annual
report
2012
Financial and Operating Highlights
President’s Message
2012 Overview
Principal Properties
Strategic Investments
Management’s Discussion & Analysis
Financial Statements
Corporate Information
1
2
4
6
25
29
59
IBC
AnnuAl Meeting of ShAreholderS
Shareholders are cordially invited to attend
the Annual Meeting of Shareholders to be held
Wednesday, May 8, 2013 at 10:30 AM MDT
at Centrium Place in the Conference Centre,
332 6th Avenue S.W., Calgary, Alberta.
forward-looking Statements and information
This annual report includes forward-looking statements and information that is based on Paramount’s
current expectations, estimates, projections and assumptions in light of our experience and our
perception of historical trends. Actual results may differ materially from those expressed or implied
by the forward-looking statements and information. Readers are referred to page 55 for our forward
looking statements and other advisories.
FINANCIAL AND OPERATING HIGHLIGHTS(1)(2)
2012
2011
% Change
($ millions, except as noted)
FINANCIAL
Petroleum and natural gas sales
Funds flow from operations
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)
OPERATIONAL
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 ($/Bbl)
Total ($/Boe)
Net wells drilled
Net undeveloped land (thousands of acres)
RESERVES
Proved plus probable
Natural gas (Bcf)
NGLs (MBbl)
Light and medium crude oil (MBbl)
Total Conventional (Mboe)
Oil sands bitumen (MBbl)
Total Company (MBoe)
197.1
58.1
0.67
(61.9)
(0.71)
523.1
704.8
2,037.0
701.4
89,932
98.5
1,873
1,620
19,917
82%
2.72
67.10
83.16
27.04
35
1,190
323.7
30,761
2,128
86,842
93,091
179,933
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%
4.04
79.56
87.00
38.00
75
1,225
244.1
5,760
6,573
53,015
–
53,015
(18)
(40)
(46)
73
76
12
(35)
18
37
5
21
21
(29)
14
(33)
(16)
(4)
(29)
(53)
(3)
33
434
(68)
64
100
239
(50)
(25)
51
Conventional F&D cost before facilities expenditures
(proved plus probable) ($/Boe)
Conventional reserves replacement (proved plus probable)
NPV10 future net revenue before tax
12.18
599%
24.19
193%
Proved
Proved plus probable
611.4
832.2
(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) Amounts include the results of discontinued operations.
(3) Based on the period-end closing prices of publicly traded enterprises and the book value of the remaining investments.
455.9
1,259.3
Paramount Resources Ltd. 2012Financial and Operating Highlights1
PRESIDENT’S MESSAGE
Paramount continues to make great progress on its large-scale projects in the Kaybob core area. It is
difficult not to get excited as our Musreau deep cut plant takes shape and the large inventory of pre-
drilled wells that will feed the facility continues to grow. The message we wish to convey is that to date,
the wells continue to test positively, the behind-pipe inventory continues to be on track with the
Company’s schedule and the Musreau deep cut plant remains on-budget and on-schedule for a Q4 2013
start-up.
During 2012, Paramount made further progress on its operational and financial performance. Production
increased 14 percent from 17,426 Boe/d in 2011 to 19,917 Boe/d in 2012, despite various significant
third party downstream capacity restrictions throughout the second half of the year. Operating costs per
Boe decreased 14 percent to $9.58 in 2012 and corporate G&A costs per Boe decreased 15 percent to
$1.61. Improvements in per unit costs will continue as incremental low cost production is brought on-
stream with minimal human resource additions.
Despite these cost improvements, netback per Boe decreased to $13.04 in 2012 from $20.13 in 2011 as
a result of lower prices for natural gas, oil and natural gas liquids. Cash netback decreased to $95 million
in 2012 from $128 million in 2011, as the higher production levels and lower per unit costs did not fully
compensate for the decline in commodity prices.
Paramount has continued to invest multiples of cash flow as significant drilling and infrastructure
spending is occurring on major projects at Musreau and Resthaven in advance of any cash flow from
these projects. The Company’s exploration and development spending totaled $523 million in 2012,
funded mainly through a combination of equity, debt and asset sales. It is expected that by 2014, after
these major projects are on production, Paramount’s capital expenditure budget and cash flow will be
much more balanced.
Significant progress has been made in rationalizing our asset base in order to focus our technical teams
on the opportunities that will create the best return on investment. In 2012, we completed the sale of
Paramount’s legacy producing assets in North Dakota and Montana, minor non-core properties in
Saskatchewan and a non-producing property in the Pembina area of Alberta. In 2013, we have already
completed the sale of the remaining properties in the U.S. and the Bistcho - Cameron Hills complex in
our Northern operating unit. Gains were realized on both 2013 dispositions, as the proceeds received
exceeded the net book costs and remaining abandonment liabilities of the assets sold. All of these
transactions have advanced our goals of reducing per unit costs and focusing our time and attention on
the projects that are expected to provide the highest rates of return on our future investments.
Paramount was very successful in 2012 in adding reserves at a low cost. Proved reserves increased by
43 percent from 35.7 MMBoe at year end 2011 to 50.9 MMBoe at year end 2012. Conventional proved
plus probable reserves increased from 53.0 MMBoe at year end 2011 to 86.8 MMBoe at year end 2012,
an increase of 64 percent. The Company achieved conventional reserves replacement ratios of 336
percent for proved reserves and 599 percent for proved plus probable reserves. Excluding capital
spending on facilities, which are expected to provide processing capability for several decades, these
reserves were added at a very efficient $16.82/Boe for proved reserves and $12.18/Boe for proved plus
probable reserves.
Paramount’s 100 percent owned oil sands subsidiary, Cavalier Energy, had a successful initial year of
operations, built a talented and experienced oilsands execution team, and finalized and submitted the
initial application for the first 10,000 Bbl/d phase at Hoole. As a result of this application, 93.1 MMBoe of
contingent resources were reclassified to probable reserves. Combined with Paramount’s conventional
reserves, the Company’s total proved plus probable reserves were 179.9 MMBoe at year end 2012.
Cavalier is evaluating funding alternatives for the initial phase of construction, with the intention of
placing advance orders for long-lead time equipment in order to remain on track for completion of
construction in late-2015, targeting first oil production from the project in early-2016.
Paramount Resources Ltd. 2012President's Message2
The Company moved forward with its initial Besa River shale gas exploration activities in the Liard Basin
in 2012. Drilling and completion operations were completed on the Patry b-40-I well, with initial test
results coming in less than anticipated at 5 to 14 MMcf/d. Drilling of the Dunedin D-57-I vertical well is
nearing completion and a decision to pursue drilling and completing a horizontal leg will be made after
the evaluation of petrophysical data obtained from the pilot hole.
Paramount looks forward to the completion and start-up of its 100 percent owned 200 MMcf/d Musreau
deep cut plant in Q4 2013 and continued positive drilling results from its core area in the Kaybob
operating unit at Musreau, Resthaven, Smoky and Kakwa. Drilling activities over the past few years have
substantially de-risked the Company’s Deep Basin lands, and Paramount is in the preliminary stages of
planning for an additional new 200 MMcf/d plant within the Kaybob operating unit. The Company has
also recently achieved positive drilling results extending the middle Montney trend north onto its Karr -
Gold Creek acreage. Successful wells in the Karr area will allow us to fill the underutilized wholly-owned
Karr facility. We also look forward to the completion of the third-party operated Smoky plant expansion,
which will initially provide us an additional 30 MMcf/d of capacity, and will ultimately provide us with a
total of 60 MMcf/d of capacity in this 300 MMcf/d deep cut plant.
Progress is slowly being made in North American gas markets, as year-over-year increases in production
have essentially ended and signs of declines are starting to appear. Low natural gas prices have also
created increased demand for the commodity, which has helped to re-balance supply and demand.
Prices for oil have been fairly stable year-over-year, but the differentials between world reference prices
and Canadian realized prices have been large and volatile due to localized oversupply as access to world
markets is constrained by limited export capacity. Our regulatory system appears to be poorly suited to
enable our industry to remedy these issues in a timely manner and, as a result, Canadians will continue
to forfeit a significant portion of the full economic benefit of our resource development.
The Company is fortunate to have been able to capture and control some of the best and most economic
oil and natural gas prospects available in North America. Paramount is of the view that prices, particularly
for natural gas, have dropped to a level that is unsustainable for the full-cycle replacement of reserves,
and that we should see appreciably higher commodity prices in the near term. We will continue to
allocate capital towards the plays that exceed our economic hurdles at current commodity prices, while
balancing risks. Paramount’s current capital expenditure program is fully aligned with this and, as a
result, approximately 90% of the Company’s conventional capital expenditure budget is directed towards
the Kaybob play, which provides compelling returns in the current commodity price environment.
Looking forward, Paramount has provided 2013 capital spending guidance of $500 million on exploration
and development activities and an additional $50 million on its Strategic Investments, mainly on shale
gas exploration activities in the Liard Basin. Production is anticipated to range between 21,000 Boe/d and
25,000 Boe/d, depending upon access to third-party downstream NGLs transportation and processing
capacity, until our new Musreau deep cut plant comes into service. Corporate production is expected to
ramp up to levels that will exceed 50,000 Boe/d at some point in 2014, with the timing dependent on the
completion of expansions to downstream de-ethanization and fractionation facilities in which Paramount
has secured long-term firm service capacity. It is extremely exciting for the Company to be realizing the
results of the many years of hard work on these projects; almost as exciting as the future opportunities
for the continued growth of the Company from these plays.
J.H.T. Riddell
President and Chief Operating Officer
March 2013
Paramount Resources Ltd. 2012President's Message3
2012 OVERVIEW
Reserves and Principal Properties
Total proved and probable reserves increased 239 percent to 179.9 MMBoe, with conventional
reserves increasing 64 percent to 86.8 MMBoe (replacement ratio of six times) and probable oil
sands bitumen reserves increasing 93.1 MMBoe.
Conventional proved reserves increased 43 percent year-over-year to 50.9 MMBoe, after production
of 7.3 MMBoe and dispositions of 3.4 MMBoe (replacement ratio of three times).
Conventional proved and probable finding and development costs, excluding facilities and gathering
system construction costs, decreased 50 percent to $12.18 per Boe and for the Kaybob COU
decreased 24 percent to $10.31 per Boe.
Natural gas and NGLs sales volumes increased approximately 20 percent despite downstream
processing and transportation constraints which impacted the Company’s operations in the second
half of the year.
The Company’s new 45 MMcf/d refrigeration facility at Musreau (the "Musreau Refrig Facility") has
been operating near capacity since being re-commissioned in March.
Operating expenses decreased 14 percent to $9.58 per Boe in 2012 compared to $11.20 per Boe in
2011 due to the sale of higher cost US properties and processing cost savings from the Company’s
Musreau Refrig Facility.
Construction of the Company’s wholly-owned 200 MMcf/d deep cut facility at Musreau (the
"Musreau Deep Cut Facility") commenced in the third quarter of 2012 following the receipt of
regulatory approval. The project continues to be on-schedule, with commissioning expected to
commence by the end of the third quarter of 2013.
Advance drilling for the deep cut facility expansions at Musreau and Smoky continued. The Company
currently has an inventory of 43 (35 net) Kaybob Deep Basin wells with estimated first month
deliverability exceeding 225 MMcf/d (185 MMcf/d net) of raw gas.
In February 2013, the Company closed the sale of substantially all of its remaining US properties for
cash proceeds of US$22.5 million, subject to closing adjustments. Since 2011, the Company has
realized aggregate cash proceeds of approximately US$130 million on the sale of its US properties,
significantly in excess of their carrying value.
Paramount Resources Ltd. 20122012 Overview4 Strategic Investments
Paramount drilled and completed its first horizontal shale gas exploration well at Patry in Northeast
British Columbia in March 2013. In order to further evaluate well performance, the Company plans
to bring the well on production by the end of 2013.
Paramount’s wholly-owned subsidiary, Cavalier Energy Inc. ("Cavalier Energy"), recorded 93.1 million
barrels of probable bitumen reserves with an NPV10 of $379 million following its regulatory
applications for the initial 10,000 Bbl/d phase of the Hoole Grand Rapids development.
Fox Drilling completed the construction of two new walking drilling rigs, which will drill on multi-well
pad sites in the Kaybob COU.
Corporate
To fund the Company’s growth initiatives, Paramount raised over $700 million in aggregate cash
proceeds in 2012, including over $400 million from equity offerings, the sale of investments and non-
core oil and gas properties and $300 million from the notes offering.
At February 28, 2013, Paramount had cash balances of $109.2 million and its $300 million credit
facility was undrawn.
Paramount Resources Ltd. 20122012 Overview5 PRINCIPAL PROPERTIES
2012
2011
Kaybob
Sales volumes (Boe/d)
E & D expenditures ($ millions)
Total land holdings (net sections)
10,910
362.5
446
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)
4,536
102.4
379
2,814
25.7
432
1,657
28.1
472
8,361
262.8
441
3,568
156.0
430
3,424
19.6
489
2,073
25.2
592
Total Principal Properties
Sales volumes (Boe/d)
E & D expenditures ($ millions)(1)
19,917
523.1
17,426
465.7
(1) Includes amounts not allocated to the individual corporate operating units.
REVIEW OF OPERATIONS(1)
Sales Volumes
Natural gas (MMcf/d)
NGLs (Bbl/d)
Oil (Bbl/d)
Total (Boe/d)
Netbacks ($ millions)(2)
Natural gas revenue
NGLs revenue
Oil revenue
Royalty and sulphur revenue
Petroleum and natural gas sales
Royalties
Operating expense and production tax
Transportation
Netback
Financial commodity contract settlements
Insurance settlement
2012
98.5
1,873
1,620
19,917
2011
% Change
81.6
1,542
2,291
17,426
21
21
(29)
14
($/Boe)(3)
($/Boe) (3)
% Change
in $/Boe
98.2
46.0
49.3
3.6
197.1
(16.5)
(69.9)
(21.8)
88.9
(0.1)
6.2
2.72
67.10
83.16
–
27.04
(2.27)
(9.58)
(2.98)
12.21
(0.02)
0.85
120.2
44.8
72.7
4.0
241.7
(22.1)
(71.3)
(20.5)
127.8
0.2
–
4.04
79.56
87.00
–
38.00
(3.47)
(11.20)
(3.23)
20.10
0.03
–
(33)
(16)
(4)
(29)
(35)
(14)
(8)
(39)
(167)
100
Netback including commodity & insurance settlements
(1)
(2)
(3)
(35)
Amounts include the results of discontinued operations. Refer to page seven of Paramount’s Management’s Discussion and Analysis for the year ended December 31, 2012.
Readers are referred to the advisories concerning non-GAAP measures and oil and gas definitions in the Advisories section of this document.
Natural gas revenue shown per Mcf.
128.0
20.13
13.04
95.0
Paramount’s natural gas and NGLs sales volumes increased 21 percent in 2012 as the Company
completed the first phase of its Kaybob Deep Basin expansion with the re-commissioning of the
Musreau Refrig Facility at the end of the first quarter. New production was also added at Valhalla in the
Grande Prairie COU, where the gathering and compression system was expanded.
The ability of Paramount to maximize production through its natural gas firm-capacity and Company-
owned facilities in 2012, including the Musreau Refrig Facility and Valhalla gathering and compression
system, was impacted by various third party downstream disruptions and capacity constraints (the "Third
Party Disruptions"), which reduced sales volumes at times by up to 6,000 Boe/d. The Third Party
Disruptions mainly related to reduced throughput at third party NGLs de-ethanization and fractionation
facilities at Fort Saskatchewan, which resulted in the apportionment of available processing capacity. The
Third Party Disruptions were also caused by NGLs and natural gas pipeline takeaway constraints and
scheduled and unscheduled downtime at third party natural gas processing facilities. The Company
estimates that average sales volumes in the second half of 2012 were reduced by approximately 3,000
Boe/d. Sales volumes in December 2012 and January 2013 were constrained to approximately 22,000
Boe/d.
Oil sales volumes decreased 29 percent to 1,620 Bbl/d in 2012 compared to 2,291 Bbl/d in 2011,
primarily because of the second quarter US property disposition and natural declines in other areas.
Petroleum and natural gas sales revenue in 2012 decreased $44.6 million compared to 2011 as a result
of lower realized prices and the US property disposition. Operating costs decreased $1.4 million
compared to 2011 primarily due to the disposition of the US properties, partially offset by higher
operating expenses from continuing operations.
Paramount Resources Ltd. 2012Principal Properties7
KAYBOB
Musreau Refrig Facility
Musreau Deep-Cut Facility
Paramount Acreage
Resthaven Plant
Smoky Facility
Smoky Deep-Cut Facility
Paramount Resources Ltd. 2012Principal Properties8
Kaybob
Sales Volumes
Natural gas (MMcf/d)
NGLs (Bbl/d)
Oil (Bbl/d)
Total (Boe/d)
Exploration and Development Expenditures ($ millions)
Exploration, drilling, completions and tie-ins
Facilities and gathering
2012
59.5
924
62
10,910
200.7
161.8
362.5
2011
% Change
44.5
868
72
8,361
171.2
91.6
262.8
34
6
(14)
30
17
77
38
Total Land Holdings (sections)
Wells Drilled
Gross
Net
Gross
Net
788
446
792
441
27
21.2
28
18.3
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. Paramount has assembled extensive multi-
zone mineral rights to 788 (446 net) sections, with the primary formations of interest being the Montney
and various Cretaceous horizons. Depending on the formation, well densities of eight or more wells per
section per formation are anticipated to be required to recover the resources in place, representing a
multi-decade inventory of drilling locations.
Paramount continues to execute the large-scale development of its Deep Basin lands that will materially
increase production volumes and cash flow. The Company’s drilling activities are currently focused on
the Montney, Dunvegan, and Falher formations, which are high pressure, liquids rich, tight gas
formations with large reserves potential. These plays continue to generate robust rates of return in the
current low natural gas price environment because of the high liquids content in these formations.
The Company achieved significant reserves growth in 2012 as a result of its development activities in the
Kaybob Deep Basin. Further increases in reserves are expected as facilities expansions are completed
and development drilling continues.
To support the accelerated development of Paramount’s Deep Basin lands, the Company constructed its
wholly-owned 45 MMcf/d Musreau Refrig Facility, is building a 200 MMcf/d deep cut processing facility
at Musreau and is participating in the deep cut expansion of the non-operated Smoky facility, which
together will more than triple Paramount’s current gas processing capacity to over 300 MMcf/d. The
Company has also entered into long-term agreements to transport, de-ethanize and fractionate NGLs
streams that will be produced from these new facilities, and has entered into a long-term ethane sales
agreement with a petrochemical company.
Operations
Average daily sales volumes in the Kaybob COU during 2012 were 10,910 Boe/d, an increase of 30
percent compared to 2011. Sales volumes in the first quarter of 2012 were impacted by the fourth
quarter 2011 electrical component failure at the Musreau Refrig Facility. The re-commissioning of the
facility was completed in March 2012, and average sales volumes increased to 12,236 Boe/d in the
second quarter. Sales volumes in the second half of the year were reduced as a result of the previously
described Third Party Disruptions. By the middle of September, production across the Kaybob COU was
curtailed to less than 6,500 Boe/d, including a temporary reduction in throughput at the Musreau Refrig
Paramount Resources Ltd. 2012Principal Properties9
Facility to 10 MMcf/d. Sales volumes reached 13,500 Boe/d in November following the partial resolution
of Third Party Disruptions.
Between December 2012 and February 2013, Kaybob COU sales volumes have ranged between 11,500
Boe/d and 13,500 Boe/d as operations continue to be impacted by Third Party Disruptions. Based on the
current NGLs constraints and projections of capacity for the remainder of 2013, production is expected to
be within the current range until the expansion of a third-party NGLs pipeline is completed, Paramount
secures additional fractionation capacity and the Musreau Deep Cut Facility is brought on-stream. The
Kaybob COU has approximately 28,000 Boe/d of first year production behind pipe which will be brought
on-stream when the Musreau and Smoky deep cut expansions are on-stream.
After the start-up of the Musreau Refrig Facility, operating costs for the Kaybob COU were reduced to
approximately $5.00 per Boe, before deducting processing income. The Musreau Refrig Facility provides
significant savings to the Company through the elimination of third-party processing fees. The Kaybob
COU’s per unit operating costs are expected to further decrease with the commissioning of the Musreau
Deep Cut Facility, as fixed costs will be applied over significantly larger production volumes. In the third
quarter, Paramount received a $6.2 million settlement in respect of a business interruption insurance
claim related to the electrical equipment failure at the Musreau Refrig Facility in December 2011.
Paramount has completed the first phase of its Deep Basin expansion with the re-commissioning of the
Musreau Refrig Facility. The next major milestone will be the start-up of the Musreau and Smoky deep
cut facilities, which will represent a major step change for Paramount, as Kaybob COU sales volumes are
expected to increase more than four times 2012 levels by the end of 2014.
Musreau Deep Cut Facility
Paramount’s wholly-owned Musreau Deep Cut Facility is designed to capture incremental volumes of
NGLs from the Company’s Deep Basin liquids rich gas production that would otherwise be sold as
slightly higher heat content natural gas. The incremental liquids are captured by cooling the natural gas
stream sufficiently to change the phase of the components from a gas to a liquid and then separating
these streams using gravity. Liquids yields from the facility will vary depending on the liquids content of
the gas being processed and the temperature to which Paramount cools the gas stream, among other
factors.
Construction of the Musreau Deep Cut Facility commenced in the third quarter of 2012 following the
receipt of regulatory approval. Site preparation is complete and piling and concrete work continues. Major
equipment, including compressors, generators and storage vessels, are being delivered to the facility site
over the course of the winter so that construction can continue through break-up. Paramount has
awarded the structural steel contract and anticipates awarding the mechanical contracts shortly, with
electrical and instrumentation contracts to follow. The project continues to be on-schedule and in-line
with budget, with approximately $100 million incurred to December 31, 2012 and an additional $80
million budgeted for 2013 to complete construction.
