Paramount Resources Ltd. (TSX:POU)
FIRST QUARTER OVERVIEW
Oil and Gas Operations
-- Average sales volumes increased 44 percent to 18,813 Boe/d in the first
quarter of 2012 from 13,097 Boe/d in the same period of 2011, with NGLs
volumes increasing by 71 percent.
-- The Company's sales volumes increased to approximately 23,000 Boe/d in
April; including 13,500 Boe/d in the Kaybob COU following the successful
re-commissioning of the 45 MMcf/d Musreau processing facility and 4,500
Boe/d in the Grande Prairie COU.
-- In the Kaybob COU, work continued on the 200 MMcf/d deep cut expansion
of the Musreau facility. Site construction is scheduled to commence in
the second half of the year.
-- Advance drilling to feed the deep cut facilities expansions at Musreau
and Smoky continued. The Company currently has an inventory of 18 net
wells with estimated first month deliverability of 26,400 Boe/d and
first year deliverability of 13,700 Boe/d.
-- In the Grande Prairie COU, construction of the Valhalla compression and
gathering system expansion to 28 MMcf/d was completed in May and
commissioning is underway.
-- The Company's first quarter netback was $22.5 million, as the 44 percent
increase in sales volumes was offset by the impact of low natural gas
prices.
-- In April, Paramount's wholly-owned subsidiary, Summit Resources, Inc.,
entered into an agreement to sell a portion of its producing properties
in North Dakota and Montana for cash proceeds of approximately US$70
million. The transaction is scheduled to close in late-May.
-- The Southern COU closed the previously announced sales of non-core
properties in Southern Alberta and Saskatchewan for total proceeds of
$49.2 million.
Strategic Investments
-- In January, the Company closed the sale of 5.0 million of its Trilogy
shares for net proceeds of $181.7 million.
-- The Company began drilling a vertical shale gas evaluation well at a
winter access location at Dunedin in Northeast British Columbia.
-- Cavalier Energy Inc. continued to focus on finalizing its regulatory
application for development of the Hoole property.
-- Fox Drilling Inc. continued the construction of two new triple-sized
walking drilling rigs, which are expected to be operational in late-
2012.
Corporate
-- Upon closing the United States property disposition in May 2012,
Paramount will have raised over $500 million since October 2011 through
equity issuances and the sale of investments and properties. Combined
with funds flow from operations, the Company has more than sufficient
capacity to fund its 2012 capital program.
-- The Company has commenced its annual credit facility renewal process and
anticipates that its current $300 million credit limit will be increased
due to reserves growth and increased asset coverage.
-- General and administrative costs per Boe decreased 34 percent in the
first quarter of 2012 to $1.77 per Boe from $2.68 in 2011.
FINANCIAL AND OPERATING HIGHLIGHTS(1)
($ millions, except as noted)
Three months ended March 31 2012 2011 % Change
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Financial
Petroleum and natural gas sales 54.7 46.8 17
Funds flow from operations 12.8 13.9 (8)
Per share - diluted ($/share) 0.15 0.19 (21)
Net income (loss) 124.5 (11.9) 1,146
Per share - basic ($/share) 1.46 (0.16) 1,013
Per share - diluted ($/share) 1.42 (0.16) 988
Exploration and development expenditures 142.2 160.2 (11)
Investments in other entities - market
value(2) 675.6 717.6 (6)
Total assets 1,810.9 1,590.9 14
Net debt(3) 474.0 432.3 10
Common shares outstanding (thousands) 85,569 75,397 13
Operating
Sales Volumes:
Natural gas (MMcf/d) 88.6 58.7 51
NGLs (Bbl/d) 1,652 968 71
Oil (Bbl/d) 2,386 2,353 1
Total (Boe/d) 18,813 13,097 44
Average realized price:
Natural gas ($/Mcf) 2.77 4.15 (33)
NGLs ($/Bbl) 78.57 75.56 4
Oil ($/Bbl) 89.21 81.40 10
Total ($/Boe) 31.95 39.67 (19)
Net wells drilled (excluding oil sands
evaluation) 11 12 (8)
Net oil sands evaluation wells drilled 1 26 (96)
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(1) Readers are referred to the advisories concerning non-GAAP measures and
oil and gas definitions in the "Advisories" section of this document.
