Tourmaline Oil Corp. Reports Q3 2012 Financial Results

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Nov 08, 2012, 17:08 ET

INCREASES 2012 EXIT AND 2013 PRODUCTION GUIDANCE AND EXPANDS CAPITAL PROGRAM

CALGARY, Nov. 8, 2012 /CNW/ - Tourmaline Oil Corp. (TSX:TOU) ("Tourmaline" or the "Company") is pleased to report strong Q3 2012 results and increased production guidance for exit 2012 and 2013. The Company has embarked upon an accelerated growth plan in all three core-operated areas through an expanded 2H 2012/2013 EP capital program and complementary accretive acquisitions.

Q3 2012 Highlights

Previous 2012 exit production guidance levels achieved in October
2013 average production guidance increased to 75,000 boepd including announced acquisitions
2012 exit production guidance increased to 63,000 - 65,000 boepd
2012 and 2013 EP capital programs increased
Complementary acquisitions in two of the Company's three core-operated areas that are expected to close prior to year end
Third quarter 2012 operating costs of $3.66/boe
Musreau Alberta plant expansion completed in September
Several successful Spirit River Charlie Lake pool expansion horizontals completed

Production Update

Production levels have reached the Company's previously upwards-revised 2012 exit guidance levels of 55,000 - 56,500 boepd. These production levels do not include production associated with the announced acquisitions. The Company remains on track to achieve full-year 2012 average production in excess of 50,000 boepd; guidance for the year was increased during Q1 2012 from 47,000 to 50,000 boepd.

Third quarter production of 48,175 boepd represented an increase of 40% over third quarter 2011 production of 34,347 boepd. Third quarter production was negatively impacted primarily by facility-related unscheduled down-time at Spirit River, Alberta and Sunrise, B.C. Sour-associated gas handling issues resulted in liquid production losses at Spirit River of approximately 900 bpd for the quarter. At Sunrise, an equipment failure in the refrigeration plant resulted in approximately 500 boepd of production losses. The Sunrise plant disruption was remedied during the third quarter and was a one-time equipment issue; the Spirit River gas-handling issues are being remedied by a gas facility expansion that is already underway and expected to be completed during the first quarter of 2013. Weather delayed tie-in of several wells throughout the EP portfolio during the third quarter. Third quarter production was positively impacted by the completion of the Musreau plant expansion in the second half of September, which has allowed the Company to meet 2012 exit production guidance ahead of schedule. Assuming closing of the Huron and Deep Basin acquisitions prior to year end, the 2012 exit production estimate has been increased to 63,000 - 65,000 boepd.

The Company is now estimating 2013 average production of 75,000 boepd, including the impact of the Huron acquisition, which is anticipated to close in late November 2012, and the Deep Basin asset acquisition that closed on November 7, 2012.

Cost Structure

Third quarter operating costs of $3.66 /boe were significantly lower than forecast - 24% lower than Q2 2012 costs of $4.83/boe and 37% lower than third quarter of 2011.

Third quarter cash G&A per boe costs were $0.79/boe, a 16% reduction from third quarter 2011, and amongst the lowest in the industry. The Company will continue the focus on reducing costs in all aspects of its EP business.

Capital Programs

The 2H 2012 capital program was expanded in conjunction with the equity financing in August. The ongoing drilling program was expanded from six to eight rigs in July and new facility projects were initiated in the third quarter, primarily at Spirit River and Sunrise-Dawson. Outside operated drilling in the Alberta Deep Basin also accelerated with six additional horizontals drilled and/or completed in the third quarter. Full year EP capital spending of $525.0 million is expected, not including acquisitions. The Company is planning to run an eight-to-nine rig program through until spring break-up 2013. Year end 2012 debt of $353.1 million is currently anticipated, including the Deep Basin acquisition for cash and assumption of Huron Energy's net debt (approximately $24 MM). This overall net debt level equates to 0.80 times annualized, anticipated Q4 2012 cash flow or 0.55 times anticipated 2013 cash flows.

2013 Capital Budget

A $650.0 million EP capital program is planned for 2013 - an increase from the earlier preliminary 2013 budget estimates of $575.0 million. $485.0 million is planned for drilling and completion activity in 2013, yielding an approximate total of 115 wells (100 horizontals, 15 verticals) throughout existing core EP areas. 2013 facilities and infrastructure spending of $115 million is anticipated, including completion of new facilities at Spirit River, Alberta and Doe, B.C. Additional 2013 facilities projects include a 50 mmcfpd capacity expansion in the Alberta Deep Basin in 2H 2013 as well as two major gas pipeline laterals in the Deep Basin further expanding the extent of Tourmaline's gas processing and transportation network.

The $650.0 million 2013 capital program compares to anticipated 2013 cash flows of $636.7 million, based on average 2013 production levels of 75,000 boepd and an assumed gas price of $3.86/mcf AECO and an average Edmonton par oil price of $90.00/bbl.

Tourmaline has been seeking to divest its Elmworth/Wapiti Alberta Montney assets and anticipates consummating a transaction in the first quarter of 2013. Proceeds from the potential disposition would be utilized for either additional acquisitions, a further 2013 EP capital program expansion or for balance sheet strengthening, depending upon the commodity price outlook at that time.

EP Program Overview

Tourmaline has embarked upon an accelerated growth plan for all three core areas through an expanded EP capital program and complementary acquisitions. The Company has accelerated and expanded its 2H 2012 EP program in response to additional available funds raised during the third quarter and an improving natural gas price environment.

The operated-rig count was increased to eight rigs, with six rigs currently drilling in the Alberta Deep Basin, one rig operating at Spirit River and one rig operating in the NEBC Montney complex.

Alberta Deep Basin

The Musreau gas plant expansion was completed in September, bringing operated production in the immediate area to 50 mmcfpd and total current Company production in the Deep Basin to approximately 230 mmcfpd. The Company has an additional 55 mmcfpd of production to bring on-stream from wells already completed, tested and shut-in.

Tourmaline is currently operating six drilling rigs in the Deep Basin, five of which are pursuing horizontal targets in the Wilrich, Notikewin, and Falher formations. The Company has targeted 25 - 30 new Wilrich horizontals to be drilled, completed and on-stream between July 2012 and April 2013 via the ongoing EP program. The three most recent Wilrich horizontal wells at Minehead, Ansel and Sundance tested at final production rates of 24.5 mmcfpd @ 24.3 MPa, 23.4 mmcfpd @ 23.1 MPa, and 15.1 mmcfpd @ 14.6 MPa, respectively, on three-day tests.⁽¹⁾ All three will be tied in by year end 2012 or early in 2013.

The Company has entered into an agreement to acquire all the assets of a private company in the Wild River area of the Alberta Deep Basin. The assets include approximately 3,000 boepd of existing production, a portion of which is already operated by Tourmaline, the remaining 30% joint interest in the Wild River gas plant, two drilled but uncompleted horizontal wells and a significant complementary land and development drilling inventory. The $84.1 million cash acquisition closed on November 7, 2012.

NEBC Montney

Current production at Sunrise-Dawson is 70 - 75 mmcfpd through the existing Tourmaline infrastructure, with an additional 90 mmcfpd completed, tested and currently shut-in. The second Tourmaline gas plant at Doe, with a planned capacity of 50 mmcfpd, is scheduled for an early April 2013 completion. Start-up of this plant, along with closing of the previously announced Huron acquisition, is anticipated to bring Company interest NEBC production to approximately 30,000 boepd.

Tourmaline is currently operating one drilling rig in NEBC, focussing on the highest liquid content gas targets within the vertically stacked series of Triassic Montney turbidite lobes. Condensate and NGL rates as high as 60 bbls/mm have been encountered in new turbidite lobes currently being delineated. Drilling and completion capital costs continue to trend downward; completed well costs averaged $3.55 million (drill, complete and stimulate) on the most recent Dawson four-well Montney pad.

