Annual Report 2013
1
Financial and Operating Highlights
2
President’s Message
5
2013 Overview
Review of Operations
7
Management’s Discussion & Analysis 27
63
Financial Statements
IBC
Corporate Information
ANNUAL MEETING OF SHAREHOLDERS
Shareholders are cordially invited to attend
the Annual Meeting of Shareholders to be held
Thursday May 8, 2014 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 document includes forward-looking statements and information that is based on Paramount’s current expectations, estimates, projections and assumptions. Actual results may differ materially from those expressed or
implied by the forward-looking statements and information. Readers are referred to the forward-looking statements and other advisories contained at the end of Paramount’s Management’s Discussion and Analysis for the year
ended December 31, 2013 contained herein which also includes supplemental advisories related to additional information included in this document.
FINANCIAL AND OPERATING HIGHLIGHTS (1)(2)
($ millions, except as noted)
Three months ended December 31
2013
2012
% Change
Year ended December 31
2013
2012
% Change
FINANCIAL
Petroleum and natural gas sales
Funds flow from operations
Per share – diluted ($/share)
Net income (loss)
Per share – diluted ($/share)
Exploration and development expenditures
Investments in other entities – market value (3)
Total assets
Net debt
Common shares outstanding (thousands)
57.8
18.3
0.19
0.3
–
175.8
54.6
17.7
0.20
(151.8)
(1.69)
166.8
6
3
100
5
OPERATING
Sales volumes
Natural gas (MMcf/d)
NGLs (Bbl/d)
Oil (Bbl/d)
Total (Boe/d)
Average realized price
Natural gas ($/Mcf)
NGLs ($/Bbl)
Oil ($/Bbl)
Total ($/Boe)
RESERVES (4)
102.5
2,668
536
20,290
3.73
74.30
78.92
30.99
104.1
2,110
1,213
20,674
3.45
61.23
79.72
28.70
(2)
26
(56)
(2)
8
21
(1)
8
232.5
70.6
0.75
(59.1)
(0.63)
624.9
688.5
2,447.8
1,119.2
96,993
106.1
2,498
726
20,914
3.57
74.73
87.47
30.46
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
2.72
67.10
83.16
27.04
Natural gas (Bcf)
NGLs (MBbl)
Light and medium crude oil (MBbl)
Total Conventional (MBoe)
Oil sands bitumen (MBbl)
Total Company (MBoe)
Conventional F&D costs
excluding facilities & gathering ($/Boe)
Conventional reserves replacement
NPV10 future net revenue before tax
Conventional
Total Company
Proved
December 31
2013
December 31
2012
Proved & Probable
December 31
2013
December 31
2012
301.3
36,777
680
87,677
–
87,677
17.79
611%
1,093
1,093
201.9
15,662
1,540
50,857
–
50,857
16.82
336%
456
456
49
135
(56)
72
–
72
6
140
140
450.5
57,844
885
133,813
93,468
227,281
10.87
759%
1,793
2,094
323.7
30,761
2,128
86,842
93,091
179,933
12.18
599%
880
1,259
18
22
5
19
(2)
20
60
8
8
33
(55)
5
31
11
5
13
39
88
(58)
54
–
26
(11)
104
66
(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. Refer to Paramount’s Management’s Discussion and Analysis for the year ended December 31, 2013.
(3) Based on the period-end closing prices of publicly-traded enterprises and the book value of the remaining investments.
(4) Working interest reserves before royalty deductions. Net present values were determined using forecast prices and costs and do not represent fair market value.
Paramount Resources Ltd. 2013Financial and Operating Highlights 1
PRESIDENT’S MESSAGE
I am very pleased to provide the following annual update to the shareholders of Paramount.
Significant progress has been made to bring the resources that the Company has captured into
production. As I write this message, we are in the final stages of completing the Musreau deep
cut gas plant construction project. We have completed several years of property rationalization
to narrow our focus onto the assets that we believe will contribute the most to shareholder value
creation. Paramount has exited a number of operating areas including North Dakota, Montana,
Saskatchewan, Bistcho in northwest Alberta, Cameron Hills in the Northwest Territories, the
high water-cut oil properties at Enchant in southern Alberta, the Pembina and Ante Creek areas
in central Alberta, and most recently our Chain-Craigmyle area coal-bed methane operations in
southern Alberta. During 2013, we allocated over 95% of our exploration and development
capital expenditures to the Deep Basin and Montney resources in the Kaybob and Grande
Prairie business units, where we believe we can generate the largest returns for our
shareholders. Meanwhile, we continue to move forward with our longer-term projects in the
Liard Basin and the oilsands opportunities within Cavalier Energy.
The oil and gas industry has undergone an immense amount of change as it adjusts to the
revolutionary technological advancements in horizontal drilling and multi-stage fraccing. These
new drilling and completion technologies have provided for a seemingly unlimited amount of
recoverable oil and gas resources. The strategy for much of the industry, including Paramount,
has shifted from capturing as much of this resource as possible to capturing the absolute most
profitable opportunities available with the understanding that if an opportunity does not compete
with the most economic available, it might as well not be owned at all. This is creating a
significant shift in individual companies’ portfolios as they exit out of less profitable holdings into
the most profitable available; which is the foundation of Paramount’s strategy. The most
important thing that a management team in the industry can do today is to allocate its technical
staff and capital to the most profitable opportunities, while attempting to realize value from the
assets that are less competitive. Paramount has done an excellent job of this, allocating the vast
majority of its capital resources primarily to the Deep Basin and Montney assets it has
assembled at Musreau, Kakwa, Karr, Gold Creek, Smoky and Resthaven.
The Company continues to make great progress on its large-scale projects in the Kaybob core
area. The Musreau project is anticipated to commence production in the latter part of the
second quarter of this year. Paramount has over 66 gross wells behind pipe, the majority of
which are completed and tied-in, with first month productive capacity of over 300 MMcf/d gross
(230 MMcf/d net) plus additional natural gas liquids. These wells will come on-stream when the
Company’s new facilities commence production. At the same time, Paramount’s production mix
will evolve from 85 percent gas and only 15 percent liquids to about 55 percent gas and 45
percent liquids. Combined with significant decreases in our per unit cost structure, this product
mix transformation will result in an expansion of our netback per Boe by over two times. The
increases in production, combined with higher netbacks, are expected to result in cash flow
levels that are approximately 10 times the prior amounts. Paramount expects to be able to
replicate its Musreau gas plant construction project many times over with the resources it has
already captured and controls.
Paramount Resources Ltd. 2013President's Message2 During 2013, Paramount achieved further operational and financial performance improvements.
Production increased 5 percent to 20,914 Boe/d in 2013, up from 19,917 Boe/d in 2012, despite
divestitures and various significant third party downstream capacity restrictions throughout the
year. Operating costs per Boe continue to decrease as we bring on incremental low cost
production and, at the same time, benefit from the results of our divestitures of higher cost
production in the last several years. Per unit netbacks increased to $16.54 per Boe in 2013 from
$12.21 per Boe in 2012. Cash netbacks increased to $126.2 million in 2013 from $88.9 million in
2012 as a result of higher production levels and higher netbacks.
The Company’s total capital spending, excluding land acquisitions and capitalized interest,
totaled $704.1 million in 2013, funded mainly through a combination of equity, debt and asset
sales. Paramount was very successful in 2013 adding reserves at a low cost. Proved reserves
increased by 72 percent from 50.9 MMBoe at the end of 2012 to 87.7 MMBoe at year-end 2013.
Conventional proved plus probable reserves increased from 86.8 MMBoe at year-end 2012 to
133.8 MMBoe at year-end 2013, an increase of 54 percent. The Company achieved
conventional reserves replacement ratios of over 600 percent for proved reserves and over 750
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 $17.79/Boe for proved reserves and $10.87/Boe for proved plus probable
reserves.
Paramount’s wholly-owned oilsands subsidiary, Cavalier Energy, had a successful year of
operations. The year was spent working through the regulatory process for the initial 10,000
Bbl/d phase at its Hoole project, with this approval now expected mid-year 2014. Cavalier
updated its independent engineering evaluation of the Hoole project resulting in an additional 27
million barrels of recoverable resource, which now totals 840 million barrels, although the value
of this project slipped slightly to an NPV of $1.8 billion, discounted at 10% before tax. Cavalier
continues to evaluate the funding alternatives for the initial phase of construction, although this
has proven difficult in the current economic environment.
Fox Drilling brought into service two new, state-of-the-art, triple sized walking drilling rigs. This
brings the total rigs owned and operated by Fox to five. Paramount has been the exclusive user
of these Fox rigs throughout 2013, as these rigs are perfectly suited to our operations in the
Kaybob area. The familiarity with Paramount’s operations has allowed the Fox Drilling team to
achieve significant reductions in time and costs to drill wells in the area, adding to the positive
economics in the Kaybob area plays.
The Company moved forward with its initial Besa River shale gas exploration activities in the
Liard Basin in 2012. Drilling and completion operations were finished on the Patry b-40-I well,
with production commencing in late-2013. Drilling of the Dunedin d-57-D vertical well was
completed and the Company made the decision to pursue drilling and completing a horizontal
leg. Paramount encountered some setbacks running the production casing in the hole and
anticipates finishing drilling operations in the near future, with the completion of the well to follow
later in the year. Paramount has also spudded an additional well at d-71-G, which has been
suspended at the intermediate casing point due to spring break-up conditions.
Paramount Resources Ltd. 2013President's Message3 North American gas markets finally received some positive momentum as the continent has
been under the influence of a Polar Vortex for most of this winter. With only modest increases in
North American gas supply, incremental heating demand across the continent has resulted in
unprecedented storage withdrawals of nearly three Tcf, with prices spiking materially at times
during periods of extreme cold throughout the winter. Natural gas inventories in North America
have dropped below one Tcf as storage caverns have been depleted by the significant
withdrawals. It is expected that prices will remain strong as storage operators attempt to restore
inventory levels in time for the next winter heating season. The same price impact has been
seen in natural gas liquids markets, as propane prices in particular have spiked to all time
record highs due to these significant heating demands. Crude oil prices have been fairly stable
year-over-year at or just below the $100 per barrel range and condensate continues to trade in
Alberta at a premium to crude oil prices as demand from oilsands operations continues to
materially outpace production in Alberta.
The Company is fortunate to have captured and control some of the best and most economic oil
and natural gas prospects available in North America. Paramount continues to maintain capital
discipline, directing investments towards the plays that exceed our economic hurdles at current
commodity prices, while balancing risks. Approximately 90% of the Company’s 2014
conventional capital expenditure budget will be allocated to the Kaybob and Grande Prairie
plays, which provide compelling returns in the current commodity price environment.
Paramount has provided 2014 capital spending guidance of $650 million on exploration and
development activities including $50 million on its Strategic Investments, mainly on shale gas
exploration activities in the Liard Basin. Production is anticipated to remain at current levels 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 facilities in which Paramount has
secured long-term firm service capacity. Paramount expects production to exceed 70,000 Boe/d
as we move into 2015 with the achievement of full extraction capability from the new facilities.
By 2015, after these major projects are on production, Paramount’s cash flow from operations
will begin to exceed our capital spending. Paramount’s management team is extremely excited
to see the results of the many years of hard work on these projects, and looks forward to
delivering continued growth from these projects and our resources in the future.
J.H.T. Riddell
President and Chief Operating Officer
March 2014
Paramount Resources Ltd. 2013President's Message4
2013 OVERVIEW
Oil and Gas Operations
Proved reserves increased 72 percent year-over-year to 87.7 MMBoe, after production of 7.6 MMBoe
and dispositions of 2.2 MMBoe (replacement ratio of 6.1 times).
Total proved and probable ("P+P") reserves increased 47.3 MMBoe to 227.3 MMBoe, with
conventional P+P reserves increasing 54 percent to 133.8 MMBoe (replacement ratio of 7.6 times)
and probable oil sands bitumen reserves increasing to 93.5 MMBoe.
Year-end 2013 P+P reserves included 57.8 MMBbl of NGLs (43 percent of conventional P+P
reserves), representing an 88 percent increase in NGLs reserves over 2012.
The value of year-end 2013 conventional P+P reserves (10% discount, before tax) more than doubled
to $1.8 billion.
Kaybob COU P+P finding and development costs, excluding major facilities and gathering system
project construction costs, were $10.21 per Boe compared to $10.31 per Boe in 2012.
Sales volumes will begin to ramp-up as the Musreau Deep Cut Facility starts up in the second quarter
of 2014. Paramount’s sales volumes are expected to reach approximately 50,000 Boe/d in 2014 and
increase to approximately 70,000 Boe/d in 2015.
Paramount’s behind pipe well inventory in the Kaybob Deep Basin has increased to 66 (47.9 net)
wells with estimated first month deliverability of approximately 300 MMcf/d (230 MMcf/d net).
Kaybob COU sales volumes increased 23 percent to 13,402 Boe/d in 2013 compared to 10,910
Boe/d in 2012. Total Company sales volumes increased 5 percent in 2013 to average 20,914 Boe/d,
despite third-party downstream disruptions that curtailed production by approximately 3,500 Boe/d
and the sale of 1,500 Boe/d of production.
NGLs volumes are projected to increase from 12 percent of total sales volumes in 2013 to
approximately 40 percent by the end of 2014.
Netbacks increased by 42 percent to $126.2 million in 2013 from $88.9 million in 2012.
In 2013, the Company sold non-core properties in Alberta, the Northwest Territories and the United
States, realizing proceeds of approximately $70 million in cash and publicly trading securities.
In February 2014, Paramount entered into an agreement to sell coal bed methane properties
producing approximately 6 MMcf/d in the Chain-Delia area of Alberta for approximately $12 million in
common shares of a TSX-Venture listed Company.
Corporate
The Company raised a total of approximately $360 million in 2013 through equity offerings and the
$150 million re-opening of its 7⅝ percent senior notes due 2019.
In November 2013, Paramount’s bank credit facility was increased from $450 million to $600 million
based on progress made in the Kaybob Deep Basin development and increases in reserves to the
end of September 2013.
Total 2013 capital spending was approximately $100 million lower than Paramount’s $800 million
capital guidance because of severe weather conditions in late-2013 and other factors which deferred
spending into 2014.
Paramount Resources Ltd. 20132013 Overview5
Strategic Investments
The market value of Paramount’s investments in publicly-traded and private corporations was
approximately $690 million ($7.10 per Paramount share) as of December 31, 2013.
In the Liard Basin, the Company’s first horizontal shale gas exploration well at Patry was brought-on
production in late-December. At Dunedin, the Company plans to complete its d-57-D shale gas
exploration well and drill an additional shale gas exploration well in 2014 to preserve lands.
Cavalier Energy anticipates regulatory approvals for the initial 10,000 Bbl/d phase of its Hoole project
will be received by mid-2014. Front-end engineering and design work was completed in 2013.
Fox Drilling’s two new walking rigs are both currently drilling separate 10-well pads in the Kaybob
COU.
Paramount Resources Ltd. 20132013 Overview6
REVIEW OF OPERATIONS (1)
Year ended December 31
Sales Volumes
Natural gas (MMcf/d)
NGLs (Bbl/d)
Oil (Bbl/d)
Total (Boe/d)
Netback ($ 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
2013
106.1
2,498
726
20,914
2012
% Change
98.5
1,873
1,620
19,917
8
33
(55)
5
($/Boe)(3)
3.57
74.73
87.47
–
30.46
(1.42)
(9.52)
(2.98)
16.54
138.3
68.1
23.2
2.9
232.5
(10.8)
(72.7)
(22.8)
126.2
($/Boe)(3)
2.72
67.10
83.16
–
27.04
(2.27)
(9.58)
(2.98)
12.21
98.2
46.0
49.3
3.6
197.1
(16.5)
(69.9)
(21.8)
88.9
% Change
in $mm
41
48
(53)
(19)
18
(35)
4
5
42
Netback
(1) Amounts include the results of discontinued operations. Refer to Paramount’s Management’s Discussion and Analysis for the year ended December 31,
2013 for further details.
(2) Readers are referred to the advisories concerning non-GAAP measures and oil and gas measures and definitions in the Advisories section of this
document.
(3) Natural gas revenue shown per Mcf.
Paramount’s operations continue to focus along the Deep Basin trend in west central Alberta, where the
Company holds extensive multi-zone mineral rights to 1,220 (774 net) sections of land, including 394 (326
net) sections of Montney rights. Over the past few years, the Company has been constructing natural gas
processing facilities and securing long-term NGLs transportation and processing capacity to provide the
necessary infrastructure to maximize the value of Paramount’s liquids-rich Deep Basin resources.
The Company’s first major natural gas processing facility in the Deep Basin, a 45 MMcf/d refrigeration
facility (the "Musreau Refrig Facility") was commissioned in the first quarter of 2012 and a second major
facility, the 200 MMcf/d Musreau Deep Cut Facility, is scheduled to start up in the second quarter of 2014.
This processing capacity, in conjunction with the expected alleviation of third-party downstream NGLs
bottlenecks, will enable the Company to more than double current production to reach approximately
50,000 Boe/d in 2014 and more than triple production to approximately 70,000 Boe/d in 2015. NGLs
volumes are projected to increase from 12 percent of total production in 2013 to approximately 40 percent
by the end of 2014, which will significantly increase per unit netbacks.
In Kaybob, mechanical construction of the Musreau Deep Cut Facility is substantially complete and
advance drilling continues to increase the volumes of behind pipe production that will feed the Musreau
Deep Cut Facility and the deep cut expansion at Smoky. In Grande Prairie, the Company is advancing
the exploration and delineation of its Montney lands northwest of Musreau at Karr-Gold Creek.
Expansions to third-party pipeline systems and NGLs processing facilities downstream of Paramount’s
properties are being completed, which will provide Paramount with the required transportation and NGLs
processing capacity to achieve planned production increases. As the Company continues to focus on its
low-cost, liquids-rich properties, further divestitures of non-core properties were completed in 2013 in
Alberta, the Northwest Territories and the United States.
Paramount Resources Ltd. 2013Review of Operations7
Sales volumes increased five percent in 2013, despite third-party disruptions which curtailed production
by approximately 3,500 Boe/d and the sale of approximately 1,500 Boe/d of production.
The Company’s netback increased 42 percent in 2013, primarily as a result of higher revenue due to
increased prices and higher natural gas and NGLs volumes. Royalties decreased because of a greater
proportion of production qualifying for Alberta new well royalty incentive programs and the impact of
annual gas cost allowance adjustments.
Paramount Resources Ltd. 2013Review of Operations8
Kaybob
Year ended December 31
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
2013
72.1
1,365
29
13,402
347
150
497
2012
% Change
59.5
924
62
10,910
201
162
363
21
48
(53)
23
73
(7)
37
Total Land Holdings (sections)
Wells Drilled
Gross
682
31
Net
428
26
Gross
788
27
Net
446
21
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 682 (428 net)
sections of extensive multi-zone mineral rights within the Kaybob COU. The Company’s drilling activities
are focused on the Montney, Falher and Dunvegan formations, which are high pressure, liquids rich, tight
gas formations with large reserves potential.
Paramount has approximately 235 (200 net) sections of Montney rights in the Kaybob COU. In 2013, the
Company received regulatory approval to increase well densities on a portion of its Montney lands at
Musreau and now has a contiguous block of 36 sections approved for up to five wells per section.
Densities of ten or more wells per section per formation are anticipated to be required to produce the
recoverable resources in place, representing a multi-decade inventory of drilling locations.
In 2013, Paramount continued to execute the large-scale development of its Deep Basin lands, advancing
construction of the Musreau Deep Cut Facility, participating in the deep cut expansion of the non-
operated Smoky facility and drilling and completing wells to increase production deliverability in advance
of the start-up of these new facilities.
The Company continued to achieve significant reserves growth in 2013 as a result of its development
activities in the Kaybob Deep Basin. Further increases in reserves volumes are expected as development
drilling continues in 2014.
With the first full year of operations of the Musreau Refrig Facility, Kaybob COU sales volumes increased
23 percent in 2013 to 13,402 Boe/d, despite continued capacity constraints and third-party disruptions.
Operating expenses, net of processing income, averaged $4.34 per Boe for the Kaybob COU in 2013 and
less than $4.00 per Boe within the Musreau area. The Musreau Refrig Facility provides significant savings
to the Company through the elimination of third-party processing fees. Following start-up of the Musreau
Deep Cut Facility, per unit operating costs are expected to decrease as fixed costs will be applied over
significantly higher production volumes.
The downstream NGLs bottlenecks that constrained Paramount’s production in 2013 are expected to
alleviate in 2014 with the commencement of long-term firm service contracts to transport and process
NGLs volumes extracted from Company’s natural gas production. These contracts, together with the
Paramount Resources Ltd. 2013Review of Operations9
completion of the deep cut facilities expansions will allow the Company to produce from its behind-pipe
inventory of 66 (47.9 net) wells, increasing production, netbacks and cash flow.
Kaybob Wells
Paramount completed the drilling of 31 (26.2 net) wells in the Kaybob COU in 2013, including 13 (12.3
net) Montney wells and 16 (11.9 net) Falher wells. The majority of these new wells have been completed
and tied-in and will be brought-on production when the Musreau Deep Cut Facility commences operation.
The 2013 drilling program included six pad sites that accounted for 19 of the 31 wells drilled. In addition,
Paramount’s two walking drilling rigs are each drilling 10-well Montney pads, which are expected to be
finished drilling in the second quarter of 2014.
Currently, Kaybob area production volumes are mainly from leaner Cretaceous wells in which
Paramount’s working interest generally ranges from 50 to 100 percent. These wells, primarily producing
from the Falher formation, have on average performed in accordance with anticipated type curves and
expected liquids yields.
NGLs transportation and fractionation capacity constraints have continued to limit Paramount’s ability to
bring Montney formation wells on production due to their high liquids content. Where NGLs capacity is
available, the Company is producing selected Montney wells at restricted flow rates, to recover load oil,
cleanup wellbores and obtain production data before being shut-in to await the start-up of the Musreau
Deep Cut Facility.
Paramount has transitioned from drilling single delineation wells to commercial resource development
where multiple wells are drilled on pad sites. The use of multi-well pad sites provides capital efficiencies
by minimizing mobilization and de-mobilization costs, as well as reducing equipping and tie-in costs
through the use of common facilities. Paramount’s walking rigs can move between wells and resume
drilling operations within two hours, with the drill pipe standing in the derrick. Drilling techniques continue
to be refined, including bit selection and drilling fluids, allowing wells to be drilled in shorter time periods.
The Company has also reduced completion costs by improving pumping techniques, modifying frac sizing
and spacing, recycling the frac oil, and securing lower costs for services, equipment and completion
fluids. Each well on the 10-well pads is expected to be drilled in about 30 days, compared to an average
of 41 days for Montney wells drilled in 2013, and cost approximately $10 million to drill, complete and tie-
in. In 2014, the Kaybob COU’s drilling program will primarily focus on drilling Montney wells from pad sites
located in the northern portion of the Company’s Kaybob area lands, where liquids yields are expected to
be the highest.
As of February 28, 2014, the Company’s behind pipe well inventory in the Kaybob Deep Basin was 66
(47.9 net) wells, including wells previously produced that have been temporarily shut-in due to capacity
constraints, with estimated first month deliverability of approximately 300 MMcf/d (230 MMcf/d net) of raw
gas. Production from these wells will be processed through the Musreau and Smoky deep cut facilities
and Paramount’s other Kaybob area capacity.
Kaybob NGLs Extraction Process
Paramount’s production will ramp-up as the Musreau Deep Cut Facility starts up in the second quarter,
with NGLs being extracted and delivered downstream for sale or to third-party facilities for further
processing. Following the completion of expansions to Company-owned natural gas processing and
downstream third-party NGLs processing facilities, the Kaybob NGLs extraction process ("C2+ Recovery
Mode") will be as follows:
Production volumes will be transported from wellsites via a Company-owned gathering system to the
Musreau Deep Cut Facility.
