2014 Annual Report
Financial and Operating Highlights (1)
Financial ($000, except as otherwise indicated)
Sales including realized hedging
Funds from operations
per share (2)
Total capital expenditures
Working capital deficit (3)
Bank indebtedness
Convertible debentures (face value)
Basic weighted average shares (000)
Operating
Daily Production
Natural gas (mcf/d)
Crude oil and NGLs (bbls/d)
Total mcfe/d (4)
Total boe/d (4)
Average prices (including hedging)
Natural gas ($/mcf)
Crude oil and NGLs ($/bbl)
Cash netbacks ($/mcfe) (4)
Petroleum and natural gas sales
Realized gains (losses) on derivatives
Royalties
Operating expense
Operating netback
General and administrative
Finance expense
Other income
Cash netbacks
Three months ended
December 31
Year ended
December 31
2014
2013
2014
2013
$
$
46,409
39,182
$
$
0.23
87,086
$
$
$
57,264
109,970
86,250
170,068
133,433
113
134,111
22,352
$
$
34,304
23,822
$
$
0.14
69,512
$
$
$
49,034
153,697
86,250
168,383
108,260
79
108,734
18,122
$
$
203,103
164,010
$
$
0.97
236,701
$
$
$
57,264
109,970
86,250
169,482
130,627
159
131,581
21,930
$
$
142,943
85,310
$
$
0.51
155,370
$
$
$
49,034
153,697
86,250
168,383
113,947
507
116,989
19,498
$
$
3.72
71.35
$
$
3.39
77.01
$
$
4.15
89.84
$
$
3.10
76.01
$
$
$
$
3.82
(0.06)
(0.18)
(0.34)
3.24
(0.11)
(0.20)
0.25
3.18
3.25
0.18
(0.15)
(0.28)
3.00
(0.39)
(0.32)
0.09
2.38
4.49
(0.26)
(0.21)
(0.32)
3.70
(0.15)
(0.21)
0.09
3.43
3.28
0.07
(0.18)
(0.48)
2.69
(0.45)
(0.28)
0.04
2.00
$
$
$
$
(1)
Financial and operating highlights for continuing operations of Advantage.
(2) Based on basic weighted average shares outstanding.
(3)
Working capital deficit includes trade and other receivables, prepaid expenses and deposits, 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.
CONTENTS
Message to Shareholders ......................................................................................................................................................................... 3
Reserves ..................................................................................................................................................................................................... 5
Consolidated Management’s Discussion & Analysis ....................................................................................................................... 10
Consolidated Financial Statements ..................................................................................................................................................... 27
Consolidated Statement of Financial Position .......................................................................................................................... 32
Consolidated Statement of Comprehensive Income (Loss)................................................................................................... 33
Consolidated Statement of Changes in Shareholders’ Equity ................................................................................................ 34
Consolidated Statement of Cash Flows ..................................................................................................................................... 35
Notes To The Consolidated Financial Statements .................................................................................................................. 36
Advantage Oil & Gas Ltd. - 2
MESSAGE TO SHAREHOLDERS
Funds from Operations Up 92%, Production Up 25%, Total Cash Costs Down 36%
(cid:1) Advantage's audited fourth quarter and full year 2014 financial and operating results demonstrates the
successful ongoing execution of our Glacier Montney development plan. Our operational
outperformance at Glacier reflects our high quality Montney asset and our focus on preserving a strong
balance sheet has maintained financial flexibility with an industry leading low cost structure and an
attractive hedging position.
(cid:1) Advantage reported a 92% increase in funds from operations to $164.0 million or $0.97 per share for
2014. Our operating netback for 2014 was $3.70/mcfe which represents 87% of our net sales price of
$4.23/mcfe, including realized hedging.
(cid:1) Glacier production increased 25% to average 131.6 mmcfe/d (21,930 boe/d) for 2014 due to continued
growth from our Glacier Montney property (excludes production from non-core assets of 12 mmcfe/d
which was disposed in early 2013). Corporate production and production per share increased 12%
compared to 2013. Production increased 23% to 134.1 mmcfe/d (22,352 boe/d) for the fourth quarter
of 2014 as compared to the same period of 2013.
(cid:1)
Industry leading total cash costs decreased 36% to $0.89/mcfe and includes operating expense
($0.32/mcfe), royalties ($0.21/mcfe), cash general and administrative expense ($0.15/mcfe), and
finance expense ($0.21/mcfe).
(cid:1) Advantage’s strong financial position supports our development program and includes an available
bank line of $290 million on our total $400 million credit facility (28% drawn at December 31, 2014),
a total year end debt to 2014 funds from operations of 1.5 times and a strong natural gas hedging
program. The $86.3 million convertible debentures matured on January 30, 2015 and were settled with
cash from our available credit facility.
(cid:1) We have increased our natural gas commodity hedging positions to 57% of forecast production for
2015 at an average AECO Canadian price of $3.86/mcf, 46% of forecast production for 2016 at an
average AECO Canadian price of $3.69/mcf, and 42% of forecast production for the first quarter of
2017 at an average AECO Canadian price of $3.65/mcf. These hedge positions exceed our current
development plan AECO Canadian price assumptions.
Advantage Oil & Gas Ltd. - 3
Outlook
Advantage has continued to successfully execute its development plan and is on-track to increase
production from approximately 135 mmcfe/d to 183 mmcfe/d in July 2015. We anticipate production to
average approximately 130 mmcfe/d to 135 mmcfe/d during the first half of 2015. During the second quarter
of 2015, we expect production to be partially impacted by construction and commissioning activities due
to our Glacier gas plant expansion.
To accommodate our growth, Advantage has secured TCPL firm sales transportation contracts averaging
97% of our production targets. Our development plan includes average production growth of 22% per year
through 2017 and targets production growth to 183 mmcfe/d in July 2015, 205 mmcfe/d in April 2016 and
245 mmcfe/d in April 2017. As a result of well production and operating outperformance at Glacier,
Advantage’s 2015 capital program was reduced by $110 million from prior estimates while production
growth remains unchanged and on schedule. The development plan is based on our natural gas price outlook
of AECO Canadian $2.50/GJ to $3.30/GJ for 2015 to 2017 and our extensive hedge position (refer to
Advantage’s 2015 Guidance and Development Plan press release dated February 17, 2015).
Our solid 2014 operating and financial results reinforces the significant long term value opportunity that is
available through development of our world class Glacier Montney asset. We remain focused on
maintaining a strong balance sheet and improving capital efficiencies as we execute on our Montney
development plan. We wish to thank our staff for their achievements and our Board of Directors and
shareholders for their continued support.
Advantage Oil & Gas Ltd. - 4
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.
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, 2014
December 31, 2013
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)
300,558
$2,297,158
$12.35
36.8
1.77
$0.37
$0.29
282,847
$2,118,740
$11.44
42.8
1.68
$0.54
$0.30
(1)Assumes that development of each property will occur, without regard to the likely availability to the Company of
funding required for that development.
(2) Based on 170.068 million Shares outstanding at December 31, 2014, and 168.383 million at December 31, 2013.
(3) Based on Q4 average production and company interest reserves.
(4) Using boe's may be misleading, particularly if used in isolation. In accordance with NI 51-101, a boe conversion
ratio for natural gas of 6 mcf: 1 bbl has been used which is based on an energy equivalency conversion method
primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the
value ratio based on the current price of crude oil as compared to natural gas is significantly different from the
energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.
Gross Working Interest Reserves
Summary as at December 31, 2014
Proved
Developed Producing
Developed Non-producing
Undeveloped
Total Proved
Probable
Total Proved + Probable
Oil
(mbbl)
Natural
Gas Liquids
(mbbl)
Natural Gas
(mmcf)
Equivalent
(mboe)
5
-
-
5
2
7
1,455
499
6,488
8,442
7,240
15,682
270,361
32,469
798,870
1,101,700
607,516
1,709,216
46,520
5,911
139,633
192,063
108,495
300,558
Advantage Oil & Gas Ltd. - 5
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
Before Income Taxes Discounted at
0%
10%
15%
$943,305
139,958
2,595,789
3,679,052
2,900,935
$6,579,987
$604,495
83,027
671,513
1,359,035
938,122
$2,297,158
$517,342
67,923
362,609
947,875
636,180
$1,584,055
(1) Advantage’s crude oil, natural gas and natural gas liquid reserves were evaluated using Sproule’s product price
forecast effective December 31, 2014 prior to the provision for income taxes, interests, debt services charges and
general and administrative expenses. It should not be assumed that the discounted future net revenue estimated
by Sproule represents the fair market value of the reserves.
(2) Assumes that development of Glacier will occur, without regard to the likely availability to the Corporation of
funding required for that development.
Sproule Price Forecasts
The present value of future net revenue at December 31, 2014 was based upon natural gas and natural gas liquids
pricing assumptions prepared by Sproule effective December 31, 2014. These forecasts are adjusted for reserve
quality, transportation charges and the provision of any applicable sales contracts. The price assumptions used over
the next seven years are summarized in the table below:
Alberta AECO-C
Natural Gas
($Cdn/mmbtu)
3.32
3.71
3.90
4.47
5.05
5.13
5.22
Henry Hub
Natural Gas
($US/mmbtu)
3.25
3.75
4.00
4.50
5.00
5.08
5.15
Year
2015
2016
2017
2018
2019
2020
2021
Edmonton
Propane
($Cdn/bbl)
34.77
43.17
48.57
49.30
50.04
51.32
52.09
Edmonton
Butane
($Cdn/bbl)
50.34
62.51
70.32
71.37
72.44
74.31
75.42
Edmonton
Pentanes Plus
($Cdn/bbl)
78.60
97.60
109.80
111.44
113.12
116.02
117.76
Exchange
Rate
($US/$Cdn)
0.85
0.87
0.87
0.87
0.87
0.87
0.87
Advantage Oil & Gas Ltd. - 6
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, 2013
Present value proved and probable reserves
Undeveloped land (2)
Working capital (deficit) and other
Convertible debentures
Bank debt
0%
$38.34
$6,579,987
9,803
(10,708)
(86,250)
(109,970)
10%
$11.44
15%
$7.43
$2,297,158
9,803
(10,708)
(86,250)
(109,970)
$1,584,055
9,803
(10,708)
(86,250)
(109,970)
Net asset value - December 31, 2014
$6,382,862
$2,100,033
$1,386,930
Net asset value per Share (1) - December 31, 2014
$37.53
$12.35
$8.16
(1) Based on 170.068 million Shares outstanding at December 31, 2014 and 168.383 million Shares outstanding at
December 31, 2013
(2) Internal estimate
Gross Working Interest Reserves Reconciliation
Proved
Opening balance Dec. 31, 2013
Extensions
Improved recovery
Infill Drilling
Discoveries
Economic factors
Technical revisions
Acquisitions
Dispositions
Production
Closing balance at Dec. 31, 2014
Oil
(mbbl)
Natural Gas
Liquids
(mbbl)
6.0
-
-
-
-
-
(0.5)
-
-
(0.6)
4.9
7,086
502
-
137
-
4
771
-
-
(57)
Natural
Gas
(mmcf)
992,325
24,066
-
12,250
-
(314)
121,053
-
-
(47,679)
Oil
Equivalent
(mboe)
172,479
4,513
-
2,179
-
(49)
20,946
-
-
(8,005)
8,442
1,101,700
192,063
Advantage Oil & Gas Ltd. - 7
Gross Working Interest Reserves Reconciliation (continued)
Proved + Probable
Opening balance Dec. 31, 2013
Extensions
Improved recovery
Infill Drilling
Discoveries
Economic factors
Technical revisions
Acquisitions
Dispositions
Production
Closing balance at Dec. 31, 2014
Oil
(mbbl)
Natural Gas
Liquids
(mbbl)
Natural
Gas
(mmcf)
1,618,833
64,576
-
17,170
-
(557)
56,874
-
-
(47,679)
Oil
Equivalent
(mboe)
282,847
12,712
-
3,054
-
(88)
10,038
-
-
(8,005)
13,035
1,949
-
193
-
5
552
-
-
(57)
15,682
1,709,216
300,558
7.0
-
-
-
-
-
0.4
-
-
(0.6)
6.8
Finding, Development & Acquisitions Costs (“FD&A”) (1)(2)(3)
2014 FD&A Costs – Gross Working Interest Reserves excluding Future Development Capital
Capital expenditures ($000)
Total mboe, end of year
Total mboe, beginning of year
Production, mboe
Reserve additions, mboe
2014 FD&A costs ($/boe)
2013 FD&A costs ($/boe)
Three year average FD&A costs ($/boe)
2014 F&D costs ($/boe)
2013 F&D costs ($/boe)
Three year average F&D costs ($/boe)
Proved
$236,701
192,063
172,479
(8,005)
27,589
$8.58
$9.03
$5.87
$8.58
$5.14
$5.46
Proved + Probable
$236,701
300,558
282,847
(8,005)
25,716
$9.20
$3.87
$4.14
$9.20
$2.94
$3.82
Advantage Oil & Gas Ltd. - 8
NI 51-101
2014 FD&A Costs – Gross Working Interest Reserves including Future Development Capital
Capital expenditures ($000)
Net changes in future development capital ($000)
Total capital ($000)
Total mboe, end of year
Total mboe, beginning of year
Production, mboe
Reserve additions, mboe
2014 FD&A costs ($/boe)
2013 FD&A costs ($/boe)
Three year average FD&A costs ($/boe)
2014 F&D costs ($/boe)
2013 F&D costs ($/boe)
Three year average F&D costs ($/boe)
Proved
$236,701
32,616
$269,317
192,063
172,479
(8,005)
27,589
$9.76
$25.28
$10.11
$9.76
$10.20
$8.77
Proved + Probable
$236,701
(78,080)
$158,621
300,558
282,847
(8,005)
25,716
$6.17
$16.28
$7.23
$6.17
$8.10
$6.21
(1) Under NI 51-101, the methodology to be used to calculate FD&A costs includes incorporating changes in future
development capital ("FDC") required to bring the proved undeveloped and probable reserves to production. For
continuity, Advantage has presented herein FD&A costs calculated both excluding and including FDC.
