Advantage Announces Record Third Quarter 2018 & Three Year Plan to Accelerate Glacier / Pipestone Area Condensate & Light Oil Growth

Source Press Release
Company Advantage Oil & Gas Ltd. 
Tags Hedging, Capital Spending, Financial & Operating Data, Strategy - Corporate
Date November 01, 2018

Advantage Oil & Gas Ltd. ("Advantage" or the "Corporation") is pleased to announce strong third quarter 2018 results which included record production of 45,611 boe/d (273.7 mmcfe/d), up 29% from the second quarter of 2018 and up 20% from the same period in 2017. Liquids production increased 69% to a record 1,804 bbls/d compared to the second quarter of 2018, up 29% from the same period of 2017. Advantage exited the third quarter of 2018 with liquids production of 2,100 bbls/d which was comprised of approximately 67% condensate ("C5+").

Adjusted funds flow during the quarter was $32 million or $0.17/share supported by realized hedging and marketing diversification gains of $9.5 million and industry leading low total cash costs of $6.12/boe ($1.02/mcfe), down 12% from the first half of 2018.  Net capital expenditures of $48.4 million were on-track for the quarter resulting in a total debt to trailing 12 month adjusted funds flow ratio of 1.8 which is estimated to be reduced to 1.6 at year-end 2018 due to surplus cash generated from Glacier operations during the fourth quarter (See Appendix  - Third Quarter 2018).

Three Year Development Plan (2019 through 2021)

The Board of Directors of Advantage has approved a three year development plan (the "Plan") including the Corporation's 2019 capital and operating budget.  This Plan is expected to be internally funded through redeploying surplus cash generated by our Glacier asset, growing liquids revenue and existing credit facilities.  Advantage's Plan is based on current annual average 2019 through 2021 strip prices for natural gas of $1.78/mcf AECO and oil of WTI $65.50 U.S./bbl and the Corporation's hedging and market diversification positions (see summary Plan estimates and assumptions provided in this press release).

Advantage's Plan is strategically designed to:

  • Continue strengthening our solid business foundation by increasing our premium C5+ / light oil production mix to further diversify and enhance the Corporation's revenue sources making Advantage even stronger through and beyond 2021 
  • Preserve balance sheet strength and develop additional operational and infrastructure optionality by optimizing infrastructure investment, leveraging efficiencies in our existing owned process capacity and utilization of third party processing capacity
  • Strengthen netbacks while maintaining Advantage's industry leading low cash cost structure
  • Increase flexibility to optimize capital allocation by development of Advantage's vast multi-zone liquids potential while retaining torque to its extensive and ultra-low cost natural gas resource

Key Anticipated/Estimated highlights of our Plan are:

  • Increases annual liquids production 700% to an exit rate of over 14,000 bbls/d and an annual average of 11,370 bbls/d in 2021 representing over 22% of total production and approximately 60% of total revenue 
  • Increases premium C5+ / light oil content from currently 67% to 82% of total liquids
  • Increases total annual average production by 25% or 8% compound annual growth rate ("CAGR") to 52,300 boe/d(314 mmcfe/d) in 2021 over estimated 2018 annual production 
  • Further diversifies Advantage's revenue exposure with natural gas accounting for approximately 14% AECO, 13% Dawn and 14% mid-west U.S. by 2021
  • Increases adjusted funds flow by 15% to $0.99/share in 2019, 26% to $1.25/share in 2020 and 34% to $1.67/share in 2021 over each prior annual period
  • Increases adjusted funds flow per boe by 58% to $16.56/boe ($2.76/mcfe) 
  • Preserves financial flexibility with year-end total debt to trailing adjusted funds flow ratios of 1.6, 1.2 and 0.6 for2019, 2020 and 2021, respectively. Significant cash flow growth results in cumulative cash of $735 million as compared to a capital investment of $690 million over the three years
  • Maintains Advantage's industry leading low total cash costs averaging $7.92/boe ($1.32/mcfe) over the three years
  • Requires only 96 new Montney wells to achieve the objectives of our Plan while retaining a significant high quality inventory of over 1,200 future Montney locations for development beyond 2021
  • Enhances operational and financial optionality through utilization of third party processing capacity for our initial Pipestone/Wembley development with options to expand.  This efficiently manages infrastructure capitalrequirements, provides more processing flexibility and accommodates growth from Advantage's other assets and third party processing revenue at our 100% owned Glacier gas plant.  The Corporation continues to work on and retains future optionality to construct a Wembley to Glacier pipeline

We look forward to reporting on our progress as we continue development of our world class Montney resource with financially disciplined and full-cycle returns based approach that focuses on per share value generation.

