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

For the quarterly period ended March 31, 2007

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

MARINER ENERGY, INC.

Delaware		86-0460233
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o      Accelerated filer o      Non-accelerated filer þ

     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 May 10, 2007, there were 87,131,044 shares issued and outstanding of the issuer’s common stock, par value $0.0001 per share.

 

 

TABLE OF CONTENTS

PART I
Item 1. Condensed Consolidated Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			35
Item 4. Controls and Procedures			36
PART II
Item 1A. Risk Factors			36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 6. Exhibits			39
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I

Item 1. Condensed Consolidated Financial Statements

MARINER ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
(Unaudited)

		March 31,				December 31,
		2007				2006
Current Assets:
Cash and cash equivalents		$	6,311			$	9,579
Receivables, net of allowances of $1,393 and $726 as of March 31, 2007 and December 31, 2006, respectively			156,513				149,692
Insurance receivables			68,059				61,001
Derivative asset			16,544				54,488
Prepaid seismic			23,637				20,835
Prepaid expenses and other			14,458				12,846
Total current assets			285,522				308,441
Property and Equipment:
Proved oil and gas properties, full-cost method			2,501,165				2,345,041
Unproved properties, not subject to amortization			64,405				40,246
Total Oil and Gas Properties			2,565,570				2,385,287
Other property and equipment			13,627				13,512
Accumulated depreciation, depletion and amortization			(481,177	)			(386,737	)
Total property and equipment, net			2,098,020				2,012,062
Restricted cash			—				31,830
Goodwill			288,504				288,504
Derivative asset			7,863				17,153
Other Assets, net of amortization			25,659				22,163
TOTAL ASSETS		$	2,705,568			$	2,680,153
Current Liabilities:
Accounts payable		$	2,768			$	1,822
Accrued liabilities			85,151				74,880
Accrued capital costs			129,902				99,028
Deferred income tax			1,368				26,857
Derivative liability			8,574				—
Abandonment liability			36,471				29,660
Accrued interest			12,074				7,480
Total current liabilities			276,308				239,727
Long-Term Liabilities:
Abandonment liability			183,181				188,310
Derivative liability			183				—
Deferred income tax			285,978				262,888
Long term debt, bank credit facility			314,000				354,000
Long term debt, senior unsecured notes			300,000				300,000
Other long-term liabilities			37,762				32,637
Total long-term liabilities			1,121,104				1,137,835
Commitments and Contingencies (see Note 7)
Stockholders’ Equity:
Preferred stock, $.0001 par value; 20,000,000 shares authorized, no shares issued and outstanding at March 31, 2007 and December 31, 2006			—				—
Common stock, $.0001 par value; 180,000,000 shares authorized, 86,361,162 shares issued and outstanding at March 31, 2007; 180,000,000 shares authorized, 86,375,840 shares issued and outstanding at December 31, 2006			9				9
Additional paid-in-capital			1,045,535				1,043,923
Accumulated other comprehensive income			8,843				43,097
Accumulated retained earnings			253,769				215,562
Total stockholders’ equity			1,308,156				1,302,591
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,705,568			$	2,680,153

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

MARINER ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share data)
(Unaudited)

		Three Months Ended
		March 31,
		2007				2006
Revenues:
Oil		$	60,451			$	30,182
Natural gas			140,532				44,156
Natural gas liquids			9,149				5,234
Other revenues			1,333				688
Total revenues			211,465				80,260
Costs and Expenses:
Lease operating expense			34,756				11,491
Severance and ad valorem taxes			2,990				1,691
Transportation expense			1,902				730
General and administrative expense			10,141				10,509
Depreciation, depletion and amortization			98,634				32,824
Total costs and expenses			148,423				57,245
OPERATING INCOME			63,042				23,015
Other Income (Expense):
Interest income			291				115
Interest expense, net of amounts capitalized			(12,347	)			(6,007	)
Other			5,431				—
Income before taxes			56,417				17,123
Provision for income taxes			(18,210	)			(5,993	)
NET INCOME		$	38,207			$	11,130
Earnings per share:
Net income per share—basic		$	0.45			$	0.22
Net income per share—diluted		$	0.45			$	0.21
Weighted average shares outstanding—basic			85,515,561				49,615,479
Weighted average shares outstanding—diluted			85,704,529				51,844,610

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

MARINER ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

		Three Months
		Ended March 31,
		2007				2006
Operating Activities:
Net income		$	38,207			$	11,130
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax			17,960				5,993
Depreciation, depletion and amortization			99,440				34,356
Ineffectiveness of derivative instruments			2,148				—
Stock compensation			1,567				6,427
Changes in operating assets and liabilities:
Receivables			(7,501	)			7,251
Insurance receivables			(7,058	)			—
Prepaid expenses and other			(1,612	)			(18,169	)
Other assets			(83	)			(5,900	)
Accounts payable and accrued liabilities			10,561				25,419
Net cash provided by operating activities			153,629				66,507
Investing Activities:
Additions to properties and equipment			(148,790	)			(78,863	)
Property conveyances			18				—
Purchase price adjustment			—				(20,808	)
Restricted cash designated for investment			31,830				—
Net cash used in investing activities			(116,942	)			(99,671	)
Financing Activities:
Repayment of term note			—				(4,000	)
Credit facility (repayments) borrowings, net			(40,000	)			214,200
Debt and working capital acquired from Forest Energy Resources, Inc.			—				(176,200	)
Proceeds from exercise of stock options			45				22
Net cash (used in) provided by financing activities			(39,955	)			34,022
(Decrease) Increase in Cash and Cash Equivalents			(3,268	)			858
Cash and Cash Equivalents at Beginning of Period			9,579				4,556
Cash and Cash Equivalents at End of Period		$	6,311			$	5,414

The accompanying notes are an integral part of these 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 West Texas 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 consolidated financial statements have been prepared without audit 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 accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, although we believe that the disclosures contained herein are adequate to make the information presented not misleading. In the opinion of management, all adjustments 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. Our balance sheet at December 31, 2006 is derived from the December 31, 2006 audited financial statements, but does not include all disclosures required by GAAP. 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, 2006.

     Use of Estimates — The preparation of the 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. Our most significant financial estimates are based on remaining proved natural gas and oil reserves. Estimates of proved reserves are key components of our depletion rate for natural gas and oil properties, our unevaluated properties and our 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 — Our consolidated financial statements as of March 31, 2007 and December 31, 2006 include our accounts and the accounts of our wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated.

     Reclassifications — Certain prior year amounts have been reclassified to conform to current year presentation.

     Income Taxes — Our 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.

     Recent Accounting Pronouncements — During February 2007, Financial Accounting Standards Board (“FASB”) issued SFAS No 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which permits all entities to choose, at

specified election dates, to measure eligible items at fair value. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value, and thereby mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We are evaluating the impact that this standard will have on our financial statements.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather it eliminates inconsistencies in the guidance found in various prior accounting pronouncements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is encouraged, provided a company has not yet issued financial statements, including for interim periods, for that fiscal year. Although we are still evaluating the potential effects of this standard, we do not expect the adoption of SFAS No. 157 to have a material impact on our consolidated financial position, results of operation, or cash flows.

