CALGARY, July 6, 2016 /CNW/ – Advantage Oil & Gas Ltd. (“Advantage” or the “Corporation”) is pleased to report that its accomplishments during the second quarter of 2016 have further strengthened the foundation for the Corporation’s next chapter of growth to 350 mmcfe/d (58,330 boe/d). During the second quarter, production growth exceeded expectations and reduced operating costs contributed to record low total corporate cash costs. Production performance from key wells, which contained the latest modified frac designs, demonstrated top quartile rates and Advantage’s Glacier gas plant was operated near design throughput allowing us to confirm equipment capability. Advantage’s sales gas pipeline loop was commissioned, increasing total take-away capacity to TCPL to 400 mmcf/d and back-up wells for water disposal and acid gas injection to support the next Glacier plant expansion were completed. Additionally, we have secured a base level of increasing natural gas firm service transportation commitments which total 293 mmcf/d by early 2019.
The Corporation is well positioned to increase production significantly without incurring incremental capital costs and per unit operating costs during the second half of 2016 should natural gas prices continue to strengthen. Advantage is able to immediately access its current surplus production capability of approximately 70 mmcf/d from 10 standing completed wells and approximately 50 mmcf/d of additional processing capacity available at the Corporation’s 100% owned Glacier gas plant. An additional 8 of our 14 standing uncompleted wells will be completed and tied-in during the second half of this year as planned in our 2016 capital budget. These wells will support and grow production through to spring 2017. The Corporation’s operational flexibility combined with its strong balance sheet, Montney leading low cost structure and strong commodity hedging program provides the foundation for Advantage’s previously announced expansion of its 100% owned Glacier gas plant to 350 mmcf/d (58,330 boe/d).
Highlights during the second quarter of 2016, which demonstrate the Corporation’s achievements, are included below: (Please note that references to second quarter 2016 operational and financial results are estimates only and have not been reviewed or audited by our independent auditors. Advantage is expected to release its second quarter results on August 4, 2016 which will include additional data).
Advantage’s production during the second quarter of 2016 increased to 210 mmcfe/d (35,000 boe/d), 26% higher than the first quarter of 2016 and 68% higher than the same period of 2015 resulting in production per share growth of 56%.
Total natural gas liquids production increased 151% to average 1,050 bbls/day compared to the first quarter of 2016. The liquids are comprised of 80% condensate (“C5+”) since Advantage continues to limit propane sales by re-injecting this product back into the sales gas stream and realizes a higher netback than extracting and selling propane due to its current low commodity price.
Operating costs during the second quarter of 2016 decreased 14% to $0.30/mcfe. Operating cost reduction initiatives included an additional water disposal well which reduced water handling costs during the second quarter. Natural gas liquids transportation costs were $0.03/mcfe during the quarter.
Total corporate cash costs reached a record low of $0.60/mcfe including royalties, operating costs, liquids transportation costs, cash G&A and financing costs.
The previously announced Glacier Gas Plant Expansion to 350 mmcf/d (58,330 boe/d) is on track with engineering design work nearing completion and regulatory application work underway. The expansion is expected to be completed by the second quarter of 2018.
Modified Completion and Frac Designs Improve Well Performance and Costs. Advantage’s Glacier standing well inventory contains numerous wells which were designed to evaluate reduced frac spacing, frac ports and longer length laterals primarily in the Lower and Middle Montney where a relatively low amount of this resource has been booked as reserves in these layers. Additional completion and frac design changes in the Upper Montney will be further evaluated in the next drilling program.
