at December 31, 2008 from 18.8 percent at December
31, 2007 through unit purchases, continued participation in Trilogy Energy Trust’s distribution
reinvestment plan and, indirectly, as a result of Trilogy’s normal course issuer bid (“NCIB”) unit
purchases.
(cid:131) Independent resource evaluation for Hoole oil sands properties was completed with a “best estimate” of
approximately 458 million barrels of “contingent resources” as of August 1, 2008; seven delineation
wells were drilled in the first quarter of 2009.
(cid:131) Invested $12.3 million in 22.4 million shares of MGM Energy Corp. pursuant to MGM Energy’s July
public offering, maintaining a 16.7 percent equity interest.
(cid:131) Invested $6.0 million in 6.1 million Class A common shares of NuLoch Resources Inc., a TSX Venture
Exchange listed company with properties in Alberta and Southeast Saskatchewan.
(cid:131) Purchased 3.5 million common shares of Paxton Corporation, a private company involved in greenhouse
gas technology, for $4.8 million.
(cid:131) Commenced construction of a third drilling rig, expected to be in service in 2009.
Corporate
(cid:131) Purchased 1.0 million Paramount shares for $7.3 million in 2008 under the Company’s NCIBs.
(cid:131) Interest and financing charges decreased to $9.9 million in 2008 from $32.1 million in 2007.
(cid:131) Reduced Corporate general and administrative expenses to $24.7 million from $28.9 million in 2007.
2
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
LETTER TO SHAREHOLDERS
Letter to Shareholders
December 18th, 2008 marked the 30th anniversary of continuous operations as a public
company for Paramount Resources Ltd. This is an extraordinary accomplishment as only a
handful of the companies that were present at the time of Paramount’s initial public offering exist
today. Paramount has continually adapted to changing economics, technological developments,
and changing political and regulatory environments. Paramount has survived and prospered
through commodity price cycles where oil and gas prices have gone from next to nothing to
highs such as the recent US$147/Bbl WTI and over US$20/Mcf Nymex gas price reached in
2001. We have seen the implementation of new technologies such as horizontal drilling, 3-D
seismic, underbalanced drilling, SAG-D, and most recently, multi-stage hydraulic fracturing
technology which has helped to unlock many unconventional reservoirs previously thought to be
uneconomic to produce.
Paramount has managed its business through periods of drastic regulatory changes; the
National Energy Policy; the deregulation of the natural gas market in the 1980’s; the conservation
of the gas over bitumen in northeast Alberta which resulted in the shut in of much of
Paramount’s production and sterilized virtually all of the future opportunities the Company had
developed in the area; the phase out of the Trust model by the Federal government and most
recently, the New Royalty Framework implemented by the Alberta Provincial government which
was designed to capture the “fair share” for the people of Alberta but instead has helped to
completely devastate the conventional energy business in the province. We believe one of our
greatest assets has been our never-ending ability to adapt to changes in our operating
environment. The knowledge we have gained from navigating through the ever changing
environment in our industry has allowed us to achieve success throughout the last 30 years and
we expect will serve us well for years to come.
Paramount produced 13,764 Boe/d in 2008 as compared to 16,669 Boe/d in 2007. Cash
Flow generated was up 79 percent from $ 100.5 million to $179.6 million. Year end net debt
stood at a conservative $77.8 million including the mark to market value of hedging contracts at
year end. In 2008, Paramount executed a total capital program of $183.0 million comprised of
$170.8 million on drilling, completions and seismic in its principal properties, $17.6 million on land
acquisitions principally at Alberta Crown land sales, property sales of $21.2 million, and strategic
3
investments of $14.8 million. Paramount estimated its net asset value to be $1.2 billion at year
end 2008 which works out to be approximately $17.80 per common share.
Paramount’s business
is currently developing along three separate platforms; a
conventional upstream Exploration and Development business, a
longer-term resource
development business, and a strategic investment portfolio. In the conventional upstream
business in 2008, Paramount focused on its North Dakota assets where 14 new wells were
drilled. The results from this program are being evaluated and it is anticipated that Paramount can
achieve better economic results by improving, principally, its completion technology used on
these wells. In the deep basin Kaybob core area, continued emphasis is being focused on driving
down the costs to drill and complete these wells. The resources in the Company’s Kaybob area
could provide material growth as lowering these costs will improve the economics of the plays in
the area. Paramount initiated drilling horizontal wells combined with multi-stage fracture
stimulation technology on its Montney resource play at Karr with good initial results. Further
drilling as well as facility design to develop these reserves is ongoing with the idea that this could
become a major producing area for Paramount in the future.
Paramount added to its investment portfolio in 2008 by acquiring additional shares of
MGM Energy and additional units in Trilogy Energy Trust. We grew our investment in Paramount
Drilling U.S. with the initiation of the construction of a third drilling rig for the Company. New
investments were made in NuLoch Resources Inc. and Paxton Corp. in 2008. At year end, these
investments were recorded at a total value of $249.9 million, excluding Paramount Drilling U.S.,
after reducing the carrying value of the MEG Energy, MGM Energy, and NuLoch Resources by a
combined $96.4 million to reflect their more current market values.
Paramount was able to start to communicate the value of one of our long-term
development assets with the disclosure of the independent resource evaluation for the Hoole
oilsands property in Northeast Alberta. A contingent best case recoverable resource of 458
million barrels was estimated to have a net present value (NPV) discounted at 10 percent of $585
million. This evaluation was updated using more current pricing at January 1, 2009 to have a NPV
of $1.378 billion. Further drilling has been completed during the current drilling season, which the
Company expects will increase both the recoverable resource and the associated NPV.
Paramount continues to evaluate the recovery potential of the resource it controls on the
carbonate bitumen trend in the same general area. Paramount has also improved its
understanding of the resource it controls in the Horn River basin of Northeastern British
4
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
LETTER TO SHAREHOLDERS
Columbia. Paramount expects to be able start to communicate what this potential may be in the
near future.
After a steady improvement of commodity prices through the first half of 2008, prices
experienced unprecedented declines through the second half of the year in response to reduced
demand for both oil and gas associated with the world-wide economic slowdown. Oil and gas
activity levels have declined which will in turn reduce supply, with the North American rig count
having already been reduced by half. It is our expectation that the supply response to the industry
slow down will start to materialize in the spring of 2009 and that supply, at least for natural gas,
will closely resemble demand by late fall of 2009. This relationship could be positively affected by
increased demand associated with the economic recovery predicted by many for the second half
of 2009. Paramount is confident that such a recovery would result in prices generating sufficient
returns to allow for greater capital reinvestment to grow its production more aggressively in
2010. The economic slowdown has materially reduced the availability of capital world-wide, and
should this persist through the point where demand begins to outstrip supply for commodities,
we could have materially higher pricing for commodities to stimulate additional activity.
Paramount is in relatively good shape in this regard as our major disposition of our oilsands
assets in 2007 has left the Company in a very strong financial position.
In summary, Paramount continues to develop some of the very large resource
opportunities that it controls. At the same time, we have tried to control the overall dilution to the
shareholders to create the best net economic return possible for our shareholders. We are
cautiously optimistic that the severe economic conditions we are currently experiencing may
prove to be the very thing that creates better economic conditions for our industry in the years
ahead. Paramount is taking the steps it feels necessary to improve its business and expects to
emerge from this economic downturn as an even stronger company.
J.H.T Riddell
President and Chief Operating Officer
March 26, 2009
5
CORE PRODUCING AREAS
Kaybob
The Kaybob Corporate Operating Unit 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 are in the Deep
Basin, which are high pressure, liquids rich, tight gas formations with large reservoir potential.
Total sales for Kaybob averaged 3,606 Boe/d in 2008, comprised of 18.2 MMcf/d of natural gas and 576
Bbl/d of crude oil and NGLs. Sales volumes decreased in 2008 by 15 percent from 2007, primarily as a
result of natural declines and a reduced capital program.
Capital expenditures in Kaybob for 2008 totaled $50 million, excluding land, and were focused on drilling
new wells and completing, equipping and tying in both new wells and those drilled in late 2007. During
2008, 21 (9.7 net) gas wells were drilled in Kaybob.
As part of the initiative to reduce per-well drilling, completion, equipping and tie-in costs, Paramount
applied for and received regulatory approval to drill up to four wells per section (“downspacing”) in 62
sections of land in Musreau, Resthaven and Smoky. Late in the year applications were submitted to allow
downspacing on an additional 40 sections of which approval has been received for 22 sections and the
remaining approvals are anticipated in the first half of 2009. Cost savings from downspacing are expected
to be realized through pad drilling by reducing equipment mobilization costs, and sharing production
facilities and pipelines. During the fourth quarter, the first two wells of what will ultimately be a four well
pad were drilled in Resthaven. One of the wells was Paramount’s first horizontal well in the area. These
wells will be completed and tied-in during the first quarter of 2009. In December 2008, Paramount
commenced drilling a second well on a lease with an existing well in the Smoky area. The drilling was
completed and the well was cased in January, with an expected tie in during the first quarter of 2009
utilizing shared facilities and pipeline. Based on the savings associated with these projects, Paramount
anticipates drilling additional pad and horizontal wells in the future.
To reduce operating costs in Resthaven, Kaybob has redirected gas from a more expensive non-operated
facility to the lower cost 100 MMcf/d Smoky plant in which Paramount owns a 10 percent working
interest. In December 2008, to reduce anticipated future processing costs in the Musreau area, Paramount
reduced its firm processing commitment at a third party gas plant.
The Deep Basin continues to be the core area for Kaybob, and as project economics improve, is expected
to be a significant growth platform for the Company over the next five to ten years. In 2009, Paramount
plans to drill 11 (6.9 net) wells and complete and tie-in 14 (7.5 net) wells that were drilled in prior years. The
majority of the 2009 capital investment will be focused in the Musreau, Resthaven, and Smoky areas and
will continue to target multiple Cretaceous formations.
Capital Expenditures
($ millions, includes land)
Net Undeveloped Land
(thousands, acres)
Production
(Boe/d)
2 0 0
15 0
10 0
5 0
0
53.0
110
15 0
10 0
5 0
0
3,606
5 ,0 0 0
4 ,0 0 0
3 ,0 0 0
2 ,0 0 0
1,0 0 0
0
2 0 0 6
2 0 0 7
2 0 0 8
2 0 0 6
2 0 0 7
2 0 0 8
2 0 0 6 2 0 0 7
2 0 0 8
6
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
CORE PRODUCING AREAS
Grande Prairie
The Grande Prairie Corporate Operating Unit produces natural gas, NGLs, and crude oil in Central Alberta.
The core natural gas producing areas in Grande Prairie include properties at Mirage and Ante Creek. Grande
Prairie’s primary crude oil producing property is in the deep, light sweet oil trend at Crooked Creek. Grande
Prairie is also starting a long-term Deep Basin development plan for liquids rich tight gas in the Karr region.
Total sales for Grande Prairie averaged 2,241 Boe/d in 2008, comprised of 9.7 MMcf/d of natural gas and
628 Bbl/d of crude oil and NGLs. Sales volumes decreased in 2008 by 15 percent from 2007 primarily due
to normal production declines throughout the region and production curtailment at Crooked Creek pending
regulatory approval of waterflood.
At Crooked Creek, Good Production Practice (“GPP”) waterflood was brought on in late December 2008
after an extended regulatory approval process, with initial production of 150 Boe/d increasing to
approximately 500 Boe/d by the end of February 2009.
Capital expenditures in Grande Prairie for 2008 totaled $30.0 million, excluding land, the majority of which
was focused on Crooked Creek and Karr. Drilling activity in 2008 at Crooked Creek consisted of four (1.9
net) oil wells. In Karr, two (2.0 net) successful horizontal wells into the lower Montney reservoir were
drilled and tied in. Grande Prairie also drilled and tied in six (1.7 net) wells in Mirage in 2008. Grande Prairie
acquired 24,000 net acres of undeveloped land positions at Crooked Creek and in the adjacent and
surrounding Karr area.
Due to current low crude oil prices and less favourable crude royalties, in 2009 Grande Prairie will shift its
focus from the oil producing Crooked Creek area to liquids rich deep gas in the Karr region. The majority of
the 2009 capital budget will be focused on exploring and drilling undeveloped land and drilling critical pool
defining wells in the Karr area.
Capital Expenditures
($ millions, includes land)
Net Undeveloped Land
(thousands, acres)
Production
(Boe/d)
15 0
10 0
5 0
0
40.0
239
3 0 0
2 5 0
2 0 0
15 0
10 0
5 0
0
2,241
4 ,0 0 0
3 ,0 0 0
2 ,0 0 0
1,0 0 0
0
2 0 0 6
2 0 0 7
2 0 0 8
2 0 0 6
2 0 0 7
2 0 0 8
2 0 0 6 2 0 0 7 2 0 0 8
7
Northern
The Northern Corporate Operating Unit 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 this property accounts for 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.
The zones targeted by Northern include 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 1,600 meters in Alberta and the Cameron Hills area.
Total sales for Northern averaged 3,796 Boe/d in 2008, comprised of 18.2 MMcf/d of natural gas and 768
Bbl/d of crude oil and NGLs. Sales volumes decreased in 2008 by 26 percent from 2007 primarily due to
the shut-in of the Maxhamish and West Liard facility in late 2007 and early 2008, and the impact of
property sales as well as natural declines across most properties in Northern. Paramount is awaiting
regulatory and community approvals to resume its drilling program in Cameron Hills.
The West Liard facility was shut-in as a result of declining gas volumes, low prices and high operating
costs and the Tattoo property was divested of for similar reasons. The combined production from West
Liard when shut in and Tattoo properties when sold was approximately 250 Boe/d.
Northern’s capital expenditures for 2008 totaled $8.5 million, excluding land. During 2008, Northern drilled
6 (3.5 net) wells, of which one (0.5 net) well was dry and abandoned. The majority of Northern’s field
activities occurred in the first quarter of 2008 because of restricted seasonal access.
In 2009, Paramount anticipates drilling four (3.5 net) operated gas wells in Bistcho with follow-up
completions and tie-ins all to be performed in the first quarter of 2009.
Capital Expenditures
($ millions, includes land)
Net Undeveloped Land
(thousands, acres)
Production
(Boe/d)
75
50
25
0
11.1
2 ,0 0 0
1,5 0 0
1,0 0 0
5 0 0
0
475
3,796
7 ,0 0 0
6 ,0 0 0
5 ,0 0 0
4 ,0 0 0
3 ,0 0 0
2 ,0 0 0
1,0 0 0
0
2006
2007
2008
2 0 0 6 2 0 0 7 2 0 0 8
2 0 0 6 2 0 0 7 2 0 0 8
8
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
CORE PRODUCING AREAS
Southern
The Southern Corporate Operating Unit 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.
