Tourmaline Oil Corp. Announces Record Year End 2012 Financial Results

CALGARY, ALBERTA--(Marketwire - Mar 19, 2013) - Tourmaline Oil Corp. (TOU.TO) ("Tourmaline" or the "Company") achieved exceptional growth in reserves (69%), production (64%) and cash flow(1) (16%) in 2012 while delivering strong profitability in a year of significantly lower natural gas prices. The Company posted strong after-tax earnings of $15.5 million for the 2012 fiscal year.

Highlights

  • 2012 average production of 50,804 boepd represented a 64% increase over the 2011 average production of 31,007 boepd.
  • Total proved plus probable (2P) reserve additions of 186.6 mmboe in 2012, representing 69% growth over 2011 total 2P reserves before 2012 production (54% per share). Similarly, proved reserves grew by 80% in 2012 over 2011 (63% per share).
  • After-tax earnings of $15.5 million in 2012 despite an average realized natural gas price in 2012 of $2.67/mcf.
  • Record annual cash flow of $280.3 million representing 16% growth over 2011 cash flow of $241.4 million.
  • 2012 operating expenses of $4.43/boe - a 21% decrease over 2011 operating expenses of $5.58/boe. Fourth quarter 2012 operating expenses were $4.10/boe.
  • Completed a $233.2 million equity financing on March 12, 2013.
  • Completed the sale of the non-producing Elmworth property on March 12, 2013, for net proceeds of $77.5 million.
  • Year-end 2012 2P reserve value of $4.3 billion (10% discount, before tax), representing 61% growth over year-end 2011 2P reserve value, despite a difficult gas price environment during the year and lower overall natural gas prices utilized in the 2012 independent reserve report. (Net Present Value increase in 2012 of $1.65 billion.)
  • 2012 2P finding, development and acquisition costs (FD&A) of $10.35/boe including future development capital (FDC) and $5.80/boe excluding FDC - down from $13.34/boe in 2011 (including changes in FDC). 2012 total Proved FD&A costs were $14.06/boe (including FDC), down from $19.71/boe in 2011.
  • Total year-end 2012 2P reserves of 438 mmboe after only four full years of operation.
  • Drilled 76 gross wells in 2012, with a 100% success rate.
(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

Full year 2013 average production guidance was increased from 75,000 boepd to 80,000 boepd, on February 20, 2013. This will represent 57% growth over 2012 average production of 50,804 boepd. The Company expects to reach the 80,000 boepd level in early June when the new Doe gas plant is currently scheduled for start-up.

The new gas processing facility at Doe BC will bring approximately 10,000 - 11,000 boepd of shut-in Triassic Montney production on-stream. The gas handling facility expansion at Spirit River Alberta will bring approximately 2,000 boepd of currently shut-in Charlie Lake light oil and gas production on-stream in June. An additional 2,500-3,000 boepd of shut-in Charlie Lake production will come on-stream in late September through ongoing complementary pipeline/debottlenecking projects.

EP Update

The Company plans to continue operating 11 drilling rigs after break-up, with 2 rigs in NEBC pursuing the Triassic Montney, 2 at Spirit River pursuing the light oil charged Triassic Charlie Lake formation, and 7 in the Alberta Deep Basin pursuing Lower Cretaceous horizontal, liquid rich gas targets.

A total of 70 Deep Basin wells (60 horizontal and 10 vertical), 25 NEBC Montney horizontals and 25 Charlie Lake horizontals are expected for full year 2013.

Major 2013 facility projects include the ongoing Q2 gas facility projects at Doe BC and Spirit River Alberta and two, 50 mmcfpd gas facility expansions in the Alberta Deep Basin during the second half of 2013. Full year 2013 EP capital spending of $740.0 million is anticipated.

Liquids Production, Marketing and Transportation

Tourmaline is targeting the 15,000 bpd total liquid production level in Q4 2013, 70% of which is condensate and light oil.

In March of 2013, Tourmaline entered into certain short-and-long-term contracts to ensure stability of market price and access for the Company''s significant hydrocarbon liquids assets. These agreements include a 130 mmcfpd deep cut gas processing arrangement commencing in 2015, an associated liquids transportation agreement and a 9,000 bopd NGL product fractionation sale agreement.  

The Company has a series of additional initiatives in place to manage the capture, transportation, storage, fractionation and the marketing of these liquids, both in the short and long-term.

In addition to participation in a third party deep cut plant, the Company is planning at least one owned-and-operated deep cut facility in the 2015 time frame.

Financial Update

Tourmaline is currently expecting 2013 cash flow of approximately $651.8 million based on production of 80,000 boepd and an AECO natural gas price of $3.66/mcf, representing 133% growth over 2012 cash flow.

Year-end 2012 net debt(2) was $464.3 million. During the first quarter of 2013 a $233.2 million equity financing closed on March 12, and the planned Elmworth disposition was completed. Net proceeds from the Elmworth disposition were $77.5 million; in addition $155 million of future capital will be removed from the 2P FDC account. Based on the $740.0 million capital program, the net proceeds from the equity financing and property disposition completed in March and the Company''s anticipated 2013 cash flow described above, the Company is forecasting 2013 exit net debt of $309.4 million, as the Company continues to strive to maintain a debt to cash flow ratio of 1.0 times or less.

Tourmaline''s unit cash cost(3) structure continued to improve during 2012 as full-year 2012 royalties fell to $1.63/boe - a 22% improvement; transportation costs fell to $1.87/boe - a 10% improvement; operating expenses were $4.43/boe - a 21% reduction; general and administrative costs dropped by 23% to $0.79/boe; and interest and financing charges increased to $0.70/boe - a change of 27%.