In the Lower Montney, three recent wells brought on-production are demonstrating performance which is trending near management’s estimated top quartile Lower Montney average well type curve with an initial 30 day average production rate (“IP30”) of 9 mmcf/d compared to our Budget Lower Montney average well type curve with an IP30 of 7.2 mmcf/d. Of particular interest is our first Lower Montney well which was completed with a cemented port, ball-drop system with 37 frac ports, 20 frac stages, slickwater and 1,480 tonnes of proppant that is significantly outperforming Management expectations. The well began production on April 27, 2016 at 18 mmcf/d (3,000 boe/d) and has been restricted below 10 mmcf/d for frac sand flow back control. This well is currently producing at a restricted rate of 7 mmcf/d at 11 mpa and is estimated to be still capable of producing in excess of 12 mmcf/d. The frac port system contributed to reducing drill, complete and tie-in well costs from $5.4 to $5.0 million resulting in a well capital efficiency of $2,200/boe/d. In the second half of 2016, 5 new Lower Montney wells are expected to be brought on-production. Three of these wells contain lateral lengths averaging 2,500 meters with the longest lateral at 2,900 meters and up to 28 frac stages compared to our historical wells which contained an average lateral length of 1,800 meters and 18 frac stages.
In the liquids rich Middle Montney formation, four new wells are trending near management’s estimated top quartile Middle Montney average well type curve with an IP30 of 6 mmcf/d compared to our Budget Middle Montney average well type curve of 4.5 mmcf/d. These wells contain an average of 20 frac stages compared to our 2013 wells which contained an average 15 frac stages. Two of these wells were drilled into the lowest layer of the Middle Montney which was previously un-drilled at Glacier. Both wells are tracking at least 25% above our average Middle Montney well type curve after producing for 180 and 90 days, respectively. There are no future undeveloped locations booked for this Middle Montney layer in Advantage’s year end 2015 reserve report.
Well costs continue to improve. Advantage will commence drilling 13 new wells in July 2016 and total well costs (drill, complete, equip and tie-in) are expected to continue to improve. We estimate Lower Montney wells will average $5.1 million per well based on an average of 25 fracs stages per well, approximately $0.7 million lower than previously drilled wells in the Lower Montney. Middle Montney well costs are also estimated to be reduced by $0.7 million per well to approximately $5.4 million based on 25 frac stages.
Advantage has secured increasing levels of TransCanada Pipeline Limited (“TCPL”) firm natural gas transportation service from 2016 to 2019 ranging between 95% to 105% of estimated future annual production. Currently, the Corporation has contracted a total of 293 mmcf/d of firm natural gas sales transportation service by early 2019. Advantage continues to evaluate the availability and timing of firm and interruptible natural gas transportation capacity and alternative options to determine the amount and timing of future firm service commitment volumes that it views as appropriate to preserve flexibility for future growth. Options for transportation and sales of associated liquids production through to 2019 are also being evaluated.
Advantage’s interest costs will decrease by $0.4 million per year resulting from the Corporation’s request to reduce its credit facility from $450 million to $400 million. Advantage’s strong balance sheet and estimated capital requirements for future growth provides ample flexibility to reduce its current credit facility. Advantage’s debt is estimated to be $194 million at the end of the second quarter resulting in a 50% draw against its revised credit facility and over $200 million of additional liquidity.
Should natural gas prices average AECO Cdn $2.50/mcf during the second half of 2016, Advantage estimates $25 million of surplus cash flow would be realized with a Year-end total Debt to trailing Cash flow of 1x. Improving natural gas prices and Advantage’s attractive hedging program which includes 52% of 2016 annual production at an average AECO price of Cdn $3.62/mcf combined with its low cost structure is anticipated to generate cash flow in excess of its planned 2016 capital program of approximately$120 million. Advantage’s hedging position has been increased to 36% of forecast 2017 annual production at an average AECO price of Cdn $3.24/mcf and 13% of forecast 2018 production at an average AECO price of Cdn $3.04/mcf. These hedge positions combined with our strong balance sheet provide additional financial flexibility to support the next significant expansion of Advantage’s Glacier gas plant processing capacity to 350 mmcf/d planned to commence construction during the second half of 2017.
The Corporation’s hedging program, industry leading low costs, improved capital efficiencies and strengthened balance sheet have already positioned Advantage with significant downside protection with flexibility to capitalize on improved natural gas prices which we anticipate will occur as North American natural gas supply and demand become better balanced in the future.