FOR: PARAMOUNT RESOURCES LTD.
TSX SYMBOL: POU
AUGUST 15, 2003 - 07:50 ET
Paramount Resources Ltd. Announces Results For The
Second Quarter Ended June 30, 2003
CALGARY, ALBERTA--
Paramount Resources Ltd. ("Paramount") is pleased to announce its
financial and operating results for the three months ended June
30, 2003.
/T/
PARAMOUNT RESOURCES LTD.
FINANCIAL HIGHLIGHTS (unaudited)
FINANCIAL
(thousands of dollars except for per share amounts)
Three Months Ended Six Months Ended
June 30 June 30
% %
2003 2002 Change 2003 2002 Change
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Gross Revenue $ 84,822 $ 126,725 -33% $ 206,546 $ 219,138 -6%
Cash Flow (1)
From
operations 36,559 80,956 -55% 95,048 139,153 -32%
Per share
(basic &
diluted) 0.61 1.36 -55% 1.58 2.34 -32%
Earnings (loss)
Net earnings
(loss) (1,436) 26,614 -105% (812) 45,526 -102%
Per share -basic (0.02) 0.45 -104% (0.01) 0.77 -101%
-diluted (0.02) 0.44 -105% (0.01) 0.76 -101%
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Net
exploration &
development
expenditures 50,659 74,400 -32% 103,068 177,052 -42%
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Total Assets 1,189,116 1,717,154 -31%
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Net Debt (2) 299,676 618,833 -52%
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Shareholders'
Equity 503,222 581,324 -13%
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Common shares
outstanding
(thousands)
-June 30 60,169 59,459 1%
-July 31 60,169 - -
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OPERATING
Production
Natural gas
(MMcf/d) 142.0 231.4 -39% 167.4 221.5 -24%
Crude oil and
liquids
(Bbl/d) 7,465 2,639 183% 7,677 3,092 148%
Total
Production
(BOE/d)@6:1 31,129 41,205 -24% 35,584 40,009 -11%
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Average Prices
Natural gas
(pre-hedge)
($/Mcf) 5.90 3.60 64% 6.45 3.00 115%
Natural gas
($/Mcf) 4.72 4.36 8% 5.08 3.98 28%
Crude oil and
liquids ($/Bbl) 36.94 33.84 9% 37.97 31.09 22%
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Drilling
Activity
Gas 29 6 383% 96 102 -6%
Oil 5 - - 10 3 233%
Other - - - - 2 -
D & A 3 1 200% 8 9 -11%
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Total Wells 37 7 429% 114 116 -2%
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/T/
(1) Cash flow from operations is a non-GAAP term that represents
net earnings adjusted for non-cash items,dry hole, geological and
geophysical costs. The Company considers cash flow from
operations a key measure as it demonstrates the Company's ability
to generate the cash necessary to fund future growth through
capital investment and to repay debt.
(2) Net debt is equal to the sum of accounts payable and accrued
liabilities, shareholder loan, bank loans, drilling rig
indebtedness and mortgage, less current assets.
REVIEW OF OPERATIONS
Kaybob
Activity in the Kaybob area was limited in the second quarter due
to an early spring break up, followed by a wet spring. Drilling
and completion activity started in June and Paramount drilled 3
(2.5 net) wells resulting in one oil well, one gas well and one
standing well by the end of the quarter. Construction has also
started on the new Kaybob North Oil Battery adjacent to the
Kaybob North gas plant. Second quarter capital expenditures
totaled approximately $3 million.
Production volumes were down by approximately 7 MMcf/d from the
first quarter. Gas volumes averaged about 80 MMcf/d in the second
quarter of 2003 versus 87 MMcf/d in the first quarter of 2003.
The decrease in production volumes was caused by the scheduled
plant turnaround at Kaybob North gas plant and the unscheduled
maintenance at Paramount's Pine Creek property. The volumes lost
due to the shutdowns lowered the quarterly production by 5.1
MMcf/d. Oil and natural gas liquids volumes averaged 2,111 Bbl/d
in the second quarter of 2003 versus 2,404 Bbl/d in the first
quarter of 2003. Production declines were caused by restricted
access and the shut-in of the associated natural gas liquids due
to the plant maintenance at Pine Creek and Kaybob North.
Activity levels in the Kaybob area are expected to increase
dramatically in the second half of 2003. Paramount anticipates
three drilling rigs to be active in this area for the remainder
of the year, drilling 30 to 35 wells prior to year end. Paramount
has an extensive inventory of gas pools in its Kaybob core area
where only one well per section had been drilled into these tight
gas reservoirs. These single wells do not adequately drain the
existing reserves in the full section, typically draining only a
third to a half of the existing reserves in place. Paramount's
strategy is to drill additional wells to drain these reserves
that are not currently being accessed by downspacing the existing
gas pools initially to two wells per section. Paramount plans to
take full advantage of its production infrastructure and
extensive land base in the Kaybob area with this low risk
downspacing program to add significant new reserves and
production. Production volumes in the Kaybob area are expected to
rise to 100 MMcf/d and 2,500 Bbl/d of oil and natural gas liquids
prior to the end of the year.
Sturgeon Lake / Mirage:
The Sturgeon Lake/Mirage core area increased production to 12
MMcf/d and 2,310 Bbl/d during the second quarter of 2003 and is
poised to show continued growth in gas production throughout the
rest of 2003.
At Mirage, Paramount has established a dominant position through
its ownership of the infrastructure, a very strong developed and
undeveloped land position, and a significant seismic database,
all of which came with last year's acquisition of Summit
Resources. Mirage is highly prospective because of its multi-zone
potential in both shallow and conventional medium-depth
reservoirs. Paramount drilled, completed and tested two
successful exploratory shallow gas wells on 100 percent Paramount
land, adding approximately 2 MMcf/d of new production and a
probable 4 BCF of new gas reserves. Pipeline construction to
existing facilities is currently in progress. Recompletions were
successful in adding 1 to 2 MMcf/d of production. This
exploratory program set up an additional 12 (9.5 net) wells as
part of a second phase of drilling which has resulted in 11 gas
wells, with one dry hole in the early third quarter. An
additional 12 locations are proposed for the late third quarter
and early in the fourth quarter of 2003. Upgrades to existing
infrastructure currently in progress will enable Paramount to
shorten tie-in times. An aggressive land acquisition program has
been implemented to facilitate the continuing expansion of the
shallow sweet-gas reserves and future, deep exploration in the
area.
