Paramount Resources Ltd.
Annual Report 2017

Plain-text annual report

President & Chief Executive Officer’s Message 2017 Highlights 2017 Overview Review of Operations Management’s Discussion & Analysis Financial Statements Corporate Information 1 4 6 8 22 52 88 ANNUAL MEETING OF SHAREHOLDERS Shareholders are cordially invited to attend the Annual Meeting of Shareholders to be held Wednesday, May 9, 2018 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, 2017 contained herein which also includes supplemental advisories related to additional information included in this document.  PRESIDENT AND CHIEF EXECUTIVE OFFICER’S MESSAGE To our Shareholders, To say the last two years have been transformational for Paramount would be an understatement. After spending the majority of 2016 downsizing the Company to reduce overall financial leverage, Paramount achieved our goal of being in a very strong financial position when the down cycle in the Canadian energy sector presented attractive investment opportunities. At the beginning of 2017, Paramount had a balance sheet of over $600 million of cash on hand, had no debt outstanding, returned about $100 million to our Shareholders through a dividend-in- kind of 3.8 million shares of Seven Generations Energy Ltd. and were well on our way to replacing virtually all the production we sold by aggressively developing the Karr resource play in the Grande Prairie Region. The Company continued to harvest lower ranking assets in our portfolio in 2017, completing the sale of the Valhalla property for an additional $150 million in the second quarter. Paramount evaluated numerous opportunities with the mindset that the Company had worked hard to build a substantial war chest of cash and, should we be successful in acquiring additional assets, we would have to be extremely happy with the value proposition of the deal. Early in 2017, Paramount was able to identify an exclusive and unique opportunity to evaluate and potentially acquire all of Apache Canada Ltd. The Company diligently evaluated all of Apache Canada’s assets and ultimately negotiated a transaction value in early April to purchase the entire corporate entity, excluding the Weyburn/Midale assets in Saskatchewan, the House Mountain and the Provost assets in Alberta, which were sold by Apache Canada prior to the closing of Paramount’s acquisition. When it became probable that the Company would complete the acquisition of Apache Canada, Paramount recognized the immense synergies which could result by also merging Trilogy Energy Corp. with Paramount at the same time. We worked quickly and diligently to satisfy the regulatory requirements related to this unique transaction and were able to announce both transactions concurrently on July 6, 2017. These two transactions collectively added over 60,000 Boe/d of production at a cost of $487 million in cash, 28.5 million common shares of Paramount issued to Trilogy shareholders and the assumption of Trilogy’s outstanding debt of approximately $465 million. Since the closing of the transactions in the third quarter of 2017, Paramount has been hard at work consolidating all three entities into one. We have taken the approach of building the consolidated Company from the ground up, choosing the best people, processes and platforms Paramount Resources Ltd. 2017 President and Chief Executive Officer’s Message 1 for each of the functions required throughout the organization with the goal of building a robust, efficient structure that will succeed in the challenging and complex modern energy industry. The integration process has been challenging and stressful at times for everyone, but I am proud to say Paramount’s people have risen to the challenge and have navigated the process in an extremely professional and capable manner. The best way for me to describe what Paramount is today is to quote the key operating statistics from the fourth quarter of 2017, which is the first reporting period of the results of the consolidated Company. Production reached a record level of over 95,000 Boe/d, comprised of 37 percent liquids and 63 percent natural gas. Cash flow from operations for the quarter was $110 million, per-unit netbacks were $14.99 per Boe and operating costs were $9.81 per Boe. Net debt at year- end, after the acquisition of Apache Canada, the assumption of Trilogy’s debt and completing the remaining capital programs for all three entities, was $636 million. Paramount’s year-end reserves, as prepared by independent reserve engineers, including the reserves acquired in the transactions, were 376 MMBoe on a proved basis, valued at $2.5 billion (discounted at 10% before tax), and 593 MMBoe on a proved plus probable basis, valued at $4.4 billion (discounted at 10% before tax). One of Paramount’s key achievements during 2017 was the execution of our development program at Karr. Paramount has moved to the forefront of the industry in applying leading technologies in our well designs and executing our drilling and completion programs. During 2017, the Company completed the 27 well program at Karr and commissioned a plant expansion from 40 MMcf/d to 80 MMcf/d. Paramount extended well designs to include 3,000 meter laterals, increased frac stage counts to approximately 75 stages per well, and increased proppant intensities to up to 2.3 tonnes per meter. This resulted in exceptional well performance, with peak 30 day production averaging approximately 2,000 Boe/d per well, including peak 30 day condensate rates of approximately 1,200 Bbl/d and condensate to gas ratios of approximately 250 Bbl/MMcf. These well results represent some of the very best wells in all of North America. Paramount is continuing to enhance our understanding of subsurface reservoir characteristics, evolve our frac designs and optimize cost structures to further enhance well economics. Paramount has also added materially to our portfolio of high-quality development opportunities. The Company previously shared our near-term development strategy to develop our focus assets, including increasing production at the Karr asset to approximately 45,000 Boe/d, bring new production on in 2019 at the newly acquired Wapiti asset and grow it to about 40,000 Boe/d, expand the Kaybob Montney oil pool to around 14,000 Boe/d of production and develop the Kaybob Duvernay projects at Smoky and Kaybob South to produce about 44,000 Boe/d. Our goal for these focus assets is to build a multi-decade production base of approximately 140,000 Boe/d, including 60,000 Bbl/d of high-value light oil and condensate. All these focus assets share the common characteristics of low-risk repeatable and predictable resource development, high liquids content, and very attractive rates of return with payouts generally less than 18 months under current commodity prices. Paramount also has numerous additional early-stage resource plays which will continue to be evaluated for future growth opportunities. The growth in production from the development of the focus assets, combined with the existing production base is expected to result in the doubling of Paramount’s current production volumes, Paramount Resources Ltd. 2017 President and Chief Executive Officer’s Message 2and more importantly, significantly improve per-unit netbacks as higher value liquids-rich production from the focus assets replaces lower netback legacy production. Paramount estimates that this combination of improving per-unit netbacks and increased production volumes would see corporate cash flows triple from current levels under current commodity prices. Paramount has been focused on the variables that are within our control. Significant improvements have been achieved despite numerous macro-economic issues within the Canadian energy industry. The industry has been plagued by capacity constraints which restrict our ability to move oil and natural gas to markets as a result of regulatory paralysis that has delayed infrastructure expansions. Continual delays in obtaining approvals for additional infrastructure has resulted in Canadian producers incurring significant additional costs to move products by less efficient means and being subject to price discounts due to a limited number of buyers that can access our products. Our industry continues to be saddled with additional costs and complexities in accessing world-wide markets, which only serves to reduce our international competitiveness. Canada, and Alberta in particular, deserves better, stronger leadership to support its most important industry, which by any measure is the energy industry. Paramount has provided our Shareholders with 2018 guidance of 100,000 Boe/d of production, including 40 percent liquids and operating costs of $10.00 per Boe. Capital spending is budgeted to be $600 million. Divestures of $150 million to $200 million are expected to be completed, which would result in cash generated from operations and divestitures exceeding capital spending. This is expected to be achieved despite allocating approximately a third of our 2018 capital to projects which will not generate new production and cash flows until 2019. To protect the Company’s cash flows and in support of its 2018 capital program, Paramount has entered into commodity hedges for 17,000 Bbl/d of liquids for the remainder of 2018 at an average price of C$71.61/Bbl and 10,000 Bbl/d of liquids for calendar 2019 at an average price of C$73.86/Bbl at the time of writing. Financial flexibility remains a key focus for the Company. Paramount will continue to evaluate business development opportunities as they may arise, in keeping with our investment criteria and maintaining our strong balance sheet. In closing, I would like to thank all of our stakeholders, and in particular our employees, for their contributions and commitment through the last several years. These efforts have allowed us to transform Paramount into what it is today. James H. T. Riddell President and Chief Executive Officer March 2018 Paramount Resources Ltd. 2017 President and Chief Executive Officer’s Message 3 2017 HIGHLIGHTS FINANCIAL AND OPERATING HIGHLIGHTS (1) ($ millions, except as noted) Three months ended December 31 Twelve months ended December 31 2017 2016 % Change 2017 2016 % Change Sales volumes Natural gas (MMcf/d) Condensate and oil (Bbl/d) Other NGLs (Bbl/d) (2) Total (Boe/d) 359.9 26,285 9,149 95,412 47.5 2,943 1,046 11,901 Petroleum and natural gas sales 258.9 32.3 Netback ($/Boe) Adjusted funds flow per share – diluted ($/share) Net income (loss) per share – diluted ($/share) 131.7 14.99 110.1 0.82 (106.2) (0.79) 17.0 15.53 14.3 0.13 212.4 1.99 658 793 775 702 702 675 (3) 670 531 (150) (140) 161.3 13,956 4,138 44,970 104.8 7,733 6,668 31,860 491.4 248.8 249.9 15.22 218.7 1.89 183.4 1.58 93.1 7.99 35.7 0.34 1,165.3 10.95 54 80 (38) 41 98 168 90 513 456 (84) (86) Exploration and Development Capital (3) 150.4 78.1 93 527.6 187.5 181 Investments in other entities – market value (4)(5) Total assets Net debt (cash) Common shares outstanding (thousands) (1) 53.3 5,090.7 636.2 135,059 208.7 2,059.0 (565.9) 105,787 (74) 147 NM 28 Readers are referred to the advisories concerning Non-GAAP Measures and Oil and Gas Measures and Definitions in the Advisories section of this document. This table contains the following non-GAAP measures: Netback, Adjusted funds flow, Exploration and Development Capital, Investments in other entities – market value and Net debt (cash). (2) Other NGLs includes ethane, propane and butane. (3) (4) (5) Excludes land and property acquisitions and spending related to corporate assets. 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 $119.0 million as at December 31, 2016. These shares were distributed to Paramount’s shareholders by way of dividend in January 2017. NM Not meaningful Paramount Resources Ltd. 2017 Highlights 4 RESERVES (1)(2)(3) Natural gas (Bcf) NGLs (MBbl) Light and Medium crude oil (MBbl) Total (MBoe) Proved Proved plus Probable 2017 2016 % Change 2017 2016 % Change 1,398.7 119,134 23,570 375,824 238.0 19,100 882 59,645 488 524 NM 530 2,171.3 196,883 34,714 593,473 463.3 36,736 1,219 115,173 369 436 NM 415 Future Net Revenue NPV10 ($ millions) 2,464 424 481 4,353 810 437 (1) (2) (3) Readers are referred to the advisories concerning Non-GAAP Measures and 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, 2017 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. 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. NM Not meaningful Paramount Resources Ltd. 2017 Highlights 5 2017 OVERVIEW OIL AND GAS OPERATIONS • Paramount exited 2017 with fourth quarter sales volumes averaging 95,412 Boe/d compared to sales volumes of 11,901 Boe/d in the fourth quarter of 2016. Full year sales volumes averaged 44,970 Boe/d in 2017. • Paramount’s sales volumes, excluding sales volumes from properties acquired or sold in the year, more than doubled to approximately 22,500 Boe/d in 2017 compared to about 10,000 Boe/d in 2016. Fourth quarter sales volumes for these properties increased to approximately 34,100 Boe/d in 2017 compared to about 10,000 Boe/d in the fourth quarter of 2016. • Adjusted funds flow was $218.7 million ($13.33 per Boe) in 2017 compared to $35.7 million ($3.06 per Boe) in 2016. Liquids revenue was $353.9 million, 72 percent of total revenue. • Fourth quarter adjusted funds flow was $110.1 million in 2017 compared to $14.3 million in 2016. • Operating costs in the fourth quarter of 2017 were $9.81 per Boe, with transportation costs of $2.77 per Boe and royalties of $1.92 per Boe. • • • In the Grande Prairie region, 26 new wells from the 2016/2017 Karr capital program averaged 1,970 Boe/d (59 percent liquids) over their initial 30-day peak production periods. Grande Prairie sales volumes averaged 31,791 Boe/d in the fourth quarter of 2017. In the Kaybob region, six (3.1 net) new Duvernay wells completed with higher intensity fracs averaged 1,346 Boe/d (47 percent liquids) per-well over their initial 90-day production periods. Kaybob sales volumes averaged 41,531 Boe/d in the fourth quarter. In the Central Alberta and Other region, 9 (4.5 net) wells were drilled at Birch in 2017, four of which were producing by year-end. Sales volumes averaged 22,090 Boe/d in the fourth quarter in the Central Alberta and Other region. • The Company is restarting legacy wells and maximizing oil production at the Zama property in northwest Alberta. These successful well reactivations underpin Paramount’s strategic objective of driving to a positive netback at Zama. 2018 GUIDANCE • Paramount’s 2018 capital budget remains at $600 million. Approximately $200 million of the 2018 capital program is related to projects that will bring new production on-stream in 2019 when incremental third-party natural gas processing capacity is commissioned. • Sales volumes in 2018 are expected to average 100,000 Boe/d with a 40 percent liquids weighting. The Company’s sales volumes are expected to remain at this level until production at Wapiti begins to ramp up in the the spring of 2019 when a new third-party natural gas processing facility is scheduled for completion. • Operating costs in 2018 are expected to average approximately $10.00 per Boe, with transportation costs expected to average approximately $3.10 per Boe. Paramount Resources Ltd. 2017 Overview 6RESERVES • The Company’s proved reserves at December 31, 2017 totalled 375.8 MMBoe compared to 59.6 MMBoe in 2016. Proved plus probable reserves (ʺP+Pʺ) at December 31, 2017 totalled 593.5 MMBoe compared to 115.2 MMBoe in 2016. • Proved reserves, excluding reserves acquired through the Apache Canada Acquisition and the Trilogy Merger and after production, increased 56 percent to 92.7 MMBoe in 2017 compared to 59.6 MMBoe in 2016. • P+P reserves, before acquisitions and after production, increased 34 percent to 153.9 MMBoe in 2017 compared to 115.2 MMBoe in 2016. • The Company’s reserve replacement ratio, before acquisitions, was 5.3 times for proved reserves and 6.1 times for P+P reserves. • P+P reserves for the Karr property, after production, increased 55 percent to 130.4 MMBoe in 2017 compared to 84.3 MMBoe in 2016. • P+P finding and development ("F&D") costs for Karr were $11.72 per Boe in 2017. • Estimated future net revenue for proved reserves increased to $2.5 billion and future net revenue for P+P reserves increased to $4.4 billion (discounted at 10 percent, before tax). CORPORATE • Paramount’s revolving bank credit facility (the “Facility”) was increased by $500 million to $1.2 billion in March 2018. At Paramount’s request, the size of the Facility can be further increased by up to $300 million (to $1.5 billion) pursuant to an accordion feature in the Facility. • The Company has delivered a redemption notice to redeem all $300 million outstanding principal amount of its 7.25% senior unsecured notes due 2019. The redemption will be funded using the upsized Facility and completed in early April 2018. • To protect the Company’s cash flows and in support of its 2018 capital program, Paramount has entered into commodity hedges for 16,000 Bbl/d of liquids for fiscal 2018 at an average price of C$71.06/Bbl and 6,000 Bbl/d of liquids for fiscal 2019 at an average price of C$71.23/Bbl. • Paramount has arrangements in place to transport and sell approximately 60,000 GJ/d of natural gas at the Dawn natural gas hub in Ontario at $US NYMEX reference prices and 21,000 GJ/d of natural gas in California at $US Malin reference prices. • In December 2017, Paramount implemented a normal course issuer bid. To date, the Company has purchased and cancelled 1,454,100 common shares at a total cost of $27.4 million. Paramount Resources Ltd. 2017 Overview 7 REVIEW OF OPERATIONS Paramount continued its transformation in 2017, expanding its footprint in the Montney and Duvernay Deep Basin resource plays and adding land positions across the Western Canadian Sedimentary basin. During the year, Paramount successfully completed the following major transactions: • May 2017 – sold the Valhalla area development for $150 million; • August 2017 – acquired Apache Canada Ltd. for $486.9 million (the ʺACL Acquisitionʺ); and • September 2017 – merged with Trilogy Energy Corp., issuing one Paramount Common Share for every 3.75 Trilogy common shares (the ʺTrilogy Mergerʺ). Entering 2018, Paramount is well positioned with an excellent portfolio of top-tier resource plays, a solid balance sheet and an expanded five-year growth plan focused on exploiting the new development opportunities captured in 2017. The ACL Acquisition added approximately 39,000 Boe/d of production, 282.9 MMBoe of proved plus probable reserves, effective December 31, 2017 as independently evaluated by McDaniel and Associates Ltd. (ʺMcDanielʺ), and approximately 1.6 million net acres of land. The Trilogy Merger added approximately 22,000 Boe/d of production, 156.8 MMBoe of proved plus probable reserves, effective December 31, 2017 as independently evaluated by McDaniel, and approximately 0.6 million net acres of land. During the year, the Company produced 44,970 Boe/d (16.4 million total Boe) and generated adjusted funds flow of $218.7 million ($13.33 per Boe), after interest and general and administrative expenses. Liquids revenue was $353.9 million, representing 72 percent of total 2017 revenue. Capital expenditures for the Company’s regions were $150.4 million in the fourth quarter, bringing total 2017 annual capital expenditures to $527.6 million (before merger and acquisition activities and spending on corporate assets). Paramount realized $158.4 million of proceeds from the sale of non-core assets in 2017. Capital expenditures in the fourth quarter of 2017 were higher than planned, primarily as a result of incurring some 2018 expenditures in late-2017 to accelerate well completions and facilities expansion work at Karr, initiate drilling operations at Smoky River, Kaybob South and Karr and accelerate work on water management facilities for 2018 well completions. OIL AND GAS OPERATIONS Paramount’s land base encompasses 2.9 million net acres across western Canada. The Company is focused on developing its suite of liquids-rich Montney and Duvernay resource plays, with approximately 378,000 net acres and 230,000 net acres of land, respectively. An additional 206,500 net acres of oil sands lands in the Western Athabasca region are held through Cavalier Energy. Paramount’s sale volumes averaged 95,412 Boe/d in the fourth quarter of 2017, despite unplanned third- party pipeline outages and freeze-offs that shut-in approximately 7,000 Boe/d of production during December. These pipelines were restarted in January 2018. The Company’s integration efforts are nearing completion, focused on safety, operational excellence and cost reduction. Paramount has organized its expanded operations into three regions and created discipline- based leadership roles to facilitate the sharing of information, align operational management systems, develop project execution standards and best practices and integrate subsurface, operating, and midstream planning. Paramount Resources Ltd. 2017 Review of Operations 8Paramount’s three new operating regions are: • • • the Grande Prairie Region, located in the Peace River Arch area of Alberta, which is focused on Montney developments at Karr, Wapiti and Resthaven / Jayar; the Kaybob Region, located in west-central Alberta, which is focused on Montney and Duvernay developments at Kaybob, Smoky River, Pine Creek and Ante Creek; and the Central Alberta and Other Region, which includes Duvernay development plays in southern Alberta at Willesden Green and the East Shale Basin, and lands and production in northern Alberta and British Columbia. The Company’s sales volumes and capital expenditures by region for the fourth quarter of 2017 were as follows: Sales volumes (Boe/d) Grande Prairie Kaybob Central Alberta and other Total Sold Assets (1) Total Capital Expenditures ($ millions) Grande Prairie Kaybob Central Alberta and other Total Three months ended December 31 2017 % Liquids 2016 % Liquids 31,791 41,531 22,090 95,412 ─ 95,412 51 29 32 37 ─ 37 8,357 271 1,312 9,940 1,961 11,901 36 48 39 37 15 34 97.0 39.3 14.1 150.4 66.6 ─ 11.5 78.1 (1) Sold Assets includes the Valhalla area oil and gas properties divested in 2017 and other non-core property dispositions. 