Paramount Resources Ltd. — Interim / Quarterly Report 2020

Nov 5, 2020

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

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

($ thousands)

		September 30	December 31
As at	Note	2020	2019
ASSETS		(Unaudited)
Current assets
Cash and cash equivalents	15	1,054	6,016
Accounts receivable		76,851	118,632
Risk management – current	12	10,363	6,062
Prepaid expenses and other		14,383	10,975
		102,651	141,685
Lease receivable	7	3,361	4,768
Dissent payment entitlement	4	89,250	–
Investments in securities	5	30,860	156,889
Exploration and evaluation	2	626,939	650,414
Property, plant and equipment, net	3	1,593,413	1,914,074
Deferred income tax	11	595,428	663,475
		3,041,902	3,531,305
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities		133,921	204,818
Risk management – current	12	9,442	1,757
Asset retirement obligations and other–current	7	30,153	40,288
		173,516	246,863
Long-term debt	6	792,652	632,300
Risk management – long-term	12	23,087	6,275
Asset retirement obligations and other– long-term	7	347,207	562,687
		1,336,462	1,448,125
Commitments and contingencies	16
Shareholders’ equity
Share capital	8	2,207,593	2,207,485
Accumulated deficit		(546,513)	(128,487)
Reserves	9	44,360	4,182
		1,705,440	2,083,180
		3,041,902	3,531,305

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

Paramount Resources Ltd. Third Quarter 2020 Financial Statements 1

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

($ thousands, except as noted)

			Three months ended September 30 Nine months ended September 30
		Note	2020 2019 2020 2019
	Petroleum and natural gas sales Royalties		138,756 199,788 424,019 655,027 (4,326) (12,059) (19,608) (46,109)
	Revenue Gain (loss) on commodity contracts	13 12	134,430 187,729 404,411 608,918 (2,084) 17,050 32,994 (27,986)
			132,346 204,779 437,405 580,932
	Expenses Operating expense Transportation and NGLs processing General and administrative Share-based compensation Depletion, depreciation and impairment Exploration and evaluation (Gain) loss on sale of oil and gas assets Interest and financing Accretion of asset retirement obligations Change in asset retirement obligations Closure costs Reorganization costs Foreign exchange	10 3 2 3 7 7 7	62,361 93,772 217,302 270,934 27,817 25,717 76,728 71,924 7,759 12,791 23,745 40,004 5,605 6,804 6,176 14,333 54,579 83,277 380,851 248,684 1,708 10,267 25,154 18,024 7,962 (157,315) 8,742 (165,030) 17,121 9,699 35,869 29,988 11,002 15,100 32,144 44,506 (25,619) (73,480) (120,976) (73,480) – – – 13,440 – – 3,048 – 351 (171) 31 (52)
			170,646 26,461 688,814 513,275
	Change in fair value of securities – warrants Other loss	5 14	(3,297) (8,819) (1,657) (8,819) (223) (1,553) (6,465) (408)
	Income (loss) before tax		(41,820) 167,946 (259,531) 58,430
	Income tax expense (recovery) Deferred	11	(18,481) 26,963 74,614 115,146
			(18,481) 26,963 74,614 115,146
	Net income(loss)		(23,339) 140,983 (334,145) (56,716)
	Other comprehensive income (loss), net of tax Items that will be reclassified to net income (loss) Change in fair value of cash flow hedges, net of tax Reclassification to net income (loss), net of tax Items that will not be reclassified to net income (loss) Change in fair value of securities, net of tax	9	(436) 383 (21,843) (12,706) 1,807 424 3,873 773 (1,327) (112,522) (33,682) (123,843)
	Comprehensive income(loss)		(23,295) 29,268 (385,797) (192,492)
	Net income (loss) per common share($/share) Basic and diluted	8	(0.17) 1.08 (2.50) (0.44)

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

Paramount Resources Ltd. Third Quarter 2020 Financial Statements 2

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

($ thousands)

