(TSX: AAV, NYSE: AAV) CALGARY, Nov. 12 /PRNewswire-FirstCall/ --
Advantage Oil & Gas Ltd. ("Advantage" or the "Corporation") is
pleased to announce its unaudited operating and financial results
for the third quarter ended September 30, 2009. Financial and
Operating Highlights Three months ended Nine months ended September
30 September 30 2009 2008 2009 2008
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Financial ($000, except as otherwise indicated) Revenue before
royalties(1) $ 93,101 $ 195,384 $ 330,710 $ 592,757 per share(2) $
0.58 $ 1.39 $ 2.21 $ 4.27 per boe $ 42.82 $ 65.51 $ 42.66 $ 66.52
Funds from operations $ 42,104 $ 93,345 $ 149,285 $ 291,717 per
share(2) $ 0.26 $ 0.67 $ 1.00 $ 2.10 per boe $ 19.38 $ 31.31 $
19.27 $ 32.73 Expenditures on property and equipment $ 42,658 $
67,744 $ 111,020 $ 156,279 Working capital deficit(3) $ 109,581 $
72,928 $ 109,581 $ 72,928 Bank indebtedness $ 330,800 $ 540,078 $
330,800 $ 540,078 Convertible debentures (face value) $ 132,221 $
219,195 $ 132,221 $ 219,195 Shares outstanding at end of period
(000) 162,476 141,333 162,476 141,333 Basic weighted average shares
(000) 161,182 140,192 149,916 138,806 Operating Daily Production
Natural gas (mcf/d) 91,200 122,627 111,288 123,611 Crude oil and
NGLs (bbls/d) 8,431 11,980 9,853 11,920 Total boe/d @ 6:1 23,631
32,418 28,401 32,522 Average prices (including hedging) Natural gas
($/mcf) $ 6.10 $ 7.55 $ 6.07 $ 8.32 Crude oil and NGLs ($/bbl) $
54.02 $ 100.02 $ 54.38 $ 95.24 (1) includes realized derivative
gains and losses (2) based on basic weighted average shares
outstanding (3) working capital deficit includes accounts
receivable, prepaid expenses and deposits, accounts payable and
accrued liabilities, distributions payable, and the current portion
of capital lease obligations and convertible debentures MESSAGE TO
SHAREHOLDERS Advantage reduced its debt obligations by 44% and
strengthened its balance sheet through the completion of an equity
financing and the closing of two asset dispositions. Success
continued at our Montney natural gas resource play at Glacier,
Alberta with strong well results, capital cost reductions and
approval of a new 50 mmcf/d gas plant that is now under
construction. Financial Funds from Operations Strengthened through
Hedging Gains, Lower Royalty Rates and Continued Reductions in
Operating Costs - Funds from operations of $42.1 million for the
third quarter of 2009 was supported by strong hedging gains, lower
royalty rates and lower operating costs. Funds from operations
decreased 55% from the same period in 2008 due to the sale of
approximately 8,100 boe/d during the third quarter and
significantly lower commodity prices compared to the high oil and
natural gas prices realized during the third quarter of 2008. -
Advantage's third quarter capital program of $42.7 million was
substantially financed from our funds from operations. In excess of
80% of the third quarter capital program was invested at Glacier to
drill and complete wells and pre-order long lead equipment for our
new gas plant. - For the three months ended September 30, 2009, our
hedging program contributed a net gain of $24.6 million to funds
from operations which helped to partially mitigate the reduction in
commodity prices. - Average daily production for the three months
ended September 30, 2009 decreased 24% to 23,631 boe/d (64% natural
gas) compared to the second quarter of 2009. Production decreased
27% when compared to the same period of 2008 due primarily to the
sale of approximately 8,100 boe/d during the quarter. Natural gas
production at Lookout Butte (1,100 boe/d) remained shut-in through
the entire third quarter with additional curtailments at smaller
operated and non-operated properties (300 boe/d) due to low
commodity prices. We anticipate Lookout Butte and the smaller
properties to resume production during the latter portion of the
fourth quarter with improved natural gas prices. - Operating costs
for the three months ended September 30, 2009 was $11.55/boe which
is a decrease of 16% when compared to the same period in 2008 and a
decrease of 7% from the second quarter of 2009. Cost reductions are
a result of optimization efforts, a lower service and supply cost
environment and the sale of higher cost properties. - Royalties
during the third quarter of 2009 decreased 7% to a royalty rate of
12.8% as compared to the same period of 2008. The decrease is
driven by significantly lower commodity prices and the impact of
Alberta's royalty incentive programs. Continued Success at Glacier
Glacier - Phase I Update - Phase I of the Glacier development plan
was completed during the second quarter of 2009 with a total ten
horizontal wells (8 Upper Montney and 2 Lower Montney) placed
on-production. Advantage's Montney wells demonstrated 30 day
initial production rates of 2 mmcf/d to over 5 mmcf/d which meets
our expectations and is similar to the majority of horizontal well
results through the Swan, Tupper, and Pouce Coupe South Montney
fairway. Additional delineation drilling and more production
history will be required to better define the longer term
production trend on our extensive land base, however we are pleased
with the preliminary results and more recent completion tests which
support long term development plans for Glacier. As more wells are
drilled through our land base, we expect 'sweet spots' in the
Montney to be further delineated and additional resource potential
in other formations to be evaluated which could add more
opportunity to the already significant drilling inventory. -
Drilling in the Montney is economic at $4.00 to $4.50 Cdn AECO per
mcf and is considered one of the top tier natural gas resource
plays in North America. The economics are further enhanced by
Advantage's strong hedging position and the Alberta royalty and
drilling incentive programs. Glacier - Phase II Development Program
- Phase II began in July 2009 and involves the drilling of new
wells and facilities expansions to grow production capacity to a
target of 50 mmcf/d during the second quarter of 2010. Production
at Glacier is anticipated to increase during the first quarter of
2010 and peak during the second quarter of 2010. - All necessary
regulatory approvals have been received for Advantage's new 50
mmcf/d gas plant and construction has commenced. The completion
date for the new gas plant, additional compression and expansion of
the existing gas gathering system is targeted for the second
quarter of 2010. - From July 2009 to November 12, 2009, a total of
8 gross (8 net) horizontal wells have been drilled by Advantage as
operator and 7 gross (2.5 net) horizontal wells have been drilled
on joint interest lands through the deployment of up to four
drilling rigs. Our Phase II development plan, which continues to
June 2010, includes a total of 16 gross (16.0 net) horizontal
wells, 1 gross (1 net) vertical well and 16 gross (6.1 net)
horizontal wells on joint interest lands. - To date, a total of 6
of the 15 gross horizontal wells drilled have been completed and
tested at an average test rate of 4.6 mmcf/d. One of the horizontal
wells on an Advantage three well horizontal pad demonstrated the
highest completion test rate to date at 9 mmcf/d with a flowing
pressure of 11 mpa (1,595 psig) after a 13 stage frac was
completed. The three well horizontal pad had a combined test rate
of over 18 mmcf/d at an average flowing pressure of 6.5 mpa (940
psig). - Advantage employs a disciplined and continuous improvement
approach to optimize costs in order to improve project economics.
Advantage's strategy to capitalize on lower industry costs combined
with improved technical knowledge has reduced drilling costs per
meter by 43% and per frac costs by 57% since 2008. For example, we
continue to improve our understanding of the geology and
variability within the Montney fairway by employing techniques such
as micro-seismic and production logging to progress our learning
curve. - Improvements in wellsite design from knowledge gained
during the commissioning of our initial ten producing horizontal
wells could lead to cost reductions by as much as 35% per well. The
design changes will be implemented during our Phase II development
program and could lead to significant long term cost savings over
the life of the Glacier project. - New wells drilled and placed on
production between March 31, 2009 and March 31, 2011 will qualify
for the Alberta royalty incentive program which includes a 5%
royalty rate for the first year or 0.5 bcf of production and an
additional drilling credit of up to $200 per meter of drilled depth
subject to a maximum of 40% of Alberta crown royalties paid by
Advantage over a calendar year. The majority of wells drilled
during Phase II and Phase III will be directed primarily at the
Upper Montney to capture the benefits of the royalty and drilling
credit incentive program which is currently set to expire on March
31, 2011. Increased drilling in the Lower Montney can be deferred
as the depth of the Lower Montney formation qualifies for the
previously announced Alberta deep drilling incentive program which
continues after March 31, 2011 and could result in approximately
$3.2 million in incentive credits per horizontal well. Improved
Financial Flexibility - In July 2009, we completed our conversion
to a growth oriented corporation and significantly improved our
balance sheet by closing two asset dispositions and completing an
equity financing which generated gross proceeds of $354.6 million.
- Total outstanding debt obligations have been reduced by 44% from
$829 million at June 30, 2009 to $462 million at September 30,
2009. - Advantage's bank debt at September 30, 2009 is $330 million
versus our current credit facility of $525 million resulting in an
unutilized capacity of $195 million. A total of $132 million of
convertible debentures remain outstanding of which $69 will mature
mid-year 2010 and $63 at the end of 2011. - Advantage's tax pool
position is estimated to be $1.5 billion net of dispositions and
provides a strong position to shield future cash flows from
corporate tax. Strong Hedging Program to Support Future Cash Flow -
Advantage's hedging program includes 82% of our net natural gas
production hedged for the fourth quarter of 2009 at an average
price of $8.17 Cdn AECO per mcf and 58% hedged for 2010 at an
average price of $7.46 Cdn AECO per mcf. Crude oil hedges for the
fourth quarter of 2009 include 53% of our net crude oil production
hedged at an average floor price of $62.40 Cdn per bbl and 31%
hedged for 2010 at an average price of $67.83 Cdn per bbl. Details
on our hedging program are available on our website. - Our strategy
will be to continue to employ a multi-year hedging program to
reduce the volatility in cash flow in support of capital
requirements. Looking Forward - On July 8, 2009, Advantage
announced an updated corporate capital budget for the 12 month
period ending June 2010. The corporate capital budget has been set
at $207 million (approximately $110 million during H2 2009) and
will continue to focus on our Montney natural gas resource play at
Glacier, Alberta. Phase II of the development plan at Glacier will
constitute approximately 80% of our corporate capital budget. -
Funds from operations for the 12 month period ending June 30, 2010
based on the mid-range of guidance is estimated at $196 million
using an average NYMEX natural gas price of $4.52 US/mmbtu (AECO
$4.42 Cdn/mcf), WTI oil price of $77.90 US/bbl and an $0.93 Cdn/$US
exchange rate. Advantage's current hedging positions have been
included in the funds from operations estimate. - As a result of
the continued shut-in of natural gas production at Lookout Butte
through the third quarter and the shut-in of several smaller
operated and non-operated properties due to lower natural gas
prices, we anticipate that production will trend towards the lower
end of the H2 2009 production guidance that was provided
(approximately 22,700 boe/d). The natural gas production shut-ins
from these properties have a smaller impact on funds from
operations due to the lower netbacks as they are not covered by our
hedge positions. Plans are to resume production from these
properties as natural gas prices improve through the fourth
quarter. We also anticipate that royalty rates will trend lower to
approximately 13% with operating costs between $11.50 and
$12.00/boe through H2 2009. - A full year 2010 capital budget and
guidance will be provided before year-end 2009. Advantage is well
positioned to pursue future development plans at Glacier with our
strong balance sheet, solid hedging position and conversion to a
growth oriented corporation. With a stable production base and an
inventory of over 500 drilling locations at Glacier, management
will continue to employ a disciplined approach to create long term
growth in shareholder value. MANAGEMENT'S DISCUSSION & ANALYSIS
The following Management's Discussion and Analysis ("MD&A"),
dated as of November 12, 2009, provides a detailed explanation of
the financial and operating results of Advantage Oil & Gas Ltd.
("Advantage", the "Corporation", "us", "we" or "our") for the three
and nine months ended September 30, 2009 and should be read in
conjunction with the consolidated financial statements contained
within this interim report and the audited financial statements and
MD&A of the predecessor legal entity, Advantage Energy Income
Fund (the "Fund") for the year ended December 31, 2008. The
consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles ("GAAP") and
all references are to Canadian dollars unless otherwise indicated.
All per barrel of oil equivalent ("boe") amounts are stated at a
conversion rate of six thousand cubic feet of natural gas being
equal to one barrel of oil or liquids. Forward-Looking Information
This MD&A contains certain forward-looking statements, which
are based on our current internal expectations, estimates,
projections, assumptions and beliefs. These statements relate to
future events or our future 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", "expect", "may", "will", "project", "predict",
"potential", "targeting", "intend", "could", "might", "should",
"believe", "would" and similar or related expressions. These
statements are not guarantees of future performance. In particular,
forward-looking statements included in this MD&A include, but
are not limited to, statements with respect to average production
and projected exit rates; areas of operations; spending and capital
budgets; availability of funds for our capital program; the size
of, and future net revenues from, reserves; the focus of capital
expenditures; expectations regarding the ability to raise capital
and to continually add to reserves through acquisitions and
development; projections of market prices and costs; the
performance characteristics of our properties; our future operating
and financial results; capital expenditure programs; supply and
demand for oil and natural gas; average royalty rates; and amount
of general and administrative expenses. 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. These
forward-looking statements involve substantial known and unknown
risks and uncertainties, many of which are beyond our control,
including the effect of acquisitions; changes in general economic,
market and business conditions; changes or fluctuations in
production levels; unexpected drilling results, changes in
commodity prices, currency exchange rates, capital expenditures,
reserves or reserves estimates and debt service requirements;
changes to legislation and regulations and how they are interpreted
and enforced, changes to investment eligibility or investment
criteria; our ability to comply with current and future
environmental or other laws; our success at acquisition,
exploitation and development of reserves; actions by governmental
or regulatory authorities including increasing taxes, changes in
investment or other regulations; the occurrence of unexpected
events involved in the exploration for, and the operation and
development of, oil and gas properties; competition from other
producers; the lack of availability of qualified personnel or
management; changes in tax laws, royalty regimes and incentive
programs relating to the oil and gas industry and income trusts;
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; stock market volatility; and ability to access
sufficient capital from internal and external sources. Many of
these risks and uncertainties are described in the Fund's Annual
Information Form which is available at http://www.sedar.com/ and
http://www.advantageog.com/. Readers are also referred to risk
factors described in other documents Advantage and the Fund files
with Canadian securities authorities. With respect to
forward-looking statements contained in this MD&A, Advantage
has made assumptions regarding: current commodity prices and
royalty regimes; availability of skilled labour; timing and amount
of capital expenditures; future exchange rates; the price of oil
and natural gas; the impact of increasing competition; conditions
in general economic and financial markets; availability of drilling
and related equipment; effects of regulation by governmental
agencies; royalty rates and future operating costs. Management has
included the above summary of assumptions and risks related to
forward-looking information provided in this MD&A in order to
provide shareholders with a more complete perspective on
Advantage's future operations and such information may not be
appropriate for other purposes. Advantage's actual results,
performance or achievement could differ materially from those
expressed in, or implied by, these forward-looking statements and,
accordingly, no assurance can be given that any of the events
anticipated by the forward-looking statements will transpire or
occur, or if any of them do so, what benefits that Advantage will
derive there from. Readers are cautioned that the foregoing lists
of factors are not exhaustive. These forward-looking statements are
made as of the date of this MD&A 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. Corporate Conversion and Asset Dispositions On
March 18, 2009, we announced that our Board of Directors had
approved conversion to a growth oriented corporation and a
strategic asset disposition program to increase financial
flexibility. On July 9, 2009, Unitholders of the Fund voted 91.64%
in favour of the corporate conversion at the annual general and
special meeting of the Fund, with subsequent approval by the
courts. The conversion will enable Advantage to pursue a business
plan that is focused on the development and growth of the Montney
natural gas resource play at Glacier, Alberta. The Corporation
retained a financial advisor to assist with the disposition of
light oil and natural gas producing properties located in Northeast
British Columbia, West Central Alberta and Northern Alberta.
