The recent rise in oil prices has been a boon for Paramount Resources (TSX: [stock_market_widget type=”inline” template=”generic” color=”default” assets=”POU.TO” markup=”{symbol} {currency_symbol}{price} ({change_pct})” api=”yf”]) investors. The stock has halved in value over the past year, but it is witnessing a turnaround of sorts in 2019 thanks to the recent rise in oil prices. In fact, Paramount shares have started to pull up from the 52-week lows they had hit in December 2018.
[stock_market_widget type=”chart” template=”basic” color=”blue” assets=”POU.TO” range=”1y” interval=”1mo” axes=”true” cursor=”true” api=”yf”]However, it remains to be seen if Paramount’s recent resurgence is sustainable. Let’s try and find an answer.
Low Natural Gas Prices Hurt Paramount’s Prospects
Paramount derives its sales from natural gas, natural gas liquids, and crude oil. During the third quarter of 2018, the company sold 80,471 barrels of oil equivalent/day, 37% of which was liquids. So the dynamics of the natural gas market will play a critical role in shaping Paramount’s fortunes.
As it turns out, severe cold in Canada has led to record natural gas consumption, but prices have failed to take off because of an existing supply glut in Western Canada. The supply glut has been triggered by the absence of exit pipeline capacity in the country and a production boom, causing a sharp pullback in natural gas prices.
For instance, the spot natural gas price had hit $4.60/MMBTU in early December last year, but subsequently fell to $3.17/MMBTU. The U.S. Energy Information Administration believes that the natural gas spot prices will trend below the $3/MMBTU mark for the entire year on account of excess supply. That could pose a problem for the company going forward and hinder its growth prospects this year.
But this isn’t the only challenge that Paramount is facing.
Paramount’s Weak Balance Sheet Hurts Outlook
Oil prices might have risen of late, but that doesn’t mean the trend will continue as cracks are emerging in the oil market’s demand-supply dynamics. Crude oil inventories in the U.S. are rising thanks to record production, while OPEC ally Russia is taking its own sweet time to comply with its promise of reducing output.
These developments could knock the wind out of the oil price rally and create a problem for Paramount in light of its weak balance sheet. Paramount has nearly C$700 million in debt and just C$36 million in cash. This means that the company will have to restrict its 2019 capital plan to avoid taking on more debt.
Paramount is yet to release its fourth quarter 2018 results and the 2019 plan, but investors can expect a haircut in the capital expenditure this year because of the sticky balance sheet situation, negatively impacting the company’s production profile in the process. However, Paramount has been divesting its non-core assets, and that could help the company support its development plans despite the oil price downturn.
Investors should be wary of the company’s precarious balance sheet situation. Further weakness in oil and natural gas prices could hurt its finances, and possibly force the company into selling more assets or slash its spending to beat the downturn.