		Three months	ended	Nine months ended	Nine months ended
		September	30	September 30
	Note	2020	2019	2020	2019
Operating activities
Net income (loss)		(23,339)	140,983	(334,145)	(56,716)
Add (deduct):
Items not involving cash	15	51,133	(92,535)	402,180	254,680
Asset retirement obligations settled	7	(732)	(3,620)	(34,947)	(11,403)
Closure program expenditures	7	–	(4,909)	–	(9,298)
Change in non-cash working capital		(15,626)	8,656	(5,356)	7,914
Cash from operating activities		11,436	48,575	27,732	185,177
Financing activities
Net draw (repayment) of revolving long-term debt	6	37,119	(188,771)	159,752	(94,077)
Lease liabilities – principal repayments	7	(1,897)	(1,879)	(5,671)	(5,555)
Common Shares issued, net of issue costs		–	–	15	110
Common Shares repurchased under NCIB		–	(212)	–	(212)
Common Shares purchased under restricted share	10	–	(4,516)	–	(4,516)
unit plan
Cash from (used in) financing activities		35,222	(195,378)	154,096	(104,250)
Investing activities
Property, plant and equipment and exploration		(50,512)	(127,534)	(155,763)	(331,902)
Sale of oil and gas assets		389	328,314	(1,743)	328,956
Investments		(60)	(49,308)	(997)	(55,338)
Change in non-cash working capital		3,160	(13,079)	(27,817)	(30,612)
Cash from (used in) investing activities		(47,023)	138,393	(186,320)	(88,896)
Net decrease		(365)	(8,410)	(4,492)	(7,969)
Foreign exchange on cash and cash equivalents		(190)	215	(470)	(235)
Cash and cash equivalents, beginning of period		1,609	19,286	6,016	19,295
Cash and cash equivalents, end ofperiod		1,054	11,091	1,054	11,091
Supplemental cash flow information	15

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

Paramount Resources Ltd. Third Quarter 2020 Financial Statements 3

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

($ thousands, except as noted)

Nine months ended September 30 Note	2020 2019
Share capital Balance, beginning of period Issued Common Shares purchased and cancelled under NCIB Change in vested and unvested Common Shares for restricted share unit plan 10	Shares (000’s) Shares (000’s) 133,337 2,207,485 130,326 2,184,608 1 19 13 158 – – (33) (212) 446 89 (286) 216
Balance, end of period 8	133,784 2,207,593 130,020 2,184,770
Retained earnings (accumulated deficit) Balance, beginning of period Net loss Reclassification of accumulated losses on securities	(128,487) 21,189 (334,145) (56,716) (83,881) –
Balance, end of period	(546,513) (35,527)
Reserves 9 Balance, beginning of period Other comprehensive loss Contributed surplus Reclassification of accumulated losses on securities	4,182 44,732 (51,652) (135,776) 7,949 12,555 83,881 –
Balance, end of period	44,360 (78,489)
Total shareholders’ equity	1,705,440 2,070,754

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

Paramount Resources Ltd. Third 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 Inc. 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. Intercompany balances and transactions have been eliminated.

These unaudited Interim Condensed Consolidated Financial Statements of the Company, as at and for the three and nine months ended September 30, 2020 (the "Interim Financial Statements"), were authorized for issuance by the Audit Committee of Paramount’s Board of Directors on November 4, 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 12, 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. For the three and nine months ended September 30, 2020, the Company recognized $3.1 million and $9.4 million, respectively, relating to the Canada Emergency Wage Subsidy ("CEWS") . In the nine months ended

Paramount Resources Ltd. Third Quarter 2020 Financial Statements 5

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

September 30, 2020, general and administrative expenses were reduced by $5.5 million and operating expenses were reduced by $3.4 million related to the CEWS.

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 in the latter part of the second quarter of 2020, adverse pricing conditions have persisted as a result of the continuing impact of the COVID-19 pandemic. The course of the COVID-19 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 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.