Southern produced 3,969 Boe/d in 2008 comprised of 14.1 MMcf/d of gas and 1,619 Bbl/d of oil and NGLs,
a decrease of 420 Boe/d from 2007 due to declines and property sales in Alberta partially offset by oil
production increases in the United States. Capital expenditures for the year were $67.5 million on drilling
and completions in the United States, and $12 million in Canada. Capital spending in the United States was
primarily for drilling and constructing facilities in North Dakota.
Southern divested of two properties producing approximately 350 Boe/d in 2008, as part of Paramount’s
objective to focus on strategic assets and lower operating costs.
In the Chain region, Southern significantly reduced capital spending from previous years with moderate
declines in production.
In the United States, Paramount operates as Summit Resources Inc (“Summit”), a wholly owned
subsidiary. In North Dakota, Summit drilled 14 (12.2 net) wells focused on growing production from the
Bakken, Birdbear and Red River formations. This program was not without its challenges, including an
escalation of all aspects of drilling program costs, a scarcity of goods and services, and lower than
expected reserves per well. The results achieved in the Red River and Bakken program were the
strongest, where three of the six completed wells have achieved expected production rates. Commodity
price reductions have caused Summit to delay the 2009 drilling program as current realized prices are
approximately $13.00 below the West Texas Intermediate index price.
The Company is continuing to assess the results of the 2008 US drilling program, with the objective of
identifying areas where improvements and cost reductions can be made, including completion techniques.
Paramount continues to believe its North Dakota properties can be a significant growth platform for the
Company despite the current realized price and the lower than expected reserve additions.
In Montana, Summit has been participating in the development of the Outlook Field, where two (0.5 net)
crude wells were drilled in 2008. At present only one of the Outlook wells is producing due to the recent
low crude prices.
Capital Expenditures
($ millions, includes land)
Net Undeveloped Land
(thousands, acres)
Production
(Boe/d)
84.7
10 0
5 0
0
202
2 5 0
2 0 0
15 0
10 0
5 0
0
3,969
5 ,0 0 0
4 ,0 0 0
3 ,0 0 0
2 ,0 0 0
1,0 0 0
0
2 0 0 6
2 0 0 7
2 0 0 8
2 0 0 6
2 0 0 7
2 0 0 8
2 0 0 6 2 0 0 7 2 0 0 8
9
OPERATING STATISTICS
Paramount’ average daily sales volumes by corporate operating unit for the years ended
December 31, 2008 and 2007 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
2008
18.2
9.7
18.2
14.1
0.8
61.0
576
628
768
1,619
3
3,594
3,606
2,241
3,796
3,969
152
13,764
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
Change (%)
(18)
(13)
(29)
(22)
(43)
(23)
8
(18)
(11)
18
-
2
(15)
(15)
(26)
(10)
(38)
(17)
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)
106.13
8.77
10.00
8.00
6.00
4.00
2.00
0.00
110.00
100.00
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
2005
2006
2007
2008
2005
2006
2007
2008
10
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
Capital Expenditures
($ millions)
Geological and geophysical
Drilling and completions
Production equipment and facilities
Exploration and development expenditures
Land and property acquisitions
Cash proceeds on dispositions
Principal Properties
Strategic Investments
Cash proceeds on disposal of Strategic Investments
Corporate
Net capital expenditures
REVIEW OF OPERATIONS
2008
7.1
137.1
26.6
170.8
17.6
(21.2)
167.2
14.8
-
1.0
183.0
2007
4.3
158.1
104.4
266.8
13.9
(28.1)
252.6
54.2
(78.7)
1.8
229.9
Land
The following table summarizes the Company’s land position at December 31:
Land (thousand of acres)
2008
Average
Working
Interest
70%
53%
65%
2007
Net
1,287
301
1,588
$142.9
Average
Working
Interest
70%
53%
66%
Gross
1,847
565
2,412
Gross
1,754
598
2,352
Net
1,221
319
1,540
$150.3
Undeveloped land
Acreage assigned reserves
Total
Value of undeveloped land (1) ($ millions)
(1) Based on McDaniel & Associates Consultants Ltd. appraisal summary of acreage evaluation
Exploration and
Development Expenditures
($ millions)
2008 Exploration and
Development Expenditures
$170.8 million
400
300
200
100
0
170.8
2005
2006
2007
2008
Drilling & Com pletion
G&G
Production Equipm ent
11
Drilling
Drilling activity for the years ended December 31, 2008 and 2007 is as follows:
Gas
Oil
Dry and Abandoned
Oil Sands and other
Total
Gas
Oil
Dry and Abandoned
Oil Sands and other
Total
Development
Net
10
15
1
-
26
Gross
27
21
1
-
49
2008
Exploration
Total
Gross
16
4
2
-
22
Net
10
1
1
-
12
Gross
43
25
3
-
71
Development
2007
Exploration
Total
Gross
58
18
2
46
124
Net
40
6
2
43
91
Gross
28
5
2
-
35
Net
12
4
1
-
17
Gross
86
23
4
46
159
Net
20
16
2
-
38
Net
52
10
3
43
108
Wells Drilled
(gross)
Drilling Distribution
71 Wells
Drilling Success Rate
(gross) (%)
400
300
200
100
0
71
2005
2006
2007
2008
Kaybob
Grande Prairie
Northern
Southern
12
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
100
80
60
40
20
0
96
2005
2006
2007
2008
REVIEW OF OPERATIONS
Reserves
Paramount’s reserves for the year ended December 31, 2008 were evaluated by McDaniel & Associates
Consultants Ltd. ("McDaniel") and prepared in accordance with the National Instrument 51-101 definitions,
standards and procedures.
Paramount’s working interest reserves and before tax net present value of future net revenues for the year
ended December 31, 2008 using forecast prices and costs are as follows:
Gross Proved and Probable Reserves (1)
Natural
Gas
Light &
Medium
Crude Oil
Natural
Gas
Liquids
Before Tax Net Present Value (1)
($ millions)
Total
Discount Rate
Reserves Category
Canada
Proved
Developed Producing
Developed Non-producing
Undeveloped
Total Proved
Total Probable
Total Proved plus Probable Canada
United States
Proved
Developed Producing
Developed Non-producing
Total Proved
Total Probable
Total Proved plus Probable USA
Total Company
Total Proved
Total Probable
Total Proved plus Probable
(1) Columns may not add due to rounding
(Bcf)
(MBbl)
(MBbl)
(MBoe)
0%
10%
15%
73.1
18.2
3.9
95.2
67.9
163.1
0.6
-
0.6
0.2
0.8
95.8
68.1
163.9
2,251
185
10
2,446
1,332
3,777
2,720
7
2,726
910
3,636
5,172
2,241
7,413
770
269
-
1,038
523
1,561
67
-
67
21
88
15,198
3,488
662
19,348
13,168
32,516
2,887
8
2,895
968
3,863
447.8
69.9
12.3
530.0
346.3
876.3
100.1
(0.3)
99.8
40.7
140.5
1,106
543
1,649
22,243
14,136
36,379
629.8
387.0
1,016.8
334.7
40.4
4.5
379.6
195.8
575.4
66.3
(0.2)
66.1
18.2
84.3
445.7
214.0
659.7
298.0
32.6
2.2
332.8
155.8
488.5
57.1
(0.2)
56.9
13.8
70.7
389.7
169.6
559.3
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)
164
300
250
200
150
100
50
0
9,062
12,000
9,000
6,000
3,000
0
36,379
60,000
40,000
20,000
0
2005
2006
2007
2008
2005
2006
2007
2008
2005
2006
2007
2008
13
Reserves Reconciliation
The following table sets forth the reconciliation of Paramount's working interest reserves for the year
ended December 31, 2008 using forecast prices and costs:
Proved Reserves
Probable Reserves
Proved & Probable Reserves
Natural
Gas
Bcf
Oil and
NGLs
MBbl
Boe(4)
MBoe
Natural
Gas
Bcf
Oil and
NGLs
MBbl
Natural
Gas
Bcf
Oil and
NGLs
MBbl
Boe(4)
MBoe
Boe(4)
MBoe
January 1, 2008
119.3
6,181
26,064
73.5
2,954
15,204
192.8
9,135
41,268
Extensions and discoveries
10.5
967
2,723
6.4
446
1,502
16.9
1,413
4,225
Technical revisions
(10.8)
434
(1,366)
(10.2)
(611)
(2,312)
(21.0)
(177)
(3,678)
Dispositions (1)
Production (2)
(1.4)
(1)
(243)
(0.7)
-
(105)
(2.1)
(1)
(348)
(21.8)
(1,303)
(4,936)
(0.9)
(3)
(153)
(22.7)
(1,306)
(5,089)
December 31, 2008(3)
95.8
6,278
22,243
68.1
2,784
14,136
163.9
9,062
36,379
(1) Paramount estimates.
(2) Excludes production from royalty interests.
(3) Columns and rows may not add due to rounding.
(4) Please refer to the oil and gas measures and definitions under the heading “Advisories” in Management’s Discussion and Analysis.
Technical reserve revisions are positive or negative changes to reserves that were booked in prior periods.
In 2008, negative technical revisions of 3.7 MMBoe primarily related to land ownership matters in
Northern, well performance issues in Southern, and development plan changes in Grande Prairie.
Finding and Development Costs
Finding and development costs associated with the 2008 exploration and development program were as
follows:
2008 Finding and Development Costs
($ millions, except as noted)
Geological and geophysical
Drilling and completions
Production equipment and facilities
$
Proved
7.1
137.1
26.6
Proved Plus
Probable
7.1
$
137.1
26.6
Exploration and development expenditures
Land
Change in future capital
Total finding and development capital (1)
Net additions to reserves (MBoe) (2)
Finding and development costs ($/Boe)
$ 366.31
(1) The aggregate of the exploration and development costs incurred in the most recent financial year and the change during that year in estimated future
170.8
17.6
4.6
$ 193.0
170.8
17.6
12.3
200.7
547
1,357
$ 142.03
$
development costs generally will not reflect total finding and development costs related to reserves additions for that year.
(2) Please refer to the oil and gas measures and definitions under the heading “Advisories” in Management’s Discussion and Analysis.
Finding and Development Costs
($/Boe)
2007
Proved
$ 120.86
Proved plus Probable(1)
N/A
$
(1) 2007 proved and probable finding and development costs not applicable due to negative technical revisions.
$ 142.03
$ 366.31
2008
2006
$ 46.94
$ 41.24
3 Year Average
$ 103.34
$ 205.43
14
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
REVIEW OF OPERATIONS
Pre-tax Net Asset Value
An estimate of Paramount’s pre-tax net asset value as of December 31, 2008 is as follows:
2008
($ millions)
Present value of reserves (1)
$659.7
Appraised value of undeveloped land (2)
150.3
85.0
Seismic (at cost)
Projects under evaluation (at cost) (3)
63.6
Investments (4)
249.9
Other property, plant and equipment (5)
57.5
Working capital surplus (6)
32.6
(110.4)
Long-term debt – excludes unamortized financing fees
$1,188.2
Pre-tax net asset value
66,741
Common Shares outstanding (thousands)
Pre-tax net asset value per basic common share
$17.80
(1) Based on McDaniel & Associates Consultants Ltd. forecast prices and costs and proved plus probable reserves discounted at 10
percent before income tax under blow-down scenario.
(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 publicly traded enterprises and book value of the remaining investments.
(5) Includes inventory, drilling rigs, and corporate assets.
(6) Includes current portion of stock-based compensation liability and financial instruments.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management’s Discussion and Analysis (“MD&A”), dated March 6, 2009, 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, 2008. Information included in this
MD&A is presented in accordance with Generally Accepted Accounting Principles (‘‘GAAP”) in Canada.
Amounts are presented in Canadian dollars unless otherwise stated.
This document contains forward-looking statements, non-GAAP measures and oil and gas measures and
definitions, including contingent resources. Readers are referred to the “Advisories” section of this
document concerning such matters.
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. Funds flow from operations excludes the impacts of non-commodity financial derivatives, among
other items. Certain comparative figures have been reclassified to conform to the current years
presentation.
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 pursue
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 in its portfolio of Strategic Investments.
Paramount’s operations are divided into three segments, established by management to assist in allocating
resources, 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 (“COUs”) as follows:
(cid:131) Kaybob consisting of properties in West Central Alberta;
(cid:131) Grande Prairie consisting of properties in Central Alberta;
(cid:131) Northern consisting of properties in Northern Alberta, the Northwest Territories and Northeast British
Columbia; and
(cid:131) Southern consisting of properties in Southern Alberta, Saskatchewan, Montana and North Dakota.
Strategic Investments include investments in other entities, including affiliates, and development stage
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.
16
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
The Corporate segment is comprised of income and expense items, including general and administrative
expense and interest expense, which have not been specifically allocated to Principal Properties or
Strategic Investments.
Highlights
Year ended December 31
($ millions, except as noted)
Financial
Net (loss) earnings
per share - basic ($/share)
per share - diluted ($/share)
Funds flow from operations
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 ($/Bbl)
Wells drilled (net)
2008
2007
2006
(116.6)
(1.72)
(1.72)
179.6
2.65
318.1
416.2
5.94
5.89
100.5
1.42
283.4
(17.8)
(0.26)
(0.26)
171.6
2.53
312.6
1,117.3
1,299.8
1,419.0
109.5
97.5
61.0
3,594
13,764
8.64
95.12
38
134.6
(15.5)
78.8
3,536
16,669
6.77
68.74
108
508.8
614.5
81.6
3,653
17,256
7.66
63.27
231
MD&A
17
Segment Earnings (Loss)
Year ended December 31
($ millions)
Principal Properties
Strategic Investments
Corporate
Taxes
Net Earnings (Loss)
2008
2007
2006
33.6
(94.6)
(40.9)
(14.7)
(116.6)
(290.2)
780.6
(31.0)
(43.2)
416.2
(142.9)
141.3
(66.3)
50.1
(17.8)
Funds Flow From Operations
The following is a reconciliation of funds flow from operations to the nearest GAAP measure:
Year ended December 31
($ millions, except as noted)
Cash from operating activities
Change in non-cash working capital
Funds flow from operations
Funds flow from operations ($/Boe)
2008 Overview
2008
2007
2006
194.9
(15.3)
179.6
35.64
98.7
1.8
100.5
16.52
182.4
(10.8)
171.6
27.25
(cid:131) Net loss of $116.6 million in 2008 compared to net earnings of $416.2 million in 2007. The current year
includes $96.9 million of Strategic Investment write-downs and $54.9 million of property and goodwill
write-downs, partially offset by higher gains on financial commodity contracts and petroleum and
natural gas sales. Prior year net earnings included $799.4 million of Strategic Investment disposition
gains partially offset by $273.9 million of property and goodwill write-downs.
(cid:131) Net earnings in 2007 of $416.2 million compared to a net loss of $17.8 million in 2006. The 2006 net
loss included $183.8 million of petroleum and natural gas property write-downs and $154.5 million of
equity investment income including a $111.3 million dilution gain related to North American Oil Sands
Corp. (“North American”). Earnings for 2007 included the impacts of lower natural gas prices and sales
volumes than 2006.
