2 0 0 9 A N N U A L R E P O R T
Letter to Shareholders
Review of Operations
Management’s Discussion & Analysis
Financial Statements
Corporate Information
2
4
18
40
IBC
ANNUAL MEETiNg Of ShAREhOLdERS
Shareholders are cordially invited to attend
the Annual Meeting of Shareholders to be held
Wednesday, May 12, 2010 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 ($/share)
Net loss
Per share – diluted ($/share)
Exploration and development expenditures
Investments(2) - market value
Total assets
Net debt
Common shares outstanding (thousands)
Operating
Sales Volumes
Natural gas (MMcf/d)
Oil and NGLs (Bbl/d)
Total (Boe/d)
Gas weighting
Average realized price
Natural gas ($/Mcf)
Oil and NGLs ($/Bbl)
Reserves(3)
Proved plus probable
Natural gas (Bcf)
Crude oil and NGLs (MBbl)
Total (MBoe)
Estimated net future revenue before tax @ 10%
Proved
Proved plus probable
Net undeveloped land (thousands of acres)
Net wells drilled
Year ended December 31
2008
% Change
2009
161.7
60.3
0.90
(97.9)
(1.46)
93.4
342.9
1,102.0
50.9
72,058
51.8
3,580
12,207
71%
4.44
59.50
155.0
8,667
34,493
365.5
549.6
1,151
21
318.1
179.6
2.65
(116.6)
(1.72)
170.8
249.9
1,144.6
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
38
(49)
(66)
(66)
16
15
(45)
37
(4)
(48)
8
(15)
-
(11)
3
(49)
(37)
(5)
(4)
(5)
(18)
(17)
(6)
(45)
(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.
Based on the period-end closing prices of publicly traded enterprises and book value of the remaining investments.
(2)
(3) Working interest reserves before royalty deductions, using forecast prices and costs.
1
President’s Message
In 2009, Paramount was able to navigate through the most devastating economic environment it has faced
in its 30 plus year history. We believe we are on the cusp of significant additions to production and
reserves. Our strategic investments have also appreciated in value and we have secured the leases of
what we expect will be large resource opportunities in both shale gas and additional oil sands. Paramount’s
land position on a number of large resource plays is expected to result in significant value appreciation for
our shareholders.
Paramount produced 12,200 Boe/d and generated cash flow of $60 million in 2009, both slightly below our
expectations as a result of production delays and lower than anticipated natural gas prices. We executed a
$93 million capital expenditure program that was essentially in line with our budget. Our focus on cost
control for all aspects of our business resulted in lower operating and general and administrative costs. It is
anticipated that further improvements will be made through continued focus on cost control and growth in
the Company’s production rates over the next 18 months.
Looking forward, most of the near term gains in production and reserves are expected to come from Karr
and Kaybob, where Paramount has made considerable advances in drilling and completion techniques over
the past year. At Karr, Paramount has progressed from its initial horizontal re-entry completion with seven
stage fracture treatments in the Montney Formation to recent new horizontal wells with up to 22 stage
fracture treatments with significantly improved results. Paramount plans to drill seven of these wells at
Karr in 2010, expand the existing compression facilities to 8 MMcf/d, and construct new compression
facilities at Karr that would add an additional 20 MMcf/d of capacity with flexibility for rapid expansion to 40
MMcf/d should continued drilling success be achieved. At Kaybob, a successful horizontal well was drilled
and completed with seven stage fracture treatments in the winter of 2009. A second well has now been
drilled into the same formation with 16 stage fracture treatments and delivered significantly better results.
Paramount is currently drilling and completing three additional horizontal wells and plans to drill and
complete up to six horizontal wells utilizing multi-stage fracturing technology in 2010.
Paramount has continued to move forward on the evaluation of our Hoole oil sands project. A 45 well
delineation drilling program was completed during this past winter. Many of these wells were cored to
complete further detailed geological work and to satisfy land tenure obligations. In addition, work was done
to evaluate proximal water reservoirs for potential use in future commercial developments, and
environmental baseline data was collected which will be necessary if and when a commercial development
application is made. Paramount had this asset independently evaluated by third-party engineers, who
provided a best estimate assessment of 458 million Bbls of contingent bitumen resource having a net
present value of $1.4 billion discounted at ten percent. We plan to incorporate our recent drilling results
into an updated evaluation assessment in the summer of 2010. Paramount has also established a large
lease position prospective for bitumen in the Devonian Grosmont Formation. We expect to see resource
delineation of these lands in the not too distant future.
2
PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
Paramount has spent several years actively mapping the potential for producing natural gas from the thick
sections of Devonian-aged shale in the Horn River Basin and Liard Basin located in Northeast British
Columbia and the Southern Northwest Territories. Industry understanding of the Horn River Basin play has
moved very quickly, with exceptional amounts paid at land sales for the rights to explore and produce this
resource. This rapid escalation in price for acreage made it difficult to add lands at prices Paramount was
willing to pay. Fortunately, we have our legacy land position to explore on. We do anticipate there to be
significant potential for Muskwa shale gas development on our lands principally at Maxhamish, Liard South
and Ootla. We have been much more successful adding land on what we believe to be an emerging shale
gas development in the Devonian shale further west in the Liard Basin. Paramount has added to our legacy
land position at Patry through successful land sale activities in Q4 2008 and throughout the summer of
2009. Paramount believes it holds a much more substantial position in the Liard Basin play that could prove
up significant gas potential should this play concept prove successful and economic to develop.
Paramount has established an extensive portfolio of strategic investments and anticipates each investment
to increase in value as their respective business plans evolve. The most material investments are in Trilogy
Energy, MEG Energy, and MGM Energy. Trilogy has been enjoying considerable success drilling very high
rate wells at its Kaybob South property, with recent wells testing at rates of 15-20 MMcf/d. Trilogy expects
to grow its production by 10 percent this year while maintaining a monthly dividend of $0.035 per share.
MEG Energy is ramping up production after completing construction of its 25,000 Bbl/d Phase 2
development at its Christina Lake project. MEG Energy has also commenced construction on its 35,000
Bbl/d Phase 2B expansion at Christina Lake. MGM Energy is starting to see some advances on the
regulatory approvals for the construction of the Mackenzie Valley Pipeline project, which is critical to
realizing value from the substantial natural gas reserves that it has established in the Mackenzie Delta.
MGM Energy estimates that it has close to 1 Tcf of discovered natural gas resource and intends to
complete its commercial development over the next decade.
Paramount has budgeted $130 million for exploration and development activities in our core asset areas,
not including any additional expenditures for undeveloped land, acquisitions or divestitures. We also plan to
spend approximately $10 million on our oil sands properties. We expect our capital expenditure budget will
grow production from 12,200 Boe/d to 13,000 Boe/d. Paramount looks forward to delivering on our 2010
goals, and anticipates realizing on the hard work invested into the business over the last several years
repositioning the Company for its next growth leg in our long history.
J.H.T. Riddell
President and Chief Operating Officer
March 19, 2010
3
REVIEW OF OPERATIONS
2009 Overview
(cid:131) Funds flow from operations in 2009 decreased by $119.3 million from the prior year due primarily to
the impact of lower realized commodity prices and lower production, partially offset by lower royalties,
operating costs and general and administrative expenses.
(cid:131) Paramount’s net loss in 2009 was $97.9 million versus a net loss of $116.6 million in the prior year.
The current year loss included the impacts of lower commodity prices and lower production and higher
tax expense. The prior year loss included $96.9 million of Strategic Investment write downs.
Principal Properties
(cid:131) Petroleum and natural gas sales declined by $156.4 million, of which $126.0 million was due to lower
prices and $30.4 million was due to lower sales volumes.
(cid:131) Netback before settlements of financial commodity contracts decreased by $112.0 million to $70.5
million in 2009 due to lower revenues, partially offset by lower royalties and operating expenses.
(cid:131) Operating expenses decreased by 21 percent to $56.7 million in 2009. Operating expenses per Boe
decreased 11 percent to $12.72 in 2009 from $14.31 in 2008.
(cid:131) The Kaybob COU drilled 13 (5.7 net) wells and tied in 16 (8.6 net) wells in 2009. New wells were drilled
on existing locations in Smoky and Resthaven, which reduced drilling and completion costs.
(cid:131) The Grande Prairie COU drilled six (5.1 net) wells in 2009. Drilling activity focused on the deep gas
project at Karr-Gold Creek, where two new Montney wells were brought on production and a
Nikanassin well was recompleted.
(cid:131) The Northern COU drilled and tied in three (3.0 net) wells in 2009. The Company also received Crown
land use permits to carry out its planned eight (7.3 net) well drilling program for 2010.
(cid:131) The Southern COU completed a Bakken well in the third quarter of 2009 that was drilled in 2008.
Although Paramount’s drilling program has not met expectations, recent drilling and completion results
of other operators in the region have been positive, and Paramount is assessing the impact of this on
future plans for the Company’s North Dakota lands.
(cid:131) Added 3.5 MMBoe of proved reserves and 2.6 MMBoe of proved plus probable reserves, after
technical revisions.
4
PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
REVIEW OF OPERATIONS
Strategic Investments
(cid:131) The Company completed a $30.4 million drilling rig financing and the proceeds were used to reduce
the credit facility balance.
(cid:131) Paramount moved two drilling rigs to Alberta from North Dakota, which are being used in the Grande
Prairie and Kaybob COU’s drilling programs.
(cid:131) Paramount invested $5.0 million in Redcliffe Exploration Inc., a publicly traded oil and gas company.
(cid:131) The Company drilled seven additional oil sands evaluation wells at Hoole for $2.0 million and
commenced a $10 million drilling and evaluation program for 2010.
Corporate
(cid:131) Paramount closed a public offering and private placements of an aggregate of 6,000,000 Common
Shares for gross proceeds of $93.8 million.
(cid:131) Corporate general and administrative costs decreased 35 percent to $14.7 million from $22.6 million in
2008.
(cid:131) The Company purchased 615,600 Common Shares for $4.2 million at an average cost of $6.85 per
share under the Company’s Normal Course Issuer Bid.
5
Principal Properties
Kaybob
The Kaybob Corporate Operating Unit (“Kaybob COU”) produces natural gas, natural gas liquids (“NGLs”),
and crude oil in West Central Alberta. The core natural gas producing areas in the Kaybob COU include
Musreau, Resthaven and Smoky, with incremental crude oil produced in the Kakwa, Musreau and Smoky
areas. The Kaybob COU pursues multiple Deep Basin gas horizons which are high pressure, liquids rich,
tight gas formations with large reservoir potential and is permitted to complete multiple formations and
commingle production in the wellbore in most of this region.
Total sales for the Kaybob COU averaged 3,615 Boe/d in 2009, comprised of 18.9 MMcf/d of natural gas
and 470 Bbl/d of crude oil and NGLs. Sales volumes in 2009 were similar to 2008, as production from new
wells replaced natural declines from existing wells. Production in the Kaybob COU was impacted by the
decision to delay initial production of two (2.0 net) new wells from March until early November due to low
natural gas prices.
Capital expenditures, excluding land, in the Kaybob COU for 2009 were approximately $40 million, and
were focused on drilling 13 (5.7 net) wells and the completion, equipping and tie-in of wells drilled in 2009
and late 2008. The 2009 drilling program included two (2.0 net) Smoky gas wells that incorporated
horizontal multistage fracture stimulations, five (2.2 net) gas wells in Kakwa, two (0.7 net) of which were
brought on production during the year and three (1.3 net) gas wells in Resthaven that were brought on
production during the year.
The majority of the Kaybob COU 2010 capital investment will be focused in the Musreau, Resthaven, and
Smoky areas and will continue to target multiple Cretaceous formations. The Kaybob COU plans to drill 12
(7.3 net) wells during the 2010 drilling season, complete and tie-in wells that were drilled in prior years and
recomplete additional horizons in several wells. The drilling program includes one horizontal Dunvegan well
in the Resthaven area which finished drilling in early January, two horizontal wells targeting the Dunvegan
formation in the Smoky area and one horizontal well targeting the Falher formation in the Musreau area.
The Kaybob COU continues to focus on reducing per-well costs and increasing reserves recoveries. These
efforts include drilling five wells from locations with existing wells in this winters drilling program and
performing larger multi-stage fracture stimulations, with the expectation that higher production rates and
increased recoverable reserves will result. In February 2010 regulations were changed, permitting the
drilling of up to four wells per section in the Kaybob COU’s core areas. The revised regulations allow
Paramount to drill up to 1,000 (600 net) wells without making applications for increased well density. The
Deep Basin continues to be a core area for Paramount, and as project economics improve, is expected to
be a significant growth platform for the Company over the next five to ten years.
Capital Expenditures
($ millions, includes land)
Production
(Boe/d)
15 0
10 0
5 0
0
40
3,615
5 ,0 0 0
4 ,0 0 0
3 ,0 0 0
2 ,0 0 0
1,0 0 0
0
2007
2008
2009
2007
2008
2009
6
PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
REVIEW OF OPERATIONS
Grande Prairie
The Grande Prairie Corporate Operating Unit (“Grande Prairie COU”) produces natural gas, NGLs, and
crude oil in the Peace River Arch area of Alberta. Primary natural gas producing areas in the Grande Prairie
COU include properties at Mirage and a new longer-term deep basin development in the Karr-Gold Creek
area targeting liquids rich tight gas. The primary crude oil producing property in the Grande Prairie COU is in
the deep, light, sweet oil trend at Crooked Creek.
Total sales for the Grande Prairie COU averaged 2,204 Boe/d in 2009, comprised of 7.5 MMcf/d of natural
gas and 960 Bbl/d of crude oil and NGLs. Sales volumes in 2009 were similar to 2008 as incremental
production at Crooked Creek and Karr-Gold Creek offset natural declines in Mirage and Ante Creek.
At Crooked Creek, Good Production Practice waterflood commenced in December 2008, resulting in
working interest volumes increasing from approximately 500 Boe/d to over 700 Boe/d in late-2009.
Production from Karr-Gold Creek increased during the year as wells drilled in 2008 and 2009 were brought
on production.
