Can Advantage Oil & Gas Increase Oil Production in 2019?


Advantage Oil & Gas [stock_market_widget type="inline" template="generic" color="default" assets="AAV.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] recently delivered record production for the fourth quarter and full-year 2018. The Calgary-based company delivered this solid increase in liquids production while keeping a handle on costs. Unfortunately, the increase was offset by weak pricing, the effect of which will be seen this year as well.

Strong Operational Performance Tempered By Weak Oil Pricing

Advantage’s 2018 production was a record 41,651 barrels of oil equivalent (BOE) per day, which included a 22% increase in liquids production. Overall production was up 6% from 2017 levels. For the fourth quarter, Advantage’s production came in at 45,686 BOE per day, an increase of 12% year over year. So, Advantage exited 2018 with a higher production rate during the fourth quarter as compared to its annual production.

However, Advantage’s annual liquids production was only 1,491 BOE per day, which means that the company is primarily reliant on natural gas prices. That’s why the steep drop in oil prices didn’t affect Advantage significantly as it managed to offset that with higher production.

Additionally, the company’s realized natural gas price remained steady during the fourth quarter. But for the full year, Advantage’s realized natural gas price fell 12.4% from 2017 levels. This impacted the company’s operating netback for the full-year, which fell from C$2.29/Mcfe in 2017 to C$1.87/Mcfe in 2018.

2019 Guidance – CapEx Pullback

The company’s productivity per well increased by 30% in the liquids-rich Montney area last year thanks to an improved frac design.

The company plans to keep a lid on its capital expenses this year in a bid to combat the weak pricing environment. Advantage will be spending between C$185 million and C$215 million on capital expenses this year, down from its earlier forecast of C$210 million to C$240 million.

The mid-point of the current CapEx guidance is almost in line with the C$203.8 million capital expenditure it incurred last year. The good thing is that despite this scaled down capital plan, Advantage plans to deliver between 43,500 and 46,500 BOE per day of production this year. That represents an increase of 8% over the 2018 output.

Additionally, Advantage has kept its capital spending plan flexible for the year. It plans to spend C$65 million in the first quarter, and then review the investment plan for the remainder of the year in the second quarter. More specifically, Advantage can defer projects worth C$100 million and still preserve its 2019 production profile to a large extent.

The reason why Advantage looks capable of increasing its production at a lower CapEx level is because of the efficient production techniques that it is deploying. For instance, the company’s productivity per well increased by 30% in the liquids-rich Montney area last year thanks to an improved frac design. Not surprisingly, the company increased its acreage in this area by adding 17 net sections spread across 10,880 acres of land in Montney last year.

However, it remains to be seen how gas prices will turn out this year, and that will play an important role in determining the company’s financial fortunes. Advantage’s sales fell last fiscal year thanks to lower prices, so if gas prices decline more than the projected increase in production, its top line will take a hit once again.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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