As with the Mirage area, Valhalla is characterized by having
excellent multi-zone potential, in shallow, intermediate, and
deep gas and oil reservoirs. Paramount has typically identified
through drilling at least two producing zones per well. Two wells
drilled in the first quarter at Valhalla were successfully
completed during the second quarter. Existing infrastructure was
insufficient to handle the additional 5 MMcf/d of sweet and sour
gas, and the associated liquids and oil production. As a result,
a Paramount-operated pipeline and facility construction program
was initiated. Production from the two wells is scheduled to
commence at the end of August 2003. Two additional completions
are in progress in the third quarter, with a total of 4 (2.8 net)
wells being tied into the new infrastructure. Additional drilling
is planned for late 2003 and early 2004 to take advantage of this
new infrastructure. Paramount's ongoing, aggressive land
acquisition program at Valhalla will facilitate future reserve
and production growth in the area.
Paramount is currently executing a drilling program for several
deep, prolific gas reservoirs in the Saddle Hills area. Paramount
spud a 100 percent interest, 3,600-meter Wabamun test at 4-35,
which is expected to reach total depth in late August 2003.
Infrastructure planning for this area has already been initiated.
The Company has an excellent undeveloped land position and
seismic information on a variety of exploratory opportunities in
the immediate area. Assuming success at 4-35, Paramount can very
quickly capitalize on these other opportunities in the Saddle
Hills area.
Activity in the Sturgeon Lake area focused on production and
facilities optimization to maximize existing production from the
deeper Devonian oil reservoirs. Late in the second quarter,
Paramount drilled and cased the 03/10-5-69-21W5 well for Leduc
oil production. Facility and completion operations are underway
to bring this well on production in the third quarter.
Northwest Alberta
The Northwest Alberta area produced 29 MMcf/d and 200 Bbl/d in
the second quarter of 2003 as compared to 20 MMcf/d in the first
quarter. The increased production is the result of the tie-in of
the first quarter drilling program at Bistcho Lake and Cameron
Hills. As this is a remote, winter access only area, no further
drilling has occurred since the first quarter of 2003.
Production from a new natural gas discovery drilled in the first
quarter of 2003 at Haro commenced in the second quarter.
Paramount has subsequently purchased additional land on this play
and the next winter program should result in an increase in
production from this area.
Oil production commenced at Cameron Hills on April 7, 2003.
Operational challenges have hampered oil production from Cameron
Hills resulting in an average oil of 200 Bbl/d for the quarter. A
pipeline failure related to the initial construction of the
Cameron Hills oil facility required the complete postponement of
production until remedial work had been completed on the newly
constructed facilities. Oil production has subsequently
approached 1,000 Bbl/d with further potential increases in the
third quarter of 2003, assuming access can be established.
Northeast British Columbia / Liard, Northwest Territories
Production in all Northeast British Columbia and Liard areas were
affected by the. turnaround of a third party facility at Fort
Nelson from June 23 to July 16. Total production for the area
averaged 12 MMcf/d for the second quarter of 2003.
At Paramount's non-operated Liard property, the 2K-29 (I-40) was
brought onstream April 28 at 25 MMcf/d (2.76 percent working
interest). The M-25 well (2.76 percent working interest) did not
come back on production after the plant turnaround at Fort Nelson
and a workover is planned to reestablish production.
In the Clarke Lake area, Paramount has initiated a program to
drill two to three development wells (36.3 percent interest) in
early August.
Completion operations on the Anadarko operated Liard P-16 well
resumed in the second quarter although conclusive results are not
yet available.
Southern Alberta / Saskatchewan / Montana / North Dakota
Production through the second quarter of 2003 from the Southern
Operating Unit averaged 9 MMcf/d and 2,845 Bbl/d (4,397 BOE/d),
reflecting the results of the property disposition program
started late last year. Operations during the second quarter were
focused in the Chain/Craigmyle and Sylvan Lake areas of Alberta.
In Chain/Craigmyle, three wells were drilled resulting in two
producing wells, one each from the middle Belly River and
Edmonton formations. Gas production additions were also made from
a non-operated Banff recompletion and a Mannville tie-in. In
Sylvan Lake several shut-in Viking oil wells were placed back on
production and a successful recompletion for Edmonton gas was
undertaken.
The Southern Operating Unit substantially concluded consolidation
and focus process in the second quarter of 2003 through the
divestiture of smaller working interest and non-operated/non-core
properties in order to pursue the growth of fewer, higher working
interest core properties. In the second quarter, 12 property
dispositions were concluded in the Southern Operating Unit.
Exploration
The Colville Lake Area is situated at the Arctic Circle about 250
kilometers northeast of Norman Wells. The Colville area is
recognized by Paramount as having significant potential for
large-scale sweet gas and condensate reserves. The main target in
the area is structurally and stratigraphically trapped gas within
Cambrian aged Mt. Clarke sandstones. Paramount drilled two wells
at 50 percent working interest on Paramount's Nogha prospect that
covers approximately 39,488 acres (61.7 sections in Alberta). The
Nogha prospect is the first of 11 concession parcels to be
tested. The first well, Paramount Apache Nogha C-49, was spud
January 25, 2003, and was drilled without any problems to its
final total depth on February 25, 2003, at 1,408 meters. The C-49
well encountered multiple zones of gas bearing sandstone
reservoir within the basal Cambrian section and was cased and
completed as a successful Mt. Clarke gas well. The second well in
the program, Nogha M-17, was drilled down structure from the C-49
well. The M-17 well was spud February 25, 2003 and was again
drilled without any problems to its final total depth on March
23, 2003, at 1,510 meters. The M-17 well was cased and completed
as a second successful Mt. Clarke gas well. Due to the
encroachment of spring breakup the well was not stimulated but
was perforated and flow tested. Pressure recorders were recovered
in June 2003 and subsequent analysis of the petrophysics,
seismic, and flow and build up data from the two Nogha wells is
seen as extremely encouraging by the partners. Further specific
information relating to deliverability, pressure and reserves
will not be released at this time due to the competitive nature
of exploration.
