Exhibit 99.3



CONSOLIDATED MANAGEMENT’S DISCUSSION
& ANALYSIS



The following Management’s Discussion
and Analysis (“MD&A”), dated as of March 2, 2017, provides a detailed explanation of the consolidated financial
and operating results of Advantage Oil & Gas Ltd. (“Advantage”, the “Corporation”, “us”,
“we” or “our”) for the three months and year ended December 31, 2016 and should be read in conjunction
with the December 31, 2016 audited consolidated financial statements. The consolidated financial statements have been prepared
in accordance with International Financial Reporting Standards (“IFRS”), representing generally accepted accounting
principles (“GAAP”) for publicly accountable enterprises in Canada. All references in the MD&A and consolidated
financial statements are to Canadian dollars unless otherwise indicated. The term “boe” or barrels of oil equivalent
and “mcfe” or thousand cubic feet equivalent may be misleading, particularly if used in isolation. A boe or mcfe conversion
ratio of six thousand cubic feet of natural gas equivalent to one barrel of oil (6 mcf: 1 bbl) is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. As the value
ratio between natural gas and crude oil based on the current prices of natural gas and crude oil is significantly different from
the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.



Forward-Looking Information and Other
Advisories



This MD&A contains certain forward-looking
statements and forward-looking information (collectively, "forward-looking statements"), which are based on our current
internal expectations, estimates, projections, assumptions and beliefs. These statements relate to future events or our future
performance. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements
are often, but not always, identified by the use of words such as "seek", "anticipate", "plan", "continue",
"estimate", "expect", "may", "will", "project", "predict", "potential",
"targeting", "intend", "could", "might", "should", "believe", "would"
and similar or related expressions. These statements are not guarantees of future performance.



In particular, forward-looking statements
included in this MD&A include, but are not limited to, the Corporation's hedging activities; terms of the Corporation's derivative
contracts, including the timing of settlement of such contracts; effect of fluctuations in commodity prices as compared to valuation
assumptions on actual gains or losses realized on cash settlement of derivatives; effect of commodity prices on the Corporation's
financial results, condition and performance; industry conditions, including effect of changes in commodity prices, weather and
general economic conditions on the crude oil and natural gas industry and demand for crude oil and natural gas; average royalty
rates and the impact of well depths, well production rates, commodity prices and gas cost allowance on average corporate royalty
rates; future anticipated royalty rates; terms of the MRF and the estimated impact on economic returns for the Corporation's average
Upper, Middle and Lower Montney wells; Advantages plans to continue to evaluate and optimize the impact of drilling and completion
design changes on royalties and economics in respect of the MRF; terms of the Corporation's equity compensation plans; the Corporation's
expectation that it will realize lower cash finance expense in future periods of 2017; estimated tax pools as at December 31, 2016;
future commitments and contractual obligations; terms of the Corporation's credit facilities, including timing of the next review
of the credit facilities, effect of revisions or changes in reserve estimates and commodity prices on the borrowing base, and limitations
on the utilization of hedging contracts; the Corporation's expectations regarding extension of Advantage's credit facilities at
each annual review; the Corporation's strategy for managing its capital structure, including the use of equity financing arrangements,
share repurchases, obtaining additional financing through bank indebtedness, refinancing current debt, issuing other financial
or equity-based instruments, declaring a dividend or adjusting capital spending; the timing of reviews of capital structure and
forecast information by management and the Board of Directors; effect of the Corporation's continual financial assessment processes
on the Corporation's ability to mitigate risks; the Corporation's ability to satisfy all liabilities and commitments, including
a working capital deficit, and meet future obligations as they become due; the Corporation's belief that it is well positioned
to successfully execute its multi-year development plan at Glacier, Alberta; Advantage's estimated funds from operations and total
debt to trailing cash flow ratio for 2017; expected timing of completion of expansion of the Corporation's Glacier gas plant; the
Corporation's drilling and completion plans, including the anticipated timing of certain well completions; the Corporation's expectation
that certain wells will meet Advantage's production targets until the second quarter of 2017; the Corporation's plans to put additional
wells on-stream and the expected timing thereof; the focus of the Corporation's capital expenditures and operations, including
the Corporation's drilling plans; the Corporation's intentions to monitor debt levels to ensure an optimal mix of financing and
cost of capital to provide a maximum return to the Corporation's shareholders; and the statements under "critical accounting
estimates" in this MD&A.



Advantage Oil & Gas Ltd. - 1







These forward-looking statements involve
substantial known and unknown risks and uncertainties, many of which are beyond our control, including, but not limited to, risks
related to changes in general economic, market and business conditions; continued volatility in market prices for oil and natural
gas; the impact of significant declines in market prices for oil and natural gas; stock market volatility; changes to legislation
and regulations and how they are interpreted and enforced; our ability to comply with current and future environmental or other
laws; actions by governmental or regulatory authorities including increasing taxes, changes in investment or other regulations;
changes in tax laws, royalty regimes and incentive programs relating to the oil and gas industry; the effect of acquisitions; our
success at acquisition, exploitation and development of reserves; unexpected drilling results; failure to achieve production targets
on timelines anticipated or at all; changes in commodity prices, currency exchange rates, capital expenditures, reserves or reserves
estimates and debt service requirements; the occurrence of unexpected events involved in the exploration for, and the operation
and development of, oil and gas properties; hazards such as fire, explosion, blowouts, cratering, and spills, each of which could
result in substantial damage to wells, production facilities, other property and the environment or in personal injury; changes
or fluctuations in production levels; individual well productivity; delays in anticipated timing of drilling and completion of
wells; lack of available capacity on pipelines; delays in timing of completion of the expansion of the Corporation's Glacier gas
plant; the failure to extend our credit facilities at each annual review; competition from other producers; the lack of availability
of qualified personnel or management; ability to access sufficient capital from internal and external sources; credit risk; and
the risks and uncertainties described in the Corporation’s Annual Information Form which is available at www.sedar.com and
www.advantageog.com. Readers are also referred to risk factors described in other documents Advantage files with Canadian securities
authorities.



With respect to forward-looking statements
contained in this MD&A, in addition to other assumptions identified herein, Advantage has made assumptions regarding, but not
limited to: current and future prices of oil and natural gas; that the current commodity price and foreign exchange environment
will continue or improve; conditions in general economic and financial markets; effects of regulation by governmental agencies;
receipt of required regulatory approvals; royalty regimes; future exchange rates; royalty rates; future operating costs; availability
of skilled labour; availability of drilling and related equipment; timing and amount of capital expenditures; the impact of increasing
competition; the price of crude oil and natural gas; that the Corporation will have sufficient cash flow, debt or equity sources
or other financial resources required to fund its capital and operating expenditures and requirements as needed; that the Corporation’s
conduct and results of operations will be consistent with its expectations; that the Corporation will have the ability to develop
the Corporation’s crude oil and natural gas properties in the manner currently contemplated; availability of pipeline capacity;
that current or, where applicable, proposed assumed industry conditions, laws and regulations will continue in effect or as anticipated
as described herein; and that the estimates of the Corporation’s production, reserves and resources volumes and the assumptions
related thereto (including commodity prices and development costs) are accurate in all material respects.



Management has included the above summary
of assumptions and risks related to forward-looking information provided in this MD&A in order to provide shareholders with
a more complete perspective on Advantage's future operations and such information may not be appropriate for other purposes. Advantage’s
actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking
statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will
transpire or occur, or if any of them do so, what benefits that Advantage will derive there from. Readers are cautioned that the
foregoing lists of factors are not exhaustive. These forward-looking statements are made as of the date of this MD&A and Advantage
disclaims any intent or obligation to update publicly any forward-looking statements, whether as a result of new information, future
events or results or otherwise, other than as required by applicable securities laws.



