Paramount Resources Ltd.
Annual Report 2015

Plain-text annual report

Annual Report 2015 C M Y CM MY CY CMY K 2015 Highlights President & Chief Executive Officer’s Message 2015 Overview Review of Operations Management’s Discussion & Analysis Financial Statements Corporate Information 1 2 5 7 20 54 92 ANNUAL MEETING OF SHAREHOLDERS Shareholders are cordially invited to attend the Annual Meeting of Shareholders to be held Wednesday, May 4, 2016 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, 2015 contained herein which also includes supplemental advisories related to additional information included in this document. 2015 HIGHLIGHTS FINANCIAL AND OPERATING (1) ($ millions, except as noted) Three months ended December 31 Twelve months ended December 31 2015 2014 % Change 2015 2014 % Change 110.5 3,986 2,128 24,524 25% 350.0 7.96 141.0 1.39 (71.7) (0.71) 160.7 8,610 8,735 44,130 39% 376.8 5.59 93.2 0.88 (901.3) (8.52) 429.9 130.8 2,781.0 1,904.6 106,212 Sales volumes Natural gas (MMcf/d) Condensate and oil (Bbl/d) Other NGLs (Bbl/d) (2) Total (Boe/d) % Liquids Petroleum and natural gas sales Operating expense ($/Boe) Funds flow from operations per share – diluted ($/share) Net loss per share – diluted ($/share) 157.8 9,991 9,175 45,466 42% 91.3 5.49 21.0 0.20 (599.0) (5.64) 10 88 79 32 (8) (22) (50) 462 143.9 5,320 5,123 34,430 30% 99.4 7.02 41.6 0.40 (106.5) (1.02) 224.6 Principal Properties Capital (3) Investments in other entities – market value (4) Total assets Net Debt Common shares outstanding (thousands) 813.9 256.9 3,199.4 1,482.5 104,844 Readers are referred to the advisories concerning Non-GAAP Measures and Oil and Gas Measures and Definitions in the Advisories section of this document. 63.0 (72) (1) (2) Other NGLs means ethane, propane and butane. (3) Principal Properties Capital includes capital expenditures and geological and geophysical costs related to the Company’s Principal Properties, and excludes land acquisitions and capitalized interest. Based on the period-end closing prices of publicly-traded investments and the book value of the remaining investments. (4) RESERVES (1)(2) Natural gas (Bcf) NGLs (MBbl) Light and Medium crude oil (MBbl) Total (MBoe) PRINCIPAL PROPERTIES 2015 710.5 107,125 788 226,340 Proved 2014 % Change 703.8 1 108,410 (1) 1,108 (29) 226,812 – Proved & Probable 2015 1,065.7 158,934 1,074 337,633 2014 % Change (2) (3) (30) 1,090.9 163,736 1,526 347,085 F&D costs - three year average Excluding facilities & gathering ($/Boe) NPV10 ($ millions) 16.93 1,608 18.95 2,255 (11) (29) 12.20 3,055 13.37 3,836 (1) (2) 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, 2015 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. 45 116 310 80 8 (30) (34) 1,157 (47) (49) (13) 28 1 (3) (9) (20) Paramount Resources Ltd. 2015 Highlights    1 PRESIDENT AND CHIEF EXECUTIVE OFFICER’S MESSAGE To our Shareholders, In 2015 Paramount completed the final modules of its Musreau facilities just in time for the commodity prices underpinning the project to collapse. At the risk of stating the obvious, the past 18 months have evolved into one of the most challenging times in the history of the Canadian energy industry. Throughout this difficult period, Paramount’s management team is focusing on reducing costs and preserving the core value of the Deep Basin resources we have captured over the last 10 years. We are continuously improving every aspect of our business, including how we develop our resources, and positioning ourselves to maximize shareholder value as commodity prices recover. In August 2014, Paramount completed the construction of its Musreau Deep Cut gas plant and brought it into service. In 2015, the remaining downstream third-party restrictions in pipeline, de- ethanization and fractionation capacities were alleviated. Paramount commissioned its condensate stabilizer expansion in May and its amine train in September, allowing the Musreau Complex to operate unconstrained. By late 2015, the facility was processing to design specifications, operating at a reliability ratio of over 98 percent and recovering all of the available condensate plus approximately 90 Bbl per MMcf of other NGLs. As the Musreau Complex has been built to our specifications and is operating reliably, Paramount has entered into an agreement to sell Pembina Pipeline Corporation the full ownership of the facility for over $600 million in cash and other considerations, while retaining priority access to the capacity on a fee-for-service basis. Upon closing, this transaction will reduce our net debt by approximately 30 percent. Concurrent with the construction of the new Musreau facilities, Paramount drilled, completed and placed on production approximately 70 Montney horizontal wells and 45 Cretaceous horizontal wells. The significant pull-back of commodity prices has caused Paramount to limit current drilling activities. Once prices recover, Paramount plans to accelerate drilling operations to fully utilize the Musreau processing capacity. Paramount completed a capital program of $490 million in 2015, including: $86 million spent on infrastructure, principally to complete the Musreau facilities; $282 million on drilling and completion activities in the core Deep Basin area; $24 million on our Willesden Green Duvernay play; $32 million on the Birch Montney play in northeast British Columbia; $29 million on our Liard Basin shale gas play; $25 million building out two additional drilling rigs in our Fox Drilling subsidiary and $5 million in our Cavalier Energy oil sands subsidiary. Paramount’s daily production in 2015 increased by 80 percent year over year to 44,130 Boe/d. The Company’s sales mix now comprises significantly higher liquids volumes, with oil and NGLs  Paramount Resources Ltd. 2015 President & Chief Executive Officer’s Message    2 constituting 39 percent of total sales volumes in 2015 compared to 25 percent in 2014. Recent production levels have averaged about 51,000 Boe/d, of which approximately half is condensate and other NGLs. Operating costs decreased significantly from $7.96 per Boe in 2014 to $5.59 per Boe in 2015, as lower cost Musreau production became a larger proportion of sales. We also achieved significant G&A cost reductions in 2015. Cash flow from operations was $93.2 million in 2015, as materially lower commodity prices more than offset the increase in production and lower per-unit costs. Upon closing of the sale of the Musreau Complex, the proceeds will be used to pay down our bank credit facility and reduce our year end net debt of $1,904 million to approximately $1,350 million. Paramount’s liquidity will improve considerably as a result of the sale, providing the necessary flexibility to manage through these turbulent times. Paramount’s reserves remained essentially the same as the prior year, with proved reserves of 226 MMBoe and proved plus probable reserves of 338 MMBoe at year end 2015. Significant decreases in estimated future development costs due to reductions in well costs resulted in negative finding and development costs in 2015. On a three year rolling average, the Company’s finding and development costs are approximately $16.93/Boe for proved reserves and $12.20/Boe for proved plus probable reserves. in unconventional resource plays, and Two major themes have developed in our industry in recent years; the significant improvements in capital efficiencies, especially the material deterioration of commodity prices. Over the last eight years, the oil and gas industry has experienced immense change as it adjusted to revolutionary technological advancements in horizontal drilling and multi-stage fracture stimulation practices. The initial step changes in technology have been followed by periods of continuous improvement. Advances in drilling technology are allowing us to drill faster and cheaper, with longer lateral lengths than previously thought possible. Improvements in fracture stimulation technology have resulted in the ability to pump more proppant at higher rates and at significantly lower costs. These main themes of longer wells, higher fracture intensities and lower costs have further enhanced well economics at the current low commodity prices. Paramount has re-engineered our drilling and completion methods and streamlined our supply chain management in our core Montney play. The most significant changes in our well design have been to increase the lateral length of our wells by 50 percent to approximately 2,400 meters, to increase fracture intensities by doubling proppant loading to 1,200 pounds per foot and to decrease fluid costs by changing from oil-based fluids to water-based fluids. The Company expects to see reductions in drilling and completions costs for new wells of approximately 30 percent, while well performance is projected to improve by approximately 50 percent. We are very excited by the prospect of these process efficiencies. The industry continues to discover new sources of hydrocarbons with costs varying dramatically across different plays. The key is the ability to produce resources economically. Paramount has secured extensive acreage and play opportunities in the Deep Basin in western Canada that benefit from a low cost structure, high well productivity and ready access to markets. We believe our Musreau/Kakwa play is one of most economical plays in North America. After several years of very strong liquids prices, the worldwide supply of oil has outpaced demand, and prices collapsed through late 2014 and 2015 and have continued to deteriorate into early 2016. The current low oil prices have resulted in drastic reductions in capital investments in major projects throughout the world, which has begun to reduce supply and will  Paramount Resources Ltd. 2015 President & Chief Executive Officer’s Message    3 likely stimulate increased demand for oil. The combination of these factors should not only rebalance the market, but may result in a major positive price response in the not too distant future. Natural gas markets exhibit the same dynamics, and are arguably further advanced in this process than oil. Low natural gas prices, together with the shift to reduce carbon emissions, have resulted in major demand increases for natural gas used in power generation, petrochemicals and exports, including new LNG projects. Where commodity prices ultimately stabilize will depend in part on industry’s improvements in capital efficiencies. We expect further efficiency improvements will continue to be developed, but we are of the view that the next few years are not likely to see improvements on the scale of those made over the last few years. The primary key for success will ultimately be the quality of the plays themselves. Paramount believes we have captured material positions in some of the highest quality plays in North America. We shifted our strategy several years ago from securing as much resource as possible to targeting only the most profitable opportunities. Increasingly, producers are realizing this is critical to long-term success in the new energy industry. We believe we have done an excellent job of focusing the Company’s capital programs on its core liquids-rich Montney plays at Musreau/Kakwa, while progressing our understanding of several other potential large scale plays in the Duvernay at Willesden Green and in the Montney at Valhalla and Birch. Paramount has not yet provided formal guidance for its capital expenditure budget or production forecast for 2016. We expect to manage our activity levels to efficiently maximize production and cash flow while maintaining our future opportunity base, ultimately undertaking capital expenditures that modestly exceed cash flow levels. In the first quarter of 2016, Paramount has not drilled any new wells in its core Deep Basin area, choosing only to complete shale gas drilling operations that commenced in the prior winter in the Liard Basin. In our core producing properties, capital spending has focused on optimization and facility enhancements. Paramount expects to resume drilling operations in its core Deep Basin area in April 2016. In closing, we want to assure all our stakeholders, including our shareholders, debt investors, employees and the communities in which we work, that we are excited about the relationships we have forged and the future that lies ahead of us. Paramount is proud of what we do to provide long-term value creation for our investors while contributing to the high standard of living that our community and our population enjoys. Paramount is well positioned to participate in a changed, but very exciting, future for our industry. James H. T. Riddell President and Chief Executive Officer March 2016  Paramount Resources Ltd. 2015 President & Chief Executive Officer’s Message    4 2015 OVERVIEW PRINCIPAL PROPERTIES  Sales volumes averaged approximately 51,000 Boe/d from December 2015 through February 2016, approximately 25,000 Bbl/d were Liquids.  2015 annual sales volumes averaged 44,130 Boe/d, 80 percent higher than 2014, with Liquids sales volumes increasing by 184 percent to 17,345 Boe/d.  Montney volumes accounted for 67 percent of overall sales in December 2015 compared to 43 percent in December 2014.  Two six well Ultra-Rich Montney pads were completed in the fourth quarter. Total costs to drill, complete, equip and tie-in the 12 one-mile horizontal wells averaged approximately $8.5 million per well.  Kaybob operating expense was $3.44/Boe in 2015. Paramount’s corporate operating expense was $5.59/Boe in 2015, 30 percent lower than 2014.  Funds flow from operations totaled $93.2 million in 2015 compared to $141.0 million in 2014. Paramount continues to generate positive cash flows from operations despite the low commodity price environment as a result of the high Liquids content of its Montney resources and low per unit production costs.  Capital spending for 2015 totaled $490.4 million, of which $429.9 million was invested in Paramount’s Principal Properties and $60.5 million was invested in Strategic Investments.  At December 31, 2015, the Company recorded aggregate impairment write-downs of $287.8 million related to its Principal Properties as a result of the decrease in commodity prices and other factors. RESERVES  Principal Properties proved and proved plus probable ("P+P") reserves were approximately 226.3 MMBoe and 337.6 MMBoe, respectively in 2015. There was no material change in reserves volumes from 2014.  The Company’s reserves continue to be economical despite significantly lower commodity prices because of high Liquids content and continued efforts to reduce operating and capital costs.  Kaybob area three-year average P+P finding and development costs averaged $11.25 per Boe, before infrastructure capital.  The estimated net present value of Paramount’s proved reserves at December 31, 2015 was $1.6 billion compared to $2.3 billion in 2014 (10 percent discount, before tax). The estimated value of P+P reserves was $3.1 billion compared to $3.8 billion in 2014 (10 percent discount, before tax).  P+P future development costs decreased $0.6 billion to $2.5 billion in 2015 compared to $3.1 billion in 2014, primarily due to improved capital efficiencies resulting from changes in completion practices, technical improvements and cost reductions in industry services.  Paramount Resources Ltd. 2015 Overview    5STRATEGIC INVESTMENTS  Fox Drilling has completed the construction of its two new triple-sized built-for-purpose walking rigs. They will be deployed as part of Paramount’s Deep Basin drilling programs in 2016.  Drilling operations resumed at the c-37-D La Biche shale gas well in the Liard Basin in December and the well is expected to be drilled to target depth before spring breakup. Upon the completion of drilling operations, the Company will have secured its mineral rights in the region for another 10 years.  At December 31, 2015, the Company recorded impairment charges of $160.0 million related to Cavalier Energy Inc. and other long-term projects as a result of the lower commodity prices. CORPORATE  The Company is managing its near-term liquidity by aligning capital expenditures with cash flows. Future spending levels for Paramount’s core developments and other initiatives will be determined following the closing of the Midstream Transaction and will also depend on commodity prices and other factors.  Paramount continues to implement measures to reduce general and administrative costs. The Company has eliminated most corporate consultant positions, reduced employee salaries by five percent in 2016 and reduced its permanent workforce by approximately 15 percent.  The Company has 6,000 Bbl/d of liquids sales hedging contracts in place for calendar 2016 at an average WTI price of C$75.72/Bbl. In January 2016, Paramount locked in the unrealized gain for 2,000 Bbl/d of the hedged volumes by entering into a fixed price liquids purchase contract at a WTI price of C$50.64/Bbl.  For the year ended December 31, 2015, the Company recorded the following non-cash accounting adjustments: a $194.2 million reduction of deferred tax assets, an $81.8 million impairment charge related to investments in other entities and a $60.8 million unrealized foreign exchange loss on the 2023 US senior notes.  As a result of the strengthening of the Canadian dollar relative to the US dollar between December 31, 2015 and March 11, 2016, the year-end unrealized foreign exchange loss of $60.8 million related to the Company’s $450 million US senior notes has been reduced by $28.1 million.  Paramount Resources Ltd. 2015 Overview    6REVIEW OF OPERATIONS PRINCIPAL PROPERTIES Paramount continued to expand its Deep Basin developments in 2015, bringing 36 (35.3 net) Montney wells on production in the Kaybob area as incremental processing capacity became available following the completion of the 15,000 Bbl/d condensate stabilizer expansion (the "Stabilizer Expansion") and the Amine Train at the Musreau Complex. At Karr-Gold Creek, 11 (10 net) new Montney wells were brought on as the Company continues to delineate the middle-Montney formation. Third-party expansions of transportation networks and NGLs processing facilities were also completed during the year, further removing constraints on Paramount’s production capability. Sales volumes increased 80 percent over 2014, averaging 44,130 Boe/d for the year, as Kaybob area sales volumes increased 107 percent. The start-up of the new Liquids-rich Montney wells contributed to a 184 percent increase in Liquids sales volumes in 2015. Following the commencement of production for the two six well Ultra-Rich Montney pads in late 2015, the Company achieved a sales mix of approximately 50 percent Liquids / 50 percent natural gas in January and February 2016. Paramount’s sales volumes averaged approximately 51,000 Boe/d from December 2015 through February 2016. The Company has reduced per-unit operating costs by 30 percent year over year, as the low-cost Kaybob area has become a higher proportion of overall production. Operating costs were $3.44/Boe in the Kaybob area in 2015, with operating costs for the overall Company averaging $5.59/Boe. Operating costs are lower for Paramount’s multi-well pads due to the benefits of economies of scale in utilizing shared surface facilities and other operational efficiencies from centralized production. Paramount’s capital spending in its Principal Properties totaled $429.9 million in 2015 compared to the Company’s original budget of $355 million, mainly due to $41.9 million of incremental spending associated with the acceleration of the completion of two six well Ultra-Rich Montney pads. The Company also invested $14.1 million in the gas lift programs at Musreau and Karr-Gold Creek, which included the installation of downhole equipment for affected wells and modifications to surface equipment and gathering systems. Paramount’s 2015 average sales volumes of 44,130 Boe/d were lower than previously announced guidance due to a number of factors, including lower than anticipated production from wells completed with oil-based fluids and lower-intensities of proppant. As a broader array of well performance data has become available following the start-up of new Montney wells in 2015, well completion practices are continuing to evolve. The Company has been completing new wells with water-based fluids and higher intensities of proppant, which has resulted in better well performance. 