ANNUAL REPORT 2014
1
2014 Highlights
President’s Message
2
2014 Overview
6
Review of Operations
8
Management’s Discussion & Analysis 24
Financial Statements
60
Corporate Information
IBC
ANNUAL MEETING OF SHAREHOLDERS
Shareholders are cordially invited to attend
the Annual Meeting of Shareholders to be held
Thursday May 7, 2015 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, 2014 contained herein which also includes supplemental advisories related to additional information included in this document.
Q4 2014
Q4 2013 % Change
2014
2013 (2) % Change
2014 HIGHLIGHTS
FINANCIAL AND OPERATING (1)
($ millions, except as noted)
OPERATING
Sales volumes
Natural gas (MMcf/d)
Condensate and oil (Bbl/d)
Other NGLs (Bbl/d) (3)
Total (Boe/d)
FINANCIAL
Petroleum and natural gas sales
Funds flow from operations
Per share – diluted ($/share)
40
110
660
70
72
127
110.5
3,986
2,128
24,524
350.0
141.0
1.39
143.9
5,320
5,123
34,430
99.4
41.6
0.40
102.5
2,530
674
20,290
57.8
18.3
0.19
0.3
–
171.8
8.3
106.1
2,313
911
20,914
232.5
70.6
0.75
(59.1)
(0.63)
612.8
37.9
688.5
2,447.8
1,119.2
96,993
4
72
134
17
51
100
(21)
33
164
(63)
31
32
8
(106.5)
(1.02)
Net income (loss)
Per share – diluted ($/share)
Principal Properties Capital (4)
Cash proceeds from divestitures (5)
Investments in other entities – market value (6)
Total assets
Net Debt
Common shares outstanding (thousands)
(1) Readers are referred to the advisories concerning non-GAAP measures and Oil and Gas Measures and Definitions in the Advisories
813.9
100.0
256.9
3,199.4
1,482.5
104,844
224.6
0.5
(71.7)
(0.71)
31
(94)
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, 2014.
(3) Other NGLs means ethane, propane and butane.
(4) Principal Properties Capital includes capital expenditures and geological and geophysical costs related to the Company’s Principal
Properties, and excludes land acquisitions and capitalized interest.
(5) Excludes shares of other companies and/or properties received in consideration for properties sold.
(6) Based on the period-end closing prices of publicly-traded investments and the book value of the remaining investments.
RESERVES (1) (2)
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 ($/Boe) (3)
Conventional reserves replacement
NPV10 future net revenue before tax ($ millions)
Conventional
Total Company
2014
703.8
108,410
1,108
226,812
–
226,812
19.72
17 X
2,255
2,255
Proved
2013 % Change
301.3
134
36,777
195
680
63
87,677
159
–
–
87,677
159
17.79
6 X
1,093
1,093
11
183
106
106
Proved & Probable
2014
1,090.9
163,736
1,526
347,085
93,468
440,553
2013 % Change
450.5
142
57,844
183
885
72
133,813
159
93,468
–
227,281
94
14.29
25 X
3,836
4,199
10.87
8 X
1,793
2,094
31
213
114
101
(1) Readers are referred to the advisories concerning Oil and Gas Measures and Definitions in the Advisories section of this document.
(2) Reserves evaluated by the Company’s independent reserves evaluator, McDaniel & Associates Consultants Ltd. as of December 31,
2014 in accordance with National Instrument 51-101 definitions, standards and procedures. Amounts are working interest reserves
before royalty deductions. Net present values were determined using forecast prices and costs and do not represent fair market value.
(3) P+P F&D costs, excluding facilities and gathering capital, were $10.87 per Boe in 2013 and $12.18 per Boe in 2012 and the three-year
average for the period 2012 to 2014 is $13.37 per Boe.
Paramount Resources Ltd. 2014 Highlights 1
PRESIDENT’S MESSAGE
To our Shareholders,
During 2014, we made significant progress on our major projects to bring the Deep Basin
resources we have captured into production. The most significant achievement was the start-up
of our Musreau deep-cut gas plant in August 2014. At the time of writing, the subsequent
expansions to the project are nearing completion and we expect our corporate sales volumes to
exceed 70,000 Boe/d in the second quarter of 2015.
Paramount’s first large-scale development project in the Deep Basin is nearly complete. The
new Musreau deep-cut plant has established reliable operations, construction of the amine
processing train was completed in December 2014 and the condensate stabilizer expansion is
nearly finished, with the additional capacity expected to be on-stream in the second quarter of
2015. Downstream pipeline, de-ethanization and fractionation capacity constraints are expected
to be alleviated around the same time in the second quarter, which will enable Paramount to
significantly increase production from previously drilled wells and maximize the utilization of our
new plant. Paramount’s non-operated Smoky deep-cut plant expansion commenced operations
in September 2014, where we hold a 20 percent ownership interest in the 200 MMcf/d facility,
which is expandable to 300 MMcf/d.
The Company’s drilling and completion programs have evolved to a commercial scale and we
are now drilling multi-well pad developments of between four and ten wells per pad. We also
continue to work diligently in refining completion practices to improve well deliverability and
increase per-well reserves, while reducing costs. The best example of this is the results from the
20 wells we drilled and completed on two pads at Musreau in the second half of 2014. These
wells had combined test rates totaling over 230 MMcf/d, plus liquids.
During 2014, we made considerable progress at our Karr property, where we have implemented
well completion practices that have reduced costs and improved productivity. Downstream
takeaway capacity constraints in this area were alleviated in the third quarter of 2014 when a
new third-party pipeline commenced service. This system not only provides reliable firm service
capacity for all of our products, but also allows us to produce our condensate directly into a
pipeline, reducing trucking and the associated costs. Paramount is proceeding with an
expansion of the Karr facility from 40 MMcf/d to 80 MMcf/d, with completion expected in early
2016.
Paramount Resources Ltd. 2014 President's Message 2
Paramount established a new exploration play in the Duvernay at Willesden Green in 2014. We
drilled and completed two initial wells into the play, which tested at wellhead condensate-to-gas
ratios of 250 Bbl/MMcf to over 1,000 Bbl/MMcf. We have drilled a third well into the play in early
2015, which is scheduled to be completed at the end of the second quarter. Paramount holds a
50 percent working interest in a contiguous land block of some 100 sections of land at Willesden
Green.
financial results. Despite divestitures and various significant
In the second half of 2014, the benefits of our Deep Basin development started to show in our
operating and
third-party
downstream capacity restrictions throughout the year, sales volumes increased 17 percent to
average 24,524 Boe/d in 2014, up from 20,914 Boe/d in 2013. Sales volumes in the fourth
quarter of 2014 increased to 34,430 Boe/d and, most recently, February 2015 sales volumes
further increased to over 40,000 Boe/d. Liquids volumes as a percentage of total sales were
about 35 percent in February 2015, compared to 25 percent in 2014 and 15 percent in 2013.
Operating and general and administrative costs per unit continue to decrease as we bring on
incremental low-cost production. The Company reduced operating costs in 2014 by 15 percent
to $7.96/Boe. Kaybob area operating costs in the fourth quarter of 2014 were $3.85/Boe. We
expect further reductions in Paramount’s per-unit operating costs in 2015 with the majority of
new production continuing to come from the Kaybob operating area. Netbacks increased to
$25.17/Boe in 2014 from $16.54/Boe in 2013, a 52 percent increase year-over-year, as a result
of an increasing proportion of liquids production and lower per-unit operating costs, as well as
generally higher commodity prices. Total cash netbacks increased to $225.3 million in 2014
from $126.2 million in 2013 due to these higher production levels and higher per-unit netbacks.
Paramount’s Principal Properties capital spending in 2014 totaled $814 million, including $603
million for drilling and completion activities and $211 million for facilities and gathering systems.
This capital expenditure program was funded through a combination of cash netbacks,
proceeds from property dispositions, draws on our credit facilities and equity issuances.
Paramount was very successful in adding reserves at a low cost in 2014. Proved reserves
increased by 159 percent from 87.7 MMBoe at the end of 2013 to 226.8 MMBoe at the end of
2014. Conventional proved plus probable reserves also increased 159 percent over the same
period, from 133.8 MMBoe to 347.1 MMBoe. Total proved plus probable reserves, including
bitumen reserves, stand at 441 MMBoe. The Company achieved reserves replacement ratios of
over 17 times for proved reserves and over 25 times for conventional proved plus probable
reserves. Excluding capital spending on facilities, which are expected to provide processing
capability for several decades, these reserves were added at $19.72/Boe for proved reserves
and $14.29/Boe for conventional proved plus probable reserves.
Paramount’s 100 percent owned oil sands subsidiary, Cavalier Energy, saw its year highlighted
by obtaining approval for the initial 10,000 Bbl/d phase at the Hoole project. Additional bitumen
resources were also added at the Hoole project through an opportunistic acquisition of lands,
increasing contingent resources by some 410 MMBbl. The independent evaluation of the Hoole
project was updated at December 31, 2014, including updated pricing and project timelines.
The updated evaluation ascribed total economic contingent resources of 1.2 billion Bbl and a
net present value, discounted at 10 percent before tax, of $2.4 billion to the Hoole project.
During 2015, the Cavalier team is working towards securing regulatory approval of the full
Paramount Resources Ltd. 2014 President's Message 3 development of the Hoole property up to 100,000 Bbl/d, as well as further business
development work in other areas.
Fox Drilling initiated the construction of two additional triple-sized walking drilling rigs, which will
bring the total fleet to seven rigs. Paramount has been the exclusive user of Fox Drilling’s rigs
throughout 2014, as they are well suited to our operations in the Deep Basin 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, enhancing the positive economics of our
Deep Basin plays.
In the Liard Basin, we continued with our shale gas program to drill evaluation wells in order to
validate all of the lands with potential from the Besa River shale gas formation. During 2014,
Paramount completed drilling the Dunedin d-57-D horizontal well. In preparing to complete the
well, problems were encountered running production casing which resulted in the horizontal leg
being abandoned. A decision to re-drill a horizontal leg has been deferred. Paramount
completed drilling the Dunedin d-71-G vertical well in early 2015 and has now commenced
drilling the c-37-D La Biche area vertical well, which will be suspended through the summer of
2015 due to access issues. We are expecting to resume drilling on the c-37-D well through the
winter of 2015/16.
In late-2014 and in early-2015, the oil and gas industry experienced a rapid collapse in the
market price for crude oil and natural gas liquids, and to a lesser degree natural gas. This
collapse appears to have been created by simple supply and demand pressures, as the supply
of these commodities in North America has increased at unprecedented levels over the last
several years. It should be noted, however, that the value of the Canadian dollar has declined
considerably against the U.S. dollar, partially offsetting the impact of these lower commodity
prices. The lower commodity prices have created material downward pressure on Paramount’s
projections of near-term cash flows. Our capital expenditure program for 2015 aligns spending
levels closely with projected cash flows for the year, which we believe will preserve financial
flexibility.
Paramount’s capital program for 2015 is currently budgeted at $400 million, which is less than
half of the prior year’s amount, due in part to the completion of the Musreau deep-cut plant in
2014. We believe the current lower commodity prices are unsustainable in the long-term, but
are not prepared to increase spending without a clearer view of higher prices in the future.
Paramount is willing to delay initiating new major projects, including the additional processing
plants at Musreau, until conditions improve. We have also deferred some of our planned well
completions, as we expect that the costs for services and materials will decrease as a result of
market pressures. The Company is also working with our service providers to reduce ongoing
operating costs as well as the costs of capital projects.
Paramount’s $400 million capital spending program for 2015 includes $355 million for Principal
Properties and $45 million for Strategic Investments, mainly for shale gas exploration activities
in the Liard Basin and completing the construction of the two new Fox Drilling rigs. Sales
volumes are expected to be approximately 40,000 Boe/d until additional processing capacity is
available during the second quarter, at which point we expect sales volumes to grow to over
70,000 Boe/d. We have set our initial expectation of 2015 average sales volumes at 55,000 to
Paramount Resources Ltd. 2014 President's Message 4 65,000 Boe/d, and will refine this estimate as the exact timing of in-service dates for the
additional capacity is confirmed. With the Company’s current capital budget, we expect that by
the second half of 2015 Paramount will begin generating cash flow from operations in excess of
capital expenditures. We will see declining debt balances in absolute terms and improving
leverage metrics.
Paramount’s management team is extremely excited to be realizing the results of the many
years of hard work on our major projects. We look forward to delivering continued growth from
our newly completed projects and our future developments as we continue to build on the
resource base we have captured and proven.
In our message to Shareholders one year ago, we stressed our view that the best strategy has
evolved from amassing a large magnitude of resources to targeting only the absolute most
profitable opportunities available. If the opportunities one holds do not compete with the most
economic available, they might as well not be owned at all. Our belief in this strategy has only
strengthened. We continue to plan to develop our Deep Basin resources with several additional
projects similar to our initial success at Musreau.
J.H.T. Riddell
President and Chief Operating Officer
March 2015
Paramount Resources Ltd. 2014 President's Message 5 2014 OVERVIEW
RESERVES
• Proved reserves increased 159 percent to 226.8 MMBoe, after production of 9.0 MMBoe and
dispositions of 2.4 MMBoe (replacement ratio of 17 times).
• Conventional proved and probable ("P+P") reserves increased 159 percent to 347.1 MMBoe
(replacement ratio of 25 times), a record level for the Company.
• P+P condensate and Other NGLs reserves increased to 163.7 MMBbl, a 183 percent increase over
2013, and represent 47 percent of conventional P+P reserves.
• The net present value of conventional P+P reserves (10% discount, before tax) more than doubled to
$3.8 billion, or $36.59 per share, despite significantly lower future commodity prices.
• P+P finding and development ("F&D") costs, excluding facilities and gathering capital, were $14.29
per Boe.
OIL AND GAS OPERATIONS
• Paramount’s sales volumes averaged approximately 40,000 Boe/d in February 2015, the highest
monthly average since the 2005 Trilogy Energy spin-out. The Company expects third-party NGLs
processing constraints that have limited its ability to maximize production will begin to abate in the
second quarter.
• Sales volumes in the fourth quarter of 2014 increased 70 percent to 34,430 Boe/d compared to the
same period in 2013. Outages and apportionments of transportation and fractionation capacity
impacted Paramount’s ability to sustain production over 40,000 Boe/d in the fourth quarter. The
Company’s annual sales volumes increased 17 percent to 24,524 Boe/d in 2014 compared to 20,914
Boe/d in 2013.
• Fourth quarter 2014 liquids sales volumes totaled 10,443 Bbl/d, 226 percent higher than the same
period in 2013, and included 5,320 Bbl/d of condensate and oil. Approximately 30 percent of fourth
quarter sales volumes and 46 percent of petroleum and natural gas sales revenues were from liquids.
• The Kaybob COU’s fourth quarter 2014 operating expense was $3.85 per Boe. Paramount’s
operating expense per Boe in 2014 was $7.96, 15 percent lower than 2013. Per-unit operating costs
are expected to continue to decrease in 2015.
• Netbacks in the fourth quarter increased 108 percent to $61.0 million in 2014 from $29.3 million in
2013. Higher sales volumes, including an increasing proportion of liquids, more than offset the impact
of lower liquids prices.
• The Company’s two 10-well Montney pads in Kaybob have been completed. Aggregate test rates for
the 10 wells on the 3-20 pad were 108 MMcf/d (10.8 MMcf/d per well) plus liquids. Aggregate test
rates for the 10 wells on the 8-22 pad were 130 MMcf/d (13.0 MMcf/d per well) plus liquids.
• The three wells on the 3-20 pad with at least 30 days of production have averaged 6.0 MMcf/d of
natural gas production over their first 30 days. Following the recovery of load oil volumes, wellhead
condensate gas ratios for these wells have averaged 193 Bbl/MMcf.
Paramount Resources Ltd. 2014 Overview 6 STRATEGIC INVESTMENTS
•
In the first quarter of 2015, Paramount finished drilling the Dunedin d-71-G shale gas exploration well
in the Liard Basin and has commenced drilling the c-37-D shale gas exploration well at La Biche.
• Commissioning of Fox Drilling’s two new triple-sized walking rigs is scheduled for the fourth quarter of
2015.
• Cavalier Energy received regulatory approval for the initial 10,000 Bbl/d phase of its Hoole Grand
Rapids development in the second quarter of 2014.
• Paramount completed the acquisition of all of the outstanding common shares of MGM Energy Corp.
that it did not already own in exchange for 1.1 million Common Shares of Paramount in June 2014.
OUTLOOK
• Sales volumes are expected to surpass 70,000 Boe/d in 2015 following the start-up of Paramount’s
condensate stabilizer expansion in the second quarter and the completion of third-party de-
ethanization facilities expansions. Annual sales volumes in 2015 are expected to average between
55,000 and 65,000 Boe/d. The Company has 33 wells behind-pipe as of February 28, 2015 that can
be brought on-stream in 2015, with estimated first-month production capability of 210 MMcf/d plus
liquids.
• Paramount’s 2015 capital budget totals $400 million, focused on the Company’s Deep Basin
development and maintaining the optionality of future growth initiatives.
• The Company is continuing planning and detailed engineering work for the construction of
incremental natural gas processing capacity in the Deep Basin. We have temporarily deferred the
ordering of long-lead-time items until summer. Paramount expects that the first new 100 MMcf/d
plant would be on-stream 18 to 22 months following the placement of long-lead-time orders. The
second new 100 MMcf/d plant is expected to commence operations 9 to 12 months after the first.
FINANCIAL FLEXIBILITY
• Paramount expects to fund its 2015 capital program with increasing funds flow from operations and
available capacity under its bank credit facility. The Company’s capital budget remains flexible and
activity levels may be adjusted depending on commodity prices and other factors.
• Paramount’s revolving bank credit facility was increased to $900 million in December 2014 and the
maturity date was extended to November 2016.
• The Company’s coverage ratios improved in 2014 as a result of the start-up of the Musreau Deep Cut
Facility and are expected to continue to strengthen in 2015 due to further growth in sales volumes
and cash flows, despite the plunge in commodity prices.
• There are no financial maintenance covenants under the terms of Paramount’s bank credit facility or
its senior unsecured notes.
•
In February 2015, Moody’s Investors Services affirmed Paramount’s corporate credit rating of B2,
Positive Outlook and Standard & Poor’s Rating Services upgraded Paramount’s corporate credit
rating to B, Positive Outlook.
Paramount Resources Ltd. 2014 Overview 7 REVIEW OF OPERATIONS
FINANCIAL AND OPERATING HIGHLIGHTS (1)
Sales volumes by COU (Boe/d)
Kaybob
Grande Prairie
Southern & Northern
Total
Q4 2014
Q4 2013 % Change
2014
2013(2) % Change
25,062
8,157
1,211
34,430
12,736
4,816
2,738
20,290
97
69
(56)
70
17,137
5,956
1,431
24,524
13,402
4,459
3,053
20,914
28
34
(53)
17
Netback ($ millions)
Natural gas revenue
Condensate and oil revenue
Other NGLs revenue (4)
Royalty and sulphur revenue
Petroleum and natural gas sales
Royalties
Operating expense
Transportation and NGLs processing (5)
Netback
$/Boe (3)
3.98
68.45
26.64
–
31.37
(1.48)
(7.02)
(3.62)
19.25
35.1
19.1
3.0
0.6
57.8
(2.8)
(18.7)
(7.0)
29.3
$/Boe (3)
3.73
82.22
48.28
–
30.99
(1.50)
(10.02)
(3.77)
15.70
52.7
33.5
12.6
0.6
99.4
(4.7)
(22.2)
(11.5)
61.0
$/Boe (3)
4.78
88.41
32.36
–
39.10
(1.96)
(7.96)
(4.01)
25.17
$/Boe (3)
3.57
93.59
37.02
–
30.46
(1.42)
(9.35)
(3.15)
16.54
138.3
79.0
12.3
2.9
232.5
(10.8)
(71.5)
(24.0)
126.2
192.7
128.6
25.1
3.6
350.0
(17.5)
(71.3)
(35.9)
225.3
Principal Properties Capital ($ millions)
Wells and exploration
Facilities and gathering
By COU ($ millions)
Kaybob
Grande Prairie
Southern, Northern & Other
183.4
41.2
224.6
182.4
39.4
2.8
224.6
119.1
52.7
171.8
126.7
45.1
─
171.8
54
(22)
31
44
(13)
100
31
603.2
210.7
813.9
528.2
204.5
81.2
813.9
457.9
154.9
612.8
462.3
127.8
22.7
612.8
32
36
33
14
60
258
33
(1)
(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.
Amounts include the results of discontinued operations. Refer to Paramount’s Management’s Discussion and Analysis for the year ended December 31, 2014 for
further details.
Natural gas revenue shown per Mcf.
(3)
(4) Other NGLs means ethane, propane and butane.
(5)
Includes downstream natural gas, NGLs and oil transportation costs and NGLs fractionation costs incurred by the Company.
Paramount’s operations are focused on the large-scale development of its Deep Basin lands in west
central Alberta, where the Company holds extensive multi-zone mineral rights to 1,186 (768 net) sections
of land, including 364 (313 net) sections of Montney rights. The Company also has exposure to emerging
plays through its Duvernay lands in the Willesden Green area and its shale gas lands in the Liard Basin
and to oil sands resources at Hoole which are held by its wholly-owned subsidiary, Cavalier Energy Inc.
("Cavalier").