Capital expenditures, excluding land, in the Grande Prairie COU for 2009 were $45 million, focused on the
Karr-Gold Creek development and facility expansion. Paramount also acquired approximately 24,000 net
acres of undeveloped land at Karr-Gold Creek and Valhalla (2008 - 24,000 net acres), including considerable
acreage in the Nikanassin sweet gas play in the area.
At Karr-Gold Creek, three (3.0 net) horizontal multistage fracture stimulated wells were drilled in the lower
Montney reservoir during 2009. Two of the wells were completed and tied in during 2009 and the third is
planned to be tied in during the first quarter of 2010. As of December 31, 2009 production from the new
wells was constrained due to facility limitations. In February 2010, facility compression was doubled to 8
MMcf/d of raw gas. Additional facility and infrastructure expansions are planned in the area in 2010,
pending an evaluation of 2009 / 2010 winter drilling and completion results. Other Karr-Gold Creek
development in the year included the completion of one (1.0 net) Nikanassin tight gas well, which was tied
in to sweet gas facilities acquired by Paramount subsequent to year-end.
In 2009, the Grande Prairie COU also drilled two (1.1 net) Montney wells at Valhalla. One (0.5 net)
horizontal well is currently on production and one (0.6 net) vertical well is expected to be tied in during the
second half of 2010. The wells were completed using similar horizontal multistage fracture stimulation
technology to that used at Karr-Gold Creek.
The Grande Prairie COU’s planned capital program for 2010 is focused on the Montney and Nikanassin
reservoirs in the Karr-Gold Creek area, including drilling critical pool defining wells and expanding facilities,
and further drilling and development of Montney opportunities at Valhalla.
Capital Expenditures
($ millions, includes land)
49
5 0
4 0
3 0
2 0
10
0
Production
(Boe/d)
2,204
3 ,0 0 0
2 ,0 0 0
1,0 0 0
0
2007
2008
2009
2007
2008
2009
7
Northern
The Northern Corporate Operating Unit (“Northern COU”) includes properties in Northwest Alberta,
Northeast British Columbia, and extends into the Cameron Hills and Fort Liard areas of the Northwest
Territories. The primary focus of the Northern COU remains at Cameron Hills in the Northwest Territories,
where this property accounts for a significant portion of the corporate operating unit’s total natural gas,
crude oil and NGLs production. Other significant natural gas producing properties in the Northern COU are
located at Bistcho and Haro in Northwest Alberta and Clarke Lake in Northeast British Columbia.
Total sales for the Northern COU averaged 3,006 Boe/d in 2009, comprised of 14.7 MMcf/d of natural gas
and 548 Bbl/d of crude oil and NGLs. Volumes decreased in 2009 by 21 percent from 2008 primarily as a
result of natural declines, and to a lesser degree, because of the shut-in of properties. The decision to
delay the tie-in of one (1.0 net) well due to low commodity prices also impacted 2009 production.
The Northern COU’s capital expenditures for 2009 were approximately $8 million, excluding land. During
2009, three (3.0 net) gas wells were drilled, tied in and brought on production in the Bistcho area of which
two remain on stable production with the third producing intermittently due to water contact issues. The
majority of field activities for the Northern COU occurred in the first quarter of 2009 because of restricted
seasonal access.
In 2010, Paramount anticipates drilling up to eight (7.3 net) operated oil wells in the Cameron Hills area.
The first well is expected to be completed and tied in during the first quarter of 2010, with the remainder
being completed in the first quarter of 2010 and tied in during 2011. Production and follow-up development
drilling associated with these wells will occur in subsequent years, pending an evaluation of the 2010
drilling results.
Capital Expenditures
($ millions, includes land)
Production
(Boe/d)
50
40
30
20
10
0
8
6,000
5,000
4,000
3,000
2,000
1,000
0
3,006
8
PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
2007
2008
2009
2007
2008
2009
REVIEW OF OPERATIONS
Southern
The Southern Corporate Operating Unit (“Southern COU”) produces crude oil and natural gas in Southern
Alberta, Montana and North Dakota. The Southern COU’s core areas are comprised of the gas producing
Chain / Craigmyle field near Drumheller, Alberta and the oil producing area near Medora, North Dakota.
The Southern COU produced 3,380 Boe/d in 2009 comprised of 10.7 MMcf/d of gas and 1,602 Bbl/d of
crude oil and NGLs, a decrease of 589 Boe/d from 2008 due primarily to declines in natural gas production
in Alberta, partially offset by an increase in oil production in the United States.
Capital expenditures, excluding land, for the Southern COU in 2009 were approximately $7 million, the
majority of which related to the completion of a Bakken well in North Dakota.
In the Chain region, the Southern COU significantly reduced capital spending from previous years, as a
result of weak gas prices. The main focus of the Southern COU in 2009 was to reduce operating costs
without significantly reducing production. Paramount shut in one electric compressor and idled a gas plant
which reduced operating costs by approximately $1 million for 2009 with only a minor impact on gas
production.
In 2010, the Southern COU anticipates drilling 22 (16.0 net) wells in Alberta, including 17 (11.7 net) shallow
gas wells in the Chain area.
In the United States, Paramount operates as Summit Resources Inc. (“Summit”), a wholly-owned
subsidiary. In North Dakota, Summit produces oil from the Mission Canyon, Bakken, Birdbear, Duperow,
Stonewall and Red River formations. Drilling results and commodity prices caused Summit to delay the
2009 drilling program, limiting activities to a single completion performed in the third quarter of 2009 of a
well drilled in 2008. The results of the completion were lower than anticipated, and the well continues to
recover fracture fluid.
Paramount continues to believe its North Dakota properties represent an important component of the
Company. Although Paramount’s drilling program has not met expectations, recent drilling and completion
results of other operators in the region have been positive, and Paramount is assessing the impact of this
on future plans for the Company’s North Dakota lands.
Capital Expenditures
($ millions, includes land)
Production
(Boe/d)
100
80
60
40
20
0
9
5,000
4,000
3,000
2,000
1,000
0
3,380
2007
2008
2009
2007
2008
2009
9
Strategic Investments
Paramount’s 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, dispositions, or future revenue generation. These investments represent
an important component of the total value of the Company. Paramount’s significant Strategic Investments
are described below.
Oil Sands and Carbonate Bitumen
Paramount’s land position includes approximately 175,000 acres of oil sands leases (approximately 172,000
net acres), prospective for oil sands bitumen and carbonate bitumen. Included in this acreage is
approximately 48 contiguous sections (30,680 acres) of 100 percent owned in-situ oil sands leases in the
Hoole area of Alberta (the “Hoole Properties”), situated within the western portion of the Athabasca Oil
Sands region.
In recent years, Paramount commenced the delineation and evaluation of the Hoole Properties. From 2004
to 2008, Paramount drilled seven oil sands evaluation wells to evaluate the Wabiskaw and Grand Rapids
formations. During 2008, the Company commissioned an independent resource evaluation of the Hoole
Properties. The evaluation was conducted by the Company’s independent reserves evaluator, McDaniel &
Associates Consultants Ltd. (“McDaniel”). McDaniel estimated that as of August 1, 2008 the Hoole
Properties contained approximately 458 million barrels of contingent bitumen resources (Best Estimate
P50) having a discounted future net revenue of $1.4 billion (before income tax, PV10, Best Estimate P50,
updated for January 1, 2009 pricing) from the Grand Rapids formation. Additional information concerning
the McDaniel evaluation is contained in Paramount’s 2009 Annual Information Form.
During 2009, the Company continued to delineate the Hoole Properties, drilling an additional seven
evaluation wells for a total cost of $2 million. Paramount has budgeted $10 million for 2010 to drill
additional delineation wells and to begin aspects of project development, including preliminary facility
design and a water study. The Company expects to submit an application for regulatory approval in 2011 to
commence a pilot project.
Shale Gas
Paramount’s land position includes considerable acreage in Northeast British Columbia and the Northwest
Territories prospective for shale gas from the Horn River Basin and the Liard Basin.
The Company is in the early stages of evaluating the potential of its acreage in this emerging shale play.
Paramount has been actively monitoring industry activity in the Horn River and Liard Basins where
operators are applying multi-stage fracturing technology to maximize production rates and reserves
recoveries and commencing the development of infrastructure to process and transport production.
Paramount has received regulatory approval to drill its first shale gas well in the Horn River Basin, and
currently plans to drill the well in the first quarter of 2011.
Drilling Rigs
Paramount owns three custom built triple-sized drilling rigs. During 2009, two of the drilling rigs were
relocated to Alberta from the United States and are being used in the Company’s drilling programs in the
Grande Prairie and Kaybob COUs. The third rig remains in North Dakota.
10 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
REVIEW OF OPERATIONS
Investments
Paramount continues to hold investments in the securities of a number of public and private entities, which
are summarized as of December 31, 2009 below:
Trilogy Energy Trust(2)
MEG Energy Corp.
MGM Energy Corp.
Other(3)
Total
Shares / Units
Owned
(millions)
24.0
3.7
43.8
Market Value(1)
($/share or unit)
8.59
27.50
0.29
($ millions)
$ 206.1
101.8
12.5
22.5
$ 342.9
(1)
(2)
(3)
Based on the period-end closing price of publicly traded investments and book value of remaining investments.
On February 5, 2010, Trilogy Energy Trust converted from an income trust to a corporation named Trilogy Energy Corp. See below for further details.
Includes Redcliffe Exploration Inc., NuLoch Resources Inc., Paxton Corporation, and other public and private corporations.
Trilogy Energy Trust
Trilogy Energy Trust was a publicly traded Canadian energy trust formed through the 2005 spinout of
certain assets of Paramount in the Kaybob and Marten Creek areas of Central Alberta. On February 5,
2010, Trilogy Energy Trust converted from an income trust structure to a corporate structure whereby all of
the outstanding trust units of Trilogy Energy Trust were exchanged for shares of Trilogy Energy Corp.
Pursuant to the conversion transaction, Paramount received 12.8 million common shares and 11.3 million
non-voting shares of Trilogy Energy Corp. in exchange for the 24.1 million trust units owned at the
conversion date, resulting in Paramount holding 21 percent of the economic interest in the corporation
immediately following the conversion. Trilogy Energy Corp. non-voting shares are essentially the same as
Trilogy Energy Corp. common shares except they do not have voting rights.
Trilogy Energy Corp. is a publicly traded Canadian petroleum and natural gas-focused corporation that
actively acquires, develops, produces and sells natural gas, crude oil and natural gas liquids. Its core areas
include producing assets in the Kaybob and Grande Prairie areas and the corporation is active in developing
its substantial inventory of low-risk development opportunities.
11
MEG Energy Corp.
MEG Energy Corp. (“MEG”) is a privately-owned company based in Calgary, Alberta solely focused on oil
sands development in the Athabasca region of Alberta. MEG owns a 100 percent working interest in over
800 square miles of oil sands leases. Two commercial projects have been identified, the first is the
Christina Lake Regional Project, estimated by MEG’s independent reserve engineers to be capable of
producing over 200,000 Bbl/d of bitumen on a sustained basis for over 30 years. The second project is in
the Surmont area, estimated by MEG’s independent reserve engineers to be capable of producing 50,000
Bbl/d of bitumen on a sustained basis for over 30 years.
Paramount acquired its ownership interest in MEG in 2007 as partial consideration for the sale of certain oil
sands leases and related properties to MEG.
MGM Energy Corp.
MGM Energy Corp. (“MGM Energy”) is a Canadian energy company focused on the acquisition and
development of hydrocarbon resources in the Northwest Territories. The company's business strategy is to
acquire interests in prospective lands and existing discoveries in the Canadian North, and to employ current
technology in exploring those lands, with the ultimate intention of developing projects that will ship
hydrocarbons through the Mackenzie Valley pipeline, when built.
MGM Energy was formed through the 2007 spinout by Paramount of certain farm-in rights and other
assets in the Northwest Territories.
12 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
REVIEW OF OPERATIONS
Operating Statistics
Sales Volumes
Paramount’s average daily sales volumes by corporate operating unit for the years ended December 31,
2009 and 2008 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
2009
2008
18.9
7.5
14.7
10.7
-
51.8
470
960
548
1,602
-
3,580
3,615
2,204
3,006
3,380
2
12,207
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
Change (%)
4
(23)
(19)
(24)
-
(15)
(18)
53
(29)
(1)
-
(1)
-
(2)
(21)
(15)
(99)
(11)
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)
10
8
6
4
2
0
5.12
125
100
75
50
25
0
59.50
2007
2008
2009
2007
2008
2009
13
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 and other
Principal Properties
Strategic Investments
Corporate
Net capital expenditures
Land
2009
5.2
65.1
23.1
93.4
6.4
(0.8)
99.0
17.6
0.1
116.7
2008
7.1
137.1
26.6
170.8
17.6
(21.2)
167.2
14.8
1.0
183.0
The following table summarizes the Company’s land position at December 31:
(thousands of acres)
Undeveloped land
Acreage assigned reserves
Total
Value of undeveloped land(1) ($ millions)
2009
Net
1,151
304
1,455
$145.1
Gross
1,620
588
2,208
Average
Working
Interest
71%
52%
66%
Gross
1,754
598
2,352
2008
Net
1,221
319
1,540
$150.3
Average
Working
Interest
70%
53%
65%
(1) Based on McDaniel & Associates Consultants Ltd. appraisal summary of acreage evaluation.
