2013 Annual Report
Non-Consolidated Financial and Operating Highlights (1)
Three months ended
December 31
Year ended
December 31
2013
2012
2013
2012
$
$
$
34,304
20.57
23,822
$
$
$
$
$
$
$
$
0.14
14.30
2,961
0.02
69,512
49,034
153,697
86,250
168,383
168,383
$
$
$
36,556
19.15
16,890
$
$
$
$
$
$
$
$
0.10
8.85
3,172
0.02
35,849
35,467
161,630
86,250
168,383
168,383
$
$
$
142,943
20.08
85,310
$
$
$
$
$
$
$
$
0.51
11.98
12,479
0.07
155,370
49,034
153,697
86,250
168,383
168,383
$
$
$
126,749
15.97
47,046
$
$
$
$
$
$
$
$
0.28
5.94
14,350
0.09
130,570
35,467
161,630
86,250
168,383
167,509
108,260
79
108,734
18,122
116,929
1,261
124,495
20,749
113,947
507
116,989
19,498
122,069
1,337
130,091
21,682
Financial ($000, except as otherwise indicated)
Sales including realized hedging
per boe
Funds from operations
per share (2)
per boe
Dividends received from Longview
per share (2)
Total capital expenditures
Working capital deficit (3)
Bank indebtedness
Convertible debentures (face value)
Shares outstanding at end of period (000)
Basic weighted average shares (000)
Operating
Daily Production
Natural gas (mcf/d)
Crude oil and NGLs (bbls/d)
Total mcfe/d (4)
Total boe/d (4)
Average prices (including hedging)
Natural gas ($/mcf)
Crude oil and NGLs ($/bbl)
2.70
65.21
(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,
$
$
$
$
3.39
77.01
and trade and other accrued liabilities
(4) A boe and mcfe conversion ratio has been calculated using a conversion rate of six thousand
cubic feet of natural gas equivalent to one barrel of oil.
$
$
3.10
76.01
$
$
2.09
68.35
CONTENTS
Message to Shareholders ................................................................................................................................................................................................ 3
Reserves ............................................................................................................................................................................................................................ 6
Consolidated Management’s Discussion & Analysis .............................................................................................................................................. 11
Consolidated Financial Statements ............................................................................................................................................................................ 36
Consolidated Statement of Financial Position ................................................................................................................................................. 41
Consolidated Statement of Comprehensive Loss ........................................................................................................................................... 42
Consolidated Statement of Changes in Shareholders’ Equity ....................................................................................................................... 43
Consolidated Statement of Cash Flows ............................................................................................................................................................ 44
Notes To The Consolidated Financial Statements ......................................................................................................................................... 45
Advantage Oil & Gas Ltd. - 2
The following Message to Shareholders discusses the non-consolidated financial and operating
results for Advantage, excluding Longview.
MESSAGE TO SHAREHOLDERS
Increased Funds from Operations driven by Glacier Production, Low Cost
Structure and Improved Gas Prices
(cid:1) Funds from operations for the fourth quarter of 2013, excluding dividends from Longview Oil Corp.
(“Longview”), increased 41% to $23.8 million or $0.14 per share as compared to the fourth quarter of
2012. Funds from operations during 2013 increased 81% to $85.3 million or $0.51 per share as
compared to 2012. The increase in funds from operations was supported by a continued reduction in
Advantage’s cost structure due to development at Glacier and an increase in realized natural gas
prices for the quarter and year.
(cid:1) The tax free dividend income received from Longview amounted to $3.0 million ($0.02/share) during
the fourth quarter of 2013 and $12.5 million ($0.07/share) for 2013 due to Advantage’s 45.1%
ownership in the common shares of Longview in 2013.
(cid:1) Glacier production increased to 135 mmcfe/d (22,500 boe/d) in early March, approximately one
month ahead of our Phase VI budget schedule. Production averaged 117.0 mmcfe/d (19,498 boe/d)
for 2013 and averaged 108.7 mmcfe/d (18,122 boe/d) during the fourth quarter of 2013. The 2013
average production rate included the non-core assets from January 1 to April 30, 2013. Production
during the fourth quarter of 2013 was impacted by minor facility outages at Glacier to accommodate
field gathering system work in preparation for the eventual tie-in of new Phase VI Montney wells.
(cid:1) The royalty rate in 2013 was 5.4% as compared to 5.7% during 2012. The reduction in royalty rate
reflects the disposition of the non-core assets and increased production from Glacier where royalty
rates of approximately 5% are realized on our Montney wells.
(cid:1) Operating costs decreased 68% to $0.28/mcfe ($1.66/boe) in the fourth quarter of 2013 compared to
the same period in 2012. The decrease in operating costs was due to the divestment of the higher cost
non-core assets and the continued improvement in operating efficiencies achieved through our
Glacier Montney development. Advantage’s operating costs for 2013 which included the non-core
assets to April 30, 2013 decreased 47% to $0.48/mcfe ($2.88/boe) compared to 2012.
(cid:1) Advantage’s operating netback during the fourth quarter of 2013 was $3.00/mcfe which is 93% of our
realized natural gas price of $3.21/mcfe. This strong cash margin is due to the industry leading low
cost structure at Glacier and is a key success factor in our go forward three year development plan
which is targeted to deliver 190% cash flow per share growth at an average natural gas price of
$3.75/GJ.
(cid:1) Total capital expenditures in the fourth quarter of 2013 were $69.5 million and $155.4 million for the
2013 year which resulted from ongoing activities in our Glacier Phase VI development program.
(cid:1) On a pro forma basis after giving consideration to net proceeds of $90 million received from the sale
of the Longview common shares, Advantage’s bank debt was $63.7 million and total debt was $199.0
million as of December 31, 2013.
(cid:1) Advantage’s estimated tax pools as of December 31, 2013 are approximately $1.1 billion of which
$0.8 billion are categorized as immediately deductible at a rate of 100%.
Advantage Oil & Gas Ltd. - 3
Glacier Operations On-Track with Three Year Development Plan
Advantage’s Glacier three year development plan is targeted to deliver 100% production per share growth
and 190% cash flow per share growth. Production is expected to grow to 183 mmcfe/d in 2015, 205
mmcfe/d in 2016 and 245 mmcfe/d in 2017. The three year development plan is supported by continuing
strong operational results and a solid financial strategy which includes an improved balance sheet and
hedging program. The three year development plan is designed to maintain an average total debt to
forward cash flow ratio of 1.5x based on an average natural gas price of AECO Cdn $3.75/GJ. Advantage
has hedged an average of 47% of its forecast production through to Q1 2016 at an average price of
$3.86/mcf.
Strong Initial Production from New Phase VI Glacier Wells
(cid:1) Only nine of the 22 new Phase VI Montney wells were required to ramp production to our 135
mmcfe/d Phase VI target which was achieved approximately one month ahead of schedule. The
remaining Phase VI wells will be brought on stream as required to maintain the 135 mmcfe/d
production rate through the balance of 2014.
(cid:1) Advantage’s record Upper Montney well at 05-20-76-12W6 which demonstrated a final production
test rate of 21 mmcf/d was initially brought on production at rates of up to 21 mmcf/d and then
restricted to approximately 10 mmcf/d for the last 80 days. The production rate has been restricted to
manage the flow back of frac sand through well site equipment which is typical in most higher rate
Montney wells. The 05-20-76-12W6 well is still producing at a strong flowing wellhead pressure of
7,620 kpa compared to our average gas gathering system pressure of 3,000 kpa. During the first 80
days of production, the 05-20-76-12W6 well has produced 0.7 bcf.
(cid:1) Two Lower Montney wells located at 15-31-75-13W6 and 10-31-75-13W6 were initially brought on
production at rates of up to 15 mmcf/d and 11 mmcf/d and then restricted to a rate of 8.0 mmcf/d for
each well. The wells have produced for an average of 125 days and each well has produced
approximately 1 bcf during this period. These wells, which were completed with slickwater and
modified completion techniques, are demonstrating significantly improved performance compared to
older Lower Montney wells.
(cid:1) Since the winter of 2012, a total of 15 Upper and Lower Montney wells that were completed with
slickwater and brought on production are demonstrating performance which is trending at or above
our Phase VII budget type curve (based on an average initial 30 day production rate of 6.9 mmcf/d).
(cid:1) Advantage’s record Middle Montney well located at 12-02-76-12W6 which demonstrated a final
production test rate of 13 mmcf/d, including 20 bbl/mmcf of free condensate, was initially brought on
production at restricted rates of up to 9.5 mmcf/d. This well has been further rate restricted to
approximately 6.0 mmcf/d for the last 20 days to manage the flow back of frac sand and to control the
amount of free condensate that our facilities can handle at this time since our Glacier gas plant does
not currently have liquid extraction or condensate stabilization processes installed. The 12-02-76-
12W6 well is still producing at a strong wellhead pressure of 10,100 kPa compared to our average gas
gathering system pressure of 3,000 kpa.
Advantage Oil & Gas Ltd. - 4
Glacier Phase VII Glacier Development Program Underway
(cid:1) The Glacier Phase VII drilling program was accelerated during the first quarter of 2014 due to lower
than anticipated capital expenditures in our Phase VI program. The lower capital spending resulted
from improved drilling and well completion efficiencies which reduced well costs below our original
budget estimates.
(cid:1) To date, four new Phase VII wells have been rig released. One drilling rig is currently situated on a
six well pad that will continue drilling through spring breakup. Two additional rigs will be deployed
once weather conditions permit access to new drilling sites. A total of 33 wells are included in our
Phase VII drilling program.
(cid:1) Engineering design is nearing completion for the expansion of our 100% owned Glacier gas plant.
The expansion work is targeted for completion during the second quarter of 2015 and includes the
installation of a shallow cut liquids extraction process and increased natural gas processing capacity
to accommodate our Phase VII production target of 183 mmcfe/d. The engineering design will allow
our Glacier gas plant to ultimately provide 245 mmcfe/d of processing capacity to accommodate our
three year development plan through to 2017.
(cid:1) Design plans are also underway for increasing the transportation capacity of the sales gas lateral
which connects the Glacier gas plant to TransCanada Pipeline’s main sales pipeline to accommodate
our three year development plan and beyond.
Advantage’s strong operating and financial achievements during 2013 combined with simplification of
the Corporate structure have positioned the company as an industry leading low cost Montney producer
with strong growth. We look forward to reporting results on our progress as we execute Advantage’s
Glacier three year development plan.
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 Gross Working Interest basis (before royalty
burdens and excluding royalty interests) 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) is included in
Advantage's Annual Information Form ("AIF") and is available at www.advantageog.com and www.sedar.com.
Highlights – Gross Working Interest Reserves
December 31, 2013
December 31, 2012
Proved plus probable reserves (mboe)
Present Value of 2P reserves discounted at 10%, before tax ($000)(1)
Net Asset Value per Share discounted at 10%, before tax (2)
Reserve Life Index (proved plus probable - years) (3)
Reserves per Share (proved plus probable) (2)
Bank debt per boe of reserves (4)
Convertible debentures per boe of reserves (4)
282,847
2,118,740
$11.44
42.8
1.68
$0.54
$0.30
268,020
$1,694,555
$9.26
35.4
1.59
$0.60
$0.32
(1) Assumes that development 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, 2013 and 2012.
(3) Based on Q4 average production and working 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.
Gross Working Interest Reserves
Summary as at December 31, 2013
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
6
-
-
6
1
7
-
-
-
-
-
-
758
243
6,084
7,085
5,949
13,034
205,253
27,648
759,424
992,325
626,509
1,618,834
34,973
4,851
132,655
172,479
110,368
282,847
Advantage Oil & Gas Ltd. - 6
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%
$786,135
117,613
2,604,490
3,508,238
3,140,500
$6,648,738
Before Income Taxes Discounted at
10%
15%
$465,720
69,208
692,264
1,227,192
891,548
$2,118,740
$395,466
58,238
398,953
852,657
591,703
$1,444,360
(1) Advantage’s crude oil, natural gas and natural gas liquid reserves were evaluated using Sproule’s product price forecast effective
December 31, 2013 prior to the provision for income taxes, interests, debt services charges and general and administrative
expenses. It should not be assumed that the discounted future revenue estimated by Sproule represents the fair market value of the
reserves.
(2) Assumes that development will occur, without regard to the likely availability to the Company of funding required for that
development.
Sproule Price Forecasts
The present value of future net revenue at December 31, 2013 was based upon crude oil and natural gas pricing
assumptions prepared by Sproule effective December 31, 2013. These forecasts are adjusted for reserve quality,
transportation charges and the provision of any applicable sales contracts. The price assumptions used over the next
seven years are summarized in the table below:
Year
2014
2015
2016
2017
2018
2019
2020
WTI Edmonton Light Alberta AECO-C
Natural Gas
($Cdn/mmbtu)
4.00
3.99
4.00
4.93
5.01
5.09
5.18
Crude Oil
($Cdn/bbl)
92.64
89.31
89.63
101.62
103.14
104.69
106.26
Crude Oil
($US/bbl)
94.65
88.37
84.25
95.52
96.96
98.41
99.89
Henry Hub Exchange
Rate
Natural Gas
($US/mmbtu)($US/$Cdn)
4.17
4.15
4.17
5.04
5.12
5.19
5.27
0.94
0.94
0.94
0.94
0.94
0.94
0.94
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, 2012
Present value proved and probable reserves
Undeveloped land (2)
Working capital (deficit) and other
Convertible debentures
Bank debt
Longview shares (3)
Net asset value - December 31, 2013
Net asset value per Share (1) - December 31, 2013
0%
$34.58
$6,648,738
6,831
(50,264)
(86,250)
(153,697)
90,353
$6,455,711
$38.34
10%
$9.26
15%
$5.80
$2,118,740
6,831
(50,264)
(86,250)
(153,697)
90,353
$1,444,360
6,831
(50,264)
(86,250)
(153,697)
90,353
$1,925,713
$1,251,333
$11.44
$7.43
(1) Based on 168.383 million Shares outstanding at December 31, 2013 and 2012.
(2) Represents amount paid for new 27,680 net acres of undeveloped land at Glacier.
(3) Represents the net proceeds from the sale of Longiew shares that closed February 28, 2014.