PRINCIPAL PROPERTIES
In 2014, the Company completed one of its multi-year development projects in the Deep Basin: the
drilling and completion of the initial large multi-well Montney pads at Musreau and the construction and
start-up of the 200 MMcf/d Musreau deep cut natural gas processing facility (the "Musreau Deep Cut
Facility"). Paramount also continues with the expansion of its regional gathering systems. Paramount’s
Deep Basin investments have provided a low-cost production base with strategic gathering and
Paramount Resources Ltd. 2014 Review of Operations 8
processing infrastructure to support the repeatable multi-decade development of the Company’s
Montney, Cretaceous and other resources. Third-party pipeline systems and NGLs processing facilities
expansions downstream of Paramount’s properties are expected to be completed in 2015.
Paramount commenced delivering sales gas from the Musreau Deep Cut Facility in August 2014 and has
continued to ramp-up production from its inventory of behind pipe wells. Total Company sales volumes
were approximately 40,000 Boe/d in February 2015; the highest monthly average since the 2005 Trilogy
Energy spin-out. Fourth quarter 2014 sales volumes increased 70 percent to 34,430 Boe/d compared to
the same period in 2013. Outages and apportionments of transportation and fractionation capacity in the
fourth quarter impacted Paramount’s ability to sustain production over 40,000 Boe/d.
Fourth quarter 2014 liquids sales volumes totaled 10,443 Bbl/d, including 5,320 Bbl/d of condensate and
oil, as incremental production from liquids-rich Montney wells was brought on. The start-up of new deep
cut processing facilities at Musreau and Smoky also resulted in higher recoveries of ethane, propane, and
butane from natural gas streams.
Paramount Resources Ltd. 2014 Review of Operations 9 Paramount’s incremental long-term firm processing capacity for Other NGLs is scheduled to become
available in two phases in 2015, following the completion of third-party expansions. The third-party
operator has announced that the first phase, a de-ethanization plant expansion, will be commissioned by
the end of the first quarter of 2015 and the second phase, a storage cavern expansion, will be in-service
in mid-2015. The Company is continuing to maximize production through firm and interruptible NGLs
processing capacity in advance of the expansions.
Sales volumes are expected to surpass 70,000 Boe/d in 2015 following the start-up of Paramount’s
condensate stabilizer expansion in the second quarter and the completion of the third-party de-
ethanization facilities expansions. Annual sales volumes in 2015 are expected to average between
55,000 and 65,000 Boe/d. The Company has 33 wells behind-pipe as of February 28, 2015 that can be
brought on-stream in 2015, with estimated first-month production capability of approximately 210 MMcf/d
plus liquids.
Approximately 30 percent of fourth quarter sales volumes and 46 percent of petroleum and natural gas
sales revenues were from liquids. Paramount’s sales volume mix is expected to evolve to approximately
50 percent gas / 50 percent liquids as additional Montney production is brought on-stream in 2015 and
the Musreau Deep Cut Facility operates in full deep cut mode following the removal of downstream
restrictions. Currently, Paramount’s working interest share of volumes being processed through the
Musreau Deep Cut Facility is approximately 80 percent. As new 100 percent working interest Montney
wells are brought on production, the Company expects its working interest share of volumes processed to
increase.
Paramount’s 2014 operating expenses were $7.96 per Boe, 15 percent lower than in 2013. The
Company’s operating expenses were $7.02 per Boe in the fourth quarter of 2014, a 30 percent decrease
from the fourth quarter of 2013. Per unit operating costs are expected to continue to decrease in 2015 as
low-cost Kaybob production comprises a greater proportion of the Company’s total production.
Paramount’s ownership of gas processing facilities provides significant savings through the elimination of
Paramount Resources Ltd. 2014 Review of Operations 10 third-party processing fees. Fourth quarter 2014 operating expenses within Kaybob averaged $3.85 per
Boe, net of processing income earned from third parties.
KAYBOB – MUSREAU, RESTHAVEN, SMOKY
As of February 28, 2015, the Company had 25 Montney wells at Musreau with production, and another 27
behind pipe wells awaiting production that will be brought on as the Company’s condensate stabilizer
expansion starts up and downstream transportation and NGLs processing expansions are completed. An
additional 14 wells are currently being drilled, including 12 wells on two six-well Montney pads where
drilling operations are scheduled to finish at the end of the first quarter.
Musreau Lands
The Montney wells in the map above which are located to the northeast of the Musreau Complex have
exhibited the highest wellhead condensate-gas ratios ("CGR"). CGRs1 for these wells range from 176
Bbl/MMcf to 338 Bbl/MMcf following the recovery of load oil volumes. Natural gas production rates 2 over
the first 30 days of production for these wells range from 2.0 MMcf/d to 7.0 MMcf/d.
The Montney wells in the map above to the south of the Musreau Complex have CGRs ranging between
48 Bbl/MMcf and 92 Bbl/MMcf following the recovery of load oil volumes. Natural gas production rates
over the first 30 days of production for these wells range from 2.7 MMcf/d to 6.9 MMcf/d.
1 CGRs included in this document were calculated for each well for the period commencing on the date load oil volumes were completely recovered for such well
and ending on February 28, 2015 (the "Post-load Recovery Period"). CGRs were calculated for each well over the applicable Post-load Recovery Period by
dividing total raw liquids volumes produced by total raw natural gas volumes produced during such period. Raw volumes as measured at the wellhead. Sales
volumes are lower due to shrinkage.
2 Production rates are gross raw volumes produced at the wellhead. Sales volumes are lower due to shrinkage.
Paramount Resources Ltd. 2014 Review of Operations 11 The Company’s Montney formation wells continue to be profitable despite the recent plunge in
condensate and oil prices.
Drilling and completion activities in 2014 focused on two 10-well Montney pads and one 5-well Montney
pad, all of which are located in the northern portion of the Company’s Musreau area lands. The 3-20 10-
well pad was completed in the third quarter, with aggregate test rates 3 of 108 MMcf/d of natural gas (10.8
MMcf/d per well) plus liquids. The second 10-well pad at 8-22 was completed in the fourth quarter, with
aggregate test rates3 of 130 MMcf/d of natural gas (13.0 MMcf/d per well) plus liquids. Drilling of the 5-
well 08-03 pad has been finished and the wells are scheduled to be completed later in 2015.
The three wells on the 3-20 pad with at least 30 days of production have averaged 6.0 MMcf/d of natural
gas production over their first 30 days. Following the recovery of load oil volumes, CGRs for these wells
have averaged 193 Bbl/MMcf.
Paramount’s two walking drilling rigs are currently finishing drilling operations on the two six-well Montney
pads located to the northeast of the Musreau Deep Cut Facility, where the Company is continuing to
target high-condensate yields. Drilling on six-well pads reduces the time from spud to initial production
compared to the larger 10-well pads, while continuing to realize the capital efficiencies of using multi-well
sites. This includes minimizing mobilization and de-mobilization costs and lowering equipping and tie-in
costs through the use of common facilities. These new pads have been laid out to allow an additional six
wells to be drilled from the same site at a later date, after the commencement of production from the initial
six wells.
The Alberta Energy Regulator recently approved new regulations applicable to the majority of
Paramount’s Deep Basin lands which will allow the drilling of as many Montney formation wells per
section as needed to capture the resources. Paramount estimates that densities of ten or more wells per
section will be required to achieve a 70 percent resource recovery ratio. Having the flexibility to drill a
higher number of wells provides opportunities to reduce the horizontal spacing of wells, to drill at different
intervals within the 200 meter thickness of the Montney formation and to complete the heels of horizontal
wells drilled into other sections, all of which will increase resource recoveries.
GRANDE PRAIRIE – KARR
Paramount’s Karr-Gold Creek property, located approximately six miles north of the Musreau
development, includes approximately 113 net sections of Montney rights. The Company has constructed
a gathering system and 48 MMcf/d of compression and dehydration capacity and has focused its drilling
programs on delineating the middle-Montney resources and preserving the mineral rights.
3 Test rates for the wells fracked on the Company’s 3-20 ten-well pad averaged 10.8 MMcf/d of natural gas per well, and are the average of production test rates
over the final period of post clean-up flow-back at the largest choke setting, with durations of between 5 and 53 hours. Flow-back casing pressures for the tests of
these wells ranged between approximately 2,200 psi and 3,000 psi. Test rates for the wells fracked on the Company’s 8-22 ten-well pad averaged 13.0 MMcf/d of
natural gas per well, and are the average of production test rates over the final period of post clean-up flow-back at the largest choke setting, with durations of
between 4 and 30 hours. Flow-back casing pressures for the tests of these wells ranged between approximately 2,000 psi and 2,900 psi. All wells were
stimulated using frack oil and substantially all fluids recovered during the test periods were load fluids. As a result, fluid volumes recovered during the tests have
not been disclosed. Pressure transient analyses and well-test interpretations have not been carried out for these wells and as such, data should be considered to
be preliminary until such analysis or interpretation has been done. Test results are not necessarily indicative of long-term performance or of ultimate recovery.
Paramount Resources Ltd. 2014 Review of Operations 12 Karr / Gold Creek Lands
In the third quarter of 2014, incremental natural gas processing capacity became available at Karr-Gold
Creek following the completion of a third-party pipeline. The incremental capacity has enabled new wells
to be brought on and existing wells to produce more consistently. As a result, Grande Prairie sales
volumes increased to 8,157 Boe/d in the fourth quarter of 2014.
There are 14 operated middle-Montney wells at Karr-Gold Creek that have produced for more than 30
days. CGRs for these wells range from 46 Bbl/MMcf to 286 Bbl/MMcf following the recovery of load oil
volumes. Natural gas production rates over the initial 30 days of production for these wells ranged from
1.4 MMcf/d to 7.7 MMcf/d.
The Company currently has 16 operated Montney wells on production, with an additional two wells
scheduled to be tied-in and brought on production in 2015. The Company is planning a 40 MMcf/d
expansion of the Karr-Gold Creek compression facility which is currently scheduled to be completed in
the first quarter of 2016.
DEEP BASIN INFRASTRUCTURE
Paramount’s net owned and firm-service contracted natural gas processing capacities total approximately
345 MMcf/d that will provide approximately 100,000 Boe/d of potential sales volumes following the
completion of the 15,000 Bbl/d Musreau condensate stabilizer expansion. Paramount has also invested in
gathering infrastructure and entered into firm-service arrangements with midstream providers downstream
of its facilities to transport and process its liquids-rich Deep Basin production. Paramount’s ownership of
natural gas processing plants and contracted firm-service transportation and processing capacity is a
Paramount Resources Ltd. 2014 Review of Operations 13 strategic advantage for the Company. These capacities are essential to being able to produce in the
Deep Basin and are currently in short supply in the region. Ownership of facilities also reduce ongoing
operating costs by eliminating third-party fees.
Processing Capacity
Musreau Deep-Cut Facility
Musreau Refrig Facility
Stabilizer Expansion
Smoky Facility
Karr capacity
Other capacity
Gross
Raw Gas
Capacity
(MMcf/d)
200
45
–
200
40
64
549
Net Paramount
Raw Gas
Capacity
(MMcf/d)
200
45
–
40
40
18
343
Potential
Sales
Volumes(1)
(Boe/d)
50,000
8,500
15,000
10,000
10,000
3,400
96,900
(1)
Refer to the heading "Potential Sales Volumes" in the Advisories section for further information.
The Company’s first natural gas processing facility in the Deep Basin, a 45 MMcf/d refrigeration facility at
Musreau, was commissioned in the first quarter of 2012. The Company’s second major facility, the 200
MMcf/d Musreau Deep Cut Facility was brought on-stream on the same site (the "Musreau Complex"):
Amine Train
Deep Cut Facility
Condensate Stabilizer
Refrigeration Facility
Musreau Complex (February 12, 2015)
Paramount also completed the construction of an amine processing train (the "Amine Train") at the
Musreau Complex in the fourth quarter of 2014 to treat sour production at the facility instead of at well
sites. The Amine Train eliminates over $1 million of equipping costs per well for wells with sour production
and reduces ongoing well operating costs.
Paramount Resources Ltd. 2014 Review of Operations 14
The Musreau Complex currently has condensate stabilization capacity of approximately 8,500 Bbl/d,
which will increase to approximately 23,500 Bbl/d when Paramount starts-up a 15,000 Bbl/d expansion
(the "Stabilizer Expansion"). Mechanical construction is nearing completion and the additional capacity is
scheduled to be on-stream in the second quarter of 2015. Paramount will continue to have the ability to
truck production in excess of this increased capacity to other Company and third-party facilities for
processing.
Paramount is a part-owner of a third-party operated natural gas processing plant at Smoky in Kaybob (the
"Smoky Deep Cut Facility"). The Company has increased its working interest in the facility to 20 percent
and participated in an expansion, which increased capacity to 200 MMcf/d (40 MMcf/d net) and added
deep cut processing. The expanded facility was operational in September 2014.
To continue the development of Paramount’s liquids-rich Montney lands in the Deep Basin, the Company
sanctioned the construction of two new wholly-owned 100 MMcf/d refrigeration plants in the summer of
2014. The plants will incorporate oversized condensate stabilization, amine processing and infrastructure
components to allow for future expansions.
Front-end engineering and design for the new facilities is ongoing and the Company received regulatory
approval for the 6-18 plant in the first quarter of 2015. The ordering of long-lead time items for the first
new plant has been temporarily deferred until the summer. Paramount expects the first plant would be on-
stream approximately 18 to 22 months following the placement of long-lead-time orders at a cost of
approximately $150 million. The second new plant is expected to commence operations 9 to 12 months
after the first.
To ensure access to downstream transportation and fractionation, Paramount has secured incremental
long-term firm-service capacity for the transportation of incremental natural gas, NGLs and condensate,
as well as C3+ fractionation capacity at Fort Saskatchewan.
Upon completion of the 40 MMcf/d facility expansion at Karr-Gold Creek and the first new 100 MMcf/d
refrigeration plant, Paramount’s net owned and firm-service natural gas processing capacity in the Deep
Basin area will increase to approximately 480 MMcf/d, providing potential sales volumes of over 130,000
Boe/d. Once the second new plant is completed in the Kaybob area, Paramount’s net owned and firm-
service natural gas processing capacity in the Deep Basin will increase to approximately 580 MMcf/d,
providing potential sales volumes of over 155,000 Boe/d, depending on the liquids content of the natural
gas processed.
OTHER AREAS
Paramount began exploration activities on its Willesden Green property in southern Alberta in 2014. The
Company has entered into joint venture agreements that will increase its land position to 100 (54 net)
sections following the completion of earning obligations. Four (2.0 net) Duvernay wells have been drilled
to date, two of which have been completed.
In the second quarter of 2014, Paramount sold a 50 percent interest in its Birch property in northeast
British Columbia for $91.5 million cash. The Company and its partner subsequently drilled four (2.0 net)
wells, three of which were fracked by the end of the year. Paramount is participating in the construction of
new compression facilities at Birch to provide capacity to produce the wells.
Paramount Resources Ltd. 2014 Review of Operations 15 RESERVES
Paramount recorded significant year-over-year reserves growth in 2014, driven by the Company’s Deep
Basin development program. Proved reserves increased by 139.1 MMBoe after 2014 production of 9.0
MMBoe and dispositions of 2.4 MMBoe. Conventional proved and probable ("P+P") reserves increased
by 213.3 MMBoe in 2014 after production of 9.0 MMBoe and dispositions of 3.4 MMBoe. Paramount’s
investments in its Deep Basin development, including the construction of processing facilities and
gathering systems, the sanctioning of the additional plants in the Kaybob area and the securing of long-
term firm-service downstream transportation and NGLs processing capacities, resulted in the recording of
significant increases in undeveloped reserves in 2014. The Company’s undeveloped reserves are related
to wells in the Kaybob and Grande Prairie COUs that are in the process of being drilled, or are expected
to be drilled within the next few years. Proved undeveloped reserves increased to 166.8 MMBoe in 2014
compared to 37.7 MMBoe in 2013.
Natural Gas (Bcf)
NGLs (MBbl)
Light and Medium crude oil (MBbl)
Total Conventional (MBoe)
Oil sands bitumen (MBbl)
Total Company (MBoe)
Conventional F&D costs
Excluding facilities & gathering ($/Boe)
Conventional reserves replacement
NPV10 future net revenue before tax
Conventional ($ millions)
Total Company ($ millions)
Proved(1)(2)(3)
2014
703.8
108,410
1,108
226,812
–
226,812
2013 % Change
301.3
36,777
680
87,677
–
87,677
134
195
63
159
–
159
Proved & Probable(1)(2)(3)
2014
1,090.9
163,736
1,526
347,085
93,468
440,553
2013 % Change
450.5
57,844
885
133,813
93,468
227,281
142
183
72
159
–
94
19.72
17 X
2,255
2,255
17.79
6 X
1,093
1,093
11
183
106
106
14.29
25 X
3,836
4,199
10.87
8 X
1,793
2,094
31
213
114
101
(1)
(2)
(3)
See "Reserves Details / F&D / Land" section below for additional information.
Readers are referred to the advisories concerning Oil and Gas Measures and Definitions in the Advisories section of this document.
Reserves evaluated by the Company’s independent reserves evaluator, McDaniel & Associates Consultants Ltd. as of December 31, 2014 in accordance with
National Instrument 51-101 definitions, standards and procedures. Working interest reserves before royalty deductions. Net present values were determined
using forecast prices and costs and do not represent fair market value.
NGLs reserves increased significantly in 2014, as the Company’s drilling program continues to focus on
the liquids-rich Montney formation. Proved NGLs reserves totaled 108.4 MMBbl as of December 31,
2014, representing 48 percent of total proved reserves, compared to 36.8 MMBbl and 42 percent of total
proved reserves in 2013. P+P NGLs reserves totaled 163.7 MMBbl as of December 31, 2014,
representing 47 percent of conventional P+P reserves, compared to 57.8 MMBbl and 43 percent of
conventional P+P reserves in 2013.
As of December 31, 2014, the net present value of proved reserves (discounted at 10 percent, before tax)
increased 106 percent to $2.3 billion ($21.52 per share) and the net present value of conventional P+P
reserves (discounted at 10 percent, before tax) increased 114 percent to $3.8 billion ($36.59 per share).
Paramount Resources Ltd. 2014 Review of Operations 16
STRATEGIC INVESTMENTS
SHALE GAS
Paramount’s shale gas holdings in the Liard and Horn River Basins in northeast British Columbia and the
Northwest Territories include approximately 133 net sections of land with potential from the Besa River
shale formation. The Company’s 2014 /
2015 winter drilling program began in the
fourth quarter of 2014 with drilling
operations resuming at the Dunedin d-71-G
vertical exploratory shale gas well, which
was drilled
targeted depth by mid-
February.
Liard Basin Lands
to
Paramount then moved to the c-37-D well
at La Biche, where drilling operations will
continue until
spring break-up. The
Company expects to return during the
2015/2016 winter season when access can
be safely re-established and complete
the well. Upon
drilling operations on
completion of drilling operations at the La
Biche well, the Company will have secured
the mineral
its shale gas
properties for another 10 years. Further
operations at the Dunedin d-57-D well have
been deferred as land earning has been
completed.
rights
for
Cavalier was created in 2011 as a self-funding entity to execute the development of the Company’s oil
sands and carbonate bitumen assets. Cavalier holds approximately 220,000 net acres of Crown leases in
the Western Athabasca region of Alberta.
Hoole Grand Rapids
Cavalier’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, which is located 10 kilometers northeast of Wabasca-Desmarais,
Alberta. Since 2004, approximately $106 million has been invested through land acquisitions,
stratigraphic drilling, engineering studies, and environmental field programs to bring this project (the
"Hoole Project") to the development stage; including $20 million that was invested in 2014 to acquire 23
additional net sections of contiguous oil sands acreage.
Front-end engineering and design work for the initial 10,000 Bbl/d phase of the Hoole Project ("Hoole
Phase 1") has been completed and Cavalier received regulatory approval for Hoole Phase 1 in the
second quarter of 2014. Construction will commence once funding has been secured and Cavalier’s
Paramount Resources Ltd. 2014 Review of Operations 17
Board of Directors has sanctioned the project. Cavalier’s current activities are being funded with drawings
on its $40 million credit facility.
An updated evaluation of the Hoole Project was prepared by McDaniel & Associates Consultants Ltd, the
Company’s independent reserves evaluator, effective December 31, 2014. In the updated evaluation,
93.5 million barrels of probable undeveloped reserves were ascribed to Hoole Phase 1 with a net present
value of $363 million (before tax, discounted at 10 percent). In addition to these probable undeveloped
reserves, this updated evaluation ascribes 1.2 billion barrels of economic contingent resources (best
estimate) with a net present value of $2.4 billion (before tax, discounted at 10 percent) to Cavalier’s 53
sections of additional Grand Rapids rights at Hoole that are not included in Hoole Phase 1 (the
"Remaining Hoole Lands"). Results of the updated evaluation of the Remaining Hoole Lands are as
follows:
Classification/Level of Certainty (1)
High Estimate
Best Estimate
Low Estimate
Economic
Contingent
Resources (1)
(MMBbl) (2)
1,492
1,157
872
NPV of Future Net
Revenue (3)
(before tax,
discounted at 10%)
($MM)
4,191
2,382
965
DEBIP (1)
(MMBbl) (2)
2,566
2,502
2,436
See Oil Sands Resource Notes in the Advisories section of this document.
(1)
(2) MMBbl means millions of barrels.