Paramount Resources Ltd. Third Quarter 2020 Financial Statements 6

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

2. Exploration and Evaluation

	Nine months ended	Twelve months ended
	September 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	(1,337)	(392)
Transfers to property, plant and equipment	24	(66,961)
Expired lease costs	(18,921)	(10,173)
Dispositions	(6,534)	(3,738)
Balance, end ofperiod	626,939	650,414

Exploration and Evaluation Expense

	Three months ended	Three months ended	Nine months ended	Nine months ended
	September 30		September 30
	2020	2019	2020	2019
Geological and geophysical	1,708	2,436	6,233	7,551
Expired lease costs	–	7,831	18,921	10,473
	1,708	10,267	25,154	18,024

At September 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
Nine months ended September 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	155,391	980	(150)	1,552	157,773
Transfers from exploration and evaluation	(24)	–	–	–	(24)
Dispositions	(34,466)	(99)	–	(552)	(35,117)
Change in asset retirement provision	(89,789)	–	–	–	(89,789)
Cost, end of period	4,027,219	162,070	15,810	47,702	4,252,801
Accumulated depletion, depreciation and
impairment
Balance, beginning of period	(2,177,753)	(89,871)	(5,296)	(32,964)	(2,305,884)
Depletion and depreciation	(177,649)	(7,605)	(2,755)	(3,430)	(191,439)
Impairment	(191,796)	–	–	–	(191,796)
Dispositions	29,118	99	–	514	29,731
Accumulated depletion, depreciation and	(2,518,080)	(97,377)	(8,051)	(35,880)	(2,659,388)
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, September 30, 2020	1,509,139	64,693	7,759	11,822	1,593,413

In the third quarter of 2019, Paramount closed the sale of its Karr 6-18 natural gas facility and related midstream assets located in the Grande Prairie cash generating unit (ʺCGUʺ), for gross cash proceeds of $331.6 million. A gain of $153.7 million was recognized on the sale.

Paramount Resources Ltd. Third Quarter 2020 Financial Statements 7

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

Depletion, Depreciation and Impairment

	Three months ended	Three months ended	Nine months ended	Nine months ended
	September 30		September 30
	2020	2019	2020	2019
Depletion and depreciation	54,579	83,277	189,055	248,684
Impairment of petroleum and natural gas assets	–	–	191,796	–
	54,579	83,277	380,851	248,684

At September 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 CGUs, 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 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.

Paramount Resources Ltd. Third Quarter 2020 Financial Statements 8

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

4. Dissent Payment Entitlement

As at	September 30, 2020	December 31, 2019
Dissent Payment Entitlement	89,250	–

Paramount held 85 million common shares of Strath Resources Ltd. (ʺStrathʺ) prior to its amalgamation with Cona Resources Ltd. in August 2020 to form Strathcona Resources Ltd. (ʺStrathconaʺ). Paramount objected to the amalgamation and exercised its right of dissent under section 191 of the Business Corporations Act (Alberta) (the ʺABCAʺ) with respect to its Strath shares. As a result, the Company is entitled to be paid in cash the fair value of its Strath shares, determined as of the close of business on July 24, 2020 (the ʺDissent Payment Entitlementʺ).

The amount of the Dissent Payment Entitlement and the timing of the payment thereof are uncertain. Paramount has applied to the Court of Queen’s Bench of Alberta (the ʺCourtʺ) seeking Strathcona’s payment of the Dissent Payment Entitlement. Strathcona made a statutorily required offer with respect to the Dissent Payment Entitlement in the amount of $45 million (the ʺOffered Amountʺ). Paramount has rejected such offer and applied to the Court for an interim payment of the Offered Amount pending final determination of the amount of the Dissent Payment Entitlement. In the event the parties are unable to agree on the amount of the Dissent Payment Entitlement, the final amount will be determined by the Court. Any payment of the Dissent Payment Entitlement will be subject to the satisfaction by Strathcona of the solvency tests provided in the ABCA.