Paramount Resources Ltd. 2013Review of Operations10
Condensate will be separated from the liquids-rich gas stream at the plant inlet and treated through
the condensate stabilizer system to remove lighter hydrocarbons, creating a higher value stabilized
pentanes-plus product ("C5+") that will be shipped through a third-party liquids pipeline system for
sale. Lighter hydrocarbons removed from the C5+ through the stabilization process will be returned
to the gas stream.
Following separation of the C5+, the liquids-rich natural gas stream will pass through the amine
processing train to sweeten the gas, and then will be cooled to approximately minus 100 degrees
Celsius to extract substantially all remaining NGLs from the gas stream. When operating in full
ethane recovery mode, the Musreau Deep Cut Facility is designed to extract approximately 90
percent of the ethane and virtually all propane, butane and heavier hydrocarbons in the gas stream
to create an "ethane plus" NGLs product ("C2+"). The C2+ stream will be shipped through a third-
party liquids pipeline system to Fort Saskatchewan for further processing at third-party NGLs
processing facilities.
At Fort Saskatchewan, the C2+ volumes will first be processed through a third-party de-ethanization
facility, where ethane will be extracted and then sold to a third party under a long-term ethane sales
agreement, and the remaining stream of propane, butane and heavier hydrocarbons ("C3+") will be
fractionated and sold.
Following the extraction of NGLs, dry natural gas, with a heat content of approximately 1,010 btu per
standard cubic foot, will be delivered from the Musreau Deep Cut Facility to a third-party natural gas
pipeline system for sale.
Until third party de-ethanization capacity is available, the Musreau Deep Cut Facility will be operated at
warmer temperatures, resulting in most of the ethane remaining in the gas stream ("C3+ Recovery Mode")
and the deep cut plant creating a "propane plus" product comprised primarily of propane, butane and
heavier hydrocarbons. Paramount’s NGLs sales volumes and revenue will be lower during C3+ Recovery
Mode compared to C2+ Recovery Mode, but these impacts will be mostly offset by higher natural gas
sales with the ethane remaining in the gas stream, which will increase both the sales value and sales
volume of natural gas.
Kaybob Natural Gas and Condensate Processing Capacity
At the end of 2013, Paramount had 79 MMcf/d of net owned and firm service natural gas processing
capacity in the Kaybob COU, which equates to approximately 15,500 Boe/d of potential sales volumes.
Upon completion of the Musreau Deep Cut Facility, the condensate stabilizer expansion and the non-
operated Smoky Deep Cut Facility in 2014, the Company’s net owned and firm service contracted natural
gas and NGLs processing capacities will increase to over 300 MMcf/d in the Kaybob COU that will
provide over 85,000 Boe/d of gross sales volume capacity. This capacity will be used to process
Paramount’s production as well as unavoidably commingled third-party volumes for a fee.
Kaybob COU sales volumes will ramp up over the first few months following startup of the Musreau Deep
Cut Facility, as the operations team optimizes the facility’s equipment and processes. Initial volumes
processed through the new facility will be primarily from leaner Cretaceous wells in which Paramount’s
working interest generally ranges from 50 percent to 100 percent. As these initial production volumes
decline, new 100 percent working interest Montney wells will be brought on production, which will
increase liquids production and Paramount’s working interest share of sales volumes. The commissioning
of the amine processing train ("Amine Train") and condensate stabilizer expansion will increase the
Company’s flexibility for processing sour gas production and for stabilizing incremental liquids volumes.
Paramount’s midstream agreements commencing in the second quarter of 2014 provide long-term firm
service transportation and processing capacity for NGLs volumes extracted from the Company’s Kaybob
Paramount Resources Ltd. 2013Review of Operations11
area natural gas production. The NGLs processing agreements initially provide for the fractionation of C3+
streams, with C2+ Recovery Mode to commence upon completion of third-party de-ethanization facility
expansions. The first phase of these expansions, previously scheduled for completion in the third quarter
of 2014, is now expected to be complete in late-2014. Third-party de-ethanization capacity is expected to
increase further with the completion of a second expansion phase in 2015. The Company is in
discussions with midstream companies to secure short-term access to de-ethanization capacity in
advance of the completion of these third-party expansions. The Company already has in place a long-
term agreement for the sale of ethane.
The elements and estimated timing of additional Kaybob area processing capacity are shown below and
are based on the expectation that planned third-party downstream de-ethanization capacity becomes
available in late-2014:
Kaybob Processing Capacity (1)(2)
Boe/d
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
Condensate Stabilizer Expansion
Smoky Deep Cut Expansion
(Non-op)
Musreau Deep Cut
C3+ Recovery
Mode
Musreau Deep Cut
Partial C2+ Recovery
Mode
Musreau Deep Cut
Full C2+ Recovery
Mode
Current Capacity
-
31-Mar-14
30-Jun-14
30-Sep-14
31-Dec-14
31-Mar-15
30-Jun-15
30-Sep-15
31-Dec-15
(1) Aggregate processing capacity of the Kaybob COU's owned and firm service natural gas and condensate processing facilities. These processing
capacity estimates are subject to a number of assumptions and risks and should not be construed as projections of Paramount's Kaybob area
production volumes at or by any particular date or dates. The Company's net sales volumes in the Kaybob COU will be lower than the capacity shown
because of a number of factors including, but not limited to: a) some unavoidably commingled third-party volumes will be processed using Paramount
capacity; b) the liquids content of wells will vary; c) production volumes sufficient to fill capacity will not be available in all periods and under certain
conditions; and d) during maintenance periods and at other times, the facilities will not operate at design capacity.
(2) Increases in Kaybob processing capacity in the chart above are shown at the mid-point of the quarter in which new facilities and facilities
expansions are scheduled to be completed. However, the completion of such facilities may occur at any point during such period or may occur in a
different period and the actual ramp-up will be different than depicted. See the Advisories section of this document.
Paramount Resources Ltd. 2013Review of Operations12
Paramount Infrastructure Projects
The Musreau Deep Cut Facility is scheduled to startup in the second quarter of 2014. Mechanical
construction is substantially complete and activities at the site are focused on completing the final stages
of the electrical and instrumentation work. Commissioning of individual components of the facility
commenced in December 2013. Activities at the site were impacted by third-party labour shortages and
severe weather conditions in late-January and February 2014 which have prolonged the remaining work
and the commissioning process. As a result of these changes, the Company is accelerating work
originally planned for later in the year to integrate the Amine Train and the condensate stabilizer
expansion to minimize downtime later in 2014 when these additional components are started-up. The
expected total cost of the facility remains at approximately $190 million, in-line with the original budget.
The Company continues to advance the construction of the Amine Train at the Musreau Deep Cut Facility
site, which will provide the capability to treat sour gas production at the facility instead of at well sites.
This project is expected to cost approximately $45 million and will reduce equipping costs per well by over
$1 million and result in lower ongoing well operating costs. Major components for the Amine Train are
being delivered to the plant site, with construction and installation activities scheduled to be completed in
the fourth quarter of 2014.
Condensate yields from Paramount’s new Montney wells at Musreau exceeded expectations in 2012. As
a result, the Company initiated a project to expand the condensate stabilizer system servicing the
Musreau Deep Cut Facility and the Musreau Refrig Facility by 15,000 Bbl/d (the "Stabilizer Expansion") to
process the anticipated incremental liquids volumes. Long-lead time components have been ordered and
the project is expected to be completed in the fourth quarter of 2014 at a cost of approximately $45
million. Upon start-up of the Musreau Deep Cut Facility, the Kaybob COU will have condensate
stabilization capacity of approximately 8,500 Bbl/d, which will increase to approximately 23,500 Bbl/d
when the Stabilizer Expansion becomes operational. Until the Stabilizer Expansion is completed, Kaybob
field condensate production in excess of capacity will be trucked to other Paramount and third-party
facilities for processing.
Paramount is continuing the preliminary planning for construction of additional natural gas processing
facilities in the Deep Basin. The Company currently anticipates that a refrigeration process will be used to
extract C3+ NGLs as opposed to a deep cut recovery process because the availability of long-term sales
contracts for incremental ethane volumes is believed to be limited. The specific location, capacity and
construction timeline of proposed new facilities are currently under review. A decision to proceed is
anticipated later in 2014 following the ramp-up of the Musreau Deep Cut Facility and obtaining additional
well performance data, including NGLs yields.
To ensure access to downstream NGLs transportation and fractionation for future natural gas processing
facilities, Paramount has secured capacity in further expansions to third-party NGLs transportation and
fractionation systems servicing the Deep Basin that are expected to come on-stream beginning in mid-
2016.
The deep cut expansion of the non-operated processing facility at Smoky (the "Smoky Deep Cut Facility")
continues to progress. The Company will have a 20 percent interest in the expanded facility, an increase
from its current 10 percent interest in the existing 100 MMcf/d dew point facility. The Smoky Deep Cut
Facility will initially have a working capacity of 200 MMcf/d (40 MMcf/d net) upon start-up, increasing to
300 MMcf/d (60 MMcf/d net) 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 this additional
compression.
Paramount Resources Ltd. 2013Review of Operations13
Site work on the Smoky Deep Cut Facility continues, with process equipment delivered and mechanical
work underway. The expansion is scheduled to be commissioned in the third quarter of 2014. Paramount
was advised by the third-party operator that it expects the existing Smoky 100 MMcf/d dew-point facility
will be shut-down for approximately two months commencing in the second quarter of 2014 to complete
its integration with the expansion. Paramount’s share of the Smoky Deep Cut Facility expansion costs is
expected to total $75 million, of which approximately $50 million has been incurred to December 31,
2013.
Upon completion of the Company’s new facilities, Paramount’s net owned and firm service processing
capacity will increase to over 300 MMcf/d in the Kaybob COU, providing over 85,000 Boe/d of gross sales
volume capacity. The Kaybob COU plans to begin ramping up production in the second quarter of 2014
and production levels are expected to continue to increase throughout 2014 and 2015. The increases in
production together with a higher proportion of NGLs, will generate significantly higher cashflows for
Paramount.
Grande Prairie
Year ended December 31
Sales Volumes
Natural gas (MMcf/d)
NGLs (Bbl/d)
Oil (Bbl/d)
Total (Boe/d)
Exploration and Development Expenditures ($ millions)
Exploration, drilling, completions and tie-ins
Facilities and gathering
2013
20.0
809
322
4,459
112
16
128
2012
% Change
20.9
749
307
4,536
70
33
103
(4)
8
5
(2)
60
(52)
24
Total Land Holdings (sections)
Wells Drilled
Gross
538
14
Net
346
9
Gross
577
10
Net
379
7
The Grande Prairie COU operates in the Peace River Arch area of Alberta, where its principal properties
include Karr-Gold Creek, Valhalla and Mirage. Activities in the Grande Prairie COU are currently focused
at Karr-Gold Creek, where the Company has approximately 159 (126 net) sections of Montney rights that
have exhibited similar reservoir and fluid characteristics to competitors’ offsetting lands and the
Company’s Montney lands at Musreau, approximately six miles to the south.
As of December 31, 2013, Paramount has drilled a total of six (6.0 net) horizontal middle-Montney wells
at Karr-Gold Creek. All six wells have been completed and brought-on production at restricted rates
because of constraints in downstream natural gas and NGLs processing capacity. The drilling of three
additional middle-Montney re-entry wells planned for the fourth quarter of 2013 was delayed to the first
quarter of 2014 due to site access restrictions caused by heavy snowfall. In 2013, the Company also
participated in seven (2.1 net) non-operated wells in the Karr-Gold Creek area.
Positive results from the Company’s middle-Montney wells and offsetting industry wells confirm that the
Montney trend extends from Kaybob northwest onto the Company’s lands at Karr-Gold Creek. To further
the exploitation of this resource, the Company has secured long-term firm service natural gas processing
Paramount Resources Ltd. 2013Review of Operations14
and liquids transportation capacity for its Karr-Gold Creek production beginning in the second quarter of
2014. This will provide long-term capacity that will allow the Grande Prairie COU to continuously produce
its wells and is expected to lower per-unit operating costs.
In 2014, the Company plans to drill up to 7 wells to continue the delineation of its middle and upper
Montney lands at Karr-Gold Creek. At Valhalla, Paramount is continuing to optimize its production
through available third-party capacity and plans to drill up to three wells to manage expiries.
Sales volumes in the Grande Prairie COU averaged 4,459 Boe/d in 2013, a decrease of two percent
compared to 2012. Third-Party Disruptions continued to impact operations during 2013, reducing sales
volumes by approximately 1,500 Boe/d, primarily at Valhalla.
In the second quarter of 2013, Paramount completed the sale of the majority of its holdings in the Ante
Creek area of Alberta in exchange for $13.5 million in common shares of RMP Energy Inc.
Southern (1)
Year ended December 31
Sales Volumes
Natural gas (MMcf/d)
NGLs (Bbl/d)
Oil (Bbl/d)
Total (Boe/d)
Exploration and Development Expenditures ($ millions)
Exploration, drilling, completions and tie-ins
Facilities and gathering
2013
9.5
255
342
2,179
7
–
7
2012
% Change
9.8
171
1,016
2,814
23
3
26
(3)
49
(66)
(23)
(70)
(100)
(73)
Total Land Holdings (sections)
Wells Drilled
(1) Amounts include the results of discontinued operations. Refer to Paramount’s Management’s Discussion and Analysis for the year ended December 31,
Gross
719
1
Net
356
1
Gross
627
4
Net
432
2
2013 for further details.
In the first quarter of 2013, the Company sold its non-operated joint venture operations and lands in North
Dakota for gross proceeds of approximately US$22 million. Combined with the 2011 sale of undeveloped
land in North Dakota for US$40 million and the 2012 sale of operated properties in North Dakota and
Montana for US$70 million, approximately US$132 million in cash proceeds were realized from the sale
of these high royalty, high operating cost United States properties. Total sales proceeds significantly
exceeded the carrying value of these assets.
In February 2014, Paramount entered into an agreement to sell its properties in the Chain-Delia area of
Alberta for approximately $12 million in common shares of Marquee Energy Ltd., a TSX Venture
Exchange listed company. These properties had average 2013 production of approximately 6 MMcf/d of
natural gas, and include approximately 160 (120 net) sections of land. This transaction is scheduled to
close in the first quarter of 2014.
Paramount Resources Ltd. 2013Review of Operations15
Following these dispositions, the Southern COU’s main producing property will be at Harmattan, which
produced approximately 600 Boe/d in the fourth quarter of 2013. The Company plans to drill up to four
exploratory wells on its Southern properties in 2014.
Northern (1)
Year ended December 31
Sales Volumes
Natural gas (MMcf/d)
NGLs (Bbl/d)
Oil (Bbl/d)
Total (Boe/d)
Exploration and Development Expenditures ($ millions)
Exploration, drilling, completions and tie-ins
Facilities and gathering
2013
2012
% Change
4.5
69
33
874
–
1
1
8.3
29
235
1,657
21
7
28
(46)
138
(86)
(47)
(100)
(86)
(96)
Total Land Holdings (sections)
(1) Amounts include the results of discontinued operations. Refer to Paramount’s Management’s Discussion and Analysis for the year ended December 31,
Gross
334
Net
220
Gross
627
Net
432
2013 for further details.
Paramount owns approximately 65 (65 net) sections of land in the Birch-Umbach area of Northeast British
Columbia that are prospective for liquids-rich natural gas production from the Montney formation. The
Company’s activities at Birch have been directed towards drilling and producing new wells in order to
evaluate well performance, including flow
rates and liquids ratios. Three horizontal
Montney wells completed to date are
being produced through a 3 MMcf/d pilot
facility, with NGLs yields averaging
approximately 60 Bbl/MMcf of raw gas.
Paramount plans to drill an additional four
horizontal Montney wells at Birch in the
second half of 2014, two of which are
expected to be completed and tied-in by
the end of the year.
BIRCH - UMBACH
In March 2013, Paramount sold
its
properties in the Bistcho area of Alberta
and
the
the Cameron Hills area of
Northwest Territories for net proceeds of
$9.1 million. Average 2012 sales volumes
for these properties were approximately
1,000 Boe/d.
Paramount Resources Ltd. 2013Review of Operations16
Reserves
Conventional
Paramount continued to achieve strong year-over-year reserves growth in 2013, driven by the Company’s
Deep Basin development program. Proved reserves additions in 2013 totaled 46.7 MMBoe, resulting in
an increase of 72 percent over 2012 proved reserves, after 2013 production of 7.6 MMBoe and
dispositions of 2.2 MMBoe. Proved & probable ("P+P") reserves additions in 2013 totaled 58.0 MMBoe,
resulting in a 54 percent increase over 2012 P+P reserves, after 2013 production of 7.6 MMBoe and
dispositions of 3.4 MMBoe. Year-over-year, proved reserves per share increased 60 percent and
conventional P+P reserves per share increased 43 percent.
NGLs reserves increased significantly in 2013, both on a volume basis and as a percentage of total
reserves, as the Company’s drilling program continues to focus on the liquids-rich Montney formation.
Proved NGLs reserves totaled 36.8 MMBbl as of December 31, 2013, representing 42 percent of total
proved reserves, compared to 15.7 MMBbl and 31 percent of total proved reserves in 2012. P+P NGLs
reserves totaled 57.8 MMBbl as of December 31, 2013, representing 43 percent of conventional P+P
reserves, compared to 30.8 MMBbl and 35 percent of conventional P+P reserves in 2012.
As of December 31, 2013, the value of proved reserves (discounted at 10 percent, before tax) increased
140 percent to $1.1 billion and the value of conventional P+P reserves (discounted at 10 percent, before
tax) increased 104 percent to $1.8 billion.
Hoole Oil Sands Bitumen
In addition to its conventional reserves, the Company’s wholly-owned subsidiary, Cavalier Energy Inc.
("Cavalier Energy"), has 93.5 MMBbl of probable bitumen reserves attributed to its proposed 10,000
barrel per day Grand Rapids formation oil sands development planned at Hoole, Alberta. Bitumen
reserves volumes for the Hoole Grand Rapids were recognized in 2012 following the filing of regulatory
applications for project approval.
MBoe
100,000
80,000
60,000
40,000
20,000
0
Proved Reserves
2009
2010
2011
2012
2013
Conventional Reserves
MBoe
250,000
200,000
150,000
100,000
50,000
0
Proved & Probable Reserves
2009
2010
2011
2012
2013
Conventional Reserves
Bitumen
Paramount Resources Ltd. 2013Review of Operations17
The Company’s working interest reserves and before tax net present value of future net revenues as of
December 31, 2013 using forecast prices and costs are as follows:
Reserves Summary (1)
Gross Reserves
Before Tax
Net Present Value (3)
($ millions)
Light &
Medium
Crude
Oil
(MBbl)
Natural
Gas
(Bcf)
183.6
7.4
110.4
301.3
149.2
450.5
–
–
–
680
–
–
680
206
885
–
–
–
Conventional
Proved
Developed Producing
Developed Non-producing
Undeveloped
Total Proved
Total Probable
Total Proved & Probable Conventional
Non-Conventional - Oil Sands Bitumen
Total Proved
Total Probable
Total Proved & Probable Non-Conventional
Natural
Gas
Liquids Bitumen
(MBbl)
(MBbl)
Total
(MBoe) (2)
Discount Rate
0%
10%
6,759
10,708
19,310
36,777
21,067
57,844
38,034
–
11,940
–
37,703
–
87,677
–
–
46,136
– 133,813
–
–
–
–
93,468
93,468
–
93,468
93,468
841
232
692
1,765
1,251
3,016
–
1,902
1,902
591
208
294
1,093
700
1,793
–
301
301
Total Company
Total Proved
Total Probable
Total Proved & Probable
(1) Columns may not add due to rounding.
(2) Refer to the Oil and Gas Measures and Definitions and other advisories 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
87,677
93,468 139,604
93,468 227,281
36,777
21,067
57,844
301.3
149.2
450.5
1,765
3,153
4,918
680
206
885
–
1,093
1,001
2,094
McDaniel’s forecast prices and costs as of January 1, 2014.
December 31, 2013 reserves include 10.7 MMBbl of NGLs in the proved developed non-producing
("PDNP") classification which primarily relate to completed wells in the Kaybob COU that will be produced
through the Musreau Deep Cut Facility. The PDNP NGLs reserves associated with these wells represent
the incremental NGLs volumes that will be extracted from the natural gas stream through deep cut
processing. These reserves will be reclassified to proved developed producing ("PDP") reserves when the
Musreau Deep Cut Facility enters service. Proved undeveloped reserves totaling 37.7 MMBoe are related
to wells in the Kaybob and Grande Prairie COUs that are in the process of being drilled, or are expected
to be drilled over the next year.
Future development costs totaling $53 million in respect of the estimated costs to complete the Musreau
Deep Cut Facility, the Amine Train and the Smoky Deep Cut Facility were deducted in determining the
estimated net present value of future net revenue from Paramount’s PDNP reserves.
Paramount Resources Ltd. 2013Review of Operations18
The following table summarizes future development costs deducted in the calculation of future net
revenue from conventional reserves:
Conventional Reserves
Total
(MBoe)
38,034
11,940
37,703
87,677
46,136
Before Tax
NPV0 (1)
($MM)
841
232
692
1,765
1,251
Proved Developed Producing
Proved Developed Non-producing
Proved Undeveloped
Total Proved
Total Probable
Future Development Costs – Undiscounted
Wells &
Other
($MM)
Plants
($MM)
Total
($MM)
–
53
–
53
3
–
16
496
512
2
–
69
496
565
5
Total Proved & Probable
(1) The estimated net present values disclosed in this document do not represent fair market value. Revenues and expenditures were calculated based on
133,813
3,016
514
56
570
McDaniel’s forecast prices and costs as of January 1, 2014.
Reserves Reconciliation(1)
Proved Reserves
Oil &
NGLs (2)
(MBbl)
Natural
Gas
(Bcf)
Total
(MBoe) (3)
Proved & Probable Reserves
Natural
Gas
(Bcf)
Oil &
NGLs (2)
(MBbl)
Total
Conventional Bitumen
(MBoe) (3)
(MBbl)
Total
(MBoe) (3)
January 1, 2013
Extensions & discoveries
Technical revisions
Dispositions
Production
201.9
124.0
23.5
(9.4)
17,202
18,822
3,267
(657)
(38.7)
(1,177)
50,857
39,496
7,183
(2,224)
(7,634)
323.7
195.1
(15.8)
(13.8)
(38.7)
32,889
29,986
(1,900)
(1,068)
(1,177)
86,842
62,507
(4,531)
(3,371)
(7,634)
December 31, 2013
(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 and other advisories in the Advisories section of this document.
133,813
93,468
37,457
87,677
58,729
450.5
301.3
93,091
179,933
–
377
–
–
62,507
(4,155)
(3,371)
(7,634)
227,281
Paramount Resources Ltd. 2013Review of Operations19
Finding and Development Costs – Conventional
Paramount’s finding and development ("F&D") costs per barrel are summarized below. The total F&D
capital includes costs of and changes in future development costs relating to major facilities and gathering
system projects.
2013 F&D Cost
Including Major Facilities & Gathering
3-Year Average F&D
Costs (1)(2)
FDC
Change (1)
Total F&D
Capital (1)
Reserves
Additions (3)
$MM
$MM
$MM
MMBoe
F&D
$/Boe
2012
$/Boe
2011
$/Boe
3-Year
Average
$/Boe
PROVED
Kaybob
Total Conventional
PROVED & PROBABLE
Kaybob
Total Conventional
485.0
612.8
202.1
315.7
687.1
928.4
485.0
612.8
49.7
163.1
534.8
775.9
37.9
46.7
44.4
58.0
18.14
19.89
12.03
13.38
27.13
29.83
26.73
41.28
22.16
25.77
16.19
19.46
21.28
36.66
14.94
17.22
(1)
(2)
(3)
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.
