2016 Annual Report
2016 Highlights
President & Chief Executive Officer’s Message
2016 Overview
Review of Operations
Management’s Discussion & Analysis
Financial Statements
Corporate Information
1
3
6
8
18
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85
ANNUAL MEETING OF SHAREHOLDERS
Shareholders are cordially invited to attend the
Annual Meeting of Shareholders to be held
Wednesday, May 10, 2017 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, 2016 contained herein which also includes supplemental advisories related to additional information included in this document.
2016 HIGHLIGHTS
FINANCIAL AND OPERATING (1)
($ millions, except as noted)
Three months ended
December 31
Twelve months ended
December 31
2016
2015
% Change
2016
2015
% Change
Sales volumes
Natural gas (MMcf/d)
Condensate and oil (Bbl/d)
Other NGLs (Bbl/d) (2)
Ongoing Operations (Boe/d)
Musreau Assets (Boe/d)
Total (Boe/d)
47.5
2,943
1,046
11,901
–
11,901
52.5
3,359
661
12,765
32,701
45,466
Petroleum and natural gas sales
32.3
91.3
Netback
($/Boe)
Funds flow from operations
per share – diluted ($/share)
Net income (loss)
per share – diluted ($/share)
17.0
15.53
14.3
0.13
212.4
1.99
48.9
11.70
21.0
0.20
(599.0)
(5.64)
(10)
(12)
58
(7)
(100)
(74)
(65)
(65)
(32)
NM
48.6
2,688
875
11,656
20,204
31,860
50.8
2,807
1,047
12,316
31,814
44,130
248.8
376.8
93.1
7.99
35.7
0.34
210.7
13.08
93.2
0.88
1,165.3
10.95
(901.3)
(8.52)
Principal Properties Capital (3)
78.2
64.7
21
171.0
429.9
Investments in other entities – market value (4)(5)
Total assets
Net cash (debt)
Common shares outstanding (thousands)
208.7
2,059.0
565.9
105,787
130.8
2,781.0
(1,904.6)
106,234
(4)
(4)
(16)
(5)
(36)
(28)
(34)
(56)
(62)
NM
(60)
60
(26)
NM
(1)
Readers are referred to the advisories concerning Non-GAAP Measures and Oil and Gas Measures and Definitions in the Advisories section of this document and
to the reconciliations of such non-GAAP measures to their most directly comparable measure under GAAP in the applicable sections of this document. This table
contains the following non-GAAP measures: Netback, Funds flow from operations, Principal Properties Capital, Investments in other entities – market value and Net
cash (debt).
(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.
Excludes 3.8 million class A common shares of 7Gen classified as "Investments in Securities for Distribution" having a carrying value and market value of $119.0
million as at December 31, 2016. These shares were distributed to Paramount’s shareholders by way of dividend in January 2017.
(4)
(5)
NM Not meaningful
Paramount Resources Ltd. 2016 Highlights 1
RESERVES (1)(2)(3)
Ongoing Operations
Natural gas (Bcf)
NGLs (MBbl)
Light and Medium crude oil (MBbl)
Total Ongoing Operations (MBoe)
Musreau Assets (MBoe)
Total (MBoe)
Future Net Revenue NPV10 ($ millions)
Ongoing Operations
Musreau Assets
Total
Principal Properties
Finding and Development Costs (5)
Karr-Gold Creek ($/Boe)
Ongoing Operations ($/Boe)
PRINCIPAL PROPERTIES (4)
Proved
Proved plus Probable
2016
2015 % Change
2016
2015 % Change
139
104
19
124
(100)
(74)
175
(100)
(74)
238.0
19,100
882
59,645
–
59,645
99.6
9,343
741
26,682
199,658
226,340
424
–
424
154
1,454
1,608
Three-
Year
Average
15.90
20.73
2016
12.15
12.16
179
132
19
159
(100)
(66)
206
(100)
(73)
463.3
36,736
1,219
115,173
–
115,173
810
–
810
2016
8.60
8.29
165.8
15,847
1,021
44,509
293,124
337,633
265
2,790
3,055
Three-
Year
Average
11.34
13.40
(1)
(2)
Readers are referred to the advisories concerning Oil and Gas Measures and Definitions in the Advisories section of this document.
Reserves evaluated and reviewed, as applicable, by the Company’s independent reserves evaluator, McDaniel & Associates Consultants Ltd. ("McDaniel") as of
December 31, 2016 in accordance with National Instrument 51-101 definitions, standards and procedures. Amounts are working interest reserves before royalty
deductions. Net present values of future net revenue were determined using forecast prices and costs and do not represent fair market value.
(3) Ongoing Operations excludes amounts attributable to the Musreau Assets. 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.
Excludes 93.5 MMBbl of probable bitumen reserves related to Hoole Grand Rapids Phase 1.
Refer to the Principal Properties – Reserves and Finding and Development Costs section of this document.
(4)
(5)
Paramount Resources Ltd. 2016 Highlights 2
PRESIDENT AND CHIEF EXECUTIVE OFFICER’S MESSAGE
To our Shareholders,
Over the past year, Paramount has undertaken a series of transformational transactions that
repaid all of the Company’s debt and provided balance sheet strength and financial flexibility. As
we enter 2017, the Company is well positioned to develop its resource base, grow production and
take advantage of new opportunities.
Paramount completed three major transactions in 2016, starting with the sale of our Musreau
plant complex to Pembina Pipeline Corporation in April for $560 million, which provided some
much-needed financial flexibility at the time.
Then in August, the Company completed the sale of our Musreau area oil and gas properties, our
largest operating development for $2.1 billion, comprised of $500 million in cash, 33.5 million
Seven Generations Energy shares and the purchaser’s assumption of our US$450 million senior
notes. Paramount subsequently sold 29.7 million of these shares for net proceeds of $860 million,
and later distributed the remaining 3.8 million shares to our shareholders by way of dividend. On
a full-cycle basis, Paramount realized a gain of $1.1 billion on the Musreau properties, after
recovering $2.2 billion of capital invested.
Finally, in December Paramount sold a royalty on our non-producing bitumen leases, held in our
wholly-owned subsidiary Cavalier Energy, for cash proceeds of $100 million.
In total, Paramount realized net proceeds of $2.75 billion in 2016, which allowed us to repay all
bank indebtedness and redeem our remaining long-term senior notes. The Company entered
2016 with total consolidated net debt of over $1.9 billion. Twelve months later, Paramount had an
extremely strong balance sheet comprised of over $600 million of cash, zero debt outstanding
and had a $100 million undrawn bank credit facility. In addition, the Company paid out a $120
million dividend in kind to our shareholders.
Full year production volumes were 31,860 Boe/d in 2016, down 28 percent from 2015 levels,
which averaged 44,130 Boe/d. Paramount produced 11.7 million Boe in 2016, realizing average
field netbacks of $7.99/Boe and cash flow of $3.06/Boe. Total netbacks in 2016 were $93.1 million
and cash flow was $35.7 million, down materially from 2015 levels due to the reduction in sales
volumes resulting from the sale of the Musreau properties and lower commodity prices. Operating
costs increased to $8.32/Boe in 2016 from $5.59/Boe in 2015 as a result of the sale of the
Musreau plant complex and fixed costs being applied over lower production levels. Capital
spending was down materially, with $205 million invested in 2016 compared to $500 million in
2015.
Paramount Resources Ltd. 2016 President and Chief Executive Officer’s Message 3
Paramount entered 2016 producing over 50,000 Boe/d, but as capital spending was reduced in
response to the collapse in commodity prices, production declines prevailed for the first half of
the year and total corporate volumes averaged about 35,000 Boe/d at the time of the Musreau
sale in August 2016. Sales volumes were approximately 10,000 Boe/d following the Musreau
dispositions and the Company has grown production to over 16,000 Boe/d in February 2017 with
new Montney wells coming on at Karr.
Paramount used the period of reduced field activities in 2015 and early 2016 to optimize its
operations and update well designs, reducing per-meter well costs and improving well
productivity. The Company’s updated well designs incorporate longer horizontal sections, an
increased number of completion stages and higher fracture proppant intensities, in keeping with
overall industry trends.
The Company resumed its drilling and completion activities at Musreau in the spring of 2016
incorporating these new well designs, but sold the property before results from these
enhancements were available. Following the Musreau sale, Paramount shifted its development
focus to its Karr property directly north of Musreau, where these well design enhancements were
incorporated in drilling and completion programs executed in the latter part of 2016. Well results
and economics for these new Karr wells are materially better than past wells completed using
previous designs. The Company has now completed six wells in the program, with initial per-well
production results exceeding 2,000 Boe/d, which we estimate to be amongst the most prolific
results in all of North America. Based on these improved results and strengthening commodity
prices, Paramount quickly increased spending to take advantage of the availability of field
services and lower input costs. As capital activity at Karr has accelerated, we have resumed
production growth through the end of 2016 into early 2017.
Since mid-2016, Paramount has embarked on a capital program at Karr to drill 27 horizontal
Montney wells by the end of 2017 and complete the expansion of our Karr facilities from 40
MMcf/d to 80 MMcf/d. Upon completion of this expansion and the newly drilled wells, the
Company expects to see corporate production increase to over 30,000 Boe/d, reaching levels
similar to those prior to the sale of the Musreau properties. The total cost of this program through
the end of 2017 is estimated to be about $300 million.
Paramount also plans to spend approximately $125 million in its other operating areas in 2017,
with the majority of these expenditures directed at its Resthaven and Birch plays. At Resthaven,
plans are in place to drill and complete six wells, which will be tied in to Paramount’s owned
capacity in the third-party operated Smoky deep cut plant. In the Birch area, the Company plans
to participate to its 50 percent working interest in nine new horizontal Montney wells and a facility
expansion which will increase gross capacity to 40 MMcf/d from the current 20 MMcf/d. The 2017
capital program also includes spending at the Valhalla and Willesden Green areas to further our
understanding of the economics and full development potential of these areas.
The Musreau disposition resulted in the sale of proved reserves of 199.7 MMBoe and proved plus
probable reserves ("P+P") of 293.1 MMBoe, as estimated at December 31, 2015.
Proved reserves for Paramount’s ongoing operations increased by 124 percent to 59.6 MMBoe
in 2016 compared to 26.7 MMBoe in 2015 and P+P reserves increased 159 percent to 115.2
MMBoe in 2016 compared to 44.5 MMBoe in 2015. The Company replaced 2016 ongoing
Paramount Resources Ltd. 2016 President and Chief Executive Officer’s Message 4
operations production of 4.3 MMBoe by 9 times with proved reserves additions and 18 times with
P+P reserves additions.
Paramount added reserves at a low cost in 2016, with finding and development costs for ongoing
operations of $12.16/Boe for proved reserves and $8.29/Boe for P+P reserves. The net present
value assigned to Paramount’s ongoing operations reserves, discounted at ten percent, increased
year over year by 175 percent to $424 million for proved reserves and by 206 percent to $810
million for P+P reserves.
Oil prices have reacted as worldwide supply and demand have become more balanced. The
OPEC agreement to curtail oil production has accelerated the re-balancing of world oil markets,
increasing prices to approximately US$50/Bbl, incentivizing Paramount to resume investing
capital in its plays. It is anticipated that in the near-term, structural improvements in worldwide
supply costs will limit any material appreciation of oil prices. In the medium-term, the prolonged
period of limited re-investment in the upstream industry since the collapse of oil prices in 2014 is
expected to catch up with supply, prompting prices to increase further.
Natural gas pricing has structurally changed because of technological improvements, initially by
the adoption of horizontal drilling and multi-stage fracturing, and more recently by continued
refinements in proppant intensity and technological improvements which have reduced capital
costs. Paramount is benefitting from these technological improvements, but so are the majority
of unconventional resource companies.
Paramount looks forward to continued production growth through the balance of 2017. Forward
guidance has been provided, which includes capital spending of $325 million, significantly more
than forecast cash flow. This capital program will increase production from about 12,000 Boe/d
at the end of 2016 to over 30,000 Boe/d in the fourth quarter of 2017, a 150 percent increase in
just 12 months. Production for 2017 is expected to average 20,000 Boe/d.
The Company will preserve its balance sheet strength and financial flexibility in 2017, with cash
on hand projected to remain over $400 million, assuming current commodity prices. Paramount
will continue to work to develop its suite of development projects at Karr, Resthaven, Valhalla,
Birch and Willesden Green and will continue to look to maximize value for our stakeholders by
further improving cost structures and well performance. The Company will also prioritize business
development activities, as our strong balance sheet has placed us in a position to take advantage
of opportunities that may arise.
Paramount’s Management and Board of Directors would like to thank all of our stakeholders for
their continued support through the last several years, which has allowed us to transform the
Company into what it is today.
James H. T. Riddell
President and Chief Executive Officer
March 2017
Paramount Resources Ltd. 2016 President and Chief Executive Officer’s Message 5
2016 OVERVIEW
OIL AND GAS OPERATIONS (1)
Paramount’s fourth quarter 2016 sales volumes averaged 11,901 Boe/d (34 percent liquids),
including approximately 5,500 Boe/d (38 percent liquids) from Karr-Gold Creek. The Company’s
annual sales volumes were 31,860 Boe/d, including 11,656 Boe/d from Ongoing Operations and
20,204 Boe/d related to the Musreau Assets.
Five new wells on the 4-19 and 15-27 pads at Karr-Gold Creek have produced a total of
approximately 250,000 barrels of condensate since first production in late-December 2016.
Paramount’s sales volumes averaged approximately 16,000 Boe/d for the month of February 2017
(50 percent liquids).
Four wells at the new 16-36 pad at Karr-Gold Creek are scheduled to be brought on production at
the end of April. Karr-Gold Creek production will be constrained until the 40 MMcf/d 6-18 Facility
expansion is completed in the second quarter.
Principal Properties capital expenditures in the fourth quarter of 2016 totaled $78.2 million, with the
majority of spending directed towards the Company’s Karr-Gold Creek development. Total Principal
Properties capital spending for 2016 was $171.0 million, including $92.5 million at Karr-Gold Creek
and $52.5 million related to the Musreau Assets.
In 2016, the Company closed dispositions of non-core properties for aggregate cash proceeds of
approximately $22.5 million.
Paramount’s 2017 capital program is expected to total approximately $325 million, excluding land
acquisitions, with about $200 million directed towards Karr-Gold Creek.
Development activities at Karr-Gold Creek are currently focused on a 27-well horizontal Montney
drilling and completion program (the "Karr Program"). By the end of 2017, the Company expects to
have completed up to 22 of the 27 wells, with the remaining wells to be completed in 2018. The Karr
Program wells will be brought on production through 2017 and 2018 to fill the expanded 6-18 Facility.
Sales volumes in 2017 are projected to average approximately 20,000 Boe/d, despite the scheduled
outage of a third-party processing facility that is expected to shut-in Karr-Gold Creek production for
most of September. Fourth quarter sales volumes are expected to average over 30,000 Boe/d.
(1) In August 2016, the Company sold the majority of its oil and gas properties in the Musreau/Kakwa area of west central Alberta (the "Musreau Assets") to Seven
Generations Energy Ltd. ("7Gen") for total consideration of approximately $2.1 billion (the "Musreau Disposition"). Disclosures of results and changes from prior periods
for "Ongoing Operations" exclude amounts attributable to the Musreau Assets.
Paramount Resources Ltd. 2016 Overview 6
RESERVES ─ ONGOING OPERATIONS (2)
In 2016, proved reserves for Paramount’s Ongoing Operations increased 124 percent to 59.6 MMBoe
(replacement ratio of 9 times) and proved plus probable ("P+P") reserves increased 159 percent to
115.2 MMBoe (replacement ratio of 18 times), after production of 4.3 MMBoe.
The increase in Ongoing Operations reserves in 2016 was driven by growth at Karr-Gold Creek,
where proved reserves increased 216 percent to 48.8 MMBoe and P+P reserves increased 194
percent to 84.3 MMBoe.
P+P finding and development ("F&D") costs for Ongoing Operations in 2016 were $8.29 per Boe in
total and $8.60 per Boe for Karr-Gold Creek.
The NPV10 of future net revenue for Ongoing Operations increased 175 percent to $424 million for
proved reserves and 206 percent to $810 million for P+P reserves.
CORPORATE
The Company exited 2016 with cash and cash equivalents of $622 million, no indebtedness and an
undrawn $100 million bank credit facility.
Paramount realized total proceeds from the sale of its Musreau natural gas processing plant, the
Musreau Assets, the Cavalier Royalty and non-core property dispositions of $2.75 billion in 2016,
recording aggregate pre-tax gains of $1.5 billion.
Funds flow from operations totaled $14.3 million in the fourth quarter and $35.7 million for 2016.
In January 2017, Paramount distributed its remaining 3.8 million 7Gen common shares, valued at
$119.0 million at December 31, 2016, to shareholders by way of dividend.
Paramount has hedged 2,000 Bbl/d of liquids at an average WTI price of C$70.43/Bbl and 1,000
Bbl/d of liquids at a WTI price of US$54.50/Bbl for 2017. The Company has also locked in US$3.4
million of gains on natural gas hedging contracts that will be received over the remainder of 2017.
(2) 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.
Paramount Resources Ltd. 2016 Overview 7
REVIEW OF OPERATIONS
Consistent with Paramount’s long track record of early stage resource capture and delineation followed by
strategic and creative value realization, the Company closed a series of transformative transactions in 2016,
including the sale of its Musreau/Kakwa area assets, for aggregate proceeds of $2.75 billion. With the
completion of these transactions, Paramount has reset its operational base, repaid all indebtedness and
secured the financial resources to continue with this strategy.
As of December 31, 2016, Paramount has a land base of over 1.2 million net acres. The Company’s
significant properties currently include:
Karr-Gold Creek;
Smoky/Resthaven;
Valhalla;
Birch/Umbach; and
Willesden Green.
Paramount also holds a portfolio of emerging plays and strategic investments, including:
exploratory shale gas assets in the Liard and Horn River Basins;
northern frontier assets in the Central Mackenzie and the Mackenzie Delta;
oil sands assets held through its wholly-owned subsidiary Cavalier Energy ("Cavalier");
seven triple-sized rigs held through its wholly-owned subsidiary Fox Drilling Limited Partnership; and
investments in other public and private oil and gas companies including, Trilogy Energy Corp. and
MEG Energy Corp.
2016 OPERATING RESULTS (1)
($ millions, except as noted)
Q4 2016
Q4 2015
Ongoing
Operations (2)
2016
Ongoing
Operations (2)
2015
Ongoing
Operations (2)
Sales volumes by COU (Boe/d)
Grande Prairie
Kaybob
Other
Total
Netback
Petroleum and natural gas sales
Royalties
Operating expense
Transportation and NGLs processing (3)
Netback
32.3
(0.1)
(10.9)
(4.3)
17.0
Principal Properties Capital
By COU (4)
Grande Prairie
Kaybob
Other
6,901
2,812
2,188
11,901
$/Boe
29.52
(0.08)
(10.00)
(3.91)
15.53
62.5
3.7
8.1
74.3
27.5
(1.2)
(13.1)
(2.6)
10.6
8,813
2,428
1,524
12,765
$/Boe
23.45
(1.06)
(11.12)
(2.24)
9.03
1.7
2.5
6.0
10.2
98.9
(0.3)
(50.8)
(20.4)
27.4
6,579
2,796
2,281
11,656
$/Boe
23.17
(0.08)
(11.91)
(4.78)
6.40
93.2
9.9
15.4
118.5
112.7
(4.1)
(54.4)
(12.2)
42.0
7,146
3,783
1,387
12,316
$/Boe
25.07
(0.92)
(12.09)
(2.71)
9.35
62.6
29.9
70.6
163.1
(1)
Readers are referred to the advisories concerning Non-GAAP Measures and Oil and Gas Measures and Definitions in the Advisories section of this document and
to the reconciliations of such non-GAAP measures to their most directly comparable measure under GAAP in the applicable sections of this document.