Paramount is currently developing its commissioning plan. Commissioning of the facility is expected to
begin towards the end of the third quarter of 2013 and span approximately two months, a process which
involves testing and calibrating the individual components and control systems, purging vessels and
piping, and pressure testing the system.
Paramount has secured a long-term firm service arrangement for the transportation of NGLs produced
from its Kaybob area facilities commencing in December 2013. The Company has also entered into a
long-term firm service arrangement with a midstream company for the de-ethanization and fractionation
of NGLs volumes commencing in April 2014. The Company is working on procuring interruptible NGLs
fractionation capacity for the period between the planned December 2013 start-up of the Musreau Deep
Cut Facility and the commencement of the long-term firm service fractionation arrangement.
Paramount Resources Ltd. 2012Principal Properties10 Kaybob COU sales volumes are expected to increase to approximately 30,000 Boe/d over the first few
months after startup, as the operations team optimizes the facility’s equipment and processes. Volumes
initially processed through the Musreau Deep Cut Facility will be primarily from leaner Cretaceous wells
in which Paramount’s working interest generally ranges from 50 percent to 100 percent. Ethane is
expected to remain in the gas stream until the midstream company completes an expansion of its de-
ethanization facilities, which is scheduled to be operational in the second half of 2014. By late-2014,
Kaybob COU sales volumes are expected to increase by over four times 2012 levels once a greater
proportion of liquids-rich, 100 percent working interest Montney wells are flowing through the Musreau
Deep Cut Facility, the expansion of the third party de-ethanization facility is completed and the Smoky
Deep Cut Facility is on-stream.
The Company continues to advance its project to construct an amine processing train at the Musreau
Deep Cut Facility, which will provide the capability to treat sour gas production at the facility instead of at
well sites. This enhancement is expected to cost approximately $50 million, and will decrease equipping
costs by over $1 million per well and reduce ongoing well operating costs. Design work for the amine
facility has been completed and long lead-time components have been ordered. The amine processing
train is scheduled to be on-stream in the first half of 2014, and will not impact the start-up of the
Musreau Deep Cut Facility.
Smoky Deep Cut Facility
Paramount continues to participate in the deep cut expansion of the non-operated processing facility at
Smoky (the "Smoky Deep Cut Facility"). The Company will have a 20 percent interest in the expanded
facility, an increase from its 10 percent interest in the existing 100 MMcf/d dew point facility. The Smoky
Deep Cut Facility will initially have 200 MMcf/d of capacity upon start-up, increasing to 300 MMcf/d
through the later installation of an incremental 100 MMcf/d of compression. As a plant owner,
Paramount has the option at any time to request installation of the additional compression, which would
bring the Company’s total owned capacity in the facility to 60 MMcf/d. Construction work commenced at
the site in the third quarter of 2012 with the installation of pilings and foundations. NGLs bullets and
compressors have been delivered and a significant portion of the major equipment is expected to be
delivered prior to break-up, with the remaining components to be delivered later this year. The expansion
is scheduled to be commissioned in the third quarter of 2014. Paramount’s share of the Smoky Deep Cut
Facility expansion costs is expected to total $65 million, of which approximately $30 million has been
incurred to December 31, 2012.
Kaybob Processing Capacity
Upon completion of the Musreau Deep Cut Facility and the Smoky Deep Cut Facility, Paramount expects
to have over 300 MMcf/d of net owned and third party firm-service processing capacity in the Deep
Basin, estimated to be capable of yielding over 73,000 Boe/d of sales volumes when fully utilized. This
capacity will be used to process Paramount’s production as well as third-party unavoidably commingled
volumes for a fee. Paramount currently has access to an incremental 10 to 12 MMcf/d of interruptible
processing capacity and will continue to utilize such capacity in addition to its owned and firm-service
capacity where available. The Company’s current and future owned and firm-service processing capacity
in the Deep Basin is as follows:
Paramount Resources Ltd. 2012Principal Properties11 Gross
Raw Gas
Capacity
(MMcf/d)
Net
Paramount
Raw Gas
Capacity
(MMcf/d)
Net
Paramount
Sales
Capacity(1)
(Boe/d)
Current Processing Capacity
Musreau Refrig Facility
Resthaven Facility
Smoky Facility
Kakwa Facility
Firm Contracted Capacity
Subtotal – Current Capacity
Future Processing Capacity
Musreau Deep-Cut Facility
Smoky Deep-Cut Facility
Subtotal – Future Capacity
Projected Total
(1) Estimated
Kaybob Drilling Activity
45
20
100
40
10
215
200
200
400
615
45
10
10
4
10
79
200
30
230
309
8,600
2,000
2,500
720
1,800
15,620
50,000
7,500
57,500
73,120
During 2012, Paramount was active drilling and completing wells in the Deep Basin, continuing to build
production deliverability in preparation for the start-up of the new Musreau and Smoky deep cut facilities.
The Company drilled 27 (21.2 net) wells in 2012, including 7 (6.0 net) horizontal Montney formation wells
and completed 17 (13.1 net) wells, including 9 (8.0 net) Montney formation wells. The initial flow rates
and NGLs content continue to be consistent with expectations, further confirming well performance
profiles.
The Company’s producing Falher formation wells have on average performed in accordance with the
anticipated type curve below:
NGLs transportation and fractionation capacity constraints have temporarily limited Paramount’s ability to
bring on Montney formation wells due to their higher liquids content. The Company has continued to drill
and complete Montney wells in advance of the Musreau and Smoky deep cut facilities expansions and
test results from the latest wells continue to be consistent with earlier wells, further confirming
Average
4.9 Bcf Type curve
Paramount Resources Ltd. 2012Principal Properties12
expected recoveries from this formation. The following table summarizes test results for Montney
formation wells rig released in 2011 and 2012:
Location
Avg. Rate
(MMcf/d)
11.6
8.6
6.1
6.6
12.4
4.1
10.9
9.0
11.0
6.5
(1) Test rates represent the average rate of gas-flow during post clean-up production tests up the largest choke setting. All wells were stimulated using frac oil and
substantially all fluids recovered during the test periods were load fluids. As a result, fluid volumes recovered during the tests have not been disclosed. Pressure
transient analyses and well-test interpretations have not been carried out for these wells 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.
Duration
(Hrs)
6
20
2
64
1
4
56
1
31
36
Musreau
Musreau
Musreau
Musreau
Musreau
Smoky
Smoky
Musreau
Musreau
Musreau
Test Results(1)
Pressure(2)
(PSI)
2,029
1,006
1,159
2,068
2,067
584
3,454
2,455
2,248
2,373
(2) Average flow-back casing pressure for the duration of the test.
The Company has varying rights to multiple formations within its 788 (446 net) section Kaybob COU land
position, including 391 (240 net) sections of Cretaceous rights and 229 (195 net) sections of Montney
rights. Having rights to multiple formations allows the Company to evaluate
shallower formations while drilling deeper wellbores targeting deeper rights.
Prospective shallower zones can be completed in addition to the deeper
reservoirs to increase total recoveries from individual locations. The Company
has received approval to drill up to five Montney formation wells per section
on six sections and is preparing to file applications on additional lands. It is
anticipated that well densities of eight or more wells per section per
formation will be required to fully recover the resources.
Paramount’s experience over the past few years in the Deep Basin has
allowed the Company to achieve cost reductions in drilling and completion
operations through improved drilling and fracturing techniques and improved
logistics with multi-well pad sites. The Company has been successful in
reducing drilling time for Falher formation wells to approximately 30 days
from 40 days in 2010. Drilling time for the deeper Montney formation wells
has been reduced to approximately 45 days from over 80 days in the early
part of 2011. With the cost of each drilling day averaging approximately
$75,000, the reduction in drilling days alone has resulted in significant cost
savings. The Company has also reduced completion costs by improving
pumping techniques, optimizing frac sizing and spacing, recycling the frac oil,
and negotiating lower rates for services, equipment and completion fluids.
During the fourth quarter of 2012, the Company finished equipping the wells
on its first five-well pad at Musreau. Three (2.5 net) Montney formation wells
and two (1.5 net) Falher formation wells were drilled, completed, equipped
and tied-in for aggregate gross costs of approximately $45 million, including
the cost of site sweetening packages for the Montney wells. Average gross
raw gas test rates for the five wells totaled approximately 55 MMcf/d over
the final 24 hours of their test periods, with flowing pressures averaging
2,500 PSI.
Multi-well pad sites will increasingly be used to develop Paramount’s Deep
Basin lands, where drilling and completion operations are performed on
Paramount Resources Ltd. 2012Principal Properties13
multiple wells thereby minimizing mobilization and de-mobilization costs and reducing equipping and tie-
in costs by using common facilities. The Company plans to utilize its two new built-for-purpose walking
rigs to drill on its multi-well pad sites beginning in the second quarter of 2013. These rigs have the ability
to move across the lease with drill pipe standing in the derrick so that pad wells are drilled in sequence
with minimal downtime between wells. Completion operations on pad sites allow the Company to
produce back energized oil from a fracture stimulation, recycle the fluid and re-inject it into the next well,
saving the cost of transporting and purchasing new frac oil.
Paramount currently has five drilling rigs working in the Deep Basin, which continue to add to the
Company’s inventory of wells that will feed the Musreau and Smoky deep cut facilities. The Company
plans to drill up to an additional 40 wells during 2013, approximately 50 percent of which will target the
Montney formation. The 2013 drilling program includes eight pad sites that are expected to account for
32 of the planned 40 wells.
The following table summarizes the status of Kaybob Deep Basin wells that have been drilled and are
awaiting production as of February 28, 2013, the estimated remaining capital required to complete these
wells, and their anticipated production and sales volumes:
Total
Remaining
Capital (net)
($ millions)
–
–
20
51
71
Estimated
Net Raw Gas
Production(1)
Estimated
Net Sales
Volumes(2)
First Month
First Year
First Month
First Year
(MMcf/d)
23
54
59
52
188
(MMcf/d)
11
25
29
28
93
(Boe/d)
6,400
14,900
19,000
17,000
57,300
(Boe/d)
3,100
7,000
9,200
9,100
28,400
Wells
Gross
Net
9
10
14
10
43
8
7
12
8
35
Shut-in due to capacity constraints
Tied-in, capable of producing
Completed, awaiting tie-in
Drilled, awaiting completion
(1) Based on the Company’s 4.9 Bcf type curve for Falher wells and 3.7 Bcf type curve for Montney wells.
(2) Based on processing through a deep cut facility.
Once the Musreau Deep Cut Facility is fully operational and the ramp-up of production volumes is
complete, the Company estimates that approximately 20 new wells will be required each year to keep
the facility operating at capacity.
The Kaybob COU’s focus in 2013 is to complete the construction of the Musreau Deep Cut Facility and
maximize production volumes through available capacity. The Company is ready for significant growth.
With production volumes ramping-up as the Musreau and Smoky deep cut facilities are brought on-
stream, Paramount will begin to realize returns on its Deep Basin drilling and infrastructure investments.
Paramount Resources Ltd. 2012Principal Properties14
GRANDE PRAIRIE
Paramount Acreage
Paramount Resources Ltd. 2012Principal Properties15
Grande Prairie
Sales Volumes
Natural gas (MMcf/d)
NGLs (Bbl/d)
Oil (Bbl/d)
Total (Boe/d)
Exploration and Development Expenditures ($ millions)
Exploration, drilling, completions and tie-ins
Facilities and gathering
2012
20.9
749
307
4,536
69.5
32.9
102.4
2011
16.0
505
393
3,568
106.4
49.6
156.0
% Change
31
48
(22)
27
(35)
(34)
(35)
Total Land Holdings (sections)
Wells Drilled
Gross
Net
Gross
Net
577
379
629
430
10
6.7
22
15.0
The Grande Prairie COU operates in the Peace River Arch area of Alberta. Core producing areas include
Valhalla and Karr-Gold Creek. Average daily sales volumes in the Grande Prairie COU during 2012 were
4,536 Boe/d, an increase of 27 percent compared to 2011. Fourth quarter 2012 sales volumes averaged
5,243 Boe/d, after being curtailed as a result of the Third Party Disruptions between August and October.
Increases in 2012 sales volumes were primarily from Valhalla. The Company’s gathering and
compression system was expanded to 24 MMcf/d in the second quarter and additional wells were
brought on-stream. The Company drilled six (4.3 net) wells in Valhalla in 2012 targeting the Montney and
Doig formations. These wells were completed and tied-in during the year, along with wells drilled in
2011.
Karr-Gold Creek is located approximately 20 kilometers north of the Kaybob COU’s Musreau
development. Activities in 2012 focused on exploration of the middle and upper Montney reservoirs and
continued efforts to improve the performance of the Company’s previously completed lower Montney
formation wells. Paramount’s land position at Karr-Gold Creek of approximately 180 (148 net) sections
exhibits similar geological reservoir and fluid characteristics to competitors’ offsetting lands, and the
Company’s Montney holdings in the Musreau / Resthaven area.
In the third quarter of 2012, the Company completed a previously drilled middle Montney well at Karr-
Gold Creek, which was brought-on production during the first quarter of 2013. A new well targeting the
middle Montney formation was drilled in the fourth quarter of 2012, was completed in the first quarter of
2013 and will be tied-in during the third quarter. Test results from these wells have exceeded forecasts,
confirming Paramount’s interpretation that the Kaybob middle/upper Montney play extends northwest
onto the Karr lands, adding significant resources to Paramount’s future development base in the Deep
Basin.
Results of the performance enhancement program for the Company’s lower Montney wells at Karr-Gold
Creek have not been consistent with expectations. While recoveries from some wells improved
modestly, others wells are unchanged and Third Party Disruptions impacted the project for a significant
portion of the year. This program will not be continued in 2013.
Exploration and development activities in the Grande Prairie COU will include the drilling, completion and
tie-in of middle Montney wells at Karr-Gold Creek. The Company anticipates the existing inventory of
producing and behind pipe wells at Valhalla will be sufficient to maintain production volumes at the
current level throughout 2013, subject to the availability of NGLs transportation and fractionation
capacity.
Paramount Resources Ltd. 2012Principal Properties16
Southern(1)
Sales Volumes
Natural gas (MMcf/d)
NGLs (Bbl/d)
Oil (Bbl/d)
Total (Boe/d)
Exploration and Development Expenditures ($ millions)
Exploration, drilling, completions and tie-ins
Facilities and gathering
2012
9.8
171
1,016
2,814
23.0
2.7
25.7
2011
10.8
150
1,483
3,424
14.9
4.7
19.6
% Change
(9)
14
(31)
(18)
51
(43)
29
Total Land Holdings (sections)
Gross
Net
Gross
Net
627
432
708
489
Wells Drilled
(1) Amounts include the results of discontinued operations. Refer to page seven of Paramount’s Management’s Discussion and Analysis for the year ended December 31, 2012.
12.0
2.2
22
4
In May 2012, Summit closed the sale of all of its operated properties in North Dakota and all of its
Montana properties for cash proceeds of approximately US$70 million. This disposition included
approximately 900 Boe/d of production and 42 net sections of land. During the first quarter of 2013,
Summit closed the sale of its non-operated joint venture operations and lands in North Dakota for
aggregate gross proceeds of US$22.5 million, subject to closing adjustments. This disposition included
approximately 200 Boe/d of production and undeveloped land. With the closing of these transactions,
substantially all of Paramount’s US assets and operations have been sold.
Combined with the 2011 sale of undeveloped land in the United States for US$40 million, approximately
US$130 million in cash proceeds has been realized from the sale of US properties, significantly in excess
of the book value of these assets.
Southern COU sales volumes decreased 18 percent to 2,814 Boe/d in 2012 compared to 3,424 Boe/d in
2011, mainly as a result of the disposition of the operated US properties in May. Wells drilled in 2012
Paramount Resources Ltd. 2012Principal Properties17
include three (2.2 net) wells in Harmattan in southern Alberta, one of which was completed and is
scheduled to be brought-on production in the second quarter of 2013.
Plans for the Southern COU’s properties in 2013 consist primarily of routine maintenance and production
optimization programs.
Northern
Sales Volumes
Natural gas (MMcf/d)
NGLs (Bbl/d)
Oil (Bbl/d)
Total (Boe/d)
Exploration and Development Expenditures ($ millions)
Exploration, drilling, completions and tie-ins
Facilities and gathering
2012
8.3
29
235
1,657
21.2
6.9
28.1
2011
10.3
19
343
2,073
21.8
3.4
25.2
% Change
(19)
53
(31)
(20)
(3)
103
9
Total Land Holdings (sections)
Wells Drilled
Gross
Net
Gross
Net
705
472
959
592
3
3.0
2
2.0
Sales volumes in the Northern COU were 1,657 Boe/d in 2012, 20 percent lower than 2011, as a result
of natural declines at Cameron Hills and Bistcho and second quarter processing disruptions at the
Bistcho plant.
Paramount’s initial well at Birch in Northeast British Columbia was brought on-stream in December 2012
following the completion of modifications to surface facilities. Two additional wells drilled in 2012 have
been completed and tied-in. The Company has 3 MMcf/d of raw gas processing capacity at Birch, and is
currently working to optimize production from these wells. In the third quarter, Paramount drilled a
Paramount Resources Ltd. 2012Principal Properties18
vertical evaluation well at Birch to evaluate the lower Montney formation and preserve surrounding
mineral rights.
In March 2013, Paramount sold its properties in the Bistcho area of Alberta and the Cameron Hills area of
the Northwest Territories for approximately $9 million, subject to closing adjustments. Average sales
volumes for these properties were approximately 1,000 Boe/d in 2012.
RESERVES
Conventional
Paramount achieved strong conventional reserves additions in 2012, driven by the Company’s Deep
Basin development in the Kaybob COU. The Company’s conventional proved and probable reserves at
December 31, 2012 increased 64 percent to 86.8 MMBoe compared to 53.0 MMBoe at December 31,
2011, after production of 7.3 MMBoe and dispositions of 4.4 MMBoe, with a proved and probable
reserves replacement ratio of 599 percent. Proved reserves increased 43 percent to 50.9 MMBoe at
December 31, 2012 from 35.7 MMBoe at December 31, 2011, with a proved reserves replacement ratio
of 336 percent.
Hoole Oil Sands Bitumen
Incremental to the conventional reserves additions, the Company recorded 93.1 MMBbl of probable
bitumen reserves additions related to Cavalier Energy’s 10,000 barrel per day oil sands development
planned for the Hoole Grand Rapids. These reserves volumes were recognized following Cavalier
Energy’s November 2012 regulatory applications for project approval to the ERCB and AESRD.
Reserves Summary
Paramount’s reserves for the year ended December 31, 2012 were evaluated by McDaniel & Associates
Consultants Ltd., the Company’s independent reserves evaluator, and prepared in accordance with
National Instrument 51-101 definitions, standards and procedures. The Company’s working interest
reserves and before tax net present value of future net revenues as of December 31, 2012 using
forecast prices and costs are as follows:
Paramount Resources Ltd. 2012Principal Properties19 Gross Proved and Probable Reserves(1)
Light &
Medium
Crude
Oil
Natural
Gas
Natural
Gas
Liquids Bitumen
(Bcf)
(MBbl)
(MBbl)
(MBbl)
Before Tax Net Present
Value(1)(3)
($ millions)
Total
(MBoe)(2)
Discount Rate
0%
10%
15%
143.3
37.6
21.0
201.9
121.8
1,416
123
–
1,540
588
4,198
3,695
7,769
15,662
15,099
323.7
2,128
30,761
–
–
–
–
–
–
29,501
10,090
11,266
50,857
35,985
472
122
55
649
774
86,842
1,422
–
–
–
–
–
–
–
–
–
–
93,091
–
93,091
–
2,065
93,091
93,091
2,065
201.9
121.8
1,540
588
15,662
15,099
–
93,091
50,857
129,076
649
2,839
382
72
2
456
424
880
–
379
379
456
803
349
57
(14)
392
334
726
–
140
140
392
474
Reserves Category
Conventional
Proved
Developed Producing
Developed Non-producing
Undeveloped
Total Proved
Total Probable
Total Proved and Probable
Conventional
Oil Sands Bitumen
Total Proved
Total Probable
Total Proved and Probable
Bitumen
Total Company
Total Proved
Total Probable
Total Proved and 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.
(3) The estimated net present values disclosed in this document do not represent fair market value. Revenues and expenditures were calculated based on McDaniel’s forecast prices and
179,933
30,761
93,091
3,487
323.7
2,128
1,259
866
costs as of January 1, 2013.
December 31, 2012 reserves include 10.1 MMBoe of proved developed non-producing ("PDNP")
reserves, mainly related to wells in the Kaybob COU that have been drilled and are expected to come on-
stream once the deep cut facilities expansions are completed. Proved undeveloped ("PUD") reserves
totalling 11.3 MMBoe are mainly related to certain of the locations that the Kaybob COU expects to drill
over the next year. PDNP and PUD reserves are expected to be reclassified to proved developed
producing reserves once the Musreau Deep Cut Facility is substantially complete and the undeveloped
locations are drilled.
Future development costs totalling $110 million in respect of estimated costs to complete the Musreau
Deep Cut Facility and Smoky Deep Cut Facility were deducted in determining the future net revenue of
Paramount’s total proved reserves; $56 million of which was deducted from PDNP reserves values and
$54 million of which was deducted from PUD reserves values.
