2011 Annual Report
Non-Consolidated Financial and Operating Highlights (1)
Financial ($000, except as
otherwise indicated)
Petroleum and natural gas sales
Royalties
Realized gain on derivatives
Operating expense
Operating
General and administrative (2)
Finance expense (3)
Miscellaneous income
Funds from operations
Dividends from Longview
Total
per share (4)
Three months ended
December 31, 2011
Three months ended
December 31, 2010
Year ended
December 31, 2011
Year ended
December 31, 2010
$000
per boe
$000
per boe
$000
per boe
$000
per boe
$
$
$
$
$
$
$
23.24
(2.16)
3.49
(4.90)
19.67
(2.12)
(1.44)
0.04
16.15
48,293
(4,481)
7,262
(10,191)
40,883
(4,400)
(2,984)
88
33,587
4,417
38,004
34.08
(4.32)
4.38
(10.65)
23.49
(2.77)
(2.54)
(0.02)
18.16
$
76,221
(9,661)
9,791
(23,811)
52,540
(6,197)
(5,679)
(36)
40,628
-
40,628
$
$
241,420
(29,661)
26,916
(59,473)
179,202
(19,497)
(17,044)
634
143,295
11,780
155,075
28.26
(3.47)
3.15
(6.96)
20.98
(2.28)
(2.00)
0.07
16.77
$
$
$
0.23
$
0.25
$
0.94
$
$
36.26
(5.22)
5.12
(10.86)
25.30
(2.87)
(2.82)
0.06
19.67
$
319,368
(45,954)
45,133
(95,609)
222,938
(25,316)
(24,832)
511
173,301
-
$
173,301
$
1.06
$
221,683
$
$
64,452
290,657
$
68,029
$
$
64,452
290,657
$
199,217
$
$
70,564
142,548
$
148,544
$
86,250
$
148,544
Expenditures on property, plant
and equipment
Working capital deficit (5)
Bank indebtedness
Convertible debentures (face
value)
Shares outstanding at end of
period (000)
Basic weighted average shares
(000)
$
75,572
$
$
70,564
142,548
$
86,250
166,304
166,249
164,092
164,035
127,265
1,378
22,589
Operating
Daily Production
Natural gas (mcf/d)
Crude oil and NGLs (bbls/d)
Total boe/d @ 6:1
Average prices (including
hedging)
Natural gas ($/mcf)
Crude oil and NGLs ($/bbl)
(1) Non-consolidated financial and operating highlights for Advantage excluding Longview.
(2) General and administrative expense excludes non-cash G&A and non-cash share-based compensation.
(3) Finance expense excludes non-cash accretion expense.
(4) Based on basic weighted average shares outstanding.
(5) Working capital deficit includes trade and other receivables, prepaid expenses and deposits,
and trade and other accrued liabilities, and the current portion of other liability
106,125
6,620
24,308
$
$
$
$
3.78
89.14
4.81
64.14
166,304
165,371
123,246
2,864
23,405
164,092
163,467
101,562
7,202
24,129
$
$
4.19
76.45
$
$
5.45
61.85
CONTENTS
Message to Shareholders ........................................................................................................................................................................................... 3
Reserves ....................................................................................................................................................................................................................... 6
Consolidated Management’s Discussion & Analysis ........................................................................................................................................... 11
Consolidated Financial Statements ........................................................................................................................................................................ 40
Consolidated Statement of Financial Position ............................................................................................................................................. 45
Consolidated Statement of Comprehensive Income (Loss)....................................................................................................................... 46
Consolidated Statement of Changes in Shareholders’ Equity .................................................................................................................... 47
Consolidated Statement of Cash Flows ........................................................................................................................................................ 48
Notes To The Consolidated Financial Statements ...................................................................................................................................... 49
ANNUAL GENERAL AND SPECIAL MEETING
Advantage Oil & Gas Ltd. is pleased to invite its shareholders and other interested parties to its Annual General and
Special Meeting to be held in the Strand/Tivoli Room at the Metropolitan Centre, 333 – 4th Avenue SW, Calgary,
Alberta on Wednesday, May 23, 2012 commencing at 1:30 p.m. We ask those shareholders unable to attend the meeting
to please complete and return your Form of Proxy.
Advantage Oil & Gas Ltd. - 2
MESSAGE TO SHAREHOLDERS
The following Message to Shareholders discusses the non-consolidated financial and operating
results for Advantage, excluding Longview.
Production Growth, Reduced Costs & Hedging Deliver Solid Financial & Operating Results
Production for the fourth quarter of 2011 averaged 22,589 boe/d (94% natural gas), comparable to the
immediate prior quarter. Production in Q4 2011 at Glacier was partially impacted due to facility downtime
associated with equipment modifications related to our Phase IV development program. During 2011,
production growth at Glacier to 100 mmcf/d substantially offset the sale of approximately 6,000 boe/d of oil
assets to Longview Oil Corp. as of April 14, 2011.
Operating costs for the current quarter were $4.90/boe compared to $5.89/boe during the third quarter of
2011. The significant reduction this quarter was primarily the result of a one-time $1.7 million equalization
credit related to a gas processing facility. Excluding this equalization, Advantage operating costs are
$5.72/boe for Q4 2011 with Glacier operating costs at $1.80/boe.
Advantage’s royalty rate during the fourth quarter of 2011 was 9.3% as compared to 11.4% in the prior
quarter. The reduced royalty rate is due to a higher percentage of production from Glacier and lower natural
gas pricing.
Funds from operations for Q4 2011 were $33.6 million or $0.20 per share, slightly higher than the third
quarter of 2011 despite a 12% reduction in AECO Canadian natural gas prices. Funds from operations for
2011 were $143.3 million or $0.87 per share. Realized hedging gains for Q4 2011 and full year 2011 were
$7.3 million and $26.9 million, respectively.
In addition to the funds from operations, Advantage also received tax-free dividend income of $4.4 million
this quarter and $11.8 million for 2011 as a result of its 63% ownership in the shares of Longview Oil Corp.
(“Longview”).
Capital expenditures for the three months and year ended December 31, 2011 were $77.2 million and $202.1
million, respectively, primarily related to completing Glacier’s Phase III expansion in March 2011 and
commencing our Glacier Phase IV expansion program in July 2011. Capital expenditures at Glacier were
$178.6 million in 2011.
Bank indebtedness at December 31, 2011 was $142.5 million a decrease of 51% since December 31, 2010
primarily due to proceeds received from the sale of certain oil-weighted assets to Longview and cash flow
from operating activities. Bank indebtedness increased during Q4 2011 predominantly due to two convertible
debentures that matured in December 2011 for the sum of $62.3 million. We have one remaining convertible
debenture outstanding for $86.2 million that will mature in January 2015.
Bank debt to annualized cash flow at the end of the fourth quarter is 1.1x and 1.7x including convertible
debentures. Bank indebtedness is expected to increase during the remainder of our budget cycle as we
continue with capital activity during H1 2012.
Advantage retains balance sheet flexibility at December 31, 2011 with an undrawn credit facility of $132.5
million and a 63% ownership in the shares of Longview which had an asset value of $298 million at
December 31, 2011.
Glacier – Montney Potential Enhanced with Discovery of Natural Gas Liquids & Significant
Increase in Reserves & Resource Potential
(refer to Advantage press release dated March 15, 2012 and the Sproule Resource Assessment)
Our Phase IV drilling program began in late July 2011 and included drilling 22 gross (21.5 net) Upper
Montney wells and 7 gross (7 net) “evaluation wells” to investigate additional layers of Montney potential
specifically in the Middle Montney and to test new completion techniques in the Lower Montney.
Advantage Oil & Gas Ltd. - 3
To date, evaluation in the Middle Montney has revealed natural gas liquids (“NGL’s”) potential in 3 separate
layers. Four horizontal wells have been tested and demonstrated well production test rates between 1.1 to 4.4
mmcf/d at an average flowing pressure of 350 psi (calculated at the end of each 90 hour flow test).
Significant natural gas liquids content was observed in the gas analyses and free condensate was noted on
flow back from 3 of the 4 wells. Liquid yields are internally estimated to range from 25 bbls/mmcf to 50
bbls/mmcf assuming a shallow cut refrigeration process. Liquid yields can be increased through construction
of a higher cost facility which involves a deep cut liquids extraction process. We estimate liquid yields would
increase to the range of 57 bbls/mmcf to 90 bbls/mmcf assuming a deep cut liquids extraction process. The
propane, butane and condensate components are estimated to comprise 46% to 60% of the liquid yield in a
deep cut liquids extraction process.
We caution that we are very early in this evaluation and more delineation and analysis will have to be
undertaken in order to ascertain the drilling economics of the three Middle Montney layers. However, our
low operating cost and royalty structure at Glacier could provide significant benefits to reduce threshold
economics in support of a potential liquids rich Middle Montney program. Several options are available for
liquids processing including undertaking modifications at our existing Glacier gas plant, accessing the nearby
Alliance pipeline which accommodates NGL’s or use of current pipeline interconnections to a third party
deep cut facility which has spare processing capacity.
The discovery of NGL’s in the Middle Montney along with the recognition of additional contingent &
prospective resources in the Upper, Middle and Lower Montney have significantly enhanced the resource
potential as recognized in Sproule’s updated Glacier Montney Resource Assessment as of February 29, 2012.
Sproule’s updated Glacier Montney resource assessment resulted in a 320% increase in the Total Petroleum
Initially in Place (“TPIIP”) to 10 Tcf gross raw (9.33 Tcf raw AAV working interest) and identified
substantial contingent and prospective resources in six layers within our Montney formation. The 2P
reserves plus contingent resource best estimate increased by 90% to 2.49 TCF which represents only 27% of
the TPIIP as compared to our year end 2011 2P Montney reserves of 1.096 Tcf which represents only 12%
of the TPIIP.
In the Middle Montney, Sproule assigned a contingent resource 0.61 Tcf (best estimate) which previously had
no assignment. In addition, Sproule also identified NGL’s Initially In Place (“NGLIIP”) of 156.34 million
bbls and an ultimate recoverable resource best estimate of 50.8 million bbls based on an estimated liquid yield
of 32 to 40 bbls/mmcf for the Middle Montney formation.
Our high quality asset at Glacier contains significant scope and scale as validated by Sproule’s resource
assessment and is underpinned with one of the lowest cost structures in Western Canada which provides
Advantage with a significant drilling inventory. Our recent drilling which involved lateral and vertical
delineation through the very thick Montney formation across our contiguous land block has added another
dimension to Glacier, specifically with the Middle Montney. We estimate that the current drilling inventory
at Glacier to be in excess of 900 wells which only includes development of 3 layers in the Montney
formation.
Looking Forward – Glacier Phase IV Production Ramp-up Deferred Due to Low Natural Gas Prices
Our capital budget for the twelve month period ending June 30, 2012 was set at $216 million of which $200
million is focused on a Phase IV development program at Glacier with two key objectives: i) increase
throughput capacity at our Glacier gas plant from 100 mmcf/d to 140 mmcf/d by the second quarter of 2012
and ii) further evaluate the Middle and Lower Montney formations.
To date, we have drilled 29 gross (28.5 net) Montney horizontal wells at Glacier as part of our Phase IV
capital program and have recently began delineation in the Middle Montney which has revealed the potential
for natural gas liquids. Current behind pipe volumes are estimated to be 37 mmcf/d including wells that have
been tested and existing wells that are currently restricted as a result of our 100 mmcf/d Glacier gas plant
capacity. An additional 14 Montney wells have been drilled and are awaiting completion.
Advantage Oil & Gas Ltd. - 4
As a result of the prevailing low natural gas pricing environment, production at Glacier will be maintained
between 90 mmcf/d to 100 mmcf/d until we see a sustained increase in natural gas pricing. We will utilize
our inventory of 29 gross (28.5 net) Montney wells that have been drilled to maintain targeted production
rates at Glacier by producing and/or completing these wells as required. Additionally, we believe that the
high industry activity levels that have increased service and supply costs could subside during the latter part
of 2012 which would benefit natural gas development economics.
We believe that it is prudent to maintain capital spending discipline and financial flexibility in this current
natural gas price environment. We also believe that the current price of natural gas is unsustainable for
generating sufficient full cycle economic returns in the vast majority of North American natural gas plays and
anticipate an improvement in the natural gas price environment. As a result, we are positioning our Glacier
gas plant with the capability to ramp up production capacity to 140 mmcf/d by completing modifications as
planned in our Phase IV capital program.
At this time, we are providing interim guidance for the six months ending June 30, 2012:
Production average
22,800 boe/d to 23,400 boe/d
Royalty rate
8% to 10%
Operating expense
$5.70/boe to $6.00/boe
Capital expenditures
$65 million to $75 million
Additional capital budget and guidance details will be provided pending our evaluation of future delineation
plans for our liquids rich Middle Montney formation in order to determine the natural gas and NGL
production and reserves potential. This evaluation will include detailed analysis and interpretation of recent
geological, engineering and completions data which we obtained from our Middle Montney Phase IV wells.
In addition, we have 1 remaining Middle Montney well and 2 Lower Montney wells that are drilled and are
awaiting completion which we anticipate undertaking after spring break-up. We expect the results of this
information and our evaluation to provide more information in regard to determining a systematic
delineation plan for the balance of 2012 and beyond.
We will continue with a technically focused and financially disciplined approach to create value from our
Glacier property and will revisit our 2012 capital spending plans as required taking into account commodity
price and market dynamics.
Advantage Oil & Gas Ltd. - 5
Reserves
Advantage engaged our independent qualified reserves evaluator Sproule Associates Ltd. (“Sproule”) to update the
reserves analysis for the Company (the “Sproule Report”) in accordance with National Instrument 51-101 (“NI 51-101”)
and the COGE Handbook.
The Sproule Report includes only Advantage’s “stand-alone” reserves and excludes the assets in Longview Oil
Corp.
Reserves and production information included herein is stated on a Company Interest basis (before royalty burdens and
including royalty interests receivable) unless noted otherwise. This summary contains several cautionary statements that
are specifically required by NI 51-101. In addition to the detailed information disclosed in this annual report more
detailed information on a net interest basis (after royalty burdens and including royalty interests) and on a gross interest
basis (before royalty burdens and excluding royalty interests) is included in Advantage's Annual Information Form
("AIF") and is available at www.advantageog.com and www.sedar.com. Note that the December 31, 2010 figures below
include the assets sold to Longview Oil Corp. on April 14, 2011.
Highlights - Company Interest Reserves (Working Interests plus Royalty Interests Receivable)
December 31, 2011
December 31, 2010
Proved plus probable reserves (mboe)
218,386
Present Value of 2P reserves discounted at 10%, before tax ($000)(1) $1,483,679
$9.35
Net Asset Value per Share discounted at 10%, before tax (2)
26.4
Reserve Life Index (proved plus probable - years) (3)
1.31
Reserves per Share (proved plus probable) (2)
$0.66
Bank debt per boe of reserves (4)
$0.40
Convertible debentures per boe of reserves (4)
244,291
$2,515,972
$13.63
27.5
1.48
$1.18
$0.61
(1) Assumes that development of each property will occur, without regard to the likely availability to the Company of funding required
for that development.
(2) Based on 166.304 million Shares outstanding at December 31, 2011, and 164.092 million Shares outstanding as December 31, 2010.
(3) Based on Q4 average production and company interest reserves.
(4) Using boe's may be misleading, particularly if used in isolation. In accordance with NI 51-101, a boe conversion ratio for natural gas
of 6 mcf: 1 bbl has been used which is based on an energy equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of crude oil as
compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be
misleading as an indication of value.
Company Interest Reserves (Working Interests plus Royalty Interests Receivable)
Summary as at December 31, 2011
Light & Medium Oil
(mbbl)
Heavy Oil
(mbbl)
Natural
Gas Liquids
(mbbl)
Oil
Natural Gas Equivalent
(mboe)
(mmcf)
Proved
Developed Producing
Developed Non-producing
Undeveloped
Total Proved
Probable
Total Proved + Probable
1,458
38
48
1,544
898
2,442
19
-
-
19
10
29
2,407
7
297
2,711
1,177
3,888
245,879
17,371
556,097
819,347
452,822
1,272,169
44,863
2,941
93,028
140,832
77,554
218,386
Advantage Oil & Gas Ltd. - 6
Gross Working Interest Reserves (Working Interest only)
Summary as at December 31, 2011
Light & Medium Oil
(mbbl)
Heavy Oil
(mbbl)
Natural
Gas Liquids
(mbbl)
Oil
Natural Gas Equivalent
(mboe)
(mmcf)
Proved
Developed Producing
Developed Non-producing
Undeveloped
Total Proved
Probable
Total Proved + Probable
1,375
38
48
1,461
870
2,331
6
-
-
6
5
11
2,374
7
297
2,678
1,165
3,843
244,430
17,259
556,092
817,781
452,262
1,270,043
44,493
2,922
93,027
140,442
77,416
217,858
Present Value of Future Net Revenue using Sproule price and cost forecasts (1)(2)
($000)
Proved
Developed Producing
Developed Non-producing
Undeveloped
Total Proved
0%
$737,412
64,615
1,545,887
2,347,914
Probable
Total Proved + Probable
2,227,996
$4,575,910
Before Income Taxes Discounted at
10%
15%
$476,330
35,282
399,105
910,718
572,961
$1,483,679
$404,290
28,459
198,522
631,272
367,629
$998,900
(1) Advantage’s crude oil, natural gas and natural gas liquid reserves were evaluated using Sproule’s product price forecast effective
December 31, 2011 prior to the provision for income taxes, interests, debt services charges and general and administrative
expenses. It should not be assumed that the discounted future revenue estimated by Sproule represents the fair market value of the
reserves.
(2) Assumes that development of each property will occur, without regard to the likely availability to the Company of funding required
for that development.
Sproule Price Forecasts
The present value of future net revenue at December 31, 2011 was based upon crude oil and natural gas pricing
assumptions prepared by Sproule effective December 31, 2011. These forecasts are adjusted for reserve quality,
transportation charges and the provision of any applicable sales contracts. The price assumptions used over the next
seven years are summarized in the table below:
Year
2012
2013
2014
2015
2016
2017
2018
WTI Edmonton Light Alberta AECO-C
Natural Gas
($Cdn/mmbtu)
3.16
3.78
4.13
5.53
5.65
5.77
5.89
Crude Oil
($Cdn/bbl)
96.87
93.75
90.89
96.23
98.16
100.12
102.12
Crude Oil
($US/bbl)
98.07
94.90
92.00
97.42
99.37
101.35
103.38
Henry Hub Exchange
Rate
Natural Gas
($US/mmbtu)($US/$Cdn)
1.012
3.55
1.012
4.18
1.012
4.54
1.012
5.95
1.012
6.07
1.012
6.19
1.012
6.32
Advantage Oil & Gas Ltd. - 7
Net Asset Value using Sproule price and cost forecasts (Before Income Taxes)
The following net asset value ("NAV") table shows what is normally referred to as a "produce-out" NAV calculation
under which the current value of the Company’s reserves would be produced at forecast future prices and costs. The
value is a snapshot in time and is based on various assumptions including commodity prices and foreign exchange rates
that vary over time.
Before Income Taxes Discounted at
($000, except per Share amounts)
Net asset value per Share (1) - December 31, 2010
Present value proved and probable reserves
Undeveloped acreage and seismic (2)
Working capital (deficit) and other
Convertible debentures
Bank debt
Longview shares at market value
Net asset value - December 31, 2011
Net asset value per Share (1) - December 31, 2011
0%
$38.70
$4,575,910
71,630
(70,564)
(86,250)
(141,705)
298,034
$4,647,055
$27.94
10%
$13.63
$1,483,679
71,630
(70,564)
(86,250)
(141,705)
298,034
15%
$9.33
$998,900
71,630
(70,564)
(86,250)
(141,705)
298,034
$1,554,824
$1,070,045
$9.35
$6.43
(1) Based on 166.304 million Shares outstanding at December 31, 2011, and 164.092 million Shares outstanding at
December 31, 2010.
(2) Internal estimate
Gross Working Interest Reserves Reconciliation
Proved
Opening balance Dec. 31, 2010
Extensions
Improved recovery
Infill Drilling
Discoveries
Economic factors
Technical revisions
Acquisitions
Dispositions
Production
Light &
Medium Oil
(mbbl)
13,862
28
-
1
-
8
63
-
(12,277)
(224)
Heavy
Oil
(mbbl)
1,654
-
-
-
-
(2)
(26)
-
(1,619)
(1)
Natural Gas
Liquids
(mbbl)
5,181
1
-
8
-
(129)
(575)
1
(1,463)
(346)
Natural
Oil
Gas Equivalent
(mboe)
143,371
2,067
-
2,645
-
(3,445)
23,681
4
(19,985)
(7,896)
(mmcf)
736,040
12,227
-
15,819
-
(19,932)
145,316
19
(27,756)
(43,952)
Closing balance at Dec. 31, 2011
1,461
6
2,678
817,781
140,442
Advantage Oil & Gas Ltd. - 8
Gross Working Interest Reserves Reconciliation (continued)
Proved + Probable
Opening balance Dec. 31, 2010
Extensions
Improved recovery
Infill Drilling
Discoveries
Economic factors
Technical revisions
Acquisitions
Dispositions
Production
Light &
Medium Oil
(mbbl)
24,044
38
-
2
-
24
(438)
-
(21,115)
(224)
Heavy
Oil
(mbbl)
4,487
-
-
-
-
8
(61)
-
(4,422)
(1)
Natural Gas
Liquids
(mbbl)
7,796
2
-
11
-
(151)
(1,007)
1
(2,463)
(346)
Natural
Oil
Gas Equivalent
(mboe)
243,656
4,931
-
3,470
-
(3,603)
13,766
5
(36,471)
(7,896)
(mmcf)
1,243,969
29,346
-
20,747
-
(20,900)
91,631
27
(50,825)
(43,952)
Closing balance at Dec. 31, 2011
2,331
11
3,843
1,270,043
217,858
Finding, Development & Acquisitions Costs (“FD&A”) (1)(2)(3)
2011 FD&A Costs – Gross Working Interest Reserves excluding Future Development Capital
Capital expenditures ($000)
Acquisitions net of dispositions ($000)
Total capital ($000)
Total mboe, end of year
Total mboe, beginning of year
Production, mboe
Reserve additions, mboe
2011 FD&A costs ($/boe)
2010 FD&A costs ($/boe)
Three year average FD&A costs ($/boe)
2011 F&D costs ($/boe)
2010 F&D costs ($/boe)
Three year average F&D costs ($/boe)
Proved
$202,148
(547,007)
$(344,859)
140,442
143,371
7,896
4,967
$(69.42)
$3.47
$(4.05)
$8.10
$4.60
$5.51
Proved + Probable
$202,148
(547,007)
$(344,859)
217,858
243,656
7,896
(17,902)
$19.27
$7.61
$(3.74)
$10.89
$8.46
$4.23
Advantage Oil & Gas Ltd. - 9
NI 51-101
2011 FD&A Costs – Gross Working Interest Reserves including Future Development Capital
Capital expenditures ($000)
Acquisitions net of dispositions ($000)
Net change in Future Development Capital ($000)
Total capital ($000)
Reserve additions, mboe
2011 FD&A costs ($/boe)
2010 FD&A costs ($/boe)
Three year average FD&A costs ($/boe)
2011 F&D costs ($/boe)
2010 F&D costs ($/boe)
Three year average F&D costs ($/boe)
Proved
$202,148
(547,007)
42,053
$(302,806)
4,967
$(60.95)
$11.06
$8.46
$9.79
$11.55
$13.10
Proved + Probable
$202,148
(547,007)
(37,932)
$(382,791)
(17,902)
$21.38
$10.89
$7.51
$8.85
$10.97
$9.90
(1) Under NI 51-101, the methodology to be used to calculate FD&A costs includes incorporating changes in future development
capital ("FDC") required to bring the proved undeveloped and probable reserves to production. For continuity, Advantage has
presented herein FD&A costs calculated both excluding and including FDC.
(2) The aggregate of the exploration and development costs incurred in the most recent financial year and the change during that year
in estimated future development costs generally will not reflect total finding and development costs related to reserves additions for
that year. Changes in forecast FDC occur annually as a result of development activities, acquisition and disposition activities and
capital cost estimates that reflect Sproule’s best estimate of what it will cost to bring the proved undeveloped and probable reserves
on production.
(3) In all cases, the FD&A number is calculated by dividing the identified capital expenditures by the applicable reserve additions. Boes
may be misleading, particularly if used in isolation. A boe conversion ratio of 6 MCF:1 BBL is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the
value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency
of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.
Advantage Oil & Gas Ltd. - 10
Consolidated Management’s Discussion & Analysis
The following Management’s Discussion and Analysis (“MD&A”), dated as of March 23, 2012, provides a detailed explanation of the
consolidated financial and operating results of Advantage Oil & Gas Ltd. (“Advantage”, the “Corporation”, “us”, “we” or “our”) for
the three months and year ended December 31, 2011 and should be read in conjunction with the December 31, 2011 audited
consolidated financial statements. The consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards (“IFRS”) and all references are to Canadian dollars unless otherwise indicated. The term "boe" or barrels of oil
equivalent may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet of natural gas to one
barrel of oil equivalent (6 mcf: 1 bbl) is based on an energy equivalency conversion method primarily applicable at the burner tip and
does not represent a value equivalency at the wellhead. As the value ratio between natural gas and crude oil based on the current prices
of natural gas and crude oil is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be
misleading as an indication of value.
Non-GAAP Measures
The Corporation discloses several financial measures in the MD&A that do not have any standardized meaning prescribed under
GAAP. These financial measures include funds from operations and cash netbacks. Management believes that these financial measures
are useful supplemental information to analyze operating performance and provide an indication of the results generated by the
Corporation’s principal business activities prior to the consideration of how these activities are financed or how the results are taxed.
Investors should be cautioned that these measures should not be construed as an alternative to net income, comprehensive income,
cash provided by operating activities or other measures of financial performance as determined in accordance with GAAP.
Advantage’s method of calculating these measures may differ from other companies, and accordingly, they may not be comparable to
similar measures used by other companies.
Funds from operations, as presented, is based on cash provided by operating activities before expenditures on decommissioning
liability and changes in non-cash working capital reduced for finance expense excluding accretion. Cash netbacks are dependent on the
determination of funds from operations and include the primary cash sales and expenses on a per boe basis that comprise funds from
operations. Funds from operations reconciled to cash provided by operating activities is as follows:
Three months ended
December 31
Year ended
December 31
($000)
Cash provided by operating activities
Expenditures on decommissioning liability
Changes in non-cash working capital
Finance expense (1)
Funds from operations
(1) Finance expense excludes non-cash accretion expense.
Creation of Longview Oil Corp.
$
$
$
$
2011
79,932
761
(21,922)
(4,137)
54,634
2010
60,964
1,811
(16,468)
(5,679)
40,628
% change
31 %
(58) %
33 %
(27) %
34 %
2011
218,181
3,335
(4,131)
(20,354)
197,031
2010
222,866
6,275
(31,008)
(24,832)
173,301
% change
(2) %
(47) %
(87) %
(18) %
14 %
$
$
$
$
On April 14, 2011, Advantage’s wholly-owned subsidiary, Longview Oil Corp. (“Longview”), completed its initial public offering (the
“Offering”) at a price of $10 per common share issuing 17,250,000 common shares and raising gross proceeds of $172.5 million
(including full exercise of the over-allotment option on April 28, 2011). Concurrent with the closing of the Offering, Longview
purchased certain oil-weighted assets (the “Acquired Assets”) from Advantage for total consideration of $546.9 million, comprised of
29,450,000 common shares of Longview representing a 63% equity ownership and $252.4 million in cash (the “Acquisition”). The
Acquired Assets were purchased with an effective date of January 1, 2011 and a closing date of April 14, 2011. As Advantage is the
parent company and has a majority ownership interest of Longview, the financial and operating results of Longview are consolidated
100% within Advantage and non-controlling interest has been recognized which represents Longview’s independent shareholders 37%
ownership interest in the net assets and income of Longview. Refer to the MD&A section “Supplementary Financial and Operating
information for Advantage and Longview” which provides detailed financial and operational information with respect to the separate
legal entities.