Proposals were received and evaluated by Advantage with two
purchase and sale agreements signed for net proceeds of $243.6
million, subject to further adjustments, and representing
production of approximately 8,100 boe/d. Both of these sales
successfully closed in July 2009 with the net proceeds used to
reduce outstanding debt. Advantage may utilize its credit
facilities in the future to redeem certain of the Corporation's
convertible debentures as they mature and to help finance its
future capital program. Given these business developments,
historical operating and financial performance will not be
indicative of future performance. Non-GAAP Measures The Corporation
discloses several financial measures in the MD&A that do not
have any standardized meaning prescribed under GAAP. These
financial measures include funds from operations, funds from
operations per share and cash netbacks. Management believes that
these financial measures are useful supplemental information to
analyze operating performance, leverage and provide an indication
of the results generated by the Corporation's principal business
activities prior to the consideration of how those activities are
financed or how the results are taxed. 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 GAAP. 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. Funds from
operations, as presented, is based on cash provided by operating
activities before expenditures on asset retirement and changes in
non-cash working capital. Funds from operations per share is based
on the number of shares outstanding during each applicable period.
Cash netbacks are dependent on the determination of funds from
operations and include the primary cash revenues and expenses on a
per boe basis that comprise funds from operations. Funds from
operations reconciled to cash provided by operating activities is
as follows: Three months ended Nine months ended September 30
September 30 2009 2008 % change 2009 2008 % change
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Cash provided by operating activities $ 50,671 $115,521 (56)%
$131,506 $290,996 (55)% Expenditures on asset retirement 868 344
152% 4,490 6,291 (29)% Changes in non-cash working capital (9,435)
(22,520) (58)% 13,289 (5,570) (339)%
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Funds from operations $ 42,104 $ 93,345 (55)% $149,285 $291,717
(49)%
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Overview Three months ended Nine months ended September 30
September 30 2009 2008 % change 2009 2008 % change
-------------------------------------------------------------------------
Cash provided by operating activities ($000) $ 50,671 $115,521
(56)% $131,506 $290,996 (55)% Funds from operations ($000) $ 42,104
$ 93,345 (55)% $149,285 $291,717 (49)% per share(1) $ 0.26 $ 0.67
(61)% $ 1.00 $ 2.10 (52)% (1) Based on basic weighted average
shares outstanding. Cash provided by operating activities and funds
from operations have decreased significantly for the three and nine
months ended September 30, 2009 as compared to the same periods of
2008 due to considerably lower revenue. Lower revenue is the result
of depressed commodity prices, partially offset by substantial
gains realized on strong derivative contracts, and lower production
from the successful asset dispositions that closed in July 2009.
The current global recession has resulted in drastic reductions in
commodity prices from lower demand and excess supply. This
challenging environment has continued into the fourth quarter of
2009 and we expect to see weak commodity prices for the near-term.
However, it is also important to recognize that although commodity
prices were weaker during the third quarter of 2009, our cash
netback actually increased 6% to $19.38 per boe from $18.26 per boe
in the second quarter of 2009. This improvement occurred as we
realized additional derivative gains as a higher proportion of our
production was hedged for the three months ended September 30,
2009. Additionally, we realized decreases in both royalties and
operating costs as compared to the second quarter of 2009. We
continue to experience lower operating costs per boe as an
aggressive optimization program through 2008 and into 2009 is
continuing to demonstrate positive benefits and we will seek
further opportunities to improve our operating cost structure. The
primary factor that causes significant variability of the
Corporation's cash provided by operating activities, funds from
operations, and net income is commodity prices. Refer to the
section "Commodity Prices and Marketing" for a more detailed
discussion of commodity prices and our price risk management.
Revenue Three months ended Nine months ended September 30 September
30 ($000) 2009 2008 % change 2009 2008 % change
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Natural gas excluding hedging $ 24,266 $ 97,618 (75)% $121,608
$303,299 (60)% Realized hedging gains (losses) 26,935 (12,480)
(316)% 62,837 (21,631) (390)%
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Natural gas including hedging $ 51,201 $ 85,138 (40)% $184,445
$281,668 (35)%
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Crude oil and NGLs excluding hedging $ 44,204 $119,000 (63)%
$138,887 $330,370 (58)% Realized hedging gains (losses) (2,304)
(8,754) (74)% 7,378 (19,281) (138)%
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Crude oil and NGLs including hedging $ 41,900 $110,246 (62)%
$146,265 $311,089 (53)%
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Total revenue(1) $ 93,101 $195,384 (52)% $330,710 $592,757 (44)%
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(1) Total revenue excludes unrealized derivative gains and losses.
Natural gas, crude oil and NGLs revenues, excluding hedging,
decreased significantly for the three and nine months ended
September 30, 2009, as compared to 2008, due to lower commodity
prices and production. Reduced production is primarily due to our
successful asset dispositions that closed in July 2009 for net
proceeds of $243.6 million, subject to further adjustments,
representing production of approximately 8,100 boe/d. Lower
commodity prices have continued from the ongoing global recession
that has reduced demand. For the three month period ended September
30, 2009, realized natural gas prices, excluding hedging, decreased
a substantial 67% while realized crude oil and NGL prices,
excluding hedging, decreased 47%. For the nine month period ended
September 30, 2009, realized natural gas prices, excluding hedging,
decreased 55% while realized crude oil and NGL prices, excluding
hedging, decreased 49%. However, as a result of our commodity price
risk management program, we recognized natural gas and crude oil
hedging net gains of $24.6 million and $70.2 million for the three
and nine months ended September 30, 2009, respectively. The
Corporation enters derivative contracts whereby realized hedging
gains and losses partially offset commodity price fluctuations,
which can positively or negatively impact revenues. Production
Three months ended Nine months ended September 30 September 30 2009
2008 % change 2009 2008 % change
-------------------------------------------------------------------------
Natural gas (mcf/d) 91,200 122,627 (26)% 111,288 123,611 (10)%
Crude oil (bbls/d) 6,289 9,566 (34)% 7,643 9,576 (20)% NGLs
(bbls/d) 2,142 2,414 (11)% 2,210 2,344 (6)%
-------------------------------------------------------------------------
Total (boe/d) 23,631 32,418 (27)% 28,401 32,522 (13)%
-------------------------------------------------------------------------
Natural gas (%) 64% 63% 65% 63% Crude oil (%) 27% 30% 27% 29% NGLs
(%) 9% 7% 8% 8% Average daily production for the third quarter of
2009 was 24% lower than the second quarter of 2009 and 27% lower
than the same period of the prior year due to the successfully
completed asset dispositions that closed in July 2009 for net
proceeds of $243.6 million, subject to further adjustments. Net
proceeds were used to reduce outstanding bank indebtedness. The
disposed properties represented approximately 8,100 boe/d of
production. Production of 1,100 boe/d at our Lookout Butte property
in Southern Alberta has remained shut-in since August 2008 due to
an extended third party outage at the Waterton gas plant where a
significant modification project was underway. The modification
project is substantially completed and our production will be
brought back on production as commodity prices improve.
Additionally, we experienced curtailments during the current
quarter of approximately 300 boe/d at smaller operated and
non-operated properties due to continued poor natural gas prices.
It is anticipated that these smaller properties will also resume
production as natural gas prices increase during the later portion
of the fourth quarter. Commodity Prices and Marketing Natural Gas
Three months ended Nine months ended September 30 September 30
($/mcf) 2009 2008 % change 2009 2008 % change
-------------------------------------------------------------------------
Realized natural gas prices Excluding hedging $ 2.89 $ 8.65 (67)% $
4.00 $ 8.95 (55)% Including hedging $ 6.10 $ 7.55 (19)% $ 6.07 $
8.32 (27)% AECO monthly index $ 3.03 $ 9.27 (67)% $ 4.10 $ 8.58
(52)% Realized natural gas prices, excluding hedging, were
significantly lower for the three and nine months ended September
30, 2009 than the same periods of 2008 and decreased 19% from the
second quarter of 2009 resulting in some of the lowest prices that
Advantage has ever experienced. Fortunately, our commodity hedging
strategy resulted in realized natural gas prices, including
hedging, that exceed current market prices. This has significantly
mitigated the negative impact from lower natural gas prices and has
protected cash flow. The 2007/2008 winter season in North America
caused inventory levels to decline to approximately the five-year
average resulting in stronger prices during early 2008. However,
since the second half of 2008 there has been significant softening
of natural gas prices from higher US domestic natural gas
production, mild weather conditions and forecasts, and the ongoing
global recession that has impacted demand. These factors have
resulted in much higher inventory levels that continue to place
considerable downward pressure on natural gas prices.
Unfortunately, these conditions have continued with AECO gas
presently trading at approximately $3.30/GJ. Although we continue
to believe in the longer-term pricing fundamentals for natural gas,
we are concerned about the current pricing and economic environment
that has the potential to extend for a considerable period of time.
The global recession could delay the recovery of natural gas
pricing longer than anticipated. While the current pricing
situation is quite weak, some of the factors that we believe will
support stronger future natural gas prices include: (i)
significantly less natural gas drilling projected in Canada and the
US, which will reduce productivity to offset declines, (ii) the
increasing focus on resource style natural gas wells, which have
high initial declines, and which are becoming a larger proportion
of the total natural gas supply based in Canada and the US, (iii)
the potential demand for natural gas for the Canadian oil sands
projects, and (iv) fuel switching to natural gas. Crude Oil and
NGLs Three months ended Nine months ended September 30 September 30
($/bbl) 2009 2008 % change 2009 2008 % change
-------------------------------------------------------------------------
Realized crude oil prices Excluding hedging $ 65.34 $ 112.35 (42)%
$ 56.24 $ 104.52 (46)% Including hedging $ 61.36 $ 102.40 (40)% $
59.77 $ 97.17 (38)% Realized NGLs prices Excluding hedging $ 32.46
$ 90.60 (64)% $ 35.72 $ 87.37 (59)% Realized crude oil and NGL
prices Excluding hedging $ 56.99 $107.96 (47)% $ 51.64 $ 101.15
(49)% Including hedging $ 54.02 $ 100.02 (46)% $ 54.38 $ 95.24
(43)% WTI ($US/bbl) $ 68.29 $ 118.13 (42)% $ 57.13 $ 113.38 (50)%
$US/$Canadian exchange rate $ 0.91 $ 0.96 (5)% $ 0.86 $ 0.98 (12)%
Realized crude oil and NGLs prices, excluding hedging, decreased
considerably for the three and nine months ended September 30,
2009, as compared to the same periods of 2008 and increased 2% from
the second quarter of 2009. Advantage's realized crude oil price
may not change to the same extent as WTI, due to changes in the
$US/$Canadian exchange rate, and changes in Canadian crude oil
differentials relative to WTI. The price of WTI fluctuates based on
worldwide supply and demand fundamentals. There has been
significant price volatility experienced over the last several
years whereby WTI reached historic high levels in the first half of
2008, followed by a record decline in the latter half of the year
and into 2009, the result of demand destruction brought on by the
global recession. There has been a respectable improvement during
the second and third quarters of 2009, and WTI is currently trading
at approximately US$79/bbl. We continue to believe that the
long-term pricing fundamentals for crude oil remain strong with
many factors affecting the continued strength including (i) supply
management and supply restrictions by the OPEC cartel, (ii)
frequent civil unrest in various crude oil producing countries and
regions, (iii) strong relative demand in developing countries,
particularly in China and India, and (iv) production declines and
reduced drilling. Commodity Price Risk The Corporation's
operational results and financial condition will be dependent on
the prices received for oil and natural gas production. Oil and
natural gas prices have fluctuated widely during recent years and
are determined by economic and, in the case of oil prices,
political factors. Supply and demand factors, including weather and
general economic conditions as well as conditions in other oil and
natural gas regions, impact prices. Any movement in oil and natural
gas prices could have an effect on the Corporation's financial
condition and performance. As current and future practice,
Advantage has established a financial hedging strategy and may
manage the risk associated with changes in commodity prices by
entering into derivatives. Although these commodity price risk
management activities could expose Advantage to losses or gains,
entering derivative contracts helps us to stabilize cash flows and
ensures that our capital expenditure program is substantially
funded by such cash flows. To the extent that Advantage engages in
risk management activities related to commodity prices, it will be
subject to credit risk associated with counterparties with which it
contracts. Credit risk is mitigated by entering into contracts with
only stable, creditworthy parties and through frequent reviews of
exposures to individual entities. We have been active in entering
new financial contracts to protect future cash flows and currently
the Corporation has fixed commodity prices on anticipated
production as follows: Approximate Production Hedged, Net of
Average Average Commodity Royalties(1) Floor Price Ceiling Price
-------------------------------------------------------------------------
Natural gas - AECO October to December 2009 82% Cdn$8.17/mcf
Cdn$8.17/mcf
-----------------------------------------------------------------------
January to March 2010 81% Cdn$7.64/mcf Cdn$7.64/mcf April to June
2010 59% Cdn$7.53/mcf Cdn$7.53/mcf July to September 2010 45%
Cdn$7.27/mcf Cdn$7.27/mcf October to December 2010 46% Cdn$7.27/mcf
Cdn$7.27/mcf
-----------------------------------------------------------------------
Total 2010 58% Cdn$7.46/mcf Cdn$7.46/mcf
-----------------------------------------------------------------------
January 2011 24% Cdn$7.25/mcf Cdn$7.25/mcf
-----------------------------------------------------------------------
Crude Oil - WTI October to December 2009 53% Cdn$62.40/bbl
Cdn$69.40/bbl
-----------------------------------------------------------------------
January to March 2010 28% Cdn$62.80/bbl Cdn$62.80/bbl April to June
2010 30% Cdn$69.50/bbl Cdn$69.50/bbl July to September 2010 32%
Cdn$69.50/bbl Cdn$69.50/bbl October to December 2010 34%
Cdn$69.50/bbl Cdn$69.50/bbl
-----------------------------------------------------------------------
Total 2010 31% Cdn$67.83/bbl Cdn$67.83/bbl
-----------------------------------------------------------------------
January 2011 35% Cdn$69.50/bbl Cdn$69.50/bbl
-----------------------------------------------------------------------
(1) Approximate production hedged is based on our assumed average
production by quarter, net of royalty payments, and takes into
consideration our asset dispositions that closed in July 2009. For
the nine month period ended September 30, 2009, we recognized in
income a net realized derivative gain of $70.2 million (September
