(Idea) Paramount Resources
Note: Dollar references are to Canadian dollars, except where otherwise specified.
Paramount Resources (POU:CA) is a Canadian E&P founded in 1976. In 2023, the company produced 96,400 boe/d, which was comprised of 37,657 boe/d of crude oil, 6,226 boe/d of NGLs, and 52,517 boe/d of natural gas. Production is approximately 46% weighted toward liquids.
The company’s assets reside in some of the most economic plays in Alberta, namely, Grande Prairie, Kaybob, and Willesden Green, as shown in the map below.
Source: Paramount Resources 2023 Annual Information Form.
In addition to holding high-quality assets, Paramount is growing production. From 2022 to 2023, production grew from 88,675 boe/d to 96,400 boe/d, or by 8.7%. Recent growth has increased its liquids weighting.
Paramount is focused on developing its Grande Prairie play. This year, it plans to spend 50% of its capex on the region. Meanwhile, it plans to allocate 29% of capex to Willesden Green and 21% to Kaybob.
Grande Prairie is clearly Paramount’s crown jewel asset. In 2023, its finding and development (F&D) costs per barrel in the play were $10.03. F&D costs that low work wonders for Paramount’s capital efficiency and return on capital.
Paramount’s other two plays possess much higher F&D costs. While management does not disclose the details for either play, companywide finding development costs for proved, developed, producing (PDP) reserves stood at a higher at $16.58 per barrel in 2023, sigificantly higher than Grande Prairie but still attractive.
Management has successfully grown Paramount’s position in Grande Prairie since 2016, increasing production by more than eight times through a series of acquisitions. It now holds 109,000 net acres in the play.
Source: Paramount Resources March 2024 Presentation.
The company’s Grande Prairie wells come on strong. Initial production rates averaged an impressive 1,920 boe/d in 2023. This year, Paramount will extend its development into the western portion of the play.
Another notable feature of Paramount isits 46% ownership by insiders, mostly the Riddell family, who descend from the company’s founder, Clay Riddell. Clay stepped down as CEO in 2018 and handed over the reins to his son, James, who remains the company’s CEO. James has spearheaded Paramount’s growth into attractive Alberta oil basins.
Management Execution Issues Crop Up
The knock against Paramount is that management has grown complacent toward shareholders due to the founding family’s large holdings of stock. These are thought to have entrenched management and the board of directors and, in doing so, reduced their attentiveness to public shareholder interests.
Paramount’s recent results have borne out some management-related concerns. While the fourth-quarter operating performance was in line with analyst expectations, management reduced its 2024 production guidance from 112,000 boe/d to 103,000 boe/d. This was the second cut to guidance in as many quarters after the first slashed 2024 production guidance from 115,000 boe/d to 112,000 boe/d.
This latest reduction was concerning, as management attributed fully half the reduction—equivalent to 6,000 boe/d— to lower-than-expected well performance. This was probably the reason why the shares have sold off by 10% from their highs earlier this year.
The results were clearly disappointing, but they shouldn’t obscure management’s positive longer-term performance. Under James Riddell, Paramount has done a commendable job assembling attractive positions in some of the most economic plays in Alberta.
It has also allocated capital well for shareholders. The company paid down debt until it was eliminated in the first quarter of 2023. That quarter, it also paid a $1.00 per share special dividend, which it funded with part of the proceeds from an asset sale.
Management has also kept operating costs reasonably consistent over recent quarters despite cost headwinds that have raised costs for every E&P in the Canadian oil patch.
Aside from management’s recent guidance snafus, there are other negatives in the longer-term picture. For one, Paramount has lacked operational consistency, with quarterly production rates considerably bumpier than those of its peers.
In 2024, its quarterly production ranged from a low of 88,245 boe/d in the second quarter to a high of 101,355 boe/d in the fourth quarter. The lack of consistency could signal an asset quality issue, though we don’t believe that’s a problem with Paramount.
In light of the longer-term positives and shorter-term negatives, we’re neutral on Paramount’s management overall. On balance, they neither add nor detract from the company’s attractiveness as an investment.