2016 Annual Report
Financial and Operating Highlights
Financial ($000, except as otherwise indicated)
Sales including realized hedging
Funds from operations
per share (1)
Total capital expenditures
Working capital deficit (2)
Bank indebtedness
Basic weighted average shares (000)
Operating
Daily Production
Natural gas (mcf/d)
Liquids (bbls/d)
Total mcfe/d (3)
Total boe/d (3)
Average prices (including hedging)
Natural gas ($/mcf)
Liquids ($/bbl)
Cash netbacks ($/mcfe) (3)
Natural gas and liquids sales
Realized gains on derivatives
Royalties
Operating expense
Transportation expense (4)
Operating netback
General and administrative
Finance expense
Other income (expense)
Cash netbacks
Three months ended
December 31
2016
2015
Year ended
December 31
2016
2015
$
$
71,090
54,610
$
$
0.30
30,043
$
$
6,167
153,102
184,641
$
$
42,654
31,656
$
$
0.19
27,604
$
$
7,196
286,519
170,742
215,369
949
221,063
36,844
154,241
179
155,315
25,886
$
$
215,027
166,861
$
$
0.92
128,014
$
$
6,167
153,102
182,056
197,852
915
203,342
33,890
$
$
165,054
123,630
$
$
0.72
164,983
$
$
7,196
286,519
170,608
139,927
154
140,851
23,475
$
$
3.35
53.01
$
$
2.96
43.24
$
$
2.75
47.97
$
$
3.18
44.60
$
$
$
$
3.17
0.32
(0.18)
(0.22)
(0.26)
2.83
(0.08)
(0.09)
0.02
2.68
2.37
0.61
(0.10)
(0.35)
-
2.53
(0.11)
(0.21)
(0.01)
2.20
2.18
0.71
(0.07)
(0.27)
(0.09)
2.46
(0.10)
(0.13)
0.01
2.24
2.57
0.64
(0.11)
(0.36)
-
2.74
(0.14)
(0.21)
0.01
2.40
$
$
$
$
(1) Based on basic weighted average shares outstanding.
(2) Working capital deficit includes trade and other receivables, prepaid expenses and deposits, and trade and other
accrued liabilities.
(3) 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.
(4) Please note that commencing on November 1, 2016, Advantage requested that its gas marketing contract be
modified to reflect natural gas transportation as a cost. Prior to November 1, 2016, Advantage’s realized
natural gas prices were reduced for natural gas transportation from the sales points to AECO. This change
has no effect on funds from operations, cash netbacks, or net income (loss), however, Advantage believes this
is more instructive for our investors to compare cost structures going forward.
CONTENTS
Message to Shareholders ..................................................................................................................................................................... 3
Reserves ................................................................................................................................................................................................. 7
Consolidated Management’s Discussion & Analysis ..................................................................................................................... 12
Consolidated Financial Statements .................................................................................................................................................. 30
Consolidated Statement of Financial Position ....................................................................................................................... 34
Consolidated Statement of Comprehensive Income (Loss)................................................................................................. 35
Consolidated Statement of Changes in Shareholders’ Equity .............................................................................................. 36
Consolidated Statement of Cash Flows .................................................................................................................................. 37
Notes To The Consolidated Financial Statements ................................................................................................................ 38
Advantage Oil & Gas Ltd. - 2
MESSAGE TO SHAREHOLDERS
Record Results and Outperformance Underscores Low Cost Glacier Montney Natural Gas
Supply & Continuing Growth
Advantage Oil & Gas Ltd. is pleased to report the Corporation outperformed its 2014 through 2016 Glacier Montney
development plan objectives and achieved record operating and financial results in 2016. During the last three years,
Advantage transformed into a North American leading low cost Montney natural gas and liquids producer with strong
investment returns despite extended periods of historically low commodity prices. As we embark on our 2017 through
2019 development plan and beyond, our achievements have further strengthened the Corporation’s capacity to continue
delivering profitable and sustainable growth based on a disciplined strategy supported by a strong hedging program,
market diversification and firm transportation service. As we continue growth from our fourth quarter 2016 production
rate of 221 mmcfe/d (36,844 boe/d) to a target of 316 mmcfe/d (52,670 boe/d) in 2019, we are excited to continue
development of our vast Montney natural gas and liquids resource contained within the Corporation’s land holdings.
We sincerely thank Advantage’s Board of Directors and our shareholders for their guidance and ongoing support. We
especially wish to thank our staff for their dedication and extra-efforts who have contributed to the Corporation’s success
in achieving stellar 2016 results and for their accomplishments in the last three years which are summarized below.
Resource Delineation and Capture
During the last three years, the Corporation grew its Montney land holdings by 30% through the acquisition of 36 net
sections (23,040 net acres) of targeted high quality lands through Alberta government land sales and producer transactions
for a total cost of $13 million. These sections were high graded based on Advantage’s geo-technical interpretations and
complement the Corporation’s existing Montney land holdings. Since 2008, a total of 181 Montney horizontal wells have
been drilled at Glacier leading to commercialization of five development layers which are estimated to contain
approximately 1,100 future drilling locations. At our Valhalla land block, we have drilled three initial evaluation wells
which confirmed natural gas liquids and an additional four wells are planned to be drilled in 2017. At our Wembley and
Progress land blocks, industry drilling, in close proximity to our lands, have demonstrated encouraging results and
Advantage plans to drill initial evaluation wells within the next 12 to 18 months. Advantage currently has a total of 157
net sections (100,480 net acres) of Montney lands which is 100% operated and controlled.
Advantage Oil & Gas Ltd. - 3
Operational Excellence
Over the last three years, Advantage increased annual production by 74% (61% per share) to 203 mmcfe/d (33,890 boe/d)
and reduced operating costs per mcfe by 44% to $0.27/mcfe ($1.62/boe) in 2016. Through the application of new
technologies in conjunction with Advantage’s Montney expertise, significant improvements in well performance
combined with lower well and facilities costs contributed to improving all-in capital efficiencies to $7,330/boe/d in 2016.
Reserves additions have been achieved at an average three year proved plus probable finding and development (“F&D”)
cost of $0.46/mcfe ($2.76/boe) and proved F&D cost of $0.75/mcfe ($4.53/boe) including the change in future
development capital. Advantage’s 100% owned Glacier gas plant was expanded from 160 mmcf/d in 2014 to 250
mmcf/d in 2016 with a current expansion underway to further increase raw processing capacity to 400 mmcf/d by the
second quarter of 2018. These achievements have created a solid foundation for a continued industry leading low cost
structure and targeted production growth to 316 mmcfe/d (52,670 boe/d) in 2019.
Financial Strength
Advantage reduced its year-end total debt from $289 million in 2013 to $159 million in 2016 including reductions in its
total capital program requirements by $177 million, growing its cash flow by 96% (81% per share) and achieving hedging
gains of $73 million during the last three years. Total corporate cash costs were reduced by 53% to $0.66/mcfe
($3.96/boe) in 2016 resulting in strong operating netbacks of $2.83/mcfe ($16.98/boe) in the fourth quarter of 2016.
Advantage generated $39 million of surplus cash (funds from operations less capital) in 2016 which contributed to a strong
balance sheet with a 2016 year-end total debt to trailing cash flow ratio of 1.0 and an undrawn credit facility of $247 million
to provide significant financial flexibility. Additionally, a commodity risk management and market diversification program
is in place through 2019 to provide downside commodity price protection. As a result, Advantage’s 2017 through 2019
development plan is highly resilient and estimated to result in a total 2019 year-end debt to trailing cash flow ratio of 0.2
assuming a three year AECO natural gas price assumption of Cdn $2.95/mcf. Assuming an average three year AECO
natural gas price assumption of Cdn $2.00/mcf or $3.50/mcf, total 2019 year-end debt to trailing cash flow ratios are
estimated to be 1.4 or 0.0, including the Corporation’s current hedging positions, respectively.
Commodity Risk Management, Transportation and Market Diversification
Advantage has continued with a multi-year commodity risk management program in conjunction with its Montney
development which began in 2008. The volume and price targets related to our hedging positions have and will continue
to vary based on future capital program content. Since we have significantly reduced our corporate cash costs and
improved capital efficiencies, a smaller volume of hedging, even at lower commodity prices than historical levels, can
generate strong returns. Advantage has also proactively secured increasing levels of firm sales gas transportation service
of up to 308 mmcf/d which will satisfy 100% of the Corporation’s annual production targets (natural gas and liquids) of
236 mmcfe/d, 272 mmcfe/d and 316 mmcfe/d for 2017, 2018 and 2019, respectively. We have diversified our end-
markets by securing Henry Hub to AECO basis differentials of US$0.85/mcf on 25,000 mcf/d for calendar 2018 and
US$0.88/mcf on 50,000 mcf/d for calendar 2019. Our exposure to AECO prices are estimated to be approximately 57%
in 2017.
The Corporation’s achievements and strategic positioning further bolsters our confidence in the future development of
Advantage’s Montney assets to continue generating attractive investment returns and to compete as an industry leading
North American natural gas and liquids supply source. We look forward to reporting on our development plan execution
over the next three years.
Note:
Please refer to Advantage’s Year-end 2016 Reserves press release dated February 7, 2017 for additional details.
Advantage Oil & Gas Ltd. - 4
2016 Operating and Financial Highlights
Fourth quarter 2016 production was up 42% to a record 221 mmcfe/d (36,844 boe/d) and up 44% to average 203
mmcfe/d (33,890 boe/d) in 2016 representing a 36% increase on a per share basis. Liquids production was up 494%
on an annual basis to 915 bbls/d as compared to 2015. The Corporation’s strategy to maintain excess Montney well
productivity and to retain available processing capacity at its 100% owned Glacier gas plant provided operational flexibility
to capitalize on strengthening gas prices and to offset TransCanada Pipeline Limited’s (“TCPL”) sales gas transportation
restrictions during 2016 and particularly in the fourth quarter of 2016.
Operating costs in the fourth quarter of 2016 were reduced by 37% to a record low of $0.22/mcfe ($1.32/boe) and
reduced on an annual basis by 25% to $0.27/mcfe ($1.62/boe) compared to the same periods of 2015. This
outstanding achievement was made possible by Advantage’s continued focus on operational excellence and through the
dedicated efforts of our Montney team.
Strong cash flow growth resulted in $39 million of surplus cash (funds from operations less capital expenditures)
during 2016. Annual cash flow was up 35% to $167 million and up 28% on a per share basis to $0.92 which
included hedging gains of $53 million. Advantage’s cash netback for 2016 was $2.24/mcfe ($13.44/boe) which represents
78% of the realized sales price, including hedging.
Total debt (including working capital deficit) was reduced by $134 million to $159 million during 2016 resulting
in a year-end 2016 total debt to trailing cash flow of approximately 1.0x. These achievements were attained despite
an average daily AECO natural gas price of $2.16/mcf during 2016. Capital spending during the fourth quarter of 2016
was $30 million and $128 million for 2016.
