Paramount Resources Ltd. reports 2021 annual results and increased dividend and 2022 guidance

HIGHLIGHTS

• Annual sales volumes averaged 82,001 Boe/d (44% liquids) in 2021, in line with guidance. Fourth quarter 2021 sales volumes averaged 85,265 Boe/d (44% liquids).⁽¹⁾ 
  • Fourth quarter sales volumes at Karr averaged 41,629 Boe/d (50% liquids) compared to 39,878 Boe/d (52% liquids) in the third quarter.
  • Fourth quarter sales volumes at Wapiti averaged 14,350 Boe/d (60% liquids) compared to 14,651 Boe/d (62% liquids) in the third quarter.
• Cash from operating activities was $482.1 million in 2021 and $191.8 million in the fourth quarter. Adjusted funds flow in 2021 was $499.8 million ($3.74 per basic share) and $174.6 million ($1.29 per basic share) in the fourth quarter, representing annual and quarterly records for the Company.⁽²⁾ 
• 2021 capital expenditures totaled $274.6 million and were predominantly focused on drilling and completion activities at Karr, Wapiti and the Willesden Green Duvernay. Capital expenditures were $15.4 million less than the midpoint of previous guidance, reflecting strong execution and a continued focus on cost control.
• In 2021, the Company achieved proved plus probable (“P+P”) reserves additions of 82.8 MMBoe, P+P finding and development (“F&D”) costs of $2.12/Boe and a P+P recycle ratio of 12.6x. Total proved (“TP”) reserves additions in 2021 were 72.9 MMBoe, with TP F&D costs of $6.72/Boe and TP recycle ratio of 4.0x.⁽³⁾

• Operating costs averaged $11.37/Boe in 2021, 4% lower than 2020. Karr operating costs averaged $9.57/Boe in 2021.⁽¹⁾ 
• Abandonment and reclamation expenditures totaled $25.4 million in 2021, net of $9.7 million funded under the Alberta Site Rehabilitation Program (“ASRP”).
• Free cash flow was $191.8 million ($1.44 per basic share) in 2021 and $99.0 million ($0.73 per basic share) in the fourth quarter.⁽²⁾ 
• The Company reduced net debt by $397.4 million year-over-year to $456.7 million at December 31, 2021.⁽³⁾ 
  • Drawings under Paramount’s $900 million credit facility were $389.1 million at December 31, 2021.
  • Non-core property dispositions generated aggregate proceeds of $165.5 million in 2021 and a further $67 million was received in the year in settlement of the previously disclosed dissent proceedings respecting an investment in securities.
  • In the fourth quarter, all $35 million of the Company’s 7.5% convertible debentures were converted by holders into 5.2 million class A common shares (“Common Shares”) of the Company.
  • Net debt to adjusted funds flow at year-end was approximately 0.9x.
• Net debt does not account for the $372.1 million carrying value of the Company’s investments in securities as at December 31, 2021.
• The Company implemented a regular monthly dividend of $0.02 per Common Share in July 2021 and tripled it to $0.06 per Common Share in November 2021. The Company is increasing its monthly dividend to $0.08 per Common Share beginning in March 2022.
• In the first quarter of 2022, the Company completed a highly complementary asset acquisition in the Grande Prairie Region for $24.4 million (the “Grande Prairie Acquisition”), which is expected to contribute approximately 1,000 Boe/d to annual 2022 sales volumes.

RESERVES

• Paramount’s P+P reserves increased 5% to 662 MMBoe in 2021 compared to 632 MMBoe in 2020. TP and proved developed producing (“PDP”) reserves increased 9% and 4%, respectively.
  • In the Grande Prairie Region, where the majority of 2021 development activity occurred and the Company achieved further reductions in its cost structure, P+P reserves were up 8%, TP reserves were up 2% and PDP reserves were up 20%.
• The Company’s reserves replacement ratio was 1.4x for PDP reserves.⁽⁴⁾ 

• Paramount achieved strong F&D costs and recycle ratios in 2021 due to lower drilling, completion, equipping and tie-in costs across its major resource plays and higher netbacks.⁽¹⁾

• Estimated future net revenue at December 31, 2021, discounted at 10% before tax, totaled $1.4 billion for PDP reserves, $3.6 billion for TP reserves and $6.2 billion for P+P reserves.⁽²⁾

2022 GUIDANCE

The Company’s planned 2022 capital expenditures remain unchanged at a range of between $500 million and $540 million, with anticipated efficiency gains offsetting certain inflationary pressures.  The 2022 capital budget is focused on development and debottlenecking operations at Karr to grow production to 43,000 to 47,000 Boe/d in the second half of 2022, development activities at Wapiti to achieve targeted plateau production of 30,000 Boe/d in 2023 and development activities at Kaybob to advance the Duvernay plays at Kaybob Smoky and Kaybob North.  Paramount remains committed to prudently managing its capital resources and has the flexibility to adjust its capital expenditure plans depending on commodity prices and other factors.

