Tourmaline Oil Corp.
TSX : TOU

Tourmaline Oil Corp.

August 11, 2011 17:00 ET

Tourmaline Oil Corp. Announces Record Q2 Results

CALGARY, ALBERTA--(Marketwire - Aug. 11, 2011) - Tourmaline Oil Corp. (TSX:TOU) ("Tourmaline" or the "Company") is pleased to announce record results for the three months ended June 30, 2011 and provide an update on its 2011 financial outlook and EP program. The results will be discussed on a conference call to be held Friday, August 12th at 10:00 am MT. Dial-in numbers are (416) 340-8530 or (877) 240-9772.

Production

Second quarter 2011 production was 28,263 boepd, a 58 % increase over second quarter 2010 production of 17,887 boepd and a 21 % increase over first quarter of 2011. Downtime related to both wet weather conditions and unscheduled third party outages reduced second quarter production by approximately 750 boepd. Current production is 33,700 boepd and the Company remains on track to meet the upwards-revised full year 2011 average production target of 31,125 boepd. Field conditions have improved dramatically over the past three weeks and previously delayed tie-in projects (that will bring a significant portion of the current 40 mmcfpd volumes awaiting tie-in on-stream) are now underway. 2011 production growth of approximately 74% over 2010 production levels is now anticipated - well ahead of the original 55% annual growth target. Strong 2011 EP results, the previously announced capital program expansion and the Cinch acquisition, which closed in July, are now anticipated to yield 2012 over 2011 production growth in excess of 40%.

EP Update

EP Program Overview

During the second quarter, Tourmaline drilled nine gas wells, more than originally anticipated as the Company drilled through break-up in Dawson-Sunrise, B.C. The Company also completed an asset consolidation at Minehead in June and acquired key EP lands at several crown land sales during the quarter.

Tourmaline plans to operate eight drilling rigs continuously through to Spring break-up 2012. Six rigs are active in the Alberta Deep Basin, one rig is drilling in Dawson-Sunrise, BC and the eighth rig will drill continuously in Spirit River, Alberta.

Alberta Deep Basin

Tourmaline has drilled and cased six additional gas wells in the Alberta Deep Basin since post break-up operations commenced in June. Four of the rigs are currently drilling horizontal wells and two are drilling verticals. Major second half 2011 drilling programs are planned at Minehead-Banshee, Musreau-Kakwa and Hinton-Solomon. The Company expects to drill approximately twenty vertical and twenty horizontal wells in the second half of 2011 in the Deep Basin. The Hinton-Solomon-Cabin program will target 3D seismic-defined follow-ups to the high deliverability vertical wells drilled in the first quarter of 2011. Horizontal drilling will focus primarily on the Cretaceous Wilrich, Cardium and Notikewin formations. Alberta Deep Basin production has now reached 26,000 boepd of natural gas and associated condensate and liquids. A fifth Company Deep Basin gas plant is being constructed at Musreau-Kakwa and is expected to start-up in November. This plant will alleviate unscheduled third party production outages in the immediate area and allow for a significant production increase from Musreau where very strong drilling results have continued. Tourmaline is expecting to reach the 30,000 boepd production level in the overall Alberta Deep Basin core area late in 2011.

Dawson-Sunrise, BC

Tourmaline drilled through break-up this year in Dawson-Sunrise, BC resulting in an additional nine new Montney horizontals during the past three months, bringing the total number of horizontals to 31 over the past 18 months. This Montney play area has three distinct over-pressured Montney horizons to exploit; all are exhibiting high deliverability horizontal gas wells with very strong liquids content (35-50 bbl/mm). Two of the wells drilled during the second quarter (1-12 and A1-12-80-18W6) tested at stable rates of 11.0 and 12.0 mmcfpd of sweet gas respectively with 35 bbls/mm condensate and NGL over a seven-day test period. Tourmaline expects to drill an additional 12-15 horizontals by year end 2011 in the Dawson-Sunrise complex.

The Company is expanding the Sunrise gas facility during the second half of 2011 from the current 35.0 mmcfpd capacity to 75 mmcfpd capacity. This expansion is expected to be complete by December 2011.

Spirit River, Alberta

Wet field conditions and associated road closures reduced June and July production at Spirit River and delayed start-up of the second half EP program. Drilling and completion activities have recommenced and the Company expects to drill at least five additional horizontals by year end 2011, bringing the total number of Triassic Charlie Lake oil horizontals to ten at Spirit River. The most recent horizontal well, 1-33-77-7W6, has been production testing at stable rates of 755 bopd and 1.7 mmcfpd over the past five days - the most prolific well in the horizontal program thus far.

Elmworth-Wapiti Montney

The Company has completed a detailed reservoir, facility and economic analysis of its extensive Elmworth-Wapiti Montney holdings and is now planning a significant development in the area for the second half of 2012. With initial well deliverabilities in the 6-8 mmcfpd range and liquids content in the 40-50 bbl/mm range, this project is highly profitable in the current price environment. The Company, along with partner Perpetual Energy Inc., plans to develop the resource in a series of 50 mmcfpd pods or phases - the initial 50 mmcfpd phase is currently being planned for calendar 2012 contingent, in part, upon commodity prices. The Company has expanded its land holdings in the area during the second and third quarters this year. Tourmaline has sufficient land and drilling inventory to support four comparable-sized Development pods.

Financial Outlook

Tourmaline is currently forecasting full-year 2011 EP capital spending of $470 million and total capital spending, including acquisitions, of $500 million. The Company has maintained a very strong balance sheet throughout its first 2.5 years of operation. Year-end 2011 net debt of $90 million is anticipated, representing less than six months debt to trailing funds from operations. Second quarter 2011 funds from operations of $60.4 million was ahead of the forecast of $58.1 million. Continued improvement on cash costs yielded an operating netback of $24.52 per boe - an increase of 12% over the corresponding quarter in 2010.

Operating costs for the six months of 2011 were $5.75/boe, 19% lower than the corresponding period in 2010 ($7.07/boe). The Company expects operating costs to be further reduced in the second half of 2011.

First half 2011 earnings of $17.9 million are up 611% over the comparable period of 2010.


CORPORATE SUMMARY - SECOND QUARTER 2011

                       Three Months Ended June 30  Six Months Ended June 30
                      ------------------------------------------------------
                              2011    2010 Change      2011    2010 Change
----------------------------------------------------------------------------
OPERATIONS
Production
 Natural gas (mcf/d)       151,634  95,533     59%  138,576  78,135     77%
 Crude oil & liquids
(bbl/d)                      2,991   1,965     52%    2,703   1,751     54%

Oil equivalent (boepd)      28,263  17,887     58%   25,799  14,773     75%

Product prices

 Natural gas ($/mcf)        $ 4.38  $ 4.61     (5%)    4.42    4.92    (10%)
 Crude oil & liquids                                           
  ($/bbl)                   $95.54  $72.49     32%   $89.96  $75.02     20%
 Operating expenses                                            
  ($/boe)                   $ 5.74  $ 6.98    (18%)  $ 5.75  $ 7.07    (19%)
 Transportation costs                                          
  ($/boe)                   $ 1.98  $ 1.59     25%   $ 1.94  $ 1.67     16%

Operating netback ($/boe)   $24.52  $21.82     12%   $23.84  $22.74      5%
Cash general &
 administrative expenses                                        
 ($/boe)                    $ 1.16  $ 1.08      7%   $ 1.21  $ 1.31     (8%)

FINANCIAL ($000, EXCEPT PER SHARE)

Revenue                     86,433  53,030     63%  154,980  93,343     66%
Royalties                    3,501   3,557     (2%)   7,730   9,150    (16%)
Funds from operations       60,415  33,925     78%  105,355  57,028     85%
Funds from operations per                
 share                      $ 0.41  $ 0.27     52%   $ 0.73  $ 0.48     52%
Net income                  15,192   1,700    794%   17,919   2,520    611%

Net income per share        $ 0.10  $ 0.01    900%   $ 0.12  $ 0.02    500%
Capital expenditures       130,075 286,808    (55%) 347,628 445,326    (22%)

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 June 30, 2011 and the consolidated financial statements for the year ended December 31, 2010. Both the consolidated financial statements and the MD&A can be found at www.sedar.com. This MD&A is dated August 10, 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 (natural gas liquids) and natural gas reserves; future prospects; the focus of and timing of capital expenditures; expectations regarding the ability to raise capital and to continually add to reserves through acquisitions and development; access to debt and equity markets; projections of market prices and costs; the performance characteristics of the Company's crude oil, NGL and natural gas properties; crude oil, NGL and natural gas production levels and product mix; Tourmaline's future operating and financial results; capital investment programs; supply and demand for crude oil, NGL and natural gas; future royalty rates; drilling, development and completion plans and the results therefrom; future land expiries; dispositions and joint venture arrangements; amount of operating, transportation and general and administrative expenses; treatment under governmental regulatory regimes and tax laws; 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

For the three months ended June 30, 2011 Tourmaline produced 2,571,959 Boe (4,669,683 Boe - six months), averaging 28,263 Boe/d (25,799 Boe/d - six months) compared to an average rate of 17,887 Boe/d (14,773 Boe/d - six months) in 2010. Production grew as new wells were brought on-stream from the Company's exploration and development program. Also, during the quarter two new facilities were brought on stream, a gas plant in the Minehead area and a pipeline interconnect from Dawson to the Tourmaline Sunrise gas plant, providing capacity for wells that were previously shut-in. Production was 89% natural gas weighted in the second quarter of 2011, which is consistent with the second quarter of 2010.


