UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-32747

 

MARINER ENERGY, INC.

(Exact name of registrant as specified in its charter)

Delaware		86-0460233
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

One BriarLake Plaza, Suite 2000
2000 West Sam Houston Parkway South
Houston, Texas 77042
(Address of principal executive offices and zip code)

(713) 954-5500
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

     As of November 3, 2009, there were 101,774,108 shares issued and outstanding of the issuer’s common stock, par value $0.0001 per share.

 

 

TABLE OF CONTENTS

PART I
Item 1. Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 2009 and December 31, 2008			3
Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2009 and 2008			4
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2009 and 2008			5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008			6
Notes to the Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
Item 3. Quantitative and Qualitative Disclosures About Market Risk			47
Item 4. Controls and Procedures			49
PART II
Item 1A. Risk Factors			50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 6. Exhibits			52
Items 1, 3, 4 and 5 are not applicable and have been omitted.
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I

Item 1. Unaudited Condensed Consolidated Financial Statements

MARINER ENERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except share data)

		September 30,				December 31,
		2009				2008
ASSETS
Current Assets:
Cash and cash equivalents		$	6,017			$	3,209
Receivables, net of allowances of $6,949 and $3,868 as of September 30, 2009 and December 31, 2008, respectively			136,424				219,920
Insurance receivables			12,414				13,123
Derivative financial instruments			4,434				121,929
Intangible assets			1,446				2,334
Prepaid expenses and other			23,264				14,438
Total current assets			183,999				374,953
Property and Equipment:
Proved oil and gas properties, full-cost method			4,897,001				4,448,146
Unproved properties, not subject to amortization			214,891				201,121
Total oil and gas properties			5,111,892				4,649,267
Other property and equipment			55,229				53,115
Accumulated depreciation, depletion and amortization:
Proved oil and gas properties			(2,745,601	)			(1,767,028	)
Other property and equipment			(7,549	)			(5,477	)
Total accumulated depreciation, depletion and amortization			(2,753,150	)			(1,772,505	)
Total property and equipment, net			2,413,971				2,929,877
Insurance Receivables			—				22,132
Derivative Financial Instruments			920				—
Other Assets, net of amortization			74,689				65,831
TOTAL ASSETS		$	2,673,579			$	3,392,793
LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Accounts payable		$	3,586			$	3,837
Accrued liabilities			119,965				107,815
Accrued capital costs			128,781				195,833
Deferred income tax			15,772				23,148
Abandonment liability			47,977				82,364
Accrued interest			30,353				12,567
Derivative financial instruments			9,907				—
Total current liabilities			356,341				425,564
Long-Term Liabilities:
Abandonment liability			408,504				325,880
Deferred income tax			78,468				319,766
Derivative financial instruments			18,267				—
Long-term debt			954,503				1,170,000
Other long-term liabilities			29,037				31,263
Total long-term liabilities			1,488,779				1,846,909
Commitments and Contingencies (see Note 9)
Stockholders’ Equity:
Preferred stock, $.0001 par value; 20,000,000 shares authorized, no shares issued and outstanding at September 30, 2009 and December 31, 2008			—				—
Common stock, $.0001 par value; 180,000,000 shares authorized, 101,855,521 shares issued and outstanding at September 30, 2009; 180,000,000 shares authorized, 88,846,073 shares issued and outstanding at December 31, 2008			10				9
Additional paid-in capital			1,250,151				1,071,347
Accumulated other comprehensive income			10,198				78,181
Accumulated deficit			(431,900	)			(29,217	)
Total stockholders’ equity			828,459				1,120,320
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,673,579			$	3,392,793

The accompanying notes are an integral part of these condensed consolidated financial statements

MARINER ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands except share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Revenues:
Natural gas		$	130,046			$	192,804			$	425,747			$	622,705
Oil			80,908				97,987				220,787				356,157
Natural gas liquids			15,736				24,541				30,398				78,579
Other revenues			656				2,558				25,720				5,798
Total revenues			227,346				317,890				702,652				1,063,239
Costs and Expenses:
Lease operating expense			65,325				65,267				165,816				167,341
Severance and ad valorem taxes			4,406				4,813				11,668				14,686
Transportation expense			4,468				4,065				13,627				11,288
General and administrative expense			18,922				11,554				57,455				36,280
Depreciation, depletion and amortization			106,218				114,398				301,305				375,170
Full-cost ceiling test impairment			—				—				704,731				—
Other miscellaneous expense			1,193				125				11,960				965
Total costs and expenses			200,532				200,222				1,266,562				605,730
OPERATING INCOME (LOSS)			26,814				117,668				(563,910	)			457,509
Other Income (Expense):
Interest income			56				369				443				976
Interest expense, net of amounts capitalized			(19,702	)			(17,507	)			(51,076	)			(53,641	)
Income (Loss) Before Taxes			7,168				100,530				(614,543	)			404,844
(Provision) Benefit for Income Taxes			(2,946	)			(35,839	)			211,860				(144,449	)
Net Income (Loss)			4,222				64,691				(402,683	)			260,395
Less: Net income attributable to noncontrolling interest			—				—				—				(188	)
NET INCOME (LOSS) ATTRIBUTABLE TO MARINER ENERGY, INC.		$	4,222			$	64,691			$	(402,683	)		$	260,207
Net Income(Loss) per share attributable to Mariner Energy, Inc.:
Basic		$	0.04			$	0.74			$	(4.29	)		$	2.98
Diluted		$	0.04			$	0.73			$	(4.29	)		$	2.95
Weighted average shares outstanding:
Basic			100,752,532				87,595,792				93,848,859				87,447,280
Diluted			101,084,502				88,183,715				93,848,859				88,239,859

The accompanying notes are an integral part of these condensed consolidated financial statements

MARINER ENERGY, INC.

(Unaudited)

(In thousands)

For the nine months ended September 30, 2009 and 2008

														Accumulated
														Other
										Additional				Comprehensive								Total
		Common				Stock				Paid-In-				Income/				Accumulated				Stockholders’
		Stock				Amount				Capital				(Loss)				Deficit				Equity
Balance at December 31, 2008			88,846			$	9			$	1,071,347			$	78,181			$	(29,217	)		$	1,120,320
Common shares issued — equity offering			11,500				1				159,673				—				—				159,674
Common shares issued — restricted stock			1,709				—				—				—				—				—
Treasury stock bought and cancelled on same day			(175	)			—				(1,991	)			—				—				(1,991	)
Forfeiture of restricted stock			(25	)			—				—				—				—				—
Share-based compensation			—				—				21,114				—				—				21,114
Stock options exercised			1				—				8				—				—				8
Comprehensive income (loss):
Net income (loss)			—				—				—				—				(402,683	)			(402,683	)
Change in fair value of derivative hedging instruments — net of income taxes of $(62,411)			—				—				—				(189,763	)			—				(189,763	)
Hedge settlements reclassified to income — net of income taxes of $68,115			—				—				—				121,780				—				121,780
Total comprehensive income (loss)			—				—				—				(67,983	)			(402,683	)			(470,666	)
Balance at September 30, 2009			101,856			$	10			$	1,250,151			$	10,198			$	(431,900	)		$	828,459

														Accumulated								Total
														Other								Mariner
										Additional				Comprehensive				Accumulated				Energy, Inc.								Total
		Common				Stock				Paid-In-				Income/				Retained				Stockholders’				Noncontrolling				Stockholders’
		Stock				Amount				Capital				(Loss)				Earnings				Equity				Interests				Equity
Balance at December 31, 2007			87,229			$	9			$	1,054,089			$	(22,576	)		$	359,496			$	1,391,018			$	1			$	1,391,019
Common shares issued — restricted stock			1,729				—				—				—				—				—				—				—
Treasury stock bought and cancelled on same day			(137	)			—				(4,239	)			—				—				(4,239	)			—				(4,239	)
Forfeiture of restricted stock			(23	)			—				—				—				—				—				—				—
Share-based compensation			—				—				11,766				—				—				11,766				—				11,766
Stock options exercised			56				—				741				—				—				741				—				741
Comprehensive income (loss):
Net loss			—				—				—				—				260,207				260,207				188				260,395
Change in fair value of derivative hedging instruments — net of income taxes of $25,790			—				—				—				69,224				—				69,224				—				69,224
Hedge settlements reclassified to income — net of income taxes of $(43,980)			—				—				—				(79,549	)			—				(79,549	)			—				(79,549	)
Total comprehensive income (loss)			—				—				—				(10,325	)			260,207				249,882				188				250,070
Balance at September 30, 2008			88,854			$	9			$	1,062,357			$	(32,901	)		$	619,703			$	1,649,168			$	189			$	1,649,357