This MD&A and, in particular the information
in respect of the Corporation's prospective funds from operations and debt to trailing cash flow for 2017, may contain future oriented
financial information ("FOFI") within the meaning of applicable securities laws. The FOFI has been prepared by management
to provide an outlook of the Corporation's activities and results and may not be appropriate for other purposes. The FOFI has been
prepared based on a number of assumptions, including the assumptions discussed above. The actual results of operations of the Corporation
and the resulting financial results may vary from the amounts set forth herein, and such variations may be material. The Corporation
and management believe that the FOFI has been prepared on a reasonable basis, reflecting management’s best estimates and
judgments. FOFI contained in this MD&A was made as of the date of this MD&A and the Corporation disclaims any intention
or obligations to update or revise any FOFI contained in this MD&A, whether as a result of new information, future events or
otherwise, unless required pursuant to applicable law.



References in this MD&A to production
test rates are useful in confirming the presence of hydrocarbons, however such rates are not determinative of the rates at which
such wells will commence production and decline thereafter and are not indicative of long term performance or of ultimate recovery.
Additionally, such rates may also include recovered "load oil" fluids used in well completion stimulation. While encouraging,
readers are cautioned not to place reliance on such rates in calculating the aggregate production for Advantage. A pressure transient
analysis or well-test interpretation has not been carried out in respect of all wells. Accordingly, the Corporation cautions that
the test results should be considered to be preliminary.



Advantage Oil & Gas Ltd. - 2







Non-GAAP Measures



The Corporation discloses several financial
measures in the MD&A that do not have any standardized meaning prescribed under GAAP. These financial measures include funds
from operations and cash netbacks. Management believes that these financial measures are useful supplemental information to analyze
operating performance and provide an indication of the results generated by the Corporation’s principal business activities.
Investors should be cautioned that these measures should not be construed as an alternative to net income, comprehensive income,
and cash provided by operating activities or other measures of financial performance as determined in accordance with GAAP. Advantage’s
method of calculating these measures may differ from other companies, and accordingly, they may not be comparable to similar measures
used by other companies.



Funds from operations, as presented, is
based on cash provided by operating activities, before expenditures on decommissioning liability and changes in non-cash working
capital, reduced for finance expense excluding accretion. Management believes these adjustments to cash provided by operating activities
increase comparability between reporting periods. Cash netbacks are dependent on the determination of funds from operations and
include the primary cash sales and expenses on a per mcfe basis that comprise funds from operations. Funds from operations reconciled
to cash provided by operating activities is as follows:



|                                          |  | Three months ended |        |   |      |   |             | Year ended |  |  |      |   
|----------------------------------------- |  | ------------------ | ------ | - | ---- | - | ----------- | ---------- |  |  | ---- | --
|                                          |  | December 31        |        |   |      |   | December 31 |            |  | 
|($000)                                    |  | 2016               |        |   | 2015 |   |             | % change   |  |  | 2016 |   
|Cash provided by operating activities     |  | $                  | 57,099 |   |      | $ | 29,772      |            |  |  | 92   | % 
|Expenditures on decommissioning liability |  |                    | 491    |   |      |   | 552         |            |  |  | (11  | )%
|Changes in non-cash working capital       |  |                    | (1,067 | ) |      |   | 4,297       |            |  |  | (125 | )%
|Finance expense (1)                       |  |                    | (1,913 | ) |      |   | (2,965      | )          |  |  | (35  | )%
|Funds from operations                     |  | $                  | 54,610 |   |      | $ | 31,656      |            |  |  | 73   | % 



(1) Finance expense excludes non-cash accretion expense.



Advantage Oil & Gas Ltd. - 3







Overview



|                                         |  | Three months ended |        |   | Year ended  |  
|---------------------------------------- |  | ------------------ | ------ | - | ----------- | -
|                                         |  | December 31        |        |   | December 31 |  
|                                         |  | 2016               |        |   | 2015        |  
|                                         |  | $000               |        |   | per mcfe    |  
|Natural gas and liquids sales            |  | $                  | 64,556 |   |             | $
|Realized gains on derivatives            |  |                    | 6,534  |   |             |  
|Royalties                                |  |                    | (3,637 | ) |             |  
|Operating expense                        |  |                    | (4,490 | ) |             |  
|Transportation expense                   |  |                    | (5,223 | ) |             |  
|Operating  income and operating netbacks |  |                    | 57,740 |   |             |  
|General and administrative expense (1)   |  |                    | (1,680 | ) |             |  
|Finance expense (2)                      |  |                    | (1,913 | ) |             |  
|Other income (3)                         |  |                    | 463    |   |             |  
|Funds from operations and cash netbacks  |  | $                  | 54,610 |   |             | $
|                                         |  |                    |        |   |             |  
|Per basic weighted average share         |  | $                  | 0.30   |   |             |  



(1) General and administrative expense excludes non-cash share
based compensation.

(2) Finance expense excludes non-cash accretion expense.

(3) Other income excludes non-cash other income.



For the three months and year ended December
31, 2016, Advantage realized funds from operations of $54.6 million and $166.9 million with cash netbacks of $2.68/mcfe and $2.24/mcfe,
respectively. On a per share basis, funds from operations was $0.30 and $0.92 per share for the three months and year ended December
31, 2016, respectively. In the fourth quarter of 2016, we achieved total funds from operations that was $23.0 million higher than
for the same period of 2015, we generated free cash flow of $24.6 million (funds from operations exceeding net capital expenditures)
and reduced bank indebtedness by $25.9 million. These accomplishments have been due to a 42% increase in production, a 26% increase
in the AECO daily price (see “Commodity Prices and Marketing”), realized derivative gains of $6.5 million from our
disciplined commodity risk management program (see “Commodity Price Risk and Market Diversification”) and low total
corporate cash costs from ongoing successes at our Montney resource development located at Glacier, Alberta. It is also significant
to note that excluding realized gains on derivatives, Advantage would still have generated a cash netback of $2.36/mcfe for the
fourth quarter of 2016. For 2016, we achieved total funds from operations that was $43.2 million higher than 2015 generating free
cash flow of $39 million that was used to reduce bank indebtedness.



Advantage Oil & Gas Ltd. - 4







Natural Gas and Liquids Sales



|                                        |  | Three months ended |        |  |      |   |        | Year ended  |  |  |      |   
|--------------------------------------- |  | ------------------ | ------ |  | ---- | - | ------ | ----------- |  |  | ---- | --
|                                        |  | December 31        |        |  |      |   |        | December 31 |  |  |      |   
|($000)                                  |  | 2016               |        |  | 2015 |   |        | % change    |  |  | 2016 |   
|Natural gas sales                       |  | $                  | 59,925 |  |      | $ | 33,155 |             |  |  | 81   | % 
|Realized gains on derivatives           |  |                    | 6,534  |  |      |   | 8,787  |             |  |  | (26  | )%
|Natural gas sales including derivatives |  |                    | 66,459 |  |      |   | 41,942 |             |  |  | 58   | % 
|Liquids sales                           |  |                    | 4,631  |  |      |   | 712    |             |  |  | 550  | % 
|Total(1)                                |  | $                  | 71,090 |  |      | $ | 42,654 |             |  |  | 67   | % 



(1) Total excludes unrealized derivative gains and losses.



