2015 Annual Report
Financial and Operating Highlights (1)
Financial ($000, except as otherwise indicated)
Sales including realized hedging
Funds from operations
per share (2)
Total capital expenditures
Working capital deficit (3)
Bank indebtedness
Convertible debentures (face value)
Basic weighted average shares (000)
Operating
Daily Production
Natural gas (mcf/d)
Liquids (bbls/d)
Total mcfe/d (4)
Total boe/d (4)
Average prices (including hedging)
Natural gas ($/mcf)
Liquids ($/bbl)
Cash netbacks ($/mcfe) (4)
Natural gas and liquids sales
Realized gains (losses) on derivatives
Royalties
Operating expense
Operating netback
General and administrative
Finance expense
Other income (expense)
Cash netbacks
Three months ended
December 31
Year ended
December 31
2015
2014
2015
2014
$
$
42,654
31,656
$
$
0.19
27,604
7,196
$
$
286,519
$
-
170,742
$
$
46,409
39,182
$
$
0.23
87,086
$
$
$
57,264
109,970
86,250
170,068
$
$
165,054
123,630
$
$
0.72
164,983
7,196
$
$
286,519
$
-
170,608
$
$
203,103
164,010
$
$
0.97
236,701
$
$
$
57,264
109,970
86,250
169,482
154,241
179
155,315
25,886
133,433
113
134,111
22,352
139,927
154
140,851
23,475
130,627
159
131,581
21,930
$
$
2.96
43.24
$
$
3.72
71.35
$
$
3.18
44.60
$
$
4.15
89.84
$
$
$
$
2.37
0.61
(0.10)
(0.35)
2.53
(0.11)
(0.21)
(0.01)
2.20
3.82
(0.06)
(0.18)
(0.34)
3.24
(0.11)
(0.20)
0.25
3.18
2.57
0.64
(0.11)
(0.36)
2.74
(0.14)
(0.21)
0.01
2.40
4.49
(0.26)
(0.21)
(0.32)
3.70
(0.15)
(0.21)
0.09
3.43
$
$
$
$
(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 liquids.
CONTENTS
Message to Shareholders ..................................................................................................................................................................... 3
Reserves ................................................................................................................................................................................................. 5
Consolidated Management’s Discussion & Analysis ..................................................................................................................... 10
Consolidated Financial Statements .................................................................................................................................................. 27
Consolidated Statement of Financial Position ....................................................................................................................... 31
Consolidated Statement of Comprehensive Income ............................................................................................................ 32
Consolidated Statement of Changes in Shareholders’ Equity .............................................................................................. 33
Consolidated Statement of Cash Flows .................................................................................................................................. 34
Notes To The Consolidated Financial Statements ................................................................................................................ 35
Advantage Oil & Gas Ltd. - 2
MESSAGE TO SHAREHOLDERS
Industry Leading Operating Efficiencies and Low Cash Costs Highlights
Advantage’s 2015 Achievements
Advantage Oil & Gas Ltd. achieved industry leading operating efficiencies as the Corporation continued
to advance its Glacier Montney development. Advantage reduced 2015 total cash costs by 8% to
$0.82/mcfe and to $0.77/mcfe in the fourth quarter of 2015, added proven plus probable (“2P”) reserves at
a finding and development ("F&D") cost of $0.77/mcfe ($4.65/boe) (1) and expanded its 100% owned
Glacier gas plant processing capacity to 250 mmcf/d to accommodate growth through 2017.
These achievements reaffirm our belief in the long term value of the Corporation’s Glacier Montney asset
and with an estimated pro-forma 2016 year-end total debt to trailing cash flow of approximately 1.0 times
based on our annual budget(2), Advantage has announced plans to expand its Glacier gas plant process
capacity beginning in the second half of 2017 to 350 mmcf/d to accommodate future growth.
We sincerely thank Advantage’s Board of Directors, our shareholders and especially the dedication and
extra-efforts of our staff who have contributed to the Corporation’s ongoing success and achievements.
Notes:
(1) Please refer to Advantage’s Year-end 2015 Reserves press release dated February 16, 2016 for additional details. F&D costs
are calculated by dividing total capital by reserve additions during the applicable period. Total capital includes both capital
expenditures incurred and changes in future development capital required to bring proved undeveloped reserves and probable
reserves to production during the applicable period. Reserve additions is calculated as the change in reserves from the
beginning to the end of the applicable period excluding production.
.(2) The pro-forma budgeted 2016 year-end total debt to trailing cash flow is based on AECO Cdn $2.50/mcf and Advantage’s
current hedge positions and includes estimated net proceeds of approximately $95 million (includes the estimated net proceeds
from the over-allotment option) resulting from the Corporation’s bought deal equity financing announced on February 18, 2016
(the “Bought Deal”).
2015 Operating and Financial Highlights
Production increased 16% to 155.3 mmcfe/d (25,886 boe/d) for the fourth quarter of 2015 and 7%
to 141 mmcfe/d for 2015 as compared to the similar periods in 2014. Production growth was achieved
despite a total of 107 days of TransCanada Pipelines Ltd. (“TCPL”) firm service sales pipeline restrictions
and outages realized from April to December 2015 and additional production interruptions required during
the construction and expansion of Advantage’s Glacier gas plant.
Funds from operations for full year 2015 was $123.6 million or $0.72 per share and $31.7 million or
$0.19 per share for the fourth quarter. Hedging gains of $8.8 million and $32.7 million during the three
months and year ended December 31, 2015, respectively, partially offset the decrease in Canadian natural
gas prices. Advantage’s cash netback for 2015 was $2.40/mcfe ($14.43/boe) which represents 75% of the
realized sales price, including hedging.
Total debt as of December 31, 2015 was $294 million including working capital deficit as compared
to our $450 borrowing base Credit Facility. Total debt including working capital deficit at December
31, 2015 reduced for the estimated net proceeds of the Bought Deal (including the over-allotment
option) would be $199 million. Advantage’s Credit Facility borrowing base was reconfirmed at $450
million during its normal semi-annual review process in October 2015. This results in a year-end 2015
undrawn bank line of $163 million that would increase to $258 million after application of the estimated
Bought Deal net proceeds, which provides continued financial flexibility to support future development.
Advantage Oil & Gas Ltd. - 3
Total cash costs decreased 8% to $0.82/mcfe in 2015 with the fourth quarter of 2015 decreased by
7% to $0.77/mcfe as compared to the same periods of 2014. Total cash costs of $0.77/mcfe in the fourth
quarter of 2015 include operating expense ($0.35/mcfe), royalties ($0.10/mcfe), general and administrative
expense ($0.11/mcfe), and finance expense ($0.21/mcfe).
Strong natural gas hedge positions averaging 52% of forecast net production for 2016 at an average
AECO floor price of Cdn $3.62/mcf provides near term downside gas price protection. For 2017 and
the first quarter of 2018, Advantage has hedged an average 31% and 37% of its forecast net production at
an average AECO floor price of Cdn $3.24/mcf and Cdn $3.12/mcf, respectively.
2015 TCPL Sales Gas Pipeline Restrictions Subsiding in 2016
Advantage experienced a total 107 days of TCPL firm service sales pipeline restrictions and outages from
April to December 2015. Additionally, no interruptible ("IT") service was available in the Glacier area
after April 2015 resulting in limited flexibility to offset normal maintenance activities or production
outages required during our construction work at the Glacier gas plant. TCPL pipeline capacity in
northwest Alberta is currently increasing after additional firm service restrictions occurred in January and
February 2016 in the Glacier area. Advantage anticipates the availability of IT service will increase during
the remainder of the first quarter of 2016 which should allow throughput capacity testing of the
Corporation's expanded Glacier gas plant.
Looking Forward
Advantage’s achievements in 2015 and its ongoing focus on operational and capital efficiencies continue
to strengthen the foundation of our Glacier Montney development program to generate profitable growth
in this low commodity price environment.
For 2016, Advantage's current standing well inventory of 37 total standing wells (23 completed and 14
uncompleted) are expected to provide sufficient productive capacity to attain the Corporation's previously
announced average annual production guidance for the year ended December 31, 2016 of 190 to 210
mmcfe/d.
The Glacier gas plant expansion completed in 2015 increased processing capacity to 250 mmcf/d and
provided 70 mmcf/d of additional capacity to meet future growth in 2016 and 2017. Advantage’s future
facility growth plans include another significant expansion of the Glacier gas plant beginning in the second
half of 2017 to increase processing capacity by 100 mmcf/d to a total of 350 mmcf/d to support future
growth. Additionally, Advantage’s 100% ownership of the Glacier gas plant provides flexibility to process
varying amounts of dry and liquids rich gas to optimize investment returns and cash netbacks.
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, 2015
December 31, 2014
Proved plus probable reserves (mboe)
325,347
Present Value of 2P reserves discounted at 10%, before tax ($000)(1) $2,035,424
$10.51
Net Asset Value per Share discounted at 10%, before tax (2)
34.4
Reserve Life Index (proved plus probable - years) (3)
1.90
Reserves per Share (proved plus probable) (2)
Bank debt per boe of reserves (4)
$0.88
Convertible debentures per boe of reserves (4)
$Nil
300,558
$2,297,158
$12.35
36.8
1.77
$0.37
$0.29
(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 170.827 million Shares outstanding at December 31, 2015, and 170.068 million at December 31, 2014.
(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, 2015
Proved
Developed Producing
Developed Non-producing
Undeveloped
Total Proved
Probable
Total Proved + Probable
Oil
(mbbl)
Natural
Gas Liquids
(mbbl)
Natural Gas
(mmcf)
Equivalent
(mboe)
9
-
-
9
3
12
2,496
913
8,688
12,097
8,024
20,121
287,183
43,164
876,137
1,206,484
624,800
1,831,284
50,369
8,107
154,711
213,187
112,160
325,347
Advantage Oil & Gas Ltd. - 5
Present Value of Future Net Revenue using Sproule price and cost forecasts (1)(2)(3)
($000)
Proved
Developed Producing
Developed Non-producing
Undeveloped
Total Proved
Probable
Total Proved + Probable
Before Income Taxes Discounted at
0%
10%
15%
$742,984
154,300
2,275,829
3,173,113
2,476,139
$508,466
93,084
613,326
1,214,876
820,548
$433,824
77,262
336,331
847,417
558,203
$5,649,252
$2,035,424
$1,405,620
(1) Advantage’s crude oil, natural gas and natural gas liquid reserves were evaluated using Sproule’s product price forecast
effective December 31, 2015 prior to the provision for income taxes, interests, debt services charges and general and
administrative expenses. It should not be assumed that the discounted future net revenue estimated by Sproule represents the
fair market value of the reserves.
