Tourmaline Oil Corp. Announces Q3 Results

CALGARY, Nov. 8, 2011 /CNW/ - Tourmaline Oil Corp. (TSX: TOU) ("Tourmaline" or the "Company") is pleased to announce record results for the three months ended September 30, 2011 and provide an update on its 2011 financial outlook and EP program.  The results will be discussed on a conference call to be held Thursday, November 10th at 10:00 am MST.  Dial-in numbers are (416) 340-8530 or (877) 240-9772.

Q3 2011 Highlights

  • Record quarterly average production of 34,347 boepd, an 82% increase over the same quarter in 2010.
  • 2011 Exit Production Guidance of 44,500 boepd.
  • 2012 Production Guidance increased to 47,000 boepd.
  • 2011 EP Capital Program increased to $600.0 million.
  • High deliverability Deep Basin Wilrich horizontal well results and disclosure of a 1,500 well Wilrich horizontal inventory.
  • Strong Q3 Operating Costs of $5.77/boe.
  • Strong quarterly earnings of $8.7 million with corresponding year-to-date earnings of $26.7 million despite a 7% drop in natural gas prices.
  • Drilled 28 wells, bringing 19 on-stream adding over 7,000 boepd of new net production.
  • Closed the Cinch Energy Corp. acquisition on attractive reserve and production metrics.

Production

Third quarter 2011 average production was 34,347 boepd, an 82% increase over third quarter 2010 production of 18,823 boepd and a 22% increase over second quarter 2011.  Third quarter 2011 oil and liquids production of 3,444 boepd was 114% higher than third quarter of 2010.  Production down time related to unscheduled third party outages, primarily at Spirit River, reduced third quarter average production by approximately 575 boepd.  Current daily production is ranging between 38,000 and 39,000 boepd and the Company remains on track to achieve the upwards-revised full year 2011 average production of 31,125 boepd.  The Company has approximately 50.0 mmcfpd of production awaiting tie-in; the majority of this production will come on-stream through the Sunrise, B.C. and Musreau, Alberta facility projects.  Construction of these two facilities is underway with an early December completion date anticipated for both plants.  Start-up of these two facility projects coupled with on-going tie-ins in the Alberta Deep Basin and Spirit River are expected to yield 2011 exit production volumes of approximately 44,500 boepd.  Consequently, the 2012 average production guidance has been raised to 47,000 boepd, representing 50% growth over the anticipated 2011 average.

2011 - 2012 Capital Program

The Company has expanded the 2011 EP Capital program to $600.0 million as both drilling and facility programs have been increased.  A ninth rig will be added to the operated fleet until Spring break-up 2012 primarily to accelerate follow-up drilling to the highly successful Deep Basin horizontal program.  Accelerated outside operated drilling will add an additional five horizontal wells in both fourth quarter 2011 and first quarter 2012.  Tourmaline will await drilling and completion results from these outside operated wells prior to adjusting 2012 production forecasts.

The principal facility projects in the second half of 2011 are the new gas plant at Musreau and the major expansion at Sunrise.  Additional facility projects in Q4 2011 and Q1 2012 include expansion of the gathering system on the Western margin of the Deep Basin asset base to accommodate the high deliverability vertical successes at Cabin, Solomon, Hinton and Lovett.  The Company has ordered equipment to allow for an additional expansion of the new Musreau gas plant should strong drilling results continue and natural gas prices support the expansion.  Additional capital is also being directed towards expansion of liquid handling capabilities at both the Musreau and Sunrise facilities.  Land expenditures to date in 2011 are more than forecast at $22 million, as the Company responds to ongoing postings in the Alberta Deep Basin.

The 2012 EP Capital program of $490 million has been approved and includes $360 million for drilling and completion, $30 million for land and seismic and $100 million for facilities projects.  The Company plans to maintain a debt-to-cash- flow ratio of six months or less through 2012.

EP Update

During the third quarter of 2011, Tourmaline operated or participated in 25 gas wells and three oil wells, more than originally anticipated.  The Company plans to employ nine drilling rigs from November 2011 through until March 2012.

Alberta Deep Basin

Tourmaline is currently operating six drilling rigs in the Alberta Deep Basin, increasing to seven rigs during the next week.  It is anticipated that approximately five rigs will be drilling horizontal wells and two rigs will be employed drilling verticals.  The main emphasis of the Deep Basin program over the next two quarters will be on the expanding Deep Basin horizontal opportunity and the high rate verticals on the western margin of the asset base.

Deep Basin Horizontal Program:

The Deep Basin horizontal program targets Cretaceous Cardium, Notikewin-Falher and Wilrich formations, with strong results continuing at all three levels.  The results in the Wilrich formation, in particular, have been very encouraging with high deliverability horizontal liquids-rich gas wells at Musreau (19.0 mmcfpd), Greater Minehead (12.2 mmcfpd) and a high rate western margin vertical at Lovett River (6.0 mmcfpd) all tested during the third quarter.  The Company will complete two additional horizontals during November that have already been drilled and expects to drill and complete an additional 10-12 Wilrich horizontals by Spring break-up 2012 as the Company continues to delineate this regional opportunity.  These upcoming Wilrich horizontals will be located at Musreau, Resthaven, Ansel, Wildhay-Wild River and Lovett-Hinton.  The Company has captured and operates approximately 760 sections of highly prospective Wilrich rights in the Deep Basin yielding a potential future Wilrich drilling inventory of over 1,500 horizontal wells.

An additional eight to ten Notikewin/Falher horizontals and four Cardium horizontals are also planned by Spring break-up, bringing Tourmaline's total Deep Basin drilled horizontal well count to approximately 50 at that time.

Western Margin Vertical Wells:

Tourmaline has an ongoing follow-up program to the three high deliverability vertical wells on the western margin of the Deep Basin announced during first quarter of 2011.  Four successful delineation wells have been drilled since July and an additional six are planned by Spring break-up 2012.  These vertical wells are production testing at rates of between 5.0 and 10.0 mmcfpd and are highly economic in the current price environment.  The Company has identified several hundred follow-up locations on existing 3D seismic on Company-interest lands, on a trend that extends from Cabin Creek to Lovett River.  Tourmaline has a complimentary regional facility plan to maximize deliverability and production on-times and to minimize operating cost along this prospective trend.

Sunrise-Dawson, B.C.

The Sunrise 3-18 facility expansion from 35.0 to 75.0 mmcfpd has received all approvals and construction is underway with an early December 2011 target start-up date.  The Company will have approximately 14 new Montney horizontals to fill the expanded plant capacity - ten horizontals are already drilled and/or completed.  A further 20-25 horizontals are planned in the complex in 2012 as the Company will continue to operate one drilling rig in the area (realized drilling times are now consistently 12-13 days per well).  Production test rates of the new wells continue to exceed expectations with the most recent well, A12-13, testing at 15.2 mmcfpd.  Liquids content is ranging between 15 and 50 bbls per million cubic feet.  Tourmaline has a future inventory of over 300 horizontals in the greater Sunrise-Dawson complex.

Spirit River, Alberta

At Spirit River, Alberta, the Company has now drilled 11 horizontals into the light oil charged Charlie Lake formation.  Seven of these wells are now on production, one is being equipped and two are in the process of being completed.  The Company is planning to have 14 horizontals on production by year-end 2011.  Light oil production levels of 2,500-3,000 bopd are anticipated in 2012 at Spirit River.

CORPORATE SUMMARY - THIRD QUARTER 2011                      
                       
  Three Months Ended September 30   Nine Months Ended September 30
    2011   2010   Change     2011   2010   Change
OPERATIONS                          
Production                          
  Natural gas (mcf/d)   185,414   103,286   80%     154,360   86,611   78%
  Crude oil & liquids (bbl/d)   3,444   1,609   114%     2,953   1,703   73%
  Oil equivalent (boepd)   34,347   18,823   82%     28,680   16,138   78%
                           
Product prices                          
  Natural gas ($/mcf) $ 4.25 $ 4.36   (3)%   $ 4.35 $ 4.69   (7)%
  Crude oil & liquids ($/bbl) $ 87.01 $ 70.49   23%   $ 88.80 $ 73.57   21%
  Operating expenses ($/boe) $ 5.77 $ 6.24   (8)%   $ 5.76 $ 6.75   (15)%
  Transportation costs ($/boe) $ 2.06 $ 1.78   16%   $ 1.99 $ 1.71   16%
                           
Operating netback ($/boe) $ 21.21 $ 19.12   11%   $ 22.77 $ 21.31   7%
Cash general & administrative expenses ($/boe) $ 0.94 $ 1.22   (23)%   $ 1.10 $ 1.27   (13)%
                           
FINANCIAL ($000, EXCEPT PER SHARE)                          
Revenue   100,068   51,843   93%     255,048   145,186   76%
Royalties   8,313   4,846   72%     16,043   13,996   15%
                           
Funds from operations   62,686   31,250   101%     168,041   88,278   90%
Funds from operations per share $ 0.40 $  0.25   60%   $ 1.13 $ 0.73   55%
                           
Net income   8,688   428    1,930%     26,607   2,948   803%
Net income per share $ 0.06 $ 0.00   -   $ 0.18 $ 0.02   800%
                           
Capital expenditures   249,162   151,944   64%     596,789   597,270   (0)%

 

Forward-Looking Information

This press release contains forward-looking information within the meaning of applicable securities laws. The use of any of the words "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "project", "should", "believe", "plans", "intends" and similar expressions are intended to identify forward-looking information. More particularly and without limitation, this press release contains forward looking information concerning Tourmaline's anticipated petroleum and natural gas production, cash flows, net debt levels, capital efficiency and capital spending, as well as Tourmaline's future drilling prospects and plans, business strategy, future development and growth opportunities, prospects and asset base. The forward-looking information is based on certain key expectations and assumptions made by Tourmaline, including expectations and assumptions concerning: prevailing commodity prices and exchange rates; applicable royalty rates and tax laws; future well production rates and reserve volumes; the timing of receipt of regulatory approvals; the performance of existing wells; the success obtained in drilling new wells; the sufficiency of budgeted capital expenditures in carrying out planned activities; and the availability and cost of labour and services. Although Tourmaline believes that the expectations and assumptions on which such forward-looking information is based are reasonable, undue reliance should not be placed on the forward-looking information because Tourmaline can give no assurances that they will prove to be correct. Since forward-looking information addresses future events and conditions, by its very nature it involves inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to: the risks associated with the oil and gas industry in general such as operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of estimates and projections relating to reserves, production, costs and expenses; health, safety and environmental risks; commodity price and exchange rate fluctuations; marketing and transportation; loss of markets; environmental risks; competition; incorrect assessment of the value of acquisitions ; failure to realize the anticipated benefits of acquisitions ; ability to access sufficient capital from internal and external sources; failure to obtain required regulatory and other approvals; and changes in legislation, including but not limited to tax laws, royalties and environmental regulations.

Also included in this press release are estimates of Tourmaline's 2011 and 2012 production levels which are based on the various assumptions as to commodity prices, capital expenditures, capital efficiency, drilling inventories and other assumptions disclosed in this press release. Tourmaline has included the above estimates in order to provide readers with a more complete perspective on Tourmaline's future operations and such information may not be appropriate for other purposes. 

Readers are cautioned that the foregoing list of factors is not exhaustive. Additional information on these and other factors that could affect Tourmaline, or its operations or financial results, are included in the Management's Discussion and Analysis forming part of this press release (See "Forward-Looking Statements" therein) and reports on file with applicable securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com) or Tourmaline's website (www.tourmalineoil.com).

The forward-looking information contained in this press release is made as of the date hereof and Tourmaline undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise, unless expressly required by applicable securities laws.

Additional Reader Advisories

See also "Forward-Looking Statements", "Boe Conversions" and "Non-IFRS Financial Measures" in the attached Management's Discussion and Analysis.

"Funds from operations" and "operating netback" as used in this press release are financial measures commonly used in the oil and gas industry, which do not have any standardized meaning prescribed by International Financial Reporting Standards ("IFRS"). See "Non-IFRS Financial Measures" in the attached Management's Discussion and Analysis for the definition and description of these terms.

MANAGEMENT'S DISCUSSION AND ANALYSIS

This management's discussion and analysis ("MD&A") should be read in conjunction with Tourmaline's consolidated financial statements and related notes for the period ended September 30, 2011 and the consolidated financial statements for the year ended December 31, 2010.  Both the consolidated financial statements and the MD&A can be found at www.sedar.com.  This MD&A is dated November 8, 2011.

The financial information contained herein has been prepared in accordance with International Financial Reporting Standards ("IFRS").  All dollar amounts are expressed in Canadian currency, unless otherwise noted.

Certain financial measures referred to in this MD&A are not prescribed by IFRS or previous Canadian generally accepted accounting principles ("GAAP").  See "Non-IFRS Financial Measures" for information regarding the following Non-IFRS financial measures used in this MD&A: "funds from operations", "operating netback", "working capital (adjusted for the fair value of financial instruments)" and "net debt".

Additional information relating to Tourmaline can be found at www.sedar.com.

Forward-Looking Statements - Certain information regarding Tourmaline set forth in this document, including management's assessment of the Company's future plans and operations, contains forward-looking statements that involve substantial known and unknown risks and uncertainties. The use of any of the words "anticipate", "continue", "estimate", "expect", "may", "will", "project", "should", "believe" and similar expressions are intended to identify forward-looking statements. Such statements represent Tourmaline's internal projections, estimates or beliefs concerning, among other things, an outlook on the estimated amounts and timing of capital investment, anticipated future debt, production, revenues or other expectations, beliefs, plans, objectives, assumptions, intentions or statements about future events or performance. These statements are only predictions and actual events or results may differ materially. Although Tourmaline believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievement since such expectations are inherently subject to significant business, economic, competitive, political and social uncertainties and contingencies. Many factors could cause Tourmaline's actual results to differ materially from those expressed or implied in any forward-looking statements made by, or on behalf of, Tourmaline.

In particular, forward-looking statements included in this MD&A include, but are not limited to, statements with respect to: the size of, and future net revenues from, crude oil, NGL (natural gas liquids) and natural gas reserves; future prospects; the focus of and timing of capital expenditures; expectations regarding the ability to raise capital and to continually add to reserves through acquisitions and development; access to debt and equity markets; projections of market prices and costs; the performance characteristics of the Company's crude oil, NGL and natural gas properties; crude oil, NGL and natural gas production levels and product mix; Tourmaline's future operating and financial results; capital investment programs; supply and demand for crude oil, NGL and natural gas; future royalty rates; drilling, development and completion plans and the results therefrom; future land expiries; dispositions and joint venture arrangements; amount of operating, transportation and general and administrative expenses; treatment under governmental regulatory regimes and tax laws; and estimated tax pool balances.  In addition, statements relating to "reserves" are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described can be profitably produced in the future.

These forward-looking statements are subject to numerous risks and uncertainties, most of which are beyond the Company's control, including the impact of general economic conditions; volatility in market prices for crude oil, NGL and natural gas; industry conditions; currency fluctuation; imprecision of reserve estimates; liabilities inherent in crude oil and natural gas operations; environmental risks; incorrect assessments of the value of acquisitions and exploration and development programs; competition; the lack of availability of qualified personnel or management; changes in income tax laws or changes in tax laws and incentive programs relating to the oil and gas industry; hazards such as fire, explosion, blowouts, cratering, and spills, each of which could result in substantial damage to wells, production facilities, other property and the environment or in personal injury; stock market volatility; ability to access sufficient capital from internal and external sources; the receipt of applicable approvals; and the other risks considered under "Risk Factors" in Tourmaline's most recent annual information form available at www.sedar.com.