30, 2008 - $40.9 million net realized derivative loss) on settled
derivative contracts. As at September 30, 2009, the fair value of
the derivatives outstanding and to be settled was a net asset of
approximately $31.7 million (December 31, 2008 - $41.0 million net
asset). For the nine months ended September 30, 2009, $9.3 million
was recognized in income as an unrealized derivative loss
(September 30, 2008 - $4.8 million unrealized derivative gain) due
to changes in the fair values of these contracts since December 31,
2008. The valuation of the derivatives is the estimated fair value
to settle the contracts as at September 30, 2009 and is based on
pricing models, estimates, assumptions and market data available at
that time. As such, the recognized amounts are not cash and the
actual gains or losses realized on eventual cash settlement can
vary materially due to subsequent fluctuations in commodity prices
as compared to the valuation assumptions. The Corporation does not
apply hedge accounting and current accounting standards require
changes in the fair value to be included in the consolidated
statement of income and comprehensive income as an unrealized
derivative gain or loss with a corresponding derivative asset and
liability recorded on the balance sheet. These derivative contracts
will settle from October 2009 to January 2011 corresponding to when
the Corporation will receive revenues from production. Royalties
Three months ended Nine months ended September 30 September 30 2009
2008 % change 2009 2008 % change
-------------------------------------------------------------------------
Royalties ($000) $ 8,749 $ 42,957 (80)% $ 37,620 $123,011 (69)% per
boe $ 4.02 $ 14.40 (72)% $ 4.85 $ 13.80 (65)% As a percentage of
revenue, excluding hedging 12.8% 19.8% (7.0)% 14.4% 19.4% (5.0)%
Advantage pays royalties to the owners of mineral rights from which
we have leases. The Corporation currently has mineral leases with
provincial governments, individuals and other companies. Royalties
have decreased in total for the three and nine months ended
September 30, 2009 compared to the same periods of 2008 due to the
decrease in revenue from significantly lower commodity prices and
reduced production from our asset dispositions completed in July
2009. Royalties as a percentage of revenue, excluding hedging, have
also decreased as compared to 2008. Effective January 1, 2009, the
Alberta Provincial Government implemented a new royalty framework
for conventional oil, natural gas and oil sands and Alberta
royalties are now affected by depths and productivity of wells and
commodity prices. Given our production profile and the current
commodity price environment, our royalty rate has decreased as
compared to prior periods. Additionally, the Alberta Provincial
Government has implemented a number of drilling incentive programs
whereby the majority of our new wells brought on production since
April 1, 2009 will benefit from a reduced 5% royalty rate on the
first 500 mmcf produced or one-year, which ever comes first. We
expect our corporate royalty rate to be in the range of 12% to 16%
for 2009 given the current commodity price environment. Operating
Costs Three months ended Nine months ended September 30 September
30 2009 2008 % change 2009 2008 % change
-------------------------------------------------------------------------
Operating costs ($000) $ 25,114 $ 41,229 (39)% $ 96,175 $121,418
(21)% per boe $ 11.55 $ 13.82 (16)% $ 12.40 $ 13.63 (9)% Total
operating costs decreased 39% and 21% for the three and nine months
ended September 30, 2009 as compared to the 2008 respective
periods, which resulted in a corresponding reduction in operating
costs per boe by 16% and 9%. When compared to the second quarter of
2009, total operating costs decreased 28% and operating costs per
boe decreased by 7%. The lower total operating costs has been
primarily due to reduced production from our asset dispositions
completed in July 2009. We continue to experience lower operating
costs per boe as an aggressive optimization program through 2008
and into 2009 is continuing to demonstrate positive benefits and we
will seek further opportunities to improve our operating cost
structure. General and Administrative Three months ended Nine
months ended September 30 September 30 2009 2008 % change 2009 2008
% change
-------------------------------------------------------------------------
General and administrative expense - cash ($000) $ 7,097 $ 6,300
13% $ 20,636 $ 20,224 2% per boe $ 3.26 $ 2.11 55% $ 2.66 $ 2.27
17% General and administrative expense - non-cash ($000) $ 6,127 $
- -% $ 7,816 $ (929) (941)% per boe $ 2.82 $ - -% $ 1.01 $ (0.10)
(1,108)% Employees at September 30 133 170 (22)% General and
administrative ("G&A") expense for the three and nine months
ended September 30, 2009 has increased compared to the same periods
of 2008 primarily due to costs associated with our corporate
conversion and reorganization. Approximately $2.2 million was
incurred directly for the corporate conversion that was completed
in July 2009 and $1.7 million for severance costs. As a result of
reducing staff levels, we were also able to consolidate office
space that will operationally and administratively benefit
Advantage. However, certain office space was completely vacated and
we were required to recognize $3.8 million as non-cash G&A
expense with a corresponding liability representing the full amount
of all future related lease payments. The office lease ends
November 2012 and we will look for opportunities to sublease the
space to mitigate associated costs. Upon conversion to a
corporation on July 9, 2009, Advantage implemented a new Restricted
Share Performance Incentive Plan ("RSPIP" or the "Plan") as
approved by the shareholders with the purpose to retain and attract
employees, to reward and encourage performance, and to focus
employees on operating and financial performance that results in
lasting shareholder return. The Plan authorizes the Board of
Directors to grant restricted shares to service providers of the
Corporation, including directors, officers, employees and
consultants. The number of restricted shares granted is based on
the Corporation's share price return for a twelve-month period and
compared to a peer group approved by the Board of Directors. The
share price return is calculated at the end of each and every
quarter and is primarily based on the 12-month change in the share
price. If the share price return for a 12-month period is positive,
a restricted share grant will be calculated based on the return. If
the share price return for a 12-month period is negative, but the
return is still within the top two-thirds of the approved peer
group performance, the Board of Directors may choose a
discretionary restricted share grant. The restricted share grants
generally vest one-third immediately on grant date, with the
remaining two-thirds vesting evenly on the following two yearly
anniversary dates. The holders of restricted shares may elect to
receive cash upon vesting in lieu of the number of shares to be
issued, subject to consent of the Corporation. Compensation cost
related to the Plan is recognized as compensation expense within
G&A expense over the service period and incorporates the share
grant price, the estimated number of restricted shares to vest, and
certain management estimates. The maximum amount of restricted
shares granted in any one quarter is limited to 50% of the base
salaries of those individuals participating in the Plan for such
period. For the nine months ended September 30, 2009, we recognized
$4.1 million of non-cash equity-based compensation expense related
to restricted shares granted to service providers. Prior to the
conversion to a corporation, the Fund had a Restricted Trust Unit
Plan and granted Restricted Trust Units ("RTUs") to service
providers in January 2009. This grant was valued at $3.8 million to
be issued in Trust Units at $5.49 per Trust Unit. The RTUs were
deemed to be granted in January 2009 with 171,093 Trust Units
issued for the first one-third of the grant that vested immediately
and 379,009 RTUs representing the remaining two-thirds of the grant
that will vest over the subsequent two anniversary dates. Since
conversion to a corporation, the RTUs are now considered restricted
shares and will be settled by the issuance of shares of the
Corporation, with corresponding compensation expense recognized
over the service period. In conjunction with the corporate
conversion, a transitional award of restricted shares to service
providers was approved by shareholders valued at $8.4 million to be
issued in shares at $5.80 per share. The restricted shares were
deemed to be granted in September 2009 with 251,867 shares issued
for the first one-quarter of the grant that vested immediately and
1,090,207 restricted shares representing the remaining
three-quarters of the grant that will vest over the subsequent
three anniversary dates. Compensation expense is recognized over
the service period and included in general and administrative
expense. Management Internalization Three months ended Nine months
ended September 30 September 30 2009 2008 % change 2009 2008 %
change
-------------------------------------------------------------------------
Management internalization ($000) $ - $ 1,118 (100)% $ 1,724 $
6,048 (71)% per boe $ - $ 0.37 (100)% $ 0.22 $ 0.68 (67)% In 2006,
the Fund and Advantage Investment Management Ltd. (the "Manager")
reached an agreement to internalize the pre-existing management
contract arrangement. As part of the agreement, the Fund agreed to
purchase all of the outstanding shares of the Manager pursuant to
the terms of the arrangement, thereby eliminating the management
fee and performance incentive effective April 1, 2006. The Trust
Unit consideration issued in exchange for the outstanding shares of
the Manager was placed in escrow for a 3-year period and was
deferred and amortized into income as management internalization
expense over the specific vesting periods during which employee
services were provided. Management internalization has decreased
during 2009 when compared to 2008 as the Trust Units held in escrow
continued to vest during the service periods. As of June 23, 2009,
the final Trust Units held in escrow vested and there will be no
subsequent management internalization expense recognized. Interest
on Bank Indebtedness Three months ended Nine months ended September
30 September 30 2009 2008 % change 2009 2008 % change
-------------------------------------------------------------------------
Interest expense ($000) $ 6,331 $ 6,579 (4)% $ 14,686 $ 21,463
(32)% per boe $ 2.91 $ 2.21 32% $ 1.89 $ 2.41 (22)% Average
effective interest rate 5.6% 4.8% 0.8% 4.4% 5.2% (0.8)% Bank
indebtedness at September 30 ($000) $330,800 $540,078 (39)% Total
interest expense decreased 4% and 32% for the three and nine months
ended September 30, 2009 as compared to 2008, respectively. The
interest expense decrease is the result of average lower interest
rates during the periods as bank lending rates declined
significantly in response to rate reductions enacted by central
banks to stimulate the economy. This reduced interest expense was
partially offset by additional interest on a higher average debt
balance during early 2009. The Corporation's interest rates are
primarily based on short term bankers acceptance rates plus a
stamping fee. In June 2009 our credit facility was renewed and is
subject to higher basis point and stamping fee adjustments ranging
from 1.5% to 4.0%, depending on the Corporation's debt to cash flow
ratio. Therefore, we expect that our average effective interest
rate will be higher during the following quarters than compared to
early 2009; however, this will be somewhat offset by lower interest
expense on the significantly reduced debt level that has resulted
from the July 2009 asset dispositions and equity financing. We
monitor the debt level to ensure an optimal mix of financing and
cost of capital that will provide a maximum return to our
shareholders. Our current credit facilities have been a favorable
financing alternative with an effective interest rate of only 4.4%
for the nine months ended September 30, 2009. Interest and
Accretion on Convertible Debentures Three months ended Nine months
ended September 30 September 30 2009 2008 % change 2009 2008 %
change
-------------------------------------------------------------------------
Interest on convertible $ 3,354 $ 4,156 (19)% $ 11,332 $ 12,547
(10)% debentures ($000) per boe $ 1.54 $ 1.39 11% $ 1.46 $ 1.41 4%
Accretion on convertible $ 612 $ 712 (14)% $ 1,975 $ 2,152 (8)%
debentures ($000) per boe $ 0.28 $ 0.24 17% $ 0.25 $ 0.24 4%
Convertible debentures maturity value at September 30 ($000)
$132,221 $219,195 (40)% Interest and accretion on convertible
debentures for the three and nine months ended September 30, 2009
has decreased compared to 2008 due to the maturity of the 9.00%
debentures on August 1, 2008, the 8.25% debentures on February 1,
2009, and the 8.75% debentures on June 30, 2009. Our 7.50%
convertible debentures were also settled on September 30, 2009 and
will result in lower interest and accretion in subsequent periods.
Interest and accretion per boe has increased in 2009 relative to
2008 due to the reduced production from the asset dispositions that
closed in July 2009. Depletion, Depreciation and Accretion Three
months ended Nine months ended September 30 September 30 2009 2008
% change 2009 2008 % change
-------------------------------------------------------------------------
Depletion, depreciation and accretion ($000) $ 62,499 $ 78,420
(20)% $204,598 $230,004 (11)% per boe $ 28.75 $ 26.29 9% $ 26.39 $
25.81 2% Depletion and depreciation of fixed assets is provided on
the "unit-of-production" method based on total proved reserves.
Accretion represents the increase in the asset retirement
obligation liability each reporting period due to the passage of
time. The depletion, depreciation and accretion ("DD&A")
provision has decreased for the three and nine months ended
September 30, 2009 compared to 2008 due to lower production
resulting from the asset dispositions that closed in July 2009.
However, the asset dispositions have also increased the DD&A
per boe as compared to 2008 since the net proceeds received per boe
of proved reserves was generally less than the net book value
accumulated by Advantage from all past acquisitions and development
activities. Taxes Current taxes paid or payable for the nine months
ended September 30, 2009 amounted to $1.0 million, compared to $2.4
million expensed for the same period of 2008. Current taxes
primarily represent Saskatchewan resource surcharge, which is based
on the petroleum and natural gas revenues within the province of
Saskatchewan. The reduction from 2008 is primarily due to the
corresponding decrease in commodity prices during 2009. On July 9,
2009, the Fund was converted into the Corporation. For the nine
months ended September 30, 2009, the Corporation recognized a total
future income tax reduction of $3.9 million compared to $15.6
million for the same period of 2008. As at September 30, 2009, the
Corporation had a total future income tax liability balance of
$50.6 million, compared to $55.9 million at December 31, 2008.
Included in the future income tax expense of $17.0 million
recognized in the third quarter of 2009 was a future income tax
expense impact of $24.0 million related to the corporate
conversion. Net Income (Loss) Three months ended Nine months ended
September 30 September 30 2009 2008 % change 2009 2008 % change
-------------------------------------------------------------------------
Net income (loss) ($000) $(53,293) $113,391 (147)% $(72,213) $
74,900 (196)% per share - Basic $ (0.33) $ 0.81 (141)% $ (0.48) $
0.54 (189)% - Diluted $ (0.33) $ 0.79 (142)% $ (0.48) $ 0.54 (189)%
Net loss for the three months ended September 30, 2009 was $53.3
million, as compared to net income of $113.4 million for the same
period of 2008. For the nine months ended September 30, 2009, we
experienced a net loss of $72.2 million, as opposed to the $74.9
million net income for the first nine months of 2008. This year has
presented major challenges relating to the commodity price
environment that has adversely impacted revenues, excluding
hedging, with reductions of 68% and 59% for the three and nine
months ended September 30, 2009, respectively. These lower revenues
were considerably mitigated by our successful hedging program that
has resulted in realized hedging gains of $24.6 million and $70.2
million for the three and nine months ended September 30, 2009. The
lower revenues have also been partially offset from a significant
reduction in royalties and lower Alberta Provincial royalty rates.
