Consolidated Management’s Discussion & Analysis



The following Management’s Discussion
and Analysis (“MD&A”), dated as of March 23, 2012, 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, 2011 and should be read in conjunction
with the December 31, 2011 audited consolidated financial statements. The consolidated financial statements have been prepared
in accordance with International Financial Reporting Standards (“IFRS”) and all references are to Canadian dollars
unless otherwise indicated. The term "boe" or barrels of oil equivalent may be misleading, particularly if used in isolation.
A boe conversion ratio of six thousand cubic feet of natural gas to one barrel of oil equivalent (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.



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
prior to the consideration of how these activities are financed or how the results are taxed. Investors should be cautioned that
these measures should not be construed as an alternative to net income, comprehensive income, 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. Cash netbacks are dependent on the determination of funds from operations
and include the primary cash sales and expenses on a per boe 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)                                    |  | 2011               |         |   | 2010 |   |         | % change    |  |  | 2011 |   
|Cash provided by operating activities     |  | $                  | 79,932  |   |      | $ | 60,964  |             |  |  | 31   | % 
|Expenditures on decommissioning liability |  |                    | 761     |   |      |   | 1,811   |             |  |  | (58  | )%
|Changes in non-cash working capital       |  |                    | (21,922 | ) |      |   | (16,468 | )           |  |  | 33   | % 
|Finance expense(1)                        |  |                    | (4,137  | ) |      |   | (5,679  | )           |  |  | (27  | )%
|Funds from operations                     |  | $                  | 54,634  |   |      | $ | 40,628  |             |  |  | 34   | % 





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



Creation of Longview Oil Corp.



On April 14, 2011, Advantage’s wholly-owned
subsidiary, Longview Oil Corp. (“Longview”), completed its initial public offering (the “Offering”) at
a price of $10 per common share issuing 17,250,000 common shares and raising gross proceeds of $172.5 million (including full exercise
of the over-allotment option on April 28, 2011). Concurrent with the closing of the Offering, Longview purchased certain oil-weighted
assets (the “Acquired Assets”) from Advantage for total consideration of $546.9 million, comprised of 29,450,000 common
shares of Longview representing a 63% equity ownership and $252.4 million in cash (the “Acquisition”). The Acquired
Assets were purchased with an effective date of January 1, 2011 and a closing date of April 14, 2011. As Advantage is the parent
company and has a majority ownership interest of Longview, the financial and operating results of Longview are consolidated 100%
within Advantage and non-controlling interest has been recognized which represents Longview’s independent shareholders 37%
ownership interest in the net assets and income of Longview. Refer to the MD&A section “Supplementary Financial and Operating
information for Advantage and Longview” which provides detailed financial and operational information with respect to the
separate legal entities.



As the Acquisition closed on April 14,
2011, financial and operating results from the Acquired Assets belong to Advantage for the period prior to April 14, 2011 and are
solely attributed to Advantage’s shareholders. For the period from April 14 to December 31, 2011, the financial and operating
results from the Acquired Assets belong to Longview and are attributed to Longview’s shareholders based on their ownership
interests.











Upon closing of the Acquisition, Advantage
entered into a Technical Services Agreement (the “TSA”) with Longview. Under the TSA, Advantage will provide the necessary
personnel and technical services to manage Longview's business and Longview will reimburse Advantage on a monthly basis for its
share of administrative charges based on respective levels of production. Longview has an independent board of directors with three
initial members. The officers of Longview provide services to Longview under the TSA but remain employees of Advantage.



Supplementary Financial and Operating Information for Advantage
and Longview



The following information has been presented
to provide additional information with respect to the legal entity financial and operating information for each of Advantage and
Longview. As the Acquisition closed on April 14, 2011, financial and operating results from the Acquired Assets belong to Advantage
for the period prior to April 14, 2011 and are solely attributed to Advantage’s shareholders. For the period from April 14
to December 31, 2011, the financial and operating results from the Acquired Assets belong to Longview and are attributed to Longview’s
shareholders based on their ownership interests.





|                                      |  | Three months ended |         |   | Year ended        |  
|------------------------------------- |  | ------------------ | ------- | - | ----------------- | -
|                                      |  | December 31, 2011  |         |   | December 31, 2011 |  
|                                      |  | Advantage          |         |   | Longview          |  
|Production                            |  |                    |         |   |                   |  
|Natural gas (mcf/d)                   |  |                    | 127,265 |   |                   |  
|Crude oil (bbls/d)                    |  |                    | 630     |   |                   |  
|NGLs (bbls/d)                         |  |                    | 748     |   |                   |  
|Total (boe/d)                         |  |                    | 22,589  |   |                   |  
|Natural gas (%)                       |  |                    | 94      | % |                   |  
|Crude oil (%)                         |  |                    | 3       | % |                   |  
|NGLs (%)                              |  |                    | 3       | % |                   |  
|                                      |  |                    |         |   |                   |  
|Natural Gas Prices ($/mcf)            |  |                    |         |   |                   |  
|Realized natural gas prices           |  |                    |         |   |                   |  
|Excluding hedging                     |  | $                  | 3.16    |   |                   | $
|Including hedging                     |  | $                  | 3.78    |   |                   | $
|                                      |  |                    |         |   |                   |  
|Crude Oil and NGLs Prices ($/bbl)     |  |                    |         |   |                   |  
|Realized crude oil prices             |  |                    |         |   |                   |  
|Excluding hedging                     |  | $                  | 91.40   |   |                   | $
|Including hedging                     |  | $                  | 91.40   |   |                   | $
|Realized NGLs prices                  |  |                    |         |   |                   |  
|Excluding hedging                     |  | $                  | 87.23   |   |                   | $
|Realized crude oil and NGLs prices    |  |                    |         |   |                   |  
|Excluding hedging                     |  | $                  | 89.14   |   |                   | $
|Including hedging                     |  | $                  | 89.14   |   |                   | $
|                                      |  |                    |         |   |                   |  
|Cash netbacks ($/boe)                 |  |                    |         |   |                   |  
|Petroleum and natural gas sales       |  | $                  | 23.24   |   |                   | $
|Royalties                             |  |                    | (2.16   | ) |                   |  
|Realized gain (loss) on derivatives   |  |                    | 3.49    |   |                   |  
|Operating expense                     |  |                    | (4.90   | ) |                   |  
|Operating                             |  |                    | 19.67   |   |                   |  
|General and administrative expense(2) |  |                    | (2.12   | ) |                   |  
|Finance expense(3)                    |  |                    | (1.44   | ) |                   |  
|Miscellaneous income                  |  |                    | 0.04    |   |                   |  
|Cash netbacks                         |  | $                  | 16.15   |   |                   | $





| | (1) | The year ended December 31, 2011 represents Longview's financial and operating results for the period from April 14 to December
31, 2011.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------

| | (2) | General and administrative expense excludes non-cash G&A and non-cash share-based compensation expense.
| | --- | -------------------------------------------------------------------------------------------------------

| | (3) | Finance expense excludes non-cash accretion expense.
| | --- | ----------------------------------------------------



Advantage Oil & Gas Ltd. - 2









|                                                   |  | Three months ended |        |   | Year ended        |  
|-------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | -
|                                                   |  | December 31, 2011  |        |   | December 31, 2011 |  
|($000, except as otherwise indicated)              |  | Advantage          |        |   | Longview          |  
|Sales including realized hedging                   |  |                    |        |   |                   |  
|Natural gas sales                                  |  | $                  | 36,986 |   |                   | $
|Realized hedging gains                             |  |                    | 7,262  |   |                   |  
|Natural gas sales including hedging                |  |                    | 44,248 |   |                   |  
|Crude oil and NGLs sales                           |  |                    | 11,307 |   |                   |  
|Realized hedging losses                            |  |                    | -      |   |                   |  
|Crude oil and NGLs sales including hedging         |  |                    | 11,307 |   |                   |  
|Total                                              |  | $                  | 55,555 |   |                   | $
|per boe                                            |  | $                  | 26.73  |   |                   | $
|                                                   |  |                    |        |   |                   |  
|Royalties                                          |  | $                  | 4,481  |   |                   | $
|per boe                                            |  | $                  | 2.16   |   |                   | $
|As a percentage of petroleum and natural gas sales |  |                    | 9.3    | % |                   |  
|                                                   |  |                    |        |   |                   |  
|Operating expense                                  |  | $                  | 10,191 |   |                   | $
|per boe                                            |  | $                  | 4.90   |   |                   | $
|                                                   |  |                    |        |   |                   |  
|General and administrative expense(2)              |  | $                  | 4,400  |   |                   | $
|per boe                                            |  | $                  | 2.12   |   |                   | $
|                                                   |  |                    |        |   |                   |  
|Interest on bank indebtedness                      |  | $                  | 989    |   |                   | $
|per boe                                            |  | $                  | 0.48   |   |                   | $
|                                                   |  |                    |        |   |                   |  
|Interest on convertible debentures                 |  | $                  | 1,995  |   |                   | $
|per boe                                            |  | $                  | 0.96   |   |                   | $
|                                                   |  |                    |        |   |                   |  
|Miscellaneous income                               |  | $                  | 88     |   |                   | $
|per boe                                            |  | $                  | 0.04   |   |                   | $
|                                                   |  |                    |        |   |                   |  
|Funds from operations                              |  | $                  | 33,587 |   |                   | $
|per boe                                            |  | $                  | 16.15  |   |                   | $
|per share(3) (4)                                   |  | $                  | 0.20   |   |                   | $
|                                                   |  |                    |        |   |                   |  
|Dividends from Longview (declared by Longview)     |  | $                  | 4,417  |   |                   | $
|Expenditures on property, plant and equipment      |  | $                  | 75,572 |   |                   | $
|Expenditures on exploration and evaluation assets  |  |                    | 1,604  |   |                   | $
|Total capital spending                             |  | $                  | 77,176 |   |                   | $
|                                                   |  |                    |        |   |                   |  
|Debt and working capital                           |  |                    |        |   |                   |  
|Bank indebtedness                                  |  |                    |        |   |                   |  
|Convertible debentures                             |  |                    |        |   |                   |  
|Working capital deficit                            |  |                    |        |   |                   |  





| | (1) | The year ended December 31, 2011 represents Longview's financial and operating results for the period from April 14 to December
31, 2011.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------

| | (2) | General and administrative expense excludes non-cash G&A and non-cash share-based compensation expense.
| | --- | -------------------------------------------------------------------------------------------------------

| | (3) | Based on basic weighted average shares outstanding applicable to each legal entity.
| | --- | -----------------------------------------------------------------------------------

| | (4) | Consolidated funds from operations per share excludes funds from operations attributable to the non-controlling interest of
Longview.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------



Advantage Oil & Gas Ltd. - 3







Transition to International Financial
Reporting Standards



The consolidated financial statements,
MD&A and comparative information have been prepared in accordance with IFRS representing generally accepted accounting principles
(“GAAP”) for publicly accountable enterprises in Canada. The transition date to IFRS was January 1, 2010 and comparative
figures for 2010 and Advantage’s financial position as at January 1, 2010 have been restated to IFRS from the previous Canadian
generally accepted accounting principles (“Previous GAAP”). Reconciliations to IFRS from Previous GAAP financial statements
including the impact of the transition on the Corporation's reported financial position and financial performance, and the nature
and effect of significant changes in accounting policies from those used in the Corporation’s Previous GAAP consolidated
financial statements for the year ended December 31, 2010, are summarized in note 25 to the audited consolidated financial statements.



