Tourmaline Oil Corp.
TSX : TOU

Tourmaline Oil Corp.

May 27, 2011 00:45 ET

Tourmaline Oil Corp. Announces Q1 Results

CALGARY, ALBERTA--(Marketwire - May 27, 2011) - Tourmaline Oil Corp. (TSX:TOU) ("Tourmaline" or the "Company") is pleased to announce results for the three months ended March 31, 2011 and provide an update on its 2011 financial outlook and EP program. The results will be discussed on a conference call to be held Friday, May 27th at 10:00 am MT. Dial in numbers are (416) 340-8530 or (877) 240-9772.

PRODUCTION

First quarter production averaged 23,308 boepd, a 101% increase over first quarter 2010 production of 11,625 boepd. During the first two weeks of April, the completion and start-up of the major facility projects at Minehead, AB and Dawson, BC grew daily production to the 30,000 boepd level. The Company now expects to average 29,000 boepd during the second quarter of 2011 - an increase from original expected production levels of 27,825 boepd. Tourmaline is also increasing full-year production guidance to 29,000 boepd (31,125 assuming closing of the Cinch acquisition) from original guidance of 27,675 boepd. Year-over-year production growth for 2011 is now expected to exceed 55%. Second quarter 2011 production has been affected by unscheduled downtime at Berland River (compressor and power issues at a non-operated plant), Gordondale (Spectra plant servicing Spirit River) and TCPL maintenance at several locations. This downtime of approximately 1,000 boepd has been factored into the upward revised Q2 guidance of 29,000 boepd. The Company expects to tie-in approximately 45 new wells throughout the EP property portfolio by year-end 2011.

Q1 2011 EP HIGHLIGHTS

The Company had a very successful first quarter 2011 EP program. Highlights include:

- 20 gas wells, 2 oil wells, 3 successful recompletions and no dry holes.

- Three high deliverability new pool wildcat vertical discoveries on the western portion of the Deep Basin complex that production tested, as previously announced, between 7 and 14 mmcfpd. The Company has identified over 150, 3D seismic defined, follow-up locations along this new play trend.

- An additional three high rate oil horizontals at Spirit River, AB.

- Construction of major facility projects at Minehead, AB and Dawson, BC, with project completion and start-up during the first half of April.

- Multiple high-deliverability, liquid-rich horizontal wells in the Deep Basin at Cardium, Wilrich and Falher levels, leading to an expansion of the Deep Basin horizontal program.

SECOND HALF 2011 EP PROGRAM

The 2011 capital budget has been increased to $450 million ($470 million assuming closing of the Cinch acquisition). The Company is planning to operate 8 drilling rigs after spring break-up, which are expected to drill approximately 55 wells through the balance of the year. These rigs will continue operating through the winter and to spring break-up 2012. Major second half 2011 drilling programs include Dawson-Sunrise, BC (approximately 16 horizontal wells), Musreau-Kakwa, AB (6 wells), Spirit River, AB (5 horizontal wells), Ansel-Minehead, AB (10 wells, including 6 horizontals). A major facility expansion at Dawson-Sunrise, BC and a new gas plant at Musreau, AB are the main second half infrastructure projects.

The second half 2011 and 2012 capital programs will also pursue several new opportunities on existing lands in the current core EP areas. These include:

- The Resthaven-Kakwa Montney play where Tourmaline controls 110 sections of prospective Montney rights.

- The Resthaven-Smoky-Wroe Wilrich play where the Company has approximately 120 potential horizontal locations identified thus far.

- An expansion of the Company's Deep Basin play area to the south, in the Lovett-Hanlan area, where the Company has acquired 115 additional sections of land.


CORPORATE SUMMARY - FIRST QUARTER 2011

                                     3 Months Ended March 31
                                    ----------------------------------------
                                         2011           2010      % Change
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OPERATIONS

Production

 Natural gas (mcf/d)                  125,374         60,545           107%
 Crude oil & liquids                    2,412          1,534            57%
 Oil equivalent boepd                  23,308         11,625           101%

Product prices

 Natural gas ($/mcf)                    $4.48          $5.41           (17%)
 Oil & liquids                         $83.00         $78.29             6%
 Operating expenses ($/boe)             $5.77          $7.22           (20%)
 Transportation costs ($/boe)           $1.90          $1.80             6%

Operating netback ($/boe)              $22.99         $24.16            (5%)

 Cash general & administrative
  expenses ($/boe)                      $1.27          $1.66           (23%)


FINANCIAL ($000, except per share)

Revenue                                68,547         40,313            70%
Royalties                               4,229          5,593           (24%)

Funds from operations                  44,940         23,103            95%
Funds from operations per share         $0.32          $0.21            52%

Net income                              2,727            820           233%
Net income per share                    $0.02          $0.01           100%

Capital expenditures                  217,553        158,518            37%

2011 FINANCIAL OUTLOOK

The Company now forecasts full-year 2011 cash flow of $266.9 million, or $1.77 per diluted common share. Assuming the closing of the Cinch acquisition, cash flow is forecast to be $284.1 million, or $1.81 per diluted share. This compares to $273.8 million or $1.94 per diluted share forecast in December 2010 immediately after the Tourmaline IPO. The revised cash flow is primarily a function of stronger production volumes (originally forecast to be 27,675 boepd for 2011 - now forecast to be 29,000 boepd and 31,125 assuming closing of the Cinch acquisition) combined with lower natural gas prices (originally forecast to be NYMEX $4.85/mcf - now forecast to be NYMEX $4.47/mcf).

The Company's overall financial position continues to be strong. The combined effects of the recent financings and the expansion of the capital expenditure program lead to a year-end 2011 net debt forecast of $27.9 million ($60.0 million assuming closing of the Cinch acquisition), compared to a 2011 year-end net debt originally forecast immediately after the IPO to be $119.4 million.

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 both before and after giving effect to the previously announced proposed acquisition of Cinch Energy Corp., as well as Tourmaline's future drilling prospects and plans, business strategy, future development and growth opportunities, prospects, asset base and anticipated benefits from the Cinch acquisition, including accretion to Tourmaline on certain operational and financial measures and operating efficiencies. 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 and shareholder approvals; the performance of existing wells; the success obtained in drilling new wells; the sufficiency of budgeted capital expenditures in carrying out planned activities; and the availability and cost of labour and services.

Although Tourmaline believes that the expectations and assumptions on which such forward-looking information is based are reasonable, undue reliance should not be placed on the forward-looking information because Tourmaline can give no assurances that they will prove to be correct. Since forward-looking information addresses future events and conditions, by its very nature it involves inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to: the risks associated with the oil and gas industry in general such as operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of estimates and projections relating to reserves, production, costs and expenses; health, safety and environmental risks; commodity price and exchange rate fluctuations; marketing and transportation; loss of markets; environmental risks; competition; incorrect assessment of the value of acquisitions including the Cinch acquisition; failure to realize the anticipated benefits of acquisitions including the Cinch acquisition; 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. There are risks also inherent in the nature of the proposed Cinch acquisition, including failure to realize anticipated production increases and anticipated cost savings and other synergies; risks regarding the integration of Cinch into Tourmaline; incorrect assessment by Tourmaline of the value of Cinch; and failure to obtain the required shareholder, court, regulatory and other third party approvals.

Also included in this press release are estimates of Tourmaline's 2011 cash flow and cash flow per share which are based on the various assumptions as to production levels, commodity prices, capital expenditures, capital efficiency, drilling inventories and other assumptions disclosed in this press release. To the extent such estimates constitute a financial outlook, they were approved by management of Tourmaline on May 24, 2011 and are included to provide readers with an understanding of Tourmaline's anticipated cash flow based on the capital expenditures 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.

"Cash flow" 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. "Cash flow" as used in this press release has the same definition as "funds from operations" as used in the attached Management's Discussion and Analysis.

MANAGEMENT'S DISCUSSION AND ANALYSIS

This management's discussion and analysis ("MD&A") should be read in conjunction with Tourmaline's consolidated financial statements and related notes for the period ended March 31, 2011 and the consolidated financial statements for the year ended December 31, 2010. Both the consolidated financial statements and the MD&A can be found at www.sedar.com. This MD&A is dated May 24, 2011.

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

Certain financial measures referred to in this MD&A are not prescribed by IFRS and previous Canadian generally accepted accounting principles ("GAAP"). See "Non-IFRS Financial Measures" for information regarding the following Non-GAAP financial measures used in this MD&A: "funds from operations", "operating netback", "working capital (adjusted for the fair value of financial instruments and deferred taxes)" 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 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; estimated tax pool balances and anticipated IFRS elections and the impact of the conversion to IFRS. 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; completion of the financing on the timing planned and 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

Tourmaline produced 2,097,724 Boe in the first quarter of 2011, averaging 23,308 Boe/d compared to an average rate of 11,625 Boe/d during the first quarter of 2010. Production on a quarter-over-quarter basis grew as new wells were brought on-stream from the exploration and development program and significant acquisitions. The first quarter of 2011 production was 90% natural gas weighted, compared to a natural gas weighting of 87% for the first quarter of 2010.


                                                         Three Months Ended
                                                ----------------------------
                                                    March 31,      March 31,
                                                        2011           2010
----------------------------------------------------------------------------
Natural Gas (mcf)                                 11,283,617      5,449,027
Crude oil and NGL (bbl)                              217,121        138,068
Oil equivalent (boe)                               2,097,724      1,046,239
Oil equivalent (boepd)                                23,308         11,625
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REVENUE

Revenue from the sale of crude oil, natural gas and NGL for the quarter ended March 31, 2011 was $68.5 million compared to $40.3 million for the first quarter of 2010. Revenue growth for the three months ended March 31, 2011, when compared to the same period in 2010, is comprised of production increases through acquisitions and the Company's exploration and development program offset partially by weaker natural gas prices. Revenue includes all petroleum, natural gas and NGL sales and realized gains on financial instruments.

The realized average natural gas price for the first quarter of 2011 was $4.48/Mcf ($5.41/Mcf - 2010). Realized crude oil and NGL prices averaged $83.00/Bbl for the first quarter of 2011 ($78.29/Bbl - 2010). Realized prices exclude the effect of unrealized gains or losses. Once these gains and losses are realized they are included in the per unit amounts. The natural gas price for the quarter ended March 31, 2011 was 19% (10% - 2010) higher than the AECO benchmark due to a combination of higher heat content on the Company's Alberta Deep Basin natural gas production and positive commodity contracts.


Tourmaline's revenue is analyzed as follows:

                                                         Three Months Ended
                                                ----------------------------
(000s)                                              March 31,      March 31,
                                                        2011           2010
----------------------------------------------------------------------------
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Revenue from:
 Natural Gas                                      $   50,527     $   29,503
 Oil and NGL                                          18,020         10,810
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Total revenue from oil, NGL and gas sales         $   68,547     $   40,313
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TOURMALINE PRICES:

                                                         Three Months Ended
                                                ----------------------------
                                                    March 31,      March 31,
                                                        2011           2010
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Natural Gas ($/Mcf)                               $     4.48     $     5.41
Oil and NGL ($/Bbl)                               $    83.00     $    78.29
Oil equivalent ($/Boe)                            $    32.68     $    38.53
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BENCHMARK OIL AND GAS PRICES:

                                                        Three Months Ended
                                                ----------------------------
                                                    March 31,      March 31,
                                                        2011           2010
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Natural Gas
 NYMEX Henry Hub (US$/mcf)                        $     4.20     $     5.09
 AECO (Cdn$/mcf)                                  $     3.77     $     4.92
Oil
 NYMEX (US$/bbl)                                  $    94.60     $    78.68
 Edmonton Par (Cdn$/bbl)                          $    88.65     $    81.02
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RECONCILIATION OF AECO INDEX TO TOURMALINE'S REALIZED GAS PRICES:

                                                         Three Months Ended
                                                ----------------------------
                                                    March 31,      March 31,
($/mcf)                                                 2011           2010
----------------------------------------------------------------------------
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AECO index                                        $     3.77     $     4.92
Heat/quality differential                               0.24           0.26
Realized gain                                           0.47           0.23
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Tourmaline realized natural gas price             $     4.48     $     5.41
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CURRENCY - EXCHANGE RATES:

                                                         Three Months Ended
                                                ----------------------------
                                                    March 31,      March 31,
                                                        2011           2010
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Cdn/US$                                           $   1.0145     $   0.9613
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ROYALTIES

Tourmaline's royalties are analyzed as follows:

                                                         Three Months Ended
                                                ----------------------------
(000s)                                              March 31,      March 31,
                                                        2011           2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Natural Gas                                       $    1,440     $    2,731
Oil and NGL                                       $    2,789     $    2,862
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Total royalties                                   $    4,229     $    5,593
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For the period ended March 31, 2011, the average effective royalty rate was 6.2%, compared to 13.9% for the period ending March 31, 2010. The Company benefited from government incentive programs including the Natural Gas Deep Drilling Program and the New Well Royalty Reduction Program.

OTHER INCOME

For the quarter ended March 31, 2011, other income was $0.5 million compared to $0.2 million for the same quarter in 2010. Tourmaline built and acquired interests in facilities over 2010, which helped generate third party processing income. The increase is due to an increase in processing income.

OPERATING EXPENSES

Operating expenses include all periodic lease and field level expenses and exclude income recoveries from processing third party volumes. Operating expenses for the quarter ended March 31, 2011 were $12.1 million or $5.77/Boe, compared to $7.6 million or $7.22/Boe for the same quarter in 2010. Tourmaline's operating expenses in the first quarter of 2011 include third party processing, gathering and compression fees of approximately $4.5 million or 37.3% of total operating costs.

The Company has identified a number of opportunities to reduce per unit operating costs and expects to achieve further reductions throughout 2011 as higher-productivity wells are brought on-stream and a greater percentage of Tourmaline's production base is redirected through Company owned-and-operated natural gas processing facilities.

