- Sales volumes averaged 79,995 Boe/d (43 percent liquids) in the second quarter of 2021, ahead of the Company's guidance of 77,000 Boe/d to 78,000 Boe/d (42 percent liquids), driven by continued outperformance at Karr.(1)
- Sales volumes at Karr averaged 38,679 Boe/d (54 percent liquids) in the second quarter, ahead of expectations and approximately 5,500 Boe/d higher than first quarter production, despite a seven-day scheduled curtailment at the third-party 6-18 facility in May. The six-well 3-10 pad continues to outperform and achieved payout in four months after coming onstream in February.
- Sales volumes at Wapiti averaged 10,604 Boe/d (59 percent liquids) in the second quarter, in line with expectations. The Company expects Wapiti sales volumes to increase in the second half of 2021 as new production is brought onstream.
- Operating costs averaged $11.23/Boe in the second quarter of 2021, down from $11.63/Boe in the first quarter. Paramount achieved another important milestone at Karr, with second quarter operating costs coming in at $9.40/Boe, beating the Company's target of $10.00/Boe at plateau production of approximately 40,000 Boe/d.
- Cash from operating activities was $112.1 million in the second quarter. Adjusted funds flow was $86.0 million or $0.65 per share. Free cash flow was ($0.7) million. Full year 2021 free cash flow is now forecast to be $45 million higher at approximately $185 million resulting in anticipated year-end net debt to adjusted funds flow of approximately 1.0x, reflecting stronger commodity prices and year-to-date performance.(2)
Second quarter capital spending, which was focused on drilling and completion activities at Karr, Wapiti and the Willesden Green Duvernay, totaled $83.5 million. Strong execution resulted in faster drilling and completion times on certain projects, translating into lower than budgeted costs and allowing the Company to complete certain activities in the second quarter that were initially planned for the third quarter. The Company remains on track for 2021 annual capital spending to be between $265 million and $285 million.
Preliminary all-in lease construction, drilling, completion, equip and tie-in (collectively "DCET") costs at the five well Karr 7-18 pad that was brought on production in late July 2021 averaged a pacesetting $6.0 million per well, approximately 11 percent lower than average DCET costs of the last two pads at Karr.
DCET costs for the seven well Wapiti 6-4 pad averaged a pacesetting $6.9 million per well, nine percent lower than average Wapiti DCET costs in 2020.
Paramount's use of the drilling rigs and crews of its wholly-owned Fox Drilling subsidiary has resulted in consistency of execution and efficiencies that have contributed to well cost reductions at Karr and Wapiti.
The Company finished drilling the two well 4-7 pad in the Willesden Green Duvernay during the second quarter. The wells were completed in July and are expected to be brought on production in late August. One of these wells was drilled to a lateral length of approximately 4,000 meters and a total measured depth of approximately 7,400 meters, representing the longest horizontal well ever drilled by the Company.
Abandonment and reclamation expenditures in the second quarter totaled $3.2 million, net of $0.8 million in funding under the Alberta Site Rehabilitation Program.
The Company's strong financial outlook and operating results enabled it to implement a monthly dividend of $0.02 per class A common share ("Common Share") and a normal course issuer bid ("NCIB") under which up to 7.3 million Common Shares may be purchased for cancellation. The inaugural cash dividend was paid on July 30, 2021.
The Company's senior secured revolving bank credit facility (the "Paramount Facility") was amended in the second quarter to extend the maturity date to June 2, 2024 and change its size to $900 million, with an accordion feature providing flexibility to increase the size to $1.0 billion.
In the second quarter, Paramount received $67 million cash in settlement of its previously disclosed dissent proceedings respecting Strath Resources Ltd. and for the sale of its remaining securities in Strathcona Resources Ltd.
The Company closed the sale of its non-operated Birch assets in July for gross proceeds of approximately $88 million before customary closing adjustments.
Paramount is reaffirming its 2021 average sales volumes guidance of between 80,000 Boe/d and 82,000 Boe/d (44 percent liquids). Second half 2021 sales volumes guidance remains unchanged at between 80,000 Boe/d and 84,000 Boe/d (45 percent liquids).