Paramount also holds two exploration licenses acquired by
competitive work commitment bid from the Federal government
(EL399 and EL414). The partners evaluated EL399 last winter
through the purchase and reprocessing of 2D trade seismic data
and by carrying out a new 156-kilometer 2D seismic survey. This
seismic has been evaluated and is being utilized to identify
potential drilling locations on EL399. On EL414 trade seismic
data was purchased and reprocessed. This data is currently being
mapped to assist in the planning of a 2D heli portable seismic
survey that will be carried out later this year. Plans by the
partners for the next season include re-entering the recent Nogha
wells to evaluate additional untested zones and the drilling of
additional wells to test other prospects in the area and to
further delineate the Nogha discovery.
FINANCIAL
Petroleum and natural gas sales before hedging totaled $101.5
million for the three months ended June 30, 2003, as compared to
$89.2 million for the comparable period in 2002. The increase is
due to significantly higher natural gas prices, offset somewhat
by lower natural gas production volumes as a result of the
disposition of substantially all of Paramount's Northeast Alberta
properties to Paramount Energy Trust in the first quarter of
2003.
Cash flow from operations for the three months ended June 30,
2003 was $36.6 million or $0.61 per common share diluted and
$95.0 million or $1.58 per common share diluted for the six
months ended June 30, 2003. Net loss for the three months ended
June 30, 2003 totaled $1.4 million or $0.02 per common share
diluted, as compared to net earnings of $26.6 million or $0.45
per common share diluted for the comparable period in 2002.
Current quarter results were impacted by a pre-tax commodity
hedging loss of $15.2 million, as well as a pre-tax loss of $21.7
million on the disposition of a non-core natural gas property,
offset by a future income tax recovery of $33.4 million as a
result of a reduction in corporate income tax rates. Earnings for
the second quarter of 2002 were positively affected by a gain on
sale of investments of $24.5 million, as well as the $38.0
million net Surmont compensation received during the quarter.
Debt levels at the end of the second quarter in 2003 reflected
continued improvement in the financial position of the company.
Net debt decreased by a further $25.8 million from March 31, 2003
bringing the total debt reduction to date in 2003 to $255.6
million. Net debt at June 30, 2003 was $299.7 million.
Capital expenditures during the second quarter of 2003 were $50.6
million, bringing the year to date total capital expenditures to
$103.1 million. Paramount continues to budget $175 million of
capital expenditures for 2003.
Management's Discussion and Analysis
Management's Discussion and Analysis ("MD&A") should be read in
conjunction with the interim unaudited consolidated financial
statements for the three and six months ended June 30, 2003 and
the audited consolidated financial statements and MD&A for the
year ended December 31, 2002.
DRILLING
/T/
Six Months Ended June 30
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Wells Drilled 2003 2002
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Gross (1) Net (2) Gross (1) Net (2)
Natural gas 96 75 102 80
Oil 10 9 3 3
Other - - 2 1
Dry 8 6 9 7
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Total 114 90 116 91
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(1) "Gross" wells means the number of wells in which Paramount has a
working interest.
(2) "Net" wells means the aggregate number of wells obtained by
multiplying each gross well by Paramount's percentage working interest
therein.
/T/
During the six months ended June 30, 2003, Paramount participated
in the drilling of 114 gross wells (90 net) including 37 wells
(33 net) in the second quarter, compared to 116 gross wells (91
net) during the same period in 2002.
CAPITAL EXPENDITURES
/T/
Six Months Ended June 30 ----------------------------------------------------------------------- (thousands of dollars) 2003 2002 2001 ----------------------------------------------------------------------- Land $ 7,441 $ 3,531 $ 18,861 Geological and geophysical 4,171 6,883 7,219 Drilling 55,435 106,196 94,090 Production equipment and facilities 36,021 60,442 76,423 ----------------------------------------------------------------------- Net exploration and development expenditures 103,068 177,052 196,593 Summit Resources Limited acquisition (30,005) 437,933 - Dry hole and seismic costs expensed (23,620) (10,053) (11,802) Petroleum and natural gas property impairment (9,868) (49,136) - Property acquisitions - 28,400 6,962 Property dispositions (324,845) (1,344) (7,068) Other 490 505 633 Depletion and depreciation expense (83,183) (60,600) (32,000) ----------------------------------------------------------------------- Net change in capital assets $ (367,963) $ 522,757 $ 153,318 ----------------------------------------------------------------------- -----------------------------------------------------------------------
/T/
Capital additions for the quarter were concentrated in the Kaybob
and Cameron Hills areas. For the six months ended June 30, 2003,
net exploration and development expenditures totaled $103.1
million.
During the second quarter 2003, Paramount closed a number of
minor non-core property dispositions for net proceeds of
approximately $39 million. Total proceeds received to date for
the minor property dispositions is approximately $59 million.
The proceeds received from the minor property dispositions have
been applied against the Company's debt facilities.
STOCK OPTIONS
During the quarter 1,455,500 stock options were issued at an
exercise price of $9.00 per option. Also during the quarter,
941,500 stock options issued in 2001, the majority of which were
at exercise prices of $14.50 and $13.35 per option, were
re-priced to exercise prices of $10.22 and $9.07 per option,
respectively. Total stock options issued and outstanding at June
30, 2003 were 2,977,000.