GENERAL & ADMINISTRATIVE EXPENSES

During the first quarter of 2011, G&A expenses of $5.2 million, including $2.6 million related to stock-based compensation expense, were incurred. The Company also capitalized direct G&A costs of $2.9 million and stock-based compensation of $2.6 million in the first quarter of 2011. Cash G&A expenses per Boe, excluding interest and financing charges, were $1.27/Boe for the first quarter of 2011, compared to $1.66/Boe for the same quarter in 2010 as unit efficiencies continue to be realized from a larger production base. The Company expects this trend of reducing G&A per Boe to continue into 2011 as production volumes grow more rapidly than the associated overhead costs.


G&A expenses are summarized as follows:

                                                         Three Months Ended
                                                ----------------------------
(000s)                                              March 31,      March 31,
                                                        2011           2010
----------------------------------------------------------------------------
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G&A expenses                                      $    5,607     $    4,015
Administrative and capital recovery                     (808)          (746)
Capitalized G&A                                       (2,130)        (1,530)
Stock-based compensation                               5,140          3,968
Capitalized stock-based compensation                  (2,570)        (1,984)
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Total G&A                                         $    5,239     $    3,723
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STOCK-BASED COMPENSATION

Tourmaline uses the fair value method for the determination of all non-cash related stock-based compensation. During the first quarter of 2011, 350,000 stock options were granted to employees, officers, directors and key consultants with exercise prices ranging from $22.27 to $25.38, and 353,334 options were exercised, bringing $2.9 million cash into treasury. The Company recognized $2.6 million of stock-based compensation expense in the quarter compared to $2.0 million in the first quarter of 2010.

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

DD&A expense was $30.3 million for the first quarter of 2011 compared to $15.7 million for the same period in 2010 due to higher production volumes. The per-unit DD&A rate for the first quarter was $14.45/Boe compared to $15.01/Boe for the first quarter of 2010. The DD&A rate per Boe in the current year is trending downward due to the nature and size of the acquisitions completed by the Company and recent drilling results.

CASH FLOW FROM OPERATIONS, FUNDS FROM OPERATIONS AND NET EARNINGS

Funds from operations for the first quarter of 2011 were $44.9 million or $0.32 per diluted share. The Company had after tax earnings of $2.7 million ($0.02 per diluted share) for the period ended March 31, 2011, compared to after tax earnings of $0.8 million (earnings of $0.01 per diluted share) in the previous period.


                                                         Three Months Ended
                                                ----------------------------
                                                    March 31,      March 31,
                                                        2011           2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash flow from operations per share (1)           $     0.33     $     0.19
Funds from operations per share (1) (2)           $     0.32     $     0.21
Earnings/(loss) per share (1)                     $     0.02     $     0.01
Operating netback per boe (2)                     $    22.99     $    24.16
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(1) Fully diluted
(2) See "Non-IFRS Financial Measures"

CAPITAL EXPENDITURES

During the three months ended March 31, 2011, the Company invested $217.6 million of cash consideration compared to $158.5 million for the same period in 2010. Expenditures on exploration and production in the first quarter of 2011 were $209.0 million compared to $112.5 million in the same quarter of 2010, which is consistent with the Company's aggressive growth strategy. The Company drilled 18 gross (16.1 net) wells, completed 26 gross (22.1 net) wells and tied-in 29 gross (26.4 net) wells. Drilling, completing, equipping and related facilities costs totalled $204.2 million and land and seismic costs were $4.8 million for the first quarter of 2011. The Company also made minor property acquisitions of $14.8 million in the Alberta Deep Basin and disposed of a non-core producing property in the first quarter of 2011, for proceeds of $7.0 million.


                                                         Three Months Ended
                                                ----------------------------
(000s)                                              March 31,      March 31,
                                                        2011           2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Land and seismic                                  $    4,814     $    7,774
Drilling and completions                             131,470         77,884
Facilities                                            72,763         26,814
Property acquisitions                                 14,776         43,737
Corporate acquisitions                                     -          3,156
Property dispositions                                 (7,008)        (2,000)
Other                                                    738          1,153
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Total                                             $  217,553     $  158,518
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LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2011, Tourmaline had negative working capital of $136.9 million, after adjusting for the fair value of financial instruments and deferred taxes (the unadjusted working capital deficiency was $139.1 million). Management believes the Company has sufficient liquidity and capital resources to fund its 2011 exploration and development program through expected cash flow from operations and its unutilized bank credit facilities.

On March 8, 2011, Tourmaline closed a private placement equity financing for gross proceeds of approximately $47.4 million. The transaction included the issuance of 1.58 million flow-through common shares at $30.00 per share. The net proceeds of approximately $45.6 million will be utilized to acquire properties and to conduct the Company's 2011 exploration and development program.

The Company has a credit facility with two Canadian chartered banks for an extendible revolving term loan in the amount of $165 million, in addition to a $25 million operating line. The facility bears interest on a variable grid currently 250 basis points over the prevailing banker's acceptance rate. Security for the facility includes a general security agreement and a $500 million demand loan debenture secured by a first floating charge over all assets. On July 31, 2011, at the Company's discretion, the facility is available on a non-revolving basis for a period of 365 days, at which time the facility would be due and payable. Alternatively, the facility may be extended for a further 364-day period at the request of the Company and subject to approval by the banks.

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

The Company is required to meet certain financial-based covenants to maintain the facilities. The financial covenants include a requirement to ensure the total amount drawn on the facility does not exceed the total borrowing base as defined in each facility's agreement, and that the ratio of earnings adjusted for interest, taxes and other non-cash items to interest expense does not exceed a predetermined amount, as determined by each facility's agreement. As at March 31, 2011, the Company was in compliance with these covenants.

As at March 31, 2011, the Company had $37.6 million drawn on existing facilities (March 31, 2010 - nil).

SHARES OUTSTANDING

As at May 24, 2011 the Company has 145,050,395 common shares outstanding and 11,743,667 million stock options granted and outstanding.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

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


Payments Due by Year
(000s)                      2011       2012       2013       2014      2015
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Operating leases        $  1,761   $  2,120   $  1,758   $  1,614   $   404
Flow-through
 obligations                   -     47,400          -          -         -
Firm transportation
 agreements               16,870     20,073     17,865     10,005     6,824
Bank debt                 37,635          -          -          -         -
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                        $ 56,266   $ 69,593   $ 19,623   $ 11,619   $ 7,228
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FINANCIAL RISK MANAGEMENT

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

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

(a) Credit risk:

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's receivables from joint venture partners and petroleum and natural gas marketers. As at March 31, 2011 Tourmaline's receivables consisted of $19.4 million (December 31, 2010 - $21.1 million) from joint venture partners, $26.4 million (December 31, 2010 - $23.6 million) from petroleum and natural gas marketers and $12.6 million (December 31, 2010 - $13.9 million) from provincial governments. As of May 24, 2011, $48.6 million of the outstanding accounts receivable at March 31, 2011 has been collected.

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

The Company monitors the age of and investigates issues behind its receivables that have been past due for over 90 days. At March 31, 2011 the Company had $0.8 million (December 31, 2010 - $1.0 million) over 90 days. The Company is satisfied that these amounts are substantially collectible.

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

(b) Liquidity risk:

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

The Company's accounts payable and accrued liabilities balance at March 31, 2011 is approximately $199.5 million (December 31, 2010 - $178.1 million). It is the Company's policy to pay suppliers within 45-75 days. These terms are consistent with industry practice. As at March 31, 2011 substantially all of the account balances were less than 90 days.

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

(c) Market risk:

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

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

Currency risk has minimal impact on the value of the financial assets and liabilities on the balance sheet at March 31, 2011. Changes in the US to Canadian exchange rate, however, could influence future petroleum and natural gas prices which could impact the value of certain derivative contracts. This influence cannot be accurately quantified.

Interest rate risk had minimal impact on the Company's balance sheet at March 31, 2011 as there was a nominal average amount of cash in short-term investments and only small amounts drawn on the Company's credit facilities over the quarter.

Commodity price risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in commodity prices. As at March 31, 2011, the Company has entered into certain financial derivative and physical delivery sales contracts in order to manage commodity risk. These instruments are not used for trading or speculative purposes. The Company has not designated its financial derivative contracts as effective accounting hedges, even though the Company considers all commodity contracts to be effective economic hedges. As a result, all such commodity contracts are recorded on the balance sheet at fair value, with changes in the fair value being recognized as an unrealized gain or loss on the consolidated statement of income.


The Company has entered into the following contracts as at March 31, 2011:

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


The following contracts were entered into subsequent to March 31, 2011:

----------------------------------------------------------------------------
Type of          Quantity     Time Period                      Contract
 Contract                                                       Price
----------------------------------------------------------------------------
Financial Swap   100 bbls/d   January - December 2012          US$108.00/bbl
----------------------------------------------------------------------------

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


                                                         Three Months Ended
                                                      ----------------------
(000s)                                                  March 31,  March 31,
                                                            2011       2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Unrealized gain/(loss) on financial instruments        $  (2,751) $    (126)
Unrealized gain/(loss) on investments held for trading       (18)       154
----------------------------------------------------------------------------
Total                                                  $  (2,769) $      28
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The unrealized gain/(loss) on derivative contracts has been included on the balance sheet with changes in the fair value included in the unrealized gain/(loss) on financial instruments on the statement of income. As at March 31, 2011, if the future strip prices for oil were $1.00 per bbl higher, with all other variables held constant, before-tax earnings for the year would have been $0.4 million lower. An equal and opposite impact would have occurred to before tax earnings and the fair value of the derivative contracts asset had oil prices been $1.00 per bbl lower.

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


The Company has entered into the following physical contracts as at March
31, 2011:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Type of Contract  Quantity      Time Period                    Contract
                                                                Price
----------------------------------------------------------------------------
AECO Fixed Price  3,000 gjs/d   April 2010 - March 2011        Cdn$5.77/gj
AECO Fixed Price  2,000 gjs/d   April 2010 - March 2011        Cdn$5.72/gj
AECO Fixed Price  3,000 gjs/d   January 2011 - December 2011   Cdn$5.75/gj
AECO Fixed Price  3,000 gjs/d   January 2011 - December 2011   Cdn$5.84/gj
AECO Fixed Price  4,000 gjs/d   February 2010 - December 2011  Cdn$5.68/gj
AECO Fixed Price  2,000 gjs/d   February 2010 - December 2011  Cdn$5.72/gj
AECO Fixed Price  2,000 gjs/d   November 2010 - March 2011     Cdn$6.01/gj
AECO Fixed Price  2,000 gjs/d   March 2010 - March 2012        Cdn$5.72/gj
AECO Fixed Price  2,000 gjs/d   March 2010 - December 2011     Cdn$5.705/gj
AECO Call Option  3,000 gjs/d   January 2011 - December 2011   Cdn$6.50/gj
                                                                strike price
AECO Fixed Price  3,000 gjs/d   March 2010 - March 2011        Cdn$5.89/gj
AECO/Nymex        3,000         November 2010 - March 2011     Nymex less
 Differential      MMbtu/d                                      $0.475/MMbtu
 Swap
AECO Call Option  3,000 gjs/d   January 2011 - December 2012   Cdn$6.00/gj
                                                                strike price
AECO Fixed Price  3,000 gjs/d   January 2011 - December 2012   Cdn$5.53/gj
AECO/Nymex        5,000         November 2010 - April 2011     Nymex less
 Differential      MMbtu/d                                      $0.62/MMbtu
 Swap
AECO/Nymex        5,000         November 2010 - March 2011     Nymex less
 Differential      MMbtu/d                                      $0.485/MMbtu
 Swap
AECO/Nymex        3,000         November 2010 - March 2011     Nymex less
 Differential      MMbtu/d                                      $0.535/MMbtu
 Swap
AECO/Nymex        5,000         January 2011 - March 2011      Nymex less
 Differential      MMbtu/d                                      $0.475/MMbtu
 Swap
AECO Fixed Price  3,000 gjs/d   February 2011 - April 2012     Cdn$4.00/gj
----------------------------------------------------------------------------

(d) Capital management:

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

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

The Company monitors this ratio and endeavours to maintain it at or below 2.0 to 1.0 in a normalized commodity price environment. This ratio may increase at certain times as a result of acquisitions or low commodity prices. As shown below, as at March 31, 2011, the Company's ratio of net debt to annualized funds from operations was 0.97 to 1.0.


                                                       As at          As at
                                                    March 31,   December 31,
(000s)                                                  2011           2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net debt:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Bank debt                                         $  (37,635)    $        -
Working capital/(deficit)                           (139,138)       (49,642)
Fair value of financial instruments - short-
 term liability                                        2,205            472
----------------------------------------------------------------------------
Net debt                                          $ (174,568)    $  (49,170)
----------------------------------------------------------------------------
Annualized funds from operations:
Cash flow from operating activities               $   46,886     $  144,237
 Change in non-cash working capital                   (1,946)        (9,517)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
 First quarter funds from operations              $   44,940     $  134,720
 Annualized fund from operations                  $  179,760     $  134,720
----------------------------------------------------------------------------
 Net debt to annualized funds from operations           0.97           0.36
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

The consolidated financial statements have been prepared in accordance with IFRS. A summary of significant accounting policies is presented in the March 31, 2011 consolidated financial statements. 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 circumstance may result in actual results or changes to estimated amounts that differ materially from current estimates. The following discussion identifies the critical accounting policies and practices of the Company and helps assess the likelihood of materially different results being reported.

RESERVES

Under the National Instrument 51-101 ("NI 51-101"), "Proved" reserves are defined as those reserves that can be estimated with a high degree of certainty to be recoverable. The level of certainty should result in at least 90% probability that the quantities actually recovered will equal or exceed the estimated Proved reserves. It does not mean that there is a 90% probability that the Proved reserves will be recovered; it means there must be at least 90% probability that the given amount or more will be recovered.