The accompanying notes are an integral part of these condensed consolidated financial statements

MARINER ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

		Nine Months
		Ended September 30,
		2009				2008
Operating Activities:
Net (loss) income attributable to Mariner Energy, Inc.		$	(402,683	)		$	260,207
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income (benefit) tax			(211,860	)			140,854
Depreciation, depletion and amortization			301,305				375,170
Ineffectiveness of derivative instruments			812				1,647
Full-cost ceiling test impairment			704,731				—
Share-based compensation			18,360				11,953
Derivative financial instruments			(14,128	)			—
Other			7,046				2,538
Changes in operating assets and liabilities:
Receivables			83,357				(12,356	)
Insurance receivables			22,841				64,378
Cash from liquidation of hedges			52,562				—
Prepaid expenses and other			(25,334	)			1,640
Accounts payable and accrued liabilities			1,100				15,777
Net cash provided by operating activities			538,109				861,808
Investing Activities:
Acquisitions and additions to oil and gas properties			(468,980	)			(952,105	)
Additions to other property and equipment			(2,141	)			(49,647	)
Restricted cash designated for investment			—				5,000
Net cash used in investing activities			(471,121	)			(996,752	)
Financing Activities:
Credit facility borrowings			350,221				938,000
Credit facility repayments			(855,221	)			(807,000	)
Repurchase of stock			(1,991	)			(4,239	)
Debt redetermination costs			(2,306	)			—
Debt offering costs			(5,906	)			—
Proceeds from equity offering			159,736				—
Proceeds from debt issuance			291,279				—
Proceeds from exercise of stock options			8				741
Net cash (used in) provided by financing activities			(64,180	)			127,502
Increase (Decrease) in Cash and Cash Equivalents			2,808				(7,442	)
Cash and Cash Equivalents at Beginning of Period			3,209				18,589
Cash and Cash Equivalents at End of Period		$	6,017			$	11,147
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)		$	29,238			$	35,059
Income taxes, net of refunds		$	(2,001	)		$	2,906

The accompanying notes are an integral part of these condensed consolidated financial statements

MARINER ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Summary of Significant Accounting Policies

     Operations — Mariner Energy, Inc. (“Mariner” or “the Company”) is an independent oil and gas exploration, development and production company with principal operations in the Permian Basin and in the Gulf of Mexico, both shelf and deepwater. Unless otherwise indicated, references to “Mariner”, “the Company”, “we”, “our”, “ours” and “us” refer to Mariner Energy, Inc. and its subsidiaries collectively.

     Interim Financial Statements — The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments (consisting of a normal and recurring nature) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year. These unaudited condensed consolidated financial statements included herein should be read in conjunction with the Financial Statements and Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, as amended.

     Use of Estimates — The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The Company’s most significant financial estimates are based on remaining proved natural gas and oil reserves. Estimates of proved reserves are key components of Mariner’s depletion rate for natural gas and oil properties, its unevaluated properties and its full-cost ceiling test. In addition, estimates are used in computing taxes, preparing accruals of operating costs and production revenues, asset retirement obligations, fair value and effectiveness of derivative instruments and fair value of stock options and the related compensation expense. Because of the inherent nature of the estimation process, actual results could differ materially from these estimates.

     Principles of Consolidation — Mariner’s condensed consolidated financial statements as of and for the period ended September 30, 2009 and consolidated financial statements as of and for the period ended December 31, 2008 include its accounts and the accounts of its subsidiaries. All inter-company balances and transactions have been eliminated.

     Reclassifications — Certain prior period amounts have been reclassified to conform to current year presentation. Amounts for certain producing well overhead were presented as “Lease operating expense” in the Company’s Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2008. These amounts are presented herein as “General and administrative expense” for the three months and nine months ended September 30, 2009. Other reclassifications are insignificant in nature. These reclassifications had no effect on total operating income or net income.

     Income Taxes — The Company’s provision for taxes includes both federal and state taxes. The Company records its federal income taxes using an asset and liability approach which results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be recovered.

     The Company had no uncertain tax positions during the nine months ended September 30, 2009 or for the year ended December 31, 2008.

     Recent Accounting Pronouncements — In June 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on the hierarchy of GAAP which established only two levels of GAAP, authoritative and non-authoritative. The FASB Accounting Standards Codification (the “Codification”) will become the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants upon adoption. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. The Codification is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. The Company began using the new guidelines prescribed by the Codification when referring to GAAP in respect of the third quarter ending September 30, 2009. As the Codification was not intended to change or alter existing GAAP, it did not have any impact on the Company’s consolidated financial position, cash flows or results of operations.

     In May 2009, the FASB issued authoritative guidance which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued and sets forth (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The guidance is effective for periods beginning after June 15, 2009. The adoption did not have a material impact on the Company’s financial position, cash flows or results of operations.

     In April 2009, the FASB amended existing authoritative guidance to provide guidelines for making fair value measurements more consistent with other authoritative guidance, enhance consistency in financial reporting by increasing the frequency of fair value disclosures and create greater clarity and consistency in accounting for and presenting impairment losses on securities. This guidance is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted the provisions for the period ending March 31, 2009. The adoption did not have a material impact on the Company’s financial position, cash flows or results of operations.

     On December 31, 2008, the SEC issued the final rule, “Modernization of Oil and Gas Reporting” (“Final Rule”), which adopts revisions to the SEC’s oil and gas reporting disclosure requirements and is effective for annual reports on Forms 10-K for years ending on or after December 31, 2009. Early adoption of the Final Rule is prohibited. The revisions are intended to provide investors with a more meaningful and comprehensive understanding of oil and gas reserves to help investors evaluate their investments in oil and gas companies. The amendments are also designed to modernize the oil and gas disclosure requirements to align them with current practices and changes in technology. Revised requirements in the Final Rule include, but are not limited to:

	•		Oil and gas reserves must be reported using average prices over the prior 12 month period, rather than year-end prices;
	•		Companies will be allowed to report, on an optional basis, probable and possible reserves;
	•		Non-traditional reserves, such as oil and gas extracted from coal and shales, will be included in the definition of “oil and gas producing activities”;
	•		Companies will be permitted to use new technologies to determine proved reserves, as long as those technologies have been demonstrated empirically to lead to reliable conclusions with respect to reserve volumes;
	•		Companies will be required to disclose, in narrative form, additional details on their proved undeveloped reserves (PUDs), including the total quantity of PUDs at year end, any material changes to PUDs that occurred during the year, investments and progress made to convert PUDs to developed oil and gas reserves and an explanation of the reasons why material concentrations of PUDs in individual fields or countries have remained undeveloped for five years or more after disclosure as PUDs; and

•

Companies will be required to report the qualifications and measures taken to assure the independence and objectivity of any business entity or employee primarily responsible for preparing or auditing the reserves estimates.

     The Company is currently evaluating the potential impact of adopting the Final Rule. The SEC is discussing the Final Rule with the FASB staff to align FASB authoritative guidance with the new SEC rules. These discussions may delay the required compliance date. Absent any change in the effective date, Mariner will begin complying with the disclosure requirements in its annual report on Form 10-K for the year ended December 31, 2009.

     In December 2007, the FASB issued authoritative guidance which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The guidance also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The guidance was effective for fiscal years beginning after December 15, 2008; the Company adopted it beginning January 1, 2009. The adoption did not have a material impact on the Company’s financial position, cash flows or results of operations. However, it did impact the presentation and disclosure of noncontrolling (minority) interests in the Company’s condensed consolidated financial statements.

     In September 2006, the FASB issued authoritative guidance for fair value measurements, which defines fair value, establishes criteria to be considered when measuring fair value and expands disclosures about fair value measurements. The guidance is effective for all recurring measures of financial assets and financial liabilities (e.g. derivatives and investment securities) for fiscal years beginning after November 15, 2007. The Company adopted the provisions for all recurring measures of financial assets and liabilities on January 1, 2008. In February 2008, the FASB amended the authoritative guidance, which granted a one-year deferral of the effective date as it applies to non-financial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis. Beginning January 1, 2009, Mariner applied the provisions to non-financial assets and liabilities. The adoption did not have a material impact on the Company’s financial position, cash flows or results of operations.