The Company is increasing its 2022 annual production guidance to average between 91,000 Boe/d and 95,000 Boe/d (46% liquids) to reflect the impact of the Grande Prairie Acquisition.  Although production in early 2022 at Wapiti was affected by two unplanned outages totaling 18 days at the third-party operated Wapiti natural gas processing facility, well outperformance is anticipated to offset this unplanned downtime.

• First half 2022 sales volumes are still expected to average between 81,000 Boe/d and 85,000 Boe/d (44% liquids), taking into account a planned 16-day full field outage at Karr during the second quarter for turnaround activities at third-party midstream facilities.
• Second half 2022 sales volumes are now expected to average between 101,000 Boe/d and 105,000 Boe/d (47% liquids) as numerous new wells from the Company’s capital program are brought onstream.

Paramount is increasing its forecast of 2022 free cash flow from approximately $455 million to approximately $590 million to reflect higher commodity price assumptions and higher forecast production.⁽³⁾ 

As previously disclosed, the Company’s free cash flow priorities are (i) the achievement of targeted leverage levels, (ii) shareholder returns and (iii) incremental growth.

• The Company expects to achieve its net debt target of about $300 million in the third quarter of 2022 based on its 2022 free cash flow forecast.
• Remaining 2022 free cash flow will be available to:
  • further augment shareholder returns through additional increases in the regular monthly dividend, special dividends or opportunistic repurchases of Common Shares under the Company’s normal course issuer bid; and
  • reinvest in incremental organic growth or strategic acquisitions.

The Company continues to budget approximately $41 million for abandonment and reclamation activities in 2022.  Approximately $8 million is to be funded directly through the ASRP, resulting in approximately $33 million net to Paramount.  The majority of these funds will be directed to the Zama area.

PRELIMINARY 2023 BUDGET

Paramount’s anticipated 2023 capital expenditure budget, based on preliminary planning and current market conditions, remains unchanged at a range of between $475 million and $525 million.

Paramount expects that a capital program in this range will result in 2023 average sales volumes of between 98,500 Boe/d and 103,500 Boe/d (48% liquids), 1,000 Boe/d higher than previously estimated.

Paramount is updating its estimate of 2023 free cash flow that would be expected from such a capital program from approximately $450 million to approximately $580 million to reflect higher commodity price assumptions and higher estimated production.⁽¹⁾

FIVE-YEAR OUTLOOK

Paramount is updating its previously provided five-year outlook to reflect recent commodity prices.  The Company now anticipates cumulative free cash flow through to the end of 2026 of over $3.3 billion, up from $2.7 billion.  The Company continues to anticipate annual capital expenditures of approximately $500 million and a compound annual production growth rate of approximately 5 percent through the period. ⁽²⁾

INCREASED DIVIDEND

Paramount’s Board of Directors has approved an increase in the Company’s regular monthly dividend from $0.06 to $0.08 per Common Share.  The first increased dividend will be payable on March 31, 2022 to shareholders of record on March 15, 2022.  The dividend will be designated as an “eligible dividend” for Canadian income tax purposes.

HEDGING

Paramount has hedged approximately 33% of its 2022 forecast production to provide greater free cash flow certainty.  The Company’s current 2022 hedging position is summarized below:

COMPLETE ANNUAL RESULTS

Paramount’s: (i) complete annual results, including a review of operations, the Company’s audited consolidated financial statements as at and for the year ended December 31, 2021 (the “Consolidated Financial Statements”) and the accompanying management’s discussion and analysis (the “MD&A”) and (ii) 2021 annual information form, which contains additional important information concerning the Company’s reserves, properties and operations, can be obtained on SEDAR at www.sedar.com or on Paramount’s website at www.paramountres.com/investors/financial-shareholder-reports.

A summary of historical financial and operating results is also available on Paramount’s website at www.paramountres.com/investors/financial-shareholder-reports.

ANNUAL GENERAL MEETING

Paramount will hold its annual general meeting of shareholders in a virtual-only format on Wednesday, May 4, 2022 at 10:30 a.m. (Calgary time).