Current Activity Update and Looking Forward
Advantage currently has 13 completed, standing wells which are expected to provide sufficient field production capability
to increase annual production by 16% to our 2017 production target of 236 mmcfe/d (39,337 boe/d). The average drill,
complete, equipping and tie-in costs for the 13 wells based on actual costs to date and Management estimates are $4.4
million/well which reflects Advantage’s structural cost reductions as well as the continuation of lower service costs in
2016. A new 16 well pad will be rig released in the first quarter of 2017 and will be completed during the latter part of
this year to support production growth through 2018.
The Corporation’s Glacier gas plant expansion to increase raw processing capacity from 250 mmcf/d to 400 mmcf/d,
including increasing propane plus (“C3+”) liquids extraction capacity to 6,800 bbls/d, is progressing on-track. Approval
has been received from the Alberta Energy Regulator (“AER”) and engineering design and equipment orders have been
completed. Construction is expected to commence during the second half of 2017 with completion targeted by the
second quarter of 2018.
To achieve our 2017 through 2019 production growth, a total of approximately 83 new Montney wells will be required to
be drilled out of our estimated drilling inventory of 1,100 future locations at Glacier. This is targeted to drive annual
production growth by 53% to 316 mmcfe/d (52,670 boe/d) in 2019. Operational flexibility to allow for increasing growth
targets and varying the number of dry gas wells versus liquids rich wells have been included in our development plan.
Advantage Oil & Gas Ltd. - 5
Commodity Risk Management Program & Market Diversification
Advantage has hedged 45% of its 2017 targeted natural gas production at an average AECO price of Cdn $3.19/mcf,
22% of 2018 targeted natural gas production at an average AECO price of Cdn $3.02/mcf and 18% of Q1 2019 targeted
natural gas production at an average AECO price of Cdn $3.00/mcf (% hedged is net of royalties). Additionally, we have
secured Henry Hub to AECO basis differentials of US$0.85/mcf on 25,000 mcf/d for calendar 2018 and US$0.88/mcf
on 50,000 mcf/d for calendar 2019 to diversify our natural gas markets.
We believe taking a disciplined approach to managing commodity price risk for 2018 and beyond will be prudent as supply
and demand fundamentals are expected to remain volatile.
Advantage Oil & Gas Ltd. - 6
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, 2016
December 31, 2015
Proved plus probable reserves (mboe)
366,106
Present Value of 2P reserves discounted at 10%, before tax ($000)(1) $2,213,743
Net Asset Value per Share discounted at 10%, before tax(2)
$11.09
Reserve Life Index (proved plus probable - years)(3)
27.2
Reserves per Share (proved plus probable - boe)(2)
1.98
Bank debt per boe of reserves (proved plus probable)(4)
$0.42
325,347
$2,035,424
$10.51
34.4
1.90
$0.88
(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 184.654 million Shares outstanding at December 31, 2016, and 170.827 million at December 31, 2015.
(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, 2016
Proved
Developed Producing
Developed Non-producing
Undeveloped
Total Proved
Probable
Total Proved Plus Probable
Light &
Medium Oil
(mbbl)
Natural
Gas Liquids
(mbbl)
Conventional
Natural Gas
(mmcf)
Total Oil
Equivalent
(mboe)
8
-
-
8
3
11
3,645
597
11,281
15,524
8,005
23,529
358,980
50,736
1,027,433
1,437,149
618,249
2,055,398
63,484
9,053
182,520
255,057
111,049
366,106
Advantage Oil & Gas Ltd. - 7
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 Plus Probable
Before Income Taxes Discounted at
0%
10%
15%
$1,084,909
186,551
2,587,841
3,859,301
2,384,445
$6,243,745
$720,793
90,765
614,694
1,426,251
787,492
$2,213,743
$616,180
72,810
298,395
987,386
546,369
$1,533,754
(1) Advantage’s light crude oil and medium crude oil, conventional natural gas and natural gas liquid reserves were evaluated using
Sproule’s product price forecast effective December 31, 2016 prior to the provision for income taxes, interests, debt services
charges and general and administrative expenses. It should not be assumed that the discounted future net revenue estimated by
Sproule represents the fair market value of the reserves.
(2) Assumes that development of Glacier will occur, without regard to the likely availability to the Corporation of funding required
for that development.
(3) Future Net Revenue incorporates Managements’ estimates of required abandonment and reclamation costs, including expected
timing such costs will be incurred, associated with all wells, facilities and infrastructure. No abandonment and reclamation costs
have been excluded.
Sproule Price Forecasts
The present value of future net revenue at December 31, 2016 was based upon natural gas and natural gas liquids pricing
assumptions prepared by Sproule effective December 31, 2016. These forecasts are adjusted for reserve quality,
transportation charges and the provision of any applicable sales contracts. The price assumptions used over the next seven
years are summarized in the table below:
Alberta AECO-C
Natural Gas
($Cdn/mmbtu)
3.44
3.27
3.22
3.91
4.00
4.10
4.19
Henry Hub
Natural Gas
($US/mmbtu)
3.50
3.50
3.50
4.00
4.08
4.16
4.24
Edmonton
Propane
($Cdn/bbl)
Edmonton
Butane
($Cdn/bbl)
Edmonton
Pentanes Plus
($Cdn/bbl)
Exchange
Rate
($US/$Cdn)
22.74
28.04
30.64
32.27
33.95
35.68
37.46
47.60
55.49
57.65
58.80
59.98
61.18
62.40
67.95
75.61
78.82
80.47
82.15
83.86
85.61
0.78
0.82
0.85
0.85
0.85
0.85
0.85
Year
2017
2018
2019
2020
2021
2022
2023
Advantage Oil & Gas Ltd. - 8
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, 2015
Present value proved and probable reserves
Undeveloped land(2)
Working capital (deficit) and other(3)
Bank debt
Net asset value - December 31, 2016
Net asset value per Share (1) - December 31, 2016
0%
$31.67
$6,243,745
16,012
(28,713)
(153,102)
$6,077,942
$32.92
10%
$10.51
$2,213,743
16,012
(28,713)
(153,102)
15%
$6.83
$1,533,754
16,012
(28,713)
(153,102)
$2,047,940
$1,367,951
$11.09
$7.41
(1) Based on 184.654 million Shares outstanding at December 31, 2016 and 170.827 million Shares outstanding at
December 31, 2015.
(2) The value of undeveloped land is based on internal estimates.
(3) Other is calculated as current and non-current derivative asset less current and non-current derivative liability.
Gross Working Interest Reserves Reconciliation
Proved
Opening balance December 31, 2015
Extensions
Infill drilling
Improved recovery
Technical revisions(1)
Discoveries
Acquisitions
Royalty changes(2)
Economic factors
Production
Closing balance at December 31, 2016
Light &
Medium Oil
(mbbl)
Natural
Gas Liquids
(mbbl)
Conventional
Natural Gas
(mmcf)
Total Oil
Equivalent
(mboe)
9.4
-
-
-
0.5
-
-
-
(0.1)
(1.4)
8.4
12,097
3,166
-
-
846
-
-
(166)
(86)
(334)
15,524
1,206,484
142,211
-
-
190,852
-
-
(20,901)
(9,087)
(72,410)
1,437,149
213,187
26,868
-
-
32,655
-
-
(3,650)
(1,600)
(12,404)
255,057
Advantage Oil & Gas Ltd. - 9
Gross Working Interest Reserves Reconciliation (continued)
Proved Plus Probable
Opening balance Dec. 31, 2015
Extensions
Infill drilling
Improved recovery
Technical revisions(1)
Discoveries
Acquisitions
Royalty changes(2)
Economic factors
Production
Closing balance at Dec. 31, 2016
Light &
Medium Oil
(mbbl)
Natural
Gas Liquids
(mbbl)
Conventional
Natural Gas
(mmcf)
Total Oil
Equivalent
(mboe)
12.2
-
-
-
0.5
-
-
-
(0.2)
(1.4)
11.1
20,121
3,966
-
-
(225)
-
-
106
(106)
(334)
23,529
1,831,284
174,684
-
-
149,264
-
-
(15,929)
(11,495)
(72,410)
2,055,398
325,347
33,080
-
-
24,653
-
-
(2,549)
(2,022)
(12,404)
366,106
(1) Technical revisions accounted for 60% of the total proved additions and 46% of the total proved plus probable additions. The
percentage of each category was calculated by dividing the technical revisions in the category by the total reserve additions in
the same category before production.
(2) Royalty changes reflect the adjustment from the Alberta Royalty Framework to the Modernized Royalty Framework.
Finding & Development Costs (“F&D”)(1)(2)(3)
2016 F&D Costs – Gross Working Interest Reserves Excluding Future Development Capital – NI 51-101
Capital expenditures ($000)
Total mboe, end of year
Total mboe, beginning of year
Production, mboe
Reserve additions, mboe
2016 F&D costs ($/boe)
2015 F&D costs ($/boe)
Three-year average F&D costs ($/boe)
Proved
$128,014
Proved Plus Probable
$128,014
255,057
213,187
12,404
54,274
$2.36
$5.56
$4.75
366,106
325,347
12,404
53,163
$2.41
$4.95
$4.72
Advantage Oil & Gas Ltd. - 10
2016 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 ($000)
Total mboe, end of year
Total mboe, beginning of year
Production, mboe
Reserve additions, mboe
2016 F&D costs ($/boe)
2015 F&D costs ($/boe)
Three-year average F&D costs ($/boe)
Proved
$128,014
(47,091)
80,923
255,057
213,187
12,404
54,274
$1.49
$5.22
$4.53
Proved Plus Probable
$128,014
(131,400)
(3,386)
366,106
325,347
12,404
53,163
$(0.06)
$4.65
$2.76
(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) The change in FDC is primarily from lower future well costs which were partly offset by increases in facilities costs to include an
upsized Glacier gas plant expansion to 400 mmcf/d and future infrastructure costs such as a frac water supply system, gas
gathering system expansions and additional utilities.
Advantage Oil & Gas Ltd. - 11
CONSOLIDATED MANAGEMENT’S DISCUSSION & ANALYSIS
The following Management’s Discussion and Analysis (“MD&A”), dated as of March 2, 2017, 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, 2016 and should be read in conjunction with the December 31, 2016 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 and Other Advisories
This MD&A contains certain forward-looking statements and forward-looking information (collectively, "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, 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; 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;
average royalty rates and the impact of well depths, well production rates, commodity prices and gas cost allowance on average corporate
royalty rates; future anticipated royalty rates; terms of the MRF and the estimated impact on economic returns for the Corporation's
average Upper, Middle and Lower Montney wells; Advantages plans to continue to evaluate and optimize the impact of drilling and
completion design changes on royalties and economics in respect of the MRF; terms of the Corporation's equity compensation plans;
the Corporation's expectation that it will realize lower cash finance expense in future periods of 2017; estimated tax pools as at
December 31, 2016; 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 financing arrangements,
share repurchases, obtaining additional financing through bank indebtedness, refinancing current debt, issuing other financial or equity-
based instruments, declaring a dividend or adjusting capital spending; 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 ability to satisfy all liabilities and commitments, including a working capital deficit, and meet
future obligations as they become due; the Corporation's belief that it is well positioned to successfully execute its multi-year
development plan at Glacier, Alberta; Advantage's estimated funds from operations and total debt to trailing cash flow ratio for 2017;
expected timing of completion of expansion of the Corporation's Glacier gas plant; the Corporation's drilling and completion plans,
including the anticipated timing of certain well completions; the Corporation's expectation that certain wells will meet Advantage's
production targets until the second quarter of 2017; the Corporation's plans to put additional wells on-stream and the expected timing
thereof; the focus of the Corporation's capital expenditures and operations, including the Corporation's drilling plans; 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; and the statements under "critical accounting estimates" in this MD&A.