     In March 2008, the FASB amended authoritative guidance, which requires enhanced disclosures about the Company’s derivative and hedging activities. The guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted the disclosure requirements beginning January 1, 2009. See Note 8 “Derivative Financial Instruments and Hedging Activities” for additional disclosures. The adoption did not have a material impact on the Company’s financial position, cash flows or results of operations.

2. Acquisitions and Dispositions

     Gulf of Mexico Shelf Acquisition. On January 31, 2008, Mariner acquired 100% of the equity in a subsidiary of Hydro Gulf of Mexico, Inc. pursuant to a Membership Interest Purchase Agreement executed on December 23, 2007. The acquired subsidiary, now known as Mariner Gulf of Mexico LLC (“MGOM”), was an indirect subsidiary of StatoilHydro ASA and owns substantially all of its former Gulf of Mexico shelf operations. Mariner paid $228.8 million for the acquisition of MGOM.

     Pro Forma Financial Information — The pro forma information set forth below gives effect to the acquisition of MGOM as if it had been consummated as of the beginning of the applicable period. The pro forma information has been derived from the historical Consolidated Financial Statements of the Company and the statements of revenues and direct operating expenses of MGOM. The pro forma information is for illustrative purposes only. The financial results may have been different had MGOM been an independent company and had the companies always been combined. You should not rely on the pro forma financial information as being indicative of the historical results that would have been achieved had the acquisition occurred in the past or the future financial results that the Company will achieve after the acquisition.

		For the Three Months				For the Nine Months
		Ended September 30, 2008
		(In thousands, except per share amounts)
Pro Forma:
Revenue		$	317,890			$	1,077,932
Net income attributable to Mariner Energy, Inc.		$	64,670			$	263,806
Basic earnings per share		$	0.74			$	3.02
Diluted earnings per share		$	0.73			$	2.99

     Permian Basin Acquisitions. On February 29, 2008 and December 1, 2008, Mariner acquired additional working interests in certain of its existing properties in the Spraberry field in the Permian Basin. Mariner operates substantially all of the assets. The purchase prices were $23.5 million for the February 2008 acquisition and $19.4 million for the December 2008 acquisition.

     Bass Lite — On December 19, 2008, Mariner acquired additional working interests in its existing property, Atwater Valley Block 426 (Bass Lite), for approximately $30.6 million, increasing its working interest by 11.6% to 53.8%. Mariner internally estimated proved reserves attributable to the acquisition of approximately 17.6 Bcfe (100% natural gas).

3. Long-Term Debt

As of September 30, 2009 and December 31, 2008 the Company’s long-term debt was as follows:

		September 30,				December 31,
		2009				2008
		(In thousands)
Bank credit facility		$	65,000			$	570,000
7 1/2% Senior Notes, due April 15, 2013, net of discount			297,983				300,000
8% Senior Notes, due May 15, 2017			300,000				300,000
11 3/4% Senior Notes, due June 30, 2016, net of discount			291,520				—
Total long-term debt		$	954,503			$	1,170,000

     Bank Credit Facility — The Company has a secured revolving credit facility with a group of banks pursuant to an amended and restated credit agreement dated March 2, 2006, as further amended. The credit facility matures January 31, 2012 and is subject to a borrowing base which is redetermined periodically. The outstanding principal balance of loans under the credit facility may not exceed the borrowing base. The most recent borrowing base redetermination concluded in September 2009 when the lenders notified the Company that they affirmed the existing $800.0 million borrowing base, its amount since June 2009, and that the next borrowing base redetermination is scheduled for February 2010.

     On June 10, 2009, the Company used aggregate proceeds from concurrent offerings of its 11³/4% senior notes due 2016 and common stock, before deducting estimated offering expenses but after deducting underwriters’ discounts and commissions, of approximately $446.2 million to repay debt under its bank credit facility. These offerings are discussed further below in this Note 3 and in Note 4 “Stockholders’ Equity.”

     As of September 30, 2009, maximum credit availability under the facility was $1.0 billion, including up to $50.0 million in letters of credit, subject to a borrowing base of $800.0 million. As of September 30, 2009, there were $65.0 million in advances outstanding under the credit facility and four letters of credit outstanding totaling $4.7 million, of which $4.2 million is required for plugging and abandonment obligations at certain of the Company’s offshore fields. As of September 30, 2009, after accounting for the $4.7 million of letters of credit, the Company had $730.3 million available to borrow under the credit facility.

     During the nine months ended September 30, 2009, the commitment fee on unused capacity was 0.250% to 0.375% per annum through March 23, 2009 and 0.5% per annum thereafter. Commitment fees are included in “Accrued interest” in the Condensed Consolidated Balance Sheets in Item 1 of Part I of this Quarterly Report. Borrowings under the bank credit facility bear interest at either a LIBOR-based rate or a prime-based rate, at the Company’s option, plus a specified margin. At September 30, 2009, when borrowings at both LIBOR and prime-based rates were outstanding, the blended interest rate was 3.03% on all amounts borrowed.

     The credit facility subjects the Company to various restrictive covenants and contains other usual and customary terms and conditions, including limits on additional debt, cash dividends and other restricted payments, liens,

investments, asset dispositions, mergers and speculative hedging. Financial covenants under the credit facility require the Company to, among other things:

•

maintain a ratio of consolidated current assets plus the unused borrowing base to consolidated current liabilities of not less than 1.0 to 1.0; and

•

maintain a ratio of total debt to EBITDA (as defined in the credit agreement) of not more than 2.5 to 1.0.

     The Company was in compliance with the financial covenants under the bank credit facility as of September 30, 2009. At September 30, 2009, the ratio of consolidated current assets plus the unused borrowing base to consolidated current liabilities was 3.22 to 1.0 and the ratio of total debt to EBITDA was 1.57 to 1.0.

     The Company’s payment and performance of its obligations under the credit facility (including any obligations under commodity and interest rate hedges entered into with facility lenders) are secured by liens upon substantially all of the assets of the Company and its subsidiaries, except its Canadian subsidiary, and guaranteed by its subsidiaries, other than Mariner Energy Resources, Inc. which is a co-borrower, and its Canadian subsidiary.

     Senior Notes — On June 10, 2009, the Company sold and issued $300.0 million aggregate principal amount of its 11³/₄% senior notes due 2016 (the “11³/₄% Notes”). In 2007, the Company sold and issued $300.0 million aggregate principal amount of its 8% senior notes due 2017 (the “8% Notes”). In 2006, the Company sold and issued $300.0 million aggregate principal amount of its 7¹/₂% senior notes due 2013 (the “7¹/₂% Notes” and together with the 11³/₄% Notes and the 8% Notes, the “Notes”). The Notes are governed by indentures that are substantially identical for each series. The Notes are senior unsecured obligations of the Company. The 11³/₄% Notes mature on June 30, 2016 with interest payable on June 30 and December 30 of each year beginning December 30, 2009. The 8% Notes mature on May 15, 2017 with interest payable on May 15 and November 15 of each year. The 7¹/₂% Notes mature on April 15, 2013 with interest payable on April 15 and October 15 of each year. There is no sinking fund for the Notes. The Company and its restricted subsidiaries are subject to certain financial and non-financial covenants under each of the indentures governing the Notes. The Company was in compliance with the financial covenants under the Notes as of September 30, 2009.

     11³/₄% Notes — The 11³/₄% Notes were issued under an Indenture, dated as of June 10, 2009, among the Company, the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (the “Base Indenture”), as amended and supplemented by the First Supplemental Indenture thereto, dated as of June 10, 2009, among the same parties (the “Supplemental Indenture” and together with the Base Indenture, the “Indenture”). Pursuant to the Base Indenture, the Company may issue multiple series of debt securities from time to time.

     The 11³/₄% Notes were sold at 97.093% of principal amount, for an initial yield to maturity of 12.375%, in an underwritten offering registered under the Securities Act of 1933, as amended (the “1933 Act”). Net offering proceeds, after deducting underwriters’ discounts and estimated offering expenses but before giving effect to the underwriters’ reimbursement of up to $0.5 million for offering expenses, were approximately $284.8 million. The Company used net offering proceeds (before deducting estimated offering expenses) to repay debt under its bank credit facility.

     The 11³/₄% Notes are senior unsecured obligations of the Company, rank senior in right of payment to any future subordinated indebtedness, rank equally in right of payment with the Company’s existing and future senior unsecured indebtedness, including the 7¹/₂% Notes and the 8% Notes, and are effectively subordinated in right of payment to the Company’s senior secured indebtedness, including its obligations under its bank credit facility, to the extent of the collateral securing such indebtedness, and to all existing and future indebtedness and other liabilities of any non-guarantor subsidiaries.