                   Three Months Ended               Six Months Ended        
             ---------------------------------------------------------------
                   June 30,   June 30, Change     June 30,   June 30, Change
                      2011       2010                2011       2010
----------------------------------------------------------------------------
Natural Gas 
 (mcf)          13,798,653  8,693,492      59% 25,082,270 14,142,519     77%
Crude oil and 
 NGL (bbl)         272,184    178,787      52%    489,305    316,855     54%
Oil equivalent 
 (boe)           2,571,959  1,627,702      58%  4,669,683  2,673,942     75%
Oil equivalent 
 (boepd)            28,263     17,887      58%     25,799     14,773     75%
----------------------------------------------------------------------------

REVENUE

Revenue from the sale of crude oil, natural gas and NGL for the quarter ended June 30, 2011 was $86.4 million ($155.0 million - six months) compared to $53.0 million for the second quarter of 2010 ($93.3 million - six months). Revenue growth for the three and six months ended June 30, 2011, when compared to the same period in 2010, is comprised of production increases 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 second quarter of 2011 was $4.38/Mcf ($4.42/Mcf - six months), as compared to $4.61/Mcf for the quarter ended June 30, 2010 ($4.92/Mcf - six months). Realized crude oil and NGL prices averaged $95.54/Bbl for the second quarter of 2011 ($89.96/Bbl - six months) as compared to $72.49/Bbl for the quarter ended June 30, 2010 ($75.02/Bbl - six months). 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 June 30, 2011 was 12% (18% - 2010) higher than the AECO benchmark due to a combination of higher heat content in the Company's Alberta Deep Basin natural gas production and positive commodity contracts.

Tourmaline's revenue is analyzed as follows:


                                Three Months Ended         Six Months Ended 
                               ---------------------------------------------
                                June 30,   June 30,      June 30,   June 30,
(000s)                             2011       2010          2011       2010
----------------------------------------------------------------------------
Revenue from:                                                               
----------------------------------------------------------------------------
 Natural Gas                   $ 60,427   $ 40,069     $ 110,964   $ 69,572
 Oil and NGL                     26,006     12,961        44,016     23,771
----------------------------------------------------------------------------
Total revenue from oil, 
 NGL and gas sales             $ 86,433   $ 53,030     $ 154,980   $ 93,343
----------------------------------------------------------------------------

TOURMALINE PRICES: 

                   Three Months Ended               Six Months Ended        
             ---------------------------------------------------------------
                   June 30,   June 30, Change     June 30,   June 30, Change
                      2011       2010                2011       2010
----------------------------------------------------------------------------
Natural Gas 
 ($/Mcf)           $  4.38    $  4.61      (5)%   $  4.42    $  4.92   (10)%
Oil and NGL 
 ($/Bbl)           $ 95.54    $ 72.49      32%    $ 89.96    $ 75.02     20%
Oil equivalent 
 ($/Boe)           $ 33.61    $ 32.58       3%    $ 33.19    $ 34.91    (5)%
----------------------------------------------------------------------------


BENCHMARK OIL AND GAS PRICES:

                                                  Three Months Ended        
                                     ---------------------------------------
                                       June 30, 2011   June 30, 2010 Change
----------------------------------------------------------------------------
Natural Gas                                                      
  NYMEX Henry Hub (US$/mcf)                  $  4.38         $  4.35      1%
  AECO (Cdn$/mcf)                            $  3.90         $  3.91      -
Oil                                                              
  NYMEX (US$/bbl)                            $102.34         $ 78.05     31%
  Edmonton Par (Cdn$/bbl)                    $103.59         $ 75.86     37%
----------------------------------------------------------------------------


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

                                                  Three Months Ended        
                                     ---------------------------------------
($/mcf)                                June 30, 2011   June 30, 2010 Change
----------------------------------------------------------------------------
AECO index                                   $  3.90         $  3.91      -
Heat/quality differential                       0.27            0.26      4%
Realized gain                                   0.21            0.44   (52)%
----------------------------------------------------------------------------
Tourmaline realized natural gas price        $  4.38         $  4.61    (5)%
----------------------------------------------------------------------------


CURRENCY - EXCHANGE RATES: 

                                                  Three Months Ended        
                                     ---------------------------------------
                                       June 30, 2011   June 30, 2010 Change
----------------------------------------------------------------------------
Cdn/US$                                       1.0334          0.9721      6%
----------------------------------------------------------------------------

ROYALTIES

Tourmaline's royalties are analyzed as follows:

                                Three Months Ended         Six Months Ended 
                               ---------------------------------------------
                                June 30,   June 30,      June 30,   June 30,
(000s)                             2011       2010          2011       2010
----------------------------------------------------------------------------
Natural Gas                      $  169     $  856       $ 1,609    $ 3,587
Oil and NGL                      $3,332     $2,701       $ 6,121    $ 5,563
----------------------------------------------------------------------------
Total royalties                  $3,501     $3,557       $ 7,730    $ 9,150
----------------------------------------------------------------------------

For the quarter ended June 30, 2011, the average effective royalty rate was 4.1%, compared to 6.7% for the period ending June 30, 2010. The Company benefited from Provincial Government incentive programs including the Natural Gas Deep Drilling Program and the New Well Royalty Reduction Program in Alberta and the Royalty Relief Program and the Deep Royalty Credit Program in British Columbia. Tourmaline also benefitted from the government incentive programs during the six months ended June 30, 2011, resulting in a similar decrease in the average effective royalty rate from 9.8% for the six months ended June 30, 2010 to 5.0% for the six months ended June 30, 2011.

OTHER INCOME

For the three and six months ended June 30, 2011, other income was $1.6 million and $2.0 million, respectively, compared to $0.2 million for the second quarter of 2010 and $0.4 million for the six months ended June 30, 2010. Over the last two years, Tourmaline has built and acquired interests in facilities which helped generate increased third party processing income when compared to the same period in 2010.

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 June 30, 2011 were $14.8 million or $5.74/Boe ($26.9 million or $5.75/Boe - six months), compared to $11.4 million or $6.98/Boe for the same quarter in 2010 ($18.9 million or $7.07/Boe - six months). Tourmaline's operating expenses in the second quarter of 2011 include third party processing, gathering and compression fees of approximately $3.2 million or 21.5% 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 second quarter of 2011, G&A expenses of $5.7 million (June 30, 2010 - 4.1 million), including $2.7 million related to stock-based compensation expense (June 30, 2010 - $2.3 million), were incurred. The Company also capitalized direct G&A costs of $2.9 million (June 30, 2010 - $3.2 million) and stock-based compensation of $2.7 million in the second quarter of 2011 (June 30, 2010 - $2.3 million). Cash G&A expenses per Boe, excluding interest and financing charges, were $1.16/Boe for the second quarter of 2011, compared to $1.08/Boe for the same quarter in 2010. The Company expects to reduce G&A per Boe in 2011 and 2012 as production volumes grow more rapidly than the associated overhead costs.

For the six months ended June 30, 2011, G&A expenses totalled $10.9 million (June 30, 2010 - $7.8 million) including $5.3 million (June 30, 2010 - $4.3 million) related to stock-based compensation expense. During the same period, direct G&A costs of $5.9 million (June 30, 2010 - $5.4 million) and stock-based compensation of $5.3 million (June 30, 2010 - $4.3 million) were capitalized. The increase in G&A expenses for the first six months of 2011 compared to the same period in 2010 are primarily due to office staff additions and higher rent expense as the Company took on more head office space. The higher total G&A expenses allow the Company to manage the commensurately larger production, reserve and land base. Notwithstanding this, the Company's G&A expenses per Boe continue to trend downward as Tourmaline's production base continues to grow faster than its accompanying G&A costs. G&A costs, excluding interest and financing charges, for the six months ended June 30, 2011 were $1.21 per Boe, compared to $1.31 per Boe for the first six months of 2010. This decrease in per Boe G&A cost is consistent with a growing production base.

G&A expenses are summarized as follows:


                                Three Months Ended         Six Months Ended 
                               ---------------------------------------------
                                June 30,   June 30,      June 30,   June 30,
(000s)                             2011       2010          2011       2010
----------------------------------------------------------------------------
G&A expenses                   $  5,898   $  4,920     $  11,505     $8,935 
Administrative and capital 
 recovery                          (780)    (2,506)       (1,588)    (3,252)
Capitalized G&A                  (2,139)      (655)       (4,269)    (2,185)
----------------------------------------------------------------------------
Total G&A expense                 2,979      1,759         5,648      3,498 
----------------------------------------------------------------------------
Stock-based compensation          5,448      4,596        10,588      8,564 
Capitalized stock-based 
 compensation                    (2,724)    (2,298)       (5,294)    (4,282)
----------------------------------------------------------------------------
Total stock-based compensation 
 expense                          2,724      2,298         5,294      4,282 
----------------------------------------------------------------------------
Total G&A and stock-based 
 compensation expense          $  5,703   $  4,057     $  10,942     $7,780 
----------------------------------------------------------------------------

STOCK-BASED COMPENSATION

Tourmaline uses the fair value method for the determination of all non-cash related stock-based compensation. During the second quarter of 2011, 825,000 stock options were granted to employees, officers, directors and key consultants with exercise prices ranging from $25.14 to $29.93, and 266,001 options were exercised, bringing $2.7 million cash into treasury. The Company recognized $2.7 million of stock-based compensation expense in the quarter compared to $2.3 million in the second quarter of 2010. For the six months ended June 30, 2011, the Company recognized $5.3 million of stock-based compensation expense compared to $4.3 million for the 6 months ended June 30, 2010.

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

DD&A expense was $38.6 million for the second quarter of 2011 compared to $25.5 million for the same period in 2010 due to higher production volumes. The per-unit DD&A rate for the second quarter was $15.00/Boe compared to $15.68/Boe for the second quarter of 2010.

For the six months ended June 30, 2011, DD&A expense was $68.9 million (June 30, 2010 - $41.2 million) with an effective rate of $14.75/Boe (June 30, 2010 - $15.42/Boe). 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, both of which have resulted in increases in proved plus probable reserves.

CASH FLOW FROM OPERATIONS, FUNDS FROM OPERATIONS AND NET EARNINGS

Funds from operations for the second quarter of 2011 were $60.4 million or $0.41 per diluted share. The Company had after tax earnings of $15.2 million ($0.10 per diluted share) for the quarter ended June 30, 2011, compared to after tax earnings of $1.7 million (earnings of $0.01 per diluted share) in the previous year. For the six months ending June 30, 2011, Tourmaline had after-tax earnings of $17.9 million (six months ending June 30, 2010 - $2.5 million) or $0.12 per diluted share (June 30, 2010 - $0.02 per diluted share).


