Paramount Resources Stock: Less Than 4x FCF, 4.4% Yield

Introduction

Paramount Resources (OTCPK:PRMRF) is a Canadian pure fuel producer with a considerable by-product credit score from condensate and NGLs (actually, though liquids solely made up 42% of the oil-equivalent manufacturing charge in Q2, they represented 70% of the income). The excessive pure fuel worth within the first half of the yr has boosted the money flows however the second semester might maybe be even higher because the manufacturing charge will improve by about 40%. And that is simply the set-up for a long-term plan with a 7% annual manufacturing development which will probably be totally funded by the incoming working money circulation. It has been ages (greater than six years!) since I final printed an article on Paramount, and the corporate has utterly modified in these years.

Paramount’s major itemizing is on the Toronto Stock Exchange the place the stock is trading with POU as its ticker symbol. With a mean each day quantity of just about 500,000 shares, the TSX itemizing is by far your best option to trade within the firm’s shares. On high of that, that itemizing has choices obtainable which could possibly be a useful gizmo because of the excessive volatility ranges.

The Q2 outcomes are only a warming-up for what will probably be an thrilling second semester

Before diving into the numbers I’d prefer to ensure you know the Q2 (and H1) outcomes will not be consultant of Paramount Resources proper now. The common manufacturing charge in Q2 was ‘simply’ 77,300 barrels of oil-equivalent per day whereas the July manufacturing outcome already jumped about 20% larger to 92,000 boe/day with a July exit rate of 100,000 boe/day (+30% in comparison with the Q2 manufacturing charge. And that is nonetheless simply the beginning as Paramount has confirmed it expects a mean manufacturing charge in H2 of 102-106,000 boe/day, the midpoint of 104,000 boe/day and the recognized July manufacturing outcome means the typical manufacturing charge within the remaining 5 months of the yr will probably be simply over 106,000 boe/day.

Keep that in thoughts whenever you proceed studying because the Q2 outcomes are already massively outdated by now.

In the primary half of the yr, the corporate reported a complete income of C$966M and after deducting the C$193M hedge losses, the online income was roughly C$773M. This relies on a mean realized pure fuel worth of just below C$6/Mcf and a condensate and oil worth of C$126M on common.

With whole working bills of C$511M, the pre-tax earnings was roughly C$262M with a reported internet earnings of C$199M. With a present share rely of

As you discover above, the second quarter of the yr was considerably stronger than the primary quarter because of the stronger pure fuel worth and the reversal of a historic impairment cost to the tune of in extra of C$45M. This is hidden within the comparatively low depletion and depreciation costs.

And though the present state of affairs is already considerably completely different from the H1 and even Q2 efficiency, I’d like to drag up the money circulation assertion to clarify what we will count on for this yr.

The whole working money circulation was roughly C$470M excluding adjustments within the working capital. Even after deducting the C$4M in lease funds, the adjusted working money circulation was roughly C$466M.

The whole capex invoice got here in at C$368M leading to a free money circulation results of roughly C$98M. Note, this features a C$110M realized loss on hedges, and excludes the C$63M in taxes that are solely deferred. In truth, on account of present tax property, Paramount thinks it will not should pay a dime in taxes for the following three years. So excluding the realized losses on hedges, the H1 working money circulation would have been roughly C$580M.

If we’d now certainly assume the H2 manufacturing charge will increase by 35%, the H2 working money circulation would are available at C$780M for a full-year money circulation efficiency of roughly C$1.3B (excluding any hedging losses). As Paramount is now guiding for a full-year capex of C$600-640M, the second semester efficiency will probably be very robust given the robust manufacturing improve and decrease capex of roughly C$250-280M. This implies that even when the typical pure fuel worth drops to lower than C$5, Paramount will nonetheless generate just a few hundred million greenback in free money circulation within the present semester. This means Paramount will very doubtless finish the yr with no internet debt. The internet debt got here in at C$375M as of the tip of June however be warned Paramount additionally features a working capital deficit in its internet debt calculation but it surely excludes the asset retirement obligations.

The plans for 2023 are maybe much more thrilling

What actually intrigued me are the up to date plans for 2023. And this slide from the corporate presentation is essential to clarify my funding thesis.

We see the whole capex for subsequent yr is estimated at roughly C$675M of which roughly 60% is sustaining capex. That’s roughly C$400M. We additionally know Paramount is anticipating to generate an adjusted funds circulation of simply over C$1.4B in 2023, leading to a sustaining free money circulation results of roughly C$1B.

Of course it is simple sufficient to create a chart, all of it is determined by the commodity costs used within the projections. In Paramount’s case, the corporate is utilizing US$84 WTI and C$5.06 AECO/US$5.68 NYMEX as pure fuel worth. Even if the commodity costs would fall by 15% in comparison with the bottom case state of affairs, the adjusted funds circulation would nonetheless are available at roughly C$1B with a free money circulation results of C$350M and a sustaining free money circulation results of C$600M. That sounds much less interesting, however take note the share rely has dropped to simply 141M shares. So even at a 15% decrease commodity worth throughout the board, the free money circulation outcome per share would nonetheless be C$2.5 together with development capex and about C$4.25 per share based mostly on simply the sustaining capex.

Paramount figures it may proceed to develop its manufacturing charge by 7% per yr utilizing roughly C$650M per yr in capex. And utilizing strip costs, this could lead to C$3.9B in cumulative free money circulation. Which is the present market capitalization of the corporate.

Investment thesis

Paramount is in a wonderful place to capitalize on the very excessive fossil gasoline costs. We ought to see a really robust third quarter and if the oil and fuel costs cooperate, 2023 could possibly be the corporate’s finest yr on document with a income of round C$2.5B and a sustaining free money circulation of C$1B. That might pave the best way to both speed up manufacturing development or improve the shareholder rewards past the present monthly dividend of C$0.10/share.

The 2P reserves as of the tip of final yr underpin a 17 yr reserve life (utilizing the anticipated exit charge of in extra of 100,000 boe/day. The after-tax PV10 worth of the proved reserves represents C$3.5B or C$25/share whereas the possible reserves add a further C$2.06B or C$14.5/share to that. These calculations are based mostly on a WTI oil worth of round US$70-72 and a Henry Hub and AECO natgas worth of respectively round US$3.30-3.40 and C$3.30 per MMBtu.

Despite the share worth evolution up to now few quarters, I feel there’s extra upside potential right here.