PRMRF - Paramount Resources: Fast-Growing And Dividends

2023-04-11 18:45:56 ET

Summary

• Paramount Resources Ltd. owns the rig drilling subsidiary.
• The company has at times functioned as a mutual fund of oil and gas companies.
• Strategic investments continue to play a significant role.
• Cash flow has finally reached the point where Paramount Resources growth is likely to be far more conventional and acceptable to the market in the future.
• Paramount Resources Ltd. can grow at a decent pace while paying a dividend and repurchasing shares.  Long-term debt is very low.

(Note: This is a Canadian company that reports in Canadian dollars unless otherwise stated.)

Paramount Resources Ltd. ( PRMRF ) is a good deal more integrated than many of its competitors. This helps the company with its fast growth to be able to pay some decent dividends and repurchase shares as well. Much of the industry is in "balance sheet repair mode" with insignificant or nominal growth. That is not the case here, as this management intends to grow either double digits or high single digits (at the worst) while rewarding shareholders at a level most companies only dream of.

Investments

This company has long invested in other companies. At times, the company has been part mutual fund. Other times, it has acquired the entire investment. Sometimes others acquire an investment or the company sells it. In any event, the ownership of these companies is generally significant to the strategy of the company.

In Canada, it is common for many companies to have significant midstream assets whereas in the United States, a fair amount of midstream assets is owned by midstream companies. For example, natural gas processing plants in Canada appear to be more likely to be owned by the upstream producer whereas in the United States that is fairly often not the case.

Similarly, this company owns its own rig company. That is going to be a huge cost advantage during a time-of-service price inflation. Now one of the risks of any vertical integration strategy has to be that management takes its "eye off the ball" and each part of the integration does not "pull its own weight." Right now, that does not seem to be the case. But it is worth keeping an eye on.

Also note that one of the companies has considerable Clearwater and Bluesky exposure. This company has plenty of profitable opportunities on its plate at the current time. But one of the more visible opportunities that is attracting a lot of attention from the Canadian companies I follow is the Clearwater play. So, investors may expect something from those leases in the future as they are getting fairly valuable.

This management appears to do decently with the strategic investments. However, there is always the risk of a failure and corresponding write-off.

History And Current Strategy

Long-time followers may remember that this company began as an essentially dry gas producer. That production was sold and the proceeds were used to purchase APA Corporation ( APA ). This management has been slowly whipping that relatively large operation into shape with considerable success ever since the acquisition.

Insiders own a significant chunk of outstanding shares. Their block is probably large enough to assure company control under normal circumstances. Management did pay a special dividend in addition to the regular monthly dividend (which has been rapidly increasing). Given the growth guidance shown on the right, the monthly dividend is likely to continue to increase.

This management has transitioned from a dry gas producer to a rich gas producer with an eye on condensate production. Condensate often trades at a premium to oil pricing because Canada uses condensate to mix with thermal and heavy oil production so that the production flows through pipelines to refineries. The result is that Canada often must import condensate (which is expensive) to meet its usage needs.

That focus on condensate production provides an extra layer of profitability throughout much of the business cycle just in case natural gas prices are low or too low. As management grows production, notice that the percentage of liquids produced will slowly increase over-time. The focus of that increase will likely remain condensate as long as that is a premium product.

The other thing to note is in an age where "no one is growing," this producer is growing fairly rapidly and intends to keep growing production. Large producers often do not grow this fast organically at the present time. The high insider ownership helps to somewhat insulate the company from market demands to allow for long-term planning that may actually benefit shareholders more than catering to current market demands.

This company was for a very long-time an asset story. The market may still consider that asset story as the cash flow is a relatively recent event. The company history was one of developing and selling assets. The proceeds were then reinvested in the business to repeat the process. After each sale, the company remained with a little more production and a little more future cash flow.

Now the debt ratio is clearly very low. So, there is not that dependency on asset sales to bring in the cash and fund development as there was throughout the company history. That is a big change that the market has yet to get used to. Management is making the market aware of the strategy change by initiating a dividend and repurchasing common shares. The special dividend helped make the market aware that the strategy has changed.

But the overall profitability of the properties has allowed a return to shareholders while growing production. That in-and-of itself is very unusual. Most companies are choosing the shareholder return and debt payments in the current environment because there is no money left for growth after that choice.

The overall decline curve is different for this company that for typical American companies. That helps to keep the maintenance capital low. But the big deal is the low cost of Canadian acreage and the bargain that they made out of purchasing Apache Canada and developing it.

That story makes for a very different far more conservative and conventional future than was the case in the past. The danger of an asset story was amply demonstrated by the fiscal year 2020 challenges when a lot of asset stories essentially were worthless as lenders demanded payment. This company was fortunately far enough along in its plans to escape the challenges of 2020 while now producing huge amounts of cash flow. These properties have turned out to be very profitable with endless profitable opportunities on the horizon.

The dividend, the low debt and the fair amount of integration make Paramount Resources Ltd. common of interest to a wide variety of investors. Any upstream play is volatile because commodity prices tend to move a lot and fast. But this one has some integration to lessen some of that pricing volatility. Family-owned companies like Paramount Resources Ltd. tend to be conservatively managed (low debt load) and above average in profitability. That often makes them a slightly safer investment than their peers.

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