Gross Working Interest Reserves Reconciliation
Proved
Opening balance Dec. 31, 2012
Extensions
Improved recovery
Infill Drilling
Discoveries
Economic factors
Technical revisions
Acquisitions
Dispositions
Production
Light &
Medium Oil
(mbbl)
1,363
-
-
-
-
6
30
-
(1,302)
(91)
Heavy
Oil
(mbbl)
3
-
-
-
-
-
-
-
(3)
-
Natural Gas
Liquids
(mbbl)
4,430
2,927
-
-
-
(16)
2,315
-
(2,477)
(94)
Natural
Oil
Gas Equivalent
(mboe)
170,187
18,997
-
-
-
(258)
11,477
-
(20,807)
(7,117)
(mmcf)
986,344
96,420
-
-
-
(1,489)
54,793
-
(102,152)
(41,591)
Closing balance at Dec. 31, 2013
6
-
7,085
992,325
172,479
Advantage Oil & Gas Ltd. - 8
Gross Working Interest Reserves Reconciliation (continued)
Proved + Probable
Opening balance Dec. 31, 2012
Extensions
Improved recovery
Infill Drilling
Discoveries
Economic factors
Technical revisions
Acquisitions
Dispositions
Production
Light &
Medium Oil
(mbbl)
2,190
-
-
-
-
11
30
-
(2,133)
(91)
Heavy
Oil
(mbbl)
9
-
-
-
-
1
(1)
-
(9)
-
Natural Gas
Liquids
(mbbl)
6,413
6,599
-
-
-
(15)
3,723
-
(3,591)
(94)
Natural
Oil
Gas Equivalent
(mboe)
268,020
39,940
-
-
-
(355)
13,195
-
(30,836)
(7,117)
(mmcf)
1,556,450
200,043
-
-
-
(2,110)
56,656
-
(150,615)
(41,591)
Closing balance at Dec. 31, 2013
7
-
13,035
1,618,833
282,847
Finding, Development & Acquisitions Costs (“FD&A”) (1)(2)(3)
2013 FD&A Costs – Gross Working Interest Reserves excluding Future Development Capital
Capital expenditures ($000)
Acquisitions net of dispositions ($000)
Total capital ($000)
Total mboe, end of year
Total mboe, beginning of year
Production, mboe
Reserve additions, mboe
2013 FD&A costs ($/boe)
2012 FD&A costs ($/boe)
Three year average FD&A costs ($/boe)
2013 F&D costs ($/boe)
2012 F&D costs ($/boe)
Three year average F&D costs ($/boe)
Proved
$155,370
(70,403) (4)
$84,967
172,479
170,187
(7,117)
9,409
$9.03
$3.09
$(2.75)
$5.14
$3.44
$5.25
Proved + Probable
$155,370
(70,403) (4)
$84,967
282,847
268,020
(7,117)
21,944
$3.87
$2.01
$(2.31)
$2.94
$2.24
$3.76
Advantage Oil & Gas Ltd. - 9
NI 51-101
2013 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 ($000)
Reserve additions, mboe
2013 FD&A costs ($/boe)
2012 FD&A costs ($/boe)
Three year average FD&A costs ($/boe)
2013 F&D costs ($/boe)
2012 F&D costs ($/boe)
Three year average F&D costs ($/boe)
Proved
$155,370
(70,403) (4)
152,889
$237,856
9,409
$25.28
$6.58
$3.52
$10.20
$6.91
$8.77
Proved + Probable
$155,370
(70,403) (4)
272,189
$357,156
21,944
$16.28
$4.29
$3.60
$8.10
$4.51
$6.59
(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.
(4) Includes net cash proceeds from dispositions closed in 2013 and $17.5 million of estimated net cash proceeds from the sale of
investments in Questfire expected to close in 2014.
Advantage Oil & Gas Ltd. - 10
CONSOLIDATED MANAGEMENT’S DISCUSSION & ANALYSIS
The following Management’s Discussion and Analysis (“MD&A”), dated as of March 27, 2014, 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, 2013 and should be read in conjunction with the December 31, 2013 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. All references in the MD&A and consolidated financial statements are to Canadian dollars unless otherwise
indicated. The term “boe” or barrels of oil equivalent and “mcfe” or thousand cubic feet equivalent may be misleading, particularly if
used in isolation. A boe or mcfe conversion ratio of six thousand cubic feet of natural gas equivalent to one barrel of oil (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.
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, effect of commodity prices on the
Corporation's financial results, condition and performance; effect of changes in the $US/$Canadian exchange rate, changes in
Canadian crude oil differentials between WTI and Canadian realized pricing, and quality and transportation adjustments on
Advantage’s realized prices; industry conditions, including effect of changes in commodity prices on the crude oil and natural gas
industry and demand for crude oil and natural gas; the Corporation's hedging strategy, including its anticipated effect on the volatility
of Advantage's future cash flows and the funding of its capital expenditure program and on the volatility of Longview Oil Corp.'s
(“Longview”) sales and stability of funds from operations; effect of commodity price risk management activities on the Corporation,
including on cash flows, sales and credit risk; the Corporation's plans to mitigate credit risk; terms of the Corporation's and
Longview's derivative contracts, including the timing of settlement of such contracts; effect of fluctuations in commodity prices and
foreign exchange rates as compared to valuation assumptions on actual gains or losses realized on cash settlement of derivatives;
average royalty rates and the impact of well depths, well production rates and commodity prices on average corporate royalty rates;
projected royalty rates, including the estimated royalty rate for the life of a Glacier Montney horizontal well; Advantage's estimated
operating costs at Glacier for the first quarter of 2014; Advantage's expectations regarding decreased general and administrative
expenses through 2014, including the estimated amount of such expenses, as a result of the termination of the TSA (as defined
herein) with Longview; terms of the Corporation's and Longview's equity compensation plans; 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;
terms of the Corporation's and Longview's credit facilities, including timing of next review of the credit facilities; the Corporation's
expectations regarding extension of Advantage's credit facilities at each annual review, effect of revisions or changes in reserve
estimates and commodity prices on the borrowing base, and limitations on the utilization of hedging contracts; terms of the
Corporation's convertible debentures; the ability of the Corporation to manage its capital structure, the Corporation's strategy for
managing its capital structure, including the use of financial and operational forecasting processes, and the timing of reviews of capital
structure and forecast information by management and the Board; future commitments and contractual obligations; effect of the
Corporation's continual financial assessment processes on the Corporation's ability to mitigate risks; the Corporation's ability to
satisfy all liabilities and commitments, including a working capital deficit, and meet future obligations as they become due;
Advantage's focus on development of the natural gas resource play at Glacier; the Corporation's expectations as to its ability to
maintain and increase production, as applicable, from Glacier at the levels and for the periods disclosed herein; the focus of each of
the Corporation's and Longview's capital drilling program; the Corporation's drilling plans at Glacier; the Corporation's beliefs
regarding the potential for Middle Montney natural gas liquids on certain recently acquired assets located southeast of Glacier and the
terms of the licenses for such assets; Longview's plans to advance their waterflood projects in Alberta; and anticipated changes in
accounting standards. 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.
Advantage Oil & Gas Ltd. - 11
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;
individual well productivity; 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; ability to access
sufficient capital from internal and external sources; credit risk; 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; that current or, where
applicable, proposed assumed industry conditions, laws and regulations will continue in effect or as anticipated as described herein;
and that the estimates of the Corporation’s production, reserves and resources volumes and the assumptions related thereto
(including commodity prices and development costs) are accurate in all material respects.
Management has included the above summary of assumptions and risks related to forward-looking information provided in this
MD&A in order to provide shareholders with a more complete perspective on Advantage's future operations and such information
may not be appropriate for other purposes. Advantage’s actual results, performance or achievement could differ materially from those
expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events
anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits that Advantage will
derive there from. Readers are cautioned that the foregoing lists of factors are not exhaustive. These forward-looking statements are
made as of the date of this MD&A and Advantage disclaims any intent or obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or results or otherwise, other than as required by applicable
securities laws.
Advantage Oil & Gas Ltd. - 12
Consolidation of Longview Oil Corp.
At December 31, 2013, Advantage owned 21,150,010 common shares of Longview, representing an interest of approximately 45.1%
in Longview. As Advantage held the single largest ownership interest of Longview and other ownership interests were comparatively
dispersed, Advantage was considered to control Longview. Accordingly, the financial and operating results of Longview were
consolidated 100% within Advantage and non-controlling interest was recognized which represented Longview’s independent
shareholders 54.9% 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. On February 4, 2014, Advantage entered into an agreement to sell its remaining 21,150,010
common shares of Longview at a price of $4.45 per share. The offering closed on February 28, 2014 and Advantage received net
proceeds of $90.0 million, all of which were used to reduce existing bank indebtedness. Concurrent with closing, Advantage ceased to
consolidate Longview.
A Technical Services Agreement (“TSA”) existed between Advantage and Longview whereby Advantage provided the necessary
personnel and technical services to manage Longview's business and Longview reimbursed Advantage on a monthly basis for its
share of administrative charges based on respective levels of production. The officers of Longview provided services to Longview
under the TSA but remained employees of Advantage. On February 1, 2014, Advantage and Longview terminated the TSA and
Advantage has no future obligations to Longview for the provision of personnel and services. Appropriate staffing and systems are
now in place to enable both organizations to run independently following termination of the TSA.
Non-core Asset Sales
The Advantage legal entity has systematically disposed of substantially all non-core assets since the third quarter of 2012 to focus on
continued development of Advantage's core Glacier Montney natural gas asset. In accordance with the requirements of IFRS,
Advantage ceased recognizing depreciation on property, plant and equipment effective when classified as held for sale. The carrying
amounts of exploration and evaluation assets, property, plant and equipment, decommissioning liabilities and derivative liabilities
associated with assets held for sale were presented separately on the statement of financial position and reflected at the lesser of fair
value less costs to sell and carrying amount. Net cash proceeds from all disposition transactions were used to reduce outstanding bank
indebtedness. The disposition transactions have had a pervasive impact on the financial and operating results and financial position of
the Advantage legal entity such that historical financial and operating performance may not be indicative of actual future
performance.
Advantage is now a pure play company focused on our signature Glacier Montney property. At December 31, 2013, Advantage’s
other assets included investments in Questfire Energy Corp. (“Questfire”) including a $32.6 million Convertible Senior Secured
Debenture (the “Questfire Debenture”) and 1.5 million Class B Shares of Questfire (the “Class B Shares”), which were received as
partial consideration for certain asset dispositions.
On March 26, 2014, Advantage entered an agreement for Questfire to repurchase the Questfire Debenture at an aggregate purchase
price of $13.6 million. Questfire also agreed that it would make an offer to purchase by way of issuer bid, all of the Class B Shares at a
purchase price of $2.60 per share. Advantage expects to receive total proceeds of $17.5 million on the disposition of its investments
in Questfire.
Advantage Oil & Gas Ltd. - 13
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 or mcfe basis that comprise
funds from operations. Funds from operations reconciled to cash provided by operating activities is as follows:
Three months ended
December 31
Year ended
December 31
($000)
Cash provided by operating activities
Expenditures on decommissioning liability
Changes in non-cash working capital
Finance expense (1)
Funds from operations
(1) Finance expense excludes non-cash accretion expense.
$
$
$
$
2013
57,355
1,533
(16,818)
(4,508)
37,562
2012
43,675
252
(7,152)
(4,246)
32,529
% change
31 %
508 %
135 %
6 %
15 %
2013
165,017
5,158
(4,052)
(17,618)
148,505
2012
106,956
2,395
14,864
(16,749)
107,466
% change
54 %
115 %
(127) %
5 %
38 %
$
$
$
$
Advantage Oil & Gas Ltd. - 14
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)
Other income (3)
Cash netbacks
Three months ended
December 31, 2013
Year ended
December 31, 2013
Advantage
Longview Consolidated
Advantage
Longview Consolidated
108,260
63
16
18,122
100%
-%
-%
6,503
4,226
506
5,816
18%
73%
9%
114,763
4,289
522
23,938
80%
18%
2%
113,947
249
258
19,498
98%
1%
1%
7,232
4,226
522
5,953
20%
71%
9%
121,179
4,475
780
25,452
79%
18%
3%
$
$
3.21
3.39
$
$
3.81
3.81
$
$
3.25
3.41
$
$
3.03
3.10
$
$
3.35
3.35
$
$
3.05
3.11
$
$
77.79
77.79
$
$
79.15
74.09
$
$
79.13
74.15
$
$
84.23
84.40
$
$
84.70
80.30
$
$
84.67
80.52
$
73.87
$
56.66
$
57.19
$
67.89
$
53.34
$
58.15
$
$
77.01
77.01
$
$
76.74
72.23
$
$
76.75
72.31
$
$
75.92
76.01
$
$
81.25
77.33
$
$
80.74
77.21
$
$
$
$
$
$
19.52
(0.91)
1.05
(1.66)
18.00
(2.36)
(1.90)
0.56
14.30
66.70
(11.97)
(3.67)
(21.56)
29.50
(1.33)
(2.49)
-
25.68
30.98
(3.60)
(0.09)
(6.50)
20.79
(2.11)
(2.04)
0.41
17.05
19.68
(1.06)
0.40
(2.88)
16.14
(2.70)
(1.70)
0.24
11.98
68.87
(12.10)
(3.12)
(21.08)
32.57
(1.25)
(2.54)
0.30
29.08
31.19
(3.64)
(0.42)
(7.14)
19.99
(2.36)
(1.89)
0.26
16.00
$
$
$
$
$
$
(1) General and administrative expense excludes non-cash G&A.
(2) Finance expense excludes non-cash accretion expense.
(3) Other income excludes non-cash other income.
