Tourmaline Oil Corp. Achieves Record Cash Flow and Earnings Growth in 2013

Marketwired

CALGARY, ALBERTA--(Marketwired - Mar 17, 2014) - Tourmaline Oil Corp. ( TOU.TO ) ("Tourmaline" or the "Company") achieved exceptional growth in reserves (41%), production (47%) and cash flow(1) (88%) in 2013 while delivering strong profitability. The Company posted significant after-tax earnings of $148.1 million for the 2013 fiscal year.

Highlights

  • Record full year after tax earnings of $148.1 million ($0.79 per diluted share), an 854% increase over 2012, and record quarterly after tax earnings of $56.8 million in the fourth quarter, underscoring the fundamental full cycle profitability of Tourmaline's natural gas business.
  • 2013 cash flow of $526.8 million ($2.80 per diluted share), an 88% increase over 2012 (67% per diluted share).
  • Record quarterly cash flow of $160.7 million ($0.83 per diluted share) in Q4 2013.
  • 2013 annual production growth of 47% (31% per diluted share), and forecast 2014 production growth of 60% over 2013.
  • Q4 2013 average production of 86,089 boepd, a 50% increase over the fourth quarter of 2012 and a 16% increase over the previous quarter.
  • Total 2P reserve additions of 179.4 mmboe in 2013, representing 41% growth over 2012 total 2P reserves before 2013 production (30% per diluted share).
  • Year end 2013 2P reserve value of $6.2 billion (10% discount, before tax), representing 42% growth over year end 2012 2P reserve value of $4.3 billion, a net present value increase in 2013 of $1.9 billion vs. $1.7 billion in 2012.
  • Three-year 2P finding, development and acquisitions cost (FD&A) of $11.65/boe (including FDC) and $7.20/boe (excluding FDC).
  • 2013 reserve replacement ratio of 6.6 times.
  • Continued industry-leading all-in cost structure of $7.72/boe (operating costs, transportation, general and administrative, and financing costs).
1 Cash flow is defined as cash provided by operations before changes in non-cash operating working capital. See "Non-GAAP Financial Measures" in the attached Management's Discussion and Analysis.

Production Update

  • Anticipated full year 2014 average production of 120,000 boepd represents a 60% increase from the 2013 average.
  • The Company expects to tie-in approximately 48 wells during the first quarter of 2014, reaching estimated production levels of 115,000-120,000 boepd in late March/early April 2014.
  • The Musreau plant expansion, Doe B.C. plant expansion and start-up of the Tourmaline Spirit River gas plant will lead to significant further production growth in the third quarter of 2014.

EP Update

Alberta Deep Basin

  • Tourmaline intends to operate 12 drilling rigs in the Alberta Deep Basin through the balance of 2014; the fleet will be shut down during break-up.
  • 17 new Wilrich horizontals have been drilled thus far in 2014; a total of 55 new Wilrich horizontals which will be tied into Tourmaline facilities, are planned for full year 2014.
  • The winter program has yielded five new high deliverability Wilrich horizontals in the Smoky-Horse-Berland areas including the Smoky 4-1-59-2W6 well with a 30-day average IP of 22.2 mmcfpd.
  • Cretaceous Notikewin results have continued to exceed internal economic template expectations. The 30-day average IP from the Wild River 12-28-56-24W5 horizontal is 20.9 mmcfpd.
  • The Company is expanding the Musreau gas plant by 50-55 mmcfpd with a Q3 2014 expected start-up and is also participating in a plant expansion at West Edson. Tourmaline expects to reach the 0.5 bcf/day production milestone in the Deep Basin in either late 2014 or early 2015.

NEBC Montney Gas/Condensate

  • Tourmaline is currently operating two rigs in the NEBC Montney gas/condensate complex and will continue with drilling operations through break-up and the remainder of the year. The Company expects to drill 35 Montney horizontal wells in NEBC in 2014.
  • The A5-5 and D5-5 condensate-rich Lower Montney discovery wells from late 2013 have 30-day IP rates of 6.3 mmcfpd and 634 bbls/day condensate (100.5 bbls/mmcfpd at wellhead) and 5.6 mmcfpd and 501 bbls/day condensate (89.5 bbls/mmcfpd at wellhead), respectively. One regional follow-up has been drilled and will be completed over the next month. Drilling on an adjacent multi-well follow-up pad to 5-5 has commenced and will continue through break-up. The Company acquired considerable acreage prospective for this new horizon in December 2013.
  • The Doe gas plant expansion of 55 mmcfpd is planned for a Q3 2014 start-up. The Company expects to be producing 250 mmcfpd and 5,000-6,000 bbls/day of condensate and NGLs in NEBC by year end 2014.

Peace River High Charlie Lake Oil

  • 14 new Charlie Lake horizontal oil wells have been drilled along the trend thus far in 2014; Tourmaline will continue to operate three drilling rigs during 2014, yielding approximately 45 new wells. The Company has now drilled 72 successful horizontal oil wells into the regional pool with no dry holes to date.
  • Two concurrently-completed dual well pairs are currently being stimulated and will be brought on-stream by break-up.
  • Current daily production from the complex is averaging 9,000 10,000 boepd; an additional 6,000 boepd of production remains shut-in at Spirit River.
  • The Tourmaline sour gas injection plant at Spirit River remains on schedule for a Q3 2014 start-up and construction of the Mulligan oil battery will commence during the third quarter as well.
  • The Company is targeting a 2014 exit volume of 18,000 - 20,000 boepd from the Peace River High Charlie Lake Complex with these new facilities on-stream.

Exploration Program

  • The Paleozoic Exploration test at Sunset 11-17 in NEBC was cased to total depth during the first quarter of 2014, with 3 gas pay zones to complete. Completion operations will commence in July as the higher pressure equipment required to safely conduct operations could not be secured in time to finish operations prior to break-up.
  • The Company's first Montney horizontal in the Resthaven-Kakwa gas-condensate play area is currently being completed and stimulated.
  • The Smoky 8-15 deep test has been drilled to the Cambrian and cased to total depth; there are multiple deep gas zones to be completed.

