Advantage Announces Completion of Strategic Alternatives Review,
Disposition of Longview Common Shares, Three Year Development Plan
& Glacier Phase VII Budget Approval
CALGARY, ALBERTA--(Marketwired - Feb 4, 2014) - Advantage Oil
& Gas Ltd. (TSX:AAV)(NYSE:AAV)
Highlights
- Advantage Oil & Gas Ltd. ("Advantage" or the "Corporation")
announces that its strategic alternatives review process has been
completed and did not result in an acceptable proposal.
- Numerous corporate and operational achievements have positioned
the Corporation as a focused, industry leading, low cost Montney
natural gas producer.
- Advantage has significantly improved the balance sheet through
the announced sale today of its Longview Oil Corp. ("Longview")
common shares and previously announced divestments of non-core
conventional assets.
- Advantage's development plan is expected to drive 190% cash
flow per share growth and 100% production per share growth through
increasing production at Glacier to 245 mmcfe/d (40,800 boe/d) in
2017, while targeting an average total debt to cash flow of
approximately 1.5 times (1)(2).
- Achievements in our current Glacier Phase VI capital program
contributed to record production of 124 mmcfe/d entering January
2014, a record 13 mmcf/d(3) liquids rich Middle Montney well and
confirmed economic production potential from the Upper, Middle and
Lower Montney across Glacier providing clear visibility for future
growth.
|
1) |
An
updated February 2014 investor presentation has been posted to our
website which contains details on our three year development plan
and approved Glacier Phase VII budget. |
|
2) |
All
references to total debt are at the end of each development phase.
Cash flow is based on forward cash flow and may also be referred to
as funds from operations. |
|
3) |
All
references to well production test rates are final test rates
normalized to our average gas gathering system pressure of 3,000
kpa unless otherwise indicated. |
Strategic Alternatives Review
With the assistance of its external financial advisors,
FirstEnergy Capital Corp. and RBC Capital Markets (collectively,
the "Advisors"), Advantage conducted an extensive and thorough
strategic review of the alternatives available to it that included
a broad global marketing effort to solicit interest in a sale of
the Corporation or other transaction to maximize value for all
shareholders. During the process, the Corporation received
expressions of interest in respect of a variety of potential
transactions. None of these proposals were determined to be in the
best interests of the Corporation and do not adequately reflect the
intrinsic value of the Corporation based upon its assets,
operations and prospects for growth.
With the formal conclusion of the strategic alternatives review
process, the Board of Advantage unanimously supports the
Corporation's three year development plan for Glacier which targets
strong per share growth in production and cash flow. Based on an
average natural gas price of AECO Cdn $3.75/gj (strip pricing as of
January 28, 2014 for 2014 to 2017), recent well results and cost
performance, this plan can be completed within existing financial
facilities and at a targeted average total debt to cash flow of
approximately 1.5 times.
The Board will always consider potential alternatives that may
arise which are in the best interests of the Corporation and its
shareholders as the business continues to grow and evolve.
Advantage continued to achieve significant operational and
financial success during the strategic alternatives review period
and is now well positioned as a low cost, focused Montney operator
with a clear strategy to drive strong per share growth. Key
accomplishments which advanced this strategy include:
- strengthened its balance sheet by repaying debt and increasing
the size of the Corporation's borrowing base from $230 million to
$300 million;
- reduced its bank debt by 58% to $64 million and reduced total
debt by 31% to $199 million based on Advantage's estimated bank
debt and total debt at December 31, 2013 pro forma net proceeds
from the sale of Longview common shares
- improved well productivity in the Upper, Middle and Lower
Montney through modified drilling and completion techniques
resulting in robust well economics across Glacier;
- further established itself as an industry leading low cost
Montney natural gas producer by reducing Glacier operating costs
from approximately $3.00/mcfe to $0.28/mcfe, combined with an
attractive low royalty rate of approximately 5% for the life of a
Glacier well. G&A cash costs are expected to be reduced to
approximately $0.20/mcfe in the latter half of 2014 and less than
$0.20/mcfe in 2015;
- acquired an additional 43.25 net sections (27,680 net acres) of
Montney land holdings (100% working interest) in the Valhalla and
Wembley areas that will complement its core Glacier holding of 77.1
net (49,344 net acres) Montney sections and;
- secured natural gas hedges that will reduce volatility of
future cash flows to March 2016 in support of our Glacier
development plan.
