CALGARY, Dec. 16, 2015 /CNW/ – Advantage Oil & Gas Ltd. (“Advantage” or the “Corporation”) is pleased to announce that its Board of Directors has approved a 2016 capital budget of $120 million targeting annual production per share growth of approximately 39% to 200 mmcfe/d (33,300 boe/d) and a further 6% reduction in total cash costs to $0.75/mcfe. Advantage’s standing inventory of 35 completed and uncompleted wells are capable of achieving and sustaining 2016 production levels through to early 2017 without the need for drilling any new wells. To support 2016 production, Advantage’s 100% owned Glacier gas plant was expanded in 2015 with additional capacity to accommodate 2016 and 2017 growth and the Corporation previously executed firm service transportation agreements with TransCanada Pipeline Limited (“TCPL”) for 97% of its production target.
The Corporation’s 2016 capital program of $120 million is expected to generate surplus cash flow, enhance financial flexibility and continue growth in 2017. Based on an average 2016 natural gas price of Aeco Cdn $2.50/mcf including Advantage’s hedging positions, annual cash flow is estimated to be approximately $160 million with year-end total debt to trailing cash flow of approximately 1.6 times. Based on an average 2016 natural gas price of Aeco Cdn $2.00/mcf and Advantage’s current hedge positions, annual cash flow is estimated to be approximately $143 million with year-end total debt to trailing cash flow of approximately 1.9 times. The resilience to commodity prices in Advantage’s 2016 budget is supported by having 52% of our 2016 production hedged at $3.62/mcf, an industry leading low total cash cost structure of $0.75/mcfe ($4.50/boe) and capital investment efficiency.
Advantage’s $120 million capital Budget supports 2016 production growth and sets the stage for 2017. The planned $120 million capital program includes completion and tie-ins of 13 standing uncompleted wells to maintain production through to early 2017, looping of Advantage’s sales pipeline to increase takeaway capacity to 400 mmcf/d for delivery into TCPL, the installation of back-up plant utility systems and the drilling of one of two future ten-well pads required to support 2017 production. Drilling of the first ten-well pad is scheduled to commence in July 2016.
Glacier outperformance enables reduced 2016 capital expenditure level. Advantage’s planned 2016 capital program is reduced from earlier Management estimates of $240 million to $120 million. This has been made possible by lower than anticipated well production declines, improvements in drilling and completion efficiencies, and approximately 20% lower well costs. The significant improvements in well performance continues to reinforce the high quality Montney reservoir at Glacier. This has created a standing well inventory to support 2016 production and allowed more flexibility with the timing of future drilling and well completions.
120 mmcf/d of completed standing well productivity is currently available to support Advantage’s 2016 production target. The 120 mmcf/d of average first month productivity (“IP30”) is based on 15 completed standing wells and includes a number of older which have been shut-in to accommodate the new production. These well will be utilized to increase and sustain production to 205 mmcfe/d in April 2016. An additional 13 uncompleted standing wells will be completed during the second half of 2016 to maintain production levels through to early 2017.
Advantage’s 100% owned Glacier gas plant currently has 70 mmcf/d of additional capacity to support growth in 2016 and 2017. The Glacier gas plant expansion completed in 2015 increased processing capacity to 250 mmcf/d and provided 70 mmcf/d of additional capacity to meet future growth in 2016 and 2017. The Glacier gas plant is capable of processing varying amounts of dry and liquids rich gas providing discretion to vary the number of producing dry or liquids rich gas wells in order to optimize investment returns and netbacks.
To reduce cash flow volatility, Advantage has hedged 52% of its 2016 forecast natural gas production at Aeco Cdn $3.62/mcf, 18% of estimated 2017 natural gas production at Aeco Cdn $3.36/mcf and 17% of estimated Q1 2018 natural gas production at Aeco Cdn $3.25/mcf.
Glacier Wells Continue to Outperform & a New 20 mmcf/d Lower Montney Well Uncovers Another Highly Productive Area at Glacier
Strong Upper & Lower Montney Well Performance Continues
Advantage has continually improved well performance since 2008 by employing changes to its well completion and frac designs. In 2013, 25 Upper and Lower Montney wells completed with slick water fracs have outperformed Management’s longer term production expectations with lower declines and higher production rates. Compared to Advantage’s historical Upper and Lower Montney average well type curve, these 25 wells are demonstrating production rates which are averaging 0.5 mmcf/d higher after 20 months of production. The top quartile wells are demonstrating production rates of approximately 2 to 3 mmcf/d higher.
Since July 2015, a total of eight Montney wells have been brought on production at restricted rates to support the current production capacity of 180 mmcfe/d. These eight wells are demonstrating strong performance and we look forward to providing more information as we bring additional standing wells on production through 2016.
