An anonymous director reports
ADVANTAGE ANNOUNCES 2011 YEAR END FINANCIAL RESULTS AND PROVIDES INTERIM GUIDANCE
Advantage Oil & Gas Ltd. has issued financial and operating results for the year ended Dec. 31, 2011.
Three months ended Three months ended
Dec. 31, 2011 Sept. 30, 2011
Financial (thousands, except as otherwise indicated) per boe per boe
Petroleum and natural gas sales $ 48,293 $ 23.24 $ 52,090 $ 25.09
Royalties (4,481) (2.16) (5,917) (2.85)
Realized gain on derivatives 7,262 3.49 6,598 3.18
Operating expense (10,191) (4.90) (12,239) (5.89)
Operating 40,883 19.67 40,532 19.53
General and administrative (4,400) (2.12) (4,164) (2.00)
Finance expense (2,984) (1.44) (3,926) (1.89)
Miscellaneous income 88 0.04 411 0.20
Funds from operations 33,587 $ 16.15 32,853 $ 15.84
Dividends from Longview 4,417 4,418
Total $ 38,004 $ 37,271
per share $ 0.23 $ 0.23
Expenditures on property, plant and equipment $ 75,572 $ 40,627
Working capital deficit $ 70,564 $ 43,166
Bank indebtedness $ 142,548 $ 67,695
Convertible debentures (face value) $ 86,250 $ 148,544
Natural gas (mcf/d) 127,265 125,250
Crude oil and NGLs (bbl/d) 1,378 1,693
Total boe/d @ 6:1 22,589 22,568
Average prices (including hedging)
Natural gas ($/mcf) $ 3.78 $ 4.17
Crude oil and NGLs ($/bbl) $ 89.14 $ 68.10
Production growth, reduced costs and hedging deliver solid financial and operating results
Production for the fourth quarter of 2011 averaged 22,589 barrels of oil equivalent per day (94 per cent natural gas), comparable with the immediate prior quarter. Production in fourth quarter 2011 at Glacier was partially impacted due to facility downtime associated with equipment modifications related to the company's phase IV development program. During 2011, production growth at Glacier to 100 million cubic feet per day substantially offset the sale of approximately 6,000 barrels of oil equivalent per day of oil assets to Longview Oil Corp. as of April 14, 2011.
Operating costs for the current quarter were $4.90 per barrel of oil equivalent compared with $5.89 per barrel of oil equivalent during the third quarter of 2011. The significant reduction this quarter was primarily the result of a one-time $1.7-million equalization credit related to a gas processing facility. Excluding this equalization, Advantage's operating costs are $5.72 per barrel of oil equivalent for fourth quarter 2011 with Glacier operating costs at $1.80 per barrel of oil equivalent.
Advantage's royalty rate during the fourth quarter of 2011 was 9.3 per cent as compared with 11.4 per cent in the prior quarter. The reduced royalty rate is due to a higher percentage of production from Glacier and lower natural gas pricing.
Funds from operations for fourth quarter 2011 were $33.6-million or 20 cents per share, slightly higher than the third quarter of 2011, despite a 12-per-cent reduction in AECO Canadian natural gas prices. Funds from operations for 2011 were $143.3-million or 87 cents per share. Realized hedging gains for fourth quarter 2011 and full year 2011 were $7.3-million and $26.9-million, respectively.
In addition to the funds from operations, Advantage also received tax-free dividend income of $4.4-million this quarter and $11.8-million for 2011 as a result of its 63-per-cent ownership in the shares of Longview Oil Corp.
Capital expenditures for the three months and year ended Dec. 31, 2011, were $77.2-million and $202.1-million, respectively, primarily related to completing Glacier's phase III expansion in March, 2011, and commencing the company's Glacier phase IV expansion program in July, 2011. Capital expenditures at Glacier were $178.6-million in 2011.
