Paramount Resources Ltd.

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Paramount Resources Ltd.

SHIFTING SANDS: 2000–02

NEW TACTICS: 2003–07

MAPPING THE FUTURE

Clay Riddell started out in modest circumstances, as the son of a Winnipeg mail carrier. Summers during high school and college were spent mapping rock outcroppings in northern Canada. Riddell graduated in 1959 from the University of Manitoba. His first job was with California Standard Co., now Chevron Corp., as a junior geologist. During much of the 1960s he searched for oil in Alberta and the Northwest Territories. At the end of the decade he struck out on his own.

In 1974, Riddell established Paramount Oil & Gas Ltd. By 1978 he was ready to take his aspirations public, as Paramount Resources Ltd. Selling 40 percent of the company, he raised $5 million. Shareholders, then, had to cultivate the skill of patience. “I once got a letter from a shareholder, well, sort of a letter—it was written on a brown paper bag. He told me I had the perfect formula for going broke,” Riddell told Canadian Business. The company finally began production early in the 1980s. The first successful well was drilled in the Northwest Territories.

Economic conditions of the early 1980s presented challenges for small energy producers such as Paramount Resources. In 1982, the company’s asset value was an estimated $80 million. As the company continued to develop natural gas interests in northeastern Alberta, the important U.S. market was headed toward a decline. Delays in bringing gas to market had already been detrimental to the company’s cash flow. Riddell was not to be deterred. Despite internal and external pressures he stuck to his guns, concentrating on natural gas exploration through the 1980s and 1990s.

SHIFTING SANDS: 2000–02

The first half of 1999 oil prices shot upward, taking the stock of oil and gas companies along for the ride.

Grown to the rank of a midsized producer, Paramount Resources had already made Clay Riddell a fortune. “Considered a textbook company in terms of its operations,” according to Canadian Business, Paramount was turning heads with a Northwest Territory gas find and a project in California. Still, all was not rosy. Barriers to growth had also cropped up.

Oil sands joint venture Gulf Canada Resources Ltd. succeeded, in early 2002, in shutting down natural gas production in an area of northern Alberta it hoped to develop. Paramount Resources was among the gas producers opposing the order geared toward maintaining the natural gas pressure level required to pump heavy oil known as bitumen. According to the Globe and Mail, the Alberta energy regulator found bitumen to be a “significant energy resource for the province” which warranted “consideration for future development.” The Alberta Energy and Utilities Board hearing lasted 47 days and resulted in a total of 146 natural gas wells ceasing production.

Better news came as 2000 wound down. Cold weather drove North American natural gas prices to record highs, breaking the $6 per million British thermal unit mark. By comparison, natural gas had sold for less than $3 in late 1999 and for $2 in late 1998. “We’re sure excited about the prices we’re seeing,” COO Jim Riddell told the Globe and Mail in November 2000. Analysts expected prices to settle back into the $4 range as temperatures moderated and producers cranked up production in response to demand. Crude oil prices topped $35.70 per barrel on October 12, spiking, for a time, energy stocks. Yet likewise, oil prices were expected to drop back, to the $25 per barrel range.

Big U.S. and Canadian energy producers snapped up midsized Canadian independents to fuel their own growth beginning about midway through 2000 and into early 2001. Energy trusts also got into the act, one made more attractive by reduced premiums on the sector’s stocks, the Globe and Mail reported. Canadian intermediates ranged from a market value of $300 million to roughly $1 billion. Producers with equity value exceeding $1.5 billion filled out the top echelon. The smaller junior producers, also trading at a reduced multiple, found themselves under the gun as well. Paramount, valued at $940 million, was sheltered by Riddell’s controlling interest.

Riddell had blended four elements into a formula for success, according to the National Post. “He built his billion-dollar company from scratch in 23 years through a combination of drilling in remote regions, cash flow, bank debt, and when things got tough, asset sales to avoid dilution through share offerings.” Riddell’s emphasis on natural gas set him and Paramount Resources apart from other energy producers, and the strategy produced its own set of risks and opportunities. Natural gas, generating relatively fewer harmful emissions than other fuels, was predicted by some as a potential beneficiary of stricter environmental laws, driving up demand in the future. Paramount, meanwhile, had to hedge against price volatility. Its natural gas fields in Alberta and the Northwest Territories made up about 94 percent of its assets.

As far as the industry’s consolidation trend was concerned, Riddell predicted that as companies grew larger, they would abandon their smallest, riskiest projects, providing opportunities for start-ups.