As the Acquisition closed on April 14, 2011, financial and operating results from the Acquired Assets belong to Advantage for the
period prior to April 14, 2011 and are solely attributed to Advantage’s shareholders. For the period from April 14 to December 31,
2011, the financial and operating results from the Acquired Assets belong to Longview and are attributed to Longview’s shareholders
based on their ownership interests.
Advantage Oil & Gas Ltd. - 11
Upon closing of the Acquisition, Advantage entered into a Technical Services Agreement (the “TSA”) with Longview. Under the TSA,
Advantage will provide the necessary personnel and technical services to manage Longview's business and Longview will reimburse
Advantage on a monthly basis for its share of administrative charges based on respective levels of production. Longview has an
independent board of directors with three initial members. The officers of Longview provide services to Longview under the TSA but
remain employees of Advantage.
Supplementary Financial and Operating Information for Advantage and Longview
The following information has been presented to provide additional information with respect to the legal entity financial and operating
information for each of Advantage and Longview. As the Acquisition closed on April 14, 2011, financial and operating results from
the Acquired Assets belong to Advantage for the period prior to April 14, 2011 and are solely attributed to Advantage’s shareholders.
For the period from April 14 to December 31, 2011, the financial and operating results from the Acquired Assets belong to Longview
and are attributed to Longview’s shareholders based on their ownership interests.
Production
Natural gas (mcf/d)
Crude oil (bbls/d)
NGLs (bbls/d)
Total (boe/d)
Natural gas (%)
Crude oil (%)
NGLs (%)
Natural Gas Prices ($/mcf)
Realized natural gas prices
Excluding hedging
Including hedging
Crude Oil and NGLs Prices ($/bbl)
Realized crude oil prices
Excluding hedging
Including hedging
Realized NGLs prices
Excluding hedging
Realized crude oil and NGLs prices
Excluding hedging
Including hedging
Cash netbacks ($/boe)
Petroleum and natural gas sales
Royalties
Realized gain (loss) on derivatives
Operating expense
Operating
General and administrative expense (2)
Finance expense (3)
Miscellaneous income
Cash netbacks
Three months ended
December 31, 2011
Year ended
December 31, 2011
Advantage
Longview Consolidated
Advantage
Longview (1) Consolidated
127,265
630
748
22,589
94%
3%
3%
10,215
4,552
568
6,823
25%
67%
8%
137,480
5,182
1,316
29,411
78%
18%
4%
123,246
1,746
1,118
23,405
88%
7%
5%
9,514
4,131
559
6,276
25%
66%
9%
130,075
4,711
1,519
27,909
78%
17%
5%
$
$
3.16
3.78
$
$
3.47
3.47
$
$
3.18
3.76
$
$
3.55
4.19
$
$
3.81
3.81
$
$
3.57
4.17
$
$
91.40
91.40
$
$
89.05
87.37
$
$
89.34
87.86
$
$
85.68
82.95
$
$
87.81
86.81
$
$
87.02
85.38
$
87.23
$
66.05
$
78.09
$
66.31
$
63.77
$
65.64
$
$
89.14
89.14
$
$
86.50
85.01
$
$
87.06
85.88
$
$
78.12
76.45
$
$
84.95
84.06
$
$
81.81
80.56
$
$
$
$
$
$
23.24
(2.16)
3.49
(4.90)
19.67
(2.12)
(1.44)
0.04
16.15
70.11
(14.11)
(1.12)
(18.36)
36.52
(1.15)
(1.84)
-
33.53
34.11
(4.93)
2.42
(8.03)
23.57
(1.89)
(1.53)
0.03
20.18
28.26
(3.47)
3.15
(6.96)
20.98
(2.28)
(2.00)
0.07
16.77
69.26
(14.18)
(0.66)
(18.06)
36.36
(1.67)
(2.01)
0.01
32.69
34.88
(5.20)
2.54
(8.75)
23.47
(2.18)
(2.00)
0.06
19.35
$
$
$
$
$
$
(1) The year ended December 31, 2011 represents Longview's financial and operating results for the period from April 14 to December 31, 2011.
(2) General and administrative expense excludes non-cash G&A and non-cash share-based compensation expense.
(3) Finance expense excludes non-cash accretion expense.
Advantage Oil & Gas Ltd. - 12
($000, except as otherwise indicated)
Sales including realized hedging
Natural gas sales
Realized hedging gains
Natural gas sales including hedging
Crude oil and NGLs sales
Realized hedging losses
Crude oil and NGLs sales
including hedging
Total
per boe
Royalties
per boe
As a percentage of petroleum and
natural gas sales
Operating expense
per boe
General and administrative
expense (2)
per boe
Three months ended
December 31, 2011
Year ended
December 31, 2011
Advantage
Longview Consolidated Advantage Longview (1) Consolidated
$
36,986
7,262
44,248
11,307
-
$
3,263
-
3,263
40,744
(704)
$
40,249
7,262
47,511
52,051
(704)
$
159,774
28,657
188,431
81,646
(1,741)
$
9,500
-
9,500
104,368
(1,090)
$
169,274
28,657
197,931
186,014
(2,831)
11,307
55,555
26.73
$
$
40,040
43,303
68.99
$
$
51,347
98,858
36.53
$
$
79,905
268,336
31.41
$
$
103,278
112,778
68.60
$
$
183,183
381,114
37.42
$
$
$
$
4,481
2.16
9.3%
$
$
8,858
14.11
20.1%
$
$
13,339
4.93
14.5%
$
$
29,661
3.47
12.3%
$
$
23,310
14.18
20.5%
$
$
52,971
5.20
14.9%
$
$
10,191
4.90
$
$
11,526
18.36
$
$
21,717
8.03
$
$
59,473
6.96
$
$
29,693
18.06
$
$
89,166
8.75
$
$
4,400
2.12
$
$
719
1.15
$
$
5,119
1.89
$
$
19,497
2.28
$
$
2,742
1.67
$
$
22,239
2.18
Interest on bank indebtedness
per boe
$
$
989
0.48
$
$
1,153
1.84
$
$
2,142
0.79
$
$
8,173
0.96
$
$
3,310
2.01
$
$
11,483
1.13
Interest on convertible debentures
per boe
Miscellaneous income
per boe
Funds from operations
per boe
per share (3) (4)
Dividends from Longview
(declared by Longview)
$
$
1,995
0.96
$
-
$
-
$
$
1,995
0.74
$
$
8,871
1.04
$
-
$
-
$
$
8,871
0.87
$
$
88
0.04
$
-
$
-
$
$
88
0.03
$
$
634
0.07
$
$
13
0.01
$
$
647
0.06
$
$
$
33,587
16.15
0.20
$
$
$
21,047
33.53
0.45
$
$
$
54,634
20.18
0.28
$
$
$
143,295
16.77
0.87
$
$
$
53,736
32.69
1.61
$
$
$
197,031
19.35
1.07
$
4,417
$
(7,012)
$
(2,595)
$
11,780
$
(18,695)
$
(6,915)
Expenditures on property, plant and
$
75,572
$
25,625
$
101,197
$
199,217
$
54,957
$
254,174
equipment
Expenditures on exploration and
1,604
$
20
1,624
2,930
76
3,006
evaluation assets
Total capital spending
Debt and working capital
Bank indebtedness
Convertible debentures
Working capital deficit
$
77,176
$
25,645
$
102,821
$
202,147
$
55,033
$
257,180
$
$
$
142,548
86,250
70,564
91,355
$
$
-
$
20,074
$
$
$
233,903
86,250
90,638
(1) The year ended December 31, 2011 represents Longview's financial and operating results for the period from April 14 to December 31, 2011.
(2) General and administrative expense excludes non-cash G&A and non-cash share-based compensation expense.
(3) Based on basic weighted average shares outstanding applicable to each legal entity.
(4) Consolidated funds from operations per share excludes funds from operations attributable to the non-controlling interest of Longview.
Advantage Oil & Gas Ltd. - 13
Transition to International Financial Reporting Standards
The consolidated financial statements, MD&A and comparative information have been prepared in accordance with IFRS
representing generally accepted accounting principles (“GAAP”) for publicly accountable enterprises in Canada. The transition date to
IFRS was January 1, 2010 and comparative figures for 2010 and Advantage’s financial position as at January 1, 2010 have been restated
to IFRS from the previous Canadian generally accepted accounting principles (“Previous GAAP”). Reconciliations to IFRS from
Previous GAAP financial statements including the impact of the transition on the Corporation's reported financial position and
financial performance, and the nature and effect of significant changes in accounting policies from those used in the Corporation’s
Previous GAAP consolidated financial statements for the year ended December 31, 2010, are summarized in note 25 to the audited
consolidated financial statements.
Forward-Looking Information
This MD&A contains certain forward-looking statements, which are based on our current internal expectations, estimates, projections,
assumptions and beliefs. These statements relate to future events or our future performance. All statements other than statements of
historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of
words such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "predict", "potential", "targeting",
"intend", "could", "might", "should", "believe", "would" and similar or related expressions. These statements are not guarantees of
future performance.
In particular, forward-looking statements included in this MD&A include, but are not limited to, statements with respect to terms of
the TSA with Longview; effect of commodity prices on the Corporation's Corporation’s financial condition and performance,
including cash provided by operating activities, funds from operations, net income and comprehensive income; industry conditions;
effect of commodity prices on sales, drilling activity and supply levels; effect of derivative contracts on sales and cash flows; the
Corporation's hedging strategy; effect of the Corporation's risk management activities; expected effect on production from the
completion of facilities and infrastructure expansion work in Glacier, Alberta; expected production from the Glacier development;
projected royalty rates; average royalty rates; terms of the Plans and the grants of restricted shares; terms of the convertible
debentures; the Corporation's estimated tax pools; timing of expiry of federal non-capital loss carry forward; future commitments and
contractual obligations; effect of changes in reserves estimates or commodity prices on the borrowing base of the Credit Facilities (as
defined herein); terms of the Credit Facilities, including Management's expectations regarding extension of the term of the Credit
Facilities; the Corporation's plans for managing its capital structure; the Corporation's ability to satisfy all liabilities and commitments
as they come due; our future operating and financial results; supply and demand for oil and natural gas; projections of market prices
and costs; effect of natural gas, oil prices and exchange rates on the Corporation's financial performance; the Corporation’s
exploration and drilling plans; focus of spending and capital budgets; capital expenditure programs; the focus and anticipated timing of
capital expenditures; plans for development of the Middle and Lower Montney; projected average production; anticipated timing of
incremental production; expected exit rate production for Longview; the Corporation's business strategy and it plans for its assets;
Longview's business strategy; the performance characteristics of our properties; and the amount of general and administrative
expenses.
In addition, statements relating to "reserves" or "resources" are deemed to be forward-looking statements, as they involve the implied
assessment, based on certain estimates and assumptions, that the resources and reserves described can be profitably produced in the
future.
These forward-looking statements involve substantial known and unknown risks and uncertainties, many of which are beyond our
control, including, but not limited to, changes in general economic, market and business conditions; stock market volatility; changes to
legislation and regulations and how they are interpreted and enforced; changes to investment eligibility or investment criteria; our
ability to comply with current and future environmental or other laws; actions by governmental or regulatory authorities including
increasing taxes, changes in investment or other regulations; changes in tax laws, royalty regimes and incentive programs relating to the
oil and gas industry; the effect of acquisitions; our success at acquisition, exploitation and development of reserves; unexpected drilling
results, changes in commodity prices, currency exchange rates, capital expenditures, reserves or reserves estimates and debt service
requirements; the occurrence of unexpected events involved in the exploration for, and the operation and development of, oil and gas
properties; hazards such as fire, explosion, blowouts, cratering, and spills, each of which could result in substantial damage to wells,
production facilities, other property and the environment or in personal injury; changes or fluctuations in production levels;
competition from other producers; the lack of availability of qualified personnel or management; individual well productivity; ability to
access sufficient capital from internal and external sources; credit risk; and the risks and uncertainties are described in the
Corporation’s Annual Information Form which is available at www.sedar.com and www.advantageog.com. Readers are also referred to
risk factors described in other documents Advantage files with Canadian securities authorities.
Advantage Oil & Gas Ltd. - 14
With respect to forward-looking statements contained in this MD&A, Advantage has made assumptions regarding, but not limited to:
conditions in general economic and financial markets; effects of regulation by governmental agencies; current commodity prices and
royalty regimes; future exchange rates; royalty rates; future operating costs; availability of skilled labour; availability of drilling and
related equipment; timing and amount of capital expenditures; the impact of increasing competition; the price of oil and natural gas;
that the Corporation will have sufficient cash flow, debt or equity sources or other financial resources required to fund its capital and
operating expenditures and requirements as needed; that the Corporation’s conduct and results of operations will be consistent with its
expectations; that the Corporation will have the ability to develop the Corporation’s oil and gas properties in the manner currently
contemplated; current or, where applicable, proposed assumed industry conditions, laws and regulations will continue in effect or as
anticipated as described herein; and the estimates of the Corporation’s production and reserves volumes and the assumptions related
thereto (including commodity prices and development costs) are accurate in all material respects.
Management has included the above summary of assumptions and risks related to forward-looking information provided in this
MD&A in order to provide shareholders with a more complete perspective on Advantage's future operations and such information
may not be appropriate for other purposes. Advantage’s actual results, performance or achievement could differ materially from those
expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events
anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits that Advantage will derive
there from. Readers are cautioned that the foregoing lists of factors are not exhaustive. These forward-looking statements are made as
of the date of this MD&A and Advantage disclaims any intent or obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or results or otherwise, other than as required by applicable securities laws.
Advantage Oil & Gas Ltd. - 15
Overview
Cash provided by operating
activities ($000)
Funds from operations ($000)
per share (1)
per boe
Three months ended
December 31
Year ended
December 31
2011
2010
% change
2011
2010
% change
$
$
$
$
79,932
54,634
0.28
20.18
$
$
$
$
60,964
40,628
0.25
18.16
31
34
12
11
%
%
%
%
$
$
$
$
218,181
197,031
1.07
19.35
$
$
$
$
222,866
173,301
1.06
19.67
%
(2)
14
%
%
1
%
(2)
(1) Based on basic weighted average shares outstanding and excludes funds
from operations attributable to the non-controlling interest of Longview.
Funds from operations for 2011 have been strong, driven by increases in production and continued gains from our hedging program,
which demonstrates the clear ongoing improvement in our financial and operating results from our focused development program.
Average daily production during the fourth quarter of 2011 increased 21% above the same period of 2010, with a 30% increase in
natural gas production and a 6% increase in crude oil production, partially offset by a 24% decrease NGLs production. For the three
months ended December 31, 2011, we recognized a net realized derivative gain of $6.6 million and for the year ended December 31,
2011, we recognized a net realized derivative gain of $25.8 million on settled derivative contracts, primarily as a result of lower average
actual natural gas prices during the periods as compared to our established average hedge prices. Our successful commodity price risk
management program continued to realize significant gains on derivatives during 2011 that has helped to offset the continued weak
natural gas prices and positively impact funds from operations. Our net realized derivative gain has decreased during 2011 as
compared to 2010 as we had less natural gas production hedged for this year at lower average prices and we have generally realized
losses on our crude oil hedges. Funds from operations have also benefited during this year from higher crude oil prices and continued
cost reductions, such as operating costs, general and administrative expense, and finance expense. Unfortunately, natural gas prices still
remain weak and pose a continuing challenge to the entire natural gas industry. When comparing the current quarter to the third
quarter of 2011, our funds from operations increased 9% and funds from operations per boe were 6% higher as realized crude oil and
NGL prices increased during this quarter and general costs continued to decrease, including operating costs.
Our financial and operating results during 2011 as compared to 2010 have been partially impacted by dispositions completed during
the second quarter of 2010. On May 31 and June 3, 2010, we closed two asset dispositions of non-core natural gas weighted properties
for net proceeds of $66.5 million and representing production of approximately 1,700 boe/d. The net proceeds from the various
dispositions were utilized to reduce outstanding debt. As a result of the dispositions, total funds from operations was negatively
impacted for 2011 as compared to 2010 with all sales and expenses generally impacted.
As a result of asset dispositions completed in 2010 and 2011 and changes in commodity prices, historical financial and
operating performance may not be indicative of actual future performance.
The primary factor that causes significant variability of the Corporation’s cash provided by operating activities, funds from operations,
net income and comprehensive income is commodity prices. Refer to the section “Commodity Prices and Marketing” for a more
detailed discussion of commodity prices and our price risk management.
Advantage Oil & Gas Ltd. - 16
Petroleum, Natural Gas Sales and Hedging
Three months ended
December 31
Year ended
December 31
($000)
Natural gas sales
Realized hedging gains
Natural gas sales including hedging
Crude oil and NGLs sales
Realized hedging losses
Crude oil and NGLs sales
including hedging
Total (1)
(1) Total excludes unrealized derivative gains and losses.
$
2011
40,249
7,262
47,511
52,051
(704)
51,347
98,858
$
$
2010
34,081
12,871
46,952
42,140
(3,080)
% change
18
%
%
(44)
%
1
%
24
%
(77)
$
2011
169,274
28,657
197,931
186,014
(2,831)
$
2010
146,572
55,360
201,932
172,796
(10,227)
% change
%
15
%
(48)
%
(2)
%
8
%
(72)
39,060
86,012
$
31
%
%
15
183,183
381,114
$
162,569
364,501
$
%
13
%
5
Total sales, excluding hedging, increased 21% and 11% for the three months and year ended December 31, 2011 as compared to 2010,
respectively. Sales have been positively impacted from significant increases in our production during these periods due to our
successful exploration and development activities. Natural gas sales in particular have benefited from our Montney natural gas
resource play at Glacier, Alberta where we have increased production capacity with our Phase III facilities and infrastructure expansion
work completed in the first quarter of 2011. Crude oil and NGL production has also increased during the fourth quarter of 2011 due
to production additions from Longview’s capital expenditure program that began late in 2011, delayed by poor field conditions from
severe wet weather. The increase in sales during 2011 has been partially offset by reduced production attributable to asset dispositions
that closed in the second quarter of 2010. We have also experienced an increase in sales during 2011 due to higher realized crude oil
and NGLs prices, excluding hedging. However, sales continues to be adversely impacted by the natural gas price environment that has
been weak during the last several years attributable to many factors, including continued high US domestic natural gas production that
has increased supply and the ongoing weak North American economy that has negatively impacted demand. These factors, in
combination with mild weather conditions, have resulted in historic high inventory levels that are currently well-above the five-year
average. This current environment has placed considerable downward pressure on natural gas prices.
Given the low natural gas price environment, our commodity price risk management program has delivered realized natural gas
hedging gains of $7.3 million and $28.7 million for the three months and year ended December 31, 2011, respectively. As crude oil
prices have remained relatively strong, we realized minor crude oil hedging losses of $0.7 million for the three months and $2.8 million
for the year ended December 31, 2011. The Corporation enters derivative contracts whereby realized hedging gains and losses partially
offset commodity price fluctuations, which can positively or negatively impact sales. The realized natural gas hedging gains have been
significant and helped us stabilize cash flows and ensure that our capital expenditure program is substantially funded by such cash
flows. However, we have no natural gas hedges for 2012.
Production
Natural gas (mcf/d)
Crude oil (bbls/d)
NGLs (bbls/d)
Total (boe/d)
Natural gas (%)
Crude oil (%)
NGLs (%)
Three months ended
December 31
Year ended
December 31
2011
137,480
5,182
1,316
29,411
78%
18%
4%
% change
30
%
%
6
(24)
%
%
21
2010
106,125
4,886
1,734
24,308
73%
20%
7%
2011
130,075
4,711
1,519
27,909
78%
17%
5%
% change
28
%
%
(7)
(29)
%
%
16
2010
101,562
5,076
2,126
24,129
70%
21%
9%
Average daily production during the fourth quarter of 2011 increased 21% above the same period of 2010, with a 30% increase in
natural gas production and a 6% increase in crude oil production, partially offset by a 24% decrease NGLs production. Production for
the current quarter was 3% higher than the 28,638 boe/d reported in the third quarter of 2011. For the year ended December 31,
2011, average daily production increased 16% above the prior year, with a 28% increase in natural gas production and decreases in
both crude oil and NGLs production.
Advantage Oil & Gas Ltd. - 17
Production for 2010 and 2011 has continued to be primarily impacted by Advantage’s significant production growth at Glacier,
Alberta. During the second quarter of 2010 our 100% working interest gas plant (“Glacier gas plant”) was brought on-stream ahead of
schedule with production rates exceeding 50 mmcf/d (8,300 boe/d). Due to stronger than expected well performance, we were able to
further increase Glacier production exiting 2010 exceeding 60 mmcf/d (10,000 boe/d). Phase III of our Glacier development project
was completed during the first quarter of 2011 on-budget and ahead of schedule with production capacity at 100 mmcf/d (16,667
boe/d) resulting in a peak corporate production rate of approximately 30,000 boe/d at March 31, 2011. During the third quarter of
2011, the Glacier gas plant experienced planned facility downtime to complete our acid gas injection system and maintenance work
conducted by TransCanada Pipelines (“TCPL”). During the fourth quarter of 2011, we successfully commissioned the acid gas
injection system which is now capable of disposing acid gas volumes for plant inlet gas volumes in excess of 140 mmcf/d. In addition,
TCPL completed further looping of their sales pipeline lateral in preparation for our plant expansion to 140 mmcf/d. These projects
represent significant milestones towards achieving our Glacier Phase IV development and will provide additional flexibility for future
production growth. Further plant downtime will be required during the first and second quarters of 2012 to accommodate future
equipment installations to finalize the expansion of our Glacier gas plant processing capacity to 140 mmcf/d.
Longview’s daily production averaged 6,823 boe/d for the fourth quarter of 2011, an increase of 12% from 6,071 boe/d realized in the
third quarter of 2011 with 75% from crude oil and NGLs. During much of the spring and summer, field conditions were poor with
severe wet weather that created challenges for the industry to conduct regular well maintenance and sustain production levels.
Fortunately, much of Longview’s production is pipeline connected rather than trucked and they experienced less outages such that the
weather impact was minimal. However, routine well maintenance and their current year capital program were delayed while conditions
improved. During the third quarter Longview began to expedite maintenance activities, workovers and reactivations and commenced
their 2011 Alberta capital expenditure program in July with the Saskatchewan program beginning in September. The well maintenance
and workover activity continued into the fourth quarter and generally lead to higher operating costs during these periods. Production
additions from their capital expenditure program began at the end of the third quarter and resulted in their fourth quarter production
increasing 12%.
Commodity Prices and Marketing
Natural Gas
($/mcf)
Realized natural gas prices
Excluding hedging
Including hedging
AECO daily index
Three months ended
December 31
Year ended
December 31
2011
2010
% change
2011
2010
% change
$
$
$
3.18
3.76
3.20
$
$
$
3.49
4.81
3.63
%
(9)
%
(22)
%
(12)
$
$
$
3.57
4.17
3.63
$
$
$
3.95
5.45
3.99
%
(10)
(23)
%
%
(9)
Realized natural gas prices, excluding hedging, for the three months ended December 31, 2011 were 9% lower as compared to the
same period of 2010 and decreased 10% for the year ended December 31, 2011 as compared to the prior year. Our realized natural gas
prices, excluding hedging, for this quarter were 12% lower than the $3.62/mcf realized during the third quarter of 2011. Although
natural gas prices have continued to remain weak, our commodity hedging has resulted in realized natural gas prices, including
hedging, that exceeds current market prices and has reduced the volatility of our cash flows. However, realized natural gas prices,
including hedging, have decreased more during 2011 as compared to 2010 as we had less natural gas production hedged for this year at
lower average prices. We have no natural gas production hedged for 2012.
During 2010 and 2011, natural gas prices have remained low from continued high US domestic natural gas production that has
increased supply, particularly from non-conventional natural gas resource plays, and the ongoing weak North American economy that
has negatively impacted demand. These factors, in combination with mild weather conditions, have resulted in historic high inventory
levels that are currently well-above the five-year average. This current environment has placed considerable downward pressure on
natural gas prices with AECO gas presently trading at approximately $1.80/mcf and we anticipate that natural gas prices will remain
low in the near term. We continue to believe in the longer-term price support for natural gas due to the increased proportion of
resource based natural gas supplies that experience higher initial production declines and reduced conventional natural gas drilling,
both of which could eventually lead to a more balanced supply and demand environment. We monitor market developments closely
and will be proactive in implementing an appropriate hedging strategy to mitigate the volatility in our cash flow as a result of
fluctuations in natural gas prices.
Advantage Oil & Gas Ltd. - 18
Crude Oil and NGLs
($/bbl)
Realized crude oil prices
Excluding hedging
Including hedging
Realized NGLs prices
Excluding hedging
Realized crude oil and NGLs prices
Excluding hedging
Including hedging
WTI ($US/bbl)
$US/$Canadian exchange rate
Three months ended
December 31
Year ended
December 31
2011
2010
% change
2011
2010
% change
$
$
89.34
87.86
$
$
74.76
67.91
20 %
29 %
$
$
87.02
85.38
$
$
72.80
67.28
20 %
27 %
$
78.09
$
53.50
46 %
$
65.64
$
48.88
34 %
$
$
$
$
87.06
85.88
94.02
0.98
$
$
$
$
69.19
64.14
85.18
0.99
26 %
34 %
10 %
(1) %
$
$
$
$
81.81
80.56
95.14
1.01
$
$
$
$
65.74
61.85
79.55
0.97
24 %
30 %
20 %
4 %
Realized crude oil and NGLs prices, excluding hedging, increased 26% for the three months ended and 24% for the year ended
December 31, 2011, as compared to the same periods of 2010. Realized crude oil and NGLs prices, excluding hedging, have increased
14% for the fourth quarter of 2011 in comparison to the third quarter of 2011. Crude oil and NGL pricing has continued to
experience considerable volatility with West Texas Intermediate (“WTI”) increasing 5% to US$94.02/bbl as compared to
US$89.81/bbl experienced in the third quarter of 2011. Advantage’s realized crude oil price may not change to the same extent as WTI
due to changes in the $US/$Canadian exchange rate and changes in Canadian crude oil differentials relative to WTI. The price of WTI
fluctuates based on worldwide supply and demand fundamentals with significant price volatility experienced over the last several years.
WTI had been relatively strong during 2010 and near the end of the year began to increase and significantly escalated during early
2011, primarily influenced by middle-east tensions and associated supply concerns, with WTI currently trading at approximately
US$107/bbl. However, we have also seen a general strengthening of the $US/$Canadian exchange rate during these periods that has
partially offset the improvement in WTI. We believe that the long-term pricing fundamentals for crude oil will remain strong with
supply management by the OPEC cartel and strong relative demand from developing countries.
Commodity Price Risk
The Corporation’s financial results and condition will be dependent on the prices received for oil and natural gas production. Oil and
natural gas prices have fluctuated widely and are determined by economic and political factors. Supply and demand factors, including
weather and general economic conditions as well as conditions in other oil and natural gas regions, impact prices. Any movement in oil
and natural gas prices will have an effect on the Corporation’s financial condition and performance. Advantage has an established
financial hedging strategy and may manage the risk associated with changes in commodity prices by entering into derivative contracts.