(cid:131) Funds flow from operations in 2008 increased by 79 percent to $179.6 million from the prior year due
to higher realized commodity prices, lower interest, operating, and general and administrative
expenses, partially offset by lower natural gas production and higher royalties.
18
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
Principal Properties
(cid:131) Netback increased to $182.5 million in 2008 from $141.5 million in 2007, largely due to higher annual
average commodity prices and lower operating expenses, partially offset by lower sales volumes and
higher royalties.
(cid:131) Exploration and development capital spending decreased to $170.8 million from $266.8 million.
(cid:131) Grande Prairie received regulatory approval for waterflood at Crooked Creek with initial production of
150 Boe/d in December 2008 increasing to approximately 500 Boe/d by the end of February.
(cid:131) Kaybob received regulatory approval for downspacing to four wells per section in 62 sections of land,
and drilled its first two wells from a common lease including one horizontal well.
(cid:131) Drilled 16 (12.7 net) wells in the United States, as part of Southern’s light oil program.
(cid:131) Continued to dispose of non-core assets, recognizing net gains of $9.1 million.
(cid:131) Recognized a property impairment charge of $44.6 million, primarily related to the United States oil
program.
Strategic Investments
(cid:131)
(cid:131)
(cid:131)
(cid:131)
Increased ownership in Trilogy to 23.3 percent at December 31, 2008 from 18.8 percent at December
31, 2007 through unit purchases, continued participation in Trilogy’s distribution reinvestment plan
(“DRIP”) and, indirectly, as a result of Trilogy’s normal course issuer bid (“NCIB”) unit purchases.
Independent resource evaluation for Hoole oil sands properties was completed with a “best estimate”
of approximately 458 million barrels of “contingent resources” as of August 1, 2008; seven delineation
wells were drilled in the first quarter of 2009.
Invested $12.3 million in 22.4 million shares of MGM Energy pursuant to MGM Energy’s July public
offering, maintaining a 16.7 percent equity interest.
Invested $6.0 million in 6.1 million Class A common shares of NuLoch Resources Inc. (“NuLoch”), a
TSX Venture Exchange listed company with properties in Alberta and Southeast Saskatchewan.
(cid:131) Purchased 3.5 million common shares of Paxton Corporation (“Paxton”), a private company involved in
greenhouse gas technology, for $4.8 million. Certain directors of Paramount are also directors and
shareholders of Paxton.
(cid:131) Commenced construction of a third drilling rig, expected to be in service in 2009.
(cid:131) Recognized a provision for impairment of $96.9 million on investments.
Corporate
(cid:131) Purchased 1.0 million Paramount shares for $7.3 million in 2008 under the Company’s NCIBs.
(cid:131)
Interest and financing charges decreased to $9.9 million in 2008 from $32.1 million in 2007.
(cid:131) Reduced Corporate general and administrative expenses to $24.7 million from $28.9 million in 2007.
MD&A
19
Principal Properties
Netbacks and Segment Earnings (Loss)
Year ended December 31
($ millions)
Revenue
Royalties
Operating expense and production tax
Transportation expense
Netback
Settlements of financial commodity contracts
Netback including settlements of financial commodity contracts
Other Principal Property items (see below)
Segment earnings (loss)
2008
318.1
(47.8)
(72.1)
(15.7)
182.5
17.4
199.9
(166.3)
33.6
2007
283.4
(40.5)
(85.5)
(15.9)
141.5
12.0
153.5
(443.7)
(290.2)
Revenue
Year ended December 31
($ millions)
Natural gas sales
Oil and NGLs sales
Total
2008
193.0
125.1
318.1
2007
194.7
88.7
283.4
% Change
(1)
41
12
Revenue from natural gas, oil and NGLs sales was $318.1 million in 2008, an increase of 12 percent from
2007, due primarily to the impact of higher commodity prices, partially offset by lower natural gas sales
volumes.
The impact of changes in prices and volumes on petroleum and natural gas sales revenue for the year
ended December 31, 2008 are as follows:
($ millions)
Year ended December 31, 2007
Effect of changes in prices
Effect of changes in sales volumes
Year ended December 31, 2008
Natural gas
194.7
41.8
(43.5)
193.0
Oil and NGLs
88.7
34.7
1.7
125.1
Total
283.4
76.5
(41.8)
318.1
20
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
Sales Volumes
Year ended December 31
Kaybob
Grande Prairie
Northern
Southern
Other
Total
2008
Oil and
NGLs
Bbl/d
576
628
768
1,619
3
3,594
Natural
Gas
MMcf/d
18.2
9.7
18.2
14.1
0.8
61.0
2007
Natural
Gas
Oil and
NGLs
MMcf/d Bbl/d
533
22.3
765
11.2
865
25.7
1,369
18.1
4
1.5
3,536
78.8
Total
Boe/d
3,606
2,241
3,796
3,969
152
13,764
Natural
Gas
MMcf/d
(4.1)
(1.5)
(7.5)
(4.0)
(0.7)
(17.8)
Total
Boe/d
4,245
2,640
5,151
4,389
244
16,669
Change
Oil and
NGLs
Bbl/d
43
(137)
(97)
250
(1)
58
Total
Boe/d
(639)
(399)
(1,355)
(420)
(92)
(2,905)
Average daily natural gas sales volumes decreased to 61.0 MMcf/d in 2008 compared to 78.8 MMcf/d in
2007. The decrease was primarily a result of the shut-in of the Maxhamish and West Liard facilities in
Northern, normal production declines across all COUs and asset sales.
Average daily crude oil and NGLs sales volumes increased to 3,594 Bbl/d in 2008 compared to 3,536 Bbl/d
in 2007, primarily as a result of Southern’s North Dakota drilling program partially offset by reduced
production at Crooked Creek in Grande Prairie pending regulatory approval of waterflood and declines at
Bistcho and Cameron Hills in Northern.
During the second quarter, Paramount initiated a process to explore the sale of properties in the Cameron
Hills, Bistcho, Negus, and Larne areas in Alberta and the Northwest Territories. On July 29, 2008, the initial
bidding period closed and while interest was expressed, no acceptable bids were received. The formal
sales process was closed in the third quarter.
Annual average production was 13,764 Boe/d for 2008, a difference of 236 Boe/d from guidance of 14,000
Boe/d provided in November 2008. This difference is primarily the result of delays in obtaining regulatory
approval for waterflood at Crooked Creek in Grande Prairie and extremely cold weather in December that
caused production and delivery interruptions.
Commodity Prices
Key monthly average commodity price benchmarks and foreign exchange rates are as follows:
Year ended December 31
2008
2007
% Change
Natural Gas
AECO (Cdn$/GJ)
New York Mercantile Exchange (US$/MMbtu)
Crude Oil
West Texas Intermediate (US$/Bbl)
Edmonton par (Cdn$/Bbl)
Foreign Exchange
Cdn$/1US$
7.71
9.04
99.65
102.87
1.07
6.27
6.86
72.34
77.02
1.07
23
32
38
34
-
MD&A
21
Average Realized Prices
Year ended December 31
2008
2007
% Change
Natural gas ($/Mcf)
Oil and NGLs ($/Bbl)
Total ($/Boe)
8.64
95.12
63.14
6.77
68.74
46.59
28
38
36
Paramount’s average realized natural gas price for 2008, before realized gains on financial commodity
contracts, was $8.64/Mcf compared to $6.77/Mcf in 2007. Paramount’s natural gas sales portfolio primarily
consists of sales priced at the Alberta spot market, Eastern Canadian markets, and California markets and
is sold in a combination of daily and monthly contracts.
The average realized oil and NGLs price for 2008, before realized gains on financial commodity contracts,
increased to $95.12/Bbl compared to $68.74/Bbl in 2007. Paramount's Canadian oil and NGLs sales
portfolio primarily consists of sales priced relative to Edmonton Par, adjusted for transportation and quality
differentials. The Company’s United States oil and NGLs sales portfolio is sold at the lease with
differentials negotiated relative to West Texas Intermediate crude oil prices.
Commodity Price Management
Paramount, from time to time, uses financial and physical commodity price instruments to manage
exposure to commodity price volatility. The financial instruments have not been designated as hedges for
accounting purposes, and as a result changes in the fair value of these contracts are recognized in
earnings.
Settlements of financial commodity contracts were as follows:
Year ended December 31
($ millions, except as noted)
Received (paid) on settlement
Gas contracts
Crude contracts
Total
$/Boe
2008
2.9
14.5
17.4
3.45
2007
15.2
(3.2)
12.0
1.98
At December 31, 2008, Paramount had the following financial commodity contracts outstanding:
($ millions, except as noted)
Gas - NYMEX
Gas - NYMEX
Gas - AECO
Total
Total Notional
sale/(purchase)
10,000 MMBtu/d
(10,000 MMBtu/d)
20,000 GJ/d
Price
Fair Value
Remaining Term
USD $9.94/MMBtu
USD $6.63/MMBtu
CAD $9.50/GJ
4.5
(0.9)
6.2
9.8
January - March 2009
January - March 2009
January - March 2009
Paramount also has a long-term physical contract to sell 3,400 GJ/d of natural gas at a fixed price of
$2.52/GJ plus an escalation factor, expiring in 2011.
22
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
Royalties
Year ended December 31
($ millions, except as noted)
Natural gas
Oil and NGLs
Total
$/Boe
Royalty rate (%)
2008
27.7
20.1
47.8
9.49
15.0
2007
% Change
27.3
13.2
40.5
6.66
14.3
1
52
18
41
Royalties increased to $47.8 million in 2008 compared to $40.5 million in 2007. Natural gas royalties
remained flat. Oil and NGLs royalties increased by 52 percent consistent with higher revenue and
production in the United States and due to higher rates in Northern.
The impact of changes in revenue and royalty rates on royalty expense for the year ended December 31,
2008 is as follows:
($ millions)
Year ended December 31, 2007
Effect of changes in revenue
Effect of changes in royalty rates
Year ended December 31, 2008
Operating Expense and Production Tax
Year ended December 31
($ millions, except as noted)
Operating expense
Production tax
Total
$/Boe
2008
68.9
3.2
72.1
14.31
2007
83.3
2.2
85.5
14.06
40.5
4.9
2.4
47.8
% Change
(17)
45
(16)
2
Operating expenses for the year ended December 31, 2008 decreased 17 percent to $68.9 million
compared to $83.3 million in 2007. The decrease is primarily due to lower operating expenses in Northern,
which include reductions resulting from the shut-in of the Maxhamish and Liard West assets, and lower
operating expenses in Kaybob as a result of lower production. Production tax and operating expenses
increased in Southern consistent with production increases in the United States. Operating expenses per
Boe remain consistent with the prior year.
Transportation Expense
Year ended December 31
($ millions, except as noted)
Transportation expense
$/Boe
2008
15.7
3.12
2007
15.9
2.61
% Change
(1)
20
MD&A
23
Transportation expense decreased to $15.7 million in 2008 due primarily to lower volumes. Transportation
costs per Boe increased in the current year due to less production over similar fixed costs compared to the
prior year.
Per Unit Netbacks
Year ended December 31
2008
2007
Natural gas ($/Mcf)
Revenue
Royalties
Operating expense
Transportation
Netback
Settlements of financial commodity contracts
Netback including settlements of financial commodity contracts
Conventional oil ($/Bbl)
Revenue
Royalties
Operating expense
Production tax
Transportation
Netback
Settlements of financial commodity contracts
Netback including settlements of financial commodity contracts
Natural gas liquids ($/Bbl)
Revenue
Royalties
Operating expense
Production tax
Transportation
Netback
All products ($/Boe)
Revenue
Royalties
Operating expense
Production tax
Transportation
Netback
Settlements of financial commodity contracts
Netback including settlements of financial commodity contracts
8.64
(1.24)
(2.45)
(0.62)
4.33
0.13
4.46
95.76
(14.15)
(10.86)
(2.81)
(1.53)
66.41
14.30
80.71
92.96
(19.23)
(11.25)
(0.91)
(1.40)
60.17
63.14
(9.49)
(13.68)
(0.63)
(3.12)
36.22
3.45
39.67
6.77
(0.95)
(2.37)
(0.52)
2.93
0.53
3.46
68.85
(10.30)
(11.94)
(1.94)
(0.50)
44.17
(3.16)
41.01
68.33
(11.62)
(9.08)
(0.77)
(1.10)
45.76
46.59
(6.66)
(13.70)
(0.36)
(2.61)
23.26
1.98
25.24
24
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
Other Principal Property Items
Year ended December 31
($ millions)
Depletion, depreciation and accretion
Exploration
Dry hole
Gain on sale of property plant and equipment
Commodity contracts – net of settlements
Write-down of petroleum and natural gas properties and goodwill
Other items
Total
2008
117.3
7.2
7.2
(9.1)
(16.7)
54.9
5.5
166.3
2007
131.8
6.2
27.7
(13.7)
25.2
274.0
(7.5)
443.7
Depletion, depreciation and accretion expense (“DD&A expense”) for the year ended December 31, 2008
decreased to $117.3 million or $23.28/Boe compared to $131.8 million or $21.66/Boe in 2007. The
decrease in DD&A expense is primarily a result of lower production and is partially offset by a higher per
Boe depletion rate.
Exploration expense consists of geological and geophysical costs, seismic, and lease rentals expenses.
The decrease in 2008 is consistent with Paramount’s lower capital spending and includes lower seismic
expenditures.
Dry hole expense was $7.2 million for 2008 compared to $27.7 million in 2007. The 2008 dry hole expense
related primarily to unsuccessful exploratory wells in Southern and Northern.
The gain on sale of property, plant and equipment comprises gains on non-core Principal Properties of $9.1
million as the Company continues to divest non-strategic properties and assets.
The commodity contract gains and losses are unrealized and relate to future production periods.
During 2008, the Company recognized a write-down of $44.6 million related petroleum and natural gas
properties. The property write-down related primarily to oil properties in the United States and is
attributable to lower than expected reserve additions and higher than expected costs. The goodwill write-
down of $10.3 million was due to an excess of carrying value of reporting units over their fair value. The
prior year write-down related primarily to natural gas properties in Kaybob, Northern, and Grande Prairie.
MD&A
25
Strategic Investments
Year ended December 31
($ millions)
Income (loss) from investments
Exploration and dry hole
Drilling, net
Gain on sale of property, plant and equipment
Other items
Non-controlling interest
Segment Earnings (Loss)
2008
2007
(93.4)
-
-
-
(1.2)
-
(94.6)
550.0
(43.6)
(0.7)
270.8
(6.8)
10.9
780.6
Strategic Investments at December 31, 2008 include the following:
(cid:131)
investments in Trilogy, MGM Energy, NuLoch, and Paxton;
(cid:131) oil sands investments, including shares in MEG Energy Corp. (“MEG Energy”) and bitumen land
holdings; and
(cid:131) drilling rigs operated by Paramount’s wholly owned subsidiary, Paramount Drilling U.S. LLC
(“Paramount Drilling”).
