Will this work to smooth out wood paneling?

I think It would. Try a small area first. Most of the grooves in paneling are rough allowing the compound to get a good grip.

you have to paint the panels first , or it won't stick, then you are still looking at a flexing problem that may cause cracks in the future.Best to' bite the bullet' and drywall over --use 3/8 ths it goes up easily and will last

We do not recommend the use of our repair compounds for that type of project as the paneling tends to be an unstable substrate. The instability of the paneling typically leads to cracking of the filled areas over a short period of time.