Advantage Oil & Gas Ltd. - 15
($000, except as otherwise indicated)
Sales including realized hedging
Natural gas sales
Realized hedging gains
Natural gas sales including hedging
Crude oil and NGLs sales
Realized hedging gains (losses)
Crude oil and NGLs sales
including hedging
Total
per boe
Royalties
per boe
Royalty Rate (percentage of
petroluem and natural gas sales)
Operating expense
per boe
General and administrative
expense (1)
per boe
Three months ended
December 31, 2013
Year ended
December 31, 2013
Advantage
Longview Consolidated Advantage
Longview Consolidated
$
31,984
1,758
33,742
562
-
$
2,280
-
2,280
33,407
(1,966)
$
34,264
1,758
36,022
33,969
(1,966)
$
126,038
2,837
128,875
14,052
16
$
8,840
-
8,840
140,812
(6,789)
$
134,878
2,837
137,715
154,864
(6,773)
562
34,304
20.57
$
$
31,441
33,721
63.03
$
$
32,003
68,025
30.89
$
$
14,068
142,943
20.08
$
$
134,023
142,863
65.75
$
$
148,091
285,806
30.77
$
$
$
$
1,523
0.91
4.7%
$
$
6,405
11.97
17.9%
$
$
7,928
3.60
11.6%
$
$
7,534
1.06
5.4%
$
$
26,297
12.10
17.6%
$
$
33,831
3.64
11.7%
$
$
2,772
1.66
$
$
11,533
21.56
$
$
14,305
6.50
$
$
20,515
2.88
$
$
45,799
21.08
$
$
66,314
7.14
$
$
3,932
2.36
$
$
709
1.33
$
$
4,641
2.11
$
$
19,246
2.70
$
$
2,706
1.25
$
$
21,952
2.36
Interest on bank indebtedness
per boe
$
$
2,087
1.25
$
$
1,334
2.49
$
$
3,421
1.55
$
$
7,784
1.09
$
$
5,521
2.54
$
$
13,305
1.43
Interest on convertible debentures
per boe
Other income (2)
per boe
Funds from operations
per boe
per share (3) (4)
Dividends from Longview
(declared by Longview)
$
$
1,087
0.65
$
-
$
-
$
$
1,087
0.49
$
$
4,313
0.61
$
-
$
-
$
$
4,313
0.46
$
$
919
0.56
2%
$
-
-
$
3%
$
$
919
0.41
$
$
1,759
0.24
$
$
655
0.30
$
$
2,414
0.26
$
$
$
23,822
14.30
0.14
$
$
$
13,740
25.68
0.29
$
$
$
37,562
17.05
0.18
$
$
$
85,310
11.98
0.51
$
$
$
63,195
29.08
1.35
$
$
$
148,505
16.00
0.68
$
2,961
$
(6,570)
$
(3,609)
$
12,479
$
(27,670)
$
(15,191)
Expenditures on property, plant and
$
69,470
$
10,674
$
80,144
$
148,539
$
40,502
$
189,041
equipment
Expenditures on exploration and
42
146
188
6,831
146
6,977
evaluation assets
Total capital spending
Debt and working capital
Bank indebtedness
Convertible debentures
Working capital deficit
$
69,512
$
10,820
$
80,332
$
155,370
$
40,648
$
196,018
$
$
$
153,697
86,250
49,034
117,642
$
$
-
$
9,486
$
$
$
271,339
86,250
58,520
(1) General and administrative expense excludes non-cash G&A.
(2) Other income excludes non-cash other income.
(3) Based on basic weighted average shares outstanding applicable to each legal entity.
(4) Consolidated funds from operations per share excludes funds from operations attributable to the non-controlling interest of Longview.
Advantage Oil & Gas Ltd. - 16
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
2013
2012
% change
2013
2012
% change
$
$
$
$
57,355
37,562
0.18
17.05
$
$
$
$
43,675
32,529
0.14
13.05
31
15
29
31
%
%
%
%
$
$
$
$
165,017
148,505
0.68
16.00
$
$
$
$
106,956
107,466
0.47
10.53
54
38
45
52
%
%
%
%
(1) Based on basic weighted average shares outstanding and excludes funds
from operations attributable to the non-controlling interest of Longview.
For the three months ended December 31, 2013, Advantage realized an increase of 15% in funds from operations to $37.6 million
and an increase of 31% in cash netbacks to $17.05 per boe, as compared to the fourth quarter of 2012. For the year ended December
31, 2013, Advantage realized an increase of 38% in funds from operations to $148.5 million and an increase of 52% in cash netbacks
to $16.00 per boe, as compared to 2012. The increased funds from operations and cash netbacks have been primarily attributable to
significantly improved commodity prices and partially offset by lower production due to non-core asset dispositions. Realized natural
gas prices, excluding hedging, increased 9% for the three months and 41% for the year ended December 31, 2013, as compared to the
same periods of 2012. Realized crude oil and NGLs prices, excluding hedging, increased 8% for the three months and 9% for the
year ended December 31, 2013 when compared to 2012. Management has been proactive in mitigating commodity price risk and has
entered numerous hedging contracts to March 31, 2016 (refer to the section “Commodity Price Risk”). Average daily production
during the three months and year ended December 31, 2013 decreased as compared to the same periods of 2012 primarily
attributable to significant non-core property dispositions, which was finalized on April 30, 2013, to create a pure play company
focused on our signature Glacier Montney property. As a result of our continued focus at Glacier, Advantage has achieved an
industry leading cost structure comprised of low royalty rates and operating expense with continued general and administrative cost
reductions. 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, disposition of our ownership interest of Longview, and changes in commodity prices,
historical financial and operating performance may not be indicative of actual future performance.
Petroleum and 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
$
2013
34,264
1,758
36,022
33,969
(1,966)
$
2012
34,310
(2,619)
31,691
40,122
1,131
% change
%
-
%
(167)
%
14
%
(15)
%
(274)
$
2013
134,878
2,837
137,715
154,864
(6,773)
$
2012
104,045
(2,382)
101,663
164,860
1,412
% change
%
%
%
%
%
30
(219)
35
(6)
(580)
32,003
68,025
$
41,253
72,944
$
(22)
%
%
(7)
148,091
285,806
$
166,272
267,935
$
%
%
(11)
7
Total sales excluding hedging during the fourth quarter of 2013 was $68.2 million, a decrease of $6.2 million or 8% when compared
to the same period of 2012 attributable to lower production due to non-core asset dispositions, partially offset by increased
commodity prices. However, for the year ended December 31, 2013, total sales excluding hedging was $289.7 million, an increase of
$20.8 million or 8% when compared to the same period of 2012 as increased commodity prices more than offset lower production
from non-core asset dispositions. Realized natural gas prices, excluding hedging, increased 9% for the three months and 41% for the
Advantage Oil & Gas Ltd. - 17
year ended December 31, 2013, as compared to the same periods of 2012. Realized crude oil and NGLs prices, excluding hedging,
increased 8% for the three months and 9% for the year ended December 31, 2013 when compared to 2012.
The Corporation’s financial results and condition will be dependent on the prices received for crude oil and natural gas production.
As such, the Corporation enters derivative contracts whereby realized hedging gains and losses partially offset commodity price
fluctuations, which can positively or negatively impact sales. Management has been proactive in mitigating commodity price risk and
has entered numerous hedging contracts to March 31, 2016 (refer to the section “Commodity Price Risk”). For the three months and
year ended December 31, 2013, we recognized net realized derivative losses on settled derivative contracts as a result of higher crude
oil prices, partially offset by realized derivative gains attributed from lower natural gas prices, as compared to our average hedge
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
2013
114,763
4,289
522
23,938
80%
18%
2%
% change
%
(9)
%
(12)
(59)
%
%
(12)
2012
125,455
4,883
1,265
27,057
77%
18%
5%
Year ended
December 31
2013
121,179
4,475
780
25,452
79%
18%
3%
% change
(8)
%
(7)
%
(39)
%
%
(9)
2012
131,007
4,799
1,283
27,917
78%
17%
5%
Average daily production during the three months and year ended December 31, 2013 decreased as compared to the same periods of
2012 primarily attributable to significant non-core property dispositions by Advantage.
Advantage’s stand-alone production averaged 108.7 mmcfe/d for the fourth quarter of 2013, as compared to 124.5 mmcfe/d for the
fourth quarter of 2012 due to several significant non-core gas weighted property dispositions from the third quarter of 2012 through
to the second quarter of 2013 (exceeding 6,000 boe/d) to create a pure play company focused on our signature Glacier Montney
property. Average daily production in 2013 from Glacier was 105 mmcfe/d, an increase of 14% from the prior year due to continued
strong well performance and development. In early March 2014 Glacier production reached the 135 mmcfe/d Phase VI
target approximately one month ahead of schedule. Nine new wells from Advantage’s Glacier Phase VI program were brought
on production to initially ramp production to 135 mmcfe/d with the remaining 13 new wells from our Phase VI program expected to
provide sufficient production inventory to maintain production at 135 mmcfe/d through to the end of 2014.
At Longview, daily production averaged 5,816 boe/d for the fourth quarter of 2013 with 82% from crude oil and NGLs, an 8%
decrease from the 6,308 boe/d realized during the fourth quarter of 2012. The majority of production declines related to natural gas
which fell by 24% compared to the fourth quarter of 2012 while higher value crude oil production remained comparable to the same
period of the prior year. On a year to date basis, total production averaged 5,953 boe/d versus 6,235 boe/d in 2012. The decrease in
total production occurred as natural gas and NGL volumes declined by 19% and 9%, respectively, due to normal production declines,
more than offsetting the 1% increase in crude oil production.
Advantage Oil & Gas Ltd. - 18
Commodity Prices and Marketing
Natural Gas
($/mcf, except where indicated)
Realized natural gas prices
Excluding hedging
Including hedging
AECO daily index
NYMEX ($US/mmbtu)
Three months ended
December 31
Year ended
December 31
2013
2012
% change
2013
2012
% change
$
$
$
$
3.25
3.41
3.52
3.63
$
$
$
$
2.97
2.75
3.22
3.36
%
9
%
24
%
9
%
8
$
$
$
$
3.05
3.11
3.18
3.67
$
$
$
$
2.17
2.12
2.40
2.80
41
%
47
%
32
%
%
31
Realized natural gas prices, excluding hedging, have increased significantly as compared to 2012 corresponding to increases in AECO
prices. 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, that resulted in
historic high inventory levels. Massive switching by electrical utilities from coal to natural gas during the 2012 summer combined with
the 2012/2013 prolonged winter reduced the inventory levels to a more balanced market and a significant improvement in pricing
during 2013.
Advantage’s realized natural gas prices include deductions for unutilized sales gas pipeline fees associated with TransCanada pipeline
firm service commitments of approximately 125 mmcf/d at Glacier for calendar 2013. We incur charges of approximately $0.25/mcf
on these service commitments and since Glacier production has averaged less than the commitments, the unutilized firm service costs
reduced our realized natural gas prices in comparison to AECO prices. Advantage has been successful is partially mitigating such
transportation commitments by assignment to third parties resulting in less unutilized firm service and lower deductions for 2013 as
compared to 2012.
Crude Oil and NGLs
($/bbl, except where indicated)
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
2013
2012
% change
2013
2012
% change
$
$
79.13
74.15
$
$
75.78
78.30
%
%
4
(5)
$
$
84.67
80.52
$
$
78.88
79.68
%
%
7
1
$
57.19
$
52.28
%
9
$
58.15
$
55.99
%
4
$
$
$
$
$
$
76.75
72.31
97.50
0.95
86.88
(15.75)
$
$
$
$
$
$
70.94
72.94
88.20
1.01
84.55
(2.78)
%
8
%
(1)
%
11
%
(6)
%
3
%
467
$
$
$
$
$
$
80.74
77.21
98.00
0.97
93.43
(7.60)
$
$
$
$
$
$
74.05
74.69
94.19
1.00
86.73
(7.46)
%
%
%
%
%
%
9
3
4
(3)
8
2
Realized crude oil and NGLs prices, excluding hedging, have increased as compared to 2012 due to modestly stronger Canadian
realized pricing. The West Texas Intermediate benchmark price (“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 Canadian crude oil differentials between WTI and Canadian realized pricing, the
$US/$Canadian exchange rate, and quality and transportation adjustments. Although differentials continue to remain volatile, the
WTI/Edmonton Light differential during the year ended December 31, 2013 approximated that for the same period of 2012.
Advantage Oil & Gas Ltd. - 19
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. 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 separately limit the utilization of derivative contracts for each of Advantage and Longview. Advantage is allowed to
hedge up to 65% of total estimated crude oil and natural gas production over the first three years and 50% over the fourth year.
Longview is allowed to hedge up to 60% of total estimated crude oil and natural gas production over the first two years and 50% over
the third year.
Advantage has entered into a number of natural gas hedges in support of our Glacier multi-year development plan. Our natural gas
hedges will reduce the volatility of future cash flows through to March 2016. Our current hedging positions are summarized as
follows:
Period
Q1 2014 to Q4 2014
Q1 2015 to Q4 2015
Q1 2016
Average
Production Hedged
60.2 mmcf/d
75.8 mmcf/d
52.1 mmcf/d
Forecast Production
Hedged
(net of royalties)
48%
51%
31%
Average Price
AECO ($Cdn.)
$3.81/mcf
$3.90/mcf
$3.88/mcf
Longview has entered into a number of crude oil hedges to reduce the volatility of sales to provide a measure of stability to their
funds from operations that will fund capital expenditures and dividend payments. Longview’s current hedging positions are
summarized as follows:
Period
Q1 2014 to Q4 2014
Average
Production Hedged
2,000 bbls/d
Average Price
WTI ($Cdn.)
$94.84/bbl
A summary of realized and unrealized hedging gains and losses for the years ended December 31, 2013 and 2012 are as follows:
($000)
Realized gains (losses) on derivatives
Natural gas
Crude oil
Total realized 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
2013
2012
% change
2013
2012
% change
$
1,758
(1,966)
(208)
$
(2,619)
1,131
(1,488)
(167)
(274)
(86)
%
%
%
$
2,837
(6,773)
(3,936)
$
(2,382)
1,412
(970)
(11,472)
1,133
(10,339)
(10,547)
$
4,058
(1,777)
2,281
793
$
(383)
(164)
(553)
(1,430)
%
%
%
%
(6,043)
(4,769)
(10,812)
(14,748)
$
2,142
1,686
3,828
2,858
$
(219)
(580)
306
%
%
%
(382)
(383)
(382)
(616)
%
%
%
%
For the three months and year ended December 31, 2013, we recognized net realized derivative losses on settled derivative contracts
as a result of higher crude oil prices, partially offset by realized derivative gains attributed from lower natural gas prices, as compared
to our average hedge prices. As at December 31, 2013, the fair value of the derivative contracts outstanding and to be settled was a
net liability of approximately $7.0 million, a change of $8.1 million from the $1.1 million net asset at December 31, 2012 due to
generally stronger commodity prices. For the year ended December 31, 2013, this $8.1 million loss due to the change in the fair value
of the derivative contracts was recognized in income as an unrealized derivative loss (December 31, 2012 – $3.8 million unrealized
Advantage Oil & Gas Ltd. - 20
derivative gain) together with the recognition of a $2.7 million unrealized derivative loss associated with the net liability of derivative
contracts outstanding that were subsequently assigned to Questfire upon disposition of corresponding assets. The valuation of the
derivatives is the estimated fair value to settle the contracts as at December 31, 2013 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 from January 1, 2014 to March 31, 2016 corresponding to when the Corporation will recognize sales from production.