Additionally, we continue to experience lower operating costs as an
aggressive optimization program through 2008 and into 2009 is
continuing to demonstrate positive benefits and we will seek
further opportunities to improve our operating cost structure. A
significant impact on our net income for this quarter has been the
corporate conversion that resulted in the recognition of several
one-time costs in G&A expense totally $7.7 million and a future
income tax expense of $24.0 million. Cash Netbacks Three months
ended September 30 2009 2008 $000 per boe $000 per boe
-------------------------------------------------------------------------
Revenue $ 68,470 $ 31.49 $216,618 $ 72.63 Realized gain (loss) on
derivatives 24,631 11.33 (21,234) (7.12) Royalties (8,749) (4.02)
(42,957) (14.40) Operating costs (25,114) (11.55) (41,229) (13.82)
-------------------------------------------------------------------------
Operating $ 59,238 $ 27.25 $111,198 $ 37.29 General and
administrative(1) (7,097) (3.26) (6,300) (2.11) Interest (6,331)
(2.91) (6,579) (2.21) Interest on convertible debentures(2) (3,354)
(1.54) (4,156) (1.39) Income and capital taxes (352) (0.16) (818)
(0.27)
-------------------------------------------------------------------------
Funds from operations and cash netbacks $ 42,104 $ 19.38 $ 93,345 $
31.31
-------------------------------------------------------------------------
Nine months ended September 30 2009 2008 $000 per boe $000 per boe
-------------------------------------------------------------------------
Revenue $260,495 $ 33.60 $633,669 $ 71.11 Realized gain (loss) on
derivatives 70,215 9.06 (40,912) (4.59) Royalties (37,620) (4.85)
(123,011) (13.80) Operating costs (96,175) (12.40) (121,418)
(13.63)
-------------------------------------------------------------------------
Operating $196,915 $ 25.41 $348,328 $ 39.09 General and
administrative(1) (20,636) (2.66) (20,224) (2.27) Interest (14,686)
(1.89) (21,463) (2.41) Interest on convertible debentures(2)
(11,332) (1.46) (12,547) (1.41) Income and capital taxes (976)
(0.13) (2,377) (0.27)
-------------------------------------------------------------------------
Funds from operations and cash netbacks $149,285 $ 19.27 $291,717 $
32.73
-------------------------------------------------------------------------
(1) General and administrative expense excludes non-cash G&A
and equity- based compensation expense. (2) Interest on convertible
debentures excludes non-cash accretion expense. Funds from
operations and cash netbacks decreased in total and per boe for the
three and nine months ended September 30, 2009 compared to the same
periods of 2008. The lower cash netback in total and per boe is
primarily due to much weaker commodity prices, particularly natural
gas, which adversely impacted revenue. However, as a result of our
successful commodity price risk management program, we were able to
realize significant offsetting gains on derivatives. Royalties also
decreased during the periods as would be expected since they are
significantly influenced by commodity prices. Operating costs,
which had increased steadily over the 2008 year, have started to
decrease as we begin to realize benefits from our ongoing
optimization efforts. When compared to the second quarter of 2009,
our cash netbacks per boe actually increased 6% to $19.38 per boe
from $18.26 per boe in the second quarter of 2009. This improvement
occurred as we realized additional derivative gains as a higher
proportion of our production was hedged for the three months ended
September 30, 2009. Additionally, we realized decreases in both
royalties and operating costs as compared to the second quarter of
2009. Contractual Obligations and Commitments The Corporation has
contractual obligations in the normal course of operations
including purchases of assets and services, operating agreements,
transportation commitments, sales contracts and convertible
debentures. These obligations are of a recurring and consistent
nature and impact cash flow in an ongoing manner. The following
table is a summary of the Corporation's remaining contractual
obligations and commitments. Advantage has no guarantees or
off-balance sheet arrangements other than as disclosed. Payments
due by period ($ millions) Total 2009 2010 2011 2012 2013
-------------------------------------------------------------------------
Building leases $ 7.4 $ 0.9 $ 3.9 $ 1.5 $ 1.1 $ - Capital leases
4.9 0.8 2.2 1.9 - - Pipeline/transportation 4.1 0.4 1.8 0.9 0.5 0.5
Convertible debentures(1) 132.2 - 69.9 62.3 - -
-------------------------------------------------------------------------
Total contractual obligations $148.6 $ 2.1 $ 77.8 $ 66.6 $ 1.6 $
0.5
-------------------------------------------------------------------------
(1) As at September 30, 2009, Advantage had $132.2 million
convertible debentures outstanding (excluding interest payable
during the various debenture terms). Each series of convertible
debentures are convertible to shares based on an established
conversion price. All remaining obligations related to convertible
debentures can be settled through the payment of cash or issuance
of shares at Advantage's option. (2) Bank indebtedness of $330.8
million has been excluded from the contractual obligations table as
the credit facilities constitute a revolving facility for a 364 day
term which is extendible annually for a further 364 day revolving
period at the option of the syndicate. If not extended, the
revolving credit facility is converted to a one year term facility
with repayment due one year after commencement of the term.
Liquidity and Capital Resources The following table is a summary of
the Corporation's capitalization structure. ($000, except as
otherwise indicated) September 30, 2009
-------------------------------------------------------------------------
Bank indebtedness (long-term) $ 330,800 Working capital deficit(1)
109,581
-------------------------------------------------------------------------
Net debt $ 440,381
-------------------------------------------------------------------------
Shares outstanding (000) 162,476 Shares closing market price
($/share) $ 7.57
-------------------------------------------------------------------------
Shares outstanding market value $1,229,946
-------------------------------------------------------------------------
Convertible debentures maturity value (long-term) $ 62,294 Capital
lease obligations (long term) $ 2,041
-------------------------------------------------------------------------
Total capitalization $1,734,662
-------------------------------------------------------------------------
(1) Working capital deficit includes accounts receivable, prepaid
expenses and deposits, accounts payable and accrued liabilities,
and the current portion of capital lease obligations and
convertible debentures. Advantage monitors its capital structure
and makes adjustments according to market conditions in an effort
to meet its objectives given the current outlook of the business
and industry in general. The capital structure of the Corporation
is composed of working capital (excluding derivative assets and
liabilities), bank indebtedness, convertible debentures, capital
lease obligations and shareholders' equity. Advantage may manage
its capital structure by issuing new shares, repurchasing
outstanding shares, obtaining additional financing either through
bank indebtedness or convertible debenture issuances, refinancing
current debt, issuing other financial or equity-based instruments,
declaring a dividend, implementing a dividend reinvestment plan,
adjusting capital spending, or disposing of assets. The capital
structure is reviewed by Management and the Board of Directors on
an ongoing basis. Management of the Corporation's capital structure
is facilitated through its financial and operational forecasting
processes. The forecast of the Corporation's future cash flows is
based on estimates of production, commodity prices, forecast
capital and operating expenditures, and other investing and
financing activities. The forecast is regularly updated based on
new commodity prices and other changes, which the Corporation views
as critical in the current environment. Selected forecast
information is frequently provided to the Board of Directors. This
continual financial assessment process further enables the
Corporation to mitigate risks. The Corporation continues to satisfy
all liabilities and commitments as they come due. We had an
established $525 million credit facility agreement with a syndicate
of financial institutions; the balance of which at September 30,
2009 was $330.8 million. This facility was renewed in June 2009 and
is comprised of a $20 million revolving operating loan facility and
a $505 million extendible revolving credit facility. The
Corporation additionally has convertible debentures that will
mature in 2010 and 2011, whereby we have the option to settle such
obligations by cash or though the issuance of shares. The current
economic situation has placed additional pressure on commodity
prices. Natural gas prices that had been improving early in 2008,
have now declined due to the ailing economy as well as increased
inventory levels from strong injections and mild weather. Natural
gas has dropped with AECO gas presently trading at approximately
$3.30/GJ. Crude oil has dropped from a historic high in 2008 to
approximately US$79/bbl. The impact from the decrease in WTI will
be somewhat mitigated for Advantage due to the strengthening US
dollar relative to the Canadian dollar. The outlook for the
Corporation from prolonged weak commodity prices would be
reductions in operating netbacks and funds from operations.
Management has partially mitigated this risk through our commodity
hedging program but the lower commodity price environment has still
had a significant negative impact. In order to strengthen our
financial position and balance our cash flows, we closed both an
equity financing and two asset dispositions in July 2009 to repay
debt and focus capital spending on our Montney natural gas resource
play. In summary, we have implemented a strategy to balance funds
from operations and capital program expenditure requirements. A
successful hedging program was also executed to help reduce the
volatility of our funds from operations. As a result, we feel that
Advantage has implemented adequate strategies to protect our
business as much as possible in this environment. However, as with
all companies, we are still exposed to risks as a result of the
current economic situation and the potential duration. We continue
to closely monitor the possible impact on our business and
strategy, and will make adjustments as necessary with prudent
management. Shareholders' Equity and Convertible Debentures
Advantage has utilized a combination of equity, convertible
debentures and bank debt to finance acquisitions and development
activities. As at September 30, 2009, the Corporation had 162.5
million shares outstanding. Prior to converting to a corporation,
the Fund had issued 1,263,158 Trust Units as a result of the
Premium Distribution(TM), Distribution Reinvestment and Optional
Trust Unit Purchase Plan, generating $5.2 million reinvested in the
Fund (September 30, 2008 - 2,918,047 Trust Units were issued,
generating $30.7 million reinvested in the Fund). On July 7, 2009,
the Fund issued 17 million Trust Units through a bought deal
financing that raised net proceeds of $96.8 million. The proceeds
were utilized to reduce bank indebtedness. On July 9, 2009, the
Fund was dissolved and converted into the Corporation, with each
Trust Unit converted into one Common Share. As at November 12,
2009, shares outstanding increased to 162.7 million due to shares
issued in October 2009 pursuant to the Corporation's RSPIP. At
September 30, 2009, the Corporation had $132.2 million convertible
debentures outstanding that were immediately convertible to 5.8
million shares based on the applicable conversion prices (December
31, 2008 - $219.2 million outstanding and convertible to 9.5
million Trust Units). During the nine months ended September 30,
2009, there were no conversions of debentures (September 30, 2008 -
$25,000 converted resulting in the issuance of 1,001 Trust Units).
The principal amount of 8.25% convertible debentures matured on
February 1, 2009 and was settled by issuing 946,887 Trust Units.
The 8.75% convertible debentures matured and were settled with
$29.8 million in cash on June 30, 2009. The 7.50% convertible
debentures matured and were settled with $52.3 million in cash on
September 30, 2009. As at November 12, 2009, the convertible
debentures outstanding have not changed from September 30, 2009. We
have $69.9 million of debentures that mature in June 2010 and $62.3
million of debentures that mature in December 2011. These
obligations can be settled through the payment of cash or issuance
of shares at Advantage's option. Bank Indebtedness, Credit Facility
and Other Obligations At September 30, 2009, Advantage had bank
indebtedness outstanding of $330.8 million. Bank indebtedness
decreased $257.0 million since December 31, 2008, primarily as a
result of the asset dispositions and equity financing, both of
which closed in July 2009. The Corporation finalized a new credit
facility of $525 million, comprised of a $20 million revolving
operating loan facility and a $505 million extendible revolving
credit facility. The credit facilities are secured by a $1 billion
floating charge demand debenture, a general security agreement and
a subordination agreement from the Corporation covering all assets
and cash flows. As well, the borrowing base for the Corporation's
credit facilities is determined through utilizing our regular
reserve estimates. The banking syndicate thoroughly evaluates the
reserve estimates based upon their own commodity price expectations
to determine the amount of the borrowing base. Revision or changes
in the reserve estimates and commodity prices can have either a
positive or a negative impact on the borrowing base of the
Corporation. The next annual review is scheduled to occur in June
2010. There can be no assurances that the $525 million credit
facility will be renewed at the current borrowing base level at
that time. As at November 12, 2009, our bank indebtedness was
approximately $330 million with unutilized room of $195 million.
Advantage had a working capital deficiency of $109.6 million as at
September 30, 2009. Our working capital includes items expected for
normal operations such as trade receivables, prepaids, deposits,
trade payables and accruals as well as the current portion of
capital lease obligations and convertible debentures. Working
capital varies primarily due to the timing of such items, the
current level of business activity including our capital program,
commodity price volatility, and seasonal fluctuations. We do not
anticipate any problems in meeting future obligations as they
become due given the level of our funds from operations. It is also
important to note that working capital is effectively integrated
with Advantage's operating credit facility, which assists with the
timing of cash flows as required. The increase in our working
capital deficiency is due to the inclusion in current liabilities
of $69.4 million of convertible debentures representing the $69.9
million 6.50% debentures that mature in June 2010. Advantage has
capital lease obligations on various pieces of equipment used in
its operations. The total amount of principal obligation
outstanding at September 30, 2009 is $4.7 million, bearing interest
at effective rates ranging from 5.5% to 6.7%, and is collateralized
by the related equipment. The leases expire at dates ranging from
December 2009 to August 2010. Capital Expenditures Three months
ended Nine months ended September 30 September 30 ($000) 2009 2008
2009 2008
-------------------------------------------------------------------------
Land and seismic $ 559 $ 5,312 $ 2,266 $ 9,493 Drilling,
completions and workovers 29,914 44,017 72,052 90,186 Well
equipping and facilities 12,161 18,198 36,540 55,774 Other 24 217
162 826
-------------------------------------------------------------------------
$ 42,658 $ 67,744 $ 111,020 $ 156,279 Property acquisitions - 7,621
- 7,621 Property dispositions (243,565) - (245,184) (91)
-------------------------------------------------------------------------
Total capital expenditures $ (200,907) $ 75,365 $ (134,164) $
163,809
-------------------------------------------------------------------------
Advantage's exploitation and development program focuses on areas
where past activity has yielded long-life reserves with high cash
netbacks. We are very well positioned to selectively exploit the
highest value-generating drilling opportunities given the size,
strength and diversity of our asset base as evidenced by our
success at Glacier, Nevis and several other key properties. As a
result, the Corporation has a high level of flexibility to allocate
its capital program and ensure a risk-balanced platform of
projects. Our preference is to operate a high percentage of our
properties such that we can maintain control of capital
expenditures, operations and cash flows. Advantage's acquisition
strategy has been to acquire long-life properties with strong
drilling opportunities while retaining a balance of year round
access and risk. For the nine month period ended September 30,
2009, the Corporation spent a net $111.0 million and drilled a
total of 19.8 net (33 gross) wells at a 97% success rate. Total
capital spending included $83.9 million at Glacier, $7.1 million at
Martin Creek, $4.0 million at Nevis, and the remaining balance at
other miscellaneous areas. Glacier capital spending included 10.3
net (13 gross) horizontal wells and 2 net (2 gross) vertical wells.
Ten horizontal wells have been brought on-stream year-to-date with
30 day initial production rates of 2 mmcf/d to over 5 mmcf/d.
Facilities work involving the expansion of compression facilities
and our pipeline gathering system was completed at the end of the
second quarter 2009 and has taken our overall facility capacity to
25 mmcf/d after commissioning the expansion. New wells brought
on-stream after April 1, 2009 have qualified for the Alberta
royalty incentive program which results in a 5% royalty rate for
one year or 500 mmcf of gas production. Activity is now well
underway at Glacier to increase production capacity to
approximately 50 mmcf/d by mid 2010. At Nevis, activity has been
focused on drilling high initial deliverability wells that should
qualify for the recently extended Alberta royalty incentive
program. On July 8, 2009, the Board of Directors approved a new
capital budget for the twelve month period beginning July 2009 and
ending June 2010. Management will review the capital program on a
regular basis in the context of prevailing economic conditions and
make adjustments as deemed necessary to the program, subject to
review by the Board of Directors. Advantage's corporate capital
budget for the twelve month period ending June 2010 has been set at
$207 million, with $105 to $110 million for the remainder of 2009.
The budget will focus on development of our Montney natural gas
resource play at Glacier, Alberta where Advantage will continue to
employ a phased development approach. Phase I of the development
plan was achieved during the second quarter of 2009 where
production capacity was increased to approximately 25 mmcf/d and
included wells, compression facilities and additional pipelines.