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. - 12
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; lack of
available capacity on pipelines; delays in timing of completion of the expansion of the Corporation's Glacier gas plant; 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; availability of pipeline capacity;
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.
This MD&A and, in particular the information in respect of the Corporation's prospective funds from operations and debt to trailing
cash flow for 2017, may contain future oriented financial information ("FOFI") within the meaning of applicable securities laws. The
FOFI has been prepared by management to provide an outlook of the Corporation's activities and results and may not be appropriate
for other purposes. The FOFI has been prepared based on a number of assumptions, including the assumptions discussed above. The
actual results of operations of the Corporation and the resulting financial results may vary from the amounts set forth herein, and such
variations may be material. The Corporation and management believe that the FOFI has been prepared on a reasonable basis, reflecting
management’s best estimates and judgments. FOFI contained in this MD&A was made as of the date of this MD&A and the
Corporation disclaims any intention or obligations to update or revise any FOFI contained in this MD&A, whether as a result of new
information, future events or otherwise, unless required pursuant to applicable law.
References in this MD&A to production test rates are useful in confirming the presence of hydrocarbons, however such rates are not
determinative of the rates at which such wells will commence production and decline thereafter and are not indicative of long term
performance or of ultimate recovery. Additionally, such rates may also include recovered "load oil" fluids used in well completion
stimulation. While encouraging, readers are cautioned not to place reliance on such rates in calculating the aggregate production for
Advantage. A pressure transient analysis or well-test interpretation has not been carried out in respect of all wells. Accordingly, the
Corporation cautions that the test results should be considered to be preliminary.
Advantage Oil & Gas Ltd. - 13
Non‐GAAP Measures
The Corporation discloses several financial measures in the MD&A that do not have any standardized meaning prescribed under
GAAP. These financial measures include funds from operations and cash netbacks. Management believes that these financial measures
are useful supplemental information to analyze operating performance and provide an indication of the results generated by the
Corporation’s principal business activities. Investors should be cautioned that these measures should not be construed as an alternative
to net income, comprehensive income, and cash provided by operating activities or other measures of financial performance as
determined in accordance with GAAP. Advantage’s method of calculating these measures may differ from other companies, and
accordingly, they may not be comparable to similar measures used by other companies.
Funds from operations, as presented, is based on cash provided by operating activities, before expenditures on decommissioning liability
and changes in non-cash working capital, reduced for finance expense excluding accretion. 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:
Three months ended
December 31
Year ended
December 31
($000)
Cash provided by operating activities
Expenditures on decommissioning liability
Changes in non-cash working capital
Finance expense (1)
Funds from operations
(1) Finance expense excludes non-cash accretion expense.
$
$
$
$
2016
57,099
491
(1,067)
(1,913)
54,610
2015
29,772
552
4,297
(2,965)
31,656
% change
92 %
(11) %
(125) %
(35) %
73 %
2016
174,906
1,857
(567)
(9,335)
166,861
2015
113,364
1,262
19,376
(10,372)
123,630
% change
54 %
47 %
(103) %
(10) %
35 %
$
$
$
$
Advantage Oil & Gas Ltd. - 14
Overview
Natural gas and liquids sales
Realized gains on derivatives
Royalties
Operating expense
Transportation expense
Operating income and operating netbacks
General and administrative expense (1)
Finance expense (2)
Other income (3)
Funds from operations and cash netbacks
Three months ended
December 31
2016
2015
Year ended
December 31
2016
2015
$
$
$
$000
$
per mcfe
$
3.17
0.32
(0.18)
(0.22)
(0.26)
2.83
(0.08)
(0.09)
0.02
2.68
$
64,556
6,534
(3,637)
(4,490)
(5,223)
57,740
(1,680)
(1,913)
463
54,610
$000
33,867
8,787
(1,379)
(4,998)
-
36,277
(1,581)
(2,965)
(75)
31,656
per mcfe
$
2.37
0.61
(0.10)
(0.35)
-
2.53
(0.11)
(0.21)
(0.01)
2.20
$
$000
161,933
53,094
(4,900)
(20,358)
(6,982)
182,787
(7,469)
(9,335)
878
166,861
per mcfe
$
2.18
0.71
(0.07)
(0.27)
(0.09)
2.46
(0.10)
(0.13)
0.01
2.24
$
$000
132,311
32,743
(5,837)
(18,357)
-
140,860
(7,222)
(10,372)
364
123,630
per mcfe
$
2.57
0.64
(0.11)
(0.36)
-
2.74
(0.14)
(0.21)
0.01
2.40
$
$
$
$
$
Per basic weighted average share
$
0.30
$
0.19
$
0.92
$
0.72
(1) General and administrative expense excludes non-cash share based compensation.
(2) Finance expense excludes non-cash accretion expense.
(3) Other income excludes non-cash other income.
For the three months and year ended December 31, 2016, Advantage realized funds from operations of $54.6 million and $166.9 million
with cash netbacks of $2.68/mcfe and $2.24/mcfe, respectively. On a per share basis, funds from operations was $0.30 and $0.92 per
share for the three months and year ended December 31, 2016, respectively. In the fourth quarter of 2016, we achieved total funds
from operations that was $23.0 million higher than for the same period of 2015, we generated free cash flow of $24.6 million (funds
from operations exceeding net capital expenditures) and reduced bank indebtedness by $25.9 million. These accomplishments have
been due to a 42% increase in production, a 26% increase in the AECO daily price (see “Commodity Prices and Marketing”), realized
derivative gains of $6.5 million from our disciplined commodity risk management program (see “Commodity Price Risk and Market
Diversification”) and low total corporate cash costs from ongoing successes at our Montney resource development located at Glacier,
Alberta. It is also significant to note that excluding realized gains on derivatives, Advantage would still have generated a cash netback
of $2.36/mcfe for the fourth quarter of 2016. For 2016, we achieved total funds from operations that was $43.2 million higher than
2015 generating free cash flow of $39 million that was used to reduce bank indebtedness.
Advantage Oil & Gas Ltd. - 15
Natural Gas and Liquids Sales
($000)
Natural gas sales
Realized gains on derivatives
Natural gas sales including derivatives
Liquids sales
Total (1)
(1) Total excludes unrealized derivative gains and losses.
Three months ended
December 31
Year ended
December 31
2016
$
59,925
6,534
66,459
4,631
71,090
$
2015
33,155
8,787
41,942
712
42,654
% change
%
81
%
(26)
%
58
%
550
%
67
2016
145,878
53,094
198,972
16,055
215,027
$
$
2015
129,802
32,743
162,545
2,509
165,054
$
$
% change
%
12
%
62
%
22
540
%
%
30
$
$
Total sales including realized derivatives for the three months ended December 31, 2016 increased $28.4 million or 67% to $71.1 million
as compared to the fourth quarter of 2015, and increased $14.4 million or 25% as compared to the third quarter of 2016. Total sales
have increased as a result of a 26% increase in AECO daily natural gas prices, higher production and a disciplined commodity risk
management program. We significantly increased our liquids sales through additional Middle Montney natural gas liquids production
from our refrigeration facilities at the Glacier gas plant. Our liquids production is comprised of approximately 75% condensate and
with the increased production in 2016, became a larger proportion of our total sales.
Production
Natural gas (mcf/d)
Liquids (bbls/d)
Total - mcfe/d
- boe/d
Natural gas (%)
Liquids (%)
Three months ended
December 31
Year ended
December 31
2016
215,369
949
221,063
36,844
97%
3%
% change
40
%
430
%
%
42
%
42
2015
154,241
179
155,315
25,886
99%
1%
2016
197,852
915
203,342
33,890
97%
3%
% change
41
%
494
%
%
44
%
44
2015
139,927
154
140,851
23,475
99%
1%
Average production during the fourth quarter of 2016 increased 42% to 221 mmcfe/d and increased 44% for 2016 to 203 mmcfe/d,
as compared to the respective periods of 2015. Production increased consistent with our multi-year development plan and incremental
firm transportation service contracts that became effective in April 2016 to support the higher production level. Available processing
capacity at our 100% owned Glacier gas plant was successfully utilized throughout 2016 to offset TransCanada Pipelines Ltd. (“TCPL”)
sales gas pipeline restrictions and particularly during the fourth quarter when firm service restrictions were more pronounced.
Advantage Oil & Gas Ltd. - 16
Commodity Prices and Marketing
Average Realized Pricing
Natural gas, excluding hedging ($/mcf)
Natural gas, including hedging ($/mcf)
Liquids, excluding and including hedging ($/bbl)
Benchmark Prices
AECO daily ($/mcf)
AECO monthly ($/mcf)
NYMEX ($US/mmbtu)
Edmonton Light ($/bbl)
Three months ended
December 31
Year ended
December 31
2016
2015
% change
2016
2015
% change
$
$
$
3.02
3.35
53.01
$
$
$
2.34
2.96
43.24
%
29
13
%
%
23
$
$
$
2.01
2.75
47.97
$
$
$
2.54
3.18
44.60
%
(21)
(14)
%
%
8
$
$
$
$
3.09
2.81
2.95
60.76
$
$
$
$
2.46
2.65
2.28
51.99
26
%
%
6
29
%
%
17
$
$
$
$
2.16
2.09
2.43
52.27
$
$
$
$
2.70
2.77
2.67
56.74
%
(20)
(25)
%
%
(9)
%
(8)
Advantage’s natural gas production at Glacier is delivered and sold directly into TCPL. Advantage sells production at the AECO
monthly price equal to our AECO fixed price contracted volumes (see “Commodity Price Risk and Market Diversification”). The
remainder of our natural gas production is sold at the AECO daily price. Realized natural gas prices, excluding hedging, were higher
than the three months ended December 31, 2015 primarily as a result of the increase in AECO prices. Natural gas prices began to
decline in late 2014 due to the continued strong U.S. domestic natural gas production relative to demand that had resulted in high
natural gas inventory. This situation placed additional pressure on Canadian natural gas prices that experienced a more significant
relative decline. The supply and demand imbalance continued throughout 2015 and worsened through the first half of 2016. However,
in the second half of 2016 natural gas prices began to improve as the typical build in gas storage in advance of winter had decreased
due to a strong increase in power generation and exports accompanied by lower production, thereby leading to a reduced storage surplus
and more balanced market.
Prior to November 1, 2016, the natural gas prices we realized were reduced for transportation from the sales points to AECO.
Commencing on November 1, 2016, gas transportation is no longer deducted from realized natural gas prices, but rather presented as
Transportation Expense (see “Transportation Expense”).