"Proved-plus-probable" reserves are the most likely case and are based on a 50% certainty that they will equal or exceed the reserves estimated.

These oil and gas reserve estimates are made using all available geological and reservoir data, as well as historical production data. At January 1, 2011, all of the Company's reserves were evaluated and reported on by independent qualified reserves evaluators. However, revisions can occur as a result of various factors including: actual reservoir performance, changes in price and cost forecasts or, a change in the Company's plans. Reserve changes will impact the financial results as reserves are used in the calculation of depletion and are used to assess whether asset impairment occurs. Reserve changes also affect other non-GAAP measurements such as finding and development costs, recycle ratios and net asset value calculations.

DEPLETION AND DEPRECIATION

Depletion of the capitalized oil and natural gas properties and depreciation of production equipment which includes estimated future development costs are calculated using the unit-of-production method, based on production volumes in relation to estimated proved-plus-probable reserves.

An increase in estimated proved-plus-probable reserves would result in a reduction in depletion expense. A decrease in estimated future development costs would also result in a reduction in depletion expense.

UNPROVED PROPERTIES

The cost of acquisition and evaluation of unproved properties is initially excluded from depletion calculation. An impairment test is performed on these assets to determine whether the carrying value exceeds the fair value. Any excess in carrying value over fair value is an impairment. When proved reserves are assigned or a property is considered to be impaired, the cost of the property or the amount of the impairment will be added to the capitalized costs for the calculation of depletion.

IMPAIRMENT TESTS ON DEVELOPMENT AND PRODUCTION ASSETS

Impairment tests are cost recovery tests intended to identify and measure potential impairment of the value of assets relative to the cost of those assets as carried on the Company's balance sheet. An impairment loss on development and production assets is recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved-plus-probable reserves. The cash flows are estimated using the future product prices and costs and are discounted using market rates. By their nature, these estimates are subject to measurement uncertainty and the impact on the financial statements could be material. Any impairment will be charged to operations as additional depletion and depreciation expense.

DECOMMISSIONING OBLIGATIONS

The Company records a liability for the fair value of legal obligations associated with the retirement of petroleum and natural gas assets. The liability is equal to the discounted value of the obligation in the period in which the asset is recorded with an equal offset to the carrying amount of the asset. The liability then accretes to its fair value with the passage of time and the accretion is recognized as an expense in the consolidated financial statements. The total amount of the decommissioning liability obligation is an estimate based on the Company's net ownership interest in all wells and facilities, the estimated costs to abandon and reclaim the wells and facilities and the estimated timing of the costs to be incurred in future periods. The total amount of the estimated cash flows required to settle the decommissioning obligation, the timing of those cash flows and the discount rate used to calculate the present value of those cash flows are all estimates subject to measurement uncertainty. Any change in these estimates would impact the decommissioning liability and the accretion expense.

INCOME TAXES

The determination of income taxes and other tax liabilities requires interpretation of complex laws and regulations. All tax filings are subject to audit and potential reassessment after the lapse of considerable time. In addition, the Company estimates when its temporary differences are expected to reverse and recognizes its tax assets and liabilities based on the legislated tax rate in those periods. Accordingly, the actual income tax liability may differ significantly from that estimated and recorded by management.

STOCK-BASED COMPENSATION

The Company applies the fair value method for valuing stock option grants. This method requires the Company to make estimates of expected stock volatility, the expected hold period prior to exercising options, expected forfeitures of options and expected dividends to be declared by the Company. The calculation of the fair value of stock-based compensation is not adjusted for the value actually received by the optionees. The stock-based compensation expense will not represent the actual fair value received by the optionees as the fair value is estimated at the time of grant and is not adjusted. Due to the time period and the number of estimates involved, it is likely that the actual value of the options will differ from what has been recorded in the financial statements.

OTHER ESTIMATES

The accrual method of accounting requires management to incorporate certain estimates including estimates of revenues, royalties and operating costs as at a specific reporting date, but for which actual revenues and costs have not yet been received. In addition, estimates are made on capital projects which are in progress or recently completed where actual costs have not been received by the reporting date. The Company obtains the estimates from the individuals with the most knowledge of the activity and from all project documentation received. The estimates are reviewed for reasonableness and compared to past performance to assess the reliability of the estimates. Past estimates are compared to actual results in order to make informed decisions on future estimates.

FAIR VALUE OF FINANCIAL DERIVATIVES

Tourmaline uses financial derivatives to manage commodity price risk. The fair value of commodity price risk contracts is estimated on Tourmaline's balance sheet with changes in fair value recognized in net income for the period. The fair value of each financial instrument is based on forward prices and therefore any change in commodity prices will impact the fair value and net income for the period.

DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING

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

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

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

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

BUSINESS RISKS AND UNCERTAINTIES

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

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

IMPACT OF NEW ENVIRONMENTAL REGULATIONS

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

INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")

The Company's IFRS accounting policies are provided in note 2 to the interim consolidated financial statements. In addition, note 22 to the interim consolidated financial statements presents reconciliations between the Company's 2010 previous GAAP results and its 2010 results under IFRS. The reconciliations include the consolidated statement of financial position as at January 1, 2010, March 31, 2010 and December 31, 2010 and consolidated statements of earnings and comprehensive income and cash flows for the three months ended March 31, 2010 and year ended December 31, 2010.

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


SUMMARY STATEMENT OF FINANCIAL POSITION RECONCILIATIONS

                                  As at January 1, 2010
----------------------------------------------------------------------------
                                                    Share-
             Previous           Decommissioning     Based  Other
($000s)          GAAP      E&E       Obligation  Payments     (1)      IFRS
----------------------------------------------------------------------------
Current
 assets       248,452        -                -         -   (204)   248,248
Investments       632        -                -         -      -        632
Exploration and
 evaluation
 assets             -  250,972                -         -      -    250,972
Property, plant
 and
 equipment    754,798 (250,972)               -         -      -    503,826
Deferred taxes      -        -                -         -    138        138
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Total
 assets     1,003,882        -                -         -    (66) 1,003,816
----------------------------------------------------------------------------

Current
 liabilities   86,938        -                -         -      -     86,938
Decommissioning
 obligation     7,208        -           11,945         -      -     19,153
Deferred
 premium
 on flow-through
 shares            -         -                -         -  3,833      3,833
Deferred
 income taxes    780         -                -         -   (780)         -
Shareholders'
 capital     895,095         -                -         - (4,143)   890,952
Contributed
 surplus       2,018         -                -     6,529      -      8,547
Non-controlling
 interest     13,526         -                -         -      -     13,526
Retained
 earnings     (1,683)        -          (11,945)   (6,529) 1,024    (19,133)
----------------------------------------------------------------------------
Total
 liabilities and
 shareholders'
 equity    1,003,882         -                -         -    (66) 1,003,816
----------------------------------------------------------------------------

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

As at December 31, 2010
----------------------------------------------------------------------------
                              Previous                     Decommissioning
($000s)                          GAAP      E&E   Depletion      Obligation
----------------------------------------------------------------------------
Current assets                143,356        -           -               -
Investments                     3,932        -           -               -
Fair value of
 financial
 instruments                    1,601        -           -               -
Exploration and
 evaluation assets                  -  479,067           -               -
Property, plant and
 equipment                  1,637,960 (479,067)     29,184           9,844
----------------------------------------------------------------------------
Total assets                1,786,849        -      29,184           9,844
----------------------------------------------------------------------------

Current liabilities           180,945        -           -               -
Decommissioning
 obligation                    13,628        -           -          21,776
Long-term                      14,589        -           -               -
 obligation
Fair value of
 financial
 instruments                        -        -           -               -
Deferred premium on
 flow-through shares                -        -           -               -
Deferred income                25,457        -           -               -
 taxes
Shareholders'               1,517,675        -           -               -
 capital
Contributed surplus             7,919        -           -               -
Non-controlling
 interest                      13,767        -           -               -
Retained                       12,869        -      29,184         (11,932)
 earnings/(loss)
----------------------------------------------------------------------------
Total liabilities
 and shareholders'
 equity                     1,786,849        -      29,184           9,844
----------------------------------------------------------------------------


----------------------------------------------------------------------------
                                    Share-Based
($000s)                                Payments       Other (1)        IFRS
----------------------------------------------------------------------------
Current assets                                -        (14,413)     128,943

Investments                                   -              -        3,932
Fair value of
 financial
 instruments                                  -         (1,601)           -
Exploration and
 evaluation assets                            -              -      479,067
Property, plant
 and equipment                            6,531           (351)   1,204,101
----------------------------------------------------------------------------
Total assets                              6,531        (16,365)   1,816,043
----------------------------------------------------------------------------

Current liabilities                           -         (2,360)     178,585
Decommissioning obligation                    -           (125)      35,279
Long-term obligation                                         -       14,589
Fair value of financial
 instruments                                               270          270

Deferred premium
 on flow-through
 shares                                                    348          348
Deferred income taxes                      (964)        21,576       46,069
Shareholders' capital                      (128)        (9,495)   1,508,052
Contributed surplus                      21,343              -       29,262
Non-controlling interest                      -            142       13,909
Retained earnings/(loss)                (13,720)       (26,721)     (10,320)
----------------------------------------------------------------------------
Total liabilities and shareholders'
 equity                                   6,531        (16,365)   1,816,043
----------------------------------------------------------------------------

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


SUMMARY NET EARNINGS RECONCILIATION
2010
----------------------------------------------------------------------------
($000s)                             Annual      Q4      Q3      Q2       Q1
----------------------------------------------------------------------------
Net earnings/(loss) - previous      14,552  (2,593)  4,463    (672)  13,354
GAAP
After-tax addition/(deduction):
 Unrealized gain/(loss) on
  financial instruments            (16,553)  4,995  (7,410)  3,676  (17,814)
 General and administrative         (1,562)   (750)   (478)    (90)    (244)
 Share-based payments               (7,191) (2,324) (1,856) (1,701)  (1,310)
 Depletion and depreciation         29,184  12,108   4,791   6,262    6,023
 Decommissioning obligation
  accretion                             14      10      12      (7)      (1)
 Gain/(loss) on divestitures         2,082   1,606   3,534  (3,058)       -
 Deferred taxes                    (11,010) (7,135) (2,663) (2,619)   1,407
 Transaction costs on corporate
  acquisition                         (561)      -       -       -     (561)
 Non-controlling interest             (142)    (53)     32     (89)     (32)
----------------------------------------------------------------------------
Net earnings/(loss) - IFRS           8,813   5,864     425   1,702      820
----------------------------------------------------------------------------

Accounting Policy Changes and the Impact of Transition to IFRS

- Exploration and Evaluation ("E&E") assets - On transition to IFRS Tourmaline reclassified $251.0 million of E&E assets that were previously included in the PP&E balance on the consolidated statement of financial position. This consisted of the book value of undeveloped land that relates to exploration properties, geological and geophysical costs and drilling and completion costs of wells in Tourmaline. E&E assets are not depleted and must be assessed for impairment at the transition date and when indicators of impairment exist. There was no transitional impairment of the E&E assets. The cost of any impairment recognized during a period, is charged as additional depletion and depreciation expense.

- Property, plant and equipment ("PP&E") - This includes oil and gas assets in the development and production phases. The Company has allocated the amount recognized under the previous GAAP as at January 1, 2010 to CGUs using reserve values.

- Divestitures - Under previous GAAP, proceeds from divestitures were deducted from the full cost pool without recognition of a gain or loss unless the deduction resulted in a change in the depletion rate of 20 percent or greater, in which case a gain or loss was recorded. Under IFRS, gains and losses are recorded on divestitures and are calculated as the difference between the proceeds and the net book value of the asset disposed. For the year ended December 31, 2010, Tourmaline recognized a $2.1 million net gain on divestitures under IFRS compared to nil under the previous GAAP.

- Impairment of PP&E assets - Under IFRS, impairment tests of PP&E must be performed at the CGU level as opposed to the entire PP&E balance which was required under the previous GAAP through the full cost ceiling test. An impairment is recognized if the carrying value exceeds the recoverable amount for a CGU. The recoverable amount is determined using fair value less costs to sell based on discounted future cash flows of proved plus probable reserves using forecast prices and costs. PP&E impairments can be reversed in the future if the recoverable amount increases.

Tourmaline performed and passed its impairment tests on its PP&E assets on transition to IFRS at January 1, 2010 as well as for the year ended December 31, 2010.

- Decommissioning Obligation - Under the previous GAAP a credit adjusted risk free rate was used to measure the obligation. Under IFRS Tourmaline has used a risk free rate given the expected cash flows are risked. The result of using a lower discount rate was an increase to the obligation on transition of $11.9 million with an offsetting charge to the opening deficit, net of the deferred income tax effect of $3.0 million.

- Depletion and depreciation expense - Under IFRS Tourmaline has chosen to base the depletion calculation using proved-plus-probable reserves. This resulted in a decrease to depletion and depreciation expense in 2010 as compared to the previous GAAP.

- Share based compensation -The major differences from the previous GAAP are the treatment of graded vesting awards as multiple separate awards with different lives, an adjustment to the measure of volatility used in the calculation to value those options that were issued while the Company was private and estimating forfeiture rates in advance as opposed to recognizing the impact when the forfeiture occurs.

RECENT PRONOUNCEMENTS ISSUED

In November 2009, the IASB published IFRS 9, "Financial Instruments," which covers the classification and measurement of financial assets as part of its project to replace IAS 39, "Financial Instruments: Recognition and Measurement." In October 2010, the requirements for classifying and measuring financial liabilities were added to IFRS 9. Under this guidance, entities have the option to recognize financial liabilities at fair value through earnings. If this option is elected, entities would be required to reverse the portion of the fair value change due to a company's own credit risk out of earnings and recognize the change in other comprehensive income. IFRS 9 is effective for the Company on January 1, 2013. Early adoption is permitted and the standard is required to be applied retrospectively. The Company is currently evaluating the impact of adopting IFRS 9.

