Paramount Resources Pitch (POU.

TO)
ENERGY & POWER Exploration & Production
Jonathan J. Chang

Jan 29, 2015

BComm, 2017

Aditya Patel

BA, Economics, 2015

Ziyi Jin

BA, Economics, 2016

Matas Sriubikis

BA, Economics, 2017

This presentation is for informational purposes only, and is not an offer to buy or sell or a solicitation to buy
or sell any securities, investment products or other financial product or service, an official confirmation of
any transaction, or an official statement of Queens Economics Investment Council (QEIC). Any views or
opinions presented are solely those of the author and do not necessarily represent those of QEIC.

Our Agenda

Industry
Breakdown
Investment
Thesis Point #2
Price Target
Summary

Company
Overview
Company
Valuation

Management
Team
Projected
Catalysts

Investment
Thesis Point #1

Associated
Risks

Sector Overview and Outlook

S&P Global Energy Index (iShares)

55

50

When will there be a

bounce back if
possible?

45

40

35

30
3-Feb-2014

Sources: Capital IQ

5-Apr-2014

5-Jun-2014

5-Aug-2014

5-Oct-2014

5-Dec-2014

Historical Commodity Pricing and 2015E Projections

Natural Gas HP
5.00

Natural Gas - Henry Hub (NYMEX) Historical Pricing

Natural Gas - Henry Hub (NYMEX) Future Contracts

4.50
4.00
3.50
3.00
2.50

2.00
8/1/2014

10/1/2014

12/1/2014

1/31/2015

4/2/2015

6/2/2015

8/2/2015

Crude Oil HP
Crude Oil - Light (NYMEX) Historical Pricing

Crude Oil - Light (NYMEX) Future Contracts

110.00
100.00
90.00

80.00
70.00
60.00
50.00
40.00
30.00
8/1/2014

Sources: Capital IQ

10/1/2014

12/1/2014

1/31/2015

4/2/2015

6/2/2015

8/2/2015

Company Overview
Paramount Resources Business Description
Paramount Resources Ltd., an independent energy
company, is engaged in the exploration, development,
production, processing, transportation, and marketing
of natural gas, crude oil, and natural gas liquids in
Canada and the United States.

Price Volume Performance

70

4.0M

60

3.5M
3.0M

50

2.5M
40

Its principal properties are located in west central

Alberta; the Peace River Arch area of Alberta;
southern Alberta; and northern Alberta and northeast
British Columbia.

2.0M
30
1.5M
20

1.0M

10

The company was founded in 1978 and is

headquartered in Calgary, Canada.

0
Feb-03-2014

0.5M
0.0M
May-03-2014

Aug-03-2014
Volume

Nov-03-2014
Price

Financial Metrics (CDN, MM)

Total Revenue

292.8

Market Capitalization

2,990.6

TEV/Total Revenue

13.9 x

EBITDA

129.9

Total Enterprise Value

4,081.6

TEV/EBITDA

24.1 x

EBIT

(36.6)

Cash & ST Invst.

P/Diluted EPS Before

Extra

82.8 x

Net Income
Capital Expenditure

Sources: Capital IQ

35.1
(877.9)

14.8

Total Debt

1,105.7

Price/Tang BV

2.0 x

Total Assets

3,090.9

Total Debt/EBITDA

8.5 x

Company Overview
Paramounts Investments

Production Split

Heavy Oil
($US /
bbl),
3.6%

Light/Medium
Oil ($US / bbl),
0.4%

NGL
($US /
bbl),
11.9%

Natural
Gas ($US
/ mcf),
84.5%

Sources: Capital IQ

Market Value of ~$348 MM or ~$3.32 / share

as of January 2015

Executive Team
Clayton Riddell, CEO

James Riddell, President & COO

Joined in 1978

Since June 2002

Was President
prior to 2002

Been with company

since 1991

Experience in
various areas of
O&G

CEO of Trilogy
Energy and director
of Strategic Oil &
Gas Ltd.

