Consolidated Financial Statements



Management’s Responsibility for Financial Statements



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



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



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



PricewaterhouseCoopers LLP, an independent
firm of Chartered Accountants, appointed by the shareholders as the external auditor of the Corporation, has audited the consolidated
statement of financial position as at December 31, 2012 and 2011, and the consolidated statements of comprehensive loss, changes
in shareholders’ equity and cash flows for the years ended December 31, 2012 and 2011. The external auditors conducted their
audits in accordance with Canadian generally accepted auditing standards and have unlimited and unrestricted access to the Audit
Committee.



|                  |                
|----------------- | ---------------
|                  |                
|Andy J. Mah       | Kelly I. Drader
|President and CEO | CFO            
|March 25, 2013    |                
|                  |                



Advantage Oil & Gas Ltd. - 1







Management’s Report on Internal Control over Financial
Reporting



The Management of Advantage Oil & Gas
Ltd. (the “Corporation”) is responsible for establishing and maintaining adequate internal control over financial reporting
for the Corporation as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended. Under the supervision
of our Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”). Based on our assessment, we have concluded that as of December 31, 2012, our internal
control over financial reporting was effective.



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



PricewaterhouseCoopers LLP, the Corporation’s
independent firm of Chartered Accountants, was appointed by the shareholders to audit and provide an independent opinion on both
the consolidated financial statements and the Corporation’s internal control over financial reporting as at December 31,
2012, as stated in their Auditor’s Report. PricewaterhouseCoopers LLP has provided such opinion.



|                  |                
|----------------- | ---------------
|                  |                
|Andy J. Mah       | Kelly I. Drader
|President and CEO | CFO            
|March 25, 2013    |                
|                  |                



Advantage Oil & Gas Ltd. - 2











March 25, 2013



Independent Auditor’s Report



To theShareholders of Advantage
Oil & Gas Ltd.



We have completed integrated audits
ofAdvantage Oil & Gas Ltd.’s 2012 and 2011 consolidatedfinancial statementsand
its internalcontrol over financial reporting as atDecember 31, 2012.Our opinions, based on our audits are presented below.



Report on theconsolidated
financial statements

We have audited the accompanying consolidated financial statements
of Advantage Oil & Gas Ltd.,which comprise theconsolidated
statement of financial position as at December 31, 2012andDecember
31, 2011 and the consolidated statements of comprehensive loss, changes in shareholders’ equity, and cash flows for the years
then ended, and the related notes, which comprise a summary of significant accounting policies and other
explanatory information.



Management’s
responsibility for theconsolidated financial statements

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



Auditor’s responsibility

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



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



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



Advantage Oil & Gas Ltd. - 3











Opinion

In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of Advantage Oil & Gas Ltd. as at December 31, 2012and December 31, 2011 and its financial performance and its cash flows for the years then ended in accordance with International
Financial Reporting Standards as issued by the International Accounting Standards Board.



Report on internal control over financial reporting

We have also audited Advantage Oil & Gas Ltd.’s internal
control over financial reporting as at December 31, 2012, based on criteria established in Internal Control - Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).



Management’s responsibility for internal control over
financial reporting

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



Auditor’s responsibility

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



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



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



Definition of internal control over financial reporting

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



Advantage Oil & Gas Ltd. - 4











Inherent limitations

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



Opinion

In our opinion, Advantage Oil & Gas Ltd.maintained, in all material respects, effective internal control over financial reporting as at December 31, 2012, based
on criteria established in Internal Control - Integrated Framework issued by COSO.







Chartered Accountants



Calgary, Alberta

March 25, 2013



Advantage Oil & Gas Ltd. - 5







|Consolidated Statement of Financial Position                      |  |  |       |  |  |                   |            |   |                  
|----------------------------------------------------------------- |  |  | ----- |  |  | ----------------- | ---------- | - | -----------------
|(thousands of Canadian dollars)                                   |  |  | Notes |  |  | December 31, 2012 |            |   | December 31, 2011
|                                                                  |  |  |       |  |  |                   |            |   |                  
|ASSETS                                                            |  |  |       |  |  |                   |            |   |                  
|Current assets                                                    |  |  |       |  |  |                   |            |   |                  
|Trade and other receivables                                       |  |  | 8     |  |  | $                 | 32,657     |   |                  
|Prepaid expenses and deposits                                     |  |  |       |  |  |                   | 5,143      |   |                  
|Derivative asset                                                  |  |  | 6     |  |  |                   | 2,186      |   |                  
|Assets held for sale                                              |  |  | 7     |  |  |                   | 222,877    |   |                  
|Total current assets                                              |  |  |       |  |  |                   | 262,863    |   |                  
|                                                                  |  |  |       |  |  |                   |            |   |                  
|Non-current assets                                                |  |  |       |  |  |                   |            |   |                  
|Exploration and evaluation assets                                 |  |  | 9     |  |  |                   | 2,381      |   |                  
|Property, plant and equipment                                     |  |  | 10    |  |  |                   | 1,605,659  |   |                  
|Deferred income tax asset                                         |  |  | 14    |  |  |                   | 42,893     |   |                  
|Total non-current assets                                          |  |  |       |  |  |                   | 1,650,933  |   |                  
|                                                                  |  |  |       |  |  |                   |            |   |                  
|Total assets                                                      |  |  |       |  |  | $                 | 1,913,796  |   |                  
|                                                                  |  |  |       |  |  |                   |            |   |                  
|LIABILITIES                                                       |  |  |       |  |  |                   |            |   |                  
|Current liabilities                                               |  |  |       |  |  |                   |            |   |                  
|Trade and other accrued liabilities                               |  |  |       |  |  | $                 | 84,979     |   |                  
|Derivative liability                                              |  |  | 6     |  |  |                   | 1,096      |   |                  
|Other liability                                                   |  |  | 15    |  |  |                   | -          |   |                  
|Liabilities associated with assets held for sale                  |  |  | 7     |  |  |                   | 136,540    |   |                  
|Total current liabilities                                         |  |  |       |  |  |                   | 222,615    |   |                  
|                                                                  |  |  |       |  |  |                   |            |   |                  
|Non-current liabilities                                           |  |  |       |  |  |                   |            |   |                  
|Bank indebtedness                                                 |  |  | 11    |  |  |                   | 272,511    |   |                  
|Convertible debentures                                            |  |  | 12    |  |  |                   | 79,108     |   |                  
|Decommissioning liability                                         |  |  | 13    |  |  |                   | 126,224    |   |                  
|Deferred income tax liability                                     |  |  | 14    |  |  |                   | 4,628      |   |                  
|Total non-current liabilities                                     |  |  |       |  |  |                   | 482,471    |   |                  
|                                                                  |  |  |       |  |  |                   |            |   |                  
|Total liabilities                                                 |  |  |       |  |  |                   | 705,086    |   |                  
|                                                                  |  |  |       |  |  |                   |            |   |                  
|SHAREHOLDERS' EQUITY                                              |  |  |       |  |  |                   |            |   |                  
|Share capital                                                     |  |  | 16    |  |  |                   | 2,229,598  |   |                  
|Convertible debentures equity component                           |  |  | 12    |  |  |                   | 8,348      |   |                  
|Contributed surplus                                               |  |  |       |  |  |                   | 84,962     |   |                  
|Deficit                                                           |  |  |       |  |  |                   | (1,252,206 | ) |                  
|Total shareholders' equity attributable to Advantage shareholders |  |  |       |  |  |                   | 1,070,702  |   |                  
|Non-controlling interest                                          |  |  | 5     |  |  |                   | 138,008    |   |                  
|Total shareholders' equity                                        |  |  |       |  |  |                   | 1,208,710  |   |                  
|Total liabilities and shareholders' equity                        |  |  |       |  |  | $                 | 1,913,796  |   |                  



Commitments(note 24)

Subsequent events(note 7 and note27)

See accompanying Notes to the Consolidated Financial Statements

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



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



Advantage Oil & Gas Ltd. - 6







|Consolidated Statement of Comprehensive Loss                           |  |  |       |  |            |                   |          |            |                  
|---------------------------------------------------------------------- |  |  | ----- |  | ---------- | ----------------- | -------- | ---------- | -----------------
|                                                                       |  |  |       |  | Year ended |                   |          | Year ended |                  
|(thousands of Canadian dollars, except for per share amounts)          |  |  | Notes |  |            | December 31, 2012 |          |            | December 31, 2011
|                                                                       |  |  |       |  |            |                   |          |            |                  
|Petroleum and natural gas sales                                        |  |  | 19    |  |            | $                 | 268,905  |            |                  
|Less: royalties                                                        |  |  |       |  |            |                   | (34,126  | )          |                  
|Petroleum and natural gas revenue                                      |  |  |       |  |            |                   | 234,779  |            |                  
|                                                                       |  |  |       |  |            |                   |          |            |                  
|Operating expense                                                      |  |  |       |  |            |                   | (89,229  | )          |                  
|General and administrative expense                                     |  |  | 21    |  |            |                   | (28,180  | )          |                  
|Depreciation expense                                                   |  |  | 10    |  |            |                   | (132,175 | )          |                  
|Impairment of assets held for sale                                     |  |  | 7     |  |            |                   | (73,000  | )          |                  
|Impairment of oil and gas properties                                   |  |  | 10    |  |            |                   | (31,865  | )          |                  
|Exploration and evaluation expense                                     |  |  | 9     |  |            |                   | (181     | )          |                  
|Finance expense                                                        |  |  | 22    |  |            |                   | (26,299  | )          |                  
|Gains on derivatives                                                   |  |  | 6     |  |            |                   | 2,858    |            |                  
|Other income                                                           |  |  | 20    |  |            |                   | 17,559   |            |                  
|Loss before taxes and non-controlling interest                         |  |  |       |  |            |                   | (125,733 | )          |                  
|Income tax recovery                                                    |  |  | 14    |  |            |                   | 28,605   |            |                  
|Net loss and comprehensive loss before non-controlling interest        |  |  |       |  |            |                   | (97,128  | )          |                  
|Net loss (income) attributable to non-controlling interest             |  |  |       |  |            |                   | 8,003    |            |                  
|                                                                       |  |  |       |  |            |                   |          |            |                  
|Net loss and comprehensive loss attributable to Advantage shareholders |  |  |       |  |            | $                 | (89,125  | )          |                  
|                                                                       |  |  |       |  |            |                   |          |            |                  
|Net loss per share attributable to Advantage shareholders              |  |  | 18    |  |            |                   |          |            |                  
|Basic                                                                  |  |  |       |  |            | $                 | (0.53    | )          |                  
|Diluted                                                                |  |  |       |  |            | $                 | (0.53    | )          |                  