(2) Ongoing Operations represents Paramount’s total results less amounts attributable to the Musreau Assets.
(3)
(4)
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. Excludes amounts attributable to the Musreau Assets
Paramount Resources Ltd. 2016 Review of Operations 8
Karr-Gold Creek
Development activities at Karr-Gold Creek are currently focused on a 27 (27.0 net) well horizontal Montney
drilling and completion program that commenced in mid-2016. The Company held approximately 92 (77
net) sections of Montney rights at Karr-Gold Creek at December 31, 2016.
The well completion design for Karr Program wells is outlined in the table below:
Horizontal lateral – completed length (meters)
Completion fluids
Fracture stages
Average inter-frack spacing (meters)
Proppant placed per stage (tonnes)
Proppant loading (tonnes / meter)
Karr Program Well Design
2,700 to 3,000
Slickwater
Up to 75
~ 40
~ 100
longer laterals
lower fluid costs
tighter frack spacing
increased tonnage per stage
2.3 – 2.5 higher proppant intensities per meter
The first well in the Karr Program, the 15-14 well on the 15-02 pad, was brought on production at controlled
rates in September 2016. Four new wells on the 4-19 pad were completed in December 2016 and January
2017 and are currently flowing back on cleanup at restricted rates. An additional new well, the 3-22 well on
the 15-27 pad, was completed and began flowing in February 2017. Production data from the wells to March
5, 2017 is shown in the following table:
Paramount Resources Ltd. 2016 Review of Operations 9
Wells
Completion Details
Horizontal length (meters)
Completion stages
Proppant (tonnes)
Proppant intensity (tonnes / meter)
Production - Cumulative (1)
Natural gas (MMcf)
Wellhead liquids (Bbl)
CGR (2) (Bbl/MMcf)
Days of flowback
Natural gas (MMcf/d)
Wellhead liquids (Bbl/d)
Production - Last 7 Producing Days (1)
Natural gas (MMcf/d)
Wellhead liquids (Bbl/d)
CGR (2) (Bbl/MMcf)
Production - Last 24 Producing Hours (1)
Natural gas (MMcf/d)
Wellhead liquids (Bbl/d)
CGR (2) (Bbl/MMcf)
15-02
PAD
15-14
3,018
50
5,000
1.7
1,098
178,863
163
173
6.3
1,034
4.7
775
166
4.7
778
167
4-19
PAD
4-7
02/4-7
1-12
02/1-12
3,047
70
7,000
2.3
220
93,913
425
65
3.4
1,445
4.1
1,389
338
4.0
1,340
338
3,049
75
7,500
2.5
125
72,314
579
34
3.7
2,127
4.3
2,120
494
4.2
2,077
497
3,054
73
7,300
2.4
90
34,004
378
29
3.1
1,173
4.2
1,465
350
4.1
1,408
344
3,036
58
5,800
1.9
94
33,133
352
26
3.6
1,274
4.9
1,761
362
4.9
1,772
362
15-27
PAD
3-22
2,870
66
6,600
2.3
72
15,590
216
22
3.3
709
4.8
856
179
5.4
942
173
(1)
(2)
Production volumes to March 5, 2017. Production volumes are the gross volumes measured at the wellhead separator for the specified period of: (i) cumulative
volumes produced to March 5, 2017 ("Cumulative"); (ii) the most recent 168 producing hours ("Last 7 Producing Days"); or (iii) the last 24 producing hours ("Last
24 Producing Hours"). Excludes hours and days when the well did not produce. Natural gas sales volumes are approximately 10 percent lower and stabilized
condensate sales volumes are expected to be approximately 15 percent lower due to shrinkage. The production rates and volumes shown are over a short period
of time and, therefore, are not necessarily indicative of long-term performance or of ultimate recovery.
The condensate to natural gas ratio ("CGR") was calculated by dividing total wellhead separator liquids volumes by total wellhead separator natural gas volumes.
The Company continues to evaluate the performance of the higher intensity completions on the 4-19 and
15-27 pads. Early results indicate that higher intensity completions have resulted in enhanced productivity.
The status of the Karr Program to date is as follows:
As of Mar 5/17
As of Dec 31/16
Wells Spud
Wells Rig Released
Wells Completed
Wells Producing
20
18
6
6
20
10
2
1
Four wells at the next new pad, the 16-36 pad, are scheduled to be brought on production at the end of
April 2017. Paramount plans to spud an additional seven wells at Karr-Gold Creek in 2017. By the end of
2017, the Company expects to have completed up to 22 of the 27 wells, with the remaining wells to be
completed in 2018. The Karr Program wells will be brought on production through 2017 and 2018 to fill the
6-18 compression and dehydration facility (the "6-18 Facility").
Production at Karr-Gold Creek is gathered through a Company-owned gas gathering system and
compressed and dehydrated at the 40 MMcf/d 6-18 Facility. Volumes are then shipped via pipeline to a
third-party natural gas processing facility (the "Third-party Facility") under a long-term firm-service
arrangement to provide sales specification natural gas, condensate and C3+. The 6-18 Facility has been
configured to facilitate the trucking-out of liquids so that volumes in excess of capacity at the Third-party
Facility can be transported for processing at alternate locations. In addition, the 6-18 Facility is pipeline
Paramount Resources Ltd. 2016 Review of Operations 10
connected to an alternate third-party facility in the area, which provides the Company with access to
incremental natural gas processing capacity on an interruptible basis in the event there is insufficient
capacity at the Third-party Facility during periods of maintenance downtime, temporary constraints or other
service disruptions. Karr-Gold Creek sales volumes are anticipated to be impacted by a September 2017
planned shut-down of the Third-party Facility for the majority of the month.
The Company is doubling the capacity of the 6-18 Facility to 80 MMcf/d, which is on-schedule to be
completed in the second quarter of 2017. The total cost of this expansion is estimated to be approximately
$35 million, of which $20 million has been incurred to December 31, 2016.
The photograph below of the 6-18 Facility as of February 26, 2017 shows the progress made to date on
the expansion:
Karr-Gold Creek 6-18 Compression and Dehydration Facility (February 26, 2017)
Other Areas
Smoky/Resthaven
Paramount held 116 (85 net) sections of Cretaceous rights and approximately 80 (78 net) sections of
Montney rights at Smoky/Resthaven as of December 31, 2016. Since 2013, the Company has drilled 12
(12.0 net) wells in the region, focused on preserving mineral rights and delineation.
Paramount is executing a six-well exploration and delineation program targeting various Cretaceous zones
at Smoky/Resthaven that commenced in 2016. The first well, a 1.4 mile horizontal Falher well, was
completed at the end of February 2017. Three additional wells are currently being drilled, with the fifth well
scheduled to commence drilling later in March.
Paramount Resources Ltd. 2016 Review of Operations 11
Valhalla
At Valhalla, the Company held 63 (47 net) sections of Montney rights and 57 (43 net) sections of Doig rights
as of December 31, 2016. A total of 17 (13.4 net) Montney and Doig wells are currently tied in. Prior to
2016, wells at Valhalla were completed with lower intensities of proppant over fewer stages.
The Company recently completed the 14-22 exploratory Montney well with a high-intensity frack, placing
approximately 2,000 tonnes of proppant over 20 stages in the 1,300 meter lateral (1.5 tonnes per meter).
The Company is evaluating the potential economics of the opportunity at Valhalla based on the results of
this initial high intensity well completion, results from offsetting operators and various alternatives to access
natural gas processing infrastructure.
Birch
Activities at Birch, where the Company held approximately 60 (30 net) sections of Montney rights as of
December 31, 2016, have mainly focused on drilling delineation wells to evaluate the reservoir.
The Company plans to drill a total of nine (4.5 net) horizontal Montney wells at Birch in 2017 and expand
the existing 20 MMcf/d compression facility to 40 (20 net) MMcf/d. Five (2.5 net) wells have been drilled to
date. Two (1.0 net) of these wells have been completed and are scheduled to be brought on production
later in the first quarter of 2017.
Willesden Green
The Company held approximately 92 (92 net) sections of Duvernay rights at Willesden Green as of
December 31, 2016, where a total of five Duvernay wells have been drilled on Paramount’s lands. Three
of these wells have been brought on production. A fourth well, the 102/13-5 well, was completed in the
fourth quarter of 2016. The well was fracked using slickwater and 4,600 tonnes of proppant placed over 26
stages in the 2,000 meter lateral wellbore (2.3 tonnes per meter). Following completion, the well was flow-
tested over an extended timeframe to obtain data for analysis of long-term reservoir performance. The
Company continues to evaluate further development of the Duvernay formation at Willesden Green,
including the preparation of a full-field development plan.
Other
In 2016, the Company closed dispositions of non-core properties for aggregate cash proceeds of
approximately $22.5 million.
OUTLOOK
Paramount’s 2017 capital program is expected to total approximately $325 million, excluding land
acquisitions, with approximately $200 million directed towards Karr-Gold Creek and the balance directed
towards Smoky/Resthaven, Birch, and other areas.
Activities at Karr-Gold Creek will focus on the expansion of the 6-18 Facility, finishing the 27 well Montney
drilling program and completing a portion of those wells to fill the expanded 6-18 Facility. At
Smoky/Resthaven, Paramount plans to drill and complete six horizontal wells targeting various Cretaceous
formations. At Birch, the Company plans to drill and complete a total of nine (4.5 net) wells and double
compression and dehydration capacity to 40 MMcf/d (20 MMcf/d net).
Paramount Resources Ltd. 2016 Review of Operations 12
Sales volumes in 2017 are projected to average approximately 20,000 Boe/d, despite the scheduled outage
of a third-party processing facility that is expected to shut-in Karr-Gold Creek production for most of
September. Fourth quarter sales volumes are expected to average over 30,000 Boe/d.
Annual operating costs for 2017 are anticipated to average approximately $10.00 per Boe. Fourth quarter
2017 operating costs are projected to be lower than in the first part of the year because of the ramp-up in
production volumes at Karr-Gold Creek.
PRINCIPAL PROPERTIES
RESERVES AND FINDING & DEVELOPMENT COSTS
Proved reserves for the Company’s Ongoing Operations increased 124 percent to 59.6 MMBoe in 2016
compared to 26.7 MMBoe in 2015. Ongoing operations proved plus probable ("P+P") reserves increased
by 159 percent to 115.2 MMBoe in 2016 compared to 44.5 MMBoe in 2015.
Proved (1)(2)
2016
2015(3) % Change
Proved plus Probable (1)(2)
2016
2015(3) % Change
Ongoing Operations
Natural gas (Bcf)
NGLs (MBbl)
Light and Medium crude oil (MBbl)
Total Ongoing Operations (MBoe)
Musreau Assets (MBoe)
Total (MBoe)
238.0
19,100
882
59,645
–
59,645
99.6
9,343
741
26,682
199,658
226,340
Readers are referred to the advisories concerning Oil and Gas Measures and Definitions in the Advisories section of this document. Principal Properties
reserves exclude 93.5 MMBbl of probable bitumen reserves related to Cavalier’s Hoole Grand Rapids Phase 1.
Reserves evaluated and reviewed, as applicable, by McDaniel as of December 31, 2016 and December 31, 2015 in accordance with National Instrument 51-101
definitions, standards and procedures. Working interest reserves before royalty deductions.
Reserves for Ongoing Operations in 2015 consist of Paramount’s total reserves less amounts attributable to the Musreau Assets. 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.
165.8
15,847
1,021
44,509
293,124
337,633
463.3
36,736
1,219
115,173
–
115,173
139
104
19
124
(100)
(74)
179
132
19
159
(100)
(66)
(1)
(2)
(3)
The following table summarizes Paramount’s Principal Properties reserves as at December 31, 2016:
Proved
Developed Producing
Developed Non-producing
Undeveloped
Total Proved
Total Probable
Total Proved plus Probable
Natural Gas
(Bcf)
65.7
0.5
171.7
238.0
225.4
463.3
NGLs
(MBbl)
3,605
26
15,469
19,100
17,636
36,736
Gross Principal Properties Reserves (1)(2)
Future Net Revenue
Net Present Value (1)(3)
Before Tax
($ millions)
Total
(MBoe)
Discount Rate
0%
10%
Light &
Medium
Crude Oil
(MBbl)
630
253
–
882
337
1,219
15,187
368
44,089
59,645
55,529
115,173
199
9
559
767
858
1,625
151
6
266
424
386
810
Columns may not add due to rounding.
Working interest reserves before royalty deductions. Principal Properties reserves exclude 93.5 MMBbl of probable bitumen reserves related to Cavalier’s Hoole
Grand Rapids Phase 1.
The estimated net present values of future net revenue disclosed in this document do not represent fair market value. Revenues and expenditures were calculated
based on McDaniel’s forecast prices and costs as of January 1, 2017.
Paramount Resources Ltd. 2016 Review of Operations 13
The following table provides a reconciliation of Paramount’s gross Principal Properties reserves for the year
ended December 31, 2016. The Company’s proved reserves were reduced by approximately 193 MMBoe
and proved plus probable reserves were reduced by approximately 287 MMBoe as a result of the Musreau
Disposition.
Principal Properties Reserves Reconciliation
January 1, 2016
Extensions & discoveries
Technical revisions
Economic factors
Acquisitions
Dispositions
Production
December 31, 2016
Natural
Gas
(Bcf)
710.6
97.5
65.1
(5.1)
0.2
(592.1)
(38.3)
238.0
Proved (1)(2)
Oil &
NGLs (3)
(MBbl)
107,913
8,817
2,749
(141)
117
(94,200)
(5,271)
19,982
Total
(MBoe)
226,340
25,068
13,604
(982)
155
(192,879)
(11,661)
59,645
Proved plus Probable (1)(2)
Oil &
NGLs (3)
(MBbl)
160,008
22,227
651
(169)
140
(139,630)
(5,271)
37,955
Total
(MBoe)
337,633
67,952
8,617
(1,007)
189
(286,550)
(11,661)
115,173
Natural
Gas
(Bcf)
1,065.7
274.4
47.8
(5.0)
0.3
(881.5)
(38.3)
463.3
(1)
(2)
(3)
Columns and rows may not add due to rounding.
Principal Properties reserves exclude 93.5 MMBbl of probable bitumen reserves related to Cavalier’s Hoole Grand Rapids Phase 1.
Light and medium crude oil and NGLs
Principal Properties Finding and Development Costs (F&D)
Proved (1)
Karr-Gold Creek
Principal Properties - Ongoing Operations
Proved plus Probable (1)
Karr-Gold Creek
Principal Properties - Ongoing Operations
Capital (2)
($ millions)
Change in
FDC (3)
($ millions)
2016
Total F&D
Capital
($ millions)
Reserves
Additions (4)
(MMBoe)
91.3
118.5
334.8
340.0
426.1
458.5
91.3
118.5
401.6
507.7
492.9
626.3
35.1
37.7
57.3
75.6
Three-
Year
Average (5)
($/Boe)
15.90
20.73
F&D
($/Boe)
12.15
12.16
8.60
8.29
11.34
13.40
(1)
(2)
(3)
(4)
(5)
F&D costs related to Ongoing Operations exclude capital costs, future development capital and reserves attributable to the Musreau Assets. Readers are
referred to the advisories concerning Oil and Gas Measures and Definitions in the Advisories section of this document.
Aggregate Principal Properties exploration and development costs incurred for the year ended December 31, 2016.
Change in estimated future development costs from December 31, 2015 to December 31, 2016.
Reserves additions were calculated as the aggregate of extensions & discoveries, technical revisions and economic factors for the year ended December 31,
2016. Excludes acquisitions and dispositions.
Three-year average finding and development ("F&D") costs are calculated using the aggregate capital costs, changes in future development capital and
reserves additions over the three-year period December 31, 2013 to December 31, 2016. Amounts for 2014 and 2015 were calculated on the same basis as for
the year ended December 31, 2016.
The following table summarizes the undiscounted future development costs ("FDC") incorporated in the
calculation of 2016 finding and development costs:
Future Development Costs –
Principal Properties (1)(2)
(Undiscounted, $ millions)
Total Proved
Total Proved plus Probable
2017
172
215
2018
90
104
2019
83
94
2020
73
80
2021 Remainder
–
158
74
85
Total
492
736
(1)
(2)
Columns may not add due to rounding.
Excludes future development costs related to Cavalier Energy’s Hoole Grand Rapids Phase 1.
Paramount Resources Ltd. 2016 Review of Operations 14
Land
The following table sets forth Paramount’s land position:
December 31, 2016
December 31, 2015
(thousands of acres)
Undeveloped land
Acreage assigned reserves
Total
Gross (1)
1,970
289
2,259
Net (2)
1,061
153
1,214
Average
Working
Interest
54%
53%
54%
Gross (1)
2,803
351
3,154
Net (2)
1,615
190
1,805
Average
Working
Interest
58%
54%
57%
(1)
(2)
"Gross" acres means the total acreage in which Paramount has an interest. Gross acreage is calculated only once per lease or license of petroleum and natural
gas rights ("Lease") regardless of whether or not Paramount holds a working and/or royalty interest, or whether or not the Lease includes multiple prospective
formations. If Paramount holds more than one Lease under the same geographical area, Paramount records acreage for both Leases.
"Net" acres means gross acres multiplied by Paramount’s working interest therein.
STRATEGIC INVESTMENTS
Cavalier Energy
Cavalier’s initial focus has been on 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 $112 million has been invested in land acquisitions, stratigraphic drilling, engineering
studies, and environmental field programs to bring this project (the "Hoole Project") to a stage capable of
development. Front-end engineering and design work for the initial 10,000 Bbl/d phase of the Hoole Project
("Hoole Grand Rapids Phase 1") has been completed and the Alberta Energy Regulator approved the Hoole
Grand Rapids Phase 1 project in the second quarter of 2014.
In December 2016, Cavalier granted a royalty (the "Cavalier Royalty") on its oil sands lands (the "Oil Sands
Lands") to an unrelated third-party for cash consideration of $100 million. The agreement governing the
Cavalier Royalty does not impose any development commitments on Cavalier in respect of the Hoole
Project or any of the other Oil Sands Lands, nor does it impose any terms or conditions on the use of the
consideration paid for the Cavalier Royalty.
Production from the Oil Sands Lands will not be subject to any royalty when the Western Canadian Select
("WCS") price is below US$50 per barrel. At a WCS price of US$50 per barrel, the royalty rate will be two
percent and the rate will increase linearly to a maximum of 20 percent at a WCS price of US$140 per barrel.
As of December 31, 2016, the WCS price was US$37.62 per barrel. The Cavalier Royalty will be payable
based on Cavalier’s realized bitumen price, net of diluent, transportation and storage costs. The Cavalier
Royalty is secured by a lien over the Oil Sands Lands. The Oil Sands Lands are at the early stages of their
evaluation and development and currently have no production.