(3)
NPV of economic contingent resources, see Oil Sands Resource Notes in the Advisories section of this document.
Fox Drilling, a wholly-owned subsidiary of Paramount, owns five triple-sized rigs, including two built-for-
purpose walking rigs. These rigs are designed to drill the deep horizontal wells that industry is currently
focusing on. During 2014, all five rigs were
deployed on the Company’s Deep Basin
lands.
To support Paramount’s
future drilling
initiatives, Fox Drilling is completing the
construction of two new triple-sized built-for-
purpose walking rigs. The new rigs are
expected to be commissioned in the fourth
quarter of 2015 and cost approximately $25
million each. Fox Drilling’s loan facilities
were expanded in 2014 to provide partial
funding for the new rigs.M
Paramount Resources Ltd. 2014 Review of Operations 18
In the second quarter of 2014, Paramount acquired all of the common shares of MGM Energy Corp.
("MGM Energy") not already owned in exchange for 1.1 million Paramount Common Shares. Through the
acquisition, Paramount added approximately 1,300,000 (725,000 net) acres of undeveloped land in the
Central Mackenzie Valley prospective for shale oil and natural gas and approximately 300,000 (155,000
net) acres of undeveloped land in the Mackenzie Delta prospective for natural gas.
INVESTMENTS IN OTHER ENTITIES
Paramount holds securities in a number of publicly–traded and private corporations as part of its portfolio
of strategic investments. The Company’s investment in Trilogy Energy Corp. was principally obtained in
the course of its spin-out from Paramount. Investments in shares of most other entities, including MEG
Energy Corp., were received as consideration for properties sold to the entities. Paramount’s investments
are summarized below:
Market Value
Trilogy Energy Corp.
MEG Energy Corp.
Other (2)
December 31, 2014
December 31, 2013
Shares (000’s)
($ millions)
($/share)
19,144
3,700
151.4
72.3
33.2
256.9
7.91
19.55
Shares (000’s)
19,144
3,700
($/share)
27.60
30.61
($ millions)
528.4
113.3
46.8
688.5
(1)
(2)
Based on the period-end closing price of publicly traded investments and the book value of remaining investments.
Includes investments in Marquee Energy Ltd., RMP Energy Inc., Strategic Oil & Gas Ltd., and other public and private corporations.
CORPORATE
Paramount’s capital structure includes a revolving bank credit facility (the "Facility") and an aggregate
$820 million principal amount of senior unsecured notes (the "Senior Notes"). The Facility was increased
to $900 million in December 2014 and the maturity date was extended to November 2016. There are no
financial maintenance covenants under the terms of the Facility or the Senior Notes.
The Company’s coverage ratios improved in 2014 as a result of the start-up of the Musreau Deep Cut
Facility and are expected to continue to strengthen in 2015 as a result of further growth in sales volumes
and cash flows, despite the collapse in commodity prices.
The Company raised aggregate gross proceeds of $350 million in July 2014 through the issuance of 4.6
million Common Shares and 1.0 million Flow-Through Common Shares.
In February 2015, Moody’s Investors Services affirmed Paramount’s corporate credit rating of B2, Positive
Outlook and Standard and Poor’s Rating Services upgraded Paramount’s corporate credit rating to B,
Positive Outlook.
Paramount Resources Ltd. 2014 Review of Operations 19
CAPITAL
2014 NET EXPLORATION AND CAPITAL EXPENDITURES
Year ended December 31
($ millions)
Geological and geophysical
Drilling, completion and tie-ins
Facilities and gathering
Principal Properties Capital (1)
Land and property acquisitions and capitalized interest
Cash proceeds on divestitures (2)
Principal Properties
Strategic Investments (3)
Corporate
2014
2013
6.7
596.5
210.7
813.9
43.5
(100.0)
757.4
95.3
1.3
854.0
6.3
451.6
154.9
612.8
32.4
(37.9)
607.3
92.3
5.8
705.4
(1) Principal Properties Capital includes capital expenditures and geological and geophysical costs related to the Company’s Principal Properties, and excludes land
acquisitions and capitalized interest.
(2) Excludes shares of other companies and/or properties received in consideration for properties sold.
(3) Strategic Investments includes $0.8 million of capitalized interest (2013 - $1.0 million) and $20.0 million of land acquisition costs (2013 – nil).
Principal Properties Capital spending in 2014 was focused in the Deep Basin; primarily drilling and
completing wells at Musreau and Karr-Gold Creek. Facilities and gathering expenditures were focused on
the new and expanded facilities at Musreau and Smoky and expansions to gathering systems in the Deep
Basin. Strategic investments capital expenditures for 2014 included $38.5 million related to shale gas
drilling activities in northeast British Columbia, $20.0 million for Cavalier’s Hoole land acquisition and
$23.5 million for the construction of Fox Drilling’s two new walking drilling rigs.
2015 CAPITAL BUDGET
Paramount’s 2015 capital budget totals $400 million, focused on the Company’s Deep Basin development
and maintaining the optionality of future growth initiatives. The Company is continuing its planning and
detailed engineering work for the construction of new natural gas processing facilities in the Deep Basin.
2015 CAPITAL BUDGET DETAILS
($ millions)
Kaybob – Musreau
220 • Pad drilling program to continue in 2015, with some completions deferred
until late 2015 or H1 2016
• Complete condensate Stabilizer Expansion
Grande Prairie – Karr Gold-Creek
65 • Montney drilling and completions
• Expand Karr compression capacity from 40 MMcf/d to 80 MMcf/d
Southern - Willesden Green
Northern - Birch
35 • Duvernay exploratory drilling and completions
35 • Montney drilling program and facilities construction
Principal Properties Capital
355
Strategic Investments
Total Capital Budget
45 • Shale gas drilling and completion of the new drilling rigs
400
Paramount Resources Ltd. 2014 Review of Operations 20
The Company expects to fund its 2015 capital program with increasing cash flow from operations and
available capacity under its bank credit facility. The Company’s capital plan remains flexible and activity
levels may be adjusted depending on commodity prices and other factors.
RESERVES DETAILS / F&D / LAND
Gross Reserves(1)
Light
Medium
Crude
Oil
(MBbl)
Natural
Gas
Liquids
(MBbl)
Natural
Gas
(Bcf)
Bitumen
(MBbl)
Total
(MBoe) (2)
Discount Rate
10%
0%
Before Tax
Net Present Value (1)(3)
($ millions)
Conventional
Proved
Developed Producing
Developed Non-producing
Undeveloped
Total Proved
Total Probable
187.6
13.4
502.8
703.8
387.2
Total Proved & Probable Conventional
1,090.9
852
178
78
1,108
418
1,526
24,172
1,317
82,921
108,410
55,326
163,736
–
–
–
–
–
–
56,295
3,722
166,795
226,812
120,273
347,085
Non-Conventional - Oil Sands Bitumen
Total Proved
Total Probable
Total Proved & Probable Non-Conventional
–
–
–
–
–
–
–
–
–
–
93,468
93,468
–
93,468
93,468
Total Company
Total Proved
Total Probable
Total Proved & Probable
703.8
387.2
1,090.9
1,108
418
1,526
108,410
55,326
163,736
–
93,468
93,468
226,812
213,741
440,553
1,131
72
3,106
4,309
3,218
7,527
–
2,328
2,328
4,309
5,546
9,855
854
49
1,352
2,255
1,581
3,836
–
363
363
2,255
1,944
4,199
(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 McDaniel’s
forecast prices and costs as of January 1, 2015.
The following table summarizes the undiscounted future development costs deducted in the calculation of
future net revenue from conventional reserves:
Future Development Costs – Conventional (1)
(Undiscounted, $ millions)
Proved Developed Producing
Proved Developed Non-producing
Proved Undeveloped
Total Proved
Total Probable
Total Proved & Probable
(1) Columns may not add due to rounding.
2014
─
11
169
180
27
207
2016
─
─
640
640
72
712
2017
─
─
692
692
60
751
2018
─
─
698
698
51
749
2019
─
─
666
666
32
697
Total
─
11
2,864
2,876
241
3,117
Paramount Resources Ltd. 2014 Review of Operations 21
RESERVES RECONCILIATION
Proved Reserves (1)
January 1, 2014
Extensions & discoveries
Technical revisions
Dispositions
Production
Natural
Gas
(Bcf)
301.3
438.8
18.0
(14.0)
(40.3)
Oil &
NGLs (2)
(MBbl)
37,457
73,277
1,070
(54)
(2,233)
Natural
Gas
(Bcf)
450.5
720.4
(19.5)
(20.1)
(40.3)
Total
Proved & Probable Reserves (1)
Oil &
NGLs (2)
(MBbl)
58,729
114,607
(5,770)
(71)
(2,233)
Conventional Bitumen
(MBbl)
93,468
–
–
–
–
93,468
(MBoe) (3)
133,813
234,669
(9,027)
(3,417)
(8,953)
347,085
Total
(MBoe) (3)
227,281
234,669
(9,027)
(3,417)
(8,953)
440,553
Total
(MBoe) (3)
87,677
146,411
4,070
(2,394)
(8,953)
226,812
December 31, 2014
(1) Columns and rows may not add due to rounding.
(2)
(3) Refer to the Oil and Gas Measures and Definitions and other advisories in the Advisories section of this document.
Light and medium crude oil and natural gas liquids.
165,262
109,518
1,090.9
703.8
FINDING AND DEVELOPMENT COSTS – CONVENTIONAL
Including Major Facilities & Gathering
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.
2014 F&D Cost
Including Major Facilities & Gathering
Total F&D
Capital (1)
$MM
Reserves
Additions (3)
MMBoe
FDC
Change (1)
$MM
Costs (1) (2)
$MM
550.8
813.9
2,384.8
2,311.3
2,935.7
3,125.3
151.0
150.5
3-Year Average F&D
F&D
$/Boe
19.44
20.77
2013
$/Boe
18.14
19.89
2012
$/Boe
27.13
29.83
3-Year
Average
$/Boe
19.99
21.58
14.04
15.24
550.8
813.9
2,393.1
2,547.2
2,943.9
3,361.1
210.2
225.6
14.00
14.90
12.03
13.38
16.19
19.46
(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.
Proved
Kaybob
Total Conventional
Proved & Probable
Kaybob
Total Conventional
Paramount Resources Ltd. 2014 Review of Operations 22
Excluding Major Facilities & Gathering
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:
2014 F&D Cost
Excluding Major Facilities & Gathering
Total F&D
Capital (1)
$MM
Reserves
Additions (3)
MMBoe
FDC
Change (1)
$MM
Costs (1) (2)
$MM
Proved
Kaybob
Total Conventional
Proved & Probable
Kaybob
Total Conventional
391.8
603.2
2,438.2
2,364.7
2,829.9
2,967.8
391.8
603.2
2,435.7
2,621.2
2,827.5
3,224.4
151.0
150.5
210.2
225.6
3-Year Average F&D
2013
$/Boe
16.01
17.79
2012
$/Boe
14.64
16.82
10.21
10.87
10.31
12.18
3-Year
Average
$/Boe
17.83
18.95
12.49
13.37
F&D
$/Boe
18.74
19.72
13.45
14.29
(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.
LAND
As at December 31, 2014
As at December 31, 2013
(thousands of acres)
Undeveloped land
Acreage assigned reserves
Total
Net (2)
1,722
201
1,923
"Gross" acres means the total acreage in which Paramount has an interest.
"Net" acres means gross acres multiplied by Paramount’s working interest therein.
Gross (1)
2,939
359
3,298
(1)
(2)
Average
Working
Interest
59%
56%
58%
Gross (1)
1,337
450
1,787
Net (2)
924
249
1,173
Average
Working
Interest
69%
55%
66%
Paramount Resources Ltd. 2014 Review of Operations 23
MANAGEMENT’S DISCUSSION AND ANALYSIS
This Management’s Discussion and Analysis ("MD&A"), dated March 5, 2015, 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, 2014. 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.
The disclosures in this document include forward-looking information, non-GAAP measures and 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 long-term non-conventional exploration and
pre-development projects and holds a portfolio of 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 which have been 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 northeast British Columbia and northern Alberta.
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"), and prospective shale gas acreage; and (iii) drilling rigs owned by
Paramount’s wholly-owned subsidiary, Fox Drilling Limited Partnership ("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. 2014 Management’s Discussion & Analysis 24
2014 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)
Principal Properties Capital
Investments in other entities – market value (2)
Total assets
Long-term debt
Net debt
OPERATIONAL
Sales volumes (3)
Natural gas (MMcf/d)
Condensate and oil (Bbl/d)
Other NGLs (Bbl/d) (4)
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
Transportation and NGLs processing (5)
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
2014
2013
2012
350.0
–
350.0
141.0
–
141.0
1.39
(71.7)
(0.71)
(71.7)
(0.71)
813.9
256.9
3,199.4
1,210.4
1,482.5
110.5
3,986
2,128
24,524
58
–
39.10
(1.96)
(7.96)
(4.01)
25.17
(0.13)
–
25.04
(1.80)
(0.87)
(7.69)
0.82
0.25
15.75
230.7
1.8
232.5
71.9
(1.3)
70.6
0.75
(87.1)
(0.93)
(59.1)
(0.63)
612.8
688.5
2,447.8
882.6
1,119.2
106.1
2,313
911
20,914
37
6
30.46
(1.42)
(9.35)
(3.15)
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)
518.5
704.8
2,037.0
660.7
701.4
98.5
2,682
811
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
Funds flow from operations
(1)
(2)
(3)
(4) Other NGLs means ethane, propane and butane.
(5)
Readers are referred to the advisories concerning non-GAAP measures and Oil and Gas Measures and Definitions in the Advisories section of this document.
Based on the period-end closing prices of publicly-traded investments and the book value of the remaining investments.
Amounts for 2013 and 2012 include the results of discontinued operations.
Includes downstream natural gas, NGLs and oil transportation costs and NGLs fractionation costs incurred by the Company.
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 25
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
2014
66.7
(37.4)
(104.0)
3.0
(71.7)
–
(71.7)
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)
Paramount recorded a loss from continuing operations of $71.7 million for the year ended December 31,
2014 compared to a loss from continuing operations of $87.1 million in 2013. Significant factors
contributing to the change are shown below:
Year ended December 31
Loss from continuing operations – 2013
• Higher netback primarily due to higher sales volumes and higher natural gas prices
• Higher gains on the sale of property, plant and equipment related to continuing operations
• Higher depletion and depreciation, and higher impairment write-downs of petroleum and natural gas
properties in 2014
• Loss from equity-accounted investments compared to income in 2013
• Higher interest and financing expense due to increased debt
• Lower income tax recovery
• Higher write-down of investments in securities
• Other
Loss from continuing operations – 2014
(87.1)
97.8
63.0
(76.9)
(24.8)
(18.0)
(15.6)
(12.0)
1.9
(71.7)
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 and financing expense due to increased debt
• Lower other income
• Loss on financial commodity contracts in 2013 compared to a gain in 2012
• 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 NGLs and natural gas sales volumes
• Other
Loss from continuing operations – 2013
(64.7)
(132.0)
(17.3)
(7.5)
(6.5)
96.0
44.2
0.7
(87.1)
In March 2013, Paramount sold its Northern COU properties in the Bistcho and Cameron Hills areas (the
"Northern Discontinued Operations") for proceeds of $9.1 million.
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 26
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.
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.
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 $25.2 million higher than in 2012, primarily as a result of impairment write-downs related to the
Northern Discontinued Operations recorded in 2012.
Funds Flow from Operations (1)
The following is a reconciliation of funds flow from operations to the nearest GAAP measure:
Year ended December 31
Cash from operating activities
Change in non-cash working capital
Geological and geophysical expenses
Asset retirement obligations settled
Funds flow from operations
Funds flow from operations ($/Boe)
(1)
(2)
Refer to the advisories concerning non-GAAP measures in the Advisories section of this document.
Includes the results of discontinued operations.
Year ended December 31
Funds flow from operations
Continuing operations
Discontinued operations
Funds flow from operations
2014
118.5
5.4
12.5
4.6
141.0
15.75
2014
141.0
–
141.0
2013 (2)
44.9
12.2
7.2
6.3
70.6
9.24
2013
71.9
(1.3)
70.6
2012 (2)
55.2
(12.1)
7.0
8.0
58.1
7.97
2012
51.9
6.2
58.1
Funds flow from operations for the year ended December 31, 2014 attributable to continuing operations
was $141.0 million, $69.1 million higher than the same period of 2013. Significant factors contributing to
the change are shown below:
Year ended December 31
Funds flow from operations – continuing operations – 2013
• Higher netback primarily due to higher sales volumes and higher natural gas prices
• Higher interest and financing expense due to increased debt
•
• Higher general and administrative expense
• Other
Funds flow from operations – continuing operations – 2014
Lower other income
71.9
97.8
(17.8)
(5.2)
(4.4)
(1.3)
141.0
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 27
Funds flow from operations for the year ended December 31, 2013 attributable to continuing operations
was $71.9 million, $20.0 million higher than the same period of 2012. Significant factors contributing to
the change are shown below:
Year ended December 31
Funds flow from operations – continuing operations – 2012
• Higher netback primarily due to higher realized prices and higher NGLs and natural gas sales volumes
• Higher interest and financing expense due to increased debt
•
• Other
Funds flow from operations – continuing operations – 2013
Lower other income
51.9
44.2
(16.5)
(7.4)
(0.3)
71.9
Funds flow from operations in 2013 attributable to discontinued operations decreased by $7.5 million
compared to 2012 because 2012 included the results of operations for the Southern Discontinued
Operations prior to their May 2012 sale.
PRINCIPAL PROPERTIES
The Principal Properties section of this MD&A provides an analysis of the results of the Company’s
continuing operations and therefore excludes results of the Northern Discontinued Operations. A
summary of the results of the Northern Discontinued Operations is included in the Discontinued
Operations section of this document.
Netback and Segment Income (Loss) – Continuing Operations
Year ended December 31
2014
2013
Natural gas revenue
Condensate and oil revenue
Other NGLs revenue (2)
Royalty and sulphur revenue
Petroleum and natural gas sales
Royalties
Operating expense
Transportation and NGLs processing (3)
Netback
Financial commodity contract settlements
Netback including commodity contract settlements
Other principal property items (see below)
Segment income (loss)
(1)
(2) Other NGLs means ethane, propane and butane.
(3)
Natural gas revenue shown per Mcf.
($/Boe) (1)
4.78
88.41
32.36
–
39.10
(1.96)
(7.96)
(4.01)
25.17
(0.13)
25.04
192.7
128.6
25.1
3.6
350.0
(17.5)
(71.3)
(35.9)
225.3
(1.1)
224.2
(157.5)
66.7
137.6
77.9
12.3
2.9
230.7
(10.8)
(68.6)
(23.8)
127.5
–
127.5
(155.7)
(28.2)
($/Boe) (1)
3.57
93.73
37.02
–
30.44
(1.43)
(9.05)
(3.14)
16.82
–
16.82
Includes downstream natural gas, NGLs and oil transportation costs and NGLs fractionation costs incurred by the Company.
Petroleum and natural gas sales were $350.0 million in 2014, an increase of $119.3 million from the prior
year, primarily due to higher sales volumes and higher natural gas prices.
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 28
The impact of changes in prices and sales volumes on petroleum and natural gas sales are as follows:
Year ended December 31, 2013
Effect of changes in prices
Effect of changes in sales volumes
Change in royalty and sulphur revenue
Year ended December 31, 2014
Natural gas
137.6
48.6
6.5
–
192.7
Condensate
and oil
77.9
(7.8)
58.5
–
128.6
Other
NGLs
12.3
(3.6)
16.4
–
25.1
Royalty and
sulphur
2.9
–
–
0.7
3.6
Total
230.7
37.2
81.4
0.7
350.0
Sales Volumes – Continuing Operations
Year ended December 31
Natural Gas
(MMcf/d)
2014
79.0
24.9
3.6
3.0
110.5
─
110.5
2013 % Change
72.1
20.0
9.5
3.8
105.4
0.7
106.1
10
25
(62)
(21)
5
(100)
4
Kaybob
Grande Prairie
Southern
Northern
Continuing Ops
Discontinued Ops
Total
Condensate and Oil
(Bbl/d)
2013 % Change
1,141
670
402
65
2,278
35
2,313
116
97
(55)
(71)
75
(100)
72
2014
2,468
1,317
182
19
3,986
─
3,986
Other NGLs
(Bbl/d)
2013 % Change
253
461
195
2
911
─
911
498
5
(33)
(100)
134
─
134
2014
1,512
486
130
–
2,128
─
2,128
Total
(Boe/d)
2013 % Change
13,402
4,459
2,179
725
20,765
149
20,914
28
34
(58)
(28)
18
(100)
17
2014
17,137
5,956
906
525
24,524
─
24,524
The Company’s sales volumes increased 18% to 24,524 Boe/d in 2014 compared to 20,765 Boe/d in
2013. Sales volumes averaged 21,186 Boe/d for the first nine months of the year and increased to an
average of 34,430 Boe/d in the fourth quarter of 2014. The Company’s production within the Kaybob COU
was constrained by available owned and contracted natural gas processing capacity until August 2014,
when the Company’s wholly-owned 200 MMcf/d Musreau Deep Cut Facility (the “Musreau Deep Cut
Facility”) commenced operations. Third-party constraints also impacted production at Karr-Gold Creek in
the Grande Prairie COU until the fourth quarter of 2014.