     In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined. FIN48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes.

     The Company is subject to the provisions of FIN 48 as of January 1, 2007. As of the adoption date, Mariner did not have a gross tax-affected unrecognized tax benefit and does not reasonably estimate that to change significantly within the next 12 months. In addition, the Company did not record a cumulative effect adjustment related to the adoption of FIN 48.

     The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company has identified its federal tax return and its state tax return filing in Texas as “major” tax jurisdictions.

     The periods subject to examination for the Company’s federal return are the years 2003 through 2006. The tax years 1999, 2000 and 2002 are subject to adjustment to the extent of net operating losses generated in those years. In the first quarter of 2007, the Texas Comptroller of Public Accounts performed a tax audit for the years 2004 through 2006. The Company’s Texas tax filing positions and deductions were sustained on audit, therefore, no reserves for uncertain income tax positions were recorded pursuant to FIN 48.

     Interest on unrecognized tax benefits, if incurred, would be reported in interest expense. Penalties, if incurred, would be recorded in earnings before taxes.

2. Acquisitions and Dispositions

     Forest Gulf of Mexico Operations — On March 2, 2006, a subsidiary of the Company completed a merger transaction with Forest Energy Resources, Inc. (the “Forest Merger”). Prior to the consummation of the Forest Merger, Forest Oil Corporation (“Forest”) transferred and contributed the assets of, and certain liabilities associated with, its offshore Gulf of Mexico operations to Forest Energy Resources, Inc. Immediately prior to the Forest Merger, Forest distributed all of the outstanding shares of Forest Energy Resources, Inc. to Forest shareholders on a pro rata basis. Forest Energy Resources, Inc. then merged with a newly formed subsidiary of Mariner, became a new wholly owned subsidiary of Mariner and changed its name to Mariner Energy Resources, Inc. (“MERI”). Immediately following the Forest Merger, approximately 59% of Mariner common stock was held by shareholders of Forest and approximately 41% of Mariner common stock was held by the pre-Forest Merger stockholders of Mariner.

     To acquire MERI, Mariner issued 50,637,010 shares of its common stock to the shareholders of Forest Energy Resources, Inc. The aggregate consideration was valued at $890.0 million, comprised of $3.8 million in pre-Forest Merger costs and $886.2 million in common stock, based on the closing price of the Company’s common stock of $17.50 per share on September 12, 2005 (which was the date that the terms of the acquisition were announced).

     The Forest Merger was accounted for using the purchase method of accounting under the accounting standards established in SFAS No. 141, Business Combinations (“SFAS 141”) and No. 142, “Goodwill and Other Intangible Assets.” As a result, the assets and liabilities acquired by Mariner in the Forest Merger are included in the Company’s December 31, 2006 balance sheet. The Company reflected the results of operations of the Forest Merger beginning March 2, 2006. The Company recorded the estimated fair values of the assets acquired and liabilities assumed at the March 2, 2006 closing date, which are summarized in the following table:

		(In millions)
Oil and natural gas properties		$	1,211.4
Abandonment liabilities			(165.2	)
Long-term debt			(176.2	)
Fair value of oil and natural gas derivatives			(17.5	)
Deferred tax liability			(199.4	)
Other assets and liabilities			(24.5	)
Goodwill			261.4
Net Assets Acquired		$	890.0

     The Forest Merger includes a large undeveloped offshore acreage position which complements the Company’s large seismic database and a large portfolio of potential exploratory prospects. The initial fair value estimate of the underlying assets and liabilities acquired is determined by estimating the value of the underlying proved reserves at the transaction date plus or minus the fair value of other assets and liabilities, including inventory, unproved oil and

gas properties, gas imbalances, debt (at face value), derivatives, and abandonment liabilities. The deferred tax liability recognizes the difference between the historical tax basis of the assets of Forest Energy Resources, Inc. and the acquisition cost recorded for book purposes. Goodwill represents the excess of the purchase price over the estimated fair value of the assets acquired net of the fair value of liabilities assumed in the acquisition. The entire goodwill balance is non-deductible for tax purposes.

     The purchase price allocation has been finalized. In 2006, we recorded a $27.1 million goodwill adjustment primarily related to insurance receivables and deferred taxes. In April 2006, Mariner made a preliminary cash payment of $20.8 million to Forest pursuant to the distribution agreement that was part of the merger documentation. The payment reduced current liabilities. Carryover basis accounting applies for tax purposes.

     On March 2, 2006, Mariner and MERI entered into a $500 million bank credit facility and an additional $40 million senior secured letter of credit. Please refer to Note 3, “Long Term Debt” for further discussion of the amended and restated bank credit facility.

     Interest in Cottonwood — On December 1, 2006, we completed the sale of our 20% interest in the Garden Banks 244 (Cottonwood) project to Petrobras America, Inc., for $31.8 million. The sale was effective November 1, 2006 and represented approximately 6.6 Bcfe of proved reserves. Proceeds from the sale were deposited in trust with a qualified intermediary to preserve our ability to reinvest them in a tax-deferred, like-kind exchange transaction for federal income tax purposes. Inasmuch as we elected not to identify replacement like-kind property to facilitate the exchange, proceeds and related interest totaling $32.0 million were disbursed to us on January 19, 2007 and used to repay borrowings under our bank credit facility. No gain was recorded on this disposition.

3. Long-Term Debt

     Bank Credit Facility — On March 2, 2004, the Company obtained a revolving line of credit with initial advances of $135 million from a group of banks led by Union Bank of California, N.A. and BNP Paribas. The bank credit facility initially provided up to $150 million of revolving borrowing capacity, subject to a borrowing base, and a $25 million term loan. The initial advance was made in two tranches: a $110 million Tranche A and a $25 million Tranche B. The Tranche B loan was converted to a Tranche A note in July 2004 and all subsequent advances under the bank credit facility were Tranche A advances.

     The borrowing base is based upon the evaluation by the lenders of the Company’s oil and gas reserves and other factors. Any increase in the borrowing base requires the consent of all lenders. Substantially all of the Company’s assets are pledged to secure the bank credit facility.

     Amendments of Bank Credit Facility — In connection with the Forest Merger, the Company amended and restated its existing bank credit facility on March 2, 2006 to, among other things, increase maximum credit availability to $500 million for revolving loans, including up to $50 million in letters of credit, with a $400 million borrowing base as of that date; add an additional dedicated $40 million letter of credit that does not affect the borrowing base; and add MERI as a co-borrower. The bank credit facility will mature on March 2, 2010, and the $40 million letter of credit will mature on March 2, 2009. The Company used borrowings under its bank credit facility to facilitate the Forest Merger and to retire existing debt, and it may use borrowings in the future for general corporate purposes. The $40 million letter of credit was obtained in favor of Forest to secure the Company’s performance of its obligations to drill and complete 150 wells under an existing drill-to-earn program and is not included as a use of the borrowing base. This letter of credit will reduce periodically by an amount equal to the product of $0.5 million times the number of wells exceeding 75 that are drilled and completed. As of March 31, 2007, 118 wells had been drilled and completed. The letter of credit balance as of March 31, 2007 was $21.9 million, and has been reduced to $17.1 million effective May 1, 2007.

