Consolidated Financial Statements



Management’s Responsibility for Financial Statements



The
Management of Advantage Oil & Gas Ltd. (the “Corporation”) is responsible for the preparation and presentation
of the consolidated financial statements together with all operational and other financial information contained in the annual
report. The consolidated financial statements have been prepared by Management in accordance with International Financial Reporting
Standards as issued by the International Accounting Standards Board and utilize the best estimates and careful judgments of Management,
where appropriate. Operational and other financial information
contained throughout the annual report is consistent with that provided in the consolidated financial statements.



Management has developed and maintains
a system of internal controls designed to provide reasonable assurance that all transactions are accurately and reliably recorded,
that the consolidated financial statements accurately report the Corporation’s operating and financial results within acceptable
limits of materiality, that all other operational and financial information presented is accurate, and that the Corporation’s
assets are properly safeguarded.



The Audit Committee, comprised of non-management
directors, acts on behalf of the Board of Directors to ensure that Management fulfills its financial reporting and internal control
responsibilities. The Audit Committee is responsible for meeting regularly with Management, the external auditors, and the internal
auditors to discuss internal controls over financial reporting processes, auditing matters and various aspects of financial reporting.
The Audit Committee reviewed the consolidated financial statements with Management and the external auditors, and recommended approval
to the Board of Directors. The Board of Directors has approved these consolidated financial statements.



PricewaterhouseCoopers LLP, an independent
firm of Chartered Accountants, appointed by the shareholders as the external auditor of the Corporation, has audited the consolidated
statement of financial position as at December 31, 2011, December 31, 2010 and January 1, 2010, the consolidated statement of comprehensive
income (loss), changes in shareholders’ equity and cash flows for the years ended December 31, 2011 and 2010. The external
auditors conducted their audits in accordance with Canadian generally accepted auditing standards and have unlimited and unrestricted
access to the Audit Committee.



|                  |                
|----------------- | ---------------
|                  |                
|Andy J. Mah       | Kelly I. Drader
|President and CEO | CFO            
|March 23, 2012    |                



Advantage Oil & Gas Ltd. - 1







Management’s Report on Internal Control over Financial
Reporting



The Management of Advantage Oil & Gas
Ltd. (the “Corporation”) is responsible for establishing and maintaining adequate internal control over financial reporting
for the Corporation as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended. Under the supervision
of our Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”). Based on our assessment, we have concluded that as of December 31, 2011, our internal
control over financial reporting was effective.



Because of inherent limitations, internal
control over financial reporting may not prevent or detect misstatements and even those systems determined to be effective can
provide only reasonable assurance with respect to the financial statement preparation and presentation. Further, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



PricewaterhouseCoopers LLP, the Corporation’s
independent firm of Chartered Accountants, was appointed by the shareholders to audit and provide an independent opinion on both
the consolidated financial statements and the Corporation’s internal control over financial reporting as at December 31,
2011, as stated in their Auditor’s Report. PricewaterhouseCoopers LLP has provided such opinion.



|                  |                
|----------------- | ---------------
|                  |                
|Andy J. Mah       | Kelly I. Drader
|President and CEO | CFO            
|March 23, 2012    |                



Advantage Oil & Gas Ltd. - 2











Independent Auditor’s Report



To the Shareholders of Advantage Oil & Gas Ltd.



We have completed an integrated audit of Advantage Oil &
Gas Ltd.’s 2011 consolidated financial statements and its internal control over financial reporting as at December 31, 2011
and an audit of its 2010 consolidated financial statements. Our opinions, based on our audits, are presented below.



Report on the consolidated financial statements

We have audited the accompanying consolidated financial statements
of Advantage Oil & Gas Ltd., which comprise the consolidated statement of financial position as at December 31, 2011, December
31, 2010 and January 1, 2010 and the consolidated statements of comprehensive income (loss), changes in shareholders’ equity,
and cash flows for the years ended December 31, 2011 and 2010, and the related notes, which comprise a summary of significant accounting
policies and other explanatory information.



Management’s responsibility for the consolidated financial
statements

Management is responsible for the preparation and fair presentation
of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board and for such internal control as management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.



Auditor’s responsibility

Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards
and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
an audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
Canadian generally accepted auditing standards require that we comply with ethical requirements.



An audit involves performing procedures to obtain audit evidence,
on a test basis, about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on
the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company’s
preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate
in the circumstances. An audit also includes evaluating the appropriateness of accounting principles and policies used and the
reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements.



Advantage Oil & Gas Ltd. - 3











We believe that the audit evidence we have obtained in our audits
is sufficient and appropriate to provide a basis for our audit opinion on the consolidated financial statements.



Opinion

In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of Advantage Oil & Gas Ltd. as at December 31, 2011, December 31,
2010, and January 1, 2010 and its financial performance and its cash flows for the years ended December 31, 2011 and 2010 in accordance
with International Financial Reporting Standards as issued by the International Accounting Standards Board.



Report on internal control over financial reporting

We have also audited Advantage Oil & Gas Ltd.’s internal
control over financial reporting as at December 31, 2011 based on criteria established in Internal Control - Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).



Management’s responsibility for internal control over
financial reporting

Management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included
in the accompanying Management’s Report on Internal Control over Financial Reporting.



Auditor’s responsibility

Our responsibility is to express an opinion on the company’s
internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects.



An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control, based on the assessed risk, and performing such other
procedures as we consider necessary in the circumstances.



We believe that our audit provides a reasonable basis for our
audit opinion on the company’s internal control over financial reporting.



Definition of internal control over financial reporting

A company’s internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.



Advantage Oil & Gas Ltd. - 4











Inherent limitations

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies
or procedures may deteriorate.



Opinion

In our opinion, Advantage Oil & Gas Ltd. maintained, in
all material respects, effective internal control over financial reporting as at December 31, 2011 based on criteria established
in Internal Control - Integrated Framework issued by COSO.







Chartered Accountants

Calgary, Alberta

March 23, 2012



Advantage Oil & Gas Ltd. - 5







|Consolidated Statement of Financial Position                      |  |       |    |  |                   |   |            |                   |  |   |                 |  
|----------------------------------------------------------------- |  | ----- | -- |  | ----------------- | - | ---------- | ----------------- |  | - | --------------- | -
|                                                                  |  |       |    |  |                   |   |            |                   |  |   |                 |  
|(thousands of Canadian dollars)                                   |  | Notes |    |  | December 31, 2011 |   |            | December 31, 2010 |  |   | January 1, 2010 |  
|                                                                  |  |       |    |  |                   |   |            | (note 25)         |  |   | (note 25)       |  
|ASSETS                                                            |  |       |    |  |                   |   |            |                   |  |   |                 |  
|Current assets                                                    |  |       |    |  |                   |   |            |                   |  |   |                 |  
|Trade and other receivables                                       |  |       | 7  |  |                   | $ | 42,344     |                   |  | $ | 42,276          |  
|Prepaid expenses and deposits                                     |  |       |    |  |                   |   | 6,045      |                   |  |   | 6,488           |  
|Derivative asset                                                  |  |       | 6  |  |                   |   | -          |                   |  |   | 25,157          |  
|Total current assets                                              |  |       |    |  |                   |   | 48,389     |                   |  |   | 73,921          |  
|                                                                  |  |       |    |  |                   |   |            |                   |  |   |                 |  
|Non-current assets                                                |  |       |    |  |                   |   |            |                   |  |   |                 |  
|Derivative asset                                                  |  |       | 6  |  |                   |   | -          |                   |  |   | -               |  
|Exploration and evaluation assets                                 |  |       | 8  |  |                   |   | 7,730      |                   |  |   | 8,262           |  
|Property, plant and equipment                                     |  |       | 9  |  |                   |   | 1,877,287  |                   |  |   | 1,883,762       |  
|Deferred income tax asset                                         |  |       | 22 |  |                   |   | 39,383     |                   |  |   | -               |  
|Total non-current assets                                          |  |       |    |  |                   |   | 1,924,400  |                   |  |   | 1,892,024       |  
|                                                                  |  |       |    |  |                   |   |            |                   |  |   |                 |  
|Total assets                                                      |  |       |    |  |                   | $ | 1,972,789  |                   |  | $ | 1,965,945       |  
|                                                                  |  |       |    |  |                   |   |            |                   |  |   |                 |  
|LIABILITIES                                                       |  |       |    |  |                   |   |            |                   |  |   |                 |  
|Current liabilities                                               |  |       |    |  |                   |   |            |                   |  |   |                 |  
|Trade and other accrued liabilities                               |  |       |    |  |                   | $ | 138,119    |                   |  | $ | 112,457         |  
|Capital lease obligations                                         |  |       |    |  |                   |   | -          |                   |  |   | 759             |  
|Convertible debentures                                            |  |       | 12 |  |                   |   | -          |                   |  |   | 62,013          |  
|Derivative liability                                              |  |       | 6  |  |                   |   | 2,738      |                   |  |   | 2,367           |  
|Other liability                                                   |  |       | 14 |  |                   |   | 908        |                   |  |   | -               |  
|Total current liabilities                                         |  |       |    |  |                   |   | 141,765    |                   |  |   | 177,596         |  
|                                                                  |  |       |    |  |                   |   |            |                   |  |   |                 |  
|Non-current liabilities                                           |  |       |    |  |                   |   |            |                   |  |   |                 |  
|Derivative liability                                              |  |       | 6  |  |                   |   | -          |                   |  |   | 177             |  
|Capital lease obligations                                         |  |       |    |  |                   |   | -          |                   |  |   | -               |  
|Bank indebtedness                                                 |  |       | 11 |  |                   |   | 232,684    |                   |  |   | 288,852         |  
|Convertible debentures                                            |  |       | 12 |  |                   |   | 75,890     |                   |  |   | 72,811          |  
|Decommissioning liability                                         |  |       | 13 |  |                   |   | 253,796    |                   |  |   | 172,130         |  
|Deferred income tax liability                                     |  |       | 22 |  |                   |   | 29,723     |                   |  |   | 40,231          |  
|Other liability                                                   |  |       | 14 |  |                   |   | -          |                   |  |   | 1,835           |  
|Total non-current liabilities                                     |  |       |    |  |                   |   | 592,093    |                   |  |   | 576,036         |  
|                                                                  |  |       |    |  |                   |   |            |                   |  |   |                 |  
|Total liabilities                                                 |  |       |    |  |                   |   | 733,858    |                   |  |   | 753,632         |  
|                                                                  |  |       |    |  |                   |   |            |                   |  |   |                 |  
|SHAREHOLDERS' EQUITY                                              |  |       |    |  |                   |   |            |                   |  |   |                 |  
|Share capital                                                     |  |       | 15 |  |                   |   | 2,214,784  |                   |  |   | 2,199,491       |  
|Convertible debentures equity component                           |  |       | 12 |  |                   |   | 8,348      |                   |  |   | 8,348           |  
|Contributed surplus                                               |  |       | 5  |  |                   |   | 71,762     |                   |  |   | 14,783          |  
|Deficit                                                           |  |       |    |  |                   |   | (1,163,081 | )                 |  |   | (1,010,309      | )
|Total shareholders' equity attributable to Advantage shareholders |  |       |    |  |                   |   | 1,131,813  |                   |  |   | 1,212,313       |  
|Non-controlling interest                                          |  |       |    |  |                   |   | 107,118    |                   |  |   | -               |  
|Total shareholders' equity                                        |  |       |    |  |                   |   | 1,238,931  |                   |  |   | 1,212,313       |  
|Total liabilities and shareholders' equity                        |  |       |    |  |                   | $ | 1,972,789  |                   |  | $ | 1,965,945       |  



Commitments(note 24)



See accompanying Notes to the Consolidated Financial Statements



On behalf of the Board of Directors of Advantage Oil & Gas
Ltd.:



|                         |  |                       | 
|------------------------ |  | --------------------- | 
|                         |  |                       | 
|Paul G. Haggis, Director |  | Andy J. Mah, Director | 



Advantage Oil & Gas Ltd. - 6







Consolidated Statement of Comprehensive Income (Loss)



|                                                                                         |  |       |    |  | Year ended        |   |          | Year ended        | 
|---------------------------------------------------------------------------------------- |  | ----- | -- |  | ----------------- | - | -------- | ----------------- | 
|(thousands of Canadian dollars, except for per share amounts)                            |  | Notes |    |  | December 31, 2011 |   |          | December 31, 2010 | 
|                                                                                         |  |       |    |  |                   |   |          | (note 25)         | 
|                                                                                         |  |       |    |  |                   |   |          |                   | 
|Petroleum and natural gas sales                                                          |  |       | 18 |  |                   | $ | 355,288  |                   | 
|Less: royalties                                                                          |  |       |    |  |                   |   | (52,971  | )                 | 
|Petroleum and natural gas revenue                                                        |  |       |    |  |                   |   | 302,317  |                   | 
|                                                                                         |  |       |    |  |                   |   |          |                   | 
|Operating expense                                                                        |  |       |    |  |                   |   | (89,166  | )                 | 
|General and administrative expense                                                       |  |       | 19 |  |                   |   | (34,587  | )                 | 
|Depreciation expense                                                                     |  |       | 9  |  |                   |   | (152,927 | )                 | 
|Impairment of oil and gas properties                                                     |  |       | 9  |  |                   |   | (187,684 | )                 | 
|Exploration and evaluation expense                                                       |  |       | 8  |  |                   |   | (3,055   | )                 | 
|Finance expense                                                                          |  |       | 21 |  |                   |   | (29,561  | )                 | 
|Gains on derivatives                                                                     |  |       | 6  |  |                   |   | 475      |                   | 
|Other income                                                                             |  |       | 20 |  |                   |   | 1,972    |                   | 
|Income (loss) before taxes and non-controlling interest                                  |  |       |    |  |                   |   | (192,216 | )                 | 
|Income tax recovery (expense)                                                            |  |       | 22 |  |                   |   | 46,807   |                   | 
|Net income (loss) and comprehensive income (loss) before non-controlling interest        |  |       |    |  |                   |   | (145,409 | )                 | 
|Net income attributable to non-controlling interest                                      |  |       |    |  |                   |   | (7,363   | )                 | 
|Net income (loss) and comprehensive income (loss) attributable to Advantage shareholders |  |       |    |  |                   | $ | (152,772 | )                 | 
|                                                                                         |  |       |    |  |                   |   |          |                   | 
|Net income (loss) per share attributable to Advantage shareholders                       |  |       | 17 |  |                   |   |          |                   | 
|Basic                                                                                    |  |       |    |  |                   | $ | (0.92    | )                 | 
|Diluted                                                                                  |  |       |    |  |                   | $ | (0.92    | )                 | 