(2) Assumes that development of Glacier will occur, without regard to the likely availability to the Corporation of funding required
for that development.
(3) Future Net Revenue incorporates Managements’ estimates of required abandonment and reclamation costs, including expected
timing such costs will be incurred, associated with all wells, facilities and infrastructure. No abandonment and reclamation
costs have been excluded.
Sproule Price Forecasts
The present value of future net revenue at December 31, 2015 was based upon natural gas and natural gas liquids
pricing assumptions prepared by Sproule effective December 31, 2015. These forecasts are adjusted for reserve
quality, transportation charges and the provision of any applicable sales contracts. The price assumptions used over
the next seven years are summarized in the table below:
Alberta AECO-C
Natural Gas
($Cdn/mmbtu)
2.25
2.95
3.42
3.91
4.20
4.28
4.35
Henry Hub
Natural Gas
($US/mmbtu)
2.25
3.00
3.50
4.00
4.25
4.31
4.38
Edmonton
Propane
($Cdn/bbl)
Edmonton
Butane
($Cdn/bbl)
Edmonton
Pentanes Plus
($Cdn/bbl)
Exchange
Rate
($US/$Cdn)
9.09
13.64
25.84
35.35
42.30
42.94
43.58
39.09
51.43
58.46
66.64
68.35
69.38
70.42
59.10
73.88
83.98
95.73
98.19
99.66
101.16
0.75
0.80
0.83
0.85
0.85
0.85
0.85
Year
2016
2017
2018
2019
2020
2021
2022
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, 2014
Present value proved and probable reserves
Undeveloped land (2)
Working capital (deficit) and other
Bank debt
Net asset value - December 31, 2015
Net asset value per Share (1) - December 31, 2015
0%
$37.53
$5,649,252
10,071
37,039
(286,519)
$5,409,843
$31.67
10%
$12.35
15%
$8.16
$2,035,424
10,071
37,039
(286,519)
$1,405,620
10,071
37,039
(286,519)
$1,796,015
$1,166,211
$10.51
$6.83
(1) Based on 170.827 million Shares outstanding at December 31, 2015 and 170.068 million Shares outstanding at
December 31, 2014.
(2) Internal estimate.
Gross Working Interest Reserves Reconciliation(1)
Proved
Opening balance December 31, 2014
Extensions
Infill drilling
Improved recovery
Technical revisions
Discoveries
Acquisitions
Dispositions
Economic factors
Production
Closing balance at December 31, 2015
4.9
-
-
-
5.2
-
-
-
(0.1)
(0.6)
9.4
Light &
Medium Oil
(mbbl)
Natural Gas
Liquids
(mbbl)
Conventional
Natural
Gas
(mmcf)
1,101,700
3,234
83,102
-
83,996
-
-
-
(14,482)
(51,066)
Total Oil
Equivalent
(mboe)
192,063
699
15,751
-
15,758
-
-
-
(2,515)
(8,569)
8,442
160
1,901
-
1,753
-
-
-
(101)
(58)
12,097
1,206,484
213,187
Advantage Oil & Gas Ltd. - 7
Gross Working Interest Reserves Reconciliation(1) (continued)
Proved + Probable
Opening balance Dec. 31, 2014
Extensions
Infill Drilling
Improved recovery
Technical revisions
Discoveries
Acquisitions
Dispositions
Economic factors
Production
Closing balance at Dec. 31, 2015
Light &
Medium Oil
(mbbl)
Natural Gas
Liquids
(mbbl)
Conventional
Natural
Gas
(mmcf)
15,682
478
2,835
-
1,314
-
-
-
(130)
(57)
1,709,216
13,795
133,044
-
45,963
-
-
-
(19,668)
(51,066)
6.8
-
-
-
6.1
-
-
-
(0.1)
(0.6)
12.2
Total Oil
Equivalent
(mboe)
300,558
2,778
25,009
-
8,980
-
-
-
(3,408)
(8,569)
20,121
1,831,284
325,347
(1) Technical revisions accounted for 53% of the total proved additions and 27% of the total proved + probable additions.
Percentage of each category calculated by dividing the technical revisions in the category by the total reserve additions in
the same category before production.
Finding & Development Costs (“F&D”) (1)(2)(3)(4)
2015 F&D Costs – Gross Working Interest Reserves Excluding Future Development Capital – NI
51-101
Capital expenditures ($000)
Total mboe, end of year
Total mboe, beginning of year
Production, mboe
Reserve additions, mboe
2015 F&D costs ($/boe)
2014 F&D costs ($/boe)
Three-year average F&D costs ($/boe)
Proved
164,983
213,287
192,603
8,569
29,693
$5.56
$8.58
$6.37
Proved + Probable
164,983
325,347
300,558
8,569
33,358
$4.95
$9.20
$4.98
Advantage Oil & Gas Ltd. - 8
2015 F&D Costs – Gross Working Interest Reserves Including Future Development Capital – NI 51-
101
Capital expenditures ($000)
Net change in Future Development Capital ($000)
Total capital ($000)
Total mboe, end of year
Total mboe, beginning of year
Production, mboe
Reserve additions, mboe
2015 F&D costs ($/boe)
2014 F&D costs ($/boe)
Three-year average F&D costs ($/boe)
Proved
164,983
(9,895)
155,088
213,187
192,063
8,569
29,693
$5.22
$9.76
$8.37
Proved + Probable
164,983
(9,948)
155,035
325,347
300,558
8,569
33,358
$4.65
$6.17
$6.63
(1) F&D costs are calculated by dividing total capital by reserve additions during the applicable period. Total capital includes
both capital expenditures incurred and changes in FDC required to bring the proved undeveloped and probable reserves to
production during the applicable period. Reserve additions is calculated as the change in reserves from the beginning to the
ending of the applicable period excluding production.
(2) The aggregate of the exploration and development costs incurred in the most recent financial year and the change during that
year in estimated FDC 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) Barrels of oil equivalent (boe) and thousand cubic feet of natural gas equivalent (mcfe) may be misleading, particularly if
used in isolation. Boe and mcfe conversion ratios have been calculated using a conversion rate of six thousand cubic feet of
natural gas equivalent to one barrel of oil. A boe and mcfe conversion ratio of 6 mcf: 1 bbl is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given
that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy
equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.
(4) The change in FDC results primarily from on average $433,000 lower capital costs per booked location offset by higher
capital inflation costs for three years (4%/year), additional booked locations and additional facility capital in 2018.
Advantage Oil & Gas Ltd. - 9
CONSOLIDATED MANAGEMENT’S DISCUSSION & ANALYSIS
The following Management’s Discussion and Analysis (“MD&A”), dated as of March 3, 2016, 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, 2015 and should be read in conjunction with the December 31, 2015 audited
consolidated financial statements. The consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards (“IFRS”), representing generally accepted accounting principles (“GAAP”) for publicly accountable enterprises in
Canada. All references in the MD&A and consolidated financial statements are to Canadian dollars unless otherwise indicated. The
term “boe” or barrels of oil equivalent and “mcfe” or thousand cubic feet equivalent may be misleading, particularly if used in isolation.
A boe or mcfe conversion ratio of six thousand cubic feet of natural gas equivalent to one barrel of oil (6 mcf: 1 bbl) is based on an
energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
As the value ratio between natural gas and crude oil based on the current prices of natural gas and crude oil is significantly different
from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.
Forward‐Looking Information
This MD&A contains certain forward-looking statements, which are based on our current internal expectations, estimates, projections,
assumptions and beliefs. These statements relate to future events or our future performance. All statements other than statements of
historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words
such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "predict", "potential", "targeting",
"intend", "could", "might", "should", "believe", "would" and similar or related expressions. These statements are not guarantees of
future performance.
In particular, forward-looking statements included in this MD&A include, but are not limited to, effect of commodity prices on the
Corporation's financial results, condition and performance; 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; 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; terms of the Corporation's equity compensation plans; estimated tax pools at December 31, 2015,
including the components thereof; future commitments and contractual obligations; terms of the Corporation's credit facilities,
including timing of the next review of the credit facilities, effect of revisions or changes in reserve estimates and commodity prices on
the borrowing base, and limitations on the utilization of hedging contracts; the Corporation's expectations regarding extension of
Advantage's credit facilities at each annual review; the Corporation's strategy for managing its capital structure, including the use of
equity and/or debt financing arrangements, share repurchases, refinancing current debt, issuing other financial or equity-based
instruments, declaring a dividend, adjusting capital spending and 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 of Directors; effect of the Corporation's continual financial assessment processes on the Corporation's ability to mitigate
risks; the Corporation's budgeted capital expenditures and anticipated funds from operations and total debt to funds from operations
for 2016; the Corporation's belief that its existing financial strength will improve in 2016 as a result of it's credit facility together with
planned expenditures on property, plant and equipment below expected funds from operations; the Corporation's ability to satisfy all
liabilities and commitments, including a working capital deficit, and meet future obligations as they become due; the Corporation's
expectation that its expenditures on property, plant and equipment will be fully funded from funds from operations; the Corporation's
intentions to monitor debt levels to ensure an optimal mix of financing and cost of capital to provide a maximum return to the
Corporation's shareholders; the anticipated processing capability of the Glacier gas plant and its ability to maintain and increase
production to the levels disclosed herein; the focus of the Corporation's capital expenditures and operations, including the Corporation's
drilling and facility expansion plans; 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, risks related to changes in general economic, market and business conditions; continued volatility
in market prices for oil and natural gas; the impact of significant declines in market prices for oil and natural gas; stock market volatility;
changes to legislation and regulations and how they are interpreted and enforced; our ability to comply with current and future
environmental or other laws; actions by governmental or regulatory authorities including increasing taxes, changes in investment or
other regulations; changes in tax laws, royalty regimes and incentive programs relating to the oil and gas industry; the effect of
acquisitions; our success at acquisition, exploitation and development of reserves; unexpected drilling results; failure to achieve
production targets on timelines anticipated or at all; changes in commodity prices, currency exchange rates, capital expenditures, reserves
Advantage Oil & Gas Ltd. - 10
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; delays in
timing of completion of the Corporation's plant expansion at Glacier; the failure to extend our 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: current and future prices of oil and natural gas; that the current commodity price
and foreign exchange environment will continue or improve; conditions in general economic and financial markets; effects of regulation
by governmental agencies; receipt of required regulatory approvals; 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 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
2015
2014
% change
2015
2014
% change
$
$
$
$
29,772
552
4,297
(2,965)
31,656
-
31,656
$
$
48,218
367
(6,901)
(2,502)
39,182
-
39,182
(38) %
50 %
(162) %
19 %
(19) %
-
%
(19) %
$
$
113,364
1,262
19,376
(10,372)
123,630
-
123,630
$
$
169,907
446
3,924
(10,267)
164,010
10,019
174,029
(33) %
183 %
394 %
1 %
(25) %
(100) %
(29) %
$
Advantage Oil & Gas Ltd. - 12
FINANCIAL AND OPERATING REVIEW – CONTINUING OPERATIONS
Overview
Three months ended
December 31
Year ended
December 31
2015
2014
2015
2014
$
$000
33,867
8,787
(1,379)
(4,998)
36,277
per mcfe
2.37
$
0.61
(0.10)
(0.35)
2.53
$
$000
47,186
(777)
(2,209)
(4,184)
40,016
per mcfe
3.82
$
(0.06)
(0.18)
(0.34)
3.24
$
$000
132,311
32,743
(5,837)
(18,357)
140,860
per mcfe
2.57
$
0.64
(0.11)
(0.36)
2.74
$
$000
215,653
(12,550)
(10,076)
(15,412)
177,615
per mcfe
4.49
$
(0.26)
(0.21)
(0.32)
3.70
(1,581)
(2,965)
(75)
(0.11)
(0.21)
(0.01)
(1,371)
(2,502)
3,039
(0.11)
(0.20)
0.25
(7,222)
(10,372)
364
(0.14)
(0.21)
0.01
(7,426)
(10,267)
4,088
(0.15)
(0.21)
0.09
$
31,656
$
2.20
$
39,182
$
3.18
$
123,630
$
2.40
$
164,010
$
3.43
Natural gas and liquids sales
Realized gains (losses) on derivatives
Royalties
Operating expense
Operating income and
operating netbacks
General and administrative expense (1)
Finance expense (2)
Other income (expense) (3)
Funds from operations and cash
netbacks
Per basic weighted average share
$
0.19
$
0.23
$
0.72
$
0.97
(1) General and administrative expense excludes share based compensation.