Exploration and
Development Expenditures
($ millions)
2009 Exploration and
Development Expenditures
($93.4 million)
Equipm ent &
Facilities
25%
93.4
Geological &
Geophysical
6%
Drilling &
Com pletion
69%
300
200
100
0
2007
2008
2009
14 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
Drilling
Drilling activity for the years ended December 31, 2009 and 2008 is as follows:
REVIEW OF OPERATIONS
Gas
Oil
Dry and abandoned
Oil Sands and other
Total
Gas
Oil
Dry and abandoned
Oil Sands and other
Total
Development
2009
Exploration
Total
Gross
18
1
-
7
26
Net
10
-
-
7
17
Gross
4
1
-
-
5
Net
3
1
-
-
4
Gross
22
2
-
7
31
Development
2008
Exploration
Total
Gross
27
21
1
-
49
Net
10
15
1
-
26
Gross
16
4
2
-
22
Net
10
1
1
-
12
Gross
43
25
3
-
71
Net
13
1
-
7
21
Net
20
16
2
-
38
Wells Drilled
(gross)
Drilling Distribution
(31 Wells)
Oil Sands
Evaluation
7
Southern 2
Northern 3
2007
2008
2009
Grande
Prairie 6
175
150
125
100
75
50
25
0
Kaybob 13
100
80
60
40
20
0
Drilling Success Rate
(gross) (%)
2007
2008
2009
15
Reserves
Paramount’s reserves for the year ended December 31, 2009 were evaluated by McDaniel and prepared in
accordance with the National Instrument 51-101 definitions, standards and procedures.
Paramount’s working interest reserves and before tax net present value of future net revenues for the year
ended December 31, 2009 using forecast prices and costs are as follows:
Reserves Category
Canada
Proved
Developed Producing
Developed Non-producing
Undeveloped
Total Proved
Total Probable
Total Proved plus Probable Canada
United States
Proved
Developed Producing
Developed Non-producing
Undeveloped
Total Proved
Total Probable
Total Proved plus Probable USA
Total Company
Total Proved
Total Probable
Gross Proved and Probable Reserves (1)
Natural
Gas
Light &
Medium
Crude Oil
Natural
Gas
Liquids
(Bcf)
(MBbl)
(MBbl)
(MBoe)
0%
10%
15%
Total
Discount Rate
Before Tax Net Present Value (1)
($ millions)
68.1
18.2
3.7
90.0
64.2
154.2
0.5
-
-
0.5
0.2
0.8
90.5
64.5
2,195
98
-
2,293
1,037
3,330
2,728
-
-
2,728
800
3,528
5,020
1,837
807
338
-
1,146
556
1,702
80
-
-
80
29
108
14,348
3,471
613
18,432
12,299
30,731
2,894
1
-
2,896
866
3,762
1,225
585
21,328
13,165
380.8
57.7
10.8
449.3
350.3
754.6
77.1
(0.4)
-
76.6
45.2
121.8
525.9
350.5
282.8
31.8
3.8
318.4
164.0
482.4
47.5
(0.3)
-
47.1
20.1
67.2
365.5
184.1
549.6
251.3
26.0
1.9
279.3
129.0
408.2
40.3
(0.3)
-
40.0
15.5
55.5
319.3
144.4
463.7
Total Proved plus Probable
(1) Columns may not add due to rounding
(2) Refer to the oil and gas measures and definitions under the heading “Advisories” in Management’s Discussion and Analysis.
34,493
6,857
155.0
1,810
876.4
Crude Oil and Natural
Gas Liquids Reserves
Proved and Probable
(MBbl)
8,667
Natural Gas Reserves
Proved and Probable
(Bcf)
155
200
150
100
50
0
10,000
7,500
5,000
2,500
0
50,000
40,000
30,000
20,000
10,000
0
Total Reserves
Proved and Probable
(MBoe)
34,493
2007
2008
2009
2007
2008
2009
2007
2008
2009
16 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
REVIEW OF OPERATIONS
Reserves Reconciliation
The following table sets forth the reconciliation of Paramount's working interest reserves for the year
ended December 31, 2009 using forecast prices and costs:
Proved Reserves
Probable Reserves
Proved & Probable Reserves
Natural
Gas
Bcf
Oil and
NGLs
MBbl
Boe(3)
MBoe
January 1, 2009
Extensions and discoveries
Technical revisions
Economic factors
Production (1)
95.8
11.2
2.7
(0.3)
6,278
22,244
541
738
(3)
2,405
1,194
(60)
(18.9)
(1,307)
(4,456)
Natural
Gas
Bcf
68.1
7.4
(2.7)
(8.3)
-
Oil and
NGLs
MBbl
Boe(3)
MBoe
Natural
Gas
Bcf
Oil and
NGLs
MBbl
Boe(3)
MBoe
2,784
14,136
163.9
9,062
36,379
246
(645)
36
-
1,479
18.6
(1,095)
(1,355)
-
(8.7)
787
94
32
-
(18.9)
(1,307)
3,884
100
(1,415)
(4,456)
December 31, 2009(2)
90.5
(1) Excludes production from royalty interests.
(2) Columns and rows may not add due to rounding.
(3) Refer to the oil and gas measures and definitions under the heading “Advisories” in Management Discussion and Analysis.
13,165
21,328
6,245
2,422
64.5
155.0
8,667
34,493
Proved and probable reserves were reduced by 1,415 MBoe in 2009 because of economic factors related
primarily to a property in the Northern COU, where reductions in forecast prices resulted in reserves being
considered uneconomic.
Finding and Development Costs(1)
($ millions, except as noted)
Geological and geophysical
Drilling and completions
Production equipment and facilities
$
Exploration and development expenditures
Land
Change in future capital
Total finding and development capital
Net reserves additions (2) (MBoe)
Finding and development costs ($/Boe)
(1) Refer to the oil and gas measures and definitions under the heading “Advisories” in Management’s Discussion and Analysis.
(2) Extensions and discoveries plus technical revisions plus economic factors.
$
$
Proved
5.2
65.1
23.1
93.4
6.4
(8.2)
91.6
3,540
25.88
Proved Plus
Probable
5.2
$
65.1
23.1
93.4
6.4
(24.7)
75.2
$
2,569
$
29.27
Finding and Development Costs
($/Boe)
Proved
Proved plus Probable(1)
(1) 2007 proved and probable finding and development costs not applicable due to negative technical revisions.
.
$ 25.88
$ 29.27
2009
2008
$ 142.03
$ 366.31
2007
$ 120.86
N/A
$
3 Year Average
$
96.26
$ 197.79
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management’s Discussion and Analysis (“MD&A”), dated March 10, 2010, 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, 2009. Information included in this MD&A is presented in accordance with Generally Accepted
Accounting Principles (“GAAP”) in Canada. Certain comparative figures have been reclassified to conform to the
current year’s presentation.
This document contains forward-looking information, non-GAAP measures and disclosures of barrels of oil equivalent
volumes. Readers are referred to the “Advisories” heading in this document concerning such matters.
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 (now Trilogy Energy Corp.) and MGM
Energy in its portfolio of strategic investments.
Paramount has divided its operations into three business segments established by management to assist
in resource allocation, to assess operating performance and to achieve 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:
• The Kaybob COU, which includes properties in West Central Alberta;
• The Grande Prairie COU, which includes properties in the Peace River Arch area of Alberta;
• The Northern COU, which includes properties in Northern Alberta, the Northwest Territories and
Northeast British Columbia; and
• The Southern COU, which includes 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, dispositions, or future revenue generation. The three rigs owned by Paramount Drilling U.S.
L.L.C. ("Paramount Drilling") and Fox Drilling Inc. ("Fox Drilling") are included in Strategic Investments.
The Corporate segment 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.
18
MANAGEMENT’S DISCUSSION AND ANALYSIS
All amounts in Management’s Discussion and Analysis are presented in millions of Canadian dollars
unless otherwise noted.
HIGHLIGHTS
Year ended December 31
2009
2008
2007
FINANCIAL
Petroleum and natural gas sales
Funds flow from operations
per share - diluted ($/share)
Net (loss) earnings
per share - basic ($/share)
per share - diluted ($/share)
Exploration and development expenditures
Total assets
Long-term debt
Net debt
OPERATIONAL
Sales volumes
Natural gas (MMcf/d)
Oil and NGLs (Bbl/d)
Total (Boe/d)
161.7
60.3
0.90
(97.9)
(1.46)
(1.46)
93.4
1,102.0
93.7
50.9
318.1
179.6
2.65
(116.6)
(1.72)
(1.72)
170.8
1,144.6
109.5
97.5
283.4
100.5
1.42
416.2
5.94
5.89
266.8
1,312.5
134.6
(15.5)
51.8
3,580
12,207
61.0
3,594
13,764
78.8
3,536
16,669
Net wells drilled
21
38
108
FUNDS FLOW FROM OPERATIONS PER BOE ($/Boe)
Petroleum and natural gas sales
Royalties
Operating expense and production tax
Transportation
Netback
Hedging settlements
Netback including hedging settlements
General and administrative
Interest
Distributions from investments
Asset retirement obligation expenditures
Other
36.29
(4.64)
(12.72)
(3.11)
15.82
2.89
18.71
(3.86)
(2.52)
3.37
(0.91)
(1.26)
13.53
63.14
(9.49)
(14.31)
(3.12)
36.22
3.45
39.67
(5.15)
(1.97)
4.28
(1.67)
0.48
35.64
46.59
(6.66)
(14.06)
(2.61)
23.26
1.98
25.24
(5.49)
(5.28)
2.68
(1.14)
0.51
16.52
19
2009 Overview
Principal Properties
(cid:131) Petroleum and natural gas sales declined by $156.4 million, of which $126.0 million was due to lower
prices and $30.4 million was due to lower sales volumes.
(cid:131) Netback before settlements of financial commodity contracts decreased by $112.0 million to $70.5
million in 2009 due to lower revenues, partially offset by lower royalties and operating expenses.
(cid:131) Operating expenses decreased by 21 percent to $56.7 million in 2009. Operating expenses per Boe
decreased 11 percent to $12.72 in 2009 from $14.31 in 2008.
(cid:131) The Kaybob COU drilled 13 (5.7 net) wells and tied in 16 (8.6 net) wells in 2009. New wells were drilled
on existing locations in Smoky and Resthaven, which reduced drilling and completion costs.
(cid:131) The Grande Prairie COU drilled six (5.1 net) wells in 2009. Drilling activity focused on the deep gas
project at Karr-Gold Creek, where two new Montney wells were brought on production and a
Nikanassin well was recompleted.
(cid:131) The Northern COU drilled and tied in three (3.0 net) wells in 2009. The Company also received Crown
land use permits to carry out its planned eight (7.3 net) well drilling program for 2010.
(cid:131) The Southern COU completed a Bakken well in the third quarter of 2009 that was drilled in 2008.
Although Paramount’s drilling program has not met expectations, recent drilling and completion results
of other operators in the region have been positive, and Paramount is assessing the impact of this on
future plans for the Company’s North Dakota lands.
Strategic Investments
(cid:131) The Company completed a $30.4 million drilling rig financing and the proceeds were used to reduce
the credit facility balance.
(cid:131) Paramount moved two drilling rigs to Alberta from North Dakota, which are being used in the Grande
Prairie and Kaybob COU’s drilling programs.
(cid:131) Paramount invested $5.0 million in Redcliffe Exploration Inc., a publicly traded oil and gas company.
(cid:131) The Company drilled seven additional oil sands evaluation wells at Hoole for $2.0 million and
commenced a $10 million drilling and evaluation program for 2010.
Corporate
(cid:131) Paramount closed a public offering and private placements of an aggregate of 6,000,000 Common
Shares for gross proceeds of $93.8 million.
(cid:131) Corporate general and administrative costs decreased 35 percent to $14.7 million from $22.6 million in
2008.
(cid:131) The Company purchased 615,600 Common Shares for $4.2 million at an average cost of $6.85 per
share under the Company’s Normal Course Issuer Bid (“NCIB”).
20 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
Net Earnings (Loss)
Year ended December 31
Principal Properties
Strategic Investments
Corporate
Taxes
Net Earnings (Loss)
MANAGEMENT’S DISCUSSION AND ANALYSIS
2009
(106.9)
(18.0)
(27.6)
54.6
(97.9)
2008
33.6
(96.4)
(39.1)
(14.7)
(116.6)
2007
(290.2)
779.2
(29.6)
(43.2)
416.2
(cid:131) Paramount’s net loss in 2009 of $97.9 million compared to a net loss of $116.6 million in the prior year.
The current year loss included the impacts of lower commodity prices and lower production, dry hole
charges of $24.3 million, a $14.9 million write-down of petroleum and natural gas properties and $54.6
million of tax expense. The 2008 net loss included $96.9 million of Strategic Investment write-downs
and $50.7 million of property and goodwill write-downs.
(cid:131) Paramount’s net loss of $116.6 million in 2008 compared to net earnings of $416.2 million in 2007.
Earnings for 2007 included $799.4 million of Strategic Investment disposition gains partially offset by
$273.9 million of property and goodwill write-downs.
Funds Flow From Operations
The following is a reconciliation of funds flow from operations to the nearest GAAP measure:
Year ended December 31
Cash from operating activities
Change in non-cash working capital
Funds flow from operations
Funds flow from operations ($/Boe)
2009
72.1
(11.8)
60.3
13.53
2008
194.9
(15.3)
179.6
35.64
2007
98.7
1.8
100.5
16.52
(cid:131) Funds flow from operations in 2009 decreased by $119.3 million from the prior year due primarily to
the impact of lower realized commodity prices and lower production, partially offset by lower royalties,
operating costs and general and administrative expenses.
Principal Properties
Netback and Segment Earnings (Loss)
Year ended December 31
2009
2008
Petroleum and natural gas sales
Royalties
Operating expense and production tax
Transportation
Netback
Settlements of financial commodity contracts
Netback including settlements of financial commodity contracts
Other Principal Property items (see below)
Segment earnings (loss)
161.7
(20.7)
(56.7)
(13.8)
70.5
12.9
83.4
(190.3)
(106.9)
($/boe)
36.29
(4.64)
(12.72)
(3.11)
15.82
2.89
18.71
318.1
(47.8)
(72.1)
(15.7)
182.5
17.4
199.9
(166.3)
33.6
($/boe)
63.14
(9.49)
(14.31)
(3.12)
36.22
3.45
39.67
21
Petroleum and Natural Gas Sales
Year ended December 31
Natural gas sales
Oil and NGLs sales
Total
2009
83.9
77.8
161.7
2008
193.0
125.1
318.1
% Change
(57)
(38)
(49)
Petroleum and natural gas sales in 2009 were $161.7 million, down 49 percent from 2008 due to the
impact of lower prices and sales volumes.