Although these commodity price risk management activities could expose Advantage to losses or gains, entering derivative contracts
helps us to stabilize cash flows and ensures that our capital expenditure program is substantially funded by such cash flows. To the
extent that Advantage engages in risk management activities related to commodity prices, it will be subject to credit risk associated
with counterparties with which it contracts. Credit risk is mitigated by entering into contracts with only stable, creditworthy parties and
through frequent reviews of exposures to individual entities. In addition, the Corporation only enters into derivative contracts with
major banks and international energy firms to further mitigate associated credit risk. Our Credit Facilities also prohibit the
Corporation from entering into any derivative contract where the term of such contract exceeds three years. Further, the aggregate of
such contracts cannot hedge greater than 60% of total estimated oil and natural gas production over two years and 50% over the third
year.
Currently the Corporation has the following derivatives in place:
Description of Derivative
Term
Volume
Average Price
Crude oil – WTI
Fixed price (1)
Collar (1)
January 2012 to December 2012
January 2012 to December 2012
1,000 bbls/d
1,000 bbls/d
Cdn $97.10/bbl
Bought put Cdn $90.00/bbl
Sold call Cdn $102.25/bbl
(1) These financial contracts were entered by Longview.
Advantage Oil & Gas Ltd. - 19
A summary of realized and unrealized hedging gains and losses for the three months and years ended December 31, 2011 and 2010 are
as follows:
($000)
Realized hedging
Natural gas
Crude oil
Total realized hedging gains
Unrealized hedging
Natural gas
Crude oil
Total unrealized hedging gains (losses)
Total gains (losses) on derivatives
Three months ended
December 31
Year ended
December 31
2011
2010
% change
2011
2010
% change
$
7,262
(704)
6,558
$
12,871
(3,080)
9,791
%
(44)
%
(77)
%
(33)
$
28,657
(2,831)
25,826
$
55,360
(10,227)
45,133
%
%
%
(48)
(72)
(43)
(6,684)
(3,919)
(10,603)
(4,045)
$
7,637
(21,784)
(14,147)
(4,356)
$
%
(188)
%
(82)
(25)
%
%
(7)
(25,152)
(199)
(25,351)
475
$
11,299
(5,918)
5,381
50,514
$
(323)
%
%
(97)
%
(571)
%
(99)
For the three months ended December 31, 2011, we recognized a net realized derivative gain of $6.6 million (December 31, 2010 -
$9.8 million net realized derivative gain) and for the year ended December 31, 2011, we recognized a net realized derivative gain of
$25.8 million (December 31, 2010 - $45.1 million net realized derivative gain) on settled derivative contracts, primarily as a result of
lower average actual natural gas prices during the periods as compared to our established average hedge prices. Our net realized
derivative gain has decreased during 2011 as compared to 2010 as we had less natural gas production hedged for this year at lower
average prices and we have generally realized losses on our crude oil hedges. However, our successful commodity price risk
management program continued to realize significant gains on derivatives during 2011 that has helped to offset the continued weak
natural gas prices and positively impact funds from operations. As at December 31, 2011, the fair value of the derivative contracts
outstanding and to be settled was a net liability of approximately $2.7 million, a decrease of $25.3 million from the $22.6 million net
asset recognized as at December 31, 2010. For the year ended December 31, 2011, this $25.3 million decrease in the fair value of
derivative contracts was recognized in income as an unrealized derivative loss (December 31, 2010 – $5.4 million unrealized derivative
gain). The valuation of the derivatives is the estimated fair value to settle the contracts as at December 31, 2011 and is based on pricing
models, estimates, assumptions and market data available at that time. As such, the recognized amounts are not cash and the actual
gains or losses realized on eventual cash settlement can vary materially due to subsequent fluctuations in commodity prices and foreign
exchange rates as compared to the valuation assumptions. The Corporation does not apply hedge accounting and current accounting
standards require changes in the fair value to be included in the consolidated statement of comprehensive income as a derivative gain
or loss with a corresponding derivative asset and liability recorded on the statement of financial position. These derivative contracts
will settle in 2012 corresponding to when the Corporation will recognize sales from production.
Royalties
Royalties ($000)
per boe
As a percentage of petroleum and natural
gas sales
Three months ended
December 31
Year ended
December 31
2011
$
$
13,339
4.93
2010
$
$
9,661
4.32
% change
38
14
%
%
2011
2010
$
$
52,971
5.20
$
$
45,954
5.22
% change
15
%
%
-
14.5%
12.7%
1.8
%
14.9%
14.4%
0.5
%
Advantage pays royalties to the owners of mineral rights from which we have leases. The Corporation currently has mineral leases with
provincial governments, individuals and other companies. Royalties include payments for Saskatchewan Resource Surcharge which is
based on the petroleum and natural gas sales earned within the Province of Saskatchewan. Royalties also include the impact of gas cost
allowance (“GCA”), which is a reduction of royalties payable to the Alberta Provincial Government to recognize capital and operating
expenditures incurred in the gathering and processing of their share of natural gas production and does not generally fluctuate with
natural gas prices. Total royalties paid has increased as compared to the prior year periods mainly due to the higher corporate
production. Royalties as a percentage of petroleum and natural gas sales have increased as significant increases in crude oil and NGL
prices have more than offset decreases in natural gas prices. The royalty rate realized by each of Advantage and Longview on a stand-
alone basis for the current quarter was 9.3% and 20.1%, respectively. Advantage’s royalty rates, that are predominately based on
Advantage Oil & Gas Ltd. - 20
natural gas production have decreased due to lower natural gas prices and lower average royalties attributed to production from our
significant development at Glacier, Alberta. Longview’s royalty rates are higher due to the stronger relative crude oil and NGL prices.
Our average corporate royalty rates are significantly impacted by the Alberta Provincial Government’s royalty framework for
conventional oil, natural gas and oil sands whereby Alberta royalties are affected by depths, well production rates, and commodity
prices. Additionally, the Alberta Provincial Government has a number of drilling incentive programs with reduced royalty rates for
qualifying wells. All of our Montney horizontal wells at Glacier drilled after May 1, 2010 qualify for the Alberta Provincial
Government’s Natural Gas Deep Drilling Program (“NGDDP”) which is estimated to provide a royalty incentive of $2.7 to $3.4
million for a typical horizontal well (a typical Advantage horizontal well at Glacier is 4,200 to 4,500 metres in total length). This royalty
incentive results in an estimated 5% royalty rate for all Montney horizontal wells for the life of the well. This significantly lowers the
natural gas price threshold required to drill economic wells and substantially improves the value of future reserves and upside potential
at Glacier. Therefore, corporate royalty rates will continue to fluctuate based on commodity prices, individual well productivity, and
our ongoing capital development plans.
Operating Expense
Three months ended
December 31
Year ended
December 31
Operating expense ($000)
per boe
2011
$
$
21,717
8.03
2010
$
$
23,811
10.65
% change
(9)
(25)
%
%
2011
2010
$
$
89,166
8.75
$
$
95,609
10.86
% change
%
(7)
%
(19)
Total operating expense decreased 9% for the three months and 7% for the year ended December 31, 2011 as compared to the same
periods of 2010. Operating expense per boe decreased 25% and 19% for the three months and year ended December 31, 2011 as
compared to the prior year.
Operating expense per boe realized by Advantage on a stand-alone basis for the fourth quarter of 2011 was $4.90/boe. The reduction
in total operating expense has been primarily due to increased production from Glacier, benefits of our ongoing optimization
program, the sale of higher cost assets, and a one-time $1.7 million equalization that was recognized in the fourth quarter of 2011
related to a gas processing facility. Operating expense at Glacier is approximately $0.30/mcf ($1.80/boe) at 100 mmcf/d due to the
efficiencies created by increasing the production rate through our 100% owned Glacier gas plant.
Operating expense per boe realized by Longview for the current quarter was $18.36/boe. During much of the spring and summer,
field conditions were poor with severe wet weather that created challenges for the industry to conduct regular well maintenance and
sustain production levels. Therefore, routine well maintenance and Longview’s current year capital program were delayed while
conditions improved. During the third quarter Longview began to expedite maintenance activities, workovers and reactivations and
commenced their 2011 Alberta capital expenditure program in July with the Saskatchewan program beginning in September. The well
maintenance and workover activity continued into the fourth quarter and generally lead to higher operating costs during these periods.
To mitigate risks associated with fluctuating power costs, Longview has also fixed the price on 0.9 MW at $77.88/MWh for the period
from January 2012 to December 2012. Longview anticipates operating costs to be $16.00 to $17.00/boe during 2012.
Advantage Oil & Gas Ltd. - 21
General and Administrative Expense
Three months ended
December 31
Year ended
December 31
2011
2010
% change
2011
2010
% change
General and administrative expense
Cash expense ($000)
per boe
Non-cash expense ($000)
per boe
Total general and administrative
expense ($000)
per boe
Employees at December 31
$
$
$
$
5,119
1.89
2,107
0.78
$
$
$
$
6,197
2.77
2,039
0.91
%
(17)
(32)
%
%
3
%
(14)
$
$
$
$
22,239
2.18
12,348
1.21
$
$
$
$
25,316
2.87
12,877
1.46
%
(12)
(24)
%
%
(4)
%
(17)
$
$
7,226
2.67
$
$
8,236
3.68
(12)
(27)
%
%
$
$
34,587
3.39
125
$
$
38,193
4.33
128
%
(9)
(22)
%
%
(2)
Cash general and administrative (“G&A”) expense for the year ended December 31, 2011 has decreased as compared to 2010 due to
ongoing cost reduction efforts, which along with the increased production has reduced cash G&A per boe.
Non-cash G&A expense is comprised of Advantage’s and Longview’s Restricted Share Performance Incentive Plans (“RSPIP” or the
“Plans”) with the purpose to retain and attract employees, to reward and encourage performance, and to focus employees on
operating and financial performance that results in lasting shareholder returns. The Plans authorize the Boards of Directors to grant
restricted shares of each public company to service providers including directors, officers, employees and consultants of Advantage
and Longview. The number of restricted shares granted is based on each Corporations’ share price return for a twelve-month period
and compared to the performance of a peer group approved by the Boards of Directors. The share price returns are calculated at the
end of each and every quarter and are primarily based on the twelve-month change in the share prices including dividends. If a share
price return for a twelve-month period is positive, a restricted share grant will be calculated based on the return. Otherwise, no
restricted shares will be granted to service providers for the period. If the share price return for a twelve-month period is negative, but
the return is still within the top two-thirds of the approved peer group performance, the Board of Directors may grant a discretionary
restricted share award. Restricted shares vest one-third immediately on grant date with the remaining two-thirds vesting on each of the
subsequent two anniversary dates. On vesting, common shares are issued to the service providers in exchange for their restricted
shares outstanding. Compensation cost related to the Plans are recognized as share-based compensation expense within G&A expense
over the service periods of the service providers and incorporates the fair value at grant date, the estimated number of restricted shares
to vest, and certain management estimates.
For the year ended December 31, 2011, Advantage granted 1,443,956 restricted shares at an average grant price of $7.78 per restricted
share and recognized $11.5 million of share-based compensation expense as non-cash G&A expense. During the year ended
December 31, 2011 Advantage issued 2,212,031 common shares to service providers in accordance with the vesting provisions of the
RSPIP. As at December 31, 2011, 2,117,710 restricted shares remain unvested and will vest to service providers over the next two
years with a total of $5.0 million in compensation cost to be recognized over the future service periods.
For the year ended December 31, 2011, Longview granted 150,722 restricted shares at a grant price of $11.45 per restricted share and
recognized $0.8 million of share-based compensation expense as non-cash G&A expense. During the year ended December 31, 2011
Longview issued 50,422 common shares to service providers in accordance with the vesting provisions of the RSPIP. As at December
31, 2011, 100,300 restricted shares remain unvested and will vest to service providers over the next two years with a total of $0.7
million in compensation cost to be recognized over the future service periods.
Depreciation Expense
Three months ended
December 31
2011
2010
Depreciation expense ($000)
per boe
$
$
41,669
15.40
$
$
32,507
14.54
Year ended
December 31
% change
28
%
%
6
2011
152,927
15.01
$
$
2010
124,592
14.15
$
$
% change
23
%
%
6
Depreciation of oil and gas properties is provided on the unit-of–production method based on total proved and probable reserves,
including future development costs, on a component basis. Depreciation expense has increased for the three months and year ended
Advantage Oil & Gas Ltd. - 22
December 31, 2011 as compared to 2010 due to the increase in production and a higher average rate of depreciation per boe. The rate
of depreciation per boe is higher partially due to an increase in property, plant and equipment attributable to changes in our
decommissioning liability. Decommissioning liabilities are determined by discounting at a risk-free rate the expected future cash flows
required to decommission all well sites, gathering systems and processing facilities. With the continued decrease in risk-free rates, the
net present value of the decommissioning liability has increased with a corresponding increase in property, plant and equipment which
impacts our depreciation expense.
Impairment of Oil and Gas Properties
Three months ended
December 31
Year ended
December 31
2011
2010
% change
2011
2010
% change
Impairment of oil and gas
properties ($000)
$
187,684
$
17,500
972
%
$
187,684
$
17,500
972
%
At each reporting date, Advantage assesses whether or not there are circumstances that indicate a possibility that the carrying values of
exploration and evaluation assets and property, plant and equipment are not recoverable, or impaired. Such circumstances include
incidents of physical damage, deterioration of commodity prices, changes in the regulatory environment, or a reduction in estimates of
proved and probable reserves. For the purpose of impairment testing of property, plant and equipment, assets are grouped together
into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of
other assets or groups of assets (the “cash-generating unit” or “CGU”). When management judges that circumstances clearly indicate
impairment, CGUs are tested for impairment by comparing the carrying values to their recoverable amounts. These calculations
require the use of estimates and assumptions, that are subject to change as new information becomes available including information
on future commodity prices, expected production volumes, quantities of reserves, discount rates, future development costs and
operating costs (refer to the section “Critical Accounting Estimates”). Impairment losses on CGUs are recognized in the Statement of
Comprehensive Income as impairment of oil and gas properties and are separately disclosed.
As at December 31, 2011, Advantage determined that the significant reduction in natural gas prices recognized within our year-end
independent reserves evaluation was an indicator of impairment. As a result, we completed an impairment assessment and calculated
an estimated recoverable amount for our natural gas concentrated CGUs, primarily based upon the net present value after tax of our
year-end proved plus probable reserves discounted at 10% and adjusted for a number of other estimates and assumptions. Based upon
these calculations, we recognized an impairment loss of $187.7 million related to two CGUs that consist of conventional natural gas
focused properties located in Western and Eastern Alberta that had suffered a significant deterioration in value due to the challenging
natural gas price environment. No impairment losses were recognized for any other CGUs, including our Glacier property. An
impairment loss is reversed if there is subsequently an objective change in the estimates used to determine the recoverable amount.
Exploration and Evaluation Expense
Three months ended
December 31
Year ended
December 31
2011
2010
% change
2011
2010
% change
Exploration and evaluation expense
($000)
$
1,708
$
752
127
%
$
3,055
$
752
306
%
All exploratory costs incurred subsequent to acquiring the right to explore for oil and natural gas are capitalized as exploration and
evaluation assets pending determination of technical feasibility and commercial viability. Such costs can typically include costs to
acquire land rights in areas with no proved or probable reserves assigned, geological and geophysical costs, and exploration wells. If
the assets are subsequently determined to be technically feasible and commercially viable, the exploratory costs are tested for
impairment and then reclassified from exploration and evaluation assets to development and production assets. If exploratory costs
are determined not to be technically feasible and commercially viable, the costs are expensed as exploration and evaluation expense.
For the year ended December 31, 2011, we expensed exploration and evaluation costs of $3.1 million related to undeveloped land that
expired during the period.
Advantage Oil & Gas Ltd. - 23
Other Income
($000)
Gain (loss) on sale of property, plant
and equipment
Miscellaneous income (expense)
Three months ended
December 31
Year ended
December 31
2011
2010
% change
2011
2010
% change
$
$
$
$
153
88
241
(1,541)
(36)
(1,577)
(110)
(344)
(115)
%
%
%
$
$
1,325
647
1,972
$
$
45,631
511
46,142
(97)
27
(96)
%
%
%
Other income primarily consists of gains related to the disposition of property, plant and equipment. During 2010, Advantage
disposed of several non-core properties and recognized a $45.6 million net gain. For 2011, Advantage disposed of several minor non-
core properties and recognized a $1.3 million net gain.
Interest on Bank Indebtedness
Three months ended
December 31
Year ended
December 31
Interest on bank indebtedness ($000)
per boe
Average effective interest rate
2011
$
$
2,142
0.79
5.4%
2010
$
$
3,376
1.51
4.9%
% change
(37)
(48)
0.5
%
%
%
2011
$
$
11,483
1.13
5.3%
2010
$
$
13,346
1.52
5.0%
% change
(14)
(26)
0.3
%
%
%
Bank indebtedness at December 31 ($000)
233,903
290,657
(20)
%
Total interest on bank indebtedness has decreased during 2011 as compared to 2010 primarily due to the reduction in the average debt
balance attributable to raising cash proceeds from selling a 37% non-controlling interest in Longview. However, our bank
indebtedness has increased $81.5 million during the fourth quarter of 2011 in comparison to the prior quarter due to the maturity and
settlement of our 7.75% and 8.00% convertible debentures in December 2011 for $62.3 million in cash and escalation of our capital
expenditure programs that modestly exceeded funds from operations. Consolidated bank indebtedness outstanding at the end of
December 31, 2011 was $233.9 million consisting of $142.5 million and $91.4 million for each of the legal entities Advantage and
Longview, respectively. Advantage’s consolidated Credit Facilities of $475 million at December 31, 2011 includes $275 million with
Advantage and $200 million with Longview. The Corporation’s interest rates are primarily based on short term bankers acceptance
rates plus a stamping fee. We monitor the debt level to ensure an optimal mix of financing and cost of capital that will provide a
maximum return to our shareholders.
Interest and Accretion on Convertible Debentures
Interest on convertible
debentures ($000)
per boe
Accretion on convertible
debentures ($000)
per boe
Convertible debentures maturity
value at December 31 ($000)
Three months ended
December 31
Year ended
December 31
2011
2010
% change
2011
2010
% change
$
$
1,995
0.74
$
$
2,303
1.03
(13)
(28)
%
%
$
$
8,871
0.87
$
$
11,486
1.30
(23)
(33)
%
%
$
$
824
0.30
$
$
824
0.37
%
-
%
(19)
$
$
3,360
0.33
$
$
3,263
0.37
%
3
%
(11)
$
86,250
$
148,544
(42)
%
Interest on convertible debentures for 2011 has decreased compared to 2010 due to the maturity and settlement of the 6.50%
debentures in June 2010 and the 7.75% and 8.00% convertible debentures in December 2011. Accretion on convertible debentures
has remained relatively comparable for the periods.
Advantage Oil & Gas Ltd. - 24
Accretion on Decommissioning Liability
Accretion on decommissioning
liability ($000)
per boe
Decommissioning liability
at December 31 ($000)
Three months ended
December 31
Year ended
December 31
2011
2010
% change
2011
2010
% change
$
$
1,459
0.54
$
$
1,270
0.57
%
15
%
(5)
$
$
5,748
0.56
$
$
6,094
0.69
%
(6)
%
(19)
$
253,796
$
172,130
47
%
Decommissioning liabilities are determined by discounting at a risk-free rate the expected future cash flows required to decommission
all petroleum and natural gas assets. With the continued decrease in risk-free rates, the net present value of the decommissioning
liability has increased with a corresponding increase in property, plant and equipment. Accretion on decommissioning liability
represents the increase in the decommissioning liability each reporting period due to the passage of time and is currently calculated at
an annualized rate of 2.5% of the liability. Accretion expense has decreased slightly for 2011 primarily due to a lower annualized rate of
accretion.
Taxes
Deferred income taxes arise from differences between the accounting and tax bases of our assets and liabilities. For the year ended
December 31, 2011, the Corporation recognized a deferred income tax recovery of $46.8 million compared to a deferred income tax
expense of $18.1 million for 2010. The deferred income tax recovery was incurred due to the significant loss before income taxes that
was recognized during 2011. As at December 31, 2011, the Corporation had a deferred income tax asset balance of $39.4 million and a
deferred income tax liability balance of $29.7 million compared to a net deferred income tax liability balance of $40.2 million at
December 31, 2010.
Advantage and Longview have approximately $1.6 billion in tax pools and deductions at December 31, 2011, which can be used to
reduce the amount of taxes payable. The estimated tax pools in place are as follows:
Canadian Development Expenses
Canadian Exploration Expenses
Canadian Oil and Gas Property Expenses
Non-capital losses
Undepreciated Capital Cost
Other
$
Estimated Tax Pools
December 31, 2011
($ millions)
Longview Consolidated
141
71
367
704
347
14
1,644
35
-
367
73
76
8
559
$
$
$
Advantage
106
$
71
-
631
271
6
1,085
$
Advantage has a federal non-capital loss carry forward balance of approximately $631 million that will expire between 2024 and 2031.
Longview has a federal non-capital loss carry forward balance of approximately $73 million that will expire in 2031 and 2032.
Net Income Attributable to Non-Controlling Interest
At December 31, 2011, Advantage had a 63% ownership interest in Longview with the remaining 37% held by outside interests or
non-controlling interests. As Advantage is the parent company and has a majority ownership interest of Longview, Advantage’s
consolidated financial statements include 100% of Longview’s accounts. To determine the net income attributable to the Advantage
shareholders, it is necessary to deduct that portion of the net income related to Longview that is consolidated within Advantage’s
financial results but are attributable to the 37% non-controlling interest. Therefore, for the year ended December 31, 2011, Advantage
recognized a $7.4 million reduction to net income related to Longview’s net income attributable to the non-controlling interests.
Advantage Oil & Gas Ltd. - 25
Net Income (Loss) and Comprehensive Income (Loss)
Three months ended
December 31
Year ended
December 31
2011
2010
% change
2011
2010
% change
Net income (loss) and comprehensive
income (loss) ($000)
per share
- basic
- diluted
$
$
$
(145,063)
(0.87)
(0.87)
$
$
$
(22,888)
(0.14)
(0.14)
534
521
521
%
%
%
$
$
$
(152,772)
(0.92)
(0.92)
$
$
$
40,920
0.25
0.25
(473)
(468)
(468)
%
%
%
The net loss and net loss per common share realized for the year ended December 31, 2011 was a considerable decrease as compared
to the net income and net income per common share for 2010. Although Advantage experienced strong operating results that have
contributed significantly to our 2011 financial results including production and sales increases, significant realized hedging gains and
continued cost reductions, we also experienced an increase in depreciation expense and a significant impairment that resulted in our
net loss. Additionally, net income for 2010 was much higher primarily due to significant gains on derivatives and asset dispositions.
Depreciation expense has increased for 2011 as compared to 2010 due to the increase in production and a higher average rate of
depreciation per boe. The rate of depreciation per boe is higher partially due to an increase in property, plant and equipment
attributable to changes in our decommissioning liability. As at December 31, 2011, Advantage determined that the significant
reduction in natural gas prices recognized within our year-end independent reserves evaluation was an indicator of impairment. As a
result, we completed an impairment assessment and calculated an estimated recoverable amount for our natural gas concentrated
CGUs. Based upon these calculations, we recognized an impairment loss of $187.7 million related to two CGUs that consist of
conventional natural gas focused properties located in Western and Eastern Alberta that had suffered a significant deterioration in
value due to the challenging natural gas price environment. The derivative gains recognized include both realized and unrealized
amounts. Our net derivative gain has decreased during 2011 as compared to 2010 as we had less natural gas production hedged for this
year at lower average prices and we have generally realized losses on our crude oil hedges. During 2010 Advantage also disposed of
several non-core properties and recognized a net $45.6 million gain.
Cash Netbacks
Petroleum and natural gas sales
Royalties
Realized gain on derivatives
Operating expense
Operating
General and administrative (1)
Finance expense (2)
Miscellaneous income
Funds from operations and
cash netbacks
Three months ended
December 31
Year ended
December 31
2011
2010
2011
2010
$
$
$
$
$000
92,300
(13,339)
6,558
(21,717)
63,802
(5,119)
(4,137)
88
54,634
per boe
34.11
$
(4.93)
2.42
(8.03)
23.57
(1.89)
(1.53)
0.03
20.18
$
$000
76,221
(9,661)
9,791
(23,811)
52,540
(6,197)
(5,679)
(36)
40,628
per boe
34.08
$
(4.32)
4.38
(10.65)
23.49
(2.77)
(2.54)
(0.02)
18.16
$
$000
355,288
(52,971)
25,826
(89,166)
238,977
(22,239)
(20,354)
647
197,031
per boe
34.88
$
(5.20)
2.54
(8.75)
23.47
(2.18)
(2.00)
0.06
19.35
$
$000
319,368
(45,954)
45,133
(95,609)
222,938
(25,316)
(24,832)
511
173,301
per boe
36.26
$
(5.22)
5.12
(10.86)
25.30
(2.87)
(2.82)
0.06
19.67
$
$
$
$
$
(1) General and administrative expense excludes non-cash G&A and non-cash share-based compensation expense.
(2) Finance expense excludes non-cash accretion expense.
Funds from operations for 2011 have been strong, driven by increases in production and continued gains from our hedging program,
which demonstrates the clear ongoing improvement in our financial and operating results from our focused development program.
Average daily production during the fourth quarter of 2011 increased 21% above the same period of 2010, with a 30% increase in
natural gas production and a 6% increase in crude oil production, partially offset by a 24% decrease in NGL production. Production
increases have been primarily due to completion of the Glacier gas plant Phase III expansion to a production capacity of 100 mmcf/d
(16,667 boe/d) at the end of the first quarter of 2011. For the three months and year ended December 31, 2011 we realized gains on
derivatives of $6.6 million and $25.8 million, respectively. Our hedging program has helped to offset the continued weak natural gas
Advantage Oil & Gas Ltd. - 26
prices and positively impacts funds from operations. However, hedging gains for 2011 have been lower than 2010 as we have a lower
percentage of natural gas production hedged at lower average prices. Funds from operations have also benefited during this year from
higher crude oil prices and continued cost reductions, such as operating costs, general and administrative expense, and finance
expense. Operating costs per boe have significantly decreased as we continue to realize benefits from the addition of lower cost
production due to the completion of our Glacier gas plant and our divestment of higher cost assets. We also recognized a one-time
$1.7 million equalization in the fourth quarter of 2011 related to a gas processing facility. Finance expense has been reduced as we
utilized proceeds from the asset dispositions and disposing of a non-controlling interest in Longview to repay bank indebtedness and
maturing convertible debentures. Although funds from operations has also benefited during this year from higher crude oil prices,
natural gas prices still remain weak and pose a continuing challenge to the entire natural gas industry. When comparing the current
quarter to the third quarter of 2011, our funds from operations increased 9% and funds from operations per boe were 6% higher as
realized crude oil and NGL prices increased during this quarter and general costs continued to decrease, including operating costs.
Contractual Obligations and Commitments
The Corporation has contractual obligations in the normal course of operations including purchases of assets and services, operating
agreements, transportation commitments, sales contracts, bank indebtedness and convertible debentures. These obligations are of a
recurring and consistent nature and impact cash flow in an ongoing manner. The following table is a summary of the Corporation’s
remaining contractual obligations and commitments. Advantage has no guarantees or off-balance sheet arrangements other than as
disclosed.