See accompanying Notes to the Consolidated Financial Statements



Advantage Oil & Gas Ltd. - 7







Consolidated Statement of Changes in Shareholders' Equity



|(thousands of Canadian dollars)                                |  | Notes |        |  | Share capital |   |           | Convertible
    debentures equity component |  |   | Contributed
    surplus |  |  | Deficit |        |   | Total
    shareholders' equity attributable to Advantage shareholders |   |            | Non-controlling
    interest |  |   | Total
    shareholders' equity |  
|-------------------------------------------------------------- |  | ----- | ------ |  | ------------- | - | --------- | ------------------------------------------- |  | - | ----------------------- |  |  | ------- | ------ | - | --------------------------------------------------------------------- | - | ---------- | ---------------------------- |  | - | ------------------------------ | -
|Balance, January 1, 2011                                       |  |       |        |  |               | $ | 2,199,491 |                                             |  | $ | 8,348                   |  |  | $       | 14,783 |   |                                                                       | $ | (1,010,309 | )                            |  | $ | 1,212,313                      |  
|Net income (loss) and comprehensive income (loss)              |  |       |        |  |               |   | -         |                                             |  |   | -                       |  |  |         | -      |   |                                                                       |   | (152,772   | )                            |  |   | (152,772                       | )
|Share based compensation                                       |  |       | 15, 16 |  |               |   | 15,293    |                                             |  |   | -                       |  |  |         | (770   | ) |                                                                       |   | -          |                              |  |   | 14,523                         |  
|Common control transaction and change in ownership interest    |  |       | 5      |  |               |   | -         |                                             |  |   | -                       |  |  |         | 57,749 |   |                                                                       |   | -          |                              |  |   | 57,749                         |  
|Change in ownership interest, share based compensation         |  |       |        |  |               |   | -         |                                             |  |   | -                       |  |  |         | -      |   |                                                                       |   | -          |                              |  |   | -                              |  
|Dividends declared by Longview 
    ($0.40 per Longview share) |  |       |        |  |               |   | -         |                                             |  |   | -                       |  |  |         | -      |   |                                                                       |   | -          |                              |  |   | -                              |  
|Balance, December 31, 2011                                     |  |       |        |  |               | $ | 2,214,784 |                                             |  | $ | 8,348                   |  |  | $       | 71,762 |   |                                                                       | $ | (1,163,081 | )                            |  | $ | 1,131,813                      |  
|                                                               |  |       |        |  |               |   |           |                                             |  |   |                         |  |  |         |        |   |                                                                       |   |            |                              |  |   |                                |  
|Balance, January 1, 2010                                       |  |       | 25     |  |               | $ | 2,190,409 |                                             |  | $ | 8,348                   |  |  | $       | 6,114  |   |                                                                       | $ | (1,051,229 | )                            |  | $ | 1,153,642                      |  
|Share based compensation                                       |  |       | 15, 16 |  |               |   | 9,082     |                                             |  |   | -                       |  |  |         | 8,669  |   |                                                                       |   | -          |                              |  |   | 17,751                         |  
|Net income and comprehensive income                            |  |       |        |  |               |   | -         |                                             |  |   | -                       |  |  |         | -      |   |                                                                       |   | 40,920     |                              |  |   | 40,920                         |  
|Balance, December 31, 2010                                     |  |       |        |  |               | $ | 2,199,491 |                                             |  | $ | 8,348                   |  |  | $       | 14,783 |   |                                                                       | $ | (1,010,309 | )                            |  | $ | 1,212,313                      |  



See accompanying Notes to the Consolidated Financial Statements



Advantage Oil & Gas Ltd. - 8







Consolidated Statement of Cash Flows

|                                                        |  |       |    |  | Year ended        |   |          | Year ended        | 
|------------------------------------------------------- |  | ----- | -- |  | ----------------- | - | -------- | ----------------- | 
|(thousands of Canadian dollars)                         |  | Notes |    |  | December 31, 2011 |   |          | December 31, 2010 | 
|                                                        |  |       |    |  |                   |   |          | (note 25)         | 
|Operating Activities                                    |  |       |    |  |                   |   |          |                   | 
|                                                        |  |       |    |  |                   |   |          |                   | 
|Income (loss) before taxes and non-controlling interest |  |       |    |  |                   | $ | (192,216 | )                 | 
|Add (deduct) items not requiring cash:                  |  |       |    |  |                   |   |          |                   | 
|Share based compensation                                |  |       | 16 |  |                   |   | 12,348   |                   | 
|Depreciation expense                                    |  |       | 9  |  |                   |   | 152,927  |                   | 
|Impairment of oil and gas properties                    |  |       | 9  |  |                   |   | 187,684  |                   | 
|Exploration and evaluation expense                      |  |       | 8  |  |                   |   | 3,055    |                   | 
|Non-cash general and administrative                     |  |       |    |  |                   |   | -        |                   | 
|Unrealized loss (gain) on derivatives                   |  |       | 6  |  |                   |   | 25,351   |                   | 
|Gain on sale of property, plant and equipment           |  |       | 20 |  |                   |   | (1,325   | )                 | 
|Finance expense                                         |  |       | 21 |  |                   |   | 29,561   |                   | 
|Expenditures on decommissioning liability               |  |       | 13 |  |                   |   | (3,335   | )                 | 
|Changes in non-cash working capital                     |  |       | 23 |  |                   |   | 4,131    |                   | 
|Cash provided by operating activities                   |  |       |    |  |                   |   | 218,181  |                   | 
|                                                        |  |       |    |  |                   |   |          |                   | 
|Financing Activities                                    |  |       |    |  |                   |   |          |                   | 
|Proceeds from Longview financing                        |  |       | 5  |  |                   |   | 160,757  |                   | 
|Increase (decrease) in bank indebtedness                |  |       | 11 |  |                   |   | (56,754  | )                 | 
|Convertible debenture maturities                        |  |       | 12 |  |                   |   | (62,294  | )                 | 
|Dividends paid by Longview                              |  |       |    |  |                   |   | (6,050   | )                 | 
|Reduction of capital lease obligations                  |  |       |    |  |                   |   | (68      | )                 | 
|Convertible debenture issue costs                       |  |       |    |  |                   |   | -        |                   | 
|Interest paid                                           |  |       |    |  |                   |   | (20,076  | )                 | 
|Cash provided by (used in) financing activities         |  |       |    |  |                   |   | 15,515   |                   | 
|                                                        |  |       |    |  |                   |   |          |                   | 
|Investing Activities                                    |  |       |    |  |                   |   |          |                   | 
|Expenditures on property, plant and equipment           |  |       | 9  |  |                   |   | (231,789 | )                 | 
|Expenditures on exploration and evaluation assets       |  |       | 8  |  |                   |   | (3,006   | )                 | 
|Property dispositions                                   |  |       |    |  |                   |   | 1,099    |                   | 
|Cash used in investing activities                       |  |       |    |  |                   |   | (233,696 | )                 | 
|Net change in cash                                      |  |       |    |  |                   |   | -        |                   | 
|Cash, beginning of year                                 |  |       |    |  |                   |   | -        |                   | 
|Cash, end of year                                       |  |       |    |  |                   | $ | -        |                   | 



See accompanying Notes to the Consolidated Financial Statements



Advantage Oil & Gas Ltd. - 9







Notes
to The Consolidated Financial Statements



For the years ended
December 31, 2011 and 2010



All tabular amounts
are in thousands of Canadian dollars except as otherwise indicated.



| | 1. | Business and structure of Advantage Oil & Gas Ltd.
| | -- | --------------------------------------------------



Advantage Oil & Gas Ltd.
and its subsidiaries (together “Advantage” or the “Corporation”) are a growth oriented intermediate oil
and natural gas development and production corporation with properties located in Western Canada.



Advantage is domiciled and incorporated
in Canada under the Business Corporations Act (Alberta). Advantage’s head office address is 700, 400 – 3rd
Avenue SW, Calgary, Alberta, Canada. The Corporation’s primary listing is on the Toronto Stock Exchange and is also traded
on the New York Stock Exchange as a Foreign Private Issuer, under the symbol “AAV”.



| | 2. | Basis of preparation
| | -- | --------------------



| | (a) | Statement of compliance
| | --- | -----------------------



The Corporation prepares its
financial statements in accordance with Canadian generally accepted accounting principles as defined in the Handbook of the Canadian
Institute of Chartered Accountants (“CICA Handbook”). In 2010, the CICA Handbook was revised to incorporate International
Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board and to require publicly
accountable enterprises to apply these standards effective for years beginning on or after January 1, 2011. Accordingly, these
consolidated financial statements are Advantage’s first annual audited consolidated financial statements to be prepared and
issued under IFRS.



The consolidated financial statements
are prepared in compliance with IFRS. The comparative figures for 2010 and Advantage’s financial position as at January 1,
2010 have been restated from previous Canadian Generally Accepted Accounting Principles (“Previous GAAP”) to IFRS.
The reconciliations to IFRS from Previous GAAP are summarized in note 25 and disclose the impact of the transition to IFRS on the
Corporation's reported financial position and financial performance, including the nature and effect of significant changes in
accounting policies from those used in the Corporation’s consolidated financial statements for the year ended December 31,
2010. Subject to certain transition elections disclosed in note 25, the Corporation has consistently applied the same accounting
policies in its opening IFRS statement of financial position at January 1, 2010 and throughout all periods presented, as if these
policies had always been in effect.



The accounting policies applied
in these financial statements are based on IFRS issued and outstanding as of March 23, 2012, the date the Board of Directors approved
the statements.



| | (b) | Basis of measurement
| | --- | --------------------



The consolidated financial statements
have been prepared on the historical cost basis, except as detailed in the Corporation’s accounting policies in note 3.



The methods used to measure
fair values of derivative instruments are discussed in note 6.



| | (c) | Functional and presentation currency
| | --- | ------------------------------------



These consolidated financial
statements are presented in Canadian dollars, which is the Corporation’s functional currency.



| | (d) | Basis of consolidation
| | --- | ----------------------



These consolidated financial
statements include the accounts of the Corporation and all subsidiaries over which it has control, including Longview Oil Corp.
(“Longview”), a public Canadian corporation of which Advantage owns 63%, and remaining ownership is disclosed as non-controlling
interest. All inter-corporate balances, income and expenses resulting from inter-corporate transactions are eliminated.



Advantage Oil & Gas Ltd. - 10







| | 3. | Significant accounting policies
| | -- | -------------------------------



The accounting policies set out
below have been applied consistently to all years presented in these financial statements, and have been applied consistently by
the Corporation.



| | (a) | Cash and cash equivalents
| | --- | -------------------------



Cash consists of balances held
with banks, and other short-term highly liquid investments with original maturities of three months or less from inception.



| | (b) | Basis of consolidation
| | --- | ----------------------



| | (i) | Subsidiaries
| | --- | ------------



Subsidiaries are entities controlled
by the Corporation. Control exists when the Corporation has the power to govern the financial and operating policies of an entity
so as to obtain benefits from its activities. In assessing control, potential voting rights that currently are exercisable are
taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date
that control commences until the date that control ceases.



| | (ii) | Non-controlling interests
| | ---- | -------------------------



The Corporation treats transactions
with non-controlling interests as transactions with equity owners of the Corporation.  For purchases of shares from non-controlling
interests, the difference between any consideration paid and the relevant ownership acquired of the carrying value of net assets
of the subsidiary is recorded in equity.  Gains or losses on disposals of shares to non-controlling interests are also recorded
in equity, unless the disposal results in the Corporation’s loss of control of the subsidiary, in which case the gain or
loss is recognized in net income and comprehensive income.



| | (iii) | Joint interests
| | ----- | ---------------



A
significant portion of the Corporation’s oil and natural gas activities involve jointly controlled assets. The consolidated
financial statements include the Corporation’s share of these jointly controlled assets and a proportionate share of the
relevant revenue and related costs.



| | (c) | Financial instruments
| | --- | ---------------------



All
financial instruments are initially recognized at fair value on the Statement of Financial Position. Measurement of financial instruments
subsequent to the initial recognition, as well as resulting gains and losses, is based on how each financial instrument was initially
classified. The Corporation has classified each identified financial instrument into the following categories: fair value through
profit or loss, loans and receivables, held to maturity investments, available for sale financial assets, and financial liabilities
at amortized cost. Fair value through profit or loss financial instruments are measured at fair value with gains and losses recognized
in income immediately. Available for sale financial assets are measured at fair value with gains and losses, other than impairment
losses, recognized in other comprehensive income and transferred to income when the asset is derecognized. Loans and receivables,
held to maturity investments and financial liabilities at amortized cost, are recognized at amortized cost using the effective
interest method and impairment losses are recorded in income when incurred.



Derivative instruments executed
by the Corporation to manage market risk associated with volatile commodity prices are classified as fair value through profit
or loss and recorded on the Statement of Financial Position at fair value as derivative assets and liabilities. Gains and losses
on these instruments are recorded as gains and losses on derivatives in the Statement of Comprehensive Income (Loss) in the period
they occur. Gains and losses on derivative instruments are comprised of cash receipts and payments associated with periodic settlement
that occurs over the life of the instrument, and non-cash gains and losses associated with changes in the fair values of the instruments,
which are remeasured at each reporting date and recorded on the Statement of Financial Position.



Advantage Oil & Gas Ltd. - 11







| | 3. | Significant accounting policies (continued)
| | -- | -------------------------------------------



| | (c) | Financial instruments (continued)
| | --- | ---------------------------------



Transaction costs are frequently
attributed to the acquisition or issue of a financial asset or liability. Such costs incurred on fair value through profit or loss
financial instruments are expensed immediately. For other financial instruments, transaction costs are added to the fair value
initially recognized for financial assets and liabilities that are not classified as fair value through profit or loss.



Embedded derivatives are separated
from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded
derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition
of a derivative, and the combined instrument is not measured at fair value through profit or loss. Changes in the fair value of
separable embedded derivatives are recognized immediately in income.



Equity instruments issued by
the Corporation are recorded at the proceeds received, with direct issue costs as a deduction therefrom, net of any associated
tax benefit.



| | (d) | Property, plant and equipment and exploration and evaluation assets
| | --- | -------------------------------------------------------------------



| | (i) | Recognition and measurement
| | --- | ---------------------------



| | a) | Exploration and evaluation costs
| | -- | --------------------------------



Pre-license
costs are recognized in the Statement of Comprehensive Income (Loss) as incurred.



All exploratory costs incurred
subsequent to acquiring the right to explore for oil and natural gas and before technical feasibility and commercial viability
of the area have been established are capitalized. Such costs can typically include costs to acquire land rights, geological and
geophysical costs, decommissioning costs, and exploration well costs.



Exploration and evaluation costs
are not depreciated and are accumulated in cost centers by well, field or exploration area and carried forward pending determination
of technical feasibility and commercial viability.



The technical feasibility and
commercial viability of extracting a mineral resource from exploration and evaluation assets is considered to be generally determinable
when proved and probable reserves are determined to exist. Upon determination of proved and probable reserves, exploration and
evaluation assets attributable to those reserves are first tested for impairment and then reclassified from exploration and evaluation
assets to development and production assets, net of any impairment loss.