Paramount Resources Ltd. 2012Principal Properties20
Conventional Reserves
The following table summarizes future development costs deducted in the calculation of future net
revenue from conventional reserves:
Proved Developed Producing
Proved Developed Non-Producing
Total
(Mboe)
29,501
10,090
Before Tax
NPV10(1)
($MM)
382
72
Future Development Costs – Undiscounted
Wells &
Other
Plants
Total
($MM)
($MM)
($MM)
–
56
–
21
–
77
Proved Undeveloped
Total Proved
Total Probable
Total Proved and Probable
(1) The estimated net present values disclosed in this document do not represent fair market value. Revenues and expenditures were calculated based on McDaniel’s forecast prices
11,266
50,857
35,985
86,842
2
456
424
880
54
110
–
110
118
139
158
297
172
249
158
407
and costs as of January 1, 2013.
Reserves Reconciliation
Proved Reserves(1)
Proved and Probable Reserves(1)
Natural
Gas
Oil and
NGLs(2)
Bitumen
Total
Natural
Gas
Oil and
NGLs(2)
Bitumen
Total
(MBbl)
(MBbl)
(MBoe)(3)
January 1, 2012
Extensions & discoveries
Technical revisions
Economic factors
Acquisitions
Dispositions
Production
(Bcf)
162.0
74.4
(1.3)
–
6.9
(4.1)
(36.1)
8,673
9,058
3,205
–
242
(2,700)
(1,278)
–
–
–
–
–
–
–
December 31, 2012
(1) Columns and rows may not add due to rounding.
(2) Light and medium crude oil and natural gas liquids.
(3) Refer to the oil and gas measures and definitions in the Advisories section of this document.
17,202
201.9
–
35,666
21,464
2,997
–
1,395
(3,376)
(7,290)
50,857
(Bcf)
244.1
148.8
(31.9)
(4.5)
9.0
(5.7)
(36.1)
323.7
(MBbl)
(MBbl)
(MBoe)(3)
12,333
21,167
3,801
(2)
318
(3,450)
(1,278)
–
53,015
93,091
139,058
–
–
–
–
–
(1,517)
(749)
1,820
(4,406)
(7,290)
32,889
93,091
179,933
MBoe
MBoe
Proved Reserves
Proved plus Probable Reserves
Paramount Resources Ltd. 2012Principal Properties21
Finding and Development Costs
Paramount’s finding and development ("F&D") costs per barrel are summarized below. The total F&D
capital includes costs and changes in future development costs relating to major facilities and gathering
system projects.
2012 F&D Cost
Including Major Facilities & Gathering
FDC
Change(1)
$MM
Total F&D
Capital(1)
$MM
Reserves
Additions(2)
MMBoe
211.2
223.0
211.2
737.1
585.5
734.2
24.5
21.4
24.5
Costs(1)
$MM
526.0
362.5
523.1
3-Year Average F&D
2011
$/Boe
2010
$/Boe
3-Year
Average
$/Boe
42.29
27.06
41.57
29.10
19.63
27.45
33.15
26.41
32.61
F&D
$/Boe
30.14
27.35
30.02
PROVED
Total Company
Kaybob
Total Conventional
PROVED & PROBABLE
Total Company
Kaybob
Total Conventional
Oil Sands Bitumen
(1) The aggregate of the exploration and development costs incurred in the most recent financial year and the change during that year in estimated future development costs generally will
2,397.4
740.9
854.9
1,542.5
1,871.5
378.5
331.9
1,539.6
37.58
21.56
36.92
–
28.50
16.30
26.91
–
17.53
16.29
19.56
16.57
136.8
45.5
43.7
93.1
526.0
362.5
523.1
2.9
19.63
17.27
23.80
16.71
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’s F&D costs per barrel, excluding costs and changes in future development costs related to
major facilities and gathering system projects are summarized below.
2012 F&D Cost
Excluding Major Facilities & Gathering
3-Year Average F&D
Costs(1)
$MM
FDC
Change(1)
$MM
Total F&D
Capital(1)
$MM
Reserves
Additions(2)
MMBoe
F&D
$/Boe
2011
$/Boe
2010
$/Boe
3-Year
Average
$/Boe
PROVED
Kaybob
Total Conventional
200.7
310.6
112.7
100.9
313.4
411.5
PROVED & PROBABLE
Kaybob
Total Conventional
200.7
310.6
268.2
221.6
468.9
532.2
21.4
24.5
45.5
43.7
14.64
16.82
10.31
12.18
17.85
27.70
15.79
21.04
15.67
20.39
13.57
24.19
13.18
20.76
11.14
15.53
(1) The aggregate of the exploration and development costs incurred in the most recent financial year and the change during that year in estimated future 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. 2012Principal Properties22
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(1)
Corporate
(1) Strategic Investments includes $7.0 million of undeveloped land purchases.
DRILLING AND LAND
2012
6.0
304.6
212.5
523.1
25.2
548.3
82.5
0.4
631.2
2011
5.5
303.7
156.5
465.7
38.2
503.9
28.0
0.1
532.0
As at December 31
(000’s of acres)
Undeveloped land
Acreage assigned reserves
Gross(1)
1,685
523
Total
(1) "Gross" acres means the total acreage in which Paramount has an interest.
(2) "Net" acres means gross acres multiplied by Paramount’s working interest therein.
2,208
2012
Net(2)
1,190
289
1,479
Average
Working
Interest
71%
55%
67%
Gross(1)
1,736
574
2,310
2011
Net(2)
1,225
334
1,559
Average
Working
Interest
71%
58%
67%
Wells Drilled
(net)
Paramount Resources Ltd. 2012Principal Properties23
OPERATING RESULTS
Paramount’s natural gas and NGLs sales volumes increased approximately 20 percent in 2012 compared
to the prior year, despite downstream processing and transportation constraints which impacted the
Company’s operations in the second half of the year. Production levels have increased each year since
2009, and are expected to increase to over 50,000 Boe/d by late-2014 when new facilities are brought
on-stream. 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
Sales Revenue
Boe/d
$ millions
$ millions
$/Boe
$ millions
$/Boe
Operating Expenses
General and Administrative Expenses
$/Boe
$/Boe
Paramount Resources Ltd. 2012Principal Properties24
STRATEGIC INVESTMENTS
SHALE GAS
Paramount’s shale gas holdings encompass approximately 260 (220 net) sections in the Liard Basin and
the Horn River Basin in Northeast British Columbia and the Northwest Territories, including
approximately 180 net sections with potential from the Besa River shale gas formation.
Paramount drilled and completed its first horizontal shale gas exploration well at Patry in Northeast
British Columbia. The well was drilled to a vertical depth of approximately 3,400 meters with a horizontal
bore of approximately 1,200 meters, and was completed with a 10-stage fracture stimulation in the Besa
River formation in early March 2013 that included the injection of approximately 120,000 barrels of
completion fluids.
The well commenced flowing on clean-up in the first week of March 2013 and continues to recover the
completion fluids. Over the first 69 hours of metered gas flow, natural gas rates ranged between 5
MMcf/d and 14 MMcf/d on clean-up and completion fluid recoveries averaged approximately 4,000 Bbl/d
at flowing tubing pressures of 11,000 to 35,000 kPa up 114.3 mm tubing. During the last 24 hours of
that period, natural gas rates averaged 7 MMcf/d at an average flowing tubing pressure of approximately
11,500 kPa and completion fluid recovery was approximately 2,800 Bbl/d. As a pressure transient
analysis or well test interpretation has not been carried out at this time, the flow-back data provided
should be considered preliminary. In addition, this data is not necessarily indicative of long-term
performance or ultimate recovery.
The Company is working to confirm that all 10 stages of the fracture stimulation are open and
contributing. In order to further evaluate well performance, the Company plans to tie the Patry well into
existing pipeline infrastructure located within two miles of the well site and plans to bring the well on
production by the end of 2013.
Paramount Resources Ltd. 2012Strategic Investments25
The Company re-commenced drilling operations on its initial shale gas evaluation well at Dunedin in
February 2013 after drilling operations were suspended there in the spring of 2012 due to warm
weather. Paramount plans to drill this well to the intended vertical depth of approximately 4,500 meters
at which point it will evaluate further plans to complete the vertical wellbore and/or drill a horizontal leg.
This activity is expected to extend the mineral rights surrounding the well location for an additional
decade and provide information useful for future development.
Cavalier Energy is designed to be a focused, self-funding entity, which was created in 2011 as a wholly-
owned subsidiary of Paramount to execute the development of the Company’s oil sands and carbonate
bitumen assets. Cavalier Energy holds over 300 sections, representing approximately 200,000 net acres
of Crown leases in the Western Athabasca region of Alberta.
Hoole Grand Rapids
The initial focus of Cavalier Energy is to develop the Grand Rapids formation in its 100 percent owned in-
situ oil sands leases in the Hoole area of Alberta (the "Hoole Project"). The Hoole Project is 10 kilometers
northeast of Wabasca-Desmarais, Alberta. Since 2004, approximately $60 million has been invested
through land acquisitions, stratigraphic drilling, engineering studies, and environmental field programs to
bring this asset to the development stage.
In 2012, Cavalier Energy focused its efforts on recruiting its leadership team and developing the project
strategy, including the project size, use of technologies and execution approach. These actions provided
the necessary information for the regulatory application and the company’s development strategy.
In November 2012, Cavalier Energy submitted regulatory applications for the initial 10,000 Bbl/d phase of
the Hoole Grand Rapids development ("Hoole Grand Rapids Phase 1") to the Energy Resources
Conservation Board ("ERCB") and Alberta Environment and Sustainable Resource Development
("AESRD"). Cavalier Energy anticipates regulatory approvals to be received in the first half of 2014.
Construction of Hoole Grand Rapids Phase 1 is dependent upon the receipt of regulatory approvals,
sanctioning by the Board of Directors, and securing funding.
During 2013, Cavalier Energy plans to complete the front end engineering and design work for Hoole
Grand Rapids Phase 1 along with geotechnical work and the drilling of additional source water and
disposal wells. Estimated costs of these activities totalling $15 million are expected to be funded with
drawings on Cavalier Energy’s $40 million credit facility.
In January 2013, Cavalier Energy received an updated independent evaluation of the Hoole Project,
effective December 31, 2012, from the Company’s independent reserves evaluators. The evaluation
ascribed 93 million barrels of probable reserves with a net present value (discounted at 10 percent) of
$379 million to Hoole Grand Rapids Phase 1, which covers approximately two sections of the Hoole
Project. Over and above the aforementioned reserves, the evaluation ascribed 719 million barrels of
economic contingent resources (best estimate) with a net present value (discounted at 10 percent) of
$1.949 billion to the remaining approximate 54 sections of the Hoole Project (the "Remaining Hoole
Leases") within the Grand Rapids formation. The updated estimates and reclassification of Hoole Project
volumes from economic contingent resources to probable reserves follows Cavalier Energy's November
2012 regulatory applications.
Paramount Resources Ltd. 2012Strategic Investments26
The reserves assigned to Hoole Grand Rapids Phase 1 are summarized in the Reserves section of this
document. Results of the evaluation of the Remaining Hoole Leases are as follows:
Classification/Level of Certainty(1)
High Estimate
Best Estimate
Low Estimate
(1) See Oil Sands Resource Notes in the Advisories section of this document.
(2) MMBbl means millions of barrels.
Future Exploration Portfolio
DEBIP(1)
(MMBbl)(2)
1,656
1,469
1,167
Economic
Contingent
Resources(1)
(MMBbl)(2)
903
719
511
NPV of Future Net
Revenue(1)
(discounted at 10%)
($MM)
2,982
1,949
946
Cavalier Energy holds 128,000 acres of mineral rights located on the Grosmont Carbonate Trend.
Industry peers have begun to explore this resource and have constructed pilot projects to refine
extraction technologies. Cavalier Energy is monitoring industry developments and will develop future
plans for its holdings based on the results of these pilot projects.
Cavalier Energy acquired 36 sections of land at Eagles Nest in early 2012. The property is prospective for
oil sands bitumen in the McMurray and Wabiskaw formations and seismic data is currently being
evaluated to validate mapping and plan additional seismic and drilling activities.
Fox Drilling Inc. ("Fox Drilling") now owns five triple-sized
rigs in Canada, including two new built-for-purpose
walking rigs and a rig previously owned by Paramount
Drilling U.S. that was moved in the fourth quarter of
2012 from the United States. Fox Drilling’s two original
rigs drilled on
in Alberta
the Company’s
throughout 2012. The two new walking drilling rigs will
be deployed on multi-well pad sites in the Kaybob
COU’s Deep Basin development. Fox Drilling’s rigs are
designed to drill the deep horizontal wells that industry
is currently focusing on in the Deep Basin of Alberta.
lands
Paramount Resources Ltd. 2012Strategic Investments27
INVESTMENTS IN OTHER ENTITIES
Market Value(1)
As at December 31
Trilogy Energy Corp. ("Trilogy")
MEG Energy Corp.
MGM Energy Corp.
Other(2)
Total
Shares
(000’s)
19,144
3,700
54,147
2012
($ millions)
$ 557.3
112.6
13.5
21.4
$ 704.8
($/share)
29.11
30.44
0.25
Shares
(000’s)
24,144
3,700
43,834
2011
($ millions)
$ 907.1
153.8
10.6
5.8
$ 1,077.3
($/share)
37.57
41.57
0.24
(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.
In January 2012, Paramount closed the sale of 5.0 million of its non-voting Trilogy shares for net cash
proceeds of $181.7 million, recognizing a gain of $157.2 million.
Market Value of Investments
$ millions
$/POU Share
$/POU Share
Paramount Resources Ltd. 2012Strategic Investments28
MANAGEMENT’S DISCUSSION & ANALYSIS
This Management’s Discussion and Analysis ("MD&A"), dated March 7, 2013, 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, 2012. Financial data included in this
MD&A has been prepared in accordance with International Financial Reporting Standards ("IFRS") and is
stated in millions of Canadian dollars, unless otherwise noted. The Company’s accounting policies have
been applied consistently to all periods presented.
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. Certain comparative figures have been reclassified to conform to the current years’
presentation. Additional information concerning Paramount, including its Annual Information Form, can
be found on the SEDAR website at www.sedar.com.
About Paramount
Paramount is an independent, publicly traded, Canadian corporation that explores for and develops
conventional petroleum and natural gas prospects, pursues longer-term non-conventional exploration and
pre-development projects and holds investments in other entities. The Company’s principal properties
are located in Alberta, the Northwest Territories and British Columbia.
Paramount has spun-out three public entities: (i) Paramount Energy Trust, now Perpetual Energy Inc.
("Perpetual"), 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’s Principal Properties are divided into four Corporate Operating Units ("COUs") as follows:
the Kaybob COU, which includes properties in West Central Alberta;
the Grande Prairie COU, which includes properties in the Peace River Arch area of Alberta;
the Southern COU, which includes properties in Southern Alberta; 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 bitumen interests 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 subsidiary Fox Drilling Inc. ("Fox Drilling").
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. 2012Management's Discussion & Analysis29 2012 OVERVIEW
Paramount’s net loss was $61.9 million in 2012 compared to a net loss of $232.0 million in 2011,
primarily due to a $157.2 million gain on the sale of 5.0 million shares of Trilogy and lower write-
downs of petroleum and natural gas properties and goodwill in 2012.
Funds flow from operations was $58.1 million in 2012, $38.1 million lower than 2011, primarily
because of a 29 percent decrease in average realized prices and lower Southern COU sales volumes
following the May 2012 United States property disposition. These decreases were partially offset by
higher sales volumes in Kaybob and higher other income, primarily due to $6.2 million in cash
proceeds from a business interruption insurance settlement.
Principal Properties
Natural gas and NGLs sales volumes increased by approximately 20 percent despite downstream
processing and transportation constraints which impacted the Company’s operations in the second
half of the year.
The Company’s new 45 MMcf/d refrigeration facility at Musreau (the "Musreau Refrig Facility")
operated near capacity following its re-commissioning in March 2012.
Operating expenses from continuing operations decreased 11 percent to $9.29 per Boe in 2012
compared to $10.40 per Boe in 2011 due to the sale of higher cost US properties and processing
cost savings from the Musreau Refrig Facility.
Construction of the Company’s wholly-owned 200 MMcf/d deep cut facility at Musreau (the
"Musreau Deep Cut Facility") commenced in the third quarter of 2012 following the receipt of
regulatory approval. The project continues to be on-schedule, with commissioning expected to
commence by the end of the third quarter of 2013.
Advance drilling for the deep cut facility expansions at Musreau and Smoky continued. The
Company currently has an inventory of 43 (35 net) Kaybob Deep Basin wells drilled and awaiting the
start-up of the facilities.
In May, Paramount’s wholly-owned subsidiary, Summit Resources, Inc. ("Summit"), closed the sale
of all of its operated properties for cash proceeds of approximately US$70 million. In February 2013,
Summit closed the sale of substantially all of its remaining US properties for cash proceeds of
US$22.5 million, subject to closing adjustments. Since 2011, the Company has realized aggregate
cash proceeds of approximately US$130 million on the sale of its US properties.
Strategic Investments
Paramount drilled and completed its first horizontal shale gas exploration well at Patry in Northeast
British Columbia in March 2013. In order to further evaluate well performance, the Company plans
to bring the well on production by the end of 2013.
Cavalier Energy recorded probable bitumen reserves following its regulatory applications for the
initial 10,000 Bbl/d phase of the Hoole Grand Rapids development.
Fox Drilling completed the construction of two new walking drilling rigs, which will drill on multi-well
pad sites in the Kaybob COU.
Corporate
To fund the Company’s growth initiatives, Paramount raised over $700 million in aggregate cash
proceeds in 2012, including over $400 million from equity offerings, the sale of investments and
non-core oil and gas properties and $300 million from the notes offering.
At February 28, 2013, Paramount had cash balances of $109.2 million and its $300 million credit
facility was undrawn.
Paramount Resources Ltd. 2012Management's Discussion & Analysis30
Highlights(1)
FINANCIAL
Petroleum and natural gas sales – continuing operations
Petroleum and natural gas sales – discontinued operations
Petroleum and natural gas sales
Funds flow from operations – continuing operations
Funds flow from operations – discontinued operations
Funds flow from operations
Per share – basic and diluted ($/share)
Net loss – continuing operations
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
Long-term debt
Net debt
OPERATIONAL
Sales volumes(2)
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
Insurance settlement
Netback including commodity contract and insurance settlements
General and administrative – corporate
General and administrative – strategic
Interest
Dividends from investments
Acquisition transaction costs
Other
2012
2011
2010
185.7
11.4
197.1
51.6
6.5
58.1
0.67
(92.1)
(1.06)
(61.9)
(0.71)
523.1
704.8
2,037.0
660.7
701.4
98.5
1,873
1,620
19,917
34
1
213.4
28.3
241.7
80.8
15.4
96.2
1.23
(256.3)
(3.27)
(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
27.04
(2.27)
(9.58)
(2.98)
12.21
(0.02)
0.85
13.04
(1.61)
(0.88)
(4.74)
1.10
–
1.06
7.97
38.00
(3.47)
(11.20)
(3.23)
20.10
0.03
–
20.13
(1.90)
(0.76)
(5.26)
1.79
(0.16)
1.28
15.12
157.5
26.9
184.4
80.3
13.7
94.0
1.29
(93.0)
(1.28)
(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
(2.43)
(0.76)
(2.79)
2.73
(0.06)
0.37
19.77
Funds flow from operations
(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) Amounts include the results of discontinued operations.
(3) Based on the period-end closing prices of publicly traded enterprises and the book value of the remaining investments.
Paramount Resources Ltd. 2012Management's Discussion & Analysis31
Consolidated Results
Net Income (Loss)
Year ended December 31
Principal Properties
Strategic Investments
Corporate
Tax recovery
Loss from continuing operations
Income from discontinued operations, net of tax
Net loss
2012
(194.1)
134.0
(65.6)
33.6
(92.1)
30.2
(61.9)
2011
(279.9)
5.1
(61.1)
79.6
(256.3)
24.3
(232.0)
2010
(107.7)
16.5
(65.3)
63.5
(93.0)
3.0
(90.0)
Paramount recorded a loss from continuing operations of $92.1 million for the year ended December 31,
2012 compared to $256.3 million in 2011. Significant factors contributing to the change are shown
below:
Loss from continuing operations – 2011
Higher income from equity-accounted investments mainly due to a $157.2 million gain on the sale of
5.0 million non-voting shares of Trilogy in January 2012
Lower depletion, depreciation and impairment mainly due to lower write-downs of petroleum and
natural gas properties and goodwill
Higher gains on the sale of property, plant and equipment related to continuing operations
Lower income tax recovery compared to 2011
Lower netback primarily due to a 27 percent decrease in average realized prices
Lower other income, mainly because 2011 included gains related to previous investments in NuLoch
Resources Inc. and ProspEx Resources Ltd.
Higher stock-based compensation expense
Higher exploration and evaluation expense mainly due to higher dry hole expense
Other
Loss from continuing operations – 2012
Year ended
December 31
(256.3)
152.1
85.8
21.6
(46.0)
(30.2)
(10.1)
(7.6)
(6.4)
5.0
(92.1)
Income from discontinued operations ("IFDO") in 2012 was $30.2 million, $5.9 million higher than in 2011.
IFDO in 2012 included a $50.7 million pre-tax gain on the sale of discontinued operations. IFDO in 2011
included a $37.2 million pre-tax gain on the sale of undeveloped land. The netback from discontinued
operations in 2012 was $8.7 million lower than in 2011 because of a partial year of operations from the
sold properties as a result of their sale May 2012.