Royalties
Royalties ($000)
per boe
Royalty Rate (percentage of petroleum and
natural gas sales)
Three months ended
December 31
Year ended
December 31
2013
$
$
7,928
3.60
2012
$
$
7,915
3.18
% change
%
-
%
13
2013
33,831
3.64
$
$
2012
34,126
3.34
$
$
% change
%
%
(1)
9
11.6%
10.6%
1.0
%
11.7%
12.7%
(1.0)
%
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. Our average corporate
royalty rates are impacted by well depths, well production rates, and commodity prices.
Royalties for the three months and year ended December 31, 2013 are generally comparable to the same periods of 2012 whereby
reduced royalties from disposed non-core properties that generally attracted higher royalty rates were offset by additional royalties
attributed from stronger commodity prices. On a stand-alone basis, the royalty rate realized by each of Advantage and Longview for
the current quarter was 4.7% and 17.9%, respectively. Advantage’s royalty rates are predominately based on our significant natural gas
development at Glacier where the royalty rate for the life of a Glacier Montney horizontal well is approximately 5% due to industry
provincial incentive programs. As production from Glacier has become a larger proportion of total production, we have experienced
a continual reduction in our realized royalty rate.
Operating Expense
Operating expense ($000)
per boe
Three months ended
December 31
Year ended
December 31
2013
14,305
6.50
$
$
2012
22,196
8.92
$
$
% change
(36)
(27)
%
%
2013
66,314
7.14
$
$
2012
89,229
8.73
$
$
% change
(26)
(18)
%
%
Operating expense for the three months and year ended December 31, 2013 decreased as compared to the same periods of 2012
attributable to significant non-core property dispositions.
Operating expense per boe realized by Advantage on a stand-alone basis for the fourth quarter of 2013 was $1.66/boe ($0.28/mcfe),
compared to $5.23/boe ($0.87/mcfe) for the fourth quarter of 2012. Advantage operating costs have decreased with disposition of
higher cost non-core assets from the third quarter of 2012 through to the second quarter of 2013. In the first quarter of 2014,
Advantage estimates operating expenses at Glacier are $0.27/mcfe due to the continued efficiencies created by processing our natural
gas through our 100% owned Glacier gas plant.
Advantage Oil & Gas Ltd. - 21
At Longview, total operating expenses for the three months and year ended December 31, 2013 were comparable to the same periods
of 2012. Although total operating costs have remained relatively stable, operating costs per boe for the year ended December 31,
2013 increased by 4% to $21.08/boe, due to the variation of production during these periods. Additionally, to help stabilize
fluctuating power costs, Longview has fixed the price of 0.8 MW at $55.41/MWh for the period from January 2013 to December
2014.
General and Administrative Expense
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
Three months ended
December 31
Year ended
December 31
2013
2012
% change
2013
2012
% change
$
$
$
$
4,641
2.11
677
0.31
$
$
$
$
6,067
2.44
2,423
0.97
$
$
5,318
2.42
$
$
8,490
3.41
(24)
(14)
(72)
(68)
(37)
(29)
%
%
%
%
%
%
$
$
$
$
21,952
2.36
5,456
0.59
$
$
27,408
2.95
80
$
$
$
$
20,960
2.05
7,220
0.71
%
5
%
15
%
(24)
%
(17)
$
$
28,180
2.76
121
%
(3)
%
7
%
(34)
Cash general and administrative (“G&A”) expense decreased for the three months ended December 31, 2013 as Advantage began to
realize cost efficiencies associated with the non-core asset dispositions which was finalized on April 30, 2013. Cash G&A increased
slightly for the year ended December 31, 2013 compared to 2012 due to one-time costs including retention and staff rationalization
associated with the asset dispositions and costs incurred during Advantage’s strategic alternatives review process that commenced in
early 2013 and was concluded on February 4, 2014. On February 1, 2014, Advantage and Longview terminated the TSA and
Advantage has no future obligations to Longview for the provision of personnel and services. Appropriate staffing and systems are
now in place to enable both organizations to run independently following termination of the TSA. As a result, Advantage currently
has 25 full time employees and expects to incur significantly lower cash G&A that will continue to decrease through 2014 to
approximately $1.20/boe ($0.20/mcfe).
Non-cash G&A expense is comprised of share based compensation. Advantage had a restricted share performance incentive plan
that expired during the third quarter of 2012 and no Advantage restricted shares were granted during 2012. 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. 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 based on the determination of fair value on grant date, the estimated number of restricted
shares or stock options to vest, and certain management estimates. The fair value of share based compensation is the estimated fair
value on grant date calculated utilizing option pricing models, including estimates, assumptions and available market data. As such,
the fair value determined on grant date and recognized as expense over the vesting period is not cash and the actual gains or losses
realized on eventual vesting and exercise can vary materially from the fair value.
For the year ended December 31, 2013, 2.0 million stock options expired unexercised, 2.0 million stock options were exercised for
cash consideration of approximately $40,000, and 3.8 million new stock options were granted. Advantage stand-alone recognized $5.2
million of compensation cost as non-cash G&A expense related to the amortization of the fair value of stock options granted over
the vesting period.
Longview non-cash G&A expense is comprised of restricted shares and for the year ended December 31, 2013, no restricted shares
were granted and $0.3 million of compensation cost was recognized as non-cash G&A expense.
Advantage Oil & Gas Ltd. - 22
Depreciation Expense
Depreciation expense ($000)
per boe
Three months ended
December 31
Year ended
December 31
2013
27,882
12.66
$
$
2012
26,453
10.63
$
$
% change
%
5
%
19
2013
111,188
11.97
$
$
2012
132,175
12.94
$
$
% change
(16)
%
%
(7)
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 the year ended December 31, 2013, depreciation expense has
decreased compared to 2012 due to the reduced rate of depreciation per boe and lower production attributable to significant non-
core property dispositions. The rate of depreciation per boe has decreased as Advantage ceased depreciation of assets held for sale in
accordance with the requirements of IFRS (refer to the section “Non-core Asset Sales”).
Impairment of Assets Held for Sale
Impairment of assets held for sale ($000)
2013
$
-
2012
$
73,000
% change
(100)
%
2013
$
-
2012
$
73,000
% change
(100)
%
Three months ended
December 31
Year ended
December 31
The carrying amounts of exploration and evaluation assets, property, plant and equipment and decommissioning liabilities associated
with the Advantage assets held for sale were presented separately on the statement of financial position at December 31, 2012 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 year ended December 31, 2012. The sale of these assets has been completed (refer to the section “Non-core Asset Sales”).
Impairment of Oil and Gas Properties
Three months ended
December 31
Year ended
December 31
2013
2012
% change
2013
2012
% change
Impairment of oil and gas properties ($000)
$
-
$
31,865
(100)
%
$
-
$
31,865
(100)
%
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.
Exploration and Evaluation Expense
($000)
Exploration and evaluation expense
2013
$
59
2012
$
41
% change
44
%
2013
$
195
2012
$
181
% change
%
8
Three months ended
December 31
Year ended
December 31
Exploration and evaluation expense represents exploration and evaluation costs related to undeveloped land that expired during the
periods.
Advantage Oil & Gas Ltd. - 23
Interest on Bank Indebtedness
Interest on bank indebtedness ($000)
per boe
Average effective interest rate
Three months ended
December 31
Year ended
December 31
2013
$
$
3,421
1.55
5.1%
2012
$
$
3,159
1.27
4.5%
% change
%
%
%
8
22
0.6
$
$
2013
13,305
1.43
5.0%
$
$
2012
12,436
1.22
4.9%
% change
%
7
%
17
%
0.1
Interest on bank indebtedness for 2013 has been slightly higher as compared to 2012 with a modest increase in effective interest rates
and average bank indebtedness. Our consolidated bank indebtedness outstanding at the end of December 31, 2013 was $271.3
million, a decrease of $1.2 million from December 31, 2012, consisting of $153.7 million and $117.6 million for each of the legal
entities Advantage and Longview, respectively. The Corporation’s interest rates have increased due to the moderately higher debt to
cash flow ratio as calculated pursuant to our Credit Facilities 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
Three months ended
December 31
Year ended
December 31
2013
2012
% change
2013
2012
% change
$
$
1,087
0.49
$
$
1,087
0.44
%
-
%
11
$
$
4,313
0.46
$
$
4,313
0.42
%
-
%
10
$
$
843
0.38
$
$
808
0.32
%
4
%
19
$
$
3,346
0.36
$
$
3,218
0.31
%
4
%
16
Interest and accretion on convertible debentures for 2013 are comparable to 2012 as there have been no changes in our convertible
debentures outstanding. We have $86.2 million of 5% convertible debentures outstanding that are due to mature January 30, 2015.
Accretion on Decommissioning Liability
Accretion on decommissioning
liability ($000)
per boe
Three months ended
December 31
Year ended
December 31
2013
2012
% change
2013
2012
% change
$
$
840
0.38
$
$
1,613
0.65
(48)
(42)
%
%
$
$
5,169
0.56
$
$
6,300
0.62
(18)
(10)
%
%
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. 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 3.20% of the liability. The
decommissioning liability has decreased significantly during 2013 primarily due to $125.0 million derecognized attributable to non-
core property dispositions and a $37.9 million decrease in the net present value of the decommissioning liability due to an increase in
the risk-free rate.
Advantage Oil & Gas Ltd. - 24
Other Income (Expense)
($000)
Gain (loss) on sale of assets held for sale
Gain (loss) on sale of property, plant and
equipment
Interest income - Questfire Debenture
Accretion income - Questfire Debenture
Unrealized loss - Questfire Class B Shares
Miscellaneous income
Three months ended
December 31
Year ended
December 31
2013
$
505
2012
$
5,476
% change
(91)
%
2013
(6,354)
$
2012
$
-
% change
100
%
(1,800)
492
569
(750)
427
(557)
$
-
-
-
-
9
5,485
$
100
100
100
100
4,644
(110)
%
%
%
%
%
%
(1,800)
1,312
1,516
(900)
1,102
(5,124)
$
16,964
-
-
-
595
17,559
$
(111)
100
100
100
85
(129)
%
%
%
%
%
%
On April 30, 2013, Advantage closed a disposition transaction with Questfire and consideration consisted of $40.2 million of cash,
the Questfire Debenture with a face value of $32.6 million and 1.5 million Class B Shares of Questfire. As a result, Advantage has
recognized a $6.4 million loss on disposition as the fair value assigned to the consideration received was less than the carrying value of
the assets held for sale. Advantage recognized $1.3 million of interest income earned at a 6% interest rate on the Questfire
Debenture. The fair value of the Questfire Debenture was based on a discounted cash flow model at a discount rate of 18% such that
the fair value assigned of $25.4 million was less than the face value. Advantage records accretion income each reporting period to
increase the carrying value to the fair value by the maturity date and therefore recognized $1.5 million of accretion income. The Class
B Shares are recognized at fair value based on quoted trading prices and we recognized an unrealized loss of $0.9 million associated
with a decrease in the fair value since acquired.
During the fourth quarter of 2013, Longview disposed of a non-core property and recognized a loss of $1.8 million as the
consideration received was less than the carrying value of the assets.
Taxes
Deferred income taxes arise from differences between the accounting and tax bases of our assets and liabilities. For the year ended
December 31, 2013, the Corporation recognized a deferred income tax expense of $2.2 million as a result of the $4.8 million net
income before taxes and non-controlling interest. As at December 31, 2013, the Corporation had a deferred income tax asset balance
of $39.1 million and a deferred income tax liability balance of $3.0 million.
Canadian Development Expenses
Canadian Exploration Expenses
Canadian Oil and Gas Property Expenses
Non-capital losses
Undepreciated Capital Cost
Other
$
Estimated Tax Pools
December 31, 2013
($ millions)
Longview Consolidated
190
66
295
860
223
25
1,659
50
-
295
108
62
4
519
$
$
$
Advantage
140
$
66
-
752
161
21
1,140
$
Advantage Oil & Gas Ltd. - 25
Net Income Attributable to Non-Controlling Interest
At December 31, 2013, Advantage had a 45.1% ownership interest in Longview with the remaining 54.9% held by outside interests or
non-controlling interests. As Advantage held the single largest ownership interest of Longview and other ownership interests were
comparatively dispersed, Advantage was 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, 2013, Advantage recognized a $6.0
million decrease to net income related to Longview’s net income consolidated within Advantage’s financial results but attributable to
the non-controlling interests (December 31, 2012 – $8.0 million increase to net income related to Longview’s net loss consolidated
within Advantage’s financial results).
On February 4, 2014, Advantage entered into an agreement to sell its remaining 21,150,010 common shares of Longview at a price of
$4.45 per share. The offering closed on February 28, 2014 and Advantage received net proceeds of $90.0 million, all of which were
used to reduce existing bank indebtedness. Concurrent with closing, Advantage ceased to consolidate Longview. As a result, historical
consolidated financial and operating performance may not be indicative of actual future performance.
Net Loss and Comprehensive Loss
Three months ended
December 31
Year ended
December 31
2013
2012
% change
2013
2012
% change
Net loss and comprehensive loss ($000)
per share
- basic and diluted
$
$
(5,403)
(0.03)
$
$
(60,218)
(0.36)
(91)
(91)
%
%
$
$
(3,382)
(0.02)
$
$
(89,125)
(0.53)
(96)
(96)
%
%
Advantage’s realized net loss for the year ended December 31, 2013, decreased $85.7 million as compared to the same period of 2012.
This improvement was primarily due to significantly higher funds from operations, less depreciation expense and no impairment
losses, partially offset by losses recognized on non-core asset dispositions. Funds from operations have improved considerably during
2013 due to increases in commodity prices and continued lower royalties and operating costs. Depreciation expense has decreased
due to the significant non-core gas weighted property dispositions that closed during the year. However, Advantage also recognized
an $8.2 million loss on the property dispositions as the fair value assigned to the consideration received was less than the carrying
value of the assets. Advantage did not recognize any impairment losses during 2013, while in 2012 both Advantage and Longview
recognized impairments that totaled $104.9 million.
Advantage Oil & Gas Ltd. - 26
Cash Netbacks
Petroleum and natural gas sales
Royalties
Realized loss on derivatives
Operating expense
Operating income
General and administrative (1)
Finance expense (2)
Other income (3)
Funds from operations and
cash netbacks
$
$
$
$
$
Three months ended
December 31
2013
per boe
2012
per boe
$
29.90
(3.18)
(0.60)
(8.92)
17.20
(2.44)
(1.71)
-
13.05
$
$000
74,432
(7,915)
(1,488)
(22,196)
42,833
(6,067)
(4,246)
9
32,529
30.98
(3.60)
(0.09)
(6.50)
20.79
(2.11)
(2.04)
0.41
17.05
$000
68,233
(7,928)
(208)
(14,305)
45,792
(4,641)
(4,508)
919
37,562
Year ended
December 31
2013
2012
$000
289,742
(33,831)
(3,936)
(66,314)
185,661
(21,952)
(17,618)
2,414
148,505
per boe
$
31.19
(3.64)
(0.42)
(7.14)
19.99
(2.36)
(1.89)
0.26
16.00
$
$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
$
$
$
$
$
$
(1) General and administrative expense excludes non-cash G&A.