Tourmaline''s total unit cash costs of $9.42/boe dropped by 17% compared to 2011, providing amongst the lowest absolute cost structures in the industry. Similarly, Depletion, Depreciation and Amortization ("DD&A") charges continued their steady trend downward for the third consecutive fiscal year to $13.04/boe - a 7% improvement over 2011.

(2) 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.
   
(3) Unit cash costs is defined as the sum of royalties, operating and transportation expenses, general and administrative costs and finance expenses divided by total production (Boe) for the period. Unit cash costs is a non-GAAP financial measure, which does not have any standardized meaning prescribed by GAAP. Management believes that unit cash costs is a useful supplemental measure in assessing the Company''s performance as it provides, among others, a measure of the Company''s cash margin per boe produced. Readers are cautioned, however, that this measure should not be construed as an alternative to conventional measures determined in accordance with GAAP as an indication of Tourmaline''s performance. Tourmaline''s method of calculating this measure may differ from other companies and accordingly, it may not be comparable to similar measures used by other companies.
               
CORPORATE SUMMARY - DECEMBER 31, 2012              
               
  Three Months Ended December 31,   Twelve Months Ended December 31,  
  2012 2011 Change   2012   2011   Change  
OPERATIONS                    
                     
Production                    
  Natural gas (mcf/d) 303,040 200,403 51 % 268,000   165,966   61 %
  Crude oil and NGL (bbls/d) 6,723 4,512 49 % 6,137   3,346   83 %
  Oil equivalent (Boe/d) 57,230 37,912 51 % 50,804   31,007   64 %
                     
Product prices(1)                    
  Natural gas ($/mcf) $ 3.29 $ 3.76 (13 )% $ 2.67   $ 4.17   (36 )%
  Crude oil and NGL ($/bbl) $ 83.28 $ 93.05 (10 )% $ 83.71   $ 90.24   (7 )%
                     
Operating expenses ($/Boe) $ 4.10 $ 5.17 (21 )% $ 4.43   $ 5.58   (21 )%
                     
Transportation costs ($/Boe) $ 1.86 $ 2.24 (17 )% $ 1.87   $ 2.06   (10 )%
                     
Operating netback(4) ($/Boe) $ 19.17 $ 21.39 (10 )% $ 16.27   $ 22.35   (27 )%
                     
Cash general and administrative expenses ($/Boe)(2) $ 0.77 $ 0.82 (6 )% $ 0.79   $ 1.02   (23 )%
                     
                     
FINANCIAL ($000, EXCEPT PER SHARE)                    
                     
Revenue 143,117 107,944 33 % 449,843   362,992   24 %
Royalties 10,793 7,510 44 % 30,304   23,553   29 %
                     
Cash flow(4) 93,807 73,311 28 % 280,279   241,352   16 %
Cash flow per share(4) $ 0.54 $ 0.45 20 % $ 1.68   $ 1.58   6 %
                     
Net earnings 16,301 16,074 1 % 15,519   42,681   (64 )%
Net earnings per share $ 0.09 $ 0.10 (10 )% $ 0.09   $ 0.28   (68 )%
                     
Capital expenditures 296,108 232,167 28 % 741,640   828,956   (11 )%
                     
Weighted average shares outstanding (diluted)         167,028,522   152,315,296   10 %
                     
Net debt(4)         (464,300 ) (228,342 ) 103 %
                     
                     
PROVED + PROBABLE RESERVES(3)                    
                     
Natural gas (bcf)         2,319.8   1,415.9   64 %
Crude oil (mbbls)         13,653   10,931   25 %
Natural gas liquids (mbbls)         37,583   22,876   64 %
Mboe         437,869   269,797   62 %
                     
(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 7:00 a.m. MT (9:00 a.m. ET)

Tourmaline will host a conference call tomorrow, March 20, 2013 starting at 7:00 a.m. MT (9:00 a.m. ET). To participate, please dial 1-866-226-1792 (toll-free in North America), or local dial-in 416-340-2216, a few minutes prior to the conference call. 

The conference call ID number is 4159296.

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, each dated effective December 31, 2012, 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, 2013 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, 2012, which will be filed on SEDAR (accessible at www.sedar.com) on or before March 30, 2013.

Per share reserve information is based on the total common shares outstanding, after accounting for outstanding Company options, at year end 2012 and 2011, respectively.

See also the Company''s news release dated February 12, 2013 for more information with respect to the Company''s reserves data.

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 2013 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 2013 average production of 80,000 boepd and commodity price assumptions for natural gas (AECO - $3.66/mcf) (2013), and crude oil (WTI (US) - $95.00/bbl) (2013) and an exchange rate assumption of $1.00 (US/CAD) for 2013. To the extent such estimate constitutes a financial outlook, it was approved by management and the Board of Directors of Tourmaline on March 19, 2013 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: 
 
bbls barrels
boe barrel of oil equivalent
boepd barrel of oil equivalent per day
bopd barrel of oil, condensate or natural gas liquids per day
gjsd gigajoules per day
mmboe millions of barrels of oil equivalent
mbbls thousand barrels
mmcf million cubic feet
mmcfpd million cubic feet per day
mmcfpde million cubic feet per day equivalent
mcfe thousand cubic feet equivalent
mmbtu million British thermal units
NGL natural gas liquids

MANAGEMENT''S DISCUSSION AND ANALYSIS

For the years ended December 31, 2012 and December 31, 2011

This management''s discussion and analysis ("MD&A") should be read in conjunction with Tourmaline''s consolidated financial statements and related notes for the years ended 2012 and 2011. Both the consolidated financial statements and the MD&A can be found at www.sedar.com. This MD&A is dated March 19, 2013.

