Pat McKeough recently replied to an Inner Circlememberlooking for an opinion on the energy producer. The company has sold assets to whittle down its debt, says Pat. But that has strengthened its outlook.
Q:Hi Pat: Can you give an update on a stock: Paramount Resources? Thanks.
A:PARAMOUNT RESOURCES (symbol POU on Toronto; www.paramountres.com) produces oil and natural gas, mostly in Alberta, but also in B.C., Saskatchewan and the Northwest Territories. Its output is 69% oil and 31% gas.
The company recently undertook a number of transactions to significantly cut its debt and bolster its balance sheet. They include the August 2016 deal to sell its oil and gas properties in the Musreau/Kakwa area of Alberta for $2.1 billion. The buyer was Seven Generations Energy (Toronto symbol VII), which paid $500 million in cash and 33.5 million of its shares. It also assumed the operation’s $600 million of debt.
Shortly after the deal closed, Paramount sold 24.7 million of those Seven Generations shares for $735 million.
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As a result, on September 30, 2016, the company’s long-term debt was down to $284.4 million, from $1.8 billion at the start of 2016. It also held cash of $721.6 million. In addition, Paramount has a stock portfolio of other oil and gas producers, including industry service firms, valued at $467 million. Those investments include 19.1 million shares of Trilogy Energy (Toronto symbol TET) worth $134.3 million at today’s price.
Factoring out the properties it sold, Paramount produced 11,148 barrels of oil equivalent per day for the three months ended September 30, 2016. That’s down 13.9% from 12,952 barrels a year earlier. However, actual production fell sharply, to 24,786 barrels from 49,990. That resulted in a deep cut to cash flow per share; it fell to $0.04 from $0.35.
Since the end of the quarter, the company has sold another five million shares of Seven Generations for $150 million. It will hand out the remaining 3.8 million shares to its shareholders on January 16, 2017. Investors will receive 0.036 Seven Generations shares for each Paramount share they hold.
Currently, the company’s main operations are: Karr-Gold Creek and Smoky-Resthaven, in west-central Alberta; Birch in northeast B.C.; and Willesden Green in southern Alberta. In the near term, the company plans to increase production at Karr-Gold Creek.
Paramount is forecast to report cash flow of $0.80 a share in 2017; it now trades at a high 20.5 times that estimate. However, the company’s low debt, high cash balance gives it long-term appeal. Its substantial landholdings and drilling targets add to that outlook.
Inner Circle recommendation: Paramount Resources is okay to hold, but only for aggressive investors.
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