An updated evaluation of Hoole Grand Rapids Phase 1 was prepared by McDaniel, the Company’s
independent reserves evaluator, effective December 31, 2016. In the updated evaluation, 93.5 million
barrels of probable undeveloped bitumen reserves were ascribed to Hoole Grand Rapids Phase 1 with a
net present value of $108 million (before tax, discounted at 10 percent). Development of the project is
contingent upon Cavalier obtaining financing and certain additional regulatory approvals.
Paramount Resources Ltd. 2016 Review of Operations 15
Shale Gas Properties
Paramount’s shale gas holdings in the Liard and Horn River Basins in northeast British Columbia and the
Northwest Territories include approximately 134 net sections of land with potential for natural gas
production from the Besa River shale formation.
In 2015, the Company completed drilling operations at the Dunedin d-71-G vertical exploratory shale gas
well and then moved to the c-37-D well at La Biche, where drilling operations continued until spring break-
up. Drilling operations resumed at c-37-D in December 2015, and the well was drilled to target depth in
March 2016. With the completion of drilling operations for the c-37-D well, the Company has secured its
mineral rights in the region for up to another 10 years.
Fox Drilling
Fox Drilling owns seven triple-sized rigs, including two new walking rigs that were commissioned and
brought into service in 2016. The Fox Drilling rigs are designed to drill the deep horizontal wells that industry
is currently focusing on. All seven rigs were deployed on the Company’s lands at the end of 2016, drilling
wells at Karr-Gold Creek and Smoky/Resthaven.
Investments in Other Entities
Paramount holds securities in a number of publicly-traded and private corporations as part of its portfolio
of Strategic Investments. The Company’s investment in Trilogy Energy Corp. was principally obtained in
the course of its spin-out from Paramount. Investments in shares of most other entities, including MEG
Energy Corp., were received as consideration for properties sold to the entities. Paramount’s investments
are summarized below:
Trilogy Energy Corp.
MEG Energy Corp.
Other (3)
December 31, 2016 (1)(2)
December 31, 2015 (1)
Shares
(000’s)
19,144
3,700
($ millions)
144.5
34.2
30.0
208.7
($/share)
7.55
9.23
Shares
(000’s)
19,144
3,700
($/share)
3.66
8.02
($ millions)
70.1
29.7
31.0
130.8
(1)
(2)
(3)
Based on the period-end closing price of publicly traded investments and the book value of remaining investments.
Excludes 3.8 million class A common shares of 7Gen classified as "Investments in Securities for Distribution" having a carrying value and market value of $119.0
million as at December 31, 2016. These shares were distributed to Paramount’s shareholders by way of dividend in January 2017.
Includes investments in Marquee Energy Ltd., RMP Energy Inc., Strategic Oil & Gas Ltd. and other public and private corporations.
CORPORATE
Paramount realized total proceeds from the sale of its Musreau natural gas processing plant, the Musreau
Assets, the Cavalier Royalty and non-core property dispositions of $2.75 billion in 2016.
In 2016, the Company repaid its bank credit facilities, redeemed all $450 million of its 7⅝ percent 2019
Notes and, in connection with the Musreau Disposition, 7Gen assumed all US$450 million principal amount
of Paramount’s 6⅞ percent 2023 Notes.
Paramount exited 2016 with cash and cash equivalents of $622 million, no indebtedness and an undrawn
$100 million bank credit facility.
In January 2017, Paramount distributed its remaining 3.8 million common shares of 7Gen received through
the Musreau Disposition to shareholders by way of dividend.
Paramount Resources Ltd. 2016 Review of Operations 16
Paramount implemented a normal course issuer bid in October 2016 under which it may purchase up to
5.4 million Common Shares for cancellation. To date, the Company has purchased 622,900 Common
Shares for cancellation at a total cost of $9.7 million.
Paramount Resources Ltd. 2016 Review of Operations 17
MANAGEMENT’S DISCUSSION AND ANALYSIS
This Management’s Discussion and Analysis ("MD&A"), dated March 8, 2017, 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, 2016. 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 energy company that explores and develops
unconventional and conventional petroleum and natural gas prospects,
long-term
unconventional exploration and pre-development projects, and holds a portfolio of investments in other
entities. The Company’s principal properties are primarily located in Alberta and British Columbia.
Paramount’s Class A common shares ("Common Shares") are listed on the Toronto Stock Exchange
under the symbol "POU".
including
Paramount’s operations are grouped 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 Grande Prairie COU, which includes Karr-Gold Creek, Valhalla and other properties in the Peace
River Arch area of Alberta;
the Kaybob COU, which includes Smoky/Resthaven and other properties in west central Alberta;
the Northern COU, which includes Birch and other properties in northeast British Columbia and
northern Alberta; and
the Southern COU, which includes Willesden Green and other properties in southern Alberta.
Strategic Investments include: (i) investments in other entities; (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 bitumen interests held by Paramount’s wholly-owned subsidiary Cavalier Energy
("Cavalier"), and prospective shale gas acreage in the Liard and Horn River Basins (the "Shale Gas
Properties"); 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, share-based compensation expense and interest expense, which have not been specifically
allocated to Principal Properties or Strategic Investments.
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 18
2016 HIGHLIGHTS (1)
FINANCIAL
Petroleum and natural gas sales
Net income (loss)
per share – basic ($/share)
per share – diluted ($/share)
Funds flow from operations
per share – basic & diluted ($/share)
Principal Properties Capital (2)
Investments in other entities – market value (3)(4)
Total assets
Long-term debt
Net cash (debt)
OPERATIONAL
Sales volumes
Natural gas (MMcf/d)
Condensate and oil (Bbl/d)
Other NGLs (Bbl/d) (5)
Total (Boe/d)
Net wells drilled
FUNDS FLOW FROM OPERATIONS ($/Boe)
2016
2015
2014
248.8
1,165.3
10.98
10.95
35.7
0.34
171.0
208.7
2,059.0
–
565.9
104.8
7,733
6,668
31,860
23
376.8
(901.3)
(8.52)
(8.52)
93.2
0.88
429.9
130.8
2,781.0
1,750.2
(1,904.6)
160.7
8,610
8,735
44,130
31
350.0
(71.7)
(0.71)
(0.71)
141.0
1.39
813.9
256.9
3,199.4
1,210.4
(1,482.5)
110.5
3,986
2,128
24,524
58
Netback
Netback including commodity contract settlements
Commodity contract settlements
Petroleum and natural gas sales
Royalties
Operating expense
Transportation and NGLs processing (6)
General and administrative – corporate
General and administrative – strategic investments
Interest and financing
Dividends from investments
Other
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
Readers are referred to the advisories concerning Non-GAAP measures and Oil and Gas Measures and Definitions in the Advisories section of this document
and to the reconciliations of such Non-GAAP measures to their most directly comparable measure under GAAP in the applicable sections of this document. This
table contains the following Non-GAAP measures: Funds flow from operations, Principal Properties Capital, Investments in other entities – market value, Net
cash (debt) and Netback.
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.
Excludes 3.8 million class A common shares of Seven Generations Energy Ltd. classified as "Investments in Securities for distribution" having a carrying value
and market value of $119.0 million as at December 31, 2016. These shares were distributed to Paramount’s shareholders by way of dividend in January 2017.
23.39
(0.64)
(5.59)
(4.08)
13.08
0.78
13.86
(1.12)
(0.36)
(6.73)
–
0.14
5.79
21.34
(0.19)
(8.32)
(4.84)
7.99
3.91
11.90
(1.68)
(0.54)
(6.74)
–
0.12
3.06
Funds flow from operations
(1)
(2)
(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. 2016 Management’s Discussion & Analysis 19
CONSOLIDATED RESULTS
Net Income (Loss)
Year ended December 31
Principal Properties
Strategic Investments
Corporate
Income tax recovery (expense)
Net income (loss)
2016
1,374.9
48.5
(102.0)
(156.1)
1,165.3
2015
(418.2)
(281.8)
(213.8)
12.5
(901.3)
2014
66.7
(37.4)
(104.0)
3.0
(71.7)
In April 2016, Paramount sold its natural gas processing facility and related midstream assets at Musreau
for net cash proceeds of $560.3 million (the "Midstream Sale"), resulting in the recognition of a gain on
sale of $125.7 million within the Principal Properties business segment. The Midstream Sale included the
50 MMcf/d refrigeration natural gas processing facility, the 200 MMcf/d deep-cut natural gas processing
facility, the condensate stabilizer and the amine train (collectively, the "Musreau Complex") and the sales
gas pipeline connecting the Musreau Complex to TCPL, as well as the majority of Paramount’s larger-
diameter gathering system in the Musreau area. In connection with the Midstream Sale, the Company
entered into a long-term natural gas processing arrangement with the purchaser (the "Processing
Arrangement") that secured Paramount priority access to the sold capacity at the Musreau Complex.
In August 2016, the Company sold the majority of its oil and gas properties in the Musreau/Kakwa area of
west central Alberta (the "Musreau Assets") to Seven Generations Energy Ltd. ("Seven Generations" or
the "Acquiror") for total consideration of approximately $2.1 billion (the "Musreau Disposition"), subject to
customary post-closing adjustments. The consideration received at closing was comprised of: (i) $496
million in cash; (ii) 33.5 million class A common shares of the Acquiror ("7Gen Shares") having a market
value of approximately $972 million based on the closing market price of the shares on the day prior to
closing; (iii) the assumption by the Acquiror of all US$450 million principal amount of the Company’s 6⅞
percent senior unsecured notes due in 2023 (the "2023 Notes"); and (iv) certain oil and gas properties of
the Acquiror valued at approximately $6 million. In connection with the Musreau Disposition, the Acquiror
also assumed Paramount’s processing and transportation commitments relating to the Musreau Assets,
including the Processing Arrangement. A gain on sale of approximately $1.2 billion was recorded in
respect of the Musreau Disposition within the Principal Properties business segment.
In 2016, Paramount received $861.1 million in aggregate net cash proceeds on the sale of 29.7 million of
the 7Gen Shares it received through the Musreau Disposition, recording a net loss of $0.8 million. The
remaining 3.8 million 7Gen Shares were distributed to Paramount’s shareholders by way of dividend in
January 2017.
Paramount’s results include amounts in respect of the Musreau Assets to August 18, 2016, the closing
date of the Musreau Disposition. When used herein, "Ongoing Operations" represents Paramount’s total
results less amounts attributable to the Musreau Assets.
In December 2016, Cavalier granted a royalty (the "Cavalier Royalty") on its oil sands lands (the "Oil
Sands Lands") to an unrelated third-party for cash consideration of $100 million. A gain on sale of $99.2
million was recorded in respect of the Cavalier Royalty within the Strategic Investments business
segment.
Additional information concerning the Musreau Disposition can be found in Paramount’s Annual
Information Form, which is available on SEDAR at www.sedar.com.
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 20
Paramount recorded net income of $1,165.3 million for the year ended December 31, 2016 compared to
a net loss of $901.3 million in the same period in 2015. Significant factors contributing to the change are
shown below:
Year ended December 31
Net Loss – 2015
Gain on the sale of oil and gas assets primarily due to the Musreau Disposition and Midstream Sale in 2016
Lower depletion and depreciation due to impairment reversals totaling $133.2 million and asset dispositions
in 2016 and because 2015 included impairment charges of $263.7 million
Exploration and evaluation income in 2016 because of a $99.2 million gain recognized on the sale of the
Cavalier Royalty compared to an expense in 2015 which included $184.1 million of impairment charges
Foreign exchange gain in 2016 compared to a loss in 2015, primarily related to the 2023 Notes
Lower write-downs of investments in securities
Lower interest and financing expense due to lower average debt balances in 2016
Lower loss from equity-accounted investments
Income tax expense in 2016 compared to a recovery in 2015
Lower Netback in 2016 mainly due to lower sales volumes and lower commodity prices
Lower gain on commodity contracts
Higher debt extinguishment expense in 2016 due to the premiums paid on redemption of the 2019 Notes
and the expensing of unamortized financing fees related to the senior unsecured notes
Higher share-based compensation expense in 2016
Other
Net Income – 2016
(901.3)
1,389.0
547.5
281.1
104.8
70.6
30.3
8.7
(168.6)
(117.6)
(52.5)
(15.6)
(7.3)
(3.8)
1,165.3
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 loss in
2015 also included a $194.2 million de-recognition of deferred income tax assets. A net loss of $71.7
million was recorded in the same period in 2014. Significant factors contributing to the change are shown
below:
Year ended December 31
Net Loss – 2014
Higher impairment write-downs of property, plant and equipment in 2015
Impairment write-downs of exploration and evaluation assets and goodwill in 2015
Higher depletion and depreciation mainly due to higher sales volumes in 2015
Loss on the sale of oil and gas properties in 2015 compared to a gain in 2014
Higher write-downs of investments in securities
Higher foreign exchange loss, primarily related to the 2023 Notes
Higher interest and financing expense due to increased debt in 2015
Higher loss from equity-accounted investments
Lower Netback primarily due to lower commodity prices
Debt extinguishment expense in 2015 due to the redemption of the 2017 Notes
Higher gains on commodity contracts
Higher income tax recovery
Lower geological and geophysical expense in 2015
Other
Net Loss – 2015
(71.7)
(231.0)
(184.1)
(163.1)
(104.7)
(66.2)
(60.5)
(40.1)
(19.6)
(14.6)
(12.0)
49.9
9.5
6.4
0.5
(901.3)
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 21
Funds Flow from Operations (1)
The following is a reconciliation of funds flow from operations to the nearest GAAP measure:
Year ended December 31
Cash from operating activities
Change in non-cash working capital
Geological and geophysical expenses
Asset retirement obligations settled
Funds flow from operations
Funds flow from operations ($/Boe)
2016
45.7
(15.9)
4.1
1.8
35.7
3.06
2015
84.3
(3.8)
6.1
6.6
93.2
5.79
2014
118.5
5.4
12.5
4.6
141.0
15.75
(1)
Refer to the advisories concerning Non-GAAP measures in the Advisories section of this document.
Funds flow from operations for the year ended December 31, 2016 was $35.7 million compared to $93.2
million in 2015. Significant factors contributing to the change are shown below:
Lower Netback in 2016 mainly due to lower sales volumes and lower commodity prices
Year ended December 31
Funds flow from operations – 2015
Higher receipts from commodity contract settlements in 2016
Other
Funds flow from operations – 2016
Lower interest and financing expense due to lower average debt balances in 2016
93.2
(117.6)
33.0
29.9
(2.8)
35.7
Funds flow from operations for the year ended December 31, 2015 was $93.2 million, $47.8 million lower
than 2014. Significant factors contributing to the change are shown below:
Year ended December 31
Funds flow from operations – 2014
Higher interest and financing expense due to increased debt
Lower Netback primarily due to lower commodity prices
Dividends from equity-accounted investments in 2014
Receipts from commodity contract settlements in 2015 compared to payments in 2014
Other
Funds flow from operations – 2015
141.0
(39.6)
(14.6)
(7.4)
13.7
0.1
93.2
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 22
PRINCIPAL PROPERTIES
Netback and Segment Income (Loss)
Year ended December 31
2016
2015
Natural gas revenue
Condensate and oil revenue
Other NGLs revenue (2)
Royalty and sulphur revenue
Petroleum and natural gas sales
Royalties
Operating expense
Transportation and NGLs processing (3)
Netback
Commodity contract settlements
Netback including commodity contract settlements
Other principal property items (see below)
Segment income (loss)
($/Boe) (1)
2.14
48.78
11.24
–
21.34
(0.19)
(8.32)
(4.84)
7.99
3.91
11.90
82.1
138.1
27.4
1.2
248.8
(2.2)
(97.0)
(56.5)
93.1
45.6
138.7
1,236.2
1,374.9
($/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)
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 $248.8 million in 2016, a decrease of $128.0 million from the prior
year due to lower sales volumes and commodity prices.
The impact of changes in sales volumes and prices on petroleum and natural gas sales are as follows:
Year ended December 31, 2015
Effect of changes in sales volumes
Effect of changes in prices
Change in royalty and sulphur revenue
Year ended December 31, 2016
Sales Volumes
Natural Gas
166.2
(57.6)
(26.5)
–
82.1
Condensate
and Oil
166.0
(16.4)
(11.5)
–
138.1
Other
NGLs
41.2
(9.7)
(4.1)
–
27.4
Royalty and
Sulphur
3.4
–
–
(2.2)
1.2
Total
376.8
(83.7)
(42.1)
(2.2)
248.8
Natural Gas
(MMcf/d)
Condensate and Oil
(Bbl/d)
Other NGLs
(Bbl/d)
Total
(Boe/d)
Year ended December 31
2016
26.1
12.9
7.0
2.6
2015 % Change
(10)
29.0
(22)
16.5
159
2.7
–
2.6
Grande Prairie (1)
Kaybob (1)
Northern
Southern
Ongoing
Operations
Musreau Assets
Total
(1)
NM Not meaningful
50.8
109.9
160.7
Excludes the results of the Musreau Assets
48.6
56.2
104.8
(4)
(49)
(35)
2016
1,922
320
191
255
2,688
5,045
7,733
2015 % Change
(2)
1,969
(32)
468
516
31
(25)
339
2,807
5,803
8,610
(4)
(13)
(10)
2016
303
332
131
109
875
5,793
6,668
2015 % Change
(14)
353
(41)
562
NM
3
(16)
129
2016
6,579
2,796
1,484
797
2015 % Change
(8)
7,146
(26)
3,783
210
479
(12)
908
1,047
7,688
8,735
(16)
(25)
(24)
11,656
20,204
31,860
12,316
31,814
44,130
(5)
(36)
(28)
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 23
Sales volumes from Ongoing Operations decreased 5 percent to 11,656 Boe/d in 2016 compared to
12,316 Boe/d in 2015. The decrease was primarily due to lower sales volumes at Smoky/Resthaven due
to downtime at a third-party operated processing facility, lower production due to declines on existing
wells in the Grande Prairie COU and the shut-in of the Valhalla property for a portion of the year due to
low natural gas prices. These decreases were partially offset by production from new Montney formation
wells brought on at Birch and at Karr-Gold Creek in 2016. Sales volumes for the Musreau Assets were
lower in 2016 primarily due to the closing of the Musreau Disposition on August 18, 2016.
Commodity Prices
Natural Gas
Paramount realized price ($/Mcf)
AECO daily spot ($/GJ)
AECO monthly index ($/GJ)
Malin (US$/MMbtu)
Crude Oil
Paramount average realized condensate and oil price ($/Bbl)
Edmonton Light Sweet ($/Bbl)
West Texas Intermediate (US$/Bbl)
Foreign Exchange
$CDN / 1 $US
2016
2015
% Change
2.14
2.05
1.97
2.38
48.78
52.80
43.32
2.83
2.55
2.62
2.56
52.83
57.45
48.80
(24)
(20)
(25)
(7)
(8)
(8)
(11)
1.33
1.28
4
Paramount’s average realized natural gas price decreased 24 percent in 2016 compared to the same
period in 2015, generally consistent with decreases in benchmark natural gas prices. Paramount’s natural
gas portfolio primarily consists of sales priced at the Alberta, California and Chicago markets and is sold
in a combination of daily and monthly contracts.
The Company’s average realized condensate and oil price decreased 8 percent in 2016 compared to the
same period in 2015, generally 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 typically 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 terminals typically receive prices based on the
Edmonton Light Sweet crude oil price, which are generally lower than prices for stabilized volumes, and
are adjusted for transportation, quality and density differentials.