Three Year Development Plan Commentary (2019 through 2021)

Advantage's Plan is anticipated to position the Corporation to capitalize on emerging demand growth with a more diversified revenue base and added flexibility to capture value enhancing opportunities.  We believe Canadian condensate market demand will continue to exceed domestic supply growth resulting in strong future pricing.   We also believe that Canadian natural gas demand will continue to grow through new domestic power, petro-chemical and industrial gas projects along with increasing export demand in the next 3 to 5 years.  Accordingly, the Corporation's Plan to accelerate development of its liquids-rich lands with a specific focus on premium C5+ / light oil while retaining optionality to accelerate development of its ultra-low cost gas resource will create additional capital allocation flexibility.

Advantage's Plan will focus development of its liquids-rich Montney resources at east Glacier, Valhalla, Pipestone/Wembley with additional delineation of the Corporation's land block at Progress.   The Plan includes anticipated liquids growth from east Glacier and Valhalla (liquids yields of 50 bbls/mmcf to 100 bbls/mmcf) in 2019with increasing contribution from our Pipestone/Wembley (>250 bbls/mmcf) land block beginning in the fourth quarter of 2019 and ramping up significantly thereafter. 

Existing gas production is expected to modestly decrease over the three year Plan; however, our low cost and lower decline Glacier foundational asset is expected to provide approximately $175 million of free cash flow to re-invest in development of Advantage's liquids potential.     

Drilling and Future Inventory

Advantage's total Montney land holdings comprise 200 net sections (128,000 net acres) of prolific gas and liquids-rich drilling opportunities in multiple layers. To date, only 5% of our liquids-rich future well inventory has been drilled.   The estimated future drilling inventory within our multi-zone land holdings reinforces the extensive high quality resource development potential that exists today and beyond 2021.

# Estimated Future Drilling Locations(1) 
   
C3+ Shallow Cut Liquids Content   # Locations 
(approximately 50% to 80% C5%+)   
<25 bbls/mmcf   270 
25 to 100 bbls/mmcf   730 
>100 bbls/mmcf   200 to 400 
Total    1,200 to 1,400                                     
 

Note: (1)  Management estimates given consideration to number of Montney layers, well spacing, frac design, regulatory guidelines and production & delineation results.  C3+ refers to propane plus butane & condensate. 

The Plan includes drilling 96 new Montney production wells comprised of 42 ultra-rich C5+/light oil wells at Pipestone/Wembley and 54 wells targeting the premium condensate Montney intervals at Valhalla, east Glacier and Progress.  The development drilling program at Pipestone/Wembley will commence during the second half of 2019 to support liquids growth targets in 2020 in conjunction with third party processing capacity.

Well costs (drill, complete, equip and tie-in) are estimated to range from $4.9 million to $5.3 million per welldependent on the number of frac stages and length.

Facilities, Processing and Transportation

Processing capacity in the Pipestone Area is currently constrained with one new third party mid-stream facility expected to come on-stream in the second half of 2019.  Subsequent new third party mid-stream facilities are expected to be completed by mid-2020 and mid-2021 with additional expansion plans progressing to provide sufficient capacity to match longer term area growth plans. 

Advantage has secured and is finalizing additional third party processing arrangements in the Pipestone/Wembley area to accommodate our Plan gas processing volume requirements with options to add additional processing capacity for future development.  This allows Advantage to optimize infrastructure investment and accelerate the drilling of liquids-rich wells.   This will also allow Advantage more flexibility to utilize the current spare raw gas processing capacity of approximately 120 mmcf/d at our 100% owned Glacier gas plant to accommodate growth from east Glacier and Valhalla and provide additional flexibility to consider third party processing arrangements at Glacier.  Advantage will retain the optionality to extend its gathering pipelines from Glacier to Wembley by completing engineering design work and surveying in 2019 but will defer the decision on this investment until a later date. 

Liquids growth from Pipestone/Wembley will be handled through a new 100% owned liquids separation/handling facility which will be constructed to an initial design capacity of 5,000 bbls/d with provisions for expansion. 

