Paramount Resources Ltd. — Interim / Quarterly Report 2023

May 3, 2023

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Interim Condensed Consolidated Financial Statements (Unaudited) For the three months ended March 31, 2023

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

($ millions)

		March 31	December 31
As at	Note	2023	2022
ASSETS
Current assets
Cash and cash equivalents	14	81.9	2.5
Accounts receivable		182.3	223.2
Risk management – current	11	5.3	19.7
Prepaid expenses and other		10.9	9.1
Assets held for sale	3	–	251.7
		280.4	506.2
Investments in securities	4	498.3	557.1
Risk management – long-term	11	1.2	2.9
Exploration and evaluation	2	512.1	485.7
Property, plant and equipment, net	3	2,545.5	2,456.3
Deferred income tax		277.1	329.1
		4,114.6	4,337.3
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities		228.1	229.9
Risk management – current	11	5.5	9.8
Asset retirement obligations and other – current	6	39.4	40.7
Liabilities associated with assets held for sale	3	–	2.0
		273.0	282.4
Long-term debt	5	–	159.4
Risk management – long-term	11	0.5	–
Asset retirement obligations and other– long-term	6	512.2	517.4
		785.7	959.2
Commitments and contingencies	16
Shareholders’ equity
Share capital	7	2,272.0	2,267.1
Retained earnings		518.1	517.6
Reserves	8	538.8	593.4
		3,328.9	3,378.1
		4,114.6	4,337.3

See the accompanying notes to these Interim Condensed Consolidated Financial Statements

Paramount Resources Ltd. First Quarter 2023 Financial Statements 1

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

($ millions, except as noted)

Three months ended March 31	Note	2023	2022	2022
Petroleum and natural gas sales		489.7	499.6
Royalties		(69.1 )	(76.2 )
Sales of commodities purchased		115.1	48.8
Revenue	12	535.7	472.2
Loss on risk management contracts	11	(1.9 )	(152.0 )
		533.8	320.2
Expenses
Operating expense		108.8	89.2
Transportation and NGLs processing		36.3	31.3
Commodities purchased		114.3	49.1
General and administrative		15.0	9.3
Share-based compensation	9	6.9	7.5
Depletion and depreciation	3	101.5	79.3
Exploration and evaluation	2	2.8	16.0
Gain on sale of oil and gas assets	3	(121.1 )	(1.7 )
Interest and financing		1.5	4.7
Accretion of asset retirement obligations	6	10.7	10.8
Other	13	0.4	0.8
		277.1	296.3
Income before tax		256.7	23.9
Income tax expense
Deferred	10	59.7	7.3
		59.7	7.3
Net income		197.0	16.6
Other comprehensive income (loss), net of tax	8
Items that will be reclassified to net income
Change in fair value of cash flow hedges, net of tax		(2.0 )	6.9
Reclassification to net income, net of tax		(1.3 )	1.5
Items that will not be reclassified to net income
Change in fair value of securities, net of tax	4	(52.1 )	140.2
Comprehensive income		141.6	165.2
Net income per common share($/share)	7
Basic		1.39	0.12
Diluted		1.33	0.11

See the accompanying notes to these Interim Condensed Consolidated Financial Statements

Paramount Resources Ltd. First Quarter 2023 Financial Statements 2

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

($ millions)

Three months ended March 31	Note	2023	2022	2022
Operating activities
Net income		197.0	16.6
Add (deduct):
Items not involving cash	14	66.2	218.6
Asset retirement obligations settled	6	(21.8 )	(14.8 )
Change in non-cash working capital		30.0	(45.5 )
Cash from operating activities		271.4	174.9
Financing activities
Net repayment of revolving long-term debt	5	(161.8 )	(84.3 )
Lease liabilities – principal repayments	6	(1.6 )	(2.0 )
Dividends	7	(196.5 )	(28.2 )
Common Shares issued, net of issue costs	7	3.0	6.0
Common Shares purchased under RSU plan	9	(0.8 )	–
Cash used in financing activities		(357.7 )	(108.5 )
Investing activities
Capital expenditures	2,3	(184.1 )	(117.0 )
Land and property acquisitions	2,3	(26.6 )	(29.2 )
Proceeds of disposition	3	371.1	51.3
Change in non-cash working capital		5.5	28.5
Cash from (used in) investing activities		165.9	(66.4 )
Net increase		79.6	–
Foreign exchange on cash and cash equivalents		(0.2 )	(0.2 )
Cash and cash equivalents, beginning of period		2.5	1.7
Cash and cash equivalents, end ofperiod		81.9	1.5

See the accompanying notes to these Interim Condensed Consolidated Financial Statements

Supplemental cash flow information 14 –

Paramount Resources Ltd. First Quarter 2023 Financial Statements

3

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

($ millions, except as noted)

Three months ended March 31	Note	2023		2022
		Shares		Shares
		(millions)		(millions)
Share capital
Balance, beginning of period		142.0	2,267.1	139.2	2,251.9
Issued on exercise of Paramount Options	7,9	0.4	3.9	0.8	7.9
Change in Common Shares for RSU plan	9	–	1.0	–	0.7
Balance, end of period		142.4	2,272.0	140.0	2,260.5
Retained earnings (accumulated deficit)
Balance, beginning of period			517.6		(15.5 )
Net income			197.0		16.6
Dividends			(196.5 )		(28.2 )
Reclassification of accumulated gain on securities	4		–		11.1
Balance, end of period			518.1		(16.0 )
Reserves	8
Balance, beginning of period			593.4		370.0
Other comprehensive income (loss)			(55.4 )		148.6
Contributed surplus			0.8		0.2
Reclassification of accumulated gain on securities	4		–		(11.1 )
Balance, end of period			538.8		507.7
Total Shareholders’ Equity			3,328.9		2,752.2

See the accompanying notes to these Interim Condensed Consolidated Financial Statements

Paramount Resources Ltd. First Quarter 2023 Financial Statements

4

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)

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

1. Basis of Presentation

Paramount Resources Ltd. ("Paramount" or the "Company") is an independent, publicly traded, liquids-rich natural gas focused Canadian energy company that explores for and develops both conventional and unconventional petroleum and natural gas. 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 Suite 4700, 888 – 3[rd] Street SW, Calgary, Alberta T2P 5C5. 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, 2023 (the "Interim Financial Statements"), were authorized for issuance by the Audit Committee of Paramount’s Board of Directors on May 2, 2023.

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, 2022 (the "Annual Financial Statements").

These Interim Financial Statements are stated in millions 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.

Paramount Resources Ltd. First Quarter 2023 Financial Statements

5

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)

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

2. Exploration and Evaluation

	Three months ended March 31, 2023 Twelve months ended December 31, 2022
Balance, beginning of period	485.7 539.9
Additions	– 0.4
Acquisitions	26.9 34.7
Change in asset retirement provision	0.2 (0.2 )
Transfers to property, plant and equipment	– (33.1 )
Expired lease costs	(0.3 ) (21.8 )
Dispositions	(0.4 ) (0.2 )
Transfer to assets held for sale (see Note 3)	– (34.0 )
Balance, end ofperiod	512.1 485.7

Exploration and Evaluation Expense
Three months ended March 31	2023	2022
Geological and geophysical expense	2.5	2.6
Expired lease costs	0.3	13.4
	2.8	16.0

At March 31, 2023, 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	Petroleum
	and natural		Drilling		Right-of-use
Three months ended March 31, 2023	gas assets		rigs		assets		Other		Total
Cost
Balance, beginning of period	4,657.3		153.0		24.8		59.5		4,894.6
Additions	179.3		3.1		1.5		3.2		187.1
Transfers	(0.9 )		0.9		–		–		–
Dispositions	(0.5 )		–		–		–		(0.5 )
Derecognition	–		–		(8.3 )		(10.6 )		(18.9 )
Change in asset retirement provision	1.2		–		–		–		1.2
Cost, end of period	4,836.4		157.0		18.0		52.1		5,063.5
Accumulated depletion and depreciation
Balance, beginning of period	(2,298.3 )		(86.8 )		(14.9 )		(38.3 )		(2,438.3 )
Depletion and depreciation	(94.4 )		(2.7 )		(0.9 )		(0.8 )		(98.8 )
Dispositions	0.2		–		–		–		0.2
Derecognition	–		–		8.3		10.6		18.9
Accumulated depletion and depreciation	(2,392.5 )		(89.5 )		(7.5 )		(28.5 )		(2,518.0 )
Net book value, December 31, 2022	2,359.0		66.2		9.9		21.2		2,456.3
Net book value, March 31, 2023	2,443.9		67.5		10.5		23.6		2,545.5

In December 2022, Paramount entered into an agreement to sell its Kaybob Smoky and Kaybob South Duvernay properties and certain other minor interests in the Kaybob region, all of which were included in the Kaybob cash-generating unit. The assets and liabilities associated with the sale were presented as held for sale at December 31, 2022. Paramount received cash proceeds of $370.6 million on closing of the transaction in January 2023, resulting in a gain of $121.1 million being recognized for the three months ended March 31, 2023.

Paramount Resources Ltd. First Quarter 2023 Financial Statements 6

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)

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

Depletion and Depreciation

Three months ended March 31	2023 2022
Depletion and depreciation	97.1 72.6
Change in asset retirement obligations	4.4 11.5
Alberta site rehabilitation program funding	– (4.8 )
	101.5 79.3

For the three months ended March 31, 2023, the Company recorded a charge of $4.4 million (March 31, 2022 – $11.5 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 resulted from revisions to the estimated costs.

At March 31, 2023, the Company assessed its property, plant and equipment assets for indicators of potential impairment and none were identified.

4. Investments in Securities

As at	March 31, 2023 December 31, 2022
Level one fair value hierarchy securities	418.7 477.3
Level three fair value hierarchy securities	79.6 79.8
	498.3 557.1

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 fair value hierarchy securities ("Level One Securities") are carried at their period-end trading prices. Estimates of fair values for investments that are categorized as level three fair value hierarchy securities ("Level Three Securities") are based on valuation techniques that incorporate unobservable inputs. The valuation techniques utilize market-based metrics of comparable companies and transactions, indicators 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, 2023, the Company recorded a charge of $58.6 million before tax, to other comprehensive income ("OCI") related to changes in the fair value estimates of its investments in securities.

In the first quarter of 2022, Paramount sold a portion of its Level One Securities for cash proceeds of $51.0 million, resulting in $11.1 million of accumulated gains, net of tax, being reclassified from reserves to retained earnings.

Paramount Resources Ltd. First Quarter 2023 Financial Statements 7

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)

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

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

	Three months ended March 31, 2023 Twelve months ended December 31, 2022
Investments in securities, beginning of period	557.1 372.1
Changes in fair value of Level One Securities	(58.6 ) 222.4
Changes in fair value of Level Three Securities	– 12.9
Changes in fair value of warrants – recorded in earnings	(0.2 ) 0.4
Acquired – cash	– 1.8
Acquired – non-cash	– 4.3
Proceeds of dispositions – cash	– (52.8 )
Proceeds of dispositions–non-cash	– (4.0 )
Investments in securities, end ofperiod	498.3 557.1

5. Long-Term Debt

As at	March 31, 2023	December 31, 2022
Paramount Facility (1)	–	159.4

(1) Presented net of $2.4 million in unamortized transaction costs at December 31, 2022.

Paramount Facility

The Company has a $1.0 billion financial covenant-based senior secured revolving bank credit facility (the "Paramount Facility"). The maturity date of the Paramount Facility is May 3, 2026. At Paramount's request, the credit limit of the Paramount Facility can be increased by up to $250 million pursuant to an accordion feature in the facility, subject to incremental lender commitments.

Paramount was in compliance with the financial covenants under the Paramount Facility at March 31, 2023.

The Company had undrawn letters of credit outstanding under the Paramount Facility totaling $2.3 million at March 31, 2023 (December 31, 2022 – $2.2 million) that reduce the amount available to be drawn on the facility.

For additional information concerning 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. The PSG is valid to June 30, 2023. At March 31, 2023, $25.1 million in undrawn letters of credit were outstanding under the LC Facility (December 31, 2022 – $24.2 million).

Paramount Resources Ltd. First Quarter 2023 Financial Statements 8

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)

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

6. Asset Retirement Obligations and Other

As at March 31, 2023	Current	Long-term	Total
Asset retirement obligations	37.9	496.1	534.0
Lease liabilities	1.5	16.1	17.6
Asset retirement obligations and other	39.4	512.2	551.6
As at December 31, 2022	Current	Long-term	Total
Asset retirement obligations	37.7	502.4	540.1
Lease liabilities	3.0	15.0	18.0
Asset retirement obligations and other	40.7	517.4	558.1

Asset Retirement Obligations

	Three months ended	Twelve months ended
	March 31, 2023	December 31, 2022
Asset retirement obligations, beginning of period	540.1	651.1
Additions	0.3	4.7
Change in estimates	4.7	(16.3 )
Change in discount rate	–	(95.7 )
Obligations settled – cash	(21.8 )	(36.1 )
Obligations settled – funding under Alberta site rehabilitation program	–	(10.0 )
Dispositions	–	(0.5 )
Transfer to liabilities associated with assets held for sale (see Note 3)	–	(2.0 )
Accretion expense	10.7	44.9
Asset retirement obligations, end ofperiod	534.0	540.1

As at March 31, 2023, estimated undiscounted, uninflated asset retirement obligations were $1,283.7 million (December 31, 2022 – $1,296.0 million). Asset retirement obligations have been determined using a credit-adjusted risk-free discount rate of 8.5 percent per annum (December 31, 2022 – 8.5 percent per annum) and an inflation rate of 2.0 percent per annum (December 31, 2022 – 2.0 percent per annum).

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, 2023, total cash principal payments made in respect of these lease liabilities, net of sublease arrangements, were $1.6 million, (March 31, 2022 – $2.0 million).

For the three months ended March 31, 2023, 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 $0.7 million (March 31, 2022 – $0.6 million).

At March 31, 2023, $3.4 million was receivable by the Company relating to lease incentives (December 31, 2022 – $6.3 million). For the three months ended March 31, 2023, $0.5 million (March 31, 2022 – $0.6 million) was received in respect of sublease arrangements.

Paramount Resources Ltd. First Quarter 2023 Financial Statements 9

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)

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

7. Share Capital

At March 31, 2023, 142.4 million (December 31, 2022 – 142.0 million) class A common shares of Paramount ("Common Shares") were outstanding, net of 0.8 million (December 31, 2022 – 0.8 million) Common Shares held in trust under the Company’s restricted share unit ("RSU") plan.

For the three months ended March 31, 2023, the Company paid total dividends of $196.5 million (March 31, 2022 – $28.2 million) comprised of a special cash dividend of $1.00 per Common Share or $142.9 million and regular monthly dividends totaling $0.375 per Common Share or $53.6 million. On April 28, 2023, the Company paid a regular monthly dividend of $17.9 million, or $0.125 per Common Share.

In June 2022, Paramount implemented a normal course issuer bid (the ʺ2022 NCIBʺ) under which the Company may purchase up to 7.6 million Common Shares for cancellation. The 2022 NCIB will terminate on the earlier of June 29, 2023 and the date on which the maximum number of Common Shares that can be acquired pursuant to the 2022 NCIB are purchased. Purchases of Common Shares under the NCIB will be effected through the facilities of the Toronto Stock Exchange or alternative Canadian trading systems at the market price at the time of purchase. The Company has not made any purchases of Common Shares under the 2022 NCIB to date.

For the three months ended March 31, 2023, Paramount issued 0.4 million Common Shares on the exercise of options to acquire Common Shares (ʺParamount Optionsʺ) (see Note 9).

Weighted Average Common Shares

Three months ended March 31	2023	2023	2022
	Wtd. Avg.		Wtd. Avg.
	Shares		Shares
	(millions)	Net income	(millions)	Net income
Net income – basic	142.2	197.0	139.5	16.6
Dilutive effect of Paramount Options	5.6	–	6.3	–
Net income – diluted	147.8	197.0	145.8	16.6

Paramount Options can be exchanged for Common Shares, are potentially dilutive and are included in the diluted per share calculations when they are dilutive to net income per share. Common Shares held in trust under the Company’s RSU plan are not included in the calculation of weighted average shares outstanding. For the three months ended March 31, 2023, 2.6 million Paramount Options were anti-dilutive (three months ended March 31, 2022 – 0.1 million).

8. Reserves

	Unrealized
	gains (losses)	Unrealized
	on cash flow	gains (losses)		Contributed	Total
Three months ended March 31, 2023	hedges	on securities		surplus	reserves
Balance, beginning of period	8.3	399.9		185.2	593.4
Other comprehensive loss, before tax	(4.3 )	(58.6 )		–	(62.9 )
Deferred tax	1.0	6.5		–	7.5
Share-based compensation (see Note 9)	–	–		1.7	1.7
Paramount Options exercised	–	–		(0.9 )	(0.9 )
Balance, end ofperiod	5.0	347.8		186.0	538.8

Paramount Resources Ltd. First Quarter 2023 Financial Statements 10

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)

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

9. Share-Based Compensation

Paramount Options

	Three months ended	Three months ended	Three months ended	Twelve months ended	Twelve months ended	Twelve months ended
	March	31,	2023	December		31, 2022
			Weighted			Weighted
			average			average
	Paramount		exercise	Paramount		exercise
	Options		price	Options		price
	(millions)		($/share)	(millions)		($/share)
Balance, beginning of period	11.3		13.55	11.0		9.55
Granted	0.1		28.65	2.5		28.65
Exercised(1)	(0.4 )		7.93	(2.1 )		10.73
Cancelled or forfeited	–		–	(0.1 )		10.90
Balance, end of period	11.0		13.84	11.3		13.55
Options exercisable, end ofperiod	2.7		8.33	3.1		8.28

(1) For Paramount Options exercised during the three months ended March 31, 2023, the weighted average market price of Common Shares on the dates exercised was $29.14 per share (twelve months ended December 31, 2022 – $30.12 per share).

Restricted Share Unit Plan – Shares Held in Trust

	Three months ended	Three months ended	Three months ended	Twelve months ended	Twelve months ended
	March	31,	2023	December	31, 2022
	Shares			Shares
	(millions)			(millions)
Balance, beginning of period	0.8		16.2	1.5	3.5
Shares purchased	0.1		0.8	0.5	17.2
Change in vested and unvested shares	(0.1 )		(1.8 )	(1.2 )	(4.5 )
Balance, end ofperiod	0.8		15.2	0.8	16.2

10. Income Tax

The following table reconciles income taxes calculated at the statutory rate to Paramount’s income tax expense:

Three months ended March 31	2023	2022
Income before tax	256.7	23.9
Effective statutory income tax rate	23.0%	23.0%
Expected income tax expense	59.0	5.5
Effect on income taxes of:
Change in statutory and other rates	–	1.1
Share-based compensation	0.6	0.5
Change in unrecognized deferred income tax asset	(0.2 )	0.3
Non-deductible items and other	0.3	(0.1 )
Income tax expense	59.7	7.3

Paramount Resources Ltd. First Quarter 2023 Financial Statements 11

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

11. Financial Instruments and Risk Management

Financial Instruments

Financial instruments at March 31, 2023 consist of cash and cash equivalents, accounts receivable, risk management assets and liabilities, investments in securities, accounts payable and the Paramount Facility. The carrying values of these financial instruments approximate their fair values.

Risk Management

From time-to-time, Paramount enters into derivative financial instruments to manage commodity price, interest rate and foreign currency exchange 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 and liabilities for the three months ended March 31, 2023 are as follows:

		Foreign
	Financial	currency
	commodity	exchange	Electricity
Three months ended March 31, 2023	contracts	contracts	swaps		Total
Fair value of asset (liability), December 31, 2022	11.8	(9.8 )	10.8		12.8
Changes in fair value – profit or loss(1)	2.6	(4.5 )	–		(1.9 )
Changes in fair value – OCI	–	–	(3.0 )		(3.0 )
Risk management contract settlements (received) paid(2)	(14.4 )	8.3	(1.3 )		(7.4 )
Fair value of asset(liability), March 31, 2023	–	(6.0 )	6.5		0.5
Risk management asset – current	–	–	5.3		5.3
Risk management asset–long-term	–	–	1.2		1.2
Risk management asset, March 31, 2023	–	–	6.5		6.5
Risk management liability – current	–	(5.5 )	–		(5.5 )
Risk management liability–long-term	–	(0.5 )	–		(0.5 )
Risk management liability, March 31, 2023	–	(6.0 )	–		(6.0 )

(1)

(1) Changes in fair value of ($1.9) million related to financial commodity and foreign currency exchange contracts are recorded as loss on risk management contracts. (2) Receipts on risk management contract settlements related to financial commodity and foreign currency exchange contracts totaled $6.1 million. Risk management contract settlements relating to electricity swap contracts are recorded in operating expenses.

Paramount Resources Ltd. First Quarter 2023 Financial Statements

12

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)

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

The Company had the following risk management contracts as at March 31, 2023:

		Aggregate	Average
Instruments	amount / notional		price or rate	Remaining term	-
Foreign Currency Exchange	Contracts
Forward Sales / Swaps	US$60	million / month	1.3293 CAD$/US$1.00	April 2023 – June 2023
Swaps	US$40	million / month	1.3427 CAD$/US$1.00	July 2023 – December 2023
Swaps	US$30	million / month	1.3433 CAD$/US$1.00	January 2024 – June 2024
Swaps	US$10	million / month	1.3400 CAD$/US$1.00	July 2024 – December 2024
Electricity Contracts(1)
Swaps		240 MWh/d	$84.00/MWh	April 2023 – December 2023
Swaps		240 MWh/d	$66.13/MWh	January 2024 – December 2024
Swaps		120 MWh/d	$73.25/MWh	January2025 – December 2025

(1) Reference electricity rate: Floating hourly rate established by the Alberta Electric System Operator. "MWH" means megawatt-hour.

The Company has classified its electricity swaps as cash flow hedges and applied hedge accounting. There were no changes to the critical terms of the hedging relationships and no hedge ineffectiveness was identified at March 31, 2023.

12. Revenue By Product

Three months ended March 31	2023 2022
Natural gas	122.0 127.1
Condensate and oil	343.5 331.9
Other natural gas liquids	23.4 29.3
Royalty and other	0.8 11.3
Royalties	(69.1 ) (76.2 )
Sales of commodities purchased	115.1 48.8
	535.7 472.2

Royalty and other revenue for the three months ended March 31, 2022 includes $10.6 million related to a business interruption insurance claim.

13. Other

Three months ended March 31	2023	2022
Provisions	2.5	–
Interest income	(1.6 )	–
Other	(0.5 )	0.8
	0.4	0.8

Paramount Resources Ltd. First Quarter 2023 Financial Statements

13

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)

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

14. Consolidated Statement of Cash Flows – Selected Information

Items Not Involving Cash

Three months ended March 31	2023 2022
Risk management contracts	8.0 102.3
Share-based compensation	6.9 7.5
Depletion and depreciation	101.5 79.3
Exploration and evaluation	0.3 13.4
Gain on sale of oil and gas assets	(121.1 ) (1.7 )
Accretion of asset retirement obligations	10.7 10.8
Deferred income tax	59.7 7.3
Other	0.2 (0.3 )
	66.2 218.6

Supplemental Cash Flow Information

Three months ended March 31	2023	2022
Interest paid	0.2	4.2
Interest received	1.6	–

Components of Cash and Cash Equivalents

As at	March 31, 2023	December 31, 2022
Cash	81.9	2.5
Cash equivalents	–	–
	81.9	2.5

15. Capital Structure

Paramount’s capital structure consists of shareholders’ equity and net (cash) debt.

The Company’s primary objectives in managing its capital structure are to:

• i. ensure liquidity to fund ongoing operations and capital programs, the settlement of obligations when due and the payment of regular monthly dividends;

• ii. preserve financial flexibility and access to capital markets, including for the pursuit of strategic initiatives; and

• iii. maximize shareholder returns considering the risk environment.

Paramount monitors and assesses its capital structure for alignment with its current and long-term business plans and will, guided by its primary capital management objectives, seek to adjust the structure as necessary in response to changes in its business plans, plans for shareholder returns, economic and operating conditions, financial and operating results, strategic initiatives and the Company’s assessment of the risk environment. Paramount may adjust its capital structure through a number of means, including by modifying capital spending programs, seeking to issue or repurchase shares, altering debt levels, modifying dividend levels or acquiring or disposing of assets.

Paramount Resources Ltd. First Quarter 2023 Financial Statements

14

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)

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

The key capital management measures used by the Company in monitoring and assessing its capital structure are net (cash) debt, adjusted funds flow, the ratio of net debt to adjusted funds flow and free cash flow. The use and composition of each of these measures is described below. These measures are not standardized measures and therefore may not be comparable with the calculation of similar measures by other entities.