Phase II of the development plan is well underway targeting a
production capacity increase to approximately 50 mmcf/d by mid
2010. Phase III of the development plan will target the attainment
of 100 mmcf/d by mid 2011. Approximately 79% of the total capital
expenditures for Phase II will be allocated to Glacier. Sources and
Uses of Funds The following table summarizes the various funding
requirements during the nine months ended September 30, 2009 and
2008 and the sources of funding to meet those requirements: Nine
months ended September 30 ($000) 2009 2008
-------------------------------------------------------------------------
Sources of funds Property dispositions $245,184 $ 91 Funds from
operations 149,285 291,717 Units issued, less costs 96,779 1,248
Decrease in working capital - 11,203
-------------------------------------------------------------------------
$491,248 $304,259
-------------------------------------------------------------------------
Uses of funds Decrease in bank indebtedness $256,968 $ 7,348
Expenditures on property and equipment 111,020 156,279 Convertible
debenture maturities 82,107 5,392 Distributions to Unitholders
23,481 120,108 Increase in working capital 12,208 - Expenditures on
asset retirement 4,490 6,291 Reduction of capital lease obligations
974 1,220 Property acquisitions - 7,621
-------------------------------------------------------------------------
$491,248 $304,259
-------------------------------------------------------------------------
The Corporation generated lower funds from operations during the
nine months ended September 30, 2009 compared to the same period of
2008, due to a sharp decrease in commodity prices and lower
production from the asset dispositions that closed in July 2009.
During the period we completed two assets dispositions and a
financing that enabled us to repay a significant portion of our
outstanding bank indebtedness. Other major uses of funds during
this period included expenditures on property and equipment and
convertible debenture maturities. We had three convertible
debenture maturities this year, two of which were settled for total
cash proceeds of $82.1 million. As a result of our efforts to
maintain a meaningful capital program, repay bank indebtedness and
convert to a growth oriented corporation, distributions were
suspended indefinitely in the first quarter of 2009 and the
corporation does not currently pay a dividend. Quarterly
Performance 2009 2008 ($000, except as otherwise indicated) Q3 Q2
Q1 Q4
-------------------------------------------------------------------------
Daily production Natural gas (mcf/d) 91,200 124,990 117,968 120,694
Crude oil and NGLs (bbls/d) 8,431 10,212 10,942 11,413 Total
(boe/d) 23,631 31,044 30,603 31,529 Average prices Natural gas
($/mcf) Excluding hedging $ 2.89 $ 3.56 $ 5.36 $ 7.15 Including
hedging $ 6.10 $ 5.63 $ 6.52 $ 7.61 AECO monthly index $ 3.03 $
3.66 $ 5.64 $ 6.79 Crude oil and NGLs ($/bbl) Excluding hedging $
56.99 $ 55.89 $ 43.41 $ 53.65 Including hedging $ 54.02 $ 54.51 $
54.54 $ 61.67 WTI ($US/bbl) $ 68.29 $ 59.62 $ 43.21 $ 58.75 Total
revenues (before royalties) $ 93,101 $ 114,659 $ 122,950 $ 149,205
Net income (loss) $ (53,293) $ (37,810) $ 18,890 $ (95,477) per
share - basic $ (0.33) $ (0.26) $ 0.13 $ (0.67) - diluted $ (0.33)
$ (0.26) $ 0.13 $ (0.67) Funds from operations $ 42,104 $ 51,590 $
55,591 $ 69,370 Distributions declared $ - $ - $ 17,266 $ 45,514
2008 2007 ($000, except as otherwise indicated) Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Daily production Natural gas (mcf/d) 122,627 123,104 125,113
128,556 Crude oil and NGLs (bbls/d) 11,980 11,498 12,281 12,895
Total (boe/d) 32,418 32,015 33,133 34,321 Average prices Natural
gas ($/mcf) Excluding hedging $ 8.65 $ 10.33 $ 7.90 $ 6.23
Including hedging $ 7.55 $ 9.18 $ 8.23 $ 6.97 AECO monthly index $
9.27 $ 9.35 $ 7.13 $ 6.00 Crude oil and NGLs ($/bbl) Excluding
hedging $ 107.96 $ 110.15 $ 85.99 $ 73.40 Including hedging $
100.02 $ 101.34 $ 84.83 $ 70.40 WTI ($US/bbl) $ 118.13 $ 124.00 $
97.96 $ 90.63 Total revenues (before royalties) $ 195,384 $ 208,868
$ 188,505 $ 165,951 Net income (loss) $ 113,391 $ (14,369) $
(24,122) $ 13,795 per share - basic $ 0.81 $ (0.10) $ (0.18) $ 0.10
- diluted $ 0.79 $ (0.10) $ (0.18) $ 0.10 Funds from operations $
93,345 $ 103,754 $ 94,618 $ 80,519 Distributions declared $ 50,743
$ 50,364 $ 50,021 $ 57,875 The table above highlights the
Corporation's and Fund's performance for the third quarter of 2009
and also for the preceding seven quarters. Production has gradually
decreased from the fourth quarter of 2007 through the first half of
2008 due to natural declines, wet and cold weather delays, and
facility turnarounds. Production increased modestly in the third
quarter of 2008 as new wells were brought on production and most
facility turnarounds were completed. During the fourth quarter of
2008 and the first quarter of 2009, production again decreased as
we experienced freezing conditions from early cold weather in
December and a slow recovery from such cold weather conditions. An
extended third party facility outage also began in August 2008 and
has continued through 2009 but is now substantially completed. Our
production will be brought back on-stream as commodity prices
improve. Production increased in the second quarter of 2009 due to
recovery from cold weather conditions that caused brief production
outages and additional production from a number of wells drilled
during the first quarter of 2009 but delayed until after March 31,
2009 such that we could benefit from the new 5% Alberta Provincial
royalty rate available on such wells for the next twelve month
period. We experienced a significant decrease in production during
the third quarter of 2009 as we successfully completed asset
dispositions that closed in July 2009 for net proceeds of $243.6
million, subject to further adjustments. The disposed properties
represented approximately 8,100 boe/d of production. Our financial
results, particularly revenues and funds from operations, increased
through to the second quarter of 2008, as both commodity prices and
production steadily increased over that timeframe. However,
revenues and funds from operations slightly declined in the third
quarter of 2008, as commodity prices began to decline in response
to the financial crisis that materialized in the fall of 2008. This
trend worsened in the fourth quarter, as a full global recession
set in, and commodity prices continued on a downward trend through
to the third quarter of 2009. We realized net income during the
fourth quarter of 2007 as we completed the full integration of the
Sound acquisition and commodity prices began to improve. However,
net losses were realized in the first and second quarters of 2008,
primarily as a result of significant unrealized losses on commodity
derivative contracts for future periods. Commodity price declines
in the third quarter of 2008 gave rise to significant unrealized
gains on these same derivative contracts, and in turn the
Corporation reported record high net income. We recognized a
considerable net loss in the fourth quarter of 2008, a combined
result of falling commodity prices and an impairment of our entire
balance of goodwill. In the first quarter of 2009, the global
economy showed no clear sign of recovery and commodity prices,
particularly natural gas, were weak in comparison to prior
quarters. However, Advantage was still able to report net income as
we recognized both realized and unrealized gains on our derivative
contracts and moderately lower expenses, including operating costs.
Natural gas prices continued to worsen during the second and third
quarters of 2009 resulting in the recognition of net losses for the
periods. The third quarter net loss was also impacted by additional
costs incurred related to the corporate conversion and increased
depletion and depreciation expense that resulted from the asset
dispositions. Partially offsetting these net losses is continuing
reduction in costs including royalties and operating costs.
Critical Accounting Estimates The preparation of financial
statements in accordance with GAAP requires Management to make
certain judgments and estimates. Changes in these judgments and
estimates could have a material impact on the Corporation's
financial results and financial condition. Management relies on the
estimate of reserves as prepared by the Corporation's independent
qualified reserves evaluator. The process of estimating reserves is
critical to several accounting estimates. The process of estimating
reserves is complex and requires significant judgments and
decisions based on available geological, geophysical, engineering
and economic data. These estimates may change substantially as
additional data from ongoing development and production activities
becomes available and as economic conditions impact crude oil and
natural gas prices, operating costs, royalty burden changes, and
future development costs. Reserve estimates impact net income
through depletion and depreciation of fixed assets, the provision
for asset retirement costs and related accretion expense, and
impairment calculations for fixed assets and goodwill. The reserve
estimates are also used to assess the borrowing base for the
Corporation's credit facilities. Revision or changes in the reserve
estimates can have either a positive or a negative impact on net
income and the borrowing base of the Corporation. Management's
process of determining the provision for future income taxes, the
provision for asset retirement obligation costs and related
accretion expense, and the fair values assigned to any acquired
company's assets and liabilities in a business combination is based
on estimates. These estimates are significant and can include
reserves, future production rates, future crude oil and natural gas
prices, future costs, future interest rates, future tax rates and
other relevant assumptions. Revisions or changes in any of these
estimates can have either a positive or a negative impact on asset
and liability values and net income. In accordance with GAAP,
derivative assets and liabilities are recorded at their fair values
at the reporting date, with unrealized gains and losses recognized
directly into net income and comprehensive income in the same
period. The fair value of derivatives outstanding is an estimate
based on pricing models, estimates, assumptions and market data
available at that time. As such, the recognized amounts are not
cash and the actual gains or losses realized on eventual cash
settlement can vary materially due to subsequent fluctuations in
commodity prices as compared to the valuation assumptions.
International Financial Reporting Standards ("IFRS") In February
2008, the Accounting Standards Board of the Canadian Institute of
Chartered Accountants confirmed that publicly accountable entities
will be required to adopt IFRS effective January 1, 2011, including
preparation of comparative financial information. Management has
engaged its key personnel responsible for financial reporting and
developed an overall plan to address IFRS implementation. The
initial stage of the plan involved staff training and ongoing
education. Key personnel received professional education on IFRS
accounting principles and standards, both in general and for the
oil and gas industry in particular. Review of changes to IFRS has
been incorporated into existing processes of internal control over
financial reporting. A project plan for IFRS implementation has
been prepared and will be subject to ongoing revision as there are
developments. As well, appropriate operating personnel have been
engaged, as necessary, to determine how to implement the
requirements of IFRS into the Corporation's manual and information
systems that collect and process financial data. We expect to have
continual discussion with our external and internal auditors
throughout the process regarding IFRS and implementation. The most
significant change identified will be accounting for fixed assets.
The Corporation, like many Canadian oil and gas reporting issuers,
applies the "full cost" concept in accounting for its oil and gas
assets. Under full cost, capital expenditures are maintained in a
single cost centre for each country, and the cost centre is subject
to a single depletion calculation and impairment test. IFRS will
require the Corporation to make a much more detailed assessment of
its oil and gas assets. For depletion and depreciation, the
Corporation must identify asset components, and determine an
appropriate depreciation or depletion method for each component.
With regard to impairment test calculations, we must identify "Cash
Generating Units", which are defined as the smallest group of
assets that produce independent cash flows. An impairment test must
be performed individually for all cash generating units when
indicators suggest there maybe impairment. The recognition of
impairments in a prior year can be reversed subsequently depending
on such calculations. It is also important to note that the
International Accounting Standards Board ("IASB") is currently
undertaking an extractive activities project, to develop accounting
standards specifically for businesses like that of the Corporation.
However, the project will not be complete prior to IFRS adoption in
Canada. We have also identified a number of other areas whereby
differences between Canadian GAAP and IFRS are likely to exist for
Advantage. However, currently we are concentrating on the
accounting for fixed assets and will evaluate these other areas in
due course and develop more detailed plans to address the
identified issues. Disclosure Controls and Internal Controls over
Financial Reporting Disclosure controls and procedures have been
designed to provide reasonable assurance that information required
to be disclosed by the Corporation is recorded, processed,
summarized and reported within the time periods specified under the
Canadian securities law. Advantage's Chief Executive Officer and
Chief Financial Officer have concluded, based on their evaluation,
that the disclosure controls and procedures as of the end of
September 30, 2009, are effective and provide reasonable assurance
that material information related to the Corporation is made known
to them by others within Advantage. Advantage's Chief Executive
Officer and Chief Financial Officer are responsible for
establishing and maintaining internal controls over financial
reporting ("ICFR"). They have, as at the quarter ended September
30, 2009, designed ICFR or caused it to be designed under their
supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with Canadian GAAP.
The control framework Advantage's officers used to design the ICFR
is the Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations. Advantage's Chief Executive
Officer and Chief Financial Officer are required to disclose any
change in the internal controls over financial reporting that
occurred during our most recent interim period that has materially
affected, or is reasonably likely to affect, the Corporation's
internal controls over financial reporting. No material changes in
the internal controls were identified during the period ended
September 30, 2009 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial
reporting. It should be noted that a control system, including
Advantage's disclosure and internal controls and procedures, no
matter how well conceived or operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system
will be met and it should be not be expected that the disclosure
and internal controls and procedures will prevent all errors or
fraud. Outlook We are pleased that during the third quarter of
2009, our conversion to a growth oriented corporation was completed
as well as several transactions aimed at reducing debt, increasing
financial flexibility, and improving our overall balance sheet. In
July 2009, we successfully closed two asset dispositions for net
proceeds of $243.6 million, subject to further adjustments, and
representing production of approximately 8,100 boe/d. On July 7,
2009, we closed the issuance of 17 million shares on a bought deal
basis, at a price of $6.00 per share for net proceeds of $96.8
million. We also settled our outstanding 7.50% convertible
debenture for $52.3 million of cash. Our total bank indebtedness
and convertible debentures obligations have decreased 44% from June
30, 2009. As at November 12, 2009, our bank indebtedness was
approximately $330 million with unutilized room available of $195
million. These transactions have enabled Advantage to repay a
significant portion of outstanding debt while increasing the
balance of unutilized credit facility. This improves our financial
flexibility moving forward as a growth oriented corporation
pursuing the significant potential of our Montney natural gas
resource play. Our credit facility may be subsequently redrawn to
fund capital expenditures and for general corporate purposes but it
is our long-term intention to balance funds from operations and our
capital expenditure program. Although our funds from operations
will continue to be impacted by the volatility of crude oil and
natural gas prices, we have a substantial hedging portfolio that
improves cash flow stability for our capital program. Approximately
82% of our natural gas production, net of royalties, is now hedged
for the remainder of 2009 at an average fixed price of $8.17/mcf.
We have also hedged approximately 53% of our remaining 2009 crude
oil production, net of royalties, at an average floor price of
$62.40/bbl. For 2010, we have hedged 58% of our natural gas
production, net of royalties, at an average fixed price of
$7.46/mcf and 31% of our crude oil production, net of royalties, at
an average fixed price of $67.83/bbl. Our strategy will be to
continue to employ a multi-year hedging program to reduce the
volatility in cash flow in support of capital requirements. In
conjunction with our corporate conversion, we announced on July 8,
2009 that the Board of Directors had approved a new capital budget
for the twelve month period beginning July 2009 and ending June
2010. Management will review the capital program on a regular basis
in the context of prevailing economic conditions and make
adjustments as deemed necessary to the program, subject to review
by the Board of Directors. Advantage's corporate capital budget for
this period has been set at $207 million, with approximately $105
to $110 million for the remainder of 2009, and will continue to
focus on our Montney natural gas resource play at Glacier, Alberta.