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


Funds from Operations

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

                                                       Three Months Ended
                                                ----------------------------
                                                    March 31,      March 31,
(000s)                                                  2011           2010
----------------------------------------------------------------------------
Cash flow from operating activities (per IFRS)   $    46,886   $     21,879
Change in non-cash working capital                    (1,946)         1,224
----------------------------------------------------------------------------
Funds from operations                            $    44,940   $     23,103
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Operating Netback

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

                                                       Three Months Ended
                                                ----------------------------
                                                    March 31,      March 31,
($/Boe)                                                 2011           2010
----------------------------------------------------------------------------
Revenue, excluding processing fee income         $     32.68   $      38.53
Royalties                                              (2.02)         (5.35)
Transportation costs                                   (1.90)         (1.80)
Operating expenses                                     (5.77)         (7.22)
----------------------------------------------------------------------------
Operating netback                                $     22.99   $      24.16
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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

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

                                                       As at          As at
                                                    March 31,   December 31,
(000s)                                                  2011           2010
----------------------------------------------------------------------------
Working capital/(deficit)                        $  (139,138)   $   (49,642)
Fair value of financial instruments - short-term
 liability                                             2,205            472
----------------------------------------------------------------------------
Working capital/(deficit) (adjusted for the fair
 value of financial instruments and deferred
 taxes)                                          $  (136,933)   $   (49,170)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net Debt

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

                                                       As at          As at
                                                    March 31,   December 31,
(000s)                                                  2011           2010
----------------------------------------------------------------------------
Bank debt                                      $     (37,635) $           -
Working capital/(deficit)                           (139,138)       (49,642)
Fair value of financial instruments - short-term
 liability                                             2,205            472
----------------------------------------------------------------------------
Net debt                                       $    (174,568) $     (49,170)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


SELECTED QUARTERLY INFORMATION
----------------------------------------------------------------------------
                                   2011                  2010
                         ---------------------------------------------------
($000s, unless otherwise
 noted)                              Q1          Q4          Q3          Q2
----------------------------------------------------------------------------
PRODUCTION
----------------------------------------------------------------------------
Crude oil and NGL(bbls)         217,121     236,502     147,997     178,787
Gas (mcf)                    11,283,617  11,251,067   9,502,337   8,693,492
Oil equivalent (boe)          2,097,724   2,111,680   1,731,720   1,627,702
Crude oil and NGL (bbls/d)        2,412       2,571       1,609       1,965
Gas (mcf/d)                     125,374     122,294     103,286      95,533
Oil equivalent (boe/d)           23,308      22,953      18,823      17,887
----------------------------------------------------------------------------
FINANCIAL
----------------------------------------------------------------------------
Gross revenue, net of
 royalties                       62,019      63,340      46,822      50,310
Cash flow from
 operating activities            46,886      45,916      40,806      34,669
Funds from operations (1)        44,940      44,747      31,371      33,971
Per diluted share                  0.32        0.34        0.25        0.27
Net (loss)/earnings               2,727       5,864         425       1,702
Per diluted share                  0.02        0.04        0.00        0.01
Total assets                  1,936,836   1,816,043   1,546,820   1,412,776

Working capital                (139,138)    (49,642)    (78,205)    (21,672)

Working capital
 (adjusted for the fair
 value of financial
 instruments and
 deferred taxes) (1)           (136,933)    (49,170)    (78,314)    (22,075)
Capital expenditures            217,553     217,648     152,257     286,733
Basic outstanding shares
 (000s)                         138,124     136,191     123,841     122,691
----------------------------------------------------------------------------

----------------------------------------------------------------------------
PER UNIT
----------------------------------------------------------------------------
Gas ($/mcf)                        4.48        4.17        4.36        4.61
Crude oil and NGL ($/bbl)         83.00       75.94       70.49       72.49
Revenue ($/boe)                   32.68       30.74       29.94       32.58
Operating netback ($/boe)         22.99       22.66       19.12       21.82
----------------------------------------------------------------------------


----------------------------------------------------------------------------
                                  2010          2009- Previous GAAP(3)
----------------------------------------------------------------------------
($000s, unless otherwise
 noted)                              Q1          Q4          Q3          Q2
----------------------------------------------------------------------------
PRODUCTION
----------------------------------------------------------------------------
Crude oil and NGL(bbls)         138,068      90,978      21,168       6,026
Gas (mcf)                     5,449,027   3,454,934   2,067,940   1,160,021
Oil equivalent (boe)          1,046,239     666,800     365,825     199,363
Crude oil and NGL (bbls/d)        1,534         989         230          66
Gas (mcf/d)                      60,545      37,554      22,478      12,747
Oil equivalent (boe/d)           11,625       7,248       3,976       2,191
----------------------------------------------------------------------------
FINANCIAL
----------------------------------------------------------------------------
Gross revenue, net of
 royalties                       34,935      22,765       6,132       4,591
Cash flow from
 operating activities            21,879      (9,388)      7,331         981
Funds from operations (1)        23,103      14,569       3,342       3,074
Per diluted share                  0.21        0.12        0.05        0.05
Net (loss)/earnings                 820        (369)     (2,081)        235
Per diluted share                  0.01        0.00       (0.03)       0.00
Total assets                  1,366,481   1,003,882     561,339     495,317

Working capital                 234,339     161,514      84,622     314,613

Working capital
 (adjusted for the fair
 value of financial
 instruments and
 deferred taxes) (1)            234,362     161,514      84,622     313,901
Capital expenditures            158,518     125,946     234,352      97,643
Basic outstanding shares
 (000s)                         120,191     101,809      73,553      70,000
----------------------------------------------------------------------------

----------------------------------------------------------------------------
PER UNIT
----------------------------------------------------------------------------
Gas ($/mcf)                        5.41        5.08        3.05        3.76
Crude oil and NGL ($/bbl)         78.29       68.02       61.27       58.29
Revenue ($/boe)                   38.53       35.59       20.80       23.66
Operating netback ($/boe)         24.16       22.72        9.91       14.98
----------------------------------------------------------------------------
(1) See Non-IFRS Financial Measures
(2) As Tourmaline's IFRS transition date was January 1, 2010, the 2009
    comparative information has not been restated.


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


CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF FINANCIAL POSITION


                                     March 31,   December 31,     January 1,
(000s) (unaudited)                       2011           2010           2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Assets
----------------------------------------------------------------------------
----------------------------------------------------------------------------
 Current assets:
 Cash and cash equivalents       $          -   $     65,160   $    199,789
 Accounts receivable                   58,374         58,669         45,129
 Prepaid expenses and deposits          4,212          5,114          3,210
 Fair value of financial                    -              -            120
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                       62,586        128,943        248,248
Investments (note 10)                   3,576          3,932            632
Exploration and evaluation
 assets                               489,586        479,067        250,972
Property, plant and equipment
 (note 7)                           1,381,088      1,204,101        503,826
Deferred taxes                              -              -            138
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                 $  1,936,836   $  1,816,043   $  1,003,816
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Shareholders'
 Equity
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current liabilities:
 Accounts payable and accrued    $    199,519   $    178,113   $     86,938
 Fair value of financial                2,205            472              -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                      201,724        178,585         86,938
Bank debt (note 9)                     37,635              -              -
Decommissioning obligations
 (note 8)                              36,230         35,279         19,153
Long-term obligation (note 11)         13,658         14,589              -
Fair value of financial
 instruments                            1,288            270              -
Deferred premium on
 flow-through                           6,618            348          3,833
Deferred taxes                         50,077         46,069              -
Shareholders' equity:
 Share capital (note 13)            1,549,823      1,508,052        890,952
 Non-controlling interest
  (note 12)                            14,084         13,909         13,526
 Contributed surplus                   33,292         29,262          8,547
 Deficit                               (7,593)       (10,320)       (19,133)
----------------------------------------------------------------------------
                                    1,589,606      1,540,903        893,892
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                 $  1,936,836   $  1,816,043   $  1,003,816
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitments (note 19)
Subsequent events (note 20)
See accompanying notes to the consolidated financial statements.


CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME/(LOSS)

                                                 For the Three Months Ended
                                                                   March 31
                                                ----------------------------
                                                ----------------------------
(000s) except per-share amounts (unaudited)             2011           2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
 Oil and natural gas sales                      $     63,281   $     40,313
 Royalties                                            (4,229)        (5,593)
----------------------------------------------------------------------------
                                                      59,052         34,720
 Realized gain on financial instruments                5,266              -
 Unrealized gain/(loss) on financial
 instruments (note 4)                                 (2,769)            28
 Other income (note 16)                                  470            187
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                      62,019         34,935

Expenses:
 Operating                                            12,100          7,555
 Transportation                                        3,980          1,888
 General and administration                            2,669          1,739
 Share based payments                                  2,570          1,984
 Loss on divestitures                                  3,630              -
 Depletion, depreciation and amortization             30,308         15,709
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                      55,257         28,875
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Results from Operating Activities                      6,762          6,060
Finance expenses (note 17)                               729            824
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income before taxes                                    6,033          5,236
 Deferred taxes                                        3,131          4,329
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income and comprehensive income for the
 period before non-controlling interest                2,902            907
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income and comprehensive income
 attributable to:
 Shareholders of the Company                           2,727            820
 Non-controlling interest (note 12)                      175             87
----------------------------------------------------------------------------
                                                       2,902            907
----------------------------------------------------------------------------

Income per share attributable to common
 shareholders
----------------------------------------------------------------------------
 Basic                                          $       0.02   $       0.01
----------------------------------------------------------------------------
 Diluted                                        $       0.02   $       0.01
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.


CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(000s) except per-share amounts
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                           Retained
                      Share  Contributed   Earnings/        Non-      Total
                    Capital      Surplus   (Deficit) controlling     Equity
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, at
 January 1, 2010  $ 890,952     $  8,547  $ (19,133)    $ 13,526 $  893,892
Issue of common
 shares (note 13)   636,727            -          -            -    636,727
Share issue
 costs, net of
 tax                (19,848)           -          -            -    (19,848)
Share-based
 payments (note 15)       -       10,388          -            -     10,388
Capitalized
 share-based
 payments
 (note 15)                -       10,388          -            -     10,388
Options exercised
 (note 15)              221          (61)         -            -        160
Income
 attributable to
 common
 shareholders             -            -      8,813            -      8,813
Income
 attributable to
 non-controlling
 interest                 -            -          -          383        383
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, at
 December 31,
 2010             1,508,052       29,262    (10,320)      13,909  1,540,903
Issue of common
 shares (note 13)    39,659            -          -            -     39,659
Share issue
 costs, net of
 tax                 (1,869)           -          -            -     (1,869)
Share-based
 payments (note 15)       -        2,570          -            -      2,570
Capitalized
 share-based                       2,570          -            -      2,570
Options exercised
 (note 15)            3,981       (1,110)         -            -      2,871
Net income before
 non-controlling
 interest                 -            -      2,727            -      2,727
Income
 attributable to
 non-controlling
 interest                 -            -          -          175        175
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, at
 March 31, 2011   $1,549,823    $  33,292  $  (7,593)    $ 14,084 $1,589,606
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(000s) except
 per-share amounts
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                           Retained
                      Share  Contributed   Earnings/         Non-     Total
                    Capital      Surplus   (Deficit)  controlling    Equity
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, at
 January 1, 2010  $ 890,952      $ 8,547  $ (19,133)    $  13,526 $ 893,892
Issue of common
 shares             311,275            -          -             -   311,275
Share issue
 costs, net of tax   (6,921)           -          -             -    (6,921)
Share-based
 payments                 -        1,984          -             -     1,984
Capitalized
 share-based
 payments                 -        1,984          -             -     1,984
Options exercised       221          (61)         -             -       160
Net income before
 non-controlling
 interest                 -            -        820             -       820
Income
 attributable to
 non-controlling
 interest                 -            -          -            87        87
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, at
 March 31, 2010  $1,195,527     $ 12,454  $ (18,313)    $  13,613 $1,203,281
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to the consolidated financial statements.


CONSOLIDATED STATEMENTS OF CASH FLOW

                                                 For the Three Months Ended
                                                                   March 31
                                                ----------------------------
                                                ----------------------------
(000s) (unaudited)                                      2011           2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash provided by (used in):
Operations:
 Net income                                     $      2,727   $        820
 Items not involving cash:
  Depletion and depreciation                          30,308         15,709
  Accretion                                              333            247
  Share-based payments                                 2,570          1,984
  Deferred taxes                                       3,131          4,329
  Unrealized (gain)/loss on financial
   instruments                                         2,769            (28)
  Realized (gain)/loss on sale of investments              -            (45)
 Loss on divestitures                                  3,630              -
 Decommissioning expenditures                           (703)             -
 Non-controlling interest                                175             87
 Changes in non-cash operating working capital         1,946         (1,224)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                      46,886         21,879

Financing:
 Issue of common shares                               50,272        224,080
 Share issue costs                                    (2,464)        (9,298)
 Increase/(decrease) in bank debt                     37,635         (6,550)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                      85,443        208,232

Investing:
 Exploration and evaluation                           (5,493)        (8,646)
 Property, plant and equipment                      (204,292)      (104,979)
 Property acquisitions                               (14,776)       (43,737)
 Proceeds from divestitures                            7,008          2,000
 Corporate acquisitions                                    -         (3,156)
 Proceeds from sale of investments                       338            255
 Repayment of long-term obligation                      (931)             -
 Change in non-cash investing working capital         20,657        (14,523)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                    (197,489)      (172,786)
Changes in cash                                      (65,160)        57,325
Cash, beginning of period                             65,160        199,789
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash, end of period                             $          -   $    257,114
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash is defined as cash and cash equivalents.
See accompanying notes to the consolidated financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended March 31, 2011 and 2010

(tabular amounts in thousands of dollars, unless otherwise noted) (unaudited)

Incorporation:

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

1. BASIS OF PREPARATION

(a) Statement of compliance:

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

Tourmaline's significant accounting policies under IFRS are presented in note 2. These policies have been retrospectively and consistently applied except where specific exemptions permitted an alternative treatment upon transition to IFRS in accordance with IFRS 1. The impact of the new standards, including reconciliations presenting the change from previous GAAP to IFRS as at January 1, 2010, as at and for the three months ended March 31, 2010 and as at and for the year ended December 31, 2010, is presented in note 22.

