Paramount Resources Ltd. — Interim / Quarterly Report 2021

May 5, 2021

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Interim Condensed Consolidated Financial Statements (Unaudited) As at and for the three months ended March 31, 2021

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

($ thousands)

		March 31	December 31
As at	Note	2021	2020
ASSETS
Current assets
Cash and cash equivalents	14	7,421	4,590
Accounts receivable		120,076	99,986
Risk management – current	11	547	408
Prepaid expenses and other		7,971	9,931
		136,015	114,915
Lease receivable	6	2,149	2,758
Dissent payment entitlement		89,250	89,250
Investments in securities	4	129,900	59,529
Exploration and evaluation	2	563,187	612,129
Property, plant and equipment, net	3	1,988,602	1,959,603
Deferred income tax	10	674,029	658,811
		3,583,132	3,496,995
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities		182,139	152,756
Risk management – current	11	80,753	32,281
Asset retirement obligations and other–current	6	35,490	32,229
		298,382	217,266
Long-term debt	5	712,652	813,491
Risk management – long-term	11	10,446	19,441
Asset retirement obligations and other– long-term	6	526,626	409,016
		1,548,106	1,459,214
Commitments and contingencies	15
Shareholders’ equity
Share capital	7	2,212,178	2,207,408
Accumulated deficit		(317,538)	(235,061)
Equity component of convertible debentures	5	1,673	–
Reserves	8	138,713	65,434
		2,035,026	2,037,781
		3,583,132	3,496,995

See the accompanying notes to these Interim Condensed Consolidated Financial Statements

Paramount Resources Ltd. First Quarter 2021 Financial Statements 1

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)

($ thousands, except as noted)

Three months ended March 31	Note	2021	2020
Petroleum and natural gas sales		279,865	172,090
Royalties		(18,619)	(11,683)
Revenue	12	261,246	160,407
Gain (loss) on financial commodity contracts	11	(81,179)	42,324
		180,067	202,731
Expenses
Operating expense		84,299	92,336
Transportation and NGLs processing		27,864	23,603
General and administrative		8,708	10,183
Share-based compensation	9	5,973	14
Depletion, depreciation and impairment	3	73,143	264,933
Exploration and evaluation	2	20,892	11,930
Gain on sale of oil and gas assets		(41,395)	(2,306)
Interest and financing		16,711	9,482
Accretion of asset retirement obligations	6	10,776	10,470
Change in asset retirement obligations	6	69,533	(94,828)
Foreign exchange		274	(753)
		276,778	325,064
Other loss	13	(7,891)	(6,033)
Loss before tax		(104,602)	(128,366)
Income tax expense (recovery)
Deferred	10	(22,125)	106,716
		(22,125)	106,716
Net loss		(82,477)	(235,082)
Other comprehensive income (loss), net of tax	8
Items that will be reclassified to net income (loss)
Change in fair value of cash flow hedges, net of tax		5,464	(18,363)
Reclassification to net income (loss), net of tax		1,574	467
Items that will not be reclassified to net income (loss)
Change in fair value of securities, net of tax	4	65,977	(115,666)
Comprehensive loss		(9,462)	(368,644)
Net loss per common share($/share)	7
Basic and diluted		(0.62)	(1.76)

See the accompanying notes to these Interim Condensed Consolidated Financial Statements

Paramount Resources Ltd. First Quarter 2021 Financial Statements 2

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

($ thousands, except as noted)

Three months ended March 31	Note	2021	2020
Operating activities
Net loss		(82,477)	(235,082)
Add (deduct):
Items not involving cash	14	164,217	261,575
Asset retirement obligations settled	6	(8,351)	(30,255)
Change in non-cash working capital		7,892	34,293
Cash from operating activities		81,281	30,531
Financing activities
Net draw (repayment) of revolving long-term debt	5	(134,378)	19,185
Lease liabilities - principal repayments	6	(1,898)	(1,876)
Convertible debentures issued, net of issue costs	5	34,919	–
Common shares issued, net of issue costs		3,274	16
Cash from (used in) financing activities		(98,083)	17,325
Investing activities
Property, plant and equipment and exploration		(59,264)	(63,849)
Sale of oil and gas assets		79,638	1,488
Investments		(12)	(900)
Change in non-cash working capital		(839)	15,019
Cash from (used in) investing activities		19,523	(48,242)
Net increase (decrease)		2,721	(386)
Foreign exchange on cash and cash equivalents		110	38
Cash and cash equivalents, beginning of period		4,590	6,016
Cash and cash equivalents, end ofperiod		7,421	5,668
Supplemental cash flow information	14

