The last time I wrote an article on Paramount Resources (OTCPK:PRMRF), it looked like lower commodity prices would "do in" the company. The management had piled on the debt to really ensure that cash flow would not service that debt. Many companies do not survive relatively high debt loads and low cash flow. Management may have been sure of the asset values, but the declining commodity pricing really crimped the property values.
But this company came up with a very creative solution to get out of its financial bind, and reward shareholders with a far higher stock price over the last six months. Sometimes speculative strategies work. Management had evidently unlocked enough value that interested buyers negotiated for the successful sale of enough of the company to untangle the debt situation.
"[Paramount Resources] is pleased to announce that it has entered into an agreement with a wholly-owned subsidiary of Pembina Pipeline Corporation ("Pembina") for the sale of its Musreau Complex and related midstream assets (the "Midstream Transaction") for cash and other considerations in excess of C$600 million.
The Midstream Transaction includes the 50 MMcf/d Refrigeration Plant, the 200 MMcf/d Deep Cut Plant, the 22,500 Bbl/d Condensate Stabilizer, the Amine Facility and the gas sales pipeline connecting the Musreau Complex to the TCPL meter station, as well as the majority of Paramount's larger-diameter gathering system in the Musreau area. Also included in the Midstream Transaction are the site and engineering and design work for the future 6-18 gas processing plant (the "6-18 Plant").
Paramount will receive C$556 million in cash at closing, plus a C$35 million capital commitment for an enhancement program the Company planned to complete in 2016 at the Musreau Complex."
First came the announced sale that netted the company more than C$500 million in cash. For a company that had no cash to pursue its capital plans in the first quarter, this transaction was a big deal. Even with some hedging, the commodity prices were just too low for the company to continue as it was. However, this was not enough all by itself because:
"In connection with the closing of the sale, the Company has cancelled C $400 million of the C$900 million Tranche A of its bank credit facility (the "Facility") as well as the entire C$100 million Tranche B of the Facility, which has never been drawn. Proceeds from the Midstream Transaction were used to pay down the Facility. Following closing, approximately C$135 million was drawn on the Facility. Paramount also has approximately C$152 million in letters of credit outstanding.
Paramount's net debt is currently estimated to be approximately C$1.3 billion, 32 percent lower than December 31, 2015."
Even though the company reduced its debt and of course reduced the credit facility as this was a very material sale for the company, the numbers still did not work. The company announced $60.3 million of netbacks in the first quarter. Funds flow from operations were an attractive C$4.91 BOE. However, with production at 50,161 BOED, and that production mostly gas, the funds flow from operations totaled about C$22 million in the first quarter. This amount was nowhere near what was needed to service that greatly reduced debt.
Then, management came through with a transforming deal:
"Paramount Resources Ltd. Enters Into an Agreement to Sell 310 Net Sections of Its Deep Basin Musreau/Kakwa Assets to Seven Generations Energy Ltd. for Total Consideration of $1.9 Billion"
"The consideration is comprised of: (NYSE:I) C$475 million in cash; (ii) 33.5 million class A common shares ("7G Shares") of Seven Generations (having a value of approximately C$837 million based on the 10 day VWAP of the 7G Shares ended at the close of markets yesterday of $24.99 per share); and (NASDAQ:III) Seven Generations' assumption of Paramount's senior unsecured notes due 2023 in the principal amount of US$450 million (approximately C$584 million). In connection with the transaction, Seven Generations will also assume Paramount's processing and transportation commitments relating to the Assets."
The announcement estimates that about 30,000 BOED is attributable to the properties in this sale and that Paramount Resources will have about 10,000 BOED of production left at the completion of the transaction. While the company needs about two-thirds of the shareholders to approve the transaction, shareholders would be crazy to turn a game-changing transaction like this down. The company's chairman will vote his 37% of common shares in support of this deal, so the deal will very likely succeed. The company also has an C$80 million deposit which should also help to insure the completion of the deal. The shares of Seven Generations Energy (OTC:SVRGF) will enable shareholders of Paramount to profit as industry conditions improve. At the same time, the company eliminates US$450 million in notes and gains cash to pay down still more debt and strengthen the balance sheet.