Bank indebtedness at Dec. 31, 2011, was $142.5-million, a decrease of 51 per cent since Dec. 31, 2010, primarily due to proceeds received from the sale of certain oil-weighted assets to Longview and cash flow from operating activities. Bank indebtedness increased during fourth quarter 2011 predominantly due to two convertible debentures that matured in December, 2011, for the sum of $62.3-million. The company has one remaining convertible debenture outstanding for $86.2-million that will mature in January, 2015.
Bank debt to annualized cash flow at the end of the fourth quarter is 1.1 times and 1.7 times including convertible debentures. Bank indebtedness is expected to increase during the remainder of the company's budget cycle as it continues with capital activity during the first half of 2012.
Advantage retains balance sheet flexibility at Dec. 31, 2011, with an undrawn credit facility of $132.5-million and a 63-per-cent ownership in the shares of Longview, which had an asset value of $298-million at Dec. 31, 2011.
Looking forward -- Glacier phase IV production ramp-up deferred due to low natural gas prices
The company's capital budget for the twelve-month period ending June 30, 2012, was set at $216-million, of which $200-million is focused on a phase IV development program at Glacier with two key objectives:
- Increase throughput capacity at the Glacier gas plant from 100 million cubic feet per day to 140 million cubic feet per day by the second quarter of 2012;
- Further evaluate the Middle and Lower Montney formations.
To date, the company has drilled 29 gross (28.5 net) Montney horizontal wells at Glacier as part of its phase IV capital program and have recently began delineation in the Middle Montney, which has revealed the potential for natural gas liquids. Current behind-pipe volumes are estimated to be 37 million cubic feet per day, including wells that have been tested and existing wells that are currently restricted as a result of the company's 100-million-cubic-foot-per-day Glacier gas plant capacity. An additional 14 Montney wells have been drilled and are awaiting completion.
As a result of the prevailing low natural gas pricing environment, production at Glacier will be maintained between 90 million cubic feet per day and 100 million cubic feet per day until the company sees a sustained increase in natural gas pricing. The company will utilize its inventory of 29 gross (28.5 net) Montney wells that have been drilled to maintain targeted production rates at Glacier by producing and/or completing these wells as required. Additionally, the company believes that the high industry activity levels that have increased service and supply costs could subside during the latter part of 2012, which would benefit natural gas development economics.
The company believes that it is prudent to maintain capital spending discipline and financial flexibility in this current natural gas price environment. It also believes that the current price of natural gas is unsustainable for generating sufficient full-cycle economic returns in the vast majority of North American natural gas plays, and anticipate an improvement in the natural gas price environment. As a result, the company is positioning its Glacier gas plant with the capability to increase production capacity to 140 million cubic feet per day by completing modifications as planned in the company's phase IV capital program.
At this time, the company is providing interim guidance for the six months ending June 30, 2012:
- Production average -- 22,800 barrels of oil equivalent per day to 23,400 barrels of oil equivalent per day;
- Royalty rate -- 8 per cent to 10 per cent;
- Operating expense -- $5.70 per barrel of oil equivalent to $6 per barrel of oil equivalent;
- Capital expenditures -- $65-million to $75-million.
Additional capital budget and guidance details will be provided pending the company's evaluation of future delineation plans for its liquids-rich Middle Montney formation in order to determine the natural gas and NGL production and reserves potential. This evaluation will include detailed analysis and interpretation of recent geological, engineering and completions data which the company obtained from its Middle Montney phase IV wells. In addition, the company has one remaining Middle Montney well and two Lower Montney wells that are drilled and are awaiting completion, which the company anticipates undertaking after spring breakup. The company expects the results of this information and its evaluation to provide more information in regard to determining a systematic delineation plan for the balance of 2012 and beyond.
The company will continue with a technically focused and financially disciplined approach to create value from its Glacier property, and will revisit its 2012 capital spending plans as required, taking into account commodity price and market dynamics.
We seek Safe Harbor.