Paramount Resources Ltd. — Interim / Quarterly Report 2020

Aug 6, 2020

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Interim Condensed Consolidated Financial Statements (Unaudited) For the three and six months ended June 30, 2020

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

($ thousands)

		June 30	December 31
As at	Note	2020	2019
ASSETS		(Unaudited)
Current assets
Cash and cash equivalents	14	1,609	6,016
Accounts receivable		80,291	118,632
Risk management – current	11	20,517	6,062
Prepaid expenses and other		8,390	10,975
		110,807	141,685
Risk management – long-term	11	788	–
Lease receivable	6	3,952	4,768
Exploration and evaluation	2	633,277	650,414
Property, plant and equipment, net	3	1,615,476	1,914,074
Investments in securities	4	124,792	156,889
Deferred income tax	10	577,294	663,475
		3,066,386	3,531,305
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities		143,815	204,818
Risk management – current	11	9,285	1,757
Asset retirement obligations and other–current	6	29,012	40,288
		182,112	246,863
Long-term debt	5	754,933	632,300
Risk management – long-term	11	24,119	6,275
Asset retirement obligations and other– long-term	6	382,092	562,687
		1,343,256	1,448,125
Commitments and contingencies	15
Shareholders’ equity
Share capital	7	2,207,477	2,207,485
Accumulated deficit		(453,293)	(128,487)
Reserves	8	**(31,054) **	4,182
		1,723,130	2,083,180
		3,066,386	3,531,305

See the accompanying notes to these Interim Condensed Consolidated Financial Statements.

Paramount Resources Ltd. Second Quarter 2020 Financial Statements 1

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)

($ thousands, except as noted)

		Three months ended	Three months ended	Six months ended	Six months ended
		June	30	June	30
	Note	2020	2019	2020	2019
Petroleum and natural gas sales		113,174	209,184	285,264	455,239
Royalties		(3,599)	(18,651)	(15,282)	(34,050)
Revenue	12	109,575	190,533	269,982	421,189
Gain (loss) on commodity contracts	11	(7,246)	27,646	35,078	(45,036)
		102,329	218,179	305,060	376,153
Expenses
Operating expense		62,605	86,779	154,941	177,162
Transportation and NGLs processing		25,309	21,631	48,911	46,207
General and administrative		5,802	13,493	15,986	27,214
Share-based compensation	9	557	2,641	571	7,528
Depletion, depreciation and impairment	3	61,339	84,710	326,272	165,407
Exploration and evaluation	2	11,516	2,664	23,446	7,757
(Gain) loss on sale of oil and gas assets		3,086	(1,730)	780	(7,716)
Interest and financing		9,266	11,063	18,747	20,289
Accretion of asset retirement obligations	6	10,672	14,894	21,142	29,406
Change in asset retirement obligations	6	(529)	–	(95,357)	–
Closure costs	6	–	–	–	13,440
Reorganization costs		3,048	–	3,048	–
Foreign exchange		435	108	(318)	119
		193,106	236,253	518,169	486,813
Change in fair value of securities – warrants	4	3,189	–	1,640	–
Other income (loss)	13	(1,758)	(852)	(6,243)	1,144
Loss before tax		(89,346)	(18,926)	(217,712)	(109,516)
Income tax expense (recovery)
Deferred	10	(13,622)	102,097	93,094	88,183
		(13,622)	102,097	93,094	88,183
Net loss		(75,724)	(121,023)	(310,806)	(197,699)
Other comprehensive income (loss), net of tax	8
Items that will be reclassified to net income (loss)
Change in fair value of interest rate swaps, net of tax		(3,043)	(3,983)	(21,406)	(13,089)
Reclassification to net income (loss), net of tax		1,599	349	2,065	349
Items that will not be reclassified to net income (loss)
Change in fair value of securities, net of tax		83,311	(3,917)	(32,355)	(11,321)
Comprehensive income(loss)		6,143	(128,574)	(362,502)	(221,760)
Net loss per common share($/share)	7
Basic and diluted		(0.57)	(0.93)	(2.33)	(1.52)

See the accompanying notes to these Interim Condensed Consolidated Financial Statements.

Paramount Resources Ltd. Second Quarter 2020 Financial Statements 2

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

($ thousands)

		Three months ended	Three months ended	Six months ended	Six months ended
		June	30	June	30
	Note	2020	2019	2020	2019
Operating activities
Net loss		(75,724)	(121,023)	(310,806)	(197,699)
Add (deduct):
Items not involving cash	14	89,471	173,087	351,046	347,215
Asset retirement obligations settled	6	(3,960)	(2,020)	(34,215)	(7,783)
Closure program expenditures	6	–	(4,389)	–	(4,389)
Change in non-cash working capital		(24,022)	2,425	10,272	(741)
Cash from (used in) operating activities		(14,235)	48,080	16,297	136,603
Financing activities
Net draw of revolving long-term debt	5	103,448	82,439	122,633	94,694
Lease liabilities – principal repayments	6	(1,898)	(1,897)	(3,774)	(3,676)
Common Shares issued, net of issue costs		–	71	15	110
Cash from financing activities		101,550	80,613	118,874	91,128
Investing activities
Property, plant and equipment and exploration		(41,401)	(100,265)	(105,251)	(204,368)
Sale of oil and gas assets		(3,621)	648	(2,133)	642
Investments		(38)	(6,029)	(938)	(6,029)
Change in non-cash working capital		(45,996)	(16,308)	(30,976)	(17,535)
Cash used in investing activities		(91,056)	(121,954)	(139,298)	(227,290)
Net increase (decrease)		(3,741)	6,739	(4,127)	441
Foreign exchange on cash and cash equivalents		(318)	(318)	(280)	(450)
Cash and cash equivalents, beginning of period		5,668	12,865	6,016	19,295
Cash and cash equivalents, end ofperiod		1,609	19,286	1,609	19,286

Supplemental cash flow information 14

See the accompanying notes to these Interim Condensed Consolidated Financial Statements.