Commodity Price Management
From time-to-time Paramount uses financial and physical commodity price contracts to manage exposure
to commodity price volatility. The Company received $45.6 million (2015 - $12.6 million) on the settlement
of commodity contracts in 2016.
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 24
Paramount had the following financial commodity contracts in place at December 31, 2016:
Instruments
Gas – NYMEX Swaps (Sale)
Gas – NYMEX Swap (Purchase)
Oil – NYMEX WTI Swaps (Sale)
Oil – NYMEX WTI Swap (Sale)
Aggregate
Notional
Average
Fixed Price
40,000 MMBtu/d US$3.44/MMBtu
10,000 MMBtu/d US$3.04/MMBtu
CDN$70.43/Bbl
US$54.50/Bbl
2,000 Bbl/d
1,000 Bbl/d
Fair
Value
(3.5)
2.9
(3.7)
(0.9)
(5.2)
Remaining Term
January 2017 – December 2017
January 2017 – December 2017
January 2017 – December 2017
January 2017 – December 2017
In February 2017, the Company entered into the following financial commodity contracts:
Instruments
Gas – NYMEX Swaps (Purchase)
Aggregate Notional
30,000 MMBtu/d
Average Fixed Price
US$3.16/MMBtu
Remaining Term
March 2017 – December 2017
Royalties
Year ended December 31
Royalties
$/Boe
2016
2.2
0.19
Rate
0.9%
2015
10.4
0.64
Rate
2.8%
Royalties decreased $8.2 million to $2.2 million in 2016 compared to $10.4 million in 2015, primarily as a
result of the Musreau Disposition, lower natural gas royalties due to lower prices and $2.7 million of
annual gas cost allowance adjustments recorded in 2016 that relate to prior periods. Excluding the impact
of the gas cost allowance adjustments, the royalty rate was 2.0 percent in 2016 compared to 3.0 percent
in 2015.
Operating Expense
Year ended December 31
Operating expense
$/Boe
2016
97.0
8.32
2015
90.0
5.59
% Change
8
49
Operating expense increased $7.0 million or 8 percent in 2016 to $97.0 million in 2016 compared to $90.0
million in 2015, primarily due to higher third-party processing fees related to the Processing Arrangement,
lower processing income following the sale of the Musreau Complex and higher operating costs at Birch
as a result of new production. These increases were partially offset by lower operating expenses at
Smoky/Resthaven and Valhalla due to lower production and lower liquids handling costs and
equalizations related to other properties. In connection with the Musreau Disposition, the Acquiror
assumed Paramount’s natural gas processing commitments related to the Musreau Assets, including the
Processing Arrangement.
Transportation and NGLs Processing
Year ended December 31
Transportation and NGLs processing
$/Boe
2016
56.5
4.84
2015
65.7
4.08
% Change
(14)
19
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 25
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 $56.5 million in 2016, a decrease of $9.2 million compared to
2015. Transportation and NGLs processing decreased primarily as a result of the Musreau Disposition,
partially offset by increased natural gas and Liquids transportation costs related to incremental firm
service capacity contracted for the Company’s Deep Basin production volumes. In connection with the
Musreau Disposition,
transportation and NGLs processing
commitments related to the Musreau Assets.
the Acquiror assumed Paramount’s
Other Principal Property Items
Year ended December 31
Commodity contracts – net of settlements
Depletion and depreciation (excluding de-impairment / impairment)
Exploration and evaluation (excluding impairment)
De-impairment / (Impairment) of PP&E and E&E
Gain (loss) on sale of oil and gas assets
Accretion of asset retirement obligations
Other
Total – other principal property items
2016
(45.4)
(204.4)
(22.9)
133.2
1,380.1
(4.3)
(0.1)
1,236.2
2015
40.2
(358.9)
(23.0)
(287.8)
(9.2)
(5.4)
2.6
(641.5)
Depletion and depreciation expense (excluding de-impairment / impairment) decreased to $204.4 million
($17.53 per Boe) in 2016 compared to $358.9 million ($22.28 per Boe) in 2015, primarily due to the
Musreau Disposition.
Exploration and evaluation ("E&E") expense in 2016 includes dry hole expense of $13.8 million (2015 -
$14.8 million), expired undeveloped land leases costs of $6.2 million (2015 - $3.7 million) and geological
and geophysical costs of $2.9 million (2015 - $4.5 million).
For the year ended December 31, 2016, the Company recorded a $133.2 million reversal of previously
recorded impairment charges related to petroleum and natural gas assets in the Grande Prairie cash-
generating unit. The impairment reversal resulted from an increase in the estimated recoverable amount
primarily due to an increase in development activities at Karr-Gold Creek following the Musreau
Disposition, recent well performance, well results of other operators in the region, improved economic
conditions and other factors.
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. An impairment charge of $24.1 million in respect of
E&E assets was also recorded at December 31, 2015 related to a previously drilled exploratory well.
The gain on sale of oil and gas assets in 2016 includes $1,233.6 million related to the Musreau
Disposition, $125.7 million related to the Midstream Sale and $20.8 million related to other non-core
property dispositions.
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 26
Ongoing Operations
The following tables set out the sales volumes and Netback for Paramount’s Ongoing Operations, which
exclude results of the Musreau Assets:
Year ended December 31
Natural gas (MMcf/d)
Condensate and oil (Bbl/d)
Other NGLs (1) (Bbl/d)
Total (Boe/d)
(1) Other NGLs means ethane, propane and butane.
2016
48.6
2,688
875
11,656
2015
50.8
2,807
1,047
12,316
% Change
(4)
(4)
(16)
(5)
Year ended December 31
2016
2015
Natural gas revenue
Condensate and oil revenue
Other NGLs revenue (2)
Royalty and sulphur revenue
Petroleum and natural gas sales
Royalties
Operating expense
Transportation and NGLs processing (3)
Netback
($/Boe) (1)
2.50
50.43
11.28
–
23.17
(0.08)
(11.91)
(4.78)
6.40
44.4
49.6
3.6
1.3
98.9
(0.3)
(50.8)
(20.4)
27.4
($/Boe) (1)
2.76
51.34
15.58
–
25.07
(0.92)
(12.09)
(2.71)
9.35
51.2
52.6
6.0
2.9
112.7
(4.1)
(54.4)
(12.2)
42.0
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.
The Netback from Ongoing Operations for the year ended December 31, 2016 decreased primarily due to
lower revenue as a result of lower realized prices and higher natural gas and Liquids transportation costs
due to incremental firm service contracted for the Company’s Deep Basin production volumes. Royalties
were lower in 2016 due to lower prices and $2.0 million of annual gas cost allowance adjustments
recorded in 2016 that relate to prior periods
Outlook
Paramount’s 2017 capital program is expected to total approximately $325 million, excluding land
acquisitions, with approximately $200 million directed towards Karr-Gold Creek and the balance directed
towards Smoky/Resthaven, Birch, and other areas.
Activities at Karr-Gold Creek will focus on the expansion of the 6-18 compression and dehydration facility
(the "6-18 Facility"), finishing the planned 27 well Montney drilling program and completing a portion of
those wells to fill the expanded 6-18 Facility. At Smoky/Resthaven, Paramount plans to drill and
complete six horizontal wells targeting various Cretaceous formations. At Birch, the Company plans to
drill and complete a total of nine (4.5 net) wells and double compression and dehydration capacity to 40
MMcf/d (20 MMcf/d net).
Sales volumes in 2017 are projected to average approximately 20,000 Boe/d, despite the scheduled
outage of a third-party processing facility that is expected to shut-in Karr-Gold Creek production for most
of September. Fourth quarter sales volumes are expected to average over 30,000 Boe/d.
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 27
Annual operating costs for 2017 are anticipated to average approximately $10.00 per Boe. Fourth quarter
2017 operating costs are expected to be lower than in the first part of the year because of the ramp-up in
production volumes at Karr-Gold Creek.
STRATEGIC INVESTMENTS
Year ended December 31
Loss on sale of oil and gas assets
General and administrative
Share-based compensation
Exploration and evaluation (expense) income
Depreciation
Interest and financing
Loss from equity–accounted investments
Write-down of investments in securities
Drilling rig revenue
Drilling rig expense
Other
Segment income (loss)
2016
(0.2)
(6.3)
(6.2)
95.0
(4.3)
(2.7)
(14.3)
(11.2)
0.2
(1.2)
(0.3)
48.5
2015
–
(5.8)
(6.5)
(161.9)
(0.8)
(2.3)
(23.0)
(81.8)
1.1
(0.6)
(0.2)
(281.8)
Strategic Investments at December 31, 2016 include:
investments in the shares of Trilogy Energy Corp. ("Trilogy"), Seven Generations, MEG Energy Corp.
("MEG"), Marquee Energy Ltd. ("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 Cavalier, including at Hoole, in the western
portion of the Athabasca Oil Sands region, and carbonate bitumen holdings in northeast Alberta;
seven triple-sized drilling rigs, including four built-for-purpose walking rigs, owned and operated by
Fox Drilling; and
shale gas holdings in the Liard and Horn River Basins in northeast British Columbia and the
Northwest Territories.
In December 2016, Cavalier granted the Cavalier Royalty on the Oil Sands Lands to an unrelated third-
party for cash consideration of $100 million. A gain of $99.2 million was recorded in respect of the sale,
which is included in the net exploration and evaluation expense / income.
E&E expense in 2015 included aggregate impairment write-downs of $160.0 million related to the E&E
assets of Cavalier and MGM Energy and goodwill with a carrying value of $21.6 million recorded on the
acquisition of MGM Energy.
The loss from equity-accounted investments in 2016 primarily consists of a $14.3 million (2015 – $22.7
million) equity loss recorded in respect of the Trilogy investment.
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. 2016 Management’s Discussion & Analysis 28
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 (3)
Total
Carrying Value
2016 (2)
44.1
34.2
30.0
108.3
2015
58.4
29.7
31.0
119.1
Market Value (1)
2016 (2)
144.5
34.2
30.0
208.7
2015
70.1
29.7
31.0
130.8
(1)
(2)
(3)
Based on the period-end closing price of publicly traded investments and the book value of remaining investments.
Excludes 3.8 million 7Gen Shares classified as "Investments in Securities for distribution" having a carrying value and market value of $119.0 million as at
December 31, 2016. These shares were distributed to Paramount’s shareholders by way of dividend in January 2017.
Includes investments in Marquee, RMP Energy, SOG and other public and private corporations.
investments
For the year ended December 31, 2016, aggregate unrealized losses of $11.2 million related to the
Company’s
in other
comprehensive income (loss) were charged to net income as a result of significant decreases in the
market prices of the securities. Aggregate write-downs of $81.8 million were recorded in 2015 as a result
of decreases in the market values of certain securities, primarily consisting of a $72.1 million write-down
related to MEG.
in MEG, Marquee and other securities previously recorded
Cavalier Oil Sands
Cavalier’s initial focus has been on 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 $112 million has been invested in land acquisitions, stratigraphic drilling, engineering
studies, and environmental field programs to bring this project (the "Hoole Project") to a stage capable of
development. Front-end engineering and design work for the initial 10,000 Bbl/d phase of the Hoole
Project ("Hoole Grand Rapids Phase 1") has been completed and the Alberta Energy Regulator approved
the Hoole Grand Rapids Phase 1 project in the second quarter of 2014.
Given the current commodity-price environment, no significant additional expenditures are planned for the
Hoole Grand Rapids Phase 1 project in the near term. Development of the project is contingent upon
Cavalier obtaining financing and certain additional regulatory approvals. The Oil Sands Lands are at the
early stages of their evaluation and development, currently have no production, and there are no
assurances that any of these lands will commence production, generate earnings, operate profitably or
provide a return on investment at any time in the future.
The agreement governing the Cavalier Royalty does not impose any development commitments on
Cavalier in respect of the Hoole Project or any of its other Oil Sands Lands, nor does it impose any terms
or conditions on the use of the consideration paid for the Cavalier Royalty. Production from the Oil Sands
Lands will not be subject to any royalty when the Western Canadian Select ("WCS") price is below US$50
per barrel. At a WCS price of US$50 per barrel, the royalty rate will be two percent and the rate will
increase linearly to a maximum of 20 percent at a WCS price of US$140 per barrel. As of December 31,
2016, the WCS price was US$37.62 per barrel. The Cavalier Royalty will be payable based on Cavalier’s
realized bitumen price, net of diluent, transportation and storage costs. The Cavalier Royalty is secured
by a lien over the Oil Sands Lands.
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 29
Shale Gas Properties
Paramount’s shale gas holdings in the Liard and Horn River Basins in northeast British Columbia and the
Northwest Territories include approximately 134 net sections of land with potential for natural gas
production 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 c-37-D in December 2015, and the well was drilled to target depth in
March 2016. With the completion of drilling operations for the c-37-D well, the Company has secured its
mineral rights in the region for up to another 10 years.
Fox Drilling
Fox Drilling owns seven triple-sized rigs, including two new walking rigs that were commissioned and
brought into service in 2016. The Fox Drilling rigs are designed to drill the deep horizontal wells that
industry is currently focusing on. All seven rigs were deployed on the Company’s lands at the end of
2016, drilling wells at Karr-Gold Creek and Smoky/Resthaven.
CORPORATE
Year ended December 31
Interest and financing
Debt extinguishment
General and administrative
Share-based compensation
Foreign exchange
Other
Segment loss
2016
77.6
27.6
19.6
21.6
(43.7)
(0.7)
102.0
2015
108.4
12.0
18.0
14.0
61.1
0.3
213.8
The Corporate segment loss decreased to $102.1 million in 2016 compared to $213.8 million in 2015.
Interest and financing expense was $77.6 million in 2016, a decrease of $30.8 million from 2015, as a
result of lower average debt balances in 2016. Debt extinguishment expense of $27.6 million was
recorded in 2016, including $13.5 million of redemption premiums related to the senior unsecured notes
due 2019 (the "2019 Notes") and $13.9 million of unamortized financing fees related to the 2019 Notes
redeemed and the 2023 Notes assumed by the Acquiror. In 2015, the Company recorded $12.0 million of
debt extinguishment expense related to the June 2015 redemption of the Company’s senior unsecured
notes due 2017 (the "2017 Notes").
Share-based compensation in 2016 includes $13.8 million related to options cancelled in the year. The
foreign exchange gain of $43.7 million for the year ended December 31, 2016 mainly related to the
US$450 million 2023 Notes assumed by the Acquiror on the closing of the Musreau Disposition.
INCOME TAX
Income tax expense in 2016 totaled $156.1 million. The Company recognized $186.7 million of previously
unrecognized deferred tax assets in 2016, which reduced income tax expense in the year.
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 30
Tax Pools
As at December 31, 2016
Canadian resource pools and undepreciated capital cost
Non-capital losses
Financing costs and other
Total federal tax pools
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 including land and property acquisitions and capitalized interest
Strategic Investments (2)
Corporate
352.8
658.0
14.4
1,025.2
2015
4.4
314.0
111.5
429.9
8.1
438.0
62.0
1.3
501.3
2016
2.9
148.5
19.6
171.0
11.0
182.0
22.0
1.1
205.1
Principal Properties Capital by COU (1)
Grande Prairie
Kaybob
Southern, Northern & Other
66.2
293.1
70.6
429.9
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 in 2015 included $1.5 million of capitalized interest.
94.9
63.0
13.1
171.0
(1)
(2)
Principal Properties Capital was $171.0 million in 2016, including $52.5 million related to the Musreau
Assets, compared to $429.9 million in 2015. Development activities following the Musreau Disposition are
focused on a planned 27 (27.0 net) well horizontal Montney drilling and completion program at Karr-Gold
Creek that commenced in mid-2016 (the "Karr Program") and the expansion of the Karr-Gold Creek 6-18
Facility to double its capacity to 80 MMcf/d. The total cost of the expansion of the 6-18 Facility is
estimated to be approximately $35 million, of which $20 million has been incurred to December 31, 2016.
Paramount has spud 20 wells in the Karr Program to date and plans to spud an additional seven wells at
Karr-Gold Creek in 2017. By the end of 2017, the Company expects to have completed up to 22 of the 27
wells, with the remaining wells to be completed in 2018. The Karr Program wells will be brought on
production through 2017 and 2018 to fill the expanded 6-18 Facility.
Strategic Investments capital expenditures in 2016 included $19.3 million related to the Company’s
exploratory Shale Gas Properties in northeast British Columbia.
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 31
Wells drilled were as follows:
2016
2015
Natural gas – Ongoing Operations
Natural gas – Musreau Assets
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)
12
11
23
Net (2)
12
11
23
Gross (1)
13
21
34
Net (2)
11
20
31
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 spending programs, acquiring or disposing of
assets, and participating in joint ventures, the availability of any such means being dependent upon
market conditions.
Net Cash (Debt)
As at December 31
Adjusted working capital surplus (deficit) (1)
Limited-recourse demand facilities
Bank credit facility
2019 Notes (2)
2023 Notes (2)
Net cash (debt)
2016
565.9
–
–
–
–
565.9
2015
(37.9)
(100.9)
(693.0)
(450.0)
(622.8)
(1,904.6)
(1)
(2)
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, 2016 – nil, December 31, 2015 – $4.1 million), risk management assets and liabilities and limited-recourse demand
facilities.
Excludes unamortized issue premiums and financing costs.
Shareholders’ Equity
As at December 31
Share capital
Accumulated deficit
Reserves
Total shareholders’ equity
2016
1,639.5
(152.2)
147.5
1,634.8
2015
1,647.0
(1,197.6)
99.3
548.7
Paramount had an adjusted working capital surplus at December 31, 2016 of $565.9 million compared to
a deficit of $37.9 million at December 31, 2015. The adjusted working capital surplus at December 31,
2016 included $621.9 million of cash and cash equivalents, $119.0 of Investments in Securities for
distribution, $23.9 million of accounts receivable, $1.7 million of prepaid amounts, a dividend payable of
$119.0 million and $81.6 million of accounts payable and accrued liabilities.
In April 2016, proceeds from the Midstream Sale were used to pay down the Company’s bank credit
facility. In August 2016, the Company repaid the remaining balance owing on its bank credit facility in
connection with the Musreau Disposition.
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 32
Paramount expects to fund its planned 2017 operations, obligations and capital expenditures with cash
and cash equivalents and funds flow from operations.
Limited-Recourse Demand Facilities
In June 2016, the Cavalier limited-recourse demand credit facility, which had an outstanding balance of
$37.5 million as at December 31, 2015, was repaid and cancelled.
In September 2016, the Fox Drilling limited-recourse demand credit facility, which had an outstanding
balance of $63.4 million as at December 31, 2015, was repaid and cancelled.
Bank Credit Facility
The Company has a $100 million revolving bank credit facility (the "Facility"). Borrowings under the
Facility bear interest at 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 Facility is secured by a first fixed and floating charge over
substantially all of the assets of Paramount, excluding the assets of Fox Drilling and Cavalier.
The borrowing base governs the maximum amount which can be drawn on the Facility. The borrowing
base is subject to review and re-determination on a semi-annual basis and more frequently in certain
other circumstances. The borrowing base amount is based on the Company’s reserves, lenders’
projections of future commodity prices and the value attributed to Paramount’s equity investments and
other assets, among other factors.
The current revolving period of the Facility ends on April 28, 2017. In the event the revolving period is not
extended, any undrawn availability would be cancelled and any amounts then outstanding would be
permitted to remain outstanding on a non-revolving basis until April 28, 2018, the current maturity date of
the Facility.