The Dissent Payment Entitlement is a financial instrument measured at amortized cost and was recorded based on valuation techniques and assumptions that incorporate unobservable inputs (level three fair value hierarchy inputs), including market-based metrics of comparable companies and transactions and other indicators of value.

5. Investments in Securities

As at	September 30, 2020	December 31, 2019
Level one fair value hierarchy securities	24,489	88,439
Level three fair value hierarchy securities	6,371	68,450
	30,860	156,889

For the three months ended September 30, 2020 and the nine months ended September 30, 2020, the Company recorded a charge of $1.4 million and a charge of $36.1 million, respectively, to other comprehensive income (ʺOCIʺ) as a result of changes in the fair value estimates of investments in level one fair value hierarchy securities (ʺLevel One Securitiesʺ) and investments in level three fair value hierarchy securities (ʺLevel Three Securitiesʺ). For the three and nine months ended September 30, 2020, the Company recorded losses of $3.3 million and $1.7 million, respectively, related to a change in the estimated fair value of warrants. Accumulated losses of $69.9 million were reclassified from accumulated OCI to accumulated deficit related to the Company’s exercise of its Strath dissent rights (see Note 4).

Paramount Resources Ltd. Third Quarter 2020 Financial Statements 9

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

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

	Nine months ended	Twelve months ended
	September 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	(64,947)	6,330
Changes in fair value of Level Three Securities(1)– recorded in OCI	28,828	(118,104)
Transfer to Dissent Payment Entitlement (see Note 4)	(89,250)	–
Changes in fair value of warrants(2)– recorded in earnings	(1,657)	(9,162)
Acquired – cash	997	55,143
Acquired – non-cash	–	4,501
Dispositions	–	(13,551)
Investments in securities, end ofperiod	30,860	156,889

(1) Primarily related to the change in fair value of Strath common shares.

(2) Strathcona warrants (previously the Strath warrants).

6. Long-Term Debt

As at	September 30, 2020(1)	December 31, 2019
Paramount Facility	792,652	632,300

(1) September 30, 2020 Paramount Facility balance is presented net of $2.5 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 quarter ending September 30, 2020, calculated on a trailing twelve-month basis;

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

Paramount Resources Ltd. Third Quarter 2020 Financial Statements 10

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 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 September 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 $2.8 million at September 30, 2020 that reduce the amount available to be drawn on the Paramount Facility.

Unsecured Letter of Credit Facility

In July 2020 the capacity under Paramount’s unsecured demand revolving letter of credit facility (the "LC Facility") with a Canadian bank 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 was also extended to June 30, 2021 and may be further extended at the option of Paramount and with the agreement of EDC. At September 30, 2020, $40.8 million in letters of credit were outstanding under the LC Facility.

Paramount Resources Ltd. Third Quarter 2020 Financial Statements 11

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

7. Asset Retirement Obligations and Other

As at September 30, 2020	Current	Long-term	Total
Asset retirement obligations	20,200	332,913	353,113
Lease liabilities	9,953	14,294	24,247
Asset retirement obligations and other	30,153	347,207	377,360
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

	Nine months ended	Twelve months ended
	September 30, 2020	December 31, 2019
Asset retirement obligations, beginning of period	569,897	807,921
Additions	498	11,705
Change in estimates(1)	7,535	(171,404)
Change in discount rate	(220,092)	(33,269)
Obligations settled	(34,947)	(29,441)
Dispositions	(1,922)	(72,273)
Accretion expense	32,144	56,658
Asset retirement obligations, end ofperiod	353,113	569,897

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

As at September 30, 2020, estimated undiscounted, uninflated asset retirement obligations were $1,345.8 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 13.5 percent (December 31, 2019 – 8.0 percent) and an inflation rate of 2.0 percent (December 31, 2019 – 2.0 percent).

For the nine months ended September 30, 2020, the Company recorded a recovery of $121.0 million (nine months ended September 30, 2019 - $73.5 million) 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 in 2020 mainly resulted from revisions in the weighted average credit-adjusted risk-free 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 nine months ended September 30, 2020, total cash payments made in respect of these lease liabilities, net of sublease arrangements, were $6.5 million, of which $0.8 million was recognized as interest and financing expense.