As a result of improved well performance, Management has increased its average Upper and Lower Montney well type curve utilizing an IP30 of 7.2 mmcf/d and a proven plus probable estimated ultimate recoverable gas volume (“2P EUR”) of 7.2 bcf. The top quartile wells are demonstrating an average type curve with an IP30 of 9 mmcf/d and a 2P EUR of 9 bcf.
Recent Lower Montney Well Uncovers High Productivity in an Undrilled Area
A 2014 Lower Montney well was drilled to evaluate the south-central area of Glacier where no Lower Montney wells were previously drilled. This well was recently brought on production at an initial rate of 20 mmcf/d and has produced for one month. Production has been restricted to 8.5 mmcf/d at a high flowing pressure of 12,940 kpa (1,876 psi). This well identifies another significant area of exceptional Lower Montney well productivity and further reinforces the high quality Montney reservoir present at Glacier.
Middle Montney Wells Outperforming
Nine previous Middle Montney producing wells and two recent Middle Montney wells brought on production in August and September 2015 are outperforming our historical average well type curve. Consequently, Management has increased its average Middle Montney well type curve to an IP30 of 4.5 mmcf/d and a 2P EUR of 4.5 Bcfe in our development plan. Eight standing completed Middle Montney wells remaining from our 2014 drilling program will be brought on stream through 2016.
Modified Completion Designs and Additional Delineation
We look forward to obtaining additional production information through 2016 from Advantage’s standing Montney wells to help further refine our technical expertise and knowledge on completion and frac techniques and to better assess undrilled areas within the Glacier land block. Some of these standing wells contain additional frac stages, tighter spacing and ball drop sliding sleeve technology. Advantage’s 2016 drilling program includes Lower Montney horizontal wells with extended lateral lengths. Accordingly, Management will continue to review and update average well type curves as longer term production results are collected and analyzed.
2016 Budget & Guidance
The table below provides calendar year estimates:
2016 |
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Guidance(1) |
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Average Annual Production (mmcfe/d) |
190 to 210 |
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% Natural Gas |
97% |
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Royalty Rate (%) |
5% to 6% |
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Operating costs including liquids transportation costs ($/mcfe) (3) |
$0.33 to $0.38 |
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Capital Expenditures ($ Million) |
$120 |
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# Net Wells to be Drilled |
13(2) |
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(1) |
Based on an average Aeco Cdn $2.50/mcf natural gas price for 2016 and Advantage’s current hedge positions. |
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(2) |
All 13 wells will be used to support 2017 growth. |
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(3) |
During 2016, additional transportation costs for increased natural gas liquids production ($0.04/mcfe to $0.07/mcfe) have been included. The actual costs will depend on the amount of liquids extracted for direct sales based on liquids prices in 2016. |
Advantage has assumed TCPL’s northwest Alberta pipeline restrictions and maintenance activity level will subside in early 2016 based on the most recent information available.
Total cash costs (includes royalties, operating costs, cash G&A, interest & other cash expenses) for 2016 are estimated to average approximately $0.75/mcfe.
Beyond 2016
Advantage will continue to closely monitor the commodity price environment through 2016 and adjust future growth plans as necessary to maintain balance sheet strength and preserve the long term value of its Glacier Montney asset. Comments regarding 2017 and 2018 are Management estimates and are not to be considered approved budgets.
Based on Aeco Cdn natural gas prices of $2.50/mcf for 2016 and $2.75/mcf for 2017 and the Corporation’s current hedging positions, Advantage’s development plan includes a targeted 18% production increase in 2017 to an annual average production rate of 235 mmcfe/d (39,300 boe/d) with production expected to reach 245 mmcfe/d. To achieve and maintain the 245 mmcfe/d production level, capital expenditures of $200 million are estimated to be required in 2017. The estimated year-end total debt to trailing cash flow based on an average 2017 natural gas price of Aeco Cdn $2.75/mcf is estimated to be 1.4 times.
Beyond 2017, Advantage estimates that at a natural gas price of Aeco Cdn $3.00/mcf, annual production growth of approximately 15% is achievable at a year-end total debt to trailing cash flow of less than two times. To support future growth, Advantage has executed firm transportation service contracts with TCPL for an incremental 35 mmcf/d of firm transportation service in 2018.
Continuing Forward With Financial Discipline and Operational Excellence
The exceptional quality of the Corporation’s Glacier Montney asset, an industry leading low cost structure and 100% ownership of our facilities allows for strong investment returns at low commodity prices. These key factors provide Advantage with significant flexibility to modify growth plans in a volatile commodity price environment without concerns over longer term corporate commitments. Our rate of capital investment and future production growth plans are based on Advantage’s underlying principles to preserve operational and financial flexibility. Accordingly, the Corporation will continue to closely monitor the natural gas commodity price environment and modify future plans as required.