At December 31, 2016, no amounts were drawn on the Facility. Paramount had undrawn letters of credit
outstanding totaling $20.4 million at December 31, 2016 that reduce the amount available to be drawn
under the Facility.
Senior Notes
In 2016, the Company redeemed all $450 million aggregate principal amount of its 7⅝ percent 2019
Notes. The Company was discharged and released from all obligations and covenants under the 2019
Notes indenture and the 2019 Notes.
In connection with the Musreau Disposition, the Acquiror assumed all US$450 million aggregate principal
amount of Paramount’s 2023 Notes in August 2016 and the Company was discharged and released from
all obligations and covenants under the 2023 Notes indenture and the 2023 Notes.
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, 2016,
105,784,070 (December 31, 2015 – 106,212,487) Common Shares were outstanding, net of 2,865
(December 31, 2015 – 21,508) Common Shares held in trust under the Company’s stock incentive
program, and no preferred shares were outstanding.
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 33
Paramount implemented a normal course issuer bid ("NCIB") on October 13, 2016. The NCIB will
terminate on the earlier of: (i) October 12, 2017; and (ii) the date on which the maximum number of
Common Shares that can be acquired pursuant to the NCIB are purchased. Purchases of Common
Shares under the NCIB will be effected through the facilities of the TSX or alternative Canadian trading
systems at the market price at the time of purchase. Paramount may purchase up to 5,441,602 Common
Shares under the NCIB. Pursuant to the rules of the TSX, the maximum number of Common Shares that
the Company may purchase under the NCIB in any one day is 188,705 Common Shares. Paramount may
also make one block purchase per calendar week which exceeds such daily purchase restriction, subject
to the rules of the TSX. Any Common Shares purchased pursuant to the NCIB will be cancelled by the
Company. Any shareholder may obtain, for no charge, a copy of the notice in respect of the NCIB filed
with the TSX by contacting the Company at 403-290-3600. To March 3, 2017, the Company has
purchased and cancelled 622,900 Common Shares pursuant to the NCIB at a total cost of $9.7 million.
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 at a price of
$41.35 per share for gross proceeds of $37.2 million. The Company has incurred sufficient qualifying
expenditures to satisfy commitments related to the issuance.
At March 3, 2017, Paramount had 106,138,675 Common Shares and 3,913,700 Paramount Options
outstanding, of which 460,000 Paramount Options are exercisable.
FOURTH QUARTER 2016 RESULTS
Netback
Three months ended December 31
2016
Natural gas revenue
Condensate and oil revenue
Other NGLs revenue (3)
Royalty and sulphur revenue
Petroleum and natural gas sales
Royalties
Operating expense
Transportation and NGLs processing (4)
Netback
Commodity contract settlements
Netback including commodity contract settlements
($/Boe) (2)
3.10
60.49
22.16
–
29.52
(0.08)
(10.00)
(3.91)
15.53
7.54
23.07
13.5
16.4
2.1
0.3
32.3
(0.1)
(10.9)
(4.3)
17.0
8.2
25.2
2015
Total
($/Boe) (2)
2.57
46.60
12.59
–
21.82
(0.73)
(5.49)
(3.90)
11.70
1.18
12.88
37.3
42.8
10.6
0.6
91.3
(3.1)
(23.0)
(16.3)
48.9
4.9
53.8
2015
Ongoing Operations (1)
($/Boe) (2)
2.44
46.36
16.92
–
23.45
(1.06)
(11.12)
(2.24)
9.03
11.8
14.3
1.0
0.4
27.5
(1.2)
(13.1)
(2.6)
10.6
Excludes the results of the Musreau Assets.
Natural gas revenue shown per Mcf.
(1)
(2)
(3) Other NGLs means ethane, propane and butane.
(4)
Includes downstream natural gas, NGLs and oil transportation costs and NGLs fractionation costs incurred by the Company.
Fourth quarter 2016 petroleum and natural gas sales were $32.3 million, a decrease of $59.0 million from
the fourth quarter of 2015, primarily due to lower sales volumes because of the August 2016 Musreau
Disposition, partially offset by higher commodity prices.
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 34
The impact of changes in sales volumes and prices on petroleum and natural gas sales are as follows:
Three months ended December 31, 2015
Effect of changes in sales volumes
Effect of changes in prices
Change in royalty and sulphur revenue
Three months ended December 31, 2016
Natural Gas
37.3
(26.1)
2.3
–
13.5
Condensate
and Oil
42.8
(30.2)
3.8
–
16.4
Other
NGLs
10.6
(9.4)
0.9
–
2.1
Royalty and
Sulphur
0.6
–
–
(0.3)
0.3
Total
91.3
(65.7)
7.0
(0.3)
32.3
Royalties decreased $3.0 million to $0.1 million in the fourth quarter of 2016, primarily as a result of the
Musreau Disposition and gas cost allowance adjustments related to prior periods.
Operating expense decreased $12.1 million to $10.9 million in the fourth quarter of 2016 compared to
$23.0 million in the same period in 2015, primarily due to the Musreau Disposition and lower operating
costs in the Grande Prairie COU related to lower rates for processing and lower production. Operating
costs in the fourth quarter of 2016 were also reduced by $2.5 million as a result of operating costs for
prior quarters being lower than originally estimated, including costs related to the Musreau Assets.
Excluding the impact of these differences, the Company’s operating costs in the fourth quarter of 2016
were approximately $12.30 per Boe.
Transportation and NGLs processing expense decreased $12.0 million to $4.3 million in the fourth quarter
of 2016 compared to $16.3 million in the same period in 2015, primarily due to the Musreau Disposition,
partially offset by increased transportation costs related to incremental firm service capacity contracted for
the Company’s Deep Basin production volumes.
Sales Volumes
Natural Gas
(MMcf/d)
Condensate and Oil
(Bbl/d)
Other NGLs
(Bbl/d)
Total
(Boe/d)
Three months ended December 31
Grande Prairie (1)
Kaybob (1)
Northern
Southern
Ongoing
Operations
Musreau Assets
Total
2016
26.5
11.5
6.9
2.6
47.5
–
47.5
2015 % Change
(25)
35.4
2
11.3
116
3.2
–
2.6
52.5
105.3
157.8
(10)
(100)
(70)
2016
2,208
336
113
286
2,943
–
2,943
Excludes the results of the Musreau Assets
(1)
NM Not meaningful
2015 % Change
(12)
2,518
(14)
392
12
101
(18)
348
2016
275
561
100
110
2015 % Change
(31)
399
267
153
NM
8
9
101
2016
6,901
2,812
1,356
832
2015 % Change
(22)
8,813
16
2,428
114
634
(7)
890
3,359
6,632
9,991
(12)
(100)
(71)
1,046
–
1,046
661
8,514
9,175
58
(100)
(89)
11,901
–
11,901
12,765
32,701
45,466
(7)
(100)
(74)
Sales volumes from Ongoing Operations decreased seven percent to 11,901 Boe/d in the fourth quarter
of 2016 compared to 12,765 Boe/d in the same period in 2015. The decrease was primarily due to natural
production declines on existing wells and non-core dispositions in the Grande Prairie COU, partially offset
by sales volumes from new Montney formation wells brought on production at Karr-Gold Creek and at
Birch and less downtime at a third-party operated processing facility disruptions at Smoky/Resthaven.
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 35
Commodity Prices
Key monthly average commodity price benchmarks and foreign exchange rates are as follows:
Three months ended December 31
Natural Gas
Paramount realized price ($/Mcf)
AECO daily spot ($/GJ)
AECO monthly index ($/GJ)
Malin (US$/MMbtu)
Crude Oil
Paramount average condensate and oil price ($/Bbl)
Edmonton Light Sweet ($/Bbl)
West Texas Intermediate (US$/Bbl)
Foreign Exchange
$CDN / 1 $US
Net Income (Loss)
Three months ended December 31
Petroleum and natural gas sales
Royalties
Revenue
Gain (loss) on financial commodity contracts
(Expenses) Income
Operating expense
Transportation and NGLs processing
General and administrative
Share-based compensation
Depletion and depreciation
Exploration and evaluation
Gain on sale of oil and gas assets
Interest and financing
Accretion of asset retirement obligations
Foreign exchange
Debt extinguishment
Loss from equity-accounted investments
Gain on sale of Investment in Securities
Write-own of Investment in Securities
Other income
Income tax recovery (expense)
Net income (loss)
2016
2015
% Change
3.10
2.93
2.62
3.02
60.49
60.76
49.29
2.57
2.34
2.51
2.29
46.60
52.55
42.18
21
25
4
32
30
16
17
1.33
1.34
(1)
2016
32.4
(0.1)
32.3
(6.3)
26.0
(10.9)
(4.3)
(6.5)
(3.6)
112.0
93.6
9.6
(5.5)
(1.0)
(0.2)
(9.3)
(2.7)
3.4
(0.1)
0.8
11.1
186.4
212.4
2015
91.3
(3.1)
88.2
19.8
108.0
(23.0)
(16.3)
(5.7)
(3.1)
(340.7)
(195.8)
0.1
(29.4)
(1.4)
(20.7)
–
(3.1)
–
(4.2)
2.6
(66.3)
(707.0)
(599.0)
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 36
Three months ended December 31
Principal Properties
Strategic Investments
Corporate
Income tax recovery (expense)
Net income (loss)
2016
129.4
93.3
(21.4)
11.1
212.4
2015
(305.7)
(170.9)
(56.1)
(66.3)
(599.0)
Paramount recorded net income of $212.4 million for the three months ended December 31, 2016, which
included the reversal of $133.2 million of previously recorded impairment charges related to petroleum
and natural gas assets and a $99.2 million gain recognized on the sale of the Cavalier Royalty. A net loss
of $599.0 million was recorded in the same period of 2015. Significant factors contributing to the change
are shown below:
Three months ended December 31
Net loss – 2015
Lower depletion and depreciation due to impairment reversals totaling $133.2 million and asset
dispositions in 2016 and because 2015 included impairment charges of $263.7 million
Exploration and evaluation income in 2016 because of a $99.2 million gain in respect of the sale of the
Cavalier Royalty compared to an expense in 2015 which included $184.1 million of impairment charges
Income tax recovery in 2016 compared to an expense in 2015
Lower interest and financing expense due to lower average debt balances in 2016
Lower foreign exchange expense in 2016
Gain on sale of oil and gas assets in 2016 mainly related to non-core asset dispositions
Lower write-downs of Investments in Securities in 2016
Gain on sale of investments in securities in 2016
Lower Netback primarily due to the Musreau Disposition
Loss on commodity contracts in 2016 compared to a gain in 2015
Debt extinguishment expense in 2016
Other
Net income – 2016
Funds Flow from Operations (1)
The following is a reconciliation of funds flow from operations to the nearest GAAP measure:
Three months ended December 31
Cash from (used in) operating activities
Change in non-cash working capital
Geological and geophysical expenses
Asset retirement obligations settled
Funds flow from operations
Funds flow from operations ($/Boe)
Funds flow from operations ($/share - diluted)
(1)
Refer to the advisories concerning Non-GAAP measures in the Advisories section of this document.
2016
(6.4)
19.6
0.2
0.9
14.3
13.10
0.13
(599.0)
452.7
289.4
77.4
23.9
20.5
9.5
4.1
3.4
(31.9)
(26.1)
(9.3)
(2.2)
212.4
2015
10.4
7.2
2.2
1.2
21.0
5.02
0.20
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 37
Funds flow from operations in the fourth quarter of 2016 was $14.3 million compared to $21.0 million in
the same period in 2015. Significant factors contributing to the change are shown below:
Three months ended December 31
Funds flow from operations – 2015
Lower Netback primarily due to the Musreau Disposition
Lower interest and financing expense due to lower average debt balances in 2016
Higher realized gains on financial commodity contracts
Other
Funds flow from operations – 2016
Exploration and Capital Expenditures
21.0
(31.9)
23.5
3.3
(1.6)
14.3
Exploration and Capital expenditures for the Company’s Principal Properties in the fourth quarter of 2016
totaled $78.2 million, with the majority of spending directed towards drilling and completing horizontal
Montney wells and advancing the 6-18 Facility expansion at the Company’s Karr-Gold Creek
development.
QUARTERLY INFORMATION
Petroleum and natural gas sales
Net income (loss)
Per share – basic ($/share)
Per share – diluted ($/share)
Funds flow from operations
Per share – basic ($/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)
2016
Q3
51.7
1,029.4
9.69
9.64
3.8
0.04
0.04
Q2
73.6
(30.6)
(0.29)
(0.29)
(4.9)
(0.05)
(0.05)
Q4
32.3
212.4
2.01
1.99
14.3
0.14
0.13
Q1
91.2
(46.0)
(0.43)
(0.43)
22.4
0.21
0.21
2015
Q4
91.3
Q3
110.7
(599.0)
(5.64)
(5.64)
(171.8)
(1.62)
(1.62)
21.0
0.20
0.20
36.9
0.35
0.35
Q2
94.6
(60.2)
(0.57)
(0.57)
19.6
0.19
0.19
Q1
80.2
(70.3)
(0.67)
(0.67)
15.7
0.15
0.15
47.5
2,943
1,046
11,901
88.6
5,335
4,687
24,786
129.8
9,490
9,764
40,890
153.9
13,245
11,259
50,161
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
3.10
60.49
22.16
29.52
2.65
51.15
11.11
22.66
1.49
52.83
11.19
19.79
2.09
42.28
10.31
19.98
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
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 38
Significant Items Impacting Quarterly Results
Quarterly earnings variances include the impacts of changing production volumes and market prices.
Fourth quarter 2016 earnings include a $133.2 million reversal of impairments of oil and gas assets
recorded in prior years, a $99.2 million gain recorded in respect of the Cavalier Royalty and the
recognition of $61.0 million of previously unrecognized deferred tax assets.
Third quarter 2016 earnings include the impacts related to the Musreau Disposition, including a $1.2
billion gain on sale, lower depletion and depreciation expense, higher income tax expense and lower
Netback.
Second quarter 2016 earnings include a $131.8 million gain on the sale of oil and gas assets primarily
in respect of the Midstream Sale, partially offset by $17.7 million of share-based compensation
expense.
First quarter 2016 earnings include a foreign exchange gain of $40.3 million and a $13.7 million gain
on commodity contracts.
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 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.
OTHER INFORMATION
Related Party Transactions
Paramount engages in transactions with Trilogy in the normal course of business, including joint
operations. Paramount accounts for its investment in Trilogy using the equity method of investment
accounting as, in management’s judgement, it has significant influence as a result of common directors
and members of senior management. Because of this, Paramount is considered related to Trilogy. All
transactions between Paramount and Trilogy are recorded at their exchange amounts.
During 2016, Paramount charged $0.4 million (2015 – $0.5 million) to Trilogy in respect of operational and
administrative services. Paramount charged $4.2 million (2015 – $3.4 million) to Trilogy and was charged
$8.6 million (2015 – $2.6 million) by Trilogy in respect of joint operations. As of December 31, 2016,
Paramount had a net receivable balance due from Trilogy of $0.2 million (2015 – net payable of $0.2
million).
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 39
Contractual Obligations
Paramount had the following contractual obligations at December 31, 2016:
Processing and transportation commitments (1)
Asset retirement obligations (2)
Operating leases and other
Total
462
212
19
693
Certain transportation and processing commitments are secured by outstanding letters of credit totaling $5.1 million at December 31, 2016 (2015 - $104.6
million).
Asset retirement obligations estimated as at December 31, 2016. Estimated costs and timing of settlement are revised from time-to-time based on new
information.
After 2021
229
161
1
391
2020-2021
95
48
4
147
2018-2019
98
3
5
106
2017
40
–
9
49
(1)
(2)
Processing and transportation commitments mainly relate to long-term firm service arrangements for the
processing and transportation of natural gas and Liquids.
Contingencies
In the normal course of Paramount’s operations, the Company may become involved in, named as a
party to, or be the subject of, various legal proceedings, including regulatory proceedings, tax
proceedings and legal actions. The outcome of outstanding, pending or future proceedings cannot be
predicted with certainty and may be determined adversely to the Company and as a result, could have a
material adverse effect on the Company. Even if Paramount prevails in any such legal proceedings, they
could be costly and time-consuming and divert the attention of management and key personnel from the
Company’s core business operations.
In 2016, a release occurred from a non-operated pipeline in which the Company owns a 50 percent
interest. The operator, and owner of the remaining 50 percent, has initiated response, containment and
remediation activities ("Response Activities"). Total costs to complete the Response Activities are
estimated at approximately $45 million. It is Paramount’s assessment that it is not responsible for the
costs of the Response Activities and as a result, no provision has been recorded in the Company’s
financial statements.
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".
The Company cannot fully protect against all of these potential risks. Some of them cannot be insured
against, and the coverage that can be obtained with respect to those that are insurable will be subject to
exclusions and monetary limits. Accordingly, Paramount may be exposed to liabilities that are outside the
scope of its insurance, are only partially covered by it, or that Paramount could not insure against (either
at all or because of high premium costs or for other reasons). The occurrence of a significant event
against which Paramount is not fully insured could have a material adverse effect on the Company.
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 40
CHANGE IN ACCOUNTING POLICIES
There were no new or amended accounting standards adopted by the Company for the year ended
December 31, 2016.
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 is currently evaluating
the impact of the IFRS on its 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 is currently evaluating the impact of the IFRS on its
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 is currently evaluating the impact of the IFRS on its Consolidated Financial Statements.
DISCLOSURE CONTROLS AND PROCEDURES
As of the year ended December 31, 2016, an evaluation of the effectiveness of Paramount’s disclosure
controls and procedures, as defined by the rules of the Canadian Securities Administrators, was
performed by the Company’s management with the oversight of the chief executive officer and chief
financial officer. Based upon that evaluation, the Company’s chief executive officer and chief financial
officer have concluded that as of the end of that fiscal year, the Company’s disclosure controls and
procedures are effective in ensuring that information required to be disclosed by the Company is (i)
recorded, processed, summarized and reported within the time periods specified in Canadian securities
law; and (ii) accumulated and communicated to the Company’s management, including its chief executive
officer and chief financial officer as appropriate, to allow timely decisions regarding required disclosure.
It should be noted that while the Company’s chief executive officer and chief financial officer believe that
the Company’s disclosure controls and procedures provide a reasonable level of assurance that they are
effective, they do not expect that the Company’s disclosure controls and procedures or internal control
over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived
or operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met.
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 41
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Management has assessed the effectiveness of the Company’s internal controls over financial reporting
("ICFR") as defined under National Instrument 52-109 "Certification of Disclosure in Issuers’ Annual and
Interim Filings" as at December 31, 2016. 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, 2016.
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, 2016, 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 assets, liabilities, 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, including assessments 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 petroleum and natural gas, which
requires the quantity and realizable value of such petroleum and natural gas 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 petroleum and natural gas, 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
petroleum and natural gas is economically viable. The concept of "sufficient progress" is a judgmental
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 42
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 establish the technical feasibility and
commercial viability of the discovery. When Management is making this assessment, changes to project
economics, expected quantities of petroleum and natural gas, expected production techniques, drilling
results, estimated capital expenditures and production costs, results of other operators in the region and
access to infrastructure and potential infrastructure expansions are important factors. Where it is
determined that an exploratory project is not economically viable, the costs are written-off as E&E
expense.