By the end of 2001, Riddell had built a fortune valued around $500 million, according to Canadian Business. Outside the energy business, Riddell’s other interests included thoroughbred horses and an upscale Calgary restaurant.

Riddell owned 48.5 percent of Paramount Resources, which generated $391.5 million in revenue during 2000. More than 90 percent was from natural gas sales. Even though Paramount ranked among Canada’s top gas exploration companies and was one of the first to concentrate its efforts in that energy sector, it remained dependent on high gas prices and strong demand to stay ahead of the curve.

COMPANY PERSPECTIVES

Environment/Values: Paramount Resources Ltd. “Paramount” is committed to achieving a high standard of environmental stewardship throughout all phases of its operations. This is a commitment to take all reasonable care to protect the environment and the safety of employees, contractors, and the public, in adherence with all applicable legislation.

In 2002, a Paramount Resources-led group of Canadian producers finally received compensation for a mandated shut down of gas wells adjacent to the northern Alberta oil sands deposits. Initially denied claims of an estimated $200 million in annual revenue losses, the group was granted CAD 85 million from the Alberta government. In 2001, Conoco had bought Gulf Canada, developer of the $1.3 billion oil sands project, and played a role in the deal, according to the Oil Daily. Paramount Resources, meanwhile, had used the detailed bitumen maps it developed to support its stance in the conflict to guide acquisition of oil sands leases of its own.

NEW TACTICS: 2003–07

In February 2003, Paramount Resources spun off northeast Alberta natural gas properties into Paramount Energy Trust. Shareholders of the trust would receive the bulk of its cash flow. The shift of assets into such investment vehicles was a trend among Canadian oil and gas concerns, according to the Daily Oil. While independent oil firms funneled their profits into exploration, a trust looked toward low-risk drilling and acquisitions to keep wells flowing.

As a side note, Riddell expanded his interests into another arena, gaining part ownership of the Calgary Flames during the year. Corporate makeover plans continued into 2004, and the market approved. Paramount Resources’ stock price jumped in September when the board authorized examination of restructuring options to increase shareholder value, according to the National Post. Announcement of public and private equity financings followed in October. The pair of placements would bring in CAD 116.5 million.

In February 2005, the company set a date for a shareholder vote on another spinoff. The Globe and Mail reported that the action would essentially divide the company in half, about 25, 000 barrels of oil equivalent a day going to the trust and about 20, 000 remaining in Paramount.

The strong oil sector increased Clay Riddell’s net worth by more than 88 percent in 2005. At CAD 2.35 billion Riddell climbed to 11th place, up from the 23rd spot, on the Canadian Business list of the country’s wealthiest citizens.

Trilogy Energy Trust, holding assets in central Alberta, had been spun out in 2005 and headed by Clay Riddell’s son Jim. Paramount Resources’ remaining conventional asset production climbed an average of 18 percent during the year, according to the annual report. Other highlights included new oil and gas discoveries and promising coal methane production development.

Additionally, Paramount Resources received a positive oil sands interest evaluation regarding potential recoverable bitumen.

As for the energy industry, crude oil prices recorded all-time highs. The numbers were driven in part by hurricane damage on the U.S. Gulf Coast. In contrast, North America’s unprecedented warm weather in early 2006 had a dampening effect on gas prices.

With oil price predictions ranging from $55 to $75 a barrel and natural gas prices in a slump, the oil sands took on increasing significance for the Canadian economy, the National Post observed in March 2006. The country’s biggest oil sands player was Canadian Natural Resources Ltd. Globally, OPEC members and Russia ranked as the top oil exporters. In either case, governments controlled output or owned the oil companies. On the buy side of the market, China, the United States, and Europe drove demand.

In January 2007 Paramount created MGM Energy Corp., spinning out far northern exploratory properties. Henry Sykes, former Conoco Phillips in Canada president, was tapped to lead the company, and Bob Peterson, former Imperial Oil Ltd. CEO, joined the board. Imperial spearheaded a drive to build the Mackenzie natural gas pipeline reaching into the Arctic. MGM would focus its attention on exploring and developing production in the region.

Riddell was betting on a repeat of earlier success with drilling in locations eschewed by other producers. Large companies had dropped out of the race to develop the region in response to pipeline problems, leaving room for smaller players. MGM planned to add as many interests as possible to its existing assets in the central Mackenzie Valley.

Kathleen Peippo