Management reviews and assesses
exploration and evaluation assets to determine if technical feasibility and commercial viability exist. If Management decides not
to continue the exploration and evaluation activity, the unrecoverable costs are charged to exploration and evaluation expense
in the period in which the determination occurs.



| | b) | Development and production costs
| | -- | --------------------------------



Items of property, plant and
equipment, which include oil and gas development and production assets, are measured at cost less accumulated depreciation and
accumulated impairment losses. Costs include lease acquisition, drilling and completion, production facilities, decommissioning
costs, geological and geophysical costs and directly attributable general and administrative costs related to development and production
activities, net of any government incentive programs.



When significant parts of an
item of property, plant and equipment, including oil and natural gas interests, have different useful lives, they are accounted
for as separate items (major components).



Advantage Oil & Gas Ltd. - 12







| | 3. | Significant accounting policies (continued)
| | -- | -------------------------------------------



| | (d) | Property, plant and equipment and exploration and evaluation assets (continued)
| | --- | -------------------------------------------------------------------------------



(ii)	Subsequent costs



Costs incurred subsequent to development
and production that are significant are recognized as oil and gas property only when they increase the future economic benefits
embodied in the specific asset to which they relate. All other expenditures are recognized in comprehensive income as incurred.
Such capitalized oil and natural gas interests generally represent costs incurred in developing proved and probable reserves and
bringing in or enhancing production from such reserves, and are accumulated on a field or area basis. The carrying amount of any
replaced or sold component is derecognized in accordance with our policies. The costs of the day-to-day servicing of property,
plant and equipment are recognized in the Statement of Comprehensive Income (Loss) as incurred.



| | (iii) | Depreciation
| | ----- | ------------



The net carrying value of oil and
gas properties is depreciated using the unit-of-production method by reference to the ratio of production in the period to the
related proved and probable reserves, taking into account estimated future development costs necessary to bring those reserves
into production. Future development costs are estimated taking into account the level of development required to produce the reserves.
These estimates are reviewed by independent reserve engineers at least annually.



| | (e) | Asset swaps and dispositions
| | --- | ----------------------------



Exchanges of development and
production assets are measured at fair value unless the exchange transaction lacks commercial substance or the fair value of neither
the asset received nor the asset given up is reliably measurable. The cost of the acquired asset is measured at the fair value
of the asset given up, unless the fair value of the asset received is more clearly evident. Where fair value is not used, the cost
of the acquired asset is measured at the carrying amount of the amount given up. Any gain or loss on derecognition of the asset
given up is recognised in the Statement of Comprehensive Income (Loss).



For exchanges or parts of exchanges that involve
only exploration and evaluation assets, the exchange is accounted for at carrying value.



Gains and losses on disposal
of an item of property, plant and equipment, including oil and natural gas interests, are determined by comparing the proceeds
from disposition with the carrying amount of property, plant and equipment and are recognized net within “other income”
or “other expenses” in the Statement of Comprehensive Income (Loss).



| | (f) | Impairment
| | --- | ----------



| | (i) | Financial assets
| | --- | ----------------



At each reporting date, the Corporation
assesses whether there is objective evidence that a financial asset is impaired. If a financial asset carried at amortized cost
is impaired, the amount of the loss is measured as the difference between the amortized cost of the loan or receivable and the
present value of the estimated future cash flows, discounted using the instrument’s original effective interest rate. The
loss is recognized in other expenses in the period incurred.



Advantage Oil & Gas Ltd. - 13







| | 3. | Significant accounting policies (continued)
| | -- | -------------------------------------------



| | (f) | Impairment (continued)
| | --- | ----------------------



| | (ii) | Property, plant and equipment and exploration and evaluation assets
| | ---- | -------------------------------------------------------------------



The carrying amounts of the Corporation’s
property, plant and equipment are reviewed at each reporting date to determine whether there is any indication of impairment. If
any such indication exists, then the asset’s recoverable amount is estimated. For the purpose of impairment testing of property,
plant and equipment, assets are grouped together into the smallest group of assets that generates cash inflows from continuing
use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”
or “CGU”).



Exploration and evaluation assets
are assessed for impairment if sufficient data exists to determine technical feasibility and commercial viability, and facts and
circumstances suggest that the carrying amount exceeds the recoverable amount. Exploration and evaluation assets are allocated
to CGU’s or groups of CGU’s for the purposes of assessing such assets for impairment.



The recoverable amount of an asset
or a CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future
cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the
time value of money and the risks specific to the asset. Value in use is generally computed by reference to the present value of
the future cash flows expected to be derived from production of proved and probable reserves. Fair value less cost to sell is assessed
utilizing market valuation based on an arm’s length transaction between active participants. In the absence of any such transactions,
fair value less cost to sell is estimated by discounting the expected after-tax cash flows of the cash generating unit at an after-tax
discount rate that reflects the risk of the properties in the cash generating unit. The discounted cash flow calculation is then
increased by a tax-shield calculation, which is an estimate of the amount that a prospective buyer of the cash generating unit
would be entitled. The carrying value of the cash generating unit is reduced by the deferred tax liability associated with its
property, plant and equipment.



Impairment losses on property,
plant and equipment are recognized in the Statement of Comprehensive Income (Loss) as impairment of oil and gas properties and
are separately disclosed. An impairment of exploration and evaluation assets is recognized as exploration and evaluation expense
in the Statement of Comprehensive Income (Loss).



Impairment losses recognized in
prior years are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment
loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed
only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined,
net of depreciation, if no impairment loss had been recognized.



| | (g) | Decommissioning liability
| | --- | -------------------------



A decommissioning liability
is recognized if, as a result of a past event, the Corporation has a present legal or constructive obligation that can be estimated
reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Decommissioning liabilities
are determined by discounting the expected future cash flows at a risk-free rate.



Advantage Oil & Gas Ltd. - 14







| | 3. | Significant accounting policies (continued)
| | -- | -------------------------------------------



| | (h) | Share based compensation
| | --- | ------------------------



Advantage accounts for share
based compensation expense based on the fair value of rights granted under its share based compensation plan.



Advantage’s Restricted
Share Performance Incentive Plan (“RSPIP” or the “Plan”), authorizes the Board of Directors to grant restricted
shares to service providers, including directors, officers, employees, and consultants of Advantage and Longview. The restricted
share grants generally vest one-third immediately on grant date, with the remaining two-thirds vesting on each of the two subsequent
anniversary dates. Compensation cost related to the Plan is recognized as share based compensation expense within general and administrative
expense over the service period of the service providers and incorporates the fair value at grant date, the estimated number of
restricted shares to vest, and certain management estimates. As compensation expense is recognized, contributed surplus is recorded
until the restricted shares vest at which time the appropriate shares are then issued to the services providers and the contributed
surplus is transferred to share capital.



| | (i) | Common-control transaction
| | --- | --------------------------



Business combinations involving
entities under common control are outside the scope of IFRS 3 Business Combinations. IFRS provides no guidance on the accounting
for these types of transactions and an entity is required to develop an accounting policy. The two most common methods utilized
are the purchase method and the predecessor values method. A business combination involving entities under common control is a
business combination in which all of the combining entities are ultimately controlled by the same party, both before and after
the business combination, and control is not transitory. Management has determined the predecessor values method to be most appropriate.
The predecessor method requires the financial statements to be prepared using the predecessor carrying values without any step
up to fair value. The difference between any consideration and the aggregate carrying value of the assets and liabilities are recorded
in shareholders’ equity.



| | (j) | Revenue
| | --- | -------



Revenue from the sale of petroleum
and natural gas is recorded when the significant risks and rewards of ownership of the product is transferred to the buyer which
is usually when legal title passes to the external party. For natural gas, this is generally at the time product enters the pipeline.
For crude oil, this is generally at the time the product reaches a trucking terminal. For natural gas liquids, this is generally
at the time the product reaches a gas plant. Revenue is measured net of discounts, customs duties and royalties.



Royalty income is recognized
as it accrues in accordance with the terms of the overriding royalty agreements.



| | (k) | Finance expense
| | --- | ---------------



Finance expense comprises interest
expense on bank indebtedness, capital leases, and accretion of the discount on the decommissioning liability and convertible debentures.



Advantage Oil & Gas Ltd. - 15







| | 3. | Significant accounting policies (continued)
| | -- | -------------------------------------------



| | (l) | Income tax
| | --- | ----------



Income tax expense comprises
current and deferred income tax. Income tax expense is recognized in income or loss except to the extent that it relates to items
recognized directly in shareholders’ equity.



Current income tax is the expected
tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any
adjustment to income tax payable in respect of previous years.



Deferred income tax is recognized
using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for taxation purposes. Deferred income tax is not recognized on the initial recognition
of assets or liabilities in a transaction that is not a business combination, and at the time of the transaction, affects neither
accounting income nor taxable income. Deferred income tax is measured at the tax rates that are expected to be applied to temporary
differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.



A deferred income tax asset
is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference
can be utilized. Deferred income tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer
probable that the related tax benefit will be realized. Deferred income tax assets and liabilities are only offset when they are
within the same legal entity and same tax jurisdiction. Deferred income tax assets and liabilities are presented as non-current.



| | (m) | Net income (loss) per share
| | --- | ---------------------------



Basic net income (loss) per
share is calculated by dividing the net income (loss) attributable to common shareholders of the Corporation by the weighted average
number of common shares outstanding during the period. Diluted net income (loss) per share is determined by adjusting the net income
(loss) attributable to common shareholders and the weighted average number of common shares outstanding for the effects of dilutive
instruments such as restricted shares granted to service providers and convertible debentures, using the treasury stock method.



Advantage Oil & Gas Ltd. - 16







| | 3. | Significant accounting policies (continued)
| | -- | -------------------------------------------



| | (n) | New standards and interpretations not yet adopted
| | --- | -------------------------------------------------



Standards issued but not yet
effective up to the date of issuance of the Corporation’s financial statements are listed below. This listing is of standards
and interpretations issued which the Corporation reasonably expects to be applicable at a future date. The Corporation intends
to adopt those standards when they become effective. The Corporation has yet to assess the full impact of these standards.



IFRS 9 Financial Instruments:
Classification and Measurement



IFRS 9 is intended to supersede
IAS 39, Financial Instruments: Recognition and Measurement and will be published in three phases, of which the first phase has
been published. The first phase addresses the accounting for financial assets and financial liabilities. The second phase will
address the impairment of financial instruments, and the third phase will address hedge accounting. For financial assets, IFRS
9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, and replaces the multiple
rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business
model and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment
method to be used, replacing the multiple impairment methods in IAS 39. For financial liabilities, although the classification
criteria for financial liabilities will not change under IFRS 9, the approach to the fair value option for financial liabilities
may require different accounting for changes to the fair value of a financial liability as a result of changes to an entity’s
own credit risk. This standard is not applicable until January 1, 2015.



IFRS 10 Consolidated Financial
Statements



IFRS 10 is a new standard that
will replace SIC 12, “Consolidation – Special Purpose Entities” and IAS 27 “Consolidated and Separate Financial
Statements”. The new standard eliminates the current risks and rewards approach and establishes control as the single basis
for determining the consolidation of an entity. This standard is not applicable until January 1, 2013.



IFRS 11 Joint Arrangements



IFRS 11 requires a venture to
classify its interest in a joint arrangement as a joint venture or joint operation. Joint ventures will be accounted for using
the equity method of accounting whereas for a joint operation, the venture will recognize its share of the assets, liabilities,
revenue and expenses. Under existing IFRS, entities have the choice to proportionately consolidate or equity account for interests
in joint ventures. IFRS 11 supersedes IAS 31, Interests in Joint Ventures and SIC-13, Jointly Controlled Entities, Non-Monetary
Contributions by Venturers. This standard is not applicable until January 1, 2013.



IFRS 12 Disclosure of Interests
in Other Entities



IFRS 12 provides the required
disclosures for interests in subsidiaries and joint arrangements. These disclosures will require information that will assist users
of financial statements to evaluate the nature, risks and financial effects associated with an entity’s interests in subsidiaries
and joint arrangements. This standard is not applicable until January 1, 2013.



IFRS 13 – Fair Value
Measurement



IFRS 13 is a comprehensive standard
for fair value measurement and disclosure requirements for use across all IFRS standards. The new standard clarifies that fair
value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market
participants, at the measurement date. It also establishes disclosures about fair value measurement. Under existing IFRS, guidance
on measuring and disclosing fair value is dispersed among the specific standards requiring fair value measurement and in many cases
does not reflect a clear measurement basis or consistent disclosures. This standard is not applicable until January 1, 2013.



IAS 28 – Investments
in Associates and Joint Ventures



IAS 28 has been amended to include
joint ventures in its scope and to address the changes in IFRS 10 to 13.



Advantage Oil & Gas Ltd. - 17







| | 4. | Significant accounting judgments, estimates and assumptions
| | -- | -----------------------------------------------------------



The
preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that
affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results
may differ from these estimates, and differences could be material. Estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognized in the year in which the estimates are revised and in any future years
affected.



Estimates and assumptions



Information about significant
areas of estimation uncertainty in applying accounting policies that have the most significant effect on the amounts recognized
in the consolidated financial statements is included in the following notes:



| | · | Note 6 – valuation of financial
instruments;
| | - | --------------------------------------------



| | · | Note 9 – valuation of property,
plant and equipment;
| | - | ----------------------------------------------------



| | · | Note 8 & 9 – impairment of property,
plant and equipment and exploration and evaluation assets;
| | - | -----------------------------------------------------------------------------------------------



| | · | Note 6, 12 – valuation of convertible
debentures;
| | - | -------------------------------------------------



| | · | Note 13 – measurement of decommissioning
liability;
| | - | ---------------------------------------------------



| | · | Note 16 – measurement of share based
compensation; and
| | - | ------------------------------------------------------



| | · | Note 22 – measurement of deferred
income tax.
| | - | ---------------------------------------------



Judgments



In the process of applying the
Corporation’s accounting policies, management has made the following judgments, apart from those involving estimates, which
may have the most significant effect on the amounts recognized in the consolidated financial statements.



| | (a) | Exploration and evaluation assets
| | --- | ---------------------------------



Costs incurred to acquire rights
to explore for oil and natural gas may be grouped into either exploration and evaluation or development and production, depending
on facts and circumstances. Costs incurred in respect of properties that have been determined to have proved and probable reserves,
are classified as development and production properties. In such circumstances, technical feasibility and commercial viability
are considered to be established. Costs incurred in respect of new prospects with no nearby established development past or present
and no proved or probable reserves assigned are classified as exploration and evaluation assets (note 8).



| | (b) | Reserves base
| | --- | -------------



| |  | The oil and gas development and production properties are depreciated on a unit-of-production (“UOP”)
basis at a rate calculated by reference to proved and probable reserves determined in accordance with National Instrument 51-101
“Standards of Disclosure for Oil and Gas Activities” and incorporating the estimated future cost of developing and
extracting those reserves. Proved plus probable reserves are determined using estimates of oil and natural gas in place, recovery
factors and future oil and natural gas prices. Future development costs are estimated using assumptions as to number of wells required
to produce the reserves, the cost of such wells and associated production facilities and other capital costs.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Advantage Oil & Gas Ltd. - 18







| | 4. | Significant accounting judgments, estimates and assumptions (continued)
| | -- | -----------------------------------------------------------------------



| | (c) | Depreciation of oil and gas assets
| | --- | ----------------------------------



Oil and gas properties are depreciated
using the UOP method over proved plus probable reserves. The calculation of the UOP rate of depreciation could be impacted to the
extent that actual production in the future is different from current forecast production based on proved plus probable reserves
(note 9).



| | (d) | Determination of cash generating units
| | --- | --------------------------------------



Oil and gas properties are grouped
into cash generating units for purposes of impairment testing. Management has evaluated the oil and gas properties of the Corporation,
and grouped the properties into cash generating units on the basis of their ability to generate independent cash flows, similar
reserve characteristics, geographical location, and shared infrastructure.



| | (e) | Impairment indicators and calculation of impairment
| | --- | ---------------------------------------------------



At each reporting date, Advantage
assesses whether or not there are circumstances that indicate a possibility that the carrying values of exploration and evaluation
assets and property, plant and equipment are not recoverable, or impaired. Such circumstances include incidents of physical damage,
deterioration of commodity prices, changes in the regulatory environment, or a reduction in estimates of proved and probable reserves.