See the accompanying notes to these Interim Condensed Consolidated Financial Statements

Paramount Resources Ltd. First Quarter 2021 Financial Statements 3

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

($ thousands, except as noted)

Three months ended March 31 Note	2021 2020
Share capital Balance, beginning of period Issued Change in Common Shares for restricted share unit plan 9	Shares (000’s) Shares (000’s) 132,284 2,207,408 133,337 2,207,485 470 4,192 2 19 – 578 7 (180)
Balance, end of period	132,754 2,212,178 133,346 2,207,324
Accumulated deficit Balance, beginning of period Net loss Reclassification of accumulated losses on securities	(235,061) (128,487) (82,477) (235,082) – (14,000)
Balance, end of period	(317,538) (377,569)
Equity component of convertible debentures 5 Balance, beginning of period Issued	– – 1,673 –
Balance, end of period	1,673 –
Reserves 8 Balance, beginning of period Other comprehensive income (loss) Contributed surplus Reclassification of accumulated losses on securities	65,434 4,182 73,015 (133,562) 264 2,055 – 14,000
Balance, end of period	138,713 (113,325)
Total Shareholders’ Equity	2,035,026 1,716,430

See the accompanying notes to these Interim Condensed Consolidated Financial Statements

Paramount Resources Ltd. First Quarter 2021 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 months ended March 31, 2021 (the "Interim Financial Statements"), were authorized for issuance by the Audit Committee of Paramount’s Board of Directors on May 4, 2021.

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, 2020 (the "Annual Financial Statements"). Certain comparative figures have been reclassified to conform to the current years’ presentation.

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.

Adoption of Accounting Standards

Financial Instruments

Effective January 1, 2021, the Company adopted the phase two amendments to IFRS 9 – Financial Instruments, IAS 39 – Financial Instruments: Recognition and Measurement , IFRS 7 – Financial Instruments: Disclosures, IFRS 4 – Insurance Contracts and IFRS 16 – Leases . These amendments provide guidance in applying IFRS when changes are made to contractual cash flows or hedging relationships arising from the replacement of an interest rate benchmark with an alternative benchmark rate from the Interbank Offered Rate ("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. The Company’s floating-to-fixed interest rate swaps, which are described in Note 11, may be impacted by these amendments in the future as hedge accounting is applied to these instruments and hedging relationships may be impacted by the IBOR reform.

Paramount Resources Ltd. First Quarter 2021 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 course of the COVID-19 pandemic and its ultimate 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 these 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 financial periods as additional information becomes available.

2. Exploration and Evaluation

	Three months ended	Twelve months ended
	March 31, 2021	December 31, 2020
Balance, beginning of period	612,129	650,414
Additions	4,626	3,294
Change in asset retirement provision	738	(724)
Transfers to property, plant and equipment	–	(8,735)
Expired lease costs	(19,113)	(25,585)
Dispositions (see Note 3)	(35,193)	(6,535)
Balance, end ofperiod	563,187	612,129

Exploration and Evaluation Expense

Three months ended March 31	2021	2020
Geological and geophysical	1,779	2,605
Expired lease costs	19,113	9,325
	20,892	11,930

At March 31, 2021, the Company assessed its exploration and evaluation assets for indicators of potential impairment or impairment reversal and none were identified.