     At March 31, 2007, the Company had approximately $314.0 million in advances outstanding under its bank credit facility and four outstanding letters of credit totaling $16.3 million, of which $14.6 million is required for plugging and abandonment obligations at certain of its offshore fields. The outstanding principal balance of loans under the bank credit facility may not exceed the borrowing base. If the borrowing base falls below the outstanding balance under the bank credit facility, the Company will be required to prepay the deficit, pledge additional unencumbered collateral, repay the deficit and cash collateralize certain letters of credit, or effect some combination

of such prepayment, pledge and repayment and collateralization. Effective March 22, 2007, the borrowing base was reaffirmed at $450 million, subject to redetermination or adjustment.

     The bank credit facility contains various restrictive covenants and other usual and customary terms and conditions, including limitations on the payment of cash dividends and other restricted payments, the incurrence of additional debt, the sale of assets, and speculative hedging. The financial covenants were modified under the amended and restated bank credit facility to 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 March 31, 2007.

     As of March 31, 2007 and December 31, 2006, $314.0 million and $354.0 million, respectively, was outstanding under the bank credit facility, and the weighted average interest rate was 7.04% and 7.29%, respectively.

     The Company must pay a commitment fee of 0.25% to 0.375% per year on the unused availability under the bank credit facility.

     7¹/2% Senior Notes due 2013 — On April 24, 2006, the Company sold and issued to eligible purchasers $300 million aggregate principal amount of its 7¹/2% Senior Notes due 2013 (the “7¹/2% Notes”) pursuant to Rule 144A under the Securities Act of 1933, as amended. The 7¹/2% Notes were priced to yield 7.75% to maturity. Net proceeds, after deducting initial purchasers’ discounts and commissions and offering expenses, were approximately $287.9 million. Mariner used the net proceeds of the offering to repay debt under the bank credit facility. The issuance of the 7¹/2% Notes was a qualifying bond issuance under Mariner’s bank credit facility and resulted in an automatic reduction of its borrowing base to $362.5 million as of April 24, 2006. On November 9, 2006, the Company replaced the original Notes issued in the private placement with new Notes with identical terms and tenor through an exchange offer registered under the Securities Act of 1933.

     The 7¹/2% 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 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 7¹/2% 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.

     Interest on the 7¹/2% Notes is payable on April 15 and October 15 of each year. The 7¹/2% Notes mature on April 15, 2013. There is no sinking fund for the 7¹/2% Notes.

     The Company may redeem the 7¹/2% Notes at any time prior to April 15, 2010 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 April 15 of the years indicated below, the Company may redeem the 7¹/2% 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:

2010 at 103.750%

2011 at 101.875%
2012 and thereafter at 100.000%

     In addition, prior to April 15, 2009, the Company may redeem up to 35% of the 7¹/2% Notes with the proceeds of equity offerings at a price equal to 107.50% of the principal amount of the 7¹/2% Notes redeemed. If the Company experiences a change of control (as defined in the indenture governing the 7¹/2% Notes), subject to certain exceptions, the Company must give holders of the 7¹/2% Notes the opportunity to sell to the Company their 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 7¹/2% Notes. The indenture governing the 7¹/2% Notes limits the Company’s and each of its restricted subsidiaries’ ability 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.

     Costs associated with the 7¹/2% Notes offering were approximately $8.5 million, excluding discounts of $3.8 million.

     JEDI Term Promissory Note — On March 2, 2004, the Company issued a $10 million term promissory note to Joint Energy Development Investments Limited Partnership (“JEDI”) as a part of consideration in a merger that resulted in JEDI’s disposition of its ownership interest in the Company’s indirect parent. The note matured on March 2, 2006, and bore interest, payable in kind at our option, at a rate of 10% per annum until March 2, 2005, and 12% per annum thereafter unless paid in cash in which event the rate remained 10% per annum. We chose to pay interest in cash rather than in kind. The JEDI note was secured by a lien on three of the Company’s non-proven, non-producing properties located in the Outer Continental Shelf of the Gulf of Mexico. The Company could offset against the note the amount of certain claims for indemnification that could be asserted against JEDI under the terms of the merger agreement. The JEDI term promissory note contained customary events of default, including the occurrence of an event of default under the Company’s bank credit facility. In March 2005, the Company repaid $6.0 million of the note utilizing proceeds from the private equity placement in March 2005. The $4.0 million balance remaining on the JEDI note was repaid in full on its maturity date of March 2, 2006.

     Cash Interest Expense — Cash paid for interest was $6.7 million and $3.5 million for the three-month periods ending March 31, 2007 and 2006, respectively.

     Bank Debt Issuance Costs — The Company capitalizes certain direct costs associated with the issuance of long term debt. In conjunction with the Forest Merger, the Company’s bank credit facility was amended and restated to, among other things, increase the borrowing capacity from $185 million to $400 million, based upon an initial borrowing base of that amount. The amendment and restatement was treated as an extinguishment of debt for accounting purposes. This treatment resulted in a charge of approximately $1.2 million in the first quarter of 2006.

     This charge is included in the interest expense line of the consolidated statement of operations.

4. Oil and Gas Properties

     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. Amortization of oil and gas properties is provided using the unit-of-production method based on estimated proved oil and gas reserves. No gains or losses are recognized upon the sale or disposition of oil and gas properties unless the sale or disposition represents a significant quantity of oil and gas reserves, which would have a significant impact on the depreciation, depletion and amortization rate.

     At the end of each quarter, a full-cost ceiling limitation calculation is made whereby net capitalized costs related to proved and unproved properties less related deferred income taxes may not exceed a ceiling amount equal to the present value discounted at 10% of estimated future net revenues from proved reserves plus the lower of cost or fair value of unproved properties less estimated future production and development costs and related income tax expense. The full-cost ceiling limitation is calculated using natural gas and oil prices in effect as of the balance sheet date and is adjusted for “basis” or location differential. Price is held constant over the life of the reserves. We use derivative financial instruments that qualify for cash flow hedge accounting under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” to hedge against the volatility of natural gas prices and, in accordance with SEC guidelines, we include estimated future cash flows from our hedging program in our ceiling test calculation. If net capitalized costs related to proved properties less related deferred income taxes were to exceed the ceiling amount, the excess would be charged to expense. Additional guidance was provided in Staff Accounting Bulletin No. 47, Topic 12(D)(c)(3), primarily regarding the use of cash flow hedges, asset retirement obligations, and the effect of subsequent events on the ceiling test calculation. Once incurred, a write-down is not reversible at a later date.

5. Accrual for Future Abandonment Costs

     SFAS No. 143, “Accounting for Asset Retirement Obligations,” addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company adopted SFAS No. 143 on January 1, 2003. SFAS No. 143 requires that the fair value of a liability for an asset’s retirement obligation be recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. 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, a gain or loss is recognized.