                   Three Months Ended               Six Months Ended        
             ---------------------------------------------------------------
                   June 30,   June 30, Change     June 30,   June 30, Change
                      2011       2010                2011       2010
----------------------------------------------------------------------------
Cash flow from 
 operations per 
 share (1)         $  0.29    $  0.28       4%    $  0.62    $  0.48     29%
Funds from 
 operations per 
 share (1) (2)     $  0.41    $  0.27      52%    $  0.73    $  0.48     52%
Earnings per 
 share (1)         $  0.10    $  0.01     900%    $  0.12    $  0.02    500%
Operating netback 
 per boe (2)       $ 24.52    $ 21.82      12%    $ 23.84    $ 22.74      5%
----------------------------------------------------------------------------
(1)  Fully diluted                                                          
(2) See "Non-IFRS Financial Measures"                                       

CAPITAL EXPENDITURES

During the six months ended June 30, 2011, the Company invested $347.6 million of cash consideration net of dispositions compared to $445.3 million for the same period in 2010. Expenditures on exploration and production in the second quarter of 2011 were $98.4 million compared to $64.3 million in the same quarter of 2010, which is consistent with the Company's aggressive growth strategy. The Company drilled 9 gross (6.8 net) wells, completed 3 gross (1.9 net) wells and tied-in 7 gross (4.6 net) wells. Drilling, completing, equipping and related facilities costs totalled $78.9 million and land and seismic costs were $19.4 million for the second quarter of 2011. The Company also acquired a property in the Deep Basin for $27.0 million during the second quarter.


                                Three Months Ended         Six Months Ended 
                               ---------------------------------------------
                                June 30,   June 30,      June 30,   June 30,
(000s)                             2011       2010          2011       2010
----------------------------------------------------------------------------
Land and seismic               $ 19,446   $  4,598      $ 24,260   $ 12,372 
Drilling and completions         34,347     40,307       165,817    118,191 
Facilities                       44,569     19,436       117,332     46,250 
Property acquisitions            27,972    228,547        42,748    272,284 
Corporate acquisitions                -          -             -      3,156 
Property dispositions                 -     (7,863)       (7,009)    (9,863)
Other                             3,741      1,783         4,479      2,936 
----------------------------------------------------------------------------
Total                          $130,075   $286,808      $347,627   $445,326 
----------------------------------------------------------------------------

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2011, Tourmaline had negative working capital of $31.6 million, after adjusting for the fair value of financial instruments (the unadjusted working capital deficiency was $32.0 million). Management believes the Company has sufficient liquidity and capital resources to fund its 2011 and 2012 exploration and development program through expected cash flow from operations and its unutilized bank credit facilities.

On May 17, 2011, Tourmaline issued 6.8 common shares at $25.50 per share in a public offering for gross proceeds of approximately $174.0 million. The net proceeds of approximately $166.5 million will be utilized to acquire properties and to conduct the Company's remaining 2011 and 2012 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 $275 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 second floating charge over all assets. On July 31, 2012, at the Company's discretion, the facility is available on a non-revolving basis for a period of 365 days, at which time the facility would be due and payable. Alternatively, the facility may be extended for a further 364-day period at the request of the Company and subject to approval by the banks.

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

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

As at June 30, 2011, the Company had $44.4 million drawn on existing facilities (June 30, 2010 - nil), and net debt of $76.0 million (June 30, 2010 - $22.1 million).

SHARES OUTSTANDING

As at August 10, 2011 the Company has 151,819,088 common shares outstanding and 12,132,499 stock options granted and outstanding.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

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


Payments Due by Year (000s)            2011     2012    2013    2014    2015
----------------------------------------------------------------------------
Operating leases                    $ 1,338  $ 2,612 $ 2,249 $ 2,105  $  526
Flow-through obligations                  -   34,340       -       -       -
Firm transportation agreements       11,497   23,887  21,739  14,077   7,354
Bank debt                                 -   44,445       -       -       -
----------------------------------------------------------------------------
                                    $12,835 $105,284 $23,988 $16,182  $7,880
----------------------------------------------------------------------------

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 June 30, 2011 Tourmaline's receivables consisted of $19.9 million (December 31, 2010 - $21.1 million) from joint venture partners, $29.5 million (December 31, 2010 - $23.6 million) from petroleum and natural gas marketers and $8.5 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 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 June 30, 2011 the Company had $2.0 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 June 30, 2011 (June 30, 2010 - nil) and did not provide for any doubtful accounts nor was it required to write-off any receivables during the period ended June 30, 2011 (June 30, 2010 - nil).

(b) Liquidity risk:

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

The Company's accounts payable and accrued liabilities balance at June 30, 2011 is approximately $92.5 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 June 30, 2011 substantially all of the account balances were less than 90 days.

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

(c) Market risk:

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

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

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

Interest rate risk had minimal impact on the Company's balance sheet at June 30, 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 flow will fluctuate as a result of changes in commodity prices. As at June 30, 2011, the Company has entered into certain financial derivative and physical delivery sales contracts in order to manage commodity risk. These instruments are not used for trading or speculative purposes. The Company has not designated its financial derivative contracts as effective accounting hedges, even though the Company considers all commodity contracts to be effective economic hedges. As a result, all such commodity contracts are recorded on the statement of financial position at fair value, with changes in the fair value being recognized as an unrealized gain or loss on the consolidated statement of income.

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


Type of Contract                     Quantity    Time Period Contract Price
---------------------------------------------------------------------------
Financial Swap                                   July 2011 -               
                                   100 bbls/d  December 2012   US$90.00/bbl
Financial Swap                                        July -               
                                   100 bbls/d  December 2011  US$100.10/bbl
Financial Swap                                   July 2011 -               
                                   100 bbls/d      June 2012  US$101.40/bbl
Financial Swap                                September 2011               
                                   100 bbls/d     - December  US$101.00/bbl
                                                        2012               
Financial Swap                                     January -               
                                   100 bbls/d  December 2012  US$104.00/bbl
Financial Swap                                     January -               
                                   100 bbls/d  December 2011   US$87.85/bbl
Costless Collar                               September 2010               
                                   100 bbls/d       - August   US$75.00/bbl
                                                        2012        floor -
                                                               US$96.00/bbl
                                                                    ceiling
Financial Swap                                January 2012 -               
                                   100 bbls/d      June 2013   US$99.70/bbl
Financial Swap                                     January -               
                                   100 bbls/d  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 June 30, 2011:

                                    Three Months Ended     Six Months Ended
                                 -------------------------------------------
(000s)                               June 30,  June 30,  June 30,   June 30,
                                        2011      2010      2011       2010
----------------------------------------------------------------------------
Unrealized gain/(loss) on                                                   
financial instruments             $    3,122 $     725 $     371 $      599
Unrealized gain/(loss) on                                                  
investments held for trading             (68)      (72)      (86)        82
----------------------------------------------------------------------------
Total                             $    3,054 $     653 $     285 $      681
----------------------------------------------------------------------------

The unrealized gain/(loss) on derivative contracts has been included on the statement of financial position with changes in the fair value included in the unrealized gain/(loss) on financial instruments on the statement of income. As at June 30, 2011, if the future strip prices for oil were $1.00 per bbl higher, with all other variables held constant, before-tax earnings for the period would have been $0.4 million lower. An equal and opposite impact would have occurred to before tax earnings and the fair value of the derivative contracts liability had oil prices been $1.00 per bbl lower.

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

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


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

(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 June 30, 2011, the Company's ratio of net debt to annualized funds from operations was 0.36 to 1.0.


                                                  As at               As at
(000s)                                    June 30, 2011   December 31, 2010
----------------------------------------------------------------------------
Net debt:                                                                   
  Bank debt                                    $(44,445)           $      - 
  Working capital/(deficit)                     (31,963)            (49,642)
  Fair value of financial instruments 
   - short-term liability                           371                 472 
----------------------------------------------------------------------------
Net debt                                       $(76,037)           $(49,170)
----------------------------------------------------------------------------
Annualized funds from  operations:                                          
  Cash flow from operating activities          $ 88,998            $144,237 
  Change in non-cash working capital             16,357              (9,517)
----------------------------------------------------------------------------
  Funds from operations to end of period       $105,355            $134,720 
Annualized funds from operations               $210,710            $134,720 
----------------------------------------------------------------------------
Net debt to annualized funds from operations       0.36                0.36 
----------------------------------------------------------------------------

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

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

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

DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING

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

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

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

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

BUSINESS RISKS AND UNCERTAINTIES

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

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

IMPACT OF NEW ENVIRONMENTAL REGULATIONS

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

INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")

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

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


SUMMARY STATEMENT OF FINANCIAL POSITION RECONCILIATIONS

                                                      As at January 1, 2010
----------------------------------------------------------------------------
                                                     Share-
                 Previous         Decommissioning    Based Other      
($000s)              GAAP      E&E    Obligations 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     
 obligations        7,208        -         11,945        -     -     19,153
Deferred
 premium on
 flow-through
 shares                 -        -              -        - 3,833      3,833
Deferred taxes        780        -              -        -  (780)         -
Share capital     895,095        -              -        -(4,143)   890,952
Non-controlling    
 interest          13,526        -              -        -     -     13,526
Contributed
 surplus            2,018        -              -    6,529     -      8,547
Retained        
 earnings/
 (deficit)         (1,683)       -        (11,945)  (6,529)1,024    (19,133)
----------------------------------------------------------------------------
Total
 liabilities and
 shareholders'
 equity         1,003,882        -              -        -   (66) 1,003,816
----------------------------------------------------------------------------

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



                                                     As at December 31, 2010
----------------------------------------------------------------------------
                                 Previous                   Decommissioning 
($000s)                              GAAP      E&E Depletion    Obligations 
----------------------------------------------------------------------------
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 obligations        13,628        -         -         21,776 
Long-term obligation               14,589        -         -              - 
Fair value of financial             
 instruments                            -        -         -              - 
Deferred premium on flow-through
 shares                                 -        -         -              - 
Deferred taxes                     25,457        -         -              - 
Share capital                   1,517,675        -         -              - 
Non-controlling interest           13,767        -         -              - 
Contributed surplus                 7,919        -         -              - 
Retained earnings/(deficit)        12,869        -    29,184        (11,932)
----------------------------------------------------------------------------
Total liabilities and 
 shareholders' equity           1,786,849        -    29,184          9,844 
----------------------------------------------------------------------------

                                                    As at December 31, 2010 
----------------------------------------------------------------------------
                                  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 obligations                 -          (125)         35,279 
Long-term obligation                                      -          14,589 
Fair value of financial
 instruments                                            270             270 
Deferred premium on flow-through
 shares                                                 348             348 
Deferred taxes                           (964)       21,576          46,069 
Share capital                            (128)       (9,495)      1,508,052 
Non-controlling interest                    -           142          13,909 
Contributed surplus                    21,343             -          29,262 
Retained earnings/(deficit)           (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, the deferred premium
    on flow-through shares, the impact of the fact that Tourmaline's forward
    gas sales contracts no longer meet the definition of a derivative, gains
    and losses on divestitures and the deferred tax impact related thereto.


