2012 Annual Report
Non-Consolidated Financial and Operating Highlights (1)
Financial ($000, except as otherwise indicated)
Sales including realized hedging
per share (2)
per boe
Funds from operations
per share (2)
per boe
Dividends received from Longview
per share (2)
Total capital expenditures
Working capital deficit (3)
Bank indebtedness
Convertible debentures (face value)
Shares outstanding at end of period (000)
Basic weighted average shares (000)
Operating
Daily Production
Natural gas (mcf/d)
Crude oil and NGLs (bbls/d)
Total boe/d @ 6:1
Average prices (including hedging)
Natural gas ($/mcf)
Crude oil and NGLs ($/bbl)
Proved plus probable reserves
Crude oil & NGLs (mbbls)
Natural gas (bcf)
Total mboe
Reserve life index (years) (4)
Three months ended
December 31
Year ended
December 31
2012
2011
2012
2011
$
36,556
$
$
$
0.22
19.15
16,890
$
$
$
$
$
$
$
$
0.10
8.85
3,172
0.02
35,849
35,467
161,630
86,250
168,383
168,383
$
55,555
$
126,749
$
268,336
$
$
$
0.33
26.73
33,587
$
$
$
$
$
$
$
$
0.20
16.15
4,417
0.03
77,176
70,564
142,548
86,250
166,304
166,249
$
$
$
0.76
15.97
47,046
$
$
$
$
$
$
$
$
0.28
5.94
14,350
0.09
130,570
35,467
161,630
86,250
168,383
167,509
$
$
$
1.62
31.41
143,295
$
$
$
$
$
$
$
$
0.87
16.77
11,780
0.07
202,147
70,564
142,548
86,250
166,304
165,371
116,929
1,261
20,749
127,265
1,378
22,589
122,069
1,337
21,682
123,246
2,864
23,405
$
$
2.70
65.21
$
$
3.78
89.14
$
$
2.09
68.35
$
$
4.19
76.45
8,611
1,556.4
268,020
35.4
6,185
1,270.0
217,858
26.4
(1) Non-consolidated financial and operating highlights for Advantage excluding Longview.
(2) Based on weighted average shares outstanding
(3) Working capital deficit includes trade and other receivables, prepaid expenses and deposits,
and trade and other accrued liabilities, and the other liability
(4) Based on fourth quarter average production rates
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 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 MEETING
Advantage Oil & Gas Ltd. is pleased to invite its shareholders and other interested parties to its Annual General Meeting
to be held in Meeting Room 1 at the Ernst & Young Tower, 440 – 2nd Avenue SW, Calgary, Alberta on Thursday, June
20, 2013 commencing at 11:00 a.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.
Solid Production and Successful Well Results at Glacier Drives Strong Operating
Netbacks
(cid:1) Funds from operations for the fourth quarter of 2012, excluding dividends received from Longview Oil
Corp. (“Longview”) increased 63% to $16.9 million or $0.10 per share as compared to the third quarter of
2012. Funds from operations improved due to a 41% increase in the average AECO Canadian natural gas
price to $3.22/mcf for the current quarter as compared to $2.28/mcf for the immediate prior quarter.
Advantage’s realized natural gas price of $2.94/mcf in the fourth quarter includes among other factors,
deductions for unutilized TransCanada pipeline firm service commitments at Glacier.
(cid:1) The tax-free dividend income received from Longview amounted to $3.2 million ($0.02 per share) during the
fourth quarter of 2012 as a result of Advantage’s 45.2% ownership in the common shares of Longview.
(cid:1) Production during the fourth quarter of 2012 averaged 20,749 boe/d (94% natural gas) and was comparable
to the third quarter of 2012 which reflects our decision to maintain production at Glacier between 90 and 100
mmcf/d. Advantage production was also impacted during the fourth quarter of 2012 as production from our
Lookout Butte property (approximately 1,000 boe/d) in southern Alberta was curtailed in June 2012 and was
brought back on production in November 2012. The curtailment occurred due to a fire that occurred at a
third party gas plant where production from Lookout Butte is processed.
(cid:1) Advantage’s average royalty rate was 3.5% for the fourth quarter of 2012 and averaged 5.7% for the entire
2012 year. Advantage’s royalty rates have decreased due to lower natural gas prices and lower average
royalties attributed to production from Glacier. Advantage’s royalty rate was particularly low for the current
quarter as we benefited from gas cost allowance adjustments received with respect to prior years.
(cid:1) Operating expense for the three months ended December 31, 2012 was $5.23/boe ($0.87/mcf) and reflects
the continued efficiencies created by processing our natural gas production through our 100% owned Glacier
gas plant. Total capital expenditures for the three months ended December 31, 2012 were $35.8 million and
$130.6 million for 2012. Our capital expenditures are focused primarily on Glacier development where we
spent $119.2 million for the year ended December 31, 2012. This program included the completion of our
Phase IV Glacier development program in June 2012 and initiation of our Phase V capital program during
H2 2012.
(cid:1) As of December 31, 2012, bank indebtedness was $161.6 million, leaving an undrawn credit facility of $138.4
million (46% available on a $300 million credit facility). In addition, Advantage’s 45.2% ownership in the
shares of Longview had an asset value of approximately $114 million as at December 31, 2012. Our undrawn
credit facility, ownership of Longview shares and cash flow provide financial flexibility to support our
continued Montney drilling and completion plans.
(cid:1) Advantages tax pools as of December 31, 2012 are approximately $1.2 billion of which approximately $721
million are non-capital losses that are 100% deductible.
Corporate Reserve Additions Replace 736% of Production at an FD&A Cost of
$4.29/boe
(cid:1) Sproule Associates Ltd. (“Sproule”) was engaged as an independent qualified reserve evaluator to evaluate
and audit Advantage’s year end reserves (the “Sproule Report”) in accordance with National Instrument 51-
101 (“NI 51-101”) and the Canadian Oil and Gas Evaluation Handbook (“COGE Handbook”).
(cid:1) The Reserves Summary presented in Appendix 1 are those of Advantage and excludes Longview. The
Reserves Summary includes all properties of Advantage as at December 31, 2012, including those properties
Advantage Oil & Gas Ltd. - 3
subject to disposition after year end. Advantage disclosed Glacier specific reserves and associated information
in a press release dated March 13, 2013.
(cid:1) Our 2012 capital program replaced 736% of corporate production adding 58.1 mmboe of Proved plus
Probable reserves (“2P”). At December 31, 2012 we had 2P reserves of 268.0 mmboe with proved reserves
representing 64% of the total. The vast majority of reserve additions are attributed to Glacier where
improved drilling results during 2012 and improved production performance from older producing wells
resulted in positive technical revisions.
(cid:1) Finding, Development & Acquisition (“FD&A”) cost on a 2P reserve basis was $4.29/boe or $0.72/mcf
including the change in Future Development Capital (“FDC”), resulting in a recycle ratio of 3.4x using our
fourth quarter 2012 operating netback of $14.57/boe.
(cid:1) The strong reserve replacement efficiencies are driven primarily by our Montney development program at
Glacier where recent changes in completion design and frac techniques based on comprehensive Montney
core and completion studies conducted by Advantage in 2012 has resulted in increasing the average test rates
by 337% in the Middle Montney and 327% in the Lower Montney. These results reinforced our earlier views
that greater than 250 meters of Montney reservoir are gas charged and initial production rates and reserves
can be significantly enhanced by utilizing a variety of alternative fracture stimulation techniques based upon
the specific reservoir properties of each interval. This has significantly increased our confidence in the
economic growth potential at Glacier which we believe will lead to significant increases in reserves and
contingent resources in the future. At year end 2012, Sproule has assigned reserves to only 21.9% of the total
Montney acreage at Glacier.
(cid:1) Advantage’s December 31, 2012 Net Asset Value (“NAV”) is $9.26/share at a 10% discount rate pre-tax.
(cid:1) The Corporation’s 2P Reserve Life Index (“RLI”) is 35.4 years using our fourth quarter 2012 average
production rate.
Looking Forward – Glacier Success Drives Development Plan to
Double Production to 200 mmcf/d by 2015
(cid:1) Glacier continues to exceed our expectations in terms of well performance and cash flow netbacks due to its
superior cost structure, which is among the lowest in North America. Improved results through the
employment of alternative completion designs in the Middle and Lower Montney combined with delineation
drilling and solid production performance from the Upper Montney resulted in a significant increase in
reserves as reflected in the Sproule report. The strong results provide further confirmation on the reservoir
quality, economic viability and future growth potential of Glacier even in this low gas price environment.
(cid:1) We are currently working on a two year development plan that will increase natural gas throughput at Glacier
to approximately 140 mmcf/d by the spring of 2014 and 200 mmcf/d by the spring of 2015. This plan will
be designed to further delineate the Middle and Lower Montney intervals where only 2.2% and 27.6% of the
total acreage, respectively, has been assigned reserves at year end 2012. The Glacier gas plant is currently
capable of processing 140 mmcf/d due to expansion work that was completed in 2012. Future gas plant
upgrades will be required in order to increase processing capacity to 200 mmcf/d which can be achieved with
a modest amount of capital. Options to process and extract liquids from the Middle Montney will also be
evaluated and included in the development plan. We anticipate announcing our capital program and budget
for the period July 1, 2013 to June 30, 2014 before mid-year 2013.
(cid:1) The additional activities undertaken in late 2012 at Glacier which included core studies, utilization of
alternative completion designs and completion of additional wells in the Lower, Middle and Upper Montney
formations resulted in an increase in our capital expenditure program for the 12 months ending June 30, 2013
which is anticipated to be approximately $115 to $125 million. This also includes expenditures for increasing
the water disposal and the electrical power generation capacity at our Glacier gas plant which will reduce
operating costs during the second half of 2013.
Advantage Oil & Gas Ltd. - 4
Commodity Hedging Program
(cid:1) Advantage has entered into a number of natural gas hedges to reduce the volatility of future cash flows for
the period from January 2013 to March 2015. Advantage now has the following hedges in place:
Period
2013 Year
2014 Year
2015 Q1
Average Volume Hedged
29,224 mcf/d
33,174 mcf/d
33,174 mcf/d
Average Price
$Cdn. AECO
$3.31/mcf
$3.78/mcf
$4.01/mcf
(cid:1) Additional details on our hedging program are available at our website at www.advantageog.com.
Strategic Alternatives Review
(cid:1) Advantage initiated a strategic alternatives review process appointing FirstEnergy Capital Corp. and RBC
Capital Markets as financial advisors and formed a special committee of the Board of Directors (the “Special
Committee”) to oversee the process. The financial advisors will contact a broad spectrum of parties to solicit
interest in a possible sale or other strategic transaction with the Corporation.
(cid:1) The Special Committee's financial advisors are currently compiling information in respect of the Corporation
to be provided to interested parties. This information will include Advantage’s December 31, 2012 year end
independent reserve report which will be updated to reflect wells drilled and completed since December 31,
2012 along with an updated independent Glacier contingent resource assessment that incorporates new well
results and core analysis. We anticipate these reports will be available by the end of April. It is the
Corporation’s current intention not to disclose developments with respect to this process until the Board has
approved a specific transaction or otherwise determines that disclosure is necessary or appropriate. The
Corporation cautions that there are no assurances or guarantees that this process will result in any
transactions or, if any transactions are undertaken, the terms, magnitude of net proceeds, or timing of any
such transactions.
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.
Highlights - Company Interest Reserves (Working Interests plus Royalty Interests Receivable)
December 31, 2012
December 31, 2011
268,436
Proved plus probable reserves (mboe)
Present Value of 2P reserves discounted at 10%, before tax ($000)(1) $1,694,555
$9.26
Net Asset Value per Share discounted at 10%, before tax (2)
Reserve Life Index (proved plus probable - years) (3)
35.4
1.59
Reserves per Share (proved plus probable) (2)
$0.60
Bank debt per boe of reserves (4)
$0.32
Convertible debentures per boe of reserves (4)
218,386
$1,438,679
$9.35
26.4
1.31
$0.66
$0.40
(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 168.383 million Shares outstanding at December 31, 2012, and 166.304 million Shares outstanding as December 31, 2011.
(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, 2012
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
1,339
39
47
1,425
853
2,278
15
-
-
15
10
25
2,292
242
1,926
4,460
1,992
6,452
264,110
28,993
694,569
987,672
570,411
1,558,083
47,664
5,113
117,735
170,512
97,924
268,436
Advantage Oil & Gas Ltd. - 6
Gross Working Interest Reserves (Working Interest only)
Summary as at December 31, 2012
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
1,279
39
45
1,363
827
2,190
3
-
-
3
5
8
2,262
242
1,926
4,430
1,983
6,413
262,925
28,856
694,563
986,344
570,105
1,556,449
47,365
5,090
117,732
170,187
97,833
268,020
Present Value of Future Net Revenue using Sproule price and cost forecasts (1)(2)
($000)
Proved
Developed Producing
Developed Non-producing
Undeveloped
TOTAL PROVED
Probable
Total Proved + Probable
0%
$969,481
102,564
2,022,373
3,094,418
2,862,722
5,957,140
Before Income Taxes Discounted at
10%
15%
$527,205
61,127
491,560
1,079,892
614,663
1,694,555
$434,660
50,732
250,204
735,596
375,670
1,111,266
(1) Advantage’s crude oil, natural gas and natural gas liquid reserves were evaluated using Sproule’s product price forecast effective
December 31, 2012 prior to the provision for income taxes, interests, debt services charges and general and administrative
expenses. It should not be assumed that the discounted future revenue estimated by Sproule represents the fair market value of the
reserves.
(2) Assumes that development of each property will occur, without regard to the likely availability to the Company of funding required
for that development.
Sproule Price Forecasts
The present value of future net revenue at December 31, 2012 was based upon crude oil and natural gas pricing
assumptions prepared by Sproule effective December 31, 2012. These forecasts are adjusted for reserve quality,
transportation charges and the provision of any applicable sales contracts. The price assumptions used over the next
seven years are summarized in the table below:
Year
2013
2014
2015
2016
2017
2018
2019
WTI Edmonton Light Alberta AECO-C
Natural Gas
($Cdn/mmbtu)
3.31
3.72
3.91
4.70
5.32
5.40
5.49
Crude Oil
($Cdn/bbl)
84.55
89.84
88.21
95.43
96.87
98.32
99.79
Crude Oil
($US/bbl)
89.63
89.93
88.29
95.52
96.96
98.41
99.89
Henry Hub Exchange
Rate
Natural Gas
($US/mmbtu)($US/$Cdn)
1.001
3.65
1.001
4.06
1.001
4.24
1.001
5.04
1.001
5.66
1.001
5.74
1.001
5.83
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, 2011
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, 2012
Net asset value per Share (1) - December 31, 2012
0%
$27.94
$5,957,140
31,418
(33,326)
(86,250)
(160,616)
113,999
$5,822,365
$34.58
10%
$9.35
15%
$6.43
$1,694,555
31,418
(33,326)
(86,250)
(160,616)
113,999
$1,111,266
31,418
(33,326)
(86,250)
(160,616)
113,999
1,559,780
976,491
$9.26
$5.80
(1) Based on 168.383 million Shares outstanding at December 31, 2012, and 166.304 million Shares outstanding at
December 31, 2011.