(2) Based on the period-end closing prices of publicly traded enterprises
and the book value of the remaining investments.
(3) Net debt is a non-GAAP measure, it is calculated and defined in the
Liquidity and Capital Resources section of Management's Discussion and
Analysis.
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REVIEW OF OPERATIONS
----------------------------------------------------------------------------
First Quarter Fourth Quarter
2012 2011 % Change
----------------------------------------------------------------------------
Sales Volumes
Natural Gas (MMcf/d) 88.6 91.5 (3)
NGLs (Bbl/d) 1,652 1,620 2
Oil (Bbl/d) 2,386 2,356 1
--------------------------------
Total (Boe/d) 18,813 19,223 (2)
--------------------------------
Average realized price
Natural gas ($/Mcf) 2.77 3.62 (23)
NGLs ($/Bbl) 78.57 78.08 1
Oil ($/Bbl) 89.21 93.25 (4)
--------------------------------
Total ($/Boe) 31.95 35.80 (11)
--------------------------------
% Change
Netbacks ($ millions) ($/Boe) ($/Boe) in $/Boe
Petroleum and natural gas sales 54.7 31.95 63.3 35.80 (11)
Royalties (5.3) (3.09) (5.5) (3.13) (1)
Operating expense and production
tax (21.3) (12.45) (21.2) (11.98) 4
Transportation (5.6) (3.29) (5.1) (2.88) 14
--------------------------------
Netback 22.5 13.12 31.5 17.81 (26)
Financial commodity contract
settlements (1.4) (0.84) 0.3 0.17 (594)
--------------------------------
Netback including financial
commodity contract settlements 21.1 12.28 31.8 17.98 (32)
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Paramount's sales volumes averaged 18,813 Boe/d in the first quarter of 2012
compared to 19,223 Boe/d in the fourth quarter of 2011, primarily as a result of
the annual Bistcho plant turnaround in the Northern COU and third party
processing facility constraints at Valhalla in the Grande Prairie COU. Average
sales volumes increased to approximately 23,000 Boe/d in April as the 45 MMcf/d
Musreau plant was re-commissioned. Following start-up of the Valhalla gathering
and processing expansion and the addition of other new well production in the
second quarter, sales volumes for the remainder of the year are expected to
range between 26,000 and 28,000 Boe/d, before accounting for the impact of the
United States property disposition.
Petroleum and natural gas sales decreased by $8.6 million compared to the fourth
quarter of 2011, mainly due to a 23 percent decline in realized natural gas
prices. Operating costs per Boe increased four percent in the first quarter as
the Company incurred seasonal scheduled maintenance costs in the Northern COU
and other winter access locations. Operating costs per Boe are expected to
decrease throughout the remainder of 2012 as fixed costs are spread over higher
production volumes.
The Company is continuing to proceed with its previously announced liquids-rich
natural gas developments despite current low natural gas prices, as associated
NGLs revenues continue to support the economics of these projects. The Company
monitors the contribution from all of its properties and evaluates alternatives
to mitigate the impact of low natural gas prices.
KAYBOB
----------------
First Quarter Fourth Quarter
2012 2011 % Change
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Sales Volumes
Natural Gas (MMcf/d) 52.7 50.8 4
NGLs (Bbl/d) 821 901 (9)
Oil (Bbl/d) 65 62 5
--------------------------------
Total (Boe/d) 9,675 9,437 3
--------------------------------
Exploration and Development
Expenditures ($ millions)
Exploration, drilling,
completions and tie-ins 40.4 69.5 (42)
Facilities and gathering 31.1 37.4 (17)
--------------------------------
71.5 106.9 (33)
--------------------------------
Gross Net Gross Net
--------------------------------
Wells drilled 6 4.5 19 12.5
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First quarter sales volumes in the Kaybob COU averaged 9,675 Boe/d. The 45
MMcf/d processing facility at Musreau was successfully re-commissioned in
mid-March and was operating at design capacity by the end of the month. Average
sales volumes increased to approximately 13,500 Boe/d in April 2012. Sales
volumes are expected to remain near this level until the phase two deep cut
expansion of the Musreau facility is commissioned in the second half of 2013.