Financial Update

  • 2014 full year cash flow forecast of $1.0 billion, representing a 92% increase over 2013 cash flow, is driven primarily by the combination of growth in production volumes and stronger natural gas prices.
  • 2013 full year operating netbacks(2) of $20.37/boe increased 25% over the prior year.
  • Maintained low overall cash costs by continuing to drive down unit operating costs to $4.35/boe.
  • Year end 2013 net debt(3) at $832.9 million, subsequently reduced in February 2014 as a result of 4.6 million common shares issued for gross proceeds of $219.2 million.
  • 2013 cash consideration invested in capital expenditures (net of dispositions) was $1.3 billion which included drilling 129 gross wells and investing $43.0 million in land and seismic to acquire 146 sections (net) of undeveloped land. In addition, $386.6 million was spent in part to expand two Deep Basin gas plants and construct a new gas plant in NEBC, bringing total throughput capacity for the Company to approximately 600 mmcfpd. Multiple property acquisitions in Spirit River, NEBC and the Alberta Deep Basin were completed for $226.9 million (515 net sections). During the year, the Company also disposed of non-core assets for cash proceeds of $78.1 million.
2 Operating netback is calculated on a per-boe basis and is defined as revenue (excluding processing income) less royalties, transportation costs and operating expenses. See "Non-GAAP Financial Measures" in the attached Management's Discussion and Analysis.
3 Net debt is defined as long-term debt plus working capital (adjusted for the fair value of financial instruments). See "Non-GAAP Financial Measures" in the attached Management's Discussion ... and Analysis.
CORPORATE SUMMARY - DECEMBER 31, 2013
Three Months Ended December 31, Twelve Months Ended December 31,
2013 2012 Change 2013 2012 Change
OPERATIONS
Production
Natural gas (mcf/d) 446,337 303,040 47 % 397,487 268,000 48 %
Crude oil and NGL (bbl/d) 11,700 6,723 74 % 8,548 6,137 39 %
Oil equivalent (boe/d) 86,089 57,230 50 % 74,796 50,804 47 %
Product prices(1)
Natural gas ($/mcf) $ 3.84 $ 3.29 17 % $ 3.65 $ 2.67 37 %
Crude oil and NGL ($/bbl) $ 71.83 $ 83.28 (14 )% $ 83.25 $ 83.71 (1 )%
Operating expenses ($/boe) $ 4.44 $ 4.10 8 % $ 4.35 $ 4.43 (2 )%
Transportation costs ($/boe) $ 2.25 $ 1.86 21 % $ 2.07 $ 1.87 11 %
Operating netback(4) ($/boe) $ 21.29 $ 19.17 11 % $ 20.37 $ 16.27 25 %
Cash general and administrative expenses ($/boe)(2) $ 0.68 $ 0.77 (12 )% $ 0.74 $ 0.79 (6 )%
FINANCIAL ($000, EXCEPT PER SHARE)
Revenue 235,113 143,117 64 % 788,863 449,843 75 %
Royalties 13,489 10,793 25 % 57,504 30,304 90 %
Cash flow(4) 160,732 93,807 71 % 526,761 280,279 88 %
Cash flow per share (diluted)(4) $ 0.83 $ 0.54 54 % $ 2.80 $ 1.68 67 %
Net earnings 56,763 16,301 248 % 148,114 15,519 854 %
Net earnings per share (diluted) $ 0.29 $ 0.09 222 % $ 0.79 $ 0.09 778 %
Capital expenditures 497,941 296,108 68 % 1,315,416 741,640 77 %
Weighted average shares outstanding (diluted) 188,244,300 167,028,522 13 %
Net debt(4) (832,942 ) (464,300 ) 79 %
PROVED + PROBABLE RESERVES(3)
Natural gas (bcf) 3,026.1 2,319.8 30 %
Crude oil (mbbls) 26,960 13,653 97 %
Natural gas liquids (mbbls) 58,590 37,583 56 %
Mboe 589,904 437,869 35 %
(1) Product prices include realized gains and losses on financial instrument contracts.
(2) Excluding interest and financing charges.
(3) Reserves are "Company gross reserves", which are defined as the working interest share of reserves prior to the deduction of interest owned by others (burdens). Royalty interest reserves are not included in Company gross reserves.
(4) See "Non-GAAP Financial Measures" in the attached Management's Discussion and Analysis.

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

Tourmaline will host a conference call tomorrow, March 18, 2014 starting at 9:00 a.m. MT (11:00 a.m. ET). To participate, please dial 1-800-766-6630 (toll-free in North America), or local dial-in 416-340-8527, a few minutes prior to the conference call.

The conference call ID number is 4187197.

Reader Advisories

Currency

All amounts in this news release are stated in Canadian dollars unless otherwise specified.

Reserves Data

The reserves data set forth above is based upon the reports of GLJ Petroleum Consultants Ltd. ("GLJ") and Deloitte LLP, each dated effective December 31, 2013, which have been consolidated into one report by GLJ and adjusted to apply certain of GLJ's assumptions and methodologies and pricing and cost assumptions. The complete GLJ January 1, 2014 price forecast used in the reserve evaluations is available on its website at www.gljpc.com.

There are numerous uncertainties inherent in estimating quantities of crude oil, natural gas and NGL reserves and the future cash flows attributed to such reserves. The reserve and associated cash flow information set forth above are estimates only. The Company's actual production, revenues, taxes and development and operating expenditures with respect to its reserves will vary from estimates thereof and such variations could be material.

All evaluations and reviews of future net revenue are stated prior to any provisions for interest costs or general and administrative costs and after the deduction of estimated future capital expenditures for wells to which reserves have been assigned. The after-tax net present value of the Company's oil and gas properties reflects the tax burden on the properties on a stand-alone basis and utilizes the Company's tax pools. It does not consider the corporate tax situation, or tax planning. It does not provide an estimate of the after-tax value of the Company, which may be significantly different. The Company's financial statements and the management's discussion and analysis should be consulted for information at the level of the Company.

The estimated values of future net revenue disclosed in this news release do not represent fair market value. There is no assurance that the forecast prices and cost assumptions used in the reserve evaluations will be attained and variances could be material.

The reserve data provided in this news release presents only a portion of the disclosure required under National Instrument 51-101. All of the required information will be contained in the Company's Annual Information Form for the year ended December 31, 2013, which will be filed on SEDAR (accessible at www.sedar.com) on or before March 31, 2014.

Per diluted share reserve information is based on the total common shares outstanding, after accounting for outstanding Company options, at year end 2013 and 2012, respectively.

See also the Company's news release dated February 19, 2014 for more information with respect to the Company's reserves data.

Initial Production (IP) Rates

Any references in this news release to IP rates are useful in confirming the presence of hydrocarbons, however, such rates are not determinative of the rates at which such wells will continue production and decline thereafter and are not necessarily indicative of long-term performance or ultimate recovery. While encouraging, readers are cautioned not to place reliance on such rates in calculating the aggregate production for the Company. Such rates are based on field estimates and may be based on limited data available at this time.

F&D and FD&A Costs

In addition to F&D, the Company uses FD&A as a measure of the efficiency of its overall capital program including the effect of acquisitions and dispositions. The aggregate of the exploration and development costs incurred in the most recent financial year and the change during that year in estimated future development costs generally will not reflect total finding and development costs related to reserves additions for that year.

Financial Outlook

Also included in this news release are estimates of Tourmaline's 2014 cash flow, which is based on, among other things, the various assumptions as to production levels, capital expenditures, and other assumptions disclosed in this news release and including Tourmaline's estimated 2014 average production of 120,000 boepd and commodity price assumptions for natural gas (AECO - $3.86/mcf) (2014), and crude oil (WTI (US) - $97.00/bbl) (2014) and an exchange rate assumption of $0.97 (US/CAD) for 2014. To the extent such estimate constitutes a financial outlook, it was approved by management and the Board of Directors of Tourmaline on March 17, 2014 and is included to provide readers with an understanding of Tourmaline's anticipated cash flow based on the capital expenditure, production and other assumptions described herein and readers are cautioned that the information may not be appropriate for other purposes.