2015 sales volumes were also lower because the high liquids content of certain new 2015 Montney wells caused fluid loading in the vertical section of the wellbores, resulting in the wells flowing at reduced rates or being temporarily shut in. Modifications have been made to the affected wells and surface facilities to install gas lift systems to optimize production. All the wells were subsequently restarted. Infrastructure constraints were also a factor in 2015, impacting the Company’s production to a greater degree than anticipated. Unscheduled third-party outages and disruptions related to transportation pipelines and downstream NGLs processing facilities impacted the industry in general in 2015, including Paramount’s Deep Basin production at Musreau and at Karr-Gold Creek. The Musreau Complex also experienced processing constraints and higher than expected downtime related to the tie-in of the 15,000 Bbl/d condensate Stabilizer Expansion and the new amine train, other maintenance outages and lower  Paramount Resources Ltd. 2015 Review of Operations    7NGLs recoveries due to the plant operating at higher than design temperatures. Paramount completed maintenance at the Musreau Complex in the fourth quarter that reduced operating temperatures at the plant, increasing NGLs recoveries. Paramount Deep Basin Montney Lands  Paramount Resources Ltd. 2015 Review of Operations    8 Q4 2015 Q4 2014 % Change 2015 2014 % Change 2015 OPERATING RESULTS (1) Sales volumes by COU (Boe/d) Kaybob Grande Prairie Other Total 34,941 9,001 1,524 45,466 25,062 8,157 1,211 34,430 39 10 26 32 % Change Netback ($ millions) Natural gas revenue Condensate and oil revenue Other NGLs revenue (3) Royalty and sulphur revenue Petroleum and natural gas sales Royalties Operating expense Transportation and NGLs processing (4) Netback $/Boe (2) 2.57 46.60 12.59 – 21.82 (0.73) (5.49) (3.90) 11.70 $/Boe (2) 3.98 68.45 26.64 – 31.37 (1.48) (7.02) (3.62) 19.25 37.3 42.8 10.6 0.6 91.3 (3.1) (23.0) (16.3) 48.9 Principal Properties Capital(5) ($ millions) Wells and exploration Facilities and gathering By COU ($ millions) Kaybob Grande Prairie Other 49.6 13.4 63.0 55.2 1.8 6.0 63.0 52.7 33.5 12.6 0.6 99.4 (4.7) (22.2) (11.5) 61.0 183.4 41.2 224.6 182.4 39.4 2.8 224.6 35,472 7,271 1,387 44,130 17,137 5,956 1,431 24,524 107 22 (3) 80 $/Boe $/Boe (2) (35) (32) (53) – (30) (51) (22) 8 (39) 2.83 166.2 52.83 166.0 41.2 12.92 3.4 – 23.39 376.8 (10.4) (0.64) (90.0) (5.59) (4.08) (65.7) 13.08 210.7 $/Boe (2) 4.78 192.7 88.41 128.6 25.1 32.36 3.6 – 39.10 350.0 (17.5) (1.96) (71.3) (7.96) (4.01) (35.9) 25.17 225.3 % Change $/Boe (41) (40) (60) – (40) (67) (30) 2 (48) (73) (67) (72) (70) (95) 114 (72) 318.4 111.5 429.9 293.1 66.2 70.6 429.9 603.2 210.7 813.9 528.2 204.5 81.2 813.9 (47) (47) (47) (45) (68) (13) (47) (1) (2) (3) (4) (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. Natural gas revenue shown per Mcf. Other NGLs means ethane, propane and butane. Includes downstream natural gas, NGLs and oil transportation costs and NGLs fractionation costs incurred by the Company. Principal Properties Capital includes capital expenditures and geological and geophysical costs related to the Company’s Principal Properties, excluding land acquisitions and capitalized interest. KAYBOB – MUSREAU, RESTHAVEN, SMOKY In 2015, the Company’s inventory of pre-drilled wells were brought on production and sales volumes from Musreau area Montney wells increased to approximately 50 percent of total Company sales volumes. Paramount generally holds a 100 percent working interest in its Montney wells, and, as a result, the Company’s share of volumes processed through the Musreau Complex in the second half of the year increased to 86 percent of the natural gas and 96 percent of the condensate. The incremental volumes from these new Montney wells resulted in a 152 percent increase in Kaybob condensate sales volumes compared to 2014. The Company’s Liquids-rich natural gas project continues to be economical despite the current low commodity price environment. Paramount’s Other NGLs volumes are fractionated and marketed under long-term agreements which provide the Company with secure access to markets for its Other NGLs production. Paramount is benefitting from a long-term ethane sales agreement which yields a premium to AECO prices. Due to a supply and demand imbalance, market prices for propane were negative at times in 2015. Ethane and propane represented approximately ten percent and seven percent, respectively, of Paramount’s total sales volumes in 2015.  Paramount Resources Ltd. 2015 Review of Operations    9 Musreau Lands KAYBOB MONTNEY WELLS In the fourth quarter, Paramount successfully finished completion operations for the 02-34 and 3-33 six well Ultra-Rich Montney pads at Musreau. All 12 wells were completed with water-based fluids and higher intensity fracks of 1,200 pounds of proppant per linear foot. The higher intensity water-based completion approach, combined with lower current year service costs, reduced completion costs by approximately 40 percent compared to the previous completions and are expected to achieve comparable or better well performance. The Company is migrating its future drilling programs towards a combination of 1.0 and 1.5 mile lateral length wells, depending on location and other factors. These longer horizontal wells with an increased number of frack stages are expected to deliver higher natural gas and Liquids production. The Company estimates that 1.5 mile lateral wells will recover approximately 50 percent more resources while reducing drilling and completion costs per meter of horizontal wellbore by approximately 15 percent. As a result of the changes in completion practices, technical improvements, increased efficiencies and reductions in industry rates, the Company has updated its cost estimates to drill, complete, equip and tie- in new Musreau area Montney wells. Current anticipated costs for 1.0 mile lateral wells are $8.2 million, a 28 percent reduction compared to Paramount's average well costs in 2014, and $10.2 million for 1.5 mile lateral wells. Since 2010, Paramount has drilled a total of 73 Montney wells on its Kaybob area lands. Initially, delineation wells were drilled at Musreau, Smoky and Resthaven to evaluate the resource base. As the play has been de-risked, the Company has focused its drilling on the northern portion of its land base at Musreau where the Company believes condensate yields are the highest. The following table summarizes the initial production rates and wellhead condensate-gas ratios ("CGRs") for the Company’s 73 Kaybob area Montney wells:  Paramount Resources Ltd. 2015 Review of Operations    10IP 30 IP 90 IP 180 IP 270 Less than 30 days on production Wells in progress (4) Total wells KAYBOB MONTNEY WELLS – ALL AREAS (1) Natural Gas (2) (MMcf/d) 3.7 3.4 2.9 2.3 Wellhead Liquids (2) (Bbl/d) 640 408 306 255 CGR (3) (Bbl/MMcf) 175 121 106 113 Total (Boe/d) 1,257 975 789 638 Wells 65 49 36 28 4 4 73 (1) (2) To February 29, 2016. Onstream dates of wells range from January 2012 to January 2016. Production rates are the average gross volumes per day measured at the wellhead over the initial 30, 90, 180 and 270 producing days commencing from the day after load oil volumes were completely recovered for wells completed with oil-based fluids and the first producing day for wells completed with water-based fluids (the "Initial Production Period"). Excludes days when the wells did not produce. Sales volumes are approximately 20 percent lower due to shrinkage. (3) CGRs were calculated for each well over the applicable Initial Production Period by dividing total wellhead Liquids volumes by total natural gas volumes during such period. (4) Wells in progress include wells that have been drilled but have not been completed and/or tied-in. Of the 73 total wells, 64 (62.3 net) are located in the northern portion of the Company’s lands at Musreau. The following table summarizes the average production rates and CGRs for these 64 wells over their Initial Production Periods: Rich Wells Ultra-Rich Wells Total Rich & Ultra-Rich Wells MUSREAU MONTNEY WELLS (1) Natural Gas (2) (MMcf/d) 4.8 4.0 3.3 2.6 IP 30 IP 90 IP 180 IP 270 Well- Head Liquids (2) CGR (3) (Bbl/d) (Bbl/MMcf) (Boe/d) Total Wells 578 387 282 220 122 97 87 86 1,378 1,054 832 653 Less than 30 days on production Wells in progress (4) Total wells Natural Gas (2) (MMcf/d) 2.2 1.8 1.5 1.4 Well- Head Liquids (2) CGR (3) Total Wells (Bbl/d) (Bbl/MMcf) (Boe/d) 783 546 458 393 359 303 296 283 1,150 846 708 626 26 12 8 8 1 1 28 Natural Gas (2) (MMcf/d) 3.6 3.4 2.8 2.2 Well- Head Liquids (2) CGR (3) (Bbl/d) (Bbl/MMcf) (Boe/d) Total Wells 667 430 325 276 183 127 114 127 1,267 997 792 643 60 44 33 25 2 2 64 34 32 25 17 1 1 36 (1) (2) To February 29, 2016. Onstream dates of wells range from January 2012 to January 2016. Production rates are the average gross volumes per day measured at the wellhead over the initial 30, 90, 180 and 270 days of the Initial Production Period for each well. Excludes days when the wells did not produce. Sales volumes are approximately 20 percent lower due to shrinkage. (3) CGRs were calculated for each well over the applicable Initial Production Period by dividing total wellhead Liquids volumes by total natural gas volumes during such period. (4) Wells in progress include wells that have been drilled but have not been completed and/or tied-in. Of the 60 wells with Initial Production Periods exceeding 30 days, 34 are Rich Montney wells with IP 30 production averaging 1,378 Boe/d and IP 30 CGRs averaging 122 Bbl/MMcf. The other 26 are Ultra-Rich Montney wells with IP 30 production averaging 1,150 Boe/d and IP 30 CGRs averaging 359 Bbl/MMcf. Midstream Sale In March 2016, Paramount entered into an agreement with a wholly-owned subsidiary of Pembina Pipeline Corporation ("Pembina") for the sale of its Musreau Complex and related midstream assets (the "Midstream Transaction") for cash and other considerations in excess of $600 million. The Midstream Transaction includes the 50 MMcf/d Refrigeration Plant, the 200 MMcf/d Deep Cut Plant, the 22,500 Bbl/d Condensate Stabilizer, the Amine Facility and the gas sales pipeline connecting the  Paramount Resources Ltd. 2015 Review of Operations    11 Musreau Complex to the TCPL meter station, as well as the majority of Paramount’s larger-diameter gathering system in the Musreau area. Also included in the Midstream Transaction are the site and engineering and design work for the future 6-18 gas processing plant (the "6-18 Plant"). Paramount will receive $556 million in cash at closing, plus a $35 million capital commitment for an enhancement program the Company planned to complete in 2016 at the Musreau Complex. In addition, Pembina has agreed to optimize existing transportation arrangements to match Paramount’s anticipated production growth. Paramount has also secured the right, upon the satisfaction of certain conditions, to call upon Pembina to build and provide up to 200 MMcf/d of gas processing capacity at the 6-18 Plant site. As part of the Midstream Transaction, Paramount and Pembina have also entered into a Midstream Service Agreement ("MSA") which includes a 20-year arrangement that secures Paramount priority access to the sold capacity at the Musreau Complex. Paramount will have lower take-or-pay volume commitments in the initial years, ramping up to 200 MMcf/d by 2019 to align with the planned expansion and development of Paramount’s Liquids-rich Montney resources. Under the terms of the MSA, the Company will pay a fixed capital fee per Mcf of raw gas delivered to the Musreau Complex, plus operating expenses. This capital charge will encompass costs for natural gas processing, condensate stabilization, use of the gathering system and transportation of sales gas from the Musreau Complex to the TCPL meter station. The capital processing fee and the foregoing of processing income is anticipated to result in Kaybob operating costs increasing by approximately $3.00 per Boe of sales volumes. Volumes delivered by Paramount in excess of its take-or-pay commitment will have processing priority treatment at the Musreau Complex. A predetermined methodology has been agreed for the processing capital fee at the future 6-18 Plant as well as the associated scheduled take-or-pay gas delivery for firm processing service. Upon closing, the proceeds from the Midstream Transaction will be used to pay down the Company’s bank credit facility (the "Facility"). As of February 29, 2016, Paramount had $668.4 million drawn on the Facility. The Company intends to reduce the $900 million Tranche A of the Facility by $300 million to $600 million and cancel the $100 million Tranche B of the Facility, which has never been drawn. The Midstream Transaction is expected to close in the second quarter of 2016, subject to regulatory approvals and customary closing conditions. There are no financing or other non-customary material closing conditions.  Paramount Resources Ltd. 2015 Review of Operations    12 GRANDE PRAIRIE – KARR-GOLD CREEK Karr-Gold Creek Lands Sales volumes in the Grande Prairie area increased 22 percent in 2015 to 7,271 Boe/d compared to 5,956 Boe/d in 2014. Paramount brought-on 11 (10.0 net) new middle-Montney wells at Karr-Gold Creek in 2015 and the Company now has a total of 25 (23.5 net) operated middle-Montney producing wells at Karr-Gold Creek. The following table summarizes the average production rates and wellhead CGRs for these wells over their Initial Production Periods. KARR-GOLD CREEK MIDDLE MONTNEY WELLS (1) Natural Gas (2) (MMcf/d) Wellhead Liquids (2) (Bbl/d) CGR (3) (Bbl/MMcf) IP 30 IP 90 IP 180 IP 270 Less than 30 days on production Total wells 2.6 2.1 1.8 1.8 291 218 184 156 111 104 100 87 Total (Boe/d) 724 568 484 456 Wells 24 24 22 11 1 25 (1) (2) (3) To February 29, 2016. Onstream dates of wells range from May 2013 to August 2015. Production rates are the average gross volumes per day measured at the wellhead over the initial 30, 90, 180 and 270 days of the Initial Production Period for each well. Excludes days when the wells did not produce. Sales volumes are approximately 20 percent lower due to shrinkage. CGRs were calculated for each well over the applicable Initial Production Period by dividing total Liquids volumes by total natural gas volumes during such period.  Paramount Resources Ltd. 2015 Review of Operations    13 MUSREAU AND KARR-GOLD CREEK GAS LIFT PROGRAM In the fourth quarter of 2015, the installation of "gas lift" production equipment was completed on 11 wells in the Musreau area, restoring production from wells that were flowing at reduced rates or had been temporarily shut in. The Company has also installed gas lift equipment on 17 wells at Karr-Gold Creek. Gas lift equipment is used to optimize the long-term production of higher liquids content wells by re- injecting natural gas into the vertical section of wellbores to provide artificial lift of produced volumes. The Company anticipates having a total of 44 wells in the Musreau and Karr-Gold Creek areas equipped with gas lift by mid-2016. OTHER AREAS Paramount has drilled a total of five (3.0 net) Duvernay wells at Willesden Green in southern Alberta, with three of the wells currently on production. The Company has completed its earning obligations and now holds the rights to 100 (54 net) sections of Duvernay rights at Willesden Green. Construction of the non-operated compression facility at Birch in northeast British Columbia was completed in the fourth quarter of 2015, and three (1.5 net) Montney wells were brought on production, adding approximately 1,000 Boe/d of new production. PRINCIPAL PROPERTIES – RESERVES / F&D Principal Properties proved reserves were approximately 226 MMBoe in 2015 and 2014. Proved plus probable ("P+P") reserves decreased by three percent to 338 MMBoe in 2015. The Company’s reserves continue to be economic despite lower commodity prices because of high Liquids content, low production costs and continued efforts to reduce per-well capital costs. Natural gas (Bcf) NGLs (MBbl) Light and Medium crude oil (MBbl) Total Principal Properties (MBoe) 2015 710.5 107,125 788 226,340 Proved (1)(2) 2014 % Change 1 703.8 (1) 108,410 (29) 1,108 – 226,812 Proved plus Probable (1)(2) 2015 1,065.7 158,934 1,074 337,633 2014 % Change (2) (3) (30) (3) 1,090.9 163,736 1,526 347,085 (1) (2) 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, 2015 in accordance with National Instrument 51-101 definitions, standards and procedures. Working interest reserves before royalty deductions.  Paramount Resources Ltd. 2015 Review of Operations    14 Gross Principal Properties Reserves (1) Before Tax Net Present Value (1)(2) ($ millions) Light Medium Crude Oil (MBbl) Proved Developed Producing Developed Non-producing Undeveloped Total Proved Total Probable Total Proved plus Probable Natural Gas (Bcf) 198.7 1.9 509.9 710.5 355.2 1,065.7 NGLs (MBbl) Total (MBoe) Discount Rate 0% 10% 712 – 76 788 287 1,074 26,993 54 80,078 107,125 51,810 158,934 60,817 378 165,145 226,340 111,293 337,633 838 3 2,285 3,126 2,713 5,839 646 2 960 1,608 1,448 3,055 Columns may not add due to rounding (1) (2) The estimated net present values disclosed in this document do not represent fair market value. Revenue and expenditures were calculated based on McDaniel’s forecast prices and costs as of January 1, 2016. The estimated future net revenue of Paramount’s reserves was impacted by a 20 percent decrease in forecast commodity prices in 2015. As at December 31, 2015, the net present value of proved reserves (discounted at 10 percent, before tax) decreased 29 percent to $1.6 billion ($15.14 per share) compared to the prior year and the net present value of P+P reserves (discounted at 10 percent, before tax) decreased 20 percent to $3.1 billion ($28.76 per share) compared to 2014. Principal Properties Reserves Reconciliation Natural Gas (Bcf) 703.8 3.9 74.1 (12.6) – (58.7) 710.5 Proved (1) Oil & NGLs (2) (MBbl) 109,518 237 5,316 (900) 72 (6,331) 107,912 Total (MBoe) 226,812 889 17,668 (3,000) 78 (16,107) 226,340 Proved plus Probable (1) Oil & NGLs (2) (MBbl) Natural Gas (Bcf) 1,090.9 8.8 38.9 (14.3) – (58.7) 1,065.6 165,262 933 1,565 (1,510) 91 (6,333) 160,008 Total (MBoe) 347,085 2,399 8,049 (3,892) 99 (16,107) 337,633 January 1, 2015 Extensions & discoveries Technical revisions Economic factors Acquisitions Production December 31, 2015 (1) Columns and rows may not add due to rounding. (2) Light and medium crude oil and NGLs.  Paramount Resources Ltd. 2015 Review of Operations    15 Finding and Development Costs – Three Year Average Proved Kaybob Total Proved plus Probable Kaybob Total Capital Costs (1) ($ millions) Net Change in FDC (2) ($ millions) Total F&D Capital ($ millions) Reserves Additions (3) (MBoe) 3-Year Average F&D 2015 ($/Boe) 2014 ($/Boe) 960.2 1,379.5 2,079.2 2,221.6 3,039.4 3,601.1 960.2 1,379.5 1,945.6 2,160.1 2,905.8 3,539.6 193.3 212.7 258.4 290.2 15.72 16.93 11.25 12.20 17.83 18.95 12.49 13.37 (1) (2) (3) Aggregate exploration and development costs incurred for the three years ended December 31, 2015. Excludes capital costs related to facilities and gathering systems, capitalized interest and land acquisitions. Change in estimated future development costs from December 31, 2012 to December 31, 2015. Reserve additions were calculated as the aggregate of extensions & discoveries, technical revisions and economic factors for the three years ended December 31, 2015. Excludes acquisitions and dispositions. The following table summarizes the undiscounted future development costs deducted in the calculation of future net revenue: Future Development Costs (1) (Undiscounted, $ millions) Proved Developed Producing Proved Developed Non-producing Proved Undeveloped Total Proved Total Probable Total Proved plus Probable (1) Columns may not add due to rounding. 2016 4 1 249 254 14 268 2017 – – 396 396 35 431 2018 – – 653 653 24 677 2019 – – 513 513 24 537 2020 – – 544 544 – 544 Total 4 1 2,356 2,361 96 2,457 P+P future development costs decreased $660 million to $2.5 billion in 2015 compared to $3.1 billion in 2014, primarily due to lower per-well capital cost estimates incorporated in undeveloped reserve estimates. The Company’s costs to drill, complete and equip wells have decreased as a result of changes in completion practices, technical improvements, increased efficiencies and lower industry rates for oilfield services. Midstream Transaction – Changes to Reserve Estimates The Company estimates that as at December 31, 2015, assuming all other variables are held constant, the pro forma impact of anticipated changes in operating costs, processing income and royalties as a result of the Midstream Transaction would result in a reduction to estimated future net revenues of proved reserves of approximately $315 million (discounted at 10 percent, before tax) and of P+P reserves of approximately $425 million (discounted at 10 percent, before tax). The impact of the Midstream Transaction on Paramount's reserve volumes and other reserves disclosure is not expected to be material.  Paramount Resources Ltd. 2015 Review of Operations    16 LAND As at December 31, 2015 As at December 31, 2014 Average Working Interest 58% 54% 57% Gross (1) 2,939 359 3,298 Net (2) 1,722 201 1,923 Average Working Interest 59% 56% 58% Liard Basin Lands (thousands of acres) Undeveloped land Acreage assigned reserves Total Gross (1) 2,803 351 3,154 Net (2) 1,615 190 1,805 (1) (2) "Gross" acres means the total acreage in which Paramount has an interest. "Net" acres means gross acres multiplied by Paramount’s working interest therein. 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 130 net sections of land with potential from the Besa River shale formation. In 2015, the Company completed drilling operations at the Dunedin d-71-G vertical exploratory shale gas well and then moved to the c-37- D vertical well at La Biche, where drilling operations commenced before being suspended for spring break- up. Drilling operations resumed at the c-37-D well in December 2015 and the well is expected to be drilled to target depth before spring breakup in 2016. Upon completing drilling operations for the 2015 / 2016 winter drilling season, the Company will have secured its mineral rights in the region for another 10 years. Cavalier Energy Inc. (“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 at Hoole, which is located 10 kilometers northeast of Wabasca-Desmarais, Alberta. Since 2004, approximately $111 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.  