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

		(In millions)
Abandonment liability as of December 31, 2006 (1)		$	218.0
Liabilities Incurred			0.5
Liabilities Settled			(3.4	)
Accretion Expense			4.4
Revisions to previous estimates			0.2
Abandonment Liability as of March 31, 2007 (2)		$	219.7

6. Stockholders’ Equity

     Equity Participation Plan — We adopted an Equity Participation Plan, as amended, that provided for the one-time grant at the closing of our private equity placement on March 11, 2005 of 2,267,270 restricted shares of our common stock to certain of our employees. No further grants will be made under the Equity Participation Plan, although persons who received such a grant are eligible for future awards of restricted stock or stock options under our Stock Incentive Plan, as amended or restated from time to time, described below. We intended the grants of

restricted stock under the Equity Participation Plan to serve as a means of incentive compensation for performance and not primarily as an opportunity to participate in the equity appreciation of our common stock. Therefore, Equity Participation Plan grantees did not pay any consideration for the common stock they received, and we received no remuneration for the stock. As a result of closing the Forest Merger, all shares of restricted stock granted under the Equity Participation Plan vested as follows: (i) the 463,656 shares of restricted stock held by non-executive employees vested on March 2, 2006, and (ii) the 1,803,614 shares of restricted stock held by executive officers vested on May 31, 2006 pursuant to an agreement, made in exchange for a cash payment of $1,000 to each officer, that his or her shares of restricted stock would not vest before the later of March 11, 2006 or 90 days after the effective date of the Forest Merger. The Equity Participation Plan expired upon the vesting of all shares granted thereunder. Stock could be withheld by us upon vesting to satisfy our tax withholding obligations with respect to the vesting of the restricted stock. Participants in the Equity Participation Plan had the right to elect to have us withhold and cancel shares of the restricted stock to satisfy our tax withholding obligations. In such events, we would be required to pay any tax withholding obligation in cash. As a result of such participant elections, we withheld an aggregate 807,376 shares that otherwise would have remained outstanding upon vesting of the restricted stock, reducing the aggregate outstanding vested stock grants made under the Equity Participation Plan to 1,459,894 shares. The 807,376 shares withheld became treasury shares that were retired and restored to the status of authorized and unissued shares of common stock, and the Company’s capital was reduced by an amount equal to the $.0001 par value of the retired shares. We paid in cash the associated withholding taxes of $14.0 million, of which $3.3 million and $10.7 million were paid in the first and second quarter of 2006, respectively.

     Stock Incentive Plan — We adopted a Stock Incentive Plan that became effective March 11, 2005, was amended and restated on March 2, 2006, further amended on March 16, 2006, and amended and restated on February 6, 2007. Awards to participants under the Stock Incentive Plan may be made in the form of incentive stock options (ISOs), non-qualified stock options or restricted stock. The participants to whom awards are granted, the type or types of awards granted to a participant, the number of shares covered by each award, and the purchase price, conditions and other terms of each award are determined by the Board of Directors or a committee thereof. A total of 6,500,000 shares of Mariner’s common stock is subject to the Stock Incentive Plan. No more than 2,850,000 shares issuable upon exercise of options or as restricted stock can be issued to any individual. Unless sooner terminated, no award may be granted under the Stock Incentive Plan after October 12, 2015.

     During the three months ended March 31, 2007, no options or shares of restricted common stock under the Stock Incentive Plan were granted. As of March 31, 2007, 818,922 shares of unvested restricted common stock and options to purchase 707,920 shares of the Company’s common stock remained outstanding under the Stock Incentive Plan, of which 526,589 were presently exercisable. As of March 31, 2007, 4,880,706 shares remained available for future issuance to participants under the Stock Incentive Plan. During the three months ended March 31, 2007, 48,608 shares of restricted stock vested, resulting in withholding tax obligations. Plan participants can elect to have us withhold and cancel shares of restricted stock to satisfy the associated tax withholding obligations. In such event, we would be required to pay any tax withholding obligation in cash. As a result of such participant elections, we withheld an aggregate 10,724 shares that otherwise would have remained outstanding upon vesting of the restricted stock. The shares withheld became treasury shares that were retired and restored to the status of authorized and unissued shares of common stock, and the Company’s capital was reduced by an amount equal to the $.0001 par value of the retired shares. We paid in cash the associated withholding taxes of approximately $187,000.

     Rollover Options — In connection with the Forest Merger and during the 12 months ended December 31, 2006, the Company granted options to acquire 156,626 shares of its common stock to certain former employees of Forest or Forest Energy Resources, Inc. (“Rollover Options”). The Rollover Options are evidenced by non-qualified stock option agreements and are not covered by the Stock Incentive Plan. As of March 31, 2007, Rollover Options to purchase 90,506 shares of the Company’s common stock remained outstanding, of which 27,928 were presently exercisable.

     Accounting for Stock Options and Restricted Stock — The Company adopted SFAS No. 123-Revised 2004 (“SFAS No. 123(R)”), “Share-Based Payment,” using the modified retrospective application effective January 1, 2005. As a result of the adoption of SFAS No. 123(R), we recorded compensation expense for the fair value of restricted stock that was granted pursuant to our Equity Participation Plan. We also recorded compensation expense for the value of restricted stock and options granted under the Stock Incentive Plan. In general, compensation expense will be determined at the date of grant based on the fair value of the stock or options granted. The fair value

will then be amortized to compensation expense over the applicable vesting period. We recorded compensation expense of $1.5 million and $6.4 million for the three-month periods ended March 31, 2007 and 2006, respectively, related to restricted stock and stock options. As of May 31, 2006, the participants were fully vested in the restricted stock granted under the Equity Participation Plan and no unrecognized compensation remains. Under the Stock Incentive Plan, unrecognized compensation expense at March 31, 2007 for the unvested portion of restricted stock granted was $13.1 million and for unvested options was $0.6 million.

     The following table presents a summary of stock option activity for the three months ended March 31, 2007:

						Weighted
						Average				Aggregate Intrinsic
						Exercise				Value (1)
		Shares				Price				($000)
Outstanding at beginning of year			802,322			$	13.77
Granted			—				—
Exercised			(3,896	)		$	11.59
Forfeited			—				—
Outstanding at March 31, 2007			798,426			$	13.78			$	4,272
Vested and expected to vest (2)			755,725			$	13.78			$	4,043
Outstanding exercisable at March 31, 2007			554,517			$	13.89			$	2,906
Available for future grant as options or restricted stock			4,880,706				—				—

     For the three month period ended March 31, 2007, 3,896 options were exercised resulting in a $45,000 increase in cash. The following table summarizes certain information about stock options outstanding at March 31, 2007:

		Options Outstanding												Options Exercisable
						Weighted
						Average								Weighted
						Remaining								Average
		Shares				Contractual								Shares
Exercise Price		Outstanding				Life (Years)				Expected Term				Exercisable
$8.81			1,056				5.91				6.00				1,056
$9.48			5,283				6.91				6.00				2,642
$9.67			1,321				6.83				6.00				—
$11.44			4,952				7.63				6.00				1,651
$11.59			67,330				7.69				6.00				19,277
$14.00			706,880				8.07				6.00				525,549
$15.50			—				—				—				(3,000	)
$16.86			10,564				8.38				6.00				2,641
$17.00			1,040				8.47				6.00				1,040

     The following table summarizes certain information about stock options outstanding at March 31, 2006:

Options Outstanding

Options Exercisable

Weighted

Average

Weighted

Weighted

Remaining

Average

Average

Number

Contractual

Exercise

Number

Exercise

Range of Exercise Prices

Outstanding

Life (Years)

Price

Exercisable

Price

$8.81 — $17.00

913,202

7.8

$

13.78

409,070

$

14.00

     Options generally vest over one to three-year periods and are exercisable for periods ranging from seven to ten years. The weighted average fair value of options granted during the quarters ended March 31, 2007 and 2006 was $2.59 and $2.15, respectively. The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The assumptions utilized at March 31, 2007 and 2006 are noted in the following table:

		March 31, 2007								March 31, 2006
		Stock Incentive								Stock Incentive
Black-Scholes Assumptions		Plan Options				Rollover Options				Plan Options				Rollover Options
Expected Term (years)			6.0				4.7				3.0				2.0
Risk Free Interest Rate			4.80	%			4.79	%			4.85	%			4.86	%
Expected Volatility			35	%			35	%			35	%			35	%
Dividend Yield			0.00	%			0.00	%			0.00	%			0.00	%

     The expected term (estimated period of time outstanding) of options granted was determined by averaging the vesting period and contractual term. The expected volatility was based on historical volatility of our closing common share price for a period equal to the stock option’s expected life. The risk free rate is based on the U.S. Treasury-bill rate in effect at the time of grant. The dividend yield is based on the Company’s ability to pay dividends.

     A summary of the activity for unvested restricted stock awards under the Stock Incentive Plan as of March 31, 2007 and 2006, respectively, and changes during the three-month periods is as follows:

		Restricted Shares under the
		Stock Incentive Plan
		March 31,
		2007				2006
Total unvested shares at beginning of period: January 1			875,380				—
Shares granted			—				—
Shares vested			(48,608	)			—
Shares forfeited			(7,850	)			—
Total unvested shares at end of period: March 31			818,922				—
Available for future grant as options or restricted stock			4,880,706				—

     A summary of the activity for unvested restricted stock share awards under the Equity Participation Plan as of March 31, 2007 and 2006, respectively, and changes during the three-month periods is as follows:

		Restricted Shares under the
		Equity Participation Plan
		March 31,
		2007				2006
Total unvested shares at beginning of period: January 1			—				2,267,270
Shares granted			—				—
Shares vested			—				(463,656	)
Shares forfeited			—				—
Total unvested shares at end of period: March 31			—				1,803,614
Available for future grant under Equity Participation Plan			—				—

7. Commitments And Contingencies

     Minimum Future Lease Payments — The Company leases certain office facilities and other equipment under long-term operating lease arrangements. Minimum rental obligations under the Company’s operating leases in effect at March 31, 2007 are as follows (in thousands):

2008		$	1,331
2009			1,099
2010			1,341
2011			1,320
2012 and thereafter			1,054

     Hedging Program — The energy markets have historically been very volatile, and we can reasonably expect that 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 our open contracts at the end of each period. If open contracts cease to qualify for hedge accounting, the mark to market change in fair value is recognized in the income statement. Loss of hedge accounting and cash flow designation will cause volatility in earnings. The fair values we report in our financial statements change as estimates are revised to reflect actual results, changes in market conditions or other factors, many of which are beyond our control.

     The cash activity on contracts settled for natural gas and oil produced during the three months ended March 31, 2007 was a $23.6 million gain. Additionally, an unrealized loss of $2.1 million was recognized for the three months ended March 31, 2007 related to the ineffective portion of open contracts that were not eligible for deferral under SFAS 133 due primarily to the basis differentials between the contract price, which is NYMEX-based for oil and Henry Hub-based for gas, and the indexed price at the point of sale.

     As of March 31, 2007, the Company had the following hedge contracts outstanding:

										March 31,
						Weighted Average				2007 Fair Value
Fixed Price Swaps		Quantity				Fixed Price				Gain/(Loss)
										(In millions)
Crude Oil (Bbls)
April 1—December 31, 2007			627,900			$	69.20			$	(0.1	)
January 1—December 31, 2008			992,350			$	69.34				(0.6	)
Natural Gas (MMbtus)
April 1—December 31, 2007			7,870,253			$	9.79				13.0
January 1—December 31, 2008			3,059,689			$	9.58				2.1
Total										$	14.4

														March 31,
						Weighted Average				Weighted Average				2007 Fair Value
Costless Collars		Quantity				Floor				Cap				Gain/(Loss)
														(In millions)
Crude Oil (Bbls)
April 1—December 31, 2007			1,426,269			$	59.64			$	83.88			$	(2.3	)
January 1—December 31, 2008			1,195,495			$	61.66			$	86.80				1.6
Natural Gas (MMbtus)
April 1—December 31, 2007			12,797,250			$	7.01			$	12.29				(2.8	)
January 1—December 31, 2008			12,347,000			$	7.83			$	14.60				4.8
Total														$	1.3

     Subsequent to March 31, 2007, the Company entered into the following hedging transactions:

						Weighted Average
Fixed Price Swaps		Quantity				Fixed Price
Crude Oil (Bbls)
January 1—December 31, 2009			1,280,750			$	68.93
Natural Gas (MMbtus)
May 1—December 31, 2007			8,774,596			$	8.00
January 1—December 31, 2008			7,774,290			$	8.59
January 1—December 31, 2009			8,052,820			$	8.30

     The Company has reviewed the financial strength of its counterparties and believes the credit risk associated with these swaps and costless collars to be minimal.

     Other Commitments — In the ordinary course of business, the Company enters into long-term commitments to purchase seismic data. In 2005, the Company entered into a two-year joint exploration agreement granting the joint venture partner the right to participate in prospects covered by certain seismic data licenses in return for $6.0 million payable to the Company in quarterly payments through December 2007. In the first quarter of 2006, the Company entered into one three-year and three two-year agreements to purchase seismic data. In the first quarter of 2007, the Company entered into one two-year commitment to purchase seismic data. The minimum annual payments under these contracts are $25.5 million in 2007 and $10 million in 2008.

     MMS Proceedings — Mariner and a subsidiary own numerous properties in the Gulf of Mexico. Certain of such properties were leased from the Minerals Management Service (“MMS”) subject to the 1996 Royalty Relief Act. This Act relieved lessees of the obligation to pay royalties on certain leases until a designated volume was produced. Two of these leases held by the Company and one held by MERI contained language that limited royalty relief if commodity prices exceeded predetermined levels. Since 2000, commodity prices have exceeded the predetermined levels, except in 2002. The Company and its subsidiary believe the MMS did not have the authority to include commodity price threshold language in these leases and have withheld payment of royalties on the leases while disputing the MMS’ authority in two pending proceedings. The Company has recorded a liability for 100% of the estimated exposure on its two leases, which at March 31, 2007 was $22.2 million, including interest. Various legal proceedings are pending concerning this potential liability and further proceedings may be initiated with respect to years not covered by the pending proceedings. In April 2005, the MMS denied Mariner’s administrative appeal of the MMS’ April 2001 order asserting royalties were due because price thresholds had been exceeded. In October 2005, Mariner filed suit in the U.S. District Court for the Southern District of Texas seeking judicial review of the dismissal. Upon motion of the MMS, the Company’s lawsuit was dismissed on procedural grounds. In August 2006, the Company filed an appeal of such dismissal. In May 2006, the MMS issued an order asserting price thresholds were exceeded in calendar years 2001, 2003 and 2004 and, accordingly, that royalties were due under such leases on oil and gas produced in those years. Mariner has filed and is pursuing an administrative appeal of that order. The MMS has not yet made demand for non-payment of royalties alleged to be due for calendar years subsequent to 2004 on the basis of price thresholds being exceeded.