(2) Finance expense excludes non-cash accretion expense.
(3) Other income excludes non-cash other income.
For the three months ended December 31, 2013, Advantage realized an increase of 15% in funds from operations to $37.6 million
and an increase of 31% in cash netbacks to $17.05 per boe, as compared to the fourth quarter of 2012. For the year ended December
31, 2013, Advantage realized an increase of 38% in funds from operations to $148.5 million and an increase of 52% in cash netbacks
to $16.00 per boe, as compared to 2012. The increased funds from operations and cash netbacks have been primarily attributable to
significantly improved commodity prices and partially offset by lower production due to non-core asset dispositions. Realized natural
gas prices, excluding hedging, increased 9% for the three months and 41% for the year ended December 31, 2013, as compared to the
same periods of 2012.
Advantage Oil & Gas Ltd. - 27
Contractual Obligations and Commitments
The Corporation has contractual obligations in the normal course of operations including purchases of assets and services, operating
agreements, transportation commitments, sales contracts, bank indebtedness and convertible debentures. These obligations are of a
recurring and consistent nature and impact cash flow in an ongoing manner. The following table is a summary of the Corporation’s
remaining contractual obligations and commitments. Advantage has no guarantees or off-balance sheet arrangements other than as
disclosed.
($ millions)
Building leases
Pipeline/transportation
Bank indebtedness (1)
Convertible debentures (2)
- principal
- interest
- principal
- interest
Total contractual obligations
Payments due by period
Total
1.5
13.1
2014
1.5
11.8
$
2015
$
-
1.3
$
272.5
20.1
-
13.6
272.5
6.5
86.2
6.4
399.8
$
-
4.3
31.2
$
86.2
2.1
368.6
$
(1) As at December 31, 2013, the Corporation’s bank indebtedness was governed by credit facility agreements for each of Advantage and Longview with a syndicate
of financial institutions. Under the terms of the agreements, the facilities are reviewed annually, with the next reviews scheduled in June 2014. 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. On disposition of Advantage’s investment in Longview on February 28, 2014, there is only one credit facility agreement remaining for
Advantage (refer to the section “Consolidation of Longview Oil Corp”).
(2) As at December 31, 2013, 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
153,697
49,034
202,731
86,250
288,981
168,382,838
4.61
776,245
$
$
$
December 31, 2013
Longview
$
117,642
9,486
127,128
-
127,128
46,928,094
4.81
225,724
$
$
$
Consolidated
$
271,339
58,520
329,859
86,250
416,109
$
(1) Working capital deficit is a non-GAAP measure that includes trade and other receivables,
prepaid expenses and deposits, and trade and other accrued liabilities.
(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
Advantage Oil & Gas Ltd. - 28
instruments, declaring a dividend, implementing a dividend reinvestment plan, adjusting capital spending, or disposing of assets or its
investments. 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
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. In order to strengthen our financial position and balance our cash flows,
Advantage has systematically disposed of substantially all non-core assets including its investment in the common shares of
Longview. The net cash proceeds from all disposition transactions were used to reduce outstanding bank indebtedness. Advantage is
now a pure play company focused on our signature Glacier Montney property. We will continue to be very cognizant of improving
our financial flexibility in the current environment.
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, 2013, Advantage had 168.4 million common shares outstanding and there were no changes in share capital
during the year ended December 31, 2013. As at March 27, 2014, Advantage had 169.1 million common shares outstanding.
The Corporation had $86.2 million of 5.00% convertible debentures outstanding at December 31, 2013 that were convertible to 10.0
million common shares based on the applicable conversion price and will mature in January 2015 (December 31, 2012 - $86.2 million
outstanding and convertible to 10.0 million common shares). Our convertible debenture obligation can be settled through the
payment of cash or issuance of common shares at Advantage’s option.
Bank Indebtedness, Credit Facilities and Other Obligations
At December 31, 2013, Advantage had consolidated bank indebtedness outstanding of $271.3 million consisting of $153.7 million
and $117.6 million for each of the legal entities Advantage and Longview, respectively. Bank indebtedness has decreased $1.2 million
since December 31, 2012. On October 24, 2013, Advantage announced an increase in the credit facility borrowing base from $230
million to $300 million which combined with Longview’s existing $200 million borrowing base resulted in a consolidated borrowing
base of $500 million as at December 31, 2013 (the “Credit Facilities”). Advantage’s 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 2014. There can be no assurance that the credit facilities will be renewed at the current
borrowing base levels at that time. On disposition of Advantage’s investment in Longview on February 28, 2014, Advantage received
net proceeds of $90.0 million that was used to reduce existing bank indebtedness, and there is only one credit facility agreement
remaining for Advantage (refer to the section “Consolidation of Longview Oil Corp”)
Advantage had a consolidated working capital deficiency of $58.5 million as at December 31, 2013. Our working capital includes
items expected for normal operations such as trade receivables, prepaids, deposits, and trade payables and accruals. Working capital
varies primarily due to the timing of such items, the current level of business activity including our capital expenditure program,
commodity price volatility, and seasonal fluctuations. Our working capital is normally in a deficit position due to our continuing
capital development activities. The working capital deficit has increased as at December 31, 2013 in conjunction with commencement
of our Phase VI capital development program at Glacier to increase production to 135 mmcfe/d. We do not anticipate any problems
in satisfying working capital deficit and meeting future obligations as they become due as they can be satisfied with funds from
operations, our available Credit Facilities, or proceeds from sale of investments.
Advantage Oil & Gas Ltd. - 29
Non-Controlling Interest
On completion of Longview’s initial public offering on April 14, 2011, Advantage owned 29,450,010 common shares of Longview
representing a 63% equity ownership with the remaining 37% equity ownership held by outside interests or non-controlling interests.
On May 22, 2012, Advantage sold 8,300,000 Longview common shares to a syndicate of underwriters at a price of $9.00 per common
share for gross proceeds of $74.7 million. At December 31, 2013, Advantage owned 21,150,010 common shares of Longview,
representing an interest of approximately 45.1% in Longview. As Advantage held the single largest ownership interest of Longview at
December 31, 2013 and other ownership interests were comparatively dispersed, Advantage was considered to control Longview. As
such, Advantage’s consolidated financial statements at December 31, 2013 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 was continually adjusted for the independent shareholders’ share of
Longview’s net income or loss that was consolidated within Advantage’s financial results and reduced for dividends declared by
Longview to the independent shareholders. Therefore, for the year ended December 31, 2013, Advantage recognized a $6.0 million
decrease to net income related to Longview’s net income consolidated within Advantage’s financial results but attributable to the
non-controlling interests. This $6.0 million increased non-controlling interest on the statement of financial position with a decrease of
$15.2 million related to dividends declared by Longview to the non-controlling interest ownership.
On February 4, 2014, Advantage entered into an agreement to sell its remaining 21,150,010 common shares of Longview at a price of
$4.45 per share. The offering closed on February 28, 2014 and Advantage received net proceeds of $90.0 million, all of which were
used to reduce existing bank indebtedness. Concurrent with closing, Advantage ceased to consolidate Longview.
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 (1)
Net capital expenditures (2)
Three months ended
December 31
2013
2012
Year ended
December 31
$
$
$
$
72,043
7,991
31
79
80,144
188
(2,457)
77,875
40,792
6,508
(65)
-
47,235
377
(2,996)
44,616
2013
162,703
26,204
55
79
189,041
6,977
(54,855)
141,163
2012
134,630
39,281
-
773
174,684
377
(13,967)
161,094
$
$
$
$
(1) Proceeds from property dispositons represents the net cash proceeds and excludes all other forms of consideration.
(2) Net capital expenditures excludes changes in non-cash working capital and change in decommissioning liability.
The Advantage legal entity spent $148.5 million on property, plant and equipment for the year ended December 31, 2013,
substantially all of which was incurred at Glacier. Advantage continues to focus on development of our Montney natural gas resource
play at Glacier, Alberta where we will continue to employ a phased development approach. During the first quarter of 2013, we
finished our Phase V capital program with an inventory of wells that maintained average daily production from Glacier for the 2013
year at 105 mmcfe/d, an increase of 14% from the prior year due to continued strong well performance and development. Our Phase
VI Glacier capital program commenced in the third quarter of 2013 with three drilling rigs and in early March 2014 Glacier
production reached the 135 mmcfe/d target approximately one month ahead of schedule. Nine new wells from Advantage’s
Glacier Phase VI program were brought on production to initially ramp production to 135 mmcfe/d with the remaining 13 new wells
from our Phase VI program expected to provide sufficient production inventory to maintain production at 135 mmcfe/d through to
the end of 2014. Additionally, Advantage has spent $6.7 million on exploration and evaluation assets to acquire an additional 43.25
sections (27,680 acres) of 100% working interest Montney lands. These lands are located southeast of Glacier in a fairway that we
believe is prospective for Middle Montney natural gas liquids. These land parcels are held under licenses which will not expire until
September 2017 and can be extended for an additional five years with the drilling of two horizontal wells. These lands can also be
continued indefinitely under production. Our total acreage position in the Montney has increased to 125.65 gross (120.35 net)
sections.
Advantage Oil & Gas Ltd. - 30
For the year ended December 31, 2013, Longview spent $40.6 million on property, plant and equipment and exploration and
evaluation assets which included $27.0 million in Saskatchewan, $5.8 million at Sunset, $3.2 million at Nevis, and $1.7 million at
Westerose, with the remaining spending for miscellaneous projects. Longview drilled a total of 18.1 net (24 gross) wells at a 95%
success rate, adding production of 1,738 boe/d (89% light oil). Consistent with their business strategy, Longview developed and
executed a sustainable and balanced 2013 budget that preserved a strong balance sheet and utilized funds from operations to maintain
their dividend policy and fund substantially all of their capital expenditures. Longview’s 2014 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. In addition, they plan on continuing to advance their
waterflood projects in Alberta through further enhancement of injection facilities in preparation for future in-fill drilling programs.
Sources and Uses of Funds
The following table summarizes the various funding requirements during the years ended December 31, 2013 and 2012 and the
sources of funding to meet those requirements:
($000)
Sources of funds
Funds from operations
Property dispositions
Change in non-cash working capital and other
Proceeds from Longview financing
Increase in bank indebtedness
Uses of funds
Expenditures on property, plant and equipment
Dividends declared by Longview to non-controlling interest
Expenditures on exploration and evaluation assets
Expenditures on decommissioning liability
Decrease in bank indebtedness
Change in non-cash working capital and other
Year ended
December 31
2013
2012
$
$
$
$
148,505
54,855
14,657
-
-
218,017
189,041
15,191
6,977
5,158
1,650
-
218,017
$
$
107,466
13,967
-
71,563
40,268
233,264
174,684
13,735
377
2,395
-
42,073
233,264
$
$
Funds from operations have increased primarily attributable to significantly improved commodity prices and partially offset by lower
production due to non-core asset dispositions. The funds from operations and $54.9 million in net cash proceeds from the non-core
asset dispositions were primarily used to fund capital expenditures during the current year. Bank indebtedness was relatively
unchanged during 2013 and 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.
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 loss ($000)
per share - basic and diluted
Total assets ($000)
Long term financial liabilities ($000) (1)
Year ended
Dec. 31, 2013
$
289,742
$
(3,382)
$
(0.02)
$
1,765,244
$
353,793
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
(1) Long term financial liabilities exclude derivative liability, decommissioning liability and deferred income tax liability.
Advantage Oil & Gas Ltd. - 31
Quarterly Performance
($000, except as otherwise
indicated)
Daily production
2013
2012
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Natural gas (mcf/d)
Crude oil and NGLs (bbls/d)
Total (boe/d)
114,763
4,811
23,938
118,875
4,738
24,551
123,843
5,366
26,007
127,398
6,127
27,360
125,455
6,148
27,057
126,606
5,724
26,825
132,411
5,880
27,949
139,664
6,582
29,859
Average prices
Natural gas ($/mcf)
Excluding hedging
Including hedging
AECO daily index
Crude oil and NGLs ($/bbl)
Excluding hedging
Including hedging
WTI ($US/bbl)
Total sales including realized hedging
Net income (loss)
per share - basic
- diluted
Funds from operations
$
$
$
3.25
3.41
3.52
$
$
$
2.47
2.62
2.45
$
$
$
3.48
3.37
3.55
$
$
$
3.00
3.05
3.20
$
$
$
2.97
2.75
3.22
$
$
$
2.07
2.07
2.28
$
$
$
1.65
1.67
1.90
$
$
$
2.02
2.02
2.17
$
$
$
$
$
$
$
$
76.75
72.31
97.50
68,025
(5,403)
(0.03)
(0.03)
37,562
$
$
$
$
$
$
$
$
93.52
85.82
105.82
66,091
(1,342)
(0.01)
(0.01)
34,475
$
$
$
$
$
$
$
$
80.35
78.57
94.23
76,363
8,342
0.05
0.05
40,171
$
$
$
$
$
$
$
$
74.18
73.12
94.34
75,327
(4,979)
(0.03)
(0.03)
36,297
$
$
$
$
$
$
$
$
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
The table above highlights the Corporation’s performance for the fourth quarter of 2013 and also for the preceding seven quarters.
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. Wet weather delayed our Glacier capital program that resumed in September 2012 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 2012 and first quarter 2013 production. Production decreased in the second and third quarters of
2013 as we completed our final significant non-core asset disposition on April 30, 2013.
During the third quarter of 2013, sales and funds from operations decreased due to a temporary collapse in AECO prices that
impacted the entire Alberta natural gas industry attributable to a significant increase in the TransCanada interruptible tolls for the
transportation of natural gas from Alberta. This situation improved in the fourth quarter of 2013 with higher AECO prices for the
new natural gas contract year that began November 1, 2013.
Advantage has generally recognized 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 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
are also used to assess the borrowing bases for the Corporation’s credit facilities. Revision or changes in the reserve estimates can
Advantage Oil & Gas Ltd. - 32
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.