(2) Internal estimate
Gross Working Interest Reserves Reconciliation
Proved
Opening balance Dec. 31, 2011
Extensions
Improved recovery
Infill Drilling
Discoveries
Economic factors
Technical revisions
Acquisitions
Dispositions
Production
Light &
Medium Oil
(mbbl)
1,461
4
-
14
1
6
183
-
(77)
(229)
Heavy
Oil
(mbbl)
6
-
-
-
-
(1)
(1)
-
-
(1)
Natural Gas
Liquids
(mbbl)
2,678
1,629
-
2
147
(132)
368
-
(3)
(259)
Natural
Oil
Gas Equivalent
(mboe)
140,442
9,960
-
3,761
1,508
(621)
23,300
-
(228)
(7,935)
(mmcf)
817,781
49,962
-
22,468
8,161
(2,961)
136,500
-
(890)
(44,677)
Closing balance at Dec. 31, 2012
1,363
3
4,430
986,344
170,187
Advantage Oil & Gas Ltd. - 8
Gross Working Interest Reserves Reconciliation (continued)
Proved + Probable
Opening balance Dec. 31, 2011
Extensions
Improved recovery
Infill Drilling
Discoveries
Economic factors
Technical revisions
Acquisitions
Dispositions
Production
Light &
Medium Oil
(mbbl)
2,331
5
-
46
1
(9)
140
-
(95)
(229)
Heavy
Oil
(mbbl)
11
-
-
-
-
-
(1)
-
-
(1)
Natural Gas
Liquids
(mbbl)
3,843
2,214
-
8
423
(218)
406
-
(3)
(259)
Natural
Oil
Gas Equivalent
(mboe)
217,858
14,186
-
62
2,876
(986)
29,273
12,960
(274)
(7,935)
(mmcf)
1,270,043
71,803
-
49
14,712
(4,557)
172,371
77,760
(1,054)
(44,677)
Closing balance at Dec. 31, 2012
2,190
9
6,413
1,556,450
268,020
Finding, Development & Acquisitions Costs (“FD&A”) (1)(2)(3)
2012 FD&A Costs – Gross Working Interest Reserves excluding Future Development Capital
Capital expenditures ($000)
Acquisitions net of dispositions ($000)
Total capital ($000)
Total mboe, end of year
Total mboe, beginning of year
Production, mboe
Reserve additions, mboe
2012 FD&A costs ($/boe)
2011 FD&A costs ($/boe)
Three year average FD&A costs ($/boe)
2012 F&D costs ($/boe)
2011 F&D costs ($/boe)
Three year average F&D costs ($/boe)
Proved
$130,570
(13,967)
$116,603
170,187
140,442
(7,936)
37,681
$3.09
$(69.42)
$(0.86)
$3.44
$8.10
$5.00
Proved + Probable
$130,570
(13,967)
$116,603
268,020
217,858
(7,936)
58,098
$2.01
$19.27
$(1.24)
$2.24
$10.89
$5.38
Advantage Oil & Gas Ltd. - 9
NI 51-101
2012 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 ($000)
Reserve additions, mboe
2012 FD&A costs ($/boe)
2011 FD&A costs ($/boe)
Three year average FD&A costs ($/boe)
2012 F&D costs ($/boe)
2011 F&D costs ($/boe)
Three year average F&D costs ($/boe)
Proved
$130,570
(13,967)
131,511
$248,114
37,681
$6.58
$(60.95)
$5.05
$6.91
$9.79
$9.62
Proved + Probable
$130,570
(13,967)
132,737
$249,340
58,098
$4.29
$21.38
$1.48
$4.51
$8.85
$6.97
(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 25, 2013, 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, 2012 and should be read in conjunction with the December 31, 2012 audited
consolidated financial statements. The consolidated financial statements have been prepared in accordance with International
Financial Reporting Standards (“IFRS”), representing generally accepted accounting principles (“GAAP”) for publicly accountable
enterprises in Canada, 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. Investors should be cautioned that these measures should not be construed as an
alternative to net income, comprehensive income, and 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
2012
43,675
252
(7,152)
(4,246)
32,529
2011
79,932
761
(21,922)
(4,137)
54,634
% change
(45) %
(67) %
(67) %
3 %
(40) %
2012
106,956
2,395
14,864
(16,749)
107,466
2011
218,181
3,335
(4,131)
(20,354)
197,031
% change
(51) %
(28) %
(460) %
(18) %
(45) %
$
$
$
$
$
$
$
$
(1) Finance expense excludes non-cash accretion expense.
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, terms of the Transaction (as defined
herein), including the anticipated timing of completion thereof; terms of the TSA (as defined herein) with Longview Oil Corp.
("Longview"); industry conditions, including effect of weak natural gas prices on the natural gas industry and demand for natural gas;
the Corporation's hedging strategy; the Corporation's plans for the drilling and completion of wells, including the completion of wells
in the Glacier area; expected production from the Glacier area through to the end of 2013; changes in commodity prices on the
Corporation's future performance; the anticipated effect of longer-term price support for natural gas on supply and demand; effect
of changes in the $US/$Canadian exchange rate and changes in Canadian crude oil differentials relative to WTI on Advantage’s
realized prices; effect of supply management by OPEC (as defined herein) and strong relative demand from developing countries on
long-term pricing fundamentals for crude oil; effect of commodity prices on the Corporation's financial results, condition and
performance; effect of derivative contracts on sales and commodity price fluctuations; terms of the Corporation's derivative
Advantage Oil & Gas Ltd. - 11
contracts, including the timing of settlement of such contracts in 2013; Longview's anticipated operating costs for 2013; projected
royalty rates, including the estimated royalty rate for the life of a Glacier Montney horizontal well; average royalty rates and the impact
of well depths, well production rates and commodity prices on average corporate royalty rates; effect of GCA (as defined herein) and
increased production from Glacier on royalty rates; terms of the Corporation's and Longview's equity compensation plans;
expectations of future compensation costs associated with the restricted shares of Longview; the Corporation's intentions to monitor
debt levels to ensure an optimal mix of financing and cost of capital to provide return to the Corporation's shareholders; the
estimated tax pools for each of Advantage and Longview as at December 31, 2012; the anticipated expiry dates of the Corporation's
and Longview's federal non-capital loss carry forward balances; future commitments and contractual obligations; terms of the
Corporation's credit facilities, including timing of next review of the credit facilities, the Corporation's expectations regarding
extension of the credit facilities at each annual review and effect of revisions or changes in reserve estimates and commodity prices on
the borrowing base; expectations regarding the effect of the Transaction on the borrowing base under the credit facilities; terms of
the Corporation's convertible debentures; the Corporation's ability to satisfy all liabilities and commitments and meet future
obligations as they become due; outlook for the Corporation from a prolonged weak commodity price environment, particularly
natural gas, including the impact on the Corporation's business, capital expenditures and strategy; anticipated effect of the
Corporation's hedging program on the volatility of funds from operations; Advantage's focus on development of the Montney natural
gas resource play at Glacier while retaining a significant investment in Longview; anticipated changes in accounting standards; the
Corporation’s exploration and drilling plans; expected effect of utilizing a variety of alternative fracture stimulation techniques on
initial production rates and reserves; the Corporation's development plan to increase production at Glacier and the anticipated
production levels and timing thereof; anticipated terms of the Corporation's capital expenditure program for the twelve months
ended June 30, 2013; effect of the sale of the non-core assets on the Corporation; current status and the plans of the Special
Committee in relation to the Corporation's strategic alternatives review process; the focus of Longview's 2013 capital drilling
program; Longview's anticipated average daily production, product mix, royalty rates, operating expenses and capital expenditures for
the year ended December 31, 2013; Longview's 2013 capital program; Longview's anticipated drilling and recompletion activities;
anticipated growth in Longview's total corporate production related to crude oil and NGLs in 2013 and anticipated crude oil and
natural gas production levels; Longview's business strategy; and Longview's plans to monitor funds from operations, its dividend
policy and capital expenditure commitments to ensure they are substantially balanced. 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;
delays in anticipated timing of drilling and completion of wells; failure to extend the credit facilities at each annual review;
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; risks related to the sale of the Corporation's non-core assets,
including failure to complete the disposition of the Corporation's non-core assets on terms contemplated or at all and the failure to
realize the anticipated benefits of the sale of such assets; failure to realize the benefits from or complete a transaction pursuant to the
strategic alternative process; and the risks and uncertainties 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.
With respect to forward-looking statements contained in this MD&A, in addition to other assumptions identified herein, 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 crude 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 crude oil and natural 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
Advantage Oil & Gas Ltd. - 12
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.
Non-core Asset Sales
On August 22, 2012, the Advantage legal entity announced that it would market for sale all remaining non-core assets, defined as all
corporate assets excluding Advantage's core Glacier Montney natural gas asset and its 21.15 million share ownership position in
Longview Oil Corp. The non-core assets produced a total of approximately 6,350 boe/d (80% gas and 20% oil and NGLs) during the
year ended December 31, 2012. In accordance with the requirements of IFRS, Advantage ceased recognizing depreciation on the
property, plant and equipment held for sale effective as of the announcement. On February 5, 2013, Advantage announced that it had
closed four separate sales transactions and signed a definitive agreement (the “Transaction”) with a fifth party, Questfire Energy
Corp. (“Questfire”) which, on a combined basis, constituted the sale of substantially all non-core assets. The Transaction is
anticipated to close by April 30, 2013 and is subject to satisfaction of customary closing conditions. The carrying amounts of
exploration and evaluation assets, property, plant and equipment and decommissioning liabilities associated with the assets held for
sale have been presented separately on the statement of financial position and reflected at the lesser of fair value less costs to sell and
carrying amount, which resulted in an impairment recognition of $73 million during the fourth quarter of 2012.
Consolidation of Longview Oil Corp.
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 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. On May 22, 2012, Advantage sold 8,300,000 common shares of
Longview to a syndicate of underwriters at a price of $9.00 per common share for gross proceeds of $74.7 million. As a result,
Advantage now owns 21,150,010 common shares of Longview, representing an interest of approximately 45.2% in Longview. As
Advantage holds the single largest ownership interest of Longview and other ownership interests are comparatively dispersed,
Advantage is considered to control Longview. Accordingly, 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 54.8%
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, 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.
Concurrent with closing of the Acquisition, 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. Longview
has an independent board of directors with three members. The officers of Longview provide services to Longview under the TSA
but remain employees of Advantage.
Advantage Oil & Gas Ltd. - 13
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.
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 income
General and administrative expense (1)
Finance expense (2)
Miscellaneous income
Cash netbacks
Three months ended
December 31, 2012
Year ended
December 31, 2012
Advantage
Longview Consolidated
Advantage
Longview Consolidated
116,929
576
685
20,749
94%
3%
3%
8,526
4,307
580
6,308
23%
68%
9%
125,455
4,883
1,265
27,057
77%
18%
5%
122,069
628
709
21,682
94%
3%
3%
8,938
4,171
574
6,235
24%
67%
9%
131,007
4,799
1,283
27,917
78%
17%
5%
$
$
2.94
2.70
$
$
3.44
3.44
$
$
2.97
2.75
$
$
2.14
2.09
$
$
2.56
2.56
$
$
2.17
2.12
$
$
80.35
80.35
$
$
75.17
78.02
$
$
75.78
78.30
$
$
81.10
81.10
$
$
78.55
79.47
$
$
78.88
79.68
$
52.47
$
52.05
$
52.28
$
57.06
$
54.67
$
55.99
$
$
65.21
65.21
$
$
72.42
74.94
$
$
70.94
72.94
$
$
68.35
68.35
$
$
75.66
76.47
$
$
74.05
74.69
$
$
$
$
$
$
20.52
(0.72)
(1.37)
(5.23)
13.20
(2.76)
(1.60)
0.01
8.85
60.75
(11.26)
1.95
(21.04)
30.40
(1.39)
(2.06)
-
26.95
29.90
(3.18)
(0.60)
(8.92)
17.20
(2.44)
(1.71)
-
13.05
16.27
(0.93)
(0.30)
(5.39)
9.65
(2.28)
(1.50)
0.07
5.94
61.25
(11.71)
0.62
(20.35)
29.81
(1.25)
(2.10)
0.01
26.47
26.32
(3.34)
(0.09)
(8.73)
14.16
(2.05)
(1.64)
0.06
10.53
$
$
$
$
$
$
(1) General and administrative expense excludes non-cash G&A.
(2) Finance expense excludes non-cash accretion expense.
Advantage Oil & Gas Ltd. - 14
($000, except as otherwise indicated)
Sales including realized hedging
Natural gas sales
Realized hedging losses
Natural gas sales including hedging
Crude oil and NGLs sales
Realized hedging gains
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 (1)
per boe
Three months ended
December 31, 2012
Year ended
December 31, 2012
Advantage
Longview Consolidated Advantage
Longview Consolidated
$
31,615
(2,619)
28,996
7,560
-
$
2,695
-
2,695
32,562
1,131
$
34,310
(2,619)
31,691
40,122
1,131
$
95,672
(2,382)
93,290
33,459
-
$
8,373
-
8,373
131,401
1,412
$
104,045
(2,382)
101,663
164,860
1,412
7,560
36,556
19.15
$
$
33,693
36,388
62.70
$
$
41,253
72,944
29.30
$
$
33,459
126,749
15.97
$
$
132,813
141,186
61.87
$
$
166,272
267,935
26.23
$
$
$
$
1,378
0.72
3.5%
$
$
6,537
11.26
18.5%
$
$
7,915
3.18
10.6%
$
$
7,401
0.93
5.7%
$
$
26,725
11.71
19.1%
$
$
34,126
3.34
12.7%
$
$
9,984
5.23
$
$
12,212
21.04
$
$
22,196
8.92
$
$
42,796
5.39
$
$
46,433
20.35
$
$
89,229
8.73
$
$
5,261
2.76
$
$
806
1.39
$
$
6,067
2.44
$
$
18,114
2.28
$
$
2,846
1.25
$
$
20,960
2.05
Interest on bank indebtedness
per boe
$
$
1,966
1.03
$
$
1,193
2.06
$
$
3,159
1.27
$
$
7,642
0.96
$
$
4,794
2.10
$
$
12,436
1.22
Interest on convertible debentures
per boe
Miscellaneous income
per boe
Funds from operations
per boe
per share (2) (3)
Dividends from Longview
(declared by Longview)
$
$
1,087
0.57
$
-
$
-
$
$
1,087
0.44
$
$
4,313
0.54
$
-
$
-
$
$
4,313
0.42
$
$
10
0.01
2%
(1)
$
-
$
3%
$
9
$
-
$
$
563
0.07
$
$
32
0.01
$
$
595
0.06
$
$
$
16,890
8.85
0.10
$
$
$
15,639
26.95
0.33
$
$
$
32,529
13.05
0.14
$
$
$
47,046
5.94
0.28
$
$
$
60,420
26.47
1.29
$
$
$
107,466
10.53
0.47
$
3,172
$
(7,025)
$
(3,853)
$
14,350
$
(28,085)
$
(13,735)
Expenditures on property, plant and
$
35,769
$
11,466
$
47,235
$
130,490
$
44,194
$
174,684
equipment
Expenditures on exploration and
80
297
377
80
297
377
evaluation assets
Total capital spending
Debt and working capital
Bank indebtedness
Convertible debentures
Working capital deficit
$
35,849
$
11,763
$
47,612
$
130,570
$
44,491
$
175,061
$
$
$
161,630
86,250
35,467
$
112,541
$
-
$
11,712
$
$
$
274,171
86,250
47,179
(1) General and administrative expense excludes non-cash G&A.
(2) Based on basic weighted average shares outstanding applicable to each legal entity.
(3) Consolidated funds from operations per share excludes funds from operations attributable to the non-controlling interest of Longview.
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
2012
2011
% change
2012
2011
% change
$
$
$
$
43,675
32,529
0.14
13.05
$
$
$
$
79,932
54,634
0.28
20.18
(45)
(40)
(50)
(35)
%
%
%
%
$
$
$
$
106,956
107,466
0.47
10.53
$
$
$
$
218,181
197,031
1.07
19.35
(51)
(45)
(56)
(46)
%
%
%
%
(1) Based on basic weighted average shares outstanding and excludes funds
from operations attributable to the non-controlling interest of Longview.
For the fourth quarter of 2012, Advantage realized a 32% increase in funds from operations to $32.5 million or $0.14 per share as
compared to $24.7 million or $0.12 per share for the third quarter of 2012 due to a 43% increase in the realized natural gas price.
However, funds from operations have decreased significantly as compared to 2011 driven primarily by considerably lower realized
commodity prices and a reduction in realized gains on derivative contracts. Natural gas prices have remained low for the last several
years due to decreased demand and increasing U.S. domestic natural gas production, particularly from non-conventional natural gas
resource plays. Crude oil prices have been lower due to wider differentials resulting in lower Canadian realized pricing. Additionally,
natural gas liquid prices softened due to oversupply attributable to successful liquids-rich drilling throughout North America.
Although our funds from operations have continued to benefit from cost reductions, the volatile commodity price environment has
significantly challenged our industry during 2012. Gains from derivatives have decreased considerably from 2011 due to a reduction
in the commodity prices at which we have been able to enter continuing derivative contracts, particularly for natural gas. 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.
As a result of asset dispositions, including the reduction in ownership interest of Longview, and changes in commodity
prices, historical financial and operating performance may not be indicative of actual future performance.
Petroleum, Natural Gas Sales and Hedging
($000)
Natural gas sales
Realized hedging gains (losses)
Natural gas sales including hedging
Crude oil and NGLs sales
Realized hedging gains (losses)
Crude oil and NGLs sales
including hedging
Total (1)
(1) Total excludes unrealized derivative gains and losses.
