CONSOLIDATED MANAGEMENT’S DISCUSSION
& ANALYSIS



The following Management’s Discussion
and Analysis (“MD&A”), dated as of March 27, 2014, 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, 2013 and should be read in conjunction
with the December 31, 2013 audited consolidated financial statements. The consolidated financial statements have been prepared
in accordance with International Financial Reporting Standards (“IFRS”), representing generally accepted accounting
principles (“GAAP”) for publicly accountable enterprises in Canada. All references in the MD&A and consolidated
financial statements are to Canadian dollars unless otherwise indicated. The term “boe” or barrels of oil equivalent
and “mcfe” or thousand cubic feet equivalent may be misleading, particularly if used in isolation. A boe or mcfe conversion
ratio of six thousand cubic feet of natural gas equivalent to one barrel of oil (6 mcf: 1 bbl) is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. As the value
ratio between natural gas and crude oil based on the current prices of natural gas and crude oil is significantly different from
the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.



Forward-Looking Information



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, effect of commodity prices on the Corporation's financial results, condition
and performance; effect of changes in the $US/$Canadian exchange rate, changes in Canadian crude oil differentials between WTI
and Canadian realized pricing, and quality and transportation adjustments on Advantage’s realized prices; industry conditions,
including effect of changes in commodity prices on the crude oil and natural gas industry and demand for crude oil and natural
gas; the Corporation's hedging strategy, including its anticipated effect on the volatility of Advantage's future cash flows and
the funding of its capital expenditure program and on the volatility of Longview Oil Corp.'s (“Longview”) sales and
stability of funds from operations; effect of commodity price risk management activities on the Corporation, including on cash
flows, sales and credit risk; the Corporation's plans to mitigate credit risk; terms of the Corporation's and Longview's derivative
contracts, including the timing of settlement of such contracts; effect of fluctuations in commodity prices and foreign exchange
rates as compared to valuation assumptions on actual gains or losses realized on cash settlement of derivatives; average royalty
rates and the impact of well depths, well production rates and commodity prices on average corporate royalty rates; projected royalty
rates, including the estimated royalty rate for the life of a Glacier Montney horizontal well; Advantage's estimated operating
costs at Glacier for the first quarter of 2014; Advantage's expectations regarding decreased general and administrative expenses
through 2014, including the estimated amount of such expenses, as a result of the termination of the TSA (as defined herein) with
Longview; terms of the Corporation's and Longview's equity compensation plans; the Corporation's intentions to monitor debt levels
to ensure an optimal mix of financing and cost of capital to provide return to the Corporation's shareholders; terms of the Corporation's
and Longview's credit facilities, including timing of next review of the credit facilities; the Corporation's expectations regarding
extension of Advantage's credit facilities at each annual review, effect of revisions or changes in reserve estimates and commodity
prices on the borrowing base, and limitations on the utilization of hedging contracts; terms of the Corporation's convertible debentures;
the ability of the Corporation to manage its capital structure, the Corporation's strategy for managing its capital structure,
including the use of financial and operational forecasting processes, and the timing of reviews of capital structure and forecast
information by management and the Board; future commitments and contractual obligations; effect of the Corporation's continual
financial assessment processes on the Corporation's ability to mitigate risks; the Corporation's ability to satisfy all liabilities
and commitments, including a working capital deficit, and meet future obligations as they become due; Advantage's focus on development
of the natural gas resource play at Glacier; the Corporation's expectations as to its ability to maintain and increase production,
as applicable, from Glacier at the levels and for the periods disclosed herein; the focus of each of the Corporation's and Longview's
capital drilling program; the Corporation's drilling plans at Glacier; the Corporation's beliefs regarding the potential for Middle
Montney natural gas liquids on certain recently acquired assets located southeast of Glacier and the terms of the licenses for
such assets; Longview's plans to advance their waterflood projects in Alberta; and anticipated changes in accounting standards.
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 damage to wells, production
facilities, other property and the environment or in personal injury; changes or fluctuations in production levels; individual
well productivity; delays in anticipated timing of drilling and completion of wells; failure to extend the credit facilities at
each annual review; competition from other producers; the lack of availability of qualified personnel or management; ability to
access sufficient capital from internal and external sources; credit risk; and the risks and uncertainties described in the Corporation’s
Annual Information Form which is available at www.sedar.com and www.advantageog.com. Readers are also referred to risk factors
described in other documents Advantage files with Canadian securities authorities.



With respect to forward-looking statements
contained in this MD&A, in addition to other assumptions identified herein, Advantage has made assumptions regarding, but not
limited to: 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
crude oil and natural gas; that the Corporation will have sufficient cash flow, debt or equity sources or other financial resources
required to fund its capital and operating expenditures and requirements as needed; that the Corporation’s conduct and results
of operations will be consistent with its expectations; that the Corporation will have the ability to develop the Corporation’s
crude oil and natural gas properties in the manner currently contemplated; that current or, where applicable, proposed assumed
industry conditions, laws and regulations will continue in effect or as anticipated as described herein; and that the estimates
of the Corporation’s production, reserves and resources volumes and the assumptions related thereto (including commodity
prices and development costs) are accurate in all material respects.



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



Advantage Oil & Gas Ltd. - 2







Consolidation of Longview Oil Corp.



At December 31, 2013, Advantage owned 21,150,010
common shares of Longview, representing an interest of approximately 45.1% in Longview. As Advantage held the single largest ownership
interest of Longview and other ownership interests were comparatively dispersed, Advantage was considered to control Longview.
Accordingly, the financial and operating results of Longview were consolidated 100% within Advantage and non-controlling interest
was recognized which represented Longview’s independent shareholders 54.9% 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. On February 4, 2014,
Advantage entered into an agreement to sell its remaining 21,150,010 common shares of Longview at a price of $4.45 per share. The
offering closed on February 28, 2014 and Advantage received net proceeds of $90.0 million, all of which were used to reduce existing
bank indebtedness. Concurrent with closing, Advantage ceased to consolidate Longview.



A Technical Services Agreement (“TSA”)
existed between Advantage and Longview whereby Advantage provided the necessary personnel and technical services to manage Longview's
business and Longview reimbursed Advantage on a monthly basis for its share of administrative charges based on respective levels
of production. The officers of Longview provided services to Longview under the TSA but remained employees of Advantage. On February
1, 2014, Advantage and Longview terminated the TSA and Advantage has no future obligations to Longview for the provision of personnel
and services. Appropriate staffing and systems are now in place to enable both organizations to run independently following termination
of the TSA.



Non-core Asset Sales



The Advantage legal entity has systematically
disposed of substantially all non-core assets since the third quarter of 2012 to focus on continued development of Advantage's
core Glacier Montney natural gas asset. In accordance with the requirements of IFRS, Advantage ceased recognizing depreciation
on property, plant and equipment effective when classified as held for sale. The carrying amounts of exploration and evaluation
assets, property, plant and equipment, decommissioning liabilities and derivative liabilities associated with assets held for sale
were presented separately on the statement of financial position and reflected at the lesser of fair value less costs to sell and
carrying amount. Net cash proceeds from all disposition transactions were used to reduce outstanding bank indebtedness. The disposition
transactions have had a pervasive impact on the financial and operating results and financial position of the Advantage legal entity
such that historical financial and operating performance may not be indicative of actual future performance.



Advantage is now a pure play company focused
on our signature Glacier Montney property. At December 31, 2013, Advantage’s other assets included investments in Questfire
Energy Corp. (“Questfire”) including a $32.6 million Convertible Senior Secured Debenture (the “Questfire Debenture”)
and 1.5 million Class B Shares of Questfire (the “Class B Shares”), which were received as partial consideration for
certain asset dispositions.



On March 26, 2014, Advantage entered an
agreement for Questfire to repurchase the Questfire Debenture at an aggregate purchase price of $13.6 million. Questfire also agreed
that it would make an offer to purchase by way of issuer bid, all of the Class B Shares at a purchase price of $2.60 per share.
Advantage expects to receive total proceeds of $17.5 million on the disposition of its investments in Questfire.