The Company continues to expect 2021 annual capital spending to be between $265 million and $285 million, excluding land acquisitions and abandonment and reclamation activities.
Paramount is updating its forecast of 2021 free cash flow from approximately $140 million to approximately $185 million to reflect year-to-date actual results and revised commodity price and other assumptions for the second half of 2021. This forecast is based on the following assumptions for 2021: (i) the midpoint of forecast capital spending and production, (ii) $25 million in abandonment and reclamation costs, (iii) realized pricing of $44.00/Boe (US$64.05/Bbl WTI, US$3.41/MMBtu NYMEX, $3.37/GJ AECO), (iv) royalties of $3.90/Boe, (v) operating costs of $11.20/Boe and (vi) transportation and processing costs of $4.00/Boe.
Approximately 53 percent of forecast midpoint production is hedged over the second half of 2021. After taking such hedging into account, 2021 forecast free cash flow would still be approximately $140 million at an average WTI oil price of US$50.00/Bbl over the second half of the year and would rise to $210 million at an average WTI oil price of US$75.00/Bbl over the second half of the year.
The Company currently prioritizes the allocation of free cash flow to: (i) achieving a targeted range of net debt to adjusted funds flow of between 1.0x and 2.0x; (ii) shareholder returns; and (iii) incremental growth. Free cash flow in 2021 is expected to be directed towards debt reduction and the payment of dividends, with the Company maintaining the flexibility to make purchases of Common Shares under the NCIB. Year-end net debt to adjusted funds flow is now anticipated to be approximately 1.0x based on forecast 2021 free cash flow and a monthly dividend of $0.02 per Common Share.
Paramount's previously announced preliminary 2022 capital spending and sales volumes guidance remains unchanged. The Company continues to anticipate 2022 spending, excluding land acquisitions and abandonment and reclamation activities, to range between $325 million and $385 million. A capital program in this range would be expected to result in 2022 annual sales volumes of between 84,000 Boe/d and 88,000 Boe/d (45 percent liquids) and free cash flow of approximately $320 million, based on the following updated assumptions for 2022: (i) the midpoint of forecast capital spending and production, (ii) $30 million in abandonment and reclamation costs, (iii) realized pricing of $43.20/Boe (US$62.18/Bbl WTI, US$3.30/MMBtu NYMEX, $3.10/GJ AECO), (iv) royalties of $4.15/Boe, (v) operating costs of $11.00/Boe and (vi) transportation and processing costs of $3.85/Boe. If all free cash flow was directed towards debt reduction, year-end 2022 net debt to adjusted funds flow would be less than 0.5x.
The Board of Directors has declared a cash dividend of $0.02 per Common Share that will be payable on August 31, 2021 to shareholders of record on August 16, 2021. The dividend will be designated as an "eligible dividend" for Canadian income tax purposes.
Second quarter sales volumes at Karr averaged 38,679 Boe/d (54 percent liquids) compared to 33,230 Boe/d (55 percent liquids) in the first quarter. The increase in sales volumes was driven by strong performance from the six well 3-10 pad that was brought onstream in February and continues to outperform internal type well projections as well as production contributions from the three well 4-28 pad that was brought onstream in late April. Sales volumes also benefitted from additional gas lift compression installed in the first quarter that became fully operational in April. Combined, these more than offset the impact of scheduled curtailments at the third-party Karr 6-18 facility related to inlet separation and liquids handling optimization that reduced sales volumes by approximately 50 percent for seven days in May.
The 4-28 pad has performed in line with internal type well projections, averaging gross peak 30-day production per well of 1,295 Boe/d (3.4 MMcf/d of shale gas and 728 Bbl/d of NGLs) with an average CGR of 214 Bbl/MMcf.(1)
Paramount continues to focus on driving DCET costs lower while maintaining well performance and has realized cost improvements relative to previous pacesetting results. Preliminary all-in DCET costs at the five well Karr 7-18 pad, which was brought on production in late July 2021, averaged a pacesetting $6.0 million per well. This represents an approximate 11 percent reduction relative to average DCET costs of the last two pads at Karr. Continued outperformance from the 3-10 pad coupled with strong commodity prices has resulted in all wells on the 3-10 pad paying out in June, four months after coming onstream.