Paramount Resources Ltd. Second Quarter 2020 Financial Statements 3

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

($ thousands, except as noted)

Six months ended June 30 Note	2020 2019
Share Capital Balance, beginning of period Issued Change in vested and unvested Common Shares for restricted share unit plan 9	Shares (000’s) Shares (000’s) 133,337 2,207,485 130,326 2,184,608 1 19 13 158 446 (27) 327 1,373
Balance, end of period 7	133,784 2,207,477 130,666 2,186,139
Retained Earnings (Accumulated Deficit) Balance, beginning of period Net loss Reclassification of accumulated losses on securities	(128,487) 21,189 (310,806) (197,699) (14,000) –
Balance, end of period	(453,293) (176,510)
Reserves 8 Balance, beginning of period Other comprehensive loss Contributed surplus Reclassification of accumulated losses on securities	4,182 44,732 (51,696) (24,061) 2,460 6,011 14,000 –
Balance, end of period	(31,054) 26,682
Total Shareholders’ Equity	1,723,130 2,036,311

See the accompanying notes to these Interim Condensed Consolidated Financial Statements.

Paramount Resources Ltd. Second Quarter 2020 Financial Statements 4

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (Tabular amounts stated in $ thousands, except as noted)

1. Basis of Presentation

Paramount Resources Ltd. ("Paramount" or the "Company") is an independent, publicly traded, liquidsfocused Canadian energy company that explores for and develops both conventional and unconventional petroleum and natural gas reserves and resources. The Company also pursues longer-term strategic exploration and pre-development plays and holds a portfolio of investments in other entities. Paramount’s principal properties are located in Alberta and British Columbia.

Paramount is the ultimate parent company of a consolidated group of companies and is incorporated and domiciled in Canada. The address of its registered office is 2800, 421 – 7[th] Avenue S.W., Calgary, Alberta, Canada, T2P 4K9. The consolidated group includes wholly-owned subsidiaries Fox Drilling Limited Partnership, Cavalier Energy and MGM Energy. The financial statements of Paramount’s subsidiaries and partnerships are prepared for the same reporting periods as the parent in accordance with the Company’s accounting policies. All intercompany balances and transactions have been eliminated.

These unaudited Interim Condensed Consolidated Financial Statements of the Company, as at and for the three and six months ended June 30, 2020 (the "Interim Financial Statements"), were authorized for issuance by the Audit Committee of Paramount’s Board of Directors on August 5, 2020.

These Interim Financial Statements have been prepared in accordance with IAS 34 – Interim Financial Reporting on a basis consistent with the accounting, estimation and valuation policies described in the Company’s audited Consolidated Financial Statements as at and for the year ended December 31, 2019 (the "Annual Financial Statements").

These Interim Financial Statements are stated in thousands of Canadian dollars, unless otherwise noted, and have been prepared on a historical cost basis, except for certain financial instruments which are stated at fair value. Certain information and disclosures normally required to be included in the notes to the Annual Financial Statements have been condensed or omitted. These Interim Financial Statements should be read in conjunction with the Annual Financial Statements.

Changes in Accounting Policies

Effective January 1, 2020, the Company adopted the amendments to IFRS 9 – Financial Instruments, IAS 39 – Financial Instruments: Recognition and Measurement and IFRS 7 – Financial Instruments: Disclosures. These amendments provide relief on hedge accounting from the potential effects of the - uncertainty arising from the phase out of interest rate benchmarks, the Interbank Offered Rate ("IBOR") reform. The Company’s floating-to-fixed interest rate swaps, which are described in Note 11, are impacted by these amendments as hedge accounting is applied to these instruments and hedging relationships may be impacted by the IBOR reform. There has been no impact on the recognized assets, liabilities or comprehensive loss of the Company resulting from the adoption of these amendments.

Government Grants

Government grants are recognized when there is reasonable assurance that the relevant conditions of the grant are met and that the grant will be received. The Company records the grant in the Interim Financial Statements with the related expenditure in the period in which the eligible costs are incurred.

Paramount Resources Ltd. Second Quarter 2020 Financial Statements 5

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (Tabular amounts stated in $ thousands, except as noted)

Significant Accounting Estimates, Assumptions & Judgments

The timely preparation of financial statements requires Management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosures regarding contingent assets and liabilities. Estimates and assumptions are regularly evaluated and are based on Management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Changes in judgments, estimates and assumptions based on new information could result in a material change to the carrying amount of assets or liabilities and have a material impact on assets, liabilities, revenues and expenses recognized in future periods.