Forward-Looking Information



This MD&A contains certain 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, statements with respect to terms of the TSA with Longview; effect of
commodity prices on the Corporation's Corporation’s financial condition and performance, including cash provided by operating
activities, funds from operations, net income and comprehensive income; industry conditions; effect of commodity prices on sales,
drilling activity and supply levels; effect of derivative contracts on sales and cash flows; the Corporation's hedging strategy;
effect of the Corporation's risk management activities; expected effect on production from the completion of facilities and infrastructure
expansion work in Glacier, Alberta; expected production from the Glacier development; projected royalty rates; average royalty
rates; terms of the Plans and the grants of restricted shares; terms of the convertible debentures; the Corporation's estimated
tax pools; timing of expiry of federal non-capital loss carry forward; future commitments and contractual obligations; effect of
changes in reserves estimates or commodity prices on the borrowing base of the Credit Facilities (as defined herein); terms of
the Credit Facilities, including Management's expectations regarding extension of the term of the Credit Facilities; the Corporation's
plans for managing its capital structure; the Corporation's ability to satisfy all liabilities and commitments as they come due;
our future operating and financial results; supply and demand for oil and natural gas; projections of market prices and costs;
effect of natural gas, oil prices and exchange rates on the Corporation's financial performance; the Corporation’s exploration
and drilling plans; focus of spending and capital budgets; capital expenditure programs; the focus and anticipated timing of capital
expenditures; plans for development of the Middle and Lower Montney; projected average production; anticipated timing of incremental
production; expected exit rate production for Longview; the Corporation's business strategy and it plans for its assets; Longview's
business strategy; the performance characteristics of our properties; and the amount of general and administrative expenses.



In addition, statements relating to "reserves"
or "resources" are deemed to be forward-looking statements, as they involve the implied assessment, based on certain
estimates and assumptions, that the resources and reserves described can be profitably produced in the future.



These forward-looking statements involve
substantial known and unknown risks and uncertainties, many of which are beyond our control, including, but not limited to, changes
in general economic, market and business conditions; stock market volatility; changes to legislation and regulations and how they
are interpreted and enforced; changes to investment eligibility or investment criteria; 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, 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



Advantage Oil & Gas Ltd. - 4







damage to wells, production facilities,
other property and the environment or in personal injury; changes or fluctuations in production levels; competition from other
producers; the lack of availability of qualified personnel or management; individual well productivity; ability to access sufficient
capital from internal and external sources; credit risk; and the risks and uncertainties are 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, Advantage has made assumptions regarding, but not limited to: conditions in general economic and financial
markets; effects of regulation by governmental agencies; current commodity prices and 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 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 oil and gas properties in the manner currently contemplated;
current or, where applicable, proposed assumed industry conditions, laws and regulations will continue in effect or as anticipated
as described herein; and the estimates of the Corporation’s production and reserves 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.



Overview



|                                             |  | Three months ended |        |  |      |   |        | Year ended  |  |  |      |  
|-------------------------------------------- |  | ------------------ | ------ |  | ---- | - | ------ | ----------- |  |  | ---- | -
|                                             |  | December 31        |        |  |      |   |        | December 31 |  |  |      |  
|                                             |  | 2011               |        |  | 2010 |   |        | % change    |  |  | 2011 |  
|Cash provided by operating activities ($000) |  | $                  | 79,932 |  |      | $ | 60,964 |             |  |  | 31   | %
|Funds from operations ($000)                 |  | $                  | 54,634 |  |      | $ | 40,628 |             |  |  | 34   | %
|per share (1)                                |  | $                  | 0.28   |  |      | $ | 0.25   |             |  |  | 12   | %
|per boe                                      |  | $                  | 20.18  |  |      | $ | 18.16  |             |  |  | 11   | %



(1) Based on
basic weighted average shares outstanding and excludes funds from operations attributable to the non-controlling interest of
Longview.



Funds from operations for 2011 have been
strong, driven by increases in production and continued gains from our hedging program, which demonstrates the clear ongoing improvement
in our financial and operating results from our focused development program. Average daily production during the fourth quarter
of 2011 increased 21% above the same period of 2010, with a 30% increase in natural gas production and a 6% increase in crude oil
production, partially offset by a 24% decrease NGLs production. For the three months ended December 31, 2011, we recognized a net
realized derivative gain of $6.6 million and for the year ended December 31, 2011, we recognized a net realized derivative gain
of $25.8 million on settled derivative contracts, primarily as a result of lower average actual natural gas prices during the periods
as compared to our established average hedge prices. Our successful commodity price risk management program continued to realize
significant gains on derivatives during 2011 that has helped to offset the continued weak natural gas prices and positively impact
funds from operations. Our net realized derivative gain has decreased during 2011 as compared to 2010 as we had less natural gas
production hedged for this year at lower average prices and we have generally



Advantage Oil & Gas Ltd. - 5







realized losses on our crude oil hedges.
Funds from operations have also benefited during this year from higher crude oil prices and continued cost reductions, such as
operating costs, general and administrative expense, and finance expense. Unfortunately, natural gas prices still remain weak and
pose a continuing challenge to the entire natural gas industry. When comparing the current quarter to the third quarter of 2011,
our funds from operations increased 9% and funds from operations per boe were 6% higher as realized crude oil and NGL prices increased
during this quarter and general costs continued to decrease, including operating costs.



Our financial and operating results during
2011 as compared to 2010 have been partially impacted by dispositions completed during the second quarter of 2010. On May 31 and
June 3, 2010, we closed two asset dispositions of non-core natural gas weighted properties for net proceeds of $66.5 million and
representing production of approximately 1,700 boe/d. The net proceeds from the various dispositions were utilized to reduce outstanding
debt. As a result of the dispositions, total funds from operations was negatively impacted for 2011 as compared to 2010 with all
sales and expenses generally impacted.



As a result of asset dispositions completed
in 2010 and 2011 and changes in commodity prices, historical financial and operating performance may not be indicative of actual
future performance.



The primary factor that causes significant
variability of the Corporation’s cash provided by operating activities, funds from operations, net income and comprehensive
income is commodity prices. Refer to the section “Commodity Prices and Marketing” for a more detailed discussion of
commodity prices and our price risk management.



Advantage Oil & Gas Ltd. - 6







Petroleum, Natural Gas Sales and Hedging



|                                               |  | Three months ended |        |   |      |   |        | Year ended  |  |  |      |   
|---------------------------------------------- |  | ------------------ | ------ | - | ---- | - | ------ | ----------- |  |  | ---- | --
|                                               |  | December 31        |        |   |      |   |        | December 31 |  |  |      |   
|($000)                                         |  | 2011               |        |   | 2010 |   |        | % change    |  |  | 2011 |   
|Natural gas sales                              |  | $                  | 40,249 |   |      | $ | 34,081 |             |  |  | 18   | % 
|Realized hedging gains                         |  |                    | 7,262  |   |      |   | 12,871 |             |  |  | (44  | )%
|Natural gas sales including hedging            |  |                    | 47,511 |   |      |   | 46,952 |             |  |  | 1    | % 
|Crude oil and NGLs sales                       |  |                    | 52,051 |   |      |   | 42,140 |             |  |  | 24   | % 
|Realized hedging losses                        |  |                    | (704   | ) |      |   | (3,080 | )           |  |  | (77  | )%
|Crude oil and NGLs
    sales including hedging |  |                    | 51,347 |   |      |   | 39,060 |             |  |  | 31   | % 
|Total(1)                                       |  | $                  | 98,858 |   |      | $ | 86,012 |             |  |  | 15   | % 

(1) Total excludes unrealized derivative
gains and losses.



Total sales, excluding hedging, increased
21% and 11% for the three months and year ended December 31, 2011 as compared to 2010, respectively. Sales have been positively
impacted from significant increases in our production during these periods due to our successful exploration and development activities.
Natural gas sales in particular have benefited from our Montney natural gas resource play at Glacier, Alberta where we have increased
production capacity with our Phase III facilities and infrastructure expansion work completed in the first quarter of 2011. Crude
oil and NGL production has also increased during the fourth quarter of 2011 due to production additions from Longview’s capital
expenditure program that began late in 2011, delayed by poor field conditions from severe wet weather. The increase in sales during
2011 has been partially offset by reduced production attributable to asset dispositions that closed in the second quarter of 2010.
We have also experienced an increase in sales during 2011 due to higher realized crude oil and NGLs prices, excluding hedging.
However, sales continues to be adversely impacted by the natural gas price environment that has been weak during the last several
years attributable to many factors, including continued high US domestic natural gas production that has increased supply and the
ongoing weak North American economy that has negatively impacted demand. These factors, in combination with mild weather conditions,
have resulted in historic high inventory levels that are currently well-above the five-year average. This current environment has
placed considerable downward pressure on natural gas prices.



Given the low natural gas price environment,
our commodity price risk management program has delivered realized natural gas hedging gains of $7.3 million and $28.7 million
for the three months and year ended December 31, 2011, respectively. As crude oil prices have remained relatively strong, we realized
minor crude oil hedging losses of $0.7 million for the three months and $2.8 million for the year ended December 31, 2011. The
Corporation enters derivative contracts whereby realized hedging gains and losses partially offset commodity price fluctuations,
which can positively or negatively impact sales. The realized natural gas hedging gains have been significant and helped us stabilize
cash flows and ensure that our capital expenditure program is substantially funded by such cash flows. However, we have no natural
gas hedges for 2012.



Production



|                    |  | Three months ended |         |   |      |  |         | Year ended  |  |  |      |   
|------------------- |  | ------------------ | ------- | - | ---- |  | ------- | ----------- |  |  | ---- | --
|                    |  | December 31        |         |   |      |  |         | December 31 |  |  |      |   
|                    |  | 2011               |         |   | 2010 |  |         | % change    |  |  | 2011 |   
|Natural gas (mcf/d) |  |                    | 137,480 |   |      |  | 106,125 |             |  |  | 30   | % 
|Crude oil (bbls/d)  |  |                    | 5,182   |   |      |  | 4,886   |             |  |  | 6    | % 
|NGLs (bbls/d)       |  |                    | 1,316   |   |      |  | 1,734   |             |  |  | (24  | )%
|Total (boe/d)       |  |                    | 29,411  |   |      |  | 24,308  |             |  |  | 21   | % 
|Natural gas (%)     |  |                    | 78      | % |      |  | 73      | %           |  |  |      |   
|Crude oil (%)       |  |                    | 18      | % |      |  | 20      | %           |  |  |      |   
|NGLs (%)            |  |                    | 4       | % |      |  | 7       | %           |  |  |      |   





Average daily production during the fourth
quarter of 2011 increased 21% above the same period of 2010, with a 30% increase in natural gas production and a 6% increase in
crude oil production, partially offset by a 24% decrease NGLs production. Production for the current quarter was 3% higher than
the 28,638 boe/d reported in the third quarter of 2011. For the year ended December 31, 2011, average daily production increased
16% above the prior year, with a 28% increase in natural gas production and decreases in both crude oil and NGLs production.



Advantage Oil & Gas Ltd. - 7









Production for 2010 and 2011 has continued
to be primarily impacted by Advantage’s significant production growth at Glacier, Alberta. During the second quarter of 2010
our 100% working interest gas plant (“Glacier gas plant”) was brought on-stream ahead of schedule with production rates
exceeding 50 mmcf/d (8,300 boe/d). Due to stronger than expected well performance, we were able to further increase Glacier production
exiting 2010 exceeding 60 mmcf/d (10,000 boe/d). Phase III of our Glacier development project was completed during the first quarter
of 2011 on-budget and ahead of schedule with production capacity at 100 mmcf/d (16,667 boe/d) resulting in a peak corporate production
rate of approximately 30,000 boe/d at March 31, 2011. During the third quarter of 2011, the Glacier gas plant experienced planned
facility downtime to complete our acid gas injection system and maintenance work conducted by TransCanada Pipelines (“TCPL”).
During the fourth quarter of 2011, we successfully commissioned the acid gas injection system which is now capable of disposing
acid gas volumes for plant inlet gas volumes in excess of 140 mmcf/d. In addition, TCPL completed further looping of their sales
pipeline lateral in preparation for our plant expansion to 140 mmcf/d. These projects represent significant milestones towards
achieving our Glacier Phase IV development and will provide additional flexibility for future production growth. Further plant
downtime will be required during the first and second quarters of 2012 to accommodate future equipment installations to finalize
the expansion of our Glacier gas plant processing capacity to 140 mmcf/d.



