Record Results and Outperformance Underscores
Low Cost Glacier Montney Natural Gas Supply
& Continuing Growth
CALGARY, March 2, 2017 /CNW/ – Advantage Oil & Gas Ltd. (“Advantage” or the “Corporation”) 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.
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. F&D costs are calculated by dividing total capital by reserve additions during the applicable period. Total capital includes both capital expenditures incurred and changes in future development capital required to bring proved undeveloped reserves and probable reserves to production during the applicable period. Reserve additions are calculated as the change in reserves from the beginning to the end of the applicable period excluding production.
2016 Operating and Financial Highlights (please refer to the summary table at the end of this release)
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.
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.
Consolidated Financial Statements and MD&A
The Corporation’s audited consolidated financial statements for the fiscal year ended December 31, 2016 together with the notes thereto, and Management’s Discussion and Analysis for the year ended December 31, 2016 have been filed on SEDAR and with the SEC and are available on the Corporation’s website at http://www.advantageog.com/investors/financial-reports/2016. The Corporation’s audited consolidated financial statements for the fiscal year ended December 31, 2015 are also available on the Corporation’s website via the same webpage. Upon request, Advantage will provide a hard copy of any financial reports free of charge.
Fourth Quarter and Full Year 2016 Operating & Financial Summary
Three months ended |
Year ended |
||||||||
Financial and Operating Highlights |
December 31 |
December 31 |
|||||||
2016 |
2015 |
2016 |
2015 |
||||||
Financial ($000, except as otherwise indicated) |
|||||||||
Sales including realized hedging |
$ |
71,090 |
$ |
42,654 |
$ |
215,027 |
$ |
165,054 |
|
Funds from operations |
$ |
54,610 |
$ |
31,656 |
$ |
166,861 |
$ |
123,630 |
|
per share(1) |
$ |
0.30 |
$ |
0.19 |
$ |
0.92 |
$ |
0.72 |
|
Total capital expenditures |
$ |
30,043 |
$ |
27,604 |
$ |
128,014 |
$ |
164,983 |
|
Working capital deficit(2) |
$ |
6,167 |
$ |
7,196 |
$ |
6,167 |
$ |
7,196 |
|
Bank indebtedness |
$ |
153,102 |
$ |
286,519 |
$ |
153,102 |
$ |
286,519 |
|
Basic weighted average shares (000) |
184,641 |
170,742 |
182,056 |
170,608 |
|||||
Operating |
|||||||||
Daily Production |
|||||||||
Natural gas (mcf/d) |
215,369 |
154,241 |
197,852 |
139,927 |
|||||
Liquids (bbls/d) |
949 |
179 |
915 |
154 |
|||||
Total mcfe/d(3) |
221,063 |
155,315 |
203,342 |
140,851 |
|||||
Total boe/d(3) |
36,844 |
25,886 |
33,890 |
23,475 |
|||||
Average prices (including hedging) |
|||||||||
Natural gas ($/mcf) |
$ |
3.35 |
$ |
2.96 |
$ |
2.75 |
$ |
3.18 |
|
Liquids ($/bbl) |
$ |
53.01 |
$ |
43.24 |
$ |
47.97 |
$ |
44.60 |
|
Cash netbacks ($/mcfe)(3) |
|||||||||
Natural gas and liquids sales |
$ |
3.17 |
$ |
2.37 |
$ |
2.18 |
$ |
2.57 |
|
Realized gains on derivatives |
0.32 |
0.61 |
0.71 |
0.64 |
|||||
Royalties |
(0.18) |
(0.10) |
(0.07) |
(0.11) |
|||||
Operating expense |
(0.22) |
(0.35) |
(0.27) |
(0.36) |
|||||
Transportation expense (4) |
(0.26) |
– |
(0.09) |
– |
|||||
Operating netback |
2.83 |
2.53 |
2.46 |
2.74 |
|||||
General and administrative |
(0.08) |
(0.11) |
(0.10) |
(0.14) |
|||||
Finance expense |
(0.09) |
(0.21) |
(0.13) |
(0.21) |
|||||
Other income (expense) |
0.02 |
(0.01) |
0.01 |
0.01 |
|||||
Cash netbacks |
$ |
2.68 |
$ |
2.20 |
$ |
2.24 |
$ |
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. |