Excludes capitalized interest.
F&D amounts relate to conventional properties only. 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 of and changes in future development costs related to
major facilities and gathering system projects are summarized below:
2013 F&D Cost
Excluding Major Facilities & Gathering
3-Year Average F&D
Costs (1)(2)
FDC
Change (1)
Total F&D
Capital (1)
Reserves
Additions (3)
$MM
$MM
$MM
MMBoe
F&D
$/Boe
2012
$/Boe
2011
$/Boe
3-Year
Average
$/Boe
PROVED
Kaybob
Total Conventional
PROVED & PROBABLE
Kaybob
Total Conventional
347.2
457.8
259.1
372.6
606.2
830.5
347.2
457.8
106.7
172.2
453.9
630.1
37.9
46.7
44.4
58.0
16.01
17.79
10.21
10.87
14.64
16.82
17.85
27.70
15.85
18.86
10.31
12.18
13.57
24.19
10.64
12.81
(1)
(2)
(3)
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.
Excludes capitalized interest.
F&D amounts relate to conventional properties only. Refer to the Oil and Gas Measures and Definitions in the Advisories section of this document.
The Kaybob COU’s recycle ratio was 2.0 to 1 in 2013, based on a proved and probable F&D cost of
$10.21 per Boe (excluding major facilities and gathering costs). Paramount anticipates that the Kaybob
COU’s recycle ratio will increase once the Musreau Deep Cut Facility is on-stream, as higher liquids
yields will generate greater per unit netbacks.
Paramount Resources Ltd. 2013Review of Operations20
Exploration and Capital Expenditures
Year ended December 31 ($ millions)
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
2013
6.3
451.6
167.0
624.9
20.3
645.2
92.3
5.8
743.3
Exploration and development expenditures include $12.1 million of capitalized interest (2012 - $4.6 million).
Strategic Investments include $1.0 million of capitalized interest (2012 - $0.4 million).
(1)
(2)
2012
6.0
304.6
212.5
523.1
25.2
548.3
82.5
0.4
631.2
The Company’s exploration and development expenditures and strategic investments spending,
excluding land acquisitions and capitalized interest, totaled $704.1 million in 2013, $95.9 million less than
Paramount’s increased 2013 capital budget of $800 million. Planned drilling, completion, tie-in and
gathering system projects for the fourth quarter within the Kaybob and Grande Prairie COUs were
impacted by site access restrictions caused by unusually heavy snowfall. Completion operations planned
for the shale gas exploration well at Dunedin in the fourth quarter were delayed until 2014, as work to
prepare the well for completion continued through year-end. Aggregate spending on facilities projects was
also lower than expected.
Drilling and Land
As at December 31
(000’s of acres)
Undeveloped land
Acreage assigned reserves
Total
(1)
(2)
"Gross" acres means the total acreage in which Paramount has an interest.
"Net" acres means gross acres multiplied by Paramount’s working interest therein.
2013
2012
Gross(1)
Net(2)
1,337
450
1,787
924
249
1,173
Average
Working
Interest
69%
55%
66%
Gross(1)
1,685
523
2,208
Net(2)
1,190
289
1,479
Average
Working
Interest
71%
55%
67%
Wells Drilled by Formation
(Net)
12
11
20
Montney
Falher
Other
Paramount Resources Ltd. 2013Review of Operations21
OPERATING RESULTS
Paramount’s sales volumes have increased in each of the past five years. The Company is planning for
further increases as its Deep Basin expansions startup, with sales volumes expected to reach
approximately 50,000 Boe/d in 2014 and increase to approximately 70,000 Boe/d in 2015.
In 2013, NGLs were 12 percent of sales volumes but represented 29 percent of total revenue. NGLs are
comprising a larger proportion of overall production and revenue, a trend that is expected to continue.
NGLs volumes are projected to increase to approximately 40 percent of total sales volumes by the end of
2014. The increases in Company production, together with a higher proportion being NGLs, will generate
significantly higher revenue and netbacks.
Paramount continues to focus on controlling its operating and general and administrative costs, and per
unit costs are projected to decrease as fixed costs are be applied over significantly higher production
volumes when the Company’s new facilities start up. Per unit operating costs have also decreased as a
result of dispositions of higher-cost properties over the past few years.
Average Sales Volumes
Sales Revenue
Boe/d
25,000
20,000
15,000
10,000
5,000
0
$MM
80
60
40
20
0
% NGLs
15
12
9
6
3
0
$MM
250
200
150
100
50
0
2009
2010
2011
2012
2013
% NGLs
30
24
18
12
6
0
2009
2010
2011
2012
2013
Natural Gas
NGLs Crude Oil % NGLs
Natural Gas
NGLs Crude Oil % NGLs
Operating Expense
General & Administrative Expense
$/Boe
16
12
8
4
0
$MM
20
16
12
8
4
0
$/Boe
5
4
3
2
1
0
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
$/Boe
$/Boe
Paramount Resources Ltd. 2013Review of Operations22
CORPORATE
In May 2013, the Company raised $150.9 million through the issuance of 4.0 million common shares. In
October 2013, Paramount raised approximately $60 million through the issuance of 1.4 million CEE flow-
through Common Shares.
In December 2013, Paramount completed a $150 million re-opening of its 7⅝ percent senior notes due
2019 at a price of $1,007.50 per $1,000 principal amount.
The Company’s bank credit facility was increased in 2013 from $300 million to $600 million. The revolving
period and maturity date of the credit facility were extended to November 30, 2014 and November 30,
2015, respectively.
STRATEGIC INVESTMENTS
SHALE GAS
Paramount’s shale gas land holdings encompass approximately 200 (167 net) sections in the Liard and
Horn River Basins in northeast British Columbia and the Northwest Territories, including approximately
156 net sections with potential from the Besa River shale gas formation.
Paramount Resources Ltd. 2013Review of Operations23
The Company finished drilling and completing its first horizontal shale gas exploration well at Patry in
northeast British Columbia in the first quarter of 2013 and the well was brought-on production in late-
December, following its tie-in to existing third-party infrastructure. Over its first 60 days of production, the
well averaged 3.2 MMcf/d of natural gas. The results of the Patry well have been attributed to the well
being drilled into a thinner portion of the Besa River shale formation along the eastern-most part of the
Liard Basin.
At Dunedin, in the central portion of the Liard Basin, the Besa River shale formation is about four times
thicker than it is at Patry. Paramount resumed drilling its Dunedin shale gas exploration well at d-57-D in
September following the completion of a road to provide all-season access to the wellsite and other area
lands. The well was drilled to a total measured depth of 6,000 meters, including a 1,600 meter horizontal
leg, with significant pressures noted during drilling operations. While running production casing, the
casing hanger packer system prematurely set, resulting in the liner becoming stuck in the wellbore. The
Company is currently undertaking recovery operations to remove the liner materials. Following the
recovery operation, the Company plans to complete the Dunedin well later in 2014, with tie-in operations
to follow in 2015, pending test results from the well. In late-February 2014, Paramount moved an
additional rig into Dunedin and has commenced drilling a vertical shale gas exploration well at d-71-G to
preserve lands.
Cavalier Energy was created in 2011 as a self-funding entity to execute the development of the
Company’s oil sands and carbonate bitumen assets. Cavalier Energy holds approximately 200,000 net
acres of Crown leases in the Western Athabasca region of Alberta.
Hoole Grand Rapids
Cavalier Energy’s initial focus 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 $80 million has been invested
through land acquisitions, stratigraphic drilling, engineering studies, and environmental field programs to
bring this asset to the development stage.
In November 2012, Cavalier Energy submitted regulatory applications for the initial 10,000 Bbl/d phase of
the Hoole Project ("Hoole Phase 1"). During 2013, front-end engineering and design work for Hoole
Phase 1 was completed, along with geotechnical work and the drilling of additional delineation wells.
Cavalier Energy’s current activities are being funded with drawings on its $40 million credit facility.
Construction of Hoole Phase 1 is dependent upon the receipt of regulatory approvals, the securing of
funding, and sanctioning by the Board of Directors. Cavalier Energy anticipates that regulatory approvals
will be received by mid-2014 and is continuing to evaluate funding alternatives.
Cavalier Energy obtained an updated independent evaluation of its Hoole Project, effective December 31,
2013, from the Company’s independent reserves evaluators. The evaluation ascribes 93.5 million barrels
of probable undeveloped reserves to Hoole Phase 1 with a net present value of $301 million (before tax,
discounted at 10 percent). In addition to these probable undeveloped reserves, the updated evaluation
ascribes 746 million barrels of economic contingent resources (best estimate) with a net present value of
Paramount Resources Ltd. 2013Review of Operations24
$1.5 billion (before tax, discounted at 10 percent) to Cavalier Energy’s approximately 54 sections of
additional Grand Rapids rights at Hoole that are not included in Hoole Phase 1 (the "Remaining Hoole
Lands"). Results of the updated evaluation of the Remaining Hoole Lands are as follows:
Classification/Level of Certainty (1)
DEBIP (1)
(MMBbl)(2)
Economic
Contingent
Resources (1)
(MMBbl)(2)
NPV of Future Net
Revenue (3)
(before tax, discounted at 10%)
($MM)
High Estimate
Best Estimate
Low Estimate
1,545
1,544
1,533
(1) See Oil Sands Resource Notes in the Advisories section of this document.
(2) MMBbl means millions of barrels.
(3) NPV of economic contingent resources, see Oil Sands Resource Notes in the Advisories section of this document.
938
746
566
2,512
1,511
446
Fox Drilling, a wholly-owned subsidiary of Paramount, owns
five triple-sized rigs in Canada, including two new built-for-
purpose walking rigs that were put into service in 2013.
Fox Drilling’s rigs are designed to drill the deep horizontal wells
that industry is currently focusing on. During 2013, all five rigs
were deployed on
Paramount has achieved reductions in drilling days and costs
from the efficiencies gained by utilizing Fox’s fleet of rigs and
maintaining the continuity of rig crews by drilling wells back-to-
back.
the Company’s Deep Basin
lands.
The two new walking rigs are both currently drilling separate
10-well pads in the Kaybob COU, and the Company is
realizing the benefit of the walking feature of the rigs as the
time required to move from well to well is being measured in
hours rather than days.
Paramount Resources Ltd. 2013Review of Operations25
INVESTMENTS IN OTHER ENTITIES
Paramount holds investments in a number of publicly–traded and private corporations as part of its
portfolio of strategic investments. The Company’s investments in shares of Trilogy Energy and MGM
Energy were principally obtained in the course of the spin-out of the entities from Paramount.
Investments in shares of most other entities, including MEG Energy and Strategic Oil & Gas, were
received as consideration for properties sold to the entities. Paramount’s investments are summarized
below:
Market Value (1)
As at December 31
Trilogy Energy Corp.
MEG Energy Corp.
MGM Energy Corp.
Strategic Oil & Gas Ltd.
Other(2)
Shares
(000’s)
19,144
3,700
54,147
7,200
2013
$
($ millions)
528.4
113.3
8.7
5.4
32.7
$
688.5
($/share)
27.60
30.61
0.16
0.75
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
─
(1)
(2)
Based on the period-end closing price of publicly traded investments and book value of remaining investments.
Includes investments in other public and private corporations.
$MM
1,200
1,000
800
600
400
200
0
Market Value of Investments
$/POU Share
18
15
12
9
6
3
0
2009
2010
2011
2012
2013
$/POU Share
Paramount Resources Ltd. 2013Review of Operations26
MANAGEMENT’S DISCUSSION & ANALYSIS
This Management’s Discussion and Analysis ("MD&A"), dated March 6, 2014, should be read in
conjunction with the audited Consolidated Financial Statements of Paramount Resources Ltd.
("Paramount" or the "Company") as at and for the year ended December 31, 2013. Financial data
included in this MD&A has been prepared in accordance with International Financial Reporting Standards
("IFRS" or "GAAP") 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 disclosure of certain oil
and gas measures. 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
primarily located in Alberta 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’s Principal Properties are divided into four Corporate Operating Units ("COUs"):
•
•
•
•
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 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 commercial
production, but a longer-term value proposition based on spin-outs, dispositions or future revenue
generation, including oil sands and carbonate 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. 2013Management's Discussion & Analysis27
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)
Loss from 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 (2)
Total assets
Long-term debt
Net debt
OPERATIONAL
Sales volumes (3)
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) (3)
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 investments
Interest
Dividends from investments
Other
Funds flow from operations
2013
2012
2011
230.7
1.8
232.5
71.9
(1.3)
70.6
0.75
(87.1)
(0.93)
(59.1)
(0.63)
624.9
688.5
2,447.8
882.6
1,119.2
106.1
2,498
726
20,914
37
6
30.46
(1.42)
(9.52)
(2.98)
16.54
–
–
16.54
(1.66)
(0.89)
(6.69)
1.05
0.89
9.24
173.4
23.7
197.1
51.9
6.2
58.1
0.67
(64.7)
(0.75)
(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
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
193.3
48.4
241.7
73.1
23.1
96.2
1.23
(241.9)
(3.08)
(232.0)
(2.96)
465.7
1,077.3
1,725.7
427.2
513.4
81.6
1,542
2,291
17,426
48
27
38.00
(3.47)
(11.20)
(3.23)
20.10
0.03
–
20.13
(1.90)
(0.76)
(5.26)
1.79
1.12
15.12
(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) Based on the period-end closing prices of publicly-traded investments and the book value of the remaining investments.
(3) Amounts include the results of discontinued operations.
Paramount Resources Ltd. 2013Management's Discussion & Analysis28
Consolidated Results
Net Loss
Year ended December 31
Principal Properties
Strategic Investments
Corporate
Income tax recovery
Loss from continuing operations
Discontinued operations, net of tax
Net loss
2013
(28.2)
5.3
(82.8)
18.6
(87.1)
28.0
(59.1)
2012
(157.5)
134.0
(65.6)
24.4
(64.7)
2.8
(61.9)
2011
(260.6)
5.1
(61.1)
74.7
(241.9)
9.9
(232.0)
Paramount recorded a loss from continuing operations of $87.1 million for the year ended December 31,
2013 compared to a loss from continuing operations of $64.7 million in 2012. Significant factors
contributing to the change are shown below:
Year ended December 31
Loss from continuing operations – 2012
Lower income from equity-accounted investments mainly due to a $157.2 million gain in 2012 on the sale of
5.0 million shares of Trilogy Energy Corp. ("Trilogy")
Higher interest expense due to increased debt
Lower other income mainly due to a $6.2 million insurance settlement in 2012
Loss on financial commodity contracts in 2013 compared to a gain in 2012
Lower income tax recovery
Lower depletion, depreciation and impairment mainly due to lower impairment write-downs of petroleum and
natural gas properties in 2013
Higher netback primarily due to higher realized prices and higher natural gas and NGLs sales volumes
Higher gains on the sale of property, plant and equipment related to continuing operations
Other
Loss from continuing operations – 2013
(64.7)
(132.0)
(17.3)
(7.5)
(6.5)
(5.8)
96.0
44.2
6.3
0.2
(87.1)
In March 2013, Paramount sold its Northern COU properties in the Bistcho area of Alberta and the
Cameron Hills area of the Northwest Territories (the "Northern Discontinued Operations") for proceeds of
$9.1 million.
In May 2012, Paramount’s wholly-owned subsidiary, Summit Resources, Inc., closed the sale of all of its
operated properties in North Dakota and all of its properties in Montana (the "Southern Discontinued
Operations") for after-tax cash proceeds of $66.5 million.
These properties were included in the Company’s Principal Properties business segment.
Discontinued operations for the year ended December 31, 2013 include the results of the Northern
Discontinued Operations. Discontinued operations for the year ended December 31, 2012 include the
results of the Northern Discontinued Operations and Southern Discontinued Operations.
Paramount Resources Ltd. 2013Management's Discussion & Analysis29
Income from discontinued operations ("IFDO") for the year ended December 31, 2013 of $28.0 million
includes a pre-tax loss of $1.6 million from ordinary activities of the Northern Discontinued Operations, a
$39.0 million pre-tax gain on the sale of the Northern Discontinued Operations and tax expense of $9.4
million. IFDO for the year ended December 31, 2012 includes a pre-tax loss from ordinary activities of the
Northern Discontinued Operations of $36.7 million, pre-tax income from ordinary activities of the Southern
Discontinued Operations of $5.0 million, a pre-tax gain of $50.8 million on the sale of the Southern
Discontinued Operations, and tax expense of $16.3 million. IFDO for the year ended December 31, 2013
was $25.2 million higher than in 2012, primarily as a result of impairment write-downs related to the
Northern Discontinued Operations recorded in 2012.
Paramount recorded a loss from continuing operations of $64.7 million for the year ended December 31,
2012 compared to a loss from continuing operations of $241.9 million in 2011. Significant factors
contributing to the change are shown below:
Year ended December 31
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 shares of Trilogy in 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
(241.9)
152.1
95.8
21.6
(50.4)
(22.2)
(10.1)
(7.6)
(6.0)
4.0
(64.7)
IFDO for the year ended December 31, 2012 was $2.8 million, $7.1 million lower than in 2011. IFDO in
2012 included a $50.8 million pre-tax gain on the sale of discontinued operations. IFDO for the year
ended December 31, 2011 included a $37.2 million pre-tax gain on the sale of undeveloped land. The
netback from discontinued operations in 2012 was $16.8 million lower than in 2011 because of a partial
year of operations from the Southern Discontinued Operations as a result of their May 2012 sale and
lower netbacks in 2012 from the Northern Discontinued Operations.
Paramount Resources Ltd. 2013Management's Discussion & Analysis30
Funds Flow from Operations (1) (2)
The following is a reconciliation of funds flow from operations to the nearest GAAP measure:
Year ended December 31
Cash from operating activities
Change in non-cash working capital
Geological and geophysical expenses
Asset retirement obligations settled
Funds flow from operations
Funds flow from operations ($/Boe)
(1) Refer to the advisories concerning non-GAAP measures in the Advisories section of this document.
(2) Includes the results of discontinued operations.
2013
44.9
12.2
7.2
6.3
70.6
9.24
2012
55.2
(12.1)
7.0
8.0
58.1
7.97
2011
84.9
(3.0)
6.8
7.5
96.2
15.12
Year ended December 31
Funds flow from operations
Continuing operations
Discontinued operations
Funds flow from operations
2013
71.9
(1.3)
70.6
2012
2011
51.9
6.2
58.1
73.1
23.1
96.2
Funds flow from operations in 2013 attributable to continuing operations was $71.9 million, $20.0 million
higher than 2012. The increase was primarily due to higher netbacks resulting from a 19 percent increase
in average realized prices and a 12 percent increase in continuing operations sales volumes, partially
offset by higher interest expense and lower other income due to a $6.2 million business interruption
insurance settlement received in 2012. Funds flow from operations in 2013 attributable to discontinued
operations decreased by $7.5 million compared to the prior year because 2012 included a partial year of
operations from the Southern Discontinued Operations as a result of their May 2012 sale.
Funds flow from operations in 2012 attributable to continuing operations decreased $21.2 million
compared to 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 $16.9 million compared to 2011 because 2012 includes a partial year of operations
from the Southern Discontinued Operations as a result of their May 2012 sale and because of lower
netbacks in 2012 from the Northern Discontinued Operations.
Paramount Resources Ltd. 2013Management's Discussion & Analysis31
Discontinued Operations
Results of the Northern Discontinued Operations have been presented as discontinued operations in the
current and prior year. Results of the Southern Discontinued Operations have been presented as
discontinued operations in 2012. Comparative results have been adjusted to conform to the current year’s
basis of presentation. The Principal Properties section of this Management’s Discussion & Analysis
provides an analysis of the results of the Company’s continuing operations. The following tables reconcile
Paramount’s loss from continuing operations, income from discontinued operations and net loss:
Income (loss) from Continuing Operations ("CO") and Discontinued Operations ("DO")
Year ended December 31
2013
2012
Natural gas revenue
NGLs revenue
Oil revenue
Royalty and sulphur revenue
Petroleum and natural gas sales
Royalties
Operating expense
Transportation
Netback
Financial commodity contract
settlements
Insurance settlement
Netback including commodity
contract and insurance settlements
General and administrative
Interest
Dividends from investments
Other
Funds flow from operations
DD&A / Accretion
Gain on sale of PP&E
Stock-based compensation
Income from equity-acct. investments
Other
Income tax (expense) recovery
Net income (loss)
(1) Natural gas revenue shown per Mcf.
CO
137.6
68.1
22.1
2.9
230.7
(10.8)
(69.8)
(22.6)
127.5
─
─
127.5
(19.5)
(51.1)
8.0
7.0
71.9
(156.0)
32.7
(25.9)
21.4
(49.8)
18.6
(87.1)
DO
($ millions)
0.7
─
1.1
─
1.8
─
(2.9)
(0.2)
(1.3)
─
─
(1.3)
─
─
─
─
(1.3)
(0.3)
39.0
─
─
─
(9.4)
28.0
Total
138.3
68.1
23.2
2.9
232.5
(10.8)
(72.7)
(22.8)
126.2
─
─
126.2
(19.5)
(51.1)
8.0
7.0
70.6
(156.3)
71.7
(25.9)
21.4
(49.8)
9.2
(59.1)
CO
Total
DO
($/Boe except natural gas)(1)
2.82
3.57
74.73
─
87.47
84.75
─
─
3.57
74.73
87.61
─
30.44
(1.43)
(9.22)
(2.97)
16.82
─
─
16.82
(2.57)
(6.74)
1.06
0.91
9.48
32.95
─
(52.54)
(4.27)
(23.86)
─
─
(23.86)
─
─
─
─
(23.86)
30.46
(1.42)
(9.52)
(2.98)
16.54
─
─
16.54
(2.55)
(6.69)
1.05
0.89
9.24
CO
93.3
45.3
31.2
3.6
173.4
(14.3)
(55.6)
(20.2)
83.3
(0.1)
6.2
89.4
(18.1)
(34.6)
8.0
7.2
51.9
(251.8)
26.4
(29.1)
153.3
(39.8)
24.4
(64.7)
DO
($ millions)
Total
CO
Total
DO
($/Boe except natural gas)(1)
2.72
2.74
2.72
67.10
73.20
67.02
83.16
82.30
83.67
–
–
–
27.04
45.01
25.64
(2.27)
(4.27)
(2.11)
(9.58)
(26.96)
(8.22)
(2.98)
(2.99)
(2.99)
98.2
46.0
49.3
3.6
197.1
(16.5)
(69.9)
(21.8)
88.9
12.32
10.79
12.21
–
–
10.79
–
–
–
0.95
11.74
(0.02)
0.85
13.04
(2.49)
(4.74)
1.10
1.06
7.97
(0.1)
6.2
(0.02)
0.92
13.22
(2.68)
(5.11)
1.19
1.06
7.68
95.0
(18.1)
(34.6)
8.0
7.8
58.1
(288.9)
77.2
(29.1)
153.3
(40.6)
8.1
(61.9)
4.9
0.7
18.1
–
23.7
(2.2)
(14.3)
(1.6)
5.6
–
–
5.6
–
–
–
0.6
6.2
(37.1)
50.8
–
–
(0.8)
(16.3)
2.8
Paramount Resources Ltd. 2013Management's Discussion & Analysis32
Principal Properties
Netback and Segment Loss – Continuing Operations
Year ended December 31
2013
2012
Petroleum and natural gas sales
Royalties
Operating expense
Transportation
Netback
Financial commodity contract settlements
Insurance settlement
Netback including commodity contract and insurance settlements
Other principal property items (see below)
Segment loss
230.7
(10.8)
(69.8)
(22.6)
127.5
─
─
127.5
(155.7)
(28.2)
($/Boe)
30.44
(1.43)
(9.22)
(2.97)
16.82
─
─
16.82
($/Boe)
25.64
(2.11)
(8.22)
(2.99)
12.32
(0.02)
0.92
13.22
173.4
(14.3)
(55.6)
(20.2)
83.3
(0.1)
6.2
89.4
(246.9)
(157.5)
Petroleum and Natural Gas Sales – Continuing Operations
Year ended December 31
Natural gas
NGLs
Oil
Royalty and sulphur revenue
2013
137.6
68.1
22.1
2.9
230.7
2012
93.3
45.3
31.2
3.6
173.4
% Change
47
50
(29)
(19)
33
Petroleum and natural gas sales in 2013 were $230.7 million, an increase of $57.3 million from the prior
year, primarily due to higher realized prices and higher natural gas and NGLs sales volumes, partially
offset by lower oil sales volumes.