Disposition of Longview Oil Corp. Shares
With the conclusion of Advantage's strategic review process and
in support of its multi-year growth plan, Advantage has entered
into an agreement to sell the 21.15 million Longview common shares
owned by Advantage at a price of CDN $4.45 per share for aggregate
gross proceeds of CDN $94.1 million. Closing of the offering is
anticipated to be on or about February 26, 2014, and all of the net
proceeds will be used to reduce Advantage's existing bank
indebtedness.
Termination of Technical Services Agreement
With the continued progression of both Advantage's and
Longview's business plans, the companies have terminated the
Technical Services Agreement ("TSA") originally entered in April
2011. The termination of the TSA and disposition of Advantage's
Longview common shares will reduce financial and operational
complexity and simplify our organizational structure.
The TSA previously provided that Advantage make available the
necessary personnel and technical services to manage Longview's
business. Appropriate staffing and systems are now in place to
enable both organizations to run independently following
termination of the TSA.
Advantage would like to acknowledge the commitment and
dedication of all staff and personnel that have contributed to the
requirements of the TSA.
Management and Board of Advantage Oil & Gas Ltd.
The management of Advantage will continue to be led by Andy Mah,
President and Chief Executive Officer and Director, Neil Bokenfohr,
Vice President Exploitation, and Craig Blackwood, Vice President
Finance and Chief Financial Officer. Mr. Blackwood has resigned as
Chief Financial Officer of Longview to focus entirely on Advantage.
This executive team has provided oversight and leadership since
development began at Glacier in 2008 and is committed to
successfully executing on future growth plans. Advantage will
retain a complement of 25 employees to support the ongoing
operations of the Corporation. Going forward, we anticipate that
cash general and administrative expenses will be reduced to
approximately $0.20/mcfe during the last half of 2014 and are
expected to be less than $0.20/mcfe in 2015.
In addition to Mr. Mah, the Board includes three independent
directors, Messrs. Ron McIntosh (who has been elected Interim
non-executive Chairman), Stephen Balog and Paul Haggis. Mr. Steven
Sharpe (former non-executive Chairman) has resigned from the Board
to attend to family matters which have arisen recently. We wish to
specifically thank Mr. Sharpe for his leadership, expertise and
dedication during the strategic alternatives process and for his
many contributions to Advantage during his tenure. The Board has
initiated a process to recruit additional Board members with a
particular focus on individuals with the skills that will further
assist in the development and growth of our world class Montney
assets.
Glacier Development Plan Expected to Double Production to 245
mmcfe/d in 2017, Glacier Phase VII Capital Budget Approved
As a result of continued operational success at Glacier since
2008 and the numerous milestones achieved during our current
Glacier Phase VI capital development program, the Board of
Directors of Advantage has endorsed a multi-year development plan
through to 2017. Additionally, the Board of Directors has approved
the Glacier Phase VII Capital and Operating Budget for the 12
months ending March 31, 2015.
Current Phase VI Glacier Capital Development Program
Achievements Set the Stage for Future Growth
Numerous successes during our current Phase VI capital program
have been pivotal in advancing our growth strategy at Glacier and
include the following key accomplishments and implications:
- Increasing Glacier production to a record 124 mmcfe/d entering
January 2014. Only eight new wells out of our 22 well Phase VI
program will be required to initially drive production to 135
mmcfe/d by Q2 2014 due to better than anticipated production from
wells with revised completion techniques.
- Improving well performance in the Upper, Middle and Lower
Montney such that the total combined final production test rate
from 12 Phase VI wells completed to date is 115 mmcf/d(1). The 22
wells in our current program will provide inventory to sustain
production through the balance of 2014.
- Drilling & completion of a record Middle Montney well at
100/12-2-76-12w6 which flowed at a final production test rate of 13
mmcf/d including 260 bbls/d of free condensate ("C5+")(2) (natural
gas and free condensate rate equivalent to 2,427 boe/d). The
estimated propane plus ("C3+") shallow cut liquids yield is 42
bbls/mmcf(3) for this well.
