Exhibit 99.2



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 Professional Accountants, appointed by the shareholders as the external auditor of the Corporation, has audited
the consolidated statement of financial position as at December 31, 2016 and 2015, and the consolidated statements of comprehensive
income (loss), changes in shareholders’ equity and cash flows for the years ended December 31, 2016 and 2015. The external
auditors conducted their audits in accordance with Canadian generally accepted auditing standards and the standards of the Public
Company Accounting Oversight Board (United States) and have unlimited and unrestricted access to the Audit Committee.



|                                      |                                                   
|------------------------------------- | --------------------------------------------------
|                                      |                                                   
|Andy J. Mah                           | Craig Blackwood                                   
|President and Chief Executive Officer | Vice President Finance and Chief Financial Officer
|March 2, 2017                         |                                                   



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 (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). Based on our assessment, we have concluded that as of December 31,
2016, 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 Professional 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, 2016, as stated in their Auditor’s Report. PricewaterhouseCoopers LLP has provided such opinion.



|                                      |                                                   
|------------------------------------- | --------------------------------------------------
|                                      |                                                   
|Andy J. Mah                           | Craig Blackwood                                   
|President and Chief Executive Officer | Vice President Finance and Chief Financial Officer
|March 2, 2017                         |                                                   



Advantage Oil & Gas Ltd. - 2











March 2, 2017



Independent Auditor’s Report



To the Shareholders of Advantage Oil and Gas Ltd.



We have completed integrated audits of Advantage
Oil & Gas Ltd.’s 2016 and 2015 consolidated financial statements and its internal control over financial reporting as
at December 31, 2016. 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, 2016 and December 31, 2015 and the consolidated statements of comprehensive income (loss), changes in shareholders’ equity,
and cash flows for the years then ended, 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 the audit to obtain reasonable assurance about whether the consolidated financial statements are free
from material misstatement. Canadian generally accepted auditing standards also 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.



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,
2016 and December 31, 2015 and its financial performance and its cash flows for the years then ended in accordance with International
Financial Reporting Standards as issued by the International Accounting Standards Board.












PricewaterhouseCoopers
LLP

111
5 Avenue SW, Suite 3100, Calgary, Alberta, Canada T2P 5L3

T: +1 403 509 7500,
F: +1 403 781 1825, www.pwc.com/ca



“PwC”
refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.



Advantage Oil & Gas Ltd. - 3











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, 2016, based on criteria established in Internal Control
- Integrated Framework (2013), 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.



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, 2016, based on criteria
established in Internal Control - Integrated Framework (2013) issued by COSO.







Chartered Professional Accountants

Calgary, Alberta



Advantage Oil & Gas Ltd. - 4







|Consolidated Statement of Financial Position |  |       |  |                   |            |   |                   |  
|-------------------------------------------- |  | ----- |  | ----------------- | ---------- | - | ----------------- | -
|(thousands of Canadian dollars)              |  | Notes |  | December 31, 2016 |            |   | December 31, 2015 |  
|                                             |  |       |  |                   |            |   |                   |  
|ASSETS                                       |  |       |  |                   |            |   |                   |  
|Current assets                               |  |       |  |                   |            |   |                   |  
|Trade and other receivables                  |  | 5     |  | $                 | 26,305     |   |                   | $
|Prepaid expenses and deposits                |  |       |  |                   | 1,681      |   |                   |  
|Derivative asset                             |  | 9     |  |                   | 730        |   |                   |  
|Total current assets                         |  |       |  |                   | 28,716     |   |                   |  
|                                             |  |       |  |                   |            |   |                   |  
|Non-current assets                           |  |       |  |                   |            |   |                   |  
|Derivative asset                             |  | 9     |  |                   | 1,448      |   |                   |  
|Exploration and evaluation assets            |  | 6     |  |                   | 16,012     |   |                   |  
|Property, plant and equipment                |  | 7     |  |                   | 1,450,283  |   |                   |  
|Total non-current assets                     |  |       |  |                   | 1,467,743  |   |                   |  
|Total assets                                 |  |       |  | $                 | 1,496,459  |   |                   | $
|                                             |  |       |  |                   |            |   |                   |  
|LIABILITIES                                  |  |       |  |                   |            |   |                   |  
|Current liabilities                          |  |       |  |                   |            |   |                   |  
|Trade and other accrued liabilities          |  |       |  | $                 | 34,153     |   |                   | $
|Derivative liability                         |  | 9     |  |                   | 13,812     |   |                   |  
|Total current liabilities                    |  |       |  |                   | 47,965     |   |                   |  
|                                             |  |       |  |                   |            |   |                   |  
|Non-current liabilities                      |  |       |  |                   |            |   |                   |  
|Derivative liability                         |  | 9     |  |                   | 10,912     |   |                   |  
|Bank indebtedness                            |  | 10    |  |                   | 153,102    |   |                   |  
|Decommissioning liability                    |  | 12    |  |                   | 40,992     |   |                   |  
|Deferred income tax liability                |  | 13    |  |                   | 35,215     |   |                   |  
|Total non-current liabilities                |  |       |  |                   | 240,221    |   |                   |  
|Total liabilities                            |  |       |  |                   | 288,186    |   |                   |  
|                                             |  |       |  |                   |            |   |                   |  
|SHAREHOLDERS' EQUITY                         |  |       |  |                   |            |   |                   |  
|Share capital                                |  | 14    |  |                   | 2,334,199  |   |                   |  
|Contributed surplus                          |  |       |  |                   | 108,315    |   |                   |  
|Deficit                                      |  |       |  |                   | (1,234,241 | ) |                   |  
|Total shareholders' equity                   |  |       |  |                   | 1,208,273  |   |                   |  
|Total liabilities and shareholders' equity   |  |       |  | $                 | 1,496,459  |   |                   | $



Commitments(note 21)



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. - 5







Consolidated Statement of Comprehensive Income (Loss)



|                                                              |  |       |  | Year ended  |         
|------------------------------------------------------------- |  | ----- |  | ----------- | --------
|                                                              |  |       |  | December 31 |         
|(thousands of Canadian dollars, except for per share amounts) |  | Notes |  | 2016        |         
|                                                              |  |       |  |             |         
|Natural gas and liquids sales                                 |  | 17    |  | $           | 161,933 
|Royalty expense                                               |  |       |  |             | (4,900  
|Natural gas and liquids revenue                               |  |       |  |             | 157,033 
|                                                              |  |       |  |             |         
|Operating expense                                             |  |       |  |             | (20,358 
|Transportation expense                                        |  |       |  |             | (6,982  
|General and administrative expense                            |  | 18    |  |             | (10,750 
|Depreciation expense                                          |  | 7     |  |             | (116,232
|Finance expense                                               |  | 19    |  |             | (10,250 
|Gains (losses) on derivatives                                 |  | 9     |  |             | (13,687 
|Other income                                                  |  |       |  |             | 878     
|Income (loss) before taxes                                    |  |       |  |             | (20,348 
|Income tax recovery (expense)                                 |  | 13    |  |             | 4,614   
|Net income (loss) and comprehensive income (loss)             |  |       |  | $           | (15,734 
|                                                              |  |       |  |             |         
|Net income (loss) per share                                   |  | 15    |  |             |         
|Basic                                                         |  |       |  | $           | (0.09   
|Diluted                                                       |  |       |  | $           | (0.09   