(2) The aggregate of the exploration and development costs incurred in the most recent financial year and the change
during that year in estimated future development costs generally will not reflect total finding and development costs
related to reserves additions for that year. Changes in forecast FDC occur annually as a result of development
activities, acquisition and disposition activities and capital cost estimates that reflect Sproule’s best estimate of what
it will cost to bring the proved undeveloped and probable reserves on production.
(3) In all cases, the FD&A number is calculated by dividing the identified capital expenditures by the applicable reserve
additions. Boes may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based
on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value
equivalency at the wellhead. Given that the value ratio based on the current price of crude oil as compared to natural
gas is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be
misleading as an indication of value.
Advantage Oil & Gas Ltd. - 9
CONSOLIDATED MANAGEMENT’S DISCUSSION & ANALYSIS
The following Management’s Discussion and Analysis (“MD&A”), dated as of March 25, 2015, 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, 2014 and should be read in conjunction with the December 31, 2014 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, expected average production levels
until July 2015 and anticipated increase to production levels in July, 2015; effect of commodity prices on the Corporation's financial
results, condition and performance; industry conditions, including effect of changes in commodity prices, weather and general economic
conditions on the crude oil and natural gas industry and demand for crude oil and natural gas; the Corporation's hedging activities;
effect of commodity price risk management activities on the Corporation, including cash flows and sales; terms of the Corporation's
derivative contracts, including the timing of settlement of such contracts; effect of fluctuations in commodity prices 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, commodity prices and gas cost allowance on average corporate royalty rates; projected royalty rates,
including the estimated royalty rate for the life of a Glacier Montney horizontal well; expected timing of rig release, service and receipt
of regulatory approvals for Advantage's water disposal well and the effect of such water disposal well on water handling capacity at
Glacier and third party costs; terms of the Corporation's equity compensation plans; estimated tax pools at December 31, 2014; terms
of the Corporation'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; future commitments and contractual obligations; the
Corporation's strategy for managing its capital structure, including the use of equity and debt financing arrangements, adjusting capital
spending, disposing of assets and the use of financial and operational forecasting processes to facilitate management of the
Corporation's capital structure; the timing of reviews of capital structure and forecast information by management and the Board; effect
of the Corporation's continual financial assessment processes on the Corporation's ability to mitigate risks; the Corporation's plans to
fund the majority of its capital expenditures for the year ended December 31, 2015 from funds from operations; the Corporation's
forecasted debt to trailing funds from operations ratio; 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 expectation that its current inventory of wells can
maintain production at the levels disclosed herein through to completion of the Corporation's plant expansion at Glacier; anticipated
timing of completion of the Corporation's plant expansion at Glacier; targeted level of production from Advantage's Phase VII program
and the anticipated timing of achievement thereof; the Corporation's intentions to monitor debt levels to ensure an optimal mix of
financing and cost of capital to provide a return to the Corporation's shareholders; Advantage's focus on development of the natural
gas resource play at Glacier, including the anticipated timing of completion of the various phases of Advantage's development program
at Glacier and expected timing of well completions; and the statements under "critical accounting estimates" in this MD&A. In addition,
statements relating to "reserves" are deemed to be forward-looking statements, as they involve the implied assessment, based on certain
estimates and assumptions that the reserves described can be profitably produced in the future.
These forward-looking statements involve substantial known and unknown risks and uncertainties, many of which are beyond our
control, including, but not limited to, changes in general economic, market and business conditions; stock market volatility; changes to
legislation and regulations and how they are interpreted and enforced; changes to investment eligibility or investment criteria; our ability
to comply with current and future environmental or other laws; actions by governmental or regulatory authorities including increasing
taxes, changes in investment or other regulations; changes in tax laws, royalty regimes and incentive programs relating to the oil and gas
Advantage Oil & Gas Ltd. - 10
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; receipt of required regulatory approvals; 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.
Disposition of Longview and Discontinued Operations
Advantage owned 21,150,010 common shares of Longview Oil Corp. (“Longview”) prior to February 28, 2014, representing an interest
of approximately 45.1% of Longview. Since Advantage held the single largest ownership interest of Longview and other ownership
interests were comparatively dispersed, Advantage was considered to control Longview. Accordingly, prior to February 28, 2014, 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. On
February 28, 2014, Advantage sold the 21,150,010 common shares of Longview at a price of $4.45 per share and received net proceeds
of $90.2 million, all of which were used to reduce existing bank indebtedness. Concurrently, Advantage derecognized all assets and
liabilities of Longview from the consolidated statement of financial position and ceased to consolidate Longview subsequent to February
28, 2014.
Given that the Longview legal entity was an operating segment, the financial results for the Advantage legal entity are presented as
“continuing operations” and for the Longview legal entity are presented as “discontinued operations” for all periods in the consolidated
financial statements, as required by IFRS. This presentation has been consistently applied throughout this MD&A on a similar basis
with the term “continuing operations” referring to the Advantage legal entity and “discontinued operations” referring to the Longview
legal entity.
Advantage Oil & Gas Ltd. - 11
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. Management believes these adjustments to
cash provided by operating activities increase comparability between reporting periods. Cash netbacks are dependent on the
determination of funds from operations and include the primary cash sales and expenses on a per mcfe basis that comprise funds from
operations. Funds from operations reconciled to cash provided by operating activities is as follows:
($000)
Cash provided by operating activities - continuing
operations
Expenditures on decommissioning liability
Changes in non-cash working capital
Finance expense (1)
Funds from operations - continuing operations
Funds from operations - discontinued operations
Funds from operations
(1) Finance expense excludes non-cash accretion expense.
Three months ended
December 31
Year ended
December 31
2014
2013
% change
2014
2013
% change
$
$
$
$
48,218
367
(6,901)
(2,502)
39,182
-
39,182
$
$
42,488
1,152
(16,644)
(3,174)
23,822
13,740
37,562
$
$
13 %
(68) %
(59) %
(21) %
64 %
(100) %
4 %
169,907
446
3,924
(10,267)
164,010
10,019
174,029
99,366
4,664
(6,623)
(12,097)
85,310
63,195
148,505
71 %
(90) %
(159) %
(15) %
92 %
(84) %
17 %
$
$
Advantage Oil & Gas Ltd. - 12
FINANCIAL AND OPERATING REVIEW – CONTINUING OPERATIONS
Overview
Three months ended
December 31
Year ended
December 31
2014
2013
2014
2013
($000)
$
47,186
(777)
(2,209)
(4,184)
40,016
per mcfe
3.82
$
(0.06)
(0.18)
(0.34)
3.24
($000)
$
32,546
1,758
(1,523)
(2,772)
30,009
per mcfe
3.25
$
0.18
(0.15)
(0.28)
3.00
$
($000)
215,653
(12,550)
(10,076)
(15,412)
177,615
per mcfe
4.49
$
(0.26)
(0.21)
(0.32)
3.70
$
($000)
140,090
2,853
(7,534)
(20,515)
114,894
per mcfe
3.28
$
0.07
(0.18)
(0.48)
2.69
(1,371)
(2,502)
3,039
(0.11)
(0.20)
0.25
(3,932)
(3,174)
919
(0.39)
(0.32)
0.09
(7,426)
(10,267)
4,088
(0.15)
(0.21)
0.09
(19,246)
(12,097)
1,759
(0.45)
(0.28)
0.04
$
$
39,182
0.23
$
3.18
$
$
23,822
0.14
$
2.38
$
$
164,010
0.97
$
3.43
$
$
85,310
0.51
$
2.00
Natural gas and liquids sales
Realized gains (losses) on derivatives
Royalties
Operating expense
Operating income and
operating netbacks
General and administrative (1)
Finance expense (2)
Other income (3)
Funds from operations and cash
netbacks
Per basic weighted average share
(1) General and administrative expense excludes share based compensation.
(2) Finance expense excludes non-cash accretion expense.
(3) Other income excludes non-cash other income.
For the three months ended December 31, 2014, Advantage realized a 64% increase in funds from operations to $39.2 million and a
34% increase in cash netbacks to $3.18 per mcfe, as compared to the fourth quarter of 2013. Funds from operations for the year ended
December 31, 2014, increased 92% to $164.0 million and cash netbacks increased 72% to $3.43 per mcfe, as compared to the same
period of 2013. On a per share basis, funds from operations increased 64% and 90% to $0.23 and $0.97 for the three months and year
ended December 31, 2014, respectively. The increased funds from operations and cash netbacks were driven by Glacier production
growth, higher natural gas prices and a lower total cash cost structure. Glacier production during the three months and year ended
December 31, 2014 was 23% and 25% higher than the same periods of 2013, as we continue to execute on our multi-year development
plan. AECO daily prices during the three months and year ended December 31, 2014 was 2% and 41% higher than the same periods
of 2013. We have also achieved an industry leading low cost structure whereby total cash costs for the year ended December 31, 2014,
including royalties, operating expense, general and administrative expense, and finance expense have been reduced by 36% to $0.89 per
mcfe as compared to 2013. The lower total cash cost structure resulted from transforming Advantage into a pure play Montney producer
with a single focus on development of our Glacier, Alberta area.
Advantage has disposed of substantially all non-core assets to focus on continued development of its core Glacier Montney natural gas
asset. Net cash proceeds received 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 Advantage such that historical
financial and operating performance may not be indicative of actual future performance.
Advantage Oil & Gas Ltd. - 13
Natural Gas and Liquids Sales and Hedging
Three months ended
December 31
Year ended
December 31
($000)
Natural gas sales
Realized gains (losses) on derivatives
Natural gas sales including hedging
Liquids sales
Realized gain on derivative
Liquids sales including hedging
Total (1)
(1) Total excludes unrealized derivative gains and losses.