⁽¹⁾ Production tests are not necessarily indicative of long-term performance or ultimate recovery.

Tourmaline is currently planning to employ a second drilling rig in NEBC to further delineate the Huron assets in 2013. These assets will provide Tourmaline with a significant increase in future liquid-rich Montney lands and horizontal drilling targets. Huron has also constructed significant complementary infrastructure in the adjoining Montney play areas that can be utilized to rapidly bring existing and new production volumes on-stream.

Spirit River

The main emphasis of the 2H 2012 Spirit River drilling program is to delineate the significant Charlie Lake pool expansion potential. The Company now believes that the original Triassic Charlie Lake oil accumulation is substantially larger than originally estimated. Thus far in the second half of 2012, five new successful horizontals have been drilled in these peripheral areas East and South of the original pool. Three of these horizontals have been on production for 14 days or longer, with current oil rates of 174, 417 and 474 bpd, respectively, and total current hydrocarbon production rates of 432, 492 and 619 boepd, respectively, including associated gas production. The Company is planning to have a total of eight pool expansion delineation horizontals drilled, completed and producing by year end 2012. The future horizontal drilling inventory at Spirit River is now in excess of 200 locations, as the property grows into a stand-alone third core operating complex for the Company.

Current production rates at Spirit River are constrained by limitations within the existing gas handling infrastructure. This has resulted in lower total Spirit River pool volumes than originally expected for the second half of 2012 and the first quarter of 2013. These constraints on both oil and total production rates are being addressed by a gas facility expansion that will increase gas handling capability from 16.0 to 40.0 mmcfpd, with an associated significant increase in oil and liquids production capability. This facility expansion was initiated in Q3 2012 and is expected to be completed in March 2013. Current production volumes at Spirit River are 5,500 - 6,000 boepd (2,700 - 3,000 bpd oil, 15 - 16 mmcfpd gas) with additional shut-in volumes at Spirit River estimated at 3,500 boepd. The Spirit River gas has a hydrocarbon liquid content of up to 102 bbls/mm providing an attractive secondary liquid target that the Company will pursue in 2013.


CORPORATE SUMMARY - THIRD QUARTER 2012

		Three Months Ended September 30,					Nine Months Ended September 30,
		2012		2011		Change	2012		2011			Change
OPERATIONS
Production
	Natural gas (mcf/d)		255,451		185,414	38%		256,235			154,360	66%
	Crude oil and NGL (bbls/d)		5,600		3,444	63%		5,940			2,953	101%
	Oil equivalent (boe/d)		48,175		34,347	40%		48,646			28,680	70%

Product prices⁽¹⁾
	Natural gas ($/mcf)	$	2.52	$	4.25	(41)%	$	2.42		$	4.35	(44)%
	Crude oil and NGL ($/bbl)	$	83.34	$	87.01	(4)%	$	83.87		$	88.80	(6)%

Operating expenses ($/boe)		$	3.66	$	5.77	(37)%	$	4.56		$	5.76	(21)%

Transportation expenses ($/boe)		$	1.97	$	2.06	(4)%	$	1.87		$	1.99	(6)%

Operating netback ($/boe)		$	15.68	$	21.21	(26)%	$	15.12		$	22.77	(34)%

Cash general & administrative expenses($/boe)⁽²⁾		$	0.79	$	0.94	(16)%	$	0.79		$	1.10	(28)%


Financial ($000, except per share)
Revenue			102,127		100,068	2%		306,726			255,048	20%
Royalties			7,641		8,313	(8)%		19,511			16,043	22%

Funds from operations			63,515		62,686	1%		186,472			168,041	11%
Funds from operations per share		$	0.38	$	0.40	(5)%	$	1.13		$	1.13	-%

Net earnings (loss)			(4,770)		8,688	(155)%		(782)			26,607	(103)%
Net earnings (loss) per share		$	(0.03)	$	0.06	(150)%	$	(0.00)		$	0.18	(100)%

Capital expenditures			175,277		249,162	(30)%		445,532			596,789	(25)%

Weighted average shares outstanding (diluted)								164,854,721			148,999,440	11%

Net debt								(311,847)			(283,704)	10%

⁽¹⁾Product prices include realized gains and losses on financial instrument contracts.
⁽²⁾Excluding interest and financing charges.

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, acquisition and 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; the successful completion of acquisition and dispositions; 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 complete or realize the anticipated benefits of acquisitions or dispositions; 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 2012 and 2013 cash flows, which are 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 - $2.43/mcf) (2012), $3.86/mcf (2013), and crude oil (WTI (US) - $94.65/bbl) (2012) and $95.00/bbl (2013) and an exchange rate assumption of $0.99 (US/CAD) for 2012 and $1.00 (US/CAD) for 2013. To the extent such estimate constitutes a financial outlook, it was approved by management and the Board of Directors of Tourmaline on November 7, 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.

Certain Definitions:

bbls	barrels
boe	barrel of oil equivalent
boepd	barrel of oil equivalent per day
bopd	barrel of oil, condensate or liquids per day
gjsd	gigajoules per day
mmboe	millions of barrels of oil equivalent
mbbls	thousand barrels
mmcf	million cubic feet
mmcfpd	million cubic feet per day
mmcfpde	million cubic feet per day equivalent
mcfe	thousand cubic feet equivalent
mmbtu	million British thermal units

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

Tourmaline will host a conference call tomorrow, November 9, 2012 starting at 9:00 a.m. MT (11:00 a.m. ET). To participate, please dial 1-888-231-8191 (toll-free in North America), or local dial-in 647-427-7450, a few minutes prior to the conference call.

The conference call ID number is 61077869.

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 and nine months ended September 30, 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 November 7, 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


	Three Months Ended			Nine Months Ended
	September 30, 2012	September 30, 2011	Change		September 30, 2012	September 30, 2011	Change
Natural Gas (mcf/d)	255,451	185,414	38%		256,235	154,360	66%
Crude oil and NGL (bbl/d)	5,600	3,444	63%		5,940	2,953	101%
Oil equivalent (Boepd)	48,175	34,347	40%		48,646	28,680	70%

Production for the three months ended September 30, 2012, averaged 48,175 Boe/d, a 40% increase over the average production for the same quarter of 2011 of 34,347 Boe/d. Production was 88% natural gas weighted in the third quarter of 2012 compared to 90% natural gas weighted in the third quarter of 2011.

For the nine months ended September 30, 2012, production increased 70% to 48,646 Boe/d from 28,680 Boe/d for the same period of 2011.

The Company's significant production growth when compared to 2011 can be attributed to new wells that have been brought on-stream since September 30, 2011, as well as property and corporate acquisitions.

REVENUE


	Three Months Ended					Nine Months Ended
(000s)		September 30, 2012		September 30, 2011	Change			September 30, 2012		September 30, 2011	Change
Revenue from:
Natural Gas	$	59,195	$	72,494	(18)%		$	170,225	$	183,458	(7)%
Oil and NGL		42,932		27,574	56%			136,501		71,590	91%
Total revenue from gas, oil and NGL sales	$	102,127	$	100,068	2%		$	306,726	$	255,048	20%

Revenue for the three months ended September 30, 2012 increased 2% to $102.1 million from $100.1 million for the same quarter of 2011. For the nine months ended September 30, 2012, revenue was $306.7 million, a 20% increase over revenue of $255.0 million for the same period of 2011. Revenue growth is consistent with the increase in production over the same periods, partially offset by lower realized commodity prices. Revenue includes all petroleum, natural gas and NGL sales and realized gains on financial instruments.