Paramount increased its equity holdings from 18.8 to 23.3 percent of Trilogy in 2008 through unit
purchases, participation in Trilogy’s DRIP and indirectly as a result of Trilogy’s NCIB unit purchases.
Paramount recorded $23.7 million of equity earning from Trilogy (2007 - $8.9 million).
Paramount invested $12.3 million in 22.4 million common shares of MGM Energy, pursuant to MGM
Energy’s July 2008 public offering, maintaining Paramount’s 16.7 percent equity ownership. In addition to
an equity loss of $17.2 million in 2008 (2007 - $ 5.0 million), Paramount wrote its investment in MGM
Energy down by $41.8 million to the trading price of MGM Energy shares on December 31, 2008.
Paramount assessed the difference between the fair value and carrying value of its investment in MGM
Energy as unlikely to recover in a reasonable time period due to the current economic uncertainty and
because of the excess of Paramount’s carrying value over the trading price of MGM Energy shares.
Prior year income from equity investments included the gain on disposal of shares of North American of
$528.6 million.
NuLoch is a TSX Venture Exchange listed oil and gas company with properties in Alberta and Southeast
Saskatchewan. In February of 2008 Paramount acquired 6.1 million Class A common shares of NuLoch for
$6.0 million. NuLoch was written down by $4.6 million to its December 31, 2008 share price. Paxton is a
development stage private company, developing technology to capture greenhouse gas for enhanced
hydrocarbon recovery and power generation where bitumen based fuels are economically available.
MEG Energy is a private company focused on oil sands development in the Athabasca region of Alberta.
MEG Energy owns a 100 percent working interest in over 800 square miles of oil sands leases including 80
contiguous square miles of oil sands leases in the Christina Lake area. MEG Energy commenced
production during the year and continues to increase resource quantities. Paramount recognized a
impairment charge of $50.0 million on its investment in MEG Energy based on recent economic events,
including weak commodity prices and volatile financial and capital markets. The impairment charge
included an assessment of the likelihood that Paramount could recover its investment in MEG Energy in a
26
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
reasonable time period and MEG Energy’s independent resources evaluation adjusted for current market
rates of return.
Paramount continues to invest in oil sands projects, including Hoole where the Company drilled a further
seven delineation wells in early 2009.
Paramount Drilling owns and operates two rigs in North Dakota, used for Paramount’s US operations.
Paramount has commissioned the construction of a third rig, expected to be operational in mid 2009.
Because of current project economics, Paramount is not presently drilling in North Dakota and is in the
process of contracting the rigs to third parties on a short-term basis. Paramount anticipates using the
drilling rigs to continue Southern’s US operations when market conditions improve.
Gain on sale of property for 2007 included the gain on disposal of properties in the Surmont area of $271.0
million.
Until May 29, 2007, Paramount owned greater than 50 percent of MGM Energy’s common shares and the
results of operations and cash-flows of MGM Energy were consolidated in the financial results of
Paramount. Subsequent to May 29, 2007, Paramount accounts for its investment in MGM Energy using
the equity method. Prior to the January 12, 2007 spin-out of MGM Energy, the Mackenzie Delta and other
Northern assets spun-out to MGM Energy were included in the Strategic Investment segment. Dry hole
and exploration expenses for 2007 related to MGM Energy’s 2006/2007 winter drilling program.
Corporate
Year ended December 31
($ millions)
General and administrative
Stock-based compensation
Interest and financing charges
Foreign exchange
Debt extinguishment and other expenses
Other income
Corporate costs
2008
2007
24.7
4.0
9.9
3.3
2.0
(3.0)
40.9
28.9
(12.3)
32.1
(20.0)
12.4
(10.1)
31.0
Corporate costs of $40.9 million in 2008 compared to $31.0 million in 2007. The change was primarily
related to foreign exchange gains and stock based compensation recoveries in 2007 partially offset by
lower debt extinguishment charges in 2008.
General and administrative expense decreased in 2008 primarily due to lower employee related costs.
Interest and financing charges for 2008 were $9.9 million compared to $32.1 million in 2007, as Paramount
had lower average debt levels in 2008 compared to 2007. Foreign exchange gains and losses primarily
result from US denominated debt partially offset by the foreign exchange collar. During 2007, Paramount
had higher levels of US denominated debt exposed to foreign exchange rate changes.
Other income includes interest income earned on short-term investments and cash balances.
MD&A
27
Capital Expenditures
($ millions)
Geological and geophysical
Drilling and completions
Production equipment and facilities
Exploration and development expenditures
Land and property acquisitions
Cash proceeds on dispositions
Principal Properties
Strategic Investments
Cash proceeds on disposal of Strategic Investments
Corporate
Net capital expenditures
2008
7.1
137.1
26.6
170.8
17.6
(21.2)
167.2
14.8
-
1.0
183.0
2007
4.3
158.1
104.4
266.8
13.9
(28.1)
252.6
54.2
(78.7)
1.8
229.9
Exploration and development expenditures for the year ended December 31, 2008 were $170.8 million
compared to $266.8 million in 2007. Paramount’s 2008 exploration and development budget was increased
to $170 million from $150 million in the third quarter primarily to fund cost increases and Paramount
increasing its working interest share of existing projects in Southern. The 2008 activities were focused on
Southern’s North Dakota oil program, Kaybob’s deep gas program including commencement of the pad
drilling program and Grande Prairie’s Crooked Creek oil and Karr gas programs.
Strategic Investments capital expenditures for 2008 consist primarily of construction of the third drilling rig
and oil sands land acquisitions. Prior year Strategic Investment capital expenditures included spending
related to oil sands projects, MGM Energy and drilling rigs. The 2007 proceeds on disposal are primarily
related to the sale of oil sands assets in the Surmont area.
Wells drilled are as follows:
(wells drilled)
Gas
Oil
Oil sands evaluation
Dry & Abandoned (3)
Total
2008
2007
Gross(1)
43
25
-
3
71
Net(2)
20
16
-
2
38
Gross(1)
87
22
46
4
159
Net(2)
52
9
44
3
108
(1) Gross wells are the number of wells in which Paramount has a working interest or a royalty interest.
(2) Net wells are 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.
28
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
Liquidity and Capital Resources
The current economic environment is challenging and uncertain: a global recession, weak commodity
prices, volatile financial markets and limited access to capital markets.
Paramount manages its capital structure to support current and future business plans and periodically
adjusts the structure in response to changes in economic conditions and the risk characteristics of the
Company’s underlying assets and operations. Paramount may adjust its capital structure by issuing or
repurchasing shares, altering debt levels, modifying capital programs, and disposing of assets.
The maximum that Paramount may borrow under the credit facility is subject to semi-annual review, and is
dependent upon Paramount’s reserves and lenders’ projections of future commodity prices, among other
factors. Paramount has requested an extension to the revolving term of its credit facility to April 29, 2010
and expects to finalize details of the extension before April 30, 2009.
The Company has currently budgeted $90 million for exploration and development spending in 2009.
Paramount will continue to monitor its capital structure, and expense and capital programs in response to
prevailing economic conditions. The Company has flexibility within its current capital plan to increase or
decrease spending, depending upon future circumstances.
Capital Structure
($ millions)
Working capital (1)
Credit facility
US Senior Notes (3)
Net debt
2008
(12.9)
–
110.4
97.5
302.7
2.4
473.4
–
876.0
2007
(152.0) (2)
–
136.5
(15.5)
313.8
1.4
593.5
–
893.2
Change
139.1
-
(26.1)
113.0
(11.1)
1.0
(120.1)
-
(17.2)
Share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Total
(1) Excludes risk management assets and liabilities and stock based compensation.
(2)
(3) Excludes unamortized financing fees.
Includes reclassification of other available for sale investments from short-term to long-term assets of $0.9 million.
Working Capital
Paramount’s working capital at December 31, 2008 was $12.9 million compared to $152.0 million at
December 31, 2007. Included in working capital at December, 2008 was $54.1 million in cash and cash
equivalents. The decrease in working capital is primarily due to capital spending, repurchases of US Senior
Notes, investments in MGM Energy, Trilogy, NuLoch, and Paxton, and Paramount’s NCIB equity
purchases, partially offset by funds flow from operations of $179.6 million and the settlement of the $75.0
million note receivable from MEG Energy.
Paramount expects to finance its 2009 operations, contractual obligations, and capital expenditures from its
existing cash and cash equivalents, funds flow from operations, and from available borrowing capacity, if
required.
MD&A
29
Bank Credit Facility
During the second quarter, Paramount renewed its credit agreement and extended the revolving term to
April 29, 2009. As of December 31, 2008, the gross borrowing base was $148.6 million and the banking
syndicate has provided a commitment to lend up to $125.0 million. As of December 31, 2008, nil was
drawn on the credit facility. Paramount also had undrawn letters of credit outstanding totalling $16.5 million
that reduce the amount available to the Company under the credit facility.
US Senior Notes
During 2008, Paramount made open market repurchases of US$48.0 million (2007 – US$75.4 million)
principal amount of 8.5% US Senior Notes reducing the outstanding balance to US$90.2 million ($110.4
million) at December 31, 2008 from the original balance of US$213.6 million. Paramount may re-market the
purchased debt at its discretion. The US Senior Notes were partially hedged economically with a foreign
exchange collar, during the year portions of the collar were settled for net payments of $15.8 million.
Paramount received $12.2 million in January 2009 on settlement of the remainder of the collar.
Share Capital
On May 6, 2008, the Company’s NCIB approved in May 2007 (the “2007 NCIB”) expired, purchases of
3,304,926 Common Shares for $55.0 million were made under the NCIB during 2007 and 2008,
representing 4.7 percent of the Common Shares outstanding when the 2007 NCIB was approved. In
November 2008, the Company received approval for a second NCIB (the “2008 NCIB”) for the purchase of
up to 3,387,456 Common Shares. To December 31, 2008 the Company purchased 1,008,300 Common
Shares for $7.2 million under the 2008 NCIB. In total 4,313,226 common shares were purchased for $62.2
million.
At February 28, 2009, Paramount had 66,152,924 Common Shares and 4,143,750 Stock Options
outstanding (799,417 exercisable).
Quarterly Information
($ millions, except as noted)
Petroleum and natural gas sales
Net earnings (loss)
per share - basic ($/share)
per share - diluted ($/share)
Funds flow from operations
per share - diluted ($/share)
Sales volumes
Natural gas (MMcf/d)
Oil and NGLs (Bbl/d)
Total (Boe/d)
Average realized price
Natural gas ($/Mcf)
Oil and NGLs ($/Bbl)
2008
2007
Q4
54.7
(150.5)
(2.23)
(2.23)
68.2
1.01
Q3
83.5
103.9
1.53
1.53
40.9
0.60
Q2
102.9
(31.9)
(0.47)
(0.47)
46.3
0.68
Q1
77.0
(38.0)
(0.56)
(0.56)
24.2
0.36
Q4
61.8
(156.5)
(2.29)
(2.29)
22.9(1)
0.33
Q3
61.9
(82.2)
(1.17)
(1.17)
21.7
0.31
Q2
80.9
671.0
9.46
9.34
18.0
0.25
Q1
78.8
(16.1)
(0.23)
(0.23)
37.9(1)
0.54
53.4
3,298
12,202
57.3
3,657
13,206
67.7
3,611
14,895
65.8
3,811
14,775
67.6
2,984
14,248
73.5
3,977
16,231
89.5
3,561
18,480
84.8
3,636
17,773
7.43
60.04
8.65
112.64
10.54
115.55
7.68
89.44
6.43
79.77
5.31
70.99
7.35
64.66
7.72
60.84
(1) Includes reclassification of foreign exchange collar to conform to current year’s presentation
30
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
Significant Items Impacting Quarterly Results
Quarterly earnings variances include the impacts of changing production volumes and market prices.
Fourth quarter 2008 earnings include a $54.9 million write-down of petroleum and natural gas properties
and goodwill and a $96.9 million investment impairment provision.
Third quarter 2008 earnings include $79.6 million of mark-to-market gains on financial commodity contracts
and $29.8 million of equity investment income.
Second quarter 2008 earnings include $5.9 million of equity investment losses and mark-to-market losses
of $56.4 million on financial commodity contracts.
First quarter 2008 earnings include $12.7 million of equity investment losses primarily related to MGM
Energy and mark-to-market losses of $15.0 million on financial commodity contracts.
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 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 assets in the Surmont area.
First quarter 2007 earnings include $47.6 million of dry hole expenses, including $39.8 million related to
MGM Energy’s 2006/2007 drilling program and an $18.9 million future income tax recovery.
Fourth Quarter Review
Netback
($ millions)
Revenue
Royalties
Operating expense and production tax
Transportation expense
Netback
Settlements of financial commodity contracts
Netback including settlements of financial commodity contracts
Netback per Boe
Funds Flow from Operations
($ millions)
Cash flow from operating activities
Change in non-cash working capital
Funds flow from operations
Funds flow from operations per Boe
(1)
Includes the impacts of intra-quarter reclassification of foreign exchange collar settlement.
2008
2007
54.7
(7.0)
(18.5)
(4.0)
25.2
42.4
67.6
60.22
2008
71.6
(3.4)
68.2
60.73
61.8
(5.2)
(21.6)
(3.4)
31.6
(4.2)
27.4
20.92
2007
42.2
(19.3)
22.9 (1)
20.40
MD&A
31
Paramount’s fourth quarter sales volumes of 12,202 Boe/d consisted of 53.4 MMcf/d of natural gas and
3,298 Bbl/d of oil and NGLs, generating revenue of $54.7 million, a decrease of $7.1 million from the prior
year comparable quarter due to lower natural gas sales volumes and oil and NGLs prices.
Fourth quarter royalties increased to $7.0 million in 2008 compared to $5.2 million in 2007, primarily as a
result of higher royalty rates in Northern in 2008. Operating expenses continued to decrease in the fourth
quarter of 2008, primarily related to Northern, which included the impact of property sales and
decommissioning of facilities in the fourth quarter of 2007 and first quarter of 2008, provisions for
additional plant equalizations and the beginning of the Northern winter maintenance program.
Funds flow from operations increased by $45.3 million to $68.2 million and includes the impact of $42.4
million of financial commodity contract settlements related to 2008 and 2009.
Fourth quarter exploration and development expenditures of $63.1 million were primarily related to
Southern’s North Dakota oil program and drilling and infrastructure in Kaybob.
Subsequent Events
(cid:131) Cancelled 3.0 million Paramount Options on surrender by their holders.
(cid:131) All stock appreciation rights that were issued in November 2008 were surrendered and cancelled in
exchange for the same number of Paramount Options with the same exercise price and vesting
terms.
Related Party Transactions
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.
Service Agreements
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. During the year Paramount charged an aggregate of $0.5
million for administrative services and recognized $0.6 million for stock-based compensation.