With respect to forward-looking statements contained in this MD&A, Tourmaline has made assumptions regarding: future commodity prices and royalty regimes; availability of skilled labour; timing and amount of capital expenditures; future exchange rates; the impact of increasing competition; conditions in general economic and financial markets; availability of drilling and related equipment and services; effects of regulation by governmental agencies; and future operating costs.

Management has included the above summary of assumptions and risks related to forward-looking information provided in this MD&A in order to provide shareholders with a more complete perspective on Tourmaline's future operations and such information may not be appropriate for other purposes.  Tourmaline's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits that the Company will derive therefrom.  Readers are cautioned that the foregoing lists of factors are not exhaustive.

These forward-looking statements are made as of the date of this MD&A and the Company disclaims any intent or obligation to update publicly any forward-looking statements, whether as a result of new information, future events or results or otherwise, other than as required by applicable securities laws.

Boe Conversions - Per barrel of oil equivalent amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil equivalent (6:1). Barrel of oil equivalents (boe) may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

PRODUCTION

Production for the three months ended September 30, 2011, averaged 34,347 Boe/d, an 82% increase over the third quarter 2010 average production of 18,823 Boe/d.  For the nine months ended September 30, 2011, production increased 78% to 28,680 Boe/d from 16,138 Boe/d in 2010.  The Company's significant production growth can be attributed to new wells that have been brought on-stream, as well as property and corporate acquisitions in the second and third quarters of 2011. Production was 90% natural gas weighted in the third quarter of 2011, which is consistent with the third quarter of 2010.

  Three Months Ended   Nine Months Ended
  September 30,
2011
  September 30,
2010
  Change   September 30,
2011
  September 30,
2010
  Change
Natural Gas (mcf) 17,058,132   9,502,337   80%   42,140,402   23,644,803   78%
Crude oil and NGL (bbl) 316,890   147,997   114%   806,194   464,852   73%
Oil equivalent (boe) 3,159,912   1,731,720   82%   7,829,594   4,405,661   78%
Oil equivalent (boepd) 34,347   18,823   82%   28,680   16,138   78%

REVENUE

For the three months ended September 30, 2011, revenue totalled $100.1 million compared to $51.8 million for the same period in 2010.  Revenue for the nine months ended September 30, 2011, increased 76% to $255.0 million from $145.2 million in the same period of 2010.  Revenue growth for the three and nine months ended September 30, 2011, is consistent with the increased production over the same period.  Revenue includes all petroleum, natural gas and NGL sales and realized gains on financial instruments.

The realized average natural gas price for the third quarter of 2011 was $4.25/Mcf compared to $4.36/Mcf for the quarter ended September 30, 2010.  Realized crude oil and NGL prices increased 23% to $87.01/Bbl for the third quarter of 2011 compared to $70.49/Bbl for the same quarter of 2010. The natural gas price for the quarter ended September 30, 2011 was 16% (September 30, 2010 - 24%) higher than the AECO benchmark due to a combination of higher heat content in the Company's Alberta Deep Basin natural gas production and positive commodity contracts.

For the nine months ended September 30, 2011, the realized average natural gas price was 7% lower in 2011 at $4.35/Mcf compared to $4.69/Mcf in 2010.  Realized crude oil and NGL prices averaged $88.80/Bbl compared to $73.57/Bbl in 2010.  Realized prices exclude the effect of unrealized gains or losses. Once these gains and losses are realized they are included in the per unit amounts.

Tourmaline's revenue is analyzed as follows:

  Three Months Ended   Nine Months Ended
(000s)   September 30,
2011
  September 30,
2010
  September 30,
2011
  September 30,
2010
Revenue from:                        
  Natural Gas $     72,494 $     41,408 $ 183,458 $ 110,980
  Oil and NGL       27,574       10,435   71,590   34,206
Total revenue from oil, NGL and gas sales $     100,068 $     51,843 $ 255,048 $ 145,186

TOURMALINE PRICES:

  Three Months Ended Nine Months Ended
    September 30,
2011
  September 30,
2010
Change   September 30,
2011
  September 30,
2010
Change
Natural Gas ($/Mcf) $     4.25     $     4.36     (3)%     $ 4.35 $ 4.69 (7)%
Oil and NGL ($/Bbl) $     87.01     $     70.49     23%     $ 88.80 $ 73.57 21%
Oil equivalent ($/Boe) $     31.67     $     29.94     6%     $ 32.57 $ 32.95 (1)%

BENCHMARK OIL AND GAS PRICES:

  Three Months Ended
    September 30,
2011
  September 30,
2010
Change
Natural Gas                              
  NYMEX Henry Hub (US$/mcf)     $     4.06     $     4.21     (4)%
  AECO (Cdn$/mcf)     $     3.67     $     3.53     4%
Oil                              
  NYMEX (US$/bbl)     $     89.54     $     75.92     18%
  Edmonton Par (Cdn$/bbl)     $     92.35     $     74.90     23%

RECONCILIATION OF AECO INDEX TO TOURMALINE'S REALIZED GAS PRICES:

  Three Months Ended
($/mcf)   September 30,
2011
  September 30,
2010
Change
AECO index     $             3.67     $     3.53     4%
Heat/quality differential                   0.24           0.24     -
Realized gain                   0.34           0.59     (42)%
Tourmaline realized natural gas price     $             4.25     $     4.36     (3)%

CURRENCY - EXCHANGE RATES:

  Three Months Ended
    September 30,
2011
  September 30,
2010
Change
Cdn/US$           1.0201           0.9615     6%

Royalties

Tourmaline's royalties are analyzed as follows:

  Three Months Ended Nine Months Ended
(000s)   September 30,
2011
  September 30,
2010
  September 30,
2011
  September 30,
2010
Natural Gas     $     3,270     $     2,433     $ 4,879 $ 5,993
Oil and NGL     $     5,043     $     2,413     $ 11,164 $ 8,003
Total royalties     $     8,313     $     4,846     $ 16,043 $ 13,996

For the quarter ended September 30, 2011, the average effective royalty rate was 8.3% compared to 9.3% for the quarter ended September 30, 2010.  The Company has benefited from Provincial Government incentive programs including the Natural Gas Deep Drilling Program and the New Well Royalty Reduction Program in Alberta and the Royalty Relief Program and the Deep Royalty Credit Program in British Columbia.  Tourmaline also benefitted from the government incentive programs during the nine months ended September 30, 2011, resulting in a similar decrease in the average effective royalty rate to 6.3% for the nine months ended September 30, 2011 from 9.6% for the same period of 2010.

OTHER INCOME

For the three and nine months ended September 30, 2011, other income was $1.4 million and $3.4 million, respectively, compared to $0.4 million and $0.8 million for the same periods in 2010.  Tourmaline continues to build and acquire interests in facilities which have helped to generate increased third party processing income.

OPERATING EXPENSES

Operating expenses include all periodic lease and field level expenses and exclude income recoveries from processing third party volumes. Operating expenses for the third quarter of 2011 were $18.2 million or $5.77/Boe compared to $10.8 million or $6.24/Boe for the same quarter in 2010. Tourmaline's operating expenses in the third quarter of 2011 include third party processing, gathering and compression fees of approximately $5.5 million or 30.1% of total operating costs.  During the third quarter of 2011, Tourmaline's owned-and-operated gas processing facilities in N.E. British Columbia were at capacity, resulting in the redirection of excess natural gas volumes to third party facilities.  This situation is expected to be alleviated by the end of 2011 as Tourmaline completes the gas plant expansion on its operated facility.

Operating expenses for the nine months ended September 30, 2011 were $45.1 million or $5.76/Boe compared to $29.7 million or $6.75/Boe for the same period of 2010.

The Company continues to focus on reducing per unit operating costs and expects to achieve further reductions in the fourth quarter of 2011 as production continues to increase and a higher percentage of Tourmaline's production base is redirected through Company owned-and-operated natural gas processing facilities.

GENERAL & ADMINISTRATIVE EXPENSES ("G&A")

G&A expenses for the third quarter of 2011 were $6.2 million including $3.3 million related to share-based payments (September 30, 2010 - $4.7 million and $2.6 million, respectively). The Company also capitalized direct G&A costs of $3.1 million and share-based payments of $3.3 million in the third quarter of 2011 (September 30, 2010 - $2.6 million and $2.6 million, respectively). Cash G&A expenses per Boe, excluding interest and financing charges, were $0.94/Boe for the third quarter of 2011, compared to $1.22/Boe for the same quarter in 2010.

For the nine months ended September 30, 2011, G&A expenses totalled $17.2 million including $8.6 million related to share-based payments (September 30, 2010 - $12.5 million and $6.9 million, respectively). During the same period, direct G&A costs of $9.0 million and share-based payments of $8.6 million were capitalized (September 30, 2010 - $7.8 million and $6.9 million, respectively).  The increase in G&A expenses for the first nine months of 2011 compared to the same period in 2010 are primarily due to office staff additions and higher rent expense as the Company increased its head office space. The higher total G&A expenses allow the Company to manage the commensurately larger production, reserve and land base.  Notwithstanding this, the Company's G&A expenses per Boe continue to trend downward as Tourmaline's production base continues to grow faster than its accompanying G&A costs.  G&A costs, excluding interest and financing charges, for the nine months ended September 30, 2011 were $1.10 per Boe, compared to $1.27 per Boe for the first nine months of 2010.  This decrease in per Boe G&A costs is consistent with a growing production base.

G&A expenses are summarized as follows:

  Three Months Ended Nine Months Ended
(000s)   September 30,
2011
  September 30,
2010
  September 30,
2011
  September 30,
2010
G&A expenses   $     6,082     $     4,724     $ 17,587 $ 13,404
Administrative and capital recovery           (939)       (1,334)       (2,527)   (3,300)
Capitalized G&A           (2,167)           (1,275)       (6,436)   (4,491)
Total G&A expense           2,976           2,115       8,624   5,613
Share-based payments           6,516           5,183       17,104   13,747
Capitalized share-based payments           (3,258)           (2,591)       (8,552)   (6,873)
Total share-based payments           3,258           2,592       8,552   6,874
Total G&A and share-based payments    $     6,234     $     4,707     $     17,176     $     12,487

SHARE-BASED COMPENSATION

Tourmaline uses the fair value method for the determination of all non-cash related share-based payments. During the third quarter of 2011, 555,000 stock options were granted to employees, officers, directors and key consultants at an exercise price of $30.76, and 327,167 options were exercised, bringing $3.9 million cash into treasury.  The Company recognized $3.3 million of share-based compensation expense in the third quarter of 2011 compared to $2.6 million in the third quarter of 2010.  For the nine months ended September 30, 2011, the Company recognized $8.6 million of share-based compensation expense compared to $6.9 million for the nine months ended September 30, 2010.

DEPLETION, DEPRECIATION AND AMORTIZATION ("DD&A")

DD&A expense was $48.1 million for the third quarter of 2011 compared to $26.2 million for the same period in 2010 due to higher production volumes, as well as, a larger capital asset base being depleted.  The per-unit DD&A rate for the third quarter was $15.21/Boe compared to $15.10/Boe for the third quarter of 2010.

For the nine months ended September 30, 2011, DD&A expense was $116.9 million (September 30, 2010 - $67.4 million) with an effective rate of $14.93/Boe (September 30, 2010 - $15.30/Boe).  The lower DD&A rate in 2011 reflects increased reserve additions due to positive drilling results partially offset by an increased capital asset base.

FINANCE EXPENSES

Finance expenses for the third quarter of 2011 totalled $3.0 million and are comprised of interest expense, accretion of provisions, as well as transaction costs incurred on the corporate acquisition of Cinch Energy Corp.  Finance expenses for the third quarter of 2010 were $0.5 million.

For the nine months ended September 30, 2011, finance expenses were $5.1 million compared to $1.6 million for the same period of 2010.  The increased finance expenses are largely due to a $2.9 million increase in interest expense resulting from a higher balance drawn on the credit facility in 2011.

CASH FLOW FROM OPERATIONS, FUNDS FROM OPERATIONS AND NET EARNINGS

Funds from operations for the three and nine months ended September 30, 2011 were $62.7 million and $168.0 million, respectively, or $0.40 and $1.13, respectively, on a per-diluted-share basis. The Company had after tax earnings of $8.7 million ($0.06 per diluted share) for the quarter ended September 30, 2011, compared to after tax earnings of $0.4 million ($0.00 per diluted share) in the previous year.  For the nine months ended September 30, 2011, Tourmaline had after-tax earnings of $26.6 million ($0.18 per diluted share) compared to $2.9 million ($0.02 per diluted share) for the same period in 2010.

  Three Months Ended Nine Months Ended
    September 30,
2011
  September 30,
2010
Change   September 30,
2011
  September 30,
2010
Change
Cash flow from
operations per share (1)
    $     0.49     $     0.32     53%     $ 1.12 $ 0.80 40%
Funds from
operations per share (1) (2)
    $     0.40     $     0.25     60%     $ 1.13 $ 0.73 55%
Earnings per share (1)     $     0.06     $     0.00     -     $ 0.18 $ 0.02 800%
Operating netback
per boe (2)
    $     21.21     $     19.12     11%     $ 22.77 $ 21.31 7%
(1) Fully diluted
(2) See "Non-IFRS Financial Measures"
                               

CAPITAL EXPENDITURES

During the third quarter of 2011, the Company invested $249.2 million of cash consideration, net of dispositions, compared to $151.9 million for the same period in 2010.  Expenditures on exploration and production were $181.2 million compared to $145.8 million in the same quarter of 2010, which is consistent with the Company's aggressive growth strategy.  During the third quarter of 2011, the Company drilled 28 gross (21.7 net) wells, completed 20 gross (18.7 net) wells and tied-in 19 gross (17.6 net) wells.  The Company also acquired properties in the Alberta Deep Basin, as well as at Sunrise, BC totalling $65.5 million (net of dispositions).

  Three Months Ended Nine Months Ended
(000s)   September 30,
2011
  September 30,
2010
  September 30,
2011
  September 30,
2010
Land and seismic     $ 10,508     $ 16,993     $ 34,768 $ 29,365
Drilling and completions       119,574       89,121       285,391   207,312
Facilities       51,081       39,702       168,413   85,952
Property acquisitions       65,894       17,116       108,642   289,400
Corporate acquisitions       -       -       -   3,156
Property dispositions       (357)       (11,971)       (7,366)   (21,834)
Other       2,462       983       6,941   3,919
Total cash capital expenditures     $ 249,162     $ 151,944     $ 596,789 $ 597,270

During the third quarter of 2011, the Company acquired all of the issued and outstanding shares of Cinch Energy Corp. in exchange for Tourmaline common shares. The acquisition resulted in an increase to Property, Plant and Equipment ("PP&E") of approximately $182.8 million and an increase to Exploration and Evaluation ("E&E") assets of $87.1 million.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2011, Tourmaline had negative working capital of $123.9 million, after adjusting for the fair value of financial instruments (the unadjusted working capital deficiency was $120.1 million).  Management believes the Company has sufficient liquidity and capital resources to fund the remainder of its 2011 and 2012 exploration and development program through expected cash flow from operations and its unutilized bank credit facilities.