Changes in Accounting Policies
The Corporation has adopted, as required, the following new and revised standards along with any consequential amendments,
effective January 1, 2013.
IFRS 10 Consolidated Financial Statements
IFRS 10 is a new standard that has replaced SIC 12, “Consolidation – Special Purpose Entities” and IAS 27 “Consolidated and
Separate Financial Statements”. The new standard eliminates the risks and rewards approach and establishes control as the single
basis for determining the consolidation of an entity. We have determined that the new standard has no effect on the 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.
IFRS 11 – Joint Arrangements, IAS 28 – Investments in Associates and Joint Ventures
IFRS 11 supersedes IAS 31, Interests in Joint Ventures and SIC-13, Jointly Controlled Entities, Non-Monetary Contributions by
Ventures and requires a venture to classify its interest in a joint arrangement as a joint venture or joint operation depending on the
contractual rights and obligations of the parties that jointly controls the arrangement. Joint ventures will be accounted for using the
equity method of accounting as set out in IAS 28 whereas for a joint operation, the venture will recognize its share of the assets,
liabilities, revenue and expenses. The Corporation determined all of its joint arrangements to be joint operations as defined in IFRS
11 and that the adoption and application of these standards did not result in any changes in the accounting for joint arrangements.
IFRS 12 Disclosure of Interests in Other Entities
IFRS 12 provides the required disclosures for interests in subsidiaries, investees and joint arrangements. These disclosures 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. The adoption of this standard did not result in any changes or additions to existing
disclosures with respect to Questfire Energy Corp, an investee, or the Corporations interests in joint arrangements. With respect to
Longview Oil Corp., a subsidiary, the Corporation has disclosed dividends paid to non-controlling interests as well as summarized
information about the assets, liabilities, profit or loss and cash flows of Longview Oil Corp., in order to assist readers in
understanding the interest that non-controlling interests have in the Corporation’s activities and cash flows in note 27 of the
consolidated financial statements.
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. The
adoption of this standard did not require any adjustments to the valuation techniques used by the Corporation to measure fair value
and did not result in any measurement adjustments as at January 1, 2013.
IAS 28 – Investments in Associates and Joint Ventures
IAS 28 has been amended to include joint ventures in its scope and to address the changes in IFRS 10 to 13. The adoption of this
standard did not result in any changes or additions to existing disclosures.
Advantage Oil & Gas Ltd. - 33
IAS 36 Impairment of Assets
In May 2013, the IASB issued an amendment to IAS 36, Impairment of Assets. The amendment removes certain disclosures of the
recoverable amount of a CGU. The amendment is effective retrospectively for annual periods beginning on or after January 1, 2014.
As allowed by the standard, the Corporation early adopted the amendment in the current period. No additional disclosures were
required as a result of this early adoption.
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.
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, 2013. 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, 2013, 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, 2013. 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, 2013 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. - 34
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.
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 27, 2014
Advantage Oil & Gas Ltd. - 35
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, 2013 and 2012, and the
consolidated statements of comprehensive loss, changes in shareholders’ equity and cash flows for the years ended December 31,
2013 and 2012. The external auditors conducted their audits in accordance with Canadian generally accepted auditing standards and
the standards of the Public Company Accounting Oversight Board (United States) and have unlimited and unrestricted access to the
Audit Committee.
Andy J. Mah
President and Chief Executive Officer
March 27, 2014
Craig Blackwood
Vice President Finance and Chief Financial Officer
Advantage Oil & Gas Ltd. - 36
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, 2013, 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, 2013, as stated in their Auditor’s Report. PricewaterhouseCoopers LLP has provided such
opinion.
Andy J. Mah
President and Chief Executive Officer
March 27, 2014
Craig Blackwood
Vice President Finance and Chief Financial Officer
Advantage Oil & Gas Ltd. - 37
March 27, 2014
Independent Auditor’s Report
To the Shareholders of Advantage Oil & Gas Ltd.
We have completed integrated audits of Advantage Oil & Gas Ltd.’s 2013 and 2012 consolidated financial statements
and its internal control over financial reporting as at December 31, 2013. 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, 2013 and December 31, 2012 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. - 38
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, 2013 and December 31, 2012 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, 2013,
based on criteria established in Internal Control - Integrated Framework (1992), 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. - 39
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, 2013, based on criteria established in Internal Control - Integrated Framework (1992)
issued by COSO.
Chartered Accountants
Calgary, Alberta
March 27, 2014
Advantage Oil & Gas Ltd. - 40
Consolidated Statement of Financial Position
(thousands of Canadian dollars)
Notes
December 31, 2013
December 31, 2012
ASSETS
Current assets
Trade and other receivables
Prepaid expenses and deposits
Derivative asset
Assets held for sale
Total current assets
Non-current assets
Derivative asset
Investment - Questfire Class B Shares
Investment - Questfire Debenture
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
Liabilities associated with assets held for sale
Total current liabilities
Non-current liabilities
Derivative liability
Bank indebtedness
Convertible debenture
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
6
12
5
12
8
9
7
10
16
12
5
12
13
14
15
16
17
14
$
32,016
$
32,657
3,357
143
-
35,516
2,329
3,750
26,876
10,270
1,647,434
39,069
1,729,728
5,143
2,186
222,877
262,863
-
-
-
2,381
1,605,659
42,893
1,650,933
$
1,765,244
$
1,913,796
$
93,893
$
84,979
8,340
-
102,233
1,183
271,339
82,454
100,616
3,006
458,598
560,831
2,229,598
8,348
92,276
(1,255,588)
1,074,634
129,779
1,204,413
1,096
136,540
222,615
-
272,511
79,108
126,224
4,628
482,471
705,086
2,229,598
8,348
84,962
(1,252,206)
1,070,702
138,008
1,208,710
Total liabilities and shareholders' equity
$
1,765,244
$
1,913,796
Commitments (note 25)
Subsequent events (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. - 41
Consolidated Statement of Comprehensive Loss
(thousands of Canadian dollars, except for per share amounts)
Notes
Year ended
December 31, 2013
Year ended
December 31, 2012
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 (losses) on derivatives
Other income (expenses)
Income (loss) before taxes and non-controlling interest
Income tax recovery (expense)
Net income (loss) and comprehensive income (loss) before
non-controlling interest
Net (income) loss attributable to non-controlling interest
Net loss and comprehensive loss attributable to Advantage
shareholders
20
21
10
5
10
7
22
12
23
16
Net loss per share attributable to Advantage shareholders
Basic
Diluted
19
See accompanying Notes to the Consolidated Financial Statements
$
289,742
(33,831)
255,911
$
268,905
(34,126)
234,779
(66,314)
(27,408)
(111,188)
-
-
(195)
(26,133)
(14,748)
(5,124)
4,801
(2,202)
2,599
(5,981)
(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
$
(3,382)
$
(89,125)
$
$
(0.02)
(0.02)
$
$
(0.53)
(0.53)
Advantage Oil & Gas Ltd. - 42
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, 2012
Net loss and comprehensive loss
Share based compensation
Change in ownership interest, share based
compensation
Dividends declared by Longview ($0.59 per
Longview share)
Balance, December 31, 2013
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
$
2,229,598
-
-
$
8,348
-
-
$
84,962
-
7,314
$
(1,252,206)
(3,382)
-
$
1,070,702
(3,382)
7,314
$
138,008
5,981
-
$
1,208,710
2,599
7,314
17, 18
-
-
-
-
-
981
981
-
2,229,598
$
-
8,348
$
-
92,276
$
-
(1,255,588)
$
-
1,074,634
$
(15,191)
129,779
$
(15,191)
1,204,413
$
$
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
17, 18
-
-
-
-
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
$
See accompanying Notes to the Consolidated Financial Statements
Advantage Oil & Gas Ltd. - 43
Consolidated Statement of Cash Flows
(thousands of Canadian dollars)
Operating Activities
Income (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 loss (gain) on derivatives
(Gain) loss on sale of property, plant and equipment
Loss on sale of assets held for sale
Unrealized loss - Questfire Class B Shares
Accretion income - Questfire Debenture
Finance expense
Expenditures on decommissioning liability
Changes in non-cash working capital
Cash provided by operating activities
Financing Activities
Proceeds from sale of shares in Longview
Increase (decrease) in bank indebtedness
Dividends paid by Longview
Interest paid
Cash provided by (used in) financing activities
Investing Activities
Expenditures on property, plant and equipment
Expenditures on exploration and evaluation assets
Property dispositions
Cash used in investing activities
Net change in cash
Cash, beginning of year
Cash, end of year
Notes
Year ended
December 31, 2013
Year ended
December 31, 2012
$
4,801
$
(125,733)
18
10
5
10
7
12
10, 23
5, 23
8, 23
9, 23
22
5, 15
24
13
10, 24
7
5,456
111,188
-
-
195
10,812
1,800
6,354
900
(1,516)
26,133
(5,158)
4,052
165,017
-
(1,650)
(15,443)
(17,140)
(34,233)
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
(179,265)
(6,977)
55,458
(130,784)
-
-
$
-
(201,429)
(377)
13,527
(188,279)
-
-
$
-
See accompanying Notes to the Consolidated Financial Statements
Advantage Oil & Gas Ltd. - 44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2013 and 2012
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 300, 440 – 2nd 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 consolidated 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 consolidated financial statements are based on IFRS issued and outstanding as
of March 27, 2014, 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 12.
(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. The only significant operating subsidiary is Longview Oil Corp. (“Longview”), a public Canadian corporation
that is a junior oil-focused development and production company with properties located in Western Canada.
Advantage owns 45.1% of the common shares of Longview at December 31, 2013. Because the remaining ownership is
dispersed, Advantage is considered to control Longview. Therefore, Longview is accounted for on a consolidated basis
in these financial statements. The remaining 54.9% 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. - 45
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 is exposed, or has
rights to variable returns from its involvement with the entity and has the ability to affect those returns
through its power over the entity. 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 arrangements
A significant portion of the Corporation’s oil and natural gas activities involve joint operations. The
consolidated financial statements include the Corporation’s share of these joint operations 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 assets and 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.
On April 30, 2013, Advantage completed the sale of substantially all non-core assets (see note 5). Proceeds received
consisted of cash and non-cash consideration. The Questfire Class B Shares have been classified as financial assets at
fair value through profit or loss. The Questfire Debenture has been classified as financial assets at amortized cost.
Advantage Oil & Gas Ltd. - 46
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. - 47
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. - 48
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. - 49
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 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. - 50
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.
Advantage Oil & Gas Ltd. - 51
3. Significant accounting policies (continued)
(p) Changes in accounting policies
The Corporation has adopted, as required, the following new and revised standards along with any consequential
amendments, effective January 1, 2013.
IFRS 10 Consolidated Financial Statements
IFRS 10 is a new standard that has replaced SIC 12, “Consolidation – Special Purpose Entities” and IAS 27
“Consolidated and Separate Financial Statements”. The new standard eliminates the risks and rewards approach and
establishes control as the single basis for determining the consolidation of an entity. We have determined that the new
standard has no effect on the 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.
IFRS 11 – Joint Arrangements, IAS 28 – Investments in Associates and Joint Ventures
IFRS 11 supersedes IAS 31, Interests in Joint Ventures and SIC-13, Jointly Controlled Entities, Non-Monetary
Contributions by Ventures and requires a venture to classify its interest in a joint arrangement as a joint venture or joint
operation depending on the contractual rights and obligations of the parties that jointly controls the arrangement. Joint
ventures will be accounted for using the equity method of accounting as set out in IAS 28 whereas for a joint operation,
the venture will recognize its share of the assets, liabilities, revenue and expenses. The Corporation determined all of its
joint arrangements to be joint operations as defined in IFRS 11 and that the adoption and application of these
standards did not result in any changes in the accounting for joint arrangements.
IFRS 12 Disclosure of Interests in Other Entities
IFRS 12 provides the required disclosures for interests in subsidiaries, investees and joint arrangements. These
disclosures 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. The adoption of this standard did not
result in any changes or additions to existing disclosures with respect to Questfire Energy Corp, an investee, or the
Corporations interests in joint arrangements. With respect to Longview Oil Corp., a subsidiary, the Corporation has
disclosed dividends paid to non-controlling interests as well as summarized information about the assets, liabilities,
profit or loss and cash flows of Longview Oil Corp., in order to assist readers in understanding the interest that non-
controlling interests have in the Corporation’s activities and cash flows in note 26.
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. The adoption of this standard did not require any adjustments to the
valuation techniques used by the Corporation to measure fair value and did not result in any measurement adjustments
as at January 1, 2013.
IAS 28 – Investments in Associates and Joint Ventures
IAS 28 has been amended to include joint ventures in its scope and to address the changes in IFRS 10 to 13. The
adoption of this standard did not result in any changes or additions to existing disclosures.
IAS 36 Impairment of Assets
In May 2013, the IASB issued an amendment to IAS 36, Impairment of Assets. The amendment removes certain
disclosures of the recoverable amount of a CGU. The amendment is effective retrospectively for annual periods
beginning on or after January 1, 2014. As allowed by the standard, the Corporation early adopted the amendment in the
current period. No additional disclosures were required as a result of this early adoption.
Advantage Oil & Gas Ltd. - 52
3. Significant accounting policies (continued)
(q) 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.
Advantage Oil & Gas Ltd. - 53
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 12 – valuation of financial instruments;
• Note 5 – valuation and impairment of assets held for sale;
• Note 10 – valuation of property, plant and equipment;
• Note 7 & 10 – impairment of exploration and evaluation assets and property, plant and equipment;
• Note 9, 12 & 14 – valuation of convertible debentures;
• Note 15 – measurement of decommissioning liability;
• Note 16 – measurement of deferred income tax; and
• Note 18 – 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, 2013, Advantage controls 45.1% 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 7).
(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. - 54
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 7 & 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. - 55
5. Assets held for sale
On February 5, 2013, Advantage announced that it had signed a definitive agreement (the “Transaction”) with Questfire
Energy Corp. (“Questfire”) for the sale of certain oil and gas properties. The Transaction closed on April 30, 2013. The
Transaction, along with another minor sale that closed in January 2013, constituted the sale of substantially all of the non-
core assets of the Advantage legal entity. All Advantage legal entity assets and associated liabilities presented as held for sale
at December 31, 2012 have been derecognized from the Consolidated Statement of Financial Position. Consideration
received by Advantage from Questfire consisted of $40.2 million of cash, a Convertible Senior Secured Debenture
(“Questfire Debenture”) with a face value of $32.6 million and a fair value of $25.4 million at closing based on an 18%
discount rate applied to future cash flows, and 1.5 million Class B Shares of Questfire (“Questfire Class B Shares”) with a
fair value of $4.7 million at closing.
