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Advantage Announces 2018 Year-End Reserves & Operations Update


221% Production Replacement Led By
22% Increase in Liquids Reserves
(TSX: AAV)

CALGARYFeb. 11, 2019 /CNW/ – Advantage Oil & Gas Ltd. (“Advantage” or the “Corporation”) is pleased to report its 2018 reserves and an operational update on the Corporation’s liquids development plan.

Advantage’s 2018 proved plus probable (“2P”) reserve additions replaced 221% of annual production through drilling successes in all of the Corporation’s land blocks and through positive technical revisions reflecting continued improvements in production performance.  2P reserves increased 4.4% to 432.2 million boe (2.59 Tcfe) at a finding and development cost (“F&D”) of $8.04/boe ($1.34/mcfe) including the change in future development capital (“FDC”).  Advantage’s focus on liquids resulted in  a 33% increase in proved developed producing (“PDP”) liquids reserves, and recorded its first reserve bookings at our ultra-rich Pipestone/Wembley block.

Fourth quarter 2018 operating results included record production of 45,686 boe/d and a 61% increase in liquids production to 1,974 bbls/d.  Liquids contributed 15% of total 2018 revenue, and marketing initiatives generated $59 million (includes realized gains on derivatives and revenue less transportation realized from physical sales arrangements involving markets outside of AECO).  Adjusted funds flow(a) for 2018 was $150 million, and year-end total debt(a) was $273 million, resulting in a debt-to-adjusted funds flow ratio of 1.8.  Advantage’s low cost structure, high rate of liquids growth, and strong balance sheet establish a solid platform for the Corporation to continue advancing it’s multi-year liquids development plan (refer to Advantage press release dated November 1, 2018).

Major facilities expenditures in 2018 included the Glacier gas plant expansion to 400 mmcf/d and 6,800 bbls/d of liquids, and the substantial completion of a new compression and liquids handling hub at Valhalla. In addition, certain liquids-rich well operations and capital expenditures that were previously planned for January 2019 were accelerated to December 2018 to capitalize on temporary service discounts and reinforce our production outlook.

2018 Reserves Achievements:

  • Replaced 225% and 221% of 2018 annual production on a Proved (“1P”) and 2P reserves basis, respectively.
  • PDP and 2P liquids reserves increased 33% and 22% to 6.0 million barrels and 38.8 million barrels, respectively. This included the first reserves bookings assigned at Pipestone/Wembley.
  • PDP reserves increased by 9% at a F&D cost of $9.04/boe ($1.51/mcfe). F&D includes $63 million spent on the Glacier gas plant expansion and $27 million on the Valhalla liquids hub.
  • 1P reserves increased by 6% at a F&D cost of $8.33/boe ($1.39/mcfe) including change in FDC.
  • 2P reserves increased by 4.4% to 432.2 million boe (2.59 Tcfe) at an F&D cost of $8.04/boe ($1.34/mcfe) including change in FDC.
  • The three year average PDP and 2P F&D cost is $7.31/boe ($1.22/mcfe) and $3.88/boe ($0.65/mcfe) including change in FDC, respectively.
  • The 2018 PDP and 2P recycle ratios are 1.4 and 1.5, respectively. The three year average PDP and 2P recycle ratios are 1.8 and 3.4, respectively.
  • Positive technical revisions from improved well production performance accounted for 21% of 2P reserves additions. Strong well performance has contributed to a low annual decline rate of 26%.
  • Approximately 5% of Advantage’s condensate rich Greater Pipestone lands and 17% of our liquids rich Glacier lands have reserves booked.
  • Achieved a 3 year capital efficiency(a) of $13,400/boe/d. Advantage’s 2018 annual capital efficiency(a) of $15,700/boe/d includes $90 million for completing major facilities projects. The capital efficiency(a) is $8,700/boe/d when major facility expenditures are excluded.