The impact of changes in prices and sales volumes on petroleum and natural gas sales are as follows:
Year ended December 31, 2012
Effect of changes in prices
Effect of changes in sales volumes
Change in royalty and sulphur revenue
Year ended December 31, 2013
Natural gas
93.3
32.8
11.5
─
137.6
NGLs
45.3
7.0
15.8
─
68.1
Oil
31.2
1.0
(10.1)
─
22.1
Royalty and
Sulphur
3.6
─
─
(0.7)
2.9
Total
173.4
40.8
17.2
(0.7)
230.7
Paramount Resources Ltd. 2013Management's Discussion & Analysis33
Sales Volumes
Natural Gas (MMcf/d)
NGLs (Bbl/d)
Oil (Bbl/d)
Total (Boe/d)
Year ended December 31
Kaybob
Grande Prairie
Southern
Northern
Continuing Ops
Discontinued Ops
Total
2013
72.1
20.0
9.5
3.8
105.4
0.7
106.1
2012 % Change 2013
1,365
21
59.5
809
(4)
20.9
255
(2)
9.7
67
9
3.5
2012 % Change 2013
29
48
322
8
342
61
─
294
924
749
158
17
2012 % Change 2013
(53)
5
(47)
─
62
307
647
─
13,402 10,910
4,536
4,459
2,419
2,179
609
725
93.6
4.9
98.5
13
(86)
8
2,496
1,848
2
2,498
25
1,873
35
(92)
33
693
33
726
1,016
604
1,620
(32)
(95)
(55)
20,765 18,474
149
1,443
20,914 19,917
23
(2)
(10)
19
12
(90)
5
2012 % Change
Natural gas sales volumes increased 11.8 MMcf/d or 13 percent to 105.4 MMcf/d in 2013 compared to
93.6 MMcf/d in 2012. NGLs sales volumes increased 648 Bbl/d or 35 percent to 2,496 Bbl/d in 2013
compared to 1,848 Bbl/d in 2012. The Company’s 45 MMcf/d natural gas refrigeration processing facility
(the "Musreau Refrig Facility") was re-commissioned in March 2012, allowing the Company to begin
producing incremental volumes that had been shut-in because of limited processing capacity. Increases
in natural gas and NGLs sales volumes were primarily related to new well production from the Company’s
2012 / 2013 drilling program at Musreau and Smoky within the Kaybob COU, including liquids-rich
Montney wells. The increase in NGLs sales includes an increase in condensate volumes, which
comprised 64 percent of total NGLs sales in 2013 (2012 – 57 percent).
Oil sales volumes decreased 32 percent to 693 Bbl/d in 2013 compared to 1,016 Bbl/d in 2012. The
decrease in oil sales volumes is primarily due to the sale of properties in the Southern COU.
In 2013, Paramount’s production within the Kaybob COU continued to be constrained by available owned
and contracted natural gas processing capacity, pending completion of the new and expanded deep cut
facilities at Musreau and Smoky. The constraints are expected to abate in 2014 following startup of the
Musreau Deep Cut Facility and the completion of expansions to third-party downstream NGLs facilities,
which will allow the Company to bring wells on production that have been shut-in on a temporary basis
awaiting additional processing capacity.
The ability of Paramount to maximize production through Company-owned and third-party facilities in
2013 was impacted by various third-party downstream disruptions and capacity constraints ("Third-Party
Disruptions") in the Kaybob and Grande Prairie COUs. The Third-Party Disruptions mainly related to
apportionments of transportation and processing capacity and down-time because of maintenance at
third-party natural gas processing facilities. The trucking of condensate production from well sites, which
partially mitigated NGLs pipeline constraints, was temporarily suspended between May and August due
to spring road bans and heavy rainfall. As a result, the Company estimates that average sales volumes
were curtailed by approximately 3,500 Boe/d during 2013. Paramount’s operations were also impacted by
the temporary shut-in of multi-well pads to bring new wells on production and maintenance downtime at
Company-owned facilities.
Paramount Resources Ltd. 2013Management's Discussion & Analysis34
Average Realized Prices – Continuing Operations
Year ended December 31
Natural gas ($/Mcf)
NGLs ($/Bbl)
Oil ($/Bbl)
Total ($/Boe)
2013
3.57
74.73
87.61
30.44
2012
2.72
67.02
83.67
25.64
% Change
31
12
5
19
Paramount’s average realized price for natural gas increased 31 percent in 2013 compared to the prior
year, consistent with increases in benchmark AECO natural gas prices. Paramount’s natural gas portfolio
primarily consists of sales priced at the Alberta spot market and California market and is sold in a
combination of daily and monthly contracts.
Paramount’s NGLs and oil sales portfolio primarily consists of sales priced relative to Alberta and United
States market indexes, adjusted for transportation and quality differentials.
Commodity Prices
Key monthly average commodity price benchmarks and foreign exchange rates are as follows:
Natural Gas
AECO daily spot (CDN$/GJ)
AECO monthly index (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
2013
2012
% Change
3.13
3.00
3.68
93.24
97.98
2.43
2.28
2.80
86.53
94.19
1.03
1.00
29
32
31
8
4
3
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.
Payments on the settlement of financial commodity contracts are as follows:
Year ended December 31
Oil Contracts
2013
─
2012
(0.1)
Paramount Resources Ltd. 2013Management's Discussion & Analysis35
At December 31, 2013, Paramount had the following financial commodity contracts outstanding:
Instrument
Oil – NYMEX WTI Swap
Oil – NYMEX WTI Swap
Total Notional
1,000 Bbl/d
2,000 Bbl/d
Average Fixed Price
US $92.43/Bbl
US $91.78/Bbl
Fair Value
(1.0)
(3.0)
(4.0)
Remaining Term
January – June 2014
January – December 2014
Subsequent to December 31, 2013, the Company entered into the following financial commodity sales
contracts:
Instrument
Natural Gas – AECO Swap
Total Notional
20,000 GJ/d
Average Fixed Price
CAD$4.45/GJ
Remaining Term
April – October 2014
Royalties – Continuing Operations
Year ended December 31
Royalties
2013
10.8
Rate
4.7%
2012
14.3
Rate
8.4%
Royalties decreased $3.5 million to $10.8 million in 2013 compared to $14.3 million in 2012, primarily as a
result of a greater proportion of production qualifying for Alberta new well royalty incentive programs,
partially offset by the impact of higher revenues. Royalties for the year ended December 31, 2013 also
decreased $2.7 million as a result of annual gas cost allowance adjustments related to 2012. Excluding
the impact of the gas cost allowance adjustments, Paramount’s 2013 royalty rate decreased to six
percent.
Operating Expense – Continuing Operations
Year ended December 31
Operating expense
2013
69.8
2012
55.6
% Change
26
Operating expense increased $14.2 million or 26 percent in 2013 to $69.8 million compared to $55.6
million in 2012, primarily related to higher production from new wells at Musreau and Smoky within the
Kaybob COU and at Birch in the Northern COU, and higher costs within the Grande Prairie COU
including well maintenance, temporary equipment rentals, and the impact of third-party processing facility
equalizations.
Paramount’s operating expenses were $9.22 per Boe in 2013 compared to $8.22 per Boe in 2012, mainly
because of higher costs within the Grande Prairie COU including well maintenance, temporary equipment
rentals and the impact of third-party processing facility equalizations. Paramount’s per unit operating
costs are expected to decrease in 2014 as a higher proportion of its production will be from its lower cost
Kaybob properties.
Paramount Resources Ltd. 2013Management's Discussion & Analysis36
Transportation – Continuing Operations
Year ended December 31
Transportation
2013
22.6
2012
20.2
% Change
12
Transportation expense was $22.6 million in 2013, an increase of $2.4 million compared to 2012,
primarily due to higher variable transportation costs related to higher sales volumes including the
additional cost of trucking condensate from well sites in 2013. The increase in variable costs was partially
offset by the expiry of a long-term natural gas transportation export agreement in the fourth quarter of
2012, which reduced current year fixed transportation costs. Transportation per Boe was $2.97 in 2013
and $2.99 per Boe in 2012.
Other Principal Property Items – Continuing Operations
Year ended December 31
Commodity contracts – net of settlements
Depletion and depreciation (excluding impairment)
Impairment
Exploration and evaluation
Gain on sale of property, plant and equipment
Accretion of asset retirement obligations
Other
Total
2013
4.0
144.1
6.5
34.7
(32.3)
3.1
(4.4)
155.7
2012
(2.6)
140.7
106.1
31.5
(26.4)
2.9
(5.3)
246.9
Depletion and depreciation expense (excluding impairment) increased to $144.1 million ($19.01 per Boe)
in 2013 compared to $140.7 million ($20.81 per Boe) in 2012, mainly due to higher production volumes.
The Company recorded a net impairment write-down of its petroleum and natural gas assets totaling $6.5
million in 2013 (2012 – $106.1 million), comprised of write-downs totaling $37.3 million in the Southern
and Northern cash generating units ("CGU"), net of an impairment reversal of $30.8 million in respect of
the Grande Prairie CGU.
The impairment write-downs in the Southern and Northern CGUs were recorded because the carrying
value of their properties exceeded their recoverable amounts, which were estimated based on expected
discounted cash flows from the production of proved and probable reserves. The impairments resulted
from a combination of declines in reserves assigned due to well performance and, in the Southern CGU,
the sale of properties with recoverable amounts that exceeded their carrying values.
The reversal of previously recorded impairment write-downs in the Grande Prairie CGU resulted from
increases in reserves assigned to the CGU due to recent drilling programs. The reversal was recorded to
the extent that the recoverable amount ascribed to the Grande Prairie CGU exceeded the carrying value
of its properties.
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 $14.4 million ($18.7 million – 2012) and dry hole expense of $14.0 million ($6.4 million – 2012),
primarily from exploratory wells in the Grande Prairie and Southern COUs.
Paramount Resources Ltd. 2013Management's Discussion & Analysis37
The gain on sale of property, plant and equipment of $32.3 million recorded in 2013 relate primarily to the
sale of lands in the Ante Creek area of Alberta and the sale of non-core properties in the Southern COU.
In February 2014, Paramount entered into an agreement to sell its properties in the Chain-Delia area
within the Southern COU for approximately $12 million in shares of a TSX Venture Exchange listed
company. The properties had average 2013 production of approximately 6 MMcf/d of natural gas. The
transaction is scheduled to close in the first quarter of 2014.
Strategic Investments
Year ended December 31
Income from equity–accounted investments
Drilling rig revenue
Drilling rig expense
General and administrative
Stock-based compensation
Interest
Other
Segment income
2013
21.4
4.2
(1.9)
(6.8)
(7.2)
(2.4)
(2.0)
5.3
2012
153.3
7.5
(4.7)
(6.4)
(10.9)
(1.5)
(3.3)
134.0
Income from equity-accounted investments in 2013 includes a $25.7 million dilution gain, partially offset
by $4.3 million of equity losses. In 2012, Paramount closed the sale of 5.0 million of its Trilogy shares for
net cash proceeds of $181.7 million, recognizing a gain of $157.2 million.
Strategic Investments at December 31, 2013 include:
investments in the shares of Trilogy, MEG Energy Corp. ("MEG"), MGM Energy Corp. ("MGM
Energy"), Strategic Oil & Gas Ltd. ("Strategic") and other public and private corporations;
oil sands and carbonate 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;
prospective shale gas acreage in the Liard and Horn River Basins in Northeast British Columbia and
the Northwest Territories; and
five drilling rigs owned by Paramount’s wholly-owned subsidiary, Fox Drilling.
Paramount Resources Ltd. 2013Management's Discussion & Analysis38
Investments
Paramount holds investments in a number of publicly-traded and private corporations as part of its
portfolio of strategic investments. The Company’s investment in shares of Trilogy and MGM Energy were
principally obtained in the course of the spin-out of the entities from Paramount. Investments in shares of
most other entities, including MEG, were received as consideration for properties sold to the entities.
Paramount’s investments are summarized as follows:
Carrying Value
Market Value (1)
As at December 31
Trilogy
MEG
MGM Energy
Strategic
Other (2)
Total
(1) Based on the period-end closing price of publicly traded investments and the book value of remaining investments.
(2) Includes investments in other public and private corporations.
2013
528.4
113.3
8.7
5.4
32.7
688.5
2012
82.4
112.6
2.3
─
21.4
218.7
2013
97.4
113.3
1.2
5.4
32.7
250.0
2012
557.3
112.6
13.5
─
21.4
704.8
Cavalier Energy
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"). During 2013, Cavalier Energy
completed front-end engineering and design work for Hoole Grand Rapids Phase 1, along with
geotechnical work and the drilling of additional delineation wells. Cavalier Energy’s current activities are
being funded with drawings on its $40 million credit facility.
Construction of Hoole Grand Rapids Phase 1 is dependent upon the receipt of regulatory approvals,
securing funding, and sanctioning by the Board of Directors. Cavalier Energy anticipates regulatory
approvals will be received by mid-2014 and is continuing to evaluate funding alternatives.
Shale Gas
The Company finished drilling and completing its first horizontal shale gas exploration well at Patry in
northeast British Columbia in the first quarter of 2013 and the well was brought-on production in late-
December, following its tie-in to existing third-party infrastructure. Over its first 60 days of production, the
well averaged 3.2 MMcf/d of natural gas. The results of the Patry well have been attributed to the well
being drilled into a thinner portion of the Besa River shale formation along the eastern-most part of the
Liard Basin.
At Dunedin, in the central portion of the Liard Basin, the Besa River shale formation is about four times
thicker than it is at Patry. Paramount resumed drilling its Dunedin shale gas exploration well at d-57-D in
September following the completion of a road to provide all-season access to the wellsite and other area
lands. The well was drilled to a total measured depth of 6,000 meters, including a 1,600 meter horizontal
leg. While running production casing, the casing hanger packer system prematurely set, resulting in the
liner becoming stuck in the wellbore. The Company is currently undertaking recovery operations to
remove the liner materials. Following the recovery operation, the Company plans to complete the
Dunedin well later in 2014, with tie-in operations to follow in 2015, pending test results from the well. In
Paramount Resources Ltd. 2013Management's Discussion & Analysis39
late-February 2014, Paramount moved an additional rig into Dunedin and has commenced drilling a
vertical shale gas exploration well at d-71-G to preserve lands.
Fox Drilling
Fox Drilling owns five triple-sized rigs in Canada, including two new built-for-purpose walking rigs that
were put into service in 2013. Fox Drilling’s rigs are designed to drill the deep horizontal wells that the
industry is currently focusing on. During 2013, all five rigs were deployed on the Company’s Deep Basin
lands. When the drilling 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. Drilling rig revenue
and drilling rig expense above relate to the working interest share of joint venture partners in such
amounts.
Corporate
Year ended December 31
Interest
General and administrative
Stock-based compensation
Depreciation
Foreign exchange
Segment loss
2013
50.2
12.7
18.7
0.7
0.5
82.8
2012
33.8
11.7
18.2
0.3
1.6
65.6
The Corporate segment loss increased to $82.8 million in 2013 compared to $65.6 million in 2012,
primarily as a result of higher interest expense as a result of higher 2013 debt levels.
Paramount’s 2013 corporate general and administrative costs were $12.7 million compared to $11.7
million in 2012.
Taxes
Based on the current tax regime, and the Company’s available tax pools and anticipated level of
operations, Paramount does not expect to be cash taxable in the near future. At December 31, 2013,
Paramount’s income tax pools are as follows:
As at December 31
Canadian oil and gas property expense
Canadian development expense
Canadian exploration expense
Undepreciated capital cost
Non-capital losses
Financing costs and other
Total federal tax pools
2013
174.0
453.3
398.6
638.0
601.5
29.0
2,294.4
Paramount Resources Ltd. 2013Management's Discussion & Analysis40
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
2013
6.3
451.6
167.0
624.9
20.3
645.2
92.3
5.8
743.3
2012
6.0
304.6
212.5
523.1
25.2
548.3
82.5
0.4
631.2
(1) Exploration and development expenditures include $12.1 million of capitalized interest (2012 - $4.6 million).
(2) Strategic Investments include $1.0 million of capitalized interest (2012 - $0.4 million).
Exploration and development ("E&D") expenditures in 2013 were $624.9 million compared to $523.1
million in 2012. 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 continuing for the new and
expanded deep cut facilities. The Company also drilled and completed wells at Karr-Gold Creek in the
Grande Prairie COU. Facilities and gathering expenditures focused on the new and expanded deep cut
facilities at Musreau and Smoky.
Strategic investments capital expenditures for 2013 included $57.5 million related to the Company’s
exploratory shale gas drilling activities at Dunedin and Patry in Northeast British Columbia, $17.6 million
related to completing the construction of two triple-sized walking drilling rigs and re-certifying an existing
rig, and $17.2 million related to front-end engineering and design, geotechnical work, and the drilling of
additional delineation wells in Cavalier Energy.
The Company’s E&D and strategic investments spending, excluding land acquisitions and capitalized
interest, totaled $704.1 million in 2013, $95.9 million less than Paramount’s increased 2013 capital
budget of $800 million. Planned drilling, completion, tie-in and gathering system projects for the fourth
quarter within the Kaybob and Grande Prairie COUs were impacted by site access restrictions caused by
unusually heavy snowfall. Completion operations planned for the shale gas exploration well at Dunedin in
the fourth quarter were delayed until 2014, as work to prepare the well for completion continued through
year-end. Aggregate spending on facilities projects was also lower than expected.
Wells drilled were as follows:
2013
2012
Gross (1)
Net (2)
Gross (1)
Net (2)
Natural gas
34
Oil
–
Oil sands evaluation
1
Total
35
(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
2
6
43
44
1
1
46
44
3
6
53
Paramount Resources Ltd. 2013Management's Discussion & Analysis41
Kaybob Deep Basin Development
The Musreau Deep Cut Facility is scheduled to startup in the second quarter of 2014. Mechanical
construction is substantially complete and activities at the site are focused on completing the final stages
of the electrical and instrumentation work. Commissioning of individual components of the facility
commenced in December 2013. Activities at the site were impacted by third-party labour shortages and
severe weather conditions in late-January and February 2014 which have prolonged the remaining work
and the commissioning process. As a result of these changes, the Company is accelerating work
originally planned for later in the year to integrate the amine processing train and the condensate
stabilizer expansion to minimize downtime later in 2014 when these additional components are started-
up. The expected total cost of the facility remains at approximately $190 million, in-line with the original
budget.
The Company continues to advance the construction of the amine processing train at the Musreau Deep
Cut Facility site, which will provide the capability to treat sour gas production at the facility instead of at
well sites. This project is expected to cost approximately $45 million, will reduce equipping costs per well
by over $1 million and result in lower ongoing well operating costs. Major components for the amine
processing train are being delivered to the plant site, with construction and installation activities
scheduled to be completed in the fourth quarter of 2014.
Condensate yields from Paramount’s new Montney wells at Musreau exceeded expectations in 2012. As
a result, the Company initiated a project to expand the condensate stabilizer system servicing the
Musreau Deep Cut Facility and the Musreau Refrig Facility by 15,000 Bbl/d to process the anticipated
incremental liquids volumes (the "Stabilizer Expansion"). Long-lead time components have been ordered
and the project is expected to be completed in the fourth quarter of 2014 at a cost of approximately $45
million. Upon start-up of the Musreau Deep Cut Facility, the Kaybob COU will have condensate
stabilization capacity of approximately 8,500 Bbl/d, which will increase to approximately 23,500 Bbl/d
when the Stabilizer Expansion becomes operational. Until the Stabilizer Expansion is completed, Kaybob
field condensate production in excess of capacity will be trucked to other Paramount and third-party
facilities for processing.
Site work on the non-operated Smoky deep cut facility expansion (the "Smoky Deep Cut Facility")
continues, with process equipment delivered and mechanical work underway. The expansion is
scheduled to be commissioned in the third quarter of 2014. Paramount was advised by the third-party
operator that it expects the existing Smoky 100 MMcf/d dew-point facility will be shut-down for
approximately two months commencing in the second quarter of 2014 to complete its integration with the
expansion. Paramount’s share of the Smoky Deep Cut Facility expansion costs is expected to total $75
million, of which approximately $50 million has been incurred to December 31, 2013.
Paramount is continuing the preliminary planning for construction of additional natural gas processing
facilities in the Deep Basin. The specific location, capacity and construction timeline of proposed new
facilities are currently under review. A decision to proceed is anticipated later in 2014 following the ramp-
up of the Musreau Deep Cut Facility and obtaining additional well performance data, including NGLs
yields.
Paramount completed the drilling of 31 (26.2 net) wells in the Kaybob COU in 2013, including 13 (12.3
net) Montney wells and 16 (11.9 net) Falher wells. The majority of these new wells have been completed
and tied-in and will be brought-on production when the Musreau Deep Cut Facility commences operation.
The 2013 drilling program included six pad sites that accounted for 19 of the 31 wells drilled. In addition,
Paramount Resources Ltd. 2013Management's Discussion & Analysis42
Paramount’s two walking drilling rigs are each drilling 10-well Montney pads, which are expected to be
finished drilling in the second quarter of 2014.
As of February 28, 2014, the Company’s behind pipe well inventory in the Kaybob Deep Basin was 66
(47.9 net) wells, including wells previously produced that have been temporarily shut-in due to capacity
constraints. Production from these wells will be processed through the Musreau and Smoky deep cut
facilities and Paramount’s other Kaybob area capacity.
Kaybob COU sales volumes will start to increase in the second quarter of 2014 as the Musreau Deep Cut
Facility starts up and will increase further as the Company’s other infrastructure projects are completed
and additional third-party NGLs processing capacity becomes available. The precise timing of the
increases will depend upon the Company’s working interest in wells processed through its facilities, the
liquids content of the wells brought-on production and the period in which third-party de-ethanization
capacity becomes available, among other factors.
Outlook
The Company’s 2014 exploration and development ("E&D") and strategic investments capital budget is
$650 million, excluding land acquisitions and capitalized interest. Paramount’s E&D investments will
primarily focus on the Company’s Deep Basin developments, including drilling and completing wells in
Kaybob to feed the new deep cut facilities and at Karr-Gold Creek to further delineate the middle and
upper Montney formation. Spending will also be directed to facilities projects including completion of the
deep cut projects at Musreau and at Smoky, the amine processing train and the condensate stabilizer
expansion. In the Southern and Northern COUs, up to eight wells are planned to be drilled to explore new
opportunities and for land retention. Strategic Investments spending in 2014 will be directed towards
completing the d-57-D shale gas exploration well at Dunedin and drilling an additional vertical shale gas
exploration well at Dunedin for land retention.