($ millions)
Building leases
Pipeline/transportation
Bank indebtedness (1)
Convertible debentures (2)
- principal
- interest
- principal
- interest
Total contractual obligations
$
$
$
Total
7.4
36.6
233.9
18.3
86.2
15.1
397.5
$
Payments due by period
2012
3.4
12.1
-
12.4
-
4.3
32.2
2013
2.5
11.9
233.9
5.9
-
4.3
258.5
$
2014
1.5
10.4
-
-
-
4.3
16.2
2015
-
$
2.2
-
-
86.2
2.2
90.6
$
$
$
$
(1) The Corporation’s bank indebtedness does not have specific maturity dates. It is governed by credit facility agreements with a syndicate of financial institutions.
Under the terms of the agreements, the facilities are reviewed annually, with the next reviews scheduled in April and June 2012. The facilities are revolving, and
extendible at each annual review for a further 364 day period at the option of the syndicate. If not extended, the credit facilities are converted at that time into
one-year term facilities, with the principal payable at the end of such one-year terms. Management fully expects that the facilities will be extended at each annual
review.
(2) As at December 31, 2011, Advantage had $86.2 million convertible debentures outstanding. The convertible debentures are convertible to common shares based
on an established conversion price. All remaining obligations related to convertible debentures can be settled through the payment of cash or issuance of common
shares at Advantage’s option.
Advantage Oil & Gas Ltd. - 27
Liquidity and Capital Resources
The following table is a summary of the Corporation’s capitalization structure.
($000, except as otherwise indicated)
Bank indebtedness (non-current)
Working capital deficit (1)
Net debt
Convertible debentures maturity value (non-current)
Total debt
Shares outstanding
Shares closing market price ($/share)
Market capitalization (2)
$
Advantage
142,548
70,564
213,112
86,250
299,362
166,304,040
4.24
705,129
$
$
$
December 31, 2011
Longview
91,355
$
20,074
111,429
-
111,429
46,750,432
10.12
473,114
$
$
$
Consolidated
233,903
$
90,638
324,541
86,250
410,791
$
(1) Working capital deficit is a non-GAAP measure that includes trade and other receivables,
prepaid expenses and deposits, trade and other accrued liabilities, and the current portion of other liability
(2) Market capitalization is a non-GAAP measure calculated by multiplying shares outstanding
by the closing market share price on the applicable date for each legal entity.
Advantage monitors its capital structure and makes adjustments according to market conditions in an effort to meet its objectives
given the current outlook of the business and industry in general. The capital structure of the Corporation is composed of working
capital (excluding derivative liabilities), bank indebtedness, convertible debentures and share capital. Advantage may manage its capital
structure by issuing new common shares, repurchasing outstanding common shares, obtaining additional financing either through
bank indebtedness or convertible debenture issuances, refinancing current debt, issuing other financial or equity-based instruments,
declaring a dividend, implementing a dividend reinvestment plan, adjusting capital spending, or disposing of assets or its ownership
interest in Longview. The capital structure is reviewed by Management and the Board of Directors on an ongoing basis.
Management of the Corporation’s capital structure is facilitated through its financial and operational forecasting processes. The
forecast of the Corporation’s future cash flows is based on estimates of production, commodity prices, forecast capital and operating
expenditures, and other investing and financing activities. The forecast is regularly updated based on new commodity prices and other
changes, which the Corporation views as critical in the current environment. Selected forecast information is frequently provided to
the Board of Directors. This continual financial assessment process further enables the Corporation to mitigate risks. The Corporation
continues to satisfy all liabilities and commitments as they come due.
The economic situation during the last several years has created significant commodity price volatility. Natural gas prices have
remained low for several years from continued high US domestic natural gas production that has increased supply and the ongoing
weak North American economy that has negatively impacted demand. These factors, in combination with mild weather conditions,
have resulted in historic high inventory levels and AECO gas is presently trading at approximately $1.80/mcf. However, crude oil
prices have generally remained relatively strong, primarily influenced by middle-east tensions and associated supply concerns, with
WTI currently trading at approximately US$107/bbl. The outlook for the Corporation from a prolonged weak commodity price
environment, particularly natural gas, would be reductions in operating netbacks, funds from operations and capital expenditures. In
order to strengthen our financial position and balance our cash flows, in 2010 we completed two non-core asset dispositions and on
April 14, 2011 we closed the sale of a 37% non-controlling interest in Longview with the net proceeds utilized to further repay bank
indebtedness. These steps have allowed us to repay significant bank indebtedness and maturing convertible debentures and also
enabled us to focus capital spending on our Glacier Montney natural gas resource play. However, we continue to be very cognizant of
improving our financial flexibility in the current environment.
We believe that Advantage has implemented strategies to protect our business as much as possible in the current industry and
economic environment. We have implemented a strategy to substantially balance funds from operations and our capital program
expenditure requirements. Historically we have had a successful hedging program that helped to reduce the volatility of funds from
operations. However, we have no natural gas hedges for 2012 and are exposed to risks as a result of the current economic situation.
We continue to closely monitor the possible impact on our business and strategy, and will make adjustments as necessary with prudent
management.
Advantage Oil & Gas Ltd. - 28
Shareholders’ Equity and Convertible Debentures
Advantage has utilized a combination of equity, convertible debentures and bank debt to finance acquisitions and development
activities.
As at December 31, 2011, Advantage had 166.3 million common shares outstanding. During 2011 Advantage issued 2,212,031
common shares to employees in accordance with the vesting provisions of the RSPIP. As at March 23, 2012, common shares
outstanding have increased to 166.6 million.
The Corporation had $86.2 million convertible debentures outstanding at December 31, 2011 that were immediately convertible to
10.0 million common shares based on the applicable conversion price (December 31, 2010 - $148.5 million outstanding and
convertible to 13.0 million common shares). During the year ended December 31, 2011, there were no conversions of debentures. The
principal amounts of the 7.75% and 8.00% convertible debentures matured in December 2011 and were settled with $62.3 million in
cash. We have $86.2 million of 5.00% debentures outstanding that mature in January 2015. Our convertible debenture obligation can
be settled through the payment of cash or issuance of common shares at Advantage’s option.
Bank Indebtedness, Credit Facilities and Other Obligations
At December 31, 2011, Advantage had consolidated bank indebtedness outstanding of $233.9 million consisting of $142.5 million and
$91.4 million for each of the legal entities Advantage and Longview, respectively. Bank indebtedness has decreased $56.8 million since
December 31, 2010, primarily due to net proceeds received from the sale of a 37% non-controlling interest in Longview, partially
offset by the maturity and settlement of convertible debentures and capital expenditures to complete our Phase III and to commence
our Phase IV development programs at Glacier. Advantage’s consolidated credit facilities of $475 million at December 31, 2011
include $275 million with Advantage and $200 million with Longview (the “Credit Facilities”). The credit facilities are each
collateralized by a $1 billion floating charge demand debenture covering all assets of the legal entities. As well, the borrowing bases for
the credit facilities are determined through utilizing the legal entities regular reserve estimates. The banking syndicate thoroughly
evaluates the reserve estimates based upon their own commodity price expectations to determine the amount of the borrowing bases.
Revisions or changes in the reserve estimates and commodity prices can have either a positive or a negative impact on the borrowing
bases. As a result of the disposition of a non-controlling interest in Longview that closed on April 14, 2011, the Advantage credit
facility was reduced to $275 million and Longview’s credit facility was established at $200 million. The next annual reviews are
scheduled to occur in April and June 2012. There can be no assurance that the credit facilities will be renewed at the current borrowing
base levels at that time.
Advantage had a consolidated working capital deficiency of $90.6 million as at December 31, 2011. Our working capital includes items
expected for normal operations such as trade receivables, prepaids, deposits, trade payables and accruals. Working capital varies
primarily due to the timing of such items, the current level of business activity including our capital expenditure program, commodity
price volatility, and seasonal fluctuations. Our working capital deficiency is usually higher during the winter months, as would be
expected, due to accounts payable and accrued liabilities associated with our active capital expenditure program. We do not anticipate
any problems in meeting future obligations as they become due given the level of our funds from operations and undrawn Credit
Facilities. It is also important to note that working capital is effectively integrated with Advantage’s revolving operating loan facility,
which assists with the timing of cash flows as required.
Non-Controlling Interest
On April 14, 2011, Longview completed its initial public offering at a price of $10 per common share issuing 17,250,000 common
shares and raising gross proceeds of $172.5 million (including full exercise of the over-allotment option on April 28, 2011). Concurrent
with the closing of the Offering, Longview purchased the Acquired Assets from Advantage for total consideration of $546.9 million,
comprised of 29,450,000 common shares of Longview representing a 63% equity ownership and $252.4 million in cash. The remaining
37% equity ownership of Longview is held by outside interests or non-controlling interests. As Advantage is the parent company and
has a majority ownership interest of Longview, Advantage’s consolidated financial statements include 100% of Longview’s accounts.
On closing of the Acquisition, non-controlling interest of $106.1 million was recognized which represents Longview’s independent
shareholders 37% ownership interest in the net assets of Longview. Non-controlling interest on the statement of financial position is
continually adjusted for the independent shareholders’ share of Longview’s net income that is consolidated within Advantage’s
financial results and reduced for any dividends paid by Longview to the independent shareholders. Therefore, for the year ended
December 31, 2011, Advantage recognized a $7.4 million reduction to net income related to Longview’s net income attributable to the
non-controlling interests. This $7.4 million increased non-controlling interest on the statement of financial position with a decrease of
$6.9 million related to dividends declared by Longview to the non-controlling interest ownership.
Advantage Oil & Gas Ltd. - 29
Capital Expenditures
($000)
Drilling, completions and workovers
Well equipping and facilities
Land and seismic
Other
Expenditures on property, plant and equipment
Expenditures on exploration and evaluation assets
Proceeds from property disposition
Net capital expenditures (1)
Three months ended
December 31
2011
2010
Year ended
December 31
$
$
$
$
85,061
15,984
138
14
101,197
1,624
(114)
102,707
55,578
11,896
458
97
68,029
529
(226)
68,332
2011
199,170
52,857
1,704
443
254,174
3,006
(1,099)
256,081
2010
169,769
48,782
2,729
403
221,683
2,091
(69,676)
154,098
$
$
$
$
(1) Net capital expenditures excludes changes in non-cash working capital and change in decommissioning liability.
Advantage’s preference is to operate a high percentage of properties such that we can maintain control of capital expenditures,
operations and cash flows. Advantage’s business structure has been established in order to fully capitalize on both natural gas and
crude oil exploration and development opportunities. Advantage is focused primarily on developing the significant natural gas resource
play at Glacier, Alberta while retaining a significant investment in Longview that is focused on oil and natural gas liquids production
and development.
Advantage on a legal entity basis spent a net $202.1 million on property, plant and equipment and exploration and evaluation assets for
the year ended December 31, 2011, including $178.6 million at Glacier, $4.0 million at Brazeau, $4.0 million in Saskatchewan, $3.0
million at Nevis, $3.0 million at Westerose and the remaining balance at other areas. Capital spending projects at Brazeau,
Saskatchewan, Nevis and Westerose were incurred by Advantage in preparation for the eventual disposition of the properties to
Longview that closed on April 14, 2011. However, Advantage continues to focus on development of our Montney natural gas
resource play at Glacier where we will continue to employ a phased development approach. Our Phase III expansion began at the end
of the second quarter of 2010 and finished in the second quarter of 2011, including the drilling of 28 horizontal wells (100% working
interest) and the fabrication of a new processing train to facilitate expansion of our Glacier gas plant to its current capacity of 100
mmcf/d. In July 2011, the Board of Directors of Advantage approved a capital and operating budget for the twelve month period
ending June 30, 2012 of $216 million of which $200 million (93%) is allocated to Glacier. The capital budget is focused on a Phase IV
development program at Glacier with two key objectives: i) increase throughput capacity at our Glacier gas plant from 100 mmcf/d to
140 mmcf/d by the second quarter of 2012; and ii) further evaluate the Middle and Lower Montney formations. During much of the
spring and summer, field conditions were poor with severe wet weather that created challenges for the industry and our Glacier Phase
IV capital program was delayed by approximately 1½ months while conditions improved. As at December 31, 2011, Advantage had
three drilling rigs contracted and had drilled 18 wells of our Phase IV program with 3 wells drilling at year-end and subsequently rig
released. Completion of our Phase IV wells has begun and 8 wells were completed and tested by year-end. In October 2011, we
successfully commissioned the acid gas injection system which is now capable of disposing acid gas volumes for plant inlet gas
volumes in excess of 140 mmcf/d. In addition, TCPL completed further looping of their sales pipeline lateral in preparation for our
expansion to 140 mmcf/d. These projects represent significant milestones towards achieving our Glacier Phase IV development and
will provide additional flexibility for future production growth.
Longview’s 2011 capital budget was 100% focused on oil or oil with liquids rich solution gas projects. The majority of their 2011
capital program was completed during the third and fourth quarters of 2011 due to the wet ground conditions that hampered activities
in the spring and summer. For the period from April 14 to December 31, 2011, Longview spent a net $55.0 million on property, plant
and equipment and exploration and evaluation assets which included $15.1 million at Nevis, $13.5 million at Brazeau, $7.1 million at
Westerose, $5.7 million at Steelman, $4.3 million at Sunset, and $4.0 million at Midale with the remaining spending for miscellaneous
projects. Longview deployed two drilling rigs in Alberta and an additional rig targeting the Midale formation in southeast
Saskatchewan. As of December 31, 2011, they drilled 20.7 net (30 gross) oil wells (100% success rate). During the third and fourth
quarters Longview conducted maintenance activities, workovers and reactivations that had been delayed due to poor field conditions.
This activity positively impacted production for the fourth quarter of 2011 that average 6,823 boe/d, an increase of 12% as compared
to the prior quarter.
Advantage Oil & Gas Ltd. - 30
Sources and Uses of Funds
The following table summarizes the various funding requirements during the years ended December 31, 2011 and 2010 and the
sources of funding to meet those requirements:
($000)
Sources of funds
Funds from operations
Proceeds from change in ownership of Longview
Change in non-cash working capital and other
Property dispositions
Increase in bank indebtedness
Uses of funds
Expenditures on property, plant and equipment
Convertible debenture maturities
Decrease in bank indebtedness
Dividends declared by Longview to non-controlling interest
Expenditures on decommissioning liability
Expenditures on exploration and evaluation assets
Reduction of capital lease obligations
Year ended
December 31
2011
2010
$
$
$
$
197,031
160,757
27,659
1,099
-
386,546
254,174
62,294
56,754
6,915
3,335
3,006
68
386,546
$
$
173,301
-
17,979
69,676
40,395
301,351
221,683
69,927
-
-
6,275
2,091
1,375
301,351
$
$
Advantage has historically focused on balancing our funds from operations and expenditures, particularly property, plant and
equipment, to maintain a strong financial position and preserve financial flexibility. Funds from operations for 2011 have been strong,
driven by increases in production and continued gains from our hedging program, which demonstrates the clear ongoing improvement
in our financial and operating results from our focused development program. For the year ended December 31, 2011, average daily
production increased 16% above the prior year, with a 28% increase in natural gas production partially offset by decreases in both
crude oil and NGLs production. For the year ended December 31, 2011, we recognized a net realized derivative gain of $25.8 million
on settled derivative contracts, primarily as a result of lower average actual natural gas prices during the year as compared to our
established average hedge prices. Our successful commodity price risk management program continued to realize significant gains on
derivatives during 2011 that has helped to offset the continued weak natural gas prices and positively impact funds from operations.
Our net realized derivative gain has decreased during 2011 as compared to 2010 as we had less natural gas production hedged for this
year at lower average prices and we have generally realized losses on our crude oil hedges. Funds from operations have also benefited
during this year from higher crude oil prices and continued cost reductions, such as operating costs, general and administrative
expense, and finance expense. Unfortunately, natural gas prices still remain weak and pose a continuing challenge to the entire natural
gas industry. During the second quarter of 2011 Advantage disposed of a 37% non-controlling interest in Longview thereby raising net
cash proceeds that significantly reduced bank indebtedness. In December 2011 the principal amounts of the 7.75% and 8.00%
convertible debentures matured and were settled with $62.3 million in cash.
Advantage Oil & Gas Ltd. - 31
Annual Financial Information
The following is a summary of selected financial information of the Corporation for the years indicated.
Total sales (before royalties) ($000)
Net income (loss) ($000)
per share - basic and diluted
Total assets ($000)
Long term financial liabilities ($000) (1)
Distributions declared per Trust Unit (2)
Year ended
Dec. 31, 2011
$
355,288
$
(152,772)
$
(0.92)
$
1,972,789
$
308,574
$
-
Year ended
Year ended
Dec. 31, 2010 Dec. 31, 2009 (3)
319,368
343,005
$
40,920
(86,426)
$
0.25
(0.56)
$
1,965,945
1,927,241
$
363,675
384,700
$
0.08
$
-
$
$
$
$
$
$
(1) Long term financial liabilities exclude decommissioning liability and deferred income tax liability.
(2) On March 18, 2009 Advantage annouced the discontinuance of distributions.
(3) Total sales (before royalties) and net loss for 2009 were prepared in accordance with the previous Canadian generally accepted accounting principles.
Total sales (before royalties) decreased from 2009 to 2010 due to lower natural gas prices and corporate production. The decrease in
production was primarily attributable to significant non-core asset dispositions completed during both 2009 and 2010, with the net
proceeds from such dispositions utilized to reduce outstanding bank indebtedness. Sales (before royalties) have increased during 2011
primarily from significant increases in our production due to our successful exploration and development activities. Natural gas sales in
particular have benefited from our Montney natural gas resource play at Glacier, Alberta where we have increased production capacity
with our continued facilities and infrastructure expansion work. However, the low natural gas prices that have persisted during these
years have contributed to the recognized net losses. During 2010 Advantage disposed of several non-core properties during the year
and recognized a $45.6 million net gain which resulted in the reported net income. Our net loss for 2011 was considerable as
Advantage determined that the significant reduction in natural gas prices recognized within our year-end independent reserves
evaluation was an indicator of impairment. As a result, we completed an impairment assessment and calculated an estimated
recoverable amount for our natural gas concentrated CGUs. Based upon these calculations, we recognized an impairment loss of
$187.7 million related to two CGUs that consist of conventional natural gas focused properties located in Western and Eastern Alberta
that had suffered a significant deterioration in value due to the challenging natural gas price environment. Total assets have continually
decreased from 2009 through 2011 due to the asset dispositions, depreciation expense and impairment losses that have exceeded
capital expenditure activity. From 2009 to 2011 we have also experienced significant decreases in long term financial liabilities due to
our concerted efforts to reduce debt, including utilizing net proceeds from significant asset dispositions, an equity financing, and a
convertible debenture issuance. We also suspended all distributions in March 2009 and completed our conversion from an income
trust to a corporation in July 2009.
Advantage Oil & Gas Ltd. - 32
Quarterly Performance
($000, except as otherwise
indicated)
Daily production
2011
2010
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Natural gas (mcf/d)
Crude oil and NGLs (bbls/d)
Total (boe/d)
137,480
6,498
29,411
134,353
6,246
28,638
136,986
5,919
28,750
111,145
6,251
24,775
106,125
6,620
24,308
104,714
6,835
24,287
107,821
7,395
25,365
87,346
7,975
22,533
Average prices
Natural gas ($/mcf)
Excluding hedging
Including hedging
AECO daily index
Crude oil and NGLs ($/bbl)
Excluding hedging
Including hedging
WTI ($US/bbl)
Total sales including realized hedging
Net income (loss)
per share - basic
- diluted
Funds from operations
$
$
$
3.18
3.76
3.20
$
$
$
3.62
4.16
3.66
$
$
$
3.77
4.29
3.88
$
$
$
3.72
4.55
3.78
$
$
$
3.49
4.81
3.63
$
$
$
3.51
4.80
3.53
$
$
$
3.81
5.58
3.89
$
$
$
5.26
6.87
4.95
$
$
$
$
$
$
$
$
87.06
85.88
94.02
98,858
(145,063)
(0.87)
(0.87)
54,634
$
$
$
$
$
$
$
$
76.56
77.33
89.81
95,797
(2,997)
(0.02)
(0.02)
50,108
$
$
$
$
$
$
$
$
88.27
86.21
102.55
99,971
997
0.01
0.01
52,041
$
$
$
$
$
$
$
$
75.41
72.82
94.25
86,488
(5,709)
(0.03)
(0.03)
40,248
$
$
$
$
$
$
$
$
69.19
64.14
85.18
86,012
(22,889)
(0.14)
(0.14)
40,628
61.84
$
59.01
$
76.21
$
83,335
$
$
(659)
$
-
$
-
$
37,698
$
$
$
$
$
$
$
$
64.66
61.80
77.98
96,377
31,379
0.19
0.19
45,291
$
$
$
$
$
$
$
$
67.23
62.42
78.79
98,777
33,089
0.20
0.20
49,685
The table above highlights the Corporation’s performance for the fourth quarter of 2011 and also for the preceding seven quarters.
Production for the first quarter of 2010 was comparable to the fourth quarter of 2009 but increased dramatically during the second
quarter of 2010 as our new gas plant was completed and production from Glacier was increased to between 50 and 55 mmcf/d. We
completed two asset dispositions during the end of the second quarter of 2010 representing approximately 1,700 boe/d that resulted
in slightly lower production. The full impact of these dispositions resulted in a decrease in production for the third quarter of 2010
with our production remaining relatively consistent through to the first quarter of 2011. Production increased significantly in the
second quarter of 2011 as the Phase III expansion at Glacier was completed with production capacity at 100 mmcf/d. Our production
has remained comparable for the remainder of 2011 with a modest increase in the fourth quarter from production additions attributed
to Longview’s capital expenditure program. Our financial results, particularly sales and funds from operations are significantly
impacted by commodity prices. During 2010 and 2011, natural gas prices have remained low which has decreased our corresponding
sales and funds from operations, although increasing production and strengthening crude oil and NGLs prices have partially mitigated
the impact. Advantage has recognized net losses during 2010 and 2011 primary driven by weak natural gas prices. During these periods
we have continued to experience a reduction in costs including royalties, operating expenses, general and administrative expense, and
finance expense. We recognized net income in the first and second quarters of 2010 due to higher natural gas prices and a $45.6
million net gain recognized on the disposal of several non-core properties. Our net loss during the fourth quarter of 2011 was
considerable as we recognized an impairment loss of $187.7 million related to two CGUs that consist of conventional natural gas
focused properties located in Western and Eastern Alberta that had suffered a significant deterioration in value due to the challenging
natural gas price environment.
Critical Accounting Estimates
The preparation of financial statements in accordance with IFRS requires Management to make certain judgments and estimates.
Changes in these judgments and estimates could have a material impact on the Corporation’s financial results and financial condition.
Management relies on the estimate of reserves as prepared by the Corporation’s independent qualified reserves evaluator. The process
of estimating reserves is critical to several accounting estimates. The process of estimating reserves is complex and requires significant
judgments and decisions based on available geological, geophysical, engineering and economic data. These estimates may change
substantially as additional data from ongoing development and production activities becomes available and as economic conditions
impact crude oil and natural gas prices, operating expense, royalty burden changes, and future development costs. Reserve estimates
impact net income and comprehensive income through depreciation and impairment of oil and gas properties. The reserve estimates
are also used to assess the borrowing bases for the Corporation’s credit facilities. Revision or changes in the reserve estimates can have
either a positive or a negative impact on asset values, net income, comprehensive income and the borrowing bases of the Corporation.
Advantage Oil & Gas Ltd. - 33
Management’s process of determining the provision for deferred income taxes, the provision for decommissioning liability costs and
related accretion expense, the fair values initially assigned to the convertible debentures liability and equity components, and the fair
values assigned to any acquired company’s assets and liabilities in a business combination is based on estimates. These estimates are
significant and can include proved and probable reserves, future production rates, future commodity prices, future costs, future
interest rates, future tax rates and other relevant assumptions. Revisions or changes in any of these estimates can have either a positive
or a negative impact on asset and liability values, net income and comprehensive income.
In accordance with IFRS, derivative assets and liabilities are recorded at their fair values at the reporting date, with gains and losses
recognized directly into comprehensive income in the same period. The fair value of derivatives outstanding is an estimate based on
pricing models, estimates, assumptions and market data available at that time. As such, the recognized amounts are non-cash items and
the actual gains or losses realized on eventual cash settlement can vary materially due to subsequent fluctuations in commodity prices
as compared to the valuation assumptions.
International Financial Reporting Standards
Canadian publicly accountable enterprises have implemented International Financial Reporting Standards (“IFRS”) for the fiscal years
beginning on or after January 1, 2011. The transition date to IFRS was January 1, 2010 and comparative figures for 2010 and
Advantage’s financial position as at January 1, 2010 have been restated to IFRS from the previous Canadian generally accepted
accounting principles (“Previous GAAP”). Reconciliations to IFRS from Previous GAAP financial statements including the impact of
the transition on the Corporation's reported financial position and financial performance, including the nature and effect of significant
changes in accounting policies from those used in the Corporation’s consolidated financial statements for the year ended December
31, 2010, are summarized in note 25 to the unaudited consolidated financial statements. The following discussion explains the
significant differences between IFRS and the Previous GAAP followed by the Corporation.
a) Property, plant and equipment
Under Previous GAAP, the Corporation, like many Canadian oil and gas reporting issuers, applied the “full cost” concept in
accounting for its oil and gas assets. Under full cost, capital expenditures were maintained in a single cost centre for each country, and
the cost centre was subject to a single depletion and depreciation calculation and impairment test. Under IFRS, the Corporation makes
a much more detailed assessment of its oil and gas assets that impact depreciation and impairment calculations. Included in this
assessment is an ongoing appraisal of exploration and evaluation expenditures (“E&E”). Under Canadian GAAP, it was only necessary
to track costs associated with unproved properties that would be excluded from depletion and depreciation calculations. Under IFRS,
a company may choose to account for E&E under its previous GAAP and capitalize such costs without recording depreciation
expense until the expenditures are determined to represent technically feasible and commercially viable projects at which time the costs
are moved to development properties or expensed accordingly. Advantage capitalizes E&E costs except for costs incurred before the
acquisition of rights to explore, and to begin depreciating when technically feasible and commercially viable. As at transition on
January 1, 2010, $6.9 million was reclassified from property, plant and equipment to exploration and evaluation assets.
As well, under Previous GAAP the Corporation did not recognize gains or losses on the disposal of oil and gas properties unless such
dispositions would change the depletion rate by 20% or more while IFRS requires such recognition. This results in an increase to the
carrying value and a gain on sale of property, plant and equipment.
b) Depreciation
For Previous GAAP purposes, the full cost method of accounting for oil and gas properties requires a single calculation of depletion
and depreciation of the carrying value of PP&E based on proved reserves. However, IFRS requires an allocation of the amount
recognized as PP&E to each significant identified component and each component depreciated separately, utilizing an appropriate
method of depreciation. This component depreciation of PP&E results in an increased number of calculations of depreciation expense
and impacts the amount of depreciation expense recognized. IFRS also permits the option of using either proved or proved and
probable reserves in the depreciation calculation. Advantage has utilized proved and probable reserves to calculate depreciation
expense as we believe it represents a better approximation of useful life and depletion of reserves.
c)
Impairment of Assets
Under Canadian GAAP, impairment calculations are prepared according to a two-step test generally conducted at a country level. Step
one involves a comparison of the PP&E carrying value to the undiscounted net cash flows of proved reserves. If a company should
fail step one, step two is completed to measure the amount of impairment whereby the PP&E carrying value is compared to a
calculated fair value with any excess carrying value above the fair value recognized as an impairment loss. Impairment losses
recognized under Canadian GAAP are not subsequently reversed. Under IFRS, impairment testing is completed at an individual asset
group or “Cash Generating Unit” level (“CGU”) when indicators suggest there may be impairment. A CGU is defined as the smallest
Advantage Oil & Gas Ltd. - 34
group of assets that produce independent cash flows. Impairment of assets at a CGU level use a one-step approach for testing and
measuring asset impairment, with asset carrying values compared to the higher of “Value in Use” and “Fair Value less Costs to Sell”.