Three months ended
December 31
Year ended
December 31
$
2012
34,310
(2,619)
31,691
40,122
1,131
$
2011
40,249
7,262
47,511
52,051
(704)
% change
%
(15)
%
(136)
(33)
%
%
(23)
%
(261)
$
2012
104,045
(2,382)
101,663
164,860
1,412
$
2011
169,274
28,657
197,931
186,014
(2,831)
% change
(39)
%
(108)
%
%
(49)
%
(11)
%
(150)
41,253
72,944
$
51,347
98,858
$
(20)
(26)
%
%
166,272
267,935
$
183,183
381,114
$
%
(9)
%
(30)
Total sales, excluding hedging, decreased 19% for the three months and 24% for the year ended December 31, 2012 as compared to
2011. Sales for 2012 have been negatively impacted primarily by the continued decrease in commodity prices, particularly natural gas
prices. Natural gas prices have remained low for the last several years due to decreased demand and increasing U.S. domestic natural
gas production, particularly from non-conventional natural gas resource plays. Crude oil prices have been lower during 2012 when
compared to the same periods of 2011 due to wider differentials resulting in lower Canadian realized pricing, which has adversely
impacted our sales. Additionally, natural gas liquid prices have softened in 2012 as compared to 2011 due to oversupply attributable
to successful liquids-rich drilling throughout North America. Average daily production during the fourth quarter of 2012 decreased
8% from the same period of 2011 but for the year ended December 31, 2012 was comparable to the prior year.
Advantage Oil & Gas Ltd. - 16
Our commodity price risk management program in 2011 delivered significant realized natural gas hedging gains due to stronger
hedged prices for that year. In 2012, we entered derivative contracts to hedge up to 66.3 mmcf/d of natural gas for the period from
May to December at a floor price of AECO $1.85/mcf and an average ceiling price of $2.70/mcf. Due to a recovery in natural gas
prices during the fourth quarter of 2012, losses were realized on these hedges. Such losses were partially offset by gains realized on
crude oil hedging due to lower actual crude oil prices.
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
2012
125,455
4,883
1,265
27,057
77%
18%
5%
2011
137,480
5,182
1,316
29,411
78%
18%
4%
2012
(9)
(6)
(4)
(8)
% change
% 131,007
4,799
%
1,283
%
27,917
%
78%
17%
5%
% change
%
1
%
2
%
(16)
%
-
2011
130,075
4,711
1,519
27,909
78%
17%
5%
Average daily production during the fourth quarter of 2012 decreased 8% from the same period of 2011 but was 1% higher than the
26,825 boe/d reported for the third quarter of 2012 and for the year ended December 31, 2012 was comparable to the prior year.
Advantage’s stand-alone production averaged 20,749 boe/d for the fourth quarter of 2012, as compared to 22,589 boe/d for the
fourth quarter of 2011 and 20,812 boe/d realized during the third quarter of 2012. In March 2011, our Phase III development at
Glacier was completed with production capacity of 100 mmcf/d at our 100% working interest gas plant (“Glacier gas plant”), a
significant increase from the prior 50 mmcf/d capability. During the third quarter of 2011, we began our Phase IV development at
Glacier to increase throughput capacity to 140 mmcf/d and further evaluate the Middle and Lower Montney formations.
Modifications at the Glacier gas plant to increase processing capacity to 140 mmcf/d were completed during the second quarter of
2012. However, as a result of the prevailing low natural gas pricing environment, we decided to maintain production from Glacier at
between 90 and 100 mmcf/d utilizing our inventory of drilled wells. During the Phase IV program we drilled 28.5 net wells (29 gross)
and had 14 wells remaining to complete prior to the 2012 spring break-up. We experienced a prolonged spring break-up and other
weather related conditions into the third quarter of 2012 causing lease access restrictions that delayed our current Glacier capital
program until September. Since that time we have drilled 3 new Middle Montney evaluation wells and completed 5 wells from the
Upper, Middle and Lower Montney formations. With the delay in our capital program, average daily production at Glacier was
approximately 88 mmcf/d during the fourth quarter of 2012 but averaged 92 mmcf/d for the 2012 year. At December 31, 2012, we
had 12 wells drilled that will be completed to offset declines as required. We estimate that we have sufficient current behind pipe
productivity to sustain production at between 90 and 100 mmcf/d for the remainder of 2013. Advantage production has also been
impacted during 2012 as production from our Lookout Butte property (1,000 boe/d) in southern Alberta was curtailed in June as a
result of a fire that occurred at the third party facility while maintenance activities were underway. Lookout Butte was brought back
on production in early November 2012.
Longview’s daily production averaged 6,308 boe/d for the fourth quarter of 2012 with 77% from crude oil and NGLs, a 5% increase
from the 6,013 boe/d realized during the immediate prior quarter but an 8% decrease from the fourth quarter of 2011. During 2011
Longview’s capital program was delayed until September due to poor field conditions resulting in the majority of production
additions occurring during the fourth quarter of 2011 from the successful completion of their 2011 drilling program that delivered
significant production increases. In the second quarter of 2012 Longview announced a reduction to their capital expenditure program
to maintain financial discipline and a strong balance sheet in response to weaker than anticipated commodity prices and higher
differentials. Production additions from Longview’s reduced 2012 capital expenditure program were sufficient to successfully offset
declines and resulted in daily production that averaged 6,235 boe/d for the current year, comparable to that of the prior year.
Advantage Oil & Gas Ltd. - 17
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
2012
2011
% change
2012
2011
% change
$
$
$
2.97
2.75
3.22
$
$
$
3.18
3.76
3.20
%
(7)
(27)
%
%
1
$
$
$
2.17
2.12
2.40
$
$
$
3.57
4.17
3.63
(39)
(49)
(34)
%
%
%
Realized natural gas prices, excluding hedging, have decreased significantly as compared to 2011. Although the fourth quarter of 2012
experienced a 43% recovery from the $2.07/mcf realized during the third quarter of 2012, natural gas prices have still remained at
historic lows for 2012. Our realized natural gas prices since March 31, 2012 include deductions for unutilized sales gas pipeline fees
associated with TransCanada pipeline firm service commitments for 130 mmcf/d at Glacier. We incur charges of approximately
$0.25/mcf on these service commitments and since we are maintaining Glacier production at between 90 and 100 mmcf/d, these
costs reduce realized natural gas prices in comparison to AECO.
Natural gas prices declined dramatically throughout 2012 due to decreased demand caused by the mild 2011/2012 winter and
increasing U.S. domestic natural gas production, particularly from non-conventional natural gas resource plays. These factors resulted
in historic high inventory levels at the end of last winter which have gradually been drawn down to levels approaching the five-year
average due to massive switching by electrical utilities from coal to natural gas during the past summer. The result has been a slightly
more balanced market and a significant improvement in pricing compared to the second and third quarters of 2012 during which we
realized natural gas prices, excluding hedging, of $1.65/mcf and $2.07/mcf, respectively. We continue to believe in the longer-term
price support for natural gas due to the increased usage for power generation, the increased proportion of resource based natural gas
supplies that result in higher initial production declines and reduced conventional natural gas drilling, which could eventually lead to a
more balanced supply and demand environment. We monitor market developments closely and will be proactive in implementing an
appropriate hedging strategy to mitigate the volatility in our cash flow as a result of fluctuations in natural gas prices.
Crude Oil and NGLs
($/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
Edmonton Light ($/bbl)
WTI/Edmonton Light Differential ($/bbl)
Three months ended
December 31
Year ended
December 31
2012
2011
% change
2012
2011
% change
$
$
75.78
78.30
$
$
89.34
87.86
(15)
%
%
(11)
$
$
78.88
79.68
$
$
87.02
85.38
%
%
(9)
(7)
$
52.28
$
78.09
%
(33)
$
55.99
$
65.64
%
(15)
$
$
$
$
$
$
70.94
72.94
88.20
1.01
84.55
(2.78)
$
$
$
$
$
$
87.06
85.88
94.02
0.98
98.03
2.09
(19)
%
(15)
%
%
(6)
%
3
%
(14)
%
(233)
$
$
$
$
$
$
74.05
74.69
94.19
1.00
86.73
(7.46)
$
$
$
$
$
$
81.81
80.56
95.14
1.01
95.62
1.42
%
(9)
%
(7)
%
(1)
%
(1)
%
(9)
%
(625)
Realized crude oil and NGLs prices, excluding hedging, decreased 19% and 9% for the three months and year ended December 31,
2012, as compared to the same periods of 2011. The price of WTI fluctuates based on regional and worldwide supply and demand
fundamentals with significant price volatility experienced over the last several years. Advantage’s realized prices may not change to the
same extent as WTI due to changes in the $US/$Canadian exchange rate, changes in Canadian crude oil differentials between WTI
and Canadian Edmonton light pricing, and quality and transportation adjustments. Our realized prices have been lower during 2012
when compared to the same periods of 2011 due to wider differentials resulting in lower Canadian realized pricing, which has
adversely impacted our sales. Additionally, natural gas liquid prices have softened in 2012 as compared to 2011 due to oversupply
attributable to successful liquids-rich drilling throughout North America. We believe that the long-term pricing fundamentals for
Advantage Oil & Gas Ltd. - 18
crude oil will remain strong with supply management by the Organization of the Petroleum Exporting Countries (“OPEC”) 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 crude oil and natural gas production.
Crude 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 crude oil and natural gas regions, impact
prices. Any movement in crude 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 crude 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
Natural gas – AECO
Fixed price
Fixed price
Fixed price
Fixed price (1)
Fixed price (1)
Fixed price (1)
Fixed price (1)
Fixed price (1)
Fixed price (1)
Fixed price (1)
Fixed price (1)
Crude oil – WTI
Fixed price (2)
Fixed price (1)(2)
January 2013 to December 2013
April 2013 to October 2013
April 2013 to October 2013
April 2013 to October 2013
July 2013 to September 2013
January 2014 to March 2014
January 2014 to March 2014
April 2014 to October 2014
April 2014 to October 2014
November 2014 to March 2015
November 2014 to March 2015
14,217 mcf/d
9,478 mcf/d
9,478 mcf/d
4,739 mcf/d
4,739 mcf/d
14,217 mcf/d
18,956 mcf/d
14,217 mcf/d
18,956 mcf/d
14,217 mcf/d
18,956 mcf/d
$3.51/mcf
$3.14/mcf
$3.17/mcf
$2.95/mcf
$3.22/mcf
$3.85/mcf
$3.84/mcf
$3.68/mcf
$3.68/mcf
$4.02/mcf
$4.01/mcf
January 2013 to December 2013
February 2013 to December 2013
1,000 bbls/d
1,000 bbls/d
$90.29/bbl
$93.00/bbl
(1) Derivative contracts entered into subsequent to December 31, 2012.
(2) Derivative contracts entered by Longview.
Advantage Oil & Gas Ltd. - 19
In February 2013, the Corporation entered into derivatives contracts, which will be transferred to Questfire upon closing of the
Transaction, as follows:
Description of Derivative
Term
Volume
Average Price
Natural gas - AECO
Fixed price
Fixed price
Crude oil - WTI
Fixed price
Fixed price
March 2013 to December 2013
January 2014 to December 2014
13,269 mcf/d
7,583 mcf/d
$3.22/mcf
$3.54/mcf
March 2013 to December 2013
January 2014 to December 2014
250 bbls/d
200 bbls/d
$97.25/bbl
$94.80/bbl
A summary of realized and unrealized hedging gains and losses for the three months and year ended December 31, 2012 and 2011 are
as follows:
($000)
Realized gains (losses) on derivatives
Natural gas
Crude oil
Total realized gains (losses) on derivatives
Unrealized gains (losses) on derivatives
Natural gas
Crude oil
Total unrealized gains (losses) on derivatives
Total gains (losses) on derivatives
Three months ended
December 31
Year ended
December 31
2012
2011
% change
2012
2011
% change
$
(2,619)
1,131
(1,488)
$
7,262
(704)
6,558
(136)
(261)
(123)
%
%
%
$
(2,382)
1,412
(970)
$
28,657
(2,831)
25,826
4,058
(1,777)
2,281
793
$
(6,684)
(3,919)
(10,603)
(4,045)
$
(161)
(55)
(122)
(120)
%
%
%
%
2,142
1,686
3,828
2,858
$
(25,152)
(199)
(25,351)
475
$
(108)
(150)
(104)
%
%
%
(109)
(947)
(115)
502
%
%
%
%
For 2012 we realized net losses on settled derivative contracts attributable to natural gas hedging as a result of higher actual natural
gas prices as compared to our average hedge prices. Such losses were partially offset by gains realized on crude oil hedging due to
lower actual crude oil prices. This differs considerably as compared to the net gains realized in 2011 due to a decrease in the natural
gas prices at which we have been able to enter continuing derivative contracts. As at December 31, 2012, the fair value of the
derivative contracts outstanding and to be settled was a net asset of approximately $1.1 million, a change of $3.8 million from the $2.7
million net liability at December 31, 2011. For the year ended December 31, 2012, this $3.8 million increase in the fair value of the
derivative contracts was recognized in income as an unrealized derivative gain (December 31, 2011 – $25.4 million unrealized
derivative loss). The valuation of the derivatives is the estimated fair value to settle the contracts as at December 31, 2012 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 2013 corresponding to when the Corporation will recognize sales from production.
Advantage Oil & Gas Ltd. - 20
Royalties
Royalties ($000)
per boe
As a percentage of petroleum and natural
gas sales
Three months ended
December 31
2012
2011
$
$
7,915
3.18
$
$
13,339
4.93
Year ended
December 31
% change
(41)
(35)
%
%
2012
34,126
3.34
$
$
2011
52,971
5.20
$
$
% change
(36)
(36)
%
%
10.6%
14.5%
(3.9)
%
12.7%
14.9%
(2.2)
%
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. Our average corporate royalty rates are impacted by well depths, well production rates, and
commodity prices.
Total royalties paid during 2012 have decreased as compared to the prior year due to a significant reduction in sales attributed to the
reduced commodity price environment and lower royalty rates. The royalty rate realized by each of Advantage and Longview on a
stand-alone basis for the current year was 5.7% and 19.1%, respectively. Advantage’s royalty rates, that are predominately based on
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. The estimated royalty rate for the life of a Glacier Montney horizontal well is
approximately 5% due to industry provincial incentive programs. As production from Glacier becomes a larger proportion of total
Advantage production, we have experienced a continual reduction in our realized royalty rate. Additionally, Advantage further
benefits from significant GCA that further lowers the effective royalty rate.
Operating Expense
Operating expense ($000)
per boe
Three months ended
December 31
Year ended
December 31
2012
$
$
22,196
8.92
2011
$
$
21,717
8.03
% change
%
2
%
11
2012
2011
$
$
89,229
8.73
$
$
89,166
8.75
% change
%
%
-
-
Total operating expense and operating expense per boe for the three months ended December 31, 2012 is slightly higher than the
same period of 2011 primarily due to 8% lower production. However, total operating expense and operating expense per boe for the
year ended December 31, 2012 is comparable to the prior year.
Operating expense per boe realized by Advantage on a stand-alone basis for the fourth quarter of 2012 was $5.23/boe, compared to
$4.90/boe for the fourth quarter of 2011 and $5.42/boe for the third quarter of 2012. Operating costs for the fourth quarter of 2011
were particularly low due to a one-time receipt for an equalization of $1.7 million recognized during that period. Operating expenses
at Glacier for the year ended December 31, 2012 were approximately $0.33/mcf ($1.98/boe) due to the continued efficiencies created
by processing our natural gas through our 100% owned Glacier gas plant.
Operating expense per boe realized by Longview for the fourth quarter of 2012 was $21.04/boe, compared to $18.36/boe for the
fourth quarter of 2011 and $20.44/boe for the third quarter of 2012. Longview’s total operating expense and operating expense per
boe realized increased during 2012 as incurred costs associated with the clean-up of two salt water spills resulting from injection
pipeline failures that occurred at Sunset, Alberta and additional costs for maintenance associated with specific facilities and pipelines
throughout the year. On a per boe basis, operating costs have been impacted by lower daily production levels during the fourth
quarter of 2012 as compared to the fourth quarter of 2011 that experienced a surge in production as a result of capital spending that
was delayed until late 2011. To help stabilize fluctuating power costs, Longview fixed the price of 0.8 MW at $55.41/MWh for the
period from January 2013 to December 2014. Longview anticipates operating costs to be $19.00 to $20.00/boe during 2013.
Advantage Oil & Gas Ltd. - 21
General and Administrative Expense
Three months ended
December 31
Year ended
December 31
2012
2011
% change
2012
2011
% 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
$
$
$
$
6,067
2.44
2,423
0.97
$
$
$
$
5,119
1.89
2,107
0.78
%
19
29
%
15
%
%
24
$
$
$
$
20,960
2.05
7,220
0.71
$
$
$
$
22,239
2.18
12,348
1.21
%
(6)
%
(6)
%
(42)
%
(41)
$
$
8,490
3.41
$
$
7,226
2.67
17
%
%
28
$
$
28,180
2.76
121
$
$
34,587
3.39
125
%
(19)
(19)
%
%
(3)
Cash general and administrative (“G&A”) expense increased for the three months ended December 31, 2012 compared to the same
period of 2011 but has decreased for the year ended December 31, 2012 as compared to 2011 due to ongoing cost reduction efforts
and continued evaluation.