Paramount Resources Ltd. 2012Management's Discussion & Analysis32
Paramount’s loss from continuing operations for the year ended December 31, 2011 was $256.3 million,
$163.3 million higher than 2010. Significant factors contributing to the change are shown below:
Loss from continuing operations – 2010
Higher depletion, depreciation and impairment mainly due to an increase of $167.7 million in write-
downs of petroleum and natural gas properties and goodwill and $49.0 million of higher Principal
Properties depletion expense due to higher production
Lower income from equity-accounted investments, as 2010 included $36.8 million of earnings
related to Trilogy’s conversion from a trust structure to a corporate structure
Higher interest expense due to higher 2011 debt levels
Loss on financial commodity contracts compared to a gain in 2010
Lower stock-based compensation expense
Higher netback mainly due to a 34 percent increase in sales volumes
Higher other income primarily due to the recognition of $11.1 million in gains on the sale of the
shares of NuLoch and its successor, Magnum Hunter Resources Corporation
Higher income tax recovery compared to 2010
Lower exploration and evaluation expense
Higher gains on the sale of property plant and equipment related to continuing operations
Other
Loss from continuing operations – 2011
Year ended
December 31
(93.0)
(215.3)
(34.8)
(20.5)
(11.7)
33.8
31.7
19.8
16.1
13.9
4.5
(0.8)
(256.3)
Income from discontinued operations in 2011 was $24.3 million compared to $3.0 million in 2010. The
increase was primarily due to the recognition of a $37.2 million pre-tax gain on sale of undeveloped land
in 2011.
Funds Flow From Operations (1)(2)
The following is a reconciliation of funds flow from operations to the nearest GAAP measure:
Year ended December 31
Cash from operating activities
Change in non-cash working capital
Geological and geophysical expenses
Asset retirement obligations settlements
Funds flow from operations
Funds flow from operations ($/Boe)
(1) Refer to the advisories concerning non-GAAP measures in the Advisories section of this document.
(2) Includes the results of discontinued operations.
2012
55.2
(12.1)
7.0
8.0
58.1
7.97
Year ended December 31
Funds flow from operations – continuing operations
Funds flow from operations – discontinued operations
Funds flow from operations
2012
51.6
6.5
58.1
2011
84.9
(3.0)
6.8
7.5
96.2
15.12
2011
80.8
15.4
96.2
2010
59.2
23.5
8.1
3.2
94.0
19.77
2010
80.3
13.7
94.0
Funds flow from operations attributable to continuing operations in 2012 was $51.6 million, $29.2 million
lower than 2011, primarily because of the impact of a 27 percent decrease in average realized prices,
partially offset by higher other income, primarily due to $6.2 million in cash proceeds from a business
interruption insurance settlement. Funds flow from operations attributable to discontinued operations in
2012 decreased by $8.9 million compared to the prior year because 2012 includes a partial year of
operations from the sold properties as a result of their May 2012 sale.
Paramount Resources Ltd. 2012Management's Discussion & Analysis33
Funds flow from operations attributable to continuing operations in 2011 increased $0.5 million
compared to 2010, primarily due to a $55.9 million increase in petroleum and natural gas sales, offset by
a $20.2 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 attributable to
discontinued operations in 2011 increased by $1.7 million compared to 2010 due to higher revenues in
2011, partially offset by higher royalties.
Discontinued Operations
In May 2012, Summit closed the sale of all of its operated properties in North Dakota and all of its
properties in Montana (the "Sold Properties") for cash proceeds of approximately US$70.0 million. The
Company recorded a pre-tax gain of $50.7 million on this transaction.
Results of the Sold Properties have been presented as discontinued operations and prior year
comparative results have been adjusted to conform to the current year’s basis of presentation. The
Principal Properties section of this Management’s Discussion & Analysis provides an analysis of the
results of the Company’s continuing operations. The following table reconciles Paramount’s earnings
from continuing operations, earnings from discontinued operations and net income:
Earnings from Continuing Operations ("CO") and Discontinued Operations ("DO")
Year ended December 31
2012
2011
CO
DO
($ millions)
Total
CO
Total
DO
($/Boe except natural gas(1))
CO
DO
($ millions)
Total
CO
DO
($/Boe except natural gas(1))
Total
Natural gas revenue
NGLs revenue
Oil revenue
Royalty and sulphur revenue
Petroleum and natural gas sales
Royalties
Operating expense
Transportation
Netback
Financial commodity contract settlements
Insurance settlement
Netback including commodity
contract and insurance settlements
General and administrative
Interest
Dividends from investments
Other
Funds flow from operations
DD&A / Accretion
Gain on sale of PP&E
Stock-based compensation
Income from equity-acct. investments
Other
Income tax (expense) recovery
Net income (loss)
98.1
45.7
38.3
3.6
185.7
(14.6)
(66.4)
(21.8)
82.9
(0.1)
6.2
89.0
(18.1)
(34.6)
8.0
7.3
51.6
(287.5)
26.4
(29.1)
153.3
(40.4)
33.6
(92.1)
(1)Natural gas revenue shown per Mcf.
0.1
0.3
11.0
–
11.4
(1.9)
(3.5)
–
6.0
–
–
6.0
–
–
–
0.5
6.5
(1.4)
50.8
–
–
(0.2)
(25.5)
30.2
98.2
46.0
49.3
3.6
197.1
(16.5)
(69.9)
(21.8)
88.9
(0.1)
6.2
95.0
(18.1)
(34.6)
8.0
7.8
58.1
(288.9)
77.2
(29.1)
153.3
(40.6)
8.1
(61.9)
2.72
67.08
83.67
–
25.98
(2.04)
(9.29)
(3.05)
11.60
(0.02)
0.87
12.45
(2.54)
(4.84)
1.13
1.01
7.21
2.31
62.67
82.06
–
79.53
(13.45)
(23.90)
–
42.18
–
–
42.18
–
–
–
2.57
44.75
2.72
67.10
83.16
–
27.04
(2.27)
(9.58)
(2.98)
12.21
(0.02)
0.85
13.04
(2.49)
(4.74)
1.10
1.06
7.97
119.8
44.1
45.5
4.0
213.4
(17.4)
(62.4)
(20.5)
113.1
0.2
–
113.3
(16.9)
(33.4)
11.4
6.4
80.8
(377.9)
4.9
(21.5)
1.2
(23.4)
79.6
(256.3)
0.4
0.7
27.2
–
28.3
(4.7)
(8.9)
–
14.7
–
–
14.7
–
–
–
0.7
15.4
(7.6)
37.1
–
–
(2.8)
(17.8)
24.3
120.2
44.8
72.7
4.0
241.7
(22.1)
(71.3)
(20.5)
127.8
0.2
–
128.0
(16.9)
(33.4)
11.4
7.1
96.2
(385.5)
42.0
(21.5)
1.2
(26.2)
61.8
(232.0)
4.04
79.79
90.38
–
35.55
(2.90)
(10.40)
(3.42)
18.83
0.04
–
18.87
(2.82)
(5.57)
1.89
1.07
13.44
4.36
67.48
81.87
–
79.11
(12.99)
(24.58)
–
41.54
–
–
41.54
–
–
–
1.88
43.42
4.04
79.56
87.00
–
38.00
(3.47)
(11.20)
(3.23)
20.10
0.03
–
20.13
(2.66)
(5.26)
1.79
1.12
15.12
Paramount Resources Ltd. 2012Management's Discussion & Analysis34
Principal Properties
Netback and Segment Loss – Continuing Operations
Year ended December 31
2012
2011
Petroleum and natural gas sales
Royalties
Operating expense
Transportation
Netback
Financial commodity contract settlements
Insurance settlement
Netback including commodity & insurance settlements
Other principal property items (see below)
Segment loss
185.7
(14.6)
(66.4)
(21.8)
82.9
(0.1)
6.2
89.0
(283.1)
(194.1)
Petroleum and Natural Gas Sales – Continuing Operations
Year ended December 31
Natural gas
NGLs
Oil
Royalty and sulphur revenue
2012
98.1
45.7
38.3
3.6
185.7
($/Boe)
25.98
(2.04)
(9.29)
(3.05)
11.60
(0.02)
0.87
12.45
2011
119.8
44.1
45.5
4.0
213.4
($/Boe)
35.55
(2.90)
(10.40)
(3.42)
18.83
0.04
–
18.87
213.4
(17.4)
(62.4)
(20.5)
113.1
0.2
–
113.3
(393.2)
(279.9)
% Change
(18)
4
(16)
(10)
(13)
Petroleum and natural gas sales in 2012 were $185.7 million, a decrease of $27.7 million from the prior
year, primarily due to the impact of lower realized prices, partially offset by higher natural gas and NGLs
sales volumes.
The impact of changes in prices and sales volumes on petroleum and natural gas sales are as follows:
Year ended December 31, 2011
Effect of changes in prices
Effect of changes in sales volumes
Change in royalty and sulphur
Year ended December 31, 2012
Sales Volumes
Natural Gas (MMcf/d)
%
Change
34
31
(8)
(19)
21
(67)
21
2011
44.5
16.0
10.5
10.3
81.3
0.3
81.6
2012
59.5
20.9
9.7
8.3
98.4
0.1
98.5
Kaybob
Grande Prairie
Southern
Northern
Continuing Ops
Discontinued Ops
Total
Natural gas
119.8
(47.4)
25.7
–
98.1
NGLs
44.1
(8.7)
10.3
–
45.7
Oil
45.5
(3.1)
(4.1)
–
38.3
Royalty and
sulphur
4.0
–
–
(0.4)
3.6
Total
213.4
(59.2)
31.9
(0.4)
185.7
NGLs (Bbl/d)
Oil (Bbl/d)
Total (Boe/d)
2012
924
749
158
29
1,860
13
1,873
2011
868
505
120
19
1,512
30
1,542
%
Change
6
48
32
53
23
(57)
21
2012
62
307
647
235
1,251
369
1,620
2011
72
393
574
343
1,382
909
2,291
%
Change
(14)
(22)
13
(31)
(9)
(59)
(29)
2012
10,910
4,536
2,419
1,657
19,522
395
19,917
2011
8,361
3,568
2,442
2,073
16,444
982
17,426
%
Change
30
27
(1)
(20)
19
(60)
14
Paramount Resources Ltd. 2012Management's Discussion & Analysis35
Natural gas sales volumes increased 17.1 MMcf/d or 21 percent to 98.4 MMcf/d in 2012 compared to
81.3 MMcf/d in 2011. NGLs sales volumes increased 348 Bbl/d or 23 percent to 1,860 Bbl/d in 2012
compared to 1,512 Bbl/d in 2011. The increases in natural gas and NGLs sales volumes were primarily
related to new well production from the Company’s 2011 / 2012 drilling program at Musreau and
Resthaven within the Kaybob COU and at Valhalla within the Grande Prairie COU and wells added
through the May 2011 acquisition of ProspEx Resources Ltd. The Company’s new 45 MMcf/d natural
gas refrigeration processing facility at Musreau was re-commissioned during March, allowing the
Company to begin producing incremental volumes that had been shut-in due to capacity constraints
since the fourth quarter of 2011.
The ability of Paramount to maximize production through its firm capacity and owned facilities in 2012,
including the Musreau Refrig Facility and Valhalla gathering and compression system, was impacted by
various third party downstream disruptions and capacity constraints (the "Third Party Disruptions"), which
reduced sales volumes at times by up to 6,000 Boe/d. The Third Party Disruptions mainly related to
reduced throughput at third party NGLs de-ethanization and fractionation facilities at Fort Saskatchewan,
which resulted in the apportionment of available processing capacity. The Third Party Disruptions were
also caused by NGLs and natural gas pipeline takeaway constraints and scheduled and unscheduled
downtime at third party natural gas processing facilities. The Company estimates that average sales
volumes in the second half of 2012 were reduced by approximately 3,000 Boe/d, including reduced
liquids yields as the Company preferentially flowed lower liquids content wells. Sales volumes in
December 2012 and January 2013 were constrained to approximately 22,000 Boe/d.
In addition to the downstream third party NGLs processing constraints, Paramount’s production within
the Kaybob COU remains constrained by available owned and contracted natural gas processing
capacity, pending completion of deep cut facilities expansions at Musreau and Smoky. Paramount
continues to utilize its own facilities and third party processing capacity to maximize production while the
expansions are in progress. In the interim, behind pipe wells will be produced where capacity is available.
Oil sales volumes decreased nine percent to 1,251 Bbl/d in 2012 compared to 1,382 Bbl/d in 2011,
primarily due to declines at Cameron Hills in the Northern COU and at Crooked Creek in the Grande
Prairie COU, partially offset by production from new wells in the Southern COU.
Average Realized Prices – Continuing Operations
Year ended December 31
Natural gas ($/Mcf)
NGLs ($/Bbl)
Oil ($/Bbl)
Total ($/Boe)
2012
2.72
67.08
83.67
25.98
2011
4.04
79.79
90.38
35.55
% Change
(33)
(16)
(7)
(27)
Paramount’s average realized prices for natural gas, NGLs and oil decreased in 2012 compared to 2011,
consistent with declines in market prices.
Paramount's natural gas sales portfolio primarily consists of sales priced at the Alberta spot market,
Eastern Canadian market, and California market and is sold in a combination of daily and monthly
contracts. Paramount's Canadian oil and NGLs sales portfolio primarily consists of sales priced relative to
Alberta and United States market indexes, adjusted for transportation and quality differentials.
Paramount Resources Ltd. 2012Management's Discussion & Analysis36 Commodity Prices
Key monthly average commodity price benchmarks and foreign exchange rates are as follows:
Natural Gas
AECO (Cdn$/GJ)
NYMEX (Henry Hub US$/MMbtu)
Crude Oil
Edmonton par (Cdn$/Bbl)
West Texas Intermediate (US$/Bbl)
Foreign Exchange
$Cdn / 1 $US
Commodity Price Management
2012
2.27
2.80
86.53
94.19
1.00
2011
% Change
3.48
4.07
95.16
95.00
0.99
(35)
(31)
(9)
(1)
1
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 (payments) on the settlement of financial commodity contracts are as follows:
Year ended December 31
Oil contracts
2012
(0.1)
2011
0.2
At December 31, 2012 there were no financial commodity contracts outstanding.
Royalties – Continuing Operations
Year ended December 31
Royalties
2012
14.6
Rate
8.0%
2011
17.4
Rate
8.3%
Royalties decreased $2.8 million to $14.6 million in 2012 compared to $17.4 million in 2011, primarily as
a result of the significant decline in natural gas prices, higher gas cost allowance deductions and lower oil
sales volumes. These reductions were partially offset by higher NGLs royalties due to higher sales
volumes.
Operating Expense – Continuing Operations
Year ended December 31
Operating expense
2012
66.4
2011
62.4
% Change
6
Operating expenses increased $4.0 million or six percent to $66.4 million in 2012 compared to $62.4
million in 2011, primarily related to higher processing and operating costs at Valhalla in the Grande Prairie
COU where new wells were brought-on and the new gathering and compression system was
commissioned. Operating expenses in the Kaybob COU did not increase in 2012 despite increased sales
volumes, as higher operating costs related to the new Musreau Refrig Facility and new wells brought-on
production were more than offset by the impact of higher processing income and lower third party
processing fees. Operating costs in the Northern and Southern COUs also decreased in 2012 as a result
of asset sales and lower production.
Paramount Resources Ltd. 2012Management's Discussion & Analysis37
Operating expenses per Boe decreased 11 percent to $9.29 in 2012 compared to $10.40 in 2011,
primarily due to lower per unit operating costs in the Kaybob COU and a lower proportion of sales
volumes being from the Northern and Southern COUs, which have higher per unit operating costs.
Transportation Expense – Continuing Operations
Year ended December 31
Transportation expense
2012
21.8
2011
20.5
% Change
6
Transportation expense increased to $21.8 million in 2012 compared to $20.5 million in 2011 as a result
of increased sales volumes in the Kaybob and Grande Prairie COUs, partially offset by a reduction in
sales volumes in the Northern COU, which has higher transportation costs. Transportation expense per
Boe decreased 11 percent to $3.05 in 2012 compared to $3.42 in 2011 as a result of the increase in
sales volumes over the fixed portion of transportation costs and the Northern COU comprising a lower
proportion of overall sales volumes. In the fourth quarter of 2012, a long-term natural gas export
transportation agreement expired, which further reduced fixed transportation costs by approximately
$0.5 million per month.
Insurance Settlement
In 2012, the Company received $6.2 million in respect of a business interruption insurance claim related
to an electrical equipment failure at the Musreau Refrig Facility in the fourth quarter of 2011.
Other Principal Property Items – Continuing Operations
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
2012
(2.6)
146.5
135.6
32.0
(26.4)
3.3
(5.3)
283.1
2011
1.9
141.9
225.7
25.6
(4.9)
7.8
(4.8)
393.2
Depletion and depreciation expense increased to $146.5 million ($20.51 per Boe) in 2012 compared to
$141.9 million ($23.65 per Boe) in 2011 due to higher 2012 sales volumes. The decrease in depletion per
Boe was mainly due to a higher proportion of sales volumes being from the Kaybob COU, where oil and
gas properties have a lower carrying value per Boe of proved reserves assigned.
The Company recorded an impairment write-down related to its petroleum and natural gas assets and
goodwill of $135.6 million (2011 – $225.7 million). The impairment write-down was primarily related to
the Bistcho/Cameron Hills and Clarke Lake area in the Northern COU, the Elmworth area in the Grande
Prairie COU and at Chain in the Southern COU. The impairment resulted from a combination of the
decline in forecast oil, natural gas, and natural gas liquids prices, higher well costs than reserves values
assigned, and declines in reserves assigned due to well performance.
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 $18.7 million ($17.5 million - 2011).
The gain on sale of property, plant and equipment recorded for 2012 is primarily related to the sale of
non-core properties at West Pembina, Alberta and at Kindersley, Saskatchewan in the Southern COU and
Paramount Resources Ltd. 2012Management's Discussion & Analysis38 at East Negus in the Northern COU for aggregate proceeds of approximately $49.2 million. These
properties did not have significant associated production.
In February 2013, Summit closed the sale of its non-operated joint venture operations and lands in North
Dakota for aggregate gross proceeds of US$22.5 million, subject to closing adjustments. This disposition
included approximately 200 Boe/d of production and undeveloped land. With the closing of this
transaction, the Company has completed the sale of substantially all of its US assets.
In March 2013, Paramount sold its properties in the Bistcho area of Alberta and the Cameron Hills area of
the Northwest Territories for approximately $9 million, subject to closing adjustments. Average sales
volumes for these properties were approximately 1,000 Boe/d in 2012.
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
Segment Income
2012
153.3
7.5
(4.7)
(6.4)
(10.9)
(1.5)
–
(3.3)
134.0
2011
1.2
8.3
(4.6)
(4.9)
(5.8)
(1.2)
15.7
(3.6)
5.1
Income from equity-accounted investments for 2012 was $153.3 million compared to $1.2 million in the
prior year. In January 2012, Paramount closed the sale of 5.0 million of its non-voting Trilogy shares for
net cash proceeds of $181.7 million, recognizing a gain of $157.2 million.
General and administrative costs of the Company’s Strategic Investments business segment increased
primarily because of higher staff and office costs related to Cavalier Energy.
The gain on investments in 2011, totalling $15.7 million, mainly related to the sale of the Company’s
investment in NuLoch Resources Inc. and shares in the successor company by acquisition, Magnum
Hunter Resources Corp., for aggregate gross proceeds of $15.8 million. The Company recognized
aggregate gains of $11.1 million in connection with these transactions.
Strategic Investments at December 31, 2012 include:
investments in the shares of Trilogy, MEG Energy Corp. ("MEG"), MGM Energy, Paxton
Corporation, and other public and private corporations;
prospective shale gas acreage in the Liard and Horn River Basins in Northeast British Columbia
and the Northwest Territories;
oil sands and carbonate bitumen interests owned by Paramount’s wholly-owned subsidiary,
Cavalier Energy, including oil sands reserves and resources at Hoole, situated within the western
portion of the Athabasca Oil Sands region, and carbonate bitumen holdings in Northeast Alberta,
including at Saleski; and
five drilling rigs operated by Paramount’s wholly-owned subsidiary, Fox Drilling.
Paramount Resources Ltd. 2012Management's Discussion & Analysis39
The Company’s investments in other entities are as follows:
As at December 31
Trilogy (2)
MEG
MGM Energy
Other(3)
Total
Carrying Value
Market Value(1)
2012
82.4
112.6
2.3
21.4
218.7
2011
118.3
153.8
1.7
5.8
279.6
2012
557.3
112.6
13.5
21.4
704.8
2011
907.1
153.8
10.6
5.8
1,077.3
(1)
(2)
(3)
Based on the period-end closing price of publicly-traded investments and book value of remaining investments.
December 31, 2011 balances include five million shares that were sold in January 2012, having a December 31, 2011 carrying value of $24.2 million and a December 31, 2011
market value of $187.9 million.
Includes investments in Paxton Corporation and other public and private corporations.
Shale Gas
Paramount’s shale gas holdings encompass approximately 260 (220 net) sections in the Liard Basin and
the Horn River Basin in Northeast British Columbia and the Northwest Territories.
Paramount drilled and completed its first horizontal shale gas exploration well at Patry in Northeast
British Columbia. The well was drilled to a vertical depth of approximately 3,400 meters with a horizontal
bore of approximately 1,200 meters, and was completed with a 10-stage fracture stimulation in the Besa
River formation in early March 2013 that included the injection of approximately 120,000 barrels of
completion fluids.
The Company is working to confirm that all 10 stages of the fracture stimulation are open and
contributing. In order to further evaluate well performance, the Company plans to tie the Patry well into
existing pipeline infrastructure located within two miles of the well site and plans to bring the well on
production by the end of 2013.
The Company re-commenced drilling operations on its initial shale gas evaluation well at Dunedin in
February 2013 after drilling operations were suspended there in the spring of 2012 due to warm
weather. Paramount plans to drill this well to the intended vertical depth of approximately 4,500 meters
at which point it will evaluate further plans to complete the vertical wellbore and/or drill a horizontal leg.
This activity is expected to extend the mineral rights surrounding the well location for an additional
decade and provide information useful for future development.