2018 Operating & Financial Information

(References to 2018 operational and financial results are estimates only and have not been reviewed or audited by our independent auditor. Advantage is expected to release its fourth quarter and year-end results after markets close on February 28, 2019)

Q4 2018E

2018E

Production

45,686 boe/d

(274.1 mmcfe/d)

41,651 boe/d
(249.9 mmcfe/d)

Operating netback ($/boe) (a)(1)

$12.24

$11.22

Cash provided by operating activities ($ millions)

$45

$160

Adjusted Funds Flow ($ millions) (a)(2)

$46

$150

Cash used in investing activities ($ millions)

$51

$214

Net Capital Expenditures ($ millions) (a)(3)

$52

$204

Total Debt ($ millions)(a)

$273

$273

Total Debt to Adjusted Funds Flow(a)

1.8

(1)

Operating netback is comprised of sales revenue and realized gains on derivatives, net of expenses resulting from field operations, including royalty expense, operating expense and transportation expense.

(2)

Adjusted funds flow excludes changes in non-cash working capital and expenditures on decommissioning liabilities.

(3)

Net capital expenditures include total capital expenditures related to property, plant and equipment and exploration and evaluation assets incurred.

  • Achieved annual 2018 cash costs including royalty costs of $0.18/boe, operating costs of $1.80/boe, transportation expenses of $3.36/boe, general and administrative costs of $0.60/boe and finance costs of $0.72/boe.
  • Annual 2018 cash provided by operating activities of $160 million and adjusted funds flow(a) of $150 millionwas supported by $59 million market diversification gains (includes realized gains on derivatives and revenue less transportation realized from physical sales arrangements involving markets outside of AECO). Advantage’s revenue exposure to AECO daily prices was 22% in 2018 and is anticipated to be 20% in 2019.
  • Cash used in investing activities was $214 million, including $204 million for 2018 net capital expenditures(a). This included a $29 million acceleration of 2019 planned capital into 2018. Accordingly, the 2019 capital budget will be reduced by $29 million.

2018 Additional Reserves Commentary and Analysis

Sproule Associates Ltd. (“Sproule”) was engaged as an independent qualified reserve evaluator to evaluate Advantage’s year-end reserves as of December 31, 2018 (“Sproule 2018 Reserves Report”) in accordance with National Instrument 51-101 (“NI 51-101”) and the Canadian Oil and Gas Evaluation Handbook (“COGE Handbook”). Reserves are stated on a gross (before royalties) working interest basis unless otherwise indicated. Additional details are provided in the accompanying tables to this release and additional reserve information as required under NI 51-101 will be included in our Annual Information Form which will be filed on SEDAR on February 28, 2019. All references to 2018 operational and financial results are estimates only and have not been reviewed or audited by our independent auditor. Advantage is expected to release its fourth quarter and year-end results after markets close on February 28, 2019.

Advantage’s 2018 reserves additions include the first liquids-rich reserves bookings at Pipestone/Wembleyalong with the continued recognition of drilling success and improved well performance at Glacier and Valhalla.

The Corporation’s Pipestone/Wembley land block consists of 31 net sections (19,840 acres) and is located in a prolific condensate fairway where significant industry drilling successes in multiple layers has occurred.  In 2018, Advantage’s first well in this land block was tested at average flow rate of 1,312 boe/d consisting of 2.9 mmcf/d of gas and 819 bbls/d of condensate and NGLs.  This well is expected to be on-production by the fourth quarter of 2019.  Advantage booked 12 locations in 2018 totaling 9.9 million boe of 2P reserves.

Drilling at Glacier and Valhalla in 2018 was focused on the liquids-rich Middle Montney.  Continued strong production performance resulted in 6.9 million boe of positive 2P technical revisions across the properties. At Glacier, our 2018 completed wells are out-performing Advantage’s average well type curve by 35% after more than 150 days of production.  At Valhalla, our new compressor station and liquids hub has been commissioned. The facility will increase drawdown of existing wells and provide capacity for future liquids-rich wells, including seven wells that make up our current winter Valhalla program.