When management judges that
circumstances indicate potential impairment, property, plant and equipment are tested for impairment by comparing the carrying
values to their recoverable amounts. The recoverable amounts of cash generating units are determined based on the higher of value-in-use
calculations and fair values less costs to sell. These calculations require the use of estimates and assumptions, that are subject
to change as new information becomes available including information on future commodity prices, expected production volumes, quantities
of reserves, discount rates, future development costs and operating costs (note 8 & 9).



| | (f) | Decommissioning liability
| | --- | -------------------------



Decommissioning costs will be
incurred by the Corporation at the end of the operating life of some of the Corporation’s facilities and properties. The
ultimate decommissioning liability is uncertain and can vary in response to many factors including changes to relevant legal requirements,
the emergence of new restoration techniques, experience at other production sites, or changes in the risk-free discount rate. The
expected timing and amount of expenditure can also change in response to changes in reserves or changes in laws and regulations
or their interpretation. As a result, there could be significant adjustments to the provisions established which would affect future
financial results.



| | (g) | Income taxes
| | --- | ------------



The Corporation recognizes deferred
income tax assets to the extent that it is probable that taxable profit will be available to allow the benefit of that deferred
income tax asset to be utilized. Assessing the recoverability of deferred income tax assets requires the Corporation to make significant
estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecast cash flows
from operations and the application of existing tax laws. To the extent that future cash flows and taxable income differ significantly
from estimates, the ability of the Corporation to realize the deferred income tax assets recorded at the reporting date could be
impacted. Additionally, future changes in tax laws in the jurisdictions in which the Corporation operates could limit the ability
of the Corporation to obtain tax deductions in future periods.



| | (h) | Contingencies
| | --- | -------------



By their nature, contingencies
will only be resolved when one or more future events occur or fail to occur. The assessment of contingencies inherently involves
the exercise of significant judgment and estimates of the outcome of future events.



Advantage Oil & Gas Ltd. - 19







| | 5. | Common-Control Transaction
| | -- | --------------------------



Advantage sold certain oil-weighted
assets to Longview for total consideration of $546.9 million, comprised of 29,450,000 common shares of Longview representing a
63% equity ownership and $252.4 million in cash. The assets were sold with an effective date of January 1, 2011 and a closing date
of April 14, 2011. As Advantage is the parent company and has a majority ownership interest of Longview, this transaction was deemed
a common-control transaction. As such, Advantage has recognized a non-controlling interest in shareholders’ equity, representing
the carrying value of the 37% shareholding of Longview held by outside interests.



The difference of $57.7 million
between the proceeds from the change in ownership interest and the carrying value of the non-controlling interest has been recognized
within contributed surplus of shareholders’ equity. At December 31, 2011, Advantage held 63% of Longview’s issued and
outstanding shares.



| | 6. | Financial risk management
| | -- | -------------------------



Financial instruments of the
Corporation include trade and other receivables, deposits, trade and other accrued liabilities, bank indebtedness, convertible
debentures, other liabilities and derivative assets and liabilities.



Trade and other receivables and
deposits are classified as loans and receivables and measured at amortized cost. Trade and other accrued liabilities, bank indebtedness
and other liabilities are all classified as financial liabilities at amortized cost. As at December 31, 2011, there were no significant
differences between the carrying amounts reported on the Statement of Financial Position 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 financial liabilities at amortized cost.
The convertible debentures have different fixed terms and interest rates (note 12) resulting in fair values that will vary over
time as market conditions change. As at December 31, 2011, the estimated fair value of the total outstanding convertible debenture
obligation was $82.8 million (December 31, 2010 - $153.2 million). The fair value of the liability component of convertible debentures
was determined based on the current public trading activity of such debentures.



Fair value
is determined following a three level hierarchy:



Level 1: Quoted prices in active
markets for identical assets and liabilities. The Corporation does not have any financial assets or liabilities that require level
1 inputs.



Level 2: Inputs other than quoted
prices included within Level 1 that are observable, either directly or indirectly. Such inputs can be corroborated with other observable
inputs for substantially the complete term of the contract. Advantage uses Level 2 inputs in the determination of the fair value
of derivative assets and liabilities. Pricing inputs include quoted forward prices for commodities, foreign exchange rates, volatility
and risk-free rate discounting, all of which can be observed or corroborated in the marketplace. 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.



Level 3: Under this level, fair
value is determined using inputs that are not observable. Advantage has no assets or liabilities that use level 3 inputs.



The Corporation’s activities
expose it to a variety of financial risks that arise as a result of its exploration, development, production, and financing activities
such as:



| | · | credit risk;
| | - | ------------



| | · | liquidity risk;
| | - | ---------------



| | · | price and currency risk; and
| | - | ----------------------------



| | · | interest rate risk.
| | - | -------------------



Advantage Oil & Gas Ltd. - 20







| | 6. | Financial risk management (continued)
| | -- | -------------------------------------



| | (a) | Credit risk
| | --- | -----------



Credit risk is the risk of financial
loss to the Corporation if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and
arises principally from the Corporation’s receivables from joint venture partners and oil and natural gas marketers. The
maximum exposure to credit risk is as follows:



|                            |  | December 31, 2011 |        |  | December 31, 2010 |   |        | January 1, 2010 | 
|--------------------------- |  | ----------------- | ------ |  | ----------------- | - | ------ | --------------- | 
|Trade and other receivables |  | $                 | 42,344 |  |                   | $ | 42,276 |                 | 
|Deposits                    |  |                   | 3,157  |  |                   |   | 2,936  |                 | 
|Derivative asset            |  |                   | -      |  |                   |   | 25,157 |                 | 
|                            |  | $                 | 45,501 |  |                   | $ | 70,369 |                 | 



Trade and other receivables,
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 banks and international energy firms to further mitigate associated credit risk.



Substantially all of the Corporation’s
trade and other receivables are due from customers and joint operation partners concentrated in the Canadian oil and gas industry.
As such, trade and other receivables are subject to normal industry credit risks. As at December 31, 2011, $0.5 million or 1.2%
of trade and other receivables are outstanding for 90 days or more (December 31, 2010 - $2.3 million or 5.4% of trade and other
receivables). The Corporation believes the entire balance is collectible, and in some instances has the ability to mitigate risk
through withholding production or offsetting payables with the same parties. Management has not provided an allowance for doubtful
accounts at December 31, 2011 (December 31, 2010 - $0.2 million).



The Corporation’s most
significant customer, a Canadian oil and natural gas marketer, accounts for $12.3 million of the trade and other receivables at
December 31, 2011 (December 31, 2010 - $12.1 million).



Advantage Oil & Gas Ltd. - 21







| | 6. | Financial risk management (continued)
| | -- | -------------------------------------



| | (b) | Liquidity risk
| | --- | --------------



The Corporation is subject to
liquidity risk attributed from trade and other accrued liabilities, bank indebtedness, convertible debentures, other liabilities,
and derivative liabilities. Trade and other accrued liabilities, other liabilities, and derivative liabilities are primarily due
within one year of the statement of financial position date and Advantage does not anticipate any problems in satisfying the obligations
from cash provided by operating activities and the existing credit facilities. The Corporation’s bank indebtedness is subject
to $475 million credit facility agreements. Although the credit facilities are a source of liquidity risk, the facilities also
mitigates liquidity risk by enabling Advantage to manage interim cash flow fluctuations. The terms of the credit facilities are
such that they provide 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 convertible debentures
outstanding that mature in 2015 (note 12). 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 as at December 31, 2011 and 2010 are as follows:





|December 31, 2011                    |  | Less than one year |         |  | One to three years |   |         | Three to five years |  |   | Thereafter |  |  | Total |  
|------------------------------------ |  | ------------------ | ------- |  | ------------------ | - | ------- | ------------------- |  | - | ---------- |  |  | ----- | -
|Trade and other accrued liabilities  |  | $                  | 138,119 |  |                    | $ | -       |                     |  | $ | -          |  |  | $     | -
|Derivative liability                 |  |                    | 2,738   |  |                    |   | -       |                     |  |   | -          |  |  |       | -
|Bank indebtedness        - principal |  |                    | -       |  |                    |   | 233,903 |                     |  |   | -          |  |  |       | -
|- interest                           |  |                    | 12,373  |  |                    |   | 5,882   |                     |  |   | -          |  |  |       | -
|Convertible debentures - principal   |  |                    | -       |  |                    |   | -       |                     |  |   | 86,250     |  |  |       | -
|- interest                           |  |                    | 4,313   |  |                    |   | 8,625   |                     |  |   | 2,156      |  |  |       | -
|Other liability                      |  |                    | 908     |  |                    |   | -       |                     |  |   | -          |  |  |       | -
|                                     |  | $                  | 158,451 |  |                    | $ | 248,410 |                     |  | $ | 88,406     |  |  | $     | -







Interest on bank indebtedness was calculated assuming conversion
of the revolving credit facility to a one-year term facility.





|December 31, 2010                    |  | Less than one year |         |  | One to three years |   |         | Four to five years |  |   | Thereafter |  |  | Total |  
|------------------------------------ |  | ------------------ | ------- |  | ------------------ | - | ------- | ------------------ |  | - | ---------- |  |  | ----- | -
|Trade and other accrued liabilities  |  | $                  | 112,457 |  |                    | $ | -       |                    |  | $ | -          |  |  | $     | -
|Capital lease obligations            |  |                    | 779     |  |                    |   | -       |                    |  |   | -          |  |  |       | -
|Derivative liability                 |  |                    | 2,367   |  |                    |   | 177     |                    |  |   | -          |  |  |       | -
|Bank indebtedness        - principal |  |                    | -       |  |                    |   | 290,657 |                    |  |   | -          |  |  |       | -
|- interest                           |  |                    | 13,717  |  |                    |   | 6,577   |                    |  |   | -          |  |  |       | -
|Convertible debentures - principal   |  |                    | 62,294  |  |                    |   | -       |                    |  |   | 86,250     |  |  |       | -
|- interest                           |  |                    | 9,179   |  |                    |   | 8,625   |                    |  |   | 6,469      |  |  |       | -
|Other liability                      |  |                    | -       |  |                    |   | 1,966   |                    |  |   | -          |  |  |       | -
|                                     |  | $                  | 200,793 |  |                    | $ | 308,002 |                    |  | $ | 92,719     |  |  | $     | -





Interest on bank indebtedness was calculated assuming
conversion of the revolving credit facility to a one-year term facility.



Advantage Oil & Gas Ltd. - 22







| | 6. | Financial risk management (continued)
| | -- | -------------------------------------



| | (b) | Liquidity risk (continued)
| | --- | --------------------------



The Corporation’s bank
indebtedness does not have specific maturity dates. It is governed by credit facility agreements with a syndicate of financial
institutions (note 11). Under the terms of the agreements, the facilities are reviewed annually, with the next reviews scheduled
in April and June 2012. The facilities are revolving and are extendible at each annual review for a further 364 day period at the
option of the syndicate. If not extended, the credit facilities are converted at that time into one year term facilities, with
the principal payable at the end of such one year terms. Management fully expects that the facilities will be extended at each
annual review.



| | (c) | 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 into non-financial derivatives 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
earnings. It is estimated that a 10% change in the forward crude oil prices used to calculate the fair value of the crude oil derivatives
at December 31, 2011 would result in a $3.0 million change in net loss for the year ended December 31, 2011.



As at December 31, 2011, the Corporation had the
following derivatives in place:



|Description of
    Derivative    |  | Term                          |  | Volume       |  | Average
    Price        
|-------------------------------- |  | ----------------------------- |  | ------------ |  | -------------------------
|                                 |  |                               |  |              |  |                          
|Crude oil - WTI                  |  |                               |  |              |  |                          
|Fixed price                      |  | January 2012 to December 2012 |  | 1,000 bbls/d |  | Cdn $97.10/bbl           
|Collar                           |  | January 2012 to December 2012 |  | 1,000 bbls/d |  | Bought put Cdn $90.00/bbl
|                                 |  |                               |  |              |  | Sold call Cdn $102.25/bbl
|Electricity – Alberta Pool Price |  |                               |  |              |  |                          
|Fixed price                      |  | January 2012 to December 2012 |  | 0.9 MW       |  | Cdn $77.88/MWh           



As at December 31, 2010 the Corporation had the following
derivatives in place:



|Description of
    Derivative |  | Term                          |  | Volume       |  | Average Price 
|----------------------------- |  | ----------------------------- |  | ------------ |  | --------------
|                              |  |                               |  |              |  |               
|Natural gas - AECO            |  |                               |  |              |  |               
|Fixed price                   |  | April 2010 to January 2011    |  | 18,956 mcf/d |  | Cdn$7.25/mcf  
|Fixed price                   |  | January 2011 to December 2011 |  | 9,478 mcf/d  |  | Cdn$6.24/mcf  
|Fixed price                   |  | January 2011 to December 2011 |  | 9,478 mcf/d  |  | Cdn$6.24/mcf  
|Fixed price                   |  | January 2011 to December 2011 |  | 9,478 mcf/d  |  | Cdn$6.26/mcf  
|                              |  |                               |  |              |  |               
|Crude oil – WTI               |  |                               |  |              |  |               
|Fixed price                   |  | April 2010 to January 2011    |  | 2,000 bbls/d |  | Cdn$69.50/bbl 
|Fixed price                   |  | January 2011 to December 2011 |  | 1,500 bbls/d |  | Cdn $91.05/bbl



Advantage Oil & Gas Ltd. - 23







| | 6. | Financial risk management (continued)
| | -- | -------------------------------------



| | (c) | Price and currency risk (continued)
| | --- | -----------------------------------



As at December 31, 2011, the
fair value of the derivatives outstanding resulted in an asset of $Nil (December 31, 2010 – $25.2 million) and a liability
of $2.7 million (December 31, 2010 – $2.5 million).