The Company is actively investigating opportunities to access additional
processing capacity in the region to increase production in the interim.
Phase two of the Musreau facility will be a wholly-owned incremental 200 MMcf/d
deep cut liquids extraction facility. Most of the facility's capacity will be
used to process Paramount's natural gas production and partner volumes from
joint ownership wells for a fee. The majority of the design work and procurement
of long lead-time equipment have been completed and construction is scheduled to
begin this fall upon receipt of regulatory approvals. The facility is expected
to be commissioned in the second half of 2013 at an estimated total cost of $180
million. The incremental investment in deep cut facilities will add significant
value to Paramount's natural gas production due to the price premium realized
from the sale of additional NGLs volumes that would otherwise be sold as higher
heat content natural gas.
At Smoky, Paramount is participating in the expansion of a non-operated
processing facility, increasing the Company's 10 percent share of the existing
100 MMcf/d facility to a 20 percent share of the expanded 200 MMcf/d facility,
which is being upgraded to operate as a deep cut liquids extraction facility.
The Company will have an option to participate in a further expansion of the
plant to 300 MMcf/d in the future with the addition of an incremental 100 MMcf/d
of compression.
The Kaybob COU continued its drilling program during the first quarter, with
four rigs working in Musreau and Resthaven, drilling two (1.5 net) Falher
formation wells, two (1.0 net) Dunvegan formation wells and two (2.0 net)
Montney formation wells. Results from the wells have been consistent with
expectations and further confirm well performance profiles. These wells will be
included in inventory as the Company builds production capability in advance of
completing the expansions of processing facilities. The following table
summarizes the current status of Kaybob Deep Basin wells awaiting production,
estimated additional costs to complete and anticipated production and sales
volumes:
Total
Additional
Capital Net Raw Gas Net Sales
Wells (net) Production Volumes(1)
---------------------------------------------------------------
First First First First
Month Year Month Year
---------------------------------------------------
Gross Net ($ millions) (MMcf/d) (MMcf/d) (Boe/d) (Boe/d)
Tied-in,
capable of
producing 6 3 - 18 9 4,000 2,000
Completed,
awaiting
tie-in 7 5 3 33 18 8,900 4,800
Drilled,
awaiting
completion 11 10 44 56 28 13,500 6,900
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24 18 47 107 55 26,400 13,700
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(1) Based on processing through a deep cut facility
The Company plans to drill up to an additional 20 wells for the remainder of
2012 with additional wells to be drilled throughout 2013 to continue to build
Paramount's well inventory ahead of the deep cut facilities expansions. The
Company continues to utilize its own facilities and third party processing
capacity to maximize production while the expansions are being constructed. In
the interim, behind pipe wells will be produced where capacity is available.
GRANDE PRAIRIE
--------------
Fourth
First Quarter Quarter
2012 2011 % Change
----------------------------------------------------------------------------
Sales Volumes
Natural Gas (MMcf/d) 16.8 19.4 (13)
NGLs (Bbl/d) 596 480 24
Oil (Bbl/d) 391 333 17
------------------------
Total (Boe/d) 3,792 4,048 (6)
------------------------
Exploration and Development Expenditures
($ millions)
Exploration, drilling, completions and
tie-ins 31.4 21.2 48
Facilities and gathering 12.5 11.2 12
------------------------
43.9 32.4 35
------------------------
Gross Net Gross Net
----------------------------------
Wells drilled 5 3.4 4 3.6
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First quarter sales volumes in the Grande Prairie COU averaged 3,792 Boe/d
compared to 4,048 Boe/d in the fourth quarter of 2011, primarily because of
capacity restrictions at a non-operated processing facility at Valhalla. During
March, the Company re-routed its Valhalla production to a different non-operated
processing facility and sales volumes increased by approximately 9 MMcf/d. On
May 1, 2012, a disruption at a downstream third party ethane extraction facility
resulted in a partial shut-in of Paramount's production at Valhalla. This
disruption is expected to last for up to six weeks. Paramount has re-routed some
of its production to alternate facilities.