The erosion of global demand for crude oil and petroleum products in connection with the COVID-19 pandemic, combined with disputes among members of OPEC+ concerning production levels, led to a material deterioration in oil and condensate prices received by the Company in the latter part of the first quarter of 2020. Despite the resolution of the OPEC+ disputes, adverse pricing conditions persisted in the second quarter as a result of the continuing impact of the COVID-19 pandemic. The course of the COVID19 pandemic and its ultimate economic impact remain highly uncertain. The ultimate impact of the pandemic on Paramount’s future operations and financial performance is unknown and will be dependent on a number of unpredictable factors outside of the knowledge and control of Management, including: (i) the duration and severity of the pandemic; (ii) the impact of the pandemic on economic growth, commodity prices and financial and capital markets; and (iii) governmental responses and restrictions. These uncertainties may continue to persist beyond the point where the initial outbreak of the COVID-19 virus has subsided. The potential impact of the COVID-19 pandemic has been considered by Management in making judgments, estimates and assumptions used in the preparation of the Interim Financial Statements, but the inherent risks and uncertainties resulting from the pandemic may result in material changes to such judgments, estimates and assumptions in future periods as additional information becomes available.

Note 3 to the Annual Financial Statements contains a description of the accounting judgments, estimates and assumptions that are considered significant. Conditions in 2020 have increased the complexity in making judgments, estimates and assumptions used to prepare these Interim Financial Statements, particularly related to: (i) estimating recoverable amounts used in impairment and impairment reversal assessments; (ii) estimating the fair value of the Company’s investments in securities of corporations that are not publicly traded; (iii) estimating the weighted average credit-adjusted risk-free discount rate used to discount asset retirement obligations; and (iv) assessing the likelihood of realizing deferred income tax assets.

2. Exploration and Evaluation

	Six months ended	Twelve months ended
	June 30, 2020	December 31, 2019
Balance, beginning of period	650,414	719,908
Additions	3,293	5,643
Acquisitions	–	6,127
Change in asset retirement provision	(1,013)	(392)
Transfers to property, plant and equipment	24	(66,961)
Expired lease costs	(18,921)	(10,173)
Dispositions	(520)	(3,738)
Balance, end ofperiod	633,277	650,414

Paramount Resources Ltd. Second Quarter 2020 Financial Statements 6

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (Tabular amounts stated in $ thousands, except as noted)

Exploration and Evaluation Expense

	Three months ended	Three months ended	Six months ended	Six months ended
	June	30	June 30
	2020	2019	2020	2019
Geological and geophysical	1,921	2,101	4,525	5,115
Expired lease costs	9,595	563	18,921	2,642
	11,516	2,664	23,446	7,757

At June 30, 2020, the Company assessed its exploration and evaluation assets for indicators of potential impairment or impairment reversal and none were identified.

3. Property, Plant and Equipment

	Petroleum
	and natural	Drilling	Right-of-use
Six months ended June 30, 2020	gas assets	rigs	assets	Other	Total
Cost
Balance, beginning of period	3,996,107	161,189	15,960	46,702	4,219,958
Additions	105,340	693	(95)	1,187	107,125
Transfers from exploration and evaluation	(24)	–	–	–	(24)
Dispositions	(18,326)	(99)	–	(399)	(18,824)
Change in asset retirement provision	(75,040)	–	–	–	(75,040)
Cost, end of period	4,008,057	161,783	15,865	47,490	4,233,195
Accumulated depletion, depreciation and
impairment
Balance, beginning of period	(2,177,753)	(89,871)	(5,296)	(32,964)	(2,305,884)
Depletion and depreciation	(127,494)	(5,095)	(1,853)	(2,226)	(136,668)
Impairment	(191,796)	–	–	–	(191,796)
Dispositions	16,170	99	–	360	16,629
Accumulated depletion, depreciation and	(2,480,873)	(94,867)	(7,149)	(34,830)	(2,617,719)
impairment, end of period
Net book value, December 31, 2019	1,818,354	71,318	10,664	13,738	1,914,074
Net book value, June 30, 2020	1,527,184	66,916	8,716	12,660	1,615,476

Depletion, Depreciation and Impairment

	Three months ended	Three months ended	Six months ended	Six months ended
	June	30	June 30
	2020	2019	2020	2019
Depletion and depreciation	61,339	84,710	134,476	165,407
Impairment of petroleum and natural gas assets	–	–	191,796	–
	61,339	84,710	326,272	165,407

At June 30, 2020, the Company assessed its property, plant and equipment for indicators of potential impairment or impairment reversal and none were identified.

At March 31, 2020, the Company recorded impairments of $188.3 million and $3.5 million related to petroleum and natural gas assets in the Kaybob and Northern cash generating units (ʺCGUsʺ), respectively. The impairments were recorded because the carrying value of the CGUs exceeded their estimated recoverable amount, which were estimated based on expected net cash flows from the production of

Paramount Resources Ltd. Second Quarter 2020 Financial Statements 7

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (Tabular amounts stated in $ thousands, except as noted)

reserves ascribed to each CGU. The impairments resulted from decreases in estimated future net revenues, mainly due to lower forecasted oil and natural gas prices.

