Advantage Announces Third Quarter 2009 Results, Continued Success at Glacier
and A 44% Reduction in Debt Obligations
(TSX: AAV, NYSE: AAV)
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
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 www.sedar.com and 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
On
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
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
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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
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 $592,757 (44)%
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(1) Total revenue excludes unrealized derivative gains and losses.
Natural gas, crude oil and NGLs revenues, excluding hedging, decreased significantly for the three and nine months ended
Production
Three months ended Nine months ended
September 30 September 30
2009 2008 % change 2009 2008 % change
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Natural gas
(mcf/d) 91,200 122,627 (26)% 111,288 123,611 (10)%
Crude oil
(bbls/d) 6,289 9,566 (34)% 7,643 9,576 (20)%
NGLs (bbls/d) 2,142 2,414 (11)% 2,210 2,344 (6)%
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Total (boe/d) 23,631 32,418 (27)% 28,401 32,522 (13)%
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Natural gas (%) 64% 63% 65% 63%
Crude oil (%) 27% 30% 27% 29%
NGLs (%) 9% 7% 8% 8%
Average daily production for the third quarter of 2009 was 24% lower than the second quarter of 2009 and 27% lower than the same period of the prior year due to the successfully completed asset dispositions that closed in
Commodity Prices and Marketing
Natural Gas
Three months ended Nine months ended
September 30 September 30
($/mcf) 2009 2008 % change 2009 2008 % change
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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
Crude Oil and NGLs
Three months ended Nine months ended
September 30 September 30
($/bbl) 2009 2008 % change 2009 2008 % change
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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
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
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Natural gas - AECO
October to December 2009 82% Cdn$8.17/mcf Cdn$8.17/mcf
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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
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Total 2010 58% Cdn$7.46/mcf Cdn$7.46/mcf
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January 2011 24% Cdn$7.25/mcf Cdn$7.25/mcf
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Crude Oil - WTI
October to December 2009 53% Cdn$62.40/bbl Cdn$69.40/bbl
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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
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Total 2010 31% Cdn$67.83/bbl Cdn$67.83/bbl
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January 2011 35% Cdn$69.50/bbl Cdn$69.50/bbl
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(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
Royalties
Three months ended Nine months ended
September 30 September 30
2009 2008 % change 2009 2008 % change
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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
Operating Costs
Three months ended Nine months ended
September 30 September 30
2009 2008 % change 2009 2008 % change
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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
General and Administrative
Three months ended Nine months ended
September 30 September 30
2009 2008 % change 2009 2008 % change
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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
Upon conversion to a corporation on
For the nine months ended
Management Internalization
Three months ended Nine months ended
September 30 September 30
2009 2008 % change 2009 2008 % change
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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
Interest on Bank Indebtedness
Three months ended Nine months ended
September 30 September 30
2009 2008 % change 2009 2008 % change
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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
Interest and Accretion on Convertible Debentures
Three months ended Nine months ended
September 30 September 30
2009 2008 % change 2009 2008 % change
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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
Depletion, Depreciation and Accretion
Three months ended Nine months ended
September 30 September 30
2009 2008 % change 2009 2008 % change
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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
Taxes
Current taxes paid or payable for the nine months ended
On
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
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
When compared to the second quarter of 2009, our cash netbacks per boe actually increased 6% to
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
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
On
At
Bank Indebtedness, Credit Facility and Other Obligations
At
Advantage had a working capital deficiency of
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
On
Advantage's corporate capital budget for the twelve month period ending
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
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
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
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
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
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
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
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
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
In conjunction with our corporate conversion, we announced on
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
The Alberta Government's recently announced extension of the energy incentive programs to
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
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 www.sedar.com and the Corporation's website at 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.
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
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.
%CIK: 0001468079
For further information: 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: www.advantageog.com, E-mail: [email protected]
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