For the nine months ended September 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 $2.6 million.

Paramount Resources Ltd. Third Quarter 2020 Financial Statements 12

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

As at September 30, 2020, $5.7 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 $3.4 million was classified as non-current. For the nine months ended September 30, 2020, $1.9 million was received in respect of office sublease arrangements, of which $0.3 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.

8. Share Capital

As at September 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 September 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 September 30	2020 2019
Net income (loss) – basic Dilutive effect of Paramount Options	Wtd. Avg Shares (000’s) Net loss Wtd. Avg Shares (000’s) Net income
	133,784 (23,339) 130,064 140,983 – – – –
Net income(loss) – diluted	133,784 (23,339) 130,064 140,983

Nine months ended September 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
	133,615 (334,145) 130,332 (56,716) – – – –
Net loss – diluted	133,615 (334,145) 130,332 (56,716)

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 6.7 million options to acquire Common Shares ("Paramount Options") outstanding at September 30, 2020 (September 30, 2019 – 9.7 million), all of which were anti-dilutive.

Paramount Resources Ltd. Third Quarter 2020 Financial Statements 13

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

9. Reserves

	Unrealized
	gains (losses)	Unrealized
	on cash flow	gains (losses)	Contributed	Total
Nine months ended September 30, 2020	hedges	on securities	surplus	reserves
Balance, beginning of period	(6,160)	(147,674)	158,016	4,182
Other comprehensive loss, before tax	(23,537)	(36,119)	–	(59,656)
Deferred tax	5,567	2,437	–	8,004
Reclassification of accumulated losses on
securities	–	83,881	–	83,881
Share-based compensation	–	–	7,953	7,953
Paramount Options exercised	–	–	(4)	(4)
Balance, end ofperiod	(24,130)	(97,475)	165,965	44,360

For the nine months ended September 30, 2020, accumulated losses of $83.9 million were reclassified from accumulated OCI to accumulated deficit related to the Company’s exercise of its Strath dissent rights (see Note 4) and the derecognition of an investment classified as Level One Securities.

10. Share-Based Compensation

Paramount Options

	Nine months ended	Nine months ended	Twelve months ended	Twelve months ended
	September 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	60,000	2.62	3,565,930	6.66
Exercised(1)	(2,000)	7.28	(21,430)	7.84
Cancelled or forfeited	(4,323,329)	18.08	(3,683,801)	18.73
Expired	(1,364,238)	11.85	(14,400)	11.90
Balance, end of period	6,681,895	8.31	12,311,462	12.16
Options exercisable, end ofperiod	1,172,489	11.24	4,442,966	15.00

(1) For Paramount Options exercised during the nine months ended September 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

	Nine months ended September 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) (89) (427) (5,337)
Balance, end ofperiod	414 1,299 860 1,388

Paramount Resources Ltd. Third Quarter 2020 Financial Statements 14

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)

(Tabular amounts stated in $ thousands, except as noted)

11. 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	Three months ended	Nine months ended	Nine months ended
	September 30			September 30
	2020		2019	2020	2019
Income (loss) before tax	(41,820)	167,946		(259,531)	58,430
Effective Canadian statutory income tax rate	25.1%		26.5%	25.1%	26.5%
Expected income tax expense (recovery)	(10,497)		44,506	(65,142)	15,484
Effect on income taxes of:
Change in statutory and other rates	(874)		(5,324)	7,839	100,596
Share-based compensation	1,378		1,734	1,996	3,340
(Gain) loss on sale of oil and gas assets	–	(17,129)		411	(17,129)
Change in value of investments	828		2,337	416	2,337
Derecognition of deferred income tax asset	(7,770)		314	126,482	765
Flow-through share renunciations	–		–	3,617	–
Non-deductible items and other	(1,546)		525	(1,005)	9,753
Income tax expense(recovery)	(18,481)		26,963	74,614	115,146

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.