Advantage Oil & Gas Ltd. - 3







Non-GAAP Measures



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



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



|                                          |  | Three months ended |         |   |      |   |        | Year ended  |  |  |      |  
|----------------------------------------- |  | ------------------ | ------- | - | ---- | - | ------ | ----------- |  |  | ---- | -
|                                          |  | December 31        |         |   |      |   |        | December 31 |  |  |      |  
|($000)                                    |  | 2013               |         |   | 2012 |   |        | % change    |  |  | 2013 |  
|Cash provided by operating activities     |  | $                  | 57,355  |   |      | $ | 43,675 |             |  |  | 31   | %
|Expenditures on decommissioning liability |  |                    | 1,533   |   |      |   | 252    |             |  |  | 508  | %
|Changes in non-cash working capital       |  |                    | (16,818 | ) |      |   | (7,152 | )           |  |  | 135  | %
|Finance expense(1)                        |  |                    | (4,508  | ) |      |   | (4,246 | )           |  |  | 6    | %
|Funds from operations                     |  | $                  | 37,562  |   |      | $ | 32,529 |             |  |  | 15   | %



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



Advantage Oil & Gas Ltd. - 4







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.



|                                      |  | Three months ended |         |   | Year ended        |  
|------------------------------------- |  | ------------------ | ------- | - | ----------------- | -
|                                      |  | December 31, 2013  |         |   | December 31, 2013 |  
|                                      |  | Advantage          |         |   | Longview          |  
|Production                            |  |                    |         |   |                   |  
|Natural gas (mcf/d)                   |  |                    | 108,260 |   |                   |  
|Crude oil (bbls/d)                    |  |                    | 63      |   |                   |  
|NGLs (bbls/d)                         |  |                    | 16      |   |                   |  
|Total (boe/d)                         |  |                    | 18,122  |   |                   |  
|Natural gas (%)                       |  |                    | 100     | % |                   |  
|Crude oil (%)                         |  |                    | -       | % |                   |  
|NGLs (%)                              |  |                    | -       | % |                   |  
|                                      |  |                    |         |   |                   |  
|Natural Gas Prices ($/mcf)            |  |                    |         |   |                   |  
|Realized natural gas prices           |  |                    |         |   |                   |  
|Excluding hedging                     |  | $                  | 3.21    |   |                   | $
|Including hedging                     |  | $                  | 3.39    |   |                   | $
|                                      |  |                    |         |   |                   |  
|Crude Oil and NGLs Prices ($/bbl)     |  |                    |         |   |                   |  
|Realized crude oil prices             |  |                    |         |   |                   |  
|Excluding hedging                     |  | $                  | 77.79   |   |                   | $
|Including hedging                     |  | $                  | 77.79   |   |                   | $
|Realized NGLs prices                  |  |                    |         |   |                   |  
|Excluding hedging                     |  | $                  | 73.87   |   |                   | $
|Realized crude oil and NGLs prices    |  |                    |         |   |                   |  
|Excluding hedging                     |  | $                  | 77.01   |   |                   | $
|Including hedging                     |  | $                  | 77.01   |   |                   | $
|                                      |  |                    |         |   |                   |  
|Cash netbacks ($/boe)                 |  |                    |         |   |                   |  
|Petroleum and natural gas sales       |  | $                  | 19.52   |   |                   | $
|Royalties                             |  |                    | (0.91   | ) |                   |  
|Realized gain (loss) on derivatives   |  |                    | 1.05    |   |                   |  
|Operating expense                     |  |                    | (1.66   | ) |                   |  
|Operating income                      |  |                    | 18.00   |   |                   |  
|General and administrative expense(1) |  |                    | (2.36   | ) |                   |  
|Finance expense(2)                    |  |                    | (1.90   | ) |                   |  
|Other income(3)                       |  |                    | 0.56    |   |                   |  
|Cash netbacks                         |  | $                  | 14.30   |   |                   | $



| | (1) | General and administrative expense excludes non-cash G&A.
| | --- | ---------------------------------------------------------

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

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



Advantage Oil & Gas Ltd. - 5







|                                                                 |  | Three months ended    |        |   | Year ended            |  
|---------------------------------------------------------------- |  | --------------------- | ------ | - | --------------------- | -
|                                                                 |  | December
    31, 2013 |        |   | December
    31, 2013 |  
|($000, except as otherwise
    indicated)                        |  | Advantage             |        |   | Longview              |  
|Sales
    including realized hedging                             |  |                       |        |   |                       |  
|Natural gas
    sales                                            |  | $                     | 31,984 |   |                       | $
|Realized
    hedging gains                                       |  |                       | 1,758  |   |                       |  
|Natural
    gas sales including hedging                          |  |                       | 33,742 |   |                       |  
|Crude oil and NGLs sales                                         |  |                       | 562    |   |                       |  
|Realized
    hedging gains (losses)                              |  |                       | -      |   |                       |  
|Crude
    oil and NGLs sales including hedging                   |  |                       | 562    |   |                       |  
|Total                                                            |  | $                     | 34,304 |   |                       | $
|per boe                                                          |  | $                     | 20.57  |   |                       | $
|                                                                 |  |                       |        |   |                       |  
|Royalties                                                        |  | $                     | 1,523  |   |                       | $
|per boe                                                          |  | $                     | 0.91   |   |                       | $
|Royalty Rate (percentage
    of petroluem and natural gas sales) |  |                       | 4.7    | % |                       |  
|                                                                 |  |                       |        |   |                       |  
|Operating
    expense                                            |  | $                     | 2,772  |   |                       | $
|per boe                                                          |  | $                     | 1.66   |   |                       | $
|                                                                 |  |                       |        |   |                       |  
|General
    and administrative expense(1)                        |  | $                     | 3,932  |   |                       | $
|per boe                                                          |  | $                     | 2.36   |   |                       | $
|                                                                 |  |                       |        |   |                       |  
|Interest
    on bank indebtedness                                |  | $                     | 2,087  |   |                       | $
|per boe                                                          |  | $                     | 1.25   |   |                       | $
|                                                                 |  |                       |        |   |                       |  
|Interest
    on convertible debentures                           |  | $                     | 1,087  |   |                       | $
|per boe                                                          |  | $                     | 0.65   |   |                       | $
|                                                                 |  |                       |        |   |                       |  
|Other
    income(2)                                              |  | $                     | 919    |   |                       | $
|per boe                                                          |  | $                     | 0.56   |   |                       | $
|Funds
    from operations                                        |  | $                     | 23,822 |   |                       | $
|per boe                                                          |  | $                     | 14.30  |   |                       | $
|per share(3) (4)                                                 |  | $                     | 0.14   |   |                       | $
|                                                                 |  |                       |        |   |                       |  
|Dividends
    from Longview (declared by Longview)               |  | $                     | 2,961  |   |                       | $
|                                                                 |  |                       |        |   |                       |  
|Expenditures
    on property, plant and equipment                |  | $                     | 69,470 |   |                       | $
|Expenditures
    on exploration and evaluation assets            |  |                       | 42     |   |                       |  
|Total
    capital spending                                       |  | $                     | 69,512 |   |                       | $
|                                                                 |  |                       |        |   |                       |  
|Debt
    and working capital                                     |  |                       |        |   |                       |  
|Bank indebtedness                                                |  |                       |        |   |                       |  
|Convertible debentures                                           |  |                       |        |   |                       |  
|Working
    capital deficit                                      |  |                       |        |   |                       |  



| | (1) | General and administrative expense excludes non-cash
G&A.
| | --- | ---------------------------------------------------------

| | (2) | Other income excludes non-cash other income.
| | --- | --------------------------------------------

| | (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. - 6







Overview



|                                             |  | Three months ended |        |  |      |   |        | Year ended  |  |  |      |  
|-------------------------------------------- |  | ------------------ | ------ |  | ---- | - | ------ | ----------- |  |  | ---- | -
|                                             |  | December 31        |        |  |      |   |        | December 31 |  |  |      |  
|                                             |  | 2013               |        |  | 2012 |   |        | % change    |  |  | 2013 |  
|Cash provided by operating activities ($000) |  | $                  | 57,355 |  |      | $ | 43,675 |             |  |  | 31   | %
|Funds from operations ($000)                 |  | $                  | 37,562 |  |      | $ | 32,529 |             |  |  | 15   | %
|per share (1)                                |  | $                  | 0.18   |  |      | $ | 0.14   |             |  |  | 29   | %
|per boe                                      |  | $                  | 17.05  |  |      | $ | 13.05  |             |  |  | 31   | %



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



For the three months ended December 31,
2013, Advantage realized an increase of 15% in funds from operations to $37.6 million and an increase of 31% in cash netbacks to
$17.05 per boe, as compared to the fourth quarter of 2012. For the year ended December 31, 2013, Advantage realized an increase
of 38% in funds from operations to $148.5 million and an increase of 52% in cash netbacks to $16.00 per boe, as compared to 2012.
The increased funds from operations and cash netbacks have been primarily attributable to significantly improved commodity prices
and partially offset by lower production due to non-core asset dispositions. Realized natural gas prices, excluding hedging, increased
9% for the three months and 41% for the year ended December 31, 2013, as compared to the same periods of 2012. Realized crude oil
and NGLs prices, excluding hedging, increased 8% for the three months and 9% for the year ended December 31, 2013 when compared
to 2012. Management has been proactive in mitigating commodity price risk and has entered numerous hedging contracts to March 31,
2016 (refer to the section “Commodity Price Risk”). Average daily production during the three months and year ended
December 31, 2013 decreased as compared to the same periods of 2012 primarily attributable to significant non-core property dispositions,
which was finalized on April 30, 2013, to create a pure play company focused on our signature Glacier Montney property. As a result
of our continued focus at Glacier, Advantage has achieved an industry leading cost structure comprised of low royalty rates and
operating expense with continued general and administrative cost reductions. 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.



As a result of asset dispositions, disposition
of our ownership interest of Longview, and changes in commodity prices, historical financial and operating performance may not
be indicative of actual future performance.