SUMMARY NET EARNINGS RECONCILIATION

2010
----------------------------------------------------------------------------
($000s)                             Annual      Q4      Q3      Q2       Q1
----------------------------------------------------------------------------
Net earnings/(loss) - previous                                              
 GAAP                               14,552  (2,593)  4,463    (672)  13,354
After-tax addition/(deduction):                                             
 Unrealized gain/(loss) on                                                  
  financial instruments            (16,553)  4,995  (7,410)  3,676  (17,814)
 General and administrative         (1,562)   (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      14      12      (9)      (3)
 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   5,868     425   1,700      820 
----------------------------------------------------------------------------

Accounting Policy Changes and the Impact of Transition to IFRS

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

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

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

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

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

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

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

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

RECENT PRONOUNCEMENTS ISSUED

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

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

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

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

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

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

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

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

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

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

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

NON-IFRS FINANCIAL MEASURES

This MD&A includes references to financial measures commonly used in the oil and gas industry such as "funds from operations", "operating netback", "working capital (adjusted for the fair value of financial instruments and 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         Six Months Ended 
                               ---------------------------------------------
                                June 30,   June 30,      June 30,   June 30,
(000s)                             2011       2010          2011       2010
----------------------------------------------------------------------------
Cash flow from operating 
 activities (per IFRS)        $  42,112  $  34,623     $  88,998  $  56,502 
Change in non-cash working 
 capital                         18,303       (698)       16,357        526 
----------------------------------------------------------------------------
Funds from operations         $  60,415  $  33,925     $ 105,355  $  57,028 
----------------------------------------------------------------------------

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         Six Months Ended 
                               ---------------------------------------------
                                June 30,   June 30,      June 30,   June 30,
($/Boe)                            2011       2010          2011       2010
----------------------------------------------------------------------------
Revenue, excluding processing 
 fee income                    $  33.60   $  32.58      $  33.19   $  34.91 
Royalties                         (1.36)     (2.19)        (1.66)     (3.42)
Transportation costs              (1.98)     (1.59)        (1.94)     (1.68)
Operating expenses                (5.74)     (6.98)        (5.75)     (7.07)
----------------------------------------------------------------------------
Operating netback              $  24.52   $  21.82      $  23.84   $  22.74 
----------------------------------------------------------------------------

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

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

(000s)


                                                  As at               As at
(000s)                                    June 30, 2011   December 31, 2010
----------------------------------------------------------------------------
Working capital/(deficit)                      $(31,963)           $(49,642)
Fair value of financial instruments 
 - short-term liability                             371                 472 
----------------------------------------------------------------------------
Working capital/(deficit) (adjusted 
 for the fair value of financial instruments)  $(31,592)           $(49,170)
----------------------------------------------------------------------------

Net Debt

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

                                                  As at               As at
(000s)                                    June 30, 2011   December 31, 2010
----------------------------------------------------------------------------
Bank debt                                      $(44,445)           $      - 
Working capital/(deficit)                       (31,963)            (49,642)
Fair value of financial instruments 
 - short-term liability                             371                 472 
----------------------------------------------------------------------------
Net debt                                       $(76,037)           $(49,170)
----------------------------------------------------------------------------


SELECTED QUARTERLY INFORMATION
----------------------------------------------------------------------------
                                 2011                      2010

($000s, unless otherwise   -------------------------------------------------
 noted)               Q2         Q1         Q4        Q3        Q2        Q1
----------------------------------------------------------------------------
PRODUCTION
----------------------------------------------------------------------------
Crude oil and NGL
 (bbls)          272,184    217,121    236,502   147,997   178,787   138,068
Gas (mcf)     13,798,653 11,283,617 11,251,067 9,502,337 8,693,492 5,449,027
Oil equivalent 
 (boe)         2,571,959  2,097,724  2,111,680 1,731,720 1,627,702 1,046,239
Crude oil and 
 NGL (bbls/d)      2,991      2,412      2,571     1,609     1,965     1,534
Gas (mcf/d)      151,634    125,374    122,294   103,286    95,533    60,545
Oil equivalent 
 (boe/d)          28,263     23,308     22,953    18,823    17,887    11,625
----------------------------------------------------------------------------
FINANCIAL
----------------------------------------------------------------------------
Gross revenue, 
 net of           
 royalties        87,551     62,019     63,340    46,822    50,310    34,935

Cash flow from            
 operating 
 activities       42,112     46,886     45,916    40,806    34,669    21,879
Funds from 
 operations (1)   60,415     44,940     44,747    31,371    33,925    23,103
Per diluted share   0.41       0.32       0.34      0.25      0.27      0.21
Net earnings/
 (loss)           15,192      2,727      5,868       425     1,700       820
Per diluted share   0.10       0.02       0.04      0.00      0.01      0.01
Total assets   2,030,285  1,936,836  1,816,043 1,546,820 1,412,776 1,366,481
Working capital  (31,963)  (139,138)   (49,642)  (78,205)  (21,672)  234,339


Working capital
 (adjusted for 
 the fair value 
 of financial                           
 instruments) 
 (1)             (31,592)  (136,933)   (49,170)  (78,314)  (22,075)  234,362
Capital 
 expenditures    130,075    217,553    217,648   152,257   286,733   158,518


Basic outstanding        
 shares (000s)   145,215    138,124    136,191   123,841   122,691   120,191
----------------------------------------------------------------------------

----------------------------------------------------------------------------
                                                            2009 - Previous
                                                                     GAAP(2)
($000s, unless otherwise                                  ------------------
 noted)                                                        Q4        Q3
----------------------------------------------------------------------------
PRODUCTION
----------------------------------------------------------------------------
Crude oil and NGL(bbls)                                    90,978    21,168
Gas (mcf)                                               3,454,934 2,067,940
Oil equivalent (boe)                                      666,800   365,825
Crude oil and NGL (bbls/d)                                    989       230
Gas (mcf/d)                                                37,554    22,478
Oil equivalent (boe/d)                                      7,248     3,976
----------------------------------------------------------------------------
FINANCIAL
----------------------------------------------------------------------------
Gross revenue, net of royalties                            22,765     6,132
Cash flow from operating activities                        (9,388)    7,331
Funds from operations (1)                                  14,569     3,342
Per diluted share                                            0.12      0.05
Net earnings/(loss)                                          (369)   (2,081)
Per diluted share                                            0.00     (0.03)
Total assets                                            1,003,882   561,339

Working capital                                           161,514    84,622

Working capital
 (adjusted for the fair
 value of financial
 instruments) (1)                                         161,514    84,622
Capital expenditures                                      125,946   234,352

Basic outstanding shares (000s)                           101,809    73,553
----------------------------------------------------------------------------
PER UNIT
----------------------------------------------------------------------------
Gas ($/mcf)         4.38       4.48       4.17      4.36      4.61      5.41
Crude oil and NGL          
 ($/bbl)           95.54      83.00      75.94     70.49     72.49     78.29
Revenue ($/boe)    33.61      32.68      30.74     29.94     32.58     38.53
Operating netback          
 ($/boe)           24.52      22.99      22.66     19.12     21.82     24.16
----------------------------------------------------------------------------
PER UNIT
----------------------------------------------------------------------------
Gas ($/mcf)                                                   5.08     3.05
Crude oil and NGL ($/bbl)                                    68.02    61.27
Revenue ($/boe)                                              35.59    20.80
Operating netback ($/boe)                                    22.72     9.91
----------------------------------------------------------------------------
(1) See Non-IFRS Financial Measures
(2) As Tourmaline's IFRS transition date was January 1, 2010, the 2009
    comparative information has not been restated.

