Tourmaline Oil Corp. Announces Q1 2012 Financial Results: Continues Record Profitable Growth

CALGARY, May 9, 2012 /CNW/ - Tourmaline Oil Corp. (TSX:TOU) ("Tourmaline" or the "Company") is pleased to announce results for the three months ended March 31, 2012 and provide an update on its 2012 EP program.

Q1 2012 Highlights

• Record quarterly average production of 46,746 boepd - a 101% increase over first quarter 2011 average production of 23,308 boepd and 23% growth from the fourth quarter of 2011.
• Record liquids production of 5,664 bpd - a 26% increase from fourth quarter of 2011.
• Earnings of $3.0 million in Q1 2012, despite significantly lower natural gas prices.
• Operating costs were $5.19/boe - below the forecast 2012 average of $5.25/boe.  The Company is targeting operating costs below $5.00/boe in the second quarter of 2012.
• The Company estimates PDP Reserve additions of approximately 13.2 mmboe during the first quarter of 2012 - a 20% increase from year end 2011.
• Tourmaline has approximately 11,500 boepd of production either awaiting tie-in or currently shut-in at Musreau-Kakwa and Dawson-Sunrise.

Production Outlook

First quarter 2012 average production was 46,746 boepd - a 101% increase over first quarter 2011 and 23% growth from Q4 2011.  Oil and liquids average production of 5,664 bpd in Q1 2012 represented 135% growth over Q1 2011 and 26% growth from Q4 2011.  Full year 2012 average production guidance was increased to 50,000 boepd during Q1 2012 from the original 2012 guidance of 47,000 boepd.  This represents 60% year-over-year production growth for 2012.  Current production is approximately 53,000 boepd, significantly ahead of the upwards revised guidance.  Oil, condensate and liquids production is expected to reach the 10,000 bpd level in the fourth quarter of 2012 and 15,000 bpd in the second half of 2013.  The accelerated liquids production growth is the result of ongoing success at Spirit River, growth in the Deep Basin liquids business via the Company's network of six gas plants and further delineation of more liquids-rich Montney turbidite lobes at Sunrise.  A significant portion of the new liquids production at Spirit River and Sunrise came on-stream in the first half of April.

The Company expects strong second half 2012 production growth with the reduced 2H capital program.  Principal production growth areas will be:

1. Musreau, Alberta, where a portion of the 47.5 mmcfpd of liquids-rich gas, drilled and completed in Q1 2012 and awaiting tie-in, will be brought on-stream with the planned 25 mmcfpd plant expansion in Q3 2012.  The balance of the natural gas volumes awaiting tie-in will be brought on-stream with the anticipated higher gas prices in Q1 2013.
2. Spirit River, Alberta, where 10 light oil horizontal wells will be drilled, and two existing horizontal wells will be completed and tied-in.
3. The Alberta Deep Basin Wilrich program where 10-12 new horizontal wells are planned during the second half of 2012, the majority of which will be tied-in by year end.

2012 EP/ Capital Program

The full year 2012 capital program was reduced from the Company's original budget of $490.0 million to $375.0 million during the first quarter of 2012, in conjunction with the increased production guidance.  First quarter capital spending of $216.4 million included operation of an expanded nine-rig program drilling a total of 24 wells (16 gas, 8 oil, 0 dry), purchasing the majority of the equipment for the Musreau gas plant expansion in Q3 2012, and $6.5 million at crown land sales in Alberta and BC.  The Company completed an additional five wells in March (quarterly total of 29 completions) and tied-in an additional six wells above budgeted levels ($4.5 million).  Additional drilling and completion expenditures of $15.8 million were incurred during the quarter, primarily at Spirit River and Musreau-Kakwa.