See accompanying Notes to the Consolidated Financial Statements



Advantage Oil & Gas Ltd. - 7







Consolidated Statement of Changes in Shareholders' Equity



|(thousands of Canadian dollars)                                        |  |  | Notes                                                              |  |  | Share
    capital |           |  | Convertible
     debentures equity component |   |       | Contributed
    surplus |  |   | Deficit |   |  | Total
    shareholders' equity attributable to Advantage shareholders |            |   | Non-
    controlling interest |   |           | Total
    shareholders'  equity | 
|---------------------------------------------------------------------- |  |  | ------------------------------------------------------------------ |  |  | ----------------- | --------- |  | -------------------------------------------- | - | ----- | ----------------------- |  | - | ------- | - |  | --------------------------------------------------------------------- | ---------- | - | ----------------------------- | - | --------- | ------------------------------- | 
|                                                                       |  |  |                                                                    |  |  |                   |           |  |                                              |   |       |                         |  |   |         |   |  |                                                                       |            |   |                               |   |           |                                
|Balance, December 31, 2011                                             |  |  |                                                                    |  |  | $                 | 2,214,784 |  |                                              | $ | 8,348 |                         |  | $ | 71,762  |   |  | $                                                                     | (1,163,081 | ) |                               | $ | 1,131,813 |                                 | 
|Net loss and comprehensive loss                                        |  |  |                                                                    |  |  |                   | -         |  |                                              |   | -     |                         |  |   | -       |   |  |                                                                       | (89,125    | ) |                               |   | (89,125   | )                               | 
|Share based compensation                                               |  |  | 16,
                                                            17 |  |  |                   | 14,814    |  |                                              |   | -     |                         |  |   | (6,671  | ) |  |                                                                       | -          |   |                               |   | 8,143     |                                 | 
|Change in ownership interest, sale of 8,300,000
    shares of Longview |  |  | 5                                                                  |  |  |                   | -         |  |                                              |   | -     |                         |  |   | 19,871  |   |  |                                                                       | -          |   |                               |   | 19,871    |                                 | 
|Change in ownership interest, share based compensation                 |  |  |                                                                    |  |  |                   | -         |  |                                              |   | -     |                         |  |   | -       |   |  |                                                                       | -          |   |                               |   | -         |                                 | 
|Dividends declared by Longview
    ($0.60 per Longview share)          |  |  |                                                                    |  |  |                   | -         |  |                                              |   | -     |                         |  |   | -       |   |  |                                                                       | -          |   |                               |   | -         |                                 | 
|Balance, December 31, 2012                                             |  |  |                                                                    |  |  | $                 | 2,229,598 |  |                                              | $ | 8,348 |                         |  | $ | 84,962  |   |  | $                                                                     | (1,252,206 | ) |                               | $ | 1,070,702 |                                 | 
|                                                                       |  |  |                                                                    |  |  |                   |           |  |                                              |   |       |                         |  |   |         |   |  |                                                                       |            |   |                               |   |           |                                 | 
|Balance, December 31, 2010                                             |  |  |                                                                    |  |  | $                 | 2,199,491 |  |                                              | $ | 8,348 |                         |  | $ | 14,783  |   |  | $                                                                     | (1,010,309 | ) |                               | $ | 1,212,313 |                                 | 
|Net loss and comprehensive loss                                        |  |  |                                                                    |  |  |                   | -         |  |                                              |   | -     |                         |  |   | -       |   |  |                                                                       | (152,772   | ) |                               |   | (152,772  | )                               | 
|Share based compensation                                               |  |  | 16,
                                                            17 |  |  |                   | 15,293    |  |                                              |   | -     |                         |  |   | (770    | ) |  |                                                                       | -          |   |                               |   | 14,523    |                                 | 
|Change in ownership interest, common control transaction               |  |  | 5                                                                  |  |  |                   | -         |  |                                              |   | -     |                         |  |   | 57,749  |   |  |                                                                       | -          |   |                               |   | 57,749    |                                 | 
|Change in ownership interest, share based compensation                 |  |  |                                                                    |  |  |                   | -         |  |                                              |   | -     |                         |  |   | -       |   |  |                                                                       | -          |   |                               |   | -         |                                 | 
|Dividends declared by Longview
    ($0.40 per Longview share)          |  |  |                                                                    |  |  |                   | -         |  |                                              |   | -     |                         |  |   | -       |   |  |                                                                       | -          |   |                               |   | -         |                                 | 
|Balance, December 31, 2011                                             |  |  |                                                                    |  |  | $                 | 2,214,784 |  |                                              | $ | 8,348 |                         |  | $ | 71,762  |   |  | $                                                                     | (1,163,081 | ) |                               | $ | 1,131,813 |                                 | 



See accompanying Notes to the Consolidated Financial Statements



Advantage Oil & Gas Ltd. - 8







Consolidated Statement of Cash Flows



|                                                  |  |  |        |  | Year ended |                   |          | Year ended |                  
|------------------------------------------------- |  |  | ------ |  | ---------- | ----------------- | -------- | ---------- | -----------------
|(thousands of Canadian dollars)                   |  |  | Notes  |  |            | December 31, 2012 |          |            | December 31, 2011
|                                                  |  |  |        |  |            |                   |          |            |                  
|Operating Activities                              |  |  |        |  |            |                   |          |            |                  
|Loss before taxes and non-controlling interest    |  |  |        |  |            | $                 | (125,733 | )          |                  
|Add (deduct) items not requiring cash:            |  |  |        |  |            |                   |          |            |                  
|Share based compensation                          |  |  | 17     |  |            |                   | 7,220    |            |                  
|Depreciation expense                              |  |  | 10     |  |            |                   | 132,175  |            |                  
|Impairment of assets held for sale                |  |  | 7      |  |            |                   | 73,000   |            |                  
|Impairment of oil and gas properties              |  |  | 10     |  |            |                   | 31,865   |            |                  
|Exploration and evaluation expense                |  |  | 9      |  |            |                   | 181      |            |                  
|Unrealized (gain) loss on derivatives             |  |  | 6      |  |            |                   | (3,828   | )          |                  
|Gain on sale of property, plant and equipment     |  |  | 20     |  |            |                   | (16,964  | )          |                  
|Finance expense                                   |  |  | 22     |  |            |                   | 26,299   |            |                  
|Expenditures on decommissioning liability         |  |  | 13     |  |            |                   | (2,395   | )          |                  
|Changes in non-cash working capital               |  |  | 23     |  |            |                   | (14,864  | )          |                  
|Cash provided by operating activities             |  |  |        |  |            |                   | 106,956  |            |                  
|                                                  |  |  |        |  |            |                   |          |            |                  
|Financing Activities                              |  |  |        |  |            |                   |          |            |                  
|Proceeds from Longview financing                  |  |  | 5      |  |            |                   | 71,563   |            |                  
|Increase (decrease) in bank indebtedness          |  |  | 11     |  |            |                   | 40,268   |            |                  
|Convertible debenture maturities                  |  |  | 12     |  |            |                   | -        |            |                  
|Dividends paid by Longview                        |  |  |        |  |            |                   | (13,318  | )          |                  
|Reduction of capital lease obligations            |  |  |        |  |            |                   | -        |            |                  
|Interest paid                                     |  |  |        |  |            |                   | (17,190  | )          |                  
|Cash provided by financing activities             |  |  |        |  |            |                   | 81,323   |            |                  
|                                                  |  |  |        |  |            |                   |          |            |                  
|Investing Activities                              |  |  |        |  |            |                   |          |            |                  
|Expenditures on property, plant and equipment     |  |  | 10, 23 |  |            |                   | (201,429 | )          |                  
|Expenditures on exploration and evaluation assets |  |  | 9      |  |            |                   | (377     | )          |                  
|Property dispositions                             |  |  |        |  |            |                   | 13,527   |            |                  
|Cash used in investing activities                 |  |  |        |  |            |                   | (188,279 | )          |                  
|Net change in cash                                |  |  |        |  |            |                   | -        |            |                  
|Cash, beginning of year                           |  |  |        |  |            |                   | -        |            |                  
|Cash, end of year                                 |  |  |        |  |            | $                 | -        |            |                  



See accompanying Notes to the Consolidated Financial Statements



Advantage Oil & Gas Ltd. - 9









Notes
to The Consolidated Financial Statements



For the years ended
December 31, 2012 and 2011



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



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



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



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



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



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



The Corporation prepares its financial
statements in accordance with Canadian generally accepted accounting principles (“GAAP”) as defined in the Handbook
of the Canadian Institute of Chartered Accountants (“CICA Handbook”). The CICA Handbook incorporates International
Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. Publicly accountable
enterprises, such as the Corporation, are required to apply these standards. Accordingly, these consolidated financial statements
are prepared and issued under IFRS.



The accounting policies applied in these
financial statements are based on IFRS issued and outstanding as of March 25, 2013, the date the Board of Directors approved the
statements.



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



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



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



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



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



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



These consolidated financial statements
include the accounts of the Corporation and all subsidiaries over which it has control, including Longview Oil Corp. (“Longview”),
a public Canadian corporation of which Advantage owns 45.2% at December 31, 2012, and the remaining ownership is disclosed as non-controlling
interest. All inter-corporate balances, income and expenses resulting from inter-corporate transactions are eliminated.