Cavalier Energy
Cavalier Energy is designed to be a focused, self-funding entity, which was created in 2011 as a wholly-
owned subsidiary of Paramount to execute the development of the Company’s oil sands and carbonate
bitumen assets.
The initial focus of Cavalier Energy is to develop the Grand Rapids formation in its 100 percent owned in-
situ oil sands leases in the Hoole area of Alberta (the "Hoole Project"). The Hoole Project is 10 kilometers
northeast of Wabasca-Desmarais, Alberta. Since 2004, approximately $60 million has been invested
through land acquisitions, stratigraphic drilling, engineering studies, and environmental field programs to
bring this asset to the development stage.
In 2012, Cavalier Energy focused its efforts on recruiting its leadership team and developing the project
strategy, including the project size, use of technologies and execution approach. These actions provided
the necessary information for the regulatory application and the company’s development strategy.
In November 2012, Cavalier Energy submitted regulatory applications for the initial 10,000 Bbl/d phase of
the Hoole Grand Rapids development ("Hoole Grand Rapids Phase 1") to the Energy Resources
Conservation Board and Alberta Environment and Sustainable Resource Development. Cavalier Energy
Paramount Resources Ltd. 2012Management's Discussion & Analysis40
anticipates regulatory approvals to be received in the first half of 2014. Construction of Hoole Grand
Rapids Phase 1 is dependent upon the receipt of regulatory approvals, sanctioning by the Board of
Directors, and securing funding.
During 2013, Cavalier Energy plans to complete the front-end engineering and design work for Hoole
Grand Rapids Phase 1 along with geotechnical work and the drilling of additional source water and
disposal wells. Estimated costs of these activities, totalling $15 million, are expected to be funded with
drawings on Cavalier Energy’s $40 million credit facility.
Fox Drilling
Fox Drilling now owns five triple-sized rigs in Canada, including two new built-for-purpose walking rigs
and a rig previously owned by Paramount Drilling U.S. that was moved in the fourth quarter of 2012 from
the United States. Fox Drilling’s two original rigs drilled on the Company’s lands in Alberta throughout
2012. The two new walking drilling rigs will be deployed on multi-well pad sites in the Kaybob COU’s
Deep Basin development. Fox Drilling’s rigs are designed to drill the deep horizontal wells that industry is
currently focusing on in the Deep Basin of Alberta.
Corporate
Year ended December 31
General and administrative
Stock-based compensation
Depletion and depreciation
Interest
Acquisition transaction costs
Foreign exchange
Segment loss
2012
2011
11.7
18.2
0.3
33.8
–
1.6
65.6
12.1
15.6
0.5
32.9
1.0
(1.0)
61.1
The corporate segment loss increased in 2012 to $65.6 million compared to $61.2 million in 2011,
primarily as a result of a $2.6 million increase in stock-based compensation expense and the impact of
foreign exchange on the Company’s US dollar denominated balances.
Corporate general and administrative costs decreased to $11.7 million in 2012 compared to $12.1 million
in 2011.
Exploration and 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(2)
Corporate
(1) Exploration and development expenditures include $4.6 million (2011 - $3.2 million) of capitalized interest.
(2) Strategic Investments includes $7.0 million of undeveloped land purchases in 2012.
2012
6.0
304.6
212.5
523.1
25.2
548.3
82.5
0.4
631.2
2011
5.5
303.7
156.5
465.7
38.2
503.9
28.0
0.1
532.0
Paramount Resources Ltd. 2012Management's Discussion & Analysis41
Exploration and development expenditures in 2012 were $523.1 million compared to $465.7 million in
2011. Current year drilling, completion and tie-in costs were focused on new wells at Musreau, Smoky
and Resthaven in the Kaybob COU where advance drilling is ongoing for the deep cut facilities
expansions. The Company also drilled and completed wells at Valhalla in the Grande Prairie COU, at Birch
in the Northern COU and at Harmattan in the Southern COU. Facilities and gathering expenditures
focused on the deep cut facility expansions at Musreau and Smoky and the expansion of gathering and
compression capacity at Valhalla to 28 MMcf/d. Exploration and development spending in 2012
exceeded the Company’s $475 million original budget mainly due to higher drilling, completion and
facilities costs in the Grande Prairie COU at Valhalla and Karr and higher spending at Birch in the Northern
COU.
Strategic investments capital expenditures in 2012 included $33.3 million related to the Company’s shale
gas drilling activities at Dunedin and Patry in Northeast British Columbia, $33.0 million related to the
construction of two triple-sized walking drilling rigs and $16.2 million related to Cavalier Energy, including
$7.0 million for the purchase of undeveloped oil sands leases. Strategic Investments capital spending
exceeded the Company’s $60 million original budget primarily due to the addition of the Patry well,
which was not included in the original 2012 exploration program.
Fourth quarter 2012 exploration and development expenditures of $166.8 million (2011 – $144.1 million)
were primarily focused on drilling and well completions in the Kaybob Deep Basin development, at Karr-
Gold Creek in the Grande Prairie COU and at Harmattan in the Southern COU, and construction activities
related to the deep cut facility expansions at Musreau and Smoky.
Wells drilled are as follows:
(wells drilled)
Natural gas
Oil
Oil sands evaluation
Dry and abandoned
2012
2011
Gross(1)
44
1
1
–
Net(2)
34
–
1
–
Gross(1)
47
26
28
1
Total
102
46
(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.
35
Kaybob Deep Basin Natural Gas Development
Net(2)
32
15
27
1
75
To support the accelerated development of Paramount’s Deep Basin lands, the Company constructed a
wholly-owned 45 MMcf/d natural gas refrigeration processing facility at Musreau, is building a 200
MMcf/d deep cut processing facility at Musreau at the same location and is participating in the expansion
of the non-operated Smoky facility, which together will more than triple Paramount’s current gas
processing capacity to over 300 MMcf/d. The Company has also entered into long-term agreements to
transport, de-ethanize and fractionate NGLs streams that will be produced from these new facilities, and
has entered into a long-term ethane sales agreement with a petrochemical company.
Construction of the Musreau Deep Cut Facility commenced in the third quarter of 2012 following the
receipt of regulatory approval. Site preparation is complete and piling and concrete work continues.
Major equipment, including compressors, generators and storage vessels, have been and will continue
to be delivered to the facility site over the winter so that construction can continue through break-up.
Paramount has awarded the structural steel contract and anticipates awarding the mechanical contracts
shortly, with electrical and instrumentation contracts to follow. Approximately $100 million has been
incurred on the project to December 31, 2012 and an additional $80 million is budgeted for 2013 to
complete construction.
Paramount Resources Ltd. 2012Management's Discussion & Analysis42
Paramount is currently developing its commissioning plan. Commissioning of the facility is expected to
begin towards the end of the third quarter of 2013 and span approximately two months, a process which
involves testing and calibrating the individual components and control systems, purging vessels and
piping, and pressure testing the system.
Paramount has secured a long-term firm service arrangement for the transportation of NGLs produced
from its Kaybob area facilities commencing in December 2013. The Company has also entered into a
long-term firm service arrangement with a midstream company for the de-ethanization and fractionation
of NGLs volumes commencing in April 2014. The Company is working on procuring interruptible NGLs
fractionation capacity for the period between the planned December 2013 start-up of the Musreau Deep
Cut Facility and the commencement of the long-term firm service fractionation arrangement.
The Company is also constructing an amine processing train at the Musreau Deep Cut Facility, which will
provide the capability to treat sour gas production at the facility instead of at well sites. This
enhancement is expected to cost approximately $50 million, and will decrease equipping costs by over
$1 million per well and reduce ongoing well operating costs. Design work for the amine facility has been
completed and long lead-time components have been ordered. The amine processing train is scheduled
to be on-stream in the first half of 2014.
Paramount is also participating in the expansion of the non-operated Smoky facility (the "Smoky Deep
Cut Facility"), expected to be commissioned in the second half of 2014. The Company will have a 20
percent interest in the expanded 200 MMcf/d (40 MMcf/d net) deep cut facility, an increase from its 10
percent interest in the existing 100 MMcf/d (10 MMcf/d net) dew point facility. Paramount’s share of the
Smoky Deep Cut Facility expansion costs is expected to total $65 million, of which approximately $30
million has been incurred to December 31, 2012.
During 2012, Paramount was active drilling and completing wells in the Deep Basin, continuing to build
production deliverability ahead of the startup of the new deep cut facilities. Paramount currently has five
drilling rigs working in the Deep Basin, which continue to add to the Company’s inventory of wells that
will feed the Musreau and Smoky deep cut facilities.
Outlook
Paramount plans to invest approximately $500 million in its Principal Properties in 2013, excluding land
acquisitions and capitalized interest, primarily focused on the Kaybob COU’s Deep Basin development.
Construction of the Musreau Deep Cut Facility is scheduled to be completed in the fourth quarter and
construction of the third-party Smoky Deep Cut Facility will continue into 2014. In preparation for the
start-up of the deep cut facilities, the Company plans to drill and complete up to 40 new wells in Kaybob
in 2013. Budgeted activities also include the drilling, completion and tie-in of middle Montney wells at
Karr-Gold Creek.
The Company plans to invest approximately $50 million in its Strategic Investments in 2013, directed
towards drilling and completions in the Liard Basin and continued pre-development work for oil sands
projects within Cavalier Energy.
Average sales volumes in January 2013 were constrained to approximately 22,000 Boe/d and increased
to approximately 23,500 Boe/d in the last week of February 2013. Paramount’s ability to maximize
production through its Company-owned and firm-service contracted capacity will likely continue to be
impacted by downstream NGLs processing and transportation constraints until the fourth quarter of
2013.
Sales volumes for the first three quarters of 2013 are expected to range between 21,000 Boe/d and
25,000 Boe/d, after giving effect to the first quarter property dispositions, depending upon the availability
Paramount Resources Ltd. 2012Management's Discussion & Analysis43 of downstream NGLs transportation and processing capacity. Sales volumes are expected to increase in
the fourth quarter once the expansion of a third-party NGLs pipeline is completed, additional fractionation
capacity is secured and the Musreau Deep Cut Facility is on-stream.
After the Musreau Deep Cut Facility starts up in late-2013, the Company will have owned and firm-
service contracted natural gas processing capacity of 279 MMcf/d, which will increase to over 300
MMcf/d in 2014 with the addition of the Smoky Deep Cut Facility. Sales volumes are expected to
increase to over 50,000 Boe/d by late-2014 as facility processes are optimized and the new long-term
NGLs processing contracts come into effect.
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 or
participating in joint ventures.
2011
2012
As at December 31
Adjusted Working Capital Deficit (Surplus)(1)
Demand Facilities
Credit Facility
Senior Notes(2)
Net Debt(3)
Share Capital
Accumulated Deficit
Reserves
Total Capital
(1) Adjusted working capital excludes demand facilities, risk management assets and 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, 2012 – $10.8 million, December 31, 2011 – $5.9
million).
Change %
(116)
79
(100)
81
37
14
(60)
(19)
16
(9.3)
40.7
–
670.0
701.4
921.7
(165.5)
94.9
1,552.5
59.2
22.8
61.4
370.0
513.4
810.8
(103.6)
116.7
1,337.3
(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.
Adjusted Working Capital
Paramount had an adjusted working capital surplus at December 31, 2012 of $9.3 million compared to a
deficit of $59.2 million at December 31, 2011. The working capital surplus at December 31, 2012
included $146.7 million of cash and cash equivalents, $32.8 million of accounts receivable and $172.7
million of accounts payable and accrued liabilities. The change in working capital is primarily due to
proceeds from the December 2012 senior notes offering, the sale of 5.0 million Trilogy shares in January
2012, equity issuances and the sale of non-core petroleum and natural gas properties and funds flow
from operations, partially offset by capital spending related to the Company’s 2012 capital program and
the repayment of $61.4 million of the Company’s credit facility.
Paramount raised approximately $710 million in aggregate net cash proceeds in 2012 through financing
transactions, the sale of investments and the sale of non-core oil and gas properties. These transactions
included a $300 million senior notes offering, the issuance of a total of 4.2 million flow-through Common
Shares, the sale of a portion of the Company’s investment in Trilogy for $181.7 million and sales of non-
core properties for aggregate proceeds of approximately $110 million.
Proceeds from these offerings and asset sales were used, and are expected to be used, to further the
development and exploration of the Company’s properties, including drilling and completion work and
facilities construction at Musreau and Smoky in the Kaybob COU and at Valhalla in the Grande Prairie
Paramount Resources Ltd. 2012Management's Discussion & Analysis44 COU and drilling and completion work in Northeast British Columbia. Proceeds from Common Shares
issued on a flow-through basis in respect of Canadian Development Expenses ("CDE") were used to incur
eligible CDE. Proceeds from Common Shares issued on a flow-through basis in respect of Canadian
Exploration Expenses ("CEE") were used and are expected to be used to incur eligible CEE. Proceeds
from the offerings and asset sales were also used for the non-permanent repayment of indebtedness
under the Company’s credit facility.
Paramount expects to fund its 2013 operations, obligations and capital expenditures with existing cash
and cash equivalents, funds flow from operations, drawings on its bank credit facilities, proceeds from
the sale of non-core assets and by accessing the capital markets, if required. The Company anticipates
its funds flow from operations to increase when the Musreau Deep Cut Facility is brought on-stream in
late-2013.
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 $12.6
million have been made to December 31, 2012. Unless demanded by the bank, scheduled principal
repayments on Drilling Rig Loan I are $5.1 million in 2013, with the remaining outstanding balance
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 construction period, with scheduled
principal repayments to commence in 2013. As of December 31, 2012, $21.0 million was drawn on
Drilling Rig Loan II. Unless demanded by the bank, scheduled principal repayments on Drilling Rig Loan II
are $3.5 million in 2013, $6.3 million in 2014, $6.3 million in 2015 and $4.9 million in 2016.
Recourse and security for Drilling Rig Loan I and Drilling Rig Loan II (the "Drilling Rig Loans") is limited to
the drilling rigs and drilling contracts guaranteed by Paramount. 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 the Drilling Rig Loans for the year ended December 31, 2012 was
4.4 percent (2011 - 4.7 percent).
Cavalier 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 Cavalier Energy, 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. At December 31, 2012, $1.9
million was drawn on the Cavalier Facility. In March 2013, the size of the Cavalier Facility was increased
to $40.0 million, with all other material terms remaining unchanged.
Bank Credit Facility
Paramount’s $300 million bank credit facility (the "Facility") 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 November 30, 2013. 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 November 30, 2013 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
Paramount Resources Ltd. 2012Management's Discussion & Analysis45 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
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, 2012, no amounts were drawn under the Facility (December 31, 2011 - $61.4 million).
Paramount had undrawn letters of credit outstanding at December 31, 2012 totalling $42.7 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, due 2017 (the "2017 Senior Notes") at par.
In February 2011, Paramount completed a public offering of an additional $70 million principal amount of
2017 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 2017 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 2017 Senior
Notes are direct senior unsecured obligations of Paramount and rank equally with all other senior
unsecured indebtedness of the Company. The Company has the right to redeem all or a portion of the
2017 Notes at par, plus accrued and unpaid interest to the date of redemption, plus a redemption
premium, if applicable, which varies based on the date of redemption.
In December 2012, Paramount completed a public offering of $300 million principal amount of senior
unsecured notes, due 2019 (the "2019 Senior Notes") at par, of which $9.6 million principal amount was
purchased by certain officers, management and associates of the Company.
The 2019 Senior Notes bear interest at 7.625 percent per annum, payable semi-annually in arrears on
June 4 and December 4 in each year and mature on December 4, 2019. The 2019 Senior Notes are
direct senior unsecured obligations of Paramount and rank equally with all other senior unsecured
indebtedness of the Company. The Company has the right to redeem all or a portion of the 2019 Notes
at par, plus accrued and unpaid interest to the date of redemption, plus a redemption premium, if
applicable, which varies based on the date of redemption.
Share Capital
In September 2012, Paramount issued 646,000 Common Shares on a flow-through basis in respect of
CEE at a price of $31.00 per share and 1,244,000 Common Shares on a flow-through basis in respect of
CDE at a price of $28.15 per share to a corporation controlled by the Company’s Chairman and Chief
Executive Officer for aggregate proceeds of $55.0 million.
In October 2012, Paramount issued 1,936,000 Common Shares on a flow-through basis in respect of
CEE at a price of $31.00 per share and 356,000 Common Shares on a flow-through basis in respect of
CDE at a price of $28.15 per share for aggregate gross proceeds of $70.0 million, pursuant to a public
offering. Certain officers and Management of the Company participated in this offering.
Paramount Resources Ltd. 2012Management's Discussion & Analysis46 The Company is committed to incur $80.0 million of qualifying expenditures related to the 2012 offerings
of CEE flow-though Common Shares by December 31, 2013. As of December 31, 2012, the Company
had incurred $22.5 million of qualifying CEE. Paramount has incurred sufficient qualifying expenditures to
satisfy commitments associated with CDE flow-through Common Shares issued in 2012 and the CEE
and CDE flow-through Common Shares issued in 2011.
At March 5, 2013, Paramount had 90,107,374 Common Shares and 6,582,350 Paramount Options
outstanding, of which 2,689,134 Paramount Options are exercisable.
Deposit
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
$20 million with the CRA, which amount will remain on account until the dispute is resolved.
income taxes relating to a prior year transaction
its
Quarterly Information
Operating Results – Continuing Operations
Sales Volumes
Natural Gas (MMcf/d)
2012
63.3
23.5
9.0
8.3
104.1
–
104.1
2011 % Change 2012
901
25
50.8
1,008
21
19.4
150
(19)
11.1
51
(16)
9.9
2,110
14
91.2
–
(100)
0.3
2,110
14
91.5
Three months ended December 31
Oil (Bbl/d)
NGLs (Bbl/d)
Total (Boe/d)
2011 % Change 2012
64
901
317
480
566
191
266
23
1,213
1,595
–
25
1,213
1,620
–
110
(21)
122
32
(100)
30
2011 % Change 2012
11,501
3
5,243
(5)
2,223
(18)
(35)
1,707
20,674
(19)
(100)
–
20,674
(49)
62
333
687
410
1,492
864
2,356
2011 % Change
9,437
4,048
2,741
2,068
18,294
929
19,223
22
30
(19)
(17)
13
(100)
8
Kaybob
Grande Prairie
Southern
Northern
Continuing Ops
Discontinued Ops
Total
Netback – Continuing Operations
Three months ended December 31
2012
2011
Natural gas
NGLs
Oil
Royalty and sulphur revenue
Petroleum and natural gas sales
Royalties
Operating expense
Transportation
Netback
Financial commodity contract settlements
Netback including financial commodity contract settlements
(1) Natural gas revenue shown per Mcf.
($/Boe) (1)
3.45
61.23
79.72
–
28.70
(2.38)
(9.41)
(2.91)
14.00
0.38
14.38
33.1
11.9
8.9
0.7
54.6
(4.5)
(17.9)
(5.5)
26.7
0.7
27.4
30.4
11.4
13.4
1.0
56.2
(4.4)
(19.3)
(5.1)
27.4
0.3
27.7
($/Boe) (1)
3.62
77.98
97.02
–
33.38
(2.61)
(11.45)
(3.03)
16.29
0.18
16.47
Paramount Resources Ltd. 2012Management's Discussion & Analysis47
Paramount’s fourth quarter average sales volumes were 20,674 Boe/d in 2012, an increase of 13 percent
over the fourth quarter of 2011. Natural gas sales volumes increased in the Kaybob COU as a result of
new production from wells producing through the Company’s new Musreau Refrig Facility. Sales
volumes also increased at Valhalla in the Grande Prairie COU where a new gathering and compression
system was commissioned in the first quarter of 2012. Sales volumes in the Southern and Northern
COUs decreased due to natural declines.
Fourth quarter 2012 petroleum and natural gas sales were $54.6 million, a decrease of $1.6 million from
the fourth quarter of 2011, as a 14 percent decrease in average realized prices more than offset the 13
percent increase in sales volumes.
Natural gas and NGLs sales volumes in the fourth quarter of 2012 were reduced due to Third Party
Disruptions, which required Paramount to restrict NGLs recovery rates and curtail production in the
Kaybob and Grande Prairie COUs. The Company estimates that average sales volumes in the fourth
quarter were reduced by approximately 3,000 Boe/d as a result, including reduced liquids yields as the
Company preferentially flowed lower liquids content wells. Sales volumes in December 2012 and
January 2013 were constrained to approximately 22,000 Boe/d.
Operating expenses decreased $1.4 million in the fourth quarter of 2012 compared to the prior year, as
higher operating costs related to the new Musreau Refrig Facility and new wells brought-on production
were more than offset by the impact of higher processing income and lower third party processing fees.
Operating costs per Boe decreased to $9.41 in the fourth quarter of 2012 compared to $11.45 in the
fourth quarter of 2011. The per-unit decrease is primarily due to a higher proportion of sales from the
Kaybob COU, which has per unit operating costs of approximately $5.00 per Boe before accounting for
the impact of third party processing income. Operating expenses in the fourth quarter include the cost of
seasonal maintenance in the Northern COU at remote locations.