Recoverable amounts were estimated on a fair value less cost of disposal basis using a discounted cash flow method (level three fair value hierarchy estimate). Cash flows were determined based on internally estimated after-tax discounted future net cash flows from the production of proved plus probable reserves assigned to the Kaybob and Northern CGUs, at discount rates of 11.5 percent and 13.5 percent, respectively. The net cash flows from the reserves estimated by Paramount’s independent qualified reserves evaluator as at December 31, 2019 were internally updated by Management to reflect commodity price estimates at March 31, 2020 and for changes to certain operating and capital assumptions to reflect the prevailing economic environment. The reserves process is inherently subjective and involves considerable estimation uncertainty.

The following table sets out the forecast benchmark commodity prices and exchange rates used to determine estimated recoverable amounts at March 31, 2020:[(1)]

	(Apr-Dec)
	2020	2021	2022	2023	2024	2025-2032	Thereafter
Natural Gas(2)
AECO ($/MMBtu)	1.74	2.20	2.38	2.45	2.53	2.60-3.04	+2%/yr
Henry Hub (US$/MMBtu)	2.10	2.58	2.79	2.86	2.93	3.00-3.45	+2%/yr
Liquids(2)
Edmonton Condensate ($/Bbl)	34.35	50.72	62.80	68.49	71.73	73.16-84.23	+2%/yr
WTI (US$/Bbl)	29.17	40.45	49.17	53.28	55.66	56.87-65.33	+2%/yr
Foreign Exchange
$US / 1$CDN	0.71	0.73	0.75	0.75	0.75	0.75	0.75

(1) Average of forecasts published by: (i) McDaniel & Associates Consultants Ltd. and GLJ Petroleum Consultants Ltd. at April 1, 2020 and (ii) Sproule Associates Ltd. at March 31, 2020.

(2) Forecast benchmark prices are adjusted for quality differentials, heat content, distance to market and other factors in determining estimated recoverable amounts.

4. Investments in Securities

As at	June 30, 2020	December 31, 2019
Level one fair value hierarchy securities	27,742	88,439
Level three fair value hierarchy securities	97,050	68,450
	124,792	156,889

Investments in level one fair value hierarchy securities (ʺLevel One Securitiesʺ) are carried at their periodend trading price. Estimates of fair values for investments in level three fair value hierarchy securities (ʺLevel Three Securitiesʺ) are based on valuation techniques that incorporate unobservable inputs (level three fair value hierarchy inputs). The valuation techniques utilize market-based metrics of comparable companies and transactions, indications of value based on equity transactions of the entities and other indicators of value including financial and operational results of the entities. Fair value estimates of Level Three Securities are updated at each balance sheet date to confirm whether the carrying value of the investment continues to fall within a range of possible fair values indicated by such techniques.

For the three months ended June 30, 2020 and the six months ended June 30, 2020, the Company recorded a recovery of $83.6 million and a charge of $34.7 million, respectively, to other comprehensive income

Paramount Resources Ltd. Second Quarter 2020 Financial Statements 8

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (Tabular amounts stated in $ thousands, except as noted)

(ʺOCIʺ) as a result of changes in the fair value estimates of Level One Securities and Level Three Securities. For the six months ended June 30, 2020 the Company recorded income of $1.6 million related to a change in the estimated fair value of Strath Resources Ltd. (ʺStrathʺ) warrants.

Changes in the fair value of investments in securities are as follows:

	Six months ended	Twelve months ended
	June 30, 2020	December 31, 2019
Investments in securities, beginning of period	156,889	231,732
Changes in fair value of Level One Securities – recorded in OCI	(61,635)	6,330
Changes in fair value of Level Three Securities(1)– recorded in OCI	26,960	(118,104)
Changes in fair value of Strath warrants – recorded in earnings	1,640	(9,162)
Acquired – cash	938	55,143
Acquired – non-cash	–	4,501
Dispositions	–	(13,551)
Investments in securities, end ofperiod	124,792	156,889

(1) Primarily related to the change in fair value of 85 million Strath common shares and excluding Strath warrants.

5. Long-Term Debt

As at	June 30, 2020(1)	December 31, 2019
Paramount Facility	754,933	632,300

(1) June 30, 2020 Paramount Facility balance is presented net of $2.7 million in unamortized costs related to the June 2020 facility amendments.

Paramount Facility

The Paramount Facility is a financial covenant-based senior secured revolving bank credit facility.

In June 2020, the Paramount Facility was amended, which amendments included:

• a period of financial covenant relief to and including June 30, 2021 (the "Covenant Relief Period"), providing for a full waiver of the Senior Secured Debt to Consolidated EBITDA covenant and a reduction of the Consolidated EBITDA to Consolidated Interest Expense covenant in certain periods; and

• a decrease in the size of the Paramount Facility to $1.0 billion.

Availability of the Paramount Facility in excess of $900 million is subject to the Company raising junior capital and obtaining required levels of lender approval. Availability will be increased by $5 million for each $10 million of junior capital raised, subject to certain limits.