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


CONSOLIDATED FINANCIAL STATEMENTS                                           
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION                               

                                                                December 31,
(000s) (unaudited)                               June 30, 2011         2010
----------------------------------------------------------------------------
Assets                                                                      
 Current assets:                                                            
 Cash and cash equivalents                        $          -  $    65,160
 Accounts receivable                                    57,929       58,669
 Prepaid expenses and deposits                           3,005        5,114
----------------------------------------------------------------------------
                                                        60,934      128,943
Investments (note 9)                                     3,508        3,932
Exploration and evaluation assets (note 5)             549,667      479,067
Property, plant and equipment (note 6)               1,416,176    1,204,101
----------------------------------------------------------------------------
                                                  $  2,030,285  $ 1,816,043
----------------------------------------------------------------------------
Liabilities and Shareholders' Equity                                        
Current liabilities:                                                        
 Accounts payable and accrued liabilities         $     92,526  $   178,113
 Fair value of financial instruments (note 4)              371          472
----------------------------------------------------------------------------
                                                        92,897      178,585
Bank debt (note 8)                                      44,445            -
Decommissioning obligations (note 7)                    37,228       35,279
Long-term obligation (note 10)                          12,726       14,589
Fair value of financial instruments (note 4)                 -          270
Deferred premium on flow-through shares (note 12)        5,609          348
Deferred taxes                                          55,851       46,069
Shareholders' equity:                                                       
 Share capital (note 12)                             1,721,873    1,508,052
 Non-controlling interest (note 11)                     14,355       13,909
 Contributed surplus                                    37,702       29,262
 Retained earnings/(deficit)                             7,599      (10,320)
----------------------------------------------------------------------------
                                                     1,781,529    1,540,903
----------------------------------------------------------------------------
                                                  $  2,030,285  $ 1,816,043
----------------------------------------------------------------------------

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


CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME                  

                                     Three Months Ended    Six Months Ended 
                                    ----------------------------------------
(000s) except per-share amounts       June 30,  June 30,  June 30,  June 30,
(unaudited)                              2011      2010      2011      2010 
----------------------------------------------------------------------------
Revenue:                                                                    
 Oil and natural gas sales           $ 83,705  $ 49,189  $146,986  $ 88,160 
 Royalties                             (3,501)   (3,557)   (7,730)   (9,150)
----------------------------------------------------------------------------
                                       80,204    45,632   139,256    79,010 
 Realized gain on financial                                                 
 instruments                            2,728     3,841     7,994     5,183 
 Unrealized gain/(loss) on financial                                        
 instruments (note 4)                   3,054       653       285       681 
 Other income (note 15)                 1,565       184     2,035       371 
----------------------------------------------------------------------------
                                       87,551    50,310   149,570    85,245 
Expenses:                                                                   
 Operating                             14,762    11,362    26,862    18,917 
 Transportation                         5,103     2,588     9,083     4,476 
 General and administration             2,979     1,759     5,648     3,498 
 Share-based payments                   2,724     2,298     5,294     4,282 
 Loss on divestitures                       -     3,058     3,630     3,058 
 Depletion, depreciation and                                                
 amortization                          38,561    25,530    68,869    41,239 
----------------------------------------------------------------------------
                                       64,129    46,595   119,386    75,470 
----------------------------------------------------------------------------
Results from Operating Activities      23,422     3,715    30,184     9,775 
Finance expenses (note 16)              1,304       310     2,033     1,134 
----------------------------------------------------------------------------
Income before taxes                    22,118     3,405    28,151     8,641 
 Deferred taxes                         6,655     1,577     9,786     5,906 
----------------------------------------------------------------------------
Net income and comprehensive income                                         
for the period before non-                                                  
controlling interest                   15,463     1,828    18,365     2,735 
----------------------------------------------------------------------------
Net income and comprehensive income                                         
attributable to:                                                            
 Shareholders of the Company           15,192     1,700    17,919     2,520 
 Non-controlling interest (note 11)       271       128       446       215 
----------------------------------------------------------------------------
                                       15,463     1,828    18,365     2,735 
----------------------------------------------------------------------------

Income per share attributable to                                            
common shareholders (note 13)                                               
----------------------------------------------------------------------------
 Basic                               $   0.11  $   0.01  $   0.13  $   0.02 
----------------------------------------------------------------------------
 Diluted                             $   0.10  $   0.01  $   0.12  $   0.02 
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.            


CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY                                

(000s) except per-share                                                     
 amounts (unaudited)                                                        
----------------------------------------------------------------------------
                                          Retained          Non-            
                   Share   Contributed   Earnings/   Controlling      Total 
                 Capital       Surplus    (Deficit)     Interest     Equity 
----------------------------------------------------------------------------
Balance, at                                                                 
 January 1,                                                                 
 2010         $  890,952  $      8,547  $  (19,133) $     13,526 $  893,892 
Issue of                                                                    
 common                                                                     
 shares (note                                                               
 12)             636,727             -           -             -    636,727 
Share issue                                                                 
 costs, net                                                                 
 of tax          (19,848)            -           -             -    (19,848)
Share-based                                                                 
 payments              -        10,388           -             -     10,388 
Capitalized                                                                 
 share-based                                                                
 payments              -        10,388           -             -     10,388 
Options                                                                     
 exercised                                                                  
 (note 12)           221           (61)          -             -        160 
Income                                                                      
 attributable                                                               
 to common                                                                  
 shareholders          -             -       8,813             -      8,813 
Income                                                                      
 attributable                                                               
 to non-                                                                    
 controlling                                                                
 interest              -             -           -           383        383 
----------------------------------------------------------------------------
Balance, at                                                                 
 December 31,                                                               
 2010          1,508,052        29,262     (10,320)       13,909  1,540,903 
Issue of                                                                    
 common                                                                     
 shares (note                                                               
 12)             213,695             -           -             -    213,695 
Share issue                                                                 
 costs, net                                                                 
 of tax           (7,568)            -           -             -     (7,568)
Share-based                                                                 
 payments              -         5,294           -             -      5,294 
Capitalized                                                                 
 share-based                                                                
 payments                        5,294           -             -      5,294 
Options                                                                     
 exercised                                                                  
 (note 12)    -    7,694        (2,148)          -             -      5,546 
Income                                                                      
 attributable                                                               
 to common                                                                  
 shareholders          -             -      17,919             -     17,919 
Income                                                                      
 attributable                                                               
 to non-               -                                                    
 controlling                                                                
 interest              -             -           -           446        446 
----------------------------------------------------------------------------
Balance, at                                                                 
 June 30,                                                                   
 2011         $1,721,873  $     37,702  $    7,599  $     14,355 $1,781,529 
----------------------------------------------------------------------------

(000s) except per-share                                                     
 amounts (unaudited)                                                        
----------------------------------------------------------------------------
                                          Retained          Non-            
                   Share   Contributed   Earnings/   Controlling      Total 
                 Capital       Surplus    (Deficit)     Interest     Equity 
----------------------------------------------------------------------------
Balance, at                                                                 
 January 1,                                                                 
 2010         $  890,952  $      8,547  $  (19,133) $     13,526 $  893,892 
Issue of                                                                    
 common                                                                     
 shares          356,275             -           -             -    356,275 
Share issue                                                                 
 costs, net                                                                 
 of tax           (7,062)            -           -             -     (7,062)
Share-based                                                                 
 payments              -         4,282           -             -      4,282 
Capitalized                                                                 
 share-based                                                                
 payments              -         4,282           -             -      4,282 
Options                                                                     
 exercised           221           (61)          -             -        160 
Income                                                                      
 attributable                                                               
 to common                                                                  
 shareholders          -             -       2,520             -      2,520 
Income                                                                      
 attributable                                                               
 to non-                                                                    
 controlling                                                                
 interest              -             -           -           215        215 
----------------------------------------------------------------------------
Balance, at                                                                 
 June 30,                                                                   
 2010         $1,240,386      $ 17,050   $ (16,613) $     13,741 $1,254,564 
----------------------------------------------------------------------------

See accompanying notes to the consolidated financial statements.            

CONSOLIDATED STATEMENTS OF CASH FLOW                                        

                                   Three Months Ended      Six Months Ended 
                                --------------------------------------------
                                   June 30,   June 30,   June 30,   June 30,
(000s) (unaudited)                    2011       2010       2011       2010 
----------------------------------------------------------------------------
Cash provided by (used in):                                                 
Operations:                                                                 
 Net income                      $  15,192  $   1,700  $  17,919  $   2,520 
 Items not involving cash:                                                  
  Depletion and depreciation        38,561     25,530     68,869     41,239 
  Accretion                            341        287        674        534 
  Share-based payments               2,724      2,298      5,294      4,282 
  Deferred taxes                     6,655      1,577      9,786      5,906 
 Unrealized (gain)/loss on                                                  
  financial instruments (note 4)    (3,054)      (653)      (285)      (681)
 Realized (gain)/loss on sale of                                            
  investments                            -          -          -        (45)
 Loss on divestitures                    -      3,058      3,630      3,058 
 Decommissioning expenditures         (275)         -       (978)         - 
 Non-controlling interest              271        128        446        215 
 Changes in non-cash operating                                              
  working capital (note 17)        (18,303)       698    (16,357)      (526)
----------------------------------------------------------------------------
                                    42,112     34,623     88,998     56,502 
Financing:                                                                  
 Issue of common shares            176,712          -    226,984    224,080 
 Share issue costs                  (7,590)      (140)   (10,054)    (9,438)
 Increase/(decrease) in bank                                                
  debt                               6,810          -     44,445     (6,550)
----------------------------------------------------------------------------
                                   175,932       (140)   261,375    208,092 
Investing:                                                                  
 Exploration and evaluation        (55,709)   (50,528)  (107,928)   (99,576)
 Property, plant and equipment     (46,394)   (15,596)  (203,960)   (80,173)
 Property acquisitions             (27,972)  (228,547)   (42,748)  (272,284)
 Proceeds from divestitures              -      7,863      7,009      9,863 
 Corporate acquisitions                  -          -          -     (3,156)
 Proceeds from sale of                                                      
  investments                            -          -        338        255 
 Repayment of long-term                                                     
  obligation                          (931)         -     (1,863)         - 
 Change in non-cash investing                                               
  working capital (note 17)        (87,038)   (10,014)   (66,381)   (24,537)
----------------------------------------------------------------------------
                                  (218,044)  (296,822)  (415,533)  (469,608)
Changes in cash                          -   (262,339)   (65,160)  (205,014)
Cash, beginning of period                -    257,114     65,160    199,789 
----------------------------------------------------------------------------
Cash/ (bank indebtedness), end                                              
 of period                       $       -  $  (5,225) $       -  $  (5,225)
----------------------------------------------------------------------------
Cash is defined as cash and cash equivalents.                               
See accompanying notes to the consolidated financial statements             

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended June 30, 2011 and 2010

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

Incorporation:

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

1. BASIS OF PREPARATION

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

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

2. FUTURE ACCOUNTING CHANGES

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

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

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

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

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

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

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

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

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

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

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

3. DETERMINATION OF FAIR VALUE

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

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

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

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

(ii) Cash and cash equivalents, trade and other receivables, bank 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 flow, discounted at the market rate of interest at the reporting date. At June 30, 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 June 30, 2011 and December 31, 2010. The carrying value of cash and cash equivalents, trade and other receivables and trade and other payables included in the consolidated statement of financial position approximate fair value due to the short-term nature of those instruments. These assets and liabilities are not included in the following tables.