General

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

Certain Definitions:
bbl barrel
bcf billion cubic feet
bpd barrels per day
boe barrel of oil equivalent
boepd or boe/d barrel of oil equivalent per day
bopd or bbl/d barrel of oil, condensate or liquids per day
gj gigajoule
gjs/d gigajoules per day
mbbls thousand barrels
mboe thousand barrels of oil equivalent
mcf thousand cubic feet
mcfe thousand cubic feet equivalent
mmboe million barrels of oil equivalent
mmbtu million British thermal units
mmbtu/d million British thermal units per day
mmcf million cubic feet
mmcfpd or mmcf/d million cubic feet per day
mstboe thousand stock tank barrels of oil equivalent
NGL natural gas liquids

MANAGEMENT'S DISCUSSION AND ANALYSIS

For the years ended December 31, 2013 and December 31, 2012

This management's discussion and analysis ("MD&A") should be read in conjunction with Tourmaline Oil Corp.'s consolidated financial statements and related notes for the years ended December 31, 2013 and 2012. Both the consolidated financial statements and the MD&A can be found at www.sedar.com. This MD&A is dated March 17, 2014.

The financial information contained herein has been prepared in accordance with International Financial Reporting Standards ("IFRS") and sometimes referred to in this MD&A as Generally Accepted Accounting Principles ("GAAP") as issued by the International Accounting Standards Board ("IASB"). All dollar amounts are expressed in Canadian currency, unless otherwise noted.

Certain financial measures referred to in this MD&A are not prescribed by IFRS. See "Non-GAAP Financial Measures" for information regarding the following non-GAAP financial measures used in this MD&A: "cash flow", "operating netback", "working capital (adjusted for the fair value of financial instruments)", "net debt", "adjusted EBITDA", "senior debt", "total debt", and "total capitalization".

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, expenses, production, cash flow and 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 and cash flow from, crude oil, NGL (natural gas liquids) and natural gas reserves; future prospects; the focus of and timing of capital expenditures; expectations regarding the ability to raise capital and to continually add to reserves through acquisitions and development; access to debt and equity markets; projections of market prices and costs; the performance characteristics of the Company's crude oil, NGL and natural gas properties; crude oil, NGL and natural gas production levels and product mix; Tourmaline's future operating and financial results; capital investment programs; supply and demand for crude oil, NGL and natural gas; future royalty rates; drilling, development and completion plans and the results therefrom; future land expiries; dispositions and joint venture arrangements; amount of operating, transportation and general and administrative expenses; treatment under governmental regulatory regimes and tax laws; and estimated tax pool balances. In addition, statements relating to "reserves" are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described can be profitably produced in the future.

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

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

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

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

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

PRODUCTION
Three Months Ended December 31, Years Ended December 31,
2013 2012 Change 2013 2012 Change
Natural gas (mcf/d) 446,337 303,040 47 % 397,487 268,000 48 %
Crude oil and NGL (bbl/d) 11,700 6,723 74 % 8,548 6,137 39 %
Oil equivalent (boe/d) 86,089 57,230 50 % 74,796 50,804 47 %

Production for the fourth quarter of 2013 averaged 86,089 boe/d, a 50% increase over the average production for the same quarter of 2012 of 57,230 boe/d. Production was 86% natural gas weighted in the fourth quarter of 2013, compared to 88% for the same quarter of the prior year. For the year ended December 31, 2013, production increased 47% to 74,796 boe/d from 50,804 boe/d in 2012. The Company's significant production growth when compared to 2012 can be primarily attributed to new wells that have been brought on-stream in 2013, as well as property acquisitions. The significant increase in liquids production can be attributed to growth in oil production in Spirit River and stronger NGL recoveries in both the Alberta Deep Basin and NEBC.

Tourmaline increased its 2014 production guidance from 118,000 boe/d to 120,000 boe/d in its February 19, 2014 press release. The production increase is a direct result of Tourmaline's continued success in the ongoing exploration and production program, as well as, continued investments in facilities and infrastructure.

REVENUE
Three Months Ended December 31, Years Ended December 31,
(000s) 2013 2012 Change 2013 2012 Change
Revenue from:
Natural gas $ 157,800 $ 91,608 72 % $ 529,124 $ 261,833 102 %
Oil and NGL 77,313 51,509 50 % 259,739 188,010 38 %
Total revenue from natural gas, oil and NGL sales $ 235,113 $ 143,117 64 % $ 788,863 $ 449,843 75 %

Revenue for the three months ended December 31, 2013 increased 64% to $235.1 million from $143.1 million for the same quarter of 2012. Revenue for the year ended December 31, 2013 increased 75% to $788.9 million from $449.8 million in 2012. Revenue growth is consistent with the increase in production and increased natural gas prices over the same periods, offset by a small decrease in liquids prices. Revenue includes all natural gas, petroleum and NGL sales and realized gains on financial instruments.

TOURMALINE PRICES:
Three Months Ended December 31, Years Ended December 31,
2013 2012 Change 2013 2012 Change
Natural gas ($/mcf) $ 3.84 $ 3.29 17 % $ 3.65 $ 2.67 37 %
Oil and NGL ($/bbl) $ 71.83 $ 83.28 (14 )% $ 83.25 $ 83.71 (1 )%
Oil equivalent ($/boe) $ 29.69 $ 27.18 9 % $ 28.90 $ 24.19 19 %

The realized average natural gas prices for the quarter and year ended December 31, 2013 were 17% and 37%, respectively, higher than the same periods of the prior year.

Realized crude oil and NGL prices decreased 14% for the quarter ended December 31, 2013, compared to the same quarter in 2012 as a result of widening Canadian differentials for sour crude and liquids relative to Edmonton Par. Realized crude oil and NGL prices decreased 1% for the year ended December 31, 2013, compared 2012.

The realized natural gas price for the quarter ended December 31, 2013 was $3.84/mcf, which is $0.32/mcf higher than the AECO index price (three months ended December 31, 2012 - $3.29/mcf and $0.10/mcf higher than AECO). The higher realized price is primarily due to higher heat content ($0.26/mcf and $0.29/mcf for the fourth quarters of 2013 and 2012, respectively). The remainder of the premium in the fourth quarter of 2013 relates to positive hedging positions, where in the fourth quarter of 2012 hedging losses offset the premium received by $0.19/mcf.

The realized natural gas price for the year ended December 31, 2013 was 15% (December 31, 2012 - 10%) higher than the AECO index as Tourmaline realized a gain on commodity contracts in combination with the higher heat content noted above. Realized prices exclude the effect of unrealized gains or losses. Once these gains and losses are realized they are included in the per-unit amounts.