Advantage will continue to employ a phased development approach for
our Glacier property. Phase II of the development plan will be
completed by mid-2010 and will result in production capacity
increasing to 50 mmcf/d. A continued focus on optimizing well
completions at Glacier will involve production logging of several
wells in order to further evaluate the effectiveness of frac
designs and new technology applications. Phase II of the Glacier
development plan includes the drilling and completion of 16 gross
(16.0 net) horizontal operated wells, up to 16 gross (6.1 net)
joint interest horizontal wells, and 1 gross (1.0 net) vertical
well. Drilling plans will continue to balance production and
reserve growth and delineation of our extensive 89 section gross
(average 90% working interest) Montney land block. Drilling resumed
in early July at Glacier with the deployment of four drilling rigs
on operated and joint interest lands. Phase II also includes the
expansion of the existing gas gathering system, additional
compression and a new Advantage operated gas plant to complement
the existing infrastructure and provide total processing and
production capacity of 50 mmcf/d. All necessary regulatory
approvals have been received for Advantage's new gas plant and
construction will commence shortly. The majority of the wells
drilled during the last half of 2009 will be tied-in during the
second quarter of 2010 when the facilities expansions and gas plant
are expected to be completed. Glacier capital expenditures are
estimated to be approximately $84 million net for the last half of
2009 and $81 million net for the first half of 2010. Approximately
$116 million will be allocated to drilling and completions with $29
million for well equipping and tie-ins and $20 million for
facilities and plant expansion. Phase III of the development plan
will result in the attainment of 100 mmcf/d by mid-2011. The
Alberta Government's recently announced extension of the energy
incentive programs to March 31, 2011 will provide substantial
benefits to all three phases of our Glacier development plan. The
energy incentive programs will allow Advantage to capitalize on
lower drilling costs (through a drilling royalty credit of up to
$200 per meter of drilled depth subject to a corporate ceiling) and
an initial 5% royalty rate on the first 500 mmcf of production for
new wells based on our go-forward drilling plans for each of the
three phases of development at Glacier. As a result of the
continued shut-in of natural gas production at Lookout Butte and
several smaller operated and non-operated properties due to lower
natural gas prices through the third quarter, we anticipate that
production will trend towards the lower end of the production range
that was provided (approximately 22,700 boe/d). The natural gas
production shut-ins from these properties have a smaller impact on
funds from operations due to the lower netbacks as they are not
covered by our hedge positions. Plans are to resume production from
these properties as natural gas prices improve through the fourth
quarter. We also anticipate that royalty rates will trend lower to
approximately 13% and operating costs between $11.50 and $12.50/boe
through the remainder of 2009. With regards to field operating
costs, we will continue with our optimization programs which has
already delivered cost reductions. We expect to see some further
easing of operating costs as the lower commodity price environment
is expected to remain for a sustained period. A full year 2010
capital budget and guidance will be provided before year-end 2009.
Looking forward, Advantage is well positioned to pursue future
development plans at Glacier with our strong balance sheet, solid
hedging position and conversion to a growth oriented corporation.
With a stable production base and an inventory of over 500 drilling
locations at Glacier, Management will continue to employ a
disciplined approach to create long term growth in shareholder
value. Additional Information Additional information relating to
Advantage can be found on SEDAR at http://www.sedar.com/ and the
Corporation's website at http://www.advantageog.com/. Such other
information includes the annual information form, the annual
information circular - proxy statement, press releases, material
contracts and agreements, and other financial reports. The annual
information form will be of particular interest for current and
potential shareholders as it discusses a variety of subject matter
including the nature of the business, description of our
operations, general and recent business developments, risk factors,
reserves data and other oil and gas information. November 12, 2009
CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets
September 30, December 31, (thousands of dollars) 2009 2008
-------------------------------------------------------------------------
(unaudited) Assets Current assets Accounts receivable $ 40,691 $
84,689 Prepaid expenses and deposits 9,446 11,571 Derivative asset
(note 10) 40,880 41,472
-------------------------------------------------------------------------
91,017 137,732 Derivative asset (note 10) 2,357 1,148 Fixed assets
(note 3) 1,823,408 2,163,866
-------------------------------------------------------------------------
$1,916,782 $2,302,746
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities Current liabilities Accounts payable and accrued
liabilities $ 87,715 $ 146,046 Distributions payable to Unitholders
- 11,426 Current portion of capital lease obligations (note 4)
2,638 1,747 Current portion of convertible debentures (note 5)
69,365 86,125 Derivative liability (note 10) 8,796 611 Future
income taxes 9,200 11,939
-------------------------------------------------------------------------
177,714 257,894 Derivative liability (note 10) 2,785 1,039 Capital
lease obligations (note 4) 2,041 3,906 Bank indebtedness (note 6)
327,749 584,717 Convertible debentures (note 5) 60,610 128,849
Asset retirement obligations (note 7) 67,666 73,852 Future income
taxes 41,404 43,976 Other liability (note 8) 3,694 -
-------------------------------------------------------------------------
683,663 1,094,233
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Shareholders' Equity Share capital (note 9) 2,188,384 - Unit
capital (note 9) - 2,075,877 Convertible debentures equity
component (note 5) 6,055 9,403 Contributed surplus (note 9) 5,213
287 Deficit (966,533) (877,054)
-------------------------------------------------------------------------
1,233,119 1,208,513
-------------------------------------------------------------------------
$1,916,782 $2,302,746
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments (note 12) see accompanying Notes to Consolidated
Financial Statements Consolidated Statements of Income (Loss),
Comprehensive Income (Loss) and Deficit (thousands of dollars,
Three months ended Nine months ended except for per share Sept. 30,
Sept. 30, Sept. 30, Sept. 30, amounts) (unaudited) 2009 2008 2009
2008
-------------------------------------------------------------------------
Revenue Petroleum and natural gas $ 68,470 $ 216,618 $ 260,495 $
633,669 Realized gain (loss) on derivatives (note 10) 24,631
(21,234) 70,215 (40,912) Unrealized gain (loss) on derivatives
(note 10) (9,136) 128,718 (9,314) 4,836 Royalties (8,749) (42,957)
(37,620) (123,011)
-------------------------------------------------------------------------
75,216 281,145 283,776 474,582
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Expenses Operating 25,114 41,229 96,175 121,418 General and
administrative 13,224 6,300 28,452 19,295 Management
internalization (note 9) - 1,118 1,724 6,048 Interest 6,331 6,579
14,686 21,463 Interest and accretion on convertible debentures
3,966 4,868 13,307 14,699 Depletion, depreciation and accretion
62,499 78,420 204,598 230,004
-------------------------------------------------------------------------
111,134 138,514 358,942 412,927
-------------------------------------------------------------------------
Income (loss) before taxes (35,918) 142,631 (75,166) 61,655 Future
income tax expense (reduction) 17,023 28,422 (3,929) (15,622)
Income and capital taxes 352 818 976 2,377
-------------------------------------------------------------------------
17,375 29,240 (2,953) (13,245)
-------------------------------------------------------------------------
Net income (loss) and comprehensive income (loss) (53,293) 113,391
(72,213) 74,900 Deficit, beginning of period (913,240) (798,711)
(877,054) (659,835) Distributions declared - (50,743) (17,266)
(151,128)
-------------------------------------------------------------------------
Deficit, end of period $ (966,533) $ (736,063) $ (966,533) $
(736,063)
-------------------------------------------------------------------------
Net income (loss) per share (note 9) Basic $ (0.33) $ 0.81 $ (0.48)
$ 0.54 Diluted $ (0.33) $ 0.79 $ (0.48) $ 0.54
-------------------------------------------------------------------------
see accompanying Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows Three months ended Nine
months ended (thousands of dollars) Sept. 30, Sept. 30, Sept. 30,
Sept. 30, (unaudited) 2009 2008 2009 2008
-------------------------------------------------------------------------
Operating Activities Net income (loss) $ (53,293) $ 113,391 $
(72,213) $ 74,900 Add (deduct) items not requiring cash: Unrealized
loss (gain) on derivatives 9,136 (128,718) 9,314 (4,836)
Equity-based compensation 2,433 - 4,122 (929) Non-cash general and
administrative (note 8) 3,694 - 3,694 - Management internalization
- 1,118 1,724 6,048 Accretion on convertible debentures 612 712
1,975 2,152 Depletion, depreciation and accretion 62,499 78,420
204,598 230,004 Future income tax expense (reduction) 17,023 28,422
(3,929) (15,622) Expenditures on asset retirement (868) (344)
(4,490) (6,291) Changes in non-cash working capital 9,435 22,520
(13,289) 5,570
-------------------------------------------------------------------------
Cash provided by operating activities 50,671 115,521 131,506
290,996
-------------------------------------------------------------------------
Financing Activities Units issued, less costs (note 9) 96,900 323
96,779 1,248 Decrease in bank indebtedness (315,361) (7,868)
(256,968) (7,348) Convertible debenture maturities (note 5)
(52,268) (5,392) (82,107) (5,392) Reduction of capital lease
obligations (329) (308) (974) (1,220) Distributions to Unitholders
- (39,476) (23,481) (120,108)
-------------------------------------------------------------------------
Cash used in financing activities (271,058) (52,721) (266,751)
(132,820)
-------------------------------------------------------------------------
Investing Activities Expenditures on property and equipment
(42,658) (67,744) (111,020) (156,279) Property acquisitions -
(7,621) - (7,621) Property dispositions (note 3) 243,565 - 245,184
91 Changes in non-cash working capital 19,480 12,565 1,081 5,633
-------------------------------------------------------------------------
Cash provided by (used in) investing activities 220,387 (62,800)
135,245 (158,176)
-------------------------------------------------------------------------
Net change in cash - - - - Cash, beginning of period - - - -
-------------------------------------------------------------------------
Cash, end of period $ - $ - $ - $ -
-------------------------------------------------------------------------
Supplementary Cash Flow Information Interest paid $ 7,095 $ 12,497
$ 22,135 $ 31,076 Taxes paid $ 450 $ 621 $ 1,060 $ 1,413 see
accompanying Notes to Consolidated Financial Statements NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS September 30, 2009 (unaudited)
All tabular amounts in thousands except as otherwise indicated. The
interim consolidated financial statements of Advantage Oil &
Gas Ltd. ("Advantage" or the "Corporation") have been prepared by
management in accordance with Canadian generally accepted
accounting principles ("GAAP") using the same accounting policies
as those set out in note 2 to the consolidated financial statements
of the predecessor legal entity, Advantage Energy Income Fund (the
"Fund"), for the year ended December 31, 2008, except as described
below. These interim financial statement note disclosures do not
include all of those required by Canadian GAAP applicable for
annual financial statements. The interim consolidated financial
statements should be read in conjunction with the audited
consolidated financial statements of the Fund for the year ended
December 31, 2008 as set out in the Fund's Annual Report. 1.
Business and Structure of Advantage Advantage is a growth oriented
intermediate oil and natural gas exploration and production
corporation with properties located in Western Canada. Advantage
was created on July 9, 2009, through the successful completion of a
plan of arrangement pursuant to an information circular dated June
5, 2009. Advantage Energy Income Fund was dissolved and converted
into the corporation, Advantage Oil and Gas Ltd., with each Trust
Unit converted into one Common Share. Advantage does not currently
pay a dividend. 2. Changes in Accounting Policies (a) Goodwill and
intangible assets In February 2008, the Canadian Institute of
Chartered Accountants ("CICA") issued Section 3064, Goodwill and
Intangible Assets, replacing Section 3062, Goodwill and Other
Intangible Assets and Section 3450, Research and Development Costs.
The new Section became effective January 1, 2009. Management has
implemented the new Section and there was no impact for the
financial statements of the Corporation. (b) Recent accounting
pronouncements issued but not implemented (i) International
Financial Reporting Standards ("IFRS") In February 2008, the CICA
Accounting Standards Board confirmed that IFRS will replace
Canadian GAAP effective January 1, 2011 for publicly accountable
enterprises. Management is currently evaluating the effects of all
current and pending pronouncements of the International Accounting
Standards Board on the financial statements of the Corporation, and
has developed a plan for implementation. (c) Comparative figures
Certain comparative figures have been reclassified to conform to
the current period presentation. 3. Fixed Assets Accumulated
Depletion and Net Book September 30, 2009 Cost Depreciation Value
---------------------------------------------------------------------
Petroleum and natural gas properties $ 3,159,534 $ 1,340,075 $
1,819,459 Furniture and equipment 11,733 7,784 3,949
---------------------------------------------------------------------
$ 3,171,267 $ 1,347,859 $ 1,823,408
---------------------------------------------------------------------
Accumulated Depletion and Net Book December 31, 2008 Cost
Depreciation Value
---------------------------------------------------------------------
Petroleum and natural gas properties $ 3,299,657 $ 1,140,710 $
2,158,947 Furniture and equipment 11,572 6,653 4,919
---------------------------------------------------------------------
$ 3,311,229 $ 1,147,363 $ 2,163,866
---------------------------------------------------------------------
In July 2009, Advantage closed two asset dispositions for net
proceeds of $243.6 million, subject to further adjustments. 4.
Capital Lease Obligations The Corporation has capital leases on a
variety of fixed assets. Future minimum lease payments at September
30, 2009 consist of the following: 2009 $ 838 2010 2,200 2011 1,925
----------------------------------------- 4,963 Less amounts
representing interest (284)
----------------------------------------- 4,679 Current portion
(2,638) ----------------------------------------- $ 2,041
----------------------------------------- 5. Convertible debentures
The balance of debentures outstanding at September 30, 2009 and
changes in the liability and equity components during the nine
months ended September 30, 2009 are as follows: 8.25% 8.75% 7.50%
--------------------------------------------------------- Trading
symbol AAV.DBB AAV.DBF AAV.DBC Debentures outstanding $ - $ - $ -
--------------------------------------------------------- Liability
component: Balance at December 31, 2008 $ 4,859 $ 29,687 $ 51,579
Accretion of discount 8 152 689 Matured (4,867) (29,839) (52,268)
--------------------------------------------------------- Balance
at September 30, 2009 $ - $ - $ -
--------------------------------------------------------- Equity
component: Balance at December 31, 2008 $ 248 $ 852 $ 2,248 Expired
(248) (852) (2,248)
--------------------------------------------------------- Balance
at September 30, 2009 $ - $ - $ - 6.50% 7.75% 8.00% Total
---------------------------------------------------------------------
Trading symbol AAV.DBE AAV.DBD AAV.DBG Debentures outstanding $
69,927 $ 46,766 $ 15,528 $ 132,221
---------------------------------------------------------------------
Liability component: Balance at December 31, 2008 $ 68,807 $ 44,964
$ 15,078 $ 214,974 Accretion of discount 558 456 112 1,975 Matured
- - - (86,974)
---------------------------------------------------------------------
Balance at September 30, 2009 $ 69,365 $ 45,420 $ 15,190 $ 129,975
---------------------------------------------------------------------
Equity component: Balance at December 31, 2008 $ 2,971 $ 2,286 $
798 $ 9,403 Expired - - - (3,348)
---------------------------------------------------------------------
Balance at September 30, 2009 $ 2,971 $ 2,286 $ 798 $ 6,055
---------------------------------------------------------------------
During the nine months ended September 30, 2009, there were no
convertible debenture conversions (September 30, 2008 - $25,000
converted resulting in the issuance of 1,001 Trust Units). The
principal amount of 8.25% convertible debentures matured on
February 1, 2009 and was settled by issuing 946,887 Trust Units.