The following table provides detail of the assets and liabilities classified as held for sale as at December 31, 2013:
Assets held for sale
Balance at December 31, 2011
Transferred from property, plant and equipment - cost (note 10)
Transferred from property, plant and equipment - accumulated depreciation and impairment losses (note 10)
Transferred from exploration and evaluation assets (note 7)
Impairment of assets held for sale
Balance at December 31, 2012
Additions
Change in decommissioning liability
Disposals
Transferred to exploration and evaluation assets (note 7)
Balance at December 31, 2013
Liabilities associated with assets held for sale
Balance at December 31, 2011
Transferred from decommissioning liability (note 15)
Balance at December 31, 2012
Change in decommissioning liability
Accretion - decommissioning liability
Expenditures on decommissioning liability
Transferred from derivative liability
Disposals - decommissioning liability and derivative liability
Transferred to decommissioning liability (note 15)
Balance at December 31, 2013
$
$
-
581,444
(288,694)
3,127
(73,000)
222,877
590
(5,483)
(216,731)
(1,253)
$
-
$
$
-
136,540
136,540
(5,483)
582
(2,060)
2,671
(127,541)
(4,709)
$
-
For the year ended December 31, 2013, Advantage realized a loss on sale of assets held for sale of $6.4 million.
Advantage Oil & Gas Ltd. - 56
6. Trade and other receivables
Trade receivables
Receivables from joint venture partners
Other
7. Exploration and evaluation assets
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 5)
Balance at December 31, 2012
Additions
Dispositions
Exploration and evaluation expense
Transferred from assets held for sale (note 5)
Transferred to property, plant and equipment (note 10)
Balance at December 31, 2013
December 31, 2013
26,317
$
4,204
1,495
32,016
$
December 31, 2012
26,154
$
5,708
795
32,657
$
$
7,730
377
(113)
(181)
(2,305)
(3,127)
2,381
6,977
-
(195)
1,253
(146)
10,270
$
$
8.
Investment – Questfire Energy Corp. – Class B Shares
Advantage received as proceeds of the Transaction (note 5), 1,500,000 Questfire Class B Shares. The Questfire Class B
Shares are convertible at the option of Questfire any time after September 30, 2014, into a number of Class A Shares of
Questfire (“Questfire Class A Shares”) equal to $10.00 divided by the greater of $1.00 and the then current market price of
Questfire Class A Shares. The Questfire Class B Shares are convertible at the option of Advantage any time after November
30, 2016 on the same basis.
9.
Investment – Questfire Energy Corp. – Convertible Senior Secured Debenture
Advantage received as proceeds of the Transaction (note 5), a Convertible Senior Secured Debenture of Questfire with a
face value of $32.6 million. The terms of the Questfire Debenture are defined in the Indenture Agreement (the
“Indenture”): The Debenture bears interest at a rate of 6.0% per annum from April 30, 2013 to April 30, 2014, 7% per
annum from May 1, 2014 to April 30, 2015, and 9% per annum from May 1, 2015 to maturity on April 30, 2016. The
Questfire Debenture only becomes convertible at the option of Advantage for 30 days after any of the following events:
October 31, 2015; April 1, 2016; a default by Questfire as defined in the Indenture; any conversion of Questfire Class B
Shares into Questfire Class A Shares effected by Questfire; a change of control of Questfire as defined in the Indenture; the
election by Questfire to satisfy an interest payment in Questfire Class A Shares in accordance with terms defined in the
Indenture. If converted, the Questfire Debenture will be converted into Questfire Class A Shares at the then current market
price of the latter.
Advantage Oil & Gas Ltd. - 57
10. Property, plant and equipment
Cost
Balance at December 31, 2011
Additions
Change in decommissioning liability (note 15)
Disposals
Transferred from exploration and evaluation assets (note 7)
Transferred to assets held for sale (note 5)
Balance at December 31, 2012
Additions
Change in decommissioning liability (note 15)
Disposals
Transferred from exploration and evaluation assets (note 7)
Balance at December 31, 2013
Accumulated depreciation and impairment losses
Balance at December 31, 2011
Depreciation
Impairment of oil and gas properties
Disposals
Transferred to assets held for sale (note 5)
Balance at December 31, 2012
Depreciation
Disposals
Balance at December 31, 2013
$
$
Oil & gas
properties
$
2,352,639
173,911
11,095
(6,443)
2,305
(581,444)
1,952,063
188,451
(30,387)
(5,876)
146
2,104,397
$
Oil & gas
properties
$
477,939
131,503
31,865
(3,521)
(288,694)
349,092
110,650
(629)
459,113
$
$
Furniture and
equipment
4,467
$
773
-
-
-
-
5,240
-
-
-
-
5,240
$
$
Furniture and
equipment
1,880
$
672
-
-
-
2,552
538
-
3,090
$
$
Total
$
2,357,106
174,684
11,095
(6,443)
2,305
(581,444)
1,957,303
188,451
(30,387)
(5,876)
146
2,109,637
$
Total
$
479,819
132,175
31,865
(3,521)
(288,694)
351,644
111,188
(629)
462,203
$
$
Net book value
At December 31, 2012
At December 31, 2013
Oil & gas
properties
$
$
1,602,971
1,645,284
Furniture and
equipment
$
2,688
$
2,150
Total
$
$
1,605,659
1,647,434
During the year ended December 31, 2013, Advantage capitalized general and administrative expenditures directly related to
development activities of $11.7 million (December 31, 2012 - $6.7 million).
Advantage included future development costs of $2.1 billion (December 31, 2012 – $1.8 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%.
For the year ended December 31, 2012, Longview recognized an impairment of oil and gas properties of $31.9 million. The
impairment of oil and gas properties recognized relates to crude oil and natural gas producing assets in West Central Alberta.
The decline in the price of crude oil and discounted after-tax future net cash flows were considered to be indicators of
impairment.
Advantage Oil & Gas Ltd. - 58
10. Property, plant and equipment (continued)
Forecast crude oil prices used in the calculation of impairment of oil and gas properties for the year ended December 31,
2012 are as follows:
Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023 (1)
Edmonton Par
($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
11. Related party transactions
Transactions between Advantage and Longview
At December 31, 2013 and 2012, Advantage and Longview were bound by a Technical Services Agreement (“TSA”). 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, 2013, amounts due from Longview totaled $1.4 million (December 31, 2012 - $2.2 million). Advantage
charged Longview $5.2 million during the year ended December 31, 2013 (December 31, 2012 - $5.3 million) under the
Technical Services Agreement (“TSA”). Dividends declared and paid or payable from Longview to Advantage during the
year ended December 31, 2013 totaled $12.5 million (December 31, 2012 - $14.4 million). All amounts due to and from
Longview are non-interest bearing in nature, 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 on consolidation.
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, 2013
5,916
$
1,180
7,096
$
December 31, 2012
3,881
$
5,088
8,969
$
(1) Represents the grant date fair value of restricted shares and stock options granted for the respective years.
As at December 31, 2013, there is a $1.9 million commitment (December 31, 2012 - $3.5 million) related to change of
control or termination of employment of officers.
Advantage Oil & Gas Ltd. - 59
12. Financial risk management
Financial instruments of the Corporation include trade and other receivables, deposits, investment in Questfire Class B
Shares, investment in Questfire Debenture, trade and other accrued liabilities, bank indebtedness, convertible debentures
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 and bank indebtedness are all classified as financial liabilities at amortized cost. As at December 31,
2013, 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 Questfire Debenture has been classified as a financial asset at amortized cost. As at December 31, 2013, there was no
significant difference between the carrying amount reported on the Consolidated Statement of Financial Position and the
estimated fair value of the financial asset. No value was assigned to the conversion option, due to its restrictions and short
term to maturity.
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 resulting in fair values that
will vary over time as market conditions change. As at December 31, 2013, the estimated fair value of the outstanding
convertible debenture obligation was $86.7 million (December 31, 2012 - $86.0 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. Financial assets measured at fair value based on a
level 1 input consist solely of the investment in Questfire Class B Shares, using a quoted market price. The Corporation does
not have any financial 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 assets and
liabilities measured at fair value on a recurring basis, such as 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. - 60
12. 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,
oil and natural gas marketers, companies with whom we enter into hedging contracts, and Questfire. The maximum
exposure to credit risk is as follows:
Trade and other receivables
Deposits
Derivative asset
Questfire debenture
$
December 31, 2013
32,016
1,548
2,472
26,876
62,912
$
$
December 31, 2012
32,657
2,780
2,186
-
37,623
$
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, 2013, $0.9 million or 2.9% of trade and other receivables are outstanding for 90 days or
more (December 31, 2012 - $0.7 million or 2.2% 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,
2013 or 2012.
The Corporation’s most significant customer, a Canadian oil and natural gas marketer, accounts for $13.0 million of the
trade and other receivables at December 31, 2013 (December 31, 2012 - $12.6 million).
Advantage Oil & Gas Ltd. - 61
12. 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, 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 14). 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, 2013 and 2012 are as follows:
December 31, 2013
Trade and other accrued liabilities
Derivative liability
Bank indebtedness
Convertible debentures
- principal
- interest
- principal
- interest
$
Less than
one year
93,893
8,340
-
13,626
-
4,313
120,172
$
One to
three years
-
$
1,183
272,521
6,496
86,250
2,156
368,606
$
Three to
five years Thereafter
-
-
$
$
-
-
-
-
-
-
-
-
-
-
$
-
$
-
Total
$
93,893
9,523
272,521
20,122
86,250
6,469
488,778
$
Interest on bank indebtedness was calculated assuming conversion of the revolving credit facility to a one-year term facility.
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.
Advantage Oil & Gas Ltd. - 62
12. 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 13). Under the terms of the agreements, the facilities are reviewed
annually, with the next reviews scheduled in June 2014. 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, 2013 would
result in a $2.5 million change in net loss for the year ended December 31, 2013. 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, 2013 would
result in a $13.6 million change in net loss for the year ended December 31, 2013.
As at December 31, 2013, the Corporation’s hedging positions are summarized as follows:
Natural gas - AECO
Period
Q1 2014 to Q4 2014
Q1 2015 to Q4 2015
Q1 2016
Average
Production Hedged
60.2 mmcf/d
59.2 mmcf/d
42.7 mmcf/d
Average Price
AECO - $Cdn.
$3.81/mcf
$3.86/mcf
$3.90/mcf
Crude oil – WTI
Period
Q1 2014 to Q4 2014
Average
Production Hedged
2,000 bbls/d
Average Price
WTI - $Cdn.
$94.84/bbl
Advantage Oil & Gas Ltd. - 63
12. Financial risk management (continued)
(c) Price and currency risk (continued)
As at December 31, 2013, the fair value of the derivatives outstanding resulted in an asset of $2.5 million (December
31, 2012 – $2.2 million) and a liability of $9.5 million (December 31, 2012 – $1.1 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, 2013, $14.7 million was recognized in net loss as a derivative loss (December 31,
2012 - $2.9 million derivative gain). The table below summarizes the realized and unrealized gains (losses) on
derivatives.
Realized loss on derivatives
Unrealized gain (loss) on derivatives
(d) Interest rate risk
Year ended
December 31, 2013
$
Year ended
December 31, 2012
$
(3,936)
(10,812)
(14,748)
(970)
3,828
2,858
$
$
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, 2013, net income (loss)
and comprehensive income (loss) would have changed by $2.0 million (December 31, 2012 - $2.8 million) based on the
average debt balance outstanding during the year.
(e) Capital management
The Corporation manages its capital with the following objectives:
• To ensure sufficient financial flexibility to achieve the ongoing business objectives including replacement of
production, funding of future growth opportunities, and pursuit of accretive acquisitions; and
• To maximize shareholder return through enhancing the share value.
Advantage monitors its capital structure and makes adjustments according to market conditions in an effort to meet its
objectives given the current outlook of the business and industry in general. The capital structure of the Corporation is
composed of working capital (excluding derivative assets and liabilities), bank indebtedness, convertible debentures, and
share capital. Advantage may manage its capital structure by issuing new shares, repurchasing outstanding shares,
obtaining additional financing either through bank indebtedness or convertible debenture issuances, refinancing current
debt, issuing other financial or equity-based instruments, declaring a dividend, implementing a dividend reinvestment
plan, adjusting capital spending, or disposing of assets or its investments. The capital structure is reviewed by
Management and the Board of Directors on an ongoing basis.
Advantage Oil & Gas Ltd. - 64
12. Financial risk management (continued)
(e) Capital management (continued)
Advantage’s capital structure as at December 31, 2013 and 2012 is as follows:
Bank indebtedness (non-current) (note 13)
Working capital deficit (1)
Net debt
Convertible debentures maturity value (non-current)
Total debt
Shares outstanding (note 17)
Share closing market price ($/share)
Market capitalization (2)
Total capitalization
December 31, 2013
$
271,339
58,520
329,859
86,250
416,109
168,382,838
4.61
776,245
1,192,354
$
$
$
December 31, 2012
$
272,511
47,179
319,690
86,250
405,940
168,382,838
3.20
538,825
944,765
$
$
$
(1) Working capital deficit is a non-GAAP measure that includes trade and other receivables, prepaid expenses and deposits and trade and
other accrued liabilities.
(2) Market capitalization is a non-GAAP measure calculated by multiplying shares outstanding by the closing market share price on the applicable
date.
13. Bank indebtedness
Revolving credit facility:
Advantage
Longview
Discount on Bankers Acceptances and other fees
Balance, end of year
December 31, 2013
December 31, 2012
$
$
154,370
118,151
(1,182)
271,339
161,630
112,541
(1,660)
272,511
$
$
As at December 31, 2013, the Corporation had 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 2014 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 four years. Further, the aggregate of such contracts cannot
hedge greater than 65% of total estimated petroleum and natural gas production over three years and 50% over the fourth
year, in the Advantage legal entity, and cannot hedge greater than 60% of total estimated petroleum and natural gas
production over two years and 50% over the third year in the Longview 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, 2013 and 2012. 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
Advantage Oil & Gas Ltd. - 65
13. Bank indebtedness (continued)
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, 2013, the average
effective interest rate on the outstanding amounts under the facilities was approximately 5.0% (December 31, 2012 – 4.9%).
Advantage has no letters of credit issued and outstanding at December 31, 2013 or December 31, 2012.