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)" 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, 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,
 
  2012 2011 Change   2012 2011 Change  
Natural Gas (mcf/d) 303,040 200,403 51 % 268,000 165,966 61 %
Crude oil and NGL (bbl/d) 6,723 4,512 49 % 6,137 3,346 83 %
Oil equivalent (Boe/d) 57,230 37,912 51 % 50,804 31,007 64 %

Production for the fourth quarter of 2012 averaged 57,230 Boe/d, a 51% increase over the average production for the same quarter of 2011 of 37,912 Boe/d. Production was 88% natural gas weighted in the fourth quarter of 2012, which is consistent with the fourth quarter of 2011. For the year ended December 31, 2012, production increased 64% to 50,804 Boe/d from 31,007 Boe/d in 2011.

The Company''s significant production growth when compared to 2011 can be primarily attributed to new wells that have been brought on-stream in 2012, as well as property and corporate acquisitions completed during the year.

Production guidance for 2013 is 80,000 Boe/d, an increase from the previous target of 75,000 Boe/d (as disclosed by press release November 8, 2012). The production increase is a direct result of Tourmaline''s continued success in the ongoing exploration and production program, as well as the planned commissioning of facilities in the Doe and Sunrise areas which will allow shut-in production to come on-stream.

REVENUE
 
  Three Months Ended
 December 31,
Years Ended
 December 31,
(000s) 2012 2011 Change 2012 2011 Change
Revenue from:            
Natural Gas $91,608 $69,323 32% $261,833 $252,781 4%
Oil and NGL 51,509 38,621 33% 188,010 110,211 71%
Total revenue from gas, oil and NGL sales $143,117 $107,944 33% $449,843 $362,992 24%

Revenue for the three months ended December 31, 2012 increased 33% to $143.1 million from $107.9 million for the same quarter of 2011. Revenue for the year ended December 31, 2012 increased 24% to $449.8 million from $363.0 million in 2011. Revenue growth is consistent with the increase in production over the same periods, partially offset by lower realized commodity 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,
 
  2012 2011 Change   2012 2011 Change  
Natural Gas ($/mcf) $3.29 $3.76 (13 )% $2.67 $4.17 (36 )%
Oil and NGL ($/bbl) $83.28 $93.05 (10 )% $83.71 $90.24 (7 )%
Oil equivalent ($/Boe) $27.18 $30.95 (12 )% $24.19 $32.07 (25 )%

The realized average natural gas prices for the quarter and year ended December 31, 2012 were 13% and 36%, respectively, lower than the same periods of the prior year. Realized crude oil and NGL prices decreased 10% and 7% for the quarter and year ended December 31, 2012, respectively, compared to the same periods of the prior year.

The realized natural gas price for the quarter ended December 31, 2012 was $3.29/mcf, which is 3% (three months ended December 31, 2011 - 18%) higher than the AECO index price. The Company receives a premium to the AECO index on its Alberta Deep Basin natural gas production to reflect a higher heat content, which has remained consistent year-over-year (December 31, 2012 - 8% and December 31, 2011 - 7%). In 2012, this premium was partially offset by losses on commodity contracts.

The realized natural gas price for the year ended December 31, 2012 was 10% (December 31, 2011 - 16%) 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,
 
  2012 2011 Change   2012 2011 Change  
Natural Gas                
  NYMEX Henry Hub (US$/mcf) $3.54 $3.48 2 % $2.83 $4.03 (30 )%
  AECO (CAD$/mcf) $3.19 $3.19 - % $2.38 $3.64 (35 )%
Oil                
  NYMEX (US$/bbl) $88.23 $94.06 (6 )% $94.15 $95.11 (1 )%
  Edmonton Par (CAD$/bbl) $84.97 $98.17 (13 )% $86.90 $95.57 (9 )%
   
RECONCILIATION OF AECO INDEX TO TOURMALINE''S REALIZED GAS PRICES:  
   
  Three Months Ended
 December 31,
  Years Ended
 December 31,
 
($/mcf) 2012   2011 Change   2012 2011 Change  
AECO index $3.19   $3.19 - % $2.42 $3.60 (33 )%
Heat/quality differential 0.29   0.22 32 % 0.20 0.24 (17 )%
Realized gain (loss) (0.19 ) 0.35 (154 )% 0.05 0.33 (85 )%
Tourmaline realized natural gas price $3.29   $3.76 (13 )% $2.67 $4.17 (36 )%
 
CURRENCY - EXCHANGE RATES:
 
  Three Months Ended
 December 31,
Years Ended
 December 31,
  2012 2011 Change 2012 2011 Change
CAD/US$ $1.0088 $0.9775 3% $1.0004 $1.0110 (1)%
   
ROYALTIES  
   
  Three Months Ended
 December 31,
  Years Ended
 December 31,
 
(000s) 2012   2011   2012   2011  
Natural Gas $3,562   $2,254   $2,053   $7,134  
Oil and NGL 7,231   5,256   28,251   16,419  
Total royalties $10,793   $7,510   $30,304   $23,553  
Royalties as a percentage of revenue 7.5 % 7.0 % 6.7 % 6.5 %

For the quarter ended December 31, 2012, the average effective royalty rate was 7.5% compared to 7.0% for the same quarter of 2011. For the year ended December 31, 2012, the average effective royalty rate was 6.7% compared to 6.5% for the same period of 2011. The Company continues to benefit from the New Well Royalty Reduction Program and the Natural Gas Deep Drilling Program in Alberta as well as the Deep Royalty Credit Program in British Columbia.

The Company expects its royalty rate for 2013 to be approximately 10% as some of the wells will no longer qualify for royalty incentive programs due to production maximums being reached and other wells coming off royalty holidays, thereby increasing the Company''s overall royalty rate. The royalty rate is sensitive to commodity prices, however, and as such, a change in commodity prices will impact the actual rate.