     The potential liability of MERI under its lease subject to the 1996 Royalty Relief Act containing such commodity price threshold language, including interest, is approximately $3.0 million as of March 31, 2007, and a reserve of that amount was recorded as of March 31, 2007. This potential liability relates to production from the

lease commencing July 1, 2005, the effective date of Mariner’s acquisition of MERI.

Insurance Matters — Hurricanes Katrina and Rita (2005)

     In 2005, our operations were adversely affected by one of the most active and severe hurricane seasons in recorded history, resulting in substantial shut-in and delayed production, as well as necessitating extensive facility repairs and hurricane-related abandonment operations. Throughout 2006 we completed substantial facility repairs that successfully returned substantially all of our shut-in properties to production without the loss of material reserves.

     As of March 31, 2007, we had incurred approximately $89.3 million in hurricane expenditures resulting from Hurricanes Katrina and Rita, of which $73.7 million were repairs and $15.6 million were hurricane-related abandonment costs. Substantially all of the costs incurred to date pertained to the Gulf of Mexico assets acquired from Forest. We estimate that we will incur additional hurricane-related abandonment costs of approximately $14.1 million during the remainder of 2007, as well as additional facility repair costs that cannot be estimated at this time but which we do not believe will be material.

     Under the terms of the acquisition from Forest, we are responsible for performing all facility repairs and hurricane-related abandonment operations on Forest’s Gulf assets at our expense, and we are entitled to receive all related insurance proceeds under Forest’s insurance policies at the time of the storms, subject to our meeting Forest’s deductibles. In 2006, we recorded an insurance receivable, net of deductibles, for facility repair costs in excess of insurance deductibles inasmuch as we believe it is probable that these costs will be reimbursed under Forest’s insurance policies. Moreover, we believe substantially all hurricane-related abandonment costs expended to date should also be covered under Forest’s insurance. At March 31, 2007 the insurance receivable balance was approximately $64.1 million.

     Forest’s primary insurance coverage for Katrina and Rita was provided through OIL Insurance, Ltd., an energy industry insurance cooperative. The terms of Forest’s coverage included a deductible of $5 million per occurrence and a $1 billion industry-wide loss limit per occurrence. OIL has advised us that the aggregate claims resulting from each of Hurricanes Katrina and Rita are expected to exceed the $1 billion per occurrence loss limit and that our insurance recovery relating to Forest’s Gulf of Mexico assets is therefore expected to be reduced pro rata with all other competing claims from the storms. To the extent insurance recovery under the primary OIL policy is reduced, Mariner believes the shortfall would be covered under Forest’s commercial excess insurance coverage. Forest’s excess coverage is not subject to an additional deductible and has a stated limit of $50 million. Mariner does not believe the hurricane related costs associated with Mariner’s legacy properties (as opposed to those acquired from Forest) will exceed Mariner’s $3.8 million deductible and we do not anticipate making a claim under our insurance.

     Taking into account Forest’s insurance coverage in effect at the time of Hurricanes Katrina and Rita, we currently estimate our unreimbursed losses from hurricane-related repairs and abandonments should not exceed $15 million. However, due to the magnitude of the storms and the complexity of the insurance claims being processed by the insurance industry, the timing of our ultimate insurance recovery cannot be ascertained. Although we expect to begin receiving insurance proceeds in the first half of 2007, we believe that full settlement of all hurricane-related insurance claims may take several quarters to complete. As a result, we expect to maintain a possibly significant insurance receivable for the indefinite future while we actively pursue settlement of our claims to minimize the impact to our working capital and liquidity. Any differences between our insurance recoveries and insurance receivables will be recorded as adjustments to our oil and gas properties.

     Hurricane Ivan (2004)

     In September 2004, we incurred damage from Hurricane Ivan that affected the Mississippi Canyon 66 (Ochre) and Mississippi Canyon 357 fields. Ochre production was shut-in until September 2006, when host platform repairs were completed and production recommenced at approximately the same net rate. Mississippi Canyon 357 production was shut-in until March 2005, when necessary repairs were completed and production recommenced. However, production was subsequently shut-in due to Hurricane Katrina and did not return to production until the first quarter of 2007. As of March 31, 2007, we had incurred approximately $8.0 million of property damage related to Hurricane Ivan. As of March 31, 2007, approximately $2.4 million has been recovered through insurance, with the balance of

$3.9 million, net of deductible, recorded as insurance receivable, as we believe it is probable that these costs will be reimbursed under our insurance policies.

     Current Insurance Against Hurricanes

     Effective March 2, 2006, Mariner was accepted as a member of OIL Insurance, Ltd. As a result, all of our properties are now insured through OIL against physical and windstorm damage. The coverage contains a $5 million ($10 million for hurricane related events effective June 1, 2007) annual per-occurrence deductible for the Company’s assets and a $250 million per-occurrence loss limit. However, if a single event causes losses to OIL insured assets in excess of $500 million ($750 million effective June 1, 2007) for Atlantic Named Windstorms (“ANWS”) or $750 million for non-ANWS events, amounts covered for such losses will be reduced on a pro rata basis among OIL members. Our current commercially underwritten insurance coverage for all Mariner assets is effective through June 1, 2007, and will pay out after OIL coverage has eroded. We have acquired additional windstorm/physical damage insurance covering all of Mariner’s assets to supplement the existing OIL coverage. The coverage provides up to $51 million of annual loss coverage (with no additional deductible) if recoveries from OIL for insured losses are reduced by the OIL overall loss limit (i.e., if losses to OIL insured assets from a single event exceed $500 million for ANWS or $750 million for non-ANWS event).

     In June 2006, we acquired additional limited business interruption insurance on most of our deepwater producing fields which becomes effective 60 days after a field is shut-in due to a covered event. The coverage varies by field and is limited to a maximum recovery resulting from windstorm damage of approximately $43 million (assuming all covered fields are shut-in for the full insurance term of 365 days).

     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. See Note 7 – “MMS Proceedings.”

     Letters of Credit — On March 2, 2006, Mariner obtained a $40 million letter of credit under its bank credit facility that is not included as a use of the borrowing base. The letter of credit was issued in favor of Forest to secure performance of our obligation to drill and complete 150 wells under an existing drill-to-earn program. This letter of credit will reduce periodically by an amount equal to the product of $0.5 million times the number of wells exceeding 75 that are drilled and completed. As of March 31, 2007, 118 wells had been drilled and completed. The letter of credit balance as of March 31, 2007 was $21.9 million, and has been reduced to $17.1 million effective May 1, 2007.