The Company was active at Valhalla during the first quarter, drilling four (2.4
net) wells, completing the construction of its compression and gathering
facilities expansion and re-routing the gathering system to an alternate
processing facility. Three (2.5 net) wells previously drilled were brought on
production late in the quarter. The Company is currently commissioning the
expansion of its gathering and compression facilities at Valhalla and will have
total raw gas capacity of 28 MMcf/d fully operational in the second quarter,
once the third party ethane extraction facility disruption has been resolved.
With the additional wells drilled to date, the Company has sufficient production
behind pipe to operate the expanded gathering system at capacity. No further
drilling is planned for the remainder of 2012.
At Karr/Gold Creek, one (1.0 net) well was drilled in the quarter, and one (1.0
net) well drilled in 2011 was brought on production. Surface equipment that had
been ordered as part of a well performance enhancement program was delivered and
installed on two (2.0 net) wells that had previously been completed but not
placed on production. The wells were brought on in April and the Company will
evaluate the results over the coming months.
SOUTHERN
------------------
First Quarter Fourth Quarter
2012 2011 % Change
----------------------------------------------------------------------------
Sales Volumes
Natural Gas (MMcf/d) 11.0 11.4 (4)
NGLs (Bbl/d) 217 216 -
Oil (Bbl/d) 1,663 1,551 7
----------------------------------
Total (Boe/d) 3,718 3,670 1
----------------------------------
Exploration and Development
Expenditures ($ millions)
Exploration, drilling,
completions and tie-ins 4.4 2.8 57
Facilities and gathering 1.4 1.3 8
----------------------------------
5.8 4.1 41
----------------------------------
Gross Net Gross Net
----------------------------------
Wells drilled 1 0.5 5 2.6
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First quarter sales volumes in the Southern COU were consistent with the fourth
quarter of 2011. First quarter capital expenditures primarily related to an oil
well drilled and tied-in at Harmattan in Southern Alberta.
CANADA
In the first quarter, Paramount closed the previously announced dispositions of
non-core properties at West Pembina, Alberta and Kindersley, Saskatchewan for
total proceeds of $49.2 million. These properties did not have significant
production volumes.
At Chain, three (2.4 net) natural gas wells were brought on production in the
first quarter of 2012 to replace natural declines. The Company does not plan to
carry out any more drilling activities at Chain for the remainder of the year
due to the current low natural gas price environment.
The Southern COU plans to drill up to eight (7.0 net) wells in Harmattan,
Ricinis and Pembina for the remainder of 2012 targeting oil and liquids-rich
natural gas prospects.
UNITED STATES
In April 2012, Paramount's wholly-owned subsidiary, Summit Resources, Inc.
("Summit"), entered into an agreement to sell a portion of its producing
properties in North Dakota and Montana for cash proceeds of approximately US$70
million, subject to customary closing adjustments. The properties had
approximately 900 Boe/d of production in the first quarter, and include
approximately 38,000 (27,000 net) acres of land. The transaction is scheduled to
close in late-May.
The transaction does not include approximately 58,000 (41,000 net) acres of
Summit's Bakken / Three Forks lands in North Dakota with first quarter
production of approximately 200 Boe/d. Paramount and Summit are continuing the
sales process for these properties.