OTHER INCOME

For the quarter ended December 31, 2012, other income totaled $1.4 million, all of which pertained to processing income, compared to $2.4 million of other income for the same quarter of 2011, of which $2.3 million related to processing income. Processing income has been decreasing as a smaller amount of third-party production has been processed in Tourmaline owned-and-operated facilities as the Company grows the amount of its own production, thus reducing capacity for third-party volumes. For the year ended December 31, 2012, other income was $5.0 million compared to $5.8 million for the prior year.

OPERATING EXPENSES  
   
  Three Months Ended
 December 31,
  Years Ended
 December 31,
 
(000s) except per unit amounts 2012 2011 Change   2012 2011 Change  
Operating expenses $21,576 $18,028 20 % $82,312 $63,129 30 %
Per Boe $4.10 $5.17 (21 )% $4.43 $5.58 (21 )%

Operating expenses include all periodic lease and field-level expenses and exclude income recoveries from processing third-party volumes. For the fourth quarter of 2012, total operating expenses increased 20% from $18.0 million in the fourth quarter of 2011 to $21.6 million in 2012 due to the increased variable costs relating to new production. On a per-Boe basis, the costs decreased 21% from $5.17/Boe for the fourth quarter of 2011 to $4.10/Boe in the fourth quarter of 2012 due to increased production, increased operational efficiencies and the impact of redirecting natural gas from third-party facilities to Tourmaline-owned infrastructure. Tourmaline''s operating expenses in the fourth quarter of 2012 include third-party processing, gathering and compression fees of approximately $5.7 million or $1.09/Boe (December 31, 2011- $5.9 million or $1.68/Boe).

For the year ended December 31, 2012, total operating expenses were $82.3 million, or $4.43/Boe, compared to $63.1 million, or $5.58/Boe for the same period of 2011. Although total operating expenses increased with production, the costs per Boe decreased 21% reflecting increased operational efficiencies. Third-party processing, gathering and compression fees for the year ended December 31, 2012 have increased year-over-year with production ($21.7 million in 2012 versus $19.1 million in 2011); however, the cost per Boe has decreased to $1.17/Boe in 2012 versus $1.68/Boe in 2011.

In September 2012, the Company completed its plant expansion at Musreau in the Alberta Deep Basin. During 2012, the Company also began work on a gas plant at Doe in NEBC and a new liquids handling facility at Spirit River. These projects allow for additional volumes to flow through Company owned-and-operated plants thereby reducing third-party processing charges on a go-forward basis.

The Company''s operating cost target is $4.25/Boe in 2013. This is lower than the previous year''s guidance due to a combination of increased production, continued operational efficiencies and redirecting third-party gas into Company owned-and-operated facilities. 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 2012 2011 Change   2012 2011 Change  
Gas transportation $6,884 $6,239 10 % $25,246 $19,169 32 %
Oil and NGL transportation 2,927 1,559 88 % 9,461 4,215 124 %
Total transportation $9,811 $7,798 26 % $34,707 $23,384 48 %
Per Boe $1.86 $2.24 (17 )% $1.87 $2.06 (10 )%

Transportation costs for the three months ended December 31, 2012 were $9.8 million or $1.86/Boe (three months ended December 31, 2011 - $7.8 million or $2.24/Boe). Transportation costs for the year ended December 31, 2012 were $34.7 million or $1.87/Boe (year ended December, 2011 - $23.4 million or $2.06/Boe). The increase in total transportation costs for the three months and the year ended December 31, 2012 can be primarily attributed to increased production. Oil and liquids transportation costs have increased due to pipeline and infrastructure constraints resulting in a higher use of more expensive truck transportation.

On a per-Boe basis, transportation costs for the three months and year ended December 31, 2012 are lower primarily due to the expansion of the Company''s owned-and-operated Sunrise and Musreau plants which allows increased volumes to be processed at these facilities which are closer to the Company''s producing assets than the previous third-party facilities.

GENERAL & ADMINISTRATIVE EXPENSES ("G&A")  
   
  Three Months Ended
 December 31,
  Years Ended
 December 31,
 
(000s) 2012   2011   Change   2012   2011   Change  
G&A expenses $7,539   $7,256   4 % $27,089   $23,943   13 %
Administrative and capital recovery (341 ) (786 ) (57 )% (1,163 ) (2,413 ) (52 )%
Capitalized G&A (3,123 ) (3,600 ) (13 )% (11,307 ) (10,036 ) 13 %
Total G&A expenses $4,075   $2,870   42 % $14,619   $11,494   27 %
Per Boe $0.77   $0.82   (6 )% $0.79   $1.02   (23 )%

G&A expenses for the fourth quarter of 2012 were $4.1 million compared to $2.9 million for the same quarter of the prior year. G&A costs per Boe for the fourth quarter of 2012 decreased 6% down to $0.77/Boe, compared to $0.82/Boe for the fourth quarter of 2011.

For the year ended December 31, 2012, G&A expenses were $14.6 million or $0.79/Boe compared to $11.5 million or $1.02/Boe for the same period of 2011. The higher total G&A expenses from 2011 to 2012 result from the need to manage the larger production, reserve and land base. Additionally, the administrative and capital recoveries from joint venture partners have decreased as the Company''s overall working interest has increased. Notwithstanding this, the Company''s G&A expenses per Boe continue to trend downward as Tourmaline''s production base continues to grow faster than its accompanying G&A costs.