Net Loss
Three months ended December 31
Principal Properties
Strategic Investments
Corporate
Tax Recovery
Loss from continuing operations
Discontinued Operations, net of tax
Net Loss
2012
(167.6)
(9.1)
(14.7)
39.6
(151.8)
–
(151.8)
2011
(253.7)
(3.4)
(16.2)
62.5
(210.8)
0.9
(209.9)
Paramount Resources Ltd. 2012Management's Discussion & Analysis48
Three months ended December 31
Netback
Gain (loss) on financial commodity contracts
General and administrative
Stock-based compensation
Depletion and depreciation
Exploration and evaluation
Gain (loss) on sale of property, plant and equipment
Interest expense
Other expenses
Loss from equity-accounted investments
Other income
Tax Recovery
Loss from continuing operations
Discontinued Operations, net of tax
Net Loss
2012
26.7
0.6
(4.0)
(7.0)
(183.1)
(13.8)
(1.8)
(11.6)
(0.8)
(0.4)
3.8
39.6
(151.8)
–
(151.8)
2011
27.4
(7.7)
(4.0)
(6.2)
(271.7)
(7.2)
3.0
(8.6)
(0.9)
(1.0)
3.5
62.6
(210.8)
0.9
(209.9)
Paramount recorded a loss from continuing operations of $151.8 million for the three months ended
December 31, 2012 compared to a loss from continuing operations of $210.8 million in the same period
of 2011. Significant factors contributing to the change are shown below:
Loss from continuing operations – 2011
Lower depletion, depreciation and impairment mainly due to lower write-downs of petroleum and
natural gas properties and goodwill
Gain on financial commodity contracts compared to a loss in 2011
Lower income tax recovery in 2012
Higher exploration and evaluation expense
Loss on sale of property, plant and equipment compared to a gain in 2011
Higher interest in 2012 due to higher debt levels
Other
Loss from continuing operations – 2012
Funds Flow from Operations(1)
Three months ended December 31
Cash from operating activities
Change in non-cash working capital
Geological and geophysical expenses
Asset retirement obligations settled
Funds flow from operations
Funds flow from operations ($/Boe)
(1) Refer to the advisories concerning non-GAAP measures in the Advisories section of this document.
(2) Includes the results of discontinued operations.
2012
(13.2)
27.2
1.0
2.7
17.7
9.29
Three months ended
December 31
(210.8)
88.6
8.3
(23.0)
(6.6)
(4.8)
(3.0)
(0.5)
(151.8)
2011(2)
7.2
14.9
1.9
2.1
26.1
14.73
Funds flow from operations decreased by $8.4 million in the fourth quarter of 2012 compared to the
same period in 2011, primarily as a result the sale of the US properties, which generated $4.0 million of
funds flow from operations in the fourth quarter of 2011, and higher interest expense.
Paramount Resources Ltd. 2012Management's Discussion & Analysis49
Petroleum and natural gas sales – CO
Petroleum and natural gas sales – DO
Petroleum and natural gas sales
Funds flow from operations – CO
Funds flow from operations – DO
Funds flow from operations
Total per share – diluted ($/share)
Income (loss) – CO
Continuing per share – basic ($/share)
Continuing per share – diluted ($/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 Continuing (Boe/d)
Discontinued (Boe/d)
Total (Boe/d)
Average realized price
Natural gas ($/Mcf)
NGLs ($/Bbl)
Oil ($/Bbl)
Continuing ($/Boe)
Discontinued ($/Boe)
Total ($/Boe)
2012
2011
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
54.6
–
54.6
17.7
–
17.7
0.20
(151.8)
(1.69)
(1.69)
(151.8)
(1.69)
(1.69)
104.1
2,110
1,213
20,674
–
20,674
3.45
61.23
79.72
28.70
–
28.70
41.3
–
41.3
15.5
–
15.5
0.18
(34.6)
(0.40)
(0.40)
(34.6)
(0.40)
(0.40)
43.2
3.3
46.5
10.2
1.9
12.1
0.15
(30.9)
(0.36)
(0.36)
–
–
–
46.6
8.1
54.7
8.2
4.6
12.8
0.15
125.2
1.46
1.43
124.5
1.46
1.42
95.3
1,755
1,081
18,712
–
18,712
106.2
1,966
1,289
20,946
528
21,474
88.3
1,604
1,421
17,755
1,058
18,813
2.58
60.65
81.28
24.00
–
24.00
2.09
69.76
81.79
22.65
69.96
23.82
2.77
78.92
89.97
28.84
84.20
31.95
56.2
7.1
63.3
22.1
4.0
26.1
0.33
(210.8)
(2.55)
(2.55)
(209.9)
(2.54)
(2.54)
91.2
1,595
1,492
18,294
929
19,223
3.62
77.98
97.02
33.38
83.45
35.80
63.9
6.6
70.5
29.8
3.0
32.8
0.42
(23.5)
(0.30)
(0.30)
(22.4)
(0.28)
(0.28)
97.5
2,024
1,425
19,705
1,002
20,707
4.12
81.22
82.18
35.24
72.48
37.03
52.9
8.2
61.1
18.7
4.7
23.4
0.29
10.8
0.14
(0.04)
12.2
0.16
(0.02)
77.4
1,478
1,109
15,501
1,071
16,572
4.36
82.18
101.72
37.53
83.77
40.52
40.4
6.4
46.8
10.2
3.7
13.9
0.19
(32.7)
(0.44)
(0.44)
(11.9)
(0.16)
(0.16)
58.5
938
1,497
12,176
921
13,097
4.05
75.96
83.66
36.92
75.09
39.67
Significant Items Impacting Quarterly Results
Significant impacts to quarterly earnings include the effects of changing production volumes and
commodity prices and the following:
Fourth quarter 2012 earnings include a $135.6 million write-down of petroleum and natural gas
properties and goodwill, and $6.5 million in dry hole charges.
Third quarter 2012 earnings includes $6.2 million in respect of a business interruption insurance
settlement related to an electrical equipment failure at the Musreau Refrig Facility in the fourth
quarter of 2011.
Second quarter 2012 earnings include a $50.7 million pre-tax gain recognized on the disposition
of United States properties.
First quarter 2012 earnings include a $157.2 million pre-tax gain on the sale of 5.0 million Trilogy
shares and a $28.3 million gain on the sale of property, plant and equipment, partially offset by
higher tax expense, operating expenses and depletion and depreciation.
Paramount Resources Ltd. 2012Management's Discussion & Analysis50
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.
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.
Other Information
Related Party Transactions
Service Agreements
Paramount engages in transactions with Trilogy, MGM Energy, Paxton and Perpetual in the normal
course of business, including joint venture operations. Paramount is considered related to Trilogy, MGM
Energy, Paxton and Perpetual because of common significant influence. All transactions between
Paramount and the entities are recorded at their exchange amounts.
During 2012, Paramount charged $0.4 million (2011 – $0.9 million) to Trilogy in respect of operational and
administrative services. Also, Paramount received $8.0 million (2011 - $10.1 million) in dividends from
Trilogy. As of December 31, 2012, Paramount had a receivable balance due from Trilogy of $0.9 million
(2011 - $0.3 million).
Contractual Obligations
Paramount had the following contractual obligations at December 31, 2012:
53.4
2013
2014-2015
2016-2017
($ millions)
Senior notes(1)
Drilling Rig Loans (1)
Cavalier Facility (1)
Transportation and processing commitments(2)
Operating leases
Capital spending commitments(3)
Total
(1)
(2) Certain pipeline transportation and NGLs processing commitments are secured by outstanding letters of credit totalling $27.3 million at
Including interest and principal repayments.
–
571.9
–
570.1
–
222.9
12.8
98.5
475.3
106.8
217.2
344.1
After 2017
26.8
10.5
87.9
17.1
85.5
1.9
3.8
8.8
2.8
3.6
5.1
–
–
–
–
Total
979.6
42.4
1.9
407.7
19.0
12.8
1,463.4
December 31, 2012 (2011 - $12.8 million).
(3) Relates to contractual obligations for purchases of major equipment.
Transportation and processing commitments include long-term firm service arrangements entered into
during 2012 for the transportation of NGLs commencing in December 2013 and for the downstream
processing of NGLs volumes commencing in April 2014.
Paramount Resources Ltd. 2012Management's Discussion & Analysis51 Operating Lease Commitment
Paramount’s head office lease expires in 2022. The Company incurred office lease costs of $3.2 million
in 2012 (2011 – $2.8 million).
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.
Change In Accounting Policies
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:
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
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.
Paramount Resources Ltd. 2012Management's Discussion & Analysis52 Disclosure Controls and Procedures
As of the year ended December 31, 2012, 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 as appropriate, to allow timely decisions regarding required disclosure.
It should be noted that while the Company’s chief executive officer and chief financial officer believe that
the Company’s disclosure controls and procedures provide a reasonable level of assurance that they are
effective, they do not expect that the Company’s disclosure controls and procedures or internal control
over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived
or operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met.
Internal Controls Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over the
Company’s financial reporting. The Company’s internal control system was designed to provide
reasonable assurance that all transactions are accurately recorded, that transactions are recorded as
necessary to permit preparation of financial statements in accordance with 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, 2012. 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, 2012.
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 procedures may deteriorate.
Changes in Internal Controls Over Financial Reporting
During the fiscal year and quarter ended December 31, 2012, 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 estimates that
affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities. Estimates and assumptions are continuously evaluated and are based on
management’s experience and other factors, including expectations of future events that are believed to
Paramount Resources Ltd. 2012Management's Discussion & Analysis53 be reasonable under the circumstances. Changes in estimates and assumptions based on new
information could result in a material change to the carrying amount of assets or liabilities and have a
material impact on revenue and expenses in future periods. The following is a discussion of the
accounting estimates that are considered significant:
Reserves Estimates
Reserve engineering is an inherently complex and subjective process of estimating underground
accumulations of petroleum and natural gas. The process relies on assumptions 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.
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. The fair value of individual assets is often required to be estimated, which may involve
estimating the fair values of reserves and resources, tangible assets, undeveloped land, intangible assets
and other assets acquired. These estimates are based on assumptions regarding appropriate indicators
of fair value. Changes in any of the estimates or assumptions 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 adjusts estimated amounts periodically as assumptions are changed to incorporate new
information. Actual payments to settle the obligations may differ materially from amounts estimated.
Share-Based Payments
The Company estimates the grant date 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 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 changes to any
of these assumptions impacts amounts recognized as stock-based compensation expense and
contributed surplus.
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
Paramount Resources Ltd. 2012Management's Discussion & Analysis54 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.
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.
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", "schedule", "intend", "propose", or similar words suggesting future
outcomes or an outlook. Forward looking information in this document includes, but is not limited to:
expected production and sales volumes and the
estimated reserves and resources and the
timing thereof;
exploration, development and strategic investment
plans and strategies and the anticipated costs,
timing, and results thereof;
budget allocations and capital spending flexibility;
the availability and adequacy of facilities to process,
de-ethanize, fractionate and transport natural gas
and NGLs production;
the scope, timing, and cost of proposed new
facilities and facilities expansions and the expected
capacity and benefits of such facilities;
the negotiation and completion of arrangements for
the transportation and sales of natural gas, NGLs,
and bitumen;
the timing and scope of the anticipated development
of oilsands, carbonate bitumen, and shale gas
assets;
expected drilling programs, well tie-ins, facility
construction and expansions, completions and the
timing, scope and results thereof;
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);
future taxes payable or owing;
business strategies and objectives;
sources of and plans for funding Paramount’s
exploration, development, facilities and other
expenditures;
acquisition and disposition plans;
operating and other costs and royalty rates;
regulatory applications and the anticipated timing,
results and scope thereof; and
the outcome and timing of any legal claims,
insurance claims, audits, assessments and
regulatory matters and 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:
future oil, gas, NGLs, and bitumen prices and general
the ability of Paramount and its industry partners to
economic, business, and market conditions;
the ability to obtain required capital, through access
to capital markets and other means, to finance
exploration and development activities and new and
expanded facilities;
the ability to obtain equipment, services, supplies
and personnel in a timely manner and at an
acceptable cost to carry out activities;
obtain drilling success and production levels
consistent with expectations, including with respect
to anticipated reserves additions and NGLs yields;
the timely receipt of required regulatory approvals;
expected timelines and budgets being met and
anticipated results achieved, in respect of facilities
and infrastructure development;
anticipated rates of return from existing and planned
Paramount Resources Ltd. 2012Management's Discussion & Analysis55 the ability to market oil, natural gas, NGLs and
bitumen successfully to current and new customers;
the ability to secure adequate product processing,
projects relative to other opportunities;
estimates of input and labour costs; and
currency exchange and interest rates.
fractionation, transportation and storage;
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:
fluctuations in oil, natural gas, NGLs and bitumen
prices and commodity price differentials;
fluctuations in foreign currency exchange rates and
the ability to fulfill pipeline transportation, processing,
de-ethanization and fractionation commitments;
changes to, or in the interpretation or application of,
interest rates;
laws, regulations or policies;
the uncertainty of estimates and projections relating
to future revenue, future production, NGLs yields,
costs and expenses and the timing thereof;
changes in environmental laws including potential
emission reduction obligations and fracing
regulations;
the ability to secure adequate product processing, de-
the receipt, timing, and scope of governmental or
ethanization, fractionation, transportation and
storage;
uncertainties associated with exploration and
development drilling and related activities;
operational risks in exploring for, developing and
regulatory approvals;
potential title defects affecting Paramount’s
properties;
uncertainties regarding aboriginal land claims and co-
existing with local populations and stakeholders;
producing oil, natural gas, NGLs and bitumen and the
timing thereof;
the effects of weather;
the timing and cost of future abandonment and
the ability to obtain equipment, services, supplies and
personnel in a timely manner and at an acceptable
cost;
potential disruptions, unexpected technical difficulties
or other constraints in designing, developing,
operating or utilizing new, expanded or existing
facilities, including third-party facilities;
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 obtain other sources of financing at an
acceptable cost to fund planned operational,
exploration and development activities, including
costs of anticipated new and expanded facilities and
other projects, and to meet current and future
obligations;
reclamation activities;
clean-up costs or business interruptions resulting
from environmental damage and contamination;
the ability to enter into or continue leases;
existing and potential lawsuits and regulatory actions;
general economic, business and market conditions;
industry wide pipeline, processing, de-ethanization
and fractionation constraints; and
other risks and uncertainties described elsewhere in
this document and in Paramount’s other filings with
Canadian securities authorities.
The foregoing list of risks is not exhaustive. Additional information concerning these and other factors
which could impact Paramount, its operations and its financial condition are included in Paramount’s
Annual Information Form for the year ended December 31, 2012. 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 commodity & insurance 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 Generally Accepted Accounting Principles in Canada ("GAAP").
Paramount Resources Ltd. 2012Management's Discussion & Analysis56
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 Paramount’s Management’s Discussion and Analysis.
Exploration and development expenditures refer to capital expenditures and geological and
geophysical costs 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 Energy, MGM Energy and others), and investments in all other entities at book value.
Paramount provides this information 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.
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 and natural gas liquids.
During the 2012, the value ratio between crude oil and natural gas was approximately 31:1. 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.
Oil Sands Resource Notes:
High Estimate is considered to be an optimistic estimate of the quantity of resource that will actually be
recovered. It is unlikely that the actual remaining quantities of resources recovered will meet or exceed
the high estimate. Those resources at the high end for the estimate range have a lower degree of
certainty (a 10 percent confidence level) that the actual quantities recovered will equal or exceed the
estimate.
Best Estimate is considered to be the best estimate of the quantity that will be actually 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.
Paramount Resources Ltd. 2012Management's Discussion & Analysis57 Low Estimate is considered to be a conservative estimate of the quantity of resources that will actually
be recovered. It is likely that the actual remaining quantities recovered will exceed the low estimate.
Those resources at the low end of the estimate range have the highest degree of certainty (a 90 percent
confidence level) that the actual quantities recovered will equal or exceed the estimate.
Discovered Exploitable Bitumen In Place ("DEBIP") 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 Remaining Hoole Leases, the presence of these characteristics is considered
necessary for the commercial application of known recovery technologies. There is no certainty that it
will be commercially viable to produce any portion of the resources from the Remaining Hoole Leases.
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 applications, 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 Remaining Hoole Leases, contingencies which must be overcome to enable the reclassification of
bitumen contingent resources as reserves include the finalization of plans for the development,
submission of a regulatory application 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 January 1, 2013). Volumes presented are working interest,
before the deduction of royalties.
NPV means net present value and represents Cavalier Energy’s share of future net revenue, before the
deduction of income tax, from the economic contingent resources in the Grand Rapids formation within
the Remaining Hoole Leases. 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. 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 January 1, 2013. The estimated net present values disclosed in this press release do not represent
fair market value.
Paramount Resources Ltd. 2012Management's Discussion & Analysis58 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 independent 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 7, 2013
/s/ Bernard K. Lee
Bernard K. Lee
Chief Financial Officer
Paramount Resources Ltd. 2012Financial Statements59
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, 2012 and 2011 and the
consolidated statements of comprehensive loss, shareholders’ equity and cash flows for the years ended
December 31, 2012 and 2011, 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, 2012 and 2011 and its financial performance
and its cash flows for the years ended December 31, 2012 and 2011 in accordance with International
Financial Reporting Standards.
Calgary, Canada
7 March 2013
Chartered accountants
Paramount Resources Ltd. 2012Financial Statements60
PARAMOUNT RESOURCES LTD.
Consolidated Balance Sheet
($ thousands)
As at December 31
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
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Demand facilities
Accounts payable and accrued liabilities
Risk management
Liabilities associated with assets held for sale
Long-term debt
Asset retirement obligations
Commitments and contingencies
Shareholders’ equity
Share capital
Accumulated deficit
Reserves
Note
2012
2011
21
20
20
6
19
8
9
10
11
19
12
13
20
20
6
14
15
24
16
17
$
$
$
$
146,684
32,790
–
2,504
12,433
194,411
20,234
405,090
1,078,451
90,977
127,767
116,901
3,124
2,036,955
40,703
183,512
–
470
224,685
660,702
300,468
1,185,855
921,680
(165,527)
94,947
851,100
2,036,955
$
$
$
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
22,842
136,820
2,787
13,040
175,489
427,186
299,202
901,877
810,781
(103,615)
116,670
823,836
1,725,713
$
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. 2012Financial Statements61
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
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 income
Loss from continuing operations before tax
Income tax expense (recovery)
Current
Deferred
Loss from continuing operations
Income from discontinued operations, net of tax
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 income (loss) per common share ($/share)
Basic – continuing operations
Basic – discontinued operations
Basic
Diluted – continuing operations
Diluted – discontinued operations
Diluted
Note
20
1,18
9
8
10
5
19
4
17
16
$
$
$
2012
185,662
(14,585)
171,077
2,487
173,564
66,396
21,774
18,140
29,082
284,155
33,516
(26,432)
35,324
3,332
–
1,583
466,870
153,333
14,290
(125,683)
789
(34,339)
(33,550)
(92,133)
30,221
(61,912)
(42,830)
438
(42,392)
(104,304)
(1.06)
0.35
(0.71)
(1.06)
0.35
(0.71)
$
2011
(restated see note 4)
213,356
(17,400)
195,956
(1,699)
194,257
62,443
20,519
16,934
21,462
369,997
27,156
(4,863)
34,109
7,887
1,044
(949)
555,739
1,201
24,392
(335,889)
12
(79,599)
(79,587)
(256,302)
24,312
(231,990)
(19,913)
1,197
(18,716)
(250,706)
(3.27)
0.31
(2.96)
(3.27)
0.31
(2.96)
$
$
See the accompanying notes to these Consolidated Financial Statements.
Paramount Resources Ltd. 2012Financial Statements62
PARAMOUNT RESOURCES LTD.
Consolidated Statement of Cash Flows
($ thousands)
Year ended December 31
Note
2012
2011
Operating activities
Net loss
Add (deduct):
Items not involving cash
Dividends from equity-accounted investments
Asset retirement obligations settled
Current tax related to the sale of U.S. properties
Change in non-cash working capital
Cash from operating activities
Financing activities
Net draw (repayment) of demand loans
Proceeds from Senior Notes, net of issue costs
Repayment of debt assumed on acquisitions
Net draw (repayment) 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 discontinued operations, net
Proceeds on sale of investment, net
Corporate acquisitions
Investments in securities
Investments in equity accounted investees
Change in non-cash working capital
Cash used in investing activities
Net increase (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
$
(61,912)
$
(231,990)
101,013
8,040
(8,002)
3,931
12,150
55,220
17,861
294,135
–
(61,383)
124,465
(3,052)
372,026
(623,631)
45,231
66,498
181,718
–
(13,023)
(1,650)
36,008
(308,849)
118,397
(713)
29,000
146,684
$
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
$
21
15
7
14
7
21
See the accompanying notes to these Consolidated Financial Statements.
Paramount Resources Ltd. 2012Financial Statements63
PARAMOUNT RESOURCES LTD.
Consolidated Statement of Shareholders’ Equity
($ thousands, except as noted)
Year ended December 31
Note
2012
2011
Share Capital
Balance, beginning of year
Issued
Issued on acquisition of ProspEx
Change in unvested common shares for stock incentive plan
7
18
Balance, end of year
Accumulated (Deficit) Earnings
Balance, beginning of year
Net loss
Balance, end of year
Reserves
Balance, beginning of year
Other comprehensive loss
Contributed surplus
Stock-based compensation – investee options
Balance, end of year
Total Shareholders’ Equity
Shares
(000’s)
Shares
(000’s)
85,414
4,432
–
11
89,857
$ 810,781
110,896
–
3
$ 921,680
75,034
8,316
2,000
64
85,414
$ 481,827
271,683
57,280
(9)
$ 810,781
17
$ (103,615)
(61,912)
$ (165,527)
$ 116,670
(42,392)
20,669
–
$ 94,947
$ 851,100
$ 128,375
(231,990)
$ (103,615)
$ 71,996
(18,716)
65,792
(2,402)
$ 116,670
$ 823,836
See the accompanying notes to these Consolidated Financial Statements.
Paramount Resources Ltd. 2012Financial Statements64
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 properties are primarily located in Alberta, the Northwest
Territories and British Columbia. 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 is the ultimate parent company of the consolidated group of companies and 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 of the Company, as at December 31, 2012 and December 31,
2011 and for the years then ended (the "Consolidated Financial Statements"), were authorized for
issuance by Paramount’s Board of Directors on March 7, 2013.
a)
Basis of Preparation
These Consolidated Financial Statements comply in all material respects 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. The Company’s accounting policies have been applied
consistently to all years presented.