See accompanying Notes to the Consolidated Financial Statements



Advantage Oil & Gas Ltd. - 6







Consolidated Statement of Changes in Shareholders' Equity



|(thousands of Canadian dollars) (unaudited) |  | Notes  |  | Share capital |           |  | Contributed surplus |   |         | Deficit |  |   | Total shareholders' equity |  
|------------------------------------------- |  | ------ |  | ------------- | --------- |  | ------------------- | - | ------- | ------- |  | - | -------------------------- | -
|Balance, December 31, 2015                  |  |        |  | $             | 2,236,728 |  |                     | $ | 103,726 |         |  | $ | (1,218,507                 | )
|Net loss and comprehensive loss             |  |        |  |               | -         |  |                     |   | -       |         |  |   | (15,734                    | )
|Shares issued on equity financing           |  | 14(b)  |  |               | 96,453    |  |                     |   | -       |         |  |   | -                          |  
|Share based compensation                    |  | 14, 16 |  |               | 1,018     |  |                     |   | 4,589   |         |  |   | -                          |  
|Balance, December 31, 2016                  |  |        |  | $             | 2,334,199 |  |                     | $ | 108,315 |         |  | $ | (1,234,241                 | )



|(thousands of Canadian dollars)     |  | Notes  |  | Share capital |           |  | Convertible debenture equity component |   |        | Contributed surplus |  |   | Deficit |  |  | Total shareholders' equity |           
|----------------------------------- |  | ------ |  | ------------- | --------- |  | -------------------------------------- | - | ------ | ------------------- |  | - | ------- |  |  | -------------------------- | ----------
|Balance, December 31, 2014          |  |        |  | $             | 2,234,959 |  |                                        | $ | 8,348  |                     |  | $ | 90,904  |  |  | $                          | (1,239,885
|Net income and comprehensive income |  |        |  |               | -         |  |                                        |   | -      |                     |  |   | -       |  |  |                            | 21,378    
|Share based compensation            |  | 14, 16 |  |               | 1,759     |  |                                        |   | -      |                     |  |   | 4,474   |  |  |                            | -         
|Conversion of Convertible Debenture |  |        |  |               | 10        |  |                                        |   | -      |                     |  |   | -       |  |  |                            | -         
|Maturity of Convertible Debenture   |  |        |  |               | -         |  |                                        |   | (8,348 | )                   |  |   | 8,348   |  |  |                            | -         
|Balance, December 31, 2015          |  |        |  | $             | 2,236,728 |  |                                        | $ | -      |                     |  | $ | 103,726 |  |  | $                          | (1,218,507



See accompanying Notes to the Consolidated Financial Statements



Advantage Oil & Gas Ltd. - 7







Consolidated Statement of Cash Flows



|                                                |  |        |  | Year ended  |         
|----------------------------------------------- |  | ------ |  | ----------- | --------
|                                                |  |        |  | December 31 |         
|(thousands of Canadian dollars)                 |  | Notes  |  | 2016        |         
|                                                |  |        |  |             |         
|Operating Activities                            |  |        |  |             |         
|Income (loss) before taxes                      |  |        |  | $           | (20,348 
|Add items not requiring cash:                   |  |        |  |             |         
|Share based compensation                        |  | 14, 16 |  |             | 3,281   
|Depreciation expense                            |  | 7      |  |             | 116,232 
|Unrealized loss on derivatives                  |  | 9      |  |             | 66,781  
|Finance expense                                 |  | 19     |  |             | 10,250  
|Expenditures on decommissioning liability       |  | 12     |  |             | (1,857  
|Changes in non-cash working capital             |  | 20     |  |             | 567     
|Cash provided by operating activities           |  |        |  |             | 174,906 
|                                                |  |        |  |             |         
|Financing Activities                            |  |        |  |             |         
|Increase (decrease) in bank indebtedness        |  | 10     |  |             | (133,718
|Net proceeds of equity financing                |  |        |  |             | 95,130  
|Maturity of convertible debenture               |  | 11     |  |             | -       
|Interest paid                                   |  |        |  |             | (9,034  
|Cash provided by (used in) financing activities |  |        |  |             | (47,622 
|                                                |  |        |  |             |         
|Investing Activities                            |  |        |  |             |         
|Payments on property, plant and equipment       |  | 7, 20  |  |             | (121,283
|Payments on exploration and evaluation assets   |  | 6      |  |             | (6,001  
|Cash used in investing activities               |  |        |  |             | (127,284
|Net change in cash                              |  |        |  |             | -       
|Cash, beginning of year                         |  |        |  |             | -       
|Cash, end of year                               |  |        |  | $           | -       



See accompanying Notes to the Consolidated Financial Statements



Advantage Oil & Gas Ltd. - 8







Notes
to The Consolidated Financial Statements



For the years ended December 31, 2016 and 2015



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”) is an intermediate natural gas and liquids
development and production corporation with a significant position in the Montney resource play located in Western Canada.



Advantage is domiciled and incorporated
in Canada under the Business Corporations Act (Alberta). Advantage’s head office address is 300, 440 – 2nd
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 consolidated
financial statements in accordance with Canadian generally accepted accounting principles (“GAAP”) as defined in the
Handbook of the Canadian Institute of Chartered Accountants (“CICA Handbook”). The CICA Handbook incorporates International
Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. Publicly accountable
enterprises, such as the Corporation, are required to apply these standards. Accordingly, these consolidated financial statements
are prepared and issued under IFRS.



The accounting policies applied in
these consolidated financial statements are based on IFRS issued and outstanding as of March 2, 2017, 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 9.



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



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



Advantage Oil & Gas Ltd. - 9







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



The accounting policies set out
below have been applied consistently to all years presented in these financial statements.



| | (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 is exposed, or has rights to variable returns from its involvement with
the entity and has the ability to affect those returns through its power over the entity. 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) | Joint arrangements
| | ---- | ------------------



A portion of the Corporation’s
natural gas and liquids activities involve joint operations. The consolidated financial statements include the Corporation’s
share of these joint operations 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 Consolidated 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 assets and 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 Consolidated 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 Consolidated 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 Consolidated Statement of Financial Position.



Advantage Oil & Gas Ltd. - 10







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



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



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



Exploration and evaluation costs



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



All exploratory costs incurred subsequent
to acquiring the right to explore for natural gas and liquids 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 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 or probable reserves are determined to exist. Upon determination of proved or 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.



Property, plant and equipment



Items of property, plant and equipment,
which include natural gas and liquids properties, 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 natural gas and liquids properties, have different useful lives, they are accounted for
as separate items (major components).



| | (ii) | Subsequent costs
| | ---- | ----------------



Costs incurred subsequent to development
and production that are significant are recognized as natural gas and liquids 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 natural gas and liquids costs 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 Consolidated Statement of Comprehensive Income (Loss) as incurred.