- Confirmation that a Middle Montney average well has a 30 day
average initial production rate ("IP30") of 4 mmcf/d and an average
C3+ liquids yield of 39 bbls/mmcf(4). The liquids content in east
Glacier have been observed to be higher than the field average with
C3+ liquid yields of up to 76 bbls/mmcf and C5+ liquid yields of 45
bbls/mmcf.
- Achievement of exceptional Upper Montney wells in east Glacier
with the last 4 Phase VI wells demonstrating an average final
production test rate of 15.7 mmcf/d including a record production
rate of 21 mmcf/d from our Upper Montney well at 100/5-20-76-12w6.
These results contribute to increasing the Upper Montney average
well IP30 to 6.9 mmcf/d which generates superior economic returns
at current gas prices(5).
- Achievement of successful Lower Montney wells, specifically in
east Glacier, which proves up new areas for reserves and production
growth. The average final production test rate from the last five
Lower Montney wells (three in east Glacier, two in west Glacier) in
our Phase VI capital program is 6.8 mmcf/d(6).
- Developed new completion and frac designs which have
significantly improved well results in the multiple Montney layers
at Glacier. Our experience has identified additional design changes
which will be implemented in the future.
|
|
|
Notes: |
(1) |
Based
on each of the 12 wells' final gas flow rate at the end of each
production test period (average 69 hrs) normalized to our average
gas gathering system pressure of 3,000 kpa. |
|
(2) |
Normalized to an average gas gathering system pressure of 3,000
kpa. Production tested for 72 hours at a final test rate of 11.6
mmcf/d at 9,410 kpa with 20 bbls/mmcf of free C5+. |
|
(3) |
Estimated based on a shallow cut liquids extraction process using
rich gas analysis and recovered free C5+ from the production
test. |
|
(4) |
Based
on the average of the estimated C3+ liquids yield for Advantage's
nine Middle Montney horizontal wells at Glacier from a shallow cut
liquids extraction process. |
|
(5) |
Based
on 14 Upper Montney completed wells with revised completion
techniques. |
|
(6) |
Based
on each of the five Lower Montney wells' final gas flow rate at the
end of each production test period (average 69 hrs) normalized to
our average gas gathering system pressure of 3,000 kpa. |
Glacier Development Plan & Phase VII Capital Budget
The Corporation's development plan is based on an average
natural gas price of AECO Cdn $3.75/gj (strip pricing as of January
28, 2014 for 2014 to 2017), recent well results and cost
performance and targets doubling production at Glacier to 245
mmcfe/d (40,800 boe/d) in 2017 including the extraction of natural
gas liquids. The development plan targets double digit production
growth each year at Glacier with anticipated production at the end
of each phase of 183 mmcfe/d in 2015, 205 mmcfe/d in 2016 and 245
mmcfe/d in 2017. Natural gas liquids production is expected to grow
from approximately 900 bbls/day in 2015 to 1,500 bbls/d in 2017.
Total capital expenditures during each 12 month development period
are estimated to be between $210 million to $270 million with the
drilling of approximately 33 wells. Significant growth potential
exists beyond 2017 supported by the quality and size of our Montney
resource and availability of future pipeline transportation
capacity.
Our Phase VII Glacier capital budget targets to increase current
production by 48% to approximately 183 mmcfe/d in the second
quarter of 2015 including approximately 900 bbls/d of natural gas
liquids from an initial 25 mmcf/d development in the Middle
Montney. The wells in this program are designed to include an
average of 17 fracs per well with an average expected cost of $6.1
million per well. Some of the wells will be drilled on six well
pads to improve cost efficiency. Facility expenditures include
additional compression, acid gas compression, and power generation.
A shallow cut liquids extraction process capable of accommodating
future liquids rich gas production growth will be installed at our
current Glacier Gas Plant.