On May 17, 2011, Tourmaline issued 6.8 million common shares at $25.50 per share in a public offering for gross proceeds of approximately $174.0 million, with net proceeds of approximately $166.5 million.  In October 2011, the Company issued 4.9 million common shares at $33 per share for gross proceeds of $161.7 million, with net proceeds of $155.3. The proceeds of the above noted financings are being used to temporarily reduce bank debt and to conduct the Company's remaining 2011 exploration and development program which has been increased from $470 million to $600 million (excluding acquisitions), as well as the 2012 capital expenditure program.

On September 8, 2011, the Company increased its credit facility for an extendible revolving term loan to $350 million from $275 million with three Canadian chartered banks, in addition to its already existing $25 million operating line.  The facility bears interest on a variable grid currently 250 basis points over the prevailing banker's acceptance rate.  Security for the facility includes a general security agreement and a $500 million demand loan debenture secured by a second floating charge over all assets.  On July 31, 2012, at the Company's discretion, the facility is available on a non-revolving basis for a period of 365 days, at which time the facility would be due and payable.  Alternatively, the facility may be extended for a further 364-day period at the request of the Company and subject to approval by the banks.

A subsidiary of the Company also has a financing arrangement with a Canadian chartered bank for an extendible revolving term loan in the amount of $5 million in addition to a $5 million operating line.  The interest rate charged varies based on the amount outstanding.  Security for the facility includes a general security agreement and a demand loan debenture secured by a second floating charge over all of the subsidiary's assets.  The revolving term credit facility has a 364-day extendible period plus a one-year maturity.

The Company is required to meet certain financial-based covenants to maintain the facilities.  The financial covenants include a requirement to ensure the total amount drawn on the facility does not exceed the total borrowing base as defined in each facility's agreement, and that the ratio of earnings adjusted for interest, taxes and other non-cash items to interest expense does not exceed a predetermined amount, as determined by each facility's agreement.  As at September 30, 2011, the Company was in compliance with these covenants.

As at September 30, 2011, the Company had $159.8 million drawn on existing facilities (December 31, 2010 - nil), and net debt of $283.7 million (December 31, 2010 - $49.2 million).

SHARES OUTSTANDING

As at November 8, 2011, the Company has 156,901,086 common shares outstanding and 12,572,499 stock options granted and outstanding.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

In the normal course of business, Tourmaline is obligated to make future payments.  These obligations represent contracts and other commitments that are known and non-cancellable.

Payments Due by Year (000s)   2011   2012   2013   2014   2015 and
thereafter
  Total
Operating leases $ 735 $ 2,823 $ 2,502 $ 2,338 $ 526 $ 8,924
Flow-through obligations       -       7,250       -       -       -       7,250
Firm transportation agreements       5,793       25,917       24,237       15,737       7,831   79,515
Bank debt       -       165,441       -       -       -   165,441
  $ 6,528 $ 201,431 $ 26,739 $ 18,075 $ 8,357 $ 261,130

FINANCIAL RISK MANAGEMENT

The Board of Directors has overall responsibility for the establishment and oversight of the Company's risk management framework.  The Board has implemented and monitors compliance with risk management policies.

The Company's risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to market conditions and the Company's activities.

(a) Credit risk:

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's receivables from joint venture partners and petroleum and natural gas marketers.  As at September 30, 2011, Tourmaline's receivables consisted of $12.7 million (December 31, 2010 - $21.1 million) from joint venture partners, $35.7 million (December 31, 2010 - $23.6 million) from petroleum and natural gas marketers and $8.8 million (December 31, 2010 - $13.9 million) from provincial governments.

Receivables from petroleum and natural gas marketers are normally collected on the 25th day of the month following production.  The Company's policy to mitigate credit risk associated with these balances is to establish marketing relationships with creditworthy purchasers.  The Company historically has not experienced any collection issues with its petroleum and natural gas marketers.  Joint venture receivables are typically collected within one to three months of the joint venture bill being issued to the partner.  The Company attempts to mitigate the risk from joint venture receivables by obtaining partner approval of significant capital expenditures prior to expenditure.  The receivables, however, are from participants in the petroleum and natural gas sector, and collection of the outstanding balances is dependent on industry factors such as commodity price fluctuations, escalating costs and the risk of unsuccessful drilling.  In addition, further risk exists with joint venture partners as disagreements occasionally arise that increase the potential for non-collection.  The Company does not typically obtain collateral from petroleum and natural gas marketers or joint venture partners; however, the Company does have the ability to withhold production from joint venture partners in the event of non-payment.

The Company monitors the age of and investigates issues relating to its receivables that have been past due for over 90 days.  At September 30, 2011, the Company had $1.3 million (December 31, 2010 - $1.0 million) over 90 days.  The Company is satisfied that these amounts are substantially collectible.

The carrying amount of accounts receivable and cash and cash equivalents and commodity risk management contracts represents the maximum credit exposure.  The Company does not have an allowance for doubtful accounts as at September 30, 2011 (September 30, 2010 - nil) and did not provide for any doubtful accounts nor was it required to write-off any receivables during the nine-month period ended September 30, 2011 (September 30, 2010 - nil).

(b) Liquidity risk:

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due.  The Company's approach to managing liquidity is to ensure that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions without incurring unacceptable losses or risking harm to the Company's reputation.  Liquidity risk is mitigated by cash on hand and bank credit facilities.

The Company's accounts payable and accrued liabilities balance at September 30, 2011 is approximately $186.2 million (December 31, 2010 - $178.1 million).  It is the Company's policy to pay suppliers within 45-75 days.  These terms are consistent with industry practice.  As at September 30, 2011, substantially all of the account balances were less than 90 days.

The Company prepares annual capital expenditure budgets, which are regularly monitored and updated as considered necessary.  Further, the Company utilizes authorizations for expenditures on both operated and non-operated projects to further manage capital expenditures.  The Company also attempts to match its payment cycle with the collection of petroleum and natural gas revenues on the 25th of each month.

(c) Market risk:

Market risk is the risk that changes in market conditions, such as commodity prices, interest rates or foreign exchange rates will affect the Company's net income or value of financial instruments.  The objective of market risk management is to manage and curtail market risk exposure within acceptable limits, while maximizing the Company's returns.

The Company utilizes both financial derivatives and physical delivery sales contracts to manage market risks.  All such transactions are conducted in accordance with the risk management policy that has been approved by the Board of Directors.

Currency risk has minimal impact on the value of the financial assets and liabilities on the statement of financial position at September 30, 2011.  Changes in the US to Canadian exchange rate, however, could influence future petroleum and natural gas prices which could impact the value of certain derivative contracts.  This influence cannot be accurately quantified.

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates.  The Company is exposed to interest rate risk to the extent that changes in market interest rates will impact the Company's bank debt which is subject to a floating interest rate.  Assuming all other variables remain constant, an increase or decrease of 1% in market interest rates in the nine-month period ended September 30, 2011 would have decreased or increased shareholders' equity and net income by $0.5 million.  As at September 30, 2011, the Company had entered into one interest rate swap included in the table below:

(000s)         Three Months Ended
September 30, 2011
Nine Months Ended
September 30, 2011
Term Type
(Floating
to Fixed)
Amount Company
Fixed
Interest
Rate (%)
Counter
Party
Floating
Rate Index
Realized
Gain/(Loss)
Unrealized
Gain/ (Loss)
Realized
Gain/(Loss)
Unrealized
Gain/ (Loss)
September 29, 2011- September 29, 2013       Swap $150,000 1.15% Floating Rate $  - $  (543) $  - $  (543)

The unrealized loss reflects the change between the fixed rate of the contract of 1.15% and the two-year fixed interest rate at September 30, 2011.  Realized gains/losses will be recorded in subsequent quarters as the difference between the fixed rate paid of 1.15% and the floating rate received, which for the fourth quarter of 2011 is set at 1.28%.  The unrealized loss on the interest rate swap has been included on the consolidated statement of financial position with changes in the fair value included in the unrealized gain/(loss) on financial instruments on the consolidated statement of income and comprehensive income.

Commodity price risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in commodity prices.  As at September 30, 2011, the Company has entered into certain financial derivative and physical delivery sales contracts in order to manage commodity risk.  These instruments are not used for trading or speculative purposes.  The Company has not designated its financial derivative contracts as effective accounting hedges, even though the Company considers all commodity contracts to be effective economic hedges.  As a result, all such financially-settled commodity contracts are recorded on the consolidated statement of financial position at fair value, with changes in the fair value being recognized as an unrealized gain or loss on the consolidated statement of income and comprehensive income.

The Company has entered into the following contracts as at September 30, 2011:

Type of Contract Quantity Time Period Contract Price
Financial Swap 100 bbls/d July 2011 - December 2012 US$90.00/bbl
Financial Swap 100 bbls/d July 2011 - December 2011 US$100.10/bbl
Financial Swap 100 bbls/d July 2011 - June 2012 US$101.40/bbl
Financial Swap 100 bbls/d September 2011 - December 2012 US$101.00/bbl
Financial Swap 100 bbls/d January 2012 - December 2012 US$104.00/bbl
Financial Swap 100 bbls/d January 2011 - December 2011 US$87.85/bbl
Costless Collar 100 bbls/d September 2010 - August 2012 US$75.00/bbl floor - US$96.00/bbl ceiling
Financial Swap 100 bbls/d January 2012 - June 2013 US$99.70/bbl
Financial Swap 100 bbls/d January 2012 - December 2012 US$108.00/bbl

The following table provides a summary of the unrealized gains and losses on financial instruments for the period ended September 30, 2011:

  Three Months Ended Nine Months Ended
(000s)   September 30,
2011
  September 30,
2010
  September 30,
2011
  September 30,
2010
Unrealized gain/(loss) on financial instruments $ 5,139 $ (583) $ 5,510 $ 16
Unrealized gain/(loss) on investments held for trading   (64)   (9)   (150)   73
Total $ 5,075 $ (592) $ 5,360 $ 89

The unrealized gain/(loss) on derivative contracts has been included on the consolidated statement of financial position with changes in the fair value included in the unrealized gain/(loss) on financial instruments on the consolidated statement of income and comprehensive income.  As at September 30, 2011, if the future strip prices for oil were $1.00 per bbl higher, with all other variables held constant, before-tax earnings for the period would have been $0.3 million lower.  An equal and opposite impact would have occurred to before tax earnings and the fair value of the derivative contracts liability had oil prices been $1.00 per bbl lower.

In addition to the financial commodity contracts discussed above, the Company has entered into physical contracts to manage commodity risk.  These contracts are considered normal sales contracts and are not recorded at fair value in the consolidated financial statements.

The Company has entered into the following physical contracts as at September 30, 2011:

       
Type of Contract Quantity Time Period Contract Price
AECO Fixed Price 3,000 gjs/d January 2011 - December 2011 Cdn$5.75/gj
AECO Fixed Price 3,000 gjs/d January 2011 - December 2011 Cdn$5.84/gj
AECO Fixed Price 4,000 gjs/d February 2010 - December 2011 Cdn$5.68/gj
AECO Fixed Price 2,000 gjs/d February 2010 - December 2011 Cdn$5.72/gj
AECO Fixed Price 2,000 gjs/d March 2010 - March 2012 Cdn$5.72/gj
AECO Fixed Price 2,000 gjs/d March 2010 - December 2011 Cdn$5.705/gj
AECO Call Option 3,000 gjs/d January 2011 - December 2011 Cdn$6.50/gj strike price
AECO Call Option 3,000 gjs/d January 2011 - December 2012 Cdn$6.00/gj strike price
AECO Fixed Price 3,000 gjs/d January 2011 - December 2012 Cdn$5.53/gj
AECO Fixed Price 3,000 gjs/d February 2011 - April 2012 Cdn$4.00/gj
AECO Fixed Price 3,000 MMbtu/d May 2011 - October 2011 USD$4.135/MMbtu
AECO Fixed Price 5,000 MMbtu/d May 2011 - October 2011 USD$3.61/MMbtu
AECO/Nymex Differential Swap 5,000 MMbtu/d October 2011 - October 2012 Nymex less USD$0.62/MMbtu
AECO Fixed Price 2,000 MMbtu/d May 2011 - October 2011 USD$3.745/MMbtu
AECO Fixed Price 3,000 MMbtu/d May 2011 - October 2011 USD$4.045/MMbtu
AECO Fixed Price 3,000 MMbtu/d May 2011 - October 2011 USD$3.695/MMbtu
AECO/Nymex Differential Swap 3,000 MMbtu/d November 2011 - October 2012 Nymex less USD$0.535/MMbtu
AECO Fixed Price 5,000 MMbtu/d June 2011 - October 2011 USD$4.125/MMbtu
AECO/Nymex Differential Swap 5,000 MMbtu/d November 2011 - December 2011 Nymex less USD$0.475/MMbtu
AECO Fixed Price 5,000 gjs/d July 2011 - October 2011 Cdn$4.16/gj
AECO/Nymex Differential Swap 5,000 Mmbtu/d January 2012 - December 2012 Nymex less USD$0.4325/MMbtu
       
The following contracts were entered into subsequent to September 30, 2011:
Type of Contract Quantity Time Period Contract Price
AECO/Nymex Differential Swap 2,000 Mmbtu/d January 2012 - December 2012 Nymex less USD$0.42/MMbtu
AECO/Nymex Differential Swap 3,000 Mmbtu/d December 2011 - March 2012 Nymex less USD$0.30/MMbtu
AECO Fixed Price 3,000 gjs/d January 2012 - December 2014 Cdn$4.45/gj
AECO Call Option 3,000 gjs/d January 2012 - December 2014 Cdn$4.50/gj strike price
AECO Call Option 3,000 gjs/d January 2015 - December 2016 Cdn$6.00/gj strike price

(d) Capital management:

The Company's policy is to maintain a strong capital base to maintain investor, creditor and market confidence and to sustain the future development of the business.  The Company considers its capital structure to include shareholders' equity, bank debt and working capital.  In order to maintain or adjust the capital structure, the Company may from time to time issue shares and adjust its capital spending to manage current and projected debt levels.  The annual and updated budgets are approved by the Board of Directors.

The key measures that the Company utilizes in evaluating its capital structure are net debt, which is defined as long-term bank debt plus working capital (adjusted for the fair value of financial instruments), to annualized funds from operations, defined as cash flow from operating activities before changes in non-cash working capital, and the current credit available from its creditors in relation to the Company's budgeted capital program.  Net debt to annualized funds from operations represents a measure of the time it is expected to take to pay off the debt if no further capital expenditures were incurred and if funds from operations in the next year were equal to the amount in the most recent quarter annualized.

The Company monitors this ratio and endeavours to maintain it at or below 2.0 to 1.0 in a normalized commodity price environment. This ratio may increase at certain times as a result of acquisitions or low commodity prices. As shown below, as at September 30, 2011, the Company's ratio of net debt to annualized funds from operations was 1.27 to 1.0.  In October 2011, the Company issued 4.9 million common shares for net proceeds of $155.3 million, resulting in a reduction of the undernoted ratio to approximately 0.57 to 1.0 (assuming all other balances remained the same).

(000s)   As at
September 30, 2011
  As at
December 31, 2010
Net debt:                
  Bank debt     $ (159,846)     $ -
  Working capital/(deficit)       (120,080)       (49,642)
  Fair value of financial instruments - short-term (asset)/liability       (3,778)       472
Net debt     $ (283,704)     $ (49,170)
Annualized funds from  operations:                
  Cash flow from operating activities     $ 166,620     $ 144,237
  Change in non-cash working capital       1,421       (9,517)
  Funds from operations to end of period     $ 168,041     $ 134,720
Annualized funds from operations     $ 224,055     $ 134,720
Net debt to annualized funds from operations       1.27       0.36

The Company has not paid or declared any dividends since the date of incorporation, nor are any contemplated in the foreseeable future.  There were no changes in the Company's approach to capital management since December 31, 2010.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

Certain accounting policies require that management make appropriate decisions with respect to the formulation of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management reviews its estimates on a regular basis. The emergence of new information and changed circumstances may result in actual results or changes to estimates that differ materially from current estimates.

DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING

The Company's Chief Executive Officer and Chief Financial Officer have designed, or caused to be designed under their supervision, disclosure controls and procedures ("DC&P") to provide reasonable assurance that: (i) material information relating to the Company is made known to the Company's Chief Executive Officer and Chief Financial Officer by others, particularly during the periods in which the annual and interim filings are being prepared; and (ii) information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time period specified in securities legislation. All control systems by their nature have inherent limitations and, therefore, the Company's DC&P are believed to provide reasonable, but not absolute, assurance that the objectives of the control systems are met.

The Company's Chief Executive Officer and Chief Financial Officer have designed, or caused to be designed under their supervision, internal controls over financial reporting ("ICFR") to provide reasonable assurance regarding the reliability of the Company's financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.

Although DC&P and ICFR were in place as of September 30, 2011, the Company was not required to evaluate the effectiveness of DC&P and ICFR, as the Company only became a reporting issuer in November 2010.  Management has certified the design of the Company's DC&P and ICFR as of September 30, 2011, and will be required to certify the effectiveness of DC&P and ICFR as of December 31, 2011.   The evaluation of ICFR will be based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations.  Tourmaline will continue to work to complete the project to support the certification of operating effectiveness by December 31, 2011.  There were no changes to ICFR as a result of the transition to IFRS.

It should be noted that while the Company's management including the Chief Executive Officer and Chief Financial Officer believe that the Company's DC&P and ICFR provide a reasonable level of assurance that they are effective, they do not expect that these controls will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

BUSINESS RISKS AND UNCERTAINTIES

Tourmaline monitors and complies with current government regulations that affect its activities, although operations may be adversely affected by changes in government policy, regulations or taxation. In addition, Tourmaline maintains a level of liability, property and business interruption insurance which is believed to be adequate for Tourmaline's size and activities, but is unable to obtain insurance to cover all risks within the business or in amounts to cover all possible claims.

See "Forward-Looking Statements" in this MD&A and "Risk Factors" in Tourmaline's most recent annual information form for additional information regarding the risks to which Tourmaline and its business and operations are subject.

IMPACT OF NEW ENVIRONMENTAL REGULATIONS

Environmental legislation, including the Kyoto Accord, the federal government's "EcoACTION" plan and Alberta's Bill 3 - Climate Change and Emissions Management Amendment Act, is evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability and potentially increased capital expenditures and operating costs. Given the evolving nature of the debate related to climate change and the resulting requirements, it is not possible to determine the operational or financial impact of those requirements on Tourmaline.

INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")

The Company's IFRS accounting policies are provided in note 2 of the March 31, 2011 unaudited interim consolidated financial statements.  In addition, note 22 to the March 31, 2011 unaudited interim consolidated financial statements presents reconciliations between the Company's 2010 previous GAAP results and its 2010 results under IFRS.  The reconciliations in the September 30, 2011 unaudited interim consolidated financial statements include the consolidated statement of financial position as at September 30, 2010, consolidated statements of earnings and comprehensive income and cash flow for the three and nine months ended September 30, 2011.

The following provides summary reconciliations of Tourmaline's 2010 previous GAAP and IFRS results, along with a discussion of the significant IFRS accounting policy changes.

SUMMARY STATEMENT OF FINANCIAL POSITION RECONCILIATIONS

As at January 1, 2010
($000s) Previous
GAAP
E&E Decommissioning
Obligations
Share-Based
Payments
Other (1) IFRS
Current assets 248,452 -   -             -  (204) 248,248
Investments 632 -             -             -             -   632
Exploration and evaluation assets - 250,972             -             -             - 250,972
Property, plant and equipment 754,798  (250,972)             -             -             - 503,826
Deferred taxes -  -             -             - 138    138
             
Total assets  1,003,882   -             -             -  (66) 1,003,816
                          
Current liabilities 86,938    -             -             -             -  86,938
Decommissioning obligations 7,208   -   11,945             -             -  19,153
Deferred premium on flow-through shares -   -             -             -  3,833 3,833
Deferred taxes 780     -             -             - (780)             -
Share capital 895,095    -             -             -   (4,143) 890,952
Non-controlling interest 13,526    -             -             -             -  13,526
Contributed surplus 2,018       -             -   6,529             -  8,547
Retained earnings/(deficit) (1,683)      -   (11,945)  (6,529) 1,024 (19,133)
Total liabilities and shareholders' equity 1,003,882      -             -             -   (66)  1,003,816

(1) Other includes adjustments for share issue costs, the deferred premium on flow-through shares, the impact of the fact that Tourmaline's forward gas sales contracts no longer meet the definition of a derivative and the deferred tax impact related thereto.

As at December 31, 2010
($000s) Previous
GAAP
E&E Depletion Decommissioning
Obligations
Share-Based
Payments
Other (1) IFRS
Current assets 143,356 - - - - (14,413) 128,943
Investments 3,932 - - - - - 3,932
Fair value of financial instruments 1,601 - - - - (1,601) -
Exploration and evaluation assets - 479,067 - - - - 479,067
Property, plant and equipment 1,637,960 (479,067) 29,184 9,844 6,531 (351) 1,204,101
Total assets 1,786,849 - 29,184 9,844 6,531 (16,365) 1,816,043
               
Current liabilities 180,945 - - - - (2,360) 178,585
Decommissioning obligations 13,628 - - 21,776 - (125) 35,279
Long-term obligation 14,589 - - - - - 14,589
Fair value of financial instruments - - - -  - 270 270
Deferred premium on flow-through shares - - - -  - 348 348
Deferred taxes 25,457 - - - (964) 21,576 46,069
Share capital 1,517,675 - - - (128) (9,495) 1,508,052
Non-controlling interest 13,767 - - - - 142 13,909
Contributed surplus 7,919 - - - 21,343 - 29,262
Retained earnings/(deficit) 12,869 - 29,184 (11,932) (13,720) (26,721) (10,320)
Total liabilities and shareholders' equity 1,786,849 - 29,184 9,844 6,531 (16,365) 1,816,043

(1) Other includes adjustments for share issue costs, the deferred premium on flow-through shares, the impact of the fact that Tourmaline's forward gas sales contracts no longer meet the definition of a derivative, gains and losses on divestitures and the deferred tax impact related thereto.

SUMMARY NET EARNINGS RECONCILIATION

2010          
($000s) Annual Q4 Q3 Q2 Q1
Net earnings/(loss) - previous GAAP 14,552 (2,593) 4,463 (672) 13,354
After-tax addition/(deduction):          
  Unrealized gain/(loss) on financial instruments (16,553) 4,995 (7,410) 3,676 (17,814)
  General and administrative (1,561) (749) (478) (90) (244)
  Share-based payments (7,191) (2,324) (1,855) (1,702) (1,310)
  Depletion and depreciation 29,184 12,108 4,791 6,262 6,023
  Decommissioning obligation accretion 13 10 13 (8) (2)
  Gain/(loss) on divestitures 2,082 1,606 3,534 (3,058) -
  Deferred taxes (11,010) (7,135) (2,662) (2,620) 1,407
  Transaction costs on corporate acquisition (561) - - - (561)
  Non-controlling interest (142) (53) 32 (88) (33)
Net earnings - IFRS 8,813 5,865 428 1,700 820

Accounting Policy Changes and the Impact of Transition to IFRS

  • Exploration and Evaluation ("E&E") assets - On transition to IFRS Tourmaline reclassified $251.0 million of PP&E assets to E&E assets on the consolidated statement of financial position.  This consisted of the book value of undeveloped land that relates to exploration properties, geological and geophysical costs and drilling and completion costs of wells in progress.  E&E assets are not depleted and must be assessed for impairment at the transition date and when indicators of impairment exist.  There was no transitional impairment of the E&E assets.  The cost of any impairment recognized during a period, is charged as additional depletion and depreciation expense.
  • Property, plant and equipment ("PP&E") - This includes oil and gas assets in the development and production phases. The Company has allocated the amount recognized under the previous GAAP as at January 1, 2010 to CGUs using reserve values.
  • Divestitures - Under previous GAAP, proceeds from divestitures were deducted from the full cost pool without recognition of a gain or loss unless the deduction resulted in a change in the depletion rate of 20 percent or greater, in which case a gain or loss was recorded.  Under IFRS, gains and losses are recorded on divestitures and are calculated as the difference between the proceeds and the net book value of the asset disposed. For the year ended December 31, 2010, Tourmaline recognized a $2.1 million net gain on divestitures under IFRS compared to nil under the previous GAAP.
  • Impairment of PP&E assets - Under IFRS, impairment tests of PP&E must be performed at the CGU level as opposed to the entire PP&E balance which was required under the previous GAAP through the full cost ceiling test.  An impairment is recognized if the carrying value exceeds the recoverable amount for a CGU. The recoverable amount is determined using fair value less costs to sell based on discounted future cash flow of proved plus probable reserves using forecast prices and costs.  PP&E impairments can be reversed in the future if the recoverable amount increases.
    Tourmaline performed and passed its impairment tests on its PP&E assets on transition to IFRS at January 1, 2010 as well as for the year ended December 31, 2010.

  • Decommissioning Obligations - Under the previous GAAP, a credit adjusted risk free rate was used to measure the obligation.  Under IFRS, Tourmaline has used a risk free rate given the expected cash flow is risked.  The result of using a lower discount rate was an increase to the obligation on transition of $11.9 million with an offsetting charge to the opening deficit, net of the deferred income tax effect of $3.0 million.
  • Depletion and depreciation expense - Under IFRS, Tourmaline has chosen to base the depletion calculation using proved-plus-probable reserves.  This resulted in a decrease to depletion and depreciation expense in 2010 as compared to the previous GAAP.
  • Share-based compensation - The major differences from the previous GAAP are the treatment of graded vesting awards as multiple separate awards with different lives, an adjustment to the measure of volatility used in the calculation to value those options that were issued while the Company was private and estimating forfeiture rates in advance as opposed to recognizing the impact when the forfeiture occurs.

RECENT PRONOUNCEMENTS ISSUED

The following pronouncements from the IASB will become effective for financial reporting periods beginning on or after January 1, 2013 and have not yet been adopted by the Company. All of these new or revised standards permit early adoption with transitional arrangements depending upon the date of initial application.

IFRS 9 - Financial Instruments addresses the classification and measurement of financial assets.

IFRS 10 - Consolidated Financial Statements builds on existing principles and standards and identifies the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company.

IFRS 11 - Joint Arrangements establishes the principles for financial reporting by entities when they have an interest in arrangements that are jointly controlled.

IFRS 12 - Disclosure of Interest in Other Entities provides the disclosure requirements for interests held in other entities including joint arrangements, associates, special purpose entities and other off balance sheet entities.

IFRS 13 - Fair Value Measurement defines fair value, requires disclosure about fair value measurements and provides a framework for measuring fair value when it is required or permitted within the IFRS standards.

IAS 19 - Employee Benefits revises the existing standard to eliminate options to defer the recognition of gains and losses in defined benefit plans, requires re-measurements of a defined benefit plan's assets and liabilities to be presented in other comprehensive income and increases disclosure.

IAS 27 - Separate Financial Statements revised the existing standard which addresses the presentation of parent company financial statements that are not consolidated financial statements.

IAS 28 - Investments in Associate and Joint Ventures revised the existing standard and prescribes the accounting for investments and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures.

The IASB also issued Presentation of Items of Other Comprehensive Income, an amendment to IAS 1 Financial Statement Presentation. The amendment addresses the presentation of other comprehensive income and requires the grouping of items within other comprehensive income that might eventually be reclassified to the profit and loss section of the income statement. The change becomes effective for financial years after July 1, 2012 with earlier adoption permitted.

The Company has not completed its evaluation of the effect of adopting these standards on its financial statements.

NON-IFRS FINANCIAL MEASURES

This MD&A includes references to financial measures commonly used in the oil and gas industry such as "funds from operations", "operating netback", "working capital (adjusted for the fair value of financial instruments)" and "net debt", which do not have any standardized meaning prescribed by IFRS.   Management believes that in addition to net income, funds from operations, operating netback, net debt and working capital (adjusted for the fair value of financial instruments) are useful supplemental measures as they demonstrate Tourmaline's ability to generate the cash necessary to repay debt or fund future growth through capital investment.  Readers are cautioned, however, that these measures should not be construed as an alternative to net income determined in accordance with IFRS as an indication of Tourmaline's performance.  Tourmaline's method of calculating these measures may differ from other companies and accordingly, they may not be comparable to measures used by other companies.  For these purposes, Tourmaline defines funds from operations as cash provided by operations before changes in non-cash operating working capital, defines operating netback as revenue less royalties and operating expenses and defines working capital (adjusted for the fair value of financial instruments) as working capital adjusted for the fair value of financial instruments.  Net debt is defined as long-term bank debt plus working capital (adjusted for the fair value of financial instruments).