REVENUE
Natural gas revenue before hedging totaled $195.6 million for the
six months ended June 30, 2003, as compared to $130.1 million
during the same period in 2002. The increase in natural gas
revenue results from higher commodity prices received during the
period. Stronger natural gas demand resulted in an increase of
115 percent in Paramount's year-to-date average natural gas sales
price to $6.45/Mcf (pre-hedge) as compared to $3.00/Mcf
(pre-hedge) for the comparable period in 2002. Included in gross
revenue are $40.3 million of natural gas hedging losses. The
2003 year-to-date average natural gas price after hedging was
$5.08/Mcf.
For the three months ended June 30, 2003, natural gas revenue
before hedging totaled $76.3 million as compared to $81.1 million
for the same period in 2002. The 13 percent reduction in
quarter-over-quarter sales was primarily due to the disposition
of the Northeast Alberta assets to the Trust in March 2003.
/T/
----------------------------------------------------------------------- Revenue Analysis Six Months Ended June 30 ----------------------------------------------------------------------- (thousands of dollars) 2003 2002 2001 ----------------------------------------------------------------------- Natural gas and other $ 195,596 $ 130,138 $ 349,552 Crude oil and natural gas liquids 55,621 17,400 13,973 Commodity hedging gain (loss) (44,322) 31,495 (36,769) Gain (loss) on sale of short-term investments (1,020) 40,105 2,982 Other revenue 671 - - ----------------------------------------------------------------------- Gross revenue 206,546 219,138 329,738 Royalties (50,912) (25,600) (69,059) ----------------------------------------------------------------------- Net revenue $ 155,634 $ 193,538 $ 260,679 ----------------------------------------------------------------------- -----------------------------------------------------------------------
/T/
Natural gas sales volumes averaged 167.4 MMcf/d to June 30, 2003,
as compared to 221.5 MMcf/d reported for the same period in 2002.
Second quarter natural gas sales averaged 142.0 MMcf/d, a 39
percent decrease from 231.4 MMcf/d reported for the equivalent
period in 2002. The decrease in natural gas sales is primarily
the result of the disposition of the Northeast Alberta assets to
the Trust.
Oil and natural gas liquids revenue before hedging for the six
months ended June 30, 2003 increased 220% to $55.6 million as
compared to $17.4 million for the comparable period in 2002. The
increase in oil and natural gas liquids revenue results from
higher commodity prices, the addition of Summit's oil and natural
gas liquids production and new oil production from Cameron Hills.
Stronger oil and natural gas liquids demand resulted in an
increase of 29 percent in Paramount's year-to-date average oil
and natural gas liquids sales price to $40.03/Bbl (pre-hedge) as
compared to $31.09/Bbl (pre-hedge) in the comparable period in
2002. Included in gross revenue are $4.0 million of oil and
natural gas liquids hedging losses. The 2003 year-to-date crude
oil price after hedging was $37.97/Bbl.
For the three months ended June 30, 2003, oil and natural gas
liquids revenue before hedging totaled $25.2 million as compared
to $8.1 million for the same period in 2002.
Oil and natural gas liquids production volumes increased 148
percent to average 7,677 Bbl/d for the six months ended June 30,
2003 as compared to 3,092 Bbl/d for the comparable period in
2002. The increase is attributable to the acquisition of Summit,
which at the time of acquisition produced approximately 5,000
Bbl/d of oil and natural gas liquids. Cameron Hills oil
production contributed approximately 154 Bbl/d for the six months
ended June 30, 2003. Once all five Cameron Hills oil wells are on
line, gross production is estimated to be 1,500 Bbl/d of which
1,372 Bbl/d will be net to Paramount.
Oil and natural gas liquids production volumes totaled 7,465
Bbl/d in the second quarter of 2003, as compared to 2,639 Bbl/d
for the comparable quarter of 2002. The 5% decrease from oil and
natural gas liquids production of 7,892 Bbl/d in the first
quarter of 2003 was due primarily to minor property dispositions
closed during the quarter, offset somewhat by new oil production
at Sturgeon Lake and Cameron Hills.
/T/
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Cash Netbacks Per Unit
of Total Production Six Months Ended June 30
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($/BOE@6:1) 2003 2002 2001
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Sales price before hedging $ 39.00 $ 20.37 $ 50.65
Less:
Royalties (7.90) (3.54) (9.62)
Operating costs (5.77) (5.60) (4.07)
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Cash netback, before hedging 25.33 11.23 36.96
Commodity hedging gain (loss) (6.88) 4.35 (5.12)
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Cash netback, after hedging $ 18.45 $ 15.58 $ 31.84
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/T/
ROYALTIES
Alberta gas crown royalties are a cash royalty calculated on the
Crown's share of production using the Alberta Reference Price.
The Alberta Reference Price is the monthly weighted average well
head price for gas consumed in Alberta and gas exported from
Alberta reduced by allowances for transportation and marketing.
A subsequent cost of service credit is applied to account for the
Crown's share of allowable capital and processing fees to arrive
at the net royalty. Generally the Crown's share of production
will increase in a higher price environment.
Royalties for the six months ended June 30, 2003 averaged
$7.90/BOE or 20 percent of Paramount's average sales price of
$39.00/BOE. This compares to $3.54/BOE or 17 percent of the
average sales price reported for the same period in 2002. The
increased rate results from the higher commodity prices received
during the quarter, before hedging losses, as compared to prior
year. Hedging losses do not reduce royalty expense due to the
Crown's use of the Alberta Reference Price to calculate
royalties, as opposed to the Company's realized price.
For the three months ended June 30, 2003, royalties totaled $19.7
million as compared to $16.5 during the same period a year
earlier.
OPERATING COSTS
For the six months ended June 30, 2003, operating costs totaled
$37.2 million compared to $40.5 million during the same period a
year earlier.