Petroleum and Natural Gas Sales and
Hedging



|                                           |  | Three months ended |        |   |      |   |        | Year ended  |  |  |      |   
|------------------------------------------ |  | ------------------ | ------ | - | ---- | - | ------ | ----------- |  |  | ---- | --
|                                           |  | December 31        |        |   |      |   |        | December 31 |  |  |      |   
|($000)                                     |  | 2013               |        |   | 2012 |   |        | % change    |  |  | 2013 |   
|Natural gas sales                          |  | $                  | 34,264 |   |      | $ | 34,310 |             |  |  | -    | % 
|Realized hedging gains (losses)            |  |                    | 1,758  |   |      |   | (2,619 | )           |  |  | (167 | )%
|Natural gas sales including hedging        |  |                    | 36,022 |   |      |   | 31,691 |             |  |  | 14   | % 
|Crude oil and NGLs sales                   |  |                    | 33,969 |   |      |   | 40,122 |             |  |  | (15  | )%
|Realized hedging gains (losses)            |  |                    | (1,966 | ) |      |   | 1,131  |             |  |  | (274 | )%
|Crude oil and NGLs sales including hedging |  |                    | 32,003 |   |      |   | 41,253 |             |  |  | (22  | )%
|Total(1)                                   |  | $                  | 68,025 |   |      | $ | 72,944 |             |  |  | (7   | )%



(1) Total excludes unrealized derivative gains and losses.



Total sales excluding hedging during the
fourth quarter of 2013 was $68.2 million, a decrease of $6.2 million or 8% when compared to the same period of 2012 attributable
to lower production due to non-core asset dispositions, partially offset by increased commodity prices. However, for the year ended
December 31, 2013, total sales excluding hedging was $289.7 million, an increase of $20.8 million or 8% when compared to the same
period of 2012 as increased commodity prices more than offset lower production from non-core asset dispositions. Realized natural
gas prices, excluding hedging, increased 9% for the three months and 41% for the year ended December 31, 2013, as compared to the
same periods of 2012. Realized crude oil and NGLs prices, excluding hedging, increased 8% for the three months and 9% for the year
ended December 31, 2013 when compared to 2012.



Advantage Oil & Gas Ltd. - 7







The Corporation’s financial results
and condition will be dependent on the prices received for crude oil and natural gas production. As such, the Corporation enters
derivative contracts whereby realized hedging gains and losses partially offset commodity price fluctuations, which can positively
or negatively impact sales. Management has been proactive in mitigating commodity price risk and has entered numerous hedging contracts
to March 31, 2016 (refer to the section “Commodity Price Risk”). For the three months and year ended December 31, 2013,
we recognized net realized derivative losses on settled derivative contracts as a result of higher crude oil prices, partially
offset by realized derivative gains attributed from lower natural gas prices, as compared to our average hedge prices.



Production



|                    |  | Three months ended |         |   |      |  |         | Year ended  |  |  |      |   
|------------------- |  | ------------------ | ------- | - | ---- |  | ------- | ----------- |  |  | ---- | --
|                    |  | December 31        |         |   |      |  |         | December 31 |  |  |      |   
|                    |  | 2013               |         |   | 2012 |  |         | % change    |  |  | 2013 |   
|Natural gas (mcf/d) |  |                    | 114,763 |   |      |  | 125,455 |             |  |  | (9   | )%
|Crude oil (bbls/d)  |  |                    | 4,289   |   |      |  | 4,883   |             |  |  | (12  | )%
|NGLs (bbls/d)       |  |                    | 522     |   |      |  | 1,265   |             |  |  | (59  | )%
|Total (boe/d)       |  |                    | 23,938  |   |      |  | 27,057  |             |  |  | (12  | )%
|Natural gas (%)     |  |                    | 80      | % |      |  | 77      | %           |  |  |      |   
|Crude oil (%)       |  |                    | 18      | % |      |  | 18      | %           |  |  |      |   
|NGLs (%)            |  |                    | 2       | % |      |  | 5       | %           |  |  |      |   



Average daily production during the three
months and year ended December 31, 2013 decreased as compared to the same periods of 2012 primarily attributable to significant
non-core property dispositions by Advantage.



Advantage’s stand-alone production
averaged 108.7 mmcfe/d for the fourth quarter of 2013, as compared to 124.5 mmcfe/d for the fourth quarter of 2012 due to several
significant non-core gas weighted property dispositions from the third quarter of 2012 through to the second quarter of 2013 (exceeding
6,000 boe/d) to create a pure play company focused on our signature Glacier Montney property. Average daily production in 2013
from Glacier was 105 mmcfe/d, an increase of 14% from the prior year due to continued strong well performance and development.
In early March 2014 Glacier production reached the 135 mmcfe/d Phase VI target approximately one month ahead of schedule. Nine
new wells from Advantage’s Glacier Phase VI program were brought on production to initially ramp production to 135 mmcfe/d
with the remaining 13 new wells from our Phase VI program expected to provide sufficient production inventory to maintain production
at 135 mmcfe/d through to the end of 2014.



At Longview, daily production averaged
5,816 boe/d for the fourth quarter of 2013 with 82% from crude oil and NGLs, an 8% decrease from the 6,308 boe/d realized during
the fourth quarter of 2012. The majority of production declines related to natural gas which fell by 24% compared to the fourth
quarter of 2012 while higher value crude oil production remained comparable to the same period of the prior year. On a year to
date basis, total production averaged 5,953 boe/d versus 6,235 boe/d in 2012. The decrease in total production occurred as natural
gas and NGL volumes declined by 19% and 9%, respectively, due to normal production declines, more than offsetting the 1% increase
in crude oil production.



Advantage Oil & Gas Ltd. - 8







Commodity Prices and Marketing



Natural Gas



|                                |  | Three months ended |      |  |      |   |      | Year ended  |  |  |      |  
|------------------------------- |  | ------------------ | ---- |  | ---- | - | ---- | ----------- |  |  | ---- | -
|                                |  | December 31        |      |  |      |   |      | December 31 |  |  |      |  
|($/mcf, except where indicated) |  | 2013               |      |  | 2012 |   |      | % change    |  |  | 2013 |  
|Realized natural gas prices     |  |                    |      |  |      |   |      |             |  |  |      |  
|Excluding hedging               |  | $                  | 3.25 |  |      | $ | 2.97 |             |  |  | 9    | %
|Including hedging               |  | $                  | 3.41 |  |      | $ | 2.75 |             |  |  | 24   | %
|AECO daily index                |  | $                  | 3.52 |  |      | $ | 3.22 |             |  |  | 9    | %
|NYMEX ($US/mmbtu)               |  | $                  | 3.63 |  |      | $ | 3.36 |             |  |  | 8    | %



Realized natural gas prices, excluding
hedging, have increased significantly as compared to 2012 corresponding to increases in AECO prices. Natural gas prices declined
dramatically throughout 2012 due to decreased demand caused by the mild 2011/2012 winter and increasing U.S. domestic natural gas
production, particularly from non-conventional natural gas resource plays, that resulted in historic high inventory levels. Massive
switching by electrical utilities from coal to natural gas during the 2012 summer combined with the 2012/2013 prolonged winter
reduced the inventory levels to a more balanced market and a significant improvement in pricing during 2013.



Advantage’s realized natural gas
prices include deductions for unutilized sales gas pipeline fees associated with TransCanada pipeline firm service commitments
of approximately 125 mmcf/d at Glacier for calendar 2013. We incur charges of approximately $0.25/mcf on these service commitments
and since Glacier production has averaged less than the commitments, the unutilized firm service costs reduced our realized natural
gas prices in comparison to AECO prices. Advantage has been successful is partially mitigating such transportation commitments
by assignment to third parties resulting in less unutilized firm service and lower deductions for 2013 as compared to 2012.



Crude Oil and NGLs



|                                        |  | Three months ended |        |   |      |   |       | Year ended  |  |  |      |   
|--------------------------------------- |  | ------------------ | ------ | - | ---- | - | ----- | ----------- |  |  | ---- | --
|                                        |  | December 31        |        |   |      |   |       | December 31 |  |  |      |   
|($/bbl, except where indicated)         |  | 2013               |        |   | 2012 |   |       | % change    |  |  | 2013 |   
|Realized crude oil prices               |  |                    |        |   |      |   |       |             |  |  |      |   
|Excluding hedging                       |  | $                  | 79.13  |   |      | $ | 75.78 |             |  |  | 4    | % 
|Including hedging                       |  | $                  | 74.15  |   |      | $ | 78.30 |             |  |  | (5   | )%
|Realized NGLs prices                    |  |                    |        |   |      |   |       |             |  |  |      |   
|Excluding hedging                       |  | $                  | 57.19  |   |      | $ | 52.28 |             |  |  | 9    | % 
|Realized crude oil and NGLs prices      |  |                    |        |   |      |   |       |             |  |  |      |   
|Excluding hedging                       |  | $                  | 76.75  |   |      | $ | 70.94 |             |  |  | 8    | % 
|Including hedging                       |  | $                  | 72.31  |   |      | $ | 72.94 |             |  |  | (1   | )%
|WTI ($US/bbl)                           |  | $                  | 97.50  |   |      | $ | 88.20 |             |  |  | 11   | % 
|$US/$Canadian exchange rate             |  | $                  | 0.95   |   |      | $ | 1.01  |             |  |  | (6   | )%
|Edmonton Light ($/bbl)                  |  | $                  | 86.88  |   |      | $ | 84.55 |             |  |  | 3    | % 
|WTI/Edmonton Light Differential ($/bbl) |  | $                  | (15.75 | ) |      | $ | (2.78 | )           |  |  | 467  | % 



Realized crude oil and NGLs prices, excluding
hedging, have increased as compared to 2012 due to modestly stronger Canadian realized pricing. The West Texas Intermediate benchmark
price (“WTI”) fluctuates based on regional and worldwide supply and demand fundamentals with significant price volatility
experienced over the last several years. Advantage’s realized prices may not change to the same extent as WTI due to changes
in Canadian crude oil differentials between WTI and Canadian realized pricing, the $US/$Canadian exchange rate, and quality and
transportation adjustments. Although differentials continue to remain volatile, the WTI/Edmonton Light differential during the
year ended December 31, 2013 approximated that for the same period of 2012.