Funds from Operations

A summary of the reconciliation of funds from operations to cash flow from operating activities is set forth below:

  Three Months Ended Nine Months Ended
(000s)   September 30,
2011
  September 30,
2010
  September 30,
2011
  September 30,
2010
Cash flow from operating activities (per IFRS)     $ 77,622     $     40,685     $ 166,620     $ 97,187
Change in non-cash working capital       (14,936)           (9,435)       1,421       (8,909)
Funds from operations     $ 62,686     $     31,250     $ 168,041     $ 88,278

Operating Netback

Operating netback is calculated on a per-boe basis and is defined as revenue less royalties, transportation costs and operating expenses, as shown below:

  Three Months Ended Nine Months Ended
($/Boe)   September 30,
2011
  September 30,
2010
  September 30,
2011
  September 30,
2010
Revenue, excluding processing fee income $ 31.67     $     29.94     $ 32.57     $ 32.95
Royalties           (2.63)           (2.80)       (2.05)       (3.18)
Transportation costs           (2.06)           (1.78)       (1.99)       (1.71)
Operating expenses           (5.77)           (6.24)       (5.76)       (6.75)
Operating netback $     21.21     $     19.12     $ 22.77     $ 21.31

Working Capital (Adjusted for the Fair Value of Financial Instruments)

A summary of the reconciliation of working capital to working capital (adjusted for the fair value of financial instruments) is set forth below:

(000s)   As at
September 30, 2011
  As at
December 31, 2010
Working capital/(deficit)     $ (120,080)     $ (49,642)
Fair value of financial instruments - short-term (asset)/liability       (3,778)       472
Working capital/(deficit) (adjusted for the fair value of financial instruments)     $ (123,858)     $ (49,170)

Net Debt

A summary of the reconciliation of net debt is set forth below:

(000s)   As at
September 30, 2011
  As at
December 31, 2010
Bank debt     $ (159,846)     $ -
Working capital/(deficit)       (120,080)       (49,642)
Fair value of financial instruments - short-term (asset)/liability       (3,778)       472
Net debt     $ (283,704)     $ (49,170)

SELECTED QUARTERLY INFORMATION

 
  2011   2010   2009 -
Previous
GAAP(2)
($000s, unless otherwise noted) Q3 Q2 Q1   Q4 Q3 Q2 Q1   Q4
PRODUCTION                    
Crude oil and NGL(bbls) 316,890 272,184 217,121   236,502 147,997 178,787 138,068   90,978
Gas (mcf) 17,058,132 13,798,653 11,283,617   11,251,067  9,502,337 8,693,492 5,449,027    3,454,934
Oil equivalent (boe) 3,159,912 2,571,959 2,097,724   2,111,680  1,731,720 1,627,702 1,046,239     666,800
Crude oil and NGL (bbls/d)  3,444 2,991 2,412   2,571 1,609 1,965 1,534   989
Gas (mcf/d)  185,414 151,634 125,374   122,294 103,286 95,533 60,545   37,554
Oil equivalent (boe/d)  34,347 28,263 23,308   22,953 18,823 17,887 11,625    7,248
FINANCIAL                    
Gross revenue, net of royalties  98,225 87,551 62,019   63,340 46,822 50,310 34,935    22,765
Cash flow from operating activities   77,622 42,112 46,886   46,108 40,685 34,623 21,879   (9,388)
Funds from operations (1) 62,686 60,415 44,940   44,939 31,250 33,925 23,103   14,569
Per diluted share 0.40 0.41 0.32   0.34 0.25 0.27 0.21   0.12
Net earnings/(loss)  8,688  15,192 2,727   5,865 428 1,700 820   (369)
Per diluted share 0.06 0.10 0.02   0.04 0.00 0.01 0.01   0.00
Total assets 2,517,607 2,030,285 1,936,836    1,816,043 1,546,820 1,412,776  1,366,481    1,003,882
Working capital   (120,080)  (31,963)  (139,138)   (49,642)  (78,205) (21,672) 234,339   161,514
Working capital (adjusted for the fair value of financial instruments) (1)  (123,858)  (31,592) (136,933)   (49,170) (78,314) (22,075) 234,362   161,514
Capital expenditures  249,162 130,075 217,553   217,063  151,944 286,808 158,518   125,946
Basic outstanding shares (000s) 151,906  145,215  138,124   136,191 123,841 122,691 120,191   101,809
PER UNIT                    
Gas ($/mcf) 4.25 4.38 4.48   4.17 4.36 4.61 5.41   5.08
Crude oil and NGL ($/bbl) 87.01  95.54   83.00   75.94   70.49 72.49  78.29   68.02
Revenue ($/boe)  31.67 33.61  32.68    30.74  29.94 32.58 38.53   35.59
Operating netback ($/boe)  21.21  24.52  22.99   22.66  19.12 21.82 24.16   22.72

(1) See Non-IFRS Financial Measures
(2) As Tourmaline's IFRS transition date was January 1, 2010, the 2009 comparative information has not been restated.

The changes to the financial information summarized above are due primarily to the continuing growth in the Company's crude oil, natural gas and NGL production over the periods, from the acquisition of producing properties and from the Company's exploration and development activities.

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(000s) (unaudited) September 30,
2011
December 31,
2010
Assets    
Current assets:        
  Cash and cash equivalents $             - $             65,160
  Accounts receivable                   57,174                   58,669
  Prepaid expenses and deposits                   5,120                   5,114
  Fair value of financial instruments (note 4)                   3,778                   -
                    66,072                   128,943
Investments (note 9)                   3,444                   3,932
Fair value of financial instruments (note 4)                   990                   -
Exploration and evaluation assets (note 5)                   640,727                   479,067
Property, plant and equipment (note 6)                   1,806,374                   1,204,101
  $             2,517,607 $             1,816,043
Liabilities and Shareholders' Equity                             
Current liabilities:                             
  Accounts payable and accrued liabilities $             186,152 $             178,113
  Fair value of financial instruments (note 4)               -               472
                    186,152                   178,585
Bank debt (note 8)                   159,846                   -
Decommissioning obligations (note 7)                   46,952                   35,279
Long-term obligation (note 10)                   11,795                   14,589
Fair value of financial instruments (note 4)                   -                   270
Deferred premium on flow-through shares                   1,184                   348
Deferred taxes                   101,207                   46,069
Shareholders' equity:                             
  Share capital (note 12)                   1,936,933                   1,508,052
  Non-controlling interest (note 11)                   14,534                   13,909
  Contributed surplus                   42,717                   29,262
  Retained earnings/(deficit)                   16,287                   (10,320)
                    2,010,471                   1,540,903
  $             2,517,607 $             1,816,043

Commitments (note 18)
Subsequent events (notes 4 and 19)
See accompanying notes to the consolidated financial statements. 

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

  Three Months Ended Nine Months Ended
(000s) except per-share amounts (unaudited) September 30,
2011
September 30,
2010
September 30,
2011
September 30,
2010
Revenue:                
  Oil and natural gas sales $             94,299 $             46,144 $             241,285 $             134,304
  Royalties                       (8,313)                       (4,846)                   (16,043)                   (13,996)
                        85,986                       41,298                   225,242                   120,308
  Realized gain on financial instruments                       5,769                       5,699                   13,763                   10,882
  Unrealized gain/(loss) on financial instruments
(note 4)
                      5,075                       (592)                   5,360                   89
  Other income (note 15)                       1,395                       417                   3,430                   788
                    98,225           46,822                   247,795                   132,067
Expenses:                                        
  Operating               18,239               10,802               45,101                   29,719
  Transportation                       6,503                       3,078                   15,586                   7,554
  General and administration                       2,976                       2,115                   8,624                   5,613
  Share-based payments               3,258               2,592               8,552                   6,874
  (Gain)/loss on divestitures               -               (3,534)               3,630                   (476)
  Depletion, depreciation and amortization                       48,059                       26,156                   116,928                   67,395
                        79,035                       41,209                   198,421                   116,679
Results from Operating Activities                       19,190                       5,613                   49,374                   15,388
Finance expenses (note 16)                       3,048                       452                   5,081                   1,586
Income before taxes                       16,142                       5,161                   44,293                   13,802
  Deferred taxes                       7,275                       4,705                   17,061                   10,611
Net income and comprehensive income for the period before non-controlling interest                       8,867                       456                   27,232                   3,191
Net income and comprehensive income attributable to:                                        
  Shareholders of the Company                       8,688                       428                    26,607                   2,948
  Non-controlling interest (note 11)                       179                       28                   625                   243
  $                 8,867 $                 456 $             27,232 $             3,191
                 
Income per share attributable to common shareholders (note 13)                                        
  Basic $                 0.06     $             0.00 $                 0.19 $             0.03
  Diluted $                 0.06 $             0.00 $                 0.18 $             0.02

See accompanying notes to the consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(000s) except per-share amounts (unaudited)                
    Share
Capital
  Contributed
Surplus
  Retained
Earnings/(Deficit)
  Non-Controlling
Interest
  Total Equity
Balance at January 1, 2010 $             890,952 $             8,547 $             (19,133) $ 13,526 $             893,892
Issue of common shares (note 12)                   636,727                   -               -               -               636,727
Share issue costs, net of tax                   (19,848)                   -               -               -               (19,848)
Share-based payments                   -                   10,388               -               -               10,388
Capitalized share-based payments                   -                   10,388               -               -               10,388
Options exercised (note 12)                   221                   (61)               -               -               160
Income attributable to common shareholders                   -                   -               8,813         -               8,813
Income attributable to non-controlling interest                   -                   -               -   383         383
Balance at December 31, 2010                   1,508,052                   29,262               (10,320)   13,909         1,540,903
Issue of common shares (note 12)               423,819                   -               -               -               423,819
Share issue costs, net of tax               (7,994)                   -               -               -               (7,994)
Share-based payments               -                   8,552               -               -               8,552
Capitalized share-based payments       -                   8,552   -               -               8,552
Options exercised (note 12)                  13,056                   (3,649)               -               -               9,407
Income attributable to common shareholders                   -                   -               26,607         -               26,607
Income attributable to non-controlling interest                   -                   -               -   625   625
Balance at September 30, 2011 $             1,936,933 $             42,717 $             16,287 $ 14,534 $             2,010,471

(000s) except per-share amounts (unaudited)                
    Share
Capital
  Contributed
Surplus
  Retained
Earnings/(Deficit)
  Non-Controlling
Interest
  Total Equity
Balance at January 1, 2010 $             890,952 $             8,547 $             (19,133) $ 13,526 $             893,892
Issue of common shares                   377,377                  -               -               -               377,377
Share issue costs, net of tax                   (7,913)                   -               -               -               (7,913)
Share-based payments                   -                   6,874               -               -               6,874
Capitalized share-based payments                   -                   6,873               -               -               6,873
Options exercised                   221                   (61)               -               -               160
Income attributable to common shareholders                   -                   -               2,948         -               2,948
Income attributable to non-controlling interest                   -                   -               -   243               243
Balance at September 30, 2010     $ 1,260,637     $             22,233 $             (16,185) $ 13,769 $             1,280,454

See accompanying notes to the consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOW

  Three Months Ended Nine Months Ended
(000s) (unaudited) September 30,
2011
September 30,
2010
September 30,
2011
September 30,
2010
Cash provided by (used in):                
Operations:                
  Net income $             8,688 $             428 $             26,607 $             2,948
  Items not involving cash:                                        
    Depletion and depreciation                       48,059                       26,156                   116,928                   67,395
    Accretion                       335                       283                   1,009                   817
    Share-based payments                       3,258                       2,592                   8,552                   6,874
    Deferred taxes                       7,275                       4,705                   17,061                   10,611
    Unrealized (gain)/loss on financial instruments
(note 4)
                      (5,075)                       592                   (5,360)                   (89)
    (Gain)/Loss on divestitures                       -                       (3,534)                   3,630                   (476)
    Non-controlling interest                       179                       28                   625                   243
  Realized (gain)/loss on sale of investments                       -                       -                   -                   (45)
  Decommissioning expenditures                       (33)                       -                   (1,011)                   -
  Changes in non-cash operating working capital (note17) 17)                       14,936                       9,435                   (1,421)                   8,909
                        77,622                       40,685                   166,620                   97,187
Financing:                                                     
  Issue of common shares               3,862               25,300               230,846                   249,380
  Share issue costs                       (529)                       (1,098)                   (10,583)                   (10,536)
  Increase in bank debt                       95,705                       41,186                   140,150                   34,636
                        99,038                       65,388                   360,413                   273,480
Investing:                                        
  Exploration and evaluation                       (56,396)                       (51,369)                   (164,324)                   (150,945)
  Property, plant and equipment                       (127,229)                       (95,430)                   (331,189)                   (175,603)
  Property acquisitions                       (65,894)                       (17,116)                   (108,642)                   (289,400)
  Proceeds from divestitures                       357                       11,971                   7,366                   21,834
  Corporate acquisitions             -                      -                   -                   (3,156)
  Proceeds from sale of investments                       -                       -                   338                   255
  Repayment of long-term obligation                       (931)                       (621)                   (2,794)                   (621)
  Change in non-cash investing working capital (note 17)                       73,433                       51,717                   7,052                   27,180
                        (176,660)                       (100,848)                   (592,193)                   (570,456)
Changes in cash                       -                       5,225                   (65,160)                   (199,789)
Cash, beginning of period               -               (5,225)               65,160               199,789
Cash/ (bank indebtedness), end of period $             - $             - $             - $             -

Cash is defined as cash and cash equivalents.
See accompanying notes to the consolidated financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2011 and 2010
(tabular amounts in thousands of dollars, unless otherwise noted) (unaudited)


Incorporation:

Tourmaline Oil Corp. (the "Company") was incorporated under the laws of the Province of Alberta on July 21, 2008.  The Company is engaged in the acquisition, exploration, development and production of petroleum and natural gas properties.  The Company is engaged in the exploration for, and development and production of, oil and natural gas and conducts many of its activities jointly with others. These consolidated financial statements reflect only the Company's proportionate interest in such activities.

1. BASIS OF PREPARATION

These unaudited interim consolidated financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34, "Interim Financial Reporting".  These unaudited interim consolidated financial statements form part of the period covered by the first IFRS annual financial statements and IFRS 1, "First-time Adoption of International Financial Reporting Standards" has been applied.  These unaudited interim consolidated financial statements do not include all of the information required for full annual financial statements.

Canadian Generally Accepted Accounting Principles ("GAAP"), as issued by the Canadian Institute of Chartered Accountants, were converted to International Financial Reporting Standards ("IFRS") effective for fiscal years beginning on or after January 1, 2011. In order to prepare comparative information, the Company applied IFRS as of January 1, 2010 (the "Transition Date") and the accounting, estimation and valuation policies adopted on conversion to IFRS have been consistently applied to all periods presented herein.  Tourmaline's IFRS accounting policies and significant accounting judgments, estimates, and assumptions are described in Note 1 and Note 2 to the Company's March 31, 2011 unaudited Interim Consolidated Financial Statements. Reconciliations of IFRS amounts for the three and nine months ended September 30, 2010 to amounts previously published in accordance with Previous GAAP are provided in Note 20 to these unaudited Interim Consolidated Financial Statements.

2. FUTURE ACCOUNTING CHANGES

The following pronouncements from the IASB will become effective for financial reporting periods beginning on or after January 1, 2013 and have not yet been adopted by the Company. All of these new or revised standards permit early adoption with transitional arrangements depending upon the date of initial application.

IFRS 9 - Financial Instruments addresses the classification and measurement of financial assets.

IFRS 10 - Consolidated Financial Statements builds on existing principles and standards and identifies the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company.

IFRS 11 - Joint Arrangements establishes the principles for financial reporting by entities when they have an interest in arrangements that are jointly controlled.

IFRS 12 - Disclosure of Interest in Other Entities provides the disclosure requirements for interests held in other entities including joint arrangements, associates, special purpose entities and other off balance sheet entities.

IFRS 13 - Fair Value Measurement defines fair value, requires disclosure about fair value measurements and provides a framework for measuring fair value when it is required or permitted within the IFRS standards.

IAS 19 - Employee Benefits revises the existing standard to eliminate options to defer the recognition of gains and losses in defined benefit plans, requires re-measurements of a defined benefit plan's assets and liabilities to be presented in other comprehensive income and increases disclosure.

IAS 27 - Separate Financial Statements revised the existing standard which addresses the presentation of parent company financial statements that are not consolidated financial statements.

IAS 28 - Investments in Associate and Joint Ventures revised the existing standard and prescribes the accounting for investments and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures.

The IASB also issued Presentation of Items of Other Comprehensive Income, an amendment to IAS 1 Financial Statement Presentation. The amendment addresses the presentation of other comprehensive income and requires the grouping of items within other comprehensive income that might eventually be reclassified to the profit and loss section of the income statement. The change becomes effective for financial years after July 1, 2012 with earlier adoption permitted.

The Company has not completed its evaluation of the effect of adopting these standards on its consolidated financial statements.

3. DETERMINATION OF FAIR VALUE

A number of the Company's accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.

(i) Property, plant and equipment and intangible exploration assets:

The fair value of property, plant and equipment recognized in a business combination, is based on market values. The market value of property, plant and equipment is the estimated amount for which property, plant and equipment could be exchanged on the acquisition date between a willing buyer and a willing seller in an arm's-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The market value of oil and natural gas interests (included in property, plant and equipment) and intangible exploration assets is estimated with reference to the discounted cash flow expected to be derived from oil and natural gas production based on externally prepared reserve reports. The risk-adjusted discount rate is specific to the asset with reference to general market conditions.

The market value of other items of property, plant and equipment is based on the quoted market prices for similar items.