                               Carrying     Fair
June 30, 2011                    Amount    Value  Level 1  Level 2  Level 3
----------------------------------------------------------------------------
Financial Assets:                                                           
  Investments                  $  3,508 $  3,508    $   - $  3,508    $   -
Financial liabilities:                                                      
  Bank debt                      44,445   44,445   44,445        -        -
  Commodity price risk contracts    371      371        -      371        -
----------------------------------------------------------------------------

                               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 June 30, 2011 Tourmaline's receivables consisted of $19.9 million (December 31, 2010 - $21.1 million) from joint venture partners, $29.5 million (December 31, 2010 - $23.6 million) from petroleum and natural gas marketers and $8.5 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 June 30, 2011, the Company had $2.0 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 June 30, 2011 (December 31, 2010 - nil) and did not provide for any doubtful accounts nor was it required to write-off any receivables during the period ended June 30, 2011 (June 30, 2010 - nil).

(b) Liquidity risk:

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

The Company's accounts payable and accrued liabilities balance at June 30, 2011 is approximately $92.5 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 June 30, 2011, substantially all of the account balances were less than 90 days.

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

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



                 Carrying Contractual Less Than One-Two Two-Five  More Than
                   Amount   Cash Flow  One Year   Years    Years Five Years 
----------------------------------------------------------------------------
Non-derivative 
 financial 
 liabilities:                                                               
  Trade and other 
   payables      $ 88,801    $ 88,801  $ 88,801  $    -   $    -     $    -
  Bank debt (1)    44,445      45,334    45,334       -        -          -
  Transportation 
   liability       16,451      16,451     3,725   3,725    9,001          -

Derivative 
 financial 
 liabilities:                                                               
  Financial 
   commodity 
   contracts          371         371       371       -        -          -
----------------------------------------------------------------------------
                 $150,068    $150,957  $138,231  $3,725   $9,001     $    -
----------------------------------------------------------------------------
(1) Includes interest expense at 4.0% being the rate applicable at June 30,
    2011.

(c) Market risk:

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

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

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

Interest rate risk 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 second quarter, there was a draw on the Company's credit facilities of $44.4 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 flow will fluctuate as a result of changes in commodity prices. Commodity prices for oil and natural gas are impacted by not only the relationship between the Canadian and United States dollar but also world economic events that dictate the levels of supply and demand. As at June 30, 2011, the Company has entered into certain financial derivative and physical delivery sales contracts in order to manage commodity risk. These instruments are not used for trading or speculative purposes. The Company has not designated its financial derivative contracts as effective accounting hedges, even though the Company considers all commodity contracts to be effective economic hedges. As a result, all such commodity contracts are recorded on the statement of financial position at fair value, with changes in the fair value being recognized as an unrealized gain or loss on the consolidated statement of income.


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

                 Quantity    Time Period            Contract Price     Fair 
Type of Contract                                                      Value 
----------------------------------------------------------------------------
Financial Swap   100 bbls/d  July 2011 - December   US$90.00/bbl     $ (511)
                             2012                                           
Financial Swap   100 bbls/d  July - December 2011   US$100.10/bbl        61 
Financial Swap   100 bbls/d  July 2011 - June 2012  US$101.40/bbl       123 
Financial Swap   100 bbls/d  September 2011 -       US$101.00/bbl        81 
                             December 2012                                  
Financial Swap   100 bbls/d  January - December     US$104.00/bbl       150 
                             2012                                           
Financial Swap   100 bbls/d  January - December     US$87.85/bbl       (199)
                             2011                                           
Costless Collar  100 bbls/d  September 2010 -       US$75/bbl floor    (342)
                             August 2012            - US$96/bbl             
                                                    ceiling                 
Financial Swap   100 bbls/d  January 2012 - June    US$99.70/bbl        (35)
                             2013                                           
Financial Swap   100 bbls/d  January - December     US$108.00/bbl       301 
                             2012                                           
----------------------------------------------------------------------------
Total fair value                                                     $ (371)
----------------------------------------------------------------------------

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

                                      Three Months Ended    Six Months Ended
                                    ----------------------------------------
                                      June 30,  June 30,  June 30,  June 30,
(000s)                                    2011      2010      2011      2010
----------------------------------------------------------------------------
Unrealized gain/(loss) on financial                                         
 instruments                         $   3,122 $     725 $     371 $     599
Unrealized gain/(loss) on                                                   
 investments held for trading              (68)      (72)      (86)       82
----------------------------------------------------------------------------
Total                                $   3,054 $     653 $     285 $     681
----------------------------------------------------------------------------

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

As at June 30, 2011, if the future strip prices for oil were $1.00 per bbl higher, with all other variables held constant, before-tax earnings for the period would have been $0.4 million lower. An equal and opposite impact would have occurred to before-tax earnings and the fair value of the derivative contracts liability oil prices $1.00 per bbl lower.

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


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

(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 June 30, 2011, the Company's ratio of net debt to annualized funds from operations was 0.36 to 1.0.


                                                  As at               As at
(000s)                                    June 30, 2011   December 31, 2010
----------------------------------------------------------------------------
Net debt:                                                                   
  Bank debt                              $      (44,445)    $             - 
  Working capital/(deficit)                     (31,963)            (49,642)
  Fair value of financial instruments 
   - short-term (asset)/liability                   371                 472 
----------------------------------------------------------------------------
Net debt                                 $      (76,037)    $       (49,170)
----------------------------------------------------------------------------
Annualized funds from  operations:                                          
  Cash flow from operating activities    $       88,998     $       144,237 
  Change in non-cash working capital             16,357              (9,517)
----------------------------------------------------------------------------
  Funds from operations to end of period $      105,355     $       134,720 
Annualized funds from operations         $      210,710     $       134,720 
----------------------------------------------------------------------------
Net debt to annualized funds from 
 operations                                        0.36                0.36 
----------------------------------------------------------------------------

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


5.  EXPLORATION AND EVALUATION ASSETS

(000s)
----------------------------------------------------------------------------
As at January 1, 2010                                            $  250,972 
 Capital expenditures                                               200,816 
 Capitalized stock-based compensation                                10,388 
 Transfers to property, plant and equipment (note 6)               (178,012)
 Acquisitions                                                       206,876 
 Divestitures                                                       (11,973)
----------------------------------------------------------------------------
As at December 31, 2010                                          $  479,067 
 Capital expenditures                                               107,928
 Capitalized stock-based compensation                                 5,068 
 Transfers to property, plant and equipment (note 6)                (52,093)
 Acquisitions                                                        14,148 
 Divestitures                                                        (4,451)
----------------------------------------------------------------------------
As at June 30, 2011                                              $  549,667 
----------------------------------------------------------------------------

General and administrative expenditures for the period ended June 30, 2011 of $8.6 million (June 30, 2010 - $6.5 million) have been capitalized and included as costs of oil and natural gas properties. Included in this amount are non-cash related stock-based compensation of $5.1 million (June 30, 2010 - $4.3 million).


6.  PROPERTY, PLANT AND EQUIPMENT

Cost

(000s)
-------------------------------------------------------------------------
As at January 1, 2010                                        $   503,826 
Capital expenditures                                             617,764 
Transfers from exploration and evaluation (note 5)               178,012 
Change in decommissioning liabilities (note 7)                    15,963 
Divestitures                                                     (15,983)
-------------------------------------------------------------------------
As at December 31, 2010                                      $ 1,299,582 
Capital expenditures                                             203,960 
Capitalized stock-based compensation                                 226 
Transfers from exploration and evaluation (note 5)                52,093 
Change in decommissioning liabilities (note 7)                     2,660 
Acquisitions                                                      28,600 
Divestitures                                                      (7,828)
-------------------------------------------------------------------------
As at June 30, 2011                                          $ 1,579,293 
-------------------------------------------------------------------------


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                             68,869 
Impairments                                                               - 
Divestitures                                                         (1,233)
----------------------------------------------------------------------------
As at June 30, 2011                                               $ 163,117 
----------------------------------------------------------------------------


Net Book Value

(000s)
----------------------------------------------------------------------------
As at January 1, 2010                                           $   503,826
As at December 31, 2010                                           1,204,101
As at June 30, 2011                                             $ 1,416,176
----------------------------------------------------------------------------

Future development costs for the period ended June 30, 2011 of $1,024 million (June 30, 2010 - $509 million) were included in the depletion calculation.

7. DECOMMISSIONING OBLIGATIONS

The Company's decommissioning obligations result from net ownership interests in petroleum and natural gas assets including well sites, gathering systems and processing facilities. The Company estimates the total undiscounted amount of cash flow required to settle its decommissioning obligations is approximately $60.5 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.


                                                                 Year Ended 
                                          Six Months Ended      December 31,
                                             June 30, 2011             2010 
----------------------------------------------------------------------------
Balance, beginning of period                     $  35,279        $  19,153 
 Obligation incurred                                 1,782            4,411
 Obligation incurred on corporate 
  acquisitions (note 5)                                  -            1,452
 Obligation incurred on property                 
  acquisitions                                         878            7,936
 Obligation divested                                  (407)            (965)
 Obligation settled                                   (978)               - 
 Accretion expense                                     674            1,128 
 Revisions (change in discount rate)                     -            2,164 
----------------------------------------------------------------------------
Balance, end of period                           $  37,228        $  35,279 
----------------------------------------------------------------------------

8. BANK DEBT

The Company has a financing arrangement with two Canadian chartered banks for an extendible revolving term loan in the amount of $275 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 second floating charge over all assets. On July 31, 2012, at the Company's discretion, the facility is available on a non-revolving basis for a period of 365 days, at which time the facility would be due and payable. Alternatively, the facility may be extended for a further 364-day period at the request of the Company and subject to approval by the banks.

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

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

Tourmaline has drawn down on existing facilities in the amount of $44.4 million. In addition to this Tourmaline has outstanding letters of credit of $4.2 million, which reduce the credit available on the facility.