BENCHMARK OIL AND GAS PRICES:
Three Months Ended December 31, Years Ended December 31,
2013 2012 Change 2013 2012 Change
Natural gas
NYMEX Henry Hub (USD$/mcf) $ 3.85 $ 3.54 9 % $ 3.73 $ 2.83 32 %
AECO (CAD$/mcf) $ 3.52 $ 3.19 10 % $ 3.17 $ 2.38 33 %
Oil
NYMEX (USD$/bbl) $ 97.61 $ 88.23 11 % $ 98.05 $ 94.15 4 %
Edmonton Par (CAD$/bbl) $ 87.00 $ 84.97 2 % $ 93.54 $ 86.90 8 %
RECONCILIATION OF AECO INDEX TO TOURMALINE'S REALIZED GAS PRICES:
Three Months Ended December 31, Years Ended December 31,
($/mcf) 2013 2012 Change 2013 2012 Change
AECO index $ 3.52 $ 3.19 10 % $ 3.17 $ 2.42 31 %
Heat/quality differential 0.26 0.29 (10 )% 0.30 0.20 50 %
Realized gain (loss) 0.06 (0.19 ) 132 % 0.18 0.05 260 %
Tourmaline realized natural gas price $ 3.84 $ 3.29 17 % $ 3.65 $ 2.67 37 %
CURRENCY - EXCHANGE RATES:
Three Months Ended December 31, Years Ended December 31,
2013 2012 Change 2013 2012 Change
CAD/USD$(1) $ 0.9528 $ 1.0088 (6 )% $ 0.9708 $ 1.0004 (3 )%
(1) Average rates for the period
ROYALTIES
Three Months Ended December 31, Years Ended December 31,
(000s) 2013 2012 2013 2012
Natural gas $ 3,143 $ 3,562 $ 22,899 $ 2,053
Oil and NGL 10,346 7,231 34,605 28,251
Total royalties $ 13,489 $ 10,793 $ 57,504 $ 30,304
Royalties as a percentage of revenue 5.7 % 7.5 % 7.3 % 6.7 %

For the quarter ended December 31, 2013, the average effective royalty rate was 5.7% compared to 7.5% for the same quarter of 2012. The reduced royalty rate reflects additional drilling credits earned and recorded in the fourth quarter of 2013. In 2013 the Company continued to benefit from the New Well Royalty Reduction Program and the Natural Gas Deep Drilling Program in Alberta, as well as, the Deep Royalty Credit Program in British Columbia.

For the year ended December 31, 2013, the average effective royalty rate was 7.3% compared to 6.7% for the same period of 2012. The average effective royalty rate increased in 2013 over 2012 mainly due to increased natural gas prices, and the impact of some wells reaching production maximums or coming off royalty holidays.

The Company expects an increase in its royalty rate for 2014 to approximately 10% as some wells will continue to reach production maximums and come off royalty holidays partially offset by new wells coming on stream receiving some royalty relief. The royalty rate is sensitive to commodity prices, and as such, a change in commodity prices will impact the actual rate.

OTHER INCOME
Three Months Ended December 31, Years Ended December 31,
(000s) except per unit amounts 2013 2012 Change 2013 2012 Change
Other income $ 2,292 $ 1,366 68 % $ 6,523 $ 5,039 29 %

The increase in other income in 2013 compared to 2012 can be attributed to higher processing income due to temporary excess capacity at the new Doe gas plant and a processing facility acquired in NEBC in late 2012, which was partially utilized in 2013 by a third party.

OPERATING EXPENSES
Three Months Ended December 31, Years Ended December 31,
(000s) except per unit amounts 2013 2012 Change 2013 2012 Change
Operating expenses $ 35,177 $ 21,576 63 % $ 118,671 $ 82,312 44 %
Per boe $ 4.44 $ 4.10 8 % $ 4.35 $ 4.43 (2 )%

Operating expenses include all periodic lease and field-level expenses and exclude income recoveries from processing third-party volumes. For the fourth quarter of 2013, total operating expenses increased 63% from $21.6 million in the fourth quarter of 2012 to $35.2 million in 2013 due to the increased total costs relating to the growing production base. On a per-boe basis, the costs increased 8% from $4.10/boe for the fourth quarter of 2012 to $4.44/boe in the fourth quarter of 2013. The higher costs per boe can be attributed to additional turnarounds which were incurred in the fourth quarter of 2013. Tourmaline's operating expenses in the fourth quarter of 2013 include third-party processing, gathering and compression fees of approximately $8.7 million or $1.10/boe (December 31, 2012 - $5.7 million or $1.09/boe).

For the year ended December 31, 2013, total operating expenses were $118.7 million, or $4.35/boe, compared to $82.3 million, or $4.43/boe for the same period of 2012. Although total operating expenses increased with production, the cost per boe decreased 2% reflecting increased operational efficiencies. The Company's operating expenses were $0.10 higher than expected on a per-boe basis due to slightly lower production than originally forecasted.

Third-party processing, gathering and compression fees for the year ended December 31, 2013, have increased year-over-year with production ($33.2 million in 2013 versus $21.7 million in 2012); the cost per boe has increased to $1.22/boe in 2013 versus $1.17/boe in 2012 due to the temporary use of higher cost third-party processing on certain volumes, as well as, increased oil and liquids production which is subject to higher processing fees.

During 2013, the Company commissioned a gas plant at Doe in NEBC, completed an expansion of the Spirit River battery in Alberta and two gas plant expansions at Wild River and Banshee in the Deep Basin. These projects allow for additional volumes to flow through Company owned-and-operated plants thereby reducing third-party charges on a go-forward basis.

The Company's operating cost target is $4.15/boe in 2014. Actual costs per boe can change, however, depending on a number of factors, including the Company's actual production levels.

TRANSPORTATION
Three Months Ended December 31, Years Ended December 31,
(000s) except per unit amounts 2013 2012 Change 2013 2012 Change
Natural gas transportation $ 12,220 $ 6,884 78 % $ 38,671 $ 25,246 53 %
Oil and NGL transportation 5,635 2,927 93 % 17,963 9,461 90 %
Total transportation $ 17,855 $ 9,811 82 % $ 56,634 $ 34,707 63 %
Per boe $ 2.25 $ 1.86 21 % $ 2.07 $ 1.87 11 %

Transportation costs for the three months ended December 31, 2013 were $17.9 million or $2.25/boe (three months ended December 31, 2012 - $9.8 million or $1.86/boe). Transportation costs for the year ended December 31, 2013 were $56.6 million or $2.07/boe (year ended December 31, 2012 - $34.7 million or $1.87/boe). The increase in total transportation costs for the three months and year ended December 31, 2013 can be primarily attributed to increased production.

On a per-boe basis, transportation costs for the three and twelve months ended December 31, 2013 are higher as a result of the increased use of more expensive transportation due to pipeline and infrastructure constraints.

GENERAL & ADMINISTRATIVE EXPENSES ("G&A")
Three Months Ended December 31, Years Ended December 31,
(000s) 2013 2012 Change 2013 2012 Change
G&A expenses $ 10,355 $ 7,539 37 % $ 37,582 $ 27,089 39 %
Administrative and capital recovery (985 ) (341 ) 189 % (2,317 ) (1,163 ) 99 %
Capitalized G&A (3,951 ) (3,123 ) 27 % (15,023 ) (11,307 ) 33 %
Total G&A expenses $ 5,419 $ 4,075 33 % $ 20,242 $ 14,619 38 %
Per boe $ 0.68 $ 0.77 (12 )% $ 0.74 $ 0.79 (6 )%

Total G&A expenses for the fourth quarter of 2013 were $5.4 million compared to $4.1 million for the same quarter of the prior year. G&A costs per boe for the fourth quarter of 2013 decreased 12% down to $0.68/boe, compared to $0.77/boe for the fourth quarter of 2012.