     The 11³/₄% Notes are jointly and severally guaranteed on a senior unsecured basis by the Company’s existing and future domestic subsidiaries. In the future, the guarantees may be released or terminated under certain circumstances. Each subsidiary guarantee ranks senior in right of payment to any future subordinated indebtedness of the guarantor subsidiary, ranks equally in right of payment to all existing and future senior unsecured indebtedness of the guarantor subsidiary and effectively subordinate to all existing and future secured indebtedness of the guarantor subsidiary, including its guarantees of indebtedness under the Company’s bank credit facility, to the extent of the collateral securing such indebtedness.

     The Company may redeem the 11³/₄% Notes at any time before June 30, 2013 at a price equal to the principal amount redeemed plus a make-whole premium, using a discount rate of the Treasury rate plus 0.50% and accrued but unpaid interest. Beginning on June 30 of the years indicated below, the Company may redeem the 11³/₄% Notes from time to time, in whole or in part, at the prices set forth below (expressed as percentages of the principal amount redeemed) plus accrued but unpaid interest:

2013 at 105.875%
2014 at 102.938%
2015 and thereafter at 100.000%

     In addition, before June 30, 2012, the Company may redeem up to 35% of the 11³/₄% Notes with the proceeds of equity offerings at a price equal to 111.750% of the principal amount of the 11³/₄% Notes redeemed plus accrued but unpaid interest.

     If a change of control triggering event (as defined in the Indenture) occurs, subject to certain exceptions, the Company must give holders of the 11³/₄% Notes the opportunity to sell to the Company their 11³/₄% Notes, in whole or in part, at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest and liquidated damages to the date of purchase.

     The Company and its restricted subsidiaries are subject to certain negative covenants under the Indenture governing the 11³/₄% Notes which are consistent with the negative covenants under each of the indentures governing the 7¹/₂% Notes and 8% Notes. The Indenture limits the ability of the Company and each of its restricted subsidiaries to, among other things:

	•		make investments;
	•		incur additional indebtedness or issue preferred stock;
	•		create certain liens;
	•		sell assets;
	•		enter into agreements that restrict dividends or other payments from its subsidiaries to itself;
	•		consolidate, merge or transfer all or substantially all of its assets;
	•		engage in transactions with affiliates;
	•		pay dividends or make other distributions on capital stock or subordinated indebtedness; and
	•		create unrestricted subsidiaries.

     Capitalized Interest — For the three-month periods ended September 30, 2009 and 2008, capitalized interest totaled $4.5 million and $0.6 million, respectively. For the nine-month periods ended September 30, 2009 and 2008, capitalized interest totaled $9.7 million and $1.5 million, respectively.

4. Stockholders’ Equity

     Common Stock Offering — On June 10, 2009, the Company sold and issued 11.5 million shares of its common stock, par value $.0001 per share, at a public offering price of $14.50 per share in an underwritten offering registered under the 1933 Act. The total sold includes 1.5 million shares issued upon full exercise of the underwriters’ overallotment option. Net offering proceeds, after deducting underwriters’ discounts and estimated offering expenses but before giving effect to the underwriters’ reimbursement of up to $0.5 million for offering expenses, were approximately $159.2 million. The Company used net offering proceeds (before deducting estimated offering expenses of approximately $0.5 million) to repay debt under its bank credit facility.

5. Oil and Gas Properties

     The Company’s oil and gas properties are accounted for using the full-cost method of accounting. All direct costs and certain indirect costs associated with the acquisition, exploration and development of oil and gas properties are capitalized, including eligible general and administrative costs (“G&A”). G&A costs associated with production, operations, marketing and general corporate activities are expensed as incurred. These capitalized costs, coupled with the Company’s estimated asset retirement obligations recorded in accordance with accounting for asset retirement and environmental obligations under GAAP, are included in the amortization base and amortized to expense using the unit-of-production method. Amortization is calculated based on estimated proved oil and gas reserves. Proceeds from the sale or disposition of oil and gas properties are applied to reduce net capitalized costs unless the sale or disposition causes a significant change in the relationship between costs and the estimated value of proved reserves. For the three-month periods ended September 30, 2009 and 2008, capitalized G&A totaled $5.0 million and $4.5 million, respectively. For the nine-month periods ended September 30, 2009 and 2008, capitalized G&A totaled $15.3 million and $14.2 million, respectively, of which $2.8 million and $1.6 million, respectively, related to non-cash share-based compensation.

     Capitalized costs (net of accumulated depreciation, depletion and amortization and deferred income taxes) of proved oil and gas properties are subject to a full-cost ceiling limitation. The ceiling limits these costs to an amount equal to the present value, discounted at 10%, of estimated future net cash flows from estimated proved reserves less estimated future operating and development costs, abandonment costs (net of salvage value) and estimated related future income taxes. The full-cost ceiling limitation is calculated using natural gas and oil prices in effect as of the balance sheet date, however, SEC rules provide that price increases subsequent to the end of the period may be used to calculate the ceiling limitation. This option will no longer be available to the Company starting December 31, 2009 due to adoption of the Final Rule. Prices are adjusted for “basis” or location differentials. Price is held constant over the life of the reserves. The Company uses derivative financial instruments that qualify for cash flow hedge accounting under GAAP to hedge against the volatility of oil and natural gas prices. In accordance with SEC guidelines, Mariner includes estimated future cash flows from its hedging program in the ceiling test calculation. If net capitalized costs related to proved properties exceed the ceiling limit, the excess is impaired and recorded in the Condensed Consolidated Statement of Operations.

     Based on commodity prices of $3.30 per Mcf for gas and $70.21 per barrel for oil at September 30, 2009, the net capitalized cost of proved oil and gas properties exceeded the ceiling limit and the Company calculated a non-cash ceiling test impairment of $4.6 million ($3.0 million, net of tax) for the third quarter. The indicated impairment would have been $71.6 million ($46.0 million, net of tax) if the Company had not used hedge adjusted prices for the volumes that were subject to hedges. Subsequent commodity price increases may be utilized to calculate the ceiling value and reserves. Subsequent to September 30, 2009 the quoted market prices of gas and oil increased. Based on commodity prices of $4.10 per Mcf for gas and $77.04 per barrel for oil at October 30, 2009, the net capitalized cost of proved oil and gas properties did not exceed the ceiling limit and the Company did not record an impairment for the three months ended September 30, 2009.

     No ceiling test impairment was recorded for the three-month period ended June 30, 2009. At March 31, 2009, the net capitalized cost of proved oil and gas properties exceeded the ceiling limit and the Company recorded a non-cash ceiling test impairment of $704.7 million ($454.6 million, net of tax) for the first quarter. The impairment would have been $808.0 million ($521.3 million, net of tax) if the Company had not used hedge adjusted prices for the volumes that were subject to hedges. The ceiling limit of its proved reserves was calculated based upon quoted market prices of $3.89 and $3.63 per Mcf for gas and $70.00 and $49.65 per barrel for oil, adjusted for market differentials for the three-month periods ended June 30, 2009 and March 31, 2009. No ceiling test impairment was recorded for the nine-month period ended September 30, 2008.

6. Accrual for Future Abandonment Liabilities

     In accordance with accounting for asset retirement and environmental obligations under GAAP, the Company records the fair value of a liability for the legal obligation to retire an asset in the period in which it is incurred with the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. Upon adoption, the Company recorded an asset retirement obligation to reflect the Company’s legal obligations related to future plugging and abandonment of its oil and natural gas wells. The liability is accreted to its then present value each period, and the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, the difference is recognized in proved oil and gas properties.

     To estimate the fair value of an asset retirement obligation, the Company employs a present value technique, which reflects certain assumptions, including its credit-adjusted risk-free interest rate, the estimated settlement date of the liability and the estimated current cost to settle the liability. Changes in timing or to the original estimate of cash flows will result in changes to the carrying amount of the liability.