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



The net carrying value of natural
gas and liquids properties is depreciated using the units-of-production (“UOP”) 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.



Advantage Oil & Gas Ltd. - 11







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



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



| | (iv) | Dispositions
| | ---- | ------------



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



| | (v) | Impairment
| | --- | ----------



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, 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 of disposition. 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 costs of
disposition 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 costs of disposition 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 Consolidated Statement of Comprehensive Income (Loss) as impairment of natural gas and liquids
properties and are separately disclosed. An impairment of exploration and evaluation assets is recognized as exploration and evaluation
expense in the Consolidated Statement of Comprehensive Income (Loss).



| | (e) | 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. - 12







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



| | (f) | Share based compensation
| | --- | ------------------------



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



Advantage’s Stock Option Plan
(“Stock Option Plan”) authorizes the Board of Directors to grant stock options to service providers, including directors,
officers, employees and consultants of Advantage. Compensation cost related to the Stock Option Plan is recognized as share based
compensation expense within general and administrative expense over the vesting period at fair value.



On April 14, 2014, the Board of Directors
approved a Restricted and Performance Award Incentive Plan to provide share based compensation for service providers. Awards granted
under this plan were originally expected to be settled in cash, as the Corporation had not sought the approval of shareholders
required to settle the awards in shares. In accordance with the requirements of IFRS 2, Share Based Payments, a liability
was recorded as compensation expense was recognized. The liability was revalued at each reporting date and at the date of settlement.
These changes in fair value were recognized in profit or loss for the period.



On May 27, 2015, shareholders of
the Corporation voted in favor of a resolution to approve the Restricted and Performance Award Incentive Plan as described in the
management information circular dated April 24, 2015. The effect of this vote was to give shareholder approval to the existing
plan approved by the Board of Directors on April 14, 2014 described above, and in so doing, enable the Corporation to settle awards
under the plan with shares, which is the intention of the Corporation. As such, the plan is no longer “cash-settled,”
but “equity-settled” as defined in IFRS 2, Share Based Payments. In accordance with the requirements of IFRS
2, the liability on the statement of financial position at May 27, 2015 relating to awards granted under this plan was transferred
to equity (contributed surplus), and revaluation will no longer occur at each reporting date. The types and timing of awards under
this plan are described in further detail in note 16(b).



As compensation expense is recognized,
contributed surplus is recorded until the restricted shares vest or stock options are exercised, at which time the appropriate
common shares are then issued to the service providers and the contributed surplus is transferred to share capital.



| | (g) | Revenue
| | --- | -------



Revenue from the sale of natural
gas and liquids is recorded when the significant risks and rewards of ownership of the product is substantially transferred to
the buyer.



| | (h) | Finance expense
| | --- | ---------------



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



Advantage Oil & Gas Ltd. - 13







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



| | (i) | Income tax
| | --- | ----------



Income tax expense or recovery comprises
current and deferred income tax. Income tax expense or recovery 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.



| | (j) | 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 performance awards and stock options granted to service providers and convertible debentures, using the treasury
stock method.



| | (k) | Investment tax credits
| | --- | ----------------------



Investment tax credits relating to
Scientific Research and Experimental Development claims are considered an income tax credit and are offset against our income tax
expense when they become probable of realization.



| | (l) | Accounting Pronouncement no yet Adopted
| | --- | ---------------------------------------



IFRS 9 Financial Instruments
introduces a new classification and measurement requirements, impairment model and hedge accounting model. IFRS 9 is effective
for annual periods on or after January 1, 2018. Advantage does not anticipate any material changes or effects to our current accounting.



IFRS 15 Revenue from Contracts
with Customers requires an entity to recognize revenue to reflect the transfer of goods and services for the amount it expects
to receive, when control is transferred to the purchaser. The standard is to be adopted for annual periods beginning on or after
January 1, 2018, either retrospectively or using a modified retrospective approach. Advantage is currently reviewing our contractual
agreements to evaluate the impact of this standard on our financial statements.



IFRS 16 Leases requires the
recognition of assets and liabilities for most leases. The standard applies to annual reports beginning on or after January 1,
2019. Advantage is currently reviewing the impact of IFRS 16 on our financial statements.



Advantage Oil & Gas Ltd. - 14







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



The preparation of consolidated
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. Significant
estimates and judgments made in the preparation of the consolidated financial statements are outlined below.



| | (a) | Reserves base
| | --- | -------------



The natural gas and liquids properties
are depreciated on a units-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 natural gas and liquids in place, recovery factors and future natural gas and liquids prices. Future development costs are estimated
using assumptions as to the number of wells required to produce the reserves, the cost of such wells and associated production
facilities and other capital costs.



| | (b) | Determination of cash generating unit
| | --- | -------------------------------------



Management has determined there to
be a single CGU (“Glacier”) on the basis of its ability to generate independent cash flows, similar reserve characteristics,
geographical location, and shared infrastructure, namely a single processing plant owned by Advantage. For purposes of assessment
of impairment, management has allocated all exploration and evaluation assets to the Glacier CGU, on the basis of their geographic
proximity to Glacier.



| | (c) | 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 of disposition. 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.



| | (d) | Decommissioning liability
| | --- | -------------------------



Decommissioning costs will be incurred
by the Corporation at the end of the operating life 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.



Advantage Oil & Gas Ltd. - 15







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



| | (e) | Income taxes
| | --- | ------------



Income tax laws and regulations are
subject to change. Deferred tax liabilities that arise from temporary differences between recorded amounts on the statement of
financial position and their respective tax bases will be payable in future periods. The amount of a deferred tax liability is
subject to management’s best estimate of when a temporary difference will reverse and expected changes in income tax rates.
These estimates by nature involve significant measurement uncertainty.



| | 5. | Trade and other receivables
| | -- | ---------------------------



|                                        |  | December 31, 2016 |        |  | December 31, 2015 |  
|--------------------------------------- |  | ----------------- | ------ |  | ----------------- | -
|Trade receivables                       |  | $                 | 25,087 |  |                   | $
|Receivables from joint venture partners |  |                   | 581    |  |                   |  
|Other                                   |  |                   | 637    |  |                   |  
|                                        |  | $                 | 26,305 |  |                   | $



| | 6. | Exploration and evaluation assets
| | -- | ---------------------------------



|Balance at December 31, 2014                          |  | $ | 9,803  |  
|----------------------------------------------------- |  | - | ------ | -
|Additions                                             |  |   | 1,192  |  
|Transferred to property, plant and equipment (note 7) |  |   | (924   | )
|Balance at December 31, 2015                          |  | $ | 10,071 |  
|Additions                                             |  |   | 6,001  |  
|Transferred to property, plant and equipment (note 7) |  |   | (60    | )
|Balance at December 31, 2016                          |  | $ | 16,012 |  