On a unit-of-production basis, average operating costs increased
3 percent to $5.77/BOE from $5.60/BOE in 2002. This increase
reflects seasonal maintenance associated with the Company's
facilities as well as a general increase in the cost of field
services and supplies, as compared to prior year. For the three
months ended June 30, 2003, operating costs totaled $18.3 million
as compared to $22.6 million for the same period in 2002, as a
result of the disposition of the Northeast Alberta assets to the
Trust and other property dispositions recorded in 2003.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $9.4 million for the
six months ended June 30, 2003, as compared to $5.7 million
recorded for the same period a year earlier. On a
unit-of-production basis, general and administrative expenses
increased to $1.45/BOE as compared to $0.79/BOE for the period
ended June 30, 2003. The increase from 2002 is due primarily to
lower overhead recoveries related to lower capital spending
levels compared to prior year. Paramount does not capitalize any
general and administrative expenses.
DRY HOLE COSTS
The Company follows the Successful Efforts Method of accounting
for petroleum and natural gas operations. Under this method the
Company capitalizes only those costs that result directly in the
discovery of petroleum and natural gas reserves. The cost of
unproductive wells, abandoned wells and surrendered leases are
charged to earnings in the year of abandonment or surrender. For
the six months ended June 30, 2003, $19.4 million in dry hole
costs were recorded, as compared to $3.2 million in the same
period of 2002. Of the dry hole expense recorded in 2003,
approximately $11.5 million results from wells drilled in prior
years, which were determined in the current year to be incapable
of production in economic quantities.
WRITE-DOWN OF U.S. PETROLEUM AND NATURAL GAS PROPERTIES
During the three months ended June 30, 2003, the Company recorded
a write-down of $9.9 million, representing the remainder of its
petroleum and natural gas assets in California.
INCOME TAXES
At December 31, 2002, the Company had accumulated tax pools of
approximately $796 million, which will be available for deduction
in 2003 in accordance with Canadian income tax regulations at
varying rates of amortization. Paramount does not expect to pay
current income taxes in 2003.
In 2003, the Alberta provincial and Canadian federal governments
introduced legislation to reduce corporate taxes. The changes
are considered substantively enacted for the purposes of Canadian
GAAP and, accordingly, the Company's future income tax liability
has been reduced by $33.4 million. The effect of this reduction
has been recognized on the income statement as a future tax
recovery for the three and six-month periods ended June 30, 2003.
CASH FLOW AND EARNINGS
Cash flow from operations totaled $95.0 million or $1.58 per
basic and diluted common share, representing a 31 percent
decrease from the $139.2 million, or $2.34 per basic and diluted
common share reported for the corresponding period in 2002. The
decrease is due to lower production levels, as well as commodity
hedging losses, offset somewhat by higher natural gas and oil and
natural gas liquids prices, as compared to prior year. Fully
diluted weighted average shares outstanding totaled 60.2 million
at June 30, 2003.
Cash flow will continue to be directed towards the Company's
capital expenditure program and the reduction of bank
indebtedness.
Net loss for the six months ended June 30, 2003 totaled $0.8
million or $0.01 per basic and fully diluted common share,
compared to net income of $45.5 million, or $0.77 per basic
common share ($0.76 per fully diluted common share) reported for
the same period a year earlier. The net loss for the six month
period is the result of a commodity hedging loss of $44.3
million, offset by a $33.4 million future tax gain due to changes
in federal and provincial tax rates. A one-time loss on sale of
property and equipment of $21.7 million was recorded as a result
of the disposition of a non-core property in Alberta.
/T/
PARAMOUNT RESOURCES LTD.
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND RETAINED EARNINGS
(unaudited)
Three Months Ended Six Months Ended
June 30 June 30
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(thousands of
dollars except for
per share amounts) 2003 2002 2003 2002
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Revenue
Petroleum and
natural gas sales $ 101,512 $ 89,246 $ 251,217 $ 147,538
Commodity hedging
gain (loss) (note 6) (15,218) 12,951 (44,322) 31,495
Royalties (net of
ARTC) (19,695) (16,519) (50,912) (25,600)
Gain (loss) on sale
of investments (1,020) 24,528 (1,020) 40,105
Other revenue
(expense) (452) - 671 -
-----------------------------------------------------------------------
65,127 110,206 155,634 193,538
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Expenses
Operating 18,302 22,550 37,168 40,542
Surmont compensation
- net - (37,960) - (37,960)
Interest on bank
loan 4,234 2,646 11,296 5,237
General and
administrative (note 2) 4,589 2,458 9,357 5,752
Lease rentals 702 981 1,477 1,624
Geological and
geophysical 3,423 6,325 4,171 6,883
Dry hole 13,628 1,448 19,449 3,170
Loss (gain) on sale
of property and
equipment 21,065 283 20,794 (130)
Provision for future
site restoration and
abandonment costs 933 600 2,195 1,200
Depletion and
depreciation 37,041 29,922 83,183 60,600
Write-down of US
petroleum and
natural gas
properties 9,868 40,000 9,868 40,000
-----------------------------------------------------------------------
113,785 69,253 198,958 126,918
-----------------------------------------------------------------------
Earnings (loss)
before taxes (48,658) 40,953 (43,324) 66,620
Income and other taxes
Large corporations
tax and other 741 615 1,288 1,230
Future income tax
(recovery) (note 8) (47,963) 13,724 (43,800) 19,864
-----------------------------------------------------------------------
Net earnings (loss) (1,436) 26,614 (812) 45,526
Retained earnings,
beginning of period 304,148 364,517 355,912 346,064
Adjustment on
disposition of
assets to a related
party (note 4) - - (1,388) -
Dividends (note 4) - - (51,000) -
Adoption of new
accounting policy
(note 2) - - - (459)
-----------------------------------------------------------------------
Retained earnings,
end of period $ 302,712 $ 391,131 $ 302,712 $ 391,131
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Net earnings (loss)
per common share
-basic $ (0.02) $ 0.45 $ (0.01) $ 0.77
-diluted $ (0.02) $ 0.44 $ (0.01) $ 0.76
-----------------------------------------------------------------------
Weighted average
number of common
shares outstanding
(thousands)
-basic 60,169 59,457 60,084 59,457
-diluted 60,244 59,524 60,343 59,524
-----------------------------------------------------------------------
See accompanying notes to consolidated financial statements
PARAMOUNT RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
June 30 December 31