The impact of changes in prices and volumes on petroleum and natural gas sales revenue are as follows:
Year ended December 31, 2008
Effect of changes in prices
Effect of changes in sales volumes
Year ended December 31, 2009
Natural gas
193.0
(79.4)
(29.7)
83.9
Oil and NGLs
125.1
(46.6)
(0.7)
77.8
Total
318.1
(126.0)
(30.4)
161.7
Sales Volumes
Year ended December 31
Kaybob
Grande Prairie
Northern
Southern
Other
Total
2009
Oil and
NGLs
Bbl/d
Natural
Gas
MMcf/d
18.9
7.5
14.7
10.7
–
51.8
470
960
548
1,602
–
3,580
Total
Boe/d
3,615
2,204
3,006
3,380
2
12,207
Natural
Gas
MMcf/d
18.2
9.7
18.2
14.1
0.8
61.0
2008
Oil and
NGLs
Bbl/d
576
628
768
1,619
3
3,594
Total
Boe/d
3,606
2,241
3,796
3,969
152
13,764
Natural
Gas
MMcf/d
Change
Oil and
NGLs
Bbl/d
0.7
(2.2)
(3.5)
(3.4)
(0.8)
(9.2)
(106)
332
(220)
(17)
(3)
(14)
Total
Boe/d
9
(37)
(790)
(589)
(150)
(1,557)
Natural gas sales volumes decreased to 51.8 MMcf/d in 2009 compared to 61.0 MMcf/d in 2008. The
decrease was primarily a result of production declines, shut-ins at Haro due to low prices in the Northern
COU and the impacts of various 2008 property sales and payouts, partially offset by new production from
the 2008/2009 capital program in the Kaybob, Grande Prairie and Northern COUs.
Crude oil and NGLs sales volumes decreased to 3,580 Bbl/d in 2009 compared to 3,594 Bbl/d in 2008,
primarily as a result of declines at Cameron Hills in the Northern COU, partially offset by increases
attributable to waterflood at Crooked Creek in the Grande Prairie COU.
Average Realized Prices
Year ended December 31
Natural gas ($/Mcf)
Oil and NGLs ($/Bbl)
Total ($/Boe)
2009
4.44
59.50
36.29
2008
8.64
95.12
63.14
% Change
(49)
(37)
(43)
22 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Commodity Prices
Key monthly average commodity price benchmarks and foreign exchange rates are as follows:
Year ended December 31
2009
2008
% Change
Natural Gas
AECO (Cdn$/GJ)
New York Mercantile Exchange (Henry Hub Close) (US$/MMbtu)
Crude Oil
Edmonton par (Cdn$/Bbl)
West Texas Intermediate (US$/Bbl)
Foreign Exchange
Cdn$/US$
3.93
4.00
65.70
61.68
1.14
7.71
9.04
102.87
99.65
1.07
(49)
(56)
(36)
(38)
7
Paramount’s average realized natural gas price for 2009, before financial commodity contract impacts, was
$4.44/Mcf compared to $8.64/Mcf in 2008. 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 2009, before financial commodity contracts impacts, decreased
to $59.50/Bbl compared to $95.12/Bbl in 2008. 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 well head 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. Paramount has not designated any of the financial instrument
contracts as hedges, 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
Received on settlement
Gas contracts
Crude oil contracts
Total
2009
2008
12.9
–
12.9
2.9
14.5
17.4
At December 31, 2009, Paramount’s outstanding natural gas contracts are summarized as follows:
Instruments
Total Notional
Average Price
Fair Value
Remaining Term
Gas – AECO swaps
30,000 GJ/d
Fixed - CAD$5.53/GJ
2.2
January 2010 – October 2010
Paramount has a long-term physical contract expiring in January of 2011, to sell 3,400 GJ/d of natural gas
at $2.73/GJ plus an escalation factor. At December 31, 2009 the fair value of the contract was a loss of
$4.1 million.
23
Royalties
Year ended December 31
Natural gas
Oil and NGLs
Total
Royalty rate (%)
2009
2008
3.7
17.0
20.7
12.8 %
27.7
20.1
47.8
15.0 %
% Change
(87)
(15)
(57)
Natural gas royalties declined by 87 percent in 2009 compared to the prior year and include the impacts of
lower natural gas revenue and lower royalty rates as a result of the New Alberta Royalty Framework. Oil
and NGLs royalties decreased 15 percent compared to the prior year due primarily to lower prices.
Operating Expense and Production Tax
Year ended December 31
Operating expense
Production tax
Total
2009
2008
54.5
2.2
56.7
68.9
3.2
72.1
% Change
(21)
(31)
(21)
Operating expenses decreased by $14.4 million compared to 2008, primarily due to lower turnaround,
facility decommissioning and other operating costs in the Northern COU and lower operating costs in the
other COUs due to lower production volumes and lower oilfield service costs. Operating expenses and
production tax per Boe were 11 percent lower in 2009 than 2008. Current year production tax in the United
States decreased by 31 percent due to lower prices and refunds related to low productivity wells.
Transportation Expense
Year ended December 31
Transportation expense
2009
13.8
2008
15.7
% Change
(12)
Transportation expense decreased to $13.8 million in 2009 compared to $15.7 million in 2008, primarily as
a result of lower production volumes. Transportation costs include the expenses of shipping natural gas to
sales points in California and the United States East coast.
Other Principal Property Items
Year ended December 31
Depletion, depreciation and accretion
Exploration
Dry hole expenses
Gain on sale of property, plant and equipment
Commodity contracts – net of settlements
Write-down of petroleum and natural gas assets and goodwill
Other
Total
2009
2008
140.4
5.0
24.3
(0.5)
7.6
14.9
(1.4)
190.3
117.3
7.2
11.4
(9.1)
(16.7)
50.7
5.5
166.3
Depletion, depreciation, and accretion increased to $140.4 million or $31.51 per Boe in 2009 compared to
$117.3 million or $23.28 per Boe in 2008. The increase was primarily due to high finding and developing
costs in recent years.
24 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
At December 31, 2009, Paramount recorded $24.3 million of dry hole expenses related to suspended
exploratory well costs. The charge was primarily related to exploratory wells in the Kaybob and Northern
COUs that were suspended for more than one year, where it was determined that sufficient progress was
no longer being made in assessing reserves. The 2008 dry hole expense related primarily to unsuccessful
wells in the Northern and Grande Prairie COUs.
The Company recorded a $14.9 million (2008 - $40.4 million) impairment charge on petroleum and natural
gas properties primarily in the Southern and Grande Prairie COUs. The write-down was the result of
exploration and development capital costs exceeding the net present value of the reserves discovered.
In 2008, the Company recorded a $10.3 million impairment charge of goodwill due to an excess of carrying
value over the fair value of its reporting units.
Strategic Investments
Year ended December 31
Loss from investments
Drilling operations, net
Stock-based compensation
Other expenses
Segment Earnings (Loss)
2009
2008
(7.3)
(3.7)
(4.6)
(2.4)
(18.0)
(93.4)
–
0.3
(3.3)
(96.4)
Strategic Investments at December 31, 2009 include the following:
•
investments in Trilogy, MEG Energy Corp. (“MEG Energy”), MGM Energy, NuLoch Resources Inc.
(“Nuloch”), Paxton Corporation and Redcliffe Exploration Inc. (“Redcliffe”);
• oil sands resources at Hoole, situated within the western portion of the Athabasca Oil Sands
region, and carbonate bitumen holdings in Northeast Alberta;
•
•
shale gas holdings in the Horn River and Liard Basins; and
three drilling rigs operated by Paramount’s wholly-owned subsidiaries: Fox Drilling in Canada and
Paramount Drilling in the United States.
The loss from investments in 2009 includes $17.4 million of equity losses, a net dilution gain of $6.9
million, and a gain of $3.2 million on the disposition of the Company’s 6.1 million Class A common shares
of NuLoch in September for proceeds of $4.6 million. The prior year loss from investments includes a
$41.8 million write-down of MGM Energy and a $50.0 million write-down of MEG Energy.
During 2009, Paramount participated in Trilogy’s distribution reinvestment plan, acquiring an additional 1.7
million units. In October 2009, Trilogy issued 10 million trust units and Paramount recognized a dilution gain
of $8.5 million. At December 31, 2009 Paramount’s equity interest in Trilogy was 21.7 percent compared
to 23.3 percent at December 31, 2008.
On February 5, 2010, Trilogy converted from an income trust to a corporation, named Trilogy Energy Corp.,
through a business combination with a private company. Paramount’s 24.1 million Trilogy units (as of
February 5, 2010) were converted into 12.8 million common shares of Trilogy Energy Corp., which are
pledged as security for Paramount’s US Senior Notes, and 11.3 million non-voting shares of Trilogy Energy
Corp. The non-voting shares convert to common shares on a one-for-one basis if: i) beneficial ownership of
25
the non-voting shares are transferred to any person that is not related to or affiliated with Paramount; or ii)
Trilogy Energy Corp. exercises its right to convert the non-voting shares to common shares. Following the
conversion, Paramount owned approximately 21 percent of Trilogy Energy Corp.’s equity and
approximately 15 percent of the voting shares.
During the year, the Company purchased 19.6 million Class A shares and 57,444 Class B shares of
Redcliffe for $5.0 million. As of December 31, 2009, Paramount owned 16.6 percent of Redcliffe’s
outstanding Class A shares and 3.8 percent of Redcliffe’s outstanding class B shares.
In October 2009, Paramount acquired 6.6 million Class A common shares of NuLoch for $4.6 million.
Paramount owns three drilling rigs: one is located in the United States, one was moved to Canada in the
year, and a third newly constructed rig was also moved to Canada. The rigs in Canada participated in the
Company’s 2009/2010 winter drilling program in the Grande Prairie and Kaybob COUs. The third drilling rig
remains in North Dakota.
Corporate
Year ended December 31
General and administrative
Stock-based compensation
Depletion and depreciation
Interest and financing charges
Foreign exchange (gain) loss
Other (income) expense
Corporate costs
2009
14.7
12.9
1.0
10.7
(11.5)
(0.2)
27.6
2008
22.6
4.3
1.7
9.9
3.3
(2.7)
39.1
Corporate segment net costs were $27.6 million in 2009, compared to $39.1 million in the prior year. The
Company’s continued focus on cost control in 2009 resulted in a decrease in general and administrative
costs of $7.9 million, including a $5.1 million reduction in personnel costs. The foreign exchange gain in
2009 was primarily the result of an unrealized gain of $16.1 million on the outstanding US Senior Notes.
Capital Expenditures
Year ended December 31
Geological and geophysical
Drilling and completions
Production equipment and facilities
Exploration and development expenditures
Land and property acquisitions
Proceeds on dispositions and other
Principal Properties
Strategic Investments
Corporate
Net capital expenditures
26 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
2009
5.2
65.1
23.1
93.4
6.4
(0.8)
99.0
17.6
0.1
116.7
2008
7.1
137.1
26.6
170.8
17.6
(21.2)
167.2
14.8
1.0
183.0
MANAGEMENT’S DISCUSSION AND ANALYSIS
Exploration and development expenditures for the year ended December 31, 2009 were $93.4 million
compared to $170.8 million in 2008. Current year expenditures were reduced by $3.8 million as a result of
the Alberta Drilling Royalty Credit program.
Exploration and development expenditures in 2009 were focused on the Karr-Gold Creek deep gas project
and facility expansion in the Grande Prairie COU and drilling Deep Basin wells in the Smoky, Musreau and
Resthaven areas in the Kaybob COU. Paramount’s 2009 exploration and development budget was $90
million. The 17 well shallow gas drilling program originally planned at Chain in the Southern COU was
delayed until 2010 due to low natural gas prices, and instead, development of the Karr-Gold Creek deep
gas project was accelerated.
Strategic Investments capital expenditures in 2009 included $7.2 million for land, $8.0 million for
construction and commissioning of the third drilling rig and $2.0 million to drill seven oil sands evaluation
wells at Hoole.
Wells drilled are as follows:
(wells drilled)
Gas
Oil
Oil sands evaluation
Dry and abandoned
Total
2009
2008
Gross(1)
Net(2)
Gross(1)
Net(2)
22
2
7
–
31
13
1
7
–
21
43
25
–
3
71
20
16
–
2
38
(1) Gross is the number of wells in which Paramount has a working interest or a royalty interest that may be converted to a working interest.
(2) Net is the aggregate number of wells obtained by multiplying each gross well by Paramount’s percentage of working interest.
Liquidity and Capital Resources
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 acquiring or disposing of assets.
2009
2008
Change
Working capital(1)
US Senior Notes (excluding unamortized financing fees)
Net debt
Share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Total Capital
(43.5)
94.4
50.9
393.1
2.9
373.7
3.2
823.8
(1) Excludes risk management assets and liabilities and stock-based compensation liabilities.
(12.9)
110.4
97.5
302.7
2.4
473.4
–
876.0
(30.6)
(16.0)
(46.6)
90.4
0.5
(99.7)
3.2
(52.2)
27
Working Capital
Paramount’s working capital surplus at December 31, 2009 was $43.5 million compared to a surplus of
$12.9 million at December 31, 2008. The increase in working capital is primarily due to the fourth quarter
share issuances and funds flow from operations, partially offset by capital spending.
During the year, the Company refinanced its drilling rigs with a $30.4 million drilling rig loan from a
Canadian bank. Interest is payable at the bank’s prime lending rate or bankers’ acceptance rate, as selected
by the Company, plus an applicable margin. Recourse and security for the drilling rig loan is limited to
Paramount’s three drilling rigs and drilling contracts guaranteed by Paramount. Proceeds from the drilling
rig loan were used to pay down the credit facility balance. A $1.0 million principal payment was made in
December 2009.
Paramount expects to finance its 2010 operations, contractual obligations, and capital expenditures from
existing cash and cash equivalents, from funds flow from operations, and from available borrowing
capacity, if required.