Advantage Oil & Gas Ltd. - 17
Commodity Price Risk and Market Diversification
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
for the purposes of reducing cash flow volatility and diversifying price realization to multiple markets in support of our Glacier multi-
year development plan. Our Credit Facilities allow Advantage to enter derivative contracts up to 75% of total estimated natural gas and
liquids production over the first three years and 50% over the fourth year.
Our natural gas production and corresponding derivative contracts are expected to result in the realization of the following fixed and
variable market prices for 2017 to 2019:
2017
2018
2019
Volumes
Contracted (1)
Average
minimum price
Estimated %
of Production
Target
Volumes
Contracted (1)
Average
minimum price
Estimated %
of Production
Target
Volumes
Contracted (1)
Average
minimum price
Estimated %
of Production
Target
Fixed Price
AECO fixed price swaps 96.8 mmcf/d
$3.19/mcf
43%
53.3 mmcf/d
$3.02/mcf
20%
11.9 mmcf/d
$3.00/mcf
4%
Variable Price
AECO daily price
129.2 mmcf/d
AECO
57%
181.7 mmcf/d
AECO
70%
235.1 mmcf/d
AECO
79%
Henry Hub through
basis swaps
-
-
129.2 mmcf/d
-
57%
25.0 mmcf/d
206.7 mmcf/d
Henry Hub less
US$0.85/mcf
10%
80%
50.0 mmcf/d
285.1 mmcf/d
Henry Hub less
US$0.88/mcf
Total (2)
226.0 mmcf/d
100%
260.0 mmcf/d
100%
297.0 mmcf/d
17%
96%
100%
(1) All volumes contracted converted to mcf on the basis of 1 mcf = 1.055056 GJ and 1 mcf = 1 mmbtu
(2) Represents the midpoint of our Guidance for 2017 to 2019 gas volumes (see News Release dated November 28, 2016)
A summary of realized and unrealized derivative gains and losses for the three months and years ended December 31, 2016 and 2015
are as follows:
($000)
Realized gains on derivatives
Unrealized gains (losses) on derivatives
Total gains (losses) on derivatives
Three months ended
December 31
2016
2015
$
6,534
(36,587)
(30,053)
$
$
8,787
6,374
15,161
$
Year ended
December 31
% change
(26)
%
%
(674)
%
(298)
2016
53,094
(66,781)
(13,687)
$
$
2015
32,743
(2,321)
30,422
$
$
% change
62
%
%
2,777
%
(145)
For the three months and year ended December 31, 2016, we realized derivative gains as a result of the decline in natural gas prices as
compared to our average derivative contract prices. For the year ended December 31, 2016, an unrealized derivative loss of $66.8
million was recognized, being the decrease in fair value of our derivative contracts to a net liability of $22.6 million at December 31,
2016 as compared to a net asset of $44.2 million at December 31, 2015. The fair value of the net derivative asset or liability 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. The decrease in the fair value of our outstanding derivative contracts was primarily due to
$53.1 million actual cash received from derivative settlements in 2016 combined with an improvement in natural gas prices as at
December 31, 2016. Remaining derivative contracts will settle between January 1, 2017 and December 31, 2019 corresponding to when
the Corporation will recognize sales from production.
Advantage Oil & Gas Ltd. - 18
Royalty Expense
Royalty expense ($000)
per mcfe
Royalty Rate (percentage of natural gas and
liquids sales)
Three months ended
December 31
2016
$
$
3,637
0.18
2015
$
$
1,379
0.10
Year ended
December 31
% change
164
%
%
80
2016
$
$
4,900
0.07
2015
$
$
5,837
0.11
% change
%
%
(16)
(36)
%
5.6
4.1
%
1.5
%
3.0
%
%
4.4
(1.4)
%
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 determined by various royalty regimes that
incorporate factors including well depths, well production rates, and commodity prices. Royalties also include the impact of gas cost
allowance (“GCA”) which is a reduction of royalties payable to the Alberta Provincial Government (the “Crown”) to recognize capital
and operating expenditures incurred by Advantage in the gathering and processing of the Crown’s share of our natural gas production.
The Corporation recovered $2.1 million of GCA in the second quarter of 2016 in relation to 2015 capital expenditures, resulting in a
royalty expense and rate for the year ended December 31, 2016 that are low. Royalty expense for the three months ended December
31, 2016 is higher than the same period of 2015 owing to higher production and commodity prices realized in the fourth quarter of
2016 (see “Commodity Prices and Marketing”). The royalty rate for the three months ended December 31, 2016 is modestly higher
than the same period of 2015 due to higher commodity prices and a higher proportion of liquids production to which higher royalty
rates are applied than to natural gas. In 2017, we anticipate royalty rates of between 4.0% and 6.0%.
On January 29, 2016, the Alberta government released its new Modernized Royalty Framework (“MRF”). The new royalty framework
partially emulates a revenue minus cost royalty structure and will be effective for wells spud on or after January 1, 2017 with existing
wells continuing to operate under the previous royalty framework for a ten-year period. A new well’s early production will be subject
to a flat 5% royalty until the well’s total revenue equals the Drilling and Completion Cost Allowance, which is a proxy for the well cost
based on average industry drilling and completion costs. Afterwards, the company will pay higher royalty rates that vary depending on
the resource and market prices. Royalty rates will drop to match declining production rates when the well reaches a Maturity Threshold.
The new royalty framework is expected to incentivize low cost producers with higher productivity wells which will continue to benefit
Advantage. We have reviewed the new framework formulas and estimate that at natural gas prices up to AECO $4.00/mcf, the impact
on the economic returns for our average Upper and Lower Montney wells are insignificant while the economic returns for our average
Middle Montney wells are slightly improved. Advantage will continue to evaluate and optimize the impact of drilling and completion
design changes on royalties and economics in respect of the MRF.
Operating Expense
Operating expense ($000)
per mcfe
Three months ended
December 31
Year ended
December 31
2016
$
$
4,490
0.22
2015
4,998
0.35
$
$
% change
(10)
(37)
%
%
2016
20,358
0.27
$
$
2015
18,357
0.36
$
$
% change
11
(25)
%
%
Operating expense per mcfe for the fourth quarter of 2016 decreased 37% to $0.22/mcfe from $0.35/mcfe in the fourth quarter of
2015 and from $0.25/mcfe in the third quarter of 2016. The lower fourth quarter 2016 per mcfe operating costs resulted from reduced
water disposal costs, continued efficiency improvement with equipment maintenance procedures and higher plant throughput.
Total operating expense for the year ended December 31, 2016 was 11% higher than for the same period of 2015 due to production
that increased by 44%, significantly offset by operating efficiency.
Advantage Oil & Gas Ltd. - 19
Transportation Expense
Transportation expense
Natural gas ($000)
per mcfe
Liquids ($000)
per mcfe
Total transportation expense ($000)
per mcfe
Three months ended
December 31
Year ended
December 31
2016
2015
% change
2016
2015
% change
$
$
$
$
$
$
4,217
0.21
1,006
0.05
5,223
0.26
$
-
-
$
-
$
-
$
$
-
$
-
100
100
100
100
100
100
%
%
%
%
%
%
$
$
$
$
$
$
4,217
0.06
2,765
0.03
6,982
0.09
$
-
$
-
$
-
-
$
$
-
$
-
100
100
100
100
100
100
%
%
%
%
%
%
Transportation expense represents the cost of transporting our liquids and natural gas to the sales points.
The first quarter of 2016 was the first reporting period in which we have presented liquids transportation expense due to higher liquids
recoveries at our Glacier gas plant.
Natural gas production at Glacier is delivered and sold directly into TCPL. Prior to November 1, 2016, natural gas transportation was
presented as a reduction against realized natural gas prices (see “Commodity Prices and Marketing”) as our transportation contracts
were permanently assigned to our third party marketer. As the magnitude of the transportation commitments have significantly
increased for the third party marketer with our continued growth, commencing November 1, 2016 Advantage chose to have these
contracts permanently assigned back to Advantage and natural gas transportation expense is now presented separately. This change has
no effect on funds from operations, cash netbacks, or net income (loss).
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
2016
2015
% change
2016
2015
% change
$
$
$
$
$
$
1,680
0.08
916
0.05
2,596
0.13
$
$
$
$
$
$
1,581
0.11
1,078
0.08
2,659
0.19
%
6
%
(27)
%
(15)
%
(38)
%
(2)
%
(32)
$
$
$
$
$
$
7,469
0.10
3,281
0.04
10,750
0.14
27
$
$
$
$
$
$
7,222
0.14
3,347
0.07
10,569
0.21
26
%
3
(29)
%
%
(2)
(43)
%
%
2
(33)
%
%
4
Cash general and administrative (“G&A”) expense for the year ended December 31, 2016 is comparable to the same period of 2015.
On a per mcfe basis, a 27% reduction was realized in the fourth quarter of 2016 compared to the same period of 2015, as a result of
higher production.
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. As at December 31, 2016, a total of 3.1 million stock options and 1.3 million performance
awards are unexercised which represents 2.4% of Advantage’s total outstanding common shares.
Advantage Oil & Gas Ltd. - 20
Depreciation Expense
Depreciation expense ($000)
per mcfe
Three months ended
December 31
Year ended
December 31
2016
28,382
1.40
$
$
2015
23,247
1.63
$
$
% change
22
(14)
%
%
2016
116,232
1.56
$
$
2015
87,391
1.70
$
$
% change
33
%
%
(8)
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 for the three months and year ended December 31, 2016 than the same periods of
2015, due to the continued production increase at Glacier.
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
2016
2015
% change
2016
2015
% change
$
$
$
$
$
$
1,913
0.09
291
0.01
2,204
0.10
$
$
$
$
$
$
2,965
0.21
286
0.02
3,251
0.23
%
%
%
%
%
%
(35)
(57)
2
(50)
(32)
(57)
$
$
$
$
$
$
9,335
0.13
915
0.01
10,250
0.14
$
$
$
$
$
$
10,372
0.21
1,440
0.03
11,812
0.24
(10)
(38)
(36)
(67)
(13)
(42)
%
%
%
%
%
%
Cash finance expense for the three months ended December 31, 2016 decreased by 35% compared to the same period of 2015. Bank
indebtedness reached its lowest average level for the year in the fourth quarter of 2016 due to funds from operations that exceeded net
capital expenditures. Interest rates are primarily based on short term bankers’ acceptance rates plus a stamping fee and determined by
total debt to the trailing four quarters Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) ratio as calculated
pursuant to our Credit Facilities. In 2017, we expect lower cash finance expense as a result of our lower bank indebtedness, and lower
interest rates as determined by our total debt to EBITDA ratio.
Accretion expense represents non-cash charges that increase the carrying value of convertible debentures and decommissioning liability
to their maturity values as a result of the passage of time. Since our remaining convertible debentures matured on January 30, 2015,
accretion expense for the year ended December 31, 2016 was lower than the same period of 2015.