Additional comments pertaining to each of the reserves categories:

  • PDP reserves increased 9% due to the recognition of 20 new Glacier & Valhalla wells that were brought on production through 2018 and higher reserves assignments on historical producing wells due to stronger performance than previously forecast.
  • 1P reserves increased 6% resulting from technical revisions which accounted for 43% of the 1P reserves additions. The remaining reserves additions resulted from the conversion of probable locations to the proved reserves category and the booking of new proven undeveloped locations.
  • 2P reserves increased 4.4% through the addition of 41 new wells and locations. A total of 356 undeveloped locations are booked in the Sproule 2018 Reserves Report. Management estimates in-excess of 1,200 total Montney locations remain undrilled across all of our land blocks.
  • 2P FDC increased by $66 million to $1.7 billion as the reduction in facilities capital expenditures in the Sproule 2018 Reserves Report were offset by the cost of booking additional future well locations.

Since Advantage’s Montney development program began in 2008, 2P reserves have grown at an average compound annual growth rate of 28% per year to 2.6 Tcfe (432 million boe).  Advantage’s 1P Net Present Value is  $1.5 billion, and 2P Net Present Value is $2.2 billion as at December 31, 2018 (10% discount factor on a pre-tax basis).

The reserves by category and year over year changes compared to 2017 are indicated below:

Reserve

Category

Light &

Medium

Crude Oil

Million bbls

Conventional

Natural Gas

Tcf

Natural Gas

Liquids

Million bbls

Total Gas

Equivalent

Tcfe

%

Change from

2017

PDP

0.49

5.97

0.53

9.1%

1P

3.01

1.78

25.88

1.95

6.2%

2P

4.40

2.36

34.42

2.59

4.4%

The total number of 2P future well locations booked in the Sproule 2018 Reserves Report are illustrated in the following table:

Sproule Number of Gross Horizontal Wells Booked

Developed

Undeveloped

Total

Upper

119

135

254

Middle

45

135

180

Lower

55

86

141

Total

219

356

575

Advantage’s 1P reserves life index is 20 years and its 2P reserves life index is 26 years based on the Corporation’s average fourth quarter 2018 production rate of approximately 45,686 boe/d.

Looking Forward

2019 Capital Spending Revised With More Flexibility Available

Advantage’s 2019 net capital expenditures(a) guidance range is reduced to $185 to $215 million from $210 to $240 million as a result of the accelerated spending discussed earlier.  No impact to our 2019 production guidance range of 43,500 to 46,500 boe/d (261 mmcfe to 279 mmcfe/d) is anticipated.

Advantage is planning to invest approximately $65 million through the first quarter of 2019 which is expected to substantially provide the well productivity to achieve our 2019 annual production guidance. Investment for the remainder of 2019 will be reviewed during the second quarter of 2019.  The Corporation has identified additional capital projects of up to $100 million which could be deferred from our 2019 plan with minimal 2019 production impact.  Capital deferrals will be prioritized to minimize impact on the highest-return liquids projects. Advantage will remain diligent in monitoring commodity and industry trends and respond accordingly to retain a strong balance sheet while advancing our multi-year strategy to increase liquids development.

RESERVES SUMMARY TABLES

Company Gross (before royalties) Working Interest Reserves
Summary as at December 31, 2018

Light &

Medium Crude

Oil

(mbbl)

Conventional

Natural Gas

(mmcf)

Natural

Gas Liquids

(mbbl)

Total Oil

Equivalent

(mboe)

Proved

Developed Producing

490,850

5,974

87,782

Developed Non-producing

266

52,097

871

9,821

Undeveloped

2,745

1,234,075

19,038

227,462

Total Proved

3,011

1,777,022

25,884

325,065

Probable

1,393

583,135

8,539

107,121

Total Proved + Probable

4,404

2,360,157

34,423

432,186

(1)

Tables may not add due to rounding.

Company Net Present Value of Future Net Revenue using Sproule price and cost forecasts (1)(2)(3)
($000)

Before Income Taxes Discounted at

0%

10%

15%

Proved

Developed Producing

1,206,385

778,999

653,677

Developed Non-producing

167,849

86,014

68,431

Undeveloped

2,712,159

652,328

336,103

Total Proved

4,086,393

1,517,341

1,058,212

Probable

2,044,535

651,846

441,686

Total Proved + Probable

6,130,928

2,169,187

1,499,898

(1)

Advantage’s light and medium oil, solution gas, conventional natural gas and natural gas liquid reserves were evaluated using Sproule’s product price forecast effective December 31, 2018 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 reserves 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.