Paramount Resources Ltd. 2015 Review of Operations    17 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. Cavalier is also in the process of preparing an application for a second stage. The Company is not planning to incur significant near-term expenditures on the Hoole Phase 1 project. The development of the project is contingent upon Cavalier obtaining financing. Fox Drilling, a wholly-owned subsidiary of Paramount, owns seven triple-sized rigs, including four built-for-purpose walking rigs. These rigs are designed to drill the deep horizontal wells on multi-well pads that industry is currently focusing on. During 2015, five rigs were deployed on the Company’s Deep Basin lands, drilling wells at Musreau, Smoky and Karr-Gold Creek. Construction of two new walking rigs was recently completed at a cost of approximately $25 million each. Fox Drilling’s loan facilities were expanded in 2014 to provide partial funding for these new rigs.M INVESTMENTS IN OTHER ENTITIES Paramount holds securities in a number of publicly-traded and private corporations as part of its portfolio of Strategic Investments. The Company’s investment in Trilogy Energy Corp. was principally obtained in the course of its spin-out from Paramount. Investments in shares of most other entities, including MEG Energy Corp., were received as consideration for properties sold to the entities. Paramount’s investments are summarized below: Market Value Trilogy Energy Corp. MEG Energy Corp. Other (2) December 31, 2015 December 31, 2014 Shares (000’s) 19,144 3,700 ($ millions) 70.1 29.7 31.0 130.8 ($/share) 3.66 8.02 Shares (000’s) 19,144 3,700 ($/share) 7.91 19.55 ($ millions) 151.4 72.3 33.2 256.9 (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.  Paramount Resources Ltd. 2015 Review of Operations    18 CORPORATE Paramount continues to implement measures to reduce its cost structure while maximizing the efficiency and effectiveness of its operations. The Company has eliminated most corporate consultant positions, reduced employee salaries by five percent in 2016 and reduced its permanent workforce by approximately 15 percent. Labour and travel costs for the Company's field operations are expected to be reduced by 12 to 15 percent in 2016. Capital expenditures, procurement processes and operating activities in the field are being reviewed to identify further opportunities to improve efficiencies and reduce costs. The Company is managing its near-term liquidity by aligning capital expenditures with cash flows. Future spending levels for Paramount’s core developments and other initiatives will be determined following the closing of the Midstream Transaction and will also depend on commodity prices and other factors. The Company has 6,000 Bbl/d of Liquids sales hedging contracts in place for calendar 2016 at an average WTI price of C$75.72/Bbl. In January 2016, Paramount locked in the unrealized gain for 2,000 Bbl/d of the hedged volumes by entering into a fixed price Liquids purchase contract at a WTI price of C$50.64/Bbl. As a result of the strengthening of the Canadian dollar relative to the US dollar between December 31, 2015 and March 11, 2016, the year-end unrealized foreign exchange loss of $60.8 million related to the Company’s $450 million US senior notes due 2023 has been reduced by $28.1 million.  Paramount Resources Ltd. 2015 Review of Operations    19MANAGEMENT’S DISCUSSION AND ANALYSIS This Management’s Discussion and Analysis ("MD&A"), dated March 17, 2016, 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, 2015. 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, British Columbia and Northwest Territories. 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. 2015 Management’s Discussion & Analysis    20 2015 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 (2) Investments in other entities – market value (3) Total assets Long-term debt Net debt OPERATIONAL Sales volumes (4) Natural gas (MMcf/d) Condensate and oil (Bbl/d) Other NGLs (Bbl/d) (5) Total (Boe/d) Net wells drilled (excluding oil sands evaluation) Net oil sands evaluation wells drilled FUNDS FLOW FROM OPERATIONS ($/Boe) (4) Petroleum and natural gas sales Royalties Operating expense Transportation and NGLs processing (6) Netback Commodity contract settlements Netback including commodity contract settlements General and administrative – corporate General and administrative – strategic investments Interest and financing Dividends from investments Other Funds flow from operations 2015 2014 2013 376.8 – 376.8 93.2 – 93.2 0.88 (901.3) (8.52) (901.3) (8.52) 429.9 130.8 2,781.0 1,750.2 1,904.6 160.7 8,610 8,735 44,130 31 – 23.39 (0.64) (5.59) (4.08) 13.08 0.78 13.86 (1.12) (0.36) (6.73) – 0.14 5.79 350.0 – 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 (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. 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. Based on the period-end closing prices of publicly-traded investments and the book value of the remaining investments. Amounts for 2013 include the results of discontinued operations. (3) (4) (5) Other NGLs means ethane, propane and butane. (6) Includes downstream natural gas, NGLs and oil transportation costs and NGLs fractionation costs incurred by the Company.  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    21 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 2015 (418.2) (281.8) (213.8) 12.5 (901.3) – (901.3) 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) Paramount recorded a net loss of $901.3 million for the year ended December 31, 2015, which included aggregate impairment charges of $529.6 million consisting of $287.8 million for Principal Properties, $160.0 million for Strategic Investments and $81.8 million related to investments in securities. The current year loss also includes a $194.2 million de-recognition of deferred income tax assets. A net loss of $71.7 million was recorded in the same period in 2014. Significant factors contributing to the change are shown below: Year ended December 31 Net Loss – 2014  Higher impairment write-downs of property, plant and equipment in 2015  Impairment write-downs of exploration and evaluation assets and goodwill in 2015  Higher depletion and depreciation due to higher sales volumes in 2015  Loss on the sale of oil and gas properties in 2015 compared to a gain in 2014  Higher write-downs of investments in securities  Higher foreign exchange loss, primarily related to the US 2023 Senior Notes  Higher interest and financing expense due to increased debt  Higher loss from equity-accounted investments  Lower netback primarily due to lower commodity prices  Debt extinguishment expense in 2015 due to the 2017 Senior Notes redemption  Higher gains on commodity contracts  Higher income tax recovery  Lower geological and geophysical expense in 2015  Other Net Loss – 2015 (71.7) (231.0) (184.1) (163.1) (104.7) (66.2) (60.5) (40.1) (19.6) (14.6) (12.0) 49.9 9.5 6.4 0.5 (901.3)  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    22 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) 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. Income from discontinued operations 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 $9.4 million. Funds Flow from Operations (1) The following is a reconciliation of funds flow from operations to the nearest GAAP measure: Year ended December 31 Cash from operating activities Change in non-cash working capital Geological and geophysical expenses Asset retirement obligations settled Funds flow from operations Funds flow from operations ($/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 2015 84.3 (3.8) 6.1 6.6 93.2 5.79 2015 93.2 – 93.2 2014 118.5 5.4 12.5 4.6 141.0 15.75 2013 (2) 44.9 12.2 7.2 6.3 70.6 9.24 2014 2013 141.0 – 141.0 71.9 (1.3) 70.6  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    23 Funds flow from operations for the year ended December 31, 2015 was $47.8 million lower than 2014. Significant factors contributing to the change are shown below: Year ended December 31 Funds flow from operations – 2014  Higher interest and financing expense due to increased debt  Lower netback primarily due to lower commodity prices  Dividends from equity-accounted investments in 2014  Receipts from commodity contract settlements in 2015 compared to payments in 2014  Other Funds flow from operations – 2015 141.0 (39.6) (14.6) (7.4) 13.7 0.1 93.2 Funds flow from operations for the year ended December 31, 2014 was $70.4 million higher than 2013. Significant factors contributing to the change are shown below: Year ended December 31 Funds flow from operations – 2013  Higher netback primarily due to higher sales volumes and higher natural gas prices  Higher interest and financing expense due to increased debt   Higher general and administrative expense Funds flow from operations – 2014 Lower other income PRINCIPAL PROPERTIES Netback and Segment Income (Loss) 70.6 97.8 (17.8) (5.2) (4.4) 141.0 Year ended December 31 2015 2014 Natural gas revenue Condensate and oil revenue Other NGLs revenue (2) Royalty and sulphur revenue Petroleum and natural gas sales Royalties Operating expense Transportation and NGLs processing (3) Netback Commodity contract settlements Netback including commodity contract settlements Other principal property items (see below) Segment income (loss) ($/Boe) (1) 2.83 52.83 12.92 – 23.39 (0.64) (5.59) (4.08) 13.08 0.78 13.86 166.2 166.0 41.2 3.4 376.8 (10.4) (90.0) (65.7) 210.7 12.6 223.3 (641.5) (418.2) 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 ($/Boe) (1) 4.78 88.41 32.36 – 39.10 (1.96) (7.96) (4.01) 25.17 (0.13) 25.04 Natural gas revenue shown per Mcf. (1) (2) Other NGLs means ethane, propane and butane. (3) Includes downstream natural gas, NGLs and oil transportation costs and NGLs fractionation costs incurred by the Company. Petroleum and natural gas sales were $376.8 million in 2015, an increase of $26.8 million from the prior year due to higher sales volumes, partially offset by lower commodity prices.  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    24 The impact of changes in prices and sales volumes on petroleum and natural gas sales are as follows: Year ended December 31, 2014 Effect of changes in sales volumes Effect of changes in prices Change in royalty and sulphur revenue Year ended December 31, 2015 Sales Volumes Natural Gas (MMcf/d) 2015 126.1 29.3 2.6 2.7 160.7 2014 % Change 79.0 24.9 3.6 3.0 110.5 60 18 (28) (10) 45 Kaybob Grande Prairie Southern Northern Total Natural gas 192.7 87.6 (114.1) – 166.2 Condensate and oil 128.6 149.2 (111.8) – 166.0 Other NGLs 25.1 78.1 (62.0) – 41.2 Royalty and sulphur 3.6 – – (0.2) 3.4 Total 350.0 314.9 (287.9) (0.2) 376.8 Year ended December 31 Condensate and Oil (Bbl/d) 2014 % Change 2,468 1,317 182 19 3,986 2015 6,213 2,027 339 31 8,610 152 54 86 63 116 Other NGLs (Bbl/d) 2014 % Change 1,512 486 130 – 2,128 445 (26) (1) 100 310 2015 8,241 362 129 3 8,735 Total (Boe/d) 2014 % Change 17,137 5,956 906 525 24,524 107 22 – (9) 80 2015 35,472 7,271 908 479 44,130 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. With this incremental capacity available throughout 2015, Paramount’s sales volumes increased 80 percent to 44,130 Boe/d compared to 24,524 Boe/d in 2014. Sales volumes within the Kaybob COU increased 107 percent in 2015 compared to the prior year. Natural gas sales volumes increased 45 percent to 160.7 MMcf/d in 2015 compared to 110.5 MMcf/d in 2014. The increase was primarily due to production from new Montney formation wells brought on production in the Kaybob and Grande Prairie COUs. Condensate and oil sales volumes increased 116 percent to 8,610 Bbl/d in 2015 compared to 3,986 Bbl/d in 2014. The increase was primarily the result of condensate volumes produced from new Montney wells brought on at Musreau in the Kaybob COU, particularly in the second half of 2015 following the May 2015 start-up of the 15,000 Bbl/d Musreau condensate stabilizer expansion (the "Stabilizer Expansion"). Other NGLs sales volumes increased to 8,735 Bbl/d in 2015 compared to 2,128 Bbl/d in 2014. The increase was primarily due to new Montney wells being brought on production in the Kaybob COU, and increased volumes of Other NGLs being extracted from natural gas streams in 2015 following the start-up of the Musreau Deep Cut Facility and the non-operated Smoky deep cut natural gas processing facility (the "Smoky Deep Cut Facility") in the third quarter of 2014. Incremental downstream third-party fractionation capacity became available at the end of March 2015 under the Company’s long-term firm processing agreement following the completion of a de-ethanization facility expansion. Paramount’s 2015 average sales volumes of 44,130 Boe/d were lower than previously announced guidance due to a number of factors, including lower than anticipated production from wells completed with oil-based fluids and lower-intensities of proppant. As a broader array of well performance data has become available following the start-up of new Montney wells in 2015, well completion practices are continuing to evolve. The Company has been completing new wells with water-based fluids and higher  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    25 intensities of proppant, which has resulted in better well performance. 2015 sales volumes were also lower because the high Liquids content of certain new 2015 Montney wells caused fluid loading in the vertical section of the wellbores, resulting in the wells flowing at reduced rates or being temporarily shut in. Modifications were made to the affected wells and surface facilities to install gas lift systems to optimize production. All the wells were subsequently restarted. Infrastructure constraints were also a factor in 2015, impacting the Company’s production to a greater degree than anticipated. Unscheduled third party outages and disruptions related to transportation pipelines and downstream NGLs processing facilities impacted the industry in general in 2015, including Paramount’s Deep Basin production at Musreau and Karr-Gold Creek. The Musreau Deep Cut Facility also experienced processing constraints and higher than expected downtime related to the tie-in of the Stabilizer Expansion and the new amine train, other maintenance outages and lower NGLs recoveries due to the plant operating at higher than design temperatures. Paramount completed maintenance at the Musreau Deep Cut Facility in the fourth quarter that reduced operating temperatures at the plant, increasing NGLs recoveries. 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) Foreign Exchange $CDN / 1 $US 2015 2014 % Change 2.83 2.55 2.62 2.56 52.83 57.45 48.80 4.78 4.27 4.19 4.38 88.41 94.18 93.00 1.28 1.10 (41) (40) (37) (42) (40) (39) (48) 16 Paramount’s average realized natural gas price decreased 41 percent in 2015 compared to the same period in 2014, consistent with decreases in benchmark natural gas prices. Paramount’s natural gas portfolio primarily consists of sales priced at the Alberta spot market, Chicago and California markets and is sold in a combination of daily and monthly contracts. The Company’s average realized condensate and oil price decreased 40 percent in 2015 compared to the same period in 2014, consistent with decreases in benchmark prices. Paramount sells its condensate volumes in both stabilized and unstabilized condition, depending upon the location of production and the availability of stabilization capacity. Stabilized condensate volumes delivered through pipelines receive prices for condensate quoted at Edmonton, which are generally higher than prices for unstabilized volumes, and are adjusted for applicable transportation, quality and density differentials. Unstabilized condensate volumes trucked to receipt terminals typically receive prices based on the Edmonton Light Sweet price, which are generally lower than prices for stabilized volumes, and are adjusted for transportation and quality differentials. Paramount’s Other NGLs volumes are fractionated and marketed under long-term agreements which provide the Company with secure access to markets for its Other NGLs production. Despite negative market prices for propane at times in 2015 due to a supply and demand imbalance, the Company’s  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    26 Liquids-rich natural gas project continues to be economic. The Company’s Other NGLs sales volumes were comprised of approximately 50 percent ethane, 35 percent propane and 15 percent butane for the year ended December 31, 2015. Commodity Price Management From time-to-time Paramount uses financial and physical commodity price contracts to manage exposure to commodity price volatility. Amounts received (paid) on the settlement of commodity contracts are as follows: Year ended December 31 Commodity contracts 2015 12.6 2014 (1.1) Paramount had the following financial commodity sales contracts in place at December 31, 2015: Instruments Oil – NYMEX WTI Swaps Aggregate notional Average fixed price 6,000 Bbl/d CDN$75.72/Bbl Fair Value 40.2 Remaining term January 2016 – December 2016 In January 2016, Paramount entered into a financial NYMEX WTI swap purchase contract for 2,000 Bbl/d at a fixed price of $50.64/Bbl from February 2016 to December 2016. Royalties Year ended December 31 Royalties $/Boe 2015 10.4 0.64 Rate 2.8% 2014 17.5 1.96 Rate 5.1% Royalties decreased $7.1 million to $10.4 million in 2015 compared to $17.5 million in 2014, primarily as a result of lower average royalty rates due to the start-up of new wells that qualify for royalty incentive programs, lower natural gas revenues and $0.8 million in annual gas cost allowance adjustments relating to 2014 recorded in the current year, partially offset by higher royalties for Liquids due to increased revenues. Excluding the impact of the 2014 annual gas cost allowance adjustments recorded in 2015, the Company’s average royalty rate was 3.0 percent in 2015 compared to 5.1 percent in 2014. The majority of Paramount’s new wells in Alberta qualify for royalty incentive programs, which reduce the Company’s overall royalty rate. Operating Expense Year ended December 31 Operating expense $/Boe 2015 90.0 5.59 2014 71.3 7.96 % Change 26 (30) Operating expense increased $18.7 million or 26 percent in 2015 to $90.0 million compared to $71.3 million in 2014, primarily due to higher plant operating and maintenance costs in the Kaybob COU associated with the new Musreau Deep Cut Facility, higher third-party processing fees in the Grande Prairie COU and higher lease operating costs in both COUs related to higher production, partially offset by an increase in processing income.  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    27 Paramount’s per Boe operating expenses decreased 30 percent to $5.59 in 2015 compared to $7.96 in 2014, mainly as a result of lower-cost Kaybob area volumes becoming a greater proportion of the Company’s overall production. Operating costs are also lower for Paramount’s multi-well pads due to the benefits of economies of scale in utilizing shared surface facilities and other operational efficiencies of centralized production. Operating expenses within the Kaybob COU, net of processing income, were $3.44 per Boe in 2015 (2014 – $4.85 per Boe). Transportation and NGLs Processing Year ended December 31 Transportation and NGLs processing $/Boe 2015 65.7 4.08 2014 35.9 4.01 % Change 83% 2% 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 $65.7 million in 2015, an increase of $29.8 million compared to 2014, primarily due to higher pipeline tolls as a result of increased production, higher fractionation costs associated with higher Other NGLs production and increased firm-service transportation costs related to incremental downstream transportation capacity contracted for the Musreau Deep Cut Facility. These increases were partially offset by lower trucking costs, as condensate stabilization and NGLs pipeline constraints abated in 2015 and a higher proportion of Liquids volumes were transported via pipelines. Other Principal Property Items Year ended December 31 Commodity contracts – net of settlements Depletion and depreciation (excluding impairment) Exploration and evaluation (excluding impairment) Impairment (PP&E and E&E) (Gain) loss on sale of oil and gas properties Accretion of asset retirement obligations Other Total 2015 (40.2) 358.9 23.0 287.8 9.2 5.4 (2.6) 641.5 2014 (4.0) 196.3 23.2 32.8 (95.7) 5.9 (1.0) 157.5 Depletion and depreciation expense (excluding impairment) increased to $358.9 million ($22.28 per Boe) in 2015 compared to $196.3 million ($21.93 per Boe) in 2014, primarily due to higher production volumes. Exploration and evaluation ("E&E") expense in 2015 includes dry hole expense of $14.8 million (2014 - $4.6 million), geological and geophysical costs of $4.5 million (2014 - $6.8 million) and expired undeveloped land leases costs of $3.7 million (2014 - $11.8 million). The Company recorded aggregate property, plant and equipment impairment write-downs of $263.7 million for the twelve months ended December 31, 2015 related to petroleum and natural gas assets in the Grande Prairie, Northern and Southern COUs. The write-downs were recorded because the carrying value of the petroleum and natural gas assets exceeded their estimated recoverable amounts, which were determined based on expected discounted net cash flows from the production of proved and probable reserves. An E&E impairment charge of $24.1 million was also recorded at December 31, 2015 as a result of the write-down of the carrying value of a previously drilled exploratory well which was assessed as being uneconomic to tie-in and bring on production.  