Tourmaline Prices:


		Three Months Ended				Nine Months Ended
		September 30, 2012		September 30, 2011	Change		September 30, 2012		September 30, 2011	Change
Natural Gas ($/mcf)	$	2.52	$	4.25	(41)%	$	2.42	$	4.35	(44)%
Oil and NGL ($/bbl)	$	83.34	$	87.01	(4)%	$	83.87	$	88.80	(6)%
Oil equivalent ($/Boe)	$	23.04	$	31.67	(27)%	$	23.01	$	32.57	(29)%

The realized average natural gas prices for the three and nine months ended September 30, 2012 were 41% and 44%, respectively, lower than the same periods of the prior year. Realized crude oil and NGL prices decreased 4% and 6% for the three and nine months ended September 30, 2012, respectively, compared to the same periods of 2011.

The realized natural gas price for the quarter ended September 30, 2012 was $2.52/mcf, which is 10% (September 30, 2011 - 16%) 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.

Benchmark Oil and Gas Prices:


		Three Months Ended
			September 30, 2012		September 30, 2011	Change
Natural Gas
	NYMEX Henry Hub (US$/mcf)	$	2.89	$	4.06	(29)%
	AECO (CAD$/mcf)	$	2.30	$	3.67	(37)%
Oil
	NYMEX (US$/bbl)	$	92.20	$	89.54	3%
	Edmonton Par (CAD$/bbl)	$	84.87	$	92.35	(8)%

Reconciliation of AECO Index to Tourmaline's Realized Gas Prices:


	Three Months Ended
($/mcf)		September 30, 2012		September 30, 2011	Change
AECO index	$	2.30	$	3.67	(37)%
Heat/quality differential		0.18		0.24	(25)%
Realized gain		0.04		0.34	(88)%
Tourmaline realized natural gas price	$	2.52	$	4.25	(41)%

Currency - Exchange Rates:


	Three Months Ended
	September 30, 2012		September 30, 2011		Change
CAD/US$	$	1.0043	$	1.0201	(2)%

ROYALTIES

	Three Months Ended				Nine Months Ended
(000s)		September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
Natural Gas	$	592	$	3,270	$	(1,509)	$	4,879
Oil and NGL		7,049		5,043		21,020		11,164
Total royalties	$	7,641	$	8,313	$	19,511	$	16,043
Royalties as a percentage of revenue		7.5%		8.3%		6.4%		6.3%

For the quarter ended September 30, 2012, the average effective royalty rate decreased to 7.5% compared to 8.3% for the same quarter of 2011. For the nine months ended September 30, 2012, the average effective royalty was 6.4% compared to 6.3% for the same period of 2011. The Company continues to benefit from the New Well Royalty Reduction Program and the Natural Gas Deep Drilling Program in Alberta as well as the Deep Royalty Credit Program in British Columbia.

The Company expects its royalty rate for 2012 to remain unchanged at 7% as previously forecasted at June 30, 2012. The royalty rate is sensitive to commodity prices, however, and as such, a change in commodity prices will impact the actual rate.

OTHER INCOME

For the quarter ended September 30, 2012, other income was $0.9 million, which includes $0.8 million in processing income, compared to $1.4 million for the same quarter of 2011, of which $1.3 million related to processing income. Processing income has been decreasing as a smaller amount of third-party production has been processed in Tourmaline owned-and-operated facilities as the Company grows the amount of its own production, thus reducing capacity for third-party volumes. For the nine months ended September 30, 2012, other income was $3.7 million compared to $3.4 million for the same period of the prior year.

OPERATING EXPENSES


	Three Months Ended					Nine Months Ended
($000s, except per unit amounts)		September 30, 2012		September 30, 2011	Change		September 30, 2012		September 30, 2011	Change
Operating expenses	$	16,236	$	18,239	(11)%	$	60,736	$	45,101	35%
Per Boe	$	3.66	$	5.77	(37)%	$	4.56	$	5.76	(21)%

Operating expenses include all periodic lease and field-level expenses and exclude income recoveries from processing third-party volumes. For the third quarter of 2012, total operating expenses decreased 11% from $18.2 million in the third quarter of 2011 to $16.2 million in 2012 due to the impact of redirecting natural gas from third-party facilities to Tourmaline owned-and-operated infrastructure. On a per Boe basis, the costs decreased 37% from $5.77/Boe for the third quarter of 2011 to $3.66/Boe in the third quarter of 2012 due to increased production and increased operational efficiencies. Tourmaline's operating expenses in the third quarter of 2012 include third-party processing, gathering and compression fees of approximately $4.3 million or 27% of total operating costs (September 30, 2011- $5.5 million or 30% of total operating costs).

For the nine months ended September 30, 2012, total operating expenses were $60.7 million, or $4.56/Boe, compared to $45.1 million, or $5.76/Boe for the same period of 2011. Although total operating expenses increased commensurate with production, the costs per Boe decreased 21% reflecting increased operational efficiencies.

The Company now expects its full year 2012 operating costs to average approximately $4.75 per Boe, which is a reduction from its previous guidance of $5.00 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 September 30, 2012 were $8.7 million or $1.97 per Boe (three months ended September 30, 2011 - $6.5 million or $2.06 per Boe, respectively). Transportation costs for the nine months ended September 30, 2012 were $24.9 million or $1.87 per Boe (nine months ended September 30, 2011 - $15.6 million or $1.99 per Boe, respectively). On a per Boe basis, transportation costs for the three and nine months ended September 30, 2012 are lower primarily 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 previous third-party facilities. The increase in total transportation costs for the nine months ended September 30, 2012 can be attributed to increased production.

GENERAL & ADMINISTRATIVE EXPENSES ("G&A")


	Three Months Ended					Nine Months Ended
(000s)		September 30, 2012		September 30, 2011	Change		September 30, 2012		September 30, 2011	Change
G&A expenses	$	6,667	$	6,082	10%	$	19,550	$	17,587	11%
Administrative and capital recovery		(484)		(939)	(48)%		(822)		(2,527)	(67)%
Capitalized G&A		(2,685)		(2,167)	24%		(8,184)		(6,436)	27%
Total G&A expenses	$	3,498	$	2,976	18%	$	10,544	$	8,624	22%
Per Boe	$	0.79	$	0.94	(16)%	$	0.79	$	1.10	(28)%

G&A expenses for the third quarter of 2012 were $3.5 million compared to $3.0 million for the same quarter of the prior year. G&A costs per Boe for the third quarter of 2012 decreased 16% down to $0.79 per Boe, compared to $0.94 per Boe for the same quarter of 2011.

For the nine months ended September 30, 2012, G&A expenses were $10.5 million or $0.79/Boe compared to $8.6 million or $1.10/Boe for the same period of 2011. 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 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.

SHARE-BASED COMPENSATION


	Three Months Ended				Nine Months Ended
(000s)		September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
Share-based payments	$	7,150	$	6,516	$	22,182	$	17,104
Capitalized share-based payments		(3,575)		(3,258)		(11,091)		(8,552)
Total share-based payments	$	3,575	$	3,258	$	11,091	$	8,552
Per Boe	$	0.81	$	1.03	$	0.83	$	1.09

Tourmaline uses the fair value method for the determination of non-cash related share-based payments expense. During the third quarter of 2012, 75,000 stock options were granted to employees, officers, directors and key consultants at a weighted-average exercise price of $28.92, and 579,291 options were exercised, bringing $6.6 million of cash into treasury. The Company recognized $3.6 million of share-based payment expense in the third quarter of 2012 compared to $3.3 million in the third quarter of 2011. Capitalized share-based payment expense for the third quarter of 2012 was $3.6 million compared to $3.3 million for the same quarter of the prior year.

For the nine months ended September 30, 2012, share-based expense totalled $11.1 million and capitalized share-based payments were $11.1 million (2011 - $8.6 million and $8.6 million, respectively). The increase in share-based payment expense in 2012 compared to 2011 reflects the increased number of employees due to increased activity.

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

	Three Months Ended				Nine Months Ended
($000s, except per unit amounts)		September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
Depletion, depreciation and amortization	$	58,733	$	48,059	$	176,530	$	116,928
Per Boe	$	13.25	$	15.21	$	13.24	$	14.93

DD&A expense was $58.7 million for the third quarter of 2012 compared to $48.1 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 third quarter of 2012 was $13.25/Boe compared to $15.21/Boe for the third quarter of 2011.