(2) Finance expense excludes non-cash accretion expense.
(3) Other income (expense) excludes non-cash other income.
For the three months and year ended December 31, 2015, Advantage realized funds from operations of $31.7 million and $123.6 million
with cash netbacks of $2.20/mcfe and $2.40/mcfe, respectively. On a per share basis, funds from operations was $0.19/share and
$0.72/share for the three months and year ended December 31, 2015, respectively. The decrease in funds from operations and cash
netbacks for 2015 as compared to 2014 was the result of a significant decrease in natural gas prices (see “Commodity Prices and
Marketing”). The effect of lower natural gas prices was partially mitigated by our significant hedging position that resulted in realized
gains of $8.8 million and $32.7 million for the three months and year ended December 31, 2015, respectively. Additionally, total cash
costs for the three months and year ended December 31, 2015, including royalties, operating expense, general and administrative
expense, and finance expense have been reduced by 7% and 8% to $0.77/mcfe and $0.82/mcfe, respectively, as compared to the same
periods of 2014. 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. Production for the fourth quarter of 2015 increased 16% compared to the
fourth quarter of 2014 and 4% above the third quarter of 2015 resulting from the successful expansion of Advantage’s 100% owned
Glacier gas plant in July 2015 (see “Production”).
Advantage Oil & Gas Ltd. - 13
Natural Gas and Liquids Sales and Hedging
($000)
Natural gas sales
Realized gains (losses) on derivatives
Natural gas sales including hedging
Liquids sales
Total (1)
(1) Total excludes unrealized derivative gains and losses.
Three months ended
December 31
Year ended
December 31
2015
$
33,155
8,787
41,942
712
42,654
$
2014
46,446
(777)
45,669
740
46,409
% change
%
(29)
%
(1,231)
%
(8)
%
(4)
%
(8)
2015
129,802
32,743
162,545
2,509
165,054
$
$
2014
210,444
(12,550)
197,894
5,209
203,103
$
$
% change
%
(38)
%
(361)
%
(18)
%
(52)
%
(19)
$
$
Total sales including hedging for the three months ended December 31, 2015 was $42.7 million, a decrease of $2.3 million or 5% as
compared to the third quarter of 2015 and a decrease of $3.8 million or 8% as compared to the fourth quarter of 2014. For the year
ended December 31, 2015 total sales including hedging was $165.1 million, a decrease of $38.0 million or 19% when compared to 2014
The decrease in total sales was the result of the significant decline in natural gas prices partially offset by increased production and
realized hedging gains of $8.8 million and $32.7 million for the three months and year ended December 31, 2015, respectively.
Production
Natural gas (mcf/d)
Liquids (bbls/d)
Total - mcfe/d
- boe/d
Natural gas (%)
Liquids (%)
Three months ended
December 31
2015
154,241
179
155,315
25,886
99%
1%
% change
16
%
58
%
16
%
%
16
2014
133,433
113
134,111
22,352
99%
1%
Year ended
December 31
2015
139,927
154
140,851
23,475
99%
1%
% change
%
%
%
%
7
(3)
7
7
2014
130,627
159
131,581
21,930
99%
1%
Production for the fourth quarter of 2015 was 16% higher as compared to the fourth quarter of 2014 and 4% higher compared to the
third quarter of 2015. In 2015, we successfully completed the Glacier gas plant expansion and production ramp-up consistent with our
multi-year development plan. However, production for the second half of 2015 was negatively affected by Trans-Canada Pipelines Ltd.
(“TCPL”) unplanned maintenance outages resulting in firm and interruptible transportation service restrictions on their northwest
Alberta main gas pipeline. TCPL restrictions impacted our production for 40 days during the fourth quarter 2015 with no interruptible
service available in the Glacier area. The amount of TCPL restrictions in the fourth quarter of 2015 were slightly more than anticipated.
Production growth was achieved in 2015 despite a total of 107 days of TCPL firm service sales pipeline restrictions and outages realized
from April to December 2015 and additional production interruptions required during the construction and expansion of Advantage’s
Glacier gas plant. These restrictions have continued into January and February 2016 although pipeline capacity in TCPL’s northwest
Alberta segment has recently experienced increasing capacity.
Advantage Oil & Gas Ltd. - 14
Commodity Prices and Marketing
Average Realized Pricing
Natural gas, excluding hedging ($/mcf)
Natural gas, including hedging ($/mcf)
Liquids, including hedging ($/bbl)
Benchmark Prices
AECO daily ($/mcf)
AECO monthly ($/mcf)
NYMEX ($US/mmbtu)
Edmonton Light ($/bbl)
Three months ended
December 31
Year ended
December 31
2015
2014
% change
2015
2014
% change
$
$
$
2.34
2.96
43.24
$
$
$
3.78
3.72
71.35
(38)
(20)
(39)
%
%
%
$
$
$
2.54
3.18
44.60
$
$
$
4.41
4.15
89.84
$
$
$
$
2.46
2.65
2.28
51.99
$
$
$
$
3.61
4.01
3.95
75.54
(32)
(34)
(42)
(31)
%
%
%
%
$
$
$
$
2.70
2.77
2.67
56.74
$
$
$
$
4.47
4.42
4.38
94.50
(42)
(23)
(50)
%
%
%
(40)
(37)
(39)
(40)
%
%
%
%
Advantage’s natural gas production at Glacier is delivered and sold directly into TCPL. The prices we receive are based on a combination
of AECO daily and monthly. Specifically, Advantage sells production at the AECO monthly price equal to our hedged production
volumes for any given month as all of our hedges are based on the AECO monthly index (see “Commodity Price Risk”). The remainder
of our production is sold at the AECO daily index. Realized natural gas prices, excluding hedging, were lower than those of the prior
year corresponding to the significant decline in AECO prices. Natural gas prices in early 2014 were much higher 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.
Commencing in the second half of 2014, natural gas prices began decreasing due to the continued strong growth of U.S. domestic
natural gas production without a similar corresponding growth in demand. This supply and demand imbalance has continued
throughout 2015 and into 2016 with a particularly weak North American natural gas pricing environment.
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 derivative contracts
to March 31, 2018 for the purpose of fixing the minimum prices that we receive for our natural gas production 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 2016 to Q4 2016
Q1 2017 to Q4 2017
Q1 2018
Average
Production Hedged
94.8 mmcf/d
64.8 mmcf/d
80.6 mmcf/d
Forecast Production
Average
Hedged
Minimum Price
(net of royalties)
52%
31%
37%
AECO
$3.62/mcf
$3.24/mcf
$3.12/mcf
A summary of realized and unrealized hedging gains and losses for the three months and years ended December 31, 2015 and 2014 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 on derivatives
2015
$
8,787
6,374
15,161
$
2014
$
(777)
55,243
54,466
$
% change
(1,231)
%
%
(88)
%
(72)
2015
32,743
(2,321)
30,422
$
$
2014
(12,550)
47,786
35,236
$
$
% change
(361)
%
(105)
%
%
(14)
For the three months and year ended December 31, 2015, we realized derivative gains as a result of the significant decline in natural
gas prices as compared to our average hedge prices. For the year ended December 31, 2015, an unrealized derivative loss of $2.3 million
was recognized, being the decrease in fair value to a net derivative asset of $44.3 million at December 31, 2015 as compared to a net
Advantage Oil & Gas Ltd. - 15
derivative asset of $46.6 million at December 31, 2014. The fair value of the net derivative asset is the estimated value to settle the
outstanding contracts as at a point in time. As such, unrealized derivative gains and losses are not cash 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. These derivative contracts will settle between January 1, 2016 to March 31, 2018 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
Year ended
December 31
2015
$
$
1,379
0.10
2014
$
$
2,209
0.18
% change
(38)
(44)
%
%
2015
$
$
5,837
0.11
2014
10,076
0.21
$
$
% change
(42)
(48)
%
%
4.1%
4.7%
(0.6)
%
4.4%
4.7%
(0.3)
%
Advantage pays royalties to the owners of mineral rights from which we have leases. The Corporation has mineral leases with provincial
governments, individuals and other companies. Our current average royalty rates are impacted by well depths, well production rates,
and commodity prices. Royalties also include the impact of gas cost allowance which is a reduction of royalties payable to the Alberta
Provincial Government to recognize capital and operating expenditures incurred by Advantage in the gathering and processing of the
province’s share of our natural gas production. Total royalties paid during the three months and year ended December 31, 2015 are
lower than the same periods of 2014 due to the significant decline in natural gas prices.
On January 29, 2016, the Alberta government released its new Modernized Royalty Framework which is based on a revenue minus cost
model and is effective for wells drilled after January 1, 2017. We are not yet able to assess the impact of the new Royalty Framework as
the full details and royalty formulae have not been determined and released.