The consolidated financial statements were authorized for issue by the Board of Directors on May 24, 2011.

(b) Basis of measurement:

The consolidated financial statements have been prepared on the historical-cost basis except for the following:

(i) derivative financial instruments are measured at fair value; and

(ii) held for trading financial assets are measured at fair value with changes in fair value recorded in earnings.

The methods used to measure fair values are discussed in note 3.

(c) Functional and presentation currency:

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

(d) Use of estimates and judgements:

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimates are revised and in any future years affected.

The preparation of financial statements requires management to make estimates and use judgment regarding the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as at the date of the interim consolidated financial statements and the reported amounts of revenues and expenses during the period. By their nature, estimates are subject to measurement uncertainty and changes in such estimates in future periods could require a material change in the financial statements. Accordingly, actual results may differ from the estimated amounts as future confirming events occur. Significant estimates and judgments made by management in the preparation of these interim consolidated financial statements are as follows:

Amounts recorded for depletion and depreciation and amounts used for impairment calculations are based on estimates of petroleum and natural gas reserves. By their nature, the estimates of reserves, including the estimates of future prices, costs, discount rates and the related future cash flows, are subject to measurement uncertainty. Accordingly, the impact to the consolidated financial statements in future periods could be material.

Amounts recorded for decommissioning obligations and the related accretion expense requires the use of estimates with respect to the amount and timing of decommissioning expenditures. Other provisions are recognized in the period when it becomes probable that there will be a future cash outflow.

The estimated fair value of derivative financial instruments resulting in financial assets and liabilities, by their very nature are subject to measurement uncertainty.

Compensation costs recognized for share based compensation plans are subject to the estimation of what the ultimate payout will be using pricing models such as Black-Scholes-Merton model which is based on significant assumptions such as volatility, dividend yield and expected term. Several compensation plans are also performance based and are subject to management's judgment as to whether or not performance criteria will be met.

Tax interpretations, regulations and legislation in the various jurisdictions in which the Company operates are subject to change. As such income taxes are subject to measurement uncertainty. Deferred income tax assets are assessed by management at the end of the reporting period to determine the likelihood that they will be realized from future taxable earnings.

2. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently to all years presented in these consolidated financial statements, and have been applied consistently by the Company and its subsidiaries.

Certain comparative amounts have been reclassified to conform with the current year's presentation per note 25.

(a) Consolidation:

The consolidated financial statements include the accounts of Tourmaline Oil Corp. and Exshaw Oil Corp., of which the Company owns 90.6% (note 12).

(i) Subsidiaries:

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

The purchase method of accounting is used to account for acquisitions of subsidiaries and assets that meet the definition of a business under IFRS. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized immediately in the income statement.

(ii) Jointly-controlled operations and jointly-controlled assets:

Substantially all of the Company's oil and natural gas activities involve jointly-controlled assets. The consolidated financial statements include the Company's share of these jointly-controlled assets and a proportionate share of the relevant revenue and related costs.

(iii) Transactions eliminated on consolidation:

Intercompany balances and transactions, and any unrealized income and expenses arising from intercompany transactions, are eliminated in preparing the consolidated financial statements.

(b) Financial instruments:

(i) Non-derivative financial instruments:

Non-derivative financial instruments comprise trade and other receivables, cash and cash equivalents, investments, bank overdrafts, loans and borrowings, and trade and other payables. Non-derivative financial instruments are recognized initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transaction costs. Subsequent to initial recognition, non-derivative financial instruments are measured as described below.

Cash and cash equivalents:

Cash and cash equivalents comprise cash on hand, term deposits held with banks, other short-term highly-liquid investments with original maturities of three months or less.

Investments:

An instrument is classified at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Tourmaline's investments in public companies are designated as held for trading. Financial instruments are designated at fair value through profit or loss if the Company manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Company's risk management or investment strategy. Upon initial recognition, attributable transaction costs are recognized in profit or loss when incurred. Financial instruments at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss.

Other:

Other non-derivative financial instruments, such as trade and other receivables, loans and borrowings, and trade and other payables, are measured at amortized cost using the effective interest method, less any impairment losses.

(ii) Derivative financial instruments:

The Company has entered into certain financial derivative contracts in order to manage the exposure to market risks from fluctuations in commodity prices. These instruments are not used for trading or speculative purposes. The Company has not designated its financial derivative contracts as effective accounting hedges, and thus not applied hedge accounting, even though the Company considers all commodity contracts to be economic hedges. As a result, all financial derivative contracts are classified as fair value through profit or loss and are recorded on the balance sheet at fair value. Transaction costs are recognized in profit or loss when incurred.

The Company has accounted for its forward physical delivery sales contracts, which were entered into and continue to be held for the purpose of receipt or delivery of non-financial items in accordance with its expected purchase, sale or usage requirements as executory contracts. As such, these contracts are not considered to be derivative financial instruments and have not been recorded at fair value on the balance sheet. Settlements on these physical sales contracts are recognized in oil and natural gas revenue.

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

(iii) Share capital:

Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares and share options are recognized as a deduction from equity, net of any tax effects.

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

(i) Recognition and measurement:

Exploration and evaluation expenditures:

Pre-license costs are recognized in the statement of operations as incurred.

Exploration and evaluation costs, including the costs of acquiring licenses and directly attributable general and administrative costs, initially are capitalized as either tangible or intangible exploration and evaluation assets according to the nature of the assets acquired. The costs are accumulated in cost centers by well, field or exploration area pending determination of technical feasibility and commercial viability.

The technical feasibility and commercial viability of extracting a mineral resource is considered to be determinable when proved or probable reserves are determined to exist. If proved and or probable reserves are found, the drilling costs and associated undeveloped land are transferred to property, plant and equipment. The cost of undeveloped land that expires or any impairment recognized during a period, is charged as additional depletion and depreciation expense.

Exploration and evaluation assets are assessed for impairment if (i) sufficient data exists to determine technical feasibility and commercial viability, and (ii) facts and circumstances suggest that the carrying amount exceeds the recoverable amount. For purposes of impairment testing, exploration and evaluation assets are allocated to cash-generating units.

The technical feasibility and commercial viability of extracting a mineral resource is considered to be determinable when proven or probable reserves are determined to exist. A review of each exploration licence or field is carried out, at least annually, to ascertain whether proven or probable reserves have been discovered. Upon determination of proven or probable reserves, intangible exploration and evaluation assets attributable to those reserves are reclassified from exploration and evaluation assets to a separate category within tangible assets referred to as oil and natural gas interests.

Development and production costs:

Items of property, plant and equipment, which include oil and gas development and production assets, are measured at cost less accumulated depletion and depreciation and accumulated impairment losses. Development and production assets are grouped into CGUs for impairment testing. The Company has grouped its development and production assets into the following CGUs: 'Deep Basin', 'Spirit River' and 'Montney'. When significant parts of an item of property, plant and equipment, including oil and natural gas interests, have different useful lives, they are accounted for as separate items (major components).

Gains and losses on disposal of an item of property, plant and equipment, including oil and natural gas interests, are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognized in profit or loss.

(ii) Subsequent costs:

Costs incurred subsequent to the determination of technical feasibility and commercial viability and the costs of replacing parts of property, plant and equipment are recognized as oil and natural gas interests only when they increase the future economic benefits embodied in the specific asset to which they relate. All other expenditures are recognized in profit or loss as incurred. Such capitalized oil and natural gas interests generally represent costs incurred in developing proved and/or probable reserves and bringing in or enhancing production from such reserves, and are accumulated on a field or geotechnical area basis. The carrying amount of any replaced or sold component is derecognized. The costs of the day-to-day servicing of property, plant and equipment are recognized in profit or loss as incurred.

(iii) Depletion and depreciation:

The net carrying value of development or production assets is depleted using the unit of production method by reference to the ratio of production in the year to the related proved-plus-probable reserves, taking into account estimated future development costs necessary to bring those reserves into production. Future development costs are estimated taking into account the level of development required to produce the reserves. These estimates are reviewed by independent reserve engineers at least annually.

Proved plus probable reserves are estimated annually by independent qualified reserve evaluators and represent the estimated quantities of crude oil, natural gas and natural gas liquids which geological, geophysical and engineering data demonstrate with a specified degree of certainty to be recoverable in future years from known reservoirs and which are considered commercially producible. For interim financial statements internal estimates of changes in reserves and future development costs are used for determining depletion for the period.

For other assets, depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership by the end of the lease term. Land is not depreciated.


The estimated useful lives for depreciable assets are as follows:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Plants and facilities                                              30 years
Office equipment                                              25% declining
Furniture and fixtures                                        25% declining
----------------------------------------------------------------------------

Depreciation methods, useful lives and residual values are reviewed at each reporting date.

(d) Impairment:

(i) Financial assets:

A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.

An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate.

Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics.

All impairment losses are recognized in profit or loss.

An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. For financial assets measured at amortized cost, the reversal is recognized in profit or loss.

(ii) Non-financial assets:

The carrying amounts of the Company's non-financial assets, other than E&E assets and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. For goodwill and other intangible assets that have indefinite lives, or that are not yet available for use, an impairment test is completed each year. E&E assets are assessed for impairment when they are reclassified to property, plant and equipment, as oil and natural gas interests, and also if facts and circumstances suggest that the carrying amount exceeds the recoverable amount.

For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the "cash-generating unit" or "CGU"). The recoverable amount of an asset or a CGU is the greater of its value in use and its fair value less costs to sell.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Value in use is generally computed by reference to the present value of the future cash flows expected to be derived from production of proven-plus-probable reserves.

An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis. Impairment losses recognized in prior years are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depletion and depreciation or amortization, if no impairment loss had been recognized.

(e) Provisions:

A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax "risk-free" rate that reflects current market assessments of the time value of money and the risks specific to the liability. Provisions are not recognized for future operating losses.

(i) Decommissioning obligations:

The Company recognizes the decommissioning obligations for the future costs associated with removal, site restoration and decommissioning costs. The fair value of the liability for the Company's decommissioning obligation is recorded in the period in which it is incurred, discounted to its present value using the risk-free interest rate and the corresponding amount recognized by increasing the carrying amount of petroleum and natural gas assets. The asset recorded is depleted on a unit-of-production basis over the life of the reserves. The liability amount is increased each reporting period due to the passage of time and the amount of accretion is charged to earnings in the period. Revisions to the estimated timing of cash flows or to the original estimated undiscounted cost could also result in an increase or decrease to the obligation. Actual costs incurred upon settlement of the retirement obligation are charged against the obligation to the extent of the liability recorded.

(ii) Onerous contracts:

A provision for onerous contracts is recognized when the expected benefits to be derived by the Company from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Company recognises any impairment loss on associated assets.

(f) Revenue recognition:

Revenue from the sale of oil and natural gas is recorded when the significant risks and rewards of ownership of the product is transferred to the buyer, which is usually when legal title passes to the external party. This is generally at the time product enters the pipeline. Revenue is measured net of discounts, customs duties and royalties. With respect to the latter, the entity is acting as a collection agent on behalf of others.

Tariffs and tolls charged to other entities for use of pipelines and facilities owned by the Company are recognized as revenue as they accrue in accordance with the terms of the service or tariff and tolling agreements.

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

(g) Finance income and expenses:

Finance expense comprises interest expense on borrowings, accretion of the discount on provisions and impairment losses recognized on financial assets.

Interest income is recognized as it accrues in profit or loss, using the effective-interest method.

(h) Income taxes:

Income tax expense comprises current and deferred tax. Income tax expense is recognized in profit or loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity.

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

Deferred tax is recognized on the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized on the initial recognition of assets or liabilities in a transaction that is not a business combination. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred-tax assets and liabilities are offset if there is a legally enforceable right to offset, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

A deferred-tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred-tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

(i) Flow-through common shares:

Periodically, the Company finances a portion of its exploration and development activities through the issuance of flow-through shares. The resource expenditure deductions for income tax purposes related to exploratory development activities are renounced to investors in accordance with tax legislation. Flow-through shares issued are recorded in share capital at the fair value of common shares on the date of issue. The premium received on issuing flow-through shares is initially recorded as a deferred credit. As qualifying expenditures are incurred, the premium is reversed and a deferred income tax liability is recorded. The net amount is then recognized as deferred income tax expense.

(j) Share based payments:

The Company applies the fair-value method for valuing stock option grants. Under this method, compensation cost attributable to all share options granted are measured at fair value at the grant date and expensed over the vesting period with a corresponding increase to contributed surplus. A forfeiture rate is estimated on the grant date and is adjusted to reflect the actual number of options or units that vest. Upon the exercise of the stock options, consideration received, together with the amount previously recognized in contributed surplus, is recorded as an increase to share capital.

(k) Per-share information:

Basic per-share information is computed by dividing income by the weighted average number of common shares outstanding for the period. The treasury-stock method is used to determine the diluted per share amounts, whereby any proceeds from the stock options, warrants or other dilutive instruments are assumed to be used to purchase common shares at the average market price during the period. The weighted average number of shares outstanding is then adjusted by the net change.