     The following roll forward is provided as a reconciliation of the beginning and ending aggregate carrying amounts of the asset retirement obligation:

		(In thousands)
Abandonment liability as of January 1, 2009		$	408,244
Liabilities incurred			13,453
Liabilities settled			(26,999	)
Accretion expense			25,390
Revisions to previous estimates			36,393
Abandonment liability as of September 30, 2009		$	456,481

7. Share-Based Compensation

     Applicable Plans — On May 11, 2009, the Company’s stockholders approved the Mariner Energy, Inc. Third Amended and Restated Stock Incentive Plan (the “Stock Incentive Plan”). Restricted common stock and non-qualified stock options are outstanding under the Stock Incentive Plan. Options to purchase the Company’s common stock granted to certain employees in connection with a March 2006 merger transaction also are outstanding but are not governed by the Stock Incentive Plan (“Rollover Options”).

     The Company’s directors, employees and consultants are eligible to participate in the Stock Incentive Plan. Awards to participants may be made in the form of incentive stock options, non-qualified stock options or restricted stock. Effective May 11, 2009, the Stock Incentive Plan increased to 12,500,000 from 6,500,000 the maximum number of shares of the Company’s common stock that can be issued to participants, and increased the number of shares that can be issued to any one employee to 5,700,000 from 2,850,000. Subject to the terms of the Stock Incentive Plan, the participants to whom awards are granted, the type or types of awards granted, the number of shares covered by each award, and the purchase price, conditions and other terms of each award are determined by the Company’s board of directors or a committee thereof appointed by the board to administer the Plan (the “committee”).

     Unless sooner terminated, no award may be granted under the Stock Incentive Plan after October 12, 2015. The Company’s board of directors or the committee may amend, alter, suspend, discontinue, or terminate (collectively, “change”) the Stock Incentive Plan without the consent of any stockholder, participant, other holder or beneficiary of an award, or other person, except that:

•

without the approval of the Company’s stockholders, no change can be made that would

	(i)		increase the total number of shares that may be issued under the Stock Incentive Plan, except as provided in the Stock Incentive Plan with respect to stock dividends or splits, or with respect to mergers, recapitalizations, reorganizations, spin-offs or other unusual transactions or events,
	(ii)		permit the exercise price of any outstanding option that is “underwater” to be reduced or for an “underwater” option to be cancelled and replaced with a new award,
	(iii)		include participants other than employees, non-employee directors and consultants, or
	(iv)		materially increase benefits accrued to participants under the Stock Incentive Plan; and

•

no change can materially adversely affect the rights of a participant under an award without the participant’s written consent.

     In addition, the Stock Incentive Plan may not be amended or terminated in any manner that would cause the Plan or any amounts or benefits payable under the Stock Incentive Plan to fail to comply with Section 409A of the Internal Revenue Code of 1986, as amended, to the extent applicable.

     Plan Activity — The Company recorded total compensation expense related to restricted stock and stock options of $7.0 million and $4.8 million for the three-month periods ended September 30, 2009 and 2008, respectively and $21.1 million and $12.0 million for the nine-month periods ended September 30, 2009 and 2008, respectively. Under the Stock Incentive Plan, unrecognized compensation expense at September 30, 2009 for the unvested portion of restricted stock granted was $52.4 million and for unvested options was $0.

     The following table presents a summary of stock option activity under the Stock Incentive Plan and under Rollover Options for the nine months ended September 30, 2009:

						Weighted
						Average				Aggregate Intrinsic
						Exercise				Value (1)
		Shares				Price				(In thousands)
Outstanding at January 1, 2009			645,348			$	13.88			$	196
Granted			—				—				—
Exercised			(726	)			11.59				(2	)
Forfeited			—				—				—
Outstanding and exercisable at September 30, 2009			644,622			$	13.88			$	194

     A summary of the activity for unvested restricted stock awards under the Stock Incentive Plan as of September 30, 2009 and 2008, respectively, and changes during the nine-month periods is as follows:

		Restricted Shares under
		Stock Incentive Plan
		September 30,
		2009				2008
Total unvested shares at beginning of period: January 1			2,697,926				1,484,552
Shares granted (1)			1,708,795				1,729,329
Shares vested			(591,049	)			(460,897	)
Shares forfeited (1)			(25,131	)			(23,383	)
Total unvested shares at end of period: September 30			3,790,541				2,729,601
Available for future grant as options or restricted stock			7,021,666				2,522,823

     The following table summarizes the status under the provisions of accounting for stock compensation under GAAP of the Company’s restricted stock, including long-term performance based restricted stock, at September 30, 2009 and the changes during the nine months then ended:

														Weighted
										Aggregate				Average
		Equity				Weighted				Intrinsic				Remaining
		Instruments				Average				Value				Contractual
		(thousands)				Fair Value				($ thousands)				Life (Years)
Unvested at January 1, 2009			2,697,926			$	28.22			$	76,123
Granted			1,708,795				11.20				19,144
Vested			(591,049	)			22.30				(13,180	)
Forfeited			(25,131	)			14.16				(356	)
Unvested at September 30, 2009			3,790,541				21.56			$	81,731				6.32

     Long-Term Performance-Based Restricted Stock Program — In June 2008, Mariner’s board of directors adopted a Long-Term Performance-Based Restricted Stock Program (the “Program”) under the Stock Incentive Plan. Shares of restricted common stock subject to the Program were granted in 2008 and 2009. Vesting of these

shares is contingent, begins upon satisfaction of specified thresholds of $38.00 and $46.00 for the market price per share of Mariner’s common stock, and continues in installments over five to seven years thereafter, assuming, in most instances, continued employment by Mariner. The fair value of restricted stock grants made under the Program is estimated using a Monte Carlo simulation. Stock-based compensation expense related to these restricted stock grants totaled $8.7 million for the nine months ended September 30, 2009.

     Weighted average fair values and valuation assumptions used to value Program grants for the quarter ended September 30, 2009 are as follows:

		Quarter Ended
		September 30,
		2009
Weighted average fair value of grants		$	33.73
Expected volatility			42.29	%
Risk-free interest rate			4.57	%
Dividend yield			0.00	%
Expected life		10 years

     Expected volatility is calculated based on the average historical stock price volatility of Mariner and a peer group as of September 30, 2009. The peer group consisted of the following seven independent oil and gas exploration and production companies: ATP Oil & Gas Corporation, Callon Petroleum Co., Energy Partners, Ltd., McMoRan Exploration Co., Plains Exploration & Production Company, Stone Energy Corporation, and W&T Offshore, Inc. The risk-free interest rate is determined at the grant date and is based on 10-year, zero-coupon government bonds with maturity equal to the contractual term of the awards, converted to a continuously compounded rate. The expected life is based upon the contractual terms of the restricted stock grants under the Program.

8. Derivative Financial Instruments and Hedging Activities

     The energy markets historically have been very volatile, and Mariner expects oil and gas prices will be subject to wide fluctuations in the future. In an effort to reduce the effects of the volatility of the price of oil and natural gas on the Company’s operations, management has elected to hedge oil and natural gas prices from time to time through the use of commodity price swap agreements and costless collars. While the use of these hedging arrangements limits the downside risk of adverse price movements, it also limits future gains from favorable movements. In addition, forward price curves and estimates of future volatility are used to assess and measure the ineffectiveness of the Company’s open contracts at the end of each period.

     For derivative contracts that are designated and qualify as cash flow hedges pursuant to accounting for derivatives and hedging under GAAP, the portion of the gain or loss on the derivative instrument that is effective in offsetting the variable cash flows associated with the hedged forecasted transaction is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings (e.g., in “revenues” when the hedged transactions are commodity sales). The remaining gain or loss on the derivative contract in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffective portion) is recognized in earnings during the current period. The Company currently does not exclude any component of the derivative contracts’ gain or loss from the assessment of hedge effectiveness.

     In the third quarter 2009, the Company liquidated certain natural gas fixed price swaps that previously had been designated as cash flow hedges for accounting purposes in respect of 10,205,560 million British thermal units of natural gas in exchange for a cash payment to Mariner of $32.0 million and total installment payments of $3.4 million to be paid monthly to Mariner through 2009. Since the forecasted sales of natural gas volumes are still expected to occur, the accumulated gains through the date of liquidation on the related derivative contracts remained in accumulated other comprehensive income, and will be reclassified into earnings as the physical transactions occur. Any changes in the value of these derivative contracts subsequent to the date of liquidation will no longer be deferred in other comprehensive income, but rather will impact current period income.