Operating Expense
Operating expense ($000)
per mcfe
Three months ended
December 31
Year ended
December 31
2015
$
$
4,998
0.35
2014
4,184
0.34
$
$
% change
%
19
%
3
2015
18,357
0.36
$
$
2014
15,412
0.32
$
$
% change
19
%
%
13
Operating expense per mcfe for 2015 was comparable to the same periods of 2014. Operating expenses for the three months and year
ended December 31, 2015 increased by 19% as compared to the same periods of 2014 due to additional third party water disposal and
trucking costs resulting from the flowback of high volumes of water used during slick water completion operations in the second and
third quarters of 2015 and higher daily production in the third and fourth quarters of 2015.
Advantage Oil & Gas Ltd. - 16
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
2015
2014
% change
2015
2014
% change
$
$
$
$
1,581
0.11
1,078
0.08
$
$
$
$
1,371
0.11
577
0.05
%
15
%
-
%
87
%
60
$
$
2,659
0.19
$
$
1,948
0.16
36
19
%
%
$
$
$
$
7,222
0.14
3,347
0.07
$
$
10,569
0.21
26
$
$
$
$
7,426
0.15
2,153
0.04
%
(3)
%
(7)
%
55
%
75
$
$
9,579
0.19
27
%
10
11
%
%
(4)
Cash general and administrative (“G&A”) expense in total and on a per mcfe basis for 2015 was reasonably comparable to 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 and to align the interests of
service providers with that of shareholders. During the 2015 year, Advantage granted 1.0 million stock options and 0.3 million
performance awards. As at December 31, 2015, a total of 4.0 million stock options and 0.7 million performance awards are unexercised
which represents 2.7% of Advantage’s total outstanding common shares.
Depreciation Expense
Depreciation expense ($000)
per mcfe
Three months ended
December 31
Year ended
December 31
2015
23,247
1.63
$
$
2014
21,329
1.73
$
$
% change
%
%
9
(6)
2015
87,391
1.70
$
$
2014
85,460
1.78
$
$
% change
%
%
2
(4)
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. The rate of depreciation expense per mcfe was lower as total costs,
including future development costs, as a proportion of total proved and probable reserves declined due to the continued efficiency of
reserve additions. Depreciation expense was higher in 2015 due to the continued production increase at Glacier.
Advantage Oil & Gas Ltd. - 17
Finance Expense
Finance expense
Cash expense ($000)
per mcfe
Accretion expense ($000)
per mcfe
Total finance expense ($000)
per mcfe
Three months ended
December 31
Year ended
December 31
2015
2014
% change
2015
2014
% change
$
$
$
$
$
$
2,965
0.21
286
0.02
3,251
0.23
$
$
$
$
$
$
2,502
0.20
1,124
0.09
3,626
0.29
%
%
%
%
%
%
19
5
(75)
(78)
(10)
(21)
$
$
$
$
$
$
10,372
0.21
1,440
0.03
11,812
0.24
$
$
$
$
$
$
10,267
0.21
4,525
0.09
14,792
0.30
%
1
%
-
%
(68)
%
(67)
%
(20)
%
(20)
Cash finance expense was higher for the three months ended December 31, 2015, as compared to the same period of 2014, due to
higher average bank debt as per our development plan. The Corporation’s interest rates on bank indebtedness, that are primarily based
on short term bankers’ acceptance rates plus a stamping fee, also slightly increased in the current quarter due to the higher total debt to
Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) ratio as calculated pursuant to our Credit Facilities.
Accretion expense represents non-cash charges that increase the carrying value of convertible debentures and decommissioning liability
as a result of the passage of time. Since our remaining convertible debentures matured on January 30, 2015, accretion expense for 2015
was lower than 2014.
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
Gain on disposition - Questfire Class B Shares
Gain (loss) on sale of asssets
Miscellaneous income (expense)
2015
$
-
-
-
-
-
(75)
(75)
$
2014
$
-
-
-
-
-
3,039
3,039
$
% change
%
-
%
-
%
-
%
-
%
-
%
(102)
%
(102)
2015
$
-
-
-
-
-
364
364
$
2014
$
455
557
(13,833)
150
(1,489)
3,633
(10,527)
$
% change
(100)
(100)
(100)
(100)
(100)
(90)
(103)
%
%
%
%
%
%
%
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.
During the same period, Advantage also accepted a Questfire offer to purchase by way of issuer bid, all of the Class B Shares, and
recognized a net gain of $0.2 million.
Advantage Oil & Gas Ltd. - 18
Taxes
Deferred income taxes arise from differences between the accounting and tax bases of our assets and liabilities. For the year ended
December 31, 2015, the Corporation recognized a deferred income tax expense of $7.8 million as a result of the $29.1 million income
before taxes from continuing operations and a $1.6 million deferred income tax expense for the Alberta corporate tax rate increase
from 10% to 12% enacted by the provincial government in June 2015. As at December 31, 2015, the Corporation had a deferred
income tax liability balance of $41.1 million.
Estimated tax pools at December 31, 2015, are as follows:
($ millions)
Canadian Development Expenses
Canadian Exploration Expenses
Canadian Oil and Gas Property Expenses
Non-capital losses
Undepreciated Capital Cost
Capital losses
Scientific Research and Experimental Development Expenditures
Other
$
194
66
4
736
206
158
33
8
1,405
$
Net Income and Comprehensive Income from Continuing Operations
Three months ended
December 31
Year ended
December 31
2015
2014
% change
2015
2014
% change
Net income and comprehensive income from
continuing operations ($000)
per share - basic
per share - diluted
$
$
$
12,408
0.08
0.07
$
$
$
53,682
0.32
0.32
(77)
(75)
(78)
%
%
%
$
$
$
21,378
0.13
0.12
$
$
$
74,597
0.44
0.44
(71)
(70)
(73)
%
%
%
Advantage’s net income from continuing operations has decreased from 2014 due to the significant decline in natural gas prices partially
offset by increased production and gains on derivatives.
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 and bank indebtedness. These obligations are of a recurring and consistent
nature and impact cash flow in an ongoing manner. The following table is a summary of the Corporation’s remaining contractual
obligations and commitments. Advantage has no guarantees or off-balance sheet arrangements other than as disclosed.
($ millions)
Building leases
Pipeline/transportation
Bank indebtedness (1)
- principal
- interest
Total contractual obligations
Total
$
2016
$
Payments due by period
2018
$
2019
$
2017
$
4.1
168.1
286.5
16.4
475.1
1.1
20.3
-
11.1
32.5
1.2
20.0
286.5
5.3
313.0
1.1
23.4
-
-
24.5
$
$
$
$
$
2020
-
$
17.3
-
-
17.3
$
2021
-
$
14.9
-
-
14.9
$
After 2021
-
$
48.3
-
-
48.3
$
0.7
23.9
-
-
24.6
(1) As at December 31, 2015, 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 2016. 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.
Advantage Oil & Gas Ltd. - 19
Liquidity and Capital Resources
The following table is a summary of the Corporation’s capitalization structure:
($000, except as otherwise indicated)
Bank indebtedness (non-current)
Working capital deficit (1)
Total debt (3)
Shares outstanding
Shares closing market price ($/share)
Market capitalization (2)
Total capitalization
Total debt to funds from operations (4)
December 31, 2015
286,519
$
7,196
293,715
170,827,158
7.03
1,200,915
$
$
$
$
1,494,630
2.4
(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 and working capital deficit.
(4) Total debt to funds from operations is calculated by dividing total debt by funds from operations for the previous four quarters.
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, and share capital. Advantage may manage its capital structure by issuing new common shares, repurchasing
outstanding common shares, obtaining additional financing through bank indebtedness, refinancing current debt, issuing other financial
or equity-based instruments, declaring a dividend, or adjusting capital spending. 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. At December 31,
2015, the Corporation had $163.5 million available on its $450 million borrowing base Credit Facility. The only financial covenant is a
requirement for the Corporation to maintain a minimum cash flow to interest expense ratio of 3.5:1, calculated as funds from operations
divided by cash finance expense for the prior four quarters. The cash flow to interest expense ratio was 11.9:1 at December 31, 2015
and 16.0:1 at December 31, 2014. On December 16, 2015, the Corporation announced its 2016 budget and guidance as approved by
the Board of Directors. The Corporation's 2016 capital program of $120 million is expected to generate surplus cash flow, enhance
financial flexibility and continue growth in 2017. Based on an average 2016 natural gas price of AECO $2.50/mcf including Advantage's
hedging positions, annual cash flow is estimated to be approximately $160 million with year-end total debt to funds from operations of
approximately 1.6 times. Based on an average 2016 natural gas price of AECO $2.00/mcf and Advantage's current hedge positions,
annual cash flow is estimated to be approximately $143 million with year-end total debt to funds from operations of approximately 1.9
times. Advantage will continue to closely monitor the commodity price environment through 2016 and adjust future growth plans as
necessary to maintain balance sheet strength and preserve the long term value of its Glacier Montney asset.
Shareholders’ Equity and Convertible Debentures
As at December 31, 2015, Advantage had 170.8 million common shares outstanding. During the year ended December 31, 2015,
Advantage issued 0.8 million common shares to service providers in exchange for the exercise of 2.1 million stock options. As at
December 31, 2015, a total of 4.0 million stock options and 0.7 million performance awards are unexercised which represents 2.7% of
Advantage’s total outstanding common shares. As at March 3, 2016, Advantage had 170.8 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. The convertible debentures matured on January 30, 2015 and were
settled with cash from the Credit Facilities.
Advantage Oil & Gas Ltd. - 20
Bank Indebtedness, Credit Facilities and Other Obligations
At December 31, 2015, Advantage had bank indebtedness outstanding of $286.5 million, an increase of $176.5 million since December
31, 2014. The increase in bank indebtedness was consistent with our 2015 budget including $165 million of capital expenditure activity
and the $86.2 million settlement of the convertible debentures that matured on January 30, 2015. Advantage’s credit facilities borrowing
base is $450 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. Advantage’s Credit Facilities were reconfirmed
in October 2015 as part of the banking syndicates’ normal semi-annual re-determination. The next annual review is scheduled to occur
in June 2016. 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 deficit of $7.2 million as at December 31, 2015, a significant decrease from December 31, 2014 due
to the relatively high level of capital expenditure activity that was underway at that time. Our working capital includes items expected
for normal operations such as trade receivables, prepaid expenses, 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 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
Other
Expenditures on property, plant and equipment
Expenditures on exploration and evaluation assets
Net capital expenditures (1)
Three months ended
December 31
Year ended
December 31
$
$
$
2015
$
16,915
10,289
400
27,604
-
27,604
2014
66,144
20,292
-
86,436
650
87,086
2015
74,519
88,580
692
163,791
1,192
164,983
2014
195,802
37,662
-
233,464
3,237
236,701
$
$
$
$
(1) Net capital expenditures excludes changes in non-cash working capital and change in decommissioning liability.