For the year ended December
31, 2011, $0.5 million was recognized in net loss as a derivative gain (December 31, 2010 - $50.5 million derivative gain). The
table below summarizes the realized and unrealized gains (losses) on derivatives.



|                                         |  | Year ended        |         |   | Year ended        |  
|---------------------------------------- |  | ----------------- | ------- | - | ----------------- | -
|                                         |  | December 31, 2011 |         |   | December 31, 2010 |  
|Realized gains on derivatives            |  | $                 | 25,826  |   |                   | $
|Unrealized gains (losses) on derivatives |  |                   | (25,351 | ) |                   |  
|                                         |  | $                 | 475     |   |                   | $



The fair value of the commodity
risk management derivatives have been allocated to current and non-current assets and liabilities on the basis of expected timing
of cash settlement and the applicable counterparties.



| | (d) | Interest rate risk
| | --- | ------------------



Interest rate risk is the risk
that future cash flows will fluctuate as a result of changes in market interest rates. The interest charged on the outstanding
bank indebtedness fluctuates with the interest rates posted by the lenders. The Corporation is exposed to interest rate risk and
has not entered into any mitigating interest rate hedges or swaps. Had the borrowing rate been different by 100 basis points throughout
the year ended December 31, 2011, net income (loss) and comprehensive income (loss) would have changed by $2.2 million (December
31, 2010 - $1.9 million) based on the average debt balance outstanding during the year.



Advantage Oil & Gas Ltd. - 24







| | 6. | Financial risk management (continued)
| | -- | -------------------------------------



| | (e) | 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, and share capital. 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 or its ownership interest in Longview. The capital
structure is reviewed by Management and the Board of Directors on an ongoing basis. Advantage’s capital structure as at December
31, 2011, December 31, 2010 and January 1, 2010 is as follows:



|($000, except as otherwise indicated)                           |  | December 31, 2011 |             |  | December 31, 2010 |   |             | January 1, 2010 | 
|--------------------------------------------------------------- |  | ----------------- | ----------- |  | ----------------- | - | ----------- | --------------- | 
|Bank indebtedness (non-current) (note 11)                       |  | $                 | 233,903     |  |                   | $ | 290,657     |                 | 
|Working capital deficit (1)                                     |  |                   | 90,638      |  |                   |   | 64,452      |                 | 
|Net debt                                                        |  | $                 | 324,541     |  |                   | $ | 355,109     |                 | 
|Shares outstanding (note 15)                                    |  |                   | 166,304,040 |  |                   |   | 164,092,009 |                 | 
|Share closing market price ($/share)                            |  |                   | 4.24        |  |                   |   | 6.76        |                 | 
|Market capitalization (2)                                       |  |                   | 705,129     |  |                   |   | 1,109,262   |                 | 
|Convertible debentures maturity value (current and non-current) |  |                   | 86,250      |  |                   |   | 148,544     |                 | 
|Capital lease obligations (non-current)                         |  |                   | -           |  |                   |   | -           |                 | 
|Total capitalization                                            |  | $                 | 1,115,920   |  |                   | $ | 1,612,915   |                 | 



(1) Working capital
deficit is a non-GAAP measure that includes trade and other receivables, prepaid expenses and deposits, trade and other accrued
liabilities, the current portion of capital lease obligations, and current portion of other liability.

(2) Market capitalization
is a non-GAAP measure calculated by multiplying shares outstanding by the closing market share price on the applicable date.



The Corporation’s bank
indebtedness is governed by credit facility agreements for $475 million (note 11) 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 years ended December 31, 2011 and 2010.



Advantage Oil & Gas Ltd. - 25







| | 7. | Trade and other receivables
| | -- | ---------------------------



|                                        |  | December 31, 2011 |        |  | December 31, 2010 |   |        | January 1, 2010 | 
|--------------------------------------- |  | ----------------- | ------ |  | ----------------- | - | ------ | --------------- | 
|Trade receivables                       |  | $                 | 32,655 |  |                   | $ | 30,997 |                 | 
|Receivables from joint venture partners |  |                   | 9,038  |  |                   |   | 6,296  |                 | 
|Other                                   |  |                   | 651    |  |                   |   | 4,983  |                 | 
|                                        |  | $                 | 42,344 |  |                   | $ | 42,276 |                 | 



| | 8. | Exploration and evaluation assets
| | -- | ---------------------------------



|Balance at January 1, 2010                            |  | $ | 6,923  |  
|----------------------------------------------------- |  | - | ------ | -
|Additions                                             |  |   | 2,091  |  
|Exploration and evaluation expense                    |  |   | (752   | )
|Balance at December 31, 2010                          |  | $ | 8,262  |  
|Additions                                             |  |   | 3,006  |  
|Transferred to property, plant and equipment (note 9) |  |   | (483   | )
|Exploration and evaluation expense                    |  |   | (3,055 | )
|Balance at December 31, 2011                          |  | $ | 7,730  |  



There
were no indicators of impairment of exploration and evaluation assets during the years ended December 31, 2011 and 2010.





Advantage Oil & Gas Ltd. - 26







| | 9. | Property, plant and equipment
| | -- | -----------------------------



|                                                            |  | Oil & gas  |           |   | Furniture and |   |       |       | 
|----------------------------------------------------------- |  | ---------- | --------- | - | ------------- | - | ----- | ----- | 
|Cost                                                        |  | properties |           |   | equipment     |   |       | Total | 
|Balance at January 1, 2010                                  |  | $          | 1,821,078 |   |               | $ | 3,621 |       | 
|Additions                                                   |  |            | 221,280   |   |               |   | 403   |       | 
|Change in decommissioning liability (note 13)               |  |            | 37,073    |   |               |   | -     |       | 
|Disposals                                                   |  |            | (60,482   | ) |               |   | -     |       | 
|Balance at December 31, 2010                                |  | $          | 2,018,949 |   |               | $ | 4,024 |       | 
|Additions                                                   |  |            | 253,731   |   |               |   | 443   |       | 
|Change in decommissioning liability (note 13)               |  |            | 79,660    |   |               |   | -     |       | 
|Disposals                                                   |  |            | (184      | ) |               |   | -     |       | 
|Transferred from exploration and evaluation assets (note 8) |  |            | 483       |   |               |   | -     |       | 
|Balance at December 31, 2011                                |  | $          | 2,352,639 |   |               | $ | 4,467 |       | 



|                                               |  | Oil & gas  |         |   | Furniture and |   |       |       | 
|---------------------------------------------- |  | ---------- | ------- | - | ------------- | - | ----- | ----- | 
|Accumulated depreciation and impairment losses |  | properties |         |   | equipment     |   |       | Total | 
|Balance at January 1, 2010                     |  | $          | -       |   |               | $ | -     |       | 
|Depreciation                                   |  |            | 123,360 |   |               |   | 1,232 |       | 
|Impairment of oil and gas properties           |  |            | 17,500  |   |               |   | -     |       | 
|Disposals                                      |  |            | (2,881  | ) |               |   | -     |       | 
|Balance at December 31, 2010                   |  | $          | 137,979 |   |               | $ | 1,232 |       | 
|Depreciation                                   |  |            | 152,279 |   |               |   | 648   |       | 
|Impairment of oil and gas properties           |  |            | 187,684 |   |               |   | -     |       | 
|Disposals                                      |  |            | (3      | ) |               |   | -     |       | 
|Balance at December 31, 2011                   |  | $          | 477,939 |   |               | $ | 1,880 |       | 



|                     |  | Oil & gas  |           |  | Furniture and |   |       |       | 
|-------------------- |  | ---------- | --------- |  | ------------- | - | ----- | ----- | 
|Net book value       |  | properties |           |  | equipment     |   |       | Total | 
|At January 1, 2010   |  | $          | 1,821,078 |  |               | $ | 3,621 |       | 
|At December 31, 2010 |  | $          | 1,880,970 |  |               | $ | 2,792 |       | 
|At December 31, 2011 |  | $          | 1,874,700 |  |               | $ | 2,587 |       | 



During the year ended
December 31, 2011, Advantage capitalized general and administrative expenditures directly related to development activities of
$7.6 million (December 31, 2010 - $8.9 million).



Advantage included future development
costs of $1.7 billion (December 31, 2010 – $1.6 billion) in property, plant and equipment costs subject to depreciation.



Advantage Oil & Gas Ltd. - 27







| | 9. | Property, plant and equipment (continued)
| | -- | -----------------------------------------



For the year ended December 31,
2011, Advantage recognized an impairment of oil and gas properties of $187.7 million (December 31, 2010 - $17.5 million). Impairment
of oil and gas properties occur when management determines that indicators of impairment are present in specific cash generating
units. Recorded impairments are the amount by which carrying amounts of the cash generating units exceed their respective recoverable
amount based on a fair value less costs to sell determination. Fair value less costs to sell is based on discounted after-tax future
net cash flows of proved and probable reserves using forecast prices and costs, discounted at 10%.



Forecast natural gas prices used
in the calculation of impairment of oil and gas properties for the year ended December 31, 2011 are as follows:



|Year                             |  | AECO ($Cdn/MMBtu) |     
|-------------------------------- |  | ----------------- | ----
|2012                             |  |                   | 3.16
|2013                             |  |                   | 3.78
|2014                             |  |                   | 4.13
|2015                             |  |                   | 5.53
|2016                             |  |                   | 5.65
|2017                             |  |                   | 5.77
|2018                             |  |                   | 5.89
|2019                             |  |                   | 6.01
|2020                             |  |                   | 6.14
|2021 (1)                         |  |                   | 6.27
|                                 |  |                   |     
|(1)Escalation of 1.5% thereafter |  |                   |     



The impairment of oil and gas
properties recognized in the year ended December 31, 2011 relates to natural gas producing assets in West and East Alberta. The
decline in the price of natural gas was considered to be an indicator of impairment.



The impairment of oil and gas
properties recognized in the year ended December 31, 2010 related to a West Alberta oil cash generating unit, that was subject
to negative reserve revisions at year end.



Advantage Oil & Gas Ltd. - 28







| | 10. | Related party transactions
| | --- | --------------------------



Transactions
between Advantage and Longview



Advantage sold certain oil-weighted
properties to Longview on April 14, 2011 (note 5).



Concurrent with the disposition,
Advantage entered into a Technical Services Agreement (“TSA”) with Longview. Under the TSA, Advantage provides the
necessary personnel and technical services to manage Longview’s business and Longview reimburses Advantage on a monthly basis
for its share of administrative charges based on respective levels of production. All amounts paid are recorded as general and
administrative expenses and measured at the exchange amount, which is the amount agreed upon by the transacting parties.



At December 31, 2011, amounts
due from Longview totaled $1.7 million (December 31, 2010 - $Nil). Advantage charged Longview $3.8 million during the year ended
December 31, 2011 under the TSA. Dividends declared and paid or payable from Longview to Advantage during the year ended December
31, 2011 totaled $11.8 million (December 31, 2010 - $Nil). All amounts due to and from Longview are non-interest bearing in nature,
are settled monthly and were incurred within the normal course of business. All inter-corporate balances, income and expenses resulting
from inter-corporate transactions are eliminated.



Key management compensation



The compensation paid or payable
to key management, including directors, is as follows:



|                                                |  | December 31, 2011 |       |  | December 31, 2010 |  
|----------------------------------------------- |  | ----------------- | ----- |  | ----------------- | -
|Salaries, director fees and short-term benefits |  | $                 | 4,821 |  |                   | $
|Other long-term benefits                        |  |                   | -     |  |                   |  
|Share based compensation(1)                     |  |                   | 5,067 |  |                   |  
|                                                |  | $                 | 9,888 |  |                   | $



(1)
Represents the grant date fair value of Restricted Shares granted under the RSPIP for the respective years.



Advantage Oil & Gas Ltd. - 29







| | 11. | Bank indebtedness
| | --- | -----------------



|                                               |  | December 31, 2011 |         |   | December 31, 2010 |   |         | January 1, 2010 | 
|---------------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | --------------- | 
|Revolving credit facility                      |  | $                 | 233,903 |   |                   | $ | 290,657 |                 | 
|Discount on Bankers Acceptances and other fees |  |                   | (1,219  | ) |                   |   | (1,805  | )               | 
|Balance, end of year                           |  | $                 | 232,684 |   |                   | $ | 288,852 |                 | 



The Corporation has credit facilities
(the "Credit Facilities") of $475 million, comprised of $275 million held by Advantage and $200 million held by Longview.
The Credit Facilities are comprised of $40 million extendible revolving operating loan facilities from one financial institution
and $435 million of extendible revolving loan facilities from a syndicate of financial institutions. Amounts borrowed under the
Credit Facilities bear interest at a floating rate based on the applicable Canadian prime rate, US base rate, LIBOR rate or bankers'
acceptance rate plus between 1.00% and 3.50% depending on the type of borrowing and the Corporations’ debt to cash flow ratio.
The Credit Facilities are each collateralized by a $1 billion floating charge demand debenture covering all assets. The amounts
available to the Corporation from time to time under the Credit Facilities are based upon the borrowing base determined semi-annually
by the lenders. The revolving period for the Credit Facilities will end in April and June 2012 unless extended at the option of
the syndicate for a further 364 day period. If the Credit Facilities are not extended, they will convert to non-revolving term
facilities due 365 days after the last day of the revolving period. The Credit Facilities 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 petroleum and natural gas production over two years and 50% over the third year, in each
respective legal entity. The Credit Facilities contain standard commercial covenants for credit facilities of this nature. The
only financial covenant is a requirement for each entity to maintain a minimum cash flow to interest expense ratio of 3.5:1, determined
on a rolling four-quarter basis. These covenants were met at December 31, 2011, December 31, 2010, and January 1, 2010. Breach
of any covenant will result in an event of default in which case the Corporation 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. Interest payments under the debentures are subordinated to the repayment of any amounts owing under
the Credit Facilities and 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. For the year ended December 31, 2011, the
average effective interest rate on the outstanding amounts under the facility was approximately 5.3% (December 31, 2010 –
5.0%). Advantage also has issued letters of credit totaling $8.8 million at December 31, 2011 (December 31, 2010 – $2.9 million).