During the Covenant Relief Period, Paramount is subject to the following financial covenant, tested at the end of each fiscal quarter:

Consolidated EBITDA to Consolidated Interest Expense to be:

• 2.50 to 1.00 or greater for the quarters ending June 30, 2020 and September 30, 2020, calculated on a trailing twelve-month basis;

Paramount Resources Ltd. Second Quarter 2020 Financial Statements 9

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (Tabular amounts stated in $ thousands, except as noted)

• 1.75 to 1.00 or greater for the quarter ending December 31, 2020, calculated on a trailing twelve-month basis; and

• 1.75 to 1.00 or greater for the quarters ending March 31, 2021 and June 30, 2021, calculated on a current quarter basis.

After the Covenant Relief Period, Paramount will be subject to the following financial covenants, tested at the end of each fiscal quarter and calculated on a trailing twelve-month basis:

• Senior Secured Debt to Consolidated EBITDA to be 3.50 to 1.00 or less; and

• Consolidated EBITDA to Consolidated Interest Expense to be 2.50 to 1.00 or greater.

Senior Secured Debt currently consists of amounts drawn under the Paramount Facility and the undrawn face amounts of letters of credit outstanding under the Paramount Facility.

Consolidated EBITDA is adjusted for material acquisitions and dispositions and is generally calculated as net income before Consolidated Interest Expense, taxes, depletion, depreciation, amortization, impairment, exploration and evaluation expense and is also adjusted to exclude non-recurring items and other non-cash items including unrealized mark-to-market amounts on derivatives, unrealized foreign exchange, sharebased compensation expense and accretion.

Consolidated Interest Expense is reduced by any interest income and other customary exclusions.

Paramount was in compliance with the financial covenant under the Paramount Facility at June 30, 2020.

Borrowings under the Paramount Facility bear interest at the lenders’ prime lending rate, US base rate, bankers’ acceptance rate, or LIBOR, as selected at the discretion of the Company, plus a margin within a graduated range depending on the Company’s prevailing Senior Secured Debt to Consolidated EBITDA ratio. Following the June 2020 amendments, margin levels were increased and will remain at the highest end of the graduated range until the Covenant Relief Period ends. The Covenant Relief Period may be terminated prior to its expiry at the Company’s election.

The Paramount Facility is secured by a charge over substantially all of the assets of Paramount. The maturity date of the Paramount Facility is November 16, 2022, which may be extended at the option of Paramount and with the agreement of the lenders.

Paramount had letters of credit outstanding under the Paramount Facility totaling $2.9 million at June 30, 2020 that reduce the amount available to be drawn on the Paramount Facility.

Unsecured Letter of Credit Facility

At June 30, 2020, Paramount had a $40 million unsecured demand revolving letter of credit facility (the "LC Facility") with a Canadian bank under which $39.2 million in letters of credit were outstanding. In July 2020, the LC Facility was increased to $70 million.

Paramount’s obligations under the LC Facility are supported by a performance security guarantee ("PSG") from Export Development Canada ("EDC"). The term of the PSG has been extended to June 30, 2021 and may be further extended at the option of Paramount and with the agreement of EDC.

Paramount Resources Ltd. Second Quarter 2020 Financial Statements 10

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (Tabular amounts stated in $ thousands, except as noted)

6. Asset Retirement Obligations and Other

As at June 30, 2020	Current	Long-term	Total
Asset retirement obligations	19,000	365,348	384,348
Lease liabilities	10,012	16,744	26,756
Asset retirement obligations and other	29,012	382,092	411,104
As at December 31, 2019	Current	Long-term	Total
Asset retirement obligations	29,000	540,897	569,897
Lease liabilities	9,851	21,790	31,641
Flow-through share renunciation obligations	1,437	–	1,437
Asset retirement obligations and other	40,288	562,687	602,975

Asset Retirement Obligations

	Six months ended	Twelve months ended
	June 30, 2020	December 31, 2019
Asset retirement obligations, beginning of period	569,897	807,921
Additions	406	11,705
Change in estimates(1)	6,607	(171,404)
Change in discount rate	(178,423)	(33,269)
Obligations settled	(34,215)	(29,441)
Dispositions	(1,066)	(72,273)
Accretion expense	21,142	56,658
Asset retirement obligations, end ofperiod	384,348	569,897

(1) Relates to changes in estimated costs and anticipated settlement dates of asset retirement obligations.

As at June 30, 2020, estimated undiscounted, uninflated asset retirement obligations were $1,351.3 million (December 31, 2019 – $1,381.5 million). Asset retirement obligations have been determined using a weighted average credit-adjusted risk-free discount rate of 12.0 percent (December 31, 2019 – 8.0 percent) and an inflation rate of 2.0 percent (December 31, 2019 – 2.0 percent).

For the six months ended June 30, 2020, the Company recorded a recovery of $95.4 million (six months ended June 30, 2019 - $nil) to earnings related to changes in the discounted carrying value of estimated asset retirement obligations in respect of properties that had a nil carrying value ascribed to property, plant and equipment. The changes mainly resulted from a revision in the weighted average credit-adjusted riskfree rate used to discount obligations.

Lease Liabilities

Paramount has lease liabilities in respect of office space and vehicles, which have been recognized at the discounted value of the remaining fixed lease payments. For the six months ended June 30, 2020, total cash payments made in respect of these lease liabilities, net of sublease arrangements, were $4.4 million, of which $0.6 million was recognized as interest and financing expense.

For the six months ended June 30, 2020, expenses related to arrangements containing variable operating costs, short-term and low value leases which have not been included in the lease liability were approximately $1.8 million.