For the nine months ended September 30, 2012, DD&A expense was $176.5 million (September 30, 2011 - $116.9 million) with an effective rate of $13.24/Boe (September 30, 2011 - $14.93/Boe). The lower DD&A rate, for both the three and nine months ended September 30, 2012 compared to the same periods of 2011, reflects strong reserve additions derived from Tourmaline's exploration and production program.

FINANCE EXPENSES

Finance expenses for the three and nine months ended September 30, 2012 totalled $3.6 million and $8.5 million, respectively, and are comprised of interest expense and accretion of provisions (September 30, 2011 - $3.0 million and $5.1 million, respectively). The increased finance expenses are largely due to higher interest expense resulting from a higher balance drawn on the credit facility in 2012.

CASH FLOW FROM OPERATIONS, FUNDS FROM OPERATIONS AND NET EARNINGS


	Three Months Ended					Nine Months Ended
		September 30, 2012		September 30, 2011	Change		September 30, 2012		September 30, 2011	Change
Cash flow from operating activities	$	66,713	$	77,622	(14)%	$	168,806	$	166,620	1%

Funds from operations ⁽²⁾	$	63,515	$	62,686	1%	$	186,472	$	168,041	11%
Funds from operations per share ^{(1) (2)}	$	0.38	$	0.40	(5)%	$	1.13	$	1.13	-%

Net earnings (loss)	$	(4,770)	$	8,688	(155)%	$	(782)	$	26,607	(103)%
Earnings (loss) per share ⁽¹⁾	$	(0.03)	$	0.06	(150)%	$	(0.00)	$	0.18	(100)%

Operating netback per Boe ⁽²⁾	$	15.68	$	21.21	(26)%	$	15.12	$	22.77	(34)%
⁽¹⁾Fully diluted ⁽²⁾ See "Non-IFRS Financial Measures"

Funds from operations for the three months ended September 30, 2012 were $63.5 million or $0.38 per diluted share compared to $62.7 million or $0.40 per diluted share for the same period of 2011. For the nine months ended September 30, 2012, funds from operations were $186.5 million or $1.13 per diluted share, which is slightly higher than the September 30, 2011 funds from operations of $168.0 million or $1.13 per diluted share. Funds from operations in 2012 reflect lower natural gas prices over 2011 offset by increased production.

The Company incurred an after-tax loss for both the three and nine months ended September 30, 2012 of $4.8 million ($0.03 per diluted share) and $0.8 million ($0.00 per diluted share), respectively, compared to earnings of $8.7 million ($0.06 per diluted share) and $26.6 million ($0.18 per diluted share), respectively, for the same periods of 2011. The after-tax loss for the first nine months of 2012, compared to 2011, reflects significantly lower realized natural gas prices, a smaller unrealized gain on financial instruments as well as the recognition of the tax effect of the flow-through common shares as the costs are incurred.

CAPITAL EXPENDITURES


	Three Months Ended				Nine Months Ended
(000s)		September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
Land and seismic	$	6,719	$	10,508	$	22,018	$	34,768
Drilling and completions		116,721		119,574		289,506		285,391
Facilities		43,333		51,081		131,489		168,413
Property acquisitions		5,867		65,894		6,841		108,642
Property dispositions		(65)		(357)		(12,633)		(7,366)
Other		2,702		2,462		8,311		6,941
Total cash capital expenditures	$	175,277	$	249,162	$	445,532	$	596,789

During the third quarter of 2012, the Company invested $175.3 million of cash consideration, net of dispositions, compared to $249.2 million for the same period of 2011. Expenditures on exploration and production were $166.8 million compared to $181.2 million for the same quarter of 2011. The lower expenditures in 2012 are a result of a reduced capital budget due to lower commodity prices realized in 2012.

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

	Nine Months Ended
	September 30, 2012
	Gross	Net
Drilled	53	45.65
Completed	53	46.78
Tied-in	33	28.69

LIQUIDITY AND CAPITAL RESOURCES

On April 4, 2012, the Company issued 1.4 million flow-through common shares at a price of $28.80 per share for total 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.

On August 30, 2012, the Company issued 4.039 million common shares at a price of $29.00 per share for total gross proceeds of $117.1 million. Subsequently, on September 19, 2012, the Underwriters exercised their over-allotment Option and purchased a further 0.6 million shares at a price of $29.00 per share for total gross proceeds of $17.4 million. The proceeds were used to temporarily reduce indebtedness, which will then be available to be redrawn and applied to fund the expansion of the 2012 exploration and production capital program from $410 million to $525 million; to fund its 2013 capital expenditure program; and to fund general corporate expenditures.

On October 9, 2012, the Company announced that it entered into a flow-through common share bought deal financing agreement. The Company will issue 1,000,000 flow-through common shares at a price of $36.90 per share for gross proceeds of $36.9 million. In addition, officers, directors and employees of Tourmaline will have the opportunity to purchase up to a maximum of 50,000 additional flow-through common shares at a price of $36.90 on a private placement basis. The proceeds will be used to temporarily reduce bank debt.

In June 2012, the Company amended and restated its bank credit facility to be a covenant-based facility rather than a borrowing base facility. This facility is a 3-year extendible revolving facility in the amount of $550 million plus a $25 million operating revolver from a syndicate of six lenders with an initial maturity date of June, 2015. The maturity date may, at the request of the Company and with the consent of the lenders, be extended on an annual basis. The facility is secured by a first ranking floating charge over all assets of the Company and its material subsidiaries. The facility can be drawn in either Canadian or U.S. funds and bears interest at the bank's prime lending rate, bankers' acceptance rates or LIBOR (for U.S. borrowings), plus applicable margins. The facility will provide the Company with greater flexibility by providing access to an additional $200 million over the previous facility.

Under the terms of the bank credit facility, Tourmaline has provided its covenant that, on a rolling four quarter basis: (i) the ratio of EBITDA to interest expense shall equal or exceed 3.5:1, (ii) the ratio of senior debt to EBITDA shall not exceed 3:1, (iii) the ratio of total debt to EBITDA shall not exceed 4:1, and (iv) the ratio of senior debt to total capitalization shall not exceed 0.5:1. As at September 30, 2012, the Company is in compliance with all debt covenants.

At September 30, 2012, Tourmaline had negative working capital of $101.6 million, after adjusting for the fair value of financial instruments (the unadjusted working capital deficiency was $98.2 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 facility. As at September 30, 2012, the Company's bank debt balance was $210.3 million (December 31, 2011 - $81.7 million), and net debt was $311.8 million (December 31, 2011 - $228.3 million).

SHARES OUTSTANDING

As at November 7, 2012, the Company has 166,971,178 common shares outstanding and 13,965,931 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)		2012		2013		2014		2015		2016 and Thereafter		Total
Operating leases	$	637	$	2,266	$	2,121	$	526	$	-	$	5,550
Flow-through obligations		-		35,953		-		-		-		35,953
Firm transportation agreements		7,246		29,693		21,609		12,171		1,058		71,777
Bank debt⁽¹⁾		-		-		-		235,382		-		235,382
	$	7,883	$	67,912	$	23,730	$	248,079	$	1,058	$	348,662

⁽¹⁾Includes interest expense at an annual rate of 3.55% being the rate applicable to outstanding bank debt at September 30, 2012.

OFF BALANCE SHEET ARRANGEMENTS

The Company has certain lease arrangements, all of which are reflected in the commitments and contractual obligations table, which were entered into in the normal course of operations. All leases have been treated as operating leases whereby the lease payments are included in operating expenses or general and administrative expenses depending on the nature of the lease.

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 September 30, 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. Such financial derivative 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 (loss) and comprehensive income (loss). The contracts that the Company has entered into in the first nine months of 2012 are detailed in note 3 of the Company's interim condensed consolidated financial statements for the three and nine months ended September 30, 2012.