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    28 In 2014, the Company recorded an impairment write-down of $32.8 million related to petroleum and natural gas assets in the Southern COU. The impairments in both 2015 and 2014 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 $95.7 million in aggregate gains recorded on the sale of oil and gas properties in 2014 primarily relates 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"). Midstream Transaction In March 2016, Paramount entered into an agreement for the sale of its Musreau Complex and related midstream assets (the "Midstream Transaction"). The Midstream Transaction includes the 50 MMcf/d Refrigeration Plant, the 200 MMcf/d Deep Cut Plant, the 22,500 Bbl/d Condensate Stabilizer, the Amine Facility and the gas sales pipeline connecting the Musreau Complex to the TCPL meter station, as well as the majority of Paramount’s larger-diameter gathering system in the Musreau area. Also included in the Midstream Transaction are the site and engineering and design work for the future 6-18 gas processing plant (the "6-18 Plant"). Paramount will receive $556 million in cash at closing, plus a $35 million capital commitment for an enhancement program the Company planned to complete in 2016 at the Musreau Complex. In addition, Pembina has agreed to optimize existing transportation arrangements to match Paramount’s anticipated production growth. Paramount has also secured the right, upon the satisfaction of certain conditions, to call upon Pembina to build and provide up to 200 MMcf/d of gas processing capacity at the 6-18 Plant site. As part of the Midstream Transaction, Paramount and Pembina have also entered into a Midstream Service Agreement ("MSA") which includes a 20-year arrangement that secures Paramount priority access to the sold capacity at the Musreau Complex. Paramount will have lower take-or-pay volume commitments in the initial years, ramping up to 200 MMcf/d by 2019 to align with the expansion and development of Paramount’s Liquids-rich Montney resources. Under the terms of the MSA, the Company will pay a fixed capital fee per Mcf of raw gas delivered to the Musreau Complex, plus operating expenses. This capital charge will encompass costs for natural gas processing, condensate stabilization, use of the gathering system and transportation of sales gas from the Musreau Complex to the TCPL meter station. This charge at the plant inlet is expected to be equivalent to approximately $3.00/Boe of products sold from the Musreau Complex. Volumes delivered by Paramount in excess of its take-or-pay commitment will have processing priority treatment at the Musreau Complex. The Midstream Transaction is expected to close in the second quarter of 2016, subject to regulatory approvals. There are no financing or other non-customary material closing conditions.  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    29 STRATEGIC INVESTMENTS Year ended December 31 General and administrative Share-based compensation Exploration and evaluation Interest and financing Loss from equity–accounted investments Write-down of investments in securities Drilling rig revenue Drilling rig expense Other Segment loss 2015 (5.8) (6.5) (161.9) (2.3) (23.0) (81.8) 1.1 (0.6) (1.0) (281.8) 2014 (7.8) (5.8) (6.8) (2.7) (3.4) (15.6) 0.5 (0.2) 4.4 (37.4) Strategic Investments at December 31, 2015 include:  Investments in the shares of Trilogy, MEG Energy Corp. ("MEG"), Marquee, RMP Energy Inc. ("RMP Energy"), Strategic Oil & Gas Ltd. ("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  Seven drilling rigs owned by Paramount’s wholly-owned subsidiary, Fox Drilling. E&E expense in 2015 included aggregate impairment write-downs of $160.0 million related to the E&E assets of Cavalier, the exploration lands acquired as part of the 2014 acquisition of MGM Energy Corp. ("MGM Energy") and goodwill with a carrying value of $21.6 million recorded upon the acquisition of MGM Energy. At December 31, 2015, Cavalier’s oil sands project at Hoole was deemed not economically viable due to lower forecast future oil prices and an increase in the cost of obtaining capital to fund oil sands developments. The carrying value of the MGM Energy assets was also deemed unrecoverable as a result of the suspension of development activity in the Northwest Territories by MGM Energy and other operators, primarily as a result of lower forecast future oil and natural gas prices and a lack of pipeline infrastructure. The loss from equity-accounted investments in 2015 primarily consists of a $21.6 million equity loss recorded in respect of the Trilogy investment. The $3.4 million loss from equity-accounted investments in 2014 include a $11.5 million equity loss and a $10.8 million gain recorded on the MGM Energy acquisition. 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 the shares of Trilogy were principally obtained in the course of its spin-out from Paramount. Investments in the shares of most other entities,  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    30 including MEG, were received as consideration for properties sold to the entities. Paramount’s investments are summarized as follows: As at December 31 Trilogy MEG Other (2) Total Carrying Value 2015 58.4 29.7 31.0 119.1 2014 79.9 72.3 33.1 185.3 Market Value (1) 2015 70.1 29.7 31.0 130.8 2014 151.4 72.3 33.2 256.9 (1) (2) 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 and other public and private corporations. The aggregate write-downs of investments in securities of $81.8 million in 2015 resulted from significant decreases in the market values of the Company’s investments in publicly traded entities during 2015, primarily consisting of a $72.1 million write-down of the investment in MEG. In 2014, a $15.6 million write- down was recorded related to the Company’s investments in Marquee, SOG and other securities. In June 2014, Paramount acquired all 338.3 million of the 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). Cavalier Cavalier’s initial focus is to develop the Grand Rapids formation in its 100 percent owned in-situ oil sands leases at Hoole, which is located 10 kilometers northeast of Wabasca-Desmarais, Alberta. Since 2004, approximately $111 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. 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. Cavalier is also in the process of preparing an application for a second stage. Development activities related to the Hoole Project have been reduced as a result of the current economic environment. Shale Gas Paramount’s shale gas holdings in the Liard and Horn River Basins in northeast British Columbia and the Northwest Territories include approximately 130 net sections of land with potential from the Besa River shale formation. In 2015, the Company completed drilling operations at the Dunedin d-71-G vertical exploratory shale gas well and then moved to the c-37-D well at La Biche, where drilling operations continued until spring break-up. Drilling operations resumed at the c-37-D La Biche in December 2015 and the well is expected to be drilled to target depth before spring breakup in 2016. Upon completing drilling operations in the 2015 / 2016 winter drilling season, the Company will have secured its mineral rights in the region for another 10 years.  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    31 Fox Drilling Fox Drilling owns seven triple-sized rigs, including four built-for-purpose walking rigs. These rigs are designed to drill the deep horizontal wells on multi-well pads that industry is currently focusing on. During 2015, five rigs were deployed on the Company’s Deep Basin lands, drilling wells at Musreau, Smoky and Karr-Gold Creek. Construction of two new walking rigs was recently completed at a cost of approximately $25 million each. Fox Drilling’s loan facilities were expanded in 2014 to provide partial funding for these new rigs. CORPORATE Year ended December 31 Interest and financing Debt extinguishment General and administrative Share-based compensation Foreign exchange Other Segment loss 2015 108.4 12.0 18.0 14.0 61.1 0.3 213.8 2014 67.9 – 16.1 19.5 0.6 (0.1) 104.0 The Corporate segment loss increased to $213.8 million in 2015 compared to $104.0 million in 2014, primarily as a result of a $60.8 million unrealized foreign exchange loss recorded in respect of the Company’s US senior unsecured notes due 2023 (the "2023 Senior Notes"), higher interest and financing expense due to increased debt and debt extinguishment expense recorded as a result of the redemption of the Company’s senior notes due 2017 (the "2017 Senior Notes"). 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 2015 124.3 591.9 460.1 746.2 1,565.6 30.1 3,518.2  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    32 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 2015 4.4 314.0 111.5 429.9 8.1 438.0 62.0 1.3 501.3 293.1 66.2 70.6 429.9 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 (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 $1.5 million of capitalized interest (2014 - $0.8 million). Principal Properties Capital was $429.9 million in 2015 compared to $813.9 million in 2014. The majority of current year well capital was focused on drilling and completion programs at Musreau in the Kaybob COU, at Karr-Gold Creek in the Grande Prairie COU and at Willesden Green in the Southern COU. Facilities and gathering expenditures were focused on the Stabilizer Expansion at Musreau, expansions to Kaybob area gathering systems and the construction of a new compression facility at Birch in the Northern COU. Paramount continued to expand its Deep Basin developments in 2015, bringing 36 (35.3 net) Montney wells on production in the Kaybob area as incremental processing capacity became available following the completion of the Stabilizer Expansion and the amine train at the Musreau Complex. The Company also accelerated completion operations for two previously drilled six-well Montney pads at Musreau to November 2015 from the first quarter of 2016. All 12 wells have been completed and brought on production. Paramount’s capital spending in 2015 exceeded the Company’s original budget of $355 million mainly due to $41.9 million of incremental spending associated with the acceleration of the completion of the two six well Montney pads. The Company also invested $14.1 million in the gas lift programs at Musreau and Karr-Gold Creek, which included the installation of downhole equipment for affected wells and modifications to surface equipment and gathering systems. Strategic Investments capital expenditures for 2015 included $28.8 million related to the Company’s exploratory shale gas drilling activities in northeast British Columbia and $25.2 million related to the two new triple-sized rigs constructed by Fox Drilling.  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    33 Wells drilled were as follows: 2015 2014 Gross (1) 61 Natural gas 5 Oil 66 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. Gross (1) 34 – 34 Net (2) 31 – 31 Net (2) 55 3 58 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) Limited-resource demand facilities Credit facility Senior notes (2) Net debt (3) Share capital Accumulated deficit Reserves Total Capital 2015 37.9 100.9 693.0 1,072.8 1,904.6 1,647.0 (1,197.6) 99.3 2,453.3 2014 183.3 81.5 397.7 820.0 1,482.5 1,603.4 (296.3) 46.2 2,835.8 % Change (79) 24 74 31 28 3 304 115 (13) (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, 2015 – $4.1 million), December 31, 2014 – $3.3 million), risk management assets and liabilities and limited-resource demand facilities. Excludes unamortized issue premiums and financing costs. Net debt as at December 31, 2014 excludes the $20 million deposit (the "CRA Deposit") on account with the Canada Revenue Agency (the "CRA") at that time. Paramount had an adjusted working capital deficit at December 31, 2015 of $37.9 million compared to a deficit of $183.3 million at December 31, 2014. The adjusted working capital deficit at December 31, 2015 included $11.9 million of cash and cash equivalents, $48.7 million of accounts receivable, $5.0 million of prepaid amounts and $103.5 million of accounts payable and accrued liabilities. The change in adjusted working capital is primarily due to the proceeds from the 2023 Senior Notes offering, drawings on credit facilities, funds flow from operations, proceeds from the issuance of Common Shares and the return of the CRA Deposit, partially offset by capital spending related to the Company’s 2015 capital program and the redemption of the 2017 Senior Notes. In 2015, Paramount raised approximately $210 million in aggregate net cash proceeds through financing transactions, including the 2023 Senior Notes offering and the subsequent redemption of the 2017 Senior Notes and a private placement of 0.9 million Common Shares on a "flow-through basis" (collectively the "2015 Transactions"). Net proceeds from the 2015 Transactions were used for capital 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 2015 Transactions were initially used to temporarily reduce indebtedness under the Company’s bank credit facility.  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    34 In 2010, the Company received reassessments of its income taxes from the CRA and provincial tax authorities relating to a prior year transaction (the "Reassessments"). Paramount filed notices of objection to the Reassessments and, as a condition of its right to proceed with the objection, the Company was required to make the CRA Deposit. In December 2015, the Company’s notices of objection were accepted by the CRA and the $20 million deposit, plus interest, was returned to Paramount. 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 (the "2014 Transactions"). 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. Proceeds from the 2014 Transactions were used in Paramount’s exploration and development activities, 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 used by Paramount to incur eligible CEE. The Company has incurred sufficient qualifying expenditures to satisfy commitments associated with the flow-through Common Shares issued in 2014. Paramount expects to fund its 2016 operations, obligations and capital expenditures with funds flow from operations, drawings on its bank credit facilities and by accessing the capital markets, if required. The Company is managing its operations and capital program such that near-term capital expenditures are expected to be aligned with cash flows. Future spending levels for Paramount’s core developments and other initiatives will be determined following the closing of the Midstream Transaction and other factors. Limited-Recourse Demand Facilities Fox Drilling Facility The Fox Drilling bank credit facility (the "Fox Drilling Facility") is a non-revolving demand loan, which is divided into two tranches. The first tranche ("Fox Tranche A") has a principal amount of $37.7 million outstanding at December 31, 2015 (December 31, 2014 – $45.8 million). Scheduled quarterly principal repayments on Fox Tranche A total $8.2 million in each of 2016 and 2017, with the remaining outstanding balance payable in 2018. The second tranche ("Fox Tranche B") has a credit limit of $27.0 million that is available to be used to fund the construction of two new drilling rigs. At December 31, 2015, $25.7 million was drawn under Fox Tranche B (December 31, 2014 – $5.1 million). Scheduled quarterly principal repayments on Fox Tranche B total $3.6 million in each year from 2016 to 2020, with the remaining outstanding balance payable in 2021. The Fox Drilling Facility is non-recourse to Paramount. Recourse is limited to Fox Drilling and its assets, including the Rigs 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 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 recourse is limited to Cavalier and its assets. At December 31, 2015, $37.5 million was drawn on the Cavalier Facility.  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    35 Bank Credit Facility Paramount has a bank credit facility (the "Facility") with a syndicate of lenders (the "Lenders"). The Facility was increased in 2015 from $900 million to $1.0 billion, which is comprised of two tranches. The maximum amount of the first tranche ("Tranche A") is $900 million and the maximum amount of the second tranche ("Tranche B") is $100 million. 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. The current revolving period of Tranche A ends on April 30, 2016. In the event the revolving period of Tranche A is not extended, any undrawn availability would be cancelled and all amounts then outstanding would be permitted to remain outstanding on a non-revolving basis until April 30, 2017, the current maturity date of Tranche A. The revolving period of Tranche B ends on April 30, 2016, its current maturity date, unless further extended. As at December 31, 2015 and as at February 29, 2016, $693.0 million and approximately $668.4 million, respectively, was drawn on the Facility. In addition, Paramount had undrawn letters of credit outstanding as at December 31, 2015 and as at February 29, 2016 totaling $120.9 million and $120.6 million, respectively, which reduce the amount available to be drawn under the Facility. Paramount has never drawn on Tranche B. 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 borrowing base governs the maximum amount which can be drawn under Tranche A. The Lenders have the right to review and re-determine Paramount’s borrowing base on a semi-annual basis and more frequently in certain other circumstances, with the next scheduled review to be completed in conjunction with the Facility’s planned April 30, 2016 renewal. The borrowing base amount is based on the Company’s reserves, the Lenders’ projections of future commodity prices, the value attributed by the Lenders to certain of Paramount’s equity investments and other assets and certain other factors. Taking into consideration all such factors, Paramount expects the borrowing base to be reduced on the next redetermination. Tranche B is currently not available to be drawn. Upon closing, the proceeds from the Midstream Transaction will be used to pay down the Facility. The Company intends to reduce the $900 million Tranche A of the Facility by $300 million to $600 million and cancel Tranche B of the Facility. Senior Notes In June 2015, Paramount issued US$450 million principal amount of senior unsecured notes due 2023 at a price of US$995.33 per US$1,000 principal amount, of which US$9.0 million principal amount was purchased by entities that are controlled by the Company’s Executive Chairman. The 2023 Senior Notes bear interest at 6⅞ percent per annum, payable semi-annually in arrears on June 30 and December 31 of each year, and mature on June 30, 2023. Immediately following the issuance of the 2023 Senior Notes, Paramount redeemed all $370 million aggregate principal amount of the 2017 Senior Notes by irrevocably depositing $380.2 million with the trustee (representing a redemption price of 102.75 percent of the principal amount of the 2017 Senior  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    36 Notes). As a result, Paramount’s obligations under the 2017 Senior Notes indenture were satisfied and discharged. The redemption premium of $10.2 million and unamortized financing fees totaling $1.8 million were recorded as debt extinguishment expense. Paramount has $450 million aggregate principal amount of senior unsecured notes due 2019 outstanding (the "2019 Senior Notes"). 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 Company’s 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 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 notes redeemed and the date of redemption. 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, 2015, 106,212,487 (December 31, 2014 – 104,843,846) Common Shares were outstanding, net of 21,508 (December 31, 2014 – 54,199) Common Shares held in trust under the Company’s stock incentive program, and no preferred shares were outstanding. In April 2015, pursuant to a private placement, Paramount issued 0.9 million Common Shares to arms- length investors on a "flow-through" basis in respect of CEE at a price of $41.35 per share for gross proceeds of $37.2 million. The Company is required to incur, on or before December 31, 2016, $37.2 million of CEE, of which $16.7 million was incurred as of December 31, 2015. 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 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 the Company’s Executive Chairman for gross proceeds of $7.4 million. At March 14, 2016, Paramount had 106,233,995 Common Shares and 7,204,550 Paramount Options outstanding, of which 3,978,270 Paramount Options are exercisable.  