Advantage Oil & Gas Ltd. - 10







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



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



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



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



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



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



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



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



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



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





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





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



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



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



Advantage Oil & Gas Ltd. - 11







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



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



Transaction costs are frequently attributed
to the acquisition or issue of a financial asset or liability. Such costs incurred on fair value through profit or loss financial
instruments are expensed immediately. For other financial instruments, transaction costs are added to the fair value initially
recognized for financial assets and liabilities.



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



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



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



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



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



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



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



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



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



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



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



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



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



Advantage Oil & Gas Ltd. - 12







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



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



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



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



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



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



| | (e) | Assets held for sale
| | --- | --------------------



Assets are classified as held for sale
if their carrying amounts will be recovered through a sale transaction rather than through continuing use. Assets held for sale
are measured at the lower of carrying amount and fair value less costs to sell and presented as a current asset on the Consolidated
Statement of Financial Position. This condition is regarded as met only when the sale is highly probable and the asset is available
for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for
recognition as a completed sale within one year from the date of classification.



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



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



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



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



| | (g) | Impairment
| | --- | ----------



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



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



Advantage Oil & Gas Ltd. - 13







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



| | (g) | Impairment (continued)
| | --- | ----------------------



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



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



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



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



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



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



| | (h) | Decommissioning liability
| | --- | -------------------------



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



Advantage Oil & Gas Ltd. - 14







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



| | (i) | Share based compensation
| | --- | ------------------------



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



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



Advantage’s Stock Option Plan (“Stock
Option Plan”) authorizes the Board of Directors to grant stock options to service providers, including directors, officers,
employees and consultants of Advantage. Compensation cost related to the Stock Option Plan is recognized as share based compensation
expense within general and administrative expense over the vesting period at fair value, as described in note 6.



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



| | (j) | Common-control transaction
| | --- | --------------------------



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



| | (k) | Revenue
| | --- | -------



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



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



| | (l) | Finance expense
| | --- | ---------------



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



| | (m) | Income tax
| | --- | ----------



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



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



Advantage Oil & Gas Ltd. - 15









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



| | (m) | Income tax (continued)
| | --- | ----------------------



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



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



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



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



| | (o) | Segmented information
| | --- | ---------------------



The Corporation has determined that it
has two reportable operating segments, being the legal entities Advantage and Longview. These segments were determined on the basis
of their different economic characteristics. Advantage is a natural gas focused producer and Longview is an oil and natural gas
liquids focused producer. Furthermore, each legal entity’s Board of Directors decides how to allocate resources and assess
performance.



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



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



IFRS 9 Financial Instruments: Classification
and Measurement



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



IFRS 10 Consolidated Financial Statements



IFRS 10 is a new standard that will replace
SIC 12, “Consolidation – Special Purpose Entities” and IAS 27 “Consolidated and Separate Financial Statements”.
The new standard eliminates the current risks and rewards approach and establishes control as the single basis for determining
the consolidation of an entity. This standard is applicable for annual periods commencing on or after January 1, 2013. We have
determined that the new standard will have no effect on the current 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.



Advantage Oil & Gas Ltd. - 16







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



| | (p) | New standards and interpretations not yet adopted (continued)
| | --- | -------------------------------------------------------------



IFRS 11 Joint Arrangements



IFRS 11 requires a venture to classify
its interest in a joint arrangement as a joint venture or joint operation. Joint ventures will be accounted for using the equity
method of accounting whereas for a joint operation, the venture will recognize its share of the assets, liabilities, revenue and
expenses. Under existing IFRS, entities have the choice to proportionately consolidate or equity account for interests in joint
ventures. IFRS 11 supersedes IAS 31, Interests in Joint Ventures and SIC-13, Jointly Controlled Entities, Non-Monetary Contributions
by Venturers. This standard is applicable for annual periods commencing on or after January 1, 2013. We have determined that our
joint arrangements are all joint operations as defined in IFRS 11. Parties to a joint operation, called joint operators, are required
to recognize their share of the assets, liabilities, revenues and expenses of the joint operation. Since this is not different
from our current methodology applied for jointly controlled assets as defined under IAS 31, there will be no changes involved in
adoption of IFRS 11.



IFRS 12 Disclosure of Interests in Other
Entities



IFRS 12 provides the required disclosures
for interests in subsidiaries and joint arrangements. These disclosures will require information that will assist users of financial
statements to evaluate the nature, risks and financial effects associated with an entity’s interests in subsidiaries and
joint arrangements. This standard is applicable for annual periods commencing on or after January 1, 2013. We have determined that
this standard will require us to provide additional disclosure of the nature of and risks associated with our interest in our subsidiary,
Longview Oil Corp. With respect to joint arrangements, we do not expect to be providing additional disclosure, as our joint arrangements
are numerous, and no single one is material to the reporting entity.



IFRS 13 – Fair Value Measurement



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



IAS 28 – Investments in Associates
and Joint Ventures



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



Advantage Oil & Gas Ltd. - 17







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



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



Estimates and assumptions



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



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



| | · | Note 7 – valuation and impairment
of assets held for sale;
| | - | ----------------------------------------------------------



| | · | Note 10 – valuation of property,
plant and equipment;
| | - | -----------------------------------------------------



| | · | Note 9 & 10 – impairment of
exploration and evaluation assets and property, plant and equipment;
| | - | ------------------------------------------------------------------------------------------------



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



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



| | · | Note 14 – measurement of deferred
income tax; and
| | - | -------------------------------------------------



| | · | Note 17 – measurement of share based
compensation.
| | - | --------------------------------------------------



Judgments



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



| | (a) | Consolidation
| | --- | -------------



At December 31, 2012, Advantage controls
45.2% of the voting rights of Longview. Although this is below 50%, management has determined that Advantage has the power to govern
the financial and operating policies of Longview so as to obtain benefits from its activities, due to the comparatively dispersed
ownership among the non-controlling interest.



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



Costs incurred to acquire rights to explore
for oil and natural gas may be grouped into either exploration and evaluation or development and production, depending on facts
and circumstances. Costs incurred in respect of properties that have been determined to have proved or probable reserves, are classified
as development and production properties. In such circumstances, technical feasibility and commercial viability are considered
to be established. Costs incurred in respect of new prospects with no nearby established development past or present and no proved
or probable reserves assigned are classified as exploration and evaluation assets (note 9).



| | (c) | Reserves base
| | --- | -------------



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



Advantage Oil & Gas Ltd. - 18







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



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



Oil and gas properties are depreciated
using the UOP method over proved plus probable reserves. The calculation of the UOP rate of depreciation could be impacted to the
extent that actual production in the future is different from current forecast production based on proved plus probable reserves
(note 10).



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



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



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



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



When management judges that circumstances
indicate potential impairment, property, plant and equipment are tested for impairment by comparing the carrying values to their
recoverable amounts. The recoverable amounts of cash generating units are determined based on the higher of value-in-use calculations
and fair values less costs to sell. These calculations require the use of estimates and assumptions, that are subject to change
as new information becomes available including information on future commodity prices, expected production volumes, quantities
of reserves, discount rates, future development costs and operating costs (note 9 & 10).



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



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



| | (h) | Income taxes
| | --- | ------------



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





Advantage Oil & Gas Ltd. - 19







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



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



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



On May 22, 2012, Advantage sold 8,300,000
common shares of Longview to a syndicate of underwriters, for net proceeds of $71.6 million. As a result, Advantage now owns 21,150,010
common shares of Longview, representing an interest of approximately 45.2% in Longview. As Advantage holds the single largest ownership
interest of Longview, and other ownership interests are comparatively dispersed, Advantage is considered to control Longview. The
sale of Longview shares is a transaction with non-controlling interests that did not result in a loss of control. Accordingly,
non-controlling interest has been increased by $51.7 million, the adjustment between the carrying amounts of the controlling and
non-controlling interests to reflect the changes in their relative interests in Longview. The difference of $19.9 million between
the net proceeds and the adjustment has been credited to shareholders’ equity attributable to Advantage shareholders through
contributed surplus.



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



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



Trade and other receivables and deposits
are classified as loans and receivables and measured at amortized cost. Trade and other accrued liabilities, bank indebtedness
and other liabilities are all classified as financial liabilities at amortized cost. As at December 31, 2012, there were no significant
differences between the carrying amounts reported on the Consolidated Statement of Financial Position and the estimated fair values
of these financial instruments due to the short terms to maturity and the floating interest rate on the bank indebtedness.



The Corporation has
a convertible debenture obligation outstanding, of which the liability component has been classified as a financial liability at
amortized cost. The convertible debenture has fixed terms and interest rates (note 12) resulting in fair values that will vary
over time as market conditions change. As at December 31, 2012, the estimated fair value of the outstanding convertible debenture
obligation was $86.0 million (December 31, 2011 - $82.8 million). The fair value of the liability component of convertible debentures
was determined based on the current public trading activity of the debenture.



Fair value is determined
following a three level hierarchy:



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



Level 2: Inputs other than quoted prices
included within Level 1 that are observable, either directly or indirectly. Such inputs can be corroborated with other observable
inputs for substantially the complete term of the contract. For derivative assets and liabilities, pricing inputs include quoted
forward prices for commodities, foreign exchange rates, volatility and risk-free rate discounting, all of which can be observed
or corroborated in the marketplace. The actual gains and losses realized on eventual cash settlement can vary materially due to
subsequent fluctuations in commodity prices as compared to the valuation assumptions.