$
$
$
$
2014
46,446
(777)
45,669
740
-
740
46,409
2013
31,984
1,758
33,742
562
-
562
34,304
% change
%
45
%
(144)
%
35
%
32
%
-
%
32
%
35
2014
210,444
(12,550)
197,894
5,209
-
5,209
203,103
2013
126,038
2,837
128,875
14,052
16
14,068
142,943
% change
%
%
%
%
%
%
%
67
(542)
54
(63)
(100)
(63)
42
$
$
$
$
Total sales excluding hedging for the three months ended December 31, 2014 was $47.2 million, an increase of $14.6 million or 45%,
and for the year ended December 31, 2014 was $215.7 million, an increase of $75.6 million or 54%, when compared to the same periods
of 2013. The increase in sales has been attributable to improved natural gas prices and higher natural gas production.
Production
Natural gas (mcf/d)
Liquids (bbls/d)
- mcfe/d
Total
- boe/d
Natural gas (%)
Liquids (%)
Three months ended
December 31
Year ended
December 31
2014
133,433
113
134,111
22,352
99%
1%
% change
%
23
%
43
%
23
%
23
2013
108,260
79
108,734
18,122
100%
- %
2014
130,627
159
131,581
21,930
99%
1%
% change
%
15
%
(69)
%
12
%
12
2013
113,947
507
116,989
19,498
97%
3%
Production for the fourth quarter of 2014 increased 23% as compared to the fourth quarter of 2013. Glacier production increased 25%
during the year ended December 31, 2014 as compared to 2013 but was partially offset by non-core conventional asset sales of
approximately 12 mmcfe/d which closed in April 2013. We expect production to average approximately 130 mmcfe/d to 135 mmcfe/d
until July 2015 when production is scheduled to increase to 183 mmcfe/d according to our 2015 Guidance and Development Plan
Update news release, issued February 17, 2015.
Advantage Oil & Gas Ltd. - 14
Commodity Prices and Marketing
Average Realized Pricing
Natural gas, excluding hedging ($/mcf)
Natural gas, including hedging ($/mcf)
Liquids, including hedging ($/bbl)
Benchmark Prices
AECO daily ($/mcf)
NYMEX ($US/mmbtu)
Edmonton Light ($/bbl)
Three months ended
December 31
Year ended
December 31
2014
2013
% change
2014
2013
% change
$
$
$
3.78
3.72
71.35
$
$
$
3.21
3.39
77.01
%
18
10
%
%
(7)
$
$
$
4.41
4.15
89.84
$
$
$
3.03
3.10
76.01
%
46
34
%
%
18
$
$
$
3.61
3.95
75.54
$
$
$
3.52
3.63
86.88
2
%
%
9
%
(13)
$
$
$
4.47
4.38
94.50
$
$
$
3.18
3.67
93.43
41
%
19
%
%
1
Advantage’s current production from Glacier is approximately 99% natural gas. Realized natural gas prices, excluding hedging,
increased significantly as compared to 2013, corresponding to the increase in AECO prices. Natural gas prices remained low throughout
much of 2013 due to a stronger supply to demand situation. Prices improved dramatically during early 2014 as a result of an extremely
cold 2013/2014 winter that increased demand and reduced North American storage levels well below the five-year average. During the
second half of 2014, natural gas prices decreased due to the continued strength of U.S. storage injections caused by record supply levels
and reduced demand from a moderate 2014 summer followed by a mild 2014/2015 winter. Advantage has hedged approximately 57%
of forecast production, net of royalties, for calendar 2015 at an average natural gas price of $3.86/mcf to support our Glacier
development plan.
Commodity Price Risk
The Corporation’s financial results and condition will be dependent on the prices received for natural gas production. Natural gas prices
have fluctuated widely and are determined by supply and demand factors, including weather, and general economic conditions in natural
gas consuming and producing regions throughout North America. Management has been proactive in entering into derivatives for the
purpose of hedging and has mitigated commodity price risk by entering natural gas hedging contracts to March 31, 2017 in support of
our Glacier multi-year development plan. Our Credit Facilities allow Advantage to hedge up to 65% of total estimated natural gas and
liquids production over the first three years and 50% over the fourth year.
Our current hedging positions are summarized as follows:
Period
Q1 2015 to Q4 2015
Q1 2016 to Q4 2016
Q1 2017
Average
Production Hedged
82.9 mmcf/d
84.1 mmcf/d
80.6 mmcf/d
Forecast Production
Hedged
(net of royalties)
57%
46%
42%
Average Price
AECO ($Cdn.)
$3.86/mcf
$3.69/mcf
$3.65/mcf
A summary of realized and unrealized hedging gains and losses for the three months and year ended December 31, 2014 and 2013 are
as follows:
Three months ended
December 31
Year ended
December 31
($000)
Realized gains (losses) on derivatives
Unrealized gains (losses) on derivatives
Total gains (losses) on derivatives
2014
$
(777)
55,243
54,466
$
2013
$
1,758
(11,472)
(9,714)
$
% change
(144)
%
%
(582)
%
(661)
2014
(12,550)
47,786
35,236
$
$
2013
$
2,853
(6,043)
(3,190)
$
% change
(540)
%
%
(891)
%
(1,205)
higher natural gas prices as
For the three months and year ended December 31, 2014, we realized derivative losses as a result of
compared to our average hedge prices. For the year ended December 31, 2014, $47.8 million was recognized in income as an unrealized
derivative gain (December 31, 2013 – $6.0 million unrealized derivative loss), being the increase in fair value to a net derivative asset of
$46.6 million at December 31, 2014 as compared to a net derivative liability at December 31, 2013. The fair value of the net derivative
asset is the estimated value to settle the contracts as at a point in time. As such, unrealized derivative gains and losses are not cash and
Advantage Oil & Gas Ltd. - 15
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. These derivative contracts will settle from January 1, 2015 to March 31, 2017 corresponding
to when the Corporation will recognize sales from production.
Royalties
Royalties ($000)
per mcfe
Royalty Rate (percentage of natural gas and
liquids sales)
Three months ended
December 31
2014
2013
$
$
2,209
0.18
$
$
1,523
0.15
Year ended
December 31
% change
45
20
%
%
2014
10,076
0.21
$
$
2013
$
$
7,534
0.18
% change
34
17
%
%
4.7%
4.7%
%
-
4.7%
5.4%
(0.7)
%
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. Our average corporate royalty rates are impacted by well depths, well
production rates, commodity prices, and gas cost allowance. The expected royalty rate for the life of a Glacier Upper and Lower
Montney horizontal well is approximately 5% before gas cost allowance due to industry provincial incentive programs. Total royalties
paid during the three months and year ended December 31, 2014 are higher than 2013 due to stronger natural gas prices and increased
natural gas production while the overall royalty rate has decreased slightly.
Operating Expense
Operating expense ($000)
per mcfe
Three months ended
December 31
Year ended
December 31
2014
$
$
4,184
0.34
2013
$
$
2,772
0.28
% change
51
21
%
%
2014
15,412
0.32
$
$
2013
20,515
0.48
$
$
% change
(25)
(33)
%
%
For the year ended December 31, 2014, operating expense was $0.32/mcfe, a decrease of 33% as compared to 2013. Operating costs
have decreased with the disposition of higher cost non-core assets and due to the increased production from our 100% owned Glacier
gas plant. Operating expense per mcfe for the fourth quarter of 2014 was $0.34/mcfe due to higher third party water disposal and
trucking costs resulting from the flowback of additional water from well completions.
General and Administrative Expense
General and administrative expense
Cash expense ($000)
per mcfe
Share based compensation ($000)
per mcfe
Total general and administrative expense
($000)
per mcfe
Employees at December 31
Three months ended
December 31
Year ended
December 31
2014
2013
% change
2014
2013
% change
$
$
$
$
1,371
0.11
577
0.05
$
$
$
$
3,932
0.39
656
0.07
$
$
1,948
0.16
$
$
4,588
0.46
(65)
(72)
(12)
(29)
(58)
(65)
%
%
%
%
%
%
$
$
$
$
7,426
0.15
2,153
0.04
$
$
9,579
0.19
27
$
$
$
$
19,246
0.45
5,180
0.12
$
$
24,426
0.57
80
(61)
(67)
(58)
(67)
(61)
(67)
(66)
%
%
%
%
%
%
%
Cash general and administrative (“G&A”) expense has decreased as significant cost efficiencies were realized with the non-core asset
dispositions and termination of the Technical Services Agreement with Longview on February 1, 2014 whereby Advantage had
previously provided the necessary personnel and technical services to manage Longview's business. Cash G&A in 2013 included 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.
Share based compensation represents non-cash G&A expense associated with Advantage’s stock option plan and restricted and
performance award plan that are designed to provide for long term compensation to service providers. Share based compensation for
Advantage Oil & Gas Ltd. - 16
the three months and year ended December 31, 2014 has decreased as a result of staff rationalization. As at December 31, 2014, a total
of 5.1 million stock options and 0.4 million performance awards are unexercised which represents only 3.3% of the 10% of Advantage’s
total outstanding common shares which are eligible to be granted to service providers.
Depreciation Expense
Depreciation expense ($000)
per mcfe
Three months ended
December 31
Year ended
December 31
2014
21,329
1.73
$
$
2013
17,958
1.80
$
$
% change
19
%
%
(4)
2014
85,460
1.78
$
$
2013
72,140
1.69
$
$
% change
18
%
%
5
Depreciation of natural gas and liquids properties is provided on the units-of–production method based on total proved and probable
reserves, including future development costs, on a component basis. Depreciation expense was higher during 2014 due to the continued
increase in production at Glacier. The rate of depreciation expense recognized at Glacier decreased in 2014 as total costs, including
future development costs, as a proportion of total proved and probable reserves declined due to the continued efficiency of production
additions. Depreciation expense per mcfe was modestly lower during the year ended December 31, 2013 as Advantage ceased
depreciation of assets held for sale for the period of January 1, 2013 to April 30, 2013.
Finance Expense
Finance expense
Cash expense ($000)
per mcfe
Accretion expense ($000)
per mcfe
Total finance expense ($000)
per mcfe
Bank indebtedness ($000)
Three months ended
December 31
Year ended
December 31
2014
2013
% change
2014
2013
% change
$
$
$
$
$
$
2,502
0.20
1,124
0.09
3,626
0.29
$
$
$
$
$
$
3,174
0.32
1,123
0.11
4,297
0.43
%
%
%
%
%
%
(21)
(38)
-
(18)
(16)
(33)
$
$
$
$
$
$
10,267
0.21
4,525
0.09
14,792
0.30
$
$
$
$
$
$
12,097
0.28
6,128
0.14
18,225
0.42
(15)
(25)
(26)
(36)
(19)
(29)
%
%
%
%
%
%
$
109,970
$
153,697
(28)
%
Cash finance expense from interest on bank indebtedness and the convertible debenture have decreased compared to 2013, due to the
lower average bank indebtedness. Our bank indebtedness outstanding as at December 31, 2014 was $110.0 million, a decrease of $43.7
million from December 31, 2013. The Corporation’s interest rates on bank indebtedness have decreased due to the lower debt to cash
flow ratios as calculated pursuant to our Credit Facilities and are primarily based on short term bankers’ acceptance rates plus a stamping
fee.
Accretion expense represents non-cash charges that increase the carrying value of the convertible debenture and decommissioning
liability as a result of the passage of time. The convertible debenture outstanding at December 31, 2014 matured on January 30, 2015,
and was settled from the Credit Facilities. Accretion expense for the year ended December 31, 2014 is lower than 2013 as the
decommissioning liability decreased in April 2013 with the closing of non-core asset sales.