In August of 2008 Paramount entered into an agreement with a supplier for the construction of a
significant portion of a third drilling rig for US$8.2 million. For the year ended December 31, 2008, US$6.5
million has been paid to the supplier. An individual who indirectly owns part of the supplier is also a director
of a company affiliated with Paramount.
32
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
Significant Equity Investees
The following table summarizes the assets, liabilities and results of operations of Paramount’s significant
equity investees. The amounts summarized have been derived directly from the investees’ financial
statements as at and for the years ended December 31, 2008 and 2007, and do not include Paramount’s
adjustments when applying the equity method of investment accounting. As a result, the amounts
included in the table below cannot be used to derive Paramount’s equity income and net investment in
Trilogy and MGM Energy.
($ millions)
As at December 31
Current assets
Long term assets
Current liabilities
Long term liabilities
Equity
Year ended December 31
Revenue
Expenses
Tax expense (recovery)
Net earnings (loss)
Units/shares outstanding at December 31 (thousands)
Paramount’s equity interest at December 31(1)
$
$
$
Trilogy
2008
78.2
879.4
70.7
470.8
416.1
MGM Energy
2007
$ 52.3
875.9
76.2
470.0
382.0
$
2008
83.9
229.7
12.7
2.0
298.9
2007
$ 112.0
250.6
15.9
1.2
345.5
2008
2007
2008
425.8
294.1
8.3
123.4
95,997
23.3%
$
$
304.3
285.0
69.1
(49.8)
94,609
18.8%
$
$
2.8
124.8
(21.9)
(100.1)
263,195
16.7%
2007
$
$
3.1
88.7
(23.1)
(62.3)
128,945
16.7%
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.
Trilogy had 4.8 million trust unit options outstanding (0.4 million exercisable) at December 31, 2008 at
exercise prices ranging from $4.85 to $23.95 per unit. MGM Energy had 11.2 million stock options
outstanding (1.0 million exercisable) at December 31, 2008 at exercise prices ranging from $0.16 to $5.00
per share.
Outlook
Paramount's 2009 exploration and development budget is $90 million, excluding land purchases. The 2009
budget will focus on the development of deep gas opportunities in the Kaybob area, and exploration and
facility development in Grande Prairie. The exploration and development budget also includes an allocation
to maintain coal bed methane production at Chain. In addition to the exploration and development budget,
the Company has budgeted $2.0 million for further oil sands delineation wells in the Hoole area and $8.0
million for the completion of the third drilling rig. The Company has flexibility within its current capital plan
to increase or decrease spending, depending upon future economic conditions.
Based on current production levels, market conditions, and the current exploration and development
budget, annual average production is expected to be approximately 12,500 Boe/d.
MD&A
33
Contractual Obligations
Paramount had the following contractual obligations as at December 31, 2008:
2009
($ millions)
US Senior Notes, including interest
Asset retirement obligations
Pipeline transportation commitments (1)
Operating leases
Total
(1) Certain of the pipeline transportation commitments are secured by $3.7 million of outstanding letters of credit million at December 31, 2008.
2012-2014
124.5
23.5
19.6
1.0
168.6
2010-2011
18.8
21.4
26.2
9.9
76.3
After 2014
-
167.6
40.5
-
208.1
9.4
3.2
14.4
7.4
34.4
Total
152.7
215.7
100.7
18.3
487.4
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
final liability may differ materially from amounts estimated and recorded.
Crown royalties for Paramount’s production from frontier lands in the Northwest Territories have been
recognized 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 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 ongoing 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 obligation
should MGM Energy not fulfill its lease obligation.
Risks and Risk Management
The exploration for and production of oil and natural gas involves a number of risks and uncertainties,
including exploration uncertainty, commodity pricing,
industry competition, production practices,
transportation restrictions, foreign exchange rates, interest rates and government and regulatory practices.
Exploration and operating uncertainty includes risks and hazards such as poor drilling results, unusual or
unexpected geological formations, high reservoir pressures, environmental damage, and other risks
involved in drilling and operating wells. Drilling success can be improved by using current technologies and
shooting or purchasing seismic information. Paramount also attempts to minimize exploration and
operating risks using prudent safety programs and adequate insurance coverage against potential losses.
Where an environmental breach occurs, fines and penalties occur.
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.
34
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
Paramount uses financial commodity contracts in addition to fixed price physical delivery contracts to
manage exposure to the impacts of volatile commodity prices. The use of financial commodity contracts is
limited by policies approved by the Board of Directors. Paramount is exposed to credit risk from financial
commodity contracts to the extent of non-performance by counterparties. Paramount manages credit risk
associated with possible non-performance by counterparties by entering into contracts with highly rated
counterparties or obtaining letters of credit, limits on individual counterparty exposure, and monitoring
procedures. Paramount also uses foreign exchange instruments to offset the earnings impacts of the
carrying value of US denominated debt. Accounts receivable include balances due from customers and
joint venture partners in the oil and gas industry and are subject to normal industry credit risk. At December
31, 2008, Paramount had balances due from one sales customer that represented approximately 14
percent of the Company’s total accounts receivable.
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.
Paramount also secures long-term transportation commitments to minimize transportation restrictions and
cost volatility.
Critical Accounting Estimates
The preparation of 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.
During the current year, in accordance with its policy, the Company reviewed depreciation estimates, and
changed the usage pattern estimates of certain facilities and gathering systems to a unit of production
method from a straight line method to better reflect the observed usage and expected lives of these
assets.
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.
MD&A
35
In 2008, 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 and estimates of future net revenue may be different from the quantities of
petroleum and natural gas that are ultimately recovered and amounts actually realized. 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 and goodwill, all of which could have a material impact on earnings.
Impairment of Petroleum and Natural Gas Properties
Proved properties are reviewed 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.
If exploratory wells encounter potentially economic quantities of oil and gas, the well costs remain
capitalized as long as sufficient progress is being made in assessing the reserves and the economic and
operating viability of the well. The concept of “sufficient progress” is a judgmental area, where the
accounting rules prohibit the continued capitalization of suspended well costs on the mere chance that
future market conditions will improve or new technologies will be found that would make the project’s
development economically profitable. For certain exploratory projects, it is possible to have exploratory
costs remain capitalized for several years while additional drilling is performed, or the Company seeks
government, regulatory or partner approval of development plans.
Management reviews suspended well balances regularly and expenses the suspended well costs when
the project does not warrant further investment. Criteria utilized in making this determination include
evaluation of the reservoir characteristics and hydrocarbon properties, expected development costs,
regulations and access or contract negotiations.
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.
Carrying Value of Investments
The carrying value of investments is assessed for impairment at least annually. For equity investments, the
Company assesses factors including the expected future cash flows from the investment and public
trading prices of investees units or shares. Impairment is assessed based on the difference between the
fair value as determined by a cash flow analysis or unit or share price and carrying value, with any excess
of the carrying value over the fair value charged to earnings. The process of assessing investments for
impairment requires estimates of fair values involving various assumptions and judgments, assessments
36
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
that the fair value of investments will return to their carrying value in reasonable periods and an
assessment of the period the investment will be held.
Carrying Value of Goodwill
Goodwill is tested for impairment, at least annually, using the expected future cash flows of the respective
reporting unit to determine its fair value. Impairment is assessed based on the difference between the fair
value of each reporting unit and its carrying value, including goodwill. Any excess of the carrying value of
the reporting unit over the fair value is charged to earnings. The process of assessing goodwill for
impairment requires estimates of fair values involving various assumptions and judgments.
Income Taxes
The Company follows the liability method of accounting for income taxes, whereby future income taxes
are recognized based on the difference between the carrying amount of an asset or liability reported in the
financial statements and its respective tax basis, using substantively enacted income tax rates. Accounting
for income taxes is a complex process requiring management to interpret frequently changing laws and
regulations and make judgments related to the application of tax law, estimate the timing of temporary
difference reversals, and estimate the realization of tax assets. These interpretations and judgments and
changes related to them impact the current and future tax provisions, future income tax assets and
liabilities and net earnings.
Changes in Accounting Policies
Canadian GAAP
Effective January 1, 2008 the Company adopted Canadian Institute of Chartered Accountants (“CICA”)
Handbook Sections 3862 “Financial Instruments – Disclosures” and 3863 “Financial Instruments –
Presentation,” which combined, replaced Section 3861 “Financial Instruments – Disclosures and
Presentation”. Sections 3862 and 3863 require enhanced disclosure of financial instruments including the
nature and extent of risks arising from financial instruments.
Effective January 1, 2008 the Company adopted CICA Handbook Section 1535 “Capital Disclosures”,
requiring disclosure related to the Company’s objectives, policies, and processes for managing capital,
including the extent of externally imposed capital requirements.
MD&A
37
Future Accounting Changes
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”) for fiscal
years beginning on January 1, 2011. The Company commenced the IFRS transition in 2008, which includes
of four key phases:
(cid:129) Project Management – A steering committee has been established to monitor the transition and
a project team has been assembled to research and analyze IFRS and implement the transition
according to the project plan.
(cid:129) Diagnostic - A diagnostic has been completed to identify key differences between existing
Canadian GAAP and IFRS, as they relate to the Company.
(cid:129) Research and policy design – This phase will identify policy changes from current practice and
an analysis of policy alternatives where applicable. This phase is ongoing and expected to be
completed in mid 2009. In addition, Paramount has secured the services of an external advisor to
provide technical accounting advice where necessary and permitted.
(cid:129) Implementation – This phase will include employee and stakeholders training, approval and
implementation of accounting policy changes, implementation of new processes and process
changes, implementation and testing of new systems and controls as well as the preparation of
an opening IFRS balance sheet. This phase is expected to commence in mid to late 2009.
Paramount’s steering committee consists of senior members of management who are responsible for
approval of policy recommendations where alternatives are permitted. Through the diagnostic, the
Company has identified property plant and equipment as one key difference. Although Paramount follows
successful efforts accounting for oil and gas operations the transition to IFRS will require certain policy,
process and disclosure changes, including impairment testing levels and exploration phase accounting.
Other significant differences include, but are not limited to, accounting for stock-based compensation and
asset retirement obligations. The project team is in the process of researching policy alternatives and
process changes related to these items.
Disclosure Controls and Procedures
As of the year ended December 31, 2008, an evaluation of the effectiveness of Paramount’s disclosure
controls and procedures, as defined by the rules of the Canadian Securities Administrators was performed
by the Company’s management with the participation of the chief executive officer and chief financial
officer. Based upon that evaluation, the Company’s chief executive officer and chief financial officer have
concluded that as of the end of that fiscal year, the Company’s disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company is (i) recorded, processed,
summarized and reported within the time periods specified in Canadian securities law and (ii) accumulated
and communicated to the Company’s management, including its chief executive officer and chief financial
officer, to allow timely decisions regarding required disclosure.
It should be noted that while the Company’s chief executive officer and chief financial officer believe that
the Company’s disclosure controls and procedures provide a reasonable level of assurance that they are
effective, they do not expect that the Company’s disclosure controls and procedures or internal control
38
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived
or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system
are met.
Disclosure Controls and Procedures and Internal Controls over Financial Reporting
Management is 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.
Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only 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 procedure may deteriorate.
Management has assessed the effectiveness of the Company’s internal control over financial reporting as
at December 31, 2008. In making its assessment, management used the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) framework in Internal Control – Integrated
Framework to evaluate the effectiveness of the Company’s internal control over financial reporting. Based
on this assessment, management has concluded that the Company’s internal control over financial
reporting was effective as of December 31, 2008.
Changes in Internal Control Over Financial Reporting
During the fiscal year ended December 31, 2008, there were no changes in the Company’s internal control
over financial reporting that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
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 and include an assessment of the
fair value and impairment charges of investments. Forward-looking statements or information in this
document include, but are not limited to: business strategies and objectives, financing plans, capital
expenditures, reserve and resource quantities and the undiscounted and discounted present value of
future net revenues from such reserves and resources, 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.
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:
(cid:131)
(cid:131)
future oil and gas prices and general economic and business conditions;
the ability of Paramount to obtain required capital to finance its exploration, development and
operations;
MD&A
39
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
the ability of Paramount to obtain equipment, services, supplies and personnel 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 ability of Paramount to secure adequate product transportation and storage;
the ability of Paramount and its industry partners to obtain drilling success consistent with
expectations;
the timely receipt of required regulatory approvals; and
(cid:131) currency, exchange and interest rates.
Although Paramount believes that the expectations reflected in such forward-looking statements or
information are reasonable, undue reliance should not be placed on such forward-looking statements or
information as 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:
(cid:131)
fluctuations in oil and gas prices, foreign currency exchange rates and interest rates;
(cid:131) general economic and business conditions;
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
loss of the services of any of Paramount’s executive officers or key employees;
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;
risks and uncertainties involving the geology of oil and gas deposits;
the uncertainty of reserves estimates and reserves life;
the uncertainty of resource estimates and resource life;
the ability of Paramount to add production and reserves through development and exploration
activities;
the impact of market competition;
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;
(cid:131) potential delays or changes in plans with respect to exploration or development projects or capital
expenditures;
(cid:131)
(cid:131)
the availability of future growth prospects and Paramount’s expected financial requirements;
risks inherent in Paramount's marketing operations, including counterparty credit risk;
(cid:131) Paramount’s ability to obtain equipment, services, supplies and personnel in a timely manner to carry
40
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
out its activities;
(cid:131) Paramount's ability to enter into or continue leases;
(cid:131) Paramount's ability to secure adequate product transportation and storage;
(cid:131)
imprecision in estimates of product sales and the anticipated revenues from such sales;
(cid:131) weather conditions;
(cid:131)
(cid:131)
the ability to obtain necessary regulatory approvals;
the possibility that government laws, regulations or policies may change or governmental approvals
may be delayed or withheld;
(cid:131) uncertainty in amounts and timing of royalty payments and changes to royalty regimes and
government regulations regarding royalty payments;
(cid:131) changes in taxation laws and regulations and the interpretation thereof;
(cid:131) health, safety and environmental risks;
(cid:131) changes in environmental laws and regulations and the interpretation thereof;
(cid:131)
(cid:131)
(cid:131)
the value and liquidity of Paramount’s investments in other entities and the returns on such
investments;
the cost of future abandonment activities and site restoration;
risks associated with existing and potential future law suits and regulatory actions against Paramount;
(cid:131) uncertainty regarding aboriginal land claims and co-existing with local populations;
(cid:131) occurrence of a significant event against which the Company is not fully insured; and
(cid:131) 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, except as required by law, 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.
Non-GAAP Measures
“Funds flow from operations” and “Netback” are used to assist management in measuring the Company’s
ability to finance capital programs and meet financial obligations. Funds flow from operations 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, production taxes 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.
Oil and Gas Measures and Definitions
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
MD&A
41
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.
Contingent Resources - Those quantities of bitumen estimated, as of a given date, to be potentially
recoverable from known accumulations using established technology or technology under development,
but are classified as a resource rather than a reserve due to one or more contingencies, such as the
absence of regulatory approvals, detailed design estimates or near term development plans.