14. Convertible debenture
The convertible unsecured subordinated debenture pays an annual coupon of 5%, paid semi-annually on January 31st and
July 31st of each year and is 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 debenture 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
AAV.DBH
Dec. 31, 2009
Jan. 30, 2015
8.60
$
$
73,019
13,231
86,250
(3,735)
$
82,515
The convertible debenture is redeemable at the option of the Corporation, upon providing appropriate advance notification
as per the debenture indenture: Redemption can only occur during the period after January 31, 2013 and on or before
January 30, 2015, provided that the Current Market Price exceeds 125% of the Conversion Price. The redemption price is
$1,000 per debenture, plus accrued and unpaid interest.
The balance of the convertible debenture outstanding at December 31, 2013 and changes in the liability and equity
components during the years ended December 31, 2013 and 2012 are as follows:
Trading symbol
Debentures outstanding
Liability component:
Balance at December 31, 2011
Accretion of discount
Balance at December 31, 2012
Accretion of discount
Balance at December 31, 2013
Equity component:
Balance at December 31, 2012
Balance at December 31, 2013
5.00%
AAV.DBH
86,250
$
75,890
3,218
79,108
3,346
82,454
$
$
$
$
8,348
8,348
There were no conversions of convertible debentures during the years ended December 31, 2013 and 2012.
Advantage Oil & Gas Ltd. - 66
15. 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 2014 and 2073. A risk-free rate of 3.20%
(December 31, 2012 – 2.37%) and an inflation factor of 2% (December 31, 2012 – 2%) were used to calculate the fair value
of the decommissioning liability at December 31, 2013. 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 from (to) assets held for sale (note 5)
Balance, end of year
16. Income taxes
The provision for income taxes is as follows:
Current income tax expense
Deferred income tax expense (recovery)
Income tax expense (recovery)
Year ended
December 31, 2013
126,224
$
4,587
3,908
1,335
(35,630)
(1,419)
(3,098)
95,907
4,709
100,616
$
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, 2013
-
$
2,202
2,202
$
Year ended
December 31, 2012
$
-
(28,605)
(28,605)
$
The provision for income taxes varies from the amount that would be computed by applying the combined federal and
provincial income tax rates for the following reasons:
Income (loss) before taxes and non-controlling interest
Combined federal and provincial income tax rates
Expected income tax expense (recovery)
Increase (decrease) in income taxes resulting from:
Non-deductible share based compensation
Change in estimated pool balances
Difference between current and expected tax rates
Effective tax rate
$
Year ended
December 31, 2013
4,801
25.00%
1,200
Year ended
December 31, 2012
$
(125,733)
25.00%
(31,433)
2,094
(2,350)
1,258
2,202
45.87%
$
2,281
1,022
(475)
(28,605)
22.75%
$
The Canadian combined statutory tax rate remained unchanged at 25.00% for 2013 and 2012.
Advantage Oil & Gas Ltd. - 67
16. Income taxes (continued)
The movement in deferred income tax liabilities and assets without taking into consideration the offsetting of balances
within the same tax jurisdiction is as follows:
Deferred income tax liability
Balance at December 31, 2011
Charged (credited) to income
Balance at December 31, 2012
Charged (credited) to income
Balance at December 31, 2013
Deferred income tax asset
Balance at December 31, 2011
Charged (credited) to income
Balance at December 31, 2012
Charged (credited) to income
Balance at December 31, 2013
Net deferred income tax liability (asset)
Balance at December 31, 2011
Charged (credited) to income
Balance at December 31, 2012
Charged (credited) to income
Balance at December 31, 2013
Property, plant and
equipment
$
Derivative
asset/liability
$
238,341
(1,095)
237,246
(18,807)
218,439
(704)
971
267
(2,058)
(1,791)
Total
$
237,637
(124)
237,513
(20,865)
216,648
$
$
$
Decommissioning
liability
$
Non-capital
losses
$
Other
$
Total
$
(63,935)
(2,282)
(66,217)
40,594
(25,623)
(176,419)
(27,728)
(204,147)
(11,422)
(215,569)
(6,943)
1,529
(5,414)
(6,105)
(11,519)
(247,297)
(28,481)
(275,778)
23,067
(252,711)
$
$
$
$
Longview
$
Advantage
$
Total
$
(39,383)
(3,510)
(42,893)
3,824
(39,069)
29,723
(25,095)
4,628
(1,622)
3,006
(9,660)
(28,605)
(38,265)
2,202
(36,063)
$
$
$
At December 31, 2013, Advantage has a $100 million outside basis difference related to its investment in Longview. It is not
probable that Advantage can utilize the capital loss that would be generated when the temporary difference reverses.
Accordingly, Advantage has not recognized a deferred income tax asset of $12.5 million relating to its investment in
Longview.
The estimated tax pools available at December 31, 2013 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
$
$
$
50,349
-
295,479
108,033
61,910
3,365
519,136
139,553
65,945
-
752,108
160,791
21,701
1,140,098
189,902
65,945
295,479
860,141
222,701
25,066
1,659,234
$
$
$
The non-capital loss carry forward balances above expire no earlier than 2023.
Advantage Oil & Gas Ltd. - 68
17. Share capital
(a) Authorized
The Corporation is authorized to issue an unlimited number of shares without nominal or par value.
(b) Issued
Balance at December 31, 2011
Share based compensation (note 18)
Balance at December 31, 2012 and 2013
Common Shares
166,304,040
2,078,798
168,382,838
18. Share based compensation
(a) Restricted share performance incentive plan
Amount
2,214,784
14,814
2,229,598
$
$
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. On vesting, common shares were issued to the service providers in exchange
for the restricted shares outstanding. On July 9, 2012, Advantage’s Restricted Share Performance Incentive Plan
expired and no new Advantage restricted shares were granted during 2012 or 2013. During the year ended
December 31, 2012, Advantage issued 2,078,798 common shares to service providers in exchange for vested
restricted shares.
The following table is a continuity of restricted shares:
Balance at December 31, 2011
Granted
Vested (note 17)
Forfeited
Balance at December 31, 2012 and 2013
Restricted Shares
2,117,710
-
(2,078,798)
(38,912)
-
Advantage Oil & Gas Ltd. - 69
18. Share based compensation (continued)
(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. Options are granted with exercise prices that approximate the
market price of common shares at the date of grant. Share based compensation costs of the Stock Option Plan are
determined using a Black-Scholes-Merton valuation model, using weighted average assumptions as follows:
Volatility
Expected forfeiture rate
Dividend rate
Risk-free rate
42%
0.25%
0%
1.04%
Volatility is based on historical stock prices at the close-of-trade-day over a historical time period.
The following tables summarize information about changes in stock options outstanding at December 31, 2013:
Balance at December 31, 2011
Granted
Forfeited
Balance at December 31, 2012
Expired
Exercised
Granted
Forfeited/cancelled
Balance at December 31, 2013
Stock Options
-
15,996,366
(18,483)
15,977,883
(1,994,658)
(1,994,641)
3,804,675
(2,732,416)
13,060,843
Weighted-Average
Exercise Price
$
$
-
3.67
3.67
3.67
3.67
3.67
3.69
3.68
3.68
$
Stock Options Outstanding
Stock Options Exercisable
Range of
Exercise Price
$3.67 - $3.69
Number of
Stock Options
Outstanding
13,060,843
Weighted Average
Remaining
Contractual Life
0.50
Weighted
Average
Exercise
Price
$ 3.68
Number of
Stock
Options
Exercisable
- $ -
Weighted
Average Exercise
Price
Share based compensation recognized by plan for the years ended December 31, 2013 and 2012 are as follows:
RSPIP
Stock Option Plan
Total share based compensation (note 21)
Capitalized
Net share based
compensation expense
Year ended
December 31, 2013
420
$
7,874
8,294
(2,838)
Year ended
December 31, 2012
6,200
$
2,878
9,078
(1,858)
$
5,456
$
7,220
Advantage Oil & Gas Ltd. - 70
19. 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, 2013
Year ended
December 31, 2012
$
(3,382)
$
(89,125)
168,382,838
167,509,131
The calculation of diluted net loss per share for the years ended December 31, 2013 and 2012 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 years ended December 31, 2013 and
2012 was 10,029,070 shares. As at December 31, 2013 and 2012, the total convertible debentures outstanding were
convertible to 10,029,070 shares.
The calculation of diluted net loss per share for the year ended December 31, 2013 excluded stock options, as their impact
would have been anti-dilutive. Total weighted average shares issuable in exchange for outstanding stock options for the year
ended December 31, 2013 was 1,445,884 shares (December 31, 2012 – nil).
Restricted shares have been excluded from the calculation of diluted net loss per share, as there were no restricted shares
outstanding at December 31, 2013 and 2012.
20. Petroleum and natural gas sales
Crude oil and natural gas liquid sales
Natural gas sales
Total petroleum and natural gas sales
Year ended
December 31, 2013
154,864
$
134,878
289,742
$
Year ended
December 31, 2012
164,860
$
104,045
268,905
$
Advantage Oil & Gas Ltd. - 71
21. General and administrative expense (“G&A”)
Salaries and benefits
Share based compensation (note 18)
Office rent
Other
Total G&A
Capitalized (note 10)
Net G&A
22. Finance expense
Interest on bank indebtedness (note 13)
Interest on convertible debentures (note 14)
Accretion on convertible debentures (note 14)
Accretion of decomissioning liability (note 15)
Accretion of other liability
Total finance expense
23. Other income (expenses)
Loss on sale of assets held for sale
Gain (loss) on sale of property, plant and equipment
Interest income - Questfire Debenture
Accretion income - Questfire Debenture
Unrealized loss - Questfire Class B Shares
Miscellaneous income
Total other income (expenses)
24. 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
Advantage Oil & Gas Ltd. - 72
Year ended
December 31, 2013
22,877
$
8,294
2,109
5,863
39,143
(11,735)
27,408
$
Year ended
December 31, 2012
19,650
$
9,078
2,540
3,568
34,836
(6,656)
28,180
$
Year ended
December 31, 2013
13,305
$
4,313
3,346
5,169
-
26,133
$
Year ended
December 31, 2012
12,436
$
4,313
3,218
6,300
32
26,299
$
Year ended
December 31, 2013
$
Year ended
December 31, 2012
-
$
16,964
-
-
-
595
17,559
$
(6,354)
(1,800)
1,312
1,516
(900)
1,102
(5,124)
$
Year ended
December 31, 2013
Year ended
December 31, 2012
$
$
641
1,786
8,914
11,341
4,052
(259)
7,548
11,341
$
$
$
$
$
$
9,687
902
(53,140)
(42,551)
(14,864)
916
(28,603)
(42,551)
25. Commitments
Advantage has several lease commitments relating to office buildings and transportation. The estimated remaining annual
minimum operating lease payments are as follows:
2013
2014
2015
Total commitments
December 31, 2013
-
13,260
4,305
17,565
$
December 31, 2012
15,280
12,499
2,371
30,150
$
Advantage Oil & Gas Ltd. - 73
26. Segmented information
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 year ended December 31, 2013 and 2012 are as follows:
Year ended
December 31, 2013
Year ended
December 31, 2012
(thousands of Canadian dollars)
Advantage Longview
Consolidated
Advantage Longview
Consolidated
Petroleum and natural gas sales
Less: royalties
Petroleum and natural gas revenue
$
140,090
(7,534)
132,556
$
149,652
(26,297)
123,355
$
289,742
(33,831)
255,911
$
129,131
(7,401)
121,730
$
139,774
(26,725)
113,049
$
268,905
(34,126)
234,779
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 (expenses)
Income (loss) before taxes and non-
controlling interest
Income tax recovery (expense)
Net income (loss) and
comprehensive income (loss) before
non-controlling interest
Net (income) loss attributable to non-
controlling interest
(20,515)
(24,426)
(72,140)
-
-
-
(18,225)
(3,190)
(3,979)
(45,799)
(2,982)
(39,048)
-
-
(195)
(7,908)
(11,558)
(1,145)
(66,314)
(27,408)
(111,188)
-
-
(195)
(26,133)
(14,748)
(5,124)
(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
(9,919)
1,622
14,720
(3,824)
4,801
(2,202)
(110,861)
25,095
(14,872)
3,510
(125,733)
28,605
(8,297)
10,896
2,599
(85,766)
(11,362)
(97,128)
-
(5,981)
(5,981)
-
8,003
8,003
Net loss and comprehensive loss
attributable to Advantage
shareholders
Total assets
Total liabilities
Cash flows from operating activities
Expenditures on property, plant and
equipment
Dividends received (paid)
(1) These items are presented before inter-company eliminations.
(2) Consolidated figure represents dividends paid to non-controlling interests.
(8,297)
1,309,543
346,416
99,366
$
$
$
$
147,949
12,479
$
$
$
$
$
$
$
$
4,915
455,701
214,415
65,651
40,502
(27,670)
(1)
(1)
$
$
$
$
(3,382)
1,765,244
560,831
165,017
$
$
$
$
(85,766)
1,424,010
470,647
40,560
$
$
$
$
(3,359)
489,786
234,439
66,396
(1)
(1)
$
$
$
$
(89,125)
1,913,796
705,086
106,956
$
$
188,451
(15,191)
(2)
$
$
130,490
14,350
$
$
44,194
(28,085)
$
$
174,684
(13,735)
(2)
Advantage Oil & Gas Ltd. - 74
27. Subsequent events
On February 4, 2014 the Corporation announced the following: That its strategic alternatives review process was completed
and did not result in an acceptable proposal; that the Technical Services Agreement (“TSA”) between the Corporation and
Longview was terminated; and that the Corporation had entered into an agreement to sell the 21.15 million Longview
common shares owned by Advantage at a price of $4.45 per share for net proceeds of $90.0 million. The offering closed on
February 28, 2014. As at December 31, 2013, the carrying value of Advantage’s investment in Longview was $111.5 million.
On March 26, 2014, Advantage entered an agreement for Questfire to repurchase the Questfire Debenture at an aggregate
purchase price of $13.6 million. Questfire also agreed that it would make an offer to purchase by way of issuer bid, all of the
Class B Shares at a purchase price of $2.60 per share. Advantage expects to receive total proceeds of $17.5 million on the
disposition of its investments in Questfire.
Advantage Oil & Gas Ltd. - 75
Directors
Stephen E. Balog (1)(2)(3)
Paul G. Haggis (1)(2)(3)
Andy J. Mah
Ronald A. McIntosh (1)(2)(3)
(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
Craig Blackwood, Vice President, Finance and CFO
Neil Bokenfohr, Senior Vice President
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., /Canada 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
300, 440 – 2nd Avenue SW
Calgary, Alberta T2P 5E9
(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. - 76