Bank Credit Facility
Paramount’s credit facility has a borrowing base and lender commitment of $125 million and is available on
a revolving basis to April 30, 2010. The Company has requested an extension to the revolving term of its
credit facility to April 29, 2011 and expects to finalize details of the extension before April 30, 2010. In the
event the revolving period is not extended, the facility would be available on a non-revolving basis for an
additional year, at which time the facility would be due and payable. As of December 31, 2009, no balance
was drawn on the credit facility. Paramount had undrawn letters of credit outstanding at December 31,
2009 of $16.2 million that reduce the amount available to the Company under the credit facility.
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.
US Senior Notes
At December 31, 2009 the outstanding balance of Paramount’s 8.5% US Senior Notes remains at US$90.2
million ($94.4 million).
In 2007 and 2008, Paramount made open market repurchases of US$123.4 million principal amount of US
Senior Notes, reducing the outstanding balance to US$90.2 million 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 in 2008. In January 2009, Paramount received $12.2
million (2008 – paid $15.8 million) on settlement of the contract.
Share Capital
In November 2008, Paramount received regulatory approval under Canadian securities laws to purchase
Common Shares under a NCIB commencing November 20, 2008 for a twelve month period. Under the
NCIB, Paramount was permitted to purchase for cancellation up to 3,387,456 Common Shares. During
2009, Paramount purchased 615,600 Common Shares under the NCIB for a total cost of $4.2 million, of
which $2.8 million was charged to share capital and $1.4 million was charged to retained earnings.
28 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Including NCIB purchases in 2008, a total of 1,623,900 Common Shares were purchased by Paramount
under the NCIB for a total cost of $11.4 million.
In October 2009, Paramount issued 1,000,000 Canadian Development Expense flow-through Common
Shares for gross proceeds of $16.9 million to a company controlled by Paramount’s Chairman and Chief
Executive Officer.
In November 2009, Paramount issued 500,000 Canadian Exploration Expense flow-through Common
Shares for gross proceeds of $9.4 million through a private placement and 4,500,000 Common Shares for
gross proceeds of $67.5 million through a public offering. A portion of the net proceeds were used to repay
outstanding indebtedness under the Company’s credit facility.
At March 2, 2010, Paramount had 72,470,024 Common Shares and 4,303,700 Stock Options outstanding
(974,534 exercisable).
Quarterly Information
2009
2008
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Petroleum and natural gas sales
45.0
36.3
40.2
40.2
54.7
83.5
102.9
77.0
Funds flow from operations
per share - diluted ($/share)
18.8
0.27
10.2
0.15
13.7
0.21
17.6
0.27
68.2
1.01
40.9
0.60
46.3
0.68
24.2
0.36
Net earnings (loss)
per share - basic & diluted ($/share)
(46.4)
(0.67)
(25.2)
(0.38)
(2.6)
(0.04)
(23.7)
(0.36)
(150.5)
(2.23)
103.9
1.53
(31.9)
(0.47)
(38.0)
(0.56)
Sales volumes
Natural gas (MMcf/d)
Oil and NGLs (Bbl/d)
Total (Boe/d)
Average realized price
Natural gas ($/Mcf)
Oil and NGLs ($/Bbl)
47.0
3,673
11,514
49.9
3,733
12,046
59.1
3,512
13,362
51.1
3,398
11,912
53.4
3,298
12,202
57.3
3,657
13,206
67.7
3,611
14,895
65.8
3,811
14,775
4.85
71.00
3.24
62.33
4.03
57.83
5.73
45.38
7.43
60.04
8.65
112.64
10.54
115.55
7.68
89.44
Significant Items Impacting Quarterly Results
Quarterly earnings variances include the impacts of changing production volumes and market prices.
• Fourth quarter 2009 earnings includes $24.3 million of dry hole expenses related to suspended
exploratory well costs and a $14.9 million write-down of petroleum and natural gas properties.
• Third quarter 2009 earnings include higher stock-based compensation charges, and lower earnings
from Strategic Investments.
• Second quarter 2009 earnings include increased future income tax recoveries and lower operating
expenses.
• First quarter 2009 earnings include lower Corporate costs and Strategic Investment losses.
29
• Fourth quarter 2008 earnings include a $50.7 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 $15.0 million on financial commodity contracts.
Fourth Quarter Review
Netback
Three months ended December 31
Revenue
Royalties
Operating expense and production tax
Transportation expense
Netback
Settlements of financial commodity contracts
Netback including settlements of financial commodity contracts
Netback including settlements of financial commodity contracts ($/Boe)
Funds Flow from Operations
Three months ended December 31
Cash flow from operating activities
Change in non-cash working capital
Funds flow from operations
Funds flow from operations ($/Boe)
2009
45.0
(7.4)
(12.5)
(3.4)
21.7
1.7
23.4
22.13
2009
21.3
(2.5)
18.8
17.75
2008
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
Paramount’s fourth quarter sales volumes of 11,514 Boe/d consisted of 47.0 MMcf/d (2008 – 53.4
MMcf/d) of natural gas and 3,673 Bbl/d (2008 – 3,298 Bbl/d) of oil and NGLs, generating revenue of $45.0
million, a decrease of $9.7 million from the prior year comparable quarter due to lower natural gas prices
and production volumes, partially offset by higher oil and NGL prices and production.
Fourth quarter royalties increased to $7.4 million in 2009 compared to $7.0 million in 2008, primarily as a
result of higher oil royalties in the Grande Prairie and Southern COUs, partially offset by lower natural gas
royalties due to lower natural gas revenue. The decrease in operating expenses in the fourth quarter of
2009 compared to the prior year is primarily related to higher prior year workover and equalization costs in
the Grande Prairie COU, higher prior year equalization costs in the Northern COU and includes the impacts
of lower oilfield service costs in 2009.
Funds flow from operations in the fourth quarter of 2009 decreased by $49.4 million to $18.8 million
compared to $68.2 million in 2008, primarily due to a $40.7 million decrease in receipts from settlements
of financial commodity contracts and a $9.7 million decrease in revenue.
30 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Fourth quarter exploration and development expenditures of $21.5 million were primarily related to the
Grande Prairie COU’s Karr-Gold Creek deep gas program and drilling horizontal wells in the Kaybob COU.
Subsequent Event
In January 2010 Paramount closed an acquisition of oil and gas properties and facilities in the Karr-Gold
Creek area of Grande Prairie for $8.1 million.
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 hold Paramount Options. Stock-based compensation expense related to these
awards accrues to Paramount. The following table summarizes the related party transactions:
Year ended December 31
2009
2008
Services agreement
Stock-based compensation
Trilogy
MGM Energy
Trilogy
MGM Energy
0.5
0.1
0.6
0.1
–
0.1
0.3
0.6
0.9
0.2
–
0.2
Paramount also has transactions with Trilogy and Paramount Energy Operating Corp. (“PEOC”) in the
normal course of business, including joint venture operations. PEOC is a wholly-owned subsidiary of
Paramount Energy Trust, and related by common significant influence. These transactions are recorded at
their exchange amounts.
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 had been paid to the supplier. At December 31, 2009, the supplier was paid in full. An individual
who indirectly owns part of the supplier is also a director of a company affiliated with Paramount.
31
Significant Equity Investee
The following table summarizes the assets, liabilities and results of operations of Trilogy Energy Trust. The
amounts summarized have been derived directly from Trilogy’s financial statements as at and for the years
ended December 31, 2009 and 2008, 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.
As at December 31
Current assets
Long term assets
Current liabilities
Long term liabilities
Equity
Trilogy
2009
2008
54.1
839.1
63.8
394.8
434.6
78.2
879.4
70.7
470.8
416.1
Year ended December 31
Revenue
Expenses
Tax expense (recovery)
Net earnings (loss)
Units outstanding at December 31 (thousands)
Paramount’s equity interest in Trilogy at December 31(1)
Readers are cautioned that Paramount does not have any direct or indirect interest in or right to Trilogy’s assets or revenue, nor does Paramount have any direct or indirect
425.8
294.1
8.3
123.4
95,997
23.3%
220.8
260.1
(5.9)
(33.4)
110,490
21.7%
2009
2008
(1)
obligation in respect of or liability for Trilogy’s expenses or obligations.
Trilogy had 4.6 million trust unit options outstanding (1.1 million exercisable) at December 31, 2009 at
exercise prices ranging from $4.85 to $12.88 per unit.
Outlook
Paramount's 2010 exploration and development budget is $130 million, excluding land purchases. The
2010 budget will focus on drilling and facility construction at Karr-Gold Creek in the Grande Prairie COU and
Deep Basin opportunities in the Kaybob COU. In addition to the exploration and development budget, the
Company has planned a $10 million oil sands drilling and evaluation program in the Hoole area. The
Company has flexibility within its current capital plan to increase or decrease spending, depending upon
future economic conditions, among other factors. Based on current production levels, market conditions,
and the current exploration and development budget, 2010 annual average production is expected to be
approximately 13,000 Boe/d.
Contractual Obligations
Paramount had the following contractual obligations at December 31, 2009:
2010
2011-2012
2013-2014
After 2014
Total
US Senior Notes, including interest
8.1
16.1
98.7
Drilling rig loan, including interest
Pipeline transportation commitments (1)
Operating leases
Total
(1) Certain of the pipeline transportation commitments are secured by $3.6 million of outstanding letters of credit million at December 31, 2009.
–
127.8
2.4
51.2
5.8
30.7
18.8
11.4
21.3
13.2
10.3
3.6
38.3
–
38.3
–
–
122.9
33.8
83.1
8.2
248.0
32 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Flow-Through Shares
In the fourth quarter of 2009, the Company committed to renounce $9.4 million of Canadian exploration
expenses and $16.9 million of Canadian development expenses pursuant to flow-through share issuances.
The Company has until December 31, 2010 to incur these expenditures.
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.
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 reserves. All costs of
development wells are capitalized. Costs of drilling exploratory wells are initially capitalized, pending
evaluation of reserves. If economically recoverable reserves are not found, such costs are charged to
earnings.
Effective October 1, 2009, for purposes of calculating depletion, the Company adopted the Financial
Accounting Standards Board update for Oil and Gas Reserve Estimation and Disclosures applicable to
Accounting Standards Codification Topic 932 (“ASC 932”). The ASC 932 update changes the pricing
methodology for proved reserves from period end pricing to an average of first day of month pricing for 12
months, consistent with the modernized US Securities and Exchange Commission reserves definition. The
effect of adopting ASC 932 for the year ended December 31, 2009 was to increase depletion expense by
$7.2 million, decrease future income tax expense by $1.9 million, decrease net earnings by $5.3 million,
and decrease basic and diluted earnings per share by $0.08.
33
Paramount recognizes royalty drilling credits as a reduction to property plant and equipment. The credits
are recognized as they are earned, as determined by well depth, to the extent the Company anticipates
being able to use the credits to reduce future royalties payable to the crown.
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 those preparing the estimate.
In 2009, all of Paramount’s reserves were evaluated by a qualified independent reserves evaluator.
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.
Estimates of reserves impact: (i) the assessment of whether or not an exploratory well has found
economic reserves; (ii) depletion rates; and (iii) impairment assessments of oil and gas properties, all of
which could have a material impact on earnings.
Impairment of Petroleum and Natural Gas Properties
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 reserves. Reserve estimates, as well as estimates for petroleum and
natural gas prices, royalties, transportation 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 development. Criteria utilized in making this determination include
evaluation of the reservoir characteristics and hydrocarbon properties, expected development costs, and
regulations.
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 as accretion expense, and for revisions
in either the timing or the amount of the original estimated cash flows associated with the liability.
34 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Estimates of asset retirement costs are subject to uncertainty associated with the method, timing and
economic and regulatory environments. 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. The Company estimates
fair value based on factors including the expected future cash flows from the investment and public trading
prices of investees’ shares or units. If the carrying value of an investment exceeds its estimated fair value
and the impairment is assessed to be other than temporary, an impairment loss is recognized and the
carrying value is written down to the fair value estimate. The process of assessing investments for
impairment requires the application of various assumptions and judgments, including assessing whether
the fair value of investments will return to their carrying value in reasonable periods and estimating the
duration 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
Effective December 31, 2009, the Company adopted amendments to CICA section 3862 – “Financial
Instruments – Disclosures”. The amendments include a three level fair value disclosure hierarchy related to
financial instruments and improved liquidity risk disclosures associated with financial instruments.
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 converted to International Financial Reporting Standards ("IFRS") for fiscal
years beginning on or after January 1, 2011. The Company commenced the IFRS transition process in
2008, including:
35
Project Management
A steering committee has been established to monitor the transition and a project team has been
assembled to research, analyze and implement the transition to IFRS. Paramount’s steering committee
consists of senior members of management whose responsibilities include the approval of policy
recommendations where alternatives are permitted. The project team is continuing to analyse policy
changes and disclosure requirements and is actively participating in IFRS peer working groups and
attending training courses.
Diagnostic
A diagnostic that identified key differences between existing Canadian GAAP and IFRS, as they relate to
the Company, was completed in 2008.
Research and Policy Design
The project team has prepared Company specific draft accounting position papers based on the research
conducted, and is engaged in on-going discussions with the Company’s auditors.
Through the diagnostic, the Company identified property plant and equipment as one key difference,
among others. Although Paramount follows the successful efforts method of 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. The project team has completed the
preliminary determination of its cash generating units, which will impact impairment. Prior year’s
impairments and depreciation may be required to be calculated on a retroactive basis and be reversed in
certain circumstances.
Other significant differences include, but are not limited to, accounting for cash-settled stock-based
compensation liabilities, translating the monetary balances of foreign subsidiaries denominated in foreign
currencies and accounting for available-for-sale investments in private companies carried at cost.
Implementation
This phase includes employee and stakeholder training, approval and implementation of accounting policy
changes, implementation of new and changed processes, implementation and testing of new systems and
controls as well as the preparation of an opening IFRS balance sheet. This phase will be the focus for 2010
and will include the following key activities:
• Testing and implementation of IFRS information system modifications. The modifications have
been tested in a test environment and will be incorporated into systems in the second quarter of
2010, enabling the Company to generate IFRS balances in parallel with Canadian GAAP balances.
• The determination of Paramount’s IFRS policy choices and IFRS 1 elections will be substantially
completed in the second half of 2010.
• Preparing the opening balance sheet and the reconciliation from Canadian GAAP to IFRS.