Natural gas sales volumes increased 5.1 MMcf/d or five percent to 110.5 MMcf/d in 2014 compared to
105.4 MMcf/d in 2013. The increase was primarily due to production from new wells in the Kaybob COU
following the start-up of the Musreau Deep Cut Facility and new well production at Karr-Gold Creek in the
Grande Prairie COU. These increases were partially offset by the impact of property dispositions in the
Southern COU, lower production at Smoky in the Kaybob COU due to a three-month shutdown to
commission an expansion to the non-operated Smoky natural gas processing facility (the "Smoky Deep
Cut Facility") and lower production at other properties due to facilities constraints and natural declines.
Condensate and oil sales volumes increased 1,708 Bbl/d or 75 percent to 3,986 Bbl/d in 2014 compared
to 2,278 Bbl/d in 2013. The increase in condensate and oil sales volumes was primarily related to new
well production from Montney formation wells at Musreau in the Kaybob COU and at Karr-Gold Creek in
the Grande Prairie COU, partially offset by the impact of property dispositions in the Southern COU.
Other NGLs sales volumes increased 134 percent to 2,128 Bbl/d in 2014 compared to 911 Bbl/d in 2013,
primarily as a result of increased Other NGLs volumes being extracted at Musreau following start-up of
the Musreau Deep Cut Facility.
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 29
Paramount’s production continues to be impacted by outages and apportionments of fractionation
capacity. The Company’s incremental long-term firm processing capacity for Other NGLs is scheduled to
become available in two phases in 2015, following the completion of third-party expansions. The third-
party operator has announced that the first phase, a de-ethanization plant expansion, will be
commissioned by the end of the first quarter of 2015 and the second phase, a storage cavern expansion,
will be in-service in mid-2015. The Company continues to maximize production through firm and
interruptible NGLs processing capacity in advance of such additional capacity becoming available.
Sales volumes are expected to surpass 70,000 Boe/d in 2015 following the start-up of Paramount’s
15,000 Bbl/d condensate stabilizer expansion (the "Stabilizer Expansion") in the second quarter and the
completion of the third-party de-ethanization facilities expansions. Annual sales volumes in 2015 are
expected to average between 55,000 and 65,000 Boe/d.
2013
Change %
Commodity Prices
Natural Gas
Paramount realized price (CDN$/Mcf)
AECO daily spot (CDN$/GJ)
AECO monthly index (CDN$/GJ)
Malin (US$/MMbtu)
Crude Oil
Paramount average realized condensate and oil price (CDN$/Bbl)
Edmonton Light Sweet (CDN$/Bbl)
West Texas Intermediate (US$/Bbl)
2014
4.78
4.27
4.19
4.38
88.41
94.18
93.00
3.57
3.13
3.00
3.60
93.73
93.08
97.98
Foreign Exchange
$CDN / 1 $US
1.10
1.03
34
36
40
22
(6)
1
(5)
7
North America experienced an unusually cold and prolonged winter in 2013 / 2014, which led to
increased seasonal demand for natural gas in the first quarter of the year and multi-year lows in inventory
levels in the spring of 2014, resulting in increases in market prices in 2014 versus 2013. Paramount’s
average realized natural gas price increased 34 percent in 2014 compared to 2013, consistent with
increases in benchmark 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 sells its condensate volumes in both stabilized and unstabilized condition, depending upon
the location of production and the availability of stabilization capacity. Unstabilized condensate volumes
trucked to receipt terminals typically receive prices based on the Edmonton Light Sweet price, adjusted
for transportation and quality differentials. Stabilized condensate volumes delivered through pipelines
receive prices for condensate quoted at Edmonton, adjusted for transportation and quality and density
differentials, which are generally higher than prices for unstabilized volumes. As incremental stabilization
capacity becomes available, a greater portion of volumes are expected to be sold in stabilized condition.
Commodity Price Management
From time-to-time Paramount uses financial and physical commodity price contracts to manage exposure
to commodity price volatility. The Company 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.
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 30
Payments made by Paramount on the settlement of financial commodity contracts are as follows:
Year ended December 31
Commodity contracts
2014
(1.1)
2013
─
Paramount did not have any financial commodity contracts in place at December 31, 2014.
Royalties – Continuing Operations
Year ended December 31
Royalties
$/Boe
2014
17.5
1.96
Rate
5.1%
2013
10.8
1.43
Rate
4.7%
Royalties increased $6.7 million to $17.5 million in 2014 compared to $10.8 million in 2013, primarily as a
result of higher current year revenue and reduced royalties in 2013 due to $2.7 million in gas cost
allowance adjustments. The increases in royalties due to higher revenue were partially offset by lower
average royalty rates in 2014.
The royalty rate was 5.1 percent in 2014 compared to 5.8 percent in 2013, excluding the impact of the
prior year gas cost allowance adjustments. The majority of Paramount’s new wells in Alberta qualify for
royalty incentive programs, which reduce the Company’s overall royalty rate.
Operating Expense – Continuing Operations
Year ended December 31
Operating expense
$/Boe
2014
71.3
7.96
2013
68.6
9.05
% Change
4
(12)
Operating expense increased $2.7 million or four percent in 2014 to $71.3 million compared to $68.6
million in 2013, primarily due to higher operating costs in the Kaybob COU associated with the start-up of
the Musreau Deep Cut Facility and the Smoky Deep Cut Facility and higher lease operating costs
resulting from increased production. Operating expenses also increased in the Grande Prairie COU as a
result of increased production. These increases were partially offset by lower operating costs in the
Southern COU as a result of property dispositions and lower costs in the Northern COU due to lower
production.
Paramount’s per Boe operating expenses decreased 12 percent to $7.96 in 2014 compared to $9.05 in
2013, mainly as a result of lower-cost Kaybob area volumes becoming a greater proportion of the
Company’s overall production. Operating expenses within the Kaybob COU, net of processing income,
averaged $3.85 per Boe in the fourth quarter of 2014. Paramount’s per-unit operating costs are expected
to continue to decrease in 2015.
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 31
Transportation and NGLs Processing – Continuing Operations
Year ended December 31
Transportation and NGLs processing
$/Boe
2014
35.9
4.01
2013
23.8
3.14
% Change
51
28
Transportation and NGLs processing includes the costs of downstream natural gas, NGLs and oil
transportation and NGLs fractionation costs incurred by the Company. Transportation and NGLs
processing was $35.9 million in 2014, an increase of $12.1 million compared to 2013, primarily due to
increased firm-service transportation costs related to incremental capacity contracted for the Musreau
Deep Cut Facility, higher pipeline tolls as a result of increased production, higher trucking costs due to
increased condensate volumes and higher fractionation costs associated with higher Other NGLs
production. Paramount incurred incremental trucking costs in 2014 in order to produce from new liquids-
rich wells that would otherwise have been shut-in due to capacity constraints.
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
2014
(4.0)
196.3
32.8
23.2
(95.7)
5.9
(1.0)
157.5
2013
4.0
144.1
6.5
34.7
(32.3)
3.1
(4.4)
155.7
Depletion and depreciation expense (excluding impairment) increased to $196.3 million ($21.93 per Boe)
in 2014 compared to $144.1 million ($19.01 per Boe) in 2013, mainly due to higher production volumes
and higher per unit rates.
The Company recorded an impairment write-down of $32.8 million at December 31, 2014 related to
petroleum and natural gas assets in the Southern cash generating unit ("CGU"). The impairment write-
down was recorded because the carrying value of the Southern CGU properties exceeded their
recoverable amounts, which were estimated based on expected discounted net cash flows from the
production of proved and probable reserves. The impairments resulted from a combination of higher well
costs than reserves values assigned and decreases in estimated future net revenues due to lower
forecasted future oil and natural gas prices.
The Company recorded a net impairment write-down of its petroleum and natural gas assets in 2013 of
$6.5 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. 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 net 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.
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 32 The reversal of previously recorded impairment write-downs in the Grande Prairie CGU in 2013 resulted
from increases in reserves assigned to the CGU. 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 in 2014 includes expired undeveloped land leases costs of $11.8
million (2013 - $14.4 million), geological and geophysical costs of $6.8 million (2013 - $6.3 million) and
dry hole expense of $4.6 million (2013 - $14.0 million).
The $95.7 million in aggregate gains recorded on the sale of property, plant and equipment in 2014
primarily relate to the second quarter sale of a 50 percent working interest in the Birch property within the
Northern COU in exchange for $91.5 million cash and the first quarter sale of coal bed methane
properties in the Chain-Delia area within the Southern COU in exchange for $11.7 million in shares of
Marquee Energy Ltd. ("Marquee"). The gain on sale of property, plant and equipment of $32.3 million
recorded in 2013 relates primarily to the sale of lands in the Ante Creek area of Alberta and the sale of
non-core properties in the Southern COU.
DISCONTINUED OPERATIONS
Results of the Northern Discontinued Operations have been presented as discontinued operations in
2013. The following table reconciles Paramount’s loss from continuing operations, income from
discontinued operations and net loss:
Income (loss) from Continuing Operations ("CO") and Discontinued Operations ("DO")
Year ended December 31, 2013
Natural gas revenue
Condensate and oil revenue
Other NGLs revenue
Royalty and sulphur revenue
Petroleum and natural gas sales
Royalties
Operating expense
Transportation and NGLs processing
Netback
General and administrative
Interest and financing
Dividends from investments
Other
Funds flow from operations
Depletion, depreciation and accretion
Gain on sale of property, plant and equipment
Stock-based compensation
Income from equity-accounted investments
Other
Income tax (expense) recovery
Net income (loss)
(1) Natural gas revenue shown per Mcf.
CO
137.6
77.9
12.3
2.9
230.7
(10.8)
(68.6)
(23.8)
127.5
(19.5)
(51.1)
8.0
7.0
71.9
(156.0)
32.7
(25.9)
21.4
(49.8)
18.6
(87.1)
DO
($ millions)
0.7
1.1
─
─
1.8
─
(2.9)
(0.2)
(1.3)
─
─
─
─
(1.3)
(0.3)
39.0
─
─
─
(9.4)
28.0
Total
138.3
79.0
12.3
2.9
232.5
(10.8)
(71.5)
(24.0)
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)
Total
DO
CO
($/Boe except natural gas) (1)
2.82
3.57
84.59
93.73
─
37.02
─
─
32.95
30.44
─
(1.43)
(52.54)
(9.05)
(4.27)
(3.14)
(23.86)
16.82
─
(2.57)
─
(6.74)
─
1.06
─
0.91
(23.86)
9.48
3.57
93.59
37.02
─
30.46
(1.42)
(9.35)
(3.15)
16.54
(2.55)
(6.69)
1.05
0.89
9.24
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 33
STRATEGIC INVESTMENTS
Year ended December 31
General and administrative
Stock-based compensation
Exploration and evaluation
Interest and financing
Income (loss) from equity–accounted investments
Write-down of investments in securities
Drilling rig revenue
Drilling rig expense
Other
Segment income (loss)
2014
(7.8)
(5.8)
(6.8)
(2.7)
(3.4)
(15.6)
0.5
(0.2)
4.4
(37.4)
2013
(6.8)
(7.2)
(0.8)
(2.4)
21.4
(3.6)
4.2
(1.9)
2.4
5.3
The loss from equity-accounted investments in 2014 of $3.4 million includes $11.5 million of equity
losses, a $2.9 million write-down of other equity-accounted investment, partially offset by a $10.8 million
gain recorded on the MGM Energy Corp. ("MGM Energy") acquisition. Income from equity-accounted
investments in 2013 of $21.4 million includes a $25.7 million dilution gain, partially offset by $4.3 million of
equity losses. The write-down of investments in securities in 2014 of $15.6 million resulted from the
recognition of aggregate unrealized losses related to the Company’s investments in Marquee, Strategic
Oil & Gas Ltd. ("SOG") and other securities as a result of significant decreases in the market values of
the securities at the end of the year.
Strategic Investments at December 31, 2014 include:
•
investments in the shares of Trilogy, MEG Energy Corp. ("MEG"), Marquee, RMP Energy Inc. ("RMP
Energy"), SOG and other public and private corporations;
• oil sands and carbonate bitumen interests owned by Paramount’s wholly-owned subsidiary, Cavalier,
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.
Investments
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 were principally
obtained in the course of the spin-out 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.
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 34 As at December 31
Trilogy
MEG
MGM Energy
Other (2)
Total
(1)
(2)
Carrying Value
2014
79.9
72.3
–
33.1
185.3
2013
97.4
113.3
1.2
38.1
250.0
Market Value (1)
2014
151.4
72.3
–
33.2
256.9
2013
528.4
113.3
8.7
38.1
688.5
Based on the period-end closing price of publicly traded investments and the book value of remaining investments.
Includes investments in Marquee, RMP Energy, SOG other public and private corporations.
In June 2014, Paramount acquired all 338.3 million issued and outstanding common shares of MGM
Energy not already owned in exchange for the issuance by Paramount of 1.1 million Common Shares.
Immediately prior to the acquisition, Paramount owned 54.1 million common shares of MGM Energy (14
percent voting interest). Through the acquisition, Paramount added approximately 1,300,000 (725,000
net) acres of undeveloped land in the Central Mackenzie Valley prospective for shale oil and natural gas
and approximately 300,000 (155,000 net) acres of undeveloped land in the Mackenzie Delta prospective
for natural gas.
Cavalier Energy Inc.
Cavalier’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, which is located 10 kilometers northeast of Wabasca-Desmarais,
Alberta. Since 2004, approximately $106 million has been invested through land acquisitions,
stratigraphic drilling, engineering studies, and environmental field programs to bring this project (the
"Hoole Project") to the development stage; including $20 million that was invested in July 2014 to acquire
23 additional net sections of contiguous oil sands acreage.
Front-end engineering and design work for the initial 10,000 Bbl/d phase of the Hoole Project ("Hoole
Phase 1") has been completed and Cavalier received regulatory approval for Hoole Phase 1 in the
second quarter of 2014. Construction will commence once funding has been secured and Cavalier’s
Board of Directors has sanctioned the project. Cavalier’s current activities are being funded with drawings
on its $40 million credit facility.
Shale Gas
Paramount’s shale gas holdings in the Liard and Horn River Basins in northeast British Columbia and the
Northwest Territories include approximately 133 net sections of land with potential from the Besa River
shale formation. Paramount continued the drilling of the Dunedin d-57-D exploratory shale gas well in
2014 to a total measured depth of 6,000 meters, including a 1,600 meter horizontal leg. While running
production casing the liner became stuck in the wellbore. Recovery operations to remove the liner
materials were unsuccessful and further operations at the well have been deferred as land earning has
been completed.
In late-February 2014, Paramount commenced drilling the d-71-G vertical exploratory shale gas well at
Dunedin before suspending operations due to spring break-up. Drilling operations resumed in the fourth
quarter and the well was drilled to targeted depth by mid-February 2015. Paramount then moved to the c-
37-D well at La Biche where drilling operations will continue until spring break-up. The Company expects
to return during the 2015/2016 winter season when access can be safely re-established and complete
drilling operations on the well.
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 35
Fox Drilling
Fox Drilling owns five triple-sized rigs, including two built-for-purpose walking rigs. These rigs are
designed to drill the deep horizontal wells that industry is currently focusing on. During 2014, all five rigs
were deployed on the Company’s Deep Basin lands.
To support the Company’s future drilling initiatives, Fox Drilling is completing the construction of two new
triple-sized built-for-purpose walking rigs. The new rigs are expected to be commissioned in the fourth
quarter of 2015 and cost approximately $25 million each. Fox Drilling’s loan facilities were expanded in
2014 to provide partial financing for the new rigs.
CORPORATE
Year ended December 31
Interest and financing
General and administrative
Stock-based compensation
Depreciation
Foreign exchange and other
Segment loss
2014
67.9
16.1
19.5
0.2
0.3
104.0
2013
50.2
12.7
18.7
0.7
0.5
82.8
The Corporate segment loss increased to $104.0 million in 2014 compared to $82.8 million in 2013,
primarily as a result of higher interest and financing expense and higher general and administrative
expenses.
Tax Pools
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
2014
87.9
631.3
476.2
736.0
1,141.3
32.0
3,104.7
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 36
EXPLORATION AND CAPITAL EXPENDITURES
Year ended December 31
Geological and geophysical
Drilling, completion and tie-ins
Facilities and gathering
Principal Properties Capital (1)
Land and property acquisitions and capitalized interest
Principal Properties
Strategic Investments (2)
Corporate
Principal Properties Capital by COU (1)
Kaybob
Grande Prairie
Southern, Northern & Other
2014
6.7
596.5
210.7
813.9
43.5
857.4
95.3
1.3
954.0
528.2
204.5
81.2
813.9
2013
6.3
451.6
154.9
612.8
32.4
645.2
92.3
5.8
743.3
462.3
127.8
22.7
612.8
(1)
(2)
Principal properties capital includes capital expenditures and geological and geophysical costs related to the Company’s Principal Properties, excluding land
acquisitions and capitalized interest.
Strategic Investments include $0.8 million of capitalized interest (2013 - $1.0 million) and $20.0 million of land acquisition costs (2013 – nil).
Principal Properties Capital was $813.9 million in 2014 compared to $612.8 million in 2013. Current year
drilling, completion and tie-in costs were focused on new wells at Musreau, Resthaven and Smoky in the
Kaybob COU and at Karr-Gold Creek in the Grande Prairie COU. The Company also drilled and
completed wells in the Southern COU, including at Willesden Green and at Birch in the Northern COU.
Facilities and gathering expenditures were focused on the new and expanded deep cut facilities at
Musreau and Smoky and expansions to liquid handling facilities and gathering systems in the Deep
Basin.
Strategic investments capital expenditures for 2014 included $38.5 million related to the Company’s
exploratory shale gas drilling activities at Dunedin in northeast British Columbia, $20.0 million related to
Cavalier’s acquisition of approximately 23 net sections of undeveloped land at Hoole and $23.5 million
related to the two new triple-sized, built-for-purpose walking rigs being constructed by Fox Drilling.
Wells drilled were as follows:
2014
2013
Natural gas
Oil
Oil sands evaluation
Total
(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.
Net (2)
55
3
–
58
Gross (1)
44
3
6
53
Gross (1)
61
5
–
66
Net (2)
35
2
6
43
Kaybob COU Major Projects
The Musreau Deep Cut Facility was brought on-line in August 2014. Prior to the start-up of the new
facility, Kaybob COU production was constrained by available owned and contracted natural gas
processing capacity. Sale volumes subsequently increased as behind pipe wells were brought on
production.
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 37
Paramount also completed the construction of an amine processing train (the "Amine Train") at the
Musreau Complex in the fourth quarter of 2014 to treat sour production at the facility instead of at well
sites.
The Company currently has condensate stabilization capacity of approximately 8,500 Bbl/d at the
Musreau Deep Cut Facility site, which will increase to approximately 23,500 Bbl/d when Paramount
starts-up its 15,000 Bbl/d Stabilizer Expansion. Mechanical construction is nearing completion and the
additional capacity is scheduled to be on-stream in the second quarter of 2015. Paramount will continue
to have the ability to truck production in excess of this increased capacity to other Company and third-
party facilities for processing.
Paramount is a part-owner of a third-party operated natural gas processing plant at Smoky in Kaybob.
The Company has increased its working interest in the facility to 20 percent and participated in an
expansion, which increased capacity to 200 MMcf/d (40 MMcf/d net) and added deep cut processing. The
expanded facility was operational in September 2014.
To continue the development of Paramount’s liquids-rich Montney lands in the Deep Basin, the Company
sanctioned the construction of two new wholly-owned 100 MMcf/d refrigeration plants in the summer of
2014. The plants will incorporate oversized condensate stabilization, amine processing and infrastructure
components to allow for future expansions.
Front-end engineering and design for the new facilities is ongoing and the Company received regulatory
approval for the 6-18 plant in the first quarter of 2015. The ordering of long-lead time items for the first
new plant has been temporarily deferred until the summer of 2015. Paramount expects the first plant
would be on-stream approximately 18 to 22 months following the placement of long-lead-time orders at a
cost of approximately $150 million. The second new plant is expected to commence operations 9 to 12
months after the first.
To ensure access to downstream transportation and fractionation, Paramount has secured incremental
long-term firm-service capacity for the transportation of incremental natural gas, NGLs and condensate,
as well as C3+ fractionation capacity at Fort Saskatchewan.
Kaybob Multi-Well Pads
Drilling and completion activities in 2014 focused on two 10-well Montney pads and one 5-well Montney
pad, all of which are located in the northern portion of the Company’s Musreau area lands. Both 10-well
pads were completed before the end of 2014. Drilling of the 5-well 08-03 pad has been finished and the
wells are scheduled to be completed later in 2015.
Paramount’s two walking drilling rigs are currently finishing drilling operations on two six-well Montney
pads located to the northeast of the Musreau Deep Cut Facility, where the Company is continuing to
target high-condensate yields.
2015 CAPITAL BUDGET
Paramount’s 2015 capital budget totals $400 million, focused on the Company’s Deep Basin development
and maintaining the optionality of future growth initiatives. The Company is continuing its planning and
detailed engineering work for the construction of new natural gas processing facilities in the Deep Basin.