Advantage invested $163.8 million on property, plant and equipment at Glacier for the year ended December 31, 2015 with $27.6
million invested in the current quarter.
During the year a significant portion of our capital expenditures were directed to our 100% owned Glacier gas plant expansion project
and expansion of our sales pipeline infrastructure. In total $75 million (45% of net capital expenditures) was spent on infrastructure
projects with $65 million directed towards our plant expansion to increase processing capacity to 250mmcf/d and $10 million directed
towards our sales pipeline. Both the Glacier gas plant and the sales pipeline were built to have spare capacity to meet future production
growth in 2016 and 2017. In addition, the plant is capable of processing varying amounts of dry and liquids rich gas production to
accommodate future development of our significant Montney land holdings at Glacier.
In 2015 Advantage drilled 16 Montney gas wells and 1 service well. Due to strong well performance and a substantial inventory of
available production, only 5 Montney horizontal wells were drilled and rig released during the fourth quarter. Advantage’s Upper,
Middle and Lower Montney wells are continuing to demonstrate strong production performance and less wells have been required to
maintain production than expected. Advantage’s current standing well inventory consisted of 37 total wells of which 23 are completed
and 14 remain uncompleted, which Management believes will provide sufficient productive capacity to attain our 2016 annual
production target without drilling any additional wells.
In 2015, Advantage acquired 6 additional sections of Lower Doig/Montney land rights in the greater Glacier area. Advantage now
holds a total of 138 net sections (88,840 net acres) of either Lower Doig or Montney rights.
Advantage Oil & Gas Ltd. - 21
Sources and Uses of Funds
The following table summarizes the various funding requirements during the years ended December 31, 2015 and 2014 and the sources
of funding to meet those requirements:
($000)
Sources of funds
Increase in bank indebtedness
Funds from operations
Disposition of Longview investment
Disposition of Questfire investments
Change in non-cash working capital and other
Dividends received from Longview
Uses of funds
Expenditures on property, plant and equipment
Maturity of convertible debenture
Change in non-cash working capital and other
Expenditures on exploration and evaluation assets
Expenditures on decommissioning liability
Decrease in bank indebtedness
Year ended
December 31
2015
2014
$
$
$
177,197
123,630
-
-
-
-
300,827
163,791
86,240
48,342
1,192
1,262
-
300,827
$
-
164,010
90,153
17,500
7,830
1,692
281,185
$
$
233,464
-
-
3,237
446
44,038
281,185
$
$
Bank indebtedness increased as planned during the year ended December 31, 2015 to fund capital expenditures and the maturity of our
convertible debentures on January 30, 2015. In 2016, we anticipate our expenditures on property, plant and equipment to be primarily
funded with funds from operations (see “Liquidity and Capital Resources”). 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 loss and comprehensive loss from discontinued operations ($000)
per share - basic and diluted
Year ended
December 31
2015
-
$
-
$
-
$
-
$
-
2014 (1)
5,622
10,019
19,092
(58,894)
(0.35)
$
$
$
$
(1) Represents the financial and operating results for the Longview segment for the 59 days from January 1, 2014 to February 28, 2014.
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
per share - 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, 2015
Year ended
Dec. 31, 2014
Year ended
Dec. 31, 2013
$
$
$
$
$
$
132,311
21,378
0.13
0.12
1,517,443
286,519
$
$
$
$
$
$
215,653
74,597
0.44
0.44
1,454,767
110,482
$
$
$
$
$
$
140,090
(8,297)
(0.05)
(0.05)
1,309,543
236,151
$
-
$
-
$
-
$
-
$
-
$
24,715
$
(58,894)
$
(0.35)
$
-
$
-
$
$
$
$
$
149,652
4,915
0.03
455,701
117,642
(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)
Q4
2015
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2014
154,241
179
155,315
147,574
212
148,846
124,299
112
124,971
133,281
112
133,953
133,433
113
134,111
131,553
161
132,519
134,912
200
136,112
122,481
164
123,465
Excluding hedging
Including hedging
AECO daily
AECO monthly
$
$
$
$
2.34
2.96
2.46
2.65
$
$
$
$
2.66
3.25
2.90
2.80
$
$
$
$
2.50
3.27
2.66
2.67
$
$
$
$
2.68
3.30
2.76
2.96
$
$
$
$
3.78
3.72
3.61
4.01
$
$
$
$
4.03
3.80
4.02
4.22
$
$
$
$
4.71
4.27
4.69
4.68
$
$
$
$
5.21
4.89
5.59
4.77
Liquids ($/bbl)
Including hedging
Edmonton Light ($/bbl)
Total sales including realized hedging
Net income (loss)
per share - basic
per share - diluted
Funds from operations
Discontinued Operations - Longview
Total sales including realized hedging
Net income (loss)
per share - basic and diluted (1)
Funds from operations
$
$
$
$
$
$
$
43.24
51.99
42,654
12,408
0.08
0.07
31,656
$
$
$
$
$
$
$
45.43
55.58
44,980
6,959
0.04
0.04
34,474
$
$
$
$
$
$
$
47.91
67.68
37,429
(2,060)
(0.01)
(0.01)
27,571
$
$
$
$
$
$
$
41.86
51.73
39,991
4,071
0.02
0.02
29,929
$
$
$
$
$
$
$
71.35
75.54
46,409
53,682
0.32
0.32
39,182
$
$
$
$
$
$
$
83.14
97.07
47,190
14,201
0.08
0.08
36,818
$
$
$
$
$
$
$
102.41
105.65
54,265
24,330
0.14
0.14
42,561
$
$
$
$
$
$
$
94.10
99.99
55,239
(17,616)
(0.10)
(0.10)
45,449
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
$
$
$
23,237
(58,894)
(0.35)
10,019
(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 2015 and also for the preceding seven quarters for
both continuing and discontinued operations. Successful execution of our 2013 capital development program at Glacier resulted in
additional production growth in early 2014 as we reached our target of 135 mmcfe/d in March 2014. The 135 mmcfe/d production
level was maintained as we drilled the required well inventory and completed the first phase of commissioning operations at our
expanded Glacier plant in July 2015 at which time production capability reached 183 mmcfe/d. The Corporation’s production for the
second half of 2015 was negatively impacted by TCPL unplanned firm and interruptible service restrictions in addition to Advantage’s
planned outages required to install new equipment for the Glacier gas plant expansion.
Sales and funds from operations that increased dramatically in 2014 attributable to improved natural gas prices and production growth
has decreased in 2015 with the decline in natural gas prices. Although Advantage has generally reported net income, we have reported
a net loss during quarters of particularly 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 and industry leading low cost structure has generally resulted in strong sales including realized hedging, net income
and funds from operations despite the challenging low natural gas prices.
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 and the provision for decommissioning liability costs
and related accretion expense 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, 2015.
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 3, 2016, we are evaluating standards issued but
not effective and we do not anticipate there to be material 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, 2015. 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, 2015, 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, 2015. 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, 2015 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) Advantage must 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) Advantage must annually 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 on 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 3, 2016
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 Professional Accountants, appointed by the shareholders as the
external auditor of the Corporation, has audited the consolidated statement of financial position as at December 31, 2015 and 2014,
and the consolidated statements of comprehensive income (loss), changes in shareholders’ equity and cash flows for the years ended
December 31, 2015 and 2014. 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 3, 2016
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, 2015, 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 Professional 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, 2015, as stated in their Auditor’s Report. PricewaterhouseCoopers LLP has provided
such opinion.
Andy J. Mah
President and Chief Executive Officer
March 3, 2016
Craig Blackwood
Vice President Finance and Chief Financial Officer
Advantage Oil & Gas Ltd. - 28
March 3, 2016
Independent Auditor’s Report
To the Shareholders of Advantage Oil & Gas Ltd.
We have completed integrated audits of Advantage Oil & Gas Ltd.’s 2015 and 2014 consolidated financial statements
and its internal control over financial reporting as at December 31, 2015. 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, 2015 and December 31, 2014 and the consolidated
statements of comprehensive income, 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.
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, 2015 and December 31, 2014 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, 2015,
based on criteria established in Internal Control - Integrated Framework (2013), issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Advantage Oil & Gas Ltd. - 29
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.
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, 2015, based on criteria established in Internal Control - Integrated Framework (2013)
issued by COSO.