Advantage Oil & Gas Ltd. - 9







Commodity Price Risk



The
Corporation’s financial results and condition will be dependent on the prices received for crude oil and natural gas production.
Crude 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 crude oil and natural gas regions, impact
prices. 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 separately limit the utilization of derivative
contracts for each of Advantage and Longview. Advantage is allowed
to hedge up to 65% of total estimated crude oil and natural gas production over the first three years and 50% over the fourth year.
Longview is allowed to hedge up to 60% of total estimated crude oil and natural gas production over the first two years and 50%
over the third year.



Advantage has entered into a number of
natural gas hedges in support of our Glacier multi-year development plan. Our natural gas hedges will reduce the volatility of
future cash flows through to March 2016. Our current hedging positions are summarized as follows:



|                   |  |                   |  | Forecast Production |  |              
|------------------ |  | ----------------- |  | ------------------- |  | -------------
|                   |  | Average           |  | Hedged              |  | Average Price
|Period             |  | Production Hedged |  | (net of royalties)  |  | AECO ($Cdn.) 
|Q1 2014 to Q4 2014 |  | 60.2 mmcf/d       |  | 48%                 |  | $3.81/mcf    
|Q1 2015 to Q4 2015 |  | 75.8 mmcf/d       |  | 51%                 |  | $3.90/mcf    
|Q1 2016            |  | 52.1 mmcf/d       |  | 31%                 |  | $3.88/mcf    



Longview has entered into a number of crude
oil hedges to reduce the volatility of sales to provide a measure of stability to their funds from operations that will fund capital
expenditures and dividend payments. Longview’s current hedging positions are summarized as follows:



|                   |  | Average           |  | Average Price
|------------------ |  | ----------------- |  | -------------
|Period             |  | Production Hedged |  | WTI ($Cdn.)  
|Q1 2014 to Q4 2014 |  | 2,000 bbls/d      |  | $94.84/bbl   



A summary of realized and unrealized hedging
gains and losses for the years ended December 31, 2013 and 2012 are as follows:



|                                               |  | Three months ended |         |   |      |   |        | Year ended  |  |  |        |   
|---------------------------------------------- |  | ------------------ | ------- | - | ---- | - | ------ | ----------- |  |  | ------ | --
|                                               |  | December 31        |         |   |      |   |        | December 31 |  |  |        |   
|($000)                                         |  | 2013               |         |   | 2012 |   |        | % change    |  |  | 2013   |   
|Realized gains (losses) on derivatives         |  |                    |         |   |      |   |        |             |  |  |        |   
|Natural gas                                    |  | $                  | 1,758   |   |      | $ | (2,619 | )           |  |  | (167   | )%
|Crude oil                                      |  |                    | (1,966  | ) |      |   | 1,131  |             |  |  | (274   | )%
|Total realized losses on derivatives           |  |                    | (208    | ) |      |   | (1,488 | )           |  |  | (86    | )%
|Unrealized gains (losses) on derivatives       |  |                    |         |   |      |   |        |             |  |  |        |   
|Natural gas                                    |  |                    | (11,472 | ) |      |   | 4,058  |             |  |  | (383   | )%
|Crude oil                                      |  |                    | 1,133   |   |      |   | (1,777 | )           |  |  | (164   | )%
|Total unrealized gains (losses) on derivatives |  |                    | (10,339 | ) |      |   | 2,281  |             |  |  | (553   | )%
|Total gains (losses) on derivatives            |  | $                  | (10,547 | ) |      | $ | 793    |             |  |  | (1,430 | )%



Advantage Oil & Gas Ltd. - 10







For the three months and year ended December
31, 2013, we recognized net realized derivative losses on settled derivative contracts as a result of higher crude oil prices,
partially offset by realized derivative gains attributed from lower natural gas prices, as compared to our average hedge prices.
As at December 31, 2013, the fair value of the derivative contracts outstanding and to be settled was a net liability of approximately
$7.0 million, a change of $8.1 million from the $1.1 million net asset at December 31, 2012 due to generally stronger commodity
prices. For the year ended December 31, 2013, this $8.1 million loss due to the change in the fair value of the derivative contracts
was recognized in income as an unrealized derivative loss (December 31, 2012 – $3.8 million unrealized derivative gain) together
with the recognition of a $2.7 million unrealized derivative loss associated with the net liability of derivative contracts outstanding
that were subsequently assigned to Questfire upon disposition of corresponding assets. The valuation of the derivatives is the
estimated fair value to settle the contracts as at December 31, 2013 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 from January
1, 2014 to March 31, 2016 corresponding to when the Corporation will recognize sales from production.



Royalties



|                                                             |  | Three months ended |       |   |      |   |       | Year ended  |  |  |      |  
|------------------------------------------------------------ |  | ------------------ | ----- | - | ---- | - | ----- | ----------- |  |  | ---- | -
|                                                             |  | December 31        |       |   |      |   |       | December 31 |  |  |      |  
|                                                             |  | 2013               |       |   | 2012 |   |       | % change    |  |  | 2013 |  
|Royalties ($000)                                             |  | $                  | 7,928 |   |      | $ | 7,915 |             |  |  | -    | %
|per boe                                                      |  | $                  | 3.60  |   |      | $ | 3.18  |             |  |  | 13   | %
|Royalty Rate (percentage of petroleum and natural gas sales) |  |                    | 11.6  | % |      |   | 10.6  | %           |  |  | 1.0  | %



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. Our average corporate royalty rates are impacted
by well depths, well production rates, and commodity prices.



Royalties for the three months and year
ended December 31, 2013 are generally comparable to the same periods of 2012 whereby reduced royalties from disposed non-core properties
that generally attracted higher royalty rates were offset by additional royalties attributed from stronger commodity prices. On
a stand-alone basis, the royalty rate realized by each of Advantage and Longview for the current quarter was 4.7% and 17.9%, respectively.
Advantage’s royalty rates are predominately based on our significant natural gas development at Glacier where the royalty
rate for the life of a Glacier Montney horizontal well is approximately 5% due to industry provincial incentive programs. As production
from Glacier has become a larger proportion of total production, we have experienced a continual reduction in our realized royalty
rate.



Operating Expense



|                         |  | Three months ended |        |  |      |   |        | Year ended  |  |  |      |   
|------------------------ |  | ------------------ | ------ |  | ---- | - | ------ | ----------- |  |  | ---- | --
|                         |  | December 31        |        |  |      |   |        | December 31 |  |  |      |   
|                         |  | 2013               |        |  | 2012 |   |        | % change    |  |  | 2013 |   
|Operating expense ($000) |  | $                  | 14,305 |  |      | $ | 22,196 |             |  |  | (36  | )%
|per boe                  |  | $                  | 6.50   |  |      | $ | 8.92   |             |  |  | (27  | )%



Operating expense for the three months
and year ended December 31, 2013 decreased as compared to the same periods of 2012 attributable to significant non-core property
dispositions.



Operating expense per boe realized by Advantage
on a stand-alone basis for the fourth quarter of 2013 was $1.66/boe ($0.28/mcfe), compared to $5.23/boe ($0.87/mcfe) for the fourth
quarter of 2012. Advantage operating costs have decreased with disposition of higher cost non-core assets from the third quarter
of 2012 through to the second quarter of 2013. In the first quarter of 2014, Advantage estimates operating expenses at Glacier
are $0.27/mcfe due to the continued efficiencies created by processing our natural gas through our 100% owned Glacier gas plant.



Advantage Oil & Gas Ltd. - 11







At Longview, total operating expenses for
the three months and year ended December 31, 2013 were comparable to the same periods of 2012. Although total operating costs have
remained relatively stable, operating costs per boe for the year ended December 31, 2013 increased by 4% to $21.08/boe, due to
the variation of production during these periods. Additionally, to help stabilize fluctuating power costs, Longview has fixed the
price of 0.8 MW at $55.41/MWh for the period from January 2013 to December 2014.