12. Financial Instruments and Risk Management

Financial Instruments

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

Level One Securities are carried at their period-end trading price. Estimates of fair values for Level Three Securities 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.

Paramount Resources Ltd. Third Quarter 2020 Financial Statements 15

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

Risk Management

Assets

As at	September 30, 2020	December 31, 2019
Financial commodity contracts–current	10,363	6,062
Risk management asset	10,363	6,062
Liabilities
As at	September 30, 2020	December 31, 2019
Interest rate swaps – current	(9,442)	(1,757)
Interest rate swaps – long-term	(22,127)	(6,275)
Financial commodity contracts–long-term	(960)	–
Risk management liability	(32,529)	(8,032)

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:

	Nine months ended	Twelve months ended
	September 30, 2020	December 31, 2019
Fair value, beginning of period	6,062	64,441
Changes in fair value – financial commodity contracts	33,954	(45,169)
Settlements received–financial commodity contracts	(29,653)	(13,210)
Fair value, end ofperiod	10,363	6,062

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

	Nine months ended	Twelve months ended
	September 30, 2020	December 31, 2019
Fair value, beginning of period	(8,032)	–
Changes in fair value – interest rate swaps	(28,602)	(9,568)
Changes in fair value – financial commodity contracts	(960)	–
Settlements paid–interest rate swaps	5,065	1,536
Fair value, end ofperiod	(32,529)	(8,032)

Paramount Resources Ltd. Third Quarter 2020 Financial Statements 16

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

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

	Aggregate	Average
Instruments	notional	fixedprice	Fair value	Remaining term
Oil – NYMEX WTI Swaps (Sale)	4,000 Bbl/d	CDN$80.11/Bbl	9,590	October 2020 – December 2020
Oil – NYMEX WTI Swaps (Sale)	11,000 Bbl/d	US$42.91/Bbl	1,182	October 2020
Oil – NYMEX WTI Swaps (Sale)	9,000 Bbl/d	US$43.30/Bbl	990	November 2020
Oil – NYMEX WTI Swaps (Sale)	9,000 Bbl/d	US$43.51/Bbl	970	December 2020
Oil – NYMEX WTI Swaps (Sale)	5,000 Bbl/d	US$44.10/Bbl	3,962	January 2021 – December 2021
Gas – Ventura Swaps (Sale)(1)	20,000 MMBtu/d	US$1.69/MMBtu	(152)	October 2020
Gas – Chicago Swaps (Sale)(1)	20,000 MMBtu/d	US$1.71/MMBtu	(238)	October 2020
Gas – NYMEX Swaps (Sale)	20,000 MMBtu/d	US$2.34/MMBtu	197	October 2020
Gas – NYMEX Swaps (Sale)	30,000 MMBtu/d	US$2.92/MMBtu	(769)	November 2020 – March 2021
Gas – NYMEX Swaps (Sale)	20,000 MMBtu/d	US$2.67/MMBtu	114	November 2020
Gas – NYMEX Swaps (Sale)	40,000 MMBtu/d	US$3.04/MMBtu	(121)	December 2020
Gas–NYMEX Swaps (Sale)	60,000 MMBtu/d	US$2.71/MMBtu	(6,322)	January 2021 to December 2021
			9,403

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

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

Instruments	Volume	Differential	Remaining term
Oil – Edmonton Condensate WTI Differential Swap (Sale)	1,000 Bbl/d	WTI + US$0.50/Bbl	January 2021 – March 2021

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

	Aggregate		Average fixed
Contract type	notional	Remaining term	contract rate	Reference	Fair value
Interest Rate Swaps	$250 million	October 2020 - January 2023	2.3%	CDOR(1)	(9,849)
Interest Rate Swaps	$250 million	October 2020 - January 2026	2.4%	CDOR(1)	(21,720)
Electricity Swaps	5 MWh/d(2)	January 2021-December 2021	$51.68/MWh	AESO Pool Price(3)	–
					(31,569)

(1) Canadian Dollar Offered Rate.