Drilling operations on the five well 5-16 East pad were completed in the second quarter. The average spud to rig release time for this pad came in at just under 24 days, 12 percent faster than on the 5-16 West pad drilled last year from the same surface location. The Company plans to complete the pad late in the third quarter and equip and tie-in the wells in the fourth quarter. The Company recently started drilling operations on the ten well 16-17 pad and expects that seven of the ten wells will be drilled by year-end.
Karr unit operating costs trended lower in the second quarter as a result of higher production volumes combined with a continued focus on capturing efficiencies and streamlining operations. Paramount achieved operating costs at Karr of $9.40/Boe in the second quarter of 2021, lower than targeted operating costs of $10.00/Boe at plateau production of approximately 40,000 Boe/d.
Royalties at Karr increased in the second quarter of 2021 compared to the first quarter as a result of higher volumes and prices as well as a number of wells having fully utilized their new well royalty incentives.
Second quarter sales volumes at Wapiti averaged 10,604 Boe/d (59 percent liquids) compared to 14,107 Boe/d (62 percent liquids) in the first quarter due to natural declines, the temporary shut-in of certain offsetting wells due to completion activities at the 6-4 pad and production curtailments at the third-party Wapiti natural gas processing facility caused by high ambient temperatures in June.
Production in July 2021 was impacted by the previously disclosed scheduled ten-day outage at the third-party Wapiti natural gas processing facility. This outage, which was undertaken to permanently address the source of the unscheduled outage that occurred at the facility in the third quarter of 2020, was completed as planned and the Company has restored production.
The seven well 6-4 pad was brought onstream in early July with encouraging initial results. DCET costs averaged a pacesetting $6.9 million per well, representing a nine percent reduction compared to average Wapiti DCET costs in 2020.
The Company has commenced drilling the seven well 9-22 pad, which is scheduled to be brought onstream in December 2021 along with the previously drilled and completed 10-22 well. The Company has also commenced the installation of infrastructure that will be operational later in 2021 and will accommodate production growth at Wapiti.
Kaybob Region sales volumes averaged 22,688 Boe/d (28 percent liquids) in the second quarter of 2021 compared to 24,938 Boe/d (28 percent liquids) in the first quarter. The decrease in production was due to natural declines and non-core asset dispositions completed in the first quarter.
Paramount holds material positions in the Duvernay and Montney resource plays in the Kaybob Region that will compete for capital in the medium term. In 2022, the Company has preliminary plans to drill, complete and tie-in a four well Duvernay pad at Kaybob Smoky and a three well Duvernay pad at Kaybob North on an existing pad where one of the three wells was previously drilled in 2019. The Company expects to realize capital cost efficiencies in its Kaybob Duvernay plays, similar to the gains achieved over the past 18 months at Karr and Wapiti, as it commences pad development and captures economies of scale. These lower costs are expected to materially improve Duvernay economics.
CENTRAL ALBERTA AND OTHER REGION
Central Alberta and Other Region sales volumes averaged 7,962 Boe/d (13 percent liquids) in the second quarter of 2021 compared to 8,217 Boe/d (14 percent liquids) in the first quarter.
The Company holds a material, contiguous Duvernay position at Willesden Green and continues to actively evaluate longer-term full field development plans for this asset. Drilling, completion and equipping of a two well, liquids rich Duvernay pad in the Willesden Green area was recently completed and Paramount plans to tie-in and bring both wells on production in late August.
Subsequent to June 30, 2021, the Company entered into the following oil and natural gas hedges:
October 2021 – March 2022 6,000 Bbl/d at $87.18/Bbl (WTI)
October 2021 – March 2022 20,000 MMBtu/d at US$4.10/MMBtu (NYMEX)
October 2021 – March 2022 20,000 GJ/d at $4.01/GJ (AECO)