ANNUAL REPORT 2011
FROM PLANNING TO PRODUCTION
Financial and Operating Highlights
President’s Message
2011 Overview
Principal Properties
Strategic Investments
Management’s Discussion & Analysis
Financial Statements
Corporate Information
1
2
5
6
21
25
58
IBC
ANNUAL MEETING OF SHAREHOLDERS
Shareholders are cordially invited to attend
the Annual Meeting of Shareholders to be held
Wednesday, May 9, 2012 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(2)
Per share – basic and diluted ($/share)
Net loss
Per share – basic and diluted ($/share)
Exploration and development expenditures
Investments in other entities – market value(3)
Total assets
Net debt
Common shares outstanding (thousands)
Operating
Sales volumes
Natural gas (MMcf/d)
NGLs (Bbl/d)
Oil (Bbl/d)
Total (Boe/d)
Gas weighting
Average realized price
Natural gas ($/Mcf)
NGLs ($/Bbl)
Oil ($/Bbl)
Net wells drilled
Net undeveloped land (thousands of acres)
Reserves(4)
Proved plus probable
Natural gas (Bcf)
Crude oil and NGLs (MBbl)
Total (MBoe)
Finding and development costs before facilities expenditures
(proved plus probable) ($/Boe)
Reserves replacement (proved plus probable)
NPV future net revenue before tax @ 10%
Proved
Proved plus probable
Year ended December 31
2011
2010
% Change
241.7
96.2
1.23
(232.0)
(2.96)
465.7
1,077.3
1,725.7
513.4
85,500
81.6
1,542
2,291
17,426
78%
4.10
82.24
87.81
75
1,225
244.1
12,333
53,015
24.19
193%
611.4
832.2
184.4
94.0
1.29
(90.0)
(1.24)
199.0
502.9
1,391.3
295.2
75,183
57.7
932
2,485
13,029
74%
4.50
70.58
72.30
88
1,198
181.8
9,782
40,087
20.76
160%
397.8
556.0
31
2
(5)
(158)
(139)
134
114
24
74
14
41
65
(8)
34
(9)
17
21
(15)
2
34
26
32
17
54
50
(1) Readers are referred to the advisories concerning non-GAAP measures and oil and gas measures and definitions in the "Advisories" section of this
document.
(2) The Company has adjusted its funds flow from operations measure for all periods presented. Refer to the advisories concerning non-GAAP
measures in the "Advisories" section of this document.
(3) Based on the period-end closing prices of publicly traded enterprises and book value of the remaining investments.
(4) Working interest reserves before royalty deductions, using forecast prices and costs.
(cid:51)(cid:68)(cid:85)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:53)(cid:72)(cid:86)(cid:82)(cid:88)(cid:85)(cid:70)(cid:72)(cid:86)(cid:3)(cid:47)(cid:87)(cid:71)(cid:17)(cid:3)(cid:21)(cid:19)(cid:20)(cid:20)
(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:43)(cid:76)(cid:74)(cid:75)(cid:79)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)
(cid:20)
PRESIDENT’S MESSAGE
Paramount achieved significant progress in all three main facets of our business strategy over the past year.
Significant production ramp-ups have begun in our Kaybob Deep Basin and Grande Prairie Montney horizontal
plays. The market value of our investment portfolio appreciated materially to over one billion dollars, a portion of
which was realized through the secondary offering of some of our Trilogy Energy holdings near the end of the
year. Our strategic investments in oilsands and northern shale gas were also advanced with the creation of
Cavalier Energy Inc. and our initial drilling in the Liard Basin.
During 2011, Paramount’s average daily production increased 34 percent from prior year levels to 17,426 Boe/d.
Production during the fourth quarter of 2011 increased 43 percent from the same period in 2010 to average
19,223 Boe/d. The Company generated funds flow from operations in 2011 of $96.2 million, a 2 percent
increase year-over-year, despite the lower natural gas price environment. We continue to improve the cost
structure of our operations, with our per unit general and administrative costs declining further in 2011 following
reductions in 2010. We expect per unit cost reductions in operating and general and administrative costs in
2012 and beyond as fixed costs are spread over our higher forecast production.
The Company invested $465.7 million in its exploration and development program in 2011, including $156.5
million in facilities, principally in the Kaybob and Grand Prairie areas, and $303.7 million in drilling and completion
activities. In addition, Paramount expended $38.2 million on land acquisitions and $28.0 million on strategic
investments, primarily in oilsands assets. Net debt totaled $513.4 million at year end 2011. This was
subsequently reduced with proceeds from the $189.5 million secondary offering of five million of Paramount’s
Trilogy shares in January 2012 and $50 million from property sales in the first quarter of 2012.
Paramount has demonstrated considerable success in its horizontal drilling program at Kaybob, principally in the
Montney, Fahler, and Dunvegan formations, and has invested substantial time and resources in the build-out of
the infrastructure to produce these reserves. The Company has completed the construction of a new 45
MMcf/d gas plant at Musreau, which has now been re-commissioned and placed on production, following
equipment failures which delayed the ramp up of production for approximately three months. Work is also
progressing on the construction of a new 200 MMcf/d deep-cut facility at Musreau. Much of the detailed
engineering for this facility has been completed and procurement of longer lead time items has been initiated.
Completion of the new plant is anticipated during the second half of 2013. Paramount is also participating in the
expansion of the third-party operated Smoky plant from 100 MMcf/d to 300 MMcf/d. The Company will hold
capacity of 60 MMcf/d when this expansion is completed near the end of 2013. We are continuing an
aggressive drilling program in Kaybob to ensure sufficient well deliverability to fill these plants when they come
into service.
The Company is building two new state-of-the-art drilling rigs, which should provide significant cost savings for
our drilling programs on our resource plays. We are also continuing to adapt our drilling program to the
changing commodity price environment, and are now targeting wells with the highest possible liquids contents
to take advantage of higher relative pricing for natural gas liquids, particularly compared to the price of dry
natural gas.
At Valhalla, Paramount continues to successfully drill horizontal wells into the Lower Montney formation, and
has now de-risked for development two additional intervals in the Lower Doig and Upper Montney. This has
significantly increased the location inventory in the area. During 2011 the Company completed the construction
of new facilities at Valhalla that can handle 14 MMcf/d of raw gas production, and has recently finished an
expansion to double processing capacity to 28 MMcf/d. With three resource targets in the Upper Montney,
Paramount Resources Ltd. 2011
President's Message
2
Lower Montney and Doig formations, Paramount expects that Valhalla could be an exciting area of material
production and reserve growth in the next several years.
Paramount was also successful in late 2011 in testing a new Montney horizontal liquids rich natural gas play at
Birch in Northeast British Columbia. The initial well tested at approximately 2.7 MMcf/d of gas and 65 Bbl/MMcf
of associated NGLs. The Company drilled two additional wells into the play in early 2012 and has constructed a
pilot facility with capacity to handle approximately 4 MMcf/d in order to assess the longer term performance of
these wells. Should this pilot be successful, Birch could prove to be a considerable resource for the Company
to exploit in the future.
In the Southern area, Paramount completed a successful drilling program in the Enchant area in 2011, offsetting
production declines in this operating unit with new oil production from the Arcs formation.
In North Dakota, Paramount sold approximately 6,000 net acres of undeveloped land for approximately US$40
million, approximately $6,700/acre, and four additional wells were drilled on the Company’s joint venture lands
with improved results. Paramount has initiated a process to sell all of its U.S. assets, which are held in its
wholly-owned US subsidiary, Summit Resources, Inc. Results of this process are expected in the second
quarter of 2012.
Non-core asset sales in the Southern area were completed in early 2012 generating proceeds of approximately
$50 million, with negligible loss of existing production. The sales did result in the loss of approximately 2,500
Boe/d of production that would have otherwise come on stream in late 2012.
Through its 2011 capital expenditure program and acquisitions, Paramount grew its proved reserves 39 percent
to 35.7 MMBoe, its proved plus probable reserves by 32 percent to 53.0 MMBoe and replaced 193 percent of
2011 production. The Company was able to add proved plus probable reserves, excluding major facility costs, at
a finding and development cost of $24.19/Boe. The Kaybob area, where the majority of the Company’s capital
spending is focused, delivered proved plus probable finding and development costs of $13.57/Boe in 2011,
excluding major facility costs. These finding and development costs compare favorably to the estimated netback
of over $30.00/Boe Paramount expects to receive in the Kaybob area when its deep cut facilities are completed,
and would result in a 2.2 times recycle ratio.
The market value of Paramount’s investment portfolio increased dramatically during 2011 to reach $1.1 billion at
year-end, a 114 percent increase from $502.9 million at the end of 2010. Paramount’s most significant holdings
at December 31, 2011 included 24.1 million shares of Trilogy Energy Corp., 3.7 million shares of MEG Energy
Corp. and three drilling rigs which operate under Fox Drilling and Paramount Drilling U.S. In January 2012,
Paramount completed a secondary offering of 5 million of its Trilogy Energy shares for gross proceeds of $189.5
million. The market value of Paramount’s investment portfolio at the end of February 2012 was approximately
$800 million which represents slightly less than $10.00 per Paramount share in value. Paramount continues to
be excited with the business prospects of these entities and believes that their success will provide further
increases to Paramount’s shareholder value.
During 2011 Paramount created a new entity, Cavalier Energy Inc., to hold and develop the Company’s oilsands
assets. The short term goals for Cavalier are to submit an application for the first phase of development of the
Hoole property, to continue to build a management team capable of executing oilsands development projects,
and to source financing to pursue its projects. In 2011, Paramount received an updated evaluation of the Hoole
asset which showed the best estimate economic contingent resource to be 763 million barrels with an NPV
10% value of $2.8 billion. During the year Paramount also received an independent assessment that estimated
over 6 billion barrels of Discovered and Undiscovered Exploitable Bitumen in Place in Cavalier’s Grosmont
Carbonate lands. Paramount is excited about the business prospects for Cavalier and looks forward to it making
rapid progress in achieving its goals during 2012.
Paramount Resources Ltd. 2011
President's Message
3
In May 2011, Paramount completed the corporate acquisition of ProspEx Resources. This acquisition added
production of approximately 3,200 Boe/d and proved plus probable reserves of approximately 6.9 million Boe as
of June 1, 2011. The principal objective of this acquisition was the strategic consolidation of lands and facilities
in Musreau and Kakwa in the Kaybob area.
Paramount continues to adapt to the rapidly changing business environment in which we operate. Industry,
including Paramount, continues to drive the advancement of new technologies to maximize return on
investment. These new technologies have changed the industry resulting in a material oversupply of natural
gas in the short term. This has served to push the price of natural gas to below $2.00/Mcf. While Paramount
believes the current low natural gas price is unsustainable, the reality is that the longer term price will be lower
than that enjoyed over the last 10 years when supplies were not as plentiful. Prices for oil have behaved much
differently than those for natural gas, with a tightening supply/demand balance and geopolitical pressures
increasing crude oil market prices to over $100/Bbl. Paramount believes that it can be very competitive in the
current commodity price environment, and grow its netback on its production by focusing its development
activities on its most liquids rich natural gas projects and building the facilities necessary to profitably produce
this liquids rich gas stream. The multi-year projects that Paramount has chosen to pursue are much larger and
more integrated than in the past, and will cause the Company’s growth to occur in step changes.
Paramount believes it has captured and now controls some of the best and most economic liquids rich natural
gas prospects. We expect the large disparity between natural gas prices and oil prices will subside with time as
end-users capitalize on the low cost of natural gas, thereby increasing the demand for gas at the expense of oil
and coal. At the same time, the supply of natural gas should decline rapidly as capital spending on natural gas is
reduced due to poor economics at these low natural gas price levels. We are already seeing this happening as
the number of rigs drilling for natural gas has dropped from over 900 to less than 650. The natural gas price
recovery will take time. Paramount is confident that with its competitive advantages of an extensive inventory
of low cost liquids rich gas prospects and ownership of growing processing capacity, it can capitalize on its
opportunities and generate high margins and returns on its invested capital in the current price environment. As
prices improve, this will only serve to further increase shareholder value.
Paramount’s 2012 guidance forecasts a 43 percent increase in production to an average of 25,000 Boe/d based
on an exploration and development capital expenditure budget of $475 million, with operating costs of about
$10.00/Boe. Paramount also plans to invest a further $60 million in its strategic investments in drilling rigs,
oilsands, and shale gas. In addition to anticipated 2012 cash flows, the Company has funded most of its
aggressive 2012 capital program in advance through approximately $220 million of equity financings in late
2011, $190 million of gross proceeds from the sale of Trilogy shares and $50 million of proceeds from non-core
property dispositions. The Company’s 2012 capital program includes significant investments in facilities and
wells to provide for continued production growth through 2013 and 2014.
/s/ J.H.T. Riddell
J.H.T. Riddell
President and Chief Operating Officer
March 26, 2012
Paramount Resources Ltd. 2011
President's Message
4
2011 OVERVIEW
Principal Properties
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Proved reserves increased by 39 percent to 35.7 MMBoe. Proved plus probable reserves increased
by 32 percent to 53.0 MMBoe. The Company replaced 193 percent of 2011 production.
Proved plus probable finding and development costs, excluding facilities and gathering system
construction costs, were $24.19/Boe for the Company and $13.57/Boe for the Kaybob COU.
Average sales volumes in 2011 increased 34 percent to 17,426 Boe/d. Netback increased 34
percent to $127.8 million in 2011 compared to $95.1 million in 2010.
The Kaybob COU increased its sales volumes by 86 percent to 8,361 Boe/d in 2011 compared to
4,495 Boe/d in 2010. Construction of phase two of the Musreau facility, an incremental 200
MMcf/d deep cut liquids extraction plant, will begin in 2012. Procurement of long lead-time
equipment has already commenced.
In May 2011, Paramount completed its acquisition of ProspEx Resources Ltd. ("ProspEx"), adding
significant land holdings and producing assets in the Deep Basin at Kakwa, Elmworth and Wapiti
and land holdings at Pembina and Brazeau in Southern Alberta.
The Southern COU divested non-core properties during the first quarter of 2012 at West Pembina,
Alberta and Kindersley, Saskatchewan for total proceeds of approximately $50 million.
In the first quarter of 2012 Paramount and its wholly-owned subsidiary Summit Resources, Inc.
("Summit") initiated a process to sell Summit and its United States properties.
Strategic Investments
(cid:120)
(cid:120)
(cid:120)
The market value of Paramount’s portfolio of investments in other oil and gas entities increased
114 percent to $1.1 billion at December 31, 2011, primarily due to an increase in the market price
of Trilogy Energy Corp. ("Trilogy") shares. In January 2012, Paramount received $189.5 million in
gross proceeds from the sale of 5.0 million of its 24.1 million Trilogy shares.
In July 2011, the Company received an updated independent evaluation of its bitumen resources
within the Grand Rapids formation at its Hoole oil sands property. Estimated economic contingent
bitumen resources increased 20 percent from the April 2010 evaluation to 763 million barrels (Best
Estimate (P50)). The before-tax net present value of future net revenue of such economic
contingent resources, discounted at ten percent (Best Estimate (P50)), increased 49 percent to
$2.8 billion.
In November 2011, Paramount reorganized all of the Company’s oil sands and carbonate bitumen
interests into a new wholly-owned subsidiary; Cavalier Energy Inc. ("Cavalier Energy"). The
reorganization was undertaken to create a focused, self-funding oil sands entity in order to
accelerate the development of Paramount’s bitumen interests.
Corporate
(cid:120)
(cid:120)
Between December 2010 and November 2011, Paramount raised approximately $650 million
through debt and equity issuances, providing financial flexibility to support the Company’s plans for
a large-scale Deep Basin liquids-rich natural gas development and strengthening its balance sheet.
General and administrative costs per Boe decreased 17 percent in 2011 to $2.66 per Boe
compared to $3.19 per Boe in 2010.
Paramount Resources Ltd. 2011
2011 Overview
5
PRINCIPAL PROPERTIES
Kaybob
Sales volumes (Boe/d)
E & D expenditures ($ millions)
Total land holdings (net sections)
Grande Prairie
Sales volumes (Boe/d)
E & D expenditures ($ millions)
Total land holdings (net sections)
Southern
Sales volumes (Boe/d)
E & D expenditures ($ millions)
Total land holdings (net sections)
Northern
Sales volumes (Boe/d)
E & D expenditures ($ millions)
Total land holdings (net sections)
Total Principal Properties
Sales volumes (Boe/d)
E & D expenditures ($ millions)
(1)
2011
2010
8,361
262.8
441
3,568
156.0
430
3,424
19.6
489
2,073
25.2
592
4,495
76.2
340
3,012
110.4
474
2,973
11.6
452
2,549
12.2
530
17,426
465.7
13,029
199.0
(1) Includes Alberta Drilling Royalty Credits and other amounts not allocated to the individual corporate operating units.
KAYBOB
Sales Volumes
Natural Gas (MMcf/d)
NGLs (Bbl/d)
Oil (Bbl/d)
Total (Boe/d)
Exploration and Development Expenditures(1)
Exploration, drilling, completions and tie-ins
($ millions)
Facilities and gathering
2011
2010
% Change
44.5
868
72
8,361
171.2
91.6
262.8
23.5
495
79
4,495
61.8
14.4
76.2
89
75
(9)
86
177
536
245
Total Land Holdings (sections)
Gross
792
Net
441
Gross
661
Net
340
Wells drilled
28
18
16
7
(1) Before the deduction of Alberta Drilling Royalty credits.
Paramount Resources Ltd. 2011
Principal Properties
7
The Kaybob corporate operating unit ("COU") operates in West Central Alberta, where its core properties
are in the Deep Basin at Musreau, Smoky and Resthaven. The Company has assembled an extensive
land holding of 792 (441 net) sections with varying rights to multiple formations from the Cretaceous to
the Montney. With well densities of up to eight wells per section per formation forecast to be required to
recover these resources, Paramount’s Deep Basin land position represents a multi-decade inventory of
drilling locations.
Paramount is executing a large-scale development on these lands that is
expected to significantly increase the Kaybob COU’s production volumes.
The Company’s drilling activities over the past few years have substantially
de-risked the Cretaceous Dunvegan and Falher formations, which are high
pressure, liquids rich, tight gas formations with large reserves potential.
With the high liquids content in these formations, these plays continue to
be economic despite the current low natural gas price environment.
Paramount has also continued the evaluation of its Montney holdings, a
deeper horizon in which the Company’s initial wells have exhibited higher
liquids yields than the Cretaceous zones and are expected to provide higher
rates of return despite higher drilling costs related to increased depths. A
combination of Cretaceous and Montney opportunities will support the
Company’s accelerated development plans and the construction of deep-
cut processing facilities.
Average daily sales volumes in the Kaybob COU during 2011 were 8,361
Boe/d, an increase of 86 percent compared to 2010. The increase was
primarily the result of new wells being brought on in Musreau and
Resthaven, and wells added through the acquisition of ProspEx. During the
year, the Kaybob COU reached the limit of its available owned capacity,
contracted firm service capacity and interruptible processing capacity,
which resulted in the temporary shut-in of a number of wells. In mid-
December the Company completed construction of its new 45 MMcf/d
processing facility at Musreau. A key electrical component within the
facility failed shortly after start-up, resulting in the plant having to be shut-
down for repairs. Commissioning of the facility is underway, and gas sales
are expected to recommence in mid-March.
During 2011 the Kaybob COU drilled 28 (18.3 net) wells, completed and
tied-in 17 (10.0 net) wells, including 10 (6.8 net) operated Falher and
Dunvegan wells. Subsequent to year-end, an additional seven (3.8 net)
Falher and Dunvegan wells were completed, of which three (3.0 net) were
equipped and tied-in. Some of these wells are shut-in in preparation for the
Musreau plant to be ramped up to design capacity before they are brought
on production. Paramount currently has an additional two (2.0 net) Falher
and Dunvegan wells awaiting completion and tie-in.
Paramount Resources Ltd. 2011
Principal Properties
8
The following table summarizes test results and average natural gas sales volumes for operated
Cretaceous wells rig released during 2011:
Test Results(1)
Avg. Rate Pressure(2)
Location
Resthaven
Resthaven
Smoky
Smoky
Smoky
Smoky
Musreau
Musreau
Musreau
Musreau
Musreau
Musreau
Musreau
Musreau
Musreau
Musreau
Musreau
Average Sales Volumes
First 3
First
Duration Month Months
(MMcf/d)
(MMcf/d)
5.0
9.0
7.4
(cid:148)
6.2
6.4
4.5
(cid:148)
(cid:144)
(cid:148)
(cid:144)
(cid:148)
(cid:144)
(cid:148)
8.5
7.7
8.9
10.6
6.1
7.8
6.1
7.7
7.1
(cid:148)
(cid:144)
(cid:148)
(cid:144)
(cid:148)
(cid:144)
(cid:148)
(cid:144)
(cid:148)
(cid:144)
(cid:148)
(1) Readers are referred to the heading "Test Results" within the "Advisories" section of this document for further information.
(2) Average flow-back casing pressure for the duration of the test.
((cid:144)) Well has not been on production one month or longer.
((cid:148)) Well has not been on production three months or longer.
((cid:202)) Load fluids have not been fully recovered.
Formation
Dunvegan
Dunvegan
Dunvegan
Dunvegan
Dunvegan
Dunvegan
Dunvegan
Falher
Falher
Falher
Falher
Falher
Falher
Falher
Falher
Falher
Falher
(MMcf/d)
16.1
12.5
13.8
10.8
13.5
14.4
5.1
21.4
18.9
17.7
18.4
19.6
13.7
20.5
19.4
29.6
14.0
Liquids
Yield
(Bbl/MMcf)
25
(cid:202)
38
(cid:202)
(cid:202)
(cid:202)
(cid:202)
14
19
21
16
(cid:202)
(cid:202)
(cid:202)
(cid:202)
(cid:202)
(cid:202)
(PSI)
2,422
1,820
1,340
1,837
2,546
1,670
1,014
3,026
3,125
2,883
2,929
2,765
1,880
3,284
3,177
2,668
1,901
(Hrs)
8.5
6.5
8.5
6
16.5
2.5
8.5
1.5
2.0
3.5
1.5
13
10
9.5
10.5
1.5
6.5
The Company has assembled a total of 209 (176 net) sections of Montney rights, and has drilled and
completed five (4.5 net) horizontal wells to date. The first Montney well (0.5 net) was tied-in during 2011,
with sales volumes averaging approximately 4.1 MMcf/d of natural gas and 79 Bbl/MMcf of NGLs over its
first 90 days of production. The Company anticipates two (2.0 net) Montney wells will be brought on
production in the third quarter of 2012. The following table summarizes test results and average natural
gas sales volumes for operated Montney wells rig released during 2011:
Location
Musreau
Musreau
Musreau
Formation
Montney
Montney
Montney
Avg. Rate
(MMcf/d)
12.0
8.5
7.2
Test Results(1)
Average Sales Volumes
First 3
First
Pressure(2) Duration Month Months
(MMcf/d)
(cid:148)
(cid:148)
(cid:148)
Liquids
Yield
(Bbl/MMcf)
(cid:202)
(cid:202)
(cid:202)
(MMcf/d)
3.1
(cid:144)
(cid:144)
(PSI)
2,030
1,589
2,430
(Hrs)
5.5
15
6
(1) Readers are referred to the heading "Test Results" within the "Advisories" section of this document for further information.
(2) Average flow-back casing pressure for the duration of the test.
((cid:144)) Well has not been on production one month or longer.
((cid:148)) Well has not been on production three months or longer.
((cid:202)) Load fluids have not been fully recovered.
The Kaybob COU is currently operating four drilling rigs on its Deep Basin properties, and the Company
has commissioned the construction of an additional two triple-sized walking rigs to be owned and
operated by Fox Drilling Inc. ("Fox Drilling"), a wholly-owned subsidiary of Paramount, that are expected to
drill on the Kaybob lands during the 2012/2013 winter drilling season. The Company plans to drill and
complete additional wells throughout 2012 and 2013 in preparation for new processing capacity that will
be added during the second half of 2013, and in the interim will produce volumes held behind pipe on
interruptible service to maximize value. The Kaybob COU currently anticipates drilling up to 27 (18.3 net)
wells in 2012, including up to five (4.0 net) Montney wells.
Design and procurement of long lead-time equipment has commenced for phase two of the Musreau
processing facility, an incremental 200 MMcf/d deep cut liquids extraction facility. Construction is
Paramount Resources Ltd. 2011
Principal Properties
9
anticipated to begin this fall once regulatory approvals have been obtained. The incremental capacity will
be used to process Paramount natural gas as well as third party natural gas for a fee. It is anticipated that
construction of this second phase will be completed during the second half of 2013 at an estimated cost
of $180 million. The addition of deep cut facilities will add significant value to Paramount’s natural gas
production due to the price premium realized from the extraction and sale of additional NGLs volumes
that would otherwise be sold as slightly higher heat content natural gas.
At Smoky, procurement activities relating to the expansion of a non-operated processing plant have also
commenced, with orders being placed for long lead-time components. The existing 100 MMcf/d (10
MMcf/d net) facility is being expanded to 300 MMcf/d (60 MMcf/d net) and upgraded to operate as a
deep cut liquids extraction facility. Initially, compression capacity for 200 MMcf/d will be installed, with an
additional 100 MMcf/d of compression to be added when production volumes warrant the investment,
thereby deferring a portion of the capital costs. The expansion is expected to be completed in late-2013.
With the start-up of the first phase of the Musreau plant, Paramount will have 49 MMcf/d of Company
owned capacity and 10 MMcf/d of firm-service third-party processing capacity in Musreau-Kakwa.
Paramount also has 20 MMcf/d of Company-owned processing capacity in the Resthaven-Smoky area.
Throughout 2012 and into 2013, the Company expects to have an aggregate of 79 MMcf/d of Company-
owned and third party firm service capacity and will utilize interruptible service where available until the
expansions of the Musreau and Smoky plants are completed. Paramount currently has access to an
additional 10 to 12 MMcf/d of interruptible capacity at Musreau/Cutbank.
The Kaybob COU’s current and expected future Company-owned and firm-service third-party processing
capacity in the Deep Basin is as follows:
Current Capacity
Musreau – Operated
Kakwa – Non-operated
Musreau/Cutbank – Contracted firm service
Resthaven – Non-operated
Smoky Plant – Non-operated
Future Capacity
Musreau Phase II Deep-Cut – Operated
Smoky/Resthaven Deep-Cut – Non-operated
Total – Year-end 2013
(1) Estimated
Gross
Raw Gas
Plant Capacity
(MMcf/d)
45
40
10
20
100
215
Net Paramount
Raw Gas
Plant Capacity
(MMcf/d)
45
4
10
10
10
79
200
200
400
615
200
30
230
309
Net Paramount
Estimated Sales
Plant Capacity(1)
(Boe/d)
8,600
720
1,800
1,800
1,800
14,720
50,000
6,750
56,750
71,470
Paramount Resources Ltd. 2011
Principal Properties
10
GRANDE PRAIRIE
Sales Volumes
Natural Gas (MMcf/d)
NGLs (Bbl/d)
Oil (Bbl/d)
Total (Boe/d)
Exploration and Development Expenditures(1)
Exploration, drilling, completions and tie-ins
($ millions)
Facilities and gathering
Total Land Holdings (sections)
Wells drilled
(1) Before the deduction of Alberta Drilling Royalty credits.
2011
2010
% Change
29
38
(33)
18
30
72
41
16.0
505
393
3,568
106.4
49.6
156.0
12.4
367
583
3,012
81.6
28.8
110.4
Gross
629
Net
430
Gross
703
Net
474
22
15
16
14
Paramount Resources Ltd. 2011
Principal Properties
11
The Grande Prairie COU operates in the Peace River Arch area of Alberta. Core producing areas include
Karr-Gold Creek, Valhalla and Mirage. Average daily sales volumes in the Grande Prairie COU during 2011
were 3,568 Boe/d, an increase of 18 percent compared to 2010. The increase was primarily the result of
production increases in Valhalla, as a new gathering and compression system was brought on stream,
and at Karr-Gold Creek.
VALHALLA
Valhalla is located approximately 70 km northwest of Grande Prairie. Paramount owns approximately 67
(47 net) sections of land in this area which has multi-zone potential, including in the Montney and Lower
Doig formations. The Company’s activities at Valhalla accelerated in 2011, with the drilling of 8 (5.7 net)
wells and 7 (5.3 net) wells being brought on production. The wells drilled in 2011, which primarily target
the Montney formation, have yielded promising results, with significant liquids yields.
A new 10 MMcf/d compression and gathering system was commissioned in the second quarter of 2011.
Construction of an expansion to this system to bring total capacity to 28 MMcf/d is near completion and
expected to be operational in the second quarter of 2012. Due to capacity constraints four (2.2 net) wells
have been temporarily shut-in and will be re-started when the expanded compression capacity is
available.
The Grande Prairie COU plans to drill up to 9 (5.0 net) operated and non-operated wells at Valhalla in
2012.