Chartered Professional Accountants
Calgary, Alberta
Advantage Oil & Gas Ltd. - 30
Consolidated Statement of Financial Position
(thousands of Canadian dollars)
Notes
December 31, 2015
December 31, 2014
ASSETS
Current assets
Trade and other receivables
Prepaid expenses and deposits
Derivative asset
Total current assets
Non-current assets
Derivative asset
Exploration and evaluation assets
Property, plant and equipment
Total non-current assets
Total assets
LIABILITIES
Current liabilities
Trade and other accrued liabilities
Convertible debenture
Total current liabilities
Non-current liabilities
Derivative liability
Performance incentive plan
Bank indebtedness
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
5
9
9
6
7
11
9
16 (b)
10
12
13
14
11
$
13,888
$
21,974
1,966
37,009
52,863
7,426
10,071
1,447,083
1,464,580
2,503
31,595
56,072
14,961
9,803
1,373,931
1,398,695
$
1,517,443
$
1,454,767
$
23,050
$
81,741
-
23,050
200
-
286,519
44,575
41,152
372,446
395,496
2,236,728
-
103,726
(1,218,507)
1,121,947
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
Total liabilities and shareholders' equity
$
1,517,443
$
1,454,767
Commitments (note 22)
Subsequent event (note 24)
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. - 31
Consolidated Statement of Comprehensive Income
(thousands of Canadian dollars, except for per share amounts)
Notes
2015
2014
Year ended
December 31
$
132,311
(5,837)
126,474
$
215,653
(10,076)
205,577
(18,357)
(10,569)
(87,391)
-
(11,812)
30,422
364
(15,412)
(9,579)
(85,460)
(53)
(14,792)
35,236
(10,527)
29,131
(7,753)
104,990
(30,393)
21,378
74,597
-
21,378
$
(58,894)
15,703
$
17
18
7
6
19
9
20
13
23
15
$
$
0.13
-
0.13
0.12
-
0.12
$
$
$
$
$
$
0.44
(0.35)
0.09
0.44
(0.35)
0.09
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 on derivatives
Other income (expenses)
Income before taxes from continuing operations
Income tax expense
Net income and comprehensive income from continuing operations
Discontinued operations
Net loss from discontinued operations
Net income and comprehensive income
Net income (loss) per share
Basic - from continuing operations
Basic - from discontinued operations
Basic
Diluted - from continuing operations
Diluted - from discontinued operations
Diluted
See accompanying Notes to the Consolidated Financial Statements
Advantage Oil & Gas Ltd. - 32
Consolidated Statement of Changes in Shareholders' Equity
(thousands of Canadian dollars)
Balance, December 31, 2014
Net income and comprehensive income
Share based compensation
Conversion of Convertible Debenture
Maturity of Convertible Debenture
Balance, December 31, 2015
Convertible
debenture
equity
component
$
8,348
-
-
-
(8,348)
$
-
Notes Share capital
$
2,234,959
14, 16
1,759
10
-
2,236,728
$
Contributed
surplus
$
$
90,904
-
4,474
-
8,348
103,726
$
$
$
Total
shareholders'
equity
1,094,326
21,378
6,233
10
-
1,121,947
$
Deficit
(1,239,885)
21,378
-
-
-
(1,218,507)
Convertible
debenture
equity
component
$
8,348
Contributed
surplus
$
92,276
$
Deficit
(1,255,588)
Total
shareholders'
equity
attributable to
Advantage
shareholders
Non-
controlling
interest
Total
shareholders'
equity
$
1,074,634
$
129,779
$
1,204,413
-
-
(1,372)
15,703
-
-
-
15,703
3,989
-
(85)
-
334
15,618
3,989
334
Notes Share capital
$
2,229,598
14, 16
5,361
-
3b, 23
-
-
2,234,959
$
-
-
8,348
$
-
-
90,904
$
-
-
(1,239,885)
$
-
-
1,094,326
$
(1,032)
(128,996)
$
-
(1,032)
(128,996)
1,094,326
$
(thousands of Canadian dollars)
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
See accompanying Notes to the Consolidated Financial Statements
Advantage Oil & Gas Ltd. - 33
Consolidated Statement of Cash Flows
(thousands of Canadian dollars)
Operating Activities
Income before taxes from continuing operations
Add (deduct) items not requiring cash:
Share based compensation
Depreciation expense
Exploration and evaluation expense
Unrealized loss (gain) on derivatives
Loss on sale of assets
Accretion income - Questfire Debenture
Loss on disposition of Questfire Debenture
Unrealized gain - Questfire Class B Shares
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
Financing Activities
Increase (decrease) in bank indebtedness
Maturity of convertible debenture
Interest paid
Cash provided by (used in) financing activities - continuing operations
Cash provided by financing activities - discontinued operations
Cash provided by (used in) financing activities
Investing Activities
Payments on property, plant and equipment
Payments on exploration and evaluation assets
Disposition of investments
Property dispositions
Cash used in investing activities - continuing operations
Cash provided by 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
Year ended
December 31
Notes
2015
2014
$
29,131
$
104,990
14, 16
7
6
9
20
20
20
20
19
12
21
23
10
11
23
7, 21
6
23
3,347
87,391
-
2,321
-
-
-
-
11,812
(1,262)
(19,376)
113,364
-
113,364
177,197
(86,240)
(12,828)
78,129
-
78,129
2,153
85,460
53
(47,786)
1,489
(557)
13,833
(150)
14,792
(446)
(3,924)
169,907
12,434
182,341
(44,038)
-
(9,956)
(53,994)
435
(53,559)
(190,301)
(1,192)
-
-
(191,493)
-
(191,493)
-
-
$
-
(221,810)
(3,237)
17,500
(211)
(207,758)
78,976
(128,782)
-
-
$
-
Advantage Oil & Gas Ltd. - 34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2015 and 2014
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 3, 2016, 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 9.
(c) Functional and presentation currency
These consolidated financial statements are presented in Canadian dollars, which is the Corporation’s functional currency.
Advantage Oil & Gas Ltd. - 35
3. Significant accounting policies
The accounting policies set out below have been applied consistently to all years presented in these financial statements.
(a) Cash and cash equivalents
Cash consists of balances held with banks, and other short-term highly liquid investments with original maturities of three
months or less from inception.
(b) Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by the Corporation. Control exists when the Corporation is exposed, or has rights
to variable returns from its involvement with the entity and has the ability to affect those returns through its power
over the entity. In assessing control, potential voting rights that currently are exercisable are taken into account. The
financial statements of subsidiaries are included in the consolidated financial statements from the date that control
commences until the date that control ceases. 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 as required by IFRS 5, non-current assets held for sale and discontinued operations (see note 23). 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 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.
Advantage Oil & Gas Ltd. - 36
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.
Property, plant and equipment
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. - 37
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. - 38
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 were originally expected to be settled in cash,
as the Corporation had 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 was recorded as compensation expense was recognized.
The liability was revalued at each reporting date and at the date of settlement. These changes in fair value were recognized
in profit or loss for the period.
On May 27, 2015, shareholders of the Corporation voted in favor of a resolution to approve the Restricted and
Performance Award Incentive Plan as described in the management information circular dated April 24, 2015. The effect
of this vote was to give shareholder approval to the existing plan approved by the Board of Directors on April 14, 2014
described above, and in so doing, enable the Corporation to settle awards under the plan with shares, which is the
intention of the Corporation. As such, the plan is no longer “cash-settled,” but “equity-settled” as defined in IFRS 2,
Share Based Payments. In accordance with the requirements of IFRS 2, the liability on the statement of financial position at
May 27, 2015 relating to awards granted under this plan was transferred to equity (contributed surplus), and revaluation
will no longer occur at each reporting date. The types and timing of awards under this plan are described in further detail
in note 16(b).
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.
Advantage Oil & Gas Ltd. - 39
3. Significant accounting policies (continued)
(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 performance awards and
stock options granted to service providers and convertible debentures, using the treasury stock method.
(k) Investment tax credits
Investment tax credits relating to Scientific Research and Experimental Development claims are considered an income
tax credit and are offset against our income tax expense when they become probable of realization.
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 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 the 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 CGU (“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. For purposes of assessment of impairment, management has allocated all exploration and
evaluation assets to the Glacier CGU, on the basis of their geographic proximity to Glacier.
(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.
The downturn in the energy sector that commenced in late 2014 continued and worsened through 2015. In the judgment
of management, this trend constituted an indicator of impairment of our Glacier CGU. Therefore, in accordance with
IAS 36, impairment of assets, management performed an impairment test, as per the Corporation’s accounting policy
described in note 3(d)(v). The test demonstrated that there was no impairment, as the recoverable amount was well in
excess of the total carrying amount of the CGU. Assumptions used in the calculation of recoverable amount are disclosed
in Note 7.
(d) Decommissioning liability
Decommissioning costs will be incurred by the Corporation at the end of the operating life 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.
Advantage Oil & Gas Ltd. - 41
4. Significant accounting judgments, estimates and assumptions (continued)
(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.
5. Trade and other receivables
Trade receivables
Receivables from joint venture partners
Other
6. Exploration and evaluation assets
Balance at December 31, 2013
Additions
Disposition of Longview (notes 3b and 23)
Exploration and evaluation expense
Transferred to property, plant and equipment (note 7)
Balance at December 31, 2014
Additions
Transferred to property, plant and equipment (note 7)
Balance at December 31, 2015
December 31, 2015
12,544
$
716
628
13,888
$
December 31, 2014
19,607
$
1,386
981
21,974
$
$
10,270
3,237
(2,335)
(53)
(1,316)
9,803
1,192
(924)
10,071
$
$
Advantage Oil & Gas Ltd. - 42
7. Property, plant and equipment
Cost
Balance at December 31, 2013
Additions
Change in decommissioning liability (note 12)
Disposition of Longview (notes 3b and 23)
Transferred from exploration and evaluation assets (note 6)
Balance at December 31, 2014
Additions
Change in decommissioning liability (note 12)
Transferred from exploration and evaluation assets (note 6)
Balance at December 31, 2015
Accumulated depreciation
Balance at December 31, 2013
Depreciation
Disposition of Longview (notes 3b and 23)
Balance at December 31, 2014
Depreciation
Balance at December 31, 2015
Net book value
At December 31, 2014
At December 31, 2015
Natural gas and
liquids properties
2,104,397
$
252,556
19,938
(664,090)
1,316
1,714,117
163,549
(4,172)
924
1,874,418
$
$
Natural gas and
liquids properties
459,113
$
91,168
(208,375)
341,906
86,999
428,905
$
$
Furniture
and
equipment
5,240
$
-
-
-
-
5,240
242
-
-
5,482
$
$
Furniture
and
equipment
3,090
$
430
-
3,520
392
3,912
$
$
$
Total
2,109,637
252,556
19,938
(664,090)
1,316
1,719,357
163,791
(4,172)
924
1,879,900
$
$
Total
$
462,203
91,598
(208,375)
345,426
87,391
432,817
$
$
Natural gas and
liquids properties
$
1,372,211
$
1,445,513
Furniture
and
equipment
$
1,720
$
1,570
Total
$
$
1,373,931
1,447,083
During the year ended December 31, 2015, Advantage capitalized general and administrative expenditures directly related to
development activities of $6.2 million (December 31, 2014 - $7.5 million).
Advantage included future development costs of $1.7 billion (December 31, 2014 – $1.7 billion) in property, plant and
equipment costs subject to depreciation.
Advantage Oil & Gas Ltd. - 43
7. Property, plant and equipment (continued)
For the year ended December 31, 2015, Advantage did not recognize an impairment of property, plant and equipment as the
recoverable amount of our single Glacier CGU was well in excess of its carrying amount and that of exploration and evaluation
assets allocated thereto. Recoverable amount was based on a fair value less cost to sell determination, being the after-tax future
net cash flows of proved and probable reserves using forecast prices and costs, discounted at 10%.
Forecast natural gas prices used in the calculation of recoverable amount at December 31, 2015 are as follows:
Year
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026 (1)
AECO ($Cdn/MMBtu)
2.25
2.95
3.42
3.91
4.20
4.28
4.35
4.43
4.51
4.59
4.67
(1) Escalation of 1.5% thereafter
8. Related party transactions
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, 2015
$
2,684
2,903
5,587
$
December 31, 2014
$
2,297
2,669
4,966
$
(1) Represents the grant date fair value of performance awards and stock options granted for the respective years.
As at December 31, 2015, there is a $2.3 million commitment (December 31, 2014 - $2.3 million) related to change of control
or termination of employment of officers.
Advantage Oil & Gas Ltd. - 44
9. Financial risk management
Financial instruments of the Corporation include trade and other receivables, deposits, trade and other accrued liabilities, bank
indebtedness, and derivative assets and liabilities.
Trade and other receivables and deposits are classified as loans and receivables and measured at amortized cost. Trade and
other accrued liabilities and bank indebtedness are all classified as financial liabilities at amortized cost. As at December 31,
2015, 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.
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 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. The actual gains and losses realized on eventual cash settlement can vary materially due
to subsequent fluctuations in commodity prices as compared to the valuation assumptions.