Total sales including realized derivatives
for the three months ended December 31, 2016 increased $28.4 million or 67% to $71.1 million as compared to the fourth quarter
of 2015, and increased $14.4 million or 25% as compared to the third quarter of 2016. Total sales have increased as a result of
a 26% increase in AECO daily natural gas prices, higher production and a disciplined commodity risk management program. We significantly
increased our liquids sales through additional Middle Montney natural gas liquids production from our refrigeration facilities
at the Glacier gas plant. Our liquids production is comprised of approximately 75% condensate and with the increased production
in 2016, became a larger proportion of our total sales.



Production



|                    |  | Three months ended |         |   |      |  |         | Year ended  |  |  |      |  
|------------------- |  | ------------------ | ------- | - | ---- |  | ------- | ----------- |  |  | ---- | -
|                    |  | December 31        |         |   |      |  |         | December 31 |  |  |      |  
|                    |  | 2016               |         |   | 2015 |  |         | % change    |  |  | 2016 |  
|Natural gas (mcf/d) |  |                    | 215,369 |   |      |  | 154,241 |             |  |  | 40   | %
|Liquids (bbls/d)    |  |                    | 949     |   |      |  | 179     |             |  |  | 430  | %
|Total - mcfe/d      |  |                    | 221,063 |   |      |  | 155,315 |             |  |  | 42   | %
|- boe/d             |  |                    | 36,844  |   |      |  | 25,886  |             |  |  | 42   | %
|Natural gas (%)     |  |                    | 97      | % |      |  | 99      | %           |  |  |      |  
|Liquids (%)         |  |                    | 3       | % |      |  | 1       | %           |  |  |      |  



Average production during the fourth quarter
of 2016 increased 42% to 221 mmcfe/d and increased 44% for 2016 to 203 mmcfe/d, as compared to the respective periods of 2015.
Production increased consistent with our multi-year development plan and incremental firm transportation service contracts that
became effective in April 2016 to support the higher production level. Available processing capacity at our 100% owned Glacier
gas plant was successfully utilized throughout 2016 to offset TransCanada Pipelines Ltd. (“TCPL”) sales gas pipeline
restrictions and particularly during the fourth quarter when firm service restrictions were more pronounced.



Advantage Oil & Gas Ltd. - 5







Commodity Prices and Marketing



|                                                 |  | Three months ended |       |  |      |   |       | Year ended  |  |  |      |  
|------------------------------------------------ |  | ------------------ | ----- |  | ---- | - | ----- | ----------- |  |  | ---- | -
|                                                 |  | December 31        |       |  |      |   |       | December 31 |  |  |      |  
|                                                 |  | 2016               |       |  | 2015 |   |       | % change    |  |  | 2016 |  
|Average Realized Pricing                         |  |                    |       |  |      |   |       |             |  |  |      |  
|Natural gas, excluding hedging ($/mcf)           |  | $                  | 3.02  |  |      | $ | 2.34  |             |  |  | 29   | %
|Natural gas, including hedging ($/mcf)           |  | $                  | 3.35  |  |      | $ | 2.96  |             |  |  | 13   | %
|Liquids, excluding and including hedging ($/bbl) |  | $                  | 53.01 |  |      | $ | 43.24 |             |  |  | 23   | %
|                                                 |  |                    |       |  |      |   |       |             |  |  |      |  
|Benchmark Prices                                 |  |                    |       |  |      |   |       |             |  |  |      |  
|AECO daily ($/mcf)                               |  | $                  | 3.09  |  |      | $ | 2.46  |             |  |  | 26   | %
|AECO monthly ($/mcf)                             |  | $                  | 2.81  |  |      | $ | 2.65  |             |  |  | 6    | %
|NYMEX ($US/mmbtu)                                |  | $                  | 2.95  |  |      | $ | 2.28  |             |  |  | 29   | %
|Edmonton Light ($/bbl)                           |  | $                  | 60.76 |  |      | $ | 51.99 |             |  |  | 17   | %



Advantage’s natural gas production
at Glacier is delivered and sold directly into TCPL. Advantage sells production at the AECO monthly price equal to our AECO fixed
price contracted volumes (see “Commodity Price Risk and Market Diversification”). The remainder of our natural gas
production is sold at the AECO daily price. Realized natural gas prices, excluding hedging, were higher than the three months ended
December 31, 2015 primarily as a result of the increase in AECO prices. Natural gas prices began to decline in late 2014 due to
the continued strong U.S. domestic natural gas production relative to demand that had resulted in high natural gas inventory. This
situation placed additional pressure on Canadian natural gas prices that experienced a more significant relative decline. The supply
and demand imbalance continued throughout 2015 and worsened through the first half of 2016. However, in the second half of 2016
natural gas prices began to improve as the typical build in gas storage in advance of winter had decreased due to a strong increase
in power generation and exports accompanied by lower production, thereby leading to a reduced storage surplus and more balanced
market.



Prior to November 1, 2016, the natural
gas prices we realized were reduced for transportation from the sales points to AECO. Commencing on November 1, 2016, gas transportation
is no longer deducted from realized natural gas prices, but rather presented as Transportation Expense (see “Transportation
Expense”).



Advantage Oil & Gas Ltd. - 6







Commodity Price Risk and Market Diversification



The Corporation’s financial results
and condition will be dependent on the prices received for natural gas production. Natural gas prices have fluctuated widely and
are determined by supply and demand factors, including weather, and general economic conditions in natural gas consuming and producing
regions throughout North America. Management has been proactive in entering into derivative contracts for the purposes of reducing
cash flow volatility and diversifying price realization to multiple markets in support of our Glacier multi-year development plan.
Our Credit Facilities allow Advantage to enter derivative contracts up to 75% of total estimated natural gas and liquids production
over the first three years and 50% over the fourth year.



Our natural gas production and corresponding
derivative contracts are expected to result in the realization of the following fixed and variable market prices for 2017 to 2019:



|                                  |  | 2017                   |                                                       |  | 2018                  |           |                                  | 2019 |    
|--------------------------------- |  | ---------------------- | ----------------------------------------------------- |  | --------------------- | --------- | -------------------------------- | ---- | ---
|                                  |  | Volumes Contracted (1) |                                                       |  | Average minimum price |           | Estimated %
of Production Target |      |    
|Fixed Price                       |  |                        |                                                       |  |                       |           |                                  |      |    
|AECO fixed price swaps            |  |                        | 96.8
                                         mmcf/d  |  |                       | $3.19/mcf |                                  |      | 43 
|                                  |  |                        |                                                       |  |                       |           |                                  |      |    
|Variable Price                    |  |                        |                                                       |  |                       |           |                                  |      |    
|AECO daily price                  |  |                        | 129.2
                                         mmcf/d |  |                       | AECO      |                                  |      | 57 
|Henry Hub through basis
    swaps |  |                        | -                                                     |  |                       | -         |                                  |      | -  
|                                  |  |                        | 129.2
                                         mmcf/d |  |                       |           |                                  |      | 57 
|                                  |  |                        |                                                       |  |                       |           |                                  |      |    
|Total (2)                         |  |                        | 226.0
                                         mmcf/d |  |                       |           |                                  |      | 100



| | (1) | All volumes contracted converted to mcf on the basis of
1 mcf = 1.055056 GJ and 1 mcf = 1 mmbtu
| | --- | -----------------------------------------------------------------------------------------------

| | (2) | Represents the midpoint of our Guidance for 2017 to 2019
gas volumes (see News Release dated November 28, 2016)
| | --- | ---------------------------------------------------------------------------------------------------------------