Non-cash G&A expense is comprised of share based compensation, including restricted shares and stock options, granted to service
providers 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 return. Restricted shares are generally granted when the
Corporation demonstrates a positive total return, subject to Board of Directors approval, and on vesting are exchanged for common
shares. Stock options are granted subject to Board of Directors approval and on vesting can be exercised at the option of the service
providers in exchange for common shares. Compensation cost related to share based compensation is recognized as non-cash G&A
expense over the vesting period and incorporates the fair value at grant date, the estimated number of restricted shares or stock
options to vest, and certain management estimates.
Advantage stand-alone had a restricted share performance incentive plan that expired during the third quarter of 2012 and no
Advantage restricted shares were granted during the current year. On September 13, 2012, shareholders of Advantage approved a
new stock option plan, to continue providing for long term equity based compensation for service providers. For the year ended
December 31, 2012, Advantage recognized $6.1 million of compensation cost as non-cash G&A expense, issued 2,078,798 common
shares to service providers in exchange for vested restricted shares that were granted during prior years, and granted 15,996,366 stock
options pursuant to the new stock option plan.
Longview has a restricted share performance incentive plan and for the year ended December 31, 2012, 114,163 restricted shares
were granted and $1.1 million of compensation cost was recognized as non-cash G&A expense. During the same period, Longview
issued 86,732 common shares to service providers in exchange for vested restricted shares. As at December 31, 2012, 113,630
restricted shares remain unvested and will vest to service providers over the next two years with a total of $0.4 million in
compensation cost to be recognized over the future service periods.
Depreciation Expense
Depreciation expense ($000)
per boe
Three months ended
December 31
Year ended
December 31
2012
$
$
26,453
10.63
2011
$
$
41,669
15.40
% change
(37)
(31)
%
%
2012
132,175
12.94
$
$
2011
152,927
15.01
$
$
% change
(14)
(14)
%
%
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. For 2012, depreciation expense has decreased due to the reduced rate of
depreciation per boe. The rate of depreciation per boe has reduced due to a decrease in net property, plant and equipment
attributable to the recognition of a $187.7 million impairment of oil and gas properties during the fourth quarter of 2011.
Additionally, in accordance with the requirements of IFRS, Advantage ceased depreciation of assets held for sale effective as of the
announcement date (refer to the sections “Non-core Asset Sales” and “Impairment of Assets Held for Sale”).
Advantage Oil & Gas Ltd. - 22
Impairment of Assets Held for Sale
Three months ended
December 31
Year ended
December 31
2012
2011
% change
2012
2011
% change
Impairment of assets held for
sale ($000)
$
73,000
$
-
100
%
$
73,000
$
-
100
%
The carrying amounts of exploration and evaluation assets, property, plant and equipment and decommissioning liabilities associated
with the assets held for sale have been presented separately on the statement of financial position and reflected at the lesser of fair
value less costs to sell and carrying amount, which resulted in an impairment recognition of $73 million during the fourth quarter of
2012 (refer to the section “Non-core Asset Sales”).
Impairment of Oil and Gas Properties
Three months ended
December 31
Year ended
December 31
2012
2011
% change
2012
2011
% change
Impairment of oil and gas
properties ($000)
$
31,865
$
187,684
(83)
%
$
31,865
$
187,684
(83)
%
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 (Loss) as impairment of oil and gas properties and are separately disclosed.
As at December 31, 2012, Longview determined that the reduction in crude oil prices recognized within their year-end independent
reserves evaluation was an indicator of impairment. As a result, they completed an impairment assessment and calculated an estimated
recoverable amount for their CGUs, primarily based upon the net present value after tax of their year-end proved plus probable
reserves discounted at 10% and adjusted for a number of other estimates and assumptions. Based upon these calculations, Longview
recognized an impairment loss of $31.9 million related to one CGU located in Alberta that had suffered a significant deterioration in
value due to the reduction in crude oil prices and decreased reserves. The decrease in Alberta reserves was more than offset by
increased reserves from Saskatchewan CGUs resulting in a total increase in Longview reserves for the year ended December 31, 2012.
No impairment losses were recognized for any other CGUs. An impairment loss is reversed if there is subsequently an objective
change in the estimates used to determine the recoverable amount.
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.
Advantage Oil & Gas Ltd. - 23
Exploration and Evaluation Expense
($000)
Exploration and evaluation expense
2012
$
41
2011
$
1,708
% change
(98)
%
2012
$
181
2011
$
3,055
% change
(94)
%
Three months ended
December 31
Year ended
December 31
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 years ended December 31, 2012 and 2011, we expensed exploration and evaluation costs related to undeveloped land that
expired.
Interest on Bank Indebtedness
Interest on bank indebtedness ($000)
per boe
Average effective interest rate
Three months ended
December 31
Year ended
December 31
2012
$
$
3,159
1.27
4.5%
2011
$
$
2,142
0.79
5.4%
% change
47
61
(0.9)
%
%
%
$
$
2012
12,436
1.22
4.9%
$
$
2011
11,483
1.13
5.3%
% change
%
8
%
8
%
(0.4)
Bank indebtedness at December 31 ($000)
$
274,171
$
233,903
17
%
Total interest on bank indebtedness has increased for the three months and year ended December 31, 2012 as compared to the same
periods of 2011 primarily due to the increase in the average debt balance attributable to capital expenditures exceeding reduced funds
from operations and settlement of the 7.75% and 8.00% convertible debentures totaling $62.3 million in December 2011. Lower
funds from operations have been primarily caused by the lower commodity price environment. Consolidated bank indebtedness
outstanding at the end of December 31, 2012 was $274.2 million consisting of $161.6 million and $112.6 million for each of the legal
entities Advantage and Longview, respectively. The Corporation’s interest rates have decreased during 2012 and 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
2012
2011
% change
2012
2011
% change
$
$
1,087
0.44
$
$
1,995
0.74
(46)
(41)
%
%
$
$
4,313
0.42
$
$
8,871
0.87
(51)
(52)
%
%
$
$
808
0.32
$
$
824
0.30
%
(2)
%
7
$
$
3,218
0.31
$
$
3,360
0.33
%
%
(4)
(6)
$
86,250
$
86,250
%
-
Interest and accretion on convertible debentures has decreased for 2012 as compared to 2011 due to the maturity and settlement of
the 7.75% and 8.00% convertible debentures in December 2011.
Advantage Oil & Gas Ltd. - 24
Accretion on Decommissioning Liability
Accretion on decommissioning
liability ($000)
per boe
Three months ended
December 31
Year ended
December 31
2012
2011
% change
2012
2011
% change
$
$
1,613
0.65
$
$
1,459
0.54
11
20
%
%
$
$
6,300
0.62
$
$
5,748
0.56
10
11
%
%
Decommissioning liability
at December 31 ($000) (1)
(1) Includes decommissioning liability associated with assets held for sale.
$
262,764
$
253,796
%
4
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. The net present value of the decommissioning liability has increased due to a decrease in the risk-
free rate. 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 2.37% of the liability.
Other Income
($000)
Gain on sale of property, plant and
equipment
Miscellaneous income
Three months ended
December 31
Year ended
December 31
2012
2011
% change
2012
2011
% change
$
$
$
$
5,476
9
5,485
153
88
241
3,479
(90)
2,176
%
%
%
$
$
16,964
595
17,559
$
$
1,325
647
1,972
1,180
%
%
(8)
%
790
Other income primarily consists of gains related to the disposition of property, plant and equipment. In the second half of 2012,
Advantage sold non-core assets resulting in gains of $17.0 million.
Taxes
Deferred income taxes arise from differences between the accounting and tax bases of our assets and liabilities. For the year ended
December 31, 2012, the Corporation recognized a deferred income tax recovery of $28.6 million as a result of the $125.7 million loss
before taxes and non-controlling interest. As at December 31, 2012, the Corporation had a deferred income tax asset balance of $42.9
million and a deferred income tax liability balance of $4.6 million.
Advantage and Longview have approximately $1.7 billion in tax pools and deductions at December 31, 2012, 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, 2012
($ millions)
Longview Consolidated
177
71
330
815
296
9
1,698
44
-
330
94
70
5
543
$
$
$
Advantage
133
$
71
-
721
226
4
1,155
$
Advantage and Longview have non-capital loss carry forward balances of approximately $815 million that will expire no earlier than
2023.
Advantage Oil & Gas Ltd. - 25
Net Income Attributable to Non-Controlling Interest
From April 14, 2011 to May 21, 2012, Advantage had a 63% ownership interest in Longview with the remaining 37% held by outside
interests or non-controlling interests. On May 22, 2012, Advantage sold 8,300,000 common shares of Longview which decreased
Advantage’s ownership interest to 45.2% and increased the non-controlling interests to 54.8%. As Advantage holds the single largest
ownership interest of Longview and other ownership interests are comparatively dispersed, Advantage is considered to control
Longview. Accordingly, Advantage’s consolidated financial statements include 100% of Longview’s accounts. To determine the net
income or loss attributable to the Advantage shareholders, it is necessary to deduct or add that portion of the net income or loss
related to Longview that is consolidated within Advantage’s financial results but is attributable to the non-controlling interests.
Therefore, for the year ended December 31, 2012, Advantage recognized an $8.0 million increase to net income related to Longview’s
net loss consolidated within Advantage’s financial results but attributable to the non-controlling interests.
Net Loss and Comprehensive Loss
Three months ended
December 31
Year ended
December 31
2012
2011
% change
2012
2011
% change
Net loss and comprehensive loss ($000)
per share
- basic
- diluted
$
$
$
(60,218)
(0.36)
(0.36)
$
$
$
(145,063)
(0.87)
(0.87)
(58)
(59)
(59)
%
%
%
$
$
$
(89,125)
(0.53)
(0.53)
$
$
$
(152,772)
(0.92)
(0.92)
(42)
(42)
(42)
%
%
%
Advantage has realized net losses during both 2012 and 2011 due to the recognition of impairments on both assets held for sale and
oil and gas assets. On August 22, 2012, the Advantage legal entity announced that it would market for sale all remaining non-core
assets (refer to section “Non-core Asset Sales”). The carrying amounts of exploration and evaluation assets, property, plant and
equipment and decommissioning liabilities associated with the assets held for sale have been presented separately on the statement of
financial position and reflected at the lesser of fair value less costs to sell and carrying amount, which resulted in an impairment
recognition of $73 million during the fourth quarter of 2012.
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. As at December 31, 2012,
Longview recognized an impairment loss of $31.9 million related to one CGU located in Alberta that had suffered a significant
deterioration in value due to the reduction in crude oil prices and decreased reserves. No impairment losses were recognized for any
other CGUs during this period. As at December 31, 2011, Advantage 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 during this period, including our Glacier property.
Advantage Oil & Gas Ltd. - 26
Cash Netbacks
Petroleum and natural gas sales
Royalties
Realized gain (loss) on derivatives
Operating expense
Operating income
General and administrative (1)
Finance expense (2)
Miscellaneous income
Funds from operations and
cash netbacks
Three months ended
December 31
Year ended
December 31
2012
2011
2012
2011
$
$
$
$
$000
74,432
(7,915)
(1,488)
(22,196)
42,833
(6,067)
(4,246)
9
32,529
per boe
$
29.90
(3.18)
(0.60)
(8.92)
17.20
(2.44)
(1.71)
-
13.05
$
$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
268,905
(34,126)
(970)
(89,229)
144,580
(20,960)
(16,749)
595
107,466
per boe
$
26.32
(3.34)
(0.09)
(8.73)
14.16
(2.05)
(1.64)
0.06
10.53
$
$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
$
$
$
$
$
(1) General and administrative expense excludes non-cash G&A.
(2) Finance expense excludes non-cash accretion expense.
For the fourth quarter of 2012, Advantage realized a 32% increase in funds from operations to $32.5 million or $13.05 per boe as
compared to $24.7 million or $10.02 per boe for the third quarter of 2012 due to a 43% increase in the realized natural gas price.
However, funds from operations have decreased significantly as compared to 2011 driven primarily by considerably lower realized
commodity prices and a reduction in realized gains on derivative contracts. Natural gas prices have remained low for the last several
years due to decreased demand and increasing U.S. domestic natural gas production, particularly from non-conventional natural gas
resource plays. Crude oil prices have been lower due to wider differentials resulting in lower Canadian realized pricing. Additionally,
natural gas liquid prices softened due to oversupply attributable to successful liquids-rich drilling throughout North America.
Although our funds from operations have continued to benefit from cost reductions, the volatile commodity price environment has
significantly challenged our industry during 2012. Gains from derivatives have decreased considerably from 2011 due to a reduction
in the commodity prices at which we have been able to enter continuing derivative contracts, particularly for natural gas.
Advantage Oil & Gas Ltd. - 27
Contractual Obligations and Commitments
The Corporation has contractual obligations in the normal course of operations including purchases of assets and services, operating
agreements, transportation commitments, sales contracts, bank indebtedness and convertible debentures. These obligations are of a
recurring and consistent nature and impact cash flow in an ongoing manner. The following table is a summary of the Corporation’s
remaining contractual obligations and commitments. Advantage has no guarantees or off-balance sheet arrangements other than as
disclosed.
($ millions)
Building leases
Pipeline/transportation
Bank indebtedness (1)
Convertible debentures (2)
- principal
- interest
- principal
- interest
Total contractual obligations
$
$
$
Payments due by period
2014
1.5
11.0
274.2
6.4
-
4.3
297.4
2013
2.6
12.7
-
13.3
-
4.3
32.9
$
$
2015
$
-
2.3
-
-
86.2
2.2
90.7
$
Total
4.1
26.0
274.2
19.7
86.2
10.8
421.0
$
(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 June 2013. 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, 2012, 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.
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
161,630
35,467
197,097
86,250
283,347
168,382,838
3.20
538,825
$
$
$
December 31, 2012
Longview
112,541
$
11,712
124,253
-
124,253
46,837,164
5.39
252,452
$
$
$
Consolidated
274,171
$
47,179
321,350
86,250
407,600
$
(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 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 assets and 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 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
Advantage Oil & Gas Ltd. - 28
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. 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. Crude oil prices have generally
remained strong, although 2012 experienced significant changes due to increased North American production that has challenged
current infrastructure resulting in volatile differentials that has placed downward pressure on Canadian realized prices. Natural gas
prices have remained low for several years due to decreased demand caused by mild winters and increasing U.S. domestic natural gas
production, particularly from non-conventional natural gas resource plays. 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, on April 14, 2011 we closed the sale of
17,250,000 Longview common shares with the net proceeds utilized to repay bank indebtedness and maturing convertible debentures.
On May 22, 2012, Advantage sold another 8,300,000 Longview common shares with net proceeds utilized to repay bank
indebtedness. Additionally, on August 22, 2012, the Advantage legal entity announced that it would market for sale all of the
Corporation's non-core assets, defined as all corporate assets excluding Advantage's core Glacier Montney natural gas asset and its
21.15 million share ownership position in Longview. On February 5, 2013, the Advantage legal entity announced that it had closed
four separate sales transactions and signed a definitive agreement with a fifth party which, on a combined basis, constituted the sale of
substantially all non-core assets. Management has partially mitigated commodity price risk whereby we have entered natural gas
hedges averaging 29.2 mmcf/d at $3.31/mcf for calendar 2013, 33.2 mmcf/d at $3.78/mcf for calendar 2014, and 33.2 mmcf/d at
$4.01/mcf for the first quarter of 2015. Additionally, Longview entered crude oil hedges of 1,000 bbls/d at $90.29/bbl for January to
December 2013 and 1,000 bbls/d at $93.00/bbl for February to December 2013. 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. A hedging program was also executed to help reduce the volatility of funds from operations. However, we
are still exposed to risks as a result of the current industry and economic situation. We continue to closely monitor the possible
impact on our business and strategy, and will make adjustments as necessary with prudent management.
Shareholders’ Equity and Convertible Debentures
Advantage utilizes a combination of equity, convertible debentures, bank indebtedness and funds from operations to finance
acquisitions and development activities.
As at December 31, 2012, Advantage had 168.4 million common shares outstanding. During the year ended December 31, 2012
Advantage issued 2,078,798 common shares to service providers in exchange for vested restricted shares that were granted during
prior years. As at March 25, 2013, common shares outstanding have not changed since December 31, 2012.
The Corporation had $86.2 million of 5.00% convertible debentures outstanding at December 31, 2012 that were convertible to 10.0
million common shares based on the applicable conversion price and will mature in January 2015 (December 31, 2011 - $86.2 million
outstanding and convertible to 10.0 million common shares). During the year ended December 31, 2012, 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. Our convertible debenture obligation can be settled through the payment of cash or issuance of common
shares at Advantage’s option.