Paramount Resources Ltd. Second Quarter 2020 Financial Statements 11

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (Tabular amounts stated in $ thousands, except as noted)

As at June 30, 2020, $6.3 million was due to the Company in respect of sublease arrangements for Paramount’s office space, of which $2.3 million was classified as current and $4.0 million was classified as non-current. For the six months ended June 30, 2020, $1.3 million was received in respect of office sublease arrangements, of which $0.2 million was recognized as interest revenue.

Closure Costs

In the first quarter of 2019, the Company made the decision to cease its production operations at the Zama property in northern Alberta and commenced a closure program at the property. The Company recognized a provision of $13.4 million as at March 31, 2019 in respect of the expected costs of the closure program.

7. Share Capital

As at June 30, 2020, 133,784,323 (December 31, 2019 – 133,337,058) class A common shares of the Company ("Common Shares") were outstanding, net of 414,394 (December 31, 2019 – 859,659) Common Shares held in trust under the restricted share unit plan.

In January 2020, Paramount implemented a normal course issuer bid program (the ʺ2020 NCIBʺ) under which the Company may purchase up to 7,044,289 Common Shares for cancellation. The 2020 NCIB will terminate on the earlier of: (i) January 5, 2021; and (ii) the date on which the maximum number of Common Shares that can be acquired pursuant to the 2020 NCIB are purchased. The Company has not purchased any Common Shares under the 2020 NCIB to June 30, 2020.

Paramount has incurred sufficient qualifying expenditures to satisfy commitments associated with Canadian development expense flow-through Common Shares issued in November 2019.

Weighted Average Common Shares

Three months ended June 30	2020 2019
Net loss – basic Dilutive effect of Paramount Options	Wtd. Avg Shares (000’s) Net loss Wtd. Avg Shares (000’s) Net loss
	133,712 (75,724) 130,608 (121,023) – – – –
Net loss – diluted	133,712 (75,724) 130,608 (121,023)
Six months ended June 30	2020 2019
Net loss – basic Dilutive effect of Paramount Options	Wtd. Avg Shares (000’s) Net loss Wtd. Avg Shares (000’s) Net loss
	133,529 (310,806) 130,469 (197,699) – – – –
Net loss – diluted	133,529 (310,806) 130,469 (197,699)

Outstanding stock options that can be exchanged for the Company’s Common Shares are potentially dilutive and are included in Paramount’s diluted per share calculations when they are dilutive to net income per share. There were 10.6 million options to acquire Common Shares ("Paramount Options") outstanding at June 30, 2020 (June 30, 2019 – 11.8 million), all of which were anti-dilutive.

Paramount Resources Ltd. Second Quarter 2020 Financial Statements 12

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (Tabular amounts stated in $ thousands, except as noted)

8. Reserves

	Unrealized losses	Unrealized gains
	on interest rate	(losses)	Contributed	Total
Six months ended June 30, 2020	swaps	on securities	surplus	reserves
Balance, beginning of period	(6,160)	(147,674)	158,016	4,182
Other comprehensive loss, before tax	(25,372)	(34,675)	–	(60,047)
Deferred tax	6,031	2,320	–	8,351
Reclassification of accumulated losses on
securities, net of tax	–	14,000	–	14,000
Share-based compensation	–	–	2,464	2,464
Paramount Options exercised	–	–	(4)	(4)
Balance, end ofperiod	(25,501)	(166,029)	160,476	(31,054)

For the six months ended June 30, 2020, $14.0 million of accumulated losses were reclassified from accumulated OCI to accumulated deficit as a result of the derecognition of an investment classified as a Level One Security.

9. Share-Based Compensation

Paramount Options

	Six months ended	Six months ended	Twelve months ended	Twelve months ended
	June 30, 2020		December	31, 2019
		Weighted		Weighted
		average		average
		exercise		exercise
		price		price
	Number	($/share)	Number	($/share)
Balance, beginning of period	12,311,462	12.16	12,465,163	15.67
Granted	10,000	7.50	3,565,930	6.66
Exercised(1)	(2,000)	7.28	(21,430)	7.84
Cancelled or forfeited	(1,123,005)	14.30	(3,683,801)	18.73
Expired	(610,778)	15.26	(14,400)	11.90
Balance, end of period	10,585,679	11.75	12,311,462	12.16
Options exercisable, end ofperiod	3,459,091	14.60	4,442,966	15.00

(1) For Paramount Options exercised during the six months ended June 30, 2020, the weighted average market price of Paramount’s Common Shares on the dates exercised was $7.77 per share (twelve months ended December 31, 2019 – $8.55 per share).