KARR-GOLD CREEK
Paramount has assembled a land position of approximately 180 (148 net) sections at Karr-Gold Creek,
located 50 km southwest of Grande Prairie. Exploration activities continued on the play during 2011, as
the Company worked to optimize recovery systems and increase production from existing wells. Since
commencing exploration of Karr-Gold Creek in 2008, the Company has brought 10 (9.7 net) lower
Montney horizontal wells on production. To date, the performance of these wells has been below
expectations, with current aggregate production averaging approximately 6 MMcf/d. A number of
operational challenges in 2011 impacted the Company’s effort to improve well performance, including
inconsistent production resulting from multiple unplanned third party processing interruptions totalling 77
days and delays in the delivery of surface equipment.
During 2012, Paramount plans to bring three (3.0 net) lower Montney horizontal wells that were drilled
during 2011 onto production and complete a previously drilled horizontal well in a Middle Montney
reservoir.
The Company completed expansions to gathering and compression systems at Karr-Gold Creek during
the year, with sour gas capacity being increased to 40 MMcf/d and sweet gas capacity of 8 MMcf/d. The
sweet development at Karr-Gold Creek has targeted various Deep Basin Cretaceous formations and the
Triassic Nikanassin formation, with ten (6.0 net) wells being drilled in 2011 and 9 (6.1 net) wells being
placed on production. The sweet compression facility is operating near capacity, with five (3.5 net) wells
awaiting tie-in. Two (1.5 net) sweet wells are planned to be drilled in 2012.
ANTE CREEK
Three (2.0 net) wells were drilled at Ante Creek in 2011 targeting oil from the Montney formation. The
first well is producing at approximately 200 Bbl/d (100 Bbl/d net), the maximum currently permitted under
regulation, a second well was dry and abandoned and a third well was completed during the first quarter
of 2012. The exploration program at Ante Creek has experienced delays due to regulatory issues,
production equipment failures and midstream service interruptions. Paramount anticipates developing
plans for further activities at Ante Creek once the performance of the latest well is known and the
regulatory matters have been successfully resolved.
Paramount Resources Ltd. 2011
Principal Properties
12
SOUTHERN
Harmattan
Southern Alberta
United States
Sales Volumes
Natural Gas (MMcf/d)
NGLs (Bbl/d)
Oil (Bbl/d)
Total (Boe/d)
Exploration and Development Expenditures(1)
Exploration, drilling, completions and tie-ins
($ millions)
Facilities and gathering
2011
2010
% Change
10.8
150
1,483
3,424
14.9
4.7
19.6
9.3
59
1,363
2,973
9.3
2.3
11.6
16
154
9
15
60
104
69
Total Land Holdings (sections)
Wells drilled
(1) Before the deduction of Alberta Drilling Royalty credits.
Gross
708
Net
489
Gross
638
Net
452
22
12
27
17
Paramount Resources Ltd. 2011
Principal Properties
13
The Southern COU operates in Southern Alberta, Saskatchewan, North Dakota and Montana. Core areas
in Southern Alberta include the natural gas producing Chain-Craigmyle and Harmattan properties and the
oil producing property at Enchant. In the United States, the Southern COU’s core oil producing area is in
North Dakota near Medora. The Southern COU’s average sales volumes increased 15 percent in 2011
compared to 2010, primarily as a result of production from wells added through the ProspEx acquisition
at Harmattan and Pembina.
CANADA
At Chain, 13 (13.0 net) wells were brought on production in 2011, which added new production to replace
natural declines. The Company does not plan to carry out any natural gas drilling at Chain in 2012 due to
the current low natural gas price environment.
During the first quarter of 2012, Paramount closed dispositions of non-core properties at West Pembina,
Alberta and Kindersley, Saskatchewan for total proceeds of approximately $50 million. These properties
did not have significant production volumes.
The Southern COU plans to drill up to 9 (7.5 net) oil wells in Harmattan, Enchant, Delia and Pembina in
2012.
UNITED STATES
In the United States, Paramount operates through its wholly-owned subsidiary, Summit. In February
2011, Summit sold approximately 6,000 net acres of undeveloped land in North Dakota for cash proceeds
of US$40 million.
During the fourth quarter of 2011, Summit’s joint venture partner drilled and completed the final earning
wells under the parties’ joint development agreement, earning an undivided 50 percent interest in
Summit’s undeveloped Bakken/Three Forks lands in North Dakota.
In the first quarter of 2012 Paramount and Summit initiated a process to sell Summit and all of its United
States properties.
Paramount Resources Ltd. 2011
Principal Properties
14
NORTHERN
Birch
Northeast British Columbia
Sales Volumes
Natural Gas (MMcf/d)
NGLs (Bbl/d)
Oil (Bbl/d)
Total (Boe/d)
Exploration and Development Expenditures(1)
Exploration, drilling, completions and tie-ins
($ millions)
Facilities and gathering
Total Land Holdings (sections)
Wells drilled
(1) Before the deduction of Alberta Drilling Royalty credits.
2011
2010
% Change
(18)
73
(25)
(19)
96
209
107
10.3
19
343
2,073
21.8
3.4
25.2
12.5
11
460
2,549
11.1
1.1
12.2
Gross
959
Net
592
Gross
820
Net
530
2
2
5
5
The Northern COU’s significant properties are located in the Northwest Territories at Cameron Hills and
Liard, in Alberta at Bistcho and in Northeast British Columbia at Birch and Clarke Lake. The Northern
COU’s average sales volumes decreased by 19 percent in 2011 compared to 2010, primarily as a result of
production declines at Cameron Hills and Bistcho.
Paramount owns 60 (60 net) sections of land at Birch that are prospective for liquids-rich natural gas from
the Montney formation. The Birch acreage was acquired in 2011 as part of the ProspEx acquisition and
through crown land sale purchases. During the third quarter of 2011, Paramount completed its initial
Paramount Resources Ltd. 2011
Principal Properties
15
exploratory well with promising results, indicating significant liquid yields. The Company has secured
limited access to a gathering system and the well will be brought on production in 2012. Two (2.0 net)
additional wells were drilled and completed in the first quarter of 2012 and are expected to be tied-in later
in the year.
RESERVES
Paramount’s estimated proved reserve volumes increased by 39 percent to 35.7 MMBoe at December
31, 2011 compared to 25.6 MMBoe in the prior year. The Company’s estimated proved and probable
reserve volumes increased by 32 percent to 53.0 MMBoe at December 31, 2011 compared to 40.1
MMBoe in the prior year. The Company achieved a 193 percent reserves replacement ratio on a proved
and probable basis, excluding acquisitions. New reserves were added primarily at Musreau, Resthaven
and Smoky in the Kaybob COU and from the ProspEx acquisition, partially offset by negative price
revisions due to a 22 percent decline in forecast natural gas prices compared to December 2010 and
technical revisions due to well performance in certain properties within the Grande Prairie and Northern
COUs.
Paramount’s reserves for the year ended December 31, 2011 were evaluated by McDaniel & Associates
Consultants Ltd. ("McDaniel") and prepared in accordance with National Instrument 51-101 definitions,
standards and procedures. The Company’s working interest reserves and before tax net present value of
future net revenues for the year ended December 31, 2011 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)
Light &
Medium
Crude
Oil
Natural
Gas
Liquids
Natural
Gas
(Bcf)
(MBbl)
(MBbl)
Before Tax Net Present Value(1)
($ millions)
Total
(MBoe)(2)
Discount Rate
0%
10%
15%
120.4
30.6
10.5
161.5
82.0
243.5
0.5
–
–
0.5
0.1
0.6
1,930
241
–
2,171
981
3,152
2,702
–
–
2,702
719
3,421
2,381
1,128
216
3,725
1,941
5,665
75
–
–
75
20
95
24,375
6,469
1,964
32,808
16,588
49,395
2,858
–
–
2,858
762
3,620
162.0
82.1
4,874
1,699
3,799
1,961
35,665
17,349
565.3
147.9
33.1
746.3
428.7
1,175.1
109.1
(0.4)
–
108.7
41.9
150.5
855.0
470.6
1,325.6
420.4
101.3
21.8
543.5
204.2
747.7
68.3
(0.3)
–
68.0
16.5
84.5
611.4
220.7
832.2
374.8
88.6
18.2
481.6
155.3
636.9
58.2
(0.3)
–
57.9
12.3
70.2
539.5
167.6
707.0
Total Proved plus Probable
(1) Columns may not add due to rounding.
(2) Refer to the oil and gas measures and definitions in the "Advisories" section of this document.
244.1
6,573
5,760
53,015
Paramount Resources Ltd. 2011
Principal Properties
16
Proved Reserves
(MBoe)
Proved and Probable Reserves
(MBoe)
Reserves Reconciliation
Proved Reserves(1)
Probable Reserves(1)
Proved & Probable Reserves(1)
Natural
Gas
(Bcf)
112.0
53.2
9.5
(8.5)
25.6
(0.2)
Oil
and
NGLs
(MBbl)
6,906
2,364
(15)
(104)
929
(8)
(29.8)
(1,399)
Natural
Gas
Oil
and
NGLs
(Bcf)
(MBbl)
69.8
25.9
(13.0)
(9.8)
9.2
–
–
2,876
1,374
(831)
(49)
293
(1)
–
Total
(MBoe)(2)
25,576
11,237
1,576
(1,522)
5,199
(40)
(6,360)
January 1, 2011
Extensions & discoveries
Technical revisions
Economic factors
Acquisitions
Dispositions
Production
Total
(MBoe)(2)
14,511
Natural
Gas
(Bcf)
181.8
Oil
and
NGLs
(MBbl)
Total
(MBoe)(2)
9,782
40,087
5,693
(2,994)
(1,690)
1,833
(4)
–
79.2
3,737
16,930
(3.4)
(846)
(1,418)
(18.4)
(154)
(3,212)
34.9
1,221
7,032
(0.2)
(9)
(44)
(29.8)
(1,399)
(6,360)
244.1
12,333
53,015
December 31, 2011
(1) Columns and rows may not add due to rounding.
(2) Refer to the oil and gas measures and definitions in the "Advisories" section of this document.
35,666
162.0
8,673
3,660
82.1
17,349
Capital Expenditures
Year ended December 31
Geological and geophysical
Drilling, completion and tie-ins
Facilities and gathering
Exploration and development expenditures(1)
Land and property acquisitions
Principal Properties
Strategic Investments
Corporate
2011
5.5
303.7
156.5
465.7
38.2
503.9
28.0
0.1
532.0
2010
7.6
144.8
46.6
199.0
82.7
281.7
16.3
0.1
298.1
(1) Exploration and development expenditures are presented after the deduction of Alberta Drilling Royalty credits
Paramount Resources Ltd. 2011
Principal Properties
17
Finding and Development Costs
Total Company
Exploration &
Development
Capital(1)
Proved
($ millions)
309.2
3.6
312.8
156.5
Proved
Plus
Probable
($ millions)
309.2
(11.6)
297.6
156.5
Reserve Additions(2)
Finding &
Development
Costs(2)
Proved
Proved
Plus
Probable
Proved
Proved
Plus
Probable
(Mboe)
(Mboe)
($/Boe)
($/Boe)
11,291
12,300
27.70
24.19
–
–
Exploration, drilling, completions and tie-ins
Change in future capital
Facilities and gathering
Total finding and development capital
(1) The aggregate of the exploration and development costs incurred in the most recent financial year and the change during that year in estimated
12,300
11,291
454.1
469.3
41.57
36.92
future development costs generally will not reflect total finding and development costs related to reserve additions for that year.
(2) Refer to the oil and gas measures and definitions in the "Advisories" section of this document.
Total finding and development costs by year ($/Boe)
2011
2010
2009
3-Year
Average
Finding and development costs before facilities expenditures
Proved
Proved plus Probable
$ 27.70
$ 24.19
$ 21.04
$ 20.76
$ 18.47
$ 19.07
$ 24.03
$ 22.45
Finding and development costs including facilities expenditures
Proved
Proved plus Probable
$ 41.57
$ 36.92
$ 27.45
$ 26.91
$ 24.05
$ 26.76
$ 34.12
$ 32.38
Finding and development costs in 2011 were impacted by technical revisions at Karr-Gold Creek and
Valhalla in the Grande Prairie COU and at the Nahanni property in the Northern COU.
Finding and development costs for the Kaybob COU, where Paramount is currently focused in developing
a large-scale liquids rich play were $13.57 on a proved plus probable basis (excluding facilities and
gathering expenditures):
Kaybob COU
Exploration &
Development
Capital(1)
Proved
Plus
Probable
($ millions)
171.2
(15.3)
155.9
91.6
Proved
($ millions)
171.2
6.4
177.6
91.6
Reserve Additions(2)
Proved
Plus
Probable
Proved
Finding &
Development
Costs(2)
Proved
Plus
Probable
Proved
(Mboe)
(Mboe)
($/Boe)
($/Boe)
9,947
11,481
17.85
13.57
–
–
Exploration, drilling, completions and tie-ins
Change in future capital
Facilities and gathering
Total finding and development capital
(1) The aggregate of the exploration and development costs incurred in the most recent financial year and the change during that year in estimated
11,481
27.06
9,947
247.5
269.2
21.56
future development costs generally will not reflect total finding and development costs related to reserve additions for that year.
(2) Refer to the oil and gas measures and definitions in the "Advisories" section of this document.
Paramount Resources Ltd. 2011
Principal Properties
18
Total finding and development costs by year ($/Boe)
2011
2010
2009
3 Year
Average
Finding and development costs before facilities expenditures
Proved
Proved plus Probable
$ 17.85
$ 13.57
$ 15.79
$ 13.18
$ 15.72
$ 15.58
$ 17.11
$ 13.71
Finding and development costs including facilities expenditures
$ 27.06
Proved
$ 21.56
Proved plus Probable
$ 19.63
$ 16.30
$ 22.60
$ 20.44
$ 24.73
$ 20.05
DRILLING AND LAND
Paramount’s drilling activities in 2011 focused on liquids-rich natural gas and oil targets opportunities. The
Company’s drilling activities have increased as a result of the expansion of Deep Basin development in
the Kaybob COU and oil wells drilled in Saskatchewan, Southern Alberta and North Dakota. Resources
are being allocated to the highest quality assets with the highest expected rates of return, and the
Company is positioned for material production and reserve growth over the next few years.
Drilling
2011
2010
(wells drilled)
Gas
Coal bed methane
Oil
Oil sands evaluation
Dry and abandoned
Total
Net(2)
23
10
6
45
4
88
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.
Net is the aggregate number of wells obtained by multiplying each gross well by Paramount’s percentage of working interest.
Gross(1)
47
–
26
28
1
102
Gross(1)
34
13
13
45
4
109
Net(2)
32
–
15
27
1
75
(1)
(2)
Wells Drilled
(net)
Paramount Resources Ltd. 2011
Principal Properties
19
Land
(000’s of acres)
Undeveloped land
Acreage assigned reserves
Gross(1)
1,736
574
2,310
2011
Net(2)
1,225
334
1,559
$ 224.3
Average
Working
Interest Gross(1)
1,682
580
71%
58%
67%
2,262
2010
Net(2)
1,198
311
1,509
$ 236.3
Average
Working
Interest
71%
54%
67%
Value of undeveloped land(3) ($ millions)
(1) "Gross" acres means the total acreage in which Paramount has an interest.
(2) "Net" acres means Paramount’s gross working interest acres multiplied by Paramount’s working interest therein.
(3) Based on McDaniel’s Evaluation of Unproven Acreage Interests.
OPERATING RESULTS
Paramount’s average sales volumes increased 34 percent in 2011 compared to the prior year, and current
production levels are the highest the Company has achieved in the last five years. Paramount continues
to focus on controlling its operating and general and administrative costs, and per unit costs are expected
to decrease further as additional production is added without significantly impacting the Company’s
operating structure.
Average Sales Volumes
Netback
Boe/d
$ millions
$/Boe
$MM
$/Boe
General and Administrative Expenses
Operating Expenses
$ millions
$/Boe
$ millions
$/Boe
$/Boe
$MM
$/Boe
$MM
$/Boe
Paramount Resources Ltd. 2011
Principal Properties
20
STRATEGIC INVESTMENTS
OIL SANDS
In November, 2011 Paramount reorganized all of its oil sands and carbonate bitumen interests into a new
leadership team. The
wholly-owned subsidiary, Cavalier Energy and assembled
reorganization was undertaken to create a focused, self-funding oil sands entity in order to accelerate the
development of Paramount’s bitumen interests.
its executive
Cavalier Energy owns approximately 275 sections of Crown oil sands leases in the western Athabasca
region of Alberta, of which 267 sections are 100 percent owned and 8 sections are 50 percent owned.
Cavalier Energy’s properties include approximately 56 sections of land at Hoole, which are primarily
prospective for bitumen in the Grand Rapids formation and carbonate properties, which are primarily
prospective for bitumen in the Grosmont formation. The carbonate properties include approximately 15
sections of land at Saleski and 186 sections of land in other areas (the "Other Carbonate Lands"), including
leases at Orchid, Granor and House. Cavalier Energy also owns approximately 18 additional sections of oil
sands rights in the Athabasca oil sands area of northeastern Alberta.
During 2011, Paramount received an updated independent evaluation of the bitumen resources within
the Grand Rapids formation at the Hoole oil sands property in July and an initial independent evaluation of
the bitumen resources within the Grosmont formation at Saleski and the Other Carbonate Lands in
November. The evaluations were conducted by McDaniel, the Company’s independent reserves
evaluator. The table below summarizes the results of McDaniel’s evaluation of the volumes attributable
Paramount Resources Ltd. 2011
Strategic Investments
21
to Cavalier Energy’s bitumen resources and the estimated net present value of future net revenue at
Hoole:
(MBbl)
(MBbl)
Discovered Exploitable Bitumen In Place (3)
Economic Contingent Resources(2)(4)
Contingent Resources (Technology Under Development)(8) (MBbl)
NPV of Future Net Revenue (Discounted at 10%)
Undiscovered Exploitable Bitumen In Place(6)
Prospective Resources(7)
MBbl means thousands of barrels.
All amounts presented in the table above are categorized as "Best Estimate".(9)
See the "Advisories" section of this document for note references.
($MM)
(MBbl)
(MBbl)
(5)
Hoole(1)
1,631,742
762,661
N/A
2,834
N/A
N/A
Saleski(1)
1,184,641
N/A
380,493
N/A
109,332
34,006
Other
Carbonate
Lands(1)
430,586
N/A
111,118
N/A
4,418,573
1,073,439
Cavalier Energy’s near-term plans are to focus on the development of its 100 percent owned oil sands
leases at Hoole, including finalizing the scope and design of the initial phase of the development,
submitting an application for commercial development, and evaluating funding alternatives. Cavalier
Energy will also continue to further delineate its carbonate bitumen leases at Saleski and the Other
Carbonate Lands.
SHALE GAS
Paramount’s shale gas land position encompasses 150,000 (127,000 net) acres which has potential for
production from the Besa River shale gas formation in the Horn River and Liard Basins.
The Company has commenced drilling an initial vertical evaluation well in the Dunedin area of the Liard
Basin of Northeast British Columbia. This well is expected to be drilled to 4,500 meters and will be cored
and logged for evaluation. Paramount continues to monitor industry activities in the Horn River and Liard
Basins where operators are applying multi-stage fracturing technology to maximize production rates and
Paramount Resources Ltd. 2011
Strategic Investments
22
reserve recoveries. The Company is taking a conservative approach to de-risking its shale gas holdings in
the current low natural gas price environment while taking steps to maintain its mineral rights.
INVESTMENTS IN OTHER ENTITIES
Market Value(1)
As at December 31
Trilogy
MEG Energy Corp.
MGM Energy Corp.
Other(2)
Total
Shares
(000’s)
24,144
3,700
43,834
2011
$
($ millions)
907.1
153.8
10.5
5.9
$ 1,077.3
($/share)
37.57
41.57
0.24
Shares
(000’s)
24,144
3,700
43,834
2010
($ millions)
$ 297.0
168.3
8.8
28.8
$ 502.9
($/share)
12.30
45.49
0.20
(1) Based on the period-end closing price of publicly traded investments and book value of remaining investments.
(2) Includes investments in other public and private corporations.
The market value of Paramount’s portfolio of investments in other oil and gas entities has increased
significantly over the past five years to a value of $1.1 billion at December 31, 2011. In January 2012,
Paramount received $189.5 million in gross proceeds from the sale of 5.0 million of its 24.1 million
Trilogy shares.
Market Value of Investments
$ millions
$/POU Share
$MM
$/POU Share
Trilogy is a Canadian energy corporation formed through a spinout of assets from Paramount in April
2005. Originally an income trust, Trilogy converted to a corporate structure in February 2010.
Trilogy is a growing petroleum and natural gas-focused Canadian energy corporation that actively
develops, produces and sells natural gas, crude oil and natural gas liquids. Trilogy’s geographically
concentrated assets are primarily low-risk, high working interest properties that provide abundant infill
drilling opportunities and good access to infrastructure and processing facilities, many of which are
operated and controlled by Trilogy.
Paramount Resources Ltd. 2011
Strategic Investments
23
MEG Energy Corp. ("MEG") is a public energy company based in Calgary, Alberta. MEG is an oil sands
company focused on sustainable in situ oil sands development and production in the southern Athabasca
region of Alberta, Canada. MEG is actively developing enhanced oil recovery projects that utilize steam
assisted gravity drainage ("SAGD") extraction methods. MEG is not engaged in oil sands mining.
MEG owns a 100% working interest in over 900 sections of oil sands leases. MEG has identified two
commercial SAGD projects, the Christina Lake project and the Surmont project. MEG believes that the
Christina Lake project can support over 200,000 Bbl/d of sustained production for 30 years and that the
Surmont project can support 100,000 Bbl/d of sustained production for over 20 years. In addition, MEG
holds other leases at other properties that are in the resource definition stage and that could provide
significant additional development opportunities.
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") 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 is currently active in two areas: the Mackenzie Delta, where it owns interests in six
discoveries and the Colville Lake/Sahtu region of the Central Mackenzie Valley, where it owns interests in
two discoveries. MGM Energy’s land holdings include both Federal Lands and First Nations Oil and Gas
Concessions.
MGM Energy was formed through the 2007 spinout by Paramount of certain farm-in rights and other
assets in the Northwest Territories.
Paramount’s wholly-owned subsidiaries, Fox Drilling and Paramount Drilling U.S. LLC, currently own
three custom built triple-sized drilling rigs with diesel-electric power top drives and dual mud pumps.
These rigs are designed to drill the deep horizontal wells that the industry is currently focusing on. Two of
the rigs are being used in the Company’s drilling program in the Kaybob COU and the third rig is
contracted to third parties in the United States until mid-2012. The Company has recently commenced
construction of two triple-sized walking rigs, at an estimated cost of $20 million per rig, which are
expected to be available to drill on Company properties in Canada in late-2012.
Paramount Resources Ltd. 2011
Strategic Investments
24
MANAGEMENT’S DISCUSSION & ANALYSIS
This Management’s Discussion and Analysis ("MD&A"), dated March 6, 2012, 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, 2011.
This document contains forward-looking information, non-GAAP measures and disclosures of barrels of
oil equivalent volumes. Readers are referred to the "Advisories" section of 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.
Canadian Generally Accepted Accounting Principles ("GAAP"), as issued by the Canadian Institute of
Chartered Accountants, were converted to International Financial Reporting Standards ("IFRS") effective
for fiscal years beginning on or after January 1, 2011. The Company’s audited Consolidated Financial
Statements for the year ended December 31, 2011 have been prepared in accordance with IFRS 1 - First-
time Adoption of IFRS. Paramount’s IFRS accounting policies and significant accounting judgments,
estimates, and assumptions are described in Note 1 and Note 2 to the Company’s December 31, 2011
audited Consolidated Financial Statements. Note 24 to the Company’s December 31, 2011 audited
Consolidated Financial Statements contains reconciliations of IFRS amounts as at January 1, 2010 (the
"Transition Date") and as at and for the twelve months ended December 31, 2010 to amounts previously
published in accordance with Canadian GAAP in effect prior to January 1, 2011 ("Previous GAAP").
In order to prepare comparative information, the Company has applied IFRS as of the Transition Date and
amounts included in this MD&A related to periods on or after the Transition Date have been adjusted to
conform to the Company’s IFRS accounting policies. Amounts related to periods prior to the Transition
Date included in this MD&A have not been adjusted, and are denoted as being prepared in accordance
with Previous GAAP.
About Paramount
Paramount Resources Ltd. is an independent, publicly traded, Canadian corporation that explores for and
develops conventional petroleum and natural gas prospects, pursues long-term non-conventional
exploration and pre-development projects and holds a portfolio of investments in other entities.
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.
Paramount has spun-out three public entities: (i) Paramount Energy Trust, now Perpetual Energy Inc., in
February, 2003; (ii) Trilogy Energy Trust, now Trilogy Energy Corp. ("Trilogy"), in April, 2005; and (iii) MGM
Energy Corp. ("MGM Energy") in January, 2007. Paramount continues to hold investments in the
securities of Trilogy and MGM Energy in its portfolio of Strategic Investments.
Paramount’s operations are divided into three 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 Resources Ltd. 2011
Management's Discussion & Analysis
25
Paramount’s Principal Properties are divided into four Corporate Operating Units ("COUs") as follows:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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 Southern COU, which includes properties in Southern Alberta, Saskatchewan, North Dakota
and Montana; and
the Northern COU, which includes properties in Northern Alberta, the Northwest Territories and
Northeast British Columbia.
Strategic Investments include: (i) investments in other entities, including affiliates; (ii) investments in
exploration and development stage assets, where there is no near-term expectation of production or
revenue, but a longer-term value proposition based on spin-outs, dispositions, or future revenue
generation, including oil sands and carbonate resources held by Paramount’s wholly-owned subsidiary,
Cavalier Energy Inc. ("Cavalier Energy") and prospective shale gas acreage; and (iii) drilling rigs owned by
Paramount’s wholly-owned subsidiaries Fox Drilling Inc. ("Fox Drilling") in Canada and Paramount Drilling
U.S. L.L.C. ("Paramount Drilling") in the United States.
The Corporate segment is comprised of income and expense items, including general and administrative
expense and interest expense, which have not been specifically allocated to Principal Properties or
Strategic Investments.
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
26
All amounts in Management’s Discussion and Analysis are presented in millions of Canadian
dollars unless otherwise noted.
HIGHLIGHTS(1)
FINANCIAL
Petroleum and natural gas sales
Funds flow from operations(2)
per share – diluted ($/share) (2)
Net loss(4)
per share – basic and diluted ($/share)(4)
Exploration and development expenditures
Investments in other entities – market value(3)
Total assets(4)
Long-term debt
Net debt
OPERATIONAL
Sales volumes
Natural gas (MMcf/d)
NGLs (Bbl/d)
Oil (Bbl/d)
Total (Boe/d)
Net wells drilled (excluding oil sands evaluation)
Net oil sands evaluation wells drilled
FUNDS FLOW FROM OPERATIONS ($/Boe)(2)
Petroleum and natural gas sales
Royalties
Operating expense and production tax
Transportation
Netback
Financial commodity contract settlements
Netback including financial commodity contract settlements
General and administrative
Interest
Dividends from investments
Acquisition transaction costs
Other
2011
2010
2009
241.7
96.2
1.23
(232.0)
(2.96)
465.7
1,077.3
1,725.7
427.2
513.4
81.6
1,542
2,291
17,426
48
27
38.00
(3.47)
(11.20)
(3.23)
20.10
0.03
20.13
(2.66)
(5.26)
1.79
(0.16)
1.28
15.12
184.4
94.0
1.29
(90.0)
(1.24)
199.0
502.9
1,391.3
294.2
295.2
57.7
932
2,485
13,029
43
45
38.77
(4.46)
(10.70)
(3.62)
19.99
2.72
22.71
(3.19)
(2.79)
2.73
(0.06)
0.37
19.77
161.7
68.3
1.02
(97.9)
(1.46)
93.4
342.9
1,102.0
93.7
50.9
51.8
756
2,824
12,207
14
7
36.29
(4.64)
(12.72)
(3.11)
15.82
2.89
18.71
(3.86)
(2.52)
3.37
–
(0.38)
15.32
(1) Readers are referred to the advisories concerning non-GAAP measures and oil and gas measures and definitions in the "Advisories" section of this document.
(2) The Company has adjusted its funds flow from operations measure for all periods presented. Refer to the advisories concerning non-GAAP measures in the "Advisories" section of this
document.
(3) Based on the period-end closing prices of publicly traded enterprises and the book value of the remaining investments.
(4) 2009 amounts prepared in accordance with Previous GAAP.
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
27
2011 OVERVIEW
Principal Properties
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Average sales volumes for the year ended December 31, 2011 increased 34 percent to 17,426
Boe/d compared to 13,029 Boe/d for the year ended December 31, 2010.
Netback increased 34 percent to $127.8 million for the year ended December 31, 2011 from
$95.1 million for the year ended December 31, 2010.
The Kaybob COU increased sales volumes by 86 percent to 8,361 Boe/d in 2011 compared to
4,495 Boe/d in 2010.
Construction of phase one of the Musreau processing plant (45 MMcf/d raw gas capacity) was
completed. The failure of a key electrical component resulted in the plant being shut down
shortly after its December 2011 start-up. The plant is currently being re-commissioned. Work is
commencing for phase two of the facility, an incremental 200 MMcf/d raw gas capacity deep cut
liquids extraction facility to be built alongside the initial phase.