Advantage Oil & Gas Ltd. - 29
Bank Indebtedness, Credit Facilities and Other Obligations
At December 31, 2012, Advantage had consolidated bank indebtedness outstanding of $274.2 million consisting of $161.6 million
and $112.6 million for each of the legal entities Advantage and Longview, respectively. Bank indebtedness has increased $40.3 million
since December 31, 2011, primarily due to capital expenditures exceeding reduced funds from operations from the lower commodity
price environment. Advantage’s consolidated credit facilities of $500 million at December 31, 2012 include $300 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. The next annual reviews are
scheduled to occur in June 2013. There can be no assurance that the credit facilities will be renewed at the current borrowing base
levels at that time. If the Transaction successfully closes, it is anticipated that the net proceeds will reduce outstanding bank
indebtedness for the Advantage legal entity and the borrowing base will be redetermined by the banking syndicate based upon their
evaluation of Advantage’s remaining reserves.
Advantage had a consolidated working capital deficiency of $47.2 million as at December 31, 2012. Our working capital includes
items expected for normal operations such as trade receivables, prepaids, deposits, trade payables and accruals, and the other liability.
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. Working capital deficiency increased during the fourth
quarter of 2012 as we increased our capital expenditure programs, particularly at Glacier where we had experienced completion
delays. 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 was held by outside interests or non-controlling interests. Additionally, on
May 22, 2012, Advantage sold another 8,300,000 Longview common shares owned by Advantage to a syndicate of underwriters at a
price of $9.00 per common share for gross proceeds of $74.7 million. Advantage now owns 21,150,010 common shares of Longview,
representing an interest of approximately 45.2% in Longview. As Advantage holds the single largest ownership interest of Longview
and other ownership interests are comparatively dispersed, Advantage is considered to control Longview. As such, Advantage’s
consolidated financial statements include 100% of Longview’s accounts and non-controlling interest was recognized which
represented Longview’s independent shareholders 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 or loss 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, 2012, Advantage recognized an $8.0 million increase to net income related to Longview’s
net loss consolidated within Advantage’s financial results but attributable to the non-controlling interests. This $8.0 million decreased
non-controlling interest on the statement of financial position along with a decrease of $13.7 million related to dividends declared by
Longview to the non-controlling interest ownership.
Advantage Oil & Gas Ltd. - 30
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 dispositions
Net capital expenditures (1)
Three months ended
December 31
2012
2011
Year ended
December 31
$
$
$
$
40,792
6,508
(65)
-
47,235
377
(2,996)
44,616
85,061
15,984
138
14
101,197
1,624
(114)
102,707
2012
134,630
39,281
-
773
174,684
377
(13,967)
161,094
2011
199,170
52,857
1,704
443
254,174
3,006
(1,099)
256,081
$
$
$
$
(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 on property, plant and equipment and exploration and evaluation assets for the year ended
December 31, 2012, $130.6 million, including $119.2 million at Glacier. 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. In March 2011, our
Phase III development at Glacier was completed with production capacity of 100 mmcf/d at our Glacier gas plant, a significant
increase from the prior 50 mmcf/d capability. During the third quarter of 2011, we began our Phase IV development at Glacier to
increase throughput capacity to 140 mmcf/d and further evaluate the Middle and Lower Montney formations. Modifications at the
Glacier gas plant to increase processing capacity to 140 mmcf/d were completed during the second quarter of 2012. However, as a
result of the prevailing low natural gas pricing environment, we decided to maintain production from Glacier at between 90 and 100
mmcf/d utilizing our inventory of drilled wells. During the Phase IV program we drilled 28.5 net wells (29 gross) and had 14 wells
remaining to complete prior to the 2012 spring break-up. We experienced a prolonged spring break-up and other weather related
conditions into the third quarter of 2012 causing lease access restrictions that delayed our current Glacier capital program until
September. Since that time we have drilled 3 new Middle Montney evaluation wells and completed 5 wells from the Upper, Middle
and Lower Montney formations. At December 31, 2012, we had 12 wells drilled that will be completed to offset declines as required.
We estimate that we have sufficient current behind pipe productivity to sustain production at between 90 and 100 mmcf/d for the
remainder of 2013. Given the additional activities undertaken including core studies, different completion technologies, and
completion of additional wells in the Lower, Middle and Upper Montney formations, we have increased our estimated capital
expenditure program for the 12 months ending June 30, 2013, to be approximately $115 to $125 million (refer to Advantage press
release dated March 13, 2013 for additional details).
For the year ended December 31, 2012, Longview spent a net $44.5 million on property, plant and equipment and exploration and
evaluation assets which included $24.2 million in Saskatchewan, $8.1 million at Nevis, $5.2 million at Westerose, $3.4 million at
Brazeau, and $2.1 million at Sunset, with the remaining spending for miscellaneous projects. Longview drilled a total of 21.0 net (33
gross) wells at a 100% success rate adding production of approximately 1,591 boe/d (90% crude oil and natural gas liquids).
Consistent with their business strategy, Longview developed a sustainable and balanced 2013 budget that will preserve a strong
balance sheet while utilizing funds from operations to maintain the current dividend policy and fund substantially all of their capital
expenditures while maintaining production at 2012 levels. Longview’s 2013 capital drilling program is primarily focused on further
development of their Midale and Frobisher plays within Southeast Saskatchewan where they have an extensive land base, high
working interests, fee title ownership and existing infrastructure.
Advantage Oil & Gas Ltd. - 31
Sources and Uses of Funds
The following table summarizes the various funding requirements during the years ended December 31, 2012 and 2011 and the
sources of funding to meet those requirements:
($000)
Sources of funds
Funds from operations
Proceeds from Longview financing
Increase in bank indebtedness
Property dispositions
Change in non-cash working capital and other
Uses of funds
Expenditures on property, plant and equipment
Change in non-cash working capital and other
Dividends declared by Longview to non-controlling interest
Expenditures on decommissioning liability
Expenditures on exploration and evaluation assets
Convertible debenture maturities
Decrease in bank indebtedness
Reduction of capital lease obligations
Year ended
December 31
2012
2011
$
$
$
$
$
$
107,466
71,563
40,268
13,967
-
233,264
174,684
42,073
13,735
2,395
377
-
-
-
233,264
197,031
160,757
-
1,099
27,659
386,546
254,174
-
6,915
3,335
3,006
62,294
56,754
68
386,546
$
$
Funds from operations for 2012 have decreased significantly as compared to 2011. Although our funds from operations have
continued to benefit from cost reductions, the volatile commodity price environment has significantly challenged our industry during
2012 resulting in lower sales and funds from operations. Over the last several years we have made significant strides in reducing our
bank indebtedness from completing various financings, divesting of non-core assets, and progressively disposing of our ownership
interest in Longview. To assist with funding capital expenditures, Advantage has typically utilized funds from operations and bank
indebtedness from its Credit Facilities. 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.
Advantage Oil & Gas Ltd. - 32
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)
Year ended
Dec. 31, 2012
$
268,905
$
(89,125)
$
(0.53)
$
1,913,796
$
351,619
Year ended
Dec. 31, 2011
$
355,288
$
(152,772)
$
(0.92)
$
1,972,789
$
308,574
Year ended
Dec. 31, 2010
$
319,368
$
40,920
$
0.25
$
1,965,945
$
363,675
(1) Long term financial liabilities exclude decommissioning liability and deferred income tax liability.
Total sales (before royalties) increased from 2010 to 2011 primarily from significant increases in our production due to our successful
exploration and development activities. Natural gas sales in particular benefited in 2011 from our Montney natural gas resource play
at Glacier, Alberta where we increased production capacity with our continued facilities and infrastructure expansion work. Sales for
2012 have been negatively impacted primarily by the continued decrease in commodity prices, particularly natural gas prices. As a
result of the prevailing low natural gas pricing environment, we decided to maintain production from Glacier at between 90 and 100
mmcf/d utilizing our inventory of drilled wells. 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 losses for 2011 and 2012 were primarily
related to lower commodity prices that resulted in the recognition of impairment losses. In 2011 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. In 2012 our assets
held for sale were reflected at the lesser of fair value less costs to sell and carrying amount, which resulted in an impairment
recognition of $73 million. Additionally, in 2012 Longview recognized an impairment loss of $31.9 million related to one CGU
located in Alberta that had suffered a significant deterioration in value due to the reduction in crude oil prices and decreased reserves.
Total assets have changed during the years due to ongoing capital expenditure activity offset by impairment losses.
Advantage Oil & Gas Ltd. - 33
Quarterly Performance
($000, except as otherwise
indicated)
Daily production
2012
2011
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Natural gas (mcf/d)
Crude oil and NGLs (bbls/d)
Total (boe/d)
125,455
6,148
27,057
126,606
5,724
26,825
132,411
5,880
27,949
139,664
6,582
29,859
137,480
6,498
29,411
134,353
6,246
28,638
136,986
5,919
28,750
111,145
6,251
24,775
Average prices
Natural gas ($/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
$
$
$
2.97
2.75
3.22
$
$
$
2.07
2.07
2.28
$
$
$
1.65
1.67
1.90
$
$
$
2.02
2.02
2.17
$
$
$
3.18
3.76
3.20
$
$
$
3.62
4.16
3.66
$
$
$
3.77
4.29
3.88
$
$
$
3.72
4.55
3.78
$
$
$
$
$
$
$
$
70.94
72.94
88.20
72,944
(60,218)
(0.36)
(0.36)
32,529
$
$
$
$
$
$
$
$
72.07
73.06
92.19
62,615
(2,769)
(0.02)
(0.02)
24,703
$
$
$
$
$
$
$
$
70.97
71.73
93.51
58,526
(15,579)
(0.10)
(0.10)
18,243
$
$
$
$
$
$
$
$
81.48
80.41
102.94
73,850
(10,559)
(0.06)
(0.06)
31,991
$
$
$
$
$
$
$
$
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
The table above highlights the Corporation’s performance for the fourth quarter of 2012 and also for the preceding seven quarters.
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. The creation of Longview and accompanying capital expenditure program resulted in increased production
during the fourth quarter of 2011 and the first quarter of 2012. Production decreased in the second and third quarters of 2012 as a
result of numerous facilities outages due to annual turnaround maintenance, facility construction activities, and prolonged spring
break-up and other related weather conditions that caused lease access restrictions. This delayed our current Glacier capital program
that resumed in September to maintain production at between 90 and 100 mmcf/d. Production was also impacted as production
from our Lookout Butte property (1,000 boe/d) in southern Alberta was curtailed in June 2012 due to maintenance and a fire that
occurred at a third party processing facility. With Lookout Butte back on production in early November 2012 and the resumption of
our capital programs, we experienced an improvement in our fourth quarter production.
Our financial results, including sales and funds from operations, are significantly impacted by commodity prices, particularly natural
gas. During 2011 and 2012, natural gas prices continued to decrease which reduced our corresponding sales and funds from
operations, although increasing production and stronger relative crude oil and NGLs prices partially mitigated the impact. Advantage
has continued to recognize net losses primary driven by weak natural gas prices, although we have also continued to achieve cost
reductions and lower expenses. During the fourth quarter of 2011, Advantage 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. During the fourth quarter of 2012 our assets
held for sale were reflected at the lesser of fair value less costs to sell and carrying amount, which resulted in an impairment
recognition of $73 million. Additionally, in the fourth quarter of 2012 Longview recognized an impairment loss of $31.9 million
related to one CGU located in Alberta that had suffered a significant deterioration in value due to the reduction in crude oil prices
and decreased reserves.
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
Advantage Oil & Gas Ltd. - 34
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.
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 are 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.
Accounting Pronouncements 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.
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 applicable for annual periods commencing on or
after January 1, 2013. We have determined that the new standard will have no effect on the current accounting methodology with
respect to Longview. We will continue to control Longview pursuant to IFRS 10 as we did under IAS 27, and as such will
consolidate Longview as a subsidiary of Advantage.
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 applicable for annual periods commencing on or after
January 1, 2013. We have determined that our joint arrangements are all joint operations as defined in IFRS 11. Parties to a joint
operation, called joint operators, are required to recognize their share of the assets, liabilities, revenues and expenses of the joint
operation. Since this is not different from our current methodology applied for jointly controlled assets as defined under IAS 31,
there will be no changes involved in adoption of IFRS 11.
Advantage Oil & Gas Ltd. - 35
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 applicable for annual periods commencing on or after
January 1, 2013. We have determined that this standard will require us to provide additional disclosure of the nature of and risks
associated with our interest in our subsidiary, Longview. With respect to joint arrangements, we do not expect to be providing
additional disclosure, as our joint arrangements are numerous, and no single one is material to the reporting entity.
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 applicable for annual periods commencing on or after January 1, 2013. We have determined that our current
measurements and disclosures of fair value will comply with the new standard.
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.
Evaluation of Disclosure Controls and Procedures
Advantage’s Chief Executive Officer and Chief Financial Officer have designed disclosure controls and procedures (“DC&P”), or
caused it to be designed under their supervision, to provide reasonable assurance that 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 DC&P as at December 31, 2012. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that the DC&P 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 financial year end December 31, 2012, 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, 2012. 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 materially affect, the Corporation’s ICFR.
No material changes in the ICFR were identified during the interim period ended December 31, 2012 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 DC&P
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 ICFR 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.
Advantage Oil & Gas Ltd. - 36
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.
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 have increased the quality and magnitude of our Montney natural gas resource
that contains significant scope and scale as validated by an independent reserve evaluator (“Sproule”) and whose solid economics
provides Advantage with a significant drilling inventory. Our Glacier 2012 and three year finding and development costs (“F&D”),
including the change in future development capital, were $0.73/mcf and $1.06/mcf, respectively. The recycle ratios associated with
our F&D costs based on Sproule’s forecast of 2013 operating netbacks were 3.6x based on our 2012 F&D and 2.5x based on our
three year F&D (refer to our press release dated March 13, 2013).
Over the course of 2012, Advantage conducted a comprehensive core study and completion study to enhance our geological
understanding of the rock properties of all the identified reservoir intervals and to assess the potential to improve well productivity,
particularly in the Middle and Lower Montney at Glacier. The results reinforced our earlier views that greater than 250 meters of
Montney reservoir provide development potential and initial production rates and reserves can be significantly enhanced by utilizing a
variety of alternative fracture stimulation techniques based upon the specific reservoir properties of each interval. These changes in
frac design resulted in a 337% increase in the Middle Montney and a 327% increase in the Lower Montney well test rates.
We are currently working on a two year development plan that will focus on doubling production throughput at Glacier to 200
mmcf/d by early 2015. This program will be designed to further the delineation of the Middle and Lower intervals where only 2.2%
and 27.6% of the total acreage, respectively, has been assigned reserves at year-end 2012. Our production growth targets will include
increasing the throughput at Glacier to approximately 140 mmcf/d by the spring of 2014 and 200 mmcf/d by the spring of 2015.
The Glacier gas plant is already capable of processing 140 mmcf/d due to the expansion work that was completed in 2012. We
anticipate providing more information on our capital budget before mid-year 2013.
Given the additional activities undertaken including core studies, different completion technologies, and completion of additional
wells in the Lower, Middle and Upper Montney formations, we have increased our estimated capital expenditure program for the 12
months ending June 30, 2013, to be approximately $115 to $125 million. At December 31, 2012, we had 12 wells drilled that will be
completed to offset declines as required. We estimate that we have sufficient current behind pipe productivity to sustain production
at between 90 and 100 mmcf/d for the remainder of 2013. Glacier continues to exceed our expectations in terms of well performance
and economic efficiencies due to its superior cost structure which is among the lowest in North America.
On August 22, 2012, the Advantage legal entity announced that it would market for sale all of the Corporation's remaining non-core
assets, defined as all corporate assets excluding Advantage's core Glacier Montney natural gas asset and its 21.15 million share
ownership position in Longview. On February 5, 2013, Advantage announced that it had closed four separate sales transactions and
signed a definitive agreement with a fifth party which, on a combined basis, constituted the sale of substantially all non-core assets.
The Board believes that its core Glacier asset is materially undervalued in the context of the Corporation's current market valuation
and that the sale of the non-core assets will simplify the Corporation leading to a greater appreciation of its core Glacier asset.
Advantage has also initiated a strategic alternatives review process appointing FirstEnergy Capital Corp. and RBC Capital Markets as
financial advisors and formed a special committee of the Board of Directors (the “Special Committee”) to oversee the process. The
Special Committee is working with its advisors to consider strategic alternatives that will enhance and maximize value for all
shareholders. The Special Committee's advisors are currently compiling information in respect of the Corporation to be provided to
Advantage Oil & Gas Ltd. - 37
interested parties and to be placed in a virtual data room to be created in connection with the process. This information will include
Advantage’s December 31, 2012 year-end independent reserve report, an updated independent reserve report to reflect wells drilled
since December 31, 2012 and an updated independent Glacier resource assessment report that incorporates well results and core
analysis completed by the Corporation. The advisors to the Special Committee will contact a broad spectrum of parties to solicit
interest in a possible sale or other strategic transaction with the Corporation. It is the Corporation’s current intention not to disclose
developments with respect to this process until the Board has approved a specific transaction or otherwise determines that disclosure
is necessary or appropriate. The Corporation cautions that there are no assurances or guarantees that this process will result in any
transactions or, if any transactions are undertaken, the terms, magnitude of net proceeds, or timing of any such transactions.