G&A costs for 2013 are expected to be similar to 2012 on a dollar-per-Boe basis. 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) 2012   2011   2012   2011  
Share-based payments $7,710   $6,266   $29,892   $23,370  
Capitalized share-based payments (3,855 ) (3,133 ) (14,946 ) (11,685 )
Total share-based payments $3,855   $3,133   $14,946   $11,685  

Tourmaline uses the fair value method for the determination of non-cash related share-based payments expense. During the fourth quarter of 2012, 1,927,000 stock options were granted to employees, officers, directors and key consultants at a weighted-average exercise price of $32.00, and 683,799 options were exercised, bringing $6.8 million of cash into treasury. The Company recognized $3.9 million of share-based payment expense in the fourth quarter of 2012 compared to $3.1 million in the fourth quarter of 2011. Capitalized share-based payments expense for the fourth quarter of 2012 was $3.9 million compared to $3.1 million for the same quarter of the prior year.

For the year ended December 31, 2012, share-based payment expense totalled $14.9 million and a further $14.9 million in share-based payments were capitalized (2011 - $11.7 million and $11.7 million, respectively). The increase in share-based payment expense in 2012 compared to 2011 reflects the increased number of options outstanding.

DEPLETION, DEPRECIATION AND AMORTIZATION ("DD&A")
 
  Three Months Ended
 December 31,
Years Ended
 December 31,
(000s) except per unit amounts 2012 2011 2012 2011
Depletion, depreciation and amortization $65,998 $41,240 $242,528 $158,168
Per Boe $12.53 $11.82 $13.04 $13.98

DD&A expense was $66.0 million for the fourth quarter of 2012 compared to $41.2 million for the same period of 2011 due to higher production volumes, as well as a larger capital asset base being depleted. The per-unit DD&A rate for the fourth quarter of 2012 was $12.53/Boe compared to $11.82/Boe for the fourth quarter of 2011.

For the year ended December 31, 2012, DD&A expense was $242.5 million (December 31, 2011 - $158.2 million) with an effective rate of $13.04/Boe (December 31, 2011 - $13.98/Boe). The lower DD&A rate in 2012 reflects strong reserve additions derived from Tourmaline''s exploration and production program, coupled with lower finding and development costs in 2012 versus those incurred in 2011.

FINANCE EXPENSES  
   
  Three Months Ended
 December 31,
  Years Ended
 December 31,
 
(000s) 2012 2011   Change   2012 2011   Change  
Interest expense $2,940 $690   326 % $9,728 $3,314   194 %
Accretion expense 388 306   27 % 1,328 1,315   1 %
Transaction costs on corporate and property acquisitions 974 -   - % 1,146 991   16 %
Other 124 103   20 % 756 560   35 %
Total finance expense $4,426 $1,099   303 % $12,958 $6,180   110 %

Finance expenses totalled $4.4 million and $13.0 million for the quarter and year ended December 31, 2012, respectively (December 31, 2011 - $1.1 million and $6.2 million, respectively) and are comprised of interest expense, transaction costs on corporate and property acquisitions and accretion of decommissioning obligations. The increased finance expenses are largely due to higher interest expense resulting from a higher balance drawn on the credit facility in 2012. The average bank debt outstanding and the average effective interest rate on that debt during 2012 were $245.4 million and 3.34%, respectively (2011 - $54.7 million and 3.3% respectively).

CASH FLOW FROM OPERATING ACTIVITIES, CASH FLOW AND NET EARNINGS  
   
  Three Months Ended
 December 31,
  Years Ended
 December 31,
 
(000s) except per unit amounts 2012 2011   Change   2012 2011   Change  
Cash flow from operating activities $104,671 $61,801   69 % $273,477 $228,421   20 %
  Per share $0.60 $0.38   58 % $1.64 $1.50   9 %
                     
Cash flow(2) $93,807 $73,311   28 % $280,279 $241,352   16 %
  Per share(1)(2) $0.54 $0.45   20 % $1.68 $1.58   6 %
                     
Net earnings $16,301 $16,074   1 % $15,519 $42,681   (64 )%
  Per share(1) $0.09 $0.10   (10 )% $0.09 $0.28   (68 )%
                     
Operating netback per Boe (2) $19.17 $21.39   (10 )% $16.27 $22.35   (27 )%
(1) Fully diluted
(2) See "Non-GAAP Financial Measures"

Cash flow for the three months ended December 31, 2012 was $93.8 million or $0.54 per diluted share compared to $73.3 million or $0.45 per diluted share for the same period of 2011. For the year ended December 31, 2012, cash flow was $280.3 million or $1.68 per diluted share, which is higher than the December 31, 2011 cash flow of $241.4 million or $1.58 per diluted share. Cash flow in 2012 reflects increased production over 2011 offset by lower natural gas prices. 

The Company had after-tax earnings for both the three months and year ended December 31, 2012 of $16.3 million ($0.09 per diluted share) and $15.5 million ($0.09 per diluted share), respectively, compared to earnings of $16.1 million ($0.10 per diluted share) and $42.7 million ($0.28 per diluted share), respectively, for the same periods of 2011. The decreased after-tax earnings for the 2012 year, compared to 2011, reflect lower natural gas prices.

CAPITAL EXPENDITURES  
   
  Three Months Ended December 31,   Years Ended December 31,  
(000s) 2012   2011   2012   2011  
Land and seismic $9,270   $17,227   $31,288   $51,995  
Drilling and completions 148,953   146,586   438,459   431,977  
Facilities 52,917   58,638   184,406   227,052  
Property acquisitions 81,778   6,590   88,619   115,231  
Property dispositions (49 ) (617 ) (12,682 ) (7,983 )
Other 3,239   3,743   11,550   10,684  
Total cash capital expenditures $296,108   $232,167   $741,640   $828,956  

During the fourth quarter of 2012, the Company invested $296.1 million of cash consideration, net of dispositions, compared to $232.2 million for the same period of 2011. Expenditures on exploration and production were $211.1 million compared to $222.5 million for the same quarter of 2011.