Best Estimate - There may be significant risk that Contingent Resources will not achieve commercial
production, however a range of potentially recoverable quantities is presented independent of such risk. A
low estimate indicates a conservative estimate. It is likely that the actual remaining quantities recovered
will exceed the low estimate. A best estimate indicates a most likely estimate. It is equally likely that the
actual remaining quantities recovered will be greater or less than the best estimate. A high estimate
indicates an optimistic estimate. It is unlikely that the actual remaining quantities recovered will exceed
the high estimate.
42
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS
Management’s Report
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.
/s/ Clayton H. Riddell
Clayton H. Riddell
Chief Executive Officer
/s/ Bernard K. Lee
Bernard K. Lee
Chief Financial Officer
March 6, 2009
43
Independent Auditors’ Report on the Consolidated Financial Statements
We have audited the consolidated balance sheets of Paramount Resources Ltd. (the “Company”) as at
December 31, 2008 and 2007 and the consolidated statements of income (loss), shareholders’ equity,
comprehensive income (loss), accumulated other comprehensive income 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 Paramount Resources Ltd. as at December 31, 2008 and 2007 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 2008 the Company changed its method
of accounting for depreciating certain property, plant and equipment assets.
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, 2008,
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 4, 2009 expressed an
unqualified opinion thereon.
Calgary, Canada
March 4, 2009
Chartered Accountants
44
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
PARAMOUNT RESOURCES LTD.
Consolidated Balance Sheet
($ thousands)
As at December 31
ASSETS (Note 6)
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable
Risk management assets (Note 11)
Prepaid expenses and other
Property, plant and equipment (Note 3)
Investments (Note 4)
Goodwill (Note 3)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities
Risk management liabilities (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)
Future income taxes (Note 10)
Commitments and contingencies (Note 15)
Shareholders' equity (Note 8)
Share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive loss
See the accompanying notes to these Consolidated Financial Statements.
On behalf of the Board
CONSOLIDATED FINANCIAL STATEMENTS
2008
2007
$
54,131
–
41,319
19,690
1,661
116,801
766,103
234,423
–
$ 1,117,327
$
84,192
–
19
84,211
109,452
87,237
–
57,940
338,840
302,727
2,398
473,362
–
778,487
$ 1,117,327
$
83,304
94,749
63,982
–
1,874
243,909
754,947
290,701
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
/s/ J.H.T. Riddell
J.H.T. Riddell
Director
/s/ J.C. Gorman
J.C. Gorman
Director
45
PARAMOUNT RESOURCES LTD.
Consolidated Statement of Earnings (Loss)
($ thousands, except as noted)
Year ended December 31
Revenue
Petroleum and natural gas sales
Gain (loss) on financial commodity contracts (Note 11)
Royalties
$
Expenses
Operating expense and production tax
Transportation
General and administrative
Stock-based compensation
Depletion, depreciation and accretion
Exploration
Dry hole
Gain on sale of property, plant and equipment (Note 3)
Write-down of petroleum and natural gas assets (Note 3)
Write-down of goodwill (Note 3)
Interest and financing charges
Foreign exchange (Note 11)
Debt extinguishment and other
Income (loss) from investments (Note 4)
Other income
Non-controlling interest
Earnings (loss) before tax
Income and other tax expense (recovery) (Note 10)
Current and other
Future
Net earnings (loss)
Net earnings (loss) per common share ($/share) (Note 8)
Basic
Diluted
See the accompanying notes to these Consolidated Financial Statements.
46
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
2008
2007
318,088
34,140
(47,827)
304,401
72,080
15,719
25,946
3,956
121,085
7,201
7,160
(9,068)
44,636
10,258
9,903
3,297
5,894
318,067
(93,375)
5,113
–
(101,928)
(4,063)
18,758
14,695
$
283,446
(13,194)
(40,523)
229,729
85,547
15,904
33,394
(11,383)
133,997
9,966
67,548
(284,474)
271,959
1,963
32,118
(20,011)
9,211
345,739
549,957
14,247
11,243
459,437
1,084
42,112
43,196
$
(116,623)
$
416,241
$
$
(1.72)
(1.72)
$
$
5.94
5.89
CONSOLIDATED FINANCIAL STATEMENTS
PARAMOUNT RESOURCES LTD.
Consolidated Statement of Shareholders’ Equity
($ thousands, except as noted)
Year ended December 31
Share Capital
Balance, beginning of year
Issued on exercise of stock options
Share issuance costs, net of tax benefit
Tax effect of flow-through share renunciations and other
Common shares repurchased
Change in unvested common shares held for stock incentive plan
Adjustment on MGM Energy spinout (Note 1)
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 Energy spinout (Note 1)
Common shares repurchased
Change in value of vested stock incentive plan common shares
Net earnings (loss)
Balance, end of year
Accumulated Other Comprehensive Income (Loss)
Balance, beginning of year
Other comprehensive income (loss), net of tax
Balance, end of year
Total Shareholders’ Equity
See the accompanying notes to these Consolidated Financial Statements.
Shares
(000’s)
67,681
75
–
–
(1,015)
–
–
66,741
2008
$
$
$
$
$
$
$
$
$
313,828
1,198
–
(7,753)
(4,601)
55
–
302,727
1,375
1,023
2,398
593,450
–
(2,675)
(790)
(116,623)
473,362
(4)
4
–
778,487
2007
Shares
(000’s)
$
70,279
701
–
–
(3,299)
–
–
67,681
$
$
$
$
$
$
$
$
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
Consolidated Statement of Comprehensive Income (Loss)
($ thousands)
Year ended December 31
Net earnings (loss)
Other comprehensive income (loss), net of tax
2008
2007
$
(116,623)
$ 416,241
Unrealized gain (loss) on available-for-sale investments
Comprehensive income (loss)
4
(116,619)
$
(4)
$ 416,237
See the accompanying notes to these Consolidated Financial Statements.
47
PARAMOUNT RESOURCES LTD.
Consolidated Statement of Cash Flows
($ thousands)
Year ended December 31
Operating activities
Net earnings (loss)
Add (deduct)
Items not involving cash (Note 13)
Asset retirement obligation expenditures
Exploration and dry hole
Settlement of foreign exchange contracts
Debt extinguishment costs
Change in non-cash working capital (Note 13)
Cash from operating activities
Financing activities
Net repayments of short-term debt and revolving long-term debt
Repayment of long-term debt
Settlement of foreign exchange contracts
Common shares issued, net of issuance costs
Common shares repurchased (Note 8)
MGM Energy shares issued, net of issuance costs (Note 1)
Cash used in financing activities
Investing activities
Expenditures on property, plant and equipment and exploration
Proceeds on sale of property, plant and equipment
Purchase of investments
Settlement of note receivable
Reorganization costs and other
Proceeds on disposal of investment (net)
Change in basis of presentation – MGM Energy (Note 1)
Change in non-cash working capital (Note 13)
Cash from (used in) investing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental cash flow information (Note 13)
See the accompanying notes to these Consolidated Financial Statements.
48
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
2008
2007
$
(116,623)
$ 416,241
274,067
(8,400)
14,361
15,774
380
179,559
15,310
194,869
–
(48,745)
(15,774)
457
(7,276)
–
(71,338)
(204,268)
21,207
(58,158)
75,000
–
–
–
13,515
(152,704)
(29,173)
83,304
(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
(50,404)
(105,343)
263,298
68,947
14,357
$
54,131
$
83,304
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 and British Columbia in Canada, and in
North Dakota and Montana 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").
a)
Principles of Consolidation
These Consolidated Financial Statements include the accounts of Paramount 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. All other investments are accounted for as financial instruments.
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 affects: (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 reporting period. Such
estimates primarily relate to fair value measurements and unsettled transactions and events as of the date
of the Consolidated Financial Statements. Actual results could differ from these estimates.
Depletion, depreciation and accretion, asset retirement obligation, and impairment calculations are based
on estimates of reserves, future costs, petroleum and natural gas prices and other relevant assumptions.
Fair values of the Company’s investments are highly dependant on economic conditions, oil and natural gas
prices, and the results of investees’ operations, among other factors. Assessments of the fair value of the
Company’s investments are based on the Company’s interpretation of such information, and where
available, publicly quoted trading prices of investees’ securities. 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 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
Petroleum and natural gas revenues are recognized when title passes 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
49
capitalizes its working interest share of the intercompany drilling expenses, and eliminates the
intercompany drilling revenue and profit.
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. If hydrocarbons are found, but further appraisal activity is
required to conclude whether they are economically recoverable, the costs continue to be carried as an
asset. All such costs are subject to management review at least once per year to confirm the continued
intent to develop the discovery. Exploratory 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 fully recoverable, an impairment loss is recognized to the extent that the carrying value
exceeds the aggregate discounted cash flows expected from the production of proved plus probable
reserves.
Paramount’s Rigs are recognized at cost, including costs of direct material, labour, and overhead. Costs
incurred to extend the useful life of the Rigs or to increase their capabilities are capitalized. 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. Depletion rates are revised annually, or more frequently when events dictate. Exploratory
costs are not depleted while under active evaluation for commercial reserves.
Capitalized costs of gas plants, gathering systems and production equipment are depreciated on a unit-of-
production basis over the proved developed reserve life of the field to which they relate.
Leasehold improvements are amortized over the term of the lease. Other assets are depreciated on a
declining balance method at rates varying from 35 to 50 percent.
The Rigs are depreciated over their expected useful lives.
Change in Estimate
The Company reviews depreciation estimates on an ongoing basis. As a result, effective January 1, 2008,
the Company changed the usage pattern estimates of certain facilities and gathering systems to a unit-of-
production method from a straight-line method to better reflect the observed usage and expected lives of
these assets. The effect of this change in estimate for the year ended December 31, 2008 was to increase
50
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
depreciation expense by $26.4 million, decrease future income tax expense by $7.1 million, decrease net
earnings by $19.3 million, and decrease basic and diluted earnings per share by $0.29.
g)
Asset Retirement Obligations
Asset retirement obligations include those legal obligations where Paramount will be required to retire
tangible long-lived assets such as well sites, natural gas processing plants, and access roads. The
Company recognizes the present value of an asset retirement obligation in the period in which it is incurred
and when its fair value can be reasonably estimated. The fair value of asset retirement costs are
capitalized as part of the related long-lived asset and depreciated on the same basis as the underlying
asset. The 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 estimated 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 is not amortized, but 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.
i)
Foreign Currency Translation
Paramount’s functional currency is the Canadian dollar. The Company’s foreign operations are 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
is 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.
In January 2008, Paramount adopted new Canadian Institute of Chartered Accountants ("CICA") Handbook
Sections 3862 "Financial Instruments – Disclosures" and 3863 "Financial Instruments – Presentation".
Additional disclosures required as a result of adopting these sections are included in Note 11.
Financial Instruments
Financial instruments are measured at fair value on initial recognition of the instrument, except for certain
related party transactions. Measurement in subsequent periods is dependant upon whether the financial
instrument has been classified as "held-for-trading", "available-for-sale", "held-to-maturity", "loans and
51
receivables", or "other financial liabilities" as defined by the standard. Paramount does not presently employ
hedge accounting for any of its financial instruments.
Held-for-trading financial assets and financial liabilities are measured at fair value, with changes in fair
values recognized in earnings. Available-for-sale financial assets are measured at fair value, with changes in
fair values recognized in other comprehensive income ("OCI"). Held-to-maturity financial assets, loans and
receivables and other financial liabilities, including transaction costs, 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.
Where Paramount designates and documents a contract as a "normal sales exception", its fair value is not
recognized in the Consolidated Financial Statements prior to settlement. Where Paramount does not use
the "normal sales exception", a contract is measured at fair value and changes in its fair value are
recognized in earnings.
Paramount recognizes earnings and cash flow effects of derivatives with the related underlying items.
Comprehensive Income
For Paramount, OCI is 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, which is presented within shareholders’ equity.
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
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
Stock Options
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. 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.
52
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Stock Appreciation Rights
Stock Appreciation Rights ("SARs") and Holdco Stock Appreciation Rights ("Holdco SARs") entitle the holder
to receive a cash payment equal to the difference between the fair market value and the stated exercise
price of an underlying security or notional security on the date of surrender, and are accounted for using
the intrinsic value method.
Stock Incentive Plan
Paramount’s stock incentive plan awards rights to Common Shares to employees annually. Common
Shares are purchased in the open market and held in trust until the completion of the vesting period,
generally two years. The unvested Common Shares balance is recorded as a reduction of share capital. The
fair value of the Common Shares is recognized in stock-based compensation over the vesting period, with
a corresponding charge to equity.
n)
MGM Energy - Basis of Presentation
On January 12, 2007, Paramount completed the spinout of MGM Energy Corp. ("MGM Energy"). 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 cash flows
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 certain 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 reclassified to conform to the current year’s financial statement
presentation.
p)
Changes in Accounting Policies
In January 2008, Paramount adopted new CICA Handbook Section 1535 – "Capital Disclosures". Additional
disclosures required as a result of adopting the section are included in Note 12.
International Financial Reporting Standards
The Accounting Standards Board of Canada has announced that accounting standards in Canada, as used
by public companies, will be converted to International Financial Reporting Standards for fiscal years
beginning on January 1, 2011. The Company is currently assessing the impacts of the conversion. A
project team has been assembled to research, analyze and oversee the transition. The project team is in
the process of identifying key differences, determining policy choices, information systems impacts and
disclosure requirements.
53
2. Segmented Information
Paramount segregates its operations into the following segments, which have been established by
management to assist in resource allocation, assessing operating performance, and achieving long-term
strategic objectives:
Principal Properties: Principal properties consist of: (i) the Kaybob Corporate Operating Unit ("COU"),
which includes properties in West Central Alberta; (ii) the Grande Prairie COU, which includes
properties in Central Alberta; (iii) the Northern COU, which includes properties in Northern Alberta, the
Northwest Territories and Northeast British Columbia; and (iv) the Southern COU, which includes
properties in Southern Alberta, Saskatchewan, Montana and North Dakota. Goodwill is included in
Principal Properties.
Strategic Investments: Strategic investments include investments in other entities, including affiliates,
and development stage 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. Paramount Drilling is
included in Strategic Investments.
Corporate: Corporate is comprised of income and expense items, including general and administrative
expense and interest expense that have not been specifically allocated to Principal Properties or
Strategic Investments.