For the year ended December 31, 2013, total G&A expenses were $20.2 million or $0.74/boe compared to $14.6 million or $0.79/boe for the same period of 2012. The higher total G&A expenses in 2013 are directly attributable to managing a larger production, reserve and land base. The Company's G&A expenses per boe continue to trend downward as Tourmaline's production base continues to grow faster than its accompanying G&A costs.

G&A costs for 2014 are expected to be approximately $0.60/boe. The Company expects G&A costs per boe to continue to decrease as the production base grows. Actual costs per boe can change, however, depending on a number of factors including the Company's actual production levels.

SHARE-BASED PAYMENTS
Three Months Ended December 31, Years Ended December 31,
(000s) 2013 2012 2013 2012
Share-based payments $ 11,588 $ 7,710 $ 38,614 $ 29,892
Capitalized share-based payments (5,794 ) (3,855 ) (19,307 ) (14,946 )
Total share-based payments $ 5,794 $ 3,855 $ 19,307 $ 14,946

The Company uses the fair value method for the determination of non-cash related share-based payments expense. During the fourth quarter of 2013, 2,398,000 stock options were granted to employees, officers, directors and key consultants at a weighted-average exercise price of $40.77, and 763,694 options were exercised, bringing $8.7 million of cash into treasury. The Company recognized $5.8 million of share-based payment expense in the fourth quarter of 2013 compared to $3.9 million in the fourth quarter of 2012. Capitalized share-based payments for the fourth quarter of 2013 were $5.8 million compared to $3.9 million for the same quarter of the prior year.

For the year ended December 31, 2013, share-based payment expense totalled $19.3 million and a further $19.3 million in share-based payments were capitalized (2012 - $14.9 million and $14.9 million, respectively). The increase in share-based payment expense in 2013 compared to 2012 reflects the increased value attributed to the options and a higher number of options outstanding.

DEPLETION, DEPRECIATION AND AMORTIZATION ("DD&A")
Three Months Ended December 31, Years Ended December 31,
(000s) except per unit amounts 2013 2012 2013 2012
Total depletion, depreciation and amortization $ 96,249 $ 65,998 $ 356,239 $ 242,528
Less mineral lease expiries (2,282 ) - (33,127 ) -
Depletion, depreciation and amortization $ 93,967 $ 65,998 $ 323,112 $ 242,528
Per boe $ 11.86 $ 12.53 $ 11.84 $ 13.04

DD&A expense was $94.0 million for the fourth quarter of 2013 compared to $66.0 million for the same period of 2012 due to higher production volumes, as well as a larger capital asset base being depleted. The per-unit DD&A rate for the fourth quarter of 2013 was $11.86/boe compared to $12.53/boe for the same quarter of 2012.

For the year ended December 31, 2013, DD&A expense was $323.1 million (December 31, 2012 - $242.5 million) with a DD&A rate of $11.84/boe (December 31, 2012 - $13.04/boe). The lower DD&A rate for the quarter and year ended December 31, 2013 reflects strong reserve additions derived from Tourmaline's exploration and production program.

Mineral lease expiries for the three months and year ended December 31, 2013 were $2.3 million and $33.1 million, respectively (December 31, 2012 - nil and nil, respectively). The increase in expiries is a result of mineral leases acquired via property and corporate acquisitions which were partially through their term at the date they were purchased, and have now begun to expire. The Company prioritizes drilling on what it believes to be the most cost-efficient and productive acreage, and with such a large land base, the Company has chosen to not continue some of the expiring sections of land. Tourmaline expects to continue to see mineral lease expiries of a similar magnitude on a go-forward basis.

FINANCE EXPENSES
Three Months Ended December 31, Years Ended December 31,
(000s) 2013 2012 Change 2013 2012 Change
Interest expense $ 3,551 $ 3,064 16 % $ 12,220 $ 10,484 17 %
Accretion expense 626 388 61 % 2,038 1,328 53 %
Transaction costs on corporate and property acquisitions 9 974 (99 )% 1,100 1,146 (4 )%
Total finance expenses $ 4,186 $ 4,426 (5 )% $ 15,358 $ 12,958 19 %

Finance expenses totalled $4.2 million and $15.4 million for the quarter and year ended December 31, 2013, respectively, and are comprised of interest expense, transaction costs on corporate and property acquisitions and accretion of decommissioning obligations (December 31, 2012 - $4.4 million and $13.0 million, respectively). The increased finance expenses in 2013 are largely due to higher interest expense resulting from a higher balance drawn on the credit facility. The average bank debt outstanding and the average effective interest rate on the debt during 2013 were $337.0 million and 3.0%, respectively (2012 - $245.4 million and 3.34%, respectively). In the fourth quarter of 2013, this increase in interest expense was offset by a decrease in transaction costs on corporate acquisitions, with the fourth quarter of 2012 having costs related to a corporate acquisition.

CASH FLOW FROM OPERATING ACTIVITIES, CASH FLOW AND NET EARNINGS
Three Months Ended December 31, Years Ended December 31,
(000s) except per unit amounts 2013 2012 Change 2013 2012 Change
Cash flow from operating activities $ 128,852 $ 104,671 23 % $ 479,239 $ 273,477 75 %
Per share(1) $ 0.66 $ 0.60 10 % $ 2.55 $ 1.64 55 %
Cash flow(2) $ 160,732 $ 93,807 71 % $ 526,761 $ 280,279 88 %
Per share(1)(2) $ 0.83 $ 0.54 54 % $ 2.80 $ 1.68 67 %
Net earnings $ 56,763 $ 16,301 248 % $ 148,114 $ 15,519 854 %
Per share(1) $ 0.29 $ 0.09 222 % $ 0.79 $ 0.09 778 %
Operating netback per boe (2) $ 21.29 $ 19.17 11 % $ 20.37 $ 16.27 25 %
(1) Fully diluted
(2) See "Non-GAAP Financial Measures"

Cash flow for the three months ended December 31, 2013 was $160.7 million or $0.83 per diluted share compared to $93.8 million or $0.54 per diluted share for the same period of 2012. For the year ended December 31, 2013, cash flow was $526.8 million or $2.80 per diluted share, which is higher than the December 31, 2012 cash flow of $280.3 million or $1.68 per diluted share. The increase in cash flow in 2013 reflects increased production and higher natural gas prices.

The Company had after-tax earnings for the three months and year ended December 31, 2013 of $56.8 million ($0.29 per diluted share) and $148.1 million ($0.79 per diluted share), respectively, compared to earnings of $16.3 million ($0.09 per diluted share) and $15.5 million ($0.09 per diluted share), respectively, for the same periods of 2012. The significant increase is attributable to increased natural gas prices and production, as well as the $77.0 million in gains realized on the sale of certain non-core assets in Alberta and NEBC (December 31, 2012 - $7.6 million).