Paramount Resources Ltd. First Quarter 2021 Financial Statements 6

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)

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

3. Property, Plant and Equipment

	Petroleum
	and natural	Drilling	Right-of-use
Three months ended March 31, 2021	gas assets	rigs	assets	Other	Total
Cost
Balance, beginning of period	4,125,044	162,476	15,459	48,053	4,351,032
Additions	59,022	658	108	537	60,325
Dispositions	(35,291)	–	–	–	(35,291)
Change in asset retirement provision	52,463	–	–	–	52,463
Cost, end of period	4,201,238	163,134	15,567	48,590	4,428,529
Accumulated depletion, depreciation and
impairment
Balance, beginning of period	(2,245,733)	(99,902)	(8,670)	(37,124)	(2,391,429)
Depletion and depreciation	(70,395)	(2,319)	(851)	(803)	(74,368)
Dispositions	25,870	–	–	–	25,870
Accumulated depletion, depreciation and	(2,290,258)	(102,221)	(9,521)	(37,927)	(2,439,927)
impairment, end of period
Net book value, December 31, 2020	1,879,311	62,574	6,789	10,929	1,959,603
Net book value, March 31, 2021	1,910,980	60,913	6,046	10,663	1,988,602

Depletion, Depreciation and Impairment

Three months ended March 31	2021	2020
Depletion and depreciation	73,143	73,137
Impairment of petroleum and natural gas assets	–	191,796
	73,143	264,933

In the first quarter of 2021, the Company sold certain non-core properties in the Kaybob and Central Alberta cash-generating units ("CGUs") for gross cash proceeds of approximately $80 million. A gain of $41.4 million was recognized on these sales.

At December 31, 2020, the Company recorded aggregate impairment reversals of $333.7 million from previously recorded impairment charges, comprised of $287.7 million, $30.6 million and $15.4 million related to petroleum and natural gas assets in the Kaybob, Northern and Central Alberta CGUs, respectively. The impairment reversals resulted from an increase in the estimated recoverable amount of such CGUs compared to the prior impairment assessment performed at March 31, 2020. The increase in the estimated recoverable amount of these CGUs was mainly due to lower operating and capital costs than previously forecasted and changes to the development plan.

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 amounts, which were estimated based on expected net cash flows from the production of proved plus probable 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.

For additional information on impairments and impairment reversals in 2020, refer to Note 5 of the Annual Financial Statements.

Paramount Resources Ltd. First Quarter 2021 Financial Statements 7

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

4. Investments in Securities

As at	March 31, 2021	December 31, 2020
Level one fair value hierarchy securities (ʺLevel One Securitiesʺ)	110,034	48,425
Level three fair value hierarchy securities (ʺLevel Three Securitiesʺ)	19,866	11,104
	129,900	59,529

Paramount holds investments in a number of publicly-traded and private corporations as part of its portfolio of investments. Investments that are categorized as Level One Securities are carried at their period-end trading prices. Estimates of fair values for investments that are categorized as Level Three Securities are based on valuation techniques that incorporate unobservable 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 operating 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 March 31, 2021, the Company recorded $70.2 million of other comprehensive income ("OCI") as a result of changes in the fair value estimates of Level One Securities and Level Three Securities.

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

	Three months ended	Twelve months ended
	March 31, 2021	December 31, 2020
Investments in securities, beginning of period	59,529	156,889
Changes in fair value of Level One Securities – recorded in OCI	61,609	(50,632)
Changes in fair value of Level Three Securities – recorded in OCI	8,638	32,547
Transfer to Dissent payment entitlement	–	(89,250)
Changes in fair value of warrants(1)– recorded in earnings	112	(1,692)
Acquired–cash	12	11,667
Investments in securities, end ofperiod	129,900	59,529

(1) Strathcona Resources Ltd. warrants (previously the Strath Resources Ltd. warrants).

5. Long-Term Debt

As at	March 31, 2021	December 31, 2020
Paramount Facility(1)	679,789	813,491
Convertible Debentures	32,863	–
Long-term debt	712,652	813,491

(1) Paramount Facility presented net of $2.4 million in unamortized transaction costs (December 31, 2020 - $2.2 million).

Paramount Resources Ltd. First Quarter 2021 Financial Statements 8

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

Paramount Facility

Paramount was in compliance with the financial covenants under its $1.0 billion financial-covenant based senior secured revolving bank credit facility (the "Paramount Facility") at March 31, 2021.

The Company had undrawn letters of credit outstanding under the Paramount Facility totaling $1.3 million at March 31, 2021 that reduce the amount available to be drawn on the Paramount Facility.