The following table provides a summary of the unrealized gains and losses on financial instruments for the three and nine months ended September 30, 2012:

	Three Months Ended				Nine Months Ended
(000s)		September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
Unrealized gain (loss) on financial instruments	$	(3,551)	$	5,139	$	1,426	$	5,510
Unrealized (loss) on investments held for trading		-		(64)		(103)		(150)
Total	$	(3,551)	$	5,075	$	1,323	$	5,360

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 and nine months ended September 30, 2012.

SUBSEQUENT EVENTS

On October 23, 2012, Tourmaline entered in to an agreement with Huron Energy Corp. ("Huron"), a private corporation, pursuant to which Tourmaline will acquire all of the issued and outstanding shares of Huron on the basis of 0.07644 of a Tourmaline common share for each Huron common share. It is expected that Tourmaline will issue an aggregate of approximately 7.4 million common shares as part of the arrangement, which is expected to close on November 30, 2012. The deal is subject to approval by the Huron shareholders. It is estimated that the acquisition will add approximately 5,500 boepd of production.

On November 7, 2012, Tourmaline closed an acquisition of a producing oil and gas asset, which is estimated to add approximately 3,000 boepd of production, for cash consideration of $84.1 million.

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 year ended December 31, 2011.

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 June 30, 2012 and ending on September 30, 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.


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

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 became effective on July 1, 2012.

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, the aforementioned non-IFRS financial measures 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:


	Three Months Ended				Nine Months Ended
(000s)		September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
Cash flow from operating activities	$	66,713	$	77,622	$	168,806	$	166,620
Change in non-cash working capital		(3,198)		(14,936)		17,666		1,421
Funds from operations	$	63,515	$	62,686	$	186,472	$	168,041

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:


	Three Months Ended				Nine Months Ended
($/Boe)		September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
Revenue, excluding processing income	$	23.04	$	31.67	$	23.01	$	32.57
Royalties		(1.72)		(2.63)		(1.46)		(2.05)
Transportation costs		(1.97)		(2.06)		(1.87)		(1.99)
Operating expenses		(3.66)		(5.77)		(4.56)		(5.76)
Operating netback ⁽¹⁾	$	15.68	$	21.21	$	15.12	$	22.77

⁽¹⁾ May not add due to rounding.

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, 2012		As at December 31, 2011
Working capital (deficit)	$	(98,184)	$	(146,317)
Fair value of financial instruments - short-term (asset) liability		(3,393)		(276)
Working capital (deficit) (adjusted for the fair value of financial instruments)	$	(101,577)	$	(146,593)

Net Debt

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


(000s)		As at September 30, 2012		As at December 31, 2011
Bank debt	$	(210,270)	$	(81,749)
Working capital (deficit)		(98,184)		(146,317)
Fair value of financial instruments - short-term (asset) liability		(3,393)		(276)
Net debt	$	(311,847)	$	(228,342)

SELECTED QUARTERLY INFORMATION


		2012			2011				2010
($000s, unless otherwise noted)		Q3	Q2	Q1	Q4	Q3	Q2	Q1	Q4
PRODUCTION
Crude oil and NGL(bbls)		515,157	596,992	515,408	415,074	316,890	272,184	217,121	236,502
Gas (mcf)		23,501,484	24,276,149	22,430,621	18,437,079	17,058,132	13,798,653	11,283,617	11,251,067
Oil equivalent (Boe)		4,432,071	4,643,016	4,253,845	3,487,920	3,159,912	2,571,959	2,097,724	2,111,680
Crude oil and NGL (bbls/d)		5,600	6,560	5,664	4,512	3,444	2,991	2,412	2,571
Gas (mcf/d)		255,451	266,771	246,490	200,403	185,414	151,634	125,374	122,294
Oil equivalent (Boe/d)		48,175	51,022	46,746	37,912	34,347	28,263	23,308	22,953
FINANCIAL
Gross revenue, net of royalties		91,863	105,567	94,781	98,309	98,225	87,551	62,019	63,340
Cash flow from operating activities		66,713	42,566	59,527	61,801	77,622	42,112	46,886	46,109
Funds from operations ⁽¹⁾		63,515	61,121	61,836	73,311	62,686	60,415	44,940	44,940
	Per diluted share	0.38	0.37	0.38	0.45	0.40	0.41	0.32	0.34
Net earnings (loss)		(4,770)	1,012	2,976	16,074	8,688	15,192	2,727	5,865
	Per basic share	(0.03)	0.01	0.02	0.10	0.06	0.11	0.02	0.05
	Per diluted share	(0.03)	0.01	0.02	0.10	0.06	0.10	0.02	0.04
Total assets		2,992,552	2,862,502	2,878,261	2,711,024	2,517,607	2,030,285	1,936,836	1,816,043
Working capital		(98,184)	(15,311)	(176,029)	(146,317)	(120,080)	(31,963)	(139,138)	(49,642)
Working capital (adjusted for the fair value of financial instruments)⁽¹⁾		(101,577)	(19,809)	(175,696)	(146,593)	(123,858)	(31,592)	(136,933)	(49,170)
Capital expenditures		175,277	53,831	216,424	232,167	249,162	130,075	217,553	217,064
Total outstanding shares (000s)		165,678	160,459	158,807	158,578	151,906	145,215	138,124	136,191
PER UNIT
Gas ($/mcf)		2.52	2.23	2.54	3.76	4.25	4.38	4.48	4.17
Crude oil and NGL ($/bbl)		83.34	77.75	91.48	93.05	87.01	95.54	83.00	75.94
Revenue ($/Boe)		23.04	21.64	24.48	30.95	31.67	33.61	32.68	30.74
Operating netback ($/Boe) ⁽¹⁾		15.68	14.22	15.52	21.39	21.21	24.52	22.99	22.66

⁽¹⁾See Non-IFRS Financial Measures.

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 48,646 Boe per day in the first nine months of 2012. 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, with the largest declines occurring in 2012. The Company's cash flows from operating activities were $143.3 million in 2010, $228.4 million in 2011, and 2012 estimated cash flows (based on the first nine months annualized) are $225.1 million. The 2012 estimated cash flows reflect the effects of the lower realized natural gas prices in 2012. 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 FINANCIAL POSITION

(000s) (unaudited)		September 30, 2012		December 31, 2011
Assets
Current assets:
	Accounts receivable	$	47,747	$	60,799
	Prepaid expenses and deposits		5,074		5,313
	Fair value of financial instruments (note 3)		3,393		276
			56,214		66,388
Investments			-		233
Exploration and evaluation assets (note 4)			639,590		620,515
Property, plant and equipment (note 5)			2,296,748		2,023,888
		$	2,992,552	$	2,711,024
Liabilities and Shareholders' Equity
Current liabilities:
	Accounts payable and accrued liabilities	$	154,398	$	212,705
			154,398		212,705
Bank debt (note 7)			210,270		81,749
Decommissioning obligations (note 6)			55,039		50,463
Long-term obligation			8,070		10,864
Fair value of financial instruments (note 3)			1,765		74
Deferred premium on flow-through shares			7,576		11,316
Deferred taxes			125,643		107,977
Shareholders' equity:
	Share capital (note 9)		2,316,436		2,140,660
	Non-controlling interest (note 8)		16,021		15,079
	Contributed surplus		65,755		47,776
	Retained earnings		31,579		32,361
			2,429,791		2,235,876
		$	2,992,552	$	2,711,024

Commitments (note 12)
Subsequent events (notes 3 and 13)
See accompanying notes to the interim condensed consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