Longview
Longview’s funds from operations are supported by crude oil prices and stable production that funds both the capital expenditure
program and dividends. During 2012 Longview’s funds from operations has been challenged by reduced commodity prices and
increased operating expense. Realized crude oil prices have been lower due to wider differentials resulting in lower Canadian realized
pricing, which has adversely impacted their sales. Additionally, natural gas liquid prices have softened due to oversupply attributable
to successful liquids-rich drilling throughout North America. Natural gas prices have remained low for several years due to decreased
demand caused by mild winters and increasing U.S. domestic natural gas production, particularly from non-conventional natural gas
resource plays. As a result, Longview prudently announced during the second quarter a reduction to the 2012 capital expenditure
program to maintain financial discipline and a strong balance sheet in response to weaker than anticipated commodity prices and
higher differentials. Production additions from Longview’s reduced 2012 capital expenditure program were sufficient to successfully
offset declines and resulted in daily production that averaged 6,235 boe/d for the current year, comparable to that of the prior year.
Consistent with Longview’s business strategy, they developed a sustainable and balanced 2013 budget that will preserve a strong
balance sheet while utilizing funds from operations to maintain the current dividend policy and fund substantially all of their capital
expenditures while maintaining production at 2012 levels. Longview has a base decline rate of approximately 19% which allows the
Company to maintain production with a modest level of capital expenditures. Longview will continue focusing on operational and
cost efficiencies to increase returns and produce stable cash flows while maintaining a conservative financial structure. Longview will
continue to high grade its inventory of drilling locations and invest in opportunities that they believe provide strong economics
during low commodity price cycles.
The following table summarizes the operational and financial guidance for Longview for the year ending December 31, 2013:
Average daily production
6,200 boe/d to 6,300 boe/d
oil & liquids %
Royalty rate
79%
19% to 21%
Operating expenses
$19.00/boe to $20.00/boe
Capital expenditures
$36 million
Longview’s 2013 capital program will be comprised of low-risk crude oil drilling and recompletion activities in areas with high
netbacks where they operate existing infrastructure. Drilling operations will focus on areas where recent activity has demonstrated
strong economics that result in a quick and positive impact on funds from operations while limiting facility and other infrastructure
expenditures to a minimum. The percentage of Longview’s total corporate production related to crude oil is expected to grow to 71%
in 2013 from 67% in 2012 as the 2013 capital budget is entirely focused on oil weighted projects. Production from crude oil and
NGLs are expected to increase to 79% of total production in 2013 from 76% in 2012. Approximately 60% of the capital budget is
allocated to Southeast Saskatchewan targeting 6 different project areas where Longview has existing infrastructure in place which will
result in lower operating costs for new production. These are lower risk locations primarily targeting the Midale formation which are
offset by nearby production where successful results will lead to additional drilling in future years. Management has also partially
mitigated commodity price risk for calendar 2013 whereby they have entered into crude oil hedges of 1,000 bbls/d at $90.29/bbl for
January to December 2013 and 1,000 bbls/d at $93.00/bbl for February to December 2013.
Longview's business strategy is to provide shareholders with attractive long term returns that combine both income and moderate
growth by exploiting their assets in a financially disciplined manner and by acquiring additional long-life oil and gas assets of a similar
nature. Given the current volatility in crude oil pricing conditions, Longview will continue to closely monitor funds from operations
as compared to their dividend policy and capital expenditure commitments to ensure they are substantially balanced.
Advantage Oil & Gas Ltd. - 38
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 management information circular, 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 25, 2013
Advantage Oil & Gas Ltd. - 39
Management’s Responsibility for Financial Statements
Consolidated Financial Statements
The Management of Advantage Oil & Gas Ltd. (the “Corporation”) is responsible for the preparation and presentation of the
consolidated financial statements together with all operational and other financial information contained in the annual report. The
consolidated financial statements have been prepared by Management in accordance with International Financial Reporting Standards
as issued by the International Accounting Standards Board and utilize the best estimates and careful judgments of Management,
where appropriate. Operational and other financial information contained throughout the annual report is consistent with that
provided in the consolidated financial statements.
Management has developed and maintains a system of internal controls designed to provide reasonable assurance that all transactions
are accurately and reliably recorded, that the consolidated financial statements accurately report the Corporation’s operating and
financial results within acceptable limits of materiality, that all other operational and financial information presented is accurate, and
that the Corporation’s assets are properly safeguarded.
The Audit Committee, comprised of non-management directors, acts on behalf of the Board of Directors to ensure that Management
fulfills its financial reporting and internal control responsibilities. The Audit Committee is responsible for meeting regularly with
Management, the external auditors, and the internal auditors to discuss internal controls over financial reporting processes, auditing
matters and various aspects of financial reporting. The Audit Committee reviewed the consolidated financial statements with
Management and the external auditors, and recommended approval to the Board of Directors. The Board of Directors has approved
these consolidated financial statements.
PricewaterhouseCoopers LLP, an independent firm of Chartered Accountants, appointed by the shareholders as the external auditor
of the Corporation, has audited the consolidated statement of financial position as at December 31, 2012 and 2011, and the
consolidated statements of comprehensive loss, changes in shareholders’ equity and cash flows for the years ended December 31,
2012 and 2011. The external auditors conducted their audits in accordance with Canadian generally accepted auditing standards and
have unlimited and unrestricted access to the Audit Committee.
Andy J. Mah
President and CEO
March 25, 2013
Kelly I. Drader
CFO
Advantage Oil & Gas Ltd. - 40
Management’s Report on Internal Control over Financial Reporting
The Management of Advantage Oil & Gas Ltd. (the “Corporation”) is responsible for establishing and maintaining adequate internal
control over financial reporting for the Corporation as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934,
as amended. Under the supervision of our Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of
the effectiveness of our internal control over financial reporting based on the Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment, we have concluded that
as of December 31, 2012, our internal control over financial reporting was effective.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even those
systems determined to be effective can provide only reasonable assurance with respect to the financial statement preparation and
presentation. Further, 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 that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP, the Corporation’s independent firm of Chartered Accountants, was appointed by the shareholders to
audit and provide an independent opinion on both the consolidated financial statements and the Corporation’s internal control over
financial reporting as at December 31, 2012, as stated in their Auditor’s Report. PricewaterhouseCoopers LLP has provided such
opinion.
Andy J. Mah
President and CEO
March 25, 2013
Kelly I. Drader
CFO
Advantage Oil & Gas Ltd. - 41
March 25, 2013
Independent Auditor’s Report
To the Shareholders of Advantage Oil & Gas Ltd.
We have completed integrated audits of Advantage Oil & Gas Ltd.’s 2012 and 2011 consolidated financial statements
and its internal control over financial reporting as at December 31, 2012. 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, 2012 and December 31, 2011 and the consolidated
statements of comprehensive loss, changes in shareholders’ equity, and cash flows for the years then ended, 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 the
audit to obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement. Canadian generally accepted auditing standards also 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.
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.
Advantage Oil & Gas Ltd. - 42
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, 2012 and December 31, 2011 and its financial performance and its cash
flows for the years then ended 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, 2012,
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 limitations
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, 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 that the degree of compliance with the policies or procedures may
deteriorate.
Opinion
In our opinion, Advantage Oil & Gas Ltd. maintained, in all material respects, effective internal control over financial
reporting as at December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued
by COSO.
Chartered Accountants
Calgary, Alberta
March 25, 2013
Advantage Oil & Gas Ltd. - 44
Consolidated Statement of Financial Position
(thousands of Canadian dollars)
Notes
December 31, 2012
December 31, 2011
ASSETS
Current assets
Trade and other receivables
Prepaid expenses and deposits
Derivative asset
Assets held for sale
Total current assets
Non-current assets
Exploration and evaluation assets
Property, plant and equipment
Deferred income tax asset
Total non-current assets
Total assets
LIABILITIES
Current liabilities
Trade and other accrued liabilities
Derivative liability
Other liability
Liabilities associated with assets held for sale
Total current liabilities
Non-current liabilities
Bank indebtedness
Convertible debentures
Decommissioning liability
Deferred income tax liability
Total non-current liabilities
Total liabilities
SHAREHOLDERS' EQUITY
Share capital
Convertible debentures equity component
Contributed surplus
Deficit
Total shareholders' equity attributable to Advantage shareholders
Non-controlling interest
Total shareholders' equity
8
6
7
9
10
14
6
15
7
11
12
13
14
16
12
5
$
32,657
$
42,344
5,143
2,186
222,877
262,863
2,381
1,605,659
42,893
1,650,933
6,045
-
-
48,389
7,730
1,877,287
39,383
1,924,400
$
1,913,796
$
1,972,789
$
84,979
$
138,119
1,096
-
136,540
222,615
272,511
79,108
126,224
4,628
482,471
2,738
908
-
141,765
232,684
75,890
253,796
29,723
592,093
705,086
733,858
2,229,598
8,348
84,962
(1,252,206)
1,070,702
138,008
1,208,710
2,214,784
8,348
71,762
(1,163,081)
1,131,813
107,118
1,238,931
Total liabilities and shareholders' equity
$
1,913,796
$
1,972,789
Commitments (note 24)
Subsequent events (note 7 and note 27)
See accompanying Notes to the Consolidated Financial Statements
On behalf of the Board of Directors of Advantage Oil & Gas Ltd.:
___________________
Paul G. Haggis, Director
_________________
Andy J. Mah, Director
Advantage Oil & Gas Ltd. - 45
Consolidated Statement of Comprehensive Loss
(thousands of Canadian dollars, except for per share amounts)
Notes
Year ended
December 31, 2012
Year ended
December 31, 2011
Petroleum and natural gas sales
Less: royalties
Petroleum and natural gas revenue
Operating expense
General and administrative expense
Depreciation expense
Impairment of assets held for sale
Impairment of oil and gas properties
Exploration and evaluation expense
Finance expense
Gains on derivatives
Other income
Loss before taxes and non-controlling interest
Income tax recovery
19
21
10
7
10
9
22
6
20
14
Net loss and comprehensive loss before non-controlling
interest
Net loss (income) attributable to non-controlling interest
Net loss and comprehensive loss attributable to Advantage
shareholders
Net loss per share attributable to Advantage shareholders
Basic
Diluted
18
See accompanying Notes to the Consolidated Financial Statements
$
268,905
(34,126)
234,779
$
355,288
(52,971)
302,317
(89,229)
(28,180)
(132,175)
(73,000)
(31,865)
(181)
(26,299)
2,858
17,559
(125,733)
28,605
(97,128)
8,003
(89,166)
(34,587)
(152,927)
-
(187,684)
(3,055)
(29,561)
475
1,972
(192,216)
46,807
(145,409)
(7,363)
$
(89,125)
$
(152,772)
$
$
(0.53)
(0.53)
$
$
(0.92)
(0.92)
Advantage Oil & Gas Ltd. - 46
Consolidated Statement of Changes in Shareholders' Equity
(thousands of Canadian dollars)
Notes Share capital
Convertible
debentures
equity
component
Contributed
surplus
Deficit
Total
shareholders'
equity
attributable to
Advantage
shareholders
Non-
controlling
interest
Total
shareholders'
equity
Balance, December 31, 2011
Net loss and comprehensive loss
Share based compensation
Change in ownership interest, sale of
8,300,000 shares of Longview
Change in ownership interest, share based
compensation
Dividends declared by Longview ($0.60 per
Longview share)
Balance, December 31, 2012
Balance, December 31, 2010
Net loss and comprehensive loss
Share based compensation
Change in ownership interest, common
control transaction
Change in ownership interest, share based
compensation
Dividends declared by Longview ($0.40 per
Longview share)
Balance, December 31, 2011
16, 17
5
16, 17
5
$
2,214,784
-
14,814
$
8,348
-
-
$
71,762
-
(6,671)
$
(1,163,081)
(89,125)
-
$
1,131,813
(89,125)
8,143
$
107,118
(8,003)
-
$
1,238,931
(97,128)
8,143
-
-
-
-
19,871
-
-
-
19,871
51,692
71,563
-
936
936
-
2,229,598
$
-
8,348
$
-
84,962
$
-
(1,252,206)
$
-
1,070,702
$
(13,735)
138,008
$
(13,735)
1,208,710
$
$
2,199,491
-
15,293
$
8,348
-
-
$
14,783
-
(770)
$
(1,010,309)
(152,772)
-
$
1,212,313
(152,772)
14,523
-
$
7,363
-
$
1,212,313
(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
$
See accompanying Notes to the Consolidated Financial Statements
Advantage Oil & Gas Ltd. - 47
Consolidated Statement of Cash Flows
(thousands of Canadian dollars)
Operating Activities
Loss before taxes and non-controlling interest
Add (deduct) items not requiring cash:
Share based compensation
Depreciation expense
Impairment of assets held for sale
Impairment of oil and gas properties
Exploration and evaluation expense
Unrealized (gain) loss 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
Interest paid
Cash provided by 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
Notes
Year ended
December 31, 2012
Year ended
December 31, 2011
$
(125,733)
$
(192,216)
17
10
7
10
9
6
20
22
13
23
5
11
12
10, 23
9
7,220
132,175
73,000
31,865
181
(3,828)
(16,964)
26,299
(2,395)
(14,864)
106,956
71,563
40,268
-
(13,318)
-
(17,190)
81,323
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
(201,429)
(377)
13,527
(188,279)
-
-
$
-
(231,789)
(3,006)
1,099
(233,696)
-
-
$
-
See accompanying Notes to the Consolidated Financial Statements
Advantage Oil & Gas Ltd. - 48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
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”) is an 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
(“GAAP”) as defined in the Handbook of the Canadian Institute of Chartered Accountants (“CICA Handbook”). The
CICA Handbook incorporates International Financial Reporting Standards (“IFRS”) as issued by the International
Accounting Standards Board. Publicly accountable enterprises, such as the Corporation, are required to apply these
standards. Accordingly, these consolidated financial statements are prepared and issued under IFRS.
The accounting policies applied in these financial statements are based on IFRS issued and outstanding as of March 25,
2013, 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 45.2%
at December 31, 2012, and the 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.
(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 the Consolidated Statement of Comprehensive Income (Loss).
(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 Consolidated 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 Consolidated 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 Consolidated 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 Consolidated 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.
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 Consolidated 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 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 or probable reserves are determined
to exist. Upon determination of proved or 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
costs 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 Consolidated 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 (“UOP”) 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) Assets held for sale
Assets are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than
through continuing use. Assets held for sale are measured at the lower of carrying amount and fair value less costs to
sell and presented as a current asset on the Consolidated Statement of Financial Position. This condition is regarded as
met only when the sale is highly probable and the asset is available for immediate sale in its present condition.
Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale
within one year from the date of classification.
(f) 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 asset given up. Any gain or loss on derecognition of the asset given up is recognised in the Consolidated 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 Consolidated Statement of Comprehensive
Income (Loss).
(g) 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)
(g) 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, 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 costs 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
costs 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 Consolidated 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 Consolidated
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.
(h) 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)
(i) Share based compensation
Advantage accounts for share based compensation expense based on the fair value of rights granted under its share
based compensation plans.
Advantage’s and Longview’s Restricted Share Performance Incentive Plan (“RSPIP”), authorizes each respective 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 RSPIP
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.
Advantage’s Stock Option Plan (“Stock Option Plan”) authorizes the Board of Directors to grant stock options to
service providers, including directors, officers, employees and consultants of Advantage. Compensation cost related to
the Stock Option Plan is recognized as share based compensation expense within general and administrative expense
over the vesting period at fair value, as described in note 6.
As compensation expense is recognized, contributed surplus is recorded until the restricted shares vest or stock options
are exercised, at which time the appropriate common shares are then issued to the service providers and the
contributed surplus is transferred to share capital.
(j) 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 three most common methods utilized are the purchase method, the predecessor
values since inception method, and the predecessor values from date of transaction 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 from the date of transaction method to be most appropriate. This
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.
(k) 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 royalty agreements.
(l) Finance expense
Finance expense comprises interest expense on bank indebtedness and convertible debentures, and accretion of the
discount on the decommissioning liability and convertible debentures.
(m) Income tax
Income tax expense or recovery comprises current and deferred income tax. Income tax expense or recovery 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
Advantage Oil & Gas Ltd. - 54
3. Significant accounting policies (continued)
(m) Income tax (continued)
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.
(n) 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 and
stock options granted to service providers and convertible debentures, using the treasury stock method.