The Smoky non-operated plant expansion has now been approved by the partners. The existing
100 MMcf/d (10 MMcf/d net) raw gas capacity facility will be expanded to 300 MMcf/d (60
MMcf/d net) and upgraded to operate as a deep cut liquids extraction facility. The expansion is
expected to be complete in late-2013.
In May 2011, Paramount completed its acquisition of ProspEx Resources Ltd. ("ProspEx"), adding
significant land holdings and producing assets in the Deep Basin at Kakwa, Elmworth and Wapiti
and land holdings at Pembina and Brazeau in Southern Alberta.
The Grande Prairie COU commissioned a 10 MMcf/d raw gas capacity compression and
gathering system at Valhalla in July 2011. Work has commenced to expand the system to 28
MMcf/d of raw gas capacity, which is expected to be brought onstream at the end of March
2012.
In the first quarter of 2011, Paramount closed the sale of approximately 6,000 net acres of
undeveloped 100 percent working interest land in North Dakota for cash proceeds of US$40
million.
In January 2012, the Southern COU divested non-core properties at West Pembina, Alberta and
Kindersley, Saskatchewan for total proceeds of approximately $50 million.
In the first quarter of 2012, Paramount and its wholly owned subsidiary, Summit Resources, Inc.
("Summit"), initiated a process to sell Summit and all of its United States properties.
Strategic Investments
(cid:120)
(cid:120)
The market value of Paramount’s portfolio of investments in other oil and gas entities increased
114 percent to $1.1 billion at December 31, 2011, primarily due to an increase in the market price
of Trilogy shares. In January 2012, Paramount received $189.5 million in gross proceeds from the
sale of 5.0 million of its 24.1 million Trilogy shares
In November, 2011 Paramount reorganized all of the Company’s oil sands and carbonate bitumen
interests into a new wholly-owned subsidiary, Cavalier Energy Inc. The reorganization was
undertaken to create a focused, self-funding oil sands entity in order to accelerate the
development of Paramount’s bitumen interests.
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
28
Corporate
(cid:120)
(cid:120)
Between January 2011 and November 2011, Paramount raised $343 million through debt and
equity issuances, strengthening its balance sheet and providing financial flexibility to support the
Company’s plans for a large-scale Deep Basin liquids-rich natural gas drilling and infrastructure
development.
General and administrative costs per Boe decreased 17 percent in 2011 to $2.66 per Boe
compared to $3.19 per Boe in 2010.
CONSOLIDATED RESULTS
Net Loss
Year ended December 31
Principal Properties
Strategic Investments
Corporate
Tax Recovery
Net Loss
(1) Prepared in accordance with Previous GAAP.
2011
2010
2009(1)
(235.4)
5.1
(63.5)
61.8
(232.0)
(102.1)
16.5
(65.1)
60.7
(90.0)
(106.9)
(18.0)
(27.6)
54.6
(97.9)
The 2011 net loss increased by $142.0 million compared to 2010, primarily as a result of:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
An increase of $167.7 million in write-downs of petroleum and natural gas properties and
goodwill;
An increase of $49.0 million in Principal Property depletion expense primarily due to higher
production levels;
A decrease of $34.8 million in income from equity-accounted investments, as the prior year
included $36.8 million of earnings related to Trilogy’s conversion from a trust structure to a
corporate structure;
An increase of $20.5 million in interest expense due to higher current year debt levels;
An increase of $20.4 million in operating expense, primarily due to higher production levels; and
A decrease of $11.7 million in income from financial commodity contracts;
Partially offset by:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
An increase of $57.3 million in petroleum and natural gas sales;
An increase of $41.6 million in gains on the sale of property plant and equipment, primarily
relating to the sale of approximately 6,000 net acres of undeveloped 100 percent working
interest land in North Dakota;
A decrease of $33.8 million in stock-based compensation expense: and
An increase of $19.7 million in other income primarily due to the recognition of $11.1 million in
gains on sale of investments in the shares of NuLoch and its successor, Magnum Hunter
Resources Corporation ("Magnum Hunter").
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
29
2009 Results
Paramount’s 2009 financial results were prepared in accordance with Previous GAAP. As the Company’s
IFRS transition date was January 1, 2010, comparative information for 2009 has not been restated, with
the exception of the 2009 funds flow from operations measure.
Paramount’s December 31, 2009 Previous GAAP consolidated financial results were as follows: total
assets of $1,102.0 million; long-term debt of $93.7 million; annual revenues net of royalties and gains on
financial commodity contracts of $146.3 million; a net loss of $97.9 million, with a basic and diluted loss
per share of $1.46. The Company’s 2009 Previous GAAP net loss was impacted by:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Average commodity prices of $36.29/Boe and average sales volumes of 12,207 Boe/d.
A dry hole charge of $24.3 million;
A $14.9 million write-down of petroleum and natural gas properties;
A loss from investments of $7.3 million;
$17.6 million of stock-based compensation expense; and
A tax recovery of $54.6 million.
Funds Flow From Operations(1)
The following is a reconciliation of funds flow from operations to the nearest GAAP measure:
Year ended December 31
Cash from operating activities
Change in non-cash working capital
Geological and geophysical expenses
Asset retirement obligations settled
Funds flow from operations
Funds flow from operations ($/Boe)
(1) The Company has adjusted its funds flow from operations measure for all periods. Refer to the advisories concerning non-GAAP measures in the “Advisories” section of this
N/A
4.1
68.3
15.32
2010
59.2
23.5
8.1
3.2
94.0
19.77
2011
84.9
(3.0)
6.8
7.5
96.2
15.12
2009
76.0(2)
(11.8) (2)
document.
(2) Prepared in accordance with Previous GAAP.
(cid:120)
(cid:120)
Funds flow from operations in 2011 increased $2.2 million compared to the prior year, primarily
due to an increase in petroleum and natural gas sales, partially offset by a $20.4 million increase
in operating expenses, a $20.1 million increase in interest expense and a $12.7 million decrease
in commodity contract settlements received.
Funds flow from operations in 2010 increased $25.7 million compared to 2009, primarily due to
the impact of higher petroleum and natural gas sales and lower operating and general and
administrative expenses, partially offset by higher transportation and interest expenses.
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
30
PRINCIPAL PROPERTIES
Netback and Segment Loss
Year ended December 31
2011
2010
Petroleum and natural gas sales
Royalties
Operating expense and production tax
Transportation
Netback
Financial commodity contract settlements
Netback including financial commodity contract
settlements
Other principal property items (see below)
Segment loss
Petroleum and Natural Gas Sales
Year ended December 31
Natural gas
NGLs
Oil
241.7
(22.1)
(71.3)
(20.5)
127.8
0.2
128.0
(363.4)
(235.4)
2011
122.0
46.3
73.4
241.7
($/Boe)
38.00
(3.47)
(11.20)
(3.23)
20.10
0.03
20.13
($/Boe)
38.77
(4.46)
(10.70)
(3.62)
19.99
2.72
22.71
184.4
(21.2)
(50.9)
(17.2)
95.1
12.9
108.0
(210.1)
(102.1)
2010
94.8
24.0
65.6
184.4
% Change
29
93
12
31
In 2011, petroleum and natural gas sales were $241.7 million, an increase of $57.3 million from the prior
year, primarily due to the impact of higher natural gas and NGLs sales volumes and higher oil and NGLs
prices, partially offset by lower natural gas prices and lower oil sales volumes.
The impact of changes in prices and sales volumes on petroleum and natural gas sales are as follows:
Year ended December 31, 2010
Effect of changes in prices
Effect of changes in sales volumes
Year ended December 31, 2011
Sales Volumes
Natural Gas (MMcf/d)
Change
%
2010
2011
Natural Gas
94.8
(12.1)
39.3
122.0
NGLs
24.0
6.6
15.7
46.3
Oil
65.6
13.0
(5.2)
73.4
Total
184.4
7.5
49.8
241.7
NGLs (Bbl/d)
Oil (Bbl/d)
Total (Boe/d)
2011
2010
Kaybob
Grande Prairie
Southern
Northern
44.5
16.0
10.8
10.3
81.6
23.5
12.4
9.3
12.5
57.7
89
29
16
(18)
868
505
150
19
495
367
59
11
41
1,542
932
73
65
Change
%
75
38
2011
2010
72
393
79
583
154
1,483
1,363
343
460
Change
%
(9)
(33)
9
(25)
2011
8,361
3,568
3,424
2,073
2010
4,495
3,012
2,973
2,549
2,291
2,485
(8)
17,426
13,029
Change
%
86
18
15
(19)
34
Natural gas sales volumes increased 23.9 MMcf/d or 41 percent to 81.6 MMcf/d in 2011 compared to
57.7 MMcf/d in 2010. NGLs sales volumes increased 65 percent to 1,542 Bbl/d in 2011 compared to 932
Bbl/d in the same period of the prior year. The increase in natural gas and NGLs sales volumes was
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
31
primarily related to new well production at Musreau and Smoky within the Kaybob COU and at Valhalla
and Karr-Gold Creek within the Grande Prairie COU from the Company’s 2010/2011 drilling program and
new well production from the acquisitions of ProspEx and Redcliffe Exploration Inc. ("Redcliffe"). Sales
volume increases were partially offset by the impact of production declines.
Oil sales volumes decreased eight percent to 2,291 Bbl/d in 2011 compared to 2,485 Bbl/d in 2010,
primarily due to declines at Crooked Creek in the Grande Prairie COU and at Cameron Hills in the
Northern COU. These decreases were partially offset by increased sales volumes related to new well
production from the acquisitions of ProspEx and Redcliffe and due to new well production in the
Southern COU.
Total average sales volumes increased 4,397 Boe/d or 34 percent in 2011 to 17,426 Boe/d compared to
13,029 Boe/d in 2010. The Company did not achieve its expected average annual sales volumes for 2011
due to the impact of third party facility outages and capacity restrictions at Musreau, Smoky, Valhalla and
Karr-Gold Creek, weaker than expected well performance at the Karr-Gold Creek property, and the
delayed start-up of the Musreau plant.
Average Realized Prices
Year ended December 31
Natural gas ($/Mcf)
NGLs ($/Bbl)
Oil ($/Bbl)
Total ($/Boe)
2011
4.10
82.24
87.81
38.00
2010
4.50
70.58
72.30
38.77
% Change
(9)
17
21
(2)
Paramount’s average realized natural gas price for 2011, before financial commodity contract impacts,
was $4.10/Mcf compared to $4.50/Mcf in 2010. Paramount's natural gas sales portfolio primarily consists
of sales priced at the Alberta spot market, Eastern Canadian market, and California market and is sold in a
combination of daily and monthly contracts.
The average realized NGLs price for 2011 increased to $82.24/Bbl compared to $70.58/Bbl in 2010. The
average realized oil price, before financial commodity contract impacts, increased to $87.81/Bbl
compared to $72.30/Bbl in 2010. Paramount's Canadian oil and NGLs sales portfolio primarily consists of
sales priced relative to Edmonton Par and United States market hubs, adjusted for transportation and
quality differentials. The Company's United States oil and NGLs sales portfolio is sold at the well head
with negotiated differentials relative to West Texas Intermediate crude oil prices.
Commodity Prices
Key monthly average commodity price benchmarks and foreign exchange rates are as follows:
Year Ended December 31
Natural Gas
AECO (Cdn$/GJ)
NYMEX (Henry Hub US$/MMbtu)
Crude Oil
Edmonton par (Cdn$/Bbl)
West Texas Intermediate (US$/Bbl)
Foreign Exchange
$Cdn / 1 $US
2011
3.48
4.07
95.16
95.00
0.99
2010
3.91
4.40
76.80
78.39
1.04
% Change
(11)
(7)
24
21
(5)
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
32
Commodity Price Management
From time-to-time Paramount uses financial and physical commodity price contracts to manage exposure
to commodity price volatility. Paramount has not designated any of its financial commodity contracts as
hedges, and as a result, changes in the fair value of these contracts are recognized in earnings.
Receipts from the settlement of financial commodity contracts are as follows:
Year ended December 31
Natural gas contracts
Oil contracts
2011
–
0.2
0.2
2010
12.9
–
12.9
At December 31, 2011, Paramount had the following financial commodity contracts outstanding:
Instruments
Oil – NYMEX WTI Swap
Notional
500 Bbl/d
Oil – NYMEX WTI Collar
500 Bbl/d
Oil – NYMEX WTI Swap
500 Bbl/d
Average Fixed Price
US $101.01/Bbl
Floor – US $85.00/Bbl
Ceiling – US $116.85/Bbl
US $101.65 /Bbl
Oil – NYMEX WTI Swap
500 Bbl/d
US $97.25/Bbl
Oil – NYMEX WTI Swap
1,000 Bbl/d
US $91.50/Bbl
Fair
Value
139
$
45
223
(288)
(2,722)
$ (2,603)
Remaining Term
January – May 2012
January – May 2012
January – June 2012
January – December 2012
January – December 2012
Royalties
Year ended December 31
Royalties
2011
22.1
Royalty rate (%)
9.1%
2010
21.2
Royalty rate (%)
11.5%
Royalties increased by $0.9 million to $22.1 million in 2011 compared to $21.2 million in 2010. Natural
gas and NGLs royalties increased to $11.1 million in 2011 from $9.8 million in 2010 due to production
from new wells and higher NGLs prices, partially offset by a decrease in royalty rates from 8.3 percent to
6.6 percent as a result of a greater proportion of production qualifying for Alberta new well royalty
incentive programs.
Oil royalties decreased to $11.0 million in 2011 from $11.4 million in 2010 due to a decrease in royalty
rates from 17.3 percent to 15.0 percent, primarily as a result of a reduction in maximum Alberta oil royalty
rates (50 percent in 2010 to 40 percent in 2011), partially offset by the impact of higher oil revenue.
Operating Expense and Production Tax
Year ended December 31
Operating Expense
Production Tax
Total
2011
68.6
2.7
71.3
2010
48.6
2.3
50.9
% Change
41
17
40
Operating expense and production taxes increased by $20.4 million in 2011 to $71.3 million compared to
$50.9 million in 2010. The increases in 2011 primarily relate to new well production at Musreau and
Smoky in the Kaybob COU and at Karr-Gold Creek and Valhalla in the Grande Prairie COU. Operating
expenses also increased as a result of wells added through the acquisitions of ProspEx and Redcliffe and
because of suspension and workover activity during 2011 in the Northern COU at remote locations.
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
33
Transportation Expense
Year ended December 31
Transportation Expense
2011
20.5
2010
17.2
% Change
19
Transportation costs increased to $20.5 million in 2011 compared to $17.2 million in 2010, primarily as a
result of a 34 percent increase in sales volumes and a $0.7 million increase in trucking costs in the
Northern COU during a liquids pipeline service interruption. Transportation costs decreased to $3.23 per
Boe in 2011 compared to $3.62 per Boe in 2010, due primarily to lower per unit fixed transportation costs
as a result of increased sales volumes, primarily in the Kaybob and Grande Prairie COUs.
Other Principal Property Items
Year ended December 31
Commodity contracts – net of settlements
Depletion and depreciation (excluding write-downs)
Write-down of petroleum and natural gas properties and goodwill
Exploration and evaluation
Gain on sale of property, plant and equipment
Accretion of asset retirement obligations
Other income
Total
2011
2010
1.9
150.0
225.7
25.7
(42.0)
7.3
(5.2)
363.4
2.9
101.0
57.9
41.8
(0.4)
7.9
(1.0)
210.1
During 2011, Paramount recorded a write-down of petroleum and natural gas properties and goodwill of
$225.7 million compared to $57.9 million in the prior year. The 2011 write-down primarily related to
properties in the Grande Prairie COU at Karr-Gold Creek and Valhalla, in the Southern COU at Chain and
Delia and in the Northern COU at Cameron Hills and Bistcho. The impairment resulted from a
combination of declines in reserves assigned due to well performance and the decline in forecast natural
gas prices.
Depletion and depreciation expense (excluding the write-downs) increased to $150.0 million or $23.64
per Boe in 2011 compared to $101.0 million or $21.23 per Boe in the prior year. The increase in depletion
and depreciation expense was primarily due to higher production.
Exploration and evaluation expense includes the cost of expired undeveloped land leases, geological and
geophysical costs and dry hole expense. Exploration and evaluation expense included expired lease
costs of $18.2 million in 2011 compared to $24.2 million in 2010. Evaluation expense included $2.4
million of dry hole expense in 2011 compared to $8.3 million in 2010.
The gain on sale of property, plant and equipment recorded for the year ended December 31, 2011 is
primarily related to the sale of approximately 6,000 net acres of undeveloped land in North Dakota,
unrelated to the farm-out lands, for cash proceeds of US$40 million.
Other income in 2011 includes $4.4 million in respect of lower royalties related to prior years, primarily as
a result of the resolution of audits and increased gas cost allowance claims.
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
34
STRATEGIC INVESTMENTS
Year ended December 31
Income from equity-accounted investments
Drilling rig revenue
Drilling rig expense
General and administrative
Stock-based compensation
Interest
Gain on investments
Other expense
Segment Earnings (Loss)
2011
2010
1.2
22.4
(11.1)
(4.9)
(5.8)
(1.2)
15.7
(11.2)
5.1
36.0
13.4
(8.0)
(3.6)
(16.6)
(1.2)
3.5
(7.0)
16.5
Income from equity-accounted investments in 2011 was $1.2 million compared to income of $36.0
million in the prior year. In 2010, the Company recorded $36.8 million of equity earnings related to
Trilogy’s conversion from a trust structure to a corporate structure.
Strategic Investments at December 31, 2011 include:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
investments in the shares of Trilogy, MEG Energy Corp. ("MEG"), MGM Energy, Paxton
Corporation ("Paxton"), and other public and private corporations;
oil sands and carbonate bitumen interests owned by Paramount’s wholly owned subsidiary,
Cavalier Energy, including oil sands resources at Hoole, situated within the western portion of the
Athabasca Oil Sands region, and carbonate bitumen holdings in Northeast Alberta, including at
Saleski;
prospective shale gas acreage in the Horn River and Liard Basins in Northeast British Columbia
and the Northwest Territories; and
drilling rigs operated by Paramount’s wholly-owned subsidiaries: Fox Drilling in Canada and
Paramount Drilling in the United States.
In April 2011, Paramount sold 3.3 million of the 6.6 million NuLoch shares it held for cash proceeds of
$8.1 million. In May 2011, Magnum Hunter acquired NuLoch and Paramount’s remaining 3.3 million
NuLoch shares were exchanged for 1.1 million Magnum Hunter shares, which the Company
subsequently sold in July 2011 for $7.7 million in cash. The Company recognized aggregate gains of
$11.1 million in gain on investments on the dispositions, which previously had been recorded in reserves.
On May 31, 2011, Paramount acquired all 54.9 million of the issued and outstanding shares of ProspEx
not already owned in exchange for $64.8 million in cash and the issuance of 2.0 million Paramount
Common Shares. ProspEx was a Calgary-based exploration and development company with interests in
petroleum and natural gas properties in western Canada. The accumulated gain of $4.4 million to May 31,
2011 that had been recorded in reserves in respect of the Company’s investment in the shares of
ProspEx was recognized in gain on investments.
In January 2012, Paramount closed the sale of five million of its Trilogy non-voting shares for gross
proceeds of $189.5 million.
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
35
The Company’s investments in other entities are as follows:
Carrying Value
Market Value(1)
As at December 31
Trilogy (3)
MEG
MGM Energy
NuLoch Resources
ProspEx
Other(2)
Total
(1) Based on the period-end closing price of publicly-traded investments and book value of remaining investments.
(2) Includes investments in Paxton Corporation and other public and private corporations.
(3) Includes five million shares sold in January 2012 with a December 31, 2011 carrying value of $24.2 million and a December 31, 2011 market value of $187.9 million.
2011
118.3
153.8
1.7
–
–
5.8
2010
125.7
168.3
5.2
13.7
7.4
7.7
2011
907.1
153.8
10.6
2010
297.0
168.3
8.8
13.7
7.4
7.7
–
–
5.8
1,077.3
328.0
279.6
502.9
Cavalier Energy
In November 2011, Paramount reorganized of all of its oil sands and carbonate bitumen interests into a
new wholly-owned subsidiary, Cavalier Energy and assembled its executive leadership team. The
reorganization was undertaken to create a focused, self-funding oil sands entity in order to accelerate the
development of Paramount’s bitumen interests.
During 2011, Paramount received an updated independent evaluation of the bitumen resources within
the Grand Rapids formation at the Hoole oil sands property and an initial independent evaluation of the
bitumen resources within the Grosmont formation at Saleski and other properties. Details concerning
these evaluations are contained in Paramount’s Annual Information Form dated March 6, 2012.
Cavalier Energy’s near-term plans are to focus on the development of its 100 percent owned oil sands
leases at Hoole, including finalizing the scope and design of the initial phase of the development,
submitting an application for commercial development and evaluating funding opportunities. Cavalier
Energy will also continue to further delineate its carbonate bitumen leases at Saleski and its other
carbonate leases.
Shale Gas
Paramount’s shale gas land position encompasses 150,000 (127,000 net) acres which has potential for
production from the Besa River shale gas formation in the Horn River and Liard Basins.
The Company has commenced drilling an initial vertical evaluation well in the Dunedin area of the Liard
Basin. This well is expected to be drilled to 4,500 meters at a cost of approximately $15 million and will
be cored and logged for evaluation. Paramount continues to monitor industry activities in the Horn River
and Liard Basins, where operators are applying multi-stage fracturing technology to maximize production
rates and reserve recoveries. The Company is taking a conservative approach to de-risking its shale gas
holdings in the current low natural gas price environment while taking steps to maintain its mineral rights.
Drilling Subsidiaries
Fox Drilling’s two Canadian-based drilling rigs drilled on Company lands in Alberta for the duration of
2011. The Paramount Drilling US drilling rig was contracted to third parties throughout the year and is
currently contracted to a third party until mid-2012.
During December 2011, Fox Drilling commenced the construction of two new "triple-sized" walking
drilling rigs to be deployed on the Company’s lands in Canada. These rigs are expected to be operational
in late-2012 at an expected cost of $20 million each.
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
36
CORPORATE
Year ended December 31
General and administrative
Stock-based compensation
Depletion and depreciation
Interest
Debt extinguishment
Acquisition transaction costs
Foreign exchange
Other
2011
2010
12.1
15.6
0.5
32.9
–
1.0
1.4
–
63.5
11.5
38.7
0.7
12.3
1.7
0.3
(0.2)
0.1
65.1
Corporate segment net costs decreased to $63.5 million in 2011 compared to $65.1 million in 2010.
Stock-based compensation decreased $23.1 million to $15.6 million in 2011 compared to $38.7 million in
2010 as a result of a significant prior year increase in the market price of the Company’s Common
Shares.
Interest expense increased $20.6 million to $32.9 million in 2011 compared to $12.3 million in 2010 due
to the Senior Notes issuances in December 2010 and February 2011 and drawings throughout 2011 on
the Company’s credit facility.
EXPLORATION AND CAPITAL EXPENDITURES
Year ended December 31
Geological and geophysical
Drilling, completion and tie-ins
Facilities and gathering
Exploration and development expenditures
Land and property acquisitions
Principal Properties
Strategic Investments
Corporate
2011
5.5
303.7
156.5
465.7
38.2
503.9
28.0
0.1
532.0
2010
7.6
144.8
46.6
199.0
82.7
281.7
16.3
0.1
298.1
Exploration and development expenditures in 2011 were $465.7 million compared to $199.0 million in
2010. Spending in 2011 focused on drilling and completing gas wells in the Kaybob COU’s Deep Basin
development, at Karr-Gold Creek and Valhalla in the Grande Prairie COU and at Birch in the Northern
COU. Additions to property, plant and equipment include $3.2 million of capitalized interest in 2011 (2010
– nil) for qualifying assets in the construction phase.
Facilities and gathering expenditures in 2011 primarily related to the construction of new plants and
gathering systems within the Kaybob COU in order to provide increased Company-owned capacity for
planned production growth in the area, including phase one of the new Musreau plant, long lead-time
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
37
equipment orders for phase two of the Musreau plant and for the non-operated Smoky plant expansion.
In the Grande Prairie COU, facilities and gathering expenditures related to construction at Valhalla and
Karr-Gold Creek.
Land and property acquisitions include purchases of Deep Basin undeveloped land in the Kaybob COU.
Strategic investments capital expenditures in 2011 include $19.9 million related to Saleski and Hoole,
$5.0 million related to the construction of two triple-sized drilling rigs and $3.1 million related to the initial
shale gas well being drilled in Dunedin in Northeast British Columbia.
In the fourth quarter of 2011, Paramount entered into agreements to sell certain oil and gas properties in
the Southern COU and the Northern COU for aggregate gross proceeds of approximately $50 million. The
transactions closed in early 2012.
During the fourth quarter of 2011, Summit’s partner drilled and completed the final wells under the joint
development agreement, earning an undivided 50 percent interest in Summit’s Bakken/Three Forks lands
in North Dakota.
In the first quarter of 2012, Paramount and its wholly owned subsidiary, Summit, initiated a process to
sell Summit and all of its United States properties.
Wells drilled are as follows:
(wells drilled)
Gas
Coal bed methane
Oil
Oil sands evaluation
Dry and abandoned
Total
Year ended December 31
2011
2010
Gross(1)
47
–
26
28
1
Net(2)
32
–
15
27
1
Gross(1)
34
13
13
45
4
Net(2)
23
10
6
45
4
88
109
(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.
102
75
OUTLOOK
Paramount plans to invest $475 million in its Principal Properties in 2012 (excluding land acquisitions and
capitalized interest), primarily focused in the Kaybob COU’s Deep Basin development. Construction of
the Musreau and Smoky deep-cut facilities will commence during the year, and drilling and completion
activities will continue in preparation for start-up in the second half of 2013. Planned 2012 activities also
include drilling at Valhalla in the Grande Prairie COU and at Birch in the Northern COU.
The Company also plans to invest approximately $60 million in its Strategic Investments in 2012 to
complete construction of two new triple-sized walking drilling rigs within Fox Drilling; to continue pre-
development activities for oil sands projects within Cavalier Energy; and to drill a shale gas well in the
Liard Basin.
Production during the first quarter of 2012 has been impacted by capacity constraints in the Kaybob COU
as a result of the failure of a key electrical component at the Musreau 45 MMcf/d facility and the expiry of
certain firm processing contracts in November 2011; and in the Grande Prairie COU due to delays in the
delivery of surface equipment. First quarter 2012 sales volumes are expected to average approximately
18,000 Boe/d.
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
38
The Musreau facility is currently being commissioned, with gas sales expected to recommence in mid-
March, and the Valhalla gas gathering system expansion and installation of surface equipment at Karr-
Gold Creek are scheduled to be completed by the end of March. Sales volumes for the remainder of
2012 are forecast to range between 26,000 and 28,000 Boe/d. The Company expects its sales volumes
will continue to be in this range until facility expansions at Musreau and Smoky are completed and
brought on-stream in the second half of 2013.
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, acquiring or disposing of assets and
participating in joint ventures.
As at December 31
Working capital deficit (surplus)(1)
Credit facility
Senior Notes(2)
Net debt(3)
Share capital
Accumulated (deficit) earnings
Reserves
Total Capital
2011
82.0
61.4
370.0
513.4
810.8
(103.6)
116.7
1,337.3
2010
(4.8)
–
300.0
295.2
481.8
128.4
72.0
977.4
Change
86.8
61.4
70.0
218.2
329.0
(231.5)
44.7
359.9
(1) Excludes risk management assets and liabilities, stock-based compensation liabilities, assets and liabilities held for sale and accounts payable and accrued liabilities relating to the
Company’s obligation to renounce qualifying expenditures for flow-through share issuances (December 31, 2011 – $5.9 million, December 31, 2010 – $6.1 million).
(2) Excludes unamortized issue premiums and financing costs.
(3) Net debt excludes the $20 million deposit on account with the CRA, pending resolution of the Company’s notices of objection.
Working Capital
Paramount’s working capital deficit at December 31, 2011 was $82.0 million compared to a surplus of
$4.8 million at December 31, 2010. The working capital deficit at December 31, 2011 included $130.9
million of accounts payable and accrued liabilities, $40.2 million of accounts receivable, $29.0 million of
cash and cash equivalents, the $22.8 million drilling rig loan and $2.6 million of prepaid and other
expenses. The decrease in working capital is primarily a result of the Company’s 2011 capital program
and the ProspEx acquisition, partially offset by equity issuances, funds flow from operations, proceeds
from the Senior Notes offering, drawings on the Company’s bank credit facility, and the undeveloped land
sale in the United States. During 2011, aggregate principal payments of $4.0 million were made on the
drilling rig loan.
Between December 2010 and November 2011, Paramount closed public offerings of an aggregate $370
million principal amount of senior notes and $263.9 million of Common Shares and flow-through
Common Shares. Proceeds from these offerings were used to further the exploration and development
of the Company’s properties, including drilling and completion work and facilities construction at Musreau
and Smoky in the Kaybob COU and at Karr-Gold Creek and Valhalla in the Grande Prairie COU.
Approximately $92 million of the proceeds from the senior notes offering were used for the purchase and
redemption of the remaining outstanding balance of the Company’s 8½% U.S. senior notes. Proceeds
from flow-through share offerings were used and are expected to be used to incur eligible Canadian
exploration expenses. Proceeds were also used for the non-permanent repayment of indebtedness under
the Company’s credit facility and for general corporate purposes.