The IFRS methodology may result in the possibility of more frequent impairments in the carrying value of PP&E. However, under
IFRS previous impairment losses must be reversed where circumstances change such that the previously recognized impairment has
been reduced.
d) Decommissioning Liabilities
Both Canadian GAAP and IFRS require a company to provide for a liability related to decommissioning PP&E. Both methodologies
are similar and we have determined there to be no significant difference for Advantage, other than a difference related to discount
rates. Canadian GAAP requires that the decommissioning liability be discounted at a credit-adjusted risk-free rate while IFRS requires
that the decommissioning liability be discounted at an appropriate rate with either the cash flows or rate adjusted for risks. Advantage
has selected to use the risk-free rate for discounting purposes as we believe this accurately represents a market-based rate for such a
liability and at transition date the decommission liability was increased $101.1 million and charged to deficit.
e) Convertible debentures liability component
Under Previous GAAP convertible debentures are financial liabilities consisting of a liability with an embedded conversion feature. As
such, the debentures were segregated between liabilities and equity and the debenture liabilities are presented at less than their eventual
maturity values. The discount of the liability component as compared to maturity value is accreted over the debenture term and
expensed accordingly. As debentures are converted to common shares, an appropriate portion of the liability and equity components
were transferred to share capital.
Prior to July 9, 2009, Advantage was an Income Trust that operated under the name Advantage Energy Income Fund. As an income
trust, convertible debentures were convertible into Trust Units, which contained a redemption feature which effectively made the
conversion option a “putable instrument” according to IFRS. As such, convertible debentures were liabilities, with no equity
component. Upon conversion to a corporation on July 9, 2009, all convertible debentures became convertible into common shares,
and were no longer deemed to contain a “putable instrument”. Under IFRS, retrospective restatement of the convertible debentures in
existence at July 9, 2009 and still outstanding at transition resulted in the liability component restated to their full maturity values, less
any issue costs and no value assigned to the equity component of the conversion features of these same debentures. Accretion expense
as recorded under Previous GAAP was reduced, as only debenture issue costs gave rise to accretion expense.
f) Deferred Income Taxes
Deferred income tax calculated according to IFRS is substantially similar to Previous GAAP and arises from differences between the
accounting and tax bases of our assets and liabilities. To the extent that assets and liabilities have changed from transition to IFRS, the
amount of deferred income tax liability has been impacted. Additionally, under Previous GAAP deferred income tax liabilities were
required to be disclosed as either current or long-term. Under IFRS, all deferred income tax liabilities are considered to be non-current
liabilities.
g) First Time Adoption of International Financial Reporting Standards
IFRS 1 provides the framework for the first time adoption of IFRS and specifies that an entity shall apply the principles under IFRS
retrospectively. IFRS 1 also specifies that the adjustments that arise on retrospective conversion to IFRS from other GAAP should be
directly recognized in retained earnings. Certain optional exemptions and mandatory exceptions to retrospective application are
provided under IFRS 1. The Corporation has taken the following exemptions:
Companies using full-cost accounting are allowed to measure their oil and gas assets at the amount determined under the Previous
GAAP at the date of transition. This amount is pro-rated to the underlying assets based upon the value of proved and probable
reserves at transition date, discounted at 10%.
Companies using the full cost book value as deemed cost exemption are allowed to measure the liabilities for decommissioning,
restoration and similar liabilities at the date of transition and recognize directly in retained earnings any difference between that
amount and the carrying amount determined under Previous GAAP.
IFRS 3 Business Combinations has not been applied to acquisitions of subsidiaries or of interests in associates and joint ventures
that occurred before January 1, 2010.
IFRS 2 Share-based Payment has not been applied to any equity instruments that were granted on or before November 7, 2002,
nor has it been applied to equity instruments granted after November 7, 2002 that vested before January 1, 2010.
IAS 17 Leases has been applied as of transition date rather than at the lease’s inception date.
Advantage Oil & Gas Ltd. - 35
IAS 32 Financial Instruments Presentation will not be applied for compound financial instruments where the liability component
is no longer outstanding.
IAS 23 Borrowing Costs will not be applied before January 1, 2010.
h) New standards and interpretations not yet adopted
Standards issued but not yet effective up to the date of issuance of the Corporation’s financial statements are listed below. This listing
is of standards and interpretations issued which the Corporation reasonably expects to be applicable at a future date. The Corporation
intends to adopt those standards when they become effective. The Corporation has yet to assess the full impact of these standards.
Standards issued but not yet effective up to the date of issuance of the Corporation’s financial statements are listed
below. This listing is of standards and interpretations issued which the Corporation reasonably expects to be applicable
at a future date. The Corporation intends to adopt those standards when they become effective. The Corporation has
yet to assess the full impact of these standards.
IFRS 9 Financial Instruments: Classification and Measurement
IFRS 9 is intended to supersede IAS 39, Financial Instruments: Recognition and Measurement and will be published in
three phases, of which the first phase has been published. The first phase addresses the accounting for financial assets
and financial liabilities. The second phase will address the impairment of financial instruments, and the third phase will
address hedge accounting. For financial assets, IFRS 9 uses a single approach to determine whether a financial asset is
measured at amortized cost or fair value, and replaces the multiple rules in IAS 39. The approach in IFRS 9 is based on
how an entity manages its financial instruments in the context of its business model and the contractual cash flow
characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing
the multiple impairment methods in IAS 39. For financial liabilities, although the classification criteria for financial
liabilities will not change under IFRS 9, the approach to the fair value option for financial liabilities may require different
accounting for changes to the fair value of a financial liability as a result of changes to an entity’s own credit risk. This
standard is not applicable until January 1, 2015.
IFRS 10 Consolidated Financial Statements
IFRS 10 is a new standard that will replace SIC 12, “Consolidation – Special Purpose Entities” and IAS 27
“Consolidated and Separate Financial Statements”. The new standard eliminates the current risks and rewards approach
and establishes control as the single basis for determining the consolidation of an entity. This standard is not applicable
until January 1, 2013.
IFRS 11 Joint Arrangements
IFRS 11 requires a venture to classify its interest in a joint arrangement as a joint venture or joint operation. Joint
ventures will be accounted for using the equity method of accounting whereas for a joint operation, the venture will
recognize its share of the assets, liabilities, revenue and expenses. Under existing IFRS, entities have the choice to
proportionately consolidate or equity account for interests in joint ventures. IFRS 11 supersedes IAS 31, Interests in
Joint Ventures and SIC-13, Jointly Controlled Entities, Non-Monetary Contributions by Venturers. This standard is not
applicable until January 1, 2013.
IFRS 12 Disclosure of Interests in Other Entities
IFRS 12 provides the required disclosures for interests in subsidiaries and joint arrangements. These disclosures will
require information that will assist users of financial statements to evaluate the nature, risks and financial effects
associated with an entity’s interests in subsidiaries and joint arrangements. This standard is not applicable until January 1,
2013.
IFRS 13 – Fair Value Measurement
IFRS 13 is a comprehensive standard for fair value measurement and disclosure requirements for use across all IFRS
standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer
a liability in an orderly transaction between market participants, at the measurement date. It also establishes disclosures
about fair value measurement. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among
the specific standards requiring fair value measurement and in many cases does not reflect a clear measurement basis or
consistent disclosures. This standard is not applicable until January 1, 2013.
Advantage Oil & Gas Ltd. - 36
IAS 28 – Investments in Associates and Joint Ventures
IAS 28 has been amended to include joint ventures in its scope and to address the changes in IFRS 10 – 13.
Evaluation of Disclosure Controls and Procedures
Advantage’s Chief Executive Officer and Chief Financial Officer have designed disclosure controls and procedures (“DCP”), or
caused it to be designed under their supervision, to provide reasonable assurance that all material information relating to the
Corporation is made known to them by others, particularly during the period in which the annual filings are being prepared, and
information required to be disclosed by the Corporation in its annual filings, interim filings or other reports filed or submitted by it
under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation.
Management of Advantage, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the
Corporation’s DCP as at December 31, 2011. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that the DCP are effective as of the end of the year, in all material respects.
Evaluation of Internal Controls over Financial Reporting
Advantage’s Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining internal control over
financial reporting (“ICFR”). They have as at the quarter ended December 31, 2011, designed ICFR, or caused it to be designed under
their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with IFRS. The control framework Advantage’s officers used to design the
Corporation’s ICFR is the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations.
Management of Advantage, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the
Corporation’s ICFR as at December 31, 2011. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that the ICFR are effective as of the end of the year, in all material respects.
Advantage’s Chief Executive Officer and Chief Financial Officer are required to disclose any change in the ICFR that occurred during
our most recent interim period that has materially affected, or is reasonably likely to affect, the Corporation’s internal controls over
financial reporting. No material changes in the internal controls were identified during the interim period ended December 31, 2011
that have materially affected, or are reasonably likely to materially affect, our ICFR.
It should be noted that while the Chief Executive Officer and Chief Financial Officer believe that the Corporation’s design of DCP
and ICFR provide a reasonable level of assurance that they are effective, they do not expect that the control system will prevent all
errors and fraud. A control system, no matter how well conceived or operated, does not provide absolute, but rather is designed to
provide reasonable assurance that the objective of the control system is met. The Corporation’s internal control over financial
reporting may not prevent or detect all misstatements because of inherent limitations. Additionally, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with the Corporation’s policies and procedures.
Corporate Governance
The Corporation’s corporate governance practices can be found in the Management Information Circular.
As a foreign private issuer listed on the New York Stock Exchange (the "NYSE"), Advantage is not required to comply with most of
the NYSE rules and listing standards and instead may comply with domestic Canadian requirements. Advantage is, however, required
to comply with the following NYSE Rules: (i) Advantage must have an audit committee that satisfies the requirements of Rule 10A-3
under the United States Securities Exchange Act of 1934, as amended; (ii) the Chief Executive Officer must promptly notify the
NYSE in writing after an executive officer becomes aware of any non-compliance with the applicable NYSE Rules; (iii) submit an
executed section 303A annual written affirmation to the NYSE, as well as a Section 303A interim affirmation each time certain
changes occurs to the audit committee; and (iv) provide a brief description of any significant differences between its corporate
governance practices and those followed by U.S. domestic issuers under NYSE listing standards. Advantage has reviewed the NYSE
listing standards followed by U.S. domestic issuers listed under the NYSE and confirms that its corporate governance practices do not
differ significantly from such standards.
Advantage Oil & Gas Ltd. - 37
Outlook
Advantage’s business structure has been established in order to fully capitalize on both natural gas and crude oil exploration and
development opportunities. Advantage is focused primarily on developing the significant natural gas resource play at Glacier, Alberta
while retaining a significant investment in Longview that is focused on crude oil and natural gas liquids production and development.
Advantage
At Glacier, our continued successful drilling results has increased the quality and magnitude of our Montney natural gas resource
which is contained in approximately 300 meters in the Upper, Middle and Lower Montney formations. Our high quality asset at
Glacier contains significant scope and scale as validated by Sproule’s resource assessment and is underpinned with one of the lowest
cost structures in Western Canada which provides Advantage with a significant drilling inventory. Our recent drilling which involved
lateral and vertical delineation through the very thick Montney formation across our contiguous land block has added another
dimension to Glacier, specifically with the Middle Montney. We estimate that the current drilling inventory at Glacier to be in excess
of 900 wells which only includes development of 3 layers in the Montney formation.
Our capital budget for the twelve month period ending June 30, 2012 was set at $216 million of which $200 million is focused on a
Phase IV development program at Glacier with two key objectives: i) increase throughput capacity at our Glacier gas plant from 100
mmcf/d to 140 mmcf/d by the second quarter of 2012; and ii) further evaluate the Middle and Lower Montney formations. As a result
of the prevailing low natural gas pricing environment, production at Glacier will be maintained between 90 mmcf/d to 100 mmcf/d
until we see a sustained increase in natural gas pricing. We will utilize our inventory of 29 gross (28.5 net) Montney wells that have
been drilled to maintain targeted production rates at Glacier by producing and/or completing these wells as required. Additionally, we
believe that the high industry activity levels that have increased service and supply costs could subside during the latter part of 2012
which would benefit natural gas development economics. We believe that it is prudent to maintain capital spending discipline and
financial flexibility in this current natural gas price environment. We also believe that the current price of natural gas is unsustainable
for generating sufficient full cycle economic returns in the vast majority of North American natural gas plays and anticipate an
improvement in the natural gas price environment. As a result, we are positioning our Glacier gas plant with the capability to ramp up
production capacity to 140 mmcf/d by completing modifications as planned in our Phase IV capital program. At this time, we are
providing interim guidance for the six months ending June 30, 2012:
Production average
22,800 boe/d to 23,400 boe/d
Royalty rate
8% to 10%
Operating expense
$5.70/boe to $6.00/boe
Capital expenditures
$65 million to $75 million
Additional capital budget and guidance details will be provided pending our evaluation of future delineation plans for our liquids rich
Middle Montney formation in order to determine the natural gas and NGL production and reserves potential. This evaluation will
include detailed analysis and interpretation of recent geological, engineering and completions data which we obtained from our Middle
Montney Phase IV wells. In addition, we have 1 remaining Middle Montney well and 2 Lower Montney wells that are drilled and are
awaiting completion which we anticipate undertaking after spring break-up. We expect the results of this information and our
evaluation to provide more information in regard to determining a systematic delineation plan for the balance of 2012 and beyond. We
will continue with a technically focused and financially disciplined approach to create value from our Glacier property and will revisit
our 2012 capital spending plans as required taking into account commodity price and market dynamics.
Longview
With regards to Longview, Advantage has retained a 63% controlling ownership interest with the potential for growth opportunities
accompanied by a stable yield. Our investment provides a significant contribution to funds from operations from annual dividends of
approximately $17.7 million that will be utilized to partially fund our capital expenditure program. Longview’s operations commenced
on April 14, 2011 and from April 14 to December 31, 2011, Longview has demonstrated strong financial and operating results with
funds from operations supported by high crude oil prices and demonstrated production growth.
Longview’s 2011 capital program and routine well maintenance activities were initially delayed due to poor field conditions from
severe wet weather during much of the spring and summer. Longview was able to commence their Alberta capital expenditure
program in July with the Saskatchewan program beginning in September after delays created by wet weather conditions.
Notwithstanding the delays, Longview was able to expedite their efforts and complete their capital expenditure program. Longview
Advantage Oil & Gas Ltd. - 38
deployed two drilling rigs in Alberta and an additional rig targeting the Midale formation in southeast Saskatchewan. As of December
31, 2011, they spent a net $55.0 million and drilled 20.7 net (30 gross) oil wells (100% success rate). This activity significantly increased
production whereby Longview daily production averaged 6,823 boe/d for the fourth quarter, an increase of 16% from that realized
during their initial quarter ended June 30, 2012.
Longview’s 2012 budget is approximately $73 million including the drilling of 25.3 net (34 gross) wells. The following table
summarizes operational guidance for Longview for the year ending December 31, 2012:
Production average
6,600 boe/d to 6,800 boe/d
% of oil & liquids
77%
Exit rate
6,800 boe/d to 7,000 boe/d
Production growth %
8%
Royalty rate
18% to 20%
Operating expense
$16.00/boe to $17.00/boe
Capital expenditures
$70 million to $75 million
Longview has contracted three rigs, two of which will target Alberta prospects and the additional rig will target the Midale formation
in southeast Saskatchewan. The capital expenditure program also includes analysis of cores that were taken from the Duvernay and
Nordegg shale formations on a well that was drilled at Sunset in the fourth quarter of 2011. Detailed core analysis is expected by
summer of 2012.
Longview has begun executing their 2012 capital program, focusing on operational and cost efficiencies to increase returns and
produce stable cash flows with a conservative financial structure. Longview's business strategy is to provide shareholders with
attractive long term returns that combine both growth and yield by exploiting their assets in a financially disciplined manner and by
acquiring additional long-life oil and gas assets of a similar nature.
Additional Information
Additional information relating to Advantage can be found on SEDAR at www.sedar.com and the Corporation’s website at
www.advantageog.com. Such other information includes the annual information form, the annual information circular – proxy
statement, press releases, material change reports, material contracts and agreements, and other financial reports. The annual
information form will be of particular interest for current and potential shareholders as it discusses a variety of subject matter
including the nature of the business, description of our operations, general and recent business developments, risk factors, reserves
data and other oil and gas information.
March 23, 2012
Advantage Oil & Gas Ltd. - 39
Consolidated
C
Financial St
tatements
Managem
ment’s Respo
onsibility for
Financial St
tatements
The Manag
of the con
annual rep
Internation
best estima
contained t
gement of Adva
solidated finan
port. The con
nal Financial Re
ates and carefu
throughout the
antage Oil & G
cial statements
nsolidated finan
eporting Standa
ul judgments of
annual report i
Gas Ltd. (the “C
together with
ncial statemen
ards as issued b
f Management,
is consistent wi
Corporation”) i
all operational
ts have been
by the Internat
where approp
ith that provide
is responsible f
l and other fin
prepared by
tional Account
priate. Operatio
ed in the consol
for the preparat
nancial informat
Management
ting Standards B
onal and other
lidated financia
tion and presen
tion contained
in accordance
Board and utili
financial inform
al statements.
ntation
in the
e with
ize the
mation
Manageme
transaction
Corporatio
financial in
nt has develope
ns are accurate
on’s operating
nformation pres
ed and maintain
ely and reliably
and financial r
sented is accura
ns a system of i
y recorded, th
results within
ate, and that the
internal control
hat the consoli
acceptable lim
e Corporation’s
ls designed to p
idated financia
mits of material
assets are prop
provide reasona
al statements a
ality, that all o
perly safeguarde
able assurance t
accurately repo
ther operation
ed.
that all
ort the
nal and
The Audit
Manageme
meeting re
financial re
the consoli
Board of D
Committee, co
nt fulfills its fin
gularly with M
eporting proces
idated financial
Directors. The B
omprised of non
nancial reportin
Management, th
ses, auditing m
l statements wi
Board of Direct
n-management
ng and internal
e external audi
atters and vario
ith Managemen
tors has approv
directors, acts
control respon
itors, and the i
ous aspects of f
nt and the exte
ved these conso
on behalf of th
nsibilities. The
internal audito
financial report
ernal auditors,
olidated financia
he Board of Di
Audit Commit
rs to discuss in
ting. The Audit
and recommen
al statements.
rectors to ensu
ttee is responsib
nternal control
t Committee rev
nded approval
ure that
ble for
ls over
viewed
to the
Pricewaterh
external au
2011, Dece
shareholder
their audits
access to th
houseCoopers
uditor of the C
ember 31, 2010
rs’ equity and c
s in accordanc
he Audit Comm
LLP, an indep
Corporation, ha
0 and January 1
cash flows for t
e with Canadia
mittee.
pendent firm o
s audited the c
1, 2010, the con
the years ended
an generally ac
of Chartered Ac
consolidated st
nsolidated state
d December 31
ccepted auditin
ccountants, ap
tatement of fin
ement of comp
1, 2011 and 201
ng standards an
pointed by the
nancial position
prehensive inco
10. The externa
nd have unlimi
e shareholders
n as at Decemb
ome (loss), chan
al auditors cond
ited and unres
as the
ber 31,
nges in
ducted
stricted
Andy J. Ma
President a
March 23, 2
ah
and CEO
2012
Drader
Kelly I. D
CFO
Advantage
e Oil & Gas Ltd
d. - 40
Managem
ment’s Repor
rt on Internal
l Control ove
er Financial R
The Manag
adequate in
Securities E
Officer, we
the Interna
Commissio
control ove
Because of
even those
statement p
subject to
compliance
Pricewaterh
shareholder
Corporatio
Pricewaterh
gement of Adv
nternal control
Exchange Act o
e have conduct
al Control-Inte
on (“COSO”).
er financial repo
f inherent limit
e systems deter
preparation an
the risk that
e with the polic
houseCoopers
rs to audit an
on’s internal co
houseCoopers L
vantage Oil &
over financial
of 1934, as ame
ted an evaluatio
egrated Framew
Based on our
orting was effec
ations, internal
rmined to be e
d presentation.
controls may b
ies or procedur
LLP, the Corp
d provide an
ontrol over fina
LLP has provid
Gas Ltd. (the
reporting for t
ended. Under th
on of the effect
work issued by
assessment, w
“Corporation”
the Corporation
he supervision o
tiveness of our
y the Committe
we have conclu
ctive.
l control over f
effective can p
. Further, proj
become inadeq
res may deterio
poration’s inde
independent o
ancial reporting
ded such opinio
financial report
provide only re
ections of any
quate because
rate.
ependent firm o
opinion on bot
g as at Decemb
on.
Reporting
”) is responsib
n as such term
of our Chief Ex
r internal contro
ee of Sponsori
uded that as o
ble for establish
m is defined in R
xecutive Office
ol over financia
ing Organizatio
f December 3
hing and maint
Rule 13a-15(f)
er and Chief Fin
al reporting ba
ons of the Tre
1, 2011, our in
taining
of the
nancial
sed on
eadway
nternal
ting may not p
easonable assu
y evaluation of
of changes in
prevent or dete
urance with res
effectiveness t
n conditions, o
ct misstatemen
spect to the fin
to future perio
or that the deg
nts and
nancial
ods are
gree of
of Chartered A
th the consolid
ber 31, 2011, a
Accountants, w
dated financial
as stated in th
was appointed
l statements an
eir Auditor’s R
by the
nd the
Report.
Andy J. Ma
President a
March 23, 2
ah
and CEO
2012
Drader
Kelly I. D
CFO
Advantage
e Oil & Gas Ltd
d. - 41
Independent Auditor’s Report
To the Shareholders of Advantage Oil & Gas Ltd.
We have completed an integrated audit of Advantage Oil & Gas Ltd.’s 2011 consolidated financial
statements and its internal control over financial reporting as at December 31, 2011 and an audit of its
2010 consolidated financial statements. Our opinions, based on our audits, are presented below.
Report on the consolidated financial statements
We have audited the accompanying consolidated financial statements of Advantage Oil & Gas Ltd., which
comprise the consolidated statement of financial position as at December 31, 2011, December 31, 2010
and January 1, 2010 and the consolidated statements of comprehensive income (loss), changes in
shareholders’ equity, and cash flows for the years ended December 31, 2011 and 2010, and the related
notes, which comprise a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board and for such internal control as management determines is necessary to
enable the preparation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards and the
standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform an audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement. Canadian generally accepted auditing standards
require that we comply with ethical requirements.
An audit involves performing procedures to obtain audit evidence, on a test basis, about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the consolidated financial
statements, whether due to fraud or error. In making those risk assessments, the auditor considers
internal control relevant to the company’s preparation and fair presentation of the consolidated financial
statements in order to design audit procedures that are appropriate in the circumstances. An audit also
includes evaluating the appropriateness of accounting principles and policies used and the reasonableness
of accounting estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements.
Advantage Oil & Gas Ltd. - 42
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide
a basis for our audit opinion on the consolidated financial statements.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of Advantage Oil & Gas Ltd. as at December 31, 2011, December 31, 2010, and January 1, 2010
and its financial performance and its cash flows for the years ended December 31, 2011 and 2010 in
accordance with International Financial Reporting Standards as issued by the International Accounting
Standards Board.
Report on internal control over financial reporting
We have also audited Advantage Oil & Gas Ltd.’s internal control over financial reporting as at December
31, 2011 based on criteria established in Internal Control - Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Management’s responsibility for internal control over financial reporting
Management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control over Financial Reporting.
Auditor’s responsibility
Our responsibility is to express an opinion on the company’s internal control over financial reporting
based on our audit. We conducted our audit of internal control over financial reporting in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects.
An audit of internal control over financial reporting includes obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating
the design and operating effectiveness of internal control, based on the assessed risk, and performing such
other procedures as we consider necessary in the circumstances.
We believe that our audit provides a reasonable basis for our audit opinion on the company’s internal
control over financial reporting.
Definition of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that: (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Advantage Oil & Gas Ltd. - 43
Inherent
Because o
misstatem
that contr
with the p
t limitation
of its inherent
ments. Also, p
rols may beco
policies or pro
s
t limitations, i
rojections of
ome inadequa
ocedures may
internal contr
any evaluatio
ate because of
y deteriorate.
rol over finan
on of effective
f changes in co
ncial reporting
eness to future
onditions or t
g may not pre
e periods are
that the degre
ct
event or detec
e risk
subject to the
nce
ee of complian
Opinion
In our opi
over finan
Integrated
inion, Advant
ncial reporting
d Framework
tage Oil & Gas
g as at Decem
k issued by CO
s Ltd. mainta
mber 31, 2011
OSO.
ined, in all m
based on crite
material respec
eria establish
cts, effective i
hed in Interna
internal contr
al Control -
rol
Chartere
Calgary,
March 23
ed Accounta
Alberta
, 2012
ants
Advantage
e Oil & Gas Ltd
d. - 44
Co
onsolidated St
atement of Fin
nancial Positio
on
(th
housands of Cana
dian dollars)
AS
SSETS
Cu
urrent assets
Tra
ade and other rece
eivables
Pre
epaid expenses an
nd deposits
De
erivative asset
To
otal current assets
No
s
on-current assets
De
erivative asset
Ex
xploration and eva
aluation assets
Pro
operty, plant and
equipment
De
eferred income tax
x asset
To
otal non-current as
ssets
To
otal assets
LI
ABILITIES
Cu
urrent liabilities
Tra
ade and other accr
rued liabilities
Ca
apital lease obligati
ions
Co
onvertible debentu
ures
De
erivative liability
Ot
ther liability
To
otal current liabiliti
ies
No
on-current liabil
ities
De
erivative liability
Ca
apital lease obligati
ions
Ba
ank indebtedness
Co
onvertible debentu
ures
De
ecommissioning li
iability
De
eferred income tax
x liability
Ot
ther liability
To
otal non-current lia
abilities
To
otal liabilities
SH
HAREHOLDER
RS' EQUITY
Sh
are capital
Co
onvertible debentu
ures equity compo
onent
Co
s
ontributed surplus
De
eficit
To
otal shareholders' e
equity attributable
e to Advantage sh
hareholders
No
on-controlling int
erest
To
otal shareholders' e
equity
Notes
7
6
6
8
9
22
12
6
14
6
11
12
13
22
14
15
12
5
To
otal liabilities and s
shareholders' equi
ity
Co
ommitments (no
te 24)
See
On
e accompanying N
behalf of the Boar
Notes to the Conso
rd of Directors of A
olidated Financial
Advantage Oil & G
Gas Ltd.:
Statements
December 3
31, 2011 Decem
mber 31, 2010
January 1, 2010
J
note 25)
(n
(note 25)
$
42,344
$
42,276
$
6,045
-
48,389
-
7,730
1,8
877,287
39,383
1,9
924,400
$
1,9
972,789
6,488
25,157
73,921
-
8,262
54,531
9,936
30,829
95,296
323
6,923
1,883,762
1,824,699
-
-
1,892,024
1,831,945
$
1,965,945
$
1,927,241
$
138,119
1
$
112,457
$
113,062
-
-
2,738
908
141,765
1
-
-
232,684
2
75,890
253,796
2
29,723
-
592,093
5
759
62,013
2,367
-
177,596
177
-
288,852
72,811
172,130
40,231
1,835
576,036
1,375
69,927
12,755
-
197,119
1,165
759
247,784
131,561
169,665
22,115
3,431
576,480
733,858
7
753,632
773,599
2,2
214,784
8,348
71,762
(1,1
163,081)
1,
,131,813
107,118
1
1,2
238,931
$
1,9
972,789
2,199,491
2,190,409
8,348
14,783
(1,010,309)
1,212,313
-
1,212,313
$
1,965,945
$
8,348
6,114
(1,051,229)
1,153,642
-
1,153,642
1,927,241
___
Pau
_______________
ul G. Haggis, Direc
___
tor
______
Andy J.