A summary of realized and unrealized derivative
gains and losses for the three months and years ended December 31, 2016 and 2015 are as follows:



|                                         |  | Three months ended |         |   |      |   |        | Year ended  |  |  |      |   
|---------------------------------------- |  | ------------------ | ------- | - | ---- | - | ------ | ----------- |  |  | ---- | --
|                                         |  | December 31        |         |   |      |   |        | December 31 |  |  |      |   
|($000)                                   |  | 2016               |         |   | 2015 |   |        | % change    |  |  | 2016 |   
|Realized gains on derivatives            |  | $                  | 6,534   |   |      | $ | 8,787  |             |  |  | (26  | )%
|Unrealized gains (losses) on derivatives |  |                    | (36,587 | ) |      |   | 6,374  |             |  |  | (674 | )%
|Total gains (losses) on derivatives      |  | $                  | (30,053 | ) |      | $ | 15,161 |             |  |  | (298 | )%



For the three months and year ended December
31, 2016, we realized derivative gains as a result of the decline in natural gas prices as compared to our average derivative contract
prices. For the year ended December 31, 2016, an unrealized derivative loss of $66.8 million was recognized, being the decrease
in fair value of our derivative contracts to a net liability of $22.6 million at December 31, 2016 as compared to a net asset of
$44.2 million at December 31, 2015. The fair value of the net derivative asset or liability is the estimated value to settle the
outstanding contracts as at a point in time. As such, unrealized derivative gains and losses are not cash and the actual gains
or losses realized on eventual cash settlement can vary materially due to subsequent fluctuations in commodity prices as compared
to the valuation assumptions. The decrease in the fair value of our outstanding derivative contracts was primarily due to $53.1
million actual cash received from derivative settlements in 2016 combined with an improvement in natural gas prices as at December
31, 2016. Remaining derivative contracts will settle between January 1, 2017 and December 31, 2019 corresponding to when the Corporation
will recognize sales from production.



Advantage Oil & Gas Ltd. - 7







Royalty Expense



|                                                           |  | Three months ended |       |   |      |   |       | Year ended  |  |  |      |  
|---------------------------------------------------------- |  | ------------------ | ----- | - | ---- | - | ----- | ----------- |  |  | ---- | -
|                                                           |  | December 31        |       |   |      |   |       | December 31 |  |  |      |  
|                                                           |  | 2016               |       |   | 2015 |   |       | % change    |  |  | 2016 |  
|Royalty expense ($000)                                     |  | $                  | 3,637 |   |      | $ | 1,379 |             |  |  | 164  | %
|per mcfe                                                   |  | $                  | 0.18  |   |      | $ | 0.10  |             |  |  | 80   | %
|Royalty Rate (percentage of natural gas and liquids sales) |  |                    | 5.6   | % |      |   | 4.1   | %           |  |  | 1.5  | %



Advantage pays royalties to the owners
of mineral rights from which we have leases. The Corporation has mineral leases with provincial governments, individuals and other
companies. Our current average royalty rates are determined by various royalty regimes that incorporate factors including well
depths, well production rates, and commodity prices. Royalties also include the impact of gas cost allowance (“GCA”)
which is a reduction of royalties payable to the Alberta Provincial Government (the “Crown”) to recognize capital and
operating expenditures incurred by Advantage in the gathering and processing of the Crown’s share of our natural gas production.
The Corporation recovered $2.1 million of GCA in the second quarter of 2016 in relation to 2015 capital expenditures, resulting
in a royalty expense and rate for the year ended December 31, 2016 that are low. Royalty expense for the three months ended December
31, 2016 is higher than the same period of 2015 owing to higher production and commodity prices realized in the fourth quarter
of 2016 (see “Commodity Prices and Marketing”). The royalty rate for the three months ended December 31, 2016 is modestly
higher than the same period of 2015 due to higher commodity prices and a higher proportion of liquids production to which higher
royalty rates are applied than to natural gas. In 2017, we anticipate royalty rates of between 4.0% and 6.0%.



On January 29, 2016, the Alberta government
released its new Modernized Royalty Framework (“MRF”). The new royalty framework partially emulates a revenue minus
cost royalty structure and will be effective for wells spud on or after January 1, 2017 with existing wells continuing to operate
under the previous royalty framework for a ten-year period. A new well’s early production will be subject to a flat 5% royalty
until the well’s total revenue equals the Drilling and Completion Cost Allowance, which is a proxy for the well cost based
on average industry drilling and completion costs. Afterwards, the company will pay higher royalty rates that vary depending on
the resource and market prices. Royalty rates will drop to match declining production rates when the well reaches a Maturity Threshold.
The new royalty framework is expected to incentivize low cost producers with higher productivity wells which will continue to benefit
Advantage. We have reviewed the new framework formulas and estimate that at natural gas prices up to AECO $4.00/mcf, the impact
on the economic returns for our average Upper and Lower Montney wells are insignificant while the economic returns for our average
Middle Montney wells are slightly improved. Advantage will continue to evaluate and optimize the impact of drilling and completion
design changes on royalties and economics in respect of the MRF.



Operating Expense



|                         |  | Three months ended |       |  |      |   |       | Year ended  |  |  |      |   
|------------------------ |  | ------------------ | ----- |  | ---- | - | ----- | ----------- |  |  | ---- | --
|                         |  | December 31        |       |  |      |   |       | December 31 |  |  |      |   
|                         |  | 2016               |       |  | 2015 |   |       | % change    |  |  | 2016 |   
|Operating expense ($000) |  | $                  | 4,490 |  |      | $ | 4,998 |             |  |  | (10  | )%
|per mcfe                 |  | $                  | 0.22  |  |      | $ | 0.35  |             |  |  | (37  | )%



Operating expense per mcfe for the fourth
quarter of 2016 decreased 37% to $0.22/mcfe from $0.35/mcfe in the fourth quarter of 2015 and from $0.25/mcfe in the third quarter
of 2016. The lower fourth quarter 2016 per mcfe operating costs resulted from reduced water disposal costs, continued efficiency
improvement with equipment maintenance procedures and higher plant throughput.



Total operating expense for the year ended
December 31, 2016 was 11% higher than for the same period of 2015 due to production that increased by 44%, significantly offset
by operating efficiency.



Advantage Oil & Gas Ltd. - 8







Transportation Expense



|                                    |  | Three months ended |       |  |      |   |   | Year ended  |  |  |      |  
|----------------------------------- |  | ------------------ | ----- |  | ---- | - | - | ----------- |  |  | ---- | -
|                                    |  | December 31        |       |  |      |   |   | December 31 |  |  |      |  
|                                    |  | 2016               |       |  | 2015 |   |   | % change    |  |  | 2016 |  
|Transportation expense              |  |                    |       |  |      |   |   |             |  |  |      |  
|Natural gas ($000)                  |  | $                  | 4,217 |  |      | $ | - |             |  |  | 100  | %
|per mcfe                            |  | $                  | 0.21  |  |      | $ | - |             |  |  | 100  | %
|Liquids ($000)                      |  | $                  | 1,006 |  |      | $ | - |             |  |  | 100  | %
|per mcfe                            |  | $                  | 0.05  |  |      | $ | - |             |  |  | 100  | %
|Total transportation expense ($000) |  | $                  | 5,223 |  |      | $ | - |             |  |  | 100  | %
|per mcfe                            |  | $                  | 0.26  |  |      | $ | - |             |  |  | 100  | %



Transportation expense represents the cost
of transporting our liquids and natural gas to the sales points.



The first quarter of 2016 was the first
reporting period in which we have presented liquids transportation expense due to higher liquids recoveries at our Glacier gas
plant.



Natural gas production at Glacier is delivered
and sold directly into TCPL. Prior to November 1, 2016, natural gas transportation was presented as a reduction against realized
natural gas prices (see “Commodity Prices and Marketing”) as our transportation contracts were permanently assigned
to our third party marketer. As the magnitude of the transportation commitments have significantly increased for the third party
marketer with our continued growth, commencing November 1, 2016 Advantage chose to have these contracts permanently assigned back
to Advantage and natural gas transportation expense is now presented separately. This change has no effect on funds from operations,
cash netbacks, or net income (loss).