(l) Comparative amounts:

Certain comparative amounts may have been reclassified to conform with presentation adopted in the current year.

(m) New standards and interpretations not yet adopted:

In November 2009, the IASB published IFRS 9, "Financial Instruments," which covers the classification and measurement of financial assets as part of its project to replace IAS 39, "Financial Instruments: Recognition and Measurement." In October 2010, the requirements for classifying and measuring financial liabilities were added to IFRS 9. Under this guidance, entities have the option to recognize financial liabilities at fair value through earnings. If this option is elected, entities would be required to reverse the portion of the fair value change due to a company's own credit risk out of earnings and recognize the change in other comprehensive income. IFRS 9 is effective for the Company on January 1, 2013. Early adoption is permitted and the standard is required to be applied retrospectively. The Company is currently evaluating the impact of adopting IFRS 9.

3. DETERMINATION OF FAIR VALUE

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

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

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

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

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

The fair value of cash and cash equivalents, trade and other receivables, bank overdraft and trade and other payables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. At March 31, 2011 the fair value of these balances approximated their carrying value due to their short term to maturity.

(iii) Derivatives:

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

(iv) Stock options:

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

(v) Measurement:

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

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

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

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

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


----------------------------------------------------------------------------
----------------------------------------------------------------------------
                        Carrying        Fair
March 31, 2011            Amount       Value   Level 1   Level 2    Level 3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial Assets:
 Investments            $  3,576    $  3,576  $  3,576   $     -    $     -
Financial liabilities:
 Bank debt                37,635      37,635    37,635         -          -
 Commodity price risk
  contracts                3,493       3,493         -     3,493          -
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
----------------------------------------------------------------------------
                        Carrying        Fair
December 31, 2010         Amount       Value   Level 1   Level 2    Level 3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial Assets:
 Investments            $  3,932    $  3,932  $  3,932   $     -    $     -
Financial
 liabilities:
 Commodity price risk
  contracts                  742         742         -       742          -
----------------------------------------------------------------------------
----------------------------------------------------------------------------

4. FINANCIAL RISK MANAGEMENT

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

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

(a) Credit risk:

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's receivables from joint venture partners and petroleum and natural gas marketers. As at March 31, 2011 Tourmaline's receivables consisted of $19.4 million (December 31, 2010 - $21.1 million) from joint venture partners, $26.4 million (December 31, 2010 - $23.6 million) from petroleum and natural gas marketers and $12.6 million (December 31, 2010 - $13.9 million) from provincial governments.

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

The Company monitors the age of, and investigates issues behind, its receivables that have been past due for over 90 days. At March 31, 2011, the Company had $0.8 million (December 31, 2010 - $1.0 million) over 90 days. The Company is satisfied that these amounts are substantially collectible.

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

(b) Liquidity risk:

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

The Company's accounts payable and accrued liabilities balance at March 31, 2011 is approximately $199.5 million (December 31, 2010 - $178.1 million). It is the Company's policy to pay suppliers within 45-75 days. These terms are consistent with industry practice. As at March 31, 2011, substantially all of the account balances were less than 90 days.

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

The following are the contractual maturities of financial liabilities, including estimated interest payments, at March 31, 2011:


----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                       More
                                              Less    One -   Two -    Than
                  Carrying  Contractual   Than One      Two    Five    Five
                    Amount   Cash Flows       Year    Years   Years   Years
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-derivative
 financial
 liabilities:
 Trade and other
  payables       $ 195,794    $ 195,794  $ 195,794  $     -  $    -  $    -
 Bank debt (1)      37,635       39,140     39,140        -       -       -
 Transportation
  liability         17,383       17,383      3,725    3,725   9,933       -
Derivative
 financial
 liabilities:
 Financial
  commodity
  contracts          3,493        3,493      2,205    1,288       -       -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                 $ 254,305    $ 255,810  $ 240,864  $ 5,013  $9,933  $    -
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) Assumes the credit facilities are not reviewed on July 11, 2011 (see
    note 9) and includes interest expense at 4.0% being the rate applicable
    at March 31, 2011.

(c) Market risk:

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

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

Currency risk has minimal impact on the value of the financial assets and liabilities on the balance sheet at March 31, 2011. Changes in the US to Canadian exchange rate, however, could influence future petroleum and natural gas prices which could impact the value of certain derivative contracts. This influence cannot be accurately quantified.

Interest rate risk has minimal impact on the Company at the balance sheet date as there was a nominal average amount of cash in short-term investments and only small amounts drawn on the credit facilities over the period. At the end of the first quarter, there was a draw on the Company's credit facilities of $37.6 million, which will expose the Company to interest rate risk via fluctuations in floating rate of interest on a go-forward basis.

Commodity price risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices for oil and natural gas are impacted by not only the relationship between the Canadian and United States dollar but also world economic events that dictate the levels of supply and demand. As at March 31, 2011, the Company has entered into certain financial derivative and physical delivery sales contracts in order to manage commodity risk. These instruments are not used for trading or speculative purposes. The Company has not designated its financial derivative contracts as effective accounting hedges, even though the Company considers all commodity contracts to be effective economic hedges. As a result, all such commodity contracts are recorded on the balance sheet at fair value, with changes in the fair value being recognized as an unrealized gain or loss on the consolidated statement of income.


The Company has entered into the following derivative contracts as at March
31, 2011:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Type of Contract   Quantity      Time Period         Contract          Fair
                                                      Price           Value
----------------------------------------------------------------------------
Financial Swap     100 bbls/d    July 2011 -         US$90.00/bbl      (953)
                                  December 2012
Financial Swap     100 bbls/d    July - December     US$100.10/bbl     (153)
                                  2011
Financial Swap     100 bbls/d    July 2011 - June    US$101.40/bbl     (238)
                                  2012
Financial Swap     100 bbls/d    September 2011 -    US$101.00/bbl     (289)
                                  December 2012
Financial Swap     100 bbls/d    January -           US$104.00/bbl      (85)
                                  December 2012
Financial Swap     100 bbls/d    January -           US$87.85/bbl      (616)
                                  December 2011
Costless Collar    100 bbls/d    September 2010 -    US$75/bbl         (837)
                                  August 2012         floor -
                                                      US$96/bbl
                                                      ceiling
Financial Swap     100 bbls/d    January 2012 -      US$99.70/bbl      (322)
                                  June 2013
----------------------------------------------------------------------------
Total fair value                                                   $ (3,493)
----------------------------------------------------------------------------


The following contract was entered into subsequent to March 31, 2011:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Type of Contract   Quantity     Time Period               Contract Price
----------------------------------------------------------------------------
Financial Swap     100 bbls/d   January - December 2012   US$108.00/bbl
----------------------------------------------------------------------------

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

                                                         Three Months Ended
                                                                   March 31,
                                                        --------------------
(000s)                                                      2011       2010
----------------------------------------------------------------------------
Unrealized gain/(loss) on financial instruments         $ (2,751)    $ (126)
Unrealized gain/(loss) on investments held for trading       (18)       154
----------------------------------------------------------------------------
Total                                                   $ (2,769)    $   28
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

As at March 31, 2011, if the future strip prices for natural gas were $0.10 per mcf higher and prices for oil were $1.00 per bbl higher, with all other variables held constant, before-tax earnings for the year would have been $0.4 million lower. An equal and opposite impact would have occurred to before-tax earnings and the fair value of the derivative contracts asset had natural gas prices been $0.10 per mcf lower and oil prices $1.00 per bbl lower.

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

The Company has entered into the following physical contracts as at March 31, 2011:


----------------------------------------------------------------------------
----------------------------------------------------------------------------
Type of Contract  Quantity      Time Period                    Contract
                                                                Price
----------------------------------------------------------------------------
AECO Fixed Price  3,000 gjs/d   April 2010 - March 2011        Cdn$5.77/gj
AECO Fixed Price  2,000 gjs/d   April 2010 - March 2011        Cdn$5.72/gj
AECO Fixed Price  3,000 gjs/d   January 2011 - December 2011   Cdn$5.75/gj
AECO Fixed Price  3,000 gjs/d   January 2011 - December 2011   Cdn$5.84/gj
AECO Fixed Price  4,000 gjs/d   February 2010 - December 2011  Cdn$5.68/gj
AECO Fixed Price  2,000 gjs/d   February 2010 - December 2011  Cdn$5.72/gj
AECO Fixed Price  2,000 gjs/d   November 2010 - March 2011     Cdn$6.01/gj
AECO Fixed Price  2,000 gjs/d   March 2010 - March 2012        Cdn$5.72/gj
AECO Fixed Price  2,000 gjs/d   March 2010 - December 2011     Cdn$5.705/gj
AECO Call Option  3,000 gjs/d   January 2011 - December 2011   Cdn$6.50/gj
                                                                strike price
AECO Fixed Price  3,000 gjs/d   March 2010 - March 2011        Cdn$5.89/gj
AECO/Nymex        3,000         November 2010 - March 2011     Nymex less
 Differential      MMbtu/d                                      $0.475/MMbtu
 Swap
AECO Call Option  3,000 gjs/d   January 2011 - December 2012   Cdn$6.00/gj
                                                                strike price
AECO Fixed Price  3,000 gjs/d   January 2011 - December 2012   Cdn$5.53/gj
AECO/Nymex        5,000         November 2010 - April 2011     Nymex less
 Differential      MMbtu/d                                      $0.62/MMbtu
 Swap
AECO/Nymex        5,000         November 2010 - March 2011     Nymex less
 Differential      MMbtu/d                                      $0.485/MMbtu
 Swap
AECO/Nymex        3,000         November 2010 - March 2011     Nymex less
 Differential      MMbtu/d                                      $0.535/MMbtu
 Swap
AECO/Nymex        5,000         January 2011 - March 2011      Nymex less
 Differential      MMbtu/d                                      $0.475/MMbtu
 Swap
AECO Fixed Price  3,000 gjs/d   February 2011 - April 2012     Cdn$4.00/gj
----------------------------------------------------------------------------

(d) Capital management:

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

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

The Company monitors this ratio and endeavours to maintain it at, or below, 2.0 to 1.0 in a normalized commodity price environment. This ratio may increase at certain times as a result of acquisitions or low commodity prices. As shown below, as at March 31, 2011, the Company's ratio of net debt to annualized funds from operations was 0.97 to 1.0.


                                                       As at          As at
                                                    March 31,   December 31,
(000s)                                                  2011           2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net debt:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
 Bank debt                                      $    (37,635)  $          -
 Working capital/(deficit)                          (139,138)       (49,642)
 Fair value of financial instruments -
  short-term (asset)/liability                         2,205            472
----------------------------------------------------------------------------
Net debt                                        $   (174,568)  $    (49,170)
----------------------------------------------------------------------------
Annualized funds from operations:
 Cash flow from operating activities            $     46,886   $    144,237
 Change in non-cash working capital                   (1,946)        (9,517)
----------------------------------------------------------------------------
 First quarter funds from operations            $     44,940   $    134,720
Annualized funds from operations                $    179,760   $    134,720
----------------------------------------------------------------------------
Net debt to annualized funds from operations            0.97           0.36
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

5. ACQUISITIONS

Altia Energy Ltd.

On January 14, 2010, Tourmaline acquired all of the issued and outstanding shares of Altia Energy Ltd. ("Altia"). As consideration, Tourmaline paid cash of $2.7 million before transaction costs of $0.6 million and issued 6,411,670 shares at a price of $15.00 per share. The operations of Altia have been included with the results of the Company commencing January 14, 2010.

This acquisition has been accounted for by the purchase method based on fair values as follows:


                                                                       2010
                                                                Acquisition
                                                               Altia Energy
                                                                        Ltd.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net assets acquired:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
 Property, plant and equipment                                 $     73,555
 Exploration and evaluation                                          52,665
 Cash                                                                  (492)
 Working capital                                                        100
 Long-term investment                                                     -
 Long-term bank debt                                                 (6,550)
 Decommissioning obligation                                          (1,452)
 Deferred taxes                                                     (18,987)
----------------------------------------------------------------------------
Total                                                          $     98,839
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consideration:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
 Cash                                                          $      2,664
 Shares issued                                                       96,175
----------------------------------------------------------------------------
Total                                                          $     98,839
----------------------------------------------------------------------------
----------------------------------------------------------------------------


6. EXPLORATION AND EVALUATION ASSETS

(000s)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at January 1, 2010                                          $    250,972
 Capital expenditures                                               200,816
 Capitalized stock-based compensation                                10,388
 Transfers to property, plant and equipment (see note 7)           (178,012)
 Acquisitions                                                       206,876
 Divestitures                                                       (11,973)
----------------------------------------------------------------------------
As at December 31, 2010                                        $    479,067
 Capital expenditures                                                52,219
 Capitalized stock-based compensation                                 2,570
 Transfers to property, plant and equipment (see note 7)            (44,922)
 Acquisitions                                                         5,080
 Divestitures                                                        (4,428)
----------------------------------------------------------------------------
As at March 31, 2011                                           $    489,586
----------------------------------------------------------------------------

Exploration and evaluation (E&E) assets consist of the Company's exploration projects which are pending the determination of proven or probable reserves. Additions represent the Company's share of costs incurred on E&E assets during the period. E&E assets are transferred to PP&E when proved or probable reserves are assigned.

The Company assesses the recoverability of intangible exploration ("E&E") assets, before and at the moment of reclassification to property, plant and equipment, using CGUs. The CGU includes both the E&E CGU and CGUs related to oil and natural gas interests for that area.

General and administrative expenditures for the period ended March 31, 2011 of $5.5 million (March 31, 2010 - $4.3 million) have been capitalized and included as costs of petroleum and natural gas properties. Included in this amount are non-cash related stock-based compensation of $2.6 million (March 31, 2010 - $2.0 million).