Advantage Oil & Gas Ltd. - 16







| | 7. | Property, plant and equipment
| | -- | -----------------------------



|Cost                                                        |  | Natural gas and liquids properties |           |   | Furniture  and  equipment |   |       | Total | 
|----------------------------------------------------------- |  | ---------------------------------- | --------- | - | ------------------------- | - | ----- | ----- | 
|Balance at December 31, 2014                                |  | $                                  | 1,714,117 |   |                           | $ | 5,240 |       | 
|Additions                                                   |  |                                    | 163,549   |   |                           |   | 242   |       | 
|Change in decommissioning liability (note 12)               |  |                                    | (4,172    | ) |                           |   | -     |       | 
|Transferred from exploration and evaluation assets (note 6) |  |                                    | 924       |   |                           |   | -     |       | 
|Balance at December 31, 2015                                |  | $                                  | 1,874,418 |   |                           | $ | 5,482 |       | 
|Additions                                                   |  |                                    | 121,847   |   |                           |   | 166   |       | 
|Change in decommissioning liability (note 12)               |  |                                    | (2,641    | ) |                           |   | -     |       | 
|Transferred from exploration and evaluation assets (note 6) |  |                                    | 60        |   |                           |   | -     |       | 
|Balance at December 31, 2016                                |  | $                                  | 1,993,684 |   |                           | $ | 5,648 |       | 



|Accumulated depreciation     |  | Natural gas and liquids properties |         |  | Furniture  and  equipment |   |       | Total | 
|---------------------------- |  | ---------------------------------- | ------- |  | ------------------------- | - | ----- | ----- | 
|Balance at December 31, 2014 |  | $                                  | 341,906 |  |                           | $ | 3,520 |       | 
|Depreciation                 |  |                                    | 86,999  |  |                           |   | 392   |       | 
|Balance at December 31, 2015 |  | $                                  | 428,905 |  |                           | $ | 3,912 |       | 
|Depreciation                 |  |                                    | 115,885 |  |                           |   | 347   |       | 
|Balance at December 31, 2016 |  | $                                  | 544,790 |  |                           | $ | 4,259 |       | 



|Net book value       |  | Natural gas and liquids properties |           |  | Furniture and equipment |   |       | Total | 
|-------------------- |  | ---------------------------------- | --------- |  | ----------------------- | - | ----- | ----- | 
|At December 31, 2015 |  | $                                  | 1,445,513 |  |                         | $ | 1,570 |       | 
|At December 31, 2016 |  |                                    | 1,448,894 |  |                         |   | 1,389 |       | 



During the year ended December 31,
2016, Advantage capitalized general and administrative expenditures directly related to development activities of $6.1 million
(December 31, 2015 - $6.2 million).



Advantage included future development
costs of $1.6 billion (December 31, 2015 – $1.7 billion) in property, plant and equipment costs subject to depreciation.



Advantage Oil & Gas Ltd. - 17







| | 8. | Related party transactions
| | -- | --------------------------



Key management compensation



The compensation paid or payable
to officers and directors is as follows:



|                                                |  | December 31, 2016 |       |  | December 31, 2015 |  
|----------------------------------------------- |  | ----------------- | ----- |  | ----------------- | -
|Salaries, director fees and short-term benefits |  | $                 | 2,111 |  |                   | $
|Share based compensation (1)                    |  |                   | 2,676 |  |                   |  
|                                                |  | $                 | 4,787 |  |                   | $



(1) Represents the grant date fair
value of performance awards and stock options granted for the respective years.



As at December 31, 2016, there is
a $2.2 million commitment (December 31, 2015 - $2.3 million) related to change of control or termination of employment of officers.



| | 9. | Financial risk management
| | -- | -------------------------



Financial instruments of the Corporation
include trade and other receivables, deposits, trade and other accrued liabilities, bank indebtedness, 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 and bank indebtedness
are all classified as financial liabilities at amortized cost. As at December 31, 2016, there were no significant differences between
the carrying amounts reported on the Consolidated 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.



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. Derivative assets and liabilities are measured at fair value on a recurring
basis. For 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.



Advantage Oil & Gas Ltd. - 18







| | 9. | Financial risk management (continued)
| | -- | -------------------------------------



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 risk; and
| | - | ---------------



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



| | (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 natural gas and liquids marketers and companies with whom we enter
into hedging contracts. The maximum exposure to credit risk is as follows:



|                            |  | December 31, 2016 |        |  | December 31, 2015 |  
|--------------------------- |  | ----------------- | ------ |  | ----------------- | -
|Trade and other receivables |  | $                 | 26,305 |  |                   | $
|Deposits                    |  |                   | 665    |  |                   |  
|Derivative asset            |  |                   | 2,178  |  |                   |  
|                            |  | $                 | 29,148 |  |                   | $



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 counterparties that diversify risk within the sector. The Corporation’s deposits are
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 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, 2016, $0.4 million or 1.4% of trade and other receivables
are outstanding for 90 days or more (December 31, 2015 - $0.3 million or 2.2% 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, 2016 or 2015.



The Corporation’s most significant
customer, a Canadian oil and natural gas marketer, accounts for $22.2 million of the trade and other receivables at December 31,
2016 (December 31, 2015 - $11.9 million).



Advantage Oil & Gas Ltd. - 19







| | 9. | Financial risk management (continued)
| | -- | -------------------------------------



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



The Corporation is subject to liquidity
risk attributed from trade and other accrued liabilities and bank indebtedness. Trade and other accrued liabilities are primarily
due within one year of the Consolidated 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 $400 million credit facility agreements. Although the credit facilities are a source of liquidity
risk, the facilities also mitigate 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.



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
offset by increased cash flows realized from the higher commodity price environment.



The timing of cash outflows relating
to financial liabilities as at December 31, 2016 and 2015 are as follows:



|December 31, 2016                   |  | Less than one year |        |  | One to three years |   |         | Total | 
|----------------------------------- |  | ------------------ | ------ |  | ------------------ | - | ------- | ----- | 
|Trade and other accrued liabilities |  | $                  | 34,153 |  |                    | $ | -       |       | 
|Bank indebtedness     - principal   |  |                    | -      |  |                    |   | 153,811 |       | 
|- interest (1)                      |  |                    | 6,890  |  |                    |   | 3,284   |       | 
|                                    |  | $                  | 41,043 |  |                    | $ | 157,095 |       | 



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



|December 31, 2015                   |  | Less than one year |        |  | One to three years |   |         | Total | 
|----------------------------------- |  | ------------------ | ------ |  | ------------------ | - | ------- | ----- | 
|Trade and other accrued liabilities |  | $                  | 23,050 |  |                    | $ | -       |       | 
|Bank indebtedness    - principal    |  |                    | -      |  |                    |   | 287,529 |       | 
|- interest (1)                      |  |                    | 11,106 |  |                    |   | 5,280   |       | 
|                                    |  | $                  | 34,156 |  |                    | $ | 292,809 |       | 



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



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 10). Under the terms of the agreements, the facilities are reviewed annually, with the next review scheduled in June 2017.
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.