Restricted Share Unit Plan – Shares Held in Trust

	Six months ended June 30, 2020 Twelve months ended December 31, 2019
	Shares (000’s) Shares (000’s)
Balance, beginning of period	860 1,388 574 2,209
Shares purchased	– – 713 4,516
Change in vested and unvested shares	(446) 27 (427) (5,337)
Balance, end ofperiod	414 1,415 860 1,388

Paramount Resources Ltd. Second Quarter 2020 Financial Statements 13

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (Tabular amounts stated in $ thousands, except as noted)

10. Income Tax

The following table reconciles income taxes calculated at the Canadian statutory rate to Paramount’s recorded income tax expense (recovery):

	Three months ended	Three months ended	Six months ended	Six months ended
	June	30	June	30
	2020	2019	2020	2019
Loss before tax	(89,346)	(18,926)	(217,712)	(109,516)
Effective Canadian statutory income tax rate	25.1%	26.5%	25.1%	26.5%
Expected income tax recovery	(22,426)	(5,015)	(54,646)	(29,022)
Effect on income taxes of:
Change in statutory and other rates	4,218	106,371	8,713	105,919
Share-based compensation	101	733	618	1,606
Loss on sale of oil and gas assets	411	–	411	–
Change in value of investments	(801)	–	(412)	–
Derecognition of deferred income tax asset	4,292	213	134,252	451
Flow-through share renunciations	–	–	3,617	–
Non-deductible items and other	583	(205)	541	9,229
Income tax expense(recovery)	(13,622)	102,097	93,094	88,183

At each reporting date, Paramount assesses the recoverability of the deferred income tax asset to determine whether it is more likely than not that the carrying value of the asset will be realized. In the first quarter of 2020, the Company determined that a portion of the carrying value of the deferred income tax asset was not probable of realization and, accordingly, $130.0 million of the deferred income tax asset was derecognized.

11. Financial Instruments and Risk Management

Financial Instruments

Financial instruments at June 30, 2020 consist of cash and cash equivalents, accounts receivable, risk management assets and liabilities, investments in securities, accounts payable and accrued liabilities and the Paramount Facility. The carrying values of these financial instruments approximate their fair values.

Risk Management

Assets

As at	June 30, 2020	December 31, 2019
Financial commodity contracts – current	20,517	6,062
Financial commodity contracts–long-term	788	–
Risk management asset	21,305	6,062
Liabilities

As at	June 30, 2020	December 31, 2019
Interest rate swaps – current	(9,285)	(1,757)
Interest rate swaps–long-term	(24,119)	(6,275)
Risk management liability	(33,404)	(8,032)

Paramount Resources Ltd. Second Quarter 2020 Financial Statements 14

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (Tabular amounts stated in $ thousands, except as noted)

The Company is exposed to market risks from changes in commodity prices, interest rates, foreign currency rates, credit risk and liquidity risk. From time-to-time, Paramount enters into derivative financial instruments to manage these risks.

The fair values of risk management financial instruments are estimated using a market approach incorporating level two fair value hierarchy inputs, including forward market curves and price quotes for similar instruments, provided by financial institutions.

Changes in the fair value of risk management assets are as follows:

	Six months ended	Twelve months ended
	June 30, 2020	December 31, 2019
Fair value, beginning of period	6,062	64,441
Changes in fair value – financial commodity contracts	35,078	(45,169)
Settlements received–financial commodity contracts	(19,835)	(13,210)
Fair value, end ofperiod	21,305	6,062

Changes in the fair value of risk management liabilities are as follows:

	Six months ended	Twelve months ended
	June 30, 2020	December 31, 2019
Fair value, beginning of period	(8,032)	–
Changes in fair value – interest rate swaps	(28,077)	(9,568)
Settlements paid–interest rate swaps	2,705	1,536
Fair value, end ofperiod	(33,404)	(8,032)

The Company had the following financial commodity contracts in place at June 30, 2020:

	Aggregate	Average
Instruments	notional	fixedprice	Fair value	Remaining term
Oil – NYMEX WTI Swaps (Sale)	4,000 Bbl/d	CDN$80.11/Bbl	19,421	July 2020 – December 2020
Gas – NYMEX Swaps (Sale)	10,000 MMBtu/d	US$2.93/MMBtu	474	November 2020 to March 2021
Gas–NYMEX Swaps (Sale)	40,000 MMBtu/d	US$2.68/MMBtu	1,410	January 2021 to December 2021
			21,305

Subsequent to June 30, 2020, the Company entered into the following financial commodity contracts:

Instruments	Aggregate notional	Average fixedprice	Remaining term
Oil – NYMEX WTI Swaps (Sale)	6,000 Bbl/d	US$41.75/Bbl	August 2020
Oil – NYMEX WTI Swaps (Sale)	16,000 Bbl/d	US$42.23/Bbl	September 2020
Oil – NYMEX WTI Swaps (Sale)	6,000 Bbl/d	US$43.03/Bbl	October 2020
Oil – NYMEX WTI Swaps (Sale)	4,000 Bbl/d	US$43.73/Bbl	November 2020
Oil – NYMEX WTI Swaps (Sale)	4,000 Bbl/d	US$43.99/Bbl	December 2020
Gas – Chicago Swaps (Sale)(1)	20,000 MMBtu/d	US$1.71/MMBtu	August 2020 to October 2020
Gas – Ventura Swaps (Sale)(1)	20,000 MMBtu/d	US$1.69/MMBtu	August 2020 to October 2020
Gas – NYMEX Swaps(Sale)	20,000 MMBtu/d	US$2.17/MMBtu	September 2020

(1) These contracts swap physical sales of Alberta natural gas production from Chicago and Ventura index pricing to fixed prices.