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 38 2015 CAPITAL BUDGET DETAILS
($ millions)
Kaybob – Musreau
220 • Pad drilling program to continue in 2015, with some completions deferred until
late 2015 or H1 2016
• Complete condensate Stabilizer Expansion
Grande Prairie – Karr Gold-Creek
65 • Montney drilling and completions
• Expand Karr compression capacity from 40 MMcf/d to 80 MMcf/d
Southern - Willesden Green
Northern - Birch
35 • Duvernay exploratory drilling and completions
35 • Montney drilling program and facilities construction
Principal Properties Capital
355
Strategic Investments
Total Capital Budget
45 • Shale gas drilling and completion of the new drilling rigs
400
The Company expects to fund its 2015 capital program with increasing funds flow from operations and
available capacity under its bank credit facility. The Company’s capital plan remains flexible and activity
levels may be adjusted depending on commodity prices and other factors.
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.
As at December 31
Adjusted working capital deficit (1)
Demand facilities
Credit facility
Senior Notes (2)
Net debt (3)
Share capital
Accumulated deficit
Reserves
Total Capital
2014
183.3
81.5
397.7
820.0
1,482.5
1,603.4
(296.3)
46.2
2,835.8
2013 % Change
151.8
75.6
71.8
820.0
1,119.2
1,169.2
(224.6)
87.6
2,151.4
21
8
454
-
32
37
(32)
(47)
32
(1)
(2)
(3)
Adjusted working capital excludes accounts payable and accrued liabilities relating to the Company’s obligation to renounce qualifying expenditures for flow-through
share issuances (December 31, 2014 – $3.3 million, December 31, 2013 – $9.5 million), risk management assets and liabilities and demand facilities.
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 notices of objection.
Paramount had an adjusted working capital deficit at December 31, 2014 of $183.3 million compared to a
deficit of $151.8 million at December 31, 2013. The adjusted working capital deficit at December 31, 2014
included $18.3 million of cash and cash equivalents, $57.0 million of accounts receivable and $263.5
million of accounts payable and accrued liabilities. The change in adjusted working capital is primarily due
to capital spending related to the Company’s 2014 capital program, partially offset by proceeds from
drawings on credit facilities, the July 2014 equity issuances, funds flow from operations and proceeds
from the sale of non-core properties and investments.
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 39
Paramount raised approximately $465 million in aggregate net cash proceeds in 2014 through financing
transactions, the sale of interests in oil and gas properties and the sale of investments. These
transactions included the public offering and private placement of 5.6 million Common Shares, of which
1.0 million Common Shares were issued on a "flow-through basis". Net proceeds from the offering of
Common Shares have been, and will be, applied to Paramount’s exploration and development activities,
which are primarily focused on the Company’s Deep Basin lands, including drilling and completing wells,
facilities and gathering expenditures, and for general corporate purposes. The gross proceeds from the
offering of flow-through shares have been, and will be used by Paramount to incur eligible Canadian
exploration expenses ("CEE"). The net proceeds from the offerings were initially used to temporarily
reduce indebtedness under the Company’s bank credit facility.
Paramount raised approximately $420 million in aggregate net 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 to further the development and exploration of Paramount’s properties,
including drilling and completion work on properties within the Kaybob, Grande Prairie, northeast British
Columbia areas, and the construction and expansion of the Company’s Kaybob natural gas processing
and associated facilities. Paramount incurred sufficient qualifying expenditures to satisfy commitments
associated with the flow-through Common Shares issued in 2013.
Paramount expects to fund its 2015 operations, obligations and capital expenditures with funds flow from
operations and available capacity under its bank credit facility. As production continues to increase in
2015, funds flow from operations is expected to increase as a result of higher sales volumes and
netbacks.
Demand Facilities
Fox Drilling Facility
The Fox Drilling Facility is divided into two tranches. The first tranche ("Fox Tranche A") is a non-
revolving demand loan with a principal amount of $45.8 million outstanding at December 31, 2014.
Scheduled principal payments under Fox Tranche A are $8.2 million in each of 2015, 2016 and 2017, with
the remaining balance payable in 2018.
The second tranche ("Fox Tranche B") is a non-revolving demand loan with a credit limit of $27.0 million
that is available to be drawn to fund the construction of two new drilling rigs. At December 31, 2014, $5.1
million was drawn under Fox Tranche B. Once construction of the new drilling rigs is completed in 2015,
scheduled quarterly principal repayments of Fox Tranche B will commence over a five year term.
Recourse and security for the Fox Drilling Facility is limited to Fox Drilling’s rigs, including new drilling rigs
being constructed, and drilling contracts with Paramount. Interest is payable at the bank's prime lending
rate or bankers’ acceptance rate, as selected at the discretion of the Company, plus an applicable
margin.
Cavalier Facility
Cavalier 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
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 40 rates, or bankers’ acceptances rates, as selected at Cavalier’s discretion, plus an applicable margin. The
Cavalier Facility is non-recourse to Paramount and is secured by all of the assets of Cavalier, including oil
sands and carbonate bitumen lands. At December 31, 2014, $30.6 million was drawn on the Cavalier
Facility.
Bank Credit Facility
Paramount’s bank credit facility (the "Facility") was increased in 2014 from $600 million to $900 million,
which is available in two tranches. The first tranche ("Tranche A") has a credit limit and lender
commitments of $800 million and is available on a revolving basis to November 30, 2015. 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, 2015 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 Fox Drilling Facility 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 the Company, 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.
At December 31, 2014, $397.7 million was drawn on Tranche A and Tranche B was undrawn. Paramount
had undrawn letters of credit outstanding at December 31, 2014 totaling $55.2 million that reduce the
amount available to the Company.
Senior Notes
Paramount has $820 million of senior unsecured notes ("Senior Notes") outstanding, consisting of $370
million principal amount due December 13, 2017 (the "2017 Senior Notes") and $450 million principal
amount due December 4, 2019 (the "2019 Senior Notes").
The 2017 Senior Notes bear interest at 8¼ percent per annum, payable semi-annually in arrears on June
13 and December 13 in each year. The 2019 Senior Notes bear interest at 7⅝ percent per annum,
payable semi-annually in arrears on June 4 and December 4 in each year.
The 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 and 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 series of Senior Notes
redeemed and date of redemption.
Paramount is not subject to financial maintenance covenants under the terms of its Facility or Senior
Notes. The Facility and senior notes agreements include certain standard restrictions on Paramount’s
ability to repurchase equity, issue or refinance debt, acquire or dispose of assets, and pay dividends.
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 41 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, 2014,
104,843,846 Common Shares were outstanding, net of 54,199 Common Shares held in trust under the
Company’s stock incentive program, and no preferred shares were outstanding.
In July 2014, Paramount issued 4.6 million Common Shares at a price of $60.00 per share and 0.9 million
Common Shares on a "flow-through" basis in respect of Canadian exploration expenses ("CEE") at a
price of $74.40 per share for aggregate gross proceeds of $343.0 million, pursuant to a public offering.
Concurrent with the public offering, Paramount issued 0.1 million Common Shares on a "flow-through"
basis in respect of CEE at a price of $74.40 per share to Paramount’s Chairman and Chief Executive
Officer for gross proceeds of $7.4 million.
The Company is committed to incur $74.4 million of CEE by December 31, 2015 in connection with the
issuance of flow-through shares in July 2014, of which $57.5 million was incurred as of December 31,
2014.
In October 2013, Paramount issued 1,360,000 shares on a "flow-through" basis in respect of CEE for
gross proceeds of $59.8 million. The Company has incurred sufficient CEE to satisfy commitments
associated with the 2013 flow through share issuance.
In May 2013, Paramount issued 4,025,000 Common Shares at a price of $37.50 per share for gross
proceeds of $150.9 million pursuant to a public offering.
At March 3, 2015, Paramount had 104,932,645 Common Shares and 7,181,250 Paramount Options
outstanding, of which 2,541,400 Paramount Options are exercisable.
QUARTERLY INFORMATION - OPERATING RESULTS
Netback
Three months ended December 31
2014
2013
Natural gas revenue
Condensate and oil revenue
Other NGLs revenue
Royalty and sulphur revenue
Petroleum and natural gas sales
Royalties
Operating expense
Transportation and NGLs processing
Netback
Financial commodity contract settlements
Netback including commodity contract settlements
(1)
Natural gas revenue shown per Mcf.
52.7
33.5
12.6
0.6
99.4
(4.7)
(22.2)
(11.5)
61.0
4.4
65.4
($/Boe) (1)
3.98
68.45
26.64
–
31.37
(1.48)
(7.02)
(3.62)
19.25
1.37
20.62
35.1
19.1
3.0
0.6
57.8
(2.8)
(18.7)
(7.0)
29.3
–
29.3
($/Boe) (1)
3.73
82.22
48.28
–
30.99
(1.50)
(10.02)
(3.77)
15.70
–
15.70
Fourth quarter 2014 petroleum and natural gas sales were $99.4 million, an increase of $41.6 million from
the fourth quarter of 2013, primarily due to higher sales volumes, partially offset by lower liquids prices.
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 42
The impact of changes in prices and sales volumes on petroleum and natural gas sales are as follows:
Three months ended December 31, 2013
Effect of changes in prices
Effect of changes in sales volumes
Three months ended December 31, 2014
Natural gas
35.1
3.4
14.2
52.7
Condensate
and oil
19.1
(6.7)
21.1
33.5
Other
NGLs
3.0
(10.2)
19.8
12.6
Royalty and
sulphur
0.6
–
–
0.6
Total
57.8
(13.5)
55.1
99.4
Sales Volumes
Natural Gas
(MMcf/d)
2014
103.7
34.8
2.7
2.7
143.9
2013 % Change
67.2
21.6
9.4
4.3
102.5
54
61
(71)
(37)
40
Kaybob
Grande Prairie
Southern
Northern
Total
Three months ended December 31
Condensate and Oil
(Bbl/d)
2013 % Change
1,283
968
208
71
2,530
175
69
(28)
(93)
110
2014
3,529
1,637
149
5
5,320
Other NGLs
(Bbl/d)
2013 % Change
256
243
174
1
674
1,563
198
(19)
(100)
660
2014
4,257
725
141
–
5,123
Total
(Boe/d)
2013 % Change
12,736
4,816
1,956
782
20,290
97
69
(62)
(41)
70
2014
25,062
8,157
748
463
34,430
Paramount’s fourth quarter sales volumes averaged 34,430 Boe/d in 2014, a 70 percent increase
compared to the fourth quarter of 2013.
Natural gas sales volumes increased 41.4 MMcf/d or 40 percent to 143.9 MMcf/d in 2014 compared to
102.5 MMcf/d in 2013. The increase was primarily due to new well production following the start-up of the
Musreau Deep Cut Facility in the Kaybob COU and new well production at Karr-Gold Creek in the Grande
Prairie COU. These increases were partially offset by lower sales volume in the Southern COU as a result
of property dispositions in the first quarter of 2014.
Condensate and oil sales volumes increased 110 percent to 5,320 Bbl/d in 2014 compared to 2,530 Bbl/d
in the same period in 2013, primarily related to new production from Montney formation wells at Musreau
in the Kaybob COU and at Karr-Gold Creek in the Grande Prairie COU.
Other NGLs sales volumes increased 660 percent to 5,123 Bbl/d in 2014 compared to 674 Bbl/d in the
same period in 2013 as a result of increased production and higher liquids recoveries at Musreau
following the start-up of the Musreau Deep Cut Facility and higher production at Karr-Gold Creek in the
Grande Prairie COU.
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 43
Commodity Prices
Key monthly average commodity price benchmarks and foreign exchange rates are as follows:
2013
Change %
Three months ended December 31
Natural Gas
Paramount realized price (CDN$/Mcf)
AECO daily spot (CDN$/GJ)
AECO monthly index (CDN$/GJ)
Malin (US$/MMbtu)
Crude Oil
Paramount average condensate and oil price (CDN$/Bbl)
Edmonton Light Sweet (CDN$/Bbl)
West Texas Intermediate (US$/Bbl)
2014
3.98
3.41
3.80
3.97
68.45
75.11
73.15
3.73
3.52
2.99
3.60
82.22
86.52
97.46
Foreign Exchange
$CDN / 1 $US
1.14
1.05
7
(3)
27
10
(17)
(13)
(25)
9
Royalties increased $1.9 million to $4.7 million in the fourth quarter of 2014 compared to $2.8 million in
the same period in 2013, primarily due to higher current year revenues.
Operating expense increased $3.5 million to $22.2 million in the fourth quarter of 2014 compared to $18.7
million in the same period in 2013, primarily due to higher operating costs associated with the start-up of
the new facilities and higher production in the Kaybob and Grande Prairie COUs. These increases were
partially offset by the impact of higher processing income and property dispositions in the Southern COU.
Paramount’s operating expense per Boe decreased 30 percent to $7.02 in the fourth quarter of 2014
compared to $10.02 in the same period of 2013, as lower-cost Musreau area volumes have become a
greater proportion of the Company’s overall production. Operating expenses within the Kaybob COU, net
of processing income, averaged $3.85 per Boe in the fourth quarter of 2014.
Transportation and NGLs processing expense increased $4.5 million to $11.5 million in the fourth quarter
of 2014 compared to $7.0 million in the same period in 2013, primarily due to higher pipeline tolls related
to higher production volumes, increased firm-service transportation costs related to incremental capacity
contracted for the Musreau Deep Cut Facility and higher Other NGLs fractionation fees.
Net Income (Loss)
Three months ended December 31
Principal Properties
Strategic Investments
Corporate
Income tax recovery
Net income (loss)
2014
(50.5)
(47.3)
(29.4)
20.7
(106.5)
2013
6.1
12.9
(21.8)
3.1
0.3
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 44
Three months ended December 31
Netback
Gain (loss) on financial commodity contracts
General and administrative
Stock-based compensation
Depletion, depreciation and impairment
Exploration and evaluation
Gain on sale of property, plant and equipment
Interest and financing
Other expenses
Income (loss) from equity-accounted investments
Write-down of investment in securities
Other income
Income tax recovery
Net income (loss)
2014
61.0
3.7
(5.2)
(6.9)
(108.5)
(12.0)
0.1
(21.5)
(1.7)
(23.3)
(13.7)
0.8
20.7
(106.5)
2013
29.3
(0.4)
(4.6)
(8.8)
(26.3)
(6.6)
6.2
(13.2)
(2.0)
19.3
(3.6)
7.9
3.1
0.3
Paramount recorded a net loss of $106.5 million for the three months ended December 31, 2014
compared to net income of $0.3 million in the same period of 2013. Significant factors contributing to the
change are shown below:
Three months ended December 31
Net income – 2013
• Higher netback primarily due to higher sales volumes, partially offset by lower liquids prices
• Higher income tax recovery
• Higher depletion and depreciation, and higher impairment write-downs of petroleum and natural gas
•
properties in 2014
Loss from equity-accounted investments in 2014 compared to income in 2013, mainly due to a $25.1
million dilution gain recorded in respect of Trilogy in 2013
• Higher write-down of investments in securities
• Higher interest and financing expense due to increased debt
•
• Other
Net loss – 2014
Lower other income
Funds Flow from Operations (1)
0.3
31.7
17.6
(82.2)
(42.6)
(10.1)
(8.3)
(7.1)
(5.8)
(106.5)
The following is a reconciliation of funds flow from operations to the nearest GAAP measure:
Three months ended December 31
Cash from (used in) operating activities
Change in non-cash working capital
Geological and geophysical expenses
Asset retirement obligations settled
Funds flow from operations
Funds flow from operations ($/Boe)
(1)
Refer to the advisories concerning non-GAAP measures in the Advisories section of this document.
2014
34.2
0.2
6.3
0.9
41.6
13.14
2013
(6.3)
22.2
1.3
1.1
18.3
9.79
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 45
Funds flow from operations in the fourth quarter of 2014 was $41.6 million, an increase of 127 percent
compared to the same period in 2013. Significant factors contributing to the change are shown below:
Three months ended December 31
Funds flow from operations – 2013
• Higher netback primarily due to higher sales volumes, partially offset by lower liquids prices
• Receipts from financial commodity contract settlements in 2014
• Higher interest and financing expense due to increased debt
• Lower other income
• Other
Funds flow from operations – 2014
18.3
31.7
4.4
(8.3)
(3.5)
(1.0)
41.6
QUARTERLY INFORMATION
Petroleum and natural gas sales – CO
Petroleum and natural gas sales – DO
Petroleum and natural gas sales
Funds flow from operations – CO
Funds flow from operations – DO
Funds flow from operations
Per share – basic and diluted ($/share)
Income (loss) – CO
Per share – basic and diluted ($/share)
Net income (loss)
Per share – basic and diluted ($/share)
Sales volumes
Natural gas (MMcf/d)
Condensate and oil (Bbl/d)
Other NGLs (Bbl/d)
Total Continuing (Boe/d)
Discontinued (Boe/d)
Total (Boe/d)
Average realized price
Natural gas ($/Mcf)
Condensate and oil ($/Bbl)
Other NGLs ($/Bbl)
Continuing ($/Boe)
Discontinued ($/Boe)
Total ($/Boe)
2014
2013
Q4
99.4
─
99.4
41.6
─
41.6
0.40
(106.5)
(1.02)
(106.5)
(1.02)
143.9
5,320
5,123
34,430
─
34,430
3.98
68.45
26.64
31.37
─
31.37
Q3
84.4
─
84.4
36.4
─
36.4
0.35
(9.4)
(0.09)
(9.4)
(0.09)
93.6
4,690
1,643
21,936
─
21,936
4.43
92.66
32.87
41.80
─
41.80
Q2
80.0
─
80.0
29.5
─
29.5
0.30
53.1
0.54
53.1
0.54
99.4
3,212
810
20,585
─
20,585
4.96
106.38
43.78
42.72
─
42.72
Q1
86.2
─
86.2
33.5
─
33.5
0.34
(8.9)
(0.09)
(8.9)
(0.09)
Q4
57.8
─
57.8
18.3
─
18.3
0.19
0.3
─
0.3
─
104.7
2,686
893
21,028
─
21,028
102.5
2,530
674
20,290
─
20,290
6.04
99.55
54.50
45.56
─
45.56
3.73
82.22
48.28
30.99
─
30.99
Q3
53.9
─
53.9
13.4
─
13.4
0.14
(37.6)
(0.39)
(37.6)
(0.39)
100.9
2,231
960
20,022
─
20,022
3.10
102.96
36.95
29.27
─
29.27
Q2
59.5
─
59.5
22.3
─
22.3
0.24
(22.1)
(0.24)
(22.1)
(0.24)
107.6
1,946
902
20,790
─
20,790
3.97
95.96
31.16
31.41
─
31.41
Q1
59.5
1.8
61.3
17.9
(1.3)
16.6
0.18
(27.7)
(0.31)
0.3
─
110.8
2,402
1,113
21,985
606
22,591
3.48
95.92
34.92
30.08
32.95
30.16
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 46
Significant Items Impacting Quarterly Results
Quarterly earnings variances include the impacts of changing production volumes and market prices:
• Fourth quarter 2014 earnings include $108.5 million of depletion, depreciation and impairment write-
downs of petroleum and natural gas properties and a $23.3 million loss from equity-accounted
investments, partially offset by income tax recovery of $20.7 million.
In the third quarter of 2014, the Musreau Deep Cut Facility was brought on-line and the Company
began to ramp-up production, which increased petroleum and natural gas sales and funds flow from
operations.
•
• Second quarter 2014 earnings include $79.0 million in aggregate gains on the sale of petroleum and
natural gas properties and $14.2 million of income from equity-accounted investments, partially offset
by income tax expense of $14.6 million.
• First quarter 2014 earnings include $17.6 million in aggregate gains on the sale of petroleum and
natural gas properties.
• 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.
• 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.
OTHER INFORMATION
Related Party Transactions
Paramount engages in transactions with Trilogy in the normal course of business, including joint
operations. Paramount is considered related to Trilogy because of common significant influence. All
transactions between Paramount and the entities are recorded at their exchange amounts.
During 2014, Paramount charged $0.6 million (2013 – $0.4 million) to Trilogy in respect of operational and
administrative services. Paramount charged $0.6 million (2013 – $3.0 million) to Trilogy and was charged
$1.6 million (2013 – $0.8 million) by Trilogy in respect of joint operations. Also, Paramount received $7.4
million (2013 – $8.0 million) in dividends from Trilogy. In December 2014, Trilogy discontinued the
payment of dividends. As of December 31, 2014, Paramount had a net payable balance due to Trilogy of
$0.3 million (2013 – net receivable of $0.3 million).
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 47
Contractual Obligations
Paramount had the following contractual obligations at December 31, 2014:
Cavalier Facility (1)
Bank Credit Facility (2)
Drilling Rig Facilities (2)
Senior notes (2)
Transportation and processing commitments (3)
Asset retirement obligations
Capital spending commitments and other (4)
Operating leases
2015
31
19
11
65
82
5
19
10
242
2016-2017
─
417
21
498
237
5
4
15
1,197
2018-2019
After 2019
Total
─
─
24
516
253
41
─
5
839
─
─
2
─
742
236
─
5
985
31
436
58
1,079
1,314
287
23
35
3,263
(1)
(2)
(3)
(4)
Excluding interest.
Including interest.
Certain transportation and processing commitments are secured by outstanding letters of credit totaling $41.2 million at December 31, 2014 (2013 - $32.3 million).
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 liquids and downstream processing of Other 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, 2014 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 because of 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. 2014 Management’s Discussion & Analysis 48
CHANGE IN ACCOUNTING POLICIES
Changes in Accounting Standards
Effective January 1, 2014, the Company adopted IFRIC 21 – Levies and amendments to IAS 32 –
Financial Instruments: Presentation that clarified the application of offsetting rules. There has been no
impact on the recognized assets, liabilities, or comprehensive income of the Company on the adoption of
these standards.