Tourmaline will operate a reduced six-rig program post break-up 2012 with EP capital spending of approximately $175.0 million anticipated for the balance of 2012.  With minimal Q2 EP expenditures and closing of the $40.4 million flow-through financing in April 2012, the Company expects exit Q2 2012 net debt of $290.0 million and year-end 2012 net debt of $221.3 million based on its current 2012 cash flow outlook of $345.5 million.  The Company expects the debt to cash flow ratio to remain below 1.0 for the remainder of the year.  Based on the sector leading 2011 Reserve growth, the Company is well positioned operationally and financially to rapidly expand the EP program in Q4 2012 should the natural gas price outlook improve more quickly than currently anticipated.  The Company is currently finalizing the expansion of its credit facility to $575.0 million from $375.0 million which is expected to close in June 2012.  The Company estimates that first quarter 2012 PDP Reserve additions were 13.2 mmboe, consisting of 9.2 mmboe of existing PUD conversions and 4.0 mmboe of new PDP reserves.

The Company's on-going minor asset disposition and consolidation program is expected to net approximately $25.0 million during 2012; the Company has closed on $12.5 million of minor sales thus far in the first and second quarters of 2012.

Alberta Deep Basin

Production in the Deep Basin is currently 36,000 boepd with approximately 90% of production now flowing through Tourmaline's six gas plant and gathering system network.  This owned and operated infrastructure allows Tourmaline to be one of the lowest cost operators in the Basin, maximize condensate and NGL recoveries, maximize production on-times (currently 98%) and well performance, as well as control the pace of future tie-ins. 

Deep Basin net production is expected to reach the 250 mmcfpd level during the second half of 2012.  The Company will operate four drilling rigs in the Deep Basin post break-up - three pursuing horizontal targets and one drilling high deliverability/reserve vertical targets on the western portion of the Company's asset base.  A total of 30 horizontal wells are anticipated for 2012 in the Deep Basin with 18-20 targeting the Cretaceous Wilrich horizon.  Wilrich results have been extremely strong thus far with average IP's in excess of 12.5 mmcfpde of liquids-rich gas from the initial 15 Wilrich horizontals drilled in the 2011 to Q1 2012 time frame.  Tourmaline has approximately 1,520 Wilrich horizontal locations identified on Company interest Deep Basin lands.

Spirit River, Alberta

Tourmaline accelerated activity at Spirit River, Alberta, where the Company is pursuing high-deliverability light oil from the Triassic Charlie Lake formation.  By the end of the first quarter 2012, a total of 18 horizontal wells had been drilled into the pool with 16.5 completed.  The 30-day IP template at Spirit River has been increased to 638 boepd (388 bopd oil and 1.5 mmcfpd) from the originally-estimated 425 boepd.  The 30-day IP from the last eight horizontal wells is actually 850 boepd (483 bopd and 2.2 mmcfpd) as the Company continues to modify the completion program.  The Company expects to reach the 5,000 bpd oil production plateau in early 2013 from the original Phase 1 development area at Spirit River.  Ongoing successful vertical exploitation drilling has indicated the potential for significant pool expansion opportunities beyond the Phase 1 pool area.  Seven of the planned ten Charlie Lake horizontal wells in the second half of 2012 will further delineate these pool expansion opportunities.  The Company has expanded its land holdings at Spirit River during the past six months to a total of 102 sections, with a future horizontal drilling inventory of 150 locations currently estimated.

Sunrise-Dawson, BC

With the completion of the Sunrise plant expansion in Q1 2012, Tourmaline became the seventh-largest Montney producer in Western Canada at 13,500 boepd.  Operating costs in the Sunrise-Dawson complex are $3.00/boe and, coupled with an average liquid content of 35 bbl/mm, make this area amongst the most profitable Montney play areas in Western Canada.  Tourmaline has drilled 43 horizontal Montney wells into the complex in the past two years; average initial deliverability of the past 10 wells is in excess of 15 mmcfpde at an average cost of $4.2 million.  The Company also has an additional 30 mmcfpd that is currently awaiting tie-in that will either access third party facilities when natural gas prices improve or come on-stream in early 2013 via a Company owned-and-operated facility expansion.  Tourmaline has a future drilling inventory of approximately 300 horizontal locations in the greater Sunrise-Dawson complex.