To view a map of the properties, please visit the following link:
http://media3.marketwire.com/docs/508pou1.pdf
NORTHERN
----------------
First Quarter Fourth Quarter
2012 2011 % Change
----------------------------------------------------------------------------
Sales Volumes
Natural Gas (MMcf/d) 8.1 9.9 (18)
NGLs (Bbl/d) 18 23 (22)
Oil (Bbl/d) 267 410 (35)
--------------------------------
Total (Boe/d) 1,628 2,068 (21)
--------------------------------
Exploration and Development
Expenditures ($ millions)
Exploration, drilling,
completions and tie-ins 18.5 3.9 374
Facilities and gathering 2.3 0.1 2,200
--------------------------------
20.8 4.0 420
--------------------------------
Gross Net Gross Net
--------------------------------
Wells drilled 2 2.0 - -
----------------------------------------------------------------------------
First quarter sales volumes in the Northern COU decreased by 21 percent in the
first quarter of 2012, primarily as a result of the annual Bistcho plant
turnaround.
The Company's first well at Birch was completed in the third quarter of 2011 and
brought on production in April 2012. Two (2.0 net) additional wells were drilled
and completed at Birch in the first quarter of 2012 and will be brought-on after
break-up. Production results from these wells will be evaluated over the coming
months.
STRATEGIC INVESTMENTS
Cavalier Energy Inc. ("Cavalier Energy") continued to build its management team
during the first quarter of 2012 with the addition of key technical personnel.
The team's efforts are focused on finalizing the regulatory application for
development of the Hoole property, which is expected to be submitted in the
fourth quarter of 2012, and developing detailed project plans for the
construction of a thermal in-situ project. Also during the quarter, Cavalier
Energy acquired 9,200 hectares of oil sands rights at a cost of $7.0 million.
SHALE GAS
The Company began drilling a vertical evaluation well at a winter access
location at Dunedin in Northeast British Columbia during the first quarter. The
targeted depth was not achieved before breakup and drilling operations have been
suspended due to warm weather. The Company will evaluate further plans prior to
the 2013 winter drilling season. The Company is taking a cautious approach to
de-risking its shale gas holdings in the current low natural gas price
environment while taking steps to maintain its mineral rights.
OUTLOOK
Paramount's annual 2012 capital spending budget, excluding land, acquisitions
and capitalized interest, is $535 million, with $475 million allocated to
exploration and development spending in the Company's core producing areas and
$60 million allocated to Strategic Investment spending. The Company has more
than sufficient capacity to fund its 2012 capital program and retains
flexibility within its current capital plan to vary spending depending upon
future economic conditions, among other factors.
First quarter 2012 exploration and development spending totaled approximately
$140 million. Planned spending of $335 million for the remainder of the year
will be focused in the Kaybob Deep Basin development, where $130 million will be
invested in the Musreau and Smoky deep cut facility expansions and $150 million
will be invested in drilling and completion activities to build an inventory of
wells to feed the new 200 MMcf/d Musreau deep cut facility. By year-end 2012,
Paramount expects to have an inventory of approximately 32 wells awaiting the
commissioning of the deep cut facilities expansions.
Strategic Investment spending for the remainder of the year will be directed to
completing the construction of two walking drilling rigs.
Following start-up of the Valhalla gathering and processing expansion and the
addition of other new well production in the second quarter, sales volumes for
the remainder of the year are expected to range between 26,000 and 28,000 Boe/d,
before accounting for the impact of the United States property disposition. The
Company's sales volumes will continue to be in this range until the deep cut
facility expansion at Musreau is fully commissioned in the second half of 2013.
Sales volumes are expected to more than double once the expansions of the
Company's Deep Basin facilities are fully operational in 2014.
ADDITIONAL INFORMATION
A copy of Paramount's complete results for the three months ended March 31,
2012, including Management's Discussion and Analysis and the unaudited Interim
Condensed Consolidated Financial Statements for the three months ended March 31,
2012 can be found at http://file.marketwire.com/release/508pou.pdf. This
information will also be made available through Paramount's website at
www.paramountres.com and SEDAR at www.sedar.com.
ABOUT PARAMOUNT
Paramount Resources Ltd. is a Canadian oil and natural gas exploration,
development and production company with operations focused in Western Canada.
Paramount's common shares are listed on the Toronto Stock Exchange under the
symbol "POU".