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    37 FOURTH QUARTER 2015 RESULTS Netback Three months ended December 31 2015 2014 Natural gas revenue Condensate and oil revenue Other NGLs revenue (2) Royalty and sulphur revenue Petroleum and natural gas sales Royalties Operating expense Transportation and NGLs processing (3) Netback Commodity contract settlements Netback including commodity contract settlements 37.3 42.8 10.6 0.6 91.3 (3.1) (23.0) (16.3) 48.9 4.9 53.8 ($/Boe) (1) 2.57 46.60 12.59 – 21.82 (0.73) (5.49) (3.90) 11.70 1.18 12.88 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 Natural gas revenue shown per Mcf. (1) (2) Other NGLs means ethane, propane and butane. (3) Includes downstream natural gas, NGLs and oil transportation costs and NGLs fractionation costs incurred by the Company. Fourth quarter 2015 petroleum and natural gas sales were $91.3 million, a decrease of $8.1 million from the fourth quarter of 2014, primarily due to lower commodity prices, partially offset by higher sales volumes. The impact of changes in prices and sales volumes on petroleum and natural gas sales are as follows: Three months ended December 31, 2014 Effect of changes in sales volumes Effect of changes in prices Three months ended December 31, 2015 Sales Volumes Natural gas 52.7 5.1 (20.5) 37.3 Condensate and oil 33.5 29.4 (20.1) 42.8 Other NGLs 12.6 9.9 (11.9) 10.6 Royalty and sulphur 0.6 – – 0.6 Total 99.4 44.4 (52.5) 91.3 Natural Gas (MMcf/d) Condensate and Oil (Bbl/d) Other NGLs (Bbl/d) Three months ended December 31 Kaybob Grande Prairie Southern Northern Total 2015 116.1 35.9 2.6 3.2 157.8 2014 % Change 103.7 34.8 2.7 2.7 143.9 12 3 (4) 19 10 2015 6,937 2,605 348 101 9,991 2014 % Change 3,529 1,637 149 97 59 134 5 1,920 88 5,320 2015 8,654 412 101 8 9,175 2014 % Change 4,257 725 141 – 5,123 103 (43) (28) 100 79 2015 34,941 9,001 890 634 45,466 Total (Boe/d) 2014 % Change 25,062 8,157 748 463 34,430 39 10 19 37 32 Paramount’s fourth quarter sales volumes averaged 45,466 Boe/d in 2015, a 32 percent increase compared to the fourth quarter of 2014. Natural gas sales volumes increased 13.9 MMcf/d or 10 percent to 157.8 MMcf/d in the fourth quarter of 2015 compared to 143.9 MMcf/d in the same period in 2014. The increase was primarily due to production from new Montney formation wells brought on production in the Kaybob COU.  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    38 Condensate and oil sales volumes increased 88 percent to 9,991 Bbl/d in the fourth quarter of 2015 compared to 5,320 Bbl/d in the same period in 2014, 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. Fourth quarter Other NGLs sales volumes increased 79 percent to 9,175 Bbl/d in 2015 compared to 5,123 Bbl/d in the same period in 2014 as a result of new Montney production wells being brought on production in the Kaybob COU. Production in the fourth quarter of 2015 was impacted by a scheduled NGLs pipeline outage that required the majority of Kaybob area wells to be shut in for 10 days beginning on October 20th and by periods of downtime in the first two weeks of November as the Musreau Deep Cut Facility was brought back on-line following maintenance work performed during the October NGLs pipeline outage. The Company's fourth quarter production was also impacted by an unscheduled outage at the third-party operated Smoky Deep Cut Facility, which shut in approximately 2,000 Boe/d of production in November and December, and delays in the commissioning of the new third-party operated compression facility at Birch in northeast BC, which delayed the startup of approximately 1,000 Boe/d of new production until December. Commodity Prices Key monthly average commodity price benchmarks and foreign exchange rates are as follows: 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) Foreign Exchange $CDN / 1 $US 2015 2014 % Change 2.57 2.34 2.51 2.29 46.60 52.55 42.18 3.98 3.41 3.80 3.97 68.45 75.11 73.15 1.34 1.14 (35) (31) (34) (42) (32) (30) (42) 18 Royalties decreased $1.6 million to $3.1 million in the fourth quarter of 2015 compared to $4.7 million in the same period in 2014, primarily as a result of lower average royalty rates due to the start-up of new wells that qualify for royalty incentive programs and lower natural gas revenues, partially offset higher royalties for Liquids due to increased revenues. Operating expense increased $0.8 million to $23.0 million in the fourth quarter of 2015 compared to $22.2 million in the same period in 2014, primarily due to higher plant maintenance costs associated with the Musreau Deep Cut Facility in the Kaybob COU and lowering processing income. Paramount’s operating expense per Boe decreased 22 percent to $5.49 in the fourth quarter of 2015 compared to $7.02 in the same period of 2014, as lower-cost Musreau area volumes have become a greater proportion of the Company’s overall production.  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    39 Transportation and NGLs processing expense increased $4.8 million to $16.3 million in the fourth quarter of 2015 compared to $11.5 million in the same period in 2014, primarily due to higher pipeline tolls related to higher production volumes, higher fractionation costs associated with higher Other NGLs production and increased firm service transportation and NGLs processing costs associated with incremental downstream capacity contracted for the Musreau Deep Cut Facility. This increase was partially offset by lower trucking costs. Net Loss Three months ended December 31 Principal Properties Strategic Investments Corporate Income tax recovery (expense) Net loss Three months ended December 31 Netback Gain on financial commodity contracts General and administrative Share-based compensation Depletion, depreciation and impairment Exploration and evaluation Interest and financing Foreign exchange Loss from equity-accounted investments Write-down of investment in securities Income tax recovery (expense) Other Net Loss 2015 (305.7) (170.9) (56.1) (66.3) (599.0) 2015 48.9 19.8 (5.7) (3.1) (340.7) (195.8) (29.4) (20.7) (3.1) (4.2) (66.3) 1.3 (599.0) 2014 (50.5) (47.3) (29.4) 20.7 (106.5) 2014 61.0 3.7 (5.2) (6.9) (108.5) (12.0) (21.5) (0.2) (23.3) (13.7) 20.7 (0.6) (106.5)  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    40 Paramount recorded a net loss of $599.0 million for the three months ended December 31, 2015, which included aggregate impairment charges of $425.6 million, including $265.6 million related to Principal Properties and $160.0 million related to Strategic Investments. The loss for the fourth quarter of 2015 also includes the de-recognition of $194.2 million of deferred income tax assets. A net loss of $106.5 million was recorded in the same period of 2014. Significant factors contributing to the change are shown below: Income tax expense in 2015 compared to a recovery in 2014 Three months ended December 31 Net loss – 2014  Higher depletion and depreciation due to higher impairment write-downs and higher sales volumes in 2015  Higher exploration and evaluation expense primarily due to impairment write-downs in 2015   Higher foreign exchange loss, primarily related to the US 2023 Senior Notes Lower netback primarily due to lower commodity prices   Higher interest and financing expense due to increased debt  Lower loss from equity-accounted investments in 2015  Higher gains on commodity contracts in 2015    Other Net loss – 2015 Lower write-down of investments in securities in 2015 Lower share-based compensation expense (106.5) (232.2) (183.8) (87.0) (20.5) (12.1) (7.9) 20.2 16.1 9.5 3.8 1.4 (599.0) Funds Flow from Operations (1) The following is a reconciliation of funds flow from operations to the nearest GAAP measure: Three months ended December 31 Cash from operating activities Change in non-cash working capital Geological and geophysical expenses Asset retirement obligations settled Funds flow from operations Funds flow from operations ($/Boe) 2015 10.4 7.2 2.2 1.2 21.0 5.02 2014 34.2 0.2 6.3 0.9 41.6 13.14 (1) Refer to the advisories concerning non-GAAP measures in the Advisories section of this document. Funds flow from operations in the fourth quarter of 2015 was $20.6 million lower than the same period in 2014. Significant factors contributing to the change are shown below: Three months ended December 31 Funds flow from operations – 2014  Lower netback primarily due to lower commodity prices  Higher interest and financing expense due to increased debt  Dividends from equity-accounted investments in 2014  Other Funds flow from operations – 2015 41.6 (12.1) (7.7) (1.3) 0.5 21.0  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    41 QUARTERLY INFORMATION Petroleum and natural gas sales Funds flow from operations Per share – basic and diluted ($/share) Net income (loss) Per share – basic ($/share) Per share – diluted ($/share) Sales volumes Natural gas (MMcf/d) Condensate and oil (Bbl/d) Other NGLs (Bbl/d) Total (Boe/d) Average realized price Natural gas ($/Mcf) Condensate and oil ($/Bbl) Other NGLs ($/Bbl) Total ($/Boe) Q4 91.3 21.0 0.20 2015 Q3 110.7 36.9 0.35 Q2 94.6 19.6 0.19 Q1 80.2 15.7 0.15 Q4 99.4 41.6 0.40 (599.0) (5.64) (5.64) (171.8) (1.62) (1.62) (60.2) (0.57) (0.57) (70.3) (0.67) (0.67) (106.5) (1.02) (1.02) 2014 Q3 84.4 36.4 0.35 (9.4) (0.09) (0.09) Q2 80.0 29.5 0.30 53.1 0.54 0.53 Q1 86.2 33.5 0.34 (8.9) (0.09) (0.09) 157.8 9,991 9,175 45,466 181.8 10,214 9,483 49,990 154.4 7,595 9,282 42,604 148.6 6,583 6,968 38,317 143.9 5,320 5,123 34,430 93.6 4,690 1,643 21,936 99.4 3,212 810 20,585 104.7 2,686 893 21,028 2.57 46.60 12.59 21.82 3.01 52.43 11.42 24.07 2.74 65.66 12.18 24.40 2.99 48.16 16.43 23.26 3.98 68.45 26.64 31.37 4.43 92.66 32.87 41.80 4.96 106.38 43.78 42.72 6.04 99.55 54.50 45.56 Significant Items Impacting Quarterly Results Quarterly earnings variances include the impacts of changing production volumes and market prices.  Fourth quarter 2015 earnings include $241.5 million of aggregate impairment write-downs of property, plant and equipment, $184.1 million of impairment write-offs of exploration and evaluation assets and deferred tax income expense of $66.3 million.  Third quarter 2015 earnings include $100.7 million of depletion and depreciation, a $22.2 million impairment write-down of oil and gas properties, a $73.0 million write-down of investments in securities and a foreign exchange loss of $41.5 million, partially offset by $38.1 million of gains on commodity contracts.  Second quarter 2015 earnings include $82.9 million of depletion and depreciation expense and $12.0 million of debt extinguishment expense in respect of the redemption of the 2017 Senior Notes, partially offset by an income tax recovery of $38.5 million.  First quarter 2015 earnings include $77.4 million of depletion and depreciation expense and a $8.9 million net loss on the sale of oil and gas properties.  Fourth quarter 2014 earnings include $108.5 million of depletion, depreciation and impairment write- downs of oil and gas properties and a $23.3 million loss from equity-accounted investments, partially offset by an 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 oil and gas properties and $14.2 million of income from equity-accounted investments, partially offset by income tax expense of $14.6 million.  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    42  First quarter 2014 earnings include $17.6 million in aggregate gains on the sale of oil and gas properties. 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 due to common directors and members of senior management. All transactions between Paramount and the entities are recorded at their exchange amounts. During 2015, Paramount charged $0.5 million (2014 – $0.6 million) to Trilogy in respect of operational and administrative services. Paramount charged $3.4 million (2014 – $0.6 million) to Trilogy and was charged $2.6 million (2014 – $1.6 million) by Trilogy in respect of joint operations. Paramount received $7.4 million in dividends from Trilogy in 2014. As of December 31, 2015, Paramount had a net payable balance due to Trilogy of $0.2 million (2014 – net payable of $0.3 million). Contractual Obligations Paramount had the following contractual obligations at December 31, 2015: Cavalier Facility (1) Fox Drilling Facility (2) Facility (2) Senior notes (2) Transportation and processing commitments (3) Asset retirement obligations Capital spending commitments and other (4) Operating leases 2016 38 14 30 77 98 1 7 5 270 2017-2018 – 40 703 154 295 4 2 7 1,205 2019-2020 After 2020 Total – 8 – 567 308 67 – 4 954 – 8 – 730 747 202 – 3 1,690 38 70 733 1,528 1,448 274 9 19 4,119 (1) (2) (3) (4) Excluding interest. Including interest. Certain transportation and processing commitments are secured by outstanding letters of credit totaling $104.6 million at December 31, 2015 (2014 - $41.2 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. Taxation 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. 2015 Management’s Discussion & Analysis    43 Risk Factors A description of the most significant risk factors related to Paramount and its business is contained in Paramount’s current Annual Information Form under the heading "Risk Factors". Paramount monitors and complies with current government regulations that affect its activities. 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 unacceptably high premium costs or for other reasons. CHANGE IN ACCOUNTING POLICIES There were no new or amended accounting standards adopted by the Company for the year ended December 31, 2015. 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, 2018. The Company has not yet determined the impact of the IFRS on its 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 its financial statements. In January 2016, the IASB issued IFRS 16 – Leases, which replaces IAS – 17 Leases and related interpretations. IFRS 16 eliminates the classification of leases as finance or operating and introduces a single lessee accounting model for recognition and measurement, which will require recognition of assets and liabilities for most leases. IFRS 16 is effective for years beginning on or after January 1, 2019. The Company has not yet determined the impact of the IFRS on its financial statements.  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    44 DISCLOSURE CONTROLS AND PROCEDURES As of the year ended December 31, 2015, 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 has assessed the effectiveness of the Company’s internal control over financial reporting ("ICFR") as defined under National Instrument 52-109 "Certification of Disclosure in Issuers’ Annual and Interim Filings" as at December 31, 2015. 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 ICFR. Based on this assessment, Management has concluded that the Company’s ICFR was effective as of December 31, 2015. 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 Control Over Financial Reporting During the year ended December 31, 2015, there was no change in the Company’s ICFR that materially affected, or is reasonably likely to materially affect, the Company’s ICFR. CRITICAL ACCOUNTING ESTIMATES 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 revenues and expenses recognized in future periods. The following is a description of the accounting judgments, estimates and assumptions that are considered significant:  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    45 Exploration and Evaluation Projects The accounting for E&E projects 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 E&E 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 exploratory activities are carried out or the Company seeks government, regulatory or partner approval for development plans. E&E 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 E&E expense. At December 31, 2015, lower forecast future commodity prices and an increase in the cost of obtaining capital to fund oil sands development resulted in Cavalier’s assets being deemed not economically viable. The assets acquired with MGM Energy were also written down as a result of the suspension of development activity in the Northwest Territories by MGM Energy and other operators. An impairment charge also resulted from the write-down of a previously drilled exploratory well which was assessed as being uneconomic to tie-in and bring on production. 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 natural gas properties used in impairment assessments, all of which could have a material impact on earnings.  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    46 Impairment of Non-Financial Assets The 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 for a particular asset, the asset’s recoverable amount is estimated. If the carrying value of an asset exceeds its estimated recoverable amount, an impairment charge is recognized. The recoverability of the carrying value of oil and gas properties is generally assessed at the Cash Generating Unit ("CGU") level. The determination of the properties and other assets grouped within a particular CGU is based on management’s judgment with respect to the integration between assets, shared infrastructure and cashflows and the overall significance of particular properties. Changes in the assets comprising each CGU impacts estimated recoverable amounts used in impairment assessments and could have a material impact on earnings. The Company’s Principal Properties PP&E assets are grouped into three CGUs for the purpose of impairment testing, consisting of the Kaybob, Grande Prairie and Southern CGUs. Strategic Investments E&E assets, including oil sands and carbonate interests, shale gas acreage and the MGM Energy assets are grouped together as a CGU. Estimates of recoverable amounts used in impairment tests often include estimated volumes and future net cash flows from oil and natural gas reserves, contingent resource estimates, future net cash flow estimates related to other long-lived assets and internal and external market metrics used to estimate value based on comparable assets and transactions. 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. The significant decline in the market prices of crude oil and natural gas were considered potential indicators of impairment at December 31, 2015. As a result, recoverable amounts were estimated for each CGU and an adjustment to the carrying value of the Grande Prairie and Southern CGUs was recorded. Recoverable amounts for each CGU were based on estimated future net cash flows from the production of estimated proved and probable reserves at December 31, 2015, at an after-tax discount rate of 10 percent. Investments in Securities The Company’s investments in securities that are accounted for as available-for-sale financial instruments are assessed at each reporting period to determine whether there is any objective evidence of impairment. Management is required to exercise judgment in determining 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. Management is also required to exercise judgment in estimating the fair value of investments in the securities of private corporations that are not traded on public exchanges. Business Combinations Business combinations are accounted for using the acquisition method of accounting, where the net identifiable assets acquired are recorded at fair value. The fair value of individual assets is often required to be estimated, including 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.  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    47 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. 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 investment in Trilogy 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 probability of the realization of deferred income 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, the carrying value of deferred income tax assets and liabilities and could have a material impact on earnings. As at December 31, 2015, the Company concluded that a portion of the carrying value of the deferred income tax asset was not probable of realization, and accordingly, a de-recognition of $194.2 million was recorded. 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 income tax assets could be impacted.  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    48 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:  the timing and completion of the Midstream Transaction and the expected use of proceeds and debt reduction resulting therefrom; the planned renewal and changes to the Facility following the Midstream Transaction; forecast capital expenditures, cost savings, spending levels, and cash flows;    estimated reserves and the discounted present value of future net revenues therefrom;  exploration, development, and associated operational plans and strategies (including completion programs), and the anticipated timing of such activities; and forecast drilling, completion, equipping and tie-in costs for new wells.  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 Midstream Transaction being completed on the expected terms and timing; 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:  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    49     fluctuations in natural gas, condensate, Other NGLs, oil and bitumen prices; changes in foreign currency exchange rates and interest rates; 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; the Midstream Transaction may not be completed on the expected terms or at the expected time or at all; 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.  