Advantage Oil & Gas Ltd. - 17
Other Income (Expense)
Three months ended
December 31
Year ended
December 31
($000)
Interest income - Questfire Debenture
Accretion income - Questfire Debenture
Loss on disposition - Questfire Debenture
Unrealized gain (loss) - Questfire Class B Shares
Gain (loss) on sale of assets
Miscellaneous income
2014
-
$
-
-
-
-
3,039
3,039
$
2013
$
% change
(100)
%
%
(100)
%
-
%
(100)
%
(100)
%
612
%
144
492
569
-
(750)
505
427
1,243
2014
$
2013
$
455
557
(13,833)
150
(1,489)
3,633
(10,527)
% change
(65)
(63)
100
(117)
(77)
713
165
%
%
%
%
%
%
%
1,312
1,516
-
(900)
(6,354)
447
(3,979)
$
$
$
Advantage recognized interest and accretion income earned on the Questfire Debenture from April 2013 up to the first quarter of 2014,
the time during which we owned the Debenture. During the first quarter of 2014, Advantage accepted a proposal from Questfire to
redeem the Questfire Debenture for an aggregate purchase price of $13.6 million and Advantage recognized a loss of $13.8 million
representing the difference from the carrying value. Advantage also accepted a Questfire offer to purchase by way of issuer bid, all of
the Class B Shares at a price of $2.60 per share. Advantage received $3.9 million in the second quarter of 2014 for the Class B Shares
and recognized a net gain of $0.2 million. Advantage recognized a loss of $1.5 million in the second quarter related to the finalization
of the gain and loss calculations attributable to non-core asset dispositions that closed in 2013. During the fourth quarter of 2014,
Advantage settled a dispute with a former joint venture partner related to properties which Advantage had disposed. The effect of this
settlement resulted in net funds received by Advantage of $3.0 million.
Taxes
Deferred income taxes arise from differences between the accounting and tax bases of our assets and liabilities. For the year ended
December 31, 2014, the Corporation recognized a deferred income tax expense of $30.4 million as a result of the $105.0 million income
before taxes from continuing operations. As at December 31, 2014, the Corporation had a deferred income tax liability balance of $33.4
million.
Estimated tax pools at December 31, 2014, are as follows:
($ millions)
Canadian Development Expenses
Canadian Exploration Expenses
Canadian Oil and Gas Property Expenses
Non-capital losses
Capital losses
Undepreciated Capital Cost
Other
$
219
66
3
734
158
169
10
1,359
$
Advantage Oil & Gas Ltd. - 18
Net Income (Loss) and Comprehensive Income (Loss) from Continuing Operations
Three months ended
December 31
Year ended
December 31
2014
2013
% change
2014
2013
% change
Net income (loss) and comprehensive
income (loss) from continuing operations
($000)
per share - basic and diluted
$
$
53,682
0.32
$
$
(6,273)
(0.04)
(956)
(900)
%
%
$
$
74,597
0.44
$
$
(8,297)
(0.05)
(999)
(980)
%
%
Advantage’s net income from continuing operations for 2014 has increased significantly as compared to 2013 primarily due to higher
funds from operations attributable to increased Glacier production, stronger natural gas prices and a lower cost structure. All reporting
periods were affected by derivative gains and losses from our ongoing commodity price risk management activities. For the year ended
December 31, 2014, Advantage has recognized total gains on derivatives of $35.2 million as compared to a $3.2 million total loss on
derivatives for the same period of 2013. One-time non-cash losses of approximately $15.2 million were recognized on disposition of
Questfire investments and non-core properties in the first half of 2014.
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.
Payments due by period
Total
$
2015
$
($ millions)
Building leases
Pipeline/transportation
Bank indebtedness (1)
Convertible debenture (2)
- principal
- interest
- principal
- interest
Total contractual obligations
5.2
119.5
110.3
10.1
86.3
2.1
333.5
2016 &
2017
$
2.3
37.7
110.3
3.3
-
-
$
153.6
1.1
17.1
-
6.8
86.3
2.1
113.4
2018 &
2019
$
2020
-
$
9.6
-
-
-
-
9.6
$
After 2020
$
-
23.8
-
-
-
-
23.8
$
1.8
31.3
-
-
-
-
33.1
$
$
$
(1) As at December 31, 2014, the Corporation’s bank indebtedness was governed by a credit facility agreement with a syndicate of financial institutions. Under the
terms of the agreement, the facility is reviewed annually, with the next review scheduled in June 2015. The facility is revolving and extendible at each annual review
for a further 364 day period at the option of the syndicate. If not extended, the credit facility is converted at that time into a one-year term facility, with the principal
payable at the end of such one-year term. Management fully expects that the facility will be extended at each annual review.
(2) As at December 31, 2014, Advantage had an $86.2 million convertible debenture outstanding that was convertible to common shares based on an established
conversion price. The convertible debenture matured on January 30, 2015, and was settled from the Credit Facilities.
Advantage Oil & Gas Ltd. - 19
Liquidity and Capital Resources
The following table is a summary of the Corporation’s capitalization structure:
($000, except as otherwise indicated)
Bank indebtedness (non-current)
Working capital deficit (1)
Net debt
Convertible debenture maturity value (current)
Total debt
Shares outstanding
Shares closing market price ($/share)
Market capitalization (2)
Total capitalization
Total debt to funds from operations (3)
$
December 31, 2014
109,970
57,264
167,234
86,250
253,484
170,067,650
5.56
945,576
$
$
$
$
1,199,060
1.5
(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.
(3) Total debt is a non-GAAP measure that includes bank indebtedness, working capital deficit and the convertible debenture maturity value.
Total debt to funds from operations is calculated by dividing total debt by funds from operations.
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
deficit, bank indebtedness, convertible debentures and share capital. Advantage may manage its capital structure by issuing new common
shares, repurchasing outstanding common shares, obtaining additional financing either through bank indebtedness or convertible
debenture issuances, refinancing current debt, issuing other financial or equity-based instruments, declaring a dividend, adjusting capital
spending, or disposing of assets. The capital structure is reviewed by Management and the Board of Directors on an ongoing basis.
Management of the Corporation’s capital structure is facilitated through its financial and operational forecasting processes. Selected
forecast information is frequently provided to the Board of Directors. This continual financial assessment process further enables the
Corporation to mitigate risks. The Corporation continues to satisfy all liabilities and commitments as they come due and has $290
million available on our $400 million credit facility at December 31, 2014. For the year ended December 31, 2015, we will be funding
our capital expenditures from funds from operations and our Credit Facilities, and have estimated that our total debt to trailing funds
from operations ratio will be approximately 2.1 based on a $2.50/GJ natural gas price. We will continue to be very cognizant of
maintaining financial flexibility in the current environment.
Shareholders’ Equity and Convertible Debentures
As at December 31, 2014, Advantage had 170.1 million common shares outstanding. During 2014, Advantage issued 1.7 million
common shares to service providers in exchange for the exercise of 7.4 million stock options including 5.0 million stock options that
vested during 2013 but could not be exercised due to trading blackout restrictions imposed by the previous strategic review process
that was terminated on February 4, 2014. Additionally, 4.3 million stock options were forfeited/cancelled in 2014 due to staff
rationalization associated with the asset dispositions. For the year ended December 31, 2014, 3.8 million stock options and 0.4 million
performance awards were granted to service providers with a vesting term of three years. As at December 31, 2014, a total of 5.1 million
stock options and 0.4 million performance awards are unexercised which represents only 3.3% of the 10% of Advantage’s total
outstanding common shares which are eligible to be granted to service providers. As at March 25, 2015, Advantage had 170.3 million
common shares outstanding.
The Corporation had $86.2 million of 5.00% convertible debentures outstanding at December 31, 2014 that were convertible to 10.0
million common shares based on the applicable conversion price (December 31, 2013 - $86.2 million outstanding and convertible to
10.0 million common shares). The convertible debentures matured on January 30, 2015 and was settled from the Credit Facilities.
Advantage Oil & Gas Ltd. - 20
Bank Indebtedness, Credit Facilities and Other Obligations
At December 31, 2014, Advantage had bank indebtedness outstanding of $110.0 million. Bank indebtedness has decreased $43.7 million
since December 31, 2013 due to net proceeds received from the disposition of investments in Longview and Questfire, and strong
funds from operations. Advantage’s credit facilities borrowing base is $400 million and is collateralized by a $1 billion floating charge
demand debenture covering all assets of the Corporation (the “Credit Facilities”). The borrowing base for the Credit Facilities is
determined by the banking syndicate through a thorough evaluation of our reserve estimates based upon their own commodity price
expectations. Revisions or changes in the reserve estimates and commodity prices can have either a positive or a negative impact on the
borrowing base. The next annual review is scheduled to occur in June 2015. There can be no assurance that the Credit Facilities will be
renewed at the current borrowing base level at that time.
Advantage had a working capital deficiency of $57.3 million as at December 31, 2014, an increase from the prior quarter due to the
relatively high level of capital expenditure activity underway at December 31, 2014. 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. We
do not anticipate any problems in satisfying the working capital deficit and meeting future obligations as they become due as they can
be satisfied with funds from operations and our available Credit Facilities.
Capital Expenditures
($000)
Drilling, completions and workovers
Well equipping and facilities
Land and seismic
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
2014
2013
$
$
$
Year ended
December 31
2013
$
66,144
20,292
-
86,436
650
-
87,086
65,182
4,257
31
69,470
42
(505)
69,007
2014
195,802
37,662
-
233,464
3,237
-
236,701
135,507
12,977
55
148,539
6,831
(52,903)
102,467
$
$
$
$
(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.
Advantage invested $233.5 million on property, plant and equipment at Glacier for the year ended December 31, 2014. We ramped up
our capital development program at Glacier in the third quarter of 2013 resulting in additional production during the first quarter of
2014, and we reached our target of 135 mmcfe/d in March 2014. We have since maintained production between 130 mmcfe/d and 135
mmcfe/d. Enhanced well performance and lower production declines from wells drilled have exceeded expectations. The last well from
our most recent capital program is now not anticipated to be required to be placed on production until July 2015.
Our most recent capital program consisted of drilling 33 new Montney wells, and was designed to grow production at Glacier to 183
mmcfe/d including 900 bbls/d of natural gas liquids by July 2015. Drilling commenced in March 2014 with one rig drilling through
spring breakup and then increasing to three drilling rigs in July 2014. All 33 Montney wells have now been drilled and rig released and
22 of the 33 wells have been completed and will be available to increase production to our target volume of 183 mmcfe/d in July 2015
and hold production at that level until the first quarter of 2016. The remaining 11 wells will be completed and brought on production
as required in 2016. First quarter 2015 activity, which consisted of drilling 10 wells and completing 6 wells is included as part of the
Corporation’s 2015 capital budget.
Advantage’s 100% owned Glacier gas plant is currently being expanded with commissioning expected in July 2015. Processing capacity
is being expanded to 250 mmcf/d including 70 mmcf/d of spare capacity to meet future production growth in 2016 and 2017.
Additionally, the plant will be capable of processing varying amounts of dry and liquids rich gas production with the installation of
natural gas liquids extraction and condensate stabilization equipment.
In 2014 Advantage acquired 9 additional sections of land with Lower Doig/Montney rights in the greater Glacier area. Advantage now
holds a total of 129 sections (82,560 acres) of either Lower Doig or Montney rights.
Firm service transportation commitments have been secured to coincide with Advantage’s 2016 production target of 205 mmcfe/d.
Advantage Oil & Gas Ltd. - 21
Sources and Uses of Funds
The following table summarizes the various funding requirements during the years ended December 31, 2014 and 2013 and the sources
of funding to meet those requirements:
($000)
Sources of funds
Funds from operations
Disposition of Longview investment
Disposition of Questfire investments
Change in non-cash working capital and other
Dividends received from Longview
Property dispositions
Uses of funds
Expenditures on property, plant and equipment
Decrease in bank indebtedness
Expenditures on exploration and evaluation assets
Expenditures on decommissioning liability
Year ended
December 31
2014
2013
$
$
164,010
90,153
17,500
7,830
1,692
-
281,185
233,464
44,038
3,237
446
281,185
$
$
85,310
-
-
16,390
12,691
52,903
167,294
148,539
7,260
6,831
4,664
167,294
$
$
$
$
The increased funds from operations combined with proceeds from the disposition of investments in Longview and Questfire were
used to fund capital expenditures and repay a significant portion of bank indebtedness. Bank indebtedness has been significantly reduced
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.