ADVISORIES
FORWARD-LOOKING INFORMATION
Certain statements in this document constitute forward-looking information under
applicable securities legislation. Forward-looking information typically
contains statements with words such as "anticipate", "believe", "estimate",
"expect", "plan", "intend", "propose", or similar words suggesting future
outcomes or an outlook. Forward looking information in this document includes,
but is not limited to:
-- expected production and sales volumes and the timing thereof;
-- planned exploration and development expenditures and the timing thereof;
-- exploration and development potential, plans and strategies and the
anticipated costs, timing and results thereof;
-- budget allocations and capital spending flexibility;
-- availability of facilities to process and transport natural gas
production;
-- the scope and timing of proposed new facilities and expansions to
existing facilities and the expected capacity and utilization of such
facilities;
-- the timing of the anticipated development of Paramount's oil sands,
carbonate bitumen and shale gas assets;
-- ability to fulfill future pipeline transportation commitments;
-- the anticipated costs and completion date of the two new triple-sized
walking drilling rigs;
-- ability to fulfill future pipeline transportation commitments;
-- business strategies and objectives;
-- sources of and plans for financing;
-- acquisition and disposition plans;
-- operating and other costs;
-- regulatory applications and the anticipated scope, timing and results
thereof;
-- expected drilling programs, completions, well tie-ins, facilities
construction and expansions and the timing thereof;
-- the outcome of any legal claims, audits, assessments or other regulatory
matters or proceedings;
-- the expected closing of property sales and the proceeds and timing
thereof;
-- the anticipated renewal of the Company's credit facility and the size
and timing thereof; and
-- the expected duration of the third party ethane extraction facility
disruption
Such forward-looking information is based on a number of assumptions which may
prove to be incorrect. The following assumptions have been made, in addition to
any other assumptions identified in this document:
-- future crude oil, bitumen, natural gas and NGLs prices and general
economic, business and market conditions;
-- the ability of Paramount to obtain required capital to finance its
exploration and development activities;
-- the ability of Paramount to obtain equipment, services, supplies and
personnel in a timely manner and at an acceptable cost to carry out its
activities;
-- the ability of Paramount to market its oil and natural gas successfully
to current and new customers;
-- the ability of Paramount to close expected property sales and the timing
thereof;
-- the ability of Paramount to secure adequate product processing,
transportation and storage;
-- the ability of Paramount and its industry partners to obtain drilling
success consistent with expectations, including liquids yields;
-- the timely receipt of required regulatory approvals;
-- expected timelines being met in respect of facility development and
construction projects;
-- access to capital markets and other sources of funding;
-- well economics relative to other projects; and
-- currency exchange and interest rates.
Although Paramount believes that the expectations reflected in such forward
looking information is reasonable, undue reliance should not be placed on it as
Paramount can give no assurance that such expectations will prove to be correct.
Forward-looking information is based on current expectations, estimates and
projections that involve a number of risks and uncertainties which could cause
actual results to differ materially from those anticipated by Paramount and
described in the forward looking information. These risks and uncertainties
include, but are not limited to:
-- fluctuations in crude oil, bitumen, natural gas and NGLs prices, foreign
currency exchange rates and interest rates;
-- the uncertainty of estimates and projections relating to future revenue,
future production, liquids yields, costs and expenses and the timing
thereof;
-- the ability to secure adequate product processing, transportation and
storage;
-- the uncertainty of exploration, development and drilling activities;
-- operational risks in exploring for, developing and producing crude oil
and natural gas, and the timing thereof;
-- the ability to obtain equipment, services, supplies and personnel in a
timely manner and at an acceptable cost;
-- potential disruptions or unexpected technical difficulties in designing,
developing or operating new, expanded or existing facilities including
third party facilities;
-- risks and uncertainties involving the geology of oil and gas deposits;
-- the uncertainty of reserves and resource estimates;
-- the ability to generate sufficient cash flow from operations and other
sources of financing at an acceptable cost to meet current and future
obligations, including costs of anticipated projects;
-- changes to the status or interpretation of laws, regulations or
policies;
-- changes in environmental laws including emission reduction obligations;
-- the receipt, timing, and scope of governmental or regulatory approvals;
-- changes in economic, business and market conditions;
-- uncertainty regarding aboriginal land claims and co-existing with local
populations;
-- the effects of weather;
-- the ability to fund exploration, development and operational activities
and meet current and future obligations;
-- the timing and cost of future abandonment and reclamation activities;
-- cleanup costs or business interruptions due to environmental damage and
contamination;
-- the ability to enter into or continue leases;
-- existing and potential lawsuits and regulatory actions; and
-- other risks and uncertainties described elsewhere in this document and
in Paramount's other filings with Canadian securities authorities,
including its Annual Information Form.
