Paramount Resources Pitch (POU.

TO)
ENERGY & POWER – Exploration & Production
Jonathan J. ChangBComm, 2017
Aditya Patel
Ziyi Jin

BA, Economics, 2015

BA, Economics, 2016

Matas Sriubiškis

Jan 29, 2015

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 Queen’s 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

45

When will there be a
bounce back if
possible?

40

35

30

Sources: Capital IQ

3

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

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

Sources: Capital IQ

4

Company Overview
Paramount Resources Business Description

Price – Volume Performance

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.
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.
The company was founded in 1978 and is
headquartered in Calgary, Canada.

70

4.0M

60

3.5M
3.0M

50

2.5M

40

2.0M
30

1.5M

20

1.0M

10

0.5M

0

0.0M

Volume

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

5

Company Overview
Production Split

Paramount’s Investments

Heavy Oil ($US
/ bbl);/ bbl);
4% 0%
Light/Medium
Oil ($US
NGL ($US / bbl); 12%

Natural Gas ($US / mcf); 84%

Market Value of ~$348 MM or ~$3.32 / share
as of January 2015

Sources: Capital IQ

6

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

7

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

─ 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

Projected Netback per boe Growth

Projected Production Growth
Production - mboe

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

0

10.0

2013 2014 2015 2016 2017 2018 2019 2020

Sources: Capital IQ, Equity Research Reports

0.0

$8.10

$9.70

2015

2016

$11.45

2017

$13.34

2018

$15.41

2019

$17.42

2020

2021

2022

2023

2024

8

Argument I: Increasing Production
Projected Production Capacity Increases

Sources: Paramount Investor Presentation

9

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

─ 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

Condensate Stabilization Capacity

Fully Financed Plant Increases

25,000

─ All plants improvements and new construction
projects are fully funded

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

─ 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

─ Paramount’s 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%

250

40%

200
30%
150
20%
100

─ 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

10%

50
0

Oil Market

2009

2010

Revenue (M)

2011

2012

2013

Gross Profit (M)

Sources: Capital IQ, Equity Research Report

2014

0%

Gross Margins

12

Argument II: Substantial Gross Margins
Paramount’s 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)

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)

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.

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.

─ 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

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

-

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

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.
─ 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

Jan. 29 Share Price
Target Share Price
Equity Upside
Dividend Yield

$26.90
$45.00
67.28%
-

Suggested Return

67.3%

NAV Sensitivity

Sources: Capital IQ, Equity Research Reports

18