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