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, projected operating costs, disposition initiatives, the timing for facility expansions, 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 is an estimate of Tourmaline's 2012 cash flow, which is based on the various assumptions as to production levels, capital expenditures, and other assumptions disclosed in this press release and including commodity price assumptions for natural gas (AECO - $2.41/mcf) and crude oil (WTI - $100.00 US) and an exchange rate assumption of $0.98 (US/CDN). To the extent such estimate constitutes a financial outlook, it was approved by management of Tourmaline on March 19, 2012 and is included to provide readers with an understanding of Tourmaline's anticipated cash flow based on the capital expenditure and other assumptions described herein and readers are cautioned that the 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",  "operating netback" and "net debt" 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.

Conference Call Tomorrow at 9:00 a.m. MT (11:00 a.m. ET)

Tourmaline will host a conference call tomorrow, May 10, 2012 starting at 9:00 a.m. MT (11:00 a.m. ET). To participate, please dial (888) 231-8191 (toll-free in North America) or (647) 427-7450 a few minutes prior to the conference call.

The conference call ID number is 77584145.

MANAGEMENT'S DISCUSSION AND ANALYSIS

This management's discussion and analysis ("MD&A") should be read in conjunction with Tourmaline's unaudited interim condensed consolidated financial statements and related notes for the three months ended March 31, 2012 and the consolidated financial statements for the year ended December 31, 2011.  Both the consolidated financial statements and the MD&A can be found at www.sedar.com.  This MD&A is dated May 9, 2012.

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. 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 for the three months ended March 31, 2012, averaged 46,746 Boe/d, a 101% increase over the first quarter of 2011 average production of 23,308 Boe/d.  Production was 88% natural gas weighted in the first quarter of 2012 compared to 90% natural gas weighted in the first quarter of 2011.  The Company's significant production growth can be attributed to new wells that have been brought on-stream since March 31, 2011, as well as property and corporate acquisitions.

Revenue for the three months ended March 31, 2012, increased 52% to $104.1 million from $68.5 million for the same period of 2011.  Revenue growth is consistent with the increased production over the same period, partially offset by lower natural gas prices.  Revenue includes all petroleum, natural gas and NGL sales and realized gains on financial instruments.

The realized average natural gas price for the first quarter of 2012 was $2.54/Mcf compared to $4.48/Mcf for the same quarter of 2011.  Realized crude oil and NGL prices increased 10% to $91.48/Bbl for the first quarter of 2012 compared to $83.00/Bbl for the same quarter of 2011.

The realized natural gas price for the quarter ended March 31, 2012 was 20% (March 31, 2011 - 19%) 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. 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.

For the quarter ended March 31, 2012, the average effective royalty rate increased to 8.1% compared to 6.2% for the same quarter of 2011.  The increased royalty rate can be attributed to royalty incentives reaching their maximum limit on some of the Company's high rate producing wells.

For 2012, the Company expects its overall royalty rate to be approximately 10% as an increased number of wells will no longer qualify for royalty incentive programs due to production maximums being reached and other wells will come off royalty holidays, thereby increasing the Company's overall royalty rate. The royalty rate is sensitive to commodity prices, however, and as such lower prices will offset some of the effects of losing the above-noted incentives on certain wells.

OTHER INCOME

For the quarter ended March 31, 2012, other income was $1.5 million, which includes $1.3 million in processing income, compared to $0.5 million for the same quarter of 2011, of which $0.4 million related to processing income.  Tourmaline continues to build and acquire interests in facilities which have helped to generate increased third-party processing income.

Operating expenses include all periodic lease and field-level expenses and exclude income recoveries from processing third party volumes.  Total operating expenses increased 82% from $12.1 million in the first quarter of 2011 to $22.1 million in the same quarter of 2012 attributable to the significant increase in production over the same period.  On a per Boe basis, the costs decreased 10% from $5.77/Boe for the first quarter of 2011 to $5.19/Boe in the first quarter of 2012 due to operational efficiencies. Tourmaline's operating expenses in the first quarter of 2012 include third party processing, gathering and compression fees of approximately $7.7 million or 35% of total operating costs (March 31, 2011- $4.5 million or 37% of total operating costs).