Reserves Estimates
Reserves engineering is an inherently complex and subjective process of estimating underground
accumulations of petroleum and natural gas. The process relies on judgments based on the interpretation
of available geological, geophysical, engineering and production data. The accuracy of a reserves
estimate is a function of the quality and quantity of available data, the interpretation of such 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, the results of subsequent drilling, testing and production and other factors 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 from time-to-time in impairment and impairment reversal assessments, all of
which could have a material impact on earnings.
Estimates of Recoverable Amounts
Estimates of recoverable amounts used in impairment and impairment reversal tests often incorporate
level three hierarchy inputs including estimated volumes and future net revenues 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 cash
flows and the overall significance of individual properties. Changes in the assets comprising CGUs could
have an impact on estimated recoverable amounts used in impairment assessments and could have a
material impact on earnings.
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 43
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 publicly
traded.
Provisions
A provision is recognized where the Company has determined that it has a present obligation arising from
past events and the settlement of the obligation is expected to result in an outflow of economic benefits.
The determination of whether the Company has a present obligation arising from past events requires
Management to exercise judgement as to the facts and circumstances of the event and the extent of any
expected obligations of Paramount. Changes in facts and circumstances as a result of new information
and other developments may impact Management’s assessment of the Company’s obligations, if any, in
respect of such events. Changes in such estimates could have a material impact on assets, liabilities,
revenues, expenses, and earnings.
Asset Retirement Obligations
Estimates of asset retirement costs are based on assumptions regarding the methods, timing, economic
environment and regulatory standards that are expected to exist at the time assets are retired.
Management adjusts estimated amounts periodically as assumptions are updated 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 and estimates related to the application of tax law, the timing
of temporary difference reversals and the likelihood of realizing 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.
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 44
ADVISORIES
Forward-looking Information
Certain statements in this document constitute forward-looking information under applicable securities
legislation. Forward-looking information typically contains statements with words such as "anticipate",
"believe", "estimate", "will", "expect", "plan", "schedule", "intend", "propose", or similar words suggesting
future outcomes or an outlook. Forward-looking information in this document includes, but is not limited
to:
projected production and sales volumes and the timing thereof;
forecast capital expenditures, operating costs (including anticipated reductions in per unit
operating costs in the fourth quarter of 2017) and remaining cash on hand at the end of 2017;
exploration, development and associated operational plans and strategies (including planned
drilling and completion programs, well tie-ins and facility expansions, and the anticipated timing,
costs and results thereof, including in terms of increased well productivity and reserves, capital
and operational efficiencies and environmental benefits);
scheduled outages of third-party processing facilities including the timing, duration and impact
thereof;
the timing and cost of future abandonment and reclamation obligations;
estimated reserves and the undiscounted and discounted net present value of future net revenues
therefrom; and
general business strategies and objectives.
Such forward-looking information is based on a number of assumptions which may prove to be incorrect.
Assumptions have been made with respect to the following matters, in addition to any other assumptions
identified in this document:
future natural gas and Liquids 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 and Liquids successfully to current and new
customers;
the ability of Paramount and its industry partners to obtain drilling success (including in respect of
anticipated production volumes, reserves additions, Liquids yields and resource recoveries) and
operational improvements, efficiencies and results consistent with expectations;
the timely receipt of required governmental and regulatory approvals; and
anticipated timelines and budgets being met in respect of drilling programs and other operations
(including well completions and tie-ins and the construction, commissioning and start-up of new
and expanded facilities).
Although Paramount believes that the expectations reflected in such forward-looking information is
reasonable, undue reliance should not be placed on it as Paramount can give no assurance that such
expectations will prove to be correct. Forward-looking information is based on expectations, estimates
and projections that involve a number of risks and uncertainties which could cause actual results to differ
materially from those anticipated by Paramount and described in the forward-looking information. The
material risks and uncertainties include, but are not limited to:
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 45
fluctuations in natural gas and Liquids 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 and Liquids;
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 estimates;
general business, economic and market conditions;
the ability to generate sufficient cash flow from operations and obtain financing at an acceptable
cost to fund planned exploration, development and operational activities and meet current and
future obligations (including costs of anticipated new and expanded facilities and other projects
and product processing, transportation, de-ethanization, fractionation and similar commitments);
changes in, or in the interpretation of, laws, regulations or policies (including environmental laws);
the ability to obtain required governmental or regulatory approvals in a timely manner, and to enter
into and maintain leases and licenses;
the effects of weather;
the timing and cost of future abandonment and reclamation obligations and potential liabilities for
environmental damage and contamination;
uncertainties regarding aboriginal claims and in maintaining relationships with local populations
and other stakeholders;
the outcome of existing and potential lawsuits, regulatory actions, audits and assessments; and
other risks and uncertainties described elsewhere in this document and in Paramount's other
filings with Canadian securities authorities.
The foregoing list of risks is not exhaustive. For more information relating to risks, see the section titled
"RISK FACTORS" in Paramount's current annual information form. The forward-looking information
contained in this document is made as of the date hereof and, except as required by applicable securities
law, Paramount undertakes no obligation to update publicly or revise any forward-looking statements or
information, whether as a result of new information, future events or otherwise.
Non-GAAP Measures
In this document "Funds flow from operations", "Netback", "Net Cash (Debt)", "Adjusted working capital",
"Exploration and Capital Expenditures", "Principal Properties Capital", "Investments in other entities –
market value" and "Finding and development costs", 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.
Refer to the Consolidated Results and Fourth Quarter 2016 Results sections of the Company’s
Management’s Discussion and Analysis for the periods and the calculation. 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. Refer to the Principal Properties and Fourth Quarter 2016 Results
sections of the Company’s Management’s Discussion and Analysis for the periods and the calculation.
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 46
Net Cash (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 and for the calculation of Net Cash (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, 2016 of $4.1
million (2015 - $6.1 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, and excludes land acquisitions and capitalized interest. 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. Refer to the Exploration and Capital Expenditures section of the Company’s
Management’s Discussion and Analysis for the period. 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, SOG and others), and investments in all
other entities at book value and excludes 3.8 million 7Gen Shares that were distributed to Paramount’s
shareholders by way of dividend in January 2017. 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. Refer to the Strategic Investments section of the Company’s
Management’s Discussion and Analysis for information on carrying and market values. The Finding and
development costs ("F&D") measure is commonly used by management and investors to assess the
relationship between capital invested in oil and gas exploration and development projects and reserve
additions associated with such projects. Refer to the Principal Properties Reserves and Finding &
Development Costs section of this document for the calculation of F&D costs.
The Non-GAAP Measures should not be considered in isolation or construed as alternatives to their most
directly comparable measure calculated in accordance with GAAP, or other measures of financial
performance calculated in accordance with GAAP. The Non-GAAP Measures are unlikely to be
comparable to similar measures presented by other issuers.
Oil and Gas Measures and Definitions
Abbreviations
Liquids
Barrels
Bbl
Thousands of barrels
MBbl
Barrels per day
Bbl/d
Natural gas liquids
NGLs
Condensate Pentane and heavier hydrocarbons
Oil Equivalent
Boe
MBoe
MMBoe
Boe/d
Barrels of oil equivalent
Thousands of barrels of oil equivalent
Millions of barrels of oil equivalent
Barrels of oil equivalent per day
Natural Gas
Mcf
Bcf
MMcf/d
GJ
MMbtu
Thousands of cubic feet
Billions of cubic feet
Millions of cubic feet per day
Gigajoule
Millions of British thermal units
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 47
Measures
This document contains disclosures expressed as "Boe", "$/Boe", MBoe, MMBoe 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.
The reserves replacement disclosure herein was calculated in respect of Ongoing Operations for each of
proved and proved plus probable reserves as the sum of extensions and discoveries, technical revisions
and economic factors for the year divided by the sales volumes from Ongoing Operations for 2016.
During the year ended December 31, 2016, the value ratio between crude oil and natural gas was
approximately 27:1. This value ratio is significantly different from the energy equivalency ratio of 6:1.
Using a 6:1 ratio would be misleading as an indication of value.
Paramount Resources Ltd. 2016 Management’s Discussion & Analysis 48
CONSOLIDATED 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
included in 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 all transactions are recorded that are necessary for the preparation and
presentation of financial statements in accordance with International Financial Reporting Standards, that
such transactions are recorded accurately 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 8, 2017
/s/ B. K. Lee
B. K. Lee
Chief Financial Officer
Paramount Resources Ltd. 2016 Consolidated Financial Statements 49
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, 2016 and 2015, and the
consolidated statements of comprehensive income (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, 2016 and 2015 and of its financial
performance and its cash flows for the years then ended in accordance with International Financial
Reporting Standards.
Calgary, Canada
March 8, 2017
Chartered Professional Accountants
Paramount Resources Ltd. 2016 Consolidated Financial Statements 50
CONSOLIDATED BALANCE SHEET
($ thousands)
As at December 31
ASSETS
Current assets
Cash and cash equivalents
Investments in Securities for distribution
Accounts receivable
Prepaid expenses and other
Risk management
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
Dividend payable
Accounts payable and accrued liabilities
Risk management
Long-term debt
Asset retirement obligations
Deferred income tax
Commitments and contingencies
Shareholders’ equity
Share capital
Accumulated deficit
Reserves
Note
2016
2015
17
12
16
16
5
6
7
8
15
6
9
12
16
16
10
11
15
20
12
13
621,872
118,978
23,895
1,715
–
766,460
301,530
882,724
44,053
64,193
–
–
2,058,960
–
118,978
81,585
5,180
205,743
–
212,309
6,125
424,177
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
1,639,466
(152,182)
147,499
1,634,783
2,058,960
1,646,984
(1,197,627)
99,337
548,694
2,781,035
See the accompanying notes to these Consolidated Financial Statements.
On behalf of the Board of Directors
/s/ C.H. Riddell
C.H. Riddell, Director
March 8, 2017
/s/ J.C. Gorman
J.C. Gorman, Director
Paramount Resources Ltd. 2016 Consolidated Financial Statements 51
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
($ thousands, except as noted)
Year ended December 31
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 assets
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
Income (loss) before tax
Income tax expense (recovery)
Current
Deferred
Net income (loss)
Note
16
14
6
5
6
11
10
7
8
4
15
Other comprehensive income (loss), net of tax
Items that may be reclassified to net income (loss):
Change in market value of securities
Reclassification of accumulated losses on securities to net income (loss)
Deferred tax on other comprehensive income related to securities
Comprehensive income (loss)
Net income (loss) per common share ($/share)
12
Basic
Diluted
See the accompanying notes to these Consolidated Financial Statements.
2016
248,828
(2,211)
246,617
253
246,870
97,040
56,465
25,877
27,771
76,415
(72,071)
(1,379,965)
80,324
4,622
(43,727)
27,575
(1,099,674)
(14,316)
(11,235)
376
1,321,369
–
156,094
156,094
1,165,275
2015
376,799
(10,388)
366,411
52,767
419,178
90,043
65,724
23,857
20,504
623,889
208,992
9,058
110,663
5,695
61,109
11,994
1,231,528
(23,018)
(81,819)
3,388
(913,799)
11
(12,509)
(12,498)
(901,301)
13,128
11,235
(1,276)
1,188,362
(42,180)
81,819
(1,314)
(862,976)
10.98
10.95
(8.52)
(8.52)
Paramount Resources Ltd. 2016 Consolidated Financial Statements 52
CONSOLIDATED STATEMENT OF CASH FLOWS
($ thousands)
Year ended December 31
Note
2016
2015
Operating activities
Net income (loss)
Add (deduct):
Items not involving cash
Asset retirement obligations settled
Debt extinguishment
Change in non-cash working capital
Cash from operating activities
Financing activities
Net draw (repayment) of limited-recourse demand facilities
Net draw (repayment) of revolving long-term debt
Proceeds from issuance of 2023 Notes, net of issue costs
Redemption of Senior Notes
Common shares issued, net of issue costs
Common shares repurchased under NCIB
Other
Cash from (used in) financing activities
Investing activities
Property, plant and equipment and exploration
Proceeds on sale of oil and gas assets
Cash acquired on corporate acquisition, net
Proceeds on sale of Investments in Securities, net of costs
Deposit
Change in non-cash working capital
Cash from (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.
1,165,275
(901,301)
(1,161,287)
(1,753)
27,575
15,942
45,752
(100,911)
(693,045)
–
(463,521)
1,462
(9,704)
(3,194)
(1,268,913)
(200,992)
1,177,437
–
862,931
–
(5,978)
1,833,398
610,237
(306)
11,941
621,872
17
11
10
9
10
10
10
12
15
17
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
Paramount Resources Ltd. 2016 Consolidated Financial Statements 53
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
($ thousands, except as noted)
Year ended December 31
Note
2016
Shares
(000’s)
2015
Shares
(000’s)
Share Capital
Balance, beginning of year
Issued
Common shares repurchased under NCIB
Change in unvested common shares for stock incentive
plan
Balance, end of year
Accumulated Deficit
Balance, beginning of year
Net income (loss)
Dividend
Balance, end of year
Reserves
Balance, beginning of year
Other comprehensive income
Contributed surplus
Balance, end of year
Total Shareholders’ Equity
See the accompanying notes to these Consolidated Financial Statements.
12
14
13
106,212
176
(623)
1,646,984
2,060
(9,704)
104,843
1,337
–
1,603,436
43,175
–
19
105,784
126
1,639,466
32
106,212
373
1,646,984
(1,197,627)
1,165,275
(119,830)
(152,182)
99,337
23,087
25,075
147,499
1,634,783
(296,326)
(901,301)
–
(1,197,627)
46,172
38,325
14,840
99,337
548,694
Paramount Resources Ltd. 2016 Consolidated Financial Statements 54
(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
energy company that explores and develops unconventional and conventional petroleum and natural gas
prospects, including long-term unconventional exploration and pre-development projects, and holds a
portfolio of investments in other entities. The Company’s principal properties are primarily located in
Alberta and British Columbia. Paramount’s operations are divided into three business segments: 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 wholly-owned subsidiaries Fox Drilling Limited
Partnership ("Fox Drilling"), Cavalier Energy ("Cavalier"), and MGM Energy. 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, 2016 and December 31,
2015 and for the years then ended (the "Consolidated Financial Statements"), were authorized for
issuance by Paramount’s Board of Directors on March 8, 2017.
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. 2016 Consolidated Financial Statements 55
(Tabular amounts stated in $ thousands, except as noted)
b) Cash and Cash Equivalents
Cash and cash equivalents are recorded at cost and are comprised of cash in operating bank accounts,
term deposits, certificates of deposit and other highly liquid investments.
c) Trade and Other Receivables
Accounts receivable are recorded as corresponding amounts of revenue are recognized or costs are
incurred on behalf of partners 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 exploration and
evaluation ("E&E") 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 establish the
technical feasibility and commercial viability of the discovery.
The Company’s exploration and evaluation assets include Liard and Horn River Basins shale gas
properties (the "Shale Gas Properties") and oil sands and carbonate bitumen properties within the
Strategic Investments business segment. Net cash flows from the sale of production from wells on the
Shale Gas Properties are applied against the capitalized costs of the properties until the overall project is
deemed commercially viable. All direct costs related to pre-development activities in connection with oil
sands properties are considered pre-operating and are capitalized, including the costs to acquire mineral
rights, conduct delineation and pre-production drilling, and design and construct plant and equipment.
When 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. 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.
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 component 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. 2016 Consolidated Financial Statements 56
(Tabular amounts stated in $ thousands, except as noted)
Depletion and Depreciation
The 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.
The capitalized costs of the majority of Paramount’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 on a straight line basis by component over their expected useful lives, which
range between 5 and 20 years.
Leasehold improvements are depreciated over the term of the related lease. Other assets are
depreciated using the declining balance method at rates ranging between 35 and 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, or whether there is any indication that an
impairment loss recognized in prior periods may no longer exist or may have decreased. 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 non-financial assets are grouped into two CGUs for the purpose of
impairment testing, consisting of the Kaybob CGU and the Grande Prairie CGU. The Company’s Strategic
Investments non-financial assets associated with the Shale Gas Properties form a third CGU for the
purposes of impairment testing.
If an indicator of impairment or impairment reversal is identified for a particular asset or CGU, its
recoverable amount is estimated. If the carrying value of such asset or CGU exceeds its estimated
recoverable amount, an impairment charge is recognized. If the estimated recoverable amount of an
asset or CGU that was previously impaired exceeds its recoverable amount, impairment charges
recognized in prior periods are reversed to a maximum of the carrying value that would have been
determined, net of depletion and amortization, had no impairment charges been recognized for the CGU
in prior periods.
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 from the production of proved and probable reserves volumes
using forecast commodity prices and costs, 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.
Paramount Resources Ltd. 2016 Consolidated Financial Statements 57
(Tabular amounts stated in $ thousands, except as noted)
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 classified as joint operations. To account for these arrangements, Paramount
recognizes its proportionate share of the related revenues, expenses, assets and liabilities of such joint
operations.
Interests in joint ventures are accounted for using the equity method of accounting. The Company does
not currently have any interests in joint arrangements that are classified as joint ventures.
h) Equity-Accounted Investments
Investments in entities in which Paramount has significant influence are accounted for using the equity
method of investment accounting. 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 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 expensed 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
Paramount Resources Ltd. 2016 Consolidated Financial Statements 58
(Tabular amounts stated in $ thousands, except as noted)
lives. The present value of an asset retirement obligation is recognized in the Consolidated Balance
Sheet when incurred and a reasonable estimate of the cost of retirement 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. 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.
Revisions to the timing, anticipated cost, discount rate and inflation rate relating to the estimated liability
are accounted for prospectively by recording an adjustment to the asset retirement obligation liability, with
a corresponding adjustment to the carrying value of the related asset.
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
the reclamation of a property is fully completed.
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 one of 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
Paramount Resources Ltd. 2016 Consolidated Financial Statements 59
(Tabular amounts stated in $ thousands, except as noted)
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’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 net 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.
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 a 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 values based on equity issuances and other indications of value from time-to-
time (level two and level three fair value hierarchy estimates).
Long-term debt balances outstanding from time-to-time 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 Investments in Securities. Amounts
recorded in OCI each period are presented in the Consolidated Statement of Comprehensive Income
(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 Investment in Securities where its fair value
decreases below its carrying value, and the decline is considered to be significant or prolonged. A
subsequent increase in the fair value of an Investment in Securities is 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-
Paramount Resources Ltd. 2016 Consolidated Financial Statements 60
(Tabular amounts stated in $ thousands, except as noted)
recognized to the extent that estimated future taxable earnings are not sufficient to result in the asset
being recovered.
p) Flow-Through Shares
The proceeds of flow-through share issuances are allocated between the sale of Paramount’s class A
common shares ("Common Shares") and the sale of tax benefits associated with the flow-through feature
of the securities. Proceeds are first allocated to share capital based on the market price of Common
Shares on the date the offering is priced, with the excess of the issue price over the market price of
Common Shares being recorded in accounts payable and accrued liabilities. 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 its Board of Directors or Compensation Committee to
grant options to acquire Common Shares of the Company ("Paramount Options") to key employees and
directors. 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 aggregate grant date fair value of stock options awarded is recognized as share-based
compensation expense over the applicable vesting period on a straight line basis, 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 that option to Share
Capital.
Cavalier Stock Option Plan
Cavalier has a stock option plan that enables its Board of Directors to grant options to acquire common
shares of Cavalier ("Cavalier Options") to key employees and directors. 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
Paramount Resources Ltd. 2016 Consolidated Financial Statements 61
(Tabular amounts stated in $ thousands, except as noted)
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.
r) Net Income Per Share
Basic net income per share is calculated by dividing net income by the weighted average number of
Common Shares outstanding during the year. Diluted net income per share is calculated by adjusting the
weighted average number of Common Shares outstanding for potentially dilutive Common Shares related
to Paramount Options. 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 net income per
share.