General and Administrative Expense



|                                                |  | Three months ended |       |  |      |   |       | Year ended  |  |  |      |   
|----------------------------------------------- |  | ------------------ | ----- |  | ---- | - | ----- | ----------- |  |  | ---- | --
|                                                |  | December 31        |       |  |      |   |       | December 31 |  |  |      |   
|                                                |  | 2016               |       |  | 2015 |   |       | % change    |  |  | 2016 |   
|General and administrative expense              |  |                    |       |  |      |   |       |             |  |  |      |   
|Cash expense ($000)                             |  | $                  | 1,680 |  |      | $ | 1,581 |             |  |  | 6    | % 
|per mcfe                                        |  | $                  | 0.08  |  |      | $ | 0.11  |             |  |  | (27  | )%
|Share based compensation ($000)                 |  | $                  | 916   |  |      | $ | 1,078 |             |  |  | (15  | )%
|per mcfe                                        |  | $                  | 0.05  |  |      | $ | 0.08  |             |  |  | (38  | )%
|Total general and administrative expense ($000) |  | $                  | 2,596 |  |      | $ | 2,659 |             |  |  | (2   | )%
|per mcfe                                        |  | $                  | 0.13  |  |      | $ | 0.19  |             |  |  | (32  | )%
|Employees at December 31                        |  |                    |       |  |      |   |       |             |  |  |      |   



Cash general and administrative (“G&A”)
expense for the year ended December 31, 2016 is comparable to the same period of 2015. On a per mcfe basis, a 27% reduction was
realized in the fourth quarter of 2016 compared to the same period of 2015, as a result of higher production.



Share based compensation represents non-cash
G&A expense associated with Advantage’s stock option plan and restricted and performance award plan that are designed
to provide for long-term compensation to service providers and to align the interests of service providers with that of shareholders.
As at December 31, 2016, a total of 3.1 million stock options and 1.3 million performance awards are unexercised which represents
2.4% of Advantage’s total outstanding common shares.



Advantage Oil & Gas Ltd. - 9







Depreciation Expense



|                            |  | Three months ended |        |  |      |   |        | Year ended  |  |  |      |   
|--------------------------- |  | ------------------ | ------ |  | ---- | - | ------ | ----------- |  |  | ---- | --
|                            |  | December 31        |        |  |      |   |        | December 31 |  |  |      |   
|                            |  | 2016               |        |  | 2015 |   |        | % change    |  |  | 2016 |   
|Depreciation expense ($000) |  | $                  | 28,382 |  |      | $ | 23,247 |             |  |  | 22   | % 
|per mcfe                    |  | $                  | 1.40   |  |      | $ | 1.63   |             |  |  | (14  | )%



Depreciation of natural gas and liquids
properties is provided on the units-of–production method based on total proved and probable reserves, including future development
costs, on a component basis. The rate of depreciation expense per mcfe was lower as total costs, including future development costs,
as a proportion of total proved and probable reserves declined due to the continued efficiency of reserve additions. Depreciation
expense was higher for the three months and year ended December 31, 2016 than the same periods of 2015, due to the continued production
increase at Glacier.



Finance Expense



|                             |  | Three months ended |       |  |      |   |       | Year ended  |  |  |      |   
|---------------------------- |  | ------------------ | ----- |  | ---- | - | ----- | ----------- |  |  | ---- | --
|                             |  | December 31        |       |  |      |   |       | December 31 |  |  |      |   
|                             |  | 2016               |       |  | 2015 |   |       | % change    |  |  | 2016 |   
|Finance expense              |  |                    |       |  |      |   |       |             |  |  |      |   
|Cash expense ($000)          |  | $                  | 1,913 |  |      | $ | 2,965 |             |  |  | (35  | )%
|per mcfe                     |  | $                  | 0.09  |  |      | $ | 0.21  |             |  |  | (57  | )%
|Accretion expense ($000)     |  | $                  | 291   |  |      | $ | 286   |             |  |  | 2    | % 
|per mcfe                     |  | $                  | 0.01  |  |      | $ | 0.02  |             |  |  | (50  | )%
|Total finance expense ($000) |  | $                  | 2,204 |  |      | $ | 3,251 |             |  |  | (32  | )%
|per mcfe                     |  | $                  | 0.10  |  |      | $ | 0.23  |             |  |  | (57  | )%



Cash finance expense for the three months
ended December 31, 2016 decreased by 35% compared to the same period of 2015. Bank indebtedness reached its lowest average level
for the year in the fourth quarter of 2016 due to funds from operations that exceeded net capital expenditures. Interest rates
are primarily based on short term bankers’ acceptance rates plus a stamping fee and determined by total debt to the trailing
four quarters Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) ratio as calculated pursuant
to our Credit Facilities. In 2017, we expect lower cash finance expense as a result of our lower bank indebtedness, and lower interest
rates as determined by our total debt to EBITDA ratio.



Accretion expense represents non-cash charges
that increase the carrying value of convertible debentures and decommissioning liability to their maturity values as a result of
the passage of time. Since our remaining convertible debentures matured on January 30, 2015, accretion expense for the year ended
December 31, 2016 was lower than the same period of 2015.



Advantage Oil & Gas Ltd. - 10







Taxes



Deferred income taxes arise from differences
between the accounting and tax bases of our assets and liabilities. For the year ended December 31, 2016, the Corporation recognized
a deferred income tax recovery of $4.6 million as a result of the $20.3 million loss before taxes and credited $1.3 million to
share capital related to tax deductions available from share issue costs. As at December 31, 2016, the Corporation had a deferred
income tax liability of $35.2 million.



Estimated tax pools at December 31, 2016,
are as follows:



|                                                              |  | ($ millions) |      
|------------------------------------------------------------- |  | ------------ | -----
|                                                              |  |              |      
|Canadian Development Expenses                                 |  | $            | 171  
|Canadian Exploration Expenses                                 |  |              | 66   
|Canadian Oil and Gas Property Expenses                        |  |              | 9    
|Non-capital losses                                            |  |              | 710  
|Undepreciated Capital Cost                                    |  |              | 212  
|Capital losses                                                |  |              | 158  
|Scientific Research and Experimental Development Expenditures |  |              | 33   
|Other                                                         |  |              | 12   
|                                                              |  | $            | 1,371



Net Income (Loss) and Comprehensive
Income (Loss)



|                                                         |  | Three months ended |        |   |      |   |        | Year ended  |  |  |      |   
|-------------------------------------------------------- |  | ------------------ | ------ | - | ---- | - | ------ | ----------- |  |  | ---- | --
|                                                         |  | December 31        |        |   |      |   |        | December 31 |  |  |      |   
|                                                         |  | 2016               |        |   | 2015 |   |        | % change    |  |  | 2016 |   
|Net income (loss) and comprehensive income (loss) ($000) |  | $                  | (8,845 | ) |      | $ | 12,408 |             |  |  | (171 | )%
|per share - basic                                        |  | $                  | (0.05  | ) |      | $ | 0.08   |             |  |  | (163 | )%
|per share – diluted                                      |  | $                  | (0.05  | ) |      | $ | 0.07   |             |  |  | (171 | )%



Advantage has reported a net loss of $8.8
million and $15.7 million, respectively for the three months and year ended December 31, 2016. Our net losses for the three months
and year ended December 31, 2016 were most significantly impacted by unrealized losses on derivatives of $36.6 and $66.8 million.
Unrealized gains and losses on derivatives are non-cash, can fluctuate greatly between periods and normally result from changes
to the estimated value to settle outstanding contracts (see “Commodity Price Risk and Market Diversification”). Compared
to the respective periods in 2015, net losses were positively impacted by increased revenue due to higher commodity prices and
production volumes, partially offset by higher depreciation expenses which also resulted from higher production volumes.