General and Administrative Expense



|                                                |  | Three months ended |       |  |      |   |       | Year ended  |  |  |      |   
|----------------------------------------------- |  | ------------------ | ----- |  | ---- | - | ----- | ----------- |  |  | ---- | --
|                                                |  | December 31        |       |  |      |   |       | December 31 |  |  |      |   
|                                                |  | 2013               |       |  | 2012 |   |       | % change    |  |  | 2013 |   
|General and administrative expense              |  |                    |       |  |      |   |       |             |  |  |      |   
|Cash expense ($000)                             |  | $                  | 4,641 |  |      | $ | 6,067 |             |  |  | (24  | )%
|per boe                                         |  | $                  | 2.11  |  |      | $ | 2.44  |             |  |  | (14  | )%
|Non-cash expense ($000)                         |  | $                  | 677   |  |      | $ | 2,423 |             |  |  | (72  | )%
|per boe                                         |  | $                  | 0.31  |  |      | $ | 0.97  |             |  |  | (68  | )%
|Total general and administrative expense ($000) |  | $                  | 5,318 |  |      | $ | 8,490 |             |  |  | (37  | )%
|per boe                                         |  | $                  | 2.42  |  |      | $ | 3.41  |             |  |  | (29  | )%
|Employees at December 31                        |  |                    |       |  |      |   |       |             |  |  |      |   



Cash general and administrative (“G&A”)
expense decreased for the three months ended December 31, 2013 as Advantage began to realize cost efficiencies associated with
the non-core asset dispositions which was finalized on April 30, 2013. Cash G&A increased slightly for the year ended December
31, 2013 compared to 2012 due to one-time costs including retention and staff rationalization associated with the asset dispositions
and costs incurred during Advantage’s strategic alternatives review process that commenced in early 2013 and was concluded
on February 4, 2014. On February 1, 2014, Advantage and Longview terminated the TSA and Advantage has no future obligations to
Longview for the provision of personnel and services. Appropriate staffing and systems are now in place to enable both organizations
to run independently following termination of the TSA. As a result, Advantage currently has 25 full time employees and expects
to incur significantly lower cash G&A that will continue to decrease through 2014 to approximately $1.20/boe ($0.20/mcfe).



Non-cash G&A expense is comprised of
share based compensation. Advantage had a restricted share performance incentive plan that expired during the third quarter of
2012 and no Advantage restricted shares were granted during 2012. On September 13, 2012, shareholders of Advantage approved a new
stock option plan, to continue providing for long term equity based compensation for service providers. Stock options are granted
subject to Board of Directors approval and on vesting can be exercised at the option of the service providers in exchange for common
shares. Compensation cost related to share based compensation is recognized as non-cash G&A expense over the vesting period
based on the determination of fair value on grant date, the estimated number of restricted shares or stock options to vest, and
certain management estimates. The fair value of share based compensation is the estimated fair value on grant date calculated utilizing
option pricing models, including estimates, assumptions and available market data. As such, the fair value determined on grant
date and recognized as expense over the vesting period is not cash and the actual gains or losses realized on eventual vesting
and exercise can vary materially from the fair value.



For the year ended December 31, 2013, 2.0
million stock options expired unexercised, 2.0 million stock options were exercised for cash consideration of approximately $40,000,
and 3.8 million new stock options were granted. Advantage stand-alone recognized $5.2 million of compensation cost as non-cash
G&A expense related to the amortization of the fair value of stock options granted over the vesting period.



Longview non-cash G&A expense is comprised
of restricted shares and for the year ended December 31, 2013, no restricted shares were granted and $0.3 million of compensation
cost was recognized as non-cash G&A expense.



Advantage Oil & Gas Ltd. - 12







Depreciation Expense



|                            |  | Three months ended |        |  |      |   |        | Year ended  |  |  |      |  
|--------------------------- |  | ------------------ | ------ |  | ---- | - | ------ | ----------- |  |  | ---- | -
|                            |  | December 31        |        |  |      |   |        | December 31 |  |  |      |  
|                            |  | 2013               |        |  | 2012 |   |        | % change    |  |  | 2013 |  
|Depreciation expense ($000) |  | $                  | 27,882 |  |      | $ | 26,453 |             |  |  | 5    | %
|per boe                     |  | $                  | 12.66  |  |      | $ | 10.63  |             |  |  | 19   | %



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. For the year ended December 31, 2013, depreciation expense has decreased compared to 2012 due to the reduced
rate of depreciation per boe and lower production attributable to significant non-core property dispositions. The rate of depreciation
per boe has decreased as Advantage ceased depreciation of assets held for sale in accordance with the requirements of IFRS (refer
to the section “Non-core Asset Sales”).



Impairment of Assets Held for Sale



|                                          |  | Three months ended |   |  |      |   |        | Year ended  |  |  |      |   
|----------------------------------------- |  | ------------------ | - |  | ---- | - | ------ | ----------- |  |  | ---- | --
|                                          |  | December 31        |   |  |      |   |        | December 31 |  |  |      |   
|                                          |  | 2013               |   |  | 2012 |   |        | % change    |  |  | 2013 |   
|Impairment of assets held for sale ($000) |  | $                  | - |  |      | $ | 73,000 |             |  |  | (100 | )%



The carrying amounts of exploration and
evaluation assets, property, plant and equipment and decommissioning liabilities associated with the Advantage assets held for
sale were presented separately on the statement of financial position at December 31, 2012 and reflected at the lesser of fair
value less costs to sell and carrying amount, which resulted in an impairment recognition of $73 million during the year ended
December 31, 2012. The sale of these assets has been completed (refer to the section “Non-core Asset Sales”).



Impairment of Oil and Gas Properties



|                                            |  | Three months ended |   |  |      |   |        | Year ended  |  |  |      |   
|------------------------------------------- |  | ------------------ | - |  | ---- | - | ------ | ----------- |  |  | ---- | --
|                                            |  | December 31        |   |  |      |   |        | December 31 |  |  |      |   
|                                            |  | 2013               |   |  | 2012 |   |        | % change    |  |  | 2013 |   
|Impairment of oil and gas properties ($000) |  | $                  | - |  |      | $ | 31,865 |             |  |  | (100 | )%



As at December 31, 2012, Longview determined
that the reduction in crude oil prices recognized within their year-end independent reserves evaluation was an indicator of impairment.
As a result, they completed an impairment assessment and calculated an estimated recoverable amount for their CGUs, primarily based
upon the net present value after tax of their year-end proved plus probable reserves discounted at 10% and adjusted for a number
of other estimates and assumptions. Based upon these calculations, Longview recognized an impairment loss of $31.9 million related
to one CGU located in Alberta that had suffered a significant deterioration in value due to the reduction in crude oil prices and
decreased reserves. The decrease in Alberta reserves was more than offset by increased reserves from Saskatchewan CGUs resulting
in a total increase in Longview reserves for the year ended December 31, 2012. No impairment losses were recognized for any other
CGUs. 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 |  |  |      |  
|($000)                             |  | 2013               |    |  | 2012 |   |    | % change    |  |  | 2013 |  
|Exploration and evaluation expense |  | $                  | 59 |  |      | $ | 41 |             |  |  | 44   | %



Exploration and evaluation expense represents
exploration and evaluation costs related to undeveloped land that expired during the periods.



Advantage Oil & Gas Ltd. - 13







Interest on Bank Indebtedness



|                                     |  | Three months ended |       |   |      |   |       | Year ended  |  |  |      |  
|------------------------------------ |  | ------------------ | ----- | - | ---- | - | ----- | ----------- |  |  | ---- | -
|                                     |  | December 31        |       |   |      |   |       | December 31 |  |  |      |  
|                                     |  | 2013               |       |   | 2012 |   |       | % change    |  |  | 2013 |  
|Interest on bank indebtedness ($000) |  | $                  | 3,421 |   |      | $ | 3,159 |             |  |  | 8    | %
|per boe                              |  | $                  | 1.55  |   |      | $ | 1.27  |             |  |  | 22   | %
|Average effective interest rate      |  |                    | 5.1   | % |      |   | 4.5   | %           |  |  | 0.6  | %



Interest on bank indebtedness for 2013
has been slightly higher as compared to 2012 with a modest increase in effective interest rates and average bank indebtedness.
Our consolidated bank indebtedness outstanding at the end of December 31, 2013 was $271.3 million, a decrease of $1.2 million from
December 31, 2012, consisting of $153.7 million and $117.6 million for each of the legal entities Advantage and Longview, respectively.
The Corporation’s interest rates have increased due to the moderately higher debt to cash flow ratio as calculated pursuant
to our Credit Facilities and 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 |  |  |      |  
|                         |  | 2013               |       |  | 2012 |   |       | % change    |  |  | 2013 |  
|Interest on convertible  |  |                    |       |  |      |   |       |             |  |  |      |  
|debentures ($000)        |  | $                  | 1,087 |  |      | $ | 1,087 |             |  |  | -    | %
|per boe                  |  | $                  | 0.49  |  |      | $ | 0.44  |             |  |  | 11   | %
|Accretion on convertible |  |                    |       |  |      |   |       |             |  |  |      |  
|debentures ($000)        |  | $                  | 843   |  |      | $ | 808   |             |  |  | 4    | %
|per boe                  |  | $                  | 0.38  |  |      | $ | 0.32  |             |  |  | 19   | %



Interest and accretion on convertible debentures
for 2013 are comparable to 2012 as there have been no changes in our convertible debentures outstanding. We have $86.2 million
of 5% convertible debentures outstanding that are due to mature January 30, 2015.



Accretion on Decommissioning Liability



|                             |  | Three months ended |      |  |      |   |       | Year ended  |  |  |      |   
|---------------------------- |  | ------------------ | ---- |  | ---- | - | ----- | ----------- |  |  | ---- | --
|                             |  | December 31        |      |  |      |   |       | December 31 |  |  |      |   
|                             |  | 2013               |      |  | 2012 |   |       | % change    |  |  | 2013 |   
|Accretion on decommissioning |  |                    |      |  |      |   |       |             |  |  |      |   
|liability ($000)             |  | $                  | 840  |  |      | $ | 1,613 |             |  |  | (48  | )%
|per boe                      |  | $                  | 0.38 |  |      | $ | 0.65  |             |  |  | (42  | )%



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.
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 3.20% of the liability. The decommissioning liability has
decreased significantly during 2013 primarily due to $125.0 million derecognized attributable to non-core property dispositions
and a $37.9 million decrease in the net present value of the decommissioning liability due to an increase in the risk-free rate.