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 assets, liabilities, 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, including assessments 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 petroleum and natural gas, which
requires the quantity and realizable value of such petroleum and natural gas 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 petroleum and natural gas, 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
petroleum and natural gas 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 establish the technical feasibility and
commercial viability of the discovery. When Management is making this assessment, changes to project
economics, expected quantities of petroleum and natural gas, expected production techniques, drilling
Paramount Resources Ltd. 2016 Consolidated Financial Statements 62
(Tabular amounts stated in $ thousands, except as noted)
results, estimated capital expenditures and production costs, results of other operators in the region and
access to infrastructure and potential infrastructure expansions are important factors. Where it is
determined that an exploratory project is not economically viable, the costs are written-off as E&E
expense.
Reserves Estimates
Reserves engineering is an inherently complex and subjective process of estimating underground
accumulations of petroleum and natural gas. The process relies on judgments based on the interpretation
of available geological, geophysical, engineering and production data. The accuracy of a reserves
estimate is a function of the quality and quantity of available data, the interpretation of that such 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, the results of subsequent drilling, testing and production and other factors 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 from time-to-time in impairment and impairment reversal assessments, all of
which could have a material impact on earnings.
Estimates of Recoverable Amounts
Estimates of recoverable amounts used in impairment and impairment reversal tests often incorporate
level three hierarchy inputs, including estimated volumes and future net revenues 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 cash
flows and the overall significance of individual properties. Changes in the assets comprising CGUs could
have an impact on estimated recoverable amounts used in impairment assessments and could have a
material impact on 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.
Paramount Resources Ltd. 2016 Consolidated Financial Statements 63
(Tabular amounts stated in $ thousands, except as noted)
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 publicly
traded.
Provisions
A provision is recognized where the Company has determined that it has a present obligation arising from
past events and the settlement of the obligation is expected to result in an outflow of economic benefits.
The determination of whether the Company has a present obligation arising from past events requires
Management to exercise judgement as to the facts and circumstances of the event and the extent of any
expected obligations of Paramount. Changes in facts and circumstances as a result of new information
and other developments may impact Management’s assessment of the Company’s obligations, if any, in
respect of such events. Changes in such estimates could have a material impact on assets, liabilities,
revenues, expenses, and earnings.
Asset Retirement Obligations
Estimates of asset retirement costs are based on assumptions regarding the methods, timing, economic
environment and regulatory standards that are expected to exist at the time assets are retired.
Management adjusts estimated amounts periodically as assumptions are updated 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 and estimates related to the application of tax law, the timing
of temporary difference reversals and the likelihood of realizing 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.
Paramount Resources Ltd. 2016 Consolidated Financial Statements 64
(Tabular amounts stated in $ thousands, except as noted)
3. Changes in Accounting Standards
There were no new or amended accounting standards adopted by the Company for the year ended
December 31, 2016.
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 is currently evaluating
the impact of the IFRS on its 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 is currently evaluating the impact of the IFRS on its
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 is currently evaluating the impact of the IFRS on its Consolidated Financial Statements.
4. Segmented Information
Paramount’s operations are grouped 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. 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 (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 bitumen interests held by Cavalier, and
prospective shale gas acreage in the Liard and Horn River Basins; and (iii) drilling rigs owned by Fox
Drilling.
Corporate: Corporate is comprised of income and expense items, including general and
administrative expense, share-based compensation expense and interest expense, which have not
been specifically allocated to Principal Properties or Strategic Investments.
Paramount Resources Ltd. 2016 Consolidated Financial Statements 65
(Tabular amounts stated in $ thousands, except as noted)
Year ended December 31, 2016
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 assets
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 income (loss)
Income tax expense
Net income
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 assets
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
Principal
Properties
246,617
253
246,870
Strategic
Investments
–
–
–
Corporate
–
–
–
Inter-segment
Eliminations
–
–
–
97,040
56,465
–
–
71,136
22,888
(1,380,136)
–
4,257
–
–
(1,128,350)
–
–
(277)
–
–
1,374,943
–
1,374,943
–
–
6,261
6,172
9,411
(94,959)
171
2,693
365
–
–
(69,886)
(14,316)
(11,235)
89
30,252
(11,669)
63,007
(14,492)
48,515
–
–
19,616
21,599
932
–
–
77,631
–
(43,727)
27,575
103,626
–
–
1,537
–
–
(102,089)
–
(102,089)
–
–
–
–
(5,064)
–
–
–
–
–
(5,064)
–
–
–
(30,029)
10,473
(14,492)
14,492
–
Principal
Properties
366,411
52,767
419,178
Strategic
Investments
–
–
–
Corporate
–
–
–
Inter-segment
Eliminations
–
–
–
90,043
65,724
–
–
622,581
47,130
9,159
–
5,448
–
–
840,085
–
–
2,726
–
–
(418,181)
–
(418,181)
–
–
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)
–
–
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
–
Total
246,617
253
246,870
97,040
56,465
25,877
27,771
76,415
(72,071)
(1,379,965)
80,324
4,622
(43,727)
27,575
(1,099,674)
(14,316)
(11,235)
1,349
223
(1,196)
1,321,369
–
1,321,369
(156,094)
1,165,275
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)
Paramount Resources Ltd. 2016 Consolidated Financial Statements 66
(Tabular amounts stated in $ thousands, except as noted)
For the year ended December 31, 2016, the Company had sales to three customers which exceeded ten
percent of total revenue. Such sales totaled $58.7 million, $48.2 million, and $37.8 million respectively.
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. Exploration and Evaluation
Year ended December 31
Balance, beginning of year
Additions
Change in asset retirement provision
Transfers to property, plant and equipment
Dry hole
Expired lease costs
Write-downs
Dispositions
Balance, end of year
2016
902,084
635,280
521,596
2,058,960
2015
2,200,981
411,694
168,360
2,781,035
2016
89
1,260
223
(1,196)
376
2015
–
2,905
1,089
(606)
3,388
2016
363,724
48,141
2,942
(23,700)
(13,811)
(6,194)
(2,969)
(66,603)
301,530
2015
567,420
93,411
2,550
(112,000)
(15,019)
(3,728)
(162,516)
(6,394)
363,724
Additions to E&E assets totaled $29.0 million (2015 – $60.4 million) for Principal Properties and $19.1
million (2015 – $33.0 million) for Strategic Investments.
Exploration and Evaluation Expense (Income)
Year ended December 31
Geological and geophysical
Dry hole
Expired lease costs
Write-down of exploration and evaluation assets and goodwill
Gain on sale of Cavalier Royalty
2016
4,115
13,811
6,194
2,969
(99,160)
(72,071)
2015
6,121
15,019
3,728
184,124
–
208,992
In 2016, Cavalier granted a royalty (the "Cavalier Royalty") on its oil sands properties (the "Oil Sands
Lands") to an unrelated third party for cash consideration of $100 million. A gain of $99.2 million was
recorded in respect of the sale of the Cavalier Royalty, which is included in exploration and evaluation
expense (income). The Cavalier Royalty is secured by a lien over the Oil Sands Lands.
Paramount Resources Ltd. 2016 Consolidated Financial Statements 67
(Tabular amounts stated in $ thousands, except as noted)
In 2015, the Company recorded aggregate impairment charges of $184.1 million 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
due to, among other factors, lower forecast future oil and natural gas prices, an increase in the cost of
obtaining capital to fund developments and limited activities in the Northwest Territories by MGM Energy
and its partners. Goodwill with a carrying value of $21.6 million recorded on the acquisition of MGM
Energy was also written off as a result of the de-recognition of the E&E assets.
6. Property, Plant and Equipment
Year ended December 31, 2016
Cost
Balance, December 31, 2015
Additions
Transfers from exploration and evaluation
Dispositions
Change in asset retirement provision
Cost, December 31, 2016
Accumulated depletion, depreciation and write-downs
Balance, December 31, 2015
Depletion and depreciation
Reversal of prior-years’ write-downs
Dispositions
Accumulated depletion, depreciation and write-downs,
December 31, 2016
Net book value, December 31, 2015
Net book value, December 31, 2016
Petroleum
and natural
gas assets
3,655,956
166,930
23,700
(1,873,123)
8,975
1,982,438
(1,741,988)
(203,706)
133,246
603,796
(1,208,652)
1,913,968
773,786
Drilling
rigs
155,107
1,330
–
–
–
156,437
(42,677)
(12,765)
–
–
(55,442)
112,430
100,995
Other
Total
29,166
2,761
–
(1,492)
–
30,435
(21,211)
(1,520)
–
239
(22,492)
7,955
7,943
3,840,229
171,021
23,700
(1,874,615)
8,975
2,169,310
(1,805,876)
(217,991)
133,246
604,035
(1,286,586)
2,034,353
882,724
Paramount Resources Ltd. 2016 Consolidated Financial Statements 68
(Tabular amounts stated in $ thousands, except as noted)
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
Petroleum
and natural
gas assets
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
Drilling
rigs
127,410
27,697
–
–
–
155,107
(38,722)
(3,955)
–
–
(42,677)
88,688
112,430
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
At December 31, 2016, $99.2 million (December 31, 2015 – $81.2 million) of capitalized costs related to
incomplete development wells and infrastructure projects were not subject to depletion or depreciation.
Additions to property, plant and equipment in 2016 were $166.9 million (2015 – $379.9 million) for
Principal Properties, $1.3 million (2015 – $27.8 million) for Strategic Investments and $2.8 million (2015 –
$1.3 million) for Corporate.
In April 2016, Paramount closed the sale of its natural gas processing facility and related midstream
assets at Musreau within the Principal Properties business segment for net cash proceeds of $560.3
million, resulting in the recognition of a gain on sale of $125.7 million.
In August 2016, Paramount sold the majority of its oil and gas properties in the Musreau/Kakwa area of
west central Alberta (the "Musreau Assets") to Seven Generations Energy Ltd. ("Seven Generations" or
the "Acquiror") for total consideration of approximately $2.1 billion (the "Musreau Disposition"), subject to
customary post-closing adjustments. The consideration received at closing was comprised of: (i) $496
million in cash; (ii) 33.5 million class A common shares of the Acquiror ("7Gen Shares") having a market
value of approximately $972 million based on the closing market price of the shares on the day prior to
closing; (iii) the assumption by the Acquiror of all US$450 million principal amount of the Company’s
senior unsecured notes due in 2023 (the "2023 Notes"); and (iv) certain oil and gas properties of the
Acquiror valued at approximately $6 million. In connection with the Musreau Disposition, the Acquiror also
assumed Paramount’s processing and transportation commitments relating to the Musreau Assets.
Goodwill with a carrying value of $3.1 million related to the sold properties was derecognized in
connection with the disposition. A gain on sale of approximately $1.2 billion was recorded in respect of
the Musreau Disposition within the Principal Properties business segment.
In 2016, Paramount received $861.1 million in aggregate net cash proceeds on the sale of 29.7 million of
the 7Gen Shares it received through the Musreau Disposition, recording a net loss of $0.8 million, which
was included in other income.
Paramount Resources Ltd. 2016 Consolidated Financial Statements 69
(Tabular amounts stated in $ thousands, except as noted)
In 2016, the Company sold certain non-core properties for aggregate proceeds of $26.6 million. 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.
Depletion and Depreciation
Year ended December 31
Depletion and depreciation
Write-down (reversal of prior year write-downs) of property, plant and equipment
Inter-segment eliminations
2016
216,087
(133,246)
(6,426)
76,415
2015
365,568
263,738
(5,417)
623,889
For the twelve months ended December 31, 2016, the Company recorded a $133.2 million reversal of
previously recorded impairment charges related to petroleum and natural gas assets in the Grande
Prairie CGU (the "De-Impairment Amount"). These properties are included within the Principal Properties
business segment. The impairment reversal resulted from an increase in the estimated recoverable
amount of the Grande Prairie CGU at December 31, 2016 compared to December 31, 2015. The $133.2
million De-Impairment Amount represents the amount required to increase the carrying value of the
Grande Prairie CGU to the amount that would have been determined, net of depletion and amortization,
had no impairment charges been recognized for the CGU in prior periods. The estimated recoverable
amount of the Grande Prairie CGU at December 31, 2016 exceeded the total of the carrying amount of
the CGU, including the recognition of the De-Impairment Amount.
The estimated recoverable amount of the Grande Prairie CGU was estimated based on expected after-
tax discounted future net cash flows from the production of proved and probable reserves. The increase
in the estimated recoverable amount was primarily due to an increase in development activities at Karr-
Gold Creek in the Grande Prairie CGU following the Musreau Disposition, recent well performance, well
results of other operators in the region, improved economic conditions and other factors.
The recoverable amount of the Grande Prairie CGU as at December 31, 2016 was estimated on a
FVLCS basis, using a discounted cash flow method, which is an approach commonly used by market
participants to value oil and gas properties (level 3 fair value hierarchy estimate). Cash flows were
projected over the expected remaining productive life of the reserves assigned to the CGU, at an after-tax
discount rate of 10 percent. Reserves estimates were prepared by Paramount’s independent qualified
reserves evaluator. The forecast prices used to determine the recoverable amount reflect the following
benchmark prices, adjusted for basis differentials to determine local reference prices, transportation costs
and quality:
(Average for the period)
Natural Gas
AECO ($/MMBtu)
Henry Hub (US$/MMBtu)
Crude Oil
Edmonton Light ($/Bbl)
WTI (US$/Bbl)
Foreign Exchange
$US / 1 $CDN
2017
2018
2019
2020
2021
2022-2031
Thereafter
3.40
3.40
3.15
3.20
3.30
3.35
3.60
3.65
3.90
4.00
3.95 – 4.85
4.05 – 4.85
69.80
55.00
72.70
58.70
75.50
62.40
81.10
69.00
86.60
75.80
88.30 – 105.50
77.30 – 92.40
+2%/yr
+2%/yr
+2%/yr
+2%/yr
0.75
0.78
0.80
0.83
0.85
0.85
0.85
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
Paramount Resources Ltd. 2016 Consolidated Financial Statements 70
(Tabular amounts stated in $ thousands, except as noted)
$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 estimated recoverable amounts. Recoverable amounts as at December 31, 2015 were
estimated on a FVLCS basis, using a discounted cash flow method based on expected net discounted
future cash flows from the production of proved and probable reserves (level 3 fair value hierarchy
estimate).
Following the write-down of the Southern CGU in 2015, the Company determined that the Southern CGU
no longer constituted a significant CGU and the Southern CGU petroleum and natural gas assets were
included in the Kaybob CGU.
7. Equity-Accounted Investments
As at December 31
Trilogy
Shares
(000’s)
19,144
2016
Carrying
Value
44,053
Market
Value (1)
144,540
Shares
(000’s)
19,144
2015
Carrying
Value
58,370
Market
Value (1)
70,068
(1)
Based on the period-end trading price (level one fair value hierarchy estimate).
Loss from equity-accounted investments is comprised of the following:
Year ended December 31
Equity loss
Dilution gain (loss)
Write-down of other equity-accounted investment
2016
(14,308)
(8)
–
(14,316)
2015
(22,676)
111
(453)
(23,018)
As at December 31, 2016, Paramount owned a 15 percent equity interest in Trilogy (December 31, 2015
– 15 percent). Trilogy is a 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 (1)
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
2015
45,550
1,217,088
(56,172)
(762,578)
443,888
15.2%
67,431
(9,061)
58,370
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, 2016 totaled $1,185,531 (2015 –
$1,220,942) and equity totaled $363,898 (2015 – $447,742).
2016
39,183
1,180,860
(65,921)
(794,895)
359,227
15.2%
54,537
(10,484)
44,053
(1)
Paramount Resources Ltd. 2016 Consolidated Financial Statements 71
(Tabular amounts stated in $ thousands, except as noted)
Year ended December 31
Revenue
Comprehensive loss (1)
Paramount’s share of Trilogy’s comprehensive loss
2016
182,464
(94,216)
(14,308)
2015
268,458
(142,369)
(21,620)
(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, 2016 was $93,401 (2015 – comprehensive loss $137,658).
Trilogy had 6.3 million stock options outstanding (2.4 million exercisable) at December 31, 2016 at
exercise prices ranging from $4.49 to $26.87 per share.
Paramount’s share of the income or loss from its other investees for the year ended December 31, 2016
was $nil (2015 – net loss of $1.1 million).
8. Investments in Securities
As at December 31
MEG Energy Corp.
Privateco
Other (1)
2016
Shares
(000’s)
3,700
Market
Value
34,151
18,675
11,367
64,193
2015
Shares
(000’s)
3,700
Market
Value
29,674
18,675
12,365
60,714
(1)
Includes investments in Marquee Energy Ltd., RMP Energy Inc., Strategic Oil & Gas Ltd., and other public corporations.
For the year ended December 31, 2016 aggregate unrealized losses of $11.2 million related to the
Company’s investments in MEG Energy Corp., Marquee Energy Ltd., RMP Energy Inc., 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. 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 Energy Ltd.,
Strategic Oil & Gas Ltd. and other securities previously recorded in OCI were charged to net earnings.
9. Limited-Recourse Demand Facilities
As at December 31
Fox Drilling Facility
Cavalier Facility
2016
–
–
–
2015
63,380
37,531
100,911
In June 2016, the Cavalier Facility was repaid and cancelled. The effective interest rate on the Cavalier
Facility for the year ended December 31, 2016 was 3.6 percent (2015 – 3.4 percent). In September 2016,
the Fox Drilling Facility was repaid and cancelled. The effective interest rate on the Fox Drilling Facility for
the year ended December 31, 2016 was 4.0 percent (2015 – 4.0 percent).
Paramount Resources Ltd. 2016 Consolidated Financial Statements 72
(Tabular amounts stated in $ thousands, except as noted)
10. Long-Term Debt
As at December 31
Bank credit facility
7⅝% Senior Notes due 2019
6⅞% US Senior Notes due 2023
Unamortized financing costs, net of premiums and discounts
Bank Credit Facility
2016
–
–
–
–
–
2015
693,045
450,000
622,800
1,765,845
(15,619)
1,750,226
The Company has a $100 million revolving bank credit facility (the "Facility"). Borrowings under the
Facility bear interest at 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 Facility is secured by a first fixed and floating charge over
substantially all of the assets of Paramount, excluding the assets of Fox Drilling and Cavalier.
The borrowing base governs the maximum amount which can be drawn on the Facility. The borrowing
base is subject to review and re-determination on a semi-annual basis and more frequently in certain
other circumstances. The borrowing base amount is based on the Company’s reserves, lenders’
projections of future commodity prices and the value attributed to Paramount’s equity investments and
other assets, among other factors.
The current revolving period of the Facility ends on April 28, 2017. In the event the revolving period is not
extended, any undrawn availability would be cancelled and any amounts then outstanding would be
permitted to remain outstanding on a non-revolving basis until April 28, 2018, the current maturity date of
the Facility.
At December 31, 2016, no amounts were drawn on the Facility. Paramount had undrawn letters of credit
outstanding totaling $20.4 million at December 31, 2016 that reduce the amount available to be drawn
under the Facility.
Senior Notes
In 2016, the Company redeemed all $450 million aggregate principal amount of 7⅝ percent senior
unsecured notes due 2019 (the "2019 Notes"). The Company was discharged and released from all
obligations and covenants under the 2019 Notes indenture and the 2019 Notes.