Fourth quarter 2013 sales volumes averaged approximately 20,000 Boe/d and Paramount expects sales
volumes to continue at that level, after giving effect to the first quarter Chain area disposition. Paramount
will begin to ramp-up production as the Musreau Deep Cut Facility starts up, additional components of the
Company’s Kaybob area infrastructure are completed and third-party de-ethanization capacity becomes
available. Sales volumes are expected to reach approximately 50,000 Boe/d in 2014 and increase to
approximately 70,000 Boe/d in 2015, depending upon the availability of downstream third-party de-
ethanization capacity.
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.
Paramount Resources Ltd. 2013Management's Discussion & Analysis43
2012
% Change
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 risk management assets and liabilities, demand facilities, 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,
2013 – $9.5 million, December 31, 2012 – $10.8 million).
(2) Excludes unamortized issue premiums and financing costs.
(3) Net debt excludes the $20 million deposit on account with the CRA, pending resolution of the Company’s notices of objection.
NM – Not meaningful.
2013
151.8
75.6
71.8
820.0
1,119.2
1,169.2
(224.6)
87.6
2,151.4
(9.3)
40.7
─
670.0
701.4
921.7
(165.5)
94.9
1,552.5
NM
86
100
22
60
27
(36)
(8)
39
Paramount had an adjusted working capital deficit at December 31, 2013 of $151.8 million compared to a
surplus of $9.3 million at December 31, 2012. The adjusted working capital deficit at December 31, 2013
included $10.7 million of cash and cash equivalents, $39.3 million of accounts receivable and $204.0
million of accounts payable and accrued liabilities. The change in adjusted working capital is primarily due
to capital spending related to the Company’s 2013 capital program, partially offset by proceeds from
equity issuances, the December 2013 senior notes offering, funds flow from operations, drawings on
credit facilities, and proceeds from the sale of non-core properties.
Paramount raised approximately $420 million in aggregate cash proceeds in 2013 through financing
transactions, the sale of non-core oil and gas properties and the sale of investments (the "2013
Transactions"). These transactions included the public offering and private placement of 5.4 million
Common Shares, of which 1.4 million Common Shares were issued on a “flow-through” basis, and the
public offering of $150 million aggregate principal amount of additional 2019 senior notes. Proceeds from
the 2013 Transactions were used, and are expected to be used, to further the development and
exploration of Paramount’s properties, including drilling and completion work on properties within the
Kaybob, Grande Prairie and northeast British Columbia areas, and the construction and expansion of the
Company’s Kaybob natural gas processing and associated facilities. Proceeds from Common Shares
issued on a “flow-through” basis were used, and are expected to be used, to incur eligible Canadian
Exploration Expenses.
Paramount raised approximately $710 million in aggregate cash proceeds in 2012 through financing
transactions, the sale of investments and the sale of non-core oil and gas properties (the “2012
Transactions”). These transactions included a public offering of $300 million aggregate principal amount
of 2019 senior notes, public offerings and private placements of 4.2 million Common Shares issued on a
“flow-through” basis, and the sale of a portion of the Company’s investment in Trilogy for $181.7 million.
Proceeds from the 2012 Transactions were used for drilling and completion work within the Kaybob,
Grande Prairie and northeast British Columbia areas, and facilities construction within the Kaybob and
Grand Prairie areas. Paramount incurred sufficient qualifying expenditures to satisfy commitments
associated with flow-through Common Shares issued in 2012.
Paramount expects to fund its 2014 operations, obligations and capital expenditures with funds flow from
operations, drawings on its bank credit facilities, existing cash and cash equivalents and by accessing the
capital markets, if required. The Company’s bank credit facility was increased to $600 million in
November 2013, of which $71.8 million was drawn as of December 31, 2013. As production constraints
Paramount Resources Ltd. 2013Management's Discussion & Analysis44
within the Kaybob COU begin to abate in 2014, funds flow from operations is expected to increase
because of higher sales volumes.
Demand Facilities
Drilling Rig Facilities
In 2013, Fox Drilling repaid and replaced demand loans previously outstanding with a new $57.0 million
non-revolving demand loan facility (the "Drilling Rig Facility"). The Drilling Rig Facility was drawn in full at
closing and principal payments of $4.0 million were made to December 31, 2013. In connection with the
Drilling Rig Facility, an $8.0 million non-revolving demand loan facility was entered into in order to fund
the purchase of auxiliary equipment for the drilling rigs (the "Auxiliary Equipment Loan"), which was
undrawn at December 31, 2013.
Recourse and security for the Drilling Rig Facility and Auxiliary Equipment Loan (collectively, the "Drilling
Rig Facilities") is limited to drilling rigs owned by Fox Drilling and drilling contracts guaranteed by
Paramount. Interest on the Drilling Rig Facilities 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. Scheduled
principal repayments are $8.0 million annually from 2014 to 2017, with the remaining outstanding balance
payable in 2018.
Cavalier Facility
Cavalier Energy has a $40.0 million demand loan facility with a syndicate of Canadian banks (the
"Cavalier Facility"). Drawings on the Cavalier Facility bear interest at the lenders’ prime lending rates, US
base rates, or bankers’ acceptances 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, 2013, $22.6
million was drawn on the Cavalier Facility.
Bank Credit Facility
Paramount’s bank credit facility (the "Facility") was increased in 2013 from $300 million to $600 million,
which is available in two tranches. The first tranche ("Tranche A") has a credit limit and lender
commitments of $500 million and is available on a revolving basis to November 30, 2014. 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 $100 million and is due November 30, 2014 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 Facilities and the
Cavalier Facility. Balances drawn under Tranche B are secured by the pledge of certain of the Company’s
equity investments from time-to-time.
Borrowings under the Facility bear interest at the lenders’ prime lending rates, US base rates, bankers’
acceptance rates 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, the tranche under which borrowings are
made and the total amount drawn. 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, the value attributed by lenders to Paramount's other property and the market
value of equity investments pledged by Paramount from time-to-time under Tranche B, among other
factors. As at December 31, 2013, $71.8 million was drawn on Tranche A and Tranche B was undrawn.
Paramount Resources Ltd. 2013Management's Discussion & Analysis45
Paramount had undrawn letters of credit outstanding at December 31, 2013 totaling $44.7 million that
reduce the amount available to the Company.
Senior Notes
Paramount has $370 million aggregate principal amount of senior unsecured notes due 2017 (the "2017
Senior Notes") outstanding. 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 Senior 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 aggregate principal amount of
senior unsecured notes due 2019 (the "2019 Senior Notes") at par. In December 2013, Paramount
completed a $150 million re-opening of the 2019 Senior Notes at a price of $1,007.50 per $1,000 principal
amount. Certain officers, management and associates of the Company purchased an aggregate $17.9
million principal amount of 2019 Senior Notes under the two offerings.
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 Senior
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 October 2013, Paramount issued 1,115,000 Common Shares on a "flow-through" basis in respect of
Canadian exploration expenses (the "FTS") at a price of $44.00 per share for gross proceeds of $49.1
million, pursuant to a public offering. Concurrent with the public offering, Paramount issued FTS at a price
of $44.00 per share to the Company’s Chairman and Chief Executive Officer and President and Chief
Operating Officer and/or companies controlled by them for gross proceeds of approximately $10 million,
and to certain other directors, officers, and employees of Paramount and other persons for gross
proceeds of approximately $1 million.
In May 2013, Paramount issued 4,025,000 Common Shares at a price of $37.50 per share for gross
proceeds of $150.9 million pursuant to a public offering.
In October 2012, Paramount issued 1,936,000 Common Shares on a "flow-through" basis in respect of
Canadian exploration expenses ("CEE") at a price of $31.00 per share and 356,000 Common Shares on
a "flow-through" basis in respect of Canadian development expenses ("CDE") at a price of $28.15 per
share for aggregate gross proceeds of $70 million, pursuant to a public offering. Certain officers and
management of the Company participated in this offering.
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 company controlled by the Company’s Chairman and Chief
Executive Officer for aggregate proceeds of $55 million.
Paramount Resources Ltd. 2013Management's Discussion & Analysis46
The Company is committed to incur $59.8 million of qualifying expenditures related to the 2013 offerings
of FTS by December 31, 2014, of which $11.2 million was incurred as of December 31, 2013. Paramount
has incurred sufficient qualifying expenditures to satisfy commitments associated with the CEE and CDE
flow-through Common Shares issued in 2012.
At March 4, 2014, Paramount had 97,501,874 Common Shares and 6,188,450 Paramount Options
outstanding, of which 1,973,000 Paramount Options are exercisable.
Quarterly Information
Operating Results – Continuing Operations
Netback – Continuing Operations
Three months ended December 31
2013
2012
Natural gas
NGLs
Oil
Royalty and sulphur revenue
Petroleum and natural gas sales
Royalties
Operating expense
Transportation
Netback
Financial commodity contract settlements
Netback including financial commodity contract settlements
(1) Natural gas revenue shown per Mcf.
($/Boe) (1)
3.73
74.30
78.92
–
30.99
(1.50)
(10.19)
(3.60)
15.70
–
15.70
35.1
18.2
3.9
0.6
57.8
(2.8)
(19.0)
(6.7)
29.3
–
29.3
31.6
11.8
6.9
0.7
51.0
(4.4)
(15.6)
(5.2)
25.8
0.7
26.5
($/Boe) (1)
3.45
61.14
79.20
–
28.27
(2.45)
(8.63)
(2.86)
14.33
0.40
14.73
Fourth quarter 2013 petroleum and natural gas sales were $57.8 million, an increase of $6.8 million from
the fourth quarter of 2012, primarily due to higher NGLs and natural gas prices and sales volumes,
partially offset by lower oil sales volumes.
The impact of changes in prices and sales volumes on petroleum and natural gas sales are as follows:
Three months ended December 31, 2012
Effect of changes in prices
Effect of changes in sales volumes
Change in royalty and sulphur revenue
Three months ended December 31, 2013
Natural gas
31.6
2.5
1.0
─
35.1
NGLs
11.8
3.2
3.2
─
18.2
Oil
6.9
─
(3.0)
─
3.9
Royalty and
Sulphur
0.7
─
─
(0.1)
0.6
Total
51.0
5.7
1.2
(0.1)
57.8
Paramount Resources Ltd. 2013Management's Discussion & Analysis47
Sales Volumes
Natural Gas (MMcf/d)
Three months ended December 31
Oil (Bbl/d)
NGLs (Bbl/d)
Kaybob
Grande Prairie
Southern
Northern
2013
67.2
21.6
9.4
4.3
2012 % Change 2013
1,520
6
63.3
833
(8)
23.5
243
4
9.0
72
19
3.6
2012 % Change 2013
19
69
378
(17)
139
62
–
85
901
1,008
150
39
Continuing Ops
102.5
99.4
3
2,668
2,098
27
Discontinued Ops
Total
–
102.5
4.7
104.1
(100)
(2)
–
2,668
12
2,110
(100)
26
536
–
536
2012 % Change 2013
(70)
19
(75)
–
64
317
566
–
12,736 11,501
5,243
4,816
2,223
1,956
639
782
947
(43)
20,290 19,606
11
(8)
(12)
22
3
266
1,213
(100)
(56)
–
1,068
20,290 20,674
(100)
(2)
Total (Boe/d)
2012 % Change
Paramount’s fourth quarter sales volumes averaged 20,290 Boe/d in 2013 compared to 19,606 Boe/d in
the fourth quarter of 2012. Increases in natural gas and NGLs sales volumes were primarily related to
new well production from the Company’s 2012 / 2013 drilling program at Musreau within the Kaybob
COU, including liquids-rich Montney wells. Oil sales volumes decreased mainly due to the sale of
properties in the Southern COU.
Production within the Kaybob COU continued to be constrained by available owned and contracted
natural gas processing capacity in the fourth quarter of 2013. In addition, the Third Party Disruptions that
have been impacting the Company’s production since mid-2012 continued in the fourth quarter of 2013,
impacting average sales volumes by approximately 4,400 Boe/d (Fourth quarter 2012 – 3,000 Boe/d).
Paramount’s fourth quarter production was also impacted by downtime at Company facilities in Musreau
and the temporary shut-in of multi-well pads in Grande Prairie to bring new wells on production.
Commodity Prices
Key monthly average commodity price benchmarks and foreign exchange rates are as follows:
Three months ended December 31
Natural Gas
AECO daily spot (CDN$/GJ)
AECO monthly index (CDN$/GJ)
NYMEX (Henry Hub – US$/MMbtu)
Crude Oil
Edmonton par (CDN$/Bbl)
West Texas Intermediate (US$/Bbl)
Foreign Exchange
$CDN / 1 $US
2013
2012
% Change
3.52
2.99
3.86
86.26
97.46
3.06
2.90
3.40
84.43
88.30
1.05
0.99
15
3
14
2
10
6
Royalties expense decreased $1.6 million to $2.8 million in the fourth quarter of 2013 compared to $4.4
million in the same period in 2012, primarily as a result of lower rates as a greater proportion of
production qualified for Alberta new well royalty incentive programs.
Paramount Resources Ltd. 2013Management's Discussion & Analysis48
Operating expense increased $3.4 million in the fourth quarter of 2013 compared to the same period in
2012, primarily due to higher processing costs within the Kaybob COU related to utilizing interruptible
third-party facilities to increase throughput and higher costs within the Grande Prairie COU including third-
party processing facility equalizations and increased repairs and maintenance costs.
Paramount’s operating expenses were $10.19 per Boe in the fourth quarter of 2013 compared to $8.63
per Boe in the same period of 2012. The per Boe increase was due to the items noted above, the impacts
of which were partially offset by a growing proportion of sales volumes from lower cost Kaybob properties.
Net Income (Loss)
Three months ended December 31
Principal Properties
Strategic Investments
Corporate
Income tax recovery
Income (loss) from continuing operations
Discontinued operations, net of tax
Net income (loss)
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
Other expenses
Income (loss) from equity-accounted investments
Other income
Income tax recovery
Income (loss) from continuing operations
Discontinued operations, net of tax
Net income (loss)
2013
6.1
12.9
(21.8)
3.1
0.3
–
0.3
2013
29.3
(0.4)
(4.6)
(8.8)
(26.3)
(6.6)
6.2
(13.2)
(2.0)
19.3
4.3
3.1
0.3
–
0.3
2012
(136.6)
(9.1)
(14.7)
31.8
(128.6)
(23.2)
(151.8)
2012
25.8
0.6
(4.0)
(7.0)
(151.4)
(13.6)
(1.8)
(11.6)
(0.8)
(0.4)
3.8
31.8
(128.6)
(23.2)
(151.8)
Paramount Resources Ltd. 2013Management's Discussion & Analysis49
Paramount recorded income from continuing operations of $0.3 million for the three months ended
December 31, 2013 compared to a loss from continuing operations of $128.6 million in the same period of
2012. Significant factors contributing to the change are shown below:
Three months ended December 31
Loss from continuing operations – 2012
Lower depletion, depreciation and impairment mainly due to lower write-downs of petroleum
and natural gas properties and goodwill in 2013
Income from equity-accounted investments in 2013 compared to a loss in 2012, mainly due to
a $25.1 million dilution gain recorded in respect of Trilogy
Gain on sale of property, plant and equipment compared to a loss in 2012
Other
Lower exploration and evaluation expense
Lower income tax recovery
Income from continuing operations – 2013
(128.6)
125.1
19.7
8.0
7.0
(28.7)
(2.2)
0.3
IFDO for the three months ended December 31, 2012 was a loss of $23.2 million, primarily due to $29.5
million of impairment write-downs related to the Northern Discontinued Operations.
Funds Flow from Operations (1)(2)
The following is a reconciliation of funds flow from operations to the nearest GAAP measure:
Three months ended December 31
Cash used in operating activities
Change in non-cash working capital
Geological and geophysical expenses
Asset retirement obligations settled
Funds flow from operations
Funds flow from operations ($/Boe)
(1) Refer to the advisories concerning non-GAAP measures in the Advisories section of this document.
(2) Includes the results of discontinued operations.
2013
(6.3)
22.2
1.3
1.1
18.3
9.79
2012
(13.2)
27.2
1.0
2.7
17.7
9.29
Funds flow from operations increased by $0.6 million in the fourth quarter of 2013 compared to the same
period in 2012, primarily as a result of higher netbacks due to higher realized prices and higher sales
volumes for natural gas and NGLs, partially offset by higher interest and financial commodity contract
settlements which contributed to cash flows in 2012.
Paramount Resources Ltd. 2013Management's Discussion & Analysis50
Petroleum and natural gas sales – CO
Petroleum and natural gas sales – DO
Petroleum and natural gas sales
Funds flow from operations – CO
Funds flow from operations – DO
Funds flow from operations
Per share – basic and diluted ($/share)
Income (loss) – CO
Per share – basic ($/share)
Per share – diluted ($/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)
2013
2012
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
57.8
─
57.8
18.3
─
18.3
0.19
0.3
─
─
0.3
─
─
102.5
2,668
536
20,290
─
20,290
3.73
74.30
78.92
30.99
─
30.99
53.9
─
53.9
13.4
─
13.4
0.14
(37.6)
(0.39)
(0.39)
(37.6)
(0.39)
(0.39)
100.9
2,535
656
20,022
─
20,022
3.10
78.55
100.73
29.27
─
29.27
59.5
─
59.5
22.3
─
22.3
0.24
(22.1)
(0.24)
(0.24)
(22.1)
(0.24)
(0.24)
59.5
1.8
61.3
17.9
(1.3)
16.6
0.18
(27.7)
(0.31)
(0.31)
0.3
─
─
107.6
2,126
722
20,790
─
20,790
110.8
2,655
861
21,985
606
22,591
3.97
71.84
85.98
31.41
─
31.41
3.48
73.76
84.32
30.08
32.95
30.16
51.0
3.6
54.6
16.9
0.8
17.7
0.20
(128.6)
(1.49)
(1.49)
(151.8)
(1.69)
(1.69)
99.4
2,098
947
19,606
1,068
20,674
3.45
61.14
79.20
28.27
36.61
28.70
38.8
2.5
41.3
15.9
(0.4)
15.5
0.18
(33.5)
(0.39)
(0.39)
(34.6)
(0.40)
(0.40)
90.6
1,745
900
17,745
967
18,712
2.58
60.55
81.45
23.78
27.96
24.00
40.5
6.0
46.5
10.2
1.9
12.1
0.15
(29.8)
(0.35)
(0.35)
─
─
─
101.4
1,957
1,064
19,904
1,570
21,474
2.08
69.52
82.74
22.36
42.31
23.82
43.1
11.6
54.7
8.9
3.9
12.8
0.15
127.2
1.49
1.45
124.5
1.46
1.42
83.3
1,589
1,153
16,637
2,176
18,813
2.77
78.96
89.99
28.43
58.51
31.95
Significant Items Impacting Quarterly Results
Quarterly earnings variances include the impacts of changing production volumes and market prices:
Fourth quarter 2013 earnings include a $25.1 million dilution gain on the Company’s investment in
Trilogy as a result of common shares issued by Trilogy during the quarter and a $7.3 million net
impairment reversal of petroleum and natural gas properties.
Third quarter 2013 earnings include a $13.8 million net impairment write-down of petroleum and
natural gas properties.
Second quarter 2013 earnings include $16.2 million of exploration expenses and $10.6 million in
aggregate gains on the sale of petroleum and natural gas properties.
Paramount Resources Ltd. 2013Management's Discussion & Analysis51
First quarter 2013 earnings include $50.8 million in aggregate gains on the sale of petroleum and
natural gas properties, partially offset by higher depletion and depreciation due to higher sales
volumes.
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.
Other Information
Related Party Transactions
Service Agreements
Paramount engages in transactions with Trilogy, MGM Energy, and Paxton Corporation in the normal
course of business, including joint venture operations. Paramount is considered related to Trilogy, MGM
Energy, and Paxton Corporation because of common significant influence. All transactions between
Paramount and these entities are recorded at their exchange amounts.
During 2013, Paramount charged $0.4 million (2012 – $0.4 million) to Trilogy in respect of operational and
administrative services. Also, Paramount received $8.0 million (2012 – $8.0 million) in dividends from
Trilogy. As of December 31, 2013, Paramount had a receivable balance due from Trilogy of $0.3 million
(2012 – $0.9 million).
Paramount Resources Ltd. 2013Management's Discussion & Analysis52
Contractual Obligations
Paramount had the following contractual obligations at December 31, 2013:
Cavalier Facility (1)
Bank Credit Facility (2)
Drilling Rig Facilities (2)
Senior notes (2)
Transportation and processing commitments (3)
Capital spending commitments (4)
Operating leases
2014
22.6
3.8
10.1
64.8
40.4
14.2
2.5
158.4
2015-2016
2017-2018
After 2018
─
75.7
19.3
129.7
162.3
─
4.6
391.6
─
─
30.7
469.2
231.6
─
3.8
735.3
─
─
─
484.3
688.2
─
6.9
1,179.4
Total
22.6
79.5
60.1
1,148.0
1,122.5
14.2
17.8
2,464.7
(1) Excluding interest.
(2) Including interest and principal repayments.
(3) Certain transportation and processing commitments are secured by outstanding letters of credit totaling $32.3 million at December 31, 2013 (2012 -
$27.3 million).
(4) Relates to contractual obligations for purchases of major equipment.
Transportation and processing commitments mainly relate to long-term firm service arrangements for the
transportation of natural gas and NGLs and downstream processing of NGLs.
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 and royalty filings are subject to subsequent government audit and
potential reassessments. Accordingly, the final liability may differ materially from amounts estimated and
recorded.
Risk Factors
A description of the most significant risk factors related to Paramount and its business is contained in
Paramount’s Annual Information Form for the year ended December 31, 2013 under the heading "Risk
Factors".
Paramount monitors and complies with current government regulations that affect its activities, although
the Company and its operations may be adversely affected by changes in government policy, legislation
and regulations. Paramount maintains liability, property and business interruption insurance which is
believed to be appropriate for the Company’s size and activities. Paramount cannot fully protect against
all risks, nor are all risks insurable. The Company may become liable for damages for events which it
cannot insure or against which it may elect not to insure due to high premium costs or for other reasons.
Refer to "Forward-Looking Information" in the Advisories section of this document and "Risk Factors" in
Paramount’s most recent annual information form for additional information.
Paramount Resources Ltd. 2013Management's Discussion & Analysis53
Change in Accounting Policies
Changes in Accounting Standards
Effective January 1, 2013, the Company adopted IFRS 10 – Consolidated Financial Statements, IFRS 11
– Joint Arrangements, IFRS 12 – Disclosure of Interests in Other Entities, IFRS 13 – Fair Value
Measurement, IAS 28 – Investments in Associates and Joint Ventures and the amendment to IAS 1 –
Presentation of Financial Statements. There has been no impact on the recognized assets, liabilities, or
comprehensive income of the Company resulting from the adoption of these standards.
Future Changes in Accounting Standards
In May 2013, the IASB issued amendments to IAS 36 "Impairment of Assets" which reduce the
circumstances in which the recoverable amount of CGUs is required to be disclosed and clarify the
disclosures required when an impairment loss has been recognized or reversed in the period. The
amendments are required to be adopted retrospectively for fiscal years beginning January 1, 2014, with
earlier adoption permitted. These amendments will be applied by Paramount effective January 1, 2014.
IFRS 9, "Financial Instruments" sets out the recognition and measurement requirements for financial
instruments and some contracts to buy or sell non-financial items. IFRS 9 proposes a single model of
classifying and measuring financial assets and liabilities and provides for only two classification
categories: amortized cost and fair value. The IASB has removed the effective date for this IFRS as they
finalize and complete the various phases of its comprehensive project on financial instruments and its
objective to fully replace IAS 39, the current standard on the recognition and measurement of financial
instruments. The Company is currently assessing the impact of adopting IFRS 9 on its Consolidated
Financial Statements.
Disclosure Controls and Procedures
As of the year ended December 31, 2013, 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.