The Company expects full year 2012 operating costs to average $5.25 per Boe.  Actual costs per Boe can change, however, depending on a number of factors including the Company's actual production levels.

TRANSPORTATION

Transportation costs for the three months ended March 31, 2012 were $7.5 million or $1.78 per Boe (March 31, 2011 - $4.0 million or $1.90 per Boe, respectively).  The increase in total transportation costs can be attributed to increased production.  On a per-Boe basis, transportation costs for the first quarter of 2012 are lower due to the expansion of the Company's owned-and-operated Sunrise plant in December 2011 whereby increased volumes are now going to this plant which is in closer proximity versus third party facilities.

G&A expenses for the first quarter of 2012 were $3.9 million compared to $2.7 million for the same quarter of the prior year.  The increase in G&A expenses in 2012 compared to 2011 is primarily due to office staff additions and higher rent expense as the Company increased its head office space. The higher total G&A expenses result from the need to manage the 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 per Boe for the first quarter of 2012 decreased 28% down to $0.91 per Boe, compared to $1.27 per Boe for the same quarter of 2011.

G&A costs for 2012 are not expected to exceed $1.00 per Boe.  Actual costs per Boe can change, however, depending on a number of factors including the Company's actual production levels.

Tourmaline uses the fair value method for the determination of all non-cash related share-based payments. During the first quarter of 2012, 50,000 stock options were granted to employees, officers, directors and key consultants at an exercise price of $24.73, and 229,167 options were exercised, bringing $1.9 million cash into treasury.  The Company recognized $3.8 million of share-based compensation expense in the first quarter of 2012 compared to $2.6 million in the first quarter of 2011.  Capitalized share-based payments for the first quarter of 2012 were $3.8 million compared to $2.6 for the same quarter of the prior year. The overall increase in share-based compensation reflects the increased number of employees due to increased activity.

DD&A expense was $56.0 million for the first quarter of 2012 compared to $30.3 million for the same period of 2011 due to higher production volumes, as well as, a larger capital asset base being depleted.  The per-unit DD&A rate for the first quarter of 2012 was $13.17/Boe compared to $14.45/Boe for the first quarter of 2011.  The lower DD&A rate in 2012 reflects strong reserve additions derived from Tourmaline's exploration and production program.

FINANCE EXPENSES

Finance expenses for the first quarter of 2012 totalled $2.1 million and are comprised of interest expense and accretion of provisions.  Finance expenses for the first quarter of 2011 were $0.7 million.  The increased finance expenses are largely due to a $1.5 million increase in interest expense resulting from a higher balance drawn on the credit facility in 2012.

Funds from operations for the three months ended March 31, 2012 were $61.8 million or $0.38 on a per-diluted-share basis compared to $44.9 million or $0.32 on a per-diluted share basis for the same period of 2011. The Company had after-tax earnings of $3.0 million ($0.02 per diluted share) for the quarter ended March 31, 2012, compared to after-tax earnings of $2.7 million ($0.02 per diluted share) for the same quarter of the previous year.  The increase in both funds from operations and after tax earnings in 2012 compared to 2011 can be attributed to the increased production during the period partially offset by lower realized natural gas prices.

During the first quarter of 2012, the Company invested $216.4 million of cash consideration, net of dispositions, compared to $217.6 million for the same period of 2011.  Expenditures on exploration and production were $225.1 million compared to $209.0 million in the same quarter of 2011, which is consistent with the Company's aggressive growth strategy.