____________
Mah, Director
Advantage
e Oil & Gas Ltd
d. - 45
Consolidated Statement of Comprehensive Income (Loss)
(thousands of Canadian dollars, except for per share amounts)
Notes
Petroleum and natural gas sales
Less: royalties
Petroleum and natural gas revenue
Operating expense
General and administrative expense
Depreciation expense
Impairment of oil and gas properties
Exploration and evaluation expense
Finance expense
Gains on derivatives
Other income
Income (loss) before taxes and non-controlling
interest
Income tax recovery (expense)
Net income (loss) and comprehensive income
(loss) before non-controlling interest
Net income attributable to non-controlling interest
Net income (loss) and comprehensive income
(loss) attributable to Advantage shareholders
Net income (loss) per share attributable to
Advantage shareholders
Basic
Diluted
18
19
9
9
8
21
6
20
22
17
See accompanying Notes to the Consolidated Financial Statements
Year ended
December 31, 2011
Year ended
December 31, 2010
(note 25)
$
355,288
(52,971)
302,317
$
319,368
(45,954)
273,414
(89,166)
(34,587)
(152,927)
(187,684)
(3,055)
(29,561)
475
1,972
(192,216)
46,807
(145,409)
(7,363)
(95,609)
(38,193)
(124,592)
(17,500)
(752)
(34,388)
50,514
46,142
59,036
(18,116)
40,920
-
$
(152,772)
$
40,920
$
$
(0.92)
(0.92)
$
$
0.25
0.25
Advantage Oil & Gas Ltd. - 46
Consolidated Statement of Changes in Shareholders' Equity
Convertible
debentures
equity
component
$
8,348
Contributed
surplus
$
14,783
Deficit
(1,010,309)
$
Notes Share capital
$
2,199,491
Total
shareholders'
equity
attributable to
Advantage
shareholders
$
1,212,313
Non-
controlling
interest
$
-
Total
shareholders'
equity
$
1,212,313
15, 16
5
-
15,293
-
-
-
-
-
-
-
(770)
(152,772)
-
(152,772)
14,523
7,363
-
(145,409)
14,523
57,749
-
-
-
57,749
106,093
163,842
-
577
577
-
2,214,784
$
-
8,348
$
-
71,762
$
-
(1,163,081)
$
-
1,131,813
$
(6,915)
107,118
$
(6,915)
1,238,931
$
(thousands of Canadian dollars)
Balance, January 1, 2011
Net income (loss) and comprehensive income
(loss)
Share based compensation
Common control transaction and change in
ownership interest
Change in ownership interest, share based
compensation
Dividends declared by Longview ($0.40 per
Longview share)
Balance, December 31, 2011
Balance, January 1, 2010
Share based compensation
Net income and comprehensive income
Balance, December 31, 2010
25
15, 16
$
2,190,409
9,082
-
2,199,491
$
8,348
-
-
8,348
6,114
8,669
-
14,783
(1,051,229)
-
40,920
(1,010,309)
1,153,642
17,751
40,920
1,212,313
$
-
-
-
$
-
$
$
1,153,642
17,751
40,920
1,212,313
$
$
$
$
$
$
$
$
See accompanying Notes to the Consolidated Financial Statements
Advantage Oil & Gas Ltd. - 47
Consolidated Statement of Cash Flows
(thousands of Canadian dollars)
Notes
Operating Activities
Income (loss) before taxes and non-controlling interest
Add (deduct) items not requiring cash:
Share based compensation
Depreciation expense
Impairment of oil and gas properties
Exploration and evaluation expense
Non-cash general and administrative
Unrealized loss (gain) on derivatives
Gain on sale of property, plant and equipment
Finance expense
Expenditures on decommissioning liability
Changes in non-cash working capital
Cash provided by operating activities
Financing Activities
Proceeds from Longview financing
Increase (decrease) in bank indebtedness
Convertible debenture maturities
Dividends paid by Longview
Reduction of capital lease obligations
Convertible debenture issue costs
Interest paid
Cash provided by (used in) financing activities
Investing Activities
Expenditures on property, plant and equipment
Expenditures on exploration and evaluation assets
Property dispositions
Cash used in investing activities
Net change in cash
Cash, beginning of year
Cash, end of year
16
9
9
8
6
20
21
13
23
5
11
12
9
8
See accompanying Notes to the Consolidated Financial Statements
Year ended
December 31, 2011
Year ended
December 31, 2010
(note 25)
$
(192,216)
$
59,036
12,348
152,927
187,684
3,055
-
25,351
(1,325)
29,561
(3,335)
4,131
218,181
160,757
(56,754)
(62,294)
(6,050)
(68)
-
(20,076)
15,515
13,415
124,592
17,500
752
(538)
(5,381)
(45,631)
34,388
(6,275)
31,008
222,866
-
40,395
(69,927)
-
(1,375)
(310)
(21,532)
(52,749)
(231,789)
(3,006)
1,099
(233,696)
-
-
$
-
(237,702)
(2,091)
69,676
(170,117)
-
-
$
-
Advantage Oil & Gas Ltd. - 48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
All tabular amounts are in thousands of Canadian dollars except as otherwise indicated.
1. Business and structure of Advantage Oil & Gas Ltd.
Advantage Oil & Gas Ltd. and its subsidiaries (together “Advantage” or the “Corporation”) are a growth oriented
intermediate oil and natural gas development and production corporation with properties located in Western Canada.
Advantage is domiciled and incorporated in Canada under the Business Corporations Act (Alberta). Advantage’s head
office address is 700, 400 – 3rd Avenue SW, Calgary, Alberta, Canada. The Corporation’s primary listing is on the Toronto
Stock Exchange and is also traded on the New York Stock Exchange as a Foreign Private Issuer, under the symbol “AAV”.
2. Basis of preparation
(a) Statement of compliance
The Corporation prepares its financial statements in accordance with Canadian generally accepted accounting principles
as defined in the Handbook of the Canadian Institute of Chartered Accountants (“CICA Handbook”). In 2010, the
CICA Handbook was revised to incorporate International Financial Reporting Standards (“IFRS”) as issued by the
International Accounting Standards Board and to require publicly accountable enterprises to apply these standards
effective for years beginning on or after January 1, 2011. Accordingly, these consolidated financial statements are
Advantage’s first annual audited consolidated financial statements to be prepared and issued under IFRS.
The consolidated financial statements are prepared in compliance with IFRS. The comparative figures for 2010 and
Advantage’s financial position as at January 1, 2010 have been restated from previous Canadian Generally Accepted
Accounting Principles (“Previous GAAP”) to IFRS. The reconciliations to IFRS from Previous GAAP are summarized
in note 25 and disclose the impact of the transition to IFRS on the Corporation's reported financial position and
financial performance, including the nature and effect of significant changes in accounting policies from those used in
the Corporation’s consolidated financial statements for the year ended December 31, 2010. Subject to certain transition
elections disclosed in note 25, the Corporation has consistently applied the same accounting policies in its opening
IFRS statement of financial position at January 1, 2010 and throughout all periods presented, as if these policies had
always been in effect.
The accounting policies applied in these financial statements are based on IFRS issued and outstanding as of March 23,
2012, the date the Board of Directors approved the statements.
(b) Basis of measurement
The consolidated financial statements have been prepared on the historical cost basis, except as detailed in the
Corporation’s accounting policies in note 3.
The methods used to measure fair values of derivative instruments are discussed in note 6.
(c) Functional and presentation currency
These consolidated financial statements are presented in Canadian dollars, which is the Corporation’s functional
currency.
(d) Basis of consolidation
These consolidated financial statements include the accounts of the Corporation and all subsidiaries over which it has
control, including Longview Oil Corp. (“Longview”), a public Canadian corporation of which Advantage owns 63%,
and remaining ownership is disclosed as non-controlling interest. All inter-corporate balances, income and expenses
resulting from inter-corporate transactions are eliminated.
Advantage Oil & Gas Ltd. - 49
3. Significant accounting policies
The accounting policies set out below have been applied consistently to all years presented in these financial statements, and
have been applied consistently by the Corporation.
(a) Cash and cash equivalents
Cash consists of balances held with banks, and other short-term highly liquid investments with original maturities of
three months or less from inception.
(b) Basis of consolidation
(i)
Subsidiaries
Subsidiaries are entities controlled by the Corporation. Control exists when the Corporation has the power to
govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing
control, potential voting rights that currently are exercisable are taken into account. The financial statements
of subsidiaries are included in the consolidated financial statements from the date that control commences
until the date that control ceases.
(ii)
Non-controlling interests
The Corporation treats transactions with non-controlling interests as transactions with equity owners of the
Corporation. For purchases of shares from non-controlling interests, the difference between any
consideration paid and the relevant ownership acquired of the carrying value of net assets of the subsidiary is
recorded in equity. Gains or losses on disposals of shares to non-controlling interests are also recorded in
equity, unless the disposal results in the Corporation’s loss of control of the subsidiary, in which case the gain
or loss is recognized in net income and comprehensive income.
(iii)
Joint interests
A significant portion of the Corporation’s oil and natural gas activities involve jointly controlled assets. The
consolidated financial statements include the Corporation’s share of these jointly controlled assets and a
proportionate share of the relevant revenue and related costs.
(c) Financial instruments
All financial instruments are initially recognized at fair value on the Statement of Financial Position. Measurement of
financial instruments subsequent to the initial recognition, as well as resulting gains and losses, is based on how each
financial instrument was initially classified. The Corporation has classified each identified financial instrument into the
following categories: fair value through profit or loss, loans and receivables, held to maturity investments, available for
sale financial assets, and financial liabilities at amortized cost. Fair value through profit or loss financial instruments are
measured at fair value with gains and losses recognized in income immediately. Available for sale financial assets are
measured at fair value with gains and losses, other than impairment losses, recognized in other comprehensive income
and transferred to income when the asset is derecognized. Loans and receivables, held to maturity investments and
financial liabilities at amortized cost, are recognized at amortized cost using the effective interest method and
impairment losses are recorded in income when incurred.
Derivative instruments executed by the Corporation to manage market risk associated with volatile commodity prices
are classified as fair value through profit or loss and recorded on the Statement of Financial Position at fair value as
derivative assets and liabilities. Gains and losses on these instruments are recorded as gains and losses on derivatives in
the Statement of Comprehensive Income (Loss) in the period they occur. Gains and losses on derivative instruments
are comprised of cash receipts and payments associated with periodic settlement that occurs over the life of the
instrument, and non-cash gains and losses associated with changes in the fair values of the instruments, which are
remeasured at each reporting date and recorded on the Statement of Financial Position.
Advantage Oil & Gas Ltd. - 50
3. Significant accounting policies (continued)
(c) Financial instruments (continued)
Transaction costs are frequently attributed to the acquisition or issue of a financial asset or liability. Such costs incurred
on fair value through profit or loss financial instruments are expensed immediately. For other financial instruments,
transaction costs are added to the fair value initially recognized for financial assets and liabilities that are not classified as
fair value through profit or loss.
Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics
and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same
terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not
measured at fair value through profit or loss. Changes in the fair value of separable embedded derivatives are
recognized immediately in income.
Equity instruments issued by the Corporation are recorded at the proceeds received, with direct issue costs as a
deduction therefrom, net of any associated tax benefit.
(d) Property, plant and equipment and exploration and evaluation assets
(i) Recognition and measurement
a) Exploration and evaluation costs
Pre-license costs are recognized in the Statement of Comprehensive Income (Loss) as incurred.
All exploratory costs incurred subsequent to acquiring the right to explore for oil and natural gas and before
technical feasibility and commercial viability of the area have been established are capitalized. Such costs can
typically include costs to acquire land rights, geological and geophysical costs, decommissioning costs, and
exploration well costs.
Exploration and evaluation costs are not depreciated and are accumulated in cost centers by well, field or
exploration area and carried forward pending determination of technical feasibility and commercial viability.
The technical feasibility and commercial viability of extracting a mineral resource from exploration and
evaluation assets is considered to be generally determinable when proved and probable reserves are
determined to exist. Upon determination of proved and probable reserves, exploration and evaluation assets
attributable to those reserves are first tested for impairment and then reclassified from exploration and
evaluation assets to development and production assets, net of any impairment loss.
Management reviews and assesses exploration and evaluation assets to determine if technical feasibility and
commercial viability exist. If Management decides not to continue the exploration and evaluation activity, the
unrecoverable costs are charged to exploration and evaluation expense in the period in which the
determination occurs.
b) Development and production costs
Items of property, plant and equipment, which include oil and gas development and production assets, are
measured at cost less accumulated depreciation and accumulated impairment losses. Costs include lease
acquisition, drilling and completion, production facilities, decommissioning costs, geological and geophysical
costs and directly attributable general and administrative costs related to development and production
activities, net of any government incentive programs.
When significant parts of an item of property, plant and equipment, including oil and natural gas interests,
have different useful lives, they are accounted for as separate items (major components).
Advantage Oil & Gas Ltd. - 51
3. Significant accounting policies (continued)
(d) Property, plant and equipment and exploration and evaluation assets (continued)
(ii) Subsequent costs
Costs incurred subsequent to development and production that are significant are recognized as oil and gas
property only when they increase the future economic benefits embodied in the specific asset to which they relate.
All other expenditures are recognized in comprehensive income as incurred. Such capitalized oil and natural gas
interests generally represent costs incurred in developing proved and probable reserves and bringing in or
enhancing production from such reserves, and are accumulated on a field or area basis. The carrying amount of any
replaced or sold component is derecognized in accordance with our policies. The costs of the day-to-day servicing
of property, plant and equipment are recognized in the Statement of Comprehensive Income (Loss) as incurred.
(iii) Depreciation
The net carrying value of oil and gas properties is depreciated using the unit-of-production method by reference to
the ratio of production in the period to the related proved and probable reserves, taking into account estimated
future development costs necessary to bring those reserves into production. Future development costs are
estimated taking into account the level of development required to produce the reserves. These estimates are
reviewed by independent reserve engineers at least annually.
(e) Asset swaps and dispositions
Exchanges of development and production assets are measured at fair value unless the exchange transaction lacks
commercial substance or the fair value of neither the asset received nor the asset given up is reliably measurable. The
cost of the acquired asset is measured at the fair value of the asset given up, unless the fair value of the asset received is
more clearly evident. Where fair value is not used, the cost of the acquired asset is measured at the carrying amount of
the amount given up. Any gain or loss on derecognition of the asset given up is recognised in the Statement of
Comprehensive Income (Loss).
For exchanges or parts of exchanges that involve only exploration and evaluation assets, the exchange is accounted for
at carrying value.
Gains and losses on disposal of an item of property, plant and equipment, including oil and natural gas interests, are
determined by comparing the proceeds from disposition with the carrying amount of property, plant and equipment
and are recognized net within “other income” or “other expenses” in the Statement of Comprehensive Income (Loss).
(f) Impairment
(i) Financial assets
At each reporting date, the Corporation assesses whether there is objective evidence that a financial asset is
impaired. If a financial asset carried at amortized cost is impaired, the amount of the loss is measured as the
difference between the amortized cost of the loan or receivable and the present value of the estimated future cash
flows, discounted using the instrument’s original effective interest rate. The loss is recognized in other expenses in
the period incurred.
Advantage Oil & Gas Ltd. - 52
3. Significant accounting policies (continued)
(f) Impairment (continued)
(ii) Property, plant and equipment and exploration and evaluation assets
The carrying amounts of the Corporation’s property, plant and equipment are reviewed at each reporting date to
determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable
amount is estimated. For the purpose of impairment testing of property, plant and equipment, assets are grouped
together into the smallest group of assets that generates cash inflows from continuing use that are largely
independent of the cash inflows of other assets or groups of assets (the “cash-generating unit” or “CGU”).
Exploration and evaluation assets are assessed for impairment if sufficient data exists to determine technical
feasibility and commercial viability, and facts and circumstances suggest that the carrying amount exceeds the
recoverable amount. Exploration and evaluation assets are allocated to CGU’s or groups of CGU’s for the
purposes of assessing such assets for impairment.
The recoverable amount of an asset or a CGU is the greater of its value in use and its fair value less costs to sell. In
assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount
rate that reflects current market assessments of the time value of money and the risks specific to the asset. Value
in use is generally computed by reference to the present value of the future cash flows expected to be derived from
production of proved and probable reserves. Fair value less cost to sell is assessed utilizing market valuation based
on an arm’s length transaction between active participants. In the absence of any such transactions, fair value less
cost to sell is estimated by discounting the expected after-tax cash flows of the cash generating unit at an after-tax
discount rate that reflects the risk of the properties in the cash generating unit. The discounted cash flow
calculation is then increased by a tax-shield calculation, which is an estimate of the amount that a prospective buyer
of the cash generating unit would be entitled. The carrying value of the cash generating unit is reduced by the
deferred tax liability associated with its property, plant and equipment.
Impairment losses on property, plant and equipment are recognized in the Statement of Comprehensive Income
(Loss) as impairment of oil and gas properties and are separately disclosed. An impairment of exploration and
evaluation assets is recognized as exploration and evaluation expense in the Statement of Comprehensive Income
(Loss).
Impairment losses recognized in prior years are assessed at each reporting date for any indications that the loss has
decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to
determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying
amount does not exceed the carrying amount that would have been determined, net of depreciation, if no
impairment loss had been recognized.
(g) Decommissioning liability
A decommissioning liability is recognized if, as a result of a past event, the Corporation has a present legal or
constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be
required to settle the obligation. Decommissioning liabilities are determined by discounting the expected future cash
flows at a risk-free rate.
Advantage Oil & Gas Ltd. - 53
3. Significant accounting policies (continued)
(h) Share based compensation
Advantage accounts for share based compensation expense based on the fair value of rights granted under its share
based compensation plan.
Advantage’s Restricted Share Performance Incentive Plan (“RSPIP” or the “Plan”), authorizes the Board of Directors
to grant restricted shares to service providers, including directors, officers, employees, and consultants of Advantage
and Longview. The restricted share grants generally vest one-third immediately on grant date, with the remaining two-
thirds vesting on each of the two subsequent anniversary dates. Compensation cost related to the Plan is recognized as
share based compensation expense within general and administrative expense over the service period of the service
providers and incorporates the fair value at grant date, the estimated number of restricted shares to vest, and certain
management estimates. As compensation expense is recognized, contributed surplus is recorded until the restricted
shares vest at which time the appropriate shares are then issued to the services providers and the contributed surplus is
transferred to share capital.
(i) Common-control transaction
Business combinations involving entities under common control are outside the scope of IFRS 3 Business
Combinations. IFRS provides no guidance on the accounting for these types of transactions and an entity is required to
develop an accounting policy. The two most common methods utilized are the purchase method and the predecessor
values method. A business combination involving entities under common control is a business combination in which all
of the combining entities are ultimately controlled by the same party, both before and after the business combination,
and control is not transitory. Management has determined the predecessor values method to be most appropriate. The
predecessor method requires the financial statements to be prepared using the predecessor carrying values without any
step up to fair value. The difference between any consideration and the aggregate carrying value of the assets and
liabilities are recorded in shareholders’ equity.
(j) Revenue
Revenue from the sale of petroleum and natural gas is recorded when the significant risks and rewards of ownership of
the product is transferred to the buyer which is usually when legal title passes to the external party. For natural gas, this
is generally at the time product enters the pipeline. For crude oil, this is generally at the time the product reaches a
trucking terminal. For natural gas liquids, this is generally at the time the product reaches a gas plant. Revenue is
measured net of discounts, customs duties and royalties.
Royalty income is recognized as it accrues in accordance with the terms of the overriding royalty agreements.
(k) Finance expense
Finance expense comprises interest expense on bank indebtedness, capital leases, and accretion of the discount on the
decommissioning liability and convertible debentures.
Advantage Oil & Gas Ltd. - 54
3. Significant accounting policies (continued)
(l) Income tax
Income tax expense comprises current and deferred income tax. Income tax expense is recognized in income or loss
except to the extent that it relates to items recognized directly in shareholders’ equity.
Current income tax is the expected tax payable on the taxable income for the year, using tax rates enacted or
substantively enacted at the reporting date, and any adjustment to income tax payable in respect of previous years.
Deferred income tax is recognized using the liability method, providing for temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred
income tax is not recognized on the initial recognition of assets or liabilities in a transaction that is not a business
combination, and at the time of the transaction, affects neither accounting income nor taxable income. Deferred
income tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse,
based on the laws that have been enacted or substantively enacted by the reporting date.
A deferred income tax asset is recognized to the extent that it is probable that future taxable profits will be available
against which the temporary difference can be utilized. Deferred income tax assets are reviewed at each reporting date
and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. Deferred income
tax assets and liabilities are only offset when they are within the same legal entity and same tax jurisdiction. Deferred
income tax assets and liabilities are presented as non-current.
(m) Net income (loss) per share
Basic net income (loss) per share is calculated by dividing the net income (loss) attributable to common shareholders of
the Corporation by the weighted average number of common shares outstanding during the period. Diluted net income
(loss) per share is determined by adjusting the net income (loss) attributable to common shareholders and the weighted
average number of common shares outstanding for the effects of dilutive instruments such as restricted shares granted
to service providers and convertible debentures, using the treasury stock method.
Advantage Oil & Gas Ltd. - 55
3. Significant accounting policies (continued)
(n) New standards and interpretations not yet adopted
Standards issued but not yet effective up to the date of issuance of the Corporation’s financial statements are listed
below. This listing is of standards and interpretations issued which the Corporation reasonably expects to be applicable
at a future date. The Corporation intends to adopt those standards when they become effective. The Corporation has
yet to assess the full impact of these standards.
IFRS 9 Financial Instruments: Classification and Measurement
IFRS 9 is intended to supersede IAS 39, Financial Instruments: Recognition and Measurement and will be published in
three phases, of which the first phase has been published. The first phase addresses the accounting for financial assets
and financial liabilities. The second phase will address the impairment of financial instruments, and the third phase will
address hedge accounting. For financial assets, IFRS 9 uses a single approach to determine whether a financial asset is
measured at amortized cost or fair value, and replaces the multiple rules in IAS 39. The approach in IFRS 9 is based on
how an entity manages its financial instruments in the context of its business model and the contractual cash flow
characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing
the multiple impairment methods in IAS 39. For financial liabilities, although the classification criteria for financial
liabilities will not change under IFRS 9, the approach to the fair value option for financial liabilities may require
different accounting for changes to the fair value of a financial liability as a result of changes to an entity’s own credit
risk. This standard is not applicable until January 1, 2015.
IFRS 10 Consolidated Financial Statements
IFRS 10 is a new standard that will replace SIC 12, “Consolidation – Special Purpose Entities” and IAS 27
“Consolidated and Separate Financial Statements”. The new standard eliminates the current risks and rewards approach
and establishes control as the single basis for determining the consolidation of an entity. This standard is not applicable
until January 1, 2013.
IFRS 11 Joint Arrangements
IFRS 11 requires a venture to classify its interest in a joint arrangement as a joint venture or joint operation. Joint
ventures will be accounted for using the equity method of accounting whereas for a joint operation, the venture will
recognize its share of the assets, liabilities, revenue and expenses. Under existing IFRS, entities have the choice to
proportionately consolidate or equity account for interests in joint ventures. IFRS 11 supersedes IAS 31, Interests in
Joint Ventures and SIC-13, Jointly Controlled Entities, Non-Monetary Contributions by Venturers. This standard is not
applicable until January 1, 2013.
IFRS 12 Disclosure of Interests in Other Entities
IFRS 12 provides the required disclosures for interests in subsidiaries and joint arrangements. These disclosures will
require information that will assist users of financial statements to evaluate the nature, risks and financial effects
associated with an entity’s interests in subsidiaries and joint arrangements. This standard is not applicable until January
1, 2013.
IFRS 13 – Fair Value Measurement
IFRS 13 is a comprehensive standard for fair value measurement and disclosure requirements for use across all IFRS
standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to
transfer a liability in an orderly transaction between market participants, at the measurement date. It also establishes
disclosures about fair value measurement. Under existing IFRS, guidance on measuring and disclosing fair value is
dispersed among the specific standards requiring fair value measurement and in many cases does not reflect a clear
measurement basis or consistent disclosures. This standard is not applicable until January 1, 2013.
IAS 28 – Investments in Associates and Joint Ventures
IAS 28 has been amended to include joint ventures in its scope and to address the changes in IFRS 10 to 13.
Advantage Oil & Gas Ltd. - 56
4. Significant accounting judgments, estimates and assumptions
The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and
assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and
expenses. Actual results may differ from these estimates, and differences could be material. Estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the
estimates are revised and in any future years affected.
Estimates and assumptions
Information about significant areas of estimation uncertainty in applying accounting policies that have the most significant
effect on the amounts recognized in the consolidated financial statements is included in the following notes:
Note 6 – valuation of financial instruments;
Note 9 – valuation of property, plant and equipment;
Note 8 & 9 – impairment of property, plant and equipment and exploration and evaluation assets;
Note 6, 12 – valuation of convertible debentures;
Note 13 – measurement of decommissioning liability;
Note 16 – measurement of share based compensation; and
Note 22 – measurement of deferred income tax.
Judgments
In the process of applying the Corporation’s accounting policies, management has made the following judgments, apart
from those involving estimates, which may have the most significant effect on the amounts recognized in the consolidated
financial statements.
(a) Exploration and evaluation assets
Costs incurred to acquire rights to explore for oil and natural gas may be grouped into either exploration and evaluation
or development and production, depending on facts and circumstances. Costs incurred in respect of properties that
have been determined to have proved and probable reserves, are classified as development and production properties.
In such circumstances, technical feasibility and commercial viability are considered to be established. Costs incurred in
respect of new prospects with no nearby established development past or present and no proved or probable reserves
assigned are classified as exploration and evaluation assets (note 8).
(b) Reserves base
The oil and gas development and production properties are depreciated on a unit-of-production (“UOP”) basis at a rate
calculated by reference to proved and probable reserves determined in accordance with National Instrument 51-101
“Standards of Disclosure for Oil and Gas Activities” and incorporating the estimated future cost of developing and
extracting those reserves. Proved plus probable reserves are determined using estimates of oil and natural gas in place,
recovery factors and future oil and natural gas prices. Future development costs are estimated using assumptions as to
number of wells required to produce the reserves, the cost of such wells and associated production facilities and other
capital costs.
Advantage Oil & Gas Ltd. - 57
4. Significant accounting judgments, estimates and assumptions (continued)
(c) Depreciation of oil and gas assets
Oil and gas properties are depreciated using the UOP method over proved plus probable reserves. The calculation of
the UOP rate of depreciation could be impacted to the extent that actual production in the future is different from
current forecast production based on proved plus probable reserves (note 9).
(d) Determination of cash generating units
Oil and gas properties are grouped into cash generating units for purposes of impairment testing. Management has
evaluated the oil and gas properties of the Corporation, and grouped the properties into cash generating units on the
basis of their ability to generate independent cash flows, similar reserve characteristics, geographical location, and
shared infrastructure.