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
39
Paramount expects to fund its 2012 operations, obligations and capital expenditures with proceeds from
the sale of the five million Trilogy shares, funds flow from operations, proceeds from the sale of the non-
core properties, existing cash and cash equivalents, drawings on its bank credit facility, and by accessing
the capital markets, if required.
Demand Facilities
Drilling Rig Loan
In 2009, Paramount entered into a $30.4 million non-revolving demand loan facility with a Canadian bank
("Drilling Rig Loan I"). The loan was drawn in full at closing and aggregate principal payments of $7.5
million have been made to December 31, 2011. Unless demanded by the bank, annual scheduled
principal repayments are $5.1 million in each of 2012 and 2013, with the remaining outstanding balance
of $12.6 million payable in 2014.
In January 2012, Paramount entered into a new $30.0 million non-revolving demand loan facility with the
same Canadian bank to partially fund the construction of two new triple-sized walking rigs ("Drilling Rig
Loan II"). Advances on Drilling Rig Loan II are available during the year long construction period with
scheduled principal repayments to commence in 2013. Drilling Rig Loan II is currently undrawn.
Recourse and security for Drilling Rig Loan I and Drilling Rig Loan II (collectively, the "Drilling Rig Loans")
is limited to the three existing drilling rigs, the two rigs to be constructed, and drilling contracts
guaranteed by Paramount. The carrying value of the three existing rigs is $37.6 million (2010 - $38.0
million). 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 effective interest rate on Drilling Rig Loan I for
the period ended December 31, 2011 was 4.7 percent (2010 - 4.2 percent).
Cavalier Facility
In January 2012, Cavalier entered into a $21.0 million demand loan facility with a syndicate of Canadian
banks (the "Cavalier Facility"). The Cavalier Facility bears interest at the lenders’ prime lending rates, US
base rates, or bankers’ acceptance rates, as selected at the discretion of Paramount, plus an applicable
margin. The Cavalier Facility is non-recourse to Paramount and is secured by all of the assets of Cavalier,
including oil sands and carbonate bitumen lands.
Bank Credit Facility
In June 2011, Paramount renewed its bank credit facility (the "Facility"), increasing the total credit limit
from $160 million to $300 million, which is available in two tranches. The first tranche ("Tranche A") has a
borrowing base and lender commitments of $225 million and is available on a revolving basis to June 30,
2012. In the event the revolving period is not extended, Tranche A would be available on a non-revolving
basis for an additional year, at which time it would be due and payable. The second tranche ("Tranche B")
is available on a revolving basis, has a credit limit of up to $75 million and is due June 30, 2012 in the
event the due date is not earlier extended. The Facility is secured by a first fixed and floating charge over
substantially all of the assets of Paramount, excluding assets securing the Drilling Rig Loans and the
Cavalier Facility. Balances drawn under Tranche B are secured by the pledge of certain of the Company’s
equity investments.
The Facility bears interest at the lenders’ prime lending rates, US base rates, bankers’ acceptance or
LIBOR rates, as selected at the discretion of Paramount, plus an applicable margin which is dependent
upon the Company’s debt to cash flow ratio and the tranche under which borrowings are made. The
maximum amount that Paramount may borrow under the Facility is subject to periodic review, and is
dependent upon the Company’s reserves, lenders’ projections of future commodity prices and the
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
40
market value of equity investments pledged by Paramount from time-to-time under Tranche B, among
other factors. Increases in the borrowing base and lender commitments under Tranche A reduce the
credit limit under Tranche B by an equivalent amount.
At December 31, 2011, $61.4 million (December 31, 2010 – nil) was drawn on Tranche A of the Facility.
Paramount had undrawn letters of credit outstanding at December 31, 2011 totaling $26.3 million that
reduce the amount available to the Company.
Senior Notes
In December 2010, Paramount completed a public offering of $300 million principal amount of senior
unsecured notes ("Senior Notes") at par, of which $11.4 million principal amount was purchased by
certain directors, associates, officers, and management of the Company.
In February 2011, Paramount completed a public offering of an additional $70 million principal amount
of Senior Notes at a price of $1,030 per $1,000 principal amount, of which $1.4 million principal amount
was purchased by an entity that is controlled by the Company’s Chairman and Chief Executive Officer.
The Senior Notes bear interest at 8.25 percent per annum, payable semi-annually in arrears on June 13
and December 13 in each year and mature on December 13, 2017. The Senior Notes are direct senior
unsecured obligations of Paramount and rank equally with all other senior unsecured indebtedness of the
Company.
The Company may redeem all or any portion of the Senior Notes at any time on or prior to December 13,
2013 at par, plus accrued and unpaid interest, plus a redemption premium equal to the greater of: (i) one
percent; and (ii) a make-whole amount based on the then current yield of a Government of Canada bond
with a similar maturity. Paramount may also redeem up to an aggregate of 35 percent of the Senior
Notes with the net cash proceeds of an equity offering at any time prior to December 13, 2013, at par
plus a redemption premium of 8.25 percent. On or after December 13, 2013, the Company may redeem
some or all of the Senior Notes at par plus a redemption premium, if applicable, of up to 4.125 percent
depending on when redeemed, plus accrued and unpaid interest.
US Senior Notes
During the fourth quarter of 2010, Paramount’s obligations under the indenture governing its US$90.2
million principal amount of US senior notes ("US Senior Notes") were discharged as a result of Paramount:
(i) purchasing US$64.2 million principal amount of US Senior Notes pursuant to a tender offer; (ii)
delivering all US Senior Notes held by the Company to the trustee for cancellation; (iii) issuing a
redemption notice for US$26.0 million principal amount of US Senior Notes not tendered under the
tender offer (the "Redeemed Notes"); and (iv) irrevocably depositing sufficient cash with the trustee to
pay all amounts due on the Redeemed Notes on the January 31, 2011 redemption date.
Share Capital
In April 2011, Paramount issued 1,500,000 Common Shares at a price of $32.50 per share for gross
proceeds of $48.8 million pursuant to a public offering. In April 2011, Paramount also issued 150,000
Common Shares on a "flow-through” basis in respect of Canadian development expenses at a price of
$36.50 per share for gross proceeds of $5.5 million to a company controlled by the Company’s Chairman
and Chief Executive Officer. In May 2011, the Company issued 2,000,000 Common Shares in connection
with the ProspEx acquisition. In October 2011, Paramount issued 1,450,000 Common Shares on a "flow-
through" basis in respect of Canadian exploration expenses ("CEE") pursuant to a public offering at a price
of $40.50 per share for gross proceeds of $58.7 million. Also in October 2011, the Company issued
100,000 Common Shares on a "flow-through basis" in respect of CEE at a price of $40.50 per share for
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
41
gross proceeds of $4.1 million to companies controlled by the Company’s Chairman and Chief Executive
Officer. In November 2011, Paramount issued 4,500,000 Common Shares at a price of $34.75 per share
for gross proceeds of $156.4 million through a public offering.
The Company is committed to incur $62.8 million of qualifying expenditures related to the 2011 offering
of CEE flow-through Common Shares by October 19, 2012. As of December 31, 2011, the Company had
incurred $33.1 million of qualifying CEE.
Paramount has incurred sufficient qualifying expenditures to satisfy its commitments associated with
flow-through shares issued in November 2010 and April 2011.
In April 2010, Paramount received regulatory approval under Canadian securities laws to purchase
Common Shares under a normal course issuer bid ("NCIB") commencing April 13, 2010 for a 12-month
period. Under the NCIB, Paramount was permitted to purchase for cancellation up to 3,626,476 Common
Shares. No shares were purchased under the NCIB, which expired on March 3, 2011.
At March 2, 2012, Paramount had 85.6 million Common Shares and 5.7 million Paramount Options
outstanding (1.8 million exercisable).
QUARTERLY INFORMATION
Petroleum and natural gas sales
Funds flow from operations
per share – diluted ($/share)
Net income (loss)
per share – basic ($/share)
per share – diluted ($/share)
Sales volumes
Natural gas (MMcf/d)
NGLs (Bbl/d)
Oil (Bbl/d)
Total (Boe/d)
Average realized price
Natural gas ($/Mcf)
NGLs ($/Bbl)
Oil ($/Bbl)
2011
2010
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
63.3
26.1
0.33
(209.9)
(2.54)
(2.54)
91.5
1,620
2,356
19,223
3.65
81.27
94.33
70.5
61.1
46.8
46.0
44.9
44.6
48.9
32.8
0.42
(22.4)
(0.28)
(0.28)
23.4
0.29
12.2
0.16
(0.02)
13.9
0.19
(11.9)
(0.16)
(0.16)
21.3
0.29
(106.3)
(1.44)
(1.44)
24.1
0.33
6.9
0.09
0.09
25.2
0.35
(17.5)
(0.24)
(0.24)
23.5
0.33
26.9
0.37
0.37
97.8
2,062
2,344
20,707
77.7
1,504
2,110
16,572
58.7
968
2,353
13,097
60.4
1,030
2,357
13,461
62.9
1,099
2,381
13,967
57.0
821
2,466
12,787
50.2
775
2,739
11,875
4.16
83.68
80.06
4.43
83.17
95.64
4.26
79.29
81.91
4.04
75.52
75.45
4.12
59.90
68.60
4.49
77.26
69.34
5.59
72.22
75.51
Significant Items Impacting Quarterly Results
Quarterly earnings variances include the impacts of changing production volumes and market prices.
(cid:120)
Fourth quarter 2011 earnings include a $225.7 million write-down of petroleum and natural gas
properties and goodwill, and $7.6 million of losses on financial commodity contracts, partially
offset by an $8.4 million decrease in stock-based compensation expense and a $3.1 million gain
on the sale of property, plant and equipment.
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
42
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Third quarter 2011 earnings include $14.6 million of stock-based compensation expense, a
decrease of $15.4 million in gains on the sale of securities and an increase of $8.3 million in
depletion and depreciation.
Second quarter 2011 earnings include the recognition of $15.4 million of gains on investments in
securities and a $10.6 million stock-based compensation recovery, partially offset by higher
depletion and depreciation and interest.
First quarter 2011 earnings include gains of $39.6 million on the sale of property, plant and
equipment, partially offset by $11.3 million of stock-based compensation charges.
Fourth quarter 2010 earnings include $33.7 million of stock-based compensation charges, a $57.9
million write-down of petroleum and natural gas properties and goodwill and $11.9 million of
expired lease costs.
Third quarter 2010 earnings include a future income tax recovery of $33.0 million and $8.1 million
of stock-based compensation charges.
Second quarter 2010 earnings include increased depletion, depreciation and accretion expense
and $6.8 million of stock-based compensation charges.
First quarter 2010 earnings include $36.8 million of equity earnings related to Trilogy’s conversion
from a trust structure to a corporate structure, $8.2 million of dry hole expenses and $6.7 million
of stock-based compensation charges.
Fourth Quarter Review
Net Loss
Three months ended December 31
Principal Properties
Strategic Investments
Corporate
Tax Recovery
Net Loss
Netback
2011
(250.3)
(3.4)
(16.3)
60.1
(209.9)
2010
(84.6)
(10.9)
(32.7)
21.9
(106.3)
Three months ended December 31
2011
2010
Petroleum and natural gas sales
Royalties
Operating expense and production tax
Transportation
Netback
Financial commodity contract settlements
Netback including financial commodity contract settlements
63.3
(5.5)
(21.2)
(5.1)
31.5
0.3
31.8
($/Boe)
35.80
(3.13)
(11.98)
(2.88)
17.81
0.17
17.98
46.0
(4.4)
(12.8)
(4.3)
24.5
1.8
26.3
($/Boe)
37.11
(3.51)
(10.37)
(3.46)
19.77
1.44
21.21
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
43
Funds Flow from Operations(1)
Three months ended December 31
Cash from operating activities
Change in non-cash working capital
Geological and geophysical expenses
Asset retirement obligations settled
Funds flow from operations
2011
7.2
14.9
1.9
2.1
26.1
2010
10.4
8.8
1.5
0.6
21.3
Funds flow from operations ($/Boe)
(1) The Company has adjusted its funds flow from operations measure for all periods. Refer to the advisories concerning non-GAAP measures in the “Advisories” section of this
19.77
17.17
document.
Sales Volumes
Natural Gas (MMcf/d)
Change
%
2010
2011
Kaybob
Grande Prairie
Southern
Northern
50.8
19.4
11.4
9.9
91.5
28.8
11.4
9.1
11.1
60.4
76
70
25
(11)
51
Three months ended December 31
Oil (Bbl/d)
NGLs (Bbl/d)
2011
2010
901
480
216
23
614
333
59
24
1,620
1,030
Change
%
47
44
2011
2010
62
333
98
428
266
1,551
1,397
(4)
57
410
434
2,356
2,357
Change
%
(37)
(22)
11
(6)
0
Total (Boe/d)
2011
9,437
4,048
3,670
2,068
2010
5,506
2,667
2,976
2,312
19,223
13,461
Change
%
71
52
23
(11)
43
Paramount’s fourth quarter average sales volumes were 19,223 Boe/d, consisting of 91.5 MMcf/d of
natural gas and 3,976 Bbl/d of oil and NGLs. Petroleum and natural gas sales were $63.3 million, an
increase of $17.3 million from the fourth quarter of 2010 due to increased production volumes from new
wells and acquisitions and higher oil and NGLs prices, partially offset by lower natural gas prices.
Production levels in the Kaybob COU in the fourth quarter of 2011 were impacted by lower firm
processing capacity in Musreau and equipment failures shortly after the start-up of the new Musreau
plant resulting in some production being temporarily shut-in.
Fourth quarter 2011 royalties increased to $5.5 million in 2011 compared to $4.4 million in 2010, primarily
as a result of increased revenue. The average royalty rate decreased from 9.3% to 8.7%, as a greater
proportion of current production is subject to the Alberta new well and deep drilling royalty incentive
programs. Operating expenses were $8.4 million higher in the fourth quarter of 2011 compared to the
prior year primarily due to higher production volumes from new well production and acquisitions.
Operating costs per Boe increased to $11.98 in the fourth quarter of 2011 compared to $10.37 in the
fourth quarter of 2010. The per unit increase is due primarily to an equalization adjustment for processing
fees at a third party midstream facility and higher 2011 costs related to winter ice roads and well work-
overs.
Funds flow from operations in the fourth quarter of 2011 increased by $4.8 million to $26.1 million
compared to $21.3 million in 2010, primarily due to the increase in petroleum and natural gas sales,
partially offset by higher operating expenses and interest.
Fourth quarter exploration and development expenditures of $78.1 million were primarily related to the
Deep Basin development in the Kaybob COU and spending at Karr-Gold Creek and Valhalla in the Grande
Prairie COU.
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
44
OTHER INFORMATION
Related Party Transactions
Service Agreements
Paramount engages in transactions with Trilogy, MGM Energy, Paxton and Perpetual Energy Inc. in the
normal course of business, including joint venture operations. Paramount is considered related to Trilogy,
MGM Energy, Paxton and Perpetual Energy Inc. because of common significant influence. All
transactions between Paramount and the entities are recorded at their exchange amounts.
During 2011, Paramount charged $0.9 million (2010 – $0.5 million) to Trilogy in respect of operational and
administrative services. Also, Paramount received $10.1 million (2010: $10.5 million) in annual dividends
from Trilogy. As of December 31, 2011, Paramount had a receivable balance due from Trilogy of $0.3
million (2010: $0.3 million).
Contractual Obligations
Paramount had the following contractual obligations at December 31, 2011:
($ millions)
Senior notes(1)
Drilling rig loan (1)
Pipeline transportation commitments(2)
Operating leases
2012
30.5
6.1
16.4
3.6
2013-2014
2015-2016
After 2016
61.1
5.3
33.2
3.5
61.1
13.0
27.7
3.5
399.3
–
55.5
10.6
Total
552.0
24.4
132.8
21.2
Capital spending commitments
Credit facility (1)
Total
(1) Including interest
(2) Certain of the pipeline transportation commitments are secured by outstanding letters of credit totaling $12.8 million at December 31, 2011 (2010 -
3.3
114.1
63.0
166.1
–
465.4
–
105.3
66.3
850.9
54.2
54.2
–
–
–
$10.4 million).
Operating Lease Commitment
During the year, the Company renewed and extended its head office lease to 2022. The Company
incurred office lease costs of $2.8 million in 2011 (2010 - $2.3 million).
Flow-Through Shares
As a result of flow through share issuances in the fourth quarter of 2011, Paramount is required to incur
and renounce $29.7 million of Canadian Exploration Expense during 2012.
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.
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
45
CHANGE IN ACCOUNTING POLICIES
IFRS Transition
As noted previously, Canadian GAAP was converted to IFRS effective for fiscal years beginning on or
after January 1, 2011. Paramount’s audited Consolidated Financial Statements as at and for the year
ended December 31, 2011 have been prepared in accordance with IFRS 1 - First-time Adoption of IFRS
("IFRS 1"). The adoption of IFRS has not had a material impact on the Company’s operations, cash flows,
capital expenditures or strategic objectives.
The Company’s IFRS accounting policies are provided in Note 1 to the audited Consolidated Financial
Statements. In addition, Note 24 presents reconciliations between the Company’s 2010 Previous GAAP
results and the 2010 IFRS results. The reconciliations include the Consolidated Balance Sheet as at
January 1, 2010 and December 31, 2010, and Consolidated Statement of Comprehensive Income,
Changes in Shareholders’ Equity and Cash Flows for the twelve months ended December 31, 2010.
Summary amounts from these reconciliations are included below.
As the IFRS accounting policies and processes were determined, corresponding changes to internal
controls over financial reporting and disclosure controls procedures were made to ensure controls
remained effective.
IFRS Transition Exemptions
The transition provisions of IFRS require changes in accounting policies to be applied on a retroactive
basis, except for certain mandatory and optional exemptions. Paramount has elected to apply the
following exemptions:
a)
b)
c)
d)
e)
f)
g)
the exemption to measure certain assets at fair value on transition to IFRS and subsequently deem
that fair value to be historical cost;
the exemption to deem cumulative foreign exchange translation differences related to foreign
subsidiaries as of January 1, 2010 to be nil;
the exemption that permits amounts recorded in respect of options settled prior to January 1, 2010
not to be retrospectively restated;
the exemption that permits business combinations completed prior to January 1, 2010 not to be
restated. Paramount’s initial business combination recorded in accordance with IFRS 3 was the
acquisition of Redcliffe in June 2010;
the exemption to measure asset retirement obligations at the Transition Date in accordance with
IFRS 1;
the exemption to assess lease arrangements using the facts and circumstances as of the Transition
Date under International Financial Reporting Interpretations Committee Interpretation 4, "Determining
whether an Arrangement contains a Lease"; and
the exemption that permits borrowing costs directly attributable to the acquisition or construction of
qualifying assets not to be capitalized on a retroactive basis prior to January 1, 2010.
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
46
Significant Accounting Policy Changes
Changes to the Company’s accounting policies on conversion to IFRS and the related adjustments to the
Company’s financial statement balances are described below. Readers are referred to Notes 1 and 24 of
the Company’s December 31, 2011 audited Consolidated Financial Statements regarding Paramount’s
IFRS accounting policies and IFRS adjustments.
a) Property, Plant and Equipment
Under IFRS, the type and method of calculating petroleum and natural gas reserves used in determining
depletion on a unit-of-production basis is not specifically prescribed. Under Previous GAAP, the Company
was required to use a reserve estimate based on average commodity prices of the preceding year. On
adoption of IFRS, Paramount amended its depletion policy to use a reserves estimate based on proved
developed reserves and forecast commodity prices.
IFRS requires an impairment write down to be recorded when the carrying value of an asset exceeds its
recoverable amount. The recoverable amount is defined as the greater of value in use and fair value less
costs to sell. Under Previous GAAP, a two-step approach was used to determine impairment write-
downs: (i) the carrying value of a property was compared to its expected undiscounted before-tax cash
flows, and (ii) where the carrying value exceeded the expected undiscounted before-tax cash flows, an
impairment write-down was calculated based on the difference between the property’s carrying value
and its expected discounted before-tax cash flows. The IFRS method of determining impairments
resulted in the recognition of additional impairment write-downs of petroleum and natural gas properties
of $65.4 million on the Transition Date. For the twelve months ended December 31, 2010, additional
write-downs of $32.6 million were recognized, including a goodwill impairment charge of $3.6 million.
b) Asset Retirement Obligations
Under IFRS the Company’s policy is to re-measure asset retirement obligations at each reporting date
using the period-end risk-free rate. Under Previous GAAP, credit-adjusted risk-free rates were applied to
each obligation when initially recognized, and that rate was not adjusted in future periods. On Transition
Date, the Company recorded a $91.6 million increase in the asset retirement obligation liability due to a
decrease in discount rates, from approximately eight percent under Previous GAAP to four percent under
IFRS.
c) Foreign exchange translation
Under IFRS, assets and liabilities of subsidiaries with functional currencies that are not the presentation
currency are translated at the exchange rate in effect at the end of the reporting period and the resulting
exchange differences are recognized in other comprehensive income. Under Previous GAAP, the assets
and liabilities of the Company’s integrated foreign operations were translated into Canadian dollars using
the temporal method, where non-monetary items were translated at historical exchange rates and
monetary assets and liabilities were translated at the exchange rate in effect at the end of the reporting
period, with resulting exchange differences recognized in income.
d) Stock-based compensation
Prior to October 1, 2011, Paramount accounted for Paramount Options as cash-settled awards, where a
liability was recognized initially based on the grant date fair value of the options. The liability was
subsequently adjusted each period for vesting and changes in the fair value of the options, until the
options were exercised, surrendered or expired, with an offsetting entry to stock-based compensation
expense. The fair value of the options were determined using the Black-Scholes-Merton model. When
options were exercised for Common Shares, the consideration paid by the option holder and the
previously recognized liability associated with the options were recorded as an increase to share capital.
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
47
When options were surrendered for cash, the cash settlement was applied against the liability and any
difference was recognized as stock-based compensation expense.
As of October 1, 2011, the Company accounts for Paramount Options as equity-settled stock-based
compensation transactions, where the grant date fair value of stock options awarded is recognized as
stock-based compensation expense over the vesting period, with a corresponding increase in Contributed
Surplus. The grant date fair value of stock options is estimated using the Black-Scholes-Merton model
and such value is not adjusted in future periods. The amount of stock-based compensation expense
recognized each period reflects the portion of the vesting term that elapsed and an estimate of the
number of options that are expected to vest. That estimate is adjusted each period such that the
cumulative amount recognized on the vesting date reflects the actual number of stock options that
ultimately vest. Upon the exercise of a stock option, the Company transfers the cumulative amount
recognized in respect of the award from Contributed Surplus to Share Capital.
Paramount previously accounted for Paramount Options as cash-settled awards due to its past practice of
accepting requests to settle Paramount Options with a cash payment. In recent years, the Company has
not been granting requests to settle Paramount Options in cash, and does not expect to do so in the
future. As a result, Paramount has accounted for Paramount Options as equity-settled stock-based
compensation transactions from of October 1, 2011. The change in accounting method resulted in the
reclassification of the September 30, 2011 stock-based compensation liability of $68.7 million to
Contributed Surplus.
e) Flow-through shares
Under IFRS, proceeds from the issuance of flow-through shares are allocated between the sale of the
shares, which are recorded in share capital, and the sale of the tax benefits, which are initially recorded
as an accrued liability. The allocation is made based on the difference between the issue price of flow-
through shares and the market price of the Common Shares on the date the offering is priced. The
liability related to the sale of the tax benefits is reversed as qualifying expenditures intended for
renunciation to subscribers are incurred, and a deferred tax liability is recorded. The difference between
the deferred tax liability recorded and the liability related to the sale of tax benefits is recognized as
deferred tax expense. Under Previous GAAP, when flow-through shares were issued, they were
recorded in share capital based on proceeds received. Upon filing the renunciation documents with the
tax authorities, a future tax liability was recognized and share capital was reduced for the tax effect of
expenditures renounced to subscribers. The IFRS adjustment on Transition Date associated with flow-
through shares was to increase share capital by $25.1 million, reduce retained earnings by $30.4 million,
increase deferred tax liabilities by $2.9 million, and increase accrued liabilities by $2.4 million.
f) Equity Accounted Investments
The equity method of accounting requires an investor to adjust the carrying value of its investment in an
investee for the investor’s proportionate share of changes in the investee’s net assets. On Transition
Date, the carrying value of Paramount’s equity accounted investments was decreased by an aggregate of
$7.6 million to reflect Paramount’s proportionate share of the adjustments Trilogy and MGM Energy
recorded in respect of their IFRS transitions. For the twelve months ended December 31, 2010, the
carrying values of Paramount’s equity accounted investments were increased by $30.3 million due to
adjustments recorded by Trilogy and MGM Energy.
g) Deferred Income Tax
On Transition Date, the Company’s deferred income tax asset balance was increased by $2.5 million, the
deferred income tax liability balance was decreased by $34.0 million, and the equity accounted
investments balance was increased by $1.9 million to reflect the tax impacts of the IFRS adjustments as
described in the preceding discussion. For the twelve months ended December 31, 2010, the deferred
income tax asset balance was decreased by $3.7 million, the equity accounted investments balance was
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
48
decreased by $1.9 million and deferred income tax expense was increased by $6.2 million. Deferred
income tax on foreign exchange differences on translation of the US subsidiaries was $0.6 million for the
twelve months ended December 31, 2010.
h) Statement of Cash Flows
Under IFRS, cash from operating activities is reduced by geological and geophysical expenses and
excludes cash outflows related to purchases of Paramount’s Common Shares under the Company’s
stock incentive plan and the effect of changes in foreign exchange rates in respect of foreign currency
cash and cash equivalent balances. Under Previous GAAP, geological and geophysical expenses were
included in cash used in investing activities and cash outflows related to the purchase of Paramount’s
Common Shares under the Company’s stock incentive plan and the effect of changes in foreign
exchange rates in respect of foreign currency cash and cash equivalent balances were included in cash
from operating activities.
Impacts of Accounting Policy Changes
Summarized reconciliations of Paramount’s 2010 Previous GAAP amounts to IFRS amounts are as
follows:
Balance Sheet
Current assets
Long term assets
Current liabilities
Long term liabilities
Equity
Previous
GAAP
110.5
1,266.7
1,377.2
151.6
439.9
591.5
785.7
1,377.2
December 31, 2010
IFRS
Adjustments
–
14.1
14.1
7.1
110.5
117.6
(103.5)
14.1
IFRS
110.5
1,280.8
1,391.3
158.7
550.4
709.1
682.2
1,391.3
Previous
GAAP
121.2
980.8
1,102.0
87.0
242.1
329.1
772.9
1,102.0
January 1, 2010
IFRS
Adjustments
–
(65.1)
(65.1)
4.8
61.4
66.2
(131.3)
(65.1)
IFRS
121.2
915.7
1,036.9
91.8
303.5
395.3
641.6
1,036.9
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
49
Comprehensive Income
Comprehensive (Loss) – Previous GAAP
IFRS Adjustments:
Adjustments to PP&E related to impairments and changes in depletion
Accretion of asset retirement obligations
Change in currency translation method related to foreign subsidiaries
Change in stock-based compensation
Change in method of accounting for flow-through shares
Change in income from equity accounted investments
Adjustment to deferred tax
Comprehensive (Loss) Income – IFRS
$
Cash Flows
Twelve months ended
December 31, 2010
Three months ended
December 31, 2010
$
(54.0)
$
(12.6)
9.2
1.8
(3.5)
3.5
(5.3)
30.4
(5.7)
(23.6)
12.7
0.5
(2.1)
1.0
(1.4)
31.9
(3.0)
27.0
$
Twelve months ended
December 31, 2010
Three months ended
December 31, 2010
Cash from operating activities under Previous GAAP
$
63.4
Adjustments under IFRS:
Exploration costs
Common shares purchased under stock incentive plan
Foreign exchange on cash and cash equivalents
Cash from operating activities under IFRS
Cash from financing activities under Previous GAAP
Adjustment under IFRS:
Common shares purchased under stock incentive plan
Cash from financing activities under IFRS
Cash used in investing activities under Previous GAAP
Adjustment under IFRS:
Exploration costs
Cash used in investing activities under IFRS
Net decrease
Foreign exchange on cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of year
(8.2)
2.9
1.1
59.2
251.9
(2.9)
249.0
(333.9)
8.2
(325.7)
(17.5)
(1.0)
93.2
74.7
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
11.1
1.5
–
0.8
10.4
149.3
–
149.3
(108.5)
1.5
(107.0)
52.7
0.8
21.2
74.7
Future Changes in Accounting Standards
As of January 1, 2013, Paramount will be required to adopt certain standards and amendments issued by
the International Accounting Standards Board ("IASB") as described below, for which the Company is
currently assessing the impact on its Consolidated Financial Statements.
(cid:120)
(cid:120)
IFRS 10, "Consolidated Financial Statements" is the result of the IASB’s project to replace
Standing Interpretations Committee 12, "Consolidation – Special Purpose Entities" and the
consolidation requirements of IAS 27, "Consolidated and Separate Financial Statements". The
new standard eliminates the current risk and rewards approach and establishes control as the
single basis for determining the consolidation of an entity.