Advantage Oil & Gas Ltd. - 20







| | 9. | Financial risk management (continued)
| | -- | -------------------------------------



| | (c) | Price risk
| | --- | ----------



Advantage’s derivative assets
and liabilities are subject to price risk as their fair values are based on assumptions regarding forward commodity prices. 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 AECO natural gas price used to calculate the fair value of the fixed price swap and
sold call option natural gas derivatives at December 31, 2016 would result in a $14.6 million change in net income (loss)
for the year ended December 31, 2016. It is estimated that a 10% change in the forward basis differential between Henry Hub and
AECO natural gas prices would result in a $1.5 million change in net income (loss) for the year ended December 31, 2016.



As at December 31, 2016, the Corporation
had the following derivative contracts in place:



|Description of Derivative                       |  | Term                           |  | Volume       |  | Price                      
|----------------------------------------------- |  | ------------------------------ |  | ------------ |  | ---------------------------
|                                                |  |                                |  |              |  |                            
|Natural gas – AECO                              |  |                                |  |              |  |                            
|Fixed price swap                                |  | January 2016 to March 2017     |  | 2,370 mcf/d  |  | Cdn $3.98/mcf              
|Fixed price swap                                |  | January 2016 to March 2017     |  | 16,587 mcf/d |  | Cdn $3.97/mcf              
|Fixed price swap                                |  | January 2016 to March 2017     |  | 4,739 mcf/d  |  | Cdn $3.75/mcf              
|Fixed price swap                                |  | January 2016 to March 2017     |  | 9,478 mcf/d  |  | Cdn $3.76/mcf              
|Fixed price swap                                |  | April 2016 to March 2017       |  | 14,217 mcf/d |  | Cdn $4.11/mcf              
|Fixed price swap                                |  | April 2016 to March 2017       |  | 14,217 mcf/d |  | Cdn $3.25/mcf              
|Fixed price swap                                |  | April 2016 to March 2017       |  | 18,956 mcf/d |  | Cdn $3.22/mcf              
|Fixed price swap                                |  | January 2017 to June 2017      |  | 14,217 mcf/d |  | Cdn $3.00/mcf              
|Fixed price swap                                |  | April 2017 to June 2017        |  | 28,434 mcf/d |  | Cdn $3.00/mcf              
|Fixed price swap                                |  | April 2017 to March 2018       |  | 4,739 mcf/d  |  | Cdn $3.27/mcf              
|Fixed price swap                                |  | April 2017 to March 2018       |  | 14,217 mcf/d |  | Cdn $3.27/mcf              
|Fixed price swap                                |  | November 2017 to March 2018    |  | 18,956 mcf/d |  | Cdn $3.22/mcf              
|Fixed price swap                                |  | July 2017 to March 2018        |  | 4,739 mcf/d  |  | Cdn $3.02/mcf              
|Fixed price swap                                |  | July 2017 to March 2018        |  | 14,217 mcf/d |  | Cdn $3.01/mcf              
|Fixed price swap                                |  | July 2017 to March 2018        |  | 14,217 mcf/d |  | Cdn $3.00/mcf              
|Fixed price swap                                |  | July 2017 to June 2018         |  | 14,217 mcf/d |  | Cdn $3.00/mcf              
|Fixed price swap                                |  | April 2017 to March 2018       |  | 23,695 mcf/d |  | Cdn $3.01/mcf              
|Call option sold                                |  | April 2017 to December 2018    |  | 23,695 mcf/d |  | Cdn $3.17/mcf (1)          
|Fixed price swap                                |  | October 2017 to September 2018 |  | 4,739 mcf/d  |  | Cdn $3.01/mcf              
|Call option sold                                |  | October 2017 to December 2018  |  | 4,739 mcf/d  |  | Cdn $3.01/mcf (2)          
|Fixed price swap                                |  | October 2017 to September 2018 |  | 4,739 mcf/d  |  | Cdn $3.01/mcf              
|Call option sold                                |  | October 2017 to December 2018  |  | 4,739 mcf/d  |  | Cdn $3.06/mcf (3)          
|Fixed price swap                                |  | October 2017 to September 2018 |  | 4,739 mcf/d  |  | Cdn $3.01/mcf              
|Call option sold                                |  | October 2017 to December 2018  |  | 4,739 mcf/d  |  | Cdn $3.11/mcf (4)          
|Fixed price swap                                |  | October 2018 to March 2019     |  | 18,956 mcf/d |  | Cdn $3.00/mcf              
|Fixed price swap                                |  | October 2018 to March 2019     |  | 18,956 mcf/d |  | Cdn $3.00/mcf              
|Fixed price swap                                |  | October 2018 to March 2019     |  | 9,478 mcf/d  |  | Cdn $3.00/mcf              
|                                                |  |                                |  |              |  |                            
|Natural gas – AECO/Henry Hub Basis Differential |  |                               
|Basis swap                                      |  | January 2018 to December 2019  |  | 25,000 mcf/d |  | Henry Hub less US $0.85/mcf



| | (1) | Call option sold is only exercisable by the counterparty if AECO exceeds Cdn $3.43/mcf.
| | --- | ---------------------------------------------------------------------------------------

| | (2) | Call option sold is only exercisable by the counterparty if AECO exceeds Cdn $3.32/mcf.
| | --- | ---------------------------------------------------------------------------------------

| | (3) | Call option sold is only exercisable by the counterparty if AECO exceeds Cdn $3.38/mcf.
| | --- | ---------------------------------------------------------------------------------------

| | (4) | Call option sold is only exercisable by the counterparty if AECO exceeds Cdn $3.43/mcf.
| | --- | ---------------------------------------------------------------------------------------



Advantage Oil & Gas Ltd. - 21







| | 9. | Financial risk management (continued)
| | -- | -------------------------------------



| | (c) | Price risk
| | --- | ----------



As at December 31, 2016, the fair
value of the derivatives outstanding resulted in an asset of $2.2 million (December 31, 2015 – $44.5 million) and a liability
of $24.7 million (December 31, 2015 – $0.2 million). The fair value of the commodity risk management derivatives have been
allocated to current assets and liabilities on the basis of expected timing of cash settlement.



For the year ended December 31, 2016,
$13.7 million was recognized in net income (loss) as a derivative loss (December 31, 2015 - $30.4 million gain). The table below
summarizes the realized and unrealized gains (losses) on derivatives recognized in net income (loss).



|                               |  | Year ended        |         |   | Year ended        |  
|------------------------------ |  | ----------------- | ------- | - | ----------------- | -
|                               |  | December 31, 2016 |         |   | December 31, 2015 |  
|Realized gain on derivatives   |  | $                 | 53,094  |   |                   | $
|Unrealized loss on derivatives |  |                   | (66,781 | ) |                   |  
|                               |  | $                 | (13,687 | ) |                   | $



| | (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, 2016, net income (loss) and comprehensive income (loss) would have changed by $1.5 million (December
31, 2015 - $1.9 million) based on the average debt balance outstanding during the year.



Advantage Oil & Gas Ltd. - 22







| | 9. | 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, 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, adjusting capital spending, or disposing
of assets. The capital structure is reviewed by Management and the Board of Directors on an ongoing basis.