(2) "MWh" means MegaWatt hour.

(3) Floating hourly rate established by the Alberta Electric System Operator.

The Company has classified these arrangements as cash flow hedges and applied hedge accounting. As at September 30, 2020, there were no changes to the critical terms of the hedging relationship and no hedge ineffectiveness was identified.

Paramount Resources Ltd. Third Quarter 2020 Financial Statements 17

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

13. Revenue By Product

	Three months	ended	Nine months ended	Nine months ended	Nine months ended
	September	30	September 30
	2020	2019	2020		2019
Natural gas	39,984	43,094	138,245		185,933
Condensate and oil	88,700	149,741	260,478		435,211
Other natural gas liquids	6,583	6,164	15,291		29,186
Royalty and other	3,489	789	10,005		4,697
Royalties	(4,326)	(12,059)	(19,608)		(46,109)
	134,430	187,729	404,411		608,918

14. Other Loss

	Three months ended	Three months ended	Nine months ended	Nine months ended	Nine months ended
	September 30		September 30
	2020	2019	2020		2019
Provision	–	–	(4,669)		–
Other	(223)	(1,553)	(1,796)		(408)
	(223)	(1,553)	(6,465)		(408)

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

15. Consolidated Statement of Cash Flows - Selected Information

Items Not Involving Cash

	Three months	ended	Nine months ended	Nine months ended
	September	30	September 30
	2020	2019	2020	2019
Commodity contracts	11,901	(11,397)	(3,341)	36,476
Share-based compensation	5,605	6,804	6,176	14,333
Depletion, depreciation and impairment	54,579	83,277	380,851	248,684
Exploration and evaluation	–	7,831	18,921	10,473
(Gain) loss on sale of oil and gas assets	7,962	(157,315)	8,742	(165,030)
Accretion of asset retirement obligations	11,002	15,100	32,144	44,506
Change in asset retirement obligations	(25,619)	(73,480)	(120,976)	(73,480)
Closure costs	–	–	–	13,440
Foreign exchange	189	(215)	470	234
Change in fair value of securities - warrants	3,297	8,819	1,657	8,819
Deferred income tax	(18,481)	26,963	74,614	115,146
Other	698	1,078	2,922	1,079
	51,133	(92,535)	402,180	254,680

Paramount Resources Ltd. Third Quarter 2020 Financial Statements 18

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

Supplemental Cash Flow Information

	Three months ended	Three months ended	Nine months ended	Nine months ended
	September 30		September 30
	2020	2019	2020	2019
Interestpaid	15,993	8,501	31,566	27,783

Components of Cash and Cash Equivalents

As at	September 30, 2020	December 31, 2019
Cash	1,054	6,016
Cash equivalents	–	–
	1,054	6,016

16. Commitments and Contingencies

Commitments – Physical Sale Contracts

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

Quantity	Location	Average fixedprice	Remaining term
90,000 GJ/d	AECO	CDN$1.66/GJ	October 2020
10,000 GJ/d	AECO	CDN$2.45/GJ	October 2020 – December 2020
40,000 GJ/d	AECO	CDN$2.68/GJ	November 2020 – March 2021
50,000 GJ/d	AECO	CDN$2.51/GJ	January2021 – December 2021

Commitment – Acquisition of Securities

On September 30, 2020, the Company executed a block trade to acquire 17.3 million common shares of NuVista Energy Ltd. ("NuVista Shares") at a price of $0.61 per share for an aggregate purchase price of $10.6 million. The block trade settled in October 2020. As at September 30, 2020, the Company owned 22.4 million NuVista Shares that were included in Investments in Securities and classified as Level One Securities. Immediately following settlement of the block trade, Paramount owned 39.8 million NuVista Shares, representing 17.6 percent of the outstanding NuVista Shares.

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.

Paramount Resources Ltd. Third Quarter 2020 Financial Statements 19

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

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. Third Quarter 2020 Financial Statements

20