Advantage Oil & Gas Ltd. - 30







| | 12. | Convertible debentures
| | --- | ----------------------



The convertible unsecured subordinated
debentures pay interest semi-annually and are convertible at the option of the holder into shares of Advantage at the applicable
conversion price per share plus accrued and unpaid interest. The details of the convertible debentures including fair market values
initially assigned and issuance costs are as follows:



|                    |  | 6.50% |               |  | 7.75% |   |               | 8.00% |  |   | 5.00%         | 
|------------------- |  | ----- | ------------- |  | ----- | - | ------------- | ----- |  | - | ------------- | 
|                    |  |       |               |  |       |   |               |       |  |   |               | 
|Trading symbol      |  |       | AAV.DBE       |  |       |   | AAV.DBD       |       |  |   | AAV.DBG       | 
|Issue date          |  |       | May 18, 2005  |  |       |   | Sep. 15, 2004 |       |  |   | Nov. 13, 2006 | 
|Maturity date       |  |       | June 30, 2010 |  |       |   | Dec. 1, 2011  |       |  |   | Dec. 31, 2011 | 
|Conversion price    |  | $     | 24.96         |  |       | $ | 21.00         |       |  | $ | 20.33         | 
|                    |  |       |               |  |       |   |               |       |  |   |               | 
|Liability component |  | $     | 69,952        |  |       | $ | 50,000        |       |  | $ | 41,445        | 
|Equity component    |  |       | -             |  |       |   | -             |       |  |   | -             | 
|                    |  |       |               |  |       |   |               |       |  |   |               | 
|Gross proceeds      |  |       | 69,952        |  |       |   | 50,000        |       |  |   | 41,445        | 
|Issuance costs      |  |       | -             |  |       |   | (2,190        | )     |  |   | -             | 
|                    |  |       |               |  |       |   |               |       |  |   |               | 
|Net proceeds        |  | $     | 69,952        |  |       | $ | 47,810        |       |  | $ | 41,445        | 



The convertible debentures are
redeemable prior to their maturity dates, at the option of the Corporation, upon providing appropriate advance notification as
per the debenture indentures. The redemption prices for the various debentures, plus accrued and unpaid interest, is dependent
on the redemption periods and are as follows:



|Convertible |      |   |                    |                                                                     | Redemption |  
|----------- | ---- | - | ------------------ | ------------------------------------------------------------------- | ---------- | -
|Debenture   |      |   | Redemption Periods |                                                                     | Price      |  
|            | 7.75 | % |                    | After December 1, 2009 and before December 1, 2011                  |            | $
|            | 8.00 | % |                    | After December 31, 2010 and before December 31, 2011                |            | $
|            | 5.00 | % |                    | After January 31, 2013 and on or before January 30, 2015            |            | $
|            |      |   |                    | Provided that Current Market Price exceeds 125% of Conversion Price |            |  



Advantage Oil & Gas Ltd. - 31







| | 12. | Convertible debentures (continued)
| | --- | ----------------------------------



The balance of debentures outstanding
at December 31, 2011 and changes in the liability and equity components during the years ended December 31, 2011 and 2010 are as
follows:



|                             |  | 6.50% |         |   | 7.75% |  
|---------------------------- |  | ----- | ------- | - | ----- | -
|Trading symbol               |  |       | AAV.DBE |   |       |  
|Debentures outstanding       |  | $     | -       |   |       | $
|Liability component:         |  |       |         |   |       |  
|Balance at January 1, 2010   |  | $     | 69,927  |   |       | $
|Accretion of discount        |  |       | -       |   |       |  
|Matured                      |  |       | (69,927 | ) |       |  
|Balance at December 31, 2010 |  |       | -       |   |       |  
|Accretion of discount        |  |       | -       |   |       |  
|Matured                      |  |       | -       |   |       |  
|Balance at December 31, 2011 |  | $     | -       |   |       | $



|                             |  | 8.00% |         |   | 5.00% |   |         | Total | 
|---------------------------- |  | ----- | ------- | - | ----- | - | ------- | ----- | 
|Trading symbol               |  |       | AAV.DBG |   |       |   | AAV.DBH |       | 
|Debentures outstanding       |  | $     | -       |   |       | $ | 86,250  |       | 
|Liability component:         |  |       |         |   |       |   |         |       | 
|Balance at January 1, 2010   |  | $     | 15,528  |   |       | $ | 69,857  |       | 
|Accretion of discount        |  |       | -       |   |       |   | 2,954   |       | 
|Matured                      |  |       | -       |   |       |   | -       |       | 
|Balance at December 31, 2010 |  |       | 15,528  |   |       |   | 72,811  |       | 
|Accretion of discount        |  |       | -       |   |       |   | 3,079   |       | 
|Matured                      |  |       | (15,528 | ) |       |   | -       |       | 
|Balance at December 31, 2011 |  | $     | -       |   |       | $ | 75,890  |       | 
|                             |  |       |         |   |       |   |         |       | 
|Equity component:            |  |       |         |   |       |   |         |       | 
|Balance at January 1, 2010   |  | $     | -       |   |       | $ | 8,348   |       | 
|Balance at December 31, 2010 |  | $     | -       |   |       | $ | 8,348   |       | 
|Balance at December 31, 2011 |  | $     | -       |   |       | $ | 8,348   |       | 



The principal amount of 7.75%
convertible debentures matured on December 1, 2011, and was settled with $46.8 million in cash. The principal amount of 8.00% convertible
debentures matured on December 31, 2011, and was settled with $15.5 million in cash. The principal amount of 6.50% convertible
debentures matured on June 30, 2010 and was settled with $69.9 million in cash. There were no conversions of convertible debentures
during the years ended December 31, 2011 and 2010.



Advantage Oil & Gas Ltd. - 32







| | 13. | Decommissioning liability
| | --- | -------------------------



The Corporation’s decommissioning
liability results from net ownership interests in petroleum and natural gas assets including well sites, gathering systems and
processing facilities, all of which will require future costs of decommissioning under environmental legislation. These costs are
expected to be incurred between 2012 and 2071. A risk-free rate of 2.50% (December 31, 2010 – 3.54%) and an inflation factor
of 2% were used to calculate the fair value of the decommissioning liability.



|A reconciliation of the decommissioning liability is provided below: |  |                   |        
|-------------------------------------------------------------------- |  | ----------------- | -------
|                                                                     |  | Year ended        |        
|                                                                     |  | December 31, 2011 |        
|Balance, beginning of year                                           |  | $                 | 172,130
|Accretion expense                                                    |  |                   | 5,748  
|Liabilities incurred                                                 |  |                   | 4,714  
|Change in estimates                                                  |  |                   | (3,699 
|Effect of change in risk-free rate                                   |  |                   | 78,645 
|Property dispositions                                                |  |                   | (407   
|Liabilities settled                                                  |  |                   | (3,335 
|Balance, end of year                                                 |  | $                 | 253,796



| | 14. | Other liability
| | --- | ---------------



The Corporation has a non-cancellable
lease for office space which, due to changes in its activities, the Corporation ceased to use in September 2009, while the lease
expires in 2012. Management considers this to be an onerous contract, therefore the obligation for the discounted future payments,
net of expected rental income, has been provided for as a liability.



|A reconcilation of the other liability is as follows: |  |                   |        |   |                   |  
|----------------------------------------------------- |  | ----------------- | ------ | - | ----------------- | -
|                                                      |  | Year ended        |        |   | Year ended        |  
|                                                      |  | December 31, 2011 |        |   | December 31, 2010 |  
|Balance, beginning of year                            |  | $                 | 1,835  |   |                   | $
|Accretion expense (note 21)                           |  |                   | 99     |   |                   |  
|Reduction of liability by subleasing space            |  |                   | -      |   |                   |  
|Liability settled                                     |  |                   | (1,026 | ) |                   |  
|Balance, end of year                                  |  | $                 | 908    |   |                   | $



| | 15. | Share capital
| | --- | -------------



| | (a) | Authorized
| | --- | ----------



The Corporation is authorized
to issue an unlimited number of shares without nominal or par value.



| | (b) | Issued
| | --- | ------





|                                   |  | Number of Shares |             |  | Amount |  
|---------------------------------- |  | ---------------- | ----------- |  | ------ | -
|Balance at January 1, 2010         |  |                  | 162,745,528 |  |        | $
|Share based compensation (note 16) |  |                  | 1,346,481   |  |        |  
|Balance at December 31, 2010       |  |                  | 164,092,009 |  |        | $
|Share based compensation (note 16) |  |                  | 2,212,031   |  |        |  
|Balance at December 31, 2011       |  |                  | 166,304,040 |  |        | $



Advantage Oil & Gas Ltd. - 33







| | 16. | Share based compensation
| | --- | ------------------------



Advantage
has a Restricted Share Performance Incentive Plan (“RSPIP” or the “Plan”) as approved by the shareholders.
The Plan authorizes the Board of Directors to grant restricted shares to service providers, including directors, officers, employees,
and consultants of Advantage. The number of restricted shares granted is based on the Corporation’s share price return for
a twelve-month period and compared to the performance of 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 twelve-month change in the share price. If the
share price return for a twelve-month period is positive, a restricted share grant will be calculated based on the return. Otherwise,
no restricted shares will be granted to service providers for the period. If the share price return for a twelve-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
grant a discretionary restricted share award. The restricted share grants generally vest one-third immediately on grant date, with
the remaining two-thirds vesting on each of the two subsequent anniversary dates. On vesting, common shares are issued to the service
providers in exchange for the restricted shares outstanding. 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. However, it is the intent to settle unvested
amounts with shares.



The following table is a continuity
of restricted shares:



|                             |  | Restricted Shares |           
|---------------------------- |  | ----------------- | ----------
|Balance at January 1, 2010   |  |                   | 2,226,904 
|Granted                      |  |                   | 2,547,020 
|Vested                       |  |                   | (1,818,707
|Forfeited                    |  |                   | (29,349   
|Balance at December 31, 2010 |  |                   | 2,925,868 
|Granted                      |  |                   | 1,443,956 
|Vested                       |  |                   | (2,212,031
|Forfeited                    |  |                   | (40,083   
|Balance at December 31, 2011 |  |                   | 2,117,710 



The following table summarizes
information about restricted shares outstanding at December 31, 2011:



|                  |  |            |           |  | Weighted     |  
|----------------- |  | ---------- | --------- |  | ------------ | -
|                  |  | Number of  |           |  | Average Fair |  
|                  |  | Restricted |           |  | Value at     |  
|Date Granted      |  | Shares     |           |  | Grant Date   |  
|September 2, 2009 |  |            | 344,353   |  |              | $
|January 12, 2010  |  |            | 247,439   |  |              | $
|April 12, 2010    |  |            | 314,232   |  |              | $
|July 12, 2010     |  |            | 257,010   |  |              | $
|January 12, 2011  |  |            | 43,955    |  |              | $
|April 11, 2011    |  |            | 539,263   |  |              | $
|July 12, 2011     |  |            | 371,458   |  |              | $
|Total             |  |            | 2,117,710 |  |              |  



During the year ended December
31, 2011, the Corporation recognized share based compensation of $15.1 million (December 31, 2010 - $19.9 million), of which $2.8
million (December 31, 2010 - $3.9 million) was capitalized to property, plant and equipment, and $12.3 million (December 31, 2010
- $16.0 million) was recorded as an expense in the Statement of Income (Loss) and Comprehensive Income (Loss).



Advantage Oil & Gas Ltd. - 34







| | 17. | Net income (loss) per share attributable to Advantage shareholders
| | --- | ------------------------------------------------------------------

| |  | 
| |  | 



The calculations of basic and
diluted net income (loss) per share are derived from both net income (loss) attributable to Advantage common shareholders and weighted
average shares outstanding, calculated as follows:





|                                                         |  | Year ended        |             |   | Year ended        |  
|-------------------------------------------------------- |  | ----------------- | ----------- | - | ----------------- | -
|                                                         |  | December 31, 2011 |             |   | December 31, 2010 |  
|Net income (loss) attributable to Advantage shareholders |  |                   |             |   |                   |  
|Basic                                                    |  | $                 | (152,772    | ) |                   | $
|Restricted shares (note 16)                              |  |                   | -           |   |                   |  
|Convertible debentures                                   |  |                   | -           |   |                   |  
|Diluted                                                  |  | $                 | (152,772    | ) |                   | $
|Weighted average shares outstanding                      |  |                   |             |   |                   |  
|Basic                                                    |  |                   | 165,370,777 |   |                   |  
|Restricted shares (note 16)                              |  |                   | -           |   |                   |  
|Convertible debentures                                   |  |                   | -           |   |                   |  
|Diluted                                                  |  |                   | 165,370,777 |   |                   |  





The calculation of diluted net
income (loss) per share for the years ended December 31, 2011 and 2010 excludes convertible debentures, as their impact would be
anti-dilutive. Total weighted average shares issuable in exchange for the series of convertible debentures excluded from the diluted
net income (loss) per share calculation for the year ended December 31, 2011 was 12,828,588 (year ended December 31, 2010 –
14,401,412 shares). As at December 31, 2011, the total convertible debentures outstanding were immediately convertible to 10,029,070
shares (December 31, 2010 – 13,019,819 shares).



Restricted shares have been excluded
from the calculation of diluted net loss per share for the year ended December 31, 2011, 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 year ended December 31, 2011 was 1,192,566 shares.