These Consolidated Financial Statements include the accounts of Paramount and its subsidiaries and
partnerships, including Cavalier Energy Inc. ("Cavalier Energy"), Fox Drilling Inc. ("Fox Drilling"), Summit
Resources, Inc. ("Summit") and Paramount Drilling U.S. LLC. All intercompany balances and transactions
have been eliminated.
In May 2012, Paramount’s wholly-owned subsidiary, Summit, closed the sale of all of its operated
properties in North Dakota and all of its properties in Montana (the "Sold Properties"). Results of the Sold
Properties have been presented as discontinued operations and prior year comparative results have been
adjusted to conform to the current year’s basis of presentation, refer to note 4.
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 Consolidated Financial Statements are described in Note 2.
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.
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.
Paramount Resources Ltd. 2012Financial Statements65
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
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 corresponding amounts of revenue are 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 Trilogy Energy Corp. ("Trilogy"), 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 Trilogy, MGM Energy and
Paxton share common directors and/or members of management. The Company’s remaining
investments in other entities are accounted for as available-for-sale investments.
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
delineation and pre-production 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.
Paramount Resources Ltd. 2012Financial Statements66
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
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 the costs of materials,
machinery, labour, and directly attributable overhead in connection with their construction. 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, which extend
up to 20 years.
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, which vary 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, 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. For oil and gas properties, the fair value less costs to sell is estimated based on expected after-
tax future net cash flows 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
Paramount Resources Ltd. 2012Financial Statements67
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
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.
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. 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. Costs incurred to affect the transaction are expensed.
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 (or group of CGUs), including
goodwill, exceeds its estimated recoverable amount. Impairment charges relating to goodwill are not
reversed in future periods.
For the purpose of testing goodwill for impairment, recoverable amounts for a CGU or group of CGUs are
estimated on the same basis as used in testing the assets of that CGU for impairment.
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
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, after applying an
estimated cost inflation factor, and is adjusted for the passage of time, which is recognized as accretion
expense. Revisions to the timing, amount, and applicable discount and inflation rates 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.
Paramount Resources Ltd. 2012Financial Statements68
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
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 purpose 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. The measurement of a financial
instrument in subsequent periods is dependent upon whether it 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. All of the Company’s financial instruments have been classified as fair value
through profit or loss except available-for-sale investments and long-term debt.
Fair value through profit or loss financial assets and financial liabilities are measured at fair value, and
changes in fair values 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 are accumulated in other comprehensive income
("OCI") until the asset is realized, at which time the cumulative gain or loss is recognized net income.
Held-to-maturity financial assets, loans and receivables and other financial liabilities, including related
transaction costs, are measured at amortized cost using the effective interest method.
Other Comprehensive Income
For Paramount, 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 in the
Consolidated Balance Sheet.
n)
Income Taxes
Paramount follows the liability method of accounting for income taxes. Under this method, a deferred
income tax asset or liability is recognized in respect of any temporary difference between the carrying
Paramount Resources Ltd. 2012Financial Statements69
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
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 the underlying 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 was 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.
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
Paramount Resources Ltd. 2012Financial Statements70
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
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
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 the completion of the vesting period. Generally, one third of an award vests immediately,
with the remaining tranches vesting annually over two years. The unvested 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.
2.
SIGNIFICANT ACCOUNTING ESTIMATES, ASSUMPTIONS AND
JUDGMENTS
The timely preparation of financial statements requires management to make judgments, estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and
disclosures regarding contingent assets and liabilities. Estimates and assumptions are continuously
evaluated and are based on management’s experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances. Changes in judgments, estimates
and assumptions based on new information could result in a material change to the carrying amount of
assets or liabilities and have a material impact on revenue and expenses in future periods. The following
is a description of the accounting judgments, estimates and assumptions that are considered significant:
Paramount Resources Ltd. 2012Financial Statements71
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Exploration and Evaluation Assets
The accounting for exploration and evaluation assets requires management to make judgments as to
whether wells are classified as exploratory or development. Management must also determine whether
exploratory wells have discovered economically recoverable quantities of reserves, which requires the
quantity and value such reserves to be estimated. 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.
Determination of CGUs
The recoverability of the carrying value of oil and gas properties is assessed at the CGU level.
Determination of the properties and other assets to be included within a particular CGU is based on
management’s judgment with respect to the integration between assets, shared infrastructure and
cashflows. Changes in the assets comprising each CGU impacts recoverable amounts used in
impairment assessments and could have a material impact on net income.
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
Paramount Resources Ltd. 2012Financial Statements72
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
consideration transferred versus the fair value of the net identifiable assets acquired is recognized in
earnings. The fair value of individual assets is often required to be estimated, which may involve
estimating the fair values of reserves and resources, tangible assets, undeveloped land, intangible assets
and other assets acquired. These estimates incorporate assumptions using appropriate indicators of fair
value, as determined by management. Changes in any of the estimates or assumptions 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 adjusts estimated amounts periodically as assumptions are changed to incorporate new
information. Actual payments to settle the obligations may differ materially from amounts estimated.
Share-Based Payments
The Company estimates the grant date 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 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:
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
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.
Paramount Resources Ltd. 2012Financial Statements73
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
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.
DISCONTINUED OPERATIONS
In May 2012, Paramount’s wholly-owned subsidiary, Summit, closed the sale of all of its operated
properties in North Dakota and all of its properties in Montana for after-tax cash proceeds of
$66.5 million. These properties were included in the Company’s Principal Properties business segment.
Details of income from discontinued operations are presented below:
$
Year ended December 31
Petroleum and natural gas sales
Royalties
Revenue
Expenses
Operating expense and production tax
Depletion and depreciation
Exploration and evaluation
Gain on sale of property, plant and equipment
Accretion of asset retirement obligations
Foreign exchange
Other income (expense)
Income from ordinary activities of discontinued operations before tax
Gain on sale of discontinued operations
Income from discontinued operations before tax
Income tax expense – discontinued operations
Current
Deferred
Income from discontinued operations
$
2012
11,481
(1,945)
9,536
3,455
1,398
(341)
–
51
–
4,563
(13)
4,960
50,721
55,681
3,931
21,529
25,460
30,221
2011
28,357
(4,656)
23,701
8,810
8,080
174
(37,158)
(513)
2,326
(18,281)
136
42,118
–
42,118
–
17,806
17,806
24,312
$
$
Paramount Resources Ltd. 2012Financial Statements74
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
The cash flows from discontinued operations, including changes in related non-cash working capital
items are as follows:
Year ended December 31
Operating
Investing
Cash flow from discontinued operations
2012
11,450
65,501
76,951
$
$
2011
15,567
37,221
52,788
$
$
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:
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; 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 Paramount’s wholly-owned subsidiary, Fox Drilling.
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. 2012Financial Statements75
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Year ended December 31, 2012
Revenue
Gain on financial commodity contracts
Expenses
Operating expense
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
Foreign exchange
Income from equity-accounted investments
Other
Drilling rig revenue
Drilling rig expense
Inter-segment eliminations
Segment income (loss)
Income tax recovery
Income from discontinued operations
Net loss
Year ended December 31, 2011
(restated see note 4)
Revenue
Loss on financial commodity contracts
Expenses
Operating expense
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 income (loss)
Income tax recovery
Income from discontinued operations
Net loss
Principal
Properties
$ 171,077
2,487
173,564
66,396
21,774
–
–
282,101
32,038
(26,432)
–
3,310
–
379,187
–
11,483
–
–
(194,140)
–
$ (194,140)
Principal
Properties
$ 195,956
(1,699)
194,257
62,443
20,519
–
–
367,614
25,552
(4,863)
–
7,837
–
–
479,102
–
4,995
–
–
(279,850)
–
$ (279,850)
Strategic
Investments
$
–
–
–
$
Corporate
–
–
–
Inter-segment
Eliminations
$
–
–
–
–
–
6,438
10,879
4,657
1,478
–
1,499
22
18
24,991
153,333
–
20,884
(10,841)
138,385
(4,295)
$ 134,090
–
–
11,702
18,203
338
–
–
33,825
–
1,565
65,633
–
–
–
–
(65,633)
–
(65,633)
$
–
–
–
–
(2,941)
–
–
–
–
–
(2,941)
–
–
(13,422)
6,186
(4,295)
4,295
–
$
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
(919)
61,167
–
–
–
–
(61,167)
–
(61,167)
$
–
–
–
–
(3,710)
–
–
–
–
–
–
(3,710)
–
–
(14,039)
6,429
(3,900)
3,900
–
$
Total
$ 171,077
2,487
173,564
66,396
21,774
18,140
29,082
284,155
33,516
(26,432)
35,324
3,332
1,583
466,870
153,333
11,483
7,462
(4,655)
(125,683)
–
(125,683)
33,550
30,221
$ (61,912)
Total
$ 195,956
(1,699)
194,257
62,443
20,519
16,934
21,462
369,997
27,156
(4,863)
34,109
7,887
1,044
(949)
555,739
1,201
20,698
8,337
(4,643)
(335,889)
–
(335,889)
79,587
24,312
$ (231,990)
Paramount Resources Ltd. 2012Financial Statements76
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Total Assets
Principal Properties
Strategic Investments
Corporate
December 31, 2012
December 31, 2011
$
$
1,410,129
342,967
283,859
2,036,955
$
$
1,216,808
361,909
146,996
1,725,713
Geographical Information
Revenue
Exploration and evaluation assets
Property, plant and equipment, net
Goodwill
Canada
$ 165,661
405,056
1,077,116
3,124
$
2012
United
States
5,416
34
1,335
–
Total
$ 171,077
405,090
1,078,451
3,124
Canada
$ 183,344
374,364
753,167
3,426
$
2011
United
States
12,612
16,378
55,450
–
Total
$ 195,956
390,742
808,617
3,426
For the year ended December 31, 2012, the Company had sales to one customer which exceeded
$30 million and to another customer which exceeded $21 million.
Other Income
Year ended December 31
Gain on investments
Drilling rig revenue
Drilling rig expense
Other
2012
–
7,462
(4,655)
11,483
14,290
$
$
2011
15,703
8,337
(4,643)
4,995
24,392
$
$
Other income for the year ended December 31, 2012 includes $6.2 million in respect of a business
interruption insurance settlement related to an electrical equipment failure at one of the Company’s
facilities in the fourth quarter of 2011.
6.
ASSETS HELD FOR SALE
Exploration and evaluation
Property, plant and equipment, net
Equity-accounted investments
Goodwill
Asset retirement obligations
December 31, 2012
Principal
Properties
12,270
$
163
–
–
(470)
$
Principal
Properties
$
$
5,052
28,251
–
539
(13,040)
December 31, 2011
Trilogy
–
–
24,196
–
–
$
$
Total
5,052
28,251
24,196
539
(13,040)
$
$
Assets Held For Sale – December 31, 2012
During the first quarter of 2013, Summit closed the sale of its non-operated joint venture operations and
lands in North Dakota for $22.5 million, subject to closing adjustments. The carrying value of the
properties and associated liabilities have been presented as assets held for sale as at December 31,
2012.
Paramount Resources Ltd. 2012Financial Statements77
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Assets Held For Sale – December 31, 2011
During the first quarter of 2012, Paramount closed sales of certain Canadian oil and gas properties within
the Southern and Northern COUs for aggregate gross proceeds of $49.2 million, including a $4.0 million
convertible debenture due February 2014. A $28.3 million before-tax gain on sale of property, plant and
equipment was recorded in respect of these transactions.
In January 2012, the Company closed the sale of 5.0 million non-voting shares of Trilogy for net cash
proceeds of $181.7 million, resulting in the recognition of a before-tax gain of $157.2 million which has
been included in income from equity-accounted investments.
7.
ACQUISITION
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:
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 $10.4 million of trade payables.
Paramount Resources Ltd. 2012Financial Statements78
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
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 in 2011 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 was 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, were 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 for the year ended December 31,
2011.
Between May 31, 2011 and December 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.
8.
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
Dry hole
Expired lease costs
Dispositions
Foreign exchange
Balance, end of year
$
2012
390,742
166,214
(12,270)
–
(111,416)
(6,842)
(18,550)
(2,548)
(240)
$
2011
269,084
229,347
(5,052)
82,100
(161,853)
(2,371)
(18,195)
(3,052)
734
$
405,090
$
390,742
Additions to exploration and evaluation assets totaled $119.0 million (2011 - $207.5 million) for Principal
Properties and $47.2 million (2011 - $21.8 million) for Strategic Investments.
Exploration and Evaluation Expense
Year ended December 31
Geological and geophysical
Dry hole
Expired lease costs
2012
7,923
6,880
18,713
33,516
$
$
2011
7,297
2,371
17,488
27,156
$
$
Paramount Resources Ltd. 2012Financial Statements79
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
9.
PROPERTY, PLANT AND EQUIPMENT
Year ended December 31, 2012
Cost
Balance, December 31, 2011
Additions
Transfers to assets held for sale
Transfers from exploration and evaluation
Dispositions
Change in asset retirement provision
Currency translation differences
Cost, December 31, 2012
Accumulated depletion, depreciation and write-downs
Balance, December 31, 2011
Transfer to assets held for sale
Depletion and depreciation
Write-downs
Dispositions
Currency translation differences
Petroleum
and natural
gas assets
$ 1,466,107
426,808
(1,284)
111,416
(58,305)
15,697
394
1,960,833
$
(696,630)
1,121
(148,174)
(135,278)
29,504
(242)
Accumulated depletion, depreciation and write-downs,
December 31, 2012
Net book value, December 31, 2011
Net book value, December 31, 2012
(949,699)
769,477
$ 1,011,134
$
Year ended December 31, 2011
Cost
Balance, December 31, 2010
Additions
Corporate acquisitions
Transfer to assets held for sale
Transfers 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
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
$
$
51,471
32,889
–
–
–
–
(260)
84,100
(13,899)
–
(4,630)
–
–
109
(18,420)
37,572
65,680
$
$
19,943
446
–
–
–
–
(15)
20,374
(18,375)
–
(367)
–
–
5
$ 1,537,521
460,143
(1,284)
111,416
(58,305)
15,697
119
2,065,307
$ (728,904)
1,121
(153,171)
(135,278)
29,504
(128)
(18,737)
1,568
1,637
(986,856)
808,617
$ 1,078,451
$
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
$
$
Paramount Resources Ltd. 2012Financial Statements80
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
2012
151,772
135,278
302
(3,197)
284,155
$
$
2011
148,385
215,156
10,502
(4,046)
369,997
$
$
At December 31, 2012, $267.7 million (December 31, 2011 – $111.4 million) of capitalized costs related
to incomplete development wells and infrastructure projects are currently not subject to depletion.
Additions to property, plant and equipment in 2012 were $426.8 million (2011 - $295.7 million) for
Principal Properties, $32.9 million (2011 - $5.0 million) for Strategic Investments and $0.5 million (2011 –
$0.1 million) for Corporate. Additions to property, plant and equipment include $4.6 million (2011 –
$3.2 million) of capitalized interest for qualifying assets in the construction phase at a weighted average
interest rate of eight percent (2011 – eight percent).
The Company recorded an impairment write-down related to its petroleum and natural gas assets of
$135.3 million (2011 – $215.2 million) within the Principal Properties business segment. The impairment
write-down was primarily related to the Bistcho/Cameron Hills and Clarke Lake CGUs in the Northern
COU, the Elmworth CGU in the Grande Prairie COU and the Southern CGU (Chain), where the carrying
value of the properties exceeded their expected discounted cash flows from the production of estimated
proved and probable reserves. The impairment resulted from a combination of the decline in forecast oil,
natural gas, and natural gas liquids prices, higher well costs than reserves values assigned, and declines
in reserves assigned due to well performance.
The 2011 impairment write-down was primarily related to the Elmworth CGU in the Grande Prairie COU,
the Southern CGU (Chain) in Canada, and the Bistcho/Cameron CGU in the Northern COU, where the
carrying value of the properties exceeded their expected discounted cash flows from the production of
estimated proved and probable reserves. The impairment resulted from a combination of declines in
reserves assigned due to well performance and the decline in forecast natural gas prices.
Write-downs were recognized to the extent that the carrying value of each CGU exceeded its expected
recoverable amount. The recoverable amount was estimated on a fair value less costs to sell basis using
a discounted cash flow method, which is an approach commonly employed by market participants to
value oil and gas properties. Cash flows were projected over the expected remaining life of each CGU’s
reserves, at an after-tax discount rate of eight percent at December 31, 2012 (December 31, 2011 – eight
percent). The forecast prices used to determine the recoverable amount reflect the following benchmark
prices, adjusted for basis differentials to determine local reference prices, transportation costs and
quality:
(Average for the period)
2013
2014
2015
2016
2017
2018-2027
Thereafter
Natural Gas
AECO ($/MMBtu)
Henry Hub (US$/MMBtu)
3.35
3.75
3.85
4.30
4.35
4.85
4.70
5.25
5.10
5.70
5.45 -6.50
6.10 - 7.25
Crude Oil
Edmonton Light ($/Bbl)
WTI (US$/Bbl)
87.50
92.50
90.50
92.50
92.60
93.60
94.50
95.50
96.40
97.40
98.30 -117.50
99.40-118.80
+2%/yr
+2%/yr
+2%/yr
+2%/yr
Paramount Resources Ltd. 2012Financial Statements81
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
The following benchmark prices were used in determining the 2011 impairment write-down:
(Average for the period)
2012
2013
2014
2015
2016
2017-2026
Thereafter
Natural Gas
AECO ($/MMBtu)
Henry Hub (US$/MMBtu)
3.50
3.75
4.20
4.50
4.70
5.05
5.10
5.50
5.55
5.95
5.90 - 7.55
6.35 - 8.10
Crude Oil
Edmonton Light ($/Bbl)
WTI (US$/Bbl)
99.00
97.50
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
10.
EQUITY ACCOUNTED INVESTMENTS
As at December 31
Trilogy(2)
MGM Energy
Paxton
Other
Shares
(000’s)
19,144
54,147
1,750
2012
Carrying
Value
$ 82,419
2,299
3,687
2,572
$ 90,977
Market
Value(1)
$ 557,292
13,537
Shares
(000’s)
19,144
43,834
1,750
Market
Value(1)
$ 719,253
10,520
2011
Carrying
Value
$ 94,062
1,691
4,015
1,775
$ 101,543
(1) Based on the year-end trading price.
(2) December 31, 2011 balances exclude 5.0 million non-voting shares of Trilogy classified within assets held for sale.
Income from equity-accounted investments is composed of the following:
Year ended December 31
2012
Trilogy
MGM Energy
Paxton
Other
Equity
income
(loss)
$ (3,725)
(1,043)
(328)
798
$ (4,298)
Dilution
gain
$
$
416
–
–
–
416
Gain on
sale
$ 157,215
–
–
–
$ 157,215
Total
$ 153,906
(1,043)
(328)
798
$ 153,333
Equity
income
(loss)
$ 1,945
(1,481)
(323)
–
141
$
2011
Dilution
gain
$ 1,060
–
–
–
$ 1,060
Total
$ 3,005
(1,481)
(323)
–
$ 1,201
Paramount recorded a $0.4 million dilution gain (2011 - $1.1 million) in respect of its investment in Trilogy
as a result of shares issued by the investee related to stock option exercises.
The following table summarizes the assets, liabilities, revenue and income of Trilogy, MGM Energy and
Paxton. These amounts have been derived directly from Trilogy’s published financial statements as at
and for the years ended December 31, 2012 and 2011. The amounts presented do not include
Paramount’s adjustments in applying the equity method of investment accounting. As a result, these
amounts cannot be used directly to derive Paramount’s equity income and net investment in Trilogy.
Paramount Resources Ltd. 2012Financial Statements82
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
As at December 31
Assets
Liabilities
Shares outstanding (thousands)
Paramount’s equity interest
2012
Trilogy
$ 1,395,111
908,712
$
116,674
16%
Trilogy
$ 1,260,364
729,919
$
116,118
21%
2011
MGM Energy(1)
76,708
$
5,845
$
314,495
14%
$
$
Paxton(1)
24,557
62
17,402
10%
Year ended December 31
Revenue
Net income (loss)
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 2012 financial statements were not finalized prior to completing these financial statements.
2012
399,098
(12,133)
–
(160,859)
342,106
17,415
103
(3,103)
2011
$
$
$
$
$
$
$
$
Trilogy had 7.3 million stock options outstanding (2.7 million exercisable) at December 31, 2012 at
exercise prices ranging from $4.85 to $38.74 per share.
11.
INVESTMENTS IN SECURITIES
As at December 31
2012
2011
MEG Energy Corp.
Other
Shares
(000’s)
3,700
Shares
(000’s)
3,700
Market
Value
$ 112,628
15,139
$ 127,767
Market
Value
$ 153,809
31
$ 153,840
Paramount sold its investment in NuLoch Resources Inc., and shares in the successor company by
acquisition, Magnum Hunter Resources Corp., through transactions in 2011 for aggregate gross
proceeds of $15.8 million. The Company recognized aggregate gains of $11.1 million in other income,
which previously had been recorded in OCI.