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

  Three Months Ended December 31, 2012 Year Ended December 31, 2012
  Gross Net Gross Net
Drilled 23 20.04 76 65.84
Completed 29 23.09 82 70.12
Tied-in 13 13.00 46 41.94

Capital expenditures in 2013 are forecast to be $740 million, which has been revised upward from $650 million (as previously disclosed by press release November 8, 2012). A total of 70 Deep Basin wells, 25 NEBC Montney horizontal wells and 25 Charlie Lake horizontal wells are expected to be drilled in 2013. Major 2013 facility projects include the completion of the gas facilities at Doe in NEBC and Spirit River, Alberta (planned to be completed in the second quarter) and two gas facility expansions in the Alberta Deep Basin during the second half of 2013.

Corporate Acquisition

On November 30, 2012, the Company acquired all of the issued and outstanding shares of Huron Energy Corporation ("Huron") in exchange for Tourmaline common shares. The acquisition resulted in an increase to Property, Plant and Equipment ("PP&E") of approximately $251.5 million and an increase to Exploration and Evaluation ("E&E") assets of $59.1 million. The acquisition of Huron provides for an increase in lands and production in Tourmaline''s key highly profitable core and designated growth area of Sunrise in NEBC.

LIQUIDITY AND CAPITAL RESOURCES

On April 4, 2012, the Company issued 1.4 million flow-through common shares at a price of $28.80 per share for total gross proceeds of $40.4 million. On August 30, 2012, the Company issued 4.039 million common shares at a price of $29.00 per share for total gross proceeds of $117.1 million. Subsequently, on September 19, 2012, the underwriters exercised their over-allotment option and purchased a further 0.6 million shares at a price of $29.00 per share for total gross proceeds of $17.4 million. On November 1, 2012, the Company issued 1.05 million flow-through common shares at a price of $36.90 per share for total gross proceeds of $38.7 million. The proceeds of the above-noted financings were used to temporarily reduce bank debt and to fund the Company''s capital exploration program.

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

Under the terms of the bank credit facility, Tourmaline has provided its covenant that, on a rolling four quarter basis: (i) the ratio of EBITDA to interest expense shall equal or exceed 3.5:1, (ii) the ratio of senior debt to EBITDA shall not exceed 3:1, (iii) the ratio of total debt to EBITDA shall not exceed 4:1, and (iv) the ratio of senior debt to total capitalization shall not exceed 0.5:1. As at December 31, 2012, the Company is in compliance with all debt covenants.

At December 31, 2012, Tourmaline had negative working capital of $103.7 million, after adjusting for the fair value of financial instruments (the unadjusted working capital deficiency was $98.9 million) (December 31, 2011 - $146.6 million and $146.3 million, respectively). Management believes the Company has sufficient liquidity and capital resources to fund the 2013 exploration and development program through expected cash flow from operations, its unutilized bank credit facility and the financing described in the subsequent events section of this MD&A. As at December 31, 2012, the Company''s bank debt balance was $360.6 million (December 31, 2011 - $81.7 million), and net debt was $464.3 million (December 31, 2011 - $228.3 million).

SHARES AND STOCK OPTIONS OUTSTANDING

As at March 19, 2013, the Company has 182,230,907 common shares outstanding and 14,617,384 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) 2013 2014 2015 2016 2017 and Thereafter Total
Operating leases $2,545 $2,168 $526 $- $- $5,239
Flow-through obligations(2) - 42,667 - - - 42,667
Firm transportation agreements 32,355 25,326 14,449 2,557 20 74,707
Bank debt(1) - - 396,023 - - 396,023
  $34,900 $70,161 $410,998 $2,557 $20 $518,636
(1) Includes interest expense at an annual rate of 3.31% being the rate applicable to outstanding bank debt at December 31, 2012.
(2) The Company closed a flow-through share financing on March 12, 2013 resulting in an additional flow-through obligation of $35.2 million due to be spent by December 31, 2014 which has not been reflected in the table above.

Subsequent to December 31, 2012, the Company entered into a 130 mmcf/d deep cut gas processing agreement and a firm service transportation agreement for the associated liquids. Both agreements have ten-year terms and begin in 2015. The Company also entered into a ten-year 9,000 bbl/d natural gas liquids product fractionation marketing agreement beginning in 2016.

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, 2012.

As at December 31, 2012, the Company has entered into certain financial derivative and physical delivery sales contracts in order to manage commodity risk. These instruments are not used for trading or speculative purposes. The Company has not designated its financial derivative contracts as effective accounting hedges, even though the Company considers all commodity contracts to be effective economic hedges. 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 has entered into in the 2012 year are detailed in note 5 of the Company''s consolidated financial statements for the year ended December 31, 2012.

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

  Three Months Ended
 December 31,
  Years Ended
 December 31,
 
(000s) 2012 2011   2012   2011  
Unrealized gain (loss) on financial instruments $1,174 $(4,566 ) $2,600   $944  
Unrealized gain (loss) on investments held for trading - 40   (103 ) (111 )
Total $1,174 $(4,526 ) $2,497   $833  

The Company has entered into physical contracts to manage commodity risk. These contracts are considered normal sales contracts and are not recorded at fair value in the consolidated financial statements. These contracts have been disclosed in note 5 of the Company''s consolidated financial statements for the year ended December 31, 2012.

The Company has entered into several financial derivative and physical delivery sales contracts subsequent to December 31, 2012. These contracts are detailed in note 5 of the Company''s consolidated financial statements for the year ended December 31, 2012.