Quantification of IFRS impacts on the opening IFRS balance sheet will be completed in the latter
half of 2010.
• Drafting IFRS financial statement disclosures. A preliminary draft of Paramount’s IFRS disclosure
will be completed in the second half of 2010.
36 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
• As the IFRS accounting policies and processes are determined, corresponding changes to internal
controls over financial reporting and disclosure controls procedures will be made to ensure controls
remain effective.
Business Activities
Paramount is a reserves-based borrower and changes to the carrying value of its assets are not expected
to have a significant impact on the Company’s debt structure or agreements.
Disclosure Controls and Procedures
As of the year ended December 31, 2009, 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
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.
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.
Management has assessed the effectiveness of the Company’s internal control over financial reporting as
at December 31, 2009. 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, 2009.
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.
37
Changes in Internal Controls Over Financial Reporting
During the fiscal year and quarter ended December 31, 2009, 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 Information
Certain statements in this document constitute forward-looking information under applicable securities
legislation. Forward-looking information in this document includes references to:
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
expected production volumes;
planned exploration and development budget;
budget allocations and capital spending flexibility;
planned per well cost reduction and improved
reserve recovery in the Kaybob COU;
the outcome of the Crown royalty and income
tax audits and assessments;
expected future plans relating to the North
Dakota properties;
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
expected drilling programs, well tie-ins, facility
expansions and the timing thereof;
planned timing of the application for regulatory
approval of the Hoole pilot project;
reserve and resource estimates
capital structure and the flexibility to change
future business plans; and
the expected extension of the revolving term of
the credit facility.
Forward-looking information is based on a number of assumptions. In addition to any other assumptions
identified in this document, assumptions have been made regarding: future oil and gas prices remaining
economic and provisions for contingencies being adequate. Assumptions have also been made relating to
production levels from existing wells and exploration and development plans based on management’s
experience, historical trends, current conditions and anticipated future developments.
Undue reliance should not be placed on forward-looking information. Forward-looking information is based
on risks and uncertainties which could cause actual results to differ materially from those anticipated by
Paramount and described in the forward-looking information. The material risks and uncertainties include,
but are not limited to:
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
fluctuations in oil and gas prices, foreign currency
exchange rates and interest rates;
the uncertainty of estimates and projections
relating to future production, costs and expenses;
the ability to secure adequate product processing,
transportation and storage;
the uncertainty of exploration, development and
drilling;
operational risks in exploring for, developing and
producing crude oil and natural gas, and the timing
thereof;
the ability to obtain equipment, services, supplies
and personnel in a timely manner;
potential disruption or unexpected
technical
difficulties in designing, developing or operating
new or existing facilities;
(cid:131) risks and uncertainties involving the geology of
oil and gas deposits;
(cid:131) the uncertainty of
estimates;
reserves and
resource
(cid:131) the ability to generate sufficient cash flow from
operations and other sources of financing at an
acceptable cost to meet current and future
obligations;
(cid:131) changes to the status or interpretation of laws,
regulations or policies;
(cid:131) the
timing of governmental or
regulatory
approvals;
(cid:131) changes in general business and economic
conditions;
(cid:131) uncertainty regarding aboriginal land claims and
co-existing with local populations; and
(cid:131) the effects of weather.
38 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
The foregoing list of risks is not exhaustive. Additional information concerning these and other factors
which could impact Paramount are included in Paramount’s most recent Annual Information Form. The
forward-looking information contained in this document is made as of the date hereof and, except as
required by applicable securities 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
In this document "Funds flow from operations", "Funds flow from operations - per Boe", "Funds flow from
operations per share - diluted", "Netback", "Netback including settlements of financial commodity contracts"
and "Net Debt", collectively the "Non-GAAP measures", are used do not have any standardized meanings as
prescribed by GAAP. They 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. The Non-GAAP measures are unlikely to be comparable to similar measures presented by
other issuers.
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
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.
39
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
March 10, 2010
/s/ Bernard K. Lee
Bernard K. Lee
Chief Financial Officer
40 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS
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, 2009 and 2008 and the Consolidated Statements of Loss, Shareholders’ Equity,
Comprehensive Loss, and Cash Flows for each of the years in the two-year period ended December 31,
2009. 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
consolidated financial position of the Company as at December 31, 2009 and 2008 and the results of its
operations and its cash flows for each of the years in the two-year period ended December 31, 2009 in
conformity with Canadian generally accepted accounting principles.
As disclosed in Note 1(f) to the Consolidated Financial Statements, the Company has changed its reserve
estimates as a result of adopting new oil and gas reserve estimation requirements.
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, 2009,
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 3, 2010 expressed an
unqualified opinion thereon.
Calgary, Canada
March 3, 2010
Chartered Accountants
41
PARAMOUNT RESOURCES LTD.
Consolidated Balance Sheet
($ thousands)
As at December 31
ASSETS (Note 6)
Current assets
Cash and cash equivalents
Accounts receivable
Risk management assets (Note 11)
Prepaid expenses and other
Property, plant and equipment, net (Note 3)
Investments (Note 4)
Future income taxes (Note 10)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Drilling rig loan (Note 5)
Accounts payable and accrued liabilities
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
Share capital (Note 8)
Contributed surplus
Retained earnings
Accumulated other comprehensive income
See the accompanying notes to these Consolidated Financial Statements
On behalf of the Board
/s/ J.H.T. Riddell
J.H.T. Riddell
Director
42 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
2009
2008
$
93,238
23,488
2,187
2,301
121,214
716,235
234,586
29,940
$ 1,101,975
$
29,380
46,162
11,441
86,983
93,655
103,462
3,771
41,194
329,065
393,087
2,890
373,745
3,188
772,910
$ 1,101,975
$
54,131
41,319
19,690
1,661
116,801
766,103
234,423
27,230
$ 1,144,557
$
–
84,192
19
84,211
109,452
87,237
–
85,170
366,070
302,727
2,398
473,362
–
778,487
$ 1,144,557
/s/ J.C. Gorman
J.C. Gorman
Director
PARAMOUNT RESOURCES LTD.
Consolidated Statement of Loss
($ thousands, except as noted)
Year ended December 31
Revenue
Petroleum and natural gas sales
Gain 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 expenses (Note 3)
Gain on sale of property, plant and equipment
Write-down of petroleum and natural gas assets (Note 3)
Write-down of goodwill (Note 3)
Interest and financing charges
Foreign exchange
Debt extinguishment and other
Loss from investments (Note 4)
Other income (loss)
Loss before tax
Income and other tax expense (recovery) (Note 10)
Current and other
Future
Net loss
Net loss per common share ($/share) (Note 8)
Basic
Diluted
See the accompanying notes to these Consolidated Financial Statements.
CONSOLIDATED FINANCIAL STATEMENTS
2009
2008
$
161,671
5,277
(20,659)
146,289
56,669
13,842
17,217
17,599
141,597
5,316
24,343
(534)
14,939
–
11,214
(11,503)
(395)
290,304
(7,333)
(1,168)
$
318,088
34,140
(47,827)
304,401
72,080
15,719
25,946
3,956
121,085
7,201
11,380
(9,068)
40,416
10,258
9,903
3,297
5,894
318,067
(93,375)
5,113
(152,516)
(101,928)
(889)
(53,743)
(54,632)
(4,063)
18,758
14,695
$
(97,884)
$
(116,623)
$
$
(1.46)
(1.46)
$
$
(1.72)
(1.72)
43
PARAMOUNT RESOURCES LTD.
Consolidated Statement of Cash Flows
($ thousands)
Year ended December 31
2009
2008
Operating activities
Net loss
Add (deduct)
Items not involving cash (Note 13)
Asset retirement obligation expenditures
Exploration and dry hole expenses
Gain on sale of available-for-sale investments
Debt extinguishment costs
Stock incentive plan
Change in non-cash working capital (Note 13)
Cash from operating activities
Financing activities
Proceeds from drilling rig loan, net
Repayment of drilling rig loan
Repayment of long-term debt
Settlement of foreign exchange contracts
Common shares issued, net of issuance costs
Common shares repurchased (Note 8)
Cash from (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
Proceeds on sale of investment
Settlement of note receivable
Change in non-cash working capital (Note 13)
Cash used in investing activities
$
(97,884)
$
(116,623)
137,511
(4,050)
29,659
(3,193)
–
(1,775)
60,268
11,797
72,065
30,307
(1,000)
–
12,205
91,170
(4,219)
128,463
(117,510)
791
(20,005)
4,605
–
(29,302)
(161,421)
285,621
(8,400)
18,581
–
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
$
54,131
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
39,107
54,131
93,238
$
Supplemental cash flow information (Note 13)
See the accompanying notes to these Consolidated Financial Statements.
44 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
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
Tax effect of flow-through share renunciations and other
Common shares repurchased
Change in unvested common shares for stock incentive plan
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
Common shares repurchased
Change in value of unvested common shares for stock incentive
plan
Net loss
Balance, end of year
Accumulated Other Comprehensive Income
Balance, beginning of year
Other comprehensive income, net of tax of $429
Balance, end of year
Total Shareholders’ Equity
See the accompanying notes to these Consolidated Financial Statements.
Consolidated Statement of Comprehensive Loss
($ thousands)
Year ended December 31
Net loss
Other comprehensive income (loss), net of tax
Change in unrealized gain (loss) on available-for-sale investments
Reclassification of accumulated (gains) losses to earnings
Comprehensive loss
See the accompanying notes to these Consolidated Financial Statements.
2009
2008
Shares
(000’s)
66,741
6,111
–
(616)
(178)
72,058
Shares
(000’s)
67,681
75
–
(1,015)
–
66,741
$ 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
$
$
$
$
$
$
$
$
$
302,727
92,767
–
(2,815)
408
393,087
2,398
492
2,890
473,362
(1,404)
(329)
(97,884)
373,745
–
3,188
3,188
772,910
2009
$
(97,884)
$
6,381
(3,193)
(94,696)
$
$
2008
(116,623)
(5,127)
5,131
(116,619)
45
($ THOUSANDS, EXCEPT AS NOTED)
1. Summary of Significant Accounting Policies
Paramount Resources Ltd. (“Paramount” or the “Company”) is an independent Canadian energy company
that explores for, develops, produces, 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., Paramount Drilling U.S. LLC (“Paramount Drilling”) and Fox Drilling Inc. (“Fox
Drilling”).
Investments in 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 available for sale 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 dependent 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 the 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.
Tax legislation, regulations, and the interpretation thereof in the various jurisdictions in which the Company
operates are complex and subject to change. As such, income taxes are subject to measurement
uncertainty.
46 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS
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
capitalizes its working interest share of the 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 that sufficient
progress is being made 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 recorded 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 of oil
equivalent on the basis of six thousand cubic feet per barrel. Depletion rates are revised annually, or more
frequently when events dictate. Exploratory costs and unproved properties 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 and significant components are depreciated over their expected useful lives, varying from 1,000
to 3,600 drilling days.
47
($ THOUSANDS, EXCEPT AS NOTED)
Change in Estimate
Effective December 31, 2009, the Company adopted the Financial Accounting Standards Board update for
Oil and Gas Reserve Estimation and Disclosures applicable to Accounting Standards Codification Topic 932
(“ASC 932”). The ASC 932 update changes the pricing methodology for proved reserves used in
calculating depletion from end of period pricing to an average of first day of month pricing for 12 months,
consistent with the modernized US Securities and Exchange Commission reserves definition. ASC 932 is
considered a change in accounting estimate and therefore was adopted prospectively and applied to the
quarter ended December 31, 2009 consistent with the Company’s policy. The effect of adopting ASC 932
for the year ended December 31, 2009 was to increase depletion expense by $7.2 million, decrease future
income tax expense by $1.9 million, decrease net earnings by $5.3 million, and decrease basic and diluted
earnings per share by $0.08.
g)
Asset Retirement Obligations
Asset retirement obligations include those legal obligations where Paramount will be required to retire
tangible long-lived assets. 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 and the liability are recognized in earnings, when
reclamation of the field is completed.
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, 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 at
rates in effect on the dates the assets were acquired or liabilities incurred. Results of foreign operations
are translated into Canadian dollars at the monthly average exchange rates for revenues and expenses,
except for depreciation and depletion which are translated at the rate of exchange applicable to the related
assets. Resulting translation gains and losses are included in earnings.
j)
Financial Instruments, Comprehensive Income and Hedges
Paramount periodically uses derivative instruments such as forwards, futures, swaps and options to
manage its exposure to fluctuations in petroleum and natural gas prices, foreign exchange rates, and
interest rates.
48 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS
Financial Instruments
Financial instruments are measured at fair value on initial recognition of the instrument. Measurement in
subsequent periods is dependent upon whether the financial instrument has been classified as “held-for-
trading”, “available-for-sale”, “held-to-maturity”, “loans and receivables”, or “other financial liabilities” as
defined by the standard. 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 loss (“OCI”), net of tax. 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. Effective January 1, 2009, the Company adopted
the accounting provisions of Emerging Issues Committee (“EIC”) Abstract EIC 173, “Credit Risk and the
Fair Value of Financial Assets and Financial Liabilities”. EIC 173 requires an entity’s own credit risk and the
credit risk of its counterparties to be considered when determining the fair value of financial assets and
financial liabilities, including derivative instruments. Adopting this accounting change did not have a
material effect on the Company’s financial statements.
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 Statement of Comprehensive Loss. 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.
49
($ THOUSANDS, EXCEPT AS NOTED)
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.
Stock Appreciation Rights
Stock Appreciation Rights (“SARs”) and Holdco Stock Appreciation Rights (“Holdco SARs”) entitled 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 were accounted
for using the intrinsic value method.