2018 OPERATIONAL AND CAPITAL PLAN The Company is executing on a multi-year development plan to double production in a five-year period. Paramount’s 2018 capital plan is focused on the development of the Company’s liquids-rich projects while initiating a divestiture program to high-grade its asset base. Paramount expects sales volumes to average 100,000 Boe/d in 2018 with a 40-percent liquids weighting. The Company’s sales volumes are anticipated to remain at this level until production at Wapiti begins to ramp up in the spring of 2019 when 150 MMcf/d of new third-party gas processing capacity is scheduled to come on-stream. Operating costs through the 2018 period are estimated to be approximately $10.00 per Boe, with transportation costs expected to average approximately $3.10 per Boe. Capital expenditures for 2018 are expected to be approximately $600 million including exploration, optimization and maintenance programs, excluding acquisitions, divestitures and abandonment and reclamation activities. Approximately $200 million of the 2018 capital program is related to projects that will bring new production on-stream in 2019, including $142 million to drill and complete wells in the Wapiti area in preparation for the startup of the third-party Wapiti natural gas processing plant in 2019 (the ʺWapiti Plantʺ). Paramount Resources Ltd. 2017 Review of Operations 9 2018 CAPITAL PROGRAM (1) Region Karr Wapiti Montney Oil Smoky River Duvernay Duvernay South Willesden Green Other wells & facilities Optimization projects TOTAL 77 / 69.9 (1) Excludes potential acquisitions, divestitures and abandonment and reclamation activities. (2) Grande Prairie Grande Prairie Kaybob Kaybob Kaybob Central Alberta and Other Various Various Wells Drilled (2) (Gross / Net) 10 / 10 23 / 23 21 / 21 4 / 4 11 / 5.6 2 / 2 6 / 4.3 Wells Completed (2) (Gross / Net) 10 / 10 6 / 6 20 / 20 4 / 4 5 / 2.5 1 / 1 5 / 3.3 51 / 46.8 Capital (3) (Wells & Infrastructure) ($ millions) $ 156 142 71 62 55 25 66 23 $ 600 Includes wells planned to be drilled and completed in 2018. The actual number of wells drilled and completed will vary depending on the effects of weather, the availability of third-party personnel, equipment and materials and other factors. (3) Budgeted capital costs for planned drilling, completion and infrastructure projects in 2018. The actual cost incurred in 2018 will vary depending on the projects actually completed, the effects of weather, the cost and availability of third-party personnel, equipment and materials and other factors. The 2018 drilling program includes 77 gross wells, requiring an estimated 2,500 drilling days. Paramount’s wholly-owned Fox Drilling fleet can accommodate approximately 1,900 of those drilling days. To achieve efficient and timely well completions, the Company has contracted a dedicated frac unit for all of 2018. Additional frac units will be contracted as required throughout the year. The Company is continuing the construction of water processing and management facilities initiated in 2017, consisting of four two-million barrel water pits, water disposal wells and related pipeline infrastructure. These water management facilities are expected to significantly increase operational efficiencies and reduce completion and operating costs going forward. Optimization Projects Paramount has allocated approximately $23 million to maintenance and optimization projects in 2018 to improve base production and reduce operating costs. Many of the optimization opportunities are possible due to the overlap of the Trilogy and Apache Canada land and infrastructure positions in Kaybob, which provide significant opportunities for cost saving synergies. The 2018 program includes plans to re-route certain Kaybob area production from third party facilities to owned and operated facilities. Abandonment Activities The Company plans to spend approximately $28 million in 2018 on abandonment and reclamation activities, primarily at Zama in northwest Alberta. Paramount Resources Ltd. 2017 Review of Operations 10 GRANDE PRAIRIE REGION The focus in the Grande Prairie Region, depicted below, is the Karr and Wapiti properties, located south of Grande Prairie, Alberta, in the over-pressured liquids-rich Deep Basin Montney trend. Paramount added approximately 45,000 net acres of high quality Montney rights in the region through the ACL Acquisition, increasing its total Montney position to approximately 155,000 net acres as of December 31, 2017. The Company also has a material position of approximately 165,000 net acres of Deep Basin Cretaceous rights partially overlying the Montney rights in the region. GRANDE PRAIRIE REGION Paramount Resources Ltd. 2017 Review of Operations 11In the fourth quarter, nine (9.0 net) wells from the 2016/2017 27-well Karr drilling program were completed and brought on production and drilling commenced on a new five (5.0 net) well Montney pad. Sales volumes for the Grande Prairie Region averaged 31,791 Boe/d (51 percent liquids) in the fourth quarter of 2017, despite a two-day planned outage at the Karr 6-18 compression and dehydration facility (the ʺ6-18 Facilityʺ) to install additional power generation. This additional power generation capacity has increased water disposal capability at the 6-18 Facility, reducing hauling and third-party water disposal costs. Karr The 2016 / 2017 Karr capital program wrapped up in late 2017 with successful completions on the final five wells in the 27-well program. The table below summarizes the average peak 30-day initial wellhead production rates for the 26 wells that have produced for at least 30 days: Well 00/04-07-065-05W6/0 02/04-07-065-05W6/0 02/01-12-065-06W6/0 00/01-12-065-06W6/0 00/03-22-066-05W6/0 00/09-32-065-04W6/0 00/15-14-065-06W6/0 00/16-32-065-04W6/0 00/04-34-065-05W6/0 00/01-33-065-05W6/0 02/16-24-066-05W6/0 00/04-06-066-04W6/0 02/04-06-066-04W6/0 00/03-06-066-04W6/0 00/16-24-066-05W6/0 02/09-32-065-04W6/0 00/08-32-065-04W6/0 02/16-14-065-06W6/0 00/13-14-065-06W6/0 02/14-14-065-06W6/0 02/15-14-065-06W6/0 02/02-25-065-05W6/2 00/02-25-065-05W6/0 02/03-25-065-05W6/0 03/01-25-065-05W6/0 00/03-25-065-05W6/0 Average Peak 30-Day Total (1) (Boe/d) Peak 30-Day Condensate (1) (Bbl/d) Peak 30-Day Condensate (%) Days on Production Cumulative Production (2) (Boe) 2,551 2,844 2,633 2,218 1,949 2,159 2,620 2,122 2,137 1,912 1,341 1,815 2,050 1,839 1,352 1,767 1,856 2,133 1,712 1,781 1,834 1,909 1,894 1,792 1,503 1,494 1,970 1,815 2,176 1,795 1,533 946 1,401 1,341 1,263 994 805 694 851 1,395 874 647 1,042 1,176 1,288 1,060 1,044 1,235 1,146 983 991 890 953 1,167 71% 77% 68% 69% 49% 65% 51% 60% 47% 42% 52% 47% 68% 48% 48% 59% 63% 60% 62% 59% 67% 60% 52% 55% 59% 64% 59% 380 350 339 275 268 268 248 248 228 226 208 207 205 204 197 189 165 141 125 76 76 75 72 59 56 31 189 521,267 593,888 450,105 325,987 306,564 433,740 476,581 429,205 346,811 326,760 208,391 303,601 311,528 331,235 233,255 220,124 261,683 264,148 179,459 120,818 134,784 117,475 116,012 98,111 105,372 45,416 (1) (2) Peak 30 Day is the highest daily average production rate over a 30-day consecutive period for an individual well, measured at the wellhead. Natural gas sales volumes are approximately 10 percent lower and stabilized condensate sales volumes are approximately 15 percent lower due to shrinkage. The production rates and volumes shown are 30 day peak rates over a short period of time and, therefore, are not necessarily indicative of average daily production, long-term performance or of ultimate recovery from the wells. Cumulative production for an individual well measured at the wellhead to February 24, 2018. Natural gas sales volumes are approximately 10 percent lower and stabilized condensate sales volumes are approximately 15 percent lower due to shrinkage. Paramount increased average frac stages completed per day from approximately five on earlier pads to over 10 on the most recent pad, with a high of 17 frac stages completed in one 24-hour period. The Company is expanding the existing 6-18 Facility, which delivers production volumes to a downstream third-party plant for processing, from its current 80 MMcf/d of compression and dehydration capacity to approximately 100 MMcf/d in the latter half of 2018. Paramount plans to increase natural gas production at Paramount Resources Ltd. 2017 Review of Operations 12 Karr to 150 MMcf/d by 2020. Firm service third-party natural gas transportation capacity is in place for the planned production ramp. Wapiti At Wapiti, two wells were rig released and two wells were completed and tested in 2017. To date, nine (9.0 net) delineation wells have been drilled and completed in three zones within the Upper, Middle and Lower Montney zones. The new third-party Wapiti Plant is scheduled to be commissioned in the spring of 2019. Paramount has secured priority access to the entire 150 MMcf/d of natural gas processing capacity in the facility. The Wapiti Plant has been designed with sufficient liquids processing capacity to process production from liquids-rich Montney wells and includes water management facilities, which will reduce Paramount’s ongoing water disposal costs. In 2018, the Company plans to drill 23 (23.0 net) Montney wells on two large multi-well pads and construct water management facilities for its completion programs. The majority of the well completions are scheduled in the early part of 2019 to align with the commissioning and startup of the Wapiti Plant. Paramount has secured firm-service third-party natural gas transportation capacity for Wapiti production volumes, which will ramp-up from 50 MMcf/d of capacity in 2019 to 130 MMcf/d in early 2021. Resthaven/Jayar At Resthaven/Jayar, the 2016/2017 program included five (4.5 net) Cretaceous wells and one (1.0 net) Montney well. A Montney well at Resthaven was drilled, completed and brought on production in the third quarter, with encouraging results. This well was completed with a similar design to recent Karr Montney wells and had a completed lateral length of approximately 2,700 meters, with 70 to 100 tonne frac stages, resulting in proppant loading intensities of 2.6 tonne/meter. The well continues to flow on cleanup and achieved an IP30 wellhead production rate of 1,314 Boe/d with 33 percent liquids. The Company is monitoring the longer-term performance of this well and may accelerate the development of the Montney in this area. Paramount Resources Ltd. 2017 Review of Operations 13KAYBOB REGION Paramount has a large portfolio of resource plays in the Kaybob Region, as depicted below. Through the ACL Acquisition and the Trilogy Merger, Paramount added approximately 900,000 net acres of land at Kaybob including 88,000 net acres of Montney oil, 122,000 net acres of liquids-rich Montney gas, and 136,000 net acres of Duvernay, more than half of which are in the liquids-rich Duvernay trend. Additionally, Paramount acquired rights in the multiple stacked Cretaceous formations and strategic owned and operated facilities, (including six natural gas processing plants and three oil batteries). Company-owned natural gas processing capacity at Kaybob exceeds 200 MMcf/d, and the oil batteries can process more than 40,000 Bbl/d of liquids. KAYBOB REGION Paramount Resources Ltd. 2017 Review of Operations 14 Kaybob Montney Oil At the Kaybob Montney Oil property, in keeping with Paramount’s strategy of innovation, the Company implemented a new completion design which includes 30 percent more stages and 100 percent greater proppant loading. The table below summarizes the average peak 30-day initial wellhead rates for wells with the new completion design: Well 02/05-06-064-18W5/0 03/04-06-064-18W5/0 02/04-06-064-18W5/0 00/13-31-064-18W5/0 02/13-31-064-18W5/0 00/14-31-064-18W5/0 00/14-12-064-19W5/2 02/15-12-064-19W5/0 03/15-12-064-19W5/0 02/08-05-064-18W5/0 03/09-05-064-18W5/0 02/08-29-064-18W5/0 Average Peak 30-Day Total (1) (Boe/d) Peak 30-Day Oil (1) (Bbl/d) Peak 30-Day Oil (%) Days on Production 2,301 1,059 1,202 1,174 811 756 539 683 754 1,007 815 1,573 1,056 1,928 759 1,082 990 605 578 475 587 620 929 758 599 826 84% 72% 90% 84% 75% 76% 88% 86% 82% 92% 93% 38% 78% 419 412 376 325 332 333 324 320 285 251 239 202 318 Cumulative Production (2) (Boe) 232,756 197,164 144,224 136,558 170,525 82,944 76,073 101,432 83,110 108,606 83,403 226,508 (1) (2) Peak 30 Day is the highest daily average production rate over a 30-day consecutive period for an individual well, measured at the wellhead. Natural gas sales volumes are approximately 10 percent lower and oil sales volumes are approximately 15 percent lower due to shrinkage. The production rates and volumes shown are 30 day peak rates over a short period of time and, therefore, are not necessarily indicative of average daily production, long-term performance or of ultimate recovery from the wells. Cumulative production for an individual well measured at the wellhead to February 28, 2018. Natural gas sales volumes are approximately 10 percent lower and oil sales volumes are approximately 15 percent lower due to shrinkage. Solution gas from Kaybob Montney Oil production is processed in Paramount’s owned and operated Kaybob 8-9-64-19W5 natural gas processing plant (the ʺ8-9 Plantʺ), and delivered to market via firm-service transportation on the TCPL system. The 8-9 Plant is dually connected to both TCPL and Alliance, providing for future optionality. Oil sales volumes from the Kaybob Montney Oil property are processed at the Company’s 100 percent owned 12-10 oil battery and sold in Alberta at Edmonton Light Sour reference prices, which are not subject to the Western Canadian Select price discount. Paramount’s development strategy at the Kaybob Montney Oil property is to grow production to approximately 14,000 Bbl/d, including 8,000 Bbl/d of oil production, maintain production at those levels and use the free cash flow from this property to help fund other developments. In 2018, the Company plans to drill up to 21 (21.0 net) wells. Kaybob South Duvernay The six (3.1 net) Duvernay well pad drilled and completed in 2017 continues to meet expectations, with average IP90 rates of 1,346 Boe/d (47 percent condensate). Drilling costs averaged $4.6 million per well ($842 per meter of total depth or $2,030 per meter of lateral length). Completion costs averaged $6.0 million for these wells ($147,000 per stage or $711 per tonne of proppant placed). This six-well pad tested two proppant loading intensities at approximately 55 meter stage spacing. Paramount’s development team is currently evaluating well performance to determine the optimal proppant loading intensity. The Kaybob South Duvernay wells are processed through third-party facilities under firm agreements, coupled with firm-service transportation capacity for natural gas and downstream contracts for condensate and NGLs. Current capacity at the 15-28 compression and dehydration facility capacity is 40 MMcf/d, and Paramount Resources Ltd. 2017 Review of Operations 15 is expandable to 80 MMcf/d. Capacity up to 100 MMcf/d is secured at a downstream third-party plant to accommodate the incremental production should Paramount proceed with the expansion. In 2018, the Company plans to drill up to 11 (5.6 net) South Duvernay wells on two multi-well pads and complete five (gross) of those wells in 2018, with the remaining wells to be completed in early 2019. Kaybob Smoky River Duvernay The 2018 program at the Kaybob Smoky River Duvernay property will see a new four (4.0 net) well pad drilled and brought on production in mid-2018. The wells are expected to have lateral lengths of approximately 2,700 meters and proppant loading intensities of 3.0 tonnes/meter. This new four-well pad will produce to Paramount’s owned and operated Smoky River 6-16-64-21W5 natural gas processing plant (the ʺ6-16 Plantʺ), which will have approximately 12 MMcf/d of throughput capacity following some minor capital expenditures. The 6-16 Plant is pipeline connected to the TCPL system, where the Company has firm-service transportation capacity. Condensate will be trucked to the Company’s 12-10 Oil Battery, which is located about 15 miles east. NGLs will be trucked to Pembina’s Fox Creek terminal. The 2018 Kaybob Smoky River Duvernay capital program is the first phase in a multi-phase development of the play. Phase Two will consist of further modifications to the 6-16 Plant to increase throughput capacity to over 20 MMcf/d, scheduled for the spring of 2019. Phase three of the development will include a condensate pipeline connection to the 8-9 Plant and some modifications and enhancements to the plant for handling Duvernay liquids. The growth plan at Kaybob Smoky River Duvernay is supported by firm-service transportation capacity on the TCPL system and downstream contracts for condensate and NGLs. Paramount Resources Ltd. 2017 Review of Operations 16CENTRAL ALBERTA AND OTHER REGION The Central Alberta and Other Region includes multiple land and resource positions including Willesden Green and East Shale Basin Duvernay, Cardium, Glauconite and Ellerslie rights as well as approximately 176,000 net acres of fee simple lands. CENTRAL ALBERTA AND OTHER REGION The Company plans to drill a total of up to five (3.3 net) wells at Willesden Green and Leafland in 2018. The new wells will primarily produce through owned and operated infrastructure. At the Zama property in northwest Alberta, the Company is restarting legacy wells and reconfiguring gathering systems to improve operational efficiencies. Sales volumes increased to approximately 1,300 Boe/d in the fourth quarter of 2017, including a year-over-year increase in oil production of 270 percent Paramount Resources Ltd. 2017 Review of Operations 17 from approximately 320 Bbl/d in the fourth quarter of 2016 to approximately 875 Bbl/d in the fourth quarter of 2017. These successful well reactivations underpin Paramount’s strategic objective of driving to a positive netback at Zama. Extending the productive life of the Zama field provides the Company with increased flexibility in managing long-term abandonment obligations associated with the property. RESERVES AND FINDING & DEVELOPMENT COSTS Paramount’s proved reserves, excluding reserves acquired through the Apache Canada Acquisition and the Trilogy Merger and after production, increased 56 percent to 92.7 MMBoe in 2017 compared to 59.6 MBoe in 2016. Proved plus probable reserves (ʺP+Pʺ), excluding the acquired reserves and after production, increased 34 percent to 153.9 MMBoe in 2017 compared to 115.2 MMBoe in 2016. The Company’s reserve replacement ratio, before acquisitions, was 5.3 times for proved reserves and 6.1 times for P+P reserves. Reserves by Product Total Company reserves at December 31, 2017 are as follows: Natural gas (Bcf) NGLs (MBbl) (4) Light and medium crude oil (MBbl) Total (MBoe) 2017 1,398.7 119,134 23,570 375,824 Proved (1)(2) 2016 (3) % Change 238.0 19,100 882 59,645 488 524 NM 530 Proved plus Probable (1)(2) 2017 2,171.3 196,883 34,714 593,473 2016 (3) % Change 369 436 NM 415 463.3 36,736 1,219 115,173 (1) (2) (3) Readers are referred to the advisories concerning Oil and Gas Measures and Definitions in the Advisories section of this document. Reserves evaluated, as applicable, by McDaniel and Associates Ltd. (ʺMcDanielʺ) as of December 31, 2017 and December 31, 2016 in accordance with National Instrument 51-101 definitions, standards and procedures. Working interest reserves before royalty deductions. 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. Includes ethane, propane, butane and condensate. (4) NM Not meaningful Reserves by Category The following table summarizes Paramount’s reserves by category as at December 31, 2017: Gross Reserves (1)(2) Natural Gas (Bcf) NGLs (4) (MBbl) Light & Medium Crude Oil (MBbl) Future Net Revenue Net Present Value (1)(3) Before Tax ($ millions) Total (MBoe) Discount Rate 0% 10% Proved Developed Producing Developed Non-producing Undeveloped Total Proved Total Probable Total Proved plus Probable Columns may not add due to rounding. Working interest reserves before royalty deductions. 