     In first quarter 2009, the Company liquidated crude oil fixed price swaps that previously had been designated as cash flow hedges for accounting purposes in respect of 977,000 barrels of crude oil in exchange for a cash payment

to Mariner of $10.0 million and installment payments of $13.5 million to be paid monthly to Mariner through 2009. In April 2009, the Company received a $10.5 million cash settlement on the hedges that were settled in monthly installments in the first quarter 2009. Since the forecasted sales of crude oil volumes are still expected to occur, the accumulated gains through January 29, 2009 on the related derivative contracts remained in accumulated other comprehensive income, and will be reclassified into earnings as the physical transactions occur. Any gain or loss realized on these derivative contracts in conjunction with installment payments received will be recognized in current period income.

     Derivative gains and losses are recorded by commodity type in oil and gas revenues in the Condensed Consolidated Statements of Operations. The effects on the Company’s oil and gas revenues from its hedging activities were as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(In thousands)
Cash Gain (Loss) on Settlements (1)		$	52,644			$	(46,968	)		$	173,648			$	(121,882	)
Reclassification of liquidated swaps (2)			3,859				—				17,059				—
Gain (Loss) on Hedge Ineffectiveness (3)			(809	)			4,827				(812	)			(1,647	)
Total		$	55,694			$	(42,141	)		$	189,895			$	(123,529	)

     As of September 30, 2009, the Company had the following hedge contracts outstanding:

						Weighted Average				Fair Value
Fixed Price Swaps		Quantity				Fixed Price				Asset (Liability) (1)
										(In thousands)
Natural Gas (MMbtus)
October 1—December 31, 2009			783,380			$	4.22			$	410
January 1—December 31, 2010			12,775,000			$	5.84				(4,405	)
January 1—December 31, 2011			13,650,000			$	6.45				(5,080	)
January 1—December 31, 2012			6,588,000			$	6.62				(2,262	)
January 1—December 31, 2013			5,840,000			$	6.76				(1,384	)
Crude Oil (Bbls)
October 1—December 31, 2009			228,160			$	76.33				1,183
January 1—December 31, 2010			1,934,500			$	67.48				(12,589	)
January 1—December 31, 2011			978,100			$	73.24				(3,369	)
January 1—December 31, 2012			494,100			$	80.77				668
January 1—December 31, 2013			408,800			$	82.81				595
Total										$	(26,233	)

     The Company has reviewed the financial strength of its counterparties and believes the credit risk associated with these swaps to be minimal. Hedges with counterparties that are lenders under the Company’s bank credit facility are secured under the bank credit facility.

     For derivative instruments that are not designated as a hedge for accounting purposes, all realized and unrealized gains and losses are recognized in the statement of income during the current period. This will result in non-cash gains or losses being reported in Mariner’s operating results.

     As of September 30, 2009, the Company expects to realize within the next 12 months approximately $42.3 million in net gains resulting from liquidated fixed price swaps and $9.3 million in net losses resulting from hedging

activities, of which $33.0 million is currently recorded in accumulated other comprehensive income. The net hedging gain is expected to be realized as a decrease of $3.0 million to oil revenues and an increase of $36.4 million to natural gas revenues.

     As of November 3, 2009, the Company has not entered into any hedge transactions subsequent to September 30, 2009.

Additional Disclosures about Derivative Instruments and Hedging Activities

     At September 30, 2009, the Company had derivative financial instruments under GAAP recorded in its balance sheet as set forth below:

Fair Value of Derivative Contracts

Asset Derivatives

September 30, 2009

December 31, 2008

Balance sheet

Balance sheet

Location

Fair value

Location

Fair value

Derivatives designated as cash flow hedging contracts

Fixed Price Swaps

Current Assets: Derivative financial instruments

$

611

Current Assets: Derivative financial instruments

$

121,929

Long-Term Assets: Derivative Financial Instruments

920

Derivatives not designated as cash flow hedging contracts

Fixed Price Swaps

Current Assets: Derivative financial instruments

3,823

Current Assets: Derivative financial instruments

—

Stockholders’ Equity: Accumulated other comprehensive income

38,844

Total

$

44,198

Total

$

121,929

Fair Value of Derivative Contracts

Liability Derivatives

September 30, 2009

December 31, 2008

Balance sheet

Balance sheet

Location

Fair value

Location

Fair value

Derivatives designated as cash flow hedging contracts

Fixed Price Swaps

Current Liabilities: Derivative financial instruments

$

9,907

Current Liabilities: Derivative financial instruments

$

—

Long-Term Liabilities: Derivative financial instruments

18,267

Long-Term Liabilities: Derivative financial instruments

—

Total

$

28,174

Total

$

—

     For the three months ended September 30, 2009, the effect on income of derivative financial instruments under. GAAP was as follows:

										Location of gain/(loss)				Amount of gain/(loss)												Amount of
		Amount of gain/(loss)								reclassified from				reclassified from								Location of gain/(loss)				gain/(loss)
Derivatives		recognized in OCI on								Accumulated OCI into				Accumulated OCI								recognized in income				recognized in income
designated as cash		derivative (effective								income (effective				into income (effective								on derivative				on derivative
flow hedging		portion)								portion)				portion)								(ineffective portion)				(ineffective portion)
contracts under		Third Quarter												Third Quarter												Third Quarter
GAAP		2009				2008								2009				2008								2009				2008
Fixed Price Swaps		$	26,643			$	(46,498	)		Revenues-Natural Gas				$	50,521			$	(17,102	)		Revenues-Natural Gas				$	(809	)		$	4,827
Fixed Price Collars			—				(3,720	)		Revenues-Crude Oil					2,123				(29,866	)		Revenues-Crude Oil					—				—
Total		$	26,643			$	(50,218	)		Total				$	52,644			$	(46,968	)		Total				$	(809	)		$	4,827

						Amount of gain/(loss) recognized in
						income on derivative
Derivatives not designated as cash		Location of gain/(loss) recognized in income				Third Quarter				Third Quarter
flow hedging contracts		on derivative				2009				2008
Fixed Price Swaps		Revenues-Natural Gas				$	(1,837	)		$	—
		Revenues-Crude Oil					5,696				—
		Total				$	3,859			$	—

9. Commitments and Contingencies

     Minimum Future Lease Payments — The Company leases certain office facilities and other equipment under long-term operating lease arrangements. Minimum future lease obligations under the Company’s operating leases in effect at September 30, 2009 are as follows:

		(In thousands)
2010		$	2,620
2011			2,587
2012			2,502
2013			2,173
2014 and thereafter			9,958

     Other Commitments — In the ordinary course of business, the Company enters into long-term commitments to purchase seismic data and other geological information such as maps, logs and studies. The minimum annual payments under these commitments are $0.3 million in 2011.

Insurance Matters

Current Insurance Against Hurricanes

     Mariner is a member of OIL Insurance Limited (“OIL”), an energy industry insurance cooperative, which provides Mariner windstorm insurance coverage subject to a $10.0 million per-occurrence deductible, a $250.0 million per-occurrence loss limit, and a $750.0 million industry aggregate per-event loss limit. Effective January 1, 2010, the windstorm coverage will be subject to a per-occurrence deductible under consideration, a $150.0 million per-occurrence loss limit per member, an annual maximum of $300.0 million per member, and a $750.0 million industry aggregate per-event loss limit. In addition, annual industry windstorm losses exceeding $300.0 million will be mutualized among windstorm members in two pools, one for offshore and one for onshore, with future premiums based upon a pool’s loss experience and a member’s weighted percent of the pool’s asset base. Mariner anticipates these changes to increase its loss retention by approximately $100.0 million for windstorm losses which it expects to either self insure, insure through the commercial market, insure through the purchase of additional OIL coverage or a combination of these.

     Each year, Mariner considers whether to purchase from the commercial market supplemental insurance which in the past has provided coverage when OIL limits have been exceeded (see discussion below under “Hurricanes Katrina and Rita (2005)”). The supplemental insurance coverage offered by the commercial market in 2009 would not have provided similar coverage and Mariner elected not to purchase it when it expired on June 1, 2009. Mariner believes its assets are sufficiently insured for 2009 through OIL and Mariner’s expected ability to cover losses in excess of OIL coverage. Mariner intends to monitor the commercial market for insurance that would, based on Mariner’s historical experience, cover its expected hurricane-related risks on a cost-effective basis once OIL limits are exceeded.

     As of September 30, 2009, Mariner accrued approximately $36.0 million for an OIL withdrawal premium contingency. As part of its OIL membership, Mariner is obligated to pay a withdrawal premium if it elects to withdraw from OIL. Mariner does not anticipate withdrawing from OIL; however, due to the contingency, Mariner periodically reassesses the sufficiency of its accrued withdrawal premium based on OIL’s periodic calculation of the potential withdrawal premium in light of past losses, and Mariner may adjust its accrual accordingly in the future.