IFRS 11, "Joint Arrangements" is the result of the IASB’s project to replace IAS 31, "Interests
in Joint Ventures". The new standard redefines "joint operations" and "joint ventures" and requires
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
50
joint operations to be proportionately consolidated and joint ventures to be equity accounted.
Under IAS 31, joint ventures could be proportionately accounted. The Company expects its joint
venture arrangements will continue to meet the definition of "joint operations" and that
proportionate consolidation of such arrangements will continue under the new standard.
IFRS 12, "Disclosure of Interests in Other Entities" outlines the required disclosures for
interests in subsidiaries and joint arrangements. The new standard requires disclosure of
information that will assist financial statement users to evaluate the nature, risks and financial
effects associated with an entity’s interests in subsidiaries and joint arrangements.
IFRS 13, "Fair Value Measurement" provides a common definition of fair value, establishes a
framework for measuring fair value under IFRS and enhances the disclosures required for fair
value measurements. The standard applies where fair value measurements are required and
does not require new fair value measurements.
(cid:120)
(cid:120)
In December 2011 the IASB approved a proposal to move the effective date for the adoption of IFRS 9,
"Financial Instruments: Classification and Measurement" to January 1, 2015. This new standard, which
reflects the first phase of the IASB’s work on the replacement of IAS 39, "Financial Instruments –
Recognition and Measurement" applies to classification and measurement of financial assets and financial
liabilities as defined in IAS 39.
The adoption of these standards and amendments are not expected to have a material impact on the
company’s business or result in changes in business practices.
DISCLOSURE CONTROLS AND PROCEDURES
As of the year ended December 31, 2011, 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 oversight 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 in ensuring 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.
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
51
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 IFRS, that the Company’s
assets are safeguarded, and that expenditures are made in accordance with appropriate authorization.
Management has assessed the effectiveness of the Company’s internal control over financial reporting
as at December 31, 2011. 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, 2011.
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.
Changes in Internal Controls Over Financial Reporting
During the fiscal year and quarter ended December 31, 2011, there was no change in the Company’s
internal control over financial reporting that materially affected, or is reasonably likely to materially affect,
the Company’s internal controls over financial reporting.
CRITICAL ACCOUNTING ESTIMATES
The timely preparation of financial statements requires management to make certain judgments based on
assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses
and the disclosure of contingent assets and liabilities. The following is a discussion of the accounting
judgments, estimates and assumptions that are considered significant:
Exploration and Evaluation Assets
The accounting for exploration and evaluation assets requires management to make certain judgments
based on assumptions and estimates as to future events and circumstances, including the designation of
wells as being exploratory or development and whether exploratory wells have discovered economically
recoverable quantities of reserves. Designations are sometimes revised as new information becomes
available.
If an exploratory well encounters hydrocarbons, but further appraisal activity is required in order to
conclude whether the hydrocarbons are economically recoverable, the well costs remain capitalized as
long as sufficient progress is being made in assessing the economic and operating viability of the well.
Criteria utilized in making this determination include evaluation of the reservoir characteristics and
hydrocarbon properties, expected additional development activities, and regulatory matters. The concept
of "sufficient progress" is a judgmental area, and 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.
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
52
Where it is determined that an exploratory well or project is unsuccessful, the costs are written-off as
exploration and evaluation expense.
Reserves Estimates
Reserve engineering is an inherently complex and subjective process of estimating underground
accumulations of petroleum and natural gas. The process relies on judgments based on the interpretation
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 factors and the judgment of those preparing the estimate. Because these estimates
depend on many assumptions, all of which may differ from actual results, reserves estimates,
commodity prices and estimates of future net revenue will be different from the sales volumes ultimately
recovered and net revenues actually realized. Changes in market conditions, regulatory matters and the
results of subsequent drilling, testing and production may require revisions to the original estimates.
Estimates of reserves impact: (i) the assessment of whether a new well has found economically
recoverable reserves; (ii) depletion rates; and (iii) the estimation of the recoverable amount of petroleum
and natural gas properties used in impairment assessments, all of which could have a material impact on
earnings.
Business Combinations
Business combinations are accounted for using the acquisition method of accounting, where the net
identifiable assets acquired are recorded at fair value. Any excess of the consideration transferred over
the fair value of the net identifiable assets acquired is recognized as goodwill. Any deficiency in the
consideration transferred versus the fair value of the net identifiable assets acquired is recognized in
earnings. Estimates of fair value require management to make assumptions about future events,
including reserves estimates. These assumptions are based on management’s judgments regarding the
use of appropriate indicators of fair value. Changes in any of the assumptions or estimates used in
determining the fair value of the net identifiable assets acquired may impact the carrying values assigned
and earnings.
Asset Retirement Obligations
Estimates of asset retirement costs are based on assumptions regarding the methods, timing, economic
environment and regulatory standards that are expected to exist at the time assets are retired.
Management applies judgment in determining such assumptions and adjusts estimated amounts
periodically to incorporate new information. Accordingly, actual payments to settle the obligations may
differ materially from amounts estimated.
Share-Based Payments
Use of the Black-Scholes-Merton method to estimate the fair value of the Company’s stock options
requires the application of various assumptions including future risk-free rates, option lives, forfeiture
rates, dividends, stock price and volatility. Changes in any of these variables could have a material impact
on stock-based compensation expense.
Income Taxes
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. All tax filings are
subject to subsequent government audits and potential reassessment. These interpretations and
judgments and changes related to them impact current and deferred tax provisions, deferred income tax
assets and liabilities and net income.
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
53
ADVISORIES
FORWARD-LOOKING INFORMATION
Certain statements in this document constitute forward-looking information under applicable securities legislation.
Forward-looking information typically contains statements with words such as "anticipate", "believe", "estimate",
"expect", "plan", "intend", "propose", or similar words suggesting future outcomes or an outlook. Forward looking
information in this document includes, but is not limited to:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
expected production volumes and the timing
thereof;
planned exploration and development expenditures
and the timing thereof;
exploration and development potential and/or plans
and strategies and the anticipated costs and results
thereof;
budget allocations and capital spending flexibility;
adequacy of facilities to process and transport
natural gas production;
the scope and timing of proposed new facilities and
expansions to existing facilities and the expected
capacity and utilization of such facilities;
estimated reserves and resources and the
undiscounted and discounted present value of
future net revenues from such reserves and
resources (including the forecast prices and costs
and the timing of expected production volumes and
future development capital);
timing of regulatory applications;
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
the timing of the anticipated development of
Paramount’s oil sands, carbonate and shale gas
assets;
ability to fulfill future pipeline transportation
commitments;
future taxes payable or owing;
undeveloped land lease expiries;
timing and cost of future abandonment and
reclamation;
business strategies and objectives;
sources of and plans for financing;
acquisition and disposition plans;
operating and other costs and royalty rates;
regulatory applications and the anticipated timing,
results and scope thereof;
anticipated increases in future reserves estimates;
expected drilling programs, well tie-ins, facility
construction and expansions, completions and the
timing thereof; and
the outcome of any legal claims, audits,
assessments or other regulatory matters or
proceedings.
Such forward-looking information is based on a number of assumptions which may prove to be incorrect. The
following assumptions have been made, in addition to any other assumptions identified in this document:
(cid:131)
(cid:131)
(cid:131)
(cid:131)
future crude oil, bitumen, natural gas and NGLs
prices and general economic , business conditions,
and market conditions;
the ability of Paramount to obtain required capital to
finance its exploration, development and
operations;
the ability of Paramount to obtain equipment,
services, supplies and personnel in a timely manner
and at an acceptable cost to carry out its activities;
the ability of Paramount to market its oil and natural
gas successfully to current and new customers;
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
the ability of Paramount to secure adequate
product processing, transportation and storage;
the ability of Paramount and its industry partners to
obtain drilling success consistent with
expectations;
the timely receipt of required regulatory approvals;
expected timelines being met in respect of facility
development and construction projects;
access to capital markets and other sources of
funding;
(cid:131) well economics relative to other projects; and
(cid:131)
currency exchange and interest rates.
Although Paramount believes that the expectations reflected in such forward looking information is reasonable,
undue reliance should not be placed on it as Paramount can give no assurance that such expectations will prove to
be correct. Forward-looking information is based on current expectations, estimates and projections that involve a
number of risks and uncertainties which could cause actual results to differ materially from those anticipated by
Paramount and described in the forward looking information. These risks and uncertainties include, but are not
limited to:
(cid:131)
(cid:131)
(cid:131)
fluctuations in crude oil, bitumen, natural gas and
NGLs prices, foreign currency exchange rates and
interest rates;
the uncertainty of estimates and projections relating
to future revenue, future production, costs and
expenses and the timing thereof;
the ability to secure adequate product processing,
(cid:131)
(cid:131)
(cid:131)
(cid:131)
changes to the status or interpretation of laws,
regulations or policies;
changes in environmental laws including emission
reduction obligations;
the receipt, timing, and scope of governmental or
regulatory approvals;
changes in economic, business and market
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
54
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
transportation and storage;
the uncertainty of exploration, development and
drilling activities;
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 and at an
acceptable cost;
potential disruptions or unexpected technical
difficulties in designing, developing or operating
new, expanded or existing facilities including, third
party facilities that service Company production;
risks and uncertainties involving the geology of oil
and gas deposits;
the uncertainty of reserves and resource estimates;
the ability to generate sufficient cash flow from
operations and other sources of financing at an
acceptable cost to meet current and future
obligations, including costs of anticipated projects;
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
conditions;
uncertainty regarding aboriginal land claims and co-
existing with local populations;
the effects of weather;
the ability to fund exploration, development and
operational activities and meet current and future
obligations;
the timing and cost of future abandonment and
reclamation activities;
cleanup costs or business interruptions due to
environmental damage and contamination;
the ability to enter into or continue leases;
existing and potential lawsuits and regulatory
actions; and
other risks and uncertainties described elsewhere in
this document and in Paramount’s other filings with
Canadian securities authorities, including its Annual
Information Form.
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 financial commodity contract settlements", "Net Debt", "Exploration
and development expenditures" and "Investments in other entities – market value", collectively the "Non-GAAP
measures", are used and do not have any standardized meanings as prescribed by GAAP.
The Company has adjusted its funds flow from operations measure for all periods subsequent to exclude asset
retirement obligation settlements, cash outflows related to the purchase of Paramount’s Common Shares under the
Company’s stock incentive plan and the effect of changes in foreign exchange rates in respect of foreign currency
cash and cash equivalent balances. Funds flow from operations refers to cash from operating activities before net
changes in operating non-cash working capital, geological and geophysical expenses and asset retirement obligation
settlements. Funds flow from operations is commonly used in the oil and gas industry to assist management and
investors in measuring the Company’s ability to fund capital programs and meet financial obligations.
Netback equals petroleum and natural gas sales less royalties, operating costs, production taxes and transportation
costs. Netback is commonly used by management and investors to compare the results of the Company’s oil and
gas operations between periods. Net Debt is a measure of the Company’s overall debt position after adjusting for
certain working capital amounts and is used by management to assess the Company’s overall leverage position.
Refer to the calculation of Net Debt in the liquidity and capital resources section of Management’s Discussion and
Analysis. Exploration and development expenditures refer to capital expenditures incurred by the Company’s COUs
(excluding land and acquisitions). The exploration and development expenditure measure provides management and
investors with information regarding the Company’s Principal Property spending on drilling and infrastructure
projects, separate from land acquisition activity.
Investments in other entities – market value reflects the Company’s investments in enterprises whose securities
trade on a public stock exchange at their period end closing price (e.g. Trilogy, MEG , MGM Energy and others), and
investments in all other entities at book value. Paramount provides this information in its MD&A because the market
values of equity-accounted investments, which are significant assets of the Company, are often materially different
than their carrying values.
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.
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
55
OIL AND GAS MEASURES AND DEFINITIONS
This document contains disclosures 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. The term "liquids" is used to represent oil, natural gas liquids ("NGLs")
and condensate. The term "liquids-rich" is used to represent natural gas streams with associated liquids volumes.
For fiscal 2011, the value ratio between crude oil and natural gas was approximately 23:1. This value ratio is
significantly different from the energy equivalency ratio of 6:1. Using a 6:1 ratio would be misleading as an indication
of value.
The reserves replacement disclosure herein was calculated as the net increase in proved and probable reserves
estimates from extensions and discoveries, technical revisions and economic factors divided by the total production
in the year.
NOTES
(1) Hoole was evaluated by McDaniel as of April 30, 2011. Saleski and the Other Carbonate Lands were evaluated
by McDaniel as of October 31, 2011.
(2) Contingent Resources are those quantities of bitumen estimated, as of a given date, to be potentially
recoverable from known accumulations using established technology or technology under development, but are
classified as a resource rather than a reserve due to one or more contingencies, such as the absence of
regulatory approvals, detailed design estimates or near term development plans. There is no certainty that it will
be commercially viable to produce any portion of the contingent resources. For the Hoole oil sands property,
contingencies which must be overcome to enable the reclassification of bitumen contingent resources as
reserves include the finalization of plans for the initial development, a regulatory application submission with no
major issues raised, access to capital markets and other sources of funding and management’s intent to proceed
evidenced by a development plan with major capital expenditures. Economic Contingent Resources are those
Contingent Resources that are economically recoverable based on specific forecasts of commodity prices and
costs (based on McDaniel’s forecast prices and costs as of April 1, 2011).
(3) Discovered Exploitable Bitumen In Place is the estimated volume of bitumen, as of a given date, which is
contained in a subsurface stratigraphic interval of a known accumulation that meets or exceeds certain reservoir
characteristics, such as minimum continuous net pay, porosity and mass bitumen content. For the Hoole oil
sands property, the presence of these characteristics is considered necessary for the commercial application of
known recovery technologies. For the Saleski property and the Other Carbonate Lands, these volumes have
been constrained to areas that have a minimum thickness of 10 meters of substantially clean, continuous
predominantly bitumen-saturated carbonate with log porosity meeting a minimum of 10 percent and bitumen
saturation greater than 50 percent, respectively and with both competent top and lateral reservoir containment.
These carbonate bitumen resources are constrained to one mile in area around known data points that penetrate
the zone and possess definitive geophysical log data. Discovered Exploitable Bitumen in Place for the Saleski
property and the Other Carbonate Lands may be assigned outside of the one mile area if reservoir continuity
between offsetting delineation is expected. The technology required to economically produce bitumen from
carbonate formations is currently in the development stage and has not been proven on a commercial scale.
There is no certainty that it will be commercially viable to produce any portion of the resources from the Hoole
oil sands property, the Saleski property or the Other Carbonate Lands.
(4) Represents the Company’s share of recoverable volumes before deduction of royalties. In the assessment of
Economic Contingent Resources, McDaniel used a minimum net pay cut-off of 10 meters in the best estimate
case.
(5) NPV means net present value and represents the Company’s share of future net revenue, before the deduction
of income tax from the Economic Contingent Resources in the Grand Rapids formation within the Hoole oil
sands property. The calculation considers such items as revenues, royalties, operating costs, abandonment
costs and capital expenditures. Royalties have been calculated based on Alberta’s Royalty Framework applicable
to oil sands projects in Alberta. The calculation does not consider financing costs and general and administrative
costs. NPVs were calculated assuming natural gas is used as a fuel for steam generation. Revenues and
expenditures were calculated based on McDaniel’s forecast prices and costs as of April 1, 2011. The estimated
net present values disclosed in this press release do not represent fair market value.
(6) Undiscovered Exploitable Bitumen In Place is the volume of petroleum estimated, as of a given date, to be
contained in accumulations yet to be discovered. These resources are mapped using known data points
penetrating the zone and possess definitive geophysical log data along with seismic data and regional mapping.
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
56
There is no certainty that any portion of the resources will be discovered. If discovered, there is no certainty that
it will be commercially viable to produce any portion of the resources.
(7) Prospective Resources are those quantities of bitumen estimated, as of a given date, to be potentially
recoverable from undiscovered accumulations by application of future development projects. Prospective
resources have both an associated chance of discovery and a chance of development. Prospective Resources
have not been, and may never be, discovered.
(8) Contingent Resources/Technology Under Development are those quantities of bitumen estimated, as of a
given date, to be potentially recoverable from known accumulations using established technology or technology
under development, but are classified as a resource rather than a reserve due to one or more contingencies,
such as the absence of regulatory approvals, detailed design estimates or near term development plans. There is
no certainty that it will be commercially viable to produce any portion of the contingent resources. For the
Saleski property and the Other Carbonate Lands, because of the lack of demonstrated commercial SAGD
production within carbonate reservoirs, the recoverable resources assigned are contingent upon successful
application of SAGD to the subject reservoir or a reasonable analog. The successful implementation of SAGD
technology in carbonate reservoirs is a significant contingency associated with these assignments that separate
them from typical McMurray clastic SAGD contingent and prospective resources, where the technology has
been proven effective. In addition to the technical contingency, additional contingencies applicable to the
carbonate resources include being in the early evaluation stage, the economic viability of development and the
absence of regulatory approvals. The economic status of these resources are undetermined.
(9) Best Estimate is considered to be the best estimate of the quantity of resources that will actually be
recovered. It is equally likely that the actual remaining quantities recovered will be greater or less than the best
estimate. Those resources that fall within the best estimate have a 50 percent confidence level that the actual
quantities recovered will equal or exceed the estimate.
TEST RESULTS
Test rates disclosed in this document represent the average rate of gas-flow during post clean-up production tests at
the largest choke setting up 4½” casing. All wells were stimulated using frac oil and substantially all fluids recovered
during the test periods were load fluids. As a result, recovered fluid volumes for the duration of the tests have not
been disclosed. Pressure transient analyses and well-test interpretations have not been carried out for the wells
disclosed and as such, data should be considered to be preliminary until such analysis or interpretation has been
done. Test results are not necessarily indicative of long-term performance or of ultimate recovery. Liquids yields
under the heading "Average Sales Volumes" are presented for the period following recovery of all load fluids. Liquids
yields are not presented where recovery of load fluids is incomplete.
Paramount Resources Ltd. 2011
Management's Discussion & Analysis
57
FINANCIAL STATEMENTS
Management’s Report
The accompanying Consolidated Financial Statements of Paramount Resources Ltd. (the "Company") are
the responsibility of Management and have been approved by the Board of Directors. The Consolidated
Financial Statements have been prepared by Management in Canadian dollars in accordance with
International Financial Reporting Standards 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 Company’s 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 International Financial
Reporting Standards, 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. 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 6, 2012
/s/ Bernard K. Lee
Bernard K. Lee
Chief Financial Officer
Paramount Resources Ltd. 2011
Financial Statements
58
INDEPENDENT AUDITORS’ REPORT
To the shareholders of Paramount Resources Ltd.:
We have audited the accompanying consolidated financial statements of Paramount Resources Ltd.
which comprise the consolidated balance sheets as at December 31, 2011 and 2010, and January 1,
2010, and the consolidated statements of comprehensive loss, shareholders equity and cash flows for
the years ended December 31, 2011 and 2010, and a summary of significant accounting policies and
other explanatory information.
Management's responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal control
as management determines is necessary to enable the preparation of consolidated financial statements
that are free from material misstatement, whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Canadian generally accepted auditing standards.
Those standards require that we comply with ethical requirements and plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures selected depend on the auditors’ judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditors consider internal control
relevant to the entity's preparation and fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity's internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide
a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of Paramount Resources Ltd. as at December 31, 2011 and 2010, and January 1, 2010, and its
financial performance and its cash flows for the years ended December 31, 2011 and 2010 in accordance
with International Financial Reporting Standards.
Calgary, Canada
6 March 2012
Chartered accountants
Paramount Resources Ltd. 2011
Financial Statements
59
PARAMOUNT RESOURCES LTD.
Consolidated Balance Sheet
($ thousands)
As at
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable
Risk management
Prepaid expenses and other
Assets held for sale
Deposit
Exploration and evaluation
Property, plant and equipment, net
Equity-accounted investments
Investments in securities
Deferred income tax
Goodwill
Note
December 31
2011
December 31
2010
(note 24)
January 1
2010
(note 24)
20
19
19
6
18
7
8
9
10
18
11
$
29,000
40,181
184
2,551
58,038
129,954
20,043
390,742
808,617
101,543
153,840
117,548
3,426
$ 1,725,713
$
74,659
33,280
–
2,572
–
110,511
19,788
269,084
580,334
138,300
189,717
75,575
8,012
$ 1,391,321
$
93,238
23,488
2,187
2,301
–
121,214
–
151,283
503,106
113,471
115,383
32,423
–
$ 1,036,880
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Demand facilities
Accounts payable and accrued liabilities
Risk management
Stock-based compensation
Liabilities associated with assets held for sale
Long-term debt
Asset retirement obligations
Stock-based compensation
Deferred income tax
Commitments and contingencies
Shareholders’ equity
Share capital
Accumulated (deficit) earnings
Reserves
12
19
19
1,17
6
13
14
1,17
18
23
15
16
$
22,842
136,820
2,787
–
13,040
175,489
427,186
299,202
–
–
901,877
$
26,880
84,928
693
46,187
–
158,688
294,205
241,770
14,460
–
709,123
$
29,380
48,571
–
13,827
–
91,778
93,655
195,088
4,721
10,034
395,276
810,781
(103,615)
116,670
823,836
$ 1,725,713
481,827
128,375
71,996
682,198
$ 1,391,321
418,191
218,386
5,027
641,604
$ 1,036,880
See the accompanying notes to these Consolidated Financial Statements.
On behalf of the Board
/s/ J.H.T. Riddell
J.H.T. Riddell, Director
/s/ J.C. Gorman
J.C. Gorman, Director
Paramount Resources Ltd. 2011
Financial Statements
60
PARAMOUNT RESOURCES LTD.
Consolidated Statement of Comprehensive Loss
($ thousands, except as noted)
Year ended December 31
Petroleum and natural gas sales
Royalties
Revenue
Gain (loss) on financial commodity contracts
Expenses
Operating expense and production tax
Transportation
General and administrative
Stock-based compensation
Depletion and depreciation
Exploration and evaluation
Gain on sale of property, plant and equipment
Interest
Accretion of asset retirement obligations
Debt extinguishment
Acquisition transaction costs
Foreign exchange
Income from equity-accounted investments
Other income
Net loss before tax
Income tax expense (recovery)
Current
Deferred
Net loss
Other comprehensive income (loss), net of tax
Change in market value of securities
Exchange differences on translation of US subsidiaries
Comprehensive loss
Net loss per common share ($/share)
Basic and diluted
See the accompanying notes to these Consolidated Financial Statements.
Note
2011
2010
(note 24)
$
$
$
241,713
(22,056)
219,657
(1,699)
217,958
71,253
20,519
16,934
21,462
378,077
27,330
(42,021)
34,109
7,374
–
1,044
1,377
537,458
1,201
24,528
(293,771)
12
(61,793)
(61,781)
(231,990)
(19,913)
1,197
(18,716)
(250,706)
$
$
$
184,395
(21,227)
163,168
10,047
173,215
50,892
17,219
15,150
55,278
160,650
42,721
(380)
13,560
7,975
1,708
267
(298)
364,742
35,999
4,784
(150,744)
213
(60,946)
(60,733)
(90,011)
68,434
(2,028)
66,406
(23,605)
$
(2.96)
$
(1.24)
19
1,17
8
7
9
5,10
18
16
15
Paramount Resources Ltd. 2011
Financial Statements
61
PARAMOUNT RESOURCES LTD.
Consolidated Statement of Cash Flows
($ thousands)
Year ended December 31
Note
2011
2010
(note 24)
Operating activities
Net loss
Add (deduct)
Items not involving cash
Dividends from equity accounted investments
Asset retirement obligations settled
Debt extinguishment costs
Change in non-cash working capital
Cash from operating activities
Financing activities
Drilling rig loan repayments
Proceeds from Senior Notes, net of issue costs
Repayment of US Senior Notes
Repayment of debt assumed on acquisitions
Net draw of revolving long-term debt
Common shares issued, net of issue costs
Common shares purchased under stock incentive plan
Cash from financing activities
Investing activities
Property, plant and equipment and exploration
Proceeds on sale of property, plant and equipment
Proceeds on sale of investment
Corporate acquisitions
Investments in securities
Equity accounted investments
Deposit
Change in non-cash working capital
Cash used in investing activities
Net decrease
Foreign exchange on cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental cash flow information
See the accompanying notes to these Consolidated Financial Statements.
$
(231,990)
$
(90,011)
310,074
11,360
(7,520)
–
3,036
84,960
(4,038)
70,899
–
(37,824)
61,383
268,627
(2,974)
356,073
(525,239)
45,385
16,129
(64,759)
–
–
–
41,769
(486,715)
(45,682)
23
74,659
29,000
$
20
14
4
13
4
18
20
161,171
12,986
(3,209)
1,708
(23,467)
59,178
(2,500)
294,171
(92,234)
(10,521)
–
62,989
(2,901)
249,004
(289,969)
1,196
–
(46,172)
(9,648)
(1,452)
(19,788)
40,138
(325,695)
(17,513)
(1,066)
93,238
74,659
$
Paramount Resources Ltd. 2011
Financial Statements
62
PARAMOUNT RESOURCES LTD.
Consolidated Statement of Shareholders’ Equity
($ thousands, except as noted)
Year ended December 31
Share Capital
Balance, beginning of year
Issued
Issued on acquisition of ProspEx
Change in unvested common shares for stock incentive plan
Balance, end of year
Accumulated (Deficit) Earnings
Balance, beginning of year
Net loss
Balance, end of year
Reserves
Balance, beginning of year
4
17
16
Other comprehensive income (loss)
Contributed surplus
Stock-based compensation - investee options
Balance, end of year
Total Shareholders’ Equity
See the accompanying notes to these Consolidated Financial Statements.
Note
2011
Shares
(000’s)
2010
Shares
(000’s)
75,034
8,316
2,000
64
85,414
$ 481,827
271,683
57,280
(9)
$ 810,781
72,058
2,948
–
28
75,034
$ 128,375
(231,990)
$ (103,615)
$ 71,996
(18,716)
65,792
(2,402)
$ 116,670
$ 823,836
(note 24)
$ 418,191
63,734
–
(98)
$ 481,827
$ 218,386
(90,011)
$ 128,375
$
5,027
66,406
–
563
$ 71,996
$ 682,198
Paramount Resources Ltd. 2011
Financial Statements
63
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
1.
SIGNIFICANT ACCOUNTING POLICIES
Paramount Resources Ltd. ("Paramount" or the "Company") is an independent, publicly traded, Canadian
corporation that explores for and develops conventional petroleum and natural gas prospects, pursues
long-term non-conventional exploration and pre-development projects and holds a portfolio of
investments in other entities. 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.
Paramount is the ultimate parent company of the consolidated group of companies. Paramount has
divided its operations into three business segments: Principal Properties, Strategic Investments and
Corporate.
Paramount Resources Ltd. is incorporated and domiciled in Canada. The address of its registered office is
4700, 888 3rd Street S.W., Calgary, Alberta, Canada, T2P 5C5.
These Consolidated Financial Statements were authorized for issuance by the Board of Directors of
Paramount Resources Ltd. on March 6, 2012.
a)
Basis of Preparation
These Consolidated Financial Statements have been prepared in accordance with International Financial
Reporting Standards ("IFRS"), are stated in Canadian dollars and have been prepared on a historical cost
basis, except for certain financial instruments. These Consolidated Financial Statements include the
accounts of Paramount and its subsidiaries and partnerships, including Summit Resources, Inc., Cavalier
Energy Inc., Paramount Drilling U.S. LLC. and Fox Drilling Inc.
Canadian Generally Accepted Accounted Principles ("GAAP"), as issued by the Canadian Institute of
Chartered Accountants, were converted to IFRS effective for fiscal years beginning on or after January 1,
2011. These Consolidated Financial Statements represent Paramount’s initial presentation of its annual
results of operations and financial position under IFRS, and include transition disclosures as required by
IFRS 1 - First-time Adoption of IFRS. In order to prepare comparative information, the Company has
applied IFRS as of January 1, 2010 (the "Transition Date") and the accounting, estimation and valuation
policies adopted on conversion to IFRS, as described below, have been consistently applied to all periods
presented herein. A reconciliation of comparative amounts included herein to amounts previously
published in accordance with Canadian GAAP in effect prior to January 1, 2011 ("Previous GAAP") has
been provided in Note 24.
The preparation of these Consolidated Financial Statements requires the use of certain accounting
estimates and also requires management to exercise judgment in applying the Company’s accounting
policies. Areas involving a higher degree of judgment or complexity, and areas where assumptions and
estimates are significant to the financial statements are described in Note 2.
The financial statements of Paramount’s subsidiaries and partnerships are prepared for the same
reporting periods as the parent in accordance with the Company’s accounting policies. All intercompany
balances and transactions have been eliminated.
b)
Revenue Recognition
Petroleum and natural gas sales revenues are recognized when title passes to third parties and the
significant risks and rewards of ownership have been transferred.
Paramount Resources Ltd. 2011
Financial Statements
64
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Drilling services are billed to customers on a per-day basis and revenues are recognized as services are
rendered and collectability is reasonably assured. When the Company’s drilling rigs (the "Rigs") drill on a
property owned by Paramount, the Company capitalizes its working interest share of the drilling
expenses, and eliminates the associated drilling revenue.
