|Shares Out. (in M):||131||P/E||0||0|
|Market Cap (in $M):||889||P/FCF||0||0|
|Net Debt (in $M):||852||EBIT||0||0|
Paramount Resources is one of the oldest publicly-traded oil and gas companies with over 2 million net acres of land in Canada. The stock is trading at multi-year lows, and I believe has an expected return of between 200% and 300% in the next year. The most important catalyst should happen very soon: growth in Q2/19 from their new Wapiti field in Alberta. Given the age of the company (IPO in 1978), legacy field production is much lower than typical shale fields, and requires much less capital to sustain. With a lower declining base and new production from Wapiti, Paramount’s production should increase after a year of declining. To oversimplify: oil and gas stocks typically move higher when production is higher than expected. With Paramount’s stock near 20-year lows, and production about to start growing after a year of declining, the stock should have a strong tailwind towards realizing my price target of ~$20/share. I believe downside is limited (outside of macro oil price shocks), given how low expectations are.
Paramount has production from three regions, but for simplicity’s sake, only one of the regions matters to the upside valuation case. The three regions are: Grand Prairie (where the crown jewel assets of Karr and Wapiti reside), Kaybob Region (will likely decline 15-20% per year) and Central Alberta (will likely decline 10-15% per year). The most important region is Grand Prairie, which is currently 1/3rd of production, and consists of the Karr and Wapiti regions. Wells here have payback periods of approximately 15 months, making them amongst the top oil wells in North America. Paramount has drilled over thirty wells at Karr and has seen consistent results. The Wapiti region, which is right next door to Karr, just had their first wells turn online in April/May when Keyera’s gas processing facility came online. The main growth driver for Paramount will be Karr and Wapiti.
History and Why the Stock is Mispriced
Today’s investment opportunity exists because of what transpired in the last two years. In 2017, Paramount bought Apache’s assets in Canada. The crown jewel of Apache Canada was the Wapiti region in Alberta; however, production from Wapiti could not start growing until mid-2019 as Paramount had to wait for Keyera to finish building infrastructure in the region. This meant that 2018 should be uneventful year with no growth. Guidance in 2018 was set at flat production of 100kboepd. However, actual production came in at 86kboepd. Paramount’s stock fell, as most oil and gas stocks do when guidance is reduced.
The bear thesis on POU is simple: production went from 95kboepd in Q4/17 to 85kboepd in Q4/18 despite $600m of capex and management’s initial promise of 100kboped of production. Bears don’t believe management’s new 2019 guidance for growth to 85-90kboepd in Q4/19 with only $350m of capex. These are the primary reasons why the stock is priced near 20-year lows today.
The bridge from 95kbodp in Q4/17 to 85kboepd Q4/18 is as follows:
5kboepd less from an asset sale (Resthaven land)
~5kboepd less from disappointing results in their new Duvernay land (exploration region that didn’t work – guidance should have been set more conservatively).
~5kboepd less from various midstream and third party issues.
Expectations for 2019 production growth are therefore extremely low. I believe Paramount’s production will exit at nearly 100mboepd (guidance is for 85-90). My simple math is as follows:
Q4/18 production was ~27kboepd. This has been their best asset recently, and production was kept flat in 2018 (exit to exit) because of midstream constraints. The company expanded their infrastructure slightly in 2H/18 and I believe production could exit 2019 around 30kboepd.
The company had zero production here in Q4/18, but began turning online wells in May/April when the long awaited Keyera gas processing facility turned online. The company will have over 20 wells drilled and completed this year, and has guided to an average IP 365 of 1395 boepd. If you multiple 20 by 1395 you get nearly 28kboepd of incremental production averaged over the whole year. These wells start off at much higher rates initially, and not all 20 wells will be turned online immediately. I believe Wapiti could therefore exit 2019 producing ~20kboepd
This is a mature old field with a ~20% decline rate. The company is drilling a few new wells here, and I think production will decline 5% from Q4/18 of 37kboepd to 35kboepd in Q4/19
This is another mature old and gas field with a ~15% decline rate. I think production will therefore go from 20kboepd in Q4/18 to 17kboepd in Q4/19.
Summary Q4/19 estimate: Karr at 30, Wapiti at 20, Kaybob at 35 and Central Alberta at 20 = 105kboepd of production versus guidance of 85-90.
I believe 2019 guidance was set conservatively because a new investor relations team, which arrived later in 2018 after initial guidance was set, did not want to repeat the old team’s mistakes from last year.
Why will Wapiti results be good?
Paramount turned online their first wells at Wapiti in the 2nd quarter, and initial results should be released with Q2 earnings in August. Production could not start until Keyera finished building its gas processing plant in the region, which it did in the 2nd quarter of this year. Various operators with consistently good well results surround Paramount’s Wapiti region. Below is a map to show proximity: