Paramount Resources: Family Owned and Conservatively Managed (TSX:POU:CA)

(Note: This article originally appeared in our November 29, 2022 newsletter)

(Note: Unless otherwise stated, this is a Canadian company reporting in Canadian dollars.)

Paramount Resources (OTCPK:PRMRF) (TSX:POU:CA) changed a lot from the beginning I started following the company. This company has been an asset story for years, often growing by developing production and selling most of what it developed. The money from the trade was used to repeat the process while maintaining a slowly growing production.

The market saw this as a risk. Fiscal 2020 saw stock prices plummet as key ratios were extended midway through. But by then, this had become a very different company. The production mix has also changed from mostly dry gas to a significant amount of liquid. Now the company can grow from cash flow without selling a lot of products.

However, based on past experience, this management team is likely to take advantage of profitable sales opportunities when they arise. Also, having done so in the past, they may invest in other companies. So there are still some differences here compared to other parts of the industry. But the future is likely to be much more traditional than the past, when asset stories dominated strategy.

Management just announced the sale of non-core. Proceeds will be used to repay bank limits and declare a special dividend of $1.00 CAD per share.

Insiders are primarily the Liddell family. Clayton Riddell founded the company and passed away a few years ago. Chairman and CEO James Liddell and several other family members remain involved with the company.

Insiders own enough stock to resist short-term market pressures. This is one of the advantages he has of large insider ownership. Corporate strategy generally has a long-term perspective. Dominant insiders know that the market values ​​growth, so anything like a return of capital gets a lukewarm response.

As a result, the strategy here was to significantly increase production early on to take advantage of high commodity prices, as shown above. Most of the company’s prospects offer quick paybacks in the current environment. That way, shareholders not only receive capital, but also a reasonable profit before the next cyclical recession.

Another part of the current production expansion is that such low-debt firms often simply “sit and cash their checks” during the next recession while waiting for the recovery to kick in. is possible. Debt balances are less of a recession threat as they can be easily handled with much lower commodity prices.

The areas of focus clearly have the potential to produce at the levels projected for more than a decade. The company has a lot of prospects to develop with the money they generate.The management is flexible enough to grow when enough money invested comes back. This management team is very likely to cut operations if we see a cyclical recession on the way.

Likewise, a Canadian company’s dividend policy can be a little more flexible than it is in the US. Management argues that current guidance is suitable for very low oil prices. However, investors should remember that balance sheet health is paramount. The second strategy is to take advantage of the early stages of the economic recovery to bring production up to a certain level. Dividends and share buybacks are then taken into account.

The outlook for commodity prices makes dividends look very safe for the foreseeable future. An increase in output could lead to management guidance that dividends are safe at lower commodity price levels. It is also possible that management will issue a floating dividend in addition to the basic dividend, which will increase the safety of the monthly dividend.

worth

This stock is one of the bargain stocks I follow in an undervalued industry.

The dividend was recently increased to C$0.125 per share each month. This equates to $1.50 Canadian dollars per share per year.

What’s unusual is that production is rising at a decent pace, unusual for a company of its size. But management is making enough profit to be able to increase production while generating sufficient free cash flow.

Production volumes are up significantly from the second quarter and from last year’s third quarter. This growth rate is exceptional both for the industry as a whole and for the size of the company.

Despite that growth, management generated decent free cash flow even after funding the growth.Net debt decreased as well. There are many companies paying generous returns in response to market demands to return cash to shareholders.

However, at the pace of growth described above, this company could return far more profits to shareholders in the future than companies that return profits to shareholders without expanding production.

The period from 2015 to 2020 was a period of adjustment that greatly undermined the market view of the industry. When oil prices plunged in 2015, the era of rapid growth and long commodity price hikes ended. In fact, gas prices had already started to fall.

Many speculators jumped on the 2018 recovery, which was halted due to a rapid increase in supply.

But industry-savvy lenders are still there, funding for sound financial propositions. The bond market also appears to be open to the industry for sound funding. The difference this time is that there are no speculative fundraising projects that should never have seen the light of day. As such, this recovery is likely to be “legged” and much more similar to past cyclical recoveries.

The management team is likely to continue growing through a combination of dividend increases and opportunistic share buybacks. Management develops the most profitable leases in North America. Not many companies can grow while generating significant amounts of free cash flow. The insider management of many stocks allows this management team to have a longer-term view than is the case with many publicly traded companies, where management cannot resist market pressures.

Family owned companies (or, for that matter, companies with significant insider ownership) tend to outperform the market over the long term. The chance to outperform while the stock remains relatively cheap is short-lived. Sooner or later the market will find that the future strategy is much more conservative than before, as there is now sufficient cash flow. Management can now successfully grow the company while keeping debt levels low and paying dividends. Not many people in the industry can say that.