FINANCIAL AND OPERATING REVIEW – DISCONTINUED OPERATIONS
The following financial and operating highlights for Longview to February 28, 2014 have been presented to provide additional
information with respect to the Longview segment prior to disposition.
Production (boe/d)
Funds from operations ($000)
Net capital expenditures ($000)
Net income (loss) and comprehensive income (loss) from discontinued operations ($000)
per share - basic and diluted
(1) Represents the financial and operating results for the Longview segment for the 59 days from January 1, 2014 to February 28, 2014.
Year ended
December 31
2014 (1)
5,622
9,693
19,092
(58,894)
(0.35)
$
$
$
$
2013
5,953
63,195
38,696
4,915
0.03
$
$
$
$
Financial and operating results from Longview for 2014 are significantly impacted, particularly the reduction in funds from operations,
as it only represents 59 days due to the disposition of Longview on February 28, 2014 as opposed to the 365 days for the year ended
December 31, 2013. Advantage has recognized a consolidated net loss of $58.9 million from the Longview segment during the first
quarter of 2014 due to a $58.8 million loss on disposition as the net proceeds received by Advantage were less than the carrying value
of the net assets.
Advantage Oil & Gas Ltd. - 22
Annual Financial Information
The following is a summary of selected financial information of the Corporation for the years indicated.
Continuing Operations - Advantage
Total sales (before royalties) ($000)
Net income (loss) ($000)
per share - basic and diluted
Total assets ($000)
Long term financial liabilities ($000) (1)
Discontinued Operations - Longview
Total sales (before royalties) ($000)
Net income (loss) ($000)
per share - basic and diluted
Total assets ($000)
Long term financial liabilities ($000) (1)
Year ended
Dec. 31, 2014
Year ended
Dec. 31, 2013
Year ended
Dec. 31, 2012
$
$
$
$
$
215,653
74,597
0.44
1,454,767
110,482
$
$
$
$
$
140,090
(8,297)
(0.05)
1,309,543
236,151
$
$
$
$
$
129,131
(85,766)
(0.51)
1,424,010
239,724
$
24,715
$
(58,894)
$
(0.35)
$
-
$
-
$
$
$
$
$
149,652
4,915
0.03
455,701
117,642
$
$
$
$
$
139,774
(3,359)
(0.02)
489,786
111,895
(1) Long term financial liabilities exclude derivative liability, decommissioning liability and deferred income tax liability.
Advantage Oil & Gas Ltd. - 23
Quarterly Performance
($000, except as otherwise
indicated)
Continuing Operations - Advantage
Daily production
Natural gas (mcf/d)
Liquids (bbls/d)
Total (mcfe/d)
Average prices
Natural gas ($/mcf)
Excluding hedging
Including hedging
AECO daily
Liquids ($/bbl)
2014
2013
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
133,433
113
134,111
131,553
161
132,519
134,912
200
136,112
122,481
164
123,465
108,260
79
108,734
111,518
105
112,148
116,469
554
119,793
119,692
1,308
127,540
$
$
$
3.78
3.72
3.61
$
$
$
4.03
3.80
4.02
$
$
$
4.71
4.27
4.69
$
$
$
5.21
4.89
5.59
$
$
$
3.21
3.39
3.52
$
$
$
2.46
2.63
2.45
$
$
$
3.47
3.35
3.55
$
$
$
2.98
3.04
3.20
Including hedging
Edmonton Light ($/bbl)
Total sales including realized hedging
Net income (loss)
per share - basic and diluted
Funds from operations
$
$
$
$
$
$
71.35
75.54
46,409
53,682
0.32
39,182
$
$
$
$
$
$
83.14
97.07
47,190
14,201
0.08
36,818
$
$
$
$
$
$
102.41
105.65
54,265
24,330
0.14
42,561
$
$
$
$
$
$
94.10
99.99
55,239
(17,616)
(0.10)
45,449
$
$
$
$
$
$
77.01
86.88
34,304
(6,273)
(0.04)
23,822
$
$
$
$
$
$
95.13
104.96
27,857
(3,187)
(0.02)
16,516
$
$
$
$
$
$
73.22
92.99
39,184
6,543
0.04
23,488
$
$
$
$
$
$
75.58
88.78
41,598
(5,380)
(0.03)
21,484
Discontinued Operations - Longview
Total sales including realized hedging
Net income (loss)
per share - basic and diluted (1)
Funds from operations
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
$
$
$
23,237
(58,894)
(0.35)
9,693
$
$
$
$
33,721
870
0.01
13,740
$
$
$
$
38,234
1,845
0.01
17,959
$
$
$
$
37,179
1,799
0.01
16,683
$
33,729
$
401
$
-
$
14,813
(1) Per share amounts based on weighted average basic and diluted shares outstanding of Advantage Oil & Gas Ltd.
The table above highlights the Corporation’s performance for the fourth quarter of 2014 and also for the preceding seven quarters for
both continuing and discontinued operations. Production during the first quarter of 2013 reflects the last full interim period in which
Advantage owned non-core assets. As of April 30, 2013, the sale of these non-core assets was completed and Advantage was
transformed into a pure play Montney producer with a single focus on development of our Glacier, Alberta area. Accordingly,
production was lower from the second to fourth quarters of 2013. We ramped up our capital development program at Glacier in the
third quarter of 2013 resulting in additional production during the first quarter of 2014, and we reached our target of 135 mmcfe/d in
March 2014. Currently, Advantage has an inventory of 33 wells drilled from our most recent capital program. We have in excess of 185
mmcf/d of first month productivity from 22 completed wells and a number of older wells which are currently shut-in due to plant
capacity constraints. These standing wells will be utilized to increase production to 183 mmcfe/d in July 2015 and are capable of
sustaining production to early 2016. The remaining 11 wells drilled from our 2014 program will be completed and brought on
production as required in 2016.
During the third quarter of 2013, sales and funds from operations decreased due to significant reductions in AECO prices that impacted
the entire Alberta natural gas industry. Sales and funds from operations increased dramatically in 2014 primarily attributable to improved
natural gas prices and production growth. In 2013, Advantage has reported net losses primarily driven by weak natural gas prices. In
the first quarter of 2014, Advantage recognized a $13.8 million loss on redemption of the Questfire Debenture and a $58.8 million loss
on disposition of the Longview operating segment as the net proceeds received by Advantage were less than the carrying value of the
net assets. As a pure Montney producer Advantage now has a much simpler capitalization structure and a strong balance sheet to
continue its multi-year development plan. Advantage’s production growth at Glacier has resulted in increased total sales including
realized hedging, net income and funds from operations from the second quarter of 2014 to the fourth quarter of 2014.
Advantage Oil & Gas Ltd. - 24
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 natural gas and liquids prices, operating expense, royalty burden changes, and future development costs. Reserve estimates
impact net income and comprehensive income through depreciation and impairment of natural gas and liquids properties. The reserve
estimates are also used to assess the borrowing base for the Corporation’s Credit Facilities. Revision or changes in the reserve estimates
can have either a positive or a negative impact on asset values, net income, comprehensive income and the borrowing base of the
Corporation.
Management’s process of determining the provision for deferred income taxes, the provision for decommissioning liability costs and
related accretion expense and the fair values initially assigned to the convertible debentures liability and equity components 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
There have been no changes in accounting policies during the year ended December 31, 2014.
Accounting Pronouncements not yet Adopted
Standards issued but not yet effective up to the date of issuance of the Corporation’s financial statements are evaluated as to whether
we expect changes to our financial reporting when they become effective. As at March 25, 2015, we do not expect any of the standards
issued but not effective to result in changes to our current financial reporting when they become effective.
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, 2014. 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.
Advantage Oil & Gas Ltd. - 25
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, 2014, 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 (2013) 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, 2014. 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, 2014 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.
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 25, 2015
Advantage Oil & Gas Ltd. - 26
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, 2014 and 2013, and the consolidated
statements of comprehensive income (loss), changes in shareholders’ equity and cash flows for the years ended December 31, 2014 and
2013. 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 25, 2015
Craig Blackwood
Vice President Finance and Chief Financial Officer
Advantage Oil & Gas Ltd. - 27
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 (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment, we have concluded
that as of December 31, 2014, 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, 2014, as stated in their Auditor’s Report. PricewaterhouseCoopers LLP has provided such
opinion.
Andy J. Mah
President and Chief Executive Officer
March 25, 2015
Craig Blackwood
Vice President Finance and Chief Financial Officer
Advantage Oil & Gas Ltd. - 28
March 25, 2015
Independent Auditor’s Report
To the Shareholders of Advantage Oil & Gas Ltd.
We have completed integrated audits of Advantage Oil & Gas Ltd.’s 2014 and 2013 consolidated financial statements
and its internal control over financial reporting as at December 31, 2014. 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, 2014 and December 31, 2013 and the consolidated
statements of comprehensive income (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. - 29
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, 2014 and December 31, 2013 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, 2014,
based on criteria established in Internal Control - Integrated Framework (2013), 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. - 30
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, 2014, based on criteria established in Internal Control - Integrated Framework (2013)
issued by COSO.