(o) Segmented information
The Corporation has determined that it has two reportable operating segments, being the legal entities Advantage and
Longview. These segments were determined on the basis of their different economic characteristics. Advantage is a
natural gas focused producer and Longview is an oil and natural gas liquids focused producer. Furthermore, each legal
entity’s Board of Directors decides how to allocate resources and assess performance.
(p) 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.
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 applicable for
annual periods commencing on or after January 1, 2013. We have determined that the new standard will have no effect
on the current accounting methodology with respect to Longview Oil Corp. We will continue to control Longview Oil
Corp. under IFRS 10 as we did under IAS 27, and as such will consolidate Longview Oil Corp. as a subsidiary of
Advantage.
Advantage Oil & Gas Ltd. - 55
3. Significant accounting policies (continued)
(p) New standards and interpretations not yet adopted (continued)
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
applicable for annual periods commencing on or after January 1, 2013. We have determined that our joint arrangements
are all joint operations as defined in IFRS 11. Parties to a joint operation, called joint operators, are required to
recognize their share of the assets, liabilities, revenues and expenses of the joint operation. Since this is not different
from our current methodology applied for jointly controlled assets as defined under IAS 31, there will be no changes
involved in adoption of IFRS 11.
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 applicable for annual periods
commencing on or after January 1, 2013. We have determined that this standard will require us to provide additional
disclosure of the nature of and risks associated with our interest in our subsidiary, Longview Oil Corp. With respect to
joint arrangements, we do not expect to be providing additional disclosure, as our joint arrangements are numerous,
and no single one is material to the reporting entity.
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 applicable for annual periods commencing on or after
January 1, 2013. We have determined that our current measurements and disclosures of fair value will comply with the
new standard.
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 7 – valuation and impairment of assets held for sale;
• Note 10 – valuation of property, plant and equipment;
• Note 9 & 10 – impairment of exploration and evaluation assets and property, plant and equipment;
• Note 6, 12 – valuation of convertible debentures;
• Note 13 – measurement of decommissioning liability;
• Note 14 – measurement of deferred income tax; and
• Note 17 – measurement of share based compensation.
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) Consolidation
At December 31, 2012, Advantage controls 45.2% of the voting rights of Longview. Although this is below 50%,
management has determined that Advantage has the power to govern the financial and operating policies of Longview
so as to obtain benefits from its activities, due to the comparatively dispersed ownership among the non-controlling
interest.
(b) 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 or 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 9).
(c) 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)
(d) 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 10).
(e) 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.
(f) 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 9 & 10).
(g) 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.
(h) 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.
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 was the parent company and had a
majority ownership interest of Longview, this transaction was deemed a common-control transaction. As such, Advantage
had 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 was recognized within contributed surplus of shareholders’ equity. At December 31, 2011,
Advantage held 63% of Longview’s issued and outstanding shares.
On May 22, 2012, Advantage sold 8,300,000 common shares of Longview to a syndicate of underwriters, for net proceeds
of $71.6 million. As a result, Advantage now owns 21,150,010 common shares of Longview, representing an interest of
approximately 45.2% in Longview. As Advantage holds the single largest ownership interest of Longview, and other
ownership interests are comparatively dispersed, Advantage is considered to control Longview. The sale of Longview shares
is a transaction with non-controlling interests that did not result in a loss of control. Accordingly, non-controlling interest
has been increased by $51.7 million, the adjustment between the carrying amounts of the controlling and non-controlling
interests to reflect the changes in their relative interests in Longview. The difference of $19.9 million between the net
proceeds and the adjustment has been credited to shareholders’ equity attributable to Advantage shareholders through
contributed surplus.
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, 2012, there were no significant differences between the carrying amounts reported on the Consolidated
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 a convertible debenture obligation outstanding, of which the liability component has been classified as
a financial liability at amortized cost. The convertible debenture has fixed terms and interest rates (note 12) resulting in fair
values that will vary over time as market conditions change. As at December 31, 2012, the estimated fair value of the
outstanding convertible debenture obligation was $86.0 million (December 31, 2011 - $82.8 million). The fair value of the
liability component of convertible debentures was determined based on the current public trading activity of the debenture.
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. For 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.
Advantage Oil & Gas Ltd. - 59
6. Financial risk management (continued)
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.
(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, 2012
32,657
2,780
2,186
37,623
$
$
December 31, 2011
42,344
3,157
-
45,501
$
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, 2012, $0.7 million or 2.2% of trade and other receivables are outstanding for 90 days or
more (December 31, 2011 - $0.5 million or 1.2% 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,
2012 or 2011.
The Corporation’s most significant customer, a Canadian oil and natural gas marketer, accounts for $12.6 million of the
trade and other receivables at December 31, 2012 (December 31, 2011 - $12.3 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 and derivative
liabilities are primarily due within one year of the Consolidated 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 $500 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 a convertible debenture outstanding that matures in 2015 (note 12). Interest payments are made semi-
annually with excess cash provided by operating activities. As the debenture becomes due, the Corporation can satisfy
the obligation in cash or issue shares at a price determined in the applicable debenture agreement. 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, 2012 and 2011 are as follows:
December 31, 2012
Trade and other accrued liabilities
Derivative liability
Bank indebtedness
Convertible debentures
- principal
- interest
- principal
- interest
$
Less than
one year
84,979
1,096
-
13,338
-
4,313
103,726
$
One to
three years
-
$
-
274,171
6,358
86,250
6,469
373,248
$
Three to
five years Thereafter
-
-
$
$
-
-
-
-
-
-
-
-
-
-
$
-
$
-
Total
$
84,979
1,096
274,171
19,696
86,250
10,782
476,974
$
Interest on bank indebtedness was calculated assuming conversion of the revolving credit facility to a one-year term facility.
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.
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 June 2013. 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, 2012 would
result in a $1.1 million change in net loss for the year ended December 31, 2012. It is estimated that a 10% change in
the forward natural gas prices used to calculate the fair value of the natural gas derivatives at December 31, 2012 would
result in a $2.2 million change in net loss for the year ended December 31, 2012.
As at December 31, 2012, the Corporation had the following derivatives in place:
Description of Derivative
Term
Volume
Average Price
Natural gas – AECO
Fixed price
Fixed price
Fixed price
Crude oil - WTI
January 2013 to December 2013
April 2013 to October 2013
April 2013 to October 2013
14,217 mcf/d
9,478 mcf/d
9,478 mcf/d
Cdn $3.51/mcf
Cdn $3.14/mcf
Cdn $3.17/mcf
Fixed price
January 2013 to December 2013
1,000 bbls/d
$90.29/bbl
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
January 2012 to December 2012
January 2012 to December 2012
1,000 bbls/d Cdn $97.10/bbl
1,000 bbls/d Bought put Cdn $90.00/bbl
Sold call Cdn $102.25/bbl
Advantage Oil & Gas Ltd. - 62
6. Financial risk management (continued)
(c) Price and currency risk (continued)
As at December 31, 2012, the fair value of the derivatives outstanding resulted in an asset of $2.2 million (December
31, 2011 – $Nil) and a liability of $1.1 million (December 31, 2011 – $2.7 million). The fair value of the commodity risk
management derivatives have been allocated to current assets and liabilities on the basis of expected timing of cash
settlement.
For the year ended December 31, 2012, $2.9 million was recognized in net loss as a derivative gain (December 31, 2011
- $0.5 million). The table below summarizes the realized and unrealized gains (losses) on derivatives.
Realized gain (loss) on derivatives
Unrealized gain (loss) on derivatives
(d) Interest rate risk
Year ended
December 31, 2012
$
$
(970)
3,828
2,858
Year ended
December 31, 2011
25,826
$
(25,351)
475
$
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, 2012, net income (loss)
and comprehensive income (loss) would have changed by $2.8 million (December 31, 2011 - $2.2 million) based on the
average debt balance outstanding during the year.
(e) Capital management
The Corporation manages its capital with the following objectives:
• To ensure sufficient financial flexibility to achieve the ongoing business objectives including replacement of
production, funding of future growth opportunities, and pursuit of accretive acquisitions; and
• To maximize shareholder return through enhancing the share value.
Advantage monitors its capital structure and makes adjustments according to market conditions in an effort to meet its
objectives given the current outlook of the business and industry in general. The capital structure of the Corporation is
composed of working capital (excluding derivative assets and liabilities), bank indebtedness, convertible debentures, and
share capital. Advantage may manage its capital structure by issuing new shares, repurchasing outstanding shares,
obtaining additional financing either through bank indebtedness or convertible debenture issuances, refinancing current
debt, issuing other financial or equity-based instruments, declaring a dividend, implementing a dividend reinvestment
plan, adjusting capital spending, or disposing of assets or its ownership interest in Longview. The capital structure is
reviewed by Management and the Board of Directors on an ongoing basis.
Advantage Oil & Gas Ltd. - 63
6. Financial risk management (continued)
(e) Capital management (continued)
Advantage’s capital structure as at December 31, 2012 and 2011 is as follows:
Bank indebtedness (non-current) (note 11)
Working capital deficit (1)
Net debt
Convertible debentures maturity value (non-current)
Total debt
Shares outstanding (note 16)
Share closing market price ($/share)
Market capitalization (2)
Total capitalization
December 31, 2012
$
274,171
47,179
321,350
86,250
407,600
168,382,838
3.20
538,825
946,425
$
$
$
December 31, 2011
$
233,903
90,638
324,541
86,250
410,791
166,304,040
4.24
705,129
1,115,920
$
$
$
(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 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.
7. Assets held for sale
On August 22, 2012, Advantage announced its intention to dispose of all non-core assets, defined as all corporate assets
excluding Advantage’s Glacier Montney natural gas asset and its 21.15 million share ownership position in Longview Oil
Corp.
As required under IFRS 5 Non-Current Assets Held For Sale and Discontinued Operations, Advantage ceased recognizing
depreciation on the property, plant and equipment held for sale as of August 22, 2012 onward. The same standard requires
that the assets held for sale be reflected at the lesser of fair value less costs to sell and their carrying amount. As a result of
this requirement, an impairment loss of $73.0 million has been recognized in the Consolidated Statement of Comprehensive
Loss.
The following table provides detail of the assets and liabilities classified as held for sale as at December 31, 2012:
Property, plant and equipment - cost (note 10)
Property, plant and equipment - accumulated depreciation and impairment losses (note 10)
Exploration and evaluation assets (note 9)
Impairment of assets held for sale
Assets held for sale
Decommissioning liability (note 13)
Liabilities associated with assets held for sale
$
581,444
(288,694)
292,750
3,127
(73,000)
222,877
$
$
$
136,540
136,540
On February 5, 2013, Advantage announced that it had signed a definitive agreement (the “Transaction”) with Questfire
Energy Corp. for the sale of certain oil and gas properties. The Transaction is anticipated to close before April 30, 2013. The
Transaction, along with other minor sales that closed during 2012 and subsequent to December 31, 2012 constitute the sale
of substantially all of the non-core assets. As the purchase price consists of cash and non-cash consideration, estimates and
assumptions regarding discount rates and the timing of closing of the Transaction were required to determine fair value less
costs to sell.
Advantage Oil & Gas Ltd. - 64
8. Trade and other receivables
Trade receivables
Receivables from joint venture partners
Other
9. Exploration and evaluation assets
Balance at December 31, 2010
Additions
Transferred to property, plant and equipment (note 10)
Exploration and evaluation expense
Balance at December 31, 2011
Additions
Dispositions
Exploration and evaluation expense
Transferred to property, plant and equipment (note 10)
Transferred to assets held for sale (note 7)
Balance at December 31, 2012
December 31, 2012
26,154
$
5,708
795
32,657
$
December 31, 2011
32,655
$
9,038
651
42,344
$
$
$
8,262
3,006
(483)
(3,055)
7,730
377
(113)
(181)
(2,305)
(3,127)
2,381
$
There were no indicators of impairment of exploration and evaluation assets during the years ended December 31, 2012 and
2011.
Advantage Oil & Gas Ltd. - 65
10. Property, plant and equipment
Cost
Balance at December 31, 2010
Additions
Change in decommissioning liability (note 13)
Disposals
Transferred from exploration and evaluation assets (note 9)
Balance at December 31, 2011
Additions
Change in decommissioning liability (note 13)
Disposals
Transferred from exploration and evaluation assets (note 9)
Transferred to assets held for sale (note 7)
Balance at December 31, 2012
Accumulated depreciation and impairment losses
Balance at December 31, 2010
Depreciation
Impairment of oil and gas properties
Disposals
Balance at December 31, 2011
Depreciation
Impairment of oil and gas properties
Disposals
Transferred to assets held for sale (note 7)
Balance at December 31, 2012
$
$
Oil & gas
properties
$
Total
$
2,018,949
253,731
79,660
(184)
483
2,352,639
173,911
11,095
(6,443)
2,305
(581,444)
1,952,063
137,979
152,279
187,684
(3)
477,939
131,503
31,865
(3,521)
(288,694)
349,092
$
Oil & gas
properties
$
Furniture and
equipment
4,024
$
443
-
-
-
4,467
773
-
-
-
-
5,240
$
$
Furniture and
equipment
1,232
$
648
-
-
1,880
672
-
-
-
2,552
$
$
2,022,973
254,174
79,660
(184)
483
2,357,106
174,684
11,095
(6,443)
2,305
(581,444)
1,957,303
139,211
152,927
187,684
(3)
479,819
132,175
31,865
(3,521)
(288,694)
351,644
$
Total
$
$
$
$
$
Net book value
At December 31, 2011
At December 31, 2012
Oil & gas
properties
$
$
1,874,700
1,602,971
Furniture and
equipment
$
2,587
$
2,688
Total
$
$
1,877,287
1,605,659
During the year ended December 31, 2012, Advantage capitalized general and administrative expenditures directly related to
development activities of $6.7 million (December 31, 2011 - $7.6 million).
Advantage included future development costs of $1.8 billion (December 31, 2011 – $1.7 billion) in property, plant and
equipment costs subject to depreciation.
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%.
Advantage Oil & Gas Ltd. - 66
10. Property, plant and equipment (continued)
For the year ended December 31, 2012, Longview recognized an impairment of oil and gas properties of $31.9 million. The
impairment of oil and gas properties recognized relates to crude oil and natural gas producing assets in West Central Alberta.
The decline in the price of crude oil and discounted after-tax future net cash flows were considered to be indicators of
impairment.
Forecast crude oil prices used in the calculation of impairment of oil and gas properties for the year ended December 31,
2012 are as follows:
Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023 (1)
Edmonton Par
($Cdn/bbl)
84.55
89.84
88.21
95.43
96.87
98.32
99.79
101.29
102.81
104.35
105.92
(1) Escalation of 1.5% thereafter
For the year ended December 31, 2011, Advantage recognized an impairment of oil and gas properties of $187.7 million.
The impairment of oil and gas properties recognized related to natural gas producing assets in West and East Alberta. The
decline in the price of natural gas was considered to be an indicator of impairment. The same natural gas producing assets
were designated by management as assets held for sale on August 22, 2012 (note 7).
Forecast natural gas prices used in the calculation of impairment of oil and gas properties for the year ended December 31,
2011 are as follows:
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021 (1)
AECO
($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
Advantage Oil & Gas Ltd. - 67
11. Bank indebtedness
Revolving credit facility
Discount on Bankers Acceptances and other fees
Balance, end of period
December 31, 2012
274,171
$
(1,660)
272,511
$
December 31, 2011
233,903
$
(1,219)
232,684
$
The Corporation has credit facilities (the "Credit Facilities") of $500 million, comprised of $300 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 $460 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 June 2013 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, 2012 and 2011. 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, 2012,
the average effective interest rate on the outstanding amounts under the facilities was approximately 4.9% (December 31,
2011 – 5.3%). Advantage has no letters of credit issued and outstanding at December 31, 2012 (December 31, 2011 – $8.8
million).
Advantage Oil & Gas Ltd. - 68
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:
Trading symbol
Issue date
Maturity date
Conversion price
Liability component
Equity component
Gross proceeds
Issuance costs
Net proceeds
7.75%
8.00%
5.00%
AAV.DBD
Sep. 15, 2004
Dec. 1, 2011
$
21.00
AAV.DBG
Nov. 13, 2006
Dec. 31, 2011
$
20.33
AAV.DBH
Dec. 31, 2009
Jan. 30, 2015
8.60
$
$
50,000
-
$
41,445
-
$
73,019
13,231
50,000
(2,190)
41,445
-
86,250
(3,735)
$
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. - 69
12. Convertible debentures (continued)
The balance of debentures outstanding at December 31, 2012 and changes in the liability and equity components during the
years ended December 31, 2012 and 2011 are as follows:
Trading symbol
Debentures outstanding
Liability component:
7.75%
AAV.DBD
$
-
8.00%
AAV.DBG
$
-
5.00%
AAV.DBH
86,250
$
Total
$
86,250
Balance at December 31, 2010
Accretion of discount
Matured
Balance at December 31, 2011
Accretion of discount
Matured
Balance at December 31, 2012
$
46,485
281
(46,766)
-
-
-
$
-
$
15,528
-
(15,528)
-
-
-
$
-
$
$
72,811
3,079
-
75,890
3,218
-
79,108
134,824
3,360
(62,294)
75,890
3,218
-
79,108
$
$
Equity component:
Balance at December 31, 2011
Balance at December 31, 2012
$
-
$
-
$
-
$
-
$
$
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. There were no conversions of convertible debentures during the years ended December 31, 2012 and 2011.