The following table summarizes the drill, complete and tie-in activities for the period:

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2012, Tourmaline had negative working capital of $175.7 million, after adjusting for the fair value of financial instruments (the unadjusted working capital deficiency was $176.0 million) (December 31, 2011 - $146.6 million and $146.3 million, respectively).  Management believes the Company has sufficient liquidity and capital resources to fund the remainder of its 2012 and 2013 exploration and development program through expected cash flow from operations and its unutilized bank credit facilities.

On April 4, 2012, the Company issued 1,402,000 flow-through common shares at a price of $28.80 per share for gross proceeds of $40.4 million. The proceeds were used to temporarily reduce bank debt and will be used to fund the Company's 2012 capital exploration program.

As at March 31, 2012, the Company had $206.7 million drawn on existing facilities (December 31, 2011 - $81.7 million), and net debt of $382.4 million (December 31, 2011 - $228.3 million).  The Company is currently in the process of renegotiating its credit facilities and anticipates a significant increase from the Company's current consolidated borrowing base of $385 million.

SHARES OUTSTANDING

As at May 9, 2012, the Company has 160,228,753 common shares outstanding and 14,099,356 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.

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. The Company's financial risks are discussed in note 5 of the Company's audited consolidated financial statements for the year ended December 31, 2011.

As at March 31, 2012, 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 contracts that the Company has entered into in the first quarter of 2012 are detailed in note 3 of the Company's interim condensed consolidated financial statements for the three months ended March 31, 2012.

The following table provides a summary of the unrealized gains and losses on financial instruments for the three months ended March 31, 2012:

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.  These contracts have been disclosed in note 3 of the Company's interim condensed consolidated financial statements for the three months ended March 31, 2012.

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.  The Company's use of estimates and judgments in preparing the interim condensed consolidated financial statements is discussed in note 1 of the consolidated financial statements for the years ended December 31, 2011 and December 31, 2010.

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. There were no changes in the Company's ICFR during the period beginning on January 1, 2012 and ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company's ICFR.

It should be noted that a control system, including the Company's disclosure and internal controls and procedures, no matter how well conceived can provide only reasonable, but not absolute assurance that the objectives of the control system will be met and it should not be expected that the disclosure and internal controls and procedures will prevent all errors or fraud.

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.

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.

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 and cash flow from operating activities; funds from operations, operating netback, net debt and working capital (adjusted for the fair value of financial instruments) are useful supplemental measures in assessing 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 or cash flow from operating activities 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 (excluding processing income) less royalties, transportation costs 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 cash flow from operating activities (per the statement of cash flow) to funds from operations, is set forth below:

Operating Netback

Operating netback is calculated on a per-Boe basis and is defined as revenue (excluding processing income) less royalties, transportation costs and operating expenses, as shown below:

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:

Net Debt

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

SELECTED QUARTERLY INFORMATION

The oil and gas exploration and production industry is cyclical in nature. The Company's financial position, results of operations and cash flows are principally impacted by production levels, and commodity prices, particularly natural gas prices. The Company has had continued growth over the last eight quarters summarized in the table above.  The Company's average annual production has increased from 17,856 Boe per day in 2010 to 31,007 Boe per day in 2011, and 46,746 Boe per day in the first quarter of 2012, with cash flows from operating activities increasing from $143.3 million in 2010 to $228.4 million in 2011.  The production growth can be attributed to both the Company's exploration and development activities, as well as, from acquisitions of producing properties.  Over the same period, natural gas prices have declined.  Commodity price changes can indirectly impact expected production by changing the amount of funds available to reinvest in exploration, development and acquisition activities in the future.  Decreases in commodity prices not only reduce revenues and cash flows available for exploration, they may also challenge the economics of potential capital projects by reducing the quantities of reserves that are commercially recoverable.  The Company's capital program is dependent on cash flows generated from operations and access to capital markets.

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CASH FLOW

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended March 31, 2012 and 2011
(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.

The Company's registered office is located at 3700, 250 - 6^th Avenue S.W., Calgary, Alberta, Canada T2P 3H7.

1. BASIS OF PREPARATION

These unaudited interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34, "Interim Financial Reporting".  These unaudited interim condensed consolidated financial statements do not include all of the information and disclosure required in the annual financial statements and should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2011.