For additional information on the Paramount Facility, refer to Note 8 of the Annual Financial Statements.

Unsecured Letter of Credit Facility

The Company has a $70 million unsecured demand revolving letter of credit facility (the "LC Facility") with a Canadian bank. Paramount’s obligations under the LC Facility are supported by a performance security guarantee ("PSG") from Export Development Canada ("EDC"). The PSG is valid to June 30, 2021 and may be extended at the option of Paramount and with the agreement of EDC.

At March 31, 2021, $40.7 million in undrawn letters of credit were outstanding under the LC Facility (December 31, 2020 – $40.7 million).

Convertible Debentures

	Liability	Equity
Three months ended March 31, 2021	Component(1)	Component
Balance, beginning of period	–	–
Issued, net of issue costs	32,746	2,176
Deferred taxes	–	(503)
Accretion	117	–
Balance, end ofperiod	32,863	1,673

(1) For the three months ended March 31, 2021, total interest payments made in respect of the Convertible Debentures was $0.5 million.

In January 2021, the Company completed a private placement of $35.0 million of senior unsecured convertible debentures (the "Convertible Debentures"). An entity controlled by Paramount’s President and Chief Executive Officer and Chairman purchased $25.0 million of the Convertible Debentures. An entity controlled by the Company’s Executive Vice President, Corporate Development and Planning, purchased $0.1 million of the Convertible Debentures. The Convertible Debentures mature on January 31, 2024 (the "Maturity Date"), bear interest at 7.50 percent per annum payable monthly in arrears and are convertible by the holder into Common Shares at any time prior to the Maturity Date at a conversion price of $6.72 per Common Share prior to January 31, 2022, $7.33 per Common Share on or after January 31, 2022 and prior to January 31, 2023 and $7.94 per Common Share on or after January 31, 2023.

The Convertible Debentures are redeemable by Paramount, in whole or in part, at any time prior to the Maturity Date, at a redemption price (expressed as percentages of principal amount) equal to 107.50 percent prior to January 31, 2022, 103.75 percent on or after January 31, 2022 and prior to January 31, 2023 and 101.875 percent on or after January 31, 2023.

The Convertible Debentures are treated as a compound financial instrument that contain a liability and an equity component and were initially recognized at fair value, net of issue costs of $0.1 million. The fair value of the liability component was initially recognized at the date of issuance using the effective interest method,

Paramount Resources Ltd. First Quarter 2021 Financial Statements 9

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

discounted using the estimated interest rate of a debt instrument having similar terms but without a conversion feature. The fair value of the conversion feature was determined at the date of issuance as the difference between the principal amount and the fair value of the liability component at the date of issue, which has been classified within shareholders’ equity.

The liability component of the Convertible Debentures is carried at amortized cost and is accreted over the term of the Convertible Debentures to the original principal amount using the effective interest method. This accretion, along with interest on the Convertible Debentures, is recorded as interest and financing expense. The equity component is not remeasured subsequent to initial recognition. The equity component and the accreted liability component will be reclassified to share capital should the debentures be converted into Common Shares.

As at March 31, 2021, there were $35.0 million aggregate principal amount of Convertible Debentures outstanding.

6. Asset Retirement Obligations and Other

As at March 31, 2021	Current	Long-term	Total
Asset retirement obligations	25,400	517,360	542,760
Lease liabilities	10,090	9,266	19,356
Asset retirement obligations and other	35,490	526,626	562,116
As at December 31, 2020	Current	Long-term	Total
Asset retirement obligations	22,250	397,276	419,526
Lease liabilities	9,979	11,740	21,719
Asset retirement obligations and other	32,229	409,016	441,245

Asset Retirement Obligations

	Three months ended	Twelve months ended
	March 31, 2021	December 31, 2020
Asset retirement obligations, beginning of period	419,526	569,897
Additions	141	507
Change in estimates	(658)	(7,605)
Change in discount rate	124,943	(145,178)
Obligations settled – cash	(8,351)	(34,994)
Obligations settled – funding under the Alberta Site Rehabilitation Program	(1,693)	(4,423)
Dispositions	(1,924)	(2,036)
Accretion expense	10,776	43,358
Asset retirement obligations, end ofperiod	542,760	419,526

As at March 31, 2021, estimated undiscounted, uninflated asset retirement obligations were $1,307.8 million (December 31, 2020 – $1,351.7 million). Asset retirement obligations have been determined using a credit-adjusted risk-free discount rate of 8.25 percent (December 31, 2020 – 11.0 percent) and an inflation rate of 2.0 percent (December 31, 2020 – 2.0 percent).