Chartered Accountants
Advantage Oil & Gas Ltd. - 31
Consolidated Statement of Financial Position
(thousands of Canadian dollars)
Notes
December 31, 2014
December 31, 2013
ASSETS
Current assets
Trade and other receivables
Prepaid expenses and deposits
Derivative asset
Total current assets
Non-current assets
Derivative asset
Investments
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
Convertible debenture
Total current liabilities
Non-current liabilities
Derivative liability
Performance incentive plan
Bank indebtedness
Convertible debenture
Decommissioning liability
Deferred income tax liability
Total non-current liabilities
Total liabilities
SHAREHOLDERS' EQUITY
Share capital
Convertible debenture equity component
Contributed surplus
Deficit
Total shareholders' equity attributable to Advantage shareholders
Non-controlling interest
Total shareholders' equity
5
10
10
6
7
8
14
10
12
10
17(b)
11
12
13
14
15
12
$
21,974
$
32,016
2,503
31,595
56,072
14,961
-
9,803
1,373,931
-
1,398,695
3,357
143
35,516
2,329
30,626
10,270
1,647,434
39,069
1,729,728
$
1,454,767
$
1,765,244
$
81,741
$
93,893
-
85,941
167,682
-
512
109,970
-
48,878
33,399
192,759
360,441
2,234,959
8,348
90,904
(1,239,885)
1,094,326
-
1,094,326
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
Total liabilities and shareholders' equity
$
1,454,767
$
1,765,244
Commitments (note 23)
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. - 32
Year ended
December 31
2014
2013
$
215,653
(10,076)
205,577
$
140,090
(7,534)
132,556
(15,412)
(9,579)
(85,460)
(53)
(14,792)
35,236
(10,527)
(20,515)
(24,426)
(72,140)
-
(18,225)
(3,190)
(3,979)
104,990
(30,393)
(9,919)
1,622
74,597
(8,297)
(58,894)
15,703
$
4,915
(3,382)
$
$
$
$
$
0.44
(0.35)
0.09
(0.05)
0.03
(0.02)
Consolidated Statement of Comprehensive Income (Loss)
(thousands of Canadian dollars, except for per share amounts)
Notes
Continuing operations
Natural gas and liquids sales
Less: royalties
Natural gas and liquids revenue
Operating expense
General and administrative expense
Depreciation expense
Exploration and evaluation expense
Finance expense
Gains (losses) on derivatives
Other income (expenses)
Income (loss) before taxes from continuing
operations
Income tax recovery (expense)
Net income (loss) and comprehensive income (loss)
from continuing operations
Discontinued operations
Net income (loss) from discontinued operations
Net income (loss) and comprehensive income (loss)
Net income (loss) per share
Basic and diluted - from continuing operations
Basic and diluted - from discontinued operations
Basic and diluted
18
19
8
7
20
10
21
14
24
16
See accompanying Notes to the Consolidated Financial Statements
Advantage Oil & Gas Ltd. - 33
Consolidated Statement of Changes in Shareholders' Equity
(thousands of Canadian dollars)
Notes Share capital
Convertible
debenture
equity
component
Contributed
surplus
Deficit
Total
shareholders'
equity
attributable to
Advantage
shareholders
Non-
controlling
interest
Total
shareholders'
equity
Balance, December 31, 2013
Net income (loss) and comprehensive
income (loss)
Share based compensation
Change in ownership interest, share
based compensation
Dividends declared by Longview
($0.04 per Longview share)
Disposition of Longview
Balance, December 31, 2014
$
2,229,598
$
8,348
$
92,276
$
(1,255,588)
$
1,074,634
$
129,779
$
1,204,413
15, 17
5,361
-
-
-
(1,372)
-
15,703
-
-
15,703
3,989
-
(85)
-
334
15,618
3,989
334
3b, 24
-
-
2,234,959
$
-
-
8,348
$
-
-
90,904
$
-
-
(1,239,885)
$
-
-
1,094,326
$
(1,032)
(128,996)
$
-
(1,032)
(128,996)
1,094,326
$
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
$
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
15, 17
-
-
-
-
-
981
981
-
2,229,598
$
-
8,348
$
-
92,276
$
-
(1,255,588)
$
-
1,074,634
$
(15,191)
129,779
$
(15,191)
1,204,413
$
See accompanying Notes to the Consolidated Financial Statements
Advantage Oil & Gas Ltd. - 34
Consolidated Statement of Cash Flows
(thousands of Canadian dollars)
Notes
Operating Activities
Income (loss) before taxes from continuing
operations
Add (deduct) items not requiring cash:
15, 17
Share based compensation
8
Depreciation expense
7
Exploration and evaluation expense
10
Unrealized loss (gain) on derivatives
21
Loss on sale of assets
6, 21
Accretion income - Questfire Debenture
Loss on disposition of Questfire Debenture
6
Unrealized loss (gain) - Questfire Class B Shares 6
20
13
22
Finance expense
Expenditures on decommissioning liability
Changes in non-cash working capital
Cash provided by operating activities - continuing
operations
Cash provided by operating activities - discontinued
operations
Cash provided by operating activities
24
11
24
8, 22
7
6
24
Financing Activities
Decrease in bank indebtedness
Interest paid
Cash used in financing activities - continuing
operations
Cash provided by (used in) financing activities -
discontinued operations
Cash used in financing activities
Investing Activities
Expenditures on property, plant and equipment
Expenditures on exploration and evaluation assets
Disposition of investments
Property dispositions
Cash used in investing activities - continuing
operations
Cash provided by (used in) investing activities -
discontinued operations
Cash used in investing activities
Net change in cash
Cash, beginning of year
Cash, end of year
See accompanying Notes to the Consolidated Financial Statements
Advantage Oil & Gas Ltd. - 35
Year ended
December 31
2014
2013
$
104,990
$
(9,919)
2,153
85,460
53
(47,786)
1,489
(557)
13,833
(150)
14,792
(446)
(3,924)
169,907
12,434
182,341
5,180
72,140
-
6,043
6,354
(1,516)
-
900
18,225
(4,664)
6,623
99,366
65,651
165,017
(44,038)
(9,956)
(7,260)
(11,756)
(53,994)
(19,016)
435
(53,559)
(15,217)
(34,233)
(221,810)
(3,237)
17,500
(211)
(139,716)
(6,831)
-
53,506
(207,758)
(93,041)
78,976
(128,782)
-
-
$
-
(37,743)
(130,784)
-
-
$
-
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
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 natural gas and
liquids development and production corporation with a significant position in the Montney resource play 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 25, 2015, 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 10.
(c) Functional and presentation currency
These consolidated financial statements are presented in Canadian dollars, which is the Corporation’s functional currency.
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.
Advantage Oil & Gas Ltd. - 36
3. Significant accounting policies (continued)
(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. The only significant operating subsidiary was Longview Oil Corp.
(“Longview”), a public Canadian corporation that was a junior oil-focused development and production company
with properties located in Western Canada. At December 31, 2013, Advantage owned 45.1% of the common shares
of Longview. Because the remaining ownership was dispersed, Advantage was considered to control Longview.
Therefore, Longview was accounted for on a consolidated basis in these financial statements. The remaining 54.9%
ownership was disclosed as non-controlling interest. All inter-corporate balances, income and expenses resulting
from inter-corporate transactions were eliminated.
On February 28, 2014, the Corporation closed an offering (the “Offering”) to sell the 21.15 million Longview
common shares for net proceeds of $90.2 million. The results of operations of Longview from January 1, 2014 to
February 28, 2014 are consolidated into the results of operations of the Corporation. Because Longview was an
operating segment, its results are presented as “discontinued operations” for the periods January 1, 2014 to February
28, 2014 and the year ended December 31, 2013 as required by IFRS 5, non-current assets held for sale and discontinued
operations (see note 24). On February 28, 2014, Advantage derecognized all assets, liabilities and the non-controlling
interest of Longview from the consolidated statement of financial position as it had lost control of Longview as
defined in IFRS 10, consolidated financial statements.
(ii) Joint arrangements
A significant portion of the Corporation’s natural gas and liquids 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. Proceeds received consisted of cash
and non-cash consideration. The Questfire Class B Shares were classified as financial assets at fair value through profit
or loss. The Questfire Debenture was classified as a financial asset at amortized cost. Questfire repurchased these assets
by way of agreement on March 26, 2014, and their balance is $Nil at December 31, 2014. (see note 6).
Advantage Oil & Gas Ltd. - 37
3. Significant accounting policies (continued)
(d) Property, plant and equipment and exploration and evaluation assets
(i) Recognition and measurement
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 natural gas and liquids 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.
Development and production costs
Items of property, plant and equipment, which include natural gas and liquids properties, 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 natural gas and liquids properties,
have different useful lives, they are accounted for as separate items (major components).
(ii) Subsequent costs
Costs incurred subsequent to development and production that are significant are recognized as natural gas and
liquids 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 natural gas and
liquids 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 natural gas and liquids properties is depreciated using the units-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.
Advantage Oil & Gas Ltd. - 38
3. Significant accounting policies (continued)
(d) Property, plant and equipment and exploration and evaluation assets (continued)
(iv) Dispositions
Gains and losses on disposal of an item of property, plant and equipment, including natural gas and liquids properties,
are determined by comparing the proceeds from disposition with the carrying amount of property, plant and
equipment and are recognized net within other income (expenses) in the Consolidated Statement of Comprehensive
Income (Loss).
(v) Impairment
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 of
disposition. 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 of disposition 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 of disposition 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 natural gas and liquids 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).
(e) 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. - 39
3. Significant accounting policies (continued)
(f) 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 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.
On April 14, 2014, the Board of Directors approved a Restricted and Performance Award Incentive Plan to provide share
based compensation for service providers. Awards granted under this plan are presently expected to be settled in cash, as
the Corporation has not sought the approval of shareholders required to settle the awards in shares. In accordance with
the requirements of IFRS 2, Share Based Payments, a liability is recorded as compensation expense is recognized. The liability
is revalued at each reporting date and at the date of settlement. These changes in fair value are recognized in profit or
loss for the period. The types and timing of awards under this plan are described in further detail in note 0.
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.
(g) Revenue
Revenue from the sale of natural gas and liquids is recorded when the significant risks and rewards of ownership of the
product is substantially transferred to the buyer.
(h) Finance expense
Finance expense comprises interest expense on bank indebtedness and the convertible debenture, and accretion of the
discount on the decommissioning liability and convertible debenture.
(i) 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 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.
(j) 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.
Advantage Oil & Gas Ltd. - 40
4. Significant accounting judgments, estimates and assumptions
The preparation of consolidated 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. Significant estimates and judgments made in the preparation
of the consolidated financial statements are outlined below.
(a) Reserves base
The natural gas and liquids development and production properties are depreciated on a units-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 natural gas and liquids in
place, recovery factors and future natural gas and liquids 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.
(b) Determination of cash generating unit
Management has determined there to be a single cash generating unit (“Glacier”) on the basis of its ability to generate
independent cash flows, similar reserve characteristics, geographical location, and shared infrastructure, namely a single
processing plant owned by Advantage.
(c) 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 of disposition. 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 & 8).
(d) 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.
(e) Income taxes
Income tax laws and regulations are subject to change. Deferred tax liabilities that arise from temporary differences
between recorded amounts on the statement of financial position and their respective tax bases will be payable in future
periods. The amount of a deferred tax liability is subject to management’s best estimate of when a temporary difference
will reverse and expected changes in income tax rates. These estimates by nature involve significant measurement
uncertainty.
Advantage Oil & Gas Ltd. - 41
5. Trade and other receivables
Trade receivables
Receivables from joint venture partners
Other
6.
Investments
December 31, 2014
19,607
$
1,386
981
21,974
$
December 31, 2013
26,317
$
4,204
1,495
32,016
$
Questfire Class B Shares
Questfire Convertible Senior Secured Debenture
December 31, 2014
-
$
-
$
-
December 31, 2013
3,750
$
26,876
30,626
$
On March 26, 2014, Advantage entered into agreements whereby Questfire purchased both the Class B Shares and the
Convertible Senior Secured Debenture for proceeds of $3.9 million and $13.6 million, respectively.
$
2,381
6,977
(195)
(146)
1,253
10,270
3,237
(2,335)
(53)
(1,316)
9,803
$
$
7. Exploration and evaluation assets
Balance at December 31, 2012
Additions
Exploration and evaluation expense
Transferred to property, plant and equipment (note 8)
Transferred from assets held for sale
Balance at December 31, 2013
Additions
Disposition of Longview (notes 3b and 24)
Exploration and evaluation expense
Transferred to property, plant and equipment (note 8)
Balance at December 31, 2014
Advantage Oil & Gas Ltd. - 42
8. Property, plant and equipment
Cost
Balance at December 31, 2012
Additions
Change in decommissioning liability (note 13)
Disposals
Transferred from exploration and evaluation assets (note 7)
Balance at December 31, 2013
Additions
Change in decommissioning liability (note 13)
Disposition of Longview (notes 3b and 24)
Transferred from exploration and evaluation assets (note 7)
Balance at December 31, 2014
Accumulated depreciation
Balance at December 31, 2012
Depreciation
Disposals
Balance at December 31, 2013
Depreciation
Disposition of Longview (notes 3b and 24)
Balance at December 31, 2014
Net book value
At December 31, 2013
At December 31, 2014
Natural gas and
liquids properties
1,952,063
$
188,451
(30,387)
(5,876)
146
2,104,397
252,556
19,938
(664,090)
1,316
1,714,117
$
$
Natural gas and
liquids properties
349,092
$
110,650
(629)
459,113
91,168
(208,375)
341,906
$
$
Furniture
and
equipment
5,240
$
-
-
-
-
5,240
-
-
-
-
5,240
$
$
Furniture
and
equipment
2,552
$
538
-
3,090
430
-
3,520
$
$
$
$
Total
1,957,303
188,451
(30,387)
(5,876)
146
2,109,637
252,556
19,938
(664,090)
1,316
1,719,357
$
Total
$
351,644
111,188
(629)
462,203
91,598
(208,375)
345,426
$
$
Natural gas and
liquids properties
$
1,645,284
$
1,372,211
Furniture
and
equipment
$
2,150
$
1,720
Total
$
$
1,647,434
1,373,931
During the year ended December 31, 2014, Advantage capitalized general and administrative expenditures directly related to
development activities of $7.5 million (December 31, 2013 - $11.7 million).
Advantage included future development costs of $1.7 billion (December 31, 2013 – $2.1 billion) in property, plant and
equipment costs subject to depreciation.