-----------------------------------------------------------------------
(thousands of dollars) 2003 2002
-----------------------------------------------------------------------
(unaudited)
ASSETS (note 5)
Current assets
Short-term investments (market value:
$15,146; 2002 - $14,168) $ 15,146 $ 14,168
Accounts receivable 83,507 91,042
Prepaid expenses 14,844 19,213
-----------------------------------------------------------------------
113,497 124,423
Property, plant and equipment, net 1,043,998 1,411,961
Goodwill (note 3) 31,621 -
-----------------------------------------------------------------------
$ 1,189,116 $ 1,536,384
-----------------------------------------------------------------------
-----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 130,434 $ 140,396
Shareholder loan - 33,000
Bank loans (note 5) 274,890 498,097
-----------------------------------------------------------------------
405,324 671,493
-----------------------------------------------------------------------
Drilling rig indebtedness 1,272 1,443
Mortgage 6,577 6,730
Provision for future site restoration
and abandonment costs 19,249 22,954
Deferred revenue 2,964 7,804
Future income taxes (note 8) 250,508 279,855
-----------------------------------------------------------------------
280,570 318,786
-----------------------------------------------------------------------
Commitments and contingencies (note 6)
-----------------------------------------------------------------------
Shareholders' equity
Share capital (notes 2 and 7)
Issued and outstanding
60,168,600 common shares (2002-
59,458,600 common shares) 200,510 190,193
Retained earnings 302,712 355,912
-----------------------------------------------------------------------
503,222 546,105
-----------------------------------------------------------------------
$ 1,189,116 $ 1,536,384
-----------------------------------------------------------------------
-----------------------------------------------------------------------
See accompanying notes to consolidated financial statements
PARAMOUNT RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended Six Months Ended
June 30 June 30
-----------------------------------------------------------------------
(thousands of dollars) 2003 2002 2003 2002
-----------------------------------------------------------------------
Operating activities
Net earnings (loss) $ (1,436) $ 26,614 $ (812) $ 45,526
Add (deduct) non-cash items
Write-down of
Surmont assets - 9,136 - 9,136
Future income tax
(recovery) (47,963) 13,724 (43,800) 19,864
Depletion and
depreciation 37,041 29,922 83,183 60,600
Write-down of US
petroleum and
natural gas
properties 9,868 40,000 9,868 40,000
Provision for future
site restoration and
abandonment costs 933 600 2,195 1,200
Loss (gain) on sale
of property and
equipment 21,065 283 20,794 (130)
Add items not
related to operating
activities
Surmont compensation - (47,096) - (47,096)
Dry hole 13,628 1,448 19,449 3,170
Geological and
geophysical 3,423 6,325 4,171 6,883
-----------------------------------------------------------------------
Cash flow from
operations 36,559 80,956 95,048 139,15
(Decrease) increase
in deferred revenue (2,380) 9,068 (4,840) 27,825
Change in non-cash
operating working
capital 19,577 100,030 (8,950) 122,721
-----------------------------------------------------------------------
53,756 190,054 81,258 289,699
-----------------------------------------------------------------------
Financing activities
Bank loans - draws - 214,229 10,000 221,465
Bank loans -
repayments (21,404) - (233,207) -
Shareholder loan - - (33,000) -
Share capital - 113 10,317 873
Mortgage (77) - (153) -
Drilling rig
indebtedness (82) 2,144 (171) 2,144
-----------------------------------------------------------------------
(21,563) 216,486 (246,214) 224,482
-----------------------------------------------------------------------
Cash flow provided
by (used in)
operating and
financing activities 32,193 406,540 (164,956) 514,181
-----------------------------------------------------------------------
Investing activities
Property, plant and
equipment
expenditures 47,511 67,126 99,447 169,310
Acquisition of
Summit Resources
Limited - 338,581 - 338,581
Petroleum and
natural gas property
acquisitions - 20,030 - 28,400
Geological and
geophysical costs 3,423 6,325 4,171 6,883
Proceeds on sale of
property and
equipment (38,649) (762) (261,481) (3,333)
Surmont compensation - (47,096) - (47,096)
Change in non-cash
investing working
capital 19,908 3,542 (7,093) 3,211
-----------------------------------------------------------------------
Cash flow (provided
by) used in
investing activities 32,193 387,746 (164,956) 495,956
-----------------------------------------------------------------------
Increase in cash - 18,794 - 18,225
Cash, beginning of
period - 171 - 740
-----------------------------------------------------------------------
Cash, end of period $ - $ 18,965 $ - $ 18,965
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Income taxes paid $ - $ - $ 5,466 $ 25,000
-----------------------------------------------------------------------
Interest paid $ 3,572 $ 2,322 $ 10,987 $ 4,998
-----------------------------------------------------------------------
See accompanying notes to consolidated financial statements
/T/
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(all tabular dollar amounts expressed in thousands of dollars)
Paramount Resources Ltd. ("Paramount" or the "Company") is
involved in the exploration and development of petroleum and
natural gas primarily in western Canada. The interim consolidated
financial statements are stated in Canadian dollars and have been
prepared by management in accordance with Canadian generally
accepted accounting principles. Certain information and
disclosures normally required to be included in notes to annual
consolidated financial statements have been condensed or omitted.
The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and the
notes thereto in Paramount's Annual Report for the year ended
December 31, 2002.
The preparation of interim consolidated financial statements
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the interim
consolidated financial statements and the reported amounts of
revenues and expenses during the period. Actual results could
differ from those estimates.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated financial statements have been prepared
in a manner consistent with accounting policies utilized in the
consolidated financial statements for the year ended December 31,
2002, except as discussed in note 2 and as noted below:
Goodwill
Goodwill, which represents the excess of purchase price over fair
value of net assets acquired, is assessed by the Company for
impairment at least annually. Impairment is assessed based on a
comparison of the fair value of the net assets acquired to the
carrying value of the net assets, including goodwill. Any excess
of carrying value over and above fair value is the impairment
amount, and is charged to earnings in the period identified.