Advantage Oil & Gas Ltd. - 21
Taxes
Deferred income taxes arise from differences between the accounting and tax bases of our assets and liabilities. For the year ended
December 31, 2016, the Corporation recognized a deferred income tax recovery of $4.6 million as a result of the $20.3 million loss
before taxes and credited $1.3 million to share capital related to tax deductions available from share issue costs. As at December 31,
2016, the Corporation had a deferred income tax liability of $35.2 million.
Estimated tax pools at December 31, 2016, are as follows:
($ 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
Net Income (Loss) and Comprehensive Income (Loss)
$
171
66
9
710
212
158
33
12
1,371
$
Three months ended
December 31
Year ended
December 31
2016
2015
% change
2016
2015
% change
Net income (loss) and comprehensive income
(loss) ($000)
per share - basic
per share - diluted
$
$
$
(8,845)
(0.05)
(0.05)
$
$
$
12,408
0.08
0.07
(171)
(163)
(171)
%
%
%
$
$
$
(15,734)
(0.09)
(0.09)
$
$
$
21,378
0.13
0.12
(174)
(169)
(175)
%
%
%
Advantage has reported a net loss of $8.8 million and $15.7 million, respectively for the three months and year ended December 31,
2016. Our net losses for the three months and year ended December 31, 2016 were most significantly impacted by unrealized losses on
derivatives of $36.6 and $66.8 million. Unrealized gains and losses on derivatives are non-cash, can fluctuate greatly between periods
and normally result from changes to the estimated value to settle outstanding contracts (see “Commodity Price Risk and Market
Diversification”). Compared to the respective periods in 2015, net losses were positively impacted by increased revenue due to higher
commodity prices and production volumes, partially offset by higher depreciation expenses which also resulted from higher production
volumes.
Contractual Obligations and Commitments
The Corporation has contractual obligations in the normal course of operations including purchases of assets and services, operating
agreements, transportation commitments, sales contracts and bank indebtedness. These obligations are of a recurring and consistent
nature and impact cash flow in an ongoing manner. The following table is a summary of the Corporation’s remaining contractual
obligations and commitments. Advantage has no guarantees or off-balance sheet arrangements other than as disclosed.
Payments due by period
($ millions)
Building leases
Transportation
Bank indebtedness (1)
- principal
- interest
Total contractual obligations
Total
$
2017
$
2018
$
2019
$
3.0
180.2
153.1
10.2
346.5
1.1
24.9
-
6.9
32.9
1.2
26.2
153.1
3.3
183.8
$
$
$
$
2020
-
$
21.9
-
-
21.9
$
2021
-
$
17.9
-
-
17.9
$
2022
-
$
17.6
-
-
17.6
$
After 2022
-
$
43.9
-
-
43.9
$
0.7
27.8
-
-
28.5
(1) As at December 31, 2016, 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 2017. 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. - 22
Liquidity and Capital Resources
The following table is a summary of the Corporation’s capitalization structure:
($000, except as otherwise indicated)
Bank indebtedness (non-current)
Working capital deficit (1)
Total debt (2)
Shares outstanding
Shares closing market price ($/share)
Market capitalization (3)
Total capitalization
Total debt to funds from operations (4)
December 31, 2016
153,102
$
6,167
159,269
184,654,333
9.12
1,684,048
$
$
$
$
1,843,317
1.0
(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) Total debt is a non-GAAP measure that includes bank indebtedness and working capital deficit.
(3) Market capitalization is a non-GAAP measure calculated by multiplying shares outstanding
by the closing market share price on the applicable date.
(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,
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.
On March 8, 2016, Advantage’s 13,427,075 common share equity financing closed with net proceeds of $95.1 million raised and used
initially to reduce bank indebtedness. In the second quarter of 2016, Advantage renewed its Credit Facilities at $400 million, and $247
million or 62% was available at December 31, 2016 (see “Bank Indebtedness, Credit Facilities and Other Obligations”). The
Corporation’s annual funds from operations of $167 million exceeded 2016 net capital expenditures by $39 million with the surplus
cash flow used to reduce bank indebtedness, resulting in a year-end 2016 total debt to trailing funds from operations of 1.0 times.
Advantage has a strong balance sheet, a disciplined commodity risk management program, an industry leading low cost structure, and
substantial available liquidity such that it is well positioned to continue successfully executing its multi-year development plan at Glacier,
Alberta. Advantage’s guidance for 2017 estimates that funds from operations will grow to $210 million, and is expected to reduce total
debt to trailing cash flow to 0.7 times at year-end 2017.
Shareholders’ Equity
As at December 31, 2016, Advantage had 184.7 million common shares outstanding. During the year ended December 31, 2016,
Advantage issued 0.4 million common shares to service providers in exchange for the exercise of 0.9 million stock options. As at
December 31, 2016, a total of 3.1 million stock options and 1.3 million performance awards are unexercised which represents 2.4% of
Advantage’s total outstanding common shares. On March 8, 2016, Advantage closed the equity financing of 13,427,075 common shares
issued for net proceeds of $95.1 million which was used initially to reduce bank indebtedness. As at March 2, 2017, Advantage had
184.9 million common shares outstanding.
Advantage Oil & Gas Ltd. - 23
Bank Indebtedness, Credit Facilities and Other Obligations
At December 31, 2016, Advantage had bank indebtedness outstanding of $153.1 million, a decrease of $133.4 million since December
31, 2015. The change in bank indebtedness was consistent with planned capital expenditure activity in our approved 2016 budget and
the equity financing that closed on March 8, 2016 in which net proceeds of $95.1 million was raised. Advantage’s credit facilities have
a borrowing base of $400 million and is collateralized by a $1 billion floating charge demand debenture covering all assets of the
Corporation (the “Credit Facilities”). The borrowing base for the Credit Facilities is determined by the banking syndicate through a
thorough evaluation of our reserve estimates based upon their own commodity price expectations. Revisions or changes in the reserve
estimates and commodity prices can have either a positive or a negative impact on the borrowing base. In the second quarter of 2016,
the Credit Facilities borrowing base was renewed at $400 million comprised of a $20 million extendible revolving operating loan facility
from one financial institution and a $380 million extendible revolving loan facility from a syndicate of financial institutions. Advantage
requested a reduction from the prior $450 million borrowing base as its strong balance sheet and estimated capital requirements for
future growth provides ample flexibility and we expect to save interest costs of $0.4 million per year. The only prior financial covenant
to maintain a minimum cash flow to interest expense ratio of 3.5:1 was removed on June 10, 2016. The next annual review is scheduled
to occur in June 2017. 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 $6.2 million as at December 31, 2016 and is comparable to the $7.2 million at December 31,
2015 due to a combination of higher trade receivables attributable to increasing revenues, offset by slightly higher trade payables from
increased capital activity at December 31, 2016 as compared to December 31, 2015. 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 meeting future obligations as they become due as they can be satisfied with funds from operations
and our available Credit Facilities.
Capital Expenditures
Three months ended
December 31
Year ended
December 31
($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)
(1) Net capital expenditures excludes change in decommissioning liability.
$
$
$
2016
$
21,188
8,537
167
29,892
151
30,043
2015
16,915
10,289
400
27,604
-
27,604
2016
56,189
65,657
167
122,013
6,001
128,014
2015
74,519
88,580
692
163,791
1,192
164,983
$
$
$
$
Advantage invested $128 million on property, plant, equipment and land purchases for the year ended December 31, 2016 with $30
million invested in the fourth quarter of 2016.
During the fourth quarter of 2016, design work continued on the announced expansion of our 100% owned Glacier gas plant to 400
mmcf/d raw gas capability and 6,800 bbls/d of liquids capability. Plant licensing and engineering design were progressed while
procurement of major pieces of equipment was initiated. Subsequent to December 31, 2016, Advantage received license approval from
the Alberta Energy Regulator (“AER”) for the expansion. We expect that construction of the expanded plant to 400 mmcf/d will be
finished early in the second quarter of 2018. During 2016, a significant portion of our capital expenditures were directed to gas plant
and pipeline infrastructure. In total $66 million, or 51% was spent on infrastructure and well tie-in projects. Advantage’s strategy of
owning and operating our own infrastructure has helped us achieve an industry leading cost structure.
Throughout 2016, Advantage drilled 13 Montney gas wells. Due to strong well performance and an inventory of available production,
only one well was drilled during the first half of 2016. In the second half of 2016, Advantage began drilling on a six-well pad and then
moved to a sixteen-well pad with two rigs running concurrently. The sixteen-well pad is expected to be finished drilling by March 2017
with the completion of this pad scheduled for the summer of 2017.
An eight-well pad drilled during the prior winter season was completed in the third quarter of 2016. The pad consisted of six Lower
Montney wells, one Middle Montney well and one Upper Montney well. Each of the eight wells was flowed in-line to our Glacier plant
Advantage Oil & Gas Ltd. - 24
for an average of 48 hours and resulted in a combined production rate of 120 mmcfe/d based on an average flowing pressure of 11,182
kPa (1,623 psi). Production from this pad began in December 2016 when the first well was placed on-stream at restricted rates to
control the amount of frac sand flow-back. Due to the significant productivity, the remaining wells on this pad are expected to meet
production targets announced in our 2017 Budget and Development Plan (news release November 28, 2016) until the second quarter
of 2017. In December, completion operations commenced on two six-well pads with operations expected to be complete by the end
of the first quarter of 2017. During 2016, Advantage finished completion operations on fifteen wells.
Advantage’s Upper, Middle and Lower Montney wells are continuing to demonstrate strong production performance. Advantage’s
current standing well inventory consists of twenty-nine total wells of which thirteen are completed and sixteen remain uncompleted
providing more than sufficient productive capacity to attain our 2017 annual production target with the wells that are currently
completed leaving the sixteen uncompleted wells for 2018 growth.
In 2016, Advantage acquired 16 additional sections of Doig/Montney land rights in the Glacier, Valhalla and Wembley areas proximal
to our existing land holdings. Subsequent to year end, Advantage acquired an additional 3.5 net sections of Doig/Montney rights near
Glacier and Valhalla. Advantage now holds a total of 157 net sections (100,480 net acres) of either Doig or Montney rights.
Sources and Uses of Funds
The following table summarizes the various funding requirements during the years ended December 31, 2016 and 2015 and the sources
of funding to meet those requirements:
($000)
Sources of funds
Funds from operations
Net proceeds of equity financing
Increase in bank indebtedness
Change in non-cash working capital and other
Uses of funds
Decrease in bank indebtedness
Net capital expenditures
Maturity of convertible debenture
Change in non-cash working capital and other
Expenditures on decommissioning liability
Year ended
December 31
2016
2015
$
$
166,861
95,130
-
1,598
263,589
133,718
128,014
-
-
1,857
263,589
$
$
$
123,630
-
177,197
-
300,827
$
$
-
164,983
86,240
48,342
1,262
300,827
$
Bank indebtedness decreased during the year ended December 31, 2016 as a result of the $95.1 million net proceeds raised in the equity
financing that closed on March 8, 2016, and funds from operations that exceeded net capital expenditures. We monitor the debt level
to ensure an optimal mix of financing and cost of capital that will provide a maximum return to our shareholders.