9. Related party transactions
Transactions between Advantage and Longview
Up until February 28, 2014, Advantage and Longview were bound by a Technical Services Agreement (“TSA”). Under the
TSA, 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. All
amounts paid were recorded as general and administrative expenses and measured at the fair value, which was the amount
agreed upon by the transacting parties.
Advantage charged Longview $0.1 million during the period from January 1, 2014 to February 28, 2014 (year ended December
31, 2013 - $5.2 million) under the TSA. Dividends declared and paid or payable from Longview to Advantage during the
period from January 1, 2014 to February 28, 2014 totaled $0.8 million (year ended December 31, 2013 - $12.5 million). All
amounts due to Advantage from Longview were non-interest bearing in nature, and were incurred within the normal course
of business. Upon closing of the Offering (note 3(b)), the TSA was terminated, and all intercompany balances were settled.
Advantage Oil & Gas Ltd. - 43
9. Related party transactions (continued)
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, 2014
2,297
$
2,669
4,966
$
December 31, 2013
5,916
$
1,180
7,096
$
(1) Represents the grant date fair value of restricted shares and stock options granted for the respective years.
As at December 31, 2014, there is a $2.3 million commitment (December 31, 2013 - $1.9 million) related to change of control
or termination of employment of officers.
10. Financial risk management
Financial instruments of the Corporation include trade and other receivables, deposits, trade and other accrued liabilities, bank
indebtedness, convertible debenture, derivative assets and liabilities, and performance incentive plan liability.
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,
2014, there were no significant differences between the carrying amounts reported on the Consolidated Statement of Financial
Position and the estimated fair values of these financial instruments due to the short terms to maturity and the floating interest
rate on the bank indebtedness.
The Corporation has a convertible debenture obligation outstanding, of which the liability component has been classified as
a financial liability at amortized cost. The convertible debenture has fixed terms and interest rates resulting in fair values that
will vary over time as market conditions change. As at December 31, 2014, the estimated fair value of the outstanding
convertible debenture obligation was $86.3 million (December 31, 2013 - $86.7 million). The fair value of the liability
component of the convertible debenture was determined based on the current public trading activity of the debenture.
Fair value is determined following a three level hierarchy:
Level 1: Quoted prices in active markets for identical assets and liabilities. The Corporation does not have any financial assets
or liabilities that require level 1 inputs.
Level 2: Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly. Such inputs
can be corroborated with other observable inputs for substantially the complete term of the contract. Derivative assets and
liabilities and the performance incentive plan liability are measured at fair value on a recurring basis. For derivative assets and
liabilities, pricing inputs include quoted forward prices for commodities, foreign exchange rates, volatility and risk-free rate
discounting, all of which can be observed or corroborated in the marketplace. For the performance incentive plan liability,
pricing inputs include estimates of forfeitures and risk-free rate discounting. The actual gains and losses realized on eventual
cash settlement can vary materially due to subsequent fluctuations in commodity prices and share price 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. - 44
10. 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,
natural gas and liquids marketers and companies with whom we enter into hedging contracts. The maximum exposure to
credit risk is as follows:
Trade and other receivables
Deposits
Derivative asset
Questfire debenture
$
December 31, 2014
21,974
1,210
46,556
-
69,740
$
$
December 31, 2013
32,016
1,548
2,472
26,876
62,912
$
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 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, 2014, $0.6 million or 2.6% of trade and other receivables are outstanding for 90 days or
more (December 31, 2013 - $0.9 million or 2.9% 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, 2014
or 2013.
The Corporation’s most significant customer, a Canadian oil and natural gas marketer, accounts for $14.7 million of the
trade and other receivables at December 31, 2014 (December 31, 2013 - $13.0 million).
Advantage Oil & Gas Ltd. - 45
10. 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 $400 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 matured on January 30, 2015 (note 12). Interest payments are
made semi-annually with excess cash provided by operating activities. As the debenture becomes due, the Corporation
can satisfy the obligation in cash or issue shares at a price determined in the applicable debenture agreement. This
settlement alternative allows the Corporation to adequately manage liquidity, plan available cash resources and implement
an optimal capital structure.
To the extent that Advantage enters derivatives to manage commodity price risk, it may be subject to liquidity risk as
derivative liabilities become due. While the Corporation has elected not to follow hedge accounting, derivative
instruments are not entered for speculative purposes and Management closely monitors existing commodity risk
exposures. As such, liquidity risk is mitigated since any losses actually realized are subsidized by increased cash flows
realized from the higher commodity price environment.
The timing of cash outflows relating to financial liabilities as at December 31, 2014 and 2013 are as follows:
December 31, 2014
Trade and other accrued liabilities
Bank indebtedness
Three to
five years Thereafter
$
-
$
-
-
-
-
-
-
-
-
-
$
-
$
-
(1) Interest on bank indebtedness was calculated assuming conversion of the revolving credit facility to a one-year term facility.
One to
three years
$
-
110,332
3,283
-
-
113,615
Less than
one year
81,741
-
6,847
86,250
2,144
176,982
- principal
- interest (1)
- principal
- interest
Convertible debenture
$
$
$
$
December 31, 2013
Trade and other accrued liabilities
Derivative liability
Bank indebtedness
Three to
five years Thereafter
$
-
$
-
-
-
-
-
-
-
-
-
-
-
$
-
$
-
(1) Interest on bank indebtedness was calculated assuming conversion of the revolving credit facility to a one-year term facility.
One to
three years
$
-
1,183
272,521
6,496
86,250
2,156
368,606
Less than
one year
93,893
8,340
-
13,626
-
4,313
120,172
- principal
- interest (1)
- principal
- interest
Convertible debenture
$
$
Advantage Oil & Gas Ltd. - 46
Total
$
81,741
110,332
10,130
86,250
2,144
290,597
$
Total
$
93,893
9,523
272,521
20,122
86,250
6,469
488,778
$
10. Financial risk management (continued)
The Corporation’s bank indebtedness does not have specific maturity dates. It is governed by credit facility agreements
with a syndicate of financial institutions (note 11). Under the terms of the agreements, the facilities are reviewed annually,
with the next review scheduled in June 2015. 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
natural gas prices used to calculate the fair value of the natural gas derivatives at December 31, 2014 would result in a
$12.1 million change in net income for the year ended December 31, 2014.
As at December 31, 2014, the Corporation’s natural gas hedging positions are summarized as follows:
Average
Period
Q1 2015 to Q4 2015
Q1 2016 to Q4 2016
Q1 2017
Production Hedged
78.2 mmcf/d
56.9 mmcf/d
47.4 mmcf/d
Average Price
AECO ($Cdn.)
$3.90/mcf
$3.93/mcf
$3.95/mcf
As at December 31, 2014, the fair value of the derivatives outstanding resulted in an asset of $46.6 million (December
31, 2013 – $2.5 million) and a liability of $Nil (December 31, 2013 – $9.5 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, 2014, $30.9 million was recognized in net income as a derivative gain (December 31,
2013 - $14.7 million derivative loss). The table below summarizes the realized and unrealized gains (losses) on derivatives
recognized in net income (loss).
Realized loss on derivatives
Unrealized gain (loss) on derivatives
From continuing operations
From discontinued operations
(d) Interest rate risk
Year ended
December 31, 2014
$
Year ended
December 31, 2013
$
(14,028)
44,941
30,913
35,236
(4,323)
30,913
$
$
$
$
$
$
(3,936)
(10,812)
(14,748)
(3,190)
(11,558)
(14,748)
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, 2014, net income (loss) and
comprehensive income (loss) would have changed by $0.7 million (December 31, 2013 - $2.0 million) based on the
average debt balance outstanding during the year.
Advantage Oil & Gas Ltd. - 47
10. Financial risk management (continued)
(e) Capital management
The Corporation manages its capital with the following objectives:
• To ensure sufficient financial flexibility to achieve the ongoing business objectives including replacement of
production, funding of future growth opportunities, and pursuit of accretive acquisitions; and
• To maximize shareholder return through enhancing the share value.
Advantage monitors its capital structure and makes adjustments according to market conditions in an effort to meet its
objectives given the current outlook of the business and industry in general. The capital structure of the Corporation is
composed of working capital (excluding derivative assets and liabilities), bank indebtedness, convertible debentures, and
share capital. Advantage may manage its capital structure by issuing new shares, repurchasing outstanding shares,
obtaining additional financing either through bank indebtedness or convertible debenture issuances, refinancing current
debt, issuing other financial or equity-based instruments, declaring a dividend, adjusting capital spending, or disposing of
assets. The capital structure is reviewed by Management and the Board of Directors on an ongoing basis.
Advantage’s capital structure as at December 31, 2014 and December 31, 2013 is as follows:
Bank indebtedness (non-current) (note 11)
Working capital deficit (1)
Net debt
Convertible debentures maturity value (current)
Total debt
Shares outstanding (note 15)
Share closing market price ($/share)
Market capitalization (2)
Total capitalization
December 31, 2014
$
109,970
57,264
167,234
86,250
253,484
170,067,650
5.56
945,576
1,199,060
$
$
$
December 31, 2013
$
271,339
58,520
329,859
86,250
416,109
168,382,838
4.61
776,245
1,192,354
$
$
$
(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.
Advantage Oil & Gas Ltd. - 48
11. Bank indebtedness
Revolving credit facility:
Advantage
Longview
Discount on Bankers Acceptances and other fees
Balance, end of year
December 31, 2014
December 31, 2013
$
$
110,332
-
(362)
109,970
154,370
118,151
(1,182)
271,339
$
$
As at December 31, 2014, the Corporation had credit facilities (the "Credit Facilities") of $400 million. The Credit Facilities
are comprised of a $20 million extendible revolving operating loan facility from one financial institution and $380 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 Corporation’s debt to cash flow ratio. The
Credit Facilities are 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 2015 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 a non-revolving term
facility 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 natural gas and liquids production over three years and 50% over the fourth
year. The Credit Facilities contain standard commercial covenants for credit facilities of this nature. The only financial
covenant is a requirement for the Corporation 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, 2014 and 2013. Breach of any covenant will result
in an event of default in which case the Corporation has 20 days to remedy such default. If the default is not remedied or
waived, and if required by the lenders, the administrative agent of the lenders has the option to declare all obligations under
the credit facilities to be immediately due and payable without further demand, presentation, protest, days of grace, or notice
of any kind. Interest payments under the debentures are subordinated to the repayment of any amounts owing under the
Credit Facilities and are not permitted if the Corporation is in default of such Credit Facilities or if the amount of outstanding
indebtedness under such facilities exceeds the then existing current borrowing base. For the year ended December 31, 2014,
the average effective interest rate on the outstanding amounts under the facilities was approximately 3.8% (December 31,
2013 – 5.0%). Advantage has $2.5 million letters of credit issued and outstanding at December 31, 2014 (December 31, 2013
- $Nil).
Advantage Oil & Gas Ltd. - 49
12. 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, 2014 and changes in the liability and equity components
during the years ended December 31, 2014 and 2013 are as follows:
Trading symbol
Debentures outstanding
Liability component:
Balance at December 31, 2012
Accretion of discount
Balance at December 31, 2013
Accretion of discount
Balance at December 31, 2014
Equity component:
Balance at December 31, 2013
Balance at December 31, 2014
5.00%
AAV.DBH
86,250
$
79,108
3,346
82,454
3,487
85,941
$
$
$
$
8,348
8,348
There were no convertible debenture conversions during the years ended December 31, 2014 and 2013. On January 30, 2015,
both the principal and final interest payment were settled with cash drawn from the credit facility, with the exception of $0.01
million, which was converted to 1,162 common shares.