SUBSEQUENT EVENTS

On March 12, 2013, the Company closed on the disposition of a non-producing property for proceeds of $77.5 million, subject to closing adjustments and transaction costs. The asset has been reclassified to current as an asset held for sale as at December 31, 2012.

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. 

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, 2012.

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, 2012, the Company''s DC&P and ICFR are effective. There were no changes in the Company''s ICFR during the period beginning on October 1, 2012 and ending December 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company''s ICFR. It should be noted that a control system, including the Company''s disclosure and internal controls and procedures, no matter how well conceived can provide only reasonable, but not absolute assurance that the objectives of the control system will be met and it should not be expected that the disclosure and internal controls and procedures will prevent all errors or fraud.

BUSINESS RISKS AND UNCERTAINTIES

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

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

IMPACT OF NEW ENVIRONMENTAL REGULATIONS

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

RECENT PRONOUNCEMENTS ISSUED

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

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

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

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

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

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

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

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

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

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

The IASB also issued Presentation of Items of Other Comprehensive Income, an amendment to IAS 1 Financial Statement Presentation. The amendment addresses the presentation of other comprehensive income and requires the grouping of items within other comprehensive income that might eventually be reclassified to the profit and loss section of the income statement. The change became effective on July 1, 2012.

NON-GAAP FINANCIAL MEASURES

This MD&A includes references to financial measures commonly used in the oil and gas industry such as "cash flow", "operating netback", "working capital (adjusted for the fair value of financial instruments)" and "net debt", which do not have any standardized meaning prescribed by GAAP. Management believes that in addition to net income and cash flow from operating activities, the aforementioned non-GAAP financial measures are useful supplemental measures in assessing Tourmaline''s ability to generate the cash necessary to repay debt or fund future growth through capital investment. Readers are cautioned, however, that these measures should not be construed as an alternative to net income or cash flow from operating activities determined in accordance with GAAP 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 cash flow as cash flow from operating activities before changes in non-cash operating working capital, defines operating netback as revenue (excluding processing income) less royalties, transportation costs and operating expenses and defines working capital (adjusted for the fair value of financial instruments) as working capital adjusted for the fair value of financial instruments. Net debt is defined as long-term bank debt plus working capital (adjusted for the fair value of financial instruments).

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) 2012   2011 2012 2011
Cash flow from operating activities (per GAAP) $104,671   $61,801 $273,477 $228,421
Change in non-cash working capital (10,864 ) 11,510 6,802 12,931
Cash flow $93,807   $73,311 $280,279 $241,352

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) 2012   2011   2012   2011  
Revenue, excluding processing income $27.18   $30.95   $24.19   $32.07  
Royalties (2.05 ) (2.15 ) (1.63 ) (2.08 )
Transportation costs (1.86 ) (2.24 ) (1.87 ) (2.06 )
Operating expenses (4.10 ) (5.17 ) (4.43 ) (5.58 )
Operating netback (1) $19.17   $21.39   $16.27   $22.35  
(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, 2012
  As at
December 31, 2011
 
Working capital (deficit) $(98,913 ) $(146,317 )
Fair value of financial instruments - short-term asset (4,814 ) (276 )
Working capital (deficit) (adjusted for the fair value of financial instruments) $(103,727 ) $(146,593 )

Net Debt

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

(000s) As at
December 31, 2012
  As at
December 31, 2011
 
Bank debt $(360,573 ) $(81,749 )
Working capital (deficit) (98,913 ) (146,317 )
Fair value of financial instruments - short-term asset (4,814 ) (276 )
Net debt $(464,300 ) $(228,342 )
   
SELECTED QUARTERLY INFORMATION  
   
  2012   2011  
($000s, unless otherwise noted) Q4   Q3   Q2   Q1   Q4   Q3   Q2   Q1  
PRODUCTION                                
Gas (mcf) 27,879,639   23,501,484   24,276,149   22,430,621   18,437,079   17,058,132   13,798,653   11,283,617  
Crude oil and NGL(bbls) 618,483   515,157   596,992   515,408   415,074   316,890   272,184   217,121  
Oil equivalent (Boe) 5,265,090   4,432,071   4,643,016   4,253,845   3,487,920   3,159,912   2,571,959   2,097,724  
Gas (mcf/d) 303,040   255,451   266,771   246,490   200,403   185,414   151,634   125,374  
Crude oil and NGL (bbls/d) 6,723   5,600   6,560   5,664   4,512   3,444   2,991   2,412  
Oil equivalent (Boe/d) 57,230   48,175   51,022   46,746   37,912   34,347   28,263   23,308  
FINANCIAL                                
Revenue, net of royalties 134,864   91,863   105,567   94,781   98,309   98,225   87,551   62,019  
Cash flow from operating activities 104,671   66,713   42,566   59,527   61,801   77,622   42,112   46,886  
Cash flow (1) 93,807   63,515   61,121   61,836   73,311   62,686   60,415   44,940  
  Per diluted share 0.54   0.38   0.37   0.38   0.45   0.40   0.41   0.32  
Net earnings (loss) 16,301   (4,770 ) 1,012   2,976   16,074   8,688   15,192   2,727  
  Per basic share 0.10   (0.03 ) 0.01   0.02   0.10   0.06   0.11   0.02  
  Per diluted share 0.09   (0.03 ) 0.01   0.02   0.10   0.06   0.10   0.02  
Total assets 3,580,253   2,992,552   2,862,502   2,878,261   2,711,024   2,517,607   2,030,285   1,936,836  
Working capital (98,913 ) (98,184 ) (15,311 ) (176,029 ) (146,317 ) (120,080 ) (31,963 ) (139,138 )
Working capital (adjusted for the fair value of financial instruments) (1) (103,727 ) (101,577 ) (19,809 ) (175,696 ) (146,593 ) (123,858 ) (31,592 ) (136,933 )
Capital expenditures 296,108   175,277   53,831   216,424   232,167   249,162   130,075   217,553  
Total outstanding shares (000s) 174,813   165,678   160,459   158,807   158,578   151,906   145,215   138,124  
PER UNIT                                
Gas ($/mcf) 3.29   2.52   2.23   2.54   3.76   4.25   4.38   4.48  
Crude oil and NGL ($/bbl) 83.28   83.34   77.75   91.48   93.05   87.01   95.54   83.00  
Revenue ($/Boe) 27.18   23.04   21.64   24.48   30.95   31.67   33.61   32.68  
Operating netback ($/Boe) (1) 19.17   15.68   14.22   15.52   21.39   21.21   24.52   22.99  
(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 31,007 Boe per day in 2011 to 50,804 Boe per day in 2012. The production growth can be attributed primarily to the Company''s exploration and development activities, as well as from acquisitions of producing properties. Over the same period, natural gas prices have declined, with the largest declines occurring in 2012.