Advantage Oil & Gas Ltd. - 25
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
Year ended
Dec. 31, 2016
Year ended
Dec. 31, 2015
Year ended
Dec. 31, 2014
$
$
$
$
$
$
161,933
(15,734)
(0.09)
(0.09)
1,496,459
153,102
$
$
$
$
$
$
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
$
-
$
-
$
-
$
-
$
-
$
-
$
$
$
24,715
(58,894)
(0.35)
(1) Long term financial liabilities exclude derivative liability, decommissioning liability and deferred income tax liability.
Advantage Oil & Gas Ltd. - 26
Quarterly Performance
($000, except as otherwise
indicated)
Daily production
Natural gas (mcf/d)
Liquids (bbls/d)
Total (mcfe/d)
Average prices
Natural gas ($/mcf)
2016
2015
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
215,369
949
221,063
207,332
1,205
214,562
203,791
1,083
210,289
164,618
418
167,126
154,241
179
155,315
147,574
212
148,846
124,299
112
124,971
133,281
112
133,953
Excluding hedging
Including hedging
AECO daily
AECO monthly
$
$
$
$
3.02
3.35
3.09
2.81
$
$
$
$
2.08
2.71
2.32
2.20
$
$
$
$
1.10
2.18
1.40
1.25
$
$
$
$
1.72
2.70
1.84
2.11
$
$
$
$
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
Liquids ($/bbl)
Including hedging
Edmonton Light ($/bbl)
Total sales including realized hedging
Net income (loss)
per share - basic
per share - diluted
Funds from operations
$
$
$
$
$
$
$
53.01
60.76
71,090
(8,845)
(0.05)
(0.05)
54,610
$
$
$
$
$
$
$
45.58
54.34
56,697
8,185
0.04
0.04
45,132
$
$
$
$
$
$
$
52.67
55.02
45,615
(29,765)
(0.16)
(0.16)
36,883
$
$
$
$
$
$
$
31.21
38.85
41,625
14,691
0.08
0.08
30,236
$
$
$
$
$
$
$
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
The table above highlights the Corporation’s performance for the fourth quarter of 2016 and also for the preceding seven quarters. A
production level of 135 mmcfe/d was reached in early 2014 and maintained as we drilled the required well inventory and completed
the first phase of commissioning operations at our expanded Glacier gas plant in July 2015 at which time production capability reached
183 mmcfe/d. The Corporation’s production for the second half of 2015 and first quarter of 2016 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 to 250 mmcfe/d. In the second half of 2016, we were less affected by TCPL restrictions and we attained
production levels in excess of 220 mmcfe/d, consistent with our multi-year development plan. In the second half of 2016, we reduced
operating costs through reduced water disposal, more efficient equipment maintenance procedures and higher plant throughput. Annual
production for 2016 was 203 mmcfe/d, which was within our previously announced Budget production guidance range of 190 to 210
mmcfe/d.
Sales and funds from operations did not increase as rapidly as production through 2015 and early 2016 due to an offsetting decline in
natural gas prices. This decrease has been partially offset by continued production growth through the quarters and gains realized from
our commodity risk management program. Although Advantage has generally reported net income, we reported a small net loss in the
second quarter of 2015 when gas prices weakened and when we had significantly less gains on derivative contracts. The net loss reported
in the second quarter of 2016 and fourth quarter of 2016 were due primarily to the recognition of unrealized derivative losses attributable
to the decrease in the fair value of our outstanding derivative contracts (see “Commodity Price Risk and Market Diversification”).
Advantage’s production growth, industry leading low cost structure, strong capital efficiencies and commodity risk management
program have achieved long-term profitability despite the current challenging low natural gas price environment.
Advantage Oil & Gas Ltd. - 27
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 (loss) and comprehensive income (loss) 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 (loss), comprehensive income (loss) 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
(loss) and comprehensive income (loss).
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 (loss) 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, 2016.
Accounting Pronouncements not yet Adopted
IFRS 9 Financial Instruments introduces a new classification and measurement requirements, impairment model and hedge accounting
model. IFRS 9 is effective for annual periods on or after January 1, 2018. Advantage does not anticipate any material changes or effects
to our current accounting.
IFRS 15 Revenue from Contracts with Customers requires an entity to recognize revenue to reflect the transfer of goods and services for the
amount it expects to receive, when control is transferred to the purchaser. The standard is to be adopted beginning on or after January
1, 2018, either retrospectively or using a modified retrospective approach. Advantage is currently reviewing our contractual agreements
to evaluate the impact of this standard on our financial statements.
IFRS 16 Leases requires the recognition of assets and liabilities for most leases. The standard applies to annual reports beginning on or
after January 1, 2019. Advantage is currently reviewing the impact of IFRS 16 on our financial statements.
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, 2016. 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. - 28
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, 2016, 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, 2016. 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, 2016 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 2, 2017
Advantage Oil & Gas Ltd. - 29
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, 2016 and 2015,
and the consolidated statements of comprehensive income (loss), changes in shareholders’ equity and cash flows for the years ended
December 31, 2016 and 2015. 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 2, 2017
Craig Blackwood
Vice President Finance and Chief Financial Officer
Advantage Oil & Gas Ltd. - 30
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, 2016, 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, 2016, as stated in their Auditor’s Report. PricewaterhouseCoopers LLP has provided
such opinion.
Andy J. Mah
President and Chief Executive Officer
March 2, 2017
Craig Blackwood
Vice President Finance and Chief Financial Officer
Advantage Oil & Gas Ltd. - 31
March 2, 2017
Independent Auditor’s Report
To the Shareholders of Advantage Oil and Gas Ltd.
We have completed integrated audits of Advantage Oil & Gas Ltd.’s 2016 and 2015 consolidated financial statements
and its internal control over financial reporting as at December 31, 2016. 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, 2016 and December 31, 2015 and the consolidated
statements of comprehensive income (loss), changes in shareholders’ equity, and cash flows for the years then ended,
and the related notes, which comprise a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards as issued by the International Accounting Standards
Board and for such internal control as management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement. Canadian generally accepted auditing standards also require that we comply with ethical requirements.
An audit involves performing procedures to obtain audit evidence, on a test basis, about the amounts and disclosures
in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the company’s preparation
and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate
in the circumstances. An audit also includes evaluating the appropriateness of accounting principles and policies used
and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation
of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for
our audit opinion on the consolidated financial statements.
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, 2016 and December 31, 2015 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.
PricewaterhouseCoopers LLP
111 5 Avenue SW, Suite 3100, Calgary, Alberta, Canada T2P 5L3
T: +1 403 509 7500, F: +1 403 781 1825, www.pwc.com/ca
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
Advantage Oil & Gas Ltd. - 32
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, 2016,
based on criteria established in Internal Control - Integrated Framework (2013), issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Management’s responsibility for internal control over financial reporting
Management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on
Internal Control over Financial Reporting.
Auditor’s responsibility
Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our
audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
An audit of internal control over financial reporting includes obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control, based on the assessed risk, and performing such other procedures as we consider
necessary in the circumstances.
We believe that our audit provides a reasonable basis for our audit opinion on the company’s internal control over
financial reporting.
Definition of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
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, 2016, based on criteria established in Internal Control - Integrated Framework (2013)
issued by COSO.
Chartered Professional Accountants
Calgary, Alberta
Advantage Oil & Gas Ltd. - 33
Consolidated Statement of Financial Position
(thousands of Canadian dollars)
Notes
December 31, 2016
December 31, 2015
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
Derivative liability
Total current liabilities
Non-current liabilities
Derivative liability
Bank indebtedness
Decommissioning liability
Deferred income tax liability
Total non-current liabilities
Total liabilities
SHAREHOLDERS' EQUITY
Share capital
Contributed surplus
Deficit
Total shareholders' equity
5
9
9
6
7
9
9
10
12
13
14
$
26,305
$
13,888
1,681
730
28,716
1,448
16,012
1,450,283
1,467,743
1,966
37,009
52,863
7,426
10,071
1,447,083
1,464,580
$
1,496,459
$
1,517,443
$
34,153
$
23,050
13,812
47,965
10,912
153,102
40,992
35,215
240,221
288,186
-
23,050
200
286,519
44,575
41,152
372,446
395,496
2,334,199
108,315
(1,234,241)
1,208,273
2,236,728
103,726
(1,218,507)
1,121,947
Total liabilities and shareholders' equity
$
1,496,459
$
1,517,443
Commitments (note 21)
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. - 34
Consolidated Statement of Comprehensive Income (Loss)
(thousands of Canadian dollars, except for per share amounts)
Notes
2016
2015
Year ended
December 31
Natural gas and liquids sales
Royalty expense
Natural gas and liquids revenue
Operating expense
Transportation expense
General and administrative expense
Depreciation expense
Finance expense
Gains (losses) on derivatives
Other income
Income (loss) before taxes
Income tax recovery (expense)
Net income (loss) and comprehensive income (loss)
Net income (loss) per share
Basic
Diluted
See accompanying Notes to the Consolidated Financial Statements
17
18
7
19
9
13
15
$
161,933
(4,900)
157,033
$
132,311
(5,837)
126,474
(20,358)
(6,982)
(10,750)
(116,232)
(10,250)
(13,687)
878
(20,348)
4,614
(15,734)
$
(18,357)
-
(10,569)
(87,391)
(11,812)
30,422
364
29,131
(7,753)
21,378
$
$
$
(0.09)
(0.09)
$
$
0.13
0.12
Advantage Oil & Gas Ltd. - 35
$
$
$
Contributed
surplus
103,726
-
-
4,589
108,315
Total
shareholders'
equity
1,121,947
(15,734)
96,453
5,607
1,208,273
Deficit
(1,218,507)
(15,734)
-
-
(1,234,241)
$
$
$
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)
Consolidated Statement of Changes in Shareholders' Equity
(thousands of Canadian dollars) (unaudited)
Balance, December 31, 2015
Net loss and comprehensive loss
Shares issued on equity financing
Share based compensation
Balance, December 31, 2016
(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
Notes
14(b)
14, 16
Share capital
$
2,236,728
-
96,453
1,018
2,334,199
$
Convertible
debenture
equity
component
8,348
$
-
-
-
(8,348)
$
-
Notes
14, 16
Share capital
2,234,959
$
-
1,759
10
-
2,236,728
$
See accompanying Notes to the Consolidated Financial Statements
Advantage Oil & Gas Ltd. - 36
Consolidated Statement of Cash Flows
(thousands of Canadian dollars)
Operating Activities
Income (loss) before taxes
Add items not requiring cash:
Share based compensation
Depreciation expense
Unrealized loss on derivatives
Finance expense
Expenditures on decommissioning liability
Changes in non-cash working capital
Cash provided by operating activities
Financing Activities
Increase (decrease) in bank indebtedness
Net proceeds of equity financing
Maturity of convertible debenture
Interest paid
Cash provided by (used in) financing activities
Investing Activities
Payments on property, plant and equipment
Payments on exploration and evaluation assets
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
2016
2015
$
(20,348)
$
29,131
14, 16
7
9
19
12
20
10
11
7, 20
6
3,281
116,232
66,781
10,250
(1,857)
567
174,906
(133,718)
95,130
-
(9,034)
(47,622)
3,347
87,391
2,321
11,812
(1,262)
(19,376)
113,364
177,197
-
(86,240)
(12,828)
78,129
(121,283)
(6,001)
(127,284)
-
-
$
-
(190,301)
(1,192)
(191,493)
-
-
$
-
Advantage Oil & Gas Ltd. - 37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
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 2, 2017, 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. - 38
3. Significant accounting policies
The accounting policies set out below have been applied consistently to all years presented in these financial statements.