Interest revenue is recognized as earned, using the effective interest method.
c)
Cash and Cash Equivalents
Cash and cash equivalents are recorded at cost and include short-term investments with maturities of
three months or less from the date of acquisition.
d)
Trade and Other Receivables
Accounts receivable are recorded as revenue is recognized or costs are incurred on behalf of partners. An
allowance for doubtful accounts is recognized based on management’s best estimate of accounts that
may not be collectible, which is reviewed and adjusted on a quarterly basis.
e)
Equity-Accounted Investments
Investments in entities in which Paramount does not have direct or joint control over strategic operating,
investing, and financing decisions, but over which it has significant influence, are accounted for using the
equity method. Under this method, the Company recognizes its proportionate share of the earnings of
investees in its earnings. As dividends are received, the carrying value of Paramount’s investment in the
investee is reduced. The Company is generally considered to have significant influence over an investee
where its equity interest exceeds 20 percent, or where significant influence can be clearly demonstrated.
Paramount accounts for its investments in MGM Energy Corp. ("MGM Energy") and Paxton Corporation
("Paxton") using the equity method, even though it holds less than a 20 percent interest in these
corporations, because the Company and each of MGM Energy and Paxton share common directors
and/or members of management. All other investments are accounted for as financial instruments.
The carrying values of the Company’s equity accounted investments are reviewed at each reporting date
to determine whether any indicators of impairment are present. If an indicator of impairment is identified,
the recoverable amount of the investment is estimated. If the carrying value of the investment exceeds
the estimated recoverable amount, an impairment charge is recognized.
f)
Joint Arrangements
Paramount recognizes its proportionate interest of the revenues, expenses, assets, and liabilities of
jointly controlled assets.
g)
Exploration and Evaluation
Costs related to the exploration for and evaluation of hydrocarbon resources, including costs of drilling
and completing exploratory wells, acquiring unproved property and estimated asset retirement costs, are
initially capitalized, pending determination of technical feasibility and commercial viability. If hydrocarbons
are found, but further appraisal activity is required to conclude whether they are economically
recoverable, the costs continue to be recognized as an asset. All such costs are subject to technical,
commercial, and management review at least annually to confirm the continued intent to develop the
discovery. All direct costs related to pre-development activities in connection with oil sands properties
are considered pre-operating and are capitalized, including the costs to acquire mineral rights, conduct
Paramount Resources Ltd. 2011
Financial Statements
65
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
delineation drilling, and design and construct plant and equipment. When a project has been determined
to be technically feasible and commercially viable, the exploration and evaluation ("E&E") costs are
transferred to petroleum and natural gas assets, subject to an impairment assessment. When the
Company determines that a project is no longer viable, its carrying value is charged to earnings.
Exploratory geological and geophysical costs, pre-license costs, and annual lease rentals are expensed as
incurred.
h)
Oil and Gas Properties and Other Property, Plant and Equipment
Oil and gas properties are carried at cost, net of accumulated depletion, depreciation and impairments,
and include costs related to drilling and completing development wells, infrastructure construction,
successful E&E projects and asset retirement.
Paramount’s Rigs are carried at cost, net of accumulated depreciation and include costs of material,
machinery, labour, and directly attributable overhead. Costs incurred to improve the capabilities of the
Rigs, extend their useful lives or replace significant components are capitalized. When a significant
component is replaced, the carrying value of the replaced part is written off. Costs incurred to maintain
and repair the Rigs are expensed as incurred.
Other property, plant and equipment, including leasehold improvements, are carried at cost net of
accumulated depreciation.
Depletion and Depreciation
Capitalized costs of proved oil and gas properties are depleted over proved developed reserves using the
unit-of-production method. For purposes of these calculations, natural gas production and reserves are
converted to barrels on an energy equivalent basis. Depletion rates are revised annually or more
frequently when events dictate. E&E costs are not depleted.
Capitalized costs of gathering systems and production equipment are depleted on a unit-of-production
basis over the proved developed reserves of the field to which they relate. Capitalized costs of
processing plants are depreciated on a straight line basis over their expected useful lives.
Leasehold improvements are depreciated over the term of the lease. Other assets are depreciated using
the declining balance method at rates varying from 35 to 50 percent.
The Rigs are depreciated by component over their expected useful lives, varying from 1,000 to 3,600
drilling days.
Impairment of Non-Financial Assets
The carrying values of the Company’s non-financial assets, excluding goodwill, are reviewed at each
reporting date to determine whether any indicators of impairment are present. If an indicator of
impairment is identified, the asset’s recoverable amount is estimated. For the purpose of impairment
testing, assets are tested individually or, in certain circumstances, assets are grouped together into a
cash-generating unit ("CGU"), which consists of the smallest group of assets that generate cash inflows
that are largely independent of the cash inflows of other assets or groups of assets. The recoverable
amount of an asset or CGU is the greater of its fair value less costs to sell and its value in use. In
assessing fair value less costs to sell, the Company estimates the value a potential purchaser would
ascribe to an asset or CGU, by estimating its expected discounted after-tax future net cash flows. For oil
Paramount Resources Ltd. 2011
Financial Statements
66
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
and gas properties, discounted after-tax future net cash flows are generally determined using forecast
commodity prices and costs over the expected economic life of proved and probable reserves,
discounted using market-based rates. Value in use is determined by estimating the present value of the
future net cash flows expected to be derived from the continued use of the asset or CGU. If the carrying
value of an asset or CGU exceeds its estimated recoverable amount, an impairment charge is
recognized.
When it is determined that there has been a subsequent increase in the recoverable amount ascribed to
an asset or CGU, reversals of impairments are recognized net of any depletion and depreciation that
would have been recorded since the date of the impairment charge.
Alberta Drilling Royalty Credits
Paramount recognized Alberta drilling royalty credits as a reduction to the cost of drilling wells. The
credits were recognized as they were earned, as determined by well depth, to the extent the Company
anticipated being able to use the credits to reduce crown royalties.
i)
Business Combinations and Goodwill
Business combinations are accounted for using the acquisition method of accounting. Under this
method, the net identifiable assets acquired are measured at fair value on acquisition date. Costs
incurred to affect the transaction are expensed. Any excess of the consideration transferred over the fair
value of the net identifiable assets acquired is recognized as goodwill. Any deficiency in the consideration
transferred versus the fair value of the net identifiable assets acquired is recognized in earnings.
Goodwill is tested for impairment at least annually, or when a potential impairment indicator is identified.
In testing goodwill for impairment, the carrying value of a CGU (or group of CGUs), including allocated
goodwill, is compared to the CGU’s (or group of CGUs’) estimated recoverable amount. An impairment
charge is recognized to the extent that the carrying amount of the CGU including goodwill exceeds its
estimated recoverable amount. Impairment charges relating to goodwill are not reversed in future
periods.
Recoverable amounts are determined based on the greater of a CGU’s fair value less costs to sell and
value in use. In assessing fair value less costs to sell, the Company estimates the value a potential
purchaser would ascribe to the CGU by estimating the CGU’s expected discounted after-tax future net
cash flows. Discounted after-tax future net cash flows are generally determined using forecast
commodity prices and costs over the expected economic life of proved and probable reserves,
discounted using market-based rates. Value in use is determined by estimating the present value of the
future net cash flows expected to be derived from the continued use of the CGU.
j)
Borrowing Costs
Borrowing costs directly associated with the acquisition, construction or production of a qualifying asset
are capitalized while the asset is being constructed or otherwise prepared for its intended productive
use. All other borrowing costs are recognized as an expense in the period in which they are incurred.
k)
Asset Retirement Obligations
Asset retirement obligations include those legal obligations where Paramount will be required to retire
assets including oil and gas wells, gathering systems, processing plants and access roads at the end of
their productive lives. The Company recognizes the present value of an asset retirement obligation in the
Paramount Resources Ltd. 2011
Financial Statements
67
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
period in which it is incurred and when its fair value can be reasonably estimated. The present value of
the obligation is determined using the applicable period-end risk free discount rate and is adjusted for the
passage of time, which is recognized as accretion expense. Revisions to the timing, amount or applicable
discount rate relating to the estimated liability are accounted for prospectively by recording an
adjustment to the asset retirement obligation liability, with a corresponding adjustment to the carrying
value of the related asset. The present value of estimated future asset retirement costs are capitalized as
part of the related long-lived asset and depreciated on the same basis as the underlying asset.
Actual costs incurred to retire assets are applied against the asset retirement obligation liability.
Differences between the actual costs incurred and the liability accrued are recognized in earnings when
reclamation of the area is completed.
l)
Foreign Currency Translation
Paramount’s functional and presentation currency is the Canadian dollar. The functional currencies of
subsidiaries of the Company are determined by the nature and location of their operations, and amounts
included in their individual financial statements are measured in that functional currency.
Revenues and expenses denominated in foreign currencies are translated into Canadian dollars at
average monthly exchange rates. Monetary assets and liabilities of the Company and its Canadian
subsidiaries that are denominated in foreign currencies are translated into Canadian dollars at the period-
end exchange rate. Gains or losses are recognized in net income.
For the purposes of consolidation, the assets and liabilities of the Company’s foreign subsidiaries are
translated into Canadian dollars using the period-end exchange rate. Cumulative translation gains and
losses related to the translation of foreign subsidiaries are accumulated in reserves. When the Company
reduces its net investment in a foreign subsidiary, the corresponding amount of the cumulative
translation gain or loss is recognized in net income.
m)
Financial Instruments, Comprehensive Income and Hedges
Paramount periodically uses derivative instruments such as forwards, swaps and options to manage its
exposure to fluctuations in petroleum and natural gas prices, foreign exchange rates, and interest rates.
Financial Instruments
Financial instruments are measured at fair value on initial recognition. Measurement in subsequent
periods is dependent upon whether the financial instrument has been classified as "fair value through
profit or loss", "available-for-sale", "held-to-maturity", "loans and receivables", or "other financial liabilities"
as defined by the relevant standard. Paramount does not presently employ hedge accounting for any of
its financial instruments.
Fair value through profit or loss financial assets and financial liabilities are measured at fair value, and
changes in fair values over time are recognized in earnings. Derivative financial instruments are classified
as fair value through profit or loss unless designated for hedge accounting. Available-for-sale financial
assets are measured at fair value, and changes in fair values over time are recognized in other
comprehensive income ("OCI"). Held-to-maturity financial assets, loans and receivables and other financial
liabilities, including transaction costs, are measured at amortized cost using the effective interest
method.
Paramount Resources Ltd. 2011
Financial Statements
68
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Other Comprehensive Income
For Paramount, other comprehensive income ("OCI") is comprised of changes in the market value of
investments in available-for-sale securities and foreign exchange translation gains and losses relating to
the Company’s United States subsidiaries. OCI is presented in the Consolidated Statement of
Comprehensive Loss. The cumulative changes in OCI are included in reserves, which is presented within
shareholders’ equity.
n)
Income Taxes
Paramount follows the liability method of accounting for income taxes. Under this method, deferred
income taxes are recognized for the effect of any temporary 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. Deferred income tax balances are adjusted to reflect changes in
substantively enacted income tax rates expected to apply when assets are realized or liabilities are
settled, with adjustments being recognized in the period in which the change occurs.
Deferred income tax assets are recognized to the extent future recovery is probable. Deferred tax assets
are reduced to the extent that it is no longer probable that sufficient taxable earnings will be available to
allow all or part of the asset to be recovered.
o)
Flow-Through Shares
The proceeds of flow-through share issuances are allocated between the sale of Paramount’s Class A
Common Shares ("Common Shares") and the sale of tax benefits on initial recognition, with share capital
being increased based on the market price of Common Shares on the date the offering is priced and
accounts payable and accrued liabilities being increased based on the difference between the issue price
of the flow-through shares and the market price of Common Shares on the date the offering is priced.
As qualifying expenditures intended for renunciation to subscribers are incurred, the Company recognizes
a deferred tax liability, reduces the accounts payable and accrued liabilities amount and records any
difference as deferred tax expense.
p)
Stock-Based Compensation
Paramount Stock Option Plan
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"). Paramount Options generally vest over five years and expire within six years after the grant
date. The provisions of the plan permit the Company to settle the options in Common Shares of the
Company or in cash.
Prior to October 1, 2011, Paramount accounted for Paramount Options as cash-settled awards, where a
liability was recognized initially based on the grant date fair value of the options. The liability was
subsequently adjusted each period for vesting and changes in the fair value of the options, until the
options were exercised, surrendered or expired, with an offsetting entry to stock-based compensation
expense. The fair value of the options were determined using the Black-Scholes-Merton model. When
options were exercised for Common Shares, the consideration paid by the option holder and the
previously recognized liability associated with the options were recorded as an increase to share capital.
Paramount Resources Ltd. 2011
Financial Statements
69
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
When options were surrendered for cash, the cash settlement was applied against the liability and any
difference was recognized as stock-based compensation expense.
As of October 1, 2011, the Company accounts for Paramount Options as equity-settled stock-based
compensation transactions, where the grant date fair value of stock options awarded is recognized as
stock-based compensation expense over the vesting period, with a corresponding increase in
Contributed Surplus. The grant date fair value of stock options is estimated using the Black-Scholes-
Merton model and such value is not adjusted in future periods. The amount of stock-based compensation
expense recognized each period reflects the portion of the vesting term that elapsed and an estimate of
the number of options that are expected to vest. That estimate is adjusted each period such that the
cumulative amount recognized on the vesting date reflects the actual number of stock options that
ultimately vest. Upon the exercise of a Paramount Option, the Company transfers the cumulative amount
recognized in respect of the award from Contributed Surplus to Share Capital.
Paramount previously accounted for Paramount options as cash-settled awards due to its past practice of
accepting requests to settle Paramount Options with a cash payment. In recent years, the Company has
not been granting requests to settle Paramount Options in cash, and does not expect to do so in the
future. As a result, Paramount has accounted for Paramount Options as equity-settled stock-based
compensation transactions from of October 1, 2011. The change in accounting method resulted in the
reclassification of the September 30, 2011 stock-based compensation liability of $68.7 million to
Contributed Surplus.
Cavalier Energy Stock Option Plan
In the fourth quarter of 2011, Paramount reorganized all of its oil sands and carbonate bitumen interests
into a new wholly-owned subsidiary, Cavalier Energy Inc. ("Cavalier Energy"). Cavalier Energy has a stock
option plan that enables its Board of Directors to grant to key employees and directors options ("Cavalier
Options") to acquire common shares of Cavalier Energy. Cavalier Options generally vest over five years
and expire within seven years after the grant date. The provisions of the stock option plan permit Cavalier
Energy to settle Cavalier Options in common shares of Cavalier Energy or in cash, at the discretion of
Cavalier Energy. Cavalier Options are accounted for as equity-settled stock-based compensation
transactions.
Stock Incentive Plan
Paramount’s stock incentive plan ("SIP") 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 completion of the vesting period. Generally, one third of an award vests immediately, with
the remaining tranches vesting annually over two years. The unvested portion of the awards is initially
recorded as a reduction of share capital. The cost of the unvested Common Shares is then recognized
over the vesting period as stock-based compensation expense, with a corresponding increase to
Paramount’s share capital.
q)
Non-current assets held for sale
Non-current assets are reclassified as assets held for sale: (i) when it is expected that their carrying
amount will be recovered principally through sale rather than from continuing use; (ii) such assets are
available for immediate sale in their present condition subject only to terms that are usual and customary
for the sale of such property; and (iii) the completion of the transaction is highly probable. The property is
measured at the lower of carrying amount or fair value less costs to sell. Non-current assets held for sale
are not depreciated or amortized.
Paramount Resources Ltd. 2011
Financial Statements
70
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
An impairment loss is recognized for any write-down of the asset to its fair value less costs to sell.
Impairment losses on initial classification as held for sale and subsequent gains or losses on re-
measurement are recognized in the Statement of Comprehensive Loss.
2.
SIGNIFICANT ACCOUNTING ESTIMATES, ASSUMPTIONS AND
JUDGMENTS
The timely preparation of financial statements requires management to make estimates, assumptions
and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and
disclosures regarding contingent assets and liabilities. The following is a discussion of the accounting
estimates, assumptions and judgments that are considered significant:
Exploration and Evaluation Assets
The accounting for exploration and evaluation assets requires management to make certain judgments
based on assumptions and estimates as to future events and circumstances, including the designation of
wells as being exploratory or development and whether exploratory wells have discovered economically
recoverable quantities of reserves. Designations are sometimes revised as new information becomes
available.
If an exploratory well encounters hydrocarbons, but further appraisal activity is required in order to
conclude whether the hydrocarbons are economically recoverable, the well costs remain capitalized as
long as sufficient progress is being made in assessing the economic and operating viability of the well.
Criteria utilized in making this determination include evaluation of the reservoir characteristics and
hydrocarbon properties, expected additional development activities, and regulatory matters. The concept
of "sufficient progress" is a judgmental area, and 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.
Where it is determined that an exploratory well or project is unsuccessful, the costs are written-off as
exploration and evaluation expense.
Reserves Estimates
Reserve engineering is an inherently complex and subjective process of estimating underground
accumulations of petroleum and natural gas. The process relies on judgments based on the interpretation
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 factors and the judgment of those preparing the estimate. Because these
estimates depend on many assumptions, all of which may differ from actual results, reserves estimates,
commodity price estimates and estimates of future net revenue will be different from the sales volumes
ultimately recovered and net revenues actually realized. Changes in market conditions, regulatory matters
and the results of subsequent drilling, testing and production may require revisions to the original
estimates.
Estimates of reserves impact: (i) the assessment of whether a new well has found economically
recoverable reserves; (ii) depletion rates; and (iii) the estimated recoverable amount of petroleum and
natural gas properties used in impairment assessments, all of which could have a material impact on net
income.
Paramount Resources Ltd. 2011
Financial Statements
71
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Business Combinations
Business combinations are accounted for using the acquisition method of accounting, where the net
identifiable assets acquired are recorded at fair value. Any excess of the consideration transferred over
the fair value of the net identifiable assets acquired is recognized as goodwill. Any deficiency in the
consideration transferred versus the fair value of the net identifiable assets acquired is recognized in
earnings. Estimates of fair value require management to make assumptions about future events,
including reserves estimates. These assumptions are based on management’s judgments regarding the
use of appropriate indicators of fair value. Changes in any of the assumptions or estimates used in
determining the fair value of the net identifiable assets acquired may impact the carrying values assigned
and net income.
Asset Retirement Obligations
Estimates of asset retirement costs are based on assumptions regarding the methods, timing, economic
environment and regulatory standards that are expected to exist at the time assets are retired.
Management applies judgment in determining such assumptions and adjusts estimated amounts
periodically to incorporate new information. Accordingly, actual payments to settle the obligations may
differ materially from amounts estimated.
Share-Based Payments
The Company estimates the value of stock options awarded using the Black-Scholes-Merton model. The
inputs used to determine the estimated value of the options are based on management’s assumptions
regarding share price volatility, the expected life of the options, expected forfeiture rates and future
interest rates. By their nature, these inputs are subject to measurement uncertainty and require
management to exercise judgment in determining which assumptions are the most appropriate.
Income Taxes
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. All tax filings are
subject to subsequent government audits and potential reassessment. These interpretations and
judgments and changes related to them impact current and deferred tax provisions, deferred income tax
assets and liabilities and net income.
3.
FUTURE CHANGES IN ACCOUNTING STANDARDS
As of January 1, 2013, Paramount will be required to adopt certain standards and amendments issued by
the International Accounting Standards Board ("IASB") as described below, for which the Company is
currently assessing the impact on its Consolidated Financial Statements:
(cid:120)
IFRS 10, "Consolidated Financial Statements" is the result of the IASB’s project to replace
Standing Interpretations Committee 12, "Consolidation – Special Purpose Entities" and the
consolidation requirements of IAS 27, "Consolidated and Separate Financial Statements". The
new standard eliminates the current risk and rewards approach and establishes control as the
single basis for determining the consolidation of an entity.
Paramount Resources Ltd. 2011
Financial Statements
72
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
(cid:120)
(cid:120)
(cid:120)
IFRS 11, "Joint Arrangements" is the result of the IASB’s project to replace IAS 31, "Interests
in Joint Ventures". The new standard redefines "joint operations" and "joint ventures" and requires
joint operations to be proportionately consolidated and joint ventures to be equity accounted.
Under IAS 31, joint ventures could be proportionately accounted. The Company expects its joint
venture arrangements will continue to meet the definition of "joint operations" and that
proportionate consolidation of such arrangements will continue under the new standard.
IFRS 12, "Disclosure of Interests in Other Entities" outlines the required disclosures for
interests in subsidiaries and joint arrangements. The new standard requires disclosure of
information that will assist financial statement users to evaluate the nature, risks and financial
effects associated with an entity’s interests in subsidiaries and joint arrangements.
IFRS 13, "Fair Value Measurement" provides a common definition of fair value, establishes a
framework for measuring fair value under IFRS and enhances the disclosures required for fair
value measurements. The standard applies where fair value measurements are required and
does not require new fair value measurements.
In December 2011 the IASB approved a proposal to move the effective date for the adoption of IFRS 9,
"Financial Instruments: Classification and Measurement" to January 1, 2015. This new standard, which
reflects the first phase of the IASB’s work on the replacement of IAS 39, "Financial Instruments –
Recognition and Measurement" applies to classification and measurement of financial assets and
financial liabilities as defined in IAS 39.
4.
ACQUISITIONS
ProspEx Resources Ltd.
On May 31, 2011, Paramount acquired all 54.9 million of the issued and outstanding common shares of
ProspEx Resources Ltd. ("ProspEx") not already owned for consideration of $64.8 million cash and the
issuance by Paramount of 2.0 million Common Shares. Immediately prior to the acquisition, Paramount
owned 5.6 million shares of ProspEx (nine percent voting interest). ProspEx was a publicly traded energy
company with the majority of its properties located in Alberta. The acquisition of ProspEx increased
Paramount’s Deep Basin land holdings in the Kakwa, Elmworth and Wapiti areas of Alberta. These
financial statements include the results of operations of the acquired business for the period following
the closing of the transaction on May 31, 2011.
The acquisition of ProspEx was accounted for using the acquisition method whereby all of the assets
acquired and liabilities assumed were recorded at fair value. The following table summarizes the net
assets acquired:
Paramount Resources Ltd. 2011
Financial Statements
73
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Accounts receivable
Exploration and evaluation
Property, plant, and equipment
Goodwill
Accounts payable and accrued liabilities
Bank debt
Asset retirement obligations
Deferred income tax liability
Other
Net assets acquired
Cash paid
Paramount Common Shares issued (1)
Fair value of ProspEx shares previously held (2)
Total
$
$
$
10,423
82,100
107,148
5,477
(10,355)
(37,824)
(11,943)
(10,610)
279
134,695
64,759
57,280
12,656
134,695
$
(1) Based on 2.0 million Paramount Common Shares issued and the acquisition date closing price of Paramount Common Shares of $28.64 per share.
(2) Based on 5.6 million ProspEx shares held by Paramount prior to the acquisition and the acquisition date closing price of ProspEx common shares of $2.25 per share.
Accounts receivable included $4.1 million of revenue receivable and $6.3 million of joint venture
receivables. Accounts payable included $10.4 million of trade payables.
Upon the acquisition of ProspEx, a gain of $4.4 million related to the ProspEx shares held by Paramount
at the acquisition date was recognized in other income based on the closing market price of the ProspEx
common shares of $2.25. The gain had previously been recorded in other comprehensive income.
Goodwill recorded on the acquisition of ProspEx is primarily related to the Company’s recognition of
deferred income tax liabilities. The goodwill recognized in the transaction is not deductible for tax
purposes. The net assets acquired, including goodwill, have been allocated to the Principal Properties
business segment.
Paramount incurred $1.0 million of transaction costs related to the acquisition, which were recognized in
acquisition transaction costs in the Statement of Comprehensive Loss.
Since May 31, 2011, the Company recorded $15.4 million of petroleum and natural gas sales in respect
of properties added through the ProspEx acquisition. If the acquisition of ProspEx had been completed
on January 1, 2011, Paramount’s petroleum and natural gas sales for the year ended December 31, 2011
would have been $258.6 million (unaudited). The impact of the acquisition on net income for the period is
impracticable to determine.
Redcliffe Exploration Inc.
On June 29, 2010, Paramount acquired, for cash consideration of $46.2 million, all 109.9 million issued
and outstanding Class A shares of Redcliffe Exploration Inc. ("Redcliffe") that it did not already own,
including 340,000 Class A shares owned by certain officers of Paramount. Immediately prior to the
acquisition, Paramount owned 23.5 million Class A shares of Redcliffe. Redcliffe was a Calgary based
company with interests in petroleum and natural gas properties primarily in the Karr-Gold Creek and
Greater Pembina areas of Alberta. These financial statements include the results of operations of the
acquired business for the period following the closing of the transaction on June 29, 2010.
Paramount Resources Ltd. 2011
Financial Statements
74
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
The acquisition of Redcliffe was accounted for using the acquisition method whereby all of the assets
acquired and liabilities assumed were recorded at fair value. The following table summarizes the net
assets acquired:
Accounts receivable
Exploration and evaluation
Property, plant, and equipment
Goodwill
Accounts payable and accrued liabilities
Bank debt
Asset retirement obligations
Deferred income tax liability
Net assets acquired
$
$
2,995
29,754
37,189
11,589
(3,701)
(10,521)
(8,541)
(2,716)
56,048
46,172
Cash paid
Fair value of Redcliffe shares previously held(1)
9,876
56,048
Total
(1) Based on 23.5 million Redcliffe shares held by Paramount prior to the acquisition and the acquisition date closing price of Redcliffe shares of $0.42 per share.
$
$
Upon the acquisition of Redcliffe, a gain of $3.5 million previously recorded in Paramount’s OCI related to
its investment in Redcliffe was reclassified to other income. Goodwill recorded on the acquisition of
Redcliffe is primarily related to the Company’s recognition of asset retirement obligations and deferred
income tax liabilities. Goodwill recorded on the acquisition of Redcliffe is not deductible for tax purposes.
The net assets acquired, including goodwill, have been allocated to the Principal Properties business
segment.
Paramount incurred $0.3 million of transaction costs related to the Redcliffe acquisition, which were
recognized in acquisition transaction costs in the Statement of Comprehensive Loss.
If the acquisition of Redcliffe had been completed on January 1, 2010, Paramount’s petroleum and
natural gas sales for the twelve months ended December 31, 2010 would have been $190.6 million
(unaudited). From the date of acquisition to December 31, 2010, petroleum and natural gas sales related
to properties acquired through the Redcliffe acquisition were $4.2 million (unaudited). The impact of the
acquisition on net income for the period is impracticable to determine.
Paramount Resources Ltd. 2011
Financial Statements
75
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
5.
SEGMENTED INFORMATION
Paramount’s operations are divided into three business segments established by management to assist
in resource allocation, to assess operating performance and to achieve long-term strategic objectives:
(cid:120)
(cid:120)
(cid:120)
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 Southern COU, which
includes properties in Southern Alberta, Saskatchewan, North Dakota, and Montana; and (iv) the
Northern COU, which includes properties in Northern Alberta, the Northwest Territories and
Northeast British Columbia.
Strategic Investments: Strategic investments include: (i) investments in other entities, including
affiliates; (ii) investments in exploration and development stage assets, where there is no near-
term expectation of production or revenue, but a longer-term value proposition based on spin-
outs, dispositions, or future revenue generation, including oil sands and carbonate resources held
by Paramount’s wholly-owned subsidiary, Cavalier Energy, and prospective shale gas acreage;
and (iii) drilling rigs owned by Fox Drilling Inc. and Paramount Drilling U.S. L.L.C., wholly-owned
subsidiaries of the Company.
Corporate: Corporate is comprised of income and expense items, including general and
administrative expense and interest expense, which have not been specifically allocated to
Principal Properties or Strategic Investments.