The Company''s cash flows from operating activities were $228.4 million in 2011 and $273.5 million in 2012. Commodity price changes can indirectly impact expected production by changing the amount of funds available to reinvest in exploration, development and acquisition activities in the future. Decreases in commodity prices not only reduce revenues and cash flows available for exploration, they may also challenge the economics of potential capital projects by reducing the quantities of reserves that are commercially recoverable. The Company''s capital program is dependent on cash flows generated from operations and access to capital markets.

SELECTED ANNUAL INFORMATION  
   
($000s unless otherwise noted) 2012   2011   2010  
PRODUCTION            
Gas (mcf) 98,087,893   60,577,481   34,895,923  
Crude oil and NGL (bbls) 2,246,040   1,221,268   701,355  
Oil equivalent (Boe) 18,594,022   11,317,515   6,517,342  
Gas (mcf/d) 268,000   165,966   95,605  
Crude oil and NGL (bbls/d) 6,137   3,346   1,922  
Oil equivalent (Boe/d) 50,804   31,007   17,856  
FINANCIAL            
Revenue, net of royalties 427,075   346,104   195,407  
Cash flow from operating activities 273,477   228,421   143,296  
Cash flow (1) 280,279   241,352   133,218  
  Per diluted share 1.68   1.58   1.08  
Net earnings 15,519   42,681   8,813  
  Per diluted share 0.09   0.28   0.07  
Total assets 3,580,253   2,711,024   1,816,043  
Working capital (deficit) (98,913 ) (146,317 ) (49,642 )
Working capital (deficit) (adjusted for the fair value of financial instruments) (1) (103,727 ) (146,593 ) (49,170 )
Capital expenditures (cash consideration) 741,640   828,956   814,334  
Basic outstanding shares (000s) 174,813   158,578   136,191  
PER UNIT            
Gas ($/mcf) 2.67   4.17   4.52  
Crude oil and NGL ($/bbl) 83.71   90.24   74.62  
Revenue ($/Boe) 24.19   32.07   32.24  
Operating netback ($/Boe) 16.27   22.35   21.76  
(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.

CONSOLIDATED FINANCIAL STATEMENTS
 
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
 
(000s) December 31, 2012   December 31, 2011
Assets      
Current assets:          
  Accounts receivable $ 83,868   $ 60,799
  Assets held for sale   33,007     -
  Prepaid expenses and deposits   5,309     5,313
  Fair value of financial instruments (notes 4 and 5)   4,814     276
Total current assets   126,998     66,388
Investments   -     233
Long-term asset   2,580     -
Exploration and evaluation assets (note 6)   639,933     620,515
Property, plant and equipment (note 7)   2,810,742     2,023,888
Total Assets $ 3,580,253   $ 2,711,024
Liabilities and Shareholders'' Equity          
Current liabilities:          
  Accounts payable and accrued liabilities $ 225,911   $ 212,705
Total current liabilities   225,911     212,705
Bank debt (note 9)   360,573     81,749
Decommissioning obligations (note 8)   64,757     50,463
Long-term obligation   7,139     10,864
Fair value of financial instruments (notes 4 and 5)   2,012     74
Deferred premium on flow-through shares   8,755     11,316
Deferred taxes (note 12)   176,391     107,977
Shareholders'' equity:          
  Share capital (note 11)   2,599,614     2,140,660
  Non-controlling interest (note 10)   16,298     15,079
  Contributed surplus   70,923     47,776
  Retained earnings   47,880     32,361
Total shareholders'' equity   2,734,715     2,235,876
Total Liabilities and Shareholders'' Equity $ 3,580,253   $ 2,711,024
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 2012     2011  
Revenue:              
  Oil and natural gas sales $ 441,888     $ 342,820  
  Royalties   (30,304 )     (23,553 )
  Net revenue from oil and natural gas sales   411,584       319,267  
  Realized gain on financial instruments   7,955       20,172  
  Unrealized gain on financial instruments (note 5)   2,497       833  
  Other income (note 15)   5,039       5,832  
Total net revenue   427,075       346,104  
Expenses:              
  Operating   82,312       63,129  
  Transportation   34,707       23,384  
  General and administration   14,619       11,494  
  Share-based payments   14,946       11,685  
  (Gain) loss on divestitures   (7,634 )     3,630  
  Depletion, depreciation and amortization   242,528       158,168  
Total expenses   381,478       271,490  
Income from operations   45,597       74,614  
Finance expenses (note 16)   12,958       6,180  
Income before taxes   32,639       68,434