(a) Cash and cash equivalents
Cash consists of balances held with banks, and other short-term highly liquid investments with original maturities of
three months or less from inception.
(b) Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by the Corporation. Control exists when the Corporation is exposed, or has rights
to variable returns from its involvement with the entity and has the ability to affect those returns through its power
over the entity. In assessing control, potential voting rights that currently are exercisable are taken into account. The
financial statements of subsidiaries are included in the consolidated financial statements from the date that control
commences until the date that control ceases.
(ii) 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. - 39
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. - 40
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. - 41
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. - 42
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.
(l) Accounting Pronouncement no yet Adopted
IFRS 9 Financial Instruments introduces a new classification and measurement requirements, impairment model and hedge
accounting model. IFRS 9 is effective for annual periods on or after January 1, 2018. Advantage does not anticipate any
material changes or effects to our current accounting.
IFRS 15 Revenue from Contracts with Customers requires an entity to recognize revenue to reflect the transfer of goods and
services for the amount it expects to receive, when control is transferred to the purchaser. The standard is to be adopted
for annual periods beginning on or after January 1, 2018, either retrospectively or using a modified retrospective
approach. Advantage is currently reviewing our contractual agreements to evaluate the impact of this standard on our
financial statements.
IFRS 16 Leases requires the recognition of assets and liabilities for most leases. The standard applies to annual reports
beginning on or after January 1, 2019. Advantage is currently reviewing the impact of IFRS 16 on our financial statements.
Advantage Oil & Gas Ltd. - 43
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.
(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. - 44
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, 2014
Additions
Transferred to property, plant and equipment (note 7)
Balance at December 31, 2015
Additions
Transferred to property, plant and equipment (note 7)
Balance at December 31, 2016
December 31, 2016
25,087
$
581
637
26,305
$
December 31, 2015
12,544
$
716
628
13,888
$
$
$
$
9,803
1,192
(924)
10,071
6,001
(60)
16,012
Advantage Oil & Gas Ltd. - 45
7. Property, plant and equipment
Cost
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
Additions
Change in decommissioning liability (note 12)
Transferred from exploration and evaluation assets (note 6)
Balance at December 31, 2016
Accumulated depreciation
Balance at December 31, 2014
Depreciation
Balance at December 31, 2015
Depreciation
Balance at December 31, 2016
Net book value
At December 31, 2015
At December 31, 2016
Natural gas and
liquids properties
1,714,117
$
163,549
(4,172)
924
1,874,418
121,847
(2,641)
60
1,993,684
$
$
Natural gas and
liquids properties
$
341,906
86,999
428,905
115,885
544,790
$
$
Furniture
and
equipment
5,240
$
242
-
-
5,482
166
-
-
5,648
$
$
Furniture
and
equipment
$
3,520
392
3,912
347
4,259
$
$
Total
$
1,719,357
163,791
(4,172)
924
1,879,900
122,013
(2,641)
60
1,999,332
$
$
Total
$
345,426
87,391
432,817
116,232
549,049
$
$
Natural gas and
liquids properties
1,445,513
$
1,448,894
Furniture
and
equipment
1,570
$
1,389
Total
$
1,447,083
1,450,283
During the year ended December 31, 2016, Advantage capitalized general and administrative expenditures directly related to
development activities of $6.1 million (December 31, 2015 - $6.2 million).
Advantage included future development costs of $1.6 billion (December 31, 2015 – $1.7 billion) in property, plant and
equipment costs subject to depreciation.
Advantage Oil & Gas Ltd. - 46
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, 2016
2,111
$
2,676
4,787
$
December 31, 2015
2,684
$
2,903
5,587
$
(1) Represents the grant date fair value of performance awards and stock options granted for the respective years.
As at December 31, 2016, there is a $2.2 million commitment (December 31, 2015 - $2.3 million) related to change of control
or termination of employment of officers.
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,
2016, 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. - 47
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, 2016
26,305
665
2,178
29,148
$
$
December 31, 2015
13,888
1,371
44,435
59,694
$
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,
2016, $0.4 million or 1.4% of trade and other receivables are outstanding for 90 days or more (December 31, 2015 - $0.3
million or 2.2% of trade and other receivables). The Corporation believes the entire balance is collectible, and in some
instances has the ability to mitigate risk through withholding production or offsetting payables with the same parties.
Management has not provided an allowance for doubtful accounts at December 31, 2016 or 2015.
The Corporation’s most significant customer, a Canadian oil and natural gas marketer, accounts for $22.2 million of the
trade and other receivables at December 31, 2016 (December 31, 2015 - $11.9 million).
Advantage Oil & Gas Ltd. - 48
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 $400 million credit facility
agreements. Although the credit facilities are a source of liquidity risk, the facilities also mitigate 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 offset by increased cash flows realized
from the higher commodity price environment.
The timing of cash outflows relating to financial liabilities as at December 31, 2016 and 2015 are as follows:
December 31, 2016
Trade and other accrued liabilities
Bank indebtedness
- principal
- interest (1)
$
Less than
one year
34,153
-
6,890
41,043
$
One to
three years
$
-
153,811
3,284
157,095
$
(1) Interest on bank indebtedness was calculated assuming conversion of the revolving credit facility to a one-year term facility.
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
$
Total
$
34,153
153,811
10,174
198,138
$
Total
$
23,050
287,529
16,386
326,965
$
(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 2017. 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. - 49
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 AECO natural gas price used to calculate the
fair value of the fixed price swap and sold call option natural gas derivatives at December 31, 2016 would result in a $14.6
million change in net income (loss) for the year ended December 31, 2016. It is estimated that a 10% change in the
forward basis differential between Henry Hub and AECO natural gas prices would result in a $1.5 million change in net
income (loss) for the year ended December 31, 2016.
As at December 31, 2016, the Corporation had the following derivative contracts in place:
Description of Derivative
Term
Volume
Price
Natural gas – AECO
Fixed price swap
Fixed price swap
Fixed price swap
Fixed price swap
Fixed price swap
Fixed price swap
Fixed price swap
Fixed price swap
Fixed price swap
Fixed price swap
Fixed price swap
Fixed price swap
Fixed price swap
Fixed price swap
Fixed price swap
Fixed price swap
Fixed price swap
Call option sold
Fixed price swap
Call option sold
Fixed price swap
Call option sold
Fixed price swap
Call option sold
Fixed price swap
Fixed price swap
Fixed price swap
January 2016 to March 2017
January 2016 to March 2017
January 2016 to March 2017
January 2016 to March 2017
April 2016 to March 2017
April 2016 to March 2017
April 2016 to March 2017
January 2017 to June 2017
April 2017 to June 2017
April 2017 to March 2018
April 2017 to March 2018
November 2017 to March 2018
July 2017 to March 2018
July 2017 to March 2018
July 2017 to March 2018
July 2017 to June 2018
April 2017 to March 2018
April 2017 to December 2018
October 2017 to September 2018
October 2017 to December 2018
October 2017 to September 2018
October 2017 to December 2018
October 2017 to September 2018
October 2017 to December 2018
October 2018 to March 2019
October 2018 to March 2019
October 2018 to March 2019
2,370 mcf/d
16,587 mcf/d
4,739 mcf/d
9,478 mcf/d
14,217 mcf/d
14,217 mcf/d
18,956 mcf/d
14,217 mcf/d
28,434 mcf/d
4,739 mcf/d
14,217 mcf/d
18,956 mcf/d
4,739 mcf/d
14,217 mcf/d
14,217 mcf/d
14,217 mcf/d
23,695 mcf/d
23,695 mcf/d
4,739 mcf/d
4,739 mcf/d
4,739 mcf/d
4,739 mcf/d
4,739 mcf/d
4,739 mcf/d
18,956 mcf/d
18,956 mcf/d
9,478 mcf/d
Cdn $3.98/mcf
Cdn $3.97/mcf
Cdn $3.75/mcf
Cdn $3.76/mcf
Cdn $4.11/mcf
Cdn $3.25/mcf
Cdn $3.22/mcf
Cdn $3.00/mcf
Cdn $3.00/mcf
Cdn $3.27/mcf
Cdn $3.27/mcf
Cdn $3.22/mcf
Cdn $3.02/mcf
Cdn $3.01/mcf
Cdn $3.00/mcf
Cdn $3.00/mcf
Cdn $3.01/mcf
Cdn $3.17/mcf (1)
Cdn $3.01/mcf
Cdn $3.01/mcf (2)
Cdn $3.01/mcf
Cdn $3.06/mcf (3)
Cdn $3.01/mcf
Cdn $3.11/mcf (4)
Cdn $3.00/mcf
Cdn $3.00/mcf
Cdn $3.00/mcf
Natural gas – AECO/Henry Hub Basis Differential
Basis swap
January 2018 to December 2019
25,000 mcf/d Henry Hub less
US $0.85/mcf
(1) Call option sold is only exercisable by the counterparty if AECO exceeds Cdn $3.43/mcf.
(2) Call option sold is only exercisable by the counterparty if AECO exceeds Cdn $3.32/mcf.
(3) Call option sold is only exercisable by the counterparty if AECO exceeds Cdn $3.38/mcf.
(4) Call option sold is only exercisable by the counterparty if AECO exceeds Cdn $3.43/mcf.
Advantage Oil & Gas Ltd. - 50
9. Financial risk management (continued)
(c) Price risk
As at December 31, 2016, the fair value of the derivatives outstanding resulted in an asset of $2.2 million (December 31,
2015 – $44.5 million) and a liability of $24.7 million (December 31, 2015 – $0.2 million). The fair value of the commodity
risk management derivatives have been allocated to current assets and liabilities on the basis of expected timing of cash
settlement.
For the year ended December 31, 2016, $13.7 million was recognized in net income (loss) as a derivative loss (December
31, 2015 - $30.4 million gain). The table below summarizes the realized and unrealized gains (losses) on derivatives
recognized in net income (loss).
Realized gain on derivatives
Unrealized loss on derivatives
(d) Interest rate risk
Year ended
December 31, 2016
53,094
$
(66,781)
(13,687)
$
Year ended
December 31, 2015
32,743
$
(2,321)
30,422
$
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, 2016, net income (loss) and
comprehensive income (loss) would have changed by $1.5 million (December 31, 2015 - $1.9 million) based on the
average debt balance outstanding during the year.
Advantage Oil & Gas Ltd. - 51
9. Financial risk management (continued)
(e) Capital management
The Corporation manages its capital with the following objectives:
To ensure sufficient financial flexibility to achieve the ongoing business objectives including replacement of
production, funding of future growth opportunities, and pursuit of accretive acquisitions; and
To maximize shareholder return through enhancing the share value.