Contractual Obligations and Commitments



The Corporation has contractual obligations
in the normal course of operations including purchases of assets and services, operating agreements, transportation commitments,
sales contracts and bank indebtedness. These obligations are of a recurring and consistent nature and impact cash flow in an ongoing
manner. The following table is a summary of the Corporation’s remaining contractual obligations and commitments. Advantage
has no guarantees or off-balance sheet arrangements other than as disclosed.



|                                  |  | Payments due by period |      
|--------------------------------- |  | ---------------------- | -----
|($ millions)                      |  | Total                  |      
|Building leases                   |  | $                      | 3.0  
|Transportation                    |  |                        | 180.2
|Bank indebtedness (1) - principal |  |                        | 153.1
|- interest                        |  |                        | 10.2 
|Total contractual obligations     |  | $                      | 346.5



| | (1) | As at December 31, 2016, the Corporation’s bank indebtedness was governed by a credit facility
agreement with a syndicate of financial institutions. Under the terms of the agreement, the facility is reviewed annually, with
the next review scheduled in June 2017. The facility is revolving and extendible at each annual review for a further 364 day period
at the option of the syndicate. If not extended, the credit facility is converted at that time into a one-year term facility, with
the principal payable at the end of such one-year term. Management fully expects that the facility will be extended at each annual
review.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Advantage Oil & Gas Ltd. - 11







Liquidity and Capital Resources



The following table is a summary of the
Corporation’s capitalization structure:



|($000, except as otherwise indicated)   |  | December 31, 2016 |            
|--------------------------------------- |  | ----------------- | -----------
|Bank indebtedness (non-current)         |  | $                 | 153,102    
|Working capital deficit (1)             |  |                   | 6,167      
|Total debt (2)                          |  | $                 | 159,269    
|Shares outstanding                      |  |                   | 184,654,333
|Shares closing market price ($/share)   |  | $                 | 9.12       
|Market capitalization (3)               |  | $                 | 1,684,048  
|                                        |  |                   |            
|Total capitalization                    |  | $                 | 1,843,317  
|                                        |  |                   |            
|Total debt to funds from operations (4) |  |                   | 1.0        



| | (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) | Total debt is a non-GAAP measure that includes bank indebtedness and working capital deficit.
| | --- | ---------------------------------------------------------------------------------------------

| | (3) | Market capitalization is a non-GAAP measure calculated by multiplying shares outstanding by the
closing market share price on the applicable date.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Total debt to funds from operations is calculated by dividing total debt by funds from operations
for the previous four quarters.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------



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, bank indebtedness, and share
capital. Advantage may manage its capital structure by issuing new common shares, repurchasing outstanding common shares, obtaining
additional financing through bank indebtedness, refinancing current debt, issuing other financial or equity-based instruments,
declaring a dividend, or adjusting capital spending. The capital structure is reviewed by Management and the Board of Directors
on an ongoing basis. Management of the Corporation’s capital structure is facilitated through its financial and operational
forecasting processes. Selected forecast information is frequently provided to the Board of Directors. This continual financial
assessment process further enables the Corporation to mitigate risks. The Corporation continues to satisfy all liabilities and
commitments as they come due.



On March 8, 2016, Advantage’s 13,427,075
common share equity financing closed with net proceeds of $95.1 million raised and used initially to reduce bank indebtedness.
In the second quarter of 2016, Advantage renewed its Credit Facilities at $400 million, and $247 million or 62% was available at
December 31, 2016 (see “Bank Indebtedness, Credit Facilities and Other Obligations”). The Corporation’s annual
funds from operations of $167 million exceeded 2016 net capital expenditures by $39 million with the surplus cash flow used to
reduce bank indebtedness, resulting in a year-end 2016 total debt to trailing funds from operations of 1.0 times. Advantage has
a strong balance sheet, a disciplined commodity risk management program, an industry leading low cost structure, and substantial
available liquidity such that it is well positioned to continue successfully executing its multi-year development plan at Glacier,
Alberta. Advantage’s guidance for 2017 estimates that funds from operations will grow to $210 million, and is expected to
reduce total debt to trailing cash flow to 0.7 times at year-end 2017.



Shareholders’ Equity



As at December 31, 2016, Advantage had
184.7 million common shares outstanding. During the year ended December 31, 2016, Advantage issued 0.4 million common shares to
service providers in exchange for the exercise of 0.9 million stock options. As at December 31, 2016, a total of 3.1 million stock
options and 1.3 million performance awards are unexercised which represents 2.4% of Advantage’s total outstanding common
shares. On March 8, 2016, Advantage closed the equity financing of 13,427,075 common shares issued for net proceeds of $95.1 million
which was used initially to reduce bank indebtedness. As at March 2, 2017, Advantage had 184.9 million common shares outstanding.



Advantage Oil & Gas Ltd. - 12







Bank Indebtedness, Credit Facilities
and Other Obligations



At December 31, 2016, Advantage had bank
indebtedness outstanding of $153.1 million, a decrease of $133.4 million since December 31, 2015. The change in bank indebtedness
was consistent with planned capital expenditure activity in our approved 2016 budget and the equity financing that closed on March
8, 2016 in which net proceeds of $95.1 million was raised. Advantage’s credit facilities have a borrowing base of $400 million
and is collateralized by a $1 billion floating charge demand debenture covering all assets of the Corporation (the “Credit
Facilities”). The borrowing base for the Credit Facilities is determined by the banking syndicate through a thorough evaluation
of our reserve estimates based upon their own 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 second quarter of 2016, the Credit Facilities
borrowing base was renewed at $400 million comprised of a $20 million extendible revolving operating loan facility from one financial
institution and a $380 million extendible revolving loan facility from a syndicate of financial institutions. Advantage requested
a reduction from the prior $450 million borrowing base as its strong balance sheet and estimated capital requirements for future
growth provides ample flexibility and we expect to save interest costs of $0.4 million per year. The only prior financial covenant
to maintain a minimum cash flow to interest expense ratio of 3.5:1 was removed on June 10, 2016. The next annual review is 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.



Advantage had a working capital deficit
of $6.2 million as at December 31, 2016 and is comparable to the $7.2 million at December 31, 2015 due to a combination of higher
trade receivables attributable to increasing revenues, offset by slightly higher trade payables from increased capital activity
at December 31, 2016 as compared to December 31, 2015. Our working capital includes items expected for normal operations such as
trade receivables, prepaid expenses, deposits, and trade payables and accruals. Working capital varies primarily due to the timing
of such items, the current level of business activity including our capital expenditure program, commodity price volatility, and
seasonal fluctuations. Our working capital is normally in a deficit position due to our capital development activities. We do not
anticipate any problems in meeting future obligations as they become due as they can be satisfied with funds from operations and
our available Credit Facilities.



Capital Expenditures



|                                                  |  | Three months ended |        |  | Year ended  |  
|------------------------------------------------- |  | ------------------ | ------ |  | ----------- | -
|                                                  |  | December 31        |        |  | December 31 |  
|($000)                                            |  | 2016               |        |  | 2015        |  
|Drilling, completions and workovers               |  | $                  | 21,188 |  |             | $
|Well equipping and facilities                     |  |                    | 8,537  |  |             |  
|Other                                             |  |                    | 167    |  |             |  
|Expenditures on property, plant and equipment     |  |                    | 29,892 |  |             |  
|Expenditures on exploration and evaluation assets |  |                    | 151    |  |             |  
|Net capital expenditures (1)                      |  | $                  | 30,043 |  |             | $



(1) Net capital expenditures excludes change in decommissioning
liability.