     OIL requires smaller members to provide a letter of credit or other acceptable security in favor of OIL to secure payment of the withdrawal premium. Acceptable security has included a letter of credit or a security agreement pursuant to which a member grants OIL a security interest in certain claim proceeds payable by OIL to the member. Mariner has entered into such a security agreement, granting to OIL a senior security interest in up to the next $50.0 million in excess of $100.0 million of Mariner’s Hurricane Ike claim proceeds payable by OIL. Mariner has the ability to replace the security agreement with a letter of credit or other acceptable security in favor of OIL.

Hurricane Ike (2008)

     In 2008, the Company’s operations were adversely affected by Hurricane Ike. The hurricane resulted in shut-in and delayed production as well as facility repairs and replacement expenses. The Company estimates that repairs and plugging and abandonment costs resulting from Hurricane Ike will total approximately $160.0 million net to Mariner’s interest. OIL has advised the Company that industry-wide damages from Hurricane Ike are expected to substantially exceed OIL’s $750.0 million industry aggregate per event loss limit and that OIL expects to initially prorate the payout of all OIL members’ Hurricane Ike claims at approximately 50%, subject to further adjustment. OIL also has indicated that the scaling factor it expects to apply to Mariner’s Hurricane Ike claims will result in settlement at less than 70%. Mariner expects that approximately 75% of the shortfall in its primary insurance coverage will be covered under its commercial excess coverage. In respect of Hurricane Ike claims that the Company submitted to OIL through September 2009, the Company received $16.9 million from OIL and as of September 30, 2009 had a receivable balance of approximately $12.2 million. Although in 2009 Mariner started receiving payment in respect of its Hurricane Ike claims, due to the magnitude of the storm and the complexity of the insurance claims being processed by the insurance industry, Mariner expects to maintain a potentially significant insurance receivable through 2010 while it actively pursues settlement of its Hurricane Ike claims to minimize the impact to its working capital and liquidity.

Hurricanes Katrina and Rita (2005)

     In 2005, the Company’s operations were adversely affected by Hurricanes Katrina and Rita, resulting in substantial shut-in and delayed production, as well as necessitating extensive facility repairs and hurricane-related abandonment operations. Since 2005, the Company has incurred approximately $204.6 million in hurricane expenditures resulting from Hurricanes Katrina and Rita, of which $129.1 million were capitalized expenditures and $75.5 million were hurricane-related abandonment costs.

     Applicable insurance for the Company’s Hurricane Katrina and Rita claims with respect to the Gulf of Mexico assets acquired from Forest Oil Corporation in March 2006 is provided by OIL. Mariner’s coverage for such properties is subject to a deductible of $5.0 million per occurrence and a $1.0 billion industry-wide loss limit per occurrence. OIL has advised the Company that the aggregate claims resulting from each of Hurricanes Katrina and Rita are expected to exceed the $1.0 billion per occurrence loss limit and that therefore Mariner’s insurance recovery is expected to be reduced pro-rata (approximately 47% for Katrina and 67% for Rita) with all other competing claims from the storms. During 2008, the Company settled its Katrina and Rita claims with its excess insurers for a one-time cash payment of $48.5 million. The insurance coverage for Mariner’s legacy properties is subject to a $3.75 million deductible.

     As of September 30, 2009, the Company had recovered $52.9 million from OIL and $48.5 million from its commercial carriers in respect of Hurricanes Katrina and Rita. With respect to Hurricane Katrina, the Company has received full and final settlement and maintains no insurance receivable balance. With respect to Hurricane Rita, although the Company had not yet submitted final claims and therefore maintained no insurance receivable balance at September 30, 2009, it expects to submit final claims and achieve settlement by 2010. Due to the magnitude of the storm and the complexity of the insurance claims being processed by the insurance industry, the timing of the Company’s ultimate insurance recovery cannot be assured. However, Mariner expects to recover substantially all of its outstanding OIL claims in respect of Hurricane Rita by 2010. Any differences between insurance recoveries and insurance receivables will be recorded as adjustments to oil and natural gas properties.

     Litigation — The Company, in the ordinary course of business, is a claimant and/or a defendant in various legal proceedings, including proceedings as to which the Company has insurance coverage and those that may involve the filing of liens against the Company or its assets. The Company does not consider its exposure in these proceedings, individually or in the aggregate, to be material.

     Letters of Credit — Mariner’s bank credit facility has a letter of credit subfacility of up to $50.0 million that is included as a use of the borrowing base. As of September 30, 2009, four such letters of credit totaling $4.7 million were outstanding of which $4.2 million is required for plugging and abandonment obligations at certain of Mariner’s offshore fields.

10. Earnings per Share

     Basic earnings per share does not include dilution and is computed by dividing net income or loss attributed to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur upon vesting of restricted common stock or exercise of options to purchase common stock.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(In thousands, except per share data)
Numerator:
Net Income (Loss) attributable to Mariner Energy, Inc.		$	4,222			$	64,691			$	(402,683	)		$	260,207
Denominator:
Weighted average shares outstanding			100,753				87,596				93,849				87,447
Add dilutive securities
Options			11				246				—				265
Restricted stock			321				342				—				528
Total weighted average shares outstanding and dilutive securities			101,085				88,184				93,849				88,240
Net Income (Loss) per share attributable to Mariner Energy, Inc.:
Basic:		$	0.04			$	0.74			$	(4.29	)		$	2.98
Diluted:		$	0.04			$	0.73			$	(4.29	)		$	2.95

     Unvested shares of restricted stock and shares issuable upon exercise of options to purchase common stock that would have been anti-dilutive are excluded from the computation of diluted earnings per share. Due to the Company’s net loss for the nine months ended September 30, 2009, all of the Company’s unvested shares of restricted stock and shares issuable upon exercise of stock options (approximately 1,969,881 and 644,721, respectively) were excluded from the computation of diluted earnings per share because the effect was anti-dilutive. For the three months ended September 30, 2009, 1,793,914 unvested shares of restricted stock and 612,805 shares issuable upon exercise of stock options were excluded from the computation of diluted earnings per share. For the three and nine months ended September 30, 2008, 400,000 and 381,000 shares issuable upon exercise of stock options, respectively, were excluded from the computation of diluted earnings per share because the effect was anti-dilutive and 1,138,785 and 444,711 unvested shares of restricted stock were excluded for the three and nine months ended September 30, 2008, respectively.

11. Comprehensive Income

     Comprehensive income includes net income (loss) and certain items recorded directly to stockholders’ equity and classified as other comprehensive income. The table below summarizes comprehensive income and provides the components of the change in accumulated other comprehensive income for the three months and nine months ended September 30, 2009 and 2008:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(in thousands)
Net Income (Loss)		$	4,222			$	64,691			$	(402,683	)		$	260,395
Other comprehensive (loss) income:
Change in fair value of derivative hedging instruments, net of income taxes of $(36,084), $150,590, $(62,411), and $25,790			(64,513	)			272,381				(189,763	)			69,224
Derivative contracts settled and reclassified, net of income taxes of $19,977, $(15,003), $68,115 and $(43,980)			35,717				(27,138	)			121,780				(79,549	)
Change in accumulated other comprehensive (loss) income			(28,796	)			245,243				(67,983	)			(10,325	)
Comprehensive (loss) income			(24,574	)			309,934				(470,666	)			250,070
Comprehensive income attributable to noncontrolling interest			—				—				—				188
Comprehensive (loss) income attributable to Mariner Energy, Inc.		$	(24,574	)		$	309,934			$	(470,666	)		$	249,882

12. Fair Value Measurement

     Certain of Mariner’s assets and liabilities are reported at fair value in the accompanying Condensed Consolidated Balance Sheets. Such assets and liabilities include amounts for both financial and nonfinancial instruments. The

carrying values of cash and cash equivalents, accounts receivable and accounts payable (including income taxes payable and accrued expenses) approximated fair value at September 30, 2009 and December 31, 2008. These assets and liabilities are not included in the following tables.

     GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As presented in the table below, the hierarchy consists of three broad levels. Level 1 inputs on the hierarchy consist of unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. Level 2 inputs are market-based and are directly or indirectly observable but not considered Level 1 quoted prices, including quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; or valuation techniques whose inputs are observable. Where observable inputs are available, directly or indirectly, for substantially the full term of the asset or liability, the instrument is categorized in Level 2. Level 3 inputs are unobservable (meaning they reflect Mariner’s own assumptions regarding how market participants would price the asset or liability based on the best available information) and therefore have the lowest priority. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Mariner believes it uses appropriate valuation techniques based on the available inputs to measure the fair values of its assets and liabilities.