Paramount Resources Ltd. Second Quarter 2020 Financial Statements 15

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (Tabular amounts stated in $ thousands, except as noted)

The Company had the following floating-to-fixed interest rate swaps in place at June 30, 2020:

			Fixed
**Contract type **	Aggregate notional	Maturity date	contract rate	Reference	Fair value
Interest Rate Swap	$250 million	January 2023	2.3%	CDOR(1)	(10,968)
Interest Rate Swap	$250 million	January 2026	2.4%	CDOR(1)	(22,436)
					(33,404)

(1) Canadian Dollar Offered Rate.

The Company classified its floating-to-fixed interest rate swaps as cash flow hedges and has applied hedge accounting. As at June 30, 2020, there were no changes to the critical terms of the hedging relationship and no hedge ineffectiveness was identified.

12. Revenue By Product

	Three months ended	Three months ended	Six months ended	Six months ended	Six months ended
	June	30	June 30
	2020	2019	2020		2019
Natural gas	44,659	49,493	98,262		142,839
Condensate and oil	60,335	150,665	171,777		285,470
Other natural gas liquids	4,266	6,873	8,709		23,022
Royalty and sulphur income	3,914	2,153	6,516		3,908
Royalties expense	(3,599)	(18,651)	(15,282)		(34,050)
	109,575	190,533	269,982		421,189

13. Other Income (Loss)

	Three months ended	Three months ended	Six months ended	Six months ended	Six months ended
	June	30	June 30
	2020	2019	2020		2019
Provision	–	–	(4,669)		–
Other	(1,758)	(852)	(1,574)		1,144
	(1,758)	(852)	(6,243)		1,144

In the first quarter of 2020, a provision of $4.7 million was recorded related to a pending partner dispute.

Paramount Resources Ltd. Second Quarter 2020 Financial Statements 16

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (Tabular amounts stated in $ thousands, except as noted)

14. Consolidated Statement of Cash Flows - Selected Information

Items Not Involving Cash

	Three months ended	Three months ended	Six months ended	Six months ended
	June	30	June	30
	2020	2019	2020	2019
Commodity contracts	20,100	(30,410)	(15,243)	47,873
Share-based compensation	557	2,641	571	7,528
Depletion, depreciation and impairment	61,339	84,710	326,272	165,407
Exploration and evaluation	9,595	563	18,921	2,642
(Gain) loss on sale of oil and gas assets	3,086	(1,730)	780	(7,716)
Accretion of asset retirement obligations	10,672	14,894	21,142	29,406
Change in asset retirement obligations	(529)	–	(95,357)	–
Closure costs	–	–	–	13,440
Foreign exchange	331	318	281	449
Change in fair value of securities - warrants	(3,189)	–	(1,640)	–
Deferred income tax	(13,622)	102,097	93,094	88,183
Other	1,131	4	2,225	3
	89,471	173,087	351,046	347,215

Supplemental Cash Flow Information

	Three months ended	Three months ended	Six months ended	Six months ended
	June	30	June	30
	2020	2019	2020	2019
Interestpaid	7,951	10,940	15,573	19,282

Components of Cash and Cash Equivalents

As at	June 30, 2020	December 31, 2019
Cash	1,609	6,016
Cash equivalents	–	–
	1,609	6,016

15. Commitments and Contingencies

Commitments – Physical Sale Contracts

The Company had the following AECO fixed-price physical contracts in place at June 30, 2020:

Quantity	Average fixedprice	Remaining term
90,000 GJ/d	CDN$1.66/GJ	July 2020 to October 2020
10,000 GJ/d	CDN$2.65/GJ	November 2020 to March 2021
20,000 GJ/d	CDN$2.50/GJ	January2021 to December 2021

Paramount Resources Ltd. Second Quarter 2020 Financial Statements 17

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (Tabular amounts stated in $ thousands, except as noted)

Subsequent to June 30, 2020, the Company entered into the following fixed-price physical contracts:

Quantity	Location	Average fixedprice	Remaining term
35,000 GJ/d	AECO	CDN$1.80/GJ	August 2020
25,000 GJ/d	AECO	CDN$1.85/GJ	September 2020
54,956 MMBtu/d	Dawn	US$1.60/MMBtu	August 2020
45,000 MMBtu/d	Dawn	US$1.56/MMBtu	September 2020

Contingencies

In the normal course of Paramount’s operations, the Company may become involved in, named as a party to, or be the subject of, various legal proceedings, including regulatory proceedings, tax proceedings and legal actions. The outcome of outstanding, pending or future proceedings cannot be predicted with certainty. Paramount does not anticipate that these claims will have a material impact on its financial position.

Tax and royalty legislation and regulations, and government interpretation and administration thereof, continually change. As a result, there are often tax and royalty matters under review by relevant government authorities. All tax and royalty filings are subject to subsequent government audit and potential reassessments. Accordingly, the final amounts may differ materially from amounts estimated and recorded.

Dispute Settlements

In the first quarter of 2020, Paramount reached an agreement to settle its dispute with respect to an alleged obligation to contribute to the costs related to the remediation of a release from a non-operated pipeline. Also in the first quarter of 2020, but unrelated to this settlement, the Company reached an agreement to settle a legal action involving the Company as plaintiff against a third-party supplier respecting defective products and services provided to the Company. The Company recognized a charge of $2.5 million in the fourth quarter of 2019 in respect of these settlements.

Paramount Resources Ltd. Second Quarter 2020 Financial Statements 18