7. PROPERTY, PLANT AND EQUIPMENT

Cost
(000s)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at January 1, 2010                                          $    503,826
Capital expenditures                                                617,764
Transfers from exploration and evaluation (see note 6)              178,012
Change in decommissioning liabilities (note 8)                       15,963
Divestitures                                                        (15,983)
----------------------------------------------------------------------------
As at December 31, 2010                                        $  1,299,582
Capital expenditures                                                167,262
Transfers from exploration and evaluation (see note 6)               44,922
Change in decommissioning liabilities (note 8)                        1,728
Divestitures                                                         (7,850)
----------------------------------------------------------------------------
As at March 31, 2011                                           $  1,505,644
----------------------------------------------------------------------------


Accumulated Depreciation, Depletion and Amortization

(000s)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at January 1, 2010                                          $          -
Depreciation, depletion and amortization                             96,660
Impairments                                                               -
Divestitures                                                         (1,179)
----------------------------------------------------------------------------
As at December 31, 2010                                        $     95,481
Depreciation, depletion and amortization                             30,308
Impairments                                                               -
Divestitures                                                         (1,233)
----------------------------------------------------------------------------
As at March 31, 2011                                           $    124,556
----------------------------------------------------------------------------


Net Book Value
(000s)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at January 1, 2010                                          $    503,826
As at December 31, 2010                                           1,204,101
As at March 31, 2011                                           $  1,381,088
----------------------------------------------------------------------------

Future development costs, for the period ended March 31, 2011, of $1,013 million (March 31, 2010 - $508 million) were included in the depletion calculation.

8. 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 flows required to settle its decommissioning obligations is approximately $49.4 million (2010 - $40.0 million), which will be incurred between 2021 and 2027. A risk-free rate of 3.5% (2010 - 4.0%) and an inflation rate of 3% (2010 - 3%) were used to calculate the fair value of the decommissioning obligations.


                                                Three Months
                                                       Ended     Year Ended
                                                    March 31,   December 31,
                                                        2011           2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, beginning of period                    $     35,279   $     19,153
 Obligation incurred                                   1,292          4,411
 Obligation incurred on corporate acquisitions                        1,452
  (note 5)                                                 -
 Obligation incurred on property acquisitions            434          7,936
 Obligation divested                                    (407)          (965)
 Obligation settled                                     (703)             -
 Accretion expense                                       335          1,128
 Revisions (change in discount rate)                       -          2,164
----------------------------------------------------------------------------
Balance, end of period                          $     36,230   $     35,279
----------------------------------------------------------------------------

9. BANK DEBT

The Company has a financing arrangement with two Canadian chartered banks for an extendible revolving term loan in the amount of $165 million, in addition to a $25 million operating line. The facility bears interest on a variable grid currently 250 basis points over the prevailing banker's acceptance rate. Security for the facility includes a general security agreement and a $500 million demand loan debenture secured by a first floating charge over all assets. On July 31, 2011, at the Company's discretion, the facility is available on a non-revolving basis for a period of 365 days, at which time the facility would be due and payable. Alternatively, the facility may be extended for a further 364-day period at the request of the Company and subject to approval by the banks.

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

The Company is required to meet certain financial-based covenants to maintain the facilities. The financial covenants include a requirement to ensure the total amount drawn on the facility does not exceed the total borrowing base as defined in each facility's agreement, and that the ratio of earnings adjusted for interest, taxes and other non-cash items to interest expense does not exceed a predetermined amount, as determined by each facility's agreement. As at March 31, 2011, the Company was in compliance with these covenants.

Tourmaline has drawn down on existing facilities in the amount of $37.6 million. In addition to this Tourmaline has letters of credit of $4.2 million, which reduce the credit available on the facility.

10. INVESTMENTS

Tourmaline owns common shares of public and private junior oil and gas companies which have been fair valued at $3.6 million based on the quoted market price at March 31, 2011.

In February 2011 Tourmaline disposed of a portion of the common shares it holds in a public junior oil and gas company for proceeds of $0.3 million, and a realized loss of $3,000.

A reconciliation of the investments is provided below:


                                                Three Months
                                                       Ended     Year Ended
                                                    March 31,   December 31,
                                                        2011           2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, beginning of period                    $      3,932   $        632
 Proceeds on disposition of shares (net of              (338)          (210)
  realized gain/( loss))
 Acquired on asset disposition                             -          3,250
 Unrealized gain/(loss) on investments                   (18)           260
----------------------------------------------------------------------------
Balance, end of period                          $      3,576   $      3,932
----------------------------------------------------------------------------
----------------------------------------------------------------------------

11. LONG TERM OBLIGATION

As part of the June 2010 acquisition of petroleum and natural gas properties, the Company acquired a firm transportation agreement. A liability of $19.9 million was recorded to account for the fair value of the agreement at the time of the acquisition. This amount was accounted for as part of the acquisition cost and will be charged as a reduction to transportation expenses over the life of the agreement as the obligation is met. The reduction to transportation expense for the period ended March 31, 2011 was $0.9 million. The outstanding balance is $17.4 million of which $3.7 million has been included in accounts payable and accrued liabilities.

12. NON-CONTROLLING INTEREST

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


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

                                                Three Months
                                                       Ended     Year Ended
                                                    March 31,   December 31,
                                                        2011           2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, beginning of period                    $     13,909   $     13,526
Share of subsidiary's net income for the
 period                                                  175            383
----------------------------------------------------------------------------
Balance, end of period                          $     14,084   $     13,909
----------------------------------------------------------------------------
----------------------------------------------------------------------------


13. 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

                                 Three Months Ended              Year Ended
                                     March 31, 2011       December 31, 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                             Number of                 Number of
($'s in 000s)                   Shares       Amount       Shares     Amount
----------------------------------------------------------------------------
Balance, beginning of
 period                    136,191,061  $ 1,508,052  101,809,391  $ 890,952
For cash on Initial Public
 Offering (includes
 over-allotment
 option)                             -            -   11,500,000    241,500
For cash on private
 placement of
 common shares                       -            -   10,350,000    188,850
For cash on private
 placement of
 flow-through common
 shares(1)                   1,580,000       39,659    3,600,000     65,202
Issued for the acquisition
 of properties                       -            -    2,500,000     45,000
Issued on corporate
 acquisitions                        -            -    6,411,670     96,175
For cash on exercise of
 stock options                 353,334        2,871       20,000        160
Contributed surplus on
 exercise of stock
 options                             -        1,110            -         61
Share issue costs                    -       (2,464)           -    (26,502)
Tax effect of share issue
 costs                               -          595            -      6,654
----------------------------------------------------------------------------
Balance, end of period     138,124,395  $ 1,549,823  136,191,061 $1,508,052
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) In March 2011, the Company issued 1.58 million flow-through shares at
    $30.00 per share for total gross proceeds of $47.4 million and $4.90 per
    share or $7.74 million was determined to be the implied premium on the
    flow-through shares. As at March 31, 2011, the Company is committed to
    spending an additional $40.5 million on qualified exploration and
    development expenditures by December 31, 2012. A total of 0.38 million
    shares were purchased by insiders. On March 19, 2010 the Company issued
    2.45 million flow-through shares at $21.60 per share for total gross
    proceeds of $52.92 million. The implied premium on the flow-through
    shares was $8.8 million or $3.60/share. On August 12, 2010 the Company
    issued 1.15 million flow-through shares at $22.00 per share for total
    gross proceeds of $25.3 million.


14. EARNINGS PER SHARE

Basic earnings-per-share was calculated as follows:

                                                         Three Months Ended
                                               -----------------------------
                                                    March 31,      March 31,
                                                        2011           2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings for the period (000s)              $      2,727   $        820
Weighted average number of common shares -
 basic                                           136,873,117    108,959,798
----------------------------------------------------------------------------
Earnings per share - basic                      $       0.02   $       0.01
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Diluted earnings-per-share was calculated as follows:

                                                         Three Months Ended
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                    March 31,      March 31,
                                                        2011           2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings for the period (000s)              $      2,727   $        820
Weighted average number of common shares -
 diluted                                         142,057,697    111,600,803
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings per share - diluted                    $       0.02   $       0.01
----------------------------------------------------------------------------
----------------------------------------------------------------------------

There were 575,000 options excluded from the weighted average share calculation because they were anti-dilutive.

15. 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 for up to 13,812,440 shares of common stock. The exercise price of each option equals the market price 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.


                                                                   Weighted
                                                                    Average
                                                   Number of       Exercise
                                                     Options          Price
----------------------------------------------------------------------------
Stock options outstanding, December 31, 2009       8,610,000   $       9.99
 Granted                                           3,407,000          17.88
 Exercised                                           (20,000)          8.00
----------------------------------------------------------------------------
Stock options outstanding, December 31, 2010      11,997,000   $      12.24
----------------------------------------------------------------------------
 Granted                                             350,000          24.17
 Exercised                                          (353,334)          8.13
 Forfeited                                          (179,999)         13.64
----------------------------------------------------------------------------
Stock options outstanding, March 31, 2011         11,813,667   $      12.69
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The following table summarizes stock options outstanding and exercisable at
March 31, 2011:

                                Weighted
                     Number      Average   Weighted       Number   Weighted
                Outstanding    Remaining    Average  Exercisable    Average
Range of          at Period  Contractual   Exercise           at   Exercise
 Exercise Price         End         Life      Price   Period End      Price
----------------------------------------------------------------------------
----------------------------------------------------------------------------
$7.00 - $8.00     3,656,667         2.65    $  7.09    2,226,667    $  7.07
$10.00 - $15.00   4,970,000         3.18      12.81    1,580,000      12.89
$16.68 - $25.38   3,187,000         4.41      18.95       56,667      16.68
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                 11,813,667         3.35    $ 12.69    3,863,334    $  9.59
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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

                                                    March 31,      March 31,
                                                        2011           2010
----------------------------------------------------------------------------
Fair value of options granted (weighted
 average)                                       $       9.40   $       5.52
Risk-free interest rate                                 2.62%          2.43%
Estimated hold period prior to exercise              5 years        5 years
Expected volatility                                       40%            40%
Dividend per share                              $       0.00   $       0.00
----------------------------------------------------------------------------
----------------------------------------------------------------------------


16. OTHER INCOME


                                                Three Months Ended March 31,
                                               -----------------------------
                                               -----------------------------
(000s)                                                   2011          2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Processing income                               $         384  $         56
Interest income                                            74           (55)
Other                                           $          12  $        186
----------------------------------------------------------------------------
Total other income                              $         470  $        187
----------------------------------------------------------------------------


17. FINANCE INCOME AND EXPENSES

                                                Three Months Ended March 31,
                                               -----------------------------
                                               -----------------------------
 (000s)                                                  2011          2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Finance income:
 Interest income on bank deposits               $         74   $          -
Finance expenses:
 Interest on loans and borrowings                        322             16
 Transaction cost on Corporate Acquisition                              561
 Accretion of provisions                                 333            247
----------------------------------------------------------------------------
Net finance expenses                            $        729   $        824
----------------------------------------------------------------------------


18. SUPPLEMENTAL CASH FLOW INFORMATION

Changes in non-cash working capital is comprised of:

                                                Three Months Ended March 31,
                                               -----------------------------
                                               -----------------------------
(000s)                                                  2011           2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Source/(use) of cash:
 Trade and other receivables                    $        295   $     (6,605)
 Deposit and prepaid expenses                            902        (27,468)
 Trade and other payables                             21,406         18,326
----------------------------------------------------------------------------
                                                $     22,603   $    (15,747)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Related to operating activities                 $      1,946   $     (1,224)
Related to investing activities                 $     20,657   $    (14,523)
----------------------------------------------------------------------------

19. COMMITMENTS

On March 8, 2011, the Company issued 1.58 million common shares, including 0.38 million common shares to insiders in a non-brokered component of the issuance, on a flow-through basis at a price of $30.00 per share for total gross proceeds of $47.4 million. As of March 31, 2011, the Company has spent $6.9 million on eligible expenditures and is committed to spend the remainder before December 31, 2012.

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


Payments due by year
(000s)                         2011      2012      2013      2014      2015
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating leases           $  1,761  $  2,120  $  1,758  $  1,614  $    404
Flow-through obligations          -    47,400         -         -         -
Firm transportation
 agreements                  16,870    20,073    17,865    10,005     6,824
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                           $ 18,631  $ 69,593  $ 19,623  $ 11,619  $  7,228
----------------------------------------------------------------------------
----------------------------------------------------------------------------

20. SUBSEQUENT EVENT

The Company issued 6,825,000 common shares at a price of $25.50 per share for total proceeds of $174 million. This transaction closed on May 17, 2011.

On May 24, 2011 Tourmaline entered in to an agreement with Cinch Energy Corp. pursuant to which Tourmaline will acquire all of the issued and outstanding common shares of Cinch on the basis of 0.06366 of a Tourmaline common share for each Cinch common share. The acquisition will be effected by a statutory plan of arrangement. Based on the five day volume weighted average trading price, Tourmaline will issue approximately 6.32 million shares for a total transaction value of approximately $205 million. The transaction is expected to close in mid-July and is subject to, among other things, Cinch shareholder approval and the receipt of all necessary court, regulatory and stock exchange approvals.

21. TRANSITION TO IFRS

Tourmaline's accounting policies under IFRS differ from those followed under previous GAAP. These accounting policies have been applied for the three months ended March 31, 2011, as well as to the opening statement of financial position on the transition date, January 1, 2010, the comparative information for the three months ended March 31, 2010 and the comparative information for the year ended December 31, 2010.

The adjustments arising from the application of IFRS to amounts on the statement of financial position on the transition date and on transactions prior to that date, were recognized as an adjustment to the Company's opening deficit category on the statement of financial position when appropriate.