ABOUT PARAMOUNT

Paramount is an independent, publicly traded, liquids-focused Canadian energy company that explores for and develops both conventional and unconventional petroleum and natural gas, including longer-term strategic exploration and pre-development plays, and holds a portfolio of investments in other entities. The Company’s principal properties are located in Alberta and British Columbia. Paramount’s Class A common shares are listed on the Toronto Stock Exchange under the symbol “POU”.

PRODUCT TYPE INFORMATION

This press release refers to sales volumes of “liquids”, “natural gas”, “condensate and oil” and “other NGLs”.    “Liquids” means NGLs (including condensate) and oil combined, “natural gas” refers to conventional natural gas and shale gas combined, “condensate and oil” refers to condensate, light and medium crude oil and tight oil combined and “other NGLs” refers to ethane, propane and butane.  Below is a complete breakdown of sales volumes for applicable periods by the specific product types of shale gas, conventional natural gas, NGLs, tight oil and light and medium crude oil.  Numbers may not add due to rounding.

Fourth quarter 2021 sales volumes at Karr averaged 41,629 Boe/d (122.5 MMcf/d of shale gas, 1.5 MMcf/d of conventional natural gas and 20,970 Bbl/d of NGLs), compared to 39,878 Boe/d (113.0 MMcf/d of shale gas, 1.4 MMcf/d of conventional natural gas and 20,805 Bbl/d of NGLs) in the third quarter of 2021.  Fourth quarter 2021 sales volumes at Wapiti averaged 14,350 Boe/d (34.1 MMcf/d of shale gas, 0.6 MMcf/d of conventional natural gas and 8,568 Bbl/d of NGLs), compared to 14,651 Boe/d (32.7 MMcf/d of shale gas, 0.6 MMcf/d of conventional natural gas and 9,100 Bbl/d of NGLs) in the third quarter of 2021.

The Company forecasts that 2022 sales volumes will average between 91,000 Boe/d and 95,000 Boe/d (54% shale gas and conventional natural gas combined, 40% light and medium crude oil, tight oil and condensate combined and 6% other NGLs).  First half 2022 sales volumes are expected to average between 81,000 Boe/d and 85,000 Boe/d (56% shale gas and conventional natural gas combined, 38% light and medium crude oil, tight oil and condensate combined and 6% other NGLs). Second half 2022 sales volumes are expected to average between 101,000 Boe/d and 105,000 Boe/d (53% shale gas and conventional natural gas combined, 41% light and medium crude oil, tight oil and condensate combined and 6% other NGLs).

SPECIFIED FINANCIAL MEASURES

Non-GAAP Financial Measures

Netback, netback including risk management contract settlements and F&D capital are non-GAAP financial measures. These measures are not standardized measures under IFRS and might not be comparable to similar financial measures presented by other issuers.  These measures should not be considered in isolation or construed as alternatives to their most directly comparable measure disclosed in the Company’s primary financial statements or other measures of financial performance calculated in accordance with IFRS.

Netback equals petroleum and natural gas sales (the most directly comparable measure disclosed in the Company’s primary financial statements) less royalties, operating expense and transportation and NGLs processing expense.  Netback is used by investors and management to compare the performance of the Company’s producing assets between periods.

Netback including risk management contract settlements equals netback after including (or deducting) risk management contract settlements received (paid). Netback including risk management contract settlements is used by investors and management to assess the performance of the Company’s producing assets after incorporating management’s risk management strategies.

Refer to the table under the heading “Financial and Operating Results” in this press release for the calculation of netback and netback including risk management contract settlements for the years ended December 31, 2021 and 2020 and for the three months ended December 31, 2021 and 2020.

F&D capital is a measure used in determining F&D costs and is comprised of capital expenditures (the most directly comparable measure disclosed in the Company’s primary financial statements) for the year excluding corporate expenditures plus the change from the prior year in estimated future development capital included in the reserves evaluation prepared by McDaniel.  F&D capital is used by management and investors, in calculating F&D costs, to represent the amount of capital invested in oil and gas exploration and development projects to generate reserves additions.

Set out below is the calculation of F&D capital for the years ended December 31, 2021 and 2020.  Prior period results have been restated to conform with the current years’ presentation to reflect the inclusion of changes in estimated future development capital in the calculation of F&D capital.