Advantage monitors its capital structure and makes adjustments according to market conditions in an effort to meet its
objectives given the current outlook of the business and industry in general. The capital structure of the Corporation is
composed of working capital (excluding derivative assets and liabilities), bank indebtedness, and share capital. Advantage
may manage its capital structure by issuing new shares, repurchasing outstanding shares, obtaining additional financing
either through bank indebtedness or convertible debenture issuances, refinancing current debt, issuing other financial or
equity-based instruments, declaring a dividend, adjusting capital spending, or disposing of assets. The capital structure is
reviewed by Management and the Board of Directors on an ongoing basis.
Advantage’s capital structure as at December 31, 2016 and December 31, 2015 is as follows:
Bank indebtedness (non-current) (note 10)
Working capital deficit (1)
Total debt
Shares outstanding (note 14)
Share closing market price ($/share)
Market capitalization (2)
Total capitalization
$
December 31, 2016
$
153,102
6,167
159,269
184,654,333
9.12
1,684,048
1,843,317
$
$
$
December 31, 2015
$
286,519
7,196
293,715
170,827,158
7.03
1,200,915
1,494,630
$
$
(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. - 52
10. Bank indebtedness
Revolving credit facility
Discount on Bankers Acceptances and other fees
Balance, end of year
December 31, 2016
153,811
$
(709)
153,102
$
December 31, 2015
287,529
$
(1,010)
286,519
$
As at December 31, 2016, the Corporation had reserve-based credit facilities (the "Credit Facilities") with a borrowing base
of $400 million. The Credit Facilities are comprised of a $20 million extendible revolving operating loan facility from one
financial institution and a $380 million extendible revolving credit facility from a syndicate of financial institutions. The
revolving period of the Credit Facilities will end on June 10, 2017 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 2017. 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 75% 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 was 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. This covenant was removed on June 10, 2016. All applicable financial and non-
financial covenants were met at December 31, 2016 and 2015. Breach of any covenant will result in an event of default in
which case the Corporation has 30 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, 2016, the average effective interest rate on the outstanding amounts under the facilities was approximately 3.5%
(December 31, 2015 – 3.2%). Advantage has no letters of credit issued and outstanding at December 31, 2016 (December 31,
2015 - none).
Advantage Oil & Gas Ltd. - 53
11. Convertible debenture
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 2017 and 2076. A risk-free rate of 2.34%
(December 31, 2015 – 2.16%) and an inflation factor of 2.0% (December 31, 2015 – 1.5%) were used to calculate the fair
value of the decommissioning liability at December 31, 2016. 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
Balance, end of year
Year ended
December 31, 2016
44,575
$
915
2,193
(1,165)
(3,669)
(1,857)
40,992
$
Year ended
December 31, 2015
48,878
$
1,131
1,767
(2,011)
(3,928)
(1,262)
44,575
$
Advantage Oil & Gas Ltd. - 54
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, 2016
-
$
(4,614)
(4,614)
$
Year ended
December 31, 2015
-
$
7,753
7,753
$
The provision for income taxes varies from the amount that would be computed by applying the combined federal and
provincial income tax rates for the following reasons:
Income (loss) before taxes
Combined federal and provincial income tax rates
Expected income tax expense (recovery)
Increase (decrease) in income taxes resulting from:
Non-deductible share based compensation
Alberta tax rate increase
Scientific Research and Experimental Development claim
Difference between current and expected tax rates
Effective tax rate
Year ended
December 31, 2016
$
(20,348)
27.00%
(5,494)
$
Year ended
December 31, 2015
29,131
26.00%
7,574
1,515
-
-
(635)
(4,614)
22.68%
$
1,487
1,778
(3,688)
602
7,753
26.61%
$
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, 2014
Charged (credited) to income
Balance at December 31, 2015
Charged (credited) to income
Balance at December 31, 2016
Deferred income tax asset
Balance at December 31, 2014
Charged (credited) to income
Balance at December 31, 2015
Charged (credited) to income
Credited to equity
Balance at December 31, 2016
Net deferred income tax liability (asset)
Balance at December 31, 2014
Charged (credited) to income
Balance at December 31, 2015
Charged (credited) to income
Credited to equity
Balance at December 31, 2016
Property, plant and
equipment
$
Derivative
asset/liability
Total
$
$
229,025
33,972
262,997
5,192
268,189
11,639
304
11,943
(18,031)
(6,088)
$
$
$
$
$
$
Decommissioning
liability
$
Non-capital
losses
Other
Total
$
$
$
$
$
$
$
(12,303)
239
(12,064)
991
-
(11,073)
(183,613)
(15,036)
(198,649)
7,200
(264)
(191,713)
(11,349)
(11,726)
(23,075)
34
(1,059)
(24,100)
$
$
$
$
240,664
34,276
274,940
(12,839)
262,101
(207,265)
(26,523)
(233,788)
8,225
(1,323)
(226,886)
$
$
$
33,399
7,753
41,152
(4,614)
(1,323)
35,215
Advantage Oil & Gas Ltd. - 55
13. Income taxes (continued)
The estimated tax pools available at December 31, 2016 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
$ 170,956
65,994
9,045
710,050
212,456
157,869
32,506
11,993
$
1,370,869
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, 2015 – $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.
(b)
Issued
Balance at December 31, 2014
Share based compensation (note 16)
Conversion of convertible debenture
Balance at December 31, 2015
Shares issued on equity financing, net of issue costs and
deferred taxes
Share based compensation (note 16)
Balance at December 31, 2016
Common Shares
170,067,650
758,346
1,162
170,827,158
Amount
2,234,959
1,759
10
2,236,728
$
$
13,427,075
400,100
184,654,333
96,453
1,018
2,334,199
$
On March 8, 2016, the Corporation closed an equity financing whereby 13,427,075 common shares were issued at
$7.45 per share, for gross proceeds of $100 million, less $3.6 million related to $4.9 million of issuance costs net of $1.3
million of deferred taxes.
Advantage Oil & Gas Ltd. - 56
15. Net income (loss) per share
The calculations of basic and diluted net income (loss) per share are derived from both net income (loss) and weighted average
shares outstanding, calculated as follows:
Net income (loss)
Basic and diluted
Weighted average shares outstanding
Basic
Stock Option Plan
Performance Incentive Plan
Diluted
Year ended
December 31
2016
2015
$
(15,734)
$
21,378
182,056,120
-
-
182,056,120
170,607,873
891,621
211,926
171,711,420
The calculation of diluted net income (loss) per share for the year ended December 31, 2016 excludes the effects of the Stock
Option Plan and Performance Incentive Plan, as their impacts would be anti-dilutive. Total weighted average shares of 866,241
and 648,037 in respect of the Stock Option Plan and Performance Incentive Plan, respectively were excluded from the diluted
net income (loss) per share calculation.
The calculation of diluted net income (loss) per share for the year ended December 31, 2015 excludes the convertible
debenture, as its impact would be anti-dilutive. Total weighted average shares issuable in exchange for the convertible
debenture excluded from the diluted net income (loss) per share calculation for the year ended December 31, 2015 was
796,830 shares. As the convertible debenture matured on January 30, 2015 (note 11), it had no dilutive effect on periods
beginning on dates thereafter.
Advantage Oil & Gas Ltd. - 57
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, 2016:
Balance at December 31, 2014
Exercised
Granted
Forfeited/cancelled
Balance at December 31, 2015
Exercised
Balance at December 31, 2016
Stock Options
5,144,676
(2,081,538)
987,928
(19,764)
4,031,302
(921,387)
3,109,915
Weighted-Average
Exercise Price
$
4.63
4.00
6.82
5.37
5.49
4.64
5.75
$
$
Stock Options Outstanding
Stock Options Exercisable
Weighted
Average Exercise
Price
$
5.08
6.81
5.36
$
Range of
Exercise Price
$4.43 - $5.87
$5.88 - $6.82
$4.43 - $6.82
Number of
Stock Options
Outstanding
2,135,825
974,090
3,109,915
Weighted Average
Remaining
Contractual Life -
Years
1.38
3.26
1.97
Weighted
Average
Exercise
Price
$
5.26
6.81
5.75
$
Number of
Stock
Options
Exercisable
1,653,817
310,931
1,964,748
Advantage Oil & Gas Ltd. - 58
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, 2016, no Restricted Awards have been granted.
The following table is a continuity of Performance Awards:
Balance at December 31, 2014
Granted
Forfeited
Balance at December 31, 2015
Granted
Balance at December 31, 2016
Performance Awards
406,142
263,510
(3,560)
666,092
661,571
1,327,663
Share based compensation recognized by plan for the years ended December 31, 2016 and 2015 are as follows:
Year ended
December 31
2016
$
2015
$
784
4,823
5,607
(2,326)
3,281
3,101
2,620
5,721
(2,374)
3,347
$
$
Stock Option Plan
Performance Incentive Plan
Total share based compensation
Capitalized
Net share based compensation expense
Advantage Oil & Gas Ltd. - 59
17. Natural gas and liquids sales
Natural gas sales
Natural gas liquids sales
Total natural gas and liquids sales
Year ended
December 31
2016
145,878
16,055
161,933
$
$
2015
129,802
2,509
132,311
$
$
18. General and administrative expense (“G&A”)
Year ended
December 31
Salaries and benefits
Share based compensation (note 16)
Office rent
Other
Total G&A
Capitalized (note 7)
Net G&A
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
20. Supplementary cash flow information
Changes in non-cash working capital is comprised of:
Source (use) of cash:
Trade and other receivables
Prepaid expenses and deposits
Trade and other accrued liabilities
Related to operating activities
Related to financing activities
Related to investing activities
Advantage Oil & Gas Ltd. - 60
2016
$
2015
$
7,332
5,607
989
2,952
16,880
(6,130)
10,750
7,026
5,721
1,146
2,869
16,762
(6,193)
10,569
$
$
Year ended
December 31
2016
$
2015
$
9,335
-
-
915
10,250
10,035
337
309
1,131
11,812
$
$
Year ended
December 31
2016
2015
$
$
$
$
(12,417)
285
11,103
(1,029)
567
-
(1,596)
(1,029)
$
$
8,086
537
(58,691)
(50,068)
(19,376)
(1,808)
(28,884)
(50,068)
$
$
21. Commitments
Advantage has lease commitments relating to office buildings of $3.0 million (December 31, 2015 - $4.1 million) and
transportation commitments of $180.2 million (December 31, 2015 - $168.1 million). The estimated remaining annual
minimum operating lease payments are as follows:
Year ended
December 31
2015
$
21,397
21,174
24,544
24,602
17,251
63,249
172,217
$
2016
2017
2018
2019
2020
2021 and thereafter
Total commitments
2016
-
$
26,067
27,338
28,519
21,850
79,438
183,212
$
Advantage Oil & Gas Ltd. - 61
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
Stock Exchange Trading Symbol
(Toronto Stock Exchange and New York Stock
Exchange)
Shares: AAV
Advantage Oil & Gas Ltd. - 62