(ii) Cash and cash equivalents, trade and other receivables, bank debt and trade and other payables:

The fair value of cash and cash equivalents, trade and other receivables, bank debt and trade and other payables is estimated as the present value of future cash flow, discounted at the market rate of interest at the reporting date. At September 30, 2011 and December 31, 2010, the fair value of these balances approximated their carrying value due to their short term to maturity.  The bank debt has a floating rate of interest and therefore the carrying value approximates the fair value.

(iii) Derivatives:

The fair value of commodity price risk management contracts is determined by discounting the difference between the contracted prices and published forward price curves as at the balance sheet date, using the remaining contracted oil and natural gas volumes and a risk-free interest rate (based on published government rates). The fair value of options and costless collars is based on option models that use published information with respect to volatility, prices and interest rates.

(iv) Stock options:

The fair value of employee stock options is measured using a Black Scholes option pricing model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general option holder behaviour), expected dividends, and the risk-free interest rate (based on government bonds).

(v) Measurement:

Tourmaline classifies the fair value of these transactions according to the following hierarchy based on the amount of observable inputs used to value the instrument.

  • Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

  • Level 2 - Pricing inputs are other than quoted prices in active markets included in Level 1. Prices are either directly or indirectly observable as of the reporting date.  Level 2 valuations are based on inputs, including quoted forward prices for commodities, time value and volatility factors, which can be substantially observed or corroborated in the marketplace.


  • Level 3 - Valuations in this level are those with inputs for the asset or liability that are not based on observable market data.

The following tables provide fair value measurement information for financial assets and liabilities as of September 30, 2011 and December 31, 2010.  The carrying value of cash and cash equivalents, trade and other receivables and trade and other payables included in the consolidated statement of financial position approximate fair value due to the short-term nature of those instruments.  These assets and liabilities are not included in the following tables.

September 30, 2011   Carrying
Amount
  Fair Value   Level 1   Level 2   Level 3
Financial Assets:                            
  Investments     $ 3,444 $ 3,444     $ - $ 3,444 $ -
  Commodity price risk contracts       4,768   4,768       -   4,768   -
Financial liabilities:                            
  Bank debt     $ 159,846 $ 159,846     $ 159,846 $ - $ -
                     
December 31, 2010   Carrying
Amount
  Fair Value   Level 1   Level 2   Level 3
Financial Assets:                    
  Investments $ 3,932 $ 3,932 $ - $ 3,932 $ -
Financial liabilities:                    
  Commodity price risk contracts $ 742 $ 742 $ - $ 742 $ -

4. FINANCIAL RISK MANAGEMENT

The Board of Directors has overall responsibility for the establishment and oversight of the Company's risk management framework.  The Board has implemented and monitors compliance with risk management policies.

The Company's risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to market conditions and the Company's activities.

(a) Credit risk:

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's receivables from joint venture partners and petroleum and natural gas marketers.  As at September 30, 2011, Tourmaline's receivables consisted of $12.7 million (December 31, 2010 - $21.1 million) from joint venture partners, $35.7 million (December 31, 2010 - $23.6 million) from petroleum and natural gas marketers and $8.8 million (December 31, 2010 - $13.9 million) from provincial governments.

Receivables from petroleum and natural gas marketers are normally collected on the 25th day of the month following production.  The Company's policy to mitigate credit risk associated with these balances is to establish marketing relationships with creditworthy purchasers.  The Company historically has not experienced any collection issues with its petroleum and natural gas marketers.  Joint venture receivables are typically collected within one to three months of the joint venture bill being issued to the partner.  The Company attempts to mitigate the risk from joint venture receivables by obtaining partner approval of significant capital expenditures prior to expenditure.  The receivables, however, are from participants in the petroleum and natural gas sector, and collection of the outstanding balances are dependent on industry factors such as commodity price fluctuations, escalating costs and the risk of unsuccessful drilling.  In addition, further risk exists with joint venture partners as disagreements occasionally arise that increase the potential for non-collection.  The Company does not typically obtain collateral from petroleum and natural gas marketers or joint venture partners; however, the Company does have the ability to withhold production from joint venture partners in the event of non-payment.

The Company monitors the age of, and investigates issues behind, its receivables that have been past due for over 90 days.  At September 30, 2011, the Company had $1.3 million (December 31, 2010 - $1.0 million) over 90 days.  The Company is satisfied that these amounts are substantially collectible.

The carrying amount of accounts receivable, cash and cash equivalents and commodity price risk management contracts represents the maximum credit exposure.  The Company does not have an allowance for doubtful accounts as at September 30, 2011 (December 31, 2010 - nil) and did not provide for any doubtful accounts nor was it required to write-off any receivables during the period ended September 30, 2011 (September 30, 2010 - nil).

(b) Liquidity risk:

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due.  The Company's approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions without incurring unacceptable losses or risking harm to the Company's reputation.  Liquidity risk is mitigated by cash on hand and credit facilities.

The Company's accounts payable and accrued liabilities balance at September 30, 2011 is approximately $186.2 million (December 31, 2010 - $178.1 million).  It is the Company's policy to pay suppliers within 45-75 days.  These terms are consistent with industry practice.  As at September 30, 2011, substantially all of the account balances were less than 90 days.

The Company prepares annual capital expenditure budgets, which are regularly monitored and updated as considered necessary.  Further, the Company utilizes authorizations for expenditures on both operated and non-operated projects to further manage capital expenditures.  The Company also attempts to match its payment cycle with collection of petroleum and natural gas revenues on the 25th of each month.

The following are the contractual maturities of financial liabilities, including estimated interest payments, at September 30, 2011:

    Carrying
Amount
  Contractual
Cash Flow
  Less Than
One  Year
  One - Two
Years
  Two - Five
Years
  More Than
Five Years
Non-derivative financial liabilities:                                
  Trade and other payables     $ 182,427     $ 182,427     $ 182,427     $ -     $ -     $ -
  Bank debt (1)       159,846       165,441       165,441       -       -       -
  Transportation liability       15,520       15,520       3,725       3,725       8,070       -
      $ 357,793     $ 363,388     $ 351,593     $ 3,725     $ 8,070     $ -

(1) Includes interest expense at 3.5% being the rate applicable at September 30, 2011.

(c) Market risk:

Market risk is the risk that changes in market conditions, such as commodity prices, interest rates and foreign exchange rates will affect the Company's net income or value of financial instruments.  The objective of market risk management is to manage and curtail market risk exposure within acceptable limits, while maximizing the Company's returns.

The Company utilizes both financial derivatives and physical delivery sales contracts to manage market risks.  All such transactions are conducted in accordance with the risk management policy that has been approved by the Board of Directors.

Currency risk has minimal impact on the value of the financial assets and liabilities on the consolidated statement of financial position at September 30, 2011.  Changes in the US to Canadian exchange rate, however, could influence future petroleum and natural gas prices which could impact the value of certain derivative contracts.  This influence cannot be accurately quantified.

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates.  The Company is exposed to interest rate risk to the extent that changes in market interest rates will impact the Company's bank debt which is subject to a floating interest rate.  Assuming all other variables remain constant, an increase or decrease of 1% in market interest rates in the nine-month period ended September 30, 2011 would have decreased or increased shareholders' equity and net income by $0.5 million.

The following table outlines the realized and unrealized gains on interest rate contracts for the three and nine months ended September 30, 2011:

(000s)         Three Months Ended
September 30, 2011
Nine Months Ended
September 30, 2011
Term Type
(Floating
to Fixed)
Amount Company
Fixed
Interest
Rate (%)
Counter
Party
Floating
Rate Index
  Realized
Gain/(Loss)
  Unrealized
Gain/ (Loss)
  Realized
Gain/(Loss)
  Unrealized
Gain/ (Loss)
September 29, 2011-
September 29, 2013
Swap $150,000 1.15% Floating Rate $ - $  (543) $ - $ (543)

The unrealized loss on the interest rate swap has been included on the consolidated statement of financial position with changes in the fair value included in the unrealized gain/(loss) on financial instruments on the consolidated statement of income and comprehensive income.

Commodity price risk is the risk that the fair value or future cash flow will fluctuate as a result of changes in commodity prices. Commodity prices for oil and natural gas are impacted by not only the relationship between the Canadian and United States dollar but also world economic events that dictate the levels of supply and demand.  As at September 30, 2011, the Company has entered into certain financial derivative and physical delivery sales contracts in order to manage commodity risk.  These instruments are not used for trading or speculative purposes.  The Company has not designated its financial derivative contracts as effective accounting hedges, even though the Company considers all commodity contracts to be effective economic hedges.  As a result, all such commodity contracts are recorded on the consolidated statement of financial position at fair value, with changes in the fair value being recognized as an unrealized gain or loss on the consolidated statement of income and comprehensive income.

The Company has entered into the following derivative contracts as at September 30, 2011:

Type of Contract  Quantity Time Period Contract Price   Fair Value
Financial Swap 100 bbls/d July 2011 - December 2012 US$90.00/bbl $ 440
Financial Swap 100 bbls/d July 2011 - December 2011 US$100.10/bbl   198
Financial Swap 100 bbls/d July 2011 - June 2012 US$101.40/bbl   609
Financial Swap 100 bbls/d September 2011 - December 2012 US$101.00/bbl   962
Financial Swap 100 bbls/d January 2012 - December 2012 US$104.00/bbl   869
Financial Swap 100 bbls/d January 2012 - December 2012 US$108.00/bbl   1,020
Financial Swap 100 bbls/d January 2011 - December 2011 US$87.85/bbl   81
Costless Collar 100 bbls/d September 2010 - August 2012 US$75/bbl floor - US$96/bbl ceiling   115
Financial Swap 100 bbls/d January 2012 - June 2013 US$99.70/bbl   1,017
Total fair value       $ 5,311

The following table provides a summary of the unrealized gains and losses on financial instruments for the period ended September 30, 2011:

  Three Months Ended   Nine Months Ended
(000s)   September 30,
2011
  September 30,
2010
  September 30,
2011
  September 30,
2010
Unrealized gain/(loss) on financial instruments $             5,139  $             (583) $             5,510  $             16
Unrealized gain/(loss) on investments held for trading                   (64)                   (9)                   (150)               73
Total $             5,075 $             (592) $             5,360 $             89

The unrealized gain/(loss) on derivative contracts has been included on the consolidated statement of financial position with changes in the fair value included in the unrealized gain/(loss) on financial instruments on the consolidated statement of income and comprehensive income.

As at September 30, 2011, if the future strip prices for oil were $1.00 per bbl higher, with all other variables held constant, before-tax earnings for the period would have been $0.3 million lower.  An equal and opposite impact would have occurred to before-tax earnings and the fair value of the derivative contracts liability oil prices $1.00 per bbl lower.

In addition to the financial commodity contracts discussed above, the Company has entered into physical contracts to manage commodity risk.  These contracts are considered normal sales contracts and are not recorded at fair value in the consolidated financial statements.

The Company has entered into the following physical contracts as at September 30, 2011:

       
Type of Contract Quantity Time Period Contract Price
AECO Fixed Price 3,000 gjs/d January 2011 - December 2011 Cdn$5.75/gj
AECO Fixed Price 3,000 gjs/d January 2011 - December 2011 Cdn$5.84/gj
AECO Fixed Price 4,000 gjs/d February 2010 - December 2011 Cdn$5.68/gj
AECO Fixed Price 2,000 gjs/d February 2010 - December 2011 Cdn$5.72/gj
AECO Fixed Price 2,000 gjs/d March 2010 - March 2012 Cdn$5.72/gj
AECO Fixed Price 2,000 gjs/d March 2010 - December 2011 Cdn$5.705/gj
AECO Call Option 3,000 gjs/d January 2011 - December 2011 Cdn$6.50/gj strike price
AECO Call Option 3,000 gjs/d January 2011 - December 2012 Cdn$6.00/gj strike price
AECO Fixed Price 3,000 gjs/d January 2011 - December 2012 Cdn$5.53/gj
AECO Fixed Price 3,000 gjs/d February 2011 - April 2012 Cdn$4.00/gj
AECO Fixed Price 3,000 MMbtu/d May 2011 - October 2011 USD$4.135/MMbtu
AECO Fixed Price 5,000 MMbtu/d May 2011 - October 2011 USD$3.61/MMbtu
AECO/Nymex Differential Swap 5,000 MMbtu/d October 2011 - October 2012 Nymex less USD$0.62/MMbtu
AECO Fixed Price 2,000 MMbtu/d May 2011 - October 2011 USD$3.745/MMbtu
AECO Fixed Price 3,000 MMbtu/d May 2011 - October 2011 USD$4.045/MMbtu
AECO Fixed Price 3,000 MMbtu/d May 2011 - October 2011 USD$3.695/MMbtu
AECO/Nymex Differential Swap 3,000 MMbtu/d November 2011 - October 2012 Nymex less USD$0.535/MMbtu
AECO Fixed Price 5,000 MMbtu/d June 2011 - October 2011 USD$4.125/MMbtu
AECO/Nymex Differential Swap 5,000 MMbtu/d November 2011 - December 2011 Nymex less USD$0.475/MMbtu
AECO Fixed Price 5,000 gjs/d July 2011 - October 2011 Cdn$4.16/gj
AECO/Nymex Differential Swap 5,000 Mmbtu/d January 2012 - December 2012 Nymex less USD$0.4325/MMbtu

The following contracts were entered into subsequent to September 30, 2011:

       
Type of Contract Quantity Time Period Contract Price
       
AECO/Nymex Differential Swap 2,000 Mmbtu/d January 2012 - December 2012 Nymex less USD$0.42/MMbtu
AECO/Nymex Differential Swap 3,000 Mmbtu/d December 2011 - March 2012 Nymex less USD$0.30/MMbtu
AECO Fixed Price 3,000 gjs/d January 2012 - December 2014 Cdn$4.45/gj
AECO Call Option 3,000 gjs/d January 2012 - December 2014 Cdn$4.50/gj strike price
AECO Call Option 3,000 gjs/d January 2015 - December 2016 Cdn$6.00/gj strike price

(d) Capital management:

The Company's policy is to maintain a strong capital base to maintain investor, creditor and market confidence and to sustain the future development of the business.  The Company considers its capital structure to include shareholders' equity, bank debt and working capital.  In order to maintain or adjust the capital structure, the Company may from time to time issue shares and adjust its capital spending to manage current and projected debt levels.  The annual and updated budgets are approved by the Board of Directors.

The key measure that the Company utilizes in evaluating its capital structure is net debt, which is defined as long-term bank debt plus working capital (adjusted for the fair value of financial instruments), to annualized funds from operations, defined as cash flow from operating activities before changes in non-cash working capital.  Net debt to annualized funds from operations represents a measure of the time it is expected to take to pay off the debt if no further capital expenditures were incurred and if funds from operations in the next year were equal to the amount in the most recent quarter annualized.

The Company monitors this ratio and endeavours to maintain it at, or below, 2.0 to 1.0 in a normalized commodity price environment. This ratio may increase at certain times as a result of acquisitions or low commodity prices. As shown below, as at September 30, 2011, the Company's ratio of net debt to annualized funds from operations was 1.27 to 1.0.

(000s)   As at
September 30, 2011
  As at
December 31, 2010
Net debt:                
  Bank debt     $             (159,846)     $             -
  Working capital/(deficit)                   (120,080)                   (49,642)
  Fair value of financial instruments - short-term (asset)/liability                   (3,778)                   472
Net debt     $             (283,704)     $             (49,170)
Annualized funds from  operations:                
  Cash flow from operating activities     $             166,620     $             144,237
  Change in non-cash working capital                   1,421                   (9,517)
  Funds from operations to end of period     $             168,041     $             134,720
Annualized funds from operations     $             224,055     $             134,720
Net debt to annualized funds from operations                   1.27                   0.36

The Company has not paid or declared any dividends since the date of incorporation, nor are any contemplated in the foreseeable future.  There were no changes in the Company's approach to capital management since December 31, 2010.