Future Changes in Accounting Standards
In May 2014, the International Accounting Standards Board ("IASB") issued IFRS 15 – Revenue From
Contracts With Customers, which establishes a single revenue recognition framework that applies to
contracts with customers. The standard requires an entity to recognize revenue to reflect the transfer of
goods and services for the amount it expects to receive, when control is transferred to the purchaser.
IFRS 15 is effective for years beginning on or after January 1, 2017. The Company has not yet
determined the impact of the IFRS on the Company’s consolidated financial statements.
In July 2014, the IASB issued IFRS 9 – Financial Instruments, which 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. IFRS 9 is effective for years
beginning on or after January 1, 2018. The Company has not yet determined the impact of the IFRS on
the Company’s consolidated financial statements.
DISCLOSURE CONTROLS AND PROCEDURES
As of the year ended December 31, 2014, an evaluation of the effectiveness of Paramount’s disclosure
controls and procedures, as defined by the rules of the Canadian Securities Administrators, was
performed by the Company’s management with the oversight of the chief executive officer and chief
financial officer. Based upon that evaluation, the Company’s chief executive officer and chief financial
officer have concluded that as of the end of that fiscal year, the Company’s disclosure controls and
procedures are effective in ensuring that information required to be disclosed by the Company is (i)
recorded, processed, summarized and reported within the time periods specified in Canadian securities
law and (ii) accumulated and communicated to the Company’s management, including its chief executive
officer and chief financial officer as appropriate, to allow timely decisions regarding required disclosure.
It should be noted that while the Company’s chief executive officer and chief financial officer believe that
the Company’s disclosure controls and procedures provide a reasonable level of assurance that they are
effective, they do not expect that the Company’s disclosure controls and procedures or internal control
over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived
or operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over the
Company’s financial reporting. The Company’s internal control system was designed to provide
reasonable assurance that all transactions are accurately recorded, that transactions are recorded as
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 49 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, 2014. In making its assessment, management used the Committee of Sponsoring
Organizations of the Treadway Commission Framework in Internal Control – Integrated Framework
(2013) 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, 2014.
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 year ended December 31, 2014, 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 description of the accounting estimates that
are considered significant follows:
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. Previous estimates 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, 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, expected quantities of resources, expected
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 50 production techniques, drilling results and estimated capital expenditures and production costs 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 Non-Financial Assets
The recoverability of the carrying value of oil and gas properties is generally 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 cash
flows. 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 generally 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.
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.
Estimates of recoverable amounts used in impairment tests often incorporate level three hierarchy inputs
including estimated volumes and future net cash flows from oil and natural gas reserves, contingent
resource estimates and internal and external market metrics used to estimate value based comparable
transactions and assets. By their nature, such estimates are subject to measurement uncertainty and
changes in such estimates based on new information could have a material impact on earnings.
The significant decline in the market prices of crude oil and natural gas were potential indicators of
impairment at December 31, 2014. As a result, recoverable amounts were estimated for each CGU and
an adjustment to the carrying value of the Southern CGU was recorded. Cash flows for the Southern
COU were projected over the expected remaining productive life of proved and probable reserves, at an
after-tax discount rate of 10 percent at December 31, 2014.
Reserves Estimates
Reserve engineering is an inherently complex and subjective process of estimating underground
accumulations of petroleum and natural gas resources. 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,
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 51 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.
Investments in Securities
The Company’s investments in securities that are accounted for as available-for-sale financial instruments
are assessed at the end of each reporting period to determine whether there is any objective evidence of
impairment. Management is required to exercise judgment to determine whether a decrease in the fair
value of an investment is significant or prolonged, which would require an impairment charge to be
recognized.
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. 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.
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 require
management to exercise judgment in determining which assumptions are the most appropriate.
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 52 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
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, 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.
Deferred income tax assets are recognized to the extent future realization is probable. 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 (including the liquids component thereof and expected
first month production volumes from the Company's inventory of behind-pipe wells);
forecast capital expenditures;
exploration, development, and associated operational plans and strategies (including planned
drilling and completion programs, well tie-ins and potential facilities expansions and additions),
and the anticipated timing of and sources of funding for such activities;
anticipated increases in netbacks and funds flow from operations and decreases in per unit
operating costs;
the further strengthening of the Company's financial coverage ratios that is expected to occur in
2015;
projected timelines for, and the estimated costs of, constructing and starting-up new and
expanded natural gas processing and associated facilities (and the Company's projected Deep
Basin processing and condensate stabilization capacities following the completion of these
facilities);
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 53 projected increases in the Company's working interest share of production processed in the
Musreau Deep Cut Facility;
the projected availability of third party processing, transportation, de-ethanization, fractionation
and other capacity;
Paramount's expected ability to continue to truck condensate volumes in excess of its condensate
stabilization capacity;
projected timelines for, and the estimated costs of, constructing and commissioning new drilling
rigs;
estimated reserves and resources and the discounted present value of future net revenues
therefrom;
anticipated increases in Montney resource recoveries under new well spacing regulations, and the
estimated well densities per section that will be required to optimize the recovery of these
resources;
the projected outcome of legal claims; and
business strategies and objectives.
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 natural gas, condensate, Other NGLs, oil and bitumen 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, de-ethanization,
fractionation, and storage capacity on acceptable terms;
the ability of Paramount to market its natural gas, condensate, Other NGLs, oil and bitumen
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, liquids yields and resource recoveries) 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 natural gas, condensate, Other NGLs, oil and bitumen prices;
changes in foreign currency exchange rates and interest rates;
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 54
the uncertainty of estimates and projections relating to future revenue, future production, reserve
additions, liquids yields (including condensate to natural gas ratios), resource recoveries, royalty
rates, taxes and costs and expenses;
the ability to secure adequate product processing, transportation, de-ethanization, fractionation,
and storage capacity on acceptable terms;
operational risks in exploring for, developing and producing natural gas, condensate, Other NGLs,
oil and bitumen;
the ability to obtain equipment, services, supplies and personnel in a timely manner and at an
acceptable cost;
potential disruptions, delays 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 geology of oil and gas deposits;
the uncertainty of reserves and resources estimates;
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, de-ethanization, fractionation 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 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 Capital Expenditures", "Principal Properties Capital", "Investments in other entities –
market value" and "Cash Proceeds From Divestitures" 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 and
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 55 transportation and NGLs processing 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
consist of the Company’s spending on drilling and infrastructure projects, land and property acquisitions,
capitalized interest and geological and geophysical costs incurred. The closest GAAP measure to
exploration and development expenditures is property, plant and equipment and exploration cash flows
under investing activities in the Company’s Consolidated Statement of Cash Flows, which includes all of
the items included in exploration and development expenditures, except for $12.5 million of geological
and geophysical costs which are expensed as incurred. Principal Properties Capital includes capital
expenditures and geological and geophysical costs related to the Company’s Principal Properties, refer
the Exploration and Capital Expenditures section of the Company’s Management Discussion and
Analysis. The Principal Properties Capital measure provides management and investors with information
regarding the Company’s Principal Properties 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, Marquee, SOG 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.
Cash Proceeds from Divestitures represents cash proceeds received by the Company on dispositions
of oil and gas properties and excludes any non-cash consideration received. This measure is equivalent
to Proceeds on Sale of Property, Plant and Equipment in the Company’s Consolidated Statement of
Cashflows.
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
Abbreviations
Liquids
Bbl
Bbl/d
MMBbl
Other NGLs Ethane, propane and butane
Condensate Pentane and heavier hydrocarbons
Barrels
Barrels per day
Millions of Barrels
Oil Equivalent
Boe
Boe/d
MMBoe
Boe/d
Barrels of oil equivalent
Barrels of oil equivalent per day
Millions of barrels of oil equivalent
Barrels of oil equivalent per day
Natural Gas
Mcf
MMcf
MMcf/d
Bcf
GJ
MMbtu
Thousands of cubic feet
Millions of cubic feet
Millions of cubic feet per day
Billions of cubic feet
Gigajoule
Millions of British thermal units
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 56
Measures
This document contains disclosures expressed as "MMBoe", "MBoe", "Boe" and "Boe/d". All oil and
natural gas equivalency volumes have been derived using the ratio of six thousand cubic feet of natural
gas to one barrel of oil. Equivalency measures may be misleading, particularly if used in isolation. A
conversion ratio of six thousand cubic feet of natural gas to one barrel of oil is based on an energy
equivalency conversion method primarily applicable at the burner tip and does not represent a value
equivalency at the well head. The term "liquids" is used to represent oil, condensate and Other NGLs.
The term "Other NGLs" means ethane, propane and butane.
During 2014, the value ratio between condensate and oil and natural gas was approximately 18:1. 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.
Test rates for the wells fracked on the Company’s 3-20 ten-well pad averaged 10.8 MMcf/d of natural gas
per well, and are the average of production test rates over the final period of post clean-up flow-back at
the largest choke setting, with durations of between 5 and 53 hours. Flow-back casing pressures for the
tests ranged between approximately 2,200 psi and 3,000 psi. Test rates for the wells fracked on the
Company’s 8-22 ten-well pad averaged 13.0 MMcf/d of natural gas per well, and are the average of
production test rates over the final period of post clean-up flow-back at the largest choke setting, with
durations of between 4 and 30 hours. Flow-back casing pressures for the tests ranged between
approximately 2,000 psi and 2,900 psi.
All 20 of the wells on these two ten-well pads were stimulated using frack oil and substantially all fluids
recovered during the test periods were load fluids. As a result, fluid volumes recovered during the tests
have not been disclosed. Pressure transient analyses and well-test interpretations have not been carried
out for these wells and as such, data should be considered to be preliminary until such analysis or
interpretation has been done. Test results are not necessarily indicative of long-term performance or of
ultimate recovery.
Wellhead condensate-gas ratios ("CGRs") disclosed in this document were calculated for each well for
the period commencing on the date load oil volumes were completely recovered for such well and ending
on February 28, 2015 (the "Post-load Recovery Period"). CGRs were calculated for each well over its
applicable Post-load Recovery Period by dividing total raw liquids volumes produced by total raw natural
gas volumes produced during such period. Raw volumes as measured at the wellhead. Sales volumes
are lower due to shrinkage.
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 & discoveries and technical revisions, after production and dispositions, included in the
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 57 reserves reconciliation table. The reserves replacement disclosure herein was calculated as the net
increase in proved and P+P reserves estimates from extensions and discoveries, technical revisions and
economic factors divided by the Company’s total production in the period.
Behind-pipe wells includes new wells that have been rig-released but have not been placed on
production, including wells that have not been completed, wells that have been completed but not yet
tied-in and wells that have been completed and tied-in.
Potential Sales Volumes
"Potential Sales Volumes" means the potential volumes of saleable natural gas and NGLs (expressed on
a combined basis in Boe/d) that could result from processing the associated quantities of raw natural gas
set out in the "Net Paramount Raw Gas Capacity" column. These potential sales volumes should not be
construed as a projection of Paramount's Deep Basin area production at or by any particular date, as they
will include some unavoidably commingled third-party production, and are subject to a number of factors
and contingencies including the following: (a) production volumes sufficient to fill Paramount's capacity
will not be available in all periods and under certain conditions; (b) during maintenance periods and at
other times, the facilities will not operate at design capacity; and (c) NGLs sales volumes will vary
depending on the liquids content of individual wells and the manner in which the facilities are operated.
The potential sales volumes for each facility have been estimated assuming that natural gas processing
and condensate stabilization capacity is fully utilized.
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, 2014 (the "Cavalier Evaluation"). Specifically, this document
includes McDaniel’s assessment as of December 31, 2014 of Cavalier’s probable undeveloped 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 undeveloped 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). "Undeveloped reserves" are those
reserves expected to be recovered from known accumulations where a significant expenditure is required
to render them capable of production. They must fully meet the requirements of the reserves classification
(proved, probable) to which they are assigned.
"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.
Paramount Resources Ltd. 2014 Management’s Discussion & Analysis 58 At Hoole, a portion of Cavalier’s economic contingent resources were re-classified by McDaniel as
probable undeveloped 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 undeveloped 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
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
resources 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, 2015 and forecast costs as of December 31, 2014. 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. 2014 Management’s Discussion & Analysis 59 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 Company’s Board of Directors. The
Consolidated Financial Statements have been prepared in accordance with International Financial
Reporting Standards as issued by the International Accounting Standards Board and include certain
estimates that reflect Management’s best judgments. If alternate accounting methods exist, Management
has chosen those policies it considers the most appropriate in the circumstances. Financial information
contained throughout the Company’s annual report, including Management’s Discussion and Analysis, 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 transactions are accurately recorded, that all necessary transactions are
recorded to permit the preparation and presentation 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, which is comprised entirely of non-Management directors. 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. 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.
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 Board of Directors, the Audit
Committee and Management.
/s/ Clayton H. Riddell
Clayton H. Riddell
Chief Executive Officer
March 5, 2015
/s/ Bernard K. Lee
Bernard K. Lee
Chief Financial Officer
Paramount Resources Ltd. 2014 Financial Statements 60
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 31 December, 2014 and 2013, 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 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 auditor’s 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 auditor considers 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 31 December, 2014 and 2013 and of its financial
performance and its cash flows for the years then ended in accordance with International Financial
Reporting Standards.
Calgary, Canada
March 5, 2015
Chartered Accountants
Paramount Resources Ltd. 2014 Financial Statements 61
CONSOLIDATED BALANCE SHEET
($ thousands)
As at December 31
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable
Prepaid expenses and other
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
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 of Directors
/s/ J.H.T. Riddell
J.H.T. Riddell, Director
March 5, 2015
Note
2014
2013
20
19
18
7
8
9
10
18
5,11
12
19
19
13
14
23
15
16
18,320
57,040
4,883
80,243
20,643
567,420
2,168,565
82,444
102,894
152,487
24,733
3,199,429
81,530
266,847
–
348,377
1,210,355
287,415
1,846,147
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
1,603,436
(296,326)
46,172
1,353,282
3,199,429
1,169,178
(224,612)
87,678
1,032,244
2,447,803
/s/ J.C. Gorman
J.C. Gorman, Director
Paramount Resources Ltd. 2014 Financial Statements 62
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
($ thousands, except as noted)
Year ended December 31
Note
2014
2013
Petroleum and natural gas sales
Royalties
Revenue
Gain (loss) on financial commodity contracts
Expenses
Operating expense
Transportation and NGLs processing
General and administrative
Stock-based compensation
Depletion and depreciation
Exploration and evaluation
Gain on sale of property, plant and equipment
Interest and financing
Accretion of asset retirement obligations
Foreign exchange
Income (loss) from equity-accounted investments
Write-down of investments in securities
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
Items that may be reclassified to net income or loss
Change in market value of securities
Exchange differences on translation of US subsidiaries
Comprehensive loss
Net income (loss) per common share ($/share)
Basic and diluted – continuing operations
Basic and diluted – discontinued operations
Basic and diluted
See the accompanying notes to these Consolidated Financial Statements.
19
17
8
7
14
9
10
4
18
6
16
15
349,995
(17,542)
332,453
2,852
335,305
71,279
35,896
23,877
25,373
229,819
30,007
(95,691)
70,599
5,936
568
397,663
(3,399)
(15,645)
6,686
(74,716)
(45)
(2,957)
(3,002)
(71,714)
–
(71,714)
(42,475)
–
(42,475)
(114,189)
(0.71)
–
(0.71)
230,722
(10,814)
219,908
(3,972)
215,936
68,615
23,782
19,481
25,851
152,935
35,537
(32,688)
52,639
3,099
528
349,779
21,378
(3,628)
10,385
(105,708)
4,983
(23,576)
(18,593)
(87,115)
28,030
(59,085)
3,908
393
4,301
(54,784)
(0.93)
0.30
(0.63)
Paramount Resources Ltd. 2014 Financial Statements 63
CONSOLIDATED STATEMENT OF CASH FLOWS
($ thousands)
Year ended December 31
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 facilities
Net draw 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
Cash of MGM Energy Corp. on acquisition
Proceeds on sale of investment, net
Investments in securities
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.
Note
2014
2013
(71,714)
(59,085)
192,829
7,371
(4,576)
–
(5,406)
118,504
5,980
325,847
–
355,392
(4,617)
682,602
(941,470)
99,957
–
3,200
10,179
(5,000)
39,549
(793,585)
7,521
96
10,703
18,320
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
20
14
12
13
13
5
20
Paramount Resources Ltd. 2014 Financial Statements 64
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
($ thousands, except as noted)
Year ended December 31
Share Capital
Balance, beginning of year
2014
Shares
(000’s)
Note
2013
Shares
(000’s)
Issued
Issued on acquisition of MGM Energy Corp.
Change in unvested common shares for stock incentive plan
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.
5
17
16
96,993
6,704
1,128
18
104,843
1,169,178
364,884
69,382
(8)
1,603,436
89,857
7,133
–
3
96,993
921,680
247,582
–
(84)
1,169,178
(224,612)
(71,714)
(296,326)
87,678
(42,475)
969
46,172
1,353,282
(165,527)
(59,085)
(224,612)
94,947
4,301
(11,570)
87,678
1,032,244
Paramount Resources Ltd. 2014 Financial Statements 65
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 into three business segments which have been
established by management to assist in resource allocation, to assess operating performance and to
achieve long-term strategic objectives: i) Principal Properties; ii) Strategic Investments; and iii) Corporate.
Paramount is the ultimate parent company of 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 Limited Partnership ("Fox Drilling") and Cavalier Energy Inc.
("Cavalier"). Paramount also holds a 15 percent equity interest in Trilogy Energy Corp. ("Trilogy"), which
is accounted for using the equity method of investment accounting along with certain other investees.
These consolidated financial statements of the Company, as at December 31, 2014 and December 31,
2013 and for the years then ended (the "Consolidated Financial Statements"), were authorized for
issuance by Paramount’s Board of Directors on March 5, 2015.
Basis of Preparation
These Consolidated Financial Statements have been prepared in accordance with International Financial
Reporting Standards ("IFRS") 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. Amounts included in these Consolidated Financial Statements are stated in thousands of
Canadian dollars, unless otherwise noted. Certain comparative figures have been reclassified to conform
with the current year’s presentation.
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.
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.
a) Revenue Recognition
Petroleum and natural gas sales revenues are recognized when title passes to third parties and the
significant risks and rewards of ownership have been transferred.
Drilling services are billed to customers on a per-day basis and revenues are recognized as services are
rendered and collectability is reasonably assured. When the Company’s drilling rigs (the "Rigs") drill on a
property owned by Paramount, the Company capitalizes its working interest share of the drilling expenses
and eliminates the associated drilling revenue.
Paramount Resources Ltd. 2014 Financial Statements 66(Tabular amounts stated in $ thousands, except as noted) b) 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.
c) Trade and Other Receivables
Accounts receivable are recorded as corresponding amounts of revenue are recognized or costs are
incurred in connection with joint operations. 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.
d) 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 determine commercial viability, 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.
The Company’s exploration and evaluation ("E&E") assets include oil sands and carbonate bitumen
properties, and shale gas lands within the Strategic Investments business segment. 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. Net cashflows from the sale of production from
shale gas exploration wells are applied against the capitalized costs of the shale gas projects to which
they relate until the overall project is deemed commercially viable.
When a project has been determined to be technically feasible and commercially viable, the E&E costs
are transferred to petroleum and natural gas assets, subject to an impairment assessment. When the
Company determines that a project is no longer viable, its carrying value is charged to earnings.
Exploratory geological and geophysical costs, pre-license costs, and annual lease rentals are expensed
as incurred.
e) 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 estimated asset retirement costs.
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 ("PP&E"), including leasehold improvements, are carried at cost net
of accumulated depreciation.
Paramount Resources Ltd. 2014 Financial Statements 67 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 40
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.
f)
Impairment of Non-Financial Assets
Carrying values of the Company’s non-financial assets 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. If the carrying value of an asset exceeds its estimated recoverable
amount, an impairment charge is recognized.
For the purpose of impairment testing, PP&E 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.
E&E assets are aggregated and tested at the operating segment level.
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 generally
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. When it is determined that there has been a
subsequent increase in the recoverable amount ascribed to an oil and gas property 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 conducts its exploration and development activities independently, as well as jointly with
others through jointly controlled assets and operations. Paramount recognizes its proportionate share of
the revenues, expenses, assets, and liabilities of joint operations. All of the Company’s interests in joint
arrangements are accounted for as joint operations. Interests in joint ventures are accounted for using the
equity method of accounting. The Company does not currently have any interests in joint ventures.
Paramount Resources Ltd. 2014 Financial Statements 68 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.
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 complete 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.
j) Capitalized 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. The present
value of an asset retirement obligation is recognized in the Consolidated Balance Sheet when incurred
and a reasonable estimate of the settlement amount can be made. 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, anticipated cost, 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 values 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.
Paramount Resources Ltd. 2014 Financial Statements 69 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 a property is fully complete.
l) Foreign Currency Translation
Paramount’s functional and presentation currency is the Canadian dollar. 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.
m) Financial Instruments and Other Comprehensive Income
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. All of the Company’s financial instruments have been classified as
fair value through profit or loss, except investments in securities and long-term debt. Paramount does not
presently employ hedge accounting for any of its financial instruments.
Fair value through profit or loss financial assets and financial liabilities, including derivative financial
instruments, are measured at fair value and changes in fair values over time are recognized in earnings.