Advantage’s capital structure
as at December 31, 2016 and December 31, 2015 is as follows:



|                                          |  | December 31, 2016 |             |  | December 31, 2015 |  
|----------------------------------------- |  | ----------------- | ----------- |  | ----------------- | -
|Bank indebtedness (non-current) (note 10) |  | $                 | 153,102     |  |                   | $
|Working capital deficit (1)               |  |                   | 6,167       |  |                   |  
|Total debt                                |  | $                 | 159,269     |  |                   | $
|Shares outstanding (note 14)              |  |                   | 184,654,333 |  |                   |  
|Share closing market price ($/share)      |  | $                 | 9.12        |  |                   | $
|Market capitalization (2)                 |  |                   | 1,684,048   |  |                   |  
|Total capitalization                      |  | $                 | 1,843,317   |  |                   | $



(1) Working capital deficit is a
non-GAAP measure that includes trade and other receivables, prepaid expenses and deposits and trade and other accrued liabilities.

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



Advantage Oil & Gas Ltd. - 23







| | 10. | Bank indebtedness
| | --- | -----------------



|                                               |  | December 31, 2016 |         |   | December 31, 2015 |  
|---------------------------------------------- |  | ----------------- | ------- | - | ----------------- | -
|Revolving credit facility                      |  | $                 | 153,811 |   |                   | $
|Discount on Bankers Acceptances and other fees |  |                   | (709    | ) |                   |  
|Balance, end of year                           |  | $                 | 153,102 |   |                   | $



As at December 31, 2016, the Corporation had reserve-based
credit facilities (the "Credit Facilities") with a borrowing base of $400 million. The Credit Facilities are comprised
of a $20 million extendible revolving operating loan facility from one financial institution and a $380 million extendible revolving
credit facility from a syndicate of financial institutions. The revolving period of the Credit Facilities will end on June 10,
2017 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 a non-revolving term credit facility due 365 days after the last day of the revolving period. The Credit Facilities
are subject to re-determination of the borrowing base semi-annually in October and June of each year, with the next annual review
scheduled to occur in June 2017. There can be no assurance that the Credit Facilities will be renewed at the current borrowing
base level at that time. The borrowing base is determined based on, among other things, a thorough evaluation of Advantage's reserve
estimates based upon the lenders commodity price expectations. Revisions or changes in the reserve estimates and commodity prices
can have either a positive or a negative impact on the borrowing base. In the event that the lenders reduce the borrowing base
below the amount drawn at the time of redetermination, the Corporation has 60 days to eliminate any shortfall by repaying amounts
in excess of the new re-determined borrowing base. Amounts borrowed under the Credit Facilities bear interest at rates ranging
from LIBOR plus 2% to 3.25% per annum, and Canadian prime or US base rate plus 1% to 2.25% per annum, in each case, depending on
the type of borrowing and the Corporation’s debt to Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)
ratio. Undrawn amounts under the Credit Facilities bear a standby fee ranging from 0.5% to 0.8125% per annum, dependent on
the Corporation’s debt to EBITDA ratio. Repayments of principal are not required prior to maturity provided that the borrowings
under the Credit Facilities do not exceed the authorized borrowing amount and the Corporation is in compliance with all covenants,
representations and warranties. The Credit Facilities prohibit the Corporation from entering into any derivative contract where
the term of such contract exceeds four years. Further, the aggregate of such contracts cannot hedge greater than 75% of total estimated
natural gas and liquids production over three years and 50% over the fourth year. The Credit Facilities contain standard commercial
covenants for credit facilities of this nature. The only financial covenant was a requirement for the Corporation to maintain a
minimum cash flow to interest expense ratio of 3.5:1, determined on a rolling four-quarter basis. This covenant was removed on
June 10, 2016. All applicable financial and non-financial covenants were met at December 31, 2016 and 2015. Breach of any covenant
will result in an event of default in which case the Corporation has 30 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. The Credit Facilities are collateralized by a $1 billion floating charge demand debenture covering all assets. For
the year ended December 31, 2016, the average effective interest rate on the outstanding amounts under the facilities was approximately
3.5% (December 31, 2015 – 3.2%). Advantage has no letters of credit issued and outstanding at December 31, 2016 (December
31, 2015 - none).





Advantage Oil & Gas Ltd. - 24







| | 11. | Convertible debenture
| | --- | ---------------------



On January 30, 2015, both the principal
and final interest payment were settled with cash drawn from the credit facility, with the exception of ten thousand dollars, which
was converted to 1,162 common shares.



| | 12. | Decommissioning liability
| | --- | -------------------------



The Corporation’s decommissioning liability results
from net ownership interests in natural gas and liquids 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 2017 and 2076. A risk-free rate of 2.34% (December 31, 2015 – 2.16%) and an inflation factor of 2.0% (December 31,
2015 – 1.5%) were used to calculate the fair value of the decommissioning liability at December 31, 2016. A reconciliation
of the decommissioning liability is provided below:



|                                                             |  | Year ended        |        |   | Year ended        |  
|------------------------------------------------------------ |  | ----------------- | ------ | - | ----------------- | -
|                                                             |  | December 31, 2016 |        |   | December 31, 2015 |  
|Balance, beginning of year                                   |  | $                 | 44,575 |   |                   | $
|Accretion expense                                            |  |                   | 915    |   |                   |  
|Liabilities incurred                                         |  |                   | 2,193  |   |                   |  
|Change in estimates                                          |  |                   | (1,165 | ) |                   |  
|Effect of change in risk-free rate and inflation rate factor |  |                   | (3,669 | ) |                   |  
|Liabilities settled                                          |  |                   | (1,857 | ) |                   |  
|Balance, end of year                                         |  | $                 | 40,992 |   |                   | $



Advantage Oil & Gas Ltd. - 25







| | 13. | Income taxes
| | --- | ------------



The provision for income taxes is as follows:



|                                       |  | Year ended        |        |   | Year ended        |  
|-------------------------------------- |  | ----------------- | ------ | - | ----------------- | -
|                                       |  | December 31, 2016 |        |   | December 31, 2015 |  
|Current income tax expense             |  | $                 | -      |   |                   | $
|Deferred income tax expense (recovery) |  |                   | (4,614 | ) |                   |  
|Income tax expense (recovery)          |  | $                 | (4,614 | ) |                   | $



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, 2016 |         |   | December 31, 2015 |  
|Income (loss) before taxes                             |  | $                 | (20,348 | ) |                   | $
|Combined federal and provincial income tax rates       |  |                   | 27.00   | % |                   |  
|Expected income tax expense (recovery)                 |  |                   | (5,494  | ) |                   |  
|Increase (decrease) in income taxes resulting from:    |  |                   |         |   |                   |  
|Non-deductible share based compensation                |  |                   | 1,515   |   |                   |  
|Alberta tax rate increase                              |  |                   | -       |   |                   |  
|Scientific Research and Experimental Development claim |  |                   | -       |   |                   |  
|Difference between current and expected tax rates      |  |                   | (635    | ) |                   |  
|                                                       |  | $                 | (4,614  | ) |                   | $
|Effective tax rate                                     |  |                   | 22.68   | % |                   |  