CAPITAL EXPENDITURES
Three Months Ended December 31, Years Ended December 31,
(000s) 2013 2012 2013 2012
Land and seismic $ 8,660 $ 9,270 $ 43,008 $ 31,288
Drilling and completions 280,326 148,953 721,653 438,459
Facilities 122,801 52,917 386,601 184,406
Property acquisitions 82,180 81,778 226,926 88,619
Property dispositions (24 ) (49 ) (78,069 ) (12,682 )
Other 3,998 3,239 15,297 11,550
Total cash capital expenditures $ 497,941 $ 296,108 $ 1,315,416 $ 741,640

During the fourth quarter of 2013, the Company invested $497.9 million of cash consideration, net of dispositions, compared to $296.1 million for the same period of 2012. Expenditures on exploration and production were $411.8 million compared to $211.1 million for the same quarter of 2012, which is consistent with the Company's aggressive growth strategy. The growth in facilities expenditures includes costs related to the expansion of the Wild River and Banshee gas facilities both of which were completed in late 2013. The Company also continued to add to its overall asset base through strategic property acquisitions during the third and fourth quarters of 2013.

During 2013 the Company invested $1,315.4 million of cash consideration, net of dispositions, compared to $741.6 million in 2012. Expenditures on exploration and production were $1,151.3 million compared to $654.2 million for 2012.

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

Three Months Ended December 31, 2013 Year Ended December 31, 2013
Gross Net Gross Net
Drilled 48 42.69 129 115.14
Completed 51 45.06 123 111.33
Tied-in 21 15.16 54 46.85

Capital expenditures in 2014 are forecast to be $1.0 billion, which was revised upward from $900 million in the February 19, 2014 press release. Major planned 2014 facility projects include expansions at Musreau in Alberta and Doe in NEBC, and a new gas plant in Spirit River, Alberta (in late 2014).

LIQUIDITY AND CAPITAL RESOURCES

On March 12, 2013, the Company issued 5.78 million common shares at a price of $34.25 per share and 0.835 million flow-through common shares at a price of $42.15 per share, for total gross proceeds of $233.2 million. The proceeds were used to temporarily reduce bank debt and to fund the Company's 2013 exploration and development program.

On October 8, 2013, the Company issued 3.495 million common shares at a price of $41.75 per share and 0.925 million flow-through common shares at a price of $51.60 per share, for total gross proceeds of $193.6 million. The proceeds were used to temporarily reduce bank debt and to fund the Company's remaining 2013 and its upcoming 2014 exploration and development programs.

On February 12, 2014 the Company issued 4.615 million common shares at a price of $47.50 per share for total gross proceeds of $219.2 million. The proceeds will be used to temporarily reduce bank debt and to fund the Company's upcoming 2014 exploration and development programs.

The Company has a covenant-based bank credit facility in place with a syndicate of bankers, the details of which are described in note 9 of the Company's consolidated financial statements for the year ended December 31, 2013. In October 2013, the facility was increased to $900 million from $750 million, under the same terms and covenants, with an initial maturity of June 2016.

At December 31, 2013, Tourmaline had negative working capital of $242.6 million, after adjusting for the fair value of financial instruments (the unadjusted working capital deficiency was $245.3 million) (December 31, 2012 - $103.7 million and $98.9 million, respectively). Management believes the Company has sufficient liquidity and capital resources to fund the 2014 exploration and development program through expected cash flow from operations, its unutilized bank credit facility and the financings described above. As at December 31, 2013, the Company's bank debt balance was $590.3 million (December 31, 2012 - $360.6 million), and net debt was $832.9 million (December 31, 2012 - $464.3 million).

SHARES AND STOCK OPTIONS OUTSTANDING

As at March 17, 2014, the Company has 195,138,903 common shares outstanding and 15,654,810 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) 1 Year 2-3 Years 4-5 Years >5 Years Total
Operating leases $ 3,591 $ 9,552 $ 10,163 $ 6,168 $ 29,474
Firm transportation and processing agreements 55,539 262,358 143,562 344,206 805,665
Bank debt(1) - 639,271 - - 639,271
$ 59,130 $ 911,181 $ 153,725 $ 350,374 $ 1,474,410
(1) Includes interest expense at an annual rate of 3.06% being the rate applicable to outstanding bank debt at December 31, 2013.

OFF BALANCE SHEET ARRANGEMENTS

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

FINANCIAL RISK MANAGEMENT

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

The Company's risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to market conditions and the Company's activities. The Company's financial risks are discussed in note 5 of the Company's consolidated financial statements for the year ended December 31, 2013.

As at December 31, 2013, the Company has entered into certain financial derivative contracts in order to manage commodity risk. These instruments are not used for trading or speculative purposes. The Company has not designated its financial derivative contracts as effective accounting hedges, even though the Company considers all commodity contracts to be effective economic hedges. Such financial derivative commodity contracts are recorded on the consolidated statement of financial position at fair value, with changes in the fair value being recognized as an unrealized gain or loss on the consolidated statement of income and comprehensive income. The contracts that the Company entered into in 2013 are detailed in note 5 of the Company's consolidated financial statements for the year ended December 31, 2013.

The following table provides a summary of the unrealized gains and losses on financial instruments for the year ended December 31, 2013:

Three Months Ended December 31, Years Ended December 31,
(000s) 2013 2012 2013 2012
Unrealized gain (loss) on financial instruments $ (4,847 ) $ 1,174 $ (10,046 ) $ 2,600
Unrealized (loss) on investments held for trading - - - (103 )
Total $ (4,847 ) $ 1,174 $ (10,046 ) $ 2,497

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. Physical contracts in place at December 31, 2013 have been disclosed in note 5 of the Company's consolidated financial statements for the year ended December 31, 2013.

Financial derivative and physical delivery contracts entered into subsequent to December 31, 2013 are detailed in note 5 of the Company's consolidated financial statements for the year ended December 31, 2013.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

Certain accounting policies require that management make appropriate decisions with respect to the formulation of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management reviews its estimates on a regular basis. The emergence of new information and changed circumstances may result in actual results or changes to estimates that differ materially from current estimates. The Company's use of estimates and judgments in preparing the consolidated financial statements is discussed in note 1 of the consolidated financial statements for the year ended December 31, 2013.

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"), as defined by National Instrument 52-109 - Certification of Disclosure in Issuers' Annual and Interim Filings ("NI 52-109"), 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"), as defined by NI 52-109, 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 GAAP.

The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's DC&P and ICFR. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as at December 31, 2013, the Company's DC&P and ICFR are effective. There were no changes in the Company's DC&P or ICFR during the period beginning on October 1, 2013 and ending December 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Company's DC&P or ICFR. It should be noted that a control system, including the Company's disclosure and internal controls and procedures, no matter how well conceived can provide only reasonable, but not absolute assurance that the objectives of the control system will be met and it should not be expected that the disclosure and internal controls and procedures will prevent all errors or fraud.

The design and assessment of the Company's DC&P and ICFR were based on the framework in 'Internal Control - Integrated Framework (1992)' issued by the Committee of Sponsoring Organizations of the Treadway Commission.