Net (Cash) Debt

Net (cash) debt, in conjunction with capacity under existing credit facilities, is used to monitor and assess liquidity by providing Management and investors with a measure of the Company’s overall leverage position. The label of this capital management measure has been revised from the previous label of net debt to allow for the description of negative amounts as net (cash).

The calculation of net (cash) debt is as follows:

As at	March 31, 2023 December 31, 2022
Cash and cash equivalents	(81.9 ) (2.5 )
Accounts receivable(1)	(178.9 ) (216.5 )
Prepaid expenses and other	(10.9 ) (9.1 )
Accounts payable and accrued liabilities	228.1 229.9
Long-term debt	– 159.4
Net(cash) debt	(43.6 ) 161.2

(1) Excludes accounts receivable relating to lease incentives and subleases (March 31, 2023 – $3.4 million, December 31, 2022 – $6.7 million).

Adjusted Funds Flow

Adjusted funds flow is used to monitor and assess liquidity and the flexibility of the Company’s capital structure by providing Management and investors with a measure of the cash flows generated by the Company’s assets available to fund capital programs and meet financial obligations, including the settlement of asset retirement obligations.

The calculation of adjusted funds flow is as follows:

Three months ended March 31	2023 2022
Cash from operating activities	271.4 174.9
Change in non-cash working capital	(30.0 ) 45.5
Geological and geophysical expense	2.5 2.6
Asset retirement obligations settled	21.8 14.8
Closure costs	– –
Provisions	2.5 –
Settlements	– –
Transaction and reorganization costs	– –
Adjusted funds flow	268.2 237.8

Net Debt to Adjusted Funds Flow Ratio

The ratio of net debt to adjusted funds flow is used to monitor and assess liquidity and the flexibility of the Company’s capital structure by showing the relation of the cash flows generated by the Company’s assets to its overall leverage position.

Paramount Resources Ltd. First Quarter 2023 Financial Statements 15

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)

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

The net debt to adjusted funds flow ratio is calculated as the period end net debt divided by adjusted funds flow for the trailing four quarters. When the Company is not in a net debt position, the ratio of net debt to adjusted funds flow is not considered meaningful.

As at	March 31, 2023 December 31, 2022
Net (cash) debt	(43.6 ) 161.2
Adjusted funds flow, trailing four quarters	1,201.5 1,171.0
Net debt to adjusted funds flow ratio	NM(1) 0.1x

(1) NM means not meaningful.

Free Cash Flow

Free cash flow is used to monitor and assess liquidity, the flexibility of the Company’s capital structure and the financial capacity to maximize shareholder returns by providing Management and investors with a measure of the internally generated cash available, after funding capital programs and asset retirement obligation settlements, to service the Company’s financial obligations, pay dividends, repurchase Common Shares and fund additional growth opportunities.

The calculation of free cash flow is as follows:

Three months ended March 31	2023	2022
Cash from operating activities	271.4	174.9
Change in non-cash working capital	(30.0 )	45.5
Geological and geophysical expense	2.5	2.6
Asset retirement obligations settled	21.8	14.8
Closure costs	–	–
Provisions	2.5	–
Settlements	–	–
Transaction and reorganization costs	–	–
Adjusted funds flow	268.2	237.8
Capital expenditures	(184.1 )	(117.0 )
Geological and geophysical expense	(2.5 )	(2.6 )
Asset retirement obligations settled	(21.8 )	(14.8 )
Free cash flow	59.8	103.4

16. Commitments and Contingencies

Commitments – Physical Sales Contracts

The Company had the following basis differential physical sale contracts at March 31, 2023:

	Volume	Location	Average price	Remaining term
Peace sweet crude oil	3,089 Bbl/d	Peace(1)	WTI – US$3.73/Bbl	April 2023 – December 2023
Natural gas	35,000 MMBtu/d	AECO	NYMEX – US$0.94/MMBtu(2)	April 2023 – October 2023
Naturalgas	25,000 MMBtu/d	Dawn	NYMEX – US$0.20/MMBtu(2)	April 2023 – October 2023

(1) Peace refers to the Peace Pipeline at Edmonton.

(2) "NYMEX" refers to NYMEX pricing at Henry Hub.

Paramount Resources Ltd. First Quarter 2023 Financial Statements

16

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)

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

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 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. First Quarter 2023 Financial Statements 17