Advantage invested $128 million on property,
plant, equipment and land purchases for the year ended December 31, 2016 with $30 million invested in the fourth quarter of 2016.



During the fourth quarter of 2016, design
work continued on the announced expansion of our 100% owned Glacier gas plant to 400 mmcf/d raw gas capability and 6,800 bbls/d
of liquids capability. Plant licensing and engineering design were progressed while procurement of major pieces of equipment was
initiated. Subsequent to December 31, 2016, Advantage received license approval from the Alberta Energy Regulator (“AER”)
for the expansion. We expect that construction of the expanded plant to 400 mmcf/d will be finished early in the second quarter
of 2018. During 2016, a significant portion of our capital expenditures were directed to gas plant and pipeline infrastructure.
In total $66 million, or 51% was spent on infrastructure and well tie-in projects. Advantage’s strategy of owning and operating
our own infrastructure has helped us achieve an industry leading cost structure.



Throughout 2016, Advantage drilled 13 Montney
gas wells. Due to strong well performance and an inventory of available production, only one well was drilled during the first
half of 2016. In the second half of 2016, Advantage began drilling on a six-well pad and then moved to a sixteen-well pad with
two rigs running concurrently. The sixteen-well pad is expected to be finished drilling by March 2017 with the completion of this
pad scheduled for the summer of 2017.



Advantage Oil & Gas Ltd. - 13







An eight-well pad drilled during the prior
winter season was completed in the third quarter of 2016. The pad consisted of six Lower Montney wells, one Middle Montney well
and one Upper Montney well. Each of the eight wells was flowed in-line to our Glacier plant for an average of 48 hours and resulted
in a combined production rate of 120 mmcfe/d based on an average flowing pressure of 11,182 kPa (1,623 psi). Production from this
pad began in December 2016 when the first well was placed on-stream at restricted rates to control the amount of frac sand flow-back.
Due to the significant productivity, the remaining wells on this pad are expected to meet production targets announced in our 2017
Budget and Development Plan (news release November 28, 2016) until the second quarter of 2017. In December, completion operations
commenced on two six-well pads with operations expected to be complete by the end of the first quarter of 2017. During 2016, Advantage
finished completion operations on fifteen wells.



Advantage’s Upper, Middle and Lower
Montney wells are continuing to demonstrate strong production performance. Advantage’s current standing well inventory consists
of twenty-nine total wells of which thirteen are completed and sixteen remain uncompleted providing more than sufficient productive
capacity to attain our 2017 annual production target with the wells that are currently completed leaving the sixteen uncompleted
wells for 2018 growth.



In 2016, Advantage acquired 16 additional sections of Doig/Montney
land rights in the Glacier, Valhalla and Wembley areas proximal to our existing land holdings. Subsequent to year end, Advantage
acquired an additional 3.5 net sections of Doig/Montney rights near Glacier and Valhalla. Advantage now holds a total of 157 net
sections (100,480 net acres) of either Doig or Montney rights.



Sources and Uses of Funds



The following table summarizes the various
funding requirements during the years ended December 31, 2016 and 2015 and the sources of funding to meet those requirements:



|                                             |  | Year ended  |        
|-------------------------------------------- |  | ----------- | -------
|                                             |  | December 31 |        
|($000)                                       |  | 2016        |        
|Sources of funds                             |  |             |        
|Funds from operations                        |  | $           | 166,861
|Net proceeds of equity financing             |  |             | 95,130 
|Increase in bank indebtedness                |  |             | -      
|Change in non-cash working capital and other |  |             | 1,598  
|                                             |  | $           | 263,589
|Uses of funds                                |  |             |        
|Decrease in bank indebtedness                |  | $           | 133,718
|Net capital expenditures                     |  |             | 128,014
|Maturity of convertible debenture            |  |             | -      
|Change in non-cash working capital and other |  |             | -      
|Expenditures on decommissioning liability    |  |             | 1,857  
|                                             |  | $           | 263,589



Bank indebtedness decreased during the
year ended December 31, 2016 as a result of the $95.1 million net proceeds raised in the equity financing that closed on March
8, 2016, and funds from operations that exceeded net capital expenditures. We monitor the debt level to ensure an optimal mix of
financing and cost of capital that will provide a maximum return to our shareholders.



Advantage Oil & Gas Ltd. - 14









Annual Financial Information



The following is a summary of selected financial information
of the Corporation for the years indicated.



|                                           |  | Year ended    |           |   | Year ended    |   |           | Year ended    | 
|------------------------------------------ |  | ------------- | --------- | - | ------------- | - | --------- | ------------- | 
|                                           |  | Dec. 31, 2016 |           |   | Dec. 31, 2015 |   |           | Dec. 31, 2014 | 
|                                           |  |               |           |   |               |   |           |               | 
|Continuing Operations - Advantage          |  |               |           |   |               |   |           |               | 
|Total sales (before royalties) ($000)      |  | $             | 161,933   |   |               | $ | 132,311   |               | 
|Net income (loss) ($000)                   |  | $             | (15,734   | ) |               | $ | 21,378    |               | 
|per share - basic                          |  | $             | (0.09     | ) |               | $ | 0.13      |               | 
|per share - diluted                        |  | $             | (0.09     | ) |               | $ | 0.12      |               | 
|Total assets ($000)                        |  | $             | 1,496,459 |   |               | $ | 1,517,443 |               | 
|Long term financial liabilities ($000) (1) |  | $             | 153,102   |   |               | $ | 286,519   |               | 
|                                           |  |               |           |   |               |   |           |               | 
|Discontinued Operations - Longview         |  |               |           |   |               |   |           |               | 
|Total sales (before royalties) ($000)      |  | $             | -         |   |               | $ | -         |               | 
|Net income (loss) ($000)                   |  | $             | -         |   |               | $ | -         |               | 
|per share - basic and diluted              |  | $             | -         |   |               | $ | -         |               | 



(1) Long term financial liabilities exclude derivative
liability, decommissioning liability and deferred income tax liability.



Advantage Oil & Gas Ltd. - 15







Quarterly Performance



|                                           |  | 2016 |         |   | 2015 |  
|------------------------------------------ |  | ---- | ------- | - | ---- | -
|($000,
    except as otherwise
 indicated) |  | Q4   |         |   | Q3   |  
|                                           |  |      |         |   |      |  
|Daily
    production                       |  |      |         |   |      |  
|Natural
    gas (mcf/d)                    |  |      | 215,369 |   |      |  
|Liquids
    (bbls/d)                       |  |      | 949     |   |      |  
|Total
    (mcfe/d)                         |  |      | 221,063 |   |      |  
|Average
    prices                         |  |      |         |   |      |  
|Natural
    gas ($/mcf)                    |  |      |         |   |      |  
|Excluding
    hedging                      |  | $    | 3.02    |   |      | $
|Including
    hedging                      |  | $    | 3.35    |   |      | $
|AECO
    daily                             |  | $    | 3.09    |   |      | $
|AECO
    monthly                           |  | $    | 2.81    |   |      | $
|Liquids
    ($/bbl)                        |  |      |         |   |      |  
|Including
    hedging                      |  | $    | 53.01   |   |      | $
|Edmonton
    Light ($/bbl)                 |  | $    | 60.76   |   |      | $
|Total
    sales including realized hedging |  | $    | 71,090  |   |      | $
|Net
    income (loss)                      |  | $    | (8,845  | ) |      | $
|per
    share - basic                      |  | $    | (0.05   | ) |      | $
|per
    share - diluted                    |  | $    | (0.05   | ) |      | $
|Funds
    from operations                  |  | $    | 54,610  |   |      | $