Advantage Oil & Gas Ltd. - 14







Other Income (Expense)



|                                                     |  | Three months ended |        |   |      |   |       | Year ended  |  |  |       |   
|---------------------------------------------------- |  | ------------------ | ------ | - | ---- | - | ----- | ----------- |  |  | ----- | --
|                                                     |  | December 31        |        |   |      |   |       | December 31 |  |  |       |   
|($000)                                               |  | 2013               |        |   | 2012 |   |       | % change    |  |  | 2013  |   
|Gain (loss) on sale of assets held for sale          |  | $                  | 505    |   |      | $ | 5,476 |             |  |  | (91   | )%
|Gain (loss) on sale of property, plant and equipment |  |                    | (1,800 | ) |      |   | -     |             |  |  | 100   | % 
|Interest income - Questfire Debenture                |  |                    | 492    |   |      |   | -     |             |  |  | 100   | % 
|Accretion income - Questfire Debenture               |  |                    | 569    |   |      |   | -     |             |  |  | 100   | % 
|Unrealized loss - Questfire Class B Shares           |  |                    | (750   | ) |      |   | -     |             |  |  | 100   | % 
|Miscellaneous income                                 |  |                    | 427    |   |      |   | 9     |             |  |  | 4,644 | % 
|                                                     |  | $                  | (557   | ) |      | $ | 5,485 |             |  |  | (110  | )%



On April 30, 2013, Advantage closed a disposition
transaction with Questfire and consideration consisted of $40.2 million of cash, the Questfire Debenture with a face value of $32.6
million and 1.5 million Class B Shares of Questfire. As a result, Advantage has recognized a $6.4 million loss on disposition as
the fair value assigned to the consideration received was less than the carrying value of the assets held for sale. Advantage recognized
$1.3 million of interest income earned at a 6% interest rate on the Questfire Debenture. The fair value of the Questfire Debenture
was based on a discounted cash flow model at a discount rate of 18% such that the fair value assigned of $25.4 million was less
than the face value. Advantage records accretion income each reporting period to increase the carrying value to the fair value
by the maturity date and therefore recognized $1.5 million of accretion income. The Class B Shares are recognized at fair value
based on quoted trading prices and we recognized an unrealized loss of $0.9 million associated with a decrease in the fair value
since acquired.



During the fourth quarter of 2013, Longview
disposed of a non-core property and recognized a loss of $1.8 million as the consideration received was less than the carrying
value of the assets.



Taxes



Deferred income taxes arise from differences
between the accounting and tax bases of our assets and liabilities. For the year ended December 31, 2013, the Corporation recognized
a deferred income tax expense of $2.2 million as a result of the $4.8 million net income before taxes and non-controlling interest.
As at December 31, 2013, the Corporation had a deferred income tax asset balance of $39.1 million and a deferred income tax liability
balance of $3.0 million.



|                                       |  | Estimated Tax Pools |      
|-------------------------------------- |  | ------------------- | -----
|                                       |  | December 31, 2013   |      
|                                       |  | ($ millions)        |      
|                                       |  | Advantage           |      
|Canadian Development Expenses          |  | $                   | 140  
|Canadian Exploration Expenses          |  |                     | 66   
|Canadian Oil and Gas Property Expenses |  |                     | -    
|Non-capital losses                     |  |                     | 752  
|Undepreciated Capital Cost             |  |                     | 161  
|Other                                  |  |                     | 21   
|                                       |  | $                   | 1,140



Advantage Oil & Gas Ltd. - 15







Net Income Attributable to Non-Controlling
Interest



At December 31, 2013, Advantage had a 45.1%
ownership interest in Longview with the remaining 54.9% held by outside interests or non-controlling interests. As Advantage held
the single largest ownership interest of Longview and other ownership interests were comparatively dispersed, Advantage was considered
to control Longview. Accordingly, Advantage’s consolidated financial statements include 100% of Longview’s accounts.
To determine the net income or loss attributable to the Advantage shareholders, it is necessary to deduct or add that portion of
the net income or loss related to Longview that is consolidated within Advantage’s financial results but is attributable
to the non-controlling interests. Therefore, for the year ended December 31, 2013, Advantage recognized a $6.0 million decrease
to net income related to Longview’s net income consolidated within Advantage’s financial results but attributable to
the non-controlling interests (December 31, 2012 – $8.0 million increase to net income related to Longview’s net loss
consolidated within Advantage’s financial results).



On February 4, 2014, Advantage entered
into an agreement to sell its remaining 21,150,010 common shares of Longview at a price of $4.45 per share. The offering closed
on February 28, 2014 and Advantage received net proceeds of $90.0 million, all of which were used to reduce existing bank indebtedness.
Concurrent with closing, Advantage ceased to consolidate Longview. As a result, historical consolidated financial and operating
performance may not be indicative of actual future performance.



Net Loss and Comprehensive Loss



|                                       |  | Three months ended |        |   |      |   |         | Year ended  |  |  |      |   
|-------------------------------------- |  | ------------------ | ------ | - | ---- | - | ------- | ----------- |  |  | ---- | --
|                                       |  | December 31        |        |   |      |   |         | December 31 |  |  |      |   
|                                       |  | 2013               |        |   | 2012 |   |         | % change    |  |  | 2013 |   
|                                       |  |                    |        |   |      |   |         |             |  |  |      |   
|Net loss and comprehensive loss ($000) |  | $                  | (5,403 | ) |      | $ | (60,218 | )           |  |  | (91  | )%
|per share - basic and diluted          |  | $                  | (0.03  | ) |      | $ | (0.36   | )           |  |  | (91  | )%



Advantage’s realized net loss for
the year ended December 31, 2013, decreased $85.7 million as compared to the same period of 2012. This improvement was primarily
due to significantly higher funds from operations, less depreciation expense and no impairment losses, partially offset by losses
recognized on non-core asset dispositions. Funds from operations have improved considerably during 2013 due to increases in commodity
prices and continued lower royalties and operating costs. Depreciation expense has decreased due to the significant non-core gas
weighted property dispositions that closed during the year. However, Advantage also recognized an $8.2 million loss on the property
dispositions as the fair value assigned to the consideration received was less than the carrying value of the assets. Advantage
did not recognize any impairment losses during 2013, while in 2012 both Advantage and Longview recognized impairments that totaled
$104.9 million.



Advantage Oil & Gas Ltd. - 16







Cash Netbacks



|                                        |  | Three months ended |         |   | Year ended  |  
|--------------------------------------- |  | ------------------ | ------- | - | ----------- | -
|                                        |  | December 31        |         |   | December 31 |  
|                                        |  | 2013               |         |   | 2012        |  
|                                        |  | $000               |         |   | per boe     |  
|Petroleum and natural gas sales         |  | $                  | 68,233  |   |             | $
|Royalties                               |  |                    | (7,928  | ) |             |  
|Realized loss on derivatives            |  |                    | (208    | ) |             |  
|Operating expense                       |  |                    | (14,305 | ) |             |  
|Operating  income                       |  |                    | 45,792  |   |             |  
|General and administrative (1)          |  |                    | (4,641  | ) |             |  
|Finance expense(2)                      |  |                    | (4,508  | ) |             |  
|Other income(3)                         |  |                    | 919     |   |             |  
|Funds from operations and cash netbacks |  | $                  | 37,562  |   |             | $



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

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

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



For the three months ended December 31,
2013, Advantage realized an increase of 15% in funds from operations to $37.6 million and an increase of 31% in cash netbacks to
$17.05 per boe, as compared to the fourth quarter of 2012. For the year ended December 31, 2013, Advantage realized an increase
of 38% in funds from operations to $148.5 million and an increase of 52% in cash netbacks to $16.00 per boe, as compared to 2012.
The increased funds from operations and cash netbacks have been primarily attributable to significantly improved commodity prices
and partially offset by lower production due to non-core asset dispositions. Realized natural gas prices, excluding hedging, increased
9% for the three months and 41% for the year ended December 31, 2013, as compared to the same periods of 2012.



Advantage Oil & Gas Ltd. - 17







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               |             |       | $                      | 1
..5
|Pipeline/transportation       |             |       |                        | 13.1 
|Bank indebtedness (1)         | - principal |       |                        | 272.5
|                              | - interest  |       |                        | 20.1 
|Convertible debentures (2)    | - principal |       |                        | 86.2 
|                              | - interest  |       |                        | 6.4  
|Total contractual obligations |             |       | $                      | 399.8



| | (1) | As at December 31, 2013, the Corporation’s bank indebtedness was governed by credit facility
agreements for each of Advantage and Longview with a syndicate of financial institutions. Under the terms of the agreements, the
facilities are reviewed annually, with the next reviews scheduled in June 2014. 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. On disposition of Advantage’s investment in Longview on February
28, 2014, there is only one credit facility agreement remaining for Advantage (refer to the section “Consolidation of Longview
Oil Corp”).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | As at December 31, 2013, 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.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Liquidity and Capital Resources



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



|                                                    |  | December 31, 2013 |            
|--------------------------------------------------- |  | ----------------- | -----------
|($000, except as otherwise indicated)               |  | Advantage         |            
|Bank indebtedness (non-current)                     |  | $                 | 153,697    
|Working capital deficit(1)                          |  |                   | 49,034     
|Net debt                                            |  |                   | 202,731    
|Convertible debentures maturity value (non-current) |  |                   | 86,250     
|Total debt                                          |  | $                 | 288,981    
|Shares outstanding                                  |  |                   | 168,382,838
|Shares closing market price ($/share)               |  | $                 | 4.61       
|Market capitalization(2)                            |  | $                 | 776,245    



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

| | (2) | Market capitalization is a non-GAAP measure calculated
by multiplying shares outstanding by the closing market share price on the applicable date 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 assets and
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 investments. The capital structure is reviewed
by Management and the Board on an ongoing basis.



