Can Paramount Resources Stock Make a Comeback?

It has been a difficult last couple of months for Paramount Resources . After a solid start to the year, Paramount stock lost momentum once oil prices started declining, and even though there has been a recovery of late, the stock continues to struggle.

Paramount is Trying to Get Its House in Order

Paramount’s biggest problem is that its balance sheet is laden with debt. The company has more than C$860 million in debt and a really thin cash position of just under C$13 million. The bad news is that the company’s debt and cash metrics are moving in the wrong direction.

At the end of 2018, Paramount had C$700 million in debt and C$36 million in cash. So it has taken on more leverage this year and its cash profile has thinned down. This is bad news for the company as any weakness in oil prices will force it to take on more debt to fund its production growth.

So it isn’t surprising to see why Paramount is selling off some of its non-core assets to boost the balance sheet. The company recently announced that it will sell its Karr 6-18 natural gas facility in a deal valued at $470 million. Of this, Paramount will receive $330 million in cash, while the remaining amount is a capital commitment to complete the expansion of another facility.

Paramount has decided to use the cash proceeds of the transaction to “reduce amounts drawn on the company’s $1.5 billion bank credit facility, which totalled $827.3 million as at March 31, 2019.”

This makes it clear that the company is taking steps to prune the debt by selling off its non-core assets and redirect the money into more productive assets.

Will the Strategy Work?

Paramount is following a strategy of funding its capital expenses using its cash flow, but still, the debt level has risen. The good news is that the company witnessed positive developments on other important fronts.

For instance, the increase in natural gas prices has boosted Paramount’s netback by 61% in the first quarter of 2019. More specifically, the company enjoyed a 26% increase in the average realized price of natural gas during the quarter.

Meanwhile, Paramount believes that it is on track to boost its production in the second half of the year thanks to the ramp-up of its Wapiti asset. But it remains to be seen if natural gas prices in Canada will remain strong going forward.

Market access remains a problem for Canada’s natural gas producers, which is why they have to settle for lower prices and can’t compete on market share either. As reported by OilPrice.com:

“Whether we’re talking about oil or natural gas, the details are different but the story is the same. Albertans are getting pennies on the dollar because we can’t get our resources to international markets, and our biggest customer has become our biggest competitor,” Alberta’s Minister of Energy Margaret McCuaig-Boyd said.

As such, there’s a probability that Paramount Resources could continue struggling thanks to a potential weakness in prices despite efforts to improve the balance sheet.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan
Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects.

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