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 2013 and 2072. A risk-free rate of 2.37%
(December 31, 2011 – 2.50%) and an inflation factor of 2% (December 31, 2011 – 2%) were used to calculate the fair value
of the decommissioning liability. A reconciliation of the decommissioning liability is provided below:
Balance, beginning of year
Accretion expense
Liabilities incurred
Change in estimates
Effect of change in risk-free rate
Property dispositions
Liabilities settled
Transferred to assets held for sale (note 7)
Balance, end of year
Year ended
December 31, 2012
253,796
$
6,300
3,637
(6,252)
13,710
(6,032)
(2,395)
262,764
(136,540)
126,224
$
Year ended
December 31, 2011
172,130
$
5,748
4,714
(3,699)
78,645
(407)
(3,335)
253,796
-
253,796
$
Advantage Oil & Gas Ltd. - 70
14. Income taxes
The provision for income taxes is as follows:
Current income tax expense
Deferred income tax recovery
Income tax recovery
Year ended
December 31, 2012
-
$
(28,605)
(28,605)
$
Year ended
December 31, 2011
$
-
(46,807)
(46,807)
$
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:
Loss before taxes and non-controlling interest
Combined federal and provincial income tax rates
Expected income tax recovery
Increase (decrease) in income taxes resulting from:
Non-deductible share based compensation
Change in estimated pool balances
Difference between current and expected tax rates
Effective tax rate
Year ended
December 31, 2012
Year ended
December 31, 2011
$
(125,733)
25.00%
(31,433)
$
(192,216)
26.57%
(51,072)
2,281
1,022
(475)
(28,605)
22.75%
$
4,031
-
234
(46,807)
24.35%
$
The Canadian combined statutory tax rates decreased from 26.57% in 2011 to 25.00% in 2012 as a result of legislation
enacted in 2007.
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 December 31, 2010
Charged (credited) to income
Balance at December 31, 2011
Charged (credited) to income
Balance at December 31, 2012
Deferred income tax asset
Balance at December 31, 2010
Charged (credited) to income
Charged (credited) to equity
Balance at December 31, 2011
Charged (credited) to income
Balance at December 31, 2012
Property, plant and
equipment
$
Derivative
asset/liability
$
242,112
(3,771)
238,341
(1,095)
237,246
6,033
(6,737)
(704)
971
267
Total
$
248,145
(10,508)
237,637
(124)
237,513
$
$
$
Decommissioning
liability
$
Non-capital
losses
$
Other
$
Total
$
(43,491)
(20,444)
-
(63,935)
(2,282)
(66,217)
(159,358)
(15,970)
(1,091)
(176,419)
(27,728)
(204,147)
(5,065)
115
(1,993)
(6,943)
1,529
(5,414)
(207,914)
(36,299)
(3,084)
(247,297)
(28,481)
(275,778)
$
$
$
$
Advantage Oil & Gas Ltd. - 71
14. Income taxes (continued)
Net deferred income tax liability (asset)
Balance at December 31, 2010
Charged (credited) to income
Charged (credited) to equity
Balance at December 31, 2011
Charged (credited) to income
Balance at December 31, 2012
Longview
-
$
(36,299)
(3,084)
(39,383)
(3,510)
(42,893)
$
Advantage
$
Total
$
40,231
(10,508)
-
29,723
(25,095)
4,628
40,231
(46,807)
(3,084)
(9,660)
(28,605)
(38,265)
$
$
The net deferred income tax asset is expected to reverse in more than 12 months.
The unrecorded taxable temporary difference related to Advantage’s investment in Longview is $4.1 million.
The estimated tax pools available at December 31, 2012 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
$
$
$
44,430
-
329,858
93,821
69,742
5,639
543,490
133,595
70,837
-
720,911
226,136
3,985
1,155,464
178,025
70,837
329,858
814,732
295,878
9,624
1,698,954
$
$
$
The non-capital loss carry forward balances above expire no earlier than 2023.
15. Other liability
The Corporation had 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 expired in November 2012. Management considered this to be an onerous
contract, therefore the obligation for the discounted future payments, net of expected rental income, was provided for as a
liability.
A reconcilation of the other liability is as follows:
Balance, beginning of year
Accretion expense (note 22)
Liability settled
Balance, end of year
16. Share capital
(a) Authorized
Year ended
December 31, 2012
908
$
32
(940)
$
-
Year ended
December 31, 2011
1,835
$
99
(1,026)
908
$
The Corporation is authorized to issue an unlimited number of shares without nominal or par value.
(b) Issued
Balance at December 31, 2010
Share based compensation (note 17)
Balance at December 31, 2011
Share based compensation (note 17)
Balance at December 31, 2012
Common Shares
164,092,009
2,212,031
166,304,040
2,078,798
168,382,838
Advantage Oil & Gas Ltd. - 72
Amount
2,199,491
15,293
2,214,784
14,814
2,229,598
$
$
$
17. Share based compensation
(a) Restricted share performance incentive plan
Advantage had a Restricted Share Performance Incentive Plan (“RSPIP”) as approved by the shareholders. The
RSPIP authorized 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 was 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 was calculated at the end of each and every quarter and
was primarily based on the twelve-month change in the share price. If the share price return for a twelve-month
period was positive, a restricted share grant was calculated based on the return. Otherwise, no restricted shares
were granted to service providers for the period. If the share price return for a twelve-month period was negative,
but the return was still within the top two-thirds of the approved peer group performance, the Board of Directors
may have granted a discretionary restricted share award. The restricted share grants generally vested one-third
immediately on grant date, with the remaining two-thirds vesting on each of the two subsequent anniversary dates.
On vesting, common shares were issued to the service providers in exchange for the restricted shares outstanding.
The holders of restricted shares could elect to receive cash upon vesting in lieu of the number of shares to be
issued, subject to consent of the Corporation. However, it was the intent to settle unvested amounts with shares.
The following table is a continuity of restricted shares:
Balance at December 31, 2010
Granted
Vested (note 16)
Forfeited
Balance at December 31, 2011
Granted
Vested (note 16)
Forfeited
Balance at December 31, 2012
Restricted Shares
2,925,868
1,443,956
(2,212,031)
(40,083)
2,117,710
-
(2,078,798)
(38,912)
-
On July 9, 2012, Advantage’s Restricted Share Performance Incentive Plan expired and no new Advantage
restricted shares were granted during 2012. For the year ended December 31, 2012, Advantage issued 2,078,798
common shares to service providers in exchange for vested restricted shares.
(b) Stock option plan
On September 13, 2012, shareholders of Advantage approved a new Stock Option Plan, to provide for long term
equity based compensation for service providers. On October 1, 2012, the Board of Directors approved a grant of
15,996,366 stock options to service providers under the Stock Option Plan. Share based compensation costs of the
Stock Option Plan are determined using a Black-Scholes pricing model. Key inputs are as follows:
Volatility
Expected forfeiture rate
Dividend rate
Risk-free rate
44%
0.25%
0%
1.06%
Advantage Oil & Gas Ltd. - 73
17. Share based compensation (continued)
(b) Stock option plan (continued)
The following tables summarize information about changes in stock options outstanding at December 31, 2012:
Balance at January 1, 2012
Granted
Forfeited
Balance at December 31, 2012
Stock Options
-
15,996,366
(18,483)
15,977,883
Weighted-Average
Exercise Price
$
-
3.67
3.67
3.67
$
Grant Date
Number
October 1, 2012 1,997,257
October 1, 2012 1,997,240
October 1, 2012 1,997,234
October 1, 2012 1,997,244
October 1, 2012 1,997,195
October 1, 2012 1,997,249
October 1, 2012 1,997,225
October 1, 2012 1,997,239
15,977,883
Stock Options Outstanding
Stock Options Exerciseable
Expiry Date
Exercise
Price
January 1, 2013 $ 3.67
April 1, 2013 3.67
July 1, 2013 3.67
October 1, 2013 3.67
January 1, 2014 3.67
April 1, 2014 3.67
July 1, 2014 3.67
October 1, 2014 3.67
$ 3.67
Number
-
-
-
-
-
-
-
-
Exercise Price
$ -
-
-
-
-
-
-
-
- $ -
Share based compensation recognized by plan for the years ended December 31, 2012 and 2011 are as follows:
RSPIP
Stock Option Plan
Total share based compensation (note 21)
Capitalized
Net share based compensation expense
Year ended
December 31, 2012
$
6,200
2,878
9,078
(1,858)
7,220
$
Year ended
December 31, 2011
$
15,100
-
15,100
(2,752)
12,348
$
Advantage Oil & Gas Ltd. - 74
18. Net loss per share attributable to Advantage shareholders
The calculations of basic and diluted net loss per share are derived from both net loss attributable to Advantage common
shareholders and weighted average shares outstanding, calculated as follows:
Net loss attributable to Advantage shareholders
Basic and diluted
Weighted average shares outstanding
Basic and diluted
Year ended
December 31, 2012
Year ended
December 31, 2011
$
(89,125)
$
(152,772)
167,509,131
165,370,777
The calculation of diluted net loss per share for the years ended December 31, 2012 and 2011 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 loss per share calculation for the year ended December 31, 2012 was
10,029,070 (December 31, 2011 – 12,828,588 shares). As at December 31, 2012, the total convertible debentures
outstanding were convertible to 10,029,070 shares (December 31, 2011 – 10,029,070 shares).
Restricted shares have been excluded from the calculation of diluted net loss per share for the years ended December 31,
2012 and 2011, as the impact would have been anti-dilutive. There were no restricted shares outstanding at December 31,
2012. 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.
The exercise price of the outstanding stock options exceeded the average market price for the period. Therefore, they have
no effect on the calculation of diluted net loss per share.
19. Petroleum and natural gas sales
Crude oil and natural gas liquid sales
Natural gas sales
Total petroleum and natural gas sales
20. Other income
Gain on sale of property, plant and equipment
Miscellaneous income
Total other income
Year ended
December 31, 2012
$
164,860
104,045
268,905
$
Year ended
December 31, 2011
$
186,014
169,274
355,288
$
Year ended
December 31, 2012
$
16,964
595
17,559
$
Year ended
December 31, 2011
$
1,325
647
1,972
$
Advantage Oil & Gas Ltd. - 75
21. General and administrative expense (“G&A”)
Salaries and benefits
Share based compensation (note 17)
Office rent
Other
Total G&A
Capitalized (note 10)
Net G&A
22. Finance expense
Interest on bank indebtedness (note 11)
Interest on convertible debentures (note 12)
Accretion on convertible debentures (note 12)
Accretion of decomissioning liability (note 13)
Accretion of other liability (note 15)
Total finance expense
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
24. Commitments
Year ended
December 31, 2012
19,650
$
9,078
2,540
3,568
34,836
(6,656)
28,180
$
Year ended
December 31, 2011
20,778
$
15,100
2,337
3,955
42,170
(7,583)
34,587
$
Year ended
December 31, 2012
12,436
$
4,313
3,218
6,300
32
26,299
$
Year ended
December 31, 2011
11,483
$
8,871
3,360
5,748
99
29,561
$
Year ended
December 31, 2012
Year ended
December 31, 2011
$
$
9,687
902
(53,140)
(42,551)
(14,864)
916
(28,603)
(42,551)
$
$
$
$
$
$
(68)
443
25,662
26,037
4,131
2,274
19,632
26,037
Advantage has several lease commitments relating to office buildings and transportation. The estimated remaining annual
minimum operating lease payments are as follows:
2012
2013
2014
2015
December 31, 2012
$
-
15,280
12,499
2,371
30,150
$
December 31, 2011
15,543
$
14,413
11,812
2,246
44,014
$
Advantage Oil & Gas Ltd. - 76
25. 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 fair value, which is the amount
agreed upon by the transacting parties.
At December 31, 2012, amounts due from Longview totaled $2.2 million (December 31, 2011 - $1.7 million). Advantage
charged Longview $5.3 million during the year ended December 31, 2012 (December 31, 2011 - $3.8 million) under the
TSA. Dividends declared and paid or payable from Longview to Advantage during the year ended December 31, 2012
totaled $14.4 million (December 31, 2011 - $11.8 million). 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 officers and directors is as follows:
Salaries, director fees and short-term benefits
Share based compensation (1)
December 31, 2012
$
3,881
5,088
8,969
$
December 31, 2011
$
4,821
5,067
9,888
$
(1) Represents the grant date fair value of restricted shares and stock options granted for the respective years.
As at December 31, 2012, there is a $3.5 million commitment (December 31, 2011 - $4.0 million) related to change of
control or termination of employment of officers.
Advantage Oil & Gas Ltd. - 77
26. Segmented information
For the year ended December 31, 2012, the Corporation is comprised of two operating segments: Advantage Oil & Gas Ltd.
(“Advantage”) and Longview Oil Corp. (“Longview”). Advantage develops and operates natural gas focused properties in
Alberta. Longview develops and operates primarily conventional oil and natural gas liquids focused properties in Alberta and
Saskatchewan.
Results by operating segment for the years ended December 31, 2012 and 2011 are as follows:
Year ended
December 31, 2012
Year ended
December 31, 2011
(thousands of Canadian dollars)
Advantage Longview Consolidated
Advantage Longview Consolidated
Petroleum and natural gas sales
Less: royalties
Petroleum and natural gas revenue
$
129,131
(7,401)
121,730
$
139,774
(26,725)
113,049
$
268,905
(34,126)
234,779
$
241,420
(29,661)
211,759
$
113,868
(23,310)
90,558
$
355,288
(52,971)
302,317
Operating expense
General and administrative expense
Depreciation expense
Impairment of assets held for sale
Impairment of oil and gas properties
Exploration and evaluation expense
Finance expense
Gains (losses) on derivatives
Other income
Income (loss) before taxes and non-
controlling interest
Income tax recovery
Net income (loss) and
comprehensive income (loss)
before non-controlling interest
Net (income) loss attributable to non-
controlling interest
Net loss and comprehensive loss
attributable to Advantage
shareholders
Total assets
Total liabilities
Expenditures on property plant and
equipment
Dividends (paid) received
(42,796)
(24,250)
(90,376)
(73,000)
-
(140)
(19,316)
(240)
17,527
(46,433)
(3,930)
(41,799)
-
(31,865)
(41)
(6,983)
3,098
32
(89,229)
(28,180)
(132,175)
(73,000)
(31,865)
(181)
(26,299)
2,858
17,559
(59,473)
(31,043)
(125,074)
-
(187,684)
(2,846)
(24,934)
(1,032)
832
(29,693)
(3,544)
(27,853)
-
-
(209)
(4,627)
1,507
1,140
(89,166)
(34,587)
(152,927)
-
(187,684)
(3,055)
(29,561)
475
1,972
(110,861)
25,095
(14,872)
3,510
(125,733)
28,605
(219,495)
10,508
27,279
36,299
(192,216)
46,807
(85,766)
(11,362)
(97,128)
(208,987)
63,578
(145,409)
-
8,003
8,003
-
(7,363)
(7,363)
$
$
$
(85,766)
1,384,055
470,647
$
$
$
(3,359)
529,741
234,439
$
$
$
(89,125)
1,913,796
705,086
$
$
$
(208,987)
1,419,344
513,802
$
$
$
56,215
553,445
220,056
$
$
$
(152,772)
1,972,789
733,858
$
$
130,490
14,350
$
$
44,194
(28,085)
$
$
174,684
(13,735)
$
$
199,217
11,780
$
$
54,957
(18,695)
$
$
254,174
(6,915)
All transactions and balances included in amounts presented above between reportable operating segments are eliminated in
the consolidated financial statements.
Advantage Oil & Gas Ltd. - 78
27. Subsequent event
On February 26, 2013, Advantage announced that it has formed a special committee of independent directors to oversee the
strategic alternatives review process with the assistance of its advisors.
Advantage Oil & Gas Ltd. - 79
Directors
Stephen E. Balog (1)(2)(3)
Kelly I. Drader
Paul G. Haggis(1)
Andy J. Mah
Ronald A. McIntosh (1)(2)(3)
Sheila H. O’Brien (2)(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
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
Wells Fargo Bank N.A., London Branch
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. - 80