Stock Incentive Plan
Paramount’s stock incentive plan provides that rights to Common Shares may be awarded to employees
annually. Common Shares are purchased in the open market and held by an independent trustee until the
completion of the vesting period. Generally, one third of an award vests immediately, with the remaining
tranches vesting annually over two years. The unvested Common Shares balance is recorded as a
reduction of share capital. The fair value of the Common Shares awarded is recognized in stock-based
compensation over the vesting period, with a corresponding charge to equity.
n)
Comparative Figures
Certain comparative figures have been reclassified to conform to the current year’s financial statement
presentation.
o)
Changes in Accounting Policies
Effective December 31, 2009, the Company adopted amendments to CICA Handbook section 3862 –
“Financial Instruments – Disclosures”. The amendments include a three level fair value disclosure
hierarchy related to financial instruments and improved liquidity risk disclosures associated with financial
instruments. The impact of these amendments is included in Note 11.
Future Changes in Accounting Policies
In January 2009, the CICA issued Handbook section 1582 – “Business Combinations”, replacing section
1581 – “Business Combinations”. The new standard requires that the purchase price of a business
combination is based on the fair value of any shares exchanged at the exchange date. Current practice
permits valuing the shares for a reasonable period before and after the acquisition is announced. The new
standard also requires that all acquisition costs associated with the acquisition be expensed, rather than
capitalized as part of the acquisition, that contingent liabilities are recognized at fair value at the acquisition
date and subsequently re-measured through earnings until settled, rather than recognized when virtually
certain, and that negative goodwill is recognized in earnings, rather than allocated back to non-monetary
assets. Section 1582 is effective on January 1, 2011 with prospective application and early adoption
permitted.
50 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS
In January 2009, the CICA issued Handbook section 1601 – “Consolidations” and 1602 “Non-controlling
Interests”, together replacing section 1600 – “Consolidations”. Section 1601 establishes standards for the
preparation of consolidated financial statements, and is effective on January 1, 2011 with early adoption
permitted. Section 1602 requires Non-controlling Interests (“NCI”) to be presented within equity and re-
measured at fair value in the event of a change in control. Currently an increase in an investment is
recorded using the purchase method and a decrease in an investment recorded as a sale with a
corresponding gain or loss. In addition, NCI may be recognized at fair value or at the proportionate share of
the fair value of the acquired net assets. Currently, NCI is recorded at the carrying amount, unless the NCI
has an obligation to fund the losses, in which case the NCI would be in deficit position. Section 1602 is
effective on January 1, 2011 with early adoption permitted.
International Financial Reporting Standards
The Accounting Standards Board of Canada has announced that accounting standards in Canada, as used
by publicly accountable enterprises, 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. The project team has identified key differences, including accounting for property, plant and
equipment, stock-based compensation, and foreign currency transactions among others, developed IFRS
accounting policies and new financial statement disclosures are being drafted. The Company continues to
monitor the development of standards.
51
($ THOUSANDS, EXCEPT AS NOTED)
2. Segmented Information
Paramount has divided its operations into three business segments established by management to assist
in resource allocation, to assess operating performance and to achieve 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 the Peace River Arch area of 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.
• 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, dispositions, or future revenue generation. The three rigs
owned by Paramount Drilling and Fox Drilling are 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.
In the second quarter of 2009, Paramount changed its measurement of Strategic Investments on a retroactive
basis, to include an allocation of general and administrative costs and stock-based compensation.
Year ended December 31, 2009
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 expenses
Gain on sale of property, plant and equipment
Write-down of petroleum and natural gas assets
Interest and financing charges
Foreign exchange
Debt extinguishment and other
Loss from investments
Other income
Drilling rig revenue
Drilling rig expense
Inter-segment eliminations
Segment loss
Income and other tax recovery
Net loss
Principal
Properties
Strategic
Investments
Corporate
Inter-segment
Eliminations
Total
$
$
141,012
5,277
146,289
$
–
–
–
–
–
–
$
–
–
–
$ 141,012
5,277
146,289
70,511
–
–
140,388
29,389
(534)
14,939
–
–
(395)
254,298
–
1,105
–
–
(106,904)
–
(106,904)
$
–
2,510
4,644
1,154
270
–
–
489
–
–
9,067
(7,333)
–
4,768
(5,640)
(17,272)
(735)
(18,007)
$
–
14,707
12,955
959
–
–
–
10,725
(11,503)
–
27,843
–
238
–
–
(27,605)
–
(27,605)
$
–
–
–
(904)
–
–
–
–
–
–
(904)
–
–
(4,388)
2,749
(735)
735
–
$
70,511
17,217
17,599
141,597
29,659
(534)
14,939
11,214
(11,503)
(395)
290,304
(7,333)
1,343
380
(2,891)
(152,516)
–
(152,516)
(54,632)
(97,884)
$
52 PARAMOUNT RESOURCES LTD. │ 2009 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 expenses
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
Other income
Drilling rig revenue
Drilling rig expense
Inter-segment eliminations
Segment earnings (loss)
Income and other tax expense
Net loss
Capital Expenditures
For the year ended December 31
Principal Properties
Strategic Investments
Corporate
Total Assets
As at December 31
Principal Properties
Strategic Investments
Corporate
CONSOLIDATED FINANCIAL STATEMENTS
Principal
Properties
Strategic
Investments
Corporate
Inter-segment
Eliminations
Total
$
$
270,261
34,140
304,401
87,799
–
–
117,289
18,581
(9,068)
40,416
10,258
–
–
5,513
270,788
–
–
–
–
33,613
–
33,613
$
–
–
–
–
3,298
(308)
2,660
–
–
–
–
–
–
–
5,650
(93,375)
–
19,706
(8,332)
(87,651)
(8,740)
(96,391)
$
$
–
–
–
–
22,648
4,264
1,675
–
–
–
–
9,903
3,297
381
42,168
–
3,018
–
–
(39,150)
–
$ (39,150)
$
–
–
–
$ 270,261
34,140
304,401
–
–
–
(539)
–
–
–
–
–
–
–
(539)
–
–
(16,076)
6,797
(8,740)
8,740
–
$
87,799
25,946
3,956
121,085
18,581
(9,068)
40,416
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)
2009
94,692
17,543
79
112,314
$
$
$
2009
685,108
291,083
125,784
$ 1,101,975
2008
181,261
14,833
1,026
197,120
$
$
$
2008
780,188
279,391
84,978
$ 1,144,557
53
($ THOUSANDS, EXCEPT AS NOTED)
Capital expenditures for Principal Properties during the year ended December 31, 2009 include $2.2 million
(2008 – $7.3 million) of drilling expenses for services provided by Paramount Drilling and Fox Drilling.
Geographical Information
2009
Canada
United States
Total
2008
Canada
United States
Total
$
Property, Plant and
Equipment
641,163
75,072
716,235
$
Property, Plant and
Equipment
648,527
117,576
766,103
$
$
Revenue
135,427
26,244
161,671
Revenue
274,026
44,062
318,088
$
$
$
$
Capital
Expenditures
101,028
11,286
112,314
$
$
Capital
Expenditures
116,923
80,197
197,120
$
$
3. Property, Plant and Equipment
Petroleum and natural gas assets
Drilling rigs
Other
2009
Accumulated
Depletion and
Depreciation
$
$
(1,148,007)
(3,172)
(17,143)
(1,168,322)
Net Book
Value
$ 668,997
44,633
2,605
$ 716,235
2008
Net Book
Value
$ 725,796
36,689
3,618
$ 766,103
Cost
1,817,004
47,805
19,748
1,884,557
$
$
Capitalized costs of $165.3 million are currently not subject to depletion (2008 - $219.3 million).
At December 31, 2009, the Company recorded an impairment charge on its petroleum and natural gas
assets of $14.9 million (2008 – $40.4 million) due to an excess of carrying value over net realizable value
determined with reference to the Company’s year-end independent reserves evaluation. In 2008, the
Company recognized a $10.3 million impairment charge 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 expenses
Wells sold
Balance, end of year
$
$
2009
39,575
66,506
(62,347)
(24,343)
–
$
19,391
$
2008
53,619
57,463
(60,008)
(11,380)
(119)
39,575
54 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS
Aging of Capitalized Exploratory Well Costs
Exploratory well costs capitalized for one year or less
Exploratory well costs capitalized for greater than one year
Balance, end of year
Number of projects capitalized for more than one year
$
$
2009
13,059
6,332
19,391
20
$
$
2008
15,146
24,429
39,575
61
At December 31, 2009, 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. At December 31, 2009, the
Company recorded dry hole expenses on suspended exploratory wells costs of $24.3 million. The dry hole
expenses were related to wells that have been suspended for more than one year, and where it was
determined that sufficient progress was no longer being made in assessing reserves.
4.
Investments
Equity accounted investments:
Trilogy Energy Trust (“Trilogy”)
MGM Energy Corp. (“MGM Energy”)
Paxton Corporation
Other
Available-for-sale investments:
MEG Energy Corp. (“MEG Energy”)
NuLoch Resources Inc. (“NuLoch”)
Redcliffe Exploration Inc. (“Redcliffe”)
Other
2009
(Shares/Units)
(000’s)
2008
(Shares/Units)
(000’s)
23,995
43,834
1,750
3,700
6,579
19,667
$ 104,472
5,876
4,574
4,280
119,202
101,750
5,921
7,210
503
$ 234,586
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
Income (loss) from investments is composed of the following:
Equity accounted investments:
Trilogy
MGM Energy
Paxton Corporation
Other
Gain on sale of NuLoch
For the year ended December 31, 2009
Equity
income (loss)
Dilution gain
(loss)
Income (loss)
from investments
$
$
(16,215)
(1,192)
(310)
281
(17,436)
$
$
8,458
(1,548)
–
–
6,910
$
$
(7,757)
(2,740)
(310)
281
(10,526)
3,193
(7,333)
55
($ THOUSANDS, EXCEPT AS NOTED)
Equity accounted investments:
Trilogy
MGM Energy
Other
Available-for-sale investments:
MEG Energy
NuLoch
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)
–
(41,810)
(49,950)
(4,594)
(533)
(96,887)
$
$
23,690
(62,753)
765
(38,298)
(49,950)
(4,594)
(533)
(93,375)
During 2009, Paramount participated in Trilogy’s distribution reinvestment plan (“DRIP”), acquiring an
additional 1.7 million units (2008 – 4.6 million units) for $10.4 million. Paramount allocated $4.9 million
(2008 - $29.5 million) of the aggregate purchase price differential of $6.6 million (2008 - $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 $1.7 million (2008 - $6.1 million) is not subject to amortization. In October
2009, Trilogy issued 10 million trust units. Paramount did not participate in the offering, and as a result
recognized a dilution gain of $8.5 million. As a result of these transactions, Paramount’s equity interest was
reduced to 21.7 percent at December 31, 2009 from 23.3 percent at December 31, 2008.
In the first quarter of 2009, MGM Energy filed renouncement documents with tax authorities relating to
flow-through shares issued during 2008, resulting in Paramount recording a $1.5 million dilution loss. In
October 2009, MGM Energy issued 19.6 million common shares and 6.7 million flow-through common
shares. Paramount did not participate in this offering, and its equity interest was reduced to 15.1 percent at
December 31, 2009 from 16.7 percent at December 31, 2008.
During 2009, the Company purchased 19.6 million Class A shares of Redcliffe for $4.9 million, and 0.1
million Class B shares for $0.1 million. As of December 31, 2009, Paramount owned 16.6 percent of
Redcliffe’s outstanding Class A shares and 3.8 percent of Redcliffe’s outstanding Class B shares.
In September 2009, Paramount sold its 6.1 million Class A common shares of NuLoch for proceeds of $4.6
million. In October 2009, the Company acquired 6.6 million Class A common shares of NuLoch for $4.6
million.
5. Drilling Rig Loan
During 2009, Paramount entered into a $30.4 million demand loan facility (the “Drilling Rig Loan”) with a
Canadian bank. Interest is payable at the bank’s prime lending rate or bankers’ acceptance rate, as selected
at the discretion of the Company, plus an applicable margin. The loan was drawn in full at closing.
Recourse and security for the Drilling Rig Loan is limited to three drilling rigs and drilling contracts
guaranteed by Paramount. The current carrying value of the rigs is $44.6 million. The effective interest rate
on the loan for the period ended December 31, 2009 was 3.9 percent. During the fourth quarter of 2009,
Paramount made a principal repayment of $1.0 million. Unless demanded by the bank, the remaining
annual scheduled principal repayments are as follows: 2010 - $2.5 million; 2011 - $4.0 million; 2012 - $5.1
million; 2013 - $5.1 million and 2014 - $12.7 million.
56 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS
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)
Unamortized debt financing costs
Bank Credit Facility
2009
2008
$
–
$
–
94,394
94,394
(739)
93,655
$
110,448
110,448
(996)
109,452
$
Paramount has a $125 million senior credit facility with a syndicate of Canadian chartered banks. At
December 31, 2009 no balances were drawn on the credit facility, however, Paramount had undrawn
letters of credit outstanding totalling $16.2 million that reduce the amount available under the credit facility.
The facility is available on a revolving basis to April 30, 2010 and can be extended a further 364 days upon
request, subject to approval by the banks. In the event the revolving period is not extended, the facility
would be available on a non-revolving basis for an additional year, at which time the facility would be due
and payable. The facility is secured by a first fixed and floating charge over substantially all of the assets of
Paramount, excluding 12.8 million Trilogy trust units, assets securing the Drilling Rig Loan, and certain oil
and gas resource properties. The facility bears interest at the lenders’ prime lending rates, bankers’
acceptance or LIBOR rates, as selected at the discretion of Paramount, plus an applicable margin on any
amount outstanding, depending upon Paramount’s debt to cashflow ratio and the type of borrowings
selected under the facility.
US Senior Notes
In 2007 and 2008, Paramount made open market purchases of US$123.4 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$213.6 million. The Company has not cancelled the repurchased notes. The US
Senior Notes bear interest at 8.5 percent per annum, mature on January 31, 2013, and are redeemable at
par plus a redemption premium, if applicable, of up to 1.25 percent, if redeemed after January 31, 2010.
They are secured by 12.8 million of the Trilogy trust units held by Paramount.
57
($ THOUSANDS, EXCEPT AS NOTED)
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
Foreign exchange
Asset retirement obligations, end of year
2009
87,237
(88)
2,693
9,334
(4,050)
8,603
(267)
103,462
$
$
2008
97,359
(3,664)
1,920
(9,587)
(8,400)
8,877
732
87,237
$
$
The undiscounted asset retirement obligations at December 31, 2009 total $227.4 million (December 31,
2008 – 215.7 million), which have been discounted using credit-adjusted risk-free rates between 7 7/8
percent and 9 1/2 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.