54
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
Year ended December 31, 2008
Revenue
Petroleum and natural gas sales, net of royalties
Gain on financial commodity contracts
Expenses
Operating expense, production tax and transportation
General and administrative
Stock-based compensation
Depletion, depreciation and accretion
Exploration and dry hole
Gain on sale of property, plant and equipment
Write-down of petroleum and natural gas assets
Write-down of goodwill
Interest and financing charges
Foreign exchange
Debt extinguishment and other
Loss from investments
Interest and other income
Drilling rig revenue
Drilling rig expense
Inter-segment eliminations
Segment earnings (loss)
Income and other tax expense
Net loss
Year ended December 31, 2007
Revenue
Petroleum and natural gas sales, net of royalties
Loss on financial commodity contracts
Expenses
Operating expense, production tax and transportation
General and administrative
Stock-based compensation
Depletion, depreciation and accretion
Exploration and dry hole
Gain on sale of property, plant and equipment
Write-down of petroleum and natural gas assets
Write-down of goodwill
Interest and financing charges
Foreign exchange
Debt extinguishment and other
Income from investments
Interest and other income
Drilling rig revenue
Drilling rig expense
Non-controlling interest
Inter-segment eliminations
Segment earnings (loss)
Income and other tax expense
Net earnings
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Principal
Properties
Strategic
Investments
Corporate
Inter-segment
Eliminations
Total
$
$
270,261
34,140
304,401
$
–
–
–
$
–
–
–
–
–
–
$
87,799
–
–
117,289
14,361
(9,068)
44,636
10,258
–
–
5,513
270,788
–
–
–
–
33,613
–
33,613
$
–
1,271
–
2,660
–
–
–
–
–
–
–
3,931
(93,375)
–
19,706
(8,332)
(85,932)
(8,740)
(94,672)
$
–
24,675
3,956
1,675
–
–
–
–
9,903
3,297
381
43,887
–
3,018
–
–
(40,869)
$
(40,869)
–
–
–
(539)
–
–
–
–
–
–
–
(539)
–
–
(16,076)
6,797
(8,740)
8,740
–
$
$
Principal
Properties
Strategic
Investments
Corporate
Inter-segment
Eliminations
$
$
242,923
(13,194)
229,729
101,451
–
–
131,790
33,915
(13,669)
271,959
1,963
–
–
(1,852)
525,557
–
5,300
–
–
302
(290,226)
–
(290,226)
$
$
–
–
–
$
–
–
–
–
4,491
926
896
43,599
(270,805)
–
–
–
–
–
(220,893)
549,957
(1,188)
5,417
(5,377)
10,941
780,643
(40)
780,603
$
–
28,903
(12,309)
1,311
–
–
–
–
32,118
(20,011)
11,063
41,075
–
10,135
–
–
–
(30,940)
–
(30,940)
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(5,417)
5,377
–
(40)
40
–
270,261
34,140
304,401
87,799
25,946
3,956
121,085
14,361
(9,068)
44,636
10,258
9,903
3,297
5,894
318,067
(93,375)
3,018
3,630
(1,535)
(101,928)
–
(101,928)
14,695
(116,623)
Total
242,923
(13,194)
229,729
101,451
33,394
(11,383)
133,997
77,514
(284,474)
271,959
1,963
32,118
(20,011)
9,211
345,739
549,957
14,247
–
–
11,243
459,437
–
459,437
43,196
$
416,241
55
Capital Expenditures
For the year ended December 31
Principal Properties
Strategic Investments
Corporate
Total Assets
Principal Properties
Strategic Investments
Corporate
2008
181,261
14,833
1,026
197,120
$
$
2007
$ 276,630
50,421
1,812
$ 328,863
2008
$
780,188
279,391
57,748
$ 1,117,327
2007
$ 787,059
330,374
182,382
$ 1,299,815
Capital expenditures for Principal Properties during the year ended December 31, 2008 include $7.3 million
(2007 – $5.4 million) of drilling expenses for services provided by Paramount Drilling.
Geographical Information
2008
Canada
United States
Total
2007
Canada
United States
Total
Property, Plant
and Equipment
$
648,527
117,576
766,103
$
Goodwill
–
–
–
$
$
Revenue
$
$
274,026
44,062
318,088
Capital
Expenditures
116,923
$
80,197
197,120
$
$
Property, Plant
and Equipment
662,852
92,095
754,947
$
Goodwill
Revenue
$
$
7,796
2,462
10,258
$
$
262,506
20,940
283,446
$
Capital
Expenditures
296,888
31,975
328,863
$
3. Property, Plant and Equipment
Petroleum and natural gas assets
Drilling rigs
Other
2008
Accumulated
Depletion and
Depreciation
$
(974,938)
(3,112)
(16,051)
2007
Net Book
Value
$ 725,796
36,689
3,618
Net Book
Value
$ 720,708
29,910
4,329
$
Cost
1,700,734
39,801
19,669
$
1,760,204
$
(994,101)
$ 766,103
$ 754,947
Capitalized costs of $219.3 million are currently not subject to depletion (2007 - $212.7 million).
During 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
56
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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. MEG Energy
repaid the $75.0 million note in the first quarter of 2008.
At December 31, 2008, the Company recorded an impairment charge on its petroleum and natural gas
assets of $44.6 million (2007 – $272.0 million, including spare parts) due to an excess of carrying value
over net realizable value determined with reference to the Company’s year-end independent reserves
evaluation. The Company also recognized a $10.3 million (2007 - $2.0 million) impairment of goodwill due
to an excess of carrying value over the fair value of its reporting units.
Continuity of Suspended Exploratory Well Costs
Balance, beginning of year
Additions pending the determination of proved reserves
Reclassifications to proved reserves
Well costs charged to dry hole expense
Write-down of well costs
Wells sold
Change in basis of presentation - MGM Energy (Note 1)
Balance, end of year
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, end of year
Number of projects with exploratory well costs that have been capitalized for
more than one year
$
$
$
$
2008
53,619
57,463
(60,008)
(7,160)
(4,220)
(119)
–
39,575
2008
15,146
24,429
39,575
61
$
2007
157,773
54,546
(50,174)
(18,128)
–
(23,896)
(66,502)
$
53,619
$
$
2007
24,131
29,488
53,619
66
At December 31, 2008, 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. Investments
Equity accounted investments:
Trilogy Energy Trust ("Trilogy")
MGM Energy
Paxton Corporation ("Paxton")
Other
Available for sale investments (Note 11):
MEG Energy
NuLoch Resources Inc. ("NuLoch")
Other
2008
(Shares/Units)
(000’s)
2007
(Shares/Units)
(000’s)
$
22,338
43,834
1,750
3,700
6,141
$
113,641
8,328
4,884
4,000
130,853
101,750
1,412
408
234,423
$
17,763
21,470
–
77,370
58,182
–
2,523
138,075
3,700
–
151,700
–
926
$ 290,701
57
Income (loss) from investments is composed of the following:
Equity accounted investments:
Trilogy
MGM Energy
Other
Available-for-sale investments:
MEG Energy
NuLoch
Other
Trilogy
MGM Energy
North American Oil Sands Corporation
Other
For the year ended December 31, 2008
Equity
income (loss)
Dilution gain
(loss)
Impairment
charge
Income (loss)
from
investments
$
$
23,690
(17,158)
701
7,233
$
$
$
–
(3,785)
64
(3,721)
$
–
(41,810)
–
23,690
(62,753)
765
(49,950)
(4,594)
(533)
(96,887)
(49,950)
(4,594)
(533)
(93,375)
For the year ended December 31, 2007
Equity income
(loss)
Dilution gain
(loss)
$
$
8,888
(4,991)
(6,047)
480
(1,670)
$
$
–
28,569
(5,496)
–
23,073
Gain (loss) on
sale of
investments
Income from
investments
$
$
–
–
528,635
(81)
528,554
8,888
23,578
517,092
399
549,957
During 2008, Paramount acquired an additional 4.6 million units of Trilogy through unit purchases and
participation in Trilogy’s distribution reinvestment plan. Paramount allocated $29.5 million of the aggregate
net purchase price differential of $35.6 million to property, plant and equipment. The purchase price
differential applicable to property, plant and equipment is being amortized into equity earnings over the life
of Trilogy’s proved reserves and the remaining purchase price differential of $6.1 million is not subject to
amortization. Paramount’s ownership in Trilogy increased to 23.3 percent (2007 – 18.8 percent) as a result of
these purchases, and indirectly as a result of Trilogy’s Normal Course Issuer Bid ("NCIB") unit purchases.
In August 2008, Paramount purchased 22.4 million common shares of MGM Energy for $12.3 million as
part of the investee’s public issuance of common and flow-through shares, maintaining a 16.7 percent
equity interest in MGM Energy. At December 31, 2008, Paramount’s investment in MGM Energy’s
common shares was assessed to be unlikely to recover to the Company’s carrying value in a reasonable
time period due to current economic conditions and market uncertainty. Paramount recognized an
impairment charge of $41.8 million on its investment in MGM Energy, writing the investment down to the
trading price of MGM Energy’s common shares at December 31, 2008.
In February 2008, the Company purchased 3.5 million common shares of Paxton, a private company, for
$4.8 million. At December 31, 2008, Paramount’s equity interest in Paxton was 10.1 percent. Certain
directors of Paramount are also directors and shareholders of Paxton.
In December 2008, Paramount’s investment in MEG Energy’s common shares was assessed to be
unlikely to recover to the Company’s carrying value in a reasonable time period because of factors
including weak commodity prices and volatile financial and capital markets. Paramount recognized an
impairment charge of $50.0 million on its investment in MEG Energy based on MEG Energy’s independent
resources evaluation and current market rates of return, among other factors.
58
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In March 2008, the Company purchased 6.1 million Class A common shares of NuLoch for $6.0 million. In
December 2008, the market value of NuLoch’s Class A common shares was assessed to be unlikely to
recover to Paramount’s carrying value in a reasonable time period due to current economic uncertainty.
The Company recognized an impairment charge of $4.6 million on its investment in NuLoch determined
with reference to the year-end trading price of NuLoch’s Class A common shares.
During 2007, Paramount sold its shares in North American Oil Sands Corp. 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.
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
Bank credit facility
U.S. Dollar Denominated Debt
8 1/2 percent US Senior Notes due 2013 (US$90.2 million), (2007 – US$138.2 million)
Unamortized debt financing costs
Bank Credit Facility
2008
2007
$
–
$
–
110,448
110,448
(996)
109,452
136,547
136,547
(1,941)
134,606
$
$
At December 31, 2008, Paramount’s credit facility had a $148.6 million gross borrowing base. At
Paramount’s request, the banking syndicate has provided commitments to lend up to $125.0 million. At
December 31, 2008 no balances were drawn on the credit facility, however, Paramount had undrawn
letters of credit outstanding totaling $16.5 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 facility is available on a revolving basis for a period of 364 days
from April 30, 2008 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.
US Senior Notes
During 2008, Paramount made open market purchases of US$48.0 million (2007 – US$75.4 million)
principal amount of US Senior Notes, reducing the net principal outstanding to US$90.2 million at
December 31, 2008 from the original balance of US$213.6 million. The Company has not cancelled the
repurchased notes. 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
59
depending on when redeemed. They are secured by approximately 12.8 million of the Trilogy trust units
held by Paramount.
Term Loan B Facility
During 2007, Paramount repaid the entire principal outstanding of its US$150 million Term Loan B Facility
plus accrued interest for $162.3 million, including a prepayment premium of $3.2 million. The Term Loan B
Facility is no longer available to the Company.
7. Asset Retirement Obligations
Asset retirement obligations, beginning of year
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
2008
2007
97,359
(3,664)
1,920
(9,587)
(8,400)
8,877
–
732
87,237
$
$
83,815
(13,107)
10,997
17,961
(6,958)
6,666
(966)
(1,049)
97,359
$
$
The undiscounted asset retirement obligations at December 31, 2008 total $215.7 million (December 31,
2007 - $221.3 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
being 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.
Normal Course Issuer Bid
On May 2, 2007, the Company received regulatory approval for a NCIB commencing on May 7, 2007 for a
12 month period (the "2007 NCIB"). In February 2008, Paramount purchased 6,400 Common Shares under
the 2007 NCIB for a total of $0.1 million (2007 – 3,298,526 Common Shares for a total of $54.9 million).
On November 18, 2008, the Company received regulatory approval for a second NCIB (the "2008 NCIB") for
the purchase of up to 3,387,456 Common Shares commencing on November 20, 2008 for a 12 month
period. For the year ended December 31, 2008, Paramount purchased 1,008,300 Common Shares under
60
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
the 2008 NCIB for a total cost of $7.3 million, of which $4.6 million was charged to share capital and $2.7
million was charged to retained earnings.
Weighted Average Shares Outstanding
Earnings (loss) per Common Share is calculated by dividing earnings available to common shareholders by
the weighted average number of Common Shares outstanding.
(thousands of Common Shares)
Weighted average Common Shares outstanding – Basic
Dilutive effect of stock options
Weighted average Common Shares outstanding – Diluted
2008
67,671
–
67,671
2007
70,030
639
70,669
9. Stock-based Compensation
Paramount Options
Paramount has a stock option plan (the "Plan") that enables the Board of Directors or its Compensation
Committee to grant to key Paramount employees and directors options to acquire Common Shares of the
Company (“Paramount Options”). The exercise price of a Paramount Option is no lower than the closing
market price of the Common Shares on the day preceding the grant date. Paramount Options granted
generally vest over five years and expire within six years after the date granted.
Paramount Options
2008
2007
Balance, beginning of year
Granted
Exercised
Cancelled or surrendered
Balance, end of year
Options exercisable, end of year
Weighted
Average
Exercise Price
($ / share)
$
$
$
19.49
7.54
7.66
20.88
14.48
12.79
Weighted
Average
Exercise Price
($ / share)
$
$
$
19.41
16.79
5.88
23.69
19.49
17.89
Number
6,430,000
2,551,000
(292,600)
(2,570,700)
6,117,700
1,708,433
Number
4,468,925
3,377,000
(865,425)
(550,500)
6,430,000
910,600
61
Additional information about Paramount Options outstanding at December 31, 2008 is as follows:
Outstanding
Weighted
Average
Contractual
Life
Weighted
Average
Exercise
Price
(years)
($ / share)
4.3
2.3
2.6
1.6
3.1
$
$
7.37
13.79
21.55
34.30
14.48
Exercisable
Weighted
Average
Exercise
Price
($ / share)
$
$
7.37
13.96
22.95
34.27
12.79
Number
827,833
609,700
181,400
89,500
1,708,433
Number
2,516,500
2,028,000
931,200
642,000
6,117,700
Exercise Prices
$4.33-$10.00
$10.01-$20.00
$20.01-$30.00
$30.01-$43.25
Total
Stock Appreciation Rights
In 2008, the Company issued SARs to certain employees, which entitle the holder to receive a cash
payment equal to the difference between the market price of the Company’s Common Shares and the
stated exercise price on date of surrender. The SARs have a weighted average contractual life of 5 years at
December 31, 2008 and a vesting period of four years. The exercise price of the SARs is the closing
market price of the Common Shares on the day of the grant.
SARs
Balance, beginning of year
Issued
Balance, end of year
Exercisable, end of year
2008
Weighted
Average
Exercise Price
($ / share)
$
$
–
7.34
7.34
7.34
Number
–
1,280,000
1,280,000
256,000
Holdco Options and Holdco Stock Appreciation Rights
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 entitled the holder thereof to acquire from Paramount, common shares of Holdco (each
a "Holdco Option"). Holdco’s shares were not listed for trading on any stock exchange. As a result, holders
of Holdco Options had 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 was 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 was 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).
