Paramount Resources: A low-profile stock no longer

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Investors are running out of time to buy into the rise of Paramount Resources Ltd.

The transformation of the oil and gas company from "resource holder to resource producer" is on the cusp of a critical phase, Cody Kwong, an analyst at First Energy Capital, said in a recent note. The company expects "first gas" at its Musreau gas processing facility in Western Alberta by the end of May.

"We're at the sweet spot where they're about to flick the switch," said Robert Lauzon, a senior portfolio manager at Middlefield Group, which holds shares of Paramount. If all goes well at Musreau, the company could see its production more than triple by the end of next year.

The market has started to believe in Paramount's explosive growth potential. The stock has more than doubled since August, 2013, and has increased by almost 23 per cent in the last two months alone as Paramount has sold investors on its story.

That's a change for the low-profile company that previously attracted limited investor attention. "It's a public company that acts like a private company," Mr. Lauzon said. "It's not promotional. Right now they're in the perfect window of seeing massive production growth, so they're getting their story out. But over the last three or four years, they didn't want the Street to know what they were doing. It might not have worked."

Two years ago, doubts among investors weighed on the stock as the company increased its debt to pay for the $190-million Musreau plant. Now, with the facility expected to come online more or less on time and on budget, Paramount's production could increase from about 20,000 barrels of oil equivalent per day to 70,000 boe/d by the end of 2015.

The second big recent tailwind behind Paramount is the price of natural gas, which since bottoming in November has increased by about 25 per cent.

As a result, Paramount's 2015 revenues could exceed $900-million, more than triple last year's revenues, said Paul Taylor, chief investment officer of fundamental equities at BMO Asset Management, which holds Paramount shares. "As that occurs, the financial metrics will be very different for this firm."

Along with the production of natural gas liquids and condensate, which is used to move heavy oil through pipelines, Musreau output could soon raise free cash flow to $700-million annually, Kurt Molnar, an analyst at Raymond James, said in a note. "This free cash flow level not only argues continued appeal on valuation, but outstanding clarity to new growth as well." That kind of money could, in theory, internally fund an expansion equal in size to Musreau every 12 months, Mr. Molnar said.

"They'll continue to build more of these," Middlefield's Mr. Lauzon said. "This is a big Phase 1. If this works, they can just replicate it."

As always, there are risks. Given the scale of Musreau, there are still operational risks the company will have to avoid as production ramps up. And there is always the risk of energy prices falling. So even after a big stock run, there is still a buying opportunity for investors who feel like Paramount will pull it off.

And there is growing confidence among both money managers and analysts in the company's reserves and the viability of the Musreau project. "It's all organic now. It's all within their control," said Mr. Taylor of BMO Asset Management.

Of the 16 analysts covering the stock, 11 rate it a "buy." First Energy's Mr. Kwong recently increased his share price target to $60, representing a 20-per-cent premium over Thursday's closing price.

In an earlier note after Paramount released its year-end results, he saw even more potential upside: "We would suggest our revised target price has room to move significantly higher as our confidence surrounding well performance grows following the Musreau facility startup."