5. EXPLORATION AND EVALUATION ASSETS

(000s)  
As at January 1, 2010     $             250,972
  Capital expenditures                   200,816
  Capitalized share-based payments                   10,388
  Transfers to property, plant and equipment (note 6)                   (178,012)
  Acquisitions                   206,876
  Divestitures                   (11,973)
As at December 31, 2010     $             479,067
  Capital expenditures                   164,324
  Capitalized share-based payments                   6,779
  Transfers to property, plant and equipment (note 6)                   (135,682)
  Acquisitions                   131,042
  Divestitures                   (4,803)
As at September 30, 2011     $             640,727

General and administrative expenditures for the nine-month period ended September 30, 2011 of $11.4 million (September 30, 2010 — $10.2 million) have been capitalized and included as exploration and evaluation assets.  Included in this amount are non-cash related share-based payments of $6.8 million (September 30, 2010 - $6.9 million).

6. PROPERTY, PLANT AND EQUIPMENT

Cost

(000s)  
As at January 1, 2010 $             503,826
Capital expenditures               617,764
Transfers from exploration and evaluation (note 5)               178,012
Change in decommissioning liabilities (note 7)               15,963
Divestitures               (15,983)
As at December 31, 2010 $             1,299,582
Capital expenditures               331,189
Capitalized share-based payments               1,773
Transfers from exploration and evaluation (note 5)               135,682
Change in decommissioning liabilities (note 7)               12,082
Acquisitions               245,075
Divestitures               (7,834)
As at September 30, 2011 $             2,017,549

Accumulated Depletion, Depreciation and Amortization

(000s)  
As at January 1, 2010 $             -
Depletion, depreciation and amortization               96,660
Divestitures               (1,179)
As at December 31, 2010 $             95,481
Depletion, depreciation and amortization               116,928
Divestitures               (1,234)
As at September 30, 2011 $             211,175

Net Book Value

(000s)  
As at January 1, 2010 $ 503,826
As at December 31, 2010   1,204,101
As at September 30, 2011 $ 1,806,374

General and administrative expenditures for the nine-month period ended September 30, 2011 of $3.0 million (September 30, 2010 - nil) have been capitalized and included as costs of oil and natural gas properties.  Included in this amount are non-cash related share-based payments of $1.8 million (September 30, 2010 - nil).

For the nine months ended September 30, 2011, the Company completed property acquisitions for total cash consideration of $108.6 million.  The Company also assumed $2.0 million in decommissioning liabilities.

Future development costs for the period ended September 30, 2011 of $1,191 million (September 30, 2010 - $726 million) were included in the depletion calculation.

Corporate Acquisition

On July 12, 2011, the Company acquired all of the issued and outstanding shares of Cinch Energy Corp. ("Cinch").  As consideration, the Company issued 6,363,523 common shares at a price of $33.02 per share. Total transaction costs incurred by the Company of $1 million associated with this acquisition were expensed in the consolidated statement of income and comprehensive income.

Results from operations for Cinch are included in the Company's unaudited interim consolidated financial statements from the closing date of the transaction.  The acquisition has been accounted for using the purchase method based on fair values as follows:

(000s)             Cinch Energy Corp.
Fair value of net assets acquired:                
  Property, plant and equipment             $ 182,770
  Exploration and evaluation               87,136
  Working capital deficiency               (3,897)
  Bank debt               (19,696)
  Decommissioning obligations               (2,430)
  Deferred income tax liabilities               (33,759)
Total             $ 210,124
Consideration:                
  Common shares issued             $ 210,124

The above noted amounts are estimates based on information available to the Company at the time of preparation of the September 30, 2011 consolidated financial statements.  Accordingly, the estimates used to derive the fair values in the purchase price include accruals and deferred tax liabilities. A future change in estimates could have an impact on the above-noted purchase equation.

7. DECOMMISSIONING OBLIGATIONS

The Company's decommissioning obligations result from net ownership interests in petroleum and natural gas assets including well sites, gathering systems and processing facilities.  The Company estimates the total undiscounted amount of cash flow required to settle its decommissioning obligations is approximately $68.7 million (2010 - $40.0 million), which will be incurred between 2023 and 2028.  A risk-free rate of 2.77% (2010 - 3.5%) and an inflation rate of 3% (2010 - 3%) were used to calculate the fair value of the decommissioning obligations.  The decommissioning obligations at September 30, 2011, have been increased by approximately $4.0 million to reflect a decrease in the risk-free rate previously used of 3.5% to 2.77%.

 (000s) Nine Months Ended
September 30, 2011
Year Ended
December 31, 2010
Balance, beginning of period     $             35,279 $             19,153
  Obligation incurred                   3,607               4,411
  Obligation incurred on corporate acquisitions (note 6)                   2,430               1,452
  Obligation incurred on property acquisitions                   2,011               7,936
  Obligation divested                   (407)               (965)
  Obligation settled                   (1,011)               -
  Accretion expense                   1,009               1,128
  Change in future estimated cash outlays                   4,034               2,164
Balance, end of period     $             46,952 $             35,279

8. BANK DEBT

On September 8, 2011, the Company increased its credit facility for an extendible revolving term loan to $350 million from $275 million with three Canadian chartered banks, in addition to its already existing $25 million operating line.  The facility bears interest on a variable grid currently 250 basis points over the prevailing banker's acceptance rate.  Security for the facility includes a general security agreement and a $500 million demand loan debenture secured by a second floating charge over all assets.  On July 31, 2012, at the Company's discretion, the facility is available on a non-revolving basis for a period of 365 days, at which time the facility would be due and payable.  Alternatively, the facility may be extended for a further 364-day period at the request of the Company and subject to approval by the banks.

A subsidiary of the Company also has a financing arrangement with a Canadian chartered bank for an extendible revolving term loan in the amount of $5 million in addition to a $5 million operating line.  The interest rate charged varies based on the amount outstanding.  Security for the facility includes a general security agreement and a demand loan debenture secured by a second floating charge over all of the subsidiary's assets.  The revolving term credit facility has a 364-day extendible period plus a one-year maturity.

The Company is required to meet certain financial-based covenants to maintain the facilities.  The financial covenants include a requirement to ensure the total amount drawn on the facility does not exceed the total borrowing base as defined in each facility's agreement, and that the ratio of earnings adjusted for interest, taxes and other non-cash items to interest expense does not exceed a predetermined amount, as determined by each facility's agreement.  As at September 30, 2011, the Company was in compliance with these covenants.

Tourmaline has drawn down on existing facilities in the amount of $159.8 million.  The effective interest rate for the nine months ended September 30, 2011 was 3.5% (September 30, 2010- nil).  In addition, Tourmaline has outstanding letters of credit of $4.0 million, which reduce the credit available on the facility.

9. INVESTMENTS

Tourmaline owns common shares of public and private junior oil and gas companies which have been fair valued at $3.4 million based on the quoted market prices at September 30, 2011.

A reconciliation of the investments is provided below:

 (000s)   Nine Months Ended
September 30, 2011
  Year Ended
December 31, 2010
Balance, beginning of period $             3,932 $             632
  Proceeds on disposition of shares (net of realized gain/( loss))               (338)               (210)
  Acquired on asset disposition               -               3,250
  Unrealized gain/(loss) on investments               (150)               260
Balance, end of period $             3,444 $             3,932

10. LONG TERM OBLIGATION

As part of an acquisition of petroleum and natural gas properties in June 2010, the Company acquired a firm transportation agreement.  A liability of $19.9 million was recorded to account for the fair value of the agreement at the time of the acquisition. This amount was accounted for as part of the acquisition cost and will be charged as a reduction to transportation expenses over the life of the agreement as the obligation is met.  The reduction to transportation expense for the period ended September 30, 2011 was $2.8 million.  The outstanding balance is $15.5 million of which $3.7 million has been included in accounts payable and accrued liabilities.

11. NON-CONTROLLING INTEREST

On November 10, 2009, Tourmaline acquired 90.6 percent of Exshaw Oil Corp., a private company engaged in oil and gas exploration in Canada.

A reconciliation of the non-controlling interest is provided below:

 (000s)   Nine Months Ended
September 30, 2011
  Year Ended
December 31, 2010
Balance, beginning of period $ 13,909 $ 13,526
Share of subsidiary's net income for the period   625   383
Balance, end of period $ 14,534 $ 13,909

12. SHARE CAPITAL

(a) Authorized

Unlimited number of Common Shares without par value.

Unlimited number of non-voting Preferred Shares, issuable in series.

(b) Common Shares Issued

  Nine Months Ended
September 30, 2011
  Year Ended
December 31, 2010
($000s) Number of
Shares
  Amount   Number of
Shares
  Amount
Balance, beginning of period 136,191,061 $             1,508,052   101,809,391 $             890,952
For cash on Initial Public Offering (includes over-allotment option) -               -   11,500,000               241,500
For cash on public offering 6,825,000               174,037   -               -
For cash on private placement of common shares -               -   10,350,000               188,850
For cash on private placement of flow-through common shares(1)(2) 1,580,000               39,658   3,600,000               65,202
Issued for the acquisition of properties -               -   2,500,000               45,000
Issued on corporate acquisitions 6,363,523               210,124   6,411,670               96,175
For cash on exercise of stock options 946,502               9,408   20,000               160
Contributed surplus on exercise of stock options -               3,648   -               61
Share issue costs -               (10,583)   -               (26,502)
Tax effect of share issue costs -               2,589   -               6,654
Balance, end of period 151,906,086 $             1,936,933   136,191,061 $             1,508,052

(1) On March 8, 2011, the Company issued 1.58 million flow-through shares at $30.00 per share for total gross proceeds of $47.4 million.  The implied premium on the flow-through shares was determined to be $7.74 million or $4.90 per share.  A total of 0.38 million shares were purchased by insiders.  As at September 30, 2011, the Company is committed to spending an additional $7.25 million on qualified exploration and development expenditures by December 31, 2012. 
(2) On March 19, 2010, the Company issued 2.45 million flow-through shares at $21.60 per share for total gross proceeds of $52.92 million.  The implied premium on the flow-through shares was $8.8 million or $3.60/share.  On August 12, 2010 the Company issued 1.15 million flow-through shares at $22.00 per share for total gross proceeds of $25.3 million.  The implied premium on the flow-through shares was $4.2 million or $3.65 per share. 

13. EARNINGS PER SHARE

Basic earnings-per-share was calculated as follows:

  Three Months Ended   Nine Months Ended
    September 30,
2011
  September 30,
2010
  September 30,
2011
  September 30,
2010
Net earnings for the period (000s)     $ 8,688     $ 428     $ 26,607 $ 2,948
Weighted average number of common shares - basic       151,044,426       123,303,560       143,230,945   117,839,772
Earnings per share - basic     $ 0.06     $ 0.00     $ 0.19 $ 0.03

Diluted earnings-per-share was calculated as follows:

  Three Months Ended   Nine Months Ended
    September 30,
2011
  September 30,
2010
  September 30,
2011
  September 30,
2010
Net earnings for the period (000s)     $ 8,688     $ 428     $ 26,607 $ 2,948
Weighted average number of common shares - diluted       157,562,227       126,871,561       148,999,440   121,106,729
Earnings per share - fully diluted     $ 0.06     $ 0.00     $ 0.18 $ 0.02

There were 1,340,000 options excluded from the weighted-average share calculation for the three months ended September 30, 2011 because they were anti-dilutive (1,640,000 - nine months).

14. SHARE-BASED PAYMENTS

The Company has a rolling stock option plan.  Under the employee stock option plan, the Company may grant options to its employees up to 15,190,609 shares of common stock.  The exercise price of each option equals the volume-weighted average market price for the five days preceding the issue date of the Company's stock on the date of grant and the option's maximum term is five years.  Options are granted throughout the year and vest 1/3 on each of the first, second and third anniversaries from the date of grant.

  Number of Options Weighted Average
Exercise Price
Stock options outstanding, December 31, 2009             8,610,000 $ 9.99
  Granted             3,407,000   17.88
  Exercised             (20,000)   8.00
Stock options outstanding, December 31, 2010             11,997,000 $ 12.24
  Granted             1,730,000   28.74
  Exercised             (946,502)   9.94
  Forfeited             (179,999)   13.64
Stock options outstanding, September 30, 2011             12,600,499 $ 14.66

The following table summarizes stock options outstanding and exercisable at September 30, 2011:

Range of Exercise Price Number
Outstanding at
Period End
Weighted
Average
Remaining
Contractual Life
  Weighted
Average
Exercise Price
Number
Exercisable at
Period End
  Weighted
Average
Exercise
Price
$7.00 - $8.00 3,366,167 2.15 $ 7.08 2,027,834 $ 7.08
$10.00 - $15.00 4,755,499 2.95   12.78 2,173,832   11.88
$16.68 - $30.76 4,478,833 4.18   22.34 809,166   18.19
  12,600,499 3.17 $ 14.66 5,010,832 $ 10.96

The fair value of options granted were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions and resulting values:

    September 30, 2011   September 30, 2010
Fair value of options granted (weighted average) $ 10.92 $ 6.82
Risk-free interest rate   2.12%   2.43%
Estimated hold period prior to exercise   5 years   5 years
Expected volatility   40%   40%
Forfeiture rate   2%   2%
Dividend per share $ 0.00 $ 0.00

15. OTHER INCOME

  Three Months Ended   Nine Months Ended
(000s)   September 30,
2011
  September 30,
2010
  September 30,
2011
  September 30,
2010
Processing income     $ 1,286     $ 99     $ 2,892 $ 269
Interest income       88       15       254   124
Other       21       303       284   395
Total other income     $ 1,395     $ 417     $ 3,430 $ 788

16. FINANCE EXPENSES

  Three Months Ended   Nine Months Ended
(000s)   September 30,
2011
  September 30,
2010
  September 30,
2011
  September 30,
2010
Finance expenses:                            
  Interest on loans and borrowings     $ 1,722     $ 169     $ 3,081 $ 208
  Transaction costs on corporate acquisitions       991       -       991   561
  Accretion of provisions       335       283       1,009   817
Total finance expenses     $ 3,048     $ 452     $ 5,081 $ 1,586

17. SUPPLEMENTAL CASH FLOW INFORMATION

Changes in non-cash working capital is comprised of:

  Nine Months Ended
(000s)   September 30, 2011   September 30, 2010
Source/(use) of cash:                
  Trade and other receivables     $             1,495     $             (7,859)
  Deposit and prepaid expenses                   (6)                   412
  Trade and other payables                   8,039                   43,536
                    9,528                   36,089
  Working capital deficiency acquired                   (3,897)                   -
      $             5,631     $             36,089
Related to operating activities     $             (1,421)     $             8,909
Related to investing activities     $             7,052     $             27,180

Cash interest paid was $1.6 million for the nine months ended September 30, 2011 (September 30, 2010 - nil).

18. COMMITMENTS

On March 8, 2011, the Company issued 1.58 million common shares, including 0.38 million common shares to insiders in a non-brokered component of the issuance, on a flow-through basis at a price of $30.00 per share for total gross proceeds of $47.4 million.  As of September 30, 2011, the Company has spent $40.2 million on eligible expenditures and is committed to spend the remainder of $7.2 million before December 31, 2012.