The accounting policies and significant accounting judgments, estimates, and assumptions used in these unaudited interim condensed consolidated financial statements are consistent with those described in Notes 1 and 2 of the Company's audited consolidated financial statements for the year ended December 31, 2011.

The unaudited interim condensed consolidated financial statements were authorized for issue by the Board of Directors on May 9, 2012.

2. 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 purposes based on the following method. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.

Measurement:

Tourmaline classifies the fair value of 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 March 31, 2012 and December 31, 2011.  The carrying value of trade and other receivables and trade and other payables included in the interim condensed 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:

3. 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.  The Company's financial risks are consistent with those discussed in note 5 of the Company's audited consolidated financial statements for the year ended December 31, 2011.

As at March 31, 2012, 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 interim condensed consolidated statement of financial position at fair value, with changes in the fair value being recognized as an unrealized gain or loss on the interim condensed consolidated statement of income and comprehensive income.

The Company has entered into the following derivative contracts since December 31, 2011 to March 31, 2012:

No contracts have been entered into subsequent to March 31, 2012.

The following table provides a summary of the unrealized gains and losses on financial instruments for the periods ended March 31, 2012 and 2011:

As at March 31, 2012, 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 $0.7 million (March 31, 2011 - $0.4 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 since December 31, 2011 to March 31, 2012:

The following contracts were entered into subsequent to March 31, 2012:

4. EXPLORATION AND EVALUATION ASSETS

General and administrative expenditures for the three months ended March 31, 2012 of $1.4 million (December 31, 2011 — $8.2 million) have been capitalized and included as exploration and evaluation assets.  Non-cash share-based payments in the amount of $1.6 million (December 31, 2011 - $9.4 million) were also capitalized and included in exploration and evaluation assets.

5. PROPERTY, PLANT AND EQUIPMENT

General and administrative expenditures for the three months ended March 31, 2012 of $1.4 million (December 31, 2011 - $1.8 million) have been capitalized and included as costs of oil and natural gas properties.  Also included in oil and natural gas properties are non-cash share-based payments of $2.2 million (December 31, 2011 - $2.3 million).

Future development costs for the three months ended March 31, 2012 of $1,606 million (December 31, 2010 - $1,539 million) were included in the depletion calculation.

6. 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 $73.3 million (December 31, 2011 - $72.5 million), which will be incurred between 2024 and 2029.  A risk-free rate of 2.49% (December 31, 2011 - 2.49%) and an inflation rate of 2% (December 31, 2011 - 2%) were used to calculate the fair value of the decommissioning obligations.

7. 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:

8. 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

9. EARNINGS PER SHARE

There were 3,818,024 options excluded from the weighted-average share calculation for the three months ended March 31, 2012 because they were anti-dilutive (March 31, 2011 - 575,000).

10. 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 15,880,675 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.

The following table summarizes stock options outstanding and exercisable at March 31, 2012:

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:

11. COMMITMENTS

On December 1, 2011, the Company issued 1.36 million common shares on a flow-through basis at a price of $41 per share for total gross proceeds of $55.8 million.  As of March 31, 2012, the Company has spent $14.0 million on eligible expenditures and is committed to spend the remainder of $41.8 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:

12. SUBSEQUENT EVENT

On April 4, 2012, the Company closed a private placement flow-through common share financing.  The Company issued 1,402,000 common shares at a price of $28.80 per share for gross proceeds of $40.4 million, including 152,000 shares which were issued to insiders.   The proceeds will be used to fund the Company's 2012 capital exploration program. The Company is committed to spend $40.4 million on qualified exploration expenditures by December 31, 2013.

About Tourmaline Oil Corp.

Tourmaline is a Canadian intermediate crude oil and natural gas exploration and production company focused on long-term growth through an aggressive exploration, development, production and acquisition program in the Western Canadian Sedimentary Basin.

SOURCE Tourmaline Oil Corporation