12. GOODWILL
As at December 31
Carrying value, beginning of year
Acquisitions
Adjustment to Redcliffe Exploration Inc. net assets acquired
Reclassified to assets held for sale
Impairment
Carrying value, end of year
The carrying amount of goodwill by COU is as follows:
As at December 31
Kaybob
Northern
2012
3,426
–
–
–
(302)
3,124
2012
3,124
–
3,124
$
$
$
$
2011
8,012
5,477
978
(539)
(10,502)
3,426
2011
3,124
302
3,426
$
$
$
$
Paramount Resources Ltd. 2012Financial Statements83
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
13. DEMAND FACILITIES
As at December 31
Drilling Rig Loan I
Drilling Rig Loan II
Cavalier Facility
Drilling Rig Loans
2012
17,766
21,000
1,937
40,703
$
$
2011
22,842
–
–
22,842
$
$
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 $12.6
million have been made to December 31, 2012. Unless demanded by the bank, scheduled principal
repayments on Drilling Rig Loan I are $5.1 million in 2013, with the remaining outstanding balance
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 construction period, with scheduled
principal repayments to commence in 2013. As of December 31, 2012, $21.0 million was drawn on
Drilling Rig Loan II. Unless demanded by the bank, scheduled principal repayments on Drilling Rig Loan II
are $3.5 million in 2013, $6.3 million in 2014, $6.3 million in 2015 and $4.9 million in 2016.
Recourse and security for Drilling Rig Loan I and Drilling Rig Loan II (the "Drilling Rig Loans") is limited to
the drilling rigs and drilling contracts guaranteed by Paramount. 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 the Drilling Rig Loans for the year ended December 31, 2012 was
4.4 percent (2011 - 4.7 percent).
Cavalier 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 Cavalier Energy, 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. In March 2013, the size of
the Cavalier Facility was increased to $40.0 million, with all other material terms remaining unchanged.
14.
LONG-TERM DEBT
As at December 31
Bank credit facility
8.25% Senior Notes due 2017
7.625% Senior Notes due 2019
Unamortized financing costs net of premiums
2012
$
–
370,000
300,000
670,000
(9,298)
$ 660,702
$
2011
61,383
370,000
–
431,383
(4,197)
$ 427,186
Paramount Resources Ltd. 2012Financial Statements84
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Bank Credit Facility
Paramount’s $300 million bank credit facility (the "Facility") 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 November 30, 2013. 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 November 30, 2013 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
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, 2012, no amounts were drawn on the Facility (December 31, 2011 - $61.4 million).
Paramount had undrawn letters of credit outstanding at December 31, 2012 totaling $42.7 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 due 2017 (the "2017 Senior Notes") at par.
In February 2011, Paramount completed a public offering of an additional $70 million principal amount of
2017 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 2017 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 2017 Senior Notes
are direct senior unsecured obligations of Paramount and rank equally with all other senior unsecured
indebtedness of the Company. The Company has the right to redeem all or a portion of the 2017 Notes
at par, plus accrued and unpaid interest to the date of redemption, plus a redemption premium, if
applicable, which varies based on the date of redemption.
In December 2012, Paramount completed a public offering of $300 million principal amount of senior
unsecured notes due 2019 (the "2019 Senior Notes") at par, of which $9.6 million principal amount was
purchased by certain officers, management and associates of the Company.
The 2019 Senior Notes bear interest at 7.625 percent per annum, payable semi-annually in arrears on
June 4 and December 4 in each year and mature on December 4, 2019. The 2019 Senior Notes are direct
senior unsecured obligations of Paramount and rank equally with all other senior unsecured indebtedness
of the Company. The Company has the right to redeem all or a portion of the 2019 Notes at par, plus
accrued and unpaid interest to the date of redemption, plus a redemption premium, if applicable, which
varies based on the date of redemption.
Paramount Resources Ltd. 2012Financial Statements85
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
15. 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 – continuing operations
Accretion expense – discontinued operations
Transfer to liabilities associated with assets held for sale
Transfer to current liabilities
Foreign exchange
Asset retirement obligations, end of year
2012
299,202
14,626
441
(8,002)
(8,500)
–
3,332
51
(470)
(280)
68
300,468
$
$
$
2011
241,770
23,463
37,791
(7,520)
(2,902)
11,943
7,887
(513)
(13,040)
–
323
$
299,202
Asset retirement obligations at December 31, 2012 were determined using a weighted average risk-free
rate of 2.00 percent (December 31, 2011 – 2.25 percent) and an inflation rate of 2.00 percent
(December 31, 2011 – 2.00 percent). These obligations will be settled over the useful lives of the assets,
which extend up to 39 years.
16. SHARE CAPITAL
Paramount’s authorized share capital consists of an unlimited number of Class A common shares
("Common Shares") without par value and an unlimited number of preferred shares issuable in series. At
December 31, 2012, 89,857,478 Common Shares were outstanding, net of 74,396 Common Shares held
in trust under the stock incentive plan, and no Preferred Shares were outstanding.
In September 2012 Paramount issued, to a company controlled by the Company’s Chairman and Chief
Executive Officer, 646,000 Common Shares on a "flow-through" basis in respect of Canadian exploration
expenses ("CEE") at a price of $31.00 per share and 1,244,000 Common Shares on a "flow-through" basis
in respect of Canadian development expenses ("CDE") at a price of $28.15 per share for aggregate
proceeds of $55 million.
In October 2012 Paramount issued, pursuant to a public offering, 1,936,000 Common Shares on a "flow-
through" basis in respect of CEE at a price of $31.00 per share and 356,000 Common Shares on a "flow-
through" basis in respect of CDE at a price of $28.15 per share for aggregate gross proceeds of
$70 million. Certain officers and management of the Company participated in this offering.
A liability of $19.8 million was recognized in accounts payable and accrued liabilities on the issuance of
such flow-through shares in respect of the Company’s obligation to renounce qualifying expenditures, of
which $9.0 million has been reclassified as a deferred tax liability upon the incurrence of qualifying
expenditures.
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 CDE at a price of $36.50 per share for gross
proceeds of $5.5 million to a company controlled by the Company’s Chairman and Chief Executive
Officer. In May 2011, the Company issued 2,000,000 Common Shares in connection with the ProspEx
acquisition. In October 2011, Paramount issued 1,450,000 Common Shares on a "flow-through" basis in
Paramount Resources Ltd. 2012Financial Statements86
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
respect of 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 $2.4 million (2011 – $8.6 million) of transaction costs in respect of these equity
offerings, net of tax benefits of $0.8 million (2011 – $2.9 million).
Weighted Average Common Shares Outstanding
Year Ended December 31
2012
2011
Loss from continuing operations – basic
Dilutive effect of Paramount Options
Loss from continuing operations - diluted
Shares
(000’s)
86,607
–
86,607
Loss from
continuing
operations
(92,133)
–
(92,133)
$
$
Shares
(000’s)
78,462
–
78,462
Loss from
continuing
operations
(256,302)
–
(256,302)
$
$
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 per share calculations when they are dilutive to income
from continuing operations.
17. RESERVES
Reserves at December 31, 2012 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, 2011
Other comprehensive income (loss)
Stock-based compensation expense
Stock options exercised
Balance, December 31, 2012
Unrealized
Gains on
Securities
51,709
(42,830)
–
–
8,879
$
$
$
Translation
of Foreign
Subsidiaries
(831)
438
–
–
(393)
$
Contributed
Surplus
$
$
65,792
–
26,072
(5,403)
86,461
Total
Reserves
$ 116,670
(42,392)
26,072
(5,403)
$ 94,947
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
Paramount Resources Ltd. 2012Financial Statements87
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Other Comprehensive Income
Year ended December 31
Unrealized 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 income to earnings
Deferred tax
Other Comprehensive Loss
18. SHARE-BASED PAYMENTS
Paramount Options
Changes in the Company’s outstanding options are as follows:
2012
(43,096)
–
266
(42,830)
89
349
–
438
(42,392)
$
$
2011
(7,109)
(15,693)
2,889
(19,913)
(1,419)
2,965
(349)
1,197
(18,716)
$
$
Balance, beginning of year
Granted
Exercised
Forfeited
Expired
Balance, end of year
Options exercisable, end of year
Number
5,767,450
1,340,000
(258,600)
(171,000)
(10,000)
6,667,850
2,862,134
2012
Weighted average
exercise price
($/share)
$
20.76
34.01
11.13
28.15
40.09
23.58
14.42
$
$
2011
Weighted average
exercise price
($/share)
$ 13.90
38.95
10.80
17.74
–
$ 20.76
$ 10.66
Number
5,006,300
1,529,000
(618,850)
(149,000)
–
5,767,450
1,832,218
For options exercised in 2012, the weighted average market price of Paramount’s Common Shares on the dates exercised was $34.46 (2011 -
$35.46).
The weighted average remaining contractual life and exercise prices of Paramount Options outstanding
as of December 31, 2012 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
0.7 years
2.3 years
3.3 years
4.8 years
3.0 years
Weighted average
exercise price
$
$
$
$
$
7.34
13.37
29.38
36.89
23.58
Number
2,170,300
689,050
1,119,500
2,689,000
6,667,850
Paramount Resources Ltd. 2012Financial Statements88
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
The fair value of Paramount Options has been estimated using the Black-Scholes-Merton model
incorporating the following weighted average inputs:
Options re-measured at
September 30, 2011
Weighted average exercise price per share
Expected volatility
Expected life of share options
Pre-vest forfeiture rate
Risk-free interest rate
Expected dividend yield
Weighted average fair value of awards
$
$
14.67
49.7%
2.3 years
4.6%
1.1%
–
18.69
$
Options awarded between
October 1, 2011 and
December 31, 2011
40.02
47.8%
4.7 years
4.9%
1.2%
–
16.45
$
Options awarded in
2012
$
$
34.01
45.3%
4.7 years
5.0%
1.3%
–
13.47
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.
Cavalier Options
Cavalier Energy granted 2.2 million Cavalier Options in 2012 (2011 – 2.5 million) which vest over three to
five years. No exercises or cancellations have occurred to date.
The grant date fair value of Cavalier Options awarded was estimated using the Black-Scholes-Merton
model, incorporating the following inputs: expected volatility 62.4% (2011 – 63.0%), expected life 6.5
years (2011 – 6.9 years), risk-free interest rate 1.5% (2011 – 1.6%), pre-vest forfeiture rate of nil (2011 –
nil), and expected dividend yield of nil (2011 – nil).
The estimated expected life of the Cavalier Options is the term of the option. As Cavalier is a private
entity, expected volatility is estimated based on the average historical volatility of the trading price of a
group publicly traded oil sands companies which are comparable to Cavalier Energy over the most recent
period that is generally commensurate with the expected term of the option.
Stock Incentive Plan – Shares Held in Trust
Year ended December 31
2012
2011
Balance, beginning of year
Shares purchased
Change in vested and unvested shares
Balance, end of year
Shares
(000’s)
86
124
(135)
75
$
$
419
3,052
(3,055)
416
Shares
(000’s)
150
101
(165)
86
$
$
410
2,974
(2,965)
419
Paramount Resources Ltd. 2012Financial Statements89
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Employee Benefit Costs
Year ended December 31
Stock option plan
Stock incentive plan
Stock-based compensation expense
Salaries and benefits, net of recoveries
19.
INCOME TAX
2012
26,072
3,010
29,082
11,951
41,033
$
$
2011
18,412
3,050
21,462
10,956
32,418
$
$
The following table reconciles income taxes calculated at the Canadian statutory rate to Paramount’s
recorded income tax expense (recovery):
Year ended December 31
Loss from continuing operations before tax
Effective Canadian statutory income tax rate
Expected income tax expense (recovery)
Change resulting from:
Statutory and other rate differences
Income from equity-accounted investments
Investment in subsidiaries
Goodwill impairment
Flow-through share renunciations
Stock-based compensation
Non-deductible items and other
Income tax recovery
Components of Deferred Income Tax Asset (Liability)
As at December 31
Property, plant and equipment
Investments
Asset retirement obligations
Non-capital and net operating losses
Other
2012
(125,683)
25.1%
(31,546)
$
$
(2,469)
(22,441)
2,643
76
8,759
6,534
4,894
(33,550)
2012
(9,373)
(2,761)
75,515
50,466
3,054
116,901
$
$
$
2011
(335,889)
26.6%
(89,346)
$
$
1,469
(3,096)
–
2,792
4,625
4,881
(912)
(79,587)
2011
(11,339)
(286)
80,105
42,131
6,937
117,548
$
$
$
Paramount has $208.6 million (2011 - $152.6 million) of unused tax losses expiring between 2014 and
2032. In addition, Paramount has $190.6 million (2011 - $167.4 million) of deductible temporary
differences in respect of investments for which no deferred income tax asset has been recognized.
Deferred tax assets are recognized to the extent that it is probable that taxable profits will be available
against which deductible temporary differences and unutilized tax losses can be applied. A deferred tax
asset related to the carry forward of unutilized tax losses has been recorded as the Company expects
that future taxable profits, through a combination of future operating results and gains realized on the
disposition of assets, will be sufficient to utilize the deferred tax asset.
In October 2010, the Company received reassessments from the Canada Revenue Agency (the "CRA")
(the
and provincial tax authorities of
"Reassessments"). Paramount disagrees with the Reassessments and has filed notices of objection with
the CRA and provincial tax authorities. Despite its disagreement, and as a condition of its right to proceed
income taxes relating to a prior year transaction
its
Paramount Resources Ltd. 2012Financial Statements90
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
with its objection to the Reassessments, the Company was required to deposit approximately $20 million
with the CRA, which will remain on account until the dispute is resolved.
20.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Financial Instruments
Financial instruments at December 31, 2012 consisted of cash and cash equivalents, accounts
receivable, the Deposit, available-for-sale investments, the demand facilities, accounts payable and
accrued 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:
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.
Publicly traded available-for-sale investments are carried at the period-end trading price.
The carrying value of the demand facilities and long-term debt are measured at amortized cost.
The 2017 Senior Notes had a market value of 104.1 percent of their principal amount at
December 31, 2012 (December 31, 2011 – 103.1 percent).
The 2019 Senior Notes had a market value of 100.3 percent of their principal amount at
December 31, 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 paid (received)
Fair value, end of year
Fair Value Hierarchy
2012
(2,603)
2,487
116
–
$
$
2011
(693)
(1,699)
(211)
(2,603)
$
$
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:
Level one – Inputs to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active markets.
Paramount Resources Ltd. 2012Financial Statements91
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
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, 2012, Paramount’s publicly traded available-for-sale investments were classified as
level one 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, 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.
Foreign Currency Risk
Paramount is exposed to foreign currency risk on financial instruments denominated in US dollars
including cash and cash equivalents, accounts receivable, 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 expenditures in US dollars.
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 2017 Senior Notes
and 2019 Senior Notes bear interest at fixed rates 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, 2012 is limited to the carrying values of
cash and cash equivalents and accounts receivable. 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, 2012, Paramount had balances due from one joint venture partner that
represented approximately 10 percent of the Company’s total accounts receivable.
Paramount Resources Ltd. 2012Financial Statements92
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
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.
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 24, contractual obligations related to financial liabilities are
as follows:
2013
2014
2015
2016
2017
Thereafter
Total
Drilling Rig Loans(1)
Cavalier Facility(2)
Accounts payable and accrued liabilities(3)
Senior Notes(1)
$ 10,458
$ 20,051
$
6,798
$
5,050
$
1,937
172,705
–
–
–
–
–
–
$
–
–
–
–
–
–
$ 42,357
1,937
172,705
53,400
53,400
53,400
53,400
421,895
344,058
979,553
$ 238,500
$ 73,451
$ 60,198
$ 58,450
$ 421,895
$ 344,058
$1,196,552
(1)Including interest
(2)Excluding interest
(3)Excluding $10.8 million related to the Company’s obligation to renounce qualifying expenditures for flow-through share issuances.
Accounts payable and accrued liabilities
As at December 31
Trade and accrued payables
Joint venture and royalties
Interest payable
Flow-through share renunciation obligations
2012
163,891
5,618
3,197
10,806
183,512
$
$
2011
127,042
2,374
1,510
5,894
136,820
$
$
Terms and conditions of the above financial liabilities:
Trade and accrued payables and joint venture payables are non-interest bearing and are normally
settled within 30 – 60 days.
Interest on the 2017 Senior Notes is payable semi-annually in arrears on June 13 and December
13 in each year.
Interest on the 2019 Senior Notes is payable semi-annually in arrears on June 4 and December 4
in each year.
Accounts receivable
As at December 31
Revenue receivable
Joint venture receivable
GST and other
$
2012
19,412
10,790
2,588
$
2011
21,543
13,420
5,218
$
32,790
$
40,181
Paramount Resources Ltd. 2012Financial Statements93
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
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 receivables and the credit worthiness of the
counterparties. As a result of this assessment, the Company determined that there was no impairment
of joint venture receivables required. There were no significant non-current joint venture receivables as at
December 31, 2012 and 2011.
21. 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 sale of investments
Discontinued operations
Other
Supplemental cash flow information
Year ended December 31
Interest paid
Current tax paid
Components of cash and cash equivalents
Year ended December 31
Cash
Cash equivalents
2012
(2,603)
29,082
284,155
26,077
(26,432)
3,332
1,497
(153,333)
(34,339)
–
(27,681)
1,258
101,013
$
$
2011
1,910
21,405
369,997
19,858
(4,863)
7,887
(1,393)
(1,201)
(79,599)
(15,703)
(8,751)
527
310,074
$
$
2012
36,424
1,598
$
$
2011
36,910
45
$
$
2012
4,575
142,109
146,684
$
$
2011
15,009
13,991
29,000
$
$
22. CAPITAL STRUCTURE
Paramount’s primary objectives in managing its capital structure are to:
(i)
(ii)
maintain a flexible capital structure which optimizes the cost of capital at an acceptable
level of risk;
maintain sufficient liquidity to support ongoing operations, capital expenditure programs,
strategic initiatives, and the repayment of debt obligations when due; and
Paramount Resources Ltd. 2012Financial Statements94
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
(iii)
maximize shareholder returns.
Paramount manages its capital structure to support current and future business plans and periodically
adjusts the structure in response to changes in economic conditions and the risk characteristics of the
Company’s underlying assets and operations. Paramount monitors metrics such as the Company’s debt-
to-equity and debt-to-cash flow ratios, among others, to measure the status of its capital structure. The
Company has not established fixed quantitative thresholds for such metrics. The capital structure may be
adjusted by issuing or repurchasing shares, issuing or repurchasing debt, refinancing existing debt,
modifying capital spending programs, and disposing of assets, the availability of any such means being
dependent upon market conditions.
Paramount’s capital structure consists of the following:
As at December 31
Working capital deficit (surplus)(1)
Credit Facility
Senior Notes(2)
Net Debt(3)
Share capital
Accumulated deficit
Reserves
Total Capital
$
2012
31,432
–
670,000
701,432
921,680
(165,527)
94,947
$ 1,552,532
$
2011
82,036
61,383
370,000
513,419
810,781
(103,615)
116,670
$ 1,337,255
(1) Excludes risk management assets and 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, 2012 - $10.8 million, December 31, 2011 - $5.9 million).
(2) Excludes unamortized issue premiums and financing costs.
(3) Net Debt excludes the deposit on account with the CRA, pending resolution of the Company’s Notice of Objection (see Note 19).
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.
23. 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 2012, Paramount charged $0.4 million (2011 – $0.9 million) to Trilogy in respect of operational and
administrative services. Also, Paramount received $8.0 million (2011 - $10.1 million) in dividends from
Trilogy. As of December 31, 2012, Paramount had a receivable balance due from Trilogy of $0.9 million
(2011 - $0.3 million).
Compensation of key management personnel
Year ended December 31
Salaries and benefits
Stock-based compensation
2012
1,914
11,039
12,953
$
$
2011
2,159
9,173
11,332
$
$
Paramount Resources Ltd. 2012Financial Statements95
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
24. COMMITMENTS AND CONTINGENCIES
Commitments
Paramount had the following commitments as at December 31, 2012:
Petroleum and natural gas transportation
and processing commitments (1)
Operating leases
Capital spending commitments(2)
Within One Year
17,142
$
After one year but not
more than 5 years
173,381
$
More than five years
217,210
$
2,786
12,789
32,717
$
7,414
–
180,795
$
8,753
–
225,963
$
(1)
(2)
Certain of the transportation and processing commitments are secured by outstanding letters of credit totaling $27.3 million at December 31, 2012 (2011 - $12.8 million).
Relates to contractual obligations for purchases of major equipment.
Operating lease commitment
Paramount’s head office lease expires in 2022. The Company incurred office lease costs of $3.2 million
in 2012 (2011 - $2.8 million).
Flow-Through Shares
As a result of flow through share issuances in 2012, Paramount is required to incur and renounce $57.5
million of CEE during 2013. Paramount has incurred sufficient qualifying expenditures to satisfy
commitments associated with CDE flow-through shares issued in 2012 and the CEE and CDE flow-
through shares issued in 2011.
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.
25. SUBSEQUENT EVENTS
In March 2013, Paramount sold its properties in the Bistcho area of Alberta and the Cameron Hills area of
the Northwest Territories for approximately $9 million, subject to closing adjustments.
Paramount Resources Ltd. 2012Financial Statements96
C o r P o r A t e i n f o r M A t i o n
offiCerS
direCtorS
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
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) (3) (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
J. B. roy (1) (2) (3) (4)
Independent Businessman
Calgary, Alberta
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)
heAd offiCe
BAnKerS
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
Bank of Montreal
Calgary, Alberta
the Bank of nova Scotia
Calgary, Alberta
royal Bank of Canada
Calgary, Alberta
Alberta treasury Branches
Calgary, Alberta
hSBC Bank Canada
Calgary, Alberta
the toronto-dominion Bank
Calgary, Alberta
regiStrAr And
trAnSfer Agent
Computershare trust
Company of Canada
Calgary, Alberta
Toronto, Ontario
StoCK eXChAnge
liSting
The Toronto Stock Exchange
(“POU”)
AuditorS
ernst & Young llP
Calgary, Alberta
4700 Bankers Hall West
888 Third Street S.W.
Calgary, Alberta
Canada T2P 5C5
Telephone: (403) 290-3600
Facsimile: (403) 262-7994
www.paramountres.com