		Three Months Ended				Nine Months Ended
(000s) except per-share amounts (unaudited)		September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
Revenue:
	Oil and natural gas sales	$	99,817	$	94,299	$	294,914	$	241,285
	Royalties		(7,641)		(8,313)		(19,511)		(16,043)
			92,176		85,986		275,403		225,242
	Realized gain on financial instruments		2,310		5,769		11,812		13,763
	Unrealized gain (loss) on financial instruments (note 3)		(3,551)		5,075		1,323		5,360
	Other income		928		1,395		3,673		3,430
			91,863		98,225		292,211		247,795
Expenses:
	Operating		16,236		18,239		60,736		45,101
	Transportation		8,737		6,503		24,896		15,586
	General and administration		3,498		2,976		10,544		8,624
	Share-based payments		3,575		3,258		11,091		8,552
	(Gain) loss on divestitures		(324)		-		(7,596)		3,630
	Depletion, depreciation and amortization		58,733		48,059		176,530		116,928
			90,455		79,035		276,201		198,421
Results from Operating Activities			1,408		19,190		16,010		49,374
Finance expenses			3,596		3,048		8,532		5,081
Income (loss) before taxes			(2,188)		16,142		7,478		44,293
Deferred taxes			2,363		7,275		7,318		17,061
Net income (loss) and comprehensive income (loss) for the period before non-controlling interest			(4,551)		8,867		160		27,232
Net income (loss) and comprehensive income (loss) attributable to:
	Shareholders of the Company		(4,770)		8,688		(782)		26,607
	Non-controlling interest (note 8)		219		179		942		625
		$	(4,551)	$	8,867	$	160	$	27,232

Net income (loss) per share attributable to common shareholders (note 10)
	Basic	$	(0.03)	$	0.06	$	(0.00)	$	0.19
	Diluted	$	(0.03)	$	0.06	$	(0.00)	$	0.18

See accompanying notes to the interim condensed consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(000s) except per-share amounts (unaudited)
		Share Capital		Contributed Surplus		Retained Earnings		Non- Controlling Interest		Total Equity
Balance at December 31, 2011	$	2,140,660	$	47,776	$	32,361	$	15,079	$	2,235,876
Issue of common shares (note 9)		166,398		-		-		-		166,398
Share issue costs, net of tax		(5,701)		-		-		-		(5,701)
Share-based payments		-		11,091		-		-		11,091
Capitalized share-based payments		-		11,091		-		-		11,091
Options exercised (note 9)	-	15,079		(4,203)		-		-		10,876
Loss attributable to common shareholders		-		-		(782)		-		(782)
Income attributable to non-controlling interest		-		-		-		942		942
Balance at September 30, 2012	$	2,316,436	$	65,755	$	31,579	$	16,021	$	2,429,791

(000s) except per-share amounts (unaudited)
		Share Capital		Contributed Surplus		Retained Earnings (Deficit)		Non- Controlling Interest		Total Equity
Balance at December 31, 2010	$	1,508,052	$	29,262	$	(10,320)	$	13,909	$	1,540,903
Issue of common shares		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		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

See accompanying notes to the interim condensed consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOW


			Three Months Ended				Nine Months Ended
(000s) (unaudited)			September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
Cash provided by (used in):
Operations:
	Net income (loss)		$	(4,770)	$	8,688	$	(782)	$	26,607
	Items not involving cash:
		Depletion and depreciation		58,733		48,059		176,530		116,928
		Accretion		325		335		940		1,009
		Share-based payments		3,575		3,258		11,091		8,552
		Deferred taxes		2,363		7,275		7,318		17,061
		Unrealized (gain) loss on financial instruments (note 3)		3,551		(5,075)		(1,323)		(5,360)
		Realized (gain) on sale of investments		-		-		(38)		-
		(Gain) loss on divestitures		(324)		-		(7,596)		3,630
		Non-controlling interest		219		179		942		625
Decommissioning expenditures				(157)		(33)		(610)		(1,011)
Changes in non-cash operating working capital				3,198		14,936		(17,666)		(1,421)
				66,713		77,622		168,806		166,620
Financing:
	Issue of common shares			141,170		3,862		185,783		230,846
	Share issue costs			(5,457)		(529)		(7,602)		(10,583)
	Increase (decrease) in bank debt			(104,788)		95,705		128,521		140,150
				30,925		99,038		306,702		360,413
Investing:
	Exploration and evaluation			(25,890)		(56,396)		(59,921)		(164,324)
	Property, plant and equipment			(143,585)		(127,229)		(391,403)		(331,189)
	Property acquisitions			(5,867)		(65,894)		(6,841)		(108,642)
	Proceeds from divestitures			65		357		12,633		7,366
	Proceeds from sale of investments			-		-		168		338
	Repayment of long-term obligation			(931)		(931)		(2,794)		(2,794)
	Changes in non-cash investing working capital			78,570		73,433		(27,350)		7,052
				(97,638)		(176,660)		(475,508)		(592,193)
Changes in cash				-		-		-		(65,160)
Cash, beginning of period				-		-		-		65,160
Cash, end of period			$	-	$	-	$	-	$	-

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 and nine months ended September 30, 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. 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 November 7, 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.

3. FINANCIAL RISK MANAGEMENT

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 September 30, 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 (loss) and comprehensive income (loss).

The Company has entered into the following financial derivative contracts since December 31, 2011 to September 30, 2012:


Financial Swaps:
Type of Contract	Quantity	Time Period	Contract Price	Fair Value
Financial Swap	100 bbls/d	July 2012 - June 2013	USD$100.10/bbl	176
Financial Swap	100 bbls/d	August 2012 - July 2013	USD$101.10/bbl	225
Financial Swap	100 bbls/d	August 2012 - December 2013	USD$100.60/bbl	318
Financial Swap	100 bbls/d	January 2013 - December 2013	USD$101.05/bbl	263
Financial Swap	100 bbls/d	July 2012 - March 2013	USD$103.30/bbl	180
Financial Swap	100 bbls/d	January 2013 - December 2013	USD$101.45/bbl	277
Financial Swap	100 bbls/d	January 2013 - December 2013	USD$103.40/bbl	347
Financial Swap	100 bbls/d	January 2013 - December 2013	USD$99.35/bbl	202


Financial Swaps/Swaptions:
Type of Contract	Quantity	Time Period	Contract Price	Fair Value
Financial Swap⁽¹⁾	400 bbls/d	April 2012 - December 2012	USD$109.00/bbl	588
Swaption⁽¹⁾	400 bbls/d	January 2013 - December 2013	USD$108.00/bbl	(150)
Financial Swap⁽²⁾	100 bbls/d	July 2013 - December 2013	USD$99.00/bbl	100
Swaption⁽²⁾	100 bbls/d	January 2014 - December 2014	USD$100.00/bbl	(225)
Financial Swap⁽²⁾	100 bbls/d	July 2013 - December 2013	USD$97.50/bbl	136
Swaption⁽²⁾	100 bbls/d	January 2014 - December 2014	USD$100.00/bbl	(225)
Financial Swap⁽²⁾	100 bbls/d	July 2013 - December 2013	USD$103.75/bbl	185
Swaption⁽²⁾	100 bbls/d	January 2014 - December 2014	USD$100.00/bbl	(225)
Financial Swap⁽²⁾	100 bbls/d	January 2013 - December 2013	USD$103.00/bbl	333
Swaption⁽²⁾	100 bbls/d	January 2014 - December 2014	USD$100.00/bbl	(225)
Financial Swap⁽³⁾	10,000 MMbtu/d	January 2013 - December 2013	USD$4.15/MMbtu	1,095
Swaption⁽³⁾	10,000 Mmbtu/d	January 2014 - December 2014	USD$4.15/MMbtu	(1,590)

⁽¹⁾ This is a combined transaction (European swaption) whereby the Company provided the option to extend an oil swap into 2013 to realize a higher price on an oil swap in 2012. The option to extend can only be exercised on December 31, 2012.
⁽²⁾ This is a combined transaction (European swaption) whereby the Company provided the option to extend an oil swap into 2014 to realize a higher price on an oil swap in 2013. The option to extend can only be exercised on December 31, 2013.
⁽³⁾ This is a combined transaction (European swaption) whereby the Company provided the option to extend a gas swap into 2014 to realize a higher price on a gas swap in 2013. The option to extend can only be exercised on December 23, 2013.