Advantage Oil & Gas Ltd. - 35







| | 18. | Petroleum and natural gas sales
| | --- | -------------------------------



|                                       |  | Year ended        |         |  | Year ended        |  
|-------------------------------------- |  | ----------------- | ------- |  | ----------------- | -
|                                       |  | December 31, 2011 |         |  | December 31, 2010 |  
|Crude oil and natural gas liquid sales |  | $                 | 186,014 |  |                   | $
|Natural gas sales                      |  |                   | 169,274 |  |                   |  
|Total petroleum and natural gas sales  |  | $                 | 355,288 |  |                   | $



| | 19. | General and administrative expense (“G&A”)
| | --- | ------------------------------------------



|                                       |  | Year ended        |        |   | Year ended        |  
|-------------------------------------- |  | ----------------- | ------ | - | ----------------- | -
|                                       |  | December 31, 2011 |        |   | December 31, 2010 |  
|Salaries and benefits                  |  | $                 | 20,778 |   |                   | $
|Share based compensation (notes 15,16) |  |                   | 15,100 |   |                   |  
|Office rent                            |  |                   | 2,337  |   |                   |  
|Other                                  |  |                   | 3,955  |   |                   |  
|Total G&A                              |  |                   | 42,170 |   |                   |  
|Capitalized (note 9)                   |  |                   | (7,583 | ) |                   |  
|Net G&A                                |  | $                 | 34,587 |   |                   | $



| | 20. | Other income
| | --- | ------------



|                                              |  | Year ended        |       |  | Year ended        |  
|--------------------------------------------- |  | ----------------- | ----- |  | ----------------- | -
|                                              |  | December 31, 2011 |       |  | December 31, 2010 |  
|Gain on sale of property, plant and equipment |  | $                 | 1,325 |  |                   | $
|Miscellaneous income                          |  |                   | 647   |  |                   |  
|Total other income                            |  | $                 | 1,972 |  |                   | $



| | 21. | Finance expense
| | --- | ---------------



|                                                |  | Year ended        |        |  | Year ended        |  
|----------------------------------------------- |  | ----------------- | ------ |  | ----------------- | -
|                                                |  | December 31, 2011 |        |  | December 31, 2010 |  
|Interest on bank indebtedness                   |  | $                 | 11,483 |  |                   | $
|Interest on convertible debentures              |  |                   | 8,871  |  |                   |  
|Accretion on convertible debentures (note 12)   |  |                   | 3,360  |  |                   |  
|Accretion of decomissioning liability (note 13) |  |                   | 5,748  |  |                   |  
|Accretion of other liability (note 14)          |  |                   | 99     |  |                   |  
|Total finance expense                           |  | $                 | 29,561 |  |                   | $



Advantage Oil & Gas Ltd. - 36







| | 22. | Income taxes
| | --- | ------------



The provision for income taxes
is as follows:



|                                       |  | Year ended        |         |   | Year ended        |  
|-------------------------------------- |  | ----------------- | ------- | - | ----------------- | -
|                                       |  | December 31, 2011 |         |   | December 31, 2010 |  
|Current income tax expense             |  | $                 | -       |   |                   | $
|Deferred income tax expense (recovery) |  |                   | (46,807 | ) |                   |  
|Income tax expense (recovery)          |  | $                 | (46,807 | ) |                   | $



The provision for income taxes
varies from the amount that would be computed by applying the combined federal and provincial income tax rates for the following
reasons:



|                                                        |  | Year ended        |          |   | Year ended        |  
|------------------------------------------------------- |  | ----------------- | -------- | - | ----------------- | -
|                                                        |  | December 31, 2011 |          |   | December 31, 2010 |  
|Income (loss) before taxes and non-controlling interest |  | $                 | (192,216 | ) |                   | $
|Combined federal and provincial income tax rates        |  |                   | 26.57    | % |                   |  
|Expected income tax expense (recovery)                  |  |                   | (51,072  | ) |                   |  
|Increase (decrease) in income taxes resulting from:     |  |                   |          |   |                   |  
|Non-deductible share based compensation                 |  |                   | 4,031    |   |                   |  
|Difference between current and expected tax rates       |  |                   | 234      |   |                   |  
|                                                        |  | $                 | (46,807  | ) |                   | $
|Effective tax rate                                      |  |                   | 24.35    | % |                   |  



The Canadian combined statutory
tax rates decreased from 28.17% in 2010 to 26.57% in 2011 as a result of legislation enacted in 2007.



Advantage Oil & Gas Ltd. - 37







| | 22. | Income taxes (continued)
| | --- | ------------------------



The movement in deferred income tax liabilities and
assets without taking into consideration the offsetting of balances within the same tax jurisdiction is as follows:



|Deferred income tax liability |  | Property, plant and
equipment |         |   | Derivative
asset/liability |   |        | Total | 
|----------------------------- |  | ----------------------------- | ------- | - | -------------------------- | - | ------ | ----- | 
|Balance at January 1, 2010    |  | $                             | 194,515 |   |                            | $ | 4,867  |       | 
|Charged (credited) to income  |  |                               | 47,597  |   |                            |   | 1,166  |       | 
|Balance at December 31, 2010  |  |                               | 242,112 |   |                            |   | 6,033  |       | 
|Charged (credited) to income  |  |                               | (3,771  | ) |                            |   | (6,737 | )     | 
|Balance at December 31, 2011  |  | $                             | 238,341 |   |                            | $ | (704   | )     | 



|Deferred income tax asset    |  | Decommissioning
liability |         |   | Non-capital
losses |   |          | Other |  |   | Total  |  
|---------------------------- |  | ------------------------- | ------- | - | ------------------ | - | -------- | ----- |  | - | ------ | -
|Balance at January 1, 2010   |  | $                         | (42,910 | ) |                    | $ | (127,941 | )     |  | $ | (6,416 | )
|Charged (credited) to income |  |                           | (581    | ) |                    |   | (31,417  | )     |  |   | 1,351  |  
|Balance at December 31, 2010 |  |                           | (43,491 | ) |                    |   | (159,358 | )     |  |   | (5,065 | )
|Charged (credited) to income |  |                           | (20,444 | ) |                    |   | (15,970  | )     |  |   | 115    |  
|Charged (credited) to equity |  |                           | -       |   |                    |   | (1,091   | )     |  |   | (1,993 | )
|Balance at December 31, 2011 |  | $                         | (63,935 | ) |                    | $ | (176,419 | )     |  | $ | (6,943 | )



|Net deferred income tax liability (asset) |  | Longview |         |   | Advantage |   |         | Total | 
|----------------------------------------- |  | -------- | ------- | - | --------- | - | ------- | ----- | 
|Balance at January 1, 2010                |  | $        | -       |   |           | $ | 22,115  |       | 
|Charged (credited) to income              |  |          | -       |   |           |   | 18,116  |       | 
|Balance at December 31, 2010              |  |          | -       |   |           |   | 40,231  |       | 
|Charged (credited) to income              |  |          | (36,299 | ) |           |   | (10,508 | )     | 
|Charged (credited) to equity              |  |          | (3,084  | ) |           |   | -       |       | 
|Balance at December 31, 2011              |  | $        | (39,383 | ) |           | $ | 29,723  |       | 



The net deferred income tax asset
is expected to reverse within 12 months.



The estimated tax pools available
at December 31, 2011 are as follows:

|                                       |  | Longview |         |  | Advantage |   |           | Total | 
|-------------------------------------- |  | -------- | ------- |  | --------- | - | --------- | ----- | 
|Canadian development expenses          |  | $        | 35,402  |  |           | $ | 105,300   |       | 
|Canadian exploration expenses          |  |          | -       |  |           |   | 70,761    |       | 
|Canadian oil and gas property expenses |  |          | 366,793 |  |           |   | -         |       | 
|Non-capital losses                     |  |          | 72,582  |  |           |   | 631,660   |       | 
|Undepreciated capital cost             |  |          | 76,362  |  |           |   | 271,190   |       | 
|Other                                  |  |          | 7,911   |  |           |   | 5,951     |       | 
|                                       |  | $        | 559,050 |  |           | $ | 1,084,862 |       | 



The non-capital loss
carry forward balances above expire no earlier than 2023.



Advantage Oil & Gas Ltd. - 38







| | 23. | Supplemented cash flow information
| | --- | ----------------------------------



Changes
in non-cash working capital is comprised of:



|                                    |  | Year ended        |        |   | Year ended        |  
|----------------------------------- |  | ----------------- | ------ | - | ----------------- | -
|                                    |  | December 31, 2011 |        |   | December 30, 2010 |  
|Source (use) of cash:               |  |                   |        |   |                   |  
|Trade and other receivables         |  | $                 | (68    | ) |                   | $
|Prepaid expenses and deposits       |  |                   | 443    |   |                   |  
|Trade and other accrued liabilities |  |                   | 25,662 |   |                   |  
|                                    |  | $                 | 26,037 |   |                   | $
|                                    |  |                   |        |   |                   |  
|Related to operating activities     |  | $                 | 4,131  |   |                   | $
|Related to financing activities     |  |                   | 2,274  |   |                   |  
|Related to investing activities     |  |                   | 19,632 |   |                   |  
|                                    |  | $                 | 26,037 |   |                   | $



| | 24. | Commitments
| | --- | -----------



Advantage has several lease commitments
relating to office buildings and transportation. The estimated remaining annual minimum operating lease payments are as follows,
of which $0.9 million is recognized in other liability (note 14):



|     |  | December 31, 2011 |        |  | December 31, 2010 |  
|---- |  | ----------------- | ------ |  | ----------------- | -
|2011 |  | $                 | -      |  |                   | $
|2012 |  |                   | 15,543 |  |                   |  
|2013 |  |                   | 14,413 |  |                   |  
|2014 |  |                   | 11,812 |  |                   |  
|2015 |  |                   | 2,246  |  |                   |  
|     |  | $                 | 44,014 |  |                   | $



Advantage Oil & Gas Ltd. - 39







| | 25. | Transition to IFRS
| | --- | ------------------



For all periods up to and including
the year ended December 31, 2010 the Corporation prepared its financial statements in accordance with previous Canadian generally
accepted accounting principles (“Previous GAAP”). These financial statements, for the year ended December 31, 2011,
are prepared in accordance with International Financial Reporting Standards (“IFRS”). The Corporation has prepared
financial statements which comply with IFRS applicable for periods beginning on or after January 1, 2010 and the significant accounting
policies meeting those requirements are described in note 3. The Corporation has prepared its IFRS opening balance sheet as at
January 1, 2010, its date of transition to IFRS.



IFRS 1 allows first-time adopters
certain exemptions from the general requirement to apply IFRS retrospectively. The Corporation has taken the following exemptions:



| | · | Companies using full-cost accounting are
allowed to measure their oil and gas assets at the amount determined under the Previous GAAP at the date of transition. This amount
is pro-rated to the underlying assets based upon the value of proved and probable reserves at transition date, discounted at 10%.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Companies using the full cost book value
as deemed cost exemption are allowed to measure the liabilities for decommissioning, restoration and similar liabilities at the
date of transition and recognize directly in retained earnings any difference between that amount and the carrying amount determined
under Previous GAAP.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | IFRS 3 Business Combinations has not been
applied to acquisitions of subsidiaries or of interests in associates and joint ventures that occurred before January 1, 2010.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | IFRS 2 Share-based Payment has not been
applied to any equity instruments that were granted on or before November 7, 2002, nor has it been applied to equity instruments
granted after November 7, 2002 that vested before January 1, 2010.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | IAS 17 Leases has been applied as of transition
date rather than at the lease’s inception date.
| | - | -----------------------------------------------------------------------------------------------



| | · | IAS 32 Financial Instruments Presentation
will not be applied for compound financial instruments where the liability component is no longer outstanding.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | IAS 23 Borrowing Costs will not be applied
before January 1, 2010.
| | - | ------------------------------------------------------------------



Reconciliations
to IFRS from Previous GAAP financial statements including the impact of the transitioning on the Corporation’s reported financial
position and financial performance, including the nature and effect of significant changes in accounting policies are summarized
as follows.



Advantage Oil & Gas Ltd. - 40







| | 25. | Transition to IFRS (continued)
| | --- | ------------------------------



| |  | Reconciliation of Consolidated Statement of Financial
Position at the date of IFRS transition, January 1, 2010.
| |  | ---------------------------------------------------------------------------------------------------------------



|                                           |  |       |   |  |          |   |           | Effect of  |  |   |                   |   |  |      |       
|------------------------------------------ |  | ----- | - |  | -------- | - | --------- | ---------- |  | - | ----------------- | - |  | ---- | ------
|                                           |  |       |   |  | Previous |   |           | Transition |  |   | IFRS              |   |  |      |       
|(thousands of Canadian dollars)            |  | Notes |   |  | GAAP     |   |           | to IFRS    |  |   | Reclassifications |   |  | IFRS |       
|                                           |  |       |   |  |          |   |           |            |  |   |                   |   |  |      |       
|ASSETS                                     |  |       |   |  |          |   |           |            |  |   |                   |   |  |      |       
|Current assets                             |  |       |   |  |          |   |           |            |  |   |                   |   |  |      |       
|Trade and other receivables                |  |       |   |  |          | $ | 54,531    |            |  | $ | -                 |   |  | $    | -     
|Prepaid expenses and deposits              |  |       |   |  |          |   | 9,936     |            |  |   | -                 |   |  |      | -     
|Derivative asset                           |  |       |   |  |          |   | 30,829    |            |  |   | -                 |   |  |      | -     
|Total current assets                       |  |       |   |  |          |   | 95,296    |            |  |   | -                 |   |  |      | -     
|                                           |  |       |   |  |          |   |           |            |  |   |                   |   |  |      |       
|Non-current assets                         |  |       |   |  |          |   |           |            |  |   |                   |   |  |      |       
|Derivative asset                           |  |       |   |  |          |   | 323       |            |  |   | -                 |   |  |      | -     
|Exploration and evaluation assets          |  |       | 2 |  |          |   | -         |            |  |   | -                 |   |  |      | 6,923 
|Property, plant and equipment              |  |       | 2 |  |          |   | 1,831,622 |            |  |   | -                 |   |  |      | (6,923
|Total non-current assets                   |  |       |   |  |          |   | 1,831,945 |            |  |   | -                 |   |  |      | -     
|                                           |  |       |   |  |          |   |           |            |  |   |                   |   |  |      |       
|Total assets                               |  |       |   |  |          | $ | 1,927,241 |            |  | $ | -                 |   |  | $    | -     
|                                           |  |       |   |  |          |   |           |            |  |   |                   |   |  |      |       
|LIABILITIES                                |  |       |   |  |          |   |           |            |  |   |                   |   |  |      |       
|Current liabilities                        |  |       |   |  |          |   |           |            |  |   |                   |   |  |      |       
|Trade and other accrued liabilities        |  |       | 6 |  |          | $ | 111,901   |            |  | $ | -                 |   |  | $    | 1,161 
|Capital lease obligations                  |  |       |   |  |          |   | 1,375     |            |  |   | -                 |   |  |      | -     
|Convertible debentures                     |  |       | 4 |  |          |   | 69,553    |            |  |   | 374               |   |  |      | -     
|Derivative liability                       |  |       |   |  |          |   | 12,755    |            |  |   | -                 |   |  |      | -     
|Deferred income tax liability              |  |       | 5 |  |          |   | 4,704     |            |  |   | -                 |   |  |      | (4,704
|Total current liabilities                  |  |       |   |  |          |   | 200,288   |            |  |   | 374               |   |  |      | (3,543
|                                           |  |       |   |  |          |   |           |            |  |   |                   |   |  |      |       
|Non-current liabilities                    |  |       |   |  |          |   |           |            |  |   |                   |   |  |      |       
|Derivative liability                       |  |       |   |  |          |   | 1,165     |            |  |   | -                 |   |  |      | -     
|Capital lease obligations                  |  |       |   |  |          |   | 759       |            |  |   | -                 |   |  |      | -     
|Bank indebtedness                          |  |       |   |  |          |   | 247,784   |            |  |   | -                 |   |  |      | -     
|Convertible debentures                     |  |       | 4 |  |          |   | 130,658   |            |  |   | 903               |   |  |      | -     
|Decommissioning liability                  |  |       | 3 |  |          |   | 68,555    |            |  |   | 101,110           |   |  |      | -     
|Deferred income tax liability              |  |       | 5 |  |          |   | 38,796    |            |  |   | (21,385           | ) |  |      | 4,704 
|Other liability                            |  |       |   |  |          |   | 3,431     |            |  |   | -                 |   |  |      | -     
|Total non-current liabilities              |  |       |   |  |          |   | 491,148   |            |  |   | 80,628            |   |  |      | 4,704 
|                                           |  |       |   |  |          |   |           |            |  |   |                   |   |  |      |       
|Total liabilities                          |  |       |   |  |          |   | 691,436   |            |  |   | 81,002            |   |  |      | 1,161 
|                                           |  |       |   |  |          |   |           |            |  |   |                   |   |  |      |       
|SHAREHOLDERS' EQUITY                       |  |       |   |  |          |   |           |            |  |   |                   |   |  |      |       
|Share capital                              |  |       |   |  |          |   | 2,190,409 |            |  |   | -                 |   |  |      | -     
|Convertible debentures equity component    |  |       | 4 |  |          |   | 18,867    |            |  |   | (10,519           | ) |  |      | -     
|Contributed surplus                        |  |       | 6 |  |          |   | 7,275     |            |  |   | -                 |   |  |      | (1,161
|Deficit                                    |  |       |   |  |          |   | (980,746  | )          |  |   | (70,483           | ) |  |      | -     
|Total shareholders' equity                 |  |       |   |  |          |   | 1,235,805 |            |  |   | (81,002           | ) |  |      | (1,161
|Total liabilities and shareholders' equity |  |       |   |  |          | $ | 1,927,241 |            |  | $ | -                 |   |  | $    | -     