Level 3: Under this level, fair value is determined using inputs that are not observable. Advantage has no assets or liabilities
that use level 3 inputs.
Advantage Oil & Gas Ltd. - 45
9. 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 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 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
$
December 31, 2015
13,888
1,371
44,435
59,694
$
$
December 31, 2014
21,974
1,210
46,556
69,740
$
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 counterparties 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 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,
2015, $0.3 million or 2.2% of trade and other receivables are outstanding for 90 days or more (December 31, 2014 - $0.6
million or 2.6% 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, 2015 or 2014.
The Corporation’s most significant customer, a Canadian oil and natural gas marketer, accounts for $11.9 million of the
trade and other receivables at December 31, 2015 (December 31, 2014 - $14.7 million).
Advantage Oil & Gas Ltd. - 46
9. Financial risk management (continued)
(b) Liquidity risk
The Corporation is subject to liquidity risk attributed from trade and other accrued liabilities and bank indebtedness.
Trade and other accrued 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 $450 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.
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, 2015 and 2014 are as follows:
December 31, 2015
Trade and other accrued liabilities
Bank indebtedness
- principal
- interest (1)
$
Less than
one year
23,050
-
11,106
34,156
$
One to
three years
-
$
287,529
5,280
292,809
$
Three to
five years Thereafter
-
-
$
$
-
-
-
-
$
-
$
-
December 31, 2014
Trade and other accrued liabilities
Bank indebtedness
(1) Interest on bank indebtedness was calculated assuming conversion of the revolving credit facility to a one-year term facility.
Less than
one year
81,741
-
6,847
86,250
2,144
176,982
Three to
five years Thereafter
-
-
$
$
-
-
-
-
-
-
-
-
$
-
$
-
One to
three years
-
$
110,332
3,283
-
-
113,615
- principal
- interest (1)
- principal
- interest
Convertible debenture
$
$
$
Total
$
23,050
287,529
16,386
326,965
$
Total
$
81,741
110,332
10,130
86,250
2,144
290,597
$
(1) Interest on bank indebtedness was calculated assuming conversion of the revolving credit facility to a one-year term facility.
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 10). Under the terms of the agreements, the facilities are reviewed annually,
with the next review scheduled in June 2016. 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.
Advantage Oil & Gas Ltd. - 47
9. Financial risk management (continued)
(c) Price risk
Advantage’s derivative assets and liabilities are subject to price risk as their fair values are based on assumptions regarding
forward commodity prices. 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, 2015 would result in a $10.6 million change in net income for the year
ended December 31, 2015.
As at December 31, 2015, the Corporation’s natural gas hedging positions are summarized as follows:
Average
Period
Q1 2016 to Q4 2016
Q1 2017 to Q4 2017
Q1 2018
Production Hedged
94.8 mmcf/d
39.9 mmcf/d
42.7 mmcf/d
Average Price
AECO ($Cdn.)
$3.62/mcf
$3.44/mcf
$3.22/mcf
As at December 31, 2015, the fair value of the derivatives outstanding resulted in an asset of $44.5 million (December
31, 2014 – $46.6 million) and a liability of $0.2 million (December 31, 2014 – $Nil). 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, 2015, $30.4 million was recognized in net income as a derivative gain (December 31,
2014 - $30.9 million). The table below summarizes the realized and unrealized gains (losses) on derivatives recognized in
net income.
Realized gain (loss) on derivatives
Unrealized gain (loss) on derivatives
From continuing operations
From discontinued operations
(d) Interest rate risk
Year ended
December 31, 2015
32,743
$
(2,321)
30,422
$
Year ended
December 31, 2014
$
$
$
$
$
$
30,422
-
30,422
(14,028)
44,941
30,913
35,236
(4,323)
30,913
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, 2015, net income and comprehensive
income would have changed by $1.9 million (December 31, 2014 - $0.7 million) based on the average debt balance
outstanding during the year.
Advantage Oil & Gas Ltd. - 48
9. Financial risk management (continued)
(e) Capital management
The Corporation manages its capital with the following objectives:
To ensure sufficient financial flexibility to achieve the ongoing business objectives including replacement of
production, funding of future growth opportunities, and pursuit of accretive acquisitions; and
To maximize shareholder return through enhancing the share value.
Advantage monitors its capital structure and makes adjustments according to market conditions in an effort to meet its
objectives given the current outlook of the business and industry in general. The capital structure of the Corporation is
composed of working capital (excluding derivative assets and liabilities), bank indebtedness, convertible debentures, and
share capital. Advantage may manage its capital structure by issuing new shares, repurchasing outstanding shares,
obtaining additional financing either through bank indebtedness or convertible debenture issuances, refinancing current
debt, issuing other financial or equity-based instruments, declaring a dividend, adjusting capital spending, or disposing of
assets. The capital structure is reviewed by Management and the Board of Directors on an ongoing basis.
Advantage’s capital structure as at December 31, 2015 and December 31, 2014 is as follows:
Bank indebtedness (non-current) (note 10)
Working capital deficit (1)
Net debt
Convertible debenture maturity value (current)
Total debt
Shares outstanding (note 14)
Share closing market price ($/share)
Market capitalization (2)
Total capitalization
December 31, 2015
$
286,519
7,196
293,715
-
293,715
170,827,158
7.03
1,200,915
1,494,630
$
$
$
December 31, 2014
$
109,970
57,264
167,234
86,250
253,484
170,067,650
5.56
945,576
1,199,060
$
$
$
(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. - 49
10. Bank indebtedness
Revolving credit facility
Discount on Bankers Acceptances and other fees
Balance, end of year
December 31, 2015
287,529
$
(1,010)
286,519
$
December 31, 2014
110,332
$
(362)
109,970
$
As at December 31, 2015, the Corporation had reserve-based credit facilities (the "Credit Facilities") with a borrowing base
of $450 million. The Credit Facilities are comprised of a $20 million extendible revolving operating loan facility from one
financial institution and a $430 million extendible revolving credit facility from a syndicate of financial institutions. The
revolving period of the Credit Facilities will end on June 10, 2016 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 credit facility due 365 days
after the last day of the revolving period. The Credit Facilities are subject to re-determination of the borrowing base semi-
annually in October and June of each year, with the next annual review scheduled to occur in June 2016. There can be no
assurance that the Credit Facilities will be renewed at the current borrowing base level at that time. The borrowing base is
determined based on, among other things, a thorough evaluation of Advantage's reserve estimates based upon the lenders
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. In the event that the lenders reduce the borrowing base below the amount drawn
at the time of redetermination, the Corporation has 60 days to eliminate any shortfall by repaying amounts in excess of the
new re-determined borrowing base. Amounts borrowed under the Credit Facilities bear interest at rates ranging from LIBOR
plus 2% to 3.25% per annum, and Canadian prime or US base rate plus 1% to 2.25% per annum, in each case, depending on
the type of borrowing and the Corporation’s debt to Earnings Before Interest, Taxes, Depreciation and Amortization
(“EBITDA”) ratio. Undrawn amounts under the Credit Facilities bear a standby fee ranging from 0.5% to 0.8125% per annum,
dependent on the Corporation’s debt to EBITDA ratio. Repayments of principal are not required prior to maturity provided
that the borrowings under the Credit Facilities do not exceed the authorized borrowing amount and the Corporation is in
compliance with all covenants, representations and warranties. 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, 2015 and 2014. 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. The Credit Facilities are collateralized by a $1 billion floating charge demand debenture covering all assets. For
the year ended December 31, 2015, the average effective interest rate on the outstanding amounts under the facilities was
approximately 3.2% (December 31, 2014 – 3.8%). Advantage has no letters of credit issued and outstanding at December 31,
2015 (December 31, 2014 - $2.5 million).
Advantage Oil & Gas Ltd. - 50
11. Convertible debenture
The balance of the convertible debenture outstanding at December 31, 2015 and changes in the liability and equity components
during the years ended December 31, 2015 and 2014 are as follows:
Trading symbol
Debenture outstanding
Liability component:
Balance at December 31, 2013
Accretion of discount
Balance at December 31, 2014
Accretion of discount
Matured
Conversion
Balance at December 31, 2015
Equity component:
Balance at December 31, 2014
Balance at December 31, 2015
5.00%
AAV.DBH
86,250
$
$
$
82,454
3,487
85,941
309
(86,240)
(10)
$
-
8,348
$
$
-
There were no convertible debenture conversions during the year ended December 31, 2014. On January 30, 2015, both the
principal and final interest payment were settled with cash drawn from the credit facility, with the exception of ten thousand
dollars, which was converted to 1,162 common shares.
12. 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 2016 and 2075. A risk-free rate of 2.16%
(December 31, 2014 – 2.33%) and an inflation factor of 1.5% (December 31, 2014 – 2%) were used to calculate the fair value
of the decommissioning liability at December 31, 2015. 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 and inflation rate factor
Liabilities settled
Disposition of Longview (notes 3b and 23)
Balance, end of year
Year ended
December 31, 2015
48,878
$
1,131
1,767
(2,011)
(3,928)
(1,262)
-
44,575
$
Year ended
December 31, 2014
100,616
$
1,364
4,218
683
15,037
(482)
(72,558)
48,878
$
Advantage Oil & Gas Ltd. - 51
13. 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, 2015
-
$
7,753
7,753
$
Year ended
December 31, 2014
-
$
30,393
30,393
$
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 before taxes from continuing operations
Combined federal and provincial income tax rates
Expected income tax expense
Increase (decrease) in income taxes resulting from:
Non-deductible share based compensation
Alberta tax rate increase
Scientific Research and Experimental Development claim
Unrecognized deferred tax asset on sale of Questfire Debenture
Difference between current and expected tax rates
Effective tax rate
$
Year ended
December 31, 2015
29,131
26.00%
7,574
$
Year ended
December 31, 2014
104,990
25.00%
26,248
1,487
1,778
(3,688)
-
602
7,753
26.61%
$
823
-
-
3,458
(136)
30,393
28.95%
$
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, 2013
Charged (credited) to income
Balance at December 31, 2014
Charged (credited) to income
Balance at December 31, 2015
Deferred income tax asset
Balance at December 31, 2013
Charged (credited) to income
Balance at December 31, 2014
Charged (credited) to income
Balance at December 31, 2015
Net deferred income tax liability (asset)
Balance at December 31, 2013
Charged (credited) to income
Balance at December 31, 2014
Charged (credited) to income
Balance at December 31, 2015
Property, plant and
equipment
$
Derivative
asset/liability
Total
$
$
$
$
$
$
$
$
(1,791)
13,430
11,639
304
11,943
216,648
24,016
240,664
34,276
274,940
218,439
10,586
229,025
33,972
262,997
Decommissioning
liability
$
Non-capital
losses
Other
Total
$
$
$
$
$
$
$
(25,623)
13,320
(12,303)
239
(12,064)
(215,569)
31,956
(183,613)
(15,036)
(198,649)
(11,519)
170
(11,349)
(11,726)
(23,075)
(252,711)
45,446
(207,265)
(26,523)
(233,788)
$
$
$
$
Longview
Advantage
Total
3,006
30,393
33,399
7,753
41,152
$
$
$
$
(36,063)
69,462
33,399
7,753
41,152
(39,069)
39,069
$
-
$
-
Advantage Oil & Gas Ltd. - 52
13. Income taxes (continued)
The estimated tax pools available at December 31, 2015 are as follows:
Canadian development expenses
Canadian exploration expenses
Canadian oil and gas property expenses
Non-capital losses
Undepreciated capital cost
Capital losses
Scientific research and experimental development expenditures
Other
$ 194,195
65,994
4,049
735,738
206,057
157,869
32,506
8,196
$
1,404,604
The non-capital loss carry forward balances above expire no earlier than 2023.