On transition to IFRS on January 1, 2010, Tourmaline used certain exemptions allowed under IFRS 1 "First Time Adoption of International Reporting Standards". The exemptions used were:

Full Cost Accounting - IFRS 1 allows an entity that used full cost accounting under its previous GAAP to elect, at the time of adoption to IFRS, to measure oil and gas assets in the development and production phases by allocating the amount determined under the entity's previous GAAP for those assets to the underlying assets pro rata using reserve volumes or reserve values as of that date. Tourmaline has used reserve values as at January 1, 2010 to allocate the cost of development and production assets to CGUs.

Business Combinations - IFRS 1 allows an entity to use the IFRS rules for business combinations on a prospective basis rather than re-stating all business combinations Tourmaline has elected to use this exemption.

Share based compensation - IFRS1 allows an entity an exemption on IFRS 2, "Share-Based Payments" to equity instruments which vested before Tourmaline's transition date to IFRS.

Decommissioning Obligation - As Tourmaline elected to use the oil and gas exemption, a decommissioning obligation exemption was also used that allows for the re-measurement of decommissioning obligations on IFRS transition to be offset to retained earnings/deficit.


22. RECONCILIATION OF STATEMENT OF FINANCIAL POSITION FROM CANADIAN GAAP TO
IFRS

At the date of IFRS transition - January 1, 2010:

                                               Effect of
(000s)                       Canadian GAAP Transition to    Note       IFRS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Assets
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current assets:
 Cash and cash equivalents      $  199,789      $      -         $  199,789
 Accounts receivable                45,129             -             45,129
 Prepaid expenses and
  deposits                           3,210             -              3,210
 Fair value of financial               324          (204)     (j)       120
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                   248,452          (204)           248,248
Investments                            632             -                632
Fair value of financial
 instruments                             -             -                  -
Exploration and evaluation
 assets                                  -       250,972      (a)   250,972
Property, plant and
 equipment                         754,798      (250,972)     (a)   503,826
Deferred taxes                           -           138                138
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                $1,003,882      $    (66)        $1,003,816
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and
 Shareholders' Equity
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current liabilities:
 Accounts payable and
  accrued                       $   86,938      $      -         $   86,938
Decommissioning
 obligations                         7,208        11,945   (c)       19,153
Deferred premium on
 flow-through                            -         3,833   (k)        3,833
Deferred taxes                         780          (780)  (h)            -
Shareholders' equity:
 Share capital                     895,095        (4,143)  (d,k)    890,952
 Non-controlling interest           13,526             -             13,526
 Contributed surplus                 2,018         6,529   (d)        8,547
 Deficit                            (1,683)      (17,450)  (c,d,k) (19,133)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                   908,956       (15,064)           893,892
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                $1,003,882      $    (66)        $1,003,816
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Reconciliation of consolidated balance sheet as at March 31, 2010:

                                               Effect of
(000s)                       Canadian GAAP Transition to    Note      IFRS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Assets
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current assets:
 Cash and cash equivalents
                                $  257,114      $      -         $  257,114
 Accounts receivable                51,734             -             51,734
 Prepaid expenses and
  deposits                          30,678             -             30,678
 Fair value of financial
  instruments                       12,774       (12,774)     (j)         -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                   352,300       (12,774)           339,526
Investments                            576             -                576
Fair value of financial
 instruments                         5,238        (5,221)     (j)        17
Exploration and evaluation
 assets                                  -       330,034      (a)   330,034
Property, plant and
 equipment                       1,016,998      (320,670)     (a,f) 696,328
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                $1,375,112      $ (8,631)        $1,366,481
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and
 Shareholders' Equity
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current liabilities:
 Accounts payable and
  accrued                       $  105,164      $      -         $  105,164
 Fair value of financial
  instruments                            -            23      (j)        23
 Deferred taxes                      3,529        (3,529)     (h)         -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                   108,693        (3,506)           105,187
Decommissioning
 obligations                         9,628        14,930      (c)    24,558
Deferred premium on
 flow-through                            -         8,287      (k)     8,287
Deferred taxes                      27,782        (2,614)   (h,k)    25,168
Shareholders' equity:
 Share capital                   1,200,778        (5,251)   (d,k) 1,195,527
 Non-controlling interest           13,580            33             13,613
 Contributed surplus                 2,980         9,474      (d)    12,454
                                                            (c,d,
                                                             e,f,
 Retained earnings/                                          h,i,
 (deficit)                          11,671       (29,984)      k)   (18,313)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                 1,229,009       (25,728)         1,203,281
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                $1,375,112      $ (8,631)        $1,366,481
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Reconciliation of consolidated income statement for the period ended March
31, 2010:

                                                Effect of
(000s)                       Canadian GAAP  Transition to   Note       IFRS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
 Oil and natural gas sales      $   40,313      $      -         $   40,313
 Royalties                          (5,593)            -             (5,593)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                    34,720             -             34,720
 Realized gain on
  financial                              -             -                  -
 Unrealized gain on
  financial instruments             17,842       (17,814)     (j)        28
 Other income                          187             -                187
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                    52,749       (17,814)            34,935
Expenses:
 Operating                           7,555             -              7,555
 Transportation                      1,888             -              1,888
 General and
  administration                     1,495           244      (l)     1,739
 Share based payments                  674         1,310      (d)     1,984
 Depletion, depreciation
  and amortization                  21,977        (6,268)     (e)   15,709
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Results from operating
 activities                         19,160       (13,100)             6,060
Finance expenses                        16           808      (i)       824
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income/(loss) before taxes
                                    19,144       (13,908)             5,236
 Deferred taxes (recovery)           5,736        (1,407)     (h)     4,329
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income/(loss) and net
 comprehensive
 income/(loss) before non-controlling
 interest                           13,408       (12,501)               907
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income and
 comprehensive income
 attributable to:
 Shareholders of the
 Company                            13,354       (12,534)               820
 Non-controlling interest
 (note 12)                              54            33                 87
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                $   13,408   $   (12,501)          $    907
----------------------------------------------------------------------------
----------------------------------------------------------------------------

At the end of the last reporting year under Canadian GAAP - December 31,
2010:

                                               Effect of
(000s)                       Canadian GAAP Transition to    Note       IFRS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Assets
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current assets:
 Cash and cash equivalents
                                $   65,160  $          -         $   65,160
 Accounts receivable                58,669             -             58,669
 Prepaid expenses and
 deposits                            5,114             -              5,114
 Fair value of financial
  instruments                       14,413       (14,413)     (j)         -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                   143,356       (14,413)           128,943
Investments                          3,932             -              3,932
Fair value of financial
 instruments                         1,601        (1,601)     (j)         -
Exploration and evaluation
 assets                                  -       479,067      (a)   479,067
Property, plant and
 equipment                       1,637,960      (433,859)   (a,f) 1,204,101
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                $1,786,849  $     29,194         $1,816,043
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and
 Shareholders' Equity
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current liabilities:
 Accounts payable and
  accrued liabilities            $ 178,113  $          -       $    178,113
 Fair value of financial
  instruments                            -           472      (j)       472
 Deferred taxes                      2,832        (2,832)                 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                   180,945        (2,360)           178,585
Decommissioning
 obligations                        13,628        21,651     (c,f)   35,279
Long-term obligation                14,589             -             14,589
Fair value of financial
 instruments                             -           270      (j)       270
Deferred premium on
 flow-through                            -           348      (k)       348
Deferred taxes                      25,457        20,612      (h)    46,069
Shareholders' equity:
 Share capital                   1,517,675        (9,623)   (d,k) 1,508,052
 Non-controlling interest           13,767           142             13,909
 Contributed surplus                 7,919        21,343      (d)    29,262
                                                            (d,e,
  Retained                                                   f,h,
   earnings/(deficit)               12,869       (23,189)    I,k)   (10,320)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                 1,552,230       (11,327)         1,540,903
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                $1,786,849  $     29,194         $1,816,043
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Reconciliation of consolidated income statement for the year ended December
31, 2010:

                                               Effect of
(000s)                       Canadian GAAP Transition to    Note      IFRS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
 Oil and natural gas sales
                                $  194,928  $          -          $ 194,928
 Royalties                         (15,630)            -            (15,630)
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                                   179,298             -            179,298
 Realized gain on
 financial instruments              15,177             -             15,177
 Unrealized gain/(loss) on
  financial instruments
                                    15,950       (16,553)     (j)      (603)
 Other income                        1,535             -              1,535
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                   211,960       (16,553)           195,407
Expenses:
 Operating                          41,352             -             41,352
 Transportation                     11,357             -             11,357
 General and
  administration                     6,831         1,561      (l)     8,392
 Share based payments                3,197         7,191      (d)    10,388
 (Gain)/loss on
 divestitures                            -        (2,082)     (g)    (2,082)
 Depletion, depreciation
  and amortization                 126,985       (30,325)     (e)    96,660
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Results from operating
 activities                         22,238         7,102              29,340
Finance expenses                     1,085         1,689      (i)      2,774
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income/(loss) before taxes          21,153         5,413              26,566
 Deferred taxes                      6,360        11,010    (h,k)     17,370
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income/(loss) and net
 comprehensive
 income/(loss) before non-controlling
 interest                           14,793        (5,597)              9,196
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income and
 comprehensive income attributable to:
 Shareholders of the
 Company                            14,552        (5,739)              8,813
 Non-controlling interest              241           142                 383
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income/(loss) and
 comprehensive income (loss)    $   14,793  $     (5,597)         $    9,196
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Notes to the reconciliations

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

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

(i) exploration and evaluation assets were reclassified from the full cost pool to intangible exploration assets at the amount that was recorded under previous GAAP; and

(ii) the remaining full cost pool was allocated to the producing/development assets and components pro rata using reserve values.

This resulted in a transfer of $251.0 million to exploration and evaluation assets and a corresponding decrease in property, plant and equipment on transition. As at December 31, 2010, the transfer was $479.1 million, which included undeveloped land acquired in 2010, geological and geophysical costs and costs related to wells in progress.

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

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

(c) Decommissioning obligations:

Under the previous GAAP, decommissioning obligations were discounted at a credit adjusted risk-free rate of ten percent. Under IFRS, the estimated cash flows to abandon and remediate the wells and facilities has been risk adjusted therefore the provision is discounted at the risk-free rate in effect at the end of each reporting period. The change in the decommissioning obligations each period as a result of changes in the discount rate will result in an offsetting charge to PP&E. Upon transition to IFRS, the impact of this change was an $11.9 million increase in the decommissioning obligations with a corresponding increase to the deficit on the statement of financial position. As at December 31, 2010, the decommissioning obligations were $21.7 million higher than under the previous GAAP due to the change in discount rate and its impact on the liabilities incurred or acquired during 2010. In addition, under the previous GAAP, accretion of the discount was included in depletion and depreciation expense. Under IFRS it is included in finance expenses.

(d) Share-based compensation:

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

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

(e) Depletion policy:

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

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

For the three months ended March 31, 2010, depleting the oil and natural gas interests over proved-plus-probable reserves resulted in a decrease to depletion and depreciation of $6.3 million. For the year ended December 31, 2010, depletion and depreciation was reduced by $30.25 million as a result of changes to the depletion calculation.

(f) Business combinations:

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

(g) Gains and losses on divestitures:

Under previous GAAP, proceeds from divestitures were deducted from the full cost pool without recognition of a gain or loss unless the deduction resulted in a change in the depletion rate of 20 percent or greater, in which case a gain or loss was recorded. Under IFRS, gains and losses are recorded on divestitures and are calculated as the difference between the proceeds and the net book value of the asset disposed. For the year ended December 31, 2010, Tourmaline recognized a $2.1 million net gain on divestitures under IFRS compared to nil under the previous GAAP.

(h) Deferred income taxes:

The adjustment to deferred income taxes on transition relates to the opening adjustment to the decommissioning obligations and the adjustment to the unrealized gain or loss on financial instruments. The opening adjustments were charged through the deficit on the statement of financial position thereby creating a temporary difference on the liability. The deferred income tax impact of the opening adjustments was a deferred income tax asset of $0.9 million.

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

Adjustments to deferred income taxes have been made in regards to the adjustments noted above that resulted in a change to the temporary difference between tax and accounting values.

(i) Finance expenses:

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

(j) Fair value of financial instruments:

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

(k) Flow through shares:

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

The IFRS adjustment on transition date associated with flow-through shares was to decrease share capital by $4.0 million, increase retained earnings by $1.9 million with $3.8 million going to the liability account "Deferred premium on flow-through shares" and to increase the deferred tax liability by $2.1 million. For the twelve months ended December 31, 2010 IFRS adjustments were made to decrease share capital by $5.1 million, and to reduce retained earnings by $8.3 million as a result of the increase to deferred income tax expense, with an increase to the liability account "Deferred premium on flow-through shares" of $3.5 million, and increase to the deferred tax asset liability balance by $16.9 million.

(l) Capitalized general and administrative costs:

Under IFRS, the criteria for which general and administrative expenses ("G&A") can be capitalized are different than previous GAAP and as a result a greater portion of G&A costs have been expensed. This resulted in an additional $1.5 million of G&A expenses for the year ended December 31, 2010 (March 31, 2010 - $0.2 million).

Additional Information

Tourmaline Oil Corp. will hold its Annual General Meeting on June 9, 2011, at the Calgary Petroleum Club, 319-5th Avenue S.W., Calgary, Alberta beginning at 3:00 p.m. (MT).

Contact Information

  • Tourmaline Oil Corp.
    Michael Rose
    Chairman, President and Chief Executive Officer
    (403) 266-5992
    rose@tourmalineoil.com

    Tourmaline Oil Corp.
    Brian Robinson
    Vice President, Finance and Chief Financial Officer
    (403) 767-3587
    robinson@tourmalineoil.com

    Tourmaline Oil Corp.
    Scott Kirker
    Secretary and General Counsel
    (403) 767-3593
    kirker@tourmalineoil.com

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