     Mariner’s bank credit facility also has a letter of credit facility for up to $50 million that is included as a use of the borrowing base. As of March 31, 2007, four such letters of credit totaling $16.3 million were outstanding. $14.6 million of this is required for plugging and abandonment obligations at certain of Mariner’s offshore fields.

8. Net Income per Share

     Basic earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period. Fully diluted earnings per share assumes the conversion of all potentially dilutive securities and is calculated by dividing net income by the sum of the weighted average number of shares of common stock outstanding plus all potentially dilutive securities.

		Three months ended March 31,
		2007				2006
		(In Thousands, except per share data)
Numerator:
Net Income		$	38,207			$	11,130
Denominator:
Weighted average shares outstanding			85,516				49,615
Add dilutive securities			189				2,230
Total weighted average shares outstanding and dilutive securities			85,705				51,845
Earnings per share—basic:		$	0.45			$	0.22
Earnings per share—diluted:		$	0.45			$	0.21

     Please refer to Note 6 “Stockholders’ Equity” for option and share activity for the three months ended March 31, 2007 and 2006.

9. Comprehensive Income

     Comprehensive income includes net income and certain items recorded directly to stockholder’s 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-month periods ended March 31, 2007 and 2006:

		Three months ended
		March 31,
		2007				2006
		(in thousands)
Net Income		$	38,207			$	11,130
Other comprehensive (loss) income
Derivative contracts settled and reclassified, net of income taxes of $7,534 and ($3,499)			13,940				(6,499	)
Change in unrealized mark to market (losses) gains arising during period, net of tax net of income taxes of ($27,123) and $13,675			(48,194	)			23,194
Change in accumulated other comprehensive (loss) income			(34,254	)			16,695
Comprehensive income		$	3,953			$	27,825

10. Supplemental Guarantor Information

     On April 24, 2006, the Company sold and issued to eligible purchasers the 7¹/2% Notes. On April 30, 2007, the Company sold and issued $300 million aggregate principal amount of its 8% senior notes due 2017 (See Note 11 – “Subsequent Events”)(together with the 7¹/2% Notes, the “Notes”). The Notes are jointly and severally guaranteed on a senior unsecured basis by the Company’s existing and future domestic subsidiaries (“Subsidiary Guarantors”). 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.

     On March 2, 2006, a subsidiary of the Company completed the Forest Merger. Prior to the transaction, Forest transferred and contributed the assets of, and certain liabilities associated with, its Gulf of Mexico operations to Forest Energy Resources, Inc. Immediately prior to the Forest Merger, Forest distributed all of the outstanding shares of Forest Energy Resources, Inc. to Forest shareholders on a pro rata basis. Forest Energy Resources, Inc. then merged with a newly formed subsidiary of Mariner, became a new wholly owned subsidiary of Mariner and changed its name to MERI.

     The following information sets forth our Consolidating Balance Sheet as of March 31, 2007 and December 31, 2006, our Consolidating Statement of Operations for the three months ended March 31, 2007 and 2006, and our Consolidating Statement of Cash Flows for the three months ended March 31, 2007 and 2006. Investments in our subsidiaries are accounted for on the consolidation method; accordingly, entries necessary to consolidate the Parent Company and the Subsidiary Guarantors are reflected in the eliminations column. In the opinion of management, separate complete financial statements of the Subsidiary Guarantors would not provide additional material information that would be useful in assessing their financial composition.

MARINER ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2007
(In thousands except share data)
(Unaudited)

														Consolidated
		Parent				Subsidiary								Mariner
		Company				Guarantors				Eliminations				Energy, Inc.
Current Assets:
Cash and cash equivalents		$	6,311			$	—			$	—			$	6,311
Receivables, net			74,440				82,073				—				156,513
Insurance receivables			3,946				64,113				—				68,059
Derivative asset			16,544				—				—				16,544
Prepaid seismic			22,270				1,367				—				23,637
Prepaid expenses and other			12,539				1,919				—				14,458
Total current assets			136,050				149,472				—				285,522
Property and Equipment:
Oil and gas properties, full-cost method: Proved			1,023,923				1,477,242				—				2,501,165
Unproved, not subject to amortization			63,867				538				—				64,405
Total			1,087,790				1,477,780				—				2,565,570
Other property and equipment			13,577				50				—				13,627
Accumulated depreciation, depletion and amortization			(271,860	)			(209,317	)			—				(481,177	)
Total property and equipment, net			829,507				1,268,513				—				2,098,020
Investment in subsidiaries			898,521				—				(898,521	)			—
Intercompany receivable			133,890				—				(133,890	)			—
Intercompany note receivable			176,200				—				(176,200	)			—
Restricted cash			—				—				—				—
Goodwill			—				288,504				—				288,504
Derivative asset			7,863				—				—				7,863
Other Assets, Net of Amortization			25,659				—				—				25,659
TOTAL ASSETS		$	2,207,690			$	1,706,489			$	(1,208,611	)		$	2,705,568
Current Liabilities:
Accounts payable		$	2,768			$	—			$	—			$	2,768
Accrued liabilities			81,332				3,819				—				85,151
Accrued capital costs			90,467				39,435				—				129,902
Deferred income tax			1,368				—				—				1,368
Derivative liability			8,574				—				—				8,574
Abandonment liability			12,640				23,831				—				36,471
Accrued interest			12,074				—				—				12,074
Total current liabilities			209,223				67,085				—				276,308
Long-Term Liabilities:
Abandonment liability			46,444				136,737				—				183,181
Derivative liability			183				—				—				183
Deferred income tax			54,013				231,965				—				285,978
Intercompany payable			—				133,890				(133,890	)			—
Long term debt, bank credit facility			314,000				—				—				314,000
Long term debt, senior unsecured notes			300,000				—				—				300,000
Other long-term liabilities			34,632				3,130				—				37,762
Intercompany note payable			—				176,200				(176,200	)			—
Total long-term liabilities			749,272				681,922				(310,090	)			1,121,104
Commitments and Contingencies (see Note 7)
Stockholders’ Equity:
Preferred stock, $.0001 par value; 20,000,000 shares authorized, no shares issued and outstanding at March 31, 2007			—				—				—				—
Common stock, $.0001 par value; 86,361,162 shares issued and outstanding at March 31, 2007			9				5				(5	)			9
Additional paid-in-capital			1,045,535				886,142				(886,142	)			1,045,535
Accumulated other comprehensive income			8,843				—				—				8,843
Accumulated retained earnings			194,808				71,335				(12,374	)			253,769
Total stockholders’ equity			1,249,195				957,482				(898,521	)			1,308,156
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,207,690			$	1,706,489			$	(1,208,611	)		$	2,705,568

MARINER ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2006
(In thousands except share data)
(Unaudited)