"The consent solicitation seeks consent from the holders of the 2019 Notes (the "2019 Noteholders") to waive and amend certain provisions of the indenture for the 2019 Notes such that the Sale Transaction can be completed with consenting holders remaining as holders of their 2019 Notes post-closing. A consent fee of $5.00 per $1,000 principal amount of 2019 Notes is payable to those 2019 Noteholders who provide their consent, conditional on the Sale Transaction closing. The Sale Transaction will be completed regardless of the results of the consent solicitation, as the 2019 Notes of all non-consenting 2019 Noteholders will be redeemed immediately before the closing of the Sale Transaction."
The company had one other set of notes, and the transaction above gives the company the ability to finance the note exchange. These notes will either be redeemed or exchanged. The company as of June 30, 2016, had a little over C$200 million outstanding on its bank line. Most likely that will be paid off from the cash received although depending upon the note exchange results, there could be a balance after the transaction. The banks will provide a new C$410 million credit facility, some of which will mature in a year. This new credit facility will most likely be not used immediately as a result of the above transactions.
"The Company plans to continue the development of its liquids-rich Deep Basin plays, comprised of:
- Karr/Gold Creek Montney;
- Smoky/Resthaven Cretaceous and Montney;
- Valhalla Montney;
- Birch/Umbach northeast British Columbia Montney; and
- Willesden Green Duvernay.
Paramount will also continue to hold a significant portfolio of emerging plays and strategic investments, including:
- Exploratory shale gas assets in the Liard Basin;
- northern frontier assets in Central Mackenzie and the Mackenzie Delta;
- oil sands assets held through its wholly-owned subsidiary Cavalier Energy Inc.;
- seven triple-sized rigs held through its wholly-owned subsidiary Fox Drilling Limited Partnership; and
- investments in other public and private oil and gas companies (including, among others, Trilogy Energy Corp., MEG Energy Corp., Strategic Oil & Gas Ltd., Marquee Energy Ltd. and RMP Energy Inc.).
Following the transaction, Paramount's financial portfolio, including its 7G Shares acquired through the transaction, is estimated to be worth approximately C$1 billion (or approximately C$9.40 per Paramount share), based on current market prices."
The Musreau properties are gone when the transaction closes. But interestingly the company retained some lower-cost properties. It will be interesting to see the profitability of the remaining properties with the greatly reduced debt load. The investments retained from the deal will give the company significantly more liquidity than it has had in the past to pursue its debt strategy for expanding production, and then selling the properties.
Source: Paramount Resources July, 2016, Corporate Presentation
The above slides demonstrate some of the potential that the remaining properties have for the future profitability of the company. Since much of the industry is reporting declining costs and improving ROI and IRR, these slides could materially improve during the current fiscal year.
Based upon the July 22, 2016, stock price close, the company has a market cap of about C$1.3 billion. About C$350 million (along with the debt) represents the value of the current production and the remaining lease potential. Plus, the company will have an investment portfolio of C$1 billion to secure future bank loans. Despite the 10,000 BOED remaining production, this is very much a non-traditional investment that the market has so far very much liked.
Management has considerably more resources than most 10,000 BOED companies to develop the potential of the remaining properties at whatever pace it desires. Plus, the increased future financial strength of Paramount could translate into better deals for shareholders as the company builds. Future investors will have to watch the value of the portfolio as well as the value of the company's operational holdings in addition to traditional cash flow measures in ascertaining the value of these shares. Management will probably be a little less anxious to use as much leverage as it did in the past as now there will be some value to preserve.
Still management delivered one very good deal to shareholders when the company was in a tight spot. It was a deal that few other managements could deliver and marks this management as a top-notch achiever. After the close of the deal in August, the stock may retreat some, and then the stock could well be a long-term buy as part of a basket of small companies for those investors with the nerve to track companies that grow in non-traditional ways. Investors may also want to purchase a position now and cost average. Expect this stock to be volatile in the future, not only as commodity prices change, but also with the length of time between material announcements. But also expect management to acquire more leases in favorable places and monetize the leases that it already has in ways that are very favorable to existing shareholders.
Disclaimer: I am not an investment advisor and this is not a recommendation to buy or sell a security. Investors are recommended to read all of the company's filings and press releases as well as do their own research to determine if the company fits their own investment objectives and risk portfolios.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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