(e) Impairment indicators and calculation of impairment
At each reporting date, Advantage assesses whether or not there are circumstances that indicate a possibility that the
carrying values of exploration and evaluation assets and property, plant and equipment are not recoverable, or impaired.
Such circumstances include incidents of physical damage, deterioration of commodity prices, changes in the regulatory
environment, or a reduction in estimates of proved and probable reserves.
When management judges that circumstances indicate potential impairment, property, plant and equipment are tested
for impairment by comparing the carrying values to their recoverable amounts. The recoverable amounts of cash
generating units are determined based on the higher of value-in-use calculations and fair values less costs to sell. These
calculations require the use of estimates and assumptions, that are subject to change as new information becomes
available including information on future commodity prices, expected production volumes, quantities of reserves,
discount rates, future development costs and operating costs (note 8 & 9).
(f) Decommissioning liability
Decommissioning costs will be incurred by the Corporation at the end of the operating life of some of the
Corporation’s facilities and properties. The ultimate decommissioning liability is uncertain and can vary in response to
many factors including changes to relevant legal requirements, the emergence of new restoration techniques, experience
at other production sites, or changes in the risk-free discount rate. The expected timing and amount of expenditure can
also change in response to changes in reserves or changes in laws and regulations or their interpretation. As a result,
there could be significant adjustments to the provisions established which would affect future financial results.
(g) Income taxes
The Corporation recognizes deferred income tax assets to the extent that it is probable that taxable profit will be
available to allow the benefit of that deferred income tax asset to be utilized. Assessing the recoverability of deferred
income tax assets requires the Corporation to make significant estimates related to expectations of future taxable
income. Estimates of future taxable income are based on forecast cash flows from operations and the application of
existing tax laws. To the extent that future cash flows and taxable income differ significantly from estimates, the ability
of the Corporation to realize the deferred income tax assets recorded at the reporting date could be impacted.
Additionally, future changes in tax laws in the jurisdictions in which the Corporation operates could limit the ability of
the Corporation to obtain tax deductions in future periods.
(h) Contingencies
By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. The
assessment of contingencies inherently involves the exercise of significant judgment and estimates of the outcome of
future events.
Advantage Oil & Gas Ltd. - 58
5. Common-Control Transaction
Advantage sold certain oil-weighted assets to Longview for total consideration of $546.9 million, comprised of 29,450,000
common shares of Longview representing a 63% equity ownership and $252.4 million in cash. The assets were sold with an
effective date of January 1, 2011 and a closing date of April 14, 2011. As Advantage is the parent company and has a
majority ownership interest of Longview, this transaction was deemed a common-control transaction. As such, Advantage
has recognized a non-controlling interest in shareholders’ equity, representing the carrying value of the 37% shareholding of
Longview held by outside interests.
The difference of $57.7 million between the proceeds from the change in ownership interest and the carrying value of the
non-controlling interest has been recognized within contributed surplus of shareholders’ equity. At December 31, 2011,
Advantage held 63% of Longview’s issued and outstanding shares.
6. Financial risk management
Financial instruments of the Corporation include trade and other receivables, deposits, trade and other accrued liabilities,
bank indebtedness, convertible debentures, other liabilities and derivative assets and liabilities.
Trade and other receivables and deposits are classified as loans and receivables and measured at amortized cost. Trade and
other accrued liabilities, bank indebtedness and other liabilities are all classified as financial liabilities at amortized cost. As at
December 31, 2011, there were no significant differences between the carrying amounts reported on the Statement of
Financial Position and the estimated fair values of these financial instruments due to the short terms to maturity and the
floating interest rate on the bank indebtedness.
The Corporation has convertible debenture obligations outstanding, of which the liability component has been classified as
financial liabilities at amortized cost. The convertible debentures have different fixed terms and interest rates (note 12)
resulting in fair values that will vary over time as market conditions change. As at December 31, 2011, the estimated fair
value of the total outstanding convertible debenture obligation was $82.8 million (December 31, 2010 - $153.2 million). The
fair value of the liability component of convertible debentures was determined based on the current public trading activity of
such debentures.
Fair value is determined following a three level hierarchy:
Level 1: Quoted prices in active markets for identical assets and liabilities. The Corporation does not have any financial
assets or liabilities that require level 1 inputs.
Level 2: Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly. Such inputs
can be corroborated with other observable inputs for substantially the complete term of the contract. Advantage uses Level
2 inputs in the determination of the fair value of derivative assets and liabilities. Pricing inputs include quoted forward prices
for commodities, foreign exchange rates, volatility and risk-free rate discounting, all of which can be observed or
corroborated in the marketplace. The actual gains and losses realized on eventual cash settlement can vary materially due to
subsequent fluctuations in commodity prices as compared to the valuation assumptions.
Level 3: Under this level, fair value is determined using inputs that are not observable. Advantage has no assets or liabilities
that use level 3 inputs.
The Corporation’s activities expose it to a variety of financial risks that arise as a result of its exploration, development,
production, and financing activities such as:
credit risk;
liquidity risk;
price and currency risk; and
interest rate risk.
Advantage Oil & Gas Ltd. - 59
6. Financial risk management (continued)
(a) Credit risk
Credit risk is the risk of financial loss to the Corporation if a customer or counterparty to a financial instrument fails to
meet its contractual obligations, and arises principally from the Corporation’s receivables from joint venture partners
and oil and natural gas marketers. The maximum exposure to credit risk is as follows:
Trade and other receivables
Deposits
Derivative asset
$
December 31, 2011
42,344
3,157
-
45,501
$
$
December 31, 2010
42,276
2,936
25,157
70,369
$
$
January 1, 2010
54,531
6,108
31,152
91,791
$
Trade and other receivables, deposits, and derivative assets are subject to credit risk exposure and the carrying values
reflect Management’s assessment of the associated maximum exposure to such credit risk. Advantage mitigates such
credit risk by closely monitoring significant counterparties and dealing with a broad selection of partners that diversify
risk within the sector. The Corporation’s deposits are primarily due from the Alberta Provincial government and are
viewed by Management as having minimal associated credit risk. To the extent that Advantage enters derivatives to
manage commodity price risk, it may be subject to credit risk associated with counterparties with which it contracts.
Credit risk is mitigated by entering into contracts with only stable, creditworthy parties and through frequent reviews of
exposures to individual entities. In addition, the Corporation only enters into derivative contracts with major banks and
international energy firms to further mitigate associated credit risk.
Substantially all of the Corporation’s trade and other receivables are due from customers and joint operation partners
concentrated in the Canadian oil and gas industry. As such, trade and other receivables are subject to normal industry
credit risks. As at December 31, 2011, $0.5 million or 1.2% of trade and other receivables are outstanding for 90 days
or more (December 31, 2010 - $2.3 million or 5.4% of trade and other receivables). The Corporation believes the entire
balance is collectible, and in some instances has the ability to mitigate risk through withholding production or offsetting
payables with the same parties. Management has not provided an allowance for doubtful accounts at December 31,
2011 (December 31, 2010 - $0.2 million).
The Corporation’s most significant customer, a Canadian oil and natural gas marketer, accounts for $12.3 million of the
trade and other receivables at December 31, 2011 (December 31, 2010 - $12.1 million).
Advantage Oil & Gas Ltd. - 60
6. Financial risk management (continued)
(b) Liquidity risk
The Corporation is subject to liquidity risk attributed from trade and other accrued liabilities, bank indebtedness,
convertible debentures, other liabilities, and derivative liabilities. Trade and other accrued liabilities, other liabilities, and
derivative liabilities are primarily due within one year of the statement of financial position date and Advantage does not
anticipate any problems in satisfying the obligations from cash provided by operating activities and the existing credit
facilities. The Corporation’s bank indebtedness is subject to $475 million credit facility agreements. Although the credit
facilities are a source of liquidity risk, the facilities also mitigates liquidity risk by enabling Advantage to manage interim
cash flow fluctuations. The terms of the credit facilities are such that they provide Advantage adequate flexibility to
evaluate and assess liquidity issues if and when they arise. Additionally, the Corporation regularly monitors liquidity
related to obligations by evaluating forecasted cash flows, optimal debt levels, capital spending activity, working capital
requirements, and other potential cash expenditures. This continual financial assessment process further enables the
Corporation to mitigate liquidity risk.
Advantage has convertible debentures outstanding that mature in 2015 (note 12). Interest payments are made semi-
annually with excess cash provided by operating activities. As the debentures become due, the Corporation can satisfy
the obligations in cash or issue shares at a price determined in the applicable debenture agreements. This settlement
alternative allows the Corporation to adequately manage liquidity, plan available cash resources and implement an
optimal capital structure.
To the extent that Advantage enters derivatives to manage commodity price risk, it may be subject to liquidity risk as
derivative liabilities become due. While the Corporation has elected not to follow hedge accounting, derivative
instruments are not entered for speculative purposes and Management closely monitors existing commodity risk
exposures. As such, liquidity risk is mitigated since any losses actually realized are subsidized by increased cash flows
realized from the higher commodity price environment.
The timing of cash outflows relating to financial liabilities as at December 31, 2011 and 2010 are as follows:
December 31, 2011
Trade and other accrued liabilities
Derivative liability
Bank indebtedness
- principal
- interest
- principal
- interest
Convertible debentures
Other liability
$
Less than
one year
138,119
2,738
-
12,373
-
4,313
908
158,451
$
One to
three years
-
$
-
233,903
5,882
-
8,625
-
248,410
$
Three to
five years Thereafter
-
-
$
$
-
-
-
-
-
-
-
86,250
-
2,156
-
-
$
-
88,406
$
$
Total
138,119
2,738
233,903
18,255
86,250
15,094
908
495,267
$
Interest on bank indebtedness was calculated assuming conversion of the revolving credit facility to a one-year term facility.
December 31, 2010
Trade and other accrued liabilities
Capital lease obligations
Derivative liability
Bank indebtedness
- principal
- interest
- principal
- interest
Convertible debentures
Other liability
$
Less than
one year
112,457
779
2,367
-
13,717
62,294
9,179
-
200,793
$
One to
three years
-
$
-
177
290,657
6,577
-
8,625
1,966
308,002
$
Four to five
years
-
$
-
-
-
-
86,250
6,469
-
92,719
$
Thereafter
-
$
-
-
-
-
-
-
-
$
-
$
Total
112,457
779
2,544
290,657
20,294
148,544
24,273
1,966
601,514
$
Interest on bank indebtedness was calculated assuming conversion of the revolving credit facility to a one-year term facility.
Advantage Oil & Gas Ltd. - 61
6. Financial risk management (continued)
(b) Liquidity risk (continued)
The Corporation’s bank indebtedness does not have specific maturity dates. It is governed by credit facility agreements
with a syndicate of financial institutions (note 11). Under the terms of the agreements, the facilities are reviewed
annually, with the next reviews scheduled in April and June 2012. The facilities are revolving and are extendible at each
annual review for a further 364 day period at the option of the syndicate. If not extended, the credit facilities are
converted at that time into one year term facilities, with the principal payable at the end of such one year terms.
Management fully expects that the facilities will be extended at each annual review.
(c) Price and currency risk
Advantage’s derivative assets and liabilities are subject to both price and currency risks as their fair values are based on
assumptions including forward commodity prices and foreign exchange rates. The Corporation enters into non-
financial derivatives to manage commodity price risk exposure relative to actual commodity production and does not
utilize derivative instruments for speculative purposes. Changes in the price assumptions can have a significant effect
on the fair value of the derivative assets and liabilities and thereby impact earnings. It is estimated that a 10% change in
the forward crude oil prices used to calculate the fair value of the crude oil derivatives at December 31, 2011 would
result in a $3.0 million change in net loss for the year ended December 31, 2011.
As at December 31, 2011, the Corporation had the following derivatives in place:
Description of Derivative
Term
Volume
Average Price
Crude oil - WTI
Fixed price
Collar
Electricity – Alberta Pool Price
Fixed price
January 2012 to December 2012
January 2012 to December 2012
Cdn $97.10/bbl
1,000 bbls/d
1,000 bbls/d Bought put Cdn $90.00/bbl
Sold call Cdn $102.25/bbl
January 2012 to December 2012
0.9 MW
Cdn $77.88/MWh
As at December 31, 2010 the Corporation had the following derivatives in place:
Description of Derivative
Term
Volume
Average Price
Natural gas - AECO
Fixed price
Fixed price
Fixed price
Fixed price
Crude oil – WTI
Fixed price
Fixed price
April 2010 to January 2011
January 2011 to December 2011
18,956 mcf/d
9,478 mcf/d
January 2011 to December 2011
January 2011 to December 2011
9,478 mcf/d
9,478 mcf/d
Cdn$7.25/mcf
Cdn$6.24/mcf
Cdn$6.24/mcf
Cdn$6.26/mcf
April 2010 to January 2011
January 2011 to December 2011
2,000 bbls/d
1,500 bbls/d
Cdn$69.50/bbl
Cdn $91.05/bbl
Advantage Oil & Gas Ltd. - 62
6. Financial risk management (continued)
(c) Price and currency risk (continued)
As at December 31, 2011, the fair value of the derivatives outstanding resulted in an asset of $Nil (December 31, 2010
– $25.2 million) and a liability of $2.7 million (December 31, 2010 – $2.5 million).
For the year ended December 31, 2011, $0.5 million was recognized in net loss as a derivative gain (December 31, 2010
- $50.5 million derivative gain). The table below summarizes the realized and unrealized gains (losses) on derivatives.
Realized gains on derivatives
Unrealized gains (losses) on derivatives
Year ended
December 31, 2011
$
25,826
(25,351)
475
$
Year ended
December 31, 2010
$
45,133
5,381
50,514
$
The fair value of the commodity risk management derivatives have been allocated to current and non-current assets and
liabilities on the basis of expected timing of cash settlement and the applicable counterparties.
(d) Interest rate risk
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The
interest charged on the outstanding bank indebtedness fluctuates with the interest rates posted by the lenders. The
Corporation is exposed to interest rate risk and has not entered into any mitigating interest rate hedges or swaps. Had
the borrowing rate been different by 100 basis points throughout the year ended December 31, 2011, net income (loss)
and comprehensive income (loss) would have changed by $2.2 million (December 31, 2010 - $1.9 million) based on the
average debt balance outstanding during the year.
Advantage Oil & Gas Ltd. - 63
6. Financial risk management (continued)
(e) Capital management
The Corporation manages its capital with the following objectives:
To ensure sufficient financial flexibility to achieve the ongoing business objectives including replacement of
production, funding of future growth opportunities, and pursuit of accretive acquisitions; and
To maximize shareholder return through enhancing the share value.
Advantage monitors its capital structure and makes adjustments according to market conditions in an effort to meet its
objectives given the current outlook of the business and industry in general. The capital structure of the Corporation is
composed of working capital (excluding derivative assets and liabilities), bank indebtedness, convertible debentures, and
share capital. Advantage may manage its capital structure by issuing new shares, repurchasing outstanding shares,
obtaining additional financing either through bank indebtedness or convertible debenture issuances, refinancing current
debt, issuing other financial or equity-based instruments, declaring a dividend, implementing a dividend reinvestment
plan, adjusting capital spending, or disposing of assets or its ownership interest in Longview. The capital structure is
reviewed by Management and the Board of Directors on an ongoing basis. Advantage’s capital structure as at
December 31, 2011, December 31, 2010 and January 1, 2010 is as follows:
($000, except as otherwise indicated)
Bank indebtedness (non-current) (note 11)
Working capital deficit (1)
Net debt
Shares outstanding (note 15)
Share closing market price ($/share)
Market capitalization (2)
Convertible debentures maturity value (current
and non-current)
Capital lease obligations (non-current)
Total capitalization
December 31, 2011
$
$
233,903
90,638
324,541
166,304,040
4.24
705,129
December 31, 2010
$
$
290,657
64,452
355,109
164,092,009
6.76
1,109,262
January 1, 2010
$
$
250,262
49,970
300,232
162,745,528
6.90
1,122,944
86,250
-
1,115,920
$
148,544
-
1,612,915
$
218,471
759
1,642,406
$
(1) Working capital deficit is a non-GAAP measure that includes trade and other receivables, prepaid expenses and deposits, trade and other
accrued liabilities, the current portion of capital lease obligations, and current portion of other liability.
(2) Market capitalization is a non-GAAP measure calculated by multiplying shares outstanding by the closing market share price on the applicable
date.
The Corporation’s bank indebtedness is governed by credit facility agreements for $475 million (note 11) that contains
standard commercial covenants for facilities of this nature. The only financial covenant is a requirement for Advantage
to maintain a minimum cash flow to interest expense ratio of 3.5:1, determined on a rolling four quarter basis. The
Corporation is in compliance with all credit facility covenants. As well, the borrowing base for the Corporation’s credit
facilities is determined through utilizing Advantage’s regular reserve estimates. The banking syndicate thoroughly
evaluates the reserve estimates based upon their own commodity price expectations to determine the amount of the
borrowing base. Revision or changes in the reserve estimates and commodity prices can have either a positive or a
negative impact on the borrowing base of the Corporation.
Management of the Corporation’s capital structure is facilitated through its financial and operational forecasting
processes. The forecast of the Corporation’s future cash flows is based on estimates of production, commodity prices,
forecast capital and operating expenditures, and other investing and financing activities. The forecast is regularly
updated based on new commodity prices and other changes, which the Corporation views as critical in the current
environment. Selected forecast information is frequently provided to the Board of Directors.
The Corporation’s capital management objectives, policies and processes have remained unchanged during the years
ended December 31, 2011 and 2010.
Advantage Oil & Gas Ltd. - 64
7. Trade and other receivables
Trade receivables
Receivables from joint venture partners
Other
December 31, 2011
32,655
$
9,038
651
42,344
$
December 31, 2010
30,997
$
6,296
4,983
42,276
$
8. Exploration and evaluation assets
Balance at January 1, 2010
Additions
Exploration and evaluation expense
Balance at December 31, 2010
Additions
Transferred to property, plant and equipment (note 9)
Exploration and evaluation expense
Balance at December 31, 2011
$
January 1, 2010
31,608
13,719
9,204
54,531
$
$
$
$
6,923
2,091
(752)
8,262
3,006
(483)
(3,055)
7,730
There were no indicators of impairment of exploration and evaluation assets during the years ended December 31, 2011 and
2010.
Advantage Oil & Gas Ltd. - 65
9. Property, plant and equipment
Cost
Balance at January 1, 2010
Additions
Change in decommissioning liability (note 13)
Disposals
Balance at December 31, 2010
Additions
Change in decommissioning liability (note 13)
Disposals
Transferred from exploration and evaluation assets (note 8)
Balance at December 31, 2011
Accumulated depreciation and impairment losses
Balance at January 1, 2010
Depreciation
Impairment of oil and gas properties
Disposals
Balance at December 31, 2010
Depreciation
Impairment of oil and gas properties
Disposals
Balance at December 31, 2011
Oil & gas
properties
Furniture and
equipment
Total
$
$
$
$
$
$
1,821,078
221,280
37,073
(60,482)
2,018,949
253,731
79,660
(184)
483
2,352,639
3,621
403
-
-
4,024
443
-
-
-
4,467
1,824,699
221,683
37,073
(60,482)
2,022,973
254,174
79,660
(184)
483
2,357,106
$
$
$
Oil & gas
properties
-
$
123,360
17,500
(2,881)
137,979
152,279
187,684
(3)
477,939
$
$
Furniture and
equipment
-
$
1,232
-
-
1,232
648
-
-
1,880
$
$
Total
$
-
124,592
17,500
(2,881)
139,211
152,927
187,684
(3)
479,819
$
$
Net book value
At January 1, 2010
At December 31, 2010
At December 31, 2011
Oil & gas
properties
$
$
$
1,821,078
1,880,970
1,874,700
Furniture and
equipment
$
$
$
3,621
2,792
2,587
Total
$
$
$
1,824,699
1,883,762
1,877,287
During the year ended December 31, 2011, Advantage capitalized general and administrative expenditures directly related to
development activities of $7.6 million (December 31, 2010 - $8.9 million).
Advantage included future development costs of $1.7 billion (December 31, 2010 – $1.6 billion) in property, plant and
equipment costs subject to depreciation.
Advantage Oil & Gas Ltd. - 66
9. Property, plant and equipment (continued)
For the year ended December 31, 2011, Advantage recognized an impairment of oil and gas properties of $187.7 million
(December 31, 2010 - $17.5 million). Impairment of oil and gas properties occur when management determines that
indicators of impairment are present in specific cash generating units. Recorded impairments are the amount by which
carrying amounts of the cash generating units exceed their respective recoverable amount based on a fair value less costs to
sell determination. Fair value less costs to sell is based on discounted after-tax future net cash flows of proved and probable
reserves using forecast prices and costs, discounted at 10%.
Forecast natural gas prices used in the calculation of impairment of oil and gas properties for the year ended December 31,
2011 are as follows:
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021 (1)
AECO ($Cdn/MMBtu)
3.16
3.78
4.13
5.53
5.65
5.77
5.89
6.01
6.14
6.27
(1) Escalation of 1.5% thereafter
The impairment of oil and gas properties recognized in the year ended December 31, 2011 relates to natural gas producing
assets in West and East Alberta. The decline in the price of natural gas was considered to be an indicator of impairment.
The impairment of oil and gas properties recognized in the year ended December 31, 2010 related to a West Alberta oil cash
generating unit, that was subject to negative reserve revisions at year end.
Advantage Oil & Gas Ltd. - 67
10. Related party transactions
Transactions between Advantage and Longview
Advantage sold certain oil-weighted properties to Longview on April 14, 2011 (note 5).
Concurrent with the disposition, Advantage entered into a Technical Services Agreement (“TSA”) with Longview. Under
the TSA, Advantage provides the necessary personnel and technical services to manage Longview’s business and Longview
reimburses Advantage on a monthly basis for its share of administrative charges based on respective levels of production.
All amounts paid are recorded as general and administrative expenses and measured at the exchange amount, which is the
amount agreed upon by the transacting parties.
At December 31, 2011, amounts due from Longview totaled $1.7 million (December 31, 2010 - $Nil). Advantage charged
Longview $3.8 million during the year ended December 31, 2011 under the TSA. Dividends declared and paid or payable
from Longview to Advantage during the year ended December 31, 2011 totaled $11.8 million (December 31, 2010 - $Nil).
All amounts due to and from Longview are non-interest bearing in nature, are settled monthly and were incurred within the
normal course of business. All inter-corporate balances, income and expenses resulting from inter-corporate transactions are
eliminated.
Key management compensation
The compensation paid or payable to key management, including directors, is as follows:
Salaries, director fees and short-term benefits
Other long-term benefits
Share based compensation (1)
December 31, 2011
$
4,821
-
5,067
9,888
$
December 31, 2010
$
4,786
-
8,242
13,028
$
(1) Represents the grant date fair value of Restricted Shares granted under the RSPIP for the respective years.
Advantage Oil & Gas Ltd. - 68
11. Bank indebtedness
Revolving credit facility
Discount on Bankers Acceptances and other fees
Balance, end of year
December 31, 2011
233,903
$
(1,219)
232,684
$
December 31, 2010
290,657
$
(1,805)
288,852
$
January 1, 2010
250,262
$
(2,478)
247,784
$
The Corporation has credit facilities (the "Credit Facilities") of $475 million, comprised of $275 million held by Advantage
and $200 million held by Longview. The Credit Facilities are comprised of $40 million extendible revolving operating loan
facilities from one financial institution and $435 million of extendible revolving loan facilities from a syndicate of financial
institutions. Amounts borrowed under the Credit Facilities bear interest at a floating rate based on the applicable Canadian
prime rate, US base rate, LIBOR rate or bankers' acceptance rate plus between 1.00% and 3.50% depending on the type of
borrowing and the Corporations’ debt to cash flow ratio. The Credit Facilities are each collateralized by a $1 billion floating
charge demand debenture covering all assets. The amounts available to the Corporation from time to time under the Credit
Facilities are based upon the borrowing base determined semi-annually by the lenders. The revolving period for the Credit
Facilities will end in April and June 2012 unless extended at the option of the syndicate for a further 364 day period. If the
Credit Facilities are not extended, they will convert to non-revolving term facilities due 365 days after the last day of the
revolving period. The Credit Facilities prohibit the Corporation from entering into any derivative contract where the term of
such contract exceeds three years. Further, the aggregate of such contracts cannot hedge greater than 60% of total estimated
petroleum and natural gas production over two years and 50% over the third year, in each respective legal entity. The Credit
Facilities contain standard commercial covenants for credit facilities of this nature. The only financial covenant is a
requirement for each entity to maintain a minimum cash flow to interest expense ratio of 3.5:1, determined on a rolling four-
quarter basis. These covenants were met at December 31, 2011, December 31, 2010, and January 1, 2010. Breach of any
covenant will result in an event of default in which case the Corporation has 20 days to remedy such default. If the default is
not remedied or waived, and if required by the lenders, the administrative agent of the lenders has the option to declare all
obligations under the credit facilities to be immediately due and payable without further demand, presentation, protest, days
of grace, or notice of any kind. Interest payments under the debentures are subordinated to the repayment of any amounts
owing under the Credit Facilities and are not permitted if the Corporation is in default of such Credit Facilities or if the
amount of outstanding indebtedness under such facilities exceeds the then existing current borrowing base. For the year
ended December 31, 2011, the average effective interest rate on the outstanding amounts under the facility was
approximately 5.3% (December 31, 2010 – 5.0%). Advantage also has issued letters of credit totaling $8.8 million at
December 31, 2011 (December 31, 2010 – $2.9 million).
Advantage Oil & Gas Ltd. - 69
12. Convertible debentures
The convertible unsecured subordinated debentures pay interest semi-annually and are convertible at the option of the
holder into shares of Advantage at the applicable conversion price per share plus accrued and unpaid interest. The details of
the convertible debentures including fair market values initially assigned and issuance costs are as follows:
6.50%
7.75%
8.00%
5.00%
Trading symbol
Issue date
Maturity date
Conversion price
Liability component
Equity component
Gross proceeds
Issuance costs
Net proceeds
AAV.DBE
May 18, 2005
June 30, 2010 Dec. 1, 2011 Dec. 31, 2011
20.33
$
AAV.DBD
AAV.DBH
AAV.DBG
Sep. 15, 2004 Nov. 13, 2006 Dec. 31, 2009
Jan. 30, 2015
8.60
$
$
$
21.00
24.96
$
69,952
-
$
50,000
-
$
41,445
-
$
73,019
13,231
69,952
-
50,000
(2,190)
41,445
-
86,250
(3,735)
$
69,952
$
47,810
$
41,445
$
82,515
The convertible debentures are redeemable prior to their maturity dates, at the option of the Corporation, upon providing
appropriate advance notification as per the debenture indentures. The redemption prices for the various debentures, plus
accrued and unpaid interest, is dependent on the redemption periods and are as follows:
Convertible
Debenture
Redemption Periods
7.75%
8.00%
5.00%
After December 1, 2009 and before December 1, 2011
After December 31, 2010 and before December 31, 2011
After January 31, 2013 and on or before January 30, 2015
Provided that Current Market Price exceeds 125% of Conversion Price
Redemption
Price
$
$
$
1,000
1,025
1,000
Advantage Oil & Gas Ltd. - 70
12. Convertible debentures (continued)
The balance of debentures outstanding at December 31, 2011 and changes in the liability and equity components during the
years ended December 31, 2011 and 2010 are as follows:
Trading symbol
Debentures outstanding
Liability component:
Balance at January 1, 2010
Accretion of discount
Matured
Balance at December 31, 2010
Accretion of discount
Matured
Balance at December 31, 2011
Trading symbol
Debentures outstanding
Liability component:
Balance at January 1, 2010
Accretion of discount
Matured
Balance at December 31, 2010
Accretion of discount
Matured
Balance at December 31, 2011
Equity component:
6.50%
AAV.DBE
$
-
$
69,927
-
(69,927)
-
-
-
$
-
8.00%
AAV.DBG
$
-
$
15,528
-
-
15,528
-
(15,528)
$
-
7.75%
AAV.DBD
$
-
$
46,176
309
-
46,485
281
(46,766)
$
-
5.00%
AAV.DBH
86,250
$
Total
$
86,250
$
$
69,857
2,954
-
72,811
3,079
-
75,890
201,488
3,263
(69,927)
134,824
3,360
(62,294)
75,890
$
$
Balance at January 1, 2010
Balance at December 31, 2010
Balance at December 31, 2011
$
-
$
-
$
-
$
$
$
8,348
8,348
8,348
$
$
$
8,348
8,348
8,348
The principal amount of 7.75% convertible debentures matured on December 1, 2011, and was settled with $46.8 million in
cash. The principal amount of 8.00% convertible debentures matured on December 31, 2011, and was settled with $15.5
million in cash. The principal amount of 6.50% convertible debentures matured on June 30, 2010 and was settled with
$69.9 million in cash. There were no conversions of convertible debentures during the years ended December 31, 2011 and
2010.