Advantage Oil & Gas Ltd. - 41







| | 25. | Transition to IFRS (continued)
| | --- | ------------------------------



Reconciliation of
Consolidated Statement of Financial Position at the end of the last reporting year under Previous GAAP, December 31, 2010.



| |  | 
| |  | 

|                                           |  |       |         |  |          |   |            | Effect of  |  |   |                    |   |  |      |       
|------------------------------------------ |  | ----- | ------- |  | -------- | - | ---------- | ---------- |  | - | ------------------ | - |  | ---- | ------
|                                           |  |       |         |  | Previous |   |            | Transition |  |   | IFRS               |   |  |      |       
|(thousands of Canadian dollars)            |  | Notes |         |  | GAAP     |   |            | to IFRS    |  |   | Reclassifiications |   |  | IFRS |       
|                                           |  |       |         |  |          |   |            |            |  |   |                    |   |  |      |       
|ASSETS                                     |  |       |         |  |          |   |            |            |  |   |                    |   |  |      |       
|Current assets                             |  |       |         |  |          |   |            |            |  |   |                    |   |  |      |       
|Trade and other receivables                |  |       |         |  |          | $ | 42,276     |            |  | $ | -                  |   |  | $    | -     
|Prepaid expenses and deposits              |  |       |         |  |          |   | 6,488      |            |  |   | -                  |   |  |      | -     
|Derivative asset                           |  |       |         |  |          |   | 25,157     |            |  |   | -                  |   |  |      | -     
|Total current assets                       |  |       |         |  |          |   | 73,921     |            |  |   | -                  |   |  |      | -     
|                                           |  |       |         |  |          |   |            |            |  |   |                    |   |  |      |       
|Non-current assets                         |  |       |         |  |          |   |            |            |  |   |                    |   |  |      |       
|Exploration and evaluation assets          |  |       | 2       |  |          |   | -          |            |  |   | -                  |   |  |      | 8,262 
|Property, plant and equipment              |  |       | 1, 2, 3 |  |          |   | 1,768,650  |            |  |   | 123,374            |   |  |      | (8,262
|Total non-current assets                   |  |       |         |  |          |   | 1,768,650  |            |  |   | 123,374            |   |  |      | -     
|                                           |  |       |         |  |          |   |            |            |  |   |                    |   |  |      |       
|Total assets                               |  |       |         |  |          | $ | 1,842,571  |            |  | $ | 123,374            |   |  | $    | -     
|                                           |  |       |         |  |          |   |            |            |  |   |                    |   |  |      |       
|LIABILITIES                                |  |       |         |  |          |   |            |            |  |   |                    |   |  |      |       
|Current liabilities                        |  |       |         |  |          |   |            |            |  |   |                    |   |  |      |       
|Trade and other accrued liabilities        |  |       |         |  |          | $ | 112,457    |            |  | $ | -                  |   |  | $    | -     
|Capital lease obligations                  |  |       |         |  |          |   | 759        |            |  |   | -                  |   |  |      | -     
|Convertible debentures                     |  |       | 4       |  |          |   | 61,570     |            |  |   | 443                |   |  |      | -     
|Derivative liability                       |  |       |         |  |          |   | 2,367      |            |  |   | -                  |   |  |      | -     
|Deferred income tax liability              |  |       | 5       |  |          |   | 5,876      |            |  |   | -                  |   |  |      | (5,876
|Total current liabilities                  |  |       |         |  |          |   | 183,029    |            |  |   | 443                |   |  |      | (5,876
|                                           |  |       |         |  |          |   |            |            |  |   |                    |   |  |      |       
|Non-current liabilities                    |  |       |         |  |          |   |            |            |  |   |                    |   |  |      |       
|Derivative liability                       |  |       |         |  |          |   | 177        |            |  |   | -                  |   |  |      | -     
|Bank indebtedness                          |  |       |         |  |          |   | 288,852    |            |  |   | -                  |   |  |      | -     
|Convertible debentures                     |  |       |         |  |          |   | 72,811     |            |  |   | -                  |   |  |      | -     
|Decommissioning liability                  |  |       | 3       |  |          |   | 58,281     |            |  |   | 113,849            |   |  |      | -     
|Deferred income tax liability              |  |       | 5       |  |          |   | 29,399     |            |  |   | 4,956              |   |  |      | 5,876 
|Other liability                            |  |       |         |  |          |   | 1,835      |            |  |   | -                  |   |  |      | -     
|Total non-current liabilities              |  |       |         |  |          |   | 451,355    |            |  |   | 118,805            |   |  |      | 5,876 
|                                           |  |       |         |  |          |   |            |            |  |   |                    |   |  |      |       
|Total liabilities                          |  |       |         |  |          |   | 634,384    |            |  |   | 119,248            |   |  |      | -     
|                                           |  |       |         |  |          |   |            |            |  |   |                    |   |  |      |       
|SHAREHOLDERS' EQUITY                       |  |       |         |  |          |   |            |            |  |   |                    |   |  |      |       
|Share capital                              |  |       |         |  |          |   | 2,199,491  |            |  |   | -                  |   |  |      | -     
|Convertible debentures equity component    |  |       | 4       |  |          |   | 15,896     |            |  |   | (7,548             | ) |  |      | -     
|Contributed surplus                        |  |       | 4       |  |          |   | 17,754     |            |  |   | (2,971             | ) |  |      | -     
|Deficit                                    |  |       |         |  |          |   | (1,024,954 | )          |  |   | 14,645             |   |  |      | -     
|Total shareholders' equity                 |  |       |         |  |          |   | 1,208,187  |            |  |   | 4,126              |   |  |      | -     
|Total liabilities and shareholders' equity |  |       |         |  |          | $ | 1,842,571  |            |  | $ | 123,374            |   |  | $    | -     



Advantage Oil & Gas Ltd. - 42







| | 25. | Transition to IFRS (continued)
| | --- | ------------------------------



Reconciliation
of Consolidated Statement of Comprehensive Income (Loss) for the year ended December 31, 2010:



|                                                  |  |       |         |  |          |   |          | Effect of  |  |   |                   |   |  |      |       
|------------------------------------------------- |  | ----- | ------- |  | -------- | - | -------- | ---------- |  | - | ----------------- | - |  | ---- | ------
|                                                  |  |       |         |  | Previous |   |          | Transition |  |   | IFRS              |   |  |      |       
|(thousands of Canadian dollars)                   |  | Notes |         |  | GAAP     |   |          | to IFRS    |  |   | Reclassifications |   |  | IFRS |       
|                                                  |  |       |         |  |          |   |          |            |  |   |                   |   |  |      |       
|Petroleum and natural gas sales                   |  |       |         |  |          | $ | 319,368  |            |  | $ | -                 |   |  | $    | -     
|Less: royalties                                   |  |       | 8       |  |          |   | (44,640  | )          |  |   | -                 |   |  |      | (1,314
|Petroleum and natural gas revenue                 |  |       |         |  |          |   | 274,728  |            |  |   | -                 |   |  |      | (1,314
|                                                  |  |       |         |  |          |   |          |            |  |   |                   |   |  |      |       
|Operating expense                                 |  |       | 1c      |  |          |   | (93,875  | )          |  |   | (1,734            | ) |  |      | -     
|General and administrative expense                |  |       | 1c      |  |          |   | (37,578  | )          |  |   | (615              | ) |  |      | -     
|Depreciation expense                              |  |       | 1, 7    |  |          |   | (215,780 | )          |  |   | 86,695            |   |  |      | 4,493 
|Impairment of oil and gas properties              |  |       | 1d      |  |          |   | -        |            |  |   | (17,500           | ) |  |      | -     
|Exploration and evaluation expense                |  |       | 2       |  |          |   | -        |            |  |   | (752              | ) |  |      | -     
|Finance expense                                   |  |       | 3, 4, 7 |  |          |   | (29,128  | )          |  |   | (767              | ) |  |      | (4,493
|Gains on derivatives                              |  |       |         |  |          |   | 50,514   |            |  |   | -                 |   |  |      | -     
|Other income                                      |  |       | 1a      |  |          |   | -        |            |  |   | 46,142            |   |  |      | -     
|                                                  |  |       |         |  |          |   |          |            |  |   |                   |   |  |      |       
|Income (loss) before taxes                        |  |       |         |  |          |   | (51,119  | )          |  |   | 111,469           |   |  |      | (1,314
|Income tax recovery (expense)                     |  |       | 5, 8    |  |          |   | 6,911    |            |  |   | (26,341           | ) |  |      | 1,314 
|Net income (loss) and comprehensive income (loss) |  |       |         |  |          | $ | (44,208  | )          |  | $ | 85,128            |   |  | $    | -     
|Net income (loss) per share                       |  |       |         |  |          |   |          |            |  |   |                   |   |  |      |       
|Basic                                             |  |       |         |  |          | $ | (0.27    | )          |  |   |                   |   |  |      |       
|Diluted                                           |  |       |         |  |          | $ | (0.27    | )          |  |   |                   |   |  |      |       



| | 1. | Property, Plant and Equipment
| | -- | -----------------------------



| | a. | Gain on sale of property, plant and equipment
| | -- | ---------------------------------------------

Under Previous
GAAP, the Corporation did not recognize gains or losses on the disposal of oil and gas properties unless such dispositions would
change the depletion rate by 20% or more while IFRS does require such recognition. This results in an increase to the carrying
value and a gain on sale of property, plant and equipment included in other income.



| | b. | Depreciation expense
| | -- | --------------------

Under Previous
GAAP, depletion and depreciation was calculated on a unit-of-production basis for oil and gas properties using proved reserves,
on a cost center basis that was defined as a country. Under IFRS, depreciation is calculated based on proved and probable reserves
over individual components resulting in a decrease in depreciation expense and increase in the carrying value of property, plant
and equipment.



| | c. | Capitalization
| | -- | --------------

During the transition
to IFRS, revisions and refinements were made to capitalization. As a result, certain expenditures incurred in 2010 were expensed
as operating expense and general and administrative expense.



| | d. | Impairment
| | -- | ----------

At December 31,
2010 an impairment loss was recognized associated with a cash generating unit located in West Central Alberta that was subject
to negative reserve revisions at year end. The cash generating unit was written down to fair value less costs to sell, determined
on a discounted cash flow model, using a discount rate of 10%.



Advantage Oil & Gas Ltd. - 43







| | 25. | Transition to IFRS (continued)
| | --- | ------------------------------



| | 2. | Exploration and evaluation assets
| | -- | ---------------------------------



Under Previous GAAP, exploration
and evaluation assets were included in the full cost pool of property, plant and equipment. Under IFRS, these assets must be reclassified
from developed oil and natural gas property, plant and equipment and presented separately. When exploration and evaluation assets
are determined to be technically feasible and commercially viable, the costs are moved to developed oil and natural gas property,
plant and equipment. Assets that are not technically feasible and commercially viable are expensed.



| | 3. | Decommissioning liability
| | -- | -------------------------



Under Previous GAAP asset retirement
obligations were discounted at a credit-adjusted risk-fee rate. Under IFRS the discount rate has been reduced to a risk-free rate
of 4.00% on January 1, 2010. Accordingly, the decommissioning liability has increased by $101.1 million at transition date, and
due to the exemption allowed by IFRS 1, the offsetting charge has been recognized in deficit. As a result, under IFRS both the
accretion expense associated with the decommissioning liability will be different and changes in the estimate of the decommissioning
liability will impact property, plant and equipment.



| | 4. | Convertible debentures liability component
| | -- | ------------------------------------------



Prior to July 9, 2009, Advantage
was an Income Trust that operated under the name Advantage Energy Income Fund. As an income trust, convertible debentures were
convertible into Trust Units, which contained a redemption feature which effectively made the conversion option a “putable
instrument” under IAS 32. As such, convertible debentures were liabilities, with no equity component. Upon conversion to
a corporation on July 9, 2009, all convertible debentures became convertible into common shares, and were no longer deemed to contain
a “putable instrument”. Retrospective restatement of the convertible debentures in existence at July 9, 2009 and still
outstanding at transition date resulted in the liability component restated to their full maturity values, less any issue costs
and no value assigned to the equity component of the conversion features of these same debentures. Accretion expense as recorded
under Previous GAAP was reduced, as only debenture issue costs gave rise to accretion expense for these convertible debentures.



| | 5. | Deferred income tax liability:
| | -- | ------------------------------



| | a. | Deferred income tax calculated according to IFRS is substantially similar to Previous GAAP and
arises from differences between the accounting and tax bases of our assets and liabilities. To the extent that assets and liabilities
have changed from transition to IFRS, the amount of deferred income tax liability would be impacted.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Under Previous GAAP, deferred income tax liabilities were required to be disclosed as either current
or long-term. Under IFRS, all deferred income tax liabilities are considered to be non-current liabilities.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. | Contributed surplus
| | -- | -------------------



At January 1, 2010, a portion
of unvested RSPIP compensation costs included in contributed surplus effectively represented cash payments. Under IFRS, this portion
was considered a liability and accordingly reclassified to trade and other accrued liabilities.



| | 7. | Finance expense
| | -- | ---------------



Under Previous GAAP, accretion
of decommissioning liability was included in the amount presented as depreciation of property, plant and equipment on the Statement
of Income and Comprehensive Income. Under IFRS, accretion of decommissioning liability has been reclassified and is included in
finance expense.



| | 8. | Royalties
| | -- | ---------



Under Previous GAAP, current taxes
included Saskatchewan resource surcharge. Under IFRS, Saskatchewan resource surcharge has been deemed a royalty and deducted from
petroleum and natural gas revenues.



| | 9. | Adjustments to the Consolidated Statement of Cash Flows
| | -- | -------------------------------------------------------



The transition from Previous
GAAP to IFRS had no significant impact on cash flows generated by the Corporation. Cash flows related to interest are classified
as financing while under Previous GAAP, cash flows relating to interest were classified as operating.





Advantage Oil & Gas Ltd. - 44