Paramount Resources Ltd. 2011
Financial Statements
76
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Year ended December 31, 2011
Revenue
Loss on financial commodity contracts
Expenses
Operating expense and production tax
Transportation
General and administrative
Stock-based compensation
Depletion and depreciation
Exploration and evaluation
Gain on sale of property, plant and equipment
Interest
Accretion of asset retirement obligations
Acquisition transaction costs
Foreign exchange
Income from equity-accounted investments
Other
Drilling rig revenue
Drilling rig expense
Inter-segment eliminations
Segment earnings (loss)
Income tax recovery
Net loss
Year ended December 31, 2010
Revenue
Gain on financial commodity contracts
Expenses
Operating expense and production tax
Transportation
General and administrative
Stock-based compensation
Depletion and depreciation
Exploration and evaluation
Gain on sale of property, plant and equipment
Interest
Accretion of asset retirement obligations
Debt extinguishment
Acquisition transaction costs
Foreign exchange
Income from equity-accounted investments
Other
Drilling rig revenue
Drilling rig expense
Inter-segment eliminations
Segment earnings (loss)
Income tax recovery
Net loss
Principal
Properties
$ 219,657
(1,699)
217,958
71,253
20,519
–
–
375,694
25,726
(42,021)
–
7,324
–
–
458,495
–
5,131
–
–
(235,406)
–
$ (235,406)
Principal
Properties
$ 163,168
10,047
173,215
50,892
17,219
–
–
158,909
41,819
(380)
–
7,917
–
–
–
276,376
–
1,066
–
–
(102,095)
–
$ (102,095)
Strategic
Investments
$
–
–
–
$
Corporate
–
–
–
Inter-segment
Eliminations
$
–
–
–
–
–
4,880
5,842
5,639
1,604
–
1,195
50
–
(30)
19,180
1,201
15,703
22,376
(11,072)
9,028
(3,900)
5,128
$
–
–
12,054
15,620
454
–
–
32,914
–
1,044
1,407
63,493
–
–
–
–
(63,493)
–
(63,493)
$
–
–
–
–
(3,710)
–
–
–
–
–
–
(3,710)
–
–
(14,039)
6,429
(3,900)
3,900
–
$
Strategic
Investments
$
–
–
–
–
–
3,602
16,583
3,781
902
–
1,243
58
–
–
(57)
26,112
35,999
2,600
13,425
(8,001)
17,911
(1,441)
16,470
$
Corporate
–
$
–
–
–
–
11,548
38,695
716
–
–
12,317
–
1,708
267
(241)
65,010
–
(109)
–
–
(65,119)
–
$ (65,119)
Inter-segment
Eliminations
$
$
–
–
–
–
–
–
–
(2,756)
–
–
–
–
–
–
–
(2,756)
–
–
(9,534)
5,337
(1,441)
1,441
–
Total
$ 219,657
(1,699)
217,958
71,253
20,519
16,934
21,462
378,077
27,330
(42,021)
34,109
7,374
1,044
1,377
537,458
1,201
20,834
8,337
(4,643)
(293,771)
–
(293,771)
61,781
$ (231,990)
Total
$ 163,168
10,047
173,215
50,892
17,219
15,150
55,278
160,650
42,721
(380)
13,560
7,975
1,708
267
(298)
364,742
35,999
3,557
3,891
(2,664)
(150,744)
–
(150,744)
60,733
(90,011)
$
Paramount Resources Ltd. 2011
Financial Statements
77
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Total Assets
Principal Properties
Strategic Investments
Corporate
December 31, 2011
1,216,808
$
361,909
146,996
1,725,713
$
December 31, 2010
816,279
$
397,009
178,033
1,391,321
$
January 1, 2010
634,860
286,392
115,628
1,036,880
$
$
Geographical Information
Revenue
Exploration and evaluation assets
Property, plant and equipment, net
Goodwill
Canada
$ 183,344
374,364
753,167
3,426
$
2011
United
States
36,313
16,378
55,450
–
Total
$ 219,657
390,742
808,617
3,426
Canada
$ 131,607
247,009
513,689
8,012
$
2010
United
States
31,561
22,075
66,645
–
Total
$ 163,168
269,084
580,334
8,012
For the year ended December 31, 2011, the Company had sales to two customers which exceeded $30
million and to one customer which exceeded $20 million.
Other Income
Year ended December 31
Gain on investments
Write-down of investments
Drilling revenue
Drilling rig expense
Other
2011
15,703
–
8,337
(4,643)
5,131
24,528
$
$
2010
3,499
(899)
3,891
(2,664)
957
4,784
$
$
6.
ASSETS HELD FOR SALE
During the fourth quarter of 2011, the Company entered into an agreement with a syndicate of
underwriters to sell five million non-voting shares of Trilogy Energy Corp. ("Trilogy") for gross proceeds of
$189.5 million. The sale closed in January 2012.
During the fourth quarter of 2011, Paramount entered into agreements to sell certain oil and gas
properties within the Southern and Northern COUs for aggregate gross proceeds of approximately $50
million. The transactions closed in early-2012.
Paramount Resources Ltd. 2011
Financial Statements
78
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
The December 31, 2011 carrying value of assets held for sale and related liabilities are as follows:
Exploration and evaluation
Property, plant and equipment, net
Equity-accounted investments
Goodwill
Asset retirement obligations
Principal
Properties
$
$
5,052
28,251
–
539
(13,040)
Total
$
Trilogy
$
–
–
24,196
–
$
–
$
5,052
28,251
24,196
539
(13,040)
7.
EXPLORATION AND EVALUATION
Year ended December 31
Balance, beginning of year
Additions
Transfer to assets held for sale
Corporate acquisitions
Transfers to property, plant and equipment
Impairment
Dry hole
Expired lease costs
Dispositions
Foreign exchange
Balance, end of year
$
2011
269,084
229,347
(5,052)
82,100
(161,853)
–
(2,371)
(18,195)
(3,052)
734
$
2010
151,283
175,495
–
29,754
(51,828)
(1,739)
(8,479)
(24,248)
(586)
(568)
$
390,742
$
269,084
Additions to exploration and evaluation assets totaled $207.5 million (2010 - $160.4 million) for Principal
Properties and $21.8 million (2010 - $15.1 million) for Strategic Investments.
Exploration and Evaluation Expense
Year ended December 31
Geological and geophysical
Dry hole
Expired lease costs
2011
6,764
2,371
18,195
27,330
$
$
2010
10,719
7,754
24,248
42,721
$
$
Paramount Resources Ltd. 2011
Financial Statements
79
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
8.
PROPERTY, PLANT AND EQUIPMENT
Year ended December 31, 2011
Cost
Balance, December 31, 2010
Additions
Corporate acquisitions
Transfer to assets held for sale
Transfer from exploration and evaluation
Dispositions
Change in asset retirement provision
Currency translation differences
Cost, December 31, 2011
Accumulated depletion, depreciation and write-downs
Balance, December 31, 2010
Transfer to assets held for sale
Depletion and depreciation
Write-downs, net
Dispositions
Currency translation differences
Petroleum
and natural
gas assets
$ 873,822
295,733
107,148
(29,859)
161,853
(4,943)
61,125
1,228
1,466,107
$
(333,455)
1,608
(150,372)
(215,156)
1,217
(472)
Drilling rigs
Other
Total
$
$
$
$
46,146
4,974
–
–
–
–
–
351
51,471
(8,157)
–
(5,595)
–
–
(147)
19,850
81
–
–
–
–
–
12
19,943
(17,872)
–
(498)
–
–
(5)
(18,375)
1,978
1,568
$ 939,818
300,788
107,148
(29,859)
161,853
(4,943)
61,125
1,591
1,537,521
$ (359,484)
1,608
(156,465)
(215,156)
1,217
(624)
(728,904)
580,334
$ 808,617
Accumulated depletion, depreciation and write-downs,
December 31, 2011
Net book value, December 31, 2010
Net book value, December 31, 2011
(696,630)
540,367
$ 769,477
(13,899)
37,989
37,572
$
$
Year ended December 31, 2010
Cost
Balance, January 1, 2010
Additions
Corporate acquisitions
Transfer from exploration and evaluation
Dispositions
Change in asset retirement provision
Currency translation differences
Cost, December 31, 2010
Accumulated depletion, depreciation and write-downs
Balance, January 1, 2010
Depletion and depreciation
Write-downs, net
Dispositions
Currency translation differences
Petroleum
and natural
gas assets
$ 641,265
118,457
37,189
51,828
(6,342)
34,063
(2,638)
873,822
$
(184,315)
(100,982)
(54,350)
5,896
296
Accumulated depletion, depreciation and write-downs,
December 31, 2010
Net book value, January 1, 2010
Net book value, December 31, 2010
(333,455)
456,950
$ 540,367
$
Drilling rigs
Other
Total
$
$
46,840
1,208
–
–
(1,121)
–
(781)
46,146
(3,274)
(5,135)
–
–
252
(8,157)
43,566
37,989
$
$
$
19,720
161
–
–
–
–
(31)
19,850
(17,130)
(751)
–
–
9
(17,872)
2,590
1,978
$ 707,825
119,826
37,189
51,828
(7,463)
34,063
(3,450)
939,818
$
(204,719)
(106,868)
(54,350)
5,896
557
(359,484)
503,106
$ 580,334
Paramount Resources Ltd. 2011
Financial Statements
80
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Depletion and Depreciation
Year ended December 31
Depletion and depreciation
Write-down of property, plant and equipment
Goodwill impairment
Inter-segment eliminations
2011
156,465
215,156
10,502
(4,046)
378,077
$
$
2010
106,868
54,350
3,577
(4,145)
160,650
$
$
At December 31, 2011, $111.4 million (December 31, 2010 – $20.0 million) of capitalized costs related to
incomplete development wells and infrastructure projects are currently not subject to depletion.
Additions to property, plant and equipment include $3.2 million of capitalized interest for qualifying assets
in the construction phase (2010 – nil) at a weighted average interest rate of eight percent. Additions were
$295.7 million (2010 - $118.6 million) for Principal Properties, $5.0 million (2010 - $1.2 million) for
Strategic Investments and $0.1 million (2010 – $0.2 million) for Corporate.
The Company recorded an impairment write-down related to its petroleum and natural gas assets of
$215.2 million (2010 – $54.4 million) within the principal properties segment. The impairment write-down
was primarily related to the Elmworth CGU (Karr–Gold Creek and Valhalla) in the Grande Prairie COU, the
Southern CGU (Chain and Delia) in Canada, and the Bistcho/Pedigree CGU (Bistcho and Cameron Hills) in
the Northern COU, where the carrying value of the properties exceeded their expected discounted cash
flows from the production of estimated proved and probable reserves. The impairment resulted from a
combination of declines in reserves assigned due to well performance and the decline in forecast natural
gas prices.
Write-downs were recognized to the extent that the carrying value of each CGU exceeded its expected
recoverable amount. The recoverable amount was estimated on a fair value less costs to sell basis using
a discounted cash flow method, which is an approach commonly employed by market participants to
value oil and gas properties. Cash flows were projected over the expected remaining life of each CGU’s
reserves, at an after-tax discount rate of eight percent at December 31, 2011 (December 31, 2010 – eight
percent). The forecast prices used to determine the recoverable amount reflect the following benchmark
prices, adjusted for basis differentials to determine local reference prices, transportation costs and
quality:
(Average for the period)
2012
2013
2014
2015
2016
2017-2026
Thereafter
Natural Gas
AECO ($/MMBtu)
Henry Hub (US$/MMBtu)
Crude Oil
Edmonton - Light Sweet ($/Bbl)
WTI (US$/Bbl)
3.50
3.75
99.00
97.50
4.20
4.50
4.70
5.05
5.10
5.50
5.55
5.95
5.90 - 7.55
6.35 - 8.10
99.00
97.50
101.50
100.00
102.30
100.80
103.20
101.70
104.20 - 120.50
102.70 - 118.80
+2%/yr
+2%/yr
+2%/yr
+2%/yr
Paramount Resources Ltd. 2011
Financial Statements
81
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
9.
EQUITY ACCOUNTED INVESTMENTS
December 31, 2011
Carrying
Value
Market
Value(1)
Shares
(000’s)
December 31, 2010
Shares
(000’s)
Carrying
Value
Market
Value(1)
Shares
(000’s)
January 1, 2010
Carrying
Value
Market
Value(1)
Trilogy
MGM Energy
Paxton
Other
19,144 (2)
43,834
1,750
$ 94,062
1,691
4,015
1,775
$ 101,543
$ 719,253
10,520
24,144
43,834
1,750
$ 125,746
5,222
4,338
2,994
$ 138,300
(1) Based on the period-end trading price of publicly traded entities.
(2) Excludes 5 million Trilogy shares classified within assets held for sale.
$ 296,975
8,767
23,995
43,834
1,750
$ 98,773
5,844
4,574
4,280
$ 113,471
$ 206,114
12,493
Income (loss) from equity-accounted investments is composed of the following:
Year ended December 31
Trilogy
MGM Energy
Paxton
Other
Equity
income
(loss)
$
$
1,945
(1,481)
(323)
–
141
2011
Dilution
gain
$ 1,060
–
–
–
$ 1,060
Equity
income
(loss)
$ 32,415
(1,041)
(240)
547
$ 31,681
2010
Dilution
gain
$ 4,109
209
–
–
$ 4,318
Total
$ 3,005
(1,481)
(323)
–
$ 1,201
Total
$ 36,524
(832)
(240)
547
$ 35,999
Paramount recorded a $1.1 million dilution gain (2010 - $4.1 million) in respect of its investment in Trilogy
as a result of shares issued by the investee related to stock option exercises.
The following table summarizes the assets, liabilities, revenues and income/loss of Trilogy, MGM Energy
and Paxton. The amounts summarized have been derived directly from Trilogy’s published financial
statements as at and for the years ended December 31, 2011 and 2010 and from MGM Energy’s and
Paxton’s financial statements as at and for the period ended December 31, 2010. The amounts
presented do not include Paramount’s adjustments in applying the equity method of investment
accounting. As a result, these amounts cannot be used directly to derive Paramount’s equity income and
net investment in these entities.
As at December 31
Assets
Liabilities
Shares outstanding (thousands)
Paramount’s equity interest
2011
Trilogy
$ 1,260,364
729,919
$
116,118
21%
Trilogy
$ 1,081,448
$ 540,629
114,741
21%
2010
MGM Energy(1)
$ 236,137
5,187
$
314,495
14%
Paxton(1)
$
$
27,527
65
17,402
10%
Year ended December 31
Revenue
–
$
Net income (loss)
(2,876)
$
Note: Readers are cautioned that Paramount does not have any direct or indirect interest in or right to the investee’s assets or revenue, nor does Paramount have any direct or indirect
obligation in respect of or liability for the expenses or obligations of such entities.
(1) MGM Energy’s and Paxton’s 2011 financial statements were not finalized prior to completing these financial statements.
$ 246,124
$ 178,242
342,106
17,415
–
(19,744)
$
$
$
$
2010
2011
Trilogy had 6.0 million stock options outstanding (1.7 million exercisable) at December 31, 2011 at
exercise prices ranging from $4.85 to $38.74 per share.
Paramount Resources Ltd. 2011
Financial Statements
82
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
10.
INVESTMENTS IN SECURITIES
MEG Energy Corp.
NuLoch Resources Inc. ("NuLoch")
ProspEx
Redcliffe
Other
December 31, 2011
December 31, 2010
January 1, 2010
Shares
(000’s)
3,700
–
–
–
Shares
(000’s)
3,700
6,579
5,625
–
$ 168,313
13,684
7,369
–
351
$ 189,717
Shares
(000’s)
3,700
$ 101,750
6,579
–
19,667
5,921
–
7,210
502
$ 115,383
$ 153,809
–
–
–
31
$ 153,840
In April 2011, Paramount sold 3.3 million of the NuLoch shares it held for cash proceeds of $8.1 million.
The Company recognized a gain on the disposition of $5.7 million, which previously had been recorded in
other comprehensive income. In May 2011, NuLoch was acquired by Magnum Hunter Resources Corp.
("Magnum Hunter") and each of the remaining 3.3 million NuLoch shares held by Paramount was
exchanged for 0.3304 of a common share of Magnum Hunter, resulting in Paramount receiving 1.1
million common shares of Magnum Hunter. An accumulated unrealized gain of $5.3 million that had been
recorded in other comprehensive income in respect of the NuLoch shares exchanged by Paramount was
recognized in other income. In July 2011, Paramount sold all 1.1 million of the Magnum Hunter shares it
held for cash proceeds of $7.7 million. The Company recognized a gain on the disposition of $0.1 million,
which previously had been recorded in other comprehensive income.
11.
GOODWILL
December 31, 2011
December 31, 2010
Carrying value, beginning of year
Acquisitions
Adjustment to Redcliffe net assets acquired
Reclassified to assets held for sale
Impairment
Carrying value, end of year
$
$
8,012
5,477
978
(539)
(10,502)
3,426
$
$
–
11,589
–
–
(3,577)
8,012
January 1, 2010
–
$
–
–
–
–
–
$
For the year ended December 31, 2011, there were additions to goodwill of $5.5 million in respect of the
ProspEx acquisition and $1.0 million in respect of additional liabilities of Redcliffe that existed at the date
of acquisition.
For the purpose of testing goodwill for impairment, the recoverable amount of each CGU was
determined on the same basis as used in determining the recoverable amount of that CGU for the
purpose of testing its property, plant and equipment assets for impairment.
The carrying amount of goodwill allocated to each of the COUs is as follows:
Grande Prairie
Kaybob
Southern
Northern
December 31, 2011
December 31, 2010
$
$
–
3,124
–
302
3,426
$
$
7,464
548
–
–
8,012
January 1, 2010
–
$
–
–
–
–
$
Paramount Resources Ltd. 2011
Financial Statements
83
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
12.
DEMAND FACILITIES
Drilling Rig Loans
In 2009, Paramount entered into a $30.4 million non-revolving demand loan facility with a Canadian bank
("Drilling Rig Loan I"). The loan was drawn in full at closing and aggregate principal payments of $7.5
million have been made to December 31, 2011. Unless demanded by the bank, annual scheduled
principal repayments are $5.1 million in each of 2012 and 2013, with the remaining outstanding balance
of $12.6 million payable in 2014.
In January 2012, Paramount entered into a new $30.0 million non-revolving demand loan facility with the
same Canadian bank to partially fund the construction of two new triple-sized walking rigs ("Drilling Rig
Loan II"). Advances on Drilling Rig Loan II are available during the year-long construction period with
scheduled principal repayments to commence in 2013. Drilling Rig Loan II is currently undrawn.
Recourse and security for Drilling Rig Loan I and Drilling Rig Loan II is limited to the three existing drilling
rigs, the two rigs to be constructed, and drilling contracts guaranteed by Paramount. The carrying value
of the three existing rigs is $37.6 million (2010 - $38.0 million). 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 effective interest rate on Drilling Rig Loan I for the period ended December 31, 2011 was 4.7
percent (2010 - 4.2 percent).
Cavalier Energy Facility
In January 2012, Cavalier Energy entered into a $21.0 million demand loan facility with a syndicate of
Canadian banks (the "Cavalier Facility"). The Cavalier Facility bears interest at the lenders’ prime lending
rates, US base rates, or bankers’ acceptance rates, as selected at the discretion of Paramount, plus an
applicable margin. The Cavalier Facility is non-recourse to Paramount and is secured by all of the assets
of Cavalier Energy, including oil sands and carbonate bitumen lands.
13.
LONG-TERM DEBT
Canadian Dollar Denominated Debt
Bank credit facility
8 ¼ percent Senior Notes due 2017
U.S. Dollar Denominated Debt
8 ½ percent US Senior Notes due 2013
Unamortized financing costs net of premiums
Bank Credit Facility
December 31, 2011
December 31, 2010
January 1, 2010
$
61,383
370,000
–
431,383
(4,197)
427,186
$
$
–
300,000
–
300,000
(5,795)
294,205
$
$
$
–
–
94,394
94,394
(739)
93,655
In June 2011, Paramount renewed its bank credit facility (the "Facility"), increasing the total credit limit
from $160 million to $300 million, which is available in two tranches. The first tranche ("Tranche A") has a
borrowing base and lender commitments of $225 million and is available on a revolving basis to June 30,
2012. In the event the revolving period is not extended, Tranche A would be available on a non-revolving
basis for an additional year, at which time it would be due and payable. The second tranche ("Tranche B")
is available on a revolving basis, has a credit limit of up to $75 million and is due June 30, 2012 in the
Paramount Resources Ltd. 2011
Financial Statements
84
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
event the due date is not earlier extended. The Facility is secured by a first fixed and floating charge over
substantially all of the assets of Paramount, excluding assets securing the Drilling Rig Loan and the
Cavalier Facility. Balances drawn under Tranche B are secured by the pledge of certain of the Company’s
equity investments.
The Facility bears interest at the lenders’ prime lending rates, US base rates, bankers’ acceptance or
LIBOR rates, as selected at the discretion of Paramount, plus an applicable margin which is dependent
upon the Company’s debt to cash flow ratio and the tranche under which borrowings are made. The
maximum amount that Paramount may borrow under the Facility is subject to periodic review, and is
dependent upon the Company’s reserves, lenders’ projections of future commodity prices and the
market value of equity investments pledged by Paramount from time-to-time under Tranche B, among
other factors. Increases in the borrowing base and lender commitments under Tranche A reduce the
credit limit under Tranche B by an equivalent amount.
At December 31, 2011, $61.4 million (December 31, 2010 – nil) was drawn on Tranche A of the Facility.
Paramount had undrawn letters of credit outstanding at December 31, 2011 totaling $26.3 million that
reduce the amount available to the Company.
Senior Notes
In December 2010, Paramount completed a public offering of $300 million principal amount of senior
unsecured notes ("Senior Notes") at par, of which $11.4 million principal amount was purchased by
certain directors, associates, officers, and management of the Company.
In February 2011, Paramount completed a public offering of an additional $70 million principal amount
of Senior Notes at a price of $1,030 per $1,000 principal amount, of which $1.4 million principal amount
was purchased by an entity that is controlled by the Company’s Chairman and Chief Executive Officer.
The Senior Notes bear interest at 8.25 percent per annum, payable semi-annually in arrears on June 13
and December 13 in each year and mature on December 13, 2017. The Senior Notes are direct senior
unsecured obligations of Paramount and rank equally with all other senior unsecured indebtedness of the
Company.
The Company may redeem all or any portion of the Senior Notes at any time on or prior to December 13,
2013 at par, plus accrued and unpaid interest, plus a redemption premium equal to the greater of: (i) one
percent; and (ii) a make-whole amount based on the then current yield of a Government of Canada bond
with a similar maturity. Paramount may also redeem up to an aggregate of 35 percent of the Senior
Notes with the net cash proceeds of an equity offering at any time prior to December 13, 2013, at par
plus a redemption premium of 8.25 percent. On or after December 13, 2013, the Company may redeem
some or all of the Senior Notes at par plus a redemption premium, if applicable, of up to 4.125 percent
depending on when redeemed, plus accrued and unpaid interest.
US Senior Notes
During the fourth quarter of 2010, Paramount’s obligations under the indenture governing its US$90.2
million principal amount of 8.5 percent US senior notes ("US Senior Notes") were discharged as a result
of Paramount: (i) purchasing US$64.2 million principal amount of US Senior Notes pursuant to a tender
offer; (ii) delivering all US Senior Notes held by the Company to the trustee for cancellation; (iii) issuing a
redemption notice for US$26.0 million principal amount of US Senior Notes not tendered under the
tender offer (the "Redeemed Notes"); and (iv) irrevocably depositing sufficient cash with the trustee to
pay all amounts due on the Redeemed Notes on the January 31, 2011 redemption date.
Paramount Resources Ltd. 2011
Financial Statements
85
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
14.
ASSET RETIREMENT OBLIGATIONS
Year ended December 31
Asset retirement obligations, beginning of year
Retirement obligations incurred
Revisions to estimated retirement costs and discount rates
Obligations settled
Disposal of properties
Assumed on corporate acquisition
Accretion expense
Transfer to liabilities associated with assets held for sale
Foreign exchange
Asset retirement obligations, end of year
2011
241,770
23,463
37,791
(7,520)
(2,902)
11,943
7,374
(13,040)
323
299,202
$
$
2010
195,088
25,691
17,819
(3,209)
(9,638)
8,541
7,975
–
(497)
241,770
$
$
The asset retirement obligation at December 31, 2011 has been determined using a weighted average
risk-free rate of 2.25 percent (2010 – 4.0 percent). These obligations will be settled over the useful lives
of the assets, which extend up to 42 years.
15.
SHARE CAPITAL
Weighted Average Common Shares Outstanding
Net loss – basic
Dilutive effect of Paramount options
Net loss – diluted
2011
2010
Shares
(000’s)
78,462
–
78,462
$
$
(231,990)
–
(231,990)
Shares
(000’s)
72,705
72,705
–
$
$
(90,011)
–
(90,011)
Outstanding Paramount Options can be exchanged for the Company’s Common Shares in accordance
with the terms of the stock option plan. As a result, they are considered potentially dilutive and are
included in the calculation of Paramount’s diluted net income per share calculation when they are dilutive
for the period.
In April 2011, Paramount issued 1,500,000 Common Shares at a price of $32.50 per share for gross
proceeds of $48.8 million pursuant to a public offering. In April 2011, Paramount also issued 150,000
Common Shares on a "flow-through" basis in respect of Canadian development expenses at a price of
$36.50 per share for gross proceeds of $5.5 million to a company controlled by the Company’s Chairman
and Chief Executive Officer. In May 2011, the Company issued 2,000,000 Common Shares in connection
with the ProspEx acquisition. In October 2011, Paramount issued 1,450,000 Common Shares on a "flow-
through" basis in respect of Canadian exploration expenses ("CEE") pursuant to a public offering at a price
of $40.50 per share for gross proceeds of $58.7 million. Also in October 2011, the Company issued
100,000 Common Shares on a "flow-through" basis in respect of CEE at a price of $40.50 per share for
gross proceeds of $4.1 million to companies controlled by the Company’s Chairman and Chief Executive
Officer. In November 2011, Paramount issued 4,500,000 Common Shares at a price of $34.75 per share
for gross proceeds of $156.4 million through a public offering.
The Company incurred $8.6 million (2010 – $1.0 million) of transaction costs in respect of these equity
offerings, net of tax of $2.9 million (2010 – $0.4 million).
Paramount Resources Ltd. 2011
Financial Statements
86
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
16.
RESERVES
Reserves at December 31, 2011 include unrealized gains on the Company’s investments in available-for-
sale securities, foreign exchange differences on the translation of foreign subsidiaries’ balances, and
contributed surplus amounts in respect of Paramount Options and Cavalier Options. The changes in
reserves are as follows:
Balance, December 31, 2010
Other comprehensive income (loss)
Stock-based compensation liability reclassified
Stock-based compensation expense
Stock options exercised
Reclassification to equity-accounted investments
Balance, December 31, 2011
Unrealized
Gains on
Securities
$ 71,622
(19,913)
–
–
–
–
$ 51,709
Translation
of Foreign
Subsidiaries
$
(2,028)
1,197
–
–
–
–
(831)
$
$
Contributed
Surplus
–
–
68,728
4,185
(7,121)
–
$ 65,792
Stock-based
compensation –
investee options
$ 2,402
–
–
–
–
(2,402)
–
$
Total
Reserves
$ 71,996
(18,716)
68,728
4,185
(7,121)
(2,402)
$ 116,670
Balance, January 1, 2010
Other comprehensive income (loss)
Stock-based compensation related to equity-
accounted investments
Balance, December 31, 2010
Unrealized
Gains on
Securities
$ 3,188
68,434
Translation
of Foreign
Subsidiaries
$
–
(2,028)
Contributed
Surplus
–
–
$
Stock-based
compensation –
investee options
$ 1,839
–
Total
Reserves
$ 5,027
66,406
–
$ 71,622
–
(2,028)
$
$
–
–
563
$ 2,402
563
$ 71,996
Other Comprehensive Income (Loss)
Year ended December 31
Unrealized Gain (Loss) on Securities
Change in market value of securities
Reclassification of other comprehensive income to earnings
Deferred tax
Translation of Foreign Subsidiaries
Exchange differences on translation of US subsidiaries
Reclassification of other comprehensive loss to earnings
Deferred tax
Other comprehensive income (loss)
2011
(7,109)
(15,693)
2,889
(19,913)
(1,419)
2,965
(349)
1,197
(18,716)
$
$
2010
75,090
(3,499)
(3,157)
68,434
(2,749)
–
721
(2,028)
66,406
$
$
Paramount Resources Ltd. 2011
Financial Statements
87
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
17.
SHARE-BASED PAYMENTS
Paramount Options
Changes in the Company’s outstanding options are as follows:
2011
2010
Number
Weighted average
exercise price
Number
Weighted average
exercise price
Balance, beginning of year
Granted
Exercised
Forfeited
Balance, end of year
Options exercisable, end of year
For options exercised in 2011, the weighted average market price of Paramount’s Common Shares on the dates exercised was $35.46 (2010 -
$21.95).
5,006,300
1,529,000
(618,850)
(149,000)
5,767,450
1,832,218
4,571,500
1,276,500
(683,700)
(158,000)
5,006,300
1,367,301
8.61
28.98
7.90
8.74
$ 13.90
8.13
$
($/share)
$ 13.90
38.95
10.80
17.74
$ 20.76
$ 10.66
($/share)
$
The weighted average remaining contractual life and exercise prices of Paramount Options outstanding
as of December 31, 2011 are as follows:
Exercise Prices
$6.87 – $10.00
$10.01 – $20.00
$20.01 – $30.00
$30.01 – $40.09
Awards Outstanding
Remaining
Contractual Life
1.8
3.3
4.3
5.3
3.4
Weighted average
exercise price
$
7.34
$ 13.38
$ 29.39
$ 39.51
$ 20.76
Number
2,378,200
751,050
1,185,200
1,453,000
5,767,450
The fair value of Paramount Options has been estimated using the Black-Scholes-Merton model
incorporating the following weighted average inputs:
Weighted average exercise price
Expected volatility
Expected life of share options
Pre-vest forfeiture rate
Risk-free interest rate
Expected dividend yield
Weighted average fair value of awards
Options re-measured at
September 30, 2011
$
Options awarded between
October 1, 2011 and
December 31, 2011
$
14.67
49.7 %
2.3 years
4.6 %
1.1 %
nil
18.69
$
$
40.02
47.8 %
4.7 years
4.9 %
1.2 %
nil
16.45
The estimated expected life of the Paramount Options is based on historical exercise patterns. The
expected volatility is estimated based on the historical volatility of the trading price of the Company’s
Common Shares over the most recent period that is generally commensurate with the expected term of
the option.