Bernard Lee, CFO

Phil Tahmazian, VP Midstream

Since May 2003

Instrumental in
spin-off of Trilogy
Energy Corp

Over 25 years of
experincein O&G
industry

Previously held
senior position with
Alberta Energy
Company Ltd.

Served as VP
Midstream at
Encana previously

Sources: Paramount Resources Company Website

Investment Thesis Outline

I: Increased Production

II: Attractive Gross Margins

Though costly to build a new plant ($250M) it went

online in the spring of 2014
Increasing output through 2017 to 160,000 Boe/d
15,000 Bbl/d condenser coming online in April

Projected Netback per boe Growth

Projected Production Growth

Production - mboe

Competing in unstable oil market, Paramount has

done exceptional well to maintain solid gross
margins
Currently sits at 55%
Indicates ability to compete in low oil prices and is
positioned to outperform competition

Production - mboe/d

25,000

$70.88
60.0
50.0

20,000

$53.13

$55.17

$43.31

40.0
15,000
30.0

10,000
20.0
5,000

10.0

$11.45
$8.10 $9.70

$13.34

$15.41

$17.42

0.0
2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Sources: Capital IQ, Equity Research Reports

2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Argument I: Increasing Production

Projected Production Capacity Increases

Sources: Paramount Investor Presentation

Argument I: Increased Production

Production Capacity Increase

New Processing Plants

Capacity was at 40,000 Boe/d by the end of Q3

2014
Increased to 50,000 Boe/d by the end of 2015
On track to hit 70,000 Boe/d by April of 2015
Capacity increase from improved infrastructure at
the Musreau Deep cut facility

Condensate Stabilization Capacity

Fully Financed Plant Increases

25,000

20,000
15,000
10,000
5,000
0
Projected Capacity
Current Capacity

Condensate stabilization is
a process of utilizing what
was once considered
waste of the production
process and filters it so
more can be used
New facility going online in
April of 2015 will increase
the companies condensate
stabilization capacity to
23,500 bbl/d from 8,500
bbl/d

Sources: Equity Research Reports and Investor Presentations

At a cost of $180mm/facility they will be starting

construction on two new processing plants
Expected to be complete in H2 2016
Starting capacity of 100mmcf/d increased to a total
capacity of 200mmcf/d at a later date

All plants improvements and new construction

projects are fully funded

High level of debt but once the plants are at full

capacity they will be producing 70,000 Boe/d which
even at $50Bbl/d there will be increasing cash
flows

Nearly doubling production

Decreasing to under $9/Boe

10

Plants and Facilities

Plant
Musreau Deep
Cut
Musreasu
Refridge

Capacity

Potential Sales
Volume

200 MMcf/d

50,000 Boe/d

45 MMc/fd

8,500 Boe/d

Smoky Deep Cut 200 MMcf/d

10,000 Boe/d

Karr

40 MMcf/d

10,000 Boe/d

Other

70 MMcf/d

4,500 Boe/d

Subtotal

555 MMcf/d

83,000 Boe/d

Under
Construction
Condensate
Stabilizer
Expansion

N/A

15,000 Boe/d

Karr Expansion

40 MMcf/d

10,000 Boe/d

6 - 18

100 MMcf/d

25,000 Boe/d

3 - 15

100 MMcf/d

25,000 Boe/d

Subtotal

240 MMcf/d

75,000 Boe/d

Projected Total

795 MMcf/d

158,000 Boe/d

Capacity

Sources: Investor Presentation

Potential Sales
Volume

11

Argument II: Substantial Gross Margins

Strong Pricing Power

Combination of Margins & Production

Paramounts high gross margins allows them to

compete in rough periods of low prices
Have better ability to absorb the low price shock
Allows Paramount the flexibility to maintain profits
and continue investments

Paramount has done excellent job in maintaining

the high margins but also aims to increase
production
Increase in production paired with their margins will
be lead to a strong 2015 for Paramount