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

The oil and gas industry is currently subject to regulation pursuant to a variety of provincial and federal environmental legislation, all of which is subject to governmental review and revision from time to time. Such legislation provides for, among other things, restrictions and prohibitions on the spill, release or emission of various substances produced in association with certain oil and gas industry operations, such as sulphur dioxide and nitrous oxide. In addition, such legislation sets out the requirements with respect to oilfield waste handling and storage, habitat protection and the satisfactory operation, maintenance, abandonment and reclamation of well and facility sites. Compliance with such legislation can require significant expenditures and a breach of such requirements may result in suspension or revocation of necessary licenses and authorizations, civil liability and the imposition of material fines and penalties.

The use of fracture stimulations has been ongoing safely in an environmentally responsible manner in western Canada for decades. With the increase in the use of fracture stimulations in horizontal wells there is increased communication between the oil and natural gas industry and a wider variety of stakeholders regarding the responsible use of this technology. This increased attention to fracture stimulations may result in increased regulation or changes of law which may make the conduct of the Company's business more expensive or prevent the Company from conducting its business as currently conducted. Tourmaline focuses on conducting transparent, safe and responsible operations in the communities in which its people live and work.

CHANGES IN ACCOUNTING POLICIES

The following new accounting standards and amendments to existing standards, as issued by the International Accounting Standards Board ("IASB"), have been adopted by the Company effective January 1, 2013.

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 and 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.

NON-GAAP FINANCIAL MEASURES

This MD&A or documents referred to in this MD&A make reference to the terms "cash flow", "operating netback", "working capital (adjusted for the fair value of financial instruments)", "net debt", "adjusted EBITDA", "senior debt", "total debt", and "total capitalization" which are not recognized measures under GAAP, and do not have a standardized meaning prescribed by GAAP. Accordingly, the Company's use of these terms may not be comparable to similarly defined measures presented by other companies. Management uses the terms "cash flow", "operating netback", "working capital (adjusted for the fair value of financial instruments)" and "net debt", for its own performance measures and to provide shareholders and potential investors with a measurement of the Company's efficiency and its ability to generate the cash necessary to fund a portion of its future growth expenditures or to repay debt. Investors are cautioned that the non-GAAP measures should not be construed as an alternative to net income determined in accordance with GAAP as an indication of the Company's performance. The terms "adjusted EBITDA", "senior debt", "total debt", and "total capitalization" are not used by management in measuring performance but are used in the financial covenants under the Company's credit facility. Under the Company's credit facility "adjusted EBITDA" means generally net income or loss, excluding extraordinary items, plus interest expense and income taxes and adjusted for non-cash items and gains or losses on dispositions, "senior debt" means generally the indebtedness, liabilities and obligations of the Company to the lenders under the credit facility and certain other secured indebtedness, liabilities and obligations of the Company ("bank debt"), "total debt" means generally bank debt plus any other indebtedness of the Company, and "total capitalization" means generally the sum of the Company's shareholders' equity and all other indebtedness of the Company including bank debt, all determined on a consolidated basis in accordance with GAAP.

Cash Flow

A summary of the reconciliation of cash flow from operating activities (per the statement of cash flow), to cash flow, is set forth below:

Three Months Ended December 31, Years Ended December 31,
(000s) 2013 2012 2013 2012
Cash flow from operating activities (per GAAP) $ 128,852 $ 104,671 $ 479,239 $ 273,477
Change in non-cash working capital 31,880 (10,864 ) 47,522 6,802
Cash flow $ 160,732 $ 93,807 $ 526,761 $ 280,279

Operating Netback

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

Three Months Ended December 31, Years Ended December 31,
($/boe) 2013 2012 2013 2012
Revenue, excluding processing income $ 29.69 $ 27.18 $ 28.90 $ 24.19
Royalties (1.70 ) (2.05 ) (2.11 ) (1.63 )
Transportation costs (2.25 ) (1.86 ) (2.07 ) (1.87 )
Operating expenses (4.44 ) (4.10 ) (4.35 ) (4.43 )
Operating netback (1) $ 21.29 $ 19.17 $ 20.37 $ 16.27
(1) May not add due to rounding.

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

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

(000s) As at
December 31, 2013
As at
December 31, 2012
Working capital (deficit) $ (245,314 ) $ (98,913 )
Fair value of financial instruments - short-term (asset) liability 2,691 (4,814 )
Working capital (deficit) (adjusted for the fair value of financial instruments) $ (242,623 ) $ (103,727 )

Net Debt

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

(000s) As at
December 31, 2013
As at
December 31, 2012
Bank debt $ (590,319 ) $ (360,573 )
Working capital (deficit) (245,314 ) (98,913 )
Fair value of financial instruments - short-term (asset) liability 2,691 (4,814 )
Net debt $ (832,942 ) $ (464,300 )
SELECTED QUARTERLY INFORMATION
2013 2012
($000s, unless otherwise noted) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
PRODUCTION
Natural gas (mcf) 41,062,993 36,486,443 34,477,391 33,055,857 27,879,639 23,501,484 24,276,149 22,430,621
Oil and NGL(bbls) 1,076,395 735,727 640,001 667,907 618,483 515,157 596,992 515,408
Oil equivalent (boe) 7,920,228 6,816,800 6,386,233 6,177,216 5,265,090 4,432,071 4,643,016 4,253,845
Natural gas (mcf/d) 446,337 396,592 378,872 367,287 303,040 255,451 266,771 246,490
Oil and NGL (bbls/d) 11,700 7,997 7,033 7,421 6,723 5,600 6,560 5,664
Oil equivalent (boe/d) 86,089 74,096 70,178 68,636 57,230 48,175 51,022 46,746
FINANCIAL
Revenue, net of royalties 219,069 167,138 180,505 161,124 134,864 91,863 105,567 94,781
Cash flow from operating activities 128,852 128,192 128,432 93,763 104,671 66,713 42,566 59,527
Cash flow (1) 160,732 120,560 128,870 116,599 93,807 63,515 61,121 61,836
Per diluted share 0.83 0.64 0.68 0.64 0.54 0.38 0.37 0.38
Net earnings (loss) 56,763 9,163 30,004 52,184 16,301 (4,770 ) 1,012 2,976
Per basic share 0.30 0.05 0.16 0.29 0.10 (0.03 ) 0.01 0.02
Per diluted share 0.29 0.05 0.16 0.29 0.09 (0.03 ) 0.01 0.02
Total assets 4,696,471 4,210,171 3,811,192 3,735,641 3,580,253 2,992,552 2,862,502 2,878,261
Working capital (deficit) (245,314 ) (206,250 ) (50,851 ) (165,385 ) (98,913 ) (98,184 ) (15,311 ) (176,029 )
Working capital (deficit)(adjusted for the fair value of financial instruments) (1) (242,623 ) (204,507 ) (53,676 ) (166,049 ) (103,727 ) (101,577 ) (19,809 ) (175,696 )
Cash capital expenditures 497,941 468,261 158,751 190,463 296,108 175,277 53,831 216,424
Total outstanding shares (000s) 189,805 184,621 184,175 183,408 174,813 165,678 160,459 158,807
PER UNIT
Natural gas ($/mcf) 3.84 3.30 3.92 3.50 3.29 2.52 2.23 2.54
Oil and NGL ($/bbl) 71.83 91.65 87.06 88.75 83.28 83.34 77.75 91.48
Revenue ($/boe) 29.69 27.58 29.88 28.33 27.18 23.04 21.64 24.48
Operating netback ($/boe) (1) 21.29 18.59 21.28 20.20 19.17 15.68 14.22 15.52
(1) See Non-GAAP Financial Measures.