The following table outlines our Glacier Phase VII Budget and
Guidance:
Glacier Phase VII Approved Budget & Guidance |
12 Months ending March 31, 2015 |
|
|
Average Production (mmcfe/d) |
134
to 139 |
End of Phase Production Rate Q2 2015 (mmcfe/d) |
183 |
Royalty Rate (%) |
5%
to 6% |
Operating Costs ($/mcfe) |
$0.25 to $0.30 |
Capital Expenditures ($ million) |
$260 to $270 |
Wells Drilled (net) Dry gas |
20 |
|
|
|
|
|
Liquids rich gas |
13 |
|
|
|
|
|
Total |
33 |
Our Capital Budget and multi-year development plan will be
funded through cash flow, available credit facilities and cash
generated from Advantage's investments including the announced sale
of Longview common shares. Based on an average natural gas price of
AECO Cdn $3.75/gj (strip pricing as of January 28, 2014 for 2014 to
2017), our development program is targeted to deliver 190% cash
flow per share and 100% production per share growth. Total debt to
cash flow is estimated to average approximately 1.5 times during
the 2014 to 2017 period.
By 2017, we estimate that a total of 250 wells will be drilled
on our Glacier land block since development began in 2008. The
remaining inventory of wells after attaining targeted production of
245 mmcfe/d in 2017 is estimated to be 1,280 wells consisting of
440 Upper Montney and Lower Montney wells and 840 Middle Montney
wells. This large inventory of undrilled locations provides a
strong platform to drive additional growth.
Strong Hedging Position Supports Development Plan
Advantage has entered into a number of natural gas hedges in
support of our Glacier development plan. Our natural gas hedges
will reduce the volatility of future cash flows through to March
2016. Our hedging positions are summarized in the following
table:
|
|
Forecast Production |
|
|
Average |
Hedged |
Average Price |
Period |
Production Hedged |
(net of royalties) |
AECO - $Cdn. |
April 2014 to March 2015 |
66.8 mmcf/d |
52% |
$3.83/mcf |
April 2015 to March 2016 |
52.1 mmcf/d |
33% |
$3.85/mcf |
Newly Acquired Montney Lands
In September 2013, Advantage acquired an additional 43.25
sections (27,680 net acres) of 100% working interest lands from the
Alberta Crown. These lands were acquired for natural gas liquids
potential in the Middle Montney and recent results in the Middle
Montney at Glacier have further supported the liquids rich
trend.
The Montney varies from an average formation thickness of 290
meters at Glacier to 230 meters in our new northern Valhalla land
block and to a thickness of 185 meters in our southern two Wembley
land blocks. A comparison of log responses between Glacier and the
new lands illustrates similar porosity characteristics.
This newly acquired Montney acreage could provide another
significant growth platform for Advantage pending future
delineation success.
Advisory
The information in this press release contains certain
forward-looking statements, including within the meaning of the
United States Private Securities Litigation Reform Act of 1995.
These statements relate to future events or our future intentions
or performance. All statements other than statements of historical
fact may be forward-looking statements. Forward-looking statements
are often, but not always, identified by the use of words such as
"seek", "anticipate", "plan", "continue", "estimate",
"demonstrate", "illustrate", "expect", "may", "will", "project",
"predict", "potential", "possible", "targeting", "intend", "could",
"might", "should", "believe", "confidence", "would" and similar
expressions and include statements relating to, but not limited to,
the anticipated effect of the Corporation's growth strategy and
development plan on production and cash flows; the Board's plans to
continue to consider potential strategic alternatives for the
Corporation; the Corporation's intent to continue to assess and
enhance the expertise and skills required at all levels of the
organization as it grows and develops its Montney asset;
anticipated production levels by Q2 of 2014; the Corporation's
expectations that the wells in its current drilling program will
provide inventory to sustain production through the balance of
2014; our belief that the intrinsic value of Glacier and its newly
acquired Montney lands will be reflected in shareholder value
growth as we execute our development plan; details of management's
future Glacier development plans and the budget with respect
thereto; the Corporation's guidance in respect of anticipated
production levels, royalty rates, operating costs, capital
expenditures, and number and types of wells drilled for the twelve
months ended March 31, 2015; the expected sources of funds to fund
the Corporation's budget and development plans; the Corporation's
expectations that its natural gas hedges will reduce the volatility
of future cash flows through to March 2016; expectations of
production levels (including the commodities expected), capital
spending details, number of wells drilled, funds from operations,
debt levels, debt to cash flow ratio, drilling costs per well,
facility costs, commodity price assumptions and netbacks through to
March 31, 2017; anticipated reductions in cash general and
administrative expenses during the last half of 2014 and in 2015;