Paramount Resources Ltd. 2013Management's Discussion & Analysis54
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 the 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, 2013. In making its assessment, management used the Committee of Sponsoring
Organizations of the Treadway Commission Framework in Internal Control – Integrated Framework
(1992) 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, 2013.
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, 2013, 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 regularly 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 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. A discussion of the accounting estimates that
are considered significant follows:
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 assumptions 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,
Paramount Resources Ltd. 2013Management's Discussion & Analysis55
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
earnings.
Exploration and Evaluation Assets
The accounting for exploration and evaluation costs requires management to make judgments as to
whether exploratory projects have discovered economically recoverable quantities of reserves, which
requires the quantity and value of such reserves to be estimated. Designations are sometimes revised as
new information becomes available. Where it is determined that an exploratory project did not discover
economically recoverable resources, the costs are written-off as exploration and evaluation expense.
If hydrocarbons are encountered, but further appraisal activity is required in order to conclude whether
they are commercially viable, the exploratory costs remain capitalized as long as sufficient progress is
being made in assessing whether the recovery of the resources is economically viable. 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 for development plans. Exploration and evaluation assets are subject to ongoing
technical, commercial and management review to confirm the continued intent to develop and extract the
underlying resources. When management is making this assessment, changes to project economics,
quantities of resources, expected production techniques, unsuccessful drilling and estimated production
costs and projected capital expenditures are important factors. Where it is determined that an exploratory
project is not economically viable, the costs are written-off as exploration and evaluation expense.
Impairment of Assets
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 CGUs impacts recoverable amounts used in impairment
assessments and could have a material impact on earnings.
At the end of each reporting period, the Company is required to identify events or conditions that indicate
that the net carrying value of a CGU might be impaired. Management uses judgment to determine if a
specific event or condition is an indication of impairment for a CGU. If an indicator of impairment is
identified, the asset’s recoverable amount is estimated. The recoverable amount of a 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 a 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 of the asset or CGU. If the carrying
value of an asset or CGU exceeds its estimated recoverable amount, an impairment charge is
recognized.
Paramount Resources Ltd. 2013Management's Discussion & Analysis56
At the end of each reporting period, the Company must exercise judgment to determine if there are
indicators that conditions causing a previous impairment have reversed. Where a new recoverable
amount estimate for a CGU exceeds its carrying value, previously recorded impairment adjustments are
reversed, up to the amount of the original impairment.
Paramount’s independent reserves evaluator evaluated the Company’s reserves as of December 31,
2013. Results of the updated evaluation, in the Company’s judgment, were an indicator of impairment for
the Northern and Southern CGUs and an indicator that the conditions causing a previous impairment in
the Grande Prairie CGU had partially reversed. As a result, recoverable amounts were estimated for each
CGU and adjustments to the carrying value of each CGU were recorded. The recoverable amounts were
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 productive life of each CGU’s proved and probable reserves, at an
after-tax discount rate of nine percent at December 31, 2013.
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 paid 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 earnings.
Asset Retirement Obligations
Estimates of asset retirement costs are based on assumptions regarding the methods, timing, economic
environment and regulatory standards that are expected to exist at the time assets are retired. The
Company incorporates information from its current asset retirement projects, internally prepared
retirement assessments for select properties, available industry estimates and estimates from regulators
in its aggregated estimate of asset retirement obligations. Management adjusts 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.
Significant Influence
An investor is presumed to have significant influence where it holds 20 percent or more of the voting
power over an investee, or where significant influence can be clearly demonstrated. Significant influence
Paramount Resources Ltd. 2013Management's Discussion & Analysis57
is the power to participate in the financial and operating policy decisions of the investee, but is not control
or joint control of the entity. Factors that may demonstrate significant influence include representation on
the board of directors of the investee, interchange of management personnel and participation in
determining the significant policies of the investee. The Company accounts for its investments in certain
entities under the equity method although it holds less than 20 percent of the voting power because, in
Management’s judgment, it has significant influence as a result of common directors and members of
senior management.
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 and 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 earnings.
Deferred tax assets are recognized when it is considered probable that deductible temporary differences
will be recovered in the foreseeable future. To the extent that future taxable income and the application of
existing tax laws in each jurisdiction differ significantly from the company’s estimate, the ability of the
company to realize the deferred tax assets could be impacted.
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", “will”, "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:
projected production and sales volumes and
growth and the timing thereof (including
expected first month production volumes
from the Kaybob COU's inventory of behind-
pipe wells);
forecast capital expenditures;
exploration, development, and associated
operational plans and strategies (including
planned drilling programs, well tie-ins and
potential future facility expansions and
additions), and the anticipated timing of
and/or sources of funding for such activities;
anticipated increases in funds flow from
operations;
projected timelines for, and anticipated costs
of, constructing, commissioning and/or
starting-up new and expanded deep cut
natural gas processing and associated
facilities, and the Kaybob COU’s processing
capacity following the completion of the
deep cut facilities;
anticipated decreases in capital and
operating costs;
the projected availability of third party
processing, transportation, fractionation, de-
ethanization and other facilities;
the anticipated date for receiving regulatory
approvals for the initial phase of Cavalier
Energy’s Hoole Grand Rapids oil sands
development project;
business strategies and objectives;
estimated reserves and resources and the
discounted present value of future net
revenues therefrom;
non-core asset dispositions and the timing
thereof; and
tax pools and attributes.
Paramount Resources Ltd. 2013Management's Discussion & Analysis58
Such forward-looking information is based on a number of assumptions which may prove to be incorrect.
Assumptions have been made with respect to the following matters, in addition to any other assumptions
identified in this document:
future oil, bitumen, natural gas, NGLs and
other commodity prices;
royalty rates, taxes and capital, operating,
general & administrative and other costs;
foreign currency exchange rates and interest
rates;
general economic and business conditions;
the ability of Paramount to obtain the
required capital to finance its exploration,
development and other operations;
the ability of Paramount to obtain
equipment, services, supplies and personnel
in a timely manner and at an acceptable
cost to carry out its activities;
the ability of Paramount to secure adequate
product processing, transportation,
fractionation, de-ethanization and storage
capacity on acceptable terms;
the ability of Paramount to market its oil,
bitumen, natural gas and NGLs successfully
to current and new customers;
the ability of Paramount and its industry
partners to obtain drilling success (including
in respect of anticipated production volumes,
reserves additions and NGLs yields) and
operational improvements, efficiencies and
results consistent with expectations;
the timely receipt of required governmental
and regulatory approvals; and
anticipated timelines and budgets being met
in respect of drilling programs and other
operations (including well completions and
tie-ins and the construction, commissioning
and start-up of new and expanded facilities).
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 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. The
material risks and uncertainties include, but are not limited to:
fluctuations in oil, bitumen, natural gas,
NGLs and other commodity prices;
changes in foreign currency exchange
rates and interest rates;
the uncertainty of estimates and
projections relating to future revenue,
future production, NGLs yields, royalty
rates, taxes and costs and expenses;
the ability to secure adequate product
processing, transportation, fractionation,
de-ethanization and storage capacity on
acceptable terms;
operational risks in exploring for,
developing and producing crude oil,
bitumen, natural gas and NGLs;
the ability to obtain equipment, services,
supplies and personnel in a timely manner
and at an acceptable cost;
potential disruptions or unexpected
technical or other difficulties in designing,
developing, expanding or operating new,
expanded or existing facilities (including
third party facilities);
industry wide processing, pipeline, de-
ethanization, and fractionation
infrastructure outages, disruptions and
constraints;
risks and uncertainties
involving
the
general business, economic and market
conditions;
the ability to generate sufficient cash flow from
operations and obtain financing at an acceptable
cost to fund planned exploration, development
and operational activities and meet current and
future obligations (including costs of anticipated
new and expanded facilities and other projects
and product processing, transportation,
fractionation, de-ethanization and similar
commitments);
changes in, or in the interpretation of, laws,
regulations or policies (including environmental
laws);
the ability to obtain required governmental or
regulatory approvals in a timely manner, and to
enter into and maintain leases and licenses;
the effects of weather;
the timing and cost of future abandonment and
reclamation obligations and potential liabilities for
environmental damage and contamination;
uncertainties regarding aboriginal claims and in
maintaining relationships with local populations
and other stakeholders;
the outcome of existing and potential lawsuits,
regulatory actions, audits and assessments; and
other risks and uncertainties described elsewhere
in this document and in Paramount’s other filings
Paramount Resources Ltd. 2013Management's Discussion & Analysis59
geology of oil and gas deposits;
the uncertainty of reserves and resources
estimates;
with Canadian securities authorities.
The foregoing list of risks is not exhaustive. For more information relating to risks, see the section titled
"RISK FACTORS" in Paramount's current annual information form. The forward-looking information
contained in this document is made as of the date hereof and, except as required by applicable securities
law, Paramount undertakes no obligation to update publicly or revise any forward-looking statements or
information, whether as a result of new information, future events or otherwise.
NON-GAAP MEASURES
In this document "Funds flow from operations", "Netback", "Net Debt", "Adjusted Working Capital",
"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 IFRS.
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 liquidity and capital
resources section of the Company’s Management’s Discussion and Analysis for the period for the
calculation of Net Debt and Adjusted Working Capital. 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, Strategic 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", "MBoe" 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 2013, the value ratio between crude oil and natural gas was approximately 25:1. 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.
Paramount Resources Ltd. 2013Management's Discussion & Analysis60
Conventional reserve estimates include nominal amounts of volumes and future net revenues related to
Paramount’s completed shale gas well. The estimates of reserves and future net revenue for individual
properties may not reflect the same confidence level as estimates of reserves and future net revenue for
all properties, due to the effects of aggregation. In addition, estimates of future net revenue do not
represent fair market value.
Finding and Development ("F&D") costs exclude capital costs and reserve volumes related to oil sands
and exploratory shale gas properties within Paramount’s Strategic Investments business segment
because the relationship between capital amounts invested and reserve volumes discovered for such
properties is not comparable to conventional oil and gas properties.
Proved reserves additions and P+P reserves additions disclosed herein were calculated as the aggregate
of extensions and discoveries and technical revisions included in the reserves reconciliation table. The
reserves replacement disclosure herein was calculated as the net increase in P+P reserves estimates
from extensions and discoveries, technical revisions and economic factors divided by the Company’s total
production in the period. The recycle ratio is calculated by dividing Netback per Boe by F&D costs per
Boe. Estimated production from wells that have not yet produced included in the Kaybob COU’s behind
pipe inventory is based on the Company’s 4.4 Bcf type curve for Falher formation wells and 3.0 Bcf type
curve for Montney formation wells.
Oil Sands Resource Notes:
This document contains disclosure of certain results of an updated independent evaluation by McDaniel
of Cavalier Energy’s bitumen reserves and resources in the Grand Rapids formation in Cavalier’s Hoole
oil sands property as of December 31, 2013 (the "Cavalier Evaluation"). Specifically, this document
includes McDaniel’s assessment as of December 31, 2013 of Cavalier’s probable reserves, and the low,
best and high estimates of economic contingent resources and discovered exploitable bitumen in place in
the Grand Rapids formation at Hoole (and the estimated net present value of these probable reserves
and economic contingent resources). These terms, as used in the Cavalier Evaluation, have the following
meanings:
"Probable reserves" are reserves that are less certain to be recoverable than proved reserves.
Specifically, whereas proved reserves are reserves that can be estimated with a high degree of certainty
to be recoverable (i.e. it is likely that the actual remaining quantities recovered will exceed the estimated
proved reserves), in the case of probable reserves it is equally likely that the actual quantities recovered
will be greater or less than the estimated probable reserves (or where there are both proved and probable
reserves the sum of the estimated proved plus probable reserves).
"Contingent resources" are those quantities of bitumen resources estimated, as of a given date, to be
potentially recoverable from known accumulations using established technology or technology under
development, but which are classified as resources rather than reserves due to one or more
contingencies, such as the absence of regulatory applications, detailed design estimates or near term
development plans. "Economic contingent resources" are a sub-category of contingent bitumen resources
that are considered to be currently economically recoverable based on the reserves evaluator’s then
current forecasts of commodity prices and costs.
At Hoole, a portion of Cavalier’s economic contingent resources were re-classified by McDaniel as
probable reserves by virtue of Cavalier having finalized its plans for a pilot project and submitted a
regulatory application for this pilot project. Cavalier will need to finalize plans for the commercial
development of the balance of the Hoole oil sands properties and submit regulatory applications for their
development before the balance of Cavalier's contingent resources at Hoole can be re-classified as
probable reserves. There is no certainty that it will be commercially viable to produce any portion of
Cavalier’s contingent resources at Hoole.
"Discovered bitumen in place" or "DBIP" (equivalent to discovered resources) is the aggregate quantity of
bitumen that is estimated, as of a given date, to be contained in a known accumulation prior to
Paramount Resources Ltd. 2013Management's Discussion & Analysis61
production. To qualify as "discovered exploitable bitumen in place" or "DEBIP" these volumes must be
contained in a reservoir that meets or exceeds certain characteristics, such as minimum continuous net
pay, porosity and mass bitumen content. DBIP or DEBIP volumes that are considered to be recoverable
as of a given date are classified as reserves or contingent resources (with the remaining DBIP or DEBIP
volumes being those that are considered to be unrecoverable as of that date).
At Hoole, DEBIP volumes have been ascribed by McDaniel to those portions of the Grand Rapids
formation where they felt minimum continuous net pay, porosity, mass bitumen content and other
reservoir characteristics allowed for the commercial application of known recovery technologies. There is
no certainty that it will ever be commercially viable to produce any portion of the DEBIP at Hoole.
"High Estimate" is considered to be an optimistic estimate of the quantity of resources 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 of resources that will actually be
recovered. It is equally likely that the actual remaining quantities recovered will be greater or less than the
best estimate (or stated another way, there is a 50 percent confidence level that the actual quantities
recovered will equal or exceed the best estimate amount).
"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.
"Net present value" or "NPV" of Cavalier’s probable undeveloped reserves and economic contingent
reserves at Hoole represents McDaniel’s estimates of Cavalier’s share of future net revenues, before the
deduction of income taxes, from these reserves and resources discounted at 10%. In calculating these
NPVs McDaniel considered items such as revenues, royalties, operating costs, abandonment costs and
capital expenditures (but excluded financing and general and administrative costs). Their calculations
assume natural gas is used as a fuel for steam generation, and are based on their forecast commodity
prices as of January 1, 2014 and forecast costs as of December 31, 2013. Royalties were calculated
based on Alberta’s Royalty Framework applicable to oil sands projects. McDaniel’s estimated NPVs do
not represent fair market value.
Paramount Resources Ltd. 2013Management's Discussion & Analysis62
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 6, 2014
/s/ Bernard K. Lee=
Bernard K. Lee
Chief Financial Officer=
Paramount Resources Ltd. 2013Financial Statements63
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, 2013 and 2012 and the
consolidated statements of comprehensive loss, shareholders’ equity and cash flows for the years then
ended, 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, 2013 and 2012 and its financial performance
and its cash flows for the years then ended in accordance with International Financial Reporting
Standards.
Calgary, Canada
March 6, 2014 Chartered accountants
Paramount Resources Ltd. 2013Financial Statements64
PARAMOUNT RESOURCES LTD.
Consolidated Balance Sheet
($ thousands)
As at December 31
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable
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
See the accompanying notes to these Consolidated Financial Statements.
On behalf of the Board
Note
2013
2012
20
19
6
18
7
8
9
10
18
11
12
19
19
6
13
14
23
15
16
$
$
$
$
10,703
39,300
2,252
─
52,255
20,437
429,911
1,573,011
104,314
145,661
119,090
3,124
2,447,803
75,550
213,581
3,972
─
293,103
882,603
239,853
1,415,559
1,169,178
(224,612)
87,678
1,032,244
2,447,803
$
$
$
$
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
/s/ J.H.T. Riddell
J.H.T. Riddell, Director
/s/ J.C. Gorman
J.C. Gorman, Director
Paramount Resources Ltd. 2013Financial Statements65
PARAMOUNT RESOURCES LTD.
Consolidated Statement of Comprehensive Loss
($ thousands, except as noted)
Year ended December 31
Note
2013
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
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
See the accompanying notes to these Consolidated Financial Statements.
19
17
8
7
14
9
5
18
4
16
15
$
$
$
230,722
(10,814)
219,908
(3,972)
215,936
69,847
22,550
19,481
25,851
152,935
35,537
(32,688)
52,639
3,099
528
349,779
21,378
6,757
(105,708)
4,983
(23,576)
(18,593)
(87,115)
28,030
(59,085)
3,908
393
4,301
(54,784)
(0.93)
0.30
(0.63)
(0.93)
0.30
(0.63)
$
2012
(restated see note 4)
173,367
(14,277)
159,090
2,487
161,577
55,610
20,196
18,140
29,082
248,888
32,955
(26,432)
35,324
2,899
1,583
418,245
153,333
14,290
(89,045)
789
(25,157)
(24,368)
(64,677)
2,765
(61,912)
(42,830)
438
(42,392)
(104,304)
(0.75)
0.04
(0.71)
(0.75)
0.04
(0.71)
$
$
Paramount Resources Ltd. 2013Financial Statements66
PARAMOUNT RESOURCES LTD.
Consolidated Statement of Cash Flows
($ thousands)
Year ended December 31
Note
2013
2012
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 of demand loans
Net draw (repayment) of revolving long-term debt
Proceeds from Senior Notes, net of issue costs
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
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
See the accompanying notes to these Consolidated Financial Statements.
$
(59,085)
$
(61,912)
109,550
8,040
(6,336)
4,915
(12,171)
44,913
34,847
71,826
148,507
217,369
(3,998)
468,551
(736,172)
37,875
9,062
10,097
(9,915)
─
38,730
(650,323)
(136,859)
878
146,684
10,703
101,013
8,040
(8,002)
3,931
12,150
55,220
17,861
(61,383)
294,135
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
$
20
14
12
13
13
$
20
Paramount Resources Ltd. 2013Financial Statements67
PARAMOUNT RESOURCES LTD.
Consolidated Statement of Shareholders’ Equity
($ thousands, except as noted)
Year ended December 31
2013
2012
Shares
(000’s)
Note
Shares
(000’s)
Share Capital
Balance, beginning of year
Issued
Change in unvested common shares for stock incentive plan
17
Balance, end of year
Accumulated Deficit
Balance, beginning of year
Net loss
Balance, end of year
Reserves
Balance, beginning of year
Other comprehensive income (loss)
Contributed surplus
Balance, end of year
Total Shareholders’ Equity
See the accompanying notes to these Consolidated Financial Statements.
89,857
7,133
3
96,993
$ 921,680
247,582
(84)
$ 1,169,178
85,414
4,432
11
89,857
$ 810,781
110,896
3
$ 921,680
16
$ (165,527)
(59,085)
$ (224,612)
$
94,947
4,301
(11,570)
$
87,678
$ 1,032,244
$ (103,615)
(61,912)
$ (165,527)
$ 116,670
(42,392)
20,669
$
94,947
$ 851,100
Paramount Resources Ltd. 2013Financial Statements68
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
1.
SIGNIFICANT ACCOUNTING POLICIES
Paramount Resources Ltd. ("Paramount" or the "Company") is an independent, publicly traded, Canadian
corporation that explores for and develops conventional petroleum and natural gas prospects, pursues
long-term non-conventional exploration and pre-development projects and holds a portfolio of
investments in other entities. Paramount’s principal properties are primarily located in Alberta and British
Columbia. Paramount’s operations are divided
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.
into
Paramount is the ultimate parent company of a 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. The consolidated group includes the following wholly-owned subsidiaries: Paramount
Resources, a partnership, Fox Drilling Inc. ("Fox Drilling"), Cavalier Energy Inc. ("Cavalier Energy") and
Summit Resources, Inc. ("Summit"). Paramount also holds a 15 percent equity interest in Trilogy Energy
Corp. ("Trilogy"), which is accounted for under the equity method of investment accounting along with
certain other investees.
These consolidated financial statements of the Company, as at December 31, 2013 and December 31,
2012 and for the years then ended (the "Consolidated Financial Statements"), were authorized for
issuance by Paramount’s Board of Directors on March 6, 2014.
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.
The financial statements of Paramount’s subsidiaries and partnerships are prepared for the same
reporting periods as the parent in accordance with the Company’s accounting policies. All intercompany
balances and transactions have been eliminated. Certain comparative figures have been reclassified to
conform with the current year’s presentation.
In March 2013, Paramount sold its properties in the Bistcho area of Alberta and the Cameron Hills area of
the Northwest Territories (the "Northern 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 "Southern
Discontinued Operations"). Results of the Northern Discontinued Operations and Southern Discontinued
Operations 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.
Paramount Resources Ltd. 2013Financial Statements69
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
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.
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)
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 commercially viable, 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.
Net cashflows from the sale of production from shale gas exploration wells within the Strategic
Investments business segment are applied against the capitalized costs of the shale gas projects to
which they relate until the overall project is deemed commercially viable. 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 costs ("E&E") are transferred to petroleum and natural gas assets, subject to an
impairment assessment. When the Company determines that a project is no longer viable, its carrying
value is charged to earnings.
Exploratory geological and geophysical costs, pre-license costs, and annual lease rentals are expensed
as incurred.
Paramount Resources Ltd. 2013Financial Statements70
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
f)
Property, Plant and Equipment
Petroleum and natural gas assets 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. 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 estimated volumes of proved
developed reserves using the unit-of-production method. For purposes of these calculations, volumes of
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 1,095 to 3,650
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 of
the asset or CGU. If the carrying value of an asset or CGU exceeds its estimated recoverable amount, an
impairment charge is recognized.
Paramount Resources Ltd. 2013Financial Statements71
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
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.
g)
Joint Arrangements
Paramount recognizes its proportionate share of the revenues, expenses, assets, and liabilities of jointly
controlled operations. Interests in joint ventures are accounted for using the equity method of accounting.
All of the Company’s interests in joint control arrangements are accounted for as joint operations, the
Company does not currently hold any interests in joint ventures.
h)
Equity-Accounted Investments
Investments in entities over which Paramount has significant influence are accounted for using the equity
method. An investor is presumed to have significant influence where it holds 20 percent or more of the
voting power over an investee, or where significant influence can be clearly demonstrated. Significant
influence is the power to participate in the financial and operating policy decisions of the investee, but is
not control or joint control of the entity. Factors that may demonstrate significant influence include
representation on the board of directors of the investee, interchange of management personnel and
participation in determining the significant policies of the investee.
Under the equity method, an equity investment is recognized at cost on acquisition, with the carrying
amount subsequently increased or decreased to reflect the investor’s proportionate share of the profit or
loss of the investee after the date of acquisition. Distributions received from an investee reduce the
carrying amount of the investor’s investment. When necessary, adjustments are made to investee
financial statements to align accounting policies of investees with those applied by the Company in its
Consolidated Financial Statements.
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.
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 paid 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.
To test goodwill for impairment, the carrying value of a CGU (or group of CGUs), including allocated
goodwill, is compared to that 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.
Paramount Resources Ltd. 2013Financial Statements72
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
For the purpose of testing goodwill for impairment, the recoverable amount of a CGU (or group of CGUs)
is 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 incurred.
k)
Asset Retirement Obligations
Asset retirement obligations arise from legal obligations to retire assets including oil and gas wells,
gathering systems, processing plants and access roads at the end of their productive lives. Paramount
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, discount rate and inflation rate relating to the estimated liability are accounted for prospectively
by recording an adjustment to the asset retirement obligation liability, with a corresponding adjustment to
the carrying value of the related asset. The present value of estimated future asset retirement costs are
capitalized as part of the related long-lived asset and depreciated on the same basis as the underlying
asset.
Actual costs incurred to retire assets are applied against the asset retirement obligation liability.