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    50 Non-GAAP Measures In this document "Funds flow from operations", "Netback", "Net Debt", "Adjusted Working Capital", "Exploration and Capital Expenditures", "Principal Properties Capital" and "Investments in other entities – market value", collectively the "Non-GAAP measures", are used and do not have any standardized meanings as prescribed by IFRS. Funds flow from operations refers to cash from operating activities before net changes in operating non-cash working capital, geological and geophysical expenses and asset retirement obligation settlements. Funds flow from operations is commonly used in the oil and gas industry to assist management and investors in measuring the Company’s ability to fund capital programs and meet financial obligations. Netback equals petroleum and natural gas sales less royalties, operating costs and 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 capital expenditures consist of the Company’s spending on wells and infrastructure projects, other property, plant and equipment, 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 capital expenditures, except for geological and geophysical costs for the year ended December 31, 2015 of $6.1 million (2014 - $12.5 million), which are expensed as incurred. Principal Properties Capital includes capital expenditures and geological and geophysical costs related to the Company’s Principal Properties business segment. Refer to the Exploration and Capital Expenditures section of the Company’s Management’s Discussion and Analysis for the period. The Principal Properties Capital measure provides management and investors with information regarding the Company’s Principal Properties spending on wells and infrastructure projects separate from land acquisition activity and capitalized interest. 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, Marquee, RMP Energy, 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. Non-GAAP measures should not be considered in isolation or construed as alternatives to their most directly comparable measure calculated in accordance with GAAP, or other measures of financial performance calculated in accordance with GAAP. The Non-GAAP measures are unlikely to be comparable to similar measures presented by other issuers.  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    51 Oil and Gas Measures and Definitions Abbreviations Liquids Barrels Bbl Barrels per day Bbl/d NGLs Natural gas liquids Condensate Pentane and heavier hydrocarbons Thousands of barrels MBbl Oil Equivalent Boe Boe/d MBoe MMBoe Barrels of oil equivalent Barrels of oil equivalent per day Thousands of barrels of oil equivalent Millions of barrels of oil equivalent Measures 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 This document contains disclosures expressed as "Boe", "MBoe", "MMBoe", "$/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 the year ended December 31, 2015, the value ratio between crude oil and natural gas was approximately 22:1. 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. 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 29, 2016 (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. Natural gas reserves consist of shale gas and conventional natural gas. Light and medium crude oil reserves include immaterial amounts of tight oil. 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. The three year average finding and development ("F&D") costs were calculated by dividing the aggregate sum of capital costs incurred for the three years ended December 31, 2015, excluding capital costs related to facilities and gathering systems, capitalized interest and land acquisitions, and the net change in estimated future development costs from December 31, 2012 to December 31, 2015 by reserve additions comprised of the aggregate sum of extensions & discoveries, technical revisions and economic factors for the three years December 31, 2015 (excluding acquisitions and dispositions).  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    52 F&D costs also 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 oil and gas properties within Paramount’s Principal Properties business segment. 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 reserves reconciliation table.  Paramount Resources Ltd. 2015 Management’s Discussion & Analysis    53 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/ J.H.T. Riddell J.H.T. Riddell President and Chief Executive Officer March 17, 2016 /s/ Bernard K. Lee Bernard K. Lee Chief Financial Officer  Paramount Resources Ltd. 2015 Financial Statements    54 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, 2015 and 2014, 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, 2015 and 2014 and of its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Calgary, Canada March 17, 2016 Chartered Accountants  Paramount Resources Ltd. 2015 Financial Statements    55 CONSOLIDATED BALANCE SHEET ($ thousands) As at December 31 ASSETS Current assets Cash and cash equivalents Accounts receivable Prepaid expenses and other Risk management 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 Limited-recourse demand facilities Accounts payable and accrued liabilities 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 17, 2016 Note 2015 2014 18 18 17 6 7 8 9 17 5,10 11 18 12 13 22 14 15 11,941 48,730 5,049 40,207 105,927 – 363,724 2,034,353 58,370 60,714 154,823 3,124 2,781,035 100,911 107,624 208,535 1,750,226 273,580 2,232,341 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 1,646,984 (1,197,627) 99,337 548,694 2,781,035 1,603,436 (296,326) 46,172 1,353,282 3,199,429 /s/ J.C. Gorman J.C Gorman, Director  Paramount Resources Ltd. 2015 Financial Statements    56 CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS ($ thousands, except as noted) Year ended December 31 Note 2015 2014 Petroleum and natural gas sales Royalties Revenue Gain on commodity contracts Expenses Operating expense Transportation and NGLs processing General and administrative Share-based compensation Depletion and depreciation Exploration and evaluation (Gain) loss on sale of oil and gas properties Interest and financing Accretion of asset retirement obligations Foreign exchange Debt extinguishment Loss from equity-accounted investments Write-down of investments in securities Other income Loss before tax Income tax expense (recovery) Current Deferred Net loss Other comprehensive income (loss), net of tax Change in market value of securities Reclassification of accumulated losses on securities to net loss Deferred tax on other comprehensive income related to securities Comprehensive loss Net loss per common share ($/share) Basic and diluted See the accompanying notes to these Consolidated Financial Statements. 376,799 (10,388) 366,411 52,767 419,178 90,043 65,724 23,857 20,504 623,889 208,992 9,058 110,663 5,695 61,109 11,994 1,231,528 (23,018) (81,819) 3,388 (913,799) 11 (12,509) (12,498) (901,301) (42,180) 81,819 (1,314) (862,976) 349,995 (17,542) 332,453 2,852 335,305 71,279 35,896 23,877 25,373 229,819 30,007 (95,691) 70,599 5,936 568 – 397,663 (3,399) (15,645) 6,686 (74,716) (45) (2,957) (3,002) (71,714) (53,664) 10,918 271 (114,189) (8.52) (0.71) 18 16 7 6 13 12 8 9 4 17 14  Paramount Resources Ltd. 2015 Financial Statements    57 CONSOLIDATED STATEMENT OF CASH FLOWS ($ thousands) Year ended December 31 Operating activities Net loss Add (deduct): Items not involving cash Dividends from equity-accounted investments Asset retirement obligations settled Debt extinguishment Change in non-cash working capital Cash from operating activities Financing activities Net draw of limited-recourse demand facilities Net draw of revolving long-term debt Proceeds from 2023 Senior Notes, net of issue costs Redemption of 2017 Senior Notes 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 oil and gas properties Cash acquired on corporate acquisitions, net Proceeds on sale of investment, net Investments in securities Deposit 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 2015 2014 (901,301) (71,714) 976,387 – (6,641) 11,994 3,834 84,273 19,381 295,372 549,649 (380,175) 41,817 (316) 525,728 (493,963) 5,617 740 – – 20,135 (152,352) (619,823) (9,822) 3,443 18,320 11,941 192,829 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 19 13 12 11 12 12 12 17 19  Paramount Resources Ltd. 2015 Financial Statements    58 CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY ($ thousands, except as noted) Year ended December 31 Share Capital Balance, beginning of year 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. 2015 Shares (000’s) Note 2014 Shares (000’s) 5 16 15 104,843 1,337 – 32 106,212 1,603,436 43,175 – 373 1,646,984 96,993 6,704 1,128 18 104,843 1,169,178 364,884 69,382 (8) 1,603,436 (296,326) (901,301) (1,197,627) 46,172 38,325 14,840 99,337 548,694 (224,612) (71,714) (296,326) 87,678 (42,475) 969 46,172 1,353,282  Paramount Resources Ltd. 2015 Financial Statements    59 (Tabular amounts stated in $ thousands, except as noted) 1. Significant Accounting Policies Paramount Resources Ltd. ("Paramount" or the "Company") is an independent, publicly traded, Canadian corporation that explores for and develops conventional petroleum and natural gas prospects, pursues long-term non-conventional exploration and pre-development projects and holds a portfolio of investments in other entities. Paramount’s principal properties are primarily located in Alberta, British Columbia and the Northwest Territories. Paramount’s operations are divided into three business segments: 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. These consolidated financial statements of the Company, as at December 31, 2015 and December 31, 2014 and for the years then ended (the "Consolidated Financial Statements"), were authorized for issuance by Paramount’s Board of Directors on March 17, 2016. 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. 2015 Financial Statements    60 b) Cash and Cash Equivalents Cash and cash equivalents are recorded at cost and, from time-to-time, may 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 acquiring unproved property, drilling and completing exploratory wells 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 the Company determines that an E&E project is no longer viable or its carrying value exceeds its recoverable amount, an impairment charge is recognized. When the technical feasibility and commercial viability of a project has been established, the E&E costs are transferred to petroleum and natural gas assets, subject to an impairment assessment. 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. 2015 Financial Statements    61 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 the majority of the Company’s 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 and other major infrastructure assets are depreciated on a straight-line basis over their expected useful lives, which extend up to 40 years. The Rigs are depreciated by component over their expected useful lives, which vary from 1,095 to 3,650 drilling days. 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. f) Impairment of Non-Financial Assets The carrying values of the Company’s non-financial assets are reviewed at each reporting date to determine whether any indicators of impairment are present. For the purpose of impairment testing, non- financial assets are tested individually or, in certain circumstances, grouped together into a cash- generating unit ("CGU"), which consists of the smallest group of assets that generate cash inflows that are largely independent of the cash inflows of other assets or groups of assets. The Company’s Principal Properties PP&E assets are grouped into three CGUs for the purpose of impairment testing, consisting of the Kaybob, Grande Prairie and Southern CGUs. Strategic Investments E&E assets, including oil sands and carbonate interests, shale gas acreage and exploratory land holdings in the Northwest Territories acquired through the MGM Energy Corp. ("MGM Energy") acquisition are grouped together as a CGU. If an indicator of impairment is identified for a particular asset or CGU, its recoverable amount is estimated. If the carrying value of an asset or CGU exceeds its estimated recoverable amount, an impairment charge is recognized. The recoverable amount of an asset or CGU is the greater of its fair value less costs to sell ("FVLCS") and its value in use. In assessing FVLCS, the Company estimates the value a potential purchaser would ascribe to an asset or CGU. For oil and gas properties, the FVLCS 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 a 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. All of the Company’s current interests in joint arrangements are accounted for as joint operations. To account for these joint operations, Paramount  Paramount Resources Ltd. 2015 Financial Statements    62 recognizes its proportionate share of the revenues, expenses, assets, and liabilities related to the arrangements. Interests in joint ventures are accounted for using the equity method of accounting. The Company does not currently have any interests in joint arrangements that are accounted for as joint ventures. h) Equity-Accounted Investments Investments in entities in 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 being 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. 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 related 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 and/or constructive 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  Paramount Resources Ltd. 2015 Financial Statements    63 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 carrying value of the related long-lived asset and depreciated on the same basis as the underlying asset. Actual costs incurred to retire assets are applied against the asset retirement obligation liability. Differences between the actual costs incurred and the liability accrued are recognized in earnings when reclamation of a property is fully complete. l) Foreign Currency Translation The functional and presentation currency of Paramount and its subsidiaries is the Canadian dollar. m) 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 as follows: Level One – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date. Level Two – Inputs are based on information other than quoted prices included within Level One that are observable for the asset or liability, either directly or indirectly, 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. n) 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", "loans and receivables", "held-to-maturity investments", or "financial liabilities measured at amortized cost", as defined by the relevant standard. Paramount does not presently employ hedge accounting for any of its financial instruments. The fair values of cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities approximate their carrying amounts due to the short-term maturities of these instruments.  Paramount Resources Ltd. 2015 Financial Statements    64 Paramount’s risk management assets and liabilities are classified as fair value through profit or loss (held for trading). Fair value through profit or loss financial instruments are measured at fair value, with changes in their fair values over time being recognized in earnings. The fair values of the Company’s risk management assets and liabilities 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. The Company’s investments in securities are classified as available-for-sale. Available-for-sale financial assets are measured at fair value, with changes in such fair values being 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. Investments in publicly-traded securities are carried at their period-end trading price (level one fair value hierarchy estimate). Investments in the securities of private entities are carried at fair value, which is estimated using private placement equity issuances and other transactions which provide indications of value (level two fair value hierarchy estimate). Paramount’s limited-recourse demand facilities and long-term debt are classified as loans and receivables. Loans and receivables, 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 the Company’s investments in securities. Amounts recorded in OCI each period are presented in the Consolidated Statement of Comprehensive Loss. 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 asset 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 asset are recognized in OCI. 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 considered probable. The carrying value of deferred income tax assets is reviewed at each reporting date taking into consideration historical and expected future taxable income, expected reversals of temporary differences, anticipated timing of realization, tax basis carry-forward periods and other factors. Deferred income tax assets are de- recognized to the extent that estimated future taxable earnings are not sufficient to allow the asset to be recovered.  Paramount Resources Ltd. 2015 Financial Statements    65 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) Share-Based Compensation Paramount Stock Option Plan Paramount has a stock option plan that enables the Board of Directors or its Compensation Committee to grant to key employees and directors options to acquire Common Shares of the Company ("Paramount Options"). Paramount Options generally vest over five years and expire within six years after the grant date. The provisions of the plan permit the Company to settle the options in Common Shares of the Company or in cash. The Company accounts for Paramount Options as equity-settled share-based compensation transactions. The grant date fair value of stock options awarded is recognized as share-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 share-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 option 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 share-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 Paramount’s Share Capital. The cost of the unvested Common Shares is then recognized over the vesting period as share-based compensation expense, with a corresponding increase to Share Capital.  Paramount Resources Ltd. 2015 Financial Statements    66 r) Net Earnings Per Share Basic net earnings per share is calculated by dividing net earnings by the weighted average number of Common Shares outstanding during the year. Diluted earnings 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 per share amounts when they are dilutive to income. 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 revenues and expenses recognized in future periods. The following is a description of the accounting judgments, estimates and assumptions that are considered significant. Exploration or Development The Company is required to apply judgment when designating a project as exploration and evaluation or development, which requires an assessment of geological and technical characteristics and other factors related to each project. Exploration and Evaluation Projects The accounting for E&E projects 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 E&E 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 exploratory activities are carried out 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 E&E expense.  Paramount Resources Ltd. 2015 Financial Statements    67 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 natural gas properties used in impairment assessments, all of which could have a material impact on earnings. 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, future net cash flow estimates related to other long-lived assets and internal and external market metrics used to estimate value based on comparable assets and transactions. 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. Determination of CGUs The recoverability of the carrying value of oil and gas properties is generally assessed at the CGU level. The determination of the properties and other assets grouped within a particular CGU is based on management’s judgment with respect to the integration between assets, shared infrastructure and cashflows and the overall significance of individual properties. Changes in the assets comprising CGUs would have an impact on estimated 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") in 2014 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. The fair value of individual assets is often required to be estimated, including reserves and resources, tangible assets, undeveloped land, intangible assets and other assets. These estimates incorporate assumptions using appropriate indicators of fair value, as  Paramount Resources Ltd. 2015 Financial Statements    68 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 investment in Trilogy 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 in determining 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. Management is also required to exercise judgment in estimating the fair value of investments in the securities of private corporations that are not traded on public exchanges. Asset Retirement Obligations Estimates of asset retirement costs are based on assumptions regarding the methods, timing, economic environment and regulatory standards that are expected to exist at the time assets are retired. Management adjusts estimated amounts periodically as assumptions are changed to incorporate new information. Actual payments to settle the obligations may differ materially from amounts estimated. Share-Based Payments The Company estimates the grant date value of stock options awarded using the Black-Scholes-Merton model. The inputs used to determine the estimated value of the options are based on assumptions regarding share price volatility, the expected life of the options, expected forfeiture rates and future interest rates. By their nature, these inputs are subject to measurement uncertainty and require management to exercise judgment in determining which assumptions are the most appropriate. Income Taxes Accounting for income taxes is a complex process requiring management to interpret frequently changing laws and regulations and make judgments related to the application of tax law, estimate the timing of temporary difference reversals and estimate the probability of the realization of deferred income 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, the carrying value of deferred income tax assets and liabilities and could have a material impact on 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 income tax assets could be impacted.  