Normal Course Issuer Bid
In November 2008, Paramount received regulatory approval under Canadian securities laws to purchase
Common Shares under a Normal Course Issuer Bid (“NCIB”), commencing November 20, 2008 for a
twelve month period. Under the NCIB, Paramount was permitted to purchase for cancellation up to
3,387,456 Common Shares. During 2009, Paramount purchased 615,600 Common Shares under the NCIB
for a total cost of $4.2 million, of which $2.8 million was charged to share capital and $1.4 million was
charged to retained earnings. Including NCIB purchases in 2008, a total of 1,623,900 Common Shares
were purchased by Paramount under the NCIB for a total cost of $11.4 million.
Share Issuances
In October 2009, Paramount issued 1,000,000 Canadian Development Expense flow-through Common
Shares for gross proceeds of $16.9 million to a company controlled by Paramount’s Chairman and Chief
Executive Officer.
In November of 2009, Paramount issued 500,000 Canadian Exploration Expense flow-through Common
Shares for gross proceeds of $9.4 million through a private placement, and 4,500,000 Common Shares for
gross proceeds of $67.5 million through a public offering.
Costs for the 2009 share issuances were $2.5 million, net of $0.9 million future tax benefits.
58 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
Weighted Average Shares Outstanding
(thousands of Common Shares)
Weighted average Common Shares outstanding – Basic
Dilutive effect of stock options
Weighted average Common Shares outstanding – Diluted
9. Stock-based Compensation
Paramount Options
CONSOLIDATED FINANCIAL STATEMENTS
2009
67,039
–
67,039
2008
67,671
–
67,671
Paramount has a stock option plan that enables the Board of Directors or its Compensation Committee to
grant to key employees and directors options to acquire Common Shares of the Company (“Paramount
Options”). The exercise price of a Paramount Option is equal to the closing market price of the Common
Shares on the day preceding the grant date. Paramount Options generally vest over five years and expire
within six years after the grant date.
Balance, beginning of year
Granted
Exercised
Cancelled or surrendered
Balance, end of year
Options exercisable, end of year
2009
2008
Weighted
Average
Exercise Price
($ / share)
$
$
$
14.48
9.73
7.89
18.86
8.61
7.51
Number
Weighted
Average
Exercise Price
($ / share)
6,117,700
2,344,000
(121,500)
(3,768,700)
4,571,500
1,208,834
$
$
$
19.49
7.54
7.66
20.88
14.48
12.79
Number
6,430,000
2,551,000
(292,600)
(2,570,700)
6,117,700
1,708,433
Additional information about Paramount Options outstanding at December 31, 2009 is as follows:
Outstanding
Weighted
Average
Contractual
Life
(years)
4.0
5.1
4.2
Weighted
Average
Exercise
Price
($ / share)
$
$
7.34
13.20
8.61
Exercisable
Weighted
Average
Exercise
Price
($ / share)
$
$
7.34
13.54
7.51
Number
1,176,834
32,000
1,208,834
Number
3,582,500
989,000
4,571,500
Exercise Prices
$ 6.22-$10.00
$10.01-$13.54
Total
Stock Appreciation Rights
In 2008, the Company issued 1,280,000 SARs to certain employees, which entitled the holder to receive a
cash payment equal to the difference between the market price of the Company’s Common Shares and
the exercise price on date of surrender. The SARs had a weighted average contractual life of five years at
December 31, 2008 and a vesting period of four years. The exercise price of the SARs of $7.34 was equal
to the closing market price of the Common Shares on the grant date.
59
($ THOUSANDS, EXCEPT AS NOTED)
In February 2009, the SARS were surrendered and cancelled in exchange for the same number of
Paramount Options with the same exercise price and vesting terms.
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 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. All of the Holdco SARs were either exercised or expired
in 2009.
Holdco SARs
2009
2008
Balance, beginning of year
Issued
Exercised
Cancelled or surrendered
Balance, end of year
Exercisable, end of year
Weighted
Average
Exercise Price
($ / share)
$
$
$
12.71
–
9.38
13.47
–
–
Number
Weighted
Average
Exercise Price
($ / share)
109,541
–
(20,458)
(89,083)
–
–
$
$
$
–
12.63
8.60
–
12.71
12.36
Number
–
111,521
(1,980)
–
109,541
93,703
60 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
10. Income Taxes
The following table reconciles income taxes calculated at the Canadian statutory rate to Paramount’s
recorded income tax expense:
CONSOLIDATED FINANCIAL STATEMENTS
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
2009
2008
$
(152,516)
$
(101,928)
29.15%
$
(44,458)
$
29.69%
(30,262)
(2,209)
23,999
7,030
16,314
180
(357)
14,695
906
(14,755)
(1,088)
755
4,631
(623)
(54,632)
$
Income and other tax expense (recovery)
$
Components of Future Income Tax Asset (Liability)
Paramount has a future tax asset in respect of its United States operations and a future tax liability in
respect of its Canadian operations.
Future income tax asset
Property, plant and equipment
Asset retirement obligations
Non-capital and net operating losses
Other
Future income tax (liability)
Timing of partnership items
Property, plant and equipment
Investments
Asset retirement obligations
Other
2009
2008
6,206
1,456
22,050
228
29,940
(31,370)
(19,293)
(400)
25,116
(15,247)
(41,194)
$
$
$
$
5,992
585
20,570
83
27,230
(53,687)
(38,178)
79
21,610
(14,994)
(85,170)
$
$
$
$
Paramount has $136.0 million (2008 - $160.5 million) of unused tax losses expiring between 2014 and
2029. In addition, Paramount has $227.6 million (2008 – $223.4 million) of deductible temporary differences
in respect of investments for which no future income tax asset has been recognized.
61
($ THOUSANDS, EXCEPT AS NOTED)
11. Financial Instruments and Risk Management
Financial Instruments
Financial instruments at December 31, 2009 consisted of cash and cash equivalents, accounts receivable,
risk management assets, available-for-sale investments, the Drilling Rig Loan, accounts payable and
accrued liabilities, and long-term debt.
Fair Values of Financial Assets and Liabilities
Risk management assets are carried at fair value, which are based on forward market curves and
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 100.4 percent of their principal
amount at December 31, 2009.
Available-for-sale investments that are publicly traded are carried at market value. The investment in MEG
Energy is carried at cost, net of 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 three-level hierarchy for fair value measurements is based upon the transparency of inputs to the
valuation of financial instruments recognized at fair value. The three levels are defined as follows:
(cid:129) Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or
liabilities in active markets.
(cid:129) Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities
in active markets, and inputs that are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial instrument.
(cid:129) Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value
measurement.
At December 31, 2009, Paramount’s publicly traded available-for-sale investments were classified as level
1 fair values and risk management assets were classified as level 2 fair values. 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, 2009 are as follows:
Instruments
Total Notional
Average Price
Gas – AECO Swaps
30,000 GJ/d
Fixed - CAD$5.53/GJ
Fair Value
$ 2,187
Remaining Term
January 2010 - October 2010
62 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS
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
2009
Foreign
Exchange
$ 9,883
2,322
(12,205)
-
$
Commodity
$ 9,807
5,277
(12,897)
$ 2,187
Total
$ 19,690
7,599
(25,102)
$ 2,187
Commodity
(6,941)
$
34,140
(17,392)
9,807
$
2008
Foreign
Exchange
$ (22,039)
16,148
15,774
$ 9,883
Total
$(28,980)
50,288
(1,618)
$ 19,690
Paramount has an outstanding commitment to sell 3,400 GJ/d of natural gas at $2.73/GJ plus an escalation
factor to 2011, which has a fair value loss of $4.1 million at December 31, 2009 (December 31, 2008 – loss
of $10.7 million). The Company has designated this contract as normal sales exception, and as a result,
does not recognize the fair value of the contract in the Consolidated Financial Statements.
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, equity price risk, credit risk and liquidity
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, 2009, 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
10% increase
$
(3,500)
10% decrease
$ 3,500
Foreign Currency Risk
The Company uses foreign exchange contracts from time to time to manage foreign exchange risks related
to its US Senior Notes. 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. At
December 31, 2009, a strengthening or weakening of the Canadian dollar relative to the US dollar by 1%
would have had the following effect on Paramount’s net earnings:
US Senior Notes
Strengthen 1%
Weaken 1%
$
800
$
(800)
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.
63
($ THOUSANDS, EXCEPT AS NOTED)
Interest Rate Risk
Paramount is exposed to interest rate risk from time to time on outstanding balances on its floating rate
bank credit facility and the Drilling Rig Loan, and on interest bearing cash and cash equivalents.
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.
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, 2009 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.
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 at least 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:
Drilling rig loan, including interest
Accounts payable and accrued liabilities
US Senior Notes, including interest
2010
2011
2012
2013
$
3,594
46,162
8,050
$ 57,806
$
5,281
–
8,050
$ 13,331
$
6,091
–
8,050
$ 14,141
$
5,838
–
98,736
$ 104,574
2014
$ 13,007
–
–
$ 13,007
Total
$ 33,811
46,162
122,886
$ 202,859
64 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS
12. Capital Structure
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. The capital structure may be
adjusted 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
dependent upon market conditions.
Paramount’s capital structure consists of the following:
Working capital(1)
US Senior Notes (excluding unamortized financing fees)
Net Debt
Share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Total Capital
(1) Excludes risk management assets and liabilities and stock-based compensation liabilities.
2009
2008
$
$
(43,485)
94,394
50,909
393,087
2,890
373,745
3,188
823,819
$
$
(12,919)
110,448
97,529
302,727
2,398
473,362
–
876,016
Paramount is subject to certain covenants under its credit facility, the Drilling Rig Loan, 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, and pay dividends.
65
($ THOUSANDS, EXCEPT AS NOTED)
13. Consolidated Statement 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
Distributions in excess of equity earnings and dilution
Impairment charge - investments
Future income tax
Debt extinguishment, interest and other
Changes in non-cash working capital
Year ended December 31
Short-term investments
Accounts receivable
Prepaid expenses and other
Account payable and accrued liabilities
Operating activities
Investing activities
Supplemental cash flow information
Year ended December 31
Interest paid
Current and other tax paid
Components of cash and cash equivalents
As at December 31
Cash
Cash equivalents
2009
7,620
17,553
141,597
(534)
14,939
–
(15,274)
25,559
–
(53,743)
(206)
137,511
2009
–
19,716
(570)
(36,651)
(17,505)
11,797
(29,302)
(17,505)
2009
11,640
159
2009
23,250
69,988
93,238
$
$
$
$
$
$
$
$
$
$
2008
(16,748)
(2,638)
121,085
(9,068)
40,416
10,258
6,722
18,073
96,887
18,758
1,876
285,621
2008
19,748
18,261
348
(9,532)
28,825
15,310
13,515
28,825
2008
11,092
1,048
2008
29,154
24,977
54,131
$
$
$
$
$
$
$
$
$
$
66 PARAMOUNT RESOURCES LTD. │ 2009 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS
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 hold Paramount Options. Stock-based compensation expense related to these
awards accrues to Paramount. The following table summarizes the related party transactions:
Year ended December 31
2009
2008
Services agreement
Stock-based compensation
Trilogy
MGM Energy
Trilogy
MGM Energy
$
465
55
520
$
$
$
55
–
55
$
$
318
565
883
$
$
229
–
229
Paramount also has transactions with Trilogy and Paramount Energy Operating Corp. (“PEOC”) in the
normal course of business, including joint venture operations. PEOC is a wholly-owned subsidiary of
Paramount Energy Trust, and related by common significant influence. These transactions are recorded at
their exchange amounts.
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 had been paid to the supplier. At December 31, 2009, the supplier was paid in full. An individual
who indirectly owns part of the supplier is also a director of a company affiliated with Paramount.
15. Commitments and Contingencies
Commitments
Paramount had the following commitments as at December 31, 2009:
Pipeline transportation commitments (1)
Operating leases
Total
2010
$ 13,167
5,765
$ 18,932
2011
$ 11,846
1,353
$ 13,199
$
2012
9,430
1,083
$ 10,513
2013
5,198
–
5,198
$
$
2014
$ 5,142
–
$ 5,142
After 2014
$ 38,276
–
$ 38,276
(1) Certain of the pipeline transportation commitments are secured by outstanding letters of credit totaling $3.6 million at December 31, 2009.
Flow-Through Shares
In the fourth quarter of 2009, the Company committed to renounce $9.4 million of Canadian
exploration expenses and $16.9 million of Canadian development expenses pursuant to flow-through
share issuances. The Company has until December 31, 2010 to incur these expenditures.
67
($ THOUSANDS, EXCEPT AS NOTED)
Contingencies
Paramount is a 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.
16. Subsequent Events
• On February 5, 2010, Trilogy converted from an income trust to a corporation, named Trilogy
Energy Corp., through a business combination with a private company. Paramount’s 24.1 million
Trilogy units (as of February 5, 2010) were converted into 12.8 million common shares of Trilogy
Energy Corp., which are pledged as security for Paramount’s US Senior Notes, and 11.3 million
non-voting shares of Trilogy Energy Corp. The non-voting shares convert to common shares on a
one for one basis if: i) beneficial ownership of the non-voting shares are transferred to any person
that is not related to or affiliated with Paramount; or ii) Trilogy Energy Corp. exercises its right to
convert the non-voting shares to common shares. Following the conversion, Paramount owned
approximately 21 percent of Trilogy Energy Corp.’s equity and approximately 15 percent of the
voting shares.
•
In January 2010 Paramount closed an acquisition of oil and gas properties and facilities in the Karr-
Gold Creek area of the Grande Prairie COU for $8.1 million.
68 PARAMOUNT RESOURCES LTD. │ 2009 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
HSBC Bank Canada
Calgary, Alberta
REgiSTRAR ANd
TRANSfER AgENT
Computershare
Investor Services Inc.
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,
Chief Executive Officer
and President
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