For the three months ended March 31, 2021, the Company recorded a charge of $69.5 million (three months ended March 31, 2020 - a recovery of $94.8 million) to earnings mainly related to changes in the discounted carrying value of estimated asset retirement obligations in respect of properties that had a nil carrying value

Paramount Resources Ltd. First Quarter 2021 Financial Statements 10

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

ascribed to property, plant and equipment. The changes mainly resulted from a revision in the creditadjusted risk-free rate used to discount obligations and also included a recovery for the three months ended March 31, 2021 of $1.7 million (twelve months ended December 31, 2020 - $4.4 million) in respect of funding under the Alberta Site Rehabilitation Program.

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 three months ended March 31, 2021, total cash payments made in respect of these lease liabilities, net of sublease arrangements, were $2.1 million, (March 31, 2020 - $2.2 million) of which $0.2 million (March 31, 2020 - $0.3 million) was recognized in interest and financing expense.

For the three months ended March 31, 2021, 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 $0.6 million (March 31, 2020 - $1.0 million).

As at March 31, 2021, $4.5 million (December 31, 2020 - $5.1 million) was due to the Company in respect of sublease arrangements for Paramount’s office space, of which $2.4 million (December 31, 2020 - $2.3 million) was classified as current and $2.1 million (December 31, 2020 - $2.8 million) was classified as noncurrent. For the three months ended March 31, 2021, $0.6 million (March 31, 2020 - $0.6 million) was received in respect of office sublease arrangements, of which $0.1 million (March 31, 2020 - $0.1 million) was recognized in interest revenue.

7. Share Capital

As at March 31, 2021, 132,753,503 (December 31, 2020 – 132,284,323) class A common shares of the Company ("Common Shares") were outstanding, net of 1,914,394 (December 31, 2020 – 1,914,394) Common Shares held in trust under the restricted share unit plan.

Weighted Average Common Shares

Three months ended March 31	2021 2020
Net loss – basic Dilutive effect of Convertible Debentures Dilutive effect of Paramount Options	Wtd. Avg. Shares (000’s) Net loss Wtd. Avg. Shares (000’s) Net loss
	132,489 (82,477) 133,345 (235,082) – – – – – – – –
Net loss – diluted	132,489 (82,477) 133,345 (235,082)

Outstanding stock options and Convertible Debentures 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. At March 31, 2021 there were 9.2 million options to acquire Common Shares ("Paramount Options") outstanding (March 31, 2020 – 12.0 million) and 5.2 million Common Shares that are currently issuable upon conversion of the Convertible Debentures, all of which were anti-dilutive.

Paramount Resources Ltd. First Quarter 2021 Financial Statements 11

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)

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

8. Reserves

	Unrealized
	gains (losses)	Unrealized
	on cash flow	gains (losses)	Contributed	Total
Three months ended March 31, 2021	hedges	on securities	surplus	reserves
Balance, beginning of period	(22,011)	(79,638)	167,083	65,434
Other comprehensive income, before tax	9,172	70,247	–	79,419
Deferred tax	(2,134)	(4,270)	–	(6,404)
Share-based compensation	–	–	1,182	1,182
Paramount Options exercised	–	–	(918)	(918)
Balance, end ofperiod	(14,973)	(13,661)	167,347	138,713