Gross Margins - Increase

350

60%

300

50%

Oil Market

250
40%

200
30%
150
20%

Oil prices are seeing a bit of surge after hitting the

low point during last week

Recovery form ISIS

In midst of this recovery, we are bullish going

forward at the target of $65/bbl by Q4, in line with
most analysts

100
10%

50
0

0%

2009

2010

Revenue (M)

2011

2012

2013

Gross Profit (M)

Sources: Capital IQ, Equity Research Report

2014
Gross Margins

12

Argument II: Substantial Gross Margins

Paramounts Average Production Cost

$14.31
$12.72
$10.70

$10.40
$9.22
$8.22

2008

2009

2010

2011

2012

2013

Comparably lower in terms of average production cost to rest of the industry.

Paramount decided to build its own infrastructure and its own gas processing plant
This allows Paramount to cut out mid-stream operators such as Keyera Corp.

Sources: Capital IQ, Equity Research Report

13

Valuation Net Asset Value (Operating Model)

Prices
Heavy Oil ($US / bbl)
Light/Medium Oil ($US / bbl)
Heavy and Light Spread
NGL ($US / bbl)
Natural Gas ($US / mcf)
$C / $US
Weighted Avg Oil & NGL ($C / bbl)
Weighted Avg Natural Gas ($C / mcf)

2015E
$41.00
$55.00
$14.00
$60.00
$2.70
$0.81
$57.01
$2.70

2016E
$41.82
$56.07
$14.25
$61.20
$2.85
$0.82
$58.15
$2.85

2017E
$42.66
$57.16
$14.50
$62.42
$3.00
$0.83
$59.31
$3.00

2018E
$43.51
$58.26
$14.75
$63.67
$3.15
$0.84
$60.50
$3.15

2019E
$44.38
$59.38
$15.00
$64.95
$3.30
$0.85
$61.71
$3.30

2020E
$45.27
$60.52
$15.25
$66.24
$3.45
$0.85
$62.94
$3.45

2021E
$46.17
$61.67
$15.50
$67.57
$3.60
$0.85
$64.20
$3.60

2022E
$47.10
$62.85
$15.75
$68.92
$3.75
$0.85
$65.48
$3.75

2023E
$48.04
$64.04
$16.00
$70.30
$3.90
$0.85
$66.79
$3.90

2024E
$49.00
$65.25
$16.25
$71.71
$4.05
$0.85
$68.12
$4.05

2P Reserves - Beginning (Gross)

Light & Medium Oil + NGL (Mbbl)
Natural Gas (Bcf)
Oil Sand Bitumen (MBbl)
2P Reserves - Oil Equiv. (mboe)

56,081
369
92,318
56,147

54,242
322
91,473
54,300

51,943
271
90,375
51,992

49,069
214
88,946
49,108

45,477
152
87,090
45,505

40,988
83
84,677
41,003

35,375
8
81,539
35,377

28,360
0
77,461
28,360

19,590
0
72,158
19,590

8,629
0
65,265
8,629

Production
Light & Medium Oil + NGL (Mbbl)
Natural Gas (Bcf)
Oil Sand Bitumen (Mbbl)
Production - Oil Equivalents (mboe)
Production - (mboe / d)

1,839
47
845
10,276
28.2

2,299
52
1,099
11,580
31.7

2,874
57
1,428
13,083
35.8

3,592
62
1,856
14,822
40.6

4,490
69
2,413
16,843
46.1

5,612
75
3,137
19,201
52.6

7,015
8
4,079
8,444
23.1

8,769
0
5,302
8,769
24.0

10,962
0
6,893
10,962
30.0

8,629
0
8,961
8,629
23.6

Production Growth Rate

Light & Medium Oil + NGL (Mbbl)
Natural Gas (MMcf)
Oil Sand Bitumen (MBbl)