														Consolidated
		Parent				Subsidiary								Mariner
		Company				Guarantors				Eliminations				Energy, Inc.
Current Assets:
Cash and cash equivalents		$	9,579			$	—			$	—			$	9,579
Receivables, net			51,118				98,574				—				149,692
Insurance receivables			4,673				56,328				—				61,001
Derivative financial instruments			54,488				—				—				54,488
Prepaid seismic			19,468				1,367				—				20,835
Prepaid expenses and other			10,927				1,919				—				12,846
Total current assets			150,253				158,188				—				308,441
Property and Equipment:
Oil and gas properties, full-cost method: Proved			922,385				1,422,656				—				2,345,041
Unproved, not subject to amortization			39,885				361				—				40,246
Total			962,270				1,423,017				—				2,385,287
Other property and equipment			13,444				68				—				13,512
Accumulated depreciation, depletion and amortization			(233,087	)			(153,650	)			—				(386,737	)
Total property and equipment, net			742,627				1,269,435				—				2,012,062
Investment in subsidiaries			945,108				—				(945,108	)			—
Intercompany receivable			153,793				—				(153,793	)			—
Intercompany note receivable			176,200				—				(176,200	)			—
Restricted cash			31,830				—				—				31,830
Goodwill			—				288,504				—				288,504
Derivative financial instruments			17,153				—				—				17,153
Other Assets, Net of Amortization			22,163				—				—				22,163
TOTAL ASSETS		$	2,239,127			$	1,716,127			$	(1,275,101	)		$	2,680,153
Current Liabilities:
Accounts payable		$	1,822			$	—			$	—			$	1,822
Accrued liabilities			61,779				13,101				—				74,880
Accrued capital costs			60,146				38,882				—				99,028
Deferred income tax			26,857				—				—				26,857
Abandonment liability			9,312				20,348				—				29,660
Accrued interest			7,355				125				—				7,480
Total current liabilities			167,271				72,456				—				239,727
Long-Term Liabilities:
Abandonment liability			48,509				139,801				—				188,310
Deferred income tax			36,701				226,187				—				262,888
Intercompany payable			—				153,793				(153,793	)			—
Long term debt, bank credit facility			354,000				—				—				354,000
Long term debt, senior unsecured notes			300,000				—				—				300,000
Other long-term liabilities			30,055				2,582				—				32,637
Intercompany note payable			—				176,200				(176,200	)			—
Total long-term liabilities			769,265				698,563				(329,993	)			1,137,835
Commitments and Contingencies (see Note 7)
Stockholders’ Equity:
Preferred stock, $.0001 par value; 20,000,000 shares authorized, no shares issued and outstanding at December 31, 2006			—				—				—				—
Common stock, $.0001 par value; 180,000,000 shares authorized, 86,375,840 shares issued and outstanding at December 31, 2006			9				5				(5	)			9
Additional paid-in-capital			1,043,923				886,142				(886,142	)			1,043,923
Accumulated other comprehensive income			43,097				—				—				43,097
Accumulated retained earnings			215,562				58,961				(58,961	)			215,562
Total stockholders’ equity			1,302,591				945,108				(945,108	)			1,302,591
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,239,127			$	1,716,127			$	(1,275,101	)		$	2,680,153

MARINER ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2007
(In thousands)
(Unaudited)

														Consolidated
		Parent				Subsidiary								Mariner
		Company				Guarantors				Eliminations				Energy, Inc.
Revenues:
Oil		$	32,103			$	28,348			$	—			$	60,451
Natural gas			75,548				64,984				—				140,532
Natural gas liquids			4,799				4,350				—				9,149
Other revenues			1,333				—				—				1,333
Total revenues			113,783				97,682				—				211,465
Costs and Expenses:
Lease operating expense			14,520				20,236				—				34,756
Severance and ad valorem taxes			2,089				901				—				2,990
Transportation expense			1,026				876				—				1,902
General and administrative expense			9,468				673				—				10,141
Depreciation, depletion and amortization			40,098				58,536				—				98,634
Total costs and expenses			67,201				81,222				—				148,423
OPERATING INCOME			46,582				16,460				—				63,042
Earnings of Affiliates			12,374				—				(12,374	)			—
Other Income (Expense):
Interest income			3,897				—				(3,606	)			291
Interest expense, net of amounts capitalized			(12,214	)			(3,739	)			3,606				(12,347	)
Other			—				5,431				—				5,431
Income before taxes			50,639				18,152				(12,374	)			56,417
Provision for income taxes			(12,432	)			(5,778	)			—				(18,210	)
NET INCOME		$	38,207			$	12,374			$	(12,374	)		$	38,207

MARINER ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2006
(In thousands)
(Unaudited)

														Consolidated
		Parent				Subsidiary								Mariner
		Company				Guarantors				Eliminations				Energy, Inc.
Revenues:
Oil		$	24,360			$	5,822			$	—			$	30,182
Natural gas			22,590				21,566				—				44,156
Natural gas liquids			3,946				1,288				—				5,234
Other revenues			688				—				—				688
Total revenues			51,584				28,676				—				80,260
Costs and Expenses:
Lease operating expense			7,101				4,390				—				11,491
Severance and ad valorem taxes			1,691				—				—				1,691
Transportation expense			474				256				—				730
General and administrative expense			10,097				412				—				10,509
Depreciation, depletion and amortization			16,607				16,217				—				32,824
Total costs and expenses			35,970				21,275				—				57,245
OPERATING INCOME			15,614				7,401				—				23,015
Earnings of Affiliates			6,263				—				(6,263	)			—
Other Income (Expense):
Interest income			115				—				—				115
Interest expense, net of amounts capitalized			(4,869	)			(1,138	)			—				(6,007	)
Income before taxes			17,123				6,263				(6,263	)			17,123
Provision for income taxes			(5,993	)			—				—				(5,993	)
NET INCOME		$	11,130			$	6,263			$	(6,263	)		$	11,130

MARINER ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2007
(In thousands)
(Unaudited)

										Consolidated
		Parent				Subsidiary				Mariner
		Company				Guarantors				Energy, Inc.
Operating Activities:
Net income		$	25,833			$	12,374			$	38,207
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax			12,182				5,778				17,960
Depreciation, depletion and amortization			40,686				58,754				99,440
Ineffectiveness of derivative instruments			2,148				—				2,148
Stock compensation			1,567				—				1,567
Changes in operating assets and liabilities:
Receivables			(24,002	)			16,501				(7,501	)
Insurance receivables			727				(7,785	)			(7,058	)
Prepaid expenses and other			(1,612	)			—				(1,612	)
Other assets			(83	)			—				(83	)
Accounts payable and accrued liabilities			22,088				(11,527	)			10,561
Net cash provided by operating activities			79,534				74,095				153,629
Investing Activities:
Additions to properties and equipment			(94,598	)			(54,192	)			(148,790	)
Property conveyances			18				—				18
Restricted cash designated for investment			31,830				—				31,830
Net cash used in investing activities			(62,750	)			(54,192	)			(116,942	)
Financing Activities:
Credit facility repayments, net			(40,000	)			—				(40,000	)
Proceeds from exercise of stock options			45				—				45
Net activity in investment from subsidiaries			19,903				(19,903	)			—
Net cash used in financing activities			(20,052	)			(19,903	)			(39,955	)
Decrease in Cash and Cash Equivalents			(3,268	)			—				(3,268	)
Cash and Cash Equivalents at Beginning of Period			9,579				—				9,579
Cash and Cash Equivalents at End of Period		$	6,311			$	—			$	6,311