The foregoing list of risks is not exhaustive. Additional information concerning
these and other factors which could impact Paramount are included in Paramount's
most recent Annual Information Form. The forward-looking information contained
in this document is made as of the date hereof and, except as required by
applicable securities law, Paramount undertakes no obligation to update publicly
or revise any forward-looking statements or information, whether as a result of
new information, future events or otherwise.
NON-GAAP MEASURES
In this document "Funds flow from operations", "Funds flow from operations - per
Boe", "Funds flow from operations per share - diluted", "Netback", "Netback
including commodity contract settlements", "Net Debt", "Exploration and
development expenditures" and "Investments in other entities - market value",
collectively the "Non-GAAP measures", are used and do not have any standardized
meanings as prescribed by Generally Accepted Accounting Principles in Canada
("GAAP").
Funds flow from operations refers to cash from operating activities before net
changes in operating non-cash working capital, geological and geophysical
expenses and asset retirement obligation settlements. Funds flow from operations
is commonly used in the oil and gas industry to assist management and investors
in measuring the Company's ability to fund capital programs and meet financial
obligations.
Netback equals petroleum and natural gas sales less royalties, operating costs,
production taxes and transportation costs. Netback is commonly used by
management and investors to compare the results of the Company's oil and gas
operations between periods. Net Debt is a measure of the Company's overall debt
position after adjusting for certain working capital amounts and is used by
management to assess the Company's overall leverage position. Refer to the
calculation of Net Debt in the liquidity and capital resources section of
Management's Discussion and Analysis. Exploration and development expenditures
refer to capital expenditures and geological and geophysical costs incurred by
the Company's COUs (excluding land and acquisitions). The exploration and
development expenditure measure provides management and investors with
information regarding the Company's Principal Property spending on drilling and
infrastructure projects, separate from land acquisition activity.
Investments in other entities - market value reflects the Company's investments
in enterprises whose securities trade on a public stock exchange at their period
end closing price (e.g. Trilogy, MEG Energy, MGM Energy and others), and
investments in all other entities at book value. Paramount provides this
information because the market values of equity-accounted investments, which are
significant assets of the Company, are often materially different than their
carrying values.
Non-GAAP measures should not be considered in isolation or construed as
alternatives to their most directly comparable measure calculated in accordance
with GAAP, or other measures of financial performance calculated in accordance
with GAAP. The Non-GAAP measures are unlikely to be comparable to similar
measures presented by other issuers.
OIL AND GAS MEASURES AND DEFINITIONS
This document contains disclosures expressed as "Boe" and "Boe/d". All oil and
natural gas equivalency volumes have been derived using the ratio of six
thousand cubic feet of natural gas to one barrel of oil. Equivalency measures
may be misleading, particularly if used in isolation. A conversion ratio of six
thousand cubic feet of natural gas to one barrel of oil is based on an energy
equivalency conversion method primarily applicable at the burner tip and does
not represent a value equivalency at the well head. The term "liquids" is used
to represent oil, natural gas liquids ("NGLs") and condensate. The term
"liquids-rich" is used to represent natural gas streams with associated liquids
volumes.
During the first quarter of 2012, the value ratio between crude oil and natural
gas was approximately 32:1. This value ratio is significantly different from the
energy equivalency ratio of 6:1. Using a 6:1 ratio would be misleading as an
indication of value.
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