9. Share-Based Compensation

Paramount Options

	Three months ended	Three months ended	Twelve	months ended
		March 31, 2021	December 31, 2020
		Weighted		Weighted
		average		average
		exercise		exercise
		price		price
	Number	($/share)	Number	($/share)
Balance, beginning of period	9,681,395	6.91	12,311,462	12.16
Granted	10,000	4.86	3,111,500	3.82
Exercised(1)	(469,180)	6.98	(2,000)	7.28
Cancelled or forfeited	(36,000)	5.48	(4,366,829)	17.97
Expired	(11,800)	8.17	(1,372,738)	11.82
Balance, end of period	9,174,415	6.91	9,681,395	6.91
Options exercisable, end ofperiod	1,935,891	10.42	2,416,871	9.74

(1) For Paramount Options exercised during the three months ended March 31, 2021, the weighted average market price of Paramount’s Common Shares on the dates exercised was $10.37 per share (twelve months ended December 31, 2020 - $7.77 per share).

Restricted Share Unit Plan – Shares Held in Trust

	Three months ended March 31, 2021 Twelve months ended December 31, 2020
	Shares (000’s) Shares (000’s)
Balance, beginning of period	1,915 1,484 860 1,388
Shares purchased	– – 1,600 4,081
Change in vested and unvested shares	– (578) (545) (3,985)
Balance, end ofperiod	1,915 906 1,915 1,484

Paramount Resources Ltd. First Quarter 2021 Financial Statements 12

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 March 31	2021	2020
Loss before tax	(104,602)	(128,366)
Effective Canadian statutory income tax rate	23.1%	25.1%
Expected income tax recovery	(24,163)	(32,220)
Effect on income taxes of:
Change in statutory and other rates	1,100	4,495
Change in value of investments	(26)	389
Change in unrecognized deferred income tax asset	(969)	129,960
Share-based compensation	273	517
Flow-through share renunciations	–	3,617
Non-deductible items and other	1,660	(42)
Income tax expense(recovery)	(22,125)	106,716

11. Financial Instruments and Risk Management

Financial Instruments

Financial instruments at March 31, 2021 consist of accounts receivable, risk management assets and liabilities, the Dissent Payment Entitlement, investments in securities, accounts payable, the Paramount Facility and Convertible Debentures. The carrying values of these financial instruments, other than the Convertible Debentures, approximate their fair values. The Convertible Debentures are a compound financial instrument, and are described further in Note 5.

Risk Management

Assets

As at	March 31, 2021	December 31, 2020
Electricity swaps–current	547	408
Risk management asset	547	408

Liabilities

As at	March 31, 2021	December 31, 2020
Interest rate swaps – current	(9,579)	(9,616)
Financial commodity contracts–current	(71,174)	(22,665)
Risk management – current	(80,753)	(32,281)
Interest rate swaps–long-term	(10,446)	(19,441)
Risk management liability	(91,199)	(51,722)

From time-to-time, Paramount enters into derivative financial instruments to manage commodity price, interest rate and foreign currency exchange risks.

Paramount Resources Ltd. First Quarter 2021 Financial Statements 13

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

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:

	Three months ended	Twelve months ended
	March 31, 2021	December 31, 2020
Fair value, beginning of period	408	6,062
Changes in fair value – financial commodity contract assets	–	31,539
Changes in fair value – electricity swaps	612	408
Settlements received – financial commodity contract assets	–	(37,601)
Settlements received–electricity swaps	(473)	–
Fair value, end ofperiod	547	408

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

	Three months ended	Twelve months ended
	March 31, 2021	December 31, 2020
Fair value, beginning of period	(51,722)	(8,032)
Changes in fair value – interest rate swaps	6,634	(26,608)
Changes in fair value – financial commodity contract liabilities	(81,179)	(22,665)
Settlements paid – interest rate swaps	2,398	5,583
Settlements paid–financial commodity contract liabilities	32,670	–
Fair value, end ofperiod	(91,199)	(51,722)

The Company had the following financial commodity contracts as at March 31, 2021:

	Aggregate	Average
Instruments	notional	fixedprice	Fair value	Remaining term
Oil – NYMEX WTI Swaps (Sale)	3,000 Bbl/d	CDN$65.93/Bbl	(2,268)	April 2021 – June 2021
Oil – NYMEX WTI Swaps (Sale)	3,000 Bbl/d	CDN$64.67/Bbl	(2,289)	July 2021 – September 2021
Oil – NYMEX WTI Swaps (Sale)	23,000 Bbl/d	US$46.93/Bbl	(31,942)	April 2021 – June 2021
Oil – NYMEX WTI Swaps (Sale)	15,000 Bbl/d	US$45.87/Bbl	(21,159)	July 2021 – September 2021
Oil – NYMEX WTI Swaps (Sale)	10,000 Bbl/d	US$45.82/Bbl	(12,598)	October 2021 – December 2021
Oil – Edmonton Condensate WTI Differential Swap (Sale)	4,000 Bbl/d	WTI+US$0.06/Bbl	(254)	April 2021 – June 2021
Gas–NYMEX Swaps (Sale)	60,000 MMBtu/d	US$2.71/MMBtu	(664)	April 2021–December 2021
			(71,174)

Paramount Resources Ltd. First Quarter 2021 Financial Statements 14

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 and electricity swaps at March 31, 2021:

	Aggregate		Average fixed
Contract type	notional	Remaining term	contract rate	Reference	Fair value
Interest Rate Swaps	$250 million	April 2021 - January 2023	2.3%	CDOR(1)	(7,858)
Interest Rate Swaps	$250 million	April 2021 - January 2026	2.4%	CDOR(1)	(12,167)
ElectricitySwaps	5 MWh/d(2)	April 2021 - December 2021	$51.68/MWh	AESO Pool Price(3)	547
					(19,478)

(1) Canadian Dollar Offered Rate.

(2) "MWh" means MegaWatt hour.

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

The Company classified its floating-to-fixed interest rate swaps and electricity swaps as cash flow hedges and has applied hedge accounting. As at March 31, 2021, 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 March 31	2021	2020
Natural gas	77,276	53,603
Condensate and oil	185,929	111,442
Other natural gas liquids	15,026	4,442
Royalty and other	1,634	2,603
Royalties	(18,619)	(11,683)
	261,246	160,407

13. Other Loss

Three months ended March 31	2021	2020
Change in fair value of securities - warrants	112	(1,549)
Provisions	(7,500)	(4,669)
Other	(503)	185
	(7,891)	(6,033)

In the first quarter of 2021, the Company recorded a provision of $7.5 million with respect to arrangements with a service provider. The Company has unsettled claims against the same service provider for significantly larger amounts with respect to certain related matters which have not been recognized. The outcome of all of these matters remains uncertain.

Paramount Resources Ltd. First Quarter 2021 Financial Statements 15

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 March 31	2021	2020
Financial commodity contracts	48,509	(35,342)
Share-based compensation	5,973	14
Depletion, depreciation and impairment	73,143	264,933
Exploration and evaluation	19,113	9,325
Gain on sale of oil and gas assets	(41,395)	(2,306)
Accretion of asset retirement obligations	10,776	10,470
Change in asset retirement obligations	69,533	(94,828)
Foreign exchange	(110)	(50)
Change in fair value of securities - warrants	(112)	1,549
Deferred income tax	(22,125)	106,716
Other	912	1,094
	164,217	261,575

Supplemental Cash Flow Information

Three months ended March 31	2021	2020
Interestpaid	13,788	7,622

Components of Cash and Cash Equivalents

As at	March 31, 2021	December 31, 2020
Cash	7,421	4,590
Cash equivalents	–	–
	7,421	4,590

15. Commitments and Contingencies

Commitments – Physical Sale Contracts

The Company had the following AECO natural gas fixed-price physical contracts at March 31, 2021:

Quantity	Location	Average fixedprice	Remaining term
50,000 GJ/d	AECO	CDN$2.52/GJ	April 2021 – October 2021
50,000 GJ/d	AECO	CDN$2.51/GJ	April 2021 – December 2021

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.

Paramount Resources Ltd. First Quarter 2021 Financial Statements 16

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

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.

16. Subsequent Event

Subsequent to March 31, 2021, Paramount entered into a definitive agreement for the sale of its nonoperated Birch asset in northeast British Columbia for total consideration of approximately $77 million. Closing is subject to customary conditions and is anticipated to occur in July 2021. The Birch asset is included in the Northern CGU.

Paramount Resources Ltd. First Quarter 2021 Financial Statements 17