Differences between the actual costs incurred and the liability accrued are recognized in earnings when
reclamation of the area is fully complete.
l)
Foreign Currency Translation
Paramount’s functional and presentation currency is the Canadian dollar. The functional currencies of the
Company’s subsidiaries are determined by the nature and location of their operations, and amounts
included in their individual financial statements are measured in that functional currency. The functional
currency of the Company’s United States subsidiaries was changed to the Canadian dollar following the
sale of the Company’s remaining United States properties in the first quarter of 2013.
For Paramount and its subsidiaries with a Canadian dollar functional currency, monetary assets and
liabilities that are denominated in foreign currencies are translated into Canadian dollars at the period-end
exchange rate. Gains or losses are recognized in earnings.
For the purpose of consolidation, the assets and liabilities of subsidiaries with functional currencies that
are not the Canadian dollar 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 earnings.
Revenues and expenses denominated in foreign currencies are translated into Canadian dollars at
average monthly exchange rates.
Paramount Resources Ltd. 2013Financial Statements73
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
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 the Company’s investments in securities and long-term debt.
Fair value through profit or loss financial assets and financial liabilities are measured at fair value and
changes in those fair values over time are recognized in earnings. Derivative financial instruments are
classified as fair value through profit or loss. 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 in earnings. 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 subsidiaries with
a functional currency other than the Canadian dollar. The amounts recorded in OCI each period are
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)
Estimates of Fair Value
Inputs used to estimate fair values incorporated in the preparation of the Consolidated Financial
Statements are categorized into three levels in a fair value hierarchy. The fair value hierarchy gives the
highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to
unobservable inputs. The three levels are defined below.
Level One – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that
can be accessed at the measurement date.
Level Two – Inputs are based on information other than quoted prices included within Level One that are
observable for the asset or liability, either directly or indirectly. Level two inputs include:
(a) quoted prices for similar assets or liabilities in active markets;
(b) quoted prices for identical or similar assets or liabilities in markets that are not active;
(c) inputs other than quoted prices that are observable for the asset or liability, for example:
(i) interest rates and yield curves observable at commonly quoted intervals;
(ii) implied volatilities; and
(iii) credit spreads; and
Paramount Resources Ltd. 2013Financial Statements74
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
(d) market-corroborated inputs.
Level Three – Inputs are unobservable. Unobservable inputs are developed using the best information
available in the circumstances, which may incorporate Paramount’s own internally generated data.
o)
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
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 realization 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.
p)
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 associated with the flow-through feature
of the securities. Proceeds are first allocated to share capital based on the market price of Common
Shares on the date the offering is priced, with the balance recorded in accounts payable and accrued
liabilities based on the difference between the issue price and the market price of Common Shares.
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.
q)
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.
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 Paramount 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 has elapsed and the estimated number of options that are
expected to vest. That estimate is adjusted each period such that the cumulative amount recognized on
Paramount Resources Ltd. 2013Financial Statements75
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
the vesting date reflects the actual number of Paramount Options that ultimately vest. Upon the exercise
of a Paramount Option, the Company transfers the cumulative amount recognized in respect of the award
from Contributed Surplus to Share Capital.
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 to acquire common shares of Cavalier Energy ("Cavalier Options"). 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 an award 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.
r)
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 regularly
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:
Exploration and Evaluation Assets
The accounting for exploration and evaluation costs requires management to make judgments as to
whether exploratory projects have discovered economically recoverable quantities of reserves, which
Paramount Resources Ltd. 2013Financial Statements76
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
requires the quantity and value of such reserves to be estimated. Designations are sometimes revised as
new information becomes available. Where it is determined that an exploratory project did not discover
economically recoverable resources, the costs are written-off as exploration and evaluation expense.
If hydrocarbons are encountered, but further appraisal activity is required in order to conclude whether
they are commercially viable, the exploratory costs remain capitalized as long as sufficient progress is
being made in assessing whether the recovery of the resources is economically viable. 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 for development plans. Exploration and evaluation assets are subject to ongoing
technical, commercial and management review to confirm the continued intent to develop and extract the
underlying resources. When management is making this assessment, changes to project economics,
quantities of resources, expected production techniques, unsuccessful drilling and estimated production
costs and projected capital expenditures are important factors. Where it is determined that an exploratory
project is not economically viable, 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 assumptions 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
earnings.
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 earnings.
Business Combinations
Business combinations are accounted for using the acquisition method of accounting, where the net
identifiable assets acquired are recorded at fair value. Any excess of the consideration paid 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
Paramount Resources Ltd. 2013Financial Statements77
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
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 earnings.
Equity Accounted Investments
The Company accounts for its investments in certain entities under the equity method although it holds
less than 20 percent of the voting power because, in Management’s judgment, it has significant influence
as a result of common directors and members of senior management.
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 earnings.
3.
CHANGES IN ACCOUNTING STANDARDS
Changes in Accounting Standards
Effective January 1, 2013, the Company adopted IFRS 10 – Consolidated Financial Statements, IFRS 11
– Joint Arrangements, IFRS 12 – Disclosure of Interests in Other Entities, IFRS 13 – Fair Value
Measurement, IAS 28 – Investments in Associates and Joint Ventures and the amendment to IAS 1 –
Presentation of Financial Statements. There has been no impact on the recognized assets, liabilities, or
comprehensive income of the Company resulting from the adoption of these standards.
Paramount Resources Ltd. 2013Financial Statements78
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Future Changes in Accounting Standards
In May 2013, the IASB issued amendments to IAS 36 "Impairment of Assets" which reduce the
circumstances in which the recoverable amount of CGUs is required to be disclosed and clarify the
disclosures required when an impairment loss has been recognized or reversed in the period. The
amendments are required to be adopted retrospectively for fiscal years beginning January 1, 2014, with
earlier adoption permitted. These amendments will be applied by Paramount effective January 1, 2014.
IFRS 9, "Financial Instruments" sets out the recognition and measurement requirements for financial
instruments and some contracts to buy or sell non-financial items. IFRS 9 proposes a single model of
classifying and measuring financial assets and liabilities and provides for only two classification
categories: amortized cost and fair value. The IASB has removed the effective date for this IFRS as they
finalize and complete the various phases of its comprehensive project on financial instruments and its
objective to fully replace IAS 39, the current standard on the recognition and measurement of financial
instruments. The Company is currently assessing the impact of adopting IFRS 9 on its Consolidated
Financial Statements.
Paramount Resources Ltd. 2013Financial Statements79
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
4.
DISCONTINUED OPERATIONS
In March 2013, Paramount sold its properties in the Bistcho area of Alberta and the Cameron Hills area of
the Northwest Territories for net proceeds of $9.1 million.
In May 2012, 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 the income from discontinued operations are presented below:
Year ended December 31
Petroleum and natural gas sales
Royalties
Revenue
Expenses
Operating expense and production tax
Transportation
Depletion, depreciation, and write-downs
Exploration and evaluation
Loss on sale of property, plant and equipment
Accretion of asset retirement obligations
Other expense
Loss 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
$
2013
1,796
(24)
1,772
2,841
233
267
29
─
─
3,370
─
(1,598)
38,985
37,387
$
2012
23,776
(2,253)
21,523
14,241
1,578
36,665
220
48
484
53,236
(13)
(31,726)
50,769
19,043
─
9,357
9,357
$ 28,030
3,931
12,347
16,278
2,765
$
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
2013
(926)
9,062
8,136
$
$
2012
12,231
60,422
72,653
$
$
Paramount Resources Ltd. 2013Financial Statements80
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
5.
SEGMENTED INFORMATION
Paramount’s operations are divided into three business segments established by management to assist
in resource allocation, to assess operating performance and to achieve long-term strategic objectives:
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 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 commercial production, but a longer-term value proposition based on spin-
outs, dispositions, or future revenue generation, including oil sands and carbonate interests held
by Cavalier Energy, and prospective shale gas acreage; and (iii) drilling rigs owned by 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.
Year ended December 31, 2013
Revenue
Loss on financial commodity contracts
Expenses
Operating expense and 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 of tax
Net loss
Principal
Properties
$ 219,908
(3,972)
215,936
92,397
─
─
150,633
34,692
(32,275)
─
3,082
─
248,529
─
4,419
─
─
(28,174)
─
$ (28,174)
Strategic
Investments
$
─
─
─
─
6,765
7,166
9,913
845
(413)
2,400
17
─
26,693
21,378
28
42,465
(19,351)
17,827
(12,508)
$ 5,319
Corporate
─
$
─
─
─
12,716
18,685
685
─
─
50,239
─
528
82,853
─
─
─
─
(82,853)
─
$ (82,853)
Inter-segment
Eliminations
$
─
─
─
─
─
─
(8,296)
─
─
─
─
─
(8,296)
─
─
(38,279)
17,475
(12,508)
12,508
─
$
Total
$ 219,908
(3,972)
215,936
92,397
19,481
25,851
152,935
35,537
(32,688)
52,639
3,099
528
349,779
21,378
4,447
4,186
(1,876)
(105,708)
─
(105,708)
18,593
28,030
$ (59,085)
Paramount Resources Ltd. 2013Financial Statements81
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Year ended December 31, 2012
(restated see note 4)
Revenue
Gain on financial commodity contracts
Expenses
Operating expense and 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 of tax
Net loss
Total Assets
Principal Properties
Strategic Investments
Corporate
Other Income
Year ended December 31
Gain on sale of investments
Write-down of available-for-sale investment
Drilling rig revenue
Drilling rig expense
Other
Principal
Properties
$ 159,090
2,487
161,577
75,806
─
─
246,834
31,477
(26,432)
─
2,877
─
330,562
─
11,483
─
─
(157,502)
─
$(157,502)
Strategic
Investments
─
$
─
─
─
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
Corporate
─
$
─
─
─
11,702
18,203
338
─
─
33,825
─
1,565
65,633
─
─
─
─
(65,633)
─
$ (65,633)
Inter-segment
Eliminations
$
─
─
─
─
─
─
(2,941)
─
─
─
─
─
(2,941)
─
─
(13,422)
6,186
(4,295)
4,295
─
$
Total
$ 159,090
2,487
161,577
75,806
18,140
29,082
248,888
32,955
(26,432)
35,324
2,899
1,583
418,245
153,333
11,483
7,462
(4,655)
(89,045)
─
(89,045)
24,368
2,765
$ (61,912)
December 31, 2013
December 31, 2012
$
$
1,772,049
520,983
154,771
2,447,803
$
$
1,410,129
342,967
283,859
2,036,955
2013
3,656
(3,628)
4,186
(1,876)
4,419
6,757
$
$
2012
–
–
7,462
(4,655)
11,483
14,290
$
$
Other income for the year ended December 31, 2012 includes $6.2 million in respect of a business
interruption insurance settlement related to an electrical equipment failure at one of the Company’s
facilities in the fourth quarter of 2011.
Paramount Resources Ltd. 2013Financial Statements82
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
6.
ASSETS HELD FOR SALE
During the first quarter of 2013, Summit closed the sale of its non-operated joint venture operations and
lands in North Dakota for proceeds of US$21.8 million. The carrying value of the properties and
associated liabilities were presented as assets held for sale as at December 31, 2012:
Exploration and evaluation
Property, plant and equipment, net
Asset retirement obligations
$
$
12,270
163
(470)
7.
EXPLORATION AND EVALUATION
Year ended December 31
Balance, beginning of year
Additions
Transfer to assets held for sale
Transfers to property, plant and equipment
Dry hole
Expired lease costs
Dispositions
Foreign exchange
Balance, end of year
2013
405,090
203,642
─
(137,355)
(13,862)
(14,429)
(13,143)
(32)
429,911
$
$
2012
390,742
166,214
(12,270)
(111,416)
(6,842)
(18,550)
(2,548)
(240)
405,090
$
$
Additions to exploration and evaluation assets totaled $125.9 million (2012 – $119.0 million) for Principal
Properties and $77.7 million (2012 – $47.2 million) for Strategic Investments.
Exploration and Evaluation Expense
Year ended December 31
Geological and geophysical
Dry hole
Expired lease costs
2013
7,101
14,007
14,429
35,537
$
$
2012
7,843
6,427
18,685
32,955
$
$
Paramount Resources Ltd. 2013Financial Statements83
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
8.
PROPERTY, PLANT AND EQUIPMENT
Year ended December 31, 2013
Cost
Balance, December 31, 2012
Additions
Transfers from exploration and evaluation
Dispositions
Change in asset retirement provision
Currency translation differences
Cost, December 31, 2013
Accumulated depletion, depreciation and write-downs
Balance, December 31, 2012
Depletion and depreciation
Write-downs
Dispositions
Currency translation differences
Petroleum
and natural
gas assets
$ 1,960,833
528,519
137,355
(126,129)
(11,220)
(2)
2,489,356
$
(949,699)
(145,014)
(6,279)
103,507
(1)
Drilling rigs
Other
Total
$
$
84,100
17,417
─
─
─
─
101,517
$ 20,374
7,461
─
(682)
─
20
27,173
(18,420)
(9,382)
─
─
─
$(18,737)
(1,218)
─
220
(12)
$ 2,065,307
553,397
137,355
(126,811)
(11,220)
18
2,618,046
$
(986,856)
(155,614)
(6,279)
103,727
(13)
Accumulated depletion, depreciation and write-downs,
December 31, 2013
Net book value, December 31, 2012
Net book value, December 31, 2013
(997,486)
1,011,134
$ 1,491,870
$
(27,802)
65,680
73,715
(19,747)
1,637
$ 7,426
(1,045,035)
1,078,451
$ 1,573,011
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)
Drilling rigs
Other
Total
$ 51,471
32,889
–
–
–
–
(260)
84,100
$ 19,943
446
–
–
–
–
(15)
20,374
$
(13,899)
–
(4,630)
–
–
109
$
(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)
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
(18,420)
37,572
$ 65,680
(18,737)
1,568
1,637
(986,856)
808,617
$1,078,451
$
Paramount Resources Ltd. 2013Financial Statements84
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
2013
155,701
6,519
─
(9,285)
152,935
$
$
2012
145,981
105,802
302
(3,197)
248,888
$
$
At December 31, 2013, $343.7 million (December 31, 2012 – $267.7 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 2013 were $523.8 million (2012 – $426.8 million) for
Principal Properties, $22.1 million (2012 – $32.9 million) for Strategic Investments and $7.5 million (2012
– $0.5 million) for Corporate. Additions to property, plant and equipment include $12.7 million (2012 –
$4.6 million) of capitalized interest for qualifying assets in the construction phase at a weighted average
interest rate of eight percent (2012 – eight percent).
The Company recorded a net impairment write-down of its petroleum and natural gas assets of $6.5
million in 2013 (2012 – $105.8 million), comprised of a $19.6 million write-down related to the Southern
CGU and a $17.7 million write-down related to the Northern CGU, net of an impairment reversal of $30.8
million related to the Grande Prairie CGU. These properties are included within the Principal Properties
business segment.
The impairment write-downs in the Southern and Northern CGUs were recorded because the carrying
value of their properties exceeded their recoverable amounts, which were estimated based on expected
discounted cash flows from the production of proved and probable reserves. The impairments resulted
from a combination of declines in reserves assigned due to well performance and, in the Southern CGU,
the sale of properties with recoverable amounts that exceeded their carrying values.
The reversal of previously recorded impairment write-downs in the Grande Prairie CGU resulted from
increases in reserves assigned to the CGU due to recent drilling programs. The reversal was recorded to
the extent that the recoverable amount ascribed to the Grande Prairie CGU exceeded the carrying value
of its properties.
Recoverable amounts were estimated on a fair value less costs to sell basis, using a discounted cash
flow method which is an approach commonly employed by market participants to value oil and gas
properties. Cash flows were projected over the expected remaining productive life of each CGU’s
reserves, at an after-tax discount rate of nine percent at December 31, 2013 (2012 – eight percent). The
forecast prices used to determine the recoverable amount reflect the following benchmark prices,
adjusted for basis differentials to determine local reference prices, transportation costs and quality:
Paramount Resources Ltd. 2013Financial Statements85
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
(Average for the period)
2014
2015
2016
2017
2018
2019-2028
Thereafter
Natural Gas
AECO ($/MMBtu)
Henry Hub (US$/MMBtu)
4.00
4.25
4.25
4.50
4.55
4.75
4.75
5.00
5.00
5.25
5.25 – 6.25
5.50 – 6.55
Crude Oil
Edmonton Light ($/Bbl)
WTI (US$/Bbl)
95.00
95.00
96.50
95.00
97.50
95.00
98.00
95.00
98.30
95.30
99.60 – 119.10
96.60 – 115.50
+2%/yr
+2%/yr
+2%/yr
+2%/yr
Following the sale of the Cameron Hills and Bistcho properties in the first quarter of 2013 and the decline
in reserves assigned to the remaining properties in the Northern CGU as at December 31, 2013,
Paramount has determined that its remaining Northern properties no longer constitute a significant CGU.
As a result, the remaining Northern properties will be included within the Grande Prairie CGU subsequent
to December 31, 2013.
The Company recorded a net impairment write-down in 2012 related to its petroleum and natural gas
assets of $105.8 million within the Principal Properties business segment, comprised of a $48.2 million
write-down related to the Grande Prairie CGU, a $32.8 million write-down related to the Northern CGU
and a $24.8 million write-down related to the Southern CGU. The impairments were recorded to the
extent that the carrying value of the properties exceeded their expected discounted cash flows from the
production of estimated proved and probable reserves. The impairment resulted from a combination of
the decline in forecast oil, natural gas, and natural gas liquids prices, higher well costs than reserves
values assigned, and declines in reserves assigned due to well performance.
The following benchmark prices were used in determining the 2012 estimates of recoverable amounts:
(Average for the period)
2013
2014
2015
2016
2017
2018-2027
Thereafter
Natural Gas
AECO ($/MMBtu)
Henry Hub (US$/MMBtu)
3.35
3.75
3.85
4.30
4.35
4.85
4.70
5.25
5.10
5.70
5.45 – 6.50
6.10 – 7.25
+2%/yr
+2%/yr
Crude Oil
Edmonton Light ($/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
9.
EQUITY ACCOUNTED INVESTMENTS
As at December 31
Trilogy
MGM Energy Corp. ("MGM")
Other
(1) Based on the period-end trading price.
Shares
(000’s)
19,144
54,147
2013
Carrying
Value
$ 97,391
1,212
5,711
$104,314
Market
Value(1)
Shares
(000’s)
$ 528,383
8,664
19,144
54,147
2012
Carrying
Value
$ 82,419
2,299
6,259
$ 90,977
Market
Value(1)
$ 557,292
13,537
Paramount Resources Ltd. 2013Financial Statements86
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Income from equity-accounted investments is comprised of the following:
Year ended December 31
Equity loss
Dilution gain
Gain on sale
2013
(4,297)
25,675
─
21,378
$
$
2012
$
(4,298)
416
157,215
$ 153,333
As at December 31, 2013, Paramount owned a 15 percent equity interest in Trilogy (December 31, 2012
– 16 percent). Trilogy is a petroleum and natural gas-focused Canadian energy corporation that develops,
produces and sells natural gas, crude oil and natural gas liquids, primarily in the province of Alberta.
Trilogy is a publicly listed entity in Canada with its common shares trading on the Toronto Stock
Exchange. The following tables summarize the assets, liabilities, equity, revenue and income of Trilogy
and Paramount’s investment in Trilogy:
As at December 31
Current assets
Non-current assets(1)
Current liabilities
Non-current liabilities
Equity
Multiply by: Paramount’s equity interest
Paramount’s proportionate share of equity
Less: share of share-based compensation recorded in equity of Trilogy
Carrying value of Paramount’s investment
(1) Includes adjustments to Trilogy’s carrying values required in the application of the equity method of investment accounting to account for
shares of Trilogy which were purchased in the open market. Excluding such adjustments, Trilogy’s non-current assets as at December
31, 2013 totaled $1,473,508 (2012 – $1,320,972).
2012
$
74,139
1,356,916
(118,599)
(790,113)
$ 522,343
16.4%
85,708
(3,289)
82,419
2013
$
73,221
1,481,860
(138,744)
(742,136)
$ 674,201
15.3%
$ 103,113
(5,722)
97,391
$
$
$
2012
Year ended December 31
Revenue
$ 399,098
Comprehensive income (loss)(1)
(22,700)
Paramount’s share of Trilogy’s comprehensive loss
(3,725)
(1) Includes amortization of the adjustments to Trilogy’s non-current assets required in the application of the equity method of investment
2013
$ 489,819
(17,397)
(2,660)
$
$
accounting to account for shares of Trilogy purchased in the open market. Excluding such adjustments, Trilogy’s comprehensive income
for the year ended December 31, 2013 was $11,467 (2012 – comprehensive loss of $12,133).
Trilogy had 7.3 million stock options outstanding (2.6 million exercisable) at December 31, 2013 at
exercise prices ranging from $4.85 to $38.74 per share.
For the year ended December 31, 2013, Paramount received cash dividends of $8.0 million (2012 – $8.0
million) from Trilogy.
Income from equity-accounted investments for the year ended December 31, 2013 also includes $25.7
million of dilution gains related to the Company’s investment in Trilogy as a result of common shares
issued by Trilogy during the year. Income from equity-accounted investments for the year ended
December 31, 2012 included a $157.2 million gain recognized on the sale of 5.0 million Trilogy shares
and a $0.4 million dilution gain.
Paramount Resources Ltd. 2013Financial Statements87
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
The aggregate carrying amount of the Company’s other equity-accounted investments at December 31,
2013 was $6.9 million (December 31, 2012 – $8.6 million) and Paramount’s share of the income or loss of
those investees for the year ended December 31, 2013 was an aggregate net loss of $1.6 million (2012 –
net loss of $0.6 million).
10.
INVESTMENTS IN SECURITIES
As at December 31
2013
2012
MEG Energy Corp.
Strategic Oil & Gas Ltd.
Other
11. GOODWILL
As at December 31
Carrying value, beginning of year
Impairment
Carrying value, end of year
Shares
(000’s)
3,700
7,200
Market
Value
$ 113,257
5,400
27,004
$ 145,661
Shares
(000’s)
3,700
─
Market
Value
$ 112,628
─
15,139
$ 127,767
2013
3,124
─
3,124
$
$
2012
3,426
(302)
3,124
$
$
The carrying amount of goodwill as at December 31, 2013 and December 31, 2012 relates to the Kaybob
CGU. The Company recorded an impairment charge of $0.3 million in respect of goodwill related to the
Northern CGU in 2012.
12. DEMAND FACILITIES
As at December 31
Drilling Rig Facilities
Drilling Rig Loan I
Drilling Rig Loan II
Cavalier Facility
Drilling Rig Loans
2013
2012
$
$
53,000
─
─
22,550
75,550
$
$
─
17,766
21,000
1,937
40,703
In 2013, Drilling Rig Loan I and Drilling Rig Loan II were repaid and replaced with a new $57.0 million
non-revolving demand loan facility (the "Drilling Rig Facility"). The Drilling Rig Facility was drawn in full at
closing and principal payments of $4.0 million were made to December 31, 2013. In connection with the
Drilling Rig Facility, an $8.0 million non-revolving demand loan facility was entered into with the same
bank to fund the purchase of auxiliary equipment for the drilling rigs (the "Auxiliary Equipment Loan"),
which was undrawn at December 31, 2013.
Paramount Resources Ltd. 2013Financial Statements88
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Recourse and security for the Drilling Rig Facility and the Auxiliary Equipment Loan (collectively, the
"Drilling Rig Facilities") is limited to drilling rigs owned by Fox Drilling and drilling contracts guaranteed by
Paramount. Interest on the Drilling Rig Facilities 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. Scheduled
principal repayments are $8.0 million annually from 2014 to 2017 with the remaining outstanding principal
balance due in 2018. The effective interest rate on the Drilling Rig Facility for the year ended December
31, 2013 was 4.4 percent. The effective combined interest rate for the drilling rig loans for the year ended
December 31, 2013 was 4.2 percent (2012 – 4.4 percent).