In October of 2008, all remaining Holdco Options were cancelled and replaced with Holdco SARs on an
economically equivalent basis to the option holder. The Holdco SARs have the same exercise price, vesting
dates and expiry dates as the Holdco Options they replaced. The holder of a Holdco SAR is entitled to
receive a cash payment equal to the difference between the fair value of a notional Holdco share at the
62
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
date of surrender and the exercise price. The fair value of a notional Holdco share continues to be based
on the fair market value of Trilogy trust units, any after-tax cash and investments. The fair value of a
notional Holdco share at December 31, 2008 was $10.33.
Holdco Options
2008
2007
Balance, beginning of year
Exercised
Cancelled
Balance, end of year
Options exercisable, end of year
Weighted
Average
Exercise Price
($ / share)
$
8.14
6.53
12.46
–
–
$
$
Holdco SARs
2008
Number
334,375
(243,875)
(90,500)
Weighted
Average
Exercise Price
($ / share)
$
6.72
5.12
–
–
$
$
9.18
8.14
7.18
Number
737,625
(362,000)
(41,250)
334,375
236,375
Weighted
Average
Exercise Price
$
($ / share)
–
12.63
8.60
12.71
12.36
$
$
Number
–
111,521
(1,980)
109,541
93,703
Balance, beginning of year
Issued
Exercised
Balance, end of year
Exercisable, end of year
MGM Energy Options
MGM Energy has a stock option plan for certain 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.
63
10. Income Taxes
The following table reconciles income taxes calculated at the Canadian statutory rate to Paramount’s
recorded income tax expense:
Year ended December 31
Earnings (loss) before tax
Effective Canadian statutory income tax rate
Expected income tax expense (recovery)
Increase (decrease) resulting from:
Statutory and other rate differences
Non-taxable portion of (gain) loss
(Income) loss from investments and other
De-recognition of future tax assets
Stock based compensation
Other
Income and other tax expense
Components of Future Income Tax 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 liability
2008
$
(101,928)
29.69%
2007
$
459,437
31.22%
$
(30,262)
$
143,436
(2,209)
23,999
7,030
16,314
180
(357)
14,695
$
6,222
(106,641)
(8,034)
12,724
(4,907)
396
43,196
$
2008
2007
$
53,687
35,136
(22,195)
(5)
(18,995)
10,312
$
51,005
29,194
(25,312)
(770)
(15,360)
(3,831)
$
57,940
$
34,926
Paramount has $160.5 million (2007 - $170.6 million) of unused tax losses expiring between 2014 and
2028. In addition, Paramount has $223.4 million (2007 – $112.8 million) of deductible temporary differences
in respect of investments for which no future income tax asset has been recognized. Included in
Paramount’s future income tax liability of $57.9 million is a $27.2 million (2007 - $12.7 million) future
income tax asset in respect of the Company’s US operations.
11. Financial Instruments and Risk Management
a)
Financial Instruments
Financial instruments at December 31, 2008 consisted of cash and cash equivalents, accounts receivable,
risk management assets, available-for-sale investments, accounts payable and accrued liabilities, and long-
term debt.
64
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Fair Values of Financial Assets and Liabilities
Risk management assets and liabilities are carried at fair value, which is based on forward market curves
and is compared to quotes provided by financial institutions. The carrying value of Paramount’s long-term
debt is measured at amortized cost. The US Senior Notes had a market value of 77 percent of their
principal amount at December 31, 2008.
Available-for-sale investments that are publicly traded are carried at market value. The investment in MEG
Energy is carried at cost, net of provisions for impairment, because MEG Energy is a private corporation
and its common shares are not traded in an active market. Paramount has no immediate plans to dispose
of its available-for-sale investments.
The carrying value of all other financial instruments approximates their fair value due to their short-term
maturities.
Risk management instruments outstanding at December 31, 2008 are as follows:
Total Notional
Type of
Contract
Price
Fair Value
Remaining Term
10,000 MMbtu/d
Swap -Purchase
Fixed - US$6.63/MMbtu
$
(902)
January 2009 - March 2009
10,000 MMbtu/d
Swap - Sale
Fixed - US$9.94/MMbtu
20,000 GJ/d
Swap -Sale
Fixed - CAD$9.50/GJ
4,547
6,162
January 2009 - March 2009
January 2009 - March 2009
Commodity
Gas - NYMEX
Gas - NYMEX
Gas - AECO
Foreign Exchange
Canadian/US Dollar
US$60 million
Collar
CAD$/US$ - Floor $1.0550
Ceiling $0.9949
9,883
January 2009 expiry
$ 19,690
The changes in fair values of risk management assets and liabilities are as follows:
Fair value, beginning of year
Changes in fair value
Settlements paid (received)
Fair value, end of year
2008
Foreign
Exchange
$ (22,039)
16,148
15,774
$ 9,883
Commodity
$ (6,941)
34,140
(17,392)
$ 9,807
Total
$ (28,980)
50,288
(1,618)
$ 19,690
Commodity
$ 18,284
(13,194)
(12,031)
$ (6,941)
2007
Foreign
Exchange
$ 4,474
(21,613)
(4,900)
$ (22,039)
Total
$ 22,758
(34,807)
(16,931)
$ (28,980)
The foreign exchange loss for the year ended December 31, 2008 includes a net loss on the US Senior
Notes of $22.3 million and a net gain of $16.1 million related to foreign exchange contracts.
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 $10.7 million at December 31, 2008 (December 31, 2007 –
loss of $17.2 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.
65
b)
Risk Management
Paramount is exposed to market risks where the fair values or future cash flows of financial instruments
fluctuate because of underlying changes in market prices. The principal market risks impacting Paramount
are commodity price risk, foreign currency risk, interest rate risk, and equity price risk.
Commodity Price Risk
The Company uses financial commodity contracts from time to time to manage its exposure to commodity
price volatility. At December 31, 2008, assuming all other variables are held constant, a 10 percent increase
or decrease in the applicable forward market curves would have had the following impact on Paramount’s
net earnings from changes in the fair value of financial commodity contracts:
Natural gas
Foreign Currency Risk
10% increase
(800)
$
10% decrease
$
800
Paramount is exposed to foreign currency risk on financial instruments denominated in US dollars including
cash and cash equivalents, accounts receivable, risk management assets and liabilities, accounts payable
and accrued liabilities, US Senior Notes and related interest. The Company uses foreign exchange
contracts to manage foreign exchange risks related to its US Senior Notes. At December 31, 2008, a
strengthening or weakening of the Canadian dollar relative to the US dollar would have had the following
effect on Paramount’s net earnings:
US Senior Notes
Foreign exchange collar
Strengthen 1%
$
$
800
(600)
Weaken 1%
(800)
600
$
$
Sales prices of crude oil and natural gas are determined with reference to US benchmark prices, therefore
a strengthening of the Canadian dollar relative to the US dollar will decrease the revenue received for
petroleum and natural gas. Paramount’s expenditures are primarily in Canadian dollars but include capital
and operating expenditures in US dollars, largely related to the Company’s US operations, and payments of
interest on US Senior Notes and settlements of risk management liabilities.
Interest Rate Risk
Paramount is exposed to interest rate risk from time to time on outstanding balances of floating rate credit
facilities and on interest bearing cash and cash equivalents and short-term investments. Paramount’s US
Senior Notes bear interest at a fixed rate and are subject to fair value changes as market interest rates
change.
Equity Price Risk
Paramount is exposed to equity price risk associated with its investments.
66
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Credit Risk
Paramount is exposed to credit risk on its financial instruments where a financial loss would be
experienced if a counterparty to a financial asset failed to meet its obligations. The Company manages
credit risk by entering into contracts with counterparties that possess high credit ratings, employing net
settlement agreements, employing letters of credit, and limiting available credit when necessary. The
maximum credit risk exposure at December 31, 2008 is limited to the carrying values of cash and cash
equivalents, accounts receivable and risk management assets. Accounts receivable include balances due
from customers and joint venture partners in the oil and gas industry and are subject to normal industry
credit risk. At December 31, 2008, Paramount had balances due from one sales customer that represented
approximately 14 percent of the Company’s total accounts receivable.
Liquidity Risk
Liquidity risk is the risk that Paramount will be unable to meet its financial obligations. The Company
manages liquidity risk by ensuring that it has sufficient cash, credit facilities and other financial resources
available to meet its obligations.
The Company forecasts cash flows for a period of 12 months to identify financial requirements. These
requirements are met through a combination of cash flows from operations, credit facilities, dispositions of
assets, and accessing capital markets.
Contractual obligations related to financial liabilities are as follows:
Accounts payable and accrued liabilities
US Senior Notes, including interest
12. Capital Structure
2009
2010-2011
2012-2014
Total
$
$
84,192
9,388
93,580
$
$
–
18,776
18,776
$
–
124,530
$ 124,530
$
$
84,192
152,694
236,886
Paramount’s primary objectives in managing its capital structure are to:
(i) maintain a flexible capital structure which optimizes the cost of capital at an acceptable level of risk;
(ii) maintain sufficient liquidity to support ongoing operations, capital expenditure programs, strategic
initiatives, and the repayment of debt obligations when due; and
(iii) maximize shareholder returns.
Paramount manages its capital structure to support current and future business plans and periodically
adjusts the structure in response to changes in economic conditions and the risk characteristics of the
Company’s underlying assets and operations. Paramount monitors metrics such as the Company’s debt-to-
equity and debt-to-cash flow ratios, among others, to measure the status of its capital structure. The
Company has not established fixed quantitative thresholds for such metrics. Paramount may adjust its
capital structure by issuing or repurchasing shares, issuing or repurchasing debt, refinancing existing debt,
modifying capital spending programs, and disposing of assets, the availability of any such means being
dependant upon market conditions.
67
Paramount’s capital structure consists of the following:
Working capital(1)
Bank credit facility
US Senior Notes (excluding unamortized financing fees)
Net Debt
Share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive loss
Total Capital
(1) Excludes risk management assets and liabilities and stock-based compensation liabilities.
2008
$
(12,919)
–
110,448
97,529
302,727
2,398
473,362
–
$ 876,016
2007
(152,013)
–
136,547
(15,466)
313,828
1,375
593,450
(4)
893,183
$
$
Paramount is subject to certain covenants under its credit facility and US Senior Note agreements. The
Company maintained compliance with all such covenants during the year. The covenants contain certain
restrictions on Paramount’s ability to repurchase equity, issue or refinance debt, acquire or dispose of
assets, or pay dividends.
13. Consolidated Statements of Cash Flows – Selected Information
Items not involving cash
Year ended December 31
Financial commodity contracts
Stock-based compensation
Depletion, depreciation and accretion
Gain on sale of property, plant and equipment
Write-down of petroleum and natural gas assets
Write-down of goodwill
Foreign exchange
Cash distributions in excess of equity earnings and dilution
Equity earnings and dilution in excess of cash distributions
(Gain) loss on sale of investments
Impairment charge - investments
Future income tax
Non-controlling interest
Debt extinguishment, interest and other
2008
(16,748)
(2,638)
121,085
(9,068)
44,636
10,258
(9,052)
18,073
–
–
96,887
18,758
–
1,876
274,067
$
$
2007
25,225
(18,608)
133,997
(284,474)
271,959
1,963
(17,325)
–
(5,115)
(528,554)
–
42,112
(11,243)
5,477
(384,586)
$
$
68
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2008
2007
19,748
18,261
348
(9,532)
–
28,825
15,310
13,515
28,825
$
$
$
$
(19,715)
40,193
3,156
(136,784)
6,026
(107,124)
(1,781)
(105,343)
(107,124)
2008
11,092
1,048
2007
$
$
38,764
1,753
$
$
$
$
$
$
Changes in non-cash working capital
Year ended December 31
Short-term investments
Accounts receivable
Prepaid expenses and other
Account payable and accrued liabilities
Change in basis of presentation – MGM Energy (Note 1)
Operating activities
Investing activities
Supplemental cash flow information
Year ended December 31
Interest paid
Current and other tax paid
14. Related Party Transactions
Service Agreements
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 Options, Holdco SARs, or previously, Holdco
Options. Stock-based compensation expense related to these awards accrues to Paramount. The following
table summarizes the related party transactions:
Year ended December 31
2008
2007
Services agreement
Stock-based compensation
Trilogy
MGM Energy
Trilogy
MGM Energy
$
$
318
565
883
$
$
229
–
229
$
1,085
$ 1,040
(352)
733
$
(90)
950
$
In August of 2008, Paramount entered into an agreement with a supplier for the construction of a
significant portion of a third drilling rig for US$8.2 million. For the year ended December 31, 2008, US$6.5
million has been paid to the supplier. An individual who indirectly owns part of the supplier is also a director
of a company affiliated with Paramount.
69
15. Commitments and Contingencies
Commitments
Paramount had the following commitments as at December 31, 2008:
Pipeline transportation commitments (1)
Operating leases
Total
2009
$ 14,384
7,357
$ 21,741
2010
$ 14,122
8,346
$ 22,468
2011
$ 12,038
1,511
$ 13,549
$
2012
9,376
1,008
$ 10,384
2013
$ 5,124
–
$ 5,124
After 2013
$ 45,703
–
$ 45,703
(1) Certain of the pipeline transportation commitments are secured by outstanding letters of credit totaling $3.7 million at December 31, 2008.
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
final liability may differ materially from amounts estimated and recorded.
Crown royalties for Paramount’s production from frontier lands in the Northwest Territories have been
recognized 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 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 ongoing 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 obligation
should MGM Energy not fulfill its lease obligation.
16. Subsequent Events
(cid:131) Received a payment of $12.2 million on the settlement of the remaining US$60.0 million notional
foreign exchange collar.
(cid:131) Cancelled 3.0 million Paramount Options on surrender by their holders.
(cid:131) All stock appreciation rights that were issued in November 2008 were surrendered and cancelled in
exchange for the same number of Paramount Options with the same exercise price and vesting
terms.
70
PARAMOUNT RESOURCES LTD. │ 2008 ANNUAL REPORT
C O R P O R A T E iNfO R M A TiO 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
E. M. Shier
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
P. R. Kinvig
Controller
L. A. Friesen
Assistant Corporate Secretary
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
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
REgiSTRAR ANd
TRANSfER AgENT
Computershare
Trust Company
Calgary, Alberta
Toronto, Ontario
STOCK EXChANgE LiSTiNg
The Toronto Stock Exchange
(“POU”)
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
D. Jungé C.F.A. (4)
Chairman of the Board and
Chief Executive Officer,
Pitcairn Trust Company
Bryn Athyn, Pennsylvania
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
Paramount Energy Operating Corp. is a
wholly owned subsidiary of Paramount
Energy Trust
(5)
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