No financial derivative contracts were entered into subsequent to September 30, 2012.

As at September 30, 2012, if the future strip prices for oil were $1.00 per bbl higher and prices for natural gas were $0.10 per mcf higher, with all other variables held constant, before-tax earnings would have been $1.5 million (September 30, 2011 - $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 if oil prices were $1.00 per bbl lower and gas prices were $0.10 per mcf 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.

On May 29, 2012, the Company entered into an interest rate swap. The following table outlines the realized and unrealized losses on the interest rate contract recorded on the consolidated statement of income (loss) and comprehensive income (loss) for the three and nine months ended September 30, 2012:

(000s)

Term

Type
(Floating
to Fixed)

Amount

Company
Fixed Interest
Rate (%)

Counter Party
Floating Rate
Index

Three Months Ended
September 30, 2012

Nine Months Ended
September 30, 2012

Realized
(Loss)

Unrealized
Gain

Realized
(Loss)

Unrealized
(Loss)

May 29, 2012-
May 29, 2014

Swap

$150,000

1.35%

Floating Rate

(49)

240

(65)

(367)

The following table provides a summary of the unrealized gains (losses) on financial instruments for the three and nine months ended September 30, 2012 and 2011:


	Three Months Ended				Nine Months Ended
(000s)		September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
Unrealized gain (loss) on financial instruments	$	(3,551)	$	5,139	$	1,426	$	5,510
Unrealized (loss) on investments held for trading		-		(64)		(103)		(150)
Total	$	(3,551)	$	5,075	$	1,323	$	5,360

The Company has entered into the following physical contracts since December 31, 2011 to September 30, 2012:


Type of Contract	Quantity	Time Period	Contract Price
AECO/Nymex Differential Swap	6,000 MMbtu/d⁽¹⁾	February 2012 - December 2012	Nymex less USD$0.42/MMbtu
AECO/Nymex Differential Swap	5,000 MMbtu/d	February 2012 - December 2012	Nymex less USD$0.325/MMbtu
AECO/Nymex Differential Swap	7,000 MMbtu/d	February 2012 - December 2012	Nymex less USD$0.44/MMbtu
AECO/Nymex Differential Swap	5,000 MMbtu/d	November 2012 - March 2013	Nymex less USD$0.405/MMbtu
AECO/Nymex Differential Swap	5,000 MMbtu/d	November 2012 - October 2013	Nymex less USD$0.445/MMbtu
AECO/Nymex Differential Swap	10,000 MMbtu/d	November 2012 - October 2013	Nymex less USD$0.3975/MMbtu
AECO Costless Collar	5,000 Gjs/d	July 2012 - December 2012	$1.70/GJ floor - $2.15/GJ ceiling
AECO Costless Collar	5,000 Gjs/d	July 2012 - December 2012	$1.80/GJ floor - $2.25/GJ ceiling
AECO/Nymex Differential Swap	5,000 MMbtu/d	November 2012 - December 2013	Nymex less USD$0.425/MMbtu
AECO/Nymex Differential Swap	10,000 MMbtu/d	January 2013 - December 2013	Nymex less USD$0.4575/MMbtu
AECO/Nymex Differential Swap	10,000 MMbtu/d	January 2014 - December 2014	Nymex less USD$0.415/MMbtu
AECO Fixed Price⁽²⁾	10,000 Gjs/d	January 2013 - December 2013	CAD$3.625/GJ
AECO Fixed Price Swaption⁽²⁾	15,000 Gjs/d	January 2014 - December 2014	CAD$3.50/Gj

⁽¹⁾ This is a restructuring of a previously held contract whereby the volumes, contract price and time period of the contract were amended subsequent to December 31, 2011.
⁽²⁾ This is a combined transaction (European swaption) whereby the Company provided the option to extend a gas swap into 2014 to realize a higher price on a gas swap in 2013. The option to extend can only be exercised on December 31, 2013.

The following physical contracts were entered into subsequent to September 30, 2012:


Type of Contract	Quantity	Time Period	Contract Price
AECO Fixed Price⁽¹⁾	10,000 Gjs/d	January 2013 - December 2013	CAD$3.64/Gj
AECO Fixed Price Swaption⁽¹⁾	10,000 Gjs/d	January 2014 - December 2014	CAD$3.50/Gj
AECO Fixed Price⁽²⁾	10,000 Gjs/d	April 2013 - October 2013	CAD$3.65/Gj
AECO Fixed Price Swaption⁽²⁾	10,000 Gjs/d	November 2013 - October 2014	CAD$3.80/Gj
AECO/Nymex Differential Swap	10,000 MMbtu/d	November 2012 - March 2013	Nymex less USD$0.355/MMbtu
AECO/Nymex Differential Swap	10,000 MMbtu/d	January 2013 - December 2013	Nymex less USD$0.435/MMbtu

⁽¹⁾ This is a combined transaction (European swaption) whereby the Company provided the option to extend a gas swap into 2014 to realize a higher price on a gas swap in 2013. The option to extend can only be exercised on December 31, 2013.
⁽²⁾ This is a combined transaction (European swaption) whereby the Company provided the option to extend a gas swap into 2014 to realize a higher price on a gas swap in 2013. The option to extend can only be exercised on October 31, 2013.

4. EXPLORATION AND EVALUATION ASSETS

(000s)
As at December 31, 2011		$	620,515
	Capital expenditures		64,440
	Transfers to property, plant and equipment (note 5)		(47,174)
	Acquisitions		7,538
	Divestitures		(5,729)
As at September 30, 2012		$	639,590

General and administrative expenditures for the nine months ended September 30, 2012 of $3.9 million (December 31, 2011 — $8.2 million) have been capitalized and included as exploration and evaluation assets. Non-cash share-based payment expense in the amount of $4.5 million (December 31, 2011 - $9.4 million) were also capitalized and included in exploration and evaluation assets.

5. PROPERTY, PLANT AND EQUIPMENT

Cost

(000s)
As at December 31, 2011		$	2,276,303
	Capital expenditures		397,975
	Transfers from exploration and evaluation (note 4)		47,174
	Change in decommissioning liabilities (note 6)		4,390
	Acquisitions		4,103
	Divestitures		(4,252)
As at September 30, 2012		$	2,725,693

Accumulated Depletion, Depreciation and Amortization

(000s)
As at December 31, 2011		$	252,415
	Depletion, depreciation and amortization		176,530
As at September 30, 2012		$	428,945

Net Book Value

(000s)
As at December 31, 2011	$	2,023,888
As at September 30, 2012	$	2,296,748

General and administrative expenditures for the nine months ended September 30, 2012 of $4.3 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 is non-cash share-based payment expense of $6.6 million (December 31, 2011 - $2.3 million).

Future development costs for the nine months ended September 30, 2012 of $1,674 million (December 31, 2011 - $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 $76.7 million (December 31, 2011 - $72.5 million), with some abandonments expected to commence in 2021. A risk-free rate of 2.49% (December 31, 2011 - 2.49%) and an inflation rate of 2.0% (December 31, 2011 - 2.0%) were used to calculate the fair value of the decommissioning obligations.

(000s)		Nine Months Ended September 30, 2012			Year Ended December 31, 2011
Balance, beginning of period		$	50,463	$	35,279
	Obligation incurred		4,198		6,048
	Obligation incurred on corporate acquisitions		-		2,430
	Obligation incurred on property acquisitions		192		1,845
	Obligation divested		(144)		(481)
	Obligation settled		(610)		(1,047)
	Accretion expense		940		1,315
	Change in future estimated cash outlays		-		5,074
Balance, end of period		$	55,039	$	50,463

7. BANK DEBT

In June 2012, the Company amended and restated its bank credit facility to a covenant-based facility rather than a borrowing base facility. This facility is a three-year extendible revolving facility in the amount of $550 million plus a $25 million operating revolver from a syndicate of lenders with an initial maturity date of June 2015. The maturity date may, at the request of the Company and with the consent of the lenders, be extended on an annual basis. The facility is secured by a first ranking floating charge over all assets of the Company and its material subsidiaries. The facility can be drawn in either Canadian or U.S. funds and bears interest at the bank's prime lending rate, bankers' acceptance rates or LIBOR (for U.S. borrowings), plus applicable margins, which range from 2.00 to 3.25 percent over bankers' acceptance rates depending on the Company's senior debt to EBITDA ratio.