Paramount Resources Ltd. 2015 Financial Statements    69 3. Changes in Accounting Standards There were no new or amended accounting standards adopted by the Company for the year ended December 31, 2015. 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, 2018. 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. In January 2016, the IASB issued IFRS 16 – Leases, which replaces IAS 17 – Leases and related interpretations. IFRS 16 eliminates the classification of leases as finance or operating and introduces a single lessee accounting model for recognition and measurement, which will require the recognition of assets and liabilities for most leases. IFRS 16 is effective for years beginning on or after January 1, 2019. The Company has not yet determined the impact of the IFRS on the Consolidated Financial Statements. 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, natural gas liquids and crude oil 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.  Paramount Resources Ltd. 2015 Financial Statements    70 Year ended December 31, 2015 Revenue Gain on commodity contracts Expenses Operating expense Transportation and NGLs processing General and administrative Share-based compensation Depletion and depreciation Exploration and evaluation (Gain) loss on sale of oil and gas properties Interest and financing Accretion of asset retirement obligations Foreign exchange Debt extinguishment Loss from equity-accounted investments Write-down of investments in securities Other Drilling rig revenue Drilling rig expense Inter-segment eliminations Segment loss Income tax recovery Net loss Year ended December 31, 2014 Revenue Gain on commodity contracts Expenses Operating expense Transportation and NGLs processing General and administrative Share-based compensation Depletion and depreciation Exploration and evaluation (Gain) loss on sale of oil and gas properties Interest and financing Accretion of asset retirement obligations Foreign exchange 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 366,411 52,767 419,178 90,043 65,724 – – 622,581 47,130 9,159 – 5,448 – – 840,085 – – 2,726 – – (418,181) – (418,181) 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 – – – – – 5,833 6,521 4,265 161,862 (101) 2,251 247 – – 180,878 (23,018) (81,819) – 30,720 (9,212) (264,207) (17,588) (281,795) 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 – – – – – 18,024 13,983 480 – – 108,412 – 61,109 11,994 214,002 – – 179 – – (213,823) – (213,823) – – – – (3,437) – – – – – – (3,437) – – – (29,631) 8,606 (17,588) 17,588 – 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 366,411 52,767 419,178 90,043 65,724 23,857 20,504 623,889 208,992 9,058 110,663 5,695 61,109 11,994 1,231,528 (23,018) (81,819) 2,905 1,089 (606) (913,799) – (913,799) 12,498 (901,301) Total 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) 6,363 539 (216) (74,716) – (74,716) 3,002 (71,714)  Paramount Resources Ltd. 2015 Financial Statements    71 For the year ended December 31, 2015, the Company had sales to four customers which exceeded ten percent of total revenue. Such sales totaled $101.6 million, $65.2 million, $49.1 million and $41.0 million. Total Assets As at December 31 Principal Properties Strategic Investments Corporate Other Income Year ended December 31 Gain on sale of investments Other Drilling rig revenue Drilling rig expense 5. Acquisition MGM Energy Corp. 2015 2,200,981 411,694 168,360 2,781,035 2014 2,449,073 559,027 191,329 3,199,429 2015 – 2,905 1,089 (606) 3,388 2014 5,154 1,209 539 (216) 6,686 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 Consolidated Financial Statements include the results of operations of the acquired business for the period following the closing of the transaction.  Paramount Resources Ltd. 2015 Financial Statements    72 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 3,200 234 76 13,909 48,420 21,609 (108) (6,856) 80,484 69,382 11,102 80,484 (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, were allocated to the Strategic Investments business segment. 6. Exploration and Evaluation Year ended December 31 Balance, beginning of year Additions Change in asset retirement provision Transfers to property, plant and equipment Corporate acquisition Dry hole Expired lease costs Write-downs Dispositions Balance, end of year 2015 567,420 93,411 2,550 (112,000) – (15,019) (3,728) (162,516) (6,394) 363,724 2014 429,911 286,995 8,954 (143,217) 13,909 (4,719) (12,780) – (11,633) 567,420 Additions to E&E assets totaled $60.4 million (2014 – $224.3 million) for Principal Properties and $33.0 million (2014 – $62.7 million) for Strategic Investments.  Paramount Resources Ltd. 2015 Financial Statements    73 Exploration and Evaluation Expense Year ended December 31 Geological and geophysical Dry hole Expired lease costs Write-down of exploration and evaluation assets and goodwill 2015 6,121 15,019 3,728 184,124 208,992 2014 12,498 4,729 12,780 – 30,007 The Company recorded aggregate impairment charges of $184.1 million at December 31, 2015 related to E&E assets and goodwill, of which $24.1 million related to the Principal Properties business segment and $160.0 million related to the Strategic Investments business segment. The Principal Properties impairment charge resulted from the de-recognition of the carrying value of a previously drilled exploratory well which was assessed as being uneconomic to tie-in and bring on production. The Strategic Investments impairment charge resulted from the de-recognition of E&E assets related to Cavalier and MGM Energy, which are included in the Strategic Investments E&E CGU along with the Company’s shale gas assets. Goodwill with a carrying value of $21.6 million recorded upon the acquisition of MGM Energy was also written off as a result of the de-recognition of the E&E assets. At December 31, 2015, Cavalier’s oil sands project at Hoole was deemed not economically viable due to lower forecast future oil prices and an increase in the cost of obtaining capital to fund oil sands developments. The carrying value of the MGM Energy E&E assets was also deemed unrecoverable as a result of the suspension of development activity in the Northwest Territories by MGM Energy and other operators, primarily as a result of lower forecast future oil and natural gas prices and a lack of pipeline infrastructure. The recoverable amount of the shale gas assets was estimated on a FVLCS basis based on a recent market transaction completed in respect of properties with similar geological characteristics which are located in close proximity to Paramount’s shale gas development (level three fair value hierarchy estimate). The estimated recoverable amount for the Company’s shale gas assets as at December 31, 2015 was $172 million.  Paramount Resources Ltd. 2015 Financial Statements    74 7. Property, Plant and Equipment Year ended December 31, 2015 Cost Balance, December 31, 2014 Additions Transfers from exploration and evaluation Dispositions Change in asset retirement provision Cost, December 31, 2015 Accumulated depletion, depreciation and write-downs Balance, December 31, 2014 Depletion and depreciation Write-downs Dispositions Accumulated depletion, depreciation and write-downs, December 31, 2015 Net book value, December 31, 2014 Net book value, December 31, 2015 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 Depletion and Depreciation Year ended December 31 Depletion and depreciation Write-down of property, plant and equipment Inter-segment eliminations Petroleum and natural gas assets Drilling rigs 3,189,927 379,948 112,000 (9,588) (16,331) 3,655,956 (1,117,596) (360,654) (263,738) – (1,741,988) 2,072,331 1,913,968 127,410 27,697 – – – 155,107 (38,722) (3,955) – – (42,677) 88,688 112,430 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 Other Total 28,082 1,396 – (312) – 29,166 (20,536) (959) – 284 (21,211) 7,546 7,955 3,345,419 409,041 112,000 (9,900) (16,331) 3,840,229 (1,176,854) (365,568) (263,738) 284 (1,805,876) 2,168,565 2,034,353 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 2015 365,568 263,738 (5,417) 623,889 2014 209,126 32,755 (12,062) 229,819 At December 31, 2015, $81.2 million (December 31, 2014 – $252.6 million) of capitalized costs related to incomplete development wells and infrastructure projects are currently not subject to depletion or depreciation.  Paramount Resources Ltd. 2015 Financial Statements    75 Additions to property, plant and equipment in 2015 were $379.9 million (2014 – $640.3 million) for Principal Properties, $27.8 million (2014 – $26.7 million) for Strategic Investments and $1.3 million (2014 – $1.8 million) for Corporate. Additions to property, plant and equipment include $1.9 million (2014 – $14.5 million) of capitalized interest for projects in the construction phase at a weighted average interest rate of 6.3 percent (2014 – 7.3 percent). In the first quarter of 2015, the Company sold certain non-core properties in the Alder Flats area of Alberta for proceeds of $5.2 million. 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. For the twelve months ended December 31, 2015, the Company recorded aggregate impairment write- downs of $236.2 million related to petroleum and natural gas assets for the Grande Prairie CGU and $27.5 million for 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 CGUs exceeded their recoverable amounts, which were estimated based on expected net discounted future cash flows from the production of proved and probable reserves. In 2014, estimated recoverable amounts for certain properties included values based on market metrics. Market metrics were not incorporated in estimates of recoverable amounts in 2015 due to volatility in commodity and capital markets and an absence of recent comparable transactions, all of which can impact the veracity of market-based estimates. 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 oil and natural gas prices. Recoverable amounts were estimated on a FVLCS 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 hierarchy estimate). Cash flows were projected over the expected remaining productive life of each CGU’s reserves, at an after-tax discount rate of 10 percent, resulting in an estimated recoverable amount of $142.2 million for the Grande Prairie CGU and $9.9 million for the Southern CGU. Reserve estimates were prepared by Paramount’s independent qualified reserves evaluator. The forecast prices used to determine the recoverable amount reflect the following benchmark prices, adjusted for basis differentials to determine local reference prices, transportation costs and quality: (Average for the period) Natural Gas AECO ($/MMBtu) Henry Hub (US$/MMBtu) Crude Oil Edmonton Light ($/Bbl) WTI (US$/Bbl) Foreign Exchange $CDN / 1 $US 2016 2017 2018 2019 2020 2021-2030 Thereafter 2.70 2.50 56.60 45.00 3.20 2.95 3.55 3.40 66.40 53.60 72.80 62.40 3.85 3.70 80.90 69.00 3.95 3.90 4.20 – 5.40 4.15 – 5.30 83.20 73.10 88.20 – 113.40 77.30 – 99.00 +2%/yr +2%/yr +2%/yr +2%/yr 1.37 1.33 1.25 1.25 1.21 1.21 1.21 Paramount 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  Paramount Resources Ltd. 2015 Financial Statements    76 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. Following the write-down of the carrying value of the Southern CGU for the year-ended December 31, 2015, the Company determined that the Southern properties no longer constitute a significant CGU. As a result, the Southern properties will be included in the Kaybob CGU subsequent to December 31, 2015. 8. Equity-Accounted Investments As at December 31 Trilogy Other (1) Based on the period-end trading price. Shares (000’s) 19,144 2015 Carrying Value 58,370 – 58,370 Market Value (1) 70,068 Shares (000’s) 19,144 2014 Carrying Value 79,879 2,565 82,444 Market Value (1) 151,432 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) 2015 (22,676) 111 (453) – (23,018) 2014 (11,508) 257 (2,938) 10,790 (3,399) As at December 31, 2015, Paramount owned a 15 percent equity interest in Trilogy (December 31, 2014 – 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. Trilogy is a publicly listed entity in Canada with its common shares trading on the Toronto Stock Exchange. The following tables summarize the assets, liabilities, equity, revenue and income of Trilogy and Paramount’s investment in Trilogy: As at December 31 Current assets Non-current assets(1) Current liabilities Non-current liabilities Equity Multiply by: Paramount’s equity interest Paramount’s proportionate share of equity Less: 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 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, 2015 totaled $1,220,942 (2014 – $1,562,475) and equity totaled $447,742 (2014 - $572,135). 2015 45,550 1,217,088 (56,172) (762,578) 443,888 15.2% 67,431 (9,061) 58,370 (1)  Paramount Resources Ltd. 2015 Financial Statements    77 Year ended December 31 Revenue Comprehensive loss(1) Paramount’s share of Trilogy’s comprehensive loss 2015 268,458 (142,369) (21,620) 2014 549,037 (68,534) (10,408) (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, 2015 was $137,658 (2014 – comprehensive loss $61,011). Trilogy had 10.3 million stock options outstanding (5.3 million exercisable) at December 31, 2015 at exercise prices ranging from $4.49 to $38.74 per share. For the year ended December 31, 2014, Paramount received cash dividends from Trilogy of $7.4 million. Paramount’s share of the income or loss from its other investees for the year ended December 31, 2015 was an aggregate net loss of $1.1 million (2014 – net loss of $1.1 million). 9. Investments in Securities As at December 31 MEG Energy Corp. Privateco Other (1) 2015 Shares (000’s) 3,700 Market Value 29,674 18,675 12,365 60,714 2014 Shares (000’s) 3,700 Market Value 72,335 8,769 21,790 102,894 (1) Includes investments in Marquee, RMP Energy Inc., Strategic Oil & Gas Ltd., and other public corporations. Paramount holds an investment in the shares of a private oil and gas company ("Privateco"). The estimated fair value of the Company’s investment is based on equity issuances by Privateco from time-to- time (level two fair value hierarchy estimate). For the year ended December 31, 2015 aggregate unrealized losses of $81.8 million related to the Company’s investments in MEG Energy Corp., Marquee, RMP Energy Inc., 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. 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. 10. Goodwill As at December 31 Carrying value, beginning of year Acquisition Write-downs Carrying value, end of year 2015 24,733 – (21,609) 3,124 2014 3,124 21,609 – 24,733 The carrying amount of goodwill at December 31, 2015 of $3.1 million relates to the Kaybob CGU. Goodwill recognized in respect of the 2014 MGM Energy acquisition was written down as at December 31, 2015, refer to Note 6.  Paramount Resources Ltd. 2015 Financial Statements    78 11. Limited-Recourse Demand Facilities As at December 31 Fox Drilling Facility Cavalier Facility Fox Drilling Facility 2015 63,380 37,531 100,911 2014 50,940 30,590 81,530 The Fox Drilling bank credit facility (the "Fox Drilling Facility") is a non-revolving demand loan, which is divided into two tranches. The first tranche ("Fox Tranche A") has a principal amount of $37.7 million outstanding at December 31, 2015 (December 31, 2014 – $45.8 million). Scheduled quarterly principal repayments on Fox Tranche A total $8.2 million in each of 2016 and 2017, with the remaining outstanding balance payable in 2018. The second tranche ("Fox Tranche B") has a credit limit of $27.0 million that is available to be used to fund the construction of two new drilling rigs. At December 31, 2015, $25.7 million was drawn under Fox Tranche B (December 31, 2014 – $5.1 million). Scheduled quarterly principal repayments on Fox Tranche B total $3.6 million in each year from 2016 to 2020, with the remaining outstanding balance payable in 2021. The Fox Drilling Facility is non-recourse to Paramount. Recourse is limited to Fox Drilling and its assets, including the Rigs 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, 2015 was 4.0 percent (2014 – 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 recourse is limited to Cavalier and its assets. The effective interest rate on the Cavalier Facility for the year ended December 31, 2015 was 3.4 percent (2014 – 3.5 percent). 12. Long-Term Debt As at December 31 Bank credit facility 8¼% Senior Notes due 2017 7⅝% Senior Notes due 2019 6⅞% US Senior Notes due 2023 Unamortized financing costs, net of premiums and discounts Bank Credit Facility 2015 693,045 – 450,000 622,800 1,765,845 (15,619) 1,750,226 2014 397,673 370,000 450,000 – 1,217,673 (7,318) 1,210,355 Paramount has a bank credit facility (the "Facility") with a syndicate of lenders (the "Lenders"). The Facility was increased in 2015 from $900 million to $1.0 billion, which is comprised of two tranches. The  Paramount Resources Ltd. 2015 Financial Statements    79 maximum amount of the first tranche ("Tranche A") is $900 million and the maximum amount of the second tranche ("Tranche B") is $100 million. 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. The current revolving period of Tranche A ends on April 30, 2016. In the event the revolving period of Tranche A is not extended, any undrawn availability would be cancelled and all amounts then outstanding would be permitted to remain outstanding on a non-revolving basis until April 30, 2017, the current maturity date of Tranche A. The revolving period of Tranche B ends on April 30, 2016, its current maturity date, unless further extended. As at December 31, 2015 and as at February 29, 2016, $693.0 million and $668.4 million, respectively, was drawn on the Facility. In addition, Paramount had undrawn letters of credit outstanding as at December 31, 2015 and as at February 29, 2016 totaling $120.9 million and $120.6 million, respectively, which reduce the amount available to be drawn under the Facility. Paramount has never drawn on Tranche B. 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 borrowing base governs the maximum amount which can be drawn under Tranche A. The Lenders have the right to review and re-determine Paramount’s borrowing base on a semi-annual basis and more frequently in certain other circumstances, with the next scheduled review to be completed in conjunction with the Facility’s planned April 30, 2016 renewal. The borrowing base amount is based on the Company’s reserves, the Lenders’ projections of future commodity prices, the value attributed by the Lenders to certain of Paramount’s equity investments and other assets and certain other factors. Taking into consideration all such factors, Paramount expects the borrowing base to be reduced on the next re- determination. Tranche B is currently not available to be drawn. Senior Notes In June 2015, Paramount issued US$450 million principal amount of senior unsecured notes due 2023 (the "2023 Senior Notes") at a price of US$995.33 per US$1,000 principal amount, of which US$9.0 million principal amount was purchased by entities that are controlled by the Company’s Executive Chairman. The 2023 Senior Notes bear interest at 6⅞ percent per annum, payable semi-annually in arrears on June 30 and December 31 of each year, and mature on June 30, 2023. Immediately following the issuance of the 2023 Senior Notes, Paramount redeemed all $370 million aggregate principal amount of senior unsecured notes due 2017 (the "2017 Senior Notes") by irrevocably depositing $380.2 million with the trustee (representing a redemption price of 102.75 percent of the principal amount of the 2017 Senior Notes). As a result, Paramount’s obligations under the 2017 Senior Notes indenture were satisfied and discharged. The redemption premium of $10.2 million and unamortized financing fees totaling $1.8 million were recorded as debt extinguishment expense. Paramount also has $450 million aggregate principal amount of senior unsecured notes outstanding due 2019 (the "2019 Senior Notes"). 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.  