25.0%
10.0%
30.0%

25.0%
10.0%
30.0%

25.0%
10.0%
30.0%

25.0%
10.0%
30.0%

25.0%
10.0%
30.0%

25.0%
10.0%
30.0%

25.0%
10.0%
30.0%

25.0%
10.0%
30.0%

25.0%
10.0%
30.0%

25.0%
10.0%
30.0%

NAV model based on 2013 AIF. No previous operations in terms of production

for oil sand bitumen so conservative projection was made.
Sources: Capital IQ, Equity Research Reports

14

Valuation Net Asset Value (Netback Calculations)

Netback Calculation (Total)
Revenue

2015E

2016E

2017E

2018E

2019E

2020E

2021E

2022E

2023E

2024E

Light & Medium Oil + NGL (C$ MM)

Natural Gas (Bcf) (C$ MM)
Oil Sand Bitumen (Mbbl)
Total Revenue

$84.9
$102.4
$34.6
$222.0

$109.6
$120.4
$45.9
$275.9

$141.5
$141.1
$60.9
$343.5

$182.5
$164.9
$80.8
$428.2

$235.5
$192.3
$107.1
$534.9

$300.3
$221.2
$142.0
$663.4

$382.8
$24.3
$188.3
$595.4

$488.1
$0.0
$249.7
$737.8

$622.3
$0.0
$331.1
$953.4

$499.6
$0.0
$439.1
$938.7

Operating & Transportation Costs ($C MM)

$97.8
Transportation Costs ($C MM)
$30.6
Royalties
$14.6
Operating Netback
$78.9

$110.2
$34.5
$16.4
$114.7

$124.5
$39.0
$18.6
$161.4

$141.1
$44.2
$21.0
$221.9

$160.3
$50.2
$23.9
$300.5

$182.8
$57.2
$27.3
$396.2

$80.4
$25.2
$12.0
$477.9

$83.5
$26.1
$12.5
$615.7

$104.4
$32.7
$15.6
$800.8

$82.1
$25.7
$12.3
$818.6

SG&A
Net Interest Expense
Netback Before Tax
Capital Taxes
Cash Flow Netback

$25.1
$48.8
$5.0
$1.2
$3.7

$31.2
$60.7
$22.8
$5.7
$17.1

$38.9
$75.6
$46.9
$11.7
$35.2

$48.5
$94.2
$79.2
$19.8
$59.4

$60.6
$117.7
$122.2
$30.6
$91.7

$75.1
$146.0
$175.1
$43.8
$131.3

$67.4
$131.0
$279.5
$69.9
$209.6

$83.5
$162.3
$369.9
$92.5
$277.4

$107.9
$209.8
$483.2
$120.8
$362.4

$106.3
$206.5
$505.8
$126.5
$379.4

Operating Netback
Capital Taxes
Netback After Tax

$78.9
$1.2
$77.7

$114.7
$5.7
$109.0

$161.4
$11.7
$149.6

$221.9
$19.8
$202.1

$300.5
$30.6
$269.9

$396.2
$43.8
$352.4

$477.9
$69.9
$408.0

$615.7
$92.5
$523.3

$800.8
$120.8
$680.1

$818.6
$126.5
$692.1

2015E
$21.60
$9.52
$1.42
$2.45
$0.12
$8.10
37.5%

2016E
$23.83
$9.52
$1.42
$2.70
$0.49
$9.70
40.7%

2017E
$26.25
$9.52
$1.42
$2.97
$0.90
$11.45
43.6%

2018E
$28.89
$9.52
$1.42
$3.27
$1.34
$13.34
46.2%

2019E
$31.76
$9.52
$1.42
$3.60
$1.81
$15.41
48.5%

2020E
$34.55
$9.52
$1.42
$3.91
$2.28
$17.42
50.4%

2021E
$70.51
$9.52
$1.42
$7.98
$8.27
$43.31
61.4%

2022E
$84.14
$9.52
$1.42
$9.52
$10.55
$53.13
63.1%

2023E
2024E
$86.98 $108.79
$9.52
$9.52
$1.42
$1.42
$9.85
$12.32
$11.02
$14.66
$55.17
$70.88
63.4%
65.2%

Netback Per Barrel of Oil Equivalent

Revenue
Operating & Transportation Costs
Royalties
SG&A
Capital Taxes
Netback Per Barrel of Oil Equivalent
Netback % Revenue