expected continued improvements in cost efficiencies of drilling
and completion plans; anticipated use of proceeds of the sale of
the Longview common shares; anticipated closing date for the sale
of the Longview common shares; anticipated debt levels following
the sale of the Longview common shares; expected benefits of the
termination of the TSA; expectations as to the composition of
management and employees of Advantage following the termination of
the TSA; anticipated effect of refinement of drilling and
completion techniques; development of new technology and our
experience at Glacier on well performance; the Corporation's
anticipated drilling and completion plans; the Corporation's
development plan to increase production at Glacier and the
anticipated production levels and timing thereof; anticipated
production and forecast production levels under the Corporation's
Phase VI capital development program; expectations of facilities
expenditures and details thereof; and plans to proceed with the
installation of a liquids extraction process and a Middle Montney
well development program. In addition, statements relating to
"reserves" or "resources" are deemed to be forward-looking
statements, as they involve the implied assessment, based on
certain estimates and assumptions that the resources and reserves
described can be profitably produced in the future. Advantage's
actual decisions, activities, results, performance or achievement
could differ materially from those expressed in, or implied by,
such forward-looking statements and accordingly, no assurances can
be given that any of the events anticipated by the forward-looking
statements will transpire or occur or, if any of them do, what
benefits that Advantage will derive from them. The forward-looking
information presented herein, including the future oriented
financial information relating to the Corporation's budget and
development plans, has been included herein to provide an outlook
of the Corporation's activities and results and to give an
indication of management's future plans. The actual results of
operations of the Corporation and the resulting financial results
will likely vary from the amounts set forth herein, and such
variation may be material, as such the forward-looking information
should not be relied for other purposes.
These statements involve substantial known and unknown risks
and uncertainties, certain of which are beyond Advantage's control,
including, but not limited to: failure to close the secondary
offering of Longview common shares in the time expected or at all;
failure to achieve the expected benefits of the termination of the
TSA; changes in general economic, market and business conditions;
industry conditions; actions by governmental or regulatory
authorities including increasing taxes and changes in investment or
other regulations; changes in tax laws, royalty regimes and
incentive programs relating to the oil and gas industry; the effect
of acquisitions; Advantage's success at acquisition, exploitation
and development of reserves; unexpected drilling results, changes
in commodity prices, currency exchange rates, capital expenditures,
reserves or reserves estimates and debt service requirements; the
occurrence of unexpected events involved in the exploration for,
and the operation and development of, oil and gas properties;
hazards such as fire, explosion, blowouts, cratering, and spills,
each of which could result in substantial damage to wells,
production facilities, other property and the environment or in
personal injury; changes or fluctuations in production levels;
delays in anticipated timing of drilling and completion of wells;
individual well productivity; competition from other producers; the
lack of availability of qualified personnel or management; credit
risk; changes in laws and regulations including the adoption of new
environmental laws and regulations and changes in how they are
interpreted and enforced; our ability to comply with current and
future environmental or other laws; stock market volatility and
market valuations; liabilities inherent in oil and natural gas
operations; uncertainties associated with estimating oil and
natural gas reserves; competition for, among other things, capital,
acquisitions of reserves, undeveloped lands and skilled personnel;
incorrect assessments of the value of acquisitions; geological,
technical, drilling and processing problems and other difficulties
in producing petroleum reserves; ability to obtain required
approvals of regulatory authorities; and ability to access
sufficient capital from internal and external sources. In addition,
although the Corporation intends to use the net proceeds of the
secondary offering as described herein, there may be circumstances
that are not known at this time where a reallocation of the net
proceeds may be advisable for business reasons that management
believes are in the Corporation's best interests. Many of these
risks and uncertainties and additional risk factors are described
in the Corporation's Annual Information Form which is available at
www.sedar.com and www.advantageog.com. Readers are also referred to
risk factors described in other documents Advantage files with
Canadian securities authorities.