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 or impaired, at which time the
cumulative gain or loss is recognized in net 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 securities, which are
classified as available-for-sale financial instruments. 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.
An impairment charge is recognized in respect of an available-for-sale financial instrument where its fair
value decreases below its carrying value, and the decline is considered to be significant or prolonged.
Subsequent increases in the fair value of an available-for-sale financial instrument are recognized in OCI.
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.
Paramount Resources Ltd. 2014 Financial Statements 70 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, including:
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:
interest rates and yield curves observable at commonly quoted intervals;
implied volatilities; and
i.
ii.
iii. credit spreads; and
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 deferred tax expense 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.
Paramount Resources Ltd. 2014 Financial Statements 71 The Company accounts for Paramount Options as equity-settled stock-based compensation transactions.
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 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 Contributed Surplus in
respect of the award to Share Capital.
Cavalier Stock Option Plan
Cavalier 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 ("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 to settle Cavalier Options in common shares of Cavalier or in cash, at the discretion
of Cavalier. 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) Net Loss Per Share
Basic net loss per share is calculated by dividing net loss by the weighted average number of Common
Shares outstanding during the year. Diluted net loss per share is calculated by adjusting the weighted
average number of Common Shares outstanding for potentially dilutive Common Shares related to the
Paramount stock option plan. The number of dilutive Common Shares is determined using the treasury
method. As Paramount Options can be exchanged for Common Shares, they are considered potentially
dilutive and are included in the Company’s diluted loss per share when they are dilutive to income from
continuing operations.
2. Significant Accounting Estimates, Assumptions & 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:
Paramount Resources Ltd. 2014 Financial Statements 72 Exploration or Development
The Company is required to apply judgment when designating the nature of a project as exploration and
evaluation or development, which requires an assessment of the geological characteristics and other
factors related to each project.
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. Previous estimates 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, 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, expected quantities of resources, expected
production techniques, drilling results and estimated capital expenditures and production costs 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.
Estimates of Recoverable Amounts
Estimates of recoverable amounts used in impairment tests often incorporate level three hierarchy inputs
including estimated volumes and future net cash flows from oil and natural gas reserves, contingent
resource estimates and internal and external market metrics used to estimate value based comparable
transactions and assets. By their nature, such estimates are subject to measurement uncertainty.
Changes in such estimates, and differences between actual and estimated amounts, could have a
material impact on earnings.
Reserves Estimates
Reserve engineering is an inherently complex and subjective process of estimating underground
accumulations of petroleum and natural gas resources. 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
Paramount Resources Ltd. 2014 Financial Statements 73 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 generally 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
To account for an acquisition as a business combination, management is required to exercise judgment in
determining whether the assets acquired and liabilities assumed constitute a business. A business
consists of an integrated set of assets and activities, comprised of inputs and processes, that is capable
of being conducted and managed as a business by a market participant. An integrated set of assets and
activities in the development stage may not have outputs. The Company’s acquisition of MGM Energy
Corp. ("MGM Energy") was accounted for as a business combination because, even though MGM
Energy had not yet generated revenues, management made the judgment that the assets and activities
acquired were capable of being managed as a business.
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. 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 of investment
accounting 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.
Investments in Securities
The Company’s investments in securities that are accounted for as available-for-sale financial instruments
are assessed at the end of each reporting period to determine whether there is any objective evidence of
impairment. Management is required to exercise judgment to determine whether a decrease in the fair
value of an investment below its carrying value is significant or prolonged, which would require an
impairment charge to be recognized.
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.
Paramount Resources Ltd. 2014 Financial Statements 74 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
Effective January 1, 2014, the Company adopted IFRIC 21 – Levies and amendments to IAS 32 –
Financial Instruments: Presentation, which clarified the application of offsetting rules. There has been no
impact on the recognized assets, liabilities, or comprehensive income of the Company on the adoption of
these standards.
Future Changes in Accounting Standards
In May 2014, the International Accounting Standards Board ("IASB") issued IFRS 15 – Revenue From
Contracts With Customers, which establishes a single revenue recognition framework that applies to
contracts with customers. The standard requires an entity to recognize revenue to reflect the transfer of
goods and services for the amount it expects to receive, when control is transferred to the purchaser.
IFRS 15 is effective for years beginning on or after January 1, 2017. The Company has not yet
determined the impact of the IFRS on the Consolidated Financial Statements.
In July 2014, the IASB issued IFRS 9 – Financial Instruments, which 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. IFRS 9 is effective for years
beginning on or after January 1, 2018. The Company has not yet determined the impact of the IFRS on
the Consolidated Financial Statements.
Paramount Resources Ltd. 2014 Financial Statements 75
4. Segmented Information
Paramount’s operations are reported by business segment, which have been established by
Management to assist in resource allocation, to assess operating performance and to achieve long-term
strategic objectives. The segments are divided based on the nature of activities and the Company’s
management structure:
• Principal Properties: Principal properties include the Company’s four Corporate Operating Units,
which are involved in the exploration, development, production and marketing of natural gas, crude oil
and natural gas liquids, generally having similar economic characteristics.
• 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, 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, 2014
Revenue
Gain on financial commodity contracts
Expenses
Operating expense
Transportation and NGLs processing
General and administrative
Stock-based compensation
Depletion and depreciation
Exploration and evaluation
(Gain) loss on sale of property, plant and equipment
Interest and financing
Other
Loss from equity-accounted investments
Write-down of investments in securities
Other
Drilling rig revenue
Drilling rig expense
Inter-segment eliminations
Segment income (loss)
Income tax recovery
Net loss
Principal
Properties
332,453
2,852
335,305
71,279
35,896
–
–
229,108
23,214
(95,734)
–
5,859
269,622
–
–
980
–
–
66,663
–
66,663
Strategic
Investments
–
–
–
–
–
7,827
5,828
11,190
6,793
43
2,686
77
34,444
(3,399)
(15,645)
5,154
47,221
(22,179)
(23,292)
(14,070)
(37,362)
Corporate
–
–
–
Inter-segment
Eliminations
–
–
–
–
–
16,050
19,545
170
–
–
67,913
568
104,246
–
–
229
–
–
(104,017)
–
(104,017)
–
–
–
–
(10,649)
–
–
–
–
(10,649)
–
–
–
(46,682)
21,963
(14,070)
14,070
–
Total
332,453
2,852
335,305
71,279
35,896
23,877
25,373
229,819
30,007
(95,691)
70,599
6,504
397,663
(3,399)
(15,645)
6,363
539
(216)
(74,716)
–
(74,716)
3,002
(71,714)
Paramount Resources Ltd. 2014 Financial Statements 76
Year ended December 31, 2013
Revenue
Loss on financial commodity contracts
Expenses
Operating expense
Transportation and NGLs processing
General and administrative
Stock-based compensation
Depletion and depreciation
Exploration and evaluation
Gain on sale of property, plant and equipment
Interest and financing
Other
Income from equity-accounted investments
Write-down of investments in securities
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
68,615
23,782
–
–
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
(3,628)
3,656
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
68,615
23,782
19,481
25,851
152,935
35,537
(32,688)
52,639
3,627
349,779
21,378
(3,628)
8,075
4,186
(1,876)
(105,708)
–
(105,708)
18,593
28,030
(59,085)
For the year ended December 31, 2014, the Company had sales of $101.1 million, $45.6 million and
$42.6 million to three customers which exceeded ten percent of its total revenue.
Total Assets
As at December 31
Principal Properties
Strategic Investments
Corporate
Other Income
Year ended December 31
Gain on sale of investments
Drilling rig revenue
Drilling rig expense
Other
2014
2,449,073
559,027
191,329
3,199,429
2013
1,772,049
520,983
154,771
2,447,803
2014
5,154
539
(216)
1,209
6,686
2013
3,656
4,186
(1,876)
4,419
10,385
Paramount Resources Ltd. 2014 Financial Statements 77
5. Acquisition
MGM Energy Corp.
On June 11, 2014, Paramount acquired all 338.3 million issued and outstanding common shares of MGM
Energy not already owned in exchange for the issuance by Paramount of 1.1 million Common Shares,
based on an exchange ratio of one Common Share of Paramount for every 300 common shares of MGM
Energy. Immediately prior to the acquisition, Paramount owned 54.1 million common shares of MGM
Energy (14 percent voting interest). MGM Energy was a publicly-traded development-stage energy
company, the principal business of which was to acquire, exploit and produce oil and natural gas in
northern Canada. MGM Energy did not generate revenues and, except for limited periods of testing,
MGM Energy’s assets have not been placed on production. The acquisition of MGM Energy increased
the Company’s exploratory land holdings in the Northwest Territories. These financial statements include
the results of operations of the acquired business for the period following the closing of the transaction.
The acquisition of MGM Energy was accounted for using the acquisition method whereby all of the assets
acquired and liabilities assumed were recorded at fair value. The following table summarizes the net
assets acquired:
Cash
Accounts receivable
Prepaid expenses
Exploration and evaluation assets
Deferred income tax asset
Goodwill
Accounts payable and accrued liabilities
Asset retirement obligations
Net assets acquired
Paramount Common Shares issued (1)
Fair value of MGM Energy shares previously held (2)
Total
(1)
(2)
Based on 1.1 million Paramount Common Shares issued and the acquisition date closing price of Paramount Common Shares of $61.52 per share.
Based on 54.1 million MGM Energy common shares held by Paramount prior to the acquisition and the acquisition date closing price of MGM Energy common
shares of $0.205 per share.
On the acquisition of MGM Energy, a gain of $10.8 million related to the MGM Energy common shares
held by Paramount at the acquisition date was recognized in income from equity-accounted investments,
based on the closing market price of the MGM Energy common shares of $0.205 per share. Goodwill
recorded on the acquisition is the result of an increase in the trading price of Paramount’s Common
Shares between the date the Company offered to acquire MGM Energy and the date the transaction
closed. The goodwill recognized in the transaction is not deductible for tax purposes. The net assets
acquired, including goodwill, have been allocated to the Strategic Investments business segment.
3,200
234
76
13,909
48,420
21,609
(108)
(6,856)
80,484
69,382
11,102
80,484
Paramount Resources Ltd. 2014 Financial Statements 78
6. 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. These properties were included in the
Company’s Principal Properties business segment. Amounts related to these properties from January 1,
2013 to their sale in March 2013 have been classified as discontinued operations and are excluded from
the results of the Company’s continuing operations.
Details of the income from discontinued operations are presented below:
Year ended December 31
Petroleum and natural gas sales
Royalties
Revenue
Expenses
Operating expense
Transportation and NGLs processing
Depletion and depreciation
Exploration and evaluation
Loss from ordinary activities of discontinued operations before tax
Gain on sale of discontinued operations
Income from discontinued operations before tax
Deferred income tax expense – discontinued operations
Income from discontinued operations
2013
1,796
(24)
1,772
2,841
233
267
29
3,370
(1,598)
38,985
37,387
9,357
28,030
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
7. Exploration and Evaluation
Year ended December 31
Balance, beginning of year
Additions
Transfers to property, plant and equipment
Corporate acquisition
Dry hole
Expired lease costs
Dispositions
Foreign exchange
Balance, end of year
2013
(926)
9,062
8,136
2013
405,090
203,642
(137,355)
–
(13,862)
(14,429)
(13,143)
(32)
429,911
2014
429,911
295,949
(143,217)
13,909
(4,719)
(12,780)
(11,633)
–
567,420
Additions to exploration and evaluation assets totaled $224.3 million (2013 – $125.9 million) for Principal
Properties and $71.7 million (2013 – $77.7 million) for Strategic Investments.
Paramount Resources Ltd. 2014 Financial Statements 79
Exploration and Evaluation Expense
Year ended December 31
Geological and geophysical
Dry hole
Expired lease costs
8. Property, Plant and Equipment
Year ended December 31, 2014
Cost
Balance, December 31, 2013
Additions
Transfers from exploration and evaluation
Dispositions
Change in asset retirement provision
Cost, December 31, 2014
Accumulated depletion, depreciation and write-downs
Balance, December 31, 2013
Depletion and depreciation
Write-downs
Dispositions
Accumulated depletion, depreciation and write-downs,
December 31, 2014
Net book value, December 31, 2013
Net book value, December 31, 2014
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
Accumulated depletion, depreciation and write-downs,
December 31, 2013
Net book value, December 31, 2012
Net book value, December 31, 2013
2014
12,498
4,729
12,780
30,007
2013
7,101
14,007
14,429
35,537
Other
Total
27,173
1,212
–
(303)
–
28,082
(19,747)
(1,001)
–
212
(20,536)
7,426
7,546
2,618,046
668,754
143,217
(145,125)
60,527
3,345,419
(1,045,035)
(208,270)
(32,755)
109,206
(1,176,854)
1,573,011
2,168,565
Other
Total
20,374
7,461
–
(682)
–
20
27,173
(18,737)
(1,218)
–
220
(12)
(19,747)
1,637
7,426
2,065,307
553,397
137,355
(126,811)
(11,220)
18
2,618,046
(986,856)
(155,614)
(6,279)
103,727
(13)
(1,045,035)
1,078,451
1,573,011
Petroleum
and natural
gas assets Drilling rigs
2,489,356
641,649
143,217
(144,822)
60,527
3,189,927
(997,486)
(196,349)
(32,755)
108,994
(1,117,596)
1,491,870
2,072,331
101,517
25,893
–
–
–
127,410
(27,802)
(10,920)
–
–
(38,722)
73,715
88,688
Petroleum
and natural
gas assets Drilling rigs
1,960,833
528,519
137,355
(126,129)
(11,220)
(2)
2,489,356
(949,699)
(145,014)
(6,279)
103,507
(1)
(997,486)
1,011,134
1,491,870
84,100
17,417
–
–
–
–
101,517
(18,420)
(9,382)
–
–
–
(27,802)
65,680
73,715
Paramount Resources Ltd. 2014 Financial Statements 80
Depletion and Depreciation
Year ended December 31
Depletion and depreciation
Write-down of property, plant and equipment
Inter-segment eliminations
2014
209,126
32,755
(12,062)
229,819
2013
155,701
6,519
(9,285)
152,935
At December 31, 2014, $252.6 million (December 31, 2013 – $343.7 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 2014 were $640.3 million (2013 – $523.8 million) for
Principal Properties, $26.7 million (2013 – $22.1 million) for Strategic Investments and $1.8 million (2013
– $7.5 million) for Corporate. Additions to property, plant and equipment include $14.5 million (2013 –
$12.7 million) of capitalized interest for major facilities in the construction phase at a weighted average
interest rate of 7.3 percent (2013 – 7.9 percent).
In the first quarter of 2014, the Company sold its properties in the Chain-Delia area of Alberta in
exchange for $11.7 million in common shares of Marquee Energy Ltd. ("Marquee"). In the second quarter
of 2014, Paramount sold a 50 percent working interest in its Birch properties in northeast British Columbia
for $91.5 million cash.
In the first quarter of 2013, Paramount’s wholly-owned subsidiary Summit Resources, Inc. sold its non-
operated joint operations and lands in North Dakota for proceeds of US$21.8 million.
The Company recorded an impairment write-down of $32.8 million at December 31, 2014 related to
petroleum and natural gas assets in the Southern CGU. These properties are included within the Principal
Properties business segment. The impairment write-down was recorded because the carrying value of
the Southern CGU properties exceeded their recoverable amounts, which were estimated based on
expected discounted net cash flows from the production of proved and probable reserves. The
impairments resulted from a combination of higher well costs than reserves values assigned and
decreases in estimated future net revenues due to lower forecasted future oil and natural gas prices.
Recoverable amounts were estimated on a fair value less costs to sell basis, using a discounted cash
flow method which is an approach commonly used by market participants to value oil and gas properties
(Level 3 fair value inputs). Cash flows were projected over the expected remaining productive life of the
Southern CGU’s reserves, at an after-tax discount rate of 10 percent, resulting in an estimated
recoverable amount of $20.6 million. The forecast prices used to determine the recoverable amount
reflect the following benchmark prices, adjusted for basis differentials to determine local reference prices,
transportation costs and quality:
(Average for the period)
Natural Gas
AECO ($/MMBtu)
Henry Hub (US$/MMBtu)
Crude Oil
Edmonton Light ($/Bbl)
WTI (US$/Bbl)
2015
2016
2017
2018
2019
2020-2029
Thereafter
3.50
3.30
68.60
65.00
4.00
3.80
4.25
4.05
83.20
75.00
88.90
80.00
4.50
4.30
94.60
84.90
4.70
4.55
5.00 – 6.50
4.85 – 6.30
99.60 104.70 – 125.30
93.80 – 112.20
89.30
+2%/yr
+2%/yr
+2%/yr
+2%/yr
Paramount Resources Ltd. 2014 Financial Statements 81
The Company recorded a net impairment write-down of its petroleum and natural gas assets in 2013 of
$6.5 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 2013 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 net 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 2013 reversal of previously recorded impairment write-downs in the Grande Prairie CGU resulted
from increases in reserves assigned to the CGU. The reversal was recorded to the extent that the
recoverable amount ascribed to the Grande Prairie CGU exceeded the carrying value of its properties.
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 determined that its remaining Northern properties no longer constituted a significant CGU. As
a result, the remaining Northern properties have been included within the Grande Prairie CGU
subsequent to December 31, 2013.
9. Equity-Accounted Investments
As at December 31
Trilogy
MGM Energy
Other
(1)
Based on the period-end trading price.
Shares
(000’s)
19,144
–
2014
Carrying
Value
79,879
–
2,565
82,444
Market
Value (1)
151,432
–
Shares
(000’s)
19,144
54,147
2013
Carrying
Value
97,391
1,212
5,711
104,314
Market
Value (1)
528,383
8,664
Income (loss) from equity-accounted investments is comprised of the following:
Year ended December 31
Equity loss
Dilution gain
Write-down of other equity-accounted investment
Gain on MGM Energy acquisition (Note 5)
2014
(11,508)
257
(2,938)
10,790
(3,399)
2013
(4,297)
25,675
–
–
21,378
As at December 31, 2014, Paramount owned a 15 percent equity interest in Trilogy (December 31, 2013
– 15 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:
Paramount Resources Ltd. 2014 Financial Statements 82
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: portion of share-based compensation recorded in equity of Trilogy
Carrying value of Paramount’s investment
2014
56,478
1,563,333
(106,941)
(939,877)
572,993
15.2%
87,161
(7,282)
79,879
2013
73,221
1,481,860
(138,744)
(742,136)
674,201
15.3%
103,113
(5,722)
97,391
(1)
Includes adjustments to Trilogy’s carrying values required in the application of the equity method of investment accounting for shares of Trilogy purchased by the
Company in the open market in prior years. Excluding such adjustments, Trilogy’s non-current assets as at December 31, 2014 totaled $1,562,475 (2013 –
$1,473,508) and equity totaled $572,135 (2013 - $665,849).
Year ended December 31
Revenue
Comprehensive loss(1)
Paramount’s share of Trilogy’s comprehensive loss
2014
549,037
(68,534)
(10,408)
2013
489,819
(17,397)
(2,660)
(1)
Includes amortization of the adjustments to Trilogy’s non-current assets required in the application of the equity method of investment accounting for shares of
Trilogy purchased by the Company in prior years in the open market. Excluding such adjustments, Trilogy’s comprehensive loss for the year ended December 31,
2014 was $61,011 (2013 – comprehensive income $11,467).
Trilogy had 8.2 million stock options outstanding (3.3 million exercisable) at December 31, 2014 at
exercise prices ranging from $4.85 to $38.74 per share.
For the year ended December 31, 2014, Paramount received cash dividends from Trilogy of $7.4 million
(2013 – $8.0 million).
Income from equity-accounted investments for the year ended December 31, 2014 also includes $0.3
million (2013 - $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.
The aggregate carrying amount of the Company’s other equity-accounted investments at December 31,
2014 was $2.6 million (December 31, 2013 – $6.9 million) and Paramount’s share of the income or loss of
those investees for the year ended December 31, 2014 was an aggregate net loss of $1.1 million (2013 –
net loss of $1.6 million).
10. Investments in Securities
As at December 31
MEG Energy Corp.
Other (1)
2014
Shares
(000’s)
3,700
Market
Value
72,335
30,559
102,894
2013
Shares
(000’s)
3,700
Market
Value
113,257
32,404
145,661
(1)
Includes investments in Marquee, RMP Energy Inc., Strategic Oil & Gas Ltd., and other public and private corporations.
At December 31, 2014 aggregate unrealized losses of $15.6 million related to the Company’s
investments in Marquee, Strategic Oil & Gas Ltd. and other securities previously recorded in OCI were
charged to net earnings as a result of significant decreases in the market prices of the securities at the
end of the year.
Paramount Resources Ltd. 2014 Financial Statements 83
11. Goodwill
As at December 31
Carrying value, beginning of year
Acquisition
Carrying value, end of year
2014
3,124
21,609
24,733
2013
3,124
–
3,124
The carrying amount of goodwill at December 31, 2014 includes $21.6 million related to the MGM Energy
acquisition and $3.1 million related to the Kaybob CGU. Goodwill recognized in respect of the MGM
Energy acquisition was allocated to a group of GGUs within the Strategic Investments business segment.
Goodwill was assessed for impairment as at December 31, 2014 based on recoverable amounts
estimated using fair value less costs to sell. Recoverable amounts in respect of Strategic Investments
CGUs with allocated goodwill were estimated using level three hierarchy inputs including third-party
estimates of fair value, third-party reserves and resource estimates and internally generated estimates.