Sources: Capital IQ, Equity Research Reports

15

Catalysts

Musreau and Future Plants

Paramount has
completed their new
Smoky and Musreau
deep cut plant
Thanks to the new
expansion, their output at
this plant alone can triple
from 8,500 barrels per
day to 23,500.

Expanding Montney
drilling program in the
Kaybob area with two
plants, one scheduled to
be online in the second
half of 2016 and the
second one six months
later.

First sales of new plant

completed in Q3 of 2014,
enables Paramount to
begin ramp-up production
from their wells to be
processed at new plant

Sources: Capital IQ, Equity Research Reports

Western Expansion

The Company has drilled and completed its first

well in the Willesden Green area of western
Alberta. The Company has also entered into a joint
venture agreement that will increase its Willesden
Green Duvernay land position to 86 wells.

16

Risks
Downturn in Prices
-

E&Ps (Exploration &

Production) companies are
involved in the high-risk/highreward area of exploration
and production focus on
finding, augmenting,
producing and merchandising
different types of oil and gas

Plant Reliance & Competition Natural Risks

Any mechanical issues would

impact the rate of forecasted
growth

Margins concentrated on
Musreau plant expansion at a
cost of $35 million.

Like all E&Ps, Paramount

Resources faces risks from
any material downturn in
commodity prices.
Volatility in crude oil and
natural gas prices can
materially affect financial
performance and the
accuracy of estimates

Due to its exploratory nature,

large scale technological
improvements in E&P
competition would destroy any
competitive position and future
margins

Geological, engineering,
regulatory and environmental
risks related to the exploration
for and development of crude oil
and natural gas resources

Access on favourable terms to

oilfield services, equipment and
labour.

Cold or warm winters will affect

natural gas prices

Condensate stabilizer has been

delayed a couple of times any
further delays could be
detrimental

17

Sources: Equity Research Reports

Summary - Price Target

Analyst Price Targets

Implied Return

NAV Calculation (C$ millions)

Total Realized Value NPV @ PV10
Undeveloped Land
Risked Resource Upside:
Total Debt

10.0%
-58.0%

Net Asset Value

Fully Diluted Shares Outstanding

$2,159.5
162.1
3869.1
(722.4)
$5,468.3
104.9

NAVPS

$52.13

P / NAV Capitalized Share Price

Jan. 29 Share Price

Target Share Price
Equity Upside
Dividend Yield

$26.90
$45.00
67.28%
-

Suggested Return

67.3%

0.6 x

Current Price
Low
High

$30.42
$48.97
$56.06

Risked Resource
Discount to ERR

NAV Sensitivity

$50.26
(70.0%)
(65.0%)
(60.0%)
(55.0%)
(50.0%)
(45.0%)
(40.0%)

4.0%
$74.93
$71.74
$68.56
$65.37
$62.19
$59.00
$55.82

Sources: Capital IQ, Equity Research Reports

6.0%
$68.70
$65.52
$62.33
$59.14
$55.96
$52.77
$49.59

Discount Rate
8.0%
10.0%
12.0%
$63.77 $59.84 $56.68
$60.59 $56.66 $53.50
$57.40 $53.47 $50.31
$54.22 $50.28 $47.13
$51.03 $47.10 $43.94
$47.84 $43.91 $40.76
$44.66 $40.73 $37.57

14.0%
$54.13
$50.94
$47.76
$44.57
$41.39
$38.20
$35.01

16.0%
$52.04
$48.86
$45.67
$42.49
$39.30
$36.12
$32.93
18