Advantage Oil & Gas Ltd. - 18







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. 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. In order to strengthen our financial position and balance our cash flows, Advantage has systematically
disposed of substantially all non-core assets including its investment in the common shares of Longview. The net cash proceeds
from all disposition transactions were used to reduce outstanding bank indebtedness. Advantage is now a pure play company focused
on our signature Glacier Montney property. We will continue to be very cognizant of improving our financial flexibility in the
current environment.



Shareholders’ Equity and Convertible
Debentures



Advantage utilizes a combination of equity,
convertible debentures, bank indebtedness and funds from operations to finance acquisitions and development activities.



As at December 31, 2013, Advantage had
168.4 million common shares outstanding and there were no changes in share capital during the year ended December 31, 2013. As
at March 27, 2014, Advantage had 169.1 million common shares outstanding.



The Corporation had $86.2 million of 5.00%
convertible debentures outstanding at December 31, 2013 that were convertible to 10.0 million common shares based on the applicable
conversion price and will mature in January 2015 (December 31, 2012 - $86.2 million outstanding and convertible to 10.0 million
common shares). 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, 2013, Advantage had consolidated bank indebtedness outstanding of $271.3 million consisting of $153.7 million and
$117.6 million for each of the legal entities Advantage and Longview, respectively. Bank indebtedness has decreased $1.2 million
since December 31, 2012. On October 24, 2013, Advantage announced an increase in the credit facility borrowing base from $230 million
to $300 million which combined with Longview’s existing $200 million borrowing base resulted in a consolidated borrowing
base of $500 million as at December 31, 2013 (the “Credit Facilities”). Advantage’s 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. The next annual reviews are scheduled to occur in June 2014. There can be no assurance that the credit facilities
will be renewed at the current borrowing base levels at that time. On
disposition of Advantage’s investment in Longview on February 28, 2014, Advantage received net proceeds of $90.0 million
that was used to reduce existing bank indebtedness, and there is only one credit facility agreement remaining for Advantage (refer
to the section “Consolidation of Longview Oil Corp”)



Advantage had a consolidated working capital
deficiency of $58.5 million as at December 31, 2013. Our working capital includes items expected for normal operations such as
trade receivables, prepaids, deposits, and trade payables and accruals. Working capital varies primarily due to the timing of such
items, the current level of business activity including our capital expenditure program, commodity price volatility, and seasonal
fluctuations. Our working capital is normally in a deficit position due to our continuing capital development activities. The working
capital deficit has increased as at December 31, 2013 in conjunction with commencement of our Phase VI capital development program
at Glacier to increase production to 135 mmcfe/d. We do not anticipate any problems in satisfying working capital deficit and meeting
future obligations as they become due as they can be satisfied with funds from operations, our available Credit Facilities, or
proceeds from sale of investments.



Advantage Oil & Gas Ltd. - 19







Non-Controlling Interest



On completion of Longview’s initial
public offering on April 14, 2011, Advantage owned 29,450,010 common shares of Longview representing a 63% equity ownership with
the remaining 37% equity ownership held by outside interests or non-controlling interests. On May 22, 2012, Advantage sold 8,300,000
Longview common shares to a syndicate of underwriters at a price of $9.00 per common share for gross proceeds of $74.7 million.
At December 31, 2013, Advantage owned 21,150,010 common shares of Longview, representing an interest of approximately 45.1% in
Longview. As Advantage held the single largest ownership interest of Longview at December 31, 2013 and other ownership interests
were comparatively dispersed, Advantage was considered to control Longview. As such, Advantage’s consolidated financial statements
at December 31, 2013 include 100% of Longview’s accounts and non-controlling interest was recognized which represented Longview’s
independent shareholders ownership interest in the net assets of Longview. Non-controlling interest on the statement of financial
position was continually adjusted for the independent shareholders’ share of Longview’s net income or loss that was
consolidated within Advantage’s financial results and reduced for dividends declared by Longview to the independent shareholders.
Therefore, for the year ended December 31, 2013, Advantage recognized a $6.0 million decrease to net income related to Longview’s
net income consolidated within Advantage’s financial results but attributable to the non-controlling interests. This $6.0
million increased non-controlling interest on the statement of financial position with a decrease of $15.2 million related to dividends
declared by Longview to the non-controlling interest ownership.



On February 4, 2014, Advantage entered
into an agreement to sell its remaining 21,150,010 common shares of Longview at a price of $4.45 per share. The offering closed
on February 28, 2014 and Advantage received net proceeds of $90.0 million, all of which were used to reduce existing bank indebtedness.
Concurrent with closing, Advantage ceased to consolidate Longview.



Capital Expenditures



|                                                  |  | Three months ended |        |   | Year ended  |  
|------------------------------------------------- |  | ------------------ | ------ | - | ----------- | -
|                                                  |  | December 31        |        |   | December 31 |  
|($000)                                            |  | 2013               |        |   | 2012        |  
|Drilling, completions and workovers               |  | $                  | 72,043 |   |             | $
|Well equipping and facilities                     |  |                    | 7,991  |   |             |  
|Land and seismic                                  |  |                    | 31     |   |             |  
|Other                                             |  |                    | 79     |   |             |  
|Expenditures on property, plant and equipment     |  |                    | 80,144 |   |             |  
|Expenditures on exploration and evaluation assets |  |                    | 188    |   |             |  
|Proceeds from property dispositions(1)            |  |                    | (2,457 | ) |             |  
|Net capital expenditures(2)                       |  | $                  | 77,875 |   |             | $



(1) Proceeds from property dispositons represents the net cash
proceeds and excludes all other forms of consideration.

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



The
Advantage legal entity spent $148.5 million on property, plant and equipment for the year ended December 31, 2013, substantially
all of which was incurred at Glacier. Advantage continues to focus on development of our Montney natural gas resource play at Glacier,
Alberta where we will continue to employ a phased development approach. During the first quarter of 2013, we finished our Phase
V capital program with an inventory of wells that maintained average daily production from Glacier for the 2013 year at 105 mmcfe/d,
an increase of 14% from the prior year due to continued strong well performance and development. Our Phase VI Glacier capital program
commenced in the third quarter of 2013 with three drilling rigs and in early March 2014 Glacier production reached the 135 mmcfe/d
target approximately one month ahead of schedule. Nine new wells from Advantage’s Glacier Phase VI program were brought on
production to initially ramp production to 135 mmcfe/d with the remaining 13 new wells from our Phase VI program expected to provide
sufficient production inventory to maintain production at 135 mmcfe/d through to the end of 2014. Additionally, Advantage has spent
$6.7 million on exploration and evaluation assets to acquire an additional
43.25 sections (27,680 acres) of 100% working interest Montney lands. These lands are located southeast of Glacier in a fairway
that we believe is prospective for Middle Montney natural gas liquids. These
land parcels are held under licenses which will not expire until September 2017 and can be extended for an additional five years
with the drilling of two horizontal wells. These lands can also be continued indefinitely under production. Our total acreage position
in the Montney has increased to 125.65 gross (120.35 net) sections.



Advantage Oil & Gas Ltd. - 20







For the year ended December 31, 2013, Longview
spent $40.6 million on property, plant and equipment and exploration and evaluation assets which included $27.0 million in Saskatchewan,
$5.8 million at Sunset, $3.2 million at Nevis, and $1.7 million at Westerose, with the remaining spending for miscellaneous projects.
Longview drilled a total of 18.1 net (24 gross) wells at a 95% success rate, adding production of 1,738 boe/d (89% light oil).
Consistent with their business strategy, Longview developed and executed a sustainable and balanced 2013 budget that preserved
a strong balance sheet and utilized funds from operations to maintain their dividend policy and fund substantially all of their
capital expenditures. Longview’s 2014 capital drilling program is primarily focused on further development of their Midale
and Frobisher plays within Southeast Saskatchewan where they have an extensive land base, high working interests, fee title ownership
and existing infrastructure. In addition, they plan on continuing to advance their waterflood projects in Alberta through further
enhancement of injection facilities in preparation for future in-fill drilling programs.



