Advantage announces 2017 budget and development plan
Tuesday, Nov 29, 2016
Advantage Oil & Gas Ltd. (“Advantage” or the “Corporation”) is pleased to announce that its Board of Directors (“Board”) has approved a 2017 capital budget and development plan estimates for 2018 and 2019.  Advantage’s 2017 through 2019 investment will continue with the profitable and sustainable growth of our industry leading low cost Montney natural gas supply.  This development will be supported by the Corporation’s future drilling inventory of 1,100 dry gas and liquids rich Montney locations at Glacier which will remain the primary focus of development through the next decade.  Additionally, the strategic expansion of Advantage’s 100% owned Glacier gas plant processing capacity has been upsized from 350 mmcf/d to 400 mmcf/d (66,670 boe/d) with construction planned to start in the second half of 2017.  This will provide optionality for accelerated growth at Glacier and operational flexibility to process a broader spectrum of gas and liquids compositions from Advantage’s Montney lands located at Valhalla, Wembley and Progress in the greater Glacier area.

Advantage’s 2017 capital budget includes an investment of $205 million targeted to increase annual production by 17% to 236 mmcfe/d (39,333 boe/d).  Annual 2017 funds from operations is estimated to grow 27% on a per share basis to $210 million based on an average daily natural gas price of AECO Cdn $2.95/mcf ($2.80/GJ) and the Corporation’s current hedging positions. The upsized Glacier plant expansion has minimal impact on the Corporation’s 2017 capital expenditure budget due to Advantage’s proven expertise in cost efficient facilities engineering design, lower construction costs and fewer required wells to grow and maintain production compared to earlier estimates. As a result, the Corporation’s increasing cash flow is expected to reduce the total debt to trailing cash flow to 0.8 times at year-end 2017.

The Corporation’s 2017 through 2019 development plan is targeted to increase 2016 annual production by 56% (52% on a per share basis) to 316 mmcfe/d (52,670 boe/d)  in 2019 or 16% on an average annual per share basis.  Based on an average AECO daily natural gas price of $2.95/mcf ($2.80/GJ) over the 2017 through 2019 period, cash flow is expected to grow by 78% (74% on a per share basis) or 20% on an average annual per share basis.  Surplus cash is anticipated to reduce estimated year-end 2016 total debt from approximately $165 million to $55 million at year-end 2019, resulting in a total debt to trailing cash flow ratio of 0.2 times.  At an average AECO Cdn daily natural gas price of $3.50/mcf ($3.30/GJ), Advantage’s strong cash margins could generate $230 million of cumulative surplus cash over the 2017 through 2019 period.  Total capital expenditures over the development plan period is estimated at $625 million and includes the drilling of 83 Montney wells.

The Corporation believes that the 2017 through 2019 period will require Canadian natural gas producers to become more competitive in the North America natural gas market and Advantage’s continuing focus on capital discipline, cost efficiencies, profitability and financial strength will remain key success factors in achieving strong investment returns.

2017 Budget & Guidance

Glacier outperformance reduces total capital expenditures.  Significant technological improvements in drilling and completion efficiencies, shallower production declines, lower well costs and lower total corporate cash costs have reduced the Corporation’s capital requirements.  The Corporation’s 2017 capital program is estimated at approximately $205 million with $83 million directed to facilities and infrastructure. This includes the Glacier gas plant expansion where $71 million of the total $90 million is anticipated to be spent in calendar 2017.  Additional facilities expenditures of $12 million include investments to support ongoing growth and value generation such as expansion of the field gas gathering system, a water source system and connections into other sales pipelines.  A total of 21 wells are planned to be drilled in 2017 with 24 new and standing wells completed to support 2018 growth.  The 2017 capital and operating budget includes consideration for potential increases in industry and regulatory costs.  

Well production type curves in all Montney layers at Glacier have been increased.  The Upper and Lower Montney average well production type curves have been increased to a Management estimated initial 30 day average well production rate (“IP30”) of 7.5 mmcf/d with a 2P estimated ultimate recovery (“EUR”) per well of 7.5 Bcfe (previous IP30 of 7.2 mmcf/d and 2P EUR of 7.2 Bcfe).  For planning purposes, in areas where top quartile well results are anticipated, an average production well type curve with an IP30 of 9 mmcf/d and a 2P EUR of 9 Bcfe has been utilized. In the Middle Montney, the average well production type curve estimates have been increased to an IP30 of 5 mmcf/d with a 2P EUR of 5 Bcfe (previous IP30 of 4.5 mmcf/d and 2P EUR of 4.5 Bcfe).  The drill, complete, equip and tie-in (“DCET”) well costs are projected to be $4.8 million for all Upper, Middle and Lower Montney wells with an average lateral length of 1,800 meters and 25 frac stages.  The DCET cost for wells with longer laterals and increased frac stages are adjusted accordingly in the budget.

Advantage’s total corporate cash costs are estimated to be $0.63/mcfe for 2017.  Advantage anticipates its industry leading low cost structure will continue due to the Corporation’s proven operational expertise and our 100% owned Glacier gas plant which provides highly efficient gas processing costs. The Glacier gas plant expansion to 400 mmcf/d includes additional processing units added to the existing gas plant infrastructure creating economies of scale with the use of common utility systems, maintenance procedures and equipment interchangeability.