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



Advantage Oil & Gas Ltd. - 20















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



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



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



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



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



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



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



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



|                            |  | December 31, 2012 |        |  | December 31, 2011 |  
|--------------------------- |  | ----------------- | ------ |  | ----------------- | -
|Trade and other receivables |  | $                 | 32,657 |  |                   | $
|Deposits                    |  |                   | 2,780  |  |                   |  
|Derivative asset            |  |                   | 2,186  |  |                   |  
|                            |  | $                 | 37,623 |  |                   | $



Trade and other receivables,
deposits, and derivative assets are subject to credit risk exposure and the carrying values reflect Management’s assessment
of the associated maximum exposure to such credit risk. Advantage mitigates such credit risk by closely monitoring significant
counterparties and dealing with a broad selection of partners that diversify risk within the sector. The Corporation’s deposits
are primarily due from the Alberta Provincial government and are viewed by Management as having minimal associated credit risk.
To the extent that Advantage enters derivatives to manage commodity price risk, it may be subject to credit risk associated with
counterparties with which it contracts. Credit risk is mitigated by entering into contracts with only stable, creditworthy parties
and through frequent reviews of exposures to individual entities. In addition, the Corporation only enters into derivative contracts
with major banks and international energy firms to further mitigate associated credit risk.



Substantially all of the Corporation’s
trade and other receivables are due from customers and joint operation partners concentrated in the Canadian oil and gas industry.
As such, trade and other receivables are subject to normal industry credit risks. As at December 31, 2012, $0.7 million or 2.2%
of trade and other receivables are outstanding for 90 days or more (December 31, 2011 - $0.5 million or 1.2% of trade and other
receivables). The Corporation believes the entire balance is collectible, and in some instances has the ability to mitigate risk
through withholding production or offsetting payables with the same parties. Management has
not provided an allowance for doubtful accounts at December 31, 2012 or 2011.



The Corporation’s most
significant customer, a Canadian oil and natural gas marketer, accounts for $12.6 million of the trade and other receivables at
December 31, 2012 (December 31, 2011 - $12.3 million).



Advantage & Oil  Gas Ltd. - 21







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



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



The Corporation is subject to
liquidity risk attributed from trade and other accrued liabilities, bank indebtedness, convertible debentures, other liabilities,
and derivative liabilities. Trade and other accrued liabilities and derivative liabilities are primarily due within one year of
the Consolidated Statement of Financial Position date and Advantage does not anticipate any problems in satisfying the obligations
from cash provided by operating activities and the existing credit facilities. The Corporation’s bank indebtedness is subject
to $500 million credit facility agreements. Although the credit facilities are a source of liquidity risk, the facilities also
mitigates liquidity risk by enabling Advantage to manage interim cash flow fluctuations. The terms of the credit facilities are
such that they provide Advantage adequate flexibility to evaluate and assess liquidity issues if and when they arise. Additionally,
the Corporation regularly monitors liquidity related to obligations by evaluating forecasted cash flows, optimal debt levels, capital
spending activity, working capital requirements, and other potential cash expenditures. This continual financial assessment process
further enables the Corporation to mitigate liquidity risk.



Advantage has a convertible
debenture outstanding that matures in 2015 (note 12). Interest payments are made semi-annually with excess cash provided by operating
activities. As the debenture becomes due, the Corporation can satisfy the obligation in cash or issue shares at a price determined
in the applicable debenture agreement. This settlement alternative allows the Corporation to adequately manage liquidity, plan
available cash resources and implement an optimal capital structure.



To the extent that Advantage
enters derivatives to manage commodity price risk, it may be subject to liquidity risk as derivative liabilities become due. While
the Corporation has elected not to follow hedge accounting, derivative instruments are not entered for speculative purposes and
Management closely monitors existing commodity risk exposures. As such, liquidity risk is mitigated since any losses actually realized
are subsidized by increased cash flows realized from the higher commodity price environment.



The timing
of cash outflows relating to financial liabilities as at December 31, 2012 and 2011 are as follows:



|December 31, 2012                   |  | Less than one year |        |   | One to three years |   |   | Three to five years |         |   | Thereafter |   |   | Total |  
|----------------------------------- |  | ------------------ | ------ | - | ------------------ | - | - | ------------------- | ------- | - | ---------- | - | - | ----- | -
|Trade and other accrued liabilities |  | $                  | 84,979 |   |                    | $ | - |                     |         | $ | -          |   |   | $     | -
|Derivative liability                |  |                    |        |   | 1,096              |   |   |                     | -       |   |            |   | - |       |  
|Bank indebtedness                   |  | - principal        |        |   | -                  |   |   |                     | 274,171 |   |            |   | - |       |  
|                                    |  | - interest         |        |   | 13,338             |   |   |                     | 6,358   |   |            |   | - |       |  
|Convertible debentures              |  | - principal        |        |   | -                  |   |   |                     | 86,250  |   |            |   | - |       |  
|                                    |  | - interest         |        |   | 4,313              |   |   |                     | 6,469   |   |            |   | - |       |  
|                                    |  |                    |        | $ | 103,726            |   |   | $                   | 373,248 |   |            | $ | - |       |  



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



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



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



Advantage Oil & Gas Ltd. - 22







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



(b)	Liquidity
risk (continued)



The Corporation’s bank
indebtedness does not have specific maturity dates. It is governed by credit facility agreements with a syndicate of financial
institutions (note 11). Under the terms of the agreements, the facilities are reviewed annually, with the next reviews scheduled
in June 2013. The facilities are revolving and are extendible at each annual review for a further 364 day period at the option
of the syndicate. If not extended, the credit facilities are converted at that time into one year term facilities, with the principal
payable at the end of such one year terms. Management fully expects that the facilities will be extended at each annual review.



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



Advantage’s derivative
assets and liabilities are subject to both price and currency risks as their fair values are based on assumptions including forward
commodity prices and foreign exchange rates. The Corporation enters into non-financial derivatives to manage commodity price risk
exposure relative to actual commodity production and does not utilize derivative instruments for speculative purposes. Changes
in the price assumptions can have a significant effect on the fair value of the derivative assets and liabilities and thereby impact
earnings. It is estimated that a 10% change in the forward crude oil prices used to calculate the fair value of the crude oil derivatives
at December 31, 2012 would result in a $1.1 million change in net loss for the year ended December 31, 2012. It is estimated that
a 10% change in the forward natural gas prices used to calculate the fair value of the natural gas derivatives at December 31,
2012 would result in a $2.2 million change in net loss for the year ended December 31, 2012.



As at December 31, 2012, the
Corporation had the following derivatives in place:





|Description of Derivative |  | Term                          |  | Volume       |  | Average Price
|------------------------- |  | ----------------------------- |  | ------------ |  | -------------
|                          |  |                               |  |              |  |              
|Natural gas – AECO        |  |                               |  |              |  |              
|                          |  |                               |  |              |  |              
|Fixed price               |  | January 2013 to December 2013 |  | 14,217 mcf/d |  | Cdn $3.51/mcf
|Fixed price               |  | April 2013 to October 2013    |  | 9,478 mcf/d  |  | Cdn $3.14/mcf
|Fixed price               |  | April 2013 to October 2013    |  | 9,478 mcf/d  |  | Cdn $3.17/mcf
|Crude oil - WTI           |  |                               |  |              |  |              
|Fixed price               |  | January 2013 to December 2013 |  | 1,000 bbls/d |  | $90.29/bbl   





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



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





Advantage Oil & Gas Ltd. - 23







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



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



As at December 31, 2012, the
fair value of the derivatives outstanding resulted in an asset of $2.2 million (December 31, 2011 – $Nil) and a liability
of $1.1 million (December 31, 2011 – $2.7 million). The fair value of the commodity risk management derivatives have been
allocated to current assets and liabilities on the basis of expected timing of cash settlement.



For the year ended December
31, 2012, $2.9 million was recognized in net loss as a derivative gain (December 31, 2011 - $0.5 million). The table below summarizes
the realized and unrealized gains (losses) on derivatives.



|                                      |  | Year ended        |       |   | Year ended        |  
|------------------------------------- |  | ----------------- | ----- | - | ----------------- | -
|                                      |  | December 31, 2012 |       |   | December 31, 2011 |  
|Realized gain (loss) on derivatives   |  | $                 | (970  | ) |                   | $
|Unrealized gain (loss) on derivatives |  |                   | 3,828 |   |                   |  
|                                      |  | $                 | 2,858 |   |                   | $



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



Interest rate risk is the risk
that future cash flows will fluctuate as a result of changes in market interest rates. The interest charged on the outstanding
bank indebtedness fluctuates with the interest rates posted by the lenders. The Corporation is exposed to interest rate risk and
has not entered into any mitigating interest rate hedges or swaps. Had the borrowing rate been different by 100 basis points throughout
the year ended December 31, 2012, net income (loss) and comprehensive income (loss) would have changed by $2.8 million (December
31, 2011 - $2.2 million) based on the average debt balance outstanding during the year.



| | (e) | Capital management
| | --- | ------------------



The Corporation manages its
capital with the following objectives:



| | · | To ensure sufficient financial flexibility
to achieve the ongoing business objectives including replacement of production, funding of future growth opportunities, and pursuit
of accretive acquisitions; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | To maximize shareholder return through
enhancing the share value.
| | - | -----------------------------------------------------------------



Advantage monitors its capital
structure and makes adjustments according to market conditions in an effort to meet its objectives given the current outlook of
the business and industry in general. The capital structure of the Corporation is composed of working capital (excluding derivative
assets and liabilities), bank indebtedness, convertible debentures, and share capital. Advantage may manage its capital structure
by issuing new shares, repurchasing outstanding shares, obtaining additional financing either through bank indebtedness or convertible
debenture issuances, refinancing current debt, issuing other financial or equity-based instruments, declaring a dividend, implementing
a dividend reinvestment plan, adjusting capital spending, or disposing of assets or its ownership interest in Longview. The capital
structure is reviewed by Management and the Board of Directors on an ongoing basis.