(4)

Tables may not add due to rounding.

Sproule Price Forecasts

The net present value of future net revenue at December 31, 2018 was based upon oil, natural gas and natural gas liquids pricing assumptions prepared by Sproule effective December 31, 2018. These forecasts are adjusted for reserves quality, transportation charges and the provision of any applicable sales contracts. The price assumptions used over the next seven years are summarized in the table below:

Year

Canadian

Light

Sweet

Crude 40o

API

($Cdn/bbl)

Alberta

AECO-C

Natural Gas

($Cdn/mmbtu)

Henry Hub

Natural Gas

($US/mmbtu)

Edmonton

Propane

($Cdn/bbl)

Edmonton

Butane

($Cdn/bbl)

Edmonton

Pentanes

Plus

($Cdn/bbl)

Exchange

Rate

($US/$Cdn)

2019

75.27

1.95

3.00

30.27

40.91

75.32

0.77

2020

77.89

2.44

3.25

34.51

50.25

80.00

0.80

2021

82.25

3.00

3.50

38.15

56.88

83.75

0.80

2022

84.79

3.21

3.57

39.64

58.01

85.50

0.80

2023

87.39

3.30

3.64

40.62

59.17

87.29

0.80

2024

89.14

3.39

3.71

41.62

60.36

89.11

0.80

2025

90.92

3.49

3.79

42.64

61.56

90.96

0.80

Company Gross (before royalties) Working Interest Reserves Reconciliation (1):

Proved

Light &

Medium Crude

Oil

(mbbl)

Conventional

Natural Gas

(mmcf)

Natural Gas

Liquids

(mbbl)

Total Oil

Equivalent

(mboe)

Opening balance Dec. 31, 2017

4

1,698,002

23,057

306,062

Extensions

3,011

37,170

1,956

11,162

Infill Drilling

66,715

1,304

12,423

Infill Future Offset

Improved recovery

Technical revisions

(4)

85,997

287

14,616

Discoveries

Acquisitions

Economic factors

(22,907)

(176)

(3,994)

Production

(87,955)

(544)

(15,204)

Closing balance at Dec. 31, 2018

3,011

1,777,022

25,884

325,065

Proved Plus Probable

Light &

Medium Crude

Oil

(mbbl)

Conventional

Natural Gas

(mmcf)

Natural Gas

Liquids

(mbbl)

Total Oil

Equivalent

(mboe)

Opening balance Dec. 31, 2017

6

2,292,273

31,768

413,819

Extensions

4,404

51,000

2,755

15,659

Infill Drilling

85,127

1,644

15,832

Infill Future Offset

Improved recovery

Technical revisions

(5)

47,473

(1,009)

6,897

Discoveries

Acquisitions

Economic factors

(27,761)

(191)

(4,817)

Production

(87,955)

(544)

(15,204)

Closing balance at Dec. 31, 2018

4,404

2,360,157

34,423

432,186

(1)

Technical revisions accounted for 43% of the total proved additions and 21% of the total proved plus probable additions. Percentage of each category calculated by dividing the technical revisions in the category by the total reserve additions in the same category before production.

(2)

Tables may not add due to rounding.

Company Finding & Development Costs (“F&D”)

Company 2018 F&D Costs – Gross (before royalties) Working Interest Reserves including Future Development Capital (1)(2)(3)

Proved

Proved + Probable

Capital expenditures ($000)

203,834

203,834

Net change in Future Development Capital ($000)

81,206

66,049

Total capital ($000)

285,040

269,883

Total mboe, end of year

325,065

432,186

Total mboe, beginning of year

306,062

413,819

Production, mboe

15,204

15,204

Reserve additions, mboe

34,207

33,571

2018 F&D costs ($/boe)

$8.33

$8.04

2017 F&D costs ($/boe)

$5.88

$5.01

Three-year average F&D costs ($/boe)

$4.88

$3.88

(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 undeveloped reserves to production during the applicable period. Reserves additions are 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 undeveloped reserves on production.

(3)

The change in FDC is primarily from incremental undeveloped locations.



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