As at September 30, 2012, Tourmaline's bank debt balance was $210.3 million (December 31, 2011 - $81.7 million). In addition, Tourmaline has outstanding letters of credit of $3.5 million (December 31, 2011 - $3.6 million), which reduce the credit available on the facility.

8. NON-CONTROLLING INTEREST

Tourmaline owns 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, 2012		Year Ended December 31, 2011
Balance, beginning of period		$	15,079	$	13,909
	Share of subsidiary's net income for the period		942		1,170
Balance, end of period		$	16,021	$	15,079

9. 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, 2012			Year Ended December 31, 2011
($000s)	Number of Shares		Amount	Number of Shares		Amount
Balance, beginning of period	158,577,586	$	2,140,660	136,191,061	$	1,508,052
For cash on public offering of common shares⁽³⁾	4,639,000		134,531	11,725,000		335,737
For cash on public offering of flow-through common shares^{(1) (2)}	1,402,000		31,867	1,361,500		44,290
For cash on private placement of flow-through common shares	-		-	1,580,000		39,658
Issued on corporate acquisitions	-		-	6,363,523		210,124
For cash on exercise of stock options	1,058,992		10,876	1,356,502		12,532
Contributed surplus on exercise of stock options	-		4,203	-		4,856
Share issue costs	-		(7,602)	-		(19,329)
Tax effect of share issue costs	-		1,901	-		4,740
Balance, end of period	165,677,578	$	2,316,436	158,577,586	$	2,140,660

⁽¹⁾ On December 1, 2011, the Company issued 1.36 million flow-through common shares at $41.00 per share for total gross proceeds of $55.8 million. The implied premium on the flow-through common shares was determined to be $11.5 million or $8.47 per share. A total of 0.16 million shares were purchased by insiders. As at September 30, 2012, the Company had spent the full committed amount. The expenditures were renounced to investors in February 2012, with an effective date of renunciation of December 31, 2011.
⁽²⁾On April 4, 2012, the Company issued 1.4 million flow-through common shares at $28.80 per share for total gross proceeds of $40.4 million. The implied premium on the flow-through common shares was determined to be $8.5 million or $6.07 per share. A total of 0.15 million shares were purchased by insiders. As at September 30, 2012, the Company has spent $4.4 million on eligible expenditures and is committed to spend the remainder of $36.0 million on qualified exploration and development expenditures by December 31, 2013. The expenditures will be renounced to investors with an effective renunciation date of December 31, 2012.
⁽³⁾On August 30, 2012, the Company issued 4.039 million common shares at a price of $29.00 per share for total gross proceeds of $117.1 million. A total of 39,000 shares were purchased by insiders. Subsequently, on September 19, 2012, the Underwriters exercised their over-allotment Option and purchased a further 0.6 million shares at a price of $29.00 per share for total gross proceeds of $17.4 million.

10. EARNINGS PER SHARE

Basic earnings-per-share was calculated as follows:


	Three Months Ended				Nine Months Ended
		September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
Net earnings (loss) for the period (000s)	$	(4,770)	$	8,688	$	(782)	$	26,607
Weighted average number of common shares - basic		162,032,270		151,044,426		160,301,308		143,230,945
Earnings (loss) per share - basic	$	(0.03)	$	0.06	$	(0.00)	$	0.19

Diluted earnings-per-share was calculated as follows:

	Three Months Ended				Nine Months Ended
		September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
Net earnings (loss) for the period (000s)	$	(4,770)	$	8,688	$	(782)	$	26,607
Weighted average number of common shares - diluted⁽¹⁾		162,032,270		157,562,227		160,301,308		148,999,440
Earnings (loss) per share - fully diluted	$	(0.03)	$	0.06	$	(0.00)	$	0.18

⁽¹⁾The diluted weighted average number of common shares for the three and nine months ended September 30, 2012 are the same as that reported for basic weighted average number of common shares as they are anti-dilutive in determining earnings-per-share.

There were 14,134,531 options excluded from the weighted-average share calculation for the nine months ended September 30, 2012 because they were anti-dilutive (September 30, 2011 - 1,640,000).

11. 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 16,567,758 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.


		Nine Months Ended
		September 30, 2012				September 30, 2011
			Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price
Stock options outstanding, beginning of period			14,213,523	$	16.82		11,997,000	$	12.24
	Granted		980,000		23.57		1,730,000		28.74
	Exercised		(1,058,992)		10.27		(946,502)		9.94
	Forfeited		-		-		(179,999)		13.64
Stock options outstanding, end of period			14,134,531	$	17.78		12,600,499	$	14.66

The following table summarizes stock options outstanding and exercisable at September 30, 2012:


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	2,445,051	1.15	$	7.09	2,445,051	$	7.09
$10.00 - $15.00	4,349,790	1.96		12.86	3,463,123		12.31
$16.68 - $32.78	7,339,690	3.67		24.25	2,179,333		21.00
	14,134,531	2.68	$	17.78	8,087,507	$	13.07

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


		September 30, 2012		September 30, 2011
Fair value of options granted (weighted average)	$	8.11	$	10.92
Risk-free interest rate		2.38%		2.12%
Estimated hold period prior to exercise		4 years		5 years
Expected volatility		40%		40%
Forfeiture rate		2%		2%
Dividend per share	$	0.00	$	0.00

12. COMMITMENTS

On April 4, 2012, the Company issued 1.4 million common shares on a flow-through basis at a price of $28.80 per share for gross proceeds of $40.4 million. As of September 30, 2012, the Company has spent $4.4 million on eligible expenditures and is committed to spend the remaining $36.0 million before December 31, 2013.

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)		2012		2013		2014		2015		2016 and Thereafter		Total
Operating leases	$	637	$	2,266	$	2,121	$	526	$	-	$	5,550
Flow-through obligations		-		35,953		-		-		-		35,953
Firm transportation agreements		7,246		29,693		21,609		12,171		1,058		71,777
Bank debt⁽¹⁾		-		-		-		235,382		-		235,382
	$	7,883	$	67,912	$	23,730	$	248,079	$	1,058	$	348,662

⁽¹⁾ Includes interest expense at an annual rate of 3.55% being the rate applicable at September 30, 2012.

13. SUBSEQUENT EVENTS

The acquisition will be accounted for under IFRS 3, "Business Combinations", by the acquisition method based on the fair value of the assets acquired. The initial accounting for the business combination is incomplete as the Company is in the process of evaluating the fair value of the assets acquired under IFRS in order to complete the purchase price equation for recognition, measurement and presentation in the Company's financial results for the year ended December 31, 2012.

On November 7, 2012, Tourmaline closed an acquisition of a producing oil and gas asset for a cash purchase price of $84.1 million.

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 Corp.

Tourmaline Oil Corp.
Michael Rose
Chairman, President and Chief Executive Officer
(403) 266-5992

Tourmaline Oil Corp.
Brian Robinson
Vice President, Finance and Chief Financial Officer
(403) 767-3587; [email protected]

Tourmaline Oil Corp.
Scott Kirker
Secretary and General Counsel
(403) 767-3593; [email protected]

Tourmaline Oil Corp.
Suite 3700, 250 - 6th Avenue S.W.
Calgary, Alberta T2P 3H7
Phone: (403) 266-5992
Facsimile: (403) 266-5952
Website: www.tourmalineoil.com

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