Advantage Oil & Gas Ltd. - 24







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



| | (e) | Capital management (continued)
| | --- | ------------------------------



Advantage’s capital structure
as at December 31, 2012 and 2011 is as follows:



|                                                    |  | December 31, 2012 |             |  | December 31, 2011 |  
|--------------------------------------------------- |  | ----------------- | ----------- |  | ----------------- | -
|Bank indebtedness (non-current) (note 11)           |  | $                 | 274,171     |  |                   | $
|Working capital deficit (1)                         |  |                   | 47,179      |  |                   |  
|Net debt                                            |  |                   | 321,350     |  |                   |  
|Convertible debentures maturity value (non-current) |  |                   | 86,250      |  |                   |  
|Total debt                                          |  | $                 | 407,600     |  |                   | $
|Shares outstanding (note 16)                        |  |                   | 168,382,838 |  |                   |  
|Share closing market price ($/share)                |  | $                 | 3.20        |  |                   | $
|Market capitalization (2)                           |  |                   | 538,825     |  |                   |  
|Total capitalization                                |  | $                 | 946,425     |  |                   | $



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



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



| | 7. | Assets held for sale
| | -- | --------------------



On August 22, 2012, Advantage
announced its intention to dispose of all non-core assets, defined as all corporate assets excluding Advantage’s Glacier
Montney natural gas asset and its 21.15 million share ownership position in Longview Oil Corp.



As required under IFRS 5
Non-Current Assets Held For Sale and Discontinued Operations, Advantage ceased recognizing depreciation on the property,
plant and equipment held for sale as of August 22, 2012 onward. The same standard requires that the assets held for sale be reflected
at the lesser of fair value less costs to sell and their carrying amount. As a result of this requirement, an impairment loss of
$73.0 million has been recognized in the Consolidated Statement of Comprehensive Loss.



The following table provides
detail of the assets and liabilities classified as held for sale as at December 31, 2012:



|                                                                                         |  |   |         
|---------------------------------------------------------------------------------------- |  | - | --------
|Property, plant and equipment - cost (note 10)                                           |  | $ | 581,444 
|Property, plant and equipment - accumulated depreciation and impairment losses (note 10) |  |   | (288,694
|                                                                                         |  |   | 292,750 
|Exploration and evaluation assets (note 9)                                               |  |   | 3,127   
|Impairment of assets held for sale                                                       |  |   | (73,000 
|Assets held for sale                                                                     |  | $ | 222,877 
|                                                                                         |  |   |         
|Decommissioning liability (note 13)                                                      |  | $ | 136,540 
|Liabilities associated with assets held for sale                                         |  | $ | 136,540 



On February 5, 2013, Advantage
announced that it had signed a definitive agreement (the “Transaction”) with Questfire Energy Corp. for the sale of
certain oil and gas properties. The Transaction is anticipated to close before April 30, 2013. The Transaction, along with other
minor sales that closed during 2012 and subsequent to December 31, 2012 constitute the sale of substantially all of the non-core
assets. As the purchase price consists of cash and non-cash consideration, estimates and assumptions regarding discount rates and
the timing of closing of the Transaction were required to determine fair value less costs to sell.



Advantage Oil & Gas Ltd. - 25







| | 8. | Trade and other receivables
| | -- | ---------------------------



|                                        |  | December 31, 2012 |        |  | December 31, 2011 |  
|--------------------------------------- |  | ----------------- | ------ |  | ----------------- | -
|Trade receivables                       |  | $                 | 26,154 |  |                   | $
|Receivables from joint venture partners |  |                   | 5,708  |  |                   |  
|Other                                   |  |                   | 795    |  |                   |  
|                                        |  | $                 | 32,657 |  |                   | $



| | 9. | Exploration and evaluation assets
| | -- | ---------------------------------



|                                                       |  |   |       
|------------------------------------------------------ |  | - | ------
|Balance at December 31, 2010                           |  | $ | 8,262 
|Additions                                              |  |   | 3,006 
|Transferred to property, plant and equipment (note 10) |  |   | (483  
|Exploration and evaluation expense                     |  |   | (3,055
|Balance at December 31, 2011                           |  | $ | 7,730 
|Additions                                              |  |   | 377   
|Dispositions                                           |  |   | (113  
|Exploration and evaluation expense                     |  |   | (181  
|Transferred to property, plant and equipment (note 10) |  |   | (2,305
|Transferred to assets held for sale (note 7)           |  |   | (3,127
|Balance at December 31, 2012                           |  | $ | 2,381 



There were no indicators
of impairment of exploration and evaluation assets during the years ended December 31, 2012 and 2011.



Advantage Oil & Gas Ltd. - 26







| | 10. | Property, plant and equipment
| | --- | -----------------------------



|                                                            |  | Oil & gas  |           |   | Furniture and |   |       |       | 
|----------------------------------------------------------- |  | ---------- | --------- | - | ------------- | - | ----- | ----- | 
|Cost                                                        |  | properties |           |   | equipment     |   |       | Total | 
|Balance at December 31, 2010                                |  | $          | 2,018,949 |   |               | $ | 4,024 |       | 
|Additions                                                   |  |            | 253,731   |   |               |   | 443   |       | 
|Change in decommissioning liability (note 13)               |  |            | 79,660    |   |               |   | -     |       | 
|Disposals                                                   |  |            | (184      | ) |               |   | -     |       | 
|Transferred from exploration and evaluation assets (note 9) |  |            | 483       |   |               |   | -     |       | 
|Balance at December 31, 2011                                |  | $          | 2,352,639 |   |               | $ | 4,467 |       | 
|Additions                                                   |  |            | 173,911   |   |               |   | 773   |       | 
|Change in decommissioning liability (note 13)               |  |            | 11,095    |   |               |   | -     |       | 
|Disposals                                                   |  |            | (6,443    | ) |               |   | -     |       | 
|Transferred from exploration and evaluation assets (note 9) |  |            | 2,305     |   |               |   | -     |       | 
|Transferred to assets held for sale (note 7)                |  |            | (581,444  | ) |               |   | -     |       | 
|Balance at December 31, 2012                                |  | $          | 1,952,063 |   |               | $ | 5,240 |       | 



|                                               |  | Oil & gas  |          |   | Furniture and |   |       |       | 
|---------------------------------------------- |  | ---------- | -------- | - | ------------- | - | ----- | ----- | 
|Accumulated depreciation and impairment losses |  | properties |          |   | equipment     |   |       | Total | 
|Balance at December 31, 2010                   |  | $          | 137,979  |   |               | $ | 1,232 |       | 
|Depreciation                                   |  |            | 152,279  |   |               |   | 648   |       | 
|Impairment of oil and gas properties           |  |            | 187,684  |   |               |   | -     |       | 
|Disposals                                      |  |            | (3       | ) |               |   | -     |       | 
|Balance at December 31, 2011                   |  | $          | 477,939  |   |               | $ | 1,880 |       | 
|Depreciation                                   |  |            | 131,503  |   |               |   | 672   |       | 
|Impairment of oil and gas properties           |  |            | 31,865   |   |               |   | -     |       | 
|Disposals                                      |  |            | (3,521   | ) |               |   | -     |       | 
|Transferred to assets held for sale (note 7)   |  |            | (288,694 | ) |               |   | -     |       | 
|Balance at December 31, 2012                   |  | $          | 349,092  |   |               | $ | 2,552 |       | 



|                     |  | Oil & gas  |           |  | Furniture and |   |       |       | 
|-------------------- |  | ---------- | --------- |  | ------------- | - | ----- | ----- | 
|Net book value       |  | properties |           |  | equipment     |   |       | Total | 
|At December 31, 2011 |  | $          | 1,874,700 |  |               | $ | 2,587 |       | 
|At December 31, 2012 |  | $          | 1,602,971 |  |               | $ | 2,688 |       | 



During the year ended December
31, 2012, Advantage capitalized general and administrative expenditures directly related to development activities of $6.7 million
(December 31, 2011 - $7.6 million).



Advantage included future development
costs of $1.8 billion (December 31, 2011 – $1.7 billion) in property, plant and equipment costs subject to depreciation.



Impairment of oil and gas properties
occur when management determines that indicators of impairment are present in specific cash generating units. Recorded impairments
are the amount by which carrying amounts of the cash generating units exceed their respective recoverable amount based on a fair
value less costs to sell determination. Fair value less costs to sell is based on discounted after-tax future net cash flows of
proved and probable reserves using forecast prices and costs, discounted at 10%.



Advantage Oil & Gas Ltd. - 27







| | 10. | Property, plant and equipment (continued)
| | --- | -----------------------------------------



For the year ended December 31,
2012, Longview recognized an impairment of oil and gas properties of $31.9 million. The impairment of oil and gas properties recognized
relates to crude oil and natural gas producing assets in West Central Alberta. The decline in the price of crude oil and discounted
after-tax future net cash flows were considered to be indicators of impairment.



Forecast crude oil prices used
in the calculation of impairment of oil and gas properties for the year ended December 31, 2012 are as follows:



|Year     |  | Edmonton Par
($Cdn/bbl) |       
|-------- |  | ----------------------- | ------
|2013     |  |                         | 84.55 
|2014     |  |                         | 89.84 
|2015     |  |                         | 88.21 
|2016     |  |                         | 95.43 
|2017     |  |                         | 96.87 
|2018     |  |                         | 98.32 
|2019     |  |                         | 99.79 
|2020     |  |                         | 101.29
|2021     |  |                         | 102.81
|2022     |  |                         | 104.35
|2023 (1) |  |                         | 105.92



(1)Escalation of 1.5% thereafter



For the year ended December 31,
2011, Advantage recognized an impairment of oil and gas properties of $187.7 million. The impairment of oil and gas properties
recognized related to natural gas producing assets in West and East Alberta. The decline in the price of natural gas was considered
to be an indicator of impairment. The same natural gas producing assets were designated by management as assets held for sale on
August 22, 2012 (note 7).