The recoverable amount for the Kaybob CGU was estimated on the basis described in Note 1(f). No
reasonably possible change in assumptions would cause goodwill to become impaired in either CGU.
12. Demand Facilities
As at December 31
Fox Drilling Facility
Cavalier Facility
Fox Drilling Facility
2014
50,940
30,590
81,530
2013
53,000
22,550
75,550
The Fox Drilling Facility is divided into two tranches. The first tranche ("Fox Tranche A") is a non-revolving
demand loan with a principal amount of $45.8 million outstanding at December 31, 2014. Scheduled
principal repayments on Fox Tranche A are $8.2 million in each of 2015, 2016 and 2017, with the
remaining outstanding balance payable in 2018.
The second tranche ("Fox Tranche B") is a non-revolving demand loan with a credit limit of $27.0 million
that is available to be drawn to fund the construction of two new drilling rigs. At December 31, 2014, $5.1
million was drawn under Fox Tranche B. Once construction of the new drilling rigs is completed in 2015,
scheduled quarterly principal repayments will commence over a five year term.
Recourse and security for the Fox Drilling Facility is limited to Fox Drilling’s rigs, including the new drilling
rigs being constructed, and drilling contracts with Paramount. Interest is payable at the bank's prime
lending rate or bankers’ acceptance rate, as selected at the discretion of the Company, plus an applicable
margin. The effective interest rate on the Fox Drilling Facility for the year ended December 31, 2014 was
4.4 percent (2013 – 4.4 percent).
Cavalier Facility
Cavalier 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 the Company, plus an applicable
margin. The Cavalier Facility is non-recourse to Paramount and is secured by all of the assets of Cavalier,
Paramount Resources Ltd. 2014 Financial Statements 84
including oil sands and carbonate bitumen lands. The effective interest rate on the Cavalier Facility for the
year ended December 31, 2014 was 3.5 percent (2013 – 3.4 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
2014
397,673
370,000
450,000
1,217,673
(7,318)
1,210,355
2013
71,826
370,000
450,000
891,826
(9,223)
882,603
Paramount’s bank credit facility (the "Facility") was increased in 2014 from $600 million to $900 million,
which is available in two tranches. The first tranche ("Tranche A") has a credit limit and lender
commitments of $800 million and is available on a revolving basis to November 30, 2015. 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, 2015 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 Fox Drilling Facility 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 the Company, 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, 2014, $397.7 million was drawn on Tranche A and Tranche B was undrawn.
Paramount had undrawn letters of credit outstanding at December 31, 2014 totaling $55.2 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 8¼ 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.
Paramount Resources Ltd. 2014 Financial Statements 85
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 7⅝ 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
Change in discount rates
Obligations settled
Dispositions
Assumed on corporate acquisition
Accretion expense
Other
Asset retirement obligations, end of year
2014
239,853
23,190
6,126
40,164
(4,576)
(30,134)
6,856
5,936
–
287,415
2013
300,468
35,749
(9,952)
(35,369)
(6,336)
(48,087)
–
3,099
281
239,853
At December 31, 2014, the estimated undiscounted asset retirement obligations were $287.4 million
(December 31, 2013 - $281.3 million), which have been discounted using a weighted average risk-free
rate of 2.00 percent (December 31, 2013 – 3.00 percent) and an inflation rate of 2.00 percent (December
31, 2013 – 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, 2014,
104,843,846 Common Shares were outstanding, net of 54,199 Common Shares held in trust under the
stock incentive program, and no preferred shares were outstanding.
In July 2014, Paramount issued 4,600,000 Common Shares at a price of $60.00 per share and 900,000
Common Shares on a "flow-through" basis in respect of Canadian exploration expenses ("CEE") at a
price of $74.40 per share for aggregate gross proceeds of $343.0 million pursuant to a public offering.
Concurrent with the public offering, Paramount issued 100,000 Common Shares on a "flow-through" basis
in respect of CEE ("FTS") at a price of $74.40 per share to Paramount’s Chairman and Chief Executive
Officer for gross proceeds of $7.4 million. On issuance of the flow-through shares, a liability of $14.4
million was recognized in accounts payable and accrued liabilities in respect of the Company’s obligation
to renounce qualifying expenditures. The Company incurred $10.7 million of transaction costs in respect
of these equity offerings, net of tax benefits of $3.6 million.
Paramount Resources Ltd. 2014 Financial Statements 86 In October 2013, Paramount issued 1,115,000 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. On issuance of the flow-through shares, a liability of $11.8 million
was recognized in accounts payable and accrued liabilities in respect of the Company’s obligation to
renounce qualifying expenditures.
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.
The Company incurred $6.4 million of transaction costs in respect of the 2013 equity offerings, net of tax
benefits of $2.1 million.
Weighted Average Common Shares
Year ended December 31
Loss from continuing operations – basic
Dilutive effect of Paramount options
Loss from continuing operations – diluted
16. Reserves
2014
Wtd. Avg
Shares
(000’s)
101,090
–
101,090
Loss from
continuing
operations
(71,714)
–
(71,714)
2013
Wtd. Avg
Shares
(000’s)
93,708
–
93,708
Loss from
continuing
operations
(87,115)
–
(87,115)
Reserves at December 31, 2014 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:
Year ended December 31, 2014
Balance, beginning of year
Other comprehensive loss
Stock-based compensation
Stock options exercised
Balance, end of year
Year ended December 31, 2013
Balance, beginning of year
Other comprehensive income
Stock-based compensation
Stock options exercised
Balance, end of year
Unrealized
gains (losses)
on securities
12,787
(42,475)
–
–
(29,688)
Contributed
surplus
74,891
–
21,439
(20,470)
75,860
Translation
of foreign
subsidiaries
(393)
393
–
–
–
Unrealized
gains
on securities
8,879
3,908
–
–
12,787
Contributed
surplus
86,461
–
28,252
(39,822)
74,891
Total
reserves
87,678
(42,475)
21,439
(20,470)
46,172
Total
reserves
94,947
4,301
28,252
(39,822)
87,678
Paramount Resources Ltd. 2014 Financial Statements 87
Other Comprehensive Income (Loss)
Year ended December 31
Unrealized gain (loss) on securities
Change in market value of securities
Reclassification of other comprehensive loss 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)
17. Share-Based Compensation
Paramount Options
Changes in outstanding Paramount Options are as follows:
2014
(53,664)
10,918
271
(42,475)
–
–
–
(42,475)
2013
636
3,628
(356)
3,908
(587)
980
393
4,301
2014
2013
Weighted
average
exercise
price
($/share)
31.20
33.22
17.22
35.67
33.75
31.58
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
6,632,200
1,922,500
(1,107,350)
(171,500)
7,275,850
2,592,750
Balance, beginning of year
Granted
Exercised (1)
Forfeited
Balance, end of year
Options exercisable, end of year
(1)
For options exercised in 2014, the weighted average market price of Paramount’s Common Shares on the dates exercised was $48.09 (2013 – $36.25).
The weighted average remaining contractual life and exercise prices of Paramount Options outstanding
as of December 31, 2014 are as follows:
Exercise Prices
$13.20 - $20.00
$20.01 - $30.00
$30.01 - $35.00
$35.01 - $40.00
$40.01 - $64.47
Awards Outstanding
Remaining
contractual
life
(years)
0.3
3.9
3.3
4.3
2.8
3.5
Number
434,450
2,514,250
1,297,900
1,689,500
1,339,750
7,275,850
Weighted
average
exercise
price
13.42
29.71
34.00
37.76
42.63
33.75
Paramount Resources Ltd. 2014 Financial Statements 88
The grant date fair value of Paramount Options was estimated using the Black-Scholes-Merton model
incorporating the following weighted average inputs:
Weighted average exercise price ($ / share)
Expected volatility (%)
Expected life of share options (years)
Pre-vest annual forfeiture rate (%)
Risk-free interest rate (%)
Expected dividend yield (%)
Weighted average fair value of awards per share ($ / share)
Options
awarded in
2014
33.22
35.0
4.6
5.7
1.3
–
10.24
Options
awarded in
2013
37.37
36.1
4.6
5.6
1.6
–
12.13
The estimated expected life of the Paramount Options is based on historical exercise patterns. The
expected volatility is estimated based on the historical volatility of the trading price of the Company’s
Common Shares over the most recent period that is generally commensurate with the expected term of
the option.
Cavalier Options
During 2014, Cavalier granted 1.7 million Cavalier Options, which vest over five years. A total of 0.2
million previously issued Cavalier Options were cancelled during the year, resulting in a net balance of
5.8 million Cavalier Options outstanding at December 31, 2014.
The grant date fair value of Cavalier Options awarded was estimated using the Black-Scholes-Merton
model, incorporating the following inputs: expected volatility 58.3% (2013 – 60.8%), expected life 6.8
years (2013 – 6.0 years), risk-free interest rate of 1.8% (2013 – 2.0%), pre-vest forfeiture rate of nil (2013
– nil), and expected dividend yield of nil (2013 – 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 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
Balance, beginning of year
Shares purchased
Change in vested and unvested shares
Balance, end of year
2014
2013
Shares
(000’s)
72
92
(110)
54
500
4,617
(4,609)
508
Shares
(000’s)
75
113
(116)
72
416
3,998
(3,914)
500
Paramount Resources Ltd. 2014 Financial Statements 89
Employee Benefit Costs
Year ended December 31
Stock option plan
Stock incentive plan
Stock-based compensation expense
Salaries and benefits, net of recoveries
18. Income Tax
2014
20,290
5,083
25,373
16,178
41,551
2013
21,347
4,504
25,851
13,392
39,243
The following table reconciles income taxes calculated at the Canadian statutory rate to Paramount’s
recorded income tax recovery:
Year ended December 31
Loss from continuing operations before tax
Effective Canadian statutory income tax rate
Expected income tax recovery
Effect on income taxes of:
Statutory and other rate differences
Income from equity-accounted investments
Write-down of investments in securities
Investment in subsidiaries
Flow-through share renunciations
Stock-based compensation
Non-deductible items and other
Income tax recovery
2014
(74,716)
25.0 %
(18,679)
2013
(105,708)
25.0 %
(26,427)
284
850
3,911
–
5,870
5,072
(310)
(3,002)
2,707
(5,344)
907
2,186
4,223
5,337
(2,182)
(18,593)
The following table summarizes the temporary differences that give rise to the net deferred income tax
asset:
As at December 31
Property, plant and equipment
Investments
Asset retirement obligations
Non-capital losses
Other
Deferred tax asset
2014
(209,850)
(357)
71,872
285,166
5,656
152,487
The following table summarizes the movements of the deferred income tax asset during the year:
Year ended December 31
Balance, beginning of year
Deferred income tax recovery
Deferred income tax recovery (expense) included in other comprehensive income
Flow-through share renunciations
Share issuance costs
Business combinations and other
Balance, end of year
2014
119,090
2,957
271
(20,671)
3,553
47,287
152,487
2013
(91,934)
(4,188)
60,006
150,514
4,692
119,090
2013
116,901
14,219
(356)
(13,008)
2,139
805
119,090
Paramount Resources Ltd. 2014 Financial Statements 90
Paramount has $1,141.3 million (2013 – $601.5 million) of unused tax losses expiring between 2025 and
2034. In addition, Paramount has $233.8 million (2013 – $180.0 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 strongly 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.
19. Financial Instruments and Risk Management
Financial Instruments
Financial instruments at December 31, 2014 consisted of cash and cash equivalents, accounts
receivable, the Deposit, investments in securities, the demand facilities, accounts payable and accrued
liabilities and long-term debt.
Fair Values of Financial Assets and Liabilities
The following methods and assumptions are used to estimate the fair values for financial instruments
carried at fair value in the Company’s financial statements:
• Cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities
approximate their carrying amounts largely due to the short-term maturities of these instruments. The
fair value of the Deposit approximates its carrying amount.
• Risk management assets and liabilities outstanding from time-to-time are carried at fair values, which
are estimated using a market approach incorporating level two fair value hierarchy inputs, including
forward market curves and price quotes for similar instruments provided by financial institutions.
• Publicly-traded investments in securities are carried at their period-end trading price, which are level
one fair value hierarchy inputs.
Liabilities Carried at Amortized Cost
The carrying value of the demand facilities and long-term debt, including the Senior Notes, are measured
at amortized cost. The 2017 Senior Notes had a market value of 97.3 percent of their principal amount at
December 31, 2014 (December 31, 2013 – 103.5 percent). The 2019 Senior Notes had a market value of
93.6 percent of their principal amount at December 31, 2014 (December 31, 2013 – 101.0 percent). The
market values of the Company’s Senior Notes were estimated using a market approach incorporating
prices quoted from financial institutions which are level two fair value hierarchy inputs.
Paramount Resources Ltd. 2014 Financial Statements 91 Risk Management
For the year ended December 31, 2014, the Company entered into financial commodity contracts in
respect of its natural gas and oil sales. Changes in the fair value of oil and natural gas 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
2014
(3,972)
2,852
1,120
–
2013
–
(3,972)
–
(3,972)
The Company did not have any financial commodity contracts in place at December 31, 2014.
Paramount is exposed to market risks where the fair values or future cash flows of financial instruments
fluctuate because of changes in underlying market prices.
Commodity Price Risk
Paramount uses financial and physical commodity price contracts from time-to-time to manage exposure
to commodity price volatility. The Company is exposed to commodity price risk on these instruments, as
changes in underlying commodity prices will impact the market values of the contracts and ultimately the
amounts received or paid upon settlement.
Foreign Currency Risk
Paramount is exposed to foreign currency risk on financial instruments denominated in US dollars
including cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities.
Sales prices of natural gas, crude oil, and natural gas liquids 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 natural gas liquids. 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, 2014 by approximately $2.7 million (2013 – $0.8 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.
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
Paramount Resources Ltd. 2014 Financial Statements 92 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, 2014 is limited to the carrying value of
accounts receivable. Accounts receivable include balances due from customers and partners in the oil
and gas industry and are subject to normal industry credit risk. At December 31, 2014, Paramount had no
balances due from partners that represented more than 10 percent of the Company’s total accounts
receivable.
Liquidity Risk
Liquidity risk is the risk that Paramount will be unable to meet its financial obligations. The Company
manages liquidity risk by ensuring that it has sufficient cash and cash equivalents, credit facilities and
other financial resources available to meet its obligations.
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:
Accounts payable & accrued liabilities (1)
Cavalier Facility (2)
Credit Facility (3)
Fox Drilling Facility (3)
Senior Notes (3)
2015
263,571
30,590
19,088
10,740
64,838
388,827
2016
–
–
416,762
10,999
64,838
492,599
2017
–
–
–
10,521
433,249
443,770
2018
–
–
–
22,959
34,313
57,272
2019
–
–
–
859
481,680
482,539
Thereafter
–
–
–
2,371
–
2,371
Total
263,571
30,590
435,850
58,449
1,078,918
1,867,378
(1)
(2)
(3)
Excluding $3.3 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 operation and other
Interest payable
Flow-through share renunciation obligations
2014
252,349
7,178
4,044
3,276
266,847
2013
191,783
8,208
4,044
9,546
213,581
Terms and conditions of the above financial liabilities:
• Trade and accrued payables and joint operation and other 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.
Paramount Resources Ltd. 2014 Financial Statements 93
Accounts Receivable
As at December 31
Revenue receivable
Joint operation receivable
GST and other
2014
33,972
17,655
5,413
57,040
2013
20,214
12,361
6,725
39,300
Joint operation receivables are non-interest bearing and are generally on 30 day terms.
In determining the recoverability of joint operation 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 operation receivables
as at December 31, 2014. There were no significant non-current joint operation receivables as at
December 31, 2014 and 2013.
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) loss from equity-accounted investments
Write-down of investments in securities
Gain on sale of investments
Deferred income tax
Discontinued operations
Other
Supplemental Cash Flow Information
Year ended December 31
Interest paid
Current tax paid
Components of Cash and Cash Equivalents
As at December 31
Cash
Cash equivalents
2014
(3,972)
25,373
229,819
17,509
(95,691)
5,936
1,058
3,399
15,645
(5,154)
(2,957)
–
1,864
192,829
2014
79,263
402
2014
18,320
–
18,320
2013
3,972
25,851
152,935
28,436
(32,688)
3,099
599
(21,378)
3,628
(3,656)
(23,576)
(29,361)
1,689
109,550
2013
58,338
8,117
2013
10,703
–
10,703
Paramount Resources Ltd. 2014 Financial Statements 94
21. Capital Structure
Paramount’s primary objectives in managing its capital structure are to:
i. maintain a flexible capital structure which optimizes the cost of capital at an acceptable level of risk;
ii. maintain sufficient liquidity to support ongoing operations, capital expenditure programs, strategic
initiatives, and the repayment of debt obligations when due; and
iii. maximize shareholder returns.
Paramount manages its capital structure to support current and future business plans and periodically
adjusts the structure in response to changes in economic conditions and the risk characteristics of the
Company’s underlying assets and operations. Paramount monitors metrics such as the Company’s debt-
to-equity and debt-to-cash flow ratios, among others, to measure the status of its capital structure. The
Company has not established fixed quantitative thresholds for such metrics. The capital structure may be
adjusted by issuing or repurchasing shares, issuing or repurchasing debt, refinancing existing debt,
modifying capital spending programs, and disposing of assets, the availability of any such means being
dependent upon market conditions.
Paramount’s capital structure consists of the following:
As at December 31
Adjusted working capital deficit (1)
Demand facilities
Facility
Senior Notes (2)
Net Debt (3)
Share capital
Accumulated deficit
Reserves
Total Capital
(1)
2014
183,328
81,530
397,673
820,000
1,482,531
1,603,436
(296,326)
46,172
2,835,813
2013
151,780
75,550
71,826
820,000
1,119,156
1,169,178
(224,612)
87,678
2,151,400
Adjusted working capital excludes accounts payable and accrued liabilities related to the Company’s obligation to renounce qualifying expenditures for flow-through
share issuances (December 31, 2014 - $3.3 million, December 31, 2013 - $9.5 million), risk management assets and liabilities, and demand facilities.
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 not subject to financial maintenance covenants under the terms of the Facility or the Senior
Notes. The agreements include 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 in the normal course of business, including joint
operations. Paramount is considered related to Trilogy because of common significant influence. All
transactions between Paramount and Trilogy are recorded at their exchange amounts.
During 2014, Paramount charged $0.6 million (2013 – $0.4 million) to Trilogy in respect of operational and
administrative services. Paramount charged $0.6 million (2013 – $3.0 million) to Trilogy and was charged
$1.6 million (2013 – $0.8 million) by Trilogy in respect of joint operations. Also, Paramount received $7.4
million (2013 – $8.0 million) in dividends from Trilogy. As of December 31, 2014, Paramount had a net
payable balance due to Trilogy of $0.3 million (2013 – net receivable of $0.3 million).
Paramount Resources Ltd. 2014 Financial Statements 95 Compensation of Key Management Personnel
Year ended December 31
Salaries and benefits
Stock-based compensation
23. Commitments and Contingencies
Paramount had the following commitments as at December 31, 2014:
2014
1,899
10,658
12,557
2013
1,857
9,980
11,837
Petroleum and natural gas transportation and processing commitments (1)
Operating leases
Capital spending commitments and other (2)
After one
year but not
more than
five years
490,425
19,748
3,359
513,532
Within one
year
81,994
10,439
19,326
111,759
More than
five years
741,331
5,067
190
746,588
(1)
(2)
Certain of the transportation and processing commitments are secured by outstanding letters of credit totaling $41.2 million at December 31, 2014 (2013 - $32.3
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 $3.7 million
in 2014 (2013 – $3.5 million).
Flow-Through Shares
As a result of flow-through share issuances in 2014, Paramount is required to incur, on or before
December 31, 2015, $74.4 million of CEE, of which $57.5 million was incurred as of December 31, 2014.
Paramount has incurred sufficient qualifying expenditures to satisfy commitments associated with CEE
flow-through shares issued in 2013.
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.
Paramount Resources Ltd. 2014 Financial Statements 96
CORPORATE INFORMATION
OFFICERS
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
L. M. Doyle
Corporate Operating Officer
G. W. P. McMillan
Corporate Operating Officer
D. S. Purdy
Corporate Operating Officer
J. Wittenberg
Corporate Operating Officer
M. S. Han
V.P. Information Services
P. R. Kinvig
V.P. Finance and Controller
P. G. Tahmazian
V.P. Midstream
E. M. Shier
Corporate Secretary
L. A. Friesen
Assistant Corporate Secretary
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
DIRECTORS
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
D. M. Knott (4)
Managing General Partner
Knott Partners, L.P.
Syosset, New York
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
National Bank of Canada
Calgary, Alberta
Wells Fargo Bank, N.A.
Calgary, Alberta
Caisse centrale Desjardins
Calgary, Alberta
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
(3) Member of Compensation
Committee
(4) Member of Corporate
Governance Committee
Canadian Western Bank
Calgary, Alberta
Business Development Bank
of Canada
Calgary, Alberta
REGISTRAR AND
TRANSFER AGENT
Computershare Trust
Company of Canada
Calgary, Alberta
Toronto, Ontario
STOCK EXCHANGE
LISTING
The Toronto Stock Exchange
(“POU”)
4700 Bankers Hall West
888 Third Street S.W.
Calgary, Alberta
Canada T2P 5C5
TELEPHONE : (403) 290-3600
FACSIMILE : (403) 262-7994
www.paramountres.com