In the normal course of business, Tourmaline is obligated to make future payments.  These obligations represent contracts and other commitments that are known and non-cancellable:

Payments Due by Year (000s)   2011   2012   2013   2014   2015 and
thereafter
  Total
Operating leases $ 735 $ 2,823 $ 2,502 $ 2,338 $ 526 $ 8,924
Flow-through obligations       -       7,250       -       -       -       7,250
Firm transportation agreements       5,793       25,917       24,237       15,737       7,831   79,515
Bank debt       -       165,441       -       -       -   165,441
  $ 6,528 $ 201,431 $ 26,739 $ 18,075 $ 8,357 $ 261,130

19. SUBSEQUENT EVENTS

On October 12, 2011, the Company issued 4.3 million common shares at $33 per share, as well as on October 19, 2011, an additional 0.6 million common shares pursuant to the exercise of the underwriters' overallotment were also issued at $33 per share for total gross proceeds of $161.7 million before total issue costs of approximately $6.4 million.  Included in the above noted issuance are 0.3 million common shares which were issued to insiders in a non-brokered private placement component of the issuance. The proceeds will be used to temporarily reduce bank debt, which will then be available to fund the Company's accelerated and expanded 2011 capital expenditure program.

20. RECONCILIATION OF THE FINANCIAL STATEMENTS FROM CANADIAN GAAP TO IFRS

These unaudited interim consolidated financial statements have been prepared under IFRS which the Company adopted on January 1, 2011. The adoption of IFRS requires the application of IFRS 1. IFRS 1 generally requires that an entity retrospectively apply all IFRS effective at the end of its first IFRS reporting period; however, IFRS 1 provides certain mandatory exceptions and permits limited optional exemptions. Certain IFRS 1 optional exemptions have been applied as described in the following notes.

The unaudited interim consolidated financial statements for the three and nine months ended September 30, 2011 and 2010 follow the same accounting policies and method of computation as outlined in note 2 of the Company's unaudited interim consolidated financial statements for the three months ended March 31, 2011.

In preparing its comparative information for the three and nine months ended September 30, 2010, the Company has adjusted amounts previously reported in its financial statements prepared in accordance with former Canadian GAAP. An explanation of how the transition from former Canadian GAAP to IFRS has affected the Company's financial position, financial performance and cash flows is set out in the following tables and the notes that accompany the tables.

Reconciliation of consolidated statement of financial position as at September 30, 2010:

(000s) Canadian GAAP Effect of
Transition to IFRS
Note   IFRS
Assets          
Current assets:              
  Accounts receivable $             52,988 $             -   $             52,988
  Prepaid expenses and deposits                   2,797                   -                     2,797
  Fair value of financial instruments                   16,633                   (16,524) (j)                   109
                    72,418                   (16,524)                     55,894
Investments                   3,745                   -                     3,745
Fair value of financial instruments                   5,255                   (5,227) (j)                   28
Exploration and evaluation assets                   -                   442,691 (a)                   442,691
Property, plant and equipment                   1,458,818                   (414,356) (a,f)                   1,044,462
  $             1,540,236 $             6,584   $             1,546,820
Liabilities and Shareholders' Equity                          
Current liabilities:                          
  Accounts payable and accrued liabilities $             134,099 $             -   $             134,099
  Deferred taxes                   3,473                   (3,473) (h)                   -
                    137,572                   (3,473)                     134,099
Decommissioning obligations                   12,189                   19,684 (c)                   31,873
Bank debt               41,186               -                 41,186
Long-term obligation                   15,520                   -                     15,520
Deferred premium on flow-through shares                   -                   5,518 (k)                   5,518
Deferred taxes                   28,930                   9,240 (h,k)                   38,170
Shareholders' equity:                          
  Share capital                   1,270,156                   (9,519) (d,k)                   1,260,637
  Non-controlling interest                   13,680                   89                     13,769
  Contributed surplus                   5,541                   16,692 (d)                   22,233
  Retained earnings/ (deficit)                   15,462                   (31,647) (c,d,e,f,h,i,k)                   (16,185)
                    1,304,839                   (24,385)                     1,280,454
  $             1,540,236 $             6,584   $             1,546,820

Reconciliation of consolidated statement of income for the nine months ended September 30, 2010:

(000s) Canadian GAAP Effect of
Transition to IFRS
Note   IFRS
Revenue:          
  Oil and natural gas sales $             134,304 $             -   $             134,304
  Royalties                   (13,996)                   -                 (13,996)
                    120,308                   -                 120,308
  Realized gain on financial instruments                   10,882                   -                 10,882
  Unrealized gain/ (loss) on financial instruments                   21,637                   (21,548) (j)               89
  Other income                   788                   -                 788
                    153,615                   (21,548)                 132,067
Expenses:                      
  Operating               29,719                   -                 29,719
  Transportation                   7,554                   -                 7,554
  General and administration                   4,801                   812 (l)               5,613
  Share-based payments               2,007                   4,867 (d)               6,874
  Gain on divestiture               -                   (476) (g)               (476)
  Depletion, depreciation and amortization                   85,291                   (17,896) (e)               67,395
Results from operating activities                   24,243                   (8,855)                 15,388
Finance expenses                   208                   1,378 (f),(i)               1,586
Income/(loss) before taxes                   24,035                   (10,233)                 13,802
  Deferred taxes                   6,736                   3,875 (h)               10,611
Net income/(loss) and net comprehensive income/(loss) before non-controlling interest                   17,299                   (14,108)                 3,191
Net income/(loss)  and comprehensive income/(loss) attributable to:                      
  Shareholders of the Company                   17,145                   (14,197)                 2,948
  Non-controlling interest                   154                   89                 243
      $             17,299 $             (14,108)   $             3,191

Reconciliation of consolidated statement of income for the three months ended September 30, 2010:

(000s) Canadian GAAP Effect of
Transition to IFRS
Note   IFRS
Revenue:          
  Oil and natural gas sales $             46,144 $             -   $             46,144
  Royalties                   (4,846)                   -                 (4,846)
                    41,298                   -                 41,298
  Realized gain on financial instruments                   5,699                   -                 5,699
  Unrealized gain/(loss) on financial instruments                   6,818                   (7,410) (j)               (592)
  Other income                   417                   -                 417
                    54,232                   (7,410)                 46,822
Expenses:                      
  Operating               10,802                   -                 10,802
  Transportation                   3,078                   -                 3,078
  General and administration                   1,637                   478 (l)               2,115
  Share-based payments               737                   1,855 (d)               2,592
  Gain on divestitures               -                   (3,534) (g)               (3,534)
  Depletion, depreciation and amortization                   31,243                   (5,087) (e)               26,156
Results from operating activities                   6,735                   (1,122)                 5,613
Finance expenses                   169                   283 (i)               452
Income/(loss) before taxes                   6,566                   (1,405)                 5,161
  Deferred taxes (recovery)                   2,043                   2,662 (h)               4,705
Net income/(loss) and net comprehensive income/(loss) before non-controlling interest                   4,523                   (4,067)                 456
Net income/(loss) and comprehensive income/(loss) attributable to:                      
  Shareholders of the Company                   4,463                   (4,035)                 428
  Non-controlling interest                   60                   (32)                 28
      $             4,523 $             (4,067)   $             456

NOTES TO THE RECONCILIATIONS

(a) IFRS 1 election for full cost oil and gas entities:

The Company elected to use an IFRS 1 exemption whereby the previous GAAP full cost pool was used to measure exploration and evaluation assets and development and production assets on transition to IFRS as follows:

(i)  exploration and evaluation assets were reclassified from the full cost pool to intangible exploration assets at the amount that was recorded under previous GAAP; and
(ii)  the remaining full cost pool was allocated to the producing/development assets and components pro rata using reserve values.

This resulted in a transfer of $251.0 million to exploration and evaluation assets and a corresponding decrease in property, plant and equipment on transition. As at September 30, 2010, the transfer was $442.7 million, which included undeveloped land acquired in 2010, geological and geophysical costs and costs related to wells in progress.

(b) Impairment of property, plant and equipment ("PP&E"):

In accordance with IFRS, impairment tests of PP&E must be performed at the CGU level as opposed to the entire PP&E balance which was required under the previous GAAP through the full cost ceiling test.  An impairment is recognized if the carrying value exceeds the recoverable amount for a CGU.  For Tourmaline, the recoverable amount is determined using fair value less cost to sell based on discounted future cash flow of proved plus probable reserves using forecast prices and costs. There was no impairment to PP&E on transition on January 1, 2010 or for the year ended December 31, 2010.

(c) Decommissioning obligations:

Under the previous GAAP, decommissioning obligations were discounted at a credit adjusted risk-free rate of ten percent. Under IFRS, the estimated cash flow to abandon and remediate the wells and facilities has been risk adjusted therefore the provision is discounted at the risk-free rate in effect at the end of each reporting period. The change in the decommissioning obligations each period as a result of changes in the discount rate will result in an offsetting charge to PP&E. Upon transition to IFRS, the impact of this change was an $11.9 million increase in the decommissioning obligations with a corresponding increase to the deficit on the statement of financial position. As at September 30, 2010, the decommissioning obligations were $19.7 million higher than under the previous GAAP due to the change in discount rate and its impact on the liabilities incurred or acquired during 2010.  In addition, under the previous GAAP, accretion of the discount was included in depletion and depreciation expense. Under IFRS it is included in finance expenses.

(d) Share-based compensation:

Under the previous GAAP, the Company recognized an expense related to share-based compensation on a straight-line basis through the date of full vesting and did not incorporate a forfeiture rate at the grant date.

Under IFRS, the Company is required to calculate a volatility factor, recognize the expense over the individual vesting periods for the graded vesting awards and estimate a forfeiture rate at the date of grant and update it throughout the vesting period.

(e) Depletion policy:

Upon transition to IFRS, the Company adopted a policy of depleting oil and natural gas interests on a unit of production basis over proved-plus-probable reserves. The depletion policy under the previous GAAP was based on units of production over proved reserves. In addition, depletion was done on the Canadian cost centre under the previous GAAP.  IFRS requires depletion and depreciation to be calculated based on individual components.

There was no impact of this difference on adoption of IFRS at January 1, 2010 as a result of the IFRS 1 election as discussed in note (a) above.

Depleting the oil and natural gas interests over proved-plus-probable reserves resulted in a decrease to depletion and depreciation for the three months ended September 30, 2010 of $5.1 million ($17.9 million - nine months).  For the year ended December 31, 2010, depletion and depreciation was reduced by $30.25 million as a result of changes to the depletion calculation.

(f) Business combinations:

In accordance with IFRS, internal transaction costs incurred on a business combination are expensed. Under the previous GAAP, these costs were capitalized as part of the acquisition. As a result, $0.6 million was charged to other expenses for transaction costs incurred on the corporate acquisition for the nine months ended September 30, 2010, (three months ended September 30, 2011- nil) and $0.6 million for the year ended December 31, 2010.  In addition, the decommissioning obligations were re-measured under IFRS requirements.

(g) Gains and losses on divestitures:

Under previous GAAP, proceeds from divestitures were deducted from the full cost pool without recognition of a gain or loss unless the deduction resulted in a change in the depletion rate of 20 percent or greater, in which case a gain or loss was recorded. Under IFRS, gains and losses are recorded on divestitures and are calculated as the difference between the proceeds and the net book value of the asset disposed. For the nine months ended September 30, 2010, Tourmaline recognized a $0.5 million net gain on divestitures under IFRS compared to nil under the previous GAAP (three months ended September 30, 2011 - $3.5 million net gain).

(h) Deferred income taxes:

The adjustment to deferred income taxes on transition relates to the opening adjustment to the decommissioning obligations, the adjustment to the unrealized gain or loss on financial instruments and the treatment of flow-through shares.  Adjustments to deferred income taxes have been made in regards to the adjustments resulting in a change to the temporary difference between tax and accounting values.  The deferred income tax impact of the opening adjustments was a deferred income tax asset of $0.9 million.

Under IFRS there is no requirement to separate the portion of deferred income taxes related to current assets or liabilities. The amounts previously classified as current have be reclassified to long-term.

(i) Finance expenses:

Under IFRS, a separate line item is required in the statement of income and comprehensive income for finance expenses. The items under the previous GAAP that were reclassified to finance expenses were interest and financing expense, which included the accretion on the decommissioning obligations.

(j) Fair value of financial instruments:

Under previous GAAP, Tourmaline recognized the fair value of its futures contracts for physical delivery.  Those contracts do not meet the definition of a financial instrument under IFRS, resulting in the removal of the asset, liability and related charges to the income statement.

(k) Flow-through shares:

Under IFRS, proceeds from the issuance of flow-through shares are allocated between the sale of the shares, which are recorded in share capital, and the sale of the tax benefits, which are initially recorded as an accrued liability. The allocation is made based on the difference between the issue price of flow-through shares and the market price of the common shares on the date the offering is priced. The liability related to the sale of the tax benefits is reversed as qualifying expenditures intended for renunciation to subscribers are incurred, and a deferred tax liability is recorded. The difference between the deferred tax liability recorded and the liability related to the sale of tax benefits is recognized as deferred tax expense. Under previous GAAP, when flow-through shares were issued, they were recorded in share capital based on proceeds received. Upon filing the renunciation documents with the tax authorities, a future tax liability was recognized and share capital was reduced for the tax effect of expenditures renounced to subscribers.

The IFRS adjustment on transition date associated with flow-through shares was to decrease share capital by $4.0 million, decrease retained earnings by $1.9 million with $3.8 million going to the liability account "Deferred premium on flow-through shares" and to increase the deferred tax liability by $2.1 million.   For the nine months ended September 30, 2010 IFRS adjustments were made to decrease share capital by $5.1 million, reduce retained earnings by $5.7 million as a result of the increase to deferred income tax expense, increase the liability account "Deferred premium on flow-through shares" by $1.7 million, and increase the deferred tax liability balance by $9.1 million.

(l) Capitalized general and administrative costs:

Under IFRS, the criteria for which general and administrative expenses ("G&A") can be capitalized are different than previous GAAP and as a result a greater portion of G&A costs have been expensed.  This resulted in an additional $1.5 million of G&A expenses for the year ended December 31, 2010 (three and nine months ended September 30, 2010 - $0.5 and $0.8 million, respectively).

(m)  Cash flow statement:

The transition from former Canadian GAAP to IFRS has had no material effect upon the reported cash flows generated by the Company.  For the nine months ended September 30, 2010, transaction costs of $0.6 million and general and administrative costs of $0.8 million were included in net income rather than capitalized and as such are now included in cash provided from operating activities.  These reconciling items between former Canadian GAAP presentation and the IFRS presentation have no net impact on the cash flow generated.

 

 

 

 

 

For further information:

Tourmaline Oil Corp.
Michael Rose
Chairman, President and Chief Executive Officer
(403) 266-5992; rose@tourmalineoil.com
OR
Tourmaline Oil Corp.
Brian Robinson
Vice President, Finance and Chief Financial Officer
(403) 767-3587; robinson@tourmalineoil.com
OR
Tourmaline Oil Corp.
Scott Kirker
Secretary and General Counsel
(403) 767-3593; kirker@tourmalineoil.com
OR
Tourmaline Oil Corp.
Suite 3700, 250 - 6th Avenue S.W.
Calgary, Alberta  T2P 3H7
Phone:  (403) 266-5992
Facsimile:  (403) 266-5952
www.tourmalineoil.com

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Tourmaline Oil Corporation

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