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



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



(1)Escalation of 1.5% thereafter



Advantage Oil & Gas Ltd. - 28







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



|                                               |  | December 31, 2012 |         |   | December 31, 2011 |  
|---------------------------------------------- |  | ----------------- | ------- | - | ----------------- | -
|Revolving credit facility                      |  | $                 | 274,171 |   |                   | $
|Discount on Bankers Acceptances and other fees |  |                   | (1,660  | ) |                   |  
|Balance, end of period                         |  | $                 | 272,511 |   |                   | $



The Corporation has credit facilities
(the "Credit Facilities") of $500 million, comprised of $300 million held by Advantage and $200 million held by Longview.
The Credit Facilities are comprised of $40 million extendible revolving operating loan facilities from one financial institution
and $460 million of extendible revolving loan facilities from a syndicate of financial institutions. Amounts borrowed under the
Credit Facilities bear interest at a floating rate based on the applicable Canadian prime rate, US base rate, LIBOR rate or bankers'
acceptance rate plus between 1.00% and 3.50% depending on the type of borrowing and the Corporations’ debt to cash flow ratio.
The Credit Facilities are each collateralized by a $1 billion floating charge demand debenture covering all assets. The amounts
available to the Corporation from time to time under the Credit Facilities are based upon the borrowing base determined semi-annually
by the lenders. The revolving period for the Credit Facilities will end in June 2013 unless extended at the option of the syndicate
for a further 364 day period. If the Credit Facilities are not extended, they will convert to non-revolving term facilities due
365 days after the last day of the revolving period. The Credit Facilities prohibit the Corporation from entering into any derivative
contract where the term of such contract exceeds three years. Further, the aggregate of such contracts cannot hedge greater than
60% of total estimated petroleum and natural gas production over two years and 50% over the third year, in each respective legal
entity. The Credit Facilities contain standard commercial covenants for credit facilities of this nature. The only financial covenant
is a requirement for each entity to maintain a minimum cash flow to interest expense ratio of 3.5:1, determined on a rolling four-quarter
basis. These covenants were met at December 31, 2012 and 2011. Breach of any covenant will result in an event of default in which
case the Corporation has 20 days to remedy such default. If the default is not remedied or waived, and if required by the lenders,
the administrative agent of the lenders has the option to declare all obligations under the credit facilities to be immediately
due and payable without further demand, presentation, protest, days of grace, or notice of any kind. Interest payments under the
debentures are subordinated to the repayment of any amounts owing under the Credit Facilities and are not permitted if the Corporation
is in default of such Credit Facilities or if the amount of outstanding indebtedness under such facilities exceeds the then existing
current borrowing base. For the year ended December 31, 2012, the average effective interest rate on the outstanding amounts under
the facilities was approximately 4.9% (December 31, 2011 – 5.3%). Advantage has no letters of credit issued and outstanding
at December 31, 2012 (December 31, 2011 – $8.8 million).



Advantage Oil & Gas Ltd. - 29







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



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



|                    |  |   | 7.75%         |   |  |   | 8.00%         |  |  |   | 5.00%         |  
|------------------- |  | - | ------------- | - |  | - | ------------- |  |  | - | ------------- | -
|                    |  |   |               |   |  |   |               |  |  |   |               |  
|Trading symbol      |  |   | AAV.DBD       |   |  |   | AAV.DBG       |  |  |   | AAV.DBH       |  
|Issue date          |  |   | Sep. 15, 2004 |   |  |   | Nov. 13, 2006 |  |  |   | Dec. 31, 2009 |  
|Maturity date       |  |   | Dec. 1, 2011  |   |  |   | Dec. 31, 2011 |  |  |   | Jan. 30, 2015 |  
|Conversion price    |  | $ | 21.00         |   |  | $ | 20.33         |  |  | $ | 8.60          |  
|                    |  |   |               |   |  |   |               |  |  |   |               |  
|Liability component |  | $ | 50,000        |   |  | $ | 41,445        |  |  | $ | 73,019        |  
|Equity component    |  |   | -             |   |  |   | -             |  |  |   | 13,231        |  
|                    |  |   |               |   |  |   |               |  |  |   |               |  
|Gross proceeds      |  |   | 50,000        |   |  |   | 41,445        |  |  |   | 86,250        |  
|Issuance costs      |  |   | (2,190        | ) |  |   | -             |  |  |   | (3,735        | )
|                    |  |   |               |   |  |   |               |  |  |   |               |  
|Net proceeds        |  | $ | 47,810        |   |  | $ | 41,445        |  |  | $ | 82,515        |  



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



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



Advantage Oil & Gas Ltd. - 30







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



The balance of debentures outstanding
at December 31, 2012 and changes in the liability and equity components during the years ended December 31, 2012 and 2011 are as
follows:



|                             |  |   | 7.75%   |   |  |   | 8.00%   |   |  |   | 5.00%   |  |  |   | Total   |  
|---------------------------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- |  |  | - | ------- | -
|Trading symbol               |  |   | AAV.DBD |   |  |   | AAV.DBG |   |  |   | AAV.DBH |  |  |   |         |  
|Debentures outstanding       |  | $ | -       |   |  | $ | -       |   |  | $ | 86,250  |  |  | $ | 86,250  |  
|Liability component:         |  |   |         |   |  |   |         |   |  |   |         |  |  |   |         |  
|Balance at December 31, 2010 |  | $ | 46,485  |   |  | $ | 15,528  |   |  | $ | 72,811  |  |  | $ | 134,824 |  
|Accretion of discount        |  |   | 281     |   |  |   | -       |   |  |   | 3,079   |  |  |   | 3,360   |  
|Matured                      |  |   | (46,766 | ) |  |   | (15,528 | ) |  |   | -       |  |  |   | (62,294 | )
|Balance at December 31, 2011 |  |   | -       |   |  |   | -       |   |  |   | 75,890  |  |  |   | 75,890  |  
|Accretion of discount        |  |   | -       |   |  |   | -       |   |  |   | 3,218   |  |  |   | 3,218   |  
|Matured                      |  |   | -       |   |  |   | -       |   |  |   | -       |  |  |   | -       |  
|Balance at December 31, 2012 |  | $ | -       |   |  | $ | -       |   |  | $ | 79,108  |  |  | $ | 79,108  |  
|                             |  |   |         |   |  |   |         |   |  |   |         |  |  |   |         |  
|Equity component:            |  |   |         |   |  |   |         |   |  |   |         |  |  |   |         |  
|Balance at December 31, 2011 |  | $ | -       |   |  | $ | -       |   |  | $ | 8,348   |  |  | $ | 8,348   |  
|Balance at December 31, 2012 |  | $ | -       |   |  | $ | -       |   |  | $ | 8,348   |  |  | $ | 8,348   |  



The principal amount of 7.75%
convertible debentures matured on December 1, 2011, and was settled with $46.8 million in cash. The principal amount of 8.00% convertible
debentures matured on December 31, 2011, and was settled with $15.5 million in cash. There were no conversions of convertible debentures
during the years ended December 31, 2012 and 2011.



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



The Corporation’s decommissioning
liability results from net ownership interests in petroleum and natural gas assets including well sites, gathering systems and
processing facilities, all of which will require future costs of decommissioning under environmental legislation. These costs are
expected to be incurred between 2013 and 2072. A risk-free rate of 2.37% (December 31, 2011 – 2.50%) and an inflation factor
of 2% (December 31, 2011 – 2%) were used to calculate the fair value of the decommissioning liability. A reconciliation of
the decommissioning liability is provided below:



|                                             |  | Year ended        |          |   | Year ended        |  
|-------------------------------------------- |  | ----------------- | -------- | - | ----------------- | -
|                                             |  | December 31, 2012 |          |   | December 31, 2011 |  
|Balance, beginning of year                   |  | $                 | 253,796  |   |                   | $
|Accretion expense                            |  |                   | 6,300    |   |                   |  
|Liabilities incurred                         |  |                   | 3,637    |   |                   |  
|Change in estimates                          |  |                   | (6,252   | ) |                   |  
|Effect of change in risk-free rate           |  |                   | 13,710   |   |                   |  
|Property dispositions                        |  |                   | (6,032   | ) |                   |  
|Liabilities settled                          |  |                   | (2,395   | ) |                   |  
|                                             |  |                   | 262,764  |   |                   |  
|Transferred to assets held for sale (note 7) |  |                   | (136,540 | ) |                   |  
|Balance, end of year                         |  | $                 | 126,224  |   |                   | $



Advantage Oil & Gas Ltd. - 31







| | 14. | Income taxes
| | --- | ------------



The provision for income taxes
is as follows:



|                             |  | Year ended        |         |   | Year ended        |  
|---------------------------- |  | ----------------- | ------- | - | ----------------- | -
|                             |  | December 31, 2012 |         |   | December 31, 2011 |  
|Current income tax expense   |  | $                 | -       |   |                   | $
|Deferred income tax recovery |  |                   | (28,605 | ) |                   |  
|Income tax recovery          |  | $                 | (28,605 | ) |                   | $



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



|                                                    |  | Year ended        |          |   | Year ended        |  
|--------------------------------------------------- |  | ----------------- | -------- | - | ----------------- | -
|                                                    |  | December 31, 2012 |          |   | December 31, 2011 |  
|Loss before taxes and non-controlling interest      |  | $                 | (125,733 | ) |                   | $
|Combined federal and provincial income tax rates    |  |                   | 25.00    | % |                   |  
|Expected income tax recovery                        |  |                   | (31,433  | ) |                   |  
|Increase (decrease) in income taxes resulting from: |  |                   |          |   |                   |  
|Non-deductible share based compensation             |  |                   | 2,281    |   |                   |  
|Change in estimated pool balances                   |  |                   | 1,022    |   |                   |  
|Difference between current and expected tax rates   |  |                   | (475     | ) |                   |  
|                                                    |  | $                 | (28,605  | ) |                   | $
|Effective tax rate                                  |  |                   | 22.75    | % |                   |  



The Canadian combined statutory
tax rates decreased from 26.57% in 2011 to 25.00% in 2012 as a result of legislation enacted in 2007.