635.2 15.0 748.5 1,398.7 772.5 2,171.3 30,924 731 87,479 119,134 77,749 196,883 12,234 667 10,669 23,570 11,144 34,714 149,032 3,903 222,890 375,824 217,648 593,473 1,475 42 3,161 4,678 4,373 9,051 1,129 32 1,303 2,464 1,889 4,353 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, 2018. Includes ethane, propane, butane and condensate. Paramount Resources Ltd. 2017 Review of Operations 18 Reserves Reconciliation The following table provides a reconciliation of Paramount’s reserves for its existing properties for the year ended December 31, 2017 and the properties acquired through the Apache Canada Acquisition and the Trilogy Merger. Estimated reserves volumes for the Apache Canada and Trilogy properties at December 31, 2017 are comprised of estimated reserves acquired, plus extensions and discoveries ascribed to such properties as at December 31, 2017, less sales volumes from the closing date of each transaction to the end of the year. December 31, 2016 Extensions & discoveries Technical revisions Economic factors Dispositions Production excluding acquired properties Total reserves before acquisitions Acquisitions (3) Extensions & discoveries – acquired properties Production from acquired properties December 31, 2017 Natural Gas (Bcf) 238.0 86.5 59.0 (4.2) (18.2) (25.7) 335.4 1,086.5 10.1 (33.2) 1,398.7 Proved (1) Oil & NGLs (2) (MBbl) 19,982 9,873 12,005 (303) (399) (4,324) 36,834 105,007 3,144 (2,280) 142,704 Total (MBoe) 59,645 24,287 21,837 (1,003) (3,433) (8,593) 92,740 286,082 4,825 (7,822) 375,824 Proved plus Probable (1) Oil & NGLs (2) (MBbl) 37,955 22,608 5,697 (374) (561) (4,324) 61,001 167,934 4,941 (2,280) 231,597 Total (MBoe) 115,173 54,908 (1,597) (1,294) (4,711) (8,592) 153,887 439,677 7,730 (7,822) 593,473 Natural Gas (Bcf) 463.3 193.8 (43.8) (5.5) (24.9) (25.7) 557.2 1,630.5 16.7 (33.2) 2,171.3 (1) (2) (3) Columns and rows may not add due to rounding. Condensate, light and medium crude oil and Other NGLs Acquisition reserves volumes for the properties acquired through the Apache Canada Acquisition and the Trilogy Merger derived in accordance with National Instrument 51-101. Includes estimated reserves volumes as at December 31, 2017 plus sales volumes from such properties from the closing date of each transaction to December 31, 2017. Total P+P acquired volumes of 439.7 MMBoe are 13.7 MMBoe lower than total P+P volumes for Apache Canada and Trilogy as of the June 1, 2017 reserve evaluations prepared by McDaniel due to production between the date of the June report and the date Paramount acquired the entities. Reserves volumes for the Apache Canada Horn River dry gas property in northeast British Columbia were also reduced by approximately 3.7 MMBoe as a result of lower forecast natural gas prices. Finding and Development Costs - Karr The following table provides a calculation of finding and development costs (ʺF&Dʺ) for Paramount’s Karr property. Karr Property Proved (1) Proved plus Probable (1) Capital (2) ($ millions) 329.5 329.5 Change in FDC (3) ($ millions) 195.4 281.8 2017 Total F&D Capital ($ millions) 524.9 611.3 Reserves Additions (4) (MMBoe) 38.9 52.2 Three- Year Average (5) ($/Boe) 13.38 10.09 F&D ($/Boe) 13.48 11.72 (1) (2) (3) (4) (5) Readers are referred to the advisories concerning Non-GAAP Measures and Oil and Gas Measures and Definitions in the Advisories section of this document. Aggregate exploration and development costs incurred for the year ended December 31, 2017. Change in estimated future development costs from December 31, 2016 to December 31, 2017. Reserves additions were calculated as the aggregate of extensions & discoveries, technical revisions and economic factors for the year ended December 31, 2017. Excludes acquisitions and dispositions. Three-year average F&D costs are calculated using the aggregate capital costs, changes in future development capital and reserves additions over the three- year period January 1, 2015 to December 31, 2017. Amounts for 2015 and 2016 were calculated on the same basis as for the year ended December 31, 2017. Paramount Resources Ltd. 2017 Review of Operations 19 Finding and development costs for Paramount’s expanded reserves base, including reserves acquired through the Apache Canada Acquisition and the Trilogy Merger, have not been presented because technical revisions and economic factors are not evaluated for acquired properties in the initial year of acquisition. Future Development Costs The following table summarizes the undiscounted future development costs incorporated in Paramount’s 2017 reserves evaluation: (Undiscounted, $ millions) Total Proved Total Proved plus Probable 2018 406 412 2019 755 768 2020 742 770 2021 695 731 2022 Remainder 460 90 615 926 Total 3,148 4,222 LAND The following table sets forth Paramount’s land position: (thousands of acres) Acreage not assigned reserves Acreage assigned reserves Total December 31, 2017 Net (2) Gross (1) December 31, 2016 Net (2) Gross (1) 3,625 1,251 4,876 2,123 775 2,898 1,757 288 2,045 848 152 1,000 (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 interests in different formations beneath the same surface location pursuant to separate leases, the acreage set out in each lease is counted. Excludes oil sands lands associated with Cavalier Energy. "Net" acres means gross acres multiplied by Paramount’s working interest therein. Excludes oil sands lands associated with Cavalier Energy. CORPORATE To protect the Company’s cash flows and in support of its 2018 capital program, Paramount has entered into commodity hedges for 16,000 Bbl/d of liquids for fiscal 2018 at an average price of C$71.06/Bbl and 6,000 Bbl/d of liquids for fiscal 2019 at an average price of C$71.23/Bbl. Paramount has arrangements in place to transport and sell approximately 60,000 GJ/d of natural gas at the Dawn natural gas hub in Ontario at $US NYMEX reference prices and 21,000 GJ/d of natural gas in California at $US Malin reference prices. The Company’s non-export natural gas sales volumes are sold in Alberta at Canadian dollar AECO reference prices. Paramount’s revolving bank credit facility (the “Facility”) was increased by $500 million to $1.2 billion in March 2018. At Paramount’s request, the size of the Facility can be further increased by up to $300 million (to $1.5 billion) pursuant to an accordion feature in the Facility. The Company has delivered a redemption notice to redeem all $300 million outstanding principal amount of its 7.25% senior unsecured notes due 2019. The redemption will be funded using the upsized Facility and completed in early April 2018. Paramount Resources Ltd. 2017 Review of Operations 20 For the year ended December 31, 2017, the Company recorded a non-cash write-down of $184.6 million related to Paramount’s Liard Basin shale gas properties as a result of reduced activity and delays and cancellations of proposed third-party natural gas liquids terminals. There were no reserves assigned to this early-stage resource exploration project. Paramount also recorded a $130.2 million write-down of petroleum and natural gas properties in northeast British Columbia, primarily due to decreases in forecast natural gas prices. In December 2017, Paramount implemented a normal course issuer bid under which the Company can purchase up to 7,497,530 Common Shares for cancellation. To date, the Company has purchased and cancelled 1,454,100 Common Shares at a total cost of $27.4 million. Paramount Resources Ltd. 2017 Review of Operations 21 MANAGEMENT’S DISCUSSION AND ANALYSIS This Management’s Discussion and Analysis ("MD&A"), dated March 7, 2018, 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, 2017 (the "Consolidated Financial Statements"). 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, liquids-focused Canadian energy company that explores for and develops conventional and unconventional petroleum and natural gas resources. The Company also pursues long-term strategic exploration and pre-development plays and holds a portfolio of investments in other entities. Paramount’s principal properties are located in Alberta and British Columbia. The Company’s Class A Common Shares ("Common Shares") are listed on the Toronto Stock Exchange under the symbol "POU". Paramount completed two major transactions in 2017, expanding its footprint in the Montney and Duvernay Deep Basin resource plays and materially increasing its inventory of undeveloped acreage in Western Canada. The Company has organized its expanded operations into three regions: • • • the Grande Prairie Region, located in the Peace River Arch area of Alberta, which is focused on Montney developments at Karr, Wapiti and Resthaven / Jayar; the Kaybob Region, located in west-central Alberta, which is focused on Montney and Duvernay developments at Kaybob, Smoky River, Pine Creek and Ante Creek; and the Central Alberta and Other Region, which includes Duvernay development plays in southern Alberta at Willesden Green and the East Shale Basin, and lands and production in northern Alberta and British Columbia. Paramount also holds a portfolio of: (i) investments in other entities; (ii) investments in exploration and development stage assets, including oil sands and carbonate bitumen interests held by Paramount’s wholly- owned subsidiary Cavalier Energy ("Cavalier"), prospective shale gas acreage in the Liard and Horn River Basins (the "Shale Gas Project"); and (iii) drilling rigs owned by Paramount’s wholly-owned subsidiary, Fox Drilling Limited Partnership ("Fox Drilling"). Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 22 2017 FINANCIAL AND OPERATING HIGHLIGHTS (1)(2) FINANCIAL Petroleum and natural gas sales Net income (loss) per share – basic ($/share) per share – diluted ($/share) Adjusted funds flow per share – basic ($/share) per share – diluted ($/share) Exploration and Development Capital (3) Investments in other entities – market value (4) Total assets Long-term debt Net debt (cash) OPERATIONAL Sales volumes Natural gas (MMcf/d) Condensate and oil (Bbl/d) Other NGLs (Bbl/d) (5) Total (Boe/d) Net wells drilled (6) 2017 491.4 183.4 1.60 1.58 218.7 1.90 1.89 527.6 53.3 5,090.7 701.8 636.2 161.3 13,956 4,138 44,970 36 2016 248.8 1,165.3 10.98 10.95 35.7 0.34 0.34 187.5 208.7 2,059.0 – (565.9) 104.8 7,733 6,668 31,860 12 2015 376.8 (901.3) (8.52) (8.52) 93.2 0.88 0.88 457.3 130.8 2,781.0 1,750.2 1,904.6 160.7 8,610 8,735 44,130 11 ADJUSTED FUNDS FLOW ($/Boe) Petroleum and natural gas sales Royalties Operating expense Transportation and NGLs processing (7) Netback Commodity contract settlements Netback including commodity contract settlements General and administrative Interest and financing expense Other Adjusted funds flow 29.94 (1.50) (10.11) (3.11) 15.22 0.88 16.10 (2.50) (0.66) 0.39 13.33 21.34 (0.19) (8.32) (4.84) 7.99 3.91 11.90 (2.22) (6.74) 0.12 3.06 23.39 (0.64) (5.59) (4.08) 13.08 0.78 13.86 (1.48) (6.73) 0.14 5.79 (1) (2) (3) 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: Adjusted funds flow, Exploration and Development Capital, Investments in other entities – market value, Net debt (cash) and Netback. The results of operations and net assets of Apache Canada Ltd. are included in Paramount’s results following the Apache Canada Acquisition on August 16, 2017. The results of operations and net assets of Trilogy Energy Corp. are included in Paramount’s results following the closing of the Trilogy Merger on September 12, 2017. Exploration and Development Capital consists of property, plant and equipment and exploration expenditures excluding spending related to land and property acquisitions and corporate assets. Based on the period-end closing prices of publicly-traded investments and the book value of remaining investments. (4) (5) Other NGLs include ethane, propane and butane. (6) (7) Excludes wells drilled on lands associated with the disposed Musreau/Kakwa properties. Includes downstream natural gas, NGLs and oil transportation costs and NGLs fractionation costs incurred by the Company. Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 23 CONSOLIDATED RESULTS Net Income Paramount recorded net income of $183.4 million for the year ended December 31, 2017 compared to net income of $1,165.3 million in the same period in 2016. Significant factors contributing to the change are shown below: Year ended December 31, 2017 Net income – 2016 • Gain on Apache Canada Acquisition • Income tax recovery in 2017 compared to income tax expense in 2016 • Higher Netback • Lower interest and financing expense due to lower average debt during 2017 • Revaluation gain on Trilogy Shares owned by Paramount immediately prior to the Trilogy Merger • Debt extinguishment expense in 2016 • Lower gain on sale of oil and gas assets in 2017 primarily due to the Musreau area asset sales in 2016 • Higher depletion and depreciation mainly due to higher sales volumes and net impairment charges of $89.9 million in 2017 compared to impairment reversals totaling $133.2 million in 2016 • Exploration and evaluation expense in 2017, including write-downs of $184.6 million related to the Shale Gas Project compared to income in 2016, which included a $99.2 million gain in respect of the Cavalier Royalty • ARO Discount Rate Adjustment related to the Apache Canada Acquisition • Foreign exchange loss in 2017; the 2016 gain mainly related to US$450 million senior notes • Transaction and reorganization costs in 2017 related to the Apache Canada Acquisition and Trilogy Merger • Other Net income – 2017 1,165.3 548.9 295.0 156.8 69.5 61.8 27.6 (1,256.0) (357.7) (286.8) (158.2) (44.0) (30.5) (8.3) 183.4 On August 16, 2017, Paramount acquired all of the outstanding shares of Apache Canada Ltd. (ʺApache Canadaʺ) for total cash consideration of $486.9 million (the "Apache Canada Acquisitionʺ). Apache Canada was a wholly-owned subsidiary of a publicly traded U.S. based international oil and gas company. Apache Canada’s primary oil and gas assets were located at Wapiti, Kaybob and in Central Alberta. On September 12, 2017, Paramount and Trilogy Energy Corp. (ʺTrilogyʺ) completed a merger transaction (the ʺTrilogy Mergerʺ) under which Paramount acquired all of the outstanding shares of Trilogy (ʺTrilogy Sharesʺ) not already owned by it in exchange for Common Shares, on the basis of one Common Share for every 3.75 Trilogy shares. Trilogy was, prior to the completion of the Trilogy Merger, a publicly traded petroleum and natural gas-focused Canadian energy corporation. Trilogy’s primary oil and gas assets were located in the Kaybob and Grande Prairie areas of Alberta. Following the completion of the Apache Canada Acquisition, Apache Canada became a direct wholly- owned subsidiary of Paramount and upon completion of the Trilogy Merger, Trilogy became a direct wholly- owned subsidiary of Paramount. Paramount continued its operations on a combined basis with the operations of Apache Canada (renamed Paramount Resources (ACL) Ltd.) and Trilogy (renamed Paramount Resources (TEC) Ltd.), for the remainder of 2017. In January 2018, Paramount Resources Ltd. amalgamated with Paramount Resources (ACL) Ltd. and Paramount Resources (TEC) Ltd., with the amalgamated corporation continuing as Paramount Resources Ltd. In April 2016, the Company sold its processing facilities at Musreau/Kakwa (the "Musreau Complex") and in August 2016, the Company sold the majority of its Musreau/Kakwa oil and gas properties (the "Musreau Assets"). In May 2017, Paramount closed the sale of its oil and gas properties in the Valhalla area (the Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 24 "Valhalla Assets"). When used herein, "Sold Assets" refers to the Musreau Complex, the Musreau Assets, the Valhalla Assets and other non-core property dispositions. Paramount’s 2017 results include the results of operations of Paramount Resources (ACL) Ltd. (formerly Apache Canada) from August 16 (138 days) and Paramount Resources (TEC) Ltd.’s (formerly Trilogy) results of operations from September 12, 2017 (111 days). 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, 2016 Net Loss – 2015 • Gain on the sale of oil and gas assets primarily due to the Musreau area asset sales 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 US$450 million senior notes • Lower write-downs of investments in securities • Lower interest and financing expense due to lower average debt balances in 2016 • Income tax expense in 2016 compared to a recovery in 2015 • Lower Netback in 2016 mainly due to lower sales volumes and lower commodity prices • Lower gain on commodity contracts • Other Net Income – 2016 Adjusted Funds Flow (1) The following is a reconciliation of Adjusted funds flow to the nearest GAAP measure: (901.3) 1,389.0 547.5 281.1 104.8 70.6 30.3 (168.6) (117.6) (52.5) (18.0) 1,165.3 Cash from operating activities Change in non-cash working capital Transaction and reorganization costs Geological and geophysical expenses Asset retirement obligations settled Adjusted funds flow Adjusted funds flow ($/Boe) (1) Refer to the advisories concerning non-GAAP measures in the Advisories section of this document. 2017 126.3 31.1 30.5 9.3 21.5 218.7 13.33 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 Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 25 Adjusted funds flow for the year ended December 31, 2017 was $218.7 million compared to $35.7 million for the same period in 2016. Significant factors contributing to the change are shown below: Year ended December 31, 2017 Adjusted funds flow – 2016 • Higher Netback in 2017 mainly due to higher sales volumes and higher commodity prices • • • Higher general and administrative expense mainly due to the Apache Canada Acquisition and Trilogy Lower interest and financing expense due to lower average debt during 2017 Lower receipts from commodity contract settlements in 2017 Merger • Other Adjusted funds flow – 2017 35.7 156.8 67.8 (31.2) (15.2) 4.8 218.7 Adjusted funds flow for the year ended December 31, 2016 was $35.7 million compared to $93.2 million in 2015. Significant factors contributing to the change are shown below: Lower Netback in 2016 mainly due to lower sales volumes and lower commodity prices Year ended December 31, 2016 Adjusted funds flow – 2015 • • Higher receipts from commodity contract settlements in 2016 • • Other Adjusted funds flow – 2016 Lower interest and financing expense due to lower average debt balances in 2016 93.2 (117.6) 33.0 29.9 (2.8) 35.7 OPERATING RESULTS Netback 2017 2016 Natural gas revenue Condensate and oil revenue Other NGLs revenue (2) Royalty and sulphur revenue Petroleum and natural gas sales Royalties Operating expense Transportation and NGLs processing (3) Netback Commodity contract settlements Netback including commodity contract settlements 132.8 313.4 40.5 4.7 491.4 (24.6) (165.9) (51.0) 249.9 14.4 264.3 ($/Boe) (1) 2.26 61.52 26.80 – 29.94 (1.50) (10.11) (3.11) 15.22 0.88 16.10 82.1 138.1 27.4 1.2 248.8 (2.2) (97.0) (56.5) 93.1 45.6 138.7 ($/Boe) (1) 2.14 48.78 11.24 – 21.34 (0.19) (8.32) (4.84) 7.99 3.91 11.90 Natural gas revenue shown per Mcf. (1) (2) Other NGLs include 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 $491.4 million in 2017, an increase of $242.6 million from the prior year due to higher sales volumes and higher commodity prices. Petroleum and natural gas sales from Paramount Resources (ACL) Ltd. (formerly Apache Canada) and Paramount Resources (TEC) Ltd. (formerly Trilogy) since the closing date of each transaction to December 31, 2017 were $123.0 million and $66.4 million, respectively. Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 26 The impact of changes in sales volumes and prices on petroleum and natural gas sales are as follows: Year ended December 31, 2016 Effect of changes in sales volumes Effect of changes in prices Change in royalty and sulphur revenue Year ended December 31, 2017 Sales Volumes Natural gas 82.1 43.9 6.8 – 132.8 Condensate and oil 138.1 110.4 64.9 – 313.4 Other NGLs 27.4 (10.5) 23.6 – 40.5 Royalty and Sulphur 1.2 – – 3.5 4.7 Total 248.8 143.8 95.3 3.5 491.4 Year ended December 31 Natural gas (MMcf/d) 2016 % Change 33.4 1.0 5.8 40.2 64.6 104.8 78 NM 533 289 (92) 54 2017 59.5 60.2 36.7 156.4 4.9 161.3 Condensate and Oil (Bbl/d) 2017 9,062 3,160 1,610 13,832 124 13,956 2016 % Change 387 NM 1,860 146 412 2,418 5,315 7,733 291 472 (98) 80 2017 1,746 885 1,424 4,055 83 4,138 Other NGLs (Bbl/d) 2016 % Change 189 NM 604 11 2017 20,717 14,073 Total (Boe/d) 2016 % Change 8,023 158 323 NM 166 781 5,887 6,668 758 9,129 1,537 419 (99) (38) 43,919 1,051 44,970 9,883 21,977 31,860 494 344 (95) 41 Grande Prairie Kaybob Central Alberta & Other Sold Assets Total NM Not meaningful Sales volumes for the year ended December 31, 2017 increased 41 percent to 44,970 Boe/d compared to 31,860 Boe/d in 2016. The increase was primarily due to incremental sales volumes resulting from the Apache Canada Acquisition and the Trilogy Merger and new production at Karr in the Grande Prairie Region, partially offset by lower sales volumes as a result of the dispositions of the Sold Assets. The increase in sales volumes in the Grande Prairie Region is primarily due to production from new Montney wells brought on production since late-2016. Sales volumes from the properties acquired through the Apache Canada Acquisition and Trilogy Merger totalled 7.8 MMBoe (approximately 21,430 Boe/d on an annual basis) since the closing of these transactions. Paramount expects sales volumes to average approximately 100,000 Boe/d in 2018 with a 40-percent liquids weighting. The Company’s sales volumes are anticipated to remain at this level until production at Wapiti begins to increase in the spring of 2019 when 150 MMcf/d of new third-party gas processing capacity is scheduled to come on-stream. Operating costs through the 2018 period are estimated to be approximately $10.00 per Boe, with transportation costs expected to average $3.10 per Boe. Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 27 Commodity Prices Natural Gas Paramount realized price ($/Mcf) AECO daily spot ($/GJ) AECO monthly index ($/GJ) NYMEX (US$/MMbtu) Malin (US$/MMbtu) Crude Oil Paramount average realized condensate & oil price ($/Bbl) Edmonton Light Sweet ($/Bbl) West Texas Intermediate (US$/Bbl) Foreign Exchange $CDN / 1 $US 2017 2.26 2.04 2.31 3.02 2.79 61.52 61.84 50.95 2016 % Change 2.14 2.05 1.97 2.55 2.38 48.78 52.80 43.32 6 - 17 18 17 26 17 18 1.30 1.33 (2) Paramount’s average realized natural gas price increased six percent in 2017 compared to the same period in 2016. Paramount’s natural gas portfolio primarily consists of sales priced at the Alberta, California and Eastern Canada markets and is sold in a combination of daily and monthly contracts. The Company has arrangements in place to transport and sell approximately 21,000 GJ/d of natural gas in California at prices based on the $US Malin reference prices. In the fourth quarter of 2017, the Company secured firm service transportation capacity for approximately 60,000 GJ/d of natural gas for delivery to the Dawn natural gas hub in Ontario, which is sold at $US NYMEX reference 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 condensate volumes, and are adjusted for applicable transportation, quality and density differentials. Prices for unstabilized condensate volumes trucked to terminals are based on crude oil or condensate prices quoted at Edmonton, depending on the terminal to which volumes are delivered, and are adjusted for transportation, quality and density differentials. The Company’s average realized condensate and oil price increased 26 percent in 2017 compared to the same period in 2016. The increase in Paramount’s realized price was greater than increases in benchmark prices mainly as a result of the addition of condensate and oil production from Apache Canada and Trilogy since the closing of these transactions in the third quarter of 2017, which coincided with an increase to benchmark prices in the fourth quarter of 2017 compared to the first three quarters of 2017. Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 28 Commodity Price Management From time-to-time Paramount uses financial commodity price contracts to manage exposure to commodity price volatility. Changes in the fair value of the Company’s risk management assets and liabilities are as follows: Year ended December 31 Fair value, beginning of period Changes in fair value, net Settlements received Assumed on Trilogy Merger Fair value, end of period 2017 (5.2) (4.1) (14.4) 4.6 (19.1) 2016 40.2 0.2 (45.6) – (5.2) At December 31, 2017 the Company had the following financial commodity contracts outstanding: Instruments Oil – NYMEX WTI Swaps (Sale) Aggregate notional 16,000 Bbl/d Average fixed price Fair Value Term CDN$71.06/Bbl (19.1) January 2018 – December 2018 Subsequent to December 31, 2017, the Company entered into the following financial commodity contracts: Instruments Oil – NYMEX WTI Swaps (Sale) Aggregate notional 6,000 Bbl/d Average fixed price CDN$71.23/Bbl Term January 2019 – December 2019 Royalties Year ended December 31 Royalties $/Boe 2017 24.6 1.50 Rate 5.0% 2016 2.2 0.19 Rate 0.9% Royalties increased $22.4 million to $24.6 million in 2017 compared to $2.2 million in 2016, primarily due to the Apache Canada Acquisition and the Trilogy Merger and increased production at Karr. Applicable royalty rates for Apache Canada and Trilogy sales volumes are higher than Paramount’s average royalty rates prior to the transactions, resulting in an increase to overall royalty rates for the Company in 2017. Following the Apache Canada Acquisition and Trilogy Merger, a lower proportion of the Company’s sales volumes benefit from royalty incentive programs. Operating Expense Year ended December 31 Operating expense $/Boe 2017 165.9 10.11 2016 97.0 8.32 % Change 71 22 Operating expense increased by $68.9 million in 2017 to $165.9 million compared to $97.0 million in 2016. This increase was primarily due to incremental operating expenses in 2017 as a result of the Apache Canada Acquisition and Trilogy Merger and higher production at Karr, partially offset by lower operating costs due to the dispositions of the Sold Assets in 2016. Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 29 Transportation and NGLs Processing Year ended December 31 Transportation and NGLs processing $/Boe 2017 51.0 3.11 2016 56.5 4.84 % Change (10) (36) 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 $51.0 million in 2017, a decrease of $5.5 million compared to 2016. The decrease was primarily as a result of the sale of the Musreau Assets in 2016, partially offset by higher current year pipeline and trucking costs at Karr due to increased production and the impact of the Apache Canada Acquisition and the Trilogy Merger. Paramount expects the majority of liquids production at Karr to be trucked until mid-2018, when the expansion of condensate stabilization capacity at a third- party facility is completed. The Company has contracted a dedicated fleet of trucks and 24-hour logistical services over this period to provide egress for liquids production. Other Operating Items Year ended December 31 Depletion and depreciation (excluding impairment / de-impairment) (Impairment) de-impairment of property plant and equipment Gain on sale of oil and gas assets Exploration and evaluation expense (excluding write-downs) Exploration and evaluation income – Cavalier Royalty Exploration and evaluation – write-down 2017 (344.3) (89.9) 124.0 (18.2) – (196.6) 2016 (209.7) 133.2 1,380.0 (24.1) 99.2 (3.0) Depletion and depreciation expense increased to $344.3 million ($20.98 per Boe) in 2017 compared to $209.7 million ($17.98 Boe) in 2016, primarily due to higher sales volumes and higher depletion rates in 2017. At December 31, 2017, the Company recorded an impairment write-down of $122.1 million related to petroleum and natural gas assets for the northern properties within the Central Alberta and Other region (the "Northern CGU"). The impairment write-down was recorded because the carrying value of the Northern CGU exceeded its recoverable amount, which was estimated based on expected net discounted future cash flows from the production of proved and probable reserves. The impairments resulted from a combination of decreases in estimated future net revenues due to lower forecasted natural gas prices and higher well costs than reserves values assigned. The Company also recorded a $42.1 million reversal of previously recorded impairment charges in the first quarter of 2017 related to the Valhalla area prior to the sale of the property in May 2017. The reversal represented the amount required to increase the carrying value of the Valhalla Assets to the amount that would have been determined, net of depletion and amortization, had no impairment charges been recognized in prior periods. 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 Grande Prairie. The impairment reversal was primarily due to increased development activities at Karr, including enhanced well performance and improved economic conditions and other factors. Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 30 Paramount closed the sale of the Valhalla Assets in May 2017 for gross cash proceeds of $151.3 million, resulting in the recognition of a gain on sale of $81.4 million. The Valhalla Assets encompassed approximately 94 (74 net) sections of land and had average sales volumes of approximately 1,400 Boe/d in 2017 prior to being sold. In September 2017, Paramount closed the sale of its oil and gas properties in the Saddle Hills/Mirage area of Alberta for cash and other proceeds of $8.2 million and recorded a gain on sale of $27.4 million. In April 2016, Paramount sold the Musreau Complex and recorded a gain of $125.7 million. In August 2016, Paramount sold the Musreau Assets and recorded a gain on sale of $1.2 billion. In December 2016, Cavalier granted a royalty (the "Cavalier Royalty") on its 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 sale, which is included in the exploration and evaluation expense (income) for the year ended December 31, 2016. Exploration and evaluation ("E&E") write-downs for the year ended December 31, 2017 included $184.6 million of write-downs resulting from the de-recognition of the carrying value of the E&E assets related to the Shale Gas Project. The write-down of the Shale Gas Project was due to, among other factors, the suspension of development activities by the Company and other operators in the region and delays and cancellations of proposed downstream third-party liquid natural gas terminals to transport shale gas production to international markets. INVESTMENTS IN SECURITIES Paramount’s investments in other entities are summarized as follows: As at December 31 Trilogy (2) MEG Other (3) Total Carrying Value 2017 (2) 2016 – 19.0 34.3 53.3 44.1 34.2 30.0 108.3 Market Value (1) 2017 (2) – 19.0 34.3 53.3 2016 144.5 34.2 30.0 208.7 Based on the period-end closing price of publicly traded investments and the book value of remaining investments. (1) (2) On September 12, 2017, Paramount acquired all of the outstanding Trilogy Shares not already owned by it pursuant to the Trilogy Merger. As a result, no carrying value or market value is shown as at December 31, 2017, as Trilogy’s results of operations and net assets have been reflected in Paramount’s consolidated financial statements. Includes investments in Blackbird Energy Inc., Marquee Energy Ltd., Storm Resources Ltd., Strategic Oil & Gas Ltd. and other public and private corporations. (3) OTHER ASSETS Fox Drilling Fox Drilling owns seven triple-sized rigs, including four walking rigs. The walking rigs have the capability of moving across a lease with the derrick and drill pipe remaining vertical, significantly increasing efficiencies on multi-well pads. The Fox Drilling rigs are being deployed on the Company’s lands in 2018. Shale Gas Project With the completion of the Company’s drilling program at the Shale Gas Project in 2016, Paramount secured its mineral rights in the region for up to another 10 years. The Company has drilled a total of 4 (4.0 net) exploration wells in the Liard Basin for delineation and land retention purposes. Future development Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 31 activities at the Shale Gas Project will depend upon the advancement of proposed downstream third-party liquid natural gas terminals, project economics and other factors. Cavalier Energy Cavalier was created in 2011 to be a self-funding entity that would develop the Company’s oil sands resources. Cavalier held approximately 206,000 net acres of Crown leases in the Western Athabasca region of Alberta as at December 31, 2017. No significant additional expenditures are planned for Cavalier in the near term. Cavalier’s oil sands resources are at the early stages of their evaluation and development, currently have no production, and there are no assurances that Cavalier 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, nor does it impose any terms or conditions on the use of the consideration paid for the Cavalier Royalty. CORPORATE Year ended December 31 General and administrative Share-based compensation Interest and financing Debt extinguishment Foreign exchange Revaluation of Trilogy Shares Income (loss) from equity-accounted investments Write-down of investments in securities Decrease in market value of securities distributed Transaction and reorganization costs Gain on Apache Canada Acquisition ARO Discount Rate Adjustment 2017 (41.1) (17.8) (10.8) – 0.3 61.8 1.9 (12.6) (10.5) (30.5) 548.9 (158.2) 2016 (25.9) (27.8) (80.3) (27.6) (43.7) – (14.3) (11.2) – – – – General and administrative expenses were higher in 2017 primarily as a result of the impact of the Apache Canada Acquisition and the Trilogy Merger. Share-based compensation expense in 2016 included $13.8 million related to options cancelled in the second quarter of 2016. Interest and financing expense was $10.8 million in 2017, a decrease of $69.5 million from 2016, primarily as a result of lower average debt balances. Debt extinguishment expense of $27.6 million was recorded in 2016 due to the redemption of the Company’s $450 million 7⅝ percent senior notes due 2019 and the assumption of the Company’s US$450 million 6⅞ percent senior notes due 2023 (the "2023 Notes") by the acquirer of the Musreau Assets. The foreign exchange gain in 2016 mainly related to the 2023 Notes, which were outstanding until August 2016. The carrying value of the 19.1 million Trilogy shares held by Paramount immediately prior to the Trilogy Merger was increased to fair value, resulting in the recognition of a gain of $61.8 million in 2017. The Company recorded equity earnings of $1.9 million prior to the closing of the Trilogy Merger. Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 32 The aggregate write-downs of investments in securities of $12.6 million in 2017 and $11.2 million in 2016 resulted from decreases in the market value of certain of the Company’s publicly traded investments. In December 2016, the Company’s Board of Directors declared a dividend of the Company’s remaining 3.8 million class A common shares of Seven Generations Energy Ltd. ("7Gen Shares") to holders of record of Paramount’s Common Shares on January 9, 2017. The decrease in the fair value of the 7Gen Shares of $10.5 million between the acquisition date and the date of the dividend, January 16, 2017, was reclassified to net income from accumulated other comprehensive income. Transaction and reorganization costs in 2017 relate to costs incurred in respect of the Apache Canada Acquisition and the Trilogy Merger and the recognition of a provision for unutilized office space due to the relocation of Paramount’s corporate office following these transactions. The $548.9 million gain recognized in respect of the Apache Canada Acquisition is substantially attributable to the undiscounted nature of the deferred tax asset recognized in the purchase allocation. Asset retirement obligations in respect of Apache Canada and Trilogy were initially recognized based on a credit adjusted discount rate and subsequently re-measured in accordance with Paramount’s accounting policy to reflect the discounting of such amounts using a risk-free discount rate (the ʺARO Discount Rate Adjustmentʺ). The ARO Discount Rate Adjustment resulted in an increase to the carrying value of property, plant and equipment, except for properties with a nil carrying value, where the corresponding amount related to the ARO Discount Rate Adjustment was recorded as a charge to net income. As a result of the ARO Discount Rate Adjustment, a charge of $158.2 million was recorded in net income for the year ended December 31, 2017. Tax Pools As of December 31, 2017, Paramount had tax pools of approximately $3.5 billion in respect of non-capital losses and scientific research and experimental development, $1.3 billion in respect of Canadian resource pools and undepreciated capital cost and $0.1 billion in respect of financing costs and other. PROPERTY, PLANT AND EQUIPMENT AND EXPLORATION EXPENDITURES Drilling, completion and tie-ins Facilities and gathering Exploration and Development Capital (1) Land and property acquisitions Exploration and Development Capital including land & property acquisitions Corporate 2017 451.7 75.9 527.6 13.3 540.9 4.2 545.1 2016 167.9 19.6 187.5 11.0 198.5 2.5 201.0 (1) Exploration and Development Capital consists of property, plant and equipment and exploration expenditures excluding spending related to land and property acquisitions and corporate assets. Exploration and Development Capital was $527.6 million in 2017 compared to $187.5 in in 2016. Current year expenditures include $37.0 million related to Apache Canada and $41.7 million related to Trilogy following the closing of each of the transactions. Expenditures in 2017 were mainly related to drilling and completion programs at Karr, Resthaven and Birch, and the 6-18 compression and dehydration facility (the ʺ6-18 Facilityʺ) expansion at Karr. Expenditures in 2017 related to properties acquired with Apache Canada and Trilogy primarily related to drilling and completion programs at the Montney oil field in the Kaybob Region and at Wapiti in the Grande Prairie Region. Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 33 Development activities in 2017 were primarily focused on the 27 (27.0) well horizontal Montney drilling and completion program at Karr in the Grande Prairie Region, which commenced in mid-2016 (the Karr Programʺ) and the expansion of the 6-18 Facility. All 27(27.0 net) wells from the Karr Program were drilled and completed by the end of 2017. In April 2017, Paramount completed the expansion of the 6-18 Facility, doubling its capacity to 80 MMcf/d. The total cost of the expansion was approximately $40 million. At Resthaven / Jayar, the 2016/17 program included five (4.5 net) Cretaceous wells and one (1.0 net) Montney well. Because of the exploratory nature of this program, drilling operations took longer than planned, resulting in approximately $10 million of additional drilling costs. The Company completed the Montney well, which was drilled in the northern portion of the Resthaven property, and brought it on production. The Company is monitoring the longer-term performance of this well and may accelerate the development of the Montney in this area. At the Kaybob South Duvernay property, the Company completed a new six (3.1 net) well pad that had been drilled by Apache Canada prior to the closing of the Apache Canada Acquisition and brought it on production. At the non-operated Birch property in northeast British Columbia, drilling operations concluded with nine (4.5 net) Montney wells being rig released. The expansion of the Birch compression and dehydration facility to 40 MMcf/d (20 MMcf/d net) was completed in the third quarter of 2017. Capital expenditures for 2018 are expected to be approximately $600 million including exploration, optimization and maintenance programs, excluding acquisitions, divestitures and abandonment and reclamation activities. Approximately $200 million of the 2018 capital program is related to projects that will bring new production on-stream in 2019, including $142 million to drill and complete wells in the Wapiti area in preparation for the startup of the third-party Wapiti natural gas processing plant in 2019. In addition, the Company intends to spend approximately $28 million on abandonment and reclamation activities in 2018. Wells drilled were as follows: Natural gas Oil Total 2017 2016 Gross (1) 35 8 43 Net (2) 28 8 36 Gross (1) 12 – 12 Net (2) 12 – 12 (1) Gross is the number of wells in which Paramount has a working interest. Excludes wells drilled on lands associated with the disposed Musreau Assets. (2) Net is the aggregate number of wells obtained by multiplying each gross well by Paramount’s percentage of working interest. Excludes wells drilled on lands associated with the disposed Musreau Assets. Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 34 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 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. Year ended December 31 Cash and cash equivalents Accounts receivable Prepaid expenses and other Accounts payable and accrued liabilities Adjusted working capital surplus (1) Paramount Facility 2019 Senior Notes ($300 million principal amount) Net Debt (Cash) (2) Share Capital Retained earnings (accumulated deficit) Reserves Total Capital 2017 (123.3) (170.3) (9.1) 237.2 (65.5) 395.0 306.7 636.2 2,249.8 50.3 143.6 3,079.9 2016 (621.9) (23.9) (1.7) 81.6 (565.9) – – (565.9) 1,639.5 (152.2) 147.5 1,068.9 (1) Adjusted working capital excludes risk management liabilities, investments in securities for distribution and related dividend payable (December 31, 2016 - $119.0 million) and the current portion of asset retirement obligations. (2) Refer to the advisories concerning non-GAAP measures in the Advisories section of this document. The change in net debt (cash) in 2017 is primarily due to the payment of the purchase price for the Apache Canada Acquisition, the assumption of Trilogy’s indebtedness through the Trilogy Merger and capital expenditures, partially offset by cash flow from operations and proceeds from sales of oil and gas assets. Paramount expects to fund its 2018 operations, obligations and capital expenditures with cash flow from operations and available capacity under its bank credit facility. Paramount Facility As at December 31, 2017, the Company had a $700 million financial covenant-based senior secured revolving bank credit facility (the ʺParamount Facilityʺ). The maturity date of the Paramount Facility is currently November 6, 2021, which may be extended from time-to-time at the option of Paramount and with the agreement of the lenders. Borrowings under the Paramount Facility bear interest at the lenders’ prime lending rates, US base rates, bankers’ acceptance rates, or LIBOR rates, as selected at the discretion of the Company, plus an applicable margin which is dependent upon the Company’s Senior Secured Debt to Consolidated EBITDA ratio. The Paramount Facility is secured by a charge over substantially all of the assets of Paramount, excluding the assets of Cavalier and Fox Drilling. As at December 31, 2017, Paramount was subject to the following two financial covenants under the Paramount Facility, which are tested at the end of each fiscal quarter: i. Senior Secured Debt to Consolidated EBITDA to be 3.00 to 1.00 or less (or 3.50 to 1.00 or less for two full fiscal quarters after completion of a material acquisition); and ii. Consolidated EBITDA to Consolidated Interest Expense to be 2.50 to 1.00 or greater. Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 35 Senior Secured Debt currently consists of amounts drawn under the Paramount Facility and the undrawn face amount of outstanding letters of credit. Consolidated EBITDA is determined on a trailing twelve month basis, is adjusted for material acquisitions and dispositions, and is generally calculated as net income before Consolidated Interest Expense, taxes, depletion, depreciation, amortization, impairment and exploration and evaluation expense and is also adjusted to exclude non-recurring items and other non-cash items including unrealized mark-to-market amounts on derivatives, unrealized foreign exchange, share-based compensation expense and accretion. Consolidated Interest Expense is reduced by any interest income and other customary exclusions and is calculated on a trailing twelve-month basis. Paramount is in compliance with all covenants under the Paramount Facility. At December 31, 2017, $395.0 million was drawn on the Paramount Facility. Paramount had undrawn letters of credit outstanding totaling $36.6 million at December 31, 2017 that reduce the amount available to be drawn on the Paramount Facility. In March 2018, the Paramount Facility was increased by $500 million to $1.2 billion and the Senior Secured Debt to Consolidated EBITDA financial covenant in such facility was amended as follows: • Senior Secured Debt to Consolidated EBITDA to be 3.50 to 1.00 or less (or 4.00 to 1.00 or less for two full fiscal quarters after completion of a material acquisition). At Paramount’s request, the size of the Paramount Facility can be further increased by up to $300 million (to $1.5 billion) pursuant to an accordion feature in such facility, subject to securing incremental lender commitments. In March 2018, the Company delivered a redemption notice to redeem all $300 million outstanding principal amount of its 7¼% senior unsecured notes due December 2019 (the ʺ2019 Senior Notesʺ). The redemption will be funded using the upsized Paramount Facility and completed in early April 2018. Senior Unsecured Notes Paramount has $300 million outstanding principal amount of senior unsecured notes due 2019. The 2019 Senior Notes were issued by Trilogy in late 2012 and became Paramount’s notes through its acquisition of, and subsequent amalgamation with, Trilogy. The 2019 Senior Notes bear interest at 7¼% per annum, payable semi-annually in arrears on June 13 and December 13 of each year, and mature on December 13, 2019. As of January 1, 2018, the 2019 Senior Notes were direct senior unsecured obligations of Paramount. The 2019 Senior Notes are redeemable in whole or in part at par, plus accrued and unpaid interest to the date of redemption, plus a redemption premium, if applicable, which varies based on the date of redemption. Trilogy Facility At closing of the Trilogy Merger on September 12, 2017, Trilogy had a $285 million senior secured revolving credit facility with a syndicate of Canadian banks (the ʺTrilogy Facilityʺ). In November 2017, the Trilogy Facility was repaid in full and cancelled. Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 36 Share Capital In September 2017, Paramount issued 28,537,134 Common Shares pursuant to the Trilogy Merger. On December 19, 2017, Paramount implemented a normal course issuer bid (the ʺ2018 NCIBʺ) under which the Company can purchase up to 7,497,530 Common Shares for cancellation. Any shareholder may obtain, for no charge, a copy of the notice in respect of the 2018 NCIB filed with the TSX by contacting the Company at 403-290-3600. Between January 1, 2018 and March 7, 2018, the Company purchased and cancelled 1,454,100 Common Shares at a total cost of $27.4 million under the 2018 NCIB. The 2018 NCIB terminates on the earlier of: (i) December 21, 2018; and (ii) the date on which the maximum number of Common Shares that can be acquired are purchased. Paramount previously implemented a normal course issuer bid on October 12, 2016 (the ʺ2016 NCIB”). The Company purchased and cancelled 622,900 Common Shares in 2016 at a total cost of $9.7 million under the 2016 NCIB. The 2016 NCIB expired on October 12, 2017. At December 31, 2017, Paramount had 134,712,907 Common Shares outstanding (net of 345,904 Common Shares held in trust under the Company’s restricted share unit plan) and 10,028,920 options to acquire Common Shares outstanding, of which 1,986,388 options are exercisable. FOURTH QUARTER 2017 RESULTS Netback Three months ended December 31 2017 2016 Natural gas revenue Condensate and oil revenue Other NGLs revenue (2) Royalty and sulphur revenue Petroleum and natural gas sales Royalties Operating expense Transportation and NGLs processing (3) Netback Commodity contract settlements Netback including commodity contract settlements 69.9 161.2 25.4 2.4 258.9 (16.8) (86.1) (24.3) 131.7 3.7 135.4 ($/Boe) (1) 2.11 66.65 30.15 – 29.49 (1.92) (9.81) (2.77) 14.99 0.42 15.41 13.5 16.4 2.1 0.3 32.3 (0.1) (10.9) (4.3) 17.0 8.2 25.2 ($/Boe) (1) 3.10 60.49 22.16 – 29.52 (0.08) (10.00) (3.91) 15.53 7.54 23.07 Natural gas revenue shown per Mcf. (1) (2) Other NGLs includes ethane, propane and butane. (3) Includes downstream natural gas, NGLs and oil transportation costs and NGLs fractionation costs incurred by the Company. Fourth quarter 2017 petroleum and natural gas sales were $258.9 million, an increase of $226.6 million from the fourth quarter of 2016, primarily due to higher sales volumes and higher liquids prices, partially offset by lower natural gas prices. The increases in sales volumes, royalties, operating expense and transportation and NGLs processing in the fourth quarter of 2017 compared to the same period in 2016 were primarily due to incremental production resulting from the Apache Canada Acquisition and the Trilogy Merger and new production at Karr in the Grande Prairie region. Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 37 The impact of changes in sales volumes and prices on petroleum and natural gas sales are as follows: Three months ended December 31, 2016 Effect of changes in sales volumes Effect of changes in prices Change in royalty and sulphur revenue Three months ended December 31, 2017 Sales Volumes Natural gas 13.5 89.0 (32.6) – 69.9 Condensate and oil 16.4 129.9 14.9 – 161.2 Other NGLs 2.1 16.5 6.8 – 25.4 Royalty and Sulphur 0.3 – – 2.1 2.4 Total 32.3 235.4 (10.9) 2.1 258.9 Three months ended December 31 Natural gas (MMcf/d) Condensate and Oil (Bbl/d) 2016 % Change 2017 31.9 0.8 4.8 37.5 10.0 47.5 194 NM NM 860 (100) 658 2016 % Change 481 NM 2,263 121 13,146 9,531 3,608 373 NM 26,285 – 26,285 2,757 186 2,943 853 (100) 793 Other NGLs (Bbl/d) 2016 % Change 286 NM 784 10 2017 31,791 41,531 Total (Boe/d) 2016 % Change 8,357 280 271 NM 145 939 107 1,046 NM 22,090 1,312 874 (100) 775 95,412 – 95,412 9,940 1,961 11,901 NM 860 (100) 702 2017 3,026 2,625 3,498 9,149 – 9,149 Grande Prairie Kaybob Central Alberta & Other Sold Assets Total NM Not meaningful 2017 93.7 176.3 89.9 359.9 – 359.9 Sales volumes increased 702 percent to 95,412 Boe/d in the fourth quarter of 2017 compared to 11,901 Boe/d in the same period in 2016. The increase was primarily due to incremental sales volumes resulting from the Apache Canada Acquisition and the Trilogy Merger and new production at Karr in the Grande Prairie Region. 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) NYMEX (US$/MMbtu) Malin (US$/MMbtu) Crude Oil Paramount average realized condensate & oil price ($/Bbl) Edmonton Light Sweet ($/Bbl) West Texas Intermediate (US$/Bbl) Foreign Exchange $CDN / 1 $US 2016 % Change 2017 2.11 1.60 1.85 2.92 2.70 66.65 65.68 55.40 3.10 2.93 2.62 3.18 3.02 60.49 60.76 49.29 1.27 1.33 (32) (45) (29) (8) (11) 10 8 12 (5) Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 38 Net Income (Loss) Three months ended December 31 Petroleum and natural gas sales Royalties Revenue 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 Transaction and reorganization costs Gain on Apache Canada Acquisition ARO Discount Rate Adjustment Loss from equity-accounted investments Gain on sale of investment in securities Income tax recovery Other Net income (loss) 2017 258.9 (16.8) 242.1 (21.5) 220.6 (86.1) (24.3) (18.7) (9.3) (309.5) (208.0) 10.0 (8.5) (9.3) 0.4 – (16.1) 182.9 65.2 – – 102.0 2.5 (326.8) (106.2) 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 11.1 0.7 186.4 212.4 Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 39 Paramount recorded a net loss of $106.2 million for the three months ended December 31, 2017, which included $184.6 million of write-downs related to the Shale Gas Project and $132.0 million of impairment charges related to petroleum and natural gas assets in the Northern CGU. Net income of $212.4 million was recorded in the same period of 2016. Significant factors contributing to the change are shown below: Three months ended December 31, 2017 Net income – 2016 • Gain on Apache Canada Acquisition • Higher Netback primarily due to higher sales volumes • Higher income tax recovery in 2017 • ARO Discount Rate Adjustment related to the Apache Canada Acquisition • Higher depletion and depreciation mainly due to higher sales volumes and impairment charges totaling $132.0 million in 2017 compared to impairment reversals totaling $133.2 million in 2016 • Exploration and evaluation expense in 2017 including the $184.6 million write-down related to the Shale Gas Project compared to income in 2016 which included a $99.2 million gain in respect of the Cavalier Royalty • Transaction and reorganization costs in 2017 related to the Apache Canada Acquisition and Trilogy Merger • Higher loss on commodity contracts in 2017 • Higher general and administrative costs mainly due to the Apache Canada Acquisition and Trilogy Merger • Other Net loss – 2017 212.4 182.9 114.7 90.9 65.2 (421.6) (301.7) (16.1) (15.2) (12.2) (5.5) (106.2) Adjusted Funds Flow (1) The following is a reconciliation of Adjusted funds flow to the nearest GAAP measure: Three months ended December 31 Cash from (used in) operating activities Change in non-cash working capital Transaction and reorganization costs Geological and geophysical expenses Asset retirement obligations settled Adjusted funds flow Adjusted funds flow ($/Boe) Adjusted funds flow ($/share - diluted) 2017 43.4 36.8 16.1 4.8 9.0 110.1 12.55 0.82 2016 (6.4) 19.6 – 0.2 0.9 14.3 13.10 0.13 (1) Refer to the advisories concerning non-GAAP measures in the Advisories section of this document. Adjusted funds flow in the fourth quarter of 2017 was $110.1 million compared to $14.3 million in the same period in 2016. Significant factors contributing to the change are shown below: Three months ended December 31, 2017 Adjusted funds flow – 2016 • Higher Netback in 2017 primarily due to higher sales volumes • Higher general and administrative expense mainly due to the Apache Canada Acquisition and Trilogy Merger • Lower receipts from commodity contracts settlements in 2017 • Higher interest and financing expense due to higher average debt in 2017 • Other Adjusted funds flow – 2017 14.3 114.7 (12.2) (4.5) (3.0) 0.8 110.1 Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 40 Exploration and Development Capital Exploration and Development Capital in the fourth quarter of 2017 totalled $150.4 million, with the majority of spending directed towards the Karr development in the Grande Prairie region, advancing the 6-18 Facility expansion at Karr and drilling and completion programs at the Montney oil field in the Kaybob region and at Wapiti in the Grande Prairie region. Exploration and Development Capital in the fourth quarter of 2017 was higher than planned, primarily as a result of incurring some 2018 expenditures in late-2017 to accelerate well completions and facilities expansion work at Karr, initiate drilling operations at Smoky River, Kaybob South and Karr and accelerate work on water management facilities for 2018 well completions. QUARTERLY INFORMATION Petroleum and natural gas sales Net income (loss) Per share – basic ($/share) Per share – diluted ($/share) Adjusted funds flow Per share – basic ($/share) Per share – diluted ($/share) Sales volumes Natural gas (MMcf/d) Condensate and oil (Bbl/d) Other NGLs (Bbl/d) Total (Boe/d) Average realized price Natural gas ($/Mcf) Condensate and oil ($/Bbl) Other NGLs ($/Bbl) Total ($/Boe) Q4 258.9 (106.2) (0.79) (0.79) 110.1 0.82 0.82 2017 Q3 116.5 223.5 1.99 1.97 45.3 0.40 0.40 Q2 61.3 45.3 0.43 0.42 35.2 0.33 0.33 Q1 54.7 20.7 0.20 0.19 28.0 0.26 0.26 Q4 32.3 212.4 2.01 1.99 14.3 0.14 0.13 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) Q1 91.2 (46.0) (0.43) (0.43) 22.4 0.21 0.21 359.9 26,285 9,149 95,412 177.2 14,845 4,641 49,023 53.0 8,118 1,414 18,367 51.4 6,348 1,255 16,163 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 2.11 66.65 30.15 29.49 1.89 54.30 23.05 25.84 3.24 57.95 20.09 36.69 3.55 61.75 23.69 37.61 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 Significant Items Impacting Quarterly Results Quarterly earnings variances include the impacts of changing production volumes and market prices. • Fourth quarter 2017 earnings include $184.6 million of write-downs related to the Shale Gas Project, a $182.9 million gain related to the Apache Canada Acquisition and $132.0 million of aggregate impairment write-downs of property, plant and equipment in the Northern CGU. • Third quarter 2017 earnings include a $366.1 million gain related to the Apache Canada Acquisition, a $223.4 million charge related to the ARO Discount Rate Adjustment and a $61.8 million gain related to a fair value adjustment in respect of the Trilogy Shares held prior to the Trilogy Merger. • Second quarter 2017 earnings include a $80.9 million gain on the sale of oil and gas assets primarily related to the sale of the Valhalla Assets. Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 41 • First quarter 2017 earnings include a $42.1 million reversal of impairments of oil and gas assets recorded in prior years related to the Valhalla Assets and a $10.5 million loss due to changes in the fair value of 3.8 million 7Gen Shares distributed to Paramount shareholders by way of dividend. • 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 impact of the sale of the Musreau Assets, 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 sale of the Musreau Complex, partially offset by $17.7 million of share-based compensation expense. • First quarter 2016 earnings include a foreign exchange gain of $40.3 million related to the 2023 Notes and a $13.7 million gain on commodity contracts. OTHER INFORMATION Contractual Obligations Paramount had the following long-term contractual obligations at December 31, 2017: Paramount Facility (1) 2019 Senior Notes (2) Transportation and processing commitments (3) Asset retirement obligations (4) Operating leases and other (5) After one year but not more than three years – 320.6 371.3 81.6 9.1 782.6 After three years but not more than five years 395.0 – 279.3 80.7 3.4 758.4 Within 1 year – 21.8 121.3 28.0 9.5 180.6 More than five years – – 537.7 1,561.7 0.2 2,099.6 Total 395.0 342.4 1,309.6 1,752.0 22.2 3,821.2 (1) (2) (3) (4) (5) Excluding interest. Including interest. Certain of the transportation and processing commitments are secured by outstanding letters of credit totaling $20 million at December 31, 2017 (December 31, 2016 - $5.1 million). Asset retirement obligations estimated as at December 31, 2017. Estimated costs and timing of settlement are revised from time-to-time based on new information. Future lease commitments for corporate office space have been reduced for sublease revenue and the impact of provisions recorded in respect of a market rate adjustment and unoccupied office space. Transportation and processing commitments mainly relate to long-term firm service arrangements for the processing of natural gas and the 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. 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 Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 42 remediation activities ("Response Activities"). Total costs to complete the Response Activities are estimated at approximately $60 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. 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 amounts may differ materially from amounts estimated and recorded. Risk Factors A description of the most significant risk factors related to Paramount and its business is contained in Paramount’s 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. CHANGE IN ACCOUNTING POLICIES There were no new or amended accounting standards adopted by the Company for the year ended December 31, 2017. 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 of goods is transferred to the purchaser or services are provided. IFRS 15 is effective for years beginning on or after January 1, 2018. The Company has evaluated the expected impact of the new standard and has concluded that it is not expected to have a material impact on the Company’s Consolidated Financial Statements. In July 2014, the IASB issued IFRS 9 – Financial Instruments, which sets out the recognition and measurement requirements for financial instruments and certain contracts to buy or sell non-financial items. IFRS 9 proposes a single model of classifying and measuring financial assets and liabilities and provides for only two classification categories: amortized cost and fair value. IFRS 9 is effective for years beginning on or after January 1, 2018. The Company has evaluated the impact of the new standard and determined that it is not expected to have a material impact on the Company’s Consolidated Financial Statements, except for the measurement and presentation of investments in securities. The new standard provides that changes in the fair value of investments in securities can be recognized in earnings or be accumulated in other comprehensive income ("OCI"). The adoption of IFRS 9 is applied retroactively. Depending on whether the Company elects to record changes in the fair value of investments in securities in earnings or in OCI, the impact may result in material adjustments to the Company’s 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 either finance or operating and introduces a single lessee accounting model for recognition and measurement, which will require the recognition of Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 43assets and liabilities for most leases. IFRS 16 is effective for years beginning on or after January 1, 2019. The Company has initiated a project to identify and review lease contracts to determine the extent of the potential impact. Paramount expects that the adoption of the standard will have a material impact on the Consolidated Financial Statements. DISCLOSURE CONTROLS AND PROCEDURES As of the year ended December 31, 2017, an evaluation of the effectiveness of Paramount’s disclosure controls and procedures, as defined by the rules of the Canadian Securities Administrators, was performed by the Company’s management with the oversight of the chief executive officer and chief financial officer. Based upon that evaluation, the Company’s chief executive officer and chief financial officer have concluded that as of the end of that fiscal year, the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company is (i) recorded, processed, summarized and reported within the time periods specified in Canadian securities law; and (ii) accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer as appropriate, to allow timely decisions regarding required disclosure. It should be noted that while the Company’s chief executive officer and chief financial officer believe that the Company’s disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the Company’s disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. INTERNAL CONTROLS OVER FINANCIAL REPORTING Management has assessed the effectiveness of the Company’s internal 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, 2017. 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, 2017. 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, 2017, there was no change in the Company’s ICFR that materially affected, or is reasonably likely to materially affect, the Company’s ICFR. Paramount closed the Apache Canada Acquisition on August 16, 2017 and the Trilogy Merger on September 12, 2017. Management has limited the scope of their design of disclosure controls and procedures and ICFR to exclude the controls, policies and procedures of Apache Canada and Trilogy, pursuant to Section 3.3(1)(b) of National Instrument 52-109. Amounts in respect of Apache Canada and Trilogy included in Paramount’s Consolidated Financial Statements as at and for the year ended December 31, 3017 are as follows: Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 44Sales Volumes (Boe/d) Petroleum and natural gas sales Current Assets Current Liabilities Apache Canada 14,882 123.0 96.0 65.0 Trilogy 6,548 66.4 32.2 56.7 Non-current assets and non-current liabilities related to Apache Canada and Trilogy were impracticable to determine separately from Paramount’s consolidated non-current assets and non-current liabilities as at December 31, 2017. For additional financial information regarding the Apache Canada Acquisition and the Trilogy Merger, refer to notes 4 and 5 of the Company’s Consolidated Financial Statements. 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 area, and it is possible to have exploratory costs remain capitalized for several years while additional exploratory activities are carried out or the Company seeks government, regulatory or partner approval for development plans. E&E assets are subject to ongoing technical, commercial and Management review to confirm the continued intent to 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. Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 45 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, 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; (iii) the estimated fair value of petroleum and natural gas acquired in a business combination, and (iv) 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. Business Combinations Management is required to exercise judgment in determining whether assets acquired and liabilities assumed constitute a business. A business consists of an integrated set of assets and activities, comprised of inputs and processes, that is capable of being conducted and managed as a business by a market participant. Business combinations are accounted for using the acquisition method of accounting, where-by the net identifiable assets acquired are recorded at fair value. The fair value of individual assets is often required to be estimated, which may involve estimating the fair values of reserves and resources, tangible assets, undeveloped land, intangible assets and other assets. These estimates incorporate assumptions using indicators of fair value, as determined by Management. Changes in any of the estimates or assumptions used in determining the fair value of the net identifiable assets acquired may impact the carrying values assigned to assets and liabilities acquired and 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 petroleum 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 petroleum and natural gas assets 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, the overall significance of individual properties and the manner in which management monitors its operations and allocates capital. Changes in the assets comprising CGUs could have an impact on Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 46estimated recoverable amounts used in impairment assessments and could have a material impact on earnings. Equity Accounted Investments Prior to the merger with Trilogy in September 2017, the Company accounted for its investment in Trilogy under the equity method of investment accounting, although it held less than 20 percent of the voting power, because in Management’s judgment, it had significant influence as a result of common directors and members of senior management. Investments in Securities The Company’s investments in securities are accounted for as available-for-sale financial instruments and 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 Paramount’s 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 Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 47 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. ADVISORIES Forward-looking Information Certain statements in this document constitute forward-looking information under applicable securities legislation. Forward-looking information typically contains statements with words such as "anticipate", "believe", "estimate", "will", "expect", "plan", "schedule", "intend", "propose", or similar words suggesting future outcomes or an outlook. Forward-looking information in this document includes, but is not limited to: • projected production and sales volumes (including the liquids component) and the timing thereof; • forecast capital expenditures, operating costs per Boe, abandonment and reclamation costs and transportation costs per Boe; • exploration, development, and associated operational plans and strategies (including planned drilling and completion programs, potential divestitures of non-core assets, facility expansions liquids transportation initiatives and potential increases in third-party processing and related capacities); • estimated reserves and the undiscounted and discounted present value of future net revenues therefrom; the timing and source of funds for the redemption of Paramount’s 2019 senior notes; 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 business, economic and market conditions; • the ability of Paramount to obtain the required capital to finance its exploration, development and other operations and meet its commitments and financial obligations; 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 them 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 Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 48materially from those anticipated by Paramount and described in the forward-looking information. The material risks and uncertainties include, but are not limited to • • • • fluctuations in natural gas 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); • processing, pipeline, de-ethanization, and fractionation infrastructure outages, disruptions and constraints; risks and uncertainties involving the geology of oil and gas deposits; • • the uncertainty of reserves and resources estimates; • general business, economic and market conditions; • the ability to generate sufficient cash flow from operations and obtain financing to fund planned exploration, development and operational activities and meet current and future commitments and obligations (including product processing, transportation, de-ethanization, fractionation and similar commitments and obligations); 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 and other factors including wildlife and environmental restrictions which affect field operations and access; 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 "Adjusted funds flow", "Netback", "Net Debt (Cash)", "Adjusted working capital", "Exploration and Development 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. Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 49 Adjusted funds flow refers to cash from operating activities before net changes in operating non-cash working capital, geological and geophysical expenses, asset retirement obligation settlements and transaction and reorganization costs. Adjusted funds flow 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 section of the Company’s Management’s Discussion and Analysis for the calculation thereof. 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 Operating Results section of the Company’s Management’s Discussion and Analysis for the calculation thereof. Net Debt (Cash) is a measure of the Company’s overall debt position after adjusting for certain working capital and other 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 calculation of Net Debt (Cash) and Adjusted working capital. Exploration and Development Capital consists of the Company’s spending on wells, infrastructure projects, and other property, plant and equipment and excludes spending related to land and property acquisitions and corporate assets. The Exploration and Development Capital measure provides management and investors with information regarding the Company’s capital spending on wells and infrastructure projects separate from land and property acquisition activity and corporate expenditures. Refer to the Property, Plant and Equipment and Exploration Expenditures section of the Company’s Management’s Discussion and Analysis for the calculation thereof for the year ended December 31, 2017 and 2016. The following is the calculation of Exploration and Development Capital from the nearest GAAP measure for the three months ended December 31, 2017 and December 31, 2016: Three months ended December 31 Property, plant and equipment and exploration Land and property acquisitions Corporate Exploration and Development Capital 2017 158.8 (6.0) (2.4) 150.4 2016 78.8 (0.2) (0.5) 78.1 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. MEG Energy Corp, Blackbird Energy Inc., Marquee Energy Ltd., Storm Resources Ltd., Strategic Oil & Gas Ltd., Trilogy (2016) and others), and investments in all other entities at book value. Refer to the Investments in Securities section of the Company’s Management’s Discussion and Analysis and Consolidated Financial Statements as at and for the year ended December 31, 2017 for information on carrying and market values. 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 Reserves and Finding & Development Costs section of this document for the calculation of the F&D costs per Boe for the Karr Property. 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. Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 50 Oil and Gas Measures and Definitions The term "liquids" includes oil, condensate and Other NGLs (ethane, propane and butane). Abbreviations Liquids Barrels Bbl Barrels per day Bbl/d Thousands of barrels MBbl NGLs Natural gas liquids Condensate Pentane and heavier hydrocarbons Oil Equivalent Boe MMBoe Boe/d Barrels of oil equivalent Millions of Barrels of oil equivalent Barrels of oil equivalent per day Natural Gas Mcf MMcf/d GJ MMbtu AECO NYMEX Thousands of cubic feet Millions of cubic feet per day Gigajoule Millions of British thermal units AECO-C reference price New York Mercantile Exchange 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. For the year ended December 31, 2017, 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. The reserves replacement disclosure herein was calculated 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 for 2017, before acquisitions and dispositions. Paramount Resources Ltd. 2017 Management’s Discussion & Analysis 51 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 7, 2018 /s/ B.K. Lee B.K. Lee Executive Vice President, Finance and Chief Financial Officer Paramount Resources Ltd. 2017 Consolidated Financial Statements 52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, 2017 and 2016, and the consolidated statements of comprehensive income, 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 December 31, 2017 and 2016, and their financial performance and cash flows for the years then ended in accordance with International Financial Reporting Standards. Calgary, Canada March 7, 2018 Chartered Professional Accountants Paramount Resources Ltd. 2017 Consolidated Financial Statements 53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 Exploration and evaluation Property, plant and equipment, net Equity-accounted investment Investments in securities Deferred income tax LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Dividend payable Accounts payable and accrued liabilities Risk management Current portion of asset retirement obligations Long-term debt Asset retirement obligations and other Deferred income tax Commitments and contingencies Shareholders’ equity Share capital Retained earnings (accumulated deficit) Reserves See the accompanying notes to these Consolidated Financial Statements. On behalf of the Board of Directors Note 2017 2016 17 11, 16 15 6 7 5 8 14 11 15 15 10 9 10 14 20 11 12 123,329 – 170,313 9,047 302,689 785,764 3,282,542 – 53,315 666,404 5,090,714 – 237,181 19,060 28,000 284,241 701,750 1,661,073 – 2,647,064 2,249,746 50,325 143,579 2,443,650 5,090,714 621,872 118,978 23,895 1,715 766,460 301,530 882,724 44,053 64,193 – 2,058,960 118,978 81,585 5,180 7,896 213,639 – 204,413 6,125 424,177 1,639,466 (152,182) 147,499 1,634,783 2,058,960 /s/ C.H. Riddell C.H. Riddell, Director March 7, 2018 /s/ J.C. Gorman J.C. Gorman, Director Paramount Resources Ltd. 2017 Consolidated Financial Statements 54CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ($ thousands, except as noted) Year ended December 31 Petroleum and natural gas sales Royalties Revenue Gain (loss) on commodity contracts Expenses 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 Transaction and reorganization costs Debt extinguishment Foreign exchange Income (loss) from equity-accounted investment Gain on Apache Canada Acquisition ARO Discount Rate Adjustment Other Income before tax Income tax expense (recovery) Deferred Net income 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 (loss) related to securities Comprehensive income Net income per common share ($/share) Basic Diluted See the accompanying notes to these Consolidated Financial Statements. Note 15 13 7 6 7 10 4,5,10 9 5 4 10 16 14 11 2017 491,421 (24,649) 466,772 (4,059) 462,713 165,893 50,985 41,102 17,840 434,118 214,776 (123,966) 10,783 15,970 30,529 – 292 858,322 63,729 548,931 (158,223) (14,324) 44,504 (138,857) (138,857) 183,361 2016 248,828 (2,211) 246,617 253 246,870 97,040 56,465 25,877 27,771 76,415 (72,071) (1,379,965) 80,324 4,622 – 27,575 (43,727) (1,099,674) (14,316) – – (10,859) 1,321,369 156,094 156,094 1,165,275 (40,078) 23,011 947 167,241 13,128 11,235 (1,276) 1,188,362 1.60 1.58 10.98 10.95 Paramount Resources Ltd. 2017 Consolidated Financial Statements 55CONSOLIDATED STATEMENT OF CASH FLOWS ($ thousands) Year ended December 31 Operating activities Net income 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 repayment of limited-recourse demand facilities Net draw (repayment) of revolving long-term debt Repayment of Trilogy Facility Redemption of senior notes Common shares issued, net of issue costs Common shares purchased under restricted share unit plan 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 Proceeds on sale of investments, net of costs Corporate acquisition Cash acquired on corporate acquisition 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. Note 2017 2016 183,361 1,165,275 (4,479) (21,450) – (31,137) 126,295 – 392,535 (155,901) – 6,623 (11,370) – – 231,887 (545,109) 158,370 – (486,852) 25,468 (7,121) (855,244) (497,062) (1,481) 621,872 123,329 17 10 9 9 9 13 11 4 4 17 (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 Paramount Resources Ltd. 2017 Consolidated Financial Statements 56CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY ($ thousands, except as noted) Year ended December 31 Share Capital Balance, beginning of year Issued Issued on Trilogy Merger, net of issuance costs Common shares purchased under NCIB Change in vested and unvested common shares for restricted share unit plan Balance, end of year Retained Earnings (Accumulated Deficit) Balance, beginning of year Net income Dividend Decrease in value of securities prior to distribution Balance, end of year Reserves Balance, beginning of year Other comprehensive income (loss) Contributed surplus Balance, end of year Total Shareholders’ Equity See the accompanying notes to these Consolidated Financial Statements. Note 2017 Shares (000’s) 2016 Shares (000’s) 11 5 13 16 12 105,784 735 28,537 – 1,639,466 9,552 603,085 – (343) (2,357) 134,713 2,249,746 106,212 176 – (623) 1,646,984 2,060 – (9,704) 19 105,784 126 1,639,466 (152,182) 183,361 – 19,146 50,325 147,499 (16,120) 12,200 143,579 2,443,650 (1,197,627) 1,165,275 (119,830) – (152,182) 99,337 23,087 25,075 147,499 1,634,783 Paramount Resources Ltd. 2017 Consolidated Financial Statements 571. Significant Accounting Policies Paramount Resources Ltd. ("Paramount" or the "Company") is an independent, publicly traded, liquids- focused Canadian energy company that explores for and develops both conventional and unconventional petroleum and natural gas resources. The Company also pursues long-term strategic exploration and pre- development plays and holds a portfolio of investments in other entities. Paramount’s principal properties are located in Alberta and British Columbia. 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 2800, 421 – 7th Avenue S.W., Calgary, Alberta, Canada, T2P 4K9. The consolidated group includes wholly-owned subsidiaries Fox Drilling Limited Partnership ("Fox Drilling"), Cavalier Energy ("Cavalier") and MGM Energy. These consolidated financial statements of the Company, as at December 31, 2017 and December 31, 2016 and for the years then ended (the "Consolidated Financial Statements"), were authorized for issuance by Paramount’s Board of Directors on March 7, 2018. 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. 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. Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 58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 E&E assets include shale gas properties in the Liard and Horn River basins and oil sands and carbonate bitumen properties. Net cash flows from the sale of production from Shale Gas Project wells 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. 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 Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 59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 estimated 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. Following two significant acquisitions in 2017, the Company’s conventional operations have been re-grouped into four new CGUs: the Grande Prairie CGU, the Kaybob CGU, the Central Alberta CGU and the Northern CGU. The Company’s non-conventional E&E assets associated with the Shale Gas Project form a fifth 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 carrying value, 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 and its value in use. In assessing fair value less costs to sell, the Company estimates the value a potential purchaser would ascribe to an asset or CGU. For oil and gas properties, fair value less costs to sell 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. 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. Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 60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 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, except for deferred income tax amounts. Any excess of the consideration paid over the value of the net identifiable assets acquired is recognized as goodwill. Any deficiency in the consideration transferred versus the value of the net identifiable assets acquired is recognized in earnings. Costs incurred to complete the business combination 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) Provisions Provisions are recognized when Paramount has a present legal and/or constructive obligation as a result of past events, it is probable that an outflow of economic resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. A provision for onerous contracts is recognized when the expected economic benefits to be derived by the Company from a contract are lower than the unavoidable cost of meeting the obligations under the contract. The provision is measured at the lower of the expected cost of terminating the contract and the present value of the expected net cost of the remaining term of the contract. Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 61l) Asset Retirement Obligations Asset retirement obligations arise from legal and/or constructive obligations to retire assets, including oil and gas wells, gathering systems, processing plants and access roads at the end of their productive lives. The present value of an asset retirement obligation is recognized in the Consolidated Balance Sheet when incurred and a reasonable estimate of the 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. m) Foreign Currency Translation The functional and presentation currency of Paramount and its subsidiaries is the Canadian dollar. n) 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. Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 62o) Financial Instruments and Other Comprehensive Income Financial Instruments Financial instruments are measured at fair value on initial recognition. The measurement of a financial instrument in subsequent periods is dependent upon whether it has been classified as "fair value through profit or loss", "available-for-sale", "loans and receivables", "held-to-maturity investments", or "financial liabilities measured at amortized cost", as defined by the relevant standard. Paramount does not presently employ hedge accounting for any of its financial instruments. The fair values of cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities approximate their carrying amounts due to the short-term maturities of these instruments. Paramount’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 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 financial liabilities. Financial liabilities, including related transaction costs, are measured at amortized cost using the effective interest method. Other Comprehensive Income For Paramount, OCI is comprised of changes in the market value of investments in securities. 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 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 is recognized in OCI. p) 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 Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 63realized or liabilities are settled, with adjustments being recognized in deferred tax expense in the period in which the change occurs. Deferred income tax assets are recognized to the extent future realization is considered probable. The carrying value of deferred income tax assets is reviewed at each reporting date taking into consideration historical and expected future taxable income, expected reversals of temporary differences, anticipated timing of realization, tax basis carry-forward periods and other factors. Deferred income tax assets are de- recognized to the extent that estimated future taxable earnings are not sufficient to result in the asset being recovered. 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 class A common shares ("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. Restricted Share Unit Plan Paramount’s restricted share unit plan ("RSU") 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, the awards vest over two years. The unvested portion of an award is initially recorded as a reduction of Paramount’s Share Capital. The cost of such awards is then recognized over the vesting period as share-based compensation expense, with a corresponding increase to Share Capital. Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 64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 stock 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. E&E 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. Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 65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, 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; (iii) the estimated fair value of petroleum and natural gas acquired in a business combination, and (iv) 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. Business Combinations Management is required to exercise judgment in determining whether assets acquired and liabilities assumed constitute a business. A business consists of an integrated set of assets and activities, comprised of inputs and processes, that is capable of being conducted and managed as a business by a market participant. Business combinations are accounted for using the acquisition method of accounting, whereby the net identifiable assets acquired are recorded at fair value. The fair value of individual assets is often required to be estimated, which may involve estimating the fair values of reserves and resources, tangible assets, undeveloped land, intangible assets and other assets. These estimates incorporate assumptions using indicators of fair value, as determined by Management. Changes in any of the estimates or assumptions used in determining the fair value of the net identifiable assets acquired may impact the carrying values assigned to assets and liabilities acquired and 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 petroleum 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 petroleum and natural gas assets 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, the overall significance of individual properties and the manner in which management monitors its operations and allocates capital. Changes in the assets comprising CGUs could have an impact on Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 66estimated recoverable amounts used in impairment assessments and could have a material impact on earnings. Equity Accounted Investments Prior to the merger with Trilogy Energy Corp. (ʺTrilogyʺ) in September 2017, the Company accounted for its investment in Trilogy under the equity method of investment accounting, although it held less than 20 percent of the voting power, because in Management’s judgment, it had significant influence as a result of common directors and members of senior management. Investments in Securities The Company’s investments in securities are accounted for as available-for-sale financial instruments and 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 Paramount’s 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 Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 67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. 