No deferred tax asset has been recognized for capital losses of $158 million (December 31, 2014 – $158 million). Recognition
is dependent on the realization of future taxable capital gains.
14. Share capital
(a) Authorized
The Corporation is authorized to issue an unlimited number of shares without nominal or par value.
Amount
2,229,598
5,361
2,234,959
1,759
10
2,236,728
$
$
$
(b) Issued
Balance at December 31, 2013
Share based compensation (note 16)
Balance at December 31, 2014
Share based compensation (note 16)
Conversion of convertible debenture
Balance at December 31, 2015
Common Shares
168,382,838
1,684,812
170,067,650
758,346
1,162
170,827,158
Advantage Oil & Gas Ltd. - 53
15. 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
2015
2014
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
Performance Incentive Plan
Diluted
$
$
21,378
-
21,378
$
$
74,597
(58,894)
15,703
170,607,873
891,621
211,926
171,711,420
169,482,394
1,317,671
-
170,800,065
The calculation of diluted net income (loss) per share for the years ended December 31, 2015 and 2014 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 per share calculation for the year ended December 31, 2015 was 796,830
shares (December 31, 2014 – 10,029,070 shares). As at December 31, 2014, the total convertible debenture outstanding was
convertible to 10,029,070 shares. As the convertible debenture matured on January 30, 2015 (note 11), it had no dilutive effect
on periods beginning on dates thereafter.
The calculation of diluted net income (loss) per share for the year ended December 31, 2014 excluded the effects of the
Performance Incentive Plan, as this plan was cash-settled until May 27, 2015 (note 3(f)).
Advantage Oil & Gas Ltd. - 54
16. 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%
0.98%
0%
1.05%
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, 2015:
Balance at December 31, 2013
Exercised
Granted
Forfeited/cancelled
Balance at December 31, 2014
Exercised
Granted
Forfeited/cancelled
Balance at December 31, 2015
Stock Options
13,060,843
(7,435,115)
3,777,255
(4,258,307)
5,144,676
(2,081,538)
987,928
(19,764)
4,031,302
Weighted-Average
Exercise Price
$
3.68
3.67
5.00
3.70
4.63
4.00
6.82
5.37
5.49
$
$
Stock Options Outstanding
Stock Options Exercisable
Range of
Exercise Price
$4.43 - $5.87
$5.88 - $6.82
$4.43 - $6.82
Number of
Stock Options
Outstanding
3,032,300
999,002
4,031,302
Weighted Average
Remaining
Contractual Life -
Years
2.09
4.25
2.62
Weighted
Average
Exercise
Price
$
5.06
6.81
5.49
$
Weighted
Average Exercise
Price
Number of
Stock
Options
Exercisable
2,550,292 $ 4.91
335,843 6.81
5.13
$
2,886,135
Advantage Oil & Gas Ltd. - 55
16. 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, that is determined based
on Corporate Performance Measures, as approved by the Board of Directors.
As at December 31, 2015, no Restricted Awards have been granted.
The following table is a continuity of Performance Awards:
Balance at December 31, 2013
Granted
Forfeited
Balance at December 31, 2014
Granted
Forfeited
Balance at December 31, 2015
Performance Awards
-
409,702
(3,560)
406,142
263,510
(3,560)
666,092
Share based compensation recognized by plan for the years ended December 31, 2015 and 2014 are as follows:
Year ended
December 31
2015
$
2014
$
3,101
2,620
-
5,721
(2,374)
3,347
3,347
-
3,347
$
$
$
$
$
$
3,265
512
1,058
4,835
(2,016)
2,819
2,153
666
2,819
Stock Option Plan
Performance Incentive Plan
RSPIP (1)
Total share based compensation
Capitalized
Net share based compensation expense
From continuing operations
From discontinued operations
(1) Relates solely to discontinued operations
Advantage Oil & Gas Ltd. - 56
17. 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
Year ended
December 31
2015
129,802
2,509
132,311
$
$
$
$
132,311
-
132,311
2014
212,579
27,789
240,368
$
$
$
$
215,653
24,715
240,368
18. General and administrative expense (“G&A”)
Year ended
December 31
2015
$
2014
$
7,026
5,721
1,146
2,869
16,762
(6,193)
10,569
8,786
4,835
1,173
4,126
18,920
(7,450)
11,470
$
$
$
$
10,569
-
10,569
$
$
9,579
1,891
11,470
Year ended
December 31
2015
$
2014
$
10,035
337
309
1,131
11,812
11,812
-
11,812
$
$
$
6,817
4,313
3,487
1,364
15,981
$
$
$
14,792
1,189
15,981
Salaries and benefits
Share based compensation (note 16)
Office rent
Other
Total G&A
Capitalized (note 7)
Net G&A
From continuing operations
From discontinued operations
19. Finance expense
Interest on bank indebtedness (note 10)
Interest on convertible debenture (note 11)
Accretion on convertible debenture (note 11)
Accretion of decomissioning liability (note 12)
Total finance expense
From continuing operations
From discontinued operations
Advantage Oil & Gas Ltd. - 57
20. Other income (expenses)
Year ended
December 31
Interest income - Questfire Debenture
Accretion income - Questfire Debenture
Loss on disposition of Questfire Debenture
Unrealized gain - Questfire Class B Shares
Loss on sale of assets
Miscellaneous income
Total other income (expenses) from continuing and discontinued operations
2015
-
$
-
-
-
-
364
364
$
21. Supplementary cash flow information – continuing operations
Changes in non-cash working capital is comprised of:
2014
$
455
557
(13,833)
150
(1,489)
3,633
(10,527)
$
Year ended
December 31
2015
2014
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
22. Commitments
$
$
$
$
8,086
537
(58,691)
(50,068)
(19,376)
(1,808)
(28,884)
(50,068)
$
$
(4,876)
159
11,525
6,808
(3,924)
1,311
9,421
6,808
$
$
Advantage has several lease commitments relating to office buildings and transportation commitments. The estimated
remaining annual minimum operating lease payments are as follows:
2015
2016
2017
2018
2019
2020 and thereafter
Total commitments
December 31
2015
2014
-
21,397
21,174
24,544
24,602
80,500
172,217
$
18,220
20,485
19,511
17,414
15,677
33,386
124,693
$
Advantage Oil & Gas Ltd. - 58
23. 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 an Offering (note 3(b)).
Results of the discontinued Longview segment are as follows:
(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
Non-controlling interest
Income before taxes from discontinued operations
Income tax expense
Loss from discontinued operations
Loss on disposition of Longview
Net 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 financing activities
Cash flow from investing activities
24. Subsequent event
Year ended
December 31
2015
2014 (1)
-
$
-
-
-
-
-
-
-
-
-
-
-
-
$
-
$
24,715
(4,108)
20,607
(7,022)
(1,891)
(6,138)
(1,189)
(4,323)
85
129
(198)
(69)
(58,825)
(58,894)
$
Year ended
December 31
2015
2014
$
-
-
-
$
12,434
435
78,976
On February 18, 2016, the Corporation announced that it had entered into an agreement with a syndicate of underwriters
pursuant to which the underwriters have agreed to purchase, on a bought deal basis, 11,750,000 common shares of Advantage
(“Common Shares”) at a price of $7.45 per Common Share, for gross proceeds of $87.5 million (the “Offering”). The
Corporation has also granted the underwriters an option to purchase an additional 15% of the Common Shares issued under
the Offering at a price of $7.45 per Common Share to cover over-allotments, if any. The Offering is expected to close on
March 8, 2016.
Advantage Oil & Gas Ltd. - 59
Directors
Jill Angevine (1)(3)
Stephen E. Balog (1)(2)(3)
Grant Fagerheim (2)(3)
Paul G. Haggis (1)(2)(3)
Andy J. Mah
Ronald A. McIntosh (2)(3)
(1) Member of Audit Committee
(2) Member of Reserve Evaluation Committee
(3) Member of Human Resources, Compensation & Corporate Governance
Committee
Officers
Andy J. Mah, President and CEO
Craig Blackwood, Vice President, Finance and CFO
Neil Bokenfohr, Senior Vice President
Corporate Secretary
Jay P. Reid, Partner
Burnet, Duckworth and Palmer LLP
Auditors
PricewaterhouseCoopers LLP
Bankers
The Bank of Nova Scotia
National Bank of Canada
Royal Bank of Canada
Canadian Imperial Bank of Commerce
Union Bank, Canada Branch
Alberta Treasury Branches
Wells Fargo Bank N.A., /Canada Branch
Independent Reserve Evaluators
Sproule Associates Limited
Legal Counsel
Burnet, Duckworth and Palmer LLP
Transfer Agent
Computershare Trust Company of Canada
Abbreviations
- barrels
bbls
- barrels per day
bbls/d
- barrels of oil equivalent (6 mcf = 1 bbl)
boe
- barrels of oil equivalent per day
boe/d
- thousand cubic feet
mcf
- thousand cubic feet per day
mcf/d
- million cubic feet
mmcf
mmcf/d - million cubic feet per day
- billion cubic feet
bcf
- trillion cubic feet
tcf
- gigajoules
gj
- natural gas liquids
NGLs
- West Texas Intermediate
WTI
Corporate Office
300, 440 – 2nd Avenue SW
Calgary, Alberta T2P 5E9
(403) 718-8000
Contact Us
Toll free: 1-866-393-0393
Email: ir@advantageog.com
Visit our website at www.advantageog.com
Toronto Stock Exchange Trading Symbols
Shares: AAV
New York Stock Exchange Trading Symbol
Shares: AAV
Advantage Oil & Gas Ltd. - 60