Longview’s daily production averaged
6,823 boe/d for the fourth quarter of 2011, an increase of 12% from 6,071 boe/d realized in the third quarter of 2011 with 75%
from crude oil and NGLs. During much of the spring and summer, field conditions were poor with severe wet weather that created
challenges for the industry to conduct regular well maintenance and sustain production levels. Fortunately, much of Longview’s
production is pipeline connected rather than trucked and they experienced less outages such that the weather impact was minimal.
However, routine well maintenance and their current year capital program were delayed while conditions improved. During the third
quarter Longview began to expedite maintenance activities, workovers and reactivations and commenced their 2011 Alberta capital
expenditure program in July with the Saskatchewan program beginning in September. The well maintenance and workover activity continued
into the fourth quarter and generally lead to higher operating costs during these periods. Production additions from their capital
expenditure program began at the end of the third quarter and resulted in their fourth quarter production increasing 12%.



Commodity Prices and Marketing



Natural Gas



|                            |  | Three months ended |      |  |      |   |      | Year ended  |  |  |      |   
|--------------------------- |  | ------------------ | ---- |  | ---- | - | ---- | ----------- |  |  | ---- | --
|                            |  | December 31        |      |  |      |   |      | December 31 |  |  |      |   
|($/mcf)                     |  | 2011               |      |  | 2010 |   |      | % change    |  |  | 2011 |   
|Realized natural gas prices |  |                    |      |  |      |   |      |             |  |  |      |   
|Excluding hedging           |  | $                  | 3.18 |  |      | $ | 3.49 |             |  |  | (9   | )%
|Including hedging           |  | $                  | 3.76 |  |      | $ | 4.81 |             |  |  | (22  | )%
|AECO daily index            |  | $                  | 3.20 |  |      | $ | 3.63 |             |  |  | (12  | )%



Realized natural gas prices, excluding
hedging, for the three months ended December 31, 2011 were 9% lower as compared to the same period of 2010 and decreased 10% for
the year ended December 31, 2011 as compared to the prior year. Our realized natural gas prices, excluding hedging, for this quarter
were 12% lower than the $3.62/mcf realized during the third quarter of 2011. Although natural gas prices have continued to remain
weak, our commodity hedging has resulted in realized natural gas prices, including hedging, that exceeds current market prices
and has reduced the volatility of our cash flows. However, realized natural gas prices, including hedging, have decreased more
during 2011 as compared to 2010 as we had less natural gas production hedged for this year at lower average prices. We have no
natural gas production hedged for 2012.



During 2010 and 2011, natural gas prices
have remained low from continued high US domestic natural gas production that has increased supply, particularly from non-conventional
natural gas resource plays, and the ongoing weak North American economy that has negatively impacted demand. These factors, in
combination with mild weather conditions, have resulted in historic high inventory levels that are currently well-above the five-year
average. This current environment has placed considerable downward pressure on natural gas prices with AECO gas presently trading
at approximately $1.80/mcf and we anticipate that natural gas prices will remain low in the near term. We continue to believe in
the longer-term price support for natural gas due to the increased proportion of resource based natural gas supplies that experience
higher initial production declines and reduced conventional natural gas drilling, both of which could eventually lead to a more
balanced supply and demand environment. We monitor market developments closely and will be proactive in implementing an appropriate
hedging strategy to mitigate the volatility in our cash flow as a result of fluctuations in natural gas prices.



Advantage Oil & Gas Ltd. - 8







Crude Oil and NGLs





|                                   |  | Three months ended |       |  |      |   |       | Year ended  |  |  |      |   
|---------------------------------- |  | ------------------ | ----- |  | ---- | - | ----- | ----------- |  |  | ---- | --
|                                   |  | December 31        |       |  |      |   |       | December 31 |  |  |      |   
|($/bbl)                            |  | 2011               |       |  | 2010 |   |       | % change    |  |  | 2011 |   
|Realized crude oil prices          |  |                    |       |  |      |   |       |             |  |  |      |   
|Excluding hedging                  |  | $                  | 89.34 |  |      | $ | 74.76 |             |  |  | 20   | % 
|Including hedging                  |  | $                  | 87.86 |  |      | $ | 67.91 |             |  |  | 29   | % 
|Realized NGLs prices               |  |                    |       |  |      |   |       |             |  |  |      |   
|Excluding hedging                  |  | $                  | 78.09 |  |      | $ | 53.50 |             |  |  | 46   | % 
|Realized crude oil and NGLs prices |  |                    |       |  |      |   |       |             |  |  |      |   
|Excluding hedging                  |  | $                  | 87.06 |  |      | $ | 69.19 |             |  |  | 26   | % 
|Including hedging                  |  | $                  | 85.88 |  |      | $ | 64.14 |             |  |  | 34   | % 
|WTI ($US/bbl)                      |  | $                  | 94.02 |  |      | $ | 85.18 |             |  |  | 10   | % 
|$US/$Canadian exchange rate        |  | $                  | 0.98  |  |      | $ | 0.99  |             |  |  | (1   | )%



Realized crude oil and NGLs prices, excluding
hedging, increased 26% for the three months ended and 24% for the year ended December 31, 2011, as compared to the same periods
of 2010. Realized crude oil and NGLs prices, excluding hedging, have increased 14% for the fourth quarter of 2011 in comparison
to the third quarter of 2011. Crude oil and NGL pricing has continued to experience considerable volatility with West Texas Intermediate
(“WTI”) increasing 5% to US$94.02/bbl as compared to US$89.81/bbl experienced in the third quarter of 2011. Advantage’s
realized crude oil price may not change to the same extent as WTI due to changes in the $US/$Canadian exchange rate and changes
in Canadian crude oil differentials relative to WTI. The price of WTI fluctuates based on worldwide supply and demand fundamentals
with significant price volatility experienced over the last several years. WTI had been relatively strong during 2010 and near
the end of the year began to increase and significantly escalated during early 2011, primarily influenced by middle-east tensions
and associated supply concerns, with WTI currently trading at approximately US$107/bbl. However, we have also seen a general strengthening
of the $US/$Canadian exchange rate during these periods that has partially offset the improvement in WTI. We believe that the long-term
pricing fundamentals for crude oil will remain strong with supply management by the OPEC cartel and strong relative demand from
developing countries.



Commodity Price Risk



The
Corporation’s financial results and condition will be dependent on the prices received for oil and natural gas production.
Oil and natural gas prices have fluctuated widely and are determined by economic and political factors. Supply and demand factors,
including weather and general economic conditions as well as conditions in other oil and natural gas regions, impact prices. Any
movement in oil and natural gas prices will have an effect on the Corporation’s financial condition and performance. Advantage
has an established financial hedging strategy and may manage the risk associated with changes in commodity prices by entering into
derivative contracts. Although these commodity price risk management activities could expose Advantage to losses or gains, entering
derivative contracts helps us to stabilize cash flows and ensures that our capital expenditure program is substantially funded
by such cash flows. To the extent that Advantage engages in risk management activities related to commodity prices, it will 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.
Our Credit Facilities also prohibit the Corporation from entering into any
derivative contract where the term of such contract exceeds three years. Further, the aggregate of such contracts cannot hedge
greater than 60% of total estimated oil and natural gas production over two years and 50% over the third year.



Currently the Corporation has the following
derivatives in place:



|Description of
    Derivative |  | Term                          |  | Volume |       | Average Price
|----------------------------- |  | ----------------------------- |  | ------ | ----- | -------------
|                              |  |                               |  |        |       |              
|Crude oil – WTI               |  |                               |  |        |       |              
|Fixed price(1)                |  | January 2012 to December 2012 |  |        | 1,000 | bbls/d       
|Collar(1)                     |  | January 2012 to December 2012 |  |        | 1,000 | bbls/d       
|                              |  |                               |  |        |       |              

(1) These financial contracts were
entered by Longview.



Advantage Oil & Gas Ltd. - 9







A summary of realized and unrealized hedging
gains and losses for the three months and years ended December 31, 2011 and 2010 are as follows:



|                                        |  | Three months ended |         |   |      |   |         | Year ended  |  |  |      |   
|--------------------------------------- |  | ------------------ | ------- | - | ---- | - | ------- | ----------- |  |  | ---- | --
|                                        |  | December 31        |         |   |      |   |         | December 31 |  |  |      |   
|($000)                                  |  | 2011               |         |   | 2010 |   |         | % change    |  |  | 2011 |   
|Realized hedging                        |  |                    |         |   |      |   |         |             |  |  |      |   
|Natural gas                             |  | $                  | 7,262   |   |      | $ | 12,871  |             |  |  | (44  | )%
|Crude oil                               |  |                    | (704    | ) |      |   | (3,080  | )           |  |  | (77  | )%
|Total realized hedging gains            |  |                    | 6,558   |   |      |   | 9,791   |             |  |  | (33  | )%
|Unrealized hedging                      |  |                    |         |   |      |   |         |             |  |  |      |   
|Natural gas                             |  |                    | (6,684  | ) |      |   | 7,637   |             |  |  | (188 | )%
|Crude oil                               |  |                    | (3,919  | ) |      |   | (21,784 | )           |  |  | (82  | )%
|Total unrealized hedging gains (losses) |  |                    | (10,603 | ) |      |   | (14,147 | )           |  |  | (25  | )%
|Total gains (losses) on derivatives     |  | $                  | (4,045  | ) |      | $ | (4,356  | )           |  |  | (7   | )%



For the three months ended December 31,
2011, we recognized a net realized derivative gain of $6.6 million (December 31, 2010 - $9.8 million net realized derivative gain)
and for the year ended December 31, 2011, we recognized a net realized derivative gain of $25.8 million (December 31, 2010 - $45.1
million net realized derivative gain) on settled derivative contracts, primarily as a result of lower average actual natural gas
prices during the periods as compared to our established average hedge prices. Our net realized derivative gain has decreased during
2011 as compared to 2010 as we had less natural gas production hedged for this year at lower average prices and we have generally
realized losses on our crude oil hedges. However, our successful commodity price risk management program continued to realize significant
gains on derivatives during 2011 that has helped to offset the continued weak natural gas prices and positively impact funds from
operations. As at December 31, 2011, the fair value of the derivative contracts outstanding and to be settled was a net liability
of approximately $2.7 million, a decrease of $25.3 million from the $22.6 million net asset recognized as at December 31, 2010.
For the year ended December 31, 2011, this $25.3 million decrease in the fair value of derivative contracts was recognized in income
as an unrealized derivative loss (December 31, 2010 – $5.4 million unrealized derivative gain). The valuation of the derivatives
is the estimated fair value to settle the contracts as at December 31, 2011 and is based on pricing models, estimates, assumptions
and market data available at that time. As such, the recognized amounts are not cash and the actual gains or losses realized on
eventual cash settlement can vary materially due to subsequent fluctuations in commodity prices and foreign exchange rates as compared
to the valuation assumptions. The Corporation does not apply hedge accounting and current accounting standards require changes
in the fair value to be included in the consolidated statement of comprehensive income as a derivative gain or loss with a corresponding
derivative asset and liability recorded on the statement of financial position. These derivative contracts will settle in 2012
corresponding to when the Corporation will recognize sales from production.



Royalties





|                                                   |  | Three months ended |        |   |      |   |       | Year ended  |  |  |      |  
|-------------------------------------------------- |  | ------------------ | ------ | - | ---- | - | ----- | ----------- |  |  | ---- | -
|                                                   |  | December 31        |        |   |      |   |       | December 31 |  |  |      |  
|                                                   |  | 2011               |        |   | 2010 |   |       | % change    |  |  | 2011 |  
|Royalties ($000)                                   |  | $                  | 13,339 |   |      | $ | 9,661 |             |  |  | 38   | %
|per boe                                            |  | $                  | 4.93   |   |      | $ | 4.32  |             |  |  | 14   | %
|As a percentage of petroleum and natural gas sales |  |                    | 14.5   | % |      |   | 12.7  | %           |  |  | 1.8  | %



Advantage pays royalties to the owners
of mineral rights from which we have leases. The Corporation currently has mineral leases with provincial governments, individuals
and other companies. Royalties include payments for Saskatchewan Resource Surcharge which is based on the petroleum and natural
gas sales earned within the Province of Saskatchewan. Royalties also include the impact of gas cost allowance (“GCA”),
which is a reduction of royalties payable to the Alberta Provincial Government to recognize capital and operating expenditures
incurred in the gathering and processing of their share of natural gas production and does not generally fluctuate with natural
gas prices. Total royalties paid has increased as compared to the prior year periods mainly due to the higher corporate production.
Royalties as a percentage of petroleum and natural gas sales have increased as significant increases in crude oil and NGL prices
have more than offset decreases in natural gas prices. The royalty rate realized by each of Advantage and Longview on a stand-alone
basis for the current quarter was 9.3% and 20.1%, respectively. Advantage’s royalty rates, that are predominately



Advantage Oil & Gas Ltd. - 10







based on natural gas production have decreased
due to lower natural gas prices and lower average royalties attributed to production from our significant development at Glacier,
Alberta. Longview’s royalty rates are higher due to the stronger relative crude oil and NGL prices.