The 8.75% convertible debentures matured and were settled with
$29.8 million in cash on June 30, 2009. The 7.50% convertible
debentures matured and were settled with $52.3 million in cash on
September 30, 2009. 6. Bank Indebtedness September 30, December 31,
2009 2008
---------------------------------------------------------------------
Revolving credit facility $ 330,800 $ 587,404 Discount on Bankers
Acceptances and other fees (3,051) (2,687)
---------------------------------------------------------------------
Balance, end of period $ 327,749 $ 584,717
---------------------------------------------------------------------
Advantage has a $525 million credit facility agreement with a
syndicate of financial institutions which consists of a $505
million extendible revolving loan facility and a $20 million
revolving operating loan facility. The loan's interest rate is
based on either prime, US base rate, LIBOR or bankers' acceptance
rates, at the Corporation's option, subject to certain basis point
or stamping fee adjustments ranging from 1.5% to 4.0% depending on
the Corporation's debt to cash flow ratio. The credit facilities
are collateralized by a $1 billion floating charge demand
debenture, a general security agreement and a subordination
agreement from the Corporation covering all assets and cash flows.
The amounts available to Advantage from time to time under the
credit facilities are based upon the borrowing base determined by
the lenders and which is re-determined on a semi- annual basis by
those lenders. The credit facilities are subject to review on an
annual basis with the next renewal due in June 2010. Various
borrowing options are available under the credit facilities,
including prime rate-based advances, US base rate advances, US
dollar LIBOR advances and bankers' acceptances loans. The credit
facilities constitute a revolving facility for a 364 day term which
is extendible annually for a further 364 day revolving period at
the option of the syndicate. If not extended, the revolving credit
facility is converted to a one year term facility with the
principal payable at the end of such one year term. The credit
facilities contain standard commercial covenants for facilities of
this nature. The only financial covenant is a requirement for
Advantage to maintain a minimum cash flow to interest expense ratio
of 3.5:1, determined on a rolling four quarter basis. The credit
facilities also prohibit the Corporation from entering into any
derivative contract where the term of such contract exceeds three
years. Further, the aggregate of such contracts cannot hedge
greater than 60% of total estimated oil and gas production over two
years and 50% over the third year, except for the initial period
ended December 31, 2009 whereby the Corporation shall not hedge
greater than 80% of total estimated oil and gas production. Breach
of any covenant will result in an event of default in which case
Advantage has 20 days to remedy such default. If the default is not
remedied or waived, and if required by the lenders, the
administrative agent of the lenders has the option to declare all
obligations under the credit facilities to be immediately due and
payable without further demand, presentation, protest, days of
grace, or notice of any kind. Dividends to shareholders are
subordinated to the repayment of any amounts owing under the credit
facilities. Dividends to shareholders are not permitted if the
Corporation is in default of such credit facilities or if the
amount of outstanding indebtedness under such facilities exceeds
the then existing current borrowing base. Interest payments under
the debentures are also subordinated to indebtedness under the
credit facilities and payments under the debentures are similarly
restricted. For the nine months ended September 30, 2009, the
average effective interest rate on the outstanding amounts under
the facility was approximately 4.4% (September 30, 2008 - 5.2%). 7.
Asset Retirement Obligations A reconciliation of the asset
retirement obligations is provided below: Nine months ended Year
ended September 30, December 31, 2009 2008
---------------------------------------------------------------------
Balance, beginning of period $ 73,852 $ 60,835 Accretion expense
4,102 4,186 Liabilities incurred 559 1,526 Change in estimates
15,918 16,564 Property dispositions (22,275) - Liabilities settled
(4,490) (9,259)
---------------------------------------------------------------------
Balance, end of period $ 67,666 $ 73,852
---------------------------------------------------------------------
8. Other Liability In August 2009, Advantage vacated an office
location as the space was no longer required. Advantage has not
currently subleased the office space and is obligated to make lease
payments for the remainder of the life of the lease, which
terminates in November 2012. As a result, the full fair value of
future scheduled lease payments has been recognized as general and
administrative expense with a corresponding liability. Fair value
was determined on a present value basis, using a credit-adjusted
risk free rate of 7%. A reconciliation of the other liability is as
follows: Nine months ended September 30, 2009
---------------------------------------------------------------------
Office lease liability incurred $ 3,781 Accretion expense 22
Liability settled (109)
---------------------------------------------------------------------
Balance, end of period $ 3,694
---------------------------------------------------------------------
9. Shareholders' Equity (a) Share capital (i) Authorized The
Corporation is authorized to issue an unlimited number of shares
without nominal or par value. (ii) Issued Number of Shares Amount
---------------------------------------------------------------------
Issued on conversion to a corporation 162,197,790 $2,186,778 Issued
pursuant to Restricted Share Performance Incentive Plan 278,627
1,606
---------------------------------------------------------------------
Balance at September 30, 2009 162,476,417 $2,188,384
---------------------------------------------------------------------
On July 9, 2009, the Fund successfully completed the plan of
arrangement pursuant to an information circular dated June 5, 2009.
Advantage Energy Income Fund was dissolved and converted into the
corporation, Advantage Oil and Gas Ltd., with each Trust Unit
converted into one Common Share. (b) Unit capital Number of Units
Amount
---------------------------------------------------------------------
Balance at December 31, 2008 142,824,854 $ 2,077,760 Distribution
reinvestment plan 1,263,158 5,211 Issued on maturity of debentures
946,887 4,867 Issued pursuant to Restricted Trust Unit Plan 171,093
939 Management internalization forfeitures (7,862) (159) Units
issued, less costs net of future taxes 17,000,000 98,161 Units
purchased from dissenting Unitholders (340) (1) Cancelled on
conversion to a corporation (162,197,790) (2,186,778)
---------------------------------------------------------------------
Balance at July 9, 2009 - $ -
---------------------------------------------------------------------
On June 23, 2006, the Fund internalized the external management
contract structure and eliminated all related fees for total
original consideration of 1,933,208 Trust Units initially valued at
$39.1 million and subject to escrow provisions over a 3-year
period, vesting one-third each year beginning June 23, 2007. For
the nine months ended September 30, 2009, a total of 7,862 Trust
Units issued for the management internalization were forfeited
(September 30, 2008 - 5,111 Trust Units) and $1.7 million has been
recognized as management internalization expense (September 30,
2008 - $6.0 million). All Trust Units in respect of management
internalization were issued and none remained held in escrow
(December 31, 2008 - 564,612 Trust Units remained in escrow). Prior
to converting to a corporation on July 9, 2009, 1,263,158 Trust
Units (September 30, 2008 - 2,918,047 Trust Units) were issued
under the Premium Distribution(TM), Distribution Reinvestment and
Optional Trust Unit Purchase Plan, generating $5.2 million
(September 30, 2008 - $30.7 million) reinvested in the Fund. The
Premium Distribution (TM), Distribution Reinvestment and Optional
Trust Unit Purchase Plan was discontinued on March 18, 2009,
concurrent with the discontinuation of cash distributions. The
principal amount of 8.25% convertible debentures matured on
February 1, 2009 and was settled by issuing 946,887 Trust Units. On
July 7, 2009, the Fund successfully closed a bought deal financing
with 17 million Trust Units issued at $6.00 each, for gross
proceeds of $102 million, less $3.8 million related to $5.2 million
of issuance costs net $1.4 million of future taxes. (c) Contributed
surplus Nine months ended Year ended September 30, December 31,
2009 2008
---------------------------------------------------------------------
Balance, beginning of period $ 287 $ 2,005 Equity-based
compensation 1,578 (1,256) Exercise of Trust Unit Rights - (691)
Expiration of convertible debentures equity component 3,348 229
---------------------------------------------------------------------
Balance, end of period $ 5,213 $ 287
---------------------------------------------------------------------
(d) Equity-based compensation Prior to the conversion to a
corporation, the Fund had a Restricted Trust Unit Plan and granted
Restricted Trust Units ("RTUs") to service providers in January
2009. This grant was related to 2008 and valued at $3.8 million to
be issued in Trust Units at $5.49 per Trust Unit. The Fund's 2008
annual return was within the top two-thirds of the approved peer
group and the Board of Directors granted RTUs at their discretion.
The RTUs were deemed to be granted in January 2009 with 171,093
Trust Units issued for the first one-third of the grant that vested
immediately and 379,009 RTUs representing the remaining two-thirds
of the grant that will vest over the subsequent two anniversary
dates. Since conversion to a corporation, the RTUs are now
considered restricted shares and will be settled by the issuance of
shares of the Corporation, with corresponding compensation expense
recognized over the service period. There were no other RTU grants
made by the Fund during prior years and no related compensation
expense has been recognized. Upon conversion to a corporation on
July 9, 2009, Advantage implemented a new Restricted Share
Performance Incentive Plan ("RSPIP" or the "Plan") as approved by
the shareholders with the purpose to retain and attract employees,
to reward and encourage performance, and to focus employees on
operating and financial performance that results in lasting
shareholder return. The Plan authorizes the Board of Directors to
grant restricted shares to service providers of the Corporation,
including directors, officers, employees and consultants. The
number of restricted shares granted is based on the Corporation's
share price return for a twelve-month period and compared to a peer
group approved by the Board of Directors. The share price return is
calculated at the end of each and every quarter and is primarily
based on the 12-month change in the share price. If the share price
return for a 12-month period is positive, a restricted share grant
will be calculated based on the return. If the share price return
for a 12-month period is negative, but the return is still within
the top two-thirds of the approved peer group performance, the
Board of Directors may choose a discretionary restricted share
grant. The restricted share grants generally vest one-third
immediately on grant date, with the remaining two-thirds vesting
evenly on the following two yearly anniversary dates. The holders
of restricted shares may elect to receive cash upon vesting in lieu
of the number of shares to be issued, subject to consent of the
Corporation. Compensation cost related to the Plan is recognized as
compensation expense within general and administrative expense over
the service period and incorporates the share grant price, the
estimated number of restricted shares to vest, and certain
management estimates. The maximum amount of restricted shares
granted in any one quarter is limited to 50% of the base salaries
of those individuals participating in the Plan for such period. In
conjunction with the corporate conversion, a transitional award of
restricted shares to service providers was approved by shareholders
valued at $8.4 million to be issued in shares at $5.80 per share.
The restricted shares were deemed to be granted in September 2009
with 251,867 shares issued for the first one-quarter of the grant
that vested immediately and 1,090,207 restricted shares
representing the remaining three-quarters of the grant that will
vest over the subsequent three anniversary dates. Compensation
expense is recognized over the service period and included in
general and administrative expense. In July 2009, the Corporation
issued 26,760 shares related to restricted shares that vested upon
employee terminations. In October 2009, the first RSPIP grant was
made to service providers and valued at $8.3 million to be issued
in shares at $7.23 per share. A total of 259,573 shares were issued
for the first one-third of the grant that vested immediately and
768,851 restricted shares representing the remaining two-thirds of
the grant that will vest over the subsequent two anniversary dates.
No compensation expense was included in general and administrative
expense for the three and nine month periods ended September 30,
2009 as this grant was deemed to occur after September 30, 2009.
(e) Net income (loss) per share The calculations of basic and
diluted net income (loss) per share are derived from both net
income (loss) available to shareholders and weighted average shares
outstanding, calculated as follows: Three months ended Nine months
ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2009 2008 2009 2008
---------------------------------------------------------------------
Income (loss) available to Shareholders Basic $ (53,293) $ 113,391
$ (72,213) $ 74,900 Interest and accretion on convertible
debentures - 4,133 - -
---------------------------------------------------------------------
Diluted $ (53,293) $ 117,524 $ (72,213) $ 74,900
---------------------------------------------------------------------
Weighted average shares outstanding Basic 161,182,480 140,192,094
149,915,761 138,806,106 Trust Units Rights - - - 22,339 Management
internalization - 318,490 - 539,752 Convertible debentures -
8,775,293 - -
---------------------------------------------------------------------
Diluted 161,182,480 149,285,877 149,915,761 139,368,197
---------------------------------------------------------------------
The calculation of diluted net income (loss) per share excludes all
series of convertible debentures for both the three and nine months
ended September 30, 2009, and the nine months ended September 30,
2008 as the impact on these periods would be anti-dilutive. Total
weighted average shares issuable in exchange for the convertible
debentures and excluded from the diluted net loss per share
calculation for the three and nine months ended September 30, 2009
were 8,345,392 and 8,964,955 shares, respectively. Total weighted
average shares issuable in exchange for the convertible debentures
and excluded from the diluted net income per share calculation for
the nine months ended September 30, 2008 was 9,775,877. Unvested
restricted shares granted have been excluded from the calculation
of diluted net loss per share for the three and nine months ended
September 30, 2009, as the impact would have been anti- dilutive.
Total weighted average shares issuable in exchange for the
restricted shares and excluded from the diluted net loss per share
calculation for the three and nine months ended September 30, 2009
were 196,831 and 180,076, respectively. Management internalization
escrowed Trust Units have been excluded from the calculation of
diluted net loss per share for the nine months ended September 30,
2009, as the impact would have been anti- dilutive. Total weighted
average shares issuable in exchange for the Management
internalization escrowed Trust Units and excluded from the diluted
net loss per share calculation for the nine months ended September
30, 2009 was 254,161. 10. Financial Instruments Financial
instruments of the Corporation include accounts receivable,
deposits, accounts payable and accrued liabilities, bank
indebtedness, convertible debentures, other liabilities and
derivative assets and liabilities. Accounts receivable and deposits
are classified as loans and receivables and measured at amortized
cost. Accounts payable and accrued liabilities, bank indebtedness
and other liabilities are all classified as other liabilities and
similarly measured at amortized cost. As at September 30, 2009,
there were no significant differences between the carrying amounts
reported on the balance sheet and the estimated fair values of
these financial instruments due to the short terms to maturity and
the floating interest rate on the bank indebtedness. The
Corporation has convertible debenture obligations outstanding, of
which the liability component has been classified as other
liabilities and measured at amortized cost. The convertible
debentures have different fixed terms and interest rates (note 5)
resulting in fair values that will vary over time as market
conditions change. As at September 30, 2009, the estimated fair
value of the total outstanding convertible debenture obligation was
$133.2 million (December 31, 2008 - $191.2 million). The fair value
of convertible debentures was determined based on the public
trading activity of such debentures. Advantage has an established
strategy to manage the risk associated with changes in commodity
prices by entering into derivatives, which are recorded at fair
value as derivative assets and liabilities with gains and losses
recognized through earnings. As the fair value of the contracts
varies with commodity prices, they give rise to financial assets
and liabilities. The fair values of the derivatives are determined
through valuation models completed internally and by third parties.
Various assumptions based on current market information were used
in these valuations, including settled forward commodity prices,
interest rates, foreign exchange rates, volatility and other
relevant factors. The actual gains and losses realized on eventual
cash settlement can vary materially due to subsequent fluctuations
in commodity prices as compared to the valuation assumptions.