9. INVESTMENTS

Tourmaline owns common shares of public and private junior oil and gas companies which have been fair valued at $3.5 million based on the quoted market price at June 30, 2011.

A reconciliation of the investments is provided below:


                                                                 Year Ended 
                                         Six Months Ended       December 31,
                                            June 30, 2011              2010
----------------------------------------------------------------------------
 Balance, beginning of period                   $   3,932         $     632 
 Proceeds on disposition of shares
  (net of realized gain/(loss))                      (338)             (210)
 Acquired on asset disposition                          -             3,250
 Unrealized gain/(loss) on investments                (86)              260
----------------------------------------------------------------------------
Balance, end of period                          $   3,508         $   3,932
----------------------------------------------------------------------------

10. LONG TERM OBLIGATION

As part of an acquisition of petroleum and natural gas properties in June 2010, the Company acquired a firm transportation agreement. A liability of $19.9 million was recorded to account for the fair value of the agreement at the time of the acquisition. This amount was accounted for as part of the acquisition cost and will be charged as a reduction to transportation expenses over the life of the agreement as the obligation is met. The reduction to transportation expense for the period ended June 30, 2011 was $1.9 million. The outstanding balance is $16.4 million of which $3.7 million has been included in accounts payable and accrued liabilities.

11. NON-CONTROLLING INTEREST

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

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


                                         Six Months Ended        Year Ended
                                            June 30, 2011 December 31, 2010
----------------------------------------------------------------------------
Balance, beginning of period                    $  13,909         $  13,526
Share of subsidiary's net income for the
 period                                               446               383
----------------------------------------------------------------------------
Balance, end of period                          $  14,355         $  13,909
----------------------------------------------------------------------------

12. SHARE CAPITAL

(a) Authorized

Unlimited number of Common Shares without par value.

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

(b) Common Shares Issued


                                Six Months Ended                 Year Ended 
                                   June 30, 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 public
 offering                 6,825,000      174,037             -            - 
For cash on private
 placement of common
 shares                           -            -    10,350,000      188,850 
For cash on private
 placement of flow-
 through common
 shares(1)(2)             1,580,000       39,658     3,600,000       65,202 
Issued for the
 acquisition of
 properties                       -            -     2,500,000       45,000 
Issued on corporate
 acquisitions                     -            -     6,411,670       96,175 
For cash on exercise of
 stock options              619,335        5,546        20,000          160 
Contributed surplus on
 exercise of stock
 options                          -        2,148             -           61 
Share issue costs                 -      (10,054)            -      (26,502)
Tax effect of share
 issue costs                      -        2,486             -        6,654
----------------------------------------------------------------------------
Balance, end of period  145,215,396  $ 1,721,873   136,191,061  $ 1,508,052
----------------------------------------------------------------------------

(1)On March 8, 2011, the Company issued 1.58 million flow-
   through shares at $30.00 per share for total gross proceeds of $47.4
   million. The implied premium on the flow-through shares was determined
   to be $7.74 million or $4.90 per share. A total of 0.38 million shares
   were purchased by insiders. As at June 30, 2011, the Company is committed
   to spending an additional $34.3 million on qualified exploration and
   development expenditures by December 31, 2012.
(2)On March 19, 2010, the Company issued 2.45 million flow-through shares at
   $21.60 per share for total gross proceeds of $52.92 million. The implied
   premium on the flow-through shares was $8.8 million or $3.60/share. On
   August 12, 2010 the Company issued 1.15 million flow-through shares at
   $22.00 per share for total gross proceeds of $25.3 million. The implied
   premium on the flow-through shares was $4.2 million or $3.65 per share. 

13. EARNINGS PER SHARE

Basic earnings-per-share was calculated as follows:


                                 Three Months Ended        Six Months Ended 
                               ---------------------------------------------
                                June 30,    June 30,     June 30,   June 30,
                                   2011        2010         2011       2010
----------------------------------------------------------------------------
Net earnings for the period 
 (000s)                       $  15,192   $   1,700    $  17,919   $   2,520
Weighted average number 
 of common shares - basic   141,619,564 120,987,762  139,259,452 115,007,007
----------------------------------------------------------------------------
Earnings per share - basic    $    0.11   $    0.01    $    0.13   $    0.02
----------------------------------------------------------------------------

Diluted earnings-per-share was calculated as follows:

                             Three Months Ended             Six Months Ended
                    --------------------------------------------------------
                         June 30,      June 30,      June 30,       June 30,
                             2011          2010          2011           2010
----------------------------------------------------------------------------
Net earnings for                                                            
 the period (000s)   $     15,192  $      1,700  $     17,919   $      2,520
Weighted average                                                            
 number of common                                                           
 shares - basic       147,338,844   124,467,420   144,601,769    118,127,462
----------------------------------------------------------------------------
Earnings per share                                                          
 - fully diluted     $       0.10  $       0.01  $       0.12   $       0.02
----------------------------------------------------------------------------

There were 1,175,000 options excluded from the weighted-average share calculation for the three months ended June 30, 2011 because they were anti-dilutive (1,320,000 - six months).

14. SHARE-BASED PAYMENTS

The Company has a rolling stock option plan. Under the employee stock option plan, the Company may grant options to its employees for up to 14,521,540 shares of common stock. The exercise price of each option equals the volume-weighted average market price for the five days preceding the issue date of the Company's stock on the date of grant and the option's maximum term is five years. Options are granted throughout the year and vest 1/3 on each of the first, second and third anniversaries from the date of grant.


                                                                    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                                               1,175,000        27.79
Exercised                                              (619,335)        8.96
Forfeited                                              (179,999)       13.64
----------------------------------------------------------------------------
Stock options outstanding, June 30, 2011             12,372,666   $    13.86
----------------------------------------------------------------------------

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

                                 Weighted                                   
                      Number      Average   Weighted       Number   Weighted
                 Outstanding    Remaining    Average  Exercisable    Average
Range of           at Period  Contractual   Exercise    at Period   Exercise
 Exercise Price          End         Life      Price          End      Price
----------------------------------------------------------------------------
$7.00 - $8.00      3,491,167         2.40  $    7.09    2,152,834  $    7.08
$10.00 - $15.00    4,895,666         3.21      12.79    2,185,666      11.96
$16.68 - $29.93    3,985,833         4.33      21.10      172,166      17.57
----------------------------------------------------------------------------
                  12,372,666         3.34  $   13.86    4,510,666  $    9.85
----------------------------------------------------------------------------

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:


                                               June 30, 2011  June 30, 2010
----------------------------------------------------------------------------
Fair value of options granted (weighted average)    $  10.67        $  6.43
Risk-free interest rate                                 2.36%          2.77%
Estimated hold period prior to exercise              5 years        5 years
Expected volatility                                       40%            40%
Forfeiture rate                                            2%             2%
Dividend per share                                  $   0.00        $  0.00
----------------------------------------------------------------------------


15. OTHER INCOME

                                 Three Months Ended        Six Months Ended 
                               ---------------------------------------------
                                June 30,    June 30,     June 30,   June 30,
(000s)                             2011        2010         2011       2010
----------------------------------------------------------------------------
Processing income              $  1,222    $    114     $  1,606   $    170
Interest income                      92         164          166        109
Other                               251         (94)         263         92
----------------------------------------------------------------------------
Total other income             $  1,565    $    184     $  2,035   $    371
----------------------------------------------------------------------------

16. FINANCE INCOME AND EXPENSES

                                 Three Months Ended        Six Months Ended 
                               ---------------------------------------------
                                June 30,    June 30,     June 30,   June 30,
(000s)                             2011        2010         2011       2010
----------------------------------------------------------------------------
Finance expenses:                         
  Interest on loans and 
   borrowings                   $   963     $    23      $ 1,359    $    39
  Transaction cost on corporate 
   acquisition                        -           -            -        561
  Accretion of provisions           341         287          674        534
----------------------------------------------------------------------------
Net finance expenses            $ 1,304     $   310      $ 2,033    $ 1,134
----------------------------------------------------------------------------

17. SUPPLEMENTAL CASH FLOW INFORMATION

Changes in non-cash working capital is comprised of:

                                                           Six Months Ended 
                                          ----------------------------------
(000s)                                       June 30, 2011    June 30, 2010
----------------------------------------------------------------------------
Source/(use) of cash:                                            
  Trade and other receivables               $          740   $       (9,266)
  Deposit and prepaid expenses                       2,109            1,051 
  Trade and other payables                         (85,587)         (16,848)
----------------------------------------------------------------------------
                                            $      (82,738)  $      (25,063)
----------------------------------------------------------------------------
Related to operating activities             $      (16,357)  $         (526)
Related to investing activities             $      (66,381)  $      (24,537)
----------------------------------------------------------------------------

Cash interest paid was $1.2 million for the six months ended June 30, 2011 (June 30, 2010 - $nil).

18. COMMITMENTS

On March 8, 2011, the Company issued 1.58 million common shares, including 0.38 million common shares to insiders in a non-brokered component of the issuance, on a flow-through basis at a price of $30.00 per share for total gross proceeds of $47.4 million. As of June 30, 2011, the Company has spent $13.1 million on eligible expenditures and is committed to spend the remainder of $34.3 million before December 31, 2012.

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


Payments due by year (000s)        2011     2012     2013     2014     2015
----------------------------------------------------------------------------
Operating leases                $ 1,338  $ 2,612  $ 2,249  $ 2,105   $  526
Flow-through obligations              -   34,340        -        -        -
Firm transportation agreements   11,497   23,887   21,739   14,077    7,354
----------------------------------------------------------------------------
                                $12,835  $60,839  $23,988  $16,182   $7,880
----------------------------------------------------------------------------

19. SUBSEQUENT EVENTS

On July 12, 2011, Tourmaline closed an agreement with Cinch Energy Corp. ("Cinch") 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. Tourmaline issued 6.4 million shares for a total transaction value of approximately $205.2 million.