2. CHANGE IN ACCOUNTING POLICY
Stock based compensation
Effective January 1, 2002, the Company adopted the new Canadian
Institute of Chartered Accountants' standard on accounting for
Stock-Based Compensation. Under this new standard, the Company's
stock options and share appreciation rights, which can be settled
in cash at the discretion of the employee, are accounted for at
an amount equal to the difference between the exercise price and
the fair value at the date of grant, resulting in a liability and
corresponding compensation expense being recognized. The awards
are remeasured at each reporting date. As permitted by the new
standard, the Company applied the change retroactively for the
share appreciation rights without restatement of individual prior
periods. The impact of the adoption of the new standard on the
financial statements as at January 1, 2002, was as follows:
/T/
------------------------------------------------------- Increase in liability $ 459 Decrease in retained earnings $ 459 -------------------------------------------------------
/T/
The recognized expenses for the six and three-month periods ended
June 30, 2003 were nil (June 30, 2002 - $342,000 and $113,000
respectively). As the remaining outstanding share appreciation
rights were cancelled on February 6, 2003, no further expenses
will be recorded in respect of the share appreciation rights
plan.
This new standard requires the presentation of pro forma net
earnings as if the Company had accounted for all of its employee
stock options granted after December 31, 2001, under the fair
value method. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the
grant date of these awards, the Company's net earnings and
earnings per share would have been reduced to the pro forma
amounts indicated below:
/T/
-----------------------------------------------------------------------
Three months Six months
ended June 30 ended June 30
-----------------------------------------------------------------------
2003 2002 2003 2002
-----------------------------------------------------------------------
Net earnings (loss) as reported (1,436) 26,614 (812) 45,526
pro forma (1,785) 26,598 (1,188) 45,507
Net earnings (loss)
per common as reported (0.02) 0.45 (0.01) 0.77
share - basic pro forma (0.03) 0.45 (0.02) 0.77
Net earnings (loss)
per common as reported (0.02) 0.44 (0.01) 0.76
share - diluted pro forma (0.03) 0.44 (0.02) 0.76
-----------------------------------------------------------------------
/T/
The fair value for these options was estimated at the date of
granting using a Black-Scholes Option Pricing Model with the
following assumptions: weighted-average risk-free interest rate
of 5.8 percent; dividend yield of zero percent; weighted-average
volatility factor of the expected market price of the Company's
common shares of 39.5 percent; and a weighted-average expected
life of the options of 4 years.
3. ACQUISITION OF SUMMIT RESOURCES LIMITED
On May 12, 2002, Paramount and Summit Resources Limited
("Summit") jointly announced that they had entered into an
agreement pursuant to which Paramount will make an offer to
purchase all of the issued and outstanding common shares of
Summit for cash consideration of $7.40 per share or approximately
$249.6 million, including acquisition costs. This transaction has
been accounted for using the purchase method and is being
accounted for as the effective date of the acquisition of July 1,
2002.
The Company has finalized the purchase price equation for this
acquisition. The following table summarizes the fair value of the
assets acquired and liabilities assumed at the date of
acquisition:
/T/
------------------------------------------------------
Assets
Accounts receivable $ 13,997
Petroleum and natural gas properties 419,642
Goodwill 31,621
------------------------------------------------------
465,260
------------------------------------------------------
Liabilities
Accounts payable 21,946
Future income taxes 108,373
Debt 74,513
Other liabilities 10,866
------------------------------------------------------
215,698
------------------------------------------------------
Net assets acquired $ 249,562
------------------------------------------------------
------------------------------------------------------
/T/
4. DISPOSITION OF ASSETS TO PARAMOUNT ENERGY TRUST
During the six months ended June 30, 2003, the Company completed
the formation and structuring of Paramount Energy Trust (the
"Trust") through the following transactions:
a) On February 3, 2003, Paramount transferred to the Trust
natural gas properties in the Legend area of Northeast Alberta
for net proceeds of $28 million and 9,907,767 units of the Trust.
b) On February 3, 2003, Paramount declared a dividend-in-kind of
$51 million, consisting of an aggregate of 9,907,767 units of the
Trust. The dividend was paid to shareholders of Paramount common
shares of record on the close of business on February 11, 2003.
The dividend was declared after the Trust received all regulatory
clearances with respect to its final prospectus and registration
statement in the United States. The final prospectus and
registration statement qualified and registered (i) the Dividend
Trust Units, (ii) Rights to purchase further Trust Units, and
(iii) the Trust Units issuable upon exercise of the Rights.
c) On March 11, 2003, in conjunction with the closing of a rights
offering by the Trust, Paramount disposed of additional natural
gas properties in Northeast Alberta to Paramount Operating Trust
for net proceeds of $175 million.
In addition to transferring the natural gas properties to the
Trust, the Company transferred the related accumulated provision
for site restoration and abandonment costs. At the time of the
transaction, the Trust was a related party as a result of a
significant number of common shareholders. As such, natural gas
properties and related liabilities were transferred at net book
value, with no gain or loss on disposition recorded. Details are
as follows:
/T/
Natural gas properties $ 240,326 Future income tax liability 11,039 Site restoration liability (5,900) Costs of disposition 9,516 Adjustment to retained earnings (1,388) ------------------------------------------------- Net proceeds on disposition $ 253,593 ------------------------------------------------- -------------------------------------------------
/T/
Associated with the creation and financing of the Trust and the
transfer of natural gas properties to the Trust, the Company
incurred costs of approximately $9.5 million. These costs have
been included as a cost of disposition.
5. BANK LOAN
In 2002, the Company negotiated a $600 million credit facility
with a syndicate of Canadian chartered banks for general
corporate use and to fund the Summit acquisition. The credit
facility consisted of a $466 million production facility, a $109
million bridge facility and a $25 million working capital
facility. The available borrowings were reduced to a total of
$304.2 million as at July 31, 2003, reflecting the dispositions
of the Trust and other minor non-core properties and the credit
facility has been amended to mature on September 2, 2003. The
Company is currently in negotiation with the same syndicate of
Canadian chartered banks for a committed term facility and
expects an extension of the current credit facility to facilitate
the closing of the new committed term facility by the end of
September.
