PRMRF - Paramount Resources: Beating A Cold Air Front

2024-01-14 06:50:45 ET

Summary

• Paramount Resources has brought online additional production supply, which will coincide with a gas processing plant expansion.
• Despite some production downtime due to unforeseen events, the company expects to meet its production guidance.
• The company's strong financial position and lack of long-term debt make it resilient in the face of market fluctuations.
• The cold air event that has begun should make the extra production and gas processing plant temporarily very valuable.
• This company grows while paying a dividend. There is no debt to service. Therefore, the company has proportionately a lot more free cash flow and cash flow.

Paramount Resources ( PRMRF ) management updated that they had brought online another natural gas processing plant and more production in the latest update. This additional production supply is going to happen right as a cold air event heads South into Canada. As is typical for good management, they also released that the company should produce in the middle of guidance despite some uncontrolled events that took some production offline. Production is now hitting a new company record right when North America may well need some record production depending upon how the cold air event unfolds. That weather event is projected to go very far South (likely to the Gulf) with major gas storage implications. Shareholders can expect further growth with an occasional push from mother nature to help profits along.

So many times, I have stated that the time to purchase natural gas companies is when they are "left for dead" because obviously natural gas usage will remain low with unfavorable trends for at least a year or two. The reason for this is things like the current cold air march event can happen and change things "overnight". The industry is very low visibility as this event is about to prove. Therefore, there really is no such thing as certainty to 2025 and beyond. In fact, investors are lucky if "certainty" in projections makes it through a quarter or two.

Financial Rock

This Canadian company ( which reports in Canadian dollars unless otherwise noted ) has the financial strength to make it through whatever the market goes through in the future. With no long-term debt, there will be a whole lot of companies going under before this one suffers long-term financial damages.

This company pays a monthly dividend that could interest conservative investors that do not mind the upstream risk of a dependency on commodity prices for the dividend. Management also shows plans to grow production as well as pay a dividend which should imply a very low breakeven price for the wells drilled and completed.

As was noted during the year, the last fiscal year had a severe winter that halted operational activities for a while and then came the longest wildfire season I ever saw. The result is shown above in the form of a drop in production. But a company with this financial stature just "shakes it off" and moves forward as shown above with growth plans for the current fiscal year.

Free Cash Flow

This company has no debt servicing. It therefore has a huge edge over many competitors, even if they have lower costs (most do not) because there is no debt to service. Therefore, management has the option to grow, pay dividends or repurchase shares with a whole lot more cash flow than is the case with other companies that are roughly the same size with the same production mix.

This management can endure any downturn by simply lowering operating activity to essential levels while cashing checks until commodity prices recover sufficiently. There are no lenders to worry about here.

Note also, that the guided levels shown for a preliminary 2024 and beyond have a very low breakeven price before the dividend is in any danger. Even if the dividend were cut, it will be among the first in the industry to be restored.

The risk (or advantage) is that the company produces a lot of natural gas and condensate. Therefore, the guidance assumes a relationship to oil that could change as the fiscal year unfolds. That might lead to an unexpected budget change during the fiscal year.

Furthermore, a Canadian company like this one will have to idle a lot of operational activity during Spring Breakup in Canada. This allows for an unusual period of reflection and adjustment before activity again begins in the third quarter (usually) through the end of the fiscal year.

Operations

This company has a strategy similar to Exxon Mobil ( XOM ) in that they develop properties and then sell them when profitability declines. Similar to Exxon Mobil they do not sell anything when industry conditions are harsh. Instead that is an opportunity for the company to acquire more possibilities for future production.

Management also maintains investments in other companies and prospects as a sort of upstream mutual fund. These can either be sold at a profit or the other working interests can be acquired in the future.

The projects listed in the slide above are the ones that the company has.

Here is an example of the company results with an extremely high recycle ratio. The wells are expensive, so the payback time is closer to a year which is unusual for a recycle ratio that high. However, the decline rate is also different than is the case throughout much of the upstream industry. That allows more cash flow earlier than is the case with unconventional that most investors are used to.

Premium Products

This company has emphasized the production of premiums products on its way to superior profitability and a debt free balance sheet.

Condensate sells at a premium to light oil. Therefore, that sizable condensate volume usually gives this company a profitability advantage over many areas in North America. Canada has long imported condensate to meet the industry needs to make heavy oil and thermal oil flow through pipelines to get to market.

Summary

This is one of the few companies that I follow that has a debt free balance sheet combined with the ability to pay a dividend while growing production. Investors can expect this conservatively run company to continue to grow in the future. Management was opportunistic enough to bring on additional production and a gas processing plant before the recent cold air event really "gets going".

But then again, many natural gas producers have long brought production online to take advantage of seasonally strong winter prices (even when some winters do not look seasonally strong at the outset).

This company remains a strong buy even for conservative investors due to the debt free balance sheet and unusual profitability of the wells. Management has done an excellent job of shifting from dry gas production when I first began to follow the company to a far more profitable production mix.

Increasing profitability, as this management has done here, is often a goal, but rarely a long-term accomplishment. That is before you get to the debt free balance sheet. Investors should expect a lot more growth and future upside surprises from this management.

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