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



|Deferred income tax liability |  | Property, plant and  equipment |         |   | Derivative  asset/liability |   |        | Total | 
|----------------------------- |  | ------------------------------ | ------- | - | --------------------------- | - | ------ | ----- | 
|Balance at December 31, 2010  |  | $                              | 242,112 |   |                             | $ | 6,033  |       | 
|Charged (credited) to income  |  |                                | (3,771  | ) |                             |   | (6,737 | )     | 
|Balance at December 31, 2011  |  |                                | 238,341 |   |                             |   | (704   | )     | 
|Charged (credited) to income  |  |                                | (1,095  | ) |                             |   | 971    |       | 
|Balance at December 31, 2012  |  | $                              | 237,246 |   |                             | $ | 267    |       | 



|Deferred income tax asset    |  | Decommissioning liability |         |   | Non-capital losses |   |          | Other |  |   | Total  |  
|---------------------------- |  | ------------------------- | ------- | - | ------------------ | - | -------- | ----- |  | - | ------ | -
|Balance at December 31, 2010 |  | $                         | (43,491 | ) |                    | $ | (159,358 | )     |  | $ | (5,065 | )
|Charged (credited) to income |  |                           | (20,444 | ) |                    |   | (15,970  | )     |  |   | 115    |  
|Charged (credited) to equity |  |                           | -       |   |                    |   | (1,091   | )     |  |   | (1,993 | )
|Balance at December 31, 2011 |  |                           | (63,935 | ) |                    |   | (176,419 | )     |  |   | (6,943 | )
|Charged (credited) to income |  |                           | (2,282  | ) |                    |   | (27,728  | )     |  |   | 1,529  |  
|Balance at December 31, 2012 |  | $                         | (66,217 | ) |                    | $ | (204,147 | )     |  | $ | (5,414 | )



Advantage Oil & Gas Ltd. - 32







| | 14. | Income taxes (continued)
| | --- | ------------------------



|Net deferred income tax liability (asset) |  | Longview |         |   | Advantage |   |         | Total | 
|----------------------------------------- |  | -------- | ------- | - | --------- | - | ------- | ----- | 
|Balance at December 31, 2010              |  | $        | -       |   |           | $ | 40,231  |       | 
|Charged (credited) to income              |  |          | (36,299 | ) |           |   | (10,508 | )     | 
|Charged (credited) to equity              |  |          | (3,084  | ) |           |   | -       |       | 
|Balance at December 31, 2011              |  |          | (39,383 | ) |           |   | 29,723  |       | 
|Charged (credited) to income              |  |          | (3,510  | ) |           |   | (25,095 | )     | 
|Balance at December 31, 2012              |  | $        | (42,893 | ) |           | $ | 4,628   |       | 



The net deferred income tax asset
is expected to reverse in more than 12 months.



The unrecorded taxable temporary
difference related to Advantage’s investment in Longview is $4.1 million.



The estimated tax pools available
at December 31, 2012 are as follows:



|                                       |  | Longview |         |  | Advantage |   |           | Total | 
|-------------------------------------- |  | -------- | ------- |  | --------- | - | --------- | ----- | 
|Canadian development expenses          |  | $        | 44,430  |  |           | $ | 133,595   |       | 
|Canadian exploration expenses          |  |          | -       |  |           |   | 70,837    |       | 
|Canadian oil and gas property expenses |  |          | 329,858 |  |           |   | -         |       | 
|Non-capital losses                     |  |          | 93,821  |  |           |   | 720,911   |       | 
|Undepreciated capital cost             |  |          | 69,742  |  |           |   | 226,136   |       | 
|Other                                  |  |          | 5,639   |  |           |   | 3,985     |       | 
|                                       |  | $        | 543,490 |  |           | $ | 1,155,464 |       | 



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





| | 15. | Other liability
| | --- | ---------------



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



A reconcilation of the other liability is as follows:



|                            |  | Year ended        |      |   | Year ended        |  
|--------------------------- |  | ----------------- | ---- | - | ----------------- | -
|                            |  | December 31, 2012 |      |   | December 31, 2011 |  
|Balance, beginning of year  |  | $                 | 908  |   |                   | $
|Accretion expense (note 22) |  |                   | 32   |   |                   |  
|Liability settled           |  |                   | (940 | ) |                   |  
|Balance, end of year        |  | $                 | -    |   |                   | $



| | 16. | Share capital
| | --- | -------------



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



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



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



|                                   |  | Common Shares |             |  | Amount |  
|---------------------------------- |  | ------------- | ----------- |  | ------ | -
|Balance at December 31, 2010       |  |               | 164,092,009 |  |        | $
|Share based compensation (note 17) |  |               | 2,212,031   |  |        |  
|Balance at December 31, 2011       |  |               | 166,304,040 |  |        | $
|Share based compensation (note 17) |  |               | 2,078,798   |  |        |  
|Balance at December 31, 2012       |  |               | 168,382,838 |  |        | $



Advantage Oil & Gas Ltd. - 33







| | 17. | Share based compensation
| | --- | ------------------------



| | (a) | Restricted share performance incentive plan
| | --- | -------------------------------------------



Advantage had a Restricted Share
Performance Incentive Plan (“RSPIP”) as approved by the shareholders. The RSPIP authorized the Board of Directors to
grant restricted shares to service providers, including directors, officers, employees, and consultants of Advantage. The number
of restricted shares granted was based on the Corporation’s share price return for a twelve-month period and compared to
the performance of a peer group approved by the Board of Directors. The share price return was calculated at the end of each and
every quarter and was primarily based on the twelve-month change in the share price. If the share price return for a twelve-month
period was positive, a restricted share grant was calculated based on the return. Otherwise, no restricted shares were granted
to service providers for the period. If the share price return for a twelve-month period was negative, but the return was still
within the top two-thirds of the approved peer group performance, the Board of Directors may have granted a discretionary restricted
share award. The restricted share grants generally vested one-third immediately on grant date, with the remaining two-thirds vesting
on each of the two subsequent anniversary dates. On vesting, common shares were issued to the service providers in exchange for
the restricted shares outstanding. The holders of restricted shares could elect to receive cash upon vesting in lieu of the number
of shares to be issued, subject to consent of the Corporation. However, it was the intent to settle unvested amounts with shares.



The following table is a continuity
of restricted shares:



|                             |  | Restricted Shares |           
|---------------------------- |  | ----------------- | ----------
|Balance at December 31, 2010 |  |                   | 2,925,868 
|Granted                      |  |                   | 1,443,956 
|Vested (note 16)             |  |                   | (2,212,031
|Forfeited                    |  |                   | (40,083   
|Balance at December 31, 2011 |  |                   | 2,117,710 
|Granted                      |  |                   | -         
|Vested (note 16)             |  |                   | (2,078,798
|Forfeited                    |  |                   | (38,912   
|Balance at December 31, 2012 |  |                   | -         



On July 9, 2012, Advantage’s
Restricted Share Performance Incentive Plan expired and no new Advantage restricted shares were granted during 2012. For the year
ended December 31, 2012, Advantage issued 2,078,798 common shares to service providers in exchange for vested restricted shares.



| | (b) | Stock option plan
| | --- | -----------------



On September 13, 2012, shareholders
of Advantage approved a new Stock Option Plan, to provide for long term equity based compensation for service providers. On October
1, 2012, the Board of Directors approved a grant of 15,996,366 stock options to service providers under the Stock Option Plan.
Share based compensation costs of the Stock Option Plan are determined using a Black-Scholes pricing model. Key inputs are as follows:



|Volatility               |  |  | 44   | %
|------------------------ |  |  | ---- | -
|Expected forfeiture rate |  |  | 0.25 | %
|Dividend rate            |  |  | 0    | %
|Risk-free rate           |  |  | 1.06 | %



Advantage Oil & Gas Ltd. - 34







| | 17. | Share based compensation (continued)
| | --- | ------------------------------------



| | (b) | Stock option plan (continued)
| | --- | -----------------------------



The following tables summarize
information about changes in stock options outstanding at December 31, 2012:



|                             |  | Stock Options |            |   | Weighted-Average Exercise Price |  
|---------------------------- |  | ------------- | ---------- | - | ------------------------------- | -
|Balance at January 1, 2012   |  |               | -          |   |                                 | $
|Granted                      |  |               | 15,996,366 |   |                                 |  
|Forfeited                    |  |               | (18,483    | ) |                                 |  
|Balance at December 31, 2012 |  |               | 15,977,883 |   |                                 | $





|                |  | Stock Options Outstanding |            |  | Stock Options Exerciseable |                
|--------------- |  | ------------------------- | ---------- |  | -------------------------- | ---------------
|Grant Date      |  | Number                    |            |  | Expiry Date                |                
|October 1, 2012 |  |                           | 1,997,257  |  |                            | January 1, 2013
|October 1, 2012 |  |                           | 1,997,240  |  |                            | April 1, 2013  
|October 1, 2012 |  |                           | 1,997,234  |  |                            | July 1, 2013   
|October 1, 2012 |  |                           | 1,997,244  |  |                            | October 1, 2013
|October 1, 2012 |  |                           | 1,997,195  |  |                            | January 1, 2014
|October 1, 2012 |  |                           | 1,997,249  |  |                            | April 1, 2014  
|October 1, 2012 |  |                           | 1,997,225  |  |                            | July 1, 2014   
|October 1, 2012 |  |                           | 1,997,239  |  |                            | October 1, 2014
|                |  |                           | 15,977,883 |  |                            |                



Share based compensation recognized
by plan for the years ended December 31, 2012 and 2011 are as follows:



|                                         |  | Year ended        |        |   | Year ended        |  
|---------------------------------------- |  | ----------------- | ------ | - | ----------------- | -
|                                         |  | December 31, 2012 |        |   | December 31, 2011 |  
|RSPIP                                    |  | $                 | 6,200  |   |                   | $
|Stock Option Plan                        |  |                   | 2,878  |   |                   |  
|Total share based compensation (note 21) |  |                   | 9,078  |   |                   |  
|Capitalized                              |  |                   | (1,858 | ) |                   |  
|Net share based compensation expense     |  | $                 | 7,220  |   |                   | $



Advantage Oil & Gas Ltd. - 35







| | 18. | Net loss per share attributable to Advantage shareholders
| | --- | ---------------------------------------------------------

| |  | 
| |  | 



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



|                                                |  | Year ended        |             |   | Year ended        |  
|----------------------------------------------- |  | ----------------- | ----------- | - | ----------------- | -
|                                                |  | December 31, 2012 |             |   | December 31, 2011 |  
|Net loss attributable to Advantage shareholders |  |                   |             |   |                   |  
|Basic and diluted                               |  | $                 | (89,125     | ) |                   | $
|Weighted average shares outstanding             |  |                   |             |   |                   |  
|Basic and diluted                               |  |                   | 167,509,131 |   |                   |  



The calculation of diluted net
loss per share for the years ended December 31, 2012 and 2011 excludes convertible debentures, as their impact would be anti-dilutive.
Total weighted average shares issuable in exchange for the series of convertible debentures excluded from the diluted net loss
per share calculation for the year ended December 31, 2012 was 10,029,070 (December 31, 2011 – 12,828,588 shares). As at
December 31, 2012, the total convertible debentures outstanding were convertible to 10,029,070 shares (December 31, 2011 –
10,029,070 shares).