Non-GAAP Ratios

F&D costs, recycle ratio, netback and netback including risk management contract settlements presented on a $/Boe of $/Mcf basis are non-GAAP ratios as they each have a non-GAAP financial measure as a component.  These measures are not standardized measures under IFRS and might not be comparable to similar financial measures presented by other issuers.  These measures should not be considered in isolation or construed as alternatives to their most directly comparable measure disclosed in the Company’s primary financial statements or other measures of financial performance calculated in accordance with IFRS.

F&D costs are calculated by dividing: (i) F&D capital (a non-GAAP financial measure) for the applicable reserves category; by (ii) the net changes to reserves in such reserves category from the prior year from extensions/improved recovery, technical revisions and economic factors.  F&D costs are a measure commonly used by management and investors to assess the relationship between capital invested in oil and gas exploration and development projects and reserve additions.  Readers should refer to the information under the heading “Reserves and Other Oil and Gas Information – Reserves Reconciliation” in the Company’s annual information form for the year ended December 31, 2021, which is available on www.sedar.com or at www.paramountres.com, for a description of the net changes to reserves in each reserves category from the prior year.  See “Advisories – Oil and Gas Definitions and Measures” for more information about this measure.

Recycle ratio is calculated by dividing the netback (a non-GAAP financial measure) per Boe for the year by the F&D costs for the year.  Recycle ratio is used by investors and management to compare the cost of adding reserves to the netback realized from production.  See “Advisories – Oil and Gas Definitions and Measures” for more information about this measure.

Set out below, for comparative purposes to the 2021 information included in this press release, are the applicable F&D costs and recycle ratios for 2020.  Prior period results have been restated to conform with the current years’ presentation to reflect the inclusion of changes in estimated future development capital in the calculation of F&D capital.

Netback on a $/Boe of $/Mcf basis is calculated by dividing netback (a non-GAAP financial measure) for the applicable period by the total production during the period in Boe or Mcf. Netback including risk management contract settlements on a $/Boe of $/Mcf basis is calculated by dividing netback including risk management contract settlements for the applicable period by the total production during the period in Boe or Mcf.  These measures are used by investors and management to assess netback and netback including risk management contract settlements on a unit of production basis.

Capital Management Measures

Adjusted funds flow, free cash flow, net debt and net debt to adjusted funds flow are capital management measures that Paramount utilizes in managing its capital structure. These measures are not standardized measures and therefore may not be comparable with the calculation of similar measures by other entities.  Refer to Note 18 – Capital Structure in the Consolidated Financial Statements for: (i) a description of the composition and use of these measures, (ii) reconciliations of adjusted funds flow and free cash flow to cash from operating activities, the most directly comparable measure disclosed in the Company’s primary financial statements, for the years ended December 31, 2021 and 2020 and (iii) a calculation of net debt as at December 31, 2021 and 2020.

The following is a reconciliation of adjusted funds flow to cash from operating activities, the most directly comparable measure disclosed in the Company’s primary financial statements, for the three months ended December 31, 2021 and 2020:

The following is a reconciliation of free cash flow to cash from operating activities, the most directly comparable measure disclosed in the Company’s primary financial statements, for the three months ended December 31, 2021 and 2020:

For comparative purposes to the 2021 information included in this press release, net debt to adjusted funds flow as at December 31, 2020 was 5.7x.

Supplementary Financial Measures

This press release contains supplementary financial measures expressed as: (i) cash from operating activities, adjusted funds flow and free cash flow on a per share – basic and per share – diluted basis and (ii) revenue, petroleum and natural gas sales, royalties, operating expenses and transportation and NGLs processing expenses on a $/Bbl, $/Mcf or $/Boe basis.

Cash from operating activities, adjusted funds flow and free cash flow on a per share – basic basis are calculated by dividing cash from operating activities, adjusted funds flow or free cash flow, as applicable, over the referenced period by the weighted average basic shares outstanding during the period determined under IFRS.  Cash from operating activities, adjusted funds flow and free cash flow on a per share – diluted basis are calculated by dividing cash from operating activities, adjusted funds flow or free cash flow, as applicable, over the referenced period by the weighted average diluted shares outstanding during the period determined under IFRS.

Revenue, petroleum and natural gas sales, royalties, operating expenses and transportation and NGLs processing expenses on a $/Bbl, $/Mcf or $/Boe basis are calculated by dividing the revenue, petroleum and natural gas sales, royalties, operating expenses or transportation and NGLs processing expenses, as applicable, over the referenced period by the aggregate applicable units of production (Bbl, Mcf or Boe) during such period.