Advantage Oil & Gas Ltd. - 71
13. Decommissioning liability
The Corporation’s decommissioning liability results from net ownership interests in petroleum and natural gas assets
including well sites, gathering systems and processing facilities, all of which will require future costs of decommissioning
under environmental legislation. These costs are expected to be incurred between 2012 and 2071. A risk-free rate of 2.50%
(December 31, 2010 – 3.54%) and an inflation factor of 2% were used to calculate the fair value of the decommissioning
liability.
A reconciliation of the decommissioning liability is provided below:
Year ended
December 31, 2011
Year ended
December 31, 2010
$
$
The Corporation has a non-cancellable lease for office space which, due to changes in its activities, the Corporation ceased
to use in September 2009, while the lease expires in 2012. Management considers this to be an onerous contract, therefore
the obligation for the discounted future payments, net of expected rental income, has been provided for as a liability.
Balance, beginning of year
Accretion expense
Liabilities incurred
Change in estimates
Effect of change in risk-free rate
Property dispositions
Liabilities settled
Balance, end of year
14. Other liability
A reconcilation of the other liability is as follows:
Balance, beginning of year
Accretion expense (note 21)
Reduction of liability by subleasing space
Liability settled
Balance, end of year
15. Share capital
(a) Authorized
172,130
5,748
4,714
(3,699)
78,645
(407)
(3,335)
253,796
1,835
99
-
(1,026)
908
$
$
Year ended
December 31, 2011
Year ended
December 31, 2010
$
$
$
$
169,665
6,094
3,331
6,601
27,141
(34,427)
(6,275)
172,130
3,431
199
(538)
(1,257)
1,835
The Corporation is authorized to issue an unlimited number of shares without nominal or par value.
(b) Issued
Balance at January 1, 2010
Share based compensation (note 16)
Balance at December 31, 2010
Share based compensation (note 16)
Balance at December 31, 2011
Number of Shares
Amount
$
$
$
2,190,409
9,082
2,199,491
15,293
2,214,784
162,745,528
1,346,481
164,092,009
2,212,031
166,304,040
Advantage Oil & Gas Ltd. - 72
16. Share based compensation
Advantage has a Restricted Share Performance Incentive Plan (“RSPIP” or the “Plan”) as approved by the shareholders.
The Plan authorizes the Board of Directors to grant restricted shares to service providers, including directors, officers,
employees, and consultants of Advantage. The number of restricted shares granted is based on the Corporation’s share price
return for a twelve-month period and compared to the performance of a peer group approved by the Board of Directors.
The share price return is calculated at the end of each and every quarter and is primarily based on the twelve-month change
in the share price. If the share price return for a twelve-month period is positive, a restricted share grant will be calculated
based on the return. Otherwise, no restricted shares will be granted to service providers for the period. If the share price
return for a twelve-month period is negative, but the return is still within the top two-thirds of the approved peer group
performance, the Board of Directors may grant a discretionary restricted share award. The restricted share grants generally
vest one-third immediately on grant date, with the remaining two-thirds vesting on each of the two subsequent anniversary
dates. On vesting, common shares are issued to the service providers in exchange for the restricted shares outstanding. The
holders of restricted shares may elect to receive cash upon vesting in lieu of the number of shares to be issued, subject to
consent of the Corporation. However, it is the intent to settle unvested amounts with shares.
The following table is a continuity of restricted shares:
Restricted Shares
Balance at January 1, 2010
Granted
Vested
Forfeited
Balance at December 31, 2010
Granted
Vested
Forfeited
Balance at December 31, 2011
The following table summarizes information about restricted shares outstanding at December 31, 2011:
Date Granted
September 2, 2009
January 12, 2010
April 12, 2010
July 12, 2010
January 12, 2011
April 11, 2011
July 12, 2011
Total
Number of
Restricted
Shares
344,353
247,439
314,232
257,010
43,955
539,263
371,458
2,117,710
2,226,904
2,547,020
(1,818,707)
(29,349)
2,925,868
1,443,956
(2,212,031)
(40,083)
2,117,710
Weighted
Average Fair
Value at
Grant Date
$5.80
$7.27
$6.97
$6.53
$6.95
$8.28
$7.15
During the year ended December 31, 2011, the Corporation recognized share based compensation of $15.1 million
(December 31, 2010 - $19.9 million), of which $2.8 million (December 31, 2010 - $3.9 million) was capitalized to property,
plant and equipment, and $12.3 million (December 31, 2010 - $16.0 million) was recorded as an expense in the Statement of
Income (Loss) and Comprehensive Income (Loss).
Advantage Oil & Gas Ltd. - 73
17. Net income (loss) per share attributable to Advantage shareholders
The calculations of basic and diluted net income (loss) per share are derived from both net income (loss) attributable to
Advantage common shareholders and weighted average shares outstanding, calculated as follows:
Year ended
December 31, 2011
Year ended
December 31, 2010
Net income (loss) attributable to Advantage shareholders
Basic
Restricted shares (note 16)
Convertible debentures
Diluted
Weighted average shares outstanding
Basic
Restricted shares (note 16)
Convertible debentures
Diluted
$
$
(152,772)
-
-
(152,772)
40,920
-
-
40,920
$
$
165,370,777
-
-
165,370,777
163,467,225
1,094,135
-
164,561,360
The calculation of diluted net income (loss) per share for the years ended December 31, 2011 and 2010 excludes convertible
debentures, as their impact would be anti-dilutive. Total weighted average shares issuable in exchange for the series of
convertible debentures excluded from the diluted net income (loss) per share calculation for the year ended December 31,
2011 was 12,828,588 (year ended December 31, 2010 – 14,401,412 shares). As at December 31, 2011, the total convertible
debentures outstanding were immediately convertible to 10,029,070 shares (December 31, 2010 – 13,019,819 shares).
Restricted shares have been excluded from the calculation of diluted net loss per share for the year ended December 31,
2011, as the impact would have been anti-dilutive. Total weighted average shares issuable in exchange for the restricted
shares and excluded from the diluted net loss per share calculation for the year ended December 31, 2011 was 1,192,566
shares.
Advantage Oil & Gas Ltd. - 74
18. Petroleum and natural gas sales
Crude oil and natural gas liquid sales
Natural gas sales
Total petroleum and natural gas sales
19. General and administrative expense (“G&A”)
Salaries and benefits
Share based compensation (notes 15,16)
Office rent
Other
Total G&A
Capitalized (note 9)
Net G&A
20. Other income
Gain on sale of property, plant and equipment
Miscellaneous income
Total other income
21. Finance expense
Interest on bank indebtedness
Interest on convertible debentures
Accretion on convertible debentures (note 12)
Accretion of decomissioning liability (note 13)
Accretion of other liability (note 14)
Total finance expense
Year ended
December 31, 2011
186,014
$
169,274
355,288
$
Year ended
December 31, 2010
172,796
$
146,572
319,368
$
Year ended
December 31, 2011
20,778
$
15,100
2,337
3,955
42,170
(7,583)
34,587
$
Year ended
December 31, 2010
20,334
$
19,851
2,192
4,755
47,132
(8,939)
38,193
$
Year ended
December 31, 2011
$
1,325
647
1,972
$
Year ended
December 31, 2010
$
45,631
511
46,142
$
Year ended
December 31, 2011
$
11,483
8,871
3,360
5,748
99
29,561
$
Year ended
December 31, 2010
$
13,346
11,486
3,263
6,094
199
34,388
$
Advantage Oil & Gas Ltd. - 75
22. Income taxes
The provision for income taxes is as follows:
Current income tax expense
Deferred income tax expense (recovery)
Income tax expense (recovery)
Year ended
December 31, 2011
-
$
(46,807)
(46,807)
$
Year ended
December 31, 2010
-
$
18,116
18,116
$
The provision for income taxes varies from the amount that would be computed by applying the combined federal and
provincial income tax rates for the following reasons:
Income (loss) before taxes and non-controlling interest
Combined federal and provincial income tax rates
Expected income tax expense (recovery)
Increase (decrease) in income taxes resulting from:
Non-deductible share based compensation
Difference between current and expected tax rates
Effective tax rate
Year ended
December 31, 2011
$
(192,216)
26.57%
(51,072)
$
Year ended
December 31, 2010
59,036
28.17%
16,630
$
4,031
234
(46,807)
24.35%
$
5,162
(3,676)
18,116
30.69%
The Canadian combined statutory tax rates decreased from 28.17% in 2010 to 26.57% in 2011 as a result of legislation
enacted in 2007.
Advantage Oil & Gas Ltd. - 76
22. Income taxes (continued)
The movement in deferred income tax liabilities and assets without taking into consideration the offsetting of balances
within the same tax jurisdiction is as follows:
Deferred income tax liability
Balance at January 1, 2010
Charged (credited) to income
Balance at December 31, 2010
Charged (credited) to income
Balance at December 31, 2011
Deferred income tax asset
Balance at January 1, 2010
Charged (credited) to income
Balance at December 31, 2010
Charged (credited) to income
Charged (credited) to equity
Balance at December 31, 2011
Net deferred income tax liability (asset)
Balance at January 1, 2010
Charged (credited) to income
Balance at December 31, 2010
Charged (credited) to income
Charged (credited) to equity
Balance at December 31, 2011
Property, plant and
equipment
$
Derivative
asset/liability
$
194,515
47,597
242,112
(3,771)
238,341
4,867
1,166
6,033
(6,737)
(704)
Total
$
199,382
48,763
248,145
(10,508)
237,637
$
$
$
Decommissioning
liability
$
Non-capital
losses
$
Other
$
Total
$
(42,910)
(581)
(43,491)
(20,444)
-
(63,935)
(127,941)
(31,417)
(159,358)
(15,970)
(1,091)
(176,419)
(6,416)
1,351
(5,065)
115
(1,993)
(6,943)
(177,267)
(30,647)
(207,914)
(36,299)
(3,084)
(247,297)
$
$
$
$
Longview
$
Advantage
$
Total
$
-
-
-
(36,299)
(3,084)
(39,383)
22,115
18,116
40,231
(10,508)
-
29,723
22,115
18,116
40,231
(46,807)
(3,084)
(9,660)
$
$
$
The net deferred income tax asset is expected to reverse within 12 months.
The estimated tax pools available at December 31, 2011 are as follows:
Longview
Advantage
Total
Canadian development expenses
Canadian exploration expenses
Canadian oil and gas property expenses
Non-capital losses
Undepreciated capital cost
Other
$
$
$
35,402
-
366,793
72,582
76,362
7,911
559,050
105,300
70,761
-
631,660
271,190
5,951
1,084,862
140,702
70,761
366,793
704,242
347,552
13,862
1,643,912
$
$
$
The non-capital loss carry forward balances above expire no earlier than 2023.
Advantage Oil & Gas Ltd. - 77
23. Supplemented cash flow information
Changes in non-cash working capital is comprised of:
Source (use) of cash:
Trade and other receivables
Prepaid expenses and deposits
Trade and other accrued liabilities
Related to operating activities
Related to financing activities
Related to investing activities
Year ended
December 31, 2011
Year ended
December 30, 2010
$
$
(68)
443
25,662
26,037
4,131
2,274
19,632
26,037
$
$
$
$
$
$
12,255
3,448
(605)
15,098
31,008
2,408
(18,318)
15,098
24. Commitments
Advantage has several lease commitments relating to office buildings and transportation. The estimated remaining annual
minimum operating lease payments are as follows, of which $0.9 million is recognized in other liability (note 14):
2011
2012
2013
2014
2015
December 31, 2011
$
-
15,543
14,413
11,812
2,246
44,014
$
December 31, 2010
11,756
$
11,791
10,576
8,723
2,108
44,954
$
Advantage Oil & Gas Ltd. - 78
25. Transition to IFRS
For all periods up to and including the year ended December 31, 2010 the Corporation prepared its financial statements in
accordance with previous Canadian generally accepted accounting principles (“Previous GAAP”). These financial
statements, for the year ended December 31, 2011, are prepared in accordance with International Financial Reporting
Standards (“IFRS”). The Corporation has prepared financial statements which comply with IFRS applicable for periods
beginning on or after January 1, 2010 and the significant accounting policies meeting those requirements are described in
note 3. The Corporation has prepared its IFRS opening balance sheet as at January 1, 2010, its date of transition to IFRS.
IFRS 1 allows first-time adopters certain exemptions from the general requirement to apply IFRS retrospectively. The
Corporation has taken the following exemptions:
Companies using full-cost accounting are allowed to measure their oil and gas assets at the amount determined
under the Previous GAAP at the date of transition. This amount is pro-rated to the underlying assets based upon
the value of proved and probable reserves at transition date, discounted at 10%.
Companies using the full cost book value as deemed cost exemption are allowed to measure the liabilities for
decommissioning, restoration and similar liabilities at the date of transition and recognize directly in retained
earnings any difference between that amount and the carrying amount determined under Previous GAAP.
IFRS 3 Business Combinations has not been applied to acquisitions of subsidiaries or of interests in associates and
joint ventures that occurred before January 1, 2010.
IFRS 2 Share-based Payment has not been applied to any equity instruments that were granted on or before
November 7, 2002, nor has it been applied to equity instruments granted after November 7, 2002 that vested
before January 1, 2010.
IAS 17 Leases has been applied as of transition date rather than at the lease’s inception date.
IAS 32 Financial Instruments Presentation will not be applied for compound financial instruments where the
liability component is no longer outstanding.
IAS 23 Borrowing Costs will not be applied before January 1, 2010.
Reconciliations to IFRS from Previous GAAP financial statements including the impact of the transitioning on the
Corporation’s reported financial position and financial performance, including the nature and effect of significant changes in
accounting policies are summarized as follows.
Advantage Oil & Gas Ltd. - 79
25. Transition to IFRS (continued)
Reconciliation of Consolidated Statement of Financial Position at the date of IFRS transition, January 1, 2010.
(thousands of Canadian dollars)
ASSETS
Current assets
Trade and other receivables
Prepaid expenses and deposits
Derivative asset
Total current assets
Non-current assets
Derivative asset
Exploration and evaluation assets
Property, plant and equipment
Total non-current assets
Total assets
LIABILITIES
Current liabilities
Trade and other accrued liabilities
Capital lease obligations
Convertible debentures
Derivative liability
Deferred income tax liability
Total current liabilities
Non-current liabilities
Derivative liability
Capital lease obligations
Bank indebtedness
Convertible debentures
Decommissioning liability
Deferred income tax liability
Other liability
Total non-current liabilities
Total liabilities
SHAREHOLDERS' EQUITY
Share capital
Convertible debentures equity component
Contributed surplus
Deficit
Total shareholders' equity
Total liabilities and shareholders' equity
Notes
Previous
GAAP
Effect of
Transition
to IFRS
IFRS
Reclassifications
IFRS
$
54,531
9,936
30,829
95,296
-
$
-
-
-
-
$
-
-
-
$
54,531
9,936
30,829
95,296
323
-
1,831,622
1,831,945
-
-
-
-
-
6,923
(6,923)
-
323
6,923
1,824,699
1,831,945
$
1,927,241
$
-
$
-
$
1,927,241
$
111,901
1,375
69,553
12,755
4,704
200,288
$
-
-
374
-
-
374
$
1,161
-
-
-
(4,704)
(3,543)
$
113,062
1,375
69,927
12,755
-
197,119
1,165
759
247,784
130,658
68,555
38,796
3,431
491,148
-
-
-
903
101,110
(21,385)
-
80,628
691,436
81,002
-
-
-
-
-
4,704
-
4,704
1,161
1,165
759
247,784
131,561
169,665
22,115
3,431
576,480
773,599
2,190,409
18,867
7,275
(980,746)
1,235,805
1,927,241
$
-
(10,519)
-
(70,483)
(81,002)
$
-
-
-
(1,161)
-
(1,161)
$
-
2,190,409
8,348
6,114
(1,051,229)
1,153,642
1,927,241
$
2
2
6
4
5
4
3
5
4
6
Advantage Oil & Gas Ltd. - 80
25. Transition to IFRS (continued)
Reconciliation of Consolidated Statement of Financial Position at the end of the last reporting year under Previous GAAP,
December 31, 2010.
(thousands of Canadian dollars)
ASSETS
Current assets
Trade and other receivables
Prepaid expenses and deposits
Derivative asset
Total current assets
Non-current assets
Exploration and evaluation assets
Property, plant and equipment
Total non-current assets
Notes
Previous
GAAP
Effect of
Transition
to IFRS
IFRS
Reclassifiications
IFRS
$
42,276
6,488
25,157
73,921
-
$
-
-
-
-
$
-
-
-
$
42,276
6,488
25,157
73,921
2
1, 2, 3
-
1,768,650
1,768,650
-
123,374
123,374
8,262
(8,262)
-
8,262
1,883,762
1,892,024
Total assets
$
1,842,571
$
123,374
$
-
$
1,965,945
LIABILITIES
Current liabilities
Trade and other accrued liabilities
Capital lease obligations
Convertible debentures
Derivative liability
Deferred income tax liability
Total current liabilities
Non-current liabilities
Derivative liability
Bank indebtedness
Convertible debentures
Decommissioning liability
Deferred income tax liability
Other liability
Total non-current liabilities
Total liabilities
SHAREHOLDERS' EQUITY
Share capital
Convertible debentures equity component
Contributed surplus
Deficit
Total shareholders' equity
Total liabilities and shareholders' equity
4
5
3
5
4
4
$
112,457
759
61,570
2,367
5,876
183,029
-
$
-
443
-
-
443
-
$
-
-
-
(5,876)
(5,876)
$
112,457
759
62,013
2,367
-
177,596
177
288,852
72,811
58,281
29,399
1,835
451,355
-
-
-
113,849
4,956
-
118,805
-
-
-
-
5,876
-
5,876
177
288,852
72,811
172,130
40,231
1,835
576,036
634,384
119,248
-
753,632
2,199,491
15,896
17,754
(1,024,954)
1,208,187
1,842,571
$
-
(7,548)
(2,971)
14,645
4,126
123,374
$
-
-
-
-
-
$
-
2,199,491
8,348
14,783
(1,010,309)
1,212,313
1,965,945
$
Advantage Oil & Gas Ltd. - 81
25. Transition to IFRS (continued)
Reconciliation of Consolidated Statement of Comprehensive Income (Loss) for the year ended December 31, 2010:
(thousands of Canadian dollars)
Petroleum and natural gas sales
Less: royalties
Petroleum and natural gas revenue
Operating expense
General and administrative expense
Depreciation expense
Impairment of oil and gas properties
Exploration and evaluation expense
Finance expense
Gains on derivatives
Other income
Income (loss) before taxes
Income tax recovery (expense)
Net income (loss) and comprehensive
income (loss)
Net income (loss) per share
Notes
Previous
GAAP
Effect of
Transition
to IFRS
IFRS
Reclassifications
IFRS
8
$
319,368
(44,640)
274,728
-
$
-
-
$
-
(1,314)
(1,314)
$
319,368
(45,954)
273,414
1c
1c
1, 7
1d
2
3, 4, 7
1a
5, 8
(93,875)
(37,578)
(215,780)
-
-
(29,128)
50,514
-
(51,119)
6,911
(1,734)
(615)
86,695
(17,500)
(752)
(767)
-
46,142
111,469
(26,341)
-
-
4,493
-
-
(4,493)
-
-
(1,314)
1,314
(95,609)
(38,193)
(124,592)
(17,500)
(752)
(34,388)
50,514
46,142
59,036
(18,116)
$
(44,208)
$
85,128
$
-
$
40,920
Basic
Diluted
$
$
(0.27)
(0.27)
$
$
0.25
0.25
1. Property, Plant and Equipment
a. Gain on sale of property, plant and equipment
Under Previous GAAP, the Corporation did not recognize gains or losses on the disposal of oil and gas properties
unless such dispositions would change the depletion rate by 20% or more while IFRS does require such
recognition. This results in an increase to the carrying value and a gain on sale of property, plant and equipment
included in other income.
b. Depreciation expense
Under Previous GAAP, depletion and depreciation was calculated on a unit-of-production basis for oil and gas
properties using proved reserves, on a cost center basis that was defined as a country. Under IFRS, depreciation is
calculated based on proved and probable reserves over individual components resulting in a decrease in
depreciation expense and increase in the carrying value of property, plant and equipment.
c. Capitalization
During the transition to IFRS, revisions and refinements were made to capitalization. As a result, certain
expenditures incurred in 2010 were expensed as operating expense and general and administrative expense.
d.
Impairment
At December 31, 2010 an impairment loss was recognized associated with a cash generating unit located in West
Central Alberta that was subject to negative reserve revisions at year end. The cash generating unit was written
down to fair value less costs to sell, determined on a discounted cash flow model, using a discount rate of 10%.
Advantage Oil & Gas Ltd. - 82
25. Transition to IFRS (continued)
2. Exploration and evaluation assets
Under Previous GAAP, exploration and evaluation assets were included in the full cost pool of property, plant and
equipment. Under IFRS, these assets must be reclassified from developed oil and natural gas property, plant and
equipment and presented separately. When exploration and evaluation assets are determined to be technically feasible
and commercially viable, the costs are moved to developed oil and natural gas property, plant and equipment. Assets
that are not technically feasible and commercially viable are expensed.
3. Decommissioning liability
Under Previous GAAP asset retirement obligations were discounted at a credit-adjusted risk-fee rate. Under IFRS the
discount rate has been reduced to a risk-free rate of 4.00% on January 1, 2010. Accordingly, the decommissioning
liability has increased by $101.1 million at transition date, and due to the exemption allowed by IFRS 1, the offsetting
charge has been recognized in deficit. As a result, under IFRS both the accretion expense associated with the
decommissioning liability will be different and changes in the estimate of the decommissioning liability will impact
property, plant and equipment.
4. Convertible debentures liability component
Prior to July 9, 2009, Advantage was an Income Trust that operated under the name Advantage Energy Income Fund.
As an income trust, convertible debentures were convertible into Trust Units, which contained a redemption feature
which effectively made the conversion option a “putable instrument” under IAS 32. As such, convertible debentures
were liabilities, with no equity component. Upon conversion to a corporation on July 9, 2009, all convertible debentures
became convertible into common shares, and were no longer deemed to contain a “putable instrument”. Retrospective
restatement of the convertible debentures in existence at July 9, 2009 and still outstanding at transition date resulted in
the liability component restated to their full maturity values, less any issue costs and no value assigned to the equity
component of the conversion features of these same debentures. Accretion expense as recorded under Previous GAAP
was reduced, as only debenture issue costs gave rise to accretion expense for these convertible debentures.
5. Deferred income tax liability:
a. Deferred income tax calculated according to IFRS is substantially similar to Previous GAAP and arises from
differences between the accounting and tax bases of our assets and liabilities. To the extent that assets and
liabilities have changed from transition to IFRS, the amount of deferred income tax liability would be impacted.
b. Under Previous GAAP, deferred income tax liabilities were required to be disclosed as either current or long-term.
Under IFRS, all deferred income tax liabilities are considered to be non-current liabilities.
6. Contributed surplus
At January 1, 2010, a portion of unvested RSPIP compensation costs included in contributed surplus effectively
represented cash payments. Under IFRS, this portion was considered a liability and accordingly reclassified to trade and
other accrued liabilities.
7. Finance expense
Under Previous GAAP, accretion of decommissioning liability was included in the amount presented as depreciation of
property, plant and equipment on the Statement of Income and Comprehensive Income. Under IFRS, accretion of
decommissioning liability has been reclassified and is included in finance expense.
8. Royalties
Under Previous GAAP, current taxes included Saskatchewan resource surcharge. Under IFRS, Saskatchewan resource
surcharge has been deemed a royalty and deducted from petroleum and natural gas revenues.
9. Adjustments to the Consolidated Statement of Cash Flows
The transition from Previous GAAP to IFRS had no significant impact on cash flows generated by the Corporation.
Cash flows related to interest are classified as financing while under Previous GAAP, cash flows relating to interest
were classified as operating.
Advantage Oil & Gas Ltd. - 83
Directors
Stephen E. Balog (1)(2)
Kelly I. Drader
Paul G. Haggis(1)
John A. Howard (2)(3)
Andy J. Mah
Ronald A. McIntosh (1)(2)
Sheila H. O’Brien (2)(3)
Carol D. Pennycook (1)(3)
Steven Sharpe
(1) Member of Audit Committee
(2) Member of Reserve Evaluation Committee
(3) Member of Human Resources, Compensation & Corporate Governance
Committee
Officers
Andy J. Mah, President and CEO
Kelly I. Drader, CFO
Patrick J. Cairns, Senior Vice President
Craig Blackwood, Vice President, Finance
Weldon M. Kary, Vice President, Geosciences and Land
Neil Bokenfohr, Vice President, Exploitation
Corporate Secretary
Jay P. Reid, Partner
Burnet, Duckworth and Palmer LLP
Auditors
PricewaterhouseCoopers LLP
Bankers
The Bank of Nova Scotia
National Bank of Canada
Royal Bank of Canada
Canadian Imperial Bank of Commerce
Union Bank, Canada Branch
Alberta Treasury Branches
HSBC Bank Canada
BNP Paribas (Canada)
Independent Reserve Evaluators
Sproule Associates Limited
Legal Counsel
Burnet, Duckworth and Palmer LLP
Transfer Agent
Computershare Trust Company of Canada
Abbreviations
- barrels
bbls
- barrels per day
bbls/d
- barrels of oil equivalent (6 mcf = 1 bbl)
boe
- barrels of oil equivalent per day
boe/d
- thousand cubic feet
mcf
- thousand cubic feet per day
mcf/d
- million cubic feet
mmcf
mmcf/d - million cubic feet per day
- billion cubic feet
bcf
- trillion cubic feet
tcf
- gigajoules
gj
- natural gas liquids
NGLs
- West Texas Intermediate
WTI
Corporate Office
700, 400 – 3 Avenue SW
Calgary, Alberta T2P 4H2
(403) 718-8000
Contact Us
Toll free: 1-866-393-0393
Email: ir@advantageog.com
Visit our website at www.advantageog.com
Toronto Stock Exchange Trading Symbols
Shares: AAV
5.00% Convertible Debentures: AAV.DBH
New York Stock Exchange Trading Symbol
Shares: AAV
Advantage Oil & Gas Ltd. - 84