Our average corporate royalty rates are
significantly impacted by the Alberta Provincial Government’s royalty framework for conventional oil, natural gas and oil
sands whereby Alberta royalties are affected by depths, well production rates, and commodity prices. Additionally, the Alberta
Provincial Government has a number of drilling incentive programs with reduced royalty rates for qualifying wells. All of our Montney
horizontal wells at Glacier drilled after May 1, 2010 qualify for the Alberta Provincial Government’s Natural Gas Deep Drilling
Program (“NGDDP”) which is estimated to provide a royalty incentive of $2.7 to $3.4 million for a typical horizontal
well (a typical Advantage horizontal well at Glacier is 4,200 to 4,500 metres in total length). This royalty incentive results
in an estimated 5% royalty rate for all Montney horizontal wells for the life of the well. This significantly lowers the natural
gas price threshold required to drill economic wells and substantially improves the value of future reserves and upside potential
at Glacier. Therefore, corporate royalty rates will continue to fluctuate based on commodity prices, individual well productivity,
and our ongoing capital development plans.



Operating Expense





|                         |  | Three months ended |        |  |      |   |        | Year ended  |  |  |      |   
|------------------------ |  | ------------------ | ------ |  | ---- | - | ------ | ----------- |  |  | ---- | --
|                         |  | December 31        |        |  |      |   |        | December 31 |  |  |      |   
|                         |  | 2011               |        |  | 2010 |   |        | % change    |  |  | 2011 |   
|Operating expense ($000) |  | $                  | 21,717 |  |      | $ | 23,811 |             |  |  | (9   | )%
|per boe                  |  | $                  | 8.03   |  |      | $ | 10.65  |             |  |  | (25  | )%



Total operating expense decreased 9% for
the three months and 7% for the year ended December 31, 2011 as compared to the same periods of 2010. Operating expense per boe
decreased 25% and 19% for the three months and year ended December 31, 2011 as compared to the prior year.



Operating expense per boe realized by Advantage
on a stand-alone basis for the fourth quarter of 2011 was $4.90/boe. The reduction in total operating expense has been primarily
due to increased production from Glacier, benefits of our ongoing optimization program, the sale of higher cost assets, and a one-time
$1.7 million equalization that was recognized in the fourth quarter of 2011 related to a gas processing facility. Operating expense
at Glacier is approximately $0.30/mcf ($1.80/boe) at 100 mmcf/d due to the efficiencies created by increasing the production rate
through our 100% owned Glacier gas plant.



Operating expense per boe realized by Longview
for the current quarter was $18.36/boe. During much of the spring and summer, field conditions were poor with severe wet weather
that created challenges for the industry to conduct regular well maintenance and sustain production levels. Therefore, routine
well maintenance and Longview’s current year capital program were delayed while conditions improved. During the third quarter
Longview began to expedite maintenance activities, workovers and reactivations and commenced their 2011 Alberta capital expenditure
program in July with the Saskatchewan program beginning in September. The well maintenance and workover activity continued into
the fourth quarter and generally lead to higher operating costs during these periods. To mitigate risks associated with fluctuating
power costs, Longview has also fixed the price on 0.9 MW at $77.88/MWh	for the period from January 2012 to December 2012. Longview
anticipates operating costs to be $16.00 to $17.00/boe during 2012.



Advantage Oil & Gas Ltd. - 11







General and Administrative Expense



|                                                |  | Three months ended |       |  |      |   |       | Year ended  |  |  |      |   
|----------------------------------------------- |  | ------------------ | ----- |  | ---- | - | ----- | ----------- |  |  | ---- | --
|                                                |  | December 31        |       |  |      |   |       | December 31 |  |  |      |   
|                                                |  | 2011               |       |  | 2010 |   |       | % change    |  |  | 2011 |   
|General and administrative expense              |  |                    |       |  |      |   |       |             |  |  |      |   
|Cash expense ($000)                             |  | $                  | 5,119 |  |      | $ | 6,197 |             |  |  | (17  | )%
|per boe                                         |  | $                  | 1.89  |  |      | $ | 2.77  |             |  |  | (32  | )%
|Non-cash expense ($000)                         |  | $                  | 2,107 |  |      | $ | 2,039 |             |  |  | 3    | % 
|per boe                                         |  | $                  | 0.78  |  |      | $ | 0.91  |             |  |  | (14  | )%
|Total general and administrative expense ($000) |  | $                  | 7,226 |  |      | $ | 8,236 |             |  |  | (12  | )%
|per boe                                         |  | $                  | 2.67  |  |      | $ | 3.68  |             |  |  | (27  | )%
|Employees at December 31                        |  |                    |       |  |      |   |       |             |  |  |      |   



Cash general and administrative (“G&A”)
expense for the year ended December 31, 2011 has decreased as compared to 2010 due to ongoing cost reduction efforts, which along
with the increased production has reduced cash G&A per boe.



Non-cash G&A expense is comprised of
Advantage’s and Longview’s Restricted Share Performance Incentive Plans (“RSPIP” or the “Plans”)
with the purpose to retain and attract employees, to reward and encourage performance, and to focus employees on operating and
financial performance that results in lasting shareholder returns. The Plans authorize the Boards of Directors to grant restricted
shares of each public company to service providers including directors, officers, employees and consultants of Advantage and Longview.
The number of restricted shares granted is based on each Corporations’ share price return for a twelve-month period and compared
to the performance of a peer group approved by the Boards of Directors. The share price returns are calculated at the end of each
and every quarter and are primarily based on the twelve-month change in the share prices including dividends. If a share price
return for a twelve-month period is positive, a restricted share grant will be calculated based on the return. Otherwise, no restricted
shares will be granted to service providers for the period. If the share price return for a twelve-month period is negative, but
the return is still within the top two-thirds of the approved peer group performance, the Board of Directors may grant a discretionary
restricted share award. Restricted shares vest one-third immediately on grant date with the remaining two-thirds vesting on each
of the subsequent two anniversary dates. On vesting, common shares are issued to the service providers in exchange for their restricted
shares outstanding. Compensation cost related to the Plans are recognized as share-based compensation expense within G&A expense
over the service periods of the service providers and incorporates the fair value at grant date, the estimated number of restricted
shares to vest, and certain management estimates.



For the year ended December 31, 2011, Advantage
granted 1,443,956 restricted shares at an average grant price of $7.78 per restricted share and recognized $11.5 million of share-based
compensation expense as non-cash G&A expense. During the year ended December 31, 2011 Advantage issued 2,212,031 common shares
to service providers in accordance with the vesting provisions of the RSPIP. As at December 31, 2011, 2,117,710 restricted shares
remain unvested and will vest to service providers over the next two years with a total of $5.0 million in compensation cost to
be recognized over the future service periods.



For the year ended December 31, 2011, Longview
granted 150,722 restricted shares at a grant price of $11.45 per restricted share and recognized $0.8 million of share-based compensation
expense as non-cash G&A expense. During the year ended December 31, 2011 Longview issued 50,422 common shares to service providers
in accordance with the vesting provisions of the RSPIP. As at December 31, 2011, 100,300 restricted shares remain unvested and
will vest to service providers over the next two years with a total of $0.7 million in compensation cost to be recognized over
the future service periods.



Depreciation Expense





|                            |  | Three months ended |        |  |      |   |        | Year ended  |  |  |      |  
|--------------------------- |  | ------------------ | ------ |  | ---- | - | ------ | ----------- |  |  | ---- | -
|                            |  | December 31        |        |  |      |   |        | December 31 |  |  |      |  
|                            |  | 2011               |        |  | 2010 |   |        | % change    |  |  | 2011 |  
|Depreciation expense ($000) |  | $                  | 41,669 |  |      | $ | 32,507 |             |  |  | 28   | %
|per boe                     |  | $                  | 15.40  |  |      | $ | 14.54  |             |  |  | 6    | %



Depreciation of oil and gas properties
is provided on the unit-of–production method based on total proved and probable reserves, including future development costs,
on a component basis. Depreciation expense has increased for the three months and year ended



Advantage Oil & Gas Ltd. - 12







December
31, 2011 as compared to 2010 due to the increase in production and a higher average rate of depreciation per boe. The rate of depreciation
per boe is higher partially due to an increase in property, plant and equipment attributable to changes in our decommissioning
liability. Decommissioning liabilities are determined by discounting
at a risk-free rate the expected future cash flows required to decommission all well sites, gathering systems and processing facilities.
With the continued decrease in risk-free rates, the net present value of the decommissioning liability has increased with a corresponding
increase in property, plant and equipment which impacts our depreciation expense.



Impairment of Oil and Gas Properties





|                                            |  | Three months ended |         |  |      |   |        | Year ended  |  |  |      |  
|------------------------------------------- |  | ------------------ | ------- |  | ---- | - | ------ | ----------- |  |  | ---- | -
|                                            |  | December 31        |         |  |      |   |        | December 31 |  |  |      |  
|                                            |  | 2011               |         |  | 2010 |   |        | % change    |  |  | 2011 |  
|Impairment of oil and gas properties ($000) |  | $                  | 187,684 |  |      | $ | 17,500 |             |  |  | 972  | %



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. 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”). When management judges that circumstances clearly indicate impairment,
CGUs are tested for impairment by comparing the carrying values to their recoverable amounts. 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 (refer
to the section “Critical Accounting Estimates”). Impairment losses on CGUs are recognized in the Statement of Comprehensive
Income as impairment of oil and gas properties and are separately disclosed.



As at December 31, 2011, Advantage determined
that the significant reduction in natural gas prices recognized within our year-end independent reserves evaluation was an indicator
of impairment. As a result, we completed an impairment assessment and calculated an estimated recoverable amount for our natural
gas concentrated CGUs, primarily based upon the net present value after tax of our year-end proved plus probable reserves discounted
at 10% and adjusted for a number of other estimates and assumptions. Based upon these calculations, we recognized an impairment
loss of $187.7 million related to two CGUs that consist of conventional natural gas focused properties located in Western and Eastern
Alberta that had suffered a significant deterioration in value due to the challenging natural gas price environment. No impairment
losses were recognized for any other CGUs, including our Glacier property. An impairment loss is reversed if there is subsequently
an objective change in the estimates used to determine the recoverable amount.



Exploration and Evaluation Expense



|                                          |  | Three months ended |       |  |      |   |     | Year ended  |  |  |      |  
|----------------------------------------- |  | ------------------ | ----- |  | ---- | - | --- | ----------- |  |  | ---- | -
|                                          |  | December 31        |       |  |      |   |     | December 31 |  |  |      |  
|                                          |  | 2011               |       |  | 2010 |   |     | % change    |  |  | 2011 |  
|Exploration and evaluation expense ($000) |  | $                  | 1,708 |  |      | $ | 752 |             |  |  | 127  | %



All exploratory costs incurred subsequent
to acquiring the right to explore for oil and natural gas are capitalized as exploration and evaluation assets pending determination
of technical feasibility and commercial viability. Such costs can typically include costs to acquire land rights in areas with
no proved or probable reserves assigned, geological and geophysical costs, and exploration wells. If the assets are subsequently
determined to be technically feasible and commercially viable, the exploratory costs are tested for impairment and then reclassified
from exploration and evaluation assets to development and production assets. If exploratory costs are determined not to be technically
feasible and commercially viable, the costs are expensed as exploration and evaluation expense. For the year ended December 31,
2011, we expensed exploration and evaluation costs of $3.1 million related to undeveloped land that expired during the period.