The oil and gas exploration and production industry is cyclical in nature. The Company's financial position, results of operations and cash flows are principally impacted by production levels and commodity prices, particularly natural gas prices.

Overall, the Company has had continued annual growth over the last two years summarized in the table above. The small decrease in production from the second quarter to the third quarter of 2012 was due to weather-related tie-in delays, as well as production disruptions related to sour gas handling issues at Spirit River and a one-time equipment issue at Sunrise. The Company's average annual production has increased from 50,804 boe per day in 2012 to 74,796 boe per day in 2013. The production growth can be attributed primarily to the Company's exploration and development activities, as well as from acquisitions of producing properties.

The Company's cash flows from operating activities were $273.5 million in 2012 and $479.2 million in 2013. Cash flows have increased with higher production and strengthening natural gas prices in 2013 over 2012. Commodity price changes can indirectly impact expected production by changing the amount of funds available to reinvest in exploration, development and acquisition activities in the future. Decreases in commodity prices not only reduce revenues and cash flows available for exploration, they may also challenge the economics of potential capital projects by reducing the quantities of reserves that are commercially recoverable. The Company's capital program is dependent on cash flows generated from operations and access to capital markets.

SELECTED ANNUAL INFORMATION
($000s unless otherwise noted) 2013 2012 2011
PRODUCTION
Natural gas (mcf) 145,082,684 98,087,893 60,577,481
Oil and NGL (bbls) 3,120,030 2,246,040 1,221,268
Oil equivalent (boe) 27,300,477 18,594,022 11,317,515
Natural gas (mcf/d) 397,487 268,000 165,966
Oil and NGL (bbls/d) 8,548 6,137 3,346
Oil equivalent (boe/d) 74,796 50,804 31,007
FINANCIAL
Revenue, net of royalties 727,836 427,075 346,104
Cash flow from operating activities 479,239 273,477 228,421
Cash flow (1) 526,761 280,279 241,352
Per diluted share 2.80 1.68 1.58
Net earnings 148,114 15,519 42,681
Per basic share 0.81 0.10 0.29
Per diluted share 0.79 0.09 0.28
Total assets 4,696,471 3,580,253 2,711,024
Working capital (deficit) (245,314 ) (98,913 ) (146,317 )
Working capital (deficit) (adjusted for the fair value of financial instruments) (1) (242,623 ) (103,727 ) (146,593 )
Cash capital expenditures 1,315,416 741,640 828,956
Basic outstanding shares (000s) 189,805 174,813 158,578
PER UNIT
Natural gas ($/mcf) 3.65 2.67 4.17
Oil and NGL ($/bbl) 83.25 83.71 90.24
Revenue ($/boe) 28.90 24.19 32.07
Operating netback ($/boe) 20.37 16.27 22.35
(1) See Non-GAAP Financial Measures.

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 Company's exploration and development activities and from the acquisition of producing properties.

MANAGEMENT'S REPORT

To the Shareholders of Tourmaline Oil Corp.:

The accompanying consolidated financial statements of Tourmaline Oil Corp. and all the information in the Annual Report are the responsibility of management and have been approved by the Board of Directors. The financial statements have been prepared by management in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. When alternative accounting methods exist, management has chosen those it deems most appropriate in the circumstances. Financial statements are not precise since they include certain amounts based on estimates and judgments. Management has determined such amounts on a reasonable basis in order to ensure that the financial statements are presented fairly, in all material respects. The financial information contained elsewhere in this report has been reviewed to ensure consistency with the financial statements.

Management has established systems of internal controls, which are designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use and to produce reliable accounting records for the preparation of financial information. The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control. It exercises its responsibilities primarily through the Audit Committee, with some assistance from the Reserves Committee regarding the annual evaluation of the Company's petroleum and natural gas reserves. The Audit Committee has reviewed the financial statements with management and the auditors, and has reported to the Board of Directors. The external auditors have access to the Audit Committee without the presence of management.

The financial statements have been audited on behalf of the shareholders by KPMG LLP, the external auditors. Their examination included such tests and procedures, as they considered necessary, to provide reasonable assurance that the consolidated financial statements are presented fairly in accordance with International Financial Reporting Standards. The Board of Directors has approved the financial statements.

Michael L. Rose, President and Vice-President, Finance and Chief Executive Officer

Calgary, Alberta

Brian G. Robinson, Chief Financial Officer

Calgary, Alberta

March 17, 2014

AUDITOR'S REPORT

To the Shareholders of Tourmaline Oil Corp.:

We have audited the accompanying consolidated financial statements of Tourmaline Oil Corp., which comprise the consolidated statements of financial position as at December 31, 2013 and December 31, 2012 and the consolidated statements of income and comprehensive income, changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors' Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Tourmaline Oil Corp. as at December 31, 2013 and December 31, 2012 and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards.

KPMG LLP, Chartered Accountants, March 17, 2014

Calgary, Canada

CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(000s) December 31, 2013 December 31, 2012
Assets
Current assets:
Accounts receivable $ 136,041 $ 83,868
Assets held for sale - 33,007
Prepaid expenses and deposits 6,918 5,309
Fair value of financial instruments (notes 4 and 5) 166 4,814
Total current assets 143,125 126,998
Fair value of financial instruments (notes 4 and 5) 663 -
Long-term asset 2,373 2,580
Exploration and evaluation assets (note 6) 700,525 639,933
Property, plant and equipment (note 7) 3,849,785 2,810,742
Total Assets $ 4,696,471 $ 3,580,253
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 385,582 $ 225,911
Fair value of financial instruments (notes 4 and 5) 2,857 -
Total current liabilities 388,439 225,911
Bank debt (note 9) 590,319 360,573
Long-term obligation 3,414 7,139
Fair value of financial instruments (notes 4 and 5) 5,216 2,012
Deferred premium on flow-through shares - 8,755
Decommissioning obligations (note 8) 76,037 64,757
Deferred taxes (note 12) 265,025 176,391
Shareholders' equity:
Share capital (note 11) 3,062,432 2,599,614
Non-controlling interest (note 10) 17,877 16,298
Contributed surplus 91,718 70,923
Retained earnings 195,994 47,880
Total shareholders' equity 3,368,021 2,734,715
Total Liabilities and Shareholders' Equity $ 4,696,471 $ 3,580,253
Commitments (note 19)
Subsequent events (notes 5, 19 and 21)
See accompanying notes to the consolidated financial statements.
...
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31,
(000s) except per-share amounts 2013
Contact:
Tourmaline Oil Corp.
Michael Rose
Chairman, President and Chief Executive Officer
(403) 266-5992
info@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
www.tourmalineoil.com

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