Paramount Resources Ltd. 2011
Financial Statements
88
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Cavalier Options
In November 2011, 2.5 million Cavalier Options were granted to Cavalier Energy management and
directors having a term of seven years and vesting over four to five years. No exercises or cancellations
have occurred to date.
Stock Incentive Plan
Year ended December 31
2011
2010
Stock incentive plan shares held in trust
Balance, beginning of year
Shares purchased
Change in vested and unvested shares
Balance, end of year
Shares
(000’s)
150
101
(165)
86
$
$
410
2,974
(2,965)
419
Shares
(000’s)
178
178
(206)
150
$
$
312
2,901
(2,803)
410
Employee Benefit Costs
Year ended December 31
Stock option plan
Stock incentive plan
Stock-based compensation expense
Salaries and benefits, net of recoveries
18.
DEFERRED INCOME TAX
2011
18,412
3,050
21,462
10,956
32,418
$
$
2010
51,642
3,636
55,278
10,125
65,403
$
$
The following table reconciles income taxes calculated at the Canadian statutory rate to Paramount’s
recorded income tax recovery:
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
Gain on investments
Income from equity-accounted investments
Goodwill impairment
Flow-through share renunciations
Stock-based compensation
Non-deductible items and other
Income tax expense (recovery)
$
2011
(293,771)
26.6%
(78,143)
$
$
2010
(150,744)
28.1%
(42,359)
$
$
8,067
(2,777)
(319)
2,792
4,625
4,881
(907)
(61,781)
(17,242)
(983)
(10,116)
1,005
6,417
14,494
(11,949)
(60,733)
$
Paramount Resources Ltd. 2011
Financial Statements
89
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Components of Deferred Income Tax Asset (Liability)
As at December 31
2011
2010
Property, plant and equipment
Investments
Asset retirement obligations
Non-capital and net operating losses
Other
$
$
(11,339)
(286)
80,105
42,131
6,937
117,548
$
$
(20,743)
(3,308)
62,404
27,523
9,699
75,575
in respect of
Paramount has $152.6 million (2010 - $100.1 million) of unused tax losses expiring between 2014 and
2031. In addition, Paramount has $167.4 million (2010 - $156.9 million) of deductible temporary
differences
income tax asset has been
recognized. Deferred tax assets are recognized to the extent that it is probable that taxable profits will be
available against which deductible temporary differences and unutilized tax losses can be applied. A
deferred tax asset related to the carry forward of unutilized tax losses has been recorded as the
Company expects that future taxable profits, through a combination of future operating results and gains
realized on the disposition of assets, will be sufficient to utilize the deferred tax asset.
investments for which no deferred
In October 2010, the Company received reassessments from the Canada Revenue Agency (the "CRA")
and provincial tax authorities of
(the
"Reassessments"). Paramount disagrees with the Reassessments and has filed notices of objection with
the CRA and provincial tax authorities. Despite its disagreement, and as a condition of its right to proceed
with its objection to the Reassessments, the Company was required to deposit approximately $20 million
with the CRA, which amount will remain on account until the dispute is resolved.
income taxes relating to a prior year transaction
its
19.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Financial Instruments
Financial instruments at December 31, 2011 consisted of cash and cash equivalents, accounts
receivable, the Deposit, available-for-sale investments, the Drilling Rig Loan, accounts payable and
accrued liabilities, risk management assets and liabilities, and long-term debt.
Fair Values of Financial Assets and Liabilities
The fair value of financial assets and liabilities are included in the Consolidated Financial Statements at
the amount at which the instrument could be exchanged in a current transaction between willing parties,
other than in a forced liquidation or sale. The following methods and assumptions were used to estimate
the fair values:
(cid:120)
(cid:120)
(cid:120)
Cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities
approximate their carrying amounts largely due to the short-term maturities of these
instruments. The fair value of the Deposit approximates its carrying amount.
Risk management assets and liabilities are carried at fair values, which are based on forward
market curves and compared to quotes provided by financial institutions.
Publicly traded available-for-sale investments are carried at the period-end trading price.
Paramount Resources Ltd. 2011
Financial Statements
90
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
(cid:120)
The carrying value of the Drilling Rig Loan and long-term debt are measured at amortized cost.
The Senior Notes had a market value of 103.1 percent of their principal amount at December 31,
2011.
Risk management financial instruments outstanding at December 31, 2011 are as follows:
Instruments
Oil – NYMEX WTI Swap
Oil – NYMEX WTI Collar
Oil – NYMEX WTI Swap
Oil – NYMEX WTI Swap
Oil – NYMEX WTI Swap
Notional
500 Bbl/d
500 Bbl/d
500 Bbl/d
500 Bbl/d
1,000 Bbl/d
Average Fixed Price
US $101.01/Bbl
Floor – US $85.00/Bbl
Ceiling – US $116.85/Bbl
US $101.65/Bbl
US $97.25/Bbl
US $91.50/Bbl
Fair
Value
$ 139
Remaining Term
January – May 2012
45
January – May 2012
223
(288)
(2,722)
$ (2,603)
January – June 2012
January – December 2012
January – December 2012
Changes in the fair value of risk management assets and liabilities are as follows:
Year ended December 31
Fair value, beginning of year
Changes in fair value
Settlements received
Fair value, end of year
Fair Value Hierarchy
2011
$
$
(693)
(1,699)
(211)
(2,603)
2010
$
$
2,187
10,047
(12,927)
(693)
Paramount uses a three-level hierarchy for determining the fair value of financial instruments, which is
based upon the transparency of inputs used in the valuation of financial instruments recognized at fair
value. The three levels are defined as follows:
(cid:120)
(cid:120)
(cid:120)
Level one – Inputs to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active markets.
Level two – 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.
Level three – Inputs to the valuation methodology are unobservable and significant to the fair
value measurement.
At December 31, 2011, Paramount’s publicly traded available-for-sale investments were classified as
level 1 fair values and risk management assets and liabilities were classified as level 2 fair values.
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. Paramount periodically uses derivative instruments such as forwards, swaps and
options to manage its exposure to fluctuations in crude oil and natural gas prices, foreign exchange rates,
and interest rates.
Paramount Resources Ltd. 2011
Financial Statements
91
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Commodity Price Risk
At December 31, 2011, 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:
Crude Oil
Foreign Currency Risk
10% increase
$
(5,000)
10% decrease
$ 5,000
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, and
accounts payable and accrued liabilities.
Sales prices of natural gas, crude oil, and natural gas liquids ("NGLs") 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 natural gas, crude oil, and NGLs. 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.
Interest Rate Risk
Paramount is exposed to interest rate risk from time to time on outstanding balances on its floating rate
bank credit facilities, and on interest bearing cash and cash equivalents. Paramount’s 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 changes in the market value of 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 endeavoring to enter 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, 2011 is limited to the carrying values of
cash and cash equivalents, accounts receivable and risk management assets. Accounts receivable
include balances due from customers and joint venture partners in the oil and gas industry and are
subject to normal industry credit risk. At December 31, 2011, Paramount had balances due from one joint
venture partner that represented more than 10 percent of the Company’s total accounts receivable.
Liquidity Risk
Liquidity risk is the risk that Paramount will be unable to meet its financial obligations. The Company
manages liquidity risk by ensuring that it has sufficient cash and cash equivalents, credit facilities and
other financial resources available to meet its obligations.
Paramount Resources Ltd. 2011
Financial Statements
92
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
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.
In addition to commitments disclosed in Note 23, contractual obligations related to financial liabilities are
as follows:
Drilling Rig Loan I(1)
Accounts payable and accrued liabilities
Risk management liabilities
Credit Facility(1)
Senior Notes(1)
(1)Including interest
2012
$ 6,092
136,820
2,787
3,253
30,525
$ 179,477
2013
$ 5,274
–
–
63,010
30,525
$ 98,809
2014
$ 12,983
–
–
30,525
$ 43,508
2015
$
–
–
–
–
30,525
$ 30,525
2016
$
–
–
–
–
30,525
$ 30,525
Thereafter
$
–
–
–
–
399,354
$ 399,354
Total
$ 24,349
136,820
2,787
66,263
551,979
$782,198
Accounts payable and accrued liabilities
Trade and accrued payables
Joint venture and royalties
Interest payable
Flow-through share renunciation obligations
Other
Total accounts payable and accrued liabilities
December 31, 2011
December 31, 2010
$
$
119,172
2,374
1,510
5,894
7,870
$
136,820
$
69,965
4,525
1,288
6,122
3,028
84,928
January 1, 2010
31,917
$
10,902
3,343
2,409
–
$
48,571
Terms and conditions of the above financial liabilities:
(cid:120)
(cid:120)
Trade and accrued payables, joint venture payables and other are non-interest bearing and are
normally settled on 60-day terms.
Interest payable on Senior Notes is payable semi-annually in arrears on June 13 and December
13 in each year.
Accounts receivable
Revenue receivable
Joint venture receivable
GST and other
Total accounts receivable
December 31, 2011
December 31, 2010
January 1, 2010
$
21,363
13,600
5,218
$
17,907
11,964
3,409
$
16,583
6,407
498
$
40,181
$
33,280
$
23,488
Joint venture receivables are non-interest bearing and are generally on 30 day terms.
In determining the recoverability of joint venture receivables, the Company performs a risk analysis
considering the type and age of the outstanding receivable and the credit worthiness of the
counterparties. As a result of this assessment, the Company determined that there was no impairment
required in joint venture receivable. There were no significant non-current joint venture receivables as at
December 31, 2011 and 2010.
Paramount Resources Ltd. 2011
Financial Statements
93
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
20.
CONSOLIDATED STATEMENTS OF CASH FLOWS – SELECTED INFORMATION
Items not involving cash
Year ended December 31
Financial commodity contracts
Stock-based compensation
Depletion and depreciation
Exploration and evaluation
(Gain) on sale of property, plant, and equipment
Accretion of asset retirement obligations
Foreign exchange
(Income) from equity accounted investments
Deferred income tax
Gain on investments
Other
Supplemental cash flow information
Year ended December 31
Interest paid
Current tax paid
Components of cash and cash equivalents
As at December 31
Cash
Bankers’ acceptances
2011
1,910
21,405
378,077
20,566
(42,021)
7,374
933
(1,201)
(61,793)
(15,703)
527
310,074
$
$
2011
36,910
45
$
$
2010
2,880
55,217
160,650
34,548
(380)
7,975
(568)
(35,999)
(60,946)
(3,499)
1,293
161,171
2010
15,615
368
$
$
$
$
2011
15,009
13,991
29,000
$
$
2010
29,679
44,980
74,659
$
$
21.
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 Resources Ltd. 2011
Financial Statements
94
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Paramount’s capital structure consists of the following:
Working capital deficit (surplus)(1)
Credit Facility
Senior Notes(2)
US Senior Notes
Net Debt(3)
Share capital
Accumulated (deficit) earnings
Reserves
Total Capital
December 31, 2011
$
$
82,036
61,383
370,000
–
513,419
810,781
(103,615)
116,670
1,337,255
December 31, 2010
$
(4,825)
–
300,000
–
295,175
481,827
128,375
71,966
977,343
$
January 1, 2010
(43,485)
$
–
–
94,394
50,909
418,191
218,386
5,027
692,513
$
(1) Excludes risk management assets and liabilities, stock-based compensation liabilities, assets and liabilities held for sale and accounts payable and
accrued liabilities related to the Company’s obligation to renounce qualifying expenditures for flow-through share issuances (December 31, 2011 -
$5.9 million, December 31, 2010 - $6.1 million, January 1, 2010 - $2.4 million).
(2) Excludes unamortized financing costs.
(3) Net Debt excludes the deposit on account with the CRA, pending resolution of the Company’s Notice of Objection (see Note 18).
Paramount is subject to covenants under its bank Facility and Senior Notes agreements which contain
certain restrictions on Paramount’s ability to repurchase equity, issue or refinance debt, acquire or
dispose of assets, and pay dividends.
22.
RELATED PARTY TRANSACTIONS
Service Agreements
Paramount engages in transactions with Trilogy, MGM Energy, Paxton and Perpetual Energy Inc. in the
normal course of business, including joint venture operations. Paramount is considered related to Trilogy,
MGM Energy, Paxton and Perpetual Energy Inc. because of common significant influence. All
transactions between Paramount and the entities are recorded at their exchange amounts.
During 2011, Paramount charged $0.9 million (2010 – $0.5 million) to Trilogy in respect of operational and
administrative services. Also, Paramount received $10.1 million (2010: $10.5 million) in annual dividends
from Trilogy. As of December 31, 2011, Paramount had a receivable balance due from Trilogy of $0.3
million (2010: $0.3 million).
Compensation of key management personnel
Year ended December 31
Salaries and benefits
Stock-based compensation
2011
2,159
9,173
11,332
$
$
2010
2,031
29,918
31,949
$
$
Paramount Resources Ltd. 2011
Financial Statements
95
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
23.
COMMITMENTS AND CONTINGENCIES
Commitments
Paramount had the following commitments as at December 31, 2011:
Pipeline transportation commitments (1)
Operating leases
Capital spending commitments(2)
Total
(1) Certain of the pipeline transportation commitments are secured by outstanding letters of credit totaling $12.8 million at December 31, 2011 (2010 -
$
$
$
More than five years
55,512
10,554
–
66,066
$
Within One Year
16,353
$
3,569
54,174
74,096
After one year but not
more than 5 years
60,947
$
7,055
–
68,002
$10.4 million).
(2) Relates to contractual obligations for purchases of major equipment.
Operating lease commitment
During the year, the company renewed and extended its head office lease to 2022. The Company
incurred office lease costs of $2.8 million in 2011 (2010 - $2.3 million).
Flow-Through Shares
As a result of flow through share issuances in the fourth quarter of 2011, Paramount is required to incur
and renounce $29.7 million of Canadian Exploration Expense during 2012.
Contingencies
Paramount is a party to various legal claims associated with the ordinary conduct of its business.
Paramount does not anticipate that these claims will have a material impact on its financial position.
Tax and royalty legislation and regulations, and government interpretation and administration thereof,
continually changes. As a result, there are often tax and royalty matters under review by relevant
government authorities. All tax filings are subject to subsequent government audit and potential
reassessments. Accordingly, the final liability may differ materially from amounts estimated and
recorded.
24.
RECONCILIATION TO PREVIOUS GAAP
GAAP in Canada was converted to IFRS as of January 1, 2011, and Paramount’s accounting policies have
been modified to comply with the new standards. The transition provisions of IFRS require changes to
accounting policies to be applied on a retroactive basis, except for certain mandatory and optional
exemptions. Paramount has elected to apply the following exemptions:
a)
b)
c)
the exemption to measure certain assets at fair value on transition to IFRS and subsequently deem
that fair value to be historical cost;
the exemption to deem cumulative foreign exchange translation differences related to foreign
subsidiaries as of January 1, 2010 to be nil;
the exemption that permits amounts recorded in respect of options settled prior to January 1, 2010
not to be retrospectively restated;
Paramount Resources Ltd. 2011
Financial Statements
96
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
d)
e)
f)
the exemption that permits business combinations completed prior to January 1, 2010 not to be
restated. Paramount’s initial business combination recorded in accordance with IFRS 3, "Business
Combinations" was the acquisition of Redcliffe in June 2010;
the exemption to measure asset retirement obligations at the Transition Date in accordance with
IFRS 1;
the exemption to assess lease arrangements using the facts and circumstances as of the Transition
Date under International Financial Reporting Interpretations Committee Interpretation 4, "Determining
whether an Arrangement contains a Lease"; and
g)
the exemption that permits borrowing costs directly attributable to the acquisition or construction of
qualifying assets not to be capitalized on a retroactive basis prior to January 1, 2010.
The following information reconciles the 2010 comparative amounts included in these Consolidated
Financial Statements to the amounts previously published in accordance with Previous GAAP:
Paramount Resources Ltd. 2011
Financial Statements
97
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N
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
a)
Reclassifications ("Reclasses")
i.
Balance Sheet
Exploration and Evaluation Assets
At the Transition Date, exploration and evaluation assets having a carrying value of $152.2 million,
primarily consisting of costs related to undeveloped land and incomplete exploratory drilling projects,
were reclassified from property, plant and equipment to exploration and evaluation. For the twelve
months ended December 31, 2010, $118.2 million of net additions were reclassified from property, plant,
and equipment to exploration and evaluation.
Equity Accounted Investments
At the Transition Date, equity accounted investments having an aggregate carrying value of $119.2
million, were reclassified from investments to equity accounted investments. For the twelve months
ended December 31, 2010, the $3.6 million net change in the carrying value of equity accounted
investments was reclassified from investments to equity accounted investments.
Investments in Securities
At the Transition Date, investments in the securities of entities that are accounted for as available-for-sale
investments, having an aggregate carrying value of $115.4 million, were reclassified from investments to
investments in securities. For the twelve months ended December 31, 2010, the change in the carrying
value of investments in securities of $74.3 million was reclassified from investments to investments in
securities.
Reserves
At the Transition Date, the contributed surplus balance of $2.9 million and accumulated other
comprehensive income balance of $3.2 million that were presented as individual line items on the
balance sheet under Previous GAAP were reclassified to reserves under IFRS. For the twelve months
ended December 31, 2010, the aggregate $69.5 million change in contributed surplus and accumulated
other comprehensive income was reclassified to reserves. Foreign exchange on the translation of US
subsidiaries of $0.5 million was reclassified from foreign exchange expense to reserves for the twelve
months ended December 31, 2010.
ii.
Statement of Comprehensive Income
Exploration Expense
Exploration expense of $8.8 million and dry hole expense of $9.5 million that were presented as
individual line items under Previous GAAP are now included in exploration and evaluation expense under
IFRS.
Depletion and Depreciation
Write-offs of the cost of expired mineral leases in respect of undeveloped properties of $24.2 million
were included in depletion and depreciation expense under Previous GAAP but are included in
exploration and evaluation expense under IFRS.
Accretion expense of $9.1 million related to asset retirement obligations was included in depletion,
depreciation and accretion under Previous GAAP but is presented separately under IFRS.
Paramount Resources Ltd. 2011
Financial Statements
101
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
The write-down of petroleum and natural gas properties of $25.3 million was presented as an individual
item under Previous GAAP but is included in depletion and depreciation under IFRS.
Other Income
The gain on sale of available-for-sale investments of $3.5 million and the write-down of investments of
$0.9 million that were included in income (loss) from investments under Previous GAAP are now
included in other income under IFRS.
b)
Property, Plant, and Equipment ("PPE")
Under IFRS, the type and method of calculating petroleum and natural gas reserves used in determining
depletion on a unit-of-production basis is not specifically prescribed. Under Previous GAAP, the Company
was required to use a reserve estimate based on average commodity prices of the preceding year. On
Transition Date, Paramount changed its reserves estimates for calculating depletion to use proved
developed reserves based on forecast commodity prices.
IFRS requires an asset or CGU to be written down when its carrying value exceeds its recoverable
amount. The recoverable amount is defined as the greater of value in use and fair value less costs to
sell. Under Previous GAAP, a two-step approach was used to determine impairment write-downs: (i) the
carrying value of a property was compared to its expected undiscounted before-tax cash flows, and (ii)
where the carrying value exceeded the expected undiscounted before-tax cash flows, an impairment
write-down was calculated based on the difference between the property’s carrying value and its
expected discounted before-tax cash flows. The IFRS method of determining impairments resulted in the
recognition of additional impairment write-downs of petroleum and natural gas properties of $65.4 million
on Transition Date. For the twelve months ended December 31, 2010, additional write-downs of $32.6
million were recognized, including a goodwill impairment charge of $3.6 million. Depletion expense in
2010 was reduced by $41.9 million under IFRS due to reduced carrying values of petroleum and natural
gas properties as a result of IFRS impairment adjustments and the change in the reserves used in
calculating unit-of-production depletion. The net IFRS adjustments to depletion and impairment write-
down amounts resulted in a net increase of $12.9 million in property, plant and equipment during the
year ended December 31, 2010.
At Transition Date, the additional impairment write-downs primarily related to the Northern and Kaybob
COUs. At December 31, 2010 the additional impairment write-downs related to the Northern, Southern,
and Grande Prairie COUs. Write-downs were recognized to the extent that the carrying value of each
CGU exceeded its expected recoverable amount. The recoverable amount was estimated on a fair value
less costs to sell basis using a discounted cash flow method, which is an approach commonly employed
by market participants to value oil and gas properties. Cash flows were projected over the expected
productive life of each CGU’s reserves, at an after-tax discount rate of eight percent at December 31,
2010 (Transition Date – ten percent).
The $3.6 million write-down of goodwill at December 31, 2010 related to goodwill associated with
properties in the Southern COU.
On Transition Date, the fair value of certain CGUs was deemed to be historical cost. The aggregate fair
value of such CGUs was $378.7 million compared to an aggregate carrying value under Previous GAAP of
$447.7 million.
Paramount Resources Ltd. 2011
Financial Statements
102
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
c)
Asset Retirement Obligations ("ARO")
Under IFRS, the Company’s policy is to re-measure asset retirement obligations at each reporting date
using the period-end risk-free rate. Under Previous GAAP, credit-adjusted risk-free rates were applied to
each obligation when initially recognized, and that rate was not adjusted for changes in discount rates in
future periods. On Transition Date, the Company recorded a $91.6 million increase in the asset
retirement obligation liability due to the decrease in discount rates, from approximately eight percent
under Previous GAAP to four percent under IFRS. The increase in the asset retirement obligation liability
was recognized as an increase in the carrying value of the related asset where the asset was not part of
a CGU for which its fair value had been deemed historical cost, otherwise the increase was recognized in
retained earnings. Net additions to the ARO liability in 2010 were increased by $19.6 million primarily due
to the change in discount rates, which included a $4.0 million increase to the ARO liability recognized in
respect of the Redcliffe acquisition. The change in discount rates decreased 2010 accretion expense by
$1.1 million.
d)
Foreign Exchange Translation ("FX")
Under IFRS, assets and liabilities of subsidiaries with functional currencies that are not the presentation
currency are translated at the exchange rate in effect at the end of the reporting period and the resulting
exchange differences are recognized in other comprehensive income. Under Previous GAAP, the assets
and liabilities of the Company’s integrated foreign operations were translated into Canadian dollars using
the temporal method, where non-monetary items were translated at historical exchange rates and
monetary assets and liabilities were translated at the exchange rate in effect at the end of the reporting
period, with resulting exchange differences recognized in earnings.
On Transition Date, the change of translation method resulted in a decrease in the carrying amount of
Paramount’s property, plant and equipment assets of $4.1 million and a decrease in exploration and
evaluation assets of $0.9 million. For the twelve months ended December 31, 2010, the change in
translation methods resulted in a further $2.9 million decrease in the carrying value of the Company’s
property, plant, and equipment assets and a further $0.6 million decrease in the carrying value of
exploration and evaluation assets. The impact on OCI for the twelve months ended December 31, 2010
as a result of the change in translation method was a decrease of $3.5 million.
e)
Stock-based Compensation ("SBC")
Until September 30, 2011, Paramount’s stock-based compensation liability related to Paramount Options
under IFRS was re-measured at the end of each period using the Black-Scholes-Merton fair value option
pricing model. Under Previous GAAP, the stock-based compensation liability was re-measured at the
end of each period using the intrinsic value method, where the liability was calculated based on the
amount by which the market price of the Company’s Common Shares exceeded the exercise price of
outstanding options. As a result of the change in valuation method, Paramount’s stock-based
compensation liability increased by $3.3 million on Transition Date. For the twelve months ended
December 31, 2010 the stock-based compensation liability increased by $0.3 million, including the
increase on Transition Date of $3.3 million and the decrease for 2010 adjustments of $3.0 million
compared to Previous GAAP. The impact on 2010 stock-based compensation expense for the year ended
December 31, 2010 was a decrease of $3.5 million.
f)
Flow-through Shares ("FTS")
Under IFRS, proceeds from the issuance of flow-through shares are allocated between the sale of the
shares, which are recorded in share capital, and the sale of the tax benefits, which are initially recorded
as an accrued liability. The allocation is made based on the difference between the issue price of flow-
Paramount Resources Ltd. 2011
Financial Statements
103
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
through shares and the market price of the Common Shares on the date the offering is priced. The
liability related to the sale of the tax benefits is reversed as qualifying expenditures intended for
renunciation to subscribers are incurred, and a deferred tax liability is recorded. The difference between
the deferred tax liability recorded and the liability related to the sale of tax benefits is recognized as
deferred tax expense. Under Previous GAAP, when flow-through shares were issued, they were
recorded in share capital based on proceeds received. Upon filing the renunciation documents with the
tax authorities, a future tax liability was recognized and share capital was reduced for the tax effect of
expenditures renounced to subscribers. The IFRS adjustment on Transition Date associated with flow-
through shares was to increase share capital by $25.1 million, reduce retained earnings by $30.4 million,
increase the deferred tax liability by $2.9 million, and increase accrued liabilities by $2.4 million. For the
twelve months ended December 31, 2010, additional IFRS adjustments were made to decrease share
capital by $2.2 million, reduce retained earnings by $5.3 million, increase accrued liabilities by $3.7 million
and decrease the deferred income tax asset balance by $3.8 million.
g)
Equity Accounted Investments ("Equity Accounting")
The equity method of accounting requires an investor to adjust the carrying value of its investment in an
investee for the investor’s proportionate share of changes in the investee’s net assets. On Transition
Date, the carrying value of Paramount’s equity accounted investments was decreased by an aggregate of
$7.6 million to reflect Paramount’s proportionate share of the adjustments Trilogy and MGM Energy
recorded in respect of their IFRS transitions. For the twelve months ended December 31, 2010, the
carrying values of Paramount’s equity accounted investments were increased by $30.3 million due to
adjustments recorded by Trilogy and MGM Energy. Income from equity-accounted investments for the
year ended 2010 increased by $30.4 million.
h)
Deferred Income Tax ("Deferred Tax")
On Transition Date, the Company’s deferred income tax asset balance was increased by $2.5 million, the
deferred income tax liability balance was decreased by $34.0 million, and the equity accounted
investments balance was increased by $1.9 million to reflect the tax impacts of the IFRS adjustments as
described in the preceding discussion. For the twelve months ended December 31, 2010, the deferred
income tax asset balance was decreased by $3.7 million, the equity accounted investments balance was
decreased by $1.9 million and deferred income tax expense was increased by $6.2 million. The deferred
income tax on foreign exchange differences on translation of the US subsidiaries was $0.6 million for the
twelve months ended December 31, 2010.
Paramount Resources Ltd. 2011
Financial Statements
104
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
The following table reconciles the Consolidated Statement of Cash Flows prepared under Previous GAAP
to the Company’s statements of Cash Flows prepared in accordance with IFRS:
Year ended December 31
Cash from operating activities under Previous GAAP
Adjustments under IFRS:
Exploration costs
Common shares purchased under stock incentive plan
Foreign exchange on cash and cash equivalents
Cash from operating activities under IFRS
Cash from financing activities under Previous GAAP
Adjustment under IFRS:
Common shares purchased under stock incentive plan
Cash from financing activities under IFRS
Cash used in investing activities under Previous GAAP
Adjustment under IFRS:
Exploration costs
Cash used in investing activities under IFRS
Net decrease
Foreign exchange on cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
2010
63,383
$
(8,172)
2,901
1,066
59,178
$
$
251,905
(2,901)
249,004
$
$
(333,867)
8,172
(325,695)
$
(17,513)
(1,066)
93,238
74,659
$
$
Paramount Resources Ltd. 2011
Financial Statements
105
C O R P O R A T E I N F O R M A T I O N
OFFICERS
DIRECTORS
HEAD OFFICE
C. H. Riddell
Chairman of the Board and
Chief Executive Officer
J. H. T. Riddell
President and
Chief Operating Officer
B. K. Lee
Chief Financial Officer
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
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. G. M. Bell (1) (4)
General Counsel
Olympia Trust Company
Calgary, Alberta
T. E. Claugus (4)
President, GMT Capital Corp.
Atlanta, Georgia
J. C. Gorman (1) (3) (4)
Retired
Calgary, Alberta
D. Jungé C.F.A. (2) (4)
Chairman of the Board and
Chief Executive Officer
Pitcairn Trust Company
Bryn Athyn, Pennsylvania
D. M. Knott (4)
Managing General Partner
Knott Partners, L.P.
Syosset, New York
S. L. Riddell Rose
President and
Chief Executive Officer
Perpetual Energy Inc.
Calgary, Alberta
V. S. A. Riddell
Business Executive
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
Member of Compensation
Committee
Member of Corporate
Governance Committee
(3)
(4)
4700 Bankers Hall West
888 Third Street S.W.
Calgary, Alberta
Canada T2P 5C5
Telephone: (403) 290-3600
Facsimile: (403) 262-7994
www.paramountres.com
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
Alberta Treasury Branches
Calgary, Alberta
The Royal Bank of Scotland N.V.
(Canada) Branch
Calgary, Alberta
The Toronto-Dominion Bank
Calgary, Alberta
HSBC Bank Canada
Calgary, Alberta
REGISTRAR AND
TRANSFER AGENT
Computershare Trust
Company of Canada
Calgary, Alberta
Toronto, Ontario
STOCK EXCHANGE
LISTING
The Toronto Stock Exchange
(“POU”)
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