     GAAP requires a credit adjustment for non-performance in calculating the fair value of financial instruments. The credit adjustment for derivatives in an asset position is determined based on the credit rating of the counterparty and the credit adjustment for derivatives in a liability position is determined based on Mariner’s credit rating.

     The following table provides fair value measurement information for the Company’s derivative financial instruments as of September 30, 2009:

		Fair Value Measurements Using:
										Significant
						Quoted Prices				other				Significant
						in Active				Observable				Unobservable
		Total Fair				Markets				Inputs				Inputs
Derivative Financial Instruments		Value				(Level 1)				(Level 2)				(Level 3)
		(In thousands)
Natural gas and crude oil fixed price swaps — Short Term		$	(5,473	)		$	—			$	(5,473	)		$	—
Natural gas and crude oil fixed price swaps — Long Term			(17,347	)			—				(17,347	)			—
Total		$	(22,820	)		$	—			$	(22,820	)		$	—

     The following methods and assumptions were used to estimate the fair values of Mariner’s derivative financial instruments in the table above.

Level 2 Fair Value Measurements

     The fair values of the natural gas and crude oil fixed price swaps are estimated using internal discounted cash flow calculations based upon forward commodity price curves, terms of each contract, and a credit adjustment based on the credit rating of the Company and its counterparties as of September 30, 2009.

Level 3 Fair Value Measurements

     The Company had no Level 3 financial instruments as of September 30, 2009.

     The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of accounting for financial instruments under GAAP, which Mariner adopted effective March 31, 2009 as described in Note 1 “Summary of Significant Accounting Policies.” The estimated fair value amounts have been determined using available market information and valuation methodologies described below. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

     The carrying amounts and fair values of the Company’s long-term debt are as follows:

		September 30, 2009								December 31, 2008
		Carrying								Carrying
Long-term Debt		Amount				Fair Value				Amount				Fair Value
		(In thousands)
Bank credit facility		$	65,000			$	65,000			$	570,000			$	570,000
7 1/2% Notes, net of discount			297,983				222,054				300,000				144,956
8% Notes			300,000				145,721				300,000				59,978
11 3/4% Notes, net of discount			291,520				147,051				—				—
Total long-term debt		$	954,503			$	579,826			$	1,170,000			$	774,934

     The fair value of the amounts outstanding under the bank credit facility as of September 30, 2009 is based on rates currently available for debt instruments with similar terms and average maturities from companies with similar credit ratings in our industry. The fair value of the Notes is based on quoted market prices based on trades of such debt as of September 30, 2009.

13. Segment Information

     The FASB has issued authoritative guidance establishing standards for reporting information about operating segments. Operating segments are defined as components of an enterprise that engage in activities from which it may earn revenues and incur expenses. Separate financial information is available and this information is regularly evaluated by the chief decision maker for the purpose of allocating resources and assessing performance.

     The Company measures financial performance as a single enterprise, allocating capital resources on a project-by-project basis across its entire asset base to maximize profitability. Mariner utilizes a company-wide management team that administers all enterprise operations encompassing the exploration, development and production of natural gas and oil. Since Mariner follows the full-cost method of accounting and all of its oil and gas properties and operations are located in the United States, the Company has determined that it has one reporting unit. Inasmuch as Mariner is one enterprise, the Company does not maintain comprehensive financial statement information by area but does track basic operational data by area.

14. Supplemental Guarantor Information

     On June 10, 2009, the Company sold and issued $300.0 million aggregate principal amount of its 11³/4% Notes. On April 30, 2007, the Company sold and issued $300.0 million aggregate principal amount of its 8% Notes. On April 24, 2006, the Company sold and issued to eligible purchasers $300.0 million aggregate principal amount of its 7¹/₂% Notes. The Notes are jointly and severally guaranteed on a senior unsecured basis by the Company’s existing and certain of its future domestic subsidiaries (“Subsidiary Guarantors”). The guarantees are full and unconditional, and the guarantors are wholly-owned. In the future, the guarantees may be released or terminated under certain circumstances.

     The following information sets forth Mariner’s Consolidating Balance Sheets as of September 30, 2009 and December 31, 2008, its Condensed Consolidating Statements of Operations for the three months and nine months ended September 30, 2009 and 2008, and its Condensed Consolidating Statements of Cash Flows for the nine months ended September 30, 2009 and 2008.

     Mariner accounts for investments in its subsidiaries using the equity method of accounting; accordingly, entries necessary to consolidate Mariner, the parent company, and its Subsidiary Guarantors are reflected in the eliminations column.

MARINER ENERGY, INC.
CONSOLIDATING BALANCE SHEET (Unaudited)
September 30, 2009
(In thousands except share data)

														Consolidated
		Parent				Subsidiary								Mariner
		Company				Guarantors				Eliminations				Energy, Inc.
Current Assets:
Cash and cash equivalents		$	6,016			$	1			$	—			$	6,017
Receivables, net of allowances			91,928				44,496				—				136,424
Insurance receivables			56				12,358				—				12,414
Derivative financial instruments			4,434				—				—				4,434
Intangible assets			1,446				—				—				1,446
Prepaid expenses and other			21,635				1,629				—				23,264
Total current assets			125,515				58,484				—				183,999
Property and Equipment:
Proved oil and gas properties, full-cost method			2,445,514				2,451,487				—				4,897,001
Unproved properties, not subject to amortization			206,092				8,799				—				214,891
Total oil and gas properties			2,651,606				2,460,286				—				5,111,892
Other property and equipment			19,871				35,358				—				55,229
Accumulated depreciation, depletion and amortization:											—
Proved oil and gas properties			(1,421,006	)			(1,324,595	)			—				(2,745,601	)
Other property and equipment			(5,718	)			(1,831	)			—				(7,549	)
Total accumulated depreciation, depletion and amortization			(1,426,724	)			(1,326,426	)			—				(2,753,150	)
Total property and equipment, net			1,244,753				1,169,218				—				2,413,971
Investment in Subsidiaries			440,538				—				(440,538	)			—
Intercompany Receivables			214,629				—				(214,629	)			—
Intercompany Note Receivable			7,175				—				(7,175	)			—
Insurance Receivables			—				—				—				—
Deferred income tax			63,110				—				(63,110	)			—
Derivative Financial Instruments			920				—				—				920
Other Assets, net of amortization			74,337				352				—				74,689
TOTAL ASSETS		$	2,170,977			$	1,228,054			$	(725,452	)		$	2,673,579
Current Liabilities:
Accounts payable		$	3,586			$	—			$	—			$	3,586
Accrued liabilities			100,965				19,000				—				119,965
Accrued capital costs			95,888				32,893				—				128,781
Deferred income tax			15,772				—				—				15,772
Abandonment liability			12,850				35,127				—				47,977
Accrued interest			30,353				—				—				30,353
Derivative financial instruments			9,907				—				—				9,907
Total current liabilities			269,321				87,020				—				356,341
Long-Term Liabilities:
Abandonment liability			71,984				336,520				—				408,504
Deferred income tax			—				141,578				(63,110	)			78,468
Intercompany payable			—				214,629				(214,629	)			—
Derivative financial instruments			18,267				—				—				18,267
Long-term debt,			954,503				—								954,503
Other long-term liabilities			28,443				594				—				29,037
Intercompany note payable			—				7,175				(7,175	)			—
Total long-term liabilities			1,073,197				700,496				(284,914	)			1,488,779
Commitments and Contingencies (see Note 9)
Stockholders’ Equity:
Preferred stock, $.0001 par value; 20,000,000 shares authorized, no shares issued and outstanding at September 30, 2009			—				—				—				—
Common stock, $.0001 par value; 180,000,000 shares authorized, 101,855,521 shares issued and outstanding at September 30, 2009			10				5				(5	)			10
Additional paid-in capital			1,250,151				886,142				(886,142	)			1,250,151
Partner capital			—				31,438				(31,438	)			—
Accumulated other comprehensive income			10,198				—				—				10,198
Accumulated deficit			(431,900	)			(477,047	)			477,047				(431,900	)
Total stockholders’ equity			828,459				440,538				(440,538	)			828,459
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,170,977			$	1,228,054			$	(725,452	)		$	2,673,579