I have used heavy weight wallpaper liner paper for this purpose. Scuff the surface of the paneling to give it tooth, then primer with a good wallpaper prep like Sheildz, hang the liner paper, skim coat the seams with joint compound once the wallpaper is dry. This will take only a lite coat of mud at the seams, then sand. Prime the whole wall and it will look like brand new drywall has been hung. Using the liner paper will cut down on the mud needed to smooth the surface. You only need to mud the seams of the wallpaper, about every 20 inches rather than trying to fill the grooves in the paneling, deeper grooves and about 4 inches and more applications of the mud after is shrinks. I usually caulk around the top prior to priming and at the baseboards. I really prefer to pull the baseboards out first and reinstall them after the liner paper has been installed, no chance for gaps doing it that way. The liner paper comes in different grades, some seem to be made for just this purpose.