Credit Risk Accounts receivable, deposits, and derivative assets
are subject to credit risk exposure and the carrying values reflect
Management's assessment of the associated maximum exposure to such
credit risk. Advantage mitigates such credit risk by closely
monitoring significant counterparties and dealing with a broad
selection of partners that diversify risk within the sector. The
Corporation's deposits are primarily due from the Alberta
Provincial government and are viewed by Management as having
minimal associated credit risk. To the extent that Advantage enters
derivatives to manage commodity price risk, it may be subject to
credit risk associated with counterparties with which it contracts.
Credit risk is mitigated by entering into contracts with only
stable, creditworthy parties and through frequent reviews of
exposures to individual entities. In addition, the Corporation only
enters into derivative contracts with major national banks and
international energy firms to further mitigate associated credit
risk. Substantially all of the Corporation's accounts receivable
are due from customers and joint operation partners concentrated in
the Canadian oil and gas industry. As such, accounts receivable are
subject to normal industry credit risks. As at September 30, 2009,
$8.6 million or 21% of accounts receivable are outstanding for 90
days or more (December 31, 2008 - $14.2 million or 17% of accounts
receivable). The Corporation believes that the entire balance is
collectible, and in some instances we have the ability to mitigate
risk through withholding production or offsetting payables with the
same parties. Management has provided for an allowance for doubtful
accounts of $1.0 million at September 30, 2009. Liquidity Risk The
Corporation is subject to liquidity risk attributed from accounts
payable and accrued liabilities, bank indebtedness, convertible
debentures, other liabilities, and derivative liabilities. Accounts
payable and accrued liabilities, and derivative liabilities are
primarily due within one year of the balance sheet date and
Advantage does not anticipate any problems in satisfying the
obligations from cash provided by operating activities and the
existing credit facility. The Corporation's bank indebtedness is
subject to a $525 million credit facility agreement. Although the
credit facility is a source of liquidity risk, the facility also
mitigates liquidity risk by enabling Advantage to manage interim
cash flow fluctuations. The credit facility constitutes a revolving
facility for a 364 day term which is extendible annually for a
further 364 day revolving period at the option of the syndicate. If
not extended, the revolving credit facility is converted to a one
year term facility with the principal payable at the end of such
one year term. The terms of the credit facility are such that it
provides Advantage adequate flexibility to evaluate and assess
liquidity issues if and when they arise. Additionally, the
Corporation regularly monitors liquidity related to obligations by
evaluating forecasted cash flows, optimal debt levels, capital
spending activity, working capital requirements, and other
potential cash expenditures. This continual financial assessment
process further enables the Corporation to mitigate liquidity risk.
Advantage has several series of convertible debentures outstanding
that mature from 2010 to 2011 (note 5). Interest payments are made
semi-annually with excess cash provided by operating activities. As
the debentures become due, the Corporation can satisfy the
obligations in cash or issue shares at a price determined in the
applicable debenture agreements. This settlement alternative allows
the Corporation to adequately manage liquidity, plan available cash
resources and implement an optimal capital structure. To the extent
that Advantage enters derivatives to manage commodity price risk,
it may be subject to liquidity risk as derivative liabilities
become due. While the Corporation has elected not to follow hedge
accounting, derivative instruments are not entered for speculative
purposes and Management closely monitors existing commodity risk
exposures. As such, liquidity risk is mitigated since any losses
actually realized are subsidized by increased cash flows realized
from the higher commodity price environment. The timing of cash
outflows relating to financial liabilities are as follows: Less
than One to Four to one year three years five years Thereafter
---------------------------------------------------------------------
Accounts payable and accrued liabilities $ 87,715 $ - $ - $ -
Derivative liabilities 8,796 2,785 - - Other liabilities 1,304
2,825 - Bank indebtedness - principal - 330,800 - - - interest
18,189 13,642 - - Convertible debentures - principal 69,927 62,294
- - - interest 9,412 7,299 - -
---------------------------------------------------------------------
$ 195,343 $ 419,645 $ - $ -
---------------------------------------------------------------------
The Corporation's bank indebtedness does not have specific maturity
dates. It is governed by a credit facility agreement with a
syndicate of financial institutions (note 6). Under the terms of
the agreement, the facility is reviewed annually, with the next
review scheduled in June 2010. The facility is revolving, and is
extendible at each annual review for a further 364 day period at
the option of the syndicate. If not extended, the credit facility
is converted at that time into a one year term facility, with the
principal payable at the end of such one year term. Management
fully expects that the facility will be extended at each annual
review. Interest Rate Risk The Corporation is exposed to interest
rate risk to the extent that bank indebtedness is at a floating
rate of interest and the Corporation's maximum exposure to interest
rate risk is based on the effective interest rate and the current
carrying value of the bank indebtedness. The Corporation monitors
the interest rate markets to ensure that appropriate steps can be
taken if interest rate volatility compromises the Corporation's
cash flows. A 1% increase in interest rates for the nine months
ended September 30, 2009 could have decreased net income by
approximately $2.8 million for that period. Price and Currency Risk
Advantage's derivative assets and liabilities are subject to both
price and currency risks as their fair values are based on
assumptions including forward commodity prices and foreign exchange
rates. The Corporation enters derivative financial instruments to
manage commodity price risk exposure relative to actual commodity
production and does not utilize derivative instruments for
speculative purposes. Changes in the price assumptions can have a
significant effect on the fair value of the derivative assets and
liabilities and thereby impact net loss. It is estimated that a 10%
increase in the forward natural gas prices used to calculate the
fair value of the natural gas derivatives at September 30, 2009
could increase net loss by approximately $9.2 million for the nine
months ended September 30, 2009. As well, an increase of 10% in the
forward crude oil prices used to calculate the fair value of the
crude oil derivatives at September 30, 2009 could increase net loss
by $6.0 million for the nine months ended September 30, 2009. An
increase of 10% in the forward power prices used to calculate the
fair value of the power derivatives at September 30, 2009 would not
materially increase net loss for the nine months ended September
30, 2009. A similar increase in the currency rate assumption
underlying the derivatives fair value does not materially increase
net loss. As at September 30, 2009 the Corporation had the
following derivatives in place: Description of Derivative Term
Volume Average Price
---------------------------------------------------------------------
Natural gas - AECO Fixed price April 2009 to 9,478 mcf/d Cdn
$8.66/mcf December 2009 Fixed price April 2009 to 9,478 mcf/d Cdn
$8.67/mcf December 2009 Fixed price April 2009 to 9,478 mcf/d Cdn
$8.94/mcf December 2009 Fixed price April 2009 to 14,217 mcf/d Cdn
$7.59/mcf March 2010 Fixed price April 2009 to 14,217 mcf/d Cdn
$7.56/mcf March 2010 Fixed price January 2010 to 14,217 mcf/d Cdn
$8.23/mcf June 2010 Fixed price January 2010 to 18,956 mcf/d
Cdn$7.29/mcf December 2010 Fixed price April 2010 to 18,956 mcf/d
Cdn$7.25/mcf January 2011 Crude oil - WTI Collar April 2009 to
2,000 bbls/d Bought put December 2009 Cdn $62.00/bbl Sold call Cdn
$76.00/bbl Fixed price April 2009 to 2,000 bbls/d Cdn$62.80/bbl
March 2010 Fixed price April 2010 to 2,000 bbls/d Cdn$69.50/bbl
January 2011 Electricity - Alberta Pool Price Fixed price March
2009 to 2.0 MW Cdn$75.43/MWh December 2009 As at September 30,
2009, the fair value of the derivatives outstanding resulted in an
asset of approximately $43.2 million (December 31, 2008 - $42.6
million) and a liability of approximately $11.6 million (December
31, 2008 - $1.7 million). For the nine months ended September 30,
2009, $9.3 million was recognized in income as an unrealized
derivative loss (September 30, 2008 - $4.8 million unrealized
derivative gain) and $70.2 million was recognized in income as a
realized derivative gain (September 30, 2008 - $40.9 million
realized derivative loss). 11. Capital Management The Corporation
manages its capital with the following objectives: - To ensure
sufficient financial flexibility to achieve the ongoing business
objectives including replacement of production, funding of future
growth opportunities, and pursuit of accretive acquisitions; and -
To maximize shareholder return through enhancing the share value.
Advantage monitors its capital structure and makes adjustments
according to market conditions in an effort to meet its objectives
given the current outlook of the business and industry in general.
The capital structure of the Corporation is composed of working
capital (excluding derivative assets and liabilities), bank
indebtedness, convertible debentures, capital lease obligations and
shareholders' equity. Advantage may manage its capital structure by
issuing new shares, repurchasing outstanding shares, obtaining
additional financing either through bank indebtedness or
convertible debenture issuances, refinancing current debt, issuing
other financial or equity-based instruments, declaring a dividend,
implementing a dividend reinvestment plan, adjusting capital
spending, or disposing of assets. The capital structure is reviewed
by Management and the Board of Directors on an ongoing basis.
Advantage's capital structure as at September 30, 2009 is as
follows: September 30, 2009
---------------------------------------------------------------------
Bank indebtedness (long-term) $ 330,800 Working capital deficit(1)
109,581
---------------------------------------------------------------------
Net debt 440,381 Shares outstanding market value 1,229,946
Convertible debentures maturity value (long-term) 62,294 Capital
lease obligations (long-term) 2,041
---------------------------------------------------------------------
Total capitalization $1,734,662
---------------------------------------------------------------------
(1) Working capital deficit includes accounts receivable, prepaid
expenses and deposits, accounts payable and accrued liabilities,and
the current portion of capital lease obligations and convertible
debentures. The Corporation's bank indebtedness is governed by a
$525 million credit facility agreement (note 6) that contains
standard commercial covenants for facilities of this nature. The
only financial covenant is a requirement for Advantage to maintain
a minimum cash flow to interest expense ratio of 3.5:1, determined
on a rolling four quarter basis. The Corporation is in compliance
with all credit facility covenants. As well, the borrowing base for
the Corporation's credit facilities is determined through utilizing
Advantage's regular reserve estimates. The banking syndicate
thoroughly evaluates the reserve estimates based upon their own
commodity price expectations to determine the amount of the
borrowing base. Revision or changes in the reserve estimates and
commodity prices can have either a positive or a negative impact on
the borrowing base of the Corporation. Management of the
Corporation's capital structure is facilitated through its
financial and operational forecasting processes. The forecast of
the Corporation's future cash flows is based on estimates of
production, commodity prices, forecast capital and operating
expenditures, and other investing and financing activities. The
forecast is regularly updated based on new commodity prices and
other changes, which the Corporation views as critical in the
current environment. Selected forecast information is frequently
provided to the Board of Directors. The Corporation's capital
management objectives, policies and processes have remained
unchanged during the nine month period ended September 30, 2009.
12. Commitments Advantage has several lease commitments relating to
office buildings. The estimated remaining annual minimum operating
lease rental payments for the buildings are as follows, of which
$3.8 million is recognized in other liabilities (note 8): 2009 $
966 2010 3,878 2011 1,471 2012 1,072
--------------------------------- $ 7,387
--------------------------------- 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",
"expect", "may", "will", "project", "predict", "potential",
"targeting", "intend", "could", "might", "should", "believe",
"would" and similar expressions and include statements relating to,
among other things, individual wells, regions, properties or
projects. These statements involve substantial known and unknown
risks and uncertainties, certain of which are beyond Advantage's
control, including: the impact of general economic conditions;
industry conditions; changes in laws and regulations including the
adoption of new environmental laws and regulations and changes in
how they are interpreted and enforced; fluctuations in commodity
prices and foreign exchange and interest rates; stock market
volatility and market valuations; volatility in market prices for
oil and natural gas; 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; changes in
income tax laws or changes in tax laws and incentive programs
relating to the oil and gas industry and income trusts; geological,
technical, drilling and processing problems and other difficulties
in producing petroleum reserves; and obtaining required approvals
of regulatory authorities. 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. Except as required
by law, Advantage undertakes no obligation to publicly update or
revise any forward-looking statements. For additional risk factors
in respect of Advantage and its business, please refer to its
Annual Information Form dated March 19, 2009 which is available on
SEDAR at http://www.sedar.com/ and http://www.advantageog.com/.
References in this press release to initial test production rates,
initial "productivity", initial "flow" rates, "flush" production
rates and "behind pipe production" 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. While encouraging, readers are cautioned not to
place reliance on such rates in calculating the aggregate
production for Advantage. Barrels of oil equivalent (boe) may be
misleading, particularly if used in isolation. A boe conversion
ratio has been calculated using a conversion rate of six thousand
cubic feet of natural gas to one barrel. "TCF" stands for trillion
cubic feet of natural gas. Such conversion rates are based on an
energy equivalency conversion method application at the burner tip
and do not represent an economic value equivalency at the wellhead.
This press release contains references to estimates of natural gas
classified as discovered petroleum initially in place and
contingent resources which are not, and should not be confused
with, estimates of oil and gas reserves. "Discovered petroleum
initially in place" is defined in the Canadian Oil and Gas
Evaluation Handbook (the "COGE Handbook") as the quantity of
hydrocarbons that are estimated to be in place within a known
accumulation. Discovered petroleum initially in place is divided
into recoverable and unrecoverable portions, with the estimated
future recoverable portion classified as reserves and contingent
resources. "Contingent resources" is defined in the COGE Handbook
as the quantity of petroleum that is estimated to be potentially
recoverable from known accumulations using established technology
or technology under development which are not currently considered
to be commercially recoverable due to one or more contingencies.
There is no certainty that it will be commercially viable to
produce any portion of the discovered petroleum initially in place
or contingent resources. There are a number of contingencies
associated with the development of the Montney resources relating
to performance from new and existing wells, future drilling
programs, the lack of infrastructure, well density per section,
recovery factors and development necessarily involves known and
unknown risks and uncertainties, including those risks identified
in this press release. The estimates of discovered petroleum
initially in place and contingent resources represents the best
estimate, as defined in the COGE Handbook, of such resources. The
contingent resources estimated by Sproule have not been adjusted
for risk based on the chance of development. There is no certainty
that the resources will be developed and, if developed, there is no
certainty that it will be commercially viable to produce any
portion of the reported contingent resources for the Montney zones.
Finding and development costs have been calculated in accordance
with section 5.15 of National Instrument 51-101 Standards of
Disclosure for Oil and Gas Activities which requires changes in FDC
to be included in the calculation of finding and development costs.
Advantage has also provided the calculation of finding and
development costs excluding changes in FDC as indicated above. The
aggregate of the exploration and development costs incurred in the
most recent financial year and the change during that year in
estimated FDC generally will not reflect total finding and
development costs related to reserve additions for that year. The
disclosure of finding and development costs for Glacier does not
include comparative information of finding and development costs
for the years ended 2007 and 2006 as finding and development costs
were not calculated for the Glacier properties for the years ended
2007 and 2006. DATASOURCE: Advantage Oil & Gas Ltd. CONTACT:
Investor Relations, Toll free: 1-866-393-0393, ADVANTAGE OIL &
GAS LTD., 700, 400 -3rd Avenue SW, Calgary, Alberta, T2P 4H2,
Phone: (403) 718-8000, Fax: (403) 718-8300, Web Site:
http://www.advantageog.com/, E-mail:
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