The table above highlights the Corporation’s
performance for the fourth quarter of 2016 and also for the preceding seven quarters. A production level of 135 mmcfe/d was reached
in early 2014 and maintained as we drilled the required well inventory and completed the first phase of commissioning operations
at our expanded Glacier gas plant in July 2015 at which time production capability reached 183 mmcfe/d. The Corporation’s
production for the second half of 2015 and first quarter of 2016 was negatively impacted by TCPL unplanned firm and interruptible
service restrictions in addition to Advantage’s planned outages required to install new equipment for the Glacier gas plant
expansion to 250 mmcfe/d. In the second half of 2016, we were less affected by TCPL restrictions and we attained production levels
in excess of 220 mmcfe/d, consistent with our multi-year development plan. In the second half of 2016, we reduced operating costs
through reduced water disposal, more efficient equipment maintenance procedures and higher plant throughput. Annual production
for 2016 was 203 mmcfe/d, which was within our previously announced Budget production guidance range of 190 to 210 mmcfe/d.



Sales and funds from operations did not
increase as rapidly as production through 2015 and early 2016 due to an offsetting decline in natural gas prices. This decrease
has been partially offset by continued production growth through the quarters and gains realized from our commodity risk management
program. Although Advantage has generally reported net income, we reported a small net loss in the second quarter of 2015 when
gas prices weakened and when we had significantly less gains on derivative contracts. The net loss reported in the second quarter
of 2016 and fourth quarter of 2016 were due primarily to the recognition of unrealized derivative losses attributable to the decrease
in the fair value of our outstanding derivative contracts (see “Commodity Price Risk and Market Diversification”).
Advantage’s production growth, industry leading low cost structure, strong capital efficiencies and commodity risk management
program have achieved long-term profitability despite the current challenging low natural gas price environment.



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Critical Accounting Estimates



The preparation of financial statements
in accordance with IFRS requires Management to make certain judgments and estimates. Changes in these judgments and estimates could
have a material impact on the Corporation’s financial results and financial condition.



Management relies on the estimate of reserves
as prepared by the Corporation’s independent qualified reserves evaluator. The process of estimating reserves is critical
to several accounting estimates. The process of estimating reserves is complex and requires significant judgments and decisions
based on available geological, geophysical, engineering and economic data. These estimates may change substantially as additional
data from ongoing development and production activities becomes available and as economic conditions impact natural gas and liquids
prices, operating expense, royalty burden changes, and future development costs. Reserve estimates impact net income (loss) and
comprehensive income (loss) through depreciation and impairment of natural gas and liquids properties. The reserve estimates are
also used to assess the borrowing base for the Corporation’s Credit Facilities. Revision or changes in the reserve estimates
can have either a positive or a negative impact on asset values, net income (loss), comprehensive income (loss) and the borrowing
base of the Corporation.



Management’s process of determining
the provision for deferred income taxes and the provision for decommissioning liability costs and related accretion expense are
based on estimates. These estimates are significant and can include proved and probable reserves, future production rates, future
commodity prices, future costs, future interest rates, future tax rates and other relevant assumptions. Revisions or changes in
any of these estimates can have either a positive or a negative impact on asset and liability values, net income (loss) and comprehensive
income (loss).



In accordance with IFRS, derivative assets
and liabilities are recorded at their fair values at the reporting date, with gains and losses recognized directly into comprehensive
income (loss) in the same period. The fair value of derivatives outstanding is an estimate based on pricing models, estimates,
assumptions and market data available at that time. As such, the recognized amounts are non-cash items and the actual gains or
losses realized on eventual cash settlement can vary materially due to subsequent fluctuations in commodity prices as compared
to the valuation assumptions.



Changes in Accounting Policies



There have been no changes in accounting
policies during the year ended December 31, 2016.



Accounting Pronouncements not 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 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.



Evaluation of Disclosure Controls and
Procedures



Advantage’s Chief Executive Officer
and Chief Financial Officer have designed disclosure controls and procedures (“DC&P”), or caused it to be designed
under their supervision, to provide reasonable assurance that material information relating to the Corporation is made known to
them by others, particularly during the period in which the annual filings are being prepared, and information required to be disclosed
by the Corporation in its annual filings, interim filings or other reports filed or submitted by it under securities legislation
is recorded, processed, summarized and reported within the time periods specified in securities legislation.



Management of Advantage, including our Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the Corporation’s DC&P as at December 31, 2016. Based
on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the DC&P are effective as of
the end of the year, in all material respects.



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Evaluation of Internal Controls over
Financial Reporting



Advantage’s Chief Executive Officer
and Chief Financial Officer are responsible for establishing and maintaining internal control over financial reporting (“ICFR”).
They have as at the financial year end December 31, 2016, designed ICFR, or caused it to be designed under their supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with IFRS. The control framework Advantage’s officers used to design the Corporation’s ICFR
is the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations.



Management of Advantage, including our
Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Corporation’s ICFR as at December
31, 2016. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the ICFR are effective
as of the end of the year, in all material respects.



Advantage’s Chief Executive Officer
and Chief Financial Officer are required to disclose any change in the ICFR that occurred during our most recent interim period
that has materially affected, or is reasonably likely to materially affect, the Corporation’s ICFR. No material changes in
the ICFR were identified during the interim period ended December 31, 2016 that have materially affected, or are reasonably likely
to materially affect, our ICFR.



It should be noted that while the Chief
Executive Officer and Chief Financial Officer believe that the Corporation’s design of DC&P and ICFR provide a reasonable
level of assurance that they are effective, they do not expect that the control system will prevent all errors and fraud. A control
system, no matter how well conceived or operated, does not provide absolute, but rather is designed to provide reasonable assurance
that the objective of the control system is met. The Corporation’s ICFR may not prevent or detect all misstatements because
of inherent limitations. Additionally, 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 deterioration in the degree of compliance with the Corporation’s
policies and procedures.



Corporate Governance



The Corporation’s corporate governance
practices can be found in the Management Information Circular.



As a foreign private issuer listed on the
New York Stock Exchange (the "NYSE"), Advantage is not required to comply with most of the NYSE rules and listing standards
and instead may comply with domestic Canadian requirements. Advantage is, however, required to comply with the following NYSE Rules:
(i) Advantage must have an audit committee that satisfies the requirements of Rule 10A-3 under the United States Securities Exchange
Act of 1934, as amended; (ii) the Chief Executive Officer must promptly notify the NYSE in writing after an executive officer becomes
aware of any non-compliance with the applicable NYSE Rules; (iii) Advantage must submit an executed section 303A annual written
affirmation to the NYSE, as well as a Section 303A interim affirmation each time certain changes occurs to the audit committee;
and (iv) Advantage must annually provide a brief description of any significant differences between its corporate governance practices
and those followed by U.S. domestic issuers under NYSE listing standards. Advantage has reviewed the NYSE listing standards followed
by U.S. domestic issuers listed on the NYSE and confirms that its corporate governance practices do not differ significantly from
such standards.



Additional Information



Additional information relating to Advantage
can be found on SEDAR at www.sedar.com and the Corporation’s website at www.advantageog.com. Such other information
includes the annual information form, the management information circular, press releases, material change reports, material contracts
and agreements, and other financial reports. The annual information form will be of particular interest for current and potential
shareholders as it discusses a variety of subject matter including the nature of the business, description of our operations, general
and recent business developments, risk factors, reserves data and other oil and gas information.



March 2, 2017





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