In connection with the Musreau Disposition, the Acquiror assumed all US$450 million aggregate principal
amount of Paramount’s 2023 Notes in August 2016 and the Company was discharged and released from
all obligations and covenants under the 2023 Notes indenture and the 2023 Notes.
Debt extinguishment expense for the year ended December 31, 2016 includes aggregate redemption
premiums totaling $13.5 million in respect of the 2019 Notes and $13.9 million of unamortized financing
fees related to the senior unsecured notes.
Paramount Resources Ltd. 2016 Consolidated Financial Statements 73
(Tabular amounts stated in $ thousands, except as noted)
11. Asset Retirement Obligations
Year ended December 31
Asset retirement obligations, beginning of year
Retirement obligations incurred
Revisions to estimated retirement costs
Obligations settled
Dispositions
Assumed on corporate acquisition
Accretion expense
Asset retirement obligations, end of year
2016
273,580
6,616
5,301
(1,753)
(76,057)
–
4,622
212,309
2015
287,415
5,010
(18,791)
(6,641)
(119)
1,011
5,695
273,580
At December 31, 2016, the estimated undiscounted asset retirement obligations were $212.3 million
(December 31, 2015 - $273.6 million), which have been discounted using a weighted average risk-free
rate of 2.00 percent (December 31, 2015 – 2.00 percent) and an inflation rate of 2.00 percent (December
31, 2015 – 2.00 percent). These obligations will be settled over the useful lives of the assets, which
extend up to 40 years.
12. 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, 2016,
105,784,070 (December 31, 2015 – 106,212,487) Common Shares were outstanding, net of 2,865
(December 31, 2015 – 21,508) Common Shares held in trust under the SIP, and no preferred shares
were outstanding.
Paramount implemented a normal course issuer bid ("NCIB") on October 13, 2016. The NCIB will
terminate on the earlier of: (i) October 12, 2017; and (ii) the date on which the maximum number of
Common Shares that can be acquired pursuant to the NCIB are purchased. Paramount may purchase up
to 5,441,602 Common Shares under the NCIB. Any Common Shares purchased pursuant to the NCIB
will be cancelled by the Company. To December 31, 2016, the Company has purchased and cancelled
622,900 Common Shares under the NCIB at a total cost of $9.7 million.
In December 2016, the Company’s board of directors declared a dividend of 3.8 million 7Gen Shares to
holders of record of Paramount’s Common Shares on January 9, 2017 (the "January 2017 Dividend"),
resulting in an entitlement of approximately 0.036 of a 7Gen Share for each Common Share, subject to
rounding for fractions. As a result, a dividend payable of $119.0 million ($1.12 per Common Share) was
recorded as at December 31, 2016, and the Company’s investment in the 3.8 million 7Gen Shares was
reclassified to current assets. The dividend was paid on January 16, 2017.
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. The Company incurred $1.0 million of transaction
costs in respect of the transaction, net of tax benefits of $0.4 million. Paramount has incurred sufficient
qualifying expenditures to satisfy commitments related to the issuance.
Paramount Resources Ltd. 2016 Consolidated Financial Statements 74
(Tabular amounts stated in $ thousands, except as noted)
Weighted Average Common Shares
Year ended December 31
2016
2015
Net income (loss) – basic
Dilutive effect of Paramount Options
Net income (loss) – diluted
Wtd. Avg
Shares
(000’s)
106,157
235
106,392
Net income
1,165,275
–
1,165,275
Wtd. Avg
Shares
(000’s)
105,801
–
105,801
Net loss
(901,301)
–
(901,301)
Outstanding Paramount Options can be exchanged for the Company’s Common Shares in accordance
with the terms of the stock option plan. As a result, they are potentially dilutive and are included in
Paramount’s diluted per share calculations when they are dilutive to net income. The Company had 4.3
million Paramount Options outstanding at December 31, 2016 (December 31, 2015 – 7.2 million). For the
year ended December 31, 2016, 2.3 million (2015 – 7.2 million) Paramount Options were anti-dilutive.
13. Reserves
Reserves at December 31, 2016 include unrealized gains and losses related to changes in the market
value of 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, 2016
Balance, beginning of year
Other comprehensive income
Share-based compensation
Options exercised
Balance, end of year
Year ended December 31, 2015
Balance, beginning of year
Other comprehensive income
Share-based compensation
Options exercised
Balance, end of year
Unrealized
gains
on securities
8,637
23,087
–
–
31,724
Contributed
surplus
90,700
–
25,674
(599)
115,775
Unrealized
gains (losses)
on securities
(29,688)
38,325
–
–
8,637
Contributed
surplus
75,860
–
23,214
(8,374)
90,700
Total
reserves
99,337
23,087
25,674
(599)
147,499
Total
reserves
46,172
38,325
23,214
(8,374)
99,337
Paramount Resources Ltd. 2016 Consolidated Financial Statements 75
(Tabular amounts stated in $ thousands, except as noted)
14. Share-Based Compensation
Paramount Options
Changes in outstanding Paramount Options are as follows:
2016
2015
Weighted
average
exercise
price
($/share)
34.66
12.74
8.34
35.41
21.05
29.83
13.00
8.26
Number
7,238,650
4,565,100
(175,840)
(6,227,300)
(148,040)
(930,450)
4,322,120
811,740
Number
7,275,850
694,000
(435,950)
–
(291,000)
(4,250)
7,238,650
3,991,050
Weighted
average
exercise
price
($/share)
33.75
33.43
13.69
–
40.52
25.85
34.66
34.85
Balance, beginning of year
Granted
Exercised (1)
Cancelled
Forfeited
Expired
Balance, end of year
Options exercisable, end of year
(1)
For Paramount Options exercised in 2016, the weighted average market price of Paramount’s Common Shares on the dates exercised was $16.41 (2015 –
$33.95).
Share-based compensation expense for the year ended December 31, 2016 includes $13.8 million
related to Paramount Options cancelled in the year.
The weighted average remaining contractual life and exercise prices of Paramount Options outstanding
as of December 31, 2016 are as follows:
Exercise Prices
$8.17
$8.18 - $18.23
Awards Outstanding
Remaining
contractual
life
(years)
3.3
5.3
4.3
Number
2,200,120
2,122,000
4,322,120
Weighted
average
exercise
price
8.17
18.01
13.00
Paramount Resources Ltd. 2016 Consolidated Financial Statements 76
(Tabular amounts stated in $ thousands, except as noted)
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)
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
2016
12.74
53.9
3.7
6.1
0.7
nil
4.79
Options
awarded in
2015
33.43
41.9
2.1
3.7
0.6
nil
8.02
The estimated expected life of Paramount Options is based on historical exercise patterns. Volatility is
generally estimated based on the historical volatility of the trading price of the Company’s Common
Shares over the most recent period that is commensurate with the expected term of the option, and may
be normalized for significant transactions and other factors.
Cavalier Options
During 2016, 0.5 million Cavalier Options were forfeited and 5.0 million Cavalier Options were cancelled.
Share-based compensation expense for the year ended December 31, 2016 includes $0.5 million related
to the cancelled Cavalier Options. In the first quarter of 2017, 5.0 million new Cavalier Options were
granted.
During 2015, no Cavalier Options were granted and a total of 0.4 million Cavalier Options were forfeited
during the year, resulting in a net balance of 5.5 million Cavalier Options outstanding at December 31,
2015.
Stock Incentive Plan – Shares Held in Trust
2016
2015
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
Shares
(000’s)
22
–
(19)
3
135
–
(126)
9
Shares
(000’s)
54
9
(41)
22
2016
25,674
2,097
27,771
18,015
45,786
508
316
(689)
135
2015
22,669
(2,165)
20,504
16,366
36,870
Paramount Resources Ltd. 2016 Consolidated Financial Statements 77
(Tabular amounts stated in $ thousands, except as noted)
15. Income Tax
The following table reconciles income taxes calculated at the Canadian statutory rate to Paramount’s
recorded income tax expense (recovery):
Year ended December 31
Income (loss) before tax
Effective Canadian statutory income tax rate
Expected income tax expense (recovery)
Effect on income taxes of:
Statutory and other rate differences
Gain on sale of oil and gas assets
Loss from equity-accounted investments
Write-down of Investments in Securities
Change in unrecognized deferred income tax asset
Goodwill impairment
Flow-through share renunciations
Share-based compensation
Foreign exchange on 2023 Notes
Non-deductible items and other
Income tax expense (recovery)
2016
1,321,369
27.0%
356,770
703
(11,610)
3,865
3,034
(186,657)
–
1,472
6,932
(13,995)
(4,420)
156,094
2015
(913,799)
26.0%
(237,588)
(20,710)
–
5,985
21,273
194,169
5,620
2,156
5,894
15,812
(5,109)
(12,498)
The following table summarizes the temporary differences that give rise to the deferred income tax asset
(liability):
As at December 31
Property, plant and equipment
Investments
Asset retirement obligations
Non-capital losses
Other
Deferred income tax asset (liability)
2016
(241,779)
(2,673)
56,837
177,474
4,016
(6,125)
2015
(138,790)
(1,397)
73,855
228,460
(7,305)
154,823
The following table summarizes movements of the deferred income tax asset (liability) during the year:
Year ended December 31
Deferred income tax asset, beginning of year
Deferred income tax recovery (expense)
Deferred income tax expense included in other comprehensive income
Flow-through share renunciations
Other
Deferred income tax asset (liability), end of year
2016
154,823
(156,094)
(1,276)
(4,065)
487
(6,125)
2015
152,487
12,509
(1,314)
(6,582)
(2,277)
154,823
As of December 31, 2016, Paramount has $658.0 million (2015 – $1,565.6 million) of unused non-capital
losses that expire between 2032 and 2035. The Company has $311.0 million (2015 – $307.1 million) of
deductible temporary differences in respect of investments for which no deferred income tax asset has
been recorded.
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
Paramount Resources Ltd. 2016 Consolidated Financial Statements 78
(Tabular amounts stated in $ thousands, except as noted)
tax asset was not probable of realization, and accordingly, a de-recognition of $194.2 million of the
deferred income tax asset 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.
16. Financial Instruments and Risk Management
Financial Instruments
Financial instruments at December 31, 2016 consisted of cash and cash equivalents, accounts
receivable, Investments in Securities, accounts payable and accrued liabilities, and risk management
liabilities.
Risk Management
The Company had the following financial commodity contracts in place as at December 31, 2016:
Instruments
Gas – NYMEX Swaps (Sale)
Gas – NYMEX Swap (Purchase)
Oil – NYMEX WTI Swaps (Sale)
Oil – NYMEX WTI Swap (Sale)
Aggregate
notional
40,000 MMBtu/d
10,000 MMBtu/d
2,000 Bbl/d
1,000 Bbl/d
Average fixed
price
US$3.44/MMBtu
US$3.04/MMBtu
CDN$70.43/Bbl
US$54.50/Bbl
Fair Value
Remaining term
(3,497) January 2017 – December 2017
2,897
January 2017 – December 2017
(3,679) January 2017 – December 2017
(901) January 2017 – December 2017
(5,180)
In February 2017, the Company entered into the following financial commodity contracts:
Instruments
Gas – NYMEX Swaps (Purchase)
Aggregate
notional
30,000 MMBtu/d
Average fixed price
US$3.16/MMBtu
Remaining term
March 2017 – December 2017
Paramount Resources Ltd. 2016 Consolidated Financial Statements 79
(Tabular amounts stated in $ thousands, except as noted)
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)
Fair value, end of year
2016
40,207
253
(45,640)
(5,180)
2015
–
55,215
(15,008)
40,207
The gain on commodity contracts for the year ended December 31, 2015 includes $2.5 million related to
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.
Commodity Price Risk
Paramount uses financial commodity 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, 2016, assuming all other variables are held constant, the following table presents the
impact of changes in commodity prices on Paramount’s net earnings due to changes in the fair value of
financial commodity contracts:
Natural Gas Contracts
US$0.25/MMBtu
increase
(2,738)
US$0.25/MMBtu
decrease
2,738
Crude Oil Contracts
US$5.00/Bbl
increase
(6,100)
US$5.00/Bbl
decrease
6,100
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
risk management assets and liabilities.
Sales prices for natural gas, crude oil and natural gas liquids and the value of financial commodity
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.
Equity Price Risk
Paramount is exposed to equity price risk associated with changes in the market value of its investments.
Paramount Resources Ltd. 2016 Consolidated Financial Statements 80
(Tabular amounts stated in $ thousands, except as noted)
Credit Risk
Paramount is exposed to credit risk on its financial instruments where a financial loss would be
experienced if a counterparty to a financial asset failed to meet its obligations. The Company manages
credit risk by endeavoring to enter into contracts with counterparties that possess high credit ratings,
employing net settlement agreements, employing letters of credit and limiting available credit when
necessary. The maximum credit risk exposure at December 31, 2016 is limited to the carrying value of
cash and cash equivalents and accounts receivable.
Paramount’s primary objectives with respect to cash and cash equivalents are to minimize financial risk
and maintain high liquidity. The Company’s cash and cash equivalents are deposited with financial
institutions with investment grade credit ratings and are highly liquid. 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, 2016, Paramount had had balances due from one joint venture partner that
represented approximately 12 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, cash and cash
equivalents, and if required, credit facilities, the sale of assets and capital market transactions.
Accounts Payable and Accrued Liabilities
As at December 31
Trade and accrued payables
Joint operation and other payables
Interest payable and financing costs
Flow-through share renunciation obligations
2016
80,869
481
235
–
81,585
2015
97,883
3,138
2,538
4,065
107,624
Trade and accrued payables and joint operation and other payables are non-interest bearing and are
normally settled within 30 to 60 days.
Accounts Receivable
As at December 31
Revenue receivable
Joint operation receivable and other
2016
11,586
12,309
23,895
2015
35,528
13,202
48,730
Revenue receivable and 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, 2016.
Paramount Resources Ltd. 2016 Consolidated Financial Statements 81
(Tabular amounts stated in $ thousands, except as noted)
17. 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 assets
Accretion of asset retirement obligations
Foreign exchange
Loss from equity-accounted investments
Write-down of Investments in Securities
Deferred income tax
Other
Supplemental Cash Flow Information
Year ended December 31
Interest paid
Current tax refunded
Components of cash and cash equivalents
As at December 31
Cash
Cash equivalents
18. Capital Structure
2016
45,387
27,771
76,415
(76,186)
(1,379,965)
4,622
(43,154)
14,316
11,235
156,094
2,178
(1,161,287)
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
2016
71,070
–
2015
107,839
(10)
2016
76,575
545,297
621,872
2015
11,941
–
11,941
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, altering debt levels, modifying capital spending programs,
acquiring or disposing of assets, and participating in joint ventures, the availability of any such means
being dependent upon market conditions.
Paramount Resources Ltd. 2016 Consolidated Financial Statements 82
(Tabular amounts stated in $ thousands, except as noted)
Paramount’s capital structure consists of the following:
Net Cash (Debt)
As at December 31
Adjusted working capital surplus (deficit) (1)
Limited-recourse demand facilities
Facility
Senior notes (2)
Net cash (debt)
2016
565,897
–
–
–
565,897
2015
(37,839)
(100,911)
(693,045)
(1,072,800)
(1,904,595)
(1)
(2)
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, 2016 - nil, December 31, 2015 - $4.1 million), risk management assets and liabilities, and limited-recourse demand
facilities.
Excludes unamortized issue premiums and financing costs.
Shareholders’ Equity
As at December 31
Share capital
Accumulated deficit
Reserves
Total shareholders’ equity
19. Related Party Transactions
Service Agreements
2016
1,639,466
(152,182)
147,499
1,634,783
2015
1,646,984
(1,197,627)
99,337
548,694
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 2016, Paramount charged $0.4 million (2015 – $0.5 million) to Trilogy in respect of operational and
administrative services. Paramount charged $4.2 million (2015 – $3.4 million) to Trilogy and was charged
$8.6 million (2015 – $2.6 million) by Trilogy in respect of joint operations. As of December 31, 2016,
Paramount had a net receivable balance due from Trilogy of $0.2 million (2015 – net payable of $0.2
million).
Compensation of Key Management Personnel
Year ended December 31
Salaries and benefits
Share-based compensation
2016
3,038
9,018
12,056
2015
1,339
9,913
11,252
Paramount Resources Ltd. 2016 Consolidated Financial Statements 83
(Tabular amounts stated in $ thousands, except as noted)
20. Commitments and Contingencies
Paramount had the following commitments as at December 31, 2016:
Within one
year
After one year but
not more than five
years
More than
five years
Petroleum and natural gas transportation and processing
commitments (1)
Operating leases and other
229,248
1,250
230,498
Certain of the transportation and processing commitments are secured by outstanding letters of credit totaling $5.1 million at December 31, 2016 (2015 – $104.6
million).
192,863
9,242
202,105
39,918
8,886
48,804
(1)
Operating Lease Commitment
Paramount’s head office lease expires in 2022. The Company incurred office lease costs of $3.7 million
in 2016 (2015 – $3.7 million).
Contingencies
In the normal course of Paramount’s operations, the Company may become involved in, named as a
party to, or be the subject of, various legal proceedings, including regulatory proceedings, tax
proceedings and legal actions. The outcome of outstanding, pending or future proceedings cannot be
predicted with certainty. Paramount does not anticipate that these claims will have a material impact on
its financial position.
In 2016, a release occurred from a non-operated pipeline in which the Company owns a 50 percent
interest. The operator, and owner of the remaining 50 percent, has initiated response, containment and
remediation activities ("Response Activities"). Total costs to complete the Response Activities are
estimated at approximately $45 million. It is Paramount’s assessment that it is not responsible for the
costs of the Response Activities and as a result, no provision has been recorded in the Consolidated
Financial Statements.
Tax and royalty legislation and regulations, and government interpretation and administration thereof,
continually changes. As a result, there are often tax and royalty matters under review by relevant
government authorities. All tax and royalty filings are subject to subsequent government audit and
potential reassessments. Accordingly, the final liability may differ materially from amounts estimated and
recorded.
Paramount Resources Ltd. 2016 Consolidated Financial Statements 84
CORPORATE INFORMATION
OFFICERS
DIRECTORS
CORPORATE OFFICE
C. H. Riddell
Executive Chairman
J. H. T. Riddell
President and
Chief Executive Officer
B. K. Lee
Chief Financial 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
M. Ockenden
V.P. Corporate Planning
P. G. Tahmazian
V.P. Midstream
E. M. Shier
General Counsel and
Corporate Secretary,
Manager Land
L. A. Friesen
Assistant Corporate Secretary
C. H. Riddell
Executive Chairman
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)
Chief Operating Officer
Founders Advantage Capital Corp.
Calgary, Alberta
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
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
4700 Bankers Hall West
888 Third Street S.W.
Calgary, Alberta
Canada T2P 5C5
Telephone: (403) 290-3600
www.paramountres.com
REGISTRAR AND
TRANSFER AGENT
Computershare Trust
Company of Canada
Calgary, Alberta
Toronto, Ontario
BANK
Bank of Montreal
Calgary, Alberta
CONSULTING ENGINEERS
McDaniel & Associates
Consultants Ltd.
Calgary, Alberta
AUDITORS
Ernst & Young LLP
Calgary, Alberta
STOCK EXCHANGE LISTING
The Toronto Stock Exchange
("POU")
Paramount Resources Ltd. Corporate Information 85