The Company has provided a first floating charge over all the
assets and a limited recourse guarantee from Paramount Oil and
Gas Ltd., a related entity with a significant ownership interest
in the Company. The facility bears interest at prime rates,
bankers acceptance rates or libor rates plus a margin ranging
from 62.5 to 162.5 basis points.
6. FINANCIAL INSTRUMENTS
The Company's financial instruments included in the consolidated
balance sheet are comprised of short-term investments, accounts
receivable, accounts payable and accrued liabilities, shareholder
loan, bank loans, mortgage and drilling rig indebtedness.
(a) Commodity price hedges
Financial forward sales arrangements entered into by the Company
are unchanged from those outstanding at December 31, 2002. Had
these financial contracts been settled on June 30, 2003, using
prices in effect at that time, the mark-to-market before-tax loss
would have totaled $19.3 million.
(b) Foreign exchange hedges
Foreign currency index swap transactions entered into by the
Company are unchanged from those outstanding at December 31,
2002. At June 30, 2003, the estimated fair value of these hedges
based on the Company's assessment of available market information
was a gain of $2.8 million.
(c) Fair values of financial assets and liabilities
Borrowings under bank credit facilities are for short periods and
are market rate based; thus, carrying values approximate fair
values. Fair values for derivative instruments are determined
based on the estimated cash repayment or receipt necessary to
settle the contract at period-end. Cash payments or receipts are
based on discounted cash flow analysis using current market rates
and prices available to the Company.
The fair values of other financial instruments, including
accounts receivable, accounts payable and accrued liabilities,
approximate their carrying values due to the short-term maturity
of those instruments.
The fair values of the mortgage and drilling rig indebtedness
approximate their carrying values, as there have been no
significant changes in long-term interest rates from the dates
these liabilities were incurred to the balance sheet date.
(d) Credit risk
The Company is exposed to credit risk from financial instruments
to the extent of non-performance by third parties, and
non-performance by counterparties to swap agreements. The Company
minimizes credit risk associated with possible non-performance by
financial instrument counterparties by entering into contracts
with only highly rated counterparties; and controls third-party
credit risk with credit approvals, limits on exposures to any one
counterparty, and monitoring procedures. The Company sells
production to a variety of purchasers under normal industry sale
and payment terms. The Company's accounts receivable are with
customers and joint venture partners in the petroleum and natural
gas industry and are subject to normal credit risks.
7. SHARE CAPITAL
(a) Authorized capital
The authorized capital of the Company consists of an unlimited
number of non-voting preferred shares without nominal or par
value, issuable in series, and an unlimited number of common
shares without nominal or par value.
/T/
(b) Issued Capital
Common share transactions for the respective periods are as follows:
------------------------------------------------------------------------
June 30, 2003 December 31, 2002
------------------------------------------------------------------------
Common Common
Shares Amount Shares Amount
------------------------------------------------------------------------
Balance, beginning
of year 59,458,600 $ 190,193 59,453,600 $ 189,320
Stock options exercised
for shares during the
period 710,000 10,317 5,000 72
Expense recognized in
respect of stock-based
compensation during the
year - - - 801
------------------------------------------------------------------------
Balance, end of period 60,168,600 $ 200,510 59,458,600 $ 190,193
------------------------------------------------------------------------
------------------------------------------------------------------------
/T/
(c) Stock option plan/share appreciation rights plan During 2001,
the Company replaced the Share Appreciation Rights Plan ("SARP")
with the Employee Incentive Stock Option plan (the "plan"). Under
the plan, stock options are granted at the current market price
on the date of issuance. Participants in the plan, upon
exercising their stock options, have the option of receiving a
cash payment equal to the difference between the exercise price
and the market price of the Company's common shares, or receiving
common shares issued from Treasury. Cash payments made in respect
of the plan are charged to general and administrative expenses
when incurred. Options granted vest over four years and have a
four and a half year contractual life. The Company has reserved
5.9 million stock options for issuance pursuant to the plan. On
February 6, 2003, all remaining outstanding share appreciation
rights were cancelled.
During the three months ended June 30, 2003, the Company issued
1,455,500 stock options at an exercise price of $9.00 per option.
Also during the period, 941,500 stock options issued in 2001, the
majority of which were at exercise prices of $14.50 and $13.35
per option, were re-priced to exercise prices of $10.22 and $9.07
per option, respectively. The following table summarizes
information about stock options outstanding at June 30, 2003:
/T/
----------------------------------------------------------------------- Exercise Number Weighted average Number Price outstanding remaining contractual exercisable at ($/share) at June 30, 2003 life (years) June 30, 2003 ----------------------------------------------------------------------- $ 9.00 1,455,500 4 - $ 9.07 275,500 3 - $ 10.22 666,000 2 - $ 12.02 580,000 2 580,000 ----------------------------------------------------------------------- $ 9.87 2,977,000 3 580,000 -----------------------------------------------------------------------
/T/
8. INCOME TAXES
In May 2003, the Government of Alberta introduced legislation to
reduce its corporate income tax rate by 0.5% effective April 1,
2003. In June 2003, the Canadian federal government introduced
legislation to change the taxation of resource income. The
legislation reduces the corporate income tax rate on resource
income from 28% to 21% over five years beginning January 1, 2003.
Over the same period, the deduction for resource allowance is
phased out and a deduction of actual crown royalties paid is
phased in. The changes are considered substantively enacted for
the purposes of Canadian GAAP and, accordingly, the Company's
future income tax liability has been reduced by $33.4 million.
The effect of this reduction has been recognized in the future
income tax expense (recovery) for the three and six-month periods
ended June 30, 2003.
9. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform
with the current financial statement presentation.