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 December 31, 2014  |  | $                             | 229,025 |  |                            | $ | 11,639  |       | 
|Charged (credited) to income  |  |                               | 33,972  |  |                            |   | 304     |       | 
|Balance at December 31, 2015  |  | $                             | 262,997 |  |                            | $ | 11,943  |       | 
|Charged (credited) to income  |  |                               | 5,192   |  |                            |   | (18,031 | )     | 
|Balance at December 31, 2016  |  | $                             | 268,189 |  |                            | $ | (6,088  | )     | 



|Deferred income tax asset    |  | Decommissioning liability |         |   | Non-capital losses |   |          | Other |  |   | Total   |  
|---------------------------- |  | ------------------------- | ------- | - | ------------------ | - | -------- | ----- |  | - | ------- | -
|Balance at December 31, 2014 |  | $                         | (12,303 | ) |                    | $ | (183,613 | )     |  | $ | (11,349 | )
|Charged (credited) to income |  |                           | 239     |   |                    |   | (15,036  | )     |  |   | (11,726 | )
|Balance at December 31, 2015 |  | $                         | (12,064 | ) |                    | $ | (198,649 | )     |  | $ | (23,075 | )
|Charged (credited) to income |  |                           | 991     |   |                    |   | 7,200    |       |  |   | 34      |  
|Credited to equity           |  |                           | -       |   |                    |   | (264     | )     |  |   | (1,059  | )
|Balance at December 31, 2016 |  | $                         | (11,073 | ) |                    | $ | (191,713 | )     |  | $ | (24,100 | )



|Net deferred income tax liability (asset) |  |   |       
|----------------------------------------- |  | - | ------
|Balance at December 31, 2014              |  | $ | 33,399
|Charged (credited) to income              |  |   | 7,753 
|Balance at December 31, 2015              |  | $ | 41,152
|Charged (credited) to income              |  |   | (4,614
|Credited to equity                        |  |   | (1,323
|Balance at December 31, 2016              |  | $ | 35,215



Advantage Oil & Gas Ltd. - 26







| | 13. | Income taxes (continued)
| | --- | ------------------------



The estimated tax pools available at December 31, 2016
are as follows:



|Canadian development expenses                                 |  | $ | 170,956   | 
|------------------------------------------------------------- |  | - | --------- | 
|Canadian exploration expenses                                 |  |   | 65,994    | 
|Canadian oil and gas property expenses                        |  |   | 9,045     | 
|Non-capital losses                                            |  |   | 710,050   | 
|Undepreciated capital cost                                    |  |   | 212,456   | 
|Capital losses                                                |  |   | 157,869   | 
|Scientific research and experimental development expenditures |  |   | 32,506    | 
|Other                                                         |  |   | 11,993    | 
|                                                              |  | $ | 1,370,869 | 



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



No deferred tax asset has been recognized for capital
losses of $158 million (December 31, 2015 – $158 million). Recognition is dependent on the realization of future taxable
capital gains.



| | 14. | Share capital
| | --- | -------------



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



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



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



|                                                                         |  | Common Shares |             |  | Amount |  
|------------------------------------------------------------------------ |  | ------------- | ----------- |  | ------ | -
|Balance at December 31, 2014                                             |  |               | 170,067,650 |  |        | $
|Share based compensation (note 16)                                       |  |               | 758,346     |  |        |  
|Conversion of convertible debenture                                      |  |               | 1,162       |  |        |  
|Balance at December 31, 2015                                             |  |               | 170,827,158 |  |        | $
|Shares issued on equity financing, net of issue costs and deferred taxes |  |               | 13,427,075  |  |        |  
|Share based compensation (note 16)                                       |  |               | 400,100     |  |        |  
|Balance at December 31, 2016                                             |  |               | 184,654,333 |  |        | $



On March 8, 2016, the Corporation closed an equity financing
whereby 13,427,075 common shares were issued at $7.45 per share, for gross proceeds of $100 million, less $3.6 million related
to $4.9 million of issuance costs net of $1.3 million of deferred taxes.



Advantage Oil & Gas Ltd. - 27







| | 15. | Net income (loss) per share
| | --- | ---------------------------



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



|                                    |  | Year ended  |            
|----------------------------------- |  | ----------- | -----------
|                                    |  | December 31 |            
|                                    |  | 2016        |            
|Net income (loss)                   |  |             |            
|Basic and diluted                   |  | $           | (15,734    
|                                    |  |             |            
|Weighted average shares outstanding |  |             |            
|Basic                               |  |             | 182,056,120
|Stock Option Plan                   |  |             | -          
|Performance Incentive Plan          |  |             | -          
|Diluted                             |  |             | 182,056,120



The calculation
of diluted net income (loss) per share for the year ended December 31, 2016 excludes the effects of the Stock Option Plan and Performance
Incentive Plan, as their impacts would be anti-dilutive. Total weighted average shares of 866,241 and 648,037 in respect of the
Stock Option Plan and Performance Incentive Plan, respectively were excluded from the diluted net income (loss) per share calculation.



The calculation
of diluted net income (loss) per share for the year ended December 31, 2015 excludes the convertible debenture, as its impact would
be anti-dilutive. Total weighted average shares issuable in exchange for the convertible debenture excluded from the diluted net
income (loss) per share calculation for the year ended December 31, 2015 was 796,830 shares. As the convertible debenture matured
on January 30, 2015 (note 11), it had no dilutive effect on periods beginning on dates thereafter.



Advantage Oil & Gas Ltd. - 28







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



| | (a) | Stock Option Plan
| | --- | -----------------



Under the Stock Option Plan, service
providers are granted options with exercise prices that approximate the market price of common shares at the date of grant. Share
based compensation costs of the Stock Option Plan are determined using a Black-Scholes valuation model, using weighted average
assumptions as follows:



|Volatility               |  |  | 41   | %
|------------------------ |  |  | ---- | -
|                         |  |  |      |  
|Expected forfeiture rate |  |  | 0.98 | %
|                         |  |  |      |  
|Dividend rate            |  |  | 0    | %
|                         |  |  |      |  
|Risk-free rate           |  |  | 1.05 | %



Volatility is based on historical
stock prices at the close-of-trade-day over a historical time period.



The following tables summarize information
about changes in stock options outstanding at December 31, 2016:



|                             |  | Stock Options |            |   | Weighted-Average Exercise Price |  
|---------------------------- |  | ------------- | ---------- | - | ------------------------------- | -
|Balance at December 31, 2014 |  |               | 5,144,676  |   |                                 | $
|Exercised                    |  |               | (2,081,538 | ) |                                 |  
|Granted                      |  |               | 987,928    |   |                                 |  
|Forfeited/cancelled          |  |               | (19,764    | ) |                                 |  
|Balance at December 31, 2015 |  |               | 4,031,302  |   |                                 | $
|Exercised                    |  |               | (921,387   | ) |                                 |  
|Balance at December 31, 2016 |  |               | 3,109,915  |   |                                 | $





|Stock Options Outstanding |  |                                     | Stock Options Exercisable | 
|------------------------- |  | ----------------------------------- | ------------------------- | 
|Range of Exercise Price   |  | Number of Stock Options Outstanding |                           | 
|$4.43 - $5.87             |  |                                     | 2,135,825                 | 
|$5.88 - $6.82             |  |                                     | 974,090                   | 
|$4.43 - $6.82             |  |                                     | 3,109,915                 | 





Advantage Oil & Gas Ltd. - 29







| | 16. | Share based compensation (continued)
| | --- | ------------------------------------



| | (b) | Performance Incentive Plan
| | --- | --------------------------



Under the Performance Incentive Plan,
service providers can be granted two types of Incentive Awards: Restricted Awards and Performance Awards. A Restricted Award is
a grant denominated in a fixed number of common shares which generally vests 1/3 on the first anniversary of the grant date, 1/3
on the second anniversary, and 1/3 on the third anniversary. A Performance Award is a grant denominated in a fixed number of common
shares which vests on the third anniversary of the grant date. Performance Award grants are multiplied by a Payout Multiplier,
that is determined based on Corporate Performance Measures, as approved by the Board of Directors.