Sources and Uses of Funds



The following table summarizes the various
funding requirements during the years ended December 31, 2013 and 2012 and the sources of funding to meet those requirements:



|                                                           |  | Year ended  |        
|---------------------------------------------------------- |  | ----------- | -------
|                                                           |  | December 31 |        
|($000)                                                     |  | 2013        |        
|Sources of funds                                           |  |             |        
|Funds from operations                                      |  | $           | 148,505
|Property dispositions                                      |  |             | 54,855 
|Change in non-cash working capital and other               |  |             | 14,657 
|Proceeds from Longview financing                           |  |             | -      
|Increase in bank indebtedness                              |  |             | -      
|                                                           |  | $           | 218,017
|Uses of funds                                              |  |             |        
|Expenditures on property, plant and equipment              |  | $           | 189,041
|Dividends declared by Longview to non-controlling interest |  |             | 15,191 
|Expenditures on exploration and evaluation assets          |  |             | 6,977  
|Expenditures on decommissioning liability                  |  |             | 5,158  
|Decrease in bank indebtedness                              |  |             | 1,650  
|Change in non-cash working capital and other               |  |             | -      
|                                                           |  | $           | 218,017



Funds from operations have increased primarily
attributable to significantly improved commodity prices and partially offset by lower production due to non-core asset dispositions.
The funds from operations and $54.9 million in net cash proceeds from the non-core asset dispositions were primarily used to fund
capital expenditures during the current year. Bank indebtedness was relatively unchanged during 2013 and 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.



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, 2013 |           |   | Dec. 31, 2012 |   |           | Dec. 31, 2011 | 
|Total sales (before royalties) ($000)      |  | $             | 289,742   |   |               | $ | 268,905   |               | 
|Net loss ($000)                            |  | $             | (3,382    | ) |               | $ | (89,125   | )             | 
|per share - basic and diluted              |  | $             | (0.02     | ) |               | $ | (0.53     | )             | 
|Total assets ($000)                        |  | $             | 1,765,244 |   |               | $ | 1,913,796 |               | 
|Long term financial liabilities ($000) (1) |  | $             | 353,793   |   |               | $ | 351,619   |               | 



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



Advantage Oil & Gas Ltd. - 21







Quarterly Performance



|                                           |  | 2013 |         |   | 2012 |  
|------------------------------------------ |  | ---- | ------- | - | ---- | -
|($000, except as otherwise
 indicated)     |  | Q4   |         |   | Q3   |  
|Daily production                           |  |      |         |   |      |  
|Natural gas
    (mcf/d)                    |  |      | 114,763 |   |      |  
|Crude oil and NGLs (bbls/d)                |  |      | 4,811   |   |      |  
|Total (boe/d)                              |  |      | 23,938  |   |      |  
|Average prices                             |  |      |         |   |      |  
|Natural gas ($/mcf)                        |  |      |         |   |      |  
|Excluding hedging                          |  | $    | 3.25    |   |      | $
|Including hedging                          |  | $    | 3.41    |   |      | $
|AECO daily index                           |  | $    | 3.52    |   |      | $
|Crude oil and NGLs ($/bbl)                 |  |      |         |   |      |  
|Excluding hedging                          |  | $    | 76.75   |   |      | $
|Including hedging                          |  | $    | 72.31   |   |      | $
|WTI ($US/bbl)                              |  | $    | 97.50   |   |      | $
|Total sales including
    realized hedging |  | $    | 68,025  |   |      | $
|Net income (loss)                          |  | $    | (5,403  | ) |      | $
|per share - basic                          |  | $    | (0.03   | ) |      | $
|- diluted                                  |  | $    | (0.03   | ) |      | $
|Funds from operations                      |  | $    | 37,562  |   |      | $



The table above highlights the Corporation’s
performance for the fourth quarter of 2013 and also for the preceding seven quarters. Production decreased in the second and third
quarters of 2012 as a result of numerous facilities outages due to annual turnaround maintenance, facility construction activities,
and prolonged spring break-up and other related weather conditions that caused lease access restrictions. Wet weather delayed our
Glacier capital program that resumed in September 2012 to maintain production at between 90 and 100 mmcf/d. Production was also
impacted as production from our Lookout Butte property (1,000 boe/d) in southern Alberta was curtailed in June 2012 due to maintenance
and a fire that occurred at a third party processing facility. With Lookout Butte back on production in early November 2012 and
the resumption of our capital programs, we experienced an improvement in our fourth quarter 2012 and first quarter 2013 production.
Production decreased in the second and third quarters of 2013 as we completed our final significant non-core asset disposition
on April 30, 2013.



During the third quarter of 2013, sales
and funds from operations decreased due to a temporary collapse in AECO prices that impacted the entire Alberta natural gas industry
attributable to a significant increase in the TransCanada interruptible tolls for the transportation of natural gas from Alberta.
This situation improved in the fourth quarter of 2013 with higher AECO prices for the new natural gas contract year that began
November 1, 2013.



Advantage has generally recognized net
losses primary driven by weak natural gas prices, although we have also continued to achieve cost reductions and lower expenses.
During the fourth quarter of 2012 our assets held for sale were reflected at the lesser of fair value less costs to sell and carrying
amount, which resulted in an impairment recognition of $73 million. Additionally, in the fourth quarter of 2012 Longview recognized
an impairment loss of $31.9 million related to one CGU located in Alberta that had suffered a significant deterioration in value
due to the reduction in crude oil prices and decreased reserves.



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.



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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 are based on estimates. These estimates are significant and can
include proved and probable reserves, future production rates, future commodity prices, future costs, future interest rates, future
tax rates and other relevant assumptions. Revisions or changes in any of these estimates can have either a positive or a negative
impact on asset and liability values, net income 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.



Changes in Accounting Policies



The Corporation has adopted, as required,
the following new and revised standards along with any consequential amendments, effective January 1, 2013.



IFRS 10 Consolidated Financial Statements



IFRS 10 is a new standard that has replaced
SIC 12, “Consolidation – Special Purpose Entities” and IAS 27 “Consolidated and Separate Financial Statements”.
The new standard eliminates the risks and rewards approach and establishes control as the single basis for determining the consolidation
of an entity. We have determined that the new standard has no effect on the accounting methodology with respect to Longview Oil
Corp. We will continue to control Longview Oil Corp. under IFRS 10 as we did under IAS 27, and as such will consolidate Longview
Oil Corp. as a subsidiary of Advantage.



IFRS 11 – Joint Arrangements,
IAS 28 – Investments in Associates and Joint Ventures



IFRS 11 supersedes IAS 31, Interests in
Joint Ventures and SIC-13, Jointly Controlled Entities, Non-Monetary Contributions by Ventures and requires a venture to classify
its interest in a joint arrangement as a joint venture or joint operation depending on the contractual rights and obligations
of the parties that jointly controls the arrangement. Joint ventures will be accounted for using the equity method of accounting
as set out in IAS 28 whereas for a joint operation, the venture will recognize its share of the assets, liabilities, revenue and
expenses. The Corporation determined all of its joint arrangements to be joint operations as defined in IFRS 11 and that the adoption
and application of these standards did not result in any changes in the accounting for joint arrangements.



IFRS 12 Disclosure of Interests in
Other Entities



IFRS 12 provides the required disclosures
for interests in subsidiaries, investees and joint arrangements. These disclosures 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. The adoption of this standard did not result in any changes or additions to existing disclosures with respect
to Questfire Energy Corp, an investee, or the Corporations interests in joint arrangements. With respect to Longview Oil Corp.,
a subsidiary, the Corporation has disclosed dividends paid to non-controlling interests as well as summarized information about
the assets, liabilities, profit or loss and cash flows of Longview Oil Corp., in order to assist readers in understanding the interest
that non-controlling interests have in the Corporation’s activities and cash flows in note 27 of the consolidated financial
statements.



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. The adoption of this standard
did not require any adjustments to the valuation techniques used by the Corporation to measure fair value and did not result in
any measurement adjustments as at January 1, 2013.



IAS 28 – Investments in Associates
and Joint Ventures



IAS 28 has been amended to include joint
ventures in its scope and to address the changes in IFRS 10 to 13. The adoption of this standard did not result in any changes
or additions to existing disclosures.



Advantage Oil & Gas Ltd. - 23







IAS 36 Impairment of Assets



In May 2013, the IASB issued an amendment
to IAS 36, Impairment of Assets. The amendment removes certain disclosures of the recoverable amount of a CGU. The amendment is
effective retrospectively for annual periods beginning on or after January 1, 2014. As allowed by the standard, the Corporation
early adopted the amendment in the current period. No additional disclosures were required as a result of this early adoption.



Accounting Pronouncements 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.



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.



Evaluation of Disclosure Controls and
Procedures



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



Management of Advantage, including our
Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Corporation’s DC&P as at
December 31, 2013. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the DC&P
are effective as of the end of the year, in all material respects.



Evaluation of Internal Controls over
Financial Reporting



Advantage’s Chief Executive Officer
and Chief Financial Officer are responsible for establishing and maintaining internal control over financial reporting (“ICFR”).
They have as at the financial year end December 31, 2013, 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, 2013. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the ICFR are effective
as of the end of the year, in all material respects.



Advantage’s Chief Executive Officer
and Chief Financial Officer are required to disclose any change in the ICFR that occurred during our most recent interim period
that has materially affected, or is reasonably likely to materially affect, the Corporation’s ICFR. No material changes in
the ICFR were identified during the interim period ended December 31, 2013 that have materially affected, or are reasonably likely
to materially affect, our ICFR.



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



Advantage Oil & Gas Ltd. - 24







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.



Additional Information



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



March 27, 2014



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