Restricted shares have been excluded
from the calculation of diluted net loss per share for the years ended December 31, 2012 and 2011, as the impact would have been
anti-dilutive. There were no restricted shares outstanding at December 31, 2012. Total weighted average shares issuable in exchange
for the restricted shares and excluded from the diluted net loss per share calculation for the year ended December 31, 2011 was
1,192,566 shares.



The exercise price of the outstanding
stock options exceeded the average market price for the period. Therefore, they have no effect on the calculation of diluted net
loss per share.



| | 19. | Petroleum and natural gas sales
| | --- | -------------------------------



|                                       |  | Year ended        |         |  | Year ended        |  
|-------------------------------------- |  | ----------------- | ------- |  | ----------------- | -
|                                       |  | December 31, 2012 |         |  | December 31, 2011 |  
|Crude oil and natural gas liquid sales |  | $                 | 164,860 |  |                   | $
|Natural gas sales                      |  |                   | 104,045 |  |                   |  
|Total petroleum and natural gas sales  |  | $                 | 268,905 |  |                   | $



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



|                                              |  | Year ended        |        |  | Year ended        |  
|--------------------------------------------- |  | ----------------- | ------ |  | ----------------- | -
|                                              |  | December 31, 2012 |        |  | December 31, 2011 |  
|Gain on sale of property, plant and equipment |  | $                 | 16,964 |  |                   | $
|Miscellaneous income                          |  |                   | 595    |  |                   |  
|Total other income                            |  | $                 | 17,559 |  |                   | $



Advantage Oil & Gas Ltd. - 36







| | 21. | General and administrative expense (“G&A”)
| | --- | ------------------------------------------



|                                   |  | Year ended        |        |   | Year ended        |  
|---------------------------------- |  | ----------------- | ------ | - | ----------------- | -
|                                   |  | December 31, 2012 |        |   | December 31, 2011 |  
|Salaries and benefits              |  | $                 | 19,650 |   |                   | $
|Share based compensation (note 17) |  |                   | 9,078  |   |                   |  
|Office rent                        |  |                   | 2,540  |   |                   |  
|Other                              |  |                   | 3,568  |   |                   |  
|Total G&A                          |  |                   | 34,836 |   |                   |  
|Capitalized (note 10)              |  |                   | (6,656 | ) |                   |  
|Net G&A                            |  | $                 | 28,180 |   |                   | $



| | 22. | Finance expense
| | --- | ---------------



|                                                |  | Year ended        |        |  | Year ended        |  
|----------------------------------------------- |  | ----------------- | ------ |  | ----------------- | -
|                                                |  | December 31, 2012 |        |  | December 31, 2011 |  
|Interest on bank indebtedness (note 11)         |  | $                 | 12,436 |  |                   | $
|Interest on convertible debentures (note 12)    |  |                   | 4,313  |  |                   |  
|Accretion on convertible debentures (note 12)   |  |                   | 3,218  |  |                   |  
|Accretion of decomissioning liability (note 13) |  |                   | 6,300  |  |                   |  
|Accretion of other liability (note 15)          |  |                   | 32     |  |                   |  
|Total finance expense                           |  | $                 | 26,299 |  |                   | $



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



Changes
in non-cash working capital is comprised of:



|                                    |  | Year ended        |         |   | Year ended        |  
|----------------------------------- |  | ----------------- | ------- | - | ----------------- | -
|                                    |  | December 31, 2012 |         |   | December 31, 2011 |  
|Source (use) of cash:               |  |                   |         |   |                   |  
|Trade and other receivables         |  | $                 | 9,687   |   |                   | $
|Prepaid expenses and deposits       |  |                   | 902     |   |                   |  
|Trade and other accrued liabilities |  |                   | (53,140 | ) |                   |  
|                                    |  | $                 | (42,551 | ) |                   | $
|                                    |  |                   |         |   |                   |  
|Related to operating activities     |  | $                 | (14,864 | ) |                   | $
|Related to financing activities     |  |                   | 916     |   |                   |  
|Related to investing activities     |  |                   | (28,603 | ) |                   |  
|                                    |  | $                 | (42,551 | ) |                   | $



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



Advantage has several lease commitments
relating to office buildings and transportation. The estimated remaining annual minimum operating lease payments are as follows:



|     |  | December 31, 2012 |        |  | December 31, 2011 |  
|---- |  | ----------------- | ------ |  | ----------------- | -
|2012 |  | $                 | -      |  |                   | $
|2013 |  |                   | 15,280 |  |                   |  
|2014 |  |                   | 12,499 |  |                   |  
|2015 |  |                   | 2,371  |  |                   |  
|     |  | $                 | 30,150 |  |                   | $



Advantage Oil & Gas Ltd. - 37







| | 25. | Related party transactions
| | --- | --------------------------



Transactions between Advantage
and Longview



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



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



At December 31, 2012, amounts
due from Longview totaled $2.2 million (December 31, 2011 - $1.7 million). Advantage charged Longview $5.3 million during the year
ended December 31, 2012 (December 31, 2011 - $3.8 million) under the TSA. Dividends declared and paid or payable from Longview
to Advantage during the year ended December 31, 2012 totaled $14.4 million (December 31, 2011 - $11.8 million). All amounts due
to and from Longview are non-interest bearing in nature, are settled monthly and were incurred within the normal course of business.
All inter-corporate balances, income and expenses resulting from inter-corporate transactions are eliminated.



Key management compensation



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



|                                                |  | December 31, 2012 |       |  | December 31, 2011 |  
|----------------------------------------------- |  | ----------------- | ----- |  | ----------------- | -
|Salaries, director fees and short-term benefits |  | $                 | 3,881 |  |                   | $
|Share based compensation(1)                     |  |                   | 5,088 |  |                   |  
|                                                |  | $                 | 8,969 |  |                   | $



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



As at December 31, 2012, there
is a $3.5 million commitment (December 31, 2011 - $4.0 million) related to change of control or termination of employment of officers.



Advantage Oil & Gas Ltd. - 38







| | 26. | Segmented information
| | --- | ---------------------



For the year ended December 31,
2012, the Corporation is comprised of two operating segments: Advantage Oil & Gas Ltd. (“Advantage”) and Longview
Oil Corp. (“Longview”). Advantage develops and operates natural gas focused properties in Alberta. Longview develops
and operates primarily conventional oil and natural gas liquids focused properties in Alberta and Saskatchewan.



Results by operating segment
for the years ended December 31, 2012 and 2011 are as follows:



|                                                                                  |  | Year ended        |           |   | Year ended        |  
|--------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ----------------- | -
|                                                                                  |  | December 31, 2012 |           |   | December 31, 2011 |  
|(thousands of Canadian dollars)                                                   |  | Advantage         |           |   | Longview          |  
|                                                                                  |  |                   |           |   |                   |  
|Petroleum and natural gas sales                                                   |  | $                 | 129,131   |   |                   | $
|Less: royalties                                                                   |  |                   | (7,401    | ) |                   |  
|Petroleum and natural gas revenue                                                 |  |                   | 121,730   |   |                   |  
|                                                                                  |  |                   |           |   |                   |  
|Operating expense                                                                 |  |                   | (42,796   | ) |                   |  
|General and administrative expense                                                |  |                   | (24,250   | ) |                   |  
|Depreciation expense                                                              |  |                   | (90,376   | ) |                   |  
|Impairment of assets held for sale                                                |  |                   | (73,000   | ) |                   |  
|Impairment of oil and gas properties                                              |  |                   | -         |   |                   |  
|Exploration and evaluation expense                                                |  |                   | (140      | ) |                   |  
|Finance expense                                                                   |  |                   | (19,316   | ) |                   |  
|Gains (losses) on derivatives                                                     |  |                   | (240      | ) |                   |  
|Other income                                                                      |  |                   | 17,527    |   |                   |  
|Income (loss) before taxes and non-controlling interest                           |  |                   | (110,861  | ) |                   |  
|Income tax recovery                                                               |  |                   | 25,095    |   |                   |  
|Net income (loss) and comprehensive income (loss) before non-controlling interest |  |                   | (85,766   | ) |                   |  
|Net (income) loss attributable to non-controlling interest                        |  |                   | -         |   |                   |  
|Net loss and comprehensive loss attributable to Advantage shareholders            |  | $                 | (85,766   | ) |                   | $
|Total assets                                                                      |  | $                 | 1,384,055 |   |                   | $
|Total liabilities                                                                 |  | $                 | 470,647   |   |                   | $
|Expenditures on property plant and equipment                                      |  | $                 | 130,490   |   |                   | $
|Dividends (paid) received                                                         |  | $                 | 14,350    |   |                   | $



All transactions and balances
included in amounts presented above between reportable operating segments are eliminated in the consolidated financial statements.



Advantage Oil & Gas Ltd. - 39







| | 27. | Subsequent event
| | --- | ----------------



On February 26, 2013, Advantage
announced that it has formed a special committee of independent directors to oversee the strategic alternatives review process
with the assistance of its advisors.



Advantage Oil & Gas Ltd. - 40