Published on March 22nd, 2023 by Aristofanis Papadatos
Paramount Resources (PRMRF) has two appealing investment characteristics:
#1: It is offering an above average dividend yield of 4.6%, which is nearly triple the 1.6% dividend yield of the S&P 500.
#2: It pays dividends monthly instead of quarterly.
You can download our full Excel spreadsheet of all monthly dividend stocks (along with metrics that matter like dividend yield and payout ratio) by clicking on the link below:
The combination of an above average dividend yield and a monthly dividend render Paramount Resources appealing to individual investors.
But there’s more to the company than just these factors. Keep reading this article to learn more about Paramount Resources.
Paramount Resources explores for and produces oil and natural gas from conventional and unconventional fields in Canada. The company holds interests in the Karr and Wapiti Montney properties, which cover an area of 185,000 net acres located south of the city of Grande Prairie, Alberta. The company was founded in 1976 and is based in Calgary, Canada.
Paramount Resources has an average production rate of about 97,400 barrels per day and total proved reserves of 445 million barrels of oil equivalent, with oil and gas at a 49/51 ratio.
Source: Investor Presentation
It is also important to note that the company has 47% ownership by insiders. This is a remarkably high percent of ownership, which results in the alignment of interests between insiders and the other individual shareholders.
As an oil and gas producer, Paramount Resources is highly cyclical due to the dramatic swings of the prices of oil and gas. The company has reported losses in 6 of the last 10 years and resumed its dividend payments only in the summer of 2021, after 22 years without a dividend payment.
On the other hand, Paramount Resources has some advantages when compared to the well-known oil and gas producers. Most oil and gas producers have been struggling to replenish their reserves due to the natural decline of their producing wells. On the contrary, Paramount Resources posted an exceptionally high reserve replacement ratio of 190% in 2022. As a result, the company expects its production in 2024 to be approximately 30% higher than its production in 2022. This is undoubtedly an impressive production growth rate, which cannot be found among the well-known oil majors, such as Exxon Mobil (XOM), Chevron (CVX), Shell (SHEL) and BP (BP).
The reserve replacement ratio is paramount in the oil and gas industry. Without a solid reserve replacement ratio, a producer cannot grow its earnings in a sustainable manner in the long run.
Just like almost all the oil and gas producers, Paramount Resources incurred losses in 2020 due to the collapse of the prices of oil and gas caused by the pandemic. However, thanks to the massive distribution of vaccines worldwide, global demand for oil and gas recovered in 2021 and thus the company returned to profitability in that year.
Even better for Paramount Resources, the war in Ukraine triggered a rally of the prices of oil and gas to 13-year highs last year. As a result, the company nearly tripled its earnings per share, from $1.32 in 2021 to $3.42 in 2022. Paramount Resources reinstated its dividend in mid-2021, after having suspended it for the preceding 22 years.
Paramount Resources posted one of the highest reserve replacement ratios in the oil and gas industry in 2022. Even better, the company has ample room for production growth thanks to the acceleration of its development efforts in its producing areas.
Source: Investor Presentation
Paramount Resources has a proven record of identifying key resource areas, with a low decline rate and more than 15 years of production.
On the other hand, as an oil and gas producer, Paramount Resources is highly sensitive to the cycles of the prices of oil and gas. This is clearly reflected in the performance record of the company, which has posted material losses in 6 of the last 10 years.
Thanks to the rally of the prices of oil and gas to 13-year highs last year, Paramount Resources posted earnings per share of $3.42 in 2022. However, the prices of oil and gas have plunged more than 50% off their highs in 2022. As a result, the company is likely to post much lower earnings per share this year.
Given the highly cyclical nature of the oil and gas industry and the high comparison base formed by the abnormally high earnings per share last year, we expect the earnings per share of Paramount Resources to decline by about 20.0% per year on average over the next five years, from $3.42 in 2022 to $1.12 in 2027.
Dividend & Valuation Analysis
Paramount Resources is currently offering an above average dividend yield of 4.6%, which is nearly triple the 1.6% yield of the S&P 500. The stock is thus an interesting candidate for income-oriented investors but the latter should be aware that the dividend is far from safe due to the dramatic cycles of the prices of oil and gas.
Paramount Resources has a payout ratio of only 29% but its earnings are likely to decrease significantly in the upcoming years. As a result, the payout ratio will increase. On the bright side, the company has a strong balance sheet, with net debt of only $540 million. As this amount is only 17% of the market capitalization of the stock, it is certainly manageable and will help the company endure the next downturn of the energy sector without any liquidity issues.
However, it is critical to note that Paramount Resources reinstated its dividend only in mid-2021, after 22 years without a dividend payment. The company failed to offer a dividend in the preceding years, as it incurred material losses in most of those years. Therefore, it is evident that the dividend of the company is far from safe.
In reference to the valuation, Paramount Resources is currently trading for only 6.3 times its earnings per share in the last 12 months. Given the high cyclicality of the company, we assume a fair price-to-earnings ratio of 10.0 for the stock. Therefore, the current earnings multiple is much lower than our assumed fair price-to-earnings ratio. If the stock trades at its fair valuation level in five years, it will enjoy a 9.5% annualized gain in its returns. However, this gain will be offset by our expected -20% average annual decline of earnings per share over the next five years.
Taking into account the -20% annual decline of earnings per share, the 4.6% current dividend yield and a 9.5% annualized expansion of valuation level, Paramount Resources could offer a -10.3% average annual total return over the next five years. The negative expected return signals that the stock is highly risky from a long-term perspective, as we have just passed the peak of the cycle of the oil and gas industry. Therefore, investors should wait for a much lower entry point.
Paramount Resources is thriving right now thanks to the above average prices of oil and gas. The stock is offering an above average dividend yield of 4.6%, with a payout ratio of only 29%. As a result, it is likely to entice some income-oriented investors.
However, the company has proved highly vulnerable to the cycles of the prices of oil and gas. As these prices seem to have entered a downcycle, the stock is highly risky right now. Therefore, investors should wait for a much more attractive entry point.
Moreover, Paramount Resources is characterized by below average trading volume. This means that it may be hard to establish or sell a large position in this stock.
Don’t miss the resources below for more monthly dividend stock investing research.
- The Monthly Dividend Stocks List
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And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.
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