As at December 31, 2016, no Restricted
Awards have been granted.



The following table is a continuity
of Performance Awards:



|                             |  | Performance Awards |          
|---------------------------- |  | ------------------ | ---------
|Balance at December 31, 2014 |  |                    | 406,142  
|Granted                      |  |                    | 263,510  
|Forfeited                    |  |                    | (3,560   
|Balance at December 31, 2015 |  |                    | 666,092  
|Granted                      |  |                    | 661,571  
|Balance at December 31, 2016 |  |                    | 1,327,663



Share based
compensation recognized by plan for the years ended December 31, 2016 and 2015 are as follows:



|                                     |  | Year ended  |       
|------------------------------------ |  | ----------- | ------
|                                     |  | December 31 |       
|                                     |  | 2016        |       
|Stock Option Plan                    |  | $           | 784   
|Performance Incentive Plan           |  |             | 4,823 
|Total share based compensation       |  |             | 5,607 
|Capitalized                          |  |             | (2,326
|Net share based compensation expense |  | $           | 3,281 



Advantage Oil & Gas Ltd. - 30







| | 17. | Natural gas and liquids sales
| | --- | -----------------------------



|                                    |  | Year ended  |        
|----------------------------------- |  | ----------- | -------
|                                    |  | December 31 |        
|                                    |  | 2016        |        
|Natural gas sales                   |  | $           | 145,878
|Natural gas liquids sales           |  |             | 16,055 
|Total natural gas and liquids sales |  | $           | 161,933



| | 18. | General and administrative expense (“G&A”)
| | --- | ------------------------------------------



|                                   |  | Year ended  |       
|---------------------------------- |  | ----------- | ------
|                                   |  | December 31 |       
|                                   |  | 2016        |       
|Salaries and benefits              |  | $           | 7,332 
|Share based compensation (note 16) |  |             | 5,607 
|Office rent                        |  |             | 989   
|Other                              |  |             | 2,952 
|Total G&A                          |  |             | 16,880
|Capitalized (note 7)               |  |             | (6,130
|Net G&A                            |  | $           | 10,750



| | 19. | Finance expense
| | --- | ---------------



|                                                |  | Year ended  |       
|----------------------------------------------- |  | ----------- | ------
|                                                |  | December 31 |       
|                                                |  | 2016        |       
|Interest on bank indebtedness (note 10)         |  | $           | 9,335 
|Interest on convertible debenture (note 11)     |  |             | -     
|Accretion on convertible debenture (note 11)    |  |             | -     
|Accretion of decomissioning liability (note 12) |  |             | 915   
|Total finance expense                           |  | $           | 10,250



| | 20. | Supplementary cash flow information
| | --- | -----------------------------------



Changes in non-cash working capital
is comprised of:



|                                    |  | Year ended  |        
|----------------------------------- |  | ----------- | -------
|                                    |  | December 31 |        
|                                    |  | 2016        |        
|Source (use) of cash:               |  |             |        
|Trade and other receivables         |  | $           | (12,417
|Prepaid expenses and deposits       |  |             | 285    
|Trade and other accrued liabilities |  |             | 11,103 
|                                    |  | $           | (1,029 
|                                    |  |             |        
|Related to operating activities     |  | $           | 567    
|Related to financing activities     |  |             | -      
|Related to investing activities     |  |             | (1,596 
|                                    |  | $           | (1,029 



Advantage Oil & Gas Ltd. - 31







| | 21. | Commitments
| | --- | -----------



Advantage has lease commitments
relating to office buildings of $3.0 million (December 31, 2015 - $4.1 million) and transportation commitments of $180.2 million
(December 31, 2015 - $168.1 million). The estimated remaining annual minimum operating lease payments are as follows:



|                    |  | Year ended  |        
|------------------- |  | ----------- | -------
|                    |  | December 31 |        
|                    |  | 2016        |        
|2016                |  | $           | -      
|2017                |  |             | 26,067 
|2018                |  |             | 27,338 
|2019                |  |             | 28,519 
|2020                |  |             | 21,850 
|2021 and thereafter |  |             | 79,438 
|Total commitments   |  | $           | 183,212



Advantage Oil & Gas Ltd. - 32







DirectorsJill Angevine (1)(3)Stephen E. Balog (1)(2)(3)Grant Fagerheim (2)(3)Paul G. Haggis (1)(2)(3)Andy J. MahRonald A. McIntosh (2)(3)(1)Member of Audit Committee(2)Member of Reserve Evaluation Committee(3)Member of Human Resources, Compensation & Corporate Governance CommitteeOfficersAndy J. Mah, President and CEOCraig Blackwood, Vice President, Finance and CFONeil Bokenfohr, Senior Vice PresidentCorporate SecretaryJay P. Reid, PartnerBurnet, Duckworth and Palmer LLPAuditorsPricewaterhouseCoopers LLPBankersThe Bank of Nova ScotiaNational Bank of CanadaRoyal Bank of CanadaCanadian Imperial Bank of CommerceUnion Bank, Canada BranchAlberta Treasury BranchesWells Fargo Bank N.A., /Canada BranchIndependent Reserve EvaluatorsSproule Associates Limited


Legal CounselBurnet, Duckworth and Palmer LLPTransfer AgentComputershare Trust Company of CanadaAbbreviations  bbls
    - barrelsbbls/d
    - barrels per dayboe
    - barrels of oil equivalent (6 mcf = 1 bbl)boe/d
    - barrels of oil equivalent per daymcf
    - thousand cubic feetmcf/d
    - thousand cubic feet per daymmcf
    - million cubic feetmmcf/d
    - million cubic feet per daybcf
    - billion cubic feettcf
    - trillion cubic feetgj
    - gigajoulesNGLs
    - natural gas liquidsWTI
    - West Texas Intermediate  Corporate Office300, 440 – 2nd Avenue SWCalgary, Alberta T2P 5E9(403) 718-8000Contact UsToll free: 1-866-393-0393Email: ir@advantageog.comVisit our website at www.advantageog.comStock Exchange Trading Symbol(Toronto Stock Exchange and New York Stock Exchange)Shares: AAV








Advantage Oil & Gas Ltd. - 33