The acquisition will be accounted for under IFRS 3, "Business Combinations", by the acquisition method based on the fair value of the assets acquired. The initial accounting for the business combination is incomplete as the Company is in the process of evaluating the fair value of the assets acquired under IFRS in order to complete the purchase price equation for recognition, measurement and presentation in the Company's financial results for the three month interim period ended September 30, 2011.

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

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

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

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


Reconciliation of consolidated statement of financial position as at
June 30, 2010:
                                      Effect of                             
                           Canadian  Transition                             
(000s)                         GAAP     to IFRS            Note        IFRS 
----------------------------------------------------------------------------
Assets                                                                      
Current assets:                                                             
 Accounts receivable     $   54,396  $        -                  $   54,396 
 Prepaid expenses and                                                       
  deposits                    2,159           -                       2,159 
 Fair value of financial                                                    
  instruments                11,098     (10,695)             (j)        403 
----------------------------------------------------------------------------
                             67,653     (10,695)                     56,958 
Investments                   3,754           -                       3,754 
Fair value of financial                                                     
 instruments                  3,963      (3,647)             (j)        316 
Exploration and                                                             
 evaluation assets                -     445,520              (a)    445,520 
Property, plant and                                                         
 equipment                1,335,796    (429,568)           (a,f)    906,228 
----------------------------------------------------------------------------
                         $1,411,166  $    1,610                  $1,412,776 
----------------------------------------------------------------------------
Liabilities and                                                             
 Shareholders' Equity                                                       
Current liabilities:                                                        
 Bank indebtedness       $    5,225  $        -                  $    5,225 
 Accounts payable and                                                       
  accrued liabilities        73,405           -                      73,405 
 Deferred taxes               2,106      (2,106)             (h)          - 
----------------------------------------------------------------------------
                             80,736      (2,106)                     78,630 
Decommissioning                                                             
 obligations                 11,280      16,819              (c)     28,099 
Long-term obligation         16,451           -                      16,451 
Deferred premium on                                                         
 flow-through shares              -       6,603              (k)      6,603 
Deferred taxes               28,306         123            (h,k)     28,429 
Shareholders' equity:                                                       
 Share capital            1,245,669      (5,283)           (d,k)  1,240,386 
 Non-controlling                                                            
  interest                   13,620         121                      13,741 
 Contributed surplus          4,105      12,945              (d)     17,050 
 Retained earnings/                                                         
  (deficit)                  10,999     (27,612) (c,d,e,f,h,i,k)    (16,613)
----------------------------------------------------------------------------
                          1,274,393     (19,829)                  1,254,564 
----------------------------------------------------------------------------
                         $1,411,166  $    1,610                  $1,412,776 
----------------------------------------------------------------------------


Reconciliation of consolidated statement of income for the six months ended
June 30, 2010:
                                      Effect of                             
                           Canadian  Transition                             
(000s)                         GAAP     to IFRS            Note        IFRS 
----------------------------------------------------------------------------
Revenue:                                                                    
 Oil and natural gas                                                        
  sales                  $   88,160  $        -                  $   88,160 
 Royalties                   (9,150)          -                      (9,150)
----------------------------------------------------------------------------
                             79,010           -                      79,010 
 Realized gain on                                                           
  financial instruments       5,183           -                       5,183 
 Unrealized gain on                                                         
  financial instruments      14,819     (14,138)             (j)        681 
 Other income                   371           -                         371 
----------------------------------------------------------------------------
                             99,383     (14,138)                     85,245 
Expenses:                                                                   
 Operating                   18,917           -                      18,917 
 Transportation               4,476           -                       4,476 
 General and                                                                
  administration              3,164         334              (l)      3,498 
 Share-based payments         1,270       3,012              (d)      4,282 
 Loss on divestiture              -       3,058              (g)      3,058 
 Depletion, depreciation                                                    
  and amortization           54,048     (12,809)             (e)     41,239 
----------------------------------------------------------------------------
Results from operating                                                      
 activities                  17,508      (7,733)                      9,775 
Finance expenses                 39       1,095          (f),(i)      1,134 
----------------------------------------------------------------------------
Income/(loss) before                                                        
 taxes                       17,469      (8,828)                      8,641 
 Deferred taxes               4,693       1,213              (h)      5,906 
----------------------------------------------------------------------------
Net income/(loss) and                                                       
 net comprehensive                                                          
 income/(loss) before                                                       
 non-controlling                                                            
 interest                    12,776     (10,041)                      2,735 
----------------------------------------------------------------------------
Net income/(loss) and                                                       
 comprehensive                                                              
 income/(loss)                                                              
 attributable to:                                                           
 Shareholders of the                                                        
  Company                    12,682     (10,162)                      2,520 
 Non-controlling                                                            
  interest                       94         121                         215 
----------------------------------------------------------------------------
                         $   12,776  $  (10,041)                 $    2,735 
----------------------------------------------------------------------------


Reconciliation of consolidated statement of income for the three months
ended June 30, 2010:
                                      Effect of                             
                           Canadian  Transition                             
(000s)                         GAAP     to IFRS            Note        IFRS 
----------------------------------------------------------------------------
Revenue:                                                                    
 Oil and natural gas                                                        
  sales                  $   49,189  $        -                  $   49,189 
 Royalties                   (3,557)          -                      (3,557)
----------------------------------------------------------------------------
                             45,632           -                      45,632 
 Realized gain on                                                           
  financial instruments       3,841           -                       3,841 
 Unrealized gain/(loss)                                                     
  on financial                                                              
  instruments                (3,023)      3,676              (j)        653 
 Other income                   184           -                         184 
----------------------------------------------------------------------------
                             46,634       3,676                      50,310 
Expenses:                                                                   
 Operating                   11,362           -                      11,362 
 Transportation               2,588           -                       2,588 
 General and                                                                
  administration              1,669          90              (l)      1,759 
 Share-based payments           596       1,702              (d)      2,298 
 Loss on divestitures             -       3,058              (g)      3,058 
 Depletion, depreciation                                                    
  and amortization           32,071      (6,541)             (e)     25,530 
----------------------------------------------------------------------------
Results from operating                                                      
 activities                  (1,652)      5,367                       3,715 
Finance expenses                 23         287              (i)        310 
----------------------------------------------------------------------------
Income/(loss) before                                                        
 taxes                       (1,675)      5,080                       3,405 
 Deferred taxes                                                             
  (recovery)                 (1,043)      2,620              (h)      1,577 
----------------------------------------------------------------------------
Net income/(loss) and                                                       
 net comprehensive                                                          
 income/(loss) before                                                       
 non-controlling                                                            
 interest                      (632)      2,460                       1,828 
----------------------------------------------------------------------------
Net income/(loss) and                                                       
 comprehensive                                                              
 income/(loss)                                                              
 attributable to:                                                           
 Shareholders of the                                                        
  Company                      (672)      2,372                       1,700 
 Non-controlling                                                            
  interest                       40          88                         128 
----------------------------------------------------------------------------
                         $     (632) $    2,460                  $    1,828 
----------------------------------------------------------------------------

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 June 30, 2010, the transfer was $445.5 million, which included undeveloped land acquired in 2010, geological and geophysical costs and costs related to wells in progress.

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

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

(c) Decommissioning obligations:

Under the previous GAAP, decommissioning obligations were discounted at a credit adjusted risk-free rate of ten percent. Under IFRS, the estimated cash flow to abandon and remediate the wells and facilities has been risk adjusted therefore the provision is discounted at the risk-free rate in effect at the end of each reporting period. The change in the decommissioning obligations each period as a result of changes in the discount rate will result in an offsetting charge to PP&E. Upon transition to IFRS, the impact of this change was an $11.9 million increase in the decommissioning obligations with a corresponding increase to the deficit on the statement of financial position. As at June 30, 2010, the decommissioning obligations were $16.8 million higher than under the previous GAAP due to the change in discount rate and its impact on the liabilities incurred or acquired during 2010. In addition, under the previous GAAP, accretion of the discount was included in depletion and depreciation expense. Under IFRS it is included in finance expenses.

(d) Share-based compensation:

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

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

(e) Depletion policy:

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

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

Depleting the oil and natural gas interests over proved-plus-probable reserves resulted in a decrease to depletion and depreciation for the three months ended June 30, 2010 of $6.5 million ($12.8 million - six months). For the year ended December 31, 2010, depletion and depreciation was reduced by $30.25 million as a result of changes to the depletion calculation.

(f) Business combinations:

In accordance with IFRS, internal transaction costs incurred on a business combination are expensed. Under the previous GAAP, these costs were capitalized as part of the acquisition. As a result, $0.6 million was charged to other expenses for transaction costs incurred on the corporate acquisition for the six months ended June 30, 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 six months ended June 30, 2010, Tourmaline recognized a $3.1 million net loss 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, the adjustment to the unrealized gain or loss on financial instruments and the treatment of flow-through shares. Adjustments to deferred income taxes have been made in regards to the adjustments resulting in a change to the temporary difference between tax and accounting values. The deferred income tax impact of the opening adjustments was a deferred income tax asset of $0.9 million.

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

(i) Finance expenses:

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

(j) Fair value of financial instruments:

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

(k) Flow-through shares:

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

The IFRS adjustment on transition date associated with flow-through shares was to decrease share capital by $4.0 million, decrease retained earnings by $1.9 million with $3.8 million going to the liability account "Deferred premium on flow-through shares" and to increase the deferred tax liability by $2.1 million. For the six months ended June 30, 2010 IFRS adjustments were made to decrease share capital by $1.0 million, reduce retained earnings by $83.0 million as a result of the increase to deferred income tax expense, increase to the liability account "Deferred premium on flow-through shares" by $2.8 million, and increase the deferred tax asset liability balance by $1.2 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 (June 30, 2010 - $0.3 million).

(m) Cash flow statement

The transition from former Canadian GAAP to IFRS has had no material effect upon the reported cash flows generated by the Company. Transaction costs of $0.6 million and general and administrative costs of $0.3 million were included in net income rather than capitalized and as such are now included in cash provided from operating activities. These reconciling items between former Canadian GAAP presentation and the IFRS presentation have no net impact on the cash flow generated.

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