Firm Transportation Service Secured. Advantage has secured firm service sales gas transportation on TransCanada Pipeline Limited’s (“TCPL”) Nova Gas Transmission System (Alberta) for 100% of its planned production targets from 2017 through 2019.   

Advantage’s hedging positions reduce cash flow volatility.  The Corporation believes natural gas prices will remain volatile and continues to provide downside cash flow protection through future hedge positions.  Advantage has hedged 45% of its 2017 forecast natural gas production at AECO Cdn $3.19/mcf, 22% of estimated 2018 natural gas production at AECO Cdn $3.02/mcf and 18% of estimated Q1 2019 natural gas production at AECO Cdn $3.00/mcf.

125 mmcf/d of completed standing well productivity is currently available to support Advantage’s 2017 production target.  The 125 mmcf/d of average first month productivity (“IP30”) is based on 9 currently completed standing wells which will be utilized to support its target of  236 mmcfe/d in 2017.  Additional wells will be drilled in the fourth quarter of 2016 to support production levels in the second half of 2017 and early 2018.  Advantage’s development cycles are planned such that the timing of capital expenditure to initial cash flow is based on large well pads (> 10 wells).  This normally means our drilling programs are completed approximately 8 to 12 months in advance and well completions are undertaken such that a sufficient number of completed wells remain in inventory to provide operational flexibility and optionality for increasing growth.

Advantage’s 100% owned Glacier gas plant has current processing capacity to support its 2017 production target and additional capacity in the future.  The Glacier gas plant expansion to 400 mmcf/d is targeted to begin construction during the second half of 2017 with completion expected by the second quarter of 2018.  Total liquids handling capacity will be increased to 6,800 bbls/d of propane plus (“C3+”) liquids.  Post expansion, Advantage will have additional raw gas processing capacity of approximately 120 mmcf/d to 80 mmcf/d in 2018 and 2019 respectively, to provide operational flexibility, accelerate growth or accommodate third party processing.  The expanded Glacier gas plant capacity to 400 mmcf/d will also match our existing sales gas pipeline lateral capacity of 400 mmcf/d which connects to TCPL.

Beyond 2017

Comments regarding 2018 and 2019 are Management estimates and are not Board approved budgets.  Additional details are included in our updated Management presentation available on our website.

Based on AECO Cdn natural gas prices of $2.95/mcf ($2.80/GJ) for 2018 and 2019 and the Corporation’s current hedging positions, Advantage’s development plan includes a targeted 15% production increase in 2018 to an annual average production rate of 272 mmcfe/d (45,330 boe/d) and a 16% increase in 2019 annual average production to 316 mmcfe/d (52,670 boe/d).  Cash flow per share is estimated to grow 12% to $1.27 in 2018 and 22% to $1.55 in 2019.  Capital expenditures of $210 million are estimated to be required in 2018 and $210 million in 2019 with a total of 62 wells to be drilled at Glacier over the two years.  The estimated year-end total debt to trailing cash flow is estimated to be 0.6 times and 0.2 times at year-end 2018 and 2019, respectively.

The 2017 through 2019 development plan is expected to generate 56% production growth or 52% on a per share basis and 74% cash flow growth per share over this period.  The total capital required during this period is estimated to be $625 million and is fully funded through cash flow.

Future Development at Valhalla, Wembley and Progress.   During the fourth quarter of 2016, three initial evaluation wells were brought on-production in our Valhalla property.  These three Valhalla wells will be produced to continue recovering load fluid and may be shut-in periodically to gather additional evaluation data. These initial wells were drilled in 2014 and 2015 into two of the four Montney layers present at Valhalla.  Two of the wells were drilled into the Upper Montney and one well drilled in the first layer of the Middle Montney.  The wells confirmed the presence of liquids in the Upper Montney, compared to dry gas in the Upper Montney at Glacier, as well as liquids in the first layer of the Middle Montney. This is consistent with Advantage’s interpretation based on geotechnical work undertaken in 2012 which indicated that each layer of the Montney stack at Valhalla could contain liquids.  In the three initial Valhalla evaluation wells, the C3+ liquid content of up to 45 bbls/mmcf is estimated based on a shallow cut liquids recovery process with a condensate quality that spans the condensate to oil window in the Upper and first Middle Montney layers.  Natural gas production rates of up to 3.5 mmcf/d are similar to the initial Middle Montney delineation wells at Glacier.  We are encouraged with these initial findings and to optimize the productivity of future wells, frac design changes and lowering the pipeline operating pressure in the Valhalla gathering system will be undertaken.  Additional geotechnical evaluation and delineation drilling is required to determine the extent and composition of the gas and liquids content in all four potential Montney development layers at Valhalla.

At Wembley, industry drilling activity has extended to the northeast of the Pipestone Montney property and is beginning to encroach within several kilometres of Advantage’s lands.  Similarly, at our Progress land block, several industry wells which indicate liquids rich production have been drilled on-trend.  Advantage has included plans to drill an initial evaluation well at Wembley and Progress within the next 18 to 24 months.  

Continuing Forward With Financial Discipline and Operational Flexibility

The exceptional quality of the Corporation’s Glacier Montney asset, an industry leading low cost structure and 100% ownership of our facilities demonstrated strong investment returns at low commodity prices in the last three years of our development. Advantage believes that continuing with a disciplined approach will generate long term attractive returns for our shareholders and provides upside potential as a more favourable natural gas price environment could evolve in North America as demand growth continues.  We look forward to reporting our continued progress and achievements as we develop our high quality Montney resource.

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