Revenue Diversification and Hedging

During the three years of the Plan, Advantage's liquids production is anticipated to grow to approximately 22% of total production in 2021 (82% C5+) and is expected to provide almost 60% of the Corporation's revenue.  At that time, Advantage's natural gas revenue as a percentage of total Corporate revenue is estimated to be comprised of approximately 14% from AECO, 13% Dawn and 14% from the U.S. mid-west markets. 

Advantage's hedging positions include an average 75 mmcf/d hedged at an average AECO price of $2.26/mcf for 2019and 23 mmcf/d hedged at an average Dawn price of U.S. $2.94/mcf for 2019.  Included in our 2019 hedging position is 87 mmcf/d hedged at an average AECO price of $2.00/mcf for the summer of 2019 where maintenance restrictions on the NGTL system are expected to occur.   The Corporation will continue to participate in hedging both natural gas and liquids prices to reduce cash flow volatility to support future development.

2019 Capital Budget

Advantage's 2019 Capital Budget will focus investment primarily to drilling and completing wells at east Glacier, Valhalla and Pipestone/Wembley to support 2019 production and to provide sufficient well productivity to meet 2020 liquids growth targets. 

Capital expenditures in 2019 are targeted at $225 million of which $154 million (68%) will be invested in drilling and completion activity.   Infrastructure investment is expected to be $58 million (26%) which includes major gathering system and liquids handling facilities for Pipestone/Wembley and the equipping and tie-in of new wells.

Development Plan Summary Table

  Guidance and Estimates 
  2019 Guidance(3)  2020 
Estimate(4) 
2021 
Estimate(4) 
Average production (Boe/day)  43,500 to 46,500  47,850  52,300 
   Gas production (mmcf/d)  244 to 260  245  246 
   Liquids production (bbls/d)  2,900 to 3,200  7,000  11,370 
   % Liquids / % Condensate/light oil  7% / 75%  15% / 80%  22% / 82% 
       
Royalty Rate (%)  4%  4%  4.5% 
Royalties ($/boe)  $0.65  $0.90  $1.15 
Operating Cost ($/boe)  $2.00  $2.45  $2.65 
Transportation Cost ($/boe)  $3.35  $3.45  $3.40 
G&A/Finance Cost ($/boe)  $1.35  $1.35  $1.25 
Total Costs ($/boe)   $7.35  $8.15  $8.45 
       
Net Capital Expenditures (millions)(1)  $210 to $240  225  240 
Capital Efficiency ($/boe/d)  $14,400  $13,700  $12,700 
Adjusted funds flow ($/boe)(1)  $11.28  $13.38  $16.56 
Adjusted funds flow (millions) (1)  $185  $235  $315 
   Per share(1)  $0.99  $1.25  $1.67 
       
       
Total YE debt / trailing cash flow ratio(1)  1.6  1.2  0.6 
       
WTI (US$/bbl) (2)  $66.79  $66.37  $63.29 
Advantage C5+/Light oil differential to WTI (CAD$/bbl) (3)  $(7.00)  $(6.00)  $(6.00) 
CAD/USD exchange rate(2)  $0.77  $0.77  $0.77 
AECO (C$/GJ) (2)  $1.68  $1.61  $1.78 
       

Notes:   
1)  Non-GAAP Measure which may not be comparable to similar non-GAAP measures used by other entities. Please see 
"Non-GAAP Advisory". 
2)  Based on strip pricing at October 23, 2018. 
3)  Management estimate. 
4)  Midpoint management estimate. 

2021 and Beyond

Advantage's land holdings and infrastructure ownership provides a strong foundation to support development of natural gas and liquids for many years beyond 2021.  Management estimates the Corporation's high quality land holdings are capable of supporting total production in excess of 120,000 boe/d with liquids production exceeding 30% of total production assuming an approximate 12+ year flat production plateau.  The estimated return on average capitalemployed (ROACE) over a 10 year period is between 10% to 15% based on a flat AECO Cdn $2.00/mcf price and a flat WTI oil price of $U.S. $65.00/bbl.  Continued efficiency improvements driven by technology gains and economies of scale could further increase these estimates.     

Updated corporate presentation and Sustainability Report have been added to our website.  The Corporation's unaudited interim condensed consolidated financial statements for the three and nine months ended September 30,2018 together with the notes thereto, and Management's Discussion and Analysis for the three and nine months ended September 30, 2018 have been filed on SEDAR and are available on the Corporation's website. 

