It may be an opportune time to buy Canadian natural gas producer Advantage Oil & Gas (AAV). With another possible bitter winter ahead, natural gas prices could be on the rise and it could be the right time to get a proven producer.
Advantage has one core area, Glacier, which is where basically all production and operations are located. During the second quarter the company set a new record for production at 136.1 mmcfe/d (22,685 boe/d). This is a 15% increase from last year which doesn't seem like a whole lot but the real growth for advantage is just beginning. The company has a 3 year plan laid out in which they plan to be producing 245 mmcfe/d by 2017, a 80% increase from current levels. Next June when the company's gas plant expansion is expected to be completed production will really be taken to the next level. After the completion, production is expected to be about 183 mmcf/d and grow nicely from there.
This 3 year plan will ultimately be accomplished by the plans to drill 111 new wells. Moving forward the company has a promising inventory of new well locations, with over 1,400 identified currently.
One of the strongest points for the company is the significant reserve growth it has seen. Since 2008 the company has increased 2P reserves by about 580%and it is important to note it has an impressive 2P RLI of about 40 years.
(Source: Advantage presentation)
For any natural gas producer, infrastructure is key. As I mentioned the company is underway with plans to expand its Glacier 100% owned gas plant which currently has a capacity of 160 mmcf/d. The plant will be expanded another 3-4 times over the next few years as production continues to grow. Along with the plant, the company's land position is well situated in relation to the TransCanada pipeline it utilizes, as seen below.
(Source: Advantage presentation)
Quarter 2 was very critical for the company financially and is actually a reason I believe strong play currently. During the quarter the company sold its shares of both Longview and Questfire which the company netted about $110 million from, and used a good chunk of the proceeds to pay down debt. In total the company has seen a decrease of $82.6 million in debt since the end of 2013. Another thing to note would be the company has only drawn 18% on its credit facility to date and are well funded into next year.
The last reason Advantage is a relatively safe play is its protection from natural gas downside. 50% of production is hedged at $3.84 CAD for 2014 and 2015. This may seem like a bad thing because of what I had said earlier in terms of a possible bitter winter again. I see this though as the right amount of risk management. No one can say for sure if natural gas will see another rise like early this year and if gas prices to see an increase the company will still benefit from it greatly.
In conclusion, Advantage is a pretty safe natural gas play with lots of potential for upside in the future. With just one great core area the company is able to better focus on driven growth for the future and the company's 3 year plan shows that. With a improving financial position and the possibility of another very cold winter it may be the right time to buy Advantage.