3. Changes in Accounting Standards There were no new or amended accounting standards adopted by the Company for the year ended December 31, 2017. 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 of goods is transferred to the purchaser or services are provided. IFRS 15 is effective for years beginning on or after January 1, 2018. The Company has evaluated the expected impact of the new standard and has concluded that it is not expected to have a material impact on the Company’s Consolidated Financial Statements. In July 2014, the IASB issued IFRS 9 – Financial Instruments, which sets out the recognition and measurement requirements for financial instruments and certain contracts to buy or sell non-financial items. IFRS 9 proposes a single model of classifying and measuring financial assets and liabilities and provides for only two classification categories: amortized cost and fair value. IFRS 9 is effective for years beginning on or after January 1, 2018. The Company has evaluated the impact of the new standard and determined that it is not expected to have a material impact on the Company’s Consolidated Financial Statements, except for the measurement and presentation of investments in securities. The new standard provides that changes in the fair value of investments in securities can be recognized in earnings or be accumulated in OCI. The adoption of IFRS 9 is applied retroactively. Depending on whether the Company elects to record changes in the fair value of investments in securities in earnings or in OCI, the election may result in material adjustments to the Company’s 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 either finance or operating and introduces a single lessee accounting model for recognition and measurement, which will require the recognition of assets and liabilities for most leases. IFRS 16 is effective for years beginning on or after January 1, 2019. The Company has initiated a project to identify and review lease contracts to determine the extent of the potential impact. Paramount expects that the adoption of this standard may have a material impact on the Consolidated Financial Statements. 4. Apache Canada Ltd. Acquisition On August 16, 2017, Paramount acquired all of the outstanding shares of Apache Canada Ltd. (ʺApache Canadaʺ) for cash consideration of $486.9 million (the ʺApache Canada Acquisitionʺ). Apache Canada was a wholly-owned subsidiary of a publicly traded U.S. based international oil and gas company. Apache Canada’s primary oil and gas assets were located at Wapiti, Kaybob and in Central Alberta. These Consolidated Financial Statements include the results of operations of Apache Canada for the period following the closing of the transaction on August 16, 2017. Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 68The Apache Canada Acquisition was accounted for as a business combination in accordance with IFRS 3, Business Combinations (ʺIFRS 3ʺ), using the acquisition method of accounting whereby all of the assets acquired and liabilities assumed were recorded at fair value. The allocation of the total consideration is preliminary and was based on estimates of fair value, except for deferred income tax amounts. The purchase allocation is based on Management’s best estimate of fair value and has been retrospectively adjusted to reflect new information obtained about conditions that existed at the acquisition date. As a result of these adjustments, the purchase price allocation includes an increase of $45.0 million to property, plant and equipment, an increase of $45.0 million to asset retirement obligations, an increase of $182.9 million to deferred income tax asset and an increase of $182.9 million to the gain recorded on acquisition. The following table summarizes the net assets acquired: Cash consideration Cash Accounts receivable Prepaids Exploration and evaluation Property, plant and equipment Deferred income tax asset Accounts payable Asset retirement obligations (see also - note 10) Provision Net assets acquired Gain on Apache Canada Acquisition $ 486,852 $ 25,468 36,113 5,015 295,095 870,329 633,503 (59,632) (757,196) (12,912) 1,035,783 (548,931) $ 486,852 The estimated asset retirement obligations were discounted using a credit-adjusted discount rate of approximately six percent. These obligations will be settled over the useful lives of the assets, which exceed 40 years. A $12.9 million provision was recorded in relation to Apache Canada’s head office lease, which expires in 2023, as a result of the difference between current market rates and the contractual rates under the lease. The gain on acquisition of $548.9 million is substantially attributable to the undiscounted nature of the deferred tax asset recognized in the purchase allocation. Paramount incurred $7.3 million of transaction costs related to the Apache Canada Acquisition, which were recognized in transaction and reorganization costs in the statement of comprehensive income. Since August 16, 2017, the Company recorded $123.0 million of petroleum and natural gas sales in respect of properties added through the Apache Canada Acquisition. The profit or loss for the same period is impracticable to determine. 5. Trilogy Energy Corp. Merger On September 12, 2017, Paramount and Trilogy completed a merger transaction (the ʺTrilogy Mergerʺ) under which Paramount acquired all of the outstanding shares of Trilogy (ʺTrilogy Sharesʺ) not already owned by it in exchange for Common Shares, on the basis of one Common Share for every 3.75 Trilogy shares. Trilogy was, prior to the completion of the merger, a publicly traded petroleum and natural gas- focused Canadian energy corporation. Trilogy’s primary oil and gas assets were located in the Kaybob and Grande Prairie areas of Alberta. These Consolidated Financial Statements include the results of operations of Trilogy for the period following the closing of the transaction on September 12, 2017. Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 69The Trilogy Merger was accounted for as a business combination in accordance with IFRS 3, using the acquisition method of accounting whereby all of the assets acquired and liabilities assumed were recorded at fair value. The allocation of the total consideration is preliminary and was based on estimates of fair value, except for deferred income tax amounts. The purchase allocation is based on Management’s best estimate of fair value and has been retrospectively adjusted to reflect new information obtained about conditions that existed at the acquisition date. As a result of these adjustments, the purchase price allocation includes a decrease of $23.7 million to exploration and evaluation assets, an increase of $35.1 million to property, plant and equipment and an increase of $11.5 million to asset retirement obligations. The following table summarizes the net assets acquired: Share consideration – Common Shares Fair value of Trilogy Shares held immediately before the Trilogy Merger Share-based compensation – Trilogy Options Total consideration Accounts receivable Risk management assets Prepaids Exploration and evaluation Property, plant and equipment Accounts payable Bank credit facility 7¼ percent senior unsecured notes due 2019 Asset retirement obligations (see also - note 10) Deferred income tax liability Net assets acquired $ 603,275 107,783 3,196 $ 714,254 $ 18,513 4,605 2,321 405,992 1,011,509 (51,033) (158,716) (306,750) (110,395) (101,792) $ 714,254 Pursuant to the Trilogy Merger, Paramount issued 28.5 million Common Shares which were ascribed a value of $21.14 per share based on the closing market price of the shares on the day immediately preceding the closing of the Trilogy Merger. The carrying value of the 19.1 million Trilogy Shares held by Paramount immediately prior to the Trilogy Merger was increased to fair value, resulting in the recognition of a gain of $61.8 million. Equity income of $1.9 million was recorded to September 12, 2017 in respect of Paramount’s investment in Trilogy (twelve months ended December 31, 2016 - $14.3 million equity loss). Following the closing of the Trilogy Merger, holders of options to acquire Trilogy Shares (ʺTrilogy Optionsʺ) are entitled to purchase Common Shares rather than Trilogy Shares at an adjusted exercise price, based on the exchange ratio for the Trilogy Shares. As a result, the fair value of the vested Trilogy Options was recognized by Paramount as additional consideration, based on a Black-Scholes option value of $3.2 million. The estimated asset retirement obligations were discounted using a credit-adjusted discount rate of approximately six percent. These obligations will be settled over the useful lives of the assets, which exceed 40 years. Paramount incurred $3.1 million of transaction costs related to the Trilogy Merger, which were recognized in transaction and reorganization costs in the statement of comprehensive income. Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 70Since September 12, 2017, the Company recorded $66.4 million of petroleum and natural gas sales in respect of properties added through the Trilogy Merger. The profit or loss for the same period is impracticable to determine. If the Apache Canada Acquisition and the Trilogy Merger had been completed on January 1, 2017, Paramount’s revenue for the twelve months ended December 31, 2017 would have been approximately $845 million (unaudited). Paramount’s revenue less transportation, NGLs processing and operating expenses would have been approximately $420 million (unaudited) for the twelve months ended December 31, 2017. The impact of the Apache Canada Acquisition and the Trilogy Merger on net income for the period is impracticable to determine. This pro forma information is not necessarily indicative of results that would have been obtained if the Apache Canada Acquisition and the Trilogy Merger had actually occurred on January 1, 2017. 6. Exploration and Evaluation Year ended December 31 Balance, beginning of year Additions Apache Canada Acquisition and Trilogy Merger Change in asset retirement provision Transfers to property, plant and equipment Dry hole Expired lease costs Write-downs Dispositions Balance, end of year Exploration and Evaluation Expense (Income) Year ended December 31 Geological and geophysical Dry hole Expired lease costs Write-down of exploration and evaluation assets Gain on sale of Cavalier Royalty 2017 301,530 14,276 701,087 4,304 (6,283) – (8,869) (196,610) (23,671) 785,764 2017 9,297 – 8,869 196,610 – 214,776 2016 363,724 48,141 – 2,942 (23,700) (13,811) (6,194) (2,969) (66,603) 301,530 2016 4,115 13,811 6,194 2,969 (99,160) (72,071) Write-downs of exploration and evaluation assets for the year ended December 31, 2017 include $184.6 million related to the de-recognition of the carrying value of shale gas properties in the Liard and Horn River basins (the "Shale Gas Project"). The write-down of the Shale Gas Project was due to, among other factors, the suspension of development activities by the Company and other operators in the region and delays and cancellations of proposed downstream liquid natural gas terminals to transport shale gas production to international markets. 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 in 2016, which was included in exploration and evaluation expense (income). The Cavalier Royalty is secured by a lien over the Oil Sands Lands. Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 717. Property, Plant and Equipment Year ended December 31, 2017 Cost Balance, December 31, 2016 Additions Apache Canada Acquisition and Trilogy Merger ARO Discount Rate Adjustment (see note 10) Transfers from exploration and evaluation Dispositions Change in asset retirement provision Cost, December 31, 2017 Accumulated depletion, depreciation and write-downs Balance, December 31, 2016 Depletion and depreciation Write-downs Dispositions Accumulated depletion, depreciation and write-downs, December 31, 2017 Net book value, December 31, 2016 Net book value, December 31, 2017 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 1,982,438 532,511 1,881,838 507,775 6,283 (324,299) (16,418) 4,570,128 (1,208,652) (335,516) (89,860) 247,562 (1,386,466) 773,786 3,183,662 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 156,437 716 – – – – – 157,153 (55,442) (12,398) – – (67,840) 100,995 89,313 Drilling rigs 155,107 1,330 – – – 156,437 (42,677) (12,765) – – (55,442) 112,430 100,995 Other Total 30,435 3,526 – – – (253) – 33,708 (22,492) (1,854) – 205 (24,141) 7,943 9,567 2,169,310 536,753 1,881,838 507,775 6,283 (324,552) (16,418) 4,760,989 (1,286,586) (349,768) (89,860) 247,767 (1,478,447) 882,724 3,282,542 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 At December 31, 2017, $119.0 million (December 31, 2016 – $99.2 million) of capitalized costs related to incomplete development wells and infrastructure projects were not subject to depletion or depreciation. In September 2017, Paramount closed the sale of its oil and gas properties in the Saddle Hills/Mirage area of Alberta for cash and other proceeds of $8.2 million and recorded a gain on sale of $27.4 million. Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 72 In May 2017, Paramount closed the sale of its oil and gas properties in the Valhalla area of Alberta (the "Valhalla Assets") for gross cash proceeds of $151.3 million. A gain of $81.4 million was recorded in respect of the sale of the Valhalla Assets. In April 2016, Paramount closed the sale of its natural gas processing facility and related midstream assets at Musreau/Kakwa 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 for total consideration of approximately $2.1 billion (the "Musreau Disposition"). A gain on sale of approximately $1.2 billion was recorded in respect of the Musreau Disposition. Depletion and Depreciation Year ended December 31 Depletion and depreciation Write-downs of property, plant and equipment (reversal of prior-years’ write-downs) 2017 344,258 89,860 434,118 2016 209,661 (133,246) 76,415 A reversal of previously recorded impairment charges of $42.1 million related to the Valhalla Assets was recorded in 2017 prior to accounting for the sale, representing the amount required to increase the carrying value of the assets to the amount that would have been determined, net of depletion and amortization, had no impairment charges been recognized in prior periods. At December 31, 2017, the Company recorded an impairment write-down of $132.0 million related to petroleum and natural gas assets in the Northern CGU. The impairment write-down was recorded because the carrying value of the CGU exceeded its recoverable amount, which was estimated on a value in use basis based on expected net discounted future cash flows from the production of proved and probable reserves. The impairments resulted from a combination of decreases in estimated future net revenues due to lower forecasted natural gas prices and higher well costs than reserves values assigned. Recoverable amounts were estimated using a discounted cash flow method (level three fair value hierarchy estimate). Cash flows were projected over the expected remaining productive life of the Northern CGU’s reserves, at an after-tax discount rate of 10.5 percent, resulting in an estimated recoverable amount of $22.1 million. Reserve estimates were prepared by Paramount’s independent qualified reserves evaluator. The forecast prices used to determine the recoverable amount reflect the following benchmark prices, adjusted for basis differentials to determine local reference prices, transportation costs and quality: (Average for the period) Natural Gas AECO ($/MMBtu) Henry Hub (US$/MMBtu) Crude Oil Edmonton Light ($/Bbl) WTI (US$/Bbl) Foreign Exchange $US / 1 $CDN 2018 2019 2020 2021 2022 2023-2032 Thereafter 2.25 3.00 2.65 3.05 3.05 3.25 3.40 3.55 3.60 3.80 3.65 – 4.35 3.85 – 4.60 70.10 58.50 71.30 58.70 74.90 62.40 80.50 69.00 82.80 73.10 84.40 – 100.90 74.50 – 89.10 +2%/yr +2%/yr +2%/yr +2%/yr 0.79 0.79 0.80 0.83 0.85 0.85 0.85 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 (as constituted in 2016 prior to the Apache Canada Acquisition and the Trilogy Merger). The impairment reversal resulted from an increase in the estimated recoverable amount of the Grande Prairie Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 73 CGU at December 31, 2016 compared to December 31, 2015 as a result of an increase in development activities at Karr, improved well performance and improved economics. 8. Investments in Securities As at December 31 2017 2016 MEG Energy Corp. Other (1) Shares (000’s) 3,700 Shares (000’s) 3,700 Market Value 19,018 34,297 53,315 Market Value 34,151 30,042 64,193 (1) Includes investments in Blackbird Energy Inc., Marquee Energy Ltd., Storm Resources Ltd., Strategic Oil & Gas Ltd., and other public and private corporations. Investments in publicly traded securities are carried at their period-end trading prices, which are level one fair value hierarchy inputs. The estimated fair value of the Company’s investments in the shares of private oil and gas companies are based on equity issuances and other indications of value from time-to-time (level three fair value hierarchy inputs). For the twelve months ended December 31, 2017 aggregate unrealized losses of $12.6 million related to the Company’s investments in MEG Energy Corp., Blackbird Energy Inc., Marquee Energy Ltd., Storm Resources Ltd., and other securities previously recorded in OCI were charged to net income as a result of significant decreases in the market prices of the securities. For the twelve months ended December 31, 2016, aggregate unrealized losses of $11.2 million related to the Company’s investments in MEG Energy Corp., Marquee Energy Ltd., and other securities previously recorded in OCI were charged to earnings. 9. Long-Term Debt As at December 31 Paramount Facility 2019 Senior Notes ($300 million principal amount) Paramount Facility 2017 2016 395,000 306,750 701,750 – – – As at December 31, 2017, the Company had a $700 million financial covenant-based senior secured revolving bank credit facility (the ʺParamount Facilityʺ). The maturity date of the Paramount Facility is currently November 6, 2021, which may be extended from time-to-time at the option of Paramount and with the agreement of the lenders. Borrowings under the Paramount Facility bear interest at the lenders’ prime lending rates, US base rates, bankers’ acceptance rates, or LIBOR rates, as selected at the discretion of the Company, plus an applicable margin which is dependent upon the Company’s Senior Secured Debt to Consolidated EBITDA ratio. The Paramount Facility is secured by a charge over substantially all of the assets of Paramount, excluding the assets of Cavalier and Fox Drilling. As at December 31, 2017, Paramount was subject to the following two financial covenants under the Paramount Facility, which are tested at the end of each fiscal quarter: i. Senior Secured Debt to Consolidated EBITDA to be 3.00 to 1.00 or less (or 3.50 to 1.00 or less for two full fiscal quarters after completion of a material acquisition); and Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 74 ii. Consolidated EBITDA to Consolidated Interest Expense to be 2.50 to 1.00 or greater. Senior Secured Debt currently consists of amounts drawn under the Paramount Facility and the undrawn face amount of outstanding letters of credit. Consolidated EBITDA is determined on a trailing twelve month basis, is adjusted for material acquisitions and dispositions, and is generally calculated as net income before Consolidated Interest Expense, taxes, depletion, depreciation, amortization, impairment and exploration and evaluation expense and is also adjusted to exclude non-recurring items and other non-cash items including unrealized mark-to-market amounts on derivatives, unrealized foreign exchange, share-based compensation expense and accretion. Consolidated Interest Expense is reduced by any interest income and other customary exclusions and is calculated on a trailing twelve-month basis. Paramount is in compliance with all covenants under the Paramount Facility. Paramount had undrawn letters of credit outstanding totaling $36.6 million at December 31, 2017 that reduce the amount available to be drawn on the Paramount Facility. Senior Unsecured Notes Paramount has $300 million outstanding principal amount of senior unsecured notes due 2019 (the "2019 Senior Notes"). The 2019 Senior Notes were issued by Trilogy in late 2012 and became Paramount’s notes through its acquisition of, and subsequent amalgamation with, Trilogy. The 2019 Senior Notes bear interest at 7¼% per annum, payable semi-annually in arrears on June 13 and December 13 of each year, and mature on December 13, 2019. As of January 1, 2018, the 2019 Senior Notes were direct senior unsecured obligations of Paramount. The 2019 Senior Notes are redeemable in whole or in part at par, plus accrued and unpaid interest to the date of redemption, plus a redemption premium, if applicable, which varies based on the date of redemption. At December 31, 2017, the 2019 Senior Notes had a market value of 102.0% of their principal amount. The market value of the 2019 Senior Notes was estimated using a market approach based on prices quoted by financial institutions, which are level two fair value hierarchy inputs. In 2016, the Company redeemed all $450 million aggregate principal amount of its 7⅝% senior unsecured notes due 2019 and was discharged and released from all obligations and covenants relating to such notes. In connection with the Musreau Disposition in 2016, the acquiror assumed all US$450 million aggregate principal amount of Paramount’s 6⅞% senior unsecured notes due 2023 (the "2023 Notes") and the Company was discharged and released from all obligations and covenants relating to such notes. Debt extinguishment expense for the year ended December 31, 2016 includes aggregate redemption premiums totaling $13.5 million and $13.9 million of unamortized financing fees related to such notes. Trilogy Facility At closing of the Trilogy Merger on September 12, 2017, Trilogy had a $285 million senior secured revolving credit facility with a syndicate of Canadian banks (the "Trilogy Facility"). In November 2017, the Trilogy Facility was repaid in full and cancelled. Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 75 10. Asset Retirement Obligations and Other Year ended December 31 Asset retirement obligations – long-term Other liabilities Asset Retirement Obligations Year ended December 31 Asset retirement obligations, beginning of year Retirement obligations incurred Apache Canada Acquisition and Trilogy Merger ARO Discount Rate Adjustment Revisions to estimated retirement costs Obligations settled Dispositions Accretion expense Asset retirement obligations, end of year Asset retirement obligations – current Asset retirement obligations – long-term 2017 1,642,194 18,879 1,661,073 2017 212,309 6,003 867,591 665,998 (20,421) (21,450) (55,806) 15,970 1,670,194 28,000 1,642,194 1,670,194 2016 204,413 – 204,413 2016 273,580 6,616 – – 5,301 (1,753) (76,057) 4,622 212,309 7,896 204,413 212,309 At December 31, 2017, estimated undiscounted asset retirement obligations were $1,752.0 million (December 31, 2016 – $212.3 million), which have been discounted using a weighted average risk-free rate of 2.25 percent (December 31, 2016 – 2.0 percent) and an inflation rate of 2.0 percent (December 31, 2016 – 2.0 percent). These obligations will be settled over the useful lives of the assets, which extend up to 53 years. Asset retirement obligations of $757.2 million and $110.4 million recognized in the purchase allocations in respect of Apache Canada and Trilogy, respectively, were subsequently remeasured in accordance with Paramount’s accounting policy to reflect the discounting of such amounts using a weighted average risk- free discount rate of 2.25 percent (the ʺARO Discount Rate Adjustmentʺ). As a result of the ARO Discount Rate Adjustment, the carrying value of the estimated asset retirement obligations recorded in the purchase price allocations was subsequently increased by an aggregate of $666.0 million. The ARO Discount Rate Adjustment resulted in a corresponding increase to the carrying value of property, plant and equipment, except for properties with a nil carrying value, where the corresponding amount related to the ARO Discount Rate Adjustment was recorded as a charge to net income. As a result of the ARO Discount Rate Adjustment, the carrying value of property, plant and equipment was increased by $507.8 million and a charge of $158.2 million was recorded to net income. Other Liabilities Other liabilities include the long-term portion of the provision recorded in respect of the Apache Canada office lease (see note 4), and the long-term portion of a provision recognized in respect of unoccupied office space. Paramount relocated its corporate offices following the closing of the Apache Canada Acquisition and the Trilogy Merger, which resulted in the Company being subject to leases for unoccupied office space. As a result, a $11.2 million provision was recorded at December 31, 2017 in respect of the remaining Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 76 obligations under the leases, which expire in 2022. A corresponding $11.2 million charge was recorded in Transaction and Reorganization costs in respect of the unutilized office space provision. 11. 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, 2017, 134,712,907 (December 31, 2016 – 105,784,070) Common Shares of the Company were outstanding, net of 345,904 (December 31, 2016 – 2,865) Common Shares held in trust under the restricted share unit plan, and no preferred shares were outstanding. In September 2017, Paramount issued 28,537,134 Common Shares pursuant to the Trilogy Merger (see note 5). In December 2017, Paramount implemented a normal course issuer bid (the ʺ2018 NCIBʺ) under which the Company may purchase up to 7,497,530 Common Shares for cancellation. Between January 1, 2018 and March 7, 2018, the Company has purchased and cancelled 1,454,100 Common Shares at a total cost of $27.4 million under the 2018 NCIB. The 2018 NCIB will terminate on the earlier of: (i) December 21, 2018; and (ii) the date on which the maximum number of Common Shares that can be acquired pursuant to the 2018 NCIB are purchased. Paramount previously implemented a normal course issuer bid in October 2016 (the ʺ2016 NCIB”). The Company purchased and cancelled 622,900 Common Shares in 2016 at a total cost of $9.7 million under the 2016 NCIB. The 2016 NCIB expired in October 2017. In December 2016, the Company’s Board of Directors declared a dividend of 3.8 million common shares of Seven Generations Energy Ltd. (ʺ7Gen Sharesʺ) to holders of record of Paramount’s Common Shares on January 9, 2017 (the ʺJanuary 2017 Dividendʺ), resulting in an entitlement of approximately 0.036 of a 7Gen Share for each Common Share, subject to rounding for fractions. The dividend was paid on January 16, 2017. Weighted Average Common Shares Year ended December 31 2017 2016 Net income – basic Dilutive effect of Paramount Options Net income – diluted Wtd. Avg Shares (000’s) 114,852 922 115,774 Net income 183,361 – 183,361 Wtd. Avg Shares (000’s) 106,157 235 106,392 Net income 1,165,275 – 1,165,275 Outstanding stock options that can be exchanged for the Company’s Common Shares are potentially dilutive and are included in Paramount’s diluted per share calculations when they are dilutive to net income per share. There were 10.0 million options to acquire Paramount Common Shares outstanding at December 31, 2017 (December 31, 2016 – 4.3 million), of which 8.1 million (December 31, 2016 – 2.3 million) were anti-dilutive. Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 77 12. Reserves Reserves at December 31, 2017 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, 2017 Balance, beginning of year Other comprehensive loss Share-based compensation Share-based compensation assumed on Trilogy Merger (see Note 5) Options exercised Balance, end of year Year ended December 31, 2016 Balance, beginning of year Other comprehensive income Share-based compensation Options exercised Balance, end of year Unrealized gains on securities 31,724 (16,120) – – – 15,604 Contributed surplus 115,775 – 11,743 3,196 (2,739) 127,975 Unrealized gains on securities 8,637 23,087 – – 31,724 Contributed surplus 90,700 – 25,674 (599) 115,775 13. Share-Based Compensation Options to Acquire Common Shares of Paramount (ʺParamount Optionsʺ) Balance, beginning of period Granted Trilogy Merger (1) Exercised (2) Cancelled Forfeited Expired Balance, end of year Options exercisable, end of year 2017 2016 Weighted average exercise price ($/share) 13.00 20.48 26.75 9.27 15.61 – – 19.12 18.72 Number 4,322,120 5,475,000 1,362,375 (734,742) (395,833) – – 10,028,920 1,986,388 Number 7,238,650 4,565,100 – (175,840) (6,227,300) (148,040) (930,450) 4,322,120 811,740 Total reserves 147,499 (16,120) 11,743 3,196 (2,739) 143,579 Total reserves 99,337 23,087 25,674 (599) 147,499 Weighted average exercise price ($/share) 34.66 12.74 – 8.34 35.41 21.05 29.83 13.00 8.26 (1) (2) In connection with the Trilogy Merger, Trilogy Options were amended to provide the holders thereof the right to acquire the number of whole Paramount Common Shares determined by dividing the number of Trilogy common shares subject to such Trilogy Options by 3.75 at an adjusted exercise price approximately equal to the exercise price of such Trilogy Options multiplied by 3.75. As at September 12, 2017, 5.1 million Trilogy Options were outstanding at a weighted average exercise price of $7.13 per Trilogy Option. For Paramount Options exercised during the twelve months ended December 31, 2017, the weighted average market price of Paramount’s Common Shares on the dates exercised was $19.97 (2016 – $16.41). Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 78 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, 2017 are as follows: Exercise Prices $8.17 - $18.23 $18.24 - $19.94 $19.95 - $39.00 Awards Outstanding Remaining contractual life (years) 3.4 5.3 4.1 4.2 Number 3,914,350 3,145,000 2,969,570 10,028,920 Weighted average exercise price 14.29 19.94 24.63 19.12 The grant date fair value of Paramount Options was estimated using the Black-Scholes-Merton model incorporating the following weighted average inputs: Weighted average exercise price ($ / 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 option ($ / option) Options awarded in 2017 20.48 40.1 3.6 10.7 1.6 nil 6.31 Options awarded in 2016 12.74 53.9 3.7 6.1 0.7 nil 4.79 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 the first quarter of 2017, Cavalier granted 5.0 million Cavalier Options, which vest over five years and expire 7.7 years from the grant date. The grant date fair value of Cavalier Options awarded was estimated using the Black-Scholes-Merton model, incorporating the following inputs: expected volatility 57%, expected life 7.7 years, risk-free interest rate of 1.4%, pre-vest forfeiture rate of nil, and expected dividend yield of nil. As Cavalier is a private company, expected volatility is estimated based on the average historical volatility of the trading price of a group of publicly traded oil sands companies over the most recent period that is generally commensurate with the expected term of the option. Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 79 Restricted Share Unit Plan – Shares Held in Trust 2017 2016 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 Restricted share unit plan Share-based compensation expense Salaries and benefits, net of recoveries 14. Income Tax Shares (000’s) 3 496 (153) 346 9 11,370 (9,013) 2,366 Shares (000’s) 22 – (19) 3 2017 11,743 6,098 17,841 32,104 49,945 135 – (126) 9 2016 25,674 2,097 27,771 18,015 45,786 The following table reconciles income taxes calculated at the Canadian statutory rate to Paramount’s recorded income tax expense: Year ended December 31 Income before tax Effective Canadian statutory income tax rate Expected income tax expense Effect on income taxes of: Gain on sale of oil and gas assets (Income) loss from equity-accounted investment Gain on Apache Canada Acquisition Write-down of investments in securities Change in unrecognized deferred income tax asset Share-based compensation Unrealized foreign exchange on 2023 Notes Non-deductible items and other Income tax expense (recovery) 2017 44,504 27.0% 12,016 2016 1,321,369 27.0% 356,770 – (17,207) (148,211) 3,392 844 3,170 – 7,139 (138,857) (11,610) 3,865 – 3,034 (186,657) 6,932 (13,995) (2,245) 156,094 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 Asset retirement obligations Non-capital losses and scientific research & experimental development Other Deferred income tax asset (liability) 2017 (773,979) 456,050 973,064 11,269 666,404 2016 (241,779) 56,837 177,474 1,343 (6,125) Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 80 The following table summarizes movements of the deferred income tax asset (liability) during the year: Year ended December 31 Deferred income tax asset (liability), beginning of year Deferred income tax recovery (expense) Deferred income tax recovery (expense) included in OCI Flow-through share renunciations Apache Canada Acquisition and Trilogy Merger Other Deferred income tax asset (liability), end of year 2017 (6,125) 138,857 947 – 531,711 1,014 666,404 2016 154,823 (156,094) (1,276) (4,065) – 487 (6,125) As of December 31, 2017, Paramount has approximately $3.3 billion (2016 – $0.7 billion) of unused non- capital losses that expire between 2032 and 2037. The Company has $167.3 million (2016 – $311.0 million) of deductible temporary differences in respect of investments for which no deferred income tax asset has been recorded. 15. Financial Instruments and Risk Management Financial Instruments Financial instruments at December 31, 2017 consisted of cash and cash equivalents, accounts receivable, investments in securities, accounts payable and accrued liabilities, risk management liabilities and long- term debt. Risk Management The Company had the following financial commodity contracts in place as at December 31, 2017: Instruments Oil – NYMEX WTI Swaps (Sale) Aggregate notional 16,000 Bbl/d Average fixed price Fair value Term (19,060) January 2018 – December 2018 CDN$71.06/Bbl The fair values of risk management financial instruments 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. 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 Assumed on Trilogy Merger (see Note 5) Fair value, end of year 2017 (5,180) (4,059) (14,426) 4,605 (19,060) 2016 40,207 253 (45,640) – (5,180) Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 81 Subsequent to December 31, 2017, the Company entered into the following financial commodity contracts: Instruments Oil – NYMEX WTI Swaps (Sale) Aggregate notional 6,000 Bbl/d Average fixed price CDN$71.23/Bbl Term January 2019 – December 2019 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. A $5.00 per barrel increase or decrease in oil prices, assuming all other variables are held constant, would have impacted Paramount’s net earnings for the year ended December 31, 2017 by $29.2 million. Foreign Currency Risk Paramount is exposed to foreign currency risk on financial instruments denominated in US dollars including cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities. Sales prices 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. 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, 2017 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. For the year ended December 31, 2017, the Company had sales to four customers which exceeded ten percent of total revenue. Such sales totaled $83.0 million, $64.6 million, $62.0 million and $48.2 million respectively. Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 82 Interest Rate Risk Paramount is exposed to interest rate risk from time-to-time on outstanding balances on its floating rate bank credit facilities and on interest bearing cash and cash equivalents. A one percent increase or decrease in interest rates would have impacted Paramount’s net earnings for the year ended December 31, 2017 by approximately $0.8 million (2016 – $2.9 million) based on the average floating rate credit facility balances outstanding during the year. Paramount’s senior notes bear interest at fixed rates and are subject to fair value changes as market interest rates change. 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. The Company’s contractual obligations related to financial liabilities are as follows: Accounts payable & accrued liabilities Risk management liabilities Credit Facility (1) 2019 Senior Notes (2) (1) (2) Excluding interest. Including interest. Accounts Payable and Accrued Liabilities As at December 31 Trade and accrued payables Joint operation and other payables Interest payable and financing costs 2018 237,181 19,060 – 21,750 277,991 2019 – – – 320,618 320,618 2020 – – – – – 2021 – – 395,000 – 395,000 Total 237,181 19,060 395,000 342,368 993,609 2017 221,888 13,926 1,367 237,181 2016 80,869 481 235 81,585 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 2017 105,897 64,416 170,313 2016 11,586 12,309 23,895 Revenue receivable and joint operation receivables are non-interest bearing and are generally settled on 30 day terms. Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 83 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, 2017. 16. Other Income (Loss) Year ended December 31 Interest income Decrease in market value of securities distributed Write-down of investments in securities Other 2017 4,700 (10,450) (12,561) 3,987 (14,324) 2016 955 – (11,235) (579) (10,859) The decrease in the fair value of Paramount’s investment in 3.8 million 7Gen Shares of $10.5 million between the acquisition date and the January 2017 Dividend was reclassified from accumulated other comprehensive income to earnings in January 2017. An associated income tax recovery of $1.4 million was also reclassified to earnings. The value ascribed to the dividend as at December 31, 2016 of $119.0 million was reduced by $19.1 million in January 2017 due to a decrease in the market price of 7Gen Shares prior to distribution, which was recorded as an increase in Retained Earnings. 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 on sale of oil and gas assets Accretion of asset retirement obligations Foreign exchange (Income) loss from equity-accounted investments Gain on Apache Canada Acquisition ARO Discount Rate Adjustment Write-down of investments in securities Decrease in market value of securities distributed Deferred income tax Other 2017 18,485 17,840 434,118 205,479 (123,966) 15,970 259 (63,729) (548,931) 158,223 12,561 10,450 (138,857) (2,381) (4,479) 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) Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 84 Supplemental Cash Flow Information Year ended December 31 Interest paid Components of cash and cash equivalents As at December 31 Cash Cash equivalents 18. Capital Structure 2017 14,629 2017 114,895 8,434 123,329 2016 71,070 2016 76,575 545,297 621,872 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 Senior Secured Debt to Consolidated EBITDA, Consolidated EBITDA to Consolidated Interest Expense, 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’s capital structure consists of the following: As at December 31 Adjusted working capital surplus (1) Paramount Facility 2019 Senior Notes Net debt (cash) Share capital Retained earnings (accumulated deficit) Reserves Total Capital (1) Adjusted working capital excludes risk management liabilities and the current portion of asset retirement obligations. 19. Related Party Transactions Compensation of Key Management Personnel Year ended December 31 Salaries and benefits Share-based compensation 2017 (65,508) 395,000 306,750 636,242 2,249,746 50,325 143,579 3,079,892 2016 (565,897) – – (565,897) 1,639,466 (152,182) 147,499 1,068,886 2017 2,554 6,439 8,993 2016 3,038 9,018 12,056 Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 85 20. Commitments and Contingencies Paramount had the following commitments as at December 31, 2017: Petroleum and natural gas transportation and processing commitments (1) Operating leases and other (2) After one year but not more than five years 650,585 12,537 663,122 Within one year 121,345 9,515 130,860 More than five years 537,671 189 537,860 (1) (2) Certain of the transportation and processing commitments are secured by outstanding letters of credit totaling $19.8 million at December 31, 2017 (December 31, 2016 – $5.1 million). Future lease commitments for corporate office space have been reduced for sublease revenue and the impact of provisions recorded in respect of a market rate adjustment and unoccupied office space. Operating Lease Commitment Paramount’s corporate office space leases expire in 2022 and 2023. The Company incurred office lease costs of $7.3 million in 2017 (2016 – $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 $60 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. 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 amounts may differ materially from amounts estimated and recorded. 21. Subsequent Event In March 2018, the Paramount Facility was increased by $500 million to $1.2 billion and the Senior Secured Debt to Consolidated EBITDA financial covenant in such facility was amended as follows: • Senior Secured Debt to Consolidated EBITDA to be 3.50 to 1.00 or less (or 4.00 to 1.00 or less for two full fiscal quarters after completion of a material acquisition). At Paramount’s request, the size of the Paramount Facility can be further increased by up to $300 million (to $1.5 billion) pursuant to an accordion feature in such facility, subject to securing incremental lender commitments. Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 86 In March 2018, the Company delivered a redemption notice to redeem all $300 million outstanding principal amount of its 2019 Senior Notes. The redemption will be funded using the upsized Paramount Facility and completed in early April 2018. Paramount Resources Ltd. 2017 Consolidated Financial Statements (Tabular amounts stated in $ thousands, except as noted) 87 CORPORATE INFORMATION EXECUTIVE OFFICERS DIRECTORS CORPORATE OFFICE C. H. Riddell Executive Chairman J. H. T. Riddell President and Chief Executive Officer B. K. Lee Executive Vice President, Finance and Chief Financial Officer E. M. Shier General Counsel and Corporate Secretary D. B. Reid Executive Vice President, Operations J. B. Williams Executive Vice President, Kaybob Region P. R. Kinvig Vice President, Finance, Capital Markets M. G. Kohut Vice President, Finance R. R. Sousa Vice President, Corporate Development 2800 TD Canada Trust Tower 421 Seventh Avenue S.W. Calgary, Alberta Canada T2P 4K9 Telephone: (403) 290-3600 Facsimile: (403) 262-7994 www.paramountres.com REGISTRAR AND TRANSFER AGENT Computershare Trust Company of Canada Calgary, Alberta Toronto, Ontario BANK Bank of Montreal Calgary, Alberta RESERVES EVALUATORS McDaniel & Associates Consultants Ltd. Calgary, Alberta AUDITORS Ernst & Young LLP Calgary, Alberta STOCK EXCHANGE LISTING The Toronto Stock Exchange (“POU”) 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 and General Counsel Founders Advantage Capital Corp. Calgary, Alberta W. A. Gobert (3) (4) (5) Independent Businessman Calgary, Alberta J. C. Gorman (1) (4) (5) Independent Businessman Calgary, Alberta D. Jungé C.F.A. (2) (4) Chairman of the Board Pitcairn Trust Company Bryn Athyn, Pennsylvania R. M. MacDonald (1) (4) Independent Businessman Calgary, Alberta R. K. MacLeod (2) (4) (5) Independent Businessman Calgary, Alberta S. L. Riddell Rose President and Chief Executive Officer Perpetual Energy Inc. Calgary, Alberta J. B. Roy (1) (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 (5) Member of Reserves Committee  Paramount Resources Ltd. Corporate Information    88 

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