Advantage Oil & Gas Ltd. - 50
13. Decommissioning liability
The Corporation’s decommissioning liability results from net ownership interests in natural gas and liquids 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 2015 and 2074. A risk-free rate of 2.33%
(December 31, 2013 – 3.20%) and an inflation factor of 2% (December 31, 2013 – 2%) were used to calculate the fair value
of the decommissioning liability at December 31, 2014. 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
Disposition of Longview (note 3b and 24)
Transferred from assets held for sale
Balance, end of year
Year ended
December 31, 2014
100,616
$
1,364
4,218
683
15,037
-
(482)
(72,558)
48,878
-
48,878
$
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
$
Advantage Oil & Gas Ltd. - 51
14. 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, 2014
-
$
30,393
30,393
$
Year ended
December 31, 2013
$
-
(1,622)
(1,622)
$
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 from continuing operations
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
Unrecognized deferred tax asset on sale of Questfire Debenture
Difference between current and expected tax rates
Effective tax rate
$
Year ended
December 31, 2014
104,990
25.00%
26,248
Year ended
December 31, 2013
$
(9,919)
25.00%
(2,480)
823
-
3,458
(136)
30,393
28.95%
$
1,987
(2,350)
-
1,221
(1,622)
16.35%
$
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, 2012
Charged (credited) to income
Balance at December 31, 2013
Charged (credited) to income
Balance at December 31, 2014
Deferred income tax asset
Balance at December 31, 2012
Charged (credited) to income
Balance at December 31, 2013
Charged (credited) to income
Balance at December 31, 2014
Property, plant and
equipment
$
Derivative
asset/liability
$
237,246
(18,807)
218,439
10,586
229,025
267
(2,058)
(1,791)
13,430
11,639
Total
$
237,513
(20,865)
216,648
24,016
240,664
$
$
$
Decommissioning
liability
$
Non-capital
losses
$
Other
$
Total
$
(66,217)
40,594
(25,623)
13,320
(12,303)
(204,147)
(11,422)
(215,569)
31,956
(183,613)
(5,414)
(6,105)
(11,519)
170
(11,349)
(275,778)
23,067
(252,711)
45,446
(207,265)
$
$
$
$
Net deferred income tax liability (asset)
Balance at December 31, 2012
Charged (credited) to income
Balance at December 31, 2013
Charged (credited) to income
Balance at December 31, 2014
Longview
$
(42,893)
3,824
(39,069)
39,069
$
-
Advantage Oil & Gas Ltd. - 52
Advantage
$
Total
$
4,628
(1,622)
3,006
30,393
33,399
(38,265)
2,202
(36,063)
69,462
33,399
$
$
The estimated tax pools available at December 31, 2014 are as follows:
Canadian development expenses
Canadian exploration expenses
Canadian oil and gas property expenses
Non-capital losses
Capital losses
Undepreciated capital cost
Other
$ 219,133
65,944
2,907
734,455
157,869
168,869
10,122
$
1,359,299
The non-capital loss carry forward balances above expire no earlier than 2023.
A deferred tax asset has not been recognized for capital losses realized in the amount of $158 million (December 31, 2013 –
$11 million). Recognition is dependent on the realization of future taxable capital gains.
15. 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, 2012 and December 31, 2013
Share based compensation (note 17)
Balance at December 31, 2014
Common Shares
168,382,838
1,684,812
170,067,650
Amount
2,229,598
5,361
2,234,959
$
$
16. Net income (loss) per share attributable to Advantage shareholders
The calculations of basic and diluted net income (loss) per share are derived from both net income (loss) attributable to
Advantage common shareholders and weighted average shares outstanding, calculated as follows:
Year ended
December 31, 2014
Year ended
December 31, 2013
Net income (loss) attributable to Advantage shareholders
Basic and diluted - continuing operations
Basic and diluted - discontinued operations
Basic and diluted
Weighted average shares outstanding
Basic
Stock Option Plan
Diluted
$
$
$
$
74,597
(58,894)
15,703
(8,297)
4,915
(3,382)
169,482,394
1,317,671
170,800,065
168,382,838
1,445,884
169,828,722
The calculation of diluted net income (loss) per share for the years ended December 31, 2014 and 2013 excludes the convertible
debenture, as its impact would be anti-dilutive. Total weighted average shares issuable in exchange for the convertible
debenture excluded from the diluted net income (loss) per share calculation for the years ended December 31, 2014 and 2013
was 10,029,070 shares. As at December 31, 2014 and 2013, the total convertible debenture outstanding was convertible to
10,029,070 shares.
Advantage Oil & Gas Ltd. - 53
17. Share based compensation
(a) Stock option plan
Under the Stock Option Plan, service providers are granted options 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 valuation model, using weighted average assumptions as follows:
Volatility
Expected forfeiture rate
Dividend rate
Risk-free rate
41%
0.85%
0%
1.07%
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, 2014:
Balance at December 31, 2012
Expired
Exercised
Granted
Forfeited/cancelled
Balance at December 31, 2013
Exercised
Granted
Forfeited/cancelled
Balance at December 31, 2014
Stock Options
15,977,883
(1,994,658)
(1,994,641)
3,804,675
(2,732,416)
13,060,843
(7,435,115)
3,777,255
(4,258,307)
5,144,676
$
Weighted-Average
Exercise Price
3.67
3.67
3.67
3.69
3.68
3.68
3.67
5.00
3.70
4.63
$
$
Stock Options Outstanding
Stock Options Exercisable
Range of
Exercise Price
$3.69 - $4.43
$4.44 - $6.34
$3.69 - $6.34
Number of
Stock Options
Outstanding
3,674,727
1,469,949
5,144,676
Weighted Average
Remaining
Contractual Life -
Years
1.35
4.29
2.19
Weighted
Average
Exercise
Price
$
4.14
5.87
4.63
$
Number of
Stock
Options
Exercisable
Weighted
Average Exercise
Price
726,949 $ 3.69
-
-
$
3.69
726,949
Advantage Oil & Gas Ltd. - 54
17. Share based compensation (continued)
(b) Performance Incentive Plan
Under the Performance Incentive Plan, service providers can be granted two types of Incentive Awards: Restricted
Awards and Performance Awards. A Restricted Award is a grant denominated in a fixed number of common shares
which generally vests 1/3 on the first anniversary of the grant date, 1/3 on the second anniversary, and 1/3 on the third
anniversary. A Performance Award is a grant denominated in a fixed number of common shares which vests on the third
anniversary of the grant date. Performance Award grants are multiplied by a Payout Multiplier. The Payout Multiplier is
a number between zero (0) and two (2), and is determined based on an equal weighting of three Corporate Performance
Measures: Relative Total Shareholder Return, Annual Cash Flow Per Share and Relative Cost Structure.
As at December 31, 2014, no Restricted Awards have been granted.
The following table is a continuity of Performance Awards:
Balance at December 31, 2012 and 2013
Granted
Forfeited
Balance at December 31, 2014
-
409,702
(3,560)
406,142
Share based compensation recognized by plan for the years ended December 31, 2014 and 2013 are as follows:
Year ended
December 31
RSPIP (1)
Stock Option Plan
Performance Incentive Plan
Total share based compensation
Capitalized
Net share based compensation expense
From continuing operations
From discontinued operations
(1) Relates solely to discontinued operations
18. Natural gas and liquids sales
Natural gas sales
Crude oil and natural gas liquids sales
Total natural gas and liquids sales
From continuing operations
From discontinued operations
Advantage Oil & Gas Ltd. - 55
2014
$
2013
$
1,058
3,265
512
4,835
(2,016)
2,819
2,153
666
2,819
$
$
$
$
$
$
420
7,874
-
8,294
(2,838)
5,456
5,180
276
5,456
Year ended
December 31
2014
212,579
27,789
240,368
$
$
2013
134,878
154,864
289,742
$
$
$
$
215,653
24,715
240,368
$
$
140,090
149,652
289,742
19. General and administrative expense (“G&A”)
Year ended
December 31
Salaries and benefits
Share based compensation (note 17)
Office rent
Other
Total G&A
Capitalized (note 8)
Net G&A
From continuing operations
From discontinued operations
20. Finance expense
Interest on bank indebtedness (note 11)
Interest on convertible debenture (note 12)
Accretion on convertible debenture (note 12)
Accretion of decomissioning liability (note 13)
Total finance expense
From continuing operations
From discontinued operations
21. Other income (expenses)
Interest income - Questfire Debenture (note 6)
Accretion income - Questfire Debenture (note 6)
Loss on disposition of Questfire Debenture (note 6)
Unrealized gain (loss) - Questfire Class B Shares
Loss on sale of assets
Miscellaneous income
Total other income (expenses)
From continuing operations
From discontinued operations
Advantage Oil & Gas Ltd. - 56
2014
$
2013
$
8,786
4,835
1,173
4,126
18,920
(7,450)
11,470
22,877
8,294
2,109
5,863
39,143
(11,735)
27,408
$
$
$
$
9,579
1,891
11,470
$
$
24,426
2,982
27,408
Year ended
December 31
2014
$
2013
$
6,817
4,313
3,487
1,364
15,981
14,792
1,189
15,981
$
$
$
13,305
4,313
3,346
5,169
26,133
18,225
7,908
26,133
$
$
$
Year ended
December 31
2014
$
2013
$
455
557
(13,833)
150
(1,489)
3,633
(10,527)
1,312
1,516
-
(900)
(8,154)
1,102
(5,124)
$
$
$
$
(10,527)
-
(10,527)
$
$
(3,979)
(1,145)
(5,124)
22. Supplementary cash flow information – continuing operations
Changes in non-cash working capital is comprised of:
Year ended
December 31
2014
2013
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
$
$
$
$
$
$
(4,876)
159
11,525
6,808
(3,924)
1,311
9,421
6,808
$
$
1,207
1,835
10,526
13,568
6,623
206
6,739
13,568
23. Commitments
Advantage has several lease commitments relating to office buildings and transportation commitments. The estimated
remaining annual minimum operating lease payments are as follows:
2014
2015
2016
2017
2018
2019
2020 and thereafter
Total commitments
December 31
2014
2013
-
18,220
20,485
19,511
17,414
15,677
33,386
124,693
$
13,260
4,305
-
-
-
-
-
17,565
$
Advantage Oil & Gas Ltd. - 57
24. Discontinued operations
The Corporation was previously comprised of two operating segments: Advantage Oil & Gas Ltd. (“Advantage”) and
Longview Oil Corp. (“Longview”). Advantage develops and operates a natural gas focused property in Alberta. Longview
developed and operated primarily conventional oil and natural gas liquids focused properties in Alberta and Saskatchewan.
On February 28, 2014, the Corporation discontinued the Longview segment by selling its investment in Longview pursuant
to the Offering (note 3(b)).
Results of the discontinued Longview segment are as follows:
Year ended
December 31
2014 (1)
2013
$
24,715
(4,108)
20,607
$
149,652
(26,297)
123,355
(7,022)
(1,891)
(6,138)
(1,189)
(4,323)
-
-
85
129
(198)
(69)
(58,825)
(45,799)
(2,982)
(39,048)
(7,908)
(11,558)
(195)
(1,145)
(5,981)
8,739
(3,824)
4,915
-
$
(58,894)
$
4,915
Year ended
December 31
2014
2013
$
12,434
435
78,976
$
65,651
(15,217)
(37,743)
(thousands of Canadian dollars)
Petroleum and natural gas sales
Less: royalties
Petroleum and natural gas revenue
Operating expense
General and administrative expense
Depreciation expense
Finance expense
Losses on derivatives
Exploration and evaluation expense
Other income (expenses)
Non-controlling interest
Income before taxes from discontinued
operations
Income tax expense
Income (loss) from discontinued
operations
Loss on disposition of Longview
Net income (loss) from discontinued
operations
(1) Results from January 1, 2014 to February 28, 2014
Cash flows of the discontinued Longview segment are as follows:
(thousands of Canadian dollars)
Cash flow from operating activities
Cash flow from (used in) financing activities
Cash flow from (used in) investing activities
Advantage Oil & Gas Ltd. - 58
Directors
Stephen E. Balog (1)(2)(3)
Paul G. Haggis (1)(2)(3)
Andy J. Mah
Ronald A. McIntosh (2)(3)
Grant Fagerheim (1)(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
New York Stock Exchange Trading Symbol
Shares: AAV
Advantage Oil & Gas Ltd. - 59