With respect to forward-looking statements contained in this
press release, Advantage has made assumptions regarding, but not
limited to: the secondary offering of Longview common shares will
close in the time and on the terms currently expected; the
anticipated use of proceeds from the sale of the Longview common
shares; conditions in general economic and financial markets;
effects of regulation by governmental agencies; current commodity
prices and royalty regimes; future exchange rates; royalty rates;
future operating costs; availability of skilled labor; availability
of drilling and related equipment; timing and amount of capital
expenditures; the impact of increasing competition; the price of
crude oil and natural gas; that the Corporation will have
sufficient cash flow, debt or equity sources or other financial
resources required to fund its capital and operating expenditures
and requirements as needed; that the Corporation's conduct and
results of operations will be consistent with its expectations;
that the Corporation will have the ability to develop the
Corporation's crude oil and natural gas properties in the manner
currently contemplated; current or, where applicable, proposed
assumed industry conditions, laws and regulations will continue in
effect or as anticipated; and the estimates of the Corporation's
production and reserves volumes and the assumptions related thereto
(including commodity prices and development costs) are accurate in
all material respects.
These forward-looking statements are made as of the date of
this press release and Advantage disclaims any intent or obligation
to update publicly any forward-looking statements, whether as a
result of new information, future events or results or otherwise,
other than as required by applicable securities laws.
References in this press release to initial production test
rates, initial "productivity", initial "flow" rates, final gas flow
rates, average gas flow rates and average type curves are useful in
confirming the presence of hydrocarbons, however such rates are not
determinative of the rates at which such wells will commence
production and decline thereafter and are not indicative of long
term performance or of ultimate recovery. While encouraging,
readers are cautioned not to place reliance on such rates in
calculating the aggregate production for Advantage. A pressure
transient analysis or well-test interpretation has not been carried
out in respect of all wells. Accordingly, the Corporation cautions
that the test results should be considered to be
preliminary.
Barrels of oil equivalent (boe) and thousand cubic feet of
natural gas equivalent (mcfe) may be misleading, particularly if
used in isolation. Boe and mcfe conversion ratios have been
calculated using a conversion rate of six thousand cubic feet of
natural gas equivalent to one barrel of oil. A boe and mcfe
conversion ratio of 6 mcf:1 bbl is based on an energy equivalency
conversion method primarily applicable at the burner tip and does
not represent a value equivalency at the wellhead. Given
that the value ratio based on the current price of crude oil as
compared to natural gas is significantly different from the energy
equivalency of 6:1, utilizing a conversion on a 6:1 basis may be
misleading as an indication of value.
The following abbreviations used in this press release have
the meanings set forth below:
mcf |
thousand cubic feet |
mcfe |
thousand cubic feet of natural gas equivalent, using the ratio
of 6 mcf of natural gas to 1 bbl of oil |
mmcfe |
million cubic feet of natural gas equivalent, using the ratio
of 6 mcf of natural gas to 1 bbl of oil |
mmcf |
million cubic feet |
mmcf/d |
million cubic feet per day |
bbls |
barrels |
bbls/d |
barrels per day |
boe/d |
barrels of oil equivalent per day |
kpa |
kilopascal |
The Corporation discloses several financial measures that do
not have any standardized meaning prescribed under International
Financial Reporting Standards ("IFRS"). These financial measures
include funds from operations, operating netbacks and cash
netbacks. Management believes that these financial measures are
useful supplemental information to analyze operating performance
and provide an indication of the results generated by the
Corporation's principal business activities. Investors should be
cautioned that these measures should not be construed as an
alternative to net income, cash provided by operating activities or
other measures of financial performance as determined in accordance
with IFRS. Advantage's method of calculating these measures may
differ from other companies, and accordingly, they may not be
comparable to similar measures used by other companies. Please see
the Corporation's most recent Management's Discussion and Analysis,
which is available at www.sedar.com and www.advantageog.com for
additional information about these financial measures, including a
reconciliation of funds from operations to cash provided by
operating activities.
Advantage Oil & Gas Ltd.Investor RelationsToll free:
1-866-393-0393Advantage Oil & Gas Ltd.300, 440 - 2nd Avenue
SWCalgary, Alberta, T2P 5E9(403) 718-8000(403)
718-8332ir@advantageog.comwww.advantageog.com
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