Annual Report 2015
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M
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CM
MY
CY
CMY
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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