APPENDIX - Third Quarter 2018

Operations Update

During the third quarter of 2018, Advantage resumed normal operations at our 100% owned Glacier gas plant after successfully completing the construction and commissioning of our major plant expansion project in the second quarter of 2018.  The expansion increased the raw gas processing capacity at the Glacier gas plant to 400 mmcf/d and increased shallow cut liquids extraction capacity to 6,800 bbls/d.  Current throughput is approximately 285 mmcf/d of raw gas and liquids extraction of approximately 2,100 bbls/d, providing spare capacity to accommodate future growth and third party processing opportunities.   

Production from six new liquids-rich Middle Montney wells located in west Glacier continue to outperform and are exceeding our expectations by an average of 100% after 120 days of production.

In east Glacier, seven wells of a 10 well Middle Montney pad have been rig released targeting liquid yields ranging from 50 to 80 bbls/mmcf. 

In Valhalla, two liquids-rich well pads at Valhalla consisting of five wells and two wells will commence drilling in the first quarter of 2019 as part of our winter drilling program.  These wells will be brought on-production in 2019.  Construction has commenced on Advantage's new liquids handling facility which is expected to be completed by year-end 2018. This facility is designed to compress up to 40 mmcf/d of liquids-rich gas production to our Glacier gas plant and will allow the existing and new Valhalla wells to flow unrestricted.

At Wembley, Advantage's existing well at 12-25-72-8W6 has been tied-in to a third party producer under a best-efforts processing arrangement.   Processing capacity is currently very limited in the Pipestone/Wembley area and production from the well may be restricted until 2019.  Advantage's 2018 annual liquids production is expected to be 1,520 bbls/d, an increase of 25% as compared to 2017.  Annual 2018 production guidance is 40,000 boe/d to 42,500 boe/d (240 mmcfe/d to 255 mmcfe/d).

Operating and Financial Summary

    Three months ended    Nine months ended 
Financial and Operating Highlights  September 30    September 30 
    2018    2017    2018    2017 
                 
Financial ($000, except as otherwise indicated)               
Sales including realized hedging (3)  57,928    51,706    176,625    193,832 
Net income (loss) and comprehensive income (loss)  (8,852)    13,026    (14,043)    73,614 
  per basic share(2)  (0.05)    0.07    (0.08)    0.40 
Cash provided by operating activities  30,786    56,661    115,372    156,553 
  per mcfe  1.23    2.69    1.75    2.46 
  per basic share(2)  0.17    0.30    0.62    0.84 
Adjusted funds flow(1)  32,035    36,722    104,077    139,319 
  per mcfe  1.28    1.74    1.58    2.18 
  per basic share (2)  0.17    0.20    0.56    0.75 
Cash used in investing activities  39,085    77,286    163,011    154,839 
Net capital expenditures (1)  48,437    89,799    151,834    175,052 
Working capital deficit  8,169    37,017    8,169    37,017 
Bank indebtedness  259,179    156,351    259,179    156,351 
Basic weighted average shares (000)    186,065      185,953      186,073      185,533 
Operating                       
Daily Production                       
  Natural gas (mcf/d)    262,841      219,812      233,780      225,480 
  Liquids (bbls/d)    1,804      1,395      1,328      1,215 
  Total mcfe/d    273,665      228,182      241,748      232,770 
  Total boe/d    45,611      38,030      40,291      38,795 
Average prices (including realized hedging)                       
  Natural gas ($/mcf) (3)  1.93    2.26    2.38    2.87 
  Liquids ($/bbl)  67.90    46.95    68.59    52.18 
Operating Netback ($/mcfe)(1)                       
  Sales of natural gas and liquids from production  2.22    2.06    2.30    2.80 
  Net sales of natural gas purchased from third parties(1)                                    0.02     
  Realized gains on derivatives    0.08      0.40      0.38      0.25 
  Royalty recovery (expense)    (0.03)      0.02      (0.01)      (0.08) 
  Operating expense    (0.27)      (0.25)      (0.31)      (0.25) 
  Transportation expense    (0.51)      (0.35)      (0.57)      (0.36) 
Operating netback(1)  1.49    1.88    1.81    2.36 

(1) Non-GAAP Measure which may not be comparable to similar non-GAAP measures used by other entities. 
(2) Based on basic weighted average shares outstanding. 
(3) Excludes net sales of natural gas purchased from third parties. 

Source: EvaluateEnergy® ©2019 EvaluateEnergy Ltd