Cavalier Facility
Cavalier Energy has a $40.0 million demand loan facility with a syndicate of Canadian banks (the
"Cavalier Facility"). Drawings on the Cavalier Facility bear 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. The effective interest rate on the
Cavalier Facility for the year ended December 31, 2013 was 3.4 percent (2012 – 4.7 percent).
13. LONG-TERM DEBT
As at December 31
Bank credit facility
8¼% Senior Notes due 2017
7⅝% Senior Notes due 2019
Unamortized financing costs, net of premiums
Bank Credit Facility
2013
71,826
370,000
450,000
891,826
(9,223)
882,603
$
$
2012
─
370,000
300,000
670,000
(9,298)
660,702
$
$
Paramount’s bank credit facility (the "Facility") was increased in 2013 from $300 million to $600 million,
which is available in two tranches. The first tranche ("Tranche A") has a credit limit and lender
commitments of $500 million and is available on a revolving basis to November 30, 2014. 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 $100 million and is due November 30, 2014 in the event
the due date is not earlier extended. The Facility is secured by a first fixed and floating charge over
substantially all of the assets of Paramount, excluding assets securing the Drilling Rig Facilities and the
Cavalier Facility. Balances drawn under Tranche B are secured by the pledge of certain of the Company’s
equity investments from time-to-time.
Borrowings under the Facility bear interest at the lenders’ prime lending rates, US base rates, bankers’
acceptance rates, or LIBOR rates, as selected at the discretion of Paramount, plus an applicable margin
which is dependent upon the Company’s debt-to-cash flow ratio, the tranche under which borrowings are
made and the total amount drawn. The maximum amount that Paramount may borrow under the Facility
is subject to periodic review and is dependent upon the Company’s reserves, lenders’ projections of
future commodity prices, the value attributed by lenders to Paramount’s other property, and the market
Paramount Resources Ltd. 2013Financial Statements89
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
value of equity investments pledged by Paramount from time-to-time under Tranche B, among other
factors. As at December 31, 2013, $71.8 million was drawn on Tranche A and Tranche B was undrawn.
Paramount had undrawn letters of credit outstanding at December 31, 2013 totaling $44.7 million that
reduce the amount available to the Company.
Senior Notes
Paramount has $370 million aggregate principal amount of senior unsecured notes due 2017 (the "2017
Senior Notes") outstanding. 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 Senior 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 aggregate principal amount of
senior unsecured notes due 2019 (the "2019 Senior Notes") at par. In December 2013, Paramount
completed a public offering of an additional $150 million aggregate principal amount of 2019 Senior Notes
at a price of $1,007.50 per $1,000 principal amount. Certain officers, management and associates of the
Company purchased an aggregate $17.9 million principal amount of 2019 Senior Notes under the two
offerings.
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 Senior
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.
14.
ASSET RETIREMENT OBLIGATIONS
Year ended December 31
Asset retirement obligations, beginning of year
Retirement obligations incurred
Revisions to estimated retirement costs and discount rates
Obligations settled
Disposal of properties
Accretion expense - continuing operations
Accretion expense - discontinued operations
Transfer to liabilities associated with assets held for sale
Other
Asset retirement obligations, end of year
$
2013
300,468
35,749
(45,321)
(6,336)
(48,087)
3,099
─
─
281
$ 239,853
2012
299,202
14,626
441
(8,002)
(8,500)
2,899
484
(470)
(212)
300,468
$
$
Asset retirement obligations at December 31, 2013 were determined using a weighted average risk-free
rate of 3.00 percent (December 31, 2012 – 2.00 percent) and an inflation rate of 2.00 percent
Paramount Resources Ltd. 2013Financial Statements90
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
(December 31, 2012 – 2.00 percent). These obligations will be settled over the useful lives of the assets,
which extend up to 47 years.
15. SHARE CAPITAL
Paramount’s authorized share capital consists of an unlimited number of Common Shares without par
value and an unlimited number of preferred shares issuable in series. At December 31, 2013, 96,993,129
Common Shares were outstanding, net of 71,495 Common Shares held in trust under the stock incentive
program, and no preferred shares were outstanding.
In October 2013, Paramount issued 1,115,000 Common Shares on a "flow-through" basis in respect of
Canadian exploration expenses ("FTS") at a price of $44.00 per share for gross proceeds of $49.1 million,
pursuant to a public offering. Concurrent with the public offering, Paramount issued FTS at a price of
$44.00 per share to the Company’s Chairman and Chief Executive Officer and President and Chief
Operating Officer and/or companies controlled by them for gross proceeds of approximately $10 million,
and to certain other directors, officers, and employees of Paramount and other persons for gross
proceeds of approximately $1 million.
In May 2013, Paramount issued 4,025,000 Common Shares at a price of $37.50 per share for gross
proceeds of $150.9 million pursuant to a public offering.
In October 2012 Paramount issued 1,936,000 Common Shares on a "flow-through" basis in respect of
Canadian exploration expenses ("CEE") at a price of $31.00 per share and 356,000 Common Shares on
a "flow-through" basis in respect of Canadian development expenses ("CDE") at a price of $28.15 per
share for aggregate gross proceeds of $70 million, pursuant to a public offering. Certain officers and
management of the Company participated in this offering.
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 company controlled by the Company’s Chairman and Chief
Executive Officer for aggregate proceeds of $55 million.
On issuance of the flow-through shares during the year, a liability of $11.8 million (2012 – $19.8 million)
was recognized in accounts payable and accrued liabilities on the issuance of flow-through shares in
respect of the Company’s obligation to renounce qualifying expenditures.
The Company incurred $6.4 million (2012 – $2.4 million) of transaction costs in respect of these equity
offerings, net of tax benefits of $2.1 million (2012 – $0.8 million).
Loss per Weighted Average Common Share
Year ended December 31
2013
2012
Loss from continuing operations – basic
Dilutive effect of Paramount options
Loss from continuing operations – diluted
Wtd. Avg.
Shares
(000’s)
93,708
─
93,708
Loss from
continuing
operations
(87,115)
$
─
(87,115)
$
Wtd. Avg.
Shares
(000’s)
86,607
─
86,607
Loss from
continuing
operations
$
(64,677)
─
(64,677)
$
Paramount Resources Ltd. 2013Financial Statements91
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
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.
16. RESERVES
Reserves at December 31, 2013 include unrealized gains and losses related to changes in the market
value of the Company’s investments in securities and contributed surplus amounts in respect of
Paramount Options and Cavalier Options. The changes in reserves are as follows:
Balance, December 31, 2012
Other comprehensive income
Stock-based compensation
Stock options exercised
Balance, December 31, 2013
Balance, December 31, 2011
Other comprehensive income (loss)
Stock-based compensation
Stock options exercised
Balance, December 31, 2012
Unrealized
gains (losses)
on securities
$
$
8,879
3,908
─
─
12,787
Translation
of foreign
subsidiaries
(393)
393
─
─
─
$
$
Unrealized
gains (losses)
on securities
51,709
(42,830)
─
─
8,879
$
$
Translation
of foreign
subsidiaries
(831)
438
─
─
(393)
$
$
Contributed
surplus
$
$
86,461
─
28,252
(39,822)
74,891
Total
reserves
$ 94,947
4,301
28,252
(39,822)
$ 87,678
Contributed
surplus
$
$
65,792
─
26,072
(5,403)
86,461
Total
reserves
$ 116,670
(42,392)
26,072
(5,403)
$ 94,947
Other Comprehensive Income
Year ended December 31
Unrealized gain (loss) on securities
Change in market value of securities
Reclassification of other comprehensive income to earnings
Deferred tax
Translation of foreign subsidiaries
Exchange differences on translation of US subsidiaries
Reclassification of other comprehensive income to earnings
Other comprehensive income (loss)
2013
2012
$
$
636
3,628
(356)
3,908
(587)
980
393
4,301
$
$
(43,096)
─
266
(42,830)
89
349
438
(42,392)
Paramount Resources Ltd. 2013Financial Statements92
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
17. SHARE-BASED PAYMENTS
Paramount Options
Changes in outstanding Paramount Options are as follows:
2013
2012
Number
6,667,850
1,865,000
(1,747,650)
(153,000)
–
6,632,200
2,407,250
Weighted
average
exercise price
($/share)
23.58
$
37.37
8.66
31.98
–
31.20
24.21
$
$
Number
5,767,450
1,340,000
(258,600)
(171,000)
(10,000)
6,667,850
2,862,134
Balance, beginning of year
Granted
Exercised
Forfeited
Expired
Balance, end of year
Options exercisable, end of year
Weighted
average
exercise price
($/share)
$
20.76
34.01
11.13
28.15
40.09
23.58
14.42
$
$
For options exercised in 2013, the weighted average market price of Paramount’s Common Shares on the dates exercised was $36.25 (2012 – $34.46)
The weighted average remaining contractual life and exercise prices of Paramount Options outstanding
as of December 31, 2013 are as follows:
Exercise Prices
$7.19 - $20.00
$20.01 - $30.00
$30.01 - $35.00
$35.01 - $38.00
$38.01 - $40.09
Number
1,174,950
1,038,000
1,456,000
1,701,000
1,262,250
6,632,200
Awards Outstanding
Remaining
contractual life
0.9 years
2.3 years
4.2 years
5.2 years
3.4 years
3.4 years
Weighted average
exercise price
$ 10.49
$ 29.37
$ 33.89
$ 37.73
$ 40.05
$ 31.20
The grant date fair value of Paramount Options was estimated using the Black-Scholes-Merton model
incorporating the following weighted average inputs:
Options awarded in
2013
Options awarded in
2012
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 per share
$
$
37.37
36.1%
4.6 years
5.6%
1.6%
–
12.13
$
$
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
Paramount Resources Ltd. 2013Financial Statements93
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Common Shares over the most recent period that is generally commensurate with the expected term of
the option.
Cavalier Options
During 2013, Cavalier Energy granted 3.5 million Cavalier Options, which vest over four years. A total of
3.9 million previously issued Cavalier Options were cancelled during the year, resulting in a net balance
of 4.3 million Cavalier Options outstanding at the end of the year.
The grant date fair value of Cavalier Options awarded was estimated using the Black-Scholes-Merton
model, incorporating the following inputs: expected volatility 60.8% (2012 – 62.4%), expected life 6.0
years (2012 – 6.5 years), risk-free interest rate 2.0% (2012 – 1.5%), pre-vest forfeiture rate of nil (2012 –
nil), and expected dividend yield of nil (2012 – nil).
The expected life of the Cavalier Options is the term of the option. As Cavalier is a private company,
expected volatility is estimated based on the average historical volatility of the trading price of a group of
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
2013
2012
Balance, beginning of year
Shares purchased
Change in vested and unvested shares
Balance, end of year
Employee Benefit Costs
Year ended December 31
Stock option plan
Stock incentive plan
Stock-based compensation expense
Salaries and benefits, net of recoveries
Shares
(000’s)
75
113
(116)
72
$
$
416
3,998
(3,914)
500
Shares
(000’s)
86
124
(135)
75
$
$
419
3,052
(3,055)
416
2013
21,347
4,504
25,851
13,392
39,243
$
$
2012
26,072
3,010
29,082
11,951
41,033
$
$
Paramount Resources Ltd. 2013Financial Statements94
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
18.
INCOME TAX
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)
Effect on income taxes of:
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
As at December 31
Property, plant and equipment
Investments
Asset retirement obligations
Non-capital losses
Other
Deferred tax asset
2013
$ (105,708)
25.0%
(26,427)
$
2,707
(5,345)
2,186
–
4,223
5,337
(1,274)
(18,593)
2013
(91,934)
(4,188)
60,006
150,514
4,692
119,090
$
$
$
2012
(89,045)
25.1%
(22,350)
$
$
(2,484)
(22,441)
2,643
76
8,759
6,534
4,895
(24,368)
$
$
2012
(9,373)
(2,761)
75,515
50,466
3,054
$ 116,901
Paramount has $601.5 million (2012 – $208.6 million) of unused tax losses expiring between 2025 and
2033. In addition, Paramount has $180.0 million (2012 – $190.6 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 2010, the Company received reassessments from the Canada Revenue Agency (the "CRA") and
provincial tax authorities of its income taxes relating to a prior year transaction (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 $20 million with the
CRA, which will remain on account until the dispute is resolved.
Paramount Resources Ltd. 2013Financial Statements95
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
19. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Financial Instruments
Financial instruments at December 31, 2013 consisted of cash and cash equivalents, accounts
receivable, the Deposit, available-for-sale investments, the demand facilities, accounts payable and
accrued liabilities, risk management 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.
Risk management liabilities are carried at fair values, which are estimated using level two fair
value hierarchy inputs including forward market curves and price quotes for similar instruments
provided by financial institutions.
Publicly traded available-for-sale investments are carried at their period-end trading price, which
are level one fair value hierarchy inputs.
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 103.5 percent of their principal amount at
December 31, 2013 (December 31, 2012 – 104.1 percent). The 2019 Senior Notes had a market
value of 101.0 percent of their principal amount at December 31, 2013 (December 31, 2012 –
100.3 percent). The Senior Notes are carried at amortized cost.
Risk management financial instruments outstanding at December 31, 2013 are as follows:
Instrument
Oil - NYMEX WTI Swap
Oil - NYMEX WTI Swap
Total Notional
1,000 Bbl/d
2,000 Bbl/d
Average Fixed Price
US$92.43/Bbl
US$91.78/Bbl
Fair Value
$ (1,015)
(2,957)
$ (3,972)
Remaining Term
January - June 2014
January - December 2014
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
Fair value, end of year
2013
─
(3,972)
─
(3,972)
$
$
2012
(2,603)
2,487
116
─
$
$
Paramount Resources Ltd. 2013Financial Statements96
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Subsequent to December 31, 2013, the Company entered into the following risk management financial
instruments:
Instrument
Natural Gas - AECO Swap
Total Notional
20,000 GJ/d
Average Fixed Price
CAD$4.45/GJ
Remaining Term
April - October 2014
Risk Management
Paramount is exposed to market risks where the fair values or future cash flows of financial instruments
fluctuate because of underlying changes in market prices. The principal market risks impacting
Paramount are commodity price risk, foreign currency risk, interest rate risk, equity price risk, credit risk
and liquidity risk. Paramount periodically uses derivative instruments such as forwards, swaps and
options to manage its exposure to fluctuations in crude oil and natural gas prices, foreign exchange rates,
and interest rates.
Commodity Price Risk
At December 31, 2013, assuming all other variables are held constant, a $10 per barrel increase or
decrease in the applicable forward market curves would have had the following impact on Paramount’s
net earnings from changes in the fair value of financial commodity contracts:
Crude Oil
Foreign Currency Risk
$10 increase
(6,800)
$
$10 decrease
$ 6,800
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. A one percent increase or
decrease in interest rates would have impacted Paramount’s net earnings for the year ended December
31, 2013 by approximately $0.8 million (2012 – $0.5 million) based on the average floating rate credit
facility balances outstanding during the year. Paramount’s 2017 Senior Notes and 2019 Senior Notes
bear interest at fixed rates and are subject to fair value changes as market interest rates change.
Equity Price Risk
Paramount is exposed to equity price risk associated with changes in the market value of its investments.
Paramount Resources Ltd. 2013Financial Statements97
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
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, 2013 is limited to the carrying values of
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, 2013,
Paramount had balances due from one joint venture partner that represented approximately 10 percent of
the Company’s total accounts receivable.
Liquidity Risk
Liquidity risk is the risk that Paramount will be unable to meet its financial obligations. The Company
manages liquidity risk by ensuring that it has sufficient cash and cash equivalents, credit facilities and
other financial resources available to meet its obligations.
The Company forecasts cash flows for a period of at least 12 months to identify financial requirements.
These requirements are met through a combination of cash flows from operations, credit facilities,
dispositions of assets, and accessing capital markets.
In addition to commitments disclosed in Note 23, contractual obligations related to financial liabilities are
as follows:
2014
2015
2016
2017
2018
Accounts payable & accrued liabilities(1) $ 204,035
22,550
Cavalier Facility(2)
3,821
Credit Facility(3)
10,159
Drilling Rig Facilities(3)
64,838
Senior Notes(3)
$ 305,403
$
–
–
75,647
9,813
64,838
$150,298
$
– $
–
–
9,468
64,838
–
–
–
9,122
434,838
$74,306 $ 443,960
$
–
–
–
21,553
34,313
$55,866
Thereafter
$ –
–
–
–
484,313
$ 484,313
Total
$ 204,035
22,550
79,468
60,115
1,147,978
$1,514,146
(1)
(2)
(3)
Excluding $9.5 million related to the Company’s obligation to renounce qualifying expenditures for flow-through share issuances.
Excluding interest.
Including interest.
Accounts payable and accrued liabilities
As at December 31
Trade and accrued payables
Joint venture and royalties
Interest payable
Flow-through share renunciation obligations
2013
$ 191,783
8,208
4,044
9,546
$ 213,581
2012
$ 163,891
5,618
3,197
10,806
$ 183,512
Paramount Resources Ltd. 2013Financial Statements98
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
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
2013
20,214
12,361
6,725
39,300
$
$
2012
19,412
10,790
2,588
32,790
$
$
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. The Company has determined that there was no impairment of joint venture receivables
as at December 31, 2013. There were no significant non-current joint venture receivables as at December
31, 2013 and 2012.
20. CONSOLIDATED STATEMENT 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
Discontinued operations
Other
2013
3,972
25,851
152,935
28,436
(32,688)
3,099
599
(21,378)
(23,576)
(29,361)
1,661
109,550
$
$
2012
(2,603)
29,082
248,888
25,596
(26,432)
2,899
1,497
(153,333)
(25,157)
(682)
1,258
101,013
$
$
Paramount Resources Ltd. 2013Financial Statements99
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Supplemental cash flow information
Year ended December 31
Interest paid
Current tax paid
Components of cash and cash equivalents
As at December 31
Cash
Cash equivalents
2013
64,207
8,117
2013
10,703
─
10,703
$
$
$
$
2012
36,424
1,598
2012
4,575
142,109
146,684
$
$
$
$
21. 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
(iii)
maximize shareholder returns.
Paramount manages its capital structure to support current and future business plans and periodically
adjusts the structure in response to changes in economic conditions and the risk characteristics of the
Company’s underlying assets and operations. Paramount monitors metrics such as the Company’s debt-
to-equity and debt-to-cash flow ratios, among others, to measure the status of its capital structure. The
Company has not established fixed quantitative thresholds for such metrics. The capital structure may be
adjusted by issuing or repurchasing shares, issuing or repurchasing debt, refinancing existing debt,
modifying capital spending programs, and disposing of assets, the availability of any such means being
dependent upon market conditions.
Paramount Resources Ltd. 2013Financial Statements100
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
Paramount’s capital structure consists of the following:
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)
$
2013
151,780
75,550
71,826
820,000
1,119,156
1,169,178
(224,612)
87,678
$ 2,151,400
$
2012
(9,271)
40,703
–
670,000
701,432
921,680
(165,527)
94,947
$ 1,552,532
Adjusted working capital excludes risk management assets and liabilities, demand facilities, 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, 2013 - $9.5 million, December 31, 2012 - $10.8
million).
Excludes unamortized issue premiums and financing costs.
Net Debt excludes the $20 million deposit on account with the CRA, pending resolution of the Company’s Notice of Objection (See Note 18).
(2)
(3)
Paramount is subject to covenants under its bank Facility and senior notes agreements which contain
certain restrictions on Paramount’s ability to repurchase equity, issue or refinance debt, acquire or
dispose of assets, and pay dividends.
22. RELATED PARTY TRANSACTIONS
Service Agreements
Paramount engages in transactions with Trilogy, MGM Energy and Paxton Corporation ("Paxton") in the
normal course of business, including joint venture operations. Paramount is considered related to Trilogy,
MGM Energy and Paxton because of common significant influence. All transactions between Paramount
and the entities are recorded at their exchange amounts.
During 2013, Paramount charged $0.4 million (2012 – $0.4 million) to Trilogy in respect of operational and
administrative services. Also, Paramount received $8.0 million (2012 – $8.0 million) in dividends from
Trilogy. As of December 31, 2013, Paramount had a net receivable balance due from Trilogy of $0.3
million (2012 – $0.9 million).
Compensation of key management personnel
Year ended December 31
Salaries and benefits
Stock-based compensation
2013
1,857
9,980
11,837
$
$
2012
1,914
11,039
12,953
$
$
Paramount Resources Ltd. 2013Financial Statements101
Notes to the Consolidated Financial Statements
($ thousands, except as noted)
23. COMMITMENTS AND CONTINGENCIES
Paramount had the following commitments as at December 31, 2013:
Petroleum and natural gas transportation
and processing commitments (1)
Operating leases
Capital spending commitments(2)
Within One Year
40,416
$
After one year but not
more than 5 years
393,994
$
More than five years
688,145
$
2,460
14,174
57,050
$
8,461
–
402,455
$
6,878
695,023
–
$
(1)
(2)
Certain of the transportation and processing commitments are secured by outstanding letters of credit totaling $32.3 million at December 31, 2013 (2012 - $27.3 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 $3.5 million
in 2013 (2012 – $3.2 million).
Flow-Through Shares
As a result of flow through share issuances in 2013, Paramount is required to incur and renounce $48.6
million of CEE during 2014. Paramount has incurred sufficient qualifying expenditures to satisfy
commitments associated with CEE and CDE flow-through shares issued in 2012.
Contingencies
Paramount is a party to various legal claims associated with the ordinary conduct of its business.
Paramount does not anticipate that these claims will have a material impact on its financial position.
Tax and royalty legislation and regulations, and government interpretation and administration thereof,
continually changes. As a result, there are often tax and royalty matters under review by relevant
government authorities. All tax and royalty filings are subject to subsequent government audit and
potential reassessments. Accordingly, the final liability may differ materially from amounts estimated and
recorded.
24. SUBSEQUENT EVENTS
In February 2014, Paramount entered into an agreement to sell its properties in the Chain - Delia area of
Alberta for approximately $12 million in shares of a TSX Venture Exchange listed company.
Paramount Resources Ltd. 2013Financial Statements102
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. G. Tahmazian
V.P. Midstream
P. R. Kinvig
V.P. Finance and 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)
Independent Businessman
Calgary, Alberta
D. Jungé C.F.A. (2) (4)
Chairman of the Board
Pitcairn Trust Company
Bryn Athyn, Pennsylvania
HEAD OFFICE
4700 Bankers Hall West
888 Third Street S.W.
Calgary, Alberta
Canada T2P 5C5
Telephone: (403) 290-3600
Facsimile: (403) 262-7994
www.paramountres.com
CONSULTING ENGINEERS
McDaniel & Associates
Consultants Ltd.
Calgary, Alberta
AUDITORS
Ernst & Young LLP
Calgary, Alberta
BANKERS
Bank of Montreal
Calgary, Alberta
HSBC Bank Canada
Calgary, Alberta
The Bank of Nova Scotia
Calgary, Alberta
Royal Bank of Canada
Calgary, Alberta
Alberta Treasury Branches
Calgary, Alberta
The Toronto-Dominion Bank
Calgary, Alberta
Canadian Imperial Bank
of Commerce
Calgary, Alberta
Canadian Western Bank
Calgary, Alberta
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)
REGISTRAR AND
TRANSFER AGENT
Computershare Trust
Company of Canada
Calgary, Alberta
Toronto, Ontario
STOCK EXCHANGE
LISTING
The Toronto Stock Exchange
(“POU”)
4700 Bankers Hall West
888 Third Street S.W.
Calgary, Alberta
Canada T2P 5C5
Telephone: (403) 290-3600
Facsimile: (403) 262-7994
www.paramountres.com