Paramount Resources Ltd. 2015 Financial Statements    80 The Company’s 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 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 notes redeemed and the date of redemption. 13. 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 Asset retirement obligations, end of year 2015 287,415 5,010 (18,791) – (6,641) (119) 1,011 5,695 273,580 2014 239,853 23,190 6,126 40,164 (4,576) (30,134) 6,856 5,936 287,415 At December 31, 2015, the estimated undiscounted asset retirement obligations were $273.6 million (December 31, 2014 - $287.4 million), which have been discounted using a weighted average risk-free rate of 2.00 percent (December 31, 2014 – 2.00 percent) and an inflation rate of 2.00 percent (December 31, 2014 – 2.00 percent). These obligations will be settled over the useful lives of the assets, which extend up to 39 years. 14. 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, 2015, 106,212,487 (December 31, 2014 – 104,843,846) Common Shares were outstanding, net of 21,508 (December 31, 2014 – 54,199) Common Shares held in trust under the stock incentive program, and no preferred shares were outstanding. In April 2015, pursuant to a private placement, Paramount issued 0.9 million Common Shares to arms- length investors on a "flow-through" basis in respect of Canadian exploration expenses ("CEE") at a price of $41.35 per share for gross proceeds of $37.2 million. A liability of $7.4 million was recorded in accounts payable and accrued liabilities on the issuance of the flow-through shares in respect of the Company’s obligation to renounce qualifying expenditures. The Company incurred $1.0 million of transaction costs in respect of the transaction, net of tax benefits of $0.4 million. 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 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 the Company’s Executive Chairman for gross proceeds of $7.4 million. The Company incurred $10.7 million of transaction costs in respect of the public offering, net of tax benefits of $3.6 million.  Paramount Resources Ltd. 2015 Financial Statements    81 Weighted Average Common Shares Year ended December 31 2015 2014 Net loss – basic Dilutive effect of Paramount options Net loss – diluted 15. Reserves Wtd. Avg Shares (000’s) 105,801 – 105,801 Wtd. Avg Shares (000’s) 101,090 – 101,090 Net loss (901,301) – (901,301) Net loss (71,714) – (71,714) Reserves at December 31, 2015 include unrealized gains and losses related to changes in the market value of the Company’s investments in securities and contributed surplus amounts in respect of Paramount Options and Cavalier Options. The changes in reserves are as follows: Year ended December 31, 2015 Balance, beginning of year Other comprehensive income Share-based compensation Options exercised Balance, end of year Year ended December 31, 2014 Balance, beginning of year Other comprehensive loss Share-based compensation Options exercised Balance, end of year Unrealized gains (losses) on securities (29,688) 38,325 – – 8,637 Unrealized gains (losses) on securities 12,787 (42,475) – – (29,688) Contributed surplus 75,860 – 23,214 (8,374) 90,700 Contributed surplus 74,891 – 21,439 (20,470) 75,860 Total reserves 46,172 38,325 23,214 (8,374) 99,337 Total reserves 87,678 (42,475) 21,439 (20,470) 46,172  Paramount Resources Ltd. 2015 Financial Statements    82 16. Share-Based Compensation Paramount Options Changes in outstanding Paramount Options are as follows: Balance, beginning of year Granted Exercised (1) Forfeited Expired Balance, end of year Options exercisable, end of year 2015 2014 Weighted average exercise price ($/share) 33.75 33.43 13.69 40.52 25.85 34.66 34.85 Number 6,632,200 1,922,500 (1,107,350) (171,500) – 7,275,850 2,592,750 Weighted average exercise price ($/share) 31.20 33.22 17.22 35.67 – 33.75 31.58 Number 7,275,850 694,000 (435,950) (291,000) (4,250) 7,238,650 3,991,050 (1) For options exercised in 2015, the weighted average market price of Paramount’s Common Shares on the dates exercised was $33.95 (2014 – $48.09). The weighted average remaining contractual life and exercise prices of Paramount Options outstanding as of December 31, 2015 are as follows: Exercise Prices $13.02 - $29.50 $29.51 - $34.10 $34.11 - $37.80 $37.81 - $40.00 $40.01 - $64.47 Awards Outstanding Remaining contractual life (years) 0.6 4.2 2.1 3.3 1.7 2.5 Number 926,250 1,673,700 1,956,700 1,447,500 1,234,500 7,238,650 Weighted average exercise price 28.67 30.07 34.53 37.98 41.70 34.66 The grant date fair value of Paramount Options was estimated using the Black-Scholes-Merton model incorporating the following weighted average inputs: Weighted average exercise price ($ / 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 2015 33.43 41.9 2.1 3.7 0.6 nil 8.02 Options awarded in 2014 33.22 35.0 4.6 5.7 1.3 nil 10.24 The estimated expected life of Paramount Options is based on historical exercise patterns. The expected volatility is estimated based on the historical volatility of the trading price of the Company’s Common Shares over the most recent period that is generally commensurate with the expected term of the option.  Paramount Resources Ltd. 2015 Financial Statements    83 Cavalier Options During 2015, no Cavalier Options were granted and a total of 0.4 million previously issued options were forfeited during the year, resulting in a net balance of 5.5 million Cavalier Options outstanding at December 31, 2015. During 2014, Cavalier granted 1.7 million Cavalier Options, which vest over five years. The expected life of a Cavalier Option 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 2015 2014 Year ended December 31 Balance, beginning of year Shares purchased Change in vested and unvested shares Balance, end of year Employee Benefit Costs Year ended December 31 Stock option plans Stock incentive plan Share-based compensation expense Salaries and benefits, net of recoveries 17. Income Tax Shares (000’s) 54 9 (41) 22 508 316 (689) 135 Shares (000’s) 72 92 (110) 54 2015 22,669 (2,165) 20,504 16,366 36,870 500 4,617 (4,609) 508 2014 20,290 5,083 25,373 16,178 41,551 The following table reconciles income taxes calculated at the Canadian statutory rate to Paramount’s recorded income tax recovery: Year ended December 31 Loss before tax Effective Canadian statutory income tax rate Expected income tax recovery Effect on income taxes of: Statutory and other rate differences Loss from equity-accounted investments Write-down of investments in securities Change in unrecognized deferred income tax asset Goodwill impairment Flow-through share renunciations Stock-based compensation Unrealized foreign exchange on US Senior Notes Non-deductible items and other Income tax recovery 2015 (913,799) 26.0% (237,588) 2014 (74,716) 25.0% (18,679) (20,710) 5,985 21,273 194,169 5,620 2,156 5,894 15,812 (5,109) (12,498) 284 850 3,911 – – 5,870 5,072 – (310) (3,002)  Paramount Resources Ltd. 2015 Financial Statements    84 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 income tax asset Unrecognized deferred income tax asset Net deferred income tax asset 2015 (138,790) (1,397) 73,855 422,629 (7,305) 348,992 (194,169) 154,823 2014 (209,850) (357) 71,872 285,166 5,656 152,487 – 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 2015 152,487 12,509 (1,314) (6,582) 355 (2,632) 154,823 2014 119,090 2,957 271 (20,671) 3,553 47,287 152,487 Paramount has $1,565.6 million (2014 – $1,141.3 million) of unused tax losses expiring between 2025 and 2035. In addition, Paramount has $307.1 million (2014 – $233.8 million) of deductible temporary differences in respect of investments for which no deferred income tax asset has been recognized. At each reporting date, Paramount assesses the recoverability of the deferred income tax asset to determine whether it is more likely than not that the carrying value of the asset will be realized. As at December 31, 2015, the Company concluded that a portion of the carrying value of the deferred income tax asset was not probable of realization, and accordingly, a de-recognition of $194.2 million of deferred income tax assets was recorded. In 2010, the Company received reassessments of its income taxes from the Canada Revenue Agency (the "CRA") and provincial tax authorities relating to a prior year transaction (the "Reassessments"). Paramount filed notices of objection to the Reassessments and, as a condition of its right to proceed with the objection, the Company was required to deposit approximately $20 million with the CRA. In 2015, the Company’s notices of objection were accepted by the CRA and the deposit, plus interest, was returned to Paramount. 18. Financial Instruments and Risk Management Financial Instruments Financial instruments at December 31, 2015 consisted of cash and cash equivalents, accounts receivable, risk management assets, investments in securities, limited-recourse demand facilities, accounts payable and accrued liabilities and long-term debt.  Paramount Resources Ltd. 2015 Financial Statements    85 Risk Management The Company had the following financial commodity sales contracts in place as at December 31, 2015: Instruments Oil – NYMEX WTI Swaps Aggregate notional Average fixed price 6,000 Bbl/d CDN$75.72/Bbl Fair Value 40,207 Remaining term January 2016 – December 2016 In January 2016, Paramount entered into a financial NYMEX WTI swap purchase contract for 2,000 Bbl/d at a fixed price of CDN$50.64/Bbl from February 2016 to December 2016. Changes in the fair value of risk management assets and liabilities are as follows: Year ended December 31 Fair value, beginning of year Changes in fair value Settlements (received) paid Fair value, end of year 2015 – 55,215 (15,008) 40,207 2014 (3,972) 2,852 1,120 – Gain on commodity contracts for the year ended December 31, 2015 include $2.5 million of realized losses in respect of marketing activities. Paramount is exposed to market risks where the fair values or future cash flows of financial instruments are impacted by changes in underlying market prices. Market Value of Senior Notes The 2019 Senior Notes had a market value of 82.0 percent of their principal amount at December 31, 2015 (December 31, 2014 – 93.6 percent). The 2023 Senior Notes had a market value of 79.0 percent of their principal amount at December 31, 2015. The market values of the Company’s Senior Notes were estimated using a market approach incorporating prices quoted from financial institutions (level two fair value hierarchy estimates). 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. At December 31, 2015, assuming all other variables are held constant, a CDN$5 per barrel increase or decrease in the applicable forward market curves would have the following impact on Paramount’s net earnings due to changes in the fair value of financial commodity contracts: CDN$ Crude Oil $5 increase (10,980) $5 decrease 10,980 Foreign Currency Risk Paramount is exposed to foreign currency risk on financial instruments denominated in US dollars including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and the 2023 Senior Notes.  Paramount Resources Ltd. 2015 Financial Statements    86 At December 31, 2015, assuming all other variables are held constant, a 5% strengthening or weakening of the Canadian dollar relative to the US dollar based on the year-end foreign exchange rate of 1.384 $CDN/1$US would have the following impact on Paramount’s net earnings due to foreign exchange related to the 2023 Senior Notes: 2023 Senior Notes 31,140 (31,140) 5% strengthening 5% weakening Sales prices for natural gas, crude oil and natural gas liquids and the value of financial commodity oil contracts denominated in Canadian dollars are determined with reference to US benchmark prices, therefore a weakening of the Canadian dollar relative to the US dollar will increase the revenue received in Canadian dollars for the sale of Company’s production and the value of such financial commodity contracts. Paramount’s expenditures are primarily in Canadian dollars but include equipment and other items sourced from the United States and settled 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, 2015 by approximately $5.6 million (2014 – $2.7 million) based on the average floating rate credit facility balances outstanding during the year. Paramount’s senior notes bear interest at fixed rates and are subject to fair value changes as market interest rates change. Equity Price Risk Paramount is exposed to equity price risk associated with changes in the market value of its investments. Credit Risk Paramount is exposed to credit risk on its financial instruments where a financial loss would be experienced if a counterparty to a financial asset failed to meet its obligations. The Company manages credit risk by endeavoring to enter into contracts with counterparties that possess high credit ratings, employing net settlement agreements, employing letters of credit, and limiting available credit when necessary. The maximum credit risk exposure at December 31, 2015 is limited to the carrying value of accounts receivable and risk management assets. 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, 2015, 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, drawings on credit facilities, dispositions of assets and accessing capital markets.  Paramount Resources Ltd. 2015 Financial Statements    87 In addition to commitments disclosed in Note 22, contractual obligations related to financial liabilities are as follows: Accounts payable & accrued liabilities (1) Cavalier Facility (2) Fox Drilling Facility (3) Credit Facility (3) Senior Notes (3) 2016 103,559 37,531 14,116 30,494 77,130 262,830 2017 – – 13,645 703,210 77,130 793,985 2018 – – 26,165 – 77,130 103,295 2019 – – 4,140 – 524,498 528,638 2020 – – 3,996 – 42,818 46,814 Thereafter – – 7,786 – 729,668 737,454 Total 103,559 37,531 69,848 733,704 1,528,374 2,473,016 (1) (2) (3) Excluding $4.1 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 payables Interest payable Flow-through share renunciation obligations 2015 97,883 3,138 2,538 4,065 107,624 2014 252,349 7,178 4,044 3,276 266,847 Terms and conditions of the above accounts payable and accrued liabilities: • Trade and accrued payables and joint operation and other payables are non-interest bearing and are normally settled within 30 to 60 days. • Interest on the 2019 Senior Notes is payable semi-annually in arrears on June 4 and December 4 in each year. Interest on the 2023 Senior Notes is payable semi-annually in arrears on June 30 and December 31 in each year. Accounts Receivable As at December 31 Revenue receivable Joint operation receivable Corporate GST and other 2015 35,528 2,493 9,954 755 48,730 2014 33,972 17,655 2,442 2,971 57,040 Joint operation receivables are non-interest bearing and are generally settled on 30 day terms. In estimating 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, 2015. There were no significant non-current joint operation receivables as at December 31, 2015 and 2014.  Paramount Resources Ltd. 2015 Financial Statements    88 19. Consolidated Statement of Cash Flows Selected Information Items Not Involving Cash Year ended December 31 Commodity contracts Share-based compensation Depletion and depreciation Exploration and evaluation (Gain) loss on sale of oil and gas properties Accretion of asset retirement obligations Foreign exchange Loss from equity-accounted investments Write-down of investments in securities Gain on sale of investments Deferred income tax Other Supplemental Cash Flow Information Year ended December 31 Interest paid Current tax paid (refunded) 20. Capital Structure 2015 (40,207) 20,504 623,889 202,871 9,058 5,695 59,984 23,018 81,819 – (12,509) 2,265 976,387 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 2015 107,839 (10) 2014 79,263 402 Paramount’s primary objectives in managing its capital structure are to: i. maintain a flexible capital structure which optimizes the cost of capital at an acceptable level of risk; ii. maintain sufficient liquidity to support ongoing operations, capital expenditure programs, strategic initiatives and the repayment of debt obligations when due; and iii. maximize shareholder returns. Paramount manages its capital structure to support current and future business plans and periodically adjusts the structure in response to changes in economic conditions and the risk characteristics of the Company’s underlying assets and operations. Paramount monitors metrics such as the Company’s debt- to-equity and debt-to-cash flow ratios, among others, to measure the status of its capital structure. The Company has not established fixed quantitative thresholds for such metrics. The capital structure may be adjusted by issuing or repurchasing shares, issuing or repurchasing debt, refinancing existing debt, modifying capital spending programs, and disposing of assets, the availability of any such means being dependent upon market conditions.  Paramount Resources Ltd. 2015 Financial Statements    89 Paramount’s capital structure consists of the following: As at December 31 Adjusted working capital deficit (1) Limited-recourse demand facilities Facility Senior notes (2) Net Debt (3) Share capital Accumulated deficit Reserves Total Capital 2014 183,328 81,530 397,673 820,000 1,482,531 1,603,436 (296,326) 46,172 2,835,813 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, 2015 - $4.1 million, December 31, 2014 - $3.3 million), risk management assets and liabilities, and limited-recourse demand facilities. Excludes unamortized issue premiums and financing costs. Net Debt as at December 31, 2014 excludes the $20 million deposit on account with the CRA (See Note 17). 2015 37,839 100,911 693,045 1,072,800 1,904,595 1,646,984 (1,197,627) 99,337 2,453,289 (1) (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. 21. Related Party Transactions Service Agreements Paramount engages in transactions with Trilogy in the normal course of business, including joint operations. All transactions between Paramount and Trilogy are recorded at their exchange amounts. During 2015, Paramount charged $0.5 million (2014 – $0.6 million) to Trilogy in respect of operational and administrative services. Paramount charged $3.4 million (2014 – $0.6 million) to Trilogy and was charged $2.6 million (2014 – $1.6 million) by Trilogy in respect of joint operations. Paramount received $7.4 million in dividends from Trilogy in 2014. As of December 31, 2015, Paramount had a net payable balance due to Trilogy of $0.2 million (2014 – net payable of $0.3 million). Compensation of Key Management Personnel Year ended December 31 Salaries and benefits Share-based compensation 2015 1,339 9,913 11,252 2014 1,899 10,658 12,557  Paramount Resources Ltd. 2015 Financial Statements    90 22. Commitments and Contingencies Paramount had the following commitments as at December 31, 2015: 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 603,043 10,565 2,036 615,644 Within one year 98,377 4,740 7,084 110,201 More than five years 746,921 3,126 – 750,047 (1) (2) Certain of the transportation and processing commitments are secured by outstanding letters of credit totaling $104.6 million at December 31, 2015 (2014 – $41.2 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 2015 (2014 – $3.7 million). Flow-Through Shares As a result of flow-through share issuances in April 2015, Paramount is required to incur, on or before December 31, 2016, $37.2 million of CEE, of which $16.7 million was incurred as of December 31, 2015. Paramount has incurred sufficient qualifying expenditures to satisfy commitments associated with CEE flow-through shares issued in 2014. 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. 23. Subsequent Event In March 2016, Paramount entered into an agreement for the sale of its Musreau Complex and related midstream assets (the “Midstream Transaction”). In connection with the Midstream Transaction, the Company has entered into a natural gas processing agreement with the purchaser that includes a long- term capacity commitment. Upon closing, the cash proceeds of $556 million will be used to pay down the Facility. The Company intends to reduce Tranche A of the Facility by $300 million to $600 million and cancel Tranche B of the Facility. The Midstream Transaction is expected to close in the second quarter of 2016, subject to regulatory approvals. There are no financing or other non-customary material closing conditions.  Paramount Resources Ltd. 2015 Financial Statements    91 CORPORATE INFORMATION OFFICERS C. H. Riddell Executive Chairman J. H. T. Riddell President and Chief Executive 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 General Counsel and Corporate Secretary, Manager Land 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 Executive Chairman of the Board Paramount Resources Ltd. Calgary, Alberta J. H. T. Riddell (2) President and Chief Executive 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 Barclays Bank PLC Toronto, Ontario 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 (1) Member of Audit Committee (2) Member of Environmental, Health and Safety Committee (3) Member of Compensation Committee (4) Member of Corporate Governance Committee Caisse centrale Desjardins Calgary, Alberta 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”) Paramount Resources Ltd. Corporate Information    92 

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