Advantage Oil & Gas Ltd. - 13







Other Income





|                                                     |  | Three months ended |     |  |      |   |        | Year ended  |  |  |      |   
|---------------------------------------------------- |  | ------------------ | --- |  | ---- | - | ------ | ----------- |  |  | ---- | --
|                                                     |  | December 31        |     |  |      |   |        | December 31 |  |  |      |   
|($000)                                               |  | 2011               |     |  | 2010 |   |        | % change    |  |  | 2011 |   
|Gain (loss) on sale of property, plant and equipment |  | $                  | 153 |  |      | $ | (1,541 | )           |  |  | (110 | )%
|Miscellaneous income (expense)                       |  |                    | 88  |  |      |   | (36    | )           |  |  | (344 | )%
|                                                     |  | $                  | 241 |  |      | $ | (1,577 | )           |  |  | (115 | )%



Other income primarily consists of gains
related to the disposition of property, plant and equipment. During 2010, Advantage disposed of several non-core properties and
recognized a $45.6 million net gain. For 2011, Advantage disposed of several minor non-core properties and recognized a $1.3 million
net gain.



Interest on Bank Indebtedness





|                                        |  | Three months ended |       |   |      |   |       | Year ended  |  |  |      |   
|--------------------------------------- |  | ------------------ | ----- | - | ---- | - | ----- | ----------- |  |  | ---- | --
|                                        |  | December 31        |       |   |      |   |       | December 31 |  |  |      |   
|                                        |  | 2011               |       |   | 2010 |   |       | % change    |  |  | 2011 |   
|Interest on bank indebtedness ($000)    |  | $                  | 2,142 |   |      | $ | 3,376 |             |  |  | (37  | )%
|per boe                                 |  | $                  | 0.79  |   |      | $ | 1.51  |             |  |  | (48  | )%
|Average effective interest rate         |  |                    | 5.4   | % |      |   | 4.9   | %           |  |  | 0.5  | % 
|                                        |  |                    |       |   |      |   |       |             |  |  |      |   
|Bank indebtedness at December 31 ($000) |  |                    |       |   |      |   |       |             |  |  |      |   



Total interest on bank indebtedness has
decreased during 2011 as compared to 2010 primarily due to the reduction in the average debt balance attributable to raising cash
proceeds from selling a 37% non-controlling interest in Longview. However, our bank indebtedness has increased $81.5 million during
the fourth quarter of 2011 in comparison to the prior quarter due to the maturity and settlement of our 7.75% and 8.00% convertible
debentures in December 2011 for $62.3 million in cash and escalation of our capital expenditure programs that modestly exceeded
funds from operations. Consolidated bank indebtedness outstanding at the end of December 31, 2011 was $233.9 million consisting
of $142.5 million and $91.4 million for each of the legal entities Advantage and Longview, respectively. Advantage’s consolidated
Credit Facilities of $475 million at December 31, 2011 includes $275 million with Advantage and $200 million with Longview. The
Corporation’s interest rates are primarily based on short term bankers acceptance rates plus a stamping fee. 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.



Interest and Accretion on Convertible
Debentures





|                                                            |  | Three months ended |       |  |      |   |       | Year ended  |  |  |      |   
|----------------------------------------------------------- |  | ------------------ | ----- |  | ---- | - | ----- | ----------- |  |  | ---- | --
|                                                            |  | December 31        |       |  |      |   |       | December 31 |  |  |      |   
|                                                            |  | 2011               |       |  | 2010 |   |       | % change    |  |  | 2011 |   
|Interest on convertible debentures ($000)                   |  | $                  | 1,995 |  |      | $ | 2,303 |             |  |  | (13  | )%
|per boe                                                     |  | $                  | 0.74  |  |      | $ | 1.03  |             |  |  | (28  | )%
|Accretion on convertible debentures ($000)                  |  | $                  | 824   |  |      | $ | 824   |             |  |  | -    | % 
|per boe                                                     |  | $                  | 0.30  |  |      | $ | 0.37  |             |  |  | (19  | )%
|Convertible debentures maturity value at December 31 ($000) |  |                    |       |  |      |   |       |             |  |  |      |   



Interest on convertible debentures for
2011 has decreased compared to 2010 due to the maturity and settlement of the 6.50% debentures in June 2010 and the 7.75% and 8.00%
convertible debentures in December 2011. Accretion on convertible debentures has remained relatively comparable for the periods.



Advantage Oil & Gas Ltd. - 14







Accretion on Decommissioning Liability





|                                                |  | Three months ended |       |  |      |   |       | Year ended  |  |  |      |   
|----------------------------------------------- |  | ------------------ | ----- |  | ---- | - | ----- | ----------- |  |  | ---- | --
|                                                |  | December 31        |       |  |      |   |       | December 31 |  |  |      |   
|                                                |  | 2011               |       |  | 2010 |   |       | % change    |  |  | 2011 |   
|Accretion on decommissioning liability ($000)   |  | $                  | 1,459 |  |      | $ | 1,270 |             |  |  | 15   | % 
|per boe                                         |  | $                  | 0.54  |  |      | $ | 0.57  |             |  |  | (5   | )%
|                                                |  |                    |       |  |      |   |       |             |  |  |      |   
|Decommissioning liability at December 31 ($000) |  |                    |       |  |      |   |       |             |  |  |      |   



Decommissioning liabilities are determined
by discounting at a risk-free rate the expected future cash flows required to decommission all petroleum and natural gas assets.
With the continued decrease in risk-free rates, the net present value of the decommissioning liability has increased with a corresponding
increase in property, plant and equipment. Accretion on decommissioning liability represents the increase in the decommissioning
liability each reporting period due to the passage of time and is currently calculated at an annualized rate of 2.5% of the liability.
Accretion expense has decreased slightly for 2011 primarily due to a lower annualized rate of accretion.



Taxes



Deferred income taxes arise from differences
between the accounting and tax bases of our assets and liabilities. For the year ended December 31, 2011, the Corporation recognized
a deferred income tax recovery of $46.8 million compared to a deferred income tax expense of $18.1 million for 2010. The deferred
income tax recovery was incurred due to the significant loss before income taxes that was recognized during 2011. As at December
31, 2011, the Corporation had a deferred income tax asset balance of $39.4 million and a deferred income tax liability balance
of $29.7 million compared to a net deferred income tax liability balance of $40.2 million at December 31, 2010.



Advantage and Longview have approximately
$1.6 billion in tax pools and deductions at December 31, 2011, which can be used to reduce the amount of taxes payable. The estimated
tax pools in place are as follows:



|                                       |  | Estimated Tax Pools
|-------------------------------------- |  | -------------------
|                                       |  | December 31, 2011  
|                                       |  | ($ millions)       
|                                       |  | Advantage          
|Canadian Development Expenses          |  | $                  
|Canadian Exploration Expenses          |  |                    
|Canadian Oil and Gas Property Expenses |  |                    
|Non-capital losses                     |  |                    
|Undepreciated Capital Cost             |  |                    
|Other                                  |  |                    
|                                       |  | $                  



Advantage
has a federal non-capital loss carry forward balance of approximately $631 million that will expire between 2024 and 2031. Longview
has a federal non-capital loss carry forward balance of approximately $73 million that will expire in 2031 and 2032.



Net Income Attributable to Non-Controlling
Interest



At December 31, 2011, Advantage had a 63%
ownership interest in Longview with the remaining 37% held by outside interests or non-controlling interests. As Advantage is the
parent company and has a majority ownership interest of Longview, Advantage’s consolidated financial statements include 100%
of Longview’s accounts. To determine the net income attributable to the Advantage shareholders, it is necessary to deduct
that portion of the net income related to Longview that is consolidated within Advantage’s financial results but are attributable
to the 37% non-controlling interest. Therefore, for the year ended December 31, 2011, Advantage recognized a $7.4 million reduction
to net income related to Longview’s net income attributable to the non-controlling interests.



Advantage Oil & Gas Ltd. - 15







Net Income (Loss) and Comprehensive
Income (Loss)





|                                                         |  | Three months ended |          |   |      |   |         | Year ended  |  |  |      |  
|-------------------------------------------------------- |  | ------------------ | -------- | - | ---- | - | ------- | ----------- |  |  | ---- | -
|                                                         |  | December 31        |          |   |      |   |         | December 31 |  |  |      |  
|                                                         |  | 2011               |          |   | 2010 |   |         | % change    |  |  | 2011 |  
|Net income (loss) and comprehensive income (loss) ($000) |  | $                  | (145,063 | ) |      | $ | (22,888 | )           |  |  | 534  | %
|per share - basic                                        |  | $                  | (0.87    | ) |      | $ | (0.14   | )           |  |  | 521  | %
|- diluted                                                |  | $                  | (0.87    | ) |      | $ | (0.14   | )           |  |  | 521  | %



The net loss and net loss per common share
realized for the year ended December 31, 2011 was a considerable decrease as compared to the net income and net income per common
share for 2010. Although Advantage experienced strong operating results that have contributed significantly to our 2011 financial
results including production and sales increases, significant realized hedging gains and continued cost reductions, we also experienced
an increase in depreciation expense and a significant impairment that resulted in our net loss. Additionally, net income for 2010
was much higher primarily due to significant gains on derivatives and asset dispositions.



Depreciation
expense has increased for 2011 as compared to 2010 due to the increase in production and a higher average rate of depreciation
per boe. The rate of depreciation per boe is higher partially due to an increase in property, plant and equipment attributable
to changes in our decommissioning liability. As at December 31, 2011,
Advantage determined that the significant reduction in natural gas prices recognized within our year-end independent reserves evaluation
was an indicator of impairment. As a result, we completed an impairment assessment and calculated an estimated recoverable amount
for our natural gas concentrated CGUs. Based upon these calculations, we recognized an impairment loss of $187.7 million related
to two CGUs that consist of conventional natural gas focused properties located in Western and Eastern Alberta that had suffered
a significant deterioration in value due to the challenging natural gas price environment. The derivative gains recognized include
both realized and unrealized amounts. Our net derivative gain has decreased during 2011 as compared to 2010 as we had less natural
gas production hedged for this year at lower average prices and we have generally realized losses on our crude oil hedges. During
2010 Advantage also disposed of several non-core properties and recognized a net $45.6 million gain.



Cash Netbacks





|                                        |  | Three months ended |         | Year ended 
|--------------------------------------- |  | ------------------ | ------- | -----------
|                                        |  | December 31        |         | December 31
|                                        |  | 2011               |         | 2010       
|                                        |  | $000               |         |            
|Petroleum and natural gas sales         |  | $                  | 92,300  |            
|Royalties                               |  |                    | (13,339 | )          
|Realized gain on derivatives            |  |                    | 6,558   |            
|Operating expense                       |  |                    | (21,717 | )          
|Operating                               |  |                    | 63,802  |            
|General and administrative (1)          |  |                    | (5,119  | )          
|Finance expense(2)                      |  |                    | (4,137  | )          
|Miscellaneous income                    |  |                    | 88      |            
|Funds from operations and cash netbacks |  | $                  | 54,634  |            





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

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



Funds from operations for 2011 have been
strong, driven by increases in production and continued gains from our hedging program, which demonstrates the clear ongoing improvement
in our financial and operating results from our focused development program. Average daily production during the fourth quarter
of 2011 increased 21% above the same period of 2010, with a 30% increase in natural gas production and a 6% increase in crude oil
production, partially offset by a 24% decrease in NGL production. Production increases have been primarily due to completion of
the Glacier gas plant Phase III expansion to a production capacity of 100 mmcf/d (16,667 boe/d) at the end of the first quarter
of 2011. For the three months and year ended December 31, 2011 we realized gains on derivatives of $6.6 million and $25.8 million,
respectively. Our hedging program has helped to offset the continued weak natural gas



Advantage Oil & Gas Ltd. - 16







prices and positively impacts funds from
operations. However, hedging gains for 2011 have been lower than 2010 as we have a lower percentage of natural gas production hedged
at lower average prices. Funds from operations have also benefited during this year from higher crude oil prices and continued
cost reductions, such as operating costs, general and administrative expense, and finance expense. Operating costs per boe have
significantly decreased as we continue to realize benefits from the addition of lower cost production due to the completion of
our Glacier gas plant and our divestment of higher cost assets. We also recognized a one-time $1.7 million equalization in the
fourth quarter of 2011 related to a gas processing facility. Finance expense has been reduced as we utilized proceeds from the
asset dispositions and disposing of a non-controlling interest in Longview to repay bank indebtedness and maturing convertible
debentures. Although funds from operations has also benefited during this year from higher crude oil prices, natural gas prices
still remain weak and pose a continuing challenge to the entire natural gas industry. When comparing the current quarter to the
third quarter of 2011, our funds from operations increased 9% and funds from operations per boe were 6% higher as realized crude
oil and NGL prices increased during this quarter and general costs continued to decrease, including operating costs.



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, bank indebtedness and convertible debentures. 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                         |  | $                     
|Pipeline/transportation                 |  |                       
|Bank indebtedness(1)        - principal |  |                       
|- interest                              |  |                       
|Convertible debentures (2) - principal  |  |                       
|- interest                              |  |                       
|Total contractual obligations           |  | $                     



| | (1) | The Corporation’s bank indebtedness does not have specific maturity dates. It is governed
by credit facility agreements with a syndicate of financial institutions. Under the terms of the agreements, the facilities are
reviewed annually, with the next reviews scheduled in April and June 2012. The facilities are revolving, and 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.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | As at December 31, 2011, Advantage had $86.2 million convertible debentures outstanding. The convertible
debentures are convertible to common shares based on an established conversion price. All remaining obligations related to convertible
debentures can be settled through the payment of cash or issuance of common shares at Advantage’s option.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Advantage Oil & Gas Ltd. - 17







Liquidity and Capital Resources



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



|                                                    |  | December 31, 2011
|--------------------------------------------------- |  | -----------------
|($000, except as otherwise indicated)               |  | Advantage        
|Bank indebtedness (non-current)                     |  | $                
|Working capital deficit(1)                          |  |                  
|Net debt                                            |  |                  
|Convertible debentures maturity value (non-current) |  |                  
|Total debt                                          |  | $                
|Shares outstanding                                  |  |                  
|Shares closing market price ($/share)               |  | $                
|Market capitalization(2)                            |  | $                



| | (1) | Working capital deficit is a non-GAAP measure that includes
trade and other receivables, prepaid expenses and deposits, trade and other accrued liabilities, and the current portion of other
liability
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Market capitalization is a non-GAAP measure calculated
by multiplying shares outstanding by the closing market share price on the applicable date for each legal entity.                               



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 liabilities),
bank indebtedness, convertible debentures and share capital. Advantage may manage its capital structure by issuing new common shares,
repurchasing outstanding common shares, obtaining additional financing either through bank indebtedness or convertible debenture
issuances, refinancing current debt, issuing other financial or equity-based instruments, declaring a dividend, implementing a
dividend reinvestment plan, adjusting capital spending, or disposing of assets or its ownership interest in Longview. The capital
structure is reviewed by Management and the Board of Directors on an ongoing basis.



Management of the Corporation’s capital
structure is facilitated through its financial and operational forecasting processes. The forecast of the Corporation’s future
cash flows is based on estimates of production, commodity prices, forecast capital and operating expenditures, and other investing
and financing activities. The forecast is regularly updated based on new commodity prices and other changes, which the Corporation
views as critical in the current environment. Selected forecast information is frequently provided to the Board of Directors. 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.



The economic situation during the last
several years has created significant commodity price volatility. Natural gas prices have remained low for several years from continued
high US domestic natural gas production that has increased supply and the ongoing weak North American economy that has negatively
impacted demand. These factors, in combination with mild weather conditions, have resulted in historic high inventory levels and
AECO gas is presently trading at approximately $1.80/mcf. However, crude oil prices have generally remained relatively strong,
primarily influenced by middle-east tensions and associated supply concerns, with WTI currently trading at approximately US$107/bbl.
The outlook for the Corporation from a prolonged weak commodity price environment, particularly natural gas, would be reductions
in operating netbacks, funds from operations and capital expenditures. In order to strengthen our financial position and balance
our cash flows, in 2010 we completed two non-core asset dispositions and on April 14, 2011 we closed the sale of a 37% non-controlling
interest in Longview with the net proceeds utilized to further repay bank indebtedness. These steps have allowed us to repay significant
bank indebtedness and maturing convertible debentures and also enabled us to focus capital spending on our Glacier Montney natural
gas resource play. However, we continue to be very cognizant of improving our financial flexibility in the current environment.



We believe that Advantage has implemented
strategies to protect our business as much as possible in the current industry and economic environment. We have implemented a
strategy to substantially balance funds from operations and our capital program expenditure requirements. Historically we have
had a successful hedging program that helped to reduce the volatility of funds from operations. However, we have no natural gas
hedges for 2012 and are exposed to risks as a result of the current economic situation. We continue to closely monitor the possible
impact on our business and strategy, and will make adjustments as necessary with prudent management.



Advantage Oil & Gas Ltd. - 18







Shareholders’ Equity and Convertible
Debentures



Advantage has utilized a combination of
equity, convertible debentures and bank debt to finance acquisitions and development activities.



As at December 31, 2011, Advantage had
166.3 million common shares outstanding. During 2011 Advantage issued 2,212,031 common shares to employees in accordance with the
vesting provisions of the RSPIP. As at March 23, 2012, common shares outstanding have increased to 166.6 million.



The Corporation had $86.2 million convertible
debentures outstanding at December 31, 2011 that were immediately convertible to 10.0 million common shares based on the applicable
conversion price (December 31, 2010 - $148.5 million outstanding and convertible to 13.0 million common shares). During the year
ended December 31, 2011, there were no conversions of debentures. The principal amounts of the 7.75% and 8.00% convertible debentures
matured in December 2011 and were settled with $62.3 million in cash. We have $86.2 million of 5.00% debentures outstanding that
mature in January 2015. Our convertible debenture obligation can be settled through the payment of cash or issuance of common shares
at Advantage’s option.



Bank Indebtedness, Credit Facilities
and Other Obligations



At December 31, 2011, Advantage had consolidated
bank indebtedness outstanding of $233.9 million consisting of $142.5 million and $91.4 million for each of the legal entities Advantage
and Longview, respectively. Bank indebtedness has decreased $56.8 million since December 31, 2010, primarily due to net proceeds
received from the sale of a 37% non-controlling interest in Longview, partially offset by the maturity and settlement of convertible
debentures and capital expenditures to complete our Phase III and to commence our Phase IV development programs at Glacier. Advantage’s
consolidated credit facilities of $475 million at December 31, 2011 include $275 million with Advantage and $200 million with Longview
(the “Credit Facilities”). The credit facilities are each collateralized by a $1 billion floating charge demand debenture
covering all assets of the legal entities. As well, the borrowing bases for the credit facilities are determined through utilizing
the legal entities regular reserve estimates. The banking syndicate thoroughly evaluates the reserve estimates based upon their
own commodity price expectations to determine the amount of the borrowing bases. Revisions or changes in the reserve estimates
and commodity prices can have either a positive or a negative impact on the borrowing bases. As a result of the disposition of
a non-controlling interest in Longview that closed on April 14, 2011, the Advantage credit facility was reduced to $275 million
and Longview’s credit facility was established at $200 million. The next annual reviews are scheduled to occur in April and
June 2012. There can be no assurance that the credit facilities will be renewed at the current borrowing base levels at that time.



Advantage had a consolidated working capital
deficiency of $90.6 million as at December 31, 2011. Our working capital includes items expected for normal operations such as
trade receivables, prepaids, deposits, 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 deficiency is usually higher during the winter months, as would be expected, due to accounts
payable and accrued liabilities associated with our active capital expenditure program. We do not anticipate any problems in meeting
future obligations as they become due given the level of our funds from operations and undrawn Credit Facilities. It is also important
to note that working capital is effectively integrated with Advantage’s revolving operating loan facility, which assists
with the timing of cash flows as required.



Non-Controlling Interest



On April 14, 2011, Longview completed its
initial public offering at a price of $10 per common share issuing 17,250,000 common shares and raising gross proceeds of $172.5
million (including full exercise of the over-allotment option on April 28, 2011). Concurrent with the closing of the Offering,
Longview purchased the Acquired Assets from Advantage for total consideration of $546.9 million, comprised of 29,450,000 common
shares of Longview representing a 63% equity ownership and $252.4 million in cash. The remaining 37% equity ownership of Longview
is held by outside interests or non-controlling interests. As Advantage is the parent company and has a majority ownership interest
of Longview, Advantage’s consolidated financial statements include 100% of Longview’s accounts. On closing of the Acquisition,
non-controlling interest of $106.1 million was recognized which represents Longview’s independent shareholders 37% ownership
interest in the net assets of Longview. Non-controlling interest on the statement of financial position is continually adjusted
for the independent shareholders’ share of Longview’s net income that is consolidated within Advantage’s financial
results and reduced for any dividends paid by Longview to the independent shareholders. Therefore, for the year ended December
31, 2011, Advantage recognized a $7.4 million reduction to net income related to Longview’s net income attributable to the
non-controlling interests. This $7.4 million increased non-controlling interest on the statement of financial position with a decrease
of $6.9 million related to dividends declared by Longview to the non-controlling interest ownership.



Advantage Oil & Gas Ltd. - 19







Capital Expenditures



|                                                  |  | Three months ended |         |   | Year ended  |  
|------------------------------------------------- |  | ------------------ | ------- | - | ----------- | -
|                                                  |  | December 31        |         |   | December 31 |  
|($000)                                            |  | 2011               |         |   | 2010        |  
|Drilling, completions and workovers               |  | $                  | 85,061  |   |             | $
|Well equipping and facilities                     |  |                    | 15,984  |   |             |  
|Land and seismic                                  |  |                    | 138     |   |             |  
|Other                                             |  |                    | 14      |   |             |  
|Expenditures on property, plant and equipment     |  |                    | 101,197 |   |             |  
|Expenditures on exploration and evaluation assets |  |                    | 1,624   |   |             |  
|Proceeds from property disposition                |  |                    | (114    | ) |             |  
|Net capital expenditures(1)                       |  | $                  | 102,707 |   |             | $



(1) Net capital expenditures excludes changes in
non-cash working capital and change in decommissioning liability.



Advantage’s preference is to operate
a high percentage of properties such that we can maintain control of capital expenditures, operations and cash flows. Advantage’s
business structure has been established in order to fully capitalize on both natural gas and crude oil exploration and development
opportunities. Advantage is focused primarily on developing the significant natural gas resource play at Glacier, Alberta while
retaining a significant investment in Longview that is focused on oil and natural gas liquids production and development.



Advantage on a legal entity basis spent
a net $202.1 million on property, plant and equipment and exploration and evaluation assets for the year ended December 31, 2011,
including $178.6 million at Glacier, $4.0 million at Brazeau, $4.0 million in Saskatchewan, $3.0 million at Nevis, $3.0 million
at Westerose and the remaining balance at other areas. Capital spending projects at Brazeau, Saskatchewan, Nevis and Westerose
were incurred by Advantage in preparation for the eventual disposition of the properties to Longview that closed on April 14, 2011.
However, Advantage continues to focus on development of our Montney natural gas resource play at Glacier where we will continue
to employ a phased development approach. Our Phase III expansion began at the end of the second quarter of 2010 and finished in
the second quarter of 2011, including the drilling of 28 horizontal wells (100% working interest) and the fabrication of a new
processing train to facilitate expansion of our Glacier gas plant to its current capacity of 100 mmcf/d. In July 2011, the Board
of Directors of Advantage approved a capital and operating budget for the twelve month period ending June 30, 2012 of $216 million
of which $200 million (93%) is allocated to Glacier. The capital budget is focused on a Phase IV development program at Glacier
with two key objectives: i) increase throughput capacity at our Glacier gas plant from 100 mmcf/d to 140 mmcf/d by the second quarter
of 2012; and ii) further evaluate the Middle and Lower Montney formations. During much of the spring and summer, field conditions
were poor with severe wet weather that created challenges for the industry and our Glacier Phase IV capital program was delayed
by approximately 11⁄2 months while conditions improved. As at December 31, 2011, Advantage had three drilling rigs contracted
and had drilled 18 wells of our Phase IV program with 3 wells drilling at year-end and subsequently rig released. Completion of
our Phase IV wells has begun and 8 wells were completed and tested by year-end. In October 2011, we successfully commissioned the
acid gas injection system which is now capable of disposing acid gas volumes for plant inlet gas volumes in excess of 140 mmcf/d.
In addition, TCPL completed further looping of their sales pipeline lateral in preparation for our expansion to 140 mmcf/d. These
projects represent significant milestones towards achieving our Glacier Phase IV development and will provide additional flexibility
for future production growth.



Longview’s 2011 capital budget was
100% focused on oil or oil with liquids rich solution gas projects. The majority of their 2011 capital program was completed during
the third and fourth quarters of 2011 due to the wet ground conditions that hampered activities in the spring and summer. For the
period from April 14 to December 31, 2011, Longview spent a net $55.0 million on property, plant and equipment and exploration
and evaluation assets which included $15.1 million at Nevis, $13.5 million at Brazeau, $7.1 million at Westerose, $5.7 million
at Steelman, $4.3 million at Sunset, and $4.0 million at Midale with the remaining spending for miscellaneous projects. Longview
deployed two drilling rigs in Alberta and an additional rig targeting the Midale formation in southeast Saskatchewan. As of December
31, 2011, they drilled 20.7 net (30 gross) oil wells (100% success rate). During the third and fourth quarters Longview conducted
maintenance activities, workovers and reactivations that had been delayed due to poor field conditions. This activity positively
impacted production for the fourth quarter of 2011 that average 6,823 boe/d, an increase of 12% as compared to the prior quarter.



Advantage Oil & Gas Ltd. - 20







Sources and Uses of Funds



The following table summarizes the various
funding requirements during the years ended December 31, 2011 and 2010 and the sources of funding to meet those requirements:



|                                                           |  | Year ended  |        
|---------------------------------------------------------- |  | ----------- | -------
|                                                           |  | December 31 |        
|($000)                                                     |  | 2011        |        
|Sources of funds                                           |  |             |        
|Funds from operations                                      |  | $           | 197,031
|Proceeds from change in ownership of Longview              |  |             | 160,757
|Change in non-cash working capital and other               |  |             | 27,659 
|Property dispositions                                      |  |             | 1,099  
|Increase in bank indebtedness                              |  |             | -      
|                                                           |  | $           | 386,546
|Uses of funds                                              |  |             |        
|Expenditures on property, plant and equipment              |  | $           | 254,174
|Convertible debenture maturities                           |  |             | 62,294 
|Decrease in bank indebtedness                              |  |             | 56,754 
|Dividends declared by Longview to non-controlling interest |  |             | 6,915  
|Expenditures on decommissioning liability                  |  |             | 3,335  
|Expenditures on exploration and evaluation assets          |  |             | 3,006  
|Reduction of capital lease obligations                     |  |             | 68     
|                                                           |  | $           | 386,546



Advantage has historically focused on balancing our funds from
operations and expenditures, particularly property, plant and equipment, to maintain a strong financial position and preserve financial
flexibility. Funds from operations for 2011 have been strong, driven by increases in production and continued gains from our hedging
program, which demonstrates the clear ongoing improvement in our financial and operating results from our focused development program.
For the year ended December 31, 2011, average daily production increased 16% above the prior year, with a 28% increase in natural
gas production partially offset by decreases in both crude oil and NGLs production. For the year ended December 31, 2011, we recognized
a net realized derivative gain of $25.8 million on settled derivative contracts, primarily as a result of lower average actual
natural gas prices during the year as compared to our established average hedge prices. Our successful commodity price risk management
program continued to realize significant gains on derivatives during 2011 that has helped to offset the continued weak natural
gas prices and positively impact funds from operations. Our net realized derivative gain has decreased during 2011 as compared
to 2010 as we had less natural gas production hedged for this year at lower average prices and we have generally realized losses
on our crude oil hedges. Funds from operations have also benefited during this year from higher crude oil prices and continued
cost reductions, such as operating costs, general and administrative expense, and finance expense. Unfortunately, natural gas prices
still remain weak and pose a continuing challenge to the entire natural gas industry. During the second quarter of 2011 Advantage
disposed of a 37% non-controlling interest in Longview thereby raising net cash proceeds that significantly reduced bank indebtedness.
In December 2011 the principal amounts of the 7.75% and 8.00% convertible debentures matured and were settled with $62.3 million
in cash.



Advantage Oil & Gas Ltd. - 21







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, 2011 |           |   | Dec. 31, 2010 |   |           | Dec. 31, 2009(3) | 
|Total sales (before royalties) ($000)      |  | $             | 355,288   |   |               | $ | 319,368   |                  | 
|Net income (loss) ($000)                   |  | $             | (152,772  | ) |               | $ | 40,920    |                  | 
|per share - basic and diluted              |  | $             | (0.92     | ) |               | $ | 0.25      |                  | 
|Total assets ($000)                        |  | $             | 1,972,789 |   |               | $ | 1,965,945 |                  | 
|Long term financial liabilities ($000) (1) |  | $             | 308,574   |   |               | $ | 363,675   |                  | 
|Distributions declared per Trust Unit (2)  |  | $             | -         |   |               | $ | -         |                  | 



| | (1) | Long term financial liabilities exclude decommissioning
liability and deferred income tax liability.                                                 
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | On March 18, 2009 Advantage annouced the discontinuance
of distributions.                                                                            
| | (3) | Total sales (before royalties) and net loss for 2009
were prepared in accordance with the previous Canadian generally accepted accounting principles.



Total sales (before royalties) decreased
from 2009 to 2010 due to lower natural gas prices and corporate production. The decrease in production was primarily attributable
to significant non-core asset dispositions completed during both 2009 and 2010, with the net proceeds from such dispositions utilized
to reduce outstanding bank indebtedness. Sales (before royalties) have increased during 2011 primarily from significant increases
in our production due to our successful exploration and development activities. Natural gas sales in particular have benefited
from our Montney natural gas resource play at Glacier, Alberta where we have increased production capacity with our continued facilities
and infrastructure expansion work. However, the low natural gas prices that have persisted during these years have contributed
to the recognized net losses. During 2010 Advantage disposed of several non-core properties during the year and recognized a $45.6
million net gain which resulted in the reported net income. Our net loss for 2011 was considerable as Advantage determined that
the significant reduction in natural gas prices recognized within our year-end independent reserves evaluation was an indicator
of impairment. As a result, we completed an impairment assessment and calculated an estimated recoverable amount for our natural
gas concentrated CGUs. Based upon these calculations, we recognized an impairment loss of $187.7 million related to two CGUs that
consist of conventional natural gas focused properties located in Western and Eastern Alberta that had suffered a significant deterioration
in value due to the challenging natural gas price environment. Total assets have continually decreased from 2009 through 2011 due
to the asset dispositions, depreciation expense and impairment losses that have exceeded capital expenditure activity. From 2009
to 2011 we have also experienced significant decreases in long term financial liabilities due to our concerted efforts to reduce
debt, including utilizing net proceeds from significant asset dispositions, an equity financing, and a convertible debenture issuance.
We also suspended all distributions in March 2009 and completed our conversion from an income trust to a corporation in July 2009.



Advantage Oil & Gas Ltd. - 22







Quarterly Performance



|                                          |  | 2011 |          |   | 2010 |  
|----------------------------------------- |  | ---- | -------- | - | ---- | -
|($000, except as otherwise
    indicated) |  | Q4   |          |   | Q3   |  
|Daily production                          |  |      |          |   |      |  
|Natural gas (mcf/d)                       |  |      | 137,480  |   |      |  
|Crude oil and NGLs (bbls/d)               |  |      | 6,498    |   |      |  
|Total (boe/d)                             |  |      | 29,411   |   |      |  
|Average prices                            |  |      |          |   |      |  
|Natural gas ($/mcf)                       |  |      |          |   |      |  
|Excluding hedging                         |  | $    | 3.18     |   |      | $
|Including hedging                         |  | $    | 3.76     |   |      | $
|AECO daily index                          |  | $    | 3.20     |   |      | $
|Crude oil and NGLs ($/bbl)                |  |      |          |   |      |  
|Excluding hedging                         |  | $    | 87.06    |   |      | $
|Including hedging                         |  | $    | 85.88    |   |      | $
|WTI ($US/bbl)                             |  | $    | 94.02    |   |      | $
|Total sales including realized hedging    |  | $    | 98,858   |   |      | $
|Net income (loss)                         |  | $    | (145,063 | ) |      | $
|per share - basic                         |  | $    | (0.87    | ) |      | $
|- diluted                                 |  | $    | (0.87    | ) |      | $
|Funds from operations                     |  | $    | 54,634   |   |      | $



The table above highlights the Corporation’s
performance for the fourth quarter of 2011 and also for the preceding seven quarters. Production for the first quarter of 2010
was comparable to the fourth quarter of 2009 but increased dramatically during the second quarter of 2010 as our new gas plant
was completed and production from Glacier was increased to between 50 and 55 mmcf/d. We completed two asset dispositions during
the end of the second quarter of 2010 representing approximately 1,700 boe/d that resulted in slightly lower production. The full
impact of these dispositions resulted in a decrease in production for the third quarter of 2010 with our production remaining relatively
consistent through to the first quarter of 2011. Production increased significantly in the second quarter of 2011 as the Phase
III expansion at Glacier was completed with production capacity at 100 mmcf/d. Our production has remained comparable for the remainder
of 2011 with a modest increase in the fourth quarter from production additions attributed to Longview’s capital expenditure
program. Our financial results, particularly sales and funds from operations are significantly impacted by commodity prices. During
2010 and 2011, natural gas prices have remained low which has decreased our corresponding sales and funds from operations, although
increasing production and strengthening crude oil and NGLs prices have partially mitigated the impact. Advantage has recognized
net losses during 2010 and 2011 primary driven by weak natural gas prices. During these periods we have continued to experience
a reduction in costs including royalties, operating expenses, general and administrative expense, and finance expense. We recognized
net income in the first and second quarters of 2010 due to higher natural gas prices and a $45.6 million net gain recognized on
the disposal of several non-core properties. Our net loss during the fourth quarter of 2011 was considerable as we recognized an
impairment loss of $187.7 million related to two CGUs that consist of conventional natural gas focused properties located in Western
and Eastern Alberta that had suffered a significant deterioration in value due to the challenging natural gas price environment.



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 crude oil and natural
gas prices, operating expense, royalty burden changes, and future development costs. Reserve estimates impact net income and comprehensive
income through depreciation and impairment of oil and gas properties. The reserve estimates are also used to assess the borrowing
bases 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, comprehensive income and the borrowing bases of the Corporation.



Advantage Oil & Gas Ltd. - 23







Management’s process of determining
the provision for deferred income taxes, the provision for decommissioning liability costs and related accretion expense, the fair
values initially assigned to the convertible debentures liability and equity components, and the fair values assigned to any acquired
company’s assets and liabilities in a business combination is 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 and comprehensive income.



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 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.



International Financial Reporting Standards



Canadian publicly accountable enterprises
have implemented International Financial Reporting Standards (“IFRS”) for the fiscal years beginning on or after January
1, 2011. The transition date to IFRS was January 1, 2010 and comparative figures for 2010 and Advantage’s financial position
as at January 1, 2010 have been restated to IFRS from the previous Canadian generally accepted accounting principles (“Previous
GAAP”). Reconciliations to IFRS from Previous GAAP financial statements including the impact of the transition on the Corporation's
reported financial position and financial performance, including the nature and effect of significant changes in accounting policies
from those used in the Corporation’s consolidated financial statements for the year ended December 31, 2010, are summarized
in note 25 to the unaudited consolidated financial statements. The following discussion explains the significant differences between
IFRS and the Previous GAAP followed by the Corporation.



a)    Property, plant and equipment



Under Previous GAAP, the Corporation, like
many Canadian oil and gas reporting issuers, applied the “full cost” concept in accounting for its oil and gas assets.
Under full cost, capital expenditures were maintained in a single cost centre for each country, and the cost centre was subject
to a single depletion and depreciation calculation and impairment test. Under IFRS, the Corporation makes a much more detailed
assessment of its oil and gas assets that impact depreciation and impairment calculations. Included in this assessment is an ongoing
appraisal of exploration and evaluation expenditures (“E&E”). Under Canadian GAAP, it was only necessary to track
costs associated with unproved properties that would be excluded from depletion and depreciation calculations. Under IFRS, a company
may choose to account for E&E under its previous GAAP and capitalize such costs without recording depreciation expense until
the expenditures are determined to represent technically feasible and commercially viable projects at which time the costs are
moved to development properties or expensed accordingly. Advantage capitalizes E&E costs except for costs incurred before the
acquisition of rights to explore, and to begin depreciating when technically feasible and commercially viable. As at transition
on January 1, 2010, $6.9 million was reclassified from property, plant and equipment to exploration and evaluation assets.



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



b)    Depreciation



For Previous GAAP purposes, the full cost
method of accounting for oil and gas properties requires a single calculation of depletion and depreciation of the carrying value
of PP&E based on proved reserves. However, IFRS requires an allocation of the amount recognized as PP&E to each significant
identified component and each component depreciated separately, utilizing an appropriate method of depreciation. This component
depreciation of PP&E results in an increased number of calculations of depreciation expense and impacts the amount of depreciation
expense recognized. IFRS also permits the option of using either proved or proved and probable reserves in the depreciation calculation.
Advantage has utilized proved and probable reserves to calculate depreciation expense as we believe it represents a better approximation
of useful life and depletion of reserves.



c)    Impairment of Assets



Under Canadian GAAP, impairment calculations
are prepared according to a two-step test generally conducted at a country level. Step one involves a comparison of the PP&E
carrying value to the undiscounted net cash flows of proved reserves. If a company should fail step one, step two is completed
to measure the amount of impairment whereby the PP&E carrying value is compared to a calculated fair value with any excess
carrying value above the fair value recognized as an impairment loss. Impairment losses recognized under Canadian GAAP are not
subsequently reversed. Under IFRS, impairment testing is completed at an individual asset group or “Cash Generating Unit”
level (“CGU”) when indicators suggest there may be impairment. A CGU is defined as the smallest



Advantage Oil & Gas Ltd. - 24







group of assets that
produce independent cash flows. Impairment of assets at a CGU level use a one-step approach for testing and measuring asset impairment,
with asset carrying values compared to the higher of “Value in Use” and “Fair Value less Costs to Sell”.
The IFRS methodology may result in the possibility of more frequent impairments in the carrying value of PP&E. However, under
IFRS previous impairment losses must be reversed where circumstances change such that the previously recognized impairment has
been reduced.



d)    Decommissioning Liabilities



Both Canadian GAAP and IFRS require a company
to provide for a liability related to decommissioning PP&E. Both methodologies are similar and we have determined there to
be no significant difference for Advantage, other than a difference related to discount rates. Canadian GAAP requires that the
decommissioning liability be discounted at a credit-adjusted risk-free rate while IFRS requires that the decommissioning liability
be discounted at an appropriate rate with either the cash flows or rate adjusted for risks. Advantage has selected to use the risk-free
rate for discounting purposes as we believe this accurately represents a market-based rate for such a liability and at transition
date the decommission liability was increased $101.1 million and charged to deficit.



e)    Convertible debentures liability
component



Under Previous GAAP convertible debentures
are financial liabilities consisting of a liability with an embedded conversion feature. As such, the debentures were segregated
between liabilities and equity and the debenture liabilities are presented at less than their eventual maturity values. The discount
of the liability component as compared to maturity value is accreted over the debenture term and expensed accordingly. As debentures
are converted to common shares, an appropriate portion of the liability and equity components were transferred to share capital.



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



f)    Deferred Income Taxes



Deferred income tax calculated according
to IFRS is substantially similar to Previous GAAP and arises from differences between the accounting and tax bases of our assets
and liabilities. To the extent that assets and liabilities have changed from transition to IFRS, the amount of deferred income
tax liability has been impacted.	Additionally, under Previous GAAP deferred income tax liabilities were required to be disclosed
as either current or long-term. Under IFRS, all deferred income tax liabilities are considered to be non-current liabilities.



g)    First Time Adoption of International
Financial Reporting Standards



IFRS 1 provides the framework for the first
time adoption of IFRS and specifies that an entity shall apply the principles under IFRS retrospectively. IFRS 1 also specifies
that the adjustments that arise on retrospective conversion to IFRS from other GAAP should be directly recognized in retained earnings.
Certain optional exemptions and mandatory exceptions to retrospective application are provided under IFRS 1. The Corporation has
taken the following exemptions:



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



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



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



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



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



Advantage Oil & Gas Ltd. - 25







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



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



h)    New
standards and interpretations not yet adopted



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



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



IFRS 9 Financial Instruments:
Classification and Measurement



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



IFRS 10 Consolidated Financial
Statements



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



IFRS 11 Joint Arrangements



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



IFRS 12 Disclosure of Interests
in Other Entities



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



IFRS 13 – Fair Value
Measurement



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



Advantage Oil & Gas Ltd. - 26







IAS 28 – Investments
in Associates and Joint Ventures



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



Evaluation of Disclosure Controls and
Procedures



Advantage’s Chief Executive Officer
and Chief Financial Officer have designed disclosure controls and procedures (“DCP”), or caused it to be designed under
their supervision, to provide reasonable assurance that all 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 DCP as at December
31, 2011. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the DCP are effective
as of the end of the year, in all material respects.



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 quarter ended December 31, 2011, 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 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, 2011. 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 affect, the Corporation’s internal controls over financial reporting.
No material changes in the internal controls were identified during the interim period ended December 31, 2011 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 DCP 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 internal control over financial reporting 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) 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) 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
under the NYSE and confirms that its corporate governance practices do not differ significantly from such standards.



Advantage Oil & Gas Ltd. - 27







Outlook



Advantage’s business structure has
been established in order to fully capitalize on both natural gas and crude oil exploration and development opportunities. Advantage
is focused primarily on developing the significant natural gas resource play at Glacier, Alberta while retaining a significant
investment in Longview that is focused on crude oil and natural gas liquids production and development.



Advantage



At Glacier, our continued successful drilling
results has increased the quality and magnitude of our Montney natural gas resource which is contained in approximately 300 meters
in the Upper, Middle and Lower Montney formations.	Our high quality asset at Glacier contains significant scope and scale as
validated by Sproule’s resource assessment and is underpinned with one of the lowest cost structures in Western Canada which
provides Advantage with a significant drilling inventory. Our recent drilling which involved lateral and vertical delineation through
the very thick Montney formation across our contiguous land block has added another dimension to Glacier, specifically with the
Middle Montney. We estimate that the current drilling inventory at Glacier to be in excess of 900 wells which only includes development
of 3 layers in the Montney formation.



Our capital budget for the twelve month
period ending June 30, 2012 was set at $216 million of which $200 million is focused on a Phase IV development program at Glacier
with two key objectives: i) increase throughput capacity at our Glacier gas plant from 100 mmcf/d to 140 mmcf/d by the second quarter
of 2012; and ii) further evaluate the Middle and Lower Montney formations. As a result of the prevailing low natural gas pricing
environment, production at Glacier will be maintained between 90 mmcf/d to 100 mmcf/d until we see a sustained increase in natural
gas pricing. We will utilize our inventory of 29 gross (28.5 net) Montney wells that have been drilled to maintain targeted production
rates at Glacier by producing and/or completing these wells as required. Additionally, we believe that the high industry activity
levels that have increased service and supply costs could subside during the latter part of 2012 which would benefit natural gas
development economics.	We believe that it is prudent to maintain capital spending discipline and financial flexibility in this
current natural gas price environment. We also believe that the current price of natural gas is unsustainable for generating sufficient
full cycle economic returns in the vast majority of North American natural gas plays and anticipate an improvement in the natural
gas price environment. As a result, we are positioning our Glacier gas plant with the capability to ramp up production capacity
to 140 mmcf/d by completing modifications as planned in our Phase IV capital program. At this time, we are providing interim guidance
for the six months ending June 30, 2012:



|Production average   | 22,800 boe/d to 23,400 boe/d
|-------------------- | ----------------------------
|                     |                             
|Royalty rate         | 8% to 10%                   
|                     |                             
|Operating expense    | $5.70/boe to $6.00/boe      
|                     |                             
|Capital expenditures | $65 million to $75 million  



Additional capital budget and guidance
details will be provided pending our evaluation of future delineation plans for our liquids rich Middle Montney formation in order
to determine the natural gas and NGL production and reserves potential. This evaluation will include detailed analysis and interpretation
of recent geological, engineering and completions data which we obtained from our Middle Montney Phase IV wells. In addition, we
have 1 remaining Middle Montney well and 2 Lower Montney wells that are drilled and are awaiting completion which we anticipate
undertaking after spring break-up. We expect the results of this information and our evaluation to provide more information in
regard to determining a systematic delineation plan for the balance of 2012 and beyond. We will continue with a technically focused
and financially disciplined approach to create value from our Glacier property and will revisit our 2012 capital spending plans
as required taking into account commodity price and market dynamics.



Longview



With regards to Longview, Advantage has
retained a 63% controlling ownership interest with the potential for growth opportunities accompanied by a stable yield. Our investment
provides a significant contribution to funds from operations from annual dividends of approximately $17.7 million that will be
utilized to partially fund our capital expenditure program. Longview’s operations commenced on April 14, 2011 and from April
14 to December 31, 2011, Longview has demonstrated strong financial and operating results with funds from operations supported
by high crude oil prices and demonstrated production growth.



Longview’s 2011 capital program and
routine well maintenance activities were initially delayed due to poor field conditions from severe wet weather during much of
the spring and summer. Longview was able to commence their Alberta capital expenditure program in July with the Saskatchewan program
beginning in September after delays created by wet weather conditions. Notwithstanding the delays, Longview was able to expedite
their efforts and complete their capital expenditure program. Longview



Advantage Oil & Gas Ltd. - 28







deployed two drilling rigs in Alberta and
an additional rig targeting the Midale formation in southeast Saskatchewan. As of December 31, 2011, they spent a net $55.0 million
and drilled 20.7 net (30 gross) oil wells (100% success rate). This activity significantly increased production whereby Longview
daily production averaged 6,823 boe/d for the fourth quarter, an increase of 16% from that realized during their initial quarter
ended June 30, 2012.



Longview’s 2012 budget is approximately
$73 million including the drilling of 25.3 net (34 gross) wells. The following table summarizes operational guidance for Longview
for the year ending December 31, 2012:



|Production average   | 6,600 boe/d to 6,800 boe/d
|-------------------- | --------------------------
|% of oil & liquids   | 77%                       
|Exit rate            | 6,800 boe/d to 7,000 boe/d
|Production growth %  | 8%                        
|Royalty rate         | 18% to 20%                
|Operating expense    | $16.00/boe to $17.00/boe  
|Capital expenditures | $70 million to $75 million



Longview has contracted three rigs, two
of which will target Alberta prospects and the additional rig will target the Midale formation in southeast Saskatchewan. The capital
expenditure program also includes analysis of cores that were taken from the Duvernay and Nordegg shale formations on a well that
was drilled at Sunset in the fourth quarter of 2011. Detailed core analysis is expected by summer of 2012.



Longview has begun executing their 2012
capital program, focusing on operational and cost efficiencies to increase returns and produce stable cash flows with a conservative
financial structure. Longview's business strategy is to provide shareholders with attractive long term returns that combine both
growth and yield by exploiting their assets in a financially disciplined manner and by acquiring